Another CEO Bites the Dust

The former CEO of BP, Bernard Looney, resigned unexpectedly from his position at the company.  There had been some allegations that Mr. Looney had been involved in inappropriate relationships with colleagues.  The BP board reviewed the allegations and concluded that there were no violations of the BP code of ethics.  Mr. Looney could stay aboard.

However, following that finding, additional allegations emerged.  The board then released a statement, “Mr. Looney has today informed the company that he now accepts that he was not fully transparent in his previous disclosures.” Effective immediately, Mr. Looney was gone. Do you just love that Mr. Looney did not say that he in fact had those relationships.? His only admission was that he accepts the board’s definition of transparency about the relationships.  The technical term for what Mr. Looney has done following his non-admission admission is weasel.

How many times must we live through these lessons?  When it comes to office relationships, two words should do it, “Stop that!”  And another piece of advice:  Don’t try to hide those relationships, don’t lie about those relationships, don’t resort to analysis of the code of ethics to see if you violated the terms of your contract, and don’t apologize for the lack of transparency.  These relationships of CFOs are wrong, wrong, wrong, wrong.  Lying about them is crazy  No, No– lying about them is actually [L]ooney.  Jenny Strasburg, “BP Chief Quits Over His Past Relationships with Staff,” Wall Street Journal, September 13, 2023

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Wells Fargo: The Bank That Can’t Get Past

“It takes a long time to turn a big ship.”  No dispute there, but Wells Fargo’s fake-account scandal exploded in September 2016.  There should have been some slight tacking.

However, Wells, whose stock has declined 15% since the 2016 shock (other banks’ stock prices have grown exponentially, with some doubled in value), still misses internal control issues, such as employee fraud in checking cashing and clearing. When it comes to self-assessment of risk, Wells, well, does not seem to get it.

Wells has employees meeting daily, virtually and in-person, to review risks and proposals for eliminating those risks.  Still, Wells missed that fraud issue despite all the efforts. And the U.S. Comptroller of  Currency has already indicated that the best way to fix big banks such as Wells may be to break up those big banks into smaller banks where problems emerge more quickly and can be remedied.

The problem at Wells is and always has been its culture. Culture change is a tough slog.  It would not be unusual for a culture change to take five to ten years.  However, if there is no visible difference in seven years, i.e., the ship is not tacking, then the problems lie with the leaders.

Issues such as incentives, disciplinary processes, terminations, turnover, promotions, demotions, and consistency in all of the previous areas are critical.  Employee risk assessment groups cannot trump what employees see happening to them and their colleagues.  Wells has a soft skills problem and it has been trying to solve it with a rote, mechanized process.  Internal controls do not a culture make.  Internal controls are late-catches for bad behaviors.  Root out the bad behaviors and you may see some tacking.



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The Irony of College Applicants Avoiding Writing as Inmates Embrace It

AI gives high school students the opportunity to have someone else write their college admissions application essays for them.  Avoiding writing seems to be the goal for those who seek a college degree.  Ironically, one of the successful programs launched for inmates has been one in free writing.  The inmates sit down with a former prosecutor who encourages them to write. One inmate explained, “I just let whatever goes through my mind go on the paper.  That’s where the magic happens.” It sure does.

Writing demands introspection, attention, reasoning, concentration, patience, learning, insight, and all of these over and over again.  Tragic that the high school kids try to avoid it as those with fewer opportunities recognize its power and their need to just do it.

There is some critically acclaimed material coming out of the prisons.  Along with the writing success, there is something else emerging from the prisons:  reclaimed lives and reformed individuals who can now see the world is their oyster.

Ernesto Londono, “Finding Clarity and Inspiration in Writing, While Incarcerated,” New York Times, September 8, 2023, p. A12.


