Archive for March, 2014

Coal Ash Taints a Would-Be Corporate Paradise

Thursday, March 27th, 2014

DanRiverAshPipeIt took a spill of tens of millions of gallons of water contaminated with toxic coal ash into a river used as a source of drinking water to put a halt to what was starting to look like a corporate coup in North Carolina. Duke Energy, the owner of the retired Dan River power plant in the town of Eden where the accident took place in early February, is now under siege, as is the governor who was doing its bidding.

North Carolina’s Department of Environment and Natural Resources (DENR) cited Duke Energy for “deficiencies” at the site of the spill and later charged the company with regulatory violations at other coal ash storage locations. DENR officials accused Duke, for instance, of deliberately pumping 61 million gallons of toxic slurry into the Cape Fear River several weeks after the Dan River accident. A federal criminal investigation that also covers DENR practices is also reported to be underway.

The actions were long overdue. Based in Charlotte, Duke is one of the largest utilities in the country, and it has long intimidated state regulators.  The Charlotte Observer looked into the matter and found that over the past decade the company has been fined only four times during the past decade, paying less than $4,000.

Duke gained even more sway over the agency last year after Pat McCrory took office as governor. McCrory was Duke’s guy — not just in the sense that the company supported him — but because McCrory was a manager at Duke for three decades, including the 14 years he was also serving as the mayor of Charlotte. McCrory is one of the most egregious examples of the reverse revolving door: the movement of someone from the private sector into government.

McCrory brought his corporate sensibilities with him to the governor’s job and set out to make state government even more friendly to companies such as his long-time employer. One of the areas in which this was most pronounced was in environmental policy. With the support of far-right legislators, McCrory appointed businessman John Skvarla to head DENR with the apparent intention of defanging the agency. Agency staffers were told to focus on expediting permits rather than enforcement. As the New York Times has put it:

Current and former state regulators said the watchdog agency, once among the most aggressive in the Southeast, has been transformed under Gov. Pat McCrory into a weak sentry that plays down science, has abandoned its regulatory role and suffers from politicized decision-making.

McCrory’s apparent use of public office to advance the interests of Duke goes back more than 15 years. In 1997, while mayor of Charlotte, he testified before a Congressional committee in opposition to tougher air-quality standards that would have required Duke to install costly new emission controls at its coal-burning plants. Then he flew home on Duke’s corporate jet. The North Carolina Supreme Court once raised ethical questions about McCrory’s actions in connection with a decision by Charlotte to condemn a tract of land to help Duke Power obtain an easement.

Throughout his political career, McCrory has insisted that there was no conflict of interest between his position as a manager at a major corporation and his role as a public official. The recent coal ash controversies are stretching that dubious contention to the limit. The governor has been forced to take a more positive stance toward regulation while insisting that he has not had direct communications with his former employer about its coal ash problems. The new image took a hit when it came out that the lawyer hired by DENR to represent it in the federal criminal investigation once represented Duke. Echoing McCrory’s frequent refrain about himself, an agency spokesperson insisted that this was absolutely no conflict of interest.

The coal ash spills have created a serious health problem for the people of North Carolina, but they have also served the useful purpose of debunking the corporate paradise that McCrory and his allies have tried to create. Along with the remarkable Moral Monday protests against the retrograde policies adopted by the state legislature, the new awareness of environmental carelessness on the part of companies like Duke is making it more difficult for business interest to masquerade as the public interest.

Still Unsafe At Any Speed

Thursday, March 20th, 2014

unsafeIn a resounding affirmation of the principle that the cover-up is worse than the crime, federal prosecutors emphasized Toyota’s deceptive practices in announcing that the carmaker will pay $1.2 billion to settle a criminal charge relating to the sudden acceleration controversy. The Justice Department press release uses just about every synonym for dishonesty in describing Toyota’s misdeeds.

