The Wall Street Journal’s Alan Murray suggested a rather novel idea this week. He argued:
Hedge funds — at least the five percent of them who pursue activist investing strategies — look to me like the saviors of capitalism. They are in the best position to hold CEOs accountable – and someone other than regulators, trial lawyers and left-leaning public pension funds needs to play that role.
I like Alan, but I’m glad he isn’t slugging for the Yankees this week. Because, this time, he really struck out.
An important part of the evolution of modern capitalism has been its wide and dynamic base of stakeholder participation —of share owners as well as consumers. That model has given people a stake in supporting key drivers of the economy along with a sense that they are benefiting from them. It is a system that requires public consent as well as efficiency.
The fact is that too little is known about most hedge funds and how they will affect all the stakeholders who have come to depend upon the modern, transparent corporation. Its often secretive practitioners seem to want to keep it that way. We know a great deal about their economic prowess. Much less is understood about their concepts of responsibility, their vision for the future of capitalism and how they plan to govern. And there is that little thing called derivatives that can see huge fortunes wiped out overnight.
Some hedge funds efforts, like those involving Carl Icahn, have proven mixed in terms of results and rather destabilizing to large groups affected. An occasional shake-up can be good for organizations, especially those run by the smug and self-satisfied. A regular series of earthquakes probably is not.
One can debate whether or not capitalism needs a savior. I am fairly certain, however, that hedge funds are an unlikely candidate for that task. Some might argue that the best way to ensure an efficient and accountable market is to have more and better informed shareholders —and a system of governance that allows investors a meaningful role in exercising the privileges and responsibilities that go with ownership. I distinguish here from the Wal-Mart approach, which seems to regard shareholder involvement and proxy initiatives as some kind of subversive activity requiring extensive background checks, and goodness knows what else, of the proponents.
A century or so ago society was promised a new approach to capitalism which was also supposed to make companies and managers more efficient. It was dominated by a handful of actors on a stage where J.P. Morgan had the leading role. It didn’t end so well, as I recall. Concentrations of power, in the long run and very often sooner, generally produce more suspicion, political outrage and public discontent than widespread improvements in progress and prosperity.
I will be the first to admit that there are serious weaknesses with the way most boards work. Management self interest often saps performance and makes companies far less productive, accountable and responsible than they need to be. Think of recent experiences with Home Depot and Hollinger, for instance. But before we throw out the concept of the widely held, shareholder owned, stakeholder dependent corporation, let’s understand better what we are getting with the inheritors of this tough-minded approach that seems to be the defining hallmark of hedge funds.
It would be unwise to adopt a cure —or a savior— that could prove more costly than the illness.
The Centre for Corporate & Public Governance was the first to raise concerns regarding BCE’s press statements in connection with its private equity talks. It has since received several dozen emails and calls from individual investors expressing fears that they were provided, at best, an incomplete picture by BCE when it denied on March 29th that any private equity talks were taking place or that any were intended to take place. The Centre has called for an explanation by BCE and, failing that, an investigation by market regulators. The Montreal Gazette carries the story in a piece today. It also carries a rather troubling response from a manager in Market Regulation Services, the body that is supposed to ensure market integrity. Here is an excerpt from the Gazette story:
A corporate accountability watchdog wants regulators to investigate whether BCE misled shareholders when it denied it was in talks with private equity firms on March 29.
Richard Finlay of the Centre for Corporate and Public Governance said many shareholders relied on BCE’s affirmation that it had no plans to take the company private. “It just doesn’t happen that fast. … It takes a lot of time to pull things together, to gather advisors and law firms.”
He is also suspicious of a spike in trading of BCE shares last Monday, the day before BCE did confirm talks with the pension funds.
“You have to ask if some people were acting on privileged information,” he said.
But an official at Market Regulation Services saw no need for an investigation. “Who knows how quickly things move along,” said Chris Lewer, manager of market surveillance. “The more high profile the case, the more things have tendency to evolve. All we can go by is the press release BCE issued.”
