Wednesday, October 22, 2008

Leadership missing in Action at Financial Companies- Part II

Looking at Senior Management Turnover at companies can reveal a lot about that company’s health.

Beside the CEO, positions that are critical to a company’s core would include, in case of the financial industry, the Chief Risk Officer (CRO). Departure or a shuffle involving this executive should definitely put you on high alert. There could be several reasons behind the turnover of senior management.

1. Could it be that the CRO warned the management about high leverage risks or perhaps non compliance risks and management did not appreciate that?

2. Maybe the new CRO who is replacing the old one is a buddy of the CEO…this could lead to a conflict of interest…

Anyway, In September 2007, Lehman reshuffled its Risk Head Madelyn Antoncic out of her role into a relatively sedate role dealing with global public policy. The reason: She had warned senior management that it was taking on riskier bets than was good for its health.

At AIG, (specifically AIG Financial Products) the Vice President of Accounting Policies, Mr.Joseph St.Dennis resigned from his position after his warnings that the accounting behind the risky financial products that AIGFP was peddling would subject the company to extensive losses, went unheeded. Mr. St. Denis subsequently came forward and gave his evidence before the House Committee on Oversight and Government Reform. Mr. St.Denis resigned in October 2007. Soon after had discussions with AIG’s auditors. They in turn, declared that the company had material weaknesses in its Internal Control System for the financial year ended December 2007. Makes you wonder, what were they doing until then?

Subsequent to Mr.Dennis’s departure, AIG also had changes in its Board of Directors Audit Committee in 2007.

Citi has had a new CEO as well as a new Risk Officer, all in 2007. They also changed their Risk Officer once again in early 2008. The earlier Chief Risk Officer had apparently chosen to retire. (after being in office for less than 6 months!)

Goldman Sachs and Bank of America (BOA) have not had any significant or critical positions that were reshuffled or fired during the entire 2007. Ofcourse this does not take into account the shuffle at BOA post Merrill purchase, but that was in 2008.

What do all these executive changes mean in terms of the share value? Can these be indicators or rather foretellers of the future?

Maybe…way back in September 2007, if a Lehman investor would have considered the implications of a Chief Risk Officer being taken out of her position and shuffled somewhere else, it should have raised red flags or a ‘watch’ on that stock.

Anytime a crititcal position in a company is changed, due to reasons other than retirements, it’s time to step back and think behind the reasons. Most large institutional investors would use information like this to take the right investment decision. Even if you are not invested directly in stock market but in mutual funds or 401K’s or other investment vehicles, it is always appropriate to be aware of the companies that belong to the industry in which the mutual fund has invested your money.

1 comment:

  1. Thanks for commenting on my blog, Tejus.
    This is a wonderful account of how such a big financial company performed a grave error, which went unnoticed even by the informed investor.
    Hope to read more stuff here!!