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Saturday, December 8, 2012

Massey Mining: Beyond Regulations

Massey Energy Co. owned the mine in West Virginia where 29 minors were killed in an explosion in 2010. Faulty water nozzles failed to stop a spark from setting a pocket of methane gas on fire, which in turn led to an explosion of coal dust. Other safety violations, such as not cleaning up extra coal dust, contributed to the accident too.
 
                                                                                       Emergency vehicles head to the Massey explosion in which 29 miners were killed.   AP
 
In their criminal investigation, prosecutors allege that between 2000 and 2010, David Hughart, former president of a Massey operating unit, and other managers ordered workers to violate standards for maintaining airflow through minds and limiting combustible coal dust. Indeed, Hughart may even have told employees to cover up  violations while inspectors were on their way. While it is unfortunately not unusual for managers to cut corners on regulations, the attitude evinced at Massey may point to a deeper problem in how business practitioners view law itself.
 
Booth Goodwin, the U.S. attorney in Charleston, West Virginia, observed, “Some mine officials, unfortunately, seem to believe health and safety laws are optional.” If true, this statement is extremely important, for it suggests that the business calculus itself views government regulation—and even law—as an obstacle to get around if possible. That is, rather than being a contour of the system, a regulation (or law) is one of many obstacles—costs—that are potentially manipulated in the interest of greater profit. The mentality thinks in terms of how to reduce any impediment to profitability.
 
Moreover, the political power of large companies (or big companies in a small pond, such as West Virginia) may mean that for practical purposes, government regulations are malleable rather than given. Just as a monopoly or oligopoly is a price-setter rather than taker, a large company with politicians and even judges “up its sleeves” may be a regulation-setter rather than taker. Regulations and even laws would from this standpoint be de facto optional. This political “reality” can reinforce the squalid mentality that “the laws don’t apply to me.” The result, at least respecting (or disrespecting) OSHA regulations, is that people other than the managers could become sick or even die, as was the case in West Virginia in 2010. The very logic as well as mentality of modern management may have been at the root of the accident, and thus of tragedies yet to occur.


Source:
Kris Maher, “Mine-Safety Probe Expands," The Wall Street Journal, November 29, 2012.

Preparing For the U.S. Presidency: Building a Resume

How should an aspiring candidate for President of the United States go about attaining that esteemed office?—an office whose occupant was regularly referred to as “the leader of the free world” when part of that world was behind an iron curtain. Mitt Romney spent six years of his life campaigning for the job only to lose it to an incumbent whose record on “pocket-book issues: was mixed at best. Perhaps it is possible to want something too much. Fortunately, a more substantive alternative is also possible.


                                                                                                              Hillary Clinton as U.S. Secretary of State.           
                                                                                                           
As Hillary Clinton was nearing the end of her tenure as U.S. Secretary of State, Michael Bloomberg, who was nearing the end of his own mayoralty in New York City, encouraged her to run for his office. Being every bit “New York,” the New York Times refers to the option as “trading international diplomacy for municipal management on the grandest scale.” In case anyone misses my sarcasm here, I should add that being mayor of New York City is not merely executive experience on a grand scale. Being chief executive of The City could be comparable to being governor of some states. Accordingly, becoming mayor of the city that never sleeps could give the former legislator and chief diplomat significant experience as a chief executive. Ironically, the latter could be most essential to the presidency.
Alternatively, were Hillary Clinton really intent at the time on running for presidency, political consultants might have been whispering in her other ear, “you need to get up to New Hampshire and over to Iowa.” However, early and regular visits to those states do not, as the case of Mitt Romney suggests, necessarily translate into winning come election day. This is not to say that a third alternative, such as taking a well-deserved break—maybe writing a book—might not be preferable to being mayor of New York City. Nevertheless, in the choice between never-ending campaigning and governing, it would be nice to think that the American people would reward substance over excess eagerness. The people have not exactly demanded of a president that he (or she) be a senior statesman when it comes to governmental experience. John Adams had been U.S. Ambassador to Great Britain (besides having had a hand in the writing of the U.S. Constitution) before being elected president. Thomas Jefferson had been the U.S. Secretary of State (besides having had a hand in, well…you know). Had he lived, James Hamilton might have been president after having served as Washington’s Secretary of the Treasury. Experience can even be ex post facto, as when President Taft joined the U.S. Supreme Court after serving as president.
From the perspective of having several substantive governmental offices, an occupant of the office of U.S. president can have both wisdom and perspective. That is, such a person would be more likely to discern instinctively the forest from those particular trees that demand too much attention. Such a person would be more oriented to the system as a whole, as President Jackson was when he opposed funding the Second National Bank of the U.S. even as he opposed South Carolina’s nullification act (by which the state legislature could invalidate U.S. laws detrimental to the state’s interest). That is to say, the president was oriented to protecting what he saw as a balance in the federal system. His perspective was systemic and thus not primarily partisan or even bureaucratic in nature.
To be sure, putting someone in the office who might be suspected of sporting a suitable countenance is ultimately up to the American people—whether we value it enough. Lest it be pointed out that few candidates could be found, it is also up to the candidates themselves—whether they are willing to substitute more governmental experience for the seemingly endless parade of chicken dinners. To those candidates, I would say: focus on the knitting and the campaigning will take care of itself; focus on the campaigning, however, and the sweater could slowly unravel from all the waving and handshakes. In short: have faith that investing in governing now will pay off later. This could mean trusting in the judgment of the American electorate, or being a leader (hence gaining leadership experience!) by providing a higher example of real presidential material. Of course, the people may not be wise or virtuous enough of character to grasp such leadership, in which case the republic itself will decline even in spite of the suitable candidates.

