Corporate Dishonesty

What Investor Crisis of Confidence?
Commentary about business and finance.
July 2 2002 2:05 PM

Corporate Dishonesty


Dear Nell,


I hate those Panglossians too! Though, come to think of it, in the strict Liebnizian sense, I'm probably one myself. The basic philosophy, I believe, is that this is the only world we could exist in because it's the only one that would have us.

Thank you for not using the words "restore investor confidence." Have you noticed how almost every solution touted by everybody sounds like it's meant to jolly up investors so they start throwing money at stocks again? I swear if you read Hank Paulson's speech or listen to anything Harvey Pitt says, it seems as if they think the best reform is one that serves its psychological purpose without changing anything substantively.

That doesn't sound like what you're saying, Nell. Further, I suspect it's only out of consideration for our readers that you don't spell out in detail what your proposed reforms are.

Myself, I favor anything that constitutes improvement but haven't heard much from any quarter that sounds like it does. The single exception is Jeremy Siegel's plea to get rid of the double taxation of dividends.

You know the guy—the Wharton prof who wrote the gospel in the form of Stocks for the Long Run. His argument is that the best way for companies to demonstrate their bona fides is to routinely deliver cash to their shareholders. Cash, after all, you can't fake. But I don't see any congresspeople storming the TV cameras to propose doing away with the corporate income tax.

You suggest that retail investors who use to download buy-hold-sell calls from Wall Street analysts need to be protected from analysts' conflicts of interest. I say anybody who does that has much bigger problems. If they're acting on stock recommendations, that's no different than betting on whatever the talking head of the moment is saying on CNBC. Such "investors" are looking for action, not for investments.

I'm sorry you and George Soros we're defrauded by Waste Management, but think about it this way: People like me look to people like you to make the world safe for our indexing strategies. If you don't ride herd on managements and flyspeck the books, then people like me can't invest broadly and indiscriminately in "the market" confident that good management decisions are being rewarded with higher share prices and bad ones punished with lower prices—such that, over time, our portfolios will appreciate as companies are constantly pressured to perform better.

I was talking recently with the head of a big public pension fund and well-known crusader for corporate governance reform. I asked if he ever sold the shares of companies that didn't adopt his recommendations. "Oh no, we index" was his answer.

Uh-huh. It seems to me he's part of the problem and not part of the solution if he's not prepared to differentiate between companies that are doing the right things and those that are doing the wrong ones. I don't have the time and resources to screen 5,000 stocks. He does.

Nell, you note an impressive recent list of corporate scandals and near-scandals. Purely as an epistemological matter, though, I wonder if the incidence has changed or whether we're paying attention more because the market's poor performance has put us in a mood to seize upon villains.

I was just revisiting the MiniScribe case from the late 1980s, in which a CEO eventually did time for loading up boxes with bricks and pretending he was shipping disk drives. Remember poor Ian Wilson? He was once the likely next CEO of Coca-Cola but recently pleaded guilty to mislabeling expenses as capital investments (just like WorldCom!) at his company Aurora Foods. Just last year we had the mistrial of a former investment banking chief who was leaking insider information to impress his porn-star mistress.

Of course a down market and a recession are likely to expose failing businesses, and failing businesses have a greater incentive than thriving ones to fudge the books. Even so, there continues to be a net weekly inflow of money into stock mutual funds, so where exactly is this "crisis of confidence" that everybody keeps shrieking about?

Yes, I hear from those small investors too who pronounce all business people "crooks" and swear they'll never trust the stock market again. Those are the poor sods, I suspect, who started investing in 1998 and got socked by the correction.

A lot of others have been at it since the early 1990s, or even the early 1980s, and have a much a more equanimitous view of current tumult.

They took all the smart advice about keeping overhead low, about not churning their accounts, about sticking their retirement money in mutual funds and letting the pros (like you and George) do the work for them. They've done just fine.  No question, executives who lie and steal should be prosecuted—but to maintain "citizen confidence" rather than to restore "investor confidence." Let's afford the latest crop of white-collar criminals the usual, laborious due process so we can see that our institutions continue to work even when the stock market appears to be stuck (horrors!) in a trading range.



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