Wednesday, August 15, 2007

State29; CEOs, Toys and Trade

August 15, 2007, 10:10, 11:30 a.m.

Welcome Back State29!

You have no idea how lonesome it can get trying to protect the taxpayers from public officials' gifts of our money, ostensibly collected for public projects, being given away to the wealthy owners of for-profit private enterprises (or, like the rain forest, for contributors' pet projects). I've already announced my intention to campaign against the election or re-election of any Iowa City City Council candidates who have voted for such giveaways, or who indicate they intend to persist in this practice. Nicholas Johnson, "They're Back: The Terrible TIFs" in "The Terrible TIFs," July 26, 2007.

For the past month, while State29 was taking a well-deserved breather from this tough life we lead as bloggers, I was going it alone. Now he (or she?; "he's" still anonymous) is back at it. Check it out:

(You -- and he -- might also want to read, in this connection, Nicholas Johnson, "Copyright, Fair Use, and Blogging" in "Copyright, Fair Use, Blogging & Other Items," July 13, 2007.)

CEOs, Toys and Trade

Yesterday I suggested that one of the reasons for paying CEOs some 450 times what is paid their employees is that we are hiring their valuable ability to anticipate risks and rewards long before they arrive. Under the category of employee and customer "safety" comes the exploration, in advance, of the range of imaginable harms. It's not enough that they wait for the damage to occur first and then appoint a committee, or otherwise then decide to address the problem. When an institution is blindsided with unanticipated damage it is, in my judgment, a reflection of the CEO's failure to earn his or her pay. They haven't done what they were hired to do.

I contrasted this with a CEO's failure to act, to remove a safety hazard, once the damage has already once occurred. And I used as examples the Utah coal miners (in a stretch of the mine that had already once collapsed), the bridge in Minneapolis (identified as having problems over 10 years ago), and the broken tiles on the NASA shuttle (following a prior occurrence of similar damage that led to the death of seven astronauts). As a friend suggested to me after that blog entry, that's not just nonfeasance, that should be treated as criminal behavior.

Nicholas Johnson, "Failure to Learn from Our Mistakes" in "Mason's Home Run," August 14, 2007.

What I should have included in my list, but didn't (my only excuse is that the best story is in today's New York Times) is the Mattel toy story: 19 million toys recalled. Louise Story and David Barboza, "Mattel Recalls 19 Million Toys Sent from China," New York Times, August 15, 2007.

"Quality control" is not a new concept. Manufacturers use it in all their factories, wherever they are. It's especially important in the toy business -- for precisely the reasons the industry is now confronting: wary parents may be more reluctant to buy toys this coming holiday season. It's a double psychological whammy when you spend more than you should for a toy for your kid -- because you love and care for him or her and are hoping to increase their happiness (or education) -- and it ends up killing or injuring him or her.

You've got to hand it to Mattel. Their public relations firms are really doing a job for them -- up to and including pro-Mattel statements from the negligent, pro-business "Consumer Product Safety Commission." Few tell the story without adding what a wonderful company Mattel is and how confident parents can be when they continue to buy Mattel's toys. (Even the Times story quotes S. Prakash Sethi, a professor at Baruch College, “If Mattel, with all of its emphasis on quality and testing, found such a widespread problem, what do you think is happening in the rest of the toy industry. . .?")

Mattel's CEO, Robert A. Eckert, should have had procedures in place to check for such problems long before there were toy recalls on toys from China. At some point, it was a new source of supply. Any business, but especially a toy company, using a new source of supply would want to give special attention not only to costs, and consistency of quality, but also the safety of the products. Why did Mattel not do so?

Nor did the inspections need to rely on really creative brainstorming as to possible problems to look for (although that also should have been done). The dangers to children from lead, and the presence of lead in paints, has long been known. The dangers to children from small objects in toys (in this case small magnets, which are even worse -- especially when a child swallows two that hold together in the intestine) are also well known.

The publicists are pushing this as a "China" story -- clearly suggesting there is something immoral or unethical about their manufacturing processes. Mattel -- and other American corporations -- can't get off that easily.

1. As the Times also quotes Professor Sethi as saying, “there is something to be said about the pressure that American and European and multinational companies put on Chinese companies to supply cheap products. The operating margins are razor thin, so you really should not be surprised that there is pressure to cut corners.”

2. The Times reports that "About 65 percent of Mattel’s toys are made in China, some in five factories the company owns and operates there." Clearly, if Mattel "owns and operates" the factories -- regardless of where they are located -- it cannot blame "the Chinese" for defective and dangerous toys. I can't imagine Toyota excusing some defect in its cars because they were manufactured in an auto plant which, though owned by the Japanese firm, was located in the United States.

3. As for the hazardous little magnets, as the the Times reports, yes "The magnetized toys were also made in China, but they followed a Mattel design specification." The firm sure can't blame the Chinese for dangerous hazards to children from toys designed by Mattel and manufactured by a Chinese firm strictly complying with those designs and directions. That's one that Mattel sure should have caught -- right here in the good old U.S. of A.

