Problems We Know How to Solve, “Social Security”

Social Security hits the ripe old age of 75 this year. Wingnuts on the left and right are sounding the alarm and coming up with ways to save it, threats to shut it down, everything but the obvious. Let’s begin by putting to bed forever the myth that Social Security and its brother Medicare are insurance policies. While it’s true that like an insurance policy these government programs take money in from a large group and pay it out when members of the group hit certain metrics. And that you might collect more or less than you pay into it. That’s it! End of insurance comparison.

Unlike an insurance policy, your money is not protected by reserve requirements. Nor is it in any special fund should you have need of it. The bucks you and your employer hand over to the feds for Social Security and Medicare go right into the hands of the Congress, and we all know how careful they are with our money. Right!

The solution to keeping these programs solvent is very simple, level the playing field. Certain folks were left out when Social Security was created in the thirties. For those with higher incomes there is a cut off in how much they had to pay each year, currently a little over $100,000 a year. That means the upper middle class and the rich don’t have to pay FICA taxes on much or most of their income.

Another birth defect was equally unintended. The thinking was that many in the public sector -legislative bodies and worker bees at the federal, state and local level- already had pension plans in place. Since it would not be necessary for them to collect from Social Security, there was no reason for them to pay FICA taxes. As it worked out, many of these folks leave public employment in their forties and fifties, their public pensions in place waiting for them to cash in. They move into private sector employment for ten years or more and collect Social Security benefits just like the folks who have been paying in all their working lives.

What has changed? Social Security/Medicare has become an income tax that pays benefits to nearly everyone but collects mainly from the poor and middle class private sector workers. This tax is at the root of the issue that has billionaire Warren Buffet sounding the alarm that he and all of his peers pay a smaller share of their income in taxes than their lowest paid employee. That is clearly wrong as he points out. Exempting certain folks in the public sector is equally wrong.

We can save the Social Security system by making it fair to all. Everyone should pay this tax on every penny of their income. That would be a well deserved birthday gift; fair to everyone at long last.

Problems We Know How to Solve, “Piracy”

A host of issues plague our nation that I have no idea how to cure. However, I can make some disappear. The ones I have in mind are protected by powerful special interests although it would be hard to find anyone who would consider them beneficial to society or our nation.

Piracy is generally frowned upon at almost all levels in America, indeed in the world. However, the same electronic trading that has modernized our capital markets has opened the way for traders flying the Jolly Roger to make a mockery of the market’s purpose. Be it stocks, bonds, commodities, derivatives (yes there are good derivatives), or anything other financial instrument, there is but one reason for them to exist; to support our economic system. To put the “Capital in Capitalism.”

Unfortunately that purpose has been lost in what has come to be known as the “Casino on Wall Street.” “Playing” the market, as it’s called, has long been a problem. A focus on short term gains has pushed aside solid growth as the players –it would be wrong to dignify them with the title investors– jump in and out of market instruments. But now a new breed of players using sophisticated software and massive computers have created a new way to game the system, High Frequency trading.

Algorithms allow them to race alongside the flow of electronic orders in the markets not unlike the sea going pirates of old that they emulate. They jump in and out in nanoseconds, thousands of times in a few minutes picking up a fraction of a cent here and there. They are daytraders on steroids. High Frequency traders contribute nothing to the companies they trade, worse they drive up prices for legitimate traders looking to improve their long term holdings. Often those entrusted with little folks’ life savings.

How does the Casino on Wall Street get away with gambling that is illegal in New York State as it is in most states? Simple. The United States Congress exempted this form of gambling from State Laws. While that legal loophole should be closed it is not the most effective way to curb this abusive practice.

A change in our tax code would pull down the Jolly Roger. Let’s eliminate all capital gains taxes on profits from investments held for more than twelve months. Tax profits earned from investments held less than a year at 35%; those held less than six months at 50%; those held less than 90 days at 60%; those held less than 30 days at 70%; those held less than seven days at 80%; those held less than 24 hours at 90%; and those held less than an hour at 95%.

