Evidence of learning in the stock market

This is a bit of an old article, but the idea of stock market learning came up in class on Wednesday and ethics all of last week, so I will mention market learning in the context of governance.

Short version: it used to be that you could get a higher return by buying firms with good governance (Gompers, Ishii, and Metrick, 2003)  (as measured by the Gompers-Ishii index) and shorting poorly governed firms.  BUT then the market learned and now the index is seemingly priced (in other words higher Q values, but returns no longer predicted by index levels.

 Investing in Good Governance - NYTimes.com:

"There is evidence that good-governance features included in standard governance indexes do improve the performance of companies – but that their significance is already reflected in market prices."

Here is the paper showing the learning:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1593911

'via Blog this'

Related articles

• Does Good Governance Pay?
• CEO Ownership and Stock Market Performance
• Dual-class share structures: The cost of control

Alibaba's Governance Leaves Investors at a Disadvantage - NYTimes.com

Alibaba's Governance Leaves Investors at a Disadvantage - NYTimes.com:



 "In Alibaba, control is going to be locked forever in the hands of a group of insiders known as the Alibaba Partnership. These are all managers in the Alibaba Group or related companies. The Partnership will have the exclusive right to nominate candidates for a majority of the board seats. Furthermore, if the Partnership fails to obtain shareholder approval for its candidates, it will be entitled “in its sole discretion and without the need for any additional shareholder approval” to appoint directors unilaterally"



'via Blog this'



This will definitely make the class discussion!  Thanks Lucian!

Related articles

• Alibaba post-IPO structure gives insiders control

Don't Make Poison Pills More Deadly - NYTimes.com

Don't Make Poison Pills More Deadly - NYTimes.com:

"Poison pills were developed in the 1980s to enable insiders to block a hostile acquisition. Over time, however — and without sufficient attention by investors and public officials — companies have started to use poison pills to prevent acquisitions of stakes that fall substantially short of a controlling block.

Indeed, among the 637 companies with poison pills in the FactSet Systems database, 80 percent have plans with a threshold of 15 percent or less."

and later

"...by entrenching insiders and insulating them from engagement by large outside shareholders, low-threshold poison pills could well impose costs on public investors who do not wish to sell their shares."

Good stuff from Harvard's Lucian Bebchuk!



UPDATE:

I was asked why this would be bad.  My answer is actually from a previous NY Times article from Lucian as well:

"...the presence of large outside shareholders, or the prospect of their emergence, provides an important source of discipline for management. Often, a company’s stock price is bolstered after S.E.C. records, known as 13D filings, disclose the emergence of a large outside shareholder. This is a reflection of investors’ belief that such a presence can be expected to benefit their fellow shareholders. The proposed 5 percent hard cap, however, would reduce the amount of stock that could be purchased before making a 13D filing. That would lower the potential returns to large outside shareholders produced by identifying an underperforming company and taking a significant stake in it."

Related articles

• Don't Make Poison Pills More Deadly
• Don't Make Poison Pills More Deadly
• Oshkosh ends 'poison pill' after Icahn drops bid

The Missing Logic of Boards

Image via Wikipedia
From The Conference Board's  Roger Martin via MBA Depot

"A board of directors is asked to span a wide (and widening) gulf, resolving the tension between two very different markets with very different actors. On the one hand, boards are intended to act on behalf of outside shareholders... On the other hand, the board must deal closely with executives...motivated to maximize their own returns, even at the expense of shareholders."

and one more:

"It raises the question: Why would we imagine that the directorial agents would act any differently than the executive agents? After all, directors and executives are drawn largely from the same pool: Current and former senior executives are highly sought as directors. Yet we choose to apply agency theory to executives and not to directors. We assume that executives will maximize their self-interest but that directors will not. This is a failure of logic."


BTW the logic is the same as that of Dr. Seuss!  Here it is from "The Economics of Dr. Seuss"---and it was in an older Brealey and Myers(?) text when I was a grad student.

"... Out west, near Hawtch-Hawtch, there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch… is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.
Well…he watched and he watched. But, in spite of his watch, that bee didn’t work any harder. Not mawtch.

So then somebody said, “Our old bee-watching man just isn’t bee-watching as hard as he can. He ought to be watched by another Hawtch-Hawtcher. The thing that we need is a Bee-Watcher-Watcher.”

WELL… The Bee-Watcher Watcher watched the Bee-Watcher. He didn’t watch well. So another Hawtch-Hawtcher had to come in as a Watch-Watcher-Watcher.

