Friday, October 15, 2010

The Importance of Integrity

Recent events in the global arena as well as back home have highlighted how important it is to have integrity in business dealings. Integrity forms the backbone of all our dealings with fellow human beings, and even more so in the arena of business, where trust is of utmost importance to sealing deals and concluding contracts. One major aspect of life where trust and integrity are of paramount importance is in dealing with others who have entrusted their monies with you, and within the business circle and investing arena this refers to shareholders and bond-holders who park their money into companies; and who expect these companies to be run by Management who are competent, diligent and most importantly above-board.

I guess everyone would have heard of the name Bernie Madoff by now, the man who perpetuated a Ponzi scam so huge that it dwarfs all other scams undertaken by con men in history. The problem, in his case, was that greed and the lust for more and more money kept the “machine” going, and once the fraud was perpetuated on such a grand scale, one would find it impossible to just “pull the plug”. Like the proverbial house of cards, just removing one of the pillars of foundation for this scam would cause the entire scheme to collapse, which was why Madoff was “forced” to concoct lie after lie to cover up a scam which grew increasingly out of proportion. Integrity, sadly, was the driving force which misled so many investors to invest in him, as he had supposedly built up a reputation of being honest, clean and upfront. Later reports would, however, paint him as a secretive man who refused to divulge how he managed to obtain his consistently stellar “returns” through both good and bad times. The rest, as they say, is history.

A little closer to home, we have the most recent massive fraud case of Sunshine Empire. The story has probably been told and re-told umpteen times, but it is worth mentioning that James Phang, the mastermind, exuded such an aura of invincibility that most people felt awed and rushed to “invest” their monies with him; not knowing that underneath the veneer of smiles was a crooked and twisted mine devoid of empathy and integrity. The strange thing about all this is that James had previously been involved in very shady, seedy and suspicious business ventures such as Number One Product (NOP) which painted him out to be less than an honourable person; yet somehow no one picked up on the integrity issue (or perhaps no one cared?) and avoided him like the plague he is. I guess he will be spending a lot of time polishing up his teeth to flash his trademark toothy grin repeatedly in prison for all the inmates to admire….

The above two examples illustrate, in a very simple manner, the headaches which occur if people put their trust in the wrong person. So how does this relate back to investing? A CEO or MD must have the integrity to admit the flaws within his company and mistakes made; and these should be communicated with unbridled candor. One way to assess if a CEO is honest is to see if he actually delivers on promises or sweeps them under the carpet once things turn back. To me, deliberately hiding the bad stuff and only promoting the good stuff smacks of dishonesty, and is tantamount to misleading the investors and shareholders! I will not name companies and people, but suffice to say I have seen such cases in the Singapore listed companies’ scene over the last few years where one thing was said but another thing was done. This, of course, has a lot to do with corporate strategy and one may argue (on the side of the CEO) that he would be unable to foresee how bad things would get (during the sub-prime crisis) or how much things would change as a result of political, social and economic factors.

However, my belief is that a good and honest CEO and top Management should prepare and pre-empt shareholders and investors for trouble on the horizon, and not continue to paint an overly rosy picture of the company’s prospects. Integrity would be lacking if all the CEO does is go on promotional road shows, attend briefings to sell his company and laud the successes while playing down the risks – all this in the name of possibly raising funds from the secondary market and boosting the share price. There are too many glamorous CEOs out there who shamelessly promote their company in the mainstream media, all the while knowing the true state of affairs but hiding it better than one of those cloaking devices in the Star Trek franchise. One could put forth a convincing argument that this is how companies sell shares to the unsuspecting fund managers and general public – by promoting the “promotable” and selling all the “saleable” aspects. Ultimately, it is still caveat emptor.

A CEO with true integrity should not set about misleading the public, as he may also be subconsciously misleading himself and his executives! Some examples of CEOs whom I will label as “having integrity” are those who are honest and come clean with their companies’ problems and risks, and down play the attractiveness of their business. They should present factual and realistic scenarios instead of “souped-up” presentations, and should also take questions in an open, transparent and frank manner. In this way, he can earn the trust and respect of his shareholders and also Board of Directors. So the next time you attend AGM to speak to the CEO, or read about some CEO in the news, remember these pointers and judge the person accordingly before you put money in his company.

So I shall leave you with a famous Warren Buffett quote: “In looking for someone to hire, you look for three qualities: integrity, intelligence and energy. But the most important is integrity, because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.”


XuCloudy said...

Don't know whether you would mind to also share,
Based on your experience, Which are the CEOs do you consider to have good integrity?

Musicwhiz said...

Hi XuCloudy,

From my experience, one of the most transparent, candid and frank CEOs has been Boustead's Mr. FF Wong. He will not hesitate to talk about his mistakes (in the Chairman's Statement in the Annual Report, not just verbally); and is willing to handle almost any question at the AGM - he has no qualms about it being a "taboo" question. In addition to being upfront and amiable, he is also down to earth, prudent and conservative.

There are of course other such CEOs around I am sure, but I will need to observe them over a longer period to be able to make definitive deductions about them....


XuCloudy said...

Hi Musicwhiz,

I have noticed the same from the audiocast transcript posted by you.
Interesting exchange between shareholders and Mr.Wong.
However admitting the mistakes is not equivalent to learning from it and not repeating it.

Mind to share about Kingsmen and MTQ's CEO?
To be frank, i am more confident with Kingsmen & MTQ's business potential.


Musicwhiz said...

Hi XuCloudy,

Yes, learning from the mistakes is of crucial importance. I guess we'll have to see if any of the mistakes are repeated? Haha.

Kingsmen's CEO is very jovial person, and upbeat about the company's long-term prospects. I've spoken to him before and obtained information about the Company's prospects. As for MTQ's CEO, he is very knowledgeable and open and is passionate about the business.

And yes I think both companies have long-term potential; I shall let them grow slowly but steadily.