Cheating at Harvard: Shocked, Shocked!

Perhaps you heard: half of a 250-person undergraduate class at Harvard has been accused of cheating on an exam. Here are:

Let’s get the irrelevancies out of the way.  First, the class was “Introduction to Congress.” Pause for yucks.

Secondly, there are the occasional whiners: “it was really hard, not fair,” or “they didn’t tell us how to define things.” Let’s not pause here either.

Moving right along, now, let’s assume that Harvard is no better or worse than other schools. You may agree or not, but I think the interesting issues lie elsewhere.

David Gebler, ethicist and author of the recent The Three Power Values, says: “It’s the worst hypocrisy to create a set of social norms and expectations in our society of which Harvard is the pinnacle, and then act as shocked as Inspector Renault in Casablanca that the students are acting unethically.”

He’s right. There are three interesting student reactions that seem to crop up in articles about the scandal:

  1. You mean, that was “cheating?”
  2. Come on, everybody does that.
  3. What do you expect me to do, the point is to win.

All three are serious causes for concern, but for very different reasons.

You Mean, That was Cheating?

This isn’t as dumb as many may think on first hearing.

The class in question was conducted making heavy use of teaching aides and study groups. This makes great sense given the need for collaborative workforces in the future. Unfortunately, if learning is primarily group learning, it puts pressure on the academic program and faculty to be very clear about boundaries between individual and group accountability.  (There’s a parallel here between group and individual bonus bases within corporations).

That raises many challenges, chief among them that the exam was “open internet.” In a day and age when everyone can share everything with everyone else in real-time, this goes beyond being just a barn-door of a loophole; it’s a fundamental failure to articulate the distinction between individual and group accountabilities.

This doesn’t mean students didn’t behave unethically; but it puts if anything more of a burden on institutions, particularly on schools, to delineate the boundaries.

Come On, Everybody Does That

To the extent this is true – and it’s considerable – shame on the role models.

As Howard Gardner points out in When Ambition Trumps Ethics, within the hallowed Ivy halls alone there are plenty of examples of

“professors [who] cut corners — in their class attendance, their attention to student work and, most flagrantly, their use of others to do research.

Most embarrassingly, when professors are caught — whether in financial misdealings or even plagiarizing others’ work — there are frequently no clear punishments. If punishments ensue, they are kept quiet, and no one learns the lessons that need to be learned.”

Gardner cites frequent, broad-based, research over time that suggests students over the last 20 years have become blasé about violations.  The majority think firing faculty for falsification of resumes is an over-reaction, and they don’t see much wrong with the behavior of the Enron gang in manipulating prices. After all, “everyone does it.”

I needn’t mention the coverups of the Catholic church, the repression of the ruling class at Penn State, or the general defense of cyclist Lance Armstrong, just to pick a few recent examples. And for heaven’s sake let’s not talk the fate of truth at political party conventions. Sadly, everyone really, really does do that.

“Everybody does that” is no excuse, widespread though it is. Cheating is unethical and should be condemned. But those doing the condemning are frequently those who, like Renault, are by default encouraging the behavior by their failure to act.

What Do You Expect – the Point is to Win

This is the most shocking of the attitudes. While the other two reflect some ambiguity in execution, this argument attacks ethics directly, claiming that ethics should be subordinated to the pursuit of success. A classic ends justify the means argument, which is in principle anti-ethical.

Rich Sternhell, retired executive, says he was not surprised by Gardner’s piece.

“By the time people get to Harvard (or Yale or Penn State or wherever) they have had to compete in ways that never tempted my generation. I note David Brooks’ observation of the recent GOP Convention, how all the speakers with the notable exception of Condoleeza Rice talked about “I” rather than “we”.

Every individual example of ethical violation weakens our community bond.  Baseball players worry about their contracts not the team. CEOs worry about their parachutes or share value, not the legacy of the company.  The concept of stewardship is rarely heard.”

