Wal-Mart in Mexico: It's Not Getting Better

Back in April, the New York Times published a devastating article by David Barstow about bribery at Wal-Mart de Mexico. And while some Times readers were inclined to give the company a free pass ("This is apparently the method of doing business in Mexico..."), I argued that this argument (a) painted a whole country with a very big brush, and (b) ignored the inconvenient fact that bribery is illegal in both the U.S. and Mexico. The behavior uncovered was, in addition, a complete violation of Wal-Mart's own code of ethics (the first of which is, "Always act with integrity.").

Today's Times has another compelling, worth-reading-in-full story by Barstow and Alejandra Xanic von Bertrab on how Wal-Mart systematically used bribes to get what it wanted and grow its business in Mexico.

The Times’s examination reveals that Wal-Mart de Mexico was not the reluctant victim of a corrupt culture that insisted on bribes as the cost of doing business. Nor did it pay bribes merely to speed up routine approvals. Rather, Wal-Mart de Mexico was an aggressive and creative corrupter, offering large payoffs to get what the law otherwise prohibited. It used bribes to subvert democratic governance — public votes, open debates, transparent procedures. It used bribes to circumvent regulatory safeguards that protect Mexican citizens from unsafe construction. It used bribes to outflank rivals. 

The Times investigation found 19 store sites in Mexico where the trail of bribes matched up with a trail of permits. For example: "Thanks to nine bribe payments totaling $765,000, Wal-Mart built a vast refrigerated distribution center in an environmentally fragile flood basin north of Mexico City, in an area where electricity was so scarce that many smaller developers were turned away." Wal-Mart is the largest private employer in Mexico.

According to the article, Wal-Mart de Mexico employees did not themselves deliver bribe payments, but entrusted "fixers" to deliver payoffs:

Wal-Mart de Mexico’s written policies said these fixers could be entrusted with up to $280,000 to “expedite” a single permit. The bribe payments covered the payoffs themselves, a commission for the fixer and taxes. For some permits, it was left to the fixers to figure out who needed to be bribed.  

How much did Bentonville, Arkansas, Wal-Mart's global headquarters know? It's hard to be sure, at least without a full judicial investigation. The Times quotes a Wal-Mart spokesperson as saying, "We are committed to having a strong and effective global anticorruption program everywhere we operate and taking appropriate action for any instance of noncompliance," and notes that the company has spent more than $100 million on investigative costs related to anticorruption training and background checks this year. Given that the company relies on careful financial accounting for its success, I do find it hard to believe that headquarters was unaware.

I wasn't surprised by the revelations back in April, and I'm not surprised now. Disappointed, oh yes.

It's Not the New Year Yet, But I Have a Resolution

I'm getting tired of writing posts in the aftermath of a horrific garment-factory fire. I wrote two in September (here and here), following the worst factory fire in Pakistan's history (one of several New York Times reports, here). And late last month there was another tragic fire, in Bangladesh.

New York Times reporter Vikas Bajaj wrote that "Bangladesh’s garment industry, the second-largest exporter of clothing after China, has a notoriously poor fire safety record. Since 2006, more than 500 Bangladeshi workers have died in factory fires..." Worse, many of the deaths were preventable, if proper -- or indeed any -- precautions had been taken. In the late November fire, another 112 workers were killed.

I hadn't thought about writing about this issue again. After all, how many times can I make a case for really tough regulations? But the story won't let go of me. Because I know I bear some responsibility too. I read labels (I hate paying for dry-cleaning, so I always look for washing instructions). I note, in passing, where a particular item was made or assembled. But do I go further than that? No.

It had been reported that the factory, Tazreen Fashions, made clothes for a number of Western companies, including Walmart / Sam's Club, Sears, and others.

In the first days after the fire, Walmart issued a statement saying,

While we are trying to determine if the factory has a current relationship with Walmart or one of our suppliers, fire safety is a critically important area of Walmart’s factory audit program and we have been working across the apparel industry to improve fire safety education and training in Bangladesh.

In yesterday's Times, Steven Greenhouse reported that documents had been found in the factory's rubble that confirm that about one-third of the production lines were devoted to Walmart / Sam's Club products. Of even greater concern, the report stated that

In a related matter, two officials who attended a meeting held in Bangladesh in 2011 to discuss factory safety in the garment industry said on Wednesday that the Walmart official there played the lead role in blocking an effort to have global retailers pay more for apparel to help Bangladesh factories improve their electrical and fire safety.....

According to the minutes of the meeting, which were made available to The Times, Sridevi Kalavakolanu, a Walmart director of ethical sourcing, along with an official from another major apparel retailer, noted that the proposed improvements in electrical and fire safety would involve as many as 4,500 factories and would be "in most cases" a "very extensive and costly modification."

"It is not financially feasible for the brands to make such investments," the minutes said. 

Kevin Gardner, a Walmart spokesman, said the company official’s remarks in Bangladesh were "out of context."

It's hard for me to imagine the context in which those comments, from a "director of ethical sourcing", would be acceptable.

Of course Walmart will do everything possible to squeeze costs from its supply chain. How else can it promise "Save money. Live better."? 

But I don't think I am the only American who would pay a few pennies more for a T-shirt that didn't smell like smoke and sound like screams.

In today's Times, Jim Yardley tries to sift through the data to find how Tazreen, a factory whose "bosses had been faulted for violations during inspections conducted on behalf of Walmart and at the behest of the Business Social Compliance Initiative, a European organization", and still managed to continue receiving orders from major companies, "slipping through the gaps in the system by delivering the low costs and quick turnarounds that buyers — and consumers — demand." (Yardley's full story, worth reading in its depressing entirety, is here)

Who bears the ultimate responsibility? We all do.

Yardley quotes Richard Locke, deputy dean of MIT's Sloan School of Management: "We as consumers like to be able to buy ever-greater quantities of ever-cheaper goods, every year.Somebody is bearing the cost of it, and we don’t want to know about it. The people bearing the cost were in this fire."

Many of the victims were young women, drawn from rural Bangladeshi villages to the outskirts of Dhaka, lured by the promise of good wages: $45 a month. (And yes, even in Bangladesh, that's not much to live on.)

Today, both Walmart and Sears are saying that Tazreen was not an authorized supplier. But it's not that simple. Yardley spoke with David Hasanat of the Viyellatex Group, "one of the country's most highly regarded garment manufacturers" who noted that

...that global apparel retailers often depend on hundreds of factories to fill orders. Given the scale of work, retailers frequently place orders through suppliers and other middlemen who, in turn, steer work to factories that deliver low costs — a practice he said is hardly unknown to Western retailers and clothing brands. The order for Walmart’s Faded Glory shorts [being produced at Tazreen at the time of the fire], documents show, was subcontracted from Simco Bangladesh Ltd., a local garment maker. "It is an open secret to allow factories to do that," Mr. Hasanat said. "End of the day, for them it is the price that matters." 

In other words, for the retailers, if they have plausible deniability, that's all that matters.

Corporations won't care until we consumers show that we care.

Ask questions before you buy. Buy from companies and countries in which workers have real rights and regulations have real teeth. If that means each item costs more, buy fewer items.

That's my resolution for the New Year, and I hope you'll join me.

Sadly, We Do Have a Trifecta Winner

The results are now in, and Wet Seal is indeed a trifecta winner: Illegal, Immoral, and Stupid.

What?

Back in July, the New York Times and other media outlets reported that Wet Seal, a retailer of "fast fashion" apparel for young women, was being sued by former employees because "the company had a high-level policy of firing and denying pay increases and promotions to African-American employees because they did not fit its 'brand image.'" (Original Times story, by Steven Greenhouse, here)

To be honest, I found it hard to believe that a nationwide retailer could be that, well, stupid. Racial discrimination is both immoral and illegal, and to have a policy in place like this seemed unlikely.

At least that's what I hoped. So I coupled my comments on Wet Seal with a report on some recent research that suggests that fast ethical decisions are worse than slow, thoughtful ones. Perhaps, I wrote, the problem was the Wet Seal was just reacting too fast to, for example, slumping sales at a particular store -- let's just fire the frontline staff and store manager, and maybe that will fix the problem. They just didn't think the situation through, right? (Original blog post, here)

The Equal Employment Opportunity Commission has now found in favor of the plaintiffs, ruling in a "determination" that Wet Seal's managers had made it overtly clear that they wanted employees who had the "Armani look, were white, had blue eyes, thin and blond in order to be profitable." (as reported, again by Steven Greenhouse, in today's Times; full story, here)

The federal commission said that, prior to the forcing-out of one of the African-American women plaintiffs, "she had received high ratings in running the King of Prussia [PA] store, which was ranked No. 8 among Wet Seal's more than 500 stores. Her regional manager and district manager had said she had 'great energy' and 'strong ability' to hold other managers and subordinates accountable in fulfilling their responsibilities." These attributes, however, were apparently not enough for senior executives to overlook her race. The senior vice president for store operations had visited her store and others in the area and then sent an email back to headquarters that read: "African Americans dominate — huge issue." The African-American store manager was fired the following day (Wet Seal continues to insist that the store manager resigned; whatever the truth, I think we can all agree that the work environment was hostile.).

