Coda

SWFs Now Mean ‘Share their Wealth Funds’

Why is it politicos put on a most winsome smile for Hollywood exports like Steven Spielberg and Babs Streisand, but suddenly turn dour when it comes to exporting pieces of true international commodities like investment banks? We shudder to think it might have to do with campaign contributions? Hillary is only the latest to weigh in with a ham-fisted demand for, believe it or not, more regulatory oversight over Sovereign Wealth Funds? Let’s look at who these deals benefit. For Middle East and Asian nations, a lack of growth opportunities outside of their own markets makes the United States attractive. SWFs also understand risk, and because they are long-term investors, the banks are inclined to reveal all the warts on their balance sheets. That’s why the humongous write-downs. For the banks, not only do they recapitalize, but their new shareholders double as future business partners.

The new rogue trader: John Paulson, who actually understood credit risk 

Is being lead director an aphrodisiac? 

Henry Kissinger is nearly everyone’s idea of a great board director: brilliant, worldly, connected, iconic. But his real talent may have been in that arcane area of negotiation known as “shuttle diplomacy,” (which he recently used to reduce the agony of the Hollinger board’s battle with Conrad Black). Today’s lead director (or nonexecutive chairman, for those who favor the new, new thing) is the equivalent of a boardroom player/ coach. He or she works the cable traffic between the CEO’s war room and the board on sundry issues, but particularly compensation and strategy. And like the vice president in the Senate and the chief justice of the Supreme Court, he or she does not brusquely enforce his or her point of view as much as play tie breaker. He also acts as the CEO’s adviser and devil’s advocate, a sounding board for investors who have issues with management, and, when necessary, a trusted face to customers and regulators—as we may be reminded, the lead director may be called on to become interim CEO. The primary qualifications for the job are honesty, candor, and judgment, a willingness to be confrontational and a willingness to forget the stresses of a well-fought battle, dogged determination, abundant energy, and an understanding spouse that permits phone calls at any and all times.

So, it's the board's fault?

Charlie Gasparino on CNBC blamed the Citigroup board for a lagging stock price prior to late January’s meltdown and then for the meltdown itself. Sorry Charlie, but our challenges (if you want to avoid the next catastrophe) are systemic (e.g., the Fed, ratings agencies, Wall Street analysts). The public market has reinforcing mechanisms that turn any positive trend into a bubble and all players are incented to run not walk. Then, of course, it bursts. Public companies just don’t have the luxury of sitting out boom markets. How many earnings calls can you recount during which the CEO said, “well, we think the market for this product is getting too hot and so we are pulling back and taking a hit to earnings this quarter, but by next year, you will see that we are right?” As directors, we cannot fall back on the response we hear from rating agencies, that we are told to sit still while things go right, but then are asked why we didn’t shake things up at the first sign of trouble? Boards must now be prepared to accept a much higher level of responsibility for risk management. This will have implications up and down the governance spectrum.