Monday, March 31, 2014

Another Solution to the College Football Player "Athlete or Employee" Question?

I'll be the first to admit that I'm not a football fan, whether played at the high school, collegiate, or professional level. In college, I got dragged to one game by a friend who thought it "ridiculous" that I'd never seen one (the Purple Cow Marching Band at half-time was the high point!); at business school, I got dragged to another by a friend who said, incredulously, "You're at a Big Ten school and you've never been to a game?!?"

So it's not surprising that I didn't pay a lot of attention to the story that broke last week, when, to quote the New York Times' Ben Strauss and Steve Eder, "A regional director of the National Labor Relations Board ruled Wednesday that a group of Northwestern football players were employees of the university and have the right to form a union and bargain collectively." (Full disclosure: the university whose business school I attended, and whose football game I therefore watched, was Northwestern, and I still didn't pay much attention to the story.) The full article is here, but pretty much every news outlet carried a version of the story; the NLRB decision can be found here.

I saw the headlines, and thought, College sports is a huge business and of course these players are employees, and of course they should be able to unionize, and if they can wrest some money and control away from the NCAA and the universities, more power to 'em.

The schools and the NCAA insist that these are "student-athletes" who receive a valuable education in exchange for their football prowess. Northwestern in particular points to its exceptionally high graduation rate (97%, the highest rate among top-tier college athletics programs) to "prove" that these are indeed students as well as athletes. But only the schools and the NCAA appear to have been taken in by that analysis.

The rest of us have seen the hours that players spend on the field and in the weight rooms (the NLRB director estimated that Northwestern's football players spend 40 to 50 hours a week on football, which sounds a lot like a fulltime job to me). Strauss and Eder note that "Kain Colter, a former Northwestern quarterback and the face of the movement [to recognize athletes as employees], testified that he was steered away from difficult science classes and denied his dream of pursuing a career as a doctor."

The decision is being appealed, and a final ruling is probably months away.

But today I came across a brief piece by Matt Bruenig in Salon, which revived a two-year suggestion from Ralph Nader: Eliminate athletic scholarships altogether (Nader's "League of Fans" proposal, from 2011, can be found here).

According to the League of Fans' senior issues analyst,
Athletic scholarships are financial inducements to play sports at college. Basically, they are one-year contracts between an athlete and a coach. Coaches can literally fire athletes for poor performance or injury. As such, a scholarship athlete’s first priority in college is to play sports. Education is a secondary consideration. Paying for young people to come to college campuses to focus on sports — not education — is perverse.

I won't argue with that. And to those who claim that sports is an important "way out" for "students" who would not otherwise get a chance to get a good education or try out for the National Football League, I'd note that (a) with 40-50 hours a week devoted to football, there's not a lot of time left for getting to class, reading assignments, writing papers, meeting with faculty advisors, etc., and (b) only about 2% of college players get drafted into the NFL. Those are worse odds than Vegas.

Take that football scholarship money and use it for needs-based academic scholarships. And then maybe universities can focus on what they're designed to do: educate.

Tuesday, March 25, 2014

What's "Reasonable"? What's "Fair"?

I wrote a post a few years ago asking a "simple" question: What's a "fair price"? As I wrote:
The starting point of business ethics is contractual: I agree to provide a fair product (or service), and you agree to pay me a fair price.

After that, the arguments start.

What's a "fair" price?....And what's a "fair" product?

Here's another simple question for you: What's "reasonable reward"?

In many companies, in addition to the stated compensation, senior managers are rewarded with bonuses and/or stock options for excellent performance. Usually these are tied to some standard metrics (the company's stock price has reached this new high; sales are increasing by that percentage; etc.).

Today's "DealBook" in the New York Times carries a column by Andrew Ross Sorkin that asks the question about what's "reasonable". It doesn't give any solid answers, but maybe some shareholders will speak up.

A money manager was reviewing the Coca-Cola annual report and proxy statement (his fund controls more than 2 million shares of the stock) when he came across some surprising (to him) numbers:
Doing a little quick math, the analyst determined that the company planned to award stock worth about $13 billion to its senior managers over the next four years, based on the company’s current stock price. Getting out his calculator, the analyst estimated that between the proposed compensation plan and a previous plan, the company had allocated as much as $24 billion toward stock-based rewards for its senior people.