Source:
Michael Barbaro, “Clinton for Mayor in ’13?Bloomberg Asked Her to Consider Succeeding Him,” The New York Times, December 4, 2012.

Tuesday, December 4, 2012

SEC Goes After Chinese CPA Firms: Beyond Diplomacy

The Securities and Exchange Commission brought an administrative proceeding against the Chinese affiliates of five major CPA firms, including the “Big Four,” in 2012. Chinese companies had raised billions of dollars on American (and Canadian) exchanges only for the share prices of the companies to plummet due to questions about bookkeeping and disclosures. The SEC alleged that the CPA firms in China refused to hand over documents in connection with the investigation of alleged accounting frauds at nine Chinese companies. The SEC maintained that firms that audit U.S.-traded companies must follow U.S. law, and the Sarbanes-Oxley Act requires foreign audit firms to hand over documents about U.S.-listed clients at the SEC’s request. SEC Commissioner Luis Aguilar said that the investigations “have been hampered by the lack of access to relevant documents.” For their part, the CPA firms in China (affiliates of American-based CPA firms) pointed out that their audit papers are treated like state secrets in mercantilist China, and that the auditors could therefore be imprisoned for handing the material over a foreign government without permission from the Chinese state. 
A spokesperson for Deloitte, an American-based CPA firm having a Chinese affiliate in the mess, issued the following statement: “While it is unfortunate that the two countries have not yet been able to find common ground on these issues, we remain hopeful that a diplomatic agreement can be reached, and we stand ready to assist that effort in any way we can.” Of course, being able to assist means acting within the law, both of China and the United States. What Deloitte’s position conveniently missed was the institutional conflict of interest in China as well as America—a problem centered not in the two governments, but rather in the CPA firm itself.
According to Audit Analytics, Chinese audit clients paid the Chinese affiliates of the “Big Four” $175.2 million in fees in fiscal 2011. This is a powerful disincentive for those affiliates to hand over incriminating documents to the SEC, even if doing so were permitted under Chinese law. Deloitte’s focus on the two governments belies the firm’s own complicity in the conflict of interest that had prompted the Chinese CPA firms to look the other way in the first place.
In 2012, I spoke with a Deloitte director from France who worked at the time on the conflict of interest at his firm. Even though he asserted that he had penalized offices that had improperly given clients unqualified opinions in order to retain those clients, I was struck by his naïve and one might say convenient blind-faith in the “Chinese fire-walls” he had helped to create at Deloitte to the partners “honest” in giving qualified opinions when warranted even if doing so means losing a client. I cited the futility of similar “paper walls” at Wall Street banks given the profit motive of senior bankers having jurisdiction over conflicting departments, but he dismissed my concern out of hand. “We’ve got that covered,” he said in a supercilious and self-satisfied tone. He was thus blind to the breaches he had not caught. When I ran into him the next day—or I should say, inadvertently swam into him in the ocean—he was practicing the avoidance stroke. Business ethicists can be nasty critters, especially when one “runs” into one in the ocean and happens to follow sharks.
It may indeed be unfortunate that the Chinese and American governments had not found “common ground.” It is equally or more unfortunate, however, that the governments allow audit firms and their clients to enjoy such potentially cozy relationships. For example, it was only after Sino-Forest admitted that audit reports were not reliable that Ernst & Young quit as the company’s auditor. The CPA firm had conveniently collected its audit fee for as long as it could. In the end, the investors in Sino-Forest rather than the CPA firm paid the price financially.
 
