It’s hard to look through papers or peruse financial websites without shaking your head as you come across yet another report on this or that company writing off bad investments or — even worse — getting fined or reprimanded for poor business practices or unethical behavior.
Such slaps on the wrist have become little more than the cost of doing business, since companies and even investors go on as if nothing has happened. But there is a cost, even if it shows up as just a part of a sterile line on a balance sheet or income statement, and investors have a right to some amount of outrage, moral or otherwise.
Which brings me to my own little measurement: the “Cost of Doing Business Index.” This index is something I plan to use to occasionally look at some of the more questionable moves by corporate management. The CDBI is scaled from 1 to 5, where 1 is a shrug, and 5 is a head-scratching “You gotta be kidding me!” moment.
Here’s a few examples:
Level 1: Microsoft — Silly Money
In 2007, Microsoft (NASDAQ:MSFT) CEO Steve Ballmer decided an 85% premium to purchase Internet advertising newbie aQuanitive was a great way to spend $6.3 billion in hard-earned cash. Apparently, Microsoft was concerned nobody in Redmond, Wash., could figure out how to cash in on Internet ads. All well and good, except MSFT ended up writing the entire venture off to the tune of a $6.2 billion (non-cash) hit for the most recent quarter.
Think Microsoft has learned a lesson? Not sure, since the company just paid $1.2 billion in cash to purchase Yammer, an enterprise social networking startup.
Level 2: JPMorgan Chase — Greed is Not Always Good
JPMorgan Chase (NYSE:JPM) had a grand old time in London trying to find ways to “hedge” a portfolio that already was hedged with a hedge product that was a derivative of … wait for it … a hedging product. The “London Whale” trader and his supervisors managed to hold down the losses on the various positions to, as of this writing, $4.4 billion.
So no, it didn’t break the bank, and the banking system is still intact, but we don’t really think the idea of a porfolio-hedging profit center at a bank that took TARP funds just four years ago is a great idea, right? How about this: Lend some of it out to creditworthy businesses and customers and collect it regularly as scheduled at a profitable interest rate. It’s called banking.
Level 3: Wells Fargo — We Promise We Won’t Do it Again
Speaking of banking, what do Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) all have in common? Lawsuits that have been settled, disputed, or are in the early stages. Pick your poison on this one: Foreclosure fraud (BAC), predatory lending practices targeting low-income households in Tennessee (WFC) and shaky sub-prime mortgage practices that sent one judge off the deep end at settlement (C) have all resulted in fines for each company.
In Wells Fargo’s case, there’s a scent of racism in the air, as Memphis sued WFC claiming it went after low-income African-American communities for high-interest and high-fee loans.
The big question is how much more is out there as the onion gets peeled. Government regulators have tried to kick someone’s butt on this, so hopefully this cost of doing business will have a short remaining shelf life.
Level 4: Barclays — Manipulation Is Our Middle Name
Collusion used to be associated with Major League Baseball owners, but now you can add Barclays PLC (NYSE:BCS) to the list of the tarred. (By the way, I hope you’ve noticed the way the Cost of Doing Business Index is littered with financial companies. I know I have.)
It seems that Barclays manipulated the Libor index used to price thousands — no, make that possibly hundreds of thousands — of loans and other financial instruments tied to the index set by European financiers. The scandal has cost president Robert Diamond and Chairman Marcus Agius their jobs, and British regulators — not to mention those in the U.S. — are looking closely to see if anyone else was involved. Any bets on that one?
So, can anything be more unethical than rigging the system? As it turns out, yes — yes it can.
Level 5: Wal-Mart — A Rose by Any Other Name Still Is …
… bribery, of which venerable Wal-Mart (NYSE:WMT) is charged with after an internal investigation uncovered payoffs to local officials in Mexico for purposes of greasing the skids for new construction and any other local project necessary to grow the brand and business.
Now, I realize $24 million in payouts is a mere pittance to one of the largest U.S. companies by market cap and the world’s largest public-sector employer. But come on! If Wal-Mart officials told the local Mexican officials they were leaving and taking all their marbles — which, by the way, represents 20% of WMT’s total number of stores — you think the government wouldn’t say, “Hold on a minute, let’s figure this out?”
You know what $24 million would buy? A little health care insurance for some of Wal-Mart’s part-time employees. Shame on you.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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