The Madoff Incident could have been prevented. All it requires is a labelling of the risk level of the company. Once a company has been labelled as a low risk investment this means that all its underlying investments ought to reflect the same level of risk as the company has represented to its investors. This would allow the expectation of the investors to be met. Presumably an investor would expect a low risk company to invest only in low risk investment.
With the disclosure system that the global security industry seems to be upholding to, it is not necessarily useful to the average investor. An average investor may not have the resources to consume all the information disclosed. Which is why it may be necessary to use a labelling approach in addition to the full disclosure system. Whilst the institutional investor may have the capacity to sieve through all the information, labelling would allow the average investor to know at a glance the risk level which the company is adhering to or whether it has not been able to adhere to. A company with a low risk level would need to disclose if its investments have complied with the same low risk level. If it has not, the company would need to reflect that it has exceeded its risk level and moved on to higher risk level. This would enable the average investor to decide if it wishes to maintain its investment at that higher risk or to sell out of the higher risk investment.
The labelling can be done by a simple colour coding. If all stocks are labelled, the colour label can easily be implemented.
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