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Chuck Dohrenwend
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Will Wall Street Reforms work? Portfolio
Managers Have Serious Doubts
NEW YORK: Pressure for governance and securities industry reforms has
not increased investor confidence that accounting fraud at public companies
is materially less today than when Enron, Worldcom, Tyco, and other corporate
missteps were front page news.
According to a survey of approximately 7,000 U.S. portfolio managers conducted
by Broadgate Consultants, Inc. in August, just 23% of the 112 respondents said
they believe recent regulatory measures to prevent fraud and promote better
governance have been effective. More than two-thirds of respondents said that
these measures will not be enough to prevent future accounting scandals. Nearly
half of the portfolio managers surveyed strongly support the efforts of state
regulators to pursue violations of securities law and do not wish to see their
authority limited.
In light of the continuing risk of corporate malfeasance, institutional investors
also appear to broadly support initiatives to provide more governance-related
disclosure. Sixty-four percent of survey participants said they are already
seeing more information and commentary on corporate governance in sell-side
research. And more than half of the portfolio managers believe that the army
of consultants supplying governance report cards will have a constructive impact
on how public boards function.
Respondents also reflected a degree of support for small investors who sustained
losses as a result of following recommendations of brokerage firms, particularly
in connection with companies that turned out to be engaged in fraud. Just 25%
agreed with the recent federal court ruling that dismissed a suit against Merrill
Lynch brought by investors trying to recover their losses
Further reflecting the extent to which brokerage firm credibility has been
damaged, sixty percent of the respondents remain unconvinced that the Wall Street
global settlement will improve the quality and independence of sell-side research.
As a result, one-third of the institutional investors surveyed said they plan
to develop relationships with new independent research firms, while over half
of the respondents said their firms expect to increase internal research capabilities.
The broad-based skepticism evident in the survey response of portfolio managers
apparently runs mainly in one direction, however. Asked whether the mutual fund
industry needed more regulatory oversight to protect small investors, 60% of
the fund managers surveyed said no.
"Faith in securities industry reform has clearly lost some steam among
fund managers and this makes it more important than ever for companies to take
a leadership role in rebuilding investor trust ," said Thomas C. Franco,
Chairman and Chief Executive Officer of Broadgate Consultants. "The most
highly valued companies in the future will be those that demonstrate the strongest
governance practices and financial controls."
About Broadgate Consultants, Inc. Established in 1987, Broadgate Consultants, Inc. provides strategic corporate
and capital markets communications advisory and implementation services to public
companies and private equity firms and their portfolio companies. Its clients
include global public companies as well as private equity firms with assets
under management ranging from $100 million to more than $5 billion. The firm
is also recognized for its crisis management services and is a partner firm
of Public Relations Organisation International, a global network of independent
public relations firms. More information about Broadgate can be found at www.broadgate.com.
