Friday, March 29, 2013

The problem with corporations

First of all, let me say that I don't have a problem with corporations generally.  In fact, I have owned or co-owned a number of corporate entities in my business career, and the protections they offer are useful not only to shareholders but also to society at large.  In fact, properly applied, it is difficult to see how we could function in the modern business world without them.

But I am continually frustrated by the way in which the corporate identity has swallowed up the ethics of the business world entirely.  I don't pretend that there are hard-and-fast rules that businesses must follow or be subject to penalties, but I do believe that a fair market imposes on companies the obligation to operate in ways that are something other than naked advantage-grabbing.  Put another way, just because something is legal does not mean it is beneficial to our society or our economy.

To illustrate, I offer a simple principle that everyone has heard of and that for many businesses is an important value:  "The customer is always right."  That doesn't literally mean that the customer is in fact always right. What it means is, if you want to keep a him as a customer, the customer is right even if you disagree about something.  Customers who have the option to go elsewhere will, in a fair market, vote with their feet when they are confronted with a vendor whose policies they don't like.

Recently, a friend of mine made an accounting mistake and ended up slightly overdrawing his business checking account.  He had made a few charges using his company debit card that hadn't come through, so his account wasn't yet showing overdrawn, but he knew it was just a matter of time before those charges showed up.  He did the responsible thing and put money in the bank, out of his own pocket, to cover those charges before they appeared on his account.

As it turned out, however, the bank has rules that seem designed to take advantage of that situation.  They cheerfully took his money, but they waited to apply it to his account until after the debit card charges were applied.  They also paid those debits (they didn't decline them), and charged him a $35 fee for each one--which caused his account to be overdrawn even further.

Now, I want to be clear about this:  At no time was the bank "out" any money. They actually received his deposit before they paid the debit charges.  But, as it turns out, the bank has a processing order, as part of its deposit agreement, that causes debit card charges to be paid before any deposits are credited--even if those deposits are in cash.

In relating his experience, my friend expressed a great deal of frustration for several reasons.  He acknowledged that the bank was within its rights to do what it was doing, and he acknowledged that his mistake was the root cause of the problem. But he had been a good customer of the bank for a long time.  It wouldn't have hurt the bank to refund his overdraft fees (they did refund one "as a courtesy") in order to keep his business.  They did not. So he's voting with his feet and finding another bank.

By the way, because of the overdraft fees, he has a small negative balance in the account.  Incredibly, if he does not bring his account balance to zero (which he has said he's not in a hurry to do), the bank threatened to turn the matter over to collections and to report him to ChexSystems, a credit reporting agency that focuses on how customers handle their checking accounts.  Since most banks will not open a bank account for someone who has a negative ChexSystems report, meaning that his choices for new bank accounts for his business are limited.

Of course, he protested--to customer service, to the branch manager, and so forth, to no avail.  At each step, the people he talked to had sympathy for his position, but each said, "I don't have the authority to change that. It's a bank policy."

The problem with corporations--just like the corporation that operates this bank--is that in precisely the same way that corporations shield shareholders from liability for the acts of the corporation in which they did not participate, corporations insulate the people who operate them from accountability for their decisions that don't rise to the level of a civil tort.  Employees who would ordinarily be vested with the authority to fix problems where the corporation is acting foolishly can merely chalk up their behavior to "company policy."  There is no social accountability.  No one has to look a wronged customer in the eye and take responsibility for a decision.

I recently saw a television advertisement for Enterprise Rent-a-Car, in which Enterprise was touting the authority it gives its front-line employees to solve problems.  My interest was piqued because for work I rent a lot of cars--in 2012 alone, I rented cars 26 times, about one every two weeks--and while the experience goes smoothly most of the time, when there is a problem, it's usually a disaster that ends up costing me money or time or both.

As it turned out, the next time I rented a car, I rented from Enterprise.  When I arrived in the sweltering heat of mid-summer Phoenix after a long plane ride, the car I had reserved wasn't ready, and it was going to be a 30-minute wait.  All it took to cause the rep to spring into action was my "tired face"--eyes askance, lips pursed, a half-sigh--which was entirely involuntary on my part.  The rep immediately said, "I can get you in the next size up right now, though."  My standard reply to that phrase--which I hear constantly--is "Well, how much is that going to cost me?"  I was pleasantly surprised when he said, "Same price. We want you to be completely satisfied."  He didn't have to "check with a manager." He just did it.

