Chapter 7 Lecture 6: Fiduciary Responsibilities in the Stock Market

In the 15th century, there was an upsurge in discovering the New World in the European continent. People were inspired by various legends, hoping to find a way to the mysterious and rich China in the far east. In 1533, 250 British people paid 250 pounds each, got three ships and hired 200 sailors, and entrusted them to go northward along the Atlantic Ocean to find a sea passage to China. These 200 sailors are really unambiguous. They traveled all the way north and came to the North Pole.On the way, they encountered a severe storm near Norway, and two of the three ships were sunk by the wind and waves. In the end, only the largest one, the Moskva, was left. They still insisted on reaching the North Pole.After going ashore, they sledged and searched for 2,000 kilometers in the wilderness. It was not until they met Aiwen, the famous horror king in European history, that they realized that this road could not go to China at all.They exchanged pens and inks for local products such as mink fur in Aiwen's hands. "Both parties felt that this was a very good deal", and returned to England after all the hardships.

They did not complete the scheduled tasks, but only proved that the road to the north cannot reach China.So they exchanged Aiwen's mink fur for money to repay the investment of the merchants. The 250 merchants did not go with them, knowing that, having entrusted these 200 sailors, the only right choice was to trust them. The sailors accepted the entrustment. They thought it was the trust of 250 investors, and only by doing their duty can they repay this trust.That's why they worked tirelessly, and persisted in fulfilling their mission even when the ship was sunk by wind and waves.Failure to find a way to China is not mission accomplished, so the sailors are returning the money to the investors.

This is the generation of fiduciary responsibility (trust). The earliest joint-stock company originated from the overseas trading companies established by the Netherlands and the United Kingdom in the early 17th century.These companies are established by raising share capital, and have obvious characteristics of a joint-stock company: legal person status: the establishment of a board of directors: the general meeting of shareholders is the highest authority of the company; dividends according to shares; the implementation of a limited liability system...The successful operation and rapid development of joint-stock companies has led more companies to follow suit, and set off a wave of joint-stock companies in the Netherlands and the United Kingdom.to 1695.About 100 new joint-stock companies were formed in the UK.

In the second half of the 18th century, Britain began the Industrial Revolution, and large-scale machine production gradually replaced the factory handicraft industry.In this reform, the shareholding system made great contributions.As the Industrial Revolution spread to other countries, the shareholding system spread throughout the capitalist world. In the middle of the 19th century, the United States produced a large number of road construction companies, transportation companies, mining companies and banks that relied on issuing stocks and bonds to raise funds, and the joint-stock system gradually entered the main economic fields.By the end of World War I, 90 percent of U.S. manufacturing output was produced by joint stock companies. In the second half of the 19th century, the joint-stock system was introduced to Japan and China.A number of joint-stock companies emerged after the Meiji Restoration in Japan.During the period of the Westernization Movement, China established a number of government-run and joint-stock enterprises. The Steamship Merchants Bureau, established in 1873, issued China's earliest stock.

The emergence of stocks led to the emergence of stock exchanges.As early as 1611, some merchants bought and sold stocks of overseas trading companies in Amsterdam, the Netherlands.The prototype of the stock exchange was formed. In 1773, the first British stock exchange was officially established in Jonathan Cafe in Chase Alley, London, which later evolved into the London Stock Exchange in 1792. Twenty-four brokers signed an agreement under a sycamore tree on Wall Street in New York.The Brokers Union was formed, which was the predecessor of the New York Stock Exchange. In 1878, the Tokyo Stock Exchange was officially established.It is the predecessor of the Tokyo Stock Exchange. 1891.Hong Kong established the Hong Kong Stock Brokers Association, which later developed into the Hong Kong Stock Exchange. In 1914, the then Beiyang government of China promulgated the Stock Exchange Law, and in 1917 the Beijing Stock Exchange was established.

After entering the 20th century.The stock market has developed rapidly and roughly experienced the following three stages: (1) The stage of laissez-faire (1900-1929). In the first 30 years of the 20th century, the number of joint-stock companies in the United States, Britain and other countries increased rapidly, which made the stock market scale and financing ability expand rapidly.On the one hand, the issuance market expanded rapidly, the circulation market was unprecedentedly prosperous, and the transaction volume soared.On the other hand, laissez-faire has led to serious excessive speculation due to lack of supervision, stock fraud and market manipulation.At that time, the prices of stocks in the major stock markets were generally inflated to an extremely unreasonable level, far exceeding their actual value. On October 29, 1929, a serious financial crisis occurred in the capitalist world. The stock markets of various countries, which were used as economic barometers, plummeted one after another, and investors suffered heavy losses.

