Archive for December, 2011

Challenging the Corporate Gods

Friday, December 23rd, 2011

When the founders of the Japanese camera maker Olympus decided in the 1920s to name their company after the home of the Greek gods, they could not have imagined how appropriate that appellation would be nine decades later.

The current accounting scandal at the firm demonstrates the kind of arrogant and unscrupulous behavior frequently attributed to Zeus and other deities.

In October it came to light that the company had paid out suspiciously large sums for some dubious acquisitions. Under pressure from regulators and law enforcement agencies, Olympus management named a panel of outsiders to look into the matter. While they were doing their work, the company admitted that for decades it had been hiding losses from high-risk, off-balance-sheet investments through those bogus deal fees.

The revelation was a serious blow to the reputation of the company, its top executives and its outside auditors—the Japanese branches of global accounting giants KPMG and Ernst & Young—which had signed off on the cooked books. It’s been reported that KPMG auditors raised questions about the merger fees, prompting Olympus to switch its business to Ernst & Young. What’s not clear is whether KPMG ever did anything about its misgivings over the company’s creative accounting.

President Shuichi Takayama bowed deeply in apology while admitting to the deception (photo), but the controversy would not die down. For a while there were reports (subsequently denied by the company) that the Yakuza, Japan’s organized crime networks, might have been involved.

Any hope that this scandal would blow over were removed in early December, when that panel of outsiders—consisting of lawyers, judges, prosecutors and accountants—released a report of its findings. The document (only the summary is online) is devastating. After outlining a complex scheme to hide the investment losses by shifting funds through foreign and domestic accounts, it concludes that there were serious failures of management oversight, corporate governance (board members are described as yes men), transparency, auditing and other aspects of accountability. The management of Olympus was described as “rotten to the core” and the scandal as a “malignant tumor.”

Along with the strong words there appears to be some strong action. Japanese prosecutors have just raided the Tokyo headquarters of Olympus and the home of its former chairman in search of evidence for what are expected to be criminal charges. There is also talk that the company could be delisted from the Tokyo Stock Exchange.

It remains to be seen how steep a price the company and the other guilty parties pay for this long-term fraud, but the treatment of Olympus already stands in stark contrast to the way in which many U.S. officials have been handling cases of domestic corporate misbehavior.

Whereas in Japan there is still the possibility of serious consequences for corporate fraud, in this country the penalties are in effect a slap on the wrist. That’s the only way to describe the way in the large banks, for example, have resolved the few cases that have been brought against them for misconduct that brought on the financial crisis that still afflicts us.

In the latest of these, Bank of America is paying $335 million to settle allegations that it (actually, the Countrywide Financial business it acquired) steered minority borrowers into predatory mortgages. Earlier, Citigroup negotiated a $282 million deal to settle fraud charges with the Securities and Exchange Commission that was so sweet the judge in the case protested.

These buy-your-way-out-of-legal-jeopardy deals also apply to non-financial firms. Alpha Natural Resources, which purchased the notorious Massey Energy, agreed to pay $209 million to resolve charges against Massey stemming from last year’s catastrophic mining disaster in West Virginia. At least when Merck agreed to pay $950 million to resolve charges over the illegal marketing of its painkiller Vioxx it also pleaded guilty to a criminal charge. But that doesn’t mean much of anything in terms of the company’s ability to operate.

A payment of a couple of hundred million does not mean much to a company such as Citigroup, which has assets of nearly $2 trillion. Until companies fear legal consequences that stand in the way of business as usual or put top executives behind bars, they will continue their nefarious ways. After all, like their Japanese counterparts, many of them are “rotten to the core.”

Money for Something

Wednesday, December 14th, 2011

“To empower job-creators, we must get rid of regulations that prevent them from growing and hiring. This means taking decision-making power away from bureaucrats who don’t understand how job creation works.” Thus writes Newt Gingrich, who has revealed that one type of regulation he hopes to abolish are the child labor laws.

My colleagues and I at Good Jobs First have just issued a report which argues that the way to improve job creation is to impose more regulation.

