Friday, July 18, 2014

How Is Inversion Different From Evasion?

If you're talking taxes, the answer's easy: Inversion is legal, evasion is not.

But if you're talking the morality of tax-avoidance... well, I think it gets a lot murkier.

If you've read this blog even casually, you know that one of my favorite quotes is from the great American jurist, Oliver Wendell Holmes: "Taxes are the price we pay for a civilized society." (Last used, I think, here when I was also talking about sleazy tax-avoidance schemes)

And if you've been following the business news lately, you've seen a lot of talk about inversion deals. (If you, like me, are not a tax accountant / lawyer, the short definition is: Moving out of the US and establishing your corporate "headquarters" in a country with a lower corporate tax rate than ours.)

And the more I've been reading about these deals, the madder I've gotten. Clearly, if the Supreme Court is right, and Corporations Are Persons, then way too many of them are sociopaths.

The current poster child for inversion is Minnesota-based Medtronic and its acquisition of Massachusetts-based-but-Ireland-headquartered Covidien (14 June 2014 New York Times article detailing the deal, here). But it's hardly the only such company making this move. Today's Times, for example, carries a David Gelles article (here) about the anticipated acquisition of Ireland-based pharmaceutical giant Shire by Chicago-based even-bigger pharmaceutical giant AbbVie.

Lawmakers may be starting to pay attention. Treasury Secretary Jacob Lew sent a letter to Congress Tuesday (as reported in today's New York Times by David Gelles, here), urging it "to take immediate action to halt the rush of companies abroad." Lew and some lawmakers are concerned about the significant reduction in tax receipts; I'm outraged by the immorality.  Especially as many of the pharma companies that are moving abroad receive substantial payments from the federal government through Medicare and Medicaid.

Thankfully, I'm not alone in my outrage.

Fortune senior editor at large Allan Sloan has written an excellent, blistering cover story (here; long but absolutely worth reading; if you're an audio person, Sloan gave a great interview to WNYC's Leonard Lopate yesterday, available here) on the fiscal and philosophical damage that mass inversion can / will cause. Sloan fairly presents the argument for moving "headquarters" abroad:
The U.S. tax rate is too high, and uncompetitive. Unlike many other countries, the U.S. taxes all profits worldwide, not just those earned here. A domicile abroad can offer a more competitive corporate tax rate. Fiduciary duty to shareholders requires that companies maximize returns.

But, Sloan argues, if your taxes are too high, you shouldn't desert the US: You should stay and fight for tax reform. Moreover:
I define “fiduciary duty” as the obligation to produce the best long-term results for shareholders, not “get the stock price up today.” Undermining the finances of the federal government by inverting helps undermine our economy. And that’s a bad thing, in the long run, for companies that do business in America.

Yes. I have written before that "shareholder value" is too often used to justify really questionable behavior (example: here).

The simple solution, many are saying, is to cut the US corporate tax rate. But would that work? Sloan believes (and I agree), that it wouldn't:
In the widely hailed 1986 tax reform act, Congress cut the corporate rate to 34% (now 35%) from 46%, and closed some loopholes. Corporate America was happy–for awhile. Now, with Ireland at 12.5% and Britain at 20% (or less, if you make a deal), 35% is intolerable. Let’s say we cut the rate to 25%, the wished-for number I hear bandied about. Other countries are lower, and could go lower still in order to lure our companies. Is Corporate America willing to pay any corporate rate above zero? I wonder.

Great: So we're back to playing a how-low-can-you-go game, and to hell with the rest of us. I don't know about you, but I'm stuck here -- and patriotically glad of it -- and paying my taxes. And may I point out that, while the "sticker rate" is 35%, it's not the actual rate that most companies pay (2013 CNN Money piece, here; according to the GAO, the effective tax rate in 2010 was ....12.6%).

As I said, Sociopaths. 


