Archive for April, 2012

Wal-Mart and Watergate

Thursday, April 26th, 2012

Wal-Mart has been probably been accused of more types of misconduct than any other large corporation. The latest additions to the list are bribery and obstruction of justice. In an 8,000-word exposé published recently in the New York Times, top executives at the giant retailer are reported to have thwarted and ultimately shelved an internal investigation of extensive bribes paid by lower-level company officials to expand Wal-Mart’s market share in Mexico.

While Wal-Mart’s outrageous behavior is often in a class by itself, the bribery aspects of the allegations are far from unique. In fact, Wal-Mart is actually a late arrival to a sizeable group of major corporations that have found themselves in legal jeopardy because of what in corporate circles are politely called questionable foreign payments.

That jeopardy has grown more significant in recent years as the Securities and Exchange Commission and the Department of Justice have stepped up enforcement of the Foreign Corrupt Practices Act, or FCPA, which prohibits overseas bribery by U.S.-based corporations and foreign companies with a substantial presence in the United States.

It is often forgotten that the Watergate scandal of the 1970s was not only about the misdeeds of the Nixon Administration. Investigations by the Senate and the Watergate Special Prosecutor forced companies such as 3M, American Airlines and Goodyear Tire & Rubber to admit that they or their executives had made illegal contributions to the infamous Committee to Re-Elect the President.

Subsequent inquiries into illegal payments of all kinds led to revelations that companies such as Lockheed, Northrop and Gulf Oil had engaged in widespread foreign bribery. Under pressure from the SEC, more than 150 publicly traded companies admitted that they had been involved in questionable overseas payments or outright bribes to obtain contracts from foreign governments. A 1976 tally by the Council on Economic Priorities found that more than $300 million in such payments had been disclosed in what some were calling “the Business Watergate.”

While some observers insisted that a certain amount of baksheesh was necessary to making deals in many parts of the world, Congress responded to the revelations by enacting the FCPA in late 1977. For the first time, bribery of foreign government officials was a criminal offense under U.S. law, with fines up to $1 million and prison sentences of up to five years.

The ink was barely dry on the FCPA when U.S. corporations began to complain that it was putting them at a competitive disadvantage. The Carter Administration’s Justice Department responded by signaling that it would not be enforcing the FCPA too vigorously. That was one Carter policy that the Reagan Administration was willing to adopt. In fact, Reagan’s trade representative Bill Brock led an effort to get Congress to weaken the law, but the initiative failed.

The Clinton Administration took a different approach—trying to get other countries to adopt rules similar to the FCPA. In 1997 the industrial countries belonging to the Organization for Economic Cooperation and Development reached agreement on an anti-bribery convention. In subsequent years, the number of FCPA cases remained at a miniscule level—only a handful a year. Optimists were claiming this was because the law was having a remarkable deterrent effect. Skeptics said that companies were being more careful to conceal their bribes, and prosecutors were focused elsewhere.

Any illusion that commercial bribery was a rarity was dispelled in 2005, when former Federal Reserve Chairman Paul Volcker released the final results of the investigation he had been asked to conduct of the Oil-for-Food Program in Iraq. Volcker’s group found that more than half of the 4,500 companies participating in the program—which was supposed to ease the impact of Western sanctions on Iraq—had paid illegal surcharges and kickbacks to the government of Saddam Hussein. Among those companies were Siemens, DaimlerChrysler and the French bank BNP Paribas.

The Volcker investigation, the OECD convention, and the Sarbanes-Oxley law (whose mandates about financial controls made it more difficult to conceal improper payments) breathed new life into FCPA enforcement during the final years of the Bush Administration and after President Obama took office.

The turning point came in November 2007, when Chevron agreed to pay $30 million to settle charges about its role in Oil-for-Food corruption. Then, in late 2008, Siemens agreed to pay the Justice Department, the SEC and European authorities a record $1.6 billion in fines to settle charges that it had routinely paid bribes to secure large public works projects around the world. This was a huge payout in relation to previous FCPA penalties, yet it was a bargain in that the big German company avoided a guilty plea or conviction that would have disqualified it from continuing to receive hundreds of millions of dollars in federal contracts.

