Friday, May 31, 2019

Encroaching Political Consolidation: The Weakening of the U.S. Federal System

It is much easier to point out the sliver in the other person's eye than the plank in one’s own. Regarding the gradual political consolidation of power at the federal level in the U.S. at the expense of not only the member-state governments, but also the federal system itself, it is easier for a political party to dismiss its own contribution than to take a wider stance including the continued viability of the federal system, or federalism, itself. As a result, both of the major parties has contributed to the increasing political consolidation at the expense of the check-and-balance feature that a balanced federal system has.
Texas’s former governor, Rick Perry, wrote in his book, Fed Up!, “From marriage to prayer, from zoning laws to tax policy, from our school systems to health care, and everything in between, it is essential to our liberty that we be allowed to live as we see fit through the democratic process at the local and state level.”[1] If it is essential to the liberty of the people that these policy domains be legislated and enforced at the member-state level, then any backtracking on any of these areas would diminish freedom. Hence the considerable consolidation of power by the U.S. Government since the war between the U.S.A. and C.S.A. from 1861-1865 has come at a cost. 
For instance, U.S. Government can preempt state legislating on a given domain even if no federal legislation is even attempted. The citizens of Texas would be hamstrung should they want the Texas Government to legislate on what is a serious problem in Texas. Preemption ignores that a given societal problem can be worse in one of the member republics than in others. The E.U.'s doctrine of subsidiarity, wherein the lowest level of government in the federal system that can deal with a problem is preferred, gives the states the preference over the federal government. 
So too does the fact that the governors of the states sit on the European Council, which is roughly equivalent to the U.S. Senate, where senators can ignore their respective governments to vote in such a way that makes reelection more likely.[2] The interests of the citizens of Texas are not the same as the Texas Government. Given the change to popular election for U.S. senators, the member-state governments had no power at the federal level to stop the federalizing of health-insurance legislation (e.g., Obama's Affordable Care Act).[3] 
American federalism can be repaired and strengthened. I'm not sure how many people realize the extent to which the federalism has deteriorated. Even people such as Perry who have emphasized a more balanced federal system have advocated policies that would add to the encroaching consolidation. “In one of his more well-publicized shifts, Mr. Perry proclaimed that gay marriage was an issue for individual states to decide, but backtracked in [August 2011 and said] he supports a federal amendment banning gay marriage. He . . . also signaled support for various federal actions to restrict abortion rather than leaving the issue to states.”[4] The governor of a large U.S. state put an ideological agenda, even one that is popular with the Texas electorate, before his own warnings of political consolidation. If federalism is to be sabotaged even by its high-level advocates, the problem has indeed become intractable. 
More generally, if Republican office holders want to federalize “social issues” and expand the military-industrial complex while Democratic officials insist on federalizing health-insurance, housing, and food aid for the poor while both parties federalize large portions of criminal law, then not only is the federalism pushed further off from a federal-level/state-level balance, but also the blame can be pushed to others such that no party takes on the matter of fixing the federal system. Any given representative could claim that his or her desired federalization would not break the camel’s back (i.e., effectively keep the federal system from working given the consolidation). Don’t look at me; its the other guy.  
The truth may well be that no elected official at the state or federal level is truly interested in the long-term viability of the governance system; the motivation is more a function of what is politically expedient at the time. Each politician may authentically believe that his or her top issues should be made to apply to all Americans—in every member state. In terms of an enabling context, perhaps the American cultures had become too egoist and short-sighted to support the difficult decisions needed to repair the American federal system. In fact, the cultures may even have contributed to the problem itself being one of America's blind-spots. The result is that everything is federalized and the state governments can no longer operate as a check on the federal level. As each official is busy imposing what is most important to him or her on as many people as possible, the question needing to be asked may therefore be, who, exactly, is minding the store?

1. Rick Perry, Fed Up! Our Fight to Save America from Washington (New York: Little and Brown, 2010). A critique of Perry's book interpretation of federalism can be found in American and European Federalism, available at Amazon.
2. Since 1913, the American states have switched from their respective governments appointing U.S. senators to the popular election of them. If it still be claimed that the senators still represent their respective governments, then popular election sets up a conflict of interest. In my view, the U.S. Senate could strengthen the American federal system by having the governors represent their respective states, as is the case in the European Council. See Essays on Two Federal Empires: Comparing the E.U. and U.S., available at Amazon.
3. The U.S. Senate, like the E.U. Council would meet formally in summits and for occasional special purposes (e.g., confirmation hearings where necessary) rather than more often, given the workload of a chief executive and head of state. The Senate's staff, like its counterpart in the Council, and the respective staffs of the governors in the member-states would do much of the coordinating and other work.
4. Manny Fernandez and Emily Ramshaw, “As a States’ Rights Stalwart, Perry Draws Doubts,” New York Times, August 29, 2011. 

