On the United Technologies-Raytheon Merger: The Macro Level of Analysis

In analyzing a merger, incorporating the macro context is vital. For very large mergers, for instance, public policy concerns inevitably surface even if they are typically ignored not only in merger analyses, but also by in societal and even governmental public discourse. Analysis at this level takes a societal standpoint, including on the relationship of business and government. This does not diminish the salience of firm-level analysis, for even how the respective organizational cultures would mesh is very important to a functional merged company. This is even true regarding the respective business-ethics climates, for it is not a given that a healthy organizational culture dominates an unethical one.

In June, 2019, United Technologies “doubled down on the aerospace market with an all-stock deal to merge with defense contractor Raytheon Co., after UTC executives early chose to exit from the escalator and air-conditioning businesses.”[1] The anticipated combined company, “valued at more than $100 billion after planned spinoffs, would be the world’s second-largest aerospace-and-defense company by sales behind Boeing.”[2] The annual revenue for 2019 would be $74 billion. UTC’s CEO at the time estimated a billion dollars in cost-savings. Additionally, spending on research could be increased.

On the macro scale, the merger would intensify the consolidation in the aerospace and defense industry. Better terms from supplies and the Pentagon had been putting pressure on contractors “to cut costs and invest more of their own money in new technologies, such as space systems and cyber security.”[3] Consolidation has a major drawback, however, in that competition and thus trade can be stifled. Society, through its government, rather than consolidated industries must resolve anti-trust problems, and this is difficult when those industries have significant power over legislative bodies and regulatory agencies. Hence, for example, anti-trust law had not been applied to the five largest American banks even after their complicity in the financial crisis of 2008. In fact, the bankers were able to use government funds to pay themselves bonuses!  So the question can legitimately be raised whether anti-trust law even can be enforced when the consolidated company or industry is not in favor.

If very large consolidated companies can rebuff regulatory attempts to constrain or limit those companies, then even very unethical managements can enjoy perches of power that are worrisome from a societal standpoint. In the late 1990’s, for example, Hughes Aircraft merged with Raytheon Missile Systems. In 2002, dioxane, a carcinogenic chemical that Hughes Aircraft/Raytheon had been using as a solvent, was discovered in the ground water under South Tucson, Arizona. Previously, Hughes had used cancer-causing trichloroethylene since 1981, and several local residents had won settlements on that chemical from Hughes.[4] Perhaps Raytheon’s management fail to use adequate oversight over Hughes, especially given that company’s track record, or was the purchasing company tacitly involved. Something to ponder for a company on the cusp of growing substantially through another merger in 2019, for an environmentally callous group to be so big would indeed be a big deal.

At the company level, a board of directors subservient to management or even a sordid corporate culture, such as that of Enron, can be enough to thwart efforts to clean up from unethical conduct. Wells Fargo, for instance, faced an entrenched corporate culture in “efforts” to stop charging customers for unordered products. Plutocracy, or the rule of wealth, at a governmental level means that such companies can not only continue acting unethically but also extract monopoly or oligarchic rents. In the case of the defense industry, the increasing power of the major contractors can even result in pressure on lawmakers to go to war when diplomacy would have been a better route. Indeed, a government’s spending can become loop-sided in favor of defense because the major contractors are powerful enough to demand it because it is good business. Hence U.S. President Lyndon Johnson kept the Vietnam conflict going in large part because he was getting kick-backs from certain contractors. In short, from being able to evade anti-trust enforcement to being able to pressure or pay off presidents in favor of military engagements, consolidated defense contractors can be said to have too much power. 

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[1] Cara Lombardo and Doug Cameron, “Merger to Create Aerospace Giant,” The New York Times, June 10, 2019.

[2] Ibid.

[3] Ibid.

[4] Tony Davis, “South-side Tucsonans Mobilize for Another Water-Pollution Struggle,” Arizona Daily Star, April 16, 2017.

