Business | Bottom Line Ethics - Part 2

A former student recently asked me to write about the Occupy Wall Street (OWS) movement. Today’s paper reported our own OWS march in College Station though, admittedly, it consisted of only about 60 people. I read an interesting article the other day in The Wall Street Journal that focused on the legitimacy of concerns that college is overpriced, one of the causes of debt that has led OWS supporters to argue that the American system is unjust. The link between quality and price in American universities is worth a column, but I will save that for another day.

What I would like to focus on instead is a common thread in many problems today—our addiction to debt. There is a proverb that says, “The rich rules over the poor, and the borrower becomes the lender’s slave.” In my view, this has always been true. I find it humorous that people protest “greedy bankers.” It is like protesting hot summers in Texas. Bankers are greedy because they make money off their money. Ethics and banking are the lubricants of the capital markets, as we teach in Mays Business School. Only one is free and the other is a $500 oil change. Bankers do not produce anything; they enable others to produce things. And their goal is to make as much money off their money as possible.

All the big banks recently decided to raise debit card fees. Since it included bailed out banks, many people objected strenuously. The main problem I had with the policy change is that banks have spent the past ten years offering incentives to addict people to their debit cards, and then they turned around and charged for the behavior they incentivized. But how is that different from almost all marketing ploys, like satellite TV services offering me a twelve-month entry price and then continually increasing my bill once I am addicted to ESPN? Airlines have used checked bag fees to become profitable. But the master of this technique is the federal government. Just read your cell phone bill for all the fees they have dreamed up to charge you.

We still have control of the situation. Debit cards are broadly available from other financial institutions, and for most people a credit union will do everything a bank can do. And my biggest problem with Occupy Wall Street is that it implies that we have no choice in matters that lead to bankers being the master and borrowers being mistreated. Most debt is volitional, whether we admit it or not. Even where it is necessary, the amount of debt is volitional. If you speculatively borrow to buy a bigger house than you can afford because you think its value will increase, or because you want to live a certain way, you expose yourself to risk. I know, because I once bought a house that I could not afford. When I finally sold it, I walked away with $400 of my equity and the charred smell of the flame that almost consumed me financially. But it was my choice to do it.

In contrast, my son, who has had a good job for five years and is wealthier than I am, lives in a 500-square-foot apartment. And that is a step up. He used to live in somebody’s basement. If you use your student loan to fund a Starbucks lifestyle or an apartment in one of the high end complexes with all the amenities, you are presuming your ability to repay. And you have put yourself in a position that you may seriously regret one day.

There was a time when people saved to go to college. People argue all the time that the cost of college has escalated so fast that there is no way for most people to do that anymore. I empathize, as my fourth child is in college, and my fifth is a year and a half away. But my father fought a world war, and worked, and saved, and scraped to get his bachelor’s degree at age 31. He did not feel he had the inherent right at age 22 to become the research physicist he eventually became. He was convinced he had other duties, and he fulfilled them. He was a mechanic, and a bus driver, and a Marine before he was a white-collar worker. And while he was in college, he lived with my Mom and my brother in a small trailer that they pulled behind the car.

The debt that homeowners and college students burden themselves with is no different than Greece borrowing itself into oblivion to finance a welfare state. People riot rather than give up their benefits and say that their treatment is unjust. But Greece is a slave to their lenders, whether they are French, German, British, or American. And if they will not adjust their behavior, their economy will collapse completely. Even now, consideration is being given to their ejection from the European Union.

We are well on our way in the U.S. to doing the same thing. We are continuing to run obscene deficits that are unnecessary because we are addicted to our lifestyle. Serious discussions of how to cut are dismissed, and state-level cuts are objected to as cruel and unjust. We can yell all we want, but this will not go on forever. There is a day when you have to pay. And our “bankers” are not letting us borrow with our best interests in mind. They are doing it to make a buck. And when they can’t, they will call that loan.

So occupy Wall Street if you must, but you can’t change the proverb. The borrower is slave to the lender. What I plan to do is figure out how to eliminate my remaining debt and determine how much extra work my kids and I need to do to pay for their college.

And when it’s all paid off, I’ll get my lawn chair and come out to watch the protests.

