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Would you ever just walk straight into an Iron Man Triathlon? No experience, no training, no prep, not even having proper equipment? No verification of your overall health with your physician? Ignoring your diet for years leading up to the race? I really hope not. That sounds insane, and will probably be your undoing. But this is precisely how the proposed legislation feels to eliminate 404 compliance from Sarbanes Oxley requirements for sub-$700m filers. I know that small cap filers have to make a substantial commitment of money and resources to comply with 404. It isn't easy, and it shouldn't be. Compliance with 404 means having hired the right, qualified people to execute sound business practices. 404 compliance means your processes are well-oiled, and have been validated. I say, let 404 stand. Let management teams decide whether or not they need to communicate a clean report to the capital markets. If the markets are truly efficient, and valuation is reflective of the business (and not just the latest spin), investors in smaller companies without a clean SOX evaluation should require higher risk premiums. Risk. Reward. If a small company makes an economic decision to seek 404 compliance status, they should be rewarded with lower cost access to capital. An investment in good control practices needs to be valued in the marketplace. Now, I recognize that 404 could be adopted by smaller companies in the same way that ISO9000 standards have been adopted. The messaging of such actions would be clear. Maybe the "manufacturers" of pooled investing dollars (mutual funds, pensions) would drive the standard. I doubt it, since the idea was around since 1977 without enforcement. But the risk in this is just like the couch potato turning triathlete overnight - big ambitions will likely cost someone. Certainly the individual, and possibly competitors. The same is true for ambitious small companies: improper preparation for growth beyond their existing market cap only increases the risks of failure as they grow and become increasingly sophisticated. I want to know the company is a contender, and capable of making the field. As an investor, I hope like mad that all my bets are sound, and any one could become the next GE, eBay, or HP success story. I want my investments to grow. I want the company to get big. But I need the financials to have integrity. I want to know that the variables in the business results are coming from strategic initiatives and management's execution, not inconsistent accounting practices or mathematical errors in tax calculations. In the absence of the corporate discipline to enforce meaningful monitoring controls throughout a company, 404 requires that management be held accountable and an opinion of performance reported to shareholders. This has been a powerful backbone introduced to augment financial auditing. I want to know that my employees (in my invested companies) can evidence that they are doing their jobs correctly. I'll close out my rant, and open comments. Thoughts are welcome: should we change the playing field for small filers by removing 404 requirements for them? Is there truly a risk to investors?
This has been hard - for everyone. Employers would prefer that competent people stay in their current seats (less risky, as such people achieve a level of "proficiency" over time at their work). But what happens when the landscape changes, and the requirements of Mr. Retired-at-Work necssitate that they grow and adapt and - gasp - do more than they have for the last 10 years? If managers don't manage, others must pick up the slack. And this is where my control work has kicked off a new passion - Slackers and weak managers jeopardize both the value of the company and the careers of professionals that have passion for their work.Quality personnel and corporate value are inseperable. Not just in a services business, but in any settting. Control environments turn on the ability of the professionals to exercise sound judgement and demonstrate the necessary discipline to execute, time and again. My tangential effort is called "More than a Living", and drills on the issues afflicting professionals that want more out of their jobs than just a paycheck. In this effort, I'm collaborating with Rick Turoczy and Amy Winkelman, two of the brightest and most observant minds I know. We've boiled down a little equation, and continue to explore the aspects that take talent and translate it into success. (Links will take you to a few select entries that give you a flavor for the discusssion.) Talent + Feedback = SkillMost entries speak directly to the individual, some to managers. All provide fair warning to the "I'll pass on change" crowd, as this is no longer an option. I hope you find this useful, insightful, or maybe just an interesting diversion from the humdrum. My Best, Toby Labels: expertise, feedback, more than a living, risk, skill, talent
Most notably in this piece, this McKinsey quote struck me: There is evidence that investors value companies with good corporate governance. McKinsey surveyed over 200 institutional investors and found that 80% of respondents would pay a premium for well-governed companies, from 11% in Canada to 40% in Egypt (Global Investor Opinion Survey, 2002).It's been a few years since this study, and the waves of optimism about reinvigorated governance practices have now seen the light of day. Have we seen this to be true in the markets - are we seeing market participants placing premiums on good governance? This 2002 analysis seems to be exactly the opposite of Greenspan's recent no apparent risk premium comments. What's been your experience or observations? Labels: risk value investor mckinsey
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