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Saturday, September 24, 2011

Weak Corporate Governance at UBS

UBS chief executive Oswald Gruebel resigned on September 24, 2011 over the $2.3 billion trading loss by one of the Swiss bank’s traders, Kweku Adoboli. Kaspar Villiger, UBS's president, said the board regretted Gruebel's decision but had decided to accept it. "Oswald Gruebel feels that it is his duty to assume responsibility for the recent unauthorized trading incident," Villiger was quoted as saying in the statement. "It is testimony to his uncompromising principles and integrity." In presumably not pushing for the CEO’s resignation because of the magnitude in the lapse of risk management in the system, the bank’s board of directors did not take the initiative in holding the management accountable. Accordingly, shareholders have reason to be concerned about the protection of their owner’s equity, at least in terms of corporate governance providing accountability on the management. The culprit may be corporate governance itself, which as structured may proffer too much power to the CEO.
In the case of UBS, the shareholders ultimately had to rely on Gruebel’s  integrity rather than corporate governance for accountability. To be sure, the resignation of the CEO does not necessarily mean that the management itself has been held accountable. Ethical leadership thus has its limits in this respect. Where a problem is systemic in a company and has been allowed to perpetuate itself by many people in upper- and middle-level management, the resignation of the CEO is not sufficient in terms of accountability. Had the CEO embezzled over $2 billion, the resignation would have been sufficient, but relying on the CEO’s integrity would be foolhardy in such a case.  

In short, the case of UBS suggests that corporate governance ought to be strengthened or fortified with respect to enforcing accountability on a management so as to protect stockholder interests. Villiger said Gruebel, who was brought in to help revive the fortunes of the Zurich-based bank, had achieved "an impressive turnaround and strengthened UBS fundamentally." But surely there must have been some lapse in Gruebel’s oversight of the bank’s system; for over $2 billion to be lost by one trader is itself a red flag concerning the bank itself and its management as a whole. Depending on ethical leadership at the top to step aside in the interest of the design and implementation of a new system does not go far enough.


Click to add a question or comment on Gruebel’s resignation at UBS in light of ethical leadership and corporate governance as alternative means of accountability.


Source:

“UBS CEO Oswald Gruebel Resigns Over Rogue Trading Loss,” The Huffington Post, September 24, 2011. http://www.huffingtonpost.com/2011/09/24/ubs-ceo-oswald-gruebel-resigns_n_978942.html




Friday, September 23, 2011

Meg Whitman at HP: Leader or Manager?

Referring to the appointment of Meg Whitman as CEO of HP, Ray Lane, chairman of the board, said, “We are at a critical moment and we need renewed leadership to successfully implement our strategy and take advantage of the market opportunities ahead.” On both scores, Lane was actually referring to management rather than leadership. Even the setting of strategy is within the purview of management, as in strategic management; implementing a strategy is the epitome of management. Similarly, recognizing market opportunities is strategic in nature, and thus a function of managing a company as a whole.

Similarly, Whitman said, “I think the No. 1 thing that HP needs is leadership. A focus on strategy, execution, excellence and communication.” A focus on strategy and execution is, as argued above, managerial in nature. Concerning a focus on excellence, it can be part of the content of leadership—that is, part of a leader’s vision. However, leadership itself is not the same as excellence. As for communication, a leader must surely communicate, but this is merely a means by which a leader’s vision is conveyed, rather than being leadership itself.

Lane and Whitman may have been invoking the term leadership simply for effect—oblivious to the more accurate term. Lest such marketing forays end up getting leadership defined as being essentially management, defining leadership a priori might be wise.

I contend that leadership in a business context is beyond management in standing for the company.  Whitman said she wanted to increase investor confidence in HP. Besides her becoming the public face of the company, leading would include exuding confidence. To be sure, it would bear some relation to strategy (and its implementation), but the leadership would be to sell the confidence itself by instantiating (not just communicating) it.

During December of 2007 as “superman” John Thain was taking the helm at Merrill Lynch, his communications director, Margaret Tutwiler, made sure that the new CEO was the public face of the bank. Thain himself exuded confidence by his persona (which his statements belied to an extent as they were over the top concerning the bank’s prospects in 2008).  That is to say, leadership involves communication writ large. As a result of confidence in Thain’s embodiment of confidence, sovereign wealth funds were willing to add billions in new capital to counter the write-offs from mortgage derivative securities already in 2007. Beyond strategy and implementation, Thain personified in his stature, look, and attitude a few vital qualities that the world (and the firm’s employees) very much needed to see in order for the bank to continue to be viewed as a going concern.

