I had no idea, when I posted a piece about CEO's who suddenly became concerned about abuses of CEO power after they had retired ("Penitent CEOs," 7/22, on this website) that the group would be joined so soon by Sandy Weill, of all people. Weill was, of course, the supreme architect of the one-stop financial supermarket, the builder of the largest and most diversified bank holding company, and the leading opponent of Glass-Steagall during the 1980s and 1990s, when the debate on deregulation of the financial sector in the U.S. came to a head. Now, he has decided that the all-embracing financial services empire which he created wasn't such a good idea after all. Read more [...]
It is interesting how many ex-Chairman/CEOs express concern about the way our current board system works or the structure of the businesses they built, and recommend sweeping changes—after they retire. I am reminded of poet Maurice Sagoff's amusing summary of Defoe's Moll Flanders, the fictional memoir of a woman of easy virtue in eighteenth-century England: at the age of 70, having lived the life of a con artist, gold-digger (five times married), courtesan, trickster, and common thief, she repents of her sins and settles down to an old age of wealth and comfort. (see full blog for quote)
Last month, Philip Purcell expressed his reservations in the pages of the Wall Street Journal regarding the integrated model of investment banking, with the inherent contradictions in its corporate culture:
"Financial institutions with high stock prices tend to be client-oriented and profitability-driven. Investment banks are neither. At their core are groups of talented individuals who are highly entrepreneurial, risk-embracing, and compensation-driven—and for this reason they should not be publicly owned and, if public, have earned a low valuation."
Thus, one of the architects of such a hybrid organization, who lobbied long and hard for the deregulation of the financial services industry, comes to the belated realization that it is inherently unstable, and represents a poor investment for the shareholders. Read more [...]
In the recent controversy about manipulation of LIBOR by Barclays and other big banks, and whether this was being done with a nod and a wink from the financial authorities, I have been amazed by the number of pundits opining on the subject who don't even know what the acronym 'LIBOR' stands for. It is, as most of us learned upon entering the business world years ago, the London Interbank Offered Rate. As with anything else in markets, rates require both a bid and an offer. LIBOR did not merely Read more [...]
The ongoing scandal regarding big banks' manipulation of LIBOR is just the latest chapter in a depressing litany of stories of once highly-reputed organizations which have been revealed in the past few years to be both ethically-challenged and poorly controlled. Whether the manipulation was done to manufacture trading profits or to conceal the weakness of a bank's credit standing, the practice was obviously illegal, harmful to the bank's customers, and inevitably damaging to the reputation of both the banks involved and the industry of which they are a key part. J.P. Morgan's "hedge" gone wrong to the tune of $7 bn and counting is another example of the sort of corporate misbehavior which used to be rare, and on a much smaller scale than it now is. The industry has been under a political microscope since the Great Crash and bailouts of 2008. Yet the scandals keep arriving.
One possible explanation is that banks have now grown so large and complex that no one can adequately manage them. Another is that personal morality throughout our society has become so weakened that more and more individuals feel that they can cheat without getting caught. A third is that the industry as a whole has become hopelessly corrupted by the markets' attitude that anything goes so long as investors can make a fast buck from a bump in corporate profits, no matter how ephemeral this may prove to be. (And lest the bankers feel unfairly singled out, I must add that scandals of this same general type are by no means limited to the financial services industry.) There is a common thread running through all of these possible explanations: the collapse of unique corporate cultures.
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Professor Lynn Stout of the Cornell Law School has fired another salvo in the current war to push back against shareholder rights. In a widely-discussed article for the Brookings Institution, "The Problem of Corporate Purpose," (Issues in Governance Studies no. 48, June 2012), which reiterates her thesis in her recently published book* she identifies a focus upon 'the maximization of shareholder value' with the entire movement for shareholder rights. She then goes on to argue that this is identical with a thrust by some investors for short-term profits, and therefore that the corporate governance movement is a concerted attempt to agitate for short-term results at the expense of longer-term strategies, research, development, and reinvestment. In short: maximization of shareholder value = short-term share price outperformance; shareholder rights = short-termism; ergo, corporate governance activism = destruction of long-term interests. In syllogistic terms: Most shareholders are obsessed with short-term returns, corporate governance is concerned with empowering shareholders, therefore corporate governance promotes short-termism.
