One of the elements of corporate malfeasance that has always really bothered me is the sheer level of contempt that those doing the malfeasing have toward the owners of the businesses they run. One can understand the agency conflict that exists throughout commerce, where things like out-of-control stock-options grants and other poorly structured incentives put the interests of insiders and minority shareholders at odds with one another. One can also understand the enormous level of confusion among shareholders, since what is a big score for the insiders often has an impact in pennies on a per-share basis and thus is inconsequential.
Minority shareholders, if they think about it at all, feel pretty helpless. And many tend to believe that if their companies' stock prices go up, then they're not really concerned with a little marginal sticky-fingeredness in the corporate offices.
That has been a common refrain as we've written about stock options over the years, and about how companies like Oracle (NASDAQ:ORCL) and Cisco (NASDAQ:CSCO) had dickered with shareholder equity by buying back overpriced shares just to counteract the dilutive impact of all those additional shares. "So what? This company has made me very, very rich. Whatever they're doing, it's working," you could hear the shareholders say. I got similar reactions when I detailed how AIG (NYSE:AIG) had two private companies controlled by management that owned large stakes in AIG, and how it effectively controlled -- and hid -- executive compensation at the company. It was the classic Sammy Sosa response: "AIG been bery, bery good to me."
And they have a point. To a point. But only to a point. Diddling a pliant shareholder base is just that. Straight theft from and lying to the same is a crime that I'm convinced that most executives and insiders are capable of only because they can dehumanize their shareholders, whom they never have to face. "They're lucky to have me," they must rationalize. "If I left tomorrow, then what would they do? I've earned this."
Frankly, such attitudes make me want to puke. It's the way of the coward. And this past week, we found out that just such a coward was stealing from my four-month-old son and is hiding out in Canada to escape justice.
Hu stole our money?
The total number tied to the theft, $100 million, made me blanch. A newspaper article in the Taiwan News led with the disclosure that Hu Ching-piao, former chairman of Chunghwa Investment, had embezzled money from the company and fled to Canada. Chunghwa Investment's 49% owner is Chunghwa Telecom (NYSE:CHT), the dominant telecommunications company in Taiwan. Wow, that's big money.
Then I saw the letters "NT," which I had missed at the outset. That symbol means that we're talking about New Taiwan Dollars, not the U.S. greenback. Do a little calculation at the current exchange rate of 31 to the dollar, carry the five, don't forget to put the decimal in the right place, and it turns out that Hu stole about $3.2 million in U.S. money, or $1.61 million from Chunghwa Telecom. This money rightfully belongs to Chunghwa Telecom's shareholders, including my own son, a child partially of Taiwanese origin, Lucas James Shau-long Mann. (You might correctly deduce that I am not the Taiwanese side of the family.)
Chunghwa Telecom shares are in Lucas's college fund. That makes him a shareholder. And, as such, he's also a victim of Hu's embezzlement, which neither Chunghwa Investment nor judicial authorities in Taiwan are bothering to call "alleged." Now, Hu, if he thought about it at all, may have justified his actions by believing that he was taking money from several government agencies, which are the major shareholders of Chunghwa Investments. That may be. But I did a little math, and it turns out that he also stole about $4.29 from my infant son.
Now, obviously, this isn't an amount fatal to Lucas's chances to pay for school at the College of William & Mary. Since we're talking about money embezzled from an investment of a company that he holds, it's not as if these dollars are going to be directly debited from our account. On the other hand, Chunghwa Telecom's dividend is based on a percentage of its net earnings, so there will be an impact, however slight, in the amount of money that Lucas -- and all shareholders -- will be paid in dividends.
My purpose isn't to spin some tale of woe -- honestly, had I not happened upon the news article, I wouldn't have ever known any embezzlement had taken place. But curiosity got the best of me, so I figured out how much Hu had effectively stolen from Lucas. And then I thought about it -- would this guy have the onions to actually rob an infant face-to-face? And if he wouldn't, does it make it any less disgusting that he did so indirectly?
