First, I think we need to diferentiate toxic culture from fraud and dishonesty. I don't think the first impacts earnings, but the second does.treva84 wrote: ↑ Speaking about WFC and TD, what are your thoughts about toxic management practices / toxic corporate culture?
The reason I bring this up is some interesting stuff I was reading in Pre-Suasion by Robert Cialidini - he states:
I think HCG is a real life example of this, where fear over fraud caused a run on the bank.
I don't think TD or WFC will face a run anytime soon, but I must admit based on the most recent allegations facing TD I really do think twice about adding.
Toxic corporate culture is hard to avoid on many large organizations, and it will be highlighted from time to time on the news. While unfortunate for the staff, it plays little role for an investor - a lot has to do with perception, since true toxic environments affects the company overall and earnings - look at Sears. For many well run companies, toxic culture are in certain pockets, and if it's becomes highlighted as a component to bring earnings, it's either ignored (Sears) or addressed (TD, WFC), and that sort of puts the ethics back in control and aligned with the company's culture. People will try to sneak and pressure from time to time but you can tell when it's ok for the culture of the company or not.
Most of financial banks run ok regardless of the CEO, and the board will change it if he/she doesn't deliver. I believe Buffett words explains it best: "buy a company that is so well structured that even an idiot could run it, because one eventually will". WFC was a great example of that, and the visibility is proportional to how poorly they handle it - hence TD didn't get much attention. Same think when comparing United or Jetblue overbooking - both kicked people out of their flights, but JetBlue handled it much better, so it barely made the news or social media. To me, since these specific events don't impact earnings permanently, it presents with an opportunity to add more - provided that other quality and value criteria are in place. Only when ethics are ignored then it breaches a fudamental quality criteria. Which then enters on dishonesty and fraud, which should be unforgiven, provided the business was a victim of it, and not the mastermind.
HCG never intended to do defraud people, only a handful of independent brokers got caught, fired and since it represented less than 2% bookings for HCG, it didn't have the attention / follow up required (which is a different issue), but by no means it justified the overkill reaction that was put in place. HCG has institutional shorts for the Canadian Real Estate market, and that contributed to the blow when compared to similar allegations that MFC had in 2009, for example. HCG case was extreme and unfortunate (and since that could happen to any company at anytime, it's why diversificiation is important). MIC carries way more risk than HCG and yet it never made the news, so people didn't panic. The media influences perception a lot, and many times it doesn't reflect the criteria that matters from an investment perspective.
The way I approach these news is by revisiting why I own them in first place. Quality criteria is the first step to make my watchlist, which then only gets removed if fundamentals or earnings / cash flow deteriorates more than I'm comfortable with. TD (and WFC) meets my criteria from a quality perspective, with growing earnings, dividends, cash flow and consistent decent ROE in place. I tend to ignore news as many times it carries emotions and it's too subjective when it comes to criteria making an investing decision. If the whole environment is toxic to the point that it affects the business engagement, I will wait that to be reflected on their numbers. But I would never make a decision because I company made the papers on a bad news. I believe that follows on the "fear" category, and if I made a commitment with management (to invest in their business), I'll give them a chance to prove that they can react and address it.