Lehman’s Bad Karma

The downfall of Lehman Brothers is bad news for its employees and shareholders, but it is difficult to avoid the feeling that, apart from the laws of the market, the law of karma may be at work as well.

After all, Lehman was a firm built on a slave economy. It was founded as a cotton brokerage by a German family that emigrated to Alabama in the 1840s. According to Robert Rosen’s book The Jewish Confederates, partner Mayer Lehman (image) was an active supporter of the Confederacy. In 1864, the governor of Alabama enlisted him in an effort to help Southern prisoners of war being held in the North, describing him in a letter to Jefferson Davis as “a foreigner” but “thoroughly identified with us.” The Lehmans helped rebuild the economy of Alabama after the Civil War.

Some 130 years later, Lehman Brothers got involved in financing what some have called a new form of slavery: private prisons. During the late 1990s Lehman was a key underwriter for securities issued by Corrections Corporation of America, by CCA’s real estate investment trust spinoff, and by some of CCA competitors.

More relevant to the current crisis is the fact that Lehman was a pioneer in the dubious business of packaging subprime loans as collateral for high-yield bonds. It provided major financial backing for First Alliance Corp., a leading practitioner of predatory lending. For this reason, Lehman was targeted by activist groups such as ACORN, and in 2000 the firm was sued by some of First Alliance’s victims. A federal jury in the case later found that Lehman had aided and abetted First Alliance in its scheme to cheat borrowers.

Despite these early signs that securitization of shaky mortgages might have drawbacks, Lehman charged ahead. Not only did it encourage investors to take the plunge, the firm filled its own balance sheet with some $300 billion in mortgage-backed securities. Lehman paved the way for the crisis that is roiling the financial world and became one of its prime victims.

According to a 2004 article in the Wall Street Journal, Lehman CEO Richard Fuld used to tape critiques of his son’s hockey performance while watching games from the bleachers. When the boy played better, he was rewarded with Lehman stock. Assuming he held onto those shares, one can only wonder how the younger Fuld feels now that the fruits of his efforts are virtually worthless. Perhaps a bit like all those people who lost their homes to the predatory lending backed by his father’s firm.

“Ethical Failure” and Offshore Oil Drilling

The phrase repeatedly chanted at the recent Republican convention — “Drill, Baby, Drill” — now sounds pornographic in the wake of the new sex and money scandal involving oil drilling companies and the federal agency that is supposed to oversee them. The Interior Department’s Inspector General has just come out with allegations that more than a dozen current and former staffers at Interior’s Minerals Management Service received improper gifts from industry representatives, who also put on wild parties for MMS employees. Gregory Smith, former director of the royalty-in-kind program at MMS, was also accused of having an illicit sexual relationship with an subordinate and paying her to buy cocaine.

The three reports just submitted by Interior IG Earl E. Devaney (photo) may be the most salacious government documents since the 1998 Starr Report on President Bill Clinton’s sexual peccadilloes.

Although the Interior Department website prominently features Secretary Dirk Kempthorne’s outraged response to the revelations, it does not see fit to provide the reports themselves. Fortunately, ProPublica, the online investigative reporting site, has posted the reports for all to view. Here are some highlights:

First there is a cover memo from Devaney decrying what he calls “a culture of ethical failure” in which some MMS employees adopted a “private sector approach to essentially everything they did. This included effectively opting themselves out of the Ethics in Government Act.” The private sector itself also comes in for criticism. Devaney suggests that the oil companies overseen by MMS were not especially helpful in an investigation that took more than two years and cost nearly $5.3 million. Chevron, Devaney states, refused to cooperate with the probe.

The first of the three reports focuses on Smith, who seems to have been confused about who was actually employing him. The report says he spent a substantial amount of his paid time doing work not for the federal government but for a private firm called Geomatrix Consultants that worked for oil industry clients. Smith also is said to have received improper gifts from employees of Chevron, Shell and a small operator called Gary Williams Energy Company.

