With corporate fraud costing the offending stock’s shareholders 22% of the enterprise value, according to a 2014 academic study, how can investors identify stocks where fraud is a problem? Listen to employee’s anonymous ratings on the website Glassdoor, says a new study.
High job satisfaction leads to low corporate fraud instances
Glassdoor is a website that enables company employees to rate their employer, the work environment and the quality of executive management in an anonymous setting on a scale of 1 to 5.
Academics studied all entries from 2008 to 2015, including 1,112,476 employee ratings of 14,282 public firms. The employee satisfaction ratings were cross-referenced with Securities and Exchange Commission fraud enforcement actions and securities class action lawsuits.
In engaging in this work, academics Yuan Ji from The Hong Kong Polytechnic University, Oded Rozenbaum and and Kyle Welch from George Washington University – School of Business discovered correlations.
The report, “Corporate Culture and Financial Reporting Risk: Looking Through the Glassdoor,” revealed that how employees viewed corporate climate was correlated to fraudulent behavior.
The report found that companies with higher ratings for job satisfaction, “culture and values,” senior leadership were less likely to be involved in SEC fraud enforcement or corporate fraud class action lawsuits.
“We find a direct relation between a lower rated culture and fraudulent financial reporting, as indicated by issuance of an Accounting and Auditing Enforcement Releases (AAER) by the Securities and Exchange Commission (SEC) and firm’s exposure to securities class action lawsuits,” the report noted.
The AAER says fraud can occur when an employee faces pressure to meet benchmarks, has an opportunity to commit fraud, and can rationalize doing so, which could include the potential for the fraud being investigated and prosecuted.
“We expect that firm culture is important in preventing fraud when firms have weaker corporate governance,” the authors wrote.
Glassdoor – How well-known companies in financial services rate
It wasn’t just fraud and corporate maleficence that correlates to job satisfaction – financial performance and hitting earnings estimates, key components for investors to measure, were also at play.
The report noted that satisfaction with corporate culture was negatively associated with abnormal accruals and the likelihood of a firm narrowly meeting or beating analysts’ EPS benchmarks.
“Consistent with our hypothesis, we find that the negative association between our measures of corporate culture and financial reporting is stronger for firms with weak board independence and firms with fewer financial experts in the audit committee,” the report opined.
Looking at the Glassdoor site, ValueWalk considered some of the more prominent names in the financial services industry today to provide relative value analysis.
Valeant Pharmaceuticals, for instance, was a company that was involved in non-transparent dealings and was of interest to federal investigators. Only 38% of the company employees approve of the CEO and only 20% would recommend working at the firm to a friend. Compare this with competitor Allergan (which nearly merged with Valeant), a company where 76% of employees approve of the CEO and 67% would recommend the firm to a friend and the company has a 3.5 rating.
In the financial services industry, Och-Ziff Capital Management, one of the largest alternative asset managers, and has been accused of wrong doing, rates as only 2.8 stars and only 38% would recommend the firm to a friend. That said, CEO Daniel Och, receives a 76% approval rating.
Compare this with legendary Wall Street investment bank Goldman Sachs, which enjoys a high 3.8 star rating, 77% would recommend the firm to a friend and the CEO, Lloyd Blankfein, received a 93% approval rating and was the highest-rated CEO in 2016.
Bridgewater Associates, the subject of much discussion regarding its corporate culture for “radical transparency,” operates in near the middle of the pack. Unlike the sharp reporting on their corporate culture, the company has a rather middle of the road 3.0 star rating, 51% would recommend the firm to a friend and 69% approve of CEO and founder Ray Dalio.
At the top”, Two Sigma (considered one of the best hedge funds by many) has an impressive 4.4 rating.
One reviewer who gave Och-Ziff two stars noted that one of the pros of working there was the “free food”.