Wednesday, December 11, 2013

Where There's Smoke, There's Fire (Usually. But Not Always.)

I try not to leap to conclusions about ethically questionable behavior. Sometimes, there's a perfectly simple, perfectly reasonable, explanation for something that looks like (for example) collusion.

It's just that I can't think of one, off the top of my head.

According to a Brian X. Chen article in today's New York Times, New York's attorney general is investigating why a "kill switch" hasn't been incorporated into smartphones.

Apparently, the major carriers (the AG is asking for "assistance" from AT&T, Verizon Wireless, Sprint, T-Mobile US, and US Cellular) have been reluctant to add the feature that Samsung has developed for its phones, which "would have allowed users to 'brick' their phones, or disable the devices remotely, to discourage criminals from stealing them."

Smartphone and tablet thefts have become increasingly popular, accounting for more than 14% of all crimes reported in New York last year.

Back at the dawn of time, a.k.a. the '80s and '90s, when I worked in the automotive industry, stealing high-end car radios was the popular crime of opportunity. Automakers and their sound-system suppliers developed removable radios that would be "bricked" (we didn't use the term, but that was the effect) if the correct code was not entered when the radio was powered up. And, surprise: radio thefts declined dramatically.

So why would wireless companies be reluctant to see this security feature added?

A Sprint  representative said that the company was "working with" vendors to come up with a solution, and Verizon Wireless said that "it would support an antitheft tool for Android phones if and when a manufacturer came up with a solution." Hmmm.....

Meanwhile, San Francisco's district attorney said that he had reviewed emails between a Samsung executive and a software developer, which "implied that the carriers were concerned that the software would eat into the profit they made from the insurance programs that many consumers buy to cover lost or stolen phones."

Doesn't that look like a little flame in all that smoke?

Thursday, December 5, 2013

Today's Least Surprising Headline. Sigh.

Today's New York Times carries a Shaila Dewan article with this headline: "Banks Fail to Comply With Parts of Mortgage Settlement, Report Says"

Who here is surprised? Not me.

According to the article, the court-appointment monitor of the settlement requirements found that Citibank, Bank of America, and JPMorgan Chase all failed several key tests, meaning that "some borrowers are still trapped in a tangle of red tape and errors as they try to save their homes from foreclosure."

(For those of you who -- like me -- have trouble remembering what this deal, reached early in 2012, involved, click here for a basic primer.)

Early on, there was a lot of skepticism as to how well the deal would really work out for consumers, as opposed to the banks. As the Times' Gretchen Morgenson wrote,
There’s no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file. 

(Click here for her full February 2012 analysis)

Looks like Gretchen was right.

While banks appear to have fulfilled "the bulk" of their financial obligations ahead of schedule, they're doing far less well on the improvement "in areas like ensuring that a loan was actually delinquent at the time that a foreclosure was initiated, and that the homeowner had been given accurate information in writing, and notifying homeowners of missing documents in their file in a timely manner."

Dewan noted that banks can be fined "up to $5 million if they do not improve their performance on a failed test." But what's $5 million to these guys?

Chump change.

Wednesday, November 20, 2013

Billions and Billions in Fines. Sort Of.

With great fanfare, the Justice Department has announced a settlement with JP Morgan Chase, bringing a close to a batch of civil investigations on payment of a "record" $13 billion fine.

$13 billion sounds like a boatload of bucks to me. And it is.: "The settlement amounts to roughly half the bank's annual profit," report Ben Protess and Jessica Silver-Greenberg in a DealBook piece in today's New York Times. The writers quote US Attorney General Eric Holder:
The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over. No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.

But the "size and scope" of the settlement isn't quite as rich as it appears at first.

For one thing, it includes a $4 billion settlement reached earlier this fall with the Federal Housing Finance Agency. So it's really a $9 billion settlement.

Still pretty good, right? An acknowledgement that things got crazy out of whack, right? Not really.

As Matthew Yglesias points out in his article for Slate, "just $2 billion takes the form of an actual fine." (I like that "just"!) As for the rest: "The $7 billion in other compensatory payments Morgan will have to make is tax deductible, which assuming they've got smart accountants and lawyers working for them will reduce the real pain by somewhere in the $2-$3 billion range."

And as David Dayen writes for Salon (full article, here),

Nearly half of the [$9 billion] figure comes in the form of “mortgage relief,” which an independent monitor (and what’s so independent about a monitor chosen by the bank?) has four years to distribute. Any time you extend the time horizon of a penalty, you’re reducing its real value.


The government had earlier claimed that it was holding out for an admission of guilt, but in the final statement, JP Morgan Chase admitted to no violations of law. Thankfully, Justice did get a concession that the bank would not try to recoup any of the $13 billion from the Federal Deposit Insurance Corporation (yes, you read that right. New definition of chutzpah!)

Tony West, a senior Justice Department official who worked on this "deal", apparently believes that steep fines will discourage repeat bad behavior.

I wish I thought he was right.

Instead, I'll agree with Bart Naylor, a policy advocate at Public Citizen, whom Protess and Silver-Greenberg quote: "Unless you hold the executives accountable, it really is just the cost of doing business."

Thursday, November 14, 2013

Truth or Falsies?

In the greater scheme of things, the truth -- or lack thereof -- of a cosmetics advertisement doesn't rank very high.

Especially when most of us know how faked they are, Photoshopped to the nth degree. I buy / use cosmetics and not since I was 13 or thereabouts have I thought, If I use that brand of mascara, I'll look exactly like that gorgeous model.

But still.

Today's New York Times carries an article by Andrew Adam Newman about the truth (or lack thereof) of mascara ads. For those of you who aren't regular cosmetics buyers: mascara ads all look alike. They all have close-up photographs of impossibly beautiful women (almost all Caucasian), with amazing eyelashes. Then they have technobabble about the new highly-engineered applicator or the new mascara formulation to assure you that you will have the fattest, longest, darkest lashes ever.

But the most important part of the picture is that all the women in these ads have lash extensions (aka falsies). It's not physically possible to get that batwing look without them. Most mascara ads get around this vexing little problem with tiny type at the bottom of the ad along the lines of "model styled with lash inserts".

Me, I hate small type. I know it's where the important stuff is hidden, and I hate having to hunt for it. (One of the few things I remember from my business-school accounting classes is: Always read the footnotes; that's where the important stuff lives.)

Newman's article is a follow-up on a decision issued in September by the National Advertising Division (NAD) that Maybelline needed to 'fess up, in the body of the ad, about their use of false lashes in advertisements for "Volum' Express the Rocket" mascara. The company could, NAD decided, continue to claim such important qualities as "8X Bigger. Smoother. Even." but the lash extensions either had to be peeled off or acknowledged. (Click here for the NAD press release) Maybelline is appealing the NAD decision to the National Advertising Review Board.

This isn't the first time, as Newman points out, that mascara ads have gotten a, you should pardon the expression, black eye. For example, in 2011, Procter & Gamble agreed to pull an ad for a CoverGirl brand mascara whose model's lashes had been "enhanced" in post-production.

But my favorite quote from the article is from NAD director Andrea Levine, who said simply, "What the big type says, the small type can't take away."

If you think about it, those are words for all of us to live by.

Tuesday, November 12, 2013

Carrot? Stick? Carrot? Stick? Yes.

We all know that both carrots and sticks can be effective ways of getting people to behave as we want them to. The question is, Which is better?

The answer, of course, is: It depends.

Most individuals respond better to carrots than to sticks, but if you're going to start incentivizing, you need to be sure that you're incentivizing the right thing.

Today's New York Times "DealBook" section has a fascinating article by financial services strategy consultant Doug Steiner, who argues that "minor, even imperceptible changes to workflow can significantly affect honesty".

For example:
....Financial institutions rely on their lawyers to determine what traders can “get away with.” Legal opinions that seem to countenance aggressive trading can reinforce troubling behavior on the part of traders and their firms. Showing lawyers the profound influence they have on trading action might dissuade them from endorsing or seeming to endorse questionable decisions.

In other words, encourage your people to do the right thing, rather than telling them how close to the wrong thing they can go.

Steiner bases his proposals on research that behavioral economists have been doing in recent years (Steiner himself works for a behavioral economics firm), particularly the work of his academic partners, the University of Toronto's Nina Mazer and Duke University's Dan Ariely (I have quoted Ariely's work previously -- here -- when I argued for clear, strict regulation, because "what we do best is delude ourselves").

But it's not enough to nudge. In addition to encouraging your people to do the right thing, you have to make it clear that doing the wrong thing will have real, negative consequences. And this is where many companies fail spectacularly. As one commentator to Steiner's article wrote:
In each of the situations [of observed malfeasance], when found out, the decision taken by upper management was to ‘quietly’ let the employee go. Charges were never laid, nor the rest of the employees advised the details of what had transpired. By quietly sweeping these transgressions under the rug and not making them public to the other employees, management inadvertently sent out the message, that it was okay to steal or cheat.