Categories: Business, Society

Rich Kinder is a living parable.  Fifteen years ago he was denied the job he really wanted—CEO of Enron.  Instead, he was passed over for a financial engineering wunderkind, Jeff Skilling, who famously went on to crash and burn the seventh largest U.S. company.  Kinder went his own way, purchasing a modest pipeline operation that Enron no longer valued because of the “sleepy” nature of the business.  To Enron’s executives, there were better ways to make money, and they were the ones smart enough to leave the old ways behind and create new and better markets.  Jeff Skilling is serving 24 years in prison; Rich Kinder, on the other hand, is reportedly the richest person in Houston.

Kinder took that modest pipeline and transformed it through a series of acquisitions into what is now Kinder Morgan, Inc., which just announced that it would purchase El Paso Corp. for $21.1 billion, creating what would be the fourth largest American energy company.  It is a company with the potential to dominate the movement of natural gas across the U.S., particularly from the rapidly developing shale formations that are transforming the face of the energy industry.  Speculation that those formations may hold 100 years’ worth of natural gas has led to an explosion of capital investment, despite depressed prices for natural gas.  And Kinder Morgan will essentially charge for the transport of this gas, regardless of energy prices.

One can imagine the disappointment that accompanied Kinder’s denial of the Enron CEO job by Ken Lay, someone he had known since their days at the University of Missouri.  There was no way he could know what he was being protected from, but he did not go quietly into retirement or rest on his laurels.  Kinder knew pipelines, and Enron’s roots were as a pipeline company.  He knew what he had to offer, and he knew there was real value in that business, regardless of whether Ken Lay valued it or not.  And he went on to take his company private, then IPO it again, while maintaining a massive personal stake.  Forbes estimated his net worth this past March at $7.4 billion.

Here at Mays Business School, we do a good job of preparing our students for success.  What is much harder to do is to prepare students to fail, to fall short of goals, to finish second when only winning seems important.  The character that comes from remaining true to who you are in the face of obstacles, of unfair decisions, of shortsightedness on the part of others, is only developed through painful transformations.  Sometimes unfairness and failures make the wheels come off of lives that seem to be doing just fine.  Other times, these injustices fuel future successes.

But it is important for me to remind my students that they always get to choose their response to circumstances, even if they do not get to choose the circumstances themselves.  It is easier to complain than it is to get better.  And there are always sympathetic ears ready to help us wallow in our misery.  But that path is a dead end.

When we send students out from this place, they are works in progress.  What they are made of can only be revealed by time and experience.  They can protest in parks if they are unemployed, or they can improve their resumes and knock on doors.  They can leave when they are passed over for a promotion, or they can use that motivation to chart a different course, perhaps one they had not thought of before.

I meet very few students who expect to go out of here and fail.  And those who have failed are too seldom invited back to our classrooms to tell their stories.  The irony is that the very seeds of our success often dwell in the rotting fruit of our failures.  The opportunity to become someone they have never imagined comes when the barriers in their planned paths are insurmountable.

There is more than irony in Rich Kinder’s story.  There is the sweet fragrance of justice, of the end result being beyond all expectations.  In the end, Rich Kinder’s bio is a demonstration of the victory of substance over form.  And in a world that glorifies vacuous entertainers and makes people rich who have not really created anything, it is nice to see someone succeed who stuck to basics, thought long-term, and connected with other people of substance.  Whether the Justice Department allows the acquisition or not, I have no doubt that Rich Kinder will continue to overcome obstacles.

What I hope to learn from him is how to turn my biggest disappointments into greater opportunities.  Is anyone out there with me in wanting to learn how?

Categories: Business

I have been in the back yard too much lately, pulling weeds and putting down mulch. But the biggest problem has been my lawn. I don’t take great pride in my grass, but I try not to let it become a basis for neighbors to storm my castle bearing torches. A large section of my lawn has a burned out appearance, which I attributed at first to the lack of rain and a badly functioning sprinkler system. But the news is worse; I have grubworms.

What a name—grubworms. It must be a bummer to have a compound name where each half is a really negative word. When they get into your lawn, all you can do is nuke them and lay down new grass. So this past weekend I bought half a pallet of grass and started putting it down. This is way more work than I really wanted to do, but I didn’t have much choice. When I was done, what came to mind in looking at my back yard was a badly fitting toupee. There were parts of the lawn that clearly needed more living grass coverage, and parts that had lumps that should not be there.

