"The greatness and the genuine trait of your thought and writings lie on the fact that you positively and interestingly make use of philosophical thoughts and thoughtfulness in order to deeply and concretely cogitate about America's social issues. . . . This does not mean that your thought is reducible to your era: your thought, being inspired by issues characterizing your era . . . , overcomes your era and will still likely be up to date even after your era, for future generations." Bruno Valentin

Friday, November 21, 2014

Wall Street Banks in Commodities Businesses: An Inherently Unethical Conflict of Interest

Writing to the bank’s board of directors, an executive at Goldman Sachs wrote that the bank’s commodities division would achieve higher value “if the business was able to grow physical activities, unconstrained by regulation and integrated with the financial activities.”[1] According to Sen. Carl Levin, Goldman’s goal here is “to profit in its financial activities using the information it gains in the physical commodities business.”[2] The integration could be achieved in part by using the bank’s access to nonpublic information from the banking or trading operations to manipulate the price of a commodity by artificially restricting or adding to supplies through ownership at the production or storage stages. This structure contains a conflict of interest. Because resisting the temptation to exploit the conflict would put the Goldman bankers at odds with the bank’s financial interest, I contend that reliance by the public on intra-bank firewalls (i.e., policies) separating the commodity businesses from the bank’s trading operations is too weak to protect the public, including buyers of the commodity.

Sen. Levin’s subcommittee focused its investigation on Goldman’s ownership and management of an aluminum storage company, Metro International Trade Services, which held nearly 1.6 million metric tons of aluminum—roughly 25 percent of the amount of aluminum used in North America (85% of LME-warranted aluminum used in the U.S.).[3] Under Goldman’s direction, Metro paid companies storing aluminum at Metro’s warehouses to move the aluminum from one Metro warehouse to another. One effect of such a Merry-Go-Round move is a lengthening of the queue, which in turn is associated with a higher price (premium) of the commodity on the market. In short, Goldman could manipulate the commodity’s price as needed by the bank’s proprietary and counterparty positions in the commodity (i.e., in the trading operations of the bank), thus integrating the revenue streams in the overall interest of the bank.

To suppose that such a potentially lucrative conflict of interest would go untapped by a private company whose principal aim is to profit borders on the absurd. Accordingly, we can say that the conflict itself—as it was structured as of 2014—is inherently unethical. To put this point differently, it would be unethical to permit Goldman to have such a structure. By analogy, situating an alcoholic in an apartment next to a liquor store can be said to be unethical because doing so subjects the person to a strong temptation. Abstractly speaking, the unnecessary acceptance of a temptation that would harm others renders a structural conflict of interest inherently unethical—meaning that the sordid nature does not depend on the conflict being actually exploited. Hence, society, acting through its government, has an ethical right and even an obligation to deconstruct such structures. The obligation is not only to protect third parties from getting harmed from the structure being exploited, but also to relieve the party subject to the temptation from it. By analogy, both the people living near the liquor store and the alcoholic are in need of protection from the alcoholic; waiting for the alcoholic to lapse under the strain of the temptation (which is in the structure itself—living next to the liquor store) would be unethical because the harm could foreseeably have been obviated by situating him or her somewhere else (i.e., getting rid of the structure itself).

Unfortunately, people (and our elected representatives) tend to minimize the baleful tendency in a structural conflict of interest. Put another way, we give human nature too much credit in being able to resist temptations that are inherent in how two roles are related (i.e., arranged, or structured). We naively assume that CPAs are more interested in giving honest audit opinions than in retaining existing clients. We assume that rating agencies will rate bonds accurately rather than overstate a rating to realize more revenue as more of the bonds are sold.

 Even in just going to a Starbucks to ask if there are any other coffee shops in the area, we unconsciously assume that the Starbucks’ employee will look the other way on the prospect and admit that a locally-owned coffee shop is just down the street. If putting someone in a conflict-of-interest situation is unethical, then it is unethical to ask the question at a coffee shop. To act ethically, we would go to another line of business near the Starbucks rather than to the coffee shop itself to ask the question. I realized this point only last week when I asked a clerk at a Shell gas station if a Mobil station is near (Mobil stations don’t charge for air). In particular, I realized that I could not trust such a clerk were he or she to answer in the negative. As this does not depend on the particular clerk, the conflict of interest is structural. Moreover, besides being a faulty choice for me to get accurate information, subjecting the clerk to the temptation to lie to me is for me to act unethically whether the clerk lies or not. In other words, the sordid nature of the conflict of interest does not depend on the clerk exploiting it at my expense.

In short, we can conclude that it is unethical for a business to buy aluminum from Metro International as long as it is owned by Goldman Sachs (assuming the bank is also trading in aluminum or in aluminum-backed or related securities) because subjecting another party to a temptation to harm others is unethical both to the other party and those who may be harmed. It is unethical for Goldman’s stockholders, board, and managers to be involved with a bank that structurally contains the conflict of interest. Lastly, it is unethical for legislators to look the other way rather than deconstruct the structure; those public officials insufficiently protect parties that would be harmed should Goldman managers exploit the conflict. Perhaps more amazing, such officials also fail to protect the people at Goldman Sachs from being subject to an all-too alluring temptation. At the very least, accepting campaign contributions from the bank should include the obligation to protect the bank from itself.  

[1] Sen. Carl Levin, “Opening Statement,” Wall Street Bank Involvement in Physical Commodities Hearing, Permanent Subcommittee on Investigations, U.S. Senate, November 20, 2014 (accessed November 21, 2014)
[2] Ibid.
[3] Ibid.

Monday, November 17, 2014

Homelessness in the U.S.: A Reflection of American Values

According to a report by the National Center on Family Homelessness in 2014, nearly 2.5 million American children were homeless at some point in 2013.[1] The U.S. Department of Education had reported that 1.3 million homeless children were going to school. California, which accounted for one-eighth of the U.S. population at the time, had one-fifth of the 2.5 million, which comes out to nearly 527,000. The relatively high cost of living and shortage of low-income housing, along with a largely stagnant minimum wage, are the more visible factors behind the gap.

