Ethics Central

2012-01-31T16:12:00.000-08:00

The Worm In That Apple

A thorny aspect of business ethics emerges when we examine the outsourcing of work by American companies. Earlier this month (01.21.12) an in-depth piece in The New York Times examined the subject especially as it applies to electronics manufacturing. Apple was the centerpiece of the well-researched and balanced story.

Reaching back a year into early 2011 they reported on a dinner the Silicone Valley élite hosted for President Obama. Each of the top tier executives was asked to bring one question for the President to answer. However, he had a question for Apple icon Steve Jobs: “What would it take to make iPhones in the United States? Why can’t that work come home?” President Obama asked. Jobs’ response was short and to the point: “Those jobs aren’t coming back.”

Surprisingly, the answer has less to do with the cost of labor in China where the iPhone is made and more to do with the availability of workers from those on the assembly lines to engineers who are trained and ready to go to work. China has huge industrial complexes with the technology and personnel available on short notice and that usually makes the difference.

One company dominates this field. Foxconn Technology has dozens of facilities in Asia, Europe, even North and South America. Close to half of the electronics that fill our lives pour out of their factories. You name it, from Amazon to Apple, from Nintendo to Nokia, from Samsung to Sony and almost any other brand name in that game, Foxconn makes it.

One of their complexes in southern China, Foxconn City, is a picture of efficiency and productivity. Nearly a quarter million workers are at its command. Many live in Spartan barracks next to the factories, on call at a few moments’ notice. That’s where the picture becomes a lot less attractive. The workers, most of them young women, often feel trapped in an endless chain of 12-to 15-hour days.

A 2006 story in The London Daily Mail and other more recent sources detail the despair that leads to a high rate of suicide among these workers. A problem that Foxconn deals with by stretching nets between their housing units to prevent the workers from leaping to their death off the roofs of their barracks. The Daily Mail cites a 21-year-old from central China, a worker on an Apple assembly line whose 90-hour weeks paid her less than fifty bucks a month. The Daily Mail points out that allowing for inflation that comes to, “about half the wage weavers earned in Liverpool and Manchester in 1805.”

Ethically where does that leave Apple and all the rest of the big guys who turn to Foxconn and the host of suppliers surrounding its facilities, most with appalling working conditions by our standards? Should we blame Apple? Maybe we should look at those who demand nifty gadgets at unrealistically low prices. Maybe we should look in the mirror. Ponder that ethical enigma the next time you finger the toys in your pockets.

2012-01-24T09:13:00.000-08:00

A Jolly Good Time

A British High Court Room saw the Murdoch media empire humbled as never before last week. It was the first of what’s likely to be many “Pay-Up Days” for Rupert and his minions. After years of denials and reported cover-ups, the Murdochs were passing out cash like Halloween candy. In carefully worded and vetted statements one potential lawsuit after another was settled, tens of thousands, even hundreds of thousands of pounds in many instances, plus legal and court costs of course. Lots of big entertainment names, political types and the occasional ordinary person who got caught up in their mess.

Two very significant factors stood out for us. One was new: News Group News, the umbrella entity for the Murdoch London based newspapers caught up in the hacking scandal, as much as admitted that their senior executives were involved. In a statement the lawyers for the victims said, “News Group News has agreed to compensation being assessed on the basis that senior employees and directors of NGN knew about the wrongdoing and sought to conceal it by deliberately deceiving investigators and destroying evidence.”

While that falls under the usual legal cover, “doesn’t admit nor deny,” it’s pretty clear that “documents relating to the nature and scale of the conspiracy, a cover-up and the destruction of evidence by News Group” in the hands of the victim’s legal counsel, has Murdoch painted into a corner. It’s pretty clear that a culture of deceit is at the core of the Murdoch organization and that it seeps down from the very top staining every corner of his vast domain.

The second thing that popped out for us is not new, but it may be the first time it has emerged in a formal legal setting. Apparently two of Murdoch’s gossip sheets, The News of the World and The Sun, had a field day with details of the back and forth that went on between Jude Law and his ex-wife Sadie Frost. Of special interest to those of us on this side of the pond is that Law had his phone hacked while he was at JFK Airport on Long Island. We had heard that before, but never in a legal setting. It’s important because the laws regarding hacking are very different in America.

The Murdoch Empire is headquartered in the United States. The parent company, News Corp, is a Delaware corporation and fully subject to the laws of the United States. Rupert Murdoch is a United States citizen. The Murdoch Empire is largely in America. Murdoch moved into the US in the early 70s with one newspaper and soon followed up by founding the Star a trashy supermarket tabloid; adding the New York Post, not much above that. Then came television, motion pictures and The Wall Street Journal, most devoted to spewing his sensationalist trademark views of the world.

By hacking Jude Law in the United States, Murdoch has put it all at risk. There will be no carefully vetted settlement in this case. Like the ethically challenged at Enron, Adelphia and others in our recent past, the Murdochs may very well be facing jail time.

2012-01-16T17:01:00.000-08:00

What’s Bugging America

A study by the highly regarded Pew Research Center provides insight into what is bugging Americans. Surprisingly it’s not the national debt, or immigration, which was the major issue in their last study done in 2009. In the Pew survey conducted in early December, income inequality leapt up about 50% from the 2009 study to be seen as America’s greatest source of tension. Two thirds of the respondents see the divide between the super rich and those on down the food chain as our major concern.

It gets more interesting when you look at the breakouts. As you might expect, the minorities, the poor, and the liberals are most likely to see inequality as the major cause of tension, but their scores were not up much from the 2009 study. The big jump came at the upper middle of the income ladder, 71% of those earning from $40,000 to $75,000 pointed to income inequality; that’s up more than 50% from 2009. Even the level of Republicans who see inequality as the number one issue is surprising, more than half, 55%.

More troubling, however, is the growing body of data indicating that opportunity to move up the ladder in the United States is in serious decline. The American Dream no longer tops the world. Canada and most western European nations now offer their citizens a better shot at that dream than we do. Among a number of studies one European study seems most comprehensive. Conducted by a group of scientists, it compares economic mobility across leading nations and we do not come off well. It shows that 40% of Americans born into the bottom 20% of our economy live out their lives there. Compare that to England at 30% and Denmark at 25%. Only 8% rise from the bottom fifth to the top fifth compared to 12% of the Brits and 14% of the Danes.

At the other end of the scale –the top of the economic pile– far more Americans born to wealth remain there than in other nations. Our absence of mobility is a threat to our nation. A threat seen not only by those on the left, but by leading right leaning players, Rick Santorum and Paul Ryan both expressed concern.

Economic inequality and economic mobility are linked at the hip. A tax code that favors the wealthy combined with a dramatic shift in taxing inequality have left those on the bottom and in the middle giving up a greater share of their income to support America. Billionaire Warren Buffett has been pointing to the flaws in our system for several years. We should all find it ludicrous –as he does– that he pays a lower share of his income than the lowest paid employee in his company.

We can’t keep the American Dream alive if we allow inequality to rule. We cannot ask the middle-class and those on the bottom of the economic ladder to devote a greater share of their income to support needed services than we require from the rich. It’s not fair; it’s ethically abhorrent.

2012-01-10T12:29:00.000-08:00

Rupert The Humble

New Year’s Resolutions showed up on Twitter in Rupert Murdoch’s name. At the same time a Twitter stream attributed to his wife Wendi turned out to be a fake. A News Corp spokesperson has confirmed that Rupert –we’d guess with the help of one or more of his minions- is actually tweeting. Not surprisingly it took less than a week for him to pick up more than a hundred thousand followers. That is pretty impressive, until you compare it –as at least one pundit did- to the vast media array at his disposal that regularly spews his views.

Associated Press reports he tweeted resolutions to “try to maintain humility, diet and to stay curious.” Humble is not a term most would apply to the media mogul. Rupert falls more into the overbearing arrogant camp. After the first few days his tweets began to fall into promotional efforts for his stable, especially The Wall Street Journal.

Then he jumped into the Republican primary race, posting, “I can’t resist” and “Good to see Santorum surging in Iowa.” While it’s no surprise that Murdoch is supporting someone on the extreme right, most media executives tend to keep their political views to themselves. While Murdoch had to become an American citizen to own US broadcast properties he still thinks like a Brit, where the media tend to be more involved.

It will be interesting to see if the Murdoch Twitter stream is just a passing fancy, or if they plan to use it as part of a strategy to deal with the very challenging year ahead. The major looming threat to the Murdoch clan comes in the form of the ongoing Leveson Inquiry in London. A number of major players from Murdoch’s Fleet Street organization have been arrested. So far they have been tight lipped and deny any wrongdoing. Worse, Rupert’s son, James, the titular head of much of the empire, seems to be caught up in the phone hacking scandal; an ethical disaster and perhaps a criminal disaster as well.

It will be interesting to see if the tweets from Rupert the Humble take a turn as all this plays out.

2012-01-03T06:53:00.000-08:00

Who Cares What You Think?

Every year we like to kick off the year responding to the remark we so often hear, “Who cares what you think?” Good question and our response is always the same, “Nobody.” A friend of ours once owned the only newspaper and radio station in a small Illinois town. He ran editorials in the paper and personally voiced them on his station. His paper would take one side of an issue and he would dispense the opposite on the radio; he wrote both. He believed a good opinion writer should be able to see both sides of an issue or they shouldn’t be writing opinion.

We are not sure we can follow that ideal in every issue we address. However, we do not write to convince anyone to take up our position. We make every effort to look at both sides. We do the research; often we will have fifteen or twenty pages of research attached to a five-hundred-word OP-ED. However, ethics rarely has two acceptable sides. On the other hand, it isn’t always a simple matter of right and wrong either. Like it or not, the situation can change the ethical call. That doesn’t mean the ends justifies the means, but there are times when one has to think about the impact of hard-line adherence to what seems the right thing at the moment. Or as our friend Saul Alinsky once defined truth, “You don’t have to cross the street to tell someone how ugly they are.”

So if we don’t write to change your mind, or help you make up your mind, and if we don’t expect people to care what we think, why do we write? We write because we feel the issues we raise are important and we want to get you to thinking about them. We want you to sort through the facts. We want you to search the internet, to read and take a position. If you throw a brick every time our OP-EDs turn up on your computer or in print somewhere, that’s fine, at least you are thinking about the issue.

Beware those who write for any other reason.

Beware the manipulators.

2011-12-20T15:01:00.000-08:00

Just in Time for Christmas

As day after day of misery goes by in the lives of the little folks crushed by the financial crisis, one question lies in the back of their minds. Who did this to us? Who’s looking for them and when will they be punished? We have known the answer to the first question for some time. The Wall Street investment banks’ sophisticated (read Crappy) investment packages whipped up a perfect storm.

They sold this Crap (their term not ours) to people who should have known better based largely on stellar ratings from the agencies charged with vetting these investments. The ratings agencies were pushed by their customers (big banks) and did not look – as hard as they should – at the packages.

And it turns out that the bailout bucks we knew about (TARP) were nothing when compared to the zero interest loans the Federal Reserve was handing out to keep the banks afloat, trillions in secret loans. Bloomberg Markets Magazine blew the lid off this program. It was ten times the size of TARP. By far the biggest hunk of these bucks (63% of the daily average) went to the same gang that got us into this mess – six humongous banks.

How did these half-dozen too-big-to-fail banks position themselves to come out of any crisis they might create covered in gold? Over a couple of decades they conned Congress into repealing the laws designed to prevent things like the 2008 crash. They even got “The Fools on the Hill” (AKA the Congress) to exempt banks from State Lottery laws. Who helped this along? Clinton’s Secretary of the Treasury, Robert Rubin, fresh from 26 years and the top job at Goldman Sachs.

When the house of cards collapsed, who came up with the plan to save the banks? Bush Secretary of the Treasury Hank Paulson, fresh from the top job at Goldman Sachs, led the charge to save his comrades. It gets even better; in 2006 Goldman Sachs was able to foresee that the crap was really crappy and likely to crash. Did they sound the alarm? Of course not, that might have interfered with their efforts to sell crap to their customers. Instead they bet it would crash and reaped a huge profit.

What ties this all together? Two of the key players, Rubin and Paulson, both came from Goldman at just the right moment to get rid of the pesky banking laws. So in addition to the efforts of all the banking lobbyists, you might say it was an “Inside Job.”

However, our wait to make those responsible pay may be nearly over. The SEC has charged six former Fanny Mae and Freddy Mac executives. More important, New York State Attorney General Eric Schneiderman and other State AGs are looking at criminal and civil charges. It would be nice to see a few of the arrogant bankers on their way to jail? When you think about it, what they did was harmful than Bernie Madoff’’s scams. “Pants-on-Fire” Goldman CEO, Lloyd Blankfein has another view; bankers, he says, are “doing God’s work.”

2011-12-13T15:01:00.000-08:00

A New Path?

