CORPORATE MISGOVERNANCE

admin — Tue, 21 Apr 2009 14:13:49 +0000

So, if the risk-averse investor continues to park good money with bad company directors, what can be done to protect the innocent? The investor has to be both reasonable and proactive. We have seen the pitfalls from the side of the ?nancial experts who have lost investors’ money, partly from a lack of proper communication. This fault can come from both sides, either the salesperson “ramping” a ?nancial instrument that is more risky (or much valuable) than is likely within the bounds of reality, or the investor having a risk appetite that is completely unsuitable. Furthermore, there is a problem with the regulatory moves to make self-disclosure best practice for the industry when the salespeople do not want to, or cannot, reveal the true extent of risk.
Regular people, not Wall Street professionals, have lost a collective fortune by relying on the tainted advice of the biggest and most trusted names in the world of ?nance.
As one Merrill Lynch analyst wrote:
We are losing people money and I don’t like it. John and Mary Smith are losing their retirement (money) because we don’t want . . . an investment banking client – the CFO of Goto.com to be mad at us.
We have to admit that a corporate gagging order, under many slogans (“Don’t rock the boat”, “Don’t tell the customer more than you have to” etc.), is likely to continue despite all legal moves for full disclosure. Faced with this scenario, it is incumbent upon the John and Mary Smiths of this world to take on the role of investigative investor and to evaluate the extant risk and fair valuation themselves. They should forget reputation and actively ask themselves whether the business opportunity offered really merits an appropriate investment.
What is more appropriate is that investors do not pass the investment mandate so readily to the “experts”, but consider the suitability risk. The suitability risk has been de?ned as: “The risk that the institution sells the client the ‘wrong’ product, which the client later claims to be inappropriate for its needs or level of experience.
Aristotle was asked what reason was. He gave examples of what reason was, and what a reasonable man would do under certain circumstances. This question still unsettles modern legal thinking two millennia after the Greek classics. The US Supreme Court employs the “reasonable man” hypothesis, to determine what a reasonable person would do under speci?c circumstances. Degrees of reasonable risk and reasonable return still trouble us today.
Determining a reasonable risk-return performance is a more dedicated and complex task than many banks have thought, even now. One view takes this task as a combination of three horizontal processes cutting across all business lines throughout the corporation:
1. Setting up risk-return guidelines and benchmarks.
2. Risk-return decision making (“ex ante perspective”).
3. Risk-return monitoring (“ex post perspective”).
It is time for the John and Mary Smiths of the investment world to extend their snouts and sniff out the risk themselves.
What has emerged over recent months is a renewed effort to force “corporate transparency” and disclosure. There are numerous moves to improve corporate governance and we track a handful of them. Will these moves drive the thieving or incompetent directors into the open? Faced with such corporate uncertainty, we need a risk management strategy to handle the potential danger. We compare this project initiation or remit according to the best practice in RAMP (risk analysis and management of projects). RAMP offers us the risk management actions to choose:

Avoiding risk
Reducing risk
Reducing uncertainty
Transferring risk
Insuring risk
Sharing risk

Nobody loves a loser, and there are few dealing operations in banking and fund management that would wish to appear anything less than a winner.

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CORPORATE MISGOVERNANCE