NewsNotables – Issue 35

How Cuts in Retiree Benefits Fatten Companies’ Bottom Line

Wall Street Journal, March 16, 2004
The loud message comes from one company after another: Surging healthcare costs for retired workers are creating a giant burden. So companies have been cutting health benefits for their retirees or requiring them to contribute more of the cost.

No matter how high the health care costs go, well over half of large American corporations face limited impact from the increases when it comes to their retirees. They have established ceilings on how much they will spend per retiree for health care. If health costs go above the caps, it’s the retiree, not the company, who’s responsible.

When companies cut these benefits, they create instant income. This isn’t just the savings that come from not spending as much. Rather, thanks to complex accounting rules, the very act of cutting retirees’ future health care benefits lets companies reduce a liability and generate an immediate accounting gain.

Consideration: After spending your career with a company being promised medical coverage upon retirement, is it ethical for a company to discover that the costs are higher than anticipated, therefore cutting benefits, so you are left with reduced or no coverage whatsoever?

FBI Adds To Wiretap Wish List

CNET News, March 16,2004
A far-reaching proposal from the FBI would require all broadband Internet providers, including cable modem and DSL companies, to rewire their networks to support easy wiretapping by police.

The FBI’s request to the Federal Communications Commission aims to give police ready access to any form of Internet-based communications. If approved the proposal could dramatically expand the scope of the agency’s wiretap powers, raise costs for cable broadband companies, ultimately passed on to customers, and complicate Internet product development.

“The importance and the urgency of this task cannot be overstated,” says the proposal, which is also backed by the U. S. Department of Justice and the Drug Enforcement Administration. “The ability of federal, state and local law enforcement to carry out critical electronic surveillance is being compromised today.”

Comment: While the FBI wiretap measure may sound great to assist the FBI and other law enforcement agencies to enforce drug trafficking, money laundering, or other crimes, does it go too far and invade into our personal privacy?

Citigroup’s Weill Received Bonus Of $29 Million in Cash for 2003

Wall Street Journal, March 17, 2004
Citigroup Inc. became the latest company to disclose handsome payouts for its top executives, with Chairman Sanford “Sandy” Weill receiving a 2003 cash bonus of $29 million, according to the bank’s shareholder proxy statement. Weill was given a package of more than $30 million for 2003.

Comment: When is enough enough?

Costco Pays Workers Too Much?

Wall Street Journal, March 26, 2004
Wal-Mart Stores, Inc.’s parsimonious approach to employee compensation has made the world’s largest retailer a frequent target of labor unions and even Democratic presidential candidate John Kerry, who has accused the Bentonville, AR. chain of failing to offer its employees affordable health-care coverage. In contrast, rival Costco Wholesale Corp. often is held up as a retailer that does it right, paying well and offering generous benefits.

But Costco’s kind-hearted philosophy toward its 100,000 cashiers, shelf-stockers, and other workers is drawing criticism from Wall Street. Some analysts and investors contend that the Issaquah, WA. warehouse-club operator actually is too good to employees, with Costco shareholders suffering as a result.

“From the perspective of investors, Costco’s benefits are overly generous,” says Bill Dreher, retailing analyst with Deutsche Bank Securities Inc. “Public companies need to care for shareholders first. Costco runs its business like it is a private company.” Mr. Dreher says the unusually high wages and benefits contribute to investor concerns that profit margins at Costco aren’t as high as they should be.

“The last thing I want people to believe is that I don’t care about the shareholder,” says Jim Sinegal, Costco’s president and chief executive since 1993. “But I happen to believe that in order to reward the shareholder in the long term, you have to please your customers and workers.”

Comment: In the March/April 2003 conversation with Jim Sinegal in Ethix, he said, “The biggest thing that causes difficulty in the business world is the short term view. We become obsessed with it but it forces bad decisions.” We agree with him, and urge Costco to continue to do the right thing for the long term.

Trial of Former Tyco Executives Ends in Mistrial

New York Times, April 3, 2004
The judge in the six-month trial of two former Tyco International executives declared a mistrial yesterday after a juror said she had received a letter pressuring her to convict the defendants. The mistrial came just as some jurors said the group was on the verge of convicting the defendants of some of the most serious criminal charges while acquitting them of others.

The Manhattan district attorney’s office said almost immediately that it would move to retry the case, in which Tyco’s former chief executive, L. Dennis Kozlowski, and former chief financial officer, Mark H. Swartz, were accused of taking $600 million through theft from the company and manipulation of its stock.

Comment: This is the highest-profile trial case of the current ethical scandals. Starting over will not only be costly, but it will be difficult for Tyco. In their efforts to restore governance in their company, they are also seeking to restore employee morale (see Ethix 31, IBTE Conversation with Eric Pillmore), and this will keep the scandal in the papers for another year.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics