Adding Integrity to your Investment checklist

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Adding Integrity to your Investment checklist

By Richard Harwood CFA

Managing Director (Jersey) and Fund Manager

Investing, like many other aspects of the modern world, is changing rapidly to include softer considerations which would previously have been ignored, and the integrity of the senior management team is rapidly becoming an important factor for investors to consider. Corporate history has been full of powerful leaders whose power and influence has been largely unchecked by their Boards and fellow Directors and whilst some of these characters have been immensely successful, the drive necessary to achieve that often comes with less positive personal characteristics.

It is impossible to read any biography of the late Steve Jobs and not admire his vision and determination, but also to realise that his drive left a wake of carnage in both his personal and professional relationships and that some of his behaviour would not be tolerated in today’s society. More recently, Steve Wynn and Sir Phillip Green have been subject to public damnation which, in the case of Steve Wynn, resulted in his being ousted as CEO of the Company bearing his name, as well as being forced to sell his shares in that Company. The consequences have not been solely reserved for the individuals involved, with many of the Board Members who oversaw Steve Wynn’s tenure as CEO having stepped down under shareholder pressure as it became apparent that they had not fulfilling their duty in monitoring the activities of their CEO.

Whilst these instances are disappointing, is it really a matter of concern for investors?Unfortunately, the answer is very much yes. When the allegations against Steve Wynn surfaced, the Wynn share price stood at $200, whilst it now trades at $117 with question marks still hanging over whether the company will be stripped of its license to run the $2.5bn Boston Encore casino. In the four days after the news broke, investors lost around $4.2bn of value.

Consumers are also becoming increasingly intolerant of poor public behaviour, with certain consumers boycotting brands which fall below acceptable standards. Companies are now having to become much more aware of their public image than at any time in the past. There are still plenty of PR tricks which can change the public’s perception of a company’s brand, but in today’s increasingly transparent society, they are short term solutions to a long term problem.

The role of the Board, which was perhaps once seen as a reward for a lifetime of service, is changing. It is now incumbent upon Board Members to monitor and review the behaviour of overly powerful CEOs, not only for their own protection but to prevent potentially permanent damage to their company. The world is changing very rapidly, and it is important not to be on the wrong side of that changing trend. Thinking about the integrity of a company and its senior management is an important step for investors, in avoiding what can be very expensive mistakes.

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