Thursday, May 30, 2019

Facebook’s Mark Zuckerberg: Power beyond Corporate Governance

Facebook’s Mark Zuckerberg and Sheryl Sandberg did not attend a committee hearing at Canada’s Parliament on May 28, 2019 in spite of having received summons from Bob Zimmer MP, the committee’s chair. Instead, Facebook sent its director of public policy and its head of public policy for Facebook Canada. “Shame on Mark Zuckerberg and shame on Sheryl Sandberg for not showing up today,” Zimmer said toward the end of the hearing.[1] For sending two representatives rather than themselves, Zuckerberg and Sandberg faced the possibility of being held in contempt. They had testified before the U.S. Congress, so by sending two representatives the two leaders of Facebook may have acted rather dismissively concerning Canada’s federal legislature. At the time, Zuckerberg had virtually unchecked power at Facebook, including over the other stockholders. From his perch, the power may have been going to his head; even after two years of user-privacy scandals, Facebook’s CEO and Chairman of the Board may have determined that summons from legislatures where the company was operating were beneath him. Such a mentality is dangerous for a person with autocratic control of such a large company.
Corporate governance can pale up against a formidable CEO who also chairs the board whose raison d’etre is in part to hold the CEO accountable. Even that such a structural conflict of interest could be allowed persist at a company suggests that its corporate governance system is weak, with too much power going to the management at the expense of the non-management stockholders. In the case of Facebook, Zuckerberg founded it, and on this basis he doubtlessly believed he was justified in being the sole holder of class B stock, each share of which having 10 votes such that he was the majority stockholder. In a show of just how pathetic minority stockholder rights can be, Zuckerberg voted down stockholder proposals “to put checks on Zuckerberg’s ironclad grip on the company he founded.”[2] This took place just two days after Zuckerberg had failed to show up at the Canadian committee hearing.
Zuckerberg was doubtless awash in power, for he had refused a legislature’s summons and could easily control his company’s corporate governance. Lawmakers in Congress and even Facebook insiders were raising concerns not only about whether Zuckerberg had too much power, but also the company itself, given the scandals that had been going on for more than two years. Shareholders argued that Zuckerberg’s holding of the board chairmanship “contributed to Facebook missing, or mishandling, a number of severe controversies.”[3] Stockholders also believed that eliminating the Class B shares (i.e., 10 votes per share) would enable stockholders to limit Zuckerberg’s power and “hold management accountable.”[4] As scandals—even one at the time hinging on Zuckerberg’s refusal to take off a distorted video of Nancy Palosi, the Speaker of the U.S. House—came up, stockholders had no recourse to management, which could safely ignore the complaints even though stockholder value was being affected.
I submit that the business judgment rule accords corporate managements with too much power in corporate governance over non-management stockholders. At the broad policy-level in which boards of large corporations operate, business expertise, while relevant, should not push out the role of non-management stockholders being able to act as a check on a CEO’s power. Fundamentally, even beyond the value of business expertise, ownership of the corporate wealth supersedes its management. As stock options as “firm-aligned” compensation for executives becomes more popular, the role of non-management stockholders becomes more important if accountability, or a check, is to be part of the system of governance. In other words, boards of directors should not be controlled by their respective CEO’s. In the case of Facebook, its breaches of private information and its role in influencing political elections as well as politics suggest that the corporation’s system of governance should include accountability.
In such a case in which a company leaves a huge societal footprint, with a potentially dire downside, and yet the corporate governance is monopolized by one person, it is only natural to look to external accountability in the form of anti-trust enforcement. Sure enough, U.S. House Rep. David Cicilline the chairman of the Antitrust Subcommittee, had called for an antitrust investigation into Facebook, “with a focus on its acquisitions of Instagram and WhatsApp,” both of which had more than a billion users in May, 2019. Even Facebook’s cofounder, Chris Hughes, “called for Facebook to be broken up and raised concerns about Zuckerberg’s ‘unchecked power.’”[5] Alex Stamos, Facebook’s former chief security officer, said Zuckerberg should “give up” some of his power and hire a new CEO.[6] Awash with power, Zuckerberg could ignore such advice. As for the prospect of being broken up, Zuckerberg could use more of the company’s wealth to make political campaign contributions and help lawmakers in other ways. When the lack of accountability in a company senses no threat from corporate governance and the reach of governments, then the exercise of such power can become virtually unstoppable.

[1] Donie O’Sullivan and Paula Newton, “Zuckerberg and Sandberg Ignore Canadian Subpoena, Face Possible Contempt Vote,”, May 28, 2019.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.

Wednesday, May 29, 2019

President Obama Took Care of Wall Street below a Public Persona of Reform

In April, 2010, President Obama gave a speech in New York City to counter what he called “the furious efforts of industry lobbyists” geared to weakening or stopping the new financial regulations that Obama claimed would be needed to stave off a second Great Depression.[1]  It is telling that the banks that had contributed to the financial crisis of 2008 were trying to diminish or block any new regulation. The very legitimacy of industry calls for deregulation in the wake of a market failure caused in part by the industry flies in the face of the rationale for regulation. In short, the rationale for government regulation has to do with market failures, which includes fraud and over-zealous profit-taking at the expense of the public good. The root of the rationale is the difference between the interests of an organization and society (i.e., the public good). 
After the financial crisis of 2008, the U.S. President wanted more consumer protections, limits on the size of banks and the risks they could take, reforms on executive compensation, and greater transparency for controversial financial securities known as derivatives.  He maintained that each of these safeguards must be in any bill that he would sign. In giving the speech with some of the banking titans in the audience, the President wanted to confront the financial industry more directly through a sharp speech. After having castigated the bankers' “failure of responsibility” in recent years, he called on them to stop resisting tighter regulation through the army of lobbyists staked out then on Capitol Hill. The president’s address at Cooper Union in Lower Manhattan circled back to another speech he had given at the same location in March of 2008 warning of financial manipulation, market bubbles and the concentration of economic power.