 
Even if American stock exchanges were to block Chinese companies whose auditors had withheld documents, and Chinese law were changed as a result, the Chinese CPA-affiliates would still face strong internal temptation (as do the American CPAs) to overlook “bookkeeping issues” such as insufficient disclosure and even fraud. To find things that the client wants hidden even from the CPA firm hired to audit the books is difficult enough in an audit based on sampling; being under pressure, even from oneself, to retain a client in the short run effectively stacks the deck against a reliable audit opinion. The public, I think, is too naïve on this point, while legislators  too often simply look the other way (in some cases with the aid of campaign contributions from the auditors and auditees).
For the SEC to get hung up on the audit documents of the Chinese affiliates presupposes that all governments can or should do is clean up after the mess has occurred. To prevent the underlying problem of auditors looking the other way from recurring, the inter-organizational conflict of interest must itself be de-toothed such that the teeth do not simply grow back and bite someone else.

Source:

Michael Rapoport and Ben Dummett, “U.S. Sues Big Firms Over China Audits,” The Wall Street Journal, December 4, 2012.

Oceans Arising on Edifices of Arrogance

A study published in late November 2012 in the journal Science estimates that the melting of ice sheets in Antarctica and Greenland had raised global sea levels by 11.1 millimeters (0.43 inch) since 1992. That represents one-fifth of the total sea-level rise increase in that period. Other contributors include the expansion of the sea water from warming, and the melting of glaciers, as for instance on mountains. In the 1990s, melting of the polar ice sheets in the Antarctica and Greenland was responsible for about 10 percent of the global sea-level rise, but by 2012 the effect had risen to 30 percent.[1] The study does not, however, uncover the underlying cause, or association, lying in a complexity in human nature itself. Our species has vaunted to the top of the food chain and leveraged a brain capable of engineering technological advances that would have seemed magical even just in the nineteenth century, and yet we seem hard-wired to accelerate our course to a self-destructive extinction. This lack of balance is reflected in the increasing extremes in the global climate. In this essay, I begin with the study and steadily work toward uncovering the underlying, subterranean culprit.

The entire essay is at "Oceans Arising on Edifices of Arrogance"



[1] Gautam Naik, “Polar Ice Melt Is Accelerating,” The Wall Street Journal, November 30, 2012.


Bailouts Without Stimulus: E.U. Policy on Spanish Banks

Directly and indirectly, the housing bust that began in 2007 put “the bailout” on the map in the lexicon of industrial policy both in Europe and North America. Whereas in the U.S., few restrictions were placed on the recipients, the E.U.’s first €37 billion ($47.9 billion) for Spain’s banking sector required the four major state banks “to make sharp cuts in their balance sheets and payrolls,” according to the Wall Street Journal. Bankia, the largest of the banks to be bailed out, planned to cut its number of employees by more than 6,000, close more than 1,000 branches, pass on any further real-estate lending, and reduce its assets by €50 billion as the bank focuses on retail banking—getting back to the knitting, as it were. Presumably the bankers were not allowed to grant themselves bonuses as a condition of the bailout. If so, it would differ appreciably from the U.S. bailout of Wall Street banks.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Sunday, December 2, 2012

China or USA: Which Will Rule Trade?

The Association of Southeast Asian Nations (ASEAN) announced at its meeting in November 2012 that it would host negotiations among its members on “a sweeping trade pact that,” according to the New York Times, “would include China.” The trade agreement would include not only the ten countries that are in the association, but also six other countries that have free-trade agreements with the association. In addition to China, those countries include Australia, India, Japan, New Zealand and South Korea. Half of the world’s population would be included in the pact. Notably absent is the United States. This is no accident, as the Obama administration’s own proposal for an eleven-nation Trans-Pacific Partnership excludes China. In other words, the contending proposals may be more about a “control battle” between two contending empires—the United States and China—than anything else. Moreover, which proposal succeeds could say something about whether China succeeds the United States as the hegemonic super-power of the twenty-first century.
 