In addition, a subtler underlying contributor—more paradigmatic—renders sustainable shelter insecure and even elusive for many people who go from paycheck to paycheck. What I have in mind here is the assumption that housing is and should be a commodity. That is to say, we use the market mechanism to allocate houses, condos, and apartments. To be sure, matching supply to demand is in itself helpful to low-income people, the assumption that the prices they pay—for example, more money due to speculators—must vary accordingly is problematic, as well as unnecessary. The Section Eight housing program, for example, separates the amounts that low-income people pay for rent from the rents that property-owners accept.

We can go even further and question whether the rents (and housing prices) determined by the market should be acceptable to society. For example, speculators bought up foreclosed properties in the U.S. during the housing slump that began in 2007. The cost of houses (and thus rents) in such markets was higher than would otherwise have been the case. Low-income families that might otherwise have had shelter may have gone homeless as a result. In the tradeoff here between speculators and homelessness, societal values can be seen. Put another way, tolerating homelessness so economic liberty can encompass residential housing reflects a value judgment.

In summary, the relatively large number of homeless children reflects a tacit societal judgment of priorities premised on the assumption that housing should be a commodity fully subject to the market mechanism. That speculators can take advantage of it to profit at the expense of people going homeless suggests that the American collective judgment may be too extreme—meaning that it accepts a high marginal pain at one pole (i.e., homelessness) in order to be able to hug the other pole. This can explain why shelter as a basic human right is virtually absent from the public discourse in the United States.

[1] David Crary and Lisa Leff, “Number of Homeless Children in America Surges to All-Time High: Report,” The Associated Press, November 17, 2014.

Friday, October 3, 2014

Religion and Business Clash at a Church’s Food Pantry

The sacred and the profane are like oil and water—oil for anointing and water for cleaning. The viability or value of the sacred does not depend on denigrating that which is exogenous to it. In other words, praising the sacred does not require trashing the world. Being in the world but not of it does not imply that the world is necessarily bad. From this perspective, the sacred and profane can both be viewed as viable in their own rights, respectively. The inevitable distance that distinguishes them so starkly is breached only with great difficulty, even if pressed out of sheer practicality. For example, a theological interpretation undergirding a religious organization’s food pantry can clash with a business calculus such as would be held by an auditor pouring over the numbers and procedures. As theology and business enjoy their own, sui generis (i.e., of its own genus or type) bases of justifications or rationales, unraveling a clash can be notoriously difficult for want of a common denominator.

One pantry, which I will call here “Food Pantry of the Church of the Ossifier,” faced a challenge when the local food bank, which distributes meat to the local pantries, informed the pantry’s director, Sue, that the amount allotted would decrease on account of supplier issues. Specifically, as the price of meat increased, grocers had more of a financial incentive to more efficiently manage their respective inventories—with less left over nearing expiration dates. Translated into the Ossified Pantry’s terms, only 80 out of 430 families would get meat on the first and third Wednesdays of each month. In Sue’s words, “Meat is in short supply as donations to the food bank.  Walmart, . . . etc are not putting as much meat out in hopes to not have as much given away.  It cuts into their profit margins and everyone is being for frugile.”

The gap can be narrowed on both the demand and supply sides of the equation. On the supply side, one of the pantry’s volunteers, a former certified public accountant (CPA), contacted Sam’s Club for funding. The company had been instrumental in setting up an infrastructure locally for getting food from grocery stores to the food bank for further distribution to the pantries. Furthermore, each Sam’s Club store gave out gift cards to local charities, which could apply for the limited funds every other month. Charities could also apply to the corporation for grants ranging from $250 to $2,500 annually. The volunteer provided Sue with the information and she applied for both programs in the hope of being able to buy meat to supplement that which the food bank could supply. In addition, she asked the store manager about a possible discounted price. She could offer incentives such as free advertising in the church bulletin and at the pantry itself, as well as inclusion among the list of donors featured on a wall in the church lobby. From this side of the equation, business and religion look like country cousins—not marriage material but close enough to help each other out on a regular basis.

The intractable distance becomes apparent on the demand side. Sue allowed food recipients to pick up for other families too, under the assumption that some families cannot get to the pantry. Some recipients picked up for four or five families. From a CPA’s standpoint, the 430 families served figure—which the food bank uses as a basis for determining the pantry’s allocation (government funders would also use the figure)—would be a highlighted item for sampling and procedure-assessment. That is to say, the potential for cheating under such an arrangement was such that an auditor would want to test its validity rigorously. In fact, such a policy might have to go for the figure of families served to be said to be accurate enough for third-party reliance. Even with a record of the families in absentia, those families may not actually have received any of the food said to be picked up for them.

Sue’s theological basis for the policy is eons away from an auditor’s foundation. Compounding the difficulty in reconciling Sue’s perspective with that of an auditor, Sue held some non-theological assumptions regarding business that are vulnerable to criticism from a business standpoint. Even so, because her theological assumptions are beyond a business critique may have given her a misplaced confidence that her business assumptions too are beyond such a basis of critique. Her theological and business assumptions in her own words come in five points.

1.  People will scam us - that is a given and something that I can't control - if they really want to cheat they will.  Thieves are so smart and creative.

2 If they cheat they will have to explain it to God, I won't.  I hope that God is merciful.

3.  I do have a paper trail.  There have been a few times when I find out someone is cheating and when I confront them about it, I tell them they are not welcome to come back.  

4.  Occasionally I will make a phone call and spot check on the ones who pick up multiple families.  Most of them have asked me for permission to do so and I believe a lot of them do it to save on gas.  I have to trust that it is true or else God will take care of it.  God often tells me not to worry as He will take care of things and so I do just that.  

5.  Lastly this is God's work not mine.  It is never about the volume but about the one who needs us most.

Regarding Sue’s first point, just because theft cannot be completely eradicated does not mean that managers cannot do anything to reduce it. Sue’s assumption that a thief’s desire to steal necessarily means the thefts will occur is fallacious. Even if thieves are smart and creative, managers can be too. The passivity in Sue’s assumption likely comes from her theological tenets.

