Here's What the Accounting Watchdog Keeps Hidden: Jonathan Weil / Bloomberg

Not in the CPA realm, never have been. The conflicts which can come at those doing audits, who after all do wish to keep their clients, can be serious indeed. Many times investors have been stunned at things which come out after a company gets a "clean", unqualified auditor's opinion. Accounting firms have been sued by investors and others, and in well-known instances have been devastated by the outcome. As investors, whether you invest in stocks of single companies or in mutual funds, you need to know that decisions on direct holdings or underlying portfolio holdings are made based on fair presentations of the financial picture.

Hold that thought, and read this:
Bloomberg.com: Opinion

'Buyback Boondoggle?' -- Matthew Hougan's blog at Index Universe

I've blogged on this a few times. See, I'm not nuts on this.

A quote: “The decline in dividend increases is disturbing, especially in light of continuing moderate earnings growth and the abundance of corporate cash,” [Howard] Silverblatt [senior analyst at Standard & Poor's] said in a statement. “We believe the present wave of corporate buybacks is contributing to the slower pace of dividend growth in 2007."

Hougan's take: "[They] strike me as tantamount to deferred pay raises for corporate employees. Whereas dividends are paid out to current shareholders, buybacks – by reducing the number of shares outstanding – represent payments to both current and future shareholders ... including the holders of vested and unvested stock options."

His bottom line on this: "It seems like a blatant conflict-of-interest for managers – who often hold large options positions – to make decisions about whether to buyback stock or boost dividend payments."


BLOG IU.COM - Buyback Boondoggle?

WSJ "How Borrowed Shares Swing Company Votes" by Kara Scannell

"SEC and Others Fear Hedge-Fund Strategy May Subvert Elections" (intro only is free - full article is subscription only)

If you have access to the whole story, it should concern you. "In some cases, the strategy has allowed speculators to gamble that a company's stock will drop, and then vote for decisions that will ensure that it does -- without their ever having to own any stock themselves." Yes, the regulators are interested. The issue seems most likely to succeed with a small-cap stock, but who knows? Buy a copy or go to your library.

What does it take to get someone to dust off a serious word: Manipulation.

One possible remedy in the article: outlaw voting by borrowers of shares. Surely the hedge funds and some lenders will argue this is not feasible; I will say of course it is.

To short a company's stock, then borrow more shares from institutional shareholders or through brokerages, and then vote in ways to negatively affect share prices, then rake in the money -- well, to the extent that this actually is a fair description of the practice -- that is just corrupt. I don't care if it is arguably legal (for now,) it is corrupt.

For an institutional shareholder, a mutual fund or pension fund to allow its shares to be borrowed by entities presumably attempting to negatively impact the value of those shares is a curious kind of stewardship. The "rental income" from the shares does not seem likely to be equal to the possible loss in value, or the hedge fund or other party doing the "empty voting" as the practice is called, would not be doing it! The article mentions that one mutual fund house, Lord Abbett, has scaled back its stock lending, and that Calpers and some other large pension funds have put some limitations in place also. Good!

The article suggests that brokerages and banks make about $8 billion annually from lending shares, and the institutions make an unknown amount. here's the link to the bit of the story on WSJ Online:

WSJ.com - Login

Why I Post on Things

In a brief look back at what I've posted on, I have noted a couple of things which someone who does not know me might think are just hobby horses. They aren't. They go to the heart of smaller investors having a fair chance to achieve their own financial goals through access to the good returns which the financial markets can provide for those who invest wisely and patiently. You see, getting those returns is my business.

I have written frequently about hedge funds. There is room in the world for them I guess. But they have huge clout and very little restraint, and serious potential for actions damaging to their own and other investors. Yes, the market will deal with a hedge fund which invests poorly, but I would really rather not have the world's financial markets go through convulsions with them in their death throes, if you don't mind. We get enough of those anyway.