At the time of his speech, the President was actually supporting the bills coming out of Congress. These bills would do nothing to forestall or minimize market bubbles and reduce the concentration of economic power.  The bills would not even limit or reduce bank size; instead, higher reserve requirements for the biggest banks was presumed a sufficient incentive for those banks to willing reduce their sizes. Although this approach, which would become law, incorporated the market mechanism (regarding financial disincentives), the assumption that empire-building Wall Street titans would reverse the "business logic" where in the opposite of growth is bankruptcy is very naive. It is remarkable that the president considered this approach as satisfying his requirement that the bill reaching his desk must include something limiting the size of financial institutions (especially when the systemic risk of one big bank failing and taking down the entire financial system had recently been lived through). Paul Volker, Chairman of the Federal Reserve under Reagan, was urging a decrease in the sizes of the five largest banks. 
I submit that Goldman Sachs' $1 million contribution to Obama's presidential campaign may have had something to do with it, as did Wall Street lobbying in Congress. On the eve of the President’s speech, Obama’s chief of staff had met behind closed doors with representatives of Wall Street firms. Fox News reported that Obama's message was the following: we’ve got to trash you in public, but know that we will take care of you in private.  While Fox News was at the time certainly no friend of the President, the account would explain why the President would eventually sign the Dodd-Frank Act of 2010, which except for staggered reserve requirements and a consumer-protection bureau is pretty kind to Wall Street.   
Recalling President Andrew Jackson, who successfully took on the bank of the U.S. by refusing to fund it in 1832, and Theodore Roosevelt, who supported the Sherman Anti-trust Act in 1911, we could certainly view Obama as not having been willing to take on the guys who not only had contributed to his 2008 campaign, but could be useful again in 2012 for Obama's reelection.  

1.  Peter Baker, "Obama Issues Sharp Call for Reforms on Wall Street," The New York Times, April 22, 2010.

Tuesday, May 28, 2019

On Fiat-Chrysler’s Merger Proposal to Renault: Too Broad?

 As Renault was considering Fiat Chrysler’s proposal to merge, industry executives and analysts believed “that carmakers must link up to share the cost of a transition from internal combustion engines to avoid being run over by fast-moving tech industry challengers like Tesla or Uber.”[1] To be sure, (b)y purchasing parts together, combining their manufacturing operations and sharing the cost of research and development,” the merger could “eventually save 5 billion euros per year,” according to Fiat.[2] The R & D would include funds spent on developing new models as well as on high tech oriented to the future. Although significant efficiency could be achieved due to under-used factories and all the money going into product development, the basic problem was one of insufficient scale (i.e., revenue) to support (i.e., finance) the very costly research and development needed on electric and/or self-diving cars. In its statement, Fiat Chrysler pointed to “the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification, and autonomous driving.”[3] The insufficient scale was particularly troubling given the declining E.U. auto market at a time when Tesla, Google and Uber were making progress on electric and self-driving cars. Fiat Chrysler could really use the expertise at Renault and Nissan on electric cars. I'm not sure, however, that a merger was the optimal route forward.
As with nearly everything, potential downsides existed. First, the merger would dilute the shares that the state of France already had in Renault from being its largest stockholder. Second, political leaders in that state as well as Italy would doubtless “fight to preserve as many jobs” in the respective states as possible.[4] In its analysis, however, The New York Times claimed at the time that it would be difficult for the merged company to avoid job cuts, given that the companies’ respective companies were operating below capacity.
So perhaps the anticipated savings of €5 million were optimistic, which raises the question: why not an alliance to fund a shared R&D center where work would be done on high cost, future revenue electrification and self-driving cars? Pushing for a full-blown merger would risk clashing corporate cultures. Also, the inevitable politics as duplicate management positions are eliminated would not be cost-free. Furthermore, the alliance between Renault and Nissan, already strained, could suffer or break apart in the event of a merger but not another alliance.
The basic problem was not enough scale (i.e., revenue) in either company to finance the heavy cost of R&D without compensating revenue in the short or medium term. When the gains from other efficiencies are not the main point of a merger, an alliance or partnership focused on the main problem may have been a better fit.
The problem of scale in terms of having enough money to finance the high-tech research need not incur the disproportional costs that come with increased organizational size and complexity. The costs of integration organizationally, for example, increase disproportionately with organizational size (and complexity).[5] Empire-building, a political as much as economic propensity at the upper level of organizations, can give rise to optimistic forecasts of savings from various efficiencies from mergers while the financial downsides are minimized. We could note, for example, the skepticism regarding Fiat Chrysler’s claim that no jobs would be lost and no factories would be closed. If the urgency for the merger was due to the advances by Tesla, etc., then perhaps a better proposal would have been delimited by that main problem rather than blown up to the form of a complete merger.

[1] Jack Ewing et al, “Renault Considering Fiat’s Offer to Merge Into a New Auto Giant,” The New York Times, May 27, 2019
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] James D. Thompson, Organizations in Action: Social Science Bases of Administrative Theory (London: Routledge, 2003).

