What Does Fairness Have to Do with the Price of Eggs?

The starting point of business ethics is contractual: I agree to provide a fair product (or service), and you agree to pay me a fair price.

After that, the arguments start.

What's a "fair" price?

When we're on the provider side of the equation, we generally want the price to be as high as possible; as consumers, we want the price to be as low as possible.

In an effort to maximize sales and minimize costs, some producers are willing to go very low indeed.

And what's a "fair" product?

At the very least, it would be safe.

I've been following, as I'm sure many of you have been too, the ongoing story of the recall of eggs from two leading U.S. producers, Wright County Egg and Hillandale Farms. Since 13 August, when the recall began, more than half a billion eggs have been recalled, and since this spring, some 1500 cases of salmonella have been linked to affected eggs.

Today's New York Times carries an article by William Neuman that outlines some of the findings from federal inspections at the Iowa egg farms: "Barns infested with flies, maggots and scurrying rodents, and overflowing manure pits" were among the appetizing details reported.

"Both companies said that they had acted quickly to correct problems and were continuing to cooperate with regulators," the article claims.

But the problems reported as so egregious that management at Wright County Egg and Hillandale Farms must have been aware of the situation. For example, at Wright County Egg, inspectors found "pits beneath laying houses where chicken manure was piled four to eight feet high." Not something you're likely to, um, overlook.

Wright County Egg is owned by Austin ("Jack") DeCoster, who is no stranger to run-ins with federal and state regulations. As reported by Mary Clare Jalonick for the Huffington Post, fines into the millions of dollars have been assessed against DeCoster for health and safety violations at his Maine operations as well as labor violations at his Iowa "farms" (full article here).

I use quotation marks around "farm" because what I think of as a farm bears little resemblance to the industrial complexes that are, for example, Wright County Egg.

In the meantime, the FDA has released a new "draft guideline" for the prevention of salmonella in shell eggs (many egg producers sell shell eggs to consumers and also send eggs to "breaking plants" where the eggs are pasteurized -- which kills the salmonella bacteria -- and sold in liquid form, usually to food manufacturers). Will these new guidelines prevent another huge salmonella outbreak?

As long as there are producers out there like DeCoster -- who seems to think of fines as merely another cost of doing business -- I suspect the FDA's efforts will be insufficient.

Egg production can be done humanely and safely, but .... it will come at a higher price. That seems fair.

What's Going On at J&J?

Back at the dawn of time, when I was in business school, Johnson & Johnson was held up as the gold standard for handling product recalls, for its swift response when cyanide-laced Tylenol capsules in a handful of Chicago-area stores caused seven consumer deaths in 1982. The company immediately pulled every single Tylenol off every single store shelf in the United States.

As I have written before (here), there was some surprise at the time that a company would react so dramatically, with so little (apparent) consideration for immediate profit concerns. The long-term effect was terrific consumer loyalty.

But that loyalty seems to have been taking a beating lately.

"More than two years after the Food and Drug Administration began receiving complaints about the failure of a hip replacement implant made by the DePuy Orthopaedics units of Johnson & Johnson, the company said Thursday that it was recalling two kinds of hip implants, " reports Natasha Singer in today's New York Times. [Full article here]

In addition, as Singer also noted, the FDA earlier this week sent the company a warning letter, claiming that DePuy was marketing one device without "marketing approval or clearance ... which is a violation of the law" and marketing another "for unapproved uses".

Earlier this year [see my blogpost on that subject here], two years of complaints from consumers about moldy-smelling bottles finally led J&J to recall an assortment of OTC products from its McNeil Consumer Health Care unit (including ... Tylenol!)

Earlier this week, J&J recalled millions of its Acuvue contact lenses sold in Japan and several other countries. As noted by the Associated Press, that was the ninth recall of a J&J consumer product in a year.

Singer quotes a health-care investment banker: "No. 1, is there a systemic issue at J&J? No. 2, is this [the hip-replacement recall] reflective of that systemic issue? And, No. 3, is there more to come?"

That banker isn't the only one asking that question. I am too, and I'll bet a lot of other consumers are as well.

The recalls are also having an immediate effect on the bottom line.

In Katharine Hobson's late July Wall Street Journal blogpost, she reported that the McNeil recalls "cut $200 million from the [second] quarter’s sales and will pare an estimated $600 million from sales for all of 2010."

But -- as was the case in 1982 -- profits can recover. Trust? Not so much.

If the CEO Does It, Does That Make It OK?

Ethics is easy when the stakes are low, or when doing the right thing makes you look good: You find your neighbor's wallet on the sidewalk, and return it to him promptly.

