Tuesday, January 28, 2014

Both Right and Wrong, All At the Same Time

JPMorgan Chase chief executive officer Jamie Dimon will receive $20 million in compensation for 2013, up 74 percent from his earnings in 2012. Of that, $18.5 million comes in the form of bank stock, with a "mere" $1.5 million as his base salary.

In a New York Times article about the salary boost, reporter Peter Eavis quoted Warren Buffett, the investor and chief executive of Berkshire Hathaway (full article, here):
I think he's worth more than that.... Over all, I think the shareholders of JPMorgan and the American people should be happy that Jamie Dimon has been running the bank over this period.

I can't speak for the shareholders (as far as I know, I'm not one, although it's possible that a mutual fund that I own holds shares of JPMorgan Chase stock), but as an American, I'm a lot less happy than Buffett thinks I should be.

It was under Dimon's watch just this last year, after all, that the bank was settled withe the Justice Department for some $13 billion. In addition, JPMorgan "paid out a large sum to settle allegations that some of its traders manipulated energy prices". And then there was the agreement to pay $1.7 billion "for failing to alert authorities to suspicions relating to Mr. [Bernie] Madoff's business" (which turned out to be nothing but a Ponzi scheme.

Dimon supporters note the bank's strong profits (despite the multi-billion-dollar fines and legal fees, the bank reported 2013 profits of nearly $18 billion) and rising stock price. Moreover, they "assert that ...[the bank's] biggest fines were related to shoddy mortgage practices that did not occur under Mr. Dimon's watch" (many stemmed from irregularities, shall we say, at Bear Stearns and Washington Mutual, which were later bought by JPMorgan). If that's all there was to the story, they'd be right, and Dimon would have earned his raise.

But I'd point out that Dimon was a strong backer of the Bear Stearns and Washington Mutual purchases, and many of the other fines are directly related to how JPMorgan has chosen to run its business. In which case, the board's decision to boost Dimon's salary is wrong.

I'm glad to say that I'm not alone in questioning the wisdom of this deal. Eavis quotes a Boston University law school professor:
If there was ever a time to take a wait-and-see attitude and pay him what they paid last year, this is it... This is a thumb in the eye of regulators and a thumb in the eye for the public.

Indeed it is. Ow.

Tuesday, January 21, 2014

The Buck Stops ... Almost Anywhere But Here

There's been a lot of talk about the Target (and, later, Neiman Marcus) data breaches; I've posted about it myself (here).

And there's even been talk about how well (or badly) the affected companies have been responding to the problem, and how this event may speed up the adoption of "smart card" technology used in other parts of the world (as opposed to the magnetic stripe technology used in the US). For example, John Heggestuen at Business Insider thinks that this is "great news" for the payments industry (article, here). Fingers have been pointed at a Russian teen(or two teens) as the "masterminds" of the malware (or not -- see Carol Matlack's analysis of the situation for Bloomberg BusinessWeek, here).

What I haven't seen is an executive from Target or Neiman Marcus taking personal responsibility for the breach.

Compare that to a huge credit-card company breach in South Korea, in which the client data was stolen for as many as 20 million people (in a nation of 50 million). As reported by Choe Sang-Hun in today's New York Times (full article, here),  
The case became known this month when prosecutors arrested a 39-year-old technician hired by the Korea Credit Bureau, a ratings firm that the credit card companies had hired to help improve their systems to protect client data. It was subsequently disclosed that the man stole personal information on 104 million credit cards issued by the KB Financial Group, the NongHyup Financial Group and Lotte Card. 

The man, identified only his last name, Park, stole the data from May 2012 to December 2013, copying it onto a USB device, prosecutors said. The data included the names, phone and South Korean social security numbers, email and residential addresses, salaries, monthly card use and other credit-rating information of clients, the Financial Supervisory Service, a regulatory agency, said in a statement. In many cases, card numbers were stolen as well.

Prosecutors have also indicted two phone marketing company managers on charges of buying the stolen data from the technician. Prosecutors said they found no evidence that the data had circulated any further, but fears spread that the information may have fallen into the hands of financial scammers.
Not surprisingly, people in South Korea are worried and angry, and have been "flooding" the card companies call centers with concern, especially when it was revealed that the stolen data had not even been encrypted. Monday, credit-card company executives offered "compensation for any possible financial losses to consumers", and apologizing to senior politicians for failing to prevent the theft.

But what caught my eye this morning was the photo of three senior executives offering their resignations. When was the last time you saw an American executive offering his resignation for a major corporate failing? Never, right?

Harry S. Truman, where are you?

Friday, January 17, 2014

How Low Can You Go?

That low? Really?

