Guide to Analysing Companies

THE CHANGING FACE OF MARKETS
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01 Essential Finance 10/11/06 2:21 PM Page 13

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all such entities above a certain threshold. It also tightened up
the rules governing when senior executives of public compa-
nies may buy and sell shares (many directors had cashed in
their options ahead of bad news, which depressed the share
price); and it curtailed the use of pro-forma accounts, which
exclude several inconvenient things, such as the cost of mergers,
and so massage profits.
To curb the power of chief executives, who until then had
reigned supreme over most public companies in the United
States (partly because they invariably combine their role with
that of chairman), the nyse followed up with several measures
of its own, aimed at giving shareholders more control over the
companies they own. For example, all boards of companies
quoted on the nyse have to have a majority of independent
members. This excludes almost anyone who has a business link
with the company, from suppliers to lawyers, bankers and con-
sultants. A better answer in the long run might be to adopt the
practice long favoured by most big companies in the UK: to split
the roles of chief executive and chairman.
Suspending disbelief
Will such measures restore faith in a system seen as damaged
by many investors? To a degree. If shareholders (not to mention
analysts and commentators) are ready to suspend disbelief
when confronted by companies with inflated numbers and im-
plausible business plans, as many did during the dotcom boom,
then no amount of regulation is likely to save them. However,
there is a chance that, for a time at least, the abuses that had
become endemic during the 1990s will be squeezed out of the
system.
For investors, the costs of failure are likely to rise, not fall, as
financial institutions increase in size and the bets they make in
markets become bigger. Greenspan, for one, believes that the
pace of change in worldwide financial markets is accelerating,
not slowing down. He thinks that the implied rewards for the
risk associated with many investments all over the world
suggest that global finance could yet grow to become even
larger in terms of its contribution to gross domestic product than
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