Ethical Business Ethics

Made in Detroit, Ohio?!?

2012-02-06T10:11:00.000-08:00

Yeesh. Sometimes these posts really write themselves.

Thanks to the website, The Atlantic Wire, I got introduced to a Detroit Free Press story that I wouldn't have seen otherwise. Reporter Susan Tompor uncovered a sad little truth:

"Made in Detroit" T-shirts aren't, in fact, made in Detroit.

In her article, she writes about how she can get choked up hearing hometown boy Kid Rock sing that "I heard them say they're shuttin' Detroit down. But I won't leave cuz this is my hometown."

Kid Rock did indeed buy the "Made in Detroit" brand after it slid into bankruptcy in 2005. The brand's website refers to itself as "the singular symbol for a city that's not about to quit." (Inside the T-shirts, you'll find a logo plus this phrase: "Tough times don't last; tough people do.")

But where are the shirts made? Tompor went shopping, and found shirts made in the Dominican Republic, India, Honduras, and ... Ohio. Some shirts had had tags removed.

Is making "Made in Detroit" shirts in India illegal? No (although removing the tags might bring you unwanted FTC attention). But for a shirt that speaks to regional pride to be made elsewhere -- even elsewhere in the US -- isn't the best ethical move. I suspect that the buyers would wear their shirts with even more pride if they knew that it was indeed Made in Detroit.

Tompor quotes the brand's operations manager as saying that "it would cost more for Made in U.S.A. shirts but ... the company is working toward using more U.S.A.-made shirts." She hopes that works out.

And so do I.

How Much Does a 5-Star Review Cost? Not Much.

2012-01-27T11:35:00.000-08:00

Word-of-mouth is about the best advertising there is -- I trust geeky friends of mine to give me advice on new toys to purchase (or not), and they trust me with car-guy questions. But just how far beyond your real circle of friends can you trust "word-of-mouth" reviews?

I've spent many years in marketing research, and the most important thing I learned, and for you to remember, is: "Lies, damned lies, and statistics". I used to tell clients -- who would inevitably try to shape the research for their own benefit -- that they should just tell me what results they wanted, and I'd get them.

"Oh, no," they'd protest, "We want to know what our customers really think."

Really? I didn't think so then, and I don't think so now. They generally want to know what will make them look good.

When I pick up my car after a regular oil-change, the service adviser reminds me that I'll be getting an online questionnaire in the next day or two, and that "We strive for 100% outstanding, so I hope that's what you'll be able to give us."

Hint. Hint.

(In fact, I never complete those questionnaires. Because of all my years in research, I know too much about how they're constructed, and how easy it is to game the system. A properly-constructed questionnaire should ask you, right up front, if you're in the marketing, sales, or research of that particular product or service, and if you say, Yes, should disqualify you. If they don't ask those questions, it's not well-designed research. Just saying....)

Now my service adviser has never offered me cash for a positive review, or a free car wash, or anything of the sort, thankfully.

But there are apparently plenty of folks out there buying positive reviews. I've written before about Amazon's army of reviewers, and the gifts some have received for those glowing reviews.

Today's New York Times has an article by David Streitfeld on the problem of buying five-star reviews.

According to the article, some customers who purchased Kindle Fire covers from VIP Deals (for less than $10, plus shipping; "regular price", $59.99) were refunded their purchase price for a five-star review.

While the letter [from VIP Deals making the refund offer] did not specifically demand a five-star review, it broadly hinted. "We strive to earn 100 percent perfect ‘FIVE-STAR’ scores from you!" it said.

As Streitfeld drily writes, at least one customer who was offered the deal had her doubts:

"I was like, 'Is this for real?'" she said. "But they credited my account. You think it’s unethical?"

Um, that would be Yes.

Connections between the person who makes a product or offers a service and the person who promotes that product or service must (by law, not just ethics) be disclosed. Streitfeld writes that the Federal Trade Commission has starting cracking down on some of the most egregious examples, and fears that the examples it found are "far from isolated instances."

A technological solution may be on the way: academic researchers are now "trying to devise mathematical models to systematically unmask the bogus endorsements."

I like the idea, although I'm just cynical enough to suspect that the moment such an algorithm is devised, someone else will have designed an algorithm to get around it.

Maybe we should rethink hive-mind reviews altogether. I have more confidence in the Times' restaurant reviews than in Yelp, and more confidence in what Consumer Reports says than in glowing reports on Amazon. Because even if I don't know those reviewers personally, I know what they stand for.

Here's Hoping that Reporting a Practice Will Lead to its Demise

2012-01-17T09:38:00.000-08:00

Recently, as a result of news accounts of expensive business trips underwritten by a corporation's not-for-profit foundation, I wrote suggesting that "gimmes" were a bad idea in whatever industry you mention. We all like to think that we're not influenced by "trinkets" ... and the research suggests that we're all wrong.

In today's New York Times, reporter Robert Pear writes that

To head off medical conflicts of interest, the Obama administration is poised to require drug companies to disclose the payments they make to doctors for research, consulting, speaking, travel and entertainment.

What you're hearing now is the sound of me, applauding.

Apparently, if a company has even one product that is covered by Medicare or Medicaid, it would have to disclose all payments made to doctors who are not its own employees. However, it's not clear to me how "payments" is defined.

After all, Pear reports that approximately one in four doctors receive cash gifts from device or drug makers, and that those payments can add up to the hundreds of thousands and even millions of dollars.

Moreover, an estimated two-thirds of doctors accept gifts of food, ranging from a bagel-and-schmear breakfast for the staff, at which at pharmaceutical representative makes a presentation, to an elegant dinner for the doctor. And what about all the pens and clipboards and notepads that we see when we go to the doctor's office, nearly always emblazoned with the logo of some unpronounceable drug?

If you think I'm concerned about something so small as a gimme pen, you're right. Pear writes,

The Times has found that doctors who take money from drug makers often practice medicine differently from those who do not and that they are more willing to prescribe drugs in risky and unapproved ways, such as prescribing powerful antipsychotic medicines for children.

Pear quotes a pharmacist and consumer advocate at the Pew Charitable Trusts:

Patients want to know they are getting treatment based on medical evidence, not a lunch or a financial relationship. They want to know if their doctor has a financial relationship with a pharmaceutical company, but they are often uncomfortable asking the doctor directly.

Speaking as a patient, "Yes we do (want to know) and Yes we are (uncomfortable asking)."

My hope is that the payment-disclosure requirement will lead to the complete demise of the gimmes practice. If it happened tomorrow, it wouldn't be too soon.

There's Good News and Bad News, and Bad News and Good News

2012-01-05T12:44:00.001-08:00

First, the bad news: According to the 2011 National Business Ethics Survey, nearly half of American business employees observed either ethical or legal violations at their workplace. Actually, that's good news: it's about the lowest level reported.

The really good news is that about two-thirds of those who witnessed violations reported them. But then there's more bad news: about one in five of those who reported violations experienced some form of retaliation, up sharply from previous years. In addition, pressure on employees to cut corners and compromise ethical standards is at an all-time high.

The Ethics Resource Center conducts the Business Ethics Survey every two years. The press release is available here, and the full downloadable report is available here.

Get Rid of the Gimmes, Whether Small, Medium, Large, or EXTRA Large

2012-01-03T06:36:00.001-08:00

As far back as 2009, I wrote about "gimme pens" and the like, and how easily we can be influenced by even the cheesiest tchotchkes. A study conducted with third- and fourth-year medical students indicated that even small gifts -- clipboards and notebooks -- had a measurable impact on how the students viewed competing drugs.

Thanks to humans' astonishing capacity for self-delusion, most of us are sure that we wouldn't be influenced by such gifts, even though they might be. The solution, I said then (and still think now), is to get rid of them all.

Now if a $0.50 pen or a $2.00 clipboard can have an effect on your attitudes and behavior, what do you think a $60,000 visit to Australia might do?

Yeah, that's what I'm thinking.

For a couple of months now, I've been following a story on inquiries into trips offered by the "Pearson Foundation", the not-for-profit arm of Pearson Education, the big publisher. In October, the New York Times' Michael Winerip wrote about trips that state education commissioners have taken to various countries to "get ideas for improving American public schools" ... and to meet with senior Pearson officials. In late December, the Times' Winnie Hu reported that New York's attorney general Eric Schneiderman is investigating whether the Pearson Foundation "acted improperly to influence state education officials by paying for overseas trips and other perks." And yesterday, Winerip showed that it's not just the state commissioners who have benefited from the Pearson Foundation's interest, but even some local school superintendents, too.

According to Winerip's account, six months after a Kentucky school superintendent took a Pearson trip to Australia "to exchange ideas on creating schools for the 21st century" (and to admire the kangaroos in Canberra!), she was voting on which of three companies should win the bidding to run the Kentucky state testing program. Even though CTB/McGraw-Hill submitted the lowest bid (and not by a few dollars either, but by $2.5 million), the committee recommended .... Pearson!

Are you surprised? Me, neither.

According to Mark Nieker, president of the Pearson Foundation, "It just is not true that the Foundation’s support of conferences attended by education officials has the purpose of helping Pearson corporate to win contracts."

Instead, he insists, the purpose of the Pearson Foundation-sponsored trips (oops, I almost said "junkets"!), is part of the foundation's "long-term commitment to foster a productive dialogue between education leaders from the United States and some of the world’s best-performing and most improving school systems."

And you know what? I bet he believes that.

Just as I'll bet that the Kentucky school superintendent honestly believes that her trip to Australia didn't influence her decision on the school-testing bid.

But -- given that nasty little self-delusion thing -- that doesn't mean that what they believe is true.

In previous lives, I've worked on both sides of the aisle. As a car-company employee, I would receive "Christmas baskets" and the like from suppliers. Did it make me feel friendlier towards them? At the time, I'm sure I would have said, "Of course not," in an affronted tone. But in retrospect... I'm not so sure.

On the other side of the aisle, working for advertising agencies and research suppliers and consulting firms, I'd make those little gifts. I enjoyed taking a client out to lunch, and making it clear that we appreciated their business. But would I have done it if I thought it wouldn't help us get more business from that client in the future? Again, at the time, I'd have been insulted by the question. In retrospect....

Winerip quotes the executive director of the American Association of School Administrators -- through whom the Australia trip was organized -- as saying that the group would no longer go on Pearson trips: "Given the climate in public education today, we won’t go on trips."

I don't think it's the "climate" that should make him re-think the trips policy. I think it's the ethics.

Here a Fee, There a Fee, Everywhere a Fee, Fee

2011-12-31T11:43:00.000-08:00

But (headline aside), sometimes a big enough outcry can get the fee to go away.

I'll admit it: I hate fees. I hate getting nickel-and-dimed for every last little thing. I hate 'em because they're sneaky, and I hate 'em because they're almost always deeply regressive.

So when I read about the outcry about Verizon Wireless's proposed $2 fee (30 December New York Times story by Ron Lieber and Brian X. Chen, here) , I was quite pleased -- even though the vitriol seemed a little excessive.

After all, as the article pointed out, the fee would only apply "to people who make a one-time credit or debit card payment of their monthly bill on the phone or online. Subscribers who write checks or have the company charge their credit or debit cards or deduct from their bank accounts each month will not have to pay the new fee."

Part of the outrage came from Verizon's stunningly-stupid naming of the charge as a... (drum roll, please) ... "convenience fee"! Part of the outrage came from the general lack of real news in the Christmas-to-New Year's week. Part of the outrage came from the sense of victory from getting Bank of America to roll back its $5 monthly fee to customers who used debit cards. But a huge part of the outrage undoubtedly comes from the you're-holding-me-hostage-with-a-two-year-contract feeling that cellphone customers feel.

This is especially true if you think about who is most likely to make a "one-time credit or debit card payment of their monthly bill on the phone or online."

Is it going to be someone who's got $50,000 in the checking account? Or is it more likely to be someone living paycheck to paycheck, and worried that if she writes the check today, that most recent paycheck won't have cleared and the Verizon check will bounce?

“They are punishing people who need to wait until the last second,” said David O’Neill, who recently lost his job at a Borders bookstore that closed. He is a former Verizon Wireless customer but took to Twitter anyway on Thursday to argue that the company’s move helps the 1 percent get richer, since it rewards Verizon shareholders.

Lieber and Chen quoted a market analyst who said that "it made sense that Verizon was charging for over-the-phone payments, because carriers typically must pay a third-party service to handle those transactions. But Internet payments do not require a third party, he said." But, hello, what is Verizon Wireless anyway? A phone and Internet provider, right? So if anyone can handle over-the-phone or over-the-Internet transactions, it ought to be Verizon.

I keep coming back to the feeling of being a hostage to a Verizon contract as the real motivator for the vitriol. Yes, I know: if you really hate the hostage feeling that much, you can always pay real money for your cellphone, instead of getting it "free" or at substantially reduced price in exchange for the contract. (Full disclosure: I'm one of those tied-by-the-contract Verizon Wireless customers.)

Remember what I said about hating fees for their essentially regressive character? This is another example of that. People who can afford to pay the full cost of a smartphone can avoid the fee; at the lower end of the economic scale, you probably don't have a choice. Perhaps you're a recent college graduate, trying to pay off student loans, minimally furnish your first real apartment, and eat regularly, all while proving to your boss that you're really committed to this job that -- itself amazing enough -- you managed to land in a horrible job market, and so you need to be reachable at all times. You need that new phone. And you definitely can't afford to pay $300 up front for it.

All that said, Verizon did a terrible job of introducing the fee. It didn't make it immediately clear who would, and who wouldn't, be affected. It didn't explain why a fee was necessary in the first place. Even members of Verizon's own "consumer advisory panel" weren't informed of the fee ahead of time.

I'm delighted that it took Verizon only a day to recant their fee. But the Internet and Twitter outrage may have only been part of the reason for that decision. Today's New York Times reports, in an article by Ron Lieber, that "the Federal Communications Commission put out word earlier Friday that it thought the company’s actions merited closer scrutiny."

I hate fees; I love sharp-eyed regulators.

How "Fair" is "Fair Trade"?

2011-12-17T12:11:00.001-08:00

What product is produced with the most forced or child labor in the world? If you said, "Gold"; you're right.

Number two? Cotton.

Because I believe that ethical business isn't just the responsibility of producers, but also of consumers, I look for the "fair trade" label on products I buy. Even if it makes that purchase a little more expensive, I'm happy to do that -- and to know that I'm blessed to be able to make that slightly more expensive purchase.

Fairtrade International, one of the groups that certifies products as "fair trade", points out that cotton prices worldwide have been in steady decline for several decades, falling this year to $0.92 per kilo, the lowest level in 30 years. Of how many other products can you say that? Significant government subsidies for cotton production in countries like the U.S. put extra downward pressure on the price (according to Fairtrade, US cotton producers receive $4.2 billion in government subsidies annually, which is equivalent to the value of their entire crop. Well over half of US cotton production is "dumped" on the world market, often priced below the costs of production, even though cotton production in Benin is less than half the cost in the US. Does anyone else have ethical problems with this?!?).

Cam Simpson at Bloomberg News reported Thursday on the exploitation of children in the production of organic and fair-trade cotton in Burkina Faso. The most depressing statement of all?

In Burkina Faso, where child labor is endemic to the production of its chief crop export, paying lucrative premiums for organic and fair-trade cotton has -- perversely -- created fresh incentives for exploitation. The program has attracted subsistence farmers who say they don’t have the resources to grow fair-trade cotton without forcing other people’s children into their fields -- violating a key principle of the movement.

Bloomberg's Simpson followed one young girl, 13-year-old Clarisse Kambire, who has been working in cotton fields for two years, digging rows by hand, and then harvesting the same way. Devastating photos and videos are available here.

Fairtrade International is reportedly starting a review of Burkina Faso policies, following the publication of the Bloomberg News article.

Until then, what's a responsible consumer to do? Unfortunately, there's no easy answer -- there's no way I can trace all the cotton in my favorite turtleneck back to its source to know whether children in West Africa planted and picked that cotton, or whether children in Sri Lanka or India spun the yarn, or operated the sewing machines in Indonesia that made the shirt.

That doesn't cut me loose from the responsibility of trying to find out, of pressuring the store from which I buy to provide that information, and to abide by the agreements that they sign.

A spokesperson for Victoria's Secret, the Columbus, OH-based lingerie company which purchased some cotton from Burkina Faso, told Bloomberg News, "Our standards specifically prohibit child labor. We are vigorously engaging with stakeholders to fully investigate this matter."

Those words are nice -- and important -- but the follow-up will be critical.

I will be keeping that in mind this week, as I rush around trying to find those perfect last-minute holiday gifts.

What's the Cost of Doing Business? What Should It Be?

2011-12-07T07:50:00.000-08:00

A couple of stories in today's New York Times got me thinking about the "cost of doing business".

That's a phrase that gets tossed around a lot. Inventory "shrinkage" (a.k.a. theft, by shoplifters or employees) is often shrugged off as a "cost of doing business", whether the company is a mom-and-pop gift shop or a major retailer like Macy's.

A week ago, a federal judge blocked a proposed $285 million settlement between the SEC and Citigroup, terming the amount "pocket change" and noting that such a settlement was often viewed on Wall Street as a "cost of doing business" (click here for Edward Wyatt's 28 November New York Times article).

Now Bank of America's Merrill Lynch unit has come to an agreement to pay $315 million to settle claims that they misled investors about mortgage-backed securities (click here for the Times article, from the Associated Press). This is only the most recent claim settlement for BoA; the AP reported that "in the first half of the year alone, the bank put up $12.7 billion to settle similar claims from different groups of investors." Only potential roadblock here? The settlement must be approved by the same federal judge, Jed S. Rakoff, who struck down the Citigroup deal last week.

Also in today's paper, Sabrina Tavernise and Clifford Krauss reported that Alpha Natural Resources, now owners of Massey Energy, agreed to pay $209 million in civil and criminal penalties and restitution for charges stemming from the Upper Big Branch mine disaster last year that resulted in the death of 29 men. While some of the money (approximately $46.5 million) is earmarked for the families of the men who died, Alpha executives are protected from prosecution by the deal. Massey Energy executives, however, are not.

The problem is, "Under the federal mine act, safety violations, with the exception of falsifying records, are categorized as misdemeanors. That limitation could make it hard to build a case against senior [Massey] managers..."

I've written before about the inadequacy of mine safety protection; this is just further proof that some people view losing lives as merely "a cost of doing business".

Meanwhile, over at Olympus (previous blog posts on that debacle here, here, and here), it becomes clearer that "Olympus had persuaded several banks, including Société Générale of France, to submit incomplete financial statements to auditors, apparently in an effort to conceal financial maneuvers that the report says involved at least $1.7 billion and were meant to hide failed investments during the 1990s." (Full story by Hiroko Tabuchi and Keith Bradsher, here) While an independent report called Olympus management "rotten to the core", it found no evidence of organized crime involvment -- which could have led the stock to be delisted by the Tokyo Stock Exchange. So again ... just a "cost of doing business"?

Yes, accidents happen in every industry, and prudent corporate managers should build allowances for disasters and settlements into their budgets. But that's doesn't mean that people's lives should be destroyed -- financially or actually -- and that the only reaction is, "That's the cost of doing business."

I'm listening for the outpouring of outrage. Why aren't I hearing it?

Want to Make Your Employees Feel Truly Valued? Don't Do This.

2011-11-11T04:34:00.000-08:00

Zynga, the maker of great time-wasters like FarmVille, is obviously brilliant when it comes to motivating customers. Motivating employees? Not so much.

The Wall Street Journal's Justin Scheck and Sayndi Raice yesterday broke a story on an unusual move for a self-described "meritocracy"(note: subscription required for full article). While details and public statements have been few, thanks to the pre-IPO "quiet period", the basic issue is this: As CEO Mark Pincus was preparing for Zynga's public offering, he decided that too many shares had been handed out to too many employees, and asked at least some employees to give at least some of those (unvested) shares back. Or risk being fired (fired workers lose all rights to unvested stock).

Zynga now has about 3,000 employees. The heart of the controversy apparently lies with some early employees who were handed large numbers of shares (rather than paying large salaries, a common move with start-ups), but who are now deemed to have contributed less than later hires (who received fewer shares).

While it's not clear that Zynga has done anything illegal, I would argue with Mr. Pincus' statement of pride in the "ethical and fair way that we've built this company" (entire statement can be found here in a New York Times DealBook piece by Evelyn Rusli).

If I were trying to develop a system to set my employees against each other -- and drive down productivity while everyone sniped at everyone else -- I don't think I could have come up with a better system than this one. As Business Insider's Tom Johansmeyer put it, Mr. Pincus is essentially saying to his employees: "You don't deserve to be rich." (full BI article here)

I don't think this is going to help Zynga's future employee recruiting, either....

Olympus Continues its Fall

2011-11-08T08:33:00.000-08:00

The Olympus debacle, as I noted last month (see original posts here and here), seemed at first like an interesting culture clash between its former chief executive (a Briton with 30 years' experience with Olympus) and a nearly 100-year-old Japanese company.

Now it's starting to look like "one of the biggest accounting fraud cases in corporate history," according to a Hiroko Tabuchi article in today's New York Times.

The evolving story had centered on one particular acquisition -- of British medical equipment manufacturer Gyrus in 2008 -- and specifically on shockingly high fees ($687 million on a $1.9 billion deal) that were paid to two heretofore-obscure Japanese bankers for "advising" Olympus on the deal. Olympus denied that anything improper had been done.

In a stunning reversal, the company yesterday admitted that "money for mergers had in fact been used to mask heavy losses on investments racked up since about 1990." (emphasis added)

Olympus' current chairman, Shuichi Takayama, acknowledged "inappropriate dealings" but would not admit to outright fraud.

Just How Trustworthy is that Trustworthy Guy in the Corner Office?

2011-11-03T06:00:00.000-07:00

You know how, when someone is arrested for a truly heinous crime, there's always a neighbor interviewed who says something along the lines of, "But he was always so nice. Just a nice, quiet, ordinary guy."

A nice, quiet, ordinary guy with thirty-two bodies in the basement.

And then, bit by bit, the background stories emerge: the torturing of animals as a small child, the sociopathic behavior as an adolescent, the inability to control rage.

With heinous corporate crimes, it's the same. Enron gets extolled as a model ... until it isn't. Madoff's investment advice is utterly brilliant ... until it isn't. The headlines are shocking, but in the weeks and months that follow, more information comes out and the surprise ends up being that the shenanigans went on as long as they did. (Many people, for example, had tried to bring Madoff to the SEC's attention?)

Two days ago, I wrote a post about the fall of MF Global. As I noted then, it had seemed at first like a simple too-many-big-bets-that-turned-out-badly failure. And then the little matter of $600 million plus in missing customer funds turned up.

And today's New York Times carries a DealBook article by Susanne Craig, Ben Protess, and Michael J. De La Merced, that claims that while the firm fell apart astonishingly fast, "the collapse came after regulators raised warning flags for more than four months." Not exactly an overnight disaster. Jon Corzine, former Goldman partner, former US Senator from New Jersey, former Governor of New Jersey, had been chairman and chief executive officer of MF Global for less than two years.

The Times reporters note drily that "even when the watchdogs sound the alarm, it is not necessarily enough to save a firm." Regulatory agencies and the FBI are now looking into the matter, although no charges have been filed. So far.

And the authors also note that the resistance to regulators' insistence that the firm should raise more capital and provide more information about some risky transactions shows that "three years after the financial crisis, Wall Street executives are still fighting regulators' demands."

Over the course of the next several months, I expect to read reports of new banking bonuses, all in the name of "we have to keep the very best people." Me, I think these guys may be some of the very worst with whom to trust our hardly-earned cash.

Is the Goldman Halo Slipping? (Please Tell Me It Is)

2011-11-01T11:22:00.000-07:00

"But -- he was at Goldman."

For a long time now there's been a halo around Goldman Sachs, despite the occasional outrageous mis-step (Remember banking as "God's work"? Read my 2009 post about that here). But spend a few years at Goldman, better yet make partner at Goldman, and you could pretty much write your ticket. Those Goldman guys: they had the Midas touch.

Well, for those of you who don't remember your Greek mythology, the whole "turning everything you touch into gold" thing was one of those sneaky "be careful what you wish for" ways that the Greek gods would play "Gotcha" with mere mortals. It's great to be able to turn a piece of wood into a block of gold -- hey, running a kingdom costs money! -- but not so much fun when the juicy steak you were looking forward to eating turns into something that will break a tooth.

Oh and when you're thinking about how smart those Goldman guys are ... Would you please also remember that we taxpayers had to bail 'em out? (Yes, they did repay that TARP money, but still....)

When I first read that MF Global was filing for bankruptcy (New York Times DealBook article by Azam Ahmed, here), it didn't seem so startling. Unfortunate, perhaps, but not startling. Jon Corzine, MF Global's chairman and chief executive officer (and former New Jersey governor, and former US Senator from New Jersey, and, oh yes, former Goldman partner), had bet heavily on European debt -- that Europe would come to the rescue of its smaller, more troubled economies. While he may yet prove right in the long run, he'd bet that way for the short term, and after trying frantically to find a buyer for MF Global over the weekend, the firm filed for bankruptcy protection on Monday.

Times financial columnist Joe Nocera was not feeling particularly forgiving about the MF Global debacle this morning, however. Of Mr. Corzine, he wrote, "you would think that as a former Wall Street titan, he would have noticed that taking giant bets on shaky, long-term bonds while financing your operations with overnight loans that can be pulled at any second is not exactly a recipe for success."

But it's not just the relative stupidity of the strategy that made Mr. Nocera angry. It's the (as he put it) "heads-I-win-tails-you-lose" mentality. If Mr. Corzine had been able to find a buyer for the firm last weekend, Mr. Nocera noted, he would have been in a position to walk away from a company that he had effectively destroyed (stock price less than two years ago when Mr. Corzine took over: $7; stock price before bankruptcy filing: about $1.20), with a "severance package" of $12.1 million.

Now that I think about it, Mr. Nocera, I'm angry too.

Adding insult to the injury: Mr. Corzine apparently came thisclose to selling the firm to Interactive Brokers, when it was revealed that "hundreds of millions of dollars" were "missing" from MF Global customer accounts. According to another Times DealBook article by Ben Protess, Michael J. De La Merced, and Susanne Craig, the sum was originally estimated at $950 million, but is now thought to be "less than $700 million".

As the reporters noted, this might be simply a matter of "sloppy internal controls". But:

In any case, what led to the unaccounted-for cash could violate a tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.

At this time, neither the firm nor Mr. Corzine have been accused of any wrongdoing.

But really -- was 2008 that long ago? With the "loss" of something more than $600 million (per this afternoon's DealBook article by Messrs. Protess and De La Merced), you're talking gross mismanagement, or theft, or both. There really aren't any other possible explanations.

As one Times reader commented: "Sure, you can leave a ten spot in your pants pocket and bring your pants to the cleaners, but $600 million?"

A Footnote re Culture Clashes

2011-10-27T07:26:00.000-07:00

Just two days ago, I posted some comments on the debacle at Olympus. Several days had already passed since the first stories broke about the firing of Olympus' British CEO. At that time, as I noted, it looked like a classic culture-clash story. And then things got muddier, as the ousted executive, Michael Woodford, accused the company of firing him for presenting evidence of fraud in the 2008 acquisition of a British medical equipment manufacturer, Gyrus.

The story is still unreeling slowly, but today's New York Times carries another Hiroko Tabuchi article that's worth noting. On Wednesday, Olympus' chairman -- to whom Mr. Woodford had presented his evidence of fraud -- resigned. He regretted "causing concern" to the shareholders (Olympus' share price has fallen by half), and continued to insist that there was "no corruption" in the deal to acquire Gyrus.