Sunday, May 26, 2019

Democracy Impaired in the E.U.: The State-Level Vortex

In interpreting exit polls released on May 26, 2019 on the E.U.’s Parliament election, The New York Times pointed to two issues, only one of which pertained to the federal level. “Observers looked to [the election] to gauge the popularity of the various anti-immigration, anti-elite, Euroskeptic parties across the union.”[1] Had the E.U. electorate focused on such a matter so central to the European Union itself, democracy at the federal level would have been nearly perfect. However, the encroachment of state-level politics in the federal election, the other point, contributed to the democratic deficit at the federal level. This takes away from the viability of the federal system itself.
Looking at the exit data pertaining to the federal-level issue, E.U. voters did not vote as much for the states’ rights parties as predicted. Even so, those parties made gains in the Parliament. On the left, the Greens did well. This means the mainstream E.U. parties lost some ground. To the extent that voters voted on the federal-level issue, the message was that the status quo was not working at the federal level. The states’ rights, or Euroskeptic, gain probably reflected the E.U.’s response to inflows of immigration during the previous session. The far-right also argued that their state-level needs were being too often overlooked at the federal level. I submit that a more serious problem at the federal level was that federal-level issues were being too often overlooked by E.U. citizens. It could be that the far-right gained in the E.U. because democracy was stronger at the state level. Ironically, this was true in part because even in democracy’s repository at the federal level, the European Parliament, the elections have not been predominately about federal issues!
In the E.U. state of France, for example, the unpopularity of the state’s governor, Emmanuel Macron, had an impact. His far-right rival, Marie Le Pen, called the federal election result “a vote for France, and for the people.”[2] The election was not about their state, but the European Union. Macron nonetheless “had put a lot of chips down on beating the far-right party led by Ms. Le pen, which was once known as National Front.”[3] The election was about Macron or Le Pen, two state leaders. Furthermore, that Macron got involved politically in the federal election doubtlessly muddied the water concerning the difficult task of voting on the basis of federal issues rather than to punish or “send a message” to the incumbent governor in France.
Regarding the state of Germany, The New York Times brazenly interpreted the exit polls in state-wide rather than federal terms. Even though people often confuse Lander with Staaten, Germany itself is a state from the perspective of the E.U. Deutschland ist ein Staat. At any rate, the Times reported the following concerning the federal election: “(T)the Greens did very well, becoming the main party on the left, while the Social Democratic Party did very badly, according to exit polls.”[4] Was the Green Party the main party on the left in the European Parliament, in Germany, or among the E.U. citizens residing in the state? The only one of these that is relevant to the election itself is the first. The Times went so far as to claim that the election results “will be seen as a judgment on the center-left Social Democrats, on the far-right Alternative for Germany and the new leader of the Christian Democrats, Annegret Kramp-Karrenbauer, who hopes to succeed Chancellor Angela Merkel.”[5] If true, the E.U. citizens residing in the state tended to vote on the basis of state politics rather than a federal-level issue. Ironically, as the election was for the E.U.’s Parliament rather than the German Bundestag, focusing so much on state-level politics was a waste of time, with a huge opportunity cost—what was lost in terms of democracy at the federal level by voters not voting principally on matters pertaining to the Parliament. 
If far-right E.U. voters were disappointed with the E.U., their own prerogative that, as Le Pen said, the election was a vote for France (or Germany) led to the self-fulfilling verdict. If E.U. citizens want more democracy at the federal level, then a certain amount of self-discipline will be needed to resist the temptation to cave into the usual state-level preoccupation and vote instead on which party in the Parliament has the most fitting platform on issues pertaining to the E.U. itself or its competencies.

See Essays on the E.U. Political Economy: Federalism and the Debt Crisis, a book that discusses the debt crisis, another federal-level issue in the E.U., that occurred after the financial crisis of 2008, from the standpoint of E.U. federalism impeding a viable federal solution. The U.S., by the way, had the same problem during the Washington administration. For a comparison, see Essays on Two Federal Empires: Comparing the E.U. and U.S. Both books are available at Amazon.

1. Steven Erlanger, “European Election Results: The Mainstream Loses Ground,” The New York Times, May 26, 2019.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.

Saturday, May 25, 2019

Executive Compensation Tied to Firm Performance: A Critique

With robust economies in America boosting companies’ sales, corporate tax cuts, and an increase in stock buybacks lifting stock prices in 2018, the default mantra in executive compensation circles that high CEO pay is justified if it is tied to firm performance could be questioned. Similarly, the typical assumption that high pay would have to get higher for a CEO to be motivated to do the basics of the job, including overseeing mergers and acquisitions, (or that doing the basics warrants a raise) could be questioned. Particularly in 2018, the comfortable, self-serving ways of the business elite in the U.S. were ripe for critique.
An analysis by The New York Times shows that the medium compensation for CEOs in 2018 was $18.6 million, which represents a raise of $1.1 million, or 6.3%, from 2017.[1] Meanwhile, the average private-sector worker got a 3.2% raise, which translates into 84 cents per hour. In short, the CEO compensation increased at almost twice the rate of ordinary wages. The question is whether the increase was justified or a matter of the American business elite taking care of their own.
Years earlier, Congress had given shareholders of American companies a “special but nonbinding vote” on the ratio of a CEO’s pay to that of the medium employee.[2] The nonbinding feature meant, however, that populism would have no weight in corporate boardrooms. If lawmakers had been motivated by corporate campaign contributions, the nonbinding nature of the vote suffered from the start from a conflict of interest exploited by the political and business elites.
Even the (pro-active?) response of corporate boards to pressure from some shareholders and advisory firms is problematic even though it seems to make sense from business perspective. Boards have been tying more of a CEO’s pay to the company’s financial performance as if the CEO has a big impact as distinct from structural forces such as a good economy or a tax cut that help companies’ bottom lines and stock prices. Boards “continue to act as if C.E.O.s have unique powers to deliver better returns.”[3]  
For example, Testla’s board approved compensation as much as $2.3 billion for Elon Musk, the CEO. To be sure, the company’s market value would have to increase 18 times to $650 billion for Musk to see get all “the options in the award.”[4] The board members tied the high compensation to company performance so he would “devote his time and energy” in Tesla rather than “wander to his other ventures, like SpaceX, or that he could leave Tesla altogether.”[5] As pointed out by the Times, this logic is flawed, for he already “owned roughly a fifth of Tesla, [so] his financial interests were already strongly aligned with the company,” according to Analysts for Institutional Shareholder Services.[6] Additionally, a highly paid CEO (without counting the 2018 award, had it been awarded) should be expected to be motivated by the high pay alone (without a 6% raise) to devote a lot of time and energy to the job. To be sure, Musk was at the time considered a visionary at the company. However, using tied-to-firm-performance to motivate him to show up each workday suggests that the criterion or basis undergirding executive compensation is problematic—and this doesn’t even take into account the matter of getting compensated more because of a tax cut or a strong economy, neither of which a CEO should get credit unless he or she had made the political contribution that got the corporate tax cut passed.