As I said, a trifecta.

Management vs Labor: Guess Who's Still Winning?

Remember Warren Buffett's comment about class warfare, that "there's been class warfare going on for the last 20 years, and my class has won"? (CNN interview, 30 Sept 2011)

Not only does his class have, as he called it, the nuclear bomb, but some of his fellow members are preparing to drop that bomb.

Salon magazine reported last week that a Florida owner of some 40 Denny's restaurants has announced that he will "cut workers' hours in advance of Obamacare's full implementation in January 2014."

Salon reporter Natasha Lennard wrote that a recent survey found that the Affordable Care Act is expected to raise large businesses' costs by approximately 4%. Metz reportedly considered adding a 5% surcharge to restaurant prices, but "has no plans to implement this idea."

Metz knows that his decision will "force my employees to go out and get a second job", but felt that he had "no choice."

I have several choices to suggest to him. Most aren't printable.

To be fair to Denny's, Metz is not Denny's. He owns 40 of their restaurants, but Denny's opened its 1,600th restaurant in September 2010. Franchisees must maintain certain standards if they wish to retain their franchises. Should Denny's corporate decide that Metz is risking Denny's good name, they will take action.

Sadly, Mr. Metz is not alone in his greed and insensitivity. Other restaurant chains, like Papa John's and Red Lobster, are increasingly turning to part-time workers to reduce their healthcare (and other) costs.

Labor and especially labor unions make attractive targets for blame, especially when they really aren't to blame.

Another example in recent news is Hostess Brands, makers of the (in)famous Twinkies, Sno-Balls, Cup Cakes, etc., filing for bankruptcy and closing its doors and laying off 18,500 employees, and blaming the intransigence of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union for the company's demise. If only those workers had accepted the 30% pay cut that the company had offered, we could all still be enjoying our Twinkies guilt-free. Sort of.

There's no mention of the fact that this is Hostess' second bankruptcy since 2009, nor that Hostess has not been making contractually-obligated pension contributions, nor that Hostess has been run by six CEOs in eight years, none of whom had bread or cake baking experience, nor that "despite their financial woes, the company’s CEO got a 300%  salary increase from $750,000 to $2,250,000, and other top executives received raises worth hundreds-of-thousands of dollars." (Reported by Politicus USA; full story, here)

It's time for a new labor movement. Where's Norma Rae when we need her?

Who's Responsible, the Corporation or the Executive?

Corporations have one big advantage over people: not only do they have, thanks to Citizens United, the right of free speech, but: it's really hard to put a corporation in jail.

Many of us have wished for corporate jails (as opposed to for-profit jails run by corporations), to which we could have sent, for example, the banks that nearly destroyed our entire economy. Alas, those don't exist, and it's extremely rare that individual executives get charged.

So I was interested but not particularly surprised to read yesterday that, as a followup to the horrific Deepwater Horizon explosion and oil spill two years in which eleven workers died, BP had finally agreed to plead guilty to numerous criminal charges and to pay more than $4 billion in fines and penalties over the next five years (article by Clifford Krauss and John Schwartz in yesterday's New York Times, here).

But what really caught my eye is that the Justice Department filed criminal charges against three BP executives in connection with the spill.

According to the Times report,

The government charged the top BP officers aboard the drilling rig, Robert Kaluza and Donald Vidrine, with manslaughter in connection with each man who died, contending that the officials were negligent in supervising tests to seal the well. 

Prosecutors also charged David Rainey, BP’s former vice president for exploration in the Gulf of Mexico, with obstruction of Congress and making false statements for understating the rate at which oil was spilling from the well.

Those charged are denying any wrongdoing.

Me, I'd want to charge BP's CEO, but that's just me.

Ironically, today's news included a report of an explosion and fire aboard another Gulf oil rig (Associated Press report, in the New York Times, here).  Thankfully, the rig was not producing at the time and there are no reports of oil leaking. No one was believed killed in the fire, although several had been seriously injured. At the time of the report, the Coast Guard was still searching for two missing workers.

Deceptive Reviews on Yelp? How Could This Be?!?

More in the "shocked, shocked" category....

Earlier this year, I was inspired by a David Streitfeld story in the New York Times to write a post about all those "5-star" reviews littering the Internet (blog post here; Streitfeld's story, here). Mr. Streitfeld has done it again, with an article in today's Times about an attempt by Yelp to halt deceptive reviewing practices.

Yelp, an online hub for reviews of local businesses (dry cleaners, restaurants, jewelry stores, you name it), realized that it had a problem with false reviews, and set up its own sting operation.

For every five new notices that are submitted, one is determined by internal filters to be so dubious — either highly favorable or highly critical — that it is banned to a secondary page, which few users bother with, instead of appearing on the business’s profile page. Many of the reviews tagged as fake are written by people new to Yelp.

As a result, some businesses have sought out Yelp's so-called "elite" reviewers -- those who have a track record of posting reviews -- and offered cash payments for positive reviews.

How do you find an "elite" reviewer? On Craigslist.

So a Yelp employee went to Craigslist itself, and posed as an elite reviewer.

The initial sting uncovered eight businesses ready to pay for excellent reviews. Which, given that Yelp has a reported 30 million reviews, doesn't sound like a lot. (A Yelp vice president is quoted as saying, "It is safe to say that this is just a sample" of businesses seeking to influence their status.)

Payments reportedly ranged from $5 to $200; reviewers were sometimes given boilerplate copy to post and sometimes asked to write their own (positive) copy.

For the next three months, the Yelp profile pages for those eight businesses will features a "consumer alert" that says, "We caught someone red-handed trying to buy reviews for this business."

This kind of public shaming may help, but I'm not convinced that it will make a real dent in the deceptions. A Cornell doctoral student in computer science who has been studying reviewer deception noted,

My intuition is that public shaming would increase the risk and therefore the cost of posting fake reviews, which could reduce the prevalence .... [But:] What’s to stop someone from going and soliciting fake positive reviews for a competitor’s restaurant, in order for them to be publicly shamed?

Let me reiterate my earlier closing:

Maybe we should rethink hive-mind reviews altogether. I have more confidence in the Times' restaurant reviews than in Yelp, and more confidence in what Consumer Reports says than in glowing reports on Amazon. Because even if I don't know those reviewers personally, I know what they stand for. 

Big Pharma, Little Compounding Pharmacy. It's Not That Simple.

I know that I've been following the ongoing story of a fungal meningitis outbreak closely because it could so easily have been me.

For those of you who haven't: To date (according to today's New York Times story by Denise Grady), eight people have died, 97 others have sickened, and as many as 13,000 may have been exposed to fungal meningitis, which has been traced to a tainted steriod given as a spinal injection for relief from back and neck pain. The medication in all cases was made by Massachusetts-based New England Compounding Center, which "has shut down, surrendered its license and recalled all its products, not just the steroid."

It is not yet known whether all the vials of the steriod were infected with fungus, or only some of them.

I had surgery several years ago to relieve back pain, and I'm among the lucky who have not (knock wood) had recurring problems. But one of the physicians I met before opting for surgery suggested that quarterly steriod injections could probably do the trick just as well. I was concerned about possible long-term effects of steroid use, hence the surgery. But, as I said, it could have been me.

How is it that so many people were exposed to this contaminated drug? How could it take so long to find out what happened? Why is it still not clear where all the drug went, and who received it? (The "13,000" figure I quote above is a "first estimate" from the Centers for Disease Control and Prevention.)

It turns out that

The Food and Drug Administration has more regulatory authority over a drug factory in China than over a compounding pharmacy in Massachusetts

according to a Boston University law professor, quoted in Saturday's Times, in an article by Denise Grady, Andrew Pollack, and Sabrina Tavernise. (Compounding pharmacies, the article explains, "mix up batches of drugs on their own, often for much lower prices than major manufacturers charge," and are increasingly used by some physicians and clinics to save money. Compounding pharmacies also sometimes fill "gaps left by shortages of drugs made by pharmaceutical companies.")