I would throw in for equal blame our leading business thinkers.  We have become subconsciously infected by the doctrines of competitive advantage, shareholder value, and an Ayn-Rand-lensed perversion of Adam Smith’s invisible hand, so much that we have a generation that can’t tell ethics from economics.  We actually have game theorists in the Harvard Business Review arguing that throwing a match in the Olympics is in principle no different from a lob shot in tennis – since after all, the ultimate goal is to win.

People, the purpose of business is not to make a profit.  That way lies madness. And a generation of cheaters.

They are still morally to blame, but the people who raised them, taught them, trained them and role-modeled for them are at least as culpable.



How Can You Fix Ethics if You Can’t Spell Ethics?

The Economist recently published an article called Fine and Punishment: The Economics of Crime Suggests that Corporate Fines Should Be Even Higher. It’s fascinating reading: it suggests that we can economically calculate how to deter corporate malfeasance.

As the article puts it:

The economics of crime prevention starts with a depressing assumption: executives simply weigh up all their options, including the illegal ones. Given a risk-free opportunity to mis-sell a product, or form a cartel, they will grab it. Most businesspeople are not this calculating, of course, but the assumption of harsh rationality is a useful way to work out how to deter rule-breakers.

In the US, anti-trust penalties run up to 40%; in the UK, they’re more like 10%.  In either country, the article notes, crime pays.  In fact, the ROI is downright incentivizing.  So it’s no surprise, the article suggests, that crime seems to be undeterred.

Prosecute the Bastards!

You might think, well then, raise the penalties – massively.  Here’s the Economist’s logic on why that is, tut-tut, really not such a good idea at all, don’t you know:

There are plenty of arguments against ultra-high fines. One is that false convictions carry too high a cost. Another is that fines of this sort could cripple firms, reducing competition.


Argument the first. The cost of a false conviction in a personal capital case is, let me see – oh yes, personal death. The cost of a false conviction in a corporate cartel case is – the falsely accused corporate entity pays money. Why do I feel the “too high a cost” argument doesn’t cut it here?

Argument the second. Ultra-high fines could reduce competition. Unlike anti-trust violations? Unlike price-fixing? Is this really The Economist proposing this twaddle?

Ethics Without the Ethical Part

Here’s the thing.  The entire article is about ethical issues, yet never once mentions ethics. It’s one thing to include a caveat like, “Here we’ll discuss a purely utilitarian view of ethical behavior.” Fine. But to never even mention the existence of another approach to ethics is fodder for paranoid amateur ethicists like me.

Do you think maybe, just maybe, one of the reasons white collar crime is so much on the rise is that no one – most especially not the Fourth Estate – chooses to describe unethical behavior as being – unethical?!

Some of it, I suspect, is style. In too many self-congratulatory business and academic circles it is just uncool to use that word. It’s hip to be a deconstructionist, neuro-whateverist, or a student of behavioral incentives – and maybe to study ethics in kind of an anthropological way.  But certainly not to believe in the stuff!

Sorry: if we conduct business solely as an exercise in self-aggrandizing profit maximization, then we will get self-aggrandizing profit-maximizing behavior. If we teach business ethics as a series of cases analyzing the balance of power between “stakeholders,” we will get what we teach.

What would it look like if we actually called ethical violations by their proper name?  We would have business, social end educational leaders insisting on massive sanctions, and not because of their deterrent power – but because of their symbolism.

Where is the language of outrage? To fix LIBOR rates, to rip off customers, to lie to the public – these things should be called by their proper names. Those names would be right and wrong, unethical, immoral, outrageous, anti-societal, sociopathic. Mostly just “wrong.”

The ultimate proper penalty is not more of the same lousy financial currency.  It is another currency – the currency of social respect.  We need to see condemnations, demands for apology – we need public shaming.

Not Just an English Economist Affectation

And now, ripped from the headlines: a few days ago, the IOC booted four pairs of Olympic badminton teams for intentionally throwing their games.  In an intriguing HBR article called Bad(minton) by Design, authors Scott Page and Simon Wilkie argue that:

While many are blaming the players, the real fault lies with the organizers for designing a tournament that encouraged throwing matches. The solution — apart from banning those pesky Danes and other “upsets” — lies in better design. [Italics mine].