On the Impact of Political Rhetoric: From “Global Warming” to “Climate Change”

Words matter in politics. The side that can frame a question by definitively naming it in the public mind enjoys a subtle though often decisive advantage in the debate and thus in any resulting public policy as well. For example, “pro-choice”privileges the pregnant woman, while “pro-life” defines the abortion debate around the fetus. Similarly, “global warming” implies a human impact, whereas“climate change” defines the issue around nature. Even though the shift from“global warming” to “climate change” is more in keeping with the evolving science and won’t be bumped off by a cold winter, political players have been the driving force—language hardly being immune to ideological pressure.

Regarding the weather shifting popular perception on the issue, research published in Public Opinion Quarterly in 2011 claimed that a bad winter can indeed discredit the “global warming” label.[1] The Washington Policy Center claimed two years later that the heavy snowfall during the latest winter had led to “climate change” replacing “global warming.”[2] The cold refusing to relent in March of 2013 and hitting North America hard in January of 2019 seemed to undercut or repudiate the scientific “global warming” hypothesis even though meteorology, a empirical science,  always demands long-term data.

However, in looking back at the name-change, we must consider the influence of political actors, who are prone to manipulate the public's perception in part by using words to frame the debate. In 2002, for example, Frank Luntz wrote a confidential memo to the Republican Party suggesting that because the Bush administration was vulnerable on the climate issue. The White House should abandon the phrase “global warming,” he wrote, in favor of “climate change.”[3] As if by magic, although “global warming” appeared frequently in President Bush’s speeches in 2001, “climate change” populated the president’s speeches on the topic by 2002.[4] In other words, the president’s political vulnerability on the issue was answered by changing the label to reframe the debate. Not missing a beat, critics charged that the motive was political in downplaying the possibility that carbon emissions were a contributing factor.[5] Both Bush and Cheney had ties to the oil and gas industry. In fact, Cheney's through Halliburton may have played a role in the administration's advocacy in favor of invading Iraq under the subterfuge that it had been involved in the attack on the Pentagon and the World Trade Center in 2001. 

The Obama administration likely went with “climate change” rather than "global warming" because the former was less controversial. The corporate Democrat tended to hold to the center politically; after all, Goldman Sachs had contributed a million dollars to his first presidential campaign in 2008. In September 2011, the White House decided to replace the term “global warming” with “global climate disruption.”[6] The administration subsequently annulled its own decision. 
So much attention on the matter of a mere label indicates that just how important what you call something is to its outcome. Labels are not always neutral. For instance, the term "African American," was making inroads whereas "Black American" was hardly ever heard. "African" slips in ethnicity whereas "Black," or negroid, refers to race. Changing the axis on which the controversy had hinged was in favor of the race-now-ethnicity. Meanwhile, the American public didn't notice the artful conflation of ethnicity (i.e., culture) and race. Obama used the ethnic term and applied it to himself even though his mother was Caucasian. He also claimed Illinois as his home state even though he moved to Chicago after college. He could benefit politically from the support of Black Americans and Illinoisans. 
Similarly, Obama could benefit politically from adopting "climage change." As the academic journal Public Opinion Quarterly reported in 2011, “Republicans are far more skeptical of ‘global warming’ than of ‘climate change.’” Whereas the vast majority of Democrats were indifferent to the label being used.[7] With “global warming” carrying “a stronger connotation of human causation, which has long been questioned by conservatives,” Obama stood to gain some republican support simply by changing how he refers to the issue.[8] That support was part of the president's ability to straddle the center in American politics. 
Given the effort that has gone into labels, it is amazing that more time in the Congress has not gone into debating labels. I am also curious why the American people did not realize that they were being manipulated by the choice of label. If "climate change" allows for the contention that human-sourced carbon emissions into that atmosphere have not been a cause of the warming of the oceans and air, then it is possible that the very survival of the species could be in jeopardy because of  the choice of a label for short-term economic and political reasons.