The theology surges in on the second point. Sue is saying that she is not obliged to provide a defense for the cheaters when God judges them.[1] Her assumption itself takes it as a given that the stealing will take place. Furthermore, her passivity or noninvolvement in the divine judgment may be a reflection (or projection) of her assumed passivity in her first point. Put another way, her assumption that the lying will take place may be based on her more foundational assumption that she has no involvement in God’s judging the cheaters.

A business practice may thus stem from a theological interpretation. Problematically, that the latter is beyond critique from a business standpoint may be used to assert that the resulting business practice is also beyond critique (and thus control) from a business basis. In cases in which the person has substantial power in the business, the business practice may go uncontrolled even though business principles have jurisdiction. Should the person’s boss have the wherewithal to stop the offending practice, the theological auspices could legitimately stand in the way if the business is part of or sponsored by a religious organization.

In her third point, Sue defends her practice of multiple-family pick-ups on the basis of business principles. She points to a paper trail, yet having the names and contact information of the families receiving the food at home is not sufficient to prevent fraud. A recipient could simply collude with a friend willing to act as a front. Asking for permission and using gas as a rationale, which Sue cites in her fourth point, can be part of the ruse even if the proactive gestures reduce the likelihood that cheating is going on in such cases.  

Sue assumes that because she has uncovered only a few cases of fraud by making a few spot calls, a small number of stealth instances remain among the 430 families being served. Of course, a colluding friend of an in-person recipient would naturally lie, though speaking with kids could uncover problems. Even so, a CPA would advise more than a few spot calls. Considering Sue’s passivity toward the matter of cheaters in general, the assumption that she has actively caught most if not all of the outstanding cases is vulnerable. In fact, the opposite assumption has more support. That her passivity is informed by her assumption of God’s agency makes her assumption of infrequent fraud particularly shaky.

In her fourth point, Sue bases her assumptions that a paper trail and a few spot calls are sufficient and that only a few cases are actually fraudulent anyway on her more fundamental (to her) theological assumption that God would take care of any problematic cases unknown to her. From a theological standpoint, this assumption is problematic, for if God would eradicate any cheating then wouldn’t God stop evil from happening? If not, then God is not omnipotent (i.e., all powerful). That injustices do in fact happen in the world is typically explained theological as an unavoidable consequence of God giving us free will.

Sue’s claim that God tells her not to worry (i.e., to passively accept that God will stop the cheating) opens the proverbial can of worms. In her fifth point, she concludes that taking care of any cheating is God’s work, presumably because God has told her this. From a religious standpoint, verifying Sue’s claim that God as “spoken” to her is fraught with intractable difficulties. However, that Sue does not question the “fact” that God has spoken to her may itself undermine her claim. Put another way, her unwillingness to question what she perceives to be the case flies in the face of the human experience, which is based in human nature itself. 

Given the conditionality inherent in Creation, Sue overplays the certainty card. Abraham struggles with God’s command that he sacrifice his only son even as God promises that his seed will populate the world. In Kierkegaard’s terminology, Abraham embraces the absurd in the realm of the finite.[2] Sue’s certainty belies her broader claim of being a person of faith. It is possible, even likely, that she had unconsciously chosen her theological assumptions to mollify her managerial challenges in formulating and implementing a system of accountability. 

Her compromised system can indeed be subjected to a business critique and correction, even if such oversight is hampered by the religious auspices of the pantry—being that it is part of a religious institution. To be sure, the business oversight can make use of the problematic elements in Sue’s theological basis, yet this presumes that managerial oversight is vigorous among religious functionaries.

Therefore, even though the gap in supply and demand occasioned by decreased supply at the local food bank could be narrowed by corporate giving and greatly reducing the instances of multiple-family pick-ups—such as by reducing the number of families a recipient can cover to one and asking volunteers to make the deliveries on their way home to cover as many cases as possible (especially the hitherto multiple-family pick-ups!)—the role of Sue’s theology on the demand side of the equation could keep the gap unnecessarily large. 

Moreover, both the pantry and the church’s administration could develop a reputation locally for ineptness in being disorganized. A boat with many leaks does not inspire much confidence. The rigidity alone with respect to plugging the leaks is easily offensive and naturally frustrating. Even though theology and business are worlds apart in their respective rationales, the flash-points need not be so intense and harmful. 

To the extent that some recipients get more meat than others, the shortfall hurts the people in need while enabling the gluttony of others; this is not exactly about the ones who need the pantry most. Hence Sue’s theological approach to caritas seu benevolentia universalis (i.e., higher-aimed human love, that is, universal benevolence) is vulnerable to her own criterion. Regarding the nexus of business and religion more generally, using the criteria of each on its own domain can work wonders in reducing otherwise inexorable difficulties from the interaction of the two domains.

[1] Notice that Sue assumes that God will judge them. This assumption has historically given confidence to people that unjust people leading a happy life would nonetheless “get theirs” eventually. Nietzsche interprets this desire of after-life retribution as being sourced on the urge of some of the weak to dominate even the strong out of resentment and for the pleasure that can be extracted even from such wan power.
[2] See Soren Kierkegaard, Fear and Trembling (London: Penguin, 1985), pp. 65, 75.

Wednesday, September 24, 2014

Societal Enabling of Economic Inequality

According to one study of people around the world, people of different cultures, incomes, religions, and other differences show “a universal desire for smaller gaps in pay between the rich and poor” than was the actual case at the time of the survey in 2014.[1] Interestingly, the respondents didn’t have a clue how much of a gap actually existed in their respective economies. The difficulty in estimation means that the public discourse on economic inequality has been rife with erroneous assumptions. Where the error lies in the direction of minimizing the gap, we can postulate that public policy allows for greater economic inequality than would otherwise be the case.

The full essay is at "CEO/worker Pay."

1. Gretchen Gavett, “CEOs Get Paid Too Much, According to Pretty Much Everyone in the World,” The Huffington Post, September 24, 2014.