[1] Peter Eavis, “It’s Never Been Easier to Be a C.E.O., and the Pay Keeps Rising,” The New York Times, May 24, 2019.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.

An Institutional Conflict of Interest in Corporate Governance: The Case of Goldman Sachs

In September 2011, a pension fund representing U.S. government employees filed a shareholder proposal to strip Goldman Sachs CEO Lloyd Blankfein of his other post as chairman of the board. According to Reuters, “The pension plan of the American Federation of State, County & Municipal Employees said on Wednesday an independent chairman would provide checks and balances in the power structure at the largest U.S. investment bank. AFSCME said splitting the roles of CEO and chairman might have prevented Goldman from getting into trouble for its actions leading up to the financial crisis and will improve its stock performance going forward. ‘A strong, independent Board chair would focus Goldman on generating long-term value for its shareholders,’ AFSCME President Gerald McEntee said in a statement.” Goldman spokesman Stephen Cohen responded, “We think we have a robust governance structure in place, with a very effective independent lead director. We always listen to our shareholders, so it is disappointing that AFSCME decided to go to the media before raising the issue with us.”[1]


One of a board of directors’ main functions is to monitor the performance of the company's management, including the chief executive. It follows that for the same person to serve concurrently as CEO and chair of the board constitutes an institutional conflict of interest in that the CEO is in charge of the group that serves as a check on the CEO. There would also have been a conflict of interest if AFSCME had taken its complaint up with the management, which is under the CEO. No group should thus be left to have the final say on complaints about the group (and especially its head). 
Goldman’s management pointing to a “lead director” as somehow providing a check on the CEO ignored the fact that that director was under the board’s chair, who was also the CEO. The management’s claim that the firm had a “robust governance system” thus rings hollow; robust systems do not contain an obvious conflict of interest. Nor should instituting them depend on there having been bad performance. However, practically speaking, anything less would have been insufficient to prompt the appointment of a new chair at Goldman.
At the time of the proposal, Goldman shares already had dropped 38 percent in 2011, compared with a decline of 43 percent for its chief rival, Morgan Stanley. The other four biggest U.S. banks were down 21-48 percent. Aside from relative financial performance, the hits to Goldman’s reputational capital since September 2008, including paying a settlement on a fraud claim, suggest that Goldman’s shareholders could have benefited from a check on the bank’s management. Unfortunately, AFSCME directly held 7,101 shares of Goldman, worth $741,000 at the market prices at the time, according to pension fund spokesman Chris Fleming. AFSCME's 1.6 million members owned 2.5 percent of Goldman's outstanding shares, worth $1.325 billion.[2] Other institutional investors would have had to be persuaded, and absent bad financial performance, achieving a majority would have been difficult.
My point is simply that recognizing the chair of a board as an inherent check on a company’s management ought not depend on the owners of enough shares being persuaded by bad financial performance. Every company should have the institutional structure of a robust governance system, rather than one containing a blatant conflict of interest. If the problem is managements having too much power in corporate governance, using corporate governance or legislation to reduce that power is apt to be a non-starter. Going to management for the reform would be sheer insanity. Expecting Lloyd Blankfein to voluntarily give up the chairmanship at Goldman in 2011 would have been tantamount to waking up one morning and expecting people to no longer be concerned with power and even their own self-interest. The U.S. Constitution was designed in large part to counter ambition with ambition rather than assuming that people with a lot of power will act selflessly. Perhaps corporate governance could take a lesson from government. 

1. “Goldman Should Strip Blankfein of Chairmanship, Pension Fund Says,” Reuters, September 14, 2011. 
2. Ibid.

Wednesday, May 22, 2019

A Far-Right "States' Rights" Ideological Depiction of the European Union Critiqued

