Who's Responsible, the Corporation or the Executive?

Corporations have one big advantage over people: not only do they have, thanks to Citizens United, the right of free speech, but: it's really hard to put a corporation in jail.

Many of us have wished for corporate jails (as opposed to for-profit jails run by corporations), to which we could have sent, for example, the banks that nearly destroyed our entire economy. Alas, those don't exist, and it's extremely rare that individual executives get charged.

So I was interested but not particularly surprised to read yesterday that, as a followup to the horrific Deepwater Horizon explosion and oil spill two years in which eleven workers died, BP had finally agreed to plead guilty to numerous criminal charges and to pay more than $4 billion in fines and penalties over the next five years (article by Clifford Krauss and John Schwartz in yesterday's New York Times, here).

But what really caught my eye is that the Justice Department filed criminal charges against three BP executives in connection with the spill.

According to the Times report,

The government charged the top BP officers aboard the drilling rig, Robert Kaluza and Donald Vidrine, with manslaughter in connection with each man who died, contending that the officials were negligent in supervising tests to seal the well. 

Prosecutors also charged David Rainey, BP’s former vice president for exploration in the Gulf of Mexico, with obstruction of Congress and making false statements for understating the rate at which oil was spilling from the well.

Those charged are denying any wrongdoing.

Me, I'd want to charge BP's CEO, but that's just me.

Ironically, today's news included a report of an explosion and fire aboard another Gulf oil rig (Associated Press report, in the New York Times, here).  Thankfully, the rig was not producing at the time and there are no reports of oil leaking. No one was believed killed in the fire, although several had been seriously injured. At the time of the report, the Coast Guard was still searching for two missing workers.

Deceptive Reviews on Yelp? How Could This Be?!?

More in the "shocked, shocked" category....

Earlier this year, I was inspired by a David Streitfeld story in the New York Times to write a post about all those "5-star" reviews littering the Internet (blog post here; Streitfeld's story, here). Mr. Streitfeld has done it again, with an article in today's Times about an attempt by Yelp to halt deceptive reviewing practices.

Yelp, an online hub for reviews of local businesses (dry cleaners, restaurants, jewelry stores, you name it), realized that it had a problem with false reviews, and set up its own sting operation.

For every five new notices that are submitted, one is determined by internal filters to be so dubious — either highly favorable or highly critical — that it is banned to a secondary page, which few users bother with, instead of appearing on the business’s profile page. Many of the reviews tagged as fake are written by people new to Yelp.

As a result, some businesses have sought out Yelp's so-called "elite" reviewers -- those who have a track record of posting reviews -- and offered cash payments for positive reviews.

How do you find an "elite" reviewer? On Craigslist.

So a Yelp employee went to Craigslist itself, and posed as an elite reviewer.

The initial sting uncovered eight businesses ready to pay for excellent reviews. Which, given that Yelp has a reported 30 million reviews, doesn't sound like a lot. (A Yelp vice president is quoted as saying, "It is safe to say that this is just a sample" of businesses seeking to influence their status.)

Payments reportedly ranged from $5 to $200; reviewers were sometimes given boilerplate copy to post and sometimes asked to write their own (positive) copy.

For the next three months, the Yelp profile pages for those eight businesses will features a "consumer alert" that says, "We caught someone red-handed trying to buy reviews for this business."

This kind of public shaming may help, but I'm not convinced that it will make a real dent in the deceptions. A Cornell doctoral student in computer science who has been studying reviewer deception noted,

My intuition is that public shaming would increase the risk and therefore the cost of posting fake reviews, which could reduce the prevalence .... [But:] What’s to stop someone from going and soliciting fake positive reviews for a competitor’s restaurant, in order for them to be publicly shamed?

Let me reiterate my earlier closing:

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. 

Big Pharma, Little Compounding Pharmacy. It's Not That Simple.

I know that I've been following the ongoing story of a fungal meningitis outbreak closely because it could so easily have been me.

For those of you who haven't: To date (according to today's New York Times story by Denise Grady), eight people have died, 97 others have sickened, and as many as 13,000 may have been exposed to fungal meningitis, which has been traced to a tainted steriod given as a spinal injection for relief from back and neck pain. The medication in all cases was made by Massachusetts-based New England Compounding Center, which "has shut down, surrendered its license and recalled all its products, not just the steroid."

It is not yet known whether all the vials of the steriod were infected with fungus, or only some of them.

I had surgery several years ago to relieve back pain, and I'm among the lucky who have not (knock wood) had recurring problems. But one of the physicians I met before opting for surgery suggested that quarterly steriod injections could probably do the trick just as well. I was concerned about possible long-term effects of steroid use, hence the surgery. But, as I said, it could have been me.

How is it that so many people were exposed to this contaminated drug? How could it take so long to find out what happened? Why is it still not clear where all the drug went, and who received it? (The "13,000" figure I quote above is a "first estimate" from the Centers for Disease Control and Prevention.)