The unemployment rate in the United States dropped precipitously last month (11.11) to 8.6%, the lowest it’s been since the early days of the recession in 2009. The disturbing note, however, is the contributing factor of those “no longer looking for work.” In addition to giving the merchants of gloom something to point to, it raises the issue that we would hope would concern us all. What happened to all those people? They didn’t just fall off the edge of the earth.

If they are still receiving unemployment benefits, they must be near the end of that lifeline. Odds are they have other family members who are still working, and while they may be tightening the family budget, they are not out on the street. In some cases they and perhaps their families are headed for disaster, loss of their car, even their home. That raises an ethical question for those cutting funding to our safety-net programs. How ethical is that effort? Is that the kind of nation we have become? Times are tough, crush the poor.

On the brighter side, maybe those no longer hunting for work have found it, at home: on the computer, in the basement, in the garage. History teaches us that tough times are when new enterprises are likely to be launched. Counterintuitive as it may seem, even comfortably employed individuals will leave their employer during dark times to launch the business they have been thinking about for years. And of course others, who have been thrust into the world of the unemployed unexpectedly, think “What the heck, I might as well give my dream a try.”

A series of articles in the business journal Fast Company got us thinking that there may be more going on in the current episode of lean times. Launching a business is never as easy as it looks, but it’s a whole lot easier today than ever. Depending on where you live, you can get set up with your local governing entity for a few bucks and open a bank account in the business name. Then your major problem is having something to support you and your family until it catches on.

A century ago, your prospects for customers when you opened a shop were those who happened by as they walked down the street, or those who heard that you offered sewing services from your home. These days, with a tad of social network skills the world is your marketplace. You can do business with someone a world away as easily as your next door neighbor. There are services that will connect you and guarantee that you get paid. You can even take credit cards without a major investment in technology.

And some of those with manufacturing skills that seem unwanted in today’s work force are finding that they can use those skills to create things in a world where handcrafted quality is appreciated. From welding to woodwork, handmade goods are in demand. So perhaps those who are no longer looking for work have created their own little corner and are very happy there, thank you very much. And if they do well, they may hire a helper or two. That’s where jobs are created.

British Tabloid Culture

2011-12-06T07:47:00.000-08:00

British Tabloid Culture

There’s a celebrity “A” list from Hugh Grant to JK Rowling parading before Lord Justice Leveson in London. The ongoing Leveson Inquiry is investigating media ethics in Britain centered on the Murdoch phone hacking mess. The celebs, along with lesser known folk, are laying out the damages the phone hacking, celebrity stalking, tabloid press has inflicted on them. Yes, it’s not just the Murdoch papers that employ these pond scum techniques. Nor is the damage limited to the crimp that it puts in the lifestyles of the rich and famous. Much sadder are the tales of everyday folk, most notably the family of murdered schoolgirl Milly Dowler.

In an effort to keep the headlines coming Murdoch’s minions repeatedly emptied the voicemails from Milly’s mobile phone, leading her parents (and the police) to believe that she was alive and picking up the messages. Actually the 13-year-old had been lured into the hands of "predatory" nightclub bouncer Levi Bellfield on her way home from school and lay dead in a field at the end of that day. Bellfield was subsequently charged with the murder of two more young women. Witnesses are laying out stories of inconvenience, embarrassment, and tragedy before Lord Justice Leveson, all brought on by the telephone hacking, police bribing, peeping Tom, high speed chase stalking style of journalism favored by the British tabloids.

The lurid stories gained by these methods dim in shock value to the testimony of one former Murdoch editor, Paul McMullan, once a deputy features editor at The News Of The World. According to published reports, McMullan admitted that all these "worthy tools'” as he called them, were not only routinely used at the paper, they were aggressively urged upon him and his colleagues by their bosses.

McMullan even called out two former Murdoch executives, Andy Coulson and Rebekah Brooks. Coulson was the chief spokesperson for Prime Minister David Cameron by the time the firestorm hit, while Ms. Brooks headed all the Murdock newspaper holdings in Britain. McMullan said they could have been the “heroes” of journalism; instead they became the “scum,” apparently for their failure to take responsibility for the use of the worthy tools at The News Of The World. He also calls Ms. Brooks an “arch-criminal.”

McMullan’s testimony was particularly hard to swallow when he described a culture that not only used these “tools” but believes they are “worthy tools.” He hotly defended a wide range of behaviors that we find ethically repulsive. When asked to define public interest, McMullan replied, “If the public is interested,” adding that if they don’t approve they could stop reading these stories. This culture seems pervasive among British tabloids and within the Murdoch Empire. Unlike McMullan we do not see these “tools” as “worthy,” we see them as disgustingly shameful.

“Round One,” The Banks vs. The Rest of Us

2011-11-29T14:23:00.000-08:00

“Round One,” The Banks vs. The Rest of Us

Within a month Federal District Judge Jed Rakoff has launched what may be the beginning of the end for rapacious behavior on the part of our banking sector. Earlier this month he refused once again to rubberstamp an under-the-table deal the Security and Exchange Commission (SEC) made with a “Too Big To Fail” Bank, this time Citi. Unlike earlier deals that came before him, he is apparently not going to agree to any settlement without all the gory details being revealed.

As you may recall from our 11.15.11 OP-ED, Citi has been charged with fraud. With selling their customers a bundle of crappy investment vehicles while at the same time betting against them. Of course the crappy stuff turned out to be crappy and when they failed, Citi’s customers took a hit somewhere north of $700 million bucks and Citi collected on their bet. Judge Rakoff questioned the settlement -$95 million- and the fact that only one individual was charged with criminal behavior. In an earlier case (Bank of America) Rakoff signed off when the SEC upped the penalty. Two other Federal Judges signed off on similar deals with Goldman Sachs and J.P. Morgan Securities, as many judges have over the years.

After mulling over the Citi deal for a couple weeks, Rakoff took a very different tack. This time he rejected the premise that Citi could walk away with a fine and a promise to never do it again. He wants all the gory details out on the table. A path that drew a snarky headline, “Rakoff Cements Status as Populist Firebrand”, on the American Lawyer Magazine website’s report on his ruling. Basically saying that his failure to play “go along to get along” would end any chance of promotion for the judge. But isn’t that what ethics is all about, doing the right thing without regard for self interest?

An end may be at hand to the age of repeated SEC “Peanuts and a promise” deals for those who pull off massive ripoffs. As Steve Denning noted in a recent Forbes article, What Shall We Do With The Big, Bad Banks, “Over the last 15 years, some 19 large major financial institutions have been found by the SEC to have broken anti-fraud security laws at least 51 times—laws that they agreed ‘never again to breach’. The group of offenders included Citigroup, Bank of America, JPMorgan Chase, UBS, Goldman Sachs, Wachovia, and AIG. In this period, the Securities and Exchange Commission has never once brought a contempt of court citation against any of the banks for repeated offences.”

The leaders of these behemoths, the Lloyd Blankfeins and Jamie Dimons and their minions who hide behind these “Don’t Ask, Don’t Tell” deals with the SEC, may be called to task if it turns out that they were aware of the double dealings underlying the SEC charges. An outcome sure to be cheered by the State Attorney Generals across the country that have been pursuing the culprits who triggered the financial collapse we are enduring; looking for someone to jail.

Wouldn’t that be nice? Three cheers for Judge Jed Rakoff.

What's Fair

2011-11-22T05:33:00.000-08:00

What's Fair

A Bloomberg Businessweek focus on wealth inequality (11.16.11) came up with some stunning conclusions. Using Census numbers –and a wide variety of past and present expert opinions– they point to the existing and growing disparity of wealth in America and conclude that it is bad for our economy. The gridlock we are experiencing leads those who are slipping behind to conclude that they have no hope, that they are at the mercy of the rich. The two ends of the economic ladder slip into bitter blame game positions.

Here’s where this game goes wrong for the rich. Income inequality leads to social instability. That leads to the belief that the system (read Stock Market) is rigged in favor of the ultra rich and you lose as much as a generation of investors. They point to the stock market following the crash in 1929. It took until 1954 for it to regain its pre-depression level, more than a quarter century. One wonders how long an extended downturn of that nature might last if we do not find our way out of the gridlock now engulfing us. Unlike the ‘30s, ‘40s, and ‘50s, in the era of the 401k etc. there are lots of middle class folks with a stake in the stock market these days.

We keep hearing that the rich create jobs. But the research shows that jobs are created by small businesses. Those folks are not the rich; they are what’s left of the middle class. They are looking for loans to grow and hire, but the banks that we all bailed out are not lending to small businesses. Instead they are back in the risky games that got us into this mess. Worse, small businesses are paying the high corporate taxes –not the big guys.

Speaking of taxes, it makes no sense for the poor and middle class to shell out a bigger piece of their income than the rich. Everyone seems to understand this except those in DC who hold to the job creation myth, and of course the rich who haven’t been able to do the math. When you talk to the savvy wealthy folks, you find that they favor a more equitable tax system. They understand that you can’t build a healthy economy on the backs of the poor. The smartest investor on the planet, Warren Buffett, figured it out years ago. No matter how big your slice is, you can’t do well if the pie keeps shrinking.

In the meantime, if the rich are not creating jobs with their wealth, what are they doing with their money? Well, their investments seem focused on commodities, where they speculate and drive up prices on food and oil; thanks for high gas prices. And they are driving the luxury market; if it’s expensive, they’re buying. Even the price of first class air travel – would you believe aircraft fitted with showers and private compartments? After all you have to look sharp when you arrive in some exotic locale. And what’s $15,000 or $20,000 for a plane ride. There are some pretty obvious ethical issues in all this. Too bad they don’t seem to matter much in our world where the Lobbyists rule in DC. How many of them do you think work for the middle class and the poor?

Take Off The Kid Gloves

2011-11-15T08:57:00.000-08:00

Take Off The Kid Gloves

The Securities & Exchange Commission (SEC) ended its fiscal year in September having filed a record number of cases (735), up almost 10% from their pace (677) last year. They collected nearly $3 billion in penalties both years. Meanwhile the annual Johnson Associates’ “Executive Compensation Study” shows an alarming drop in pay for the folks on Wall Street, as much as 20% - 30%. Alarming perhaps to the Wall Street types, but to those who are trying to make ends meet the Wall Street pay scale, that begins at a hundred grand and can escalate into seven or eight figures, still looks really good.

Reuters reports that over the last two years the SEC has removed a management layer and restructured their enforcement division. And, they have created a new whistleblower bounty program alongside other incentives to encourage witnesses to cooperate. Given the two record years they have registered, it must be working.

Or is it? It appears that the SEC is still treading softly with the big banks and the individuals behind the misdeeds (AKA CEOs etc.). A Federal District Judge, Jed Rakoff, doesn’t seem convinced that a proposed settlement with Citibank is tough enough on the bank. Citi is charged with fraud; selling customers crappy financial instruments at the same time the bank was betting they would fail. The very same double dealing that triggered the financial collapse we are enduring.

In a hearing last week Judge Rakoff questioned the SEC on the settlement: $95 million when the investors Citi ripped off lost $700 million. The judge has taken a similar position with several lowball settlements the SEC proposed in the past. Rakoff also questioned why only one individual in this case has been charged with wrongdoing.

We –along with many others, including State Attorney Generals across the country– have been wondering about the SEC slap-on-the-wrist penalty proclivity. A concern the Attorney Generals also direct toward the Justice Department; why has it not zealously prosecuted bankers who triggered the recession? We know who they are and what they did. Instead, after bailing them out we are forced to watch as they go back to the same risky stuff all over again, sure that we will bail them out again when it collapses. All the while taking home eight-figure bucks.

The banks’ reaction to the relatively mild restraints of the Dodd/Frank Act is to pile new fees on their customers. They have grown so accustomed to inflated profits from what are nothing more than risky gambling schemes that when a little of that revenue stream is cut off, they sock it to their customers instead of living lean. In the meantime we have to listen to Jamie Dimon, JPMorgan Chase “Whiner in Chief,” and Goldman Sachs CEO, Lloyd Blankfein (AKA The Artful Dodger) complain. They are so misunderstood and unappreciated after all they do for us, poor babies.

Alan Johnson, managing director of Johnson Associates, the firm that carried out the Wall Street wage study, put the ethical issue very succinctly, “Wall Street executives,” he said, “haven’t gotten the memo at all.”

Not for Sale

2011-11-08T12:02:00.000-08:00

Not for Sale

There are –and always have been– so-called “pay for play” print and broadcast deals. That’s why federal law requires them to be labeled “advertising” or “paid programming”. Unfortunately, there is no such law covering internet content. So it should come as no surprise that web based news sites are being targeted by those looking for a plug for one thing or another.

While we understand legitimate efforts to gain media exposure, when there is money involved the ground rules need to be crystal clear. Apparently, with no legal firewall, some of the slime that inhabits the fringe of every sector of media and marketing will attempt to slip over the ethical wall that protects most all of the world of commerce.