I've seen worse: the company that punishes everyone for the misdeeds of an individual, rather than firing the offending employee.

But the effect is the same: It must be OK to do what "everyone else" is doing.

Wednesday, November 6, 2013

Good News, Bad News

In March 2012, I wrote that it looked as though the many investors -- some of them very small investors -- who lost everything in the collapse of MF Global just might get their money back.

It's taken a while, but indeed it now looks as though it's happening.

Today's New York Times carries a DealBook column by Ben Protess (who covered much of the disaster that was MF Global) reporting that MF Global customers are "now all but assured" of receiving "every last penny" of the $1.6 billion that, shall we say, vanished from customer accounts.

Many of the firm's original customers sold their claims to banks and investment firms, unsure that they would ever see the funds owed to them. US customers have already received nearly everything that they lost, but overseas customers are the ones who will really benefit, having to date recovered only about three-quarters of their money.

The MF Global story never got as much coverage as I thought it deserved. As I wrote exactly two years ago this month, MF Global was a brokerage firm whose chairman and chief executive officer, Jon S. Corzine, was a former Goldman Sachs partner, former New Jersey governor, and former US Senator from New Jersey. The firm made a number of bad bets, and, while desperately trying to find a buyer, made the unbelievably bad (not to mention illegal) decision to raid customers' accounts to try to stay afloat. In the blink of an eye, $1.6 billion in customer money disappeared. Corzine's resume got the company's downfall some press, and while there was a lot of commentary about the absolute no-no of using customers' money to try to prop up the company, few people seemed to care about the fact that -- while the business was imploding -- Corzine was trying to walk away with a $12.1 million severance package. Moreover, as many as 23 senior MF Global may have received six-figure bonuses for "helping" with the bankruptcy investigation.

There's no question that the return of customer money, taken illegally, is good news. The bad news, as far as I'm concerned, is that Corzine and his cronies got away with it.

Yes, Corzine is still facing private lawsuits and civil charges (filed in June by the Commodity Futures Trading Commission, click here for a Protess DealBook New York Times story from June of this year). But really? He got away with it. Completely.

Thursday, October 17, 2013

Just What's In That Plastic Container? And Why?

Here's another "what if" scenario to think about:

What if ... you had been manufacturing a product, successfully, profitably, for a while, and then ... studies start to indicate that your product is toxic in the long term. (We'll assume that if it were toxic in the short term, you would have noticed and stopped manufacture.)

It's not that unusual a story. Everyone knows how long it took to figure out that cigarettes were deeply toxic. In this 1930 ad reproduced in a 2008 New York Times article, the headline reads: "20,679 Physicians Say 'Luckies are less irritating' [because] 'it's toasted'". I mean, Yikes.

What's more disturbing is how viciously Big Tobacco fought the scientific evidence that pointed out smoking's dangers. As early as the 1940s, evidence was accumulating that smoking was a significant cause of cancer. And that evidence was well-known and acknowledged within the tobacco companies, even as they resisted all efforts to limit their advertising and marketing claims. (Click here for a long, but fascinating / depressing, 2002 article from the BMJ, "Failed promises of the cigarette industry and its effect on consumer misperceptions about the health risks of smoking")

It's easy for us, from this distance, to say what the tobacco companies should have done.

What about plastics companies today? Not to mention pesticide companies, toy companies, cosmetics companies, and others.

New York Times columnist Nicholas Kristof has a question today: "What are the lessons from years of lead poisoning?" (Full column, here) The lead industry, like the tobacco industry, fought long and hard the efforts to regulate and limit consumer exposure to lead (in paint, in gasoline, etc.). And Kristof considers the chemical industry to be today's lead industry.

His concerns are focused on "endocrine disruptors", chemicals that mimic the body's own hormones. They're found in everything. While there is still debate about how much damage these chemicals cause, there's little debate that they cause some. Kristof quotes from a 2012 World Health Organization / United Nations report:
Exposure to EDC's [Endocrine Disrupting Chemicals] during fetal development and puberty plays a role in the increased incidences of reproductive diseases, endocrine-related cancers, behavioral and learning problems, including ADHD, infections, asthma, and perhaps obesity and diabetes in humans.

The WHO is concerned that

Close to 800 chemicals are known or suspected to be capable of interfering with hormone receptors, hormone synthesis or hormone conversion. However, only a small fraction of these chemicals have been investigated in tests capable of identifying overt endocrine effects in intact organisms. 

Really? In fact, "The vast majority of chemicals in current commercial use have not been tested at all."

Kristof notes that the chemical industry "spent $55 million lobbying last year, twice the figure a decade earlier". So don't expect these chemicals to be more heavily regulated any time soon.

The battle is a sneaky one, too, in part because no one knows exactly how dangerous these chemicals are. Kristof notes,
This summer 18 scientists wrote a scathing letter railing against European Union regulations of endocrine disruptors. That underscored the genuine scientific uncertainty about risks -- until Environmental Health News showed that 17 of the 18  have conflicts of interests, such as receiving money from the chemical industry. Meanwhile, more than 140 other scientists followed up with their own open letters denouncing the original 18 and warning that endocrine disruptors do indeed constitute a risk.

Me, I'd rather that chemicals were regulated first, until we were sure that they're safe (within whatever reasonable boundaries you want to use as the definition of "safe", since of course nothing is 100% safe under all circumstances). But that's not going to happen here.

But what to do when scientists are themselves uncertain? Kristof wonders, too, and writes:
But I'm struck that many experts in endocrinology, toxicology or pediatrics aren't waiting for regulatory changes. They don't heat food in plastic containers, they reduce their use of plastic water bottles, and they try to give their kids organic foods to reduce exposure to pesticides. 
So I, too, am tossing the plastic containers, drinking my water from the tap, and continuing to spend a little more for organic.

But I'm especially struck by Kristof's closing question to the big chemical companies: "Are you really going to follow the model of tobacco and lead and fight regulation every step of the way, once more risking our children's futures?"

Well, are you?

Friday, October 4, 2013

"See No Evil, Face No Liability"

Today's headline is lifted from New York Times finance columnist Floyd Norris' piece about Ponzi schemes. While a single individual may be behind a particular scheme, the money raised has to pass through a bank. As Norris writes,
In such a scheme, money that is supposed to be invested is really used to line the pockets of the Ponzi promoter or to pay previous investors. A lot of money has to flow through bank accounts, and it flows in ways that differ from what the promoter tells investors is happening. Banks are in a unique position to notice what is going on before the money is all gone. 

But do the banks notice? And even if they do notice, do they have to take action, or do they have plausible deniability?

Generally speaking, the courts have sided with the banks. Hence, "See no evil, face no liability." So there's actually an incentive to turn away and not look too carefully. Sigh.
If regulators do not go after banks, the banks are usually home free. Some bankruptcy trustees for collapsed Ponzi schemes have tried to sue banks to recover money for defrauded investors only to have judges rule that because the trustee is standing in the shoes of the fraudster, such suits are not permitted. But when investors try to sue the banks, they can run up against rules limiting class-action suits and a Supreme Court decision saying that only the government — not victims — can bring suits contending that a bank, or anyone else, aided and abetted a fraud.  

So Norris is interested -- and so am I -- in a joint regulatory action filed by the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Financial Crimes Enforcement Network (part of Treasury), in which a total of $52.5 million in fines was levied against TD Bank for "failure to file suspicious activity reports related to the massive Ponzi scheme orchestrated by Florida attorney Scott Rothstein." A .pdf of the 23 Sept press release can be found here.

The press release quotes Financial Crimes Enforcement Network director Jennifer Shasky Calvery: "In the face of repeated alerts on Mr. Rothstein's accounts by the Bank's anti-money laundering surveillance software over an 18 month period, the Bank did not do enough to prevent the pain and financial suffering of innocent investors."

Mr. Rothstein's $1.2 billion Ponzi scheme (he has pleaded guilty to most charges and is currently serving a 50-year sentence) was more than usually egregious. And so was TD Bank's involvement.
TD Bank initially disclaimed any responsibility, and it bitterly fought a suit filed by Coquina Investments, which lost more than $30 million in the scheme. The bank is appealing a jury verdict that ordered it to pay Coquina $67 million in damages, including $35 million in punitive damages.... It later turned out that lawyers for TD had withheld evidence in the case and misled the judge in a number of instances. As punishment, the judge ordered the bank to pay Coquina’s legal fees. 

The bank has since settled other cases filed by victims. Altogether, the mess has cost it $500 million, according to a report in The South Florida Business Journal, although the bank declined to confirm the figure.

Now Norris is concerned -- and so am I -- that the joint SEC and FinCEN action does not represent "a new attitude on the part of regulators to try to force banks to pay attention to possible Ponzi schemes" but only a response to a particularly over-the-top "mess".