The second report focuses on the people who worked under Smith. Apparently following his lead, many of them, according to Devaney, “developed inappropriate relationships with representatives of oil companies doing business with” MMS. Some of these relationships were pecuniary: two staffers were said to have received prohibited gifts from major oil companies on at least 135 occasions. Here, too, the gifts came from Chevron, Shell and Gary Williams as well as Hess. The report also reports on some brief “intimate” relationships a couple of MMS employees had with oil industry people. The sexual misconduct seems to have been a lot more limited than the other hanky panky, but it is irresistible to talk about regulatory agency employees’ being literally in bed with the industry at a time when some major oil companies are involved in a multi-billion-dollar dispute with MMS.

The final report focuses on Lucy Denett, the former associate director of minerals revenue management and the highest-ranking MMS staffer to have been caught up in the scandal. Denett is mainly accused of being overly generous to her Special Assistant Jimmy Mayberry as he was getting ready for retirement. According to the report, she improperly arranged a lucrative consulting contract for the firm Mayberry was going to set up after he left the agency.

Mayberry is said to have pleaded guilty to a criminal charge. The cases against Smith and Denett were referred to the Justice Department. Devaney asks Interior Secretary Kempthorne to take disciplinary action against the remaining employees involved. It would be nice if someone thought to take some action against those drilling companies, which seemed to have had no hesitation in corrupting federal employees. But then again, “ethical failure” is nothing new in the oil industry.

American Corporate Idol

Forget American Idol and Dancing With the Stars—here’s the contest you’ve been waiting for: the U.S. Chamber of Commerce 2008 Corporate Citizenship Awards. According to a press release put out by the Chamber, the awards “recognize companies, chambers of commerce, and business associations for making positive contributions to their communities, advancing important economic and social goals, and demonstrating ethical leadership and sound stewardship.”

The Chamber has just announced the finalists for each of the award categories. The winners in most of the categories will be chosen by “a panel of distinguished leaders in the field of corporate citizenship,” including Harvard Business School Professor Michael Porter, past winners and the board of directors of the Chamber’s Business Civic Leadership Center.

Let’s focus on the Large Business Award, which is given to companies with annual revenue of more than $5 billion. Although the public is not invited to vote in this category, we can cheer on our favorite contestant—once we figure out which one that should be. Let’s mull that over.

One of the most familiar names among the finalists is Verizon Communications, a telecom behemoth with $93 billion in revenues. Although the company’s traditional phone service business is highly unionized, its Verizon Wireless and Verizon Business units have vehemently opposed organizing drives by their employees.

Another finalist is Bank of America, which is now the parent of Countrywide Financial, the poster child for predatory mortgage lending currently being sued by various states for deceptive practices. B of A itself paid $460 million in 2005 to settle charges related to its marketing of WorldCom securities just before the scandal-ridden company filed for bankruptcy.

Also competing is Siemens USA, the American subsidiary of German industrial engineering giant Siemens AG. The parent company has been embroiled in a major bribery scandal that has resulted in the resignation of various managers, including some who have been convicted of misuse of funds.

Then there’s KPMG, one of the Big Four auditing and tax advisory firms. In 2005 more than a dozen of KPMG’s executives were indicted for promoting fraudulent tax shelters. The firm itself reached a deferred-prosecution agreement with the Justice Department but had to pay $456 million in fines.

The last finalist is known mainly to truck drivers. Pilot Travel Centers operates more than 300 truck stops in 41 states. It’s amazing to learn that this seemingly modest business has annual revenues of more than $13 billion. There’s not much objectionable about Pilot (except perhaps the fast food), but it turns out that Pilot is half-owned by Marathon Oil. In addition to having been identified as a potentially responsible party at ten different toxic waste sites, Marathon was one of a group of oil companies that agreed earlier this year to pay a total of $423 million to settle charges that they contaminated public water supplies with the gasoline additive MTBE.

Decisions, decisions. Should we go with the (alleged) union-buster, predatory lender, bribe-payer, tax cheat or polluter? Perhaps it’s best that the judging is being done by professionals, who are best equipped to appreciate the contestants’ unique qualities.

Shell’s Troubled Relationship with the Truth

Oil giant Royal Dutch Shell is facing accusations that it manipulated a supposedly independent environmental audit of a huge Russian oil and gas project in which it is involved. Nick Mathiason of the British newspaper The Observer reports that he obtained dozens of internal e-mails showing that Shell officials in London sought to influence the conclusions of a review of Sakhalin II being conducted by AEA Technology. The audit was used by financial institutions in making funding decisions about the $22 billion project.

