Monday, September 21, 2015

Business 101: The Truth Will Out

A number of companies have found themselves in, um, unfortunate situations this month because of problems that they should have known would eventually come to light.

You may think I'm talking about GM's ignition switch issues (which I've written about plenty of times before, e.g., here), and for which the company agreed last week to pay $900 million (some details of the settlement can be found in a New York Times article sourced from Reuters, here), and in some ways, I guess I am: did they really think the problems would just go away? That no one would notice?

Or were they just hoping that no one would notice on my watch?

But I was also thinking about the ouster of United Airlines CEO Jeff Smisek, in part due to the turbulent investigation of "Bridgegate". According to Chicago Tribune reporter Gregory Karp, Smisek is accused of "improperly currying favor with former Port Authority of New York and New Jersey David Samson. United reinstated a money-losing route from Newark to an airport near Samson's South Carolina vacation home." (full article, here)

Smisek was apparently hoping for, among other things, subsidies for a new United airplane maintenance hangar at Newark. The Thursday-down and Monday-back flights (I want a three-day workweek too!) were cancelled four days after Samson resigned from the Port Authority in 2014.

Did he think no one would notice?

Smisek is out, but not exactly hurting: According to a New York Times article from the Associated Press (here), the ex-CEO "would get a severance payment of $4.9 million and be eligible for a bonus. Smisek, 61, will have health insurance until he is eligible for Medicare and keep flight benefits and parking privileges for the rest of his life. He gets to keep his company car."

I particularly like that he is "eligible for a bonus."

And then there's Volkswagen (September has been a sadly great month for these stories).

In last Friday's New York Times, reporters Coral Davenport and Jack Ewing wrote that the Environmental Protection Agency was ordering the carmaker to recall some 500,000 diesel automobiles because:

...the German automaker [was] using software to detect when the car is undergoing its periodic state emissions testing. Only during such tests are the cars' full emissions control systems turned on. During normal driving situations, the controls are turned off, allowing the cars to spew as much as 40 times as much pollution as allowed under the Clean Air Act...

Why would VW do such a thing? "Experts in automotive technology said that disengaging the pollution controls on a diesel-fueled car can yield better performance, including increased torque and acceleration."

Did they think no one would notice?

It does take a while sometimes (the VW and Audi models involved in the recall, for example, are 2009-2015 model year vehicles), but:

The Truth Will Out.

Monday, August 31, 2015

What Does It Take to Get a Banker to Perp Walk?

Thank you, Gretchen Morgenson, for regularly asking the right questions. I have complained before (most recently here and here) that bankers -- despite nearly imploding the US economy -- have never had to undergo an individual "perp walk" but have merely paid (at a corporate level) fines.

In the business section of Sunday's The New York Times, Morgenson asked, "How can we expect Wall Street's me-first culture to change when regulators won't pursue or even identify the me-firsters who are directly involved?" (full column, here)

In a settlement between the Securities and Exchange Commission and Citigroup, the bank has agreed to pay $180 million, mostly to investors, for a "disastrous" municipal bond deal that Citigroup "concocted and peddled" to wealthy investors from 2002 until 2008, which ended up losing said investors some $2 billion.

As is often the case in these settlements, the bank "neither admitted nor denied" the allegations. And the bank has already paid out over $700 million to compensate some of its investors for some of their losses. But....
The SEC case also comes more than seven years after the Citigroup investment strategy imploded. Unfortunately, six years is the time limit given to clients wishing to bring an arbitration case. So the facts laid out in the SEC's complaint against Citi are of no help to any investor who had not yet sued to recover from the bank.
Most disturbing, though, is the settlement's lack of accountability. As is all too common, Citigroup's shareholders are footing the $180 million bill associated with it. But they didn't devise the toxic bond strategy, sell it or hide its risks to investors. 
That was the work of Citi employees, as the SEC's order makes clear. Indeed, it contains chapter and verse about the crucial role played by the fund manager overseeing these investments. Some 50 references to actions taken by the fund manager and his staff are contained in the order.
What the SEC's order doesn't do, however, is name that fund manager. Morgenson has done her research, however, and does. That may embarrass that former Citi employee, but what I want to know is...

