Mark Maremont is one of The Wall Street Journal’s top investigative reporters (and a senior editor), focusing much of his efforts on executive compensation and accounting.
He led the team of Journal reporters who wrote the blockbuster stories in 2006* that led to the backdating scandal. The team used an ingenious technique that uncovered wild statistical improbabilities in executive stock-options timing and found that many companies fraudulently inflated executive pay. The eye-opening stories resulted in dozens of corporate earnings restatements, dozens of executive defenestrations—even a few convictions.
Among other notable stories, Maremont in 2003 co-wrote a major page-one Journal story that laid out the failings and weaknesses of the SEC—something that looks prescient in the wake of the scandal still unfolding on Wall Street.
Just last week, I praised a page-one story Maremont wrote finding that companies have inflated—and had long-concealed until they were recently forced to disclose—executives’ benefit plans for years using favorable formulas they deny their regular workers.
The Audit caught up earlier this week with Maremont and talked about database trolling, “archaeological investigations,” and scaredy-cat CEO’s.
The Audit: Tell me a little about your background; how you got on the path to be an investigative journalist at the Journal.
Mark Maremont: I had done some investigative reporting when I was in London for BusinessWeek. I’d done some digging into Robert Maxwell. He was a big fraudster, and I was very skeptical about him and had written some negative stories and dug into his finances. It was fun and interesting and like putting pieces of a puzzle together—particularly when people didn’t want you to.
When I came to the Journal I had a more general-assignment type job but did do a number of investigative-type stories—mostly accounting-related.
One of the things I eventually came to realize is that the more complicated the financial area, the less likely it was that anybody else could understand it or was going to take the time to understand it and the easier it was for the bad guys to hide things. So accounting, taxes, compensation to some extent are the kind of areas where disclosures were murky or nonexistent, at least until recently. And the rules are very complicated and the numbers are daunting for people who don’t have a numerical bent. I spend a lot of time plumbing those areas of business.
TA: How did you learn this stuff, it’s not easy to figure out to pick apart a balance sheet?
MM: I wish I could say that I took a six-month course in it. I did take a couple of things. There was a class at the Wharton school that I attended for three days when I was at BusinessWeek that was helpful—kind of an accounting-for-reporters type of thing. I basically just picked it up over the years, you know? I feel like I know enough to ask the right questions or to find people who can explain it to me. I’m still far from a whiz at reading a balance sheet or an income statement, for that matter.
TA: Well, it seems like a lot of CFO’s aren’t either.
It’s interesting that you mention that accounting, taxes, things like that are fertile areas for reporters because it’s so daunting to look at. How do you go about finding things? You get tips, of course, but you don’t just randomly pick out a 10-K and look at the balance sheet, I assume.
MM: In the last three or four years I’ve spent not all, but a good portion of my time looking at executive compensation, which when I broke out at the Journal, I was heading a very small investigative team about three or four years ago…
TA: On backdating.
MM: Well, that came out of that eventually. I’d done a lot of stuff about executive perks that year. Jet aircraft and golf. I did a story linking jet aircraft being used by executives to go play golf in leisure time on company planes.
There was a way to get information on where jet planes travel, which was kind of fun. And then I eventually discovered that there was a database of golf scores that people who wanted to have handicaps had to post their golf scores on this Web site. And I said, “Woah!” A little light bulb went off: Why not marry the two and see if you could link up times where a corporate jet went from A to B and the executive was playing golf?
I’ve gotten a lot of good stories just mining databases. Obviously you can’t just troll among information and find stories. Usually you have to come up with the idea ahead of time. But sometimes just knowing that the database is there will give you a story idea.
TA: The golf story was ‘05 and the climate was a little bit different then—the corporate-jet thing has really taken off now in this crisis. Was there pushback on that story then from corporate types that said “I don’t know what the problem is here or what you’re exposing. This is just part of business.”
MM: A little bit. There’s a legitimate argument that if you’re flying frequently to Wichita, Kansas, from upstate New York that it’s going to take a long time to go on commercial flights and that sometimes executives are better served by having a private jet.
But what was clear was that a lot of people were using it essentially as a flying limousine service to take themselves around. And they get these bogus security studies that suggested that they needed to fly all the time, and their families needed to fly for security reasons. There may be a handful of executives in the country who really do have security concerns, but when was the last time you heard about a CEO being attacked in a public airport?
TA: That’s about the last place you could be attacked these days.