He was so surprised by the numbers that he sent a letter, released publicly, to Coca-Cola's board and shareholders. In it, he wrote:
We can find no reasonable basis for gifting management 14.2 percent of the share capital of Coca-Cola, worth $24 billion at today’s share price. No matter how well a management team performs, it is unfathomable that they would require such astronomical sums of money to provide motivation. This compensation plan appears to place the economic well-being of management far ahead of the interests of the company’s owners.

Coke's response was that this analysis was "misinformed and does not reflect the facts." Moreover, the company said, the proposed program "is not limited to senior executives, but extends to a large group of employees and is important for incentive and retention. Approximately 6,400 were eligible in 2013. The amount of long-term equity compensation awards granted each year are within industry norms."

To this claim, Mr. Sorkin notes wryly, "If that is the case, each of Coca-Cola’s managers eligible would be entitled to, on average, a little more than $2 million each. Of course, the bonus money won’t be doled out equally."

It's almost certain that the numbers are at least somewhat exaggerated. And there are specific performance targets that must be met, or the shares are not distributed. 

So, Mr. Sorkin asked the analyst, how much should Coke's senior management be paid? His reply: "I don’t know the answer. But I know $24 billion is excessive."

What's your definition of "reasonable reward"?

Monday, March 24, 2014

You Paid How Much for That Painting? And the Artist Got Nothing?

When an artist initially sells her painting, she receives the full price of that work (less a commission, should she have sold it through a gallery instead of directly). But what happens when the purchaser resells that work? The proceeds benefit only that purchaser (and his or her gallery or auction house). As Patricia Cohen writes in today's New York Times (full article, here),

As the art market has become a high-priced playground for billionaires and hedge-fund moguls, interest in resale royalties has grown. A few celebrity artists have shared in the tremendous growth in wealth, but most — even those whose work may now command millions of dollars — don’t benefit if prices increase after the initial sale. 

At least, that's the case in the United States. In France, and some 70 other countries, a portion of the proceeds of the second sale (and third and fourth and so on) would go back to the original artist. California passed a Resale Royalty Act in 1976, requiring the payment of a 5% royalty on sales over $1,000 to the original artist, but the law was declared unconstitutional in 2012 (and is now being reviewed at the appellate level). 

Major auction houses are willing to go to considerable lengths to block a proposed national "resale royalty" act (also known by its French term, "droit de suite") rights, notably by hiring some pricey lobbyists.  The bill, introduced by Rep. Jerrold Nadler (D-NY, 10th District) and, in the Senate, by Edward Markey (D-MA) and Tammy Baldwin (D-WI), would require a 5% royalty payment to the artist on resale, to a maximum of $35,000. Any sale occurring at auction (large house, like Sotheby's or Christie's, small house, or online) would be affected; private sales (including galleries and dealers, not just between individuals) would not.

Auction houses, of course, "worry that the proposed royalty bill would encourage more sellers to abandon public auctions for private deals."
Sotheby’s and Christie’s have also argued that royalties would benefit only the wealthiest artists and estates, because they are the ones most frequently sold in the secondary market. To that, Mr. Nadler responds: "This is not an anti-poverty bill. It’s a fairness and equity bill."

Droit de suite was originally opposed by the US Copyright Office, but a December 2013 analysis revised that opinion (complete analysis, including a thorough review of the history of resale royalties, and arguments for and against the concept, here). 

Droit de suite may not be a perfect solution to a problem that few of us will ever face, but it's better than no solution at all.

Thursday, March 20, 2014

Take the Hit Now. It'll Hurt Less Than It will Later.

I wrote last month (here) about GM's recall of vehicles with a faulty ignition switch, basically asking "Why would you wait to work on a fix if your product demonstrates a significant flaw?" It shouldn't be necessary for people to die.