They point out – quite rightly – that the design of the tournament (single elimination after pool play) provides perverse incentives to throw a match – assuming that your objective is to maximize your chances to win an Olympic medal. Interesting, to be sure. And their suggestions make sense; after all, why suborn unethical behavior unnecessarily?

We might even agree with the authors’ conclusion: “If you don’t consider incentives and strategic behavior, there will come a day when strategy trumps ethos. We would do much better to design organizations from the outset with Denmark in mind.”

Here’s the problem. In describing the situation, the authors suggest that throwing a game in order to win the tournament is in principle no different from a lob shot in tennis, or going out slow in the 5000m run – a short term tactic in support of a long-term goal.  Can you say, “the end justifies the means?”

I leave it to you, the readers. Can you spot the difference between a tennis lob shot and throwing an Olympic match? If so, congratulations – your ethical instincts are more intact than those whose profession is “competition economics.”

Bonus point: can you tell the difference between throwing a match at the Olympics and throwing the World Series? Me neither. Except that one is being “explained” in the Harvard Business Review as a case of misaligned incentives, and the other – quite properly – is considered the gold standard for sports scandals.

Would somebody please tell the economics profession that they’re missing a few letters in “ethics?” Particularly, the letters e, t, h, i, c and s.

Who’s a Poor Murdoch to Trust?

Gregory (Scotland Yard detective): “Is there any other point to which you would wish to draw my attention?”

Holmes: “To the curious incident of the dog in the night-time.”

Gregory: “The dog did nothing in the night-time.”

Holmes: “That was the curious incident.”

Silver Blaze, The Memoirs of Sherlock Holmes, by Sir Arthur Conan Doyle

Murdoch: This is the most humble day of my life…we have broken our trust with our readers…

Q: Do you accept you are ultimately responsible for this whole fiasco?

Murdoch: No.

Q: Have you considered resigning?

Murdoch: No. Because people I trusted let me down…and I am the best person to clean this up.

Mr. Rupert Murdoch, 19 July 2011, before a British Parliament Committee, ABC News

Rupert Murdoch claimed in his July 19 2011 British Parliament Committee appearance that “people he trusted” were responsible for the News of the World phone hacking scandal.

Can you say ‘cognitive disconnect?’ Few people in the word can simultaneously believe that a) Murdoch was not responsible for the hacking fiasco, b) he was done in by those whom he trusted, and c) that he nonetheless remains the best person to clean things up.

I sincerely doubt that Murdoch himself believes all three of those propositions.

And so we have yet another trust-destroying scandal, the principals posturing and spinning, and the public left asking, where is Sherlock Holmes when we need him–to ask why there was no barking dog at the scene of the crime.

And the answer is–just like in the Holmes story–because the watchdogs were very familiar with the crook whodunit.

The News Corp.hacking scandal has three points in common with most systemic failures of trust–think Enron, Watergate, and the recent financial crisis:

  1. “Leaders” who have a tendency to blame and an inability to confront;
  2. Corporate cultures based on secrecy and rules, not on virtues and values;
  3. The compromise of a social institution key to social trust.

Phony Leaders

Let me propose two ironclad indicators of bad leadership. First, one of my favorite gems from Phil McGee—most management problems, he feels, stem from a tendency to blame, and an inability to confront.

Rupert Murdoch’s brazenness of blaming, even in today’s climate, I still find breathtaking. It was “others” who betrayed him. Not his direct reports, of course, whom he says he trusts with his life. But “others.”

This is not new. Ken Lay and Jeffrey Skilling at Enron didn’t blame themselves, it was “others.” Ditto for Abu Ghraib in Iraq, Nixon at Watergate, and so on. Maybe the original blamethrower was King Henry II, who famously shouted, “Will no one rid me of this troublesome priest?” meaning Thomas Becket.

Someone of course did, and the King was conveniently left with what came to be known as ‘plausible deniability.’