(2) The legal system construction stage (1930-1969). After the economic crisis in 1929, the governments of various countries began to comprehensively strengthen the legal system and standardize the stock market. Taking the United States as an example, the government began to strictly manage the securities market legally, and formulated A series of strict and feasible securities laws such as the "Securities Act of 1933" and (1934 Securities Exchange Act). The United States established the Securities and Exchange Management Commission in 1934 to directly supervise and manage the stock market, making the US securities market the largest in the world. The foundation of the securities market has been laid. The securities legal system of other relevant countries has also been continuously strengthened, and the stock market has gradually been regulated.

(3) Rapid development stage (since 1970).After entering the 1970s, with the improvement of economic scale and intensification in developed western industrialized countries, the economies of developing countries in Southeast Asia and Latin America rose vigorously.With the advancement of modern computer, communication and network technology, the stock market has entered a stage of rapid development. In 1986, the total market value of the global stock market was 6.51 trillion US dollars, and the total number of listed companies in the world was 28,200. By the end of 1995, the median value rose to 17.79 trillion US dollars. In the past 10 years, the market value has increased by nearly 3 times, and the number of listed companies has increased by more than 10,000, reaching 38,900. In 1996, the global stock market value continued to rise, reaching 20.29 trillion US dollars.In major developed countries, the securitization rate (the ratio of total stock market value to GDP) has reached a relatively high level. In 1995, the securitization rates of the United States, Japan and the United Kingdom reached 95.5%, 83.5% and 121.7% respectively .Stock markets in developing countries have also grown fairly rapidly.The total stock market value of emerging markets increased from 0.24 trillion US dollars in 1986 to 1.9 trillion US dollars in 1995, an increase of nearly 7 times in 10 years.While the scale of the stock market is expanding, trading activities are also becoming increasingly active. In 1986, the transaction volume of the global stock market was 3.57 trillion U.S. dollars, and in 1995 it reached 11.66 trillion U.S. dollars.

Share reform has the so-called three laws of share reform, that is, the three laws implemented by the Rothschild family during the period of Margaret Thatcher in the United Kingdom: Law 1: Listed companies must be run by professional managers with professional qualifications. The second law, if the government wants to fulfill its fiduciary responsibility, it must be a good company before it can carry out share reform.We do not have the concept of fiduciary responsibility, so both good and bad companies can be reformed. Law 3: The British government retains a share of gold shares for fiduciary duty. If something happens that hurts shareholders, the British government has a veto power.

In 2001, the bankruptcy of MCI Worldcom refreshed the historical record of the amount involved in US corporate bankruptcy.Accounting scandals are well-known causes.Since then, "WorldCom" has become synonymous with "scandal".Was the scandal really the root cause of WorldCom's fall? In a normal business environment, no company would be involved in an accounting scandal of such magnitude that it would be passive.What's more, this company, which dominates the telecommunications industry, once ranked No. 42 on the Fortune 500; in its heyday, the total number of employees was 80,000, and its annual revenue reached 35.2 billion US dollars.