Roughly a month before the 2019 elections of the representatives in the E.U.’s Parliament, Matteo Salvini, the leader of an anti-immigrant party at the state level in the state of Italy, announced the formation of a far-right party—also anti-immigrant—at the federal level. Because far-right parties at the state level are dubbed “nationalist,” at least by The New York Times, that paper suggested at the time that such nationalist parties federalized can seem “incompatible with a transnational body.”[1] I submit that any such thought of even apparent incompatibility stems at least in part from a lack of understanding of the E.U. itself, as well as federalism and thus the place of states from the perspective of the federal system rather than a state. In short, the paper implicitly took the perspective of the states in writing about the upcoming election. The paradigm chosen by the paper reflects the far-right ideology in the E.U., and is thus not neutral. In fact, the slant is inherently helpful to the Euroskeptic and anti-immigration political agendas.
The paper’s uses of nationalist and transnational, for example, are misleading. Both terms imply that the E.U. is an international organization, or “bloc,” which was not the case even when the E.U. came into existence.  We can translate the term “nationalist” as used by the far-right parties in terms of two senses relevant to the federal level. The term could mean “Euroskeptic,” or, in American terms, “anti-federalist.”[2] Euroskeptic, unlike nationalist, is a term from the perspective of the E.U. because a Euroskeptic is a person who wants less power at the federal level and more at the state level. Nationalism, on the other hand, is a stand-alone term without implicitly or explicitly suggesting the existence of a federal system. In fact, nationalism implies a sovereign rather than a semi-sovereign state. In the cases both of the E.U. and U.S., complete governmental sovereignty encompasses that of both levels, hence both federal unions are nations even if not recognized as such.  In discussing a federal election, terms that make sense in terms of federalism should be used.
No contradiction exists in having an anti-federalist or Euroskeptic party active at the federal level. In the U.S., the anti-federalists became Thomas Jefferson’s Republican Party. Having a weaker central government paired with stronger state governments as the central pillar is consistent with federalism because ending the federal system itself is not being advocated. In contrast, a nationalist party at the federal level does not make sense unless the federation is a confederation of totally sovereign states, which does not apply to either the E.U. or U.S. because of the feature of dual sovereignty (i.e., both levels have some governmental sovereignty). Whether most of the sovereignty is at the state or federal level does not matter; in both cases, neither level has all of the sovereignty. If a nation has full national sovereignty, then the affairs of semi-sovereign states in a federal system cannot be labeled as nationalist. In such a system, and from its perspective, using nationalist to refer to the state level is incorrect. Neither does the national-transnational divide apply because transnational organizations do not themselves hold even some governmental sovereignty. Simply put, the E.U. is not an international or transnational organization, even if “nationalist” ideologies at the state level want to insist otherwise.
Besides meaning Euroskepticism in regard to federalism, nationalist can also refer to an anti-immigration platform. In 2019, the Republican Party at the federal level in the U.S. was strongly anti-immigration, especially in the White House. Both how many immigrants are allowed and the respective involvements of the state and federal governments are matters that involve federalism, rather than only the states. So to equate anti-immigration with nationalism at the state level is flawed. In fact, to use nationalist for either Euroskepticism or anti-immigration is faulty because “national” concerns do not reduce two platform items. In other words, the term is too broad for its use in characterizing the federal involvement of either a state-level or federal party at the federal level. I suspect the term was being used anyway as a way of furthering the far-right ideology. As noted above, even the media was implicitly (or intentionally) helping.
As for the E.U. being “transnational,” this term is a misnomer. To be sure, the European Council represents the state governments just as the U.S. Senate does. Both the Council and the Senate can be said to be transnational in that the member-states are semi-sovereign. Both bodies are based on principles of international law. For example, polities rather than individuals are the members, and thus represented, in the bodies. Qualified majority rule in the Council and the filibuster in the Senate reflect the fact that the respective members retain residual sovereignty. By the way, qualified majority voting is itself one way in which the federal level of the E.U. has some of the sovereignty in the federal system. Enumerated competencies (in the E.U.) and powers (in the U.S.) are another source of federal-level governmental sovereignty. In contrast, transnational bodies such as NAFTA and NATO do not have governmental sovereignty.
Another, glaring (i.e., because the Times was reporting on the Parliament’s upcoming election) reason why the E.U.’s federal level is not transnational centers ironically on the E.U.’s Parliament.  Unlike the Council, the Parliament consists of direct representatives of E.U. citizens rather than of the states. That each state has so many House seats in the U.S. and Parliament seats in the E.U. does not mean that the seats represent the states or that the state governments pick the representatives. Even though Americans vote for a specific candidate whereas Europeans vote for a party, the elected representatives in both cases represent the citizens rather than the states. This corresponds to the notion of direct effect, which means that federal-level governmental institutions can bypass the state governments in affecting the citizens directly. Transnational bodies and even international confederations, such as the ancient Spartan league and the early-modern U.S. Articles of Confederation, do not have legislative bodies that represent and have direct effect on citizens rather than the member polities.[3] In
In fact, whereas the U.S. Senate and the E.U. Council are predicated on modified international law, the U.S. House and the E.U.’s Parliament are national in principle, both in terms of citizens being directly represented and direct effect. The appellation of national to a federal-level institution may seem strange to many Europeans in 2019, but Americans had the same reaction during at least the first fifty years of the United States because, like the United Colonies before, the U.S. was commonly viewed on both sides of the Atlantic as an empire.[4] In fact, the members of the British Empire, whether Ireland or Virginia, had their own legislatures for domestic legislation.
Therefore, transnational is a misnomer in referring to the federal level of the E.U. Reflected in its federal institutions, the E.U., like the U.S., is actually a national/international hybrid at the federal level. Both citizens and polities are represented, and governmental sovereignty is split between the federal and state levels.
Regarding the body in the Times’ term, “transnational body,” to characterize the E.U., again the intent or implication is to diminish the legitimacy of the federal legislative, executive, and judicial (i.e., governmental) institutions in line with the far-right ideology. The E.U. is not itself a “body.” Rather, the federal level has several bodies, or institutions. The European Parliament, the Commission, the European Court of Justice, and the European Council (and the Council of Ministers) are all governmental bodies at the federal level. They all have institutional interests going beyond particular state interests and even the summation of state interests, for in a federal system, both levels have their own distinct interests. Applying logic to counter ideology, the E.U. itself cannot be a body because the federal level contains several governmental bodies. Furthermore, to claim that the E.U.’s federal level reduces to one of its bodies, or even an aggregation of them denies the distinct interest of a federal level, which can be at odds with state interests.
So the “confusion” regarding the E.U. that The New York Times reported as one of the reasons why voter turnout had dropped in federal elections (i.e., of representatives in the E.U.’s Parliament) is in part caused by intentional misnomers. These tend to reflect an anti-federalist ideology that views the federal level as something less than a government whereas all legitimate legislation is promulgated at the state level. Hence the states are nationalist whereas the E.U. is a transnational body rather than national in part. The term nationalist is used problematically instead of Euroskeptic or anti-immigration, and the term transnational body and even bloc are used rather than federal level or even federal government. “Blocs” do not have legislatures, executive branches (the Commission), and a Supreme Court (the E.C.J.) as well as competencies in a variety of domains in addition to trade and even economics. To refer to the E.U. as a “bloc,” like a trading bloc (and where did the k go?), essentially denies the political development that differentiates the EEC from the E.U. Specifically, the federal competencies of the E.U. extend beyond economics and trade and the federal system itself fits under modern federalism wherein sovereignty is split and the federal level has direct effect (and a legislative body based on national rather than international principles), rather than under confederalism wherein the member-countries are sovereign (e.g. the UN).  I submit that the terminological “mistakes” fit and thus implicitly advance an anti-federalist or Euroskeptic ideology that seeks to minimize the onslaught of federal legislation by going after the credibility of the E.U. itself.