When a “leader” moans that he has broken his public’s trust, and that this is the humblest day of his life—wait, wait for it—and then blames someone else, well, you’ve got an untrustworthy leader at the top.

The other indicator is the presence of the phrase “career-limiting move.” If that phrase is current in your company, it’s a canary in the mine for a lack of transparency. People get fired for saying or doing things they are “not supposed to say.” That is, the norm is silence, and the implied threat for speaking up is your career.

And if your company acronymizes it to CLM, double-trouble for you.

Bad Corporate Cultures

The best way to spot an untrustworthy corporate culture is to look at how it tries to be trustworthy.  If it relies on secrecy and threats, well, enough said.

But in addition, a culture that relies on laws, procedures, processes, rules and compliance—and little else—is in trouble.  Trustworthiness and ethical behavior are viewed in such cultures as just another set of rules to be gamed.  There’s a very thin line between “keep your nose clean” and “just don’t get caught,” and that line has a way of breaking down.

A corporate culture that fosters trust, by contrast, is almost certainly one that relies on virtues and values, and that preaches them all the time.

How does News Corp. stack up? Listen to this description from Andrew Ross Sorkin’s Dealbook column:

“This is a board that qualifies for an ‘F’ in every category,” Nell Minow, a member of the board of GovernanceMetrics International and founder of the Corporate Library, a governance firm, said without any hesitation. “It is the ultimate crony board.”

Transparency? Values? I don’t think so.

Which brings us to the third trait: a threat to societal institutions of trust.

Compromised Social Institutions

Watergate is, of course, the gold standard of corruption, the poster child for scandals.  How does the News Corp. scandal measure up?

Surprisingly well. That is, bad. Watergate compromised the US Justice Department, the White House, a major political party, and ultimately a President. But there was sort of a hero in that story—the press.

In the Murdoch case, the press is itself on trial.  And–so is Scotland Yard.  Right there, the players are bigger than in Watergate.  When the cops and the press are in cahoots, you have muscle backing up politics.  The rule of law is at stake.

Think I’m kidding?

Think about your perception of this case to date–even from media other than News Corp. I’ll bet your image is loaded with thrown pies, hacked phones, and trophy wives.  Speculation in the US media is focused on whether it will turn out that 9/11 victims’ phones were hacked.

Meanwhile, did you know that News Corp.’s News America Marketing subsidiary has paid out $655 million dollars to settle charges of corporate espionage and anticompetitive behavior—in the US?  Do you think Rupert Murdoch didn’t know about more than a half-billion dollars paid out that way?

Did you know that:

News America was led by Paul V. Carlucci, who, according to Forbes, used to show the sales staff the scene in “The Untouchables” in which Al Capone beats a man to death with a baseball bat.  Mr. Emmel testified that Mr. Carlucci was clear about the guiding corporate philosophy.

According to Mr. Emmel’s testimony, Mr. Carlucci said that if there were employees uncomfortable with the company’s philosophy — “bed-wetting liberals in particular was the description he used” Mr. Emmel testified — then he could arrange to have those employees “outplaced from the company.”

You might wonder what became of Mr. Carlucci? Rupert Murdoch appointed him head of the New York Post, calling him “without peer in the consumer advertising and marketing industry.” You know the New York Post: they’re the Murdoch paper that branded a New York hotel maid a hooker on the front page.  The story was hugely helpful to one Dominique Strauss-Kahn, but has not been verified by any other newspaper to date.

But I digress.  The problem is that the press wields enormous power, even in allegedly educated and refined countries.  So do the police.  And when Scotland Yard’s leadership, and even Downing Street appear compromised by an evil corporate culture like News Corp.’s, there are serious implications for society’s ability to trust anyone.

Who’s a poor Murdoch to trust? That’s what Rupert Murdoch would have you ask.

And if you can believe the nerve of his News Corp. empire and its culture, check this clip from Fox News.

Syndicated columnist Cal Thomas explains the phenomenon as “piling on…the left has been itching to get after News Corp. for years.”

Just another witch hunt, going after poor Mr. Murdoch. Makes you wonder if he paid the guy with the pie.

