Monday, May 12, 2008

Investing Options & The Folly of "Corporate Governance"

Thursday night's O'Reilly Factor featured a segment following up on matters at GE. Bill O'Reilly had, as a guest, an institutional investor who holds GE shares and attended the annual meeting in order to ask CEO Jeff Immelt some pointed questions.

During this segment, the audio of the investors was played as he finished asking questions of Immelt and received a reply, including Immelt's contention that the investor had now taken enough of everyone's time.

As I watched O'Reilly retrace some of the same ground he covered in his discussion with me last month, which can be seen in this post, I considered the irony of the situation.

Bill O'Reilly clearly wanted to cover the GE annual meeting and, if possible, capture an unhappy investor closely questioning Immelt, and then interview the investor. This makes sense.

But, then again, it sort of doesn't. Because, as I wrote in this recent post,

"Mr. Effron's email provides at least one answer to Mr. O'Reilly's question of me about GE's equity,

"Who would own this stupid stock? Who would buy it?

People who think like Mr. Effron.

The remaining shareholders would seem to have motivations, valuation and performance criteria similar to those of Mr. Effron.

And that, my friends, is what makes markets. Different views of and valuations for the same instrument.

In this case, we're fortunate to have one of those, in Mr. O'Reilly's words, 'stupid enough to own this stock' actually tell us why he does."

It's one of those Holmesian cases of the dog that did not bark. Only, in this case, it's the investor who was absent.

The investor who was sanguine and realistic enough to have already sold and moved onto better investment opportunities.

So, while I appreciate Bill O'Reilly's desire to deliver good television by interviewing a disgruntled institutional shareholder, I also see that it is very much beside the point.

Further, the institutional fund manager then mumbled something about hoping that the board or shareholders would eventually move Immelt and GE to act in some way that would improve the value of the stock.

I like Bill O'Reilly and I fully understand his reason for covering the GE story on his new program. As I mentioned in this earlier post, he had a trifecta on this topic,

"However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001."

How much better can a news story be? A well-known US company, GE, continues to do business which supports the building of the infrastructure of a country, Iran, which is actively engaged in killing American servicemen in Iraq, while the company's total returns languish and the CEO is paid over $120MM since assuming the job in 2001.

But the investment angle of the story, as represented by Mr. O'Reilly's institutional manager/guest last night, now focuses on the wrong point.

The wonderful thing about our American economic system and environment is that you don't have to own GE! Or any other underperforming asset!

There are thousands of investing options available to both institutional and retail investors alike.

Rather than wait, like those poor souls anticipating Godot's arrival, for the seemingly-always-coming 'corporate governance' solution, investors are better off to just sell what they don't like and buy something else.

Look at Ed Lampert. He got fed up with Sears and decided to improve it. When Lampert surfaced last week, he was full of excuses about how Sears' continuing dismal performance is the economy's fault, and he was sure, in time, when that was doing better, so, too, would his newest headache.

Do you think Ed Lampert now wishes he'd avoided the Sears mess and just stuck with conventional hedge fund investing, instead of crossing the line into operating management of his holdings?

Honestly, the more I watch and listen to people hectoring company CEOs and their boards to 'improve governance,' the more I am convinced you should just vote your shares in the market by selling them.

After all, modern American corporations were devised mainly for the companies to attract capital, not in order to provide investors with additional instruments which would also allow them maximal voices in the operation of the firms seeking capital from the investing public.

If our modern publicly-held corporate model were so highly-evolved and optimal, why would private equity firms exist?

Isn't this the non-barking dog? Private equity?

Obviously some investors are sufficiently trusting of private equity managers such that they hand over large sums of money with less apparent influence on management than they would have in a publicly-listed firm.

Doesn't this suggest that there are more good investment opportunities than there are good CEOs and boards? That it's easier to sell your shares in a company which has potentially good positions, but bad management, and find a better pairing of business opportunity and management?

I thought about this on Friday, when I read a piece in the Wall Street Journal concerning Vikram Pandit's impending moves, or lack thereof, with the bloated, overly-complex and -diversified Citigroup. Rather than hope the inexperienced and untested CEO manages to pull a rabbit out of his hat at Citigroup, why not just sell the stock and buy equity in a company that is better-positioned in its sector, with better, proven management?

There are so many opportunities for investment in the American economy that there's simply no reason to hold onto a problematic equity and either hope, yet again, that this year will bring change for the better, or, worse, lobby for 'management change' or 'board action.'

It probably makes more sense to trust the senior management and board of the firm in which you invest to do a great job with the assets under their control than to invest in a company which you think could, or wish would, do better than it has with the company's assets, and then try to change the management and/or board's behavior.

I'm not Bill O'Reilly, nor one of his producers. So I don't know as much about what makes good television as he and his record-audience-producing staff do. But if it were me? The guest I'd have had on his GE-related segment Thursday night would have been someone who sold GE on or before last month's disappointing announcement of the firm's quarterly profits.

Why did he sell? How long had he waited? What did he buy with the proceeds of his GE equity sale?

That's an investor I'd find interesting and credible.

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