Corporate Virtue and Corporate Subsidies

corporate_flag2-1For a speech that was supposed to focus on the plight of low-wage workers, President Obama’s State of the Union contained a surprising number of favorable references to specific large corporations. I counted seven plugs — for Apple, Costco, Ford, Google, Microsoft, Sprint and Verizon. The Ford mention, which alluded to “the best-selling truck in America,” sounded like a high-level product placement.

Most of these companies were cited for their supposed acts of corporate virtue, such as the role of the telecoms in helping to bring high-speed broadband to schools. There’s something else these firms have in common: they’ve all been recipients of substantial economic development subsidies from state and local governments.

My colleagues and I at Good Jobs First issued two reports this week that take a critical stance toward these types of financial aid to business. In one of the reports, Putting State Pension Costs in Context, we look at how the revenue loss from subsidies and corporate tax breaks and loopholes compare to the cost of public employee pensions in ten states where those retirement benefits have been under attack.

We find that in every one of the states the corporate giveaways far outweigh the current costs of providing pensions to state workers. In the case of Louisiana, for example, the giveaways are more than five times the retirement costs.

State legislators and governors have a tendency these days to get frantic about pension costs. Our research suggest that they should be more concerned about the larger revenue losses stemming from what are often ineffective “incentives” given to business.

The other report, Show Us the Subsidized Jobs, is the latest in our series of surveys on the performance of state governments in disclosing online which companies are getting financial assistance and what they are doing with it, especially in relation to job creation. There are two main messages that emerge from the study.

First is the fact that there is now at least some online recipient disclosure in all but a handful of states. The number has doubled since we did the first of these surveys in 2007. That’s the good news.

The other message is not so encouraging: There are vast discrepancies in the depth and the quality of the disclosure. Some states such as Michigan and North Carolina provide reasonably good disclosure for all their major programs, while others such as Nevada and South Carolina provide bare-bones disclosure — meaning company names only — for only one key program. In many cases no information is reported on the number of jobs subsidized companies are creating or the wages being paid.

To enable detailed comparisons of programs, we rate them on a scale of 0 to 100. Points are given for providing details on subsidy amounts, on job and wage outcomes, and on the inclusion of key information about subsidized projects and companies. We also rate programs on how easy it is to find and use the data.

Based on this system, the states with the best average scores for their key programs are Illinois, Michigan and North Carolina. Being best in relative terms does not mean that the absolute scores are very impressive. Top-ranking Illinois has an average of only 65 and Michigan comes in at 58. Every other state has an average below 50 percent. The average program score is only 21 (or 39 if you leave out those with no disclosure at all). Only seven programs score 75 or above.

These scores are so low mainly because so many programs fail to provide good reporting on outcomes, which account for a large portion of the points in our scoring system. Fewer than half of the 246 programs we examine include any reporting on jobs or wages in subsidized companies. And many of those that do provide only projections rather than the actual amounts. Less than one-tenth of the programs provide actual amounts for both jobs and wages.

In the report we emphasize that transparency does not equal effectiveness or complete accountability. A program can disclose all the essential details but still be a waste of taxpayer money. Transparency is what allows the public to determine when that is the case.

Our interest in disclosure is not only for abstract reasons of accountability. If states put more information online, there were will more for us to capture for our Subsidy Tracker database, a national search engine covering more than 500 programs.

Next month we will introduce Subsidy Tracker 2.0. Along with the raw data, we will add information on the parent company of the recipient firms. This will make it possible to see at a glance how much large companies such as the seven cited above have received across the country. The Dirt Diggers Digest will provide wall-to-wall coverage.

A Great Place for Wage Theft

Restaurant giant Darden, which is being pressured by hedge funds to sell off both its Red Lobster and Olive Garden chains, got some good news recently when it appeared once again on Fortune magazine’s list of the 100 companies that are supposedly the best places to work.

That designation, for a company that has been the subject of numerous allegations of labor abuse, is even more puzzling than the idea that Darden would be better off without the outlets through which it grew into an $8 billion industry powerhouse.

For more than a decade, Darden has been accused by groups such as ROC United of using various means to shortchange its workers on their paychecks, a practice known as wage theft. In 2005 the company agreed to pay $9.5 million to more than 20,000 current and former servers at Red Lobster and Olive Garden outlets in California to settle a lawsuit claiming that the restaurants violated state labor regulations by preventing workers from taking required breaks and by requiring them to purchase and maintain their uniforms.

Three years later, Darden disclosed that it had paid $4 million to settle two class-action lawsuits alleging that it had violated California law in requiring servers and bartenders to make up for cash shortages at the end of their shifts. Also in 2008, Darden reported that it had paid $700,000 to settle another California suit claiming several types of wage and hour violations, including a failure to provide itemized wage statements and timely pay when an employee was terminated.