In Money for Something we look at the economic development programs through which states spend billions of dollars each year in an effort to expand business activity inside their borders. These are the corporate tax credits, tax abatements, tax exemptions, cash grants, low-cost loans and other forms of financial assistance that states lavish on companies to lure one of the dwindling number of new plants, office buildings or distribution centers that the private sector is willing to construct in the USA rather than in China or India.

Unfortunately, many companies regard these benefits as a kind of entitlement and are willing to force states to bid against one another, driving the value of subsidy packages to unrealistic levels. A few years ago, for instance, German steelmaker ThyssenKrupp walked away with $1 billion for building a steel plant in Alabama that Louisiana also coveted.

Or else an established company demands new subsidies under the threat of relocating to another state. Sears has been playing this game shamelessly in Illinois. Two decades ago it got nearly $200 million to move its headquarters from downtown Chicago to a distant suburb. This year, as that deal was expiring, the company demanded new tax breaks from Illinois while it openly flirted with other states. The Illinois legislature has just approved a new $150 deal for Sears (along with breaks for other companies) amid protests that included the unfurling of a banner in the House Chamber reading “Stop Corporate Extortion.”

While the best choice might be to get rid of many of these subsidy programs, as long as they are in place they need to be made more accountable. When purported job creators are getting handouts of taxpayer money, we need to be damned well sure that they perform as expected.

In Money for Something, we evaluate 238 subsidy programs in all 50 states and the District of Columbia in two ways:

* Whether they impose a strict requirement on recipients to create a certain number of jobs

* And whether they make sure those are quality jobs by attaching wage and benefit standards to them.

We found that nearly 50 percent of the programs have no job-related performance requirements. States are spending more than $7 billion on these subsidies and have no guarantee that any job creation will result.

Many of the 103 programs without job creation requirements are designed to encourage investment. Left to their own devices, companies might focus that investment on labor-saving equipment that results in head-count reductions. There’s enough of that happening without using taxpayer funds to encourage even more.

The subsidy programs also leave a lot to be desired when it comes to job quality standards. Fewer than half have a wage requirement, and many of those are based on fixed amounts that can easily become outdated. We found one program in Delaware whose wage standard has for years been set at $7 an hour—a level that is now below the federal minimum wage. Other programs have standards that are only slightly above that federal minimum.

While it is clear that companies should not get subsidies to create sub-standard jobs (especially those that pay so little that workers would qualify for social safety net programs), that doesn’t take it far enough. Companies receiving subsidies should be creating jobs with wages that are significantly above market rates, thereby raising living standards. We found only eleven programs that do so.

State subsidy programs are even more deficient when it comes to benefits. Only 51 of the 238 we looked at require companies to make available health coverage of any kind, and only about half of those compel the employer to contribute to premium costs.

Even if all these standards are in place, they do not guarantee that a subsidy program’s benefits will outweigh its costs. Yet the presence of these safeguards gives public officials some recourse when a recipient’s performance is abysmal.

The question at that point is whether states are willing to enforce the standards they put in place. That is the subject of our next report at Good Jobs First, which will look at the use of clawbacks and other penalty procedures. Subsidy recipients that don’t create quality jobs need to feel the heat.

The Corporate Raid on State Tax Revenue

Thursday, December 8th, 2011

One of the usual canards of the corporate tax reduction crowd is that high U.S. rates force large companies to invest offshore instead of at home. The Institute on Taxation and Economic Policy and Citizens for Tax Justice have just issued the second installment of their detailed refutation of the myth of oppressive rates.

After putting out a report last month showing that many large corporations end up paying far less than the statutory federal rate (so much less that their rates often become negative), ITEP and CTJ now demonstrate that the story is the same at the state level. Their study, Corporate Tax Dodging in the Fifty States, lists 68 Fortune 500 companies that managed to pay no state income tax at all in at least one year during the period from 2008 through 2010 despite posting a total of nearly $117 billion in pre-tax U.S. profits during those no-tax years.

