Corporate governance has moved forward from earlier carte blanche control structures. Different management structures have been examined, and changes will be inevitable through regulation or internal pressures for reform. Mandating the money immediately without control or lien is a bad idea and one that has fallen out of favour in fund management. Control by a more proactive group of trustees, an elected board of non-executive directors and more effective risk-burden sharing is on the cards. Tie everyone in and knot tightly to secure corporate loyalty and performance.
Governance capability levels show some ways in which we can exercise more control over the CEO and investment manager. ‘. . . the Sarbanes-Oxley Act is a call to get back to the basics that we have been discussing. Simply stated, the current status quo for corporate governance is unacceptable and must change. . . . The message for chief executive and chief financial officers and senior management is: Uphold your responsibility to maintain effective financial reporting and disclosure controls and adhere to high ethical standards. This requires meaningful certifications, code of ethics, and conduct for insiders that, if violated, will result in fines and criminal penalties, including imprisonment.’ We have shown some of the models for reforming and monitoring the fiduciary duty of the board of directors and investment managers. Organic risk management plays a valuable role here by asking what is the value of leadership – i.e. stripping away performance from perceived reputation. These models have the potential to move us into the light rather than signing your money away and being left in the dark.
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Everyone wants profit on their investment, but we all invest different amounts of resources in research. A modern bank or fund would be happy to invest $50 million into a venture and to spend $500 000 on a due diligence with lawyers. It would be unwilling to fork out $5000 on discreet enquiries and a chat with detectives in the FBI, Russian FSB, City of London Fraud Squad or similar. Due diligence has become ossified in its own rigorous blinkered thinking.
Fallacy: only banks, insurers, lawyers and accountants have the monopoly in professional investment knowledge.
Private investigators, from AON, Marsh, Control Risks Group, Pinkertons and Wackenhut all offer potential corporate added-value here. They also operate under the forensic accounting banner to undertake deep financial and behavioural analysis. A proper due diligence can win through more flexibility and discretion. One such due diligence by Dynegy on Enron made the correct call on risk hazard and called off the merger. It saved an unbelievable fortune.
Basel II enables Moodys and Standard & Poors, plus the corporations themselves, to certify the level of operational risk. Some groups will have become disposed towards offering a more tailored or sympathetic risk assessment. The traditional credit-rating visit cannot be so highly valued seeing that the target company has lots of advance warning. To paraphrase Heisenberg’s principle of uncertainty:
You can never be sure of the direction or health of a target company, because these are directly affected by the means you use to observe them.
Newer aspects of this investigative process show that company data are more accurate and accountable when the target is completely unaware of the observation carried out by snooping. Forensic accounting comes in useful; it is more akin to industrial espionage, but the data is less likely to be compromised by a public relations exercise. These forensic agents can be employed to separate performance from ill-deserved reputation. They can take the subtle, covert observation of the subject to get closer to the truth.
Then, they can get the metaphysical corporate handcuffs on the risk-offering crook. More flexible analytical activity clearly complements the bank’s own analysts and traditional due
diligence process. Forensic accounting comes in to provide a deeper investigation. Otherwise, banks and financial companies suffer when they are still locked in a narrow corporate group- think.
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