Perhaps while not as rational and "bottom-line" as strategic management, leadership is nonetheless valued and even needed (even to the bottom-line!), particularly when a business is in trouble. For Thain to have reduced leadership to strategic management would have been a huge mistake. Similarly, Ray Lane and Meg Whitman run the risk of trivializing leadership if they really do view it as the implementation of strategy. In terms of exuding confidence, Whitman’s failed run for the top government office in California may undercut her leadership. Perhaps this is why she approached her appointment at the outset by wrapping leadership in strategic management and the virtue of excellence.

Click to add a question or comment on leadership at HP or Merrill Lynch.


Sources:

“HP Names Meg Whitman as New CEO,” Reuters, September 22, 2011. http://www.cnbc.com/id/44630492/

 “HP’s Whitman: I’ll Focus on Leadership,” The Bottom Line, msnbc.com., September 23, 2011. http://bottomline.msnbc.msn.com/_news/2011/09/23/7921986-hps-whitman-ill-focus-on-leadership


Wednesday, September 21, 2011

Bank One: Adding to Systemic Risk

How soon we forget. How soon the financial crisis in September 2008 was relegated or even forgotten. Exactly three years later, the New York Times reported that Republicans have been repeatedly invoking the Dodd-Frank Act’s 848-page length and rules on trading derivatives and swaps as instances of government overreach at the expense of much-needed jobs. “Dodd-Frank is adding safety margins to the banking system,” according to Douglas Elliott at the Brookings Institution. “That may mean somewhat fewer jobs in normal years, in exchange for the benefit of avoiding something like what we just went through in the financial crisis, which was an immense job killer.” To scrap the new law in order to save few jobs would thus be short-sighted even with regard to jobs.

The New York Times points out that the Dodd-Frank law “aims to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff.” The banks themselves cannot be relied on to forestall such “cliff-diving” because they are looking out for their own financial interest rather than at the viability of the financial system as a whole.

For example, at the Federal Reserve hearing on September 20, 2011 on Capital One’s proposed takeover of ING, John Finneran, Capital One’s general counsel, said the “acquisition of ING Direct will further reduce, rather than increase, any risk to the financial system.” But the combination would have around $200 billion in deposits (moving the bank from No. 8 to No. 5 in the U.S.), which the New York Times claims raises “questions about the deal’s impact on customers and the broader economy.” John Finneran’s claim of lower risk, being self-serving to the bank, requires further support. To be sure, he did argue that the deal would “not lessen competition or result in any undue concentration of resources.” But he is thinking in terms of restraint of trade more so than systemic risk. Regarding the latter, John Taylor of the National Community Reinvestment Coalition, pointed to the risky subprime loans in the bank’s credit card portfolio. Before the hearing, he had asked, “We already have four too-big-to-fail banks. Why make a fifth?”

That the proposal to carve up the four $1 trillion plus banks was summarily dismissed as Dodd-Frank was being written (with the help of the banking lobby, which Sen. Durbin said still owned Congress) was apparently not enough; preventing an increase in the number of mega-banks too big to fail would still go too far, at least from the vantage point of the banks and, presumably, the Republican party as well. This view was expressed by Dan Tarullo, a Federal Reserve governor. “While Congress instructed us to consider the extent to which a proposed acquisition would pose a greater risk to financial stability, it clearly did not instruct us to reject an acquisition simply because there would be any increase in such risks.” I contend that Tartullo’s stance is wrongheaded and even dangerous.

The continued existence of banks with assets of over $1 trillion is itself allowing for enough systemic risk to tank the system. Increasing such risk by permitting Bank One to continue “amassing a big national banking franchise” ignores the risk of there being too much systemic risk in the system already. It is highly unlikely that merely increasing capital requirements for the biggest banks and providing for their possible liquidations has reduced the systemic risk in the system to a tolerable level. Therefore, the last thing we should be doing is adding to such risk by enabling another giant to form.  We do have control over whether more systemic risk is loaded on the system, unless we want to pretend that the concern itself is government encroachment on banks that are somehow no threat to the system itself. Is it too much to ask for some learning curve in the wake of September 2008, or is history destined to repeat itself from short-sightedness and continued greed? That the anti-regulation argument has been made at all in the three years following the financial crisis of 2008—as if in utter denial—does not bode well for American democracy (or plutocracy).


Click to add a question or comment on whether Dodd-Frank goes far enough in reducing systemic risk, or on whether Capital One should be allowed to acquire ING.


Sources:

Edward Wyatt, “Dodd-Frank Act a Favorite Target for Republicans Laying Blame,” New York Times, September 21, 2011. http://www.nytimes.com/2011/09/21/business/dodd-frank-act-is-a-target-on-gop-campaign-trail.html

Ben Protess, “Capital One Denies ING Takeover Would Make It ‘Too Big to Fail’,” New York Times, September 21, 2011. http://dealbook.nytimes.com/2011/09/20/capital-one-defends-ing-direct-deal/


Tuesday, September 20, 2011

Is God the Invisible Hand?

