Published in CommPRO.biz 2013.07.18

Chasing the Bucks

If we are to believe the most successful investor of our time, the most important goal for any company is long-term growth. Why then do the directors of company after company follow a short-term path? Why would anyone focus on quarterly results? How many Americans watch the stocks in their 401Ks or other market packages rise and fall quarter to quarter? Why? Unless you are almost ready to hang up your spurs and retire, why do quarterly numbers even interest you? It’s the long term results that will support you one day, that’s the Warren Buffett way.

The only people who benefit from the quarterly rat race are those who collect fees from every trade. Trades and fees that reduce your nest egg, how does that make sense? This madness extends to the outrageous compensation levels “C Suite” occupants score these days. This, in spite of evidence that sky-high pay does not focus executives on the long-term health of a company; it focuses them on their paycheck and ways to fatten it up. Management guru Jim Collins pointed out in a USA Today piece a decade ago that leaders do not create great companies for a paycheck; they create great companies because they can. True then, true today.

A recent New York Times article on “C Suite” compensation notes that three Oracle executive’s compensation ranks them among the top five CEO paychecks. Among the top 200 CEOs the software company founder Larry Ellison is number one. His two Co-Presidents Safra Catz and Mark Hurd both have earnings that would put them into the top five if they were CEOs. Hurd, ousted from Hewlett Packard where he carried on the slash and burn route to profitability that his predecessor Carly Fiorina established. She was canned when her ham-handed style dragged this once great company down. Hurd collected over twelve million dollars on his way out the door for his role in destroying HP. For his leadership at Oracle Ellison saw his pay jump by a quarter last year. However, his shareholders suffered an almost equal decline. How does that make sense?

“C Suiters” should be well compensated, compensated for long-term strategies like research and development and real growth. Oracle Co-President Safra Catz lists 85 acquisitions completed within five years as an accomplishment. That is a strategy often followed by those looking to improve their quarterly gains. While acquisitions make sense when they fit, often they do not and can lead -as they did under Carly Fiorina at HP- to chaos and corporate decline. 

Flashy, pricy, “C Suiters” do not make companies great. Anytime their pay scale runs more than forty times the wage of the lowest paid worker in the company it’s way high. Today we have “C Suiters” routinely collecting a hundred, even as much as a thousand times their lowest paid worker’s take home. That’s just outrageous. It makes no sense as a business plan and it is ethically disgusting.

Published 2013.03.04 in CommPRO.biz

Bad Pharma, Trials & Travails

“Everybody’s doing it.” That lame excuse seems the only explanation of rampant bad behavior in the Pharma sector. However, it becomes more than bad behavior when it costs lives. Psychiatrist, journalist, author, Ben Goldacre, a Brit with more degrees and credentials than seem possible for one not quite forty years old, has a new book, Bad Pharma.

This quote from the book sums up his case: “Drugs are tested by the people who manufacture them, in poorly designed trials, on hopelessly small numbers of weird, unrepresentative patients, and analysed using techniques flawed by design, in such a way that they exaggerate the benefits. Unsurprisingly, these trials tend to produce results that favour the manufacturer.”

Dr. Goldacre writes a weekly column, “Bad Science,” in the London Guardian. He has a history of well-researched work taking on the quacks and crooks in and on the fringes of medicine. His research on drugs and medical devices spills into America’s Pharma. The more of Dr. Goldacre’s work you read, the more horrified you become. Evidence that bad behavior is not an anomaly; it is common place, driven by the need to meet the quarterly profit marks Wall Street is looking for. And too often supported by doctors on Pharma payrolls who do not speak up publicly for a host of reasons.

How bad is it? This quote from Dr. Goldacre’s book nails it: “Sponsors get what they want. In 2007, researchers looked at every published trial that set out to explore the benefit of a statin. This study found 192 trials in total, comparing one statin against another, or comparing a statin against a different treatment. The researchers found that industry-funded trials were 20 times more likely to give results favoring the test drug.” When a sponsored trial does not deliver the results its sponsor is looking for, they bury it.

In a New York Times story* Johnson & Johnson, a communications community poster child for its response to the 1982 Tylenol nightmare, comes off practicing the worst of the worst. One of several memos from doctors working for J&J came to light in the first of more than 10,000 artificial hip lawsuits J&J is facing. The consultant was blunt in a memo sent to several J&J “C Suiters”. The doctor’s memo indicated that, “An artificial hip sold by the company was so poorly designed that the company should slow its marketing until it understood why patients were getting hurt.” 