Hamilton Nolan, who writes for the popular blog Gawker, recently received an email from a marketer suggesting an easy way to earn a little extra money. All he had to do was drop in a website link for one of their clients, only –of course– if it “fits naturally in the context of the article.” In a series of emails this solicitation was identified as coming from a so-called “marketing agency” specializing in this kind of placement. Payment offered began at $130 and escalated quickly to $175. Not bad, as Nolan noted, for five seconds’ work.

The “agency” claimed to represent a number of “major” clients, Motorola, Dell, and T-Mobile, all of whom denied any connection. The agency also told Nolan that they had writers taking their bucks from a wide range of top ranked internet sites including The Huffington Post. You can guess Huffington’s response; it was mirrored by the other sites where writers and/or editors were said to be on the “take”.

Who knows how many clients these guys really represent? Or how many writers and/or editors at internet sites have succumbed to this siren call? There is always a certain amount of slime on both sides of the ethical wall. Sadly, one cannot exist without the other.

The Return of the Robber-Barons

2011-11-01T09:09:00.000-07:00

The Return of the Robber-Barons

At the dawn of the 20th century America experienced unprecedented change. The young were moving off the farms into the cities. Steel, rail, and oil giants wrought permanent change; change that created a chasm between the wealthy few and the vast number of Americans struggling far below.

Into this moment stepped Theodore Roosevelt. A brash young President who recognized that a nation so divided could never achieve the greatness that would allow its people to thrive. His trust-busting crusade initiated a series of legal restraints on the robber-barons culminating in the Glass–Steagall Acts of 1932 and 1933. These boundaries, along with labor laws and a variety of safety nets, allowed our free enterprise system –and our people– to thrive and grow.

The loosening of those restraints as the 20^th century faded into the 21st brought a return of the practices they were designed to control. A study of the effect of wide spread deregulation was ordered several years ago by Senators Max Baucus and Charles Grassley, then ranking members of the Senate Finance Committee. The Congressional Budget Office delivered the study just last week. Its findings paint a bleak picture: the middle class is fast shrinking while those on the bottom are sinking farther away from those on the top of the pile.

Over the last few decades the top 1% of Americans enjoyed a 275% jump in their income. The bottom 20% not so much, they gained 18%. Do the math, 275% is over 15 times greater than 18%. The report points to the move from progressive income taxes to payroll taxes, easing the tax burden on those with the 275% gain while increasing the tax rate of those who have seen a measly 18% improvement.

As the giants of industry are quick to point out, our corporate taxes are among the highest in the world. However, since most of them have successfully lobbied their way out of paying taxes at the local, state and federal level, the federal tax rate has little or no effect on the corporate titans. Our hefty corporate rate does hit small businesses – the folks who are struggling to stay afloat in the aftermath of the collapse triggered by the bankers’ reckless gambling.

Since everyone agrees that small businesses create jobs, we find ourselves taxing these job creators, while the Fortune 500 (who rang up a net job loss over the last twenty years) pay little taxes, if any. The banks we bailed out are swimming in profits generated from the same risky games that got us into this mess. Weren’t they were supposed to help small businesses who want to grow and create jobs? What happened to that?

Meanwhile the top 1% (the 275% folks) are investing overseas or gambling on commodities (like oil – boosting gas prices and adding to the woes of the poor) all the while giving luxury marketers like Tiffany’s a boost. Sales in Tiffany’s New York flagship store increased 41% in the second quarter ending in July, up 33% thus far for the year. Tiffany’s stores worldwide are booming as well, thank you.

If you missed the ethical issues in this scenario, read it again.

The Essential Benefit

2011-10-25T09:14:00.000-07:00

The Essential Benefit

We are puzzled by a decision retail giant Wal-Mart announced limiting access to its health insurance programs. Access to healthcare benefits is important to the individuals in our workforce and to society as a whole. Living without coverage is a nightmare experience. The number of Americans who find themselves without health insurance –about 50 million– is shocking.

Two groups dominate this segment of our neighbors.
1) The young: They believe they are immune to serious illness. They often have health insurance available –and they could afford it– but they would rather spend their bucks on something else. For minor issues they visit tax and/or community supported clinics. They pay a few bucks for routine care, leaving the rest of the cost for their treatment to the taxpayers, or those who support these clinics through charitable gifts. If they become seriously ill they often end up with a crushing debt, or bankruptcy. In the end we all pay for it.

2) The working poor: They are not eligible for Medicare, Medicaid, or any of the other government funded programs that provide healthcare benefits for roughly half of all Americans. They worry about their health and try to ignore problems until a condition is really serious. Then it costs a ton to treat, either through the emergency room, or hospitalization. They can’t pay and so the hospitals pass the costs on to all their other patients driving up the cost of healthcare. Once again, we all pay for it.

This is where Wal-Mart, etc. –who employ the young and the working poor– can make a huge difference. Nobody expects any of these companies to pick up the health insurance premiums for these folks, but what they can do is make it available at a fraction of the cost of healthcare coverage in the open market.

When the working poor go direct to the insurers they face premiums far beyond their ability to pay, often three or four times the cost of a group plan offered through an employer. The reason for that hinges foremost on the ability of a company with thousands of employees to negotiate favorable rates. Add to that the much higher costs insurers incur in administering individual policies. A part of this cost –group insurance administration– is borne by the companies. We would guess that’s one of the reasons behind the decision at Wal-Mart to exclude some of their employees.

A short-sighted decision in our view. Access to affordable healthcare insurance is vital; it’s the kind of benefit that stabilizes a workforce. Less employee turnover cuts retraining costs and makes for better customer service, the lifeblood of a retail company. Moreover, taking care of your employees in this fashion says a lot about an employer, it makes people loyal and more productive. Not having to worry about their family’s healthcare costs keeps them focused on their job.

And besides, it’s the right thing to do; Ethics 101.

The Rich get Richer, Redux

2011-10-18T16:01:00.000-07:00

We’ve been reading a Merrill Lynch Global Wealth Management report on High Net Worth Individuals (HNWI). There are a number of metrics to define this group, but most include those who have at least a million bucks to play with. That’s a million+ not counting homes, yachts, private jets, etc. Then there is a subset, Ultra High Net Worth Individuals (UHNWIs), those with 30-50 million in play money. There are about 10 million worldwide in the HNWI playpen; North America has by far the most, over 3 million.

The HNWIs took a hit when the economy collapsed. Not that they had to make any lifestyle changes, but it got their attention. Not to worry, you’ll be happy to hear that this report shows they pretty much recovered from the beating they took — within one year. The Merrill Lynch study was just released but it covers the HNWI world as it was in 2009, just one year after the collapse. At that point the HNWIs were up 18.9% with a total of $39 Trillion in their piggybanks. The subset UHNWIs were up 21.5%. Apparently the Joneses couldn’t quite keep up.

What are they doing with their money? Here’s what Merrill Lynch sees in the research, “By 2011, HNWIs are expected to further reduce investments in their home regions and look to those regions in which growth is expected to be more robust. While HNWIs from the mature economic regions of North America and Europe are expected to continue increasing their allocations to Asia-Pacific in search of higher returns, HNWIs in Europe are also likely to increase their North American holdings to inject stability into their portfolios.”

So Merrill Lynch says the 1% of Americans who have almost all the bucks are going to invest in Asia. Their tax advisors will -of course- have them leave their profits offshore so they aren’t bothered by those pesky IRS types. On the other hand, the HNWIs from Europe will be investing over here; in our Treasury Bonds if they are looking for stability. One way or the other, none of the HNWIs are doing anything for our economy, except maybe for Tiffany & Co. along with all the others in the booming luxury markets.

None of this creates the jobs we need. Small businesses create jobs and there are precious few small business owners in the HNWI class. Most are lucky to take home healthy five figure paychecks and everything they have is in their business. To grow they need help from the banks whose coffers are bulging with bucks (thanks to the tax payers), but they aren’t lending. So the folks who create jobs are stuck, in many cases barely hanging on in a slow economy the banks created.

If the HNWIs think they are immune from the growing discontent rising in America they are mistaken. If they believe they have no responsibility to restore and maintain the safety nets put in place following the Great Depression, they are mistaken. “With great power there must also come great responsibility,” so saith Peter Parker (AKA Spiderman). That is the essence of ethics.

The Bottom Line

2011-10-11T05:50:00.000-07:00

Dog Eat Dog, nothing but the bottom line matters. Surprisingly there are those in business who still buy into this myth. Understand, it works. Goldman Sachs and many of the other Wall Street types come quickly to mind. It is always those who get away with playing dirty and breaking the rules who make the headlines. As the saying goes, “Good News is not News.”

Truth is, from the days of the industrial revolution businesses that treated their stakeholders well– their employees, their customers, their community, their suppliers, and the environment– found that the bottom line took care of itself. Does that mean the good guys always win? Of course not. It does mean they have a better chance of winning. And when they do, they win bigger than those who choose the alternative path.

The problem is documenting this truism. A few years ago a writer and couple of college professors set out to do just that. Their book, Firms of Endearment, showed that those who took care of all their stakeholders returned eight times as much as the Standard and Poors average over the ten years prior to their study. That’s not eight times the worst, that’s eight times the AVERAGE return; that’s the kind of bottom line every company dreams of.

A massive research effort, 10,000 consumers in ten countries, The Cone/Echo 2011 Global Corporate Responsibility Study, shows that consumers not only support those who follow this business model, they will punish businesses that focus solely on the bottom line. The margins surprised the researchers as they did us. Over nine out of ten respondents said that to win their business companies must go beyond the legal requirements and that they need to look at their practices and make sure their overall impact on society as a whole is as positive as possible.

Their number one concern is a company’s efforts to support and expand the economy. Nearly all the respondents (96%) placed economic development at the top of the list they expect companies to strive for. The environment comes in at the same level (96%), followed by human rights, education, health, and poverty, all above -or just below- the ninety percentile mark. That’s pretty dramatic.

And it’s widespread; the study covered a lot of geography: Canada, China, Brazil, France, Germany, India, Japan, Russia, The United Kingdom and The United States. Nations that house almost half the people on the planet and by far the majority of enlightened consumers. Consumers who told the researchers that they would switch brands to be assured of their makers’ devotion to high ethical standards.

Pack that all together and it makes for an overwhelming argument for the ethical business model. It makes sense; who would want to do business with someone or a company that is trying to rip you off? Who wants a company that does not care about you, your community, the air you breathe, the water you drink? Who needs those kind of people? You can no more run a company by focusing on the bottom line, than you can win a ball game by focusing on the scoreboard.

CEO Meltdown

2011-10-04T10:21:00.000-07:00

What is it with these people? The banking class seems to forget how we got into this mess and who is primarily responsible. Wholesale stripping away of the rules of the road –read banking regulations–over the last few decades opened the doors to unbelievable levels of greed.

Now that the rather mild (after the lobbyists beat it down) Dodd-Frank Act is in place, they are whining about too much regulation. In truth that unregulated playground where greed-monger bankers frolicked, it’s still open. They are playing the same game with reckless abandon. While the law says we won’t bail them out again, they know we can not allow “too-big-to-fail” banks to fail.

The mere mention of restraint triggers an explosive response. Take the reports leaked from a meeting of the Financial Stability Forum in Washington. Mark Carney, Governor of the Bank of Canada, endured a hissy fit from JP Morgan Chase Honcho, Jamie Dimon. Dimon found suggested changes to the Basel III banking standards, “anti-American.”

When banks like Chase were fighting for their lives and begging our taxpayers to bail them out, Canada’s banks were fine. Carney’s response to Dimon’s attack was measured: "If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon." Based on sixteen attributes worldwide, 42,000+ respondents to The Reputation Institute's 2011 annual study ranked Canada #1. Is it any wonder the US came in 23^rd – behind even Greece?

It’s not as though JP Morgan Chase is a “Poster Child.” They are mired in a smarmy Jefferson County, Alabama bribery mess where political types have been convicted of pocketing $8 million. Birmingham’s mayor went down for taking $235,000. As part of the settlement, Chase eats $647 million in fees, pays Jefferson County $50 million, plus a $25 million SEC penalty. This does the county little good; it is still drowning in over $3 billion in derivative based financial instruments.

The ethical no-man’s-land JP Morgan Chase seems to inhabit extends to our fighting men and women as well. The law is crystal clear when it comes to mortgage holders and the military. But, Chase may have missed that memo. In just one case, a Marine captain flying F-18 missions overseas suffered an ongoing nightmare. He and his wife did everything right. To their surprise Chase ignored their on-time mortgage payments, began foreclosure proceedings, and set collection agency dogs on them. The captain’s wife was raising their small children on her own, one with health issues, all the while the Chase collection goons are ringing her telephone around the clock.

When Chase finally recognized the string of goof-ups on the military that included the Marine Captain, a mid-level banker apologized. That – is – pathetic! JP Morgan Chase and its spoiled brat CEO, Jamie Dimon, that’s who is “anti-American” in this sad tale.

