The Ethical Barometer

Seen it before. Written about it before. The cult-like following among investors and buyers. Tesla is a cultivated brand — status symbol — environmentally conscientious folks who can feel pretentious and pure at the same time. The iconic CEO — Elon Musk. Written about, talked about, and quirky. Facebook posts for ending a marriage are always great fun. That classic swagger — billionaire by age 32. Iconic CEOs mean turnover in the management team. Ugly departure of the former CFO and the original founders. Oh, take a look at that executive compensation with the stock options. We have an irrational share price that cannot come from growth. Where’s the capacity for building and selling the cars the company would have to sell to justify the stock price? 500,000 cars by 2018? As of 2016, Tesla produced 100,000 cars. Stinky governance. Musk is CEO and chairman and no one has any choice about that. Tesla pays SpaceX to leases it aircraft. Tesla bought SolarCity, a company that has been unprofitable since 2012, and Musk’s cousin is the CEO. Not sure how the shareholders of Tesla benefit from the acquisition, but members of the Board do because of their investments. Kimbal Musk, Elon’s brother, may be the most independent director of all because of the investment interconnections among and between the others. The sheer number of subsidiaries is mindboggling. Numbers pressure. The cash burn rate. Investors just managed to pony up another billion in an offering. And this is a company that is unprofitable. The marketing budget has gone from $9 million in 2013 to $58 million in 2015. Divide that by 100,000 cars sold. Think what GM could do with that kind of budget per car.

You hope that Mr. Musk is just a genius and that this all works out for investors. However, Mike Jackson, CEO of AutoNation may be right — it is either the greatest Ponzi scheme ever or, the Barometer’s phrase, another Apple. The Seven Signs of Ethical collapse are evident here — and those seven signs were present in all the once-great ones: Enron, WorldCom, Adelphia, Madoff. You hope for the best, but there comes a point when you have seen the story one too many times.

Antony Jenkins was named Barclay’s CEO in December 2012 following the LIBOR rate-fixing problems at the bank, a serious misstep that cost the bank almost one-half billion in fines. Mr. Jenkins, by all accounts, worked diligently to change the Barclay’s culture. Then, he was fired by Barclay’s board in July 2015 because he was not doing enough shareholder-wise. So much for the culture change; we want turn-arounds and earnings. Enter James E. Staley, former JPMorgan investment bank executive, to take the Barclay’s CEO slot. Hiring from the home of the London Whale and that $6-billion trading loss, may not speak “culture is important here,” either.

In January 2016, things got sticky. The board learned through an anonymous letter that Mr. Staley had asked for some unmasking of a whistleblower. Apparently, the whistleblower Staley wanted identified by the bank’s information security team had written letters to the Barclay’s board and a senior executive raising allegations about another executive and his behavior. Mr. Staley said the allegations were untrue, and he sought to identify the author of the letter.

Now, stop here for a minute. In the world of ethics and compliance, one of the keys to anonymous reporting is anonymity. However, Mr. Staley insists that he did not know such a request was wrong. CEO training must have forgotten to mention the anonymity thing. An investigation by a law firm hired by the Barclay’s board found that Mr. Staley was told at the time his request that he could not unmask the identity of whistleblowers. Mr. Staley did it anyway, has admitted what he did, and is likely to have his bonus (or some portion thereof) clawed back.

The board has received media kudos for holding Mr. Staley to account. Pardon me? There is no way to change a culture when you fired the CEO who was trying to do so but was not making enough money followed by the retention of a CEO who is not too busy to seek the identity of whistleblowers. For what purpose we will never know. What we do know is that Barclay’s has a problem going forward. What employee is his or her right mind would make an anonymous report now? This guy needs to go if the board expects to ever hear about any issue. Mind you, Mr. Staley sought the whistleblowers identity because he felt the whistleblower was in error. Don’t we all! That’s why we have compliance officers and investigations. We sort things through to determine if the whistleblower is right or wrong.

Worse, the regulators have just gotten started on their investigation. Mr. Staley says that he has apologized to the board (“for errors on my part,” which is a weasely way of saying, “Hey, those other guys did it too!”) and vows to cooperate with regulators in their investigation. Let’s hope the regulators see the issues the board missed.

The United Airlines passenger-dragging has a ubiquitous presence on the Internet, TV, radio, and at work gathering places. Every opinion possible has been uttered, save one. Yes, we have no rights as passengers. Yes, United did not handle things well. Yes, this is a PR nightmare. Yes, the lawyers are circling. But, the Barometer sees shortcomings and failures in others beyond United and airport police. How come not one of the seated passengers offered to take the man’s place? There would have been nothing wrong with a passenger saying, “It’s not worth this, I can get off the plane.”

