Who Can You Trust Now? Investor Confidence Dependent on Reforms for Corporate Behaviour

Right now the question to ask before investing again is, “Who Can You Trust?”. The answer should be a resounding NO ONE.

We have seen the utter disdain and contempt with which the public investors are held by many of the blue chip boards and executives, as well as many fund managers and financial planners.

We have seen boards award massive pay rises to their CEO’s and to themselves. This has occurred despite the shareholders voting against such practices. Any reform of the markets should include giving shareholders back the control of the companies they own. It sound crazy but it is a shareholders right as the owner to decide on the remuneration of its workers. I say workers because the CEO is a worker and works for the shareholders.

If the shareholders don’t approve a pay rise then the CEO can always leave. If that results in the Company not performing as well with the next CEO, it is the shareholders who will be responsible. That is as it should be since they own the company.

The Boards are there to oversee the company on the shareholders behalf and keep the bastards honest. But in many cases Boards are all selected from an elite club of directors that do the company rounds and tend to go along with the management in most things. Many Board members wouldn’t know a balance sheet if they fell over it if recent company performances are anything to go by.

“Next in line stand the major shareholders, led by the Singapore Government, and the ABC Learning directors. The shareholders clearly had no idea of what they were doing and that’s also the very kindest interpretation of the directors’ performance.”

A little prison time for some of the most flagrant misbehaviour might focus the mind and make many of them more aware of their responsibilities to their shareholders.

I believe that large fund managers that take significant stock positions in companies can be offered a seat on the board. Any Director’s Fees paid to a fund manager to sit on a Board should be distributed to the fund investors.

We also need to insist that any shareholder voting is passed down to the fund’s investors who own the shares. It should not be up to the fund manager who sits on the Board to act as a proxy and decide the vote on behalf of all the investors in his fund. This disenfranchises shareholders.

I’m assuming that is how it is done because whilst I was in a fund I was never ask to vote on anything for any company whose stock I held.

It seems odd to me that a fund manager sitting on a Board, can vote for something they may have put together as a Director of that Board. If that is the case it is a little incestuous if you ask me.

We have all seen how many of the Banks Boards and CEO’s have been dragged kicking and screaming to report “bad things” like mortgage backed securities, bad debts, unsecured loans and the like during the reporting season.

The mentality of, “don’t say anything bad unless you are forced to” is an example of the poor ethics and lack of honesty that now pervades many company Board Rooms and executive managements.

Failure by many company executives to notify the stock exchange of significant information in a timely manner or not at all has been growing. In many instances this has gone unpunished by the regulators, or just a warning issued.

In Australia the banks control much of the wealth industry. It seems to me even with the best of intentions this can lead to conflict of interest manifest most often when the bank is under financial pressure.

In Australia banks have loaned money to some lists companies that right now are on life-support. These banks in some cases did not take out any security for some of the loans and are now likely to face serious bad debts write-downs.

So companies that would normally be bankrupt are being allowed to stay in business with the blessing of regulators and governments and with their stocks suspended on the stock market. Why can this go on indefinitely? By what right are the shareholders not allowed to trade their shares and/or realise their loses so they can move on?

But it might be worse than that. Banks have not only provided large unsecured loans, they have purchased large parcels of shares in these same companies for their in-house portfolio’s and I expect at significant discounts to the market.

Plus their wealth management arm may have purchased large parcels of the shares for their fund investors.

Now those shares are in the tank if they didn’t manage to sell them. So they have a double-whammy. Non-performing loans and stock holdings that might be worth nothing.

If they did manage to sell their stock holdings then the question to ask next is did they sell them before they sold the same stock in the managed funds they have in their wealth management arm.

I understand any financial institution has a fiduciary responsibility to sell their clients stock holdings in any stock before they dispose of their own. That includes managed funds investors.

Your Fund Managers have even loaned the stock they invested in on your behalf, to hedge funds to sell short. In this article, “ABC Learning – a lesson for regulator” it is blatantly apparent.

“Never before have a number of superannuation fund and index fund managers acted against the interests of the people they represent by loaning stock for hedge funds to sell short. ABC may force regulators to wake up and look to a potential opportunity for a class action against the managers.”

It is my view that banks should not be allowed to trade in-house portfolios and have brokerage departments and wealth management arms under their control.

So until some reforms are made for much more transparency and separation of key functions so there is true independence I’d be reluctance to give my money to a bank owned wealth manager again.

In this case passed performance could be an indication of how things might be done again in the future, unless reforms are made.

Leave a Reply

CommentLuv badge