For the rest of us, keep your ears open. Emulate Sherlock Holmes.  Look for the barking dog, and when you don’t hear one—cry bloody murder, because someone has to.

Doing the Right Thing May Be Easier Than You Think

We all know the hard stories of corporate whistleblowers. Sharon Watkins at Enron, Cynthia Cooper at Worldcom, for example. We view such people—quite rightly—as having not just the courage of their convictions, but courage enough to put their social and economic lives at risk for the sake of what they see as right. We all live in a better world because of the risks taken by such people.

Most of us think that such whistleblowers are rare, and perhaps they are. But we also think the cards are stacked against them—that the reason they are so rare is the likelihood of retaliation against someone going up against ‘the system.’

What if that’s not true? What if the risk of doing the right thing is in fact vastly overstated? That virtue is in fact appreciated more than we think? If that’s true, then what excuse do we all have for not doing the right thing more often?

Examples of Ethical Behavior that Evoke Admiration

Twice in the past two weeks I have heard stories that make me think we underestimate the power of good behavior. Briefly:

Story One. I was brought in to manage a main stream of a major contract we had with the government. To my horror, I quickly realized it was over budget, behind schedule, and we were not in a position to attest otherwise. Yet we had a major meeting upcoming at which I would be asked to do just that.

My boss and my boss’s boss had a lot riding on this. The government client had a lot riding on this. It was clear everyone wanted me to sign off and just deal with it, somehow, later. As I entered the headquarters building that day, I had this horrible feeling I was about to lose my job.

The moment came, and I was asked to publicly attest to our progress against milestones. “I simply cannot do that,” I said. “We are not in compliance on a number of those items, and I can’t claim otherwise.” I went home that night prepared to clear out my desk the next day.

But when I went to work the following day, it was as if little had happened. “Good job,” said one superior, “we had no business signing off.” The client appeared relieved too. I later was promoted; we also got more client work. In both cases, this moment was cited as a positive example of my performance.

Story Two. I was a manager of a large client project, which involved a presentation to the client’s Board of Directors. The CEO suggested that if our work turned out a certain way, we would receive a lot of business. I said I could not in good conscience bend the work the way he wanted it.

The next day, in front of the Board, the CEO put me on the spot, saying I was prepared to comment on my findings in a way that would have favored his request. I gulped. I didn’t confront him head on; but I did say that the data and analysis that we had performed unfortunately did not, in fact, support the CEO’s hoped-for outcome, but rather another.

I thought I would be in serious trouble with my boss. Instead, he told me that’s why they hired me in the first place, to stand up to tough situations. A few weeks later, a board member—a director in half a dozen other, larger companies—came to me with invitations to present at those companies. He said he did so because he could read between the lines and knew what I had done.

We Underestimate the Attraction of Ethical Behavior

I have no idea how common these stories are. They could be the exception rather than the rule (though I rather think there are more than we hear about).

The real point, however, is how easily the two organizations fell in behind these two people to support them in doing the right thing. As it turned out, their fears were unfounded. 

This I suspect is true: that we overstate the threat posed by ‘them.’ We overestimate the likelihood that no one would stand behind us, and that there is no support in our organizations for doing the right thing.

I suspect this too is true: that we understate the ability of people to appreciate the obviousness of the right thing. We under-state their hunger and willingness to follow someone who does the right thing, that there is in fact a reservoir of great good will and support.

Believing this doesn’t take anything away from the true courage it takes to be a whistleblower. On the contrary, it may suggest that the truly unethical and anti-social organizations are fewer than we think.

The bigger problem may lie not in unethical leaders, but in managers and future leaders who are too afraid to try on ethical leadership for size.

Where’s your whistle? What are you waiting for?

The Insurance Industry Is Getting the Shirley Sherrod Treatment

In early July, the news industry and a number of politicians and government officials grossly over-reacted to an out of context news-bit in the case of Shirley Sherrod. The blowback was justified, and swift.

On July 28, it happened again. The news industry and a number of politicians grossly over-reacted to another out of context news-bit. This time it was death benefits’ insurance payments. The blowback is equally justified–but is nowhere to be found.