But it seems to me that watching people try to recover their integrity after a public fall is much like watching someone whose hairpiece falls short of the ideal. This is particularly true when they seem ambitious as well. Former House Speaker Newt Gingrich is discovering this as he puts himself forward as a presidential candidate. If he implies any change in a position, as Gingrich has with requiring Americans to purchase health insurance, people roll their eyes and say, “There he goes again.”

This may be less true with entertainment figures; Arnold Schwarzenegger is about to find out. But it is still awkward to think about Eliot Spitzer being a talk show host rather than the governor of New York. And trying to see Tiger as the good guy becomes a bit tiresome. His string of injuries, which prompted his drop from the world’s top ten golfers for the first time in 14 years, has almost served as a relief from constant discussion of his character and attitude.

I have concluded that though folks largely want to read these stories, they quickly move to a stage where they do not care about these people any more. It is really difficult to gin up the emotion time after time that would somehow make these people an example not to be followed. Instead, they are a news item, and then, history.

Andy Fastow of Enron fame has been transferred to a halfway house prior to his release from prison later this year. He is 49. What hope does he have to regain his reputation? Perhaps more than you think. It is difficult enough to find people who finish well among the general populace, much less among those whose lives have cratered. But there are exceptions. Chuck Colson, famous for being one of Richard Nixon’s hatchet men and the first member of the administration to go to prison for Watergate, bounced back from his prison term to found Prison Fellowship, an evangelical organization that has had significant influence for good. He went to prison in his mid-40’s, and he will turn 80 later this year. Perhaps Fastow will have a similar experience.

But it is not easy. Grubworms eat the roots, and that’s why my work in the back yard is so painful and unsatisfying. Who wants to stay after it year after year, when it would be much easier to move to a condo? (I have suggested this on more than one occasion to my wife.) It would be very difficult to do it to please others. There probably has to be a genuine inner transformation that withstands the catcalls, the snickers, the derision, and the lingering bitterness that big mistakes bring.

Because, in the end, recovered integrity is just like a badly fitting toupee. People may smile and treat you the same. But, despite their best intentions, they can’t help but notice.

Categories: Athletics, Business, Politics

It is impossible to read the business press in recent weeks without being impressed by the extent to which insider trading dominates the headlines. Last week Berkshire Hathaway executive David Sokol resigned after revealing that he had taken a large stake in Lubrizol prior to pushing for Berkshire Hathaway to acquire the company, a transaction that increased the value of his stake by $3 million. He invested only after Citigroup had identified them as a good acquisition target for Berkshire Hathaway.

The Wall Street Journal’s Holman Jenkins opined that “…Berkshire’s shareholders aren’t out a dime unless Mr. Sokol has somehow put out word that Lubrizol was in play, thus driving up the price—which he didn’t.” Even if you believe that a previously uninterested party taking a $10 million stake in a company sends no signal and has no effect on the price of the stock, you would also have to assume that Mr. Sokol had no influence on the price offered for Lubrizol, which may be true. To be fair, even Mr. Jenkins saw a whiff of insider trading, a conflict “[t]o the normal business eye.” And this is a lot for Mr. Jenkins, who rarely objects to any behavior that makes the market more efficient. He largely assumes away any mixed motives in Mr. Sokol, and the editorial’s title clearly states his opinion that it did not bother Berkshire Hathaway CEO Warren Buffett: “St. Warren Casts Not the First Stone.”

But it bothers a lot of other people. It is true that insider trading increases the efficiency of the market by speeding up the incorporation of information into the share price. But what drives insider trading laws, and what bothers most people about it, is the issue of fairness. Trading on insider information is not a victimless crime. There is another party on the other side of that transaction, since the number of shares in the market is fixed. What are that person’s (or investment fund’s) rights?

My guess is that Sokol’s situation is not something that will result in any kind of criminal charge, though it may result in SEC sanctions. Raj Rajaratnam, on the other hand, is fighting for his future in a courtroom. If courtroom testimony and the confessions of others who have pled guilty are to be believed, Mr. Rajaratnam never hesitated to mine information for his Galleon Group by whatever means possible. The vortex surrounding his trades has sucked in people within his firm, traders with other firms, an IBM executive, even his own brother. As detailed in a recent Fortune article, the story is a real page turner.