For starters, this is a false syllogism. It begins with a dubious premise, and proceeds with dubious logic.
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There was an old, annoyingly repetitive song on the nightclub circuit from the late '50s, which must have seemed more amusing to an audience who'd had more than a few drinks, which ran, over and over:
Here we go, round again
Singin' a song about Molly Dee:
Far away, I know not where,
She's the girl who waits for me . . .
I was somehow reminded of this when I saw this morning that Volkswagen's Ferdinand Piëch has managed, yet again, to pick the pockets of shareholders, and make himself both richer and more powerful in the process. I am referring, of course, to today's announcement that VW has come up with a tax-efficient way to buy up the 50.1% of Porsche it doesn't already own. It is buying this asset from the Porsche holding company, whose principal asset is, not Porsche, but 50.7% of—Volkswagen! The deal was/will be approved because Porsche SE, the holding company, is 90% owned by Ferdinand Piëch and his relatives. As for the preferred shareholders in Porsche AG, the famed auto manufacturer, they will get—nothing.
I bring this up on a blog devoted to corporate governance because Herr Piëch's governance practices have been the subject of dismay by better-governance advocates, both inside and outside Germany, at least since the middle 1990's, after Piëch had succeeded to the job of CEO at Volkswagen. Read more [...]
J.P. Morgan's $2 billion and rising mistake in what was supposedly a hedging strategy is a perfect example of what can happen when an otherwise extremely capable and effective chief executive gets stretched too thin. Dimon did, mostly, the right thing. He faults himself for not having micro-managed the Chief Investment Office as much as he micro-managed everything else, but (a) he trusted its head, who had proven herself again and again, and (b) the positive results coming from it had justified his trust. In retrospect, all those positive results should have flashed a red light, because hedging operations are not supposed to generate profits, at least not consistently. But this is the same mistake that was made by almost every other business, financial or otherwise, which suffered a blow-up over the past twelve years. Even the best manager can't be everywhere, and it is difficult and usually inadvisable to attempt to fix that which doesn't appear to be broken.
What this incident demonstrates, yet again, is that these highly complex derivative strategies, when multiplied by a legion of traders, of quant analysts, each pursuing a different concept, and the competing executives who each acquire a stake in the success of their particular group, become too complex for any human being, or small group of human beings, even aided by the best information technology in the world, to manage. Read more [...]
"If everything seems to be going well, then you've overlooked something."
—From the so-called "Laws of Perversity," corollaries of Murphy's Law: 'If something can go wrong, it will.'
If the reports of investigative journalists prove to be true, Wal-Mart has been pursuing a policy of "See no evil, hear no evil, speak no evil," with respect to criminal corporate misbehavior in its Mexican subsidiary. As a result, the company is now in big trouble, (and its share price has taken a big dive), Read more [...]
Last week the internet and major news media were both abuzz with the public denunciation (in the pages of the New York Times) of Goldman Sachs in an "I quit!!" letter by a mid-level executive. The Goldman employee, named Greg Smith, who worked in London selling derivatives to hedge fund clients, charged that the firm's culture had changed dramatically for the worse in the twelve years he worked there, that many of its employees regarded its clients as suckers, or in the British parlance, "muppets," Read more [...]
UCLA Professor Stephen Bainbridge, in his new book, Corporate Governance After the Financial Crisis, attempts to trace an historical lineage of what he calls “quack corporate governance,” through a series of regulatory responses to business scandals and market crises, especially since the Enron scandal in 2001. Indeed, much of the regulation which has been adopted (and more which has been proposed) may justly be characterized as burdensome over-reactions by Congress and foreign legislatures, Read more [...]