Friday, February 06, 2004

Exposure to knowledge

Taking Richard’s point and briefly reflecting again on the history of English capitalism, I think now, just as I’ve thought for a long time, that caveat emptor has always to be the guiding rule when it comes to risk management in this context.

Knowledge is power for the people at the top and the commercial law of limited liability merely does what it says on the label - when Enron or the Maxwell empire collapses all you lose is your shareholding. The risk for small shareholders is of course that when your shareholding is your entire fortune and your entire future then collapse becomes a human tragedy.

It’s no small coincidence that the profession of ‘risk management’ is owned by guys who specialize in making sure that a financial institution’s financial exposure – the aggregate of its limited liability exposures – is never enough to threaten the institution’s future. They are also required to ensure that the institution’s rewards adequately reflect that exposure.

The market efficiency model I referred to earlier claimed that no decision could be taken by a FTSE100 firm without that decision instantly being reflected in its share price. Risk management analysis is (ostensibly) what underpins this claim. Risk managers ‘look unfavourably’ on plc leaders who act as sole owners or entrepreneurs. Whatever the true POSIWID of risk management in this context – and financial institutions never lose sight of the risk-reward nexus that ordinary people can often be blind to - it clearly exists to look after its own and its master’s interests.

Those of us who can’t afford risk management – and can’t do what those Irish guys are doing to Man Utd - are forced either to make a leap of faith and go with some kind of ‘fund’ or a ‘mutual’ or else stand the risk ourselves. Whatever our choice, we are forced to exist on second-hand knowledge, to wash our feet with our socks on and ultimately to put our fortunes in the hands of others. Funds and mutuals, institutions that try to minimize risk by ‘spreading’ their exposure, were traditionally claimed to be a ‘safe’ if less rewarding option for the little guy than was full-on exposure. When the FTSE crashed and Wall Street plummeted, these guys instantly revealed their POSIWID, cried ‘foul’ and stung millions of little guys just as Enron and Maxwell had.

Richard says the issue here is about bosses who behave as if they were the sole owners, trampling over the rights of the real owners. I don’t necessarily agree. For example people used to swear by Tiny Rowlands’s freebooting trampling – just as they did about Maxwell’s and just as they do about Murdoch and many another stockmarket ‘star’ - and fought off regulation as long as they possibly could. This is capitalism and the only rule is ‘more is better’. That means that as long as they keep paying dividends and the share price keeps rising they can do precisely as they please. Caveat emptor.

My position then is that I'm pretty risk-indifferent as to who owns plcs - sic transit gloria mundi - I say. Ownership of knowledge though, that's an entirely different kettle of risk.