Monday, August 19th, 2019

Ethics, Values and Exemplary Corporate Strength

Monday, June 1st, 2015

The notion that many of America's corporations, banks, and other commercial ventures are apt, at least on occasion, to lapse into compromised ethics won't shock a goodly portion of our nation's populous. Indeed, it's probable that names like Enron, Madoff, and Tyco International have garnered more general familiarity than those of companies for whom integrity and positive values are keys to their day-to-day existence.

Let's take a relatively quick look at two polar opposite companies from an ethics and values perspective. Both were involved in the finance industry. And, I suppose ironically, both touched my own background, such that I'm able to provide something of an insider's view of each.

I'll wager that there's fairly widespread awareness of the Stanford Financial Group, a crooked bunch that drained its customers of an amount second only to that pilfered by the infamous Bernie Madoff. I know the Stanford story well. In the middle of the past decade, having spent more years than I care to count as a securities analyst, I joined the firm's newly-formed investment banking arm. My function was to serve as an analyst of major media stocks, including Comcast (CMCSA), the vaunted New York Times Company (NYT), and a bevy of other cable and satellite TV providers.

An oily operation in the Caribbean
At the time, Stanford's investment banking arm represented a relatively small portion of the firm's total businesses. The entity had been founded and funded by Texas-born and Baylor University-educated billionaire Robert Allen Stanford, who had relocated to the Caribbean -- first to Montserrat and then to Antigua -- in the mid-1980s, after accumulating a fortune in Houston real estate.

Long before adding investment banking to his repertoire, he'd established significant positions in commercial banking in several locations. And he'd also become the owner of Caribbean newspapers and the sponsor of cricket teams and tournaments in the region. Closer to Stanford Financial Group's home base -- which was always tied to Houston -- Stanford Financial was the title sponsor of the 2007 St. Jude PGA golf tournament in Memphis.

On the banking front, the firm stretched well beyond the scenic islands that dot the Caribbean. In fact, its banks could be found in the likes of Venezuela and Ecuador, among other spots on the continent to our south. And beyond that, the firm also maintained a number of financial affiliations in Europe.

The first indication of Stanford's sliminess
Unfortunately, much of Stanford Financial Group was being operated in a manner that was several layers beneath the up and up. Indeed, my own stint with the organization lasted just six months. In that short span, I'd detected a distinct odor of dishonesty and immediately beat a hasty retreat. It now appears that not long afterwards, in 2006, a cable had been leaked by the U.S. embassy in the Bahamas conjecturing that Stanford's companies were possibly engaging in "bribery, money laundering, and political manipulation."

The initial tip-offs included the consistently higher-than-market rates that those companies offered on certificates of deposit. In essence, if you were promised an eight percent return on Stanford C.D.'s, when all other institutions were offering five percent, you likely were receiving far less than you paid for.

Despite those earlier suspicions, it took until early 2009 for the SEC to outwardly contend that Stanford and his minions were operating a "massive Ponzi scheme." The group had apparently also tampered massively with Stanford International Bank's records to the point that they bore almost no relationship to reality. The result for Sir Allen -- he'd been appointed Knight Commander of the Order of the Nation by the Antiguan government in 2006 -- was that by the middle of 2009, his billions of dollars in assets had been frozen and he had been taken into custody by the FBI.

A life sentence and then some
Due, however, to the lingering effects of being beaten half to death by fellow inmates in a Texas jail facility where he was being held temporarily, along with other impediments, his trial didn't actually begin until January 2012. In March, his jury required only three hours to find him guilty of spearheading the scheme. He ultimately was ordered to disgorge $6.9 billion and to pay a $5.9 billion fine. Even if he's somewhat shy of the entire amount, he'll have more than enough time to save for it, since he was socked with a 110-year federal prison sentence.

