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.