Forty-three percent of active, individual investors have less confidence in the stock market in the aftermath of Enron. And only 23% of U.S. investors believe strongly in the stock market’s ability to reflect the fair value of stocks. Further, 88 percent of investors believe Enron’s executives, board, auditors or attorneys “intentionally” misled the public.
These are results of a survey sponsored by TowersGroup, a New York public relations and reputation management firm, measuring the toll taken on investor trust following Enron’s bankruptcy and news of financial deception at other companies. The survey was conducted in late February by Opinion Research Corporation, which queried 363 investors with 401(k)s or other retirement plans who had also invested outside their plans in stocks or mutual funds during the past two years. The margin of error is +/- 5 percent at the 95 percent confidence level.
“The public’s trust is the cornerstone of our capital markets,” said Alan Towers, President of TowersGroup, reflecting on his company’s research. “Enron’s blow to investor faith is the Watergate of business. Trust will no longer be assumed. Companies will have to earn it with behavior, communications and leaders that inspire confidence.”
Asked who was at fault for Enron’s decline, respondents blamed former Chairman Kenneth Lay most, followed by former CEO Jeffrey Skilling and the company’s board of directors. Surprisingly, a significant minority believe Enron is a catalyst for improvement. Thirty-three percent said investigation of the company’s collapse will make investment information more reliable.
Asked what should be done to improve corporate integrity, 30 percent of those polled said to tighten financial reporting regulations. Twenty-two percent want to loosen the definition of criminal behavior so rogue corporate executives, directors and advisors can face criminal charges more easily.
Employees holding Enron stock in their 401(k) retirement plans saw the value of these holdings evaporate. But 70 percent of survey respondents claim they’re comfortable with the amount of company stock in their retirement plans, and nine percent would like to own more. The findings call into question reforms for holding company stock in 401(k)s.
Rate The ExpertsThe survey asked investors to rank the honesty and integrity of investment advice providers, auditors and corporate management on a 1 to 5 scale, with 1 being the lowest.
Perhaps the most revealing results were those showing corporate management and boards of directors sharing low ratings for honesty and integrity. Thirty-six percent of respondents gave lowest marks (1 or 2) to corporate management, and 33 percent gave them to directors.
While there are no comparable figures for these attitudes prior to Enron, the extent of damage to corporate credibility appears extensive.
The only groups receiving as low or lower trust scores were insurance salespeople, who got the bottom rankings from 51 percent of respondents, and stock brokers, who tied management with 36 percent of investors handing them the lowest marks.
Groups with the highest honesty and integrity scores (4 or 5) were bankers, who received those scores from 39 percent of respondents; followed by mutual fund companies, with highest rankings from 38 percent; and financial planners, who were ranked highest by 37 percent. Despite Enron, 34 percent of respondents gave accounting firms the highest trust rankings.
Respondents were divided on the honesty and integrity of securities analysts, who have been criticized for their coverage of Enron and investment banking conflicts. Twenty-nine percent of respondents gave analysts the lowest ratings and 21 percent gave them the highest.