"Clean" Coal Cleaned Up?

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

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?

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

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

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"

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....

"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.