Monday, September 1, 2014

Wage Theft: More Companies Flouting Trust

If you are playing by the rules, not trying to cut corners at others’ expense, you need not let the bastards get you down. Of course, if your detractors catch you with your hand in the cookie jar, then blaming them only confirms that a sordid character flaw undergirds the stealing. As a business strategy, accusing union officials of having an agenda simply because they have identified cases of wage theft by the company is not exactly good public relations; in fact, the ploy sends a message that the managers at the helm are more interested in shifting the spotlight onto distractions than “manning up” to take responsibility for the unethical and illegal conduct at the employees’ expense.

The New York Times reported at the end of August, 2014 that a virtual flood of cases had recently arisen that “accuse employers of violating minimum wage and overtime laws, erasing work hours and wrongfully taking employees’ tips.”[1] U.S. and member-state officials asserted at the time “that more companies are violating wage laws than ever before, pointing to the record number of enforcement actions.”[2] The U.S. Labor Department had uncovered nearly $1 billion in illegally unpaid wages since 2010.[3] Julie Su, the California labor commissioner, notes that her agency “has found more wages being stolen from workers in California than any time in history. This has spread to multiple industries across many sectors. It’s affected not just minimum-wage workers, but also middle-class workers.”[4] Some substratum must be behind the trend.

Even as the officials pointed an increasing number of companies flouting wage laws, many business groups countered “that government officials have drummed up a flurry of wage enforcement actions, largely to score points with union allies.”[5] That the actions have stuck, however, means that they were not “drummed up.”

For example, a federal appeals court in California ruled in August, 2014 “that FedEx had in effect committed wage theft by insisting that its drivers were independent contractors rather than employees. FedEx orders many drivers to work 10 hours a day, but does not pay them overtime, which is required only for employees.”[6] Rather than admit that the loophole bit was up, the company’s management decided to appeal. To the extent that the business lobby has undue influence in Congress and the California legislature, FedEx can have greater confidence that pursuing a distinction beyond recognition will pan out. No shame, the government officials would likely say.

David Weil, the director of the federal Labor Department’s wage and hour division, points to the increased use of franchise operators, subcontractors and temp agencies as providing tempting cover for managers who want to reduce costs by cutting labor corners. “We have a change in the structure of work that is then compounded by a falling level of what is viewed as acceptable in the workplace in terms of how you treat people and how you regard the law,” he said.[7] This points to a sordid mentality below the orientation to keep costs down, which, as a fully legitimate managerial accounting tactic, is ubiquitous in business.

Michael Rubin, one of the lawyers who had recently won a $21 million settlement on wage theft by the U.S. trucking company, Schneider, opines that the “reason there is so much wage theft is many employers think there is little chance of getting caught.”[8] If that’s true, the virtuous citizenry so necessary to sustaining the rule of law over the long haul may be crumbling in esteemed places; for with widespread disrespect for the law under the arrogant presumption that the law does not apply to oneself, enforcement can hardly catch up.

Reacting to the $17 million in wage claims recovered over the last three years, Eric Schneiderman, New York’s attorney general, remarks, “I’m amazed at how petty and abusive some of these practices are. Cutting corners is increasingly seen as a sign of libertarianism rather than the theft that it really is.”[9] To break the law for something petty demonstrates among other things a mentality wherein little things are magnified as if they were big things. The abusiveness may point to a rising level of passive aggression in society generally, including by functionaries using what little authority they have to inflict spite onto other people deemed even lower than themselves, and thus inferior.

Trust inevitably breaks down in a society in which people flaunt the law and have no ethical problem harming others by unfairly taking from them. Our species does not naturally do very well living among so many strangers—over 150 to be exact. Our shift from living in small hunter-gatherer bands to larger, more complex social arrangements required the invention of ways to have enough confidence in strangers to live among them without being in a state of constant anxiety. Without faith in money, for example, we can no longer trust that work done will translate into some future benefit as compensation for the labor expended. Even with faith in money as a symbol standing for value, trust in an agreed upon translation is necessary to large-scale productive enterprises being able to function. In other words, in being reckless over petty matters, more and more companies may have been putting their very bedrock at risk in the years after the financial crisis of 2008 while being too petty, proud, and even vindictive to realize the increasing systemic risk from in their willful shirking of legal and ethical responsibilities.

[1] Steven Greenhouse, “More Workers Are Claiming ‘Wage Theft,’” The New York Times, August 31, 2014.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Ibid.

Tuesday, July 29, 2014

Bad Boy Banks Enabling Inversion: Can a Firm Be Patriotic?

The “corporate citizenship” literature has it that companies in the private sector can indeed be “good citizens.” Even though a company cannot vote or be drafted, citizenship is said to fit as an apt description of what is organizationally speaking a profit-seeking machine. To say that a company is a good or bad citizen is, moreover, to anthropomorphise (i.e., apply human characteristics to a non-human). Furthermore, in their managerial capacities, the people who run companies are duty-bound to act in the financial interest of the stockholders, and only then in the broader societal interest. Even so, an ethical basis does exist on which some of the banks can be viewed as culpable.

Between 2011 and 2014 when Goldman Sachs made nearly $210 million in “inversion fees” for helping companies based in the U.S. shift their headquarters overseas to obviate a relatively high U.S. corporate tax, asking whether the executives at the bank were patriotic is tantamount to making a category mistake. A person can without contradiction be patriotic away from work while focusing on increasing inversion fees in his or her managerial role. Hence, Jamie Dimon could sincerely look at those fees earned by JPMorgan Chase and claim, “I’m just as patriotic as anyone.”[1] Were he to have put his personal patriotism into force at the bank at the expense of the stockholders’ financial interests and the chartered function of the bank, he would have been unethically disregarding his fiduciary duty. From a Kantian standpoint, we can ask what would happen if every manager at every bank had as his or her own “personal project” as a patriotic U.S. citizen trump the duty. Patriotism, after all, is hardly monolithic, but involves interpretation in discerning the applications and the proper choices therein. Banks could hardly function that way, so to say every manager should put patriotism first would not make sense (for the banks would fail under such a mandate). This, by the way, is the first formulation of Kant’s categorical imperative. If universalizing your maxim doesn’t work because of a contradiction in the reasoning or logic, the maxim is unethical.