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Retailers Gaming their Sales Techniques

Eddie Bauer was sued by a consumer who paid $6.00 for a pair of leggings originally priced at $12.50. The consumer discovered that the original price was not $12.50, but much less. An Amazon customer complained that a $114.99 vacuum seller changed its list price to  $249.99.  The seller  then reduced that price to $189.95 for two days.  After that “special sale price,” for two days only,  the seller changed the price back to $114.99.  Amazon says that it now has a system for monitoring such practices. Patrick Coffee, “Stores Accused of Fake Sales,”  Wall Street Journal, August 24, 2023, p. B5.

Known as “fake sales,” retailers are using the tactic more and more as consumer purchases decline. The Federal Trade Commission does not dabble in pricing guidelines.  The states do the regulating of fake sales, and not much regulation is taking place there.

Consumers have been filing suit against the sellers  who inflate original prices to lead customers to believe there is a sale item. However, a recent dismissal of such a case has put the kibosh on these class actions.  The judge dismissed  the suit against Eddie Bauer for the $6.00 leggings because plaintiff purchaser could not show any harm.

So, the risk of being caught is small.  Now the risk of having to pay any damages has been reduced as the suits go nowhere.  However, the retailer gains market share and revenue boosts.  To the retailers it is worth the risk to look better financially, at least on paper.

There is always a way to game the system.  The law may not cover the situation, but ethically speaking???

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Retailers Gaming the System

We just don’t know how much inventory has been stolen from retail stores.  The reason we don’t know is because retailers are using euphemisms to describe what is really happening.  Their financial reports disclose that retailers are experiencing higher “shrink.”  But “shrink” can mean loss of inventory value, as when you have increasing difficulties moving those Pelotons out the door unless you slash the price.  Your inventory value of your Pelotons is cut in half. “Shrink” could also mean that goods were damaged in transit.

What retailers are not saying is that shoplifting, smashing and grabbing, and, well, stealing, are on the rise.  There is “organized retail crime,” not “shrink.  However, the retail stores do not wish to offend.  After all, it is their vault those designer bags, wallets, and belts are needed for going out shopping for food.

Retailers say little because they do not wish to offend.  They just bemoan their inability to to take off the financial pressure of shrink.  It would be better to bemoan the fact that their “shrink” will not end any time soon.  That’s because no one who is stealing, shoplifting, and smashing and grabbing is being arrested.  We watch them on videos each night.  One shoplifter this week dragged out the entire display stand to which the designer bags, which were being stolen, were hooked.  How hard can it be to walk down the street and find a 30-year-old man wandering the streets pulling a Nordstrom display case who is looking for wire cutters?

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An “Oops” From the Justice Department on the KPMG Prosecutions

In the so-called “steal the exam” scandal, the federal government prosecuted a former KPMG audit partner as well as an official with PCAOB (the federal government regulator of audit firms that audits publicly traded companies). They were convicted or settled their cases.

KPMG had not been doing so well on its audit quality scores from PCAOB.   So, KPMG got to work and made contacts with PCAOB employees to obtain critical information: Which company audits that KPMG had done would PCAOB review? Some PCAOB employees cooperated with KPMG and later got KPMG jobs.

What KPMG and the PCAOB employees did was just plain wrong.  But, it was not criminal.  The U.S. Supreme Court, and federal district and appellate courts following the high court’s lead, have been curbing the use of federal fraud statutes to prosecute conduct that do not fit the crime’s elements.

Wire fraud charges must involve some type of conduct that deprives someone of property or money. Deception, corruption, and abuse of power are wrong, but do not fall under federal fraud statutes. Several of the parents in the Varsity Blues admissions scandal had their convictions reversed.  Why?  The Fifth Circuit appellate court held that admission to a university is not property. Dave Michaels, “New Definition of Fraud Derails High-Profile Cases,” Wall Street Journal, August 4, 2023, p. B10.

So, the prosecutors in the KPMG case have admitted that they were wrong. The charges have been dropped.  So, when Dave Middendorf, a KPMG audit partner, said at his sentencing hearing that he never imagined that what he was doing was wrong, he was correct.  At least in a criminal law sense.  What Mr. Middendorf  did was unfair, deceitful, and corrupt.  He damaged the audit profession and chipped away at the trust needed in economic systems.  Cheating isn’t always criminal. If it were, by latest stats, 90% of college students would be in jail.