Five years later, WorldCom has changed its name to "MCI". Perhaps we can also get rid of the overly superficial disgust caused by the scandal and find a more appropriate answer from the development history of the former WorldCom. Twenty-two years ago, Bernie Ebbers, then 43, and a few partners drew up a business plan on a napkin in a small restaurant in Mississippi and decided to start a telephone company -- Long Distance Discount Company (LDDS).This is the predecessor of WorldCom.At the time, its main business was determined to be buying long-distance telephone service from AT&T at a low price and selling it to ordinary consumers at a slightly higher price. Two years later, Ebbers has formulated a strategy that will define its future development, that is, to achieve extraordinary growth rates through mergers and acquisitions.At first, the plan went so smoothly and achieved remarkable results that by the time the company went public in 1989, any investor who had bought $100 of the company's stock could get more than $3,000 in shares. In the next few years, the long-distance discount service company swallowed dozens of communication companies and changed its name to WorldCom in 1995. Ebbers was the CEO. By June 21, 1999: WorldCom stock rose to 64.50 At the highest peak of the US dollar, the market value broke through 196 billion US dollars. Ebbers, the former gym teacher CEO, and the company he leads seem to be very good at profiting from acquisitions, and WorldCom's takeover targets during this period were usually small local carriers.Due to the limited scale of WorldCom itself, each acquisition can greatly improve its financial indicators.In most mergers and acquisitions, WorldCom does not need to pay cash, but uses stock exchange to achieve the purpose of controlling. For this reason, the investment banks and securities firms on Wall Street have become more and more favorable to Ebbers and WorldCom, which has brought more and more bargaining chips for WorldCom to conduct new mergers and acquisitions, which eventually led to the company's financial indicators having to pass the test again and again. buy to maintain.WorldCom gradually deviated from the normal track of a company without knowing it: the acquisition became an end in itself, and the basic aspects of the company's operation were instead forgotten. With the irrational expansion of the telecommunications industry, WorldCom's appetite is growing. In 1998, it acquired the long-distance telephone company MCI for US$37 billion. The amount involved in the transaction set a record for corporate acquisitions at the time, and the company's stock price rose like a smashing bamboo.This acquisition is decisive for the future size of the company.Since then, WorldCom has been officially regarded and demanded by Wall Street as a large company. However, in this way, WorldCom felt significantly increased pressure: if it grows naturally, it will be difficult for WorldCom to continue to attract the attention of Wall Street with its solid and excellent performance. Therefore, Ebbers decided to acquire a larger opponent to maintain Substantial earnings growth. In 1999, WorldCom decided to acquire Sprint, a major US telecommunications company, at an astonishing price of US$115 billion, but in the end, the acquisition was rejected by the US government.As a result, WorldCom's fortunes took a turn for the worse. Profit and revenue growth continued to slow down, and stock prices fell. In addition, the telecommunications network market deteriorated rapidly due to excessive expansion. In 2001, WorldCom's high debt situation attracted the attention of US securities regulators, and the investigation conducted for this led to Ebbers' forced resignation.The new CEO soon discovered in an internal audit that since 2001, WorldCom's large expenses related to the expansion of telecommunications system engineering have not been recorded as normal costs, but are treated as capital expenditures. The "skills" brought a huge "profit" of US$3.8 billion to WorldCom - the WorldCom scandal has since become known to the world. In fact, in the stage of rapid growth of the company, in order to maintain its image on Wall Street, WorldCom has made sporadic whitewashing in its financial statements.After feeling the crisis of falling out of favor, in order to restore the interest of Wall Street and investors, WorldCom decided to take risks and carry out large-scale fraud, and it has never returned. According to the final investigation data released by the US Securities and Exchange Commission, in the two years from 1999 to 2001, WorldCom’s fictitious revenue reached more than 9 billion US dollars: by abusing the reserve account, using various reserves accrued in previous years Writing off costs to exaggerate reported profits, the amount involved reached 1.635 billion U.S. dollars; and 3.852 billion U.S. dollars in operating expenses were separately listed in capital expenditures-plus other similar methods, making WorldCom's 2000 financial statements ambiguous. The bright spot was a $23.9 billion increase in revenue. But no matter how clever an accountant is, it is impossible to turn the figures on the accounting statements into real money.WorldCom's random modification of financial accounts and even outrageous lies did not promote the actual operation of the company in the slightest. Instead, it made the senior managers even more foolish. They focused on the operation of capital and fraud to get away with it. Leading to the imprisonment of the company's CEO Ebbers, WorldCom went bankrupt. In recent years, there are not a few American companies that have suffered financial scandals, such as Kmart, Microsoft, General Electric, Xerox, Merck, Johnson & Johnson, etc., and companies like WorldCom rely on mergers and acquisitions and fraud to obtain profits and goodwill. , which is quite representative in the American business community. Some commentators believe that the reason why listed companies in the United States are falsifying one after another is related to the atmosphere of personality cult for business leaders in this society.In a country that traditionally values ​​personal fulfillment and real-world interests, chief executives are rightly seen as the epitome of individual heroism.This results in high salaries for top corporate executives with attractive entitlements to stock options.In order to obtain benefits in the capital market, many top managers one-sidedly pursue high growth rates and high stock prices, and even take risks, colluding with accounting firms and other intermediaries to exaggerate the company's performance by making false accounts, and then cash out profits. This view can explain the origins of frequent financial scandals, but on a more practical level, if the atmosphere is mismanaged, it can easily create a disconnect between corporate governance and individual greed.In the case of WorldCom, the long process of scaling up through acquisitions has always been controlled by insiders, mainly founder Ebbers.WorldCom once lent $366 million to Ebbers for stock trading-so that the long-term development of the company finally gave way to the personal interests and greed of executives. It is not difficult to imagine that Ebbers' pursuit of quick-rich values ​​has resulted in WorldCom's reliance on mergers and acquisitions during its growth process, resulting in WorldCom's frantic expansion for expansion.In fact, if it is not for the purpose of obtaining complementary and synergistic effects, if there is no detailed cost-benefit analysis, and without the backing of substantial operational improvement, it is impossible for any company engaged in manufacturing and service industries to rely on large-scale mergers and acquisitions as an effective strategy. means of survival. After the bankruptcy of WorldCom, some people sarcastically said that the CEO was not credible, accounting firms and stock analysts were not credible either. Americans who printed "Trust in God" on banknotes began to reflect on their proud business traditions. .It's not just Americans who should learn from this, however.After two decades of development, the ambitious companies that have emerged in the Chinese business community are now facing the mission of expanding their scale and occupying the world market. Among the numerous mergers and acquisitions, these entrepreneurs need to consider urgently: How to make the failure of takeovers end in the West?