Enterprise has a company culture that differs from most of its competitors.  They genuinely value putting their customers first because they want a customer for life.  They recognize that making an extra $10 or $15 off a customer's impatience on one rental is far less important than impressing that customer and keeping him as a customer for life.

Somewhere along the way, most corporations have adopted the view that they exist solely to maximize the value for their shareholders, no matter what.  That's true, but it's incomplete.  Corporations are really about maximizing value for their shareholders by building a loyal customer base who returns to buy products again and again and again.  That doesn't mean maximizing the bottom line every day, but maximizing the total return over the lifetime of the company.

Recently, at a shareholder meeting, Starbucks CEO Howard Schultz made news by talking back to a complaining shareholder.  The shareholder was upset because (a) Starbucks had openly supported the successful referendum to establish marriage equality in Washington, (b) as a result, the National Organization for Marriage started a boycott of Starbucks, and (c) the shareholder believed the boycott had hurt sales.  Schultz told the shareholder that if the 38% return that shareholder got wasn't enough he was welcome to sell his shares and buy something else.

Could Starbucks have squeezed a few more percentage points out of its business for that shareholder? Maybe.  But at what cost?  As Schultz put it, Starbucks support of marriage equality was something they did for their more than 200,000 employees, many of whom are young enough to see marriage equality as a social imperative (even if most of them aren't gay).  The Tazo® tea leaves aren't hard to read on that question anyway, and Starbucks wants to associate its brand with the right side of history. Schultz has his eye not only on the cups of coffee he won't sell to the last vestiges of a dying breed of bigots, but also on the coffee he hasn't sold yet to tomorrow's customers, who will regard those bigots, at best, as...quaint.  Trading a tall today for a venti tomorrow seems like a smart bet.

Starbucks and Enterprise are getting it right.  Too bad most corporations haven't figured it out yet.

Tuesday, March 5, 2013

GC Explains: Contractionary Policy Is Contractionary

This is one in a series of articles designed to explain complex concepts in simpler terms.

Except this one isn't.  Read on for the explanation of a simple concept in simple terms.

The federal government spends a lot of money.  This year, it will spend about $4 trillion. That's such an enormous amount of money that if you spent $100 every second, it would take you 1,268 years to spend $4 trillion.

The federal government gets this money in a lot of different ways.  A pretty significant portion of it comes from the personal income tax.  Corporate taxes make up part of it.  Excise taxes, which are taxes paid on the value of things, usually on the basis of their being sold or purchased, make up part of it.  User fees--fees that you pay to use government services, like passport application fees and patent application fees and national park entry fees, make up part of it.  The government also receives royalties on the use of federal lands for things like timbering, oil drilling, and so forth.

And the government borrows money, sometimes a lot of money, to make some of this spending possible.  The government borrows money by selling bonds, bills, and notes, which are various financial instruments that include a promise to pay them back.  Borrowed money comes from private investors (including maybe you, if you own savings bonds, or you own shares of a mutual fund that holds bonds), from institutional investors like pension funds, from sovereign wealth funds (other countries that want to put their money in a safe investment), and even from itself.  See, the government collects more in Social Security and Medicare taxes than it pays out in benefits, and the difference is loaned to the federal government.

Right now, the government can borrow money nearly for free--i.e., without having to pay much in interest at all.

Let's go back to the spending part of this.  When the government spends money, where does the money go?  Well, it goes into the hands of individuals who work as government employees, and they use it to pay their bills and buy things.  It also goes into the hands of corporations (mostly) that provide the government with things the government needs, like bombs and paper clips and cars.  Those corporations in turn spend that money on buying things, paying their employees, and paying dividends to shareholders.

We can disagree about whether it is a good idea for the government to buy the things it buys with its money, but even the money that the government "wastes" doesn't disappear.  It goes into the hands of people, ultimately, who buy things.