In 2011, following a U.S. Labor Department investigation that found workers were not being paid for all their hours, Darden agreed to pay $25,000 in back wages to 140 current and former servers at an Olive Garden in Mesquite, Texas.  The company was also fined $30,800. That same year, the company consented to pay $27,000 in back pay and was fined $23,980 in connection with a similar federal investigation at a Red Lobster in Lubbock, Texas.

In the wake of the two Texas cases, suits were brought against Darden in several other states. For example, in early 2012 ROC United filed a class action case on behalf of Darden workers at another of the company’s chain, Capital Grille. For technical reasons, the action was later divided into separate actions in five jurisdictions (all are still pending).

An even larger legal challenge to the company came in September 2012, when a class action suit was filed in federal court in Miami on behalf of all current and former employees (back to 2009) at five of Darden’s chains. The 54 named plaintiffs in the case stated that the company did not pay them for the period between the beginning of their shifts and the time customers began to arrive, thereby forcing them to do prep work off the clock. Darden was also accused of failing to pay time-and-a-half for those working more than 40 hours per week and for improperly applying the lower subminimum wage for tipped workers when they were engaged in non-serving tasks.

The complaint in the case — which described the company as having “a steadfast, single minded focus on minimizing its labor costs” by arranging to have “as many tasks as possible performed by as few employees as possible” — also alleged that two of the named plaintiffs had suffered retaliation from management because of their participation in the case. Some 13,000 current and former Darden servers have joined the suit, which is pending.

The ROC United wage theft actions against Capital Grille also allege that the chain has engaged in a pattern of racial discrimination, including the denial of better-paid server and bartender jobs to non-white workers.

In 2009 the U.S. Equal Employment Opportunity Commission announced that Darden’s Bahama Breeze chain would pay $1.26 million to settle allegations that managers at its restaurant in Beachwood, Ohio had subjected 37 black workers to repeated overt racial harassment. In addition to the monetary relief, the chain signed a three-year consent decree requiring it to improve its anti-discrimination practices throughout the country.

In September 2013 the EEOC filed suit against Red Lobster, alleging that female workers at its restaurant in Salisbury, Maryland have been subjected to “pervasive sexual harassment.” According to the agency, the harassment was committed by a manager, whose superior was said to have failed to take prompt action on the matter despite complaints from at least one of the affected workers.

Darden has also sought to lower its labor costs by becoming more active in the public policy arena. Until 2007 Darden spent less than $250,000 a year on federal lobbying. Beginning in 2008 that amount jumped to well over $1 million annually.

The company is a prominent participant in the National Restaurant Association (NRA), which promotes policies that enhance the bottom line of chains such as Darden. It has opposed living wage initiatives, worked to keep the minimum wage for tipped workers at $2.13 an hour (where it has remained since 1991) and resisted efforts by labor groups to enact mandatory paid sick days, often by promoting state laws that pre-empt local ordinances on the issue. Darden is reported to have helped write the pre-emption bill in Florida.

All of this somehow escaped the attention of Fortune and the organization, the Great Place to Work Institute, which compiles the list. Or perhaps the Institute doesn’t worry about real working conditions. A 2011 investigative report raised serious questions about its methodology, suggesting it is mostly interested in selling consulting services to the companies it is rating. As a recent Alternet piece notes, the lack of an arm’s-length relationship with those companies is also seen in the fact that Darden CEO Clarence Otis has been a speaker at Institute events.

The designation as a “great place to work” is featured by Darden on its website, but the dubious honor cannot change the company’s dismal labor track record.

Note: This piece draws from my new Corporate Rap Sheet on Darden, which can be found here.

Freedom to Pollute

freedomindustriesRecent news reports out of West Virginia sound like they were written as part of a parody of modern business: the company responsible for a chemical leak that contaminated the water supply of hundreds of thousands of people is named Freedom Industries and was cofounded by a two-time convicted felon.

The situation, however, is far from a joke. Freedom Industries spilled a substantial quantity of a substance called 4, methylcyclohexane methanol (MCHM) into the Elk River near the intake valve for a water treatment plant serving the Charleston area, sending more than 150 people to the hospital and forcing residents to use bottled water for drinking, cooking and bathing. The plume is now heading toward Cincinnati.

As is all too common in such incidents, it turns out that the 75-year-old facility where the rupture took place had not been visited by government inspectors for more than 20 years. In fact, as a storage rather than a production facility, it was subject to little in the way of federal or state oversight. So much for the idea of regulatory excess.

Given that MCHM is used to process coal, this accident adds to the heavy toll that mining has taken on West Virginia—from the Buffalo Creek flood in 1972 to the Upper Big Branch disaster in 2010 in which 29 miners were killed. It is also significant that Freedom Industries purchases MCHM, for which it serves as a distributor, from a subsidiary of Georgia-Pacific, which in turn is controlled by the rabidly anti-regulation Koch Brothers.

