The Ethical Barometer

The FAA nearly grounded 38 of Southwest’s 737 fleet on the grounds that the planes had incomplete maintenance records. Inspectors on the ground said immediate action was necessary. The FAA’s head of the office of audit and evaluation said urgent action was necessary and that some of the records for the planes had not yet been translated into English. Southwest has called the situation one of “regulatory compliance” not an “elevated safety risk.” Got that? The regulations on inspection and records are not necessary for safety. Either the inspections and records are in compliance or they are not. Why are the regulations there? Why the inspections? There is some circular reasoning going on here.

In May, Intel released a fix for a series of security weaknesses in its processors. Users assumed the problem was fixed. However, some Dutch researchers found that the problem was not fixed, and six months later (November), Intel released another patch. The problem is not a new one to Intel. The company lived through a debacle in 1993 when a math professor found a computing error in Intel’s new Pentium chip. Intel continued to ship the chips despite knowledge of the problem and offered fixes, but only for those computer owners who need to do computations. When IBM quit using the chips until there was a fix, Intel finally undertook a real fix. Sometimes the lessons in the past are forgotten in the future.

Kudos to the Wall Street Journal for good old-fashioned journalism. The Journal uncovered that McDonald’s was investigating its former CEO, Steve Easterbrook, for weeks before the announcement of his departure. The company’s general counsel had conducted an investigation and reported to the board that Easterbrook had a short-term consensual relationship with an employee. However, the board concluded that Easterbrook’s judgment was in question. The board reached that conclusion because this was not its first rodeo.

Before Easterbrook became CEO he had a relationship with Denise Paleothodoros, staff member at Golin, a PR subsidiary of Interpublic Group, a company that contracts with McDonald’s. Ms. Palothosdoros did work on the McDonald’s account. Easterbrook disclosed the relationship to the board, the board approved it if Ms. Paleothosdoros was removed from the account. Easterbrook was separated from his wife at the time he became CEO of McDonald’s and is now divorced. The relationship with Ms. Paleothdoros is also now over.

This is the stuff of soap operas. How do thees folks get any work done? Just have a Happy Meal and do your job. Dating, marriage (and not the same person), and CEOing do not mix.

There McKinsey is, right in the middle of that PGE mess of a bankruptcy. And there the Feds are doing interviews at Alpha Natural Resources and SunEdison and McKinsey’s work in their bankruptcies. The bankruptcy judges in both of those cases suggested that the Justice Department was best equipped to handle the conflicts questions related to McKinsey’s involvement and possible conflicts in those cases. McKinsey has had legal opinions and has been insistent that investments by its investment fund, MIO, did not require conflicts disclosures for its position in the companies. MIO is listed as a McKinsey subsidiary and an investment vehicle for retirement funds for McKinsey’s employees and partners.

A curious question in the SunEdison bankruptcy relates to McKinsey pulling back unpaid invoices for its work for SunEdison after SunEdison filed for bankruptcy. Those invoices were then revised and resubmitted to four profitable subsidiaries of SunEdison. An e-mail discloses that project managers in those companies were miffed about absorbing the costs. Whoa! Little bit of gaming the system there.

Unclear where this will go, but it ain’t over until it’s over.

Titans (I believe Tennessee?) offensive lineman (who knows what that is), who leads his team with 9 penalties in 6 games.

The Barometer is grateful for this NFL player’s well said standard for avoiding penalties in football. Stay as far away from the line as possible — don’t interpret, don’t push the envelope, and don’t give any regulator any reason to call a penalty. From the world of sports, a wonderful analogy.

Yale, Georgetown, USC, and other universities were hit by operation Varsity Blue, the largest college-cheating scandal in history. Mastermind Rick Singer funneled money to the universities in exchange for their admission of the children of the wealthy. However, when Singer called the admissions officer of Occidental College and asked Mr. Vince Cuseo to reconsider the rejection of an “academically challenged daughter of a wealthy family,” he hit a closed door in his side-door, back-door, basement infiltration approach to admissions. Singer said Occidental was “dumb” for having “too thick of a wall between admissions and fundraising departments.” Jennifer Levitz and Douglas Belkin, “L.A. College Rebuffed Admissions Scammer,” Wall Street Journal,, November 7, 2019, p. A1.