A Baylor University survey on religion and economics reveals something that may be distinctly American, culturally speaking. According to the survey results, about “one in five Americans combine a view of God as actively engaged in daily workings of the world with an economic conservative view that opposes government regulation and [advocates] the free market as a matter of faith.” Specifically, those Americans believe that the “invisible hand” of a competitive market is actually God at work. That is, the economy “works” because God wills it to by intervening directly in the market mechanism. Government regulation, in diverting economic supply and demand from “the invisible hand,” is thus sinful. Regulating the economy challenges God’s omnipotence by interfering with God’s intervention in our daily lives via the operation of the market mechanism. This can explain why the Tea Party contingent can be so set against compromising with Democrats who push for a more activist government in the economy.

A problem for Americans who view God as actively intervening in Creation in general and through the market mechanism in particular concerns a market equilibrium short of full employment wherein there are unemployed people who would starve without government assistance. Would an interventionist universal deity allow so much innocent suffering, particularly when Jesus is said to advocated caring for the poor. Lest the “interventionist” Christians point to charity (derived from caritas, which is higher-oriented human love), it could be argued that non-profit institutions cannot be relied on to feed and house people who need sustenance assistance on a daily basis.

A more fundamental problem facing the “divine interventionist” crowd concerns their standing as finite beings in being able to have knowledge that the invisible hand is indeed that of God intervening in Creation on a daily basis. In other words, is it not impious to view God’s ways in terms of our ways—our artifacts such as the market? In other words, the “interventionists” might resist government regulation under the presumption that they cannot be wrong.Innocent people could suffer needlessly as a result. The confluence of the “interventionist” theological belief and a political/economic ideology is a red flag that self-idolatry is in the mix, or perhaps even the determining force.  Most (81%) political conservatives say there is one ultimate truth in the world. The question is perhaps whether they believe that they know that truth and furthermore cannot be wrong about it.

At the opposite end, another one in five Americans don’t  believe that God intervenes in their daily lives. Rather than viewing God as the “invisible hand,” these people are wont to rely on government intervention to protect people in the economy from getting harmed as a result of the wanton greed of others. Rather than believing that God directs greed to good material ends through an “invisible hand,” the theologically “non-interventionist” Americans favor the human use of government to mitigate economic harm by reducing economic inequality. Such Americans who favor government intervention while not believing that God intervenes in human life tend to believe that there is no one ultimate truth.

Believing that God intervenes regularly in one’s life is typically associated with a belief that there is one ultimate truth. Whereas this confluence carries with it the risk a lack of compassion for people who are suffering, the view of God as non-interventionist and truth as multifarious risks a spiritual void into which a political-economic ideology, such as economic equality, can be taken as truth. In other words, faith itself can come to be identified with a particular economic structure. Furthermore, relying totally on government regulation, particularly to take from those with means to capture the governmental representatives through campaign contributions, can be risky because no truth-based normative constraint on greed is admitted to exist or to be possible. In other words, greed may get the upper hand if religion itself is eliminated as possible a constraint. A normative bulwark based solely on an ethical principle may not be strong enough to constrain the basic desire for more (i.e., greed).

Click to add a question or comment on American religion and political/economic policy.

Source:

Cathy Lynn Grossman, “Religion Colors Money Views,” USA Today, September 20, 2011. http://www.usatoday.com/MONEY/usaedition/2011-09-20-God-Economy_ST_U.htm

On the history of Christian thought (actually going back to Homer and running through the Puritans) on wealth and profit-seeking in relation to greed (and justice as love and benevolence as a possible constraint on greed), see the book,  Godliness and Greed.




Monday, September 19, 2011

Taxing A Few Millionaires: Symbolic?

 According to the Wall Street Journal, the top 1% of U.S. taxpayers had 19.4% of the total income in 2007 and paid 28.1% of all federal taxes. In 1987, the top 1% had 11.2% of the total income and paid 16.2% of all federal taxes. In other words, the share of total income going to the wealthy (income over $353,000 in 1987) and the share of federal income taxes they paid increased. That the poverty rate hit 15% in 2011 while the real wages of the middle and lower classes were back to mid-1990s levels suggests that the rich were getting richer as the poor were getting poorer. That is to say, income and wealth inequalities were increasing. With the top 1% having more in income and the lower 60% taking in a smaller share, it makes sense that the top 1% would pay a larger share of the total federal income taxes. The question is whether the increase in taxes was sufficient, considering the increased amount of income. The 15% rate on dividends and capital gains put in place during the second Bush administration suggests a negative answer. According to the New York Times, “many wealthy Americans pay considerably less because their earnings are derived from dividends or capital gains.” Also, advantageous itemized deductions are more likely to be useful to a wealthy taxpayer, enabling a lower effective rate lower than that of a middle-class taxpayer.