Tsuyoshi Kikukawa, who resigned yesterday, had been with Olympus for nearly 50 years, and its chairman for ten. He has been replaced by Shuichi Takayama, a managing director who has been with Olympus for 30 years.

As the Times article notes, the current debacle can be seen "as evidence of still-frequent lapses of corporate governance in a country where truly independent board members are still rare, although there’s a requirement that one director or auditor be independent. And still in force, experts say, is a deep-rooted Japanese business culture in which personal relationships can sometimes seem to take priority over generally accepted accounting practices."

So, is it culture? Or is it ethics? And will it look more like one to us, in the West, and more like the other, to those in Japan?

Make Haste Slowly, Please

2011-10-26T07:00:00.000-07:00

Let's say you've developed a nifty new medical device, and -- best yet! -- you've gotten some venture-capital financing to help you bring this product to market. How many regulatory hoops should you have to jump through to start selling it to the patients who need it?

What if you're one of those patients? More hoops, or fewer?

Or if your nifty device doesn't work? Or has side effects you hadn't been aware of?

Different answers, maybe?

Today's New York Times carries an article by Barry Meier and Janet Roberts on the expensive lobbying efforts by venture capital firms to reduce the regulation required to bring new devices to market.

According to the Times article, venture capitalists and device manufacturers "argue that the FDA suffers from high personnel turnover, an unwieldy bureaucracy and a regiment that forces start-up device companies to run new and costly tests constantly, often duplicating past efforts."

But that's only one side of the story, isn't it?

The reporters quote the editor of Archives of Internal Medicine, who said that venture capitalists operate under "this unwritten assumption that every new device is innovative." But the reality, she added, is that some devices "are killing people or causing significant harm."

I've written about more than one of those devices in the past -- the cone-beam CR scanner that may be exposing children and adolescents to excessive radiation (post, here) and the DePuy hip replacements whose metal-on-metal design is failing early far too often, requiring painful and extensive additional surgery (post, here).

The House seems more interested in the manufacturers' and investors' concerns, however:

Since February, four House panels have held hearings on the impact of FDA procedures on device approval. At those sessions, 19 of the 26 listed witnesses were investors, entrepreneurs, industry consultants, trade group officials or patients who said that agency delays in approving a device had harmed them or a loved one. The list included no patients injured by a flawed device; one hearing the Senate had a more varied witness list. [emphasis added]

One investment fund manager is quoted as saying, "This is about survival... We are deeply concerned about the future."

Shouldn't they be "deeply concerned" about the "survival" of their patients?

Culture Clash, or Egregious Ethics?

2011-10-25T04:28:00.000-07:00

When the news broke about ten days ago that Olympus -- the Japanese company best know for its digital cameras, although its medical equipment business is far more profitable -- was firing its British CEO, it seemed like a classic culture-clash story.

Indeed, that's how it was presented. As the New York Times' Hiroko Tabuchi reported (full story, here), Olympus' chairman said, "We hoped that he could do tings that would be difficult for a Japanese executive to do... But he was unable to understand that we need to reflect a management style we have built up in our 92 years as a company, as well as Japanese culture."

Isn't that a fascinating comment? In other words, Olympus wanted a CEO who was un-Japanese, but not too un-Japanese. How's that for a recipe for failure? (Michael Woodford, the ousted CEO, was British, but had spent 30 years with Olympus, so you'd think he would have a pretty good handle on Japanese culture.)

Share prices in Olympus dropped dramatically on the news of the CEO's demotion.

They declined further two days later, when Mr. Woodford claimed that he was forced out because he had presented the Olympus chairman with evidence of fraud. (Article by Hiroko Tabuchi here)

As further explained a few days later by the Times' Wayne Arnold and John Foley (full story, here), Mr. Woodford said that "he was forced out after pointing out governance problems surrounding overseas acquisitions, in particular a $1.9 billion deal for Gyrus, a British medical equipment firm. He accuses [sic] the board of violating British law against paying a buyer for an acquisition, false accounting and breach of fiduciary duties."

So now it appears not to be a cultural issue at all, but an ethical and legal one. Were Japanese laws allegedly violated as well? Or only British laws?

The heart of the conflict, as reported yesterday by the Times' DealBook reporter, Ben Protess, is "a mysterious $687 million payout" made by Olympus to two formerly-unknown Japanese bankers (full story, here). That payout was originally described as a "fee" for advising Olympus on the 2008 Gyrus takeover. But, as Protess notes, that payout is "more than 30 times the norm on Wall Street" -- and Wall Street is not generally known for underpaying itself.

Protess also reported that "the FBI is now investigating the $687 million payment... The focus of the investigation is not yet clear, and a spokesman for the FBI ...declined to comment."

So now there are American laws that may have been broken, too?

Protess quotes Jeffrey Manns, an associate professor at George Washington University Law School: "This is such an extraordinary deviation from normal fees.... No one would have entered into this transaction if they were showing good business judgment."

Olympus, of course, insists that the payment was "appropriate".

It's far too early to know whether this is primarily a cultural clash or an ethical (and legal) breach; the mess may well end up having elements of both, and those elements may be closely intertwined. Either way, there's an ugly smell hanging over a once-admired firm.

If You Check In, Can You Still Check Out?

2011-10-17T07:42:00.001-07:00

Two unrelated, but weirdly related, articles in the New York Times caught my eye yesterday:

"Online Banking Keeps Patrons Tangled in Fees" wrote Nelson Schwartz in the first. In the second, "The Haggler" (columnist David Segal) investigated the questionable practices of Synapse Group, a magazine subscription firm that "is skilled at signing up subscribers but miserable at alerting them later that their subscriptions are being renewed. So bad that a plaintiff’s lawyer, Gary Graifman, filed a class-action lawsuit against it, contending that it purposely tries to make its renewal notices look like junk mail."

At first glance, these don't seem related, do they? But consider one example from Schwartz's story:

Tedd Speck, a 49-year-old market researcher in Kent, Conn., was furious about Bank of America’s planned $5 monthly fee for debit card use.
But he is staying put after being overwhelmed by the inconvenience of moving dozens of online bill paying arrangements to another bank.
“I’m really annoyed,” he said, “but someone at Bank of America made that calculation and they made it right.”

In other words, the bank has made it as difficult as possible to "unsubscribe". Meanwhile, what did the plaintiff's lawyer say about Synapse's practices?

“You subscribe to, say, Sports Illustrated, but you get a notice from a company called Synapse, which no one has ever heard of,” says Mr. Graifman, of the New York law firm Kantrowitz, Goldhamer & Graifman. “The whole game is to discourage as many people as possible from canceling, and these guys are very sophisticated about how they do that.”
He sent a copy of the renewal notice that Synapse sends to customers. The front reads: “Less time at the newsstand means more time enjoying your favorite magazines.” Next to that is: “Subscriber rate enclosed. Up to 40 percent off newsstand prices.”
If that doesn’t say “Toss me, I’m junk mail,” what does?

If you do toss that piece of "junk mail", you will shortly discover that by not replying, you have "permitted" Synapse to bill your credit card automatically for renewals. In other words, they've made it as difficult as possible to unsubscribe. The original complainer to The Haggler had forwarded the company phone number that had been listed on her credit-card bill; if you do call the number, what you get is "only an automated voice routine, not a human being."

In neither of these cases does the company care about customer satisfaction. They define loyalty as "gotcha".

Meanwhile, on Synapse's website, the home page extols the company's "values" and "social responsibility". Synapse, of course, doesn't really care about you, the magazine reader who can't get out of your subscription. It cares about the magazine, which has hired it to keep you on the hook (Synapse is a wholly-owned subsidiary of Time Inc.). Synapse is particularly proud of its patented "magazine subscription model, Continuous Service." And what is Continuous Service? It's a model that

eliminates the inefficiencies and inconveniences of the traditional model, and replaces it with a solution that meets the needs of today's harried consumer. Today, tens of millions of subscribers enjoy the simplicity and superior experience of continuous service.

Sounds exactly like what the plaintiff's attorney was describing, doesn't it?

The banks, meanwhile, will trill away about how much easier it is for you to have all your accounts at one bank, and to pay your bills online. They will not tell you that "using the Internet to pay bills, do automatic deductions and send electronic checks reduced customer turnover for banks by up to 95 percent in some cases." Even if you're deeply dissatisfied, the thought of having to change all those accounts is daunting.

Every business wants to hold onto its customers, of course. The question is, Are you being truthful and transparent about how you're holding on to them?

When is a Promise Not a Promise?

2011-09-30T11:01:00.000-07:00

If you grew up in the '50s and '60s, like me, you remember a world where dads (and a handful of moms) went off to work every morning, and stayed with the same employer for years and years. After 30 or 40 years, those dads retired with a company pension, usually enough to keep them comfortable, if not wealthy, through their remaining years.

Sounds like a fairy-tale today, doesn't it? Who still stays with the same company for 40 years? As for company pension plans, what are they? If you're lucky, you have a 401(k) that you've been lugging around with you from job to job, and which -- given the vagaries of the market -- is probably worth a whole lot less than you thought it was going to be worth in late 2011.

Some of us even bought the line that companies fed us: that they needed to get rid of massive pension-plan schemes to remain competitive with international firms that had no such obligations.

But the truth is a little different.

According to Ellen Schultz, Wall Street Journal reporter and author of a new book, Retirement Heist, "When companies began cutting benefits it wasn’t to remain competitive because the plans had a huge surplus and there was no cost to the company. What they were doing is taking the plan and finding a way to convert some of the assets into a benefit for the company and also to boost their profits." (Click here for a transcript of an interview with Ellen Schultz on NPR's Morning Edition on 29 September)

From being significantly overfunded in the '90s, the remaining corporate pension plans are now significantly underfunded. As an example, in the late '90s, Schultz reports, GE's pension plan had a $20 billion surplus -- even though it had not made any contribution to the fund since the mid-1980s. Today, GE's plan is underfunded by $5 billion. What happened?

When companies started looking for ways to get rid of older (read: more expensive) employees in the early '90s, Schultz writes, they could have offered those who were laid off a generous severance package. But "the cost-effective way was to instead promise them a bit more pension money in lieu of severance." In the end, "you've just laid off somebody who's expensive and it has cost you nothing." The problem is that you have just added a person to the eventual pension pool ... without having increased the pool's funds.

"Cutting the benefits actually gives companies a boost to profits. It’s an accounting effect. If you promise to pay $100 million to retirees, that’s a debt on the books. If you cancel that debt, then you get to keep the profit," says Schultz. So pension dollars were used to finance downsizings, and to sell assets in merger deals.

Meanwhile, of course, senior executive pay and pensions continue to rise dramatically. Today's New York Times carries an article by Eric Dash, who writes drily that "the golden goodbye has not gone away."

It's one thing to reward a retiring CEO for a brilliant tenure, but consider these examples that Dash cites:

$13.2 million in cash and stock severance, in addition to a sign-on package worth about $10 million, for Leo Apotheker, just ousted from Hewlett-Packard after 11 months;
$17.2 million in cash and stock in August to Robert P. Kelley, ousted from Bank of New York Mellon;
Nearly $10 million to Carol Bartz after her ouster from Yahoo

Meanwhile, how many people are unemployed? How many have seen their unemployment benefits end? How many are underemployed?

None of the moves that Schultz and Dash describe appear to be illegal. But grossly unethical? Oh yeah.

PS: UBS

2011-09-24T11:25:00.000-07:00

A week ago, I quoted FT associate editor John Gapper, asking whether it was a rogue trader or a rogue bank that was behind UBS' "rogue trading" loss of $2.3 billion.

It looks more and more like the latter. Columnist James B. Stewart, writing in today's New York Times, reviews the sadly-long history of, um, questionable behavior at UBS and notes,

The problem the [UBS] board faces is whether the UBS culture ... was one of personal greed. UBS should ruthlessly and visibly weed out not just executives with dubious ethical and legal standards, but anyone who puts their personal interests ahead of clients -- which, when you think about it, should be the litmus test for anyone who claims to be a professional.

The current chairman, Oswald Grunwald, was brought out of retirement (from Credit Suisse) specifically to bring a new ethics focus; it is now rumored that the trading loss will cost him his job -- just as substantive legal and ethical lapses brought an end to the prior chief executives (Peter Wuffli, in 2007, and Marcel Rohner, in 2009).

No one has suggested that the current chief was in any way involved in the "rogue trades" -- but then, it's not even clear that the trader involved, Kweku Adoboli, profited directly from his trades (the "profit", for Mr. Adoboli, would be that a dramatic success would have propelled his career upwards).

Are You a Slave Owner?

2011-09-23T04:22:00.001-07:00

A recurring request in this blog has been for all of us to be more thoughtful consumers -- to think about the repercussions of the purchases we make. It's not enough to score a better deal (though that feels great!): we need to think about how the purchases we make affect the world we live in.

For example, for several years we have been asked to consider the size of our "carbon footprints", measuring our individual and household effects on the greenhouse gas emissions that are causing climate change.

And we've learned about "blood diamonds" (diamonds whose sales are used to finance insurgencies, warlord activities, and other conflicts).

An article by Andrew Martin in yesterday's New York Times introduced me to a new concept: the slavery footprint.

You may think that slavery is a thing of the past, but the creators of a new website want us all to understand that "anyone who is forced to work without pay, being economically exploited and is unable to walk away" is a slave, and that the State Department estimates that there are 27 million slaves globally.

If you want to know how many slaves work for you, take the survey, here. Along the way, you'll get depressing little bits of information, like: "Bonded labor is used for much of Southeast Asia's shrimping industry, which supplies more shrimp to the U.S. than any other country. Laborers work up to 20-hour days to peel 40 pounds of shrimp. Those who attempt to escape are under constant threat of violence or sexual assault."

The site and survey were created by the Fair Trade Fund, a nonprofit group that focuses primarily on human slavery; funding was provided by a State Department grant.

As Martin writes, the purpose of the survey is "to get consumers engaged enough in the issue to do something about it, primarily hoping people demand that companies carefully audit supply chains to ensure, as best as they can determine, that no 'slave labor' was used to manufacture its products."

What do you know about who made the stuff that surrounds you? I know that my answer now has to be, Not enough.

(PS: if you're curious about the size of your carbon footprint, a couple of free calculators can be found here, from the Nature Conservancy, and here, from the Cool Climate Network at the University of California, Berkeley.)

Physician, Heal Thyself

2011-09-21T08:55:00.000-07:00

No, this isn't going to be another gripe about Big Pharma.

Instead, it's going to be a request to the Securities and Exchange Commission to go to the nearest health-care facility and get itself a spine.

Or at least a manual on what is and is not ethical behavior.

Anyone who has read this blog more than once knows that I'm a "trust, but regulate" person. But that requires that the regulators at the very least regulate themselves (to quote one of those dead white guys, the Latin poet and satirist, Juvenal, "Who watches the watchmen?").

Today's New York Times carries a story by Louise Story and Gretchen Morgenson reporting that

After Bernard Madoff's giant Ponzi scheme was revealed, the Securities and Exchange Commission went to great lengths to make sure that none of its employees working on the case posed a conflict of interest, barring anyone who had accepted gifts or attended a Madoff wedding.

Which makes complete sense. Except that the SEC made one giant exception: its general counsel, David M. Becker, "who went on to recommend how the scheme's victims would be compensated, despite his family's $2 million inheritance from a Madoff account." Mary L. Schapiro, SEC chairwoman, was the lone commissioner aware of Mr. Becker's conflict of interest.

Excuse me?

The reporters dryly note that this "provides fresh details about the weakness of the agency's ethics office".

Ya think?

According to Mr. Becker's lawyer, Mr. Becker had notified senior SEC officials about the inheritance. Among those informed was William Lenox, at that time the agency's designated ethics officer (Mr. Lenox left the SEC earlier this year).

Mr. Becker's financial interest in the Madoff matter was revealed when he and his brothers (who shared in the inheritance) were among those sued by Irving H. Picard, the Madoff trustee, who is suing many Madoff clients to redistribute money.

This is yet another black eye for the SEC, which has by now had so many that it is starting to look punch-drunk. The Madoff matter alone has generated several, starting with why the SEC never investigated Madoff properly in the first place, despite being warned several times that his investing "genius" seemed more like grifting.

According to the article, "Two House subcommittees have called a hearing for Thursday about the incident with Mr. Becker." Stay tuned...

Does the blame lie with the individual or with the organization?

2011-09-16T07:04:00.000-07:00

Some of each, don’t you think?

UBS, the Swiss banking giant, is back in the news today, with the arrest of a European equities trader, whose unauthorized trading has reportedly cost the bank $2 billion.

UBS has been in the news for too many years, for everything from wildly underestimating the subprime mortgage crisis (to the tune of some $37 billion in write-offs in 2007 and 2008) to significant fines ($780 million in 2009) for helping American clients evade taxes. In exchange for turning over more than 4,000 names of clients to the authorities, U.S. prosecutors finally dropped charges against UBS last year (click here for a previous blogpost on ethics at UBS). I could go back even a little further to mention the near-collapse of the bank in 1998 following the actual collapse of the hedge fund Long-Term Capital Management.

As Matthew Saltmarsh writes in the The New York Times "DealBook", “The incident raises questions about the bank’s management and risk policies…” Well, yeah.

He also notes, “The case could also bolster the efforts of regulators who have been pushing in some countries to separate trading from private banking and other less risky businesses.” Well, hurrah! Some of us still think that repealing Glass-Steagall a dozen years ago, thereby permitting commercial banks to operate investment banks, was one of the key factors leading to the financial crises of the last few years.

(What does it say about our society that when one rogue trader costs his employer billions of dollars, he gets arrested and carted off to jail, but when a whole Street-ful of traders cost their government – that is to say, Us – billions, if not trillions, of dollars, no one gets arrested, and their employers get bailed out. By Us.)

But back to UBS, specifically.

Financial Times associate editor John Gapper asks whether “Kweku Adoboli is a rogue trader or his employer is a rogue bank” (click here for his complete blogpost).

Gapper points to resemblances between Adoboli and Nick Leeson, whose unauthorized trades brought down the venerable Barings Bank in 1995, and Jerôme Kerviel of the 2008 Société Générale disaster: Adoboli, like those others, is “young, fairly junior and works on a desk that combined proprietary position-taking with ‘flow trading’ in customer orders.”

But, he adds, there’s more to the situation, as “we know plenty about the proclivity of UBS for getting involved in fiascos in which the bank believed it was taking relatively little risk but ended up losing large amounts of money.”

Finally, Gapper quotes a report UBS commissioned following the 2008 crisis. Written by Tobias Straussman of the University of Zurich, the report concluded:

Top management was too complacent, wrongly believing that everything was under control, given that numerous risk reports, internal audits and external reviews almost always ended in a positive conclusion. The bank did not lack risk consciousness; it lacked healthy mistrust, independent judgement and strength of leadership.

Or, to quote Forbes contributor Robert A. Green, “How can we trust bank accounting and reporting when their internal controls don’t even work?”

After the 2008 crisis, I spoke to a UBS employee, who assured me that all these “ethical lapses” were behind the bank. The new chairman, Oswald Grübel, had brought a new sense of stability and ethics to the organization. “It has to come from the top,” she said, confidently.

I don’t disagree. But I do have to wonder what exactly has come down from the top.

UBS will undoubtedly insist that this is “just one bad apple”, and that, with Adoboli’s arrest, all will once again be right in the world.

But the complete saying is that one bad apple spoils the whole barrel. You can’t just pick the rotten one out and think that everything else is fine. You need to take all the apples out, and look them over carefully, and remove all the other blemished apples, and scrub out the barrel before you can put more apples back in.

What Price the "Free" Market?

2011-08-22T03:22:00.000-07:00

What will it take to get us all to agree that "The Market" can't do everything? To admit that there are some things that the government is uniquely qualified to do?

We can agree on national defense -- and even there, well, don't get me started on private military contractors -- but after that?

Saturday's New York Times gave an excellent example.

Gardiner Harris reported that there are currently "critical shortages of drugs to treat a number of life-threatening illnesses, including bacterial infection and several forms of cancer."

These are not new drugs, but nearly 200 reliable, generally inexpensive, standards for the treatment of a wide range of diseases. As one oncologist quoted said, "These drugs save lives, and it's unconscionable that medicines that cost a couple of bucks a vial are unavailable."

When they are available at all, prices have risen dramatically (in some cases as much as twentyfold). And while the shortages are all of older drugs, they are affecting new-drug trials, as "some experimental cures have been delayed because the studies must also offer older medicines that cannot be reliably provided."

What is behind these shortages? In a majority of the cases, supplies have been disrupted because inspectors (internal or government) found contamination problems. Note that more and more of the production of these types of older drugs has shifted to a handful of generic-drug companies, many of whom manufacture overseas where they are never inspected by the FDA. In other cases, shortages "have occurred because of capacity problems at drug plants or lack of interest because of low profits, according to the FDA." (emphasis added)

These issues might all be important, but they don't help patients dying of childhood leukemia, colon or breast cancer, or bacterial infections.

As Harris wrote,

A crucial problem is disconnection between the free market and required government regulation. Prices for many older medicines are low until the drugs are in short supply; then prices soar. But these higher prices do little to encourage more supply, because it can be difficult and expensive to overcome the technical and regulatory hurdles. And if supplies return to normal, prices plunge.

Moreover,

...Some wholesalers buy certain drugs in large quantities because they are betting there will be a shortage. The excessive buying can help make their predictions come true.

I'm sure that some would say that the solution to the "disconnection" is less government regulation rather than more. But you know me -- while it's really tempting to rant about despicable war profiteers, that's not where I'm going to go with this.

The federal government, lawmakers, representatives of the pharmaceutical industry and doctors' groups are working on possible solutions, "which include a national stockpile of cancer medicines and a nonprofit company that will import drugs and eventually make them," that are still only in the planning stages.

Absent the national health-care system that I believe we have a moral responsibility to provide, we must at the very least not make it harder for Americans to obtain necessary care. A cancer diagnosis is always deeply stressful, no matter how treatable the particular form. We owe it to our fellow citizens not to make it more stressful by guaranteeing adequate supplies at uninflated prices.

It's Amazing What $5 Can Buy You

2011-08-21T10:55:00.000-07:00

Is a five-star review really better than a four-star one? What does "excellent" service (as opposed to "very good") mean anyway? And by how much does a rave review on Yelp affect your restaurant choices?

I wrote recently about "anonymous" Amazon reviewers, and about the gifts some receive for positive reviews. If you found that troubling, as I did, you'll find an article in yesterday's New York Times by David Streitfeld even more troubling. It appears that "[as] online retailers increasingly depend on reviews as a sales tool, an industry of fibbers and promoters has sprung up to buy and sell raves for a pittance."

Reviewers-for-hire may receive as little as $5 or $10 for a positive review, a "pittance" indeed, but if you churn out enough of them you can make enough to get by -- without wasting the time, effort, and money of actually reading the book or staying at the hotel.

Streitfeld continues,

The boundless demand for positive reviews has made the review system an arms race of sorts. As more five-star reviews are handed out, even more five-star reviews are needed. Few want to risk being left behind.

Does this sound familiar? We are all experiencing this "arms race", every day. I take my car for a regular service call and am told that the service team needs an "excellent" rating on my "anonymous" customer satisfaction survey call, or they will all be at risk of losing key bonuses. A friend, at the end of a cruise-ship vacation, is told that anything less than an "excellent" rating will ruin the careers of crew members. And, most egregiously, schoolteachers in Atlanta (and elsewhere) are encouraged to correct their students' standardized test scores in order to meet and exceed the No Child Left Behind goals.

Most anything can be measured. Some things should be measured. But before you go crazy on the measurement side, you might want to think about the unintended consequences. The more importance you place on a test, the more likely that you will see this kind of behavior. I am not excusing cheating, but I am explaining it. We should not be surprised by it. And maybe there are other ways of measuring that might provide more useful data -- but no doubt they'd be more expensive.

Consider book reviews, for example. Fewer and fewer newspapers and magazines these days have reviewers on staff, but I value those reviewers' comments. Over time, I get to know their idiosyncrasies ("Oh, no wonder it's a negative review -- she hates hard science fiction."), and so know how to weight a positive or negative review. And I know that the critic's newspaper or magazine has paid for the book, not the reviewer herself. But with Amazon reviewers -- it could be the author in disguise, the author's best friend, the editor's husband, the publisher's enemy, or, in fact, a disinterested reader. But I don't have enough information to make a value judgment of the worth of the review. I don't even know if the reviewer has, in fact, read the book in question (I don't know it about the newspaper or magazine reviewer either, but I consider it far more likely).

"The whole system falls apart if made-up reviews are given the same weight as honest ones," says a Cornell University reviewer that Streitfeld quotes, who is part of a team working on an algorithm to detect fake reviews.

All those "personal" reviews give us a false sense of community. A book recommendation from a friend who knows me well is qualitatively different from a book recommendation in the New York Review of Books. A book recommendation from Amazon purports to be more like a friend's review... but in fact, it's not. Maybe "the whole system" should fall apart.

Ooooommmm. Trust. Ooooommmm. Transparency.

2011-08-12T10:36:00.000-07:00

Anyone who's read more than two posts on this blog (maybe even more than one) knows my twin mantras: Trust & Transparency.

I don't believe in them just because they're the right way to behave -- although of course, given the title of this blog, I do think the ethics of such behavior is important -- but also because they're the smart way to behave.

As a result, I believe in strong regulation ("Trust, but verify", if you like). I believe in prosecutors' pursuing those who violate that essential market trust (which is why I keep wondering why we haven't seen a steady stream of go-to-jail-go-directly-to-jail following the 2008 market collapse).

Today's New York Times has a great article by Julie Creswell that illuminates the importance of trust and transparency.

"Small investors provide the bedrock for the United States stock market through their mutual funds, 401(k) plans and other company-sponsored retirement programs," she notes. In the current roller-coaster environment, what's a small investor to do?

Some will stay the course, because that's what their investment counselors have told them to do (or because they don't know what else to do). Some will pull out, because they've been spooked.

But some are heading for the exits because they no longer trust the markets' essential fairness:

Some investors fear that the markets have become dominated by high-frequency traders blitzing in and out of stocks, or by sophisticated hedge funds running mind-bending algorithmic trading programs that can outsmart the ordinary investor.

These people said they feel that the game is rigged and they are the fool.

Creswell quotes one retiree who sold out completely in the fall of 2008 to buy Treasuries: "I simply have no confidence at all that the markets are fair...."

In other words, Fool me once, shame on you; fool me twice, shame on me.

Investment professionals at all levels should be worried about that sentiment. The comments posted by readers reflect similar concerns. The very first comment reads,

I was a small investor and I am totally out of the market. There's no way for the little guy to respond fast enough to the computer programs that are set to kick in at various levels. Between that and the Hedge Funds, market manipulations and insider traders (yes, I know you are out there) there is no way I'm going to make any money in the stock market. There are going to have to be new rules and new ways of doing business before I will even consider it.

And there are many more in the same vein.

But if small investors get really spooked, there's no way that the stock market, which has indeed been an engine of wealth creation for many, will be able to sustain the draining downward pressure.

If the investment community is smart, and in it for the long term (as they always tell us small investors to be), they will get out in front of this and press Congress for tougher rules and greater transparency, to prove that the market can be trusted, that a small investor has a fair chance.

Do I think that will happen?

I'm not that naive.

Wolves in Sheep's Clothing

2011-08-11T12:23:00.000-07:00

At the best of times, I'm not a great fan of con artists. When they target the merely greedy, I can sometimes pause to admire the artistry of a con. But when they target the desperate, I go crazy.

