In Your Face

In Your Face
Thought provoking opinions on topical issues.

Monday, March 29, 2004

The Lesson of History

I understand that Tony Blair is “dismayed” that President Bush has rejected the UK’s call for an American led monitoring force, to be deployed as a buffer zone between Israel and the Palestinian Authority.

The rationale for Tony Blair’s proposal was based on the knowledge that Israel would never accept a UN led force.

However, he ignored the other side of the equation; namely:

  • The USA already has large numbers of its forces committed around the world, eg Iraq to name but one place, these commitments are overstretching its resources.

  • President Bush is standing for re-election, and will do nothing to antagonise the Jewish vote.

In view of the above, the USA would not have deemed Tony Blair’s proposal to be in its interest; no matter how well intentioned. Therefore it rejected it.

PM Blair felt, that after his support for the US invasion of Iraq, he was owed some form of payback. He ignored the lesson of history, that when dealing with the USA, the USA will always do whatever is in its own national self interest.

This is as true today, when dealing with President Bush; as it was in the Second World War when dealing with FDR, or during the Suez crisis when dealing with Eisenhower.

I do not understand why Blair is “dismayed”, ignore the lesson of history at your peril.

Tuesday, March 23, 2004

Parmalat, a Warning to Directors

I recently wrote an article entitled “Parmalat, Europe’s Enron”, about the Italian dairy company which is accused of falsifying its accounts.

Since that article was written the wheels of Italian justice have been set into motion, with a fast track prosecution being initiated.

However, what is of more interest is the action being taken by the creditors of Parmalat. They are not content with waiting for their own country’s legal system to bring them justice, and more importantly compensation, for the money that they claim that they have lost as a result of the alleged fraud.

Instead they have initiated a class action using, not an Italian firm of lawyers, but an American firm Milberg Weiss (details of the class action can be viewed via this link Milberg Weiss). Even more interestingly the class action is citing American law, not Italian law. The rationale being that as Parmalat traded in the USA, and allegedly presented falsified accounts, then USA law has been breached. A case can be made by non US creditors for compensation, using the US legal framework and lawyers who are vastly more experienced at bringing class actions.

This, in my view, is a natural development of the Sarbanes-Oxley legislation (introduced post Enron); which imposes tough reporting requirements on directors of US companies, and those companies that have US subsidiaries or listings in the US.

Directors who believe that they are not affected by the tougher regulatory regime in the US, simply because their company is listed in Europe, are deluding themselves. The less robust legal framework of Europe will no longer protect those who, either deliberately or through incompetence, cause investors and creditors to suffer significant financial losses.

The Parmalat case should be seen as a wake up call to those directors who are in denial about Sarbanes-Oxley. Lax reporting, poor internal controls and weak corporate governance will no longer be tolerated; you have been warned.

Saturday, March 06, 2004

Characteristics of an Effective Audit Committee

I read with interest the “goings on” at Shell last week. The Chairman, Sir Philip Watts, was forced to resign on Wednesday. This was the culmination of a chain of events that started when Shell announced, on 9th January, that it had reduced its proven oil and gas reserves by 20%.

Various groups and events led to the departure of Watts. However, it is reported that the final push came from the internal audit committee; which advised the board that management changes were needed.

During my career (see my resume), I have set up a number of audit committees around the world, and have been involved with others. I was therefore pleased to see an audit committee proactively asserting itself, and being listened to.

I would like to take this opportunity to remind those less proactive audit committees, and less supportive boards, as to what in my opinion (based on my experience) constitutes the top ten characteristics of an effective audit committee:

1. The audit committee must be independent, members should not have previously held executive positions in the company for which they sit on the audit committee; eg the chairman of the audit committee should not have previously been the finance director. The company should not use the audit committee as a paid retirement home for previous directors.

2. The audit committee should be suitably qualified and experienced, at least one member should hold a relevant financial qualification; so that they can at least understand the intricacies of the company’s accounts.

3. The audit committee should present a report in the year end accounts, as to the quality and effectiveness of the internal controls and risk management process.