MM: What some of these people say is well, you know, some of these CEO’s have to make tough decisions and they may have had to lay off 10,000 people. What happens if they’re in an airport and one of the guys they laid off decides to take a swing at him or something? But I haven’t heard a lot of those reports recently, even though there are a lot of layoffs now.
I’d love to jump on my corporate jet if I want to go off to Florida every weekend. If I am a very, very wealthy individual I should probably be able to afford that myself. But the whole question was whether shareholders should be paying for it and whether it was properly disclosed and properly taxed and that kind of thing.
TA: Do you feel like you’ve sort of been toiling away in executive compensation and—A lot of people have said, and I believe, that it’s in part the structure of bonuses and pay that contributed to creating the current crisis…
MM: I think there are a lot of things that helped contribute to creating the current crisis, and compensation, arguably, was too short-term oriented and too rich. In other words, the risk of failing was low, because all you do is get fired. (Yet) the reward was huge because you could make tens of millions of dollars. It wasn’t necessarily even at the CEO level, it was at the levels of people who were actually deciding to make these investments.
TA: But do you think your stories got enough traction? In the good times people look past this stuff and say “Well, the stock’s going up.” Is that frustrating? Now it’s got a wide audience and people are outraged and have got their pitchforks and torches.
MM: It got traction at the time, a lot of these stories. I’m not sure that it created the widespread change or at least closer look that you might always like. But a number of the stories did have impact. The primary impact, unfortunately, of the golf and jet data was that companies moved to block their jet aircraft from being tracked and the golf association that had made that data available said you can no longer get that data. I think it’s a pretty sad commentary.
But certainly the next year when we worked on the backdating and stock-options investigation—that one had an explosive impact. Certainly can’t complain about impact on that one.
TA: One of the great business investigations of all time. Can you talk about that and the advent of that series?
MM: I think it’s one of these things where I was rooting around in the same neighborhood already, which was executive compensation. One of the people I talked to said there was this paper circulating in academic circles on this theory that this guy has at the University of Iowa, Erik Lie, that people were improperly backdating their options to make them worth more.
Once executives started having to file when they got their stock options, you could start compiling a huge database and then analyzing that against stock prices, which is what he did. And he found that they were on average given on very advantageous days, which was extremely improbable. So somebody must have been cheating.
I thought that was kind of interesting. But the issue was that it was a theory and there were no actual cases of it. We called around to a few people and no one believed it was true. In fact, the guy was actually having trouble getting the paper published because of that very thing. Essentially what he was saying was there’s massive fraud going on inside corporate America that no one’s discovered, and basing that on statistical evidence from the database.
About two weeks after that initial conversation, I saw that the SEC actually brought a case about something that looked similar against a company in California. I thought, “Wait a minute. Maybe there is something.”
So I jumped in and worked with the reporters on a small story that day. And then I did a page-one story about how the SEC had been looking in this area in a somewhat limited way. But no one seemed to pay the slightest attention. There were no follow-up stories, as far as I could tell. I decided there’s got to be more of these companies out there.
I was talking with James Bandler, who worked for me at the time about going into this stuff, and Charles Forelle, who worked in the Boston office but in a different unit, was a mathematical type. He was sort of wandering by this hallway conversation and said “Why don’t you do something about probability of these people getting their options on particularly favorable dates?” That’s essentially how the project was born. I had the idea and Charles had the mathematical approach to it and James did a lot of digging.
We published the first article, which said this is so highly improbable that the only explanation would be backdating. We didn’t actually accuse anybody of doing anything illegal, we were very careful. But when you’re talking about billions-to-one odds, it seems likely.
There was silence for a while. And then a couple of companies announced internal investigations, and Wall Street research firms started doing their own analyses of different companies using a slightly different statistical approach.
TA: Was it frustrating to you—I can remember the pushback, including by the editorial page of the Journal itself, saying “Well, this isn’t fraud.” I think most people were shocked and thought this stuff was fraud, but was this something you had to take into account in subsequent stories?
MM: It’s always tricky when you’re in a high-profile type of investigative situation and you get pushback, but the paper stood behind us and it was clear that it was right. People were getting fired and companies were admitting it. It became quickly obvious that there were hundreds of companies that had done this.
The editorial page has got its own opinion, and they’ve got a right to their opinion. I think it’s delusional to think that these executives didn’t know that what they were doing was wrong. They clearly did in 90 percent of the cases at least. But they thought they could get away with it, and for a long time they did.
