The guide explains and calls for broader corporate governance of listed companies and provides support for investors who want the spirit of the law to remain intact, at the very least.
CFA Institute Rushes New Guide in Response to Recent Corporate Misdeeds
The CFA Institute’s recently published "A Manual for Investors" is an updated version of a primer on corporate governance issued in 2005, by the Institute’s Center for Financial Market Integrity. In the new edition’s Introduction, the writers review how a rogue’s gallery of corporate executives who have sullied corporate affairs in recent years convinced them a new handbook was needed immediately.
The manual is offered free on the Institute’s Web site, in PDF format at the link above (click on "Research Topics and Positions"). In a section on definitions, It defines corporate governance as the system of internal controls and procedures by which individual companies are managed.
Investigations Found Lack of Transparency and Management Controls
Earlier in the present decade, legal actions showed that slothful corporate governance at Enron Corporation, WorldCom and Parmalat revealed an appalling lack of corporate transparency and inner management controls. In some cases, CEOs of companies infected by the greed virus of the turbo-charged decade could not even explain the events that caused financial disasters for their stockholders.
More recently, in Congressional investigations of the “Irrational Exuberance” of the first decade of the new millennium, executives of Bear Stearns Companies, Lehman Brothers Holdings, and Northern Rock as well as many commercial banks seemed to lack or misunderstand adequate risk management; or were sponsors of bloated remuneration packages, often bearing little connectivity to accomplishing long-range corporate missions.
Institute Aims for Manual to Educate and Empower Investors
The CFA primer asserts wayward corporate behavior contributed to the current financial malaise around the world. Apparently, many financial institutions lost sight of a cardinal tenet of investing – preservation of capital – in favor of greater (maybe grander) returns on investments.
According to the Institute, losses of trillions of dollars in investor capital around the world in the 2008-09 financial meltdown illustrated that corporate checks and balances on insider activities did not indemnify investors against fraud and malfeasance. Corporate officers committed both sins of commission and omission far too easily, including the manipulation and misappropriation of company resources by management.
The Institute wants the manual to educate and empower investors, by providing them a way of assessing a company’s attitude toward meaningful corporate governance, and showing them the penalties for not doing so.
Graham and Dodd Recognized Importance of Corporate Governance Early
The importance of effective corporate governance is not a new concept. Benjamin Graham and David Dodd, authors of the classic text “Securities Analysis,” recognized in the 1930s the direct correlation between active ownership and strong corporate governance. They advised that while the choice of a common stock is a single act, its ownership is a continuum and investors should act accordingly, perhaps as partners even.
In pointing investors in the right direction to accomplish authentic corporate governance, the manual suggests they first understand the roles of a corporation’s three interlocking entities:
- Board of Directors
- Management
- Owners or Shareholders
First, it suggests Directors, non-operating officers who exercise voting control over most significant policies and expenditures, should have the following attributes for stockholders to consider in voting for them:
- Independence from operating management and biased outside forces
- Experience in management, accounting and general business operations
- Evidence of resources furnished by the corporation to enable them to be effective overseers.
Secondly, from Management, stockholders have a right to expect:
- Explicit plans and schedules to implement a code of ethics
- A clear policy on preventing personal use of company assets
- Expressed attitude of creating corporate transparency, with openness in dealing with company affairs
- Clear enunciation of executive compensation matters
- Proof of strong communications with Stockholders.
Thirdly, owners have the right to expect:
- Opportunities to learn of ownership structure and hidden ownership interests
- Openness about voting rights for elections of directors and company changes
- Explanations where applicable of proxy voting, confidential voting, vote tabulation and cumulative voting
- How owners can make proposals
- Announcements of owner Legal Rights
- Elimination of hidden shareholder or corporate agendas.
Manual Could Serve As Investors Bill of Rights for the Risk-laden New Century
Judging by actions taken in the House Financial Services Committee last month, an investors Bill of Rights might be needed more than ever to slow down the assault to weaken investor protection under the wide-sweeping Investor Protection Act of 2002 or Sarbanes-Oxley. The House committee action approved the exemption of establishments valued at less than $75 million from certain disclosures in Section 404(b) of the act.
While relaxing rules on smaller companies would probably not affect big investors, the House committee’s bill would allow more companies to be excluded from the purview of Sarbanes-Oxley, according to Floyd Norris writing in The New York Times on November 9, 2009. He suggests Sarbanes-Oxley is in danger of being gutted.
If the amendment is adopted by the full House, and is followed by other Congressional efforts to liberalize the landmark investment act, the CFA Institute’s manual comes at a critical time; for the primer gives investors a realistic model around which to rally political pressures to protect their rights.
*The writer is a Chartered Financial Analyst (CFA).
Howard Bryan Bonham - Howard Bryan Bonham is a former daily newspaper editor and award-winning financial writer.