The reason is simple: Shirley Sherrod was a good woman maligned, and all it took was a few more minutes of video to prove it to anyone’s satisfaction.

By contrast, the insurance industry has no face to connect with the public, and their reputation is hardly warm and fuzzy. 

But since when should the reputation of the victim be allowed to justify bad behavior on the part of the press and the government?

The lessons should be the same. The reputation of the victim shouldn’t justify different treatment by press and politicians. The orgy of bombastic claims, the piling on of politicians and media alike are just as ugly and threatening to a free society as they were in the Sherrod case. 

Distortion and uncritical use of reports are an abuse of trust, regardless of target, and regardless of your politics. 

How the Press and Government are Reprising the Shirley Sherrod Mistake

It started with Bloomberg Markets Magazine on July 28. The headline was Duping the Families of Fallen Soldiers. That headline suggests a fraud; it suggests a particular class of victim; and it suggests an emotion-laden issue (fallen soldiers and greedy financiers).

The first paragraph then continues this three-part theme of fraud, victims and outrage:

"Life insurers are secretly profiting from death benefits owed to the survivors of service members and other Americans."  

The story then goes on to tell the sad story of the mother of a soldier killed in Afghanistan, who received a package, including what she thought was a checkbook, and who didn’t notice a disclaimer in the explanation. She was then “shocked” to find out her money wasn’t in an FDIC-insured bank.

Before I list everything wrong with this opening, let’s look at how politicians reacted:

The House of Representatives introduced a bill to set new rules for life insurance companies holding death benefits from policies of military…

Andrew Cuomo began an investigation, saying

“It is shocking and plain wrong for these multinational life insurance companies to pocket hundreds of millions in profits that really belong to those who have lost family members,”

The Department of Veterans Affairs says it will begin an investigation;

Defense Secretary Gates pledged help to assist the VA’s investigation;

“It’s disgusting, particularly in the case of dead soldiers, for insurance companies to be holding back” money from survivors, said Robert Hunter, Director of Insurance for the Consumer Federation of America.

“… insurance companies…profiting inappropriately from these service members’ sacrifice is completely unacceptable,” [said] Mike Walcoff, acting undersecretary for the VA’s Veterans Benefit Administration.

Senator Chuck Schumer says:

"It’s deeply troubling that insurance companies would promote these accounts as if they were run-of-the-mill checking accounts, yet the insurance companies profit from the interest, and provide no FDIC guarantee that the money itself is insured."

House Veterans Affairs Committee Chairman Bob Filner said he was “outraged."

The New York State Insurance Department pledged a review.

Even White House spokesman Nick Shapiro said President Obama “supports the VA’s immediate investigation" into the "unacceptable" practices.

What about the press?

Unlike the Sherrod case, where the left wing media gleefully jumped on Fox News, here they grabbed their own pitchforks. Mother Jones talked about Wall Street’s Dead Soldier Problem, calling it a scam.

Mainstream media? Here’s the CBS evening news preview: “A Fallen Hero: How an Insurance Company Profited.

"The consensus is in: there is massive fraud being committed by major insurance companies; the victims are the bereaved families of our fallen military heroes; and the ill-gotten gains, as well as the damages, are massive.

And what’s John Q. Public to believe? You can sample the blogs and letters to the editor yourself, but here’s a typical one:

"Prudential is literally making money off dead soldiers. That’s sick. Seriously, have they no shame? Is there anything lower than that?"

 The only problem is—as it was with Sherrod—the headlines are far from the real truth. Very far.

The Real Truth: It’s Not about the Soldiers

The Bloomberg story, reported by David Evans, was headlined Duping the Families of Fallen Soldiers, and as I said the lead paragraph continued the theme. But the article itself contained hints of how wrong that was.

First, the practice in question is called “retained-asset accounts.” As the article itself says,

“retained-asset accounts have become standard operating procedure in an industry that touches virtually every American: There are more than 300 million active life insurance policies in the U.S.”

