Investors ignore risks resulting from corporate governance issues and accounting practices and transparency at their own peril.
A revealing analysis by GovernanceMetrics International Inc. shows MF Global Holdings Ltd. faced risks, providing an indication of potential trouble for investors.
The company filed for bankruptcy earlier this month, followed by the resignation of Jon S. Corzine as chairman and CEO.
Among the company's troubles, the Commodity Futures Trading Commission is investigating $633 million missing from customer accounts.
Outstanding credentials of Mr. Corzine, the former Democratic governor of New Jersey and former co-CEO of Goldman Sachs Co., undoubtedly burnished the image of the company, but he didn't appear to transform corporate governance or accounting practices.
GMI rated MF Global as having “aggressive accounting and governance risk,” according to a September report. GMI placed the company “in the 24th percentile among all companies in North America, indicating higher accounting and governance risk than 76% of companies.”
In addition, in an October report GMI graded MF Global a "D,' because of its high corporate governance risk assessment. It cited, for example, concern about corporate compensation, which included Mr. Corzine's pay and incentives.
Corporate governance and accounting disclosures aren't issues that come up widely in traditional investment analysis. They should. Such metrics provide an indication of financial distress or litigation risk or regulatory risk. Certainly, the irregular corporate governance practices cited at MF Global were an indication of its risk to investors.