I was not aware that regulators were in the business of blindly accepting without question what publicly traded companies say. If that’s true, they can all shut the doors and we might save a lot of money —except for all the investors that will be fleeced. Certainly the misbehavers in the marketplace —and it is rumored there are more than a few— will be pleased to hear about the new policy of securities regulators, who appear to have been struck with a sudden case of acute panglossianism.
Anyone looking at the two releases, and the huge spike in the trading of BCE stock just the day before the announcement, would have serious questions to ask BCE management. If the right answers are not forthcoming, an investigation should be conducted. That’s the way the system is supposed to work. Dozens of investors have already expressed that opinion and I expect there are hundreds out there who feel the same way.
Fortunately, BCE stock is also traded on the NYSE board. There are a number of U.S. investors who also relied upon BCE’s statements and have some concerns about the contradiction that later followed. So once again, Canadian investors will have to look to U.S. regulators to dig a little deeper than their northern counterparts
The market’s Canadian watchdog prefers to sleep.
What a coincidence. BCE is now engaged in the very talks it previously denied were occurring to take the company private, with a group that includes KKR, the very company rumored before to be involved in the discussions —the discussions BCE said were not taking place. It might be regarded as a statistical amusement to some, but to investors it may well have amounted to a substantial loss. The Centre for Corporate & Public Governance has called on regulators to review discrepancies in the company’s statements.
BCE’s stock has been soaring since “speculation” about a possible LBO deal surfaced in March. In response, the company issued a statement on March 29th denying that talks were occurring in respect of privatization and claiming it had no plans to pursue such discussions. The stock continued to appreciate, nevertheless. On Monday, before BCE’s statement of today, there was a huge spike in volume and price at the start of the trading day both on the TSX and NYSE boards, which suggests a number of people decided over the weekend to buy BCE. Were the big transactions yesterday and BCE’s announcement today linked? That’s what regulators are supposed to guard against.
The kind of landmark move BCE disclosed today proceeds only after extensive meetings, analysis, preparation and discussions. It does not occur overnight. Board approval must be obtained from a number of players, as well as BCE. My point is that it stretches credulity for BCE to have asserted “there are no ongoing discussions being held with any private equity investor with respect to any privatization of the Company or any similar transaction” and that “the company has no current intention to pursue such discussions” —while less than three weeks later announcing that such negotiations are underway.
The question that needs to be addressed is: Were certain investors able to profit from information that such talks were occurring, while others did not because they were relying upon the information the company provided? The question takes on even greater significance in that just one week ago the New York Times cited a top BCE official as saying “Our statement of March 29th stands. We are not in any current talks with any other parties.”
There are vast sums in a company like BCE to be made or lost by its shareholders. Investor confidence is based on the principle —indeed the law— that all investors are entitled to material information that could affect the company at the same time.
Regulators need to act quickly to ensure that, in what might be the largest deal of its kind in Canada, involving one of its most valuable market assets, no shenanigans will be tolerated.
Alan Murray, of the Wall Street Journal, has a column this week from his Davos trip where he talks about some of the implications of the private equity deals that have become all the rage. This was apparently a much discussed topic behind the scenes at the World Economic Forum last week. Some of us have been talking about this concern on planet Earth for a while now. Still, Mr. Murray raises a valid question:
Shareholders are right to be concerned about this trend. But the fault lies less with a private-equity market that is generating superior returns than with a public-company market that is generating lousy ones. Investors would be better off if public companies could clean up their own houses, and get rid of the high-priced middleman.
(Column available by subscription at the Journal Online).
I have subscribed to the electronic version of WSJ for several years now, and I would have to say it offers rather good value for the money, the frequency of neocon-infatuated op-ed commentaries and myopic editorial salvos notwithstanding. One can only wonder how things would have been different if a fraction of the resources that went into the Journal’s Ahab-like obsession with the Clintons and Whitewater (you won’t find a hint of the series of books they produced on this subject at the WSJ website any longer) had been devoted to persuading business to take up the cause of global warming (instead of resisting it) or championing the need for reforms in corporate governance and transparency (instead of ignoring it). I wrote several letters to the Journal’s editors at the time in this regard, none of which was published, of course.
