What's That Smell?

Corporate scandal will be all the rage for the next few days as we endure the buzz regarding the upcoming trials for executives Bernard Ebbers, Richard Scrushy, and Dennis Kozlowski, ringleaders -- or scapegoats, depending on your point of view -- of the financial meltdowns at WorldCom -- reborn as MCI (Nasdaq: MCIP  ) -- HealthSouth, and Tyco International (NYSE: TYC  ) . Rather than rehash the dirty details, I want to point out how an enterprising Fool can avoid investing in such train wrecks. Let's begin with an interesting tidbit from the namesake paper of the Washington PostCo. (NYSE: WPO  ) .

"It's not enough to prove these guys got billions. Getting billions is not a crime," a former prosecutor turned defense attorney told the paper.

That all depends on what you mean by the word crime. Technically, there are plenty of ways to get away with plundering a corporation. Could be, all you have to do is convince a jury that you felt entitled to charge the company for gold shower curtains and tacky, Sardinian, Gladiator-theme parties featuring ice statues that whizzed vodka into executives' highballs.

But as a shareholder, you are entitled to come up with your own definition of theft. And it's something I encourage you to do. Keep in mind: Once you buy a stock, those managers are spending your money. When they're putting too much of it in their own pockets, who cares if they're doing it legally or not? It's time to scram.

How do you know how much they're getting? Stay informed. Read the financials, especially the footnotes. Do salaries seem low? Check out how much of the cream is being skimmed by executives and board members via perks, stock giveaways, and options.

More specific nonsense can be tougher to find. No one's going to tell you that you, Jane Q. Shareholder, are footing the bill for executive foot rubs, but you can get a feeling for the way things are by digesting the annual proxy statement in full. As I've suggested in the past, the dirty laundry in the DEF 14A is a must-read. If you can't be bothered to check it out -- free download via the SEC here -- you probably shouldn't be investing in stocks at all.

For just a taste of the delights contained within, consider the $17 million cash bonuses and 3 million options awarded to Bernard Ebbers in 1999 and 2000 and reported in the April 2002 proxy. This huge handout came on top of a $1 million annual salary and $40,000 worth of personal flights on corporate jets. In addition, the corporation backed up $150 million in loans that Ebbers owed Bank of America. Wait! It gets better! The firm loaned Ebbers another $165 million at rates in the low 2% range.

Plenty of this was already reported in the 2001 proxy. Folks, the stench here was perceptible long before the world(com) blew into pieces, wiping out a couple hundred billion dollars worth of investors' money.

Bottom line. Don't take your eyes off the ball just because you're making money too.

For related Foolishness:

Seth Jayson counts the pennies in the ashtray before leaving his car at the oil change place. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. Fool rules are here.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 489880, ~/Articles/ArticleHandler.aspx, 10/20/2014 6:02:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 16,380.41 263.17 1.63%
S&P 500 1,886.76 24.00 1.29%
NASD 4,258.44 41.05 0.97%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/17/2014 4:00 PM
GHC $704.73 Up +15.73 +2.28%
Graham Holdings Co… CAPS Rating: **
TYC $40.19 Up +1.26 +3.24%
Tyco International CAPS Rating: ****

Advertisement