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How Investors Should Manage Executive Liabilities of Their Stocks (Part 1)

15 November 2007 - Features - Editor

Some errant executives are sentenced to prison for their torts, while others simply start their own enterprises with outlandish severance packages, but neither of these ways of holding others accountable returns lost cash to holders of stocks!

Limitations of liabilities on stocks due to malfeasance, negligence, and incompetence of executives are areas which can hardly be measured, much less fully managed. It is one of the conundrums of the free enterprise model that others are free to play with our savings invested trustfully in stocks!

It is not adequate to leave matters to regulators because accounting rules leave gaping holes for skilled sharks. The situation is worse in some rapidly growing economies than the standards to which we are accustomed in the first world. The write-offs on account on bad housing loans indicate that we cannot trust even audited statements of current assets!

The convention of due diligence proves that the state of affairs with respect to statutory disclosures, is good enough for herds of retail investors. The elite and wealthy have their own accountant peering under the skirts of companies to uncover what they are truly worth!

One option for small investors is to use the vehicle of Mutual Funds and trust their managers to do the needful. Indeed all small portfolios should include at least a modicum of funds dedicated for investments by reliable professionals. However, this approach is unlikely to satisfy investors who are eager to apply their own minds on which stocks to support.

Small and medium enterprises, as well as professional with interesting ideas, would be happy to entertain venture capitalists of any size. Small investors are always willing to open their doors to investors who wish to ply them with capital. Partnerships are structured this way. Once again, such an involved form of investing does not suit all investors. Diversification demands that portfolios must contain stocks from diverse sectors-few investors can know all of them with equal felicity.

It is time to think of new approaches to protect the interests of small investors, as far as their stocks in large corporations are concerned. Financial institutions have information about the business statuses of these organizations that go far deeper than any statutory disclosure can hope to do. The need of the hour is to give small fry equal access to these privileged insights.

Why Your Investments in Stocks Need Management Audit Attention

What if small investors ganged up and arranged for their own management audits? Can we hope for the best brains from business management schools to appraise stocks professionally for public benefit? Are there companies willing to open their operations to detailed scrutiny by groups of small investors, so that their true values can be more transparently known?

It is true that such questions are mere rhetoric in the stock market culture of today. Vested interests will ridicule and oppose transparency with respect to stocks which are listed and traded for the exclusive benefits of the rich and powerful. Revaluation of fixed assets, open tendering for capital projects, controls on the use of depreciation reserves, due provisions for product liabilities, and controls on discretionary executive decisions on spending, pricing, and terms of trade, hide more skeletons than any cupboard can hold.

How Investors Should Manage Executive Liabilities of Their Stocks (Part 2)

 


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