Corporate Turkey Governance

News headline - Revenue Up by X%! EPS 1 cent above analysts' expectation, so on and so forth. Most (if not all) corporate executives' income are tied to how well the company's stocks perform. As one can imagine, there is tremendous pressure from shareholders to outperform previous years' revenue or profit - and when financial shenanigans are busted, the shareholders blame management executives for misleading (or defrauding) the shareholders, especially minority shareholders.

I personally feel that the shareholders are partially to be blamed (if not fully). If the company reports better revenue or profit, the management must therefore be doing their job and hence, rewarded accordingly. No shareholder will value an executive telling the truth that the company is making losses. Are you kidding? The share price will plummet. I still remember about 10 years ago, there was a Canadian company which claimed that it has stumbled upon a gold mine (literally) in Indonesia, in fact, the largest gold mine in the world. Shares were trading under 50 cents before that but shot up to over 200 dollars in a matter of months. Then, things turned bad, one of its engineer was murdered in Indonesia and in fact, there were only minimal gold to be found. Every insider sold their shares before the news got out. Let's see, if the management had come clean much earlier, by explaining they had made an honest mistake and none of them sold their shares before the news were published - would that have made any difference? Seriously - think about it - what would have been different?

The truth is the minority shareholders will still suffer as much loss. The only difference is the insider trader wouldn't have made the monies they did and would have suffer the same losses as the minority shareholders.

Let's face it - playing the stock market is like playing the musical chairs, you hope that either the music won't stop or that you will have a chair to sit on when it stop. How can the minority shareholders then blame the corporate executives for allowing the music to play a little longer? In fact, the minority shareholders ENCOURAGED the executives to do everything within their power to prolong the music. This is what I call Corporate Turkey Governance.

What happens if the executives who are responsible for false/misleading financial reporting do not have enough money to repay the shareholders after the civil proceedings? Thank god there are deep pocket auditors :)