Wednesday, July 16, 2014

Hate Those Regulations And Unions? Look In The Mirror, And You'll See Why They Exist

Senior managers seem to take great pleasure in excoriating the twin evils of government regulation and labor unions. Without those, they say, think how much more efficient our marketplaces would be! Think how much more profitable our company would be!

It's my opinion that government regulations and labor unions are in fact statements about how badly many companies are run. I can't think of many governments that begin with massive regulation of corporations -- regulation comes about because of horrific instances of environmental pollution, workplace safety lapses, or other abuses. Labor unions have trouble getting into companies where workers feel valued and well-paid. If your employees are starting to mutter about unionizing, the problem's not with them: it's with you.

I wrote a few months ago (full post, here) about the tiniest hints that companies are learning that hiring more employees and paying them better results in happier customers, bigger sales, and even higher profits. Today's New York Times has two article that relate to this discussion.

In the first (full story, here), Steven Greenhouse writes about the growing pushback against "on-call" schedules that give workers little or no control over their working hours. In many cases, workers learn only a day or two in advance -- occasionally on the day itself -- whether they will be working or not. That gives them little time to arrange for child care, for example, or to work a second job to improve their financial situation.

A retail organization representative is quoted opposing proposed regulations that would require employers to pay workers extra if they are given less than 24 hours' notice, or to grant flexibility for care-giving or school-conflict requests: "Where employers and employees now work together to solve scheduling problems, you’ll have a very bureaucratic environment where rigid rules would be introduced."

Expect that, as I hear it from retail employees, employers and employees don't "work together". Unless you define "working together" way differently from the way I do.

A University of Chicago professor notes, "Frontline managers face pressure to keep costs down, but they really don’t have much control over wages or benefits...What they have control over is employee hours."

And employees have no power to resist.

That situation won't change until retailers stop thinking of their store employees purely as a cost. I know I'm not the only shopper who has left a store in annoyance, and without spending the money that I had intended to spend, because I couldn't find anyone on the floor to help me.

In the second story (here), Eduardo Porter compares the commitment that many early- to mid-20th century employers had to their employees to what passes for commitment today. He recalls Eastman Kodak's early profit-sharing plan, Ford's revolutionary (for the time) $5 a day salary for its workers, and other well-known examples. Meanwhile, today, too many companies still worship at the altar of Milton Friedman and "shareholder value".
Companies, of course, are not charities. Their main responsibility is to remain profitable.

Still, there is a case to be made that attending to workers’ rights or environmental degradation might help the business in the long term...

More broadly, company executives are under a new form of pressure. George Serafeim of Harvard Business School points out that the information age has brought greater transparency to corporate operations. Customers, investors and employees know more about what businesses do around the world and can exert influence to change their behavior.
Of course, while corporations may clean up what's visible to the outside world, that's no guarantee that the same will occur on the inside. Which is why I support whistle-blower protections, too.




Tuesday, July 1, 2014

Is It Possible to be TOO Transparent?

You know how I'm going to answer that question, right?

But I've been thinking about it all day, after reading an article by Bill Vlasic and Danielle Ivory in today's New York Times, whose headline tells the story: "In recall blitz, GM risks its reputation."

They quote an analyst: "We’re hitting unprecedented numbers and it’s reasonable for people to start asking, When and where will it end?"

(Note that a substantial number of comments to the Times article are along the lines of:  Reputation for quality? What reputation for quality? Unless you mean, Poor quality.)

Still, it made me think of a post I wrote in March (here) in which I encouraged manufacturers with a problem to address it as quickly and directly as possible, as a big hurt now will hurt less than a lot of little hurts later.

But is it possible to recall too many products at once? I don't think so, despite the massive size of the current spate of recalls (more than eight million more vehicles were recalled on Monday, many with ignition-switch issues that appear to be similar to the Cobalt problems that started the wave).

