An (unnecessary) debate has begun about the right of Board members to access data in excess of what management provides, if necessary. We can and should discuss the form of potential abuses and its punishments, as well as reasonable boundaries of access to management and data. But we should not seek to remove a basic right of the Board members, who are personally liable for their decisions.
This LEX piece on sell-side research reflects several old, recurring and ever more vital themes I try to address at Buysiders.com: conflict of interests, incentive systems, the power of brands, halo effects and whatnots – and ultimately how hard it is to actually KNOW something when it is so hard to filter out the noise. All this is more evidence that trustworthy, independent analysis is growing in value by the second.
An anonymous survey of 365 U.S. sell-side analysts confirmed many insights about that industry’s practices that should trouble the long-term, value-oriented investor (at least the ones who didn’t yet already know this). That said, it is wrong to generalize and say that all sell-side research is flawed and I explain why in the post. Ultimately, any knowledge that has not been directly earned by you, no matter the source, can’t be taken at face value.
We highlight a post by Fortune’s Dan Primack on a conflict of interests in Private Equity fund-raising. It falls into the “imagined but unproven” category – unproven until now, if you believe the research Mr. Primack uncovers. Interesting stuff, as long as we remain honest and vigilant about our own industry’s shortcomings.
We have a follow-up article related to a previous post that I am very proud of – “Invaluable art and analysis”, written on October 2011. As with many posts I’m proud of since 2009, this one was started by someone else – who read the original New Yorker article, linked it with a film he had seen and sent me the material. I then linked it with other subjects and finished it. Back to the post at hand, it’s about incentives, “knowledge” vs. “expertise”, analysis, investigation… the fact that it’s set in the art market is irrelevant – actually, if it makes the subject easier to grasp, great.
We’ve talked about the art market in light of incentives, insiders, asymmetry of information and price formation in Oct ’11. In an article called “How the art market thrives on inequality”, the NY Times writer goes in pretty much the same direction and highlights why the “art fund” attempts have had, so far, less than stellar results.
A Goldman Sachs executive quits via an scathing editorial in the NY Times, generating all sorts of reactions – reminding us of the need to always analyze things from all sides while keeping one’s head cool. Make sure you know what level of confidence you can live with when dealing with each counterparty in your business and personal dealings, and don’t depend on anyone’s “moral fiber” in all occasions (it’s hard enough to know your own limits).
Two Dealbook articles to read over the weekend. One regards the Greek debt restructuring and what it means for CDS – a test regarding the reliability of CDSs as a hedge instrument. The other regards the ages-old conflicts of interest in LBOs, hostile takeovers and other transactions in which the safest route is the one that assumes that all advisors are biased and conflicted.
Great thought-provoking article, called “The Dumbest Idea In The World: Maximizing Shareholder Value”, sent by our most loyal reader. As the sender himself said, the discussion isn’t new but it’s always interesting. The real point of it is the power of incentives. The “too-simple” conclusion would be that “the road to hell is paved with good intentions” – but that would be wrong.
We continue to learn from the collapse of Jon Corzine’s MF Global. A recent article at NYT’s Dealbook highlights another lesson: ignore your chief risk or compliance officer at your own peril. While we agree that in this case it might have led to different and better decisions, such officers are still prone to all the talent, behavioral and incentives-driven traps and pitfalls. That said, the simple governance, hierarchical and process improvements the author suggests do help, and he also has the merit of recognizing that “Leadership has the right to challenge, disagree or even reject that advice.” Remember: “Culture eats Strategy for breakfast”.