The FDA is holding its collective breath after charges were filed last week against an employee accused of making millions trading on information to which he was privy. He allegedly used seven accounts in other people’s names. He had access to the system that tracks the approval process for drugs, trading against denials and buying shares ahead of approvals. Not that long ago, it was inside information about an FDA action that led Martha Stewart to dump ImClone shares to avoid a loss, and the subsequent investigation led to charges of lying to investigators, and a federal prison sentence.

Once Mr. Rajaratnam’s trial is over, we are likely to see one or more high profile trials aimed at ferreting out networks of “experts” that may be enabling insider trading on a massive scale. Firms hire “experts” as consultants who are then interviewed by hedge funds and other traders. These experts are often insiders at public companies. If they do not reveal private information, but just opine on industry conditions, this is generally not a problem. But there appears to be significant evidence that a number of these experts have stepped over the line.

So what is fair? If there is bad news, shareholders will be impacted eventually when it is revealed. This is just accelerated by the insider trade. However, the insider trader avoids the loss by trading out of it. It reminds people of what happened at Enron when management changed pension plan providers, preventing employees from selling their Enron stock while management was dumping its stock in large quantities. It helped adjust the stock price rapidly and efficiently. But was it fair?

When an insider buys shares on inside information, the insider is taking those shares from someone at a discounted price from their true value, which is unknown to the seller. I am guessing that David Sokol will hear from one or two of those folks who traded out of Lubrizol when he was buying in.

I am a believer in market efficiency, both as a description of what is generally true and something that is largely good, and to be preferred. But that does not make it the ultimate value that ought to control markets.

There is a moral problem in insider trading that is rooted in fairness. Immature markets are dominated by insider trading. But in mature markets, as long as there are people who care about fairness, you can expect to see insider trading prohibitions enforced.

Categories: Business

Barry Minkow’s career has largely paralleled mine, and he has always been to me one of the most interesting personalities to intersect with my profession. His audacious ZZZZ Best fraud still stands as one of the preeminent examples of creating something out of nothing. Perhaps 80 percent of the sales for his public company were completely made up, and he managed to fool auditors and investors long enough that at one time the company had a market capitalization of over $240 million. When they liquidated the company, the total assets brought less than $60,000.

What fascinated me was the fact that Minkow did not slip quietly into oblivion, as so many fraudsters do. While he was serving seven years in federal prison, he was interviewed by Joe Wells, who founded the Association of Certified Fraud Examiners. That interview has been watched by tens of thousands of accounting students, including many of mine. Minkow was completely transparent about the ways he deliberately manipulated audit partners and their spouses to believe a lie and to embrace his media personification as a “boy wonder” entrepreneur. The video is instructive, and it has helped to better calibrate the professional skepticism of many people.

In the 1990’s, after his release from prison, Minkow rebuilt his life on the foundation of a conversion to Christianity and the pursuit of fraud performed by others. I followed this next chapter with interest as well, particularly as it seemed to validate the story of redemption which seems so central to men continuing to have hope after their inevitable failures. While spending 14 years as a pastor, Minkow also founded the Fraud Discovery Institute, and he worked undercover in multiple situations to root out fraud being committed by other companies. The judge who sentenced him was so impressed by the work that Minkow did that he removed all the conditions from his federal parole. Minkow worked closely with law enforcement and gained a reputation for his insights into fraudulent dealings. He even taught fraud courses for the FBI.

The one consistency across the years as a business owner, felon, and fraud detective has been Minkow’s tendency toward self-promotion. Never afraid of a camera, a willing story teller who seems to revel in revelations, he was never far from a press release or YouTube clip. In fact, a major motion picture biography of his life has been made recently, starring James Caan and Mark Hamill (Luke Skywalker of Star Wars fame). The movie’s release and, in fact, its ultimate ending, are uncertain now.

Last week The Wall Street Journal and The Washington Post reported that Minkow has agreed to plead guilty to a securities charge that could land him in prison for five years. He has been accused of falsely citing homebuilder Lennar Corp. with producing fraudulent financial statements, depressing the price of the stock, at the same time he was betting against the stock in the market on supposedly nonpublic information.

