"The CEO is the soul of the company." -- Kay Koplovitz, founder, USA Networks
The majority of CEOs on Wall Street are hardworking, honest men and women, however bad apples can seed themselves in any company. CEO/cheerleaders can seduce investors (and win positive headlines) with legal loopholes and sleight-of-hand tricks, even if they never technically cross the line of lying, cheating or stealing. The company may have red bleeding all over its balance sheets, inching toward bankruptcy, but by airbrushing the troubled areas and applying some makeup to the product line, journalists and even respected analysts can be bamboozled into reporting on the "good news" that diverts attention away from the true story.
This is where common sense can be your best friend. Mall REITs have lost 13-22 percent so far this year. How many times have you visited a high-end fashion mall recently where the designer shops looked like empty museums? Where do you shop for your stuff? Ross Dress for Less, Zappos or Rodeo Drive? If you aren't purchasing at the expensive retail shops, and you're not seeing anyone else there, how are the stores and the malls still in business?
The Top 10 Signs a CEO is Rolling in Your Dough and Cooking the Books
Here are the top warning signs that a company or CEO is being a little too freewheeling with the company checkbook. If you see a slew of signs, beware!
1. Rock Star CEO
When the CEO shows up more often in the society pages than in the executive suite, the company's bottom line is taking a mud bath on your dime. Now, there's nothing wrong with Sir Richard Branson kite-sailing to demonstrate the need for the Ocean Elders. Or to have Oprah on the cover of every issue of O Magazine. That's called advertising, and it is handled by a professional team to promote the brand. These are two conscientious people who have proven over the decades to care about bringing good things to the planet.
However, lavish parties and licentious spending outside of the office reveal the taste and appetite of the executive's soul. As Kay Koplovitz, the former Chairman of the National Women's Business Council (NWBC) under President Clinton, says, "The CEO is the soul of the company."
Respectable CEOs don't party like rock stars.
2. Offshore corporate headquarters
When the company has the majority of its operations in the United States, but holds one shareholder meeting every year in Bermuda (or the Cayman Islands or some other well-known tax shelter) in order to claim the island as its base of operations (and avoid paying taxes), you are dealing with a corporate ethos of flaunting the rules. Another perk of this strategy is that it makes it extremely difficult for shareholders to attend annual meetings, especially "special" impromptu meetings. That means insiders can run amuk and make all of the decisions without any input from other stakeholders.
The person who is attracted to helm a corporation that loves to bend rules to its favor is someone who likes to bend the favors toward herself, too. Dennis Kozlowski went to prison for stealing more than $100 million from Tyco International (and investors and employees).
3. The SEC is conducting an investigation
Fewer than five percent of publicly traded companies are investigated in any one year. Of course, an SEC investigation doesn't mean the executives or the company are guilty of a crime, but it could be a red flag, especially if you spot other suspicious signs in the company or eyebrow-raising reports about the chief executive. If the company later has charges filed against it, it could take a while for the share price to recover.
The company could be eaten alive by the competition, even if the investigation reveals no foul play. When the brainpower and manpower at the top have to be directed toward lawsuits and investigators, product innovation suffers.
4. Confusing, complicated earnings reports
Are the company's quarterly reports harder to understand than quantum theory and the darkest caverns of your lover's brain? Is the company operating a dozen spin-off and shell corporations, employing complicated financial schemes that you don't understand? People who want you to understand explain what they're doing in plain English. People who don't might be hiding something.
5. Product prices have sunk faster than the Titanic, but earnings reflect steady growth.
This was the hallmark of the telecommunications industry in the first part of 2000. Anyone with a phone was practically leaping for joy that they could now call anywhere in the United States for under five cents a minute. Wow! It was amazing. But at the same time that prices had imploded to 25 percent of what they were in the previous year and all of that revenue had disappeared from the top of balance sheets, many telecommunications companies were still releasing press statements touting "earnings growth." (There are more than a few ways that a smart Chief Financial Officer can achieve this.)
This is happening today in retail. Discount designer stores like Ross Dress for Less and TJ Max are reporting increased sales. The Gap is closing stores. Quiksilver just declared bankruptcy. Many designer brands have lower sales this year than last.
6. Consensus insider selling.
Bill Gates unloads about $500 million a year, largely to fund the Bill and Melinda Gates Foundation. For a man who owns 878 million shares, selling off 16 million shares a year is not alarming. He's still the richest man in the world.
Where you'll see more problematic insider selling is with the rookies -- young, smaller-cap corporations. When the insiders of a young company dump their shares en masse, bad news is breathing down their neck. It's against the law to trade on information that hasn't been made available to the general public, but tempting nonetheless.
Sometimes you get lucky enough to spot insider buying, which can be a very good sign. Months before 1-800-CONTACTS was purchased by Johnson and Johnson, the insiders were buying their own company stock. When the acquisition went through, the share price quite naturally jumped, rewarding all stakeholders.
7. Delays
Delays in filing earnings. Delays in returning goods. Delays in adjusting credits. Delays in shipping. If it takes less time to swim to Antarctica than it does to receive a replacement part for your coffeemaker or to receive a credit on your bill for an unauthorized charge or returned item, these are big red flags.
8. Bait and Switch
When a company buys back shares of its stock or increases its dividends, that can be happy news for shareholders... unless it's a bait-and-switch tactic used to keep your dough, while debt, earnings, or liability questions are swept under the carpet. Corporate buybacks can be a sign that good things are happening at the company, and the board of directors wants the company to have a bigger piece of the upside. However, the current bull market has been fueled by the most aggressive corporate buybacks seen since 2007 -- the year before the Great Recession! Sales are lower in many of these corporations, however, the buybacks make EPS higher, by reducing the amount of shares.
9. Executive exodus
Captains may go down with the ship, but executives rarely do. If two or more executives have jumped ship in the last few months, so should you!
10. Employees hate their jobs
The stores are filthy and under-stocked, and employees shrug off your questions. Rampant employee dissatisfaction is usually indicative of deep trouble within the corporation.
The Bottom Line
Great companies make great products. When executives are hardworking, visionary, inspiring, honest and have integrity, along with an easygoing laugh and long-term strategy, their team wants to do a great job. Happy people make better products, faster and cheaper. When the company is headed up by a narcissistic, dishonest, arrogant profligate, the "leaks" in the CEO personality could eventually sink the company's ship.
This is an Amended Excerpt from Put Your Money Where Your Heart Is (aka You Vs. Wall Street in paperback). Published 2008. The Vanguard Press.