1. Tom Jacobs, “Wording Change Softens Global Warming Skeptics,” Pacific Standard, March 2, 2011. 

2. Washington Policy Center, “Climate Change: Where the Rhetoric Defines the Science,” March 8, 2011.

3. Oliver Burkeman, “Memo Exposes Bush’s New Green Strategy,” The Guardian, March 3, 2003.

4. Ibid.

5. Washington Policy Center, “Climate Change: Where the Rhetoric Defines the Science,” March 8, 2011.

6. Erik Hayden, “Republicans Believe in ‘Climate Change,’ Not ‘Global Warming’,” The Atlantic Wire, March 3, 2011.

7. Tom Jacobs, “Wording Change Softens Global Warming Skeptics,” Pacific Standard, March 2, 2011.

8. Ibid.

Social Harmony and Toxic Chemicals in China

According to the New York Times in 2012, the Chinese had become increasingly willing “to take to the streets despite the perils of openly challenging the country’s authoritarian government.” Even more surprising, government officials had actually acquiesced in some notable cases. Given the raw nature of power, particularly under authoritarian auspices, revolution rather than gradual reform may still be the most likely means by which democracy can bloom under the golden, albeit hazy, sun.
In October 2012, local officials in the coastal city of Ningbo promised “to halt the expansion of a petrochemical plant after thousands of demonstrators [had] clashed with the police during three days of protests that spotlighted the public’s mounting discontent with industrial pollution. . . . The project, an $8.8 billion expansion of a refinery owned by the state-run behemoth Sinopec, was eagerly backed by the local government, which [had] been promoting a vast industrial zone outside Ningbo, a city of 3.4 million people in Zhejiang Province. Residents were particularly unnerved by one major component of the project: the production of paraxylene, a toxic petrochemical known as PX that is a crucial ingredient in the manufacture of polyester, paints and plastic bottles. Many residents [contended] that the concentration of polluting factories in the Ningbo Chemical Industrial Zone [had] led to a surge in cancer and other illnesses.” Lest it be assumed the officials had suddenly “got religion” as far as democracy is concerned, the New York Times provides a more realistic explanation:

“Although local officials were undoubtedly alarmed by the size and ferocity of the protests, their decision to bend so quickly was also probably influenced by the coming series of meetings that will determine China’s next generation of leaders. The ruling Communist Party, always eager to keep a lid on public discontent, is especially nervous about any disruptions that might mar the 18th Party Congress.”

Culturally, the Chinese officials—like the Chinese people generally—undoubtedly felt the need to protect or restore social harmony. At close range, loud protests ring out like a frontal assault on such harmony. The protests began “when farmers blocked a road near the refinery, grew over the weekend as thousands of students and middle-class residents converged on a downtown square carrying handmade banners and wearing surgical masks painted with skull and bones. . . . (T)he demonstrations turned violent when riot police fired tear gas and began to beat and drag away protesters. At one point, according to people who were there, marchers tossed bricks and bottles at the police. At least 100 people were detained, according to some estimates, although most were later released.” Accordingly, the immediate instinct of the officials would have been to do whatever would be most likely to stop the disruption as soon as possible.
In the long term, however, social harmony requires some degree of fit between public policy and popular sentiment. While not necessarily the will of the people, the intensity of political protests can provide some indication of the extent of a breach or gap. Whether by deflating or squashing, short-circuiting a protest at its outset in a dire attempt to restore the appearance of social harmony can mean that public officials lose touch with the popular mood and thus “fly blind.” The result could be a revolution in ten or twenty years, the ferocity of which could come as a complete surprise to the party officials.
Put another way, the apparent success of protests could belie the more subterranean possibility that public officials were still impervious to public demands. “In 2007, protesters in the coastal city of Xiamen, in Fujian Province, successfully forced the relocation of a PX plant that had been planned just 10 miles from downtown. In August 2012, officials in Dalian, in northeast China, announced that they would shut down a PX plant there after thousands of residents angrily confronted the riot police.” However, as of the fourth quarter of 2012, that factory was still operating. “We’ve seen the same pattern over and over again,” said Ma Jun, the director of the Institute of Public and Environmental Affairs. “Ignoring public concerns leads to confrontation. We can’t resolve all our environmental issues through street action. The cost is just too high.” That is to say, protests do not guarantee that government officials will heed popular sentiment, and the result of continued protests could be violent.
Seeming to acquiesce could simply be a strategy by which to assuage the public. “The announcement is just a way to ease tensions,” said Yu Xiaoming, a critic of the plant who took part in negotiations with the authorities on Sunday. Even if paraxylene is not produced in Ningbo, the chemical could be quietly made elsewhere. A pattern of such apparent placating, moreover, could give everyone the false impression of social and political cohesion between the Chinese people and the government. Minimizing broader knowledge that the protests had taken place only contributes to the misleading picture of social harmony instead of strife. Although Ningbo residents “held aloft smartphones and computer tablets and flooded microblog sites with images and vivid descriptions of the running battles with the police,” for example, the “Chinese news media carried no reports of the protests.”
In spite of the appearance being constructed by the apparent “listening” by government officials and the government-media censorship, pressure could nonetheless build and possibly erupt in contagious strife spiraling uncontrollably into full-blown revolution. That it would seem to come out of nowhere would only heighten the fear on both sides, and thus the sense of a lack of control and related violence. Any apparent gradual “opening up” toward democracy, as in permitting the residents of Hong Kong to vote for some offices, would be only on the surface, and even misleading.
One might imagine a flight-control tower with radar screens overstating the distance between planes in the air. Flight-control might dismiss the concerns of the pilots and even permit more planes into the area. A mid-air collision would come as a complete surprise to everyone, even though such an outcome would be more likely due to the perceptual misalignment. In terms of China, a full-blown revolution could be extremely disruptive not only within China, but also for the world given China’s sheer size and economic role in the global economy. Gradual reform in China is in everyone’s interest—even those officials interested in maintaining social harmony. 