Why hasn't he been charged with anything?

Monday, August 10, 2015

The Merchants of Doubt Are Back in Town

In 2010, historians of science Naomi Oreskes and Erik Conway published a terrific book called The Merchants of Doubt (the book was followed last year by a documentary of the same title, directed by Robert Kenner).

In their book, Oreskes and Conway outlined the way some key scientists, political conservatives, have manipulated scientific data to cast doubt on the dangers of smoking, the reality of human-caused climate change, the existence of a hole in the earth's ozone layer, etc.  (More information about the book can be found at the Merchants of Doubt website.)

Coca-Cola seems to have found the technique compelling.

In today's New York Times, Anahad O'Connor reports that Coca-Cola is providing funding to scientists who argue that obesity is caused, not by eating too much, but by exercising too little (full article, here).

Global Energy Balance Network, the non-profit receiving Coke funds, is described on its website as "a newly formed, voluntary public-private, not-for-profit organization dedicated to identifying and implementing innovative solutions -- based on the science of energy balance -- prevent and reduce diseases associated with inactivity, poor nutrition and obesity. It is a premier world-wide organization led by scientists working on the development and application of an evidence-based approach to ending obesity." ("Energy balance" is the simple equation of calories in, from food and drink, to calories out, from physical activity.)

So much for all that pesky criticism about the role that sugary soft drinks play in weight gain and obesity.

So it's really all about getting up off that couch, and not so much about getting your hand out of the cookie jar, right?

Sadly, no.

As Aaron Carroll wrote in the New York Times last June, research clearly shows that, to lose weight, eating less is far more effective than exercising more (article, here).

Among other points, Carroll noted that studies have shown that "total energy expenditure and physical activity levels in developing and industrial countries are similar, making activity and exercise unlikely to be the cause of differing obesity rates."

Moreover, exercise can raise appetite, so if all you do is exercise more... you may find that you're eating more too.

That's not to say exercise is unimportant. Carroll wrote that:
Many studies and reviews detail how physical activity can improve outcomes in musculoskeletal disorders, cardiovascular disease, diabetes, pulmonary diseases, neurological diseases and depression....
But that huge upside doesn't seem to necessarily apply to weight loss. The data just don't support it. Unfortunately, exercise seems to excite us much more than eating less does.
So why would Coca-Cola be funding this Global Energy Balance Network? Let's see...

As O'Connor reports today, regular Coke sales are down ("In the last two decades, consumption of full-calorie sodas by the average American has dropped by 25 percent."), there are widespread efforts to tax sugary drinks and/or to remove them from school vending machines.


Monday, July 27, 2015

Should "Cost of Doing Business" Include Product Safety?

Over the years, I've spent a lot of time thinking about the "cost of doing business".

Traditionally, that has meant a pretty simple calculation: add up all the expenses needed to run your business (renting office space, buying and supporting the tech equipment you'll need, phones, lights, insurance, your own salary and that of any needed support staff, etc., etc.); divide that by the number of days per year that you expect to have to work; and you end up with a daily break-even: make more than that, on average, and you'll be profitable; make less, and you'll go broke. The difference can be small... but the results dramatic.

As Charles Dickens' Mr. Micawber says in David Copperfield:
Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds, ought and six, result misery.
What else should you include in the "cost of doing business"?

For a while now, it's become apparent that fines related to failure to comply with government regulations are part of that "cost" calculation in many industries. I've written about that in regards to banking (here and here, for example), agriculture (here), technology (here), and automotive (here).

Today's New York Times has a Bill Vlasic article that sheds more light, unfortunately, on that cost calculation.

According to the article, the National Highway Traffic Safety Administration (NHTSA) has fined Fiat Chrysler a record $105 million "for failing to complete 23 safety recalls covering more than 11 million vehicles."

Let me repeat myself: 23 safety recalls, and 11 million vehicles.