Ethics play a critical role in society. Not every rotten, dirty trick can be criminalized.  Enter ethics. Ethical standards offer some semblance of fair play. Without them society and the economy are the lesser as cheaters run free, happy, and unaccountable in search of another way to game the system without dipping a toe into fraud.

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The Hazing and Hazy Mess at Northwestern

If true, the details on the hazing in the football and baseball programs at Northwestern are deeply troubling.  How many times must we live through these college sports debacles before university presidents realize that college athletic programs are to colleges and universities what wealthy clients are to banks and toddlers around swimming pools are to their mothers?  You watch them all the time and you never leave them unattended.

Perhaps more stunning is the difference in experiences of those who were part of the athletic department.  Some saw nothing and others saw players forced to practice au buffo.  If witnesses were uncomfortable raising the issues related to nakedness, they could have hung their hats on  the legal liability of players practicing without padding.

Perhaps most stunning is that Northwestern was aware of the allegations in November 2022 and took no action until July 2023. In the interim, alumni were filing lawsuits and even the student newspaper was cracking the case wide open.

Northwestern’s brand spanking new president is slow on the uptake.  He has offered that there was a culture driving the behaviors.  The only cure for a culture is cleaning the leadership house along with a good portion of those aligned with them. The football coach is already gone following a bone-chilling two-week suspension (?????). He is lawyered up because $5 million per year is a tough gig to lose. And all this before the new president even had a chance to take off his cap and gown from his inauguration ceremony.

Therein lies the lesson for all college and university presidents — never mind the pomp and circumstance. Assume chicanery is afoot.  Forget the faculty and alumni donors.  Heigh thee down to the field house, stadium, or locker room for a surprise visit or two.  Oh, the things you will see, and the fixes you will need.

Dana Goldstein and Billy Witz, “Accusations of Abuse and Racism Plague Northwestern,” New York Times, July 30, 2023, p. A28.

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Product Recalls: Take Your Pain, Get It Out There, Get It Over With, or Suffer More

A new study reveals the following about the recall of medical devices and the behaviors of their CEOs:

The greater the level of stock ownership by the CEO, the longer the delay in issuing the recall for the medical device

The greater the defect in the medical device, the longer the delay

The greater the delay in recalling the medical device, the more the stock market punishes the company

While it is true that the delay could be the result of trying to determine the root cause of the defect, the studies offer the wisdom of the ages:  If a company has bad news, take your pain:  Get the information out there and get it over with.  With medical devices, the motivation to disclose early and often should be paramount because lives and health hang in the balance.

For board members, watch the CEO’s stock ownership and review and discuss delay risks in recalls.  And it must follow, as the night the day, the market punishes the stock of companies with recalls, as it should.  However, wait too long and the market punishment is greater because the market punishes for lack of trust and not just the  costs and litigation that come with product defects.

Jessica Darby, David J. Kitchen, Jr., George P. Ball, and Ijjal Mukherjee, “CEO Stock Ownership, Recall Timing, and Stock Market Penalties,” Manufacturing & Service Operations Management (2023),

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NCAA and Accountability

The NCAA found that the University of Tennessee gave $60,000 of forbidden benefits.  Those benefits included $5,000 and $6,000 payments to the parents of football players.  The former head coach of the Titans also worked with others in the Athletic Department to camouflage those payments. There were also 110 impermissible hotel nights and 180 impermissible meals.

As bad as all that sounds, the NCAA opted not to impose a ban on the team’s participation in postseason bowl games.  Crediting “exemplary cooperation” by the university, the NCAA fined the university $8 million and banished the former coach from coaching positions for six years. UT lost 28 scholarships but was credited with 16 scholarship reductions the university had imposed as a self-punishment.

So the lessons learned?  Be really sorry.  Be really cooperative with the NCAA.  And get ahead of the curve with your own self-imposed sanctions and you skirt the big kahuna of penalties — post-season play.

Accountability used to involve more pain.  Now we have it down to formulas that avoid doing what schools fear most.

