At stake are complex regulatory ailments, from consumer credit and fuel economy to poverty and public health. Remarkably, the marriage between economics and psychology that explores how behavior influences financial decisions also has become a go-to theory for gamification, targeted mobile ads and other tools to attract eyeballs. Even The Colbert Report has weighed in, calling BE’s well-known nudging apparatus “Big Mother.”
Last week Fairfax Financial Holdings chief executive officer Prem Watsa insisted that he would not walk away from a BlackBerry deal. “We’ve never renegotiated,” he said. “Over 28 years our reputation is stellar on that front. We just don’t do that.” Watsa’s statement followed a 6 percent loss in share price. The firm was in a tough spot. Reporters covered the market’s lack of enthusiasm and the deal looked like it could be a goner.
What Watsa does is anyone’s guess. But a new paper in the Journal of Financial Economics that examines the media’s role in acquisitions sheds light on the complexities of Watsa’s bad press amid falling share prices. Baixiao Liu of Florida State University and John McConnell of Purdue University found that a CEO was more likely to shelve a bad deal if reporting in the New York Times, the Wall Street Journal and Dow Jones News Service was negative, not necessarily because of its merits, but because of its effect on managers. The authors conclude that news reporting can be a force of good in corporate governance, even when managers act in their interest.
When Smithfield Foods CEO Larry Pope appears before the Senate Agriculture Committee this week, senators will likely grill him on whether U.S. consumers will be harmed by the proposed $4.7 billion sale to the Chinese firm Shuanghui. Some members of Congress have suggested the deal could hurt the U.S. food supply, even though the meat will be exported.
It seems probable that the deal will go through, but one hurdle is that it must receive approval from the little-known Committee on Foreign Investment in the United States (CFIUS). As foreign investment rises CFIUS, the federal committee created by President Ford that is barely known outside Beltway and M&A circles, will only become more central to investment by foreign firms. CFIUS’s opaque rules will reach even further into deals from candy companies to technology portals.
In April, U.S. banks dusted off the dividend again, a trick they’d mostly abandoned during the financial crisis. JPMorgan Chase plans an 8-cent-per-share hike. Wells Fargo’s will be 5 cents. Same for Morgan Stanley. Bank of America will raise its dividend a penny. Some might celebrate the move: The banks are back! But there’s more to it. In this fairly anemic economy, dividends are yet another strategic, if counterintuitive, hedge that won’t get our loved and loathed financial institutions lending again anytime soon.
Although good news for shareholders, the payouts don’t mask the reality that banks are still unstable. Executives are scared of looming regulatory schemes, such as the Brown-Vitter bill in the Senate, that could raise equity requirements to cushion the excessive debt of borrowing-prone banks. While earnings are up, balance sheets are deceptive. The big banks still rely heavily on income from the stock market, which overall has been stronger, and take in about $83 billion in subsidies. Their equity and cash reserves are a tiny fraction of their debt.
Shareholder activism sounds so respectable, even noble. The phrase conjures images of good-corporate-governance folk fighting greedy or dysfunctional management in the company’s best interest. While shareholders can be disciplinarians who right the wrongs of abusive directors, many boardroom activists advance some of the most destructive short-term thinking in business today.
Sparring with management is popular sport for short-termists seeking to maximize the value of their assets. The game ranges from venal to honorable. “Don’t let the Elliott Hedge Fund pursue its self-serving short-term agenda and destroy the long term [sic] value of your investment,” Hess Chief Executive Officer John Hess wrote in a letter to shareholders last week. T-Mobile CEO John Legere blamed “greedy hedge funds” after proxy advisors to MetroPCS investors advised shareholders to block a merger with the wireless giant. In February 2012, Apple’s board agreed to majority voting, a once-fringe officer election process that can have unintended consequences and has become more common at large-cap firms. Coincidentally or not, since the resolution was adopted, Apple announced that it will distribute $45 billion in dividends from its $137-plus billion in cash reserves.
In 1988, Michael Dell was a 23-year-old wunderkind who sold cheap computers directly to “end users,” which is what he called his customers. He arranged an initial public offering to raise cash and attract top-tier engineers and managers while basking in the light of transparency.
Dell was so small that the IPO wasn’t mentioned in the New York Times. At around $12 million, or $23 million in 2013 dollars, the book value of Dell’s common stock likely would have been too low to entice a modern-day Goldman Sachs, one of its lead underwriters. But Dell’s IPO was a winner. In two months, its stock price jumped from $8.50 to $19 per share. By the end of the year, it had made $159 million in sales.
In 1982, Nike began selling the Air Force 1 with its signature “swoosh” design. Almost 30 years later, it sued a small sneaker maker in New York federal district court for trademark infringement. During the litigation, Nike promised not to sue for old designs, mostly because its competitor’s shoes were no longer being widely sold and litigation costs had escalated. It was too late. The scrappy newcomer already had counterclaimed, challenging the validity of Nike’s trademark registration. A battle over the extent of that promise, under the guise of procedure, ensues.
A decade ago, the case might have been an obscure dispute involving a less-than-urgent constitutional question. But last month, the Supreme Court heard oral arguments in a suit that could change the way trademark and possibly patent registration is practiced in the fast-moving, entrepreneur-flooded digital economy.
The U.S. Securities and Exchange Commission’s case against Citigroup’s Brian Stoker, a director in the bank’s Global Markets group, seemed clear-cut. Stoker structured and marketed an investment portfolio consisting of credit default swaps. The agency accused him of misrepresenting deal terms and defrauding investors for not disclosing the bank’s bet against the portfolio while pitching the investment vehicle to customers. But when it came to trial earlier this summer, the government could not prove that Stoker knew or should have known that the pitches were misleading, and the jury didn’t convict.
It’s hardly surprising. The SEC’s failure to secure a guilty verdict is one more sign that the commission still has not climbed out of the morass in which it was mired for most of the Bush years. The agency tasked with overseeing some 5,000 broker-dealers, 10,000 investor-advisers, 10,000 hedge funds, and 12,000 public companies, as well as mutual funds, the exchanges and even the rating agencies, is ailing because of outdated rules, systems and structures.