Knowing that 80 percent or more of the world's toys are manufactured in China (65 percent of those sold by Mattel) American toy wholesalers and retailers should have taken, at a minimum, the same proactive, preventative steps they would have applied to a new American manufacturing plant. Given that this was a supply from another country, operating under a different culture, laws and regulations, those efforts should have been at least doubled.

But in fact this did not require any really creative thinking prior to any warnings.

We have already had case after case of problems with the safety of products imported from China: tires, pet food, human food and drugs. But that's not all. There were prior cases of unsafe toys as well.

And so it is that, alas, we must consider the possibility that the CEO's failure in this instance is not mere nonfeasance -- a failure to do the anticipation for which he is being paid the big bucks -- but a criminal malfeasance, a failure to act, knowing of the potential safety risks, after having been put on notice of the risk. It is, in short, another example to be listed along with the Minneapolis bridge, Utah coal mine, and NASA's defective heat shield tiles.

But there are bigger issues here as well involving foreign trade and offshore operations.

One of the objections raised to the WTO and NAFTA is that while they take very good care of American corporations' opportunities for ever-greater profits, they did so while ignoring the rights and needs of employees (e.g., low wages, long hours, abusive conditions, child labor, and so forth) -- abroad as well as here -- and the adverse impact on the environment in other countries (ultimately affecting us as well) of their use of practices that would have violated U.S. law.

Offshore corporations and banking enabled them to avoid U.S. taxes (not that corporate taxes amounted to much after their lobbyists had worked over Congress). Offshore manufacturing enabled them to avoid U.S. labor and environmental laws.

And now, it turns out, offshore manufacturing has also enabled them to avoid U.S. consumer protection standards (in this case for rather small and defenseless consumers).

In the case of the Mattel toys, many were manufactured in plants in China owned by Mattel. Clearly, the company should be responsible for the quality of the products manufactured in their own plants and then marketed to American children (fully capable of manipulating their parents into purchasing them).

But I think we should look behind mere ownership. Whether you call it "ownership," "outsourcing" or Tom Friedman's "in-sourcing," in practical effect these Chinese manufacturing firms -- of whatever product -- are essentially subsidiary corporations of American corporations and should be treated as such for purposes of complying with American law.

Talk all you want about "marketplace regulation" and "self-regulation," the responsibilities of parents, and caveat emptor, we are now talking about dangers to American children for which virtually no American parent, however much they apply a caveat, can test and prevent. There are some points at which ever-escalating profits must stop and public responsibility must start. This is one of them.

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Anonymous said...

I hear a lot of hand wringing and criticism and no solutions.

What's your solution? Bring back Smoot-Hawley??

Yes, the corporations demand profits for their shareholders. Shareholders like U of I employees with 401K's, IRA's and pension systems like IPERS and CALPERS. Tell those people who own those accounts that their retirement accounts have to stop going up for the public good. I am sure they won't mind.

Anonymous said...

Barleykorn, you do a great job of distracting from the issue.

The issue isn't IRAs and stockholders, the issue is corporate responsibility.

So you suppose the holders of 401K plans will endorse poor and dangerous products so they can retire in peace? Ridiculous.

Furthermore, it sure doesn't take much thought to divine a solution here. Hold the CEOs responsible for their actions. As the article says: criminal malfeasance.

Anonymous said...

Its not a matter of endorsing poor products per se. It is the constant pressure to get good quarterly returns. This leads people naturally to cut corners and costs whenever possible. So, yes the investors (Many of them institutional like CALPERS or IPERS) are responsible to some extent. The fact is, any CEO is judged by the bottom line of the company, not some vague concept of corporate responsibility. Don't be so naive.

Anonymous said...

Gotta throw in that little dig at the end, huh? Can we debate without the name calling?

Everyone knows all about the pressure to enhance revenue. Not news. We are not naive.

It is illogical to blame investors for CEO irresponsibility. I understand that performing for the stockholders may be part of the equation; however to blame the U of I employees for lead paint on toys is a bit of a stretch.

I do understand your drift. If the public demanded more responsible corporate management that would bring a more balanced management style.

Since 1980, US corporations appear to have a license to steal, rape the environment, and grab Gov't contracts. Let's hope this can be reversed.

Anonymous said...

Part of the Equation? It is THE only part of the eqauation in almost every case. Yes, you can socially invest in funds like Domini whose managers do pay attention to such issues. However, go ask any of the fund managers at Fidelity or Vanguard or even IPERS or CALPERS what they judge a CEO on...P/E ratios and shareholder dividends.

This did not start in 1980. It is not illogical to blame shareholders. I don't know anyone who does not like seeing a 10% return annually on their mutual funds, IRA's or 401k's. Until you get shareholders to literally dump Mattel stock for reasons like this, it wont change.