I didn't sleep well last night, thinking about a Michael Powell "Gotham" column in yesterday's New York Times. I wish the same fate on the guys at the top of the PrimeFlight pyramid, but I probably won't get my wish.

For those of you who missed it, Powell talked to many of the thousands of people who "scrub toilets, climb into baggage bins and under seats, restock food, haul bags and polish bathroom doors and seatbelts to a glittering shine" at the three major New York City airports.

He talked to a 52-year-old Colombian immigrant who pushes wheelchairs at LaGuardia, and whose pay has been cut from $7.25 an hour to $6.15. Why? The wheelchair operator was told that it was because "sometimes you will get a tip." Sometimes.

Take a moment and do the math. $6.15 an hour for 40 hours is $246 a week. $246 a week for 52 weeks is $12,792 (by the way, no benefits and no paid days off). With $1,000 a month to spend, try finding a place to live in Queens, NY, with enough left over to pay for  food to eat. Forget about the incidentals of clothes and transport. And if you get sick?

Powell wrote that "Port Authority officials are sympathetic" but claim that their hands are tied, because the workers to whom Powell spoke aren't Port Authority employees but rather employees of private contractors.

But how hard would it be to change things? As Powell noted,
Thirteen years ago, San Francisco International Airport raised the minimum wage for all airport employees, including wheelchair operators, baggage handlers, and ramp and airline ground workers. They get a minimum of $12.93 per hour, with 12 paid days off per year, and health coverage from employers. 
$12.93 per hour works out to $26,894.40 a year. Hardly lavish, especially in another city whose cost of living is high. But a living wage.

The man who pushes wheelchairs at LaGuardia works for PrimeFlight, whose website proclaims itself the "gold standard" in airline services. PrimeFlight's holding company, SMS Holdings, made $330 million in revenue last year.

I hope the senior executives at PrimeFlight start sleeping badly. But I doubt they will. What can we do? Well, for God's sake, you can start by tipping wheelchair operators at LaGuardia generously. And thank them.

Wednesday, January 15, 2014

Trust, Once Lost, ....

... is hard to regain. Sadly, this is a headline that can be used again and again (I used it first almost exactly four years ago, here).

As I noted in Monday's post, things are slowly starting to return to normal in the Charleston, W.Va., area, as clean water flows from most local taps.

But here's the headline that caught my eye in today's New York Times, over an article by Trip Gabriel: "Return to Normal in Parts of West Virginia is Marred by Distrust." Ya think?

Gabriel quotes numerous local residents, and "few were convinced that all was well, and an outside environmental scientist questioned the standards authorities were using." This, despite assurances from the governor, state health officials, and the water company.

There was a touch of gallows humor in some of the comments, which I enjoyed, but also a real sense of the pain and frustration that ordinary residents are feeling.

It doesn't help that the manufacturer of the chemical responsible for the water shutdown, through a spokesperson, said that "it was cooperating with authorities, but declined to make studies of the chemical’s effects public, calling them proprietary."

If it were your water supply that had been affected, wouldn't you want to know? Me too.

Monday, January 13, 2014

This is What Happens in a Regulation-Free World

I don't enjoy saying, "I told you so." Really I don't. (OK, I did enjoy saying that when I was a kid, but now it just makes me mad.)

As CNN reports, water has finally started flowing again in some West Virginia households, four days after chemical contamination left more than a quarter-million people without water for drinking, washing, cooking, brushing teeth, or bathing. The chemical responsible is using for washing coal, and was being stored at a facility upriver from Charleston, the state's largest city.

A key problem is that, as reported in today's New York Times by Coral Davenport and Ashley Southall, "the site of the spill has not been subject to a state or federal inspection since 1991. West Virginia law does not require inspections for chemical storage facilities — only for production facilities." (Full article, here)

I mean, really? Not since 1991??

The reporters note, "Critics say the problems are widespread in a state where the coal and chemical industries, which drive much of West Virginia’s economy and are powerful forces in the state’s politics, have long pushed back against tight federal health, safety and environmental controls."

It's an article of faith with many conservatives that "The Market" is much better at supervising industry than is Government. More efficient, less expensive, they say.

My faith lies with Trust and Transparency. And a big helping of regulation. What I call: Trust but Verify (old post on the subject, here). As to "less expensive" -- well, I'd ask Charleston residents what they think is the value of four days without drinkable water from their taps.

Build Those Ethics Muscles Now

Sometimes it takes me longer than it should to get through the weekend's New York Times newspapers and magazines, which is why it's taken me until now to draw your attention to an article published Saturday -- but, thanks to the magic of the Internet, at least you don't have to go rooting through the recycle bin for that edition!

No one expects to get physically fit, and especially to stay that way, without working at it regularly, whether at a gym or at home.

So why do we expect that we can be "morally fit" without working at it? We "know" that we would do the right thing in a tough situation.

