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	<title>Investment Initiatives</title>
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	<description>Corporate Governance Engagements for the Long-Term Investor</description>
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		<title>Now it&#8217;s Sandy Weill&#8217;s Turn</title>
		<link>http://www.ii2llc.com/index.php/2012/07/26/now-its-sandy-weills-turn/</link>
		<comments>http://www.ii2llc.com/index.php/2012/07/26/now-its-sandy-weills-turn/#comments</comments>
		<pubDate>Thu, 26 Jul 2012 19:20:54 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=430</guid>
		<description><![CDATA[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.]]></description>
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		<title>Penitent CEOs</title>
		<link>http://www.ii2llc.com/index.php/2012/07/22/penitent-ceos/</link>
		<comments>http://www.ii2llc.com/index.php/2012/07/22/penitent-ceos/#comments</comments>
		<pubDate>Sun, 22 Jul 2012 21:55:45 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=406</guid>
		<description><![CDATA[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.]]></description>
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		<item>
		<title>Pundits Could At Least Get their Terms Straight</title>
		<link>http://www.ii2llc.com/index.php/2012/07/18/pundits-could-at-least-get-their-terms-straight/</link>
		<comments>http://www.ii2llc.com/index.php/2012/07/18/pundits-could-at-least-get-their-terms-straight/#comments</comments>
		<pubDate>Wed, 18 Jul 2012 14:47:39 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=398</guid>
		<description><![CDATA[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&#8217;t even know what the acronym &#8216;LIBOR&#8217; 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 set overnight rates; these are usually so low and differ by so few basis points that announcing them would be tantamount to solemnly repeating the official Greenwich time every ten seconds.  LIBOR is concerned with an amalgam of short-term rates from overnight to one year, and is different for each of the quoted currencies. The mechanism by which LIBOR is set may be &#8216;technical&#8217; (although one may intelligently ask, what rate quotation is not?  Does any rational businessman go out and offer enormous sums of money at a rate chosen at random?) but its uses are not technical at all.  Hundreds of thousands of loans are based upon LIBOR, not simply involving inter-bank transactions, but also commercial paper, corporate bonds, options and commodities contracts, and even, if I recall aright, many adjustable mortgages.  The spreads are often very significant—&#8221;LIBOR plus two percent,&#8221; &#8220;LIBOR plus 575 basis points&#8221;—but these rates will go up and down depending upon what LIBOR happens to be on specific dates.  There is nothing arcane about its uses, and they affect most participants in the economy one way or another. Those who would publish commentary—even in respected financial news sources—would do well to spend more time with a dictionary.  Getting these things wrong greatly erodes one&#8217;s credibility.]]></description>
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		<item>
		<title>Corporate Culture and Corporate Misbehavior</title>
		<link>http://www.ii2llc.com/index.php/2012/07/15/corporate-culture-and-corporate-misbehavior/</link>
		<comments>http://www.ii2llc.com/index.php/2012/07/15/corporate-culture-and-corporate-misbehavior/#comments</comments>
		<pubDate>Mon, 16 Jul 2012 02:03:07 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=387</guid>
		<description><![CDATA[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.


]]></description>
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		<title>Short-termism and Corporate Governance:  Prof. Stout Creates a Straw Man</title>
		<link>http://www.ii2llc.com/index.php/2012/07/12/short-termism-and-corporate-governance-prof-stout-creates-a-straw-man/</link>
		<comments>http://www.ii2llc.com/index.php/2012/07/12/short-termism-and-corporate-governance-prof-stout-creates-a-straw-man/#comments</comments>
		<pubDate>Thu, 12 Jul 2012 04:24:12 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=374</guid>
		<description><![CDATA[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. 
