The third great problem to retaining wealth is agency. Agency is whenever you trust someone else to do something for you. There is no end to the problems here. To cope, I am going to discuss two aspects of agency: stewardship and reporting.

Stewardship has to do with taking care of something and managing it, be it a country, a company, an estate, or a house. An agency problem occurs when agents usurp their authority and manage things not to the benefit of the ultimate owners but of themselves.

For a long time, one of my favourite subjects was development economics. I used to read quite a lot of it because I felt it was one of the key subjects in the world, a means by which the north-south divide, the problem of poverty in the world, and of war, could be alleviated leading to more stability and wealth overall. I remember being struck by various studies that showed that the number-one reason for under-development was political leadership.

We are not talking here of normal economic cycles, the normal booms and recessions, but of how countries either fall into or never rise out of poverty. Once a country falls into that state, it is very hard to recover, and it will take a long time, much like an infected human body which has lost most of its white blood cells which fight disease.

What a country needs is simple and yet so elusive: good government. It is as difficult to define good government as it is to be lucky enough to have good leaders and recognise them. There are, of course, the concepts of honesty, good faith, and acting with the diligence of a bonus pater familias, expressed in practice as "would you trust this person with your family and your wealth?" What "good government" is, you know as well as I do, each investor must decide for himself or herself.

The best way I know of understanding the nature of good government is by following international affairs and travelling. When you go to a country, you have to read about it, especially its newspapers, and as much as possible talk to people in all walks of life. (You find that taxi drivers, barbers and restaurateurs know everything.)

You get an idea of the rule or otherwise of law, how business is treated, civil rights, what the environment looks like, how upright or crooked the politicians are, who owns the big buildings, who has the land, who has shares, the degree to which wealth and power are concentrated in a few hands or is more widely spread, how leaders are chosen, the degree or otherwise of democracy, how the have-nots are treated, and that sort of thing.

Usually, but not always, people get the leaders and the public standards they deserve, those they choose, and what they are willing to put up with.

The problem of agency in stewardship rears its head not just in public administration but also in corporate affairs. The problem of compensation is the one currently in the forefront, but there are others that we do not hear much about, such as the decisions to first merge and then de-merge, first acquire and then dispose of companies, first acquire and then destroy brands.

These things go on all the time, often dressed up in very questionable economic and commercial garb, but they are currently not the big issue. As an investor, if you see them, and do not like them, sell.

The big issue today is management compensation. If you want good management you have to pay for it. I am sure most investors are willing to pay good money for good management. The problem is when a company is paying good money for bad management. And it gets worse if this fact is not disclosed in a sufficiently clear manner.

If you get to see little, and do not like the little you see, you have to be on your way out of the company. That is for the normal investor. For big investors, such as pension funds, who control such a lot of money that they cannot easily switch holdings, often not finding enough securities in which to invest, the problem is even more serious and they are therefore trying to play an active role in those companies where they see problems. As a result, there is the danger that they get coopted into these companies' bad ways.

Compensation committees ask compensation consultants to give them their opinion of industry rates of pay. As companies compensate their executives, new industry rates are set, and this got to be a spiral, with good managers setting higher levels of pay and normal and mediocre managers being carried along.

So long as share prices were going up, managers retorted "look how we have increased shareholder returns", taking the benefit of the boom but when shares went down, some of them came under the microscope.

Executive compensation is a big research topic in business schools. They are researching not just the criteria on which compensation should be set, and how compensation should be tied to performance, but also the organisational and institutional context in which compensation is set.

The good news for normal and small investors is that disclosure today is much more onerous than it was in the past, that you can see who the people are, and get an idea of what they are getting, and importantly that you can measure their performance in your own way by that magic number: profit after tax. You can soon form a pretty good idea of what's happening.

The mention of profit figures brings us to the second aspect of the corporate agency problem: reporting. Here we have seen sins of commission and omission all along the spectrum, ranging from outright fraud to a Byzantine sort of Bosphorus-like interpretation of the rules by both directors, accountants and auditors where semantics reigned supreme.

This problem strikes at the very heart of the financial system as we know it because investors part with their money on the basis of information contained in certified statements and if the statements are false then there can be no trust, nor finance.

Paul V. Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such. The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.