The argument that banks that had been in trouble in 2008 and subsequently received loaned funds from the U.S. Government are obliged ethically not to turn around and profit by depriving that government of corporate tax revenue presents us with a stronger case, for it rests on an implicit contract, or quid pro quo, rather than patriotism. Social contract theory, of which Kant was an advocate, includes implicit contracts, rather than being limited to the ones where both parties sign on the dotted line. In fact, as regards any historical agreement establishing government and citizens, Kant idealizes the notion to say that such an agreement would be what people would agree to in a state of nature—not that such an agreement was literally made as man first stepped into complex living arrangements. From this interpretation of the theory, it makes sense to say that in return for being bailed out—even from the tailwind of irrational exuberance aided and abetted by a “big short”—a person naturally would expect an obligation not to double-cross the hand that had helped at the time of crisis.

This ethical argument applies to Goldman Sachs, Morgan Stanley, and Citigroup, each of which made sizeable profits from inversion fees and had needed the government bailout. JPMorgan Chase, on the other hand, avoided the greedy temptation to get into mortgage-based derivatives and insurance swaps based on the securities, and thus that bank did not face the implicit obligation. Jamie Dimon need not have jumped to defend his patriotism after all, or even an implicit obligation that his bank put the revenue of the U.S. Government before stockholder profits.

Regarding Goldman Sachs and Citigroup, dismissing the implicit obligation was, say we say, par for the course (i.e., in keeping with the banks’ respective cultures), for in both banks clients were lied to regarding what the traders knew were “crap.” I’m referring of course to the bonds based on sub-prime mortgages. Such fraud is also a disregard for an implicit social contract (as well as a very public legal one). Societally, people have a general expectation that people working at a bank will not exploit them through dishonest means. That’s not how business is done, the average Joe would rightly say. So perhaps the utility of this case of inversion fees lies in what it says about the intractability of a mentality in a corporate culture: the dysfunction is very difficult to remove, and thus it is likely to perpetuate itself in a pattern.

1. Mark Gongloff, “’Patriotic’ Big Banks Profit Helping U.S. Companies Dodge Taxes,” The Huffington Post, July 29, 2014.

Thursday, July 10, 2014

Labor and Stockholders: Applying Locke’s Notion of Property

John Locke’s view on how something becomes a person’s property could fundamentally alter labor-management negotiations in companies. Moreover, our assumption that management participates in the discussions may be upended. The key, I contend, lies in how we classify labor. I submit that the paradigm that has been handed down to us is deeply flawed in its fundamentals, and yet strangely we do not even question its contours.

In describing his notion of property, Locke begins with the state of nature, wherein “every Man has a Property in his own Person. This no Body has any Right to but himself.”[1] Unlike Thomas Hobbes, Locke did not think that rights depend on the existence of government. From a person’s body, Locke goes next to its labor, as properly one’s own. It follows, Locke contends, that “(w)hatsoever then [a person] removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property. It being by him removed from the common state Nature placed it in, it hath by this labour something annexed to it, that excludes the common right of other Men. For this Labour being the unquestionable Property of the Labourer, no Man but he can have a right to what that is once joyned to, at least where there is enough, and as good left in common for others.”[2] The caveat at the end means that as parcels from the commons are belaboured, the resulting private property should not exhaust the commons itself, which nature provides to all. Yet even when all land, for example, has been claimed by individuals and government, surely Locke’s claim still holds that in mixing with an object, the labor of one’s person, being his or her property already, extend the property to the object too.

Yet what if another person already owns the object? Locke assumes the laboring person snatches it out of the state of nature, where anyone can appropriate the object with one’s own labor. If the basis of Locke’s theory of property is not the state of nature itself, but, rather, that a person’s own person and labor are one’s property—whether in the state of nature or in an arranged society—then a right of property is still in the mixing of a person’s labor in an object. In cases in which the object is already owned by another and he or she consents to the labor of another being mixed with said object, then either the laborer has an ownership share or he or she contracts with the pre-existing owner to sell the share.

Hence, companies, whether owned by private interests (capitalism) or a government (socialism), contract with employees essentially to purchase their property rights that naturally accrue as their respective laboring mixes in with the means of production. I distance the labor from the means of production because the latter do not gain a property right in working on an object, for it makes no sense to say that a machine has its machine and work as property. The implications of this distinction are nothing short of huge with respect to the assumptions we make about business and capital.

In financial reporting, labor is classified as an expense to be deducted from revenues to arrive at profit. The returns to a company’s owners (e.g., stockholders) come off after the profit, rather than being an expense of doing business. If Locke is correct that labor also gives rise to a property right, then the sale of the stake is also extra-business, rather than a mere means of production. That is, the cost of labor should rightfully be classified with dividends after profit.

By implication, rather than negotiating the sale of the labored property as if it were an expense, the talks would be between owners. For one group of owners, that of capital, to say, “We can pay more, but we’ll have to cut expenses” would be a category mistake. So too, would the common (and convenient) assumption, “If we pay you more, we’d have to raise prices and we’d lose business.” Within the property classification, buying up the labor-property shares would come out of dividends, rather than to be made up for by intra-business revenue or expenses. This “third rail” is never brought up as even an alternative—the capital-owners’ dividends presumably being off the table. Such a narrowing of a debate goes a long way in getting what you want in negotiations. John Locke might just say, not so fast!

1. John Locke, The Second Treatise of Government, section 27, in Locke, Two Treatises of Government (Cambridge University Press: Cambridge, 2003), p. 287.
2. Ibid., p. 288.

Tuesday, July 1, 2014

Hobby Lobby: On the Significance of the Case

For all the controversy stirred up by the case of Hobby Lobby v. Sibelius(2014) on whether an employer must comply with the mandate for contraceptives coverage in the Affordable Care Act, the significance of the decision handed down in a 5-4 majority opinion by the U.S. Supreme Court may be less than some commentators were predicting. 

The full essay is at "Hobby Lobby"

Friday, June 27, 2014

World Cup Soccer Frenzy in the U.S.: A Threat to the NFL?