Fiat Chrysler has admitted to violating federal safety rules.
...[The] civil penalty was broken down into a cash penalty of $70 million, and an agreement that Fiat Chrysler would spend at least $20 million on meeting performance requirements detailed in the consent order. An additional penalty of $15 million will be assessed on the company if an independent monitor, who has yet to be announced, discovers further violations of safety laws or the consent order. 
Under the order, Fiat Chrysler is required to buy back as many as 500,000 vehicles with defective suspensions that can cause drivers to lose control. Also, owners of more than one million Jeeps with rear-mounted gas tanks that are prone to fires will be given an opportunity to trade in their vehicles at rates above market value.
As I've written before -- about General Motors in that case -- If your product has a problem, please don't wait for people to die to address it.

As of a few hours ago, Fiat Chrysler stock was down, following the fine announcement, but who knows how seriously the penalty will affect the stock price. After all -- it's just a cost of doing business, right?


Wednesday, June 24, 2015

Paid Leave: Do the Right Thing. I Don't Care If It's For the Wrong Reason.

The United States likes to celebrate its "exceptionalism", except when it's exceptional on the wrong side of the bell curve. Did you know, for example, that the US is the only developed nation that doesn't require employees to have some sort of guaranteed paid leave -- either sick leave (to care for themselves or a child) or family leave (to care for a newborn or newly-adopted child or seriously ill family member)?

The only protection workers have is the 1993 Family and Medical Leave Act which guarantees some workers up to 12 weeks of unpaid leave to care for a child or a family member or themselves. (More info about the FMLA is available from the Department of Labor; for example, here and here)

As reported in Claire Cain Miller's "Upshot" column in today's New York Times, maybe paid leave will finally get traction here. A few states require sick leave; a few cities require family leave. But there has been to date no political will for a national policy. This despite the fact that, as Miller notes,
Polls show that the vast majority of Americans support both. Eighty-five percent are in favor of requiring employees to offer paid sick leave, and 80 percent support paid family leave.

You'd expect politicians to want to get in front of that parade. And really - sick leave? Isn't that a no-brainer? I don't want my waiter serving me food when she's fighting off a cold. Ugh. And I don't want my financial analyst mis-entering data because he's focused on what's happening to his sick child at home.

So who's against this idea?
 Corporate America, as a whole, has long fought paid leave. Executives, especially at small businesses, say it burdens employers with additional costs and the need to temporarily replace employees. Some studies have found that when governments require paid leave, employers pay for it by decreasing employees’ wages.

But this argument is the same one that got trotted out in opposition to the Family and Medical Leave Act. It was used to argue against overtime laws. It is used every time increases in the minimum wage are proposed. And yet, somehow, every time those small steps are taken to improve workers' lives, businesses manage to adapt and succeed.

Moreover, not all small businesses agree. Miller interviewed the owner of one small business who offers her employees 12 weeks of paid parental leave because "It was not just the right thing to do but also a really important retention policy."

With the unemployment rate now below 6 percent, retention rates are more and more important. So maybe we can get employers to focus on doing the right thing. I don't care if it's for the wrong reason.

Tuesday, June 23, 2015

Once Again: If People Are Dying Because of Your Product, Admit It, and Fix It. Fast.

Most of us hate publicly admitting our failings. We're good at not admitting them to ourselves, and we're really good at hiding them from those whose opinions matter to us.

In this case, corporations are people too!

I've written before (here and here) about the problems with Takata airbags. The story -- which is now "resolving" itself with the largest automotive recall in U.S. history (32 million vehicles) -- continues to unfold. In an article in today's New York Times, reporters Hiroko Tabuchi and Danielle Ivory write that "Takata halted global safety audits at its manufacturing plants in 2009, a year after Honda had started recalling a small number of cars to replace the airbags."

Let's think about that for a moment: Your product has been identified as having a potentially life-threatening problem (to date, eight deaths have been attributed to the defect). One of your customers has started recalling vehicles in which your product was installed. And this is the moment when you choose to stop doing safety audits???


This was only one of several "serious safety lapses", according to a report released yesterday by Senator Bill Nelson (D - FL). According to the article, "a Takata executive is among those scheduled to testify before the [Senate] committee [on Commerce, Science, and Transportation] about its defective airbags."

I'm looking forward to reading that testimony.