The Observer quotes Doug Norlen of the group Pacific Environment as saying: “Shell stage-managed the whole process. They set the agenda, scheduled meetings and even participated in the editing of sections. I believe this to be a stark and vivid example of manipulation.” The Shell website contains a page on which it touts the favorable findings of the AEA report.

Pacific Environment, a non-profit advocacy organization based in San Francisco, has done pioneering environmental work on the Russian Far East and Siberia, collaborating with Russian activists who formed Sakhalin Environment Watch. The groups have been highly critical of the offshore Sakhalin II project because it threatens the survival of the world’s most endangered species of whales—Western Pacific Grays (photo). The campaign has pressured Shell and its partners to adopt stronger environmental protections or abandon the project.

The campaign became more complicated in late 2006, when Shell was forced by Russia to sell half of its holdings in the project at a bargain-basement price to Gazprom, which is publicly traded but controlled by the Russian government. This gave Gazprom a majority stake of 55 percent, with Shell’s interest reduced to 27.5 percent. The holdings of the other partners, Mitsui and Mitsubishi, were also slashed.

In its diminished position, Shell was even more vulnerable to attacks in the Russian and foreign press in mid-2007 after it was revealed that David Greer, the deputy chief executive of Sakhalin II, had sent out a motivational memo to his staff containing unattributed passages taken from a speech made by U.S. General George S. Patton on the eve of D-Day in 1944. Amid the ensuing furor over plagiarism, Greer resigned.

Shell’s integrity problems are not limited to Sakhalin II. In January 2004 the company admitted that had overstated its proven petroleum reserves by 20 percent. It later came out that that top executives at the company knew of the situation two years before it was publicly disclosed. Shell ended up paying penalties of about $150 million to U.S. and British authorities for the misreporting.

In his Observer article, Mathiason notes that environmental campaigners are worried that Shell’s behavior with the Sakhalin II report could be repeated in audits involving other projects such as its oil drilling leases in Alaska’s Chukchi Sea. Given the company’s troubled relationship with the truth, that concern is quite legitimate.

Will Xcel Settlement Lead to Meaningful Climate-Change Risk Disclosure?

Utility holding company Xcel Energy is getting lots of free publicity this week, since its name is on the arena in St. Paul, Minnesota where the Republican Party is holding its national convention. Last week, the company was being named in a different context.

While much of the attention of the country was focused on the Democratic National Convention, New York Attorney General Andrew Cuomo announced that Xcel had settled litigation brought against it by the state by agreeing to disclose the financial risks that climate change poses to the company and its investors. Minneapolis-based Xcel is itself a major contributor to global warming thanks to its ownership of more than a dozen coal-fired electric power plants in states such as Colorado, Minnesota and Texas.

Last year, Cuomo launched an investigation of Xcel and four other energy companies — AES, Dominion, Dynergy and Peabody — that were building new coal plants around the country. In Xcel’s case, the plant is Comanche 3 in Colorado (seen above in an Xcel photo simulation), which is expected to be completed next year. The probe was based on New York’s Martin Act, the same securities law that Cuomo’s predecessor Eliot Spitzer used in prosecuting Wall Street investment banks and major insurance companies.

The settlement with Xcel (the cases involving the other companies are ongoing) is a milestone in the effort to get publicly traded companies to reveal more about the potential financial consequences of climate change. Cuomo’s use of his prosecutorial powers is only one front in that effort. Institutional shareholders, working through the Investor Network on Climate Risk, have been pushing companies through shareholder resolutions while urging the Securities and Exchange Commission to mandate better disclosure. At the same time, the Carbon Disclosure Project is urging large companies to directly report their estimated CO2 emissions.

Under the settlement with Cuomo, Xcel will be required to include in its annual 10-K filing with the SEC a discussion of financial risks relating to:

  • present and probable future climate change regulation and legislation;
  • climate-change related litigation; and
  • physical impacts of climate change.

In addition, Xcel will have to provide various climate change disclosures on its operations, including:

  • current carbon emissions;
  • projected increases in carbon emissions from planned coal-fired power plants;
  • company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions;
  • and corporate governance actions related to climate change, including whether environmental performance is incorporated into officer compensation.