Source:

Andrew Jacobs, “Protests Over Chemical Plant Force Chinese Officials to Back Down,” The New York Times, October 29, 2012.

The U.S. Goes after Executives at Volkswagen: A Deterrent?

Oliver Schmidt, a Volkswagen executive who had been head of the company’s environmental and engineering center in Michigan, pleaded guilty on August 4, 2017 to two federal charges in the United States: conspiracy to defraud the federal government and violating the Clean Air Act. He “admitted conspiring with other Volkswagen employees to mislead and defraud the United States in 2015 by failing to disclose that thousands of diesel cars were rigged to evade detection of excess emissions levels. He also admitted filing fraudulent emissions reports to regulators.”[1] He faced possible fines and time in prison. James Liang, another of the company’s executives who had been charged, had already pleaded guilty to charges of conspiracy and violating the Clean Air Act. The other executives charged were in the E.U. state of Germany, which does not extradite its residents. Given the power of the auto industry in that state, such accountability applied to executives for the same fraud in the E.U. may have been too difficult to achieve. Nevertheless, for the sake of business ethics alone, prosecuting executives personally rather than just companies is in general important as a deterrent.

Prior to Schmidt’s admission of guilt, Volkswagen had agreed to pay $4.3 billion in civil and criminal penalties, which in turn were part of $22 billion in settlements and fines in connection with “the cheating scandal and the sale of vehicles that emit harmful levels of pollution.”[2] Yet with revenues of $228.5 billion in 2016, the question of whether 10% of one year’s revenues for a company that had nearly $431 billion in assets at the end of that year could reasonably be expected to act as a deterrent.[3] I submit that prison time for executives is the way to get not only their attention, but that of the company itself, including its current and future management personnel. As wealthy as executives typically are, not even fining them would be of a sufficient deterrent; their quality of life must be significantly thwarted for a significant amount of time for the message to get through. Given the massive lapses in holding Wall Street executives accountable for their role in producing and/or selling sub-prime mortgage-based bonds and the high probability that resumed excessive risk-taking held secret even from clients and stockholders could trigger yet another financial crisis, the U.S. Justice Department was on a prudent path in going after the executives at Volkswagen rather than only the legal person (i.e., the company itself). Yet a pattern of prosecuting executives, even of financial institutions based in the U.S., would be necessary for the deterrent to work going forward.

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[1] Bill Vlasic, “Volkswagen Executive Pleads Guilty in Diesel Emissions Case,” The New York Times, August 4, 2017.

[2] Ibid.

[3] Volkswagen’s 2016 financial statements. 

