Tallying Trust and Corporate Misdeeds
July 8 -- Many say that the value of trust in capitalism can't be quantified. They are wrong.
The recent spate of corporate scandals — from Enron to ImClone to WorldCom — show that trust can be very easily accounted for in its absence.
Accounting tricks and insider dealings, among other recent breaches, create friction and become real measurable transaction costs for companies and investors.
And while those involved in ensuring trust — lawyers, insurers, regulators — turn scandals of verity into opportunity, the market will continue to lag the economy until the corporate and investor types are scared into trusting each other again.
Billion-Dollar Bloodbath
Actual events are the best examples. The market value of Tyco fell 20 percent, to $67 billion, when it belatedly disclosed a $20 million consulting fee paid to a director.
The fallout from Martha Stewart's questionable sale of ImClone stock, for $230,000, brought her stake in her own company, Martha Stewart Living Omnimedia, down 40 percent to $300 million.
All told, investors have lost $6 trillion in wealth since the March 2000 market peak — 14 percent of that since January, an $840 billion bloodbath. They feel cheated out of their money by chief executives who couldn't resist the next deal.
And maintaining a reputation as a smooth operator often pulls corporations or executives to sidestep investor trust, says Joel Papernik, a securities attorney with Mintz Levin Cohn Ferris Glovsky and Popeo in New York. "They forget that they are also selling credibility as a product."
When Their Word Is Golden
What happens in a market where credibility is the only product?
Bond traders, for example, have only their word and their reputation. "Your reputation is worth more than your trading ability," says Vince Boberski, head of fixed income research for RBC Dain Rauscher in Chicago.
Though over a recorded line, up-front honesty preempts "street justice": If a price isn't delivered, that trader is out the next trade. And no trading firm wants to be frozen out of the $19 trillion bond market. Comparatively, the stock market's total value is $10.9 trillion, according to Wilshire Associates.
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