Saturday, May 22, 2010

"Company Boarding" ...

... or maybe "Investor Boarding" should enter modern business jargon to describe how shareholders of publicly traded companies get railroaded by poor and insufficient oversight and discharge of responsibilities by "elected" Boards of Directors. Readers of this blog may have read my earlier posts on this subject.

Please click on the link to read an interesting article on the price Merrill Lynch shareholders paid due to the alleged inaction of a senior independent Director. Also interesting are Buffett's views on independent Directors (if there is such a thing).

I hasten to add that several things in the article should be taken with a table spoon of salt - the article paints the then CEO as a victim of circumstance while he was singularly responsible for several of the factors that brought that once fine firm to its knees. (Disclosure - I did work there in the 1990s but was never a shareholder of the holding company and sold my shares in a subsidiary well before the credit crisis).

I've discussed this with several bankers and private equity guys and pretty much with unanimity, we all agreed that while things were looking good and the housing bubble was expanding, no Bank CEO who expressed reservations on potentially dangerous exposure to risk and suggested paring back (while writing some investments down - likely negligible amounts compared to what came later) to his Board would have been permitted to execute on that plan, or for that matter keep his job! Remember Prince's comment on dancing while the music was playing? Haven't we therefore given Board members of banks a free ride here?

Most importantly - how can we improve the system of oversight? I won't pretend to have a solution to what is a complicated problem but I do believe that there would be a price for more effective representation of investors' interests than we have today. This logically should be paid by investors collectively - shouldn't it?

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