As a frequent flyer, the Barometer has pretty much seen it all, especially the selfishness of travelers. The walking on the backs of other passengers to get on the plane as quickly as possible. The Shetland-pony-size comfort pets. This is a wild crowd. Air travel is not for the faint-hearted. But, when there is tension in the air, and you are not involved, how about easing the tension instead of contributing to injuries, a lawsuit, and a multi-million-dollar award? It is difficult to know who is right and who is wrong, but you know when someone is being physically harmed. Passengers in the video were saying, “This is not right.” No, it was not, no matter who did what, when, and why. Victims of the bystander effect, not a single passenger stepped in. Preventing escalation and further harm is a good thing. So, step in. Help out. Sacrifice.

The Barometer has given up her carry-on bag space to appease foul-mouthed passengers, agitated because they don’t want to check their bags. The Barometer has switched seats when other passengers refused. The Barometer has no expectations on air travel, save one The flight must be relatively crash-free. And 99.9% of the time, my expectation is met. I am grateful for that. Any other inconveniences are solvable and make for great stories. The Barometer would have offered to get off the plane. Frequent flyers know that they will, somehow, get from Chicago to Louisville. A small price to pay to stop the blood-drawing dragging of a human being through the aisle of a regional jet. Life is short. Opportunities to help abound. And in this season, would it have been too much for a single passenger to make a sacrifice to save another?

Reading through the full-page ad Wells Fargo has run in the Wall Street Journal, New York Times, and USA Today. for two days in a row. They have done some good things:

1. Fired some executives who were linked to inappropriate sales practices.
2. The Board “cancelled [Wells prefers the British spelling] all 2016 cash bonuses for 8 senior leaders (including the new CEO) who were serving on the Operating Committee.
3. Separated out the roles of CEO and Chairman of the Board.
4. Refunded $3.2 million to 130,000 customers.
5. Eliminated product sales goals.
6. Changed pay mechanisms for retail bankers.
7. Increased pay for entry-level employees.
8. Created a new Office of Ethics, Oversight, and Integrity.
9. Added protection for those who come forward with issues.
10. Increased training for managers on how to respond to employee concerns and issues.

Good start, but here are some gaps.
1. The changes are all dashboard — you can list them and they make for a nice list. However, the question is whether the culture has changed. The Barometer took a look at the latest report Continue reading →

Uttered by the coach whilst whining about “this junk,” referring to the academic scandal at the university that resulted in 3,000 students getting credit for coursework in classes that never met (and nearly half of the students were student-athletes, mostly football and basketball players). “This junk” went on for 18 years, and the coach seems surprised that it has affected UNC’s reputation and ability to recruit. Well, ethical lapses do that. Ask Wells Fargo what has happened to its ability to recruit new customers. Ask BP about its inability to drill when it was banished from federal contracts. Ask the former Arthur Andersen employees how hard it was for them to get work after their firm collapsed.

Until the term turns from “this junk” to “serious issues involving academic integrity,” UNC cannot move beyond the taint. The first step, in the grand and healing philosophy of AA, is admitting that you have a problem.

Hat tip to USA Today today, April 3, 2017, p. 1C for the quote. Nancy Armour, “Carolina Blue Has a Black Mark.”

Yes, you read that correctly, Bruno, as the star goalkeeper is known in Brazil, was signed by Boa Esporte for two years. He received a 22-year sentence for killing his ex-girlfriend after she demanded child support for their newborn child. He has been released because of his lengthy appeal. He had served six years. And you thought the NFL was bad.

The soccer club’s president says that he was not breaking any laws and, in fact, was fulfilling a “social obligation” by helping Bruno readjust to society after prison (and the act of exploring dismemberment as a possibility for canine nourishment — note, The Barometer inserted this last part). “I have a clear conscience that Bruno needs this process of re-socialization. He deserves another opportunity.” He may have a clear conscience, but the rest of us are sleeping with the lights on tonight.

He avoided the felony charges, but got a misdemeanor conviction for what the jury found was his failure to stop the Sandusky abuse of minors on the Penn State campus. The one count conviction carries punishment of up to five years and a $10,000 fine. Tim Curley, the former athletics director at Penn State, and Gary Schultz, a former senior vice president, turned state’s evidence and testified against Mr. Spanier in exchange for a misdemeanor charge.