Except that we often don't.

On Saturday, the Times' Alina Tugend wrote about the upcoming launch of a new website, Ethical Systems, whose goal is "business integrity through research" (Tugend's full article is here).
The site is the first to pull together extensive research and resources on the subject of business ethics with the aim of making the vast trove available to schools, government regulators and businesses — especially their compliance officers.

Because it's not enough just to say, "Do the right thing." We have to understand why so many people do the wrong thing.

Probably the single most important factor is our amazing ability to fool ourselves. I've written about that a lot (e.g., here), so I'm already on board with the concept.
Like pilots who use flight simulators, people need to work on situations that cause them anxiety before they occur.

Because when you're anxious, you're not thinking clearly. And when you're not thinking clearly, you're not likely to be thinking about ethical ramifications.

Saturday, January 11, 2014

Three "Ts" - Trust, Transparency, and Target

Anyone who has ever shopped at a Target -- which, as far as I can tell, is nearly every American -- has no doubt been following the story of its security breach.

In mid-December, Target confirmed that as many as 40 million customers in the pre-Christmas shopping season "might" have had their payment information stolen. Some of us thought, Phew - Glad I didn't do my Black Friday shopping there!

But the news didn't stop there. Bit by bit, the numbers of affected customers has grown, and the amount of information stolen has become more alarming.

In today's New York Times, reporters Elizabeth A. Harris and Nicole Perlroth write that as many as 110 million people may be affected (full article, here):
Not only did Target’s announcement disclose a vastly expanded universe of victims, but it revealed that the hackers had stolen a broader trove of data than originally reported. The company now says that other kinds of information were taken, including mailing and email addresses, phone numbers or names, the kind of data routinely collected from customers during interactions like shopping online or volunteering a phone number when using a call center.

It's clear that this wasn't just a "look what I can do" attack, but a well-planned criminal venture:
Fraud experts said the information stolen from Target’s systems quickly flooded the black market. On Dec. 11, shortly after hackers first breached Target, Easy Solutions, a company that tracks fraud, noticed a 10 to twentyfold increase in the number of high-value stolen cards on black market websites, from nearly every bank and credit union.

Target has apologized regularly, and profusely -- as, of course, they should. (Although am I alone in gritting my teeth every time a store executive refers to me as a "guest"? I'm not a guest, I'm a customer. End of rant.)

Target has absolutely been doing the right thing in getting information out as quickly as possible. Transparency is key. But quick information is often incomplete information. And so there's the "bit by bit" information release that, as New York Times reporter Hilary Stout notes in a related article, has its own negative effect:
As clear evidence that the drip, drip of disclosures may be unnerving shoppers, the company on Thursday acknowledged that its sales had been slipping since the initial announcement of the security breach on Dec. 19. What started out as a promising fourth quarter, with “stronger than expected sales” turned into a dismal one, most likely down 2.5 percent from the fourth quarter of 2012, executives said. That would be bad news at any time, but it is particularly distressing given that the fiscal fourth quarter, which encompasses holiday shopping, is the most important quarter of the year for retailers.

Target has offered customers free credit monitoring for a year. Which is a reasonable first step. But to rebuild consumers' confidence in the company, Target needs to do more.

A real, if only temporary (given the ingenuity of fraudsters), solution is the chipped "Smart Card" technology used in many other countries. To date, chipped cards have proven nearly impossible to duplicate, unlike the common magnetic-strip cards used in the US. The current schedule is for banks and retailers to phase in chipped cards and Smart Card readers of the course of the next two years. Maybe Target can help lead the way.

Wednesday, January 8, 2014

Here a Fine, There a Fine, But I Still Feel Fine

Or I would, if I were JP Morgan Chase. (Remember, corporations are people too!)

Ben Protess and Jessica Silver-Greenberg report in today's New York Times that JP Morgan Chase has agreed to pay a total of $2 billion in penalties for charges relating to the Bernie Madoff Ponzi scheme (JP Morgan was Madoff's primary bank for decades). There is a $1.7 billion penalty for violations of the Bank Secrecy Act, "a federal law that requires banks to alert authorities to suspicious activity" (in other words, if they were paying attention, they would have noticed that something funny was going on with Madoff's accounts); that sum is to be distributed to Madoff victims. In addition, the bank will pay $350 million to the Office of the Comptroller of the Currency.

The Times journalists note (full article, here),
It could have been worse for the bank. At one point, prosecutors were weighing whether to demand that the bank plead guilty to a criminal charge, a move that senior executives feared could have devastating ripple effects. Rather than extracting a guilty plea, prosecutors struck a so-called deferred-prosecution agreement, suspending an indictment for two years as long as JPMorgan overhauls its controls against money-laundering.

