WishingWealth wrote:A shareholder is you and me and thousand of others either on their own or regrouped in MF.
Do you really believe that laypeople should be lining up in front of the CFO's door to check if such and such hedge is sound?
From the article:
Anthony Bolton is president, investment, at Fidelity International.
So I don't think the standards for you and me should be the same as for Mr. Bolton. And indeed, although the article doesn't say, I suspect that Mr. Bolton is paid large sums of money for his financial acumen. If so, I don't think Mr. Bolton can shift the blame from himself to the regulators quite so easily.
Indeed, I would hold Mr. Bolton to a higher level of duty than regulatory staff, in part because he is paid so much more than they are. And if he is not responsible for due diligence and so on, just exactly what value does he add?
And in future will we get full disclosure from actively managed funds: WARNING: The management of this fund takes no responsibility (for anything)?
In itself, having a well-paid professional evade responsibility when things go wrong is nothing new. But this is an example of a wider problem that I have been posting about here, off and on.
(1) I take it as given that regulation is not sufficient to keep corporations honest. Examples abound. It is just not feasible to hire enough highly competent regulatory staff to stay on top of all these corporations. And even when regulators do recognize problems and want to act, often they are stopped by politicians, who have been heavily lobbied by the industries in question.
Anecdotes are not proof, but they can help understanding. So I offer attempts in the 1990s by the accounting profession to force companies to show options granted to emplyees as an expense when granted. The move was defeated by Congress, led by (Democratic) Senator Lieberman, threatening to emasculate (cut funding) the various bodies if they went through with it.
(2) Okay, so regulators can help. But they are far from a complete solution. So what other controls might we have on corporate management? Well, there are Boards of Directors. And indeed the main thrust of Sarbanes-Oxley was to strengthen the Boards and hand them the tools to better control management.
But that failed. As a rule, Boards are captured by management, and it looks increasingly as if reform is bound to fail. (See the excellent book by
Jonathan Macey.) Boards will not solve our problem.
(3) Who else? Well, shareholders have the right motivation. But there is a free rider problem. As you point out, it is just not worth the cost and effort for small shareholders to do any level of due diligence, since each would incur the entire cost of the due diligence, but receive only a tiny fraction of the benefits.
For a time, my hopes were for large institutional investors. For them (or their clients), the benefits of due diligence would be large enough to justify the costs. But alas! this is proving to be a false hope. Working closely with some institutioal ionvestors, I was appalled at the lack of expertise. And now Mr. Bolton confirms that they don't even try.
(4) Independent financial analysts? Independent rating agencies? Very funny.
So what's left? We can take the same attitude as investors in third-world countries. Yes, management will steal us blind. But it's the only game in town.
Or we can adopt your approach:
we'll be living in a world where everyone is a T-Bills or RRB investor. OTOH, this may be the cure to over consumption/over production.
Over the years, I have been edging over to this position, myself. Karl Marx was right -- capitalism carries within it the seeds of its own destruction. Only it ain't the owners of capital who will do it to us -- it's the managers.
That would be like auditing the auditors. And again, do we need 3 layers of auditors, just in case the first layer is too cozy with the audited?
I have been in situations with three layers -- when I was helping regulate the telephone companies. First, there were the telcos' internal auditors, Then there were the external auditors, who in large part checked the first set. Then we had CRTC auditors who checked the previous two, aqnd went into molre depth in certain areas of regulatory interest. (I had responsibility for this last audit.) I think that's when I first started losing faith in audits.
As you say, we've danced around this maypole a few times already. Having been involved in regulation, on and off, for forty years now, I think that it can stop only the most flagrant and obvious abuses. A smart manager can run rings around a regulator. We need a better answer.
George
The plural of anecdote is NOT data.
Webring
