Windsors of Change - A Diversity Champion in The Firm?

Tan, Ready, and Rested

Robert Shrimsley had an absolutely brilliant article in The FT Weekend Magazine on the topic of a diversity champion for the English Royal Family.

One very major quibble. 

He mentions that currently the Family (or is that The Firm?) are primarily Windsors. And seems to suggest that a Plantagenet would be a worthy addition.

How sad when there are descendants of the House of Stuart extant to reclaim their rightful place on the throne. Or at least a share.

Who knows how such a magnanimous gesture might affect the fate (and perhaps faith) of the Union

Scotland: John Major Endorses IndyRef#2

 

Not Peter Greaves

Yaldi!

You could have knocked me over with a feather or a perhaps more appropriately a small thistle.

I read in The Financial Times today that John Major--yes, that John Major--believes “Westminister should not refuse Scotland a referendum”.

Which I believe demonstrates quite clearly that the Conservative Party does have something to offer Scotland.

An offramp.

To be fair he did go on to natter about “constitutional reform”, “devolution”, etc.

The Unionists “strong” economic arguments for the “Union”.

And that “small” Scotland would be but a minnow in the EU and have a concomitant small voice.

That is, no doubt in contrast to today?

One final comment a quote from the FT for those who have forgotten or perhaps never knew: The writer is a former UK prime minister

Bahrain Middle East Bank - 2020 Financials and 1Q2021 Financials Still in "Limbo"

24 March BMB announced that no date had been set by its Board of Directors to review and approve the bank’s financial statements for the period ending 30 June 2020, 30 September 2020, or 31 December 2020. 

As well it announced no date had been set for Board review and approval of its 31 March 2021 financials. These cannot be approved until 2020 financials are “set”.

Clearly, there is no “good” news to report. Which suggests that the news is bad.

Not a big surprise the bank is in dire straits.

But the continued delay on the financials probably indicates that things are heading further "south".

Wirecard: More Missing Money - This Time Real Money

Recommended Not Only for Its Fine Weather
But Also for Its Banking Facilities and "Discretion"

The FT reported 24 March that sources told them that Oliver Bellenhaus, late of WireCard and Al Alam, informed investigators that in 2011 he and Jan Marsalek, Wirecard’s former CF), began a scheme to shift money out of WC into “an array” of offshore accounts of shell companies in Hong Kong and the British Virgin Islands. Said account opened in 2010.

As I read this account, I suspected that many readers would think that this is where WC’s missing Euros 1.9 billion had gone.

I don’t think that this is the case.

Why?

Because it’s hard to steal what doesn’t exist.

If press reports are correct and WC was loss making, then the Euros 1.9 billion never existed. And couldn’t therefore be stolen.

These “shifted” funds would have had to be derived from other sources. And while no doubt significant, nothing close to the former amount.

Earlier I posted a detailed explanation why fiddling with the income statement requires fiddling dollar for dollar with the balance sheet (and vice versa) in my earlier post here.

Let’s look at WC’s financials from FY 2004 though 3Q19 to see if there was evidence of income above the imaginary Euros 1.9 billion. That may have produced actual cash to be stolen.

Why that period?

Prior to 2004 Wirecard was InfoGenie, a rather small call center with negative retained earnings.

There wasn’t much to fiddle with before 2004.

As the table below shows, during that period WC reported Euros 1.919 billion in net income, paid dividends of Euros 165 million, and had other adjustments to retained earnings of Euro 15 million. The dividends were likely funded via increased liabilities rather than cash flow from operations.

So, if there were transfers of “millions” as Mr. Bellenhaus is reported to have said, where did they come from?

Two likely possibilities.

Overstatement of  Expenses/Costs

Either those recognized through the income statement (expenses) or capitalized (costs).

For the former, professional services are a frequent favorite as they don’t generate a hard asset. Or business acquisition/referral fees, processing fees. 

Perhaps, imaginary fees on the imaginary transactions with the difference here is that the latter were paid in cash.

A particularly fertile ground for the latter might be the creation of intangible assets.

What is the proof of the cost of new software, other than the bill for development, particularly if outside vendors were contracted?

In its FY 2018 annual report, WC discloses it spent some Euros 86 million in FY 2018 and Euros 98 million in FY 2017 in cash for “investments in intangible assets”.

Over the period 2016 through 2017, WC’s internally created and other intangible assets increased from Euros 181 million to Euros 252 million.

Could some of these be the result of shifting funds? We don’t know.

Overpayment for Acquisitions

Acquisitions by their nature are “chunky” unless there are periodic payments, e.g., if the newly acquired company performs above a benchmark, the sellers may be entitled to a payment reflecting the greater value of the company they sold. That of course will depend on the terms of sale.