For more on this topic, see the following books: Essays on Two Federal Empires: Comparing the E.U. & U.S., American and European Federalism: A Critique of Rick Perry’s “Fed Up!” and Essays on the E.U. Political Economy: Federalism and the Debt Crisis

1. Megan Specia, “European Elections 2019: How the System Works and Why It Matters,” The New York Times, May 21, 2019.
2. See Ralph Ketcham, The Anti-Federalist Papers and the Constitutional Convention Debate (New York: Penguin, 2003).
3. Althusius’ text on historical federal thought, based in large part on the Holy Roman Empire, clearly demonstrates that each level in a confederation acts only on the next lowest. Only the guilds act directly on the individuals. See Althusius’ Politica (Indianapolis: Liberty Fund, 1604/2010).

Monday, May 20, 2019

NASA and It's Contractors: The Challenger Disaster

Roger Boisjoly was a booster rocket engineer at a NASA contractor, Morton Thiokol. Boisjoly blew the whistle both within the company and to NASA regarding the danger of the rubber in the o-rings, which seal the connections in the shuttle’s rockets, being insufficiently elastic in cold weather. Although The Challenger Disaster (2019) is not a documentary, the film’s narrative, which centers on Roger, or "Adam," is oriented to understanding why the Challenger space shuttle exploded after being launched on January 28, 1986. In other words, although some names are different and the conversations are not verbatim in the film, the factors that contributed to the actual explosion are presented. In fact, the film leans too much on technical details before the disaster and legal arguments afterwards without adequate entertaining elements to make the film enjoyable. However, the film's political function in informing a mass market of why part of the government-business system was broken is valuable. In fact, this mission demonstrates that the medium of motion pictures is capable of aiding in social, political, economic, and religious awareness and education, and thus development. 

The full essay is at "The Challenger Disaster."

Thursday, May 16, 2019

Facebook: Holding User Accounts Hostage

A Facebook “challenge” asking users to post a current photo and one from a decade earlier went viral in early 2019. Even though it is unlikely that the company was behind the “challenge” going viral, that the company had been working on facial recognition technology had users being suspicious on the motive behind the “challenge.”[1] A writer for Wired wrote at the time, “Imagine that you wanted to train a facial recognition algorithm on age-related characteristics and, more specifically, on age progression (e.g., how people are likely to look as they get older). Ideally, you’d want a broad and rigorous dataset with lots of people’s pictures. It would help if you knew they were taken a fixed number of years apart—say, 10 years.”[2] Why would Facebook want to track how a person is likely to look years later? Some users may put up an old picture of themselves or simply not update the existing photo, but why would Facebook want to know what those users are likely to look currently? Perhaps Facebook wanted to be able to identify those users in current pictures uploaded by others. So why did the company deny using the “challenge” for such a legitimate purpose as connecting people socially? Nonetheless, the company insisted that it had no benefit from the “challenge” going viral. This statement seems suspicious, especially given the company’s earlier lapses on user privacy. I contend that an even more toxic subterfuge existed at the time at Facebook—a cloak that held user accounts hostage until a clear facial picture could be supplied.
Perhaps because of the company’s track record since Cambridge Analytica on user privacy, the company’s statement also sought to reassure users by reminding them that they “can choose to turn facial recognition on or off at any time.”[3] While technically true, the company could freeze any user’s account supposedly for security reasons—to protect the user—until a current picture that clearly shows the face is supplied.
In spite of the fact that no legitimate security concerns could be raised a month or so after I created a user account, I discovered one day that Facebook’s computer had blocked my account until such time as I could verify the phone number I had used in setting up the account (when verification on the number was successfully made). I followed through nonetheless the second time, only to find days later that a current picture clearly showing my face was needed “for security reasons.” Until then, I could not use my account to protect my security. That I had not used the account for anything remotely suspicious, not to mention trolling or spam, led me to view the “security” rationale as fake, or at least as excessive. In demanding a face picture from me, the company indicated that the picture will not go on my profile, but this differentiation makes no difference in the company being able to use facial recognition software on me for the company’s internal uses (and even those of external stakeholders like the FBI) from then on. Facebook’s work on facial recognition AI for the previous two years had included such uses as tagging users in other users’ photos even if the photographed user does not know the photographer. Under the subterfuge of a “security need” for a current picture that other users will not see, the picture can still be used in tagging the user without his or her awareness.
I contend, therefore, that Facebook’s demand for a clear face photo is unethical. Besides the company’s horrendous track record on safekeeping user privacy, having users’ accounts held ransom nonetheless can seem presumptuous, like a bad child nonetheless demanding that his parents take him to Disneyland. The unethical verdict is also due to the felt-vulnerability that is natural (even among innocent people!) in handing a face picture to unknown people, even if they have a good reputation in securing privacy. For a company to dismiss the vulnerability and go so far as to demand a clear face picture can be reckoned as a harm (even as passive aggression) that is unjustifiable ethically.  Furthermore, the lying, such as in Facebook’s claim that it had no benefit from the treasure-trove of before-and-after pictures, and the subterfuge that a user can always turn facial-recognition off (even as the company uses it under the lie of a security need to connect a face to an account) are themselves unethical. Anticipating the future revelations on the privacy breaches, I wrote a booklet, Taking the Face off Facebook, on the unethical management at the company. It may therefore be that I’m on a “make problems for” list at Facebook, but other users have complained of having their accounts held hostage too, so I suspect the problem was still with the company’s managers, including its CEO. 