The problem is that 

Compounding falls in a legal no man’s land, between the federal government and the states. The F.D.A. regulates manufacturers, but compounders register as pharmacies, putting them under a patchwork of state rules. The F.D.A. did develop a clear set of rules for compounding, but subsequent litigation that culminated in a Supreme Court decision in 2002 struck them down, and Congress never re-established the agency’s clear authority...

Who knew? Well, somebody did, of course, but it was certainly news to me. And I might have been more trusting of a "compounding pharmacy" -- because that sounds more local and service-oriented -- than of a huge pharmaceutical company.

Not that all compounding pharmacies are that local (or, obviously, that service-oriented). New England Compounding was apparently licensed in all fifty states, and there are 23 states now tracking where this specific steroid went. A Washington lawyer, and a former chief counsel for the FDA, was quoted in Saturday's article as saying,

Some of these companies are just setting up big manufacturing shops in the guise of traditional compounding and making drugs that are, for the most part, commercially available. Instead of making fake Rolexes, they are making fake drugs.

If this is how industries self-regulate (and all too often, it is), is it any wonder that I keep asking for more regulation, not less?

Manage Your Supply Chain, Or It Might Manage You

Managing a supply chain that spans the globe has never been easy. It's so complicated, in fact, that many manufacturers simply throw up their hands -- as long as the product showed up when and where and how it was supposed to, what more could one do?

But in the Internet age, things are different.

Many of your customers want to know whether your jeans were made in a sweatshop factory where workers might burn to death because exits have been blocked, or whether that rug was knotted by children's hands, or whether the tanzanite stone in a beautiful ring was exchanged for illegal guns that will fuel a brutal regime and its equally brutal opponents.

And they expect you to be able to answer their questions.

Sometimes it will be the final retail consumer who will demand to know; sometimes it will be your wholesale customer.

Today, it's Whole Foods, which will remove Hershey's high-end chocolate brand, Scharffen Berger, from all store shelves by the end of the year "due to Hershey’s failure to assure that the cocoa is sourced without the use of forced child labor," according to a story off the CSR Newswire (full release, here). Whole Foods' action came as the result of "more than 15,000 customers demanding that ... Hershey [be held] accountable for exploiting children for profit."

The CSRWire report notes that, according to "a U.S. government-funded study, over 1.8 million children work in West Africa’s cocoa industry. Many of these children are exposed to dangerous working conditions and some are even trafficked and sold off to perform grueling labor."

Several major chocolate makers, including Mars and Ferraro, have committed to the ethical sourcing of chocolate, but Hershey's has, to date, refused.

This small news story may have struck me particularly forcefully because I've just finished reading The Responsible Company, by Yvon Chouinard (owner / founder of Patagonia) and Vincent Stanley (who initiated the company's Footprint Chronicles blog, which traces its suppliers' activities). The pair spoke recently at Yale, at a discussion co-sponsored by the Divinity School, the School of Forestry, and the School of Management (press release, here).

Chouinard spoke forcefully about a company's responsibilities not just to shareholders, but four other key stakeholders: employees, customers, communities, and nature. In "communities", he includes not just the physical locations in which a business operates, but also suppliers, as well as:

trade associations, nongovernmental organizations (NGOs), standards-setting organizations, nonprofits, and other citizens' organizations that may have an interest or something to say about what your company does. Advocacy groups like Greenpeace and PETA may confront you about your practices, as may individual citizen activists through social media like Facebook and Twitter. Friendly or not, those who engage with you are part of your community in its broadest sense and deserve your attention.

That sounds like a lot, doesn't it? But that's the reality of a globalized world. If you don't want to manage your supply chain thoughtfully, it might manage you ... right out of business.

What's the Value of "Certification"? It Depends.

Who will watch the watchmen?

It's a question that's been asked many times before, since at least the days of the Roman poet Juvenal, who is credited with coining the phrase.

It's as relevant as ever, with the news today that the Pakistani textile factory which exploded in flames last month, killing nearly 300 workers, had been awarded "independent" certification as meeting critical international standards.

As reported by Declan Walsh and Steven Greenhouse in today's New York Times (full article, here),

In August, two inspectors who visited the factory, Ali Enterprises in Karachi, to examine working conditions gave it a prestigious SA8000 certification, meaning it had met international standards in nine areas, including health and safety, child labor and minimum wages. The two inspectors were working on behalf of Social Accountability International, a nonprofit monitoring group based in New York that obtains much of its financing from corporations and relies on 21 affiliates around the world to do most of its inspections. 

The reporters call the Karachi fire a "huge embarrassment" to the monitoring system. Social Accountability International had not conducted the inspection itself, contracting the job out to an Italian firm, RINA (Registro Italiano Navale Group). According to a press release on the Social Accountability website, 

RINA has voluntarily suspended all SA8000 auditing activity in Pakistan. It is undertaking its own internal investigation and also seeking from local authorities clearer information about the circumstances surrounding this tragedy. In the coming days, SAAS will be rigorously following its own strict rules, and will be examining very closely the validity and effectiveness of RINA's audit and certification process.

That's all well and good, but I'm inclined to agree with Scott Nova, executive director of Worker Rights Consortium, quoted in the Times article as saying, "The whole system is flawed... This demonstrates, more clearly than ever, that corporate-funded monitoring systems like S.A.I. cannot and will not protect workers."

A key problem is that the initial audit -- which is what RINA conducted at the Ali Enterprises factory -- is not a surprise inspection (future inspections would normally not come with advance notice).

According to the Times  report,  "some surviving workers said that they had been warned of a visit by inspectors and coached to lie about their working conditions, under threat of dismissal."

To blame the disaster entirely on the S.A.I. audit and certification process would of course be grossly unfair.

On Monday, a two-person [Pakistani] government commission of inquiry started investigating the circumstances around the fire. It has already uncovered evidence of gross failings in Pakistan’s regulatory system, which is riddled with corruption, political interference and poor management. 

In circumstances like these, to expect a Western, corporate-financed "certificate" to solve the problems of workers' rights and safety would be beyond naive. But the "certificate" is unquestionably itself part of the problem. It relieves the end purchaser (retail seller and consumer alike) of having to ask the hard questions: How was this product made? If all health and safety issues are properly addressed, and workers' wages and benefits adequate, is it really possible to offer this item at so low a price? Who is benefiting, and who is being harmed? If I am complicit (and, by purchasing this item, I am complicit), how can I make things right?

Questions, questions. I've got so many questions. And so few good answers. Only prayers for the families and friends of those 300 workers.

Do You Really Want to Go Back to the Good Old Days of Deregulation?

"The towering metal door at the back of the burned-out garment factory could have been an escape for many of the low-paid textile workers caught in the fire.... Instead, it stands as a testament to greed and corruption at a factory where 289 trapped employees died."

This may sound like a description of the infamous Triangle Shirtwaist Factory fire of 1911. But it isn't. It's the opening paragraph from an article by Declan Walsh in today's New York Times, describing the scene after the deadliest accident in Pakistan's history.

His article continues,

As hundreds of workers scrambled to escape the flaming factory after a boiler explosion, they found the main sliding door -- 30 feet high, big enough for a truckload of cotton -- firmly locked. Instead of letting the workers escape, several survivors said Thursday, plant managers forced them to stay in order to save the company's stock: piles of stonewashed jeans, destined for Europe.

There was apparently only one open exit, through which employees could escape -- or they could jump from windows "considered too high to require bars." As a result, nearly half lost their lives, most often from smoke inhalation. Many of the survivors are in local hospitals, suffering from third-degree burns.

I wrote about the Triangle Shirtwaist fire a few years ago (post, here), and quoted labor activist Rose Schneiderman, who said, a few days after the disaster, "The life of men and women is so cheap and property is so sacred! There are so many of us for one job, it matters little if 140-odd are burned to death."

At the time, there were few laws protecting American workers. In contrast, the current laws protecting Pakistani workers are quite strong, "but application is notoriously weak. In textiles, which account for 53 percent of exports, employers routinely sidestep health and safety regulations through bribery and corruption."

Regular readers of this blog know that I am a _big_ supporter of regulation. Because the fire in Karachi is a terrible, tragic reminder of what the "good old days" were like. Regulations alone, of course, are not enough -- you need a strong rule of law, and plenty of alert inspectors on the job.

Why Pay More When You Can Collude?

Another in a long series of "we're shocked, shocked" headlines (this one from today's New York Times): "Equity Firms Like Bain Are Depicted as Colluding".

No, really? People do that? (Full article, here)

Reporters Eric Lichtblau and Peter Lattman write that court documents indicate that, for Bain Capital's "$32.1 billion purchase of the hospital giant HCA in 2006, competitors agreed privately to 'stand down' and not bid on the company as part of an understanding with Bain to divvy up companies targeted for leveraged buyouts."