Which is why I was so happy today, listening to Leonard Lopate's show on WNYC, to hear that the New York City Department of Consumer Affairs has issued subpoenas to 15 debt settlement companies (all chosen as a result of complaints by New Yorkers).

You know the companies I mean -- their advertisements are everywhere, promising to "cut your debt in half", and "negotiate" so that you end up paying pennies on the dollar.

It's easy for those of us who are fortunate enough not to be sinking under a rising tide of debt to wag a metaphoric finger, and say, "If it sounds too good to be true...." But when you're in that situation, and panicking, it's virtually impossible to think clearly. Someone offers to throw you a rope, you'll grab for it. Only to find out later that it's a noose.

“These so-called ‘debt settlement’ companies bombard New Yorkers with ads that fraudulently offer false hope, but instead deliver nothing but added fees and long-lasting financial ruin,” said [DCA] Commissioner Jonathan Mintz, in a press release issued today.

Speaking on the Lopate show, the commissioner went on to say that the best these companies do is take more of the indebted person's money, demanding an upfront fee, usually in the hundreds of dollars. The worst they do? Crater credit ratings, vastly increase penalties and fees, and push someone teetering on the edge right over the financial cliff.

The companies' "advice" is generally: Stop paying your debts. Wait 'em out. Eventually they'll be so exhausted, they'll let you off the hook, or nearly so. We'll talk to you for them.

That's not just bad advice; it's almost criminally bad. The creditor will sell the debt to a collection agency, and add fees and penalties. Monies that an indebted person puts into escrow with the settlement company are nearly impossible to retrieve, in part because the companies change names frequently. And there's little indication that these companies actually do contact the creditors.

This isn't a new story. The New York Times, as part of its "New Poor" series, ran an article by Peter Goodman more than a year ago about this nationwide scourge, preying on the vulnerable:

In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program.

By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.

A number of state attorneys general have been investigating these companies (now represented by their own trade association, the genteelly-named United States Organizations for Bankruptcy Alternatives), but I have yet to hear of significant criminal proceedings.

Commissioner Mintz said that about 18% of New York City households are carrying credit-card balances in excess of $10,000 (compared to about 13% nationwide). With an economy that continues to sputter, and jobs few and far between, it's easy to understand how that kind of debt could lead someone to jump for a proffered out. It's much harder to understand how people could choose to defraud the desperate.

Would the Hens Hire a Fox to Value their Eggs?

2011-08-08T06:23:00.001-07:00

Let's say that you're in the business of rating products and services. Investors rely on your ratings to decide whether to buy a product, or whether to demand more return for greater risk. Now imagine that you're paid for this work by the companies whose products and services you rate. Can you say, "conflict of interest"? Sure you can.

Remember all those junk-quality mortgages that got split up and repackaged and sold as AAA-rated bonds? Sure you do.

That explains why, when Standard and Poor's downgraded US debt to AA+ (from AAA) status on Friday, I was less than impressed. As Paul Krugman wrote in today's New York Times, Standard & Poor's is "the last place anyone should turn for judgments about our nation’s prospects". (Full opinion piece, here)

S&P is, after all, the company that "gave Lehman Brothers, whose collapse triggered a global panic, an A rating right up to the month of its demise. And how did the rating agency react after this A-rated firm went bankrupt? By issuing a report denying that it had done anything wrong."

It didn't help S&P's case that the administration immediately pointed out a $2 trillion error in S&P's math. The rating firm argued briefly, conceded the error, and went ahead with the downgrade.

Just how good at their jobs are the rating agencies? In his Times "FiveThirtyEight" blog, Nate Silver calls S&P country ratings "substandard and porous", noting that, for example, their egregious $2 trillion error in the US downgrade came from "their lack of understanding of the way that bills are scored by the Congressional Budget Office". Not a way to engender trust in their acumen, wouldn't you say?

I'm not suggesting that we aren't facing serious financial and economic difficulties in this country; of course we are. But this blog isn't about economics -- it's about ethics.

I find it ethically troubling that S&P (and Moody's and Fitch) are primarily paid by the very companies whose products they are reviewing.

There isn't any question that a great deal of, um, questionable behavior was going on, at the banks, at the ratings agencies, and no doubt at the accounting and law firms that served the banks as well. Much of it is coming out in private suits. An article by Louise Story and Gretchen Morgenson in today's Times, for example, reports:

One case against Bear Stearns indicates that its employees put troubled mortgages into securitization trusts that it sold to customers, while simultaneously receiving reimbursement — known as apology payments — from the companies that originated the loans.
And a recent case against Morgan Stanley cited a witness saying that the bank would receive mortgages with documentation of a buyer’s income and then shred that documentation so that it could call it a “no doc” loan and pay less for it. Those banks dispute the accusations.

If these allegations are true, then I'm glad that lawsuits are uncovering it.

But can we pause for a moment here and wonder why the Justice Department hasn't gone after these firms? Or Moody's? Or, for that matter, Bank of America, which is likely to be sued by still-largely-taxpayer-owner AIG? (Story and Morgenson's article in the Times reports that AIG will claim that BoA "misrepresented the quality of the mortgages placed in securities and sold to investors.")

Perhaps AIG has the wrong target in mind for its suit. If they bought BoA mortgage bonds in part because they were AAA rated... maybe the rating agencies should be held accountable, too. The agencies would no doubt claim that BoA and its subsidiaries provided falsified data, and that they're just victims here too. I'm not buying it. What about you?

Where is Dickens When We Need Him?

2011-07-26T07:14:00.001-07:00

Dickens' novels all seem to turn around the questions of the "deserving poor" versus the "undeserving poor". While the theory of Social Darwinism -- which Dickens argued against -- has been widely discredited in academia, it keeps popping up in business circles. And today's New York Times has a particularly depressing example.

According to an article by Catherine Rampell, "A recent review of job vacancy postings on popular sites like Monster.com, CareerBuilder and Craigslist revealed hundreds that said employers would consider (or at least "strongly prefer") only people currently employed or just recently laid off."

In other words, if you're looking for a job, you need to have a job. This, despite an unemployment rate of 9.2%, according to the government's Bureau of Labor Statistics.

Refusing to consider someone who's currently unemployed for a job "probably does not violate discrimination laws because unemployment is not a protected status, like age or race," Rampell writes. New Jersey has recently passed a law outlawing the practice, and other states (and Congress) are considering similar action.

But such legislation may not help much: if proving age- or race-discrimination is hard, proving that you didn't get hired because you were unemployed at the time is going to be that much more difficult. Moreover, in a few occupations -- like technology -- it may be legitimately important to stay on top of the ever-changing field. This does not explain the ads that the Times found for concierges, orthopedics device salesmen, air-conditioning technicians, and others that required current employment.

A related, and equally distasteful, practice is that of companies using job-applicants' credit scores to decide whether to hire them. While there may be a handful of cases where such scrutiny is valid (where there is clear opportunity for embezzlement, say), in most cases it is just another obstacle for people who have been laid off and have fallen behind on their bills. And how are they supposed to raise their scores back to prior levels if they don't have a paycheck to cover those bills?

Both techniques are easy shortcuts for companies inundated with hundreds of resumes for every posted position. I understand the problem. I understand the frustration of dealing with resumes that are completely wrong for the position. I understand that even HR departments are short-staffed these days. But short cuts are rarely the ethical choice, and they certainly aren't in this case.

In fact, they may be exacerbating this country's racial divide. In another article in today's Times, Sabrina Tavernise reports that "Hispanic families accounted for the largest single decline in wealth of any ethnic and racial group in the country during the recession, according to a study published Tuesday by the Pew Foundation." In the period from 2005 to 2009, median wealth for white households declined by 16 percent, for African-American households, by 53 percent; for Asians, by 54 percent; and for Hispanics, by 66 percent, meaning that the wealth gap between white households and others is "the largest since since the government began publishing such data a quarter century ago". (The full Pew Foundation report is available on the Times website, here, or on the Pew site, here)

So maybe it isn't Dickens we need, but Joseph Heller. How else can you describe this but Catch-22?

News Corp Dodges Taxes, Too

2011-07-13T08:07:00.000-07:00

Shortly before Tax Day, I wrote a post about how General Electric was managing to rack up ginormous profits and a teeny-tiny tax bill. Lots of people, from the left and the right, complained about the unfairness of this. There was relatively calm reporting about it (e.g., The New York Times, here), and there was shrill reporting about it ("scandalous tax breaks", according to CBS's interactive business network, BNET, here; and from Fox News' Bill O'Reilly, here).

Why am I bringing this up now? Because there's a lovely new twist on the News Corp scandal.

Reuters columnist David Cay Johnston did a little extra digging, and discovered that Fox News' parent (News Corp) has not only not paid U.S. taxes in the last four years, it has made money from taxes. According to Johnston (full story, here, and at Salon, here):

Over the past four years Murdoch's U.S.-based News Corp. has made money on income taxes. Having earned $10.4 billion in profits, News Corp. would have been expected to pay $3.6 billion at the 35 percent corporate tax rate. Instead, it actually collected $4.8 billion in income tax refunds, all or nearly all from the U.S. government.

There's even a really lovely little chart, here.

OK, so Johnston might have been exaggerating a bit -- I wouldn't have "expected" News Corp to pay $3.6 billion, because virtually no company actually pays the 35% rate. But collecting $4.8 billion? Really?

Do you think that Bill O'Reilly will be as shrill in castigating his uber-boss as he was in castigating GE?

No, I don't think so either.

By the way, News Corp has now dropped its plans to buy the rest of satellite company BSkyB. Explained News Corp COO Chase Carey, the deal was simply "too difficult to progress in this climate" (full Guardian story, here). By "this climate", I think he means "this disastrous scandal", don't you?

The "News of the World" May be Gone, but the Story isn't Going Away

2011-07-12T10:38:00.000-07:00

I wasn't going to add anything to my previous post, and then I got forwarded this story by Sam Gustin at PaidContent: a suit filed by Amalgamated Bank and other funds against News Corp in March alleging nepotism (in the purchase of a company run by one of Rupert Murdoch's daughters) has been amended to reflect the phone-hacking and police-payoff scandal. The revised suit states that the scandal indicates "a culture run amuck" and that the current board of directors "provides no effective review or oversight."

PaidContent also reports that a non-profit group, Citizens for Responsibility and Ethics in Washington (CREW) has called for a Congressional investigation (press release here) into whether News Corp journalists have hacked American voicemail accounts.

Murdoch closed the 168-year-old News of the World last week, essentially claiming that this would take care of the rotten apples. But it appears the other News Corp papers, including the Sun and the Sunday Times have engaged in similarly questionable behavior (click here for a Financial Times update; note that free registration is required to access the FT site).

CREW executive director Melanie Sloan said, "It is becoming increasingly clear this scandal was not perpetrated by a few rogue reporters, but was systematically orchestrated at the highest levels of News Corp.... If Mr. Murdoch's employees can be so brazen as to target the British prime minister, then it is not unreasonable to believe they also might hack into the voicemails of American politicians and citizens."

The Wall Street Journal, the New York Post, and Fox News are among News Corp's American properties.

While the News Corp scandal may represent a new low, let's not forget that American journalists have been guilty of questionable ethical behavior themselves, including phone-hacking. As Howard Kurtz wrote in Sunday's Washington Post, "Back in 1998, the Cincinnati Enquirer paid $10 million and apologized to Chiquita Brands after a reporter obtained voice-mail messages from a company executive 'in violation of the law,' the paper acknowledged."

Murdoch Throws 200+ Under the Bus -- But Not the Right One(s)

2011-07-08T09:39:00.001-07:00

If you've read, watched, or listened to the news at all in the last day or two, you've heard about the shutdown of the 168-year-old British weekly, News of the World, as a result of a phone hacking scandal (you've heard so much about it because there's nothing that journalists think is more interesting than other journalists).

Every hour seems to bring some new "juicy" tidbit, which is why the Guardian is live-blogging the unfolding scandal (here). Indeed, there has apparently been so much bad behavior, it's hard to know where to start.

The scandal has old roots.

In 2005, according to the Guardian's interactive timeline, Buckingham Palace began to suspect that the voicemail of Prince William and other royals had been hacked, and called in Scotland Yard. News of the World royals editor Clive Goodman, and a private investigator the weekly had hired, were arrested in August 2006, and were jailed in January 2007. Editor Andy Coulson resigned, claiming he knew nothing, and in August became a senior media adviser to now-Prime Minister David Cameron (Coulson resigned from Cameron's staff in January of this year, and was arrested today).

More victims were uncovered in 2009 and 2010, as well as payments to drop legal action to several of the victims. But the uproar was relatively muted as long as the victims were royals and celebrities who live much of their lives in the public eye.

What made the scandal roar were the revelations this month that the tabloid, Britain's largest-circulation paper (2.7 million), had hacked into (a) the voicemail of a murdered schoolgirl in 2002, even deleting messages to make room in the box, thereby giving the girl's parents false hope that she was still alive, and (b) the phones of families of the victims of the July 2005 London subway bombings. In addition, there are now police investigations into alleged bribery of police officers for information (not just for news tips -- illegal but apparently commonplace -- but also, according to a story by Sarah Lyall and Alan Cowell at the New York Times, "for substantial information, including confidential documents held by the police.")

After all this, drastic action was needed, and News Corp. has taken drastic action, shutting down the paper after this Sunday's issue, devoting all advertising space in the final issue to charities (most major advertisers had already fled), and donating all final issue revenues to "good causes", specified as "organisations ... that improve life in Britain and are devoted to treating others with dignity." (I found the full statement from James Murdoch, chairman of News International, and son of News Corp. CEO Rupert Murdoch at the Poynter Institute site here; scroll down).

But is shuttering the tabloid enough? Is it right?

Murdoch acknowledges that many, if not most, of the 200+ writers, editors, and staff were "either new to the Company or ... had no connection to the News of the World during the years when egregious behaviour occurred."

He did not, however, apologize to that staff, saying only that "I can understand how unfair these decisions may feel." "May feel"? How about, "are"? This is, after all, guilt by association.

Who hasn't been fired? Rebekah Brooks, editor of News of the World when much of the hacking took place, and now chief executive of News International (of which James Murdoch is chairman; the company is the British newspaper subsidiary of News Corp.). Rupert Murdoch is reported, according to Sarah Lyall and Jo Becker's article in today's New York Times, to "regard her as a kind of favorite daughter (although he has four actual daughters)."

The article goes on to quote a "person who knows them both socially":

Rupert Murdoch adores her -- he's just very, very attached to her.... To be frank, the most sensible thing that News Corp. could do would be to dump Rebekah Brooks, but he won't.

Actually, it's more than "the most sensible thing", it would be the right thing, as this happened on her watch and was therefore ultimately her responsibility. Of course, on the "buck stops here" principle, one could argue that Rupert should dump his son James, but the younger Murdoch actually has far more "plausible deniability" than does Ms. Brooks.

Why did the Murdochs move so quickly to close the paper down? You might think it was to silence the chorus of outrage.

But it seems to have done little more than raise suspicions.

Slate's Jack Shafer calls the action "the ultimate 'reverse-ferret'" (read the whole story; it's scandalously funny and deeply depressing). He terms the closing of the paper as an action "designed to scatter and confuse the audience." Shafer continues,

It looks like the sacrifice of something very special to him, seeing as it was his first U.K. newspaper acquisition in 1968. But it's not. It looks like atonement, but it's not. It's supposed to change the subject, but it's too late for that....

As Jennifer Preston and Jeremy Peters wrote in today's New York Times, some immediately saw it "as a ploy to salvage government approval of the News Corporation's potentially lucrative controlling stake in the satellite company British Sky Broadcasting, or BSkyB. Others saw it merely as a rebranding."

Allison Frankel, on her Reuters blog, wrote that -- according to a British media lawyer -- by closing the tabloid down, the company "may not be obliged to retain documents that could be relevant to civil and criminal claims against the newspaper -- even in cases that were already underway."

Moreover, the scandal has made one thing very clear: the relationship between the British press, in the person of Mr. Murdoch (senior), and British politicians (on both sides of the aisle) has been ickily close.

In today's New York Times, John Burns and Jo Becker report that

Some of Mr. Cameron's political opponents have cast the embrace of Mr. Murdoch as a mistake that could combine with other recent miscues by the Cameron government to seriously weaken the prime minister's party, the Conservatives. But those critics ... have to cope with the awkward fact that the Labour Party was just as closely linked to Mr. Murdoch, if not more so, during the 13 years that Britain was led by Mr. Cameron's predecessors as prime minister, Tony Blair and Gordon Brown.

But there's another group I'd like to hear from: News Corp.'s board of directors. They are ultimately responsible. What are they going to do? I'm waiting to read that story. (Curious as to who they are? Try here.)

Time for Ethics 101

2011-07-06T06:30:00.000-07:00

It's one thing to create incentives; it's another to figure out exactly what behavior you're incentivizing.

Think of it this way: Your company makes widgets; they're OK widgets but senior management wants them to be the best widgets. A manufacturing consultant tells the CEO to provide big bonuses to the workers who make the best widgets and their supervisors, and the program is implemented. Now, you're a supervisor for a dozen people on the widget-production line. At the end of the shift, when they've gone home, you notice that a few of the widgets aren't quite right. With the new bonus program, your salary, your very job in fact, depends on the percentage of perfect widgets produced. If you could fix those wacky widgets quickly, without anyone noticing, would you?

That was pretty simple, but let's turn to a more complicated question: public education. More and more schools, locally and nationally, have instituted testing programs to determine how much children have learned. Teachers, principals, and superintendents are frequently praised or punished, depending on the test results. Not only are bonuses tied to test scores, but jobs are too. Teachers whose students don't improve enough risk being let go. In a tough economic climate, that incentive might easily incline someone to fudge the data a little bit.

And so it has. Only more than a little bit.

According to an article by Kim Severson in today's New York Times (and widely reported elsewhere), a Georgia state investigation has shown "rampant, systematic cheating on test scores" in Atlanta's public schools (the full report, divided into three volumes, is available here, here, and here).

Cheating "occurred at 44 schools and involved at least 178 teachers and principals, almost half of whom have confessed..."

The investigation has centered on former Atlanta school superintendent Beverly Hall, "who was named the 2009 National Superintendent of the Year and has been considered one of the nation's best at running large, urban districts."

Hall was superintendent from 1999 until June of this year. She had announced last November that she would be leaving at the end of the 2010-2011 academic year. According to Severson's story, she left Tuesday for a vacation and was apparently unavailable for comment.

However, according to an article in today's Atlanta Journal-Constitution by Heather Vogell, Hall has issued a statement through her lawyer, "denying that she, her staff or the 'vast majority' of Atlanta educators knew or should have known of 'allegedly widespread' cheating. 'She further denies any other allegations of knowing and deliberate wrongdoing on her part or on the part of her senior staff,' the statement said, 'whether during the course of the investigation or before.'"

Questions have been raised about Atlanta schools' performance -- and that of Dr. Hall -- for many years. Last August, the Times ran a story by Shaila Dewan about a 2009 investigation that "centered on suspicions that answer forms on the state achievement test used to measure progress under the federal No Child Left Behind law had been tampered with by educators."

Dewan reported that during Dr. Hall's tenure,

...[The] graduation rate has increased by 30 percentage points. In the last three years, the college scholarship money offered to Atlanta graduates has doubled. And in the urban district tracking program, where progress is measured by a gold-standard test called the National Assessment of Educational Progress, or NAEP, scores have continued to climb.

Now it appears that it was all -- or largely -- a mirage. Instead, there was, as the report states, a "culture of fear, intimidation and retaliation." Those teachers and principals who were willing to report cheating or other misconduct often found themselves "the subject of an investigation and were disciplined."

After reading the stories, what saddened me most was that I wasn't surprised. Assuming that what the state's investigation indicates is true, it's shameful. But I doubt that it sprang into being full-blown. Most likely it started with one or two schools, one or two teachers, one or two principals. And one superintendent for whom winning was apparently not everything, but the only thing.

Sound familiar?

Instead of focusing only on testing math and reading skills, maybe we need to send everyone back to school for a quick brush-up on ethics skills.

Coal is Even Dirtier than I Thought

2011-06-30T12:52:00.000-07:00

In April of last year, I wrote a post about just how dirty "clean" coal is. Yesterday's New York Times showed that it's even dirtier than I thought.

According to an article by Sabrina Tavernise, "...Massey Energey, the owner of the West Virginia mine where 29 men were killed in an explosion last year, misled government inspectors by keeping accounts of hazardous conditions out of official record books where inspectors could see them." Massey was acquired by Alpha Natural Resources this month.

The 5 April 2010 explosion at the Upper Big Branch mine was the worst U.S. mining disaster in 40 years.

That double books on hazards were kept was only one of many damning findings of the federal investigators' report. In addition, required gas readings were not recorded. Required air readings were not recorded. Training of miners was inadequate or non-existent. Miners were intimidated into not slowing or stopping production for safety reasons.

(The Times has posted the complete report of the West Virginia governor's independent investigation panel, released in May of this year; information about the federal investigation, which is apparently continuing, is available at the Mine Safety and Health Administration site, here)

Massey blamed a "massive inundation" of natural gas for the explosion, according to a report it released in early June, apparently without permission from its parent company. From the government investigations, it appears that coal dust -- improperly allowed to accumulate, highly explosive, and prone to spontaneous combustion -- was at fault.

"Alpha Natural Resources called the report's release 'inappropriate,'" according to an article by E&E Publishing reporter Manuel Quinones.

Just how "inappropriate" was it? Quinones wrote,

In a cover letter accompanying the report, Bobby Inman, the former Massey chairman, said the report's release was delayed to avoid bad publicity in advance of the Alpha-Massey merger. The delay was requested by Alpha executives and major Massey shareholders, he said.

Quinones also reported that "Alpha said it would conduct its own probe into the Upper Big Branch disaster and promised to cooperate with pending government investigations, including a criminal probe by the U.S. Department of Justice."

Two people have been indicted so far. Some of us are waiting for a lot more.

Who is That Masked Reviewer, Anyway?

2011-06-29T11:07:00.000-07:00

If you're like me, you buy too many books on Amazon. And you probably scan the online reviews. I can't say I've ever been dissuaded from buying something by a review, but I have occasionally been slowed down in my headlong rush to acquire some more printed matter.

And, if you're like me, you've not given much thought to who those reviewers are. If you'd asked me, I would have guessed that they were customers like us, people who love books and sharing "finds", and who have way more time to read and comment than I do.

But that's not exactly the case.

Thanks to paidContent.org, and specifically Laura Hazard Owen, I've learned that "Amazon's customer reviewers -- particularly the top 1,000 reviewers -- do not always make independent decisions about which books and other products they write about." (Full article, here)

And those reviewers aren't exactly like you and me, either: "Seventy percent of the top reviewers are male, their median age is 51-60, and more than half hold a graduate degree."

Ms. Owen's information comes from research conducted by Cornell University professor Trevor Pinch, who surveyed 166 of Amazon's top 1,000 reviewers for his study.. (Cornell press release on the study, here).

Ms. Owen reports,

Respondents to Pinch's survey overwhelmingly mentioned "self-expression" and "enjoyment" as their motivations [for writing the unpaid reviews]. Many respondents also cited altruistic reasons for reviewing -- "hope to help others decide whether to buy," "wanting to share what I have liked with others," etc.

All this is great, but what I found most concerning among Prof. Pinch's key findings was this one: "85 percent [reported that they] had received free products from publishers, agents, authors, and manufacturers."

Why does that concern me? Not just because of my "transparency" mantra, but because we humans are so easy to influence, and so unaware of how we've been influenced.

Two years ago, I wrote a post about "gimme" pens and caps, suggesting that we should simply get rid of all of them. The post was based on findings reported in the New York Times, which asked:

Can a little promotional gift like a pen or a coffee mug inscribed with a drug’s name really make a difference in a doctor’s prescription patterns? It can, researchers say.

A study reports that students from a medical school where such gifts are allowed had a more favorable attitude toward a cholesterol drug than did students from a school where they are banned.

In fact, the research indicated that no gift is "too small" to have an effect on us. Even if we're not aware of it. My own hypothesis -- based on no research at all, but why should I let that stop me? -- is that we are hard-wired for reciprocity, and that as soon as you give me something, I'm going to try to find a way to "even" things up.

Among the comments posted to Ms. Owen's report is this one:

I'm in the 300s in the Amazon ranking.... I get some freebies through Amazon and some through a review site, but most items I purchase. None of the freebies are dependent on a positive review... And then I tell people what I really think. I know a lot of reviewers who won't rock the boat, but in my experience that's a personality trait based on not wanting to be a green meanie and nothing to do with swag.

I have no doubt that this reviewer believes this comment whole-heartedly. And maybe it's true. My point is that it's impossible for her to be sure of herself, and it's impossible for me reading her review to be sure.

Say It Ain't So, Joe

2011-06-26T11:04:00.000-07:00

I'm a big fan of Joe Nocera, columnist for the New York Times (formerly on the business pages, now an Op-Ed columnist). But today, well ... OK, everybody's allowed an off day, right?

Today's "Sunday Review" section of the Times carries a long front-page piece by Nocera, extolling the joys of the Chevy Volt. For those of you who aren't "car guys" like me, the Volt is an electric-gas hybrid, running first off its electric battery and then, when the battery is drained (after about 40 miles) switching seamlessly over to a traditional gasoline-powered combustion engine.

Nocera sounds almost like a GM press guy as he waxes poetic about "the smugness I felt as I drove past gas stations", and about how he was "pleasantly surprised by the car’s power, pickup and handling."

What was most fun, Nocera writes, is the gauge in the $41,000 car that lets you follow your gasoline usage over time:

By the time I gave the car back to General Motors, I had driven 300 miles, without using another drop of gas beyond the original two gallons. I’m not what you’d call a Sierra Club kind of guy, but I have to tell you: I was kind of proud of myself.

Joe, maybe you should be more of a Sierra Club kind of guy, because nowhere in your piece did you mention the ugly truth about electric vehicles: Yes, electric-powered fleets of cars in the U.S. would mean fewer imports of oil from the Middle East, but, alas, most electricity in the U.S. is generated in dirty dirty dirty coal-fired plants.

Despite the coal industry's frantic "clean coal" campaign, coal isn't clean. Not when it's being extracted from the earth; not when it's being transported to power plants; not when it's being burned to generate electricity.

To ignore the issue entirely, Joe, is irresponsible. The (petroleum-based) energy you saved was offset by the (different-fossil-fuel-based) energy you consumed.

'Fess up. Please.

Let's Really Get Tough on Crime

2011-06-25T13:08:00.000-07:00

What does it take to send a crook to jail?

If we're talking about the burglar stealing your family silverware or the shoplifter grabbing twelve cashmere scarves, it may not take much. But if someone steals thousands, if not millions, of dollars from your shareholders... well, that's a different story, isn't it?

James B. Stewart, Pulitzer-Prize-winning journalist at the Wall Street Journal and now a financial columnist for the New York Times, has a depressing example of this in today's paper. Headlined "Bribery, but Nobody was Charged," the piece details years of payments by Tyson Foods to keep veterinarians at a Mexican processing plant happy. The veterinarians were there, Stewart reports, "as part of Mexico's efforts to meet high sanitary and processing standards... [and] certified products as suitable for export."

The payments ($2700 per month, each, made over many years) were originally given to the wives of the veterinarians. When this became known at company headquarters, in 2004, action was swiftly taken.

But it's not the action that you or I would expect.

Participants agreed that the payments to the wives had to stop. But the executives (including, Stewart notes, the president of Tyson International, the vice president for operations, and the vice president for internal audit) then "were tasked with investigating how to shift the payroll payments ... directly to the veterinarians."

Hello?