In February 2009 Halliburton and its former subsidiary Kellogg Brown and Root agreed to pay a total of $579 million to resolve allegations that they bribed government officials in Nigeria over a ten-year period. A year later, the giant British military contractor BAE Systems reached settlements totaling more than $400 million with the Justice Department and the UK Serious Fraud Office to resolve longstanding multi-country bribery allegations. In April 2010 Daimler and three of its subsidiaries paid $93 million to resolve FCPA charges. Other well-known companies that have settled similar bribery cases since the beginning of 2011 include Tyson Foods, IBM, and Johnson & Johnson. In most cases companies have followed the lead of Siemens in negotiating non-prosecution or deferred prosecution deals that avoided criminal convictions.

A quarter century after the Watergate investigation revealed a culture of corruption in the foreign dealings of major corporations, the new wave of FCPA prosecutions suggests that little has changed. There is one difference, however. Whereas the bribery revelations of the 1970s elicited a public outcry, the cases of the past few years have generated relatively little comment in the United States—except for the complaints of corporate apologists that the FCPA is too severe. Among those apologists are board members of the Institute for Legal Reform (a division of the U.S. Chamber of Commerce), whose ranks have included the top ethics officer of Wal-Mart.

The Wal-Mart case could turn out to be a much bigger deal than previous FCPA cases—for the simple reason that the mega-retailer appears to have forgotten Watergate’s central lesson that the cover-up is often punished more severely than the crime. A company that has often avoided serious consequences for its past misconduct may finally pay a high price.

Employers Stand their Ground

Thursday, April 19th, 2012

These are heady days for the corporate accountability movement. Threats of consumer boycotts prompted half a dozen major companies to drop out of the American Legislative Exchange Council, which in turn forced ALEC to cease its efforts to get states to enact “stand your ground” laws like the one in Florida at the center of an uproar over the shooting of an unarmed teenager.

At the same time, institutional investors humiliated Citigroup by rejecting a board-approved compensation package for its senior executives. Although the “say on pay” resolution is non-binding, it will in all likelihood result in smaller paydays for top officers of an institution that epitomizes financial sector misconduct. This comes on the heels of an announcement by Goldman Sachs that it would change its board structure in response to pressure from the capital strategies arm of the public employee union AFSCME.

Environmentalists have succeeded in stalling and perhaps killing the disastrous Keystone XL pipeline . The past few months have also seen a surge in protest over working conditions at the Chinese plants that produce the wildly popular Apple iPad tablets. Apple’s manufacturing contractor Foxconn was forced to boost pay for factory workers, while Apple itself faced demonstrations at many of its normally idolized retail stores. The Apple campaign and others are being propelled by new online services such as Sum of Us and Change.org that mobilize online pressure for a variety of anti-corporate initiatives.

Missing from all this positive momentum is a significant victory for the U.S. labor movement. While major corporations have bowed to pressure from consumers and shareholders, they are standing their ground against unions.

Rather than making concessions, large private-sector employers are looking to further roll back labor’s power. Companies such as American Airlines and Hostess Brands (maker of Twinkies and Wonder Bread) have filed for Chapter 11 and are using the bankruptcy courts to decimate their collective bargaining agreements and gut pension plans.

Verizon continues to stonewall in negotiations with members of the Communications Workers of America, who struck the company for two weeks last summer in the face of unprecedented concessionary demands from management but then went back to work without a new contract. CWA is also facing difficult negotiations with AT&T, even though the union went out on a limb to support the company’s ultimately unsuccessful bid to take over T-Mobile.

There have been a few relatively bright spots for labor. For example, after being locked out for three months, Steelworkers union members at Cooper Tire and Rubber managed to negotiate a new contract that excluded the company’s demand for a five-tier wage structure with no guaranteed pay increases.

Yet organized labor has not been able to take the offensive in a significant way, and employers continue to feel emboldened. This comes through loud and clear in the results of the latest Employers Bargaining Objectives survey conducted by Bloomberg BNA (summarized in the April 11 edition of Labor Relations Week).

“Employers are fairly brimming with confidence as they head into 2012 talks,” Bloomberg BNA writes. “Nine out of 10 of the employers surveyed are either fairly confident or highly confident of obtaining the goals they have set for their labor agreements.”

