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Due Diligence Rights of Stock Market Interests Related to Provisions

9 April 2007 - Features - Editor

The attention stock market operators give to revenue, profits, dividends, and price movements, is not shared by provisions, liabilities, and litigation. Most management statements gloss over possible charges on future profits and reserves: perhaps they genuinely do not know of claims and court judgments which can rock the financial statements of the companies for which they are responsible. Executive accountability for sudden charges on companies is no salve for major losses with unsuspecting investors must endure in such unpleasant and shocking circumstances.

Consider the recent Federal ruling against banks for denying employees overtime wages. A case initiated by a single employee has taken the form of a class action suit, opening the doors for untold numbers of employees to present similar claims. Perhaps the banks concerned will have the financial strength to meet such sudden obligations without going under, but what if other companies listed on a stock market were to be faced with similar class action suits? Employee remuneration and rights are vast fields, and conventional accounting systems have no ways of informing stock market investors if companies default on serious counts. Such aspects are not covered by financial audits either!

There are precedents of pharmaceutical companies facing such charges related to side-effects of their brands, but presumably their product margins and insurance policies cover such eventualities. However, retrospective payments to employees are unlikely to be covered. There seems to be no end to the traps which can suck values away from stock market investments! Perhaps we should lobby for management and operational audits to accompany the financial ones done now, though that would still not cover us against unexpected court judgments.

It is not necessary for stock market operators to suffer uncontrollable risks from unknown liabilities. It is better to ask management teams for diligent legal audits of their operations. Companies which are conservative in providing for possible claims, and which carry adequate insurance cover, should find favor with investors. This kind of approach is especially important for companies with relatively low profit margins, and those with vulnerable balance sheets. Details of pending litigation against each company, and the consequences of awards against other companies in an industry, should also be weighed carefully before investors take portfolio decisions. Clearly, there is a case for moving beyond the historical dividend and price movements approach when it comes to evaluating stock market alternatives.

 


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