And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch, Watch-Watching the Watcher who’s watching that bee. You’re not a Hawtch-Hawtcher. You’re lucky you see."

perfect for my class' Nexus of Contracts and Governance discussion.

Related articles

• The Fundamental Error: Shareholders & Ownership (professorbainbridge.com)
• CEOs and Boards Need a Pact on How the Firm Will be Run - HBR (bjconquest.com)

A look at Olympus

I want to use Olympus in class, so I put together a short recap from various sources:

From the BBC:

"The Japanese camera and medical equipment company, Olympus, has admitted to hiding investment losses dating back to the 1990s. The revelation came after the firm's British president, Michael Woodford, went public with allegations that the company had wasted $1.4bn (£880m) on buying companies for inflated prices, as a way of covering up old losses. He was subsequently fired. The company's shares plunged in value when Olympus bosses confirmed the attempts to conceal losses and apologised

BTW the BBC piece is an absolutely great interview with former CEO Michael Woodford which will be the part of another class on Japanese governance which is rapidly being shown to be far from adequate.

From the Economist:

"The scandal first hit global headlines on October 14th, when Michael Woodford, a Briton who had recently taken over as Olympus’s boss, was sacked. Mr Woodford had just told the board that the unusual payments merited investigation....Olympus’s shares fell 29% on November 8th, their daily limit. They are now 80% lower than before Mr Woodford was ousted. The Tokyo Stock Exchange has placed the firm on a watch-list for delisting."

From CBSNews'Is Olympus scandal tip of a Japanese iceberg?

"No corporations like losses (unless the engineered kind that reduce taxes). Announcing them to investors is painful, so you can understand why executives might want them to go away. But there's a big difference between wishful thinking and corrupt financial engineering, which is what some people at the top of Olympus allegedly did.
Although the details are still sketchy, apparently Olympus had suffered decades of losses on investments. Instead of admitting to one level of ineptitude, a few executives took things to a whole new level. They covered over the losses and then disguised them as acquisitions. Oh, they acquired companies, but the prices were sometimes outrageously high and the size of the fees to advisors, stunning."

From Time:

"...a publicly listed brand-name corporation spends hundreds of millions of dollars to buy companies that at the time of the acquisitions have zero revenue and dubious assets. That's what Olympus...did.......Japan Inc. is notorious for poor board and shareholder oversight. While the apparent lack of credible checks on top management is not unique, the details of the Olympus case are still stunning. From 2006 to '09, Olympus made four acquisitions, three of which had nothing to do with the company's core businesses, which are digital imaging and medical paraphernalia. Those three outfits, for which Olympus paid close to $1 billion.....In the fourth case, Olympus, after acquiring a British-based medical-instruments company for $2.2 billion in 2008, forwarded $687 million as "a transaction fee" to two investment bankers — also into a Caymans account that subsequently vanished.Read more: http://www.time.com/time/magazine/article/0,9171,2098601,00.html#ixzz1eVbSgwWH

While some are saying the faked transactions were shams to cover past losses, some are now wondering if they weren't payments to organized crime. Bloomberg addresses this in a piece that covered Warren Buffett's trip to Japan to consider buying some firms. There he was asked about Olympus. He said it was not a a reason to avoid Japan stocks as a whole, but Bloomberg.com wondered.
Buffett Is No Match for Mobsters With Tattoos: William Pesek - Bloomberg:

"Olympus, as venerable a name as there is in Japan, demonstrates the point. Investigators want to know what happened to at least $4.9 billion they say is unaccounted for at the camera maker. Of all the bizarre questions surrounding this sordid tale, the role of organized crime groups, or yakuza, is the most tantalizing. Police are looking into how much of the missing cash went into the pockets of these gangs."

and then this:

"With their full-body tattoos and amputated fingers, the yakuza have long held a unique place in the public imagination. Unfortunately, that goes for Japan’s economy, too. Adelstein calls the yakuza “Goldman Sachs with guns” because of the prowess with which their groups’ roughly 80,000 members infiltrate companies through extortion and intimidation. "

Olympus for their part maintain that money did not go to "anti-social" groups (i.e. organized crime).

Stay tuned.


Note to my classes: if you are still looking for a case, this would be a good one.