Although Cuomo’s agreement with Xcel applies only to that company, it could give a boost to other efforts to get large corporations to own up to the financial and other consequences of the growing climate crisis.

For this to happen, shareholder activists and others have to make sure that when companies accede to demands for climate-risk disclosure the result is meaningful. Xcel’s last 10-K filing, issued before the settlement, refers to climate change and emphasizes the need to reduce greenhouse gas emissions. When mentioning the New York State case, the company thus argues that it is already making the disclosures sought by Cuomo. Yet its main emphasis in the 10-K is on reassuring investors that the company is prepared for climate change, while there is no acknowledgment that building new plants such as Comanche 3 is exacerbating the problem. That’s not risk disclosure—it’s corporate spin.

If this same sort of rhetoric and evasion appear in the company’s next 10-K, let’s hope Cuomo prosecutes Xcel for violating the settlement agreement.

Trade Associations Squawk at New Pay Disclosure

Whether they are paid lavishly or barely above the minimum wage, Americans usually prefer not to tell others how much they earn. Some people cannot keep their pay entirely private, because their position is subject to public disclosure requirements, such as those that apply to non-profits. The Internal Revenue Service recently issued the first revisions of the compensation disclosure rules for non-profits in 30 years, and that is upsetting some people — especially in trade associations such as the National Football League — whose pay stubs will be exposed to the world for the first time.

The controversy surrounds the Form 990, an annual document through which non-profits — as a condition of remaining tax-exempt — have to disclose extensive information about their finances, including top-level compensation. After being submitted to the IRS, the 990s are made available on the web through sites such as Guidestar and the Foundation Center. The transparency is meant to discourage excessive spending on internal expenses rather than the group’s stated mission.

Currently, non-profits must disclose the compensation of officers, board members and “key employees” (such as an executive director) as well as the pay of the five highest-paid employees who do not fit those categories and who earn above $50,000. The IRS, which oversees non-profits, now wants non-profits to reveal the names and salaries of up to 20 key employees (more broadly defined) earning more than $150,000 as well as the five-highest paid other employees earning above $100,000.

Trade associations — previously not subject to the disclosure rule relating to highly compensated non-key employees — are doing most of the grousing about the new guidelines. The National Football League, which now reveals the salary of only one employee: its Commissioner, is leading the charge against the new IRS rules, saying the added disclosure is not appropriate for organizations that don’t take tax-deductible contributions from the public.

While you’d expect that a professional sports organization might be trying to conceal bloated pay levels, Joe Browne, the NFL’s executive vice president for communications and public affairs, recently strained to suggest to the New York Times that the problem was the opposite: “I finally get to the point where I’m making 150 grand, and they want to put my name and address on the form so the lawyer next door who makes a million dollars a year can laugh at me.”

Working with the American Society of Association Executives, the NFL has begun lobbying Congress for legislation that would allow trade associations to redact the additional salary information from the public version of the 990 (the way charities are allowed to remove information on their largest contributors).

While it is true that trade associations don’t receive donations from the public, they are still tax-exempt, which means that they should give up the financial privacy enjoyed by other private entities. Besides, even the new rules would require that trade associations disclose a lot less salary information than another non-charity type of non-profit: labor unions.

Under the Labor-Management Reporting and Disclosure Act of 1959, unions must file annual forms called LM-2s that, among other things, list the salaries not only of officers but all employees. The U.S. Department of Labor makes the forms available on the web and also provides a search engine that allows you to enter the name of any individual and easily find his or her compensation. How would trade associations feel about that level of mandatory transparency?

The SEC’s Risky New IDEA

When you go to the Securities and Exchange Commission website these days, the first thing you see is an animation that looks like something out of The Matrix films or the TV show Numb3rs. It seems the agency’s accountants and lawyers are trying to look cool as they move toward the creation of a new system for distributing public-company financial information on the web.

