June 8, 2009 (FinancialWire) — Citing examples of “Cumulative Excess Returns”, which are the shareholder returns for the stock in question less shareholder returns calculated for a portfolio of the S&P 500 (NASDAQ: SPX), examples of Level Two investing, Non-Control Voting Initiatives, such as the case of Avon (NYSE: AVP), as well as Robert Monks’ unsuccessful proxy battle for a seat on the Board of Directors of Sears (NASDAQ: SHLD), the fifth entry in Dr. Susanne Trimbath’s “No Accounting For Corporate Governance” series, entitled “Why Governance Matters”, was recently posted at Investrend Weblogs. The post continues Trimbath’s description of tension created by institutional investors’ desire to earn extra revenue from stock lending and outlines the challenges to corporate governance presented by the subsequent lack of accounting for voting rights.

From the blog:

“We cannot over-emphasize the importance of voting rights. Beyond the simple question of fairness, there is evidence of economic consequences associated with voting initiatives. Given the nature of this approach to correcting corporate strategy, the research is naturally limited to case studies. Still it is possible to point to more cases of positive returns than negative returns for the limited voting challenges associated with Level Two active investing, aimed at changing corporate policies or securing representation on the corporate board through the exercise of corporate governance rights associated with ownership. This appears to hold true whether the investor wins or loses the voting challenge.” And the post continues. (To see the entire entry, see “Article Links”, below).

Slated for six parts, other previously posted entries are Part One through Part Four in Trimbath’s ‘No Accounting’ series.

The setting for the first entry in the series begins with the October 2008 U.S. Congressional hearing on the financial crisis, in which former Federal Reserve Chairman, Alan Greenspan, “admitted that he was shocked to find out, after 40 years as an economist, that some executives would do things that were not in the best interest of the company they worked for.” And continues by commenting that, “His approach was overly simplistic because the difference between what executives can do and what they should do is the crux of corporate governance.”

Part Two, entitled “A Little History”, explains that, “Over time, active investing transforms as laws, politics, and economic forces shift. At work changing the shape of active investing strategies are significant shifts in the financing markets. Preferred stock was the most favored form of financing for corporate actions (takeovers) during the 1970s. During the 1980s, debt financing was plentiful so that junk bond takeovers and leveraged buyouts were the order of the day for effecting change at inefficient corporations. In the early 1990s, there was an implosion in the debt markets. As the tech bubble began to inflate, equity financing was prevalent.”

Part Three, entitled “Shareholder Activism”, discusses several new investment partnerships that were formed in the early 1990’s, which “presented ‘alternative emerging investment opportunities’ to the major pension plans,” and continues by stating, “These partnerships proposed to make a limited number of restricted investments in major public corporations, and then, to utilize the expertise of the principals to increase the value of those investment stakes.”

Part Four, entitled “Stock Loan Versus Voting Rights” notes that, “from the perspective of corporate governance, the practice of securities lending creates three complications. First, the institutional investor temporarily loses his voting rights and is therefore partially unable to fulfill his corporate governance obligations. Second, there is a risk that the ultimate borrower of the shares will abuse the process by using the shares to influence a vote in a direction contrary to the best interests of the lender institution. Finally, there is a risk that the borrower, in using the shares to fulfill delivery obligations for short sales, will be driving down the value of the institutional investor’s portfolio”, adding, “this last complication was the motivation for the 2008 halt to short selling in the shares of financial companies.”

The entire “Stock Loan Versus Voting Rights” entry, accessible via Investrend Weblogs (see Article Links, below) included this disclosure statement: “Investrend does not edit the weblog content posted in this section. Investrend Weblogs content is posted as it is submitted by its authors, and weblog content may not reflect the views and/or opinions of Investrend.  Also, authors may trade in subject securities and/or otherwise have a vested interest in other securities and/or funds and/or companies, either directly and/or indirectly related to content appearing here.”

Dr. Susanne Trimbath, CEO and Chief Economist at STP Advisory Services, LLC, holds a Ph.D. in Economics from New York University. She was Senior Research Economistat Milken Institute and Senior Advisor on a USAID-sponsored capital markets project in Russia. Her early career experience was in financial services at national clearing and settlement organizations in San Francisco and New York as well as at the Federal Reserve Bank of San Francisco. Dr. Trimbath is co-author of Beyond Junk Bonds: Expanding High-Yield Markets (2003, Oxford University Press); contributor and co-editor of The Savings and Loan Crisis: Lessons from a Regulatory Failure (Kluwer Academic Publishers, 2004); and author of Mergers and Efficiency: Changes Across Time (Kluwer Academic Publishers, 2002).

Sources: Courtesy of STP Advisors, LLC, and Investrend Weblogs.

Article Links:

Trimbath’s Blog Post: http://infoescrow.net/?u=http://www.investrendweblogs.net/strimbath/2009/06/03/no-accounting-for-corporate-governance-part-5-why-governance-matters/

Investrend Weblogs: http://infoescrow.net/?u=http:??www.http://www.investrendweblogs.net

STP Advisors: http://infoescrow.net/?u=http://www.stpadvisors.com/

FinancialWire(tm) is a fully independent, proprietary news wire service. FinancialWire(tm) is not a press release service, and receives no compensation for its news, opinions or distributions. Further disclosure is at the FinancialWire(tm) web site (http://www.financialwire.net/disclosures.php).  Contact FinancialWire(tm) directly via inquiries@financialwire.net.

Free annual reports for companies mentioned in the news are available through the Free Annual Reports Service (http://investrend.ar.wilink.com/?level=279).