Related articles

• Olympus accounting probe widens (ft.com)
• Woodford to Face Olympus Board That Fired Him on Tokyo Return (businessweek.com)
• Police look for gangster link in Olympus cover-up scandal (independent.co.uk)
• You: Woodford: In-house probe lacks credibility (japantimes.co.jp)

Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN

Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN:

Are older board members good or bad? The answer seems to be "Yes".


Whether it is good OR bad ...it depends on what you want the board to do. If you want conservatism, then older board members appear to be better. However, if you want to risk taking leadership, you probably want a younger board.

From the abstract:

"After controlling for endogeneity using firm size as instrument, the effect of board age is found to be more significant....we show that the performance of younger and high-growth firms is more sensitive to board age, which points to a risk-based explanation. Indeed, it appears that older boards are more reluctant to take risks and particularly to undertake acquisitions. Overall, the results underline the disadvantage of (re)appointing older managers since the latter tend to be more conservative, perhaps because of their shorter decision horizons or greater vested interests."

and from the paper:

"... we further show that the impact of board age does not depend on the firm’s size or affiliation to a business group, but is stronger among younger and high-growth firms, and among firms using more intangible assets. These results point out that some firms may require different types of managers because of their different characteristics. More precisely, it appears that the greater determination and ability to take risk typical of younger managers make them more fit to operate in high-growth or rapidly-changing environments (Child, 1974; Wiersema and Bantel, 1992). 

.....Our cross-sectional regressions show that firms with older boards exhibit a significantly lower variability in their operating profits, market values and stock returns. They are also less likely to undertake acquisitions, which are considered to be risky investments. This result is consistent with May (1995) who notes that managers with more capital vested are more likely to diversify in order to reduce their firm’s idiosyncratic risk. In the case of Japan, age can be a good proxy for a manager’s vested capital due to the enduring practice of lifetime employment and deferred compensation (Ono, 2010). This negative influence on risk-taking may explain why older boards are associated with lower profitability and firm value." 

 I guess not unsurprising, but interesting none-the-less.


Cite:
  Nakano, Makoto and Nguyen, Pascal, Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms (July 5, 2011). Available at SSRN: http://ssrn.com/abstract=1879250

Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN

Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN:

Du, Waisman, Wang, and Zhou provide an interesting look at a topic that frankly I never considered: whether post employment non compete contracts in financial service firms are priced by market participants and whether the enforcement of these contracts is good for bondholders.



From the abstract:

"...this study examines whether and to what extent the capital markets recognize the risk associated with the mobility of human capital. We evaluate the state-by-state variations in the enforceability of noncompetition agreements in the United States to test the market-discipline hypothesis and find a significant negative relation between the degree of enforcement of noncompetition agreements and the yield spreads for bonds issued by financial institutions. We also find that the negative relation is more prominent for investment-grade bonds and bonds with long-term maturities. In addition, we find that investors care more about managerial stability when bond issuers have weak protection of shareholder rights."

From the paper:

"Noncompetition agreements can function as strong binding mechanisms that significantly increase managerial stability and reduce the mobility of human capital (Garmaise 2010). The legal enforcement of covenants not to compete varies widely across jurisdictions in the United States. For example, a majority of states allow and enforce noncompetition agreements as long as they are ―reasonable and necessary,‖ though California virtually forbids such covenants. This variation in legal enforcement provides a natural setting to apply the insights of the law and finance literature (La Porta et al. 1997, 1998). 

This paper examines whether bondholders demand different yield spreads if the legal enforcement of noncompetition agreements affects the mobility of human capital. Following existing research (Morgan and Stiroh 2001), we collect data on new bond issues from financial institutions and document that the statewide enforcement level is negatively correlated with bond spreads, which means that investors do recognize the risk associated with the mobility of human capitals and price the risk accordingly. We also find that bonds investors care more about the managerial stability of financial institutions having weak protection of shareholder rights. "

Interesting.

Cite:

Du, Wei, Waisman, Maya, Wang, Haizhi and Zhou, Mingming, Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry (June 18, 2011). Available at SSRN: http://ssrn.com/abstract=1885752

Icahn, a Deal-Maker With a Spotty Record - NYTimes.com

Image by Getty Images via @daylifeIcahn, a Deal-Maker With a Spotty Record - NYTimes.com:

We talk about Ichan in class a great deal. He is an interesting character. Probably most famous for launching many takeover (or supposed takeover attempts) and being rumored for greenmail, in my opinion his bigger role is monitoring firms' management and helping disseminate information on both managerial practices and apparent undervaluation. (indeed looking at a study of Q values of firms he owns ala Rene Stulz)

From the NY Times:

"Mr. Icahn’s own record as a deal-maker — either as a bidder or as a catalyst for a takeover — is spotty at best.....