I expect that GM will take a hit in sales in the short term -- although June sales were actually up from a year ago, as were year-to-date sales (see Ward's report, here), thanks to strong government fleet and commercial fleet orders -- but if CEO Mary Barra and her team can show that they are serious about changing the culture of GM, the long-term effects of the recall(s) should be positive.

I'll stick to my old line: To rebuild Trust, embrace Transparency.

Wednesday, June 25, 2014

Just How "Rigorous" Should a "Rigorous Inspection" Be?



Many years ago, I worked for an automotive manufacturer. It was a common saying that "all new cars are alike, but every used car is different."

What we meant by that was that the differences between two brand-new Maximotor Mojomodels were generally insignificant. But once those two Mojomodels were a few years old, they could be very different, depending on whether one owner had driven many more miles, or had the car serviced less regularly, or had driven nothing but short in-town runs, or lived in an area with high use of road salt, or... or... or.... Those differences were potentially endless, and could be critical.

Which is why buying a used car could be fraught with peril. Even if you were armed with the latest Consumer Reports, and knew that Maximotor Mojomodels were highly rated for reliability, safety, and durability, could you be sure that this Mojomodel -- all shiny with fresh polish, "only" two years old, with "only" 20,000 miles on the odometer, and tricked out with all the options available -- was really a good buy?

When I bought my first car, I hired an independent mechanic to go over two possibles for me, because, honestly, it could have been a bunch of mice running around on a wheel that made the car go, as far as I knew. I had my heart set on a cherry-red Fiat, but on Terry's recommendation, ended up with a lime-green Subaru that served me well for several years.

But what if you don't know a good independent mechanic? That's why I thought CarMax was a great idea when it was introduced in the early '90s. It dealt head-on with many "used-car dealer" stereotypes. Go to its site (here) and right at the top you'll see that "All of our used cars are CarMax Quality Certified and include a 5-day Money-Back Guarantee". Deeper in the site, and in TV commercials, the company trumpets its "125+ - point inspection" that "checks the core systems of every car".

Wow, I feel better!

Alas, it appears that "Quality Certified" may not mean what you or I think it means.

According to a Christopher Jensen article in today's New York Times, " a coalition of 11 consumer groups has asked the Federal Trade Commission to investigate" whether CarMax ads are deceptive. 
The groups say CarMax does not fix vehicles that have been recalled before it sells them, even though the retailer’s ads promise that the vehicles have had a rigorous quality inspection.

It should be noted that while the "National Highway Traffic Safety Administration requires new-car dealers to fix recalled new vehicles before they can be sold", this is not true of used-car dealers or used cars. (Did you know that? I certainly didn't.) The Times article notes that NHTSA "is seeking such authority from Congress." (Given how quickly Congress takes action these days, I'm not holding my breath.)

According to a CarMax spokesperson, "CarMax provides the necessary information for customers to register their vehicle with the manufacturer to determine if it has an open recall and be notified about future recalls."

Which is probably just as far as they need to go, legally.

The CarMax spokesperson is right that "automakers did not give retailers like CarMax the authority to carry out recalls at their facilities", but there is nothing preventing CarMax from taking a vehicle on its lot that is subject to a recall to the nearest authorized dealership, having the recall repair done, and then bringing it back to the CarMax lot.

Sometimes, going just as far as you need to go isn't far enough. Especially if you are trumpeting that the "foundation" upon which your business is built is "INTEGRITY" (their caps, not mine).




Thursday, June 19, 2014

Do The Right Thing, Even If You Don't Want To... And It Just Might Be Profitable, Too

It's depressing when someone has to be dragged kicking and screaming to do the right thing... and then turns around and makes a ginormous profit on the process.

This thought first occurred to me last month, during the uproar over basketball's L.A. Clippers owner Donald Sterling's racist remarks -- while the NBA promptly assessed a $2.5 million fine (relatively speaking, chump change to a billionaire), if the forced sale of his team goes through, he stands to profit to the tune of more than $1.5 billion. Which is real money by anybody's standards. (What will actually happen is anyone's guess, as the matter continues to be locked in the courts.)