Those goals, of course, do not include hikes in pay and improvements in working conditions. In fact, only 11 percent of respondents said they expected to have to negotiate significant wage increases, while 27 percent said they planned to bargain for no improvements at all in wage rates. Many employers expect to shift more health care costs to workers, and few expect to agree to stronger job security provisions.

Employers are prepared to play hardball in seeking their objectives. For example, one-quarter of manufacturing-sector respondents told Bloomberg BNA they would be likely to resort to a lockout of workers if they did not get their way in negotiations. Corporations have little fear of strikes, which are all but extinct, and if workers do dare to walk out, employers are confident of prevailing—or at least maintaining the kind of impasse that exists at Verizon.

Such arrogance is not surprising at a time when unemployment levels remain high and private-sector unionization rates are abysmally low. The question is what it will take to shatter employer intransigence.

One piece of the solution is greater cooperation between unions and the rest of the broader corporate accountability movement, and that’s exactly what seems to be emerging from the 99% Spring offensive.

Strong private sector unions in the United States are an essential check on the power of large corporations and one of the most effective vehicles for raising living standards. Corporate accountability will mean much more when big business is running away not only from ALEC but also from union-busting.

Paying Taxes to the Boss

Thursday, April 12th, 2012

From Howard Jarvis, father of California’s notorious Proposition 13, to Grover Norquist, the superlobbyist who pressures politicians to sign a Taxpayer Protection Pledge, conservative ideologues have spent the past few decades poisoning the attitude of Americans toward the payment of taxes. Norquist in particular has been blunt about his ultimate goal: radical reduction in the size of government.

That crusade assumes that taxes are actually going to government. Yet it turns out that a growing portion of state tax revenue is being diverted to corporations, in the name of job creation or job retention. Nearly $700 million a year in withholding taxes paid by workers is being turned over to their employers.

This startling fact comes from Paying Taxes to the Boss, a report my colleagues and I at Good Jobs First have just published.  We found 22 programs in 16 states under which companies are allowed to retain payroll taxes that they deduct from worker paychecks and would normally pass along to state revenue departments. Companies can keep up to 100 percent of the state withholding for designated workers for periods as long as 25 years. The most expensive program, New Jersey’s Business Employment Incentive Program (BEIP), disbursed $178 million in FY2011.

It should come as no surprise that the biggest windfalls are going to major corporations rather than small businesses. Among the largest recipients we found are: Nissan ($160 million in Mississippi), Sears ($150 million in Illinois), General Electric ($115 million in Ohio), Procter & Gamble ($85 million in Utah), Fidelity ($72 million in North Carolina) and Goldman Sachs ($60 million in New Jersey).

Apart from being unseemly, the whole practice is a threat to the fiscal stability of state governments. Payroll and other personal income taxes (PIT) represent a much bigger pot of money than corporate income taxes, so economic development officials can offer larger giveaways to companies and thus do escalating damage to state budgets.

To make matters worse, many of the PIT-based subsidy deals go to companies that don’t really create any new jobs. States frequently offer fat packages to firms that simply relocate existing jobs from a facility in another state. In fact, the diversion of withholding taxes was first adopted in Kentucky as a way to lure companies from neighboring states; the politician credited with originated the idea called it “the atomic bomb of economic development incentives.” Ohio and Indiana responded with their own withholding tax diversions, setting off a PIT-based subsidy arms race.

In recent years, withholding tax diversions have been used, for example, by South Carolina to get Continental Tire to move its North American headquarters from North Carolina; by Georgia to lure NCR from Ohio; and by Colorado to get Arrow Electronics to move its corporate headquarters from New York. In 2011 Kansas provided a reported $47 million in withholding-tax subsidies to AMC Entertainment to get the movie theater chain to move its headquarters from downtown Kansas City, Missouri about 10 miles across the state line to Leawood, a suburb of Kansas City, Kansas.

Along with this interstate job piracy, PIT awards are being given to firms that use the threat of an interstate move to extract big payments to simply stay put. This use of jobs blackmail has been most pronounced recently in Ohio and Illinois.