Unethical Business at Volkswagen: Loans Cut off

As R&D was at a premium in car companies reorienting to electric and even driverless cars, Volkswagen could ill-afford the suspension of the European Investment Bank’s low-cost financing in 2017. The company “was barred from receiving European Union research funding over allegations it misused a previous loan to cheat on emissions” by programming “11 million cars to fool regulators.”[1] At issue were the company’s “use of so-called defect devices, software that caused pollution controls in diesel motors to work properly only when the engine computer detected that an official emissions test was underway.”[2] Accordingly, the European Anti-Fraud Office concluded that the company had misled authorities about how €400 million ($472 million) was used ostensibly to develop engines to be more fuel efficient and thus pollute less. I contend that the company’s reply was worse than none.
In spite of the fact that the company had pleaded guilty to having installed defect devices in cars in the U.S., the company’s management in the E.U. issued the following statement: “All funds received by Volkswagen from the European Union were used for the designated purposes”[3] Such boiler-plate language that leans on perfection as if it were a daily phenomenon actually makes a culprit look more guilty (and oblivious). Why is it that managers can be so utterly tone-deaf in replying in a defensive way to an accusation against their respective companies? I suspect that going on the advice of PR people is not the best plan, for such people are oriented to making someone or something look good. Meanwhile, a corporate legal department is also narrowly concerned; in this case, the concern is to minimize or obviate entirely any legal liability. The result is a company that doesn’t look very good because efforts to evade taking responsibility for oneself never do. Better not to issue a statement than to go down the road most travelled. The challenge for managers in formulating a company statement is to take responsibility and demonstrate contrition as in accepting the consequences, such as the suspension of low-cost loans in Volkswagen’s case, while not admitting to legal liability that the company genuinely disputes. A statement thus may not be available in short order, but even a delayed response is better than boiler-plate obviating for a company’s reputation.


A related book:  Cases of Unethical Business, can be obtained in print or as an ebook at Amazon.com.

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[1] Jack Ewing, “European Bank Cuts Funds to VW Because of Emissions Fraud,” The New York Times, August 1, 2017.

[2] Ibid.

[3] Ibid.

California Passes Stricter Pollution Targets: Bringing Business Around

California’s legislature approved a bill (SB 32) in August, 2016 that extends the climate targets from reducing greenhouse-gas emissions from 1990 levels by 2020 (the former target) to just 40 percent of 1990 levels by 2030.[1] A second law, which includes increased legislative oversight of California regulators and targets refineries in poor areas, passed as well. Diane Regas of the Environmental Defense Fund pointed to California’s climate leadership. “As major economies work under the Paris Agreement to strengthen their plans to cut pollution and boost clean energy, California, once again, is setting a new standard for climate leadership worldwide.”[2] At first glance, it would seem that the legislature had freed itself from big business to pass the bills, but the sector itself was split. I submit the anticipation of a refreshed “cap and trade” program as an alternative (or mitigating factor) to stricter regulations played a role. Simply put, using the market mechanism in government regulation makes the stricter targets more palatable to market-based enterprises.

To be sure, oil companies and some manufacturers fought the bills hard. Of the higher costs and out-of-control regulators supposed or at least advertised by big oil, Governor Brown labeled the lobbying campaign a “brazen deception.”[3] Given the companies’ vested commercial interests, that lobbying effort could have been flagged as a conflict-of-interest situation. Accordingly, that campaign’s credibility should have been hard won, with Californians applying strict scrutiny to the “information.” Sadly, it is not uncommon for regulators to cast aside such a conflict because they are fine with relying on information provided by the very companies being regulated. 

That big oil did not dominate the debate may be due in part to Governor Brown’s use of the market mechanism to appeal to business in spite of the higher target in the legislation. Specifically, the legislation increased the government’s leverage in getting wayward polluting companies to participate in the cap and trade program, which requires companies to buy permits in order to release greenhouse gas emissions. According to Governor Brown, the passage of SB32 would increase the leverage that the government has to “reach an elusive deal with businesses that would prefer a flexible program like cap and trade instead of more stringent requirements to slash pollution.”[4] Business managers prefer flexible programs, and bringing in the market mechanism provides a sense of familiar ground.