Monday, September 9, 2013

Happy Crash Anniversary. Sort of.

It's been five years since the financial markets nearly melted down, and threatened to take the whole US economy down with it. Feel like celebrating the anniversary?

I don't, either.

The recovery has been unexciting, to say the least, and none of the big players have gone to jail. The best the Justice Department seems to be able to do is go after little fish. (I'm talkin' 'bout you, Fabulous Fab!)

In fact, every since Fabrice Tourre, formerly of Goldman Sachs, was found liable for fraud early last month (click here for an example of the numerous news accounts), I've been thinking about the ones that got away. (I'm thinkin' 'bout you, Jamie Dimon!)

What's changed since 2008? What did we learn from the fall of Lehman Brothers? Not much. In Robert Reich's words for Salon, the biggest banks are still "too big to fail, too big to jail, too big to curtail". (click here for full essay)

Good way to start your Monday, right?

The New York Times' Ben Protess and Susanne Craig have an excellent "DealBook" report in today's paper detailing the Security and Exchange Commission's attempts to build a case against senior executives.

To be fair, the SEC has brought several civil cases, and has extracted multi-million dollar settlements from several banks. And yet....
Yet the continued absence of parallel criminal cases against top executives reflects the challenge of white-collar investigations in which prosecutors struggle to pinpoint where risky dealings cross the line into illegality. When the evidence is murky, prosecutors sometimes hesitate to charge top executives, who have the money to fight rather than settle.

“It’s not like a murder case, where you have a dead body and you know a crime has been committed,” said Rita M. Glavin, a former federal prosecutor who is now a defense lawyer at Seward & Kissel.
It is hard to prove the corpus delecti (literally, the body of the crime) - the legal principle that a crime has been committed before a person can be found guilty of committing it. The areas being investigated can be very very grey.

And it's why the big guns are so careful to be well protected.

As James Kwak wrote in the Atlantic shortly after the Tourre decision (full story, here):
When you tell smart, ambitious people that their job is to produce, they will produce, no matter what it takes. And I don't mean this is in an evil, Tony Soprano, "fix the problem" sort of way. Even if you shade the truth a bit, you're not committing murder. There's a lot to take comfort in: You're dealing with supposedly sophisticated professionals, it's all other people's money (the nice fund investor you're talking to isn't betting his house), and it's quite possible the deal will turn out fine (for the person you're defrauding) anyway.

For the real executives, the optimal strategy is simple: hire people whose ambition outweighs their scrupulousness, measure them by results, and let incentives take care of the rest. Oh, and give them the best securities regulation training money can buy, from the most reputable law firm around, so that you can't be sued for negligent supervision down the line. If things blow up and you're ever summoned to Congress, just say you put your clients' interests first and you had no idea that people were breaking the law.

Because you really didn't know--not for sure, at least. All you did was put them in a position where, you knew, it was likely that some were breaking the law. And you can take that plausible deniability to the bank.

Which, of course, is what they did.

Yeah, I'm depressed too.

Thursday, August 29, 2013

If You Tell a Lie in a Forest, and No One Hears, Is It Really a Lie?

I don't know, but good luck finding a forest where no one else can hear you any more. Or see you, on the branch-mounted spycam.

On the Internet, the New Yorker cartoon famously posited, Nobody knows you're a dog.

But now it seems that, while they may not have known it before, sooner or later, your doggy-ness will be outed.

This month's Atlantic has a great short article by Megan Garber on "The Way We Lie Now." She notes that "Technology makes it easier than ever to play fast and loose with the truth -- but easier than ever to get caught."

While no Luddite, I've been concerned that the distance created by the Internet makes it easier to play "fast and loose" with trust. It's hard to lie to a close friend, face to face. It's a lot easier in an email or a Facebook post. Garber has interviewed Cornell professor Jeff Hancock, who has studied dishonesty, and he agrees that "We tend to have an easier time lying ...when we're spatially distant from the people we're interacting with."

Of course, there are lies and lies. "Does this dress make me look fat?" almost begs for a lie. "I'll be there in two minutes" (when you're still 15 minutes away) is categorically different from "Money? What money?" (when you've pilfered the cash register).

But the good news, Garber notes, is that while it's easier than ever to lie, it's also easier than ever to get caught:
More than ever before, our communications leave trails.... Which means that the claims we make about ourselves, from the big to the banal, can, as never before, be cross-referenced against reality. Stuck in traffic? This real-time map suggests otherwise. Never got the e-mail? The sender's read receipt begs to differ. You're 25? That was true, a Google search says -- five years ago.
I was a terrible liar as a child -- "terrible" as in "did it all the time", and "terrible" as in "not very good at it". Eventually, I discovered, as many of us do, that it's easier to tell the truth, mostly because it's easier to remember the truth than to remember which lie you told to whom.

It's nice to know that the Internet's going to back me up on this.

Monday, August 19, 2013

Another "Surprising" Headline about Conflicts of Interest

Today's New York Times has a brief article by Robert Pear with one of the most un-surprising headlines I can remember: "Doctors Who Profit From Radiation Prescribe It More Often, Study Finds".

Well, sure.

That doesn't mean I"m happy about it, of course.

I've written before about how easily humans are swayed, even by a pharmaceutical sales rep's "gimme" pens (full post, here), and about how hard it can be to see a conflict of interest, especially from the inside (full post, here), so I do sympathize... up to a point.

Today's article draws from a July 2013 report from the Government Accounting Office (full report, in .pdf format, here) on the recommendation of doctors for IMRT (Intensity-Modulated Radiation Therapy), a relatively common and costly prostate-cancer treatment.

The bottom line: "Doctors who have a financial interest in radiation treatment centers are much more likely to prescribe such treatments for patients with prostate cancer."

The report stated that,
The number of Medicare prostate cancer... IMRT services performed by self-referring groups increased rapidly, while declining for non-self referring groups from 2006 to 2010.... The growth in services performed by self-referring groups was due entirely to limited specialty groups -- groups comprised of urologists and a small number of other specialties -- rather than multispecialty groups.
The report explains that "self-referral" means that "a provider refers patients to entities in which the provider or the provider's family members have a financial interest", and goes on to explain that the Medicare beneficiaries are generally unaware of the financial connection.

For those of us on the outside, it isn't hard to see the conflict of interest.

But I can understand how easy it might be to overlook from the inside. A group of urologists may purchase the radiation therapy equipment, and honestly believe that their brand-new machine is better than anyone else's in town.

And it's possible that it is.

But wouldn't you want to know that the bills for the machine's use will eventually work their way back to the doctor who recommended that treatment center? (The GAO report recommends that "Congress should consider directing the Secretary of Health and Human Services require providers to disclose their financial interests in IMRT to their patients.")

Disclosure is always a good first step. But it shouldn't be the only step. It's valuable to try to step outside of one's own perspective whenever possible: How will this action look to someone who doesn't know me?

Monday, August 12, 2013

It Take More than Not Doing Wrong to Do Right

We often think of ethics as "doing the right thing". In other words, we think of it as resisting the temptation to do wrong: somebody drops a $20 bill as they're stepping away from a cash register, and, instead of pocketing it quietly ourselves, we call out to the person and return the lost money.

But I've been thinking about the flip side of ethics lately. In one version of the Episcopal Church's communal confession of sin, congregants ask God for forgiveness not only because "we have done those things which we ought not to have done", but also because "we have left undone those things which we ought to have done."

Just the other day, I drove right past an older, heavy-set woman walking slowly up a hill, laden with packages. How hard would it have been for me to stop and offer her a ride? I didn't have anyone else in the car; I wasn't late for any appointment. It would have been easy. And I didn't do it.

I've been thinking about leaving things "undone" since reading an article by Winnie Hu in Friday's New York Times, where she reports about a suit filed by deaf customers against the Astor Place (New York) Starbucks for allegedly discriminating against the deaf. A small group of deaf New Yorkers had been meeting regularly at that coffee shop, and say that "Starbucks workers refused to take some of their orders at these meetings, stared when they signed to each other, complained that they were not buying enough coffee and pastries, and eventually told the group not to come back."

As Hu wrote, "The legal battle has jolted many New Yorkers who have made the ubiquitous coffee shops part of their routine, and served as a reminder that even in a city as tolerant as New York, intolerance can be all too common for some populations."

The lawsuit "seeks to compel the company to conduct sensitivity training for employees and adopt policies to better serve deaf customers". A Starbucks spokeswoman would not comment on the specific litigation, but said that the company "does not agree with the allegations contained in the complaint" and noted that the company already provided sensitivity training for its employees and supported "equality, inclusion, and accessibility" for both employees and customers.