I have written also frequently on the subject of shareholders' rightful interest in not having the corporate enterprise's earnings slashed by utterly fantastic manager pay, excessive managerial stock options, not to mention unscrupulous or illegal abuse of same. Corporate directors are before anything else the trusted stewards of the shareholders' property (the corporation, if you please) and should not forget that. Whether the stockholders are investing to fund their retirements, college for their children, or just to gainfully deploy the financial resources they have accumulated, they have skin in the game. A managerial "hireling" with big pockets and a short-term employment horizon should be seen as having a radically lesser stake in the corporation's earnings. Mutual funds have largely supplanted individual shareholders, for many valid reasons, but they should never feel that they have no responsibility to vote their shares wisely, and in ways jealously protective of their portfolio holdings' long-term investor returns.

The common theme: we all, as investors, need and require orderly financial markets, and good directorial stewardship in the Board Room.

I know one person who is rather cynical sometimes about things. He's pretty smart. I can almost hear him saying, "...you know, that really is the way it's always been, and it's the only way it ever will be, and you're too old to be sooooo naive." Well I would just say that there are two world views through which you can see how things are. I will take a "half-full glass" view, acknowledge the imperfections of people and organizations and try to do what I can. There is power in reason, and in communication. Improving things, even if just incrementally, is possible. That other view is no fun at all.

More on Ruckus Over Nardelli's Compensation and Home Depot's Independent Directors

I sort of felt obligated to come back to this when I saw the NYT article linked below, as I had touched on it before.

It seems there are some HD stockholders with voices. The company now says that a majority of independent directors will have to approve Mr. Nardelli's compensation. How independent they are has yet to be seen, and in all fairness, there may be some pretty hefty sums built in to Mr. Nardelli's deal with Home Depot.


Home Depot to Review Pay - New York Times

Home Depot's Nardelli Gets $210 Million -- Stockholders Get Shaft

Back to Corporations 101: A pop quiz, with only one question: To whom do the profits of a corporation belong?

(a) To the Government
(b) To the Managers
(c) To the rank and file employees
(d) To the owners, the stockholders

The correct answer is (d) the owners, the stockholders. The other answers are incorrect.


Bloomberg.com: Worldwide

Apple & Steve Jobs & Report of Faked Option-Grant Dates

I guess you could think of this as an opinion/editorial. And while the link is to today's story about Apple, Apple is just one company, and many companies are involved.

When games are played with incentive stock options the stockholders get shafted.

Public Corporations 101

Many stories on this sort of thing lately. Each one is reflective of management with the directors' connivance, in essence plundering the stockholders' property (the profits). The Unknown Advisor holds to the old-school idea that the corporation's profits belong to the stockholders, not management. Ideally, they should be either retained and plowed back into the business in an intelligent way or paid out to the owners as cash dividends, not stuffed into management's pockets through options programs. These programs are passed at stockholders' meetings when stockholders don't care enough to vote, and when the corporate directors act in a way to primarily serve the interests of management, not the real owners of the corporate enterprise. All too often, the directors are management. Directors are supposed to hire managers, not be the sycophants of managers or even the managers themselves. These days there are supposed to be some "outside" directors, to help deter, among other things, an unhealthy relationship between the managers and the board whereby the interests of the shareholders get subordinated to those of insiders.

Backdating of options grants. Repricing of options. Packing corporate boards with management sycophants. Resistance to expensing options. Stock repurchase plans that merely serve to mitigate the dilutive effect of the options programs, not to really raise share prices. Do we have enough problems with this subject, or not? This can be an opportunity for shareholders to assert themselves.

I would support mandatory big typeface, bold letter disclosure in each annual report and proxy mailing of the percentage of the corporation's profits going to highly-compensated individuals and to all employees through actual and proposed incentive and employer stock options programs. In the [alleged] words of Senator Hillary Clinton , back from her First Lady days, [there would be] "hell to pay". I would also support voluntary corporate stewardship initiatives at mutual funds and institutional shareholders in general to vote "NO!" on any corporate resolution involving portfolio shares held which would divert more than ten percent of the corporate profits to fund these programs. Small-caps would presumably need an exception on this. What say you, readers?


Apple's stock falls on report of faked option-grant dates - MarketWatch