GM, of course, is not the only company -- not even the only car company -- to deal with the question of recalls. Today's New York Times reports that Toyota has been fined $1.2 billion for hiding safety defects (full article, by Bill Vlasic and Matt Apuzzo, here).

The article includes a quote from US Attorney General Eric Holder that perfectly encapsulates why you should do the right thing as soon as possible:
A recall may damage a company’s reputation, but deceiving your customers makes that damage far more lasting.
Thank you.

The fine, the largest criminal penalty ever for an automaker in the United States, is related to a 2004-2010 problem of "unintended acceleration" in many of the most popular Toyota and Lexus models. As reported in the Times,
Toyota recalled more than 10 million vehicles in 2009 and 2010 for problems related to unintended acceleration. The company modified gas pedals and floor mats and made brake-override systems standard on new models.
The company has already paid more than $60 million in civil penalties related to the gas-pedal problems, and will still have to deal with numerous wrongful-death and personal-injury lawsuits. Of course, when you have more than $60 billion in cash reserves, even these penalties will not do lasting financial damage. And Toyota's market share has largely recovered. But:
There has been a growing sense among [Toyota] executives that a prolonged investigation would ultimately do more damage to the automaker’s image in the United States than a settlement, people with knowledge of the company’s thinking say.
I'd like to say, Think about that long-term damage before you embark on a cover-up. 

But I know that "long-term" is a concept we all have trouble with.

Monday, March 17, 2014

Another Race to the Bottom, Instead of to the Top

One of my mantras, as anyone who's read even one of my posts probably knows, is Transparency. Or, in the words of the eminent jurist Louis Brandeis, "Sunlight is said to be the best disinfectant."

Which is why I find secret negotiations so disquieting. I recognize that some negotiating must be done away from prying eyes, but when everything is done in the dark? Well, that raises my suspicions.

Which is why I've been increasingly concerned about the Trans-Pacific Partnership (TPP), which is supposed to create the largest free trade area in the world.

If you are one of the key delegates from Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, or Vietnam, you no doubt believe that TPP "is critical for creating jobs and promoting growth, providing opportunity for our citizens and contributing to regional integration and the strengthening of the multilateral trading system." Sounds good, right? (The quote is from the website of the Office of the US Trade Representative, found here)

On the other hand, if you're from the Electronic Frontier Foundation, you think that TPP is "is a secretive, multi-national trade agreement that threatens to extend restrictive intellectual property (IP) laws across the globe and rewrite international rules on its enforcement." (From the EFF website, found here) Similar complaints have been voiced by other stakeholders who have felt locked out of the discussions.

The only details that have been made available to those of us who aren't delegates have been leaked documents, most recently in December of last year (Wikileaks link, here).

As Nobel laureate economist Joseph E. Stiglitz wrote in yesterday's New York Times, "Based on the leaks -- and the history of arrangements in past trade pacts -- it is easy to infer the shape of the whole TPP, and it doesn't look good." (Full essay, here)

More correctly, it may look good to the wealthiest 1%, but to the rest of us, not so much.

Stiglitz points out that trade deals originally (post-World War II) "focused on lowering tariffs." The idea was that lower tariffs would increase trade, and "each country could develop the sectors in which it had strengths and as a result, standards of living would rise. Some jobs would be lost, but new jobs would be created."

And by and large, that idea worked. So what's different now? A new emphasis:
The focus has shifted to "nontariff barriers," and the most important of these -- for the corporate interests pushing agreements -- are regulations. Huge multinational corporations complain that inconsistent regulations make business costly.

That makes sense: if all the rules were the same, think how much easier it would be for any company to open an office, a store, a factory in a new country. This would certainly be good for corporate profits. But would it be good for the rest of us?

Stiglitz reminds us that "most of the regulations, even if they are imperfect, are there for a reason: to protect workers, consumers, the economy and the environment."

The professor can imagine a positive to this drive for "regulatory harmonization":
One could, of course, get regulatory harmonization by strengthening regulations to the highest standards everywhere.

