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Sunday, October 31, 2010

Elections and America’s Unholy Trinity

I’ve worked in management for all of my professional career. Most of that career has been spent in large corporations. For over two decades, it has been fashionable for most large firms to formulate written "Code of Business Conduct" documents and required managers above a certain level to sign yearly statements indicating their understanding of the content of that code. For firms tagged with anti-trust lawsuits or gross safety or accounting failures, the practice was frequently required by judicial settlements. In the post-Sarbanes/Oxley management world, ALL publicly traded American firms are now REQUIRED to have these written codes in place and are REQUIRED to have ALL managers of the firm review them annually.

In the post-Sarbanes/Oxley world, the precise wording of these Codes has become much more critical so reviews of the code by employees who later get caught forging millions of mortgage documents, lying to clients about billions in collateralized debt swaps or inflating earnings provide some limited legal protection for the firm and its top executives. Most Fortune 500 firms don’t actually craft the Code of Business Conduct review material itself. Instead, they farm the task out to consulting firms who deliver it in the form of electronic training. To management, outsourcing of the COBC training has all of the following benefits:

a) no need to employ anyone in HR who is actually capable of explaining the material
b) we know the material will have been used by many firms, providing legal comfort that the language covers the regulatory bases and the firm’s legal you-know-what
c) we can deliver the training electronically and collect electronic proof (date, time, content and employee ID) that employees have seen EVERY SINGLE PAGE of the training

Recently, it was my turn once again to review my firm’s Code material. Like most other firms, my firm’s training is outsourced, electronic on-line material so I logged in from home (you can’t possibly sit through an hour of material during a workday), accessed the corporate intra-net via VPN, and dove in.

The very first section of the material focused on explaining exactly why employees were being asked to dedicate an hour to review the material. I don’t want to quote the material exactly for copyright reasons, but the nutshell version of the stated goal was this:

Reviewing this material ensures employees understand their responsibility to report any conduct by any employees of the firm that violates these codes.

Okay, stop. That much I get. Makes perfect sense. This is the CYA aspect of the training that ensures that if an underling spots wrong-doing but fails to report it, upper managers have some plausible explanation and possible defense. Then it continues:

Prompt reporting of violations is critical to ensure that actions of one or a few employees do not counteract the goals of the company itself.

I haven’t quite paraphrased the sentence perfectly but it struck me at the time that the sentence was very carefully, methodically phrased and the reference to the company was to THE COMPANY, not a collection of executives or the entire employee body.

Can anyone spot the problem in the premise of such a statement?

I’ll give points if you read that sentence and spotted the not-so-subtle assumption that a corporation has only positive, completely legal and thoroughly ethical goals and that any bad goals or actions only arise from individuals.

However, that’s actually not the correct answer.

The REAL problem with that statement is the assumption that a corporation has ANY goals or ethics, either good or bad.


Corporations – Sanctified Legal Fictions

A corporation doesn’t think. A corporation doesn’t feel. A corporation doesn’t have goals. A corporation doesn’t have morals. A corporation is the business equivalent of the Glenn Miller Orchestra. It’s a collection of individuals acting under a single legal identity accepted within the judicial system that can continue operating indefinitely as individual members come and go as long as the group as a whole agrees to continue operating and can maintain a legal tie to the original identity or founding idea, both of which are often long gone.

You can’t assume a corporation will do the right thing. You can’t assume a corporation will learn or remember its lesson from being punished for doing the wrong thing. You can’t assume a corporation with many talented people will overcome a business challenge and survive. The behavior of a corporation is based upon the balance of personalities, talents, management structure and social skills of the individuals in the firm. That balance changes nearly every day as employees come and go.

These truisms apply to ANY collection of individuals. It’s true for collections of people operating as a civic group, people operating as a non-profit business, people operating as a charity, people operating as an army, people operating as a government and yes, even people operating as a religion.

Of course, the one key difference between a corporation and these other types of human institutions is that a corporation’s very legal reason for existence is to simplify the accumulation of economic wealth over time and stimulate that growth by providing limits to the legal and financial liability of its shareholders to encourage risk-taking. That distinction is VITALLY IMPORTANT.


Stone Tablets And Fine Print

Public failures and humiliating embarrassments over the past 50 years of American history have tarnished the reputation of and spiked distrust and cynicism towards every type of human organization – armies, governments, charities, religions. Except one, it would seem. Business. Especially small business, if you paid attention to the four billion dollars of advertising in the 2010 elections. According to the stone tablets governing this religion of business, small business --- accounting for sixty-five percent of all job creation in the country (#1) – is the very bedrock upon which our entire country stands.