Investors in Clorox appeared hopeful that Mr. Icahn will succeed this time, pushing shares in the company up 7.3 percent by midday to $73.51. Still, the price remains below Friday’s offer price, indicating some apparent skepticism"

and later:

"The unsolicited offer is a strategy Mr. Icahn has turned to time and again: 15 times since 1997, according to the data provider FactSet Shark Repellent. He most recently bid $1.9 billion for Mentor Graphics, with the aim of flushing out a potential bidder."

Related articles

• Carl Icahn makes $10.2B offer for Clorox (ctv.ca)
• Carl Icahn: I'll Buy Clorox! But I'm the Wrong Buyer (blogs.wsj.com)
• Icahn fights them on the bleaches (telegraph.co.uk)
• Carl Icahn: Yes, I Want to Buy Clorox. Really (blogs.wsj.com)

Don’t Gut Proxy Access - DealBook Blog - NYTimes.com

I could not agree more!!! Great article by Harvard's Lucian Bebchuk.





Short version: strengthen corporate governance practices even though management may not want you to!

Another View: Don’t Gut Proxy Access - DealBook Blog - NYTimes.com:

"While shareholder power to elect new directors is supposed to serve as a foundation for our system of corporate governance, American shareholders seeking to replace incumbent directors face considerable legal impediments. Lowering these impediments would make directors more focused on shareholder interests. The case for doing so is supported by empirical evidence indicating that arrangements increasing directors’ insulation from removal are associated with lower company value and worse performance.

Any reform of corporate elections should include ending incumbents’ monopoly over the corporate ballot — the proxy card sent by the company at its expense to all shareholders. Only board-nominated candidates get to appear on this ballot; challengers must bear the costs of sending (and getting back) their own proxy card to shareholders. Providing shareholders with proxy access — the right to place candidates on the ballot — would contribute to leveling the playing field."

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Internal Governance of Firms

I really like this insight. It is from Raghuram Rajan's discussion of The Internal Governance of Firms by Acharya and Myers. It will definitely be added to class notes.

The simple version is that when junior level managers want to climb to the top, they have a vest interest in monitoring senior level managers.

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Internal Governance of Firms:

"The basic intuition behind the model is as follows. Think of a partnership run by an old CEO who is about to retire.....The CEO can appropriate everything else: he can tunnel cash out of the firm, consume perks, or convert cash to leisure by shirking. Because the CEO has a short horizon, he could simply decide to take all of the cash flow, investing nothing for the future. But he needs the young manager’s effort in order to generate the cash flow. If the manager sees that the CEO will leave nothing behind, she has scant incentive to exert effort, and cash flow falls significantly."

It would be interesting to see how this changes depending on whether firms have a reputation for hiring from within. Continually hiring external CEOs could lead to reduced internal monitoring.

Did Goldman learn anything? Did shareholders?

Asymmetric and short-term oriented pay packages have largely been seen as major causes of the financial meltdown we saw last year. So since everyone has seen the problems, we are no longer going to pay people in the same manner. Right? Well, hold on, not so fast.

First from the NY Times:

"Goldman posted the richest quarterly profit in its 140-year history and, to the envy of its rivals, announced that it had earmarked $11.4 billion so far this year to compensate its workers. At that rate, Goldman employees could, on average, earn roughly $770,000 each this year — or nearly what they did at the height of the boom."

Now it should be noted, that the firm has not said what they are doing with all of this money that is being set aside, but it does seem like a potential problem.

In the WSJ, Harvard's Lucian Bebchuk stresses the short-term focus of plans. (Remember the firm was losing billions last year).

"...if Goldman proceeds to pay record cash bonuses this year, as many now expect, these payments would reflect a return to flawed pay structures, as well as a failure to implement effectively the compensation principles Goldman recently put forward....The crisis has highlighted a substantial flaw in compensation structures that provide rewards for short-term performance – which is what Goldman’s paying super cash bonuses for 2009 would do. Such rewards can over-compensate executives as well as produce excessive incentives to take risks."