You may have recently heard about something called the "sequester."  The sequester is a method of keeping the government from spending quite so much money by reducing expenditures across the board.  So, some office of the government may have a budget of $1 million before the sequester, and after the sequester, its budget goes to $900,000 (these figures are just made up to illustrate).  So, instead of spending $1 million, that office will spend only $900,000.

All told, the government will reduce spending by $83 billion in the first year of the sequester.  What that means is that $83 billion less will be made available to people who do business with the government (including employees, vendors, and service providers).  Those people will have to find a way to deal with less, by reducing their own spending by $83 billion in the aggregate.  That means layoffs of government and corporate employees, and less spending by corporations and individuals on the things they need to keep going.

Why does this matter?  Well, in a booming economy, it might not matter much at all, and might even be a good thing.  But we don't live in a booming economy.  It's hard to find ways to earn enough money to maintain our standard of living.  When you reduce government spending, you reduce the spending of people who get their money by doing things for the government also, which means that the people who depend on those people--the landlords, the grocery stores, the gas stations, the electric utilities, the restaurants, the hotels, the car dealers, the appliance stores--have to get by with less, too. 

Our economy is designed to grow continuously in the sense that each quarter and each year we expect more and more economic activity.  The economy needs to grow at some level because our population is increasing.  When the economy shrinks instead of growing, we're going in the opposite direction from where we need to be, which is called contraction.  If we go two quarters (half a year) with contraction, it's called a recession, which is a term that most people know but a lot of people don't understand. 

We can't do a whole lot to get people to spend their own money in a weak (contractionary) economy.  Everybody makes their own decisions, and when times are tough, people are concerned that they need to conserve their money because it will be harder to replace it when needed.

But we can spend money through the government.  Even if tax revenues aren't high enough to support more spending, the government can borrow money and spend it.  The idea is that when the government spends extra money, the fact that more money than usual is flowing to people who do business with the government causes those people to loosen the purse strings a bit and buy things.  In other words, the government spending stimulates other spending, which causes the economy to expand again.

When we do the opposite--reduce the money the government spends--then people react in the opposite way. They reduce their spending, worried that tough times are ahead.  When the government reduces its spending as a matter of policy, that is a "contractionary" policy.

These concepts are well understood by economists, so well understood that there is very little debate over them.

And when you implement a contractionary policy, the result is going to be contraction--i.e., the economy will get smaller, not bigger.  Contractionary policy is contractionary, and we shouldn't be surprised by it.

Now, I get that we need to get wasteful spending out of the government.  I'm all in favor of doing that.  But we're not talking about wasteful spending.  We're talking about all kinds of spending, wasteful or not.  You can stop wasteful spending and still spend that money on something else that's not wasteful.  There are a lot of things that we really need, that would benefit a lot of people and lay the groundwork for future growth in the economy.

Fundamentally, the question is this:  Do you want the economy to grow or contract?  If you want it to contract, we should cut government spending.  If you want it to grow, we should do the opposite.

Trivia isn't so trivial after all

Just a quick brag.

I've been a trivia guy for a long time. I grew up watching Jeopardy! and playing Trivial Pursuit with the family.  When I was in 6th grade, I captained a team from my hometown, Pine Bluff, that won the first-ever 6th Grade Knowledge Master Open (and if you hit the link, you can see us there, enshrined for all eternity in the KMO Hall of Fame).  I played Quiz Bowl in high school and was proud to represent the University of Arkansas in College Bowl, twice.  (The guy who was the captain of our team both years went on to win the 1996 Jeopardy! College Championship.) 

Recently, I've been playing in a trivia competition in Memphis with my brother, his father-in-law (Norman), his brother-in-law (Lloyd), and our dad.  The team used to be known by the name "Penny's from Heaven," a clever non-sexual double entendre, "Penny" being the name of Norman's beloved dog.  But for this season we became "Blame Canada!" because of our maddening penchant for getting questions about Canada wrong.

Anyway, last Saturday, we played in the Mid-South Regional Tournament put on by Challenge Entertainment against 108 other teams, all of whom had done well enough in their areas to make the finals.  When the dust settled, we found ourselves at the top of the pile, splitting (among the five of us) the $7500 top prize.  It was a true team effort.  I can't wait for the summer league to start.