It turns out that

The Food and Drug Administration has more regulatory authority over a drug factory in China than over a compounding pharmacy in Massachusetts

according to a Boston University law professor, quoted in Saturday's Times, in an article by Denise Grady, Andrew Pollack, and Sabrina Tavernise. (Compounding pharmacies, the article explains, "mix up batches of drugs on their own, often for much lower prices than major manufacturers charge," and are increasingly used by some physicians and clinics to save money. Compounding pharmacies also sometimes fill "gaps left by shortages of drugs made by pharmaceutical companies.")

The problem is that 

Compounding falls in a legal no man’s land, between the federal government and the states. The F.D.A. regulates manufacturers, but compounders register as pharmacies, putting them under a patchwork of state rules. The F.D.A. did develop a clear set of rules for compounding, but subsequent litigation that culminated in a Supreme Court decision in 2002 struck them down, and Congress never re-established the agency’s clear authority...

Who knew? Well, somebody did, of course, but it was certainly news to me. And I might have been more trusting of a "compounding pharmacy" -- because that sounds more local and service-oriented -- than of a huge pharmaceutical company.

Not that all compounding pharmacies are that local (or, obviously, that service-oriented). New England Compounding was apparently licensed in all fifty states, and there are 23 states now tracking where this specific steroid went. A Washington lawyer, and a former chief counsel for the FDA, was quoted in Saturday's article as saying,

Some of these companies are just setting up big manufacturing shops in the guise of traditional compounding and making drugs that are, for the most part, commercially available. Instead of making fake Rolexes, they are making fake drugs.

If this is how industries self-regulate (and all too often, it is), is it any wonder that I keep asking for more regulation, not less?

Manage Your Supply Chain, Or It Might Manage You

Managing a supply chain that spans the globe has never been easy. It's so complicated, in fact, that many manufacturers simply throw up their hands -- as long as the product showed up when and where and how it was supposed to, what more could one do?

But in the Internet age, things are different.

Many of your customers want to know whether your jeans were made in a sweatshop factory where workers might burn to death because exits have been blocked, or whether that rug was knotted by children's hands, or whether the tanzanite stone in a beautiful ring was exchanged for illegal guns that will fuel a brutal regime and its equally brutal opponents.

And they expect you to be able to answer their questions.

Sometimes it will be the final retail consumer who will demand to know; sometimes it will be your wholesale customer.

Today, it's Whole Foods, which will remove Hershey's high-end chocolate brand, Scharffen Berger, from all store shelves by the end of the year "due to Hershey’s failure to assure that the cocoa is sourced without the use of forced child labor," according to a story off the CSR Newswire (full release, here). Whole Foods' action came as the result of "more than 15,000 customers demanding that ... Hershey [be held] accountable for exploiting children for profit."

The CSRWire report notes that, according to "a U.S. government-funded study, over 1.8 million children work in West Africa’s cocoa industry. Many of these children are exposed to dangerous working conditions and some are even trafficked and sold off to perform grueling labor."

Several major chocolate makers, including Mars and Ferraro, have committed to the ethical sourcing of chocolate, but Hershey's has, to date, refused.

This small news story may have struck me particularly forcefully because I've just finished reading The Responsible Company, by Yvon Chouinard (owner / founder of Patagonia) and Vincent Stanley (who initiated the company's Footprint Chronicles blog, which traces its suppliers' activities). The pair spoke recently at Yale, at a discussion co-sponsored by the Divinity School, the School of Forestry, and the School of Management (press release, here).

Chouinard spoke forcefully about a company's responsibilities not just to shareholders, but four other key stakeholders: employees, customers, communities, and nature. In "communities", he includes not just the physical locations in which a business operates, but also suppliers, as well as:

trade associations, nongovernmental organizations (NGOs), standards-setting organizations, nonprofits, and other citizens' organizations that may have an interest or something to say about what your company does. Advocacy groups like Greenpeace and PETA may confront you about your practices, as may individual citizen activists through social media like Facebook and Twitter. Friendly or not, those who engage with you are part of your community in its broadest sense and deserve your attention.

That sounds like a lot, doesn't it? But that's the reality of a globalized world. If you don't want to manage your supply chain thoughtfully, it might manage you ... right out of business.

What's the Value of "Certification"? It Depends.

Who will watch the watchmen?

It's a question that's been asked many times before, since at least the days of the Roman poet Juvenal, who is credited with coining the phrase.

It's as relevant as ever, with the news today that the Pakistani textile factory which exploded in flames last month, killing nearly 300 workers, had been awarded "independent" certification as meeting critical international standards.

As reported by Declan Walsh and Steven Greenhouse in today's New York Times (full article, here),

In August, two inspectors who visited the factory, Ali Enterprises in Karachi, to examine working conditions gave it a prestigious SA8000 certification, meaning it had met international standards in nine areas, including health and safety, child labor and minimum wages. The two inspectors were working on behalf of Social Accountability International, a nonprofit monitoring group based in New York that obtains much of its financing from corporations and relies on 21 affiliates around the world to do most of its inspections. 