The editorial page’s argument was that the accounting rule was silly and therefore violating it wasn’t really that serious. But you can’t have people going around making up their own accounting rules. “I don’t like this rule; I’m going to ignore it.” It’s just a recipe for chaos. It’s a completely nonsensical approach. If you don’t like the accounting rule then lobby to change it, but don’t not like it, violate it, and then pretend it was okay.
TA: A broader question: What’s the climate for investigative reporting in general? Do you sense it’s getting more difficult or there’s less ability to do investigative reporting on corporations with all the cutbacks?
MM: (Everybody) knows that to do investigative reporting is somewhat expensive and people-intensive, time-intensive.
So far I’ve been blessed with editors that understood that and understood that sometimes it’s going to take weeks and sometimes months. My contention is what is it that people remember every year? They read something really great in the newspaper or magazine and maybe they’ll resubscribe.
It’s just a question of balance and how much time should people be allowed and how much expense is it. There also has to be a recognition on the part of management that you’ve got to drill some dry holes when you’re prospecting for oil.
Fortunately, at some of the bigger newspaper and magazines there’s still some pretty good investigative journalism going on, but my sense is there’s less of it. There’s pressures to just cut some of that and it’s something the reader doesn’t know they’re missing necessarily until they don’t get it.
TA: I ask this of everybody: How did we do covering the run-up to the crisis? The people I’ve talked to, a kind of consensus has formed that we did a very good job warning of the real estate bubble but a much less good job warning about the overleverage of Wall Street and the capacity of the system to melt down.
MM: I think that’s about right. Journalism unfortunately—and even more these days—seems to be backward-looking. It’s important also to think about broader issues, but they’re hard to do. The systemic-risk issue, what can you say? You quote experts saying hedge funds have trillions of dollars that are unregulated, Wall Street’s overleveraged, and all these toxic products out there that could blow if things get really, really bad. But how many times can you say that? I think there’s a novelty factor issue, which is “We’ve already done that” or “There’s nothing new there.”
And investigative journalists, what’s there to investigate per se? It’s almost an opinion or a systemic-approach thing.
TA: How do we do reporting to lay the groundwork for a “black swan”? How can we attempt to pick these things off next time?
MM: In hindsight, there were a lot of things I would have liked to have done. But if I had (that foresight), I probably would have shorted the entire stock exchange (laughs).
I think broader thinking is important—stepping back to do broader pieces and thinking about interconnections. I think one of the issues, particularly for people who were assigned to a beat, is you don’t necessarily step back and see the big picture.
That to some extent is what editors are for, but everybody’s focused on putting out tomorrow’s paper and fighting fires. It’s important from time to time to step back and really give it some thought. And we’ve had people do that, as have others.
One of the things I like to talk about with regard to types of investigative reporting—I’m not sure that’s really well understood, even by top editors within papers—is that there’s two different types: One type is a real investigative-reporting job where you find something that nobody else has really written about. That to me is pure investigative reporting. Backdating was an example of that. CIA rendition. Bad conditions at a VA hospital.
Then there’s what I would call “archaeological investigation,” which is where something happens and you go back and in hindsight say, well, this person did this and people did this wrong. To me, it’s a very valuable form of investigative reporting as well, but I think it’s less of a service to the reader and to society than actually getting out ahead of a problem or exposing a problem that nobody knew existed.
I think we’ve got to do both well.
TA: What should the press be looking for now? This thing is still unwinding and there’s still a lot of important archaeological work, as you nicely put it, to help us understand it and prevent it the next time. But there’s still many more scandals to come out of this thing. There always are when you have something happen of this magnitude. Are there anythings we’re still missing and what should we be looking for?
MM: Any time that there’s turmoil and markets recede is when a lot of the scams come to light, like Madoff. And I have absolutely no doubt there are others—not as big as that, I’m sure. There probably are going to be some other corporate-type scandals, as well.
But I think this whole interaction of government and business and how that works and what good is done and what harm is done is really going to be a critical one the next couple of years. Clearly the government has gotten much more involved in the economy than ever before. After all these years of decrying the Europeans for socialism, it’s become a somewhat nationalized economy. But that brings all kinds of temptations and problems and opportunities with it. How those play out is going to be really, really interesting and important.
* Updated to correct dateRyan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at firstname.lastname@example.org. Follow him on Twitter at @ryanchittum.