At the time, the $32.1 billion purchase price for HCA was a record.

In another example, KKR and Silver Lake Partners brought Bain into their acquisition of Philips's semiconductor business, thanks to "a secret deal whereby Bain would permit KKR and Silver Lake to submit the winning bid and then invite Bain into its deal on equal terms."

The documents are from a lawsuit filed in Boston's Federal District Court against Bain and other firms "by shareholders who say the firms' bid-rigging artificially deflated the sales price of more than two dozen companies and cost them billions of dollars."


The documents were made public, although with heavy redactions, following a motion brought by the Times.

A lawyer for the plaintiffs was quoted as saying, "I think you can tell...there is enough to show that there was very active collusion going on between the leading private equity firms."

The equity firms' executives and lawyers deny that there was collusion to drive down prices. The Times reporters quote one (anonymous) executive: "These shareholders should be grateful that we purchased their companies when we did, right before the financial crisis hit."

Grateful's not exactly the adjective I'd use....

You Report Misbehavior. What's the Likelihood You'll Be the One to Pay?

Sadly, it's pretty high.

Consider, for a moment, what you would do if you observed unethical behavior in your workplace.

Would you report it immediately? Would you ignore it, because it's "just business"? Would you worry about possible blowback to you if you did report it?

If possible negative repercussions occurred to you, you're wise to worry.

Back in January, I noted that the 2011 National Business Ethics Survey (NBES) reported nearly half of all Americans had observed either legal or ethical violations at their workplace in the previous year. The good news was that it was nearly the lowest level reported.

The really good news, I said, was that about two-thirds of those who observed violations reported them.

But now the Ethics Resource Center, which conducts the NBES every other year, has issued a supplemental report, with some really bad news. According to their press release:

Retaliation against workplace whistleblowers is rising dramatically, extending to previously safe groups such as senior managers and also including more acts of physical violence...

Of those who reported misconduct, more than one in five reported some form of retaliation, up from 15% in 2009 and 12% in 2007.

 Since fear of retaliation is one of the most commonly cited reasons for not reporting illegal or unethical behavior, the rise in actual retaliation is doubly worrisome.

Remarkably, the greatest increase in reported retaliation rates occurred at higher levels of management (from fewer than one in ten of those reporting misconduct in 2009 to more than one in four in the most recent study). Moreover, according to the report,

Employees at higher management levels are more likely to experience traceable forms of retaliation. Traceable forms of retaliation are those that leave proof of having happened: physical harm, online harassment, harassment at home, job shift, demotion, cuts to hours or pay.

It's likely that these higher-level employees are reporting the most serious infractions.

The news isn't all bad, because there are clear ways for management to reduce the likelihood of retaliation:

...Ethics and compliance programs, strong ethical cultures, high standards of accountability that are consistently applied, and positive management behaviors are all linked to a reduced likelihood of experiencing retaliation.

The full ethics report and the new supplement are both available as free downloads at the Ethics Resource Center website, here.

Dear Joe Nocera: Thank You!

I've been arguing against "shareholder value" as the prime measure of corporate performance and CEO bonuses for quite a while (most recent blogpost on the subject, here). But sometimes my soapbox has felt pretty lonely.

Saturday, Joe Nocera, columnist for The New York Times, picked up his much bigger microphone and made the call: "Down With Shareholder Value" (here).

As Nocera writes, the results of the corporate focus on shareholder value are plain to see, and they're "not pretty":

Too many chief executives succumb to the pressure to boost short-term earnings at the expense of long-term value creation.... In the lead-up to the financial crisis -- to take just one example -- financial institutions took on far too much risk in search of easy profits that would lead to a higher stock price.

But the times appear to be a-changin'. Nocera notes that Cornell Law professor Lynn Stout and other academics are questioning the legal basis for the emphasis on shareholder value. Other academics are looking at the issue more closely, too. Nocera quotes from a recent Harvard Business Review article, "What Good are Shareholders?", by Harvard Business School professor Jay W. Lorsch and HBR Group editorial director Justin Fox (article, here; note that a subscription is required for full access).

Lorsch and Fox report, "There's a growing body of evidence... that the companies that are most successful at maximizing shareholder value over time are those that aim towards goals other than maximizing shareholder value."

That's not to say that shareholders are irrelevant. Lorsch and Fox argue for "a favored role" for long-term shareholders. In addition, there should be

roles for other actors in the corporate drama -- boards, customers, employees, lenders, regulators, nonprofit groups -- that enable those actors to take on some of the burden of providing money, information, and especially discipline. This is stakeholder capitalism -- not as some sort of do-good imperative but as recognition that today's shareholders aren't quite up to making shareholder capitalism work.

This is a movement I could get behind.

Can We Build a Corporate Jail?

Not a privatized prison (we have plenty of those already, and I have lots of ethical issues with them, but that's a post for another time). No, I mean: If corporations are persons, why can't we send the bad ones among them to jail?

OK, so I know that my suggestion is physically impossible (although it's fun to try to visualize). But it is gratifying to know that I'm not alone in pondering relative sentences between felonious companies and felonious individuals. It's like the old joke: "Steal a thousand dollars and you go to jail; steal a million, and you own the bank."

In Monday's New York Times, Michael Powell pondered the shame of the guilty in Manhattan Criminal Court and contrasted it to the lack of shame among repeat offenders of the banking world (full story, here). He calls the bankers "a less scrupulous class of lawbreaker."

The following day, the Times' Michael S. Schmidt and Edward Wyatt explored the gulf between the record sums being collected by the Justice Department from businesses charged with defrauding the government in contrast to the minute number of charges being filed against executives of those same companies (full story, here).

The reporters quote Senator Jack Reed (D - R.I.), chairman of a subcommittee overseeing securities regulation: "A lot of people on the street, they're wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed."

Count me as one of those people.

Acting associate attorney general Tony West assure us that "there is a lot of behavior that makes us angry but which is not necessarily illegal. If the evidence is there, we won't hesitate to bring those cases."

The evidence appears to be the key problem. Senior executives have plausible deniability when it comes to day-to-day operations. Most of them have also learned not to commit fraud via email.

The risk is that executives become more willing to skirt the law: Smith and Wyatt quote the president of Better Markets, which advocates for regulatory reform, "If you are an executive, you know that the chances of getting caught are infinitely small, and the chances of getting caught and prosecuted are even smaller."

I don't have a great solution.

But I do have a lot of anger.

And, ethically speaking: If it happened on your watch, Mr. CEO, isn't it your responsibility? And since you're so happy to take the credit for record profits or dramatic increases in the share price, shouldn't you be as ready to take the blame?

Should Ethics Be a Required Business-School Course?

Since I'm an ethicist, and a business-school graduate, you'd think I'd be in favor of including one or more required ethics classes in business school curricula.

But I'm not.

By the time a student gets to business school, he or she should have a pretty well-developed moral compass. One required class (or even more) won't fix that. An amoral student will simply learn what's expected from the professor in order to earn that all-important A.

Does that mean that ethics is irrelevant to a business-school education?

By no means.

University of Chicago Business School Professor Luigi Zingales agrees. In an article ("Do Business Schools Incubate Criminals?") published at Bloomberg View (here) and Huffington Post (here), he argues that "ethics should become an integral part of the so-called core classes -- such as accounting, corporate finance, macroeconomics and microeconomics -- that tend to be taught by the most respected professors."

A few weeks ago, I made a reference to the late University of Chicago economist Milton Friedman's 1970s comment that the corporation's responsibility is "generally ... to make as much money as possible." (full blog post, here) I allowed that Friedman qualified that much-quoted line, by adding, "while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom."

I saw a lot of wiggle-room in that qualification.

Prof. Zingales chooses a similar Friedman quote (from his Capitalism and Freedom):

There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Zingales considers the qualification "a very big caveat, and one that is not stressed nearly enough in our business schools." -- on that we certainly both agree.

Zingales notes,

Lobbying to secure a competitive advantage from the government certainly does not represent "open and free competition." Similarly, preying on customers’ addictions or cognitive limitations constitutes deception, if not outright fraud. Not to mention using clients’ confidential information for personal gain, manipulating a major interest-rate benchmark such as Libor [the London Inter-Bank Offered Rate], or selling financial products you know to be flawed. 

So why is such unethical (and, frequently, criminal) behavior so common? What's gone wrong?

In Zingales' view, "our business schools are partly to blame" for a general decline in ethical standards in business. Why? Because economists have taken to teaching their subject as though it were a natural science: economists "liken themselves to physicists, who teach how atoms do behave, not how they should behave."

