Originally created 07/21/02

Check out companies before investing



Good companies have good governance in four key areas. Before investing your money, check out:

  • Whether most members of the board of directors are independent in fact and appearance, not cronies who rubber-stamp what the CEO says. Directors should be knowledgeable of a company's business and skeptical of its actions to know right from wrong.
  • Whether the board authorizes outrageous executive compensation, including "golden-parachute" severance packages and stock options that have pushed CEO pay up 535 percent since 1990 at the same time rank-and-file worker pay rose just 32 percent, according to Business Week's annual executive-pay survey.
  • Whether the company motto is: "Can we get away with it?" Questions about firms that cook the company books start at the back of the annual report with the accountant's footnotes, where the bad news gets buried.
  • Study up on off-balance sheet partnerships - that's how Enron hid its losses - and look for operating costs that get treated as long-term capital investment, the source of WorldCom's $4 billion blooper.

  • Whether audit firms do consulting for audit clients, too. Senate-passed reforms call for strict separation of functions.
  • One further caveat before investing your hard-earned dollars: Ask if a broker or analyst who recommends a stock or mutual fund is compensated based on investment banking or other financial ties to the company being touted.