And here's another example: today's New York Times reported -- as did most other major media outlets -- that the U.S. Patent and Trademark Office had stripped the Washington Redskins football team of six of its trademarks because the name is "disparaging" to Native Americans (full article, by Ken Belson and Edward Wyatt, here).

An attorney for the team was dismissive:  "We have seen this story before. And just like last time, today's ruling will have no effect at all on the team's ownership of and right to use the Redskins name and logo." (Full statement, as .pdf, here)

"Just like last time" refers to a 1999 trademark office decision cancelling the trademark registrations, which was reversed on appeal by a federal district court judge in 2003.

Even if the current Patent Office decision were to be upheld, it wouldn't stop the team from continuing to sell Redskins' glasses, T-shirts, blankets, and assorted other paraphernalia, although it would make it harder for them to rein in the counterfeiters.

Washington Redskins owner Dan Snyder has said that he would "never" change the name, and that "Redskins" was "never a label. It was, and continues to be, a badge of honor" (from a letter to the Washington Post, published 9 Oct 2013; available here).

The truth is that the world has changed since 1999. More of us understand the power of words, and especially of slurs. If it were my team, knowing that a great number of people who could be described as Redskins consider it a slur and not a "badge of honor", I'd have changed the name as soon as I was made aware of the problem. Snyder clearly needs some more convincing.

And if Snyder is smart -- and not just an insensitive racist -- he's busy meeting with marketing and branding folks right now, thinking up a new name and a new logo. Because all his team's biggest fans will be lining up to buy blankets, glasses, T-shirts, and all the other tchotchkes with the new name and logo, making a satisfying ka-ching sound in the football team's cash registers, and in Snyder's pockets. Sigh.

Tuesday, June 17, 2014

We All Knew It. And Now There Seems to be Proof.

There's a flurry of activity in the stock of Company X, for no apparent reason. And then, after the fact, after the acquisition (or merger) has been publicly announced, then it all makes sense: Insider trading, we think.

But the evidence is seemingly all anecdotal. So maybe it just looks bad, and that's why the Securities and Exchange Commission isn't prosecuting right and left.

Three professors (two from New York University and one from McGill) have done the math, however, and the evidence is overwhelming. In fact, they say, as many as a quarter of all deals involving public companies may also involve insider trading.

Their study, reported by Andrew Ross Sorkin in the DealBook section of today's New York Times (full article here; full 81-page report with some really dramatic charts, here), makes for depressing reading:
...[We] document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements.

Isn't it possible that this is simply coincidence? The authors, who studied deals between 1996 and 2012, scoff: the probability of similar actions occurring randomly is about "three in a trillion." Remind me to buy a Lotto ticket tonight.

As Sorkin writes,
The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.

In other words, in the words of an income-tax professor of mine, "Be aggressive, but don't be stupid." (He would add that if you had to think about whether something was aggressive or stupid, "it's usually stupid.")  Just don't be so aggressive that the SEC has to notice, and you should be fine.

And by the way: while the SEC focuses largely on stock trading, the study suggests that much of the most questionable activity occurs around options. 

As you might expect, the study found that "the bigger the deal and the more trading volume in the stock of the target company, the more likely there will be insider trading." Not -- perhaps surprisingly -- because there were more bankers and lawyers involved with the deal (and therefore more people to leak information to the media and others). But simply because "the anticipated abnormal stock price performance upon announcement is larger" and because it's easier to hide the illicit trading in a bigger pool.

We all knew it was probably happening. Now we know for sure. Sigh.


Monday, June 16, 2014

How Much Harder Can We Make It to be Poor?

Once again, I find two unrelated articles resonating in my head: an opinion piece in Sunday's New York Times  Sunday Review section, "No Money, No Time, by Maria Konnikova (here) and a Jessica Silver-Greenberg and Michael Corkery article (here) in today's Times, "Bank Account Screening Tool is Scrutinized as Excessive".

