Do we need a corporate honesty index?

It’s Sunday, and the talk shows are all aflutter over AIG’s plans to pay $165 million in bonuses, even as the ink has yet to dry on its $170 billion bailout check.  Former US Treasury Secretary Larry Summers says the governments hands are tied.  Are our hands tied as well?

First off, though, let’s clear up any confusion about Liddy’s culpability.  In case anyone out there thinks this man is decent because he’s taking a $1 salary this year, remember that he’s just getting the same pay he always got, except this year his pay is in stock rather than cash (and he’ll be eligible for a giant bonus in 2010).  If you invested in AIG stock, chances are good that you have more invested in Liddy’s retirement than your own.

There are, of course, a number of things we could do to respond to this outrage, all with varying degrees of effectiveness:

We could refuse to pay our taxes

Thoreau did it, why can’t we?  Well, we saw how effective that policy was.  The Mexican-American War raged on while Thoreau rotted in jail.  Still, if enough of us refused, if we could somehow raise more than one voice against the wind, maybe the government would have to take its money back from AIG to keep the lights on in Washington.  And they can’t throw all of us in jail.

We could roll Ed Liddy’s house

AIG CEO Ed Liddy says the company is contractually obligated to pay out the bonuses that were promised before he took over, but does it not stretch credibility that one of the largest companies in the world did not tie its bonuses to performance?  Or is it possible that Liddy is responding to social pressure within his company to ‘keep the troops happy.’   If that’s the case, might he also respond to a little counter-pressure to keep us peasants happy?  Showing up to his house bearing torches might be extreme, but perhaps we could pop a banana in his tailpipe and prank call him: “Liddy, Geithner here, I’ve got $100 billion burning a hole in my pocket…any ideas?”

We could focus on our own problems

So Liddy and Paulson are spinless…what of it?  At least they’re not in my family.  My parents worked hard their whole lives and created real value for society in the process.  While they never had the kind of money that AIG execs rake in every year, they were always generous with me, even in the hard times.  They were an example to me of selflessness and courage, and if I can be a similar example to my kids, there will be fewer Liddys and Paulsons in the world.

We could work to create an economic climate that is toxic to the Liddys of the world

If you invested in AIG, you did so without knowing that this company was run by incompetent, dishonerable men.  You might also have recently invested in 3M (it was, after all, on a number of value screens), without knowing that Liddy also sits on the board of that company.  But now that you know the consequences of entrusting your life savings to people who see this as a big game (or ‘adventure’ as Jon Stewart recently remarked), you wish you had paid more attention to Philip Fisher’s rule to never invest in any company whose management does not have “unquestionable integrity.”

But how do you screen for unquestionable integrity?  Because it’s not easy, it’s one of those things that people ignore.  But what if it were easy?  What if, like Gross National Happiness, there were some way to quantify corporate honesty?  It could be a sliding scale of 0-100 (100 being a company like Berkshire Hathaway, whose officers take a reasonable salary and have an unblemished record putting the shareholder first, 0 being a company like AIG).

With a corporate honesty index, investors everywhere would have an easy way to check on their investments, and they would recognize that investing in a company with a low index is a bit like playing Russian Roulette with your retirement.  The PEs of those companies may be low, but the risk is astronomical.

Here, then, are some of the inputs for the Corporate Honesty Index:

  1. CEO compensation
  2. Number of SEC investigations in the past 10 years
  3. Tax rate?
  4. Number of lawsuits from employees, clients, or suppliers in past 10 years
  5. Spread between cash flow and earnings
  6. Corporate Honesty Index of other companies represented on the board

If you know of anything like this that already exists, or if you’d like to suggest other inputs, please comment below.

2 thoughts on “Do we need a corporate honesty index?”

  1. I thoroughly enjoyed your post. We need to do something to get the attention of our elected officials.

    As far as I’m concerned, AIG’s all just the world’s biggest Ponzi scheme! Of course there’s no transparency. The people who claim to be fixing it were all in positions to have had something to do (or look the other way) with the making of the Wall Street debacle.

    I was opposed to the bailout from the very start. While I knew there would be consequences with AIG’s failure, I figured at least the executives would have to take their lumps, too. And I figured my share would be less. Instead, we’re all paying and the executives are pocketing it. With no end in sight.

  2. @Cynical Synapse
    I know! I’m trying hard to avoid getting angry by doing something about it. I’m reading a biography of Warren Buffett right now, and I’ve been impressed with how he seems to very carefully consider the integrity of management whenever he makes an investment. But he’s able to meet directly with executives, so he’s able to better judge their character. I hope to find, over the next few weeks, some ways that average investors like us can avoid rewarding bad behavior with our investments.

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