High Frequency trading generates as much as 70% of the trading on Wall Street; one of these outfits is reported to make 20% of the daily trades. When you add in the daytraders, there’s not much focused on what should be the primary role of the market, raising capital to support our economy. It’s past time to shut down the Casino and pull down the Jolly Roger. That will take the focus off quarterly returns and allow management to look to long term growth.

As Clear As Mud

Sifting through mounds of media coverage on the Gulf Oil spill for the cause has proven almost as fruitless as watching the Congressional hearing participants play the blame game on who bears responsibility for this disaster. While it’s important to find out just what went wrong with the Deepwater Horizon last month –as it is to minimize the damage– the underlying cause is becoming quite clear. The ethical culture projected at the top by British Petroleum (BP) was not conveyed or perhaps enabled at the operating level. This disconnect becomes obvious in reviewing their operations on another Gulf rig, the Atlantis.

The company hired an independent firm headed by Stanley Sporkin, a former federal judge, to review a whistle-blower's complaints about the BP-owned Atlantis, stationed more than 150 miles south of New Orleans in over 7,000 feet of water. The gist of the complaint is that the Atlantis operated with incomplete and inaccurate engineering documents, which one expert warned could "lead to catastrophic operator error." Sporkin says that the whistle-blower’s allegation "was substantiated, and that's it." We are not talking about a paper here and a paper there. An expert who reviewed thousands of the Atlantis’ documents says that as many as 85% of them were flawed.

Not so according to an Associated Press report. Karen K. Westall, Managing Attorney for BP, says "BP has reviewed the allegations and found them to be unsubstantiated." Adding to the confusion, early this year a BP lawyer advised members of Congress that the company was complying with federal requirements. Furthermore the Atlantis received an award for safe operation from the Minerals and Management Service (MMS), the federal agency that oversees these rigs. Makes you wonder what they call that award, maybe “The MMS So Far, So Good Award.”

It all comes down to this. Ethical behavior ain’t cheap, but it’s a whole lot less expensive than the alternative as BP is discovering. When you’re in a hurry, or someone is pushing to save a buck, it’s too easy to cut a corner, or in this case thousands of corners. BP can talk the talk, but they are far from walking the walk. At this point they need to step full bore into the ethical model. They keep saying they will bear responsibility for all financial loss. That would be a big step in the right direction. It rings a little hollow, however, against the finger pointing they did during the Congressional hearing.

It’s time for BP to decide their future. If they do the right thing, tell their lawyers to “stuff a sock in it” and spread an ethical culture into every corner of their operations, they may be able to recover their reputation. That is an incredibly expensive alternative. Should they choose to stonewall, duck and dodge, the odds are they will destroy what little is left of their reputation and perhaps the company. A much more expensive alternative.

The True Believer

Embattled Goldman Sachs CEO Lloyd Blankfein has been in the media spotlight since he and his associates were sliced and diced on national television during an eleven hour Senate hearing. Blankfein went up to bat last; his underlings took a day long battering before he appeared alone at the end of the day. The Senators peppered him with the same stuff they had used all day and he fed back the same responses. No big surprise. Given the legal challenges Goldman faces, the company can’t be too careful about what they say.

The hand of Mark Fabiani, the so-called Public Relations “Master of Disaster,” can also be seen in the performances displayed by the Goldman cast of characters, especially that of Blankfein. Flash forward over the ensuing weeks and Fabiani really got Goldman’s top-gun in the grove. A humble, forthcoming Lloyd Blankfein conveyed a “Reasonable response for every question image” in the broadcast and print interviews Fabiani set up for him. And there have been plenty.

Blankfein was so omnipresent as to remind one of Dick Orkin’s 1960s radio superhero, Chickenman, “He’s everywhere! He’s everywhere!” From Charlie Rose to Fareed Zakaria, a soft spoken Blankfein has been everywhere with a well rehearsed explanation for every challenge. Frequently his response only obliquely relates to the question. An often increasingly frustrated host is left facing a mild mannered Blankfein in the role of the patient mentor explaining a complex world to a less than gifted underling.