]]></description>
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		<title>Volkswagen goes &#8220;Round again . . .&#8221;</title>
		<link>http://www.ii2llc.com/index.php/2012/07/06/volkswagen-goes-round-again/</link>
		<comments>http://www.ii2llc.com/index.php/2012/07/06/volkswagen-goes-round-again/#comments</comments>
		<pubDate>Fri, 06 Jul 2012 05:54:43 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=359</guid>
		<description><![CDATA[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. ]]></description>
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		<title>Jamie Dimon&#8217;s Real Mistake</title>
		<link>http://www.ii2llc.com/index.php/2012/05/18/jamie-dimons-real-mistake/</link>
		<comments>http://www.ii2llc.com/index.php/2012/05/18/jamie-dimons-real-mistake/#comments</comments>
		<pubDate>Sat, 19 May 2012 04:46:24 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=325</guid>
		<description><![CDATA[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.]]></description>
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		<title>Wal-Mart and Risk Management</title>
		<link>http://www.ii2llc.com/index.php/2012/05/01/wal-mart-and-risk-management/</link>
		<comments>http://www.ii2llc.com/index.php/2012/05/01/wal-mart-and-risk-management/#comments</comments>
		<pubDate>Tue, 01 May 2012 16:34:42 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=319</guid>
		<description><![CDATA[&#8220;If everything seems to be going well, then you&#8217;ve overlooked something.&#8221; —From the so-called &#8220;Laws of Perversity,&#8221; corollaries of Murphy&#8217;s Law:  &#8216;If something can go wrong, it will.&#8217; If the reports of investigative journalists prove to be true, Wal-Mart has been pursuing a policy of &#8220;See no evil, hear no evil, speak no evil,&#8221; 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), because of  substantial bribes being paid to facilitate operations in Mexico which senior management first ignored, then attempted to cover up.  This is a classic example of why improved governance structures are needed at successful companies, and not only at those which have experienced problems in the recent past. As usual, investors were inclined to cut the company an enormous amount of slack because it had been so successful and apparently well-run. But corporate governance is mostly about ways to diminish the risk of something going wrong, not about methods to make the day-to-day functioning of a successful company even more efficient and profitable. Here, an essential mechanism—whistle-blowing, and the proper procedures for conducting allegations of corporate misbehavior—was neglected because everyone trusted management to continue to grow the company, and ignored the possibility that some trusted manager would abuse his position, or cut corners. And now shareholders have taken a huge hit. Nor, in all likelihood, have we seen the end of the problem. In a way, it&#8217;s like speed limits: no reasonable observer should doubt that most of the time it is perfectly safe for the alert driver of a modern, high-quality car to go far faster on our public roads than the posted limits. The problem comes when the driver is distracted, or there is something wrong with his car, or with road conditions, or most frequently when there is some unexpected external event:  a child dashing out into the road, a stalled vehicle around a bend, an oncoming car which has lost control. Then, suddenly, the magnitude of the mishap is enormously magnified, and a major calamity is more likely to occur. It is to make such calamities less likely that companies should have all those tedious, &#8220;unnecessary,&#8221; and mind-numbing procedures dictated by the canons of corporate governance best practice:  ombudsmen, whistle-blower protections, rigorous internal investigation procedures, use of external investigators when it appears necessary, and the willingness to discipline executives who violate the trust of shareholders. Reliance on ad hoc procedures has so far cost shareholders $15 bn, and we are nowhere near finished with the fallout from this scandal.]]></description>
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		<title>Why Investment Bankers Still Have to be Honest:  Behind the Goldman Sachs Kerfuffle</title>
		<link>http://www.ii2llc.com/index.php/2012/03/21/behind-the-goldman-sachs-kerfuffle/</link>
		<comments>http://www.ii2llc.com/index.php/2012/03/21/behind-the-goldman-sachs-kerfuffle/#comments</comments>
		<pubDate>Wed, 21 Mar 2012 17:38:01 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=303</guid>
		<description><![CDATA[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 &#8220;I quit!!&#8221; 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&#8217;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, &#8220;muppets,&#8221; and that conflicts of interest and self-serving behavior had not only become the rule there, but that they were being encouraged by fellow employees and by the firm&#8217;s managers.  He took the firm to task for violating its supposed motto, &#8220;clients first.&#8221; While there was a lot of piling on by those who agreed with his dim view either of Goldman in particular or of investment banking in general, and an ample amount of Schadenfreude from those who did not work in the sector, there were many who either jumped to the defense of the firm, or who essentially met the accusations of the employee, by arguing that investment banks had always been that way, and always would be, because that was the nature of financial markets businesses.  