By Kathryn Dill | Forbes Staff
As one-time corporate superpowers Enron and WorldCom collapsed like dominoes, James Kaplan grew tired of the routine spin on financial wrongdoing. Kaplan, director of proprietary ratings provider and investment adviser GMI Ratings, wanted to find a way to identify nefarious corporate behaviors and, at the same time, spotlight companies who abstained.
The result was a ranking of the 100 Most Trustworthy Companies in America.
“These were major financial disasters predicated on outright fraud,” says Kaplan. “I said, ‘I think we can differentiate between companies that may be fraudulent but not yet discovered, and those companies that show governance and accounting transparency.’”
Each year, GMI Ratings provides Forbes with a list of the 100 Most Trustworthy Companies in America. To develop the ranking, GMI reviews the accounting and governance behaviors of more than 8,000 publicly-traded companies in North America. In assessing each company, GMI considers factors including high risk
events, revenue and expense recognition methods, SEC actions, and bankruptcy risk as indicators of a company’s credibility.
Lamar Advertising Company was named one of 'America's 100 Most Trustworthy Companies' by Forbes. A congratulatory message from NASDAQ (shown above) ran on a digital spectacular in Times Square.
The companies that make this list garnered the 100 highest scores for trustworthy behavior over the four quarters of the previous fiscal year.
The company with the strongest AGR—“Aggressive Accounting and Governance Risk,” the final composite by which companies on the list are scored—is Casey’s General Stores, a mid cap Iowa-based chain of convenience stores and gas stations that achieved an AGR of 99 out of a possible 100. Houston-based Oceaneering International holds the best AGR, 93, among large cap companies, while mechanical products operation Altra Industrial Motion Corp., with an AGR of 97, holds the best score among small cap companies.
“The focus has always been on people who cheat, lie, and steal,” says Kaplan, “so we thought it could be good to focus some light on those companies that are transparent and consistent.”
Kaplan says that companies that make this list are reporting accurately on their outcomes, good or bad. While there’s no guarantee that an honest company is a thriving one, in most cases the companies here are financially sound, with strong stock performance.
“There’s far less uncertainty associated with [these companies.] For better or for worse based on performance, they’re informing their shareholders,” says Kaplan. “There’s a lot of things that factor into your decision making as a shareholder, but one is what is the company doing.”
In ranking companies, GMI considers factors categorized as “Corporate Governance Events”—for example, accounting issues, late filings, or cases where the Chairman is also CEO—and “High-Risk Events,” such as abnormal changes in employee count or share repurchases. Kaplan says while none of these events by itself indicates wrongdoing, high occurrences of these kinds of issues, or particular combinations of behavior, can raise suspicion.
View slideshow of The Most Trustworthy Large Cap Companies 2014 »
“None of them are smoking guns,” says Kaplan, “but when a company has 15 or 16 pieces of forensic evidence, that becomes a smoking gun. It’s inconsistent. Too many parts are moving too quickly.”
Addressing the example of CEOs holding multiple company titles, Kaplan says, “When the CEO is Chairman, that’s fairly meaningless, but when the CEO is also Chairman, and the incentive compensation is higher than every peer group member, he’s controlling his own compensation, and that’s a flag.”
GMI’s ranking is sorted into large cap companies with market caps of $5 billion or higher, mid cap companies with market caps of $1 to $5 billion, and small cap companies with market caps of $25 million to $1 billion. Only four companies have appeared on the list three times in the previous seven years.
While there’s no magic formula for which companies may turn out to be engaging in fraudulent practices, Kaplan says newer industries tend to be given to more chaos. He singles out technology and pharmaceuticals as industries with high incidences of fraud.
Many of the companies on this ranking are new this year or have only appeared in one or two of these lists over the past seven years. Kaplan points out that in a ranking that reviews thousands of companies for numerous factors over four short quarters, one minor event can easily knock a company off the top 100. Further, companies that don’t appear on the list aren’t necessarily engaged in wrongdoing–these are merely the 100 with the most sterling reputations this year.
Kaplan says that while he feels much talk of corporate social responsibility is just that—corporate practices, he says, are “certainly no better since Enron”—he does see growing interest in watchdog assessment of the behaviors considered for this list.
“This is not one of those overnight movements,” says Kaplan. “It should be disruptive technology but it’s being widely ignored by most people because it may not benefit them to use it. There’s a whole system at work that’s very protective of the status quo.”