Murdoch Woes

2011-09-27T13:23:00.000-07:00

It just keeps getting worse for the Murdoch Empire. An empire so vast that it’s hard to grasp the wide flung tentacles that encompass a host of newspaper, television and entertainment entities spread across the planet. Rupert Murdoch’s shadow darkens almost every English speaking nation in the world, from his birthplace in Australia, to Great Britain and of course the United States. They are all rife with Murdoch properties.

Things first began to get out of hand in Great Britain. London’s rough and tumble Fleet Street newspaper world, the world that formed the Murdoch culture has ironically exposed behaviors that may end it all for the clan. A rival newspaper, the Guardian, has unearthed one misdeed after another. Most of the media coverage has focused on the telephone hacking the Murdoch London newspapers seemingly used at every opportunity. That, however, is the least of it.

Murdoch scion, James –who heads (in title if not in fact) much of the family enterprise– testified before Parliament that he knew nothing of any hacking beyond one rogue reporter. When the then editor of the now shuttered News of the World and their legal manager came forth with detailed testimony to the contrary, it left James flopping about like a fish out of water.

Rupert started with a tabloid stable his daddy left him in Australia. He moved on to London while still in his early twenties and much later came to America where he owns a wide array of media from newspapers to motion pictures to television entities. Actually it isn’t “his;” while Murdoch effectively controls News Corp, it is a public company. In fact it is an American company headquartered in New York City.

While fibbing to a parliamentary committee is serious stuff, it is not the worst of the specters looming over the Murdoch Empire. The courts present the most serious threat. News Corp stockholders are lining up to sue. These law suits are serious but not nearly as serious as the gathering storm in Washington. Rupert Murdoch is an American citizen, and News Corp is an American company; both are subject to American laws.

The U.S. Justice Department is looking at bribes paid to London police by News Corp newspapers. Under our Foreign Corrupt Practices Act (FCPA) American companies are not permitted to practice bribery abroad. News Corp is taking this threat very seriously, as well they should. They have hired a flock of lawyers to deal with it, many of them former Department of Justice FCPA experts.

As the noose tightens it’s hard to see any outcome short of the collapse of the Murdoch Empire. An outcome that would seem foreordained in a company run by a man described by one of his executives as, “a man who wants it all, and doesn't understand anybody telling him he can't have it all." That sounds more like a spoiled child than the kind of person we want running the largest media company in the world. While it fits the trashy tabloid culture that spawned Murdoch, a person of character would have grown into a more ethical mode. It seems a waste to have the resources Rupert Murdoch has amassed devoted to the smarmy ends he put them to.

Unexpected Consequences

2011-09-20T06:04:00.000-07:00

Unexpected consequences frequently arise from actions at every level of life. Not in the least when it comes to enacting new legislation. Take the Wall Street Reform & Consumer Protection Act (AKA Dodd–Frank), created in response to the reckless actions of a handful of bankers that triggered the 2008 financial collapse.

(Actually the collapse was triggered by the banking lobbyists’ success in conning a brain dead 1999 Congress into removing one of the last remaining firewalls in the circa 1933 Banking Act (AKA Glass–Steagall). This Act protected us from this kind of nonsense for +/- 70 years; anybody for reinstating Glass–Steagall? Dodd–Frank left the gap opened in 1999 unfilled and the banks are headed full tilt for the same cliff they took us over in 2008. But that’s another subject for another day)

Dodd–Frank will “undermine existing compliance programs” according to its critics–read lobbyists. That pile of bovine excrement has vanished in the light of a study conducted by the SCCE (Society of Corporate Compliance and Ethics).

The SCCE surveyed compliance and ethics professionals on Dodd–Frank. Surprise, they found the exact opposite of the banking lobby fueled fears and expectations. The SCCE found more transparency; companies are making employees more aware of how to react when they come across misdeeds or misbehavior in the workplace, even if it’s your boss. They found compliance programs grown stronger thanks to Dodd–Frank.

The Act has also triggered more ethics training at the management level. Anything that improves ethics in our society is good news. Business ethics is not an oxymoron. Most people strive to do the right thing day in and day out. The impression that nice guys finish last is dead wrong. Study after study shows that –all things being equal– an ethics driven business model will out perform any alternative. Does that mean that dog-eat-dog never wins? Of course not, but even then the good guys will win bigger.

If that’s true, then why do we never hear about it? Simple, good news is no news. We want to hear about the unusual, the dramatic. Same thing with drama, on

stage, television or the movies, if it’s not comedy it’s got to be action. Even in the most famous good guy movie of all time, It’s a Wonderful Life, it took divine intervention to save George Bailey.

Aristotle is quoted* as declaring that Philosophy** led him, “to do without being commanded what others do only from fear of the law” That exactly defines ethics. And while ethics often gets bundled up with compliance, there’s a vast chasm between complying with a rule or law and doing the right thing.

* Supposedly uttered by Aristotle according t0 Laërtius Diogenes, who lived six or seven hundred years after Aristotle (BTW not the lantern dude, Diogenes of Sinope. He also lived six or seven hundred years before Laërtius Diogenes).

** Philosophy, a system of principles for guidance in practical affairs. – Dictionary.com 09.20.11

Crooks?

2011-09-13T15:34:00.000-07:00

Three years after the big banks drove our economy off the cliff we are beginning to call some of the players to task. It’s been no secret that mortgage entities lured people into buying properties they could not afford. They coached them on deceptive practices, like lying about their income and most everything else. These subprime (read unlikely to be repaid) mortgages were gobbled up largely by the big Wall Street banks who demanded more, ever more from these small time con artists.

The banks bundled them into investment instruments called Collateralized Debt Obligations (CDOs). These mortgage packages were blessed with AAA (the very best) ratings by Standard & Poor’s, Fitch Ratings, and Moody’s Investor’s Service. Soon they were being bought and sold all over the world. This charade* carried on until the rotten mortgages in these packages began to collapse.

The agency that oversees Fanny Mae and Freddie Mac (who live on taxpayer dollars) is gearing up to sue a bunch of the big banks for +/- $30 billion in losses (our money). Add to this, lawsuits from various individuals along with AIG – they got suckered into insuring some of the banks against losses from these loans. And the Attorneys General of all 50 states who are in settlement negotiations with a bunch of the big banks. There’s trouble on Wall Street.

As you can imagine, this has triggered a flurry of finger pointing. The banks shrug and point to the rating agencies, ignoring the obvious. The agencies were seriously overmatched by the fast talking bankers. Plus, the banks are among the rating agencies’ best customers. Everybody is pointing to the “sophisticated investors, who knew what they were buying.” Again, maybe overmatched by the fast talking bankers?

This whole dance is ridiculous. The California farm hand earning $14,000 a year had to be conned into buying a $750,000 house, as did many like him who had never heard of a subprime mortgage. The big banks knew what they were buying; they cynically put decent mortgages on top of the losers in the CDOs to make them smell better. Internally they referred to these CDOs as “Crap.” They hustled this “Crap” to their customers; all the while buying insurance to cover the “Crap” they were holding.

When it all fell apart, the taxpayers were forced to bail them out to keep the banking system from collapsing. A generation ago we had the S&L crisis. An avalanche of bad mortgages threw the nation into a recession. The savings banks took a hit, nearly 750 were closed, about a fourth of the national total. The taxpayers took a $90 billion hit – the beginning of the national debt that has been building over the last decade.

There’s a difference between what happened to the peddlers of “Crap” in the last decade and those responsible for the S&L disaster twenty years ago. The S&L flimflammers (AKA crooks) were nailed for racketeering and other crimes. They were fined and in some cases jailed. The flimflammers who triggered the recession we are now suffering through still have their big jobs, big pay checks and bonuses, just as if nothing happened. Meanwhile the poor and the middle class suffer. What’s wrong with this picture?

*Dictionary.com – “Charade” A blatant pretense or deception,

especially something so full of pretense as to be a travesty.

The Rich Get Richer

2011-09-06T14:26:00.000-07:00

The Institute for Policy Studies (IPS) –a left wing think tank– released a startling study on corporate taxes at the federal level. While we have some quibble points, their underlying facts are solid – and alarming. Much has been made of our sky high 35% corporate tax rate. Who pays these taxes? Apparently not the big guys.

Major corporate entities have the accounting and legal resources to find every loophole. They pour money into the pockets of the politicians and into lobbying; looking to avoid taxes. Many large companies put more into lobbyists and their CEO’s paycheck than they pay in taxes. Makes you wonder if CEO stands for Chief Evasion Officer. So if the big guys don’t pay taxes, who does? The little guys, they pay the corporate taxes. The hundreds of billions in corporate taxes pouring into the federal coffers comes mostly from small businesses. As famously put by billionaire Leona Helmsley: "We don't pay taxes. Only the little people pay taxes.”

We have known for years that major corporations create few of the jobs in America. Small businesses create jobs. So our high-end 35% tax on corporations falls on the shoulders of the very people who create the jobs we need to get our economy going again. Taxes, however, aren’t the only thing hindering small businesses from creating jobs. It’s hard to expand and hire if you don’t have the bucks for growth.

So who has the bucks? The banks, the same banks we bailed out with our tax dollars. Are they lending our money to the small businesses to create jobs? No, the banks are back in the business of trading complicated financial instruments –“Derivatives,” “Collateralized Debt Obligations” and such. Then laying bets on which ones will fail. This is the same nonsense that took us off the cliff.

How about the rich, the untouchables getting big tax breaks? Are they investing in small businesses, or maybe in the stock market? No, they’ve taken to trading commodities. Helping to drive up food prices and pushing up the price of oil while the world was awash in oil. That gave us high vacation time gas prices.

All the while consumer spending –the backbone of our economy– is struggling, except at the luxury level. Yachts, $1,495.00 shoes, private jets, $1.650.00 for a jar of facial “Crème,” jewelry, $200,000+ Mercedes, fancy resorts and spas, the rich have lots of bucks to pamper themselves.

All of this is perfectly legal. Most of it enabled by the stripping away of the laws and regulations put in place following the Great Depression. Legal, however, is not necessarily ethical. Therefore, it sometimes takes the hand of the people (read government) to restrain those who won’t do what’s right on their own. Otherwise they run amuck as they are now, pointing to spending on the poor, the old and the defenseless as the cause of the problem.

Rolling the Dice, Again

2011-08-30T12:38:00.000-07:00

Let’s suppose a bunch of organized crime types –unbeknownst to you– put together a scheme to offer odds on whether or not you will pay your mortgage on time each month for the next year. And even though your mortgage is only a few hundred bucks a month, they found high rollers willing to put big money, hundreds of millions, on one side or the other of these bets.

While that’s a little oversimplified, that’s pretty much what happened leading up to the 2008 financial crash when the big banks had folks betting for and against packages of home mortgages. Of course organized crime types would be in big trouble if they did something like that; gambling laws in almost every state make that kind of activity a big no-no. Those laws, however, do not apply to banks, and others engaged in what can laughably be called investing. During recent decades the Federal Government adopted laws exempting this form of gambling.

You would think that after what happened so recently we would have changed those laws. You would be wrong. In fact the lobbyists have managed to block even modest reform. Dodd/Frank would have made some important changes, but it has been hamstrung by opponents who simply cut off funding to implement the reforms.

And the gamblers have turned to the commodity market. Summer, normally a quiet time, has seen an all-time record trading month in July and it looks like August will surpass it. All the exchanges from commodities to stocks are racking up billions of trades every day; some are showing trading increases in the billion range doubling normal volume. From the high-frequency traders who are little more than pirates roaming the capital markets to panicky investors afraid to be skinned by the gamblers, the markets are crazy.

It’s time to set some parameters that will bring the markets back to their purpose, to create capital to support our economy. Banks need to get back to banking and off the trading floor. The exchanges need to focus on their purpose, to serve as a marketplace for capital and business to meet and create growth in our economy. At this point they are too interested in the revenue created by billions of trades and not interested enough in the future of this nation.

We need to reward investors, those who buy and hold stocks. Those in the market for the long haul. They’re the ones who should get the tax breaks. Let’s make capital gains taxes gradually go away the longer you hold an investment. Let’s make the gains reaped by those who buy and sell stocks in a matter of days or hours or a few seconds subject to punishing taxes. This kind of “playing” the market generates no public benefit.

And let’s call those who bet for and against almost anything what they are, gamblers. Let’s take away their “Get out of jail free cards.” Let them suffer the same legal consequences as those running an illegal card game in their basement. It’s the right thing to do.

Our First Amendment??

2011-08-23T08:28:00.000-07:00

Five big tobacco companies,

AKA Merchants of Death, have filed suit against our Food and Drug Administration (FDA). The FDA rolled out a batch of gruesome warning labels –the first new ones in 25 years– and they are due to go on every pack of cigarettes in September. Big tobacco is suing to stop the new labels based on their First Amendment rights.

Their what!

“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

That First Amendment?