“The company admits that it misled U.S. consumers by concealing and making deceptive statements,” the release states, adding that the company “gave inaccurate facts to Members of Congress.” Later it says that Toyota “was hiding” critical information from federal regulators and that it made public a “false timeline.” U.S. Attorney Preet Bharara alleges that the company “cared more about savings than safety and more about its own brand and bottom line than the truth.”

Such strong talk is gratifying, but Toyota, like so many other corporate miscreants, was offered a deferred prosecution agreement in place of an outright conviction. This was made somewhat more palatable by the provision in the agreement that bars the company from deducting the penalty amount from its taxes.

Prosecutors used the announcement to convey a thinly veiled warning to General Motors that it too will have to pay a substantial amount to resolve its own legal entanglements on safety issues. Bharara declared: “Companies that make inherently dangerous products must be maximally transparent, not two-faced. That is why we have undertaken this landmark enforcement action. And the entire auto industry should take notice.”

GM’s announcement several weeks ago that it was recalling hundreds of thousands of its small cars because of an ignition switch problem mushroomed into a major scandal as information came to light suggesting that the company had dragged its feet in dealing with the issue, even though it was linked to 13 deaths. Federal regulators, which had received several hundred complaints relating to the problem, were also criticized for being slow to act. Both Congress and the Justice Department have launched investigations of the matter.

In recent days, GM has tried to spin the situation to its advantage, with CEO Mary Barra putting herself out front and making extravagant promises that such a safety lapse would never happen again. Living up to such a commitment will be even more difficult for GM than it was for Toyota, which used similar p.r. stratagems during earlier phases of its controversy and ultimately failed.

After all, the history of GM is filled with examples of irresponsibility on safety issues. It is now 50 years since Ralph Nader exposed the defects of GM’s Corvair, prompting the company to spy on him and thus inadvertently give a boost to the nascent corporate accountability movement.

Later, GM failed to act when presented with reports that poorly sealed panels on some of its cars could cause dangerous levels of carbon monoxide to leak into the passenger compartment. After some deaths were attributed to the problem in the late 1960s, the company finally recalled 2.5 million cars to repair the defect.

During the 1970s and 1980s the company was frequently criticized by environmentalists and consumer advocates for its efforts to weaken federal rules on emissions and for its resistance to regulations requiring passive restraints such as airbags in all automobiles. In 1990 GM finally agreed to put air bags in all of its U.S. cars starting in 1995.

In 1992 the New York Times published an investigation concluding that GM had recognized as early as 1983 that its pickup trucks with side-mounted gas tanks were highly dangerous but took no action until 1988, even then saying the change was for design rather than safety reasons. During that period, more than 300 people were killed in collisions in which the tanks exploded.

GM resisted recalling trucks with the side-mounted tanks even after the federal government asked it to do so. Instead, it launched a campaign against safety advocates and plaintiffs’ lawyers. In 1994 the company reached a settlement with the U.S. Transportation Department under which the federal government gave up on its effort to get GM to recall the trucks in exchange for which the company agreed to contribute $51 million to auto safety programs. GM still faced a series of personal injury lawsuits in connection with the exploding gas tanks, including one in which a Los Angeles jury awarded victims $4.9 billion in damages. GM appealed, and the case was later settled out of court for an undisclosed amount.

It remains to be seen how much GM has to pay in fines and settlements for its current ignition switch scandal, but it will take a lot of punishment to get a company with such a long history of safety lapses to change its ways for good.

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New in CORPORATE RAP SHEETS: a profile of Yum Brands and its controversies relating to wage & hour violations, sanitation lapses and animal cruelty.

Injustice Incorporated

Thursday, March 13th, 2014

Pages from pol300012014enIt’s been clear for a long time that oil drilling in Ecuador’s rain forests dating back to the 1960s caused severe environmental damage. Yet for more than two decades a lawsuit against the lead drilling company, Texaco, and its new owner, Chevron, has meandered through Ecuadoran and U.S. courts.