While Fabiani offered him up to all the mainline interview and news broadcasts, the “Master of Disaster” kept him away from satirist Jon Stewart, who had skewered Blankfein and Goldman Sachs repeatedly. While Blankfein seems able to finesse questions from the real news guys, Stewart would make mincemeat of him. The Goldman team was probably afraid Stewart might ask about Goldman’s incestuous relationship with AIG that siphoned a ton of the taxpayer’s money into Goldman’s coffers. If Stewart was out of bounds, fellow Comedy Central star, Stephen Colbert was off the wall in his depiction of Blankfein.

The worst part of all this is that as I reviewed the history and the videos of Blankfein’s ongoing display of gamesmanship, the more I came to understand that the Goldman Sachs CEO believes every word that comes out of his mouth. I didn’t fully understand this until I saw an interview Blankfein gave to Bloomberg television. Under repeated questions about conflict of interest issues, the Goldman executive brought the issue around to the company’s success. In his eyes there can be no conflict if your customers keep giving you their money.

This convoluted view boils down to, “Anything we can get away with is OK!” How can Blankfein possibly believe this? It’s called “Cognitive Dissonance.” A wonderful human trait that leads us to increasingly believe that the path we have chosen is the right path. It frees us of unnecessary doubt. In modest doses it is a life saver. When taken to the extreme that Lloyd Blankfein displays, it is a disaster. Understand, the Goldman Sachs CEO is not alone; thousands of Wall Street types believe they are perfectly free to play games with our economy. And to be paid outrageous sums for gambling with the pensions and savings of hard working people. All the more reason that Mr. Blankfein’s mild mea culpas are not enough and Goldman’s plan to establish an in-house “Business Standards Committee” is laughable. The Master of Disaster probably came up with this scheme to stave off adult supervision. By now we know better. All of this obstructivity can be described with the four letter word that Goldman Sachs sales people used to describe the toxic packages they were peddling, S**t. Some of us might even preface it with “Bull.”

The Goldman SEC Case

The merits of the SEC case against Goldman Sachs aside, the ethical issues are crystal clear. Pushing investments that have a high probability of failure is just plain wrong. Blaming the rating agencies for putting their stamp of approval on these bundles of soon to be worthless mortgages is disingenuous at best.

Given the “pay grade” of those selling these investments wouldn’t you think they would do some due diligence on their value? Instead, those peddling this junk were said to be relying on the idea that real estate prices were going to rise forever.

Even if that dicey concept were true, much of what was in these packages could not stand the light of day. People in houses miles beyond their means; a $14,000 dollar a year farm laborer in a $750,000 house, others all across the country enticed by no money down, no closing costs, low payments for a few months and then wham! a recipe for disaster. Anyone who cared enough to look could see these bundles were a time bomb waiting to explode.

The banks, pension funds and other “sophisticated” types who bought this junk; should they have done their due diligence? You bet. People on all sides of this deal who were being paid hundreds of thousands of dollars, sometimes millions each year should have seen the risk.

Truth is much of this marketplace has nothing to do with investing. It is pure and simple gambling. Those involved didn’t even own the bundles of mortgages; they just bet on their value. It’s like picking out a house you don’t own and betting someone it will burn down. Goldman’s position is that they were just the bookie. The SEC thinks Goldman knew the house on was on fire. Thereon lies the case; fraud or not.

Who cares, other than the little old ladies, retired workers and other pensioners who lost their savings, not to mention the taxpayers worldwide who had to bail Goldman and other banks out when the world economy went south in large part because of these –too big to fail- bank’s gambling problems. In case you are wondering, why banks and others in the wonderful world of stocks, bonds, commodities and such are allowed to gamble in this manner when the rest of us have to go to a casino, there is a reason. When it comes to these securities Wall Street really is a casino, a legal casino.

The Commodity Futures Modernization Act of 2000 along with a 1992 Act overturned reforms enacted following the 1907 bank panic. That turned our financial system noted for its transparency and security into –well– an unregulated casino. So it may very well be that Goldman Sachs –and perhaps other big banks– did nothing illegal. Fleecing the suckers may be perfectly legal. Ethics, however are another matter.

Everyone from the folks who coached the $14,000 a year farm laborer on how to get a loan he could never repay, to the bank that originated the loan, to those who sold and resold it and those who bundled it with a bunch of other bad loans, and finally those in the too-big-to fail banks who acted as bookies or bet the savings of pensioners on these loans, every single individual in that chain was ethically bankrupt.