Another possibility would be fees to those who sourced acquisitions for WC, provided WC financial advice, performed due diligence, etc. This presumes such charges were capitalized as part of the cost of the acquisition rather than expensed.

Expense fiddling would a better “cover” for frequently recurring transfers than acquisitions which tend to be lumpy, particularly if the same accounts were used again and again.

It’s not clear from the FT article whether the same accounts were used over and over. 

Does “array of accounts” mean a single group of accounts created in 2010? 

Or could it mean repeated creation of new accounts?

Acquisitions would allow for larger payments in a single transaction. But it would seem that these would be handled by using a different (new) account for each acquisition rather than the same accounts. 

It would (should?) look a bit suspicious to auditors –at least I hope so—if acquisitions from different sellers and in different part of the world went to the same account.

So, if I’ve read the FT article correctly, my best guess would be expense fiddling.

With Mr. Bellenhaus’ co-operation and access to WC’s accounting records, investigators should be able to calculate the amount “shifted” and what transactions were used for cover.

Presumably, the stolen amounts were used to fund the costs associated with running the income fraud as well as to compensate the key players (like Mr. Bellenhaus) for their role.

SuqAlMal Career Advice -- Manage Your Personal Career Like Big Successful Corporations

 

AA Started Learning from Others on His
First Day as an Analyst at MegaBucks Firm

Did you ever wonder how I got this prestigious position at SuqAlMal coupled with a fast paced highly remunerative career in finance?

Besides my innate abilities and willingness to put in the hours, I wasn’t too proud to learn from the successes of others as the above archival picture demonstrates.

And apply what I found to my own career.

It is a uncommon occasion indeed when I share some of those career lessons.

Consider yourself lucky. Today is definitely one of those rare days.

As we all know, or think we do, major corporations have discovered secrets to success.

Sometimes a putative business leader “genius” will put his wisdom down in one of the many tomes you’ll find in the business books celebrity section at your local bookstore.

Sometimes an academic will distill these lessons into a path to excellence.

But what if this does not happen for whatever reason?

If we look closely at companies we can discover these “success” principles and strategies on our own. We can tease them out of their actions.

More than that, we are likely to find those principles and strategies that they are trying to keep for themselves!

Once we have a hold of them, we can apply them to our own careers.

Here are two sure-fire ways to increase your bonus this year:

1. Claim a 2021 bonus based on potential highly lucrative business you will obtain in the future from existing or potential future clients that are currently unknown. (This tactic is known among the cognoscenti as the “Blueridge” or “Liberty Primary” gambits).
2. Add credibility to that claim by committing that by 2050 you will have reduced your incidence of “lost” pitches to zero. (The Pitch Climate Improvement Plan).

With these two simple tactics, you’ll be on the way not only to a larger bonus in your firm, but also it's highly likely you’ll be identified as someone with leadership potential.

Market Commentary: Berkshire Hathaway, St. Augustine, and ESG

Patron Saint of Good Works,
But Primarily Those in the Future

 Analyst Disclosures:

• Oxford Commas provided by Eton College in return for this promotional mention. 
• AA holds no investment position (either short or long) in BH. Or more precisely BRK.

Berkshire Hathaway has made what I consider puzzling (at least on their face) responses to two shareholder introduced proposals for consideration at the 2021 annual general meeting. 

Readers are invited to make their own judgments as to the motives for these responses.

You’ll find BH’s proxy materials here. 

The first proposal is that “the Company publish an annual assessment addressing how the Company manages physical and transitional climate-related risks and opportunities.” This proposal contains suggested elements in that report but gives the board “discretion” on framing the report.

Berkshire replies that:

1. The Board recognizes the importance of responsibly managing climate-related risks to both shareholders and the future of Berkshire and its operating businesses.
2. The Board regularly receives reports on the major risks and opportunities of the operating companies, including those related to climate, and discusses those risks and opportunities. 
3. Berkshire manages its operating businesses on an unusually decentralized basis. There are few centralized or integrated business functions. (At the BH level).
4. We want our managers to do the right things and we give them enormous latitude to do that; consistent with our business model, each subsidiary is independently responsible for identifying and managing the risks and opportunities associated with their business, including those related to climate change. 

As I read this, BH admits it has the requested information in one form or the other (point #2) but pleads (point #3) that they don’t have the staff at the holding company level to compile such a report. 

Apparently, hiring a third party to compile such a report would be a large and extravagant expense. Note that is my assumption. BH did not say this.