We don't hear a lot (if you'll pardon the expression) about discrimination against the hearing-impaired. Hu quotes a civil rights lawyer who said that "discrimination against the deaf often goes overlooked because it is subtle and sophisticated, and because some deaf  people may be isolated and may not speak up when it happens to them." He added,
It's not like putting up a sign on the door, 'No deaf people allowed." But when deaf people are treated differently than others, it does hurt and it's illegal.

Illegal and unethical aren't always the same, but in this case they certainly run together. I'd like to suggest, however, that it's not enough to "do the right thing". People who are hearing-impaired are already outsiders in a hearing world, just as the blind are in a seeing world. It isn't enough to get out of the way of a blind person being led by her guide dog. How hard is it to ask her if she needs assistance? It's not enough to accept a hand-written request for a super-tall extra-strong four-sugars iced coffee from someone who is deaf; how hard is it to offer a warm smile?

As for me, the next time I see someone to whom I should offer a ride, I'm going to try to remember what I left "undone" the last time. And this time, I want to do the really right thing.

Friday, July 26, 2013

Does a Traffic Ticket Mean You're More Inclined to Fraud? Maybe....

I'll be the first to admit that I have been known to exceed posted limits on the highway. By how much? Hmmm. Maybe I'd better lay claim to the Fifth on that.

Oh and I can justify my speeding, of course: I'm just keeping up with traffic! Statistics have shown that being an outlier on either end of the bell curve (driving significantly more slowly than traffic or driving significantly faster) is much more dangerous than flowing along with the rest of the vehicles on the road.

So it's not really that I want to go fast: I want to be safe.

Yeah, and I've got a bridge to sell you.

But now I may have to rethink my vehicular behavior.

The New York Times' Floyd Norris has a fascinating article in today's paper, based on an academic report written and recently published by Robert Davidson (Georgetown University), Aiyesha Dey (University of Minnesota), and Abbie Smith (University of Chicago), that suggests that "off-work" behavior can give a strong clue about "at-work" behavior. An abstract of the paper, which is to appear in the Journal of Financial Economics,  is available here; a .pdf of the full paper is also available there.

The authors explored whether two forms of "off-work" behavior by senior corporate executives -- living "high on the hog", and having any kind of criminal record (including traffic violations) -- were correlated to misfeasance or malfeasance on the job:
We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high probabilities of other insiders perpetrating fraud and unintentional material reporting errors. 

First of all, I wasn't aware that people with criminal records could even be CEOs or CFOs. Norris reports that
Of the 109 chief executives of companies found to have committed fraud, 12 had previous encounters with the law that were more serious than a speeding ticket. The academics counted eight felony drug charges, four case of domestic violence and four traffic violations so serious that they were lumped under the heading of reckless endangerment. (Some of the bosses had more than one item on their record.)

The professors had turned to SEC fraud cases dating from 1992 to 2004, and then looked for companies as similar to those, but with fraud filings, as possible: similar in size, in the same industries, similar (pre-fraud filing) stock market performance, etc.

So, what kind of legal record had the CEOs and CFOs of the non-fraud companies have? None of them had anything more serious than "an ordinary traffic violation." And even there, the differences were compelling. Norris notes:
Of the 109 chief executives from nonfraudulent companies, just five had traffic tickets. Sixteen of the fraud company chief executives had such tickets. Some of them had more serious violations. Altogether, 22 of the 109 had some previous violation.

As the paper's authors state,
we interpret an executive’s prior legal infractions, including driving under the influence of alcohol, other drug-related charges, domestic violence, reckless behavior, disturbing the peace, and traffic violations, as symptoms of a relatively high disregard for laws and lack of self-control. We predict and find a direct, positive relation between CEOs’ and CFOs’ prior records and their propensity to perpetrate fraud....
Or, as Norris puts it, more simply: "What this could indicate is that people who are willing to violate one set of social norms are more likely to be willing to violate far more serious ones."

I've written before of our human capacity for self-delusion (e.g., here, writing about the need to get rid of the "gimmes"). While I don't think that a speeding ticket on my record should automatically mean that I couldn't be a great CEO (on the other hand, felony drug charges? Really?), I do think that before the board offers me the job, they should do a background check. And look for answers more compelling, and less self-serving, than "I was just keeping up with traffic."

Tuesday, July 9, 2013

If Greed is Good, Is Speed Even Better?

To coin a phrase: The early bird catches the worm.

Being first with the news is an obvious advantage, and not just if your livelihood comes from trading either stocks or gossip. If you're in the market for a Manhattan apartment, knowing that a friend-of-a-friend is about to sell and move out to the 'burbs can mean landing that perfect (tiny) West Village condo.

Sometimes being first is just good luck.

Sometimes it comes from greasing the right palm, a.k.a. insider trading, which is illegal -- although proving the illegality can be tough.

And between pure luck and insider trading, there's a lot of grey.

As Nathaniel Popper reports in today's New York Times, "first access" has become a profitable business model.

He writes, "Dow Jones recently announced the creation of DJ Dominant, a program that will release news articles two minutes early to subscribers who pay more."

Another examples Popper cites is
a service that the Nasdaq market and Chicago Mercantile Exchange introduced in May, which promises to get Nasdaq's market data to customers in Chicago -- and Chicago data to the East Coast -- 2 milliseconds faster than it is otherwise available thanks to the use of microwave transmission. The cost for the advantage is a reported $20,000 a month.

Similarly, Thomson Reuters has offered clients information about the University of Michigan's influential consumer confidence index "a full two seconds" before its "early" release, itself two minutes before the official release.

As trading is increasingly computer-driven and high-speed, even two seconds can make a significant difference.

But Thomson Reuters has just suspended its early-early release, under pressure from the New York attorney general's office, which is reportedly taking a "broad look" at the practice. According to a New York Times DealBook article by Peter Lattman (published Monday), the state's "investor protection bureau" is looking into the question of "whether preferential disclosure of data is a fair and appropriate business practice."

The New York attorney general's office has considerable power over Wall Street, thanks to the Martin Act, which gives "the attorney general broad powers to pursue either criminal or civil actions against companies... [and] does not require the government to show proof that a company intended to defraud anyone."

Popper quotes state attorney general Eric Schneiderman as saying, "The securities markets should be a level playing field for all investors and the early release of market-moving survey data undermines fair play in the markets."

Since I'm not a lawyer, I can't speak to the legality of Thomson Reuters' behavior (nor that of Dow Jones, the Nasdaq, et al.). But I can speak to the ethics.

The stock market is often held up as an example of a perfectly level playing field -- if you can spot a great investment opportunity before your neighbor can, it doesn't matter that she's a high-powered hedge fund manager and you're a day trader working from your home office: You'll win.

But if that hedge fund manager can pay to get information about that potential opportunity two seconds before you can ... Just how level is that playing field, really?

Monday, July 1, 2013

Want to Get Paid? Pay a Fee.

How many more ways can we find to make it seem reprehensible to be poor?

The working poor used to be admired for their grit and perseverance in the face of remarkable road-blocks. People talked about the "dignity" of working poverty (this was generally said by those who had never experienced the soul-corrosiveness of genuine poverty).

Today, we seem to specialize in finding new ways to nickel-and-dime the people who are barely making it by as it is.

Today's New York Times has a lengthy, depressing, but valuable article by Jessica Silver-Greenberg and Stephanie Clifford on the new way to pay workers: not with a paper check, or by direct deposit, but prepaid cards, similar to a debit card.
Companies and card issuers, which include Bank of America, Wells Fargo and Citigroup, say the cards are cheaper and more efficient than checks — a calculator on Visa’s Web site estimates that a company with 500 workers could save $21,000 a year by switching from checks to payroll cards.

Savings like that can get the attention of corporate financial officers. 

The cards are particularly popular with retailers and restaurants, which have large numbers of minimum-wage employees. According to the Times, "$34 billion was loaded onto 4.6 million active payroll cards [in 2012], according to the research firm Aite Group." And the total is expected to grow to $68.9 billion( and 10.8 million cards) by 2017.

But what does it mean for the workers? In theory, it should be just as easy to use as a debit card. In practice... not so much:
...In the overwhelming majority of cases, using the card involves a fee. And those fees can quickly add up: one provider, for example, charges $1.75 to make a withdrawal from most A.T.M.’s, $2.95 for a paper statement and $6 to replace a card. Some users even have to pay $7 inactivity fees for not using their cards. These fees can take such a big bite out of paychecks that some employees end up making less than the minimum wage once the charges are taken into account...

As an example, the Times reporters spoke to a young man who works at a McDonald's in Milwaukee, earning $7.25 an hour (which is the current minimum wage in Wisconsin). He gets paid via a prepaid card, and spends "$40 to $50 a month on fees associated with his JPMorgan Chase payroll card."