We’re talking about beefing up warnings on the sale and use of a drug that kills about a half million people in the United States every year. We don’t see any difference between these labels and the king-sized skull & cross bones on a box of rat poison. The new warnings are certainly more dramatic than the current bland text warnings. If there’s a First Amendment issue in that difference we sure can’t find it.

Before enabling the use of something harmful, even life threatening, one must make an ethical decision. Everything that is legal is not necessarily ethical. It’s easy to rule out certain potentially harmful sectors in our culture, but there is no way to protect against everything. There is, however, no way to rule out tobacco, we know how to protect against this lethal substance. Those who are part of this world are drug dealers pure and simple. Their drug, tobacco, happens to be legal but that doesn’t make it ethical nor any less lethal.

Don’t listen to, “Back when we started we didn’t know.” We knew. A hundred years ago during World War One cigarettes were called “Coffin Nails.” American “Doughboys” sang “If the Fatimas don’t kill you the Camels will.” They knew. R.J. Reynolds knew. He shipped his “Camels” by the millions “Over There” where they were handed out, “Free” to our troops. R.J. was secure in the knowledge that they would get hooked and be forced to buy them by the time they returned home.

Those who have chosen to cross the great ethical divide and take part in this evil enterprise will find a way to justify their action. But for Big Tobacco to challenge a need to warn those who buy cigarettes, that is a new low. Since they can’t ban tobacco, the least the FDA can do is to warn smokers of the devastating outcomes they risk. Seeing the gruesome conditions cigarettes trigger every time they light up may help, especially for those lighting up the first time.

Many of those who have escaped this horrific habit say getting off cigarettes was the hardest thing they ever did. Enduring the physical pain when your body screams for a narcotic, be it heroin or nicotine, is near unbearable. Then there’s a constant craving that lasts sometimes for years. The health risks, Cancer, Emphysema, Heart Disease, they all await that first puff. Not taking that first puff is the easiest way to breathe easy.

