What happens if lots of companies have tightened up their supply chains to cut down on inventory costs, and the economy goes into a severe recession? The shock of lower sales should be transmitted through the supply chain much more quickly than it has been in earlier bad recessions. Maybe the big, sudden drop in manufacturing output is partly driven by this factor. In which case, what we're doing is getting to the bottom of the cycle much quicker than before.
With any luck, the bounce out will be equally quick. I'm not holding my breath.
Tuesday, March 31, 2009
Friday, March 6, 2009
Some Boards are getting up my nose!
It is very difficult for the general body of shareholders to affect the Board in any meaningful way. While nominally being elected by the shareholders, a Board is self-propagating unless something seriously bad happens.
Despite all the best will in the world, such an environment is dynamically unstable. A good Board would ensure it has regular external and independent reviews of its structure, capabilities, and mechanisms. It would embrace robust discussions at AGMs and would welcome feedback from shareholders and a constructive dialogue (with the shareholders' mostly determining what is constructive). Because of the dangers of ossification, there would be a regular turnover of Board membership.
This process is unstable because in the absence of shareholders being able to affect the Board, any sufficiently large departure of the Board from its exacting standards causes its self-correction mechanisms to fail. Self-serving rationalisations can be made for why the independent Board review got it wrong, or the Board reviewer may not be changed regularly enough and so loses their external and independent nature (no matter how good you are, a close working relationship over a number of years destroys the independence - we have tons of psychological evidence for this in general, and I can't see why Board reviewing (and company auditing for that matter) would be any different). A small departure from good behaviour allows slightly larger departures, and so on in ever widening spiral of departure from best practice. And all the time the Board is arguing it's doing a good job, and steadily entrenching themselves - for the good of the company! And they believe it.
OK, so how to fix it. We know how - a mechanism whereby the beneficiaries of the company (the owners) can exercise control over the executive function, which is essentially by electing the Board. While I object to some of the activities of proxy advisors, they are doing a good job by getting more coordinated action by the end shareholders.
Despite all the best will in the world, such an environment is dynamically unstable. A good Board would ensure it has regular external and independent reviews of its structure, capabilities, and mechanisms. It would embrace robust discussions at AGMs and would welcome feedback from shareholders and a constructive dialogue (with the shareholders' mostly determining what is constructive). Because of the dangers of ossification, there would be a regular turnover of Board membership.
This process is unstable because in the absence of shareholders being able to affect the Board, any sufficiently large departure of the Board from its exacting standards causes its self-correction mechanisms to fail. Self-serving rationalisations can be made for why the independent Board review got it wrong, or the Board reviewer may not be changed regularly enough and so loses their external and independent nature (no matter how good you are, a close working relationship over a number of years destroys the independence - we have tons of psychological evidence for this in general, and I can't see why Board reviewing (and company auditing for that matter) would be any different). A small departure from good behaviour allows slightly larger departures, and so on in ever widening spiral of departure from best practice. And all the time the Board is arguing it's doing a good job, and steadily entrenching themselves - for the good of the company! And they believe it.
OK, so how to fix it. We know how - a mechanism whereby the beneficiaries of the company (the owners) can exercise control over the executive function, which is essentially by electing the Board. While I object to some of the activities of proxy advisors, they are doing a good job by getting more coordinated action by the end shareholders.
Thursday, March 5, 2009
A nice piece from the FT on the level of losses from the "AAA" rated tranches of the sub-prime linked CDOs. There is still going to be a lot more losses to be revealed presumably.
http://www.ft.com/cms/s/0/2970532c-0421-11de-845b-000077b07658.html
http://www.ft.com/cms/s/0/2970532c-0421-11de-845b-000077b07658.html
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