Therefore, it is possible that the anticipation of a renewed, fuller utilization of the market-based method increased support for the bills from the business sector, or at least mitigated possible opposition, such that big oil and the climate-denying stalwarts in manufacturing could not dominate the lobbying. Put another way, incorporating the market mechanism either directly or indirectly as an alternative to tougher regulations applied across the board is a political strategy that can split the business vote such that the sector itself does not dominate lobbying campaigns in one direction and thus thwart the voters’ judgments, which should consider the arguments of both sides of a proposal.  

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[1] Chris Megerian, “’A Real Commitment Backed Up by Real Power’: Gov. Jerry Brown to Sign Sweeping New Climate legislation,” Los Angeles Times, August 25, 2016.

[2] “Landmark Climate Bill Passed by California Legislature,” August 26, 2016.

[3] “Landmark Climate Bill Passed by California Legislature,” August 26, 2016.

[4] Megerian, “A Real Commitment.”

Electric Utilities Thwart Solar Applications: A Conflict of Interest Rewarding the Status Quo

Considering the contribution of coal-burning power-plants to atmospheric carbon-emissions and thus global warming, governments around the world should be encouraging rather than discouraging home-owners to install solar panels. That is to say, we ought not privilege the status quo when it has contributed so much already to an uncomfortable or even uninhabitable Earth for mankind. So it is unfortunate that energy officials in Hawaii’s government had to step in to pressure—no, order—the Hawaiian Electric Company to approve its “lengthy backlog” of solar applications.[1] I submit that the officials should have gone further in correcting for the conflict of interest in the utility. Put in the vernacular, electric companies tended at the time to screw customers who could sell back “home-grown” solar power. The root problem here is in the utilities’s dual roles of seller and consumer of power.


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Prognosis for the Chinese Economy

At the end of February 2012, the World Bank released its “China 2030” report in Beijing. The bank’s president, Robert Zoellick, said that China’s economic growth model is unsustainable, so significant reforms are needed. The report projects growth down to five or six percent annually by 2030, down from the ten percent annual growth in the thirty years up to the issuance of the report. Given the nature of the reforms, the Chinese government officials have their work cut out for them.

For instance, the report calls for “further reforms of state enterprises,” including “separating ownership from management.”[1] Even in the case of the private sector in the U.S., such a separation has been daunting, as CEO’s typically control their respective boards—even being chairman of the board. For state enterprises, management may blur into the government officials under whom the enterprises are run. Moreover, the public or state interest is typically more salient in state enterprises, so separating management from the ownership can raise problems of legitimacy and accountability. Furthermore, lacking an independent judiciary, China is not exactly the sort of system wherein the checks and balances of a separation of ownership and management could viably function. In other words, hierarchical accountability wherein a boss tells a subordinate what to do is more in keeping with the macro political economy of China.

Secondly, the report urges China to build several “world-class research universities.”[2] Here again, the lack of an independent judiciary may make foreign scholars wary of living in China. On the plus side for China, strengthening research domestically may relieve the pressure to pirate technology from foreign companies (sharing technology is often a condition of foreign direct investment). More research done in China may result in relaxed FDI requirements and less industrial spying. The result could be higher economic growth rates both in the short term and beyond.

Lastly, the report urged more of a focus on environmental technology and more spending on social programs (ironic advice given to a communist country). Just months before the report, Beijing had agreed to make public the measurements of finer pollutants in the city (as the U.S. embassy had been publishing its own numbers there anyway). While environmental technology could make a dent, the ultimate problem for the Chinese concerning not just pollution, but economic sustainability as well, is the huge population—over a billion. Simply put, having more people means more must be consumed. Whether in terms of food or more cars on the road, the population itself may not be sustainable, especially as more of it has become densely-packed in urban centers. Ultimately, sustainability for our species has to do with whether we can limit ourselves, not just individually or even in our cities, but also as a species.

1. Bob Davis, “World Bank Chief Urges Reforms for Beijing,” The Wall Street Journal, February 27, 2012.
2. Ibid.