There is another reason why 28.1% of all federal taxes may be too low for those who earn nearly 20% of all income. The income of those taxpayers near or below the poverty line may be exhausted by sustenance expenses so it could be argued that no tax ought to be paid on said income. Few if any low-income taxpayers benefit from itemizing deductions. It could be that the standard deduction (and exemptions) are not sufficient to reflect the actual and necessary expenses—especially relative to income. So to claim that the bottom 1% should pay the same share of taxes as the top 1% ignores the fundamental difference between surplus and necessity. In other words, not everyone’s income should be taxed. The symmetry of a bell-shaped curve does not apply because the incomes at the respective tails are qualitatively (i.e., not just quantitatively) different (e.g., relative to survival).

As for the effective rates, the unjust inversion with the middle class is not universally the case. For example, the top 400 taxpayers saw their effective federal income tax rate drop from 29% in 1993 to 18% in 2008. By comparison, households with income between $50,000 and $75,000 had an effective rate of 15% in 2008. These are averages, so there were doubtless cases of inversion where middle class taxpayers had a higher effective rate than wealthy tax payers. Depending on restoring justice to such cases does not go far enough in deficit reduction. That is to say, as just as it is, making sure millionaires are at least at the effective rate of the middle class may not go far enough, considering the seriousness and magnitudes of the U.S. deficit and accumulated debt. Given the sheer magnitudes, those who can afford to contribute more should be required to do so. It is doubtful that merely correcting for the effective rate injustice on a case by case basis would go far enough.

In 2009, for instance, 238,000 households filed returns with adjusted gross incomes of at least $1 million. Twenty-five percent of them paid an effective federal income tax rate of less than 15 percent, and 1,470 paid no federal income tax at all. Although the money involved dwarfs the number of taxpayers concerned, focusing on this “effective rate” injustice need not blind us to the fact that the increase to the treasury would fall well short of what is necessary to eliminate a deficit of over $1 trillion (not to mention paying down a debt roughly equal to the annual GNP of the U.S.). A macro justice matter concerns the role of the wealthy in reducing the deficits and debt—beyond the question of effective rates to address the inconvenience to the wealthy versus the pain from cuts to the poor.

To claim that the effective tax rate on the top 1% or even 5% of all taxpayers should be higher than the rates on lower incomes is not “class warfare.” Neither is the claim that those who can afford to contribute more money to reduce the deficit (and debt). The notion that those who can afford to contribute more follows from the principle that those who have means, rather than those who do not, should be relied on disproportionately, given the qualitative difference between surplus and sustenance. To suggest that everyone except those who are able should sacrifice to reduce a deficit is antipodal to the ethical principle of fairness. In other words, it is unfair to try to squeeze blood from a turnip while leaving the watermelons alone.

As easy as it may be to get bogged down on the percentages and dollar amounts, charts and graphs, pros and cons, the debate about taxation, spending cuts, and deficit reduction comes down to values. This is why the debate can get so heated, only we don’t take the cue and cut to the chase. We are perhaps too instrumental and utility-oriented; we miss the broader question of what we as a society value—who we are—things that are even if we don’t make it explicit. I submit, therefore, that the final paragraph below is much more significant than any of the figures and analysis above. Statistics can be manipulated to support virtually any point, whereas values go to the core in defining a society and its members.

A society that cuts its way to eliminating a deficit is saying something quite different regarding itself than a society that includes a solidarity tax on the wealthy. Solidarity itself can mean different things to different people, particularly when self-interest is consulted. How do we weigh society as dog-eat-dog relative to society as solidarity? In other words, is solidarity something more than society as an aggregation? Is it ethical to exempt the rich from paying more while making cuts to the sustenance of the poor? Is solidarity implicit or renounced in extending the Bush Tax Cuts while cutting food stamps and unemployment compensation? Do we go to the alter in the name of the trinity of Me, Myself, and I, or of the solidarity of my brother and me? Squaring the values in a Trinitarian “cuts only” approach with teachings ascribed to Jesus of Nazareth regarding the poor (and the rich man) seems a bit like getting a camel through the eye of a needle. It is from such questions, rather than simply measuring differences in effective rates and counting dollars—and even eliminating minor injustices—that the answers may be found. Are we afraid to look in the mirror, for fear of we might find—possibly too much comfort with convenience, with selfishness, or even pettiness? If we don’t like what we see, can we change?

Click to add a question or comment on whether American millionaires should pay more in federal income tax as part of the deficit-reduction laws.

Sources:

John D. McKinnon, “Millionaire’s Tax To Be Tough Sell,” Wall Street Journal, September 19, 2011.http://online.wsj.com/article/SB10001424053111904106704576579082751681762.html?mod=googlenews_wsj

David Kocieniewski, “A Tax Others Embrace, U.S. Opposes,” New York Times, September 21, 2011. http://www.nytimes.com/2011/09/21/business/obamas-tax-on-millionaires-faces-obstacles.html