Chevron, fighting a $19 billion judgment against it in Ecuador (later reduced to $9.5 billion), has sought to turn the tables on the plaintiffs and their U.S. lawyer, Steven Donziger. Recently, a U.S. court ruled in favor of the company, bolstering its refusal to pay anything in compensation.

The challenges faced by the plaintiffs in the Chevron case are, unfortunately, the rule rather than the exception. It is often next to impossible to get a large transnational corporation to fully rectify serious environmental, labor or human rights abuses.

This frustrating reality is analyzed at great length in a new 300-page report from Amnesty International entitled Injustice Incorporated. The study begins with a primer on the relationship between corporations and international human rights law. Amnesty points out a key dilemma:

In some respects the corporate model is antithetical to the right to effective remedy; by admitting and addressing human rights abuses companies expose themselves to financial liability and reputational harm which shareholders (if not the directors and officers of the company themselves) see as entirely contrary to their interests.

Consequently, Amnesty points out, corporations tend to respond in ways that can compound the abuse: “deals with governments, denying victims access to vital information and using vastly greater financial means to delay and frustrate attempts to bring cases to court.”

Another problem highlighted by Amnesty is that large companies tend to be structured as a collection of separate legal entities whose liability is compartmentalized. While recognizing that it is not realistic to try to change this well-entrenched feature of corporation-friendly legal systems, Amnesty argues that “a counter-balance is needed to protect public interest and the international human rights framework.”

Amnesty amplifies its analysis through four detailed case studies. The first is the 1984 Bhopal catastrophe, in which a massive leak of toxic methyl isocyanate gas at a facility owned by a subsidiary of Union Carbide killed thousands and caused debilitating illnesses in tens of thousands more. Union Carbide paid what the victims considered grossly inadequate compensation while its CEO, with the help of the U.S. government, evaded extradition on criminal charges. Dow Chemical, which acquired Union Carbide in 2001, has refused to do anything more to help the victims.

The other situations examined in the Amnesty report are not as well known. The first is the Omai gold mine in Guyana, where the rupture of a tailings dam in 1995 spilled a vast quantity of effluent laced with cyanide and heavy metals into two rivers. The mining operation and the dam were run by Omai Gold Mines Limited, a company controlled at the time by Canada’s Cambior Inc. Soon after the accident, Cambior paid out modest amounts in compensation to local residents while vigorously contesting legal actions brought both in Guyana and in Canada. The company, which later merged with another Canadian firm, Iamgold, never paid out anything more.

Amnesty’s third case study deals with the Ok Tedi mine in Papua New Guinea, where for many years waste products were dumped into a river used by some 250 communities of indigenous people. In 1994 a lawsuit on behalf of local residents was filed in Australia, the home country of the company, Broken Hill Proprietary, which at the time was the primary operator of the mine. BHP, now part of BHP Billiton, eventually agreed to an out-of-court settlement that included the equivalent of $86 million in compensation but did not require it to build a long overdue tailings dam.

The final case study in the Amnesty report is also the most recent. In 2006 the Dutch oil trading company Trafigura signed a dubious agreement with a small firm in Ivory Coast that allowed it to dump petroleum waste products at various sites in the city of Abidjan. Thousands of residents exposed to the substances suffered from nausea, headaches, breathing difficulties, stinging eyes and burning skin. At least 15 were reported to have died. Trafigura reached a settlement that Amnesty labels as insufficient.

Amnesty finishes its report with an analysis of what it calls the three biggest obstacles in such cases: the legal hurdles to extraterritorial action, the lack of information needed to support claims for adequate reparations and the unwillingness of the governments of the countries involved to hold foreign corporations to full account. While offering a set of reforms aimed at alleviating these challenges, Amnesty harbors no illusions about the difficulty of bringing about such changes. Legal systems, it admits, exist primarily to protect powerful corporate interests.