Do the math. $7.25 per hour for a standard 40-hour week is $290. Multiply that by 52 for a year, without any vacation time, and you're up to $15,080. Forget about Social Security or other payroll tax deductions for the moment, and you try living on that. $45 a month in fees adds up to $540, which is more than 3.5% of his gross earnings, and a substantially higher bite on net earnings. Do the math backwards, and this young man is now earning $6.99 an hour. A 3.5% drop in earnings may not sound like much, but when you're living this close to the edge, it can easily mean the difference between having enough to eat and not.

To be fair, it's worth noting that some 10 million American households are now "unbanked", and
Some employers and card issuers say that the payroll cards are useful for low-wage workers who do not have bank accounts. They also say that the fees on the cards are usually lower than those associated with check-cashing services, which are often the only other option for people who do not have bank accounts. 

But I think the more important factor for the issuing banks is that prepaid cards have been virtually untouched by recent financial regulation.
The lack of regulation in the payroll card market, while alluring for some of the issuers, can potentially leave cardholders swimming in fees. Take the example of inactivity fees that penalize customers for infrequently using their cards. The Federal Reserve has banned such fees for credit and debit cards, but no protections exist on prepaid cards. Cards used by more than two dozen major retailers have inactivity fees of $7 or more, according to a review of agreements. 

Some employees can also be hit with $25 overdraft fees, called “balance protection,” on some of the prepaid cards. Under the Dodd-Frank financial overhaul law, banks with more than $10 billion in assets are barred from levying overdraft fees on customers’ checking accounts [but not on prepaid cards].
So the people who are least able to pay the fees are the ones getting hit with the fees. And those cost savings for the companies? If you're wondering where they go, I suggest you check out a headline on page-one of the business section in Sunday's New York Times: "That Unstoppable Climb in CEO Pay".

Friday, June 21, 2013

The Toxic Legacy of Tax-Avoidance Schemes

As an ethicist, I suppose I shouldn't indulge in schadenfreude -- the delight in someone else's misfortunes -- but then, I'm human too.

In this particular instance, however, the pain doesn't fall on the right party.

New York Times business reporter Floyd Norris writes today that "Tribune Company, the publisher of The Chicago Tribune and The Los Angeles Times, among other publications, ... seems likely to have to pay hundreds of millions of dollars in taxes that it would never have owed had it not tried to be so clever."

The shenanigans began with the 2007 takeover of the Tribune Company by real estate billionaire Samuel Zell, a man with essentially zero experience in the media business.

(Aside: Back at the dawn of time, when I worked -- briefly -- as a journalist, most newspapers were owned by people who actually gave a damn about journalism. Sigh.)

The initial $8.2 billion transaction was complicated enough (the Chicago Tribune ran a lengthy piece in January, by Michael Oneal and Steve Mills, unfurling the whole long sad tale), and things got more complicated still, and quickly.

To be fair -- not that I really want to be -- not everything was Zell's direct fault: the 2008 financial collapse effectively prevented Zell from selling off assets that would have buoyed his plans. Advertising was already weakening under the digital onslaught, and it was about to get much worse.

The Tribune Company slid into bankruptcy about a year after Zell's acquisition, emerging in 2012 a shadow of its former self, with thousands fewer employees than in its heyday (many of whom had given up contributions to a retirement pension in exchange for agreeing to a now-worthless Employee Stock Ownership Plan). And the future does not look bright, thanks to the huge tax bill that the company now faces.

The key shenanigan in the whole deal -- which is now coming back to haunt the Tribune in a very very big way -- revolved around taxes. Or more to the point, how not to pay them.

Those of you who have read more than a few of my posts know that I am a big believer in taxes and regulation, that I am firmly in the Justice Oliver Wendell Holmes Jr. camp ("Taxes are the price we pay for a civilized society.").

This is what happens when you structure a deal entirely to avoid paying taxes. As Oneal and Mills wrote,
Taxes were a special problem for anyone hoping to take control of Tribune Co. by using a lot of borrowed money. Federal income taxes reduced the company's cash flow each year by hundreds of millions of dollars, limiting the amount available to pay interest. And while the company boasted many prize assets like the Chicago Cubs that could be unloaded to pare down the acquisition debt, selling them piece by piece would trigger huge capital gains taxes because Tribune Co. had owned most of the assets for so long.
The Zell team's brainstorm was to take the company private and convert it into what's known as an S-Corp ESOP, a Subchapter S corporation owned by an employee stock ownership plan. Because an ESOP is officially a retirement vehicle, the structure immediately eliminates corporate income tax. 

So far, so good, right?

Floyd Norris quotes tax analyst Robert Willens: "In conception, it was brilliant... It would have been probably the greatest tax avoidance structure ever devised, had they earned income."

The catch is that, as Norris notes, a company that converts "to S status may still be subject to capital gains taxes if it sells assets within 10 years after the conversion. If that happens, it owes taxes on the gain in value that accrued before the company converted."

The Tribune did sell some assets, and Zell apparently had another "clever way" to handle that potential tax problem. 

The Internal Revenue Service is now questioning many Tribune Co asset sales, but especially the sale of Long Island, NY-based Newsday and that of the Chicago Cubs. Norris notes drily that the IRS concluded that Zell's gimmick was "so outrageous that it added a 20 percent 'accuracy related penalty' to the $190 million tax that should have been paid when Tribune sold ... Newsday to Cablevision in 2008. Under the law, that penalty is reserved for transactions that show 'negligence or disregard of rules or regulations,' or are 'lacking economic substance.'"

Fortune senior editor-at-large Allan Sloan wrote a few days ago, 
I used to consider Zell and his tax avoidance schemes sort of amusing. But the amusement -- and congeniality -- are both long gone.

I'm sure that after litigation or the threat of it, Tribune will ultimately settle [for] considerably less than the $600 million likely total of the claims, penalties and interest. However, my bet is that Tribune will ultimately fork over more than $100 million to pay for the tax games Zell played with Newsday (one of my former employers) and the Cubs.

That's just what the company, struggling to survive in a hostile landscape for media companies, needed in its new life -- a big, fat tax bill from the past. Thanks a lot, Sam.

I believe in taxes. I don't believe in totally simplistic one-size-fits-all flat taxes. But I want a system that rewards companies and employees, not $1,000-an-hour lawyers who can figure out ways to avoid paying taxes. If Zell had been a little less clever, or a lot more ethical, ... well, a person can dream, can't she?

Thursday, June 13, 2013

"Brand You" Really Does Belong to You!

It's taken several years for the case to wend its way to the Supreme Court, but today, thankfully, the Court ruled unanimously that your genes are your own.

Seems obvious, doesn't it?

More than three years ago, I commented on round one of this case, when US District Court Judge Robert W. Sweet struck down seven patents held by Utah-based Myriad Genetics that were the basis of tests that looked for mutations of the BRCA 1 and 2 genes. Those mutations are associated with a substantially greater risk for breast and ovarian cancer. The only way to know whether you have the mutations is to pay approximately $3000 for the Myriad Genetics test; Myriad has refused to license the test to other companies. The suit had charged that by doing so, Myriad kept prices artificially high and prevented woman from getting a second opinion from another testing company.

Myriad had argued that without the potential for significant financial gain that the patents represent, there would be no incentive to invest in potentially life-saving research.

As I wrote then: "I think that many of us, who are not genetic scientists, find it hard to understand (and more than a little ambiguous morally) that a corporate entity could own genes that come from our own bodies."

The Supreme Court today, as reported by the New York Times' Adam Liptak, ruled that "isolated human genes may not be patented." (Full article, here)

Writing for the Court, Justice Clarence Thomas stated, "A naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated. It is undisputed that Myriad did not create or alter any of the genetic information encoded in the BRCA1 and BRCA2 genes."

There's some wiggle room left for companies like Myriad, however: The manipulation of a gene "to create something not found in nature" would be patentable.

Thursday, May 23, 2013

Chairman _and_ CEO? Or Chairman _or_ CEO?

If I were the chief executive officer of a major financial institution, I would want to be chairman, too. Not just for the extra pay -- tho' I probably wouldn't turn it down -- but mostly for the extra power. No one checking over my shoulder except those pesky board members (and I can usually keep them quiet).

If I were a shareholder of a major financial institution? You bet that I'd want an independent chairman overseeing operations.

For a few years now, some JP Morgan Chase shareholders have wanted to split the offices of chairman and chief executive officer, held by Jamie Dimon. In 2012, 40% of shareholders voted to have the offices split. This year? In a victory for Dimon, the support for splitting the offices fell to 30%.

As noted by Jessica Silver-Greenberg in yesterday's New York Times, the (non-binding) shareholder resolution was positioned as a way to improve the bank's governance, but "it soon became tangled up in how Mr. Dimon handled last year’s trading blowup. The surprising loss at the chief investment office unit in London felled some of Mr. Dimon’s top lieutenants and helped lay bare broad risk and control weaknesses throughout the vast bank." (Full article, here)

Dimon's victory didn't come easily -- a lot of intense lobbying was involved, according to an earlier New York Times article by Silver-Greenberg and Susanne Craig:
At its Park Avenue headquarters, JPMorgan assembled a war room where executives kept close tallies as shareholder votes began streaming in, according to two people briefed on the matter. To sway investors, these people said, influential board members were paired with large shareholders....

