Ethics are just as important in business as they are in everyday life. Money is said to be the root of evil, and greed corrupts. There is a lot of money going around in the business world and if a company is not ethically strong it can catch up to them and destroy them. We’ve witnessed this in recent history, the prime example being the Enron scandal in the end of 2001. There are a few key things to look for to see if a company’s management is being ethically responsible or has the potential to be tempted to consider themselves over the interest of the shareholders.

—Dollar value ratio of management’s share ownership in the company to their cash compensation

• If their cash compensation, their salary, is greater than their shares in the company they could have a lack of interest in whether or not the company’s shares go up, but just that they do enough to keep their job. This, of course, is not always the case, but if management has a greater value in their shares than in their salary they will be more naturally motivated to increase the value of the company’s shares.  This is also known as the principal-agent problem, a form of moral hazard.

• A good number to look for in this ratio is (5*Dollar Value of Management Share Ownership)=Salary

—Look for conflicts of interest

• For example, a manager of a company that produces wooden chairs and also has stake in a lumber company may choose to use that lumber company as their supplier for wood even though there may be a better supplier of wood for their wooden chair company. The manager would profit from the transaction because they have stake in the lumber company, but the wooden chair company they manage may not be better off.

—Watch out for nepotism

• A family run company can be very dangerous for shareholders. There are many reasons why this could be negative. For instance, an incompetent family member may be given a position simply for the well being of that family member, not for the well being of the company. Family first as the saying goes, but for a company it should be increasing value for the shareholder’s first.

Remember, it is better to compromise on an investment’s fundamentals than on its ethics.