Singer was flummoxed because he referred to what he was proposing as a “win-win” for the young woman and her family and Occidental. But, Occidental had made the decision back in the 1980s that it would not admit the children of the wealthy because they were the children of the wealthy. Occidental went with upholding standards and a strategy of raising money for scholarships for minority students.

The campus does not have the trappings of the schools with legacy admits and the children of the wealthy, but the school seems to have a credo, lines it does not cross. One is not gaming the rejection rate. Occidental has not lowered its standards in order to increase the number of applications and appear to be more selective. Faculty members report discussions of those strategies but also a simple shut-down, “It’s not who we are.”

FYI — 43% of Harvard white students are athletes, legacy admits, or the children of donors or faculty. Parents, please let your children grown up to be Occidental students. Occidental — stay the course. To the Wall Street Journal, gratitude for showing us that there are those who do not rationalize, who have clear lines, and whose employees know those lines and live them.

Oh, that College Board! Oh, those test scores! Oh, those colleges and universities! They are gaming the system.

The College Board rakes in the dough by charging students to take PSAT, SAT, and AP tests. Then the College Board sells test data to colleges and universities. The colleges and universities then take then send out letters to high school students that seem to be recruiting letters. Most of the students apply and most are rejected. However, the colleges and universities thereby get their rejection rates up, thereby giving the appearance of an elite institution. The number admitted has remained the same, but the number rejected has increased almost 300%. Yes, more are applying, but you have a great many crestfallen applicants who believed that they were sought after and assured acceptance.

Well Fargo and their fake accounts have nothing on this scheme to improve those numbers, rankings, and ratings.

Two weeks before the collapse of the Vale SA dam in Brazil that killed 270 people, Vale’s then-CEO, CFO, and other executives received the following anonymous e-mail:

“We are facing great challenges ahead, our operations are lacking the minimum level of adequate investment, we are lacking personnel in the operational, maintenance and engineering areas and they are poorly remunerated…equipment is breaking, the dams are at their limit.” Luciana Magalhaes and Samantha Pearson, “Warned of a Problem, Vale’s CEO Lashed Out,” Wall Street Journal,November 5, 2019, p. A1.

There is now a criminal investigation focusing on the warning and a Vale spokesperson said that the warning was “generic.” However, the follow-up e-mail from then-CEO Fabio Schvartsman to other executives told them to find out who wrote it so that he could speak to the employee “eye to eye.” Mr. Schvartsman did not order an investigation into the allegations and added that the employee was a disgruntled one who was upset with his changes as CEO — one of which was eliminating the fiefs in the company. Say what?

Here’s a safety tip for CEOs around the world: When you get an anonymous complaint or any type of complaint, piece of information, or tip, remember this saying, “If what they said it true, you have a problem, if what they said is false, you have a problem. Find out if what they are saying it true, fix it. If what they are saying is false, fix the culture.” Disgruntled employees have a root cause– find it and fix it.

This is one for the books, as it were. Mattel understated its losses in the third and fourth quarters of 2017 by $109 million. The mistake in losses resulted from an error in calculating an allowance for its tax valuation. The company’s audits committee, along with outside counsel, found that Mattel had to restate its financials (but nothing material here, so move along) and its 10-K. Oh, and the report identified a “material weakness” in internal controls. Say what? So long as it is not quantitatively material, what, me worry? To be fair, the error did not materially affect annual EBITDA, adjusted EBITDA, cash flows, or EPS, i.e., neither the fake numbers nor the real numbers were materially affected — quantitatively)