This week SEC Chairman Christopher Cox (photo) unveiled Interactive Data Electronic Applications (IDEA, for short), the successor to the EDGAR system that corporate researchers have relied on since the mid-1990s for easy access to 10-Ks, proxy statements and the like. The big selling point of IDEA is tagging. Companies (and mutual funds) will be required to prepare their filings so that key pieces of information are electronically labeled—using a system called XBRL—and thus can be easily retrieved and compared to corresponding data from other companies. The first interactive filings are expected to be available through IDEA late this year. EDGAR will stick around indefinitely as an archive for pre-interactive filings.

“With IDEA,” the SEC press release gushes, “investors will be able to instantly collate information from thousands of companies and forms, and create reports and analysis on the fly, in any way they choose.”

I just finished watching the webcast of Cox’s press conference earlier this week and came away with mixed feelings about IDEA. In one respect, it will be great to be able to readily extract specific nuggets of information. My concern is the emphasis being placed on disclosure as simply a collection of pieces of data. This may serve the needs of financial analysts and investors, but as a corporate researcher, I find that some of the most valuable portions of SEC filings are narratives rather than numbers—for example, the descriptions of a company’s operations, its competitive position and its legal problems that appear in 10-Ks.

As Cox finally mentioned about an hour into the press conference, tagging can be applied to text as well as numbers. Yet I can’t help worry that the direction the SEC is going in will tend to reduce narratives to bite-size portions that serve to diminish the full scope of disclosure. It was not comforting to hear William Lutz, the outside academic who is advising the SEC on a complete overhaul of its entire disclosure system, suggest during the press conference that the forms (10-K, 10-Q, etc.) companies are currently required to file will be phased out. Perhaps it was unintentional, but the impression Lutz and Cox gave is that future disclosure will be mainly quantitative.

This shift in focus from text to numbers would, I believe, increase the risk that company reporting on social and environmental matters, already inadequate, will be scaled back. That may not mean much for short-sighted investors, but it would be a major setback for corporate accountability.

Sweatshops on Trial in North Carolina

In April, I wrote about the efforts of my son Thomas and other students at the University of North Carolina to get UNC’s administration to endorse the Designated Suppliers Program (DSP), an initiative that seeks to improve the abysmal working conditions of employees at companies that produce university logo apparel—a big business for schools such as Carolina.

After pressing the matter for many months without getting a response, UNC student activists launched a sit-in this spring at the building containing the office of Chancellor James Moeser. The hope was that Moeser, who was planning to leave UNC, would resolve the DSP issue before departing. The administration tolerated the occupation (with certain ground rules) but dragged its feet on the supplier issue.  Finally, on May 2, after the sit-in had continued for 16 days, Moeser announced he would not act on the DSP. This prompted students to occupy his personal office. After police arrived and arrested one activist, most of the protesters left. Those who remained, including Thomas, were eventually arrested and charged with “failure to disperse.” Salma Mirza, the only one who went limp when taken into custody, was also charged with resisting arrest.

Yesterday, the five anti-sweatshop activists had their day in court in Chapel Hill. The charges, all misdemeanors, were heard in Orange County District Court right across from campus on Franklin Street, the main student shopping strip and the place where UNC fans celebrate major basketball victories. District Court normally deals with mundane matters such as traffic violations, so it caused a stir when the five defendants, all wearing blue t-shirts emblazoned with the slogan “Justice for All Workers,” showed up with their pro bono legal team—led by veteran civil rights lawyer Al McSurely—and supporters who filled the gallery.

The defendants’ plea of not guilty was followed by a three-hour trial presided over by Judge Pat Devine without a jury. The prosecution’s case consisted of the testimony of four police officers and a video of the arrests. As his first defense witness, McSurely called on Mirza, who started to give a detailed description of the sweatshop problem and the campaign to get universities to sign on to the DSP (around 45 have done so). When the prosecution objected, Judge Devine refused to rule the background testimony irrelevant but said that no more than five minutes could be devoted to it. In doing so, the judge made it clear she was taking it for granted that the students were justified in arguing that supplier factories were abusive and that the UNC administration was complicit. The administration, though not a party to the case and not represented at the trial, was in effect being found guilty of enabling worker exploitation.

McSurely’s other objective was to have the charges against the five students dismissed. He sought to do this in several ways: he argued that the exact charge of “failure to disperse” was inappropriate in the circumstances; he elicited testimony from the students that they had never heard a final warning that they would be subject to arrest if they did not leave the chancellor’s office; he had Linda Gomaa, the first to be arrested, testify that she was taken into custody before any kind of warning was given; and he argued that Mirza’s behavior did not constitute resisting arrest.