Now 65 years old, Stanford will be eligible for release in April 2105, at which time he'll have just chalked up his 155th birthday. In the meantime, he passes his time in the maximum-security Coleman II prison unit in Florida, where his neighbors include the nefarious Boston gangster, Whitey Bolger.

The other side of the quality coin
The Stanford story may tend to increase the likelihood that many of those who learn of it will attach negative connotations to the mention of "Wall Street." Allow me then to quickly soak that erroneous notion in the coldest of water, a task that will simply require that we lurch back to the earliest days of my career.

It seems that, with my college diploma still somewhat damp, I'd headed for the New York metropolitan area. My intent was to immediately initiate work on an M.B.A. diploma. But the leap from one academic pursuit into another turned out to be far too abrupt. I needed at least a brief rest from scholarly pursuits. Fortunately, I was able to top a group of applicants -- how, I'm still not certain -- for entry into a trader training program at Kidder Peabody & Co., an eminent Wall Street investment banking firm. The program was to have lasted for two years, but with more than a little luck, I was given a big boy's portfolio to trade within three months.

With that as a backdrop, however, the Kidder story is hardly about me. Rather, it focuses on the firm's leader, patrician and ultra-ethical Albert H. Gordon, one of the finest individuals to ever have trod the streets of New York's financial district.

Gordon had graduated from Harvard, and added one of its M.B.A. degrees way back in 1925. His first subsequent stop was at Goldman Sachs (GS), where he began as a statistician. Six years later, in the still early stages of the Great Depression, he moved to Kidder, which, according to Forbes magazine, he built into a "minor powerhouse on Wall Street."

Indeed, In a 1953 ruling that the investment industry had not violated federal antitrust laws, Judge Harold R. Medina observed that Kidder under Gordon had "forged its way strictly on the merits from a minor that of one of the country's leading underwriters." (In the wave of scandals that swept Wall Street during the second half of the 1980s, Kidder did become involved in an insider-trading scandal that was essentially the handiwork of Martin Siegel, then of the firm's corporate finance group.)

The inevitable consequences of mistreated employees
Gordon transported to Kidder a valuable lesson he'd learned at Goldman. While at the larger firm, he'd snagged a $2 million deal -- a pile of loot in those days -- with what later became Kraft Foods. He should have been rewarded handsomely. Instead, his boss grabbed the entire credit for himself. As Gordon told Forbes in 2000, he learned from that event that "You can't retain employees if you don't spread credit around." A decade earlier, The New York Times had noted that Gordon had injected into Kidder Peabody "an air of positive gentility, giving employees a free hand to pursue deals."

He also gave them more than that, including cash rewards for those who managed to quit smoking. He also more than practiced what he preached in the area of health and fitness. Those practices included walking long treks from his residence in Manhattan to Kidder's office in the city's downtown financial district.

He clearly upped his pace when, in his eighties, he began entering marathons, twice being the oldest participant in the London event. Almost certainly his fetish for fitness was key to his survival until 2009, when he passed away at 107 years of age, more than two decades after he'd sold Kidder to General Electric (GE). At the time of his death, he was the oldest graduate of Harvard University -- or perhaps any institution of higher learning. Today, the track and tennis facilities at his august Ivy League alma mater are named in his honor.

The real differences
The above is not intended solely as a disquisition on Wall Street. Rather, it's meant as a demonstration that two firms, perhaps operating in the same industry, can constitute complete opposites from an ethical and values perspective. The key difference almost always boils down to the variances in the values propounded by their managerial leadership.

Having said that, it's also possible for pockets of integrity to exist within some of the smarmiest of organizations. It's obviously difficult for a conversation about unethical business practices to move beyond, say, the 30-second mark, without Enron's transgressions being figuratively run up the flagpole. It's also beyond conjecture that the top management of that company -- Ken Lay, Jeffery Skilling, Andrew Fastow, etc. -- constituted a world-class team for its ability to conjure up and knowingly employ skullduggery in setting the company's tone and direction.