Anyone can make a mistake on allowances, particularly on taxes. The odd thing about this particular error (and the resulting finding of a material weakness in internal controls) is that no one told either the CEO nor the audit committee about the error. One more odd thing, the error did not come to light until the company’s auditor received a whistleblower letter in August 2019. Oops– one more odd thing. PricewaterhouseCoopers LLP (the supercalifragilisticexpialidocious of the Big 4 accounting firms) replaced its lead partner on the Mattel account because the former lead partner had been recommending people for senior finance positions in Mattel. The whistleblower let those beans spill as well. PwC (to save the space) and Mattel issued statements indicating that they both “take independence seriously” and that they have “robust policies and procedures in place to identify and address potential threats to independence.”

PwC can stay, nothing to see here, and we will fix those internal controls. Just “lapses in judgment by management.” Off you go! The Barometer has found that “lapses in judgment by management” loosely translated means, “Managers were too “‘a scared” to report the error.” Such a “lapse in judgment” travels in pairs. The accounting “lapse in judgment” is followed by another “lapse in judgment” the failure to appreciate that this stuff wants out there. Somehow this stuff always comes out. Sort of comical that the whistleblower sent the letter to PwC — must not have known of the HR work of the audit firm.

See Paul Ziobro, “Mattel’s Finance Chief to Leave,” Wall Street Journal, October 30, 2019, p. B5 for more insights into the issues.

The SEC is investigating AIG sales practices (in its Valic division) with schools districts. Part of the investigation includes looking into whether money Valic gives to schools for certain expenses even as it offers plans, advice, and products to those schools. Oh, and there is the matter of the compensation system for sales reps, i.e., sales reps get bigger bonuses for selling more expensive products and it is not clear that their disclosures of such an upside for them were clear. Oh, and one last thing. The SEC is looking at those who do legal and compliance work for the school districts on their retirement plans. The lawyers are looking at the lawyers who are responsible for making sure retirement plans meet disclosure standards.

AIG has placed several Valid executives on leave, but declined to comment on the investigation. Conflicts of interest are at the heart of this investigation. Only two ways to deal with a conflict of interest: don’t or disclose. In this investigation, the focus seems to be one the adequacy of the disclosures.

Boeing employee e-mail to the head of the Boeing 737 MAX program during the plane’s production. The employee added that, “Our work force is exhausted. Fatigued employees make mistakes.”

At the time of the design of the 737 MAX airplane, Boeing was facing intense competition from Airbus and needed a plane that could carry more passengers for longer distances. Rather than design from scratch, the company started with its existing 737 plane and added bigger engines and made it wider. The result was an impact on the plane’s angle of attack, and a decision to not install an alert for the system tracking the plane’s angle. Cost was an issue as well. The result was pilots had only 10 seconds to react to flawed sensing of the plane’s altitude and automatic adjustments in the wrong directions. Two of the planes crashed, killing 346 people.

Boeing’s CEO testified before Congress this past week, and Boeing ran full-page ads twice in the Wall Street Journal, New York Times, and USA Today explaining what it has done thus far to address the issues with the still-grounded plane and the needs of the families of those who were killed in the two crashes.

Former California Representative Katie Hill gave her last speech on the House floor on Thursday. Ms. Hill said, “I am leaving now because of a double standard. I’m leaving, but we have men who have been credibly accused of intentional acts of sexual violence and remain in board rooms, in the Supreme Court, in this very body and worst of all in the Oval Office.” Speaker of the House Nancy Pelosi added, “Regardless of any errors in judgment that anyone may have made, it’s shameful that she’s been exposed to public humiliation by way of cyber exploitation.”

The cyber exploitation is not the cause of Ms. Hill’s departure. The cyber posts are evidence of truly awful judgment: Nudity, bongs, a Nazi-era tattoo, and a photo of a kiss of a staffer are indeed her personal life. But when there is photographic evidence of bad judgment elected representatives are exposed (as it were) to pressures, threats, and even blackmail, well, there are few choices. The public is not asking for perfect lives in elected representatives — the public is asking for good judgment and discretion. – grown-ups. That was once not too much to ask.