As Stewart puts it, "What were these Tyson officials thinking?"

Two years later, the company finally did what it should have done at the outset. Sort of. With the help of outside counsel, "under a government program intended to encourage voluntary disclosure of white-collar crime, [Tyson] turned the results over to the Justice Department and the Securities and Exchange Commission."

In the end, Tyson agreed to a "deferred prosecution agreement", admitted the government's statement of facts, acknowledged its violation of the Foreign Corrupt Practices Act (a.k.a. Paying Bribes), and paid a total of $5.2 million in penalties and SEC charges.

So which Tyson employee went to jail for this appalling scheme?

None of them.

As Stewart writes,

It would seem self-evident that if Tyson engaged in a conspiracy and violated the Foreign Corrupt Practices Act, then someone at Tyson did so as well. The statute specifically provides for fines of up to $5 million and a prison term of up to 20 years for individuals...

Perhaps it is only that the investigation is still continuing?

You wish.

...[Press] officers for both the Justice Department and SEC said the investigation was over and no one would be named or charged. This seems to reflect the belief that the deferred prosecution agreement, penalty and SEC settlement largely achieved the government's objectives, which were to stop the illegal conduct at Tyson and deter future instances.... But surely bribery, not to mention other forms of corporate wrongdoing, would be more effectively deterred if someone was actually held accountable for it.

In this case, none of the senior executives involved have suffered any negative backlash. While none is still employed at Tyson, the former president of Tyson International is now a director of Yuhe International ("China's largest producer of day-old broiler chicks"), and the chief administrative officer, who received the 2004 email first reporting the illegal payments, has taken early retirement, receiving $1 million at retirement and "a 10-year consulting contract providing an additional $3.6 million in compensation", plus such fringe niceties as the use of a car, reimbursement for country-club dues, and some personal use of company aircraft.

It takes a lot, sadly, to shock me these days. But this story recounted so much bad behavior it was hard to know where to start.

And what's particularly frustrating is the feeling that there's nothing we can do about it, that Tyson probably differs from others in its industry in that it 'fessed up and paid the fine (more exactly, the shareholders paid the fine), and that Tyson itself may be back to the same old way of "doing business".

Why didn't the president of Tyson International get charged personally with violation of the Foreign Corrupt Practices Act? It may be, as Stewart suggests, a reflection of "budgetary constraints at both agencies ... and, for the Justice Department, the burden in a criminal case of proving guilt beyond a reasonable doubt."

Call me cynical, but I think it also has to something to do with the well-worn hallways between DOJ and the nation's top law firms, the very firms to which a company like Tyson might turn.

What can we as consumers do? About the only thing we can do is hit 'em where it hurts: boycott the product.

But know that the other guy is likely doing something just as bad.

I'd say it was time to turn vegetarian if it weren't for Germany's recent E. coli-laden sprouts....

When You Say, "Confidential", What Exactly Do You Mean?

2011-06-21T12:12:00.000-07:00

How you feel about the legal protections now offered to whistle-blowers depends on your background. Americans tend to think they're good, encouraging people to bring illegal or unethical things to light that might otherwise stay hidden. Europeans, with recent memories of secret police and neighborhood informers, are less enthused.

But no matter how you feel about them, I hope you'll agree that if you promise protection to a whistle-blower, you should mean that you'll protect them.

Journalists, in particular, claim to be willing to do almost anything -- even go to jail themselves -- to protect their confidential sources.

For example, a month ago, the New York Times reported that one of its reporters, James Risen, had been subpoenaed by federal prosecutors to require him "to testify at a criminal trial about who leaked information to him about the [Central Intelligence] agency's effort to sabotage the Iranian nuclear program at the end of the Clinton administration." (Full story by Charlie Savage, here)

Mr. Risen's response was, "I am going to fight this subpoena. I will always protect my sources, and I think this is a fight about the First Amendment and the freedom of the press."

I agree with him.... up to a point.

My very first job after college was as a newspaper reporter-photographer for a small-city daily, so I have a soft spot for "print people". But that doesn't mean that I'm blind to everything that goes on.

Journalism may be a "calling", but it's also a business, and big scoops mean more than just bragging rights.

Early this month, the Electronic Frontier Foundation (EFF) reported that "the success of Wikileaks in obtaining and releasing information has inspired mainstream media outlets to develop copycat sites." (Full story by Hanni Fakhoury and Leafan Rosen, here)

The EFF reported specifically on efforts by Al-Jazeera (called "the Al-Jazeera Transparency Unit"; website here) and the Wall Street Journal (called "SafeHouse"; website here). Both appeal to readers for help in the important work of investigative journalism. The WSJ, speaking of its SafeHouse site, says:

Documents and databases: They're key to modern journalism. But they're almost always hidden behind locked doors, especially when they detail wrongdoing such as fraud, abuse, pollution, insider trading, and other harms. That's why we need your help.
If you have newsworthy contracts, correspondence, emails, financial records or databases from companies, government agencies or non-profits, you can send them to us using the SafeHouse service.

This sounds a lot like a fishing expedition, doesn't it?

I'm uncomfortable with that, too. Is this really what journalism is about?

Both Al-Jazeera and the WSJ promise to go to "great lengths" (Al-Jazeera's phrase) to protect sources. But what's that promise worth? According to the EFF, not much. Less than a day after the "SafeHouse" program was launched, online security experts were exposing a number of security problems.

Gawker's Adrian Chen pointed out what he called "a doozy of a caveat":

Except when we have a separately negotiated confidentiality agreement… we reserve the right to disclose any information about you to law enforcement authorities or to a requesting third party, without notice, in order to comply with any applicable laws and/or requests under legal process, to operate our systems properly, to protect the property or rights of Dow Jones or any affiliated companies, and to safeguard the interests of others.

As Chen wrote (full piece here), "So, go ahead and upload your explosive documents to SafeHouse. But if they publish a scoop based on your material and someone gets mad, they can sell you out to anyone for any reason, including the insanely broad one of safeguarding 'the interests of others.'"

EFF also pointed out that the Al-Jazeera site asks, among other things, that you "represent that you 'have full legal right, power and authority' to give them ownership of the material". But isn't that just what leaked documents aren't about?

My issue isn't really with how well or badly these sites protect the sources from whom they hope to obtain material. My point, as usual, is about transparency and trust.

If you can't guarantee me confidentiality, tell me so. Tell me what the risks are. Tell me why you think it's important that I ignore those risks and go ahead and share the material that you want. Tell me why I should trust you with this material.

In other words, journalism sites shouldn't keep their security secrets from whistle-blowers.

"Clean" Coal Cleaned Up?

2011-05-14T08:37:00.000-07:00

Whenever new legislation is proposed that would limit advertising aimed directly at children, a chorus of "Nanny State! Nanny State" erupts from hardline free-marketers. But if you're curious about "what it really looks like when the coal industry targets kids" (to quote Fast Company; article here) look no further. And I expect you'll be as upset as I was.

In Thursday's New York Times, Tamar Lewin reported that Scholastic Inc. had, in partnership with the American Coal Foundation, produced a "lesson plan" for fourth graders which extols coal's virtues without ever mentioning the negative effects of mining and burning coal (full article here).

Scholastic is the world's largest publisher of children's books. As the Times editorial writers noted on Friday (here), Scholastic materials can be found in "about 90 percent of the nation's classrooms." (Full disclosure: my husband works for Scholastic.) Many of us have fond memories of Scholastic book clubs and book fairs. As the publisher of Clifford the Big Red Dog, the Harry Potter books (in the U.S.), and the Hunger Games trilogy, among many others, Scholastic is a powerful, positive brand.

The coal "curriculum" is a four-page program and poster, "The United States of Energy".

It maps the various energy sources that are used in the U.S. "Coal is produced in half of the 50 states, and America has 27 percent of the world's coal resources.... Coal is the source of half of the electricity produced in the United States." Nowhere is there any mention of, say, mountaintop removal, sulfur dioxide, toxic waste, asthma rates, or mining disasters.

The matter was brought to public attention by three advocacy groups (Rethinking Schools, Campaign for a Commercial-Free Childhood, and Friends of the Earth) who have started a letter-writing campaign asking Scholastic to discontinue the product.

In her article for Mother Jones, Kate Sheppard quotes Rethinking Schools editor Bill Bigelow: "Simply put, the coal industry is renting Scholastic's credibility and recognition."

It's true that I think that there's no such thing as "clean coal". But I would be as angry at Scholastic if they accepted money from a left-wing advocacy group and produced a "lesson plan" that papered over opposition to their position. The Times editorialist is right: Scholastic's reputation and access to children makes for "a special obligation to adhere to high educational standards."

It doesn't take much to tarnish a brand. Scholastic's halo has slipped and dulled.

Measuring Well Matters

2011-05-09T04:13:00.000-07:00

But what you measure matters at least as much. How do you pick the right metrics? How can you avoid unintended consequences of the metrics you choose?

Put yourself in the position of a giant retail business' compensation committee for a moment. You want to reward your senior executives' excellent performance, of course, but you also want to be sure that what you're rewarding really is excellent. So you need some good metrics. For years, a key retail metric has been "same-store sales", comparing sales results at stores that have been open for at least a year (which keeps you from overstating the bounce that might be the result of new-store-opening hype). It's a metric that industry analysts watch closely.

Why would your compensation committee drop that metric? That's a really good question.

In yesterday's New York Times, columnist Gretchen Morgenson asked precisely that question of Wal-Mart. And got no answer. (Full column, here; the switch in metrics was announced in a proxy statement the company filed a few weeks ago)

"The timing was certainly curious," Ms. Morgenson noted. "The switch came amid a sustained decline in Wal-Mart's same-store sales, which have been falling for nearly two years. The company's total sales, however, rose 3.4 percent in the latest fiscal year."

Guess what the switch would mean for Michael T. Duke, the company's chief executive officer. You're right!! (Morgenson noted that the same-store sales metric "accounted for 30 percent of the weighted factors determining his performance pay in fiscal 2010".)

Removing the metric is "a failure to admit failure", according to a retail consulting firm's managing director.

But it's more than just that. It's a reminder that for too long now we've had one set of rules for those at the top and another set for those at the bottom -- and that's just wrong.

Remember that the Supreme Court is now deciding whether the largest class-action lawsuit in the country's history can move forward, Dukes vs. Wal-Mart, which alleges systematic discrimination in pay and promotion for women. (A decision is expected in June; the Supreme Court is not being asked to decide whether Wal-Mart actively discriminated against women, but at this point is only being asked to determine whether hundreds of thousands of women who have worked or are working at Wal-Mart have enough in common to create a "class". Click here for a 29 March 2011 article by Adam Liptak in the Times for more background.)

In addition, Wal-Mart last year eliminated a profit-sharing program for lower-level workers. Morgenson notes that "Last year, before Wal-Mart eliminated that profit-sharing program, it said it paid roughly $1.1 billion in profit-sharing and 401(k) matches to employees. In the future, it will offer only the 401(k) match."

Do I need to remind you whose salary is about to increase?

Burt Flickinger III, the retailing consultant, called the elimination of profit-sharing "the ultimate Ebenezer Scrooge story of the last holiday season.... Ebenezer makes all the money, and all the poor Cratchits working in the Wal-Mart stores become poorer and poorer."

Scrooge: it's not just for Christmas anymore.

My question is, simply, What was the compensation committee thinking? What has happened to the independence of boards?

Don't answer. I know. And it's too depressing.

When is "Too Much" Really Too Much?

2011-04-11T07:37:00.000-07:00

Last week, I cheered for some Catholic nuns who are pressing Goldman Sachs on the issue of compensation excesses. The "how much is too much" issue seems to be gaining attention, although not enough.

In yesterday's New York Times, columnist Gretchen Morgenson interviewed a Texas money manager who argues that "you don't have to pay nosebleed compensation to attract good people."

The money manager, Albert Meyer, is a former professor of accounting and skilled at ferreting out the nuggets buried in proxy statements. Excessive compensation is a "red flag", he says: "Does the company exist for the benefit of shareholders or insiders?"

And stock-based compensation -- heralded by many as a way to ensure that executives work harder for their shareholders -- receives particular scorn: "Stock-based compensation plans are often nothing more than legalized front-running, insider trading and stock-watering all wrapped up in one package."

Mr. Meyer's money management firm ends up investing in many international companies whose corporate governance is "more respectful of shareholders" (Ms. Morgenson's phrase) than most American companies. Mr. Meyer is committed to doing the best possible job for his clients' capital, of course, but there is a significant social ethics component to his thinking too:

Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs.... There has been a massive wealth transfer from middle-class America's retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.

Want an example of that wealth transfer? Turn to today's Times, and a David Carr article on Gannett.

Since I'm a journalism junkie, you don't have to tell me that running a business that has (among other properties) more than 80 small-city dailies (plus its iconic USA Today) is going to have trouble dealing with a major recession, declining circulation everywhere, and an advertising flight. Given that, you might say that CEO Craig Dubow has done a pretty good job: revenues down last year only marginally, operating cash flow up, debt down.

As Carr writes,

That's a testament to what the Street would call "aggressive cost management." But out in the rest of the world, we know that generally means dumping bodies overboard, and Gannett is a high achiever when it comes to downsizing. In the five years that Mr. Dubow has run the company, its work force has gone from 52,000 employees to just over 32,000.

Most of its employees are nonunion, so the leadership is free to manage as it sees fit, including telling some people their careers are over and telling the people that remain not to come to work.

Those Gannett employees who work for the community-news division, for example, will be taking a full week of (unpaid) furlough again this year. Lest they think that executives not be empathetic to their situation, they were told that the senior executives would each "be taking a reduction of salary that is equivalent to a week's furlough."

We may begin by musing whether a CEO is as likely to be living paycheck-to-paycheck as his lower-level employees.

And then there's the matter of the cash bonus of $1.75 million that Mr. Dubow received in 2010. Not to mention stock, options, and deferred compensation. Yeah, he's really going to have to cut back.

Carr notes that

In fact, the top six executives at the embattled publishing company would receive 2010 compensation packages of more than $28 million if the company does very well, which seems unlikely, but the symbolism remains.

The savings from two years of mandatory furloughs for the rest of Gannett employees: $33 million. Well, that didn't go very far, did it?

As one blogger on the Gannett Blog wrote, "Who says charity doesn't begin at home?"

Once again, we're seeing the rank-and-file getting screwed while the top 1% chuckle all the way to the bank. Why is there no more outrage? Could it be because we have systematically seen unions bashed and broken? Who is left who will speak for the employees? Or are we all going to buy into the plutocratic theory that if you're poor, it's your own damn fault?

Transocean Executives to Donate Meager Portion of Unearned Bonuses

2011-04-06T11:20:00.000-07:00

Can you spell "insensitive"? Sure you can.

How about "insufficient"?

Consider this headline: "Transocean Executives to Donate Bonuses".

How generous, you may think. If you've forgotten, it was Transocean that owned the Deepwater Horizon rig that exploded last April in the Macondo area of the Gulf of Mexico; eleven rig workers died in the accident. The bonuses will go to a fund established for the victims' families.

Wait a minute: bonuses? What are the bonuses for? Among other things, for "the best year in safety performance in our company's history." (click here for Forbes's Jeff McMahon's take on this)

Transocean has since allowed that the wording of their announcement was "insensitive". I can think of other adjectives.

The remainder of the bonuses awarded appear to be for additional work ... responding to the Deepwater Horizon disaster.

According to the Transocean annual report,

Many of our senior executive officers… dedicated a significant portion of their time in 2010 following the Macondo Incident to responding to the needs of the victims’ families, coordinating the involvement of additional resources required to stem the flow of hydrocarbons, including drilling rigs and personnel to drill relief wells and other operations as requested by the Unified Area Command, cooperating with the numerous federal, state, and local reviews and investigations into the incident, overseeing our internal investigation of the incident, and managing other demands stemming from these activities, in addition to performing their normal responsibilities.

And this means that these executives are due additional compensation?!? And it was an "Incident"?!?

The headline I quoted above is from today's Wall Street Journal (click here for Dionne Searcy's article; note that most is behind a pay wall). In the article, Searcy reports that while the five senior executives are donating their safety bonuses, the total sum dontated ($250,000) represents slightly more than one-quarter of their overall bonuses.

I think mine is a more accurate headline: "Transocean Executives to Donate Meager Portion of Unearned Bonuses".

Goldman Shareholders: Please Vote with the Nuns

2011-04-05T06:33:00.000-07:00

Who would you trust when it comes to deciding what "God's work" involves: senior bankers at Goldman Sachs or four orders of Catholic nuns?

Me, too.

The nuns (Sisters of Saint Joseph of Boston, Sisters of Notre Dame de Namur, the Sisters of Saint Francis of Philadelphia, and the Benedictine Sisters of Mount Angel) have prepared a shareholder proposal to be presented at Goldman Sachs' annual general meeting next month that asks the bank's compensation committee to review whether "senior executive compensation packages (including, but not limited to, options, benefits, perks, loans and retirement agreements) are 'excessive' and should be modified."

The five most senior executives at Goldman received $69.5 million in pay last year, despite a 38% drop in annual earnings and an essentially unchanged share price.

The nuns also ask the compensation committee to explore "how sizeable layoffs and the level of pay of our lowest paid workers impact senior executive pay." (click here for Alex Hawkes' article in The Guardian; here for Katya Wachtel's Business Insider piece)

The nuns, together with the Nathan Cummings Foundation, are Goldman shareholders. While individual nuns take vows of poverty, orders of sisters may have investable funds. The nuns, of course, have a fiduciary responsibility to see that those funds are well- and wisely-invested. They also have a moral obligation to speak out when they believe funds are being unwisely spent. And they understand that compensation is not just a financial issue, but a moral one.

Goldman's chief executive officer, Lloyd Blankfein, famously said in 2009 that the bank was doing "God's work" (click here for my post on that comment and others like it); the nuns seem to disagree.

Goldman, in the SEC filing that revealed the nuns' proposal, urged its shareholders to vote against the request, as "the preparation of the requested report would be a distraction to our compensation committee and our board, [and] would entail an unjustified cost to our firm..."

Apparently, they're not concerned that their pay packages might be an "unjustified cost".

A New Definition of "Chump Change"

2011-04-01T05:41:00.000-07:00

It might be nice to think of $3 million as "chump change", but I doubt that I'll ever be able to do that.

The question is, Is it ever worth profoundly damaging your reputation (at the very least) or risking massive fines and jail time (at the worst) for chump change?

Martha Stewart, please pick up the phone.

News broke Wednesday that David Sokol, "heir apparent" to Warren Buffett's Berkshire Hathaway, had bought shares in a company that he then encouraged Berkshire Hathaway to acquire. It sounds an awful lot like insider trading, but Mr. Sokol (and Mr. Buffett) insist that he did nothing wrong.

Mr. Sokol has resigned from Berkshire Hathaway, and, according to today's New York Times, the SEC is investigating (full story here).

From a timeline prepared by Reuters, it's not clear that Mr. Sokol actually broke the law. He did make a profit of at least $3 million which would be a rich reward to most of us, but is likely only chump change to Mr. Sokol, who has earned many times that amount in the last three years as chairman of MidAmerican Energy, a subsidiary of Berkshire Hathaway. Would it be worth risking everything for such a (relatively) small amount?

Even if the investigation proves that Mr. Sokol's actions in buying Lubrizol shares only days before recommending the acquisition to Berkshire Hathaway were not illegal, the appearance of his action is bad; the ethics is certainly shaky; and the best one can say for it is, Stupid stupid stupid. So if it's not a trifecta of illegal, immoral, and dumb, it's definitely a two-fer.

Actually, I find Mr. Buffett's behavior a little more puzzling than Mr. Sokol's. According to the timeline, in mid-January, "Sokol suggests buying Lubrizol to Buffett, with a 'passing remark' that he owned some stock in the company."

Despite the fact that Mr. Buffett was apparently not interested in acquiring Lubrizol at the time (again, per the timeline), wouldn't you have expected him to ask some questions?

As reported in today's Times "Dealbook" (full story here),

At that point, most corporate chieftains would have asked questions, directed the executive to seek legal advice or even put the idea of a deal on ice, experts said. But Mr. Buffett did none of those things — even though his company, Berkshire Hathaway, like most large companies, has policies that restrict employees from using or sharing confidential information for “stock trading purposes.”

“It just seems odd to me that it didn’t throw up some red flags,” said Greggory Warren, a senior stock analyst at Morningstar. “As much as they don’t like to have their hands in what managers are doing, there are occasions like this where they have to.”
Mr. Buffett assumed that Mr. Sokol had held the stock for years, not days, which would make the timing of the deal less suspicious. “It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings,” Mr. Buffett said in a statement on Wednesday announcing Mr. Sokol’s resignation.

Well, that seems a little disingenuous, doesn't it? Why would Mr. Buffett have simply "assumed" that Mr. Sokol had held the stock for years? Particularly when Mr. Buffett has for so long built and protected his company's reputation for ethical dealing.

Mr. Buffett seems to understand just how quickly a carefully-developed reputation can be undone; "Dealbook" also reported that in a July 2010 letter Mr. Buffett had told his managers to guard the company's reputation "zealously".

Mr. Buffett is quoted as saying, "We can afford to lose money — even a lot of money. But we can’t afford to lose reputation — even a shred of reputation."

Prescient words, unfortunately.

Fool Me Once, Shame on You....

2011-03-29T07:18:00.000-07:00

"Consumers are generally more sensitive to changes in prices than to changes in quantity," says a marketing professor at Harvard Business School in an article in today's New York Times by Stephanie Clifford and Catherine Rampell.

That explains why your one-pound box of spaghetti is easier to lift. You haven't gotten stronger; it's gotten lighter.

That marketing professor may be right -- at least the first time. Especially when, as he says, "companies try to do it in such a way that you don't notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same."

Can we call that by its real name? No, not "smart packaging design."

It's called cheating.

And it assumes that we're all stupid.

One of my all-time favorite quotes about marketing is from the legendary advertising man David Ogilvy: "The consumer is not an idiot. The consumer is your wife."

So why are all these companies treating us like idiots? Do they think we're too stupid to understand that if commodities prices are soaring, it will force them either to reduce profits or to raise prices? And that reducing profits will have an immediate negative effect on their share prices (and that upholding shareholder value is their responsibility)?

Or might it be that, where raw ingredients' prices aren't increasing dramatically, it's an easy way to make a little extra money?

The Times article quotes one careful Texas shopper who notes that she used to buy 16-ounce cans of corn. Gradually, the cans' weight slipped to 15.5 ounces, and then to 14.5 ounces, and now: "The first time I've ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored," she said.

And how does she feel about this "responsible" attempt by a company not to raise its prices? "It's sneaky, because they figure people won't know."

She's nicer than I would be. I'd call it stealing. How is it different from putting your thumb on the scale?

If you have to raise prices, do so. Explain why to me. Be transparent.

You might even use some of that big advertising budget to talk to me as though I had a brain, instead of trying to manipulate me with winsome children and earworm jingles.

Only The Little People Pay Taxes...

2011-03-25T06:02:00.000-07:00

...as the late Leona Helmsley, the "Queen of Mean", famously said.

It turns out to be true.

Most individuals don't look forward to Tax Day. And, as corporations are "persons" too, we can freely anthropomorphize and assume that corporations don't like Tax Day either.

But they have resources that aren't available to most of us.

In today's New York Times, David Kocieniewski reports that the 2010 tax bill for General Electric, the country's largest corporation, isn't, in fact, a bill: It claimed a tax benefit of $3.2 billion (on worldwide profits of $14.2 billion, of which $5.1 billion came from U.S. operations).

In a country that has a relatively high corporate tax rate by global standards (top rate: 35%), how is this even possible? And how has GE managed to cut its US tax bill year after year?

Kocieniewski writes,

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.'s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world's best tax law firm. Indeed, the company's slogan "Imagination at Work" fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

Don't you wish you had that kind of team?

What's wrong with this, you might ask. After all, they're just using the rules of the game to maximize profits for their shareholders.

Since G.E. does business in so many countries, it can book revenues from one country in another (with a lower tax rate). According to Kocieniewski, in the last three years, "46 percent of the company's revenue was in the United States, but just 18 percent of its profits." The company asserts that the disparity results from "ordinary business factors, such as investment in overseas markets and heavy lending losses in the United States recently."

It may be "smart business", but critics argue that "the assertive tax avoidance of multinationals like G.E. not only shortchanges the Treasury, but also harms the economy by discouraging investment and hiring in the United States."

In fact, G.E. employment in the U.S. has declined by one-fifth over the last decade, while overseas hiring has increased.

G.E. now has a tax team of close to 1,000 employees. Their focus isn't only on adhering to the letter of the law, but equally on finding ways around it: "At a tax symposium in 2007, a G.E. tax official said that the department's 'mission statement' consisted of 19 rules and urged employees to divide their time evenly between ensuring compliance with the law and 'looking to exploit opportunities to reduce tax.'"

With a lobbying budget in the tens of millions of dollars to win new tax breaks, and a tax team expert in exploiting them, it's not surprising that G.E. has been so successful in reducing its tax burden. But it's wrong.

Companies like G.E., that got their start and owe their continued success to American laws, American enterprise, and the American consumer, owe the American taxpayer too. If G.E. isn't going to bring at least a fair portion of its profits home for reinvestment here, why should we taxpayers continue to support them?

Driving Mr. Gambler

2011-03-17T11:57:00.000-07:00

Here's the situation: Company A agrees to deliver goods to Company B. It's a profitable arrangement for both. Company A hires Driver D to transport the goods from Location A to Location B.

So far, so good, right?

Is it ethical for Company A to minimize payments to Driver D in order to maximize the company's own profits? And is it ethical for Company B to pretend that it has no stake in this transaction?

This sounds like one of those fifth-grade math "word problems" that I hated, so let's move from the theoretical to the real:

Company A = tour bus companies and Company B = casinos. The goods to be delivered are gamblers, and Driver D are the drivers hired by the tour bus companies.

New York area newspapers and radio and television stations have carried many stories in the past few days about two area tour buses, in which passengers were being transported to Connecticut and New Jersey casinos, and which were involved in serious, even horrific, accidents. (Click here for New York Times coverage of the first accident.)

Questions have been raised about the drivers (were they impaired? fatigued? insufficiently supervised?), about the tour bus companies (was there sufficient oversight? regulation?), and more.

Today's Times has a particularly interesting piece, by Michael Grynbaum and Noah Rosenburg, that shed light on one corner of the overall story.

Yes, driver fatigue is a possible element, those interviewed say. The reporters note: "Federal guidelines limit passenger-bus drivers to 10 hours behind the wheel, within a 15-hour work day, and bus carriers face a fine if violations are discovered. But the hours, recorded in a handwritten logbook, are easily falsified, and even outstanding violations are often ignored: World Wide Travel, the operator whose bus crashed in the Bronx, had been cited several times by regulators for problems with its logs."

But the story is about more than federal regulations. It's about a space, "small, drab and windowless", provided at the Uncasville casino for bus drivers waiting for their passengers. Many of the buses, you see, operate for "overnight gamblers": they leave New York (or other cities) at night and head for the nearest casinos; returns are only a few hours later, after midnight. They're cheap, too -- essentially free, as tickets often come with vouchers for food and gambling.

For drivers, the rewards are few (unless they happen to be lucky at the tables): the pay is low and the hours are long. The fact that Mohegan Sun provides a lounge for them is a positive -- most casinos don't, and drivers who want to nap as they wait for their return trip passengers must do so in their buses, parked out in the bus lots, often several miles from the casino itself.

One driver quoted by the Times expressed his gratitude for the Mohegan Sun lounge, saying of his bus, "in the wintertime, it's too cold, and in the summertime, it's too hot.... It gets over 100 inside the bus in the summer. You cannot stay up there."