Reports say, however, that as little as two weeks ago, the resolution was on the verge of winning. The bank lobbying swung into high (fear) gear, warning that Dimon might leave, that the bank stock price would therefore be deeply damaged, and so on. The real turning point, Silver-Greenberg and Craig reported, came when "an influential shareholder advisory firm" recommended that shareholders blame the bank's directors:
In a scathing 33-page report, the firm faulted three directors, saying they lacked risk expertise. By zeroing in on the board members, several people close to the bank said, the advisory firm effectively gave shareholders an alternative. They could register their dissatisfaction with JPMorgan without going after Mr. Dimon....

I don't blame Dimon for pulling out all the stops to hold onto the power base he's built. I don't even really blame the shareholders for falling for the scare tactics.

But the victory for Dimon wasn't just that; it was a defeat for good corporate governance.


Tuesday, May 21, 2013

"Legal" is Not a Synonym for "Ethical"

It appears that we need a refresher course in the difference between "legal" and "ethical", at least from reading a lead story in today's New York Times by Nelson Schwartz and Charles Duhigg on the "web of tax shelters" that allowed Apple to escape from billions of dollars in US tax payments.

The US tax code may have Byzantine rules that encourage gaming the system, and I'm sure that Apple will argue that keeping its taxes as low as possible was the responsible thing for the company to do for its shareholders.

But if I am going to pick one of two short-hand phrases about taxation by which to live, I'll go with the late Supreme Court Justice Oliver Wendell Holmes ("Taxes are the price we pay for a civilized society") over the also-late but unlamented Leona Helmsley ("Only the little people pay taxes"). Apple apparently went with the Queen of Mean.

Schwartz and Duhigg explained:
Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and went beyond anything most experts had ever seen, Congressional investigators disclosed on Monday....

... [They] found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless — exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world. 

The investigators are not claiming that Apple broke any laws, nor is it the only major corporation using all kinds of arcane schemes to keep its tax bill as low as possible. But Apple's "gimmicks" and "schemes" (words used by US lawmakers) were on a whole new scale. The Times journalists quote a University of Southern California law professor on the Apple strategy: "There is a technical term that economists like to use for behavior like this: Unbelievable chutzpah." I might have used a stronger term.

Corporate tax avoidance on this scale encourages those of us who pay our own fair share -- willingly or not! -- to feel like chumps.

Meanwhile, technology companies like Apple are lobbying hard for changes in immigration legislation to permit them to hire more foreign engineers and computer scientists due to the (alleged) lack of sufficient US talent. But it is taxes that pay for long-term research and development, that support the colleges and universities that train engineers and other scientists, that underwrite the infrastructure that delivers products from the port (since most while designed in the US, are built elsewhere) to the retail stores.

Legal, sure (although I'd like to see these rules changed!). Ethical? Not hardly.

Monday, May 20, 2013

A Possible Breakthrough on Global Garment Worker Safety

The news media have continued to run stories about garment worker safety in Bangladesh and other minimal-wage countries, but despite outrage, little real change seemed likely.

It's still a long ways from certain, but there are glimmers of hope. Last Friday's New York Times carried a Steven Greenhouse article on the coalition of religious groups and investors who were "pressing major American retailers to join a sweeping plan to improve safety in Bangladesh apparel factories".

A letter, drafted by the Interfaith Center on Corporate Responsibility, called on "brands and retailers to collectively pledge to implement the internationally recognized core labor standards of the International Labour Organization (ILO)."

Specifically, according to a statement released through Inside Investor Relations, "the investors are calling on companies to commit to strengthening local trade unions, publicly disclose the identities of all of their suppliers and divulge the health and safety programs they have in place, as well as their progress in meeting health and safety objectives. They also call on companies to ensure a living wage for workers, to make sure their suppliers have the means in place to address worker grievances and to join the Accord on Fire and Building Safety sponsored by the ILO and others."

Fire killed 112 Bangladeshi garment workers last November, and a building collapse outside the capital, Dhaka, killed more than 1,100 workers last month.

Swedish retailer H&M, which has made its name with "fast fashion" which relies on rapid turnaround from order to delivery and continual downward pressure on costs, was one of the first major signatories to the plan that will require companies to invest in improving worker safety. How much they will have to invest will depend on the relative size of the company.

To date, only two US-based firms have signed on, Abercrombie & Fitch, and PVH, parent company to Calvin Klein and Tommy Hilfiger.

According to today's New York Times, "the American retail giants Wal-Mart Stores and Gap have declined to endorse the pact, citing legal concerns. Both say they will continue pursuing their own worker safety programs." (Full article, by Liz Alderman, here) Nor have other major retailers like Target and J.C. Penney signed on.

Without pressure from consumers, those retailers may continue to resist, saying that their own efforts will be plenty. But they won't be.

So it's up to us to stick to our guns. Read the labels. Demand accountability. No dress, no matter how flattering, is worth a worker's life.

Friday, May 3, 2013

When is Inexpensive Too Inexpensive?

I've been pleased to see how much coverage the recent Bangladesh clothing factory collapse has gotten, and how it has raised important questions about protections for workers in developing nations, and about how cheap is too cheap.

In my post last week, I reiterated my promise to read clothing labels more carefully, but honestly: it's hard.

How do I know whether the Pakistani factory that made this pair of jeans is run more carefully than the Malaysian factory that made that pair of jeans? The manufacturer's label won't tell me much, and it's possible that the manufacturer doesn't even know, as many items will be subcontracted through many times. (Yes, this provides plausible deniability.)

The simple solution is to refuse to buy anything from, say, Bangladesh, until working conditions improve there.

The Walt Disney Company, "considered the world’s largest licenser with sales of nearly $40 billion, in March ordered an end to the production of branded merchandise in Bangladesh," according to Steven Greenhouse's article in yesterday's New York Times. "Less than 1 percent of the factories used by Disney’s contractors are in Bangladesh." Other companies are said to be considering pulling out of the country also.

But -- and I know I've used my favorite H. L. Mencken quote before -- "For every complex problem, there is a solution that is simple, neat, and wrong."

In today's New York Times, Greenhouse wrote about concerns in Bangladesh that more Western companies will decide to leave. He quoted a Bangladeshi legislator (and factory owner) who pointed out that many factories in the country do comply with safety regulations, and noted:
The whole nation should not be made to suffer. This industry is very important to us. Fourteen million families depend on this. It is a huge number of people who are dependent on this industry.

So if the labels can't be entirely trusted, and there's no easy solution, should I just throw up my hands and say, Never mind?

Of course not.

In an article for The Nation, Elizabeth Cline, the author of recently-published Overdressed: The Shockingly High Cost of Cheap Fashion, has some suggestions:
Eileen Fisher has introduced a labeling system that marks whether an item of clothing is fair trade, made in the USA or certified organic. Knights Apparel, which produces clothing for American colleges, owns a successful, unionized factory in the Dominican Republic that pays a living wage.... Get that? The company is not subcontracting. It actually owns and takes full responsibility for the factory that makes its products. And its products cost the same as those of its rivals (Nike and Adidas). I hope in the coming months we see major fashion brands adopting similar practices, or coming up with their own innovative and ethical alternatives to the cheap-fashion juggernaut. 

There are other options, too. Interviewed by Terry Gross on her NPR program, Fresh Air (highlights of the show here; podcast and transcript of the complete 39-minute interview also available there), Cline acknowledged that not every consumer buys cheap clothes because they're fun or disposable; some buy cheap because they can't afford better.

...When we don't support domestically made clothes, that, you know, translates into a loss of jobs here. All these things are very tied together. But, you know, and that's also why I say if people can't afford better, shop where you're going to shop. Sometimes it's about how you shop and not where you shop. So if you buy something cheap, that doesn't mean you have to have a disposable attitude about it or a disposable relationship to it. 

She also mentioned fast-fashion powerhouse H&M, which has developed a "Conscious Collection, which is made out of organic, cotton and recycled polyester and other eco-friendly materials." (It's not clear, however, whether the materials are made in an equally "eco-friendly" factory.)

All of these are positive moves. But it's up to us, as consumers, to keep the pressure on. We need to ask for labels that give more information and to make it clear that we're willing to pay the small additional price to know that the workers who make our clothes have a safe workplace and a living wage.

Thursday, April 25, 2013

Do I Really Need That $10 Blouse? Wouldn't It Be Just as Cute at $11?

Another garment-factory fire, another garment-factory building collapse. Sigh.

I've written several times (most recently, here) about the effects of our fixation with low prices, and our blindness to how we get them.

