Category Archives: Corporate Governance

New Report Shows Private Insurers’ Marketing Materials Misinforming Seniors

Source: Alliance for Retired Americans, Friday Alert, September 5, 2008

Senate Finance Chairman Max Baucus (D-MT) commented on Thursday about a new and alarming report from the Office of the Inspector General at the Department of Health and Human Services that indicates 85% of “marketing” materials presented to American seniors by private insurers selling Medicare benefits do not meet standards set forth by the Centers for Medicare and Medicaid Services. Sen. Baucus, who has held hearings in the Committee on unscrupulous marketing to seniors by private plans, said action must be taken to improve service to seniors now. The full report is online. “This report reveals a near-total failure by CMS, where officials have insisted that they can regulate the marketing of plans to seniors as well as or better than experienced state insurance agencies. The evidence now shows that’s not the case,” said Sen. Baucus. “It’s unconscionable that CMS has let the insurance industry’s materials – including essential items like pharmacy directories and summaries of benefits – fail to properly inform seniors 85 percent of the time…and you’d better believe the Finance Committee will move to make sure seniors get better service one way or the other,” he continued. The senator’s own Medicare improvement bill, enacted into law this year, contained prohibitions on unscrupulous marketing practices by private plans, including unannounced visits and cold calls by plan agents.

GAO Analyzes Lack of Tax Liability Among Corporations

Source: Government Accountability Office, GAO-08-957, July 2008

The Government Accountability Office (GAO) issued a report earlier this week comparing the tax liability of foreign-controlled corporations operating in the United States with U.S.-controlled corporations between 1998 and 2005. It compares tax liability in a number of ways, including the percentage with no tax liability, the number of years with no tax liability, and tax liability as a percentage of gross receipts or assets… The study was requested by Senators Carl Levin (D-MI) and Byron Dorgan (D-ND), out of concern that foreign-controlled corporations are able to manipulate transfer pricing to avoid U.S. taxes… A 2004 study from Citizens for Tax Justice examined tax liability for a period of years (2001-2003) contained within the window covered by the GAO report. CTJ’s report found that the average effective tax rate for these corporations had fallen to less than half the statutory rate of 35 percent. The average rate fell from 21.4 percent in 2001 to 17.2 percent in 2002-2003. Nearly a third of the corporations paid no taxes in at least one of the three years.

Some Pension Funds Drained in Order to Fund Executives’ Benefits

Source: Alliance for Retired Americans, Friday Alert, August 8, 2008

An examination by The Wall Street Journal (subscription required) finds that a range of companies have been quietly converting their pension plans into resources to finance their executives’ retirement benefits and pay. By moving some of the obligations for supplemental pensions into rank-and-file pension plans, companies capture tax breaks intended for pensions of regular workers and use them to pay for executives’ supplemental benefits and compensation. Companies using this tactic have included Intel Corp. and CenturyTel Inc. In addition to being a dubious use of tax law, the practice risks harming regular workers: It can drain assets from pension plans and make them more likely to fail. Ultimately, taxpayers are helping finance executive compensations while companies grow richer. With the current bear market in stocks weakening many pension plans, the maneuver could put more plans in jeopardy.

Private Equity and Employment

Source: Steven J. Davis, John Haltiwanger, Ron S. Jarmin, Josh Lerner, Javier Miranda, US Census Bureau Center for Economic Studies, Paper No. CES-WP-08-07, March 1, 2008

The impact of private equity on employment arouses considerable controversy. Labor groups concerned about the fortunes of workers employed at buyout firms contend private equity firms destroy jobs. By contrast private equity associations and other groups have released a number of recent studies that claim positive effects of private equity on employment following the takeover. In this paper we conduct a comprehensive examination of the impact of private equity buyouts on the employment outcomes of firms that are taken over by these investment firms. We focus the analysis on two different dimensions. First, what are the employment outcomes of workers employed at establishments existing at the time of the buyout? Second, what is growth performance of the firm following the buyout? We conduct the analysis using a unique linked dataset covering the universe of US firms and information regarding US buyout operations between 1980 and 2005. We find targeted establishments exhibit net employment contraction, higher job destruction and establishment exit relative to controls. However, targeted firms exhibit higher greenfield entry and more acquisition and divestiture.

The World Bank and the ILO: Two Visions of Employment Regulation

Source: Yaraslau Kryvoi, Bulletin of Comparative Labour Relations, Vol. 66, 2008

From the abstract:
The World Bank’s Doing Business report has become one of the most influential, yet the most controversial instruments which affect labour law reforms around the world. This study discusses the controversy between the World Bank’s and the International Labour Organization’s approaches towards flexibility of employment regulation with special emphasis on fixed-term contracts.