On the same theme later:

"The short-term distortion caused by standard compensation structures, ...highlighted in our “Pay without Performance” book, has recently become widely accepted. Treasury Secretary Geithner stated last month that “[s]ome of the decisions that contributed to this crisis occurred when people were able to earn immediate gains without their compensation reflecting the long-term risks they were taking for their companies and their shareholders.”"

What can be done? Bebchuk suggests a partial solution that is being used by some firms:

"At a minimum, even if some bonuses are based on 2009 results alone, Goldman would do well to prevent the immediate cashing out of these bonuses....any 2009-based amounts should be parked in a company account for an extended period of time and adjusted downward if subsequent information indicates that the basis for the bonuses no longer holds up."

This piece brings to mind two cliches which I will allow the reader to apply as needed:

1. "Fool me once, shame on you. Fool me twice, shame on me."
2. "Learning from our past mistakes is a sign of intelligence."

BTW the article is also largely available on the Harvard's Governance blog.

John Bogle on FORA.tv - The Culture that Spawned the Crisis: A Closer Look

FORA.tv - The Culture that Spawned the Crisis: A Closer Look: "The Culture that Spawned the Crisis: A Closer Look"

Bogle is a great presenter and this definitely does not disappoint. VERY good. It will definitely be used for classes dealing with governance and even financial institutions.




The Bogle piece that I used here is part of a longer (1:27) presentation on the crisis. The entire thing is worth the effort, but I am biased and liked Bogle's the best. Why biased? Possibly because one of the best presentations I have ever seen was by John Bogle in Rochester a few years ago. The ideas he railed against then (agency costs and transaction while calling for better transparency and governance), really were driving forces behind the current problems.

Corporate Governance: Separating the CEO and the Chairman Roles

The D & O Diary does a great tackles the issue of separating the CEO and Chairman positions. Corporate Governance: Separating the CEO and the Chairman Roles : The D & O Diary:

"A growing chorus of voices is calling for public companies to make the separation of the Chairman and CEO functions the default governance structure. This movement, which may have the support of the new SEC Chair, appears likely to lead to some type of 'adapt or explain' approach. Increasing evidence that the companies where the CEOs also act as board Chair are likelier to have 'certain troubling governance characteristics' will likely encourage shareholder interest in the initiative as well."

"The Millstein Center’s March 30, 2009 press release (here) reports that while in the U.k. only 5% of the FTSE 350 companies combine the chairman and CEO roles, over 60% of the S&P 500 companies have boards that are chaired by their CEOs"

"....as noted by the Chairmen’s Forum report, that "the overwhelming majority of financial institutions had combined roles before the current crisis erupted" – including, among others, Bear Stearns, Lehman Brothers, Citigroup, Washington Mutual and Wachovia.

On the other hand, there may be limits to how much can be expected or discerned from this single governance trait. As the Chairmen’s Forum’s report also notes, "splitting the role of chairman and CEO does not guarantee the application of independent oversight,"

The piece does cite research from the Corporate Library that argues that separation of the two positions is good for a number of reasons (but noticeably absent is stock performance).

From the Corporate Library press release:

"March 25, 2009 – A new study from The Corporate Library, an independent corporate governance and executive compensation research firm, found that companies whose chief executive officers (CEOs) also serve as Chair of the Board are more likely to have certain troubling governance characteristics than companies where the roles are separated. The study is the result of an analysis of the board leadership structure at more than 3,000 North American companies.

The governance features in question, all of which have been associated with board entrenchment
or lessened oversight of management, include:
• relatively long CEO tenures;
• fewer board meetings per year;
• classified board structures; and
• the presence of executive committees, which are typically given the power to act on
behalf of the entire board, potentially allowing for a concentration of power among a few
board members."

While there are obvious conflicts with having the same person perform each role, there may be good reasons for having a single CEO/Chair. But before the baby is thrown out with the bath water, it is important to see both sides.

The separation of CEO and Board Chair has been an issue for over a decade (see this 1996 paper by Dahya, Loni, and Power finding that separation results in positive stock price reaction).

Both sides agree that incentive conflicts can exist when the same person is the both the CEO and Chairman of the board, but there what the sides disagree with are whether these conflicts are enough to outweigh potential benefits of the roles each being played by same person.

For instance from the FinanceProfessor summary of a 2004 paper paper by Brickley, Coles, and Jarrell,

"Notably the paper posits the view that the CEO has valuable inside information and he may be better able to use that in both roles. Further that firms use the multiple title to phase in and phase out new CEOs. Conclude that there are good points of having a single person in charge of both positions."

and from a Knowledge@Wharton 2004 article entitled "Splitting up the Roles of CEO and Chairman: Reform or Red Herring?