Sixteen of the companies—including the likes of DuPont, Tenet Healthcare, International Paper, Intel and  Peabody Energy—had more than one no-tax year. DuPont, Pepco Holdings and American Electric Power contributed nothing to state coffers in all three years. The report points out that, if the 265 companies in the sample had all paid the average 6.2 percent average corporate tax rate on their combined $1.33 trillion in U.S. profits, their state tax bill would have been about $82 billion. Instead, they paid only $40 billion, meaning that states were left without $42 billion in revenue that could have been used to help pay for education, healthcare, transportation, public safety and other key state government functions.

A system that allows many companies to sidestep millions of dollars in state tax payments can hardly be called onerous and certainly can’t be the reason for investing overseas. It is thus no surprise that the ITEP/CTJ list of firms with negative or minimal tax rates includes corporations that engage in extensive offshoring; among them are Eli Lilly, General Electric, Hewlett Packard and Merck.

At the same time, the key state tax dodgers include some manufacturing companies that have (at least in part) bucked the offshoring trend and made substantial investments in the United States. Chief among them are Intel and Boeing.

Intel, which has been spending billions on semiconductor fabrication plants in state such as Arizona, and Boeing, which focuses its aircraft assembly in Washington State and South Carolina, are major recipients of the kind of company-specific tax breaks that the ITEP/CTJ report cites as one of the reasons for the decline of state corporate income tax collections.

Intel has been playing the subsidy game in earnest since 1993, when it announced plans for what was then an unprecedented $1 billion investment in a new chip plant, to be built in a suburb of Albuquerque called Rio Rancho. The company pressured local officials to provide what would ultimately amount to about $455 million in property tax abatements and sales tax exemptions on the equipment purchased for the facility.

Soon after getting its way in New Mexico, Intel put the squeeze on officials in Arizona, where it proposed to build another plant in Chandler, a suburb of Phoenix. The company received some $82 million in property tax abatements, sales tax exemptions and corporate income tax credits. In 2005 Intel strong-armed the state to change the method by which it calculates corporate taxes to a system known as single sales factor, which allowed Intel and other companies with lots of property and a big payroll but relatively low sales in the state to enjoy enormous tax reductions.

In 1999 Intel announced plans for a large expansion of its semiconductor operations in Oregon but made it clear that the investment was contingent on receiving a property tax abatement that turned out to be worth an estimated $200 million over 15 years. In 2005 Intel got the county to extend the property tax break to 2025, locking in an estimated $579 million in additional savings. Intel also enjoys a substantial reduction in corporate income taxes thanks to Oregon’s decision to join the single sales factor bandwagon.

Boeing has also sought special tax breaks and other subsidies in multiple states. When the company was ready to begin production of its much-anticipated Dreamliner, it forced Washington to compete with around 20 other states for the work and agreed to stay there only after the legislature in 2003 approved a package of research & development tax credits and cuts in Business & Occupation taxes (the state’s substitute for a corporate income tax), sales taxes and property taxes that together were estimated to be worth $3.2 billion over 20 years.

Rather than showing its appreciation to Washington, the company went shopping for a better deal for the second Dreamliner production line. It chose South Carolina, where it was awarded a subsidy package that has been valued at more than $900 million and is able to take advantage of a “right to work” law that discourages unionization. The Machinists union accused the company of retaliating against union activism in Washington, but the complaint has just been withdrawn as part of a deal in which Boeing will build its new 737 in the Seattle area.

While it was once taken for granted that large U.S. corporations would do most of their investing at home, companies such as Boeing and Intel now act as if they are doing the country a favor with their domestic projects and expect to be rewarded handsomely in the form of special state tax breaks on top of those business-friendly provisions available to all firms.

Far from being held back by tax rates, large U.S. corporations invest offshore or onshore as they please while contributing as little as possible to the cost of public services.

Pension Busting at American Airlines

Thursday, December 1st, 2011

There was once a time when a bankruptcy filing by a company was a mark of shame. That stigma has fallen by the wayside, and firms now employ Chapter 11 not to protect themselves against creditors but for strategic purposes.