But (as Zingales continues) atoms' behavior do not have moral implications, while our behavior does.

Students may then make an unethical, if logical, leap: "if teachers pretend to be agnostic [on matters of ethics], they subtly encourage amoral behavior without taking any responsibility [for that behavior]."

Adam Smith (who was, if you recall, a professor of moral philosophy at Glasgow University before writing The Wealth of Nations) would be appalled to think that economic behavior could be divorced from ethical behavior. I'm glad that Prof. Zingales is working to bring the two together again.

Not a moment too soon.

Slow Down: You Move Too Fast

Two unrelated articles had me thinking last weekend about how we make decisions and why so many of them don't turn out as well as we had hoped.

Friday's New York Times carried an article by Steven Greenhouse about a discrimination lawsuit filed against an apparel retailer, Wet Seal, "asserting that the company had a high-level policy of firing and denying pay increases and promotions to African-American employees because they did not fit its 'brand image'."

Wow, I thought. If the allegations are true, that's a trifecta: illegal, immoral, and stupid.

The retailer of course denies all allegations, while the lawsuit claims that a former senior vice president of the company "ordered various managers to 'lighten up' the work force in stores with a large white clientele by hiring more whites and had told a regional manager that she must have 'lost her mind' to have put a black person in charge of a particular store."

A senior vice president said that?

So it looks as though we can throw out the extremely-young-inexperienced-supervisor excuse. Is it simply a case of racism? Most likely, yes and no.

Assuming the facts of the lawsuit are correct, this case would appear to be, to quote a law professor that Greenhouse interviewed, "a slam-dunk." As the professor noted, "Even if there is a consumer preference for employees to be of a certain race, even if it might reduce patronage, the law doesn't provide an exception for you to discriminate that way."

I immediately thought of Dr. Martin Luther King Jr.'s comment that "while it may be true that morality cannot be legislated, behavior can be regulated. It may be true that the law cannot change the heart but it can restrain the heartless. It may be true that the law cannot make a man love me but it can keep him from lynching me and I think that is pretty important, also." (from a 1963 speech given at Western Michigan University; full transcript here)

But there may be another issue here, too, beyond the stunning racism.

People have always made business decisions based on insufficient data, but there is more and more pressure to make decisions fast. There's a problem? Fix it. Now. (Because there's another problem coming down the pike right behind the first. Not to mention that if the first one's not fixed, it'll cause us so much trouble that we may never recover.)

So, if, for example, you see sales slumping at one of your locations, you're going to want to move fast to turn that around.

But is the fast decision the right decision? In the 7 July issue of The Economist, columnist "Schumpeter" writes "in praise of procrastination." Specifically, the columnist calls out some research by Brian Gunia of Johns Hopkins University, who, with three co-authors, conducted research that indicates that slow right-wrong decisions are more likely to be ethical: "Our findings suggest that contemplation and conversation ... seem to provide alternate routes to ethicality, while immediate choice and self-interested conversations seem to provide detours around it."

In other words, slow down and think about that decision before you act on it. Or talk it through with a colleague, preferably one with a strong moral compass.

(The complete paper, "Contemplation and Conversation: Subtle Influences on Moral Decision Making," was published in the Academy of Management Journal, 55(1). Available online here as PDF. Note that Gunia et al. were considering "right-wrong" decisions, where one option is in line with values and the other is not, as opposed to "right-right" decisions, where two moral values are in competition.)

Gunia and his fellow authors suggest that some organizational cultures may be at greater risk for unethical behavior:

Organizations with a "fast pulse" or tendency to reward quick decision making may suffer ethical penalties by discouraging contemplation and conversation. Organizations that afford time to think and talk with others—especially ethical others—should benefit from more ethical action. Similarly, organizations with interdependent workflows, which encourage conversation, might promote more ethical action than organizations of independent silos.

Schumpeter reads "fast pulse" and thinks immediately of banks, noting, "The current LIBOR scandal engulfing Barclays in Britain supports this idea."

I think of companies like Wet Seal, which specializes in fast fashion for notoriously fickle teens, heralding "top trends" and "just arrived" on their web site.

To quote the business philosophers Simon & Garfunkel:

Slow down; You move too fast.

Bankers Behaving Badly -- What Else is New?

Oh, bankers! What would I find to do without you? (Alas, plenty.)

But today seems like a Friday the 13th windfall in banking news. In the New York Times alone, there were four articles about questionable bank dealings:

• Ben Protess, in the DealBook blog, explores the widening Barclays-LIBOR scandal (see my earlier post here; Protess' article is here); apparently Tim Geithner, now Treasury Secretary, then head of the Federal Reserve Bank of New York, was questioning possible bank manipulation of the London InterBank Offered Rate as far back as 2008, and urging British authorities to "strengthen governance and establish a credible reporting procedure" and to "eliminate [the] incentive to misreport."
• Elsewhere in DealBook, Azad Ahmed and Peter Lattman write about the widening Peregrine Financial turmoil, with $215 million (and counting!) in customer money missing. Its founder is in the hospital following a suicide attempt. Lawsuits have been filed, and Peregrine has filed for bankruptcy. It now appears that regulators missed red flags for years. A Peregrine client apparently "sent a letter to the National Futures Association, the firm’s primary regulator, and the C.F.T.C., asking it to intervene to prevent the firm from misusing its customers’ money" in 2004.
• Wells Fargo has agreed to pay a fine of at least $175 million for allegedly steering black and Latino borrowers into riskier subprime mortgages, charging them higher fees and rates, and otherwise discriminating against minority borrowers during the housing boom, according to Charlie Savage's article. The company denied the Justice Department charges, but in a statement by the president of Wells Fargo Home Mortgage, said that it was settling "to avoid a long and costly legal fight, and to instead devote our resources to continuing to contribute to the country’s housing recovery."
•  And Landon Thomas Jr. and Mark Scott, also in DealBook, report that we can expect, as early as next week, to hear that HSBC senior officials apologizing to U.S. officials "for not cracking down soon enough on money-laundering activities in America." The money laundering, now being investigated by a Senate subcommittee, occurred from 2004 to 2010 and involved drug deals and terrorism, and "could result in HSBC paying fines of up to $1 billion." So much for HSBC's reputation as "one of the more conservatively run and trustworthy of the financial giants based in London.

Add in this morning's breaking news that JPMorganChase's losses "on a soured credit bet" could mount to more than $7 billion, as its "traders may have intentionally tried to conceal the extent of the red ink on the disastrous position." (This is from an article by Jessica Silver-Greenberg, posted on the Times' DealBook blog this morning)

What does all this tell me?

You know my mantra: Regulate, regulate, regulate.

And while you're at it: Regulate the regulators.

And make sure that if bankers are wildly compensated for successful trades, they are equally wildly un-compensated for disastrous losses.

I miss the days when banking was boring.

What We Do Best is Delude Ourselves

I am not revealing any deep dark secret -- at least not to anyone who has read even one of my posts -- by saying that I'm a big fan of regulation (example post, here). Much though I would like to think that we can all police ourselves and behave ethically without the imposition of laws and penalties, I don't believe it (and if I did, you would -- rightly -- call me naive.).

We humans are much too good at covering up for ourselves, at rationalizing our ethically questionable behaviors.

I've been thinking about this for several days, ever since the story broke (on Wednesday 27 June) that giant British bank Barclays had agreed to pay $450 million to resolve accusations that it had manipulated Libor, the London interbank offered rate (used to set commercial and consumer loan rates), to its own benefit (selected New York Times DealBook articles here, here, and here; all by Mark Scott; the first by Scott and Ben Protess).

In the Barclays case, regulators say they uncovered “pervasive” wrongdoing that spanned a four-year period and touched top rungs of the firm, including members of senior management and traders stationed in London, New York and Tokyo. A 45-page complaint laid bare the scheme that unfolded from 2005 to 2009, describing how Barclays had made false reports with the aim of manipulating rates to increase the bank’s profits. Barclays was also accused of “aiding attempts by other banks to manipulate” Euribor [Euribor is the European interbank offered rate].

Barclay's American chief executive, Robert Diamond, originally offered apologies and announced that he and three other top officers would voluntarily give up their bonuses. A day later, Diamond was offering to give up his entire year's compensation. By Tuesday (2 July), Diamond had resigned.

Yesterday, he was reported to have told a Parliamentary committee that while the actions of 14 Barclays traders in manipulating the Libor made him "physically sick", it wasn't just Barclays that was to blame.

According to Scott's article, Diamond said that "the bank had raised concerns multiple times with American and British authorities about discrepancies over how Libor ... was set. The bank was not told to stop the practice."