"...Michael Useem, director of Wharton’s Center for Leadership and Change Management, says a few statistical studies have compared companies where two persons hold the CEO and chair positions with companies where one person holds both posts. This research, which also took into account other factors that can affect financial performance, shows that whether a company does or does not separate the CEO and chairperson titles “has no bearing on corporate financial performance,” he notes."

And while clearly these papers are 5 years old now and the trend is noticeably towards separation, the evidence is still not so overwhelming in either direction as to be certain. Would I encourage separation? Yes. But making it mandatory (or even making firms explain why they are not separating the two) seems to be a case of regulation going too far.

Stakeholder Governance: A Bad Idea Getting Worse by George Dent

Every corporate course starts out with a discussion of the the Nexus of Contracts and why it is that shareholder based models are superior to any other model (Short explanation: as residual claimants they are on the sloped section of the payoff graph and thus have best incentives to monitor).

The following article by George Dent reiterates this and reminds us (and US) that investment can go elsewhere.

SSRN-Stakeholder Governance: A Bad Idea Getting Worse by George Dent:

From the abstract:

"The traditional objections to stakeholder governance remain valid: the interests of stakeholder groups clash not only with those of the shareholders but also with each other, and acceptable means for choosing representatives of stakeholders other than employees have not been discovered. Stakeholder governance would impair economic efficiency: maximization of shareholder wealth remains the best proxy for maximizing the benefits of private enterprise to society. Beyond the traditional problems with stakeholder governance, economic developments make it an even worse idea. Capital has become more mobile, and the U.S. is no longer so dominant a venue for investment; many countries (notably China and India) have now entered the competition for capital, and corporate governance in many countries now treats investors better than the U.S. does. Instituting a serious stakeholder role in corporate governance now would send capital fleeing abroad, with great resulting damage to the American economy."

For clarification: stakeholder governance is that which gives stakeholders other than shareholders an active role on boards. For a more rigorous defense of shareholder based governance see Tirole 2001.

Cite: Dent, George W.,Stakeholder Governance: A Bad Idea Getting Worse(March 2009). Case Western Reserve Law Review, Vol. 48, 2009; Case Legal Studies Research Paper No. 09-9. Available at SSRN: http://ssrn.com/abstract=1368947

UCLA Anderson School of Management | Knowledge Assets | UCLA Anderson Faculty Highlights

WOW! Occasionally I am still blown away by how many amazingly good resources are available online. This is a great case in point. UCLA's Andersen School of Management has made many of their faculty available to us.

UCLA Anderson School of Management | Knowledge Assets | UCLA Anderson Faculty Highlights

I really don't know where to start, but here goes. I just watched these and a few others. All good. All Recommended. I am picking these since they fit my class the best, but by all means watch them all!

William Ouchi on Corporate Governance in the US.




Sanford Jacoby and Emily Nason on governance in Japan and the US.



John Hughes on information asymmetries and how to impact the cost of capital it must impact on systematic risk (which is based on his paper with Liu and Liu that is available here). Richard Roll on Real Estate prices and interest rates.

Holding CEOs Accountable - WSJ.com

Jonathan Macey has a great piece in the WSJ on the problems with many boards.

Holding CEOs Accountable - WSJ.com:

"As board tenure lengthens, it becomes increasingly less likely that boards will remain independent of the managers they are charged with monitoring. The capture problem is exacerbated by the incentives of managers to develop close personal ties with directors."

Sounds a lot like behavioral finance! Not willing to admit mistakes etc. One more look:

"Once an opinion, such as the opinion that a CEO is doing a good job, becomes ingrained in the minds of a board of directors, the possibility of altering those beliefs decreases substantially. All too often, it is only when an outsider takes an objective look does anybody realize the obvious: That the directors of a company are generally the last people to recognize management failure"

It is refreshing that Macey, like in his book "Corporate Governance: Promises Kept, Promises Broken", comes out for a market (and not a regulation) solution.

"We need to encourage market solutions -- not bureaucratic ones -- as the best strategy for addressing the corporate governance failures we face today. Hedge funds and activist investors like Carl Icahn are the solution, not the problem."

