Once detecting operational risk conditions is in existence, we can think about deploying risk countermeasures. Could any CEO shark engineer himself some huge pay-off based on undisclosed benchmarks?
Frankly, yes and no. Yes, they could get away with it easily in the old days. General Motors was a classic example where the head of a modern corporation could do what he liked in the era of Roger Smith. Pressure from the board, CalPers and H. Ross Perrot eventually forced him out. More recently, NYSE chairman Richard Grasso was pressured into resigning after the resultant furore that erupted when his $140m pay package was made public. Was this a case of Kalashnikov risk management used successfully? Some would say with justification that the aggrieved Western shareholders are amateurish when it comes to reining in the wayward behaviour of boards and CEOs. The professionals in the Japanese mafia do it so much better.Western shareholders could well adopt this tactic as a last resort. The UK GSK and the US GM meetings do not even compare in skill. This is one of the positive role models of the Yakuza systematically ignored in the Western world. They could teach shareholders how to level the corporate playing field by disrupting the AGM. If they get continually fobbed off, then they could always shoot the directors one supposes.
Badgering and damaging leaders’ reputation certainly can have effect. Corporate governance is coming along slowly. It would arrive faster if we could borrow some of the Yakuza’s tactics in Western companies. In the meantime, we have the regulatory cogs slowly grinding around the Combined Code, Higgs Report and Sarbanes–Oxley to protect us.
The covering up of negative financial reports and losses are examples of corporate misgovernance to head off risk of reputation damage. The eventual cost on ongoing business may be greater where the fundamental causes of the original loss have not been remedied, but merely swept under the carpet until recurring later.
This behavioural trend increases systemic risk where greater eventual damage is vested upon the wider industry. We have already seen this in Lloyds insurance, where a nepotistic code of doing business with “our sort of chaps” represents a sclerosis risk that nearly blew the UK insurance industry. The more we ignore it, the more it can blow up in our faces.
These hidden losses and weaknesses make it more difficult to value a company and its assets. The persistent ramping of a company’s value, and the love of M&A to increase company size instantly, creates additional problems for investors in Western firms. It is a problem rooted in the modern business culture, much influenced by the USA.
The weaknesses inherent in embedded value methods are repeated and added to in US GAAP reporting. These need to be anticipated, adjusted for and fully understood before reliance should be placed on the results.
How to discourage the executives from acting in an irresponsible fashion?