The free market is all well and good but it relies on people!

2 mins. to read

I was watching the documentary about free market economist Friedrich Hayek on “Masters of money” last night on the BBC and was thinking how in theory de-regulation and open markets make so much sense but human greed is so often the factor which destroys this dream!

Looking back into recent history there’s plenty of examples of massive corporate greed toppling both supposedly solid companies and even driving countries to the brink of economic collapse.

When energy giant, Enron, collapsed in December 2001, shareholders saw their investment collapse from over $90 a share to zero losing them $11 billion in the process. Executive greed caused the company to employ a series of shady accounting practices including off book accounting to mask issues with profitability. The management team, Kenneth Lay and Jeffrey Skilling, were given 45 year and 24 year prison sentences for their part in the fraud (Lay died in 2006).

Then on to Lehman Brothers which, before its bankruptcy in September 2008, saw its CEO Dick Fuld, known as the “gorilla” receive $22 million in compensation in 2007. Fuld was famous for his dictatorial style and greed for bonuses that he drove the investment bank  to massively over leverage itself on sub-prime and commercial property debt which ultimately led to its demise after the US Treasury decided not to intervene to save the bank.

Closer to home but perhaps not in the same league perhaps, the issue of corporate governance and executive management teams has reared its ugly head over recent months.

They seem to be coming like buses right now. News that JJB sports was going into receivership after years of mismanagement and wasting shareholder funds on ill advised acquisitions. The issues with Bumi and its Indonesian operations where significant financial irregularities appear to have been uncovered related to its coal assets. The asset stripping at Plus markets as well as the debacle at HMV under Simon Fox which has seen its share price collapse but ensured that plenty of bonuses were paid out.

The unfortunate fact is that there although there are many examples of management teams out there who really look out for the interests of shareholders as they should do, there are many, many examples of executives who are more focused on personal enrichment than the greater good. The problem for investors is that identifying the latter group is easier said than done before a company announces a devastating piece of news which wipes out the share price.

Perhaps, Friedrich Hayek, should have built greed into his models?

Contrarian Investor UK

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