The Silver-Greenberg / Corkery article begins with the account of a young woman who has been unbanked, because she "is one of more than a million Americans who have been effectively blacklisted from the mainstream financial system because they overdrew their accounts or bounced a check — mistakes that routinely bedevil young and low-income consumers, financial counselors say."

The young woman in question did pay back "the roughly $700 that she owed, [but] a record of her youthful transgressions remains in a vast private database, preventing her from opening a new account."

Such databases, used by Bank of America, JPMorgan Chase and other big banks, were intended to weed out serial fraudsters. Now, regulators say, banks are screening out potential customers and swelling the ranks of the so-called unbanked — the roughly 10 million households in the United States that lack even a basic bank account.

According to today's article, the New York attorney general's office is looking into the practice. A single error has significant consequences, as "negative marks typically stay in the databases for at least five years".
Without access to a checking account, many have no choice but to rely on costly alternatives for even the most basic transactions, like paying bills, withdrawing money and wiring funds. At first blush, the fees can seem relatively small: $15 to cash a check, for example, or $1 to place a money order. For people already living on shaky financial footing, however, the costs can quickly add up, eroding a chunk of their paychecks before they even have access to their cash.....

Such fees can make saving money, which is critical to building wealth and long-term financial stability, almost impossible, financial counselors say.

So here's another way we make it more difficult for the working poor to "bootstrap" themselves out of poverty. Thanks, banks.

And it's not just the additional cost (and the time required to get to the check-cashing storefront or the payday lender). There are other risks as well:
For low-income Americans who may already be living in crime-ridden neighborhoods, carrying around money from a check casher can be dangerous. When the Pew Charitable Trusts conducted a two-year study of 1,000 families in Los Angeles that lacked bank accounts, researchers found that one in five lost money — on average $729, or the equivalent of two weeks of household expenses.

All of these can trap the poor. But there's more to the story, I know, since I'd also read the Sunday Review piece on the relationship between money and time. Konnikova spoke with a Harvard economist, who explained that there are really three types of poverty:
..."There’s money poverty, there’s time poverty, and there’s bandwidth poverty." The first is the type we typically associate with the word. The second occurs when the time debt of the sort I incurred starts to pile up. [The reporter had mismanaged her deadlines, and therefore had to ask for an extension to complete this piece.]

And the third is the type of attention shortage that is fed by the other two: If I’m focused on the immediate deadline, I don’t have the cognitive resources to spend on mundane tasks or later deadlines. If I’m short on money, I can’t stop thinking about today’s expenses — never mind those in the future. In both cases, I end up making decisions that leave me worse off because I lack the ability to focus properly on anything other than what’s staring me in the face right now, at this exact moment.
In other words, being short of time is one thing when you're rich -- you can buy someone else's time to take the pressure of yourself (think a nanny to keep an eye on your kids, an event planner to organize your next social event, a landscaping service to mow your lawn). But if you're poor? No such luck. And the stress of that bandwidth poverty can lead you to making very bad decisions.

So the poor don't just make the same mistakes that we all make: they make worse ones. Konnikova continues with examples drawn from a research game run by the economist and two psychologists, with participants assigned to be "poor" or "rich":
...When the experimenters showed players a preview of the next round’s questions, the rich ones took advantage of the edge, performing better over all, while the poor acted as if they couldn’t see the previews at all. They were so focused on operating under scarcity that they couldn’t think their way through to a strategy — or, indeed, even realize that an opportunity to do so was available. 
We all have only a limited attention span. When all the pieces of your life are held together with duct tape, and that tape keeps threatening to split, that's where your attention goes. Not on what you could do two years from me if you husbanded your resources more carefully. I'm tired of hearing the poor called "shiftless" when we've allowed the game to be stacked against them.