To all this can be added the fact that Freedom Industries was cofounded by an individual named Carl Lemley Kennedy II. As the Charleston Gazette has reported, Kennedy filed for personal bankruptcy in 2005 after he was hit with federal charges of tax evasion and failure to remit employee withholding taxes. He is reported to have admitted to diverting more than $1 million that should have gone to the Internal Revenue Service.

Kennedy’s involvement in Freedom Industries, the Gazette notes, does not seem to have been affected by the fact that he had once pleaded guilty to selling cocaine in connection with a scandal that involved the mayor of Charleston. The paper quotes the current mayor, who is said to have known Kennedy since the 1980s, as an “edgy guy.”

Another remarkable aspect of the story reported by the Gazette is that Freedom Industries was struggling in 2009, and its Elk River facility was able to go on functioning only after the Army Corps of Engineers dredged that portion of the river using federal stimulus funds.

To summarize: a tax evader and drug dealer helped to establish a largely unregulated chemical company that benefitted from the federal stimulus but apparently did little in the way of preventive maintenance and set the stage for large-scale drinking water contamination.

Large corporations such as Dow Chemical and Exxon Mobil have caused vast amounts of environmental damage, but it shouldn’t be forgotten that small-time operators such as Freedom Industries can also do substantial harm. And it is not just producers of hazardous materials but also distributors that can be the culprits. It was another small distributor, West Fertilizer, that was involved in the ammonium nitrate explosion in Texas last April that killed 15 people. Much of the reporting in the wake of that event, particularly with respect to holes in the regulatory system, could have been recycled for the new West Virginia accident.

As long as the illusion of regulation is perpetuated in place of the real thing, these accidents will continue to happen, and the right to pollute will trump the right to be safe from pollution.

J. Ponzi Morgan

morgan_madoffIt’s bad enough that for years JPMorgan Chase failed to alert federal authorities about the suspicious transactions being conducted by its customer Madoff Securities in what would later be revealed as a massive Ponzi scheme.

What’s equally damning in the criminal case the bank just resolved with federal prosecutors is that at times JPM seemed to want to get in on Madoff’s action.

The Statement of Facts to which JPM stipulated tells an interesting story about how, beginning in 2006, the bank began investing substantial sums (initially $343 million) of its own money in Madoff feeder funds in addition to issuing derivates tied to those funds and selling them to investors. In 2007 this business seemed so appealing that JPM’s London branch sought to write more than $1 billion in Madoff-linked derivatives.

This move had to be approved by the bank’s chief risk officer, who in 2007 nixed the plan after being told by a colleague that there is a “well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” While he was unwilling to risk $1.3 billion under such circumstances, the officer did allow the Madoff exposure to remain up to $250 million.

The JPM London trading desk subsequently became more uneasy about Madoff Securities. It pulled out of the Madoff feeder funds, and in 2008 it filed a report with UK regulators expressing concerns that Madoff’s returns were probably “too good to be true.” JPM failed to do the same in the United States, and that turned out to be an expensive oversight.

JPM’s messy history with Madoff illustrates an interesting point about the relationship between individual white-collar crime and collective corporate crime. There’s long been a tendency to see corruption for self-enrichment (such as embezzlement) as being separate from misconduct by groups of people to enrich corporations (for example, price-fixing conspiracies).

In the case of Madoff and JPM, the two were closely connected. Madoff, who was working through his firm but was essentially running a one-man Ponzi operation, created conditions that were exploited (up to a point) by JPM to enhance the profits of the bank’s derivatives business. Even when that opportunity was deemed too risky by JPM, the bank failed to warn U.S. regulators and went on doing profitable banking business with Madoff.

In other words, the individual fraud being committed by Madoff was a source of profit for JPM, which in a sense became his co-conspirator.

The distinction between individual crime and corporate misbehavior is also a matter of perennial debate when it comes to punishment. Business apologists like to claim that corporations cannot really commit crimes and that only individuals should be prosecuted, knowing full well that such cases are much harder to prove.

What’s needed is a more aggressive approach toward the prosecution of both corporations and the higher-level executives responsible for their misconduct.

The JPM-Madoff case shows the limitations of the current system. No individuals were charged, and the bank was able to take advantage of the kind of deferred prosecution agreement that the Justice Department uses in almost every corporate case. Neither JPM nor the stock market seems to be fazed by the $2.6 billion payout. In fact, this is just the latest in a series of large settlements that JPM has made with prosecutors. Just two months ago, it agreed to pay $13 billion to resolve a variety of federal and state charges relating to the sale of toxic mortgage-backed securities.

Madoff himself was not able to buy his way out of a criminal conviction and prison time (150 years of it). There was a broad consensus that he deserved every penalty that could be imposed, to ensure that he could never defraud again.

We’re still waiting for a system of punishment that provides that kind of definitive treatment for rogue corporations such as J. Ponzi Morgan.