In any event, the Journal’s assemblage of news and several worthwhile columnists is something I find difficult to do without. Alan Murray’s contributions are a must. Here is a reprint of my comment on his latest piece, which is also posted at the Journal Online.
I am rather troubled by the galloping trend in private equity deals and the concomitant erosion in both the size and transparency of the capital market if the craze continues. If history is any indication, there is a tendency in these arrangements to be driven by short-term “strip and flip” motivations at the expense of longer-term interests, including those of customers and employees, which no business can live without for very long no matter how hard some may try. I was recently interviewed on this subject by Germany’s Focus Magazine.
But if there are significant lessons to be gained from these capital market take-outs (my term), it is perhaps that private owners are acting more like how directors of public companies should be acting –making rational decisions, setting benchmarks for performance and not being overly influenced by what’s happening in the cozy club.
The fact is that for all the talk of reform, the failure of directors to actually direct and their propensity instead to be unduly acquiescent to an imperial CEO remains the dominant flaw of the publicly traded corporation. Whether it’s in the mail room or the boardroom, performance always comes down to accountability. It is a remarkable discipline and one that is often missing in cases where directors are too far removed from meaningful answering to stockholders, and investors are too weak to effect necessary change.
Germany’s popular Focus magazine is just out with an extensive interview I had with the publication on the current wave of private equity deals sweeping North America. I will have more to say about this in a future posting (in English). The gist of my views on the subject for my German-speaking friends follows below.
“Größte Bedrohung des Stabilität“
Doch der kanadische Unternehmensexperte J. Richard Finlay sieht den derzeitigen Trend zum „Going Private“ mit großer Skepsis: „Dies ist eine der größten Bedrohungen für die wirtschaftliche Stabilität und das Wohlergehen der Anteilseigner im vergangenen halben Jahrhundert“, sagt er. „Wenn es an Offenheit in den Firmen fehlt, werden Probleme oft so lange versteckt, bis die Lage so kritisch wird, dass niemand mehr etwas tun kann. Und dann können die Folgen für die Mitarbeiter, die Zulieferer und die Gemeinden verheerend sein.”
Als Beispiel nennt er den kanadischen Immobilienkonzern Olympia and York, der in den 80er-Jahren zu einem der größten Grundbesitzer der Welt aufgestiegen war. 1992 implodierte das Unternehmen unter der Last seiner Schulden von mehr als 20 Milliarden Dollar und der Inkompetenz seiner Bosse, der Brüder Albert, Paul und Ralph Reichman. „Es gibt wenige Beweise dafür, dass private Beteiligungsfirmen besser geführt werden oder weniger zu Dummheiten und Machtmissbrauch an der Spitze neigen“, meint Finlay. „Und den Chefs große Summen von Geld nachzuschmeißen, hat sich noch nie als zuverlässige Formel für den Erfolg erwiesen.“ Der Chef der Baumarktkette Home Depot, Robert Nardelli, der für sein Scheitern auch noch mit 210 Millionen Dollar belohnt wurde, sei das beste und nicht einzige Beispiel dafür.
Corporate Governance, also die Unternehmensführung unter Aufsicht, ist für Finlay nach wie vor die beste Methode, ethisches und verantwortungsvolles Verhalten an den Firmenspitzen zu gewährleisten. „Es ist kein Zufall, dass die größten Firmen mit der eindrucksvollsten Geschichte von Einkommen, Innovation und Fairness gegenüber den Anlegern, etablierte Aktiengesellschaften sind, die sich über lange Zeit entwickeln konnten.“ Private Beteiligungfirmen hingegen seien wie der Ozeandampfer Titanic: „Jeder glaubt, sie seien zu groß, um versagen zu können, und zu raffiniert, um nicht erfolgreich zu sein. Und dann, eines Morgens, wacht man auf und muss entdecken, dass das Undenkbare geschehen ist.“
