Wednesday, July 30, 2014

Worried About That Used Car You're Thinking of Buying? Go to New York City.

Why regulate? I'll say it again: Because if you don't, too many people won't do the right thing.

I wish that weren't true. But it is, and we all know it. Oh, and we know all the "good" reasons why, too. (Free example: "Gee, I really want to do the right thing, but my competitor, across the street? He's a horrible person, and I know he won't do the right thing, which would cost a little more, so he'd be able to charge less, and I'd go out of business. But really: I'd like to be able to do the right thing. Honestly.")

I wrote a month ago (here) about my disappointment that CarMax's "rigorous inspection" of the used cars it offered for sale did not include having vehicles under recall repaired before sale. It turns out -- which I didn't know, and I suspect most other consumers don't either -- that while a new-car dealer must repair a recalled vehicle before it can be sold, used-car dealers aren't required to do that.

The National Highway Traffic Safety Administration (NHTSA) has been asking Congress for such a law, but proposals have been languishing in both House and Senate (what a surprise!).

In a May New York Times article, the NHTSA director said, "It should be a slam dunk...To me it is hard to oppose ensuring that people who buy a car, whether it is new or used, or whether you are renting a vehicle, can have the confidence that it is safe." (Full article, here)

New York City is now taking matters into its own hands. According to Rachel Abrams and Christopher Jensen, in today's New York Times (full article, here), 
New York [City]’s requirement is a stricter interpretation of a state law that requires all vehicles to be safe and roadworthy in order to be sold. Now, city officials want to make it clear to dealers that being safe includes repairing cars under recall....

Companies found to have sold unrepaired used cars will be required to notify the vehicles’ owners about the defect and make any necessary repairs. The department is prepared to issue violations to offending companies and, if necessary, revoke their licenses to operate.

While some dealerships already have policies in place requiring the repair of vehicles under recall, others are complaining about the additional burden this regulation will place upon them:  "When do we stop babysitting the consumer?" asked one used-car dealer.

He clearly has a different definition of "babysitting" than do I.

The question is, How many people will have to be injured or die before Congress takes action?

Friday, July 18, 2014

How Is Inversion Different From Evasion?

If you're talking taxes, the answer's easy: Inversion is legal, evasion is not.

But if you're talking the morality of tax-avoidance... well, I think it gets a lot murkier.

If you've read this blog even casually, you know that one of my favorite quotes is from the great American jurist, Oliver Wendell Holmes: "Taxes are the price we pay for a civilized society." (Last used, I think, here when I was also talking about sleazy tax-avoidance schemes)

And if you've been following the business news lately, you've seen a lot of talk about inversion deals. (If you, like me, are not a tax accountant / lawyer, the short definition is: Moving out of the US and establishing your corporate "headquarters" in a country with a lower corporate tax rate than ours.)

And the more I've been reading about these deals, the madder I've gotten. Clearly, if the Supreme Court is right, and Corporations Are Persons, then way too many of them are sociopaths.

The current poster child for inversion is Minnesota-based Medtronic and its acquisition of Massachusetts-based-but-Ireland-headquartered Covidien (14 June 2014 New York Times article detailing the deal, here). But it's hardly the only such company making this move. Today's Times, for example, carries a David Gelles article (here) about the anticipated acquisition of Ireland-based pharmaceutical giant Shire by Chicago-based even-bigger pharmaceutical giant AbbVie.

Lawmakers may be starting to pay attention. Treasury Secretary Jacob Lew sent a letter to Congress Tuesday (as reported in today's New York Times by David Gelles, here), urging it "to take immediate action to halt the rush of companies abroad." Lew and some lawmakers are concerned about the significant reduction in tax receipts; I'm outraged by the immorality.  Especially as many of the pharma companies that are moving abroad receive substantial payments from the federal government through Medicare and Medicaid.

Thankfully, I'm not alone in my outrage.

Fortune senior editor at large Allan Sloan has written an excellent, blistering cover story (here; long but absolutely worth reading; if you're an audio person, Sloan gave a great interview to WNYC's Leonard Lopate yesterday, available here) on the fiscal and philosophical damage that mass inversion can / will cause. Sloan fairly presents the argument for moving "headquarters" abroad:
The U.S. tax rate is too high, and uncompetitive. Unlike many other countries, the U.S. taxes all profits worldwide, not just those earned here. A domicile abroad can offer a more competitive corporate tax rate. Fiduciary duty to shareholders requires that companies maximize returns.

But, Sloan argues, if your taxes are too high, you shouldn't desert the US: You should stay and fight for tax reform. Moreover:
I define “fiduciary duty” as the obligation to produce the best long-term results for shareholders, not “get the stock price up today.” Undermining the finances of the federal government by inverting helps undermine our economy. And that’s a bad thing, in the long run, for companies that do business in America.

Yes. I have written before that "shareholder value" is too often used to justify really questionable behavior (example: here).