First, 19 out of 20 brains of former NFL football-players showed lethal brain damage in autopsies. Then, it was 45 out of 46 brains.[1] Missed at first from the initial assumption that concussions from the occasional hard-hits—which make good television—have been the cause of the dementia-causing protein in the damaged brains, was the impact of the more subtle mini-concussions from regular play. A 21 year-old with dementia (CTE) had not had a concussion from a major hit.  Nor had a high-school senior football player with chronic (CTE) brain damage in the front lobe, and thus severe short-term memory loss, difficulty thinking, personality changes, and fits of rage. Suicides are not uncommon, not to mention an abbreviated life-span.[2] Meanwhile, the violence of the sport ironically continued to be the main draw to an American audience, with cheers at the most jarring clashes. What is going on here, and is there light at the end of this tunnel?

The NFL is a wealthy organization, shielded from tax by its non-profit status. From taking in $10 billion a year as of 2014, and that figure expected to go to $25 billion by 2027, a lot is on the line in maintaining the status quo in terms of American culture and sport.[3] The NFL continued for a long time to deny any link between the CTE dementia and football even though the wealthy non-profit organization’s own sponsored study had already admitted to a link—the league kept the result secret for years.

Blinded by the astonishingly high pay, the players too have been complicit, even self-destructive, as they have ignored the incoming scientific evidence culled from the dead brains of former colleagues. The illusion of immortality that typically runs out of steam by age 40 is alive and well in many young athletes. Together with the monetary high, the illusion can feed the denial.

Perhaps even more astonishing, given the huge amount of money on the line for the NFL as well as that league’s players (and the team owners) is the propensity of masses of people to continue right ahead as if nothing had changed, even with the new knowledge. During the 2013-2014 season, two years after PBS’s Frontline exposition of the scientific evidence of “brown matter” in the brains of ex-pro-football players not yet elderly and Frontline’s investigation of the NFL’s cover-up and subsequent damage-control, I discerned no shift away from the huge interest in NFL games among the American public. Sunday afternoons still turned residential neighborhoods into temporary ghost-towns.

Do we not understand the concept of a sport in which head-bashing is a staple as being inherently dangerous? I think we do. Cognitive dissidence, the holding of contradictory beliefs simultaneously, is in all likelihood enabling the denial. This lapse so happens to be in line with the moneyed status quo and popular culture writ large. Change in the sport’s popularity is likely to be long in coming, and so the dollars are likely to keep coming to the NFL, the team owners, and the players. Powerful interests being highly invested in perpetuating the status quo while seeming to adequately address destabilizing news is nothing new.

American fans at the World Cup 2014 in Brazil, cheering on their team. Could the leap in numbers and enthusiasm be a game changer in terms of American sports? If so, will the most dangerous game bear the brunt of the squeeze? (Image Source: Frederic Brown via Getty Images)

The axis of change can come from unexpected places, however, with an earthquake far away setting in motion a sea-change of change eventually from the subtle shifts of subterranean tectonic plates under the sea. The frenzy intensifying at huge viewing parties in major American cities as team USA made its way through the World Cup in 2014, and the increased American viewership up 44 percent over the previous Cup in 2010 may evince such an earthquake, with any subsequent gradual shift under American sports being much less visible.[4]
In the 2014 tournament, a record-breaking 18.2 million viewers in the U.S.—a record American viewership at that point for a soccer game—saw the U.S. game with the E.U. state of Portugal.[5] For the game between the U.S. and the E.U. state of Germany, 1.7 million concurrent viewers were logged on to ESPN—more than the number that had signed in to watch Super Bowl less than five months earlier.[6] For the final, the record broke again, with 26.5 million people in the U.S. watching, according to the Nielson company, with over 750,000 more people watching the game online at any given minute.[7] Generally speaking, the average viewership in the U.S. for all of the 2014 World Cup matches was up nearly 40 percent over the previous Cup in 2010.[8]

Such a leap in popularity raises the possibility that soccer, which is known more accurately to the rest of the world as football, could act as a sort of pressure-release value on the inherently dangerous sport of head-clashes and body collisions. Even though the two sports are played in different seasons, the people over at the danger-plagued NFL must have noticed the dramatically increased popularity of soccer in the summer of 2014.

To be sure, soccer still had a distance to go before triumphing over American football’s major feast-day. After all, American football is, well, American, while taking up soccer means getting in bed with the rest of the world--something anathema to American isolationists and the "City on a Hill" pilgrims. Additionally, as some pundits observed, a low-scoring soccer game can be pretty boring (like baseball?). That's actually a fair point, which is why I advocate the heresy of making the goals wider. Lest too much scoring occur, the economic law of declining marginal returns suggests that the width be brought in a bit, though still wider than was the case for all those low-scoring World Cup games in 2010. Lest the statistics-obsessed traditionalist lose it over this suggestion, those little factoids are merely means, rather then ends in themselves.

Whether or not soccer is spruced up, the huge bump in both fan enthusiasm and numbers of Americans watching the World Cup games may point to a opening void in American sports, festering just under the surface since the bad news for American football Fans from that sport may one day be up for grabs, with the healthier, more athletic sport hopefully scoring more and reaping the benefits.

[1] Frontline, “League of Denial,” PBS, 2012.
[2] Ibid.
[3] Brent Schotenboer, “NFL Takes Aim at $25 Billion, But at What Price?USA Today, February 5, 2014.
[4] Kim Bellware, “USA vs. Belgium World Cup Match Breaks Another Ratings Record,” The Huffington Post, July 2, 2014.
[5] Kim Bellware, “It’s Official: The United States As a Nation Has Gone World Cup Crazy,” The Huffington Post, June 27, 2014.
[6] Ibid.
[7]David Bauder, "The World Cup Final Was the Most Watched Soccer Game in U.S. History," Associated Press, July 14, 2014.
[8] Ibid.