4. The audit committee should be prepared to take a stand against the board on matters of significance, and resign if the board does not take the appropriate corrective action.

5. The members of the audit committee should be up to the job, they should not hold an excessive number of other positions. Those that, through age, fall asleep during the meetings should be retired. Do not think that this is an exaggeration, I personally have witnessed this occurrence.

6. The audit committee should have free and unfettered access to the internal auditors and external auditors of the company, as well as the board and management of that company.

7. The role and scope of the audit committee should be laid down in a charter, which should be signed by the board and distributed within the company.

8. The internal audit department should report directly to the audit committee. Dual reporting lines, to eg the Finance Director, do not work.

9. The audit committee should be responsible for assessing the quality and effectiveness of the internal audit department and external auditors. The committee should be able to make changes, as and when required, to the scope and providers of the audit (both internal and external) coverage.

10. The audit committee should be responsible for the budget of the internal and external audit coverage. I have witnessed a situation where neither the board nor the audit committee held the budget; needless to say this did not work.

This list is not intended to be exhaustive. However, it can be used as a starting point to establish an effective and respected audit committee that adds value to the business.

Wednesday, March 03, 2004

A Simple Guide to Investing

I have been reading the posts on one of the threads of a bulletin board, hosted by a popular UK financial website, with interest and alarm over the past few weeks.

The thread relates to a company that listed in the last year. The shares of the company have enjoyed a dramatic 3000% rise in value over this period.

Needless to say, the thread relating to this company has been very active as of late; as more people are drawn in by the idea of making a "fast buck".

There are a number of people posting on this thread who, by the grace of God, seem to feel that they have been gifted with second sight.

They routinely, via goat's entrails and runes (I assume), make bold predictions as to the upward price movement that they expect the stock to make over the coming days. In the last fortnight or so, as the speculative bubble begins to burst, these predictions have been wrong.

The price has started to dip, and there are a number of "investors" who (I suspect bought in at much higher levels) will get their fingers "badly burnt".

This is a more extreme example of the daily ebb and flow of share prices around the world. However, it serves to highlight a number of common characteristics of some "investors" and the "techniques" that they apply when investing money in companies:

  • It is apparent that many of the investors in this share have not the slightest understanding, or knowledge, about the company or the industry in which it operates.

  • The slightest hint of positive news concerning the company, or its area of operations, is seized upon as an omen that the stock will double in value.

  • Individuals who post warnings about the risks involved are shouted down with vitriol, and denounced as "de-rampers" (people who deliberately seek to drive down a share price, in the hope of making money).

  • Certain posts pertaining to contain "facts" and information are, at best, dubious and worst dishonest.

  • The average investor appears to have a limited time horizon, extending no further than 2 weeks. This is usually the length of time that they have to pay for the shares that they have purchased.

  • The desperation to make a "fast buck" suggests that some are in serious financial difficulties.

  • The atmosphere on this bulletin board is more akin to a casino or racetrack, rather than an investors?f discussion forum.

  • In short it is apparent that these people have not a clue about what they are doing. They are no better than an ill informed, and reckless, gambler staking all on the spin of a roulette wheel.

    My advice, for what it is worth, to those seeking to invest in companies is as follows:

  • Never make any investment without consulting a suitably qualified independent financial adviser.

  • Never invest what you cannot afford to lose. Investments can go down as well as up!

  • Do not put all of your eggs in one basket; spread the risk.

  • Never invest for short-term gain. Life is full of uncertainties; you must assume that you may have to hold for two or more years before seeing a decent return.

  • Be prepared to cut your losses and sell, before you lose everything.

  • Research, research, research; learn all there is to know about the company, and industry in which it is operating in, before you part with any of your hard earned money.

  • Test your investment policy first, before putting down hard cash; see if you really do know what you are doing.

  • Note that this advice is based purely on my own opinions, observations and experience. It is not exhaustive, and should not be used solely as a basis for any investments that you may be considering to make in the future.