Despite this setback, Ms. Hill has an opportunity to help others. Some of us learn our lessons in life with pain, but in private. Some of us have the documentation of text messages and photos that are out there even when we have changed. The pain and embarrassment are humiliating. She is a public figure who is being judged publicly, but therein lies her opportunity. Helping others understand the risks of posts, messages, and a little too much sharing is a tall order in this era of too much posted information. Ms. Hill should seize this moment, not seek to blame. Grace when we are fallen is an admirable quality. Bitterness cuts off redemption’s freedom.

The Barometer is no fan of Mark Zuckerberg, his hoodies, or his company, Facebook. However, it is a commentary on the intellectual level of members of congress when the man who became a billionaire through a marketing scheme planted within an addictive social media site looks like a sage. Mr. Zuckerberg was up on the Hill looking to win support for Facebook’s cryptocurrency, Libra. Sure, Zuckerberg and fake currency – what could possibly go wrong there? However, the members of congress did not want to zero on on that scary proposition. Nay, nay. They wanted Zuckerberg to pledge to take down political ads that contained “lies.” The ubiquitous Alexandria Ocasio-Cortez was loaded for bear.

AOC: “Could I run ads targeting republicans in primaries saying they voted for the Green New Deal?”
“Do you see a problem here with a complete lack of fact-checking on political advertisements?”
“So you will take down lies or you won’t take down lies? I think this is a pretty simple yes or no.”

Mr. Zuckerberg did not provide an answer, but should have explained the policy his company came up with (not sure Mr. Zuckerberg came up with it, which explains why he was stumped). He did well when he offered an explanation when he spoke recently at a law school. Someone at Facebook figured out that fact-checking political ads would consume their resources. Shades of truth, opinion, phrasing, and other content in all ads are misleading. Check out the infomercials for cooking pans alone.

Are there misleading statements in political ads? Absolutely. Are there misleading statements in speeches by members of congress? ‘Tis why they exist. Are there misleading statements at the UN, the state of the union address, and Parliament? The Honorable AOC needs to learn the old joke, “How can you tell when a politician is lying?” “When his lips are moving.” Or hers. Like the AOC whopper about the world ending in 12 years. That she honestly believes that factoid does not make it true. Or the time she posted footage of her crying at the border as she hung onto a chain-link fence because of the detained children. The problem was that there was just a tree and a Ford Explorer on the other side of the fence, but no detained children.

An AOC staffer offered justification, “But she could see the entrance!” True or false photo op? You decide. The point being that Facebook is right in its policy even if its CEO cannot always articulate it. Zuckerberg lucked out by not answering because whether true or false, political ads need voter discretion, analysis, and reflection. Voters do it well. Facebook has proven unreliable on the issue of disclosure in the past. Designating this crowd as an arbiter of truth would be playing with fire. The prism of self-righteousness in the members of congress does not allow them to see the risk. To his credit, Mr. Zuckerberg does.

Two young London bankers who share an apartment, Darina Windsor and Benjamin Taylor, also shared inside information that they had on companies, such as Merck, Amgen, and Celgene,
with middlemen from 2012 to 2018. The middlemen then passed along that information to securities traders who were able to profit in the 7-figures range from the information. The two used burner phones and used cryptic and very literary code language and the code names “Pops” and “Popsy” in the e-mails to pass along what they had. One title in a e-mail was, “Once upon a time, there was a Pops searching for truffle in the Forest.” The two, now charged with insider trading, were also savvy with the spreadsheets. Popsy sent via e-mail an Excel spreadsheet in which she presented the amount of her cut. The spreadsheet took into account percentages for the participants, exchange rates, and the denomination of bills in her payments, i.e., how many Euro50 notes and $100 bills it would take to pay Pops and her.

The banks that employed Pops and Popsy remain unclear. There will however, be no further references allowed to truffles in work emails.