In essence, they were saying that all dealings with investment banks are conducted at arms&#8217; length by knowledgeable individuals who are trying to take advantage of each other, that no securities firm has any obligations to its customers other than to deliver whatever securities are agreed upon at the negotiated price, and that caveat emptor has always been and should always be the law of the financial marketplace. This last argument is wrong, and dangerously cynical for two reasons:  it assumes that all financial services businesses are akin to open-market trading, and it assumes that every participant in those markets knows as much as every other, or at least, ought to.  On the contrary, the investment banking business is extremely diverse and includes many activities which are nothing at all like the horse-trading of listed securities for a short-term gain, and the survival of effective markets depends upon both the efficient bridging of asymmetries of knowledge and the maintenance of specialists who can serve as sources of knowledge and providers of services which depend upon that specialization.  The problem is that all of these services have been brought together under one roof because of the economic advantages of size and access to low-cost capital, and because too many participants in the industry labor under the notion that they are not only smarter, but more knowledgeable than anyone else in the room. The existence of such highly-paid middlemen as investment bankers suggests that they serve some purpose.   It was of course possible, so long as the stock exchanges had a monopoly on transactions and could limit memberships, while at the same time having the power to expel anyone who engaged in price competition, for stockbrokers—as well as anyone whose [...]]]></description>
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		<title>Both the Right and the Left are Confused about Governance</title>
		<link>http://www.ii2llc.com/index.php/2012/02/25/both-the-right-and-the-left-are-confused-about-governance/</link>
		<comments>http://www.ii2llc.com/index.php/2012/02/25/both-the-right-and-the-left-are-confused-about-governance/#comments</comments>
		<pubDate>Sat, 25 Feb 2012 23:31:48 +0000</pubDate>
		<dc:creator>Andrew Clearfield</dc:creator>
				<category><![CDATA[Blog]]></category>

		<guid isPermaLink="false">http://www.ii2llc.com/?p=284</guid>
		<description><![CDATA[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, which raise the costs of doing business and are potentially a drag upon an already struggling economy.  This layer upon layer of new regulation may be described as well-intentioned but often ill thought-out efforts with significant unforeseen consequences; much of the lobbying for it has been carried on by special interest groups which may fairly be described as having something other than the economic recovery of the world&#8217;s free markets at heart.  However, Prof. Bainbridge&#8217;s otherwise interesting and thorough analysis unfortunately obfuscates as much as it reveals. The problem, as Professor Bainbridge should know, is that we are dealing with two very different kinds of legislation here, with different intent.  One is intended to substitute government agencies&#8217; control for the decisions of independent actors (managements and the free market.)  The other is intended to ensure that the free market, i.e., the shareholders, have the power to do something regarding their own investment—other than sell it—when they feel that it is being mismanaged.  The dichotomy is important:  regulatory decision-making by government agencies, vs. the actions of independent economic actors who have invested their own money with the company. &#8220;Corporate governance&#8221; is frequently used as a synonym for some sort of reform.  This is misleading.  Every corporation must be governed.  The questions are How?  By whom? and, Well or badly?  The question for legislators and the markets is to what extent the corporation (which is, let us not forget, an artificial creation of the State) is allowed to run itself without external interference, and to what extent outsiders are allowed to intervene.  Clearly, when the company violates some other laws pertaining to the public good (i.e., pollution, sale of defective merchandise, abuse of its labor force and/or of public safety, fraud) the State is entitled to intervene, just as it would be if the actor were a private individual.  But that is not the issue here.  The issue is the internal governance of the corporation. If the managers of the company are the principal owners, there is no agency problem:  it is their money, and they are allowed to do with it what they want, (providing they do not violate any of the laws regulating external behavior, as above.)  Normally, they will be very careful with their own property, and &#8216;monitoring&#8217; is seldom a problem. The issues instead involve fair treatment of minority investors, who own less than enough to control the company, even if they were to vote unanimously.  Their protection necessarily involves market regulations, listing rules, and laws to make sure that they receive their fair share [...]]]></description>
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