I'm shocked -- but sadly, not really surprised -- that such a lounge, tacky and "sparsely furnished with snack machines and worn khaki chairs" as it is, isn't a standard offering at all casinos. After all, the drivers are how Company A (the tour bus companies) get their goods (gamblers) to Company B (the casinos). It's in both companies' best interest to have drivers rested and ready to drive.

Not to mention, it's the right thing to do.

Should We Trust a Liar?

2011-02-17T04:28:00.001-08:00

A followup on my most recent post:

Without any direct knowledge, last Friday I questioned whether the Wilpon family knew -- or "should have known", as Madoff bankruptcy trustee Irving Picard has asserted -- that Madoff's investment scheme was too good to be true. Picard is claiming that, since they were sophisticated investors, they should have known, and therefore should be required to give back up to $1 billion of the profits they earned over the years with Mr. Madoff.

Is it fair, I asked, to assume that because you "should have known" -- without any actual evidence that you did know -- that a fraud was being perpetrated, you should be denied protection offered to those, less sophisticated investors, who were also defrauded?

In yesterday's New York Times, Diana B. Henriques reported on a series of interviews she has conducted with Bernie Madoff in prison (and which will serve as the basis of an upcoming book).

In the article, Madoff insists that the Wilpons, like his own family members, "knew nothing."

On the other hand, he said, various (unnamed) banks and hedge funds that did business with the Madoff investment business "had to know... But the attitude was sort of, 'If you're doing something wrong, we don't want to know.'"

Given role of the banks and hedge funds in the 2009 financial meltdown, many of us may find that quite easy to believe.

But ... just how far can we trust what Bernie Madoff says now? Even if you believe, as I do, that regulators were asleep at the switch, having been given several warnings that not everything at Madoff's firm was on the up-and-up, you have to acknowledge that Madoff was a masterful manipulator of people and the truth. Why should we believe him now?

Just How Much "Caveating" Should an "Emptor" Have to Do?

2011-02-11T10:52:00.000-08:00

Yes, dreadful Latin, I know. But while "buyer beware" has been a watchword for millenia, I've been wondering about just how far you should beware.

I'm not a Mets fan, so when the news first broke (two early-February New York Times articles are here and here) that Mets owner Fred Wilpon might have to sell at least a partial share of the team in order to pay what the Madoff bankruptcy / Ponzi scheme trustee is seeking from him, I didn't really care. (Full disclosure: I was born in Boston. That tells you all you need to know about what team I cheer for.)

The bankruptcy trustee, Irving H. Picard, has sued Mr. Wilpon and his associates for something on the order of $1 billion. There is no question that Mr. Wilpon did invest, and invested heavily, with Bernie Madoff. There's also no question that Mr. Wilpon and his associates took a lot of profit from those investments.

But while Mr. Wilpon claims that he was a victim like everyone else -- well, maybe not like everyone else -- Mr. Picard claims that Mr. Wilpon should have known that the "investment" fund was a fraud.

Mr. Picard's argument is simple: He considers the Mets owners to be sophisticated investors who should have known better but were "simply in too deep" to act on any warnings. For example, according to the lawsuit, advisers at other investment vehicles Mr. Wilpon used repeatedly warned him that Madoff's returns were "too good to be true."

As Floyd Norris put it in today's Times column, "The trustee cites no evidence that Mr. Wilpon or his associates actually knew Mr. Madoff was a fraud, but concludes that they should have known. And if they should have known, they can be treated as if they did know, and that means they acted 'with actual intent to hinder, delay or defraud creditors.'"

So, as Norris says, "If you should have known you were being defrauded, you do not deserve the same protection as those who were not sophisticated."

That seems like a pretty big leap to me.

I don't know how Mr. Wilpon's lawyers will argue, but it seems likely that they will point out that -- despite several whistle-blowers -- the Securities and Exchange Commission never properly investigated the Madoff "investment" fund. No doubt the SEC now has the same 20/20 hindsight we all have, and the "obviousness" of the Ponzi scheme is clear. But then?

The questions that occur to me are, Who gets to decide who deserves the fraud protection? Who gets to decide that you're a more sophisticated investor than I am? Who gets to decide that I should have known? Who will watch the watchmen of this process?

Or, to put it another, much older way: Quis custodiet ipsos custodes?

Broker, Adviser, What's the Difference?

2011-01-27T08:48:00.000-08:00

What's the difference? Probably more than you think.

"Investment advisers and stockbrokers should be subject to the same fiduciary standard of conduct -- putting a customer's interests above their own -- rather than the different governance regimes that currently apply to the two groups, the Securities and Exchange Commission recommended," according to a report published in the New York Times's "Dealbook" on Monday, and in an article by Edward Wyatt published Sunday.

You didn't know that there was a different standard? Neither do a lot of people.

As Timothy Noah reported in Slate, the distinction between brokers and investment advisers might have made sense back in the New Deal day when the SEC was created, but these days it's hard to tell the difference. And while "investment advisers" must act in their clients' best interests, "brokers" only have to "make sure that the products that they sell are suitable for their clients", as Wyatt termed it.

So... is the guy who's "managing" your investments a broker or an adviser? I don't know about mine, and you probably don't know about yours. But all of a sudden... it makes a difference, doesn't it?

The SEC's staff, in preparing the recommendation, said that "retail investors" (as Noah put it, that's "suckers like you and me") are "generally not aware" that there are different standards. And why should we be? From our perspective, advisers and brokers basically do the same thing -- tell us where, other than under the mattress, we should put our hardly-earned dollars.

Wyatt noted that the "five S.E.C. commissioners did not vote on whether to adopt the study’s recommendations, but the two Republicans issued a statement criticizing the study, saying it 'fails to adequately justify its recommendation' and 'lacks a basis' to conclude that a uniform standard would enhance investor protection."

I don't know how one would "adequately justify" this recommendation better. There are obviously lots of corporate ethical lapses that bother me, or why would I keep posting to this blog? But the ones that bother me that most, I think, are those that rely on a disconnect between what customers reasonably expect and what the corporation figures it can legally get away with.

And in this case, the disconnect is big enough to drive a fleet of New York City snowplows through it.

When is a Recall Not a Recall?

2011-01-13T08:18:00.000-08:00

When you call it an "audit", of course.

In 2010, I wrote four posts about Johnson & Johnson's problems (most recently, here). At that time, I noted that J&J had issued nine product recalls over the course of the year, and that investment bankers were starting to wonder whether there was a systemic problem at J&J, and consumers were starting to wonder if there was any reason for paying a premium for a branded product.

And here we are, back again, talking about J&J.

Today's New York Times carries an article by Natasha Singer and Reed Abelson reporting on a suit filed by the state of Oregon against a "phantom recall" conducted by McNeil Consumer Healthcare in early 2009.

McNeil apparently "hired outside contractors to buy back vials of Motrin ... because the pills failed to dissolve properly, a problem that could diminish the product's effectiveness."

Note that McNeil did not initiate a public recall, but gave contractors the following instructions: "Do not communicate to store personnel any information about this product. Just purchase all available product. If you are questioned by store personnel, simply advise that you have been asked to perform an audit."

Oregon attorney general John R. Kroger said that the point of the suit is "to send a message to pharmaceutical companies and other companies that make medical products that they have to do proper recalls that give consumers real notice."

McNeil did eventually complete a formal recall of eight-count vials of Motrin in July 2009, after the FDA inquired into the matter. A recall of 24-count vials was announced in February 2010.

I think we are well past the point of saying that there's a quality problem at McNeil. There is clearly a systemic problem, and McNeil has made it clearer than any other division at J&J (as Singer and Abelson note, "McNeil recalled more than 200 million product units last year, including different kinds of Tylenol, Motrin, and Rolaids." Emphasis added.). That's not to say that it's a McNeil problem alone. As the parent company, J&J is responsible for setting the overall standards -- and for seeing to it that subsidiaries consistently meet those standards.

Here's hoping that 2011 will be a quality year.

Ends and Means, Means and Ends

2010-12-17T07:40:00.000-08:00

Especially at this time of year, when people are so crazed by the spirit of love and charity that they will get into fistfights over parking spaces at the shopping mall, it's important to review some ethics basics.

For instance: Do the ends ever justify the means?

I don't like to say, "Never". Mostly because whenever I say I'd "never do X", within approximately 30 seconds I'm doing X. Always for the best of reasons, of course.

So I'll just answer my question with a little wriggle-room: Almost never.

Here's a great example from today's New York Times:

As Abby Goodnough writes in her article, "On its face, it seemed reasonable enough: a bone marrow registry sending recruiters to malls, ballparks and other busy sites to enlist potential donors."

What a worthy enterprise! Who could argue against having more people sign up to help those suffering from formerly-incurable diseases?

The devil, as they say, is in the details.

If you were a young man, hanging out at the mall with some friends, would you be more likely to respond positively to a request to "be a hero" if those words were said to you by a paunchy middle-aged guy in floods, or by a pretty young model in a short skirt and high heels?

I thought so.

You could argue that this was smart marketing (assuming there were some attractive young men in the model pool too, preferably not in short skirts and heels).

But models aren't free, of course. The donor registry, Caitlin Raymond International, apparently hired them at a cost of about $60,000 per week, according to Goodnough's article.

The registry is a nonprofit subsidiary of UMass Memorial Medical Center in Worcester, MA. An estimated 185,000 potential donors were recruited in New England.

The hospital "said Thursday that it had stopped seeking donors in New Hampshire and using models altogether."

Why no New Hampshire donors? Because the registry's practices are being investigated by the New Hampshire state attorney general's office. The AG is interested, not just because of questionable marketing tactics, but also because of extremely questionable billing procedures: those who agreed to the DNA cheek swab were not told that their insurance companies would be billed for the test, to the tune of $4,300 each.

Goodnough notes that "New Hampshire passed a law in 2006 requiring insurers to pay for tissue-typing tests for potential bone marrow donors. But at the time, ... proponents told lawmakers that each test would cost $100 or less." Oops. All of a sudden, we understand why New Hampshire seemed like such a good recruiting arena, don't we?

There's no question that more of us should learn about donation -- of blood, of marrow, of organs -- and that more of us should donate all of these.

But: isn't there a more transparent way of getting information out than by hiring sweet-talking high-heeled models, and by hoping no one will notice that the insurers are being billed, big-time?

Did the hospital really have that little confidence in the worth of the work it was doing that it needed to resort to these kind of tactics?

When this many people are being enlisted, do the tests really cost $4,300 a shot, and if so, how could New Hampshire legislators have been given a figure almost 98% lower?

Not to mention: don't you think there was a better use for $60,000 per week?

Who Writes Medical Textbooks? You Might be Surprised.

2010-11-30T07:45:00.000-08:00

Last week, I wrote a post about dental products manufacturers underwriting articles, and even entire issues, in dental practice journals. This week, I get to write about pharmaceutical companies writing whole books.

This does not make me happy.

Today's New York Times carries an article by Duff Wilson about a 1999 textbook on the treatment of psychiatric disorders that was apparently written by GlaxoSmithKline (then SmithKline Beecham).

Pharmaceutical companies and medical instrument manufacturers have in the past been accused of playing too important a part in the writing of articles, but "to ghostwrite an entire textbook is a new level of chutzpah," to quote Dr. David A. Kessler, a former FDA commissioner.

The book ("Recognition and Treatment of Psychiatric Disorders: A Psychopharmacology Handbook for Primary Care") was "written" by Dr. Charles B. Nemeroff (who was at Emory University's medical school at the time) and Dr. Alan F. Schatzberg (then at Stanford's medical school). In the book's preface, the "authors" thanked SmithKline Beecham for an "unrestricted educational grant."

According to Wilson's article, Drs. Nemeroff and Schatzberg insist that SmithKline "had no involvement in content."

But a 1997 letter from the associate editorial director of Scientific Therapeutics Information suggests a somewhat different scenario. The letter was attached to a "complete content outline", notes that "we have begun development of the text", names the primary technical writer (not either Dr. Nemeroff or Dr. Schatzberg), and presents a proposed timeline, which includes dates for drafts to be submitted to "co-authors / APPI / sponsor".

"APPI" is the publishing arm of the American Psychiatric Association, and was the publisher of the book.

Guess who "sponsor" is.

Peer-reviewed medical journals now require full disclosure -- as Wilson put it, "whose idea it was, who wrote the first draft, and who edited."

Don't you think medical textbooks should meet those same standards? Of course you do.

Full Disclosure is Better than Full-Body Scans

2010-11-23T08:48:00.000-08:00

Pretend, for a moment, that you are a dentist.

If you read an article in the Journal of the American Dental Association that tells you that a "cone-beam CR scanner" would provide a safe and effective way to identify tooth and jaw problems earlier and more effectively than older methods like X-rays, you might consider investing in such a gizmo for your office, right?

In fact, there's an entire issue in the JADA dedicated to the wonders of this new technology. Sounds even better, right?

Now ... what if I tell you that the entire issue is underwritten by a cone-beam scanner manufacturer. Still as interested?

I thought not.

Today's New York Times has a long article by Walt Bogdanich and Jo Craven McGinty on this new technology, and about concerns that children, who are particularly vulnerable to the pernicious effects of radiation, are being exposed to excessive levels of radiation in their dentists' chairs.

Individual scans, properly administered, are not dangerous, but the effects are cumulative, so children (and adults) should not be scanned unless there's a genuine need.

An expert in 3-D technology like the cone-beam scan is quoted as saying that "a cone-beam scan produces no more radiation than a whole-body scan at the airport," while another expert argues that "cone-beam scanners can be several hundred times as powerful." (Never mind that there are questions being raised about the radiation levels to which frequent travelers may be exposed.)

The real question is, Why are we exposing children and adolescents to radiation if it isn't necessary?

According to the Times, cone-beam CT scans produced "significantly higher" levels of radiation than traditional dental imaging techniques, without sufficient scientific data to prove that it provides better results.

That's not to say that traditional techniques are perfectly safe. Dentists have been advised not to use old, slow "D-speed" X-ray film "because it requires more radiation than faster film". But about 70 percent of dentists are still using D-speed film.

The Times offered its readers an important sidebar: "What Patients Might Want to Ask the Dentist about X-Rays". It is important to know why a particular technique is being recommended, and that a proper lead shield is being used to protect you (or your child) from unnecessary exposure.

But an even more important question to ask might be why obvious conflicts of interest keep getting by us.

At the end of their lengthy article, Bogdanich and McGinty point to the continuing education credits that dentists can earn "by reading about cone-beam technology in a new magazine, Orthodontic Practice - US, and then answering 10 simple questions appended to the end."

The article is credited to Dr. Edward Y. Lin, a Wisconsin orthodontist, who is a strong supporter of cone-beam scanning. That's fine; different dentists certainly have different opinions about the value of the technology, and Dr. Lin said that "the company did not pay him to write the article or to appear in its full-page advertisement in the same issue."

What company would that be? Imaging Sciences, a scanner manufacturer. For whom Dr. Lin has been a paid lecturer.

In other words: How many lectures paid for that article?

Illegal vs Unethical vs Stupid

2010-11-09T05:17:00.000-08:00

Imagine this situation: you have a conflict with your boss. It's not a huge deal, but it's been simmering away for a while, and you're ticked off about it. You're convinced that you're not getting a fair deal -- after all, your boss is your boss, right? So you vent a little to your co-workers in the lunchroom, or around the water-cooler.

Or on Facebook.

Is this a firing offense?

Here's the actual situation: An ambulance service company had asked an EMT employee to prepare a response to a customer complaint about her work, but denied her representation by her union. Later that day (from home), the employee posted a derogatory comment about her supervisor on her personal Facebook page; some of her friended colleagues piled on. She was suspended and later fired for those postings, which violated company Internet policies.

According to the National Labor Relations Board, that was a violation of workers' rights: your right to complain about your boss does indeed extend to social media sites.

"The labor relations board announced last week that it had filed a complaint against an ambulance service, American Medical Response of Connecticut, that fired an emergency medical technician, accusing her, among other things, of violating a policy that bars employees from depicting the company 'in any way' on Facebook or other social media sites in which they post pictures of themselves," writes Steven Greenhouse in an article in today's New York Times.

In addition, the NLRB found "that the company’s blogging and internet posting policy contained unlawful provisions, including one that prohibited employees from making disparaging remarks when discussing the company or supervisors and another that prohibited employees from depicting the company in any way over the internet without company permission." (The complete board release is here.)

I'm not going to rehash all the public details of the case, but it does seem as though everyone involved behaved badly.

And while I agree with the NLRB position, the employee's behavior strikes me as, well, dumb.

Yes, the EMT is ticked off right now and wants to vent with her friends. I understand that, and empathize. That's what water coolers and (after hours!) the neighborhood bar are for. But what happens when she applies for another job, and the prospective employer, in conducting the background check, comes across this posting?

Now put yourself in that employer's shoes: You don't know all the circumstances of the dispute (any more than I do). Maybe the employee is right; maybe her boss is right. But wouldn't her response (the posting) strike you as a little intemperate? Could such behavior escalate? While she may have all the qualifications you are looking for, in an environment of high unemployment, what are the chances you can't find someone who hasn't been posting negative comments about her boss?

How many articles do we have to read about people posting embarrassing pictures or comments about themselves or others before it sinks in that the Internet is forever.

Is $750 Million Enough to Get Your Attention?

2010-10-27T05:44:00.000-07:00

In the largest criminal (and civil) payment for the manufacture of adulterated drugs, GlaxoSmithKline yesterday agreed to pay $750 million to settle complaints that it had knowingly sold contaminated and/or ineffective products.

The complaints all stem from a plant in Cidra, Puerto Rico, since closed. (News articles from the New York Times here, The Guardian here, National Public Radio here; there are many, many more.)

In a statement, a GlaxoSmithKline (GSK) senior vice president said, "We regret that we operated the Cidra facility in a manner that was inconsistent with current Good Manufacturing Practice (cGMP) requirements and with GSK's commitment to manufacturing quality. GSK worked hard to resolve fully the manufacturing issues at the Cidra facility prior to its closure in 2009 and we are committed to continuous improvement in our manufacturing processes."

This is an apology? And what is "cGMP" anyway -- not making people sick when they use your product?

So ... just how serious were those "manufacturing issues"? NPR's Scott Hensley termed some of the "sobering":

Nausea medicine Kytril and antibiotic ointment Bactroban could have been contaminated with bacteria.
A special coating on Paxil CR pills cracked, leading to medicine that wasn't effective.
Tablets of Avandeamet, a diabetes drug, were sometimes too strong or too weak.
Different medicines were mixed up in the same bottles.

How were these "sobering" issues first uncovered?

Following a Food and Drug Administration (FDA) warning letter in 2002, Cheryl Eckard, then a GSK global quality assurance manager, was sent to the Puerto Rico plant to lead a team of 100 experts to fix the cited problems.

According to Gardiner Harris and Duff Wilson's article in the New York Times,

[Cidra] was GlaxoSmithKline's premier manufacturing facility, producing $5.5 billion of product each year. But Ms. Eckard soon discovered that quality control was a mess: the water system was contaminated; the air system allowed for cross-contamination between products; the warehouse was so overcrowded that rented vans were used for storage; the plant could not ensure the sterility of intravenous drugs for cancer; and pills of differing strengths were sometimes mixed in the same bottles.

Ms. Eckard complained to her supervisors, and was ignored. Instead, she was fired. A ten-year GSK employee, she turned to the FDA and sued the company. The complete complaint can be found online here; it does not make for pleasant reading. Ms. Eckard will receive $96 million, one of the highest whistle-blower awards for health care fraud.

The three-quarters of a billion dollars that GlaxoSmithKline is paying to settle the charges is the largest ever paid for the manufacture of adulterated drugs, but is only the third highest that drug companies have paid in the last two years. Pfizer agreed to pay a total of $2.3 billion in September 2009 to settle charges relating to Bextra, Zyvox, Lyrica, and other drugs (I wrote about that settlement, here), and Eli Lilly agreed to pay a total of $1.4 billion in January 2009 to settle charges related to its Zyprexa drug.

The key difference in the GSK case is that nearly all prior settlements dealt with illegal marketing issues (e.g., in the Pfizer case, a government investigation showed that Pfizer actively promoted off-label use of Bextra, by providing all-expenses-paid trips, and even kickbacks, to doctors). As the Times article noted, this GSK case "is the first successful case ever to assert that a drug maker knowingly sold contaminated products." (emphasis added)

It should also be noted that 2009 profits were up 20% over the previous year (Financial Channel article here), to 5.5 billion pounds (some $8 billion). At which point $0.75 billion doesn't sound so bad. According to Market Watch, third-quarter 2010 sales and profits are down, larger due to lower sales of Avandia (a troubled diabetes drug) and Valtrex (used to treat certain herpes infections). The company had in July set aside $750 million in anticipation of reaching an agreement with the government regarding the Cidra manufacturing complaints.

I have written before that 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 can start.

When it comes to pharmaceuticals, the floor below which we must not go is: It's safe; it's effective; it's not contaminated; it's what I say it is.

GSK went down to the sub-basement on this one. Very senior heads should roll.

My Back Hurts -- Pass Me One of Your Vicodins Please

2010-10-25T12:34:00.001-07:00

If you're taking illegal drugs at work, and test positive on a random drug test, you'll be fired. What if you're taking prescribed drugs for pain or anxiety?

Should you be fired for testing positive for those prescription painkillers?

It's actually a more complicated issue than it might sound.

What if you're taking prescription painkillers so that you can get back to work? What if you're taking painkillers as a result of injuries sustained on the job? What if you're taking a painkiller that was prescribed to one of your colleagues, who offered you one of his pills because your back hurts, and you forgot to bring your medication with you? What if ...

I'll stop here -- there are endless variations possible, but you get the picture.

Katie Zezima and Abby Goodnough have a long article in today's New York Times about how prescription drug testing may pose a new kind of "quandary" for employers, some twenty years "after the Supreme Court first upheld the right to test for drugs in the workplace."

It used to be that companies only tested for illegal drugs, but more and more companies are testing for prescription painkillers, anxiety medication, and more.

In one example in the Times story, a 22-year employee (not a 22-year-old, but someone who had been with the company for 22 years) was fired for taking a medication which had been prescribed by her doctor for back pain because she had tested positive for that drug, which the company, "which makes car parts, had suddenly deemed unsafe."

Now trimming car window molding, which was this woman's job, is not an office job. There is far more dangerous equipment around the factory floor than staplers. Employees may be working in closer proximity than the next cubicle, and if someone on the line has an accident or is impaired, there is substantial risk to those nearby. (Note: this particular employee is suing for discrimination and invasion of privacy, and her company would not comment for the article, citing the ongoing lawsuit.)

But how impaired is too impaired? In this tough economy, a lot of people who have jobs will do anything to keep those jobs. If it means popping a bunch of pain pills to keep working on the line, they will do that.

The employee who was fired said that "she understood [the company's] safety concerns but believed the company should have worked with employees who take prescription drugs rather than fire them. She said,

If the medicine they're taking is not good for them or the workplace, then there should be some sort of program where they can teach us how that affects you or see if something can be worked out. But that was not an option for us.

The automotive parts manufacturer decided that it wanted to "provide a safe environment" and would consider all drugs "unsafe if its label included a warning against driving or operating machinery, but doctors say many users function normally despite such warnings."

I can understand that the manufacturer preferred to have a blanket policy: All drugs of this type will be banned. Such a policy is easier to explain, easier to administer, and should be easier to defend in a court of law (although we'll have to wait and see whether it can be successfully defended). But is it ethically better?

In general, I don't like hard-and-fast rules for how to treat people because people themselves aren't "hard and fast". Some people respond better to "carrots" and some react better to "sticks". In the case of medications, different people react to different medications differently. Some people get "up" on "downers"; some people get slow and logy on "uppers".

Moreover, the Times article points out that setting rules about prescription drug use at work can easily run afoul of the Americans with Disabilities Act which "prohibits asking employees about prescription drugs unless workers are seen acting in a way that compromises safety or suggests they cannot perform their job for medical reasons."

Other employees at the plant said in interviews that there were some people there who used illegal drugs, and that some passed around prescription drugs (along the lines of, "Sorry, I don't have any Tylenol for your headache, but I'll give you one of my OxyContins.").

With an employee who has been working for you for 22 years -- assuming you're really worried about line safety ... don't you think you could have found a different, non-line position for her?

I wouldn't mind a "no illegal drugs" blanket rule, and I wouldn't mind a "no prescription drug sharing" blanket rule. But firing people for using a properly-prescribed drug properly, without any evidence that it's affecting their ability to perform their job?

That's going too far.

Fool Me Once...

2010-10-19T07:06:00.000-07:00

I'm not a health-care industry analyst, so why am I writing about Johnson & Johnson for the fourth time this year?

It's to say, "I told you so."

And I'm not happy about it.

Back in January (here), I wrote about how long it took McNeil Consumer Healthcare, a J&J division, to respond to consumer complaints about odd smells in some bottles of over-the-counter medications. At that time, I wrote,

As a consumer, I have plenty of generic non-branded choices for pain relief. Unless I have a good reason to trust J&J to provide me with a higher level of product quality, why would I pay extra for Tylenol or Motrin?

I wrote again about McNeil in March (here), about the steps the company was taking to address the funny-smell problem (traced to chemicals leaching from wooden pallets that were used to transport and store product packaging materials), and contrasted the company's behavior with the "gold standard" comments J&J got in 1982 for its Tylenol recall.

And then in August, news broke of more problems, this time at the DePuy Orthopaedics unit and Acuvue contact lens. It was the ninth product recall for J&J this year. In that post (here), I quoted an investment banker who follows the company:

No. 1, is there a systemic issue at J&J? No. 2, is this [the DePuy hip-replacement recall] reflective of that systemic issue? And, No. 3, is there more to come?

I also noted that all these recalls were starting to affect J&J's bottom line.

And now it seems to be affecting consumer behavior.

Andrea Gardner, for American Public Media's Marketplace program today, reports that more and more parents are realizing that "there is no boogieman in the [generics] bottle", which could have a huge, long-term impact on companies like J&J.

Gardner notes (full story here) that she usually bought generics for herself, but bought branded products to care for her infant. With the recall of Infant Tylenol in April, she turned to generic acetaminophen. Will she go back when production ramps up again?

Gardner quotes a pharmaceutical industry analyst, who thinks that she, and other mothers like her, will return to the fold. There will be "a barrage of ads from J&J in 2011 and '12, with a message of trust, and changes made in the wake of the recall," he believes.

But: today's New York Times reports that McNeil is now voluntarily recalling eight-hour Tylenol caplets made at its Fort Washington PA plant, before that plant was closed.

Can a massive advertising campaign really make consumers forget everything they've heard this year? Fool me once.... Fool me twice.... Fool me thrice....

At some point, consumers can't be fooled anymore.

In Whose Universe Was Robo-Signing a Good Idea?

2010-10-14T07:12:00.000-07:00

Given that all 50 state attorneys general are looking into current foreclosure practices (full article from New York Times here), it seems likely that some of the practices weren't OK in the legal universe.

Taking "hair stylists, Walmart floor workers and people who had worked on assembly lines" and making them "foreclosure experts" without any formal training, as reported by AP's Michelle Conlin (full story here) certainly isn't OK in the ethical universe.

But ... beyond all that? ... it was stupid in the corporate universe too.