McSurely also presented a necessity defense, arguing that even if the students technically broke the law, they should be found not guilty because their actions were in pursuit of a higher good. This was buttressed, for example, by the testimony of defendant Tim Stallmann that the university had previously improved the working conditions of the campus housekeeping staff after students staged protests and engaged in civil disobedience.

Judge Devine did not accept any of those arguments. She concluded that the defendants knew they were crossing a line when they moved the sit-in to the the chancellor’s office; that the police adequately warned the students they would be arrested if they didn’t leave the premises; and that Mirza’s behavior constituted resisting arrest. She also rejected the necessity defense, agreeing with the prosecutor that there was insufficient “nexus” between the actions of the students and the ending of worker exploitation.

The judge, however, made it clear she had enormous respect for the five students, each of whom had been called by McSurely to testify about their commitment to social and economic justice. Sarah Hirsch, for example, described her work with Witness for Peace, and Thomas mentioned that he had just completed a ten-week program with a non-profit called Bike and Build, during which he and others cycled across the country and worked on Habit for Humanity-type housing projects along the way.

After the prosecutor indicated the state was not seeking harsh penalties, Judge Devine in effect imposed no sentences at all. Instead, she entered  a “prayer for judgment continued,” a procedure—unique to North and South Carolina, it seems—in which there is a finding of guilt but no formal conviction is entered on the defendant’s record.

All parties got what they wanted. The prosecutor got a finding of guilt, the police were vindicated in their actions, and the students got an opportunity to highlight the sweatshop issue in court and ended up with the mildest possible adverse ruling. The only real loser was the UNC administration, whose intransigence on the DSP issue emerged from the trial looking even more unreasonable.

Toxic Exports — from the USA

While catching up on my magazine reading, I came across an interesting piece by Russell Carollo in the May-June issue of The IRE Journal, which is published by Investigative Reporters and Editors. IRE, by the way, is a great organization for researchers (as well as journalists) to join to get print and online access to the Journal and other valuable data resources.

Carollo, a special projects reporter at the Sacramento Bee, offers a unique perspective amid a package of articles put together by IRE on toxic imports from countries such as China. Reacting to the self-righteous statements of the federal government’s Consumer Products Safety Commission about its commitment to consumer protection, Carollo points out that for many years the CPSC has allowed many U.S. manufacturers to export products deemed too hazardous to sell in their home market.

It turns out the CPSC has a database of “non-approved products” that companies have sought permission to sell abroad. Using the Freedom of Information Act, Carollo obtained a copy of the database. It shows, he writes, that in the period from October 1993 to September 2006, the CPSC received 1,031 requests to export products banned in the USA. The Commission approved 96 percent of those requests.

Some of the small number of rejected requests involved proposed exports to Canada and Mexico, which the CPSC apparently worried might make their way back into the United States. Carollo mentions the case of Indianapolis-based Great Lakes Products, which in 2005 sought approval to export room odorants containing isobutyl nitrite — a substance used in inhalers known as “poppers” to enhance sexual arousal before being banned in the U.S. in 1988 — to Canada and the Czech Republic. The CPSC blocked the sale to Canada but allowed the shipment to the Czechs.

Apparently, the commercial interests of domestic companies trumped the health and safety of foreign consumers. Congress finally took action to end this state of affairs. It recently passed legislation that would bar the CPSC from allowing the export of the most hazardous products. The bill is awaiting the signature of President Bush. [UPDATE: Bush has signed the measure, which is part of a larger bill on consumer product safety.]

Note: The CPSC database does not appear to be available online, but Carollo’s original Bee article with more details about it can be found here. Speaking of product safety, a good source for tracking goods that have been withdrawn from sale in the U.S. is the federal government’s Recalls.gov site.

Is Starbucks Beyond Reproach?

There has been a spate of books celebrating the remarkable rise of Starbucks, but the latest, by Kim Fellner, stands out from the pack. Unlike the others, which are mainly addressed to appreciative shareholders, consumers and business analysts, Wrestling with Starbucks is an appeal to critics of the coffeehouse chain.

