Common Stocks and Uncommon Profits and Other Writings

 
15
. Does the company have a management of
unquestionable integrity? 
The management of a company is always far closer to its assets than is
the stockholder. Without breaking any laws, the number of ways in 
which those in control can benefit themselves and their families at the 
expense of the ordinary stockholder is almost infinite. One way is to
put themselves—to say nothing of their relatives or in-laws—on the 
payroll at salaries far above the normal worth of the work performed. 
Another is to own properties they sell or rent to the corporation at 
above-market rates. Among smaller corporations this is sometimes hard 
to detect, since controlling families or key officers at times buy and
lease real estate to such companies, not for purposes of unfair gain but 
in a sincere desire to free limited working capital for other corporate 
purposes. 

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7 8
 
Another method for insiders to enrich themselves is to get the cor- 
poration’s vendors to sell through certain brokerage firms which perform
little if any service for the brokerage commissions involved but which are 
owned by these same insiders and relatives or friends. Probably most 
costly of all to the investor is the abuse by insiders of their power of issu-
ing common stock options. They can pervert this legitimate method of 
compensating able management by issuing to themselves amounts of 
stock far beyond what an unbiased outsider might judge to represent a 
fair reward for services performed. 
There is only one real protection against abuses like these.This is to 
confine investments to companies the managements of which have a 
highly developed sense of trusteeship and moral responsibility to their 
stockholders. This is a point concerning which the “scuttlebutt” method 
can be very helpful. Any investment may still be considered interesting
if it falls down in regard to almost any other one of the fifteen points 
which have now been covered, but rates an unusually high score in 
regard to all the rest. Regardless of how high the rating may be in all 
other matters, however, if there is a serious question of the lack of a 
strong management sense of trusteeship for stockholders, the investor 
should never seriously consider participating in such an enterprise. 

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