Garment industry workers are among the least honored and protected in the world. Manufacturers have consistently fled from "high wage" regions to lower wage ones, from New England to the South, from the South to China, from China to Bangladesh and Pakistan and elsewhere.

Garment workers have paid for this with their lives, from the Triangle Shirtwaist Factory girls (and boys) of lower Manhattan in 1910 to the Bangladeshi workers of this year and the last. In 2012 alone, more than 300 workers died in a factory fire in Pakistan and nearly 300 in a similar fire in Bangladesh.

Yesterday, news broke of a building collapse in a suburb of Dhaka, causing the death of more than 100 garment workers.

According to the New York Times  report by Julfikar Ali Manik and Jim Yardley, the death toll is sure to rise, as workers remain trapped in the rubble.
The Bangladeshi news media reported that inspection teams had discovered cracks in the structure of Rana Plaza on Tuesday. Shops and a bank branch on the lower floors immediately closed. But the owners of the garment factories on the upper floors ordered employees to work on Wednesday, despite the safety risks.
Because after all, what's more important than keeping those sewing machines humming?

But the structural cracks spotted on Tuesday weren't cosmetic, and the next day, there came "a loud and terrifying cracking sound", followed by feeling "the concrete factory floor roll beneath their feet", and then the awful implosion of an eight-story building.

Who's responsible for this nightmare of suffering? The factory owners who placed their profits ahead of the workers' safety, of course, and I hope that there will be legal repercussions.  But they are not alone. 

Activists blame the Western companies for which these factories produce garments.
Labor activists combed the wreckage on Wednesday afternoon and discovered labels and production records suggesting that the factories were producing garments for major European and American brands. Labels were discovered for the Spanish brand Mango, and for the low-cost British chain Primark. 

Activists said the factories also had produced clothing for Walmart, the Dutch retailer C & A, Benetton and Cato Fashions, according to customs records, factory Web sites and documents discovered in the collapsed building.

Scott Nova, an executive director with a labor rights organization (Workers Rights Consortium), is quoted as saying:
The front-line responsibility is the government’s, but the real power lies with Western brands and retailers, beginning with the biggest players: Walmart, H & M, Inditex, Gap and others. The price pressure these buyers put on factories undermines any prospect that factories will undertake the costly repairs and renovations that are necessary to make these buildings safe.

I am not a Wal-Mart fan, but I'm not about to lay all the blame at Wal-Mart's feet, either.

We are the ones who demand cheap-and-good, even while we know in our hearts that these are incompatible. The solution is to look the other way. Not my problem.

Just a few months ago, I quoted 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." (NYT article from which that quote is taken, here)

And so, just a few months ago, I made an early New Year's resolution, promising to read clothing labels more carefully, to ask tougher questions, and to be willing to walk away from that "adorable" blouse that was obviously made with near-slave labor.

My purchase decisions alone aren't enough to swing the pendulum. But with your help, we can make the change. Please join me.

Wednesday, April 24, 2013

Under-Punishment Isn't Much of a Deterrent to Bad Behavior

In a perfect world, we would all do the right thing because it was the right thing to do, not because we were afraid of getting caught doing the wrong thing.

Last time I checked, we weren't living in a perfect world.

So if I pass you on the highway doing speeds only slightly in excess of posted limits -- because I'm afraid of the cost of a ticket and the inevitable effect said ticket will have on my insurance rates -- I expect you won't complain that I should be driving at posted limits because they're, well, the posted limits.

But what if the ticket would cost me, say, less than a dollar? And it would be emailed to me, rather than costing me time while the officer writes me up? And my insurance company would say, Eh, don't worry about it?

What are the chances that I would still be driving at anything even remotely resembling the posted limits?

Exactly: Slim to none.

We talk about "the punishment should fit the crime", and by that, we usually mean that you shouldn't over-punish: we wouldn't send someone away to a supermax for 10 years for driving 35 in a 25 m.p.h. zone.

But it's just as important that we not under-punish.

What got me thinking about under-punishment? Claire Cain Miller's article in yesterday's New York Times, reporting on Germany's imposition of "the largest fine ever assessed by European regulators" on Google, for privacy violations relating to personal information collected in the course of its Street View mapping.

How big was the fine? $189,225. As Miller noted drily, "that's how much Google made every two minutes last year, or roughly 0.002 percent of its $10.7 billion in net profit."

How much of a deterrent do you think that is?

The fine was actually close to the legal maximum that could be imposed. Johannes Caspar, the German data protection supervisor who led the Street View investigation, said, "As long as violations of data protection law are penalized with such insignificant sums, the ability of existing laws to protect personal privacy in the digital world, with its high potential to abuse, is barely possible."

Google has paid far larger fines in recent years: $22.5 million to the Federal Trade Commission for a privacy violation related to its Safari browser ("the largest civil penalty [the FTC] had ever levied, though Google did not admit any wrongdoing."); $7 million to settle a lawsuit brought by 38 states; 100,000 Euros to France for data illegally collected, and so on.

But, when your profit is measured in billions of dollars, even $22.5 million can seem like chump change, like the cost of doing business.

As Miller notes in her article, this is not a Silicon Valley problem alone. Many have questioned the effect of large fines on the largest banks: "Even when Goldman Sachs paid a record $550 million fine to the [Securities and Exchange Commission] in 2010, it amounted to less than 10 percent of the bank's profit that year."

Some have argued that companies shouldn't be fined too severely, as a too-big fine "hurts shareholders if the stock price suffers, and consumers if the company has to raise prices to pay the fine."

But is that true? There is research to suggest that the opposite is the case. John Nugent, a professor at Texas Women's University, said that "even large fines had little long-term effect on companies' stock prices," and that, in fact,

Management will often choose to take actions they may know are improper because they realize the long-term consequences will not affect them.

It is true that the public-relations effect of a major fine can be significant, but it too is likely to be short-lived.

What's needed? Real teeth, that take a real bite.

Wednesday, April 17, 2013

One Jury Giveth, and Another Taketh

Just over a month ago, I commented on how much Johnson & Johnson's poor business decision was going to cost them -- more than $8 million, and that was just the first suit related to its metal-on-metal DePuy artificial hip's high failure rate (full post, here).

I wondered at that time whether J&J would regret going to trial (rather than settling out of court). After all, the decision was the first of literally thousands of suits filed against the company.

From the company's perspective, the courtroom news hadn't been all bad -- the Los Angeles jury awarded no punitive damages, accepting the company's statement that it had not acted with "fraud or malice". Still, it seemed like a high-stakes gamble. After all, the jury had awarded the plaintiff $8.3 million, the $0.3 million for medical expenses, and the $8 million for pain and suffering, which is chump change only in the world of Wall Street hedge funds.

J&J's decision makes a little more sense today, with the results from the second trial (this one in Chicago), in which the jury rejected all claims that DePuy had "inappropriately" marketed its artificial hip.

In Barry Meier's story in today's New York Times, he noted, "It was not immediately clear why the two juries returned such differing verdicts."

I won't commit on the jury decision(s). What I can comment on is the ethics of the decisions that J&J's DePuy unit made.

As today's story (and earlier ones) made clear:
Internal DePuy documents introduced at the trials indicated that company officials knew that the design of the A.S.R. was flawed long before they recalled the device and even considered redesigning the implant. They never shared that information with doctors and patients, those documents show.  

Any way you try to spin it, that's wrong.

Wednesday, April 3, 2013

Easy Solutions are So Tempting, And So Often Wrong

I believe it was the late "Sage of Baltimore", H. L. Mencken, who coined this phrase: "There is always an easy solution to every human problem -- neat, plausible, and wrong."

There are so many situations for which that line is apt, aren't there?

I thought of it again today, reading an article by Stephanie Clifford and Jessica Silver-Greenberg in today's New York Times, "Retailers Track Employee Thefts in Vast Databases".

Employee theft -- euphemistically known as "shrinkage" -- is an old, stubborn, problem. Even if you catch a pilfering employee, it can be difficult to get a local prosecutor to take the case, especially if the amount stolen is small -- a $50 shirt, say, or a box of chocolates. So employers generally fire the employee and leave it at that.

Technology has come up with one solution: vast databases of employee information which are used by major retailers as part of the background check on potential new employees.

The solution seems neat and plausible: if you are hiring a salesperson for Company A, you would like to know that I was fired from Company B for stealing merchandise, wouldn't you?

Ah, but -- to coin another phrase -- the devil is in the details.

The databases "often contain scant details about suspected thefts and routinely do not involve criminal charges." But the information that is there "can be enough to scuttle a job candidate’s chances". And there are few ways for an individual to correct the inaccuracies that are in the database.

The information often comes from "informal" interviews conducted by the employer rather than from a legal proceeding, where due process -- among other things -- provides a measure of protection to the employee.

The current system seems almost perfectly designed for abuse. With no easy route for redress, some of the most vulnerable employees are most at risk. Completely innocent, they may find their future employment blocked.

