Saturday, October 20, 2007

My favorite presentation of the day-Friday

Hard to say today as I had several interviews and missed more presentations than yesterday (we are hiring--if interested, let me know!). The ones I did get to go to were very good.

Probably my favorite was session 148 where Robert Monks and Michael Jensen spoke on corporate governance. Nothing super earth shattering as each said what would be expected if you have read their work, but fascinating none the less.

A few Look-ins:

* Jensen commented that executive stock options should have a strike price that grows each year by the cost of equity. This is better than indexing to overall market or industry (especially in the case where managers can pick the industry).

* One reason why private equity has been so successful is that it avoids the silly game of worrying about quarterly earnings and the all to frequent gamesmanship (which after the latter lecture by Jensen (see below) really should be called lying) of earnings management and the like. (Especially interesting here was the discussion by Jensen on Warren Buffett who is seen as a great manager yet when it comes to not offering earnings guidance, many think he is quirky).

* There is a worry that conflict of interests similar to those at accounting firms may exist in some compensation firms. For instance, if they say cut CEO pay, they would potentially lose the larger business of helping to set employee pay.

* Firing for cause is nearly impossible at many firms due to employment contracts-for instance less than 5% can be fired for cause even if the manager breeches fiduciary obligation. Or only about 40% can be fired for cause even after the manager is convicted of fraud. Interesting these contracts apparently grew out of laws to prevent large golden parachute payments.

* Transparency may not solve all problems, but should improve things.

BTW the quote of the day also came from Michael Jensen in his later presentation on integrity and why and how it impacts finance. The quote grew out of his heuristic "without integrity nothing works" and into "As integrity declines, workablity declines; as workability declines, value declines."

While focused on finance (he used many examples from Boards of Directors, managers, etc), his advice is valuable to all.

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