Stop Coddling the Super-Rich

2011-08-16T15:39:00.000-07:00

I decided that the tack I was taking this week could wait. I have long been aware of Warren Buffett's belief that our tax structure is unfair. I had no idea how unfair until I read his OP-ED in the New York Times on the subject. For those of you who may have missed it, it is the very essence of an ethical position.
~~~~~~~~~~~~~~~~~~

By WARREN E. BUFFETT

Omaha

Our leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with super-rich for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

Warren E. Buffett is the chairman and chief executive of Berkshire Hathaway.

A History Lesson

2011-08-08T04:10:00.000-07:00

Bainbridge Island is one of the most beautiful locations on earth. Across Puget Sound from Seattle, this lush green landscape saw a memorial wall dedicated early this month marking one of the ugliest moments in our history. In the spring of 1942 US Army troops came to Bainbridge Island, bayonets fixed, to roundup residents of Japanese descent.

They were given less than a week to get together what they could carry and be ready to go they knew not where. Some of the 277 were third generation Americans, their forebearers came to Bainbridge in the 1800s. They were the first of roughly 120,000 to be sent off to Internment Camps based solely on their Japanese ancestry. Sixty percent –over 70,000– were American citizens.

An irrational fear that they might help Japan attack the West Coast was at the root of this massive injustice. Apparently fueled by the racist paranoia of the military commander tasked with guarding the Coast, the internment (AKA imprisonment) was endorsed by his superiors –including President Roosevelt.

Oddly, in Hawaii where there were a lot more Japanese, the military commander steadfastly refused to consider any such measure. When he was ordered to remove those of Japanese descent from one sensitive region, he simply refused. After the war we learned that Japan had considered invading Hawaii following their successful 1941 attack but abandoned that plan. Japan had no plan to invade the West Coast.

Meanwhile our treatment of those related to Nazi Germany was very different. Our Ambassador to Great Britain, Joseph Kennedy, repeatedly attempted to set up a meeting with Adolph Hitler, whom he admired. When his public remarks became overly outrageous he was recalled. Henry Ford and Charles Lindberg among other prominent Americans were also seen as Nazi sympathizers.

The German American Bund –one of several Nazi leaning groups made up of Americans of German descent– openly displayed their support for the Fatherland. Bund parades in full Nazi uniforms carrying Swastika emblazed banners were seen on the streets all across America.

In February of 1939 a huge Bund rally was held in Madison Square Garden; in October the Bund paraded on 86^th Street in New York. Most Americans of German heritage were appalled by those who supported the Bund, however, no one suggested setting up interment camps even for those with a picture of the Führer on their mantelpiece. These movements died out soon after Germany declared war on the United States.

The errors we made in the 1940s, should give us pause. Muslim Americans were as horrified by the 9/11 attack as any of us. Here was a fringe group committing mass murder in the name of their faith. The blanket opposition to Muslim Americans today is as mindless as the internment Camps of WW2. As we mark the 10^th year since the attack on the twin towers let us remember Bainbridge Island and rededicate ourselves to the rights of all Americans.

How Low Can You Go?

2011-08-02T07:14:00.000-07:00

Just when you begin to think that the Murdoch Empire’s Limbo demonstration could not lower the bar any further, another disclosure adds to their record setting performances. We’ve known about their hacking into the mobile phone of murdered teen Milly Dowler in 2002. Rupert Murdoch himself made a very public apology for that one.

Now the London Coppers have told Sara Payne -who’s eight-year-old was murdered two years earlier in 2000- that her mobile was hacked by a private detective in the employ of Murdoch’s News Corp. And guess where Sara got that telephone? It was a gift from the sympathetic and ever-so-friendly then editor of The News of the World, Rebekah Brooks. The same woman who went on to head all of Murdoch’s British newspaper operations. The same woman who resigned a hair's-breadth before she was arrested. So we are left to ask, where did the private eye get Sara’s number? Is it possible that Ms. Rebekah knew nothing of all of this? Right!

Nasty business, smarmy, but maybe no laws were broken. Maybe. Leave the law breaking bit to new disclosures of a four-year News Corp cover-up. It turns out that an investigation in 2007 by a committee of the British Parliament triggered by a phone hacking guilty plea from a News Corp reporter did not get the whole story. News Corp saw to it that important disclosures were left out.

Murdoch’s minions had their law firm, Harbottle & Lewis, review a couple thousand emails looking “only” for any involvement by the reporter’s editors in his efforts to hack the mobile phones of the Royal Family. After much back and forth about its content, the prestigious law firm dispatched a one-paragraph letter saying they had found no evidence of any higher-up’s involvement in the hacking and the Committee was satisfied.

Now it turns out that while there may have been nothing in the emails to show that the phone hacking went above this one reporter, there were instances –lots of instances– indicating that the reporter was routinely paying police officers to provide inside information. In one instance he asked for a thousand pounds (about two grand US) to buy a stolen copy of the Royal Family’s private phone directory from a police officer.

A review of funds used by News Corp reporters shows receipts covering payments to police officers that round out to about a half billion in US funds over several years. Jon Chapman, a News Corp lawyer at the time, says that he did not realize that slipping payoffs to police officers was illegal. How could he? After all he is not a criminal lawyer and he must have missed that bit about bribing police when he was in law school. Apparently News Corp wouldn’t allow Harbottle & Lewis to go there. Since they were unwilling to flat out say they had found nothing incriminating, they kept their response narrowly parsed to cover only the level of knowledge related to the phone hacking. And the friendly Investigative Committee bought it.

In the meantime, Rupert Murdock stands steadfast that he knew nothing of any of this; reminiscent of Sergeant Schultz in the CBS Sitcom, “Hogan’s Heroes”. While Murdoch may yet escape any personal responsibility, the culture and views he holds dear are indelibly stamped on every aspect of his worldwide organization. It is hard to imagine that these unsavory and perhaps illegal, ongoing tactics do not reflect News Corp’s founder.

Surely, You Jest?

2011-07-26T15:13:00.000-07:00

High-frequency traders account for between 60% and 80% of the couple billion trades on the NY Stock Exchange every day. They are also deep into commodities and other markets. Using computers and sophisticated algorithms these modern-day “Highwaymen” ride the capital market highways and byways, ducking in and out in nanoseconds to pick up a couple pennies here and there.

And they gallop alongside large institutional block-traders pushing the price up on the block, cashing in when it executes. The “Highwaymen” are long gone with their profits when the pricing drops. The institutional trader (read- Grandma & Grandpa’s pension fund) is left holding an over-priced stock paid for with the hard earned savings of their pensioners. While it isn’t always the old folks who suffer, at the end of the day the high-frequency traders, day-traders, and other bottom feeders have pumped up the prices paid by regular investors-- the “losers,” as those who game the market call them.

None of this has anything to do with the stated purpose of the markets, putting funds into the hands of business, funds to create jobs. The high-frequency folks, however, are emerging into the daylight. They showed up first on “K” Street doling out hundreds of thousands of dollars to candidates and lobbyists. Well north of a million and a quarter last year according to published reports. Big bucks, but well within their means, given the six billion they are reported to have skimmed off the markets last year.

The high-frequency folks have also laid claim to a positive impact on the market. They feel they’ve made it more competitive and lowered trading fees. They have to be joking. Experts argue that by using their speed to duck in and out of the market, they have taken the edge off competition and destabilized the market. And it seems much more likely that trading fees have been driven down by online trading and the brokerage houses featuring low fees.

None of the fun-and-games trading schemes that have emerged since the markets were opened up to pure gambling plays have anything to do with providing the capital American business needs to create jobs. Laws exempting traders from gambling laws and allowing banks to wander out of their traditional role created this mess, and triggered the economic collapse we are still staggering from.

Restoring sanity to this sector is no big secret. Repeal the gambling exemptions, and set up tax rules that will encourage capital development. Start with a 95% tax on gains from investments held less than a day, 80% on those held less than a week, 60% on those held less than a month, and so on until those held more than a decade are tax free. Let’s take our capital markets out of the hands of the Highwaymen and their ilk and return it to “Investors” and the companies they own. Let’s focus on what’s best for our people in the long term, not the next quarter. Let’s put the market to work providing capital for our economy and jobs for our people.

It’s the Culture, Stupid!

2011-07-13T13:02:00.000-07:00

The Murdock media feeding frenzy continues unabated. And it may be just beginning. One defining aspect helps explain much. The nature of the media across the pond is different from that in the United States. Great Britain –and most of what’s referred to as the British Commonwealth– are subject to some form of the “Official Secrets Act.”

For all intents and purposes, these laws put all government activity and government folks (those elected, the bureaucracy, etc.) –so far as what they are doing on the job– pretty much out of bounds, safe from pesky reporters. There could have been no Watergate, no Pentagon papers had we suffered under these laws in the United States.

Media subject to these restrictions are reduced to a frantic effort to be the first to reveal any trace of scandal or other bit on the personal level that they can dig up –by hook or by crook as it now turns out. The kind of stuff we largely leave to the supermarket tabloids such as the National Star, one of Murdock’s first purchases in the United States.

The scion of an Australian publisher, Rupert Murdock was still in his early twenties when he landed in the dog-eat-dog culture of Fleet Street where London’s newspapers reside. The young Murdock inhaled it, savored it, embraced it, and made it his own; embarking on a lifetime culture of journalism as a competitive calling.

As he expanded his Empire across the globe Murdock acquired a wide range of US media: motion pictures, television, newspapers and news services. He was forced to become a US citizen –a prerequisite to the ownership of broadcast entities here– but his heart, his soul, the culture of his News Corp remains on Fleet Street.

No one has suggested that Murdock personally hacked into (among thousands of others) the mobile telephone of a missing youngster, or bribed police and other public officials. However, the culture he has projected since founding his organization may have driven dozens of his employees to engage in these repulsive practices over many years. “Get it first” morphed into “Get it anyway you can”. There are now suggestions that News Corp hacking efforts extended to the mobile phones of families of 9/11 victims in America.

These disclosures couldn’t have come at a worse time for Murdock. First his crown jewel, The News of the World, the leading tabloid in Great Britain, went under the bus in an attempt to save his bid for the 61% of British Sky Broadcasting (BSkyB) that his company does not already own. The enormously popular and profitable satellite service dominates television in Great Britain and Ireland. Until the scandals surfaced, it looked like British government approval of the deal was a slam-dunk. Now Murdock has been forced to drop that effort and his current 39% ownership may be in jeopardy.

Faced with government investigations and legislative hearings in Great Britain and the United States, Murdock’s Media Empire –the second largest on the planet– may suffer more losses. None could be more welcome than an end to a culture that has soured and revealed an evil side.

Cooking the Books

2011-07-05T07:45:00.000-07:00

From the time our forbearers first began burrowing into the ground in pursuit of the earth’s treasures, danger has been their companion. Over time the price in human terms that society is prepared to pay has contracted, hence the protection extended miners by State and Federal Laws. That protection, however, is only as good as those who enforce the laws, those who work in the mines, and those who manage them are willing to make it.

When that will to obey and enforce the law is diminished, we see the kind of horrific disaster that occurred a little over a year ago at the Massey Energy Upper Big Branch mine in West Virginia. Twenty-nine of thirty-one miners working a thousand feet underground died at 3:27 PM, April 5^th, 2010, in what investigators now say was a preventable explosion caused by a coal dust buildup.

Hundreds of State & Federal investigators looked at the evidence, interviewed the better part of a thousand individuals –save eighteen executives who took the Fifth– and poured through tens of thousands of documents. It was the document bit that exposed the disgusting culture of deceit and intimidation that was Massey’s business model.

The investigators found that Massey maintained two sets of books; one –a no problems version– for the inspectors when they showed up and another with the real conditions in the mine. All this was against the law of course, a felony in fact, perhaps the motivation for most of the top guys taking the Fifth. Even with these devious practices, in the year before the blast the mine received more orders to shut down unsafe areas than any other coal mine in the United States, so the authorities knew.

There’s lots of blame to go around. What about the workers? Decent paychecks are hard to come by in Appalachia. The culture at Massey seems to have discouraged anybody blowing the whistle. Fear, raw fear that they would lose their jobs kept the workers in line. Two low-level supervisors have been indicted for lying to the Feds after the disaster. Good soldiers taking the hit, still trying to hide the truth.

On top of this dysfunctional organization stood Don Blankenship, CEO. Known for pouring millions into political races, Blankenship comes across in pre-disaster YouTube videos as a garden variety schoolyard bully, blustering and smirking. Of course, as the tragedy unfolded, to the best of his ability Blankenship became Mr. Compassionate Father Figure, as he crafted an explanation for the explosion as phony the proverbial three-dollar bill.

Within eight months Blankenship had sold the company and walked with a huge paycheck by Wall Street standards let alone Appalachia. He’s likely to face Federal and State charges, not to mention civil suits launched by the families of the victims. While the new owners of the company are known to be more responsible, the scars left from the Blankenship era will remain. Justice -if it comes- may help, but it will not heal the evil that was done at Massey.

Not today!

2011-06-28T08:13:00.000-07:00

No rant today. Today we celebrate 25 magical years since I convinced the Lady Carolyn to marry me. You should all be as happy as we are.

How Much Is Enough

2011-06-21T13:42:00.000-07:00

Apparently it’s all in how you look at it. According to a Governance Metrics International (GMI) study, on average CEO pay levels jumped 28% in 2010. And it gets worse. At the top, CEOs of “S&P 500” companies saw their income jump 94.2%. CEOs of “S&P Midcap” companies did even better; they got an average 123.5% boost in 2010.

At about the same time the GMI study was released, an article posted on CFO.com whined, “Ghost of Enron Wreaks New Havoc on Exec Pay.” Written by an “Executive Compensation” Attorney, the piece goes on for several paragraphs about how certain tax dodges that were changed post-Enron are now resulting in those at the top of the pile being forced to pay more taxes. Poor babies!

The growing gap between the rich and the poor in America raises the ethical question, how much is enough? There is not a speck of evidence that these outrageous executive compensation levels create great leaders; quite the contrary in fact. Nearly a decade ago best selling author and business consultant, Jim Collins, addressed that subject in a USA Today OP-ED. His company found, “In a five-year study, after 112 separate analyses looking for a strong link between executive compensation and corporate results, we found no pattern whatsoever. If you have the right people, they will do everything in their power to make the company great.”

Take away? It’s the people, not the paycheck. Should executives be well compensated? Of course. But this out-of-control “Carpet Land” battle to take home the most bucks is insane. In way too many cases it is taking the focus away from leading the company and turning it to leading the pay scale.

A few decades ago CEOs earned about 40 times as much as the lowest paid employee in the company they headed; today 1000 times is not uncommon. So how did executive pay rocket out of control? Greed. Ego driven greed enabled by corporate directors who allowed it to happen; directors too often chosen by the CEO. These CEOs then conned them into hiring Compensation Consultants who –knowing which side their bread is buttered on– make sure they convince these compliant directors that they must boost executive compensation. And so a destructive cycle drives the bucks up, up and away.

Hopefully the stockholders will shake off this compensation culture, boot the consultants and others that drive this destructive practice and reign in executive compensation. After all, a stable society is built on a content middle class, an endangered species these days.

These top-dogs will still be able to afford the luxury goods that are flying off the shelves across America today, while those down the food chain worry about the basics. And maybe if the greedy don’t have quite so much extra cash lying around, they will stop speculating in oil and driving up the price of gasoline. That would be nice and it might just simmer down the growing discontent with life in these United States. How much is enough? Enough is Enough!

Whose Money Is It Anyway?

2011-06-14T06:44:00.000-07:00

Occasionally we get to see the folks on Wall Street actually engaged in the job we expect them to carry out, creating capital. All of the other nonsense that takes up most of their time –trading bogus investment instruments, pawning them off on unsuspecting clients and then laying bets that they will fail– are not interrupted, of course, but some social good does bubble up to the surface of the slime pit in lower Manhattan from time to time.

Initial Public Offerings (IPOs) are perhaps the most visible benefit provided by the monster (in all defining aspects of that word) banks like Morgan Stanley, Goldman Sachs and the three or four other names we have become painfully aware of since they sent us crashing into a recession in 2008. They gleefully took our money to forestall a world-wide economic collapse. And while we are slowly climbing out of the crater they left us in, they are doing very well thank you, making money hand over fist.

Actually they are doing exactly what they were doing before, the same things that dumped us into the sewer. We thought our money was supposed to help small businesses and other job creating stuff. But that’s hard and it’s so much easier to succumb to their gambling habit of old. That’s what some folks see even creeping into the IPOs that are beginning to turn up again on Wall Street.