This was not the only such report. Reports that languished for almost two years before J&J recalled the faulty hips. We’re not talking about recalling something simple; a hip replacement involves serious surgery. It would be unconscionable to put a single human being through the risks of this surgery once the dangers were known. To expose tens of thousands was criminal. The human beings –the J&J executives– who chose profit before ethics may have thought “Everybody’s doing it.” It’s time to offer a fitting remedy for such a deadly choice, a jail sentence.
*(02/15/13)

Walmart, Ethics & the Law

Walmart announced that Daniel Trujillo came on board last week (2012.10.29) as SVP and Chief Compliance Officer for Walmart International. It’s a new post and part of a restructuring of the retail giant’s legal structure. General Counsel Jeff Gearhart now heads compliance, legal, ethics, and investigations ops, according to published reports. They also added Jay Jorgensen, an attorney, as Global Chief Compliance Officer and FBI veteran Tracy Reinhold, as VP Global Investigations.

This reflects a flurry of activity triggered by the exposure of what looks like their widespread use of bribery in Mexico. If true it would open Walmart to charges under the Foreign Corrupt Practices Act (FCPA). Earlier this year (2012.02.21) in an in-depth investigative piece, The New York Times painted a picture of bribery fueling Walmart’s growth in Mexico. Tens of millions were paid to overcome any obstacle in their effort to fast-track new store construction across the country. It worked; twenty percent of the world’s Walmart stores are now in Mexico.

Walmart employees in Mexico who tried to alert headquarters “Carpet-Landers” were ignored or marginalized. When the top leaders could no longer turn a blind eye to the problem they did their best to minimize the issue. Their Investigations Unit was rebuked for being “overly aggressive” by then Walmart CEO, H. Lee Scott Jr., who is still on their Board of Directors. A few days later their report was shipped to Walmart’s Mexican headquarters never to be mentioned again.

These new hires and this consolidation in the headquarters legal office looks like an extension of the cover-up that has been at the core of Walmart’s response to the bribery scandal. Looking at their newly minted SVP, and Chief Compliance Officer for Wal-Mart International, Daniel Trujillo’s chief qualification for the job is pretty obvious. He was Chief Compliance Officer at oilfield services company Schlumberger Ltd. Our Justice Department just bailed on a bribery investigation involving Schlumberger, an outcome Walmart is probably hoping for.

There are a couple things wrong here. Compliance and ethics don’t belong in the same basket. Compliance has to do with the law; ethics falls way outside what’s legal. It’s about corporate culture and reputation. The corporate communications folks deal in that arena. Were Walmart really interested in fixing this problem, they would be focused on new hires to create a culture to repair their reputation.

You would think that the 2006 Hewlett-Packard Board of Directors spying case would burn that into the minds of every major corporation. Kevin Hunsaker, HP Senior Counsel and Director of Ethics and Standards of Business Conduct, green-lighted a stupid telephone spying operation. He thought it was legal, it wasn’t. Hunsaker and several others were charged with a felony; he pleaded no contest. From an ethics viewpoint this plan wasn’t even close to being OK, but that’s not the viewpoint lawyers work from. Ethics and reputation are not in their skill set.

 It Doesn’t Change The Facts

Published today in CommPro.biz http://www.commpro.biz/news/tuesday-october-30-2012/ 

 

Remember last March when a Goldman Sachs executive very publicly resigned with a scathing OP-ED in the New York Times? Well, last week (2012.10.23) Greg Smith released a book fleshing out his description of Goldman’s decay over the twelve years of his impressive career from the heady time when he made the cut and became an intern. Prior to the book’s release, Goldman fired back. They deny that they play any of the smarmy games that Smith claims are routine.

The investment banking firm paints Smith as a disgruntled employee who left not out of disgust with a deteriorating culture, but because he was refused an increase in his annual bonus from a half-million to a million dollars. Smith doesn’t deny that request, but suggests that instead of select items, Goldman should release his entire personnel file. He says it will show twelve years of rave reviews.