The ILO employment regulation targets are balanced to harmonize the interests of all three stakeholders – employers, employees and governments, while the Doing Business targets clearly favour the interests of employers. What is more important, the Doing Business targets on fixed-term contracts and dismissals seem to contradict the international labour standards as reflected in the ILO conventions and recommendations.

Although both organizations ultimately have the same goal – to help economies and people prosper, their visions of the proper mixture of flexibility and security are clearly different. It is hardly possible to expect that Doing Business reports would lobby for the interests of employees because this will not necessarily stimulate more favourable businesses environments. However, as this study suggests, there are ways to reduce tensions between these two visions.

Corporate Social Responsibility Through an Economic Lens

Source: Forest Reinhardt, Robert N. Stavins, Richard Vietor, HKS Faculty Research Working Paper Series, RWP08-023, April 20, 2008

From the abstract:
Business leaders, government officials, and academics are focusing considerable attention on the concept of “corporate social responsibility” (CSR), particularly in the realm of environmental protection. Beyond complete compliance with environmental regulations, do firms have additional moral or social responsibilities to commit resources to environmental protection? How should we think about the notion of firms sacrificing profits in the social interest? May they do so within the scope of their fiduciary responsibilities to their shareholders? Can they do so on a sustainable basis, or will the forces of a competitive marketplace render such efforts and their impacts transient at best? Do firms, in fact, frequently or at least sometimes behave this way, reducing their earnings by voluntarily engaging in environmental stewardship? And finally, should firms carry out such profit-sacrificing activities (i.e., is this an efficient use of social resources)? We address these questions through the lens of economics, including insights from legal analysis and business scholarship.

Corporate Governance

Source: Richard Thornburgh, Former U.S. Attorney General & Martha Raddatz, ABC News, Brookings Institution, May 30, 2008
(video)

Former U.S. Attorney General Richard Thornburgh examines today’s corporate culture and finds that, while it is replete with good corporate citizens, we’ve seen a culture of greed and failure to observe basic fiduciary duties in the first part of this decade. Thornburgh argues that the Sarbanes-Oxley regulations do not go far enough in addressing wrongdoing because the problem exceeds our legislative grasp. “What we’re really left with,” he says, “is a failure of corporate management.” Thornburgh says it is time for a system of corporate best practices for good governance.

Banks vs. Consumers (Guess Who Wins)

Source: Robert Berner and Brian Grow, Business Week, June 5, 2008

The business of resolving credit-card disputes is booming. But critics say the dominant firm favors creditors that are trying to collect from unsophisticated debtors.

What if a judge solicited cases from big corporations by offering them a business-friendly venue in which to pursue consumers who are behind on their bills? What if the judge tried to make this pitch more appealing by teaming up with the corporations’ outside lawyers? And what if the same corporations helped pay the judge’s salary?

It would, of course, amount to a conflict of interest and cast doubt on the fairness of proceedings before the judge.

Yet that’s essentially how one of the country’s largest private arbitration firms operates. The National Arbitration Forum (NAF), a for-profit company based in Minneapolis, specializes in resolving claims by banks, credit-card companies, and major retailers that contend consumers owe them money. Often without knowing it, individuals agree in the fine print of their credit-card applications to arbitrate any disputes over bills rather than have the cases go to court. What consumers also don’t know is that NAF, which dominates credit-card arbitration, operates a system in which it is exceedingly difficult for individuals to prevail.

Private Equity and Public Good

Source: Stephen F. Diamond, Dissent, Winter, 2008

The collapse of the credit markets over the last year has hit more than just the homebuilding and mortgage sectors of the economy. As interest rates increased, private equity, or “PE,” an important new form of financial capital, was also rocked on its heels. … Trade unions have an ambivalent attitude toward the rise of private equity. On the one hand, many American labor unions have representatives on the boards of the same pension funds that are largely responsible for the steady flow of capital into PE funds, and, of course, that means some union members have benefited handsomely from the funds’ above-average returns. On the other hand, over the last decade, organized labor has developed a relatively sophisticated program of investor activism through the Office of Investment at the AFL-CIO, the Capital Strategies Group of Change to Win, and similar groups at key affiliates. This effort relies on labor’s pension-fund investments in public companies to raise concerns about corporate social responsibility, excessive CEO pay, workers’ rights, and internal corporate governance. But labor does not seem to have made up its mind whether or not PE funds raise or lower corporate standards of behavior.
See also:
The Modern Corporation and Private Property
Adolph Berle and Gardiner Means

Private Equity’s Broken Pension Promises: Private Equity Companies’ Links
To Insolvent Pension Funds

GMB, a Central Executive Council Special Report, 2007

A Workers’ Guide to Private Equity
International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers Associations