Merrill Lynch and Morgan Stanley were hired by LinkedIn, the B2B social media site, to take the company public. The banks’ role was to evaluate LinkedIn and judge what the market would pay; their figure was $45.00 each for the just under eight million shares in the offering. That netted LinkedIn about $350 million, a healthy infusion of capital. However, the $45.00 turned out to be way low; by the end of the first day the stock had rocketed up 110%. In fact the minute it went on the market it jumped over 80%. So the investment bank’s customers and a few others bought low and probably sold high, doubling their money in one day. Money that some believe should have gone to LinkedIn.

It’s easy to tag Merrill & Morgan as the bad guys. With their fingers on the pulse of the market they should have known the run-up would be huge. On the other hand, LinkedIn was the first of the social media companies to go public. With a yet-to-be proven business model that only pushed $16 million to its bottom line last year, LinkedIn was hardly a slam-dunk to rocket into Wall Street Stardom. When you take into account that the Street still has the dot.com bubble in its rear view mirror, the $45 price doesn’t look so bad. Had the banks overpriced the shares and seen them plummet when they hit the market, the legal beagles in the banks would have been busy for years defending a storm of lawsuits.

There is an alternative, an auction that allows the investors, the market, to set the price. While that description is a bit too simple, the auction model IPO seems a better path. It doesn’t take the banks out of the process completely, but it does give the company a lot more control over who gains from the offering. Take away for the other IPOs in the wings? An auction will put more of your money in your pocket.

Too Big to Jail?

2011-06-07T04:57:00.000-07:00

When a covey of executives from Goldman Sachs appeared before the Senate Permanent Investigations Subcommittee in Washington, they first stood up and swore to tell the “Truth, etc., etc.” When the committee’s 650-page report was released, it seemed pretty clear that they did not tell any part of the truth let alone the whole truth. Already under attack by the S.E.C., Goldman is now facing charges from multiple sources.

We are all tired to death of grandstanding members of the Congress and their “Gotcha” hearings. Senator Carl Levin, Chairman of the Permanent Investigations Subcommittee, does not fall into that classification. Levin has a law degree from Harvard and experience as Michigan’s Special Assistant Attorney General. He doesn’t do “Gotcha.”

That said, the appearance of the Goldman Sachs “Carpetland” crew, including CEO Lloyd Blankfein, in front of Levin’s committee pretty much turned into just such an outing. The Senator turned over the results of their investigation to the Justice Department suggesting that they review as to bringing perjury charges. While we claim no legal insight, what Blankfein and his associates said under oath and what they said in internal documents obtained by the Committee are vastly different.

The Justice Department has taken no action. We would assume they are building a case. After all, they are putting baseball legend Roger Clemens on trial for exactly the same offense –lying to the Congress while under oath– with seemingly little more than the word of Clemens’ one time trainer. While lying to the Congress under any circumstances is a bad thing, whether or not a sports figure shot up some performance enhancing drugs is not quite in the same class as involvement in triggering the derailment of our economy.

Meanwhile New York's newly minted state Attorney General, Eric Schneiderman, is charging ahead with an investigation into the role played by several major investment banks –including Goldman Sachs– in triggering the financial collapse. And Manhattan District Attorney Cyrus Vance, Jr. has issued subpoenas to Goldman for records relating to the 2008 crisis.

The New York based prosecutors have a unique tool, the 1921 Martin Act, a state law aimed at curbing financial fraud. Schneiderman and Vance could use the Martin Act along with information gleaned from an S.E.C. and two federal investigations to help build cases against the individuals who created worthless financial instruments and conned buyers into paying top dollar for them.

Many Wall Street lawyers seem to believe that nothing much but some slap-on-the-wrist fines will come of this. They are sure nobody will go to jail or even end up with “Felon” attached to their name. That would be a tragedy; it would do nothing to deter a repeat of the reckless behavior that ran us off the cliff.

After all, if we are going after sports heroes for lying about behavior that resulted in fooling their fans, how can we justify not holding those accountable who appear to have thrown us into a recession that has wracked our nation to its core. What’s good enough for Roger Clemens is good enough for Lloyd Blankfein and the others who appeared before Senator Levin’s committee. We deserve their day in court.

We Have No Mandate to Spin

2011-06-07T04:54:00.000-07:00

Anyone who has ever watched a cop show is familiar with the “Read ‘em their rights” routine. “You have the right to remain silent. Anything you say can and will be used against you in a court of law. You have the right to speak to an attorney, and to have an attorney present during any questioning. If you cannot afford a lawyer, one will be provided for you.”

I don’t see any reference to any right to public relations counsel in there. That’s why I was stunned by a Reuters story outlining the “Dream Team” of lawyers, private eyes, and public relations practitioners Dominique Strauss-Kahn is assembling to defend himself against charges of sexual assault. He is, of course, innocent until proven guilty of these charges; however, at best he has a reputation as an outrageous womanizer. Now I understand -and I agree- that he is entitled to all the lawyers and gumshoes his millions can buy, but why would anyone in the reputation business (that’s us, isn’t it?) want to be associated with Strauss-Kahn or this mess?

Occasionally a long-time client is ensnared in some illegal activity, mostly unjustly, sometimes through stupidity, or an act of a rogue employee. In that case we would want to be on the team, although our counsel would likely be dramatically different from what the Strauss-Kahn team is looking for. Sadly, many who fly the public relations flag are happy to work with anyone and follow whatever agenda the folks with the cash are looking for.

Most communications pros recognize their role as a “Canary in the Coal Mine,” on guard to sniff out the slightest hint of reputation damaging activity and roadblock it before it can tarnish our employer or client. However, there are a minority of spin-doctors and worse who bring shame on all the good guys. Unfortunately, a few of the largest firms in the business fall into the latter group.

One of our professional organizations, the PRSA, has the good work it does diminished by its toothless ethics code. They enable the pond-scum that clings to us all to brazenly fly the PRSA flag and puff themselves up showing-off their PRSA issued credentials. Meanwhile the rest of us have to share the same tent and put up with the stench.

What we have in this situation is a 32-year-old widow, struggling to support her daughter on a hotel maid’s income, stacked up against all the guns a multimillionaire big shot can bring to play against her. It’s already started; they’ve put out the word that she lives in an apartment complex reserved for HIV/AIDS folk. Score one for the Strauss-Kahn Dream Team; it’s just the first salvo in the Dream Team’s efforts to demonize this young woman.

Of course no one mentions that she is from West Africa and was granted asylum in the United States; facts that explain the HIV/AIDS issue quite nicely. But still, what chance does she have? At the end of the day, if they are successful in this assault on the assaulted, all those who toil where they might encounter the mighty will be afraid to report future assaults.

Wouldn’t it be nice if one of our discipline’s heavyweights signed on pro bono to act as a truth squad and protect this woman in the media? Wouldn’t they have fun crossing swords with the best that Strauss-Kahn can throw at her?

Don’t Mess With the Little Folk

2011-05-31T04:41:00.000-07:00

Urban Outfitters operates a couple hundred retail outlets worldwide offering a range of kitcehy goods from housewares to shoes to clothing and more, under six brand names. Their appeal is to teens and twenty-somethings striving to be “Hip,” whatever that means these days. It is a remarkable success story launched by Richard Hayne (now worth $1.8 billion) in 1970 with a single store on the campus of the University of Pennsylvania.

According to a piece in the Huffington Post and other sources, Urban Outfitters is caught up in an intellectual property dustup with Stevie Koerner, a Chicago based designer selling her jewelry online. She has a line of handmade silver pendants, many in the shape of some of the 50 states, a few countries and several continents. They all have a heart cut out; she calls these her “World/United States of Love” line.

So one day a design similar to her New York State pendant shows up in an Urban Outfitters’ store. Not cool, thinks Stevie, but not much I can do about it. She tweets a complaint with her sad tale and soon a “Boycott Urban Outfitters” movement begins. Before long Twitter is trending heavy with the message and it goes viral worldwide. Unconfirmed reports indicate that Urban Outfitters pulled their version from the stores tout de suite.

This is not the first instance of a ripoff design showing up in Urban Outfitters’ stores. A year ago The Brooklyn Paper and The Village Voice ran stories about similar design ripoffs involving Urban Outfitters. The issue has not escaped Urban Outfitters; reportedly they are now asking suppliers if their designs have been “inspired” by others. Given Ms. Koerner’s recent experience that message hasn’t done much to cure the problem. Perhaps a plainspoken, “If we find that you ripped this design off from someone, we will make you eat it and you will never sell us another dime’s worth of anything” might do the trick.

Getting the ripoff of Ms. Koerner’s design out of Urban Outfitters is apparently just the beginning of a reversal in her fortune. A note on her website, www.IMakeShinyThings.com tells it all: “Thank you SO much for the support everyone! Orders will take a bit longer due to the overwhelming response to Urban Outfitters! Please give me 3-4 weeks to create and ship your items! Xo.” Seems that taking on the giant retailer has raised her profile and business is booming. Good for her!

In Tom Friedman’s Flat World the lesson for Urban Outfitters and others in a similar position –is– don’t mess with the little folk; they can organize an army of supporters and even make billionaires back down. The lesson for the little folk like Stevie Koerner –is– don’t take it lying down; use Twitter and all the social media to go after anyone who has wronged you. The message for the rest of us –is– it is a new day, a brighter, nicer, kinder, more ethical day.

WhisperGate

2011-05-24T08:18:00.000-07:00

Things don’t sink much lower than having the guardians of reputation forgetting that reputation is their sole reason for existence. Despite what some believe, the vast majority of public relations practitioners are not a bunch of smarmy spin doctors. They value nothing more than their ability to be the “Canary in the Coal Mine,” sniffing out the slightest hint of an action that might damage the reputation of their company or their client.

That’s what makes a blatant attack on Google engineered and carried out by PR giant Burson-Marsteller on behalf of Facebook so mindboggling. Tagged “WhisperGate” by the media –perhaps because of its resemblance to a nasty grade school rumor– it’s hard to understand how anyone thought this was a good idea. The fact that two guys who recently moved into the PR world from fairly senior positions in journalism were badmouthing Google to their contacts in the media makes it even harder to fathom.

What level of hubris made them think they could carry off this kind of nonsense? What journalist or ex-journalist would fail to see this going public and viral in the blink of an eye; as it did? Their phone calls were stupid; pushing their garbage in emails was insane. How long did they think it would take for someone to forward their own words to the world? Who did they think they were?

Of course we have no way of knowing how this all came about, or whose idea it was in the first place. We are not likely to discover how many others –alongside, or up the food chain– were involved. But it does lead us to take a look at Burson-Marsteller. A quick perusal of their history and website leaves one less than impressed with their ethical grounding. To their credit they swore off tobacco last year (2010) after shilling for Philip Morris and other industry players for years. Among other things, they set up what were made to look like independent scientific entities to cast doubt on the dangers of smoking.

They lay claim to crisis management credentials springing from the 1982 Tylenol tragedy in Chicago. In a carefully parsed paragraph they say, “Burson-Marsteller worked closely with Johnson & Johnson.” To our knowledge all the smarts that have become the gold standard for dealing with this kind of catastrophic happening came solely from J&J. Burson-Marsteller certainly played no part in setting the course J&J chose.

The Burson-Marsteller Google attack delivered a black eye to every public relations practitioner, the good and the bad. Sadly, the good guys have no way to distance themselves from the smarmy elements in their discipline. As Warren Buffett famously said, “It takes 20 years to build a reputation and five minutes to ruin it;” in this case for somebody else to ruin it. Burson-Marsteller will shrug off this despicable incident and go on to the next smarmy tactic, seemingly their only regret that they got caught. Meanwhile the good guys will suffer.

Reputation, Reputation, Reputation!

2011-05-11T05:49:00.000-07:00

Harris Interactive rolled out their 12th annual Reputation Quotient® (RQ®) last week (5/2/11). They compiled the views of 30,104 Americans to determine what Harris describes as the “public’s positive perception” of “the 60 most visible companies in the United States.” It is great news that overall these well-known companies have earned a dramatically improved image in this year’s rankings.

Google sits atop the Harris RQ® study for the first time. Certainly no big surprise given the company’s well-known drive to be good guys. It’s no surprise either to find the big banks at the other end of the scale with Goldman Sachs leading the race to the bottom. Actually, Goldman is the major loser across the board. They were buoyed slightly by a few of the study respondents who –can you imagine– saw Goldman as a good place to invest. In the same vein, however, Goldman was rated the very least likely to be recommended; probably by those investors Goldman hammered.

Goldman Sachs’ view from the sewer doubtless makes it hard for them to even see the top of the Harris Sixty. However, in the unlikely event that they should ever glance in that direction with a mind to improving their reputation, they might try practicing Google’s informal motto, “Don’t be evil.”

Actually, more companies than ever are striving and succeeding in bettering their reputation. The number of companies that attained the Harris “Gold Standard” RQ® score of 80 or above increased dramatically to an all-time record high this year. It almost tripled from 6 in 2010 to 16 in 2011. Three factors drove the reputations of these list toppers: transparency, ethics, and performance. This is the first time ever that there have been more than a handful of companies at this level.

There are ten companies that have scored above 75 for the last ten years or more. That kind of consistent reputation maintenance shows a true commitment to doing the right thing. No surprises here: Johnson & Johnson, Coca Cola, 3M, Procter & Gamble, Sony, General Mills, UPS, FedEx, Microsoft & Kraft Foods. The 2011 study has 27 companies with an RQ® above 75, and a 28^th just below that bar. While the number of companies scoring 80 and above grew dramatically, the number of companies that scored 75 or better was only up one this year over last from 26 to 27; about half of the Sixty. The bottom half of the list seems to be made up of those who haven’t gotten the message that, “ethics works.”

In nearly every ranking you are once again looking at the same cast of characters–including the bottom feeders.Leading that gang Goldman Sachs is the least trusted company in the 2011 Harris RQ® Study. Sachs and four other big banks take half of the ten spots in the bottom rank among those respondents who say they would “definitely not” trust these companies. The other five are a dog’s breakfast of oil, chemical, and cable television companies along with one of the biggest insurers on the planet, AIG.

When the Rich are Worried!

2011-05-03T07:13:00.000-07:00

It’s easy to understand the need to encourage economic growth and other socially beneficial outcomes with tax breaks. The problem arises when tax policies have unintended outcomes or provide an unfair advantage to one group over another. And oft-times a tax policy starts out working fine but over time it no longer makes sense.

Take our duties on imported sugar. We have driven the price of sugar in the United States to astronomical levels. In addition to impacting the cost of sweetening one’s “morning-joe,” this has greatly sweetened the lives of a handful of sugar plantation owners. Worse, these tariffs have driven nearly every major candy maker out of the country. Just take a drive up the Queen Elizabeth Way between Fort Erie & Toronto; you can see where much of the candy we enjoy is now made. Oh, and by the way, the Canadians are thrilled with the tens of thousands of jobs we pushed their way.

On a different note, some of the laws enacted over the last +/-100 years (yes, they go back to 1913) intended to encourage oil exploration are no longer in our interest. We are giving the oil companies billions of taxpayer dollars to do what most companies do with their own funds.

High oil and gasoline prices have suddenly focused attention on these perks; especially when the mega oil companies are reporting spectacular profits. Understand, there is nothing illegal about any of this, but there is a clear ethical line that seems to have been left in the rear view mirror. No one questions any business’s right -even their responsibility- to seek out the help of their elected representatives when they need help.

On the other hand, once the need has passed, don’t they have a responsibility to advise their government contacts that they no longer are in need? Instead the oil companies are fighting to keep billions in tax breaks. That’s not need, that’s greed. They are all quick to say that they are not causing the run up in oil prices. In fact everyone connected with oil has disavowed responsibility. Furthermore, there is no shortage of oil; nor has there been any interruption in the supply chain.

Then why is this plentiful resource so expensive? The experts seem to agree that the culprit is speculation. It appears that the super wealthy seized on the unrest in the Middle East and rushed into the commodity markets creating a price tsunami in oil. While the speculators are lining their pockets, they are emptying ours at the gas pumps. Worse, increased fuel costs are hitting us everywhere from the grocery store to the home store and threatening to derail the recovery.

Some of the well intended deregulation efforts and tax policies of the last two decades are whipping through our economy with devastating impact on the little folks. When you have large numbers of the very wealthy calling for an end to tax breaks for the rich – shouldn’t we listen? It isn’t that they don’t want the money; the rich see this imbalance endangering our economy. It’s too bad this viewpoint escapes those in charge of setting tax policy.

It Can’t Be Coincidence

2011-04-26T18:37:00.000-07:00

There’s nothing like getting started early. Last year two days before the 40^th Earth Day celebration (4/20/2010) Oil Giant BP and its Deepwater Horizon team saw their nearly billion dollar investment in the oil rig explode in a truly spectacular way. Since then there has hardly been a day without bad news from this tragedy.