Sure, it's less violent to steal with a pen than with a sword, but on the whole, it's still a pretty repugnant act. So, Mr. Hu Ching-piao, you cowardly cur, why don't you come on down and rob my other kids, too? You think there was only one infant in the whole world who was the beneficiary of Chunghwa Telecom stock? I'm guessing that there are hundreds of children under the age of 1 who are Chunghwa Telecom shareholders. And you stole from them. I certainly hope that knowledge of such keeps you awake at night, even as Taiwanese officials try to get you sent home from Canada.
OK, enough parental pique. Hu is a worst-case representation of corporate malfeasance, since he seems to have actually embezzled money from a company, but he is far from alone in his willingness to act without regard toward shareholder interests. This attitude permeates corporate culture, homilies in glossy annual reports be damned.
Shareholders = Ungrateful Moochers
In my interactions with employees at public companies, I've noticed a tendency toward substantial contempt for shareholders, since the employees feel that they are the ones who should get the financial reward since they do all the work, while shareholders simply await the reward for their passive investments. Some have even demanded that I quit calling the unencumbered assets of their companies "shareholder equity," since it sounds to them like the shareholders own the company and are, as such, more important than the employees. If this had happened one time, I'd chalk it up to a single person not having a firm grasp on capital's role in capitalism. But this happens all the time. Many employees consider shareholders to be little more than moochers who want to profit off the labors of others.
Which is, of course, exactly true.
But the negative inference has the effect of dehumanizing the shareholders of a firm. Let's be honest: The most vocal shareholders tend to be aggressive, male, and about as pleasant to deal with as a screaming case of chlamydia. They ask bad questions; they talk loudly about things they don't understand; they scream when the share price drops -- as if anyone at the company can do anything about it. It must be supremely easy for executives to amalgamate their shareholders into this very type of person. It must be even easier not to consider the shareholders at all, favoring instead their relationships with institutional investors.
But every time an executive does something not in the interest of shareholders, he or she is having an impact on all shareholders, be they opportunistic hedge funds, retirees, employees at the company, even infants. When Enron chose to set up all those poorly structured entities to hide debt, management was hiding it from the rightful owners of the company, which included all of the above. Many of these folks lost much, much more than the piddling $4 that Hu seems to have expropriated from my infant son. Some longtime employees and retirees at Enron lost everything they had.
Our investment in Chunghwa Telecom has been very successful, and I expect it will continue to be so. I don't blame the company for the action of a person it had never hired. But in the end, this occurrence is a fairly pain-free way to demonstrate why it is that management integrity matters. If you wouldn't stand idle while someone robbed a child in real life, why in the world would it be acceptable for one to do so in the corporate arena?
For whom the bell atolls
In last Wednesday's column, I asked people to email me with the only word in the English language to be derived from Dhivehi, the language of the Maldives. Several hundred folks wrote in with the correct answer -- "atoll." The Wes Unseld bobblehead doll goes to the first person who responded, whom I have emailed.
If I may make an observation: About a dozen people wrote in saying that the question was too easy because it didn't take long to find it using Google (NASDAQ:GOOG), Wikipedia, or AskJeeves (NASDAQ:ASKJ). Naturally, this is just for fun -- though some folks apparently really want a Wes Unseld bobblehead doll -- so I obviously don't mind that people are looking up the answer. But I think it's a pretty interesting social commentary that people would write in that an answer that they had to look up was too easy because the search didn't take very long.
So, for this installment, I'm giving away a CD titled Calming Kitty, music to play for your pet while you're away at work. The question is this: There are five Division I-A football schools in the United States that do not have the word "university" in their full name. First to answer correctly gets the CD.
See also Bill Mann's "Taking Advantage of the Terminally Stupid."
Bill Mann owns shares of Chunghwa Telecom. For the next four months, he is serving as the guest analyst for the Motley Fool Hidden Gems newsletter. Come and see what we're cooking up! A free 30-day trial is just that. Free. For 30 days.