The simple solution, many are saying, is to cut the US corporate tax rate. But would that work? Sloan believes (and I agree), that it wouldn't:
In the widely hailed 1986 tax reform act, Congress cut the corporate rate to 34% (now 35%) from 46%, and closed some loopholes. Corporate America was happy–for awhile. Now, with Ireland at 12.5% and Britain at 20% (or less, if you make a deal), 35% is intolerable. Let’s say we cut the rate to 25%, the wished-for number I hear bandied about. Other countries are lower, and could go lower still in order to lure our companies. Is Corporate America willing to pay any corporate rate above zero? I wonder.

Great: So we're back to playing a how-low-can-you-go game, and to hell with the rest of us. I don't know about you, but I'm stuck here -- and patriotically glad of it -- and paying my taxes. And may I point out that, while the "sticker rate" is 35%, it's not the actual rate that most companies pay (2013 CNN Money piece, here; according to the GAO, the effective tax rate in 2010 was ....12.6%).

As I said, Sociopaths. 

Wednesday, July 16, 2014

Hate Those Regulations And Unions? Look In The Mirror, And You'll See Why They Exist

Senior managers seem to take great pleasure in excoriating the twin evils of government regulation and labor unions. Without those, they say, think how much more efficient our marketplaces would be! Think how much more profitable our company would be!

It's my opinion that government regulations and labor unions are in fact statements about how badly many companies are run. I can't think of many governments that begin with massive regulation of corporations -- regulation comes about because of horrific instances of environmental pollution, workplace safety lapses, or other abuses. Labor unions have trouble getting into companies where workers feel valued and well-paid. If your employees are starting to mutter about unionizing, the problem's not with them: it's with you.

I wrote a few months ago (full post, here) about the tiniest hints that companies are learning that hiring more employees and paying them better results in happier customers, bigger sales, and even higher profits. Today's New York Times has two article that relate to this discussion.

In the first (full story, here), Steven Greenhouse writes about the growing pushback against "on-call" schedules that give workers little or no control over their working hours. In many cases, workers learn only a day or two in advance -- occasionally on the day itself -- whether they will be working or not. That gives them little time to arrange for child care, for example, or to work a second job to improve their financial situation.

A retail organization representative is quoted opposing proposed regulations that would require employers to pay workers extra if they are given less than 24 hours' notice, or to grant flexibility for care-giving or school-conflict requests: "Where employers and employees now work together to solve scheduling problems, you’ll have a very bureaucratic environment where rigid rules would be introduced."

Expect that, as I hear it from retail employees, employers and employees don't "work together". Unless you define "working together" way differently from the way I do.

A University of Chicago professor notes, "Frontline managers face pressure to keep costs down, but they really don’t have much control over wages or benefits...What they have control over is employee hours."

And employees have no power to resist.

That situation won't change until retailers stop thinking of their store employees purely as a cost. I know I'm not the only shopper who has left a store in annoyance, and without spending the money that I had intended to spend, because I couldn't find anyone on the floor to help me.

In the second story (here), Eduardo Porter compares the commitment that many early- to mid-20th century employers had to their employees to what passes for commitment today. He recalls Eastman Kodak's early profit-sharing plan, Ford's revolutionary (for the time) $5 a day salary for its workers, and other well-known examples. Meanwhile, today, too many companies still worship at the altar of Milton Friedman and "shareholder value".
Companies, of course, are not charities. Their main responsibility is to remain profitable.

Still, there is a case to be made that attending to workers’ rights or environmental degradation might help the business in the long term...

More broadly, company executives are under a new form of pressure. George Serafeim of Harvard Business School points out that the information age has brought greater transparency to corporate operations. Customers, investors and employees know more about what businesses do around the world and can exert influence to change their behavior.
Of course, while corporations may clean up what's visible to the outside world, that's no guarantee that the same will occur on the inside. Which is why I support whistle-blower protections, too.

Tuesday, July 1, 2014

Is It Possible to be TOO Transparent?

You know how I'm going to answer that question, right?

But I've been thinking about it all day, after reading an article by Bill Vlasic and Danielle Ivory in today's New York Times, whose headline tells the story: "In recall blitz, GM risks its reputation."

They quote an analyst: "We’re hitting unprecedented numbers and it’s reasonable for people to start asking, When and where will it end?"

(Note that a substantial number of comments to the Times article are along the lines of:  Reputation for quality? What reputation for quality? Unless you mean, Poor quality.)

Still, it made me think of a post I wrote in March (here) in which I encouraged manufacturers with a problem to address it as quickly and directly as possible, as a big hurt now will hurt less than a lot of little hurts later.

But is it possible to recall too many products at once? I don't think so, despite the massive size of the current spate of recalls (more than eight million more vehicles were recalled on Monday, many with ignition-switch issues that appear to be similar to the Cobalt problems that started the wave).

I expect that GM will take a hit in sales in the short term -- although June sales were actually up from a year ago, as were year-to-date sales (see Ward's report, here), thanks to strong government fleet and commercial fleet orders -- but if CEO Mary Barra and her team can show that they are serious about changing the culture of GM, the long-term effects of the recall(s) should be positive.

I'll stick to my old line: To rebuild Trust, embrace Transparency.