BP, however, has plowed doggedly ahead, demonstrating again and again a level of insensitivity usually seen in a rhinoceros and other thick-skinned earthlings. It didn’t seem that way in the beginning when they focused on winning the hearts and minds of the people impacted by this tragedy. They focused everything on their efforts to shut off the flow of oil into the Gulf of Mexico. Early on they downplayed the volume, as if that would divert attention from the fact that they hadn’t the foggiest idea of how to deal with a massive underwater gusher.

The world waited as they built one Rube Goldberg gadget after another, each sure to shut off or divert the flow. The three main players in this comedy of errors were all the while pointing at each other as the blame-game unfolded. While Deepwater Horizon was drilling for BP, it was owned and operated by an outfit called Transocean that does stuff like that.

After a few months of finger pointing and BP’s CEO and “Whiner in Chief,” Tony Hayward (“I want my life back”), wandering the Gulf beaches, the BP Board booted him. Of course in addition to getting his life back he got the millions in severance the standard reward failed business leaders expect these days.

In an effort to keep up with its annual Earth Day observance, this year (4/20/2011) BP took the blame-game up a notch and sued some of the other players in this tragedy: Transocean (of course), Halliburton (they seem to turn up everywhere) and Cameron International, the company that made the blowout gadget that was supposed to prevent this whole scenario.

The timing of BP’s lawsuits is just too perfect for words. Painting themselves as the “Victim” on the first anniversary of this continuing disaster shows them as the kind of heartless villains that give business a bad name. The minority that besmear the reputations of the great majority of businesses striving for high ethical standards.

All through this horror story BP and their fellow members of the Keystone Kops School of Management have scrambled to keep the focus on anything but the one factor that should be in the fore, especially on the first anniversary of the disaster. The amount of oil leaking, the environmental impact, the impact on the businesses and the beaches, are all important but secondary.

The loss of eleven lives, injuries to another seventeen, that’s what we should be focusing on. That’s the real tragedy. Those families will never get their lives back. To cynically make a move designed to clog the news cycle on the first anniversary of the spill when the focus should have been on those who lost their loved ones is beyond disgusting, it’s just evil.

Doing Time

2011-04-19T10:32:00.000-07:00

There has been endless speculation as to what and or who created the giant economic bubble that burst in 2007. To prevent a global financial meltdown the Bush administration created a huge bailout program for banks and for the colossal insurer AIG. The bailout not only prevented a bad situation from becoming unimaginably worse, it has paid off for the taxpayers as the banks pay back the loans with interest. It appears that the bailout of General Motors and Chrysler may pay off as well.

None of this is very comforting to those who lost their jobs and homes. Those folks and many of the rest of us have been wondering when the high flyers whose reckless behavior triggered all this might get theirs. Perhaps that time has come.

Last week (4/13/11) the Senate Permanent Subcommittee on Investigations released its two-years-in-the-making report “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.” Frankly, given the spineless catering to the special interests over a few modest reforms in the Dodd/Frank Bill, it was hard to imagine that this investigation would amount to much. Surprisingly the members of this Committee were on the job. They were, as the saying goes, “Taking names and kicking butt.”

They paint a detailed picture of the out-of-control atmosphere that saw investment bankers enabling downstream players, mortgage brokers and lenders to spread money across the housing market like there was no tomorrow. All showered with encouragement from the boneheads at Fannie Mae and Freddie Mac, not to mention the rating agencies and –of all people– the head of the Federal Reserve Bank.

People were encouraged –coached if you will– to falsify loan applications. They ended up owning property they could not afford and well, you know the story. These sure-to-fail loans were bundled into increasingly sophisticated –read deceptive– packages and sold as securities by the investment bankers.

It’s not that the bankers didn’t know they were selling crap; they even called it crap inside the trading desks. And they protected themselves; as they sold these so-called toxic securities they bet against them at the same time. Some bankers were more aware than others. Not that any of them had reason to miss what was really going on. Read Michael Lewis’ The Big Short for an inside view.

Prosecutors are poring through the 650-page Senate Report looking for criminal behavior. Many believe that those who triggered the catastrophe are too big to go to jail, just as their organizations were too big to fail. Maybe not. No major public official in NY State ever headed behind bars until last Friday (4/15/11) when former Controller Alan Hevesi was led out of court in cuffs sentenced to one to four years in jail. So maybe there’s hope that we will see some of these arrogant bankers in cuffs on their way to jail.

It would be nice if the members of the Congress would rethink the laws that allowed all this to happen; that still allow Wall Streeters to gamble. Investment bankers need to get back to creating capital for business. That would help in a real way. It would create jobs. Isn’t that what they keep talking about in DC?

First Things First

2011-04-12T14:58:00.000-07:00

While the players are frantically filling the air with chaff, it doesn’t take much to see that investment bankers pay a lot more attention to their own money than they do to those who entrust them with cash to invest. The latest smarmy deal to ooze into public view is a little (just a couple billion bucks) deal that the folks at J.P. Morgan profited from to the tune of a billion or two, while JPM clients took a half-billion dollar hit.

They began sorting it out in Federal Court last week. The investors claim JPM should never have put their bucks into so-called Structured Investment Vehicles (SIVs) issued by an outfit called Sigma. It may very well be that JPM will skate on this one. There seems to be no question that shortly after they plugged the investors’ money into Sigma, JPM could see that Sigma was headed for the rocks. That insight was so clear, JPM bet over $8 billion that Sigma was breathing its last. In return for their eight big ones JPM latched onto Sigma assets that the investors say netted JPM a couple billion.

JPM says Hey, the guys who put our clients into Sigma are in one division of our company (apparently the not too bright division) and the guys who made the other deal (the smart guys) are in another division. Sort of their right hand didn’t know what their left hand was doing. What’s more, they point out, they are required to maintain a “Chinese Wall” between these divisions (they have to keep their right hand behind their back). One division isn’t allowed to talk to the other. That may actually fly in court and JPM may walk on this one.

There are a host of reasons why it won’t fly anywhere else. First off, a lot of people at JPM, including their CEO, knew about both sides of this deal. According to a New York Times story, JPM’s top credit officer pointed out the dilemma only to be told by the bank’s top risk guy, “JPMorgan needed to protect its own position and not worry about what its clients were invested in.”

And in those words lies the key to what’s wrong with the investment bank sector. The same kind of conflict was at the core of the financial collapse that is still inflicting suffering across our land and most of the rest of the planet. Investment Banks (who are fine, completely recovered thank you) should be focused on helping their clients grow capital, not running trading desks with their own bucks. It leads to actions and behaviors that may legally pass muster, but morally and ethically are disgusting. Chinese Walls don’t work, these banks need serious adult supervision.

Problems We Know How to Solve, “Social Security”

2010-10-18T13:02:00.000-07:00

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”

2010-09-18T13:13:00.000-07:00

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

2010-05-18T12:56:00.000-07:00

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

2010-05-13T11:26:00.000-07:00

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

2010-05-11T09:33:00.000-07:00

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

2010-05-03T12:38:00.000-07:00

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

2010-04-27T12:26:00.000-07:00

“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

2010-04-22T08:51:00.000-07:00

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?

2010-02-23T09:08:00.000-08:00

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

2010-02-23T09:03:00.000-08:00

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

2010-02-23T08:59:00.000-08:00

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.

Dear A.I.G., I Quit!

2009-03-25T17:46:00.000-07:00

Poor Jake!

An A.I.G. EVP vented on the New York Times opinion page today (3.25.09). Jake DeSantis is quitting because he has been betrayed by the company that has paid him to make money for them trading “Commodities, Energy, (and) Derivatives” according to his public profile on the professional social media site, LinkedIn. Now A.I.G. (and most of the rest of us) expect him to give back the +/- million buck bonus he was paid earlier this month.

Jake says it’s unfair that A.I.G. is reneging on the deal they promised him. That the division where he labored 10-14 hours a day was not responsible for the “credit swaps” that sent A.I.G. reeling. That he had agreed to work for $1 a year on the belief that he would be rewarded for his effort with the big bonus in question. It was a deal, a “contract in writing,” and he should get to keep his money. So there!

Jake says, “I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.” Jake graduated from M.I.T. S.M., Materials Science in 1992. His thesis? "Chemical Vapor Deposition of Iridium and Rhodium from Organometallic Precursors conducted at the Los Alamos National Laboratory”, where he was an intern.

Bright guy, most of us can’t pronounce that stuff let alone understand what it is about. So where did this scientific genius head? To the Union Bank of Switzerland (UBS) where he worked in “Equity derivatives trading.” Isn’t that what’s being called “toxic” these days? After six years at UBS he moved to A.I.G.. Over the last eleven years Jake made a lot of money.

He says, “I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.”

Hard work? Actually most would argue that commodity and derivative trading during the boom years that Jake has been at it, was a piece of cake. If -as he says- he and his fellows have been overpaid, why did it not occur to him earlier that the retention contracts he and others signed to hang in there and try to salvage the company that has made him rich were wrong? Is he saying that the sailors on a sinking ship should be given a contract assuring them of a big pay check before they agree to help to bail it out? Just because the hole in the bottom of the ship is in the bow doesn’t relieve those in the stern from the need to help save the ship.

That’s what it’s all about, Jake. If the American people -few of whom are as privileged as you- are going to throw billions of their hard earned dollars into saving your company, shouldn’t you be willing to work for a $1 a year and live off the fat of the land (all the money you made in the last eleven years) for a couple years to help save the company that has been so good to you? When little folks all over the country are being asked to give up part of their earnings, why are you whining all the way back to your luxury life?

Where is the moral compass that allows your vindictive plan to be sure that the company that put you where you are and/or the taxpayers who are trying to save the company do not get one cent of the bonus that you are giving up. Where would you be if A.I.G. had been allowed to fail? There would be no bonus. Nor would there be most of the other goodies that assure that you and yours will live comfortably for the rest of your lives.

You stepped off the ethical high ground when it even crossed your mind that you should be paid to do the right thing. Maybe you didn't lose any money for your company but you are a loser Jake!

The Thinker

2009-01-19T15:45:00.000-08:00

Today my friend and colleague Chris Dunstan introduced me to Nick Bostrom. Professor Bostrom's thinking makes my hair ache. He functions at a level that I can only imagine. Yet he lays out his thoughts in verbiage that reads as easy as a summer breeze.

This fable that Chris shared with me is particularly resonant as I progress through the final year of my eighth decade. Enjoy:
http://www.nickbostrom.com/fable/dragon.html

If you are intrigued with his thinking try his website:
http://www.nickbostrom.com/

If you can advance his agenda, you might want to think about it.

The Wages Of Trust

2008-12-15T07:53:00.000-08:00

In less than forty-eight hours two of the most breathtaking ethical breaches in memory popped up in the news. Last Wednesday evening (12/10/08) legendary Wall Streeter Bernard Madoff reportedly met with two of his key executives and told them his money-management business was “all just one big lie;” “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to investors out of the cash received from other investors. In that conversation, Madoff said, “he was ‘finished,’ that he had ‘absolutely nothing.’ ”

The next morning he was arrested by federal agents accused of fraud, a multibillion-dollar scheme — $50 billion by Madoff’s own estimate. Wealthy people found themselves broke; charitable organizations, colleges and universities learned that their endowments were diminished or gone. No one knows how long this elegant con man had been bilking his clients. His firm had been in business almost fifty years.

Over the weekend another jaw dropping story emerged. A high flying lawyer, Marc Dreier, popped up in the news. Seems the wheels have been falling off his practice over the last couple months. Dreier set up his own firm a dozen years ago. He soon had several branch offices and was able to attract lawyers from the top of the talent pool with lavish financial deals. Flashy is the only way to describe the firm and its founder.

Dreier is said to have used his connections with clients to bilk outside investors by issuing phony promissory notes. Is that gutsy or what? To keep the scheme afloat he was paying interest on the notes, perhaps from cash coming in from new investors, another Ponzi scheme. One of his clients began to smell a rat after Dreier showed up with a group of people in their conference room for a meeting that nobody in the company knew about. The light dawned when the company’s CEO got a phone call asking about the firm’s promissory notes Dreier was offering. Fake notes as it turned out.

Earlier this month Dreier showed up in the offices of a public service pension fund, again with a group of potential investors. However, a savvy receptionist cut him off on his way to the conference room and called the cops. Dreier ended up in the slammer. Even then he was still squirming and managed to grab $10 million from a client’s escrow fund. Now it turns out that most of the firm’s escrow funds are empty.

Compared to Bernie Madoff’s huge $50 billion rip-off, Marc Dreier’s deals that add up to a few hundred million seem like peanuts. It’s not the size of their deals that lines these con men up beside each other, it’s the trust relationships they preyed on and betrayed. We are way beyond the ethics realm and into bizarre criminal behavior. However Madoff and Drier played on the vital ingredient of ethical behavior: “trust.” Do their actions damage the vast majority of us who strive for an ethical climate? You bet!

But honest folks should have no fear of these deals. There was good reason to doubt both Madoff and Dreier. In Madoff’s case it was the age old rule, “If it sounds too good to be true, it probably isn’t.” Many in the financial world were onto Madoff years ago and refused to buy into his deals for that very reason; the returns he promised were too good to be true.

In Dreier’s case it was the seller who was out of place. Lawyers have many important roles, but hawking financial instruments is not one of them. It’s pretty safe to say, “Never allow lawyers to be involved in business decisions, especially where money is involved.” They can advise if something is within the law, or suggest wording, but they are notoriously bad business people and just don’t have any business in business.

Am I blaming the victims of these con men? Yes! While those who were led into Madoff’s deals by financial pros may deserve a little slack, they still should have paid more attention to the deals. And anyone who buys a financial instrument from a lawyer should know that it may not be worth the paper it’s printed on.

Beware “Blind” trust.

Cognitive Dissidence

2008-11-14T13:13:00.000-08:00

Impact Analysis is a by-monthly newsletter published by Manzella Trade Communications (www.ManzellaTrade.com). It is private labeled by a number of World Trade Centers and Chambers of Commerce in the United States. My ethical business model message was published in its November/December 2008 issue.

Guarding Our Most Valuable Asset

Nothing is as valuable as reputation. And yet we see corporate reputations squandered daily. In truth most companies and most people spend every day trying to do the right thing and protect their reputation. Very few set out to do anything less. So how does it happen?

In a variety of ways but mostly a little bit at a time. I call it the “Paper Clip Slip.” Anyone who hasn’t walked off with a company owned paper clip hasn’t ever worked with paper clips. The problem comes when it grows to a box of paper clips, or pencils, or something else.

The process we use to justify this petty larceny is called Cognitive Dissidence. It’s a very valuable human trait that we would be whimpering wrecks without. After we choose between the alternatives we need to move on. We all know people who agonize over every choice and are filled with doubts, sometimes for days. Cognitive Dissidence is the mental function that tells us we made the right choice and we become more convinced every hour that the other options would not have been as good.

The problem comes when we have too much of this trait. We begin to justify our actions no matter how outrageous. Actually, excessive Cognitive Dissidence is often admired in the C-Suite. A decisive executive can be a real asset to any organization. However, the same strong leader can steer the ship into treacherous waters sure that they are on course to success. And when things don’t look too good it is easy for them to justify actions that threaten the reputation of the company. When it goes sour they say, “I did what I had to do.”

Others come into corporate life with a distorted view of what you have to do. They believe that you have to do what it takes to win in a dog-eat-dog climate. Where do these people, some of them the best and brightest of our youngsters, get this idea? That’s easy! Good news is not news, so almost everything they see and hear in the media involves the baddies. And it’s not just the news media. Books, movies, TV shows, it’s all about the interesting nasty stuff, in business and in life.

Doing the right thing is not always easy. Sometimes it’s not even clear what the right thing is. We face hard choices everyday. What is clear is that an ethical business model is the best choice. The research shows that companies that put the best interest of their stakeholders first –their customers, their employees, their suppliers, their communities, the environment, and finally their shareholders and lenders– win in every way.

Why shareholders last? Because if you take care of the others, profits will take care of themselves. Do ethics driven businesses always win? Of course not. But if all things are equal these companies will do better every time, and they are a lot more fun to work for, and a lot more fun to run.