Of depositions released Tuesday, Conlin writes,

The depositions paint a surreal picture of foreclosure experts who didn't understand even the most elementary aspects of the mortgage or foreclosure process -- even though they were entrusted as the records custodians of homeowners' loans. In one deposition taken in Houston, a foreclosure supervisor with Litton Loan couldn't define basic terms like promissory note, mortgagee, lien, receiver, jurisdiction, circuit court, plaintiff's assignor or defendant. She testified that she didn't know why a spouse might claim interest in a property, what the required conditions were for a bank to foreclose or who the holder of the mortgage note was. "I don't know the ins and outs of the loan, I just sign documents," she said at one point.

If it weren't so pathetic, it might be funny.

If you're a bank with a whole lot of mortgage loans that might or might not, well OK, probably are, bad ... wouldn't you want people looking at the documents who could figure out which ones were really really bad and which ones might be salvageable?

I wrote last month about the recurring problem of a passion for new sales as opposed to servicing and satisfying the customers you have, and part of this problem is related to that one. In the go-go years, banks spent billions to build their mortgage machines. With the market on a seemingly nonstop upward rise, actually servicing mortgages became an afterthought.

But when the bubble popped, a new army of trained employees was needed, and the banks were very slow to hire such talent. Enter the robo-signer (for those of you who haven't been following this story closely, some bank employees were signing off on literally thousands of foreclosure every month without reviewing the files, as is legally required. To keep up with the flow of paperwork, they just kept signing -- a robot could have done it just as well.).

The Times' Eric Dash and Nelson Schwartz note that "banks had few financial incentives to invest in their servicing operations... A mortgage generates an annual fee equal to only about 0.25 percent of the loan's total value, or about $500 a year on a typical $200,000 mortgage. That revenue evaporates once a loan becomes delinquent, while the cost of a foreclosure can easily reach $2,500 and devour the meager profits generated from handling healthy loans." (click here for full story)

So once again, we see that incentives work ... as long as we know what exactly we're incentivizing.

And one might argue that, if the cost of a foreclosure is so much higher than the profit, it might pay to do the triage and find as many homeowners whose loans could successfully be modified as possible....

The scandals are going to get worse, I fear, before they get better. Felix Salmon's Reuters blog makes a strong case that the investment "banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That’s a lie of omission, and if I was one of the investors in one of these pools, I’d be inclined to sue for my money back."

Maybe I should have gone to law school.

Good Analysis, Bad Method

2010-09-17T03:48:00.000-07:00

I nearly wrote a blogpost last week about customer service, or the decline thereof, based on a nice piece by James Suroweicki in The New Yorker (click here for full story), He accurately analyzes a problem I've been railing against for a lot of years:

The real problem may be that companies have a roving eye: they’re always more interested in the customers they don’t have. So they pour money into sales and marketing to lure new customers while giving their existing ones short shrift, in an effort to minimize costs and maximize revenue. The consultant Lior Arussy calls this the “efficient relationship paradox”: it’s only once you’ve actually become a customer that companies put efficiency ahead of attention, with the result that a company’s current customers are often the ones who experience its worst service. Economically, this makes little sense; it’s more expensive to acquire a new customer than to hold on to an old one, and, these days, annoyed customers are quick to take their business elsewhere. But, because most companies are set up to focus on the first sale rather than on all the ones that might follow, they end up devoting all their energies to courting us, promising wonderful products and excellent service. Then, once they’ve got us, their attention wanders...

This attitude has never made any sense to me. It is, as Suroweicki writes, always more expensive to get a new customer than to keep an old one, so, in a tight-money environment, why wouldn't you spend less to keep rather than more to acquire?

My guess has been -- I don't have any research to prove it -- that it's the sex appeal. It's simply sexier, a bigger rush, to land a new customer than to keep an old one happy. (I wonder if this is why so many people seem to be better at courtships than at marriages?)

In response to the article, one reader responded as follows (I haven't found the "letters to the editor" section on the magazine's website, so I'm providing the text rather than a link):

Many years ago, I owned a small business. Two members of my staff handled customer-service calls. They were told that they didn't have to listen to customers screaming at them but that, instead of hanging up, I preferred they give the really tough calls to me. I would begin every conversation the same way: "Mr. Jones, I understand there's a problem, and I'm here to solve it. But, before we get to that, there are a few things I'd like you to know. On the way to work today, I got two flat tires. When I finally got to my desk, I found a letter from the I.R.S. telling me that I'm being audited for the past three years. And, as if that weren't enough, I just got a call from my son's school. I was told that he has been suspended indefinitely. But enough about me, Mr. Jones. How can I help you?" At that point, I could hear the wind go out of Mr. Jones's sails, and a calm discussion would ensue. If you can get people to take a deep breath, and put things in perspective, customer service can work more effectively for those on both sides of the divide."

The analysis is correct: If you can get people to put things in perspective, customer service can work more effectively.

But the method? Lying to your customers as a way to do customer service?!?!

I don't think so.

Most customers don't call customer service screaming for blood immediately. Something else has gone wrong along the way. Usually, it's a sequence of indifference that makes them madder and madder, so that by the time they have gotten to the business owner or the vice president or whomever, they're steaming. Or it's the call-center-from-hell automation system (press "1" for a different problem than yours, press "2" for something else entirely, press "Mom" on your speed dial if you want someone who cares).

The way to deal with infuriated customers isn't to lie to them at this point -- by the way: just imagine, Mr. Ex-Small Business Owner, how your former customers will feel when they read your letter -- but to deal with their problem immediately before they get so angry they can't "put things in perspective."

In other words, your customer-service representatives should have had not just the responsibility of dealing with customers' problem, but the authority to see to it that the customers were satisfied.

Whatever it took.

Oh, that open-ended offer is going to get me into trouble.

Not really.

Most customers aren't out for blood. They have a problem, and they want it fixed. And they want to be treated respectfully and honestly.

The first thing to do is to listen. Really listen. Let them tell the whole story without interruption, even if it's the 238th variation on the theme that you've heard. It's not the 238th for them (at least, we hope not! And if it's the 238th for you ... well, you have a set of problems all your own that need fixing, don't you?).

Acknowledge that the customers' issues are real problems, whether you think they are or not. It's real to them. (Note that your lawyers may not like this suggestion: "You're laying yourself open in the event of a lawsuit," they will warn. Ignore them. If you deal with the problem promptly, and fix it, there won't be a lawsuit. Suits come about because you've screwed up.)

Ask your customers what it would take to make it right. Unlikely as it may seem to you, most of them are quite reasonable: "The toaster broke the day after the warranty expired." Do they want your store, your savings, or your first-born child in recompense for this disaster? No. "Gee, all I really want is to get it fixed or replaced."

Then fix it, or replace it. Done.

And you, Mr. Ex-Small Business Owner, haven't had to get involved. You haven't had to waste your more-valuable (or at least more expensive) time. And best of all, you haven't had to lie to your customers.

A Fee That Developers Love and an Ethicist Hates

2010-09-13T12:16:00.000-07:00

Here a fee, there a fee, everywhere you look a new fee.

We've gotten used to them -- the fee airlines charge to check your bag (or the fee that they charge for your carry-on), the fee for parking in a previously-free lot, the fee for ... you name it.

But yesterday's New York Times introduced me to a new fee: the "resale fee" (or "capital recovery fee" or "private transfer fee") that some real-estate developers are charging, permitting them to collect 1% of the sale price every time the property changes hands, for up to 99 years. [Full article, by Janet Morrissey, here]

A growing number of developers and builders have been quietly slipping "resale fee" covenants into sales agreements of newly built homes in some subdivisions. In ... [one particular] contract, the clause was in a separate 13-page document -- called the declaration of covenants, conditions and restrictions -- that wasn't even included in the closing papers and did not require a signature.

I find it hard to believe that I'd be legally liable for a fee that I haven't been told about and that I don't have to sign for, but let's ignore the legality for a moment and think about the ethics.

I'm not alone in having ethical qualms about this, fortunately. Morrisey quotes Justin Ailes, director of government affairs at the American Land Title Association: "The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn't pass the smell test."

The concept is also opposed by the National Association of Realtors and the Center for Responsible Lending, among others.

Developers, apparently, see this "as a creative way to get new financing."

In fact, according to the chief operating officer of Freehold Capital Partners, it's a "win-win deal" for developers and home owners, because "the fee is a fair and equitable way to spread development costs [including building roads and other infrastructure], and results in lower costs to the average homeowner."

The home page for the Freehold Capital Partners website has a link for a brochure with more information on "capital recovery fees" which are described as "a real estate financing solution designed to more efficiently structure the economics of real estate projects." Who could argue with so laudable a fiscal goal?..... Just give me a second.

Now, no one can deny that some developers, like some homeowners, are currently upside down on their loans and are in deep financial trouble.

But neither can anyone deny that this is a singularly shady way to try to get out of the situation.

There are plenty of homeowners who rode the surge in home prices upwards by flipping a series of houses, and are now holding the bag and crying for help. Since they're not as essential to the overall economy as the major banks who encouraged them in this risky behavior, the homeowners are not likely to get much of a government bail-out. Whether they should is a topic for another day.

Should the developers be eligible for government help? That too is another issue.

But, to use Ailes' "smell test", the developers' "resale fee" is the wrong way to go.

In one example the Times used, not only did the homeowners not learn of the resale fee until after the closing, but even the home builder was not aware of the fee.

Even if a prospective owner learns of the fee at the time of the closing -- does that strike you as fair? Given the number of houses a prospective buyer has probably visited, the negotiations that he or she has gone through to reach an agreed-upon price, the inspections and banking arrangements, and everything else that's involved in buying or selling a house, this fee seems like adding insult to injury. Moreover, given that a standard mortgage is 20% down (sometimes less), a 1% resale fee will amount to 5-10% of the buyer's downpayment -- which is significant, and not something to be thrown at you when you're signing the final papers on your dream house.

The Buck Stops Where?

2010-09-09T06:21:00.001-07:00

According to a 193-page report released yesterday, British Petroleum (BP) has concluded that "multiple companies and work teams" were responsible for the devastating 20 April 2010 Deepwater Horizon disaster.

Per the executive summary (here; BP press release here),

The team did not identify any single action or inaction that caused this accident. Rather, a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation and team interfaces came together to allow the initiation and escalation of the accident. Multiple companies, work teams and circumstances were involved over time.

This sounds just like a mea culpa, doesn't it? Well, maybe not.

In fact, it sounds more like an effort to deflect as much culpa onto other parties as possible, especially Transocean (which owned the rig) and Halliburton (the rig's cement contractor).

Note that on the same day that BP's report was issued, news came from the Gulf that the well still has not been fully sealed (New York Times story here), "as engineers worked to better understand the well's condition."

The report laid out a number of significant errors, human and mechanical. Some are well-known, such as the failure of the "blow-out preventer" (which was raised from the ocean floor over the Labor Day weekend and will be analyzed by government investigators); others are less familiar, such as the particular cement slurry that was used at the bottom of the well.

Both Transocean and Halliburton have raised objections to BP's findings.

Tiernan Ray, on his Barron's blog, reported that Transocean said, "This is a self-serving report that attempts to conceal the critical factor that set the stage for the Macondo incident: BP’s fatally flawed well design. In both its design and construction, BP made a series of cost-saving decisions that increased risk – in some cases, severely." (Side notes: I like calling the biggest oil-spill disaster ever an "incident", don't you? "Macondo" refers to the Macondo Prospect, the part of the Gulf of Mexico in which the Deepwater Horizon well was located.)

Halliburton's response was a little more measured, and did not specifically deny some of the more serious allegations, saying only: "Halliburton remains confident that all the work it performed with respect to the Macondo well was completed in accordance with BP’s specifications for its well construction plan and instructions.... The well owner is responsible for designing the well program and any testing related to the well. Contractors do not specify well design or make decisions regarding testing procedures as that responsibility lies with the well owner." (Full response in Ray's blog, here)

In the end, we may learn that actions taken by Halliburton and Transocean did indeed have an impact on the scale and scope of the disaster. But being (partially) at fault is not the same thing as being responsible. It was BP's well; Halliburton and Transocean were contracted by BP; the buck should stop with BP.

What Does Fairness Have to Do with the Price of Eggs?

2010-08-31T09:48:00.001-07:00

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?

When we're on the provider side of the equation, we generally want the price to be as high as possible; as consumers, we want the price to be as low as possible.

In an effort to maximize sales and minimize costs, some producers are willing to go very low indeed.

And what's a "fair" product?

At the very least, it would be safe.

I've been following, as I'm sure many of you have been too, the ongoing story of the recall of eggs from two leading U.S. producers, Wright County Egg and Hillandale Farms. Since 13 August, when the recall began, more than half a billion eggs have been recalled, and since this spring, some 1500 cases of salmonella have been linked to affected eggs.

Today's New York Times carries an article by William Neuman that outlines some of the findings from federal inspections at the Iowa egg farms: "Barns infested with flies, maggots and scurrying rodents, and overflowing manure pits" were among the appetizing details reported.

"Both companies said that they had acted quickly to correct problems and were continuing to cooperate with regulators," the article claims.

But the problems reported as so egregious that management at Wright County Egg and Hillandale Farms must have been aware of the situation. For example, at Wright County Egg, inspectors found "pits beneath laying houses where chicken manure was piled four to eight feet high." Not something you're likely to, um, overlook.

Wright County Egg is owned by Austin ("Jack") DeCoster, who is no stranger to run-ins with federal and state regulations. As reported by Mary Clare Jalonick for the Huffington Post, fines into the millions of dollars have been assessed against DeCoster for health and safety violations at his Maine operations as well as labor violations at his Iowa "farms" (full article here).

I use quotation marks around "farm" because what I think of as a farm bears little resemblance to the industrial complexes that are, for example, Wright County Egg.

In the meantime, the FDA has released a new "draft guideline" for the prevention of salmonella in shell eggs (many egg producers sell shell eggs to consumers and also send eggs to "breaking plants" where the eggs are pasteurized -- which kills the salmonella bacteria -- and sold in liquid form, usually to food manufacturers). Will these new guidelines prevent another huge salmonella outbreak?

As long as there are producers out there like DeCoster -- who seems to think of fines as merely another cost of doing business -- I suspect the FDA's efforts will be insufficient.

Egg production can be done humanely and safely, but .... it will come at a higher price. That seems fair.

What's Going On at J&J?

2010-08-27T09:20:00.000-07:00

Back at the dawn of time, when I was in business school, Johnson & Johnson was held up as the gold standard for handling product recalls, for its swift response when cyanide-laced Tylenol capsules in a handful of Chicago-area stores caused seven consumer deaths in 1982. The company immediately pulled every single Tylenol off every single store shelf in the United States.

As I have written before (here), there was some surprise at the time that a company would react so dramatically, with so little (apparent) consideration for immediate profit concerns. The long-term effect was terrific consumer loyalty.

But that loyalty seems to have been taking a beating lately.

"More than two years after the Food and Drug Administration began receiving complaints about the failure of a hip replacement implant made by the DePuy Orthopaedics units of Johnson & Johnson, the company said Thursday that it was recalling two kinds of hip implants, " reports Natasha Singer in today's New York Times. [Full article here]

In addition, as Singer also noted, the FDA earlier this week sent the company a warning letter, claiming that DePuy was marketing one device without "marketing approval or clearance ... which is a violation of the law" and marketing another "for unapproved uses".

Earlier this year [see my blogpost on that subject here], two years of complaints from consumers about moldy-smelling bottles finally led J&J to recall an assortment of OTC products from its McNeil Consumer Health Care unit (including ... Tylenol!)

Earlier this week, J&J recalled millions of its Acuvue contact lenses sold in Japan and several other countries. As noted by the Associated Press, that was the ninth recall of a J&J consumer product in a year.

Singer quotes a health-care investment banker: "No. 1, is there a systemic issue at J&J? No. 2, is this [the hip-replacement recall] reflective of that systemic issue? And, No. 3, is there more to come?"

That banker isn't the only one asking that question. I am too, and I'll bet a lot of other consumers are as well.

The recalls are also having an immediate effect on the bottom line.

In Katharine Hobson's late July Wall Street Journal blogpost, she reported that the McNeil recalls "cut $200 million from the [second] quarter’s sales and will pare an estimated $600 million from sales for all of 2010."

But -- as was the case in 1982 -- profits can recover. Trust? Not so much.

If the CEO Does It, Does That Make It OK?

2010-08-11T05:23:00.000-07:00

Ethics is easy when the stakes are low, or when doing the right thing makes you look good: You find your neighbor's wallet on the sidewalk, and return it to him promptly.

It gets more difficult as the stakes go up.

The most recent case is that of Mark Hurd, who was until last Friday chief executive officer of Hewlett-Packard.

As reported by numerous news outlets (click here for Colin Barr's article for Fortune / CNN), Hurd resigned following an accusation of sexual harassment of a marketing contractor with whom he developed a personal relationship. In the course of its internal investigation, H-P determined that Hurd had not violated its sexual harassment policy, but violated its "standards of business conduct" policy, having repeatedly filed inaccurate expense reports in amounts ranging from $1,000 to $20,000, apparently in an effort to keep the relationship secret (Hurd is married).

Hurd reportedly first offered to repay the improperly expensed items, but the board insisted that he step down.

In the words of CNET's Erica Ogg, "Hurd's resignation marks a stunning end to what had been by most accounts a wildly successful five years at the helm of what is now the largest computer company in the world, measured by total revenues." H-P share prices dropped nearly 10% in late trading on news of Hurd's departure.

In an email to the New York Times, which was first reported by UK-based theregister.co, Oracle's chief executive officer Larry Ellison blasted the H-P decision as "the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago."

"In losing Mark Hurd, the H.P. board failed to act in the best interest of H.P.’s employees, shareholders, customers and partners," Mr. Ellison wrote. "The H.P. board admits that it fully investigated the sexual harassment claims against Mark and found them to be utterly false."

Well, maybe, Mr. Ellison. But what about those pesky "inaccuracies" in expense reporting? Such behavior is generally considered to be a for-cause firing offense. Or is it only a firing offense if you're a junior-level employee? Doesn't this remind you of President Nixon's remark to David Frost that if the president does it, it's not illegal?

Not to mention that a junior-level employee with falsified expense reports wouldn't receive a nice little severance payment of more than $12 million....

How Would You Define "Conflict of Interest"?

2010-08-06T09:14:00.001-07:00

... That's what I thought. Me, too.

Today's New York Times carries an excellent, if depressing, piece by Gretchen Morgenson: "Exotic Deals Put Denver Schools Deeper in Debt".

It turns out that not-as-financially-savvy-as-they-thought-they-were individuals weren't the only ones targeted for bizarre financial instruments in the runup to the Wall Street implosion.

According to Morgenson's article, early in 2008, the Denver Board of Education, seeking to fill a $400 million hole in its pension fund, turned to JP Morgan Chase for help.

The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs -- money that could be plowed back into Denver's classrooms, starved in recent years for funds.

Yeah, I know. It smells, now. But then (the deal closed just weeks after the failure of Bear Stearns), well, let's just say that there were still a lot of house-flippers out there, and the Denver school board, as Morgenson puts it, "essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise, instead of a conventional, fixed-rate mortgage that offered larger, but unchanging, monthly payments."

To date, the school system has apparently paid at least $25 million more in interest and other fees than it had originally expected. While they would like to renegotiate, to undo the deal completely, Denver would have to pay a huge "termination" fee.

The deal is getting extra attention in part because Michael Bennet, the superintendent of schools who, with the system's operating officer, pushed hard for the deal, is now a United States senator from Colorado.

But I found this paragraph the most telling, and the most depressing:

A spokesman at JPMorgan, which led the Denver deal, declined to comment. Royal Bank of Canada, which acted as the school system's independent adviser even though it participated in the debt transaction, declined to comment. Denver school officials said that they had agreed to sign a conflict waiver with Royal Bank of Canada. [Emphasis added]

Even though it participated in the debt transaction?!?! How could one ignore that level of conflict of interest?

I am not going to throw all the blame for this at Royal Bank of Canada, however. It would be easy to say, Oh those horrible greedy bankers, and leave it at that.

Sadly, there seems to be a fair amount of responsibility to spread around.

For example, unlike many school superintendents, now-Senator Bennet had extensive private-sector financial experience. Morgenson reports that "Mr. Bennet handled investments and structured financial deals for the Anschutz Investment Company, a private concern owned by the billionaire Philip Anschutz that has a stakes in telecommunications and oil." The district's chief operating officer (and currently superintendent), Thomas Boasberg, also had private-sector experience, having been a mergers and acquisitions deal maker for a telecommunications company.

Morgenson further reports that, according to then-members of the board of education, "the bankers' presentations for the 2008 debt deal outline its risks only in broad terms... [and] had not discussed problems in the variable-rate debt market that arose the previous year -- a development that would have alerted them to troubles they might have had securing a manageable rate on the debt they were refinancing."

Of course, if we're looking at responsibility, it's worth asking those same board members, How is it that it was OK with you that "for years, the school system had not met its required annual pension payments to ensure a fully funded plan"?

If You Must Recall, Please Do So Loudly

2010-07-30T11:25:00.000-07:00

Let's say that I am a pet food manufacturer, and some of my products are being linked to outbreaks of salmonella (among people feeding my products to their pets). I announce a recall.

How loudly do you want me to announce that?

Pretty damn loudly, I'd think.

Today's New York Times carries an article by William Neuman, reporting on a frozen-mouse recall. Apparently frozen mice are popular among reptile owners: just thaw and feed (I like snakes and other reptiles, but I am suppressing considerable squeamishness here. May I just say, Ewwww.).

MiceDirect, based in Cleveland GA, sells mice (from "small pinkies" to "jumbo adults"), rats ("pinkies" to "mammoth") and chicks. (Sorry, I'm having another squeam moment here. Deep breath.)

The website currently carries a "Recall Notice: May 2009 - July 23, 2010" hot link right at the top of its home page, but that has not been the case for long.

According to the Times report, "The company's recall notice was not prominently posted on its Web site until Thursday. And neither the company's site nor the F.D.A.'s site gave clear instructions on what to do with mice that customers still had." (emphasis added)

A reptile owner, who "bought 10,500 mice from MiceDirect early this year", when contacted by the Times said that "he had not heard about the recall until a reporter called him Wednesday."

Salmonella linked to MiceDirect was first reported in Great Britain in August 2008, and in the United States in January of this year. A spokesperson for the Centers for Disease Control said that British officials informed the CDC of the outbreaks in 2009; the FDA (which regulates pet food companies) was also informed.

An FDA spokesperson, on the other hand, said that her agency was "checking to see if it had a record of the 2009 contact from the CDC" and was not told of the American outbreak until May of this year. In early July, officials of both agencies conducted an inspection at MiceDirect, and the FDA informed the company on 21 July that tests of the product and plants had found salmonella. Two days later, the company agreed to a recall.

Don't you think that MiceDirect should have taken a proactive stance after the first, British reports of salmonella?

So do I, especially in light of the fact that, to date, "more than 400 have people have fallen ill there, about two-thirds of them ...children under 10." An epidemiologist at the Health Protection Agency's Center for Infections noted that "although shipments of tainted mice were halted last year, people continue to get sick there.... perhaps because snake owners, unaware of the dangers, continue to use mice kept in their freezers."

Since pet owners have the mice delivered directly to their doors, the company has their contact information. They should have reached out to them immediately, loudly, and persistently.

BigFood -- The Gift That Keeps Giving, Alas

2010-07-24T08:21:00.001-07:00

Assuming, of course, that you write a blog about ethics in business. Or the lack thereof.

I've written twice already about food rules (here and here) and about the ways major companies like Kellogg's, ConAgra, and McDonald's skirt the minimal rules that are out there in their marketing to children.

There had been some indication that the Food & Drug Administration was finally getting tough, but according to today's New York Times, the progress has stalled. William Neuman writes,

A report to Congress from several federal agencies — expected to include strict nutritional definitions for the sorts of foods that could be advertised to children — is overdue, and officials say it could be months before it is ready. Some advocates fear the delay could result in the measure being stripped of its toughest provisions.

While I'm fine with arguing about the specifics of the proposed new rules (the "level for saturated fats would be set so low it would exclude peanut butter," for example), I'm dismayed to see how this administration is caving to big business.

My favorite quote from the business side was from Dan Jaffee, executive vice president for government relations for the Association of National Advertisers:

The proposal was extraordinarily restrictive and would virtually end all food advertising as it’s currently carried out to kids under 18 years of age.

And that would be so terrible, Mr. Jaffee, why?

It's not the 10-year-olds, after all, who are out there in the supermarkets buying Froot Loops (12 grams of sugar per serving, compared to proposed limit of 8 grams). It's their parents. So why do I look for stronger government controls rather than tell the parents to do their job and practice saying, "NO!"

First of all, let's be realistic here. I'm not suggesting that Froot Loops be banned. Nor am I suggesting that all advertising be banned. But poor eating habits and childhood obesity are serious problems, and I think that we should be helping parents address these issues, not throwing up libertarian roadblocks all over the place.

Are American parents all spineless wusses? Hardly. But many of them are tired. They are picking their battles and caving because of the "Please, Mommy, Pleeeeeeeeeeeeeeeease" factor, and the "If-you-don't-I'll-have-a-temper-tantrum-right-here-in-the-store" factor (I pulled those stunts myself as a child.).

And why are the children pulling these stunts? Because marketers know exactly how to play on children's credulity (I still remember the disappointment of realizing that "Sea Monkeys" -- aka brine shrimp -- didn't look like the cartoon images on the back of my comic book) and tastes (the bolder and brighter the colors, the more alluring).

Moreover, even if the advertising were limited only to children's television programming, it might be easier for parents to control their children's exposure. But it isn't. It's everywhere. It's in movies (hello, product placement and tie-ins!); it's in magazines and billboards; it's on the television screens in doctors' waiting rooms, for crying out loud.

Advertising directly to children (defined as under 12) is limited in many EU countries, and forbidden in Norway and Sweden, and in the province of Quebec. That's not a reason why the US should do the same ... but it's not a reason to oppose restrictions or a ban either.

Let's give parents real help to raise a generation of healthy kids.

Why Would You Treat the Honest as Though They Were Dishonest...

2010-07-09T09:07:00.000-07:00

...instead of simply firing the @$$ of the dishonest?

The first time I heard about this latest corporate hoop, I laughed -- how ludicrous, I thought.

The second time, I thought, Blog post!

Even with "family-friendly" companies, it is now apparently commonplace to ask new employees to provide marriage certificates and "proof" that the marriage is still active, if they want to sign up for health-care benefits for their spouses. (For children's coverage, birth certificates are required, but apparently not proof that the child is still around.)

Clearly, there were people out there gaming the system in one way or another, getting coverage for those who weren't entitled to such coverage. (And people wonder why I'm in favor of national health insurance. Single-payer, too.)

It seems to me that if such gaming were so serious, the solution is to let employees know that lying about beneficiaries and their relationships to same is a firing offense.

You catch 'em out, you fire 'em.

Sadly, it's not the first time that I've found corporations -- which are usually quick enough to fire without cause (a.k.a. massive layoffs) -- unwilling to step up and fire for cause.

In a previous life, when I joined one company and asked about company credit cards, I was told, "Oh we don't do that anymore. We used to have them, but some of the field reps abused the privilege, so they were all taken away."

In other words, the honest were punished as well as the dishonest.

I know that the corporations will argue that it's because of our increasingly litigious society: that it's easier to pile on extra hoops for everyone to jump through than to risk lawsuits for an unfair dismissal.

So here again you have the situation where the honest are treated as though they were dishonest.

Easier maybe, but hardly more ethical.

Who's to Blame? Who's Responsible?

2010-06-28T11:02:00.000-07:00

I've been thinking about blame and responsibility a lot lately, and about the differences between them.

When I was a child, there wasn't much difference, actually. If my father said, "Who's to blame for this mess?" instead of "Who's responsible for this mess?" -- well, either way, it meant that I was in trouble.