Wednesday, June 25, 2014

On the Banality of Disruptive Innovation

When a herd grabs hold of something, odds are that its original meaning will not only get trampled over, but also in a way that turns it up-side down before spreading it all over as if it were sweet-smelling manure. Particularly striking is the ensuing willfulness that typically contravenes efforts to pen in the herd to the confines of the term’s definition. I have in mind the erroneous and even tautological self-aggrandizing trajectory of the term disruption in the business sector of society. Drawing on Nietzsche, I submit that the offending sickness is centered in an interlarding presumptuousness to define an existing word conveniently, even in ways that are antithetical to the received meaning. That is to say, this cultural problem involves more than garden-variety ignorance.

In his essay in New York Magazine, Kevin Roose maligns all the efforts by business practitioners to fly the flag of disruption as “an all-purpose rhetorical bludgeon” that “can distract.”[1] In spite of disruptive innovation being defined as the process by which “’technologically straightforward’ services target the bottom end of an established market, then move their way up the chain until, eventually, they overtake the existing market leaders,” many “disruptive” start-ups do not actually follow this route.

Tesla Motors, for example, may render fossil fuels obsolete for cars, but the innovation “is not disruptive in the classic sense, since its approach has been to start selling to high-end buyers with the hope of eventually moving downmarket.” Nor are Google’s  “smart” thermostats disruptive either, going at $249 each. According to Maxwell Wessel, “If a start-up . . . launches a better product, at a higher margin, to an incumbent’s best customers—that’s not distruption. That’s just . . . innovation.” I contend that it is precisely such “just innovation” that the self-aggrandizing herd animals are refusing to accept in over-reaching to misappropriate the label of disruption. Undoubtedly, a hardened refusal to go back to mere innovation confronts any effort (such as Roose’s) to defend the integrity of the word. That is to say, a refusal to accept a realistic rendering of one’s achievement is at least one of the sources of the presumptuousness in ignoring or even dismissing such correction.

If my theory holds, the operative dynamic is not a lack of education. To be sure, instructors in business schools may have joined in with the herd, using disruption as a buzzword without pointing out that a tautology—something that applies to virtually everything in a domain—is actually void of any substantive meaning. If disruption is in every company, then disruption is actually the order of the existing status quo. If every innovation is disruptive, then why bother to say so? Why boast of breathing air when everyone is doing it?

Did Mark Zuckerberg know the meaning of the word in its business sense when he was presumably pontificating about it? That he dropped out of Harvard in his second year may imply something about how much he values "book learning." Yet more than just disvaluing the vaults of knowledge in academe is involved in the adoption of a fashionable buzzword and refusing to back down from a tautological and even an erroneous usage. (Image Source: Business Insider)

So ignorance is not extraneous. Not all disruptive change is good; the financial crisis of 2008 resulted in large part from the innovations in derivative security products and the related risk-swaps made infamous by AIG. The corporate managers “blindly waving the flag of disruption” are indeed ignorant of what the term means in terms of innovation. Even if the intent is to engage in “meaningless rhetoric” for motivational purposes, the “incessant droning on” must surely connote a more generalized condition of ignorance to anyone who knows what the term actually means.

Should an attempt to correct the incorrect or tautological use be rebuffed, the ignorance that can’t be wrong manifests something else: presumptuousness like that of ignorance on stilts during a flood—the presumption to being entitled to more than is justified by the facts on the ground. Although a refusal to face the handwriting on the wall is doubtless in the mix, this does not exhaust the explanation for why a person would join the buzzword chorus in the first place. Presumption resides even in assuming a sort of license to use a word to suit one’s own situation without bothering to find out what the word actually means. Ironically, the attempt to vaunt one’s venture by adopting a buzzword gives the manager—and, by extension, the company—a pedestrian, or low-class, air; for in over-reaching in a banal way, a person becomes a grasping herd-animal whose will to power, Nietzsche tells us, extends beyond whatever strength it has innately.

[1]This an all other quotes in this essay are from: Kevin Roose, “Let’s All Stop Saying ‘Disrupt’ Right This Instant,” New York Magazine, June 16, 2014.

Saturday, June 21, 2014

Presbyterian Church (USA): Divestment from Companies Helping Israel

By a narrow vote of 310 to 303, the General Assembly of the Presbyterian Church (USA) voted in June 2014 to divest about $21 million in stock from Motorola, Caterpillar, and Hewlett Packard because their respective products were being used by the Israeli Government in violent occupation of the Palestinian territories. The Friends Fiduciary Corp, which manages investments for 250 Quaker groups, had divested from Catepillar, Motorola, and Veolia Environment two years earlier, and in 2013 the Mennonite Central Committee decided not to “knowingly invest in companies that benefit from products or services used to perpetrate acts of violence against Palestinians [and] Israelis.”[1] This point brings up the ethical point of what to do about companies that sell products used in violence by the Palestinians. To occupy is not like being occupied, though violence is violence. Moreover, using divestment from holding equity in a company may not be a very effective strategy, other than perhaps serving as a symbol, though even in this respect the effort can fad without having brought about the desired policy change.

The Caterpillar bulldozers used by the Israelis to topple Palestinian neighborhoods in shows of “collective justice” had actually been sold to the U.S. Government, which in turn either sold or gave the trucks to Israel. Even if Caterpillar’s management could possibly have predicted the eventual transfer from the buyer to a third party, holding the company ethically responsible for the actions of the U.S. Government would be unfair. To be sure, were the product inherently dangerous, such as a grenade, the eventual use could be anticipated even by the manufacturer, but a bulldozer truck’s use is not inherently violent. Nor would it be fair to draw attention to the company simply out of frustration with the U.S. Government, given the power of the main Israeli lobby, the American Israel Public Affairs Committee (AIPAC). If the U.S. Government is looking the other way as it hands over billions of dollars in aid to Israel even as it continues to occupy Palestinian territory and build still more settlements, taking frustration out on the companies that sell to Israel’s government violates the ethical principle of fairness. Even if divestment pressures the companies not to sell to Israel, the products can wind up there in ways that are beyond the ability of companies to control.