Santa Neckar, “N.C.A.A. Gives Tennessee $8 Million Fine for Skirting Rules, but Not a Bowl Ban,”  New York Times, July 15, 2023, p. B12.


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Churchill Downs Extends Bob Baffert’s Suspension Through 2024- “[He] cannot be trusted to avoid future misconduct.”

The Churchill Downs cited Mr. Baffert’s continued unwillingness to accept responsibility for the failed postrace drug test of the 2021 Kentucky Derby winner, Medina Spirit.Medina Spirit’s victory was revoked.

Mr. Baffert’s horses have won the Kentucky Derby six times.  His career earnings total $344 million.   But, Mr. Baffert has had more than his share of controversies. His autobiography includes his stories of skirting rules.

One of the non-quantifiable benefits of ethics is trust.  If someone has never had a question about following rules, their explanations when facing an accusation hold some weight.  Without trust, skepticism abounds.  From the little boy who cried wolf too often to the Baffert stories about how his horses came to test positive, the credibility gap grows.  So does the length of the suspensions.

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Crackdowns on Gaming the System to Avoid Membership Fees and Subscriptions: Netflix and Costco Get Serious

Netflix is cracking down on memberships used all around the family.  Mom and Dad are kicking the kids off because Netflix is on to the whole fam deal for one subscription.  Now Costco is cutting off the way nonmembers were gaming the system.

Costco has patrols at the entrance — you must show your card.  Costco has patrols at its exits.  After you walk through the hot-dog area you can’t escape without getting your receipt marked with a yellow highlighter.  That kind of crackerjack security system couldn’t possibly have flaws.

Enter the neighbors, relatives, and friends who use the self checkout lines at Costco.  You did not need to worry about ID and photos on the card you were using.  No one was checking and you could sail through payment, the hot dogs, and on to the highlighter without actually having your own Costco membership card.

No more!  Costco is on to the gamers.  You will now have to show your ID at the self checkout lanes. No more loading up on one membership.  Now the self checkout lanes will be as gummed up as the regular lanes with yet another security checkpoint added to the whole Costco experience.

Funny, the little fees for which we will sell our souls. Funny how the dishonest impose time costs on those of us who pay for memberships.  Makes you want to do some serious damage with a yellow highlighter.

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Those Olympics, Again!

Well, at least it’s not bribery this time.  French authorities raided the headquarters of the international organizing committee on their suspicions of embezzlement.  There were corruption suspicions in the 2016 Rio games and in the 2021 games in Japan. Not to mention the Salt Lake City Winter Olympics and their merry band of “briberious” manipulators.

Let’s face it — some of the people running the Olympics just cannot resist cash.  Perhaps cleaning house could help.

Joshua Robinson, “French Authorities Raid Offices of Paris 2024 Olympic Organizers,” Wall Street Journal, June 21, 2023, p. A14

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Even the Dollar Stores Suffer From Theft

We have known the answer to, “Would you sell your soul for a Louis Vuitton bag?” for some time.  Ongoing raids of luxury stores by looters seizing the luxury brands is not just the sale of a soul.  It’s a sale that ends up on TikTok, with great pride and no fear of prosecution.

But, the price of a soul is declining.  Dollar Tree reports that their gross margins have shrunk 30.5% so far this year due to theft.  Their usual shrinkage rate is 3.5%. Their level of sales is up but theft still takes them into negative category. Dollar Tree and Christian Dior look the same now.  There are security guards looming at the doors of both store chains.

Oh, dear prosecutors, where art thou?

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Target’s Profits Are Down $500 Million So Far This Year

The reason? “Violent incidents” resulting in stolen property. It’s gang looting, gang! Then the thieves post themselves on TikTok in the middle of the looting.  “A culture of impunity drives the market for retail theft.”  Indulging criminals is no way to run a country.  Because of that we are approaching a point of having no way to run a store.   Target is grappling with that sad reality.

The result?  Target closes stores in high-crime areas, leaving the residents there with no place to shop. The looters are eating their own.  It happens when the rule of law breaks down.

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