Deal Heavyweights on the Future of M&A - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

Wouldn't you have loved to be there for this one?
Deal Heavyweights on the Future of M&A - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times:

"The panelists — Stephen Friedman, the retired chairman of Goldman Sachs and the current Chairman of the Federal Reserve Bank of New York; Martin Lipton, the founding partner of the law firm Wachtell, Lipton, Rosen & Katz; and Joseph Rice III, the founder and chairman of private equity firm Clayton Dubilier & Rice — took turns discussing the challenges and opportunities ahead, as well as reflecting on the current economic crisis."

Will give one look in:

"Mr. Friedman spoke at length about the current crisis, which he described as the greatest financial panic since the Great Depression. Part of the problem, he said, was that “people will play the way you pay them,” meaning that the incentive structures that were in place encouraged bad lending and faulty business practices. He said he blamed the banks, consumers and the rating agencies for playing a part in the financial debacle"

While the Panel discussion was on mergers and acquisitions (which have slowed dramatically and will likely remain slow--except in cases of consolidations and saving firms from bankruptcy), some key points in it carry forward to all parts of this meltdown. For instance Friedman's comments that "incentive structures that were in place encouraged bad lending and faulty business practices."

I think everyone knew (and some even understood) that incentives were in place to encourage risk taking. The problem was that many, myself included, gave the banks too much credit. We all failed to understood that the banks (both Investment banks and Commercial Banks) did not fully understand what they were getting into, and the banks did not have controls (offsetting positions) in place, and seemingly (see Greenspan's comments of yesterday) had never stress tested their models with data that considered data out of the recent good economic times. This blatant error has to fall on the shoulders of the Boards of Directors, the management, regulators, and dare I say auditors/analysts/rating agencies.

Without being adequately prepared, when the worst came (call it a black swan, call it a perfect storm, call it the worse case scenario), all of a sudden we had meltdown. (Now if you really want to consider the worse, what happens now if a natural disaster hits. Earthquake hits California, etc.)

This is why SIMM (our student managed real money portfolio) argued so long, and unfortunately unsuccessfully, to be allowed to hedge with derivatives and take short positions last semester.

Corporate governance gets more transparent worldwide - USATODAY.com

Corporate governance gets more transparent worldwide - USATODAY.com:

"In what some call a worldwide corporate-governance movement, shareholders are pushing for stronger corporate-governance laws, teaming with investors from different countries....
'We've seen some dramatic changes,' says Stanley Dubiel, head of governance research at RiskMetrics Group, the largest U.S.-based proxy research firm, with offices in 50 countries. 'There's a strong desire on the part of many companies to attract capital from international investors...

[Later in the same article]

Dozens of countries are developing systems of watchdog corporate-governance and shareholder activism, with some modeling themselves after U.S. and United Kingdom governance practices or the Sarbanes-Oxley Act, the U.S. anti-fraud law passed after the Enron accounting scandal six years ago led to the demise of the company.

South Africa, Italy and Japan, for instance, have recently beefed up their corporate-governance codes to strengthen shareholders' oversight '"

Corporate goverance making inroads in Nigeria!

In a story that shows the importance of capital markets and governance, the Central Bank of Nigeria is pushing for better corporate governance of banks. Remember that Nigeria wants to grow into one of the top 20 economies by 2020, this is a good start.

allAfrica.com: Nigeria: No Bank Survives Without Good Corporate Governance -CBN (Page 1 of 1):

"The Central Bank of Nigeria (CBN) has restated that no bank would survive, even with large capital base, without good corporate governance practices. ....He further explained that good corporate governance means good management, accountability, adding that good management principles...."

Later:

"...the CBN has rules and regulation which stipulate the roles of the chief executive, independent directors, directors, audit committee and the roles of management to ensure good corporate governance....the CBN tried to build these rules, adding that one of such was limitation of state government ownership of banks, as part of measures to avoid huge withdrawal from the bank on the ground that they are owners. He stated that government withdrawal in the past has contributed to the failure of the nation's banks."

and then also:

"...also stated that media on the other hand has the role to play to encourage corporate governance and report those that do not comply"

Fall 2007 FMA Online--

Fall 2007 FMA Online: "

"Jay's Ritter's Keynote Address tackles the question of if there is a corporate governance premium for listing in the United States, with an insightful look at international competition for new listings of IPOs."

At the FMA's in Orlando I was talking to a friend and our comments about Jay Ritter were almost identical: "He is a genius." Well here is your chance to watch his presentation from the European Financial Management's annual meeting. It is just under 30 minutes long but very good!