But he thinks that's unlikely. And the secretiveness with which the negotiations have taken place make it more likely that the depressing second sentence of Stiglitz's paragraph is correct:
But when corporations call for harmonization, what they really mean is a race to the bottom.
I hope that Professor Stiglitz is wrong. There's one way for the US trade representative and others to show that: Open up the proceedings so that everyone who will be affected by this new pact -- that would be all of us -- can take part.

Wednesday, March 5, 2014

Two Wrongs Still Don't Make a Right

Imagine this scenario: You and some neighbors have seen the land on which you rely for agricultural sustenance despoiled by a major company. You sue. The company fights back. Its resources are, to say the least, greater than yours. You dig your heels in and sue again. Someone offers you falsified data to strengthen your case. Will you use it?

I'll begin by saying, right off, that I don't know the "truly truth" of this story. But it's a great case to consider, especially when dealing with the (allegedly) bad behavior by multinational giants whose size and power is greater than that of many independent nations, and who aren't afraid to use that size and power aggressively.

Today's New York Times carries a long story by Clifford Krauss about a significant victory posted by Chevron in its "Goliath and David" battle against local activists and environmentalists who claimed that the corporation had refused to clean up after (or even accept blame for) polluting Ecuador's rain forests.

The origins of the case (as reported by Simon Romero and Clifford Krauss in 2011, full story, here) "go back to the 1970s, when Texaco, which was later acquired by Chevron, operated as a partner with the Ecuadorean state oil company. The villagers sued in 1993, claiming that Texaco had left an environmental mess that was causing illnesses. Chevron bought Texaco in 2001, before the case was resolved." Note that Chevron claims that Texaco did clean up its mess, and that the pollution found was cuased by the Ecuadorean national oil company.

A key figure in the litigation against Chevron was a New York-based lawyer, Steven R. Donziger, who gained fame in a documentary called "Crude". The 2009 film (see trailer etc., here) deals with a two-year portion of the ongoing battle and presents Mr. Donziger in a highly favorable light as a crusader for the poor and voiceless.

In 2011, Chevron was dealt a significant setback, when an Ecuadorean judge ordered the company to pay $9 billion in damages (and double that if Chevron continued to refuse to apologize publicly). Chevron promptly appealed.

Yesterday, it was Ecuador that was dealt a major setback, when a US federal judge ruled that "a two-decade legal effort to punish the company was marred by fraud and corruption." (The 497-page full ruling -- no, I haven't read it all -- is here, and an 89-page appendix, here)

The judge acknowledges that pollution occurred, and wrote,
On that assumption, Texaco and perhaps even Chevron -- though it never drilled for oil in Ecuador -- might bear some responsibility. In any case, improvement of conditions for the residents of the Oriente' appears to be both desirable and overdue. But the defendants' effort to change the subject to the Oriente', understandable as it is as a tactic, misses the point of this case.

The issue here is not what happened in the Oriente' more than twenty years ago and who, if anyone, now is responsible for any wrongs then done. It instead is whether a court decision was procured by corrupt means, regardless of whether the cause was just. An innocent defendant is no more entitled to submit false evidence, to coopt and pay off a court-appointed expert, or to coerce or bribe a judge or jury than a guilty one. So even if Donziger and his clients had a just cause -- and the Court expresses no opinion on that -- they were not entitled to corrupt the process to achieve their goal.

Chevron's team had acquired outtakes from "Crude" that highlighted what Mr. Krauss of the Times called Mr. Donziger's "unorthodox style." From those outtakes and witness testimony, it became clear, the judge wrote that "fraudulent evidence" was presented, that judges were "coerced", that "half-truths or worse" were told to "prevent exposure of ... wrongdoing." In summation, the judge wrote, "If ever there were a case warranting equitable relief with respect to a judgment procured by fraud, this is it."

The judge's ruling affects only the US -- there are cases pending against Chevron in Canada, Brazil, and Argentina as well.

The judge did acknowledge that Mr. Donziger "began his involvement in this controversy with a desire to improve conditions in the area in which his Ecuadorian clients live." But, he continued,
Justice is not served by inflicting injustice. The ends do not justify the means. There is no "Robin Hood" defense to illegal and wrongful conduct.

What's your ruling?