Let’s move away from the smarmy little characters at the beginning of each of these human tragedies who pushed foolish dreamers into deals that would ruin them. Let’s move up to the six and seven figure folk in their $3,000 outfits who turned these individual travesties into a nightmare.

Take Goldman Sachs forinstance. As a publically traded company under Sarbanes-Oxley (SOX) they are required to offer ethics training to their employees. It would be hard to imagine how anyone involved in this high flying flimflam could have considered any part of it ethical. Let alone how Goldman Sachs’ management could believe they have fulfilled their SOX mandated ethics training obligations.

Pharma, Where Ethics is a No-Brainer

It would be hard to imagine any element of our business community where ethical behavior is more important than healthcare. We aren’t surprised when some smarmy little guy is caught conning folks with some medical scam. What we should not be seeing are the big guys engaging in off-the-chart ethical no-nos. Last week’s announcement that Pharma giant, AstraZeneca would split a half billion dollar fine between Medicare and Medicaid was a stunner.

The company issued the usual “Without admitting any wrongdoing” settlement statement. Right! They are going to cough up that kind of money just for kicks. They were charged with “aggressively” pushing a psychiatric drug, Seroquel, that was FDA approved for schizophrenia and bi-polar disease. A class of drugs with a history of dramatic side effects.

AstraZeneca turned this drug into a cure-all for a host of diseases for old folks, veterans, and even kids. They played down the added weight and diabetes that showed up. Actually they acknowledged these problems to Japanese doctors in 2002, years before they stopped dismissing the same potentially deadly side effects in North America.

It turns out that this half billion is only half of the story. Last fall –October 2009– AstraZeneca paid out a half billion to settle two federal investigations and two whistle-blower lawsuits. That’s a billion dollars in less than a year. And there’s going to be more, there are close to 20,000 lawsuits lined up from folks who took Seroquel and believe they were harmed.

Makes one wonder how they can afford those kinds of payouts – until you look at the sales numbers. Worldwide sales of Seroquel are astronomical; it is the best selling psychiatric drug in the United States. How did AstraZeneca build this blockbuster? Well that’s reason AstraZeneca is in this mess. Basically they talked a lot of docs into prescribing Seroquel for all kinds of stuff that it wasn’t intended to treat. They took advantage of a loophole. Once a drug is approved by the FDA, doctors can prescribe it for anything they wish. Or in this case, anything the drug company can talk them into.

All drug companies push their products on the docs. Anyone who has ever spent time in a doctor’s waiting room has seen the Pharma sales folks. They come breezing in and too often head right back to the doc’s inner sanctum, the place you’ve been waiting hours to access. They are young, very well dressed, and as smart as they are attractive. They have a case full of goodies, samples, literature, pens, notepads - whatever pleases.

However, what AstraZeneca did went way beyond that. Even way beyond their sales people pushing docs to use Seroquel for conditions that it certainly wasn’t intended to treat. Some docs who slid into that rabbit hole were paid to give speeches at posh soirées urging their colleagues to do likewise. These thinly disguised bribes are at the heart of the government’s AstraZeneca settlement.

The whole thing reeks of unethical behavior; unethical behavior on the part of AstraZeneca, unethical behavior on the part of the docs who took the bucks, and unethical behavior on the part of the docs who wrote Seroquel scripts for conditions that it simply was not suited. AstraZeneca should never have allowed it to rise to a legal issue. And by the way, who is looking at the docs who played along.

The Goldna Sachs Saga

“Those who fail to learn from the mistakes of their predecessors are destined to repeat them.”

George Santayana

Marcus Goldman and his family launched their company in 1869, building a reputation highlighted in 1896 with an invitation to join the New York Stock Exchange (NYSE) and in 1906 to manage the initial public offering (IPO) for Sears Roebuck.

A couple decades later the partners launched Goldman Sachs Trading Corporation. It was basically a Ponzi scheme that made tons of money before the bottom fell out in 1929. At that point former office boy, Sidney Weinberg, took the helm and spent a quarter century rebuilding their reputation. In 1956 Goldman Sachs landed the IPO of the century, Ford Motor Company.

