Were corporate principles even practiced?
Welcome back to Pretty Little Business, I hope an exciting
week has occurred for you. Prior to this post I watched a fictional movie
called Margin Call, and I found it really enjoyable and interesting. It gives
you an insight into an investment bank and the Financial Crisis. Although this
is a fictional movie, I believe that it definitely has elements of real life. (The link to the trailer is at the bottom of this post.)
Corporate valuation: the value of shares and the company is
going to be the main focus of this blog post. I am going to look at this with
regards to the movie (Margin Call), and to the literature.
The movie is based around a firm which realises that their
assets are worthless. It shows the decisions, the attitudes and the
consequences of the financial crisis from an investment bank perspective.
Insider information was found and this reflected a completely inefficient
market that was running on next to nothing with MINUS days of survival.
The product that they were selling (which was now completely
worthless) was the product that made them rich, completely drew by money. I
thought that a great thing about this movie was that it doesn’t go through the
technicalities of the Financial Crisis, it examines psychological causes –
greed, egoism, selfishness, ignorance and money, money, money orientated. The
characters were under pressure and stress but at the end of the day, the bonus
was the goal. Traders were offered more than $1.3 MILLION per person if the
whole floor hit the quota which would also mean destroying the market, yet they
all were willing to do it because…money. Focused on short term gain for people who
quote, ‘need the money’.
In the movie all risk was placed in mortgage securities
which are all liquid. Relying on one product is the same as putting all the
risk into one product. Markowitz believed that a good portfolio is a
diversified portfolio. If investors were to spread their risk, the risk would
be reduced. If the company in the movie were to diversify risk then the outcome
may not have been as disastrous.
What I thought represented a shocking truth in the movie was
that some of the CEOs did not even understand the figures and charts that were
displayed in front of them. Surely they should know best? Surely CEOs should
have the deepest understanding of their company’s situations? Does this show lack
of communication? Lack of skill? Lack of actual care in the business? Does this
yet again represent only the care of the outcome - money? It definitely doesn’t
represent the perceived value of the company.
It was made quite clear at the start of the movie that they
had over leveraged itself. This makes me think that maybe they are believers of
the Modigliani and Millers theory of increasing gearing and having a lower
WACC. Do you think this is a good idea? Is that really moral? It harmed the
market in the movie just like it did during the Financial Crisis of 2008! Maybe
the theory is not so good after all?
Don’t even get me started on the salaries of the CEOs! In
the movie one CEO made $86 million a YEAR! And on top of that he still ‘needed
the money’?! Do you think this salary is fair? Does he really deserve that
much? The lack of morals and human values is unreal. He was selling bogus products
to people who work hard, who don’t have millions, just so he could make even
more millions! Which isn’t even over-stated to real life situations considering…
- · Ralph Lauren - $66.7m
- · Antonio Horta-Osorio (Lloyds) - £11.5m
- · Sir Martin Sorrell (WPP) - £40m+
- · Howard Schultz (Starbucks) - $29.21
Really though, do you think this is fair? Do they deserve
this much money? I think high salaries are important as then it attracts the
right people, but for reckless investors? By people driven by money? Of course
it isn’t fair. They should be after doing a good job and doing well for the
business and shareholders. Money should not ever be the be all and end all in
the eyes of CEOs and I personally think that this is where businesses are going
wrong. What do you think?
Corporate principles should ALWAYS be practiced. This way things like the Financial Crisis might be averted.
Please leave comments below of what you think of this. And I
would definitely recommend watching the movie for a deeper understanding into
investment banks and their lack of human values. Thanks for reading!
Blog soon, Laura.
Blog soon, Laura.
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