                                                    Barack Obama and Wen Jiabao: A contest of wills at the East Asia Summit in 2012.   Jason Reed/Reuters
That the immediate issue was that of China’s inclusion or exclusion can be gleamed from Barak Obama’s statement during one of the presidential debates in 2012. “We’re organizing trade relations with countries other than China so that China starts feeling more pressure about meeting basic international standards.” The inclusion of basic can be read as a slight against China. However, that protecting state-run enterprises as done by China would continue to be allowed under ASEAN’s Regional Comprehensive Economic Partnership suggests that what the U.S. takes to be settled in terms of what constitutes the basics of international trade may not have been so settled after all. China could point to U.S. companies being able to deduct expenses on their income tax forms as a form of government aid to the home team. Since at least the mercantilist era in the seventeenth century, governments have carried out industrial policies designed to profit domestic companies and increase tax revenue. Laissez-faire-based trade may not be realistic, considering the myriad ways in which governments interact with business. Regulation itself, in being of a strategic to some firms more than others, could have a differential impact on domestic and foreign firms. It is unrealistic to assume that governments would stop regulating just so the trade is “fair” as well as “free.”
As the twenty-first century was coming into its own, two major economic powers in the world were contending not only for economic dominance, but political hegemony as well. Would it be another American century, or would power follow economic growth over to Asia? The “control battle” itself ostensibly about ordering trade alliances could be an indication that power was about to shift on a massive scale in terms of which economic power would become the definitive superpower.

Source:

Jane Perlez, “Asian Nations Plan Trade Bloc That, Unlike U.S.’s, Invites China,” The New York Times, November 21, 2012.  

Constructing a Constitution: Egypt

Concerning a new constitution, which is more important, the process or the content? In Egypt, that most secularists and the Coptic Christian representatives walked out of the assembly working on a document suggests that the final product would not have legitimacy for all of Egypt. To be sure, it is possible for a partisan group to design a system of basic law that is not overtly self-serving at others’ expense. The document emerging from the assembly weakens the presidency and strengthens the parliament in line with the popular protest in “the Arab Spring.” However, the assembly left in place a “longstanding article” grounding Egyptian law in the principles of one religion. Furthermore, a provision on women’s equality was left out, and the military generals would keep their existing power. Moreover, anticipating dissolution from Mubarak-appointed judges, the assembly began its work from the last Egyptian constitution.
                                                                           Do the members of the constitutional assembly look liberal or conservative?  Reuters
 
Basing deliberations on the status quo works against the process needed to arrive at a new constitution, especially if the last constitution had been constructed in a very different time. The Wall Street Journal reports legal experts as indicating that the assembly’s final document is “almost identical to the 1971 constitution written by former President Anwar Sadat”—hardly a democratic standpoint.
The construction of a new constitution from scratch has particular value in allowing a political system to “catch up” to the contemporary context, even if ancient political theories are drawn on. The default in a constitutional assembly’s deliberations should not be based in the status quo. This point is easily missed, particularly when the other weakness of a partisan group dominating the assembly is also the case.
In the best of all possible worlds (Leibniz’s expression), delegates from all of the principal segments of society should be included in a constitutional assembly, with no group having a majority. Where such a majority is the case, a certain percentage of the minority should be required for an article to be adopted. Second, rather than being based on the last constitution, the starting point could be based on a new blue-print formulated in very basic terms by a committee (composed of delegates from the major segments of society). In the case of Egypt, delegates favoring particular major religions as well as secular society should have been on such a committee, and, moreover, active in the deliberations of the committee of the whole—the assembly itself.
A constitutional assembly should be a microcosm of the macro society, and thus inclusive of the powers and the non-so-powerful. Ideally, Rawls’ “veil of ignorance” should apply, wherein no delegate knows which segment he or she is in. Hence, no segment is apt to be left out or expunged. The veil would apply as well to the existing or prior constitution, so ever its assumptions would not serve as the default for deliberation. In short, a constitutional assembly should “reinvent the wheel” in the context of where a society is, rather than was. This does not mean that the resulting document would necessarily be progressive, particularly if a given society is traditionally-oriented.
In the case of Egypt, the “new” constitution drafted by the assembly, unlike the constitution that had been written by Anwar Sadat, includes a reference to the laws of a particular religion. In fact, both the state and “society” are given the authority to “ensure public morality.” Lest it be supposed that Egyptian society had become more traditionalist and religious in terms of a particular religion since 1971, the changes from the status quo document could simply be a reflection of the partisan make-up of the assembly. The point is that it is impossible to know unless it is the living—representing all of society rather than one party or segment—rather than the already-dead as the force behind the construction of the edifice by which public governance is to run its course.
Accordingly, all major segments of society must ratify a proposed document of basic law for it to have legitimacy operationally. Absent such approval of a super-majority or of all of the major elements of society, a proposal should be read as partial or incomplete. Rather than returning to it, a new assembly of delegates should “start from scratch” so a document can be crafted with presuppositions freed from the tyranny of the status quo and any major faction.

Sources:

David Kirkpatrick, “Islamists Rush Through Egyptian Constitution and Prepare to Vote on It,” The New York Times, November 30, 2012.

Sam Dagher and Matt Bradley, “Egypt Adds Islamic Influence to Constitution,” The Wall Street Journal, November 30, 2012.