Even as Weinberg rebuilt Goldman’s reputation, however, others in the firm lost sight of their role: putting the Capital into Capitalism. Along with much of the banking world, Goldman Sachs moved increasingly into trading, crossing a line long considered a conflict of interest; a world of strange financial products, often with no societal value. They, of course, didn’t see it that way given the astronomical amounts the firm pocketed.

This world rapidly evolved into little more than a gambling den. The virtual Casino on Wall Street had become a reality. The bankers’ political clout (read contributions) generated legislation in 1992 and 2000 exempting derivatives –including their high risk cousins, synthetic derivatives and credit default swaps– from gambling laws.

From there on it was a race to disaster. In 2003 legendary investor Warren Buffett warned that derivatives could become “Financial weapons of mass destruction;” a warning soon to become fact. They became a root cause of the global financial sector collapse.

In the midst of this Goldman Sachs got involved in a smarmy deal. The SEC says they peddled some scummy bundles of mortgage derivatives to pension fund managers, European banks, and other large “sophisticated” investors. Legally the case is said to be on shaky ground. But why would Goldman Sachs (and other banks) ever let it get onto legal ground?

We don’t know if the course they have been following is legal, but it is anything but ethical. Under Sarbanes-Oxley (SOX) publically traded companies are required to offer those in their employ ethics training. It would be hard to imagine how anyone involved in this high flying flimflam could have considered any part of it ethical. Let alone how Goldman Sachs’ management could believe they fulfilled their SOX mandated ethics training obligation.

In a business built on trust and reputation, how could Goldman Sachs forget how long it took Sidney Weinberg to restore their reputation when it tanked in the 1920s? Or a famous quote from their largest shareholder Warren Buffett, “It takes 20 years to build a reputation and five minutes to ruin it.”

Public Safety - A New Cell Phone Era

Mobile telephone service has entered a new phase that is too little recognized, Public Safety. In recent years medical first responders have increasingly relied on mobile telephone technology to provide a connection to emergency room personnel while en route, sirens screaming, to the hospital. Vital signs, EKGs, and other data alert the emergency room physicians and staff, as well as giving them the ability to transmit lifesaving treatment instructions to the EMTs.

Newer mobile telephones are GPS chip equipped. This technology enables more than the special features your service provider would like you to purchase. GPS enabled mobile telephones can be mapped and located within one meter, give or take –a yard for us “metric deniers.” For you privacy types, just turn your phone off if you don’t want anyone to be able to find you.

For the rest of us, think of this: what if your home is on fire, or you are out for a walk, or cycling, or boating and need help? Even if you are barely able to call 911 the medical first responders can find you. In any emergency, mobile telephone GPS technology makes us all safer.

In 1959 when a mobile telephone was installed in my car, it was an oddity. The birth of cellular in the early 1980s dramatically improved the service. A marketing company I owned was hired to help launch this new concept. Our job was to find people who could afford a $3,000 phone for their car and $200-$400 a month to use it. In our wildest dreams none of us every imagined the scene today. Nor could we have imagined its evolution into a public safety necessity.

For reasons that are important only to the geeks among us, the more folks using their mobile phones at any one time, the more cells (tower locations) are needed. The federal government has placed these towers in the same category as any utility. While localities have some say as to their location, in the end they cannot prevent them from popping up where they are needed. Providing service to the users takes priority.

That ruling assumes new importance as cellular mobile telephone service takes on an increasingly important public safety role. The definition of “needed” has changed dramatically. Where once local governments could push tower locations around a mile or so to satisfy their constituents’ concerns, any move that diminishes ideal coverage patterns can no longer be justified or tolerated.

Cellular tower signals have two basic characteristics: they are very weak (good for +/- a mile) and they travel pretty much in a straight line. If they run into any natural or manmade obstacle they are cut off. So even a minor site change can leave an area on the edge of a cell with little or no signal. Not what you want if you are in an ambulance headed for an emergency room. Not what you want if you are walking, hiking, boating, driving, or even alone at home and need help. A weak signal or no signal is now a life or death matter.