Many will write this off as the story of a man who never changed, but there seems much more to it than that. For my young auditors, I would warn them to always be professionally skeptical, and especially of those who tend to promote themselves or focus on themselves. You should not be surprised that these things happen, but you do not need to be cynical about people as a result. Many lives turn, stay turned, and finish well.

What I take to heart for my own life is that we are all vulnerable. Every indication is that Barry Minkow’s spiritual conversion was genuine, and that he has been a mentor to many men, as well as being a good husband and father. The price he will pay in his personal life, what he will have to give up, is much higher now than it was the first time. I need people to watch my back, and to point out to me when I am making myself vulnerable to a fall. I need to be accountable.

Finally, I need to be careful if I find myself drawn to the limelight. If what I want is approval and applause, the price can be very high. That siren call will draw my students as well, and I need to find ways to let them know in advance.

I am sorry to say that, until I become a better lighthouse, the wreckage of Barry Minkow’s ship on the rocks will have to be warning enough.

Categories: Business, Crime

I have often made the observation that in American society, time after time, competence trumps integrity. We value people who have certain abilities or who entertain us in certain ways, and what they do to make us money or make us happy is much more important to us than who they are, or who they hurt in the process. I see it as a fundamental weakness in the moral character of American society, one that provides a ceiling on how far we can really progress ethically.

I see the examples in business again and again. The latest example is Mark Hurd, former CEO of Hewlett-Packard, and currently the new co-president of Oracle. I would say that the things that he did to get fired at HP were relatively small compared to the accusations against many in positions of power in business. Usually, a single relationship that leads to an accusation of sexual harassment, especially when there is no favoritism shown in areas like promotion and raises, is not enough to get a successful CEO fired. If the reports in The Wall Street Journal are accurate, Hurd’s alleged misrepresentations on travel reimbursements were the cause of the board’s breakdown in trust with their CEO. If this is true, it is to their credit that they took the issue seriously. But many in the business community think that they were fools to fire him.

And, in that light, there is probably no one more likely than Oracle’s Larry Ellison to be a buyer in the market for someone of Mark Hurd’s skills. Ellison has a reputation for taking no prisoners, and he manifested that arched back mentality when HP pushed back at the hiring because of a non-compete clause in Hurd’s contract. Ellison openly threatened breaking off the long-term relationship between Oracle and HP, relatively typical bluster for him. It was all settled by Hurd giving back some of his stock awards, which, of course, does nothing to address the fact that Hurd has extensive inside information about HP.

As much as I care about business ethics, it is hard for me not to see Ellison as the clear winner in the negotiation. In some sense, competent people being employable despite their flaws may simply be the price of the free enterprise system. If the moral disconnect is not so outrageous as to make people angry, and you are really good at what you do, you are probably going to get away with it. If you are punished, it will probably only be in the short-term, and you will quickly have other, even superior, opportunities.

It is no different in the NFL. New York Jets wide receiver Braylon Edwards’s alleged drunk driving event this week was met with a tepid response from his team’s organization, from the coach to the general manager to the owner. Coach Rex Ryan indicated that he was tired of these types of events and owner Woody Johnson intoned that Edwards had let himself and the team down. Oh, by the way, he will be playing against Miami Sunday, because the Jets have a better chance of winning if he does. (As an aside, it’s unclear to me as a football fan, based on his performance on the field, why they think that.)

And Edwards is a second chancer also. Cleveland traded him to the Jets not only because he had a tendency to drop passes, but because he was a public relations nightmare, including accusations of assault on a 135-pound man. The Jets are clearly a superior opportunity for him, the chance to play with a team with designs on the Super Bowl. Nothing he has done has prevented him from having this chance, and who could blame him for believing that nothing ever will? About the only thing you can do that will push you off the cliff is lie about what you did—ask Roger Clemens and Martha Stewart. And Mark Hurd is, allegedly, living proof that not even that will always do it.

I can feign moral outrage if you like. But, the truth is, Americans generally like winning more than they like doing the right thing. They like making money more than they like doing the right thing. That’s why I tell the young auditors I train the truth. It’s the world you are operating in, and you had better be prepared for it.