But at base, this article is about what I believe to be the truism that values-driven companies, e.g. Kidder Peabody, are far more likely than the corner-cutters to perform in an exemplary fashion, especially over time. They do so by paying close attention to the best interests of their customers, clients, employees, communities, and other publics. As such, it's appropriate to note that there are two quite solid companies extant that originally wore the ultimately besmirched colors of the Enron stable.

A couple of positive results from the Enron debacle
Now massive Kinder Morgan (KMI), which operates largely in the pipeline, storage and gathering systems portions of the energy oil and gas industry, was founded in 1996 by William D. Kinder, a college classmate of Ken Lay and an attorney and executive at Exxon and several of its predecessor companies. Upon leaving Enron, he and another of his college chums bought Enron's pipeline operations for a dirt cheap $40 million. Those assets were to constitute the foundation of Kinder Morgan, which today packs a net worth near $12 billion. In 2014 alone, the company generated revenues of more than $16 billion.

Enron's other notable corporate progeny is EOG Resources (EOG). As with Kinder, Houston-based EOG (a remaining acronym from what was once Enron Oil & Gas) is one the truly admirable companies in the world of U.S. oil and gas production. Founded in 1999 by Mark G. Papa, who became its first chairman and CEO, the company has become the fifth-largest U.S.-based oil and gas company, a position that stems from its prolific operations in such major U.S. liquids-prone plays as the Eagle Ford, the Bakken, and the Permian Basin.

So even an Enron can produce top-of-the-line offspring. But what of the above-mentioned contention that companies that are seriously concerned with ethics, values, and fairness? The economist in me is convinced that those hatchlings stand a far better chance of survival and even stellar performance over time if they differ significantly from their parentage in the all-important areas of ethics, values, fairness and honesty.

A concept that's hardly new
I'm hardly alone in harboring this notion. Just over two years ago writer Ken Silverstein contributed an article to Forbes in which, referring to Enron, he said "is a stark reminder of the implications of being seduced by charismatic leaders, or more specifically, those who sought excess at the expense of their communities and their employees."

Later he observed that, "...a clear-cut mission and a corporate code of ethics is crucial. It's the foundation to which boards, managers, and workers rely when they reach a fork in the road." And, "Stock values...are a function of multiple factors. But solid principles are good for business, and ultimately good for corporation valuations."

In addition, just a couple of months ago, Rana Foroohar, writing in her Curious Capitalist commentary in the progressively more emaciated Time magazine, said:

CEO's who are paid mostly in stock and live in fear of being punished by the markets, race to hit the numbers rather than simply making the best decisions for their businesses long term. One National Bureau of Economic Research study found that 80% of executives would forgo innovation-generating spending if it meant missing their quarterly earnings figures

Virtually all investors acknowledge that, while hardly unique, approaches to business of the type exhibited by the crew at Enron have hardly become the order of the day. Otherwise those investors would have long since bid adieu to the notion of parking their own funds with public companies of any sort. Nevertheless, all too many of those same market observers have unfortunately become inured to the frequency of corporate corner cutting.

The major value of searching for values
What does all this mean for those who even occasionally toss a few shekels into the equity markets? Simply this: Whether one receives his or her stock ideas from lengthy and careful research or from quick tips from neighbors, golf team compatriots, or coworkers, there's extra, but valuable, time that should be added to the selection process.

Simply tickling a computer keyboard during that added time is likely to uncover the ethics codes and values statements that signal where management is apt to head when it comes upon that proverbial fork in the road. The difference just might be one of landing on the fast-and-loose Enron or on one of its far more conscientious -- and ultimately more successful -- offspring.

More about the author, David Lee Smith

As a consultant and contributing author for American Values Investments, Inc. David Lee Smith is an economist, investment analyst, and writer.  He and his wife, Virginia, are active members of Christ Our Savior Lutheran Church and often enjoy attending sporting events especially UT football, basketball and tennis. 

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