Fellner, an long-time friend and colleague of mine, places the origins of the book in late 1999, when she was in Seattle for the protests against the World Trade Organization and was surprised to see Starbucks attacked both figuratively and literally (when the front window of one of its outlets was shattered by demonstrators). Because she had a favorable impression of the chain, whose stores she frequented for her caffeine fix, Fellner wondered, she writes, “how had a coffee company with a liberal reputation come to symbolize the ills of globalization?”

Fellner spent much of the following eight years trying to answer that question. Her journey took her deep into the world of coffee – from the hillsides of Costa Rica to the Starbucks roasting plant in Kent, Washington to the various company outlets she visited in her travels at home and abroad. Fellner provides a wealth of anecdotes, but she keeps coming back to the issue of whether Starbucks should be viewed as a force for good or evil in the world.

Defying the tendencies of the labor and social justice circles in which she dwells, Fellner finds much to praise in the behavior of the coffee behemoth: good conditions, including health benefits, for its part-time baristas; strict environmental standards and fair prices for its third-world suppliers; high-quality products and appealing ambiance for its customers that have helped expand the demand for upscale java to such an extent that independent coffeehouses benefited as well.

Fellner is not blind to the company’s faults. She acknowledges the company’s strong anti-union animus; the fact that most of its workers (which it refers to as “partners”) don’t work enough hours to qualify for medical insurance; the inferior working conditions at the large number (more than one-third) of its outlets that are run by licensees at places such as airports and turnpike rest stops; the fact that it had to be pressured by groups such as Global Exchange before it began to purchase significant quantities of fair trade beans; and the clumsy way it responded to Ethiopian coffee growers unhappy that the company was asserting trademark claims over traditional names for their products.

The reason I (and I suspect many other corporate critics) part company with Fellner is that she is surprisingly tolerant of these shortcomings. She is convinced Starbucks–and especially its charismatic head Howard Schultz–is either trying hard to rectify the problems or has a sincere alternative view, such as the company’s insistence that what it considers its enlightened personnel policies are better for employees than union representation.

Fellner is uncomfortable with the latter stance–which prompted Schultz to encourage a decertification drive that removed the unions that existed at Starbucks before he took over the company in 1987–but she does not seem outraged. Schultz’s attitudes on unions, Fellner says in an oddly mild turn of phrase, “chafe me like an itchy sweater.”

Fellner seems to have a more seriously negative reaction to the unions that have tried to organize Starbucks outlets, especially the anarchist-inspired modern incarnation of the Industrial Workers of the World. She digresses into a discussion of alternatives to traditional labor organizing but ultimately concludes that unions fail to address the “psychic need” of today’s workers for “recognition and approval.” She lauds Starbucks for addressing that need through practices such as giving out “appreciation cards” to its “partners” when they do a good job.

Just when I thought that Fellner had gone over to the dark side, her book switches its focus from Starbucks to the broader issue of corporate social responsibility (CSR), which is so much the rage in business circles these days. Here her discussion is more nuanced. She acknowledges that CSR is often bogus and affirms that there are malevolent corporations–Wal-Mart, Big Oil, Big Pharma, etc.–that should be targeted. It turns out her real problem is not with anti-corporate campaigns in general, but rather with the frequent decision of campaigners to go after high-profile companies (like Starbucks) rather than the worst offenders in an industry. She worries that if “good” companies are continuously slammed for not doing better, they as well as their less diligent competitors will have little motivation to improve.

This is a legitimate issue, but the problem, as I see it, is that it’s not always clear who the good guys are. Fellner clearly believes Starbucks is one of them and Wal-Mart is not. Yet in the past couple of years, the giant retailer has made a mighty effort to boost its CSR credentials, especially in the environmental realm. It has made modest improvements in working conditions but remains vehemently anti-union. Does Wal-Mart now qualify to be exempt from vilification?

I would say emphatically no, but then again I don’t think any company should be given a total pass by labor unions and social justice organizations. Fellner is right to question whether corporations with better track records should be our primary targets, but that’s not to say they should never be challenged. Even companies like Starbucks–whose relatively enlightened policies may falter now that its financial condition is weakening–sometimes need to be pushed to do the right thing.