It is also the truth that the fall comes for many, for Enron’s Jeff Skilling and Andy Fastow, for WorldCom’s Bernie Ebbers and Scott Sullivan. And I am glad that I live in a country that gives second chances. But sometimes, in my heart of hearts, I wish I could pick who got them.

Categories: Athletics, Business

I have been wrestling lately with the issue of sudden ethical collapses in people’s lives, dramatic one-time or short-window events that change the course of their lives and careers. Why do they happen, and what can be done to reduce the probability that they will?

I am not talking about the final revelation of people who have spent a lifetime manipulating people and finally experience what virtually always occurs. I am concerned with those who seem to be cruising along, often on smooth waters with fair winds. And then, suddenly, it happens.

Mark Hurd, HP’s CEO is just the latest example. He recently resigned under pressure from the board of directors after settling a sexual harassment lawsuit brought by a contractor for the company. This is not the type of topic I enjoy writing about a lot, because it is hard to be dispassionate about passion, and the genuine benefit of debating the downfall of folks where “close personal relationships” are involved gets swamped by the smirking over the details. But I think there is something for a lot of us to learn from Mark Hurd’s experience.

We are most vulnerable to doing something foolish when we are desperate and when we are very successful. The headlines that go with a desperate fool are short-lived—think convenience store hold-ups. Those that involve a successful person falling tend to have a life of their own, far beyond the importance of the event.

Most people can understand why a person who is desperate might end up in the headlines. They have a harder time explaining why someone who has virtually everything at his disposal would do the same, particularly when the incremental gains in happiness are so small.

I think, in the end, there is a sense of invulnerability that goes with a long string of successes that makes a star subject to imploding. The examples run from King David to Tiger Woods, and infidelity is not the only manifestation. Gradual increases in abuse of those under their authority, increasing isolation, and a smug self-sufficiency have been the recurring themes for the leaders of failed and fraudulent companies that I have studied for the past two decades. At the root of all of this is that the leader stops listening.

And the failure to listen is a critical mistake. I am often tempted to stop listening to my wife, because I am vulnerable to her ability to see underlying weaknesses in my life that others miss. If others are not criticizing me, why should she? Those who love us most and know us best must continually be reassured that we are listening to them and that we trust their perspective.

Perhaps just as important, we must listen to the criticism of those who oppose us, even those who mock us. The clearest presentation of our real weaknesses and long-term vulnerabilities often comes from those who are looking for an advantage or would like to bring us down. Their criticisms are often unhearable. Who wants to know what somebody in Austin thinks about us?

Earlier this week a Halliburton employee, Jesse Gagliano, testified that he had warned BP that if they did not use more risers to control the pressure in the Deepwater Horizon well, it risked a serious gas flow incident. Gagliano apparently recommended 21 risers to control the flow; BP went with six, according to The Wall Street Journal.

Perhaps BP did not listen to its friends. And I am sure it is tempting for BP now to just get past this incident and ignore the catcalls of its enemies. But it does so at its peril.

And if I am wise, I will cultivate honesty not just in my wife or my closest friends, but in those who think I am a simpleton. It takes combing through their criticisms for what is legitimate, and listening to things that are hard to hear. But it may just be the key to preventing an ethical blowout in my life.

Categories: Business

It has been a painful week for me personally. Part of it was my own fault. I was trimming my lawn, when I managed to do something I had never done before—thoroughly weed whack my ankle. I am pretty sure that the scar left on my ankle is a gang symbol, though I’m not sure which one. I think it might be the Smurfs.

But the more painful event in my week was inflicted on me by the Texas State Board of Public Accountancy. June is my month to report continuing education and renew my license, and I generally benefit from the conferences and sessions that help me maintain my certification. But every other year CPAs in Texas are required to report a four-hour session from a small group of select courses approved by the Board. You might be surprised to know that what caused me so much pain was an ethics course.

There are a number of reasons why that ought not to be true. One relatively obvious one is that I happen to love the topic and teach it for a living. I care deeply about the ethical reasoning and behavior of CPAs, particularly of my students. I am also invigorated by my students when I am with them in the accounting ethics classroom. I cannot tell you how much I learned from my 138 students this past spring as they related to one another in ethics accountability groups, and put together some stunning and meaningful presentations. These students also each developed a set of principles to guide their professional lives. I was challenged and moved by the growth in students’ perspectives during the course.