2. Ibid.
3. Ibid.

Wednesday, May 15, 2019

The FAA Deferred to Boeing on the 737 MAX Jet

After a misfiring-prone automatic stall-prevention device on the 737 MAX jet had caused two accidents in which 346 people died, an internal review at the U.S. Federal Aviation Administration, a regulatory agency, found that the regulators had relied too much on Boeing employees to conduct the safety inspections of the planes. Incredibly, Congress expanded the industry-reliance practice of the agency in 2018. Both the FAA and Congress were admittedly motivated by the added efficiency that such “sub-contracting” could bring. However, to focus on the economic benefit while ignoring the inherent (and obvious) conflict of interest in “sub-contracting” to the very companies that are regulated by the FAA is itself a red flag. A subservient or over-reliant regulatory agency cannot be a check on a company’s claims of not having sacrificed safety or even safety checks in order to focus more on profitability.  Of course, the political influence of a large company such as Boeing may have played a role in the FAA’s “back-seat” approach, but in this case the government’s own interest in stretching the coverage of its human resources may have been dominant. That such an interest could involve minimizing or ignoring outright such a blatant conflict of interest may point to a wider culture in which institutional conflicts of interest are presumed to be innocuous or even benign rather than too toxic to permit even if they have not been actively exploited.  
During the FAA certification process for the 737 MAX, Boeing didn’t flag the automated stall-prevention feature as a system whose malfunction or failure could cause a catastrophic event.”[1] The FAA’s report does not point to any fabrication on the part of the company. The problem is that “FAA engineers and midlevel managers deferred to Boeing’s early safety classification.”[2] No check on the company’s determination could be in such deference. It is astounding that managers at a regulatory agency could have neglected or ignored this basic point, which gets at the raison d’etre of any regulatory agency. C’est vraiment incroyable.
In fact, the company’s initial safety classification allowed “company experts to conduct subsequent analyses of potential hazards with limited agency oversight.”[3] The operative assumption in this practice seems to be that experts cannot be initially wrong, or that they could eventually catch their own errors, and that such experts are not subject to pressure from managers to get the planes in the air and generating revenue that can at least cover payments on the planes themselves.
Even worse, the FAA classified certain Boeing employees as “designated agency representatives.”[4] Employees of a regulated company cannot represent the regulatory agency, for such a designation is itself an institutional conflict of interest. It is, in effect, to designate one wolf as a police-wolf around a hen house! How can this not be obvious? I submit that only in a permissive culture can such blind-spots thrive. The FAA’s practice of designating some employees of regulated companies as being able “to act for the agency” was set up by the FAA and “endorsed and expanded” by Congress with “the aim of freeing up government resources to focus on what are deemed the most important and complex safety matters.”[5] Was not something that had killed hundreds of people an important safety matter? FAA managers might retort, “But we didn’t know this except in hindsight.” Exactly. This is precisely what minimizing or ignoring a huge conflict of interest can do.

See Institutional Conflicts of Interest, available at Amazon.

[1] Andy Paztor, Andrew Tangel, and Alison Sider, “FAA Left 737 MAX Review to Boeing,” The Wall Street Journal, May 15, 2019.
[2] Ibid.
[3] Ibid., italics added.
[4] Ibid.
[5] Ibid.

Friday, May 10, 2019

President Obama and Goldman Sachs: A Quid Pro Quo?

Wall Street and the White House may be closer than the typical American thinks. One way this is accomplished is for a bank to contribute heavily to both presidential campaigns so as to be able to hedge political risk by getting ex-managers into strategic posts in the executive arm of the U.S. Government. This can be the case even when one of the candidates has campaigned on holding Wall Street accountable, such as after the financial crisis of 2008. There is the campaign slogan, and there is the political-economic reality underneath. 
U.S. President Obama nominated Timothy Geithner to be Secretary of the Treasury. While president of the New York Federal Reserve Bank, he had played a key role in forcing AIG to pay Goldman Sachs’ claims dollar for dollar. Geithner, as well as Henry Paulson, Goldman’s ex-CEO who was serving at the time as Secretary of the Treasury under President Bush, stopped AIG from the leverage in its bankrupt condition to pay claimants much less than full value, which would have been expected given AIG's plight. Once Geithner became Secretary of the Treasury under Obama, Geithner’s chief of staff was Mark Patterson, a former lobbyist for Goldman Sachs.
To head the Commodity Futures Trading Commission—the regulatory agency that Born had headed during the previous administration—Obama picked Gary Gensler, a former Goldman Sachs executive who had helped ban the regulation of derivatives in 1999. Born had pushed for the securities to be regulated, only to be bullied by Alan Greenspan (Chairman of the Federal Revere) and Larry Summers, whom Obama would have as his chief economic adviser. To head the SEC, Obama nominated Mary Shapiro, the former CEO of FINRA, the financial industry’s self-regulatory body.
In short, Obama stacked his financial appointees during his first term with people who had played a role in or at least benefited financially from financial bubble that came crashing down in September 2008. Put another way, Obama selected people who had taken down the barriers to spreading systemic risk to fix the problem. Why would he have done so? Could it have been part of the quid pro quo the president had agreed to when he accepted the $1 million campaign contribution from Goldman Sachs (the largest contribution to Obama in 2007)? Might Goldman’s executives have wanted to hedge their bets should the Democrat win? Unfortunately, getting Goldman alums in high positions of government would essentially make the U.S. Government a Wall Street Government—one that would be hampered in holding Wall Streeters accountable, even in terms of criminal prosecutions related to the financial crisis. It is no accident, we can conclude, that the spiraling economic inequality increased during the Democrat’s first term of office.

Source: Inside Job (2010), directed by Charles Ferguson