News flash: I am not a court of law. I don't operate under the rules of a court of law, and I don't have the same standards. As an investor, I'd have to be insane to subject my decisions to the same standards as a court of law.
The trial of Dennis Kozlowski of Tyco (NYSE:TYC) fame ended in a mistrial last April. Kozlowski stood accused of looting hundreds of millions of dollars in unauthorized compensation. Does the inability of a court of competent jurisdiction to convict of Mr. Kozlowski mean that any money that may have been misappropriated is suddenly back in Tyco's coffers? Absolutely not.
When it comes to our investments, the standard for judging corporate executives should by necessity be far lower. When a Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) shareholder asked Vice Chairman Charlie Munger why the company sold Freddie Mac (NYSE:FRE) back when things were going very well for the mortgage finance company, he said that Freddie was doing things that made him nervous. "I'm old and rich. Why should I be nervous?" When Boeing (NYSE:BA) showed Harry Stonecipher the door last week after he was found to have had an extramarital affair, its decision had nothing to do with any laws being broken. Did we not learn after the impeachment of President Clinton that it's none of our business?
But Boeing's directors were right: It very well was their business. A CEO's actions in all regards speak to the level of trust that investors can put in his or her stewardship of their money. Put into force a stark Code of Conduct and then break that code yourself, and you've signaled your unwillingness to follow the rules. Why should shareholders trust you?
Which brings me to Martha Stewart, creator of Martha Stewart Omnimedia (NYSE:MSO), and her loyal band of defenders. In an article yesterday regarding an investigation into whether a biotech executive traded ahead of bad news at BiogenIDEC (NASDAQ:BIIB), I made a parallel to the fact that Martha Stewart had just gotten out of jail for "acts surrounding illicit trades." This was apparently beyond the pale for the Martha People, who flooded my inbox to tell me that she wasn't convicted of insider trading and that, furthermore, she was the victim of overzealous prosecution.
The former point, of course, is true. I also happen to believe the latter point is true. Stewart got in trouble after she started listening to her lawyers. If only her lawyer had simply said: "While I'm paid to believe you, lying to investigators is a felony. They're not going to believe you. If they come after you for this, the end result will be much worse than if you just say, 'I screwed up,' take your licks, and move on."
Instead, she rolled the dice and lost, and now her accessories include a charming GPS anklet.
But a discussion of Martha that doesn't appropriately paint her as the victim is apparently insufficient for the Martha People. Since she wasn't convicted of trading on insider information, it is heresy to even discuss it in those terms.
I'm not a court; I'm an investor. For an investor, trust in management is one of the most ironclad elements we have. A management doesn't have to break the law to call to question the willingness of investors to trust it. After all, whether Ken Lay is found guilty has no bearing on the fact that investors lost billions for the misdeed of trusting him.
Martha Stewart is no Ken Lay, and it is deeply ironic that she's been incarcerated while he has not -- yet. But for investors, the outcome within a court of law isn't the point. If you're banking on "not guilty" to inform your decisions on the trustworthiness of management, you're already way too close to the line.
Martha Stewart's actions on that day, and her response to the investigation -- illegal or not -- were reasons for her shareholders to be nervous. And that's more than enough reason to question them.
Bill Mann holds shares in Berkshire Hathaway.