Federal law does not permit health issues to enter into tower location considerations. But the myth survives that the RF signal they transmit is a health risk. As I mentioned, cellular signals are very weak. Much weaker, say, than the RF transmissions from radio and TV stations, Ham operators, government and private two-way radio systems and a host of other RF sources. Not to mention Mother Nature, who has bombarded the earth with RF signals since the beginning of time.

Our TV sets and computers give off RF signals. Cellular towers add next to nothing, no matter how close you live to them. There is no indication that individuals who have worked in extremely high RF atmospheres for decades have experienced any health problems. Manmade RF signals have been around for about ninety years. If there were any grounds for concern they would have showed up years ago.

The RF signals from cellular telephone towers have a new role that is life saving, not life threatening. The rules for locating these towers need to be updated. They need to be put in the best available location to provide ideal coverage. Anything that stands in the way of that goal needs to be struck down.

Visual issues can be addressed. Towers disguised as palm or pine trees, massive sculptures, church steeples, bell towers, are all available to mitigate visual damage. That’s the only avenue that should be allowed those opposing what has become a vital public service tool.

Et Tu Toyota?

The Bulldog Reporter
The Journal Of Public Relations

Iconic Automaker's Downfall Offers Tough PR Lessons

February 9, 2010

Reputation Management Rule #1: When something bad—large or small—comes to light relating to your organization, alert the media, put it up on your website, put it out on Twitter and all the other social media; disclose it before an outsider hits you with it. Do not listen to your legal department; do not worry about how it happened, or who is at fault; instantly move to make it right. Do the right thing!

A second iconic organization fell victim to what happens when reputation gets shoved to the back of the bus, or in this case the backseat of perhaps the most admired automobile company in the world, Toyota.

Johnson & Johnson led the dumb response parade. They ignored a foul odor emanating from J&J consumer products ranging from Tylenol to Rolaids and St. Joseph Aspirin. After delaying a recall for a ridiculously long period of time, they came out with the lamest excuse ever. Somehow, a preservative chemical banned in the United States had found its way into their wooden shipping pallets and then through multiple layers of cardboard and plastic and into their products. Even if true, so what! If your products stink, recall them, think of the customer. At least no one seems to have been seriously harmed by the stinky J&J pills. Upset tummies and other intestinal problems seem to be the worst of it.

Not so in Toyota's case. It appears that an uncontrolled acceleration problem resulted in several serious automobile accidents. If the reports are true, people were injured and killed. Back in 2002, when the problem first surfaced, Toyota said it was driver error. More recently, they claimed it was connected to an improperly installed floor mat. It turns out that while they were talking driver error and floor mats, they suspected all along that they had problems with the electronic throttle control system used in a wide range of Toyota models. Now they have been forced to recall millions of cars, shutter factories and advise their dealers to stop selling some of their most popular models.

Let's go back to Rule #1. What if Toyota had jumped on this problem right away? Electronic throttle controls were probably not that widely in use six or seven years ago. It would have cost them a lot of money and thrown a monkey wrench into a promising technology. But it would have preserved their reputation and the trust of their worldwide customer base.

Instead, they now face perhaps the most costly recall in history. One analyst in Japan estimates that this issue will take over—wait for it— "a billion dollars a month off Toyota's bottom line." That, however, is peanuts in comparison to the long-term loss of reputation and trust that Toyota will suffer.

It's crushing to have two great companies stumble; they will pay the price for many years to come. Hopefully, others out there will observe and learn.

Johnson & Johnson Stinks Up Its Reputation

Bulldog Reporter

The Public Relations Journal

February 1, 2010

In 1983, a year after the Tylenol tragedy in Chicago, I was in that city looking forward to hearing the keynote speaker at a communications seminar. His name escapes me but his task a year earlier is burned in my memory. He was a high ranking C-Suite executive from Johnson & Johnson who had led the team from

J&J sent to Chicago to deal with people dying from tainted Tylenol.

By then our discipline and the general public had made J&J's handling of the tragic incident Legend. He opened his remarks describing his feelings. He said he felt ill as his plane descended into O'Hare, as he had the first time he came to deal with the tainted Tylenol issue and every time since. And then he gave us an inside view of the sequence of events from the first report linking Tylenol to the unfolding tragedy. From the beginning management at J&J had acted to protect people. Help those harmed, prevent additional harm, and search for the source.