In other words, there were other banks doing it too, and besides, the regulators could have stopped us.

Nor would Diamond accept sole responsibility for Barclays' actions (it is not clear how much Diamond knew, how early): "I don’t feel personal culpability. What I do feel is a strong sense of responsibility."

What prompted me to write this particular blog post was an episode of "On Point" that I heard this morning. Tom Ashbrook interviewed (here) Dan Ariely, a professor of psychology and behavioral economics at Duke, and author of a new book, The Honest Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves.

The whole interview was fascinating, and I'm looking forward to reading the book. Some interesting snippets that I recall:

* Golfers are in near-unanimous agreement that picking up the ball and moving it four inches to line up a better shot is a complete no-no. Nudging it with your foot, somehow, seems a little different, and significantly less "wrong". And tapping it gently with the club? More likely still, and almost OK. But we're still talking about the same four inches!

* The further away from the person we affect by our cheating, the more easily we are able to rationalize it: The individual who would never shoplift an actual CD from a music store has no problem downloading that music illegally.

* If "everybody else is doing it", we're much more likely to as well -- especially if there is an inherent conflict of interest. We have all ranted about evil bankers nearly bringing the whole system down, but can we be so sure that we would have behaved that much better, had we been incentivized in the same way and surrounded by other bankers behaving badly? ("Wow, these mortgage-backed securities don't look very good. But the more of them I sell, the bigger my bonus will be. And their quality doesn't seem to worry any of these smart guys I work with, so maybe they're really OK?")

Barclay's ex-CEO can blame the regulators (in part) and he may be right: they may not have been careful enough. Prof. Ariely's research indicates that, while clear rules may not stop all  the liars and cheats, they will deter many. University honor rules work -- even if not perfectly.

So the answer is better, stricter regulation.

Is "Shareholder Value" Real?

The concept of shareholder value was first articulated fully in a 13 September 1970 New York Times article by the late University of Chicago economist Milton Friedman, who asserted that the "social responsibility" of a corporation was "to increase its profits." (Full article available in PDF format here) Friedman wrote,

In a free-enterprise private-property system a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

There's a lot of latitude in "conforming to the basic rules of the society", isn't there?

But there's apparently another problem: According to Cornell Law professor Lynn A. Stout, shareholders aren't really the owners of the corporation.

As explained by ProPublica reporter Jesse Eisinger in an article published in yesterday's New York Times, Prof. Stout believes that "shareholders are more like contractors, similar to debtholders, employees and suppliers." (Prof. Stout's ideas are fully explored in her new book, The Shareholder Value Myth.)

Prof. Stout explains that, legally, "shareholders [get] special consideration only during takeovers and in bankruptcy." And what you as a manager or board member should focus on when a company is in bankruptcy (or sufficiently weak to be the promising target of a takeover) is very different from what you should focus on when a company is doing well, she says.

By focusing on "shareholder value," she argues, and especially by aligning executive pay with stock-market share performance, companies have become more and more concerned with short-term solutions. Worse yet, thanks to the corporate governance movement which has been pushing for the pay-for-performance alignment, "Investors are actually causing corporations to do things that are eroding investor returns."

Prof. Stout would prefer that corporations return to "managerialism", "where executives and directors run companies without being preoccupied with shareholder value."

Really? Shareholders have that much power? Boards are that preoccupied with shareholders' concerns? Given the number of non-binding shareholder resolutions that corporate boards claim to "consider seriously" (and then ignore), I'd have said that shareholders still have a long way to go before they can be accused of undue influence. (Click here for a recent blogpost on shareholder "revolts")

As Eisinger writes, Prof. Stout does "share some goals with the corporate governance movement." She agrees that executive pay scales are "out-of-whack", and she believes in the need for a "Robin Hood tax" (a tax on securities trading, that would thereby discourage "zero-sum, socially useless trading").

I'm not a lawyer, so I can't argue the merits of Prof. Stout's argument about whether or not, by law, shareholders are indeed the company's owners.

But I'm glad to see another voice raised against the simplistic "shareholder value" argument. Even in Friedman's original article, we can see a bigger picture. The real problem with Prof. Friedman's argument is that his gaze is so narrowly focused on the corporation that even as he mentions the broader society in which the corporation exists, he doesn't see it.

Because of course corporations don't exist in a vacuum. They are run by employees and serve customers, all of whom are not only consumers (in economic terms) but citizens (in broader political terms). They have social networks. They have ethical concerns and values. And, generally speaking, they want to live lives that reflect those concerns and values. Which means that the corporations for which they work should reflect those values and concerns, too.

The End of Workplace Hooky?!?

Raise your hand if you've ever played workplace hooky.

Wow -- that's a lot of hands up out there (mine included).

Well, the news for all of us is that the game's about to get a lot harder to play.

According to numerous reports published in the last few days (Caleb Garling at Wired Enterprise here, John Ribiero at PC Advisor here, Thomas Clayburn at InformationWeek here, and Quentin Hardy at the New York Times' Bits Blog here, among many others), Google Maps can now be used to find out exactly where you are.

For a fee of $15 per employee per month, administrators can use Google's Maps Coordinate (with software downloaded onto employee smartphones running Android 2.0 or higher) to determine where any employee is at any given time.

The positive side of this -- which is of course what Google emphasizes -- is that, in the event of an emergency, a telephone company (for example) could immediately locate its nearest technician and send them on. (Click here for a blogpost by Google senior product manager Daniel Chu explaining Maps Coordinate's features in detail.)

This isn't the first mobile employee-tracking service, but it appears to be the simplest and smartest, offering real-time updates. It can even track employees within a building (so stopping by your favorite boutique that's in the same building as your client's office just became trickier....).

We can all probably think of times where Maps Coordinate's capabilities would be extremely valuable (like the "find me a technician close by now" example).

Oh, but then there are the negatives.

Google claims that Maps Coordinate can be turned off by an employee (when he or she is leaving the office for home, for example). But what if you work for someone who doesn't believe in work-home boundaries?

What if you want to stop in the park to write up your notes from a client meeting? That's not really hooky -- you're still doing company work -- but all the administrator watching you knows is that you've been sitting in the park for the last 15 minutes. Highly suspicious behavior, wouldn't you say?

Doesn't this feel a little too "1984"-ish? Can you say, "Creepy"? I thought so.

The Times' Hardy quotes the chief executive of a game developing company: "How perfectly horrible! ...You can track who is stopping by whose cubicle? That's HR gone made. You should worry about what people are producing, not where they are producing it."

Easy for him to say, with assets that go home every night. If your company relies on the creative and/or intellectual skills of its employees to produce its product or service, you probably want to err on the side of giving them some leeway. But if you rely more on technical skills -- for example, the driving ability of your delivery team -- your profits may be much more, shall we say, geographically dependent. If I were RAPS (Rose-Anne's Pizza Supreme), with ten people out racing all over Fairfield County CT delivering my fabulous pies, knowing where they were at all times would matter to me. A lot.

But would the negative vibes I'd get back from my drivers be worth the extra dollars RAPS would earn? I'm not so sure.

One of the first lessons I learned as an employee is that when companies start nickel-and-diming their employees, employees nickel-and-dime right back. And the employees are usually better at the game, so it turns into dime-and-quartering. After all, employees can be just as "absent" at their desks as they are on the road....

The Shareholders Are Revolting! (I hope)

Another day, another (non-binding) shareholder revolt.

According to Julia Werdigier's article in today's New York Times, 59% of advertising giant WPP Group shareholders rejected chief Martin Sorrell's $10.5 million pay package.

After the vote, WPP chairman Philip Lader said that the vote would be taken seriously, but added, "Our board exercised its best judgment in the context of the company’s record year, international competitors and the executives’ performance."

As I've written before (re Citigroup shareholders' objections to chief executive officer Vikram Pandit's pay package), to consider a vote "seriously" is not the same as to abide by it.

Werdigier noted that "Mr. Sorrell’s total pay, including base salary and bonus, rose 60 percent in 2011 from £4.2 million in 2010, according to the WPP annual report. WPP’s share price fell 15 percent last year."

Since the shareholder votes are non-binding, it could be argued that they are simply an exercise in futility. But it could also be argued -- and this is what I will choose to believe for now -- that they are a harbinger of things to come.

In my inbox today, I found a new "Talkback" from CSR Wire, with an interview with Laura Berry, executive director of ICCR (Interfaith Council on Corporate Relations; organization website here).

ICCR has 40 years' experience in "corporate engagement". Sometimes it's been successful, sometimes it's been frustrated (and, no doubt, frustrating).