It gets more difficult as the stakes go up.

The most recent case is that of Mark Hurd, who was until last Friday chief executive officer of Hewlett-Packard.

As reported by numerous news outlets (click here for Colin Barr's article for Fortune / CNN), Hurd resigned following an accusation of sexual harassment of a marketing contractor with whom he developed a personal relationship. In the course of its internal investigation, H-P determined that Hurd had not violated its sexual harassment policy, but violated its "standards of business conduct" policy, having repeatedly filed inaccurate expense reports in amounts ranging from $1,000 to $20,000, apparently in an effort to keep the relationship secret (Hurd is married).

Hurd reportedly first offered to repay the improperly expensed items, but the board insisted that he step down.

In the words of CNET's Erica Ogg, "Hurd's resignation marks a stunning end to what had been by most accounts a wildly successful five years at the helm of what is now the largest computer company in the world, measured by total revenues." H-P share prices dropped nearly 10% in late trading on news of Hurd's departure.

In an email to the New York Times, which was first reported by UK-based theregister.co, Oracle's chief executive officer Larry Ellison blasted the H-P decision as "the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago."

"In losing Mark Hurd, the H.P. board failed to act in the best interest of H.P.’s employees, shareholders, customers and partners," Mr. Ellison wrote. "The H.P. board admits that it fully investigated the sexual harassment claims against Mark and found them to be utterly false."

Well, maybe, Mr. Ellison. But what about those pesky "inaccuracies" in expense reporting? Such behavior is generally considered to be a for-cause firing offense. Or is it only a firing offense if you're a junior-level employee? Doesn't this remind you of President Nixon's remark to David Frost that if the president does it, it's not illegal?

Not to mention that a junior-level employee with falsified expense reports wouldn't receive a nice little severance payment of more than $12 million....

How Would You Define "Conflict of Interest"?

... That's what I thought. Me, too.

Today's New York Times carries an excellent, if depressing, piece by Gretchen Morgenson: "Exotic Deals Put Denver Schools Deeper in Debt".

It turns out that not-as-financially-savvy-as-they-thought-they-were individuals weren't the only ones targeted for bizarre financial instruments in the runup to the Wall Street implosion.

According to Morgenson's article, early in 2008, the Denver Board of Education, seeking to fill a $400 million hole in its pension fund, turned to JP Morgan Chase for help.

The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs -- money that could be plowed back into Denver's classrooms, starved in recent years for funds.

Yeah, I know. It smells, now. But then (the deal closed just weeks after the failure of Bear Stearns), well, let's just say that there were still a lot of house-flippers out there, and the Denver school board, as Morgenson puts it, "essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise, instead of a conventional, fixed-rate mortgage that offered larger, but unchanging, monthly payments."

To date, the school system has apparently paid at least $25 million more in interest and other fees than it had originally expected. While they would like to renegotiate, to undo the deal completely, Denver would have to pay a huge "termination" fee.

The deal is getting extra attention in part because Michael Bennet, the superintendent of schools who, with the system's operating officer, pushed hard for the deal, is now a United States senator from Colorado.

But I found this paragraph the most telling, and the most depressing:

A spokesman at JPMorgan, which led the Denver deal, declined to comment. Royal Bank of Canada, which acted as the school system's independent adviser even though it participated in the debt transaction, declined to comment. Denver school officials said that they had agreed to sign a conflict waiver with Royal Bank of Canada. [Emphasis added]

Even though it participated in the debt transaction?!?! How could one ignore that level of conflict of interest?

I am not going to throw all the blame for this at Royal Bank of Canada, however. It would be easy to say, Oh those horrible greedy bankers, and leave it at that.

Sadly, there seems to be a fair amount of responsibility to spread around.

For example, unlike many school superintendents, now-Senator Bennet had extensive private-sector financial experience. Morgenson reports that "Mr. Bennet handled investments and structured financial deals for the Anschutz Investment Company, a private concern owned by the billionaire Philip Anschutz that has a stakes in telecommunications and oil." The district's chief operating officer (and currently superintendent), Thomas Boasberg, also had private-sector experience, having been a mergers and acquisitions deal maker for a telecommunications company.

Morgenson further reports that, according to then-members of the board of education, "the bankers' presentations for the 2008 debt deal outline its risks only in broad terms... [and] had not discussed problems in the variable-rate debt market that arose the previous year -- a development that would have alerted them to troubles they might have had securing a manageable rate on the debt they were refinancing."

Of course, if we're looking at responsibility, it's worth asking those same board members, How is it that it was OK with you that "for years, the school system had not met its required annual pension payments to ensure a fully funded plan"?