One of the most popular ploys is to use the bankruptcy court to undermine the bargaining position of labor unions. The latest firm to do so is American Airlines, which said it took the step to “achieve industry competitiveness.” This is corporate-speak for “we’re going to milk our employees dry.”

Such union-busting bankruptcies are far from new. They were pioneered three decades ago by the likes of ruthless airline executive Frank Lorenzo, who used Chapter 11 to abrogate union contracts after taking over Continental Airlines in 1983. Six years later he tried something similar at Eastern Airlines, but changes in the law forced him to settle for weakening the unions rather than eliminating them altogether. Subsequently, most of the other major carriers (and various smaller ones) also went through the bankruptcy process.

Airline management has made the most of the system. In 2006 a federal bankruptcy court barred unions at regional carrier Mesaba Airlines from engaging in strikes or other job actions, prompting the company’s unions to agree to management’s wage-cutting demands. In 2008 a bankruptcy judge gave Frontier Airlines permission to cancel its collective bargaining agreement with the Teamsters, but that decision was later overruled in federal district court. The union, nonetheless, had to make contract concessions, as have workers at other carriers and in other industries.

It remains to be seen how far AMR will go in using the bankruptcy process against its unions. Yet there is little doubt that it will seek to slash labor costs, especially those relating to pensions. The head of the federal Pension Benefit Guaranty Corporation has already expressed concern that AMR might terminate its plans—the way United Air Lines did during its stint in Chapter 11.

This would put an enormous strain on the PBGC, which has already amassed a deficit of $26 billion and would have difficulty providing significant payments to the tens of thousands of people covered by AMR’s pension plans.

There is good reason for AMR’s unions to be concerned about management’s intentions. AMR’S crusade against labor began three decades ago, when Robert Crandall took control of the company in the early days of airline industry deregulation. Apparently inspired by Reagan’s crushing of the air controllers strike, he was determined to get workers to bear the financial consequences of increased competition.

In the early 1980s AMR was one of the country’s first major employers to adopt the pernicious practice of two-tier wages. Crandall pressured unionized pilots to accept a contract that cut the pay of new hires by a whopping 50 percent; for flight attendants the reduction was more than 30 percent, making many of them eligible for food stamps. The moves transferred $100 million a year from paychecks to company coffers.

AMR also pioneered the practice of high-tech offshore outsourcing in 1983 when it set up a subsidiary in Barbados called Caribbean Data Services. The company began air-shipping tons of used ticket coupons to the facility, where operators (mostly women) paid $1.75 to $3 an hour entered the information on computer terminals and then transmitted it via satellite to the airline’s accounting center in Tulsa, Oklahoma. By 1985 the operation was successful enough in cutting costs that American shut down its data-entry operation in Tulsa.

When unions began to challenge the two-tier system in the late 1980s, AMR sued them for supposed violations of federal labor law, fired activists and threatened to shut down the airline. Eventually, Crandall had to accept a softening of the two-tier arrangement, but he pursued a relentless campaign against labor costs which prompted a 1993 strike by flight attendants that ended only when President Clinton personally intervened. Four years later, Clinton intervened again when American’s pilots walked out to protest the company’s rigid bargaining position.

Crandall’s successor, Donald Carty, continued the company’s confrontational labor relations posture. In 2003 he used the threat of bankruptcy to wring $1.8 billion in annual concessions from AMR’s unions. While those negotiations were taking place, AMR management failed to mention that it was simultaneously offering lucrative retention bonuses and special pension protections to top executives at the company. When the plan came to light, the uproar was so intense that AMR’s board ousted Carty and—for a while—adopted a less aggressive posture toward the unions. With the bankruptcy filing, the company appears to be returning to its savage ways.

When Occupy protesters or others talk about income inequality, conservatives complain that this is class warfare. The real class war is that being waged by corporations against decent wages and benefits, using the bankruptcy courts as one of their most effective weapons.

What makes this all the more galling is that severe restrictions have been placed on the ability of struggling individuals—including young people overwhelmed by student loan debt—to use the bankruptcy system to gain relief. Here, as in so many other areas, corporate “persons” have been given the upper hand over real people.