Another major reason the Board-approved ethics course should not have been a problem for me is that I have a high tolerance for boredom. I am, after all, a CPA, and have been for almost 27 years. I am also a professor who has sat through innumerable commencement speeches and faculty meetings. I may have to pull the hair on my legs to stay awake, but I can usually manage to get through most sessions that normal people would find intolerable.

I had a couple of factors working against me. I had waited till the last minute and had no choice but to sit through the whole course at one time. In addition, I had decided to go the low cost route in selecting my course, insuring an online delivery method that was as interesting as reading the phone book.

You might think I was bored because I already know all this stuff. But the stuff I know was actually the interesting part of the course. The course also covered, but essentially never tested over, innumerable philosophers’ perspectives, a few of which were actually relevant to decisions we make in the accounting profession. And there were endless pages of minutiae to protect the public from such dangers as two CPAs using the same staff and incorrectly representing that they were a partnership. Wow! There oughta be a law! That will bring down the republic!

But it ought not to be this way. This course is a perfect example of why people look at me with a puzzled expression when I talk about how much I enjoy teaching ethics. The nice ones ask, “Can you teach ethics?” Of course, they mean, “Can you teach it up? Can you help people make better decisions?” Everybody knows that you can teach it down; my profession has plenty of examples.

In fact, perhaps the most painful experience of my week was an e-mail from a former student who related having to make an ethical decision at her CPA firm in a ten-minute window. She chose to tell the truth, and did what was right, and it got her fired. It made my blood boil.

She told me that she remembered what I had said in class about having to make hard decisions. And she was writing to say thanks, to say that she was content and her conscience was clear, when she could easily have been writing to tell me I was wrong, and how could she have ever listened to me?

I’m sure there are better ethics continuing education courses that I can take, and maybe two years from now I will open my pockets wider and hope for the best. But I know the best hope for changing the profession is not in this futile biennial requirement.

It is in that classroom I will return to, where hearts and lives are shaped and changed. I have the chance to fan the flame of moral courage in a remarkable group of students from a variety of backgrounds. The accounting profession may not like what they get sometimes. But as long as I have breath, and as long as I prepare Aggies, people like my student are what I am going to send them.

Categories: Business, Texas A&M

One of the major problems with capitalism is the outsourcing of externalities, expected or unexpected events that have broader effects beyond the company causing them. Transocean’s Deepwater Horizon problem, with the thousands of gallons of oil pouring into the Gulf, is a classic example of an externality, and it provides an interesting example of how regulation can actually increase the costs to the populace when a disaster of this nature takes place.

People are understandably infuriated at the outcomes from the well explosion. They are reacting by fleeing companies connected to the event. BP alone has lost $17 billion of its market capitalization, according to The Wall Street Journal. BP representatives have made regular comments about accepting responsibility for legitimate claims. The well’s operator, Transocean, has sought protection from unlimited liability under an 1851 law, the Shipowner’s Limitation of Liability Act. According to the Associated Press, this would limit the company’s liability to $27 million. This seems wrong on its face to most people, and it has enraged Senator Chuck Schumer, who wants the law repealed. Admittedly, Senator Schumer has been known to get apoplectic over a lot less; he seems to have a propensity for getting excited. But this is an easy opportunity for him to capitalize on public anger over the spill.

What he does not mention is that this 1851 regulation had its own externalities, its own unforeseen consequences. If Transocean’s liability is, in fact, limited, the Shipowner’s Act is explicitly the cause of Transocean’s ability to outsource the externality to American taxpayers (or other unfortunate parties involved who may be held to greater levels of liability under joint and several liability laws). I am doubting that Congress, almost a decade before the French developed the first ironclad battleship, had floating oil rigs in mind. Who can blame them? But Congress in recent years has shown a penchant for demonstrating far less foresight, and they are on a roll.

Sending attorney general Eric Holder to Louisiana to threaten criminal prosecution is not the kind of action that leads to good legislation either. There are significant ethical issues involved in this problem, as there are in all externality situations. The environment needs to be protected in a time when unemployment is high. There needs to be strategic thinking about how to address justice concerns and allocation of liability, as well as addressing how to minimize the probability of these “black swan” unexpected events happening.

