Disclosure always pays

Disclosure always pays
The much-trumpeted listing of Diligent Systems on the NZX occurred in December.  Listed at $1 (currently circling 40c), the chief executive was removed soon after the listing ceremony for not making full disclosure on past associations and history.  The moral is that disclosure is always the best option for negative news.  You can't fool everyone all the time and it takes only one shareholder with a long memory to spoil the party.  The Institute of Directors was surprised the issue was over subscribed given the prospectus was long on gloss but short on past financial strength or a detailed plan to beat the competition.

Who loves you, baby?
A Reader's Digest trust survey sees chief executives ranked at 24 out of 30, behind fire fighters, nurses, accountants and life coaches but ahead of stock brokers, real estate agents, psychics and car salesmen. Company directors did not feature (perhaps mercifully).

South Side business school - I
Some interesting governance observations are made in Steven Levitt’s excellent book Freakonomics (2005). When describing the business structure of a Chicago South Side crack (cocaine) gang it becomes clear that a specific and recognisable business model applies. Overall control of the Chicago area is vested in a 20-strong board of directors. Compliance is a real issue as at any one time 25% of the directors are in jail. A franchise model sees the board issuing licences covering specific neighbourhood distribution areas. The cost is 20% of gross turnover. The accuracy of financial statements is ensured by strict regulation; any misstatement sees the franchisee murdered. Auditors are not required. Franchisees are also granted collateral licences (pimping, prostitution, stolen goods) to augment their earning streams.

South Side business school - II
A philosophy of empowerment operates where the franchisee can dispense net revenues entirely as he sees fit to maximise his franchise’s value. Competitive strategies against competing franchises are always pressing and see large investment in weapons and mercenaries. Staff turnover is high with 25% of front-line employees being killed. Responsible franchisees are observed to follow sound stakeholder principles and provide for the families of deceased staff members. This is a high margin business after all where profits accrue upwards and most street level employees cannot afford to live away from their single parent families.  There is a clear and effective performance management system and career path in place: avoid death by competitors; avoid death by management; impress with sales and marketing results; and survivors can make it to franchise holder level and eventually to the board of directors if sufficient numbers of other people die or get imprisoned.  All in all, this is not too dissimilar from the average competitive FMCG business.