Still, the size of the fine and the rarity of a deferred-prosecution agreement — such deals are scarcely used against giant American banks and are typically employed only when misconduct is extreme — reflect the magnitude of the accusations.

So, we should be pleased, right? Sort of.  Because the total amount of fines being levied on the bank are really starting to mount up, as I commented late last year (full post, here). We still haven't seen the perp walk I've been hoping for, but the dollars have to be enough to guarantee that the bank will start paying attention, right?

Alas, probably not.

As Peter Eavis reports, also in today's New York Times, the bank is taking these fines in stride. While a total of $20 billion or so in fines in the last year would sink most banks, "JPMorgan has become so large and profitable that it has been able to weather the government’s legal blitz, which has touched many parts of the bank’s sprawling operations." (full article, here)

Wall Street in general certainly isn't worried. In fact, "shares [of JP Morgan] are up 28 percent over the last 12 months."

With something like $100 billion in annual revenue (and $23 billion in profits last year), and very large set-aside legal reserves, the bank can continue operating as though nothing really significant was happening.

But, in the words of a Michigan law professor that Eavis quotes, "[While] JPMorgan’s shareholders may believe these billions of dollars don’t count because they see them as extraordinary expenses, ...they keep popping up one after another — and the bank could have done something about them."

Doesn't anyone else think that $20 billion in fines isn't just a cost of doing business but evidence of a massive criminal organization?

Monday, January 6, 2014

New Year, New Attitudes? Maybe.

One of the most misused phrases in the corporate lexicon is "Human Resources". When was the last time that you felt that HR really cared about its "resources"?

Typically, it seems, we're just round pegs that have to be stuffed into whatever convenient square hole is handy, with as much force as necessary. And the number of holes keeps shrinking -- think Musical Chairs with a pink-slip "prize".

But maybe -- just maybe -- attitudes are starting to change. I've been thinking a lot about an end-of-the-year New York Times Magazine article, "Thinking Outside the (Big) Box", by Adam Davidson. In it, Davidson explains that "the most coldhearted, money-hungry capitalists ought to realize that increasing their work force, and paying them and treating them better, will often yield happier customers, more engaged workers and — surprisingly — larger corporate profits."

This is not the argument of some wild-eyed lefty mainstream-media pundit, but rather that of MIT Sloan School business professor Zeynep Ton and her colleagues (For more details, see Ton's Jan-Feb 2012 Harvard Business Review article, "Why 'Good Jobs' Are Good for Retailers"; preview available here; full article requires payment or subscriber registration).

As Ton argues, most retailers (and other businesses) count employees first as a cost. Reducing costs = improving productivity, which = greater profitability and high stock price. So it's simple: when in doubt, cut staff and/or pay.

But, Ton goes on, that's the wrong way to look at employees. Better-paid employees, with better training, are more invested in the business where they work, more willing in helping customers find what they are looking for, more interested in increasing overall sales. Ton writes,
In my analysis of data from 1999 through 2002 from more than 250 stores of Borders, a major bookstore chain at the time, I found that a one-standard-deviation increase in labor levels at a store increased profit margins by 10% over the course of a year. Research by Marshall Fisher, Serguei Netessine, and Jayanth Krishnan supports my findings: Their analysis of 17 months of data from a large retailer shows that for every $1 increase in payroll, a store could see a $4 to $28 increase in monthly sales.
Ton allows that the connection between increased staffing and higher profits is not a purely linear one. But, as Davidson notes, "Costco pays its workers about $21 an hour; Walmart is just about $13. Yet Costco’s stock performance has thoroughly walloped Walmart’s for a decade."

I think most of us have had the experience of leaving a big store in frustration, without buying anything, because we haven't been able to find what we were looking for, and there was no one there to help us.

Here's a personal example (I know, I know: statistically significant national sample of One. But bear with me, please): There are two hardware stores in my neighborhood, roughly equidistant from my house. One is a small neighborhood store; the other is a big-box. When do I go to the big box? Virtually never. 

I know that Small Hardware does not carry as many items as Big Box. I know that Small Hardware's prices are a little higher. If I were a contractor building a whole house, I would probably care. But I'm not. I'm usually at the hardware store for a few nails or some picture-hanging wire, a little wood glue or a smaller pair of needle-nose pliers. Small Hardware's salespeople know exactly where every item is, will walk me over to the correct spot (as opposed to saying, "Aisle 3, about halfway down, on the left, I think"), and will talk over the relative merits of pliers A versus pliers B. They also understand homeowners' small jobs well enough to ask, "Do you have the X that you'll need, too?" They have saved me time, money, and frustration again and again.

Henry Ford figured some of this stuff out 100 years ago, with his $5-a-day wage for factory employees. Maybe it's time to go back to the future....