Unfortunately, stone tablets are notoriously unsuited for fine print. The fine print to this story is that while small business employs 50% of all private sector employees, small business accounts for far less than 50% of all business profits. Actual PROFITS are highly concentrated in the hands of the largest firms. How many small businesses do you think it takes to equal the profits of Microsoft or Oracle? Microsoft made $18.7 billion for its 2009 fiscal year. The typical definition of a small business is a firm employing less than 500 people and taking in less than $7 million in revenue. That means PROFITS will be even less than $7 million. If a small business had a 10 percent profit margin (enviable) and netted $700,000 in profits, it would take 26,714 small businesses to match Microsoft’s profits.

You don’t have to work for large companies very long to agree that very few revolutionary ideas and improvements are likely to come from large companies. With few exceptions, they’re too lazy, risk-averse and worried about cannibalization of their own product lines to “think outside the box” and come up with the next personal computer, browser, search engine or MP3 player (hint, Apple didn’t invent the MP3 player – it wasn’t even third to market). However, in the evolutionary financial cycle, THEY DON’T HAVE TO INNOVATE. As long as the small businesses who DO innovate are paralyzed, the status quo remains profitable and it is predominately big business that profits most from the status quo.


The Religion of Business and Elections

The central theme of the 2010 election has involved anger over “job-killing” government taxes and wasted stimulus spending that has produced no perceptible improvement in unemployment. If only government would stop its wasteful spending and lower those job killing taxes, we’d bounce right back to the glory days of 2005 and the American dream of the two-SUVs-and-every-child-with-their-new-$300-video-game-or-iSomething perversion of the American dream. All funded by HELOCs funded by ever-rising home prices.

It sounds like an easy diagnosis in a 30-second attack add but the reality is far different.

The reality is:

Taxes have been HIGHER in the past and did not CAUSE these problems.

Our books are out of order in part because we chose to cut taxes by nearly $300 billion per year (for a total cost of $1.8 trillion dollars -- see #2) in mid-2001 then chose to launch two wars of choice costing over $1 trillion dollars.

Unemployment had been rising steadily from January 2008 through September 2009 (see #3) and has leveled out but is unlikely to decline in the near term REGARDLESS of tax cuts. While profits may fluctuate, big businesses remain profitable because, by definition, they have grown big by focusing on segments profitable over the entire business cycle that benefit from economies of scale. Risk-taking is what small companies do best but they’re much more risky during downturns and that’s our situation so why lend to small business?

Financial markets imploded because big firms were not properly regulated and audited. The biggest firms that participated in the practices that produced the meltdown actually got BIGGER during the panic, producing MORE financial uncertainty and risk, not less.

Cutting taxes on big business won’t create jobs, it will simply increase the dollars going to the top executives and shareholders. Payouts to shareholders may stabilize pension funds based upon shares in large companies but that alone will not produce new jobs.

Cutting taxes WILL further impair government’s ability at all levels to properly regulate big business, which may very well produce future meltdowns which destabilize the entire economy and destroy jobs.

Cutting taxes WILL worsen near term deficits, further spooking foreign investors and increasing the risk premium portion of interest rates on US Treasuries, further increasing the long-term cost of our $13.6 trillion in debt. (A one percent increase in interest paid on T-Bills costs us $136 billion in additional interest per year.)

Any true “Tea Party” candidate winning office and who begins working to cut spending will find themselves immediately ostracized by both Democratic and Republican leaders who, if they agree upon nothing else, agree that any actual progress made by “third party” candidates is an attack upon their two-party power which will be defended at all costs.

Any vote to re-institute political gridlock won’t actually prevent more bad policies and wasteful spending. It will only block the pursuit of policies that Americans care about as individuals. Policies beneficial to the biggest of businesses will continue sailing through the government unabated and likely undebated. You tend to get exactly what you want when you get to write the legislation yourself.


America’s Unholy Trinity

So why is it that a country so proud of its rugged individualism and so proud of its Constitutional balance of personal rights and freedoms against group power is so willing to trust the one flavor of human organization whose sole purpose is to outlive its members and concentrate power?

It seems America’s true religion is based upon a uniquely American combination of too-big-to-trust mega-corporations that have more economic power than many countries, a corrupt government of the Democratic and Republican parties, by the two parties and for the two parties, and an American electorate that keeps hearing the same lies and keeps rewarding the same behavior. Call it America’s Unholy Trinity of greed, corruption and stupidity.

So, exactly how stupid is America? We’ll know around 9:00pm Tuesday, November 2, 2010.


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#1) http://www.sba.gov/advo/stats/sbfaq.pdf

#2) http://www.tax.com/taxcom/taxblog.nsf/permalink/chas-89lpz9?opendocument

#3) http://www.shadowstats.com/alternate_data/unemployment-charts