Shutting down new drilling in the Gulf for six months, as ordered by the president, will do this to some extent. It will also insure that rigs are sent elsewhere in the world, and with them American jobs. These issues are joined at the hip, and when anger causes sudden swerves in a deliberate problem-solving track, you rarely get better ethical decisions. What you get is short-term solutions, and the externalities that go with them.

But I am well aware that as long as the public is watching the BP camera showing oil pouring into the Gulf, deliberate decision making is unlikely. We are witnessing a risk management failure at BP of enormous proportions. I just returned from a Gulf coast vacation, and I wonder if I will be able to go on another one in the near future. I shake my head thinking of the damage to wildlife. What has happened is devastating.

I do not expect to be listened to on this issue, because populist anger is all the rage (pun intended). But we must carefully discern what must be done to minimize harm from what seems just to do in the moment to eliminate all risk and get revenge on those we blame. If not, we should not be surprised at the externalities we outsource to future generations.

Categories: Business

As a freshman accounting major I was required to take two science courses. Since I placed out of chemistry, I was able to choose whatever I wanted for my second course. I chose Astronomy, one of the two smart course choices I made during my undergraduate career. (The other was Sports in American Life.) I loved that Astronomy course. It had just enough physics that I could still follow what the professor meant, but not enough to make it evident that my high school physics teacher was more interested in the girls P.E. coach than in teaching physics. In fact, I enjoyed it so much that I signed up for a second astronomy course simply because I had room for an elective.

The second course bore no resemblance to Astronomy as I had come to know it in the first course. The enticing title of the course, “Black Holes and Stellar Masses,” quickly devolved into the droning of an incredibly boring professor on topics indecipherable to man (or at least to accountants). For some unknown reason, if you look at my undergraduate transcript, the course is listed as “Astronomy Bizarre.” How apropos. What began as a wondrous exploration of the mysteries of deep space became an obsession about how much mass could collapse upon itself.

I used to teach at a university that had a live lion in a habitat on campus. Please note that I said “a lion”, as in only one, meaning that this lion was unhappy most of the time. (The current lion is much happier, because they expanded the habitat and gave him a female companion.) It is interesting and unique to have a lion on campus, the kind of thing that you like to tell friends about who live on less savage campuses (no offense, Reveille). I actually stayed in the President’s Home on campus during one visit before I started teaching there. I awoke at 6 a.m. to a jungle roar.

I did not understand lions, because it was not really my job. But it was possible that this creature that I did not understand could significantly affect my life. I can remember thinking to myself, what exactly is the plan if the lion gets out? If I am going to lunch, and I look up to find myself face-to-face with a lion, what is my next step? There may well be a documented plan, but I guarantee you that no faculty member on that campus knew what it was. And those who did were unlikely to carry it out in the heat of the moment.

This brings me, logically, to the 1000 point intraday drop in the Dow last week. As I write, people are still speculating as to what triggered the selling spree that caused Procter and Gamble to plunge 36% and consulting firm Accenture to temporarily trade at a penny. Watching the market the other day and listening to people describe their emotions and decisions reminded me of a bunch of professors trying to decide what to do now that Leo is out of the cage. The popular term for unexpected events in the market is “Black Swans”, after Nassim Taleb’s book, Black Swan: The Impact of the Highly Improbable, which claims that these devastating “unlikely events are far more likely than most investors believe,” according to Tuesday’s Wall Street Journal. In fact, a hedge fund advised by Taleb made a $7.5 million options bet that the market would fall, and this transaction may have started a string of transactions that caused the Dow’s dramatic drop.

Things eventually turned, with some people taking advantage of the situation and some transactions being unwound after the fact. But this black swan was a “loose lion” moment for many people in the market, something they had not experienced before. The markets have chosen efficiency over accuracy, and with electronic high-frequency trading firms providing the bulk of the trades and much of the market liquidity, rapid adjustments of this sort are likely to happen again. Of course, safeguards will be put into place. Leo’s habitat will be redesigned to make escape much more difficult.

But today people are wondering—can one influential trade linked to a bunch of trading robots cause a market disaster? How do I hedge the risk of this type of event happening? The black swans of today are the black holes of my yesterday, collapsing all mass within reach on top of themselves. And as happy as Leo is on a normal day in his habitat, what do we do if he gets out?

Categories: Business

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