Berry thinks that things are beginning to move: "...Change has really started to accelerate in the last couple of years, but I think this year is really a watershed year. We're seeing an inflexion point for so much of our work. The shareholders are learning that they can demonstrate their outrage and the attention they are paying to value creation—and the lack thereof—through their votes on nonbinding shareholder proposals."

"Value creation" is what it's supposed to be all about. And that means for the whole company, not just the top brass.

The Sun Shines on Rich and Poor Alike

But only the rich can take economic advantage of it.

At least, that's the interesting conclusion raised by Diane Cardwell's article in today's New York Times on "solar fairness."

Here's the situation: in most communities, utility customers who have installed solar panels on their roofs can sell back excess energy to the local power company, thereby further lowering their own bills and reducing the power company's reliance on electricity generated by less-clean fuels like coal or gas. Sounds like a win-win, right?

But -- and it's a big "but" -- generated electricity itself is not the sole cost for an electrical utility: there's the whole cost of maintaining the grid, of moving the electricity from where it's generated (your roof) to where it's needed (my business, tens or even hundreds of miles away). That maintenance cost is pretty much fixed, but with more people becoming "generators", and being paid for it, there are fewer people among whom to share the cost of maintaining the system. Which means that each of them is going to end up paying more. (Sounds sort of like health-insurance pools, doesn't it? OK, I'm not going to go there. At least not today.)

So, as more people make the decision to switch to solar, whether for cost or for environmental friendliness, "the utilities not only lose valuable customers that help support the costs of the power grid but also have to pay them for the power they generate. Ultimately, the utilities say, the combination will lead to higher rate increases for everyone left on the traditional electric system."

Cardwell quotes one executive of the Edison Electric Institute (EEI), "Low-income customers can't put on solar panels -- let's be blunt. So why should a low-income customer have their rates go up for the benefit of someone who puts on a solar panel and wants to be credited the retail rate?"

The right to sell power back to the utility at near-retail rates dates from the time when solar installations were a lot more expensive than they are now, and consumer advocates, renewable energy proponents, and others were looking for ways to reduce the long payback period.

I generally look for the fine print in anything that the utility companies tell me. I certainly don't want to see us rely even more heavily on non-renewable energy sources. And I don't think that solar generators shouldn't be reimbursed for the energy they provide to the utility. But this is another of those interesting "unintended consequences" dilemmas.

We can all agree that access to electricity is an essential public good. We can generally agree that those who use the most should pay the most. But what happens when some of those big users essentially opt out? Is there some way to guarantee that we don't create another regressive burden on those least able to afford it?

I don't have good answers to my questions. But we need to come up with some, and soon.

Looking for a Level Playing Field

There are investors, and then there are investors, and if you need to ask which group you're in, you're not with the big boys (neither am I), and it's not even close to being a level playing field.

The news about the Facebook IPO has been unrelentingly bad, from the Nasdaq snafus that delayed initial trading to the stock's non-existent opening "bump" to the current allegations of unfair play.

To date, to be clear, no one at Facebook or at its lead underwriters (Morgan Stanley, Goldman Sachs, and JP Morgan) has been charged with any illegal behavior. But at very best, it's grossly unfair behavior.

Here's what happened, according to Henry Blodget's Business Insider blog, the Wall Street Journal's Gina Chon, Jenny Strasburg, and Anupreeta Das (article here; subscription required), Evelyn M. Rusli, Ben Protess, and Michael J. De La Merced at the New York Times' "DealBook" blog, and others:

A Facebook executive (or executives) told the underwriters' analysts that its second quarter results would fall short of the analysts' previous estimates. That information was conveyed to larger institutional investors, but not to everyone.

As Blodget writes, "The estimate cut appears to have influenced the investment decisions of at least some institutional investors, dampening their appetite for Facebook stock, and crucially, affecting the price at which they were willing to buy Facebook stock."

He goes on to term this uneven sharing of information as, "at best ... grossly unfair". At worst? It's "a violation of securities laws."

As the Times reporters note, "Under securities rules, a soon-to-be public company is permitted to provide “material” information to research analysts. But if that data is inconsistent with the company’s public prospectus, the issuer must revise the regulatory filing."

The Securities and Exchange Commission has apparently opened an inquiry, and Congress may do the same. While these investigations may well show that no laws have been broken -- just "business as usual" -- it makes it clearer than ever that the institutional investors operate with advantages that retail investors can never match.

If it's not illegal, it still stinks.

Dimon's in the Rough

Like many of you, I suspect, I've been following the JP Morgan Chase story with a certain amount of "Dimonfreude" (oh how I wish I could take credit for that coinage!).

It's true that the $2 billion loss won't materially affect the bank's solid position (the bank is still expected to make more than twice that amount this quarter). But it certainly has shaken Jamie Dimon's position as the "America's least hated banker", as he was termed in a December 2010 New York Times profile by Roger Lowenstein.

Questions about the "London whale" trading activity arose in April. and Dimon dismissed the concerns as a "tempest in a teapot".

More recently, Dimon has been quoted as saying that the trade -- part of a hedging strategy to protect the bank from big losses -- was a "terrible egregious mistake".

But the disastrous outcome shouldn't have been that big a surprise -- Jessica Silver-Greenberg and Nelson D. Schwartz report in today's New York Times that for months, if not years, "risk managers and some senior investment bankers raised concerns that the bank was making increasingly large investments involving complex trades that were hard to understand."

What's the solution to the endless series of banking disasters and near-disasters?

Joe Nocera argues in today's Times that banking needs to be "boring" again, and regulation is the way to accomplish that:

Which brings us, inevitably, to the Volcker Rule, that part of the financial reform law intended to prevent banks from doing what JPMorgan was doing: making risky bets for its own account. JPMorgan executives have insisted in recent days that the London trades did not violate the Volcker Rule (which, for the record, has not yet taken effect). But that is only because the banks have lobbied to protect their ability to hedge entire portfolios. A letter to regulators written in February by a top JPMorgan lobbyist — a letter denouncing the potential effects of a strictly interpreted Volcker Rule — describes a trade that sounds exactly like the ones that have just caused all the problems. Such trades need to be preserved, the lobbyist argues.  

It shouldn't surprise you that I'm in Nocera's camp on this, although I don't think he goes far enough.

I have come to the conclusion that if corporations are persons, then regulation is their superego.

People -- even people working and managing corporations! -- have consciences, but corporations don't. They're sociopaths, if you like, lacking that awareness of others' selfhood that makes us fully human. Since corporations don't have an internal compass, we have to provide them with an external one.

What I'd like to see is a new Glass-Steagall Act, fully separating high-risk investment banks from traditional commercial banks. Will I get it? Probably not, given how actively the banks have been lobbying Congress.

Don't Rock the Boat, Board! (Except: You Should)

Last July, when the News of the World scandal was unfurling in all of its non-glory of phone hacking, computer hacking, police bribes, and the like, I wrote a post about how Rupert Murdoch had thrown the NotW staff under the bus -- except for the ones who were really responsible (including Rupert himself, but we couldn't expect much of a mea culpa from him, could we?).

I closed the post by asking what the News Corp. board would do, as they are, ultimately, responsible. When would they hold Murdoch to account for his company's failings?

Today's New York Times has a deliciously acerbic answer: Not anytime soon, thank you very much. (Article, by David Carr, here)

As Carr writes, "Being a board member of News Corporation is not a bad gig; it pays over $200,000 a year and requires lifting nothing heavier than a rubber stamp."

The board is independent only in name, and barely in that (board members are listed here). There are a bunch of Murdochs there, plus others who may at first glance appear to be independent, but whose connections to the family just aren't immediately obvious:

• Natalie Bancroft, an opera singer. Opera singer? Oh yes, and a member of the Bancroft family, that made a lot of money selling Dow Jones (and its crown jewel, The Wall Street Journal) to News Corp.
• Viet Dinh, a law professor at Georgetown. Also: a former Bush administration official, and godfather to Lachlan Murdoch's son.
• Sir Roderick Eddington, of JP Morgan. Formerly: a deputy chairman of a News Corp. division.
• Andrew S. B. Knight, of J Rothschild Capital Management Ltd. Another former senior News Corp. executive.
• And so on.

How far do you think these people will rock the Murdoch boat?

Isn't it time for genuinely independent boards? Past time, I'd say.

Thankfully, Mr. Conard, It's Not Just About the Money

Despite economists' fondness for complicated equations and computer models, economics is not a true, hard science. And even most economists will admit that.

Which is why you can end up with completely different world-views, each backed by its own set of economists-with-equations.

