In the Sunday Opinion section of the New York Times, Christopher Cox, Chairman of the SEC wrote an article entitled ‘Swapping Secrecy for Transparency’ in which he recommended increased regulation and transparency governing the derivatives market and in particular, credit default swaps. In the article he says, “Transparency is a powerful antidote for what ails our capital markets. When investors have clear and accurate information, and when they can make informed decisions about where to put their resources, money and credit will begin to flow again. By giving regulators the authority they need to bring the credit derivatives market into the sunshine, we can take a giant step forward in protecting our financial system and the well-being of every American.”
The need for transparency is abundantly evident, but here are a few things that also come to mind for me:
Six degrees of separation – we all know this theory… through our network of contacts every one of us is within six ‘steps’ of each person on earth. Think of the magnitude of this for a minute and then ask yourself, shouldn’t there be a limit on how many ‘degrees of separation’ are permitted when packaging some of these financial products/partnering with other institutions? How can risk be accurately assessed if the product cannot even be defined?
Creativity needs to be measured against business value – my son Ryan is an honours math grad from UofT who was nicknamed Physics Boy for his ability to always see how one thing was connected to another. One year for my birthday he presented me with a program he had written that included the mathematical probability for every potential move in the game of backgammon. He said to me, “Mom, if you learn this – you will never lose.” I looked at him and thought, “But what would be the fun of playing?” When I hear about these complex investment products – I don’t necessarily see a room full of duplicitous finance types intent on deception through their creation of intricate models. Instead I see a room full of Physics Boys who joyfully create complex products without the foresight of practical application. Like every other creative ‘genius’ they need to be grounded through the oversight of guardians that test and measure the true long-term business value of their creations.
Short-term focus – we live in a world of immediacy and the market has come to expect more immediate gains. Quarter over quarter performance expectations can drive companies to deliver short-term results at the expense of the long-term health of the company. Measuring short-term tactics against long-term strategy and assessing the risk involved is something investors expect of company officers. Should risk assessment factor more prominently into regulation/disclosure or if a company is truly transparent and communicative, will this be self evident?
Executive compensation not tied enough to the long-term – a few months ago I read about a staggering (but not uncommon) bonus paid to an executive in relation to a successful merger and I wondered… is it really worth that much if this same executive isn’t then able to extract the full value of the deal when transitioning the combined companies? Isn’t that the point at which success can truly be measured? Are companies paying out too much in advance of knowing the end score? Would tying compensation more closely to longer term results better protect investors? (I’m sure the Physics Boys could come up with a model that would work for this.)
Like most of you, I have more questions than answers but what remains clear is that a healthy market relies on a high level of transparency between a company and its stakeholders. When this is compromised on a large scale, as it was with the credit swap fiasco, we are ultimately all at risk.
attendance were myself who has served as a judge for the annual awards in the electronic disclosure category for the past three years, Catherine Crofton our VP Sales & Marketing who has also participated as a judge in the electronic disclosure category for the past seven years and Karen Adams our Client Relations Director.
In a recent edition of 
As usual, there were a lot of great sessions to choose from at 
This month marks roughly the 2nd anniversary for 
CIRI Ontario
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