The two testified that the three had come up with a plan to not report the Sanudusky behavior and simply handle it in-house with a strong talk with Sandusky. Their plan was self-described as “compassionate.” The smoking gun e-mail that got Mr. Spanier, despite his denials that he knew what was happening is seemingly inexplicable, “The only downside for us is if the message isn’t “heard” and acted upon, and we then become vulnerable for not having reported it.” No, actually, there was another downside. That would be the additional victims of Sandusky who were harmed over nearly a decade of Sandusky’s unfettered access to young males. How we frame an issue dangerously justifies bad decisions and blinds us to true harm. When children are involved, err on the side of no-holds-barred, swift action, not “compassion.”

Brig. Gen. Ron Lewis, a military adviser to Secretary of Defense, Ash Carter, used his government credit card to pay his tabs at “Hooker Hill in Seoul, drank excessively on trips with Secretary Carter, and had “inappropriate interactions” with military and civil female personnel. Mr. Carter sacked him, the Army lopped $10,000 of his pension, and a letter of reprimand outlined all of what was just described. However, the Army has recommended that he keep his security clearance.

Post-military employment with defense contractors requires security clearance. So, the Army does not want to interfere with his ability to cash in with his experience. The bars in Rome and sex clubs in Korea will be happy to know that the former general will be back with private credit cards. Is there an ounce of common sense in Washington, D.C.? Did it occur to anyone there that his behavior pattern a risk to security? And, who would hire this guy? Let’s find him a new line of work, away from national security, travel, and women. Retirement will do nicely.

All analysts want that bit of information they can get from management for an edge in the market. Professors Jonathan Milian, Antoinette Smith, and Elio Alfonso now have a study, “Does an Analyst’s Access to Information Vary with the Favorableness of Their Language When Speaking to Management?” documenting that analysts use groveling to flatter management into serving up more info. Hat tip to Jason Zweig at the Wall Street Journal for finding the study and sharing it with the world. Without him, the paper would have been limited to its 58 downloads, well, 59 with the Barometer’s actions.

In a review of 16,000 earnings conference calls from 2003-2013, the professors found that analysts uttered the term “great quarter” 3,000 times. And that praise is not the only phrase used (although it is the only one with a Twitter account named after it:@greatquarter, which is a parody look at what analysts do). In fact, “great quarter” is mild in comparison to “Amazing,” “Incredible,” “Phenomenal,” and “Congratulations.”

Praise and flattery will get you something, and for analysts, it is access. In one-half of the calls, the authors found praise from analysts. Analysts have entered the school of “everyone gets a trophy.” Anything shy of Chapter 11 bankruptcy gets you a thumbs-up from the peanut gallery of analysts.

On April 4, 2014, the Barometer posted this:

In a 2008 e-mail Thomas Quinn, a PwC tax partner, wrote to Steven R. Williams, a managing director at the firm, “We are going to have to create a story that will put some distance between them [the managers] and the parts…to retain the benefit.” Mr. Williams responded, “What the heck. We’ll all be retired when this comes up on audit.”

Suffice it to say, they did not make it. The two had developed a tax strategy for Caterpillar, which drew both IRS and congressional attention, involved shifting profits to Switzerland through transfer of Caterpillar’s parts sales to a Swiss operation. When Mr. Quinn was asked about the e-mail exchange during congressional hearings on the issue, he responded, “Senator, that was a very poor choice of words.” The hearings came about because the e-mails emerged in a lawsuit filed by a former Caterpillar tax department employee. The lawsuit was settled in 2012. What happens in e-mails never stays in e-mails.

Ah, that was only the beginning. Federal agents raided Caterpillar facilities in Illinois on March 2, 2017 for documents related to its Swiss parts operations and the possible understatement of income. Caterpillar has been battling the IRS for some time on several proposals to settle the tax dispute. Caterpillar’s 10-K indicates that it is/was “vigorously contesting” a proposed settlement with the IRS for $2 billion plus penalties.

It deserved being clipped from the Wall Street Journal, “Low_Key Chief Led Bank’s Acquisition Drive,” March 4, 2017, p. A9.. An inspirational obituary. Melanie Dressel, the CEO of Columbia Banking System, Inc. died too soon at the age of 64, on February 19, 2017.

Let’s get the business accomplishments of this really successful community banker on the table:

• Took the bank from $1.7 billion in assets to $9.5 billion
• The bank survived the crisis and grew because she had “a traditional balance sheet.” Everyone kept asking why Columbia was not making as much as the other banks. Her response was that what the other banks were doing was “not a business model.” Continue reading →