Staying in sync

I believe that many problems regarding financial matters center around misalignment of interests.

Just as a car doesn’t run well when the wheels are not aligned correctly, in my opinion, investors and pension fund portfolios can take a hit when a corporate strategy isn’t in sync.

For stock investors, one red flag in my view is when a management team does not have a large financial ownership position in the company they oversee.


Diverging Interests

In my view, often times this is why managers sometimes grant excessive options, thereby diluting existing shareholders.

Problems can also arise when management compensation is based on short-term, rather than long-term, stock performance.

When it comes to corporate performance, bad things may also happen when expenses are not aligned with revenues.

Profit Squeeze

Imagine if costs are in Euros but revenues are in British pounds.

Much of what sunk Lehman Brothers in 2008 was an overwhelming amount of short-term debt via repurchase agreements or repos.

These days a number of big state pension funds suffer from underfunding.  

ECB’s Take

There’s a misalignment between liabilities (payments to their pensioners) and the financial assets to support those distributions.

As you see, alignment of interests matters when it comes to finance.

European Central Bank President Mario Draghi made news by suggesting that monetary tapering may be in the cards as European economies improve.

One can see this reality confirmed by the strength of the Euro versus the US dollar.

Photo Credit: Christian Ferrer via Flickr Creative Commons