Fool Me Once, Shame on You....

"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...

...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

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?

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?

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?

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?

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.