While smearing Greg Smith may blunt his criticism, the fact is, Goldman has paid out more than a half-billion dollars to make charges of the very kind Smith hangs his arguments on, go away. Goldman CEO Lloyd Blankfein told the Times of London, that he is “just a banker doing God’s work.” Comedian Stephen Colbert noted that “Blankfein had not indicated which god. Perhaps Shiva, Lord of Destruction.”

Blankfein has hired a lawyer with a history of defending high profile corporate crooks; not what those working in God’s vineyards normally do. On the face of it Greg Smith has an impressive track record. During his twelve years at Goldman he rose from intern to a high ranking position in their London office. He was chosen as one of ten out of more than 30,000 Goldman employees to appear in their college recruiting video. He was certainly a key player.

A Congressional investigation detailed that Goldman routinely sold packages of crappy investment vehicles to their customers (AKA “Muppets”) all the while betting that they would fail. Testifying before a Congressional Committee, CEO Blankfein denied knowledge of these practices. However, the Committee trotted out internal documents putting his denial in “Pants on Fire” territory.

So it comes down to this. Greg Smith’s motivation for leaving may or may not have been pristine. However, his motivation does not make his claims untrue. Goldman Sachs is not a nice outfit. They are not doing God’s work. They grind out huge profits moving money around. In Goldman’s case not a role that contributes to the well-being of society.

Understand, many investment banks play an important role. They provide bucks to keep major organizations in business and serve as advisors to businesses and to institutional investors. Problem is Goldman Sachs and some other bottom feeders play both sides of the street. The game that regulators during the Great Depression decided was a really bad idea. The laws set up back then to protect against the activities Greg Smith sees as toxic were swept away in the 1980’s and 90’s, leading to the recession we are struggling to overcome. Bad idea? You bet! Once a bad idea, always a bad idea.

So, What Else Is New?

What starts out as a straight forward ethical issue can sometimes turn quickly into a legal problem. Saturday (04.21.12) the New York Times laid out in detail (nearly 7,600 words and a baker’s dozen photos) the slide down the proverbial slippery slope that Walmart has taken over the last decade in Mexico. And maybe in other nations as well.

One in every five Walmart stores is in Mexico. The company is very popular south of the border and very profitable. Under the leadership of Eduardo Castro-Wright Walmart exploded in Mexico, opening new stores by the hundreds. This dazzling pace left their competitors in the dust. According to the Times account growth fueled by millions in bribes to local officials. Building permits, zoning and environmental issues, all the bureaucratic paperwork that normally takes weeks and months to clear, melted away in days. 

Castro-Wright was hailed for his success, promoted into a senior position in the United States and rumored to be a candidate for the top post at Walmart. There is, however, strong evidence that Castro-Wright encouraged the use of bribery to achieve the spectacular growth of Walmart de Mexico. So how could this happen without the knowledge of folks at headquarters? It couldn’t, it didn’t, they knew; in fact it appears it was decided at the highest levels to sweep it under the rug. 

When evidence surfaces that some individual or organization has strayed from the straight and narrow, invariably the number one response is, “everybody does it.” While that’s not what Walmart is saying now, it seems to have played a major role in overlooking the use of bribes in Mexico. 

Walmart headquarters’ rationale followed the “that’s just the way they do business down there” line of thinking. The most disturbing aspect of this mess is that it seems to have permeated every level at Walmart. That makes it part of the company culture. 

While Walmart has made positive moves on many fronts, it seems every time something big like this scenario rises, they fall short. That’s culture. The Times report isolates one of the moments in this scenario when Walmart lost their way big time. Their internal investigation had exposed the bribery in Mexico. Instead of putting an end to the misconduct and firing those responsible, they turned on their own investigators, “accusing them of being overbearing, disruptive and naïve about the moral ambiguities of doing business abroad,” AKA, everybody does it.

There is nothing morally or ethically ambiguous about what went on in this case. If their code of ethics amounts to anything more than words on paper, the first mention of a bribe should have been rejected out of hand. It seems inconceivable –given the jobs and taxes that a Walmart store offers a community– that bribes would have to be paid to local officials to get them built. So once again the culture doesn’t live up to the words in the Walmart Code of Ethics; surprise, surprise, surprise.

Stop Coddling the Super-Rich

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.

© 2011 New York Times

Dear A.I.G., I Quit!

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!