Furthermore, how much financial damage to the three companies is exacted from selling $21 million in stock? Presumably buyers exist—the Dow at the time heading close to 17,000 and the S&P above 1960. The principle impact, I submit, is symbolic; a religious group of 1.76 million members essentially says “No” to Israel’s violence-ridden occupation of a people. The ethical dimension is salient owing to the fact that the group is religious in nature. Yet even in this respect, like the years of divestment from South Africa to free Nelson Mandela and put an end to apartheid, the creation of a symbol does not portend quick results. Indeed, the condition of divestment can itself become part of the status quo, rather than an event.

Additionally, the symbol may backfire. At the Presbyterian assembly meeting, Rabbi Steve Gutow of the Jewish Council for Public Affairs, described the vote as coming out of a “deep animus” against “both the Jewish people and the State of Israel.”[2] To be sure, as depicted in the Oscar-winning 1947 film, Gentleman’s Agreement, anti-Semitism can be as subtle as simply saying nothing after a joke at a dinner table. Following the defeat of the Nazi Germany, many Americans were doubtless able to conclude that anti-Semitism and racism had been squashed “over there”—meaning there’s none of that here. The film demonstrates just how pervasive denial can be. Nevertheless, anti-Semitism (and racism) can also be used as a weapon that obfuscates the real point of a decision such as that of the Presbyterians. The violence of an occupier is sufficiently galvanizing for observers that the alternative charge of anti-Semitism has the air of phoniness. In other words, a person can be against such violence without hating Jews.

Therefore, both the divestment strategy and the charge of anti-Semitism can be viewed as weak responses. To the extent that political mobilization would be futile too, given the political power of the pro-Israel lobby in Washington, D.C., we might just be left with a “no good alternative” situation in which the quagmire goes on and on. With regard to the natural frustration at the status quo protected by long-entrenched, powerful interests, perhaps the sad reality is that most people simply tune out.

[1] Jaweed Kaleem, “Presbyterian Church (USA) Makes Controversial Divestment Move Against Israel,” The Huffington Post, June 20, 2014.
[2] Ibid.

Thursday, June 12, 2014

Trading Egalitarian Reputational Capital For First-Class Business: JetBlue Airline

It may sound trite, but managers really do compromise or expunge their company’s reputational capital altogether in order to chase down the additional revenue obtainable from a market segment that had been extraneous to the reputation. If the new advertisements have a Janus-like duplicitousness air, the source is not likely even to admit to the previously long-held principles. Indeed, the contrivance can be discerned from the way in which artful managers use words themselves—stretching them for an intended effect well past their respective meanings and customary usages. Unfortunately, the made-up diction can be contagious in a society that esteems organizational position.

I have in mind Jet Blue’s switch from its egalitarian single-class cabins to the first/coach bifurcated model. Left in the jet-wash is the company’s long-standing principle of egalitarianism, lost in the anticipation of more revenue from business travelers. Jami Counter at a website that includes reviews of airlines suggests that Jet Blue would no longer be “challenged winning their fair share of corporate and business contracts because they didn’t have a true premium experience.”[1] What, pray tell, is a premium experience? How does a true one differ from the mere garden-variety? In the case of JetBlue, the benefits to the business traveler include “the longest, widest flatbed seats” on any route within the U.S., and four “suites”—single-seat “pods” with their own doors.[2] The latter reminds me of the forts my elementary school friends and I used to make in the woods behind the school; each of us would pick a bush and use its base to build a tiny enclosed “fort.” It would seem that adult business travelers have the same instinct.

In any case, we don’t have to look far to see where verbal garbage like “a true premium experience” comes from. Perhaps the experience-warping complimentary “signature drink” before take-off and a “cocktail” before dinner might render experience itself transparent, such that the airline could indeed market “experience” itself. All the same, I would be more interested in the 100 channels on the seat’s 15-inch screen, and whether I could plug my laptop into it as I sit in my little fort as the elongated tin can careens forward at 30,000 feet at 500 miles an hour.

Jamie Perry, the airline’s director of product development, delivered a line as if on cue that the novelty would not be limited to the “Mint,” or first-class” experience; an “effort to reinvent the core cabin”[3]—where “core” is a cover for coach—boils down to bigger seats, power-outlets at each one, and up to 100 channels of television undoubtedly to placate perturbed pre-existing customers accustomed to flying egalitarian. Perry's linguistic over-reach—the larger seats and additional plugs hardly constituting an invention in any sense of the word (and reinvention being an oxymoron, like rebeginning)—points to a certain round-aboutness that is anything but up-front and transparent. 

Behind the "reinvented cabin" is a manufactured shift from the longstanding egalitarian premise to that of all boats rising—just not to the same level. The lack of equivalence is precisely what the fuzzy word-play is meant to blur. That is to say, the crafty wordplay—“core” for coach and “premium experience” for first-class service—dovetails with the wily switch from the long-held principle to one that allows for broader revenue streams. 

I disagree with Counter’s contention that JetBlue did not change its business model in the process; in fact, I would say that the first-class/coach standard fare deprives the airline of the more distinctive model, and thus of the associated reputational capital. To be sure, Counter does acknowledge that the change “could alienate the loyal JetBlue flier who now has to walk past (five) rows of a very premium experience.”[4] There we go again! How exactly does a person walk past an experience? Does a person say, “Hey, guess what—yesterday I was out doing errands and I drove right past an experience!” The response is likely to be, “Time for your medication again, dear.”

In actuality, the coach passengers are to walk past rows of more spacious seating arrangements and larger television screens. Putting the matter thusly, rather than artfully and without concrete substance, makes the cost to the airline’s reputational capital transparent—especially with respect to the loyal (i.e., long-standing) passengers who will of course instantly notice the unpalatable change. Such passengers need only look over at Southwest Airline, whose approach to attracting more business passengers was to expand to big-city airports and offer “business select” priority boarding, a free drink, and extra frequent-flier miles rather than introducing a separate class of seating.[5] That is to say, Jetblue managers could have went with alternatives to the old first-class/coach model. The principles that a company supposedly “stands for” are indeed expendable, particularly when they grind up against an untapped source of revenue.

1. Charisse Jones, “Egalitarian JetBlue Tries Out First Class,” USA Today, June 12, 2014.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ben Mutzabaugh, “Southwest Finds Itself at a Crossroads,” USA Today, June 30, 2014.