Monday, April 1, 2013

What are Directors Worth, and What do They Owe?

All weekend, I've been thinking about James B. Stewart's excellent column in Friday's New York Times about "bad directors and why they aren't thrown out." (Full column, here)

His "shining" example of a disastrously bad board is Hewlett-Packard. Item by item, Stewart follows the board's non-actions through the Mark Hurd sexual harassment disaster, through the hiring of fired SAP chief Leo Apotheker, the "wildly overpriced" acquisition of Autonomy, a UK software maker, and eventually the firing of Apotheker (with $13 million in "termination benefits") -- during all of which the company's stock slid by more than half.

To add insult to Hewlett-Packard shareholder's injuries: "all 11 HP directors were re-elected on March 20."

In its proxy materials, HP recommended that the entire slate of directors be re-elected, "citing the risk of 'destabilizing' the company by changing directors in an 'abrupt and disorderly manner.'"

It's hard to see how the company could be more destabilized by a bunch of newcomers than it already has been by a bunch of rubber-stamps.

What do directors owe the companies on whose boards they serve? For their generous salaries for part-time work (per Stewart's article, HP directors "received a mix of cash and stock payments ranging from $292,000 to $380,000 in 2012."), I think that the least they owe the company is a measure of integrity.

Did no one on the board question the hiring of Apotheker? Did no one question the price paid for Autonomy? Did no one question.... Oh you get the point.

I know the power of group-think, that impulse to go along with what everybody seems to think is right.

Was that the problem? Or, in this case, was it the power of that hefty cash-and-stock incentive? Rock the boat too much, and you might find yourself out of favor, and out of a cushy little piece of cash.

Compensation experts are always saying that top-dollar needs to be paid to entice the most talented executives and board members. But maybe top-dollar is just a little too much.

Today's Times carries a DealBook column by Susanne Craig (here) on the soaring pay for bank boards. You thought HP directors did well? According to Craig, at Goldman Sachs, "the average annual compensation for a director ...was $488,709 in 2011, the last year for which data is available, up more than 50 percent from 2008", and some directors earned over $500,000.

You know, I have a bunch of household renovation projects I'd like to take up, so I could use a little extra cash. I'd be happy to serve on the HP board.

I don't see how I could do worse than the current crop.

Wednesday, March 20, 2013

Loan Sharks Still Swimming Offshore

Payday lenders are among the scummiest people on the planet, I say without fear of argument, preying on the most financially vulnerable among us.

Unlike the loan sharks of yore, they no longer threaten to break your kneecaps, but short of that -- pretty much anything goes.

But when you're living teeny-paycheck-to-teeny-paycheck, a sudden emergency can leave you with nowhere else to turn. All of a sudden, an interest rate in excess of 500 percent can seem, if not reasonable, at least an option (especially because the rate is not usually presented in APR terms, but as "I can give you $100 now, and you'll pay me back, plus $20, in two weeks," which sounds almost reasonable.).

If you can't pay the full $120 two weeks from now, your lender will "kindly" accept partial payment and roll over the loan... You can see how quickly someone can get lost in debt.

Because  payday lenders rely on those whose financial options are few, and whose financial acumen is often also low, some states (15 to date) ban such loans. The lenders' solution? Move online.

New York Times journalist Jessica Silver-Greenberg reported late last month that these lenders have found willing co-conspirators in the major banks (full article, here). The banks themselves don't dirty their hands with such loans directly, but they're enablers, permitting "the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals." (emphasis added)

The bankers' explanation? They are "simply serving customers who have authorized the lenders to withdraw money from their accounts."

This is ingenuous, at best.

Especially since the withdrawals often "set off a cascade of [highly profitable] fees from problems like overdrafts."

I doubt that there are any truly ethically-minded payday lenders, but moving online has made it even easier for the true scam artists to operate.
While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of. Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed. 

Customers have the legal right, under federal law, to stop such automatic withdrawals. But many have complained that their banks have ignored their requests to do so.

But there's a glimmer of good news.

In today's Times, Silver-Greenberg reports that JP Morgan Chase is changing its policy to give its customers greater control to halt the automatic withdrawals and close their accounts (full story, here). Unfortunately, both Bank of America and Wells Fargo said that their policies regarding payday loans would be unchanged.

It's also only a glimmer of good news because JP Morgan Chase said that part of the policy change would include "training to their employees so that stop-payment requests are honored."

Wouldn't you expect your bank to honor your request to stop payment from your account anyway?!?

Monday, March 11, 2013

$8.3 Million. And Counting.

How much is a bad business decision going to cost you? It depends, of course.

Johnson & Johnson got one answer last week: $8.3 million and counting.

That was the jury award ($338,000 for medical expenses, and $8 million for pain and suffering) from the first of many cases against Johnson & Johnson's DePuy Orthopedics unit for its now-recalled metal-on-metal artificial hip.

The 12-member jury, however, did not award punitive damages, accepting that the company did not act "with fraud or malice". (A complete news article on the decision, by Barry Meier in Friday's New York Times, can be found here.) Meier wrote that

Internal Johnson & Johnson documents that became public during the trial indicated that the company executives were told by surgeons, who were also paid consultants to the design maker, that the design of the A.S.R. [Articular Surface Replacement, the full name of the metal-on-metal hip replacement] was flawed. In addition, some surgeons also urged the device maker to slow sales of the implant or stop them completely....

In the case, evidence was also presented that showed Johnson & Johnson considered redesigning the A.S.R. to reduce its problems, but then abandoned the project because the implant's sales did not justify the costs of the redesign.

Johnson & Johnson did move to recall the device, introduced first in 2003, in 2010 "when data from an orthopedic registry in Britain showed that its failure rate was higher than normal."

In fact, about four in ten patients with an A.S.R. would need a second operation within five years to have the implant replaced. In comparison, traditional artificial hips, made of a combination of metal and plastic, generally have a failure rate of less than 5%.

DePuy has said that it will appeal the damage award.

The second of more than 10,000 cases goes to trial today in Chicago.

Thursday, February 28, 2013

Thinking About Chocolate Rather Than Eating It

As a Swiss citizen, eating chocolate is my favorite way of supporting the national economy. Alas, this Lenten season, I can only think about it, rather than indulging in it.

And thinking about chocolate can be dispiriting. The truth is that the fabulous final product often hides an ugly sourcing story. I wrote about this a few months ago (here), when Whole Foods removed Hershey Brand's high-end Scharffen Berger chocolate line from its shelves because of Hershey's " failure to assure that the cocoa is sourced without the use of forced child labor."

Forced child labor in West Africa's huge cocoa market is only one sad story from the chocolate front. Another is the continued exploitation of women workers, who routinely earn less than half of what men are paid, for the same job.

A recent report from Oxfam (here; note: launches as PDF) notes that while global chocolate sales keep rising (breaking $100 billion in 2011), the tight control on the market by its largest players has kept that success from reaching the farmers who produce the base crop. Ninety percent of the world's cocoa is grown by small-scale farmers, and most -- especially in West Africa, from which 70% of cocoa is sourced -- live below the poverty line.

And it is the women who suffer the most.

One example should suffice:
While everyone struggles to survive on the meager income made from cocoa, it is the women laborers who appear to fare the worst. Agnes Gabriel, a 37-year-old migrant worker living in Ayetoro-Ijesa [Nigeria] says that one of the jobs she is hired to do on local cocoa farms is lug water to be mixed with pesticides. Other tasks include removing the beans from their pods during harvest time, carrying them to the site where they will ferment and then helping with the drying process. For her efforts, she earns 500 Naira a day, or just over $3. Farmers say women are paid $2–3 for a typical day’s work, while men earn about $7 per day.

What should the companies be doing? The Oxfam report has three steps it recommends: (1) "know and show" how women are treated in their supply chains; (2) Commit to the adoption of a "plan of action" to increase opportunities for women and address inequalities in women’s pay and working conditions; and (3) influence other powerful and relevant public and private actors to address gender inequality (for example, by signing on to the UN Women's Empowerment Principles, here).

What can any one individual do? Know what you buy.

The Food Empowerment Project has a "Food Is Power" list of chocolate products that appear to be produced from areas where child labor / slavery have been reduced if not eliminated (here), but it does not address the issue of gender discrimination.

Oxfam has a "Behind the Brands" scorecard, not limited to chocolate, where consumers can learn more about the supply-chain ethics behind some of their favorite products. Sadly, one of my favorite non-Lenten indulgences, Toblerone, produced by Mondelez International, does not score well on any of Oxfam's seven vectors (land, women, farmers, workers, climate, transparency, water).

I'll happily pay more for chocolate that I know is ethically sourced. But I won't pay more for chocolate if it just means that the CEO's pay goes from $4.2 million per year to $4.4 million.

Transparency, folks. That's what I'm looking for.