Interestingly in arguing against adoption of this proposal BH then goes on to recite the climate related achievements of some subsidiaries in some detail. 

In light of the above comments about the small size of BH’s central staff, I wonder who prepared these. 

Could it possibly be the same folks who prepare information on financial performance at the subsidiary level? Note my assumption is that it is staff at those subsidiary companies.

In point #1 BH “recognizes” the “importance” of these issues and in point #4, it “wants” the managers of its subsidiaries to do the “right things”, but as also outlined in point #4 isn’t going to interfere with the discretion entrusted to the operating company managers.

BH's position on climate issues seems to AA to be similar to St. Augustine who reportedly recognized the danger of sin, and ardently wanted to do something about his own personal situation, but not today.

AA wonders at least rhetorically, and hope you do too, if the Board takes same approach on operating company financial performance. It “recognizes” the importance of good financial performance, “wants” good performance, but lets the operating companies “independently manage” financial performance.

The second shareholder proposal requested that “Berkshire Hathaway holding companies annually publish reports assessing their diversity and inclusion efforts, at reasonable expense and excluding proprietary information 

BH’s Board responded that:

1. Berkshire’s commitment to diversity, equity and inclusion and the effectiveness of our companies’ related programs starts with our leaders, including our Board of Directors on which three female and two ethnically diverse members serve. 
2. Mr. Buffett, Berkshire’s Chairman and CEO has set the “tone at the top” for Berkshire and its employees for over 50 years. During this period of time, Mr. Buffett has a record of opposing efforts, seen or unseen, to suppress diversity or religious inclusion. 
3. All of Berkshire’s leaders – whether in our operating businesses or on our Board – are extraordinarily qualified, committed to our culture and focused on ensuring long-term success for shareholders.
4. The proposal’s supporting statement indicates that “investors seek quantitative, comparable data to understand the effectiveness of the Berkshire Hathaway companies’ diversity, equity and inclusion programs,” improperly suggesting that there is a standardized technique for each of Berkshire’s more than 60 operating businesses to address diversity, equity and inclusion. 
5. Berkshire’s operating businesses represent dissimilar industries operating in multiple locations throughout the world. It would be unreasonable to ask for uniform, quantitative reporting for the purposes of comparing such dissimilar operations in different geographic locations. 

Again, as I read points #1 and #2, BH both recognizes and supports diversity and inclusion. Though I’d guess that as outlined above in the discussion on climate, the Board really doesn’t do anything to interfere with the subsidiaries’ operations.

Also I'd like to call to your attention another demonstration of why many call Mr. Buffett the Oracle of Omaha: he apparently can see both the seen and the unseen.

Point #3 was puzzling.

AA wonders if it is designed to calm the potential worries that some shareholders might have after reading point #2. All that diversity. Is my money really safe? 

I’d also note that two of BH’s directors would qualify as senior citizens. So score a few more diversity points for the Company.

Points #4 and #5 raise a question about how BH is able to provide reporting on its financial performance. 

I mention this because BH’s 60 companies operate in “different geographic locations” and “different industries” in “multiple locations in the world”. 

As a consequence, it is highly likely they are using different languages, different accounting systems, to say nothing of accounting principles, and are subject to different laws. 

It sounds an impossible task, but if you take a look at BH’s 2020 Annual Report, you will see a rather extensive discussion on BNSF, BHE, and other of BH’s companies.

Were these prepared by the 26 central staff in Omaha who, if this is the case, might be the modern day equivalent of the 300 Spartans? 

Or were they prepared by the subsidiaries themselves?

Couldn’t that be a solution if only in part to the shareholder proposal? 

The subsidiaries prepare such reports. 

Who better prepared to put their efforts and results in the appropriate regional and industry context?

Perhaps, with the requirement that only a few of BH’s 60 subsidiaries report each year.

With the focus on the major subsidiaries.

Where there is a will there is a way or so AA was told by his parents.

On the wider topic of ESG itself, here’s a link to an interesting piece at Bloomberg from January 2020 which analyzes the differences between what investors profess and what they do.

Two salient points therein:

1. Berkshire tends to score low on ESG (even below Amazon) due to lack of reporting and its holdings of coal-fired utilities. Mr. Buffett’s Friedmanite skepticism dogmatism on ESG may also be a factor.
2. Most investors who claim that ESG is a key element in their investing philosophy do not practice what they preach. If an investment has a high return, ESG concerns vanish. Virtue is apparently not its own reward. Even more interesting those who claim they would shun an investment in Amazon because of concerns about workers’ rights, would definitely shop there. There are a lot of St. Augustines about, it would seem.