The reporters call the Karachi fire a "huge embarrassment" to the monitoring system. Social Accountability International had not conducted the inspection itself, contracting the job out to an Italian firm, RINA (Registro Italiano Navale Group). According to a press release on the Social Accountability website, 

RINA has voluntarily suspended all SA8000 auditing activity in Pakistan. It is undertaking its own internal investigation and also seeking from local authorities clearer information about the circumstances surrounding this tragedy. In the coming days, SAAS will be rigorously following its own strict rules, and will be examining very closely the validity and effectiveness of RINA's audit and certification process.

That's all well and good, but I'm inclined to agree with Scott Nova, executive director of Worker Rights Consortium, quoted in the Times article as saying, "The whole system is flawed... This demonstrates, more clearly than ever, that corporate-funded monitoring systems like S.A.I. cannot and will not protect workers."

A key problem is that the initial audit -- which is what RINA conducted at the Ali Enterprises factory -- is not a surprise inspection (future inspections would normally not come with advance notice).

According to the Times  report,  "some surviving workers said that they had been warned of a visit by inspectors and coached to lie about their working conditions, under threat of dismissal."

To blame the disaster entirely on the S.A.I. audit and certification process would of course be grossly unfair.

On Monday, a two-person [Pakistani] government commission of inquiry started investigating the circumstances around the fire. It has already uncovered evidence of gross failings in Pakistan’s regulatory system, which is riddled with corruption, political interference and poor management. 

In circumstances like these, to expect a Western, corporate-financed "certificate" to solve the problems of workers' rights and safety would be beyond naive. But the "certificate" is unquestionably itself part of the problem. It relieves the end purchaser (retail seller and consumer alike) of having to ask the hard questions: How was this product made? If all health and safety issues are properly addressed, and workers' wages and benefits adequate, is it really possible to offer this item at so low a price? Who is benefiting, and who is being harmed? If I am complicit (and, by purchasing this item, I am complicit), how can I make things right?

Questions, questions. I've got so many questions. And so few good answers. Only prayers for the families and friends of those 300 workers.

Do You Really Want to Go Back to the Good Old Days of Deregulation?

"The towering metal door at the back of the burned-out garment factory could have been an escape for many of the low-paid textile workers caught in the fire.... Instead, it stands as a testament to greed and corruption at a factory where 289 trapped employees died."

This may sound like a description of the infamous Triangle Shirtwaist Factory fire of 1911. But it isn't. It's the opening paragraph from an article by Declan Walsh in today's New York Times, describing the scene after the deadliest accident in Pakistan's history.

His article continues,

As hundreds of workers scrambled to escape the flaming factory after a boiler explosion, they found the main sliding door -- 30 feet high, big enough for a truckload of cotton -- firmly locked. Instead of letting the workers escape, several survivors said Thursday, plant managers forced them to stay in order to save the company's stock: piles of stonewashed jeans, destined for Europe.

There was apparently only one open exit, through which employees could escape -- or they could jump from windows "considered too high to require bars." As a result, nearly half lost their lives, most often from smoke inhalation. Many of the survivors are in local hospitals, suffering from third-degree burns.

I wrote about the Triangle Shirtwaist fire a few years ago (post, here), and quoted labor activist Rose Schneiderman, who said, a few days after the disaster, "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."

At the time, there were few laws protecting American workers. In contrast, the current laws protecting Pakistani workers are quite strong, "but application is notoriously weak. In textiles, which account for 53 percent of exports, employers routinely sidestep health and safety regulations through bribery and corruption."

Regular readers of this blog know that I am a _big_ supporter of regulation. Because the fire in Karachi is a terrible, tragic reminder of what the "good old days" were like. Regulations alone, of course, are not enough -- you need a strong rule of law, and plenty of alert inspectors on the job.

Why Pay More When You Can Collude?

Another in a long series of "we're shocked, shocked" headlines (this one from today's New York Times): "Equity Firms Like Bain Are Depicted as Colluding".

No, really? People do that? (Full article, here)

Reporters Eric Lichtblau and Peter Lattman write that court documents indicate that, for Bain Capital's "$32.1 billion purchase of the hospital giant HCA in 2006, competitors agreed privately to 'stand down' and not bid on the company as part of an understanding with Bain to divvy up companies targeted for leveraged buyouts."

At the time, the $32.1 billion purchase price for HCA was a record.

In another example, KKR and Silver Lake Partners brought Bain into their acquisition of Philips's semiconductor business, thanks to "a secret deal whereby Bain would permit KKR and Silver Lake to submit the winning bid and then invite Bain into its deal on equal terms."

The documents are from a lawsuit filed in Boston's Federal District Court against Bain and other firms "by shareholders who say the firms' bid-rigging artificially deflated the sales price of more than two dozen companies and cost them billions of dollars."


The documents were made public, although with heavy redactions, following a motion brought by the Times.

A lawyer for the plaintiffs was quoted as saying, "I think you can tell...there is enough to show that there was very active collusion going on between the leading private equity firms."

The equity firms' executives and lawyers deny that there was collusion to drive down prices. The Times reporters quote one (anonymous) executive: "These shareholders should be grateful that we purchased their companies when we did, right before the financial crisis hit."

Grateful's not exactly the adjective I'd use....