Private Equity and Public Assistance

Thursday, March 6th, 2014

schwarzmanEverything seems to be coming up roses for the barons of private equity. A front-page article in the Wall Street Journal headlined BLOWOUT HAUL FOR BUYOUT TYCOONS proclaims: “Private equity’s top moguls took home more than $2.6 billion last year as booming markets allowed their firms to cash out of investments and notch blockbuster gains.”

Leon Black, the founder and chief executive of Apollo Global Management, led the pack with $546 million in compensation. Stephen Schwarzman of Blackstone received $465 million and William Conway of the Carlyle Group $346 million. These three men are also well-placed on the new Forbes list of the world’s billionaires. Schwarzman comes in at No.122 with a net worth of $10 billion; Black at No. 240 and a net worth of $5.8 billion; and Conway No. 520 with $3.1 billion in net worth.

Vibrant stock markets are not the only reason for these massive paydays and accumulated fortunes. It’s well known that these firms and their principals also make out like bandits because of the favorable federal tax treatment of the revenue they extract from their portfolio companies. Now it is possible to demonstrate the extent to which the buyout kings are also being subsidized by state and local governments.

My colleagues and I at Good Jobs First recently unveiled a major enhancement of our Subsidy Tracker database. The main refinement in version 2.0 is the addition of parent-subsidiary linkages for more than 25,000 individuals entries accounting for 75 percent of the dollar value of the entire Tracker universe. These entries have been linked to nearly 1,000 parent companies, including many of the world’s largest corporations.

Included among the parent companies are the big private equity firms. In our matching process, we made sure to check which of the portfolio companies of those buyout firms were among the subsidy recipients included in Tracker. We found a lot.

Of the 50 largest buyout firms on the Private Equity International ranking of the largest players in that field,  30 were found to have subsidized portfolio companies. (Many of the other 20 either don’t reveal their portfolios or don’t do business in the United States.) Those companies had received a total of 1,332 subsidies worth $1.8 billion (dollar values are not available for some awards).

Here are the buyout firms whose portfolio companies have received the most in cumulative subsidies:

  • Silver Lake Partners is No. 35 on our list of top parent companies, with total associated subsidies of $482 million. This is mainly a reflection of the fact that Silver Lake took over the computer company Dell, which has received giant subsidies in places such as North Carolina and Tennessee.  (We attribute past subsidies to a company’s current parent, since awards often stretch over many years and usually transfer with a change of ownership.)
  • Onex is No. 45 on the list with subsidies of $388 million, the largest amounts coming from the large packages Spirit AeroSystems received in North Carolina and Kansas.
  • Blackstone is No. 91, with 141 subsidy awards totaling $203 million awarded to several dozen of its portfolio companies.
  • Apollo Global Management comes in at No. 111, with 107 subsidies amounting to $158 million. Among its most heavily subsidized portfolio companies are Berry Plastics and Verso Paper.

Other major buyout firms are also on the list, including TPG Capital ($68.6 million), KKR ($54.9 million), Bain Capital ($51.6 million) and the Carlyle Group ($36.6 million).

By themselves, state and local subsidies are usually not the predominant factor in the profitability of a portfolio company, but they certainly can contribute to a fatter bottom line. In a recent article about Subsidy Tracker, the investor website Motley Fool wrote:

Companies which are clearly adept at seeking out incentives are much more likely to be able to keep more of their hard-earned income as these subsidies often take the form of a multi-year tax break. Lower effective taxes within a state can allow for more research and development as well as hiring, which can lead to even faster growth for these companies. In other words, seeking out companies with large subsidies is another way of giving yourself an edge over the uninformed investor. Keep in mind that a large subsidy alone is no guarantee of a companies’ success, but it often translates into lower taxes and higher profits.

And when that company is in the portfolio of a buyout firm, those higher profits means that the operation can more easily be taken public and further enrich the likes of Black, Schwarzman and Conway.