You’ll note that "Fault" is conspicuous by its absence. J&J did not hesitate to help those damaged, or to suffer massive losses by immediately recalling a product that ultimately was shown to be harmless. Nor did they stop there. When their products returned to the market it was in sophisticated packaging to protect against future efforts to tamper with them. Before the Chicago incident Tylenol enjoyed about a third of the market, more than double its nearest rival. Even though Tylenol was then, as it is now, just a J&J brand name for acetaminophen, a compound with no patent protection, none of its competitors were able to take over its dominant share of market.

A year later when I was reliving the horror story through the eyes of this frontline player, J&J had already been rewarded for its response by a rebound in market share. They were soon back to a third or better of the market; a position now at serious risk. They are facing charges of using kickbacks to a nursing home Pharma provider to push their Alzheimer's drug to unsuspecting old folks. And, of dodging possible contamination reports for nearly two years before issuing the recall of foul smelling products across several J&J lines.

A company as trusted as J&J may come away not much harmed. They may retain their massive market share or most of it. But what if the latter should prove to be the case? How much over the next few years would the loss of a point, or two,, or three,,, cost J&J? And how vulnerable are they now to the slightest misstep?

It's important for them to find out what's causing the foul odor, both in their products and in their marketing practices. However, it is much more important to find out who in their midst is responsible for exposing their reputation to these potentially catastrophic issues. In both cases they need to remember their first duty is to serve and protect the public. Then they need to rid themselves of those who twisted the J&J culture and caused the stink before it permeates the entire organization.

Comes the Revolution

IR Alert
The Journal of Investor Relations

January 21, 2010


CEO Compensation will be in our shareholders' crosshairs this year

Anyone in our discipline who believes that public outrage will end at financial sector bonuses is whistling through the graveyard. Executive compensation will be the next target and our shareholders will hit us hard. Anytime the gap between those at the top of our economic food chain and those further down grows too wide, folks rebel.

Teddy Roosevelt became perhaps the most successful occupant of the White House in the twentieth century riding such a rebellion. The former Rough Rider rode roughshod over arguably the most powerful businessmen in our history.

A trustbuster president and master politician led the first revolution during the last century. Growing in the background even as Teddy spoke softly and carried a big stick was the American Federation of Labor. Labor pioneer Samuel Gompers gathered a group of disparate trade unions together under one banner. His dream laid the foundation for John L. Lewis to leverage his position as head of the Coal Miner's UMWA into the head of the AFL-CIO and a partnership with another Roosevelt, Franklin D. This revolution carried up to World War II and created a major portion of middleclass America during the last half of the twentieth century.

That same time span, however, saw the roots of another revolution-inspiring trend: ballooning salaries at the top of America's corporate structure. At the end of World War II, these executives earned salaries that allowed room for fair compensation to the middle management and those below. In the ensuing decades, however, executive pay scales have grown way out of proportion to those at the other end of the scale.

Depending on whose figures you use, just the last thirty years have seen a huge disparity emerging. In the early 1980s, CEOs were earning about forty times as much as their average hourly employee. Today they are earning ten to twenty times that much; five hundred times as much is common and a thousand times as much is not unheard of.

Not only that, they are paying a smaller percentage of their income in taxes than those at the bottom of the scale. Who says so? Warren Buffett, who issued this challenge in a 2007 interview on NBC television: "I'll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists." So far he has had no takers, because he's right.

What does that mean for us? It means that not just the folks on the street are fed up with executive compensation. The shareholders we face day to day are increasingly going to raise this issue, and what we're hearing this week tied to banking bonuses is just the tip of the iceberg. We need to be ready, and we need to know the numbers, be it for our CEO or the CEOs of our clients. We need to know the ratio of our top folks versus the hourly folks, and yes, we need to know the tax rate they pay and how it compares to those who greet our visitors (and our shareholders) when they walk up to the reception desk.

Then, as trusted advisors, we need to have a heart to heart with our CEOs.