Takata has already claimed that the report is inaccurate, based on out-of-context reading of corporate emails:
The company said that it had conducted regular reviews of product quality and safety and that the halted global audits referred to in the report related only to worker safety, not product quality or safety.
I feel much better, don't you?

In a previous post, I shared reports that Takata had conducted secret tests, using airbags from junked cars, as much as a decade ago, and came up with some alarming results. More alarming, however, was that those results didn't prod the company to take action. Something similar appears to have happened with the global safety audits:
When Takata eventually restarted the safety audits in 2011, auditors identified quality lapses in the plants [in Monclova, Mexico, and Moses Lake, WA], the report said, citing internal company emails....
But those findings were not shared with Takata's headquarters in Tokyo, the report said, citing internal emails from Takata's safety director at the time.
Then, when the safety director returned to the plant months later to conduct a follow-up audit, employees appeared to scramble to create the appearance of a safety committee within the plant. 
It just gets worse.

We do know that the propellant, which is intended to help the airbag inflate very fast in the event of a crash, can degrade. When that happens, the airbag may inflate with too much force, rupturing the steel canisters that hold the propellant and spewing metal shards into the passenger compartment. But it's not altogether clear what causes the propellant to degrade (moisture and high temperatures help, but not all propellant exposed to those conditions degrades in the same way). Nor is it completely clear what causes the inflater ruptures. So it's likely that "replacement airbags being fitted in recalled cars [will] ...eventually have to be recalled."

And you wonder why I like regulators with teeth?

Monday, June 22, 2015

Will Coal Finally Clean Up its Act?

I started writing about how dirty "clean coal" is back in 2010 and 2011 (here, here, and here), originally driven by the horrific death of 29 miners in the Upper Big Branch mine in April 2010, the worst mine disaster in the US in more than four decades. Massey Energy, owner of the Upper Big Branch, had come to see fines for safety violations as simply a cost of doing business, and it seemed as though no one could do anything about it.

Finally, maybe, someone is.

A 2011 Mine Safety and Health Administration report explicitly blamed safety violations at the mine for allowing coal dust and methane gas to collect and ignite (MSHA report, here), but it wasn't until November of last year that Don Blankenship, Massey Energy's former chief executive, was indicted on four criminal counts by a federal grand jury in West Virginia (13 November 2014 New York Times article by Trip Gabriel, here; indictment, here). Massey Energy is now owned by Alpha Natural Resources, which acquired Massey in 2011.

Penalties for the criminal counts Blankenship is facing, which include conspiracy to violate mine safety and health standards and conspiracy to defraud the United States (by obstructing the Labor Department and MSHA efforts to enforce mine safety standards), could add up to more than 30 years of prison time.

Blankenship's trial has not yet begun (originally scheduled to begin in January, it has been postponed to October; Blankenship has pleaded not guilty and is free on $5 million bond), but something has changed in West Virginia.

In a long article in Sunday's New York Times, David Segal recounts what brought down Blankenship, a man who had long acted as though the state in general and his coal mines in particular were a private fiefdom. The short answer is: hubris.
...How did Mr. Blankenship become the first coal chief in the region to face charges that could put him in prison? One answer is that the tragedy of Upper Big Branch was of such a scale and its apparent causes so mercenary -- prosecutors say the explosion stemmed from a hellbent emphasis on production at the expense of safety -- that a criminal case may have been inevitable. It came, too, at a time when economic shifts have reduced the power of coal kinds, who now rule over fiefs in decline.
Then there is Mr. Blankenship himself, a man who can come across as a cartoon of a corporate villain. He tangled with inspectors and buffaloed rivals. He is a Republican in a state that was long a Democratic redoubt, and he seemed to relish making public officials his enemies.
And while many senior managers -- think of the bankers who nearly ran this economy off the rails in 2008 -- insulate themselves from criminal liability with layers of middle management, Blankenship was micro-manager par excellence. There's no way he can pretend not to have know what was happening at Upper Big Branch.

Segal quotes a West Virginia University law professor: "One reason that Blankenship is being prosecuted is that he was different from other top coal executives. Most CEOs don't get production records every half-hour by fax. That places him right in the mine, hands on. That makes him vulnerable."

How vulnerable? We'll have to wait and see.