But as we get older, things get more complicated. Often, it's not so easy to determine who's the guilty party.

Who's to blame for the disastrous oil spill in the Gulf of Mexico? British Petroleum. It's their well, their plan; the buck has to stop at their desk.

But who's responsible? Ah, now that's more complicated: there are a great many threads in that weaving.

There's TransOcean, of course, and Halliburton, and other BP subcontractors, both individual and corporate.

Beyond that -- there's each and every one of us who drove when we could have walked or biked, who bought cars that were a little less fuel-efficient because they were a little more comfortable, who thought "Drill Baby Drill" sounded easier / more macho / more "in control" than did "Conserve Baby Conserve", who opposed higher gas taxes and tougher CAFE standards, who ... oh, you get the picture.

And I'm guilty -- and therefore just as responsible -- too. I'm going to do better, I swear.

There are other areas of our consumer lives in which we need to think and act more responsibly; Nicholas Kristof's column in yesterday's New York Times, "Death by Gadget", offers an important example.

Kristof points out that an essential ingredient for cellphones, computers, and gaming devices is a mineral called tantalum, which is mined in (among other places) Congo. You may have heard of tantalum under another name, "coltan", which is short for columbite-tantalite, from which the elements niobium and tantalum are extracted.

Proceeds from tantalum mining are financing one of the bloodiest and most barbaric conflicts happening in the world today, with more than 5.4 million deaths since 1996 due to the war and its aftermath. Beyond the deaths are the atrocities. Eastern Congo is now considered to be the most dangerous place in the world to be a woman or a girl, as rape is used as a weapon of war.

A brief video on coltan mining -- which is horrific in its own way, forget about the profits -- was produced by the Pulitzer Center in 2007 and is available here.

Does my cellphone contain tantalum from Congo? I don't know. Tantalum is also mined in countries from Australia to Mozambique to Brazil. So maybe my phone is "clean". But I have no way of knowing.

As Kristof reports, "activists are harassing companies like Apple, Intel and Research in Motion ...to get them to lean on their suppliers and ensure the use of, say, Australian tantalum rather than tantalum peddled by a Congolese militia."

Until now, most manufacturers have accepted "statements from suppliers that they do not source in eastern Congo, with no verification. Auditing the supply chains at smelters to determine whether minerals are clean or bloody would add about a penny to the price of a cellphone, according to the Enough Project," writes Kristof. (If you click through to the Enough Project website, you'll find, among other things, a great video that spoofs the "I'm a Mac" / "I'm a PC" ads.)

The easy thing for us consumers to do is to wait for the manufacturers to do the right thing.

The better thing is to encourage those manufacturers. The next time you're buying a new phone, a new gaming device, a new laptop, ask the salesperson, "Is this built with conflict-free tantalum?"

Chances are, they won't know.

But it should encourage them to ask their supervisors, and for those supervisors to ask suppliers, and it will work its way up the chain.

You can also go to the Raise Hope for Congo website, where you can learn more, pledge to buy conflict-free electronics, and start to take action.

As Kristof says, "No phone or tablet computer can be considered 'cool' if it may be helping perpetuate one of the most brutal wars on the planet."

It's time for us all to be responsible.

Are Your Communications On Message? How About "On Reality"?

2010-06-07T04:21:00.001-07:00

Yesterday's New York Times had a wonderful, pathetic example of what happens when reality collides with corporate happy-speak.

On page 11 of the A-section (for those of you who haven't recycled yesterday's news already), there's a full-page ad from BP headlined, "We will get it done. We will make this right."

In the body of the ad, there are these claims: "We have organized the largest environmental response in this country's history. More than three million feet of boom, 30 planes and over 1,300 boats are working to protect the shoreline. When oil reaches the shore, thousands of people are ready to clean it up."

Sounds good, doesn't it? (Actually, sounds like the very least that BP could do.)

Unfortunately, there's a news article just a few pages later, from John Leland in Pensacola Beach, FL (click here), headlined "Local Officials Simmer Over BP Recovery Efforts".

In it, Leland quotes William A. Lee, executive director of the Santa Rosa Island Authority (which oversees Pensacola Beach):

We called BP at 4:30 this morning and told them to send cleanup crews... It's 9:30 and they're not here. There's supposed to be 30 or 40 skimmers out there to protect Pensacola Beach. Do you see any? BP dropped the ball.

The cleanup crews, according to reports from the Times and NPR, arrived around 11.30. Oops.

Remember "Under-promise, over-deliver"?

What's Good for a "Working Mother" May Not Be Good...

2010-05-21T07:08:00.000-07:00

...for working women in general.

Not if the women in question find themselves stuck in a pink-collar ghetto.

That, at least, seems to be a take-away from this week's ruling that Novartis Pharmaceuticals -- a regular on Working Mother magazine's "100 Best Companies to work for" -- must pay $250 million in punitive damages for discriminating against female sales representatives.

The jury decision for the class-action case opens the door to additional compensatory damages, which some reports have estimated could run as high as $1 billion. The jury awarded $3.3 million in compensatory damages to the 12 women who testified, but there are nearly 5,600 others who fall into the covered class.

In a Reuters piece that appeared in yesterday's New York Times, the president of Working Mother Media was quoted as saying that the magazine's criteria for its award relied on programs such as flextime, telecommuting, and paid maternity leave.

On its website, here's what Working Mother says "we love" about Novartis:

Being there for the kids isn’t the only reason this East Hanover, NJ–based pharmaceutical company offers its employees flexible schedules. “I’ve used my arrangements to allow more time for friendships, community activities, fitness and personal interests,” says mom Laurie Letvak, an MD who serves as global program head for its Glivac and Tasigna division and now compresses her weeks after years as a part-time worker. Jobsharers, telecommuters and other flex fans can rely on the firm’s easily customizable child-care offerings, including discounts on fulltime care at national chains with budget-friendly backup (just $15 to $25 per day) and in-home sick care ($5 per hour). Impressively, anyone who saves $4,000 in a pretax child-care account is gifted another $1,000 by the company. Summer camp fairs and college coaching programs help make life a little easier for the parents of older kids.

Which is all well and good ... except that the lawsuit claimed Novartis systematically discriminated against women in pay and promotion, and was especially discriminatory against women who got pregnant.

As Ann Woolner notes caustically in her article for Bloomberg Businessweek, "You can't keep the numbers up when you're out on maternity leave, and forget about staying on a management track."

"Women who sold pharmaceuticals for Novartis said that some of the doctors to whom they would pitch products expected something on the side. They groped, they propositioned, and one fellow stuck his tongue in the ear of a startled sales rep," Woolner reports.

The support that the women reps got from the company was less than stellar: "When one of the women complained, her supervisor, also a woman, reminded her that the physicians she saw were valuable to Novartis."

I think we can take that to mean that sales reps were not valuable.

The jury's verdict is one of the largest ever in a gender discrimination case.

Abigail Field at Daily Finance, following Susan Beck at Am Law Litigation Daily, thinks that might be because the jury realized that Novartis, and its lawyers, "just didn't get it." They both note that, in Field's words, the "defense's closing argument was laced with sexist stereotypes and must have left jurors with the impression that the company really didn't respect women." (Field's article is here; Beck's, which requires premium subscription to access, is here.)

That Novartis "didn't get it" may be one reason why the company chose not to settle out of court, as is more typical. (Or it could just be that, in comparison to Novartis' core net income in 2009 of $10.3 billion, $250 million doesn't sound like much.)

Among the most damning "dont' get it" quotes from the closing argument of Richard Schandig, a partner with Vedder Price: "I've never seen anybody cry so much on the witness stand in my life ... She didn't have very much to cry about ... It's like she had been knifed. Honestly. What was wrong with this woman? She was so fragile."

Best of all, Schandig referred to one witness as "that little blond that came up here from Texas."

No, this wasn't last week's episode of Mad Men. It was, maybe, a reminder that we still have a long way to go.

In a Rescue, What's the First Thing You Do

2010-05-14T10:29:00.000-07:00

... after the actual physical rescue?

If your answer is, "Cover your a*& and have the victims sign release forms," you too can be an oil company executive.

We have all been following the story of the Deepwater Horizon blowout and subsequent oil spill. The economic devastation to Gulf Coast communities, the environmental damage, the human toll, the apparent lack of oversight by the federal Minerals Management Service -- there's a lot here for an ethicist to absorb.

I'd like to concentrate on just one aspect of the story. Here's the scenario:

The Deepwater Horizon oil rig has just blown up and sunk. Survivors, traumatized by the deaths and disaster they have witnessed, want nothing more than to go home and be able to assure their loved ones that they are indeed OK. But before they can do that ... there are forms to sign.

The Damon Bankston, a cargo boat attached to the rig when the blowout occurred, picked up survivors from lifeboats.

What happened next? According to New York Times reporters Ian Urbina and Justin Gillis,

The men were kept aboard the rescue ship, in the middle of the ocean, for a full 12 hours. Worse than the wait, [the interviewed survivors] ... said, was being forbidden to call their families. The men were told that the Coast Guard wanted to conduct interviews before the workers spoke to family or anyone else.

Rumors spread that the BP executives who had visited the rig were up on the Bankston’s bridge using the ship’s radio or a satellite phone to call home. (Complete article is here.)

NPR correspondent Joseph Shapiro interviewed one young survivor, who told him that when the Coast Guard arrived, papers were handed out, and they were told, "You need to sign these. Nobody's getting off here until we get one from everybody ... And then at the bottom it says something about ... this can be used as evidence in court...."

Even when the survivors got back to land, their ordeal wasn't over. The group were taken first to a hotel to meet with representatives from Transocean (owner of the Deepwater Horizon rig) and the Coast Guard. Urine samples for a mandatory drug test were collected, and the representatives handed out forms which the exhausted survivors were told to initial, which said, "I was not injured as a result of the incident or the evacuation." (Click here for the complete NPR piece)

According to the Associated Press, an attorney for 10 of the Transocean workers said that, "These men are told they have to sign these statements or they can't go home. I think it's pretty callous, but I'm not surprised by it."

Survivors' families waited at least 12 and in many cases more than 24 hours before receiving word that their husbands, fathers, brothers, and sons were alive.

Is this what you'd call ethical?

Me, neither. These men have been traumatized by a disaster, and the company shows its concern for them by traumatizing them all over again.

When in Rome, Should You Do as the Romans Do?

2010-05-06T11:00:00.000-07:00

Not according to Economist columnist "Schumpeter", who argues in this week's edition that "when in Rome, behave like a Swede."

The columnist makes the case that doing the right thing is smart business.

I'd really like to think that people do the right thing because it's the right thing to do.

But I know that there are lot of folks out there who think that, in the "jungle" of business, it's eat or be eaten, and if that means you have to slip a couple of bills into someone's hands or cut some other ethical corners, well, that's just part of being a tough business person.

In other words, it's a macho thing.

Sadly for the macho among us, hard analysis indicates that they're wrong.

"Schumpeter" points to research by Wharton School economist Philip Nichols and by World Bank researchers David Kaufmann and Shang-Jin Wei; their paper, "Does 'Grease Money' Speed Up the Wheels of Commerce?", is available online her e.

I know what you're thinking: What do those eggheads know?

Well, among other things, they know that "companies that pay bribes actually end up spending more time negotiating with bureaucrats. The prospect of a payoff gives officials an incentive to haggle over regulations. The [World Bank] paper also found that borrowing is more expensive for corrupt companies, probably because of the regulatory flux."

Moreover, the "hidden costs of corruption are almost always much higher than companies imagine. Corruption inevitably begets ever more corruption: bribe-takers keep returning to the trough and bribe-givers open themselves up to blackmail. Corruption also exacts a high psychological cost on those who engage in it..."

Our macho business guy is snorting here, I know: "High psychological cost? Only if they're spineless wimps to begin with."

Or not.

Still, if those reasons don't convince you, how about this?

"Schumpeter" also points out that "the likelihood of being caught is dramatically higher than it was a few years ago."

Whistle-blowers have more ways of getting information out, and getting it in front of a lot of people. Prosecutions are up. Prison sentences are getting longer and fines are getting bigger.

So if you aren't impressed with the "do the right thing because it's the right thing" argument, ask yourself: How would you have liked to be the Siemens CEO, having to explain to your shareholders why you had to pay $1.6 billion in American and German fines to settle bribery allegations? (click here for a Guardian story from December 2008 on the settlements)

Could We Please Stop Talking about "Clean Coal"?

2010-04-29T09:53:00.001-07:00

... or "cheap coal" for that matter.

The fact is, it's neither clean nor cheap.

Coal-fired electric power plants might look like a cheap way to produce energy, but only if you concentrate on how much a ton of coal will cost you on the open market today (for what it's worth: as of last week, according to Energy Information Administration, the highest Btu coal, from Northern Appalachia, would run you $62.75).

Make no mistake, there's no way to make that power clean, however.

And when you count more than just the market -- don't get me started on the impact of mountain-top removal -- coal's not cheap, either.

As if the disaster at the Massey Energy's Upper Big Branch mine in West Virginia on 6 April wasn't enough, there's now word that two miners are missing following a roof collapse at Alliance Resource Partners' Dotiki Mine in Kentucky (read news reports from the Associated Press here and from Bloomberg here).

The Upper Big Branch catastrophe killed 29 miners, the worst US mining disaster in four decades. And now two more men won't be coming home.

Does that sound "cheap" to you?

Business Week has an excellent analysis up on the sorry state of regulation, at least as far as protecting miners is concerned. The 2006 Mine Improvement and New Emergency Response Act (The MINER Act -- get it? Oy. I hate cutesy acronyms.) came in the wake of another catastrophic West Virginia mine disaster, at the Sago Tmine in which 12 miners were killed.

According to the article: "The act raised the maximum penalty for safety violations, forced mine operators to build emergency underground shelters with oxygen, water and food, and required installation of more modern communication devices." That all sounds good, doesn't it?

Let's take a closer look.

The Dotiki mine, according to news reports, was ranked seventh in the number of "significant and substantial" violations since 2009 (for data junkies, the website of the Mine Safety and Health Adminstration is a great resource). A "significant and substantial" violation means that the MSHA inspector considers that "there exists a reasonable likelihood the hazard contributed to will result in an injury or illness of a reasonably serious nature" (click here for full MSHA document).

Why would a mine that has such a record be operating?

As Business Week's Jeff Plungis and Holly Rosenkrantz report, "While the new law did result in more citations and higher fines, the Labor Department's Mine Safety and Health Administration in 2007 added 10 criteria that inspectors had to meet before a mine could be shut down for a 'pattern of violations'... Only one mine has ever been ordered closed for a pattern of violations... That order, issued in November 2008 to a Patriot Mining LLC mine in Virginia, was revoked when one of the violation findings was withdrawn..."

Does that sound "clean" to you?

So miners keep getting injured and dying, and fines have come to be seen as a cost of doing business. And we don't really notice until there's a major disaster, like Upper Big Branch (the Dotiki roof-fall is not leading most of today's news reports).

Meanwhile, by challenging citations (there's a helpful link right on MSHA's home page: "How to contest citations"), the industry pushes off the date when penalties might have to be paid.

According to Business Week, the "backlog of challenged cases ... has grown to more than 16,000 today from fewer than 1,500 in 2005" (emphasis added).

The current regulations don't even have baby-teeth; all they can do is gum a violator. It's time to stop pretending that miners' lives are valuable, and time to start acting as though we really believed that. A respectful minute of silence is good; tough legislation would be much better.

How "Informed" Should "Informed Consent" Be?

2010-04-22T12:40:00.001-07:00

As informed as you can possibly make it, of course.

I've been thinking about "informed consent" a lot lately, ever since I read the first articles and reviews about "The Immortal Life of Henrietta Lacks". Rebecca Skloot's nonfiction account of the culturing of cervical cancer cells taken from Lacks -- without her permission -- in 1951 is transfixing. (New York Times book reviews are here and here; a "health" section article is here)

Skloot's book reminds us just how recent some concerns about informed consent are. Henrietta Lacks died in Johns Hopkins Hospital's "colored ward"; she and her family were never asked about the research use of her cells, nor were they ever compensated financially (as reviewer Lisa Margonelli noted, "HeLa [as the cells are known, from the first two letters of Lacks' first and last names] has helped build thousands of careers, not to mention more than 60,000 scientific studies, with nearly 10 more being published every day...").

Skloot's book (quoting Margonelli again) criticizes "science that insists on ignoring the messy human provenance of its materials. 'Scientists don't like to think of HeLa cells as being little bits of Henrietta because it's much easier to do science when you dissociate your materials from the people they come from,' a researcher named Robert Stevenson tells Skloot in one of the many ethical discussions seeded throughout the book."

We like to think things have changed since the early '50s. Not only would Ms. Lacks no longer have been required to stay in the hospital's "colored ward", but we would certainly ask her permission today. Anyone who has been treated for almost anything these days is familiar with the "sign here" routine of consent forms.

But how much have things really changed?

Today's Times carries an article by Amy Harmon on the payment of $700,000 by Arizona State University to members of the Havasupai tribe in settlement of complaints about the misuse of tribal members' blood samples. The university will also return blood samples and provide other forms of assistance to the tribe.

According to the article, members of the Havasupai tribe provided blood samples to university researchers in 1990, "in the hope that they might provide genetic clues to the tribe's devastating rate of diabetes." A broad consent form was prepared, and donors signed that form. Later, the tribal members learned that the blood samples had been used to study for genetic variants that would be linked to diabetes, but also for schizophrenia, metabolic disorders, alcoholism, and more. Studies were published reporting "a high degree of inbreeding" and that "the tribe's ancestors had crossed the frozen Bering Sea to arrive in North America", and more.

All of it interesting research, no doubt, and some of it valuable, but all of it unethical.

The geneticist responsible for the original studies, Dr. Therese Markow, now a professor at the University of California, San Diego, insisted that she was "doing good science", and that those who have complained "failed to understand the fundamental nature of genetic research, where progress often occurs from studies that do not appear to bear directly on a particular disease."

The consent forms were purposely broad, Dr. Markow said, because "English was a second language for many Havasupai, and few of the tribe's 650 members had graduated from high school. They were always given the opportunity to ask questions, she said, and students were also instructed to explain the project and get written and verbal consent from donors."

Should I list all the things that are wrong with the previous paragraph? Well, for starters:

If you are genuinely concerned about the English-language skills of your prospective donors, how about having the forms translated into their native language, or at the very least providing skilled translators?
If you're planning on using the samples for more than one test, tell the prospective donors. Maybe you don't know where the research might take you. Tell them that, too.
Is the Havasupai culture one that encourages asking questions of people perceived to hold power or not? If not, you could ask, "Do you have any questions?" until the cows come home, and never hear any. That wouldn't mean that there were no questions.

It was only by sheer accident that the misuse of Havasupai blood samples was discovered, according to the Times article. One tribe member, who had attended college, was visiting at the University and was invited to a student's doctoral presentation. The research on which that dissertation was based was derived from research with the Havasupai DNA. The tribal member "understood little of the technical aspect, but what she heard bore no resemblance to the diabetes research she had pictured when she had given her own blood sample years earlier."

During the post-presentation question period, she asked whether he had permission to use the donated tribal blood for this purpose.

"The presentation was halted. Dr. Markow and the other members of the doctoral committee asked the student to redact that chapter from his dissertation."

Could anything be more damning?

But it's not just cultural and language barriers that all too often make "informed consent" anything but. There's also timing.

When a friend underwent surgery a few years ago, just before being wheeled into the operating room, already hospital-gowned and mentally prepared, he was handed a clipboard and pen to sign the "consent form" permitting the surgeon to use tissue removed in the operation for research purposes.

If he hadn't signed, the operation wouldn't have gone forward. So of course he did. But let's not pretend that his experience was "informed consent."

Research needs to be done. But not by trampling over the human subjects who make that research possible. Even if it's just in the name of "efficiency".

Raise My Taxes, Please!

2010-04-14T10:21:00.001-07:00

I'll be the first to admit that 2009 was not a great year, incomewise. But -- on the optimistic assumption that 2010 will be better -- I want to be on record, the day before Tax Day, saying, Raise my taxes, please.

In this, happily, I'm not alone.

NPR ran a nice piece on Morning Edition today (click here for print version; audio is here) on "some of the rich ask for higher taxes." Among the people quoted is Jeffrey Hollander, a co-founder of Seventh Generation eco-products, who says that so-called trickle-down economics is "really about keeping money in the pockets of people who already have too much money."

Hollander and others are members of the Responsible Wealth Project of United for a Fair Economy, which (to quote their website), holds that "concentrated wealth and power undermine the economy, corrupt democracy, deepen the racial divide, and tear communities apart."

Applause!

In fact, that position makes so much sense to me, I have to stop and ask -- why on earth isn't every American a member of United for a Fair Economy?

I blame the "bootstraps" myth -- the idea that any American can, purely by his or her own effort, rise from the deepest poverty to the greatest wealth.

It's a great story, but it's a myth.

In fact, it's the most dangerous myth I know.

No one does it alone. Not only are there innumerable people who propelled Joe Bootstraps on his way (whom he is now conveniently forgetting -- hello, Mom and Dad? Third-grade teacher Mrs. Benton? Boy Scout leader Mr. O'Hanlon? Rabbi Shlomo Ereritz? High-school science teacher Mr. Yee? You get the idea.), there are also innumerable institutions of law and government that made it possible for Joe to succeed.

Would Joe have succeeded without the trust that's embedded in a working economy grounded in the rule of law?

His first customers could be confident that if he were merely a flimflam artist, sooner or later regulators would find him out and he would be prosecuted and at least a portion of their lost funds would be returned.

His first employees could be confident that, were his interview promises to prove false, there was some legal recourse to which they could turn.

His first suppliers could be confident that, should Joe neglect to pay them promptly, they too had legal recourse.

You get the idea.

I try to keep good company, so I'm with Oliver Wendell Holmes Jr. on this: "Taxes are the price we pay for civilization."

I want more civilization, so go ahead, Tax me more.

You Wouldn't Buy a Car Without a Warranty; How About a Hip?

2010-04-03T06:11:00.000-07:00

Let's say I'm a car manufacturer, and a prospective customer is asking about what sort of warranty I'll be offering on my new XY7200. Here's my reply:

"The longevity of a vehicle depends on a great many factors beyond my control, including the driver's skill, the types of driving done, and the owner's adherence to break-in time restrictions and the regular maintenance schedule. Because of the multifactorial nature of the survival of a vehicle, no, we really can't offer any kind of warranty."

So... would you buy that spiffy new XY7200?

I didn't think so.

I wouldn't either.

Such a scenario could never play out in the big-ticket world of automobiles, or in the small-ticket world of appliances like toaster, TVs, and kitchen mixers.

But in orthopedic implants? Oh, yeah.

Today's New York Times has an excellent article by Barry Meier on how the "health system bears [the] cost of implants with no warranties."

The million or so artificial hips and knees implanted each year in the United States ... are normally not guaranteed. Instead, the costs of replacing implants that fail early because of design or mechanical problems -- devices that sell for as much as $15,000 each -- are largely paid by Medicare, insurance companies and patients.

Implants can fail for many reasons, but if only a small percentage of them fail prematurely because they are substandard, the costs to taxpayers, policyholders and patients can run into tens of millions of dollars each year, health care experts estimate.

Orthopedic producers may sometimes even profit from the failures because they sell the replacements at full price.

Anyone else see a problem with this picture? [Read the full article for, among other things, the comment by Zimmer Holdings on why they don't guarantee their products, which I only barely parodied above.]

There are serious financial concerns here -- at a time when everyone is arguing about how best to rein in healthcare costs, this seems like a good place to start -- but there are also serious ethical concerns.

The system, as currently constructed, actually provides incentives for building something badly. Why should I care if my products are substandard if I don't have to bear the cost? If, indeed, there is a financial incentive to do so? (Yes, I know, we'd like manufacturers to build good products because it's the right thing to do....)

To add insult to injury, accord to Meier's piece, at least one manufacturer does offer warranties on certain of its knee, hip, and shoulder implants (including a "free of charge replacement" if one fails) ... just in Great Britain, and not in the United States.

Is Pay Garnishment More Immoral Than Debt?

2010-04-02T09:38:00.000-07:00

"We are confident we are treating our customers fairly and with integrity," says an HSBC North America spokesman in today's New York Times article (by John Collins Rudolf) about garnishing the pay of consumers who owe the bank for credit-card or other personal loan debt.

The spokesman's definition of "fairly and with integrity" appears to be slightly different from mine.

In the specific case reported, a 45-year-old Virginia maintenance worker took out a $4097 personal loan in 2001 from a subprime lender now owned by HSBC. He fell behind on the payments, and was taken to court. Since he failed to appear ("I just thought they were going to take what I owed," he is quoted as saying), the lender was awarded a judgment of more than $5500 (including lawyers' fees), with debt to accrue at 27.55% until paid in full. By 2003, the bank was garnishing his wages, and continued to do so over the next six years, deducting more than $10,000 from his earnings ... and the end of which he still owed the company nearly $4,000, "a sum," Rudolf notes in the article, "nearly equal to the original loan amount."

"Dale Pittman, a consumer law lawyer in Petersburg, Va., took ... [this] case without charge, and found that all but $134 of his [client's] payments had gone toward interest, fees and court costs. 'It's a perfectly legal result under Virginia law,' Mr. Pittman said."

Does this really sound like treating a customer "fairly and with integrity"? To me, it sounds more like "usury" or even "loan-sharking".

I'm not suggesting that Mr. Pittman's client's debt should have been forgiven as soon as he fell behind. Fiscal responsibility is important; most of us struggle, but manage, to owe no more than we can afford to pay. But it's also important to recognize, and allow for, the power differential in the lender / borrower relationship, and especially to recognize that circumstances can change fast.

In the current Great Recession, there are millions of people falling behind on credit-card bills, mortgage payments, home-equity loans, and other bills, not because of some terrible moral failing on their part, but because it had never occurred to them that they could be out of work for so long, or that their homes' values could have fallen so far. The bank's first step should have been to find out why Mr. Pittman's client had fallen behind on his payments -- did he have an accident that kept him from working for a week or a month? did a child become severely ill? did he underestimate the size of his income-tax refund? did he play the ponies with money that was supposed to have gone to bank payments?

Any of those events could have affected his ability to pay; not all of them are morally questionable.

To add insult to injury for the working poor, a former last resort -- declaring personal bankruptcy -- has become increasingly difficult, and expensive. Rudolf notes that "sweeping changes to federal law in 2005 -- pushed by the banking lobby -- complicated the process and more than doubled the average cost of filing, to more than $2000. Many low-income debtors must save for months before they can afford to go broke."

Despite the tightening, the recession has had its expected effect: "More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, ...a result of high unemployment and the housing crash," with federal courts reporting nearly 7000 filings a day, up 35% from February, according to Duff Wilson's article in today's New York Times.

So which is the more immoral: the consumer falling behind through no fault of his own, or the banker garnishing his wages to the tune of 27.55%?

I'm "Brand Me", But My Genes Belong to Someone Else?

2010-03-30T07:41:00.000-07:00

It's too early to celebrate -- who knows what will happen on appeal, and I have not doubt that this decision will be appealed -- but US District Court Judge (Southern District of New York) Robert W. Sweet is my hero for the day.

In a 152-page ruling Judge Sweet struck down seven patents currently held by Myriad Genetics for genes associated with a greater risk for breast and ovarian cancer, as reported by John Schwartz and Andrew Pollack in today's New York Times, and by many other news channels. The suit had been filed last May by a group of women with breast cancer, several medical research organizations, the American Civil Liberties Union, and others.