In 2011 Ohio forked over a $93 million subsidy package—including PIT-based tax credits worth $75 million—in response to a threat by greeting-card giant American Greetings to move its headquarters out of state. A few weeks later, the administration of Gov. John Kasich responded to a similar threat by security services provider Diebold Inc. with a $56 million package, including $30 million in PIT-based credits.

Meanwhile in Illinois, Sears got $150 million in PIT-based credits along with $125 million in local property breaks to keep its headquarters in the distant Chicago suburb of Hoffman Estates. And Motorola Mobility, now part of Google, was given a $100 million withholding-tax deal to keep its headquarters in the Chicago suburb of Libertyville.

At Good Jobs First we normally frame our critique of subsidy programs in terms of the need for greater accountability. In the case of withholding-tax diversions, we decided that the negative impacts are so serious that the best policy recommendation is to call for their abolition.

I wonder if Grover Norquist would support the idea of getting state politicians to pledge that they will not support any increases in taxes going to employers?

Neither Social Darwinism Nor Paternalism

Wednesday, April 4th, 2012

President Obama’s critique of the Republican budget plan as “thinly veiled social Darwinism” is a refreshingly blunt statement about the retrograde features of contemporary conservative thinking.

The efforts of House Budget Chair Paul Ryan and his colleagues to accelerate the upward redistribution of income and the unraveling of the social safety net deserve all the scorn that Obama served up.

While invoking a phrase that has a grand history in the critique of laissez-faire ideology, Obama failed to mention how social Darwinism was originally embraced not just by philosophers such as Herbert Spencer but also by leading industrialists such as Andrew Carnegie and John D. Rockefeller (a fact noted by Richard Hofstadter in his seminal work on the subject, Social Darwinism in American Thought).

Rather than pointing out how social Darwinist ideas can still be found in corporate boardrooms (especially those of Koch Industries) as well as in House hearing rooms, the purportedly socialist Obama went out of his way to sing the praises of business: “I believe deeply that the free market is the greatest force for economic progress in human history.”

Obama also used his speech to extol Henry Ford, specifically for the auto magnate’s policy of paying his workers enough so that they could afford to buy the cars they were assembling. Higher wages are a good thing, but it is misleading to cite Ford without putting his practices in some context.

Henry Ford gained fame as the man who instituted the Five Dollar Day for his workers in the 1910s. The facts were somewhat more complicated: not all workers at Ford Motor qualified for that amount, which in any event was not the base pay. A large part of the $5 consisted of a so-called “profit-sharing” bonus that had to be earned — by working at a high level of intensity on the job, and by living in a style that Ford considered appropriate off the job.

To enforce the lifestyle regulations, Ford created a Sociological Department with inspectors who visited the homes of workers and interviewed family members and neighbors. The company wanted to be sure that workers were not spending their share of Ford profits in a frivolous or irresponsible manner.

Ford’s practices were also designed to discourage unionization. When workers nonetheless tried to organize, Ford’s paternalism quickly dissolved. In 1932 a protest march to the company’s River Rouge plant in Dearborn, Michigan was met with tear-gas and machine-gun fire, which killed four persons. Dearborn police officers were supplemented by members of the Service Department, Ford’s own security force. Headed by Harry Bennett, the Service Department became notorious for its surveillance of workers both on and off the job. In a 1937 confrontation known as the Battle of the Overpass (photo), union organizers were attacked by Bennett’s security force and freelance thugs when they attempted to distribute leaflets outside the Rouge plant. Ford was the last of Detroit’s Big Three to give in to unionization.

It is telling that the word “unions” was not uttered a single time during Obama’s speech. Instead, Obama seems to want us to believe that the alternative to deregulation and trickle-down economics is a return to some kind of government and big business paternalism.

The first problem is that big business, despite giving frequent lip service to corporate social responsibility, has almost completely abandoned paternalism in favor of the human resources principles of Wal-Mart. As for government paternalism, Obama himself felt compelled to say in his speech that “I have never been somebody who believes that government can or should try to solve every problem.”

Even if the prospects for paternalism were more promising, it would not be the most effective way of responding to neo-social Darwinism. As the story of Henry Ford illustrates, paternalism is simply another form of social control by the powerful, and when necessary it is quickly abandoned in favor of repression and austerity. Collective action of the type that was put aside after Obama took office and recently revived by the Occupy Movement is the only real way forward.