Dear Prudence

You wouldn't be a prudent manager of a large company these days for quids. (Quidzillions, maybe, but not quids.)

Guambat will relate a story to that thought in a moment, but first consider the "prudent man" theory. Admittedly, the prudent man theory is a notion most particularly applicable to the world of trusts, not companies, where risk taking is part of the business of management and protected by its own "business judgement" rule in most US jurisdictions and something akin to that elsewhere.

But in its widest expression, the prudent man rule would not be unfamiliar in the board rooms of prudently run businesses. You can find plenty of references to it on the web, but there is a very good concise discussion by the Federal Deposit Insurance Corporation in its Trust Examination Manual:

There are two fiduciary standards governing the prudence of the individual investments selected by a fiduciary: the Prudent Investor Act and the Prudent Man Rule. The Prudent Investor Act, which was adopted in 1990 by the American Law Institute's Third Restatement of the Law of Trusts ("Restatement of Trust 3d"), reflects a "modern portfolio theory" and "total return" approach to the exercise of fiduciary investment discretion. This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary's performance is measured on the performance of the entire portfolio, rather than individual investments.

The Prudent Man Rule is based on common law, stemming from the 1830 Massachusetts court decision -- Harvard College v. Armory, 9 Pick. (26 Mass.)446, 461 (1830). The Prudent Man Rule directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." Id. A copy of the Prudent Man Rule, also known as the Restatement of Trusts 2d, together with explanatory notes, is included in Appendix C.

Under the Prudent Man Rule, when the governing trust instrument or state law is silent concerning the types of investments permitted, the fiduciary is required to invest trust assets as a "prudent man" would invest his own property, keeping in mind: the needs of the beneficiaries, the need to preserve the estate (or corpus of the trust) and the amount and regularity of income. The application of these general principles depends on the type of account administered. This continues to be the prevailing statute in a small number of states.

The Prudent Man Rule requires that each investment be judged on its own merits. Thus, a fiduciary could be held liable for a loss in one investment, which when viewed in isolation may have been imprudent at the time it was acquired, but as a part of a total investment strategy, was a prudent investment in the context of the investment portfolio taken as a whole. Under the Prudent Man Rule, speculative or risky investments must be avoided. Certain types of investments, such as second mortgages or new business ventures, are viewed as intrinsically speculative, and, therefore, prohibited as fiduciary investments.

The Prudent Investor Act differs from the Prudent Man Rule in four major ways:

* A trust account's entire investment portfolio is considered when determining the prudence of an individual investment. Under the Prudent Investor Act standard, a fiduciary would not be held liable for individual investment losses, so long as the investment, at the time of acquisition, is consistent with the overall portfolio objectives of the account.
* Diversification is explicitly required as a duty for prudent fiduciary investing.
* No category or type of investment is deemed inherently imprudent. Instead, suitability to the trust account's purposes and beneficiaries' needs is considered the determinant. As a result, junior lien loans, investments in limited partnerships, derivatives, futures, and similar investment vehicles, are not per se considered imprudent. However, while the fiduciary is now permitted, even encouraged, to develop greater flexibility in overall portfolio management, speculation and outright risk taking is not sanctioned by the rule either, and they remain subject to criticism and possible liability.
* A fiduciary is permitted to delegate investment management and other functions to third parties.

Since the Prudent Man Rule was last revised in 1959, numerous investment products have been introduced or have come into the mainstream. For example, in 1959, there were 155 mutual funds with nearly $16 billion in assets. By year-end 2000, mutual funds had grown to 10,725, with $6.9 trillion in assets (as reported by CDA/Wiesenberger). In addition, investors have become more sophisticated is more attuned to investments, since the last revision. As these two concepts converged, the Prudent Man Rule became less relevant.

So, now, let's consider the conundrum faced by poor old Don Mercer.

Everyone's a target by George Lekakis

ORICA chairman Don Mercer has warned that more companies with low debt levels were in the sights of private equity groups.

The warning came after Orica yesterday rejected suggestions it had been approached by private equity groups seeking to buy the business but warned that any low-geared company could come under takeover pressure.

Speaking after the company's annual shareholders' meeting in Melbourne yesterday, Mr Mercer warned that more companies with low debt levels were in the firing line.

"One of the characteristics of all these takeovers is that conservatively geared companies are taken over, geared to the hilt, and their equity stripped," he said.

"I think that any company which is properly conservatively geared is looking as though somebody might put the ruler over them."

The prospect of an avalanche of takeovers in Australia next year has stoked the local stockmarket, with share prices of rumoured targets such as Fosters and CSL soaring through records.

Stockbroker Bell Potter recently included Orica on a list of ASX 100 companies most vulnerable to takeover activity.

The list also included BHP Billiton, Tabcorp and Woolworths.

Deutsche Equities has highlighted David Jones and Metcash as companies in the firing line of private equity.

The next private equity play is likely to come from a syndicate of former Patrick Corporation executives which will invest around $250 million in a logistics joint venture with DP World.

Your attention is also directed to Let's party like its 1987 and these.