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. And that was the crux of the suit.

The patents had been used in the development of a test that looks for mutations in the BRCA 1 and 2 genes. The only way to know whether you have the mutations is to pay up to $3000 for the Myriad Genetics test; Myriad has refused to license the test to other companies. The suit charged that by doing so, Myriad kept prices artificially high and prevented woman from getting a second opinion from another testing company.

Moreover, the suit asserted that the "patenting of human genes, the concept of looking at or comparing human genes, and correlations found in nature between certain genes and an increased risk of breast and/or ovarian cancer violates long established legal principles that prohibit the patenting of laws of nature, products of nature, and abstract ideas." (More background on the case can be found here, in a March 2010 E-Commerce Times article by C. Douglas Brown, and here, in Turna Ray's piece for Pharmacogenomics Reporter) The patenting of genes, the plaintiffs argued, "stifle[s] research that could lead to cures and limit women's options regarding their medical care."

Companies like Myriad have 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.

Some legal experts had expected that the case would be dismissed -- after all, as Schwartz and Pollack reported in the Times, "the Supreme Court upheld patents on living organisms in 1980."

But Judge Sweet agreed with the plaintiffs, ruling that the patents had been "improperly granted".

This is hardly the end of the story. As I said above, appeals can be expected. Moreover, Myriad holds 23 patents for its BRCA analysis, so there are still 15 not addressed by this suit.

Note that at present, about one-fifth of all human genes have been patented. Hello?!? Note also that this is a US problem; most other countries do not permit gene patenting.

Honoring the Triangle Shirtwaist Fire victims

2010-03-26T10:24:00.000-07:00

Did you know that yesterday was the 99th anniversary of the Triangle Shirtwaist Factory fire? I didn't either, until reminded yesterday by Jezebel.com and the New Yorker, and today by the New York Times. Some of the nearly 150 workers who died in that fire were suffocated by the smoke; others died as they leapt from the ninth floor to the street below; still others were killed when the single, flimsy exterior fire escape broke (there was no audible alarm on the affected floors; doors locked to prevent unauthorized cigarette breaks then prevented many workers from escaping the flames; fire department ladders could reach no higher than the sixth floor).

As labor activist Rose Schneiderman said at the time, "The life of men and women is so cheap and property is so sacred! There are so many of us for one job, it matters little if 140-odd are burned to death."

There are memorial observances every year at the site and around New York. Why? It was a tragedy, of course, but Americans are generally speaking not very good at history, so why does this historical event still resonate?

The fire played a critical role in tougher safety regulations, of course. Since its victims were largely young immigrant women, it also played a key role in the founding of the International Ladies' Garment Workers Union (ILGWU, now a part of UNITE HERE!). And the fire launched the political career of Frances Perkins, the first female cabinet member (Labor, under FDR), a staunch progressive voice for the minimum wage and unemployment insurance.

Maybe we remember the Triangle Shirtwaist Fire so well because those issues are, alas, still with us.

Just a month ago, as reported by LaborNotes and others, 21 Bangladeshi garment workers were killed in a fire because they had been locked in for their own "security". Astonishingly enough, such things still happen, even here in the United States: Only a few years ago that it was revealed that Wal-Mart / Sam's Club in the U. S. were routinely locking overnight workers into the stores, ostensibly to keep robbers out (and to prevent employee theft -- click here for a 2004 New York Times article on the practice). So there's still a lot of work to be done to guarantee people's safety in their workplaces. Since companies obviously cannot be trusted to police themselves on this matter, we need tougher laws and tougher enforcement.

Labor unions have lost ground for years, but stagnating middle-class salaries and rapidly growing economic inequality should tell us how smart that has been for America. I still believe, with Schneiderman, that the single best one-word solution to poverty is: organize. To steal a tagline from LaborNotes, it's time to put "the movement back in the labor movement."

And while Frances Perkins should be praised for her pioneering work on unemployment insurance and the minimum wage, can anyone really say that this work is done? The federal minimum wage, since July 2009, is $7.25 / hour. Multiply that by 40 hours, and figure out how you would get by on $290 a week, or $15,080 for a 52-week year (on that salary, are you going to take a two-week vacation? I didn't think so.).

So a moment of silence for the Triangle Shirtwaist victims. But honor them by changing workers' lives for the better.

Fixing Specific Problems; Fixing General Procedures

2010-03-18T07:19:00.001-07:00

Another day, another update. This one from Johnson & Johnson's McNeil Consumer Healthcare unit.

Back in mid-January, I wrote about complaints -- including an FDA warning letter -- about some moldy-smelling bottles of McNeil's over-the-counter medications. McNeil apparently waited nearly two years from receiving its first complaints to recall batches of the products. The problem was eventually traced to "the breakdown of a chemical that is sometimes applied to wood that is used to build wood pallets that transport and store product packaging materials. The health effects of this chemical have not been well studied but no serious events have been documented in the medical literature." (This from a company press release at the time; my full blog post can be found here.)

My concern at the time was about trust, and how easily it can be lost and how hard to regain. Would I ever feel the same way about McNeil's branded products, like Motrin? (I have some back trouble, and trust me, I love my Motrin.) If I can't trust J&J completely, why not just buy a generic? (The answer to that question can be found in this Times story re manufacturing violations at a major generic manufacturer's Indian and New Jersey plants.)

Today's New York Times carries a piece by Natasha Singer (who also reported on the initial problem) in which McNeil seeks to reassure consumers that they have taken the steps necessary to prevent such incidents in the future. In a letter dated 5 February 2010 and posted on the FDA's website, McNeil's president Peter Luther wrote that the company "recognizes the seriousness of this situation" and outlined a "corrective action plan" involving "enhancements to the quality system," "organizational changes", and "senior management oversight".

It's not just the specific problems with chemicals leaching from pallets to products that are being addressed, the McNeil letter asserted, but company-wide complaint review processes and complaint handling processes are being changed. That's good news, as the next problem -- and there will inevitably be a next one -- will be something quite different.

But I still don't feel quite the same way about McNeil and J&J as I did before.

Winner Declared!

2010-03-17T11:29:00.001-07:00

Yesterday I was still pondering who best "deserved" the prize in the Lehman fiasco. Today, there's no question.

The winner is ... (envelope please) ... former CEO Richard S. Fuld Jr.

According to a published reports in today's New York Post, Fuld is apparently "feeling vindicated" by the bank examiner's report on Lehman's fall. This despite being called "at least grossly negligent" (emphasis added) in the 2200-page report.

The Post's Mark DeCambre writes, "Fuld privately believes that the report by examiner Anton Valukas provides proof that he did nothing illegal as he steered Lehman through a financial mess that ultimately led the firm to file the largest bankruptcy in US history..."

There may indeed not be enough evidence for criminal charges, although I suspect a civil suit would be harder to beat. Still, Mr. Fuld appears to be, um, ethically challenged. He denied having any knowledge of the highly-questionable Repo 105 accounting tricks (and yet was able to certify with his signature the financial statements), and he did admit to telling his underlings to reduce the firm's debt levels. Apparently, he didn't care how they went about doing so.

Sorry, Mr. Fuld: the buck stops at your desk. Congratulations on your "prize".

And the Prize Goes To....

2010-03-16T09:05:00.000-07:00

... really, there are so many here in the Lehman Brothers mess that it's hard to know whom to honor first.

Like many of you, I suspect, I've been wallowing in the report from court-appointed bank examiner Anton R. Valukas over the past several days. I haven't waded through all nine volumes, 2200 pages plus appendices (which is, thanks to the New York Times' DealBook, all available online here), but I've read some of it, as well as articles and blog posts in the Times and elsewhere.

"Lehman was more the consequence than the cause of a deteriorating economic climate," Valukas writes in the executive summary, "[But] Lehman's financial plight, and the consequences to Lehman's creditors and shareholders, was exacerbated by Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by Government agencies, who by their own admission might better have anticipated or mitigated the outcome."

There's a lot of good ammunition in the report, based on what I've seen so far, for plaintiffs planning civil lawsuits against Lehman executives. Former CEO Richard S. Fuld Jr., who certified the financial statements, is called "at least grossly negligent".

Accounting gimmicks, chiefly one known internally as Repo 105, used by Lehman to reduce its net leverage ratio are termed "materially misleading" by Valukas. "Unbeknownst to the investing public, rating agencies, government regulators, and Lehman's board of directors, Lehman reverse engineered the firm's net leverage ratio for public consumption," the report states. Questions could be asked here: How is it that the board knew nothing? Isn't that what audit committees are there for? How could the government regulators, who saw it all, have been so blind?

As Andrew Ross Sorkin reports in today's Times, "Almost two years ago to the day, a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York quietly moved into the headquarters of Lehman Brothers. They were provided desks, phones, computers -- and access to all of Lehman's books and records.... [The] mystery is why it took this long for anyone to raise a red flag...."

And serious questions have been raised about how Ernst & Young, Lehman's accounting firm, could have certified accounting results. Still, it seems unlikely that E&Y will go the way of Enron's accountants, the late Arthur Andersen. In a Financial Times article published Sunday, Rachel Sanderson wrote, "Accounting experts do not believe the fallout from the Lehman report will damage E&Y’s reputation in a life threatening way, although damage from litigation costs could be significant as could the longer- term impact on the credibility of the profession particularly among the Big Four."

Sanderson also quoted Steven Thomas, a trial attorney with Thomas Alexander & Forrester LLP, saying that continued disclosures are eroding confidence in the profession “and leaves us asking why do we have auditors”?

It appears as though, as a Times headline put it on Friday (12 March), "findings on Lehman take even experts by surprise."

I know these guys are/were supposed to be the brightest of the bright -- which is why they deserve those billion-dollar bonuses, of course -- but, honestly, and sadly, which one of us is really taken by surprise by this report?

The FDA is Growing Some Teeth, Finally

2010-03-04T09:28:00.000-08:00

I've written before about misleading labels on food products, from the "Smart Choice" checkmark on Fruit Loops cereal (41% sugar) to Kellogg's agreement in December of last year to remove "now supports your child's IMMUNITY" labels on Rice Krispies.

This stuff makes me CRAZY. And it makes me wonder, as many of you no doubt do too, how the FDA, which is, after all, responsible for regulating food labeling, lets companies get away with such nonsense.

Well, the FDA seems finally to be growing teeth. Little ones, to be sure, but teeth nonetheless.

Yesterday, as reported by the New York Times, the Wall Street Journal, and many others, the FDA sent warning letters to 17 food manufacturers regarding their labels. For example, the agency objected to Dreyer's label for "Dibs Bite Sized Ice Cream Snacks Vanilla Ice Cream with Nestle Crunch Coating" which trumpets its "no trans fat" recipe ... but neglects to point out that it has "significant" amounts of saturated fat and total fat. In fact, the fine print of the Dibs label shows that one serving has 20 grams of saturated fat, 99% of the suggested daily value.

Similarly, Diamond Food was cited for claiming in its "California Shelled Walnuts" packaging that walnuts can "treat, prevent, or cure diseases such as heart disease, arthritis and cancer." (Click here for the FDA's chart of all firms, products, and product claims that were involved, and here for the FDA's accompanying press release.)

The warning letters give companies 15 business days to inform the FDA of the steps they plan to take to bring their labels in line with agency regulations.

Why the action now? Agency commissioner Dr. Margaret Hamburg has made nutrition labeling a priority, but the timing is no doubt related to a new report issued by the Center for Science in the Public Interest, which has been urging the FDA to crack down on "false and misleading food labeling" for some time, and just released a comprehensive report on what the center terms "Food Labeling Chaos" (full report here; accompanying letter to Dr. Hamburg here)

According to the Times' William Neuman, food manufacturers seem to be surprised:

A spokesperson for POM (cited by the FDA for making claims that its POM pomegranate juice "will treat, prevent, or cure diseases such as hypertension, diabetes, and cancer") said that "'all statements made in connection with POM products are true' and supported by scientific research."

The POM response also said that the company, "as strong advocates of honest labeling and fair advertising" is "looking forward to working with the agency to resolve this matter."

Doesn't that sound like Casablanca's Captain Renault being "shocked, shocked to find that gambling is going on here" (as he's being handed his winnings)?

Plausible Deniability Is One Thing....

2010-02-24T12:01:00.000-08:00

...but sometimes you run into Implausible Deniability.

Today's New York Times carries an article by Brooks Barnes on the debate in Hollywood over so-called "red band trailers" -- essentially, R-rated trailers for R-rated movies. Most trailers are "green band": even for a blood-and-guts R-rated movie, the trailer will be edited to show less violence, no skin, and little offensive language.

Red-band trailers -- so-called because the reels in which they are delivered to movie theaters carry a red band, to warn projectionists that they should not be spliced onto a "G", "PG", or "PG-13" film -- are in fact rarely seen in theaters. In a multiplex, it's too easy for mix-ups to be made, and many theaters simply refuse to run them.

The problem, of course, is the Internet. Nearly all trailers can be found online quickly, but, as Barnes notes, "the red-band ones speed across the Internet with an added velocity because of their 'can you believe what they just said' nature."

The current brouhaha is about an upcoming Lionsgate picture called "Kick-Ass". The green-band trailer can be seen here; the red-band is here (you will be asked to enter your name, partial address, and birthdate; but, not to encourage unethical behavior, if you lie, you can get in....). Or you can go to the website of corporate behemoth Time Warner's Entertainment Weekly, and not bother with the "registration": click here.

The trailers focus primarily on the adventures of a teenage boy who wants to be a superhero (the eponymous Kick Ass) and the 11-year-old Hit Girl. In the green-band version, you get snark and some violence. In the red-band version, Hit Girl's language is way beyond the kind of vulgarity I'd be able to post here (note that the actress playing Hit Girl is now 13); and the violence is way past what I'd want to see (I know: I'm hardly the target audience).

The Motion Picture Association of America (MPAA), which issues the G/PG/PG-13/R/NC-17 ratings and which governs movie advertising, requires that access to red-bands be protected by age requirements. So Lionsgate is doing the "right" thing.

Note that Warner Bros (also a Time Warner company, like Entertainment Weekly, referenced above) is an official member of the MPAA.

Barnes quotes this pious statement from the MPAA's senior vp for advertising: "We devote enormous resources to making certain that kids don't encounter these trailers. That said, we can't scrub the entire Internet."

The MPAA has demanded that sites that provide "unrestricted" access to red-band trailers remove them, and most comply. But it's still absurdly easy to get past the "requirements," and fans then distribute the trailers widely on blogs (like this one!!) and other social media.

Meanwhile, Lionsgate is reaping publicity benefits right and left.

Sounds to me like having one's cake and eating it too.

Sometimes, It's Not Just About the Money

2010-02-19T09:10:00.001-08:00

Imagine this situation: You're the owner (with three partners) of a successful company, built up over more than 30 years, and now worth, say, $80 million. You have more than 200 employees, some of whom have been with you for all that time.

Now imagine that you've just turned 81, and two of your partners are in their 60s and 70s. What would you do?

Well, if you're Bob Moore (alas, no relation!) of Bob's Red Mill of Milwaukie OR, which manufactures some 400 whole grains, flours, and other products, here's what you do: you make a gift. Of the whole company. To your employees.

As Mr. Moore told Marketplace's Kai Ryssdal, "You reach a certain point in your life.... And you've got to decide what you're going to do. You can sell the company. We've had lots and lots of opportunities. There's just too many bad stories about what happens when going entities like our company are sold. The new owners don't always do what you think they should do, and they're not always kind to the employees. I just absolutely felt I had to come up with something that would work." (click here for the whole interview, available as transcript or audio)

Moore and his partners have set up an Employee Stock Ownership Plan (ESOP) that essentially turns over the whole company to the employees.

In an interview with ABC News' Christine Brozyna, Moore said, "There's a lot of negative stuff going into business today.... It's a good old basic Bible lesson -- love of money is the root of all evil. And unfortunately, our entire philosophy today is get all the money you can and whatever way you can. It's caused many corporations to bite off more than they can chew. And it causes people to do a lot of things just for money that they feel in their hearts is not the right thing to do."

Thanks, Bob, and many many happy returns of the day.

When in Doubt, Ask

2010-02-13T10:32:00.000-08:00

Google is, as many of you know by now, getting significant negative press about "Buzz", its new effort in social networking.

Google often launches products that are not 100% ready-for-prime-time, which if often tags as "Beta" products, and then tweaks them regularly as time goes on. For this reason, some of the problems with "Buzz" are as one would expect. For example, the "Buzz" privacy controls are difficult to find -- as one commenter said, "Note to Google: If filling out IRS form 54321 in triplicate is easier than following your directions on using Buzz (and canceling it the right way) then you are doing something wrong."

But far more seriously, this time Google has run into the brick wall of privacy.

(Which is interesting, considering how much positive press Google received over its threats to leave China over allegedly government-sponsored hacking of human rights activists' Gmail accounts.)

"Buzz" was automatically provided to Gmail accounts last week, and account holders found that they had a ready-made network of "friends" selected by Google from the people with whom they had communicated regularly by email -- much simpler, really, than Facebook's careful "So-and-so has added you as a friend on Facebook. We need to confirm that you know So-and-so in order for you to be friends on Facebook."

No doubt their motives were excellent. But what Google did is akin to what a colleague of mine used to do. As he said, "It's easier to ask for forgiveness after than for permission before."

It is easier. It's also wrong.

In an article in today's New York Times, reporter Miguel Helft quotes the executive director of Washington-based Electronic Privacy Information Center: "People thought what they had [with Gmail] was an address book for an email program, and Google decided to turn that into a friends list for a new social network... E-mail is one of the few things that people understand to be private."

It's not just an invasion of privacy; it has the potential to be dangerous. One blogger who has been widely cited around the Net (her post can be found here on Gizmodo; her actual blog is now protected by a Wordpress login) was horrified to discover that the list of "friends" included her third-most frequent Gmail correspondent, who happens to be ... her abusive ex-husband.

So much for "Do no evil", eh?

What Google's inventive genuises need to remember is that there are sins of omission as well as sins of commission.

When in doubt, ask first.

Time to Jump on the Beat-Up-On-Toyota Bandwagon?

2010-02-09T10:57:00.001-08:00

Not exactly. There's still much to admire about the company, but I've been thinking a lot about its recall woes, as have many people (and not just the Toyota owners out there).

The sections on "crisis management" in the PR manuals have all been updated.

"Managing a public-relations disaster isn't what it used to be. Back in 1982, even as people in Chicago were dying of cyanide poisoning from tampered Tylenol bottles, the drugmaker's parent company, Johnson & Johnson, didn't have to worry about Internet message boards inciting panic or fueling rumors and fear-mongering. The strategy of corporate crisis management hasn't necessarily changed, but in the Google, Twitter, and Facebook era, the execution has," notes Newsweek writer Matthew Phillips in an online-only article.

Managing a crisis, unfortunately, takes time, and in the Internet world, it's a lot easier to yell, "End of the world!" than it is to analyze.

If Toyota had ordered a recall when the first complaints about unintended acceleration arose (in 2004, according to a Reuters timeline), the company might well have been savaged for encouraging panic -- especially if the problem had, on thorough investigation, proven to be simple to fix and rare in occurrence.

The recall(s) will certainly affect Toyota negatively for a time, both because the recalls involve really scary stuff (My car is going to run away with me? My car won't stop when I need it to?!?), and because Toyota Loyalty has been built on the brand's near-mythic reputation for quality and reliability.

Will the negative effect be permanent?

I suspect not, in part because we humans have short memories for a lot of stuff. But a lot will depend on Toyota's actions in the next weeks and months.

This is a great opportunity for transparency within the Toyota organization and in the way Toyota deals with the world at large -- whether customers, dealers, or regulators.

In a piece published in today's Washington Post, Toyota CEO Akio Toyoda (grandson of the company's founder) apologized directly to consumers, and outlined three steps that he and his company will be taking: (1) "I have launched a top-to-bottom review of our global operations to ensure that problems of this magnitude do not happen again and that we not only meet but exceed the high safety standards that have defined our long history." (2) "...[We] will ask a blue-ribbon safety advisory group composed of respected outside experts in quality management to independently review our operations and make sure that we have eliminated any deficiencies in our processes. The findings of these experts will be made available to the public, as will Toyota's responses to these findings." (3) "...[We] fully understand that we need to more aggressively investigate complaints we hear directly from consumers and move more quickly to address any safety issues we identify. That is what we are doing by addressing customer concerns about the Prius and Lexus HS250h anti-lock brake systems."

Relatedly, Mr. Toyoda wrote, the company will be "putting in place steps to do a better job within Toyota of sharing important quality and safety information across our global operations. This shortcoming contributed to the current situation. With respect to sticking accelerator pedals, we failed to connect the dots between problems in Europe and problems in the United States..."

All of these are good plans. The proof will be in the execution.

Two "Persons" Act the Same, But Only One is Unethical?

2010-02-03T12:37:00.001-08:00

For many months now, I've been reading articles about "underwater" homeowners who are choosing to walk away from their mortgages.

We're not talking here about genuine foreclosures -- people who have lost jobs or assets and can no longer afford to pay their mortgages -- but the so-called "jingle mail" types, the ones who do the math, figure that it's just not worth it, and mail the keys in to the bank, setting off a foreclosure.

There are general articles about the phenomenon (such as Roger Lowenstein's piece in early January in the New York Times); there are instructional articles (like "How to Walk Away from Your Mortgage" online at BusinessInsider.com); there are even cheerful websites (like YouWalkAway.com).

The tone ranges from the strongly censorious to the happily matter-of-fact.

Lowenstein, in the Times, quotes John Courson, president of the Mortgage Bankers Association, as saying that those thinking about walking away should also think about, "What about the message they will send to their family and their kids and their friends?"

Lowenstein also quotes -- widely reported elsewhere also -- Former Treasury Secretary Henry Paulson Jr. as saying "any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligation."

In contrast, in an article in today's Times, David Streitfeld quotes a mortgage broker in Scottsdale, who says, "Since the beginning of December, I've advised 60 people to walk away....Everyone has lost hope. They don't qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old."

"Walking away" will ruin your credit score; should it ruin your character as well?

I don't want to encourage people not to honor their obligations. But what's so special about home mortgages? Or rather, what's so special about a mortgage held by a single individual or couple, compared to one that's held by a corporation (a "person", of sorts, under law)?

When Tishman Speyer and BlackRock Realty walked away from their $5.4 billion Stuyvesant Town deal in New York a week ago (see Times piece by Charles Bagli and Christine Haughney, here), there were complaints, but no accusations of immorality. I'm sure that "walking away" made sense to the principals. After all, as my cost-accounting professor told us years ago in class, the only lesson that he really wanted to pound into our skulls was that "sunk costs are ... sunk."

Other investors in the Stuyvesant Town / Peter Cooper Village included pensions funds, countries, and banks. Why aren't they heaping scorn on the Tishman Speyer principals for their weak morals?

And if Mr. Paulson is right, and those homeowners who walk away are "simply speculators", well, what were the banks who approved those mortgages, chopped them up, and immediately resold them?

When Will We Stop Pretending that Shareholder Value is All that Matters?

2010-01-27T06:24:00.001-08:00

Even back at the dawn of time, when I was in business school, there were plenty of voices arguing that "shareholder value" should be one of management's goals, but not the only one.

Up the road from the University of Chicago, Kellogg professor Gene Lavengood spoke up forcefully for "stakeholder value": the need to maximize value for all those with a stake in the corporation -- shareholders, of course, but also employees, customers, residents of the communities in which the corporation operated, etc.

Still, shareholder value was the rallying cry through the go-go years. Jack Welch, in his General Electric days, was one of the loudest voices in its favor -- although even he later repudiated it, telling the Financial Times in March 2009, "On the face of it, shareholder value is the dumbest idea in the world... Shareholder value is a result, not a strategy . . . Your main constituencies are your employees, your customers and your products." (FT article here)

The banks have apparently decided that their main concern should be salary value.

"Ailing banks favor salaries over shareholders" reports today's New York Times (article by Eric Dash here).

Oh, no, you're thinking: another boring rant about overpaid bankers. Doesn't she know that banks need to pay outrageously high salaries and bonuses in order to attract and keep the best talent?

Well, no, I don't know that. Especially in the current economy, with jobs disappearing right and left -- still -- I think that there are plenty of enormously talented people out there who would work just as hard and just as smartly (maybe more so, given the mess the banks got us into) for a lot less than Wall Street seems to think essential.

But even I was surprised by how little relationship there seems to be between pay and profit (and profit, after all, is supposed to be what shareholders care about, and, remember, corporations are supposed to be all about maximizing shareholder value, right?).

If bankers are paid for profit, then explain this example from Dash's article: "In 2005... Morgan Stanley made a pretax profit of $7.4 billion. That year, compensation at the bank averaged $212,000 for each employee. Last year, Morgan Stanley made about $857 million before taxes. But compensation averaged $235,000 for each employee. In other words, Morgan Stanley employees collected roughly 61 cents out of every dollar the bank made in 2005, and about 94 cents of every dollar last year."

Sounds to me like, Heads I win, tails you lose.

Dash qoutes John Bogle, founder of mutual fund company Vanguard Group: "The investor in America sits at the bottom of the food chain... The financial industry gets paid before their clients, and we get paid whether times are good or bad."

Isn't it time to reexamine the fundamental "truths" that underlie the system: Is shareholder value really what we should care about? And, is price (or salary) really the only way to measure value?

Trust, Once Lost, Is Hard to Regain

2010-01-18T10:16:00.001-08:00

Who is it that you trust most? Not, probably, someone you've just met -- it takes time to build a trusting relationship. And if that trust is violated, it will take a very long time to rebuild it.

This is as true for brands and companies as it is for people.

The current issue of the Harvard Business Review has a long, excellent article by Roger Martin on "customer capitalism", which argues that making customer value the highest corporate priority will pay off better for shareholders than does focusing primarily on shareholder value: "...[If] more companies made customers the top priority, the quality of corporate decision making would improve because thinking about the customer forces you to focus on improving your operations and the products and services you provide, rather than on spinning lines to shareholders."

Among the examples Martin uses are Procter & Gamble, and Johnson & Johnson -- making specific reference to J&J's decision in 1982 to pull every Tylenol capsule in the US off the shelves after seven Chicago-area consumers died from tampered Tylenols. At the time, many expressed surprise that a company would (seemingly) throw profit concerns to the winds, but the bet paid off with soaring loyalty to the product and the company.

Martin may well be rethinking his examples now.

As the New York Times's Natasha Singer reported today, McNeil Consumer Healthcare, a J&J division, apparently waited 20 months from receiving its first consumer complaints about moldy-smelling bottles of over-the-counter products to recall batches of such popular medicines as Benadryl, Motrin, Rolaids, and ... Tylenol.

The federal Food and Drug Administation issued a press release on Friday, reporting that McNeil Consumer Healthcare was "voluntarily recalling certain lots of OTC products". The company has set up a website with information on specific lots and on how to return or dispose of the products. The problem has apparently been traced, according to the press release, to "the breakdown of a chemical that is sometimes applied to wood that is used to build wood pallets that transport and store product packaging materials. The health effects of this chemical have not been well studied but no serious events have been documented in the medical literature."

But why did it take so long for the company to take action? Singer quotes a marketing professor from Northwestern's Kellogg School of Management: "The FDA comments on Friday were devastating because they make the company seem to be complacent and sloppy."

As a consumer, I have plenty of generic non-branded choices for pain relief. Unless I have a good reason to trust J&J to provide me with a higher level of product quality, why would I pay extra for Tylenol or Motrin?

And now that I'm asking myself these questions, is there anything J&J can do to rebuild my trust? Maybe not.

As the old saw says, "Fool me once, shame on you; fool me twice, shame on me."