On one side are the Horatio Alger stories of boys who, through sheer grit, determination, smarts, and courage, lifted themselves out of the mires of poverty to great personal success. Call it the "Bootstraps Tribe".

On the other side are those, like Elizabeth Warren, current candidate for US Senator for Massachusetts, who believes that there is "nobody in this country who got rich on his own." Call this the "Hanging Together Tribe". (I'm playing with a quote attributed to Ben Franklin, at the time of the signing of the Declaration of Independence: "We must all hang together, or assuredly we shall all hang separately.")

I wrote about these two positions just a few days ago, after reading an AlterNet review of a new book, The Self-Made Myth: And the Truth About How Government Helps Individuals and Businesses Succeed.

The other perspective just got a lengthy write-up in this Sunday's New York Times Magazine, in which author Adam Davidson interviews retired Bain Capital executive Edward Conard (full article, here). Conard has just written a book himself, to be published next month by Portfolio: Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong.

Conard makes a strong case for why inequality is good (more investors making investments in improvements that make all our lives better). The value of investment to society at large is, of course, one with which most economists would agree. As Davidson notes,

Dean Baker, a prominent progressive economist with the Center for Economic and Policy Research, says that most economists believe society often benefits from investments by the wealthy. Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value. The Google founder Sergey Brin might be very rich, but the world is far richer than he is because of Google. 

Conard considers the 5-to-1 ratio too low, and makes a case for 20-to-1. In other words, "we should all appreciate the vast wealth of others more, because we’re benefiting, proportionally, from it."

And it's not just the investors behind products like laptop computers or services like Google who benefit society as a whole -- it's the investment banks and other financial institutions who make the system more efficient. Conard apparently doesn't agree that complex instruments like credit-default swaps were key elements in the 2008 financial crisis: they were "fundamentally sound" and "served a market need for the world's most sophisticated investors."

I could go on and on, but you should read the article for yourself (I haven't read the book; unlike Davidson, I can't get pre-publication copies, but I do intend to once it's out. I think I'll wait, however, until my library has it -- I don't think Mr. Conard needs my royalty payment....).

In any event: my biggest problem with Conard's position, at least as articulated in the Times article, is that he seems to believe that it's all about the money. In other words, if you can't monetize it, it doesn't have value. So Wall Street needs those outsize salaries because otherwise smart, talented people might go off and do something dumb, like be art-history majors (his choice of pejorative, not mine).

Like Conard, I went to business school in the mid-'80s (me, Kellogg / Northwestern; him, Harvard), so I recognize a lot of the jargon. And there's value to some of it. Capital markets are incredibly efficient.

The problem is, they're not perfectly efficient. Davidson notes, "Nearly every economist I spoke with said that Conard has too much faith in the market’s ability to reward only those who create real value."

Moreover, markets don't know how to account for things that aren't monetized (for example, a housewife's or househusband's contributions). They don't know how to correct for rent-seeking -- Davidson does ask Conard about rent-seeking (the idea that people, or companies, get rich because of their power or access to power, rather than their ideas), and he poo-poos its presence in our economy.

And I found Conard's coldly logical approach to everything (including choosing a wife!) chilling. I can't be sure that he's not right, at least on some points, but his world is not one I would ever choose to live in. And I wouldn't even wish my worst enemy there:

There's no place for levity, for warmth, for non-cost-effective rumination in Conard's world. As Davidson writes, "The world Conard describes too often feels grim and soulless, one in which art and romance and the nonremunerative satisfactions of a simpler life are invisible." Davidson quotes Conard:

God didn’t create the universe so that talented people would be happy. It’s not beautiful. It’s hard work. It’s responsibility and deadlines, working till 11 o’clock at night when you want to watch your baby and be with your wife. It’s not serenity and beauty.

I'm not one to say exactly why God created the universe. But I think that God created us to flourish. In the words of early Church father Iranaeus, "The glory of God is a human being fully alive."

Conard doesn't seem to understand that some people aren't motivated just by money, that some people would flourish most completely in professions that would give them time to create something new and valuable (art-history scholarship! painting! theology! dance!) that won't be wildly remunerated. And by concentrating so much wealth in the hands of a few, I fear he's condemning the poor to endless poverty, and helping the middle-class slide back into poverty. His wealth may improve society as a whole -- but does it do anything for the individual struggling to get by?

I can't help contrasting Conard's concentrate-the-wealth formula with the spread-it-around generosity of the Self-Made Myth's perspective. I'll close with a quote from a foreword to that book, written by an attorney (Conard doesn't like them much -- smart but not risk-takers), named Bill Gates, Sr.:

As an attorney for almost 50 years, I worked closely with entrepreneurs and saw how their business enterprises are boosted by government efforts to create a stable and positive business environment. I also had a front-row seat for the creation and the growth of my son's business (Microsoft), and I observed the many ways our country's publicly supported infrastructure, tax laws, government-funded research, education, patent protection, and so forth helped the company grow.... [If] you had plunked Bill down in some developing country, even with all of his intelligence, creativity, and hard work, the company would have gone nowhere. Being born in this country is the ingredient that most reliably determines whether a person has the opportunity to become wealthy.

Conard would say that "[t]echnology and global competition have made it more important than ever that the United States remain the world’s most productive, risk-taking, success-rewarding society." Like many conservatives, he underestimates the importance of governmental infrastructure (trust in the rule of law; fairness in the marketplace, guaranteed by enforced regulations; roads, rails, airports, and the rest). Would Bill Gates Jr. really have been able to make Microsoft the powerhouse it is today if he'd been born in, say, Zaire?

I expect that Conard also underestimates the "step up" he had by growing up white, male, and middle-class, with parents who encouraged his educational attainments. Not to mention a little bit of luck.

Get Rid of the Gimmes (redux)

I've written before about the problem of "gimmes" in the medical / pharmaceutical industry (see here and here, for example), but I know that lots of people still have trouble believing that a pen or a coffee cup or lunch for the office can really affect whether doctors will prescribe Drug A or Drug Q.

So I was happy this morning to hear a further discussion of the issue on Connecticut Public Radio's program, "Where We Live" (audio download, here). Should drug company sales reps be allowed to make presentations, for example, to medical students?

Give it a listen; it's a fascinating discussion.

Will No One Rid Us of This Turbulent Myth?

While I don't generally advocate for violence, I might make an exception in this case.

I consider Horatio Alger, and the other boy-who-makes-good characters like him, the most dangerous American myth around (I touched on this issue about two years ago, when pleading for my taxes to be raised).

As I wrote then, the "bootstraps myth" -- the idea that, by your own efforts alone, you can propel yourself from deepest poverty to greatest wealth -- is embedded in American psychology, and it's (a) a myth, and (b) a dangerous one. Why? Because no one makes it entirely on his or her own. There are scores of individuals who helped propel Young Mr. Alger onward, and there are institutions of law and government (not least, the very concept of "rule of law") that further paved the way for his success.

So I was cheered last September, when Elizabeth Warren, now the Democratic candidate for the U.S. Senate in Massachusetts, made a similar point, which promptly whizzed around the Internet (or at least, the progressive portions thereof). Speaking to a group of supporters (CBS News report by Lucy Madison,  here), she said: 

There is nobody in this country who got rich on his own. Nobody.

You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along. 

I was cheered by her remarks (and even -- full disclosure -- sent a small check to support her candidacy; as a resident of CT, I can't vote for her ... although I briefly considered moving!), but didn't write a blog post about it, as this does not aim to be a political forum.

What prompts this post is a review by Sara Robinson in today's Salon (re-posted from AlterNet) of a new book by Brian Miller and Mike Lapham, The Self-Made Myth: The Truth About How Government Helps Individuals and Businesses Succeed.

Miller is executive director of United for a Fair Economy, and Lapham is a director of UFE's Responsible Wealth project (which I mentioned in the April 2010 post). Together, Robinson reports, they "argue that the self-made myth absolves our economic leaders from doing anything about inequality, frames fair wages as extortion from deserving producers, and turns the social safety net into a moral hazard that can only promote laziness and sloth."

They make a strong case that, as Warren said, "nobody ... got rich on his own." From interviews with a range of wealthy individuals, Miller and Lapham point to several key elements to "self-made" success, including:

• A good, and often public, high school and university education;
• The steady support of the Small Business Administration and other government agencies;
• A strong regulatory environment;
• The Internet, created by government investment;
• A fair (and regulated!) marketplace to issue and trade stock;
• Enforceable copyright and trademark laws;
• The (relatively) robust network of roads, rails, and airports; and -- last but certainly not least -- 
• Luck and timing.

So, please: Can we kill off Horatio Alger?