October 22, 2014

Book Review: ‘Flash Boys’

flash boysMuch is bandied about in financial media on high-frequency trading (HFT) and the implications for institutional and individual investors.  The overarching thought is that the capital markets are gamed by high-frequency traders, known as flash boys, and there isn’t anything we can do about it, unless, of course, you’re a portfolio manager who decides to trade on an exchange that is devoted to evening out the playing field.  That is what IEX is attempting to do, as the first equity-trading venue dedicated to eliminating the predatory practices of HFT. A new book by Michael Lewis entitled “Flash Boys” provides readers with a glimpse of this esoteric world, and PondelWilkinson’s Evan Pondel reviewed the book for IRupdate in this month’s issue.

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Diversity Growing in Corporate America

Earlier this week we tweeted about the rise of women in the boardroom. The topic is pretty interesting to me so I figured this was a good place to share some views.

 

CFO recently reported that nearly one out of every three board nominees at Fortune 500 companies is a woman. According to a study from Institutional Shareholder Services, the number of women being tapped for board positions at the country’s largest companies has doubled in the last six years. Further, new board nominees at Russell 3000 companies were 22 percent female in 2014, again, doubling from 2008.

 

With board diversity a hot button among investors, it’s not altogether surprising that some companies are widening their approach to identifying new nominees. The Pax Ellevate Global Women’s Index Fund, which invests in companies with a high percentage of gender equality, names a few: Avon (not surprising), The Procter & Gamble Company (again, not that surprising) and Xerox Corporation (pretty surprising). Many would say, however, that it’s not enough. Several companies have been taken to task by activist investors (CalSTERS and CalPERS, for example) and media for maintaining homogenous boards amidst what seems to be growing support for diversity.

 

What evidence is there that diversity in the boardroom makes a positive difference? A blog post from the Harvard Law School Forum on Corporate Governance and Financial Regulation offers the following thoughts, among others:

 

• “Diverse boards engage in richer and ultimately more effective discussion and debate. People of diverse backgrounds bring different perspectives, experiences, concerns, and sensibilities to the boardroom.”
• “Directors of diverse backgrounds ensure that the perspectives and concerns of often-ignored constituencies are represented in board discussions.”
• “The presence of female and minority directors sends signals to various constituencies about a company’s values. Those constituencies include employees at all levels, customers, communities, regulators and other government actors, and the public.”
• “A company that does not have a diverse board is failing to tap into a significant part of the relevant talent pool, and is therefore likely to be less effective.”

 

For more tangible evidence, Business Insider reports that “Companies with women on the board crush companies that are only men.” Citing an older report by Credit Suisse, companies with market caps of more than $10 billion that have at least one woman on the board of directors, outperformed those with no women 26% from 2005 to 2011. A few years later a Thomson Reuters study revealed that the stocks of companies with mixed-gender boards have outperformed, on average, companies with no women on their boards.

 

Whether the evidence is empirical or anecdotal, I think we’d all agree that diversity – in all walks of life – is a good thing. My advice for any company is to broaden your search parameters, embrace variety and be a leader in effecting change. But, remember, diversity for diversity sake is not the best policy, so choose the best man (or woman) for the job.

 

– Laurie Berman, lberman@pondel.com

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SEC Enforces Insider Transaction Rules As Boards Authorize Buybacks at Brisk Pace

1903 stock certificate of the Baltimore and Oh...

1903 stock certificate of the Baltimore and Ohio Railroad (Photo credit: Wikipedia)

Insider buying or selling of shares is one of the most emotional and telltale communications messages a public company can send.
 
Last week, the SEC handed out charges against 28 officers, directors and major shareholders for violating federal securities laws requiring the prompt reporting of information about transactions in company stock.  In addition, six publicly traded companies were charged for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.
 
Curiously, the SEC did not say whether or not those transactions were on the buy or sell side. But this is important stuff and a subject that many investors hold sacrosanct.
 
Some funds immediately sell if they see insiders are selling for anything other than “personal” reasons, such as sending a child to college. And other investors immediately buy when they see insiders buy, believing those insiders must know something positive about the future. The same usually holds true when companies initiate buyback programs.
 
A news release issued by the SEC September 10 said information about insider buying and selling gives investors an “opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company’s future prospects.”
 
Granted, it is important to look at much more than insider transactions when evaluating a stock’s viability. But as Peter Lynch, who is still regarded as one of the greatest and smartest investors of all time, has said on numerous occasions: “Insiders may sell their shares for any number of reasons, but they buy for only one—they think the price will rise.”
 
So while it is not necessary in this blog to name names of those violators, as the SEC’s press release did (in case you want to know), 33 of the 34 individuals and companies cited agreed to settle the charges and pay financial penalties totaling $2.6 million.
 
“Using quantitative analytics, we identified individuals and companies with especially high rates of filing deficiencies, and we are bringing these actions together to send a clear message about the importance of these filing provisions,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement, in the news release.
 
There are usually no such communications issues when public company boards authorize buyback programs. Making a public announcement, usually via news release, is often one of the key reasons such programs are launched—to make a statement that one’s stock is undervalued and we’re not going to take it anymore.
 
In fact, according to an analysis by Barclays PLC as reported in the Wall Street Journal September 16, companies are buying back their own shares these days at the fastest pace since the financial meltdown, and companies with the largest buyback programs have outperformed the broader market by 20 percent.
 
Barclays’ head of U.S. equities strategy, Jonathan Glionna, as reported in the same article, said that among the reasons why companies do stock buybacks, “one is that it seems to work; it makes stocks go up.”
 
– Roger Pondel, rpondel@pondel.com

 

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