The article goes on to identify three firms that collectively manage over a million retained asset accounts. 

Now do the math. About 2.5 million people die annually in the US. There are somewhere over 1 million retained asset accounts. And the number of US troops killed in Afghanistan and Iraq since those two wars began is about 4,300. 

Contrary to what the article suggests—and regardless of what you think about our wars—the retained asset account story has almost nothing to do with soldiers. They look to account for somewhere under 5% of total policies.

Of course, “fallen soldiers” is just about as emotionally loaded as “reverse racism,” the concept that underlay the Shirley Sherrod debacle. And it worked just as well on knee-jerk politicians and journalists. But it’s not the whole story.

The Real Truth: It’s Not a Scam

As the insurance commissioner of the State of Connecticut says, “[this] practice has been in place for at least twenty years, with 0 complaints or problems reported in Connecticut.”

Two life insurance analysts at FBR Capital Markets say:

"Accounts that life insurers offer to set up for beneficiaries are a long-established product feature that is optional for consumers, who can choose to take a lump sum in cash instead, the analysts said.

In fact, the practice is the essence of what insurers do everyday, they added.

The bereaved mother at the heart of the story, Ms. Lohman, “believed that” her insurance monies were in a bank, and were FDIC-insured. Quoting the article, “The company’s letter omits that the money is in MetLife’s corporate investment account, isn’t in a bank and has no FDIC insurance.”

Unfortunately, Ms. Lohman “believed” wrongly if she thought “Prudential” was a bank, and that its funds were FDIC-guaranteed. Mistaken beliefs are not a surprising thing when one has lost one’s child. 

But that’s precisely the reason behind retained asset accounts: it saves you from dealing with the complex emotional reality of a check received around the same time as the funeral of the person whose death caused you to get the money. Who among us thinks right at such moments? The validity of the accounts is they let you defer an important decision until you are ready to deal with it, and offer some nominal interest in the meantime.

As to the “omission” about FDIC insurance, the letters also “omit” that they are not insured by Warren Buffet, or Jimmy Buffet, or the local buffet restaurant. Of course they’re not—they’re guaranteed by the insurance company (and often to levels much higher than the FDIC guarantees).

The Real Truth: There’s No Ripoff

Most of the stories on this issue play on the emotional themes of dead soldiers and financial greed; the combination is as old as the villain in a novel. But in this case, it’s manufactured. Again, from the original article:

"Prudential paid survivors like Lohman 1 percent interest in 2008 on their Alliance Accounts, while it earned a 4.8 percent return on its corporate funds…’I’m shocked…it’s a betrayal,’ [says Lohman]

Ms. Lohman may have been shocked, but I can’t see why reporters from Bloomberg news should be. That’s a 3.8% spread on liquid funds. What does your bank make on your checking account balances?   For that matter, how much does your bank pay you on your checking account?

How about Prudential’s customers? Again from the original article:

Metlife spokesman Joseph Madden says his company’s customers are very happy with the Total Control Account. “The feedback from TCA customers has been overwhelmingly positive,” he says. “The TCA affords beneficiaries security, peace of mind and time to make an informed decision — while earning interest in the interim.”

The Real Truth: The Story Headlined Is Not the Real Story Here

The most you can say about retained-asset accounts is that they may unfairly use small-print.

Again quoting from the original story itself:

“Quite honestly, we deal with issues that our members want us to deal with,” says Michael Stevens, senior vice president for regulatory policy at the Washington-based Conference of State Bank Supervisors. “This is not one that has drawn their attention.”

Connecticut’s Insurance Commissioner has said, "I am committed to strengthening consumer awareness regarding this issue… I will not, however, overreact to a misinformed, sensationalized story that did not include all the facts.” He’s right. Regardless of what suspicions this story may have generated about state insurance commissioners, he’s right.

The original article hypothesized that, when people found out ‘the truth’ about these programs, there could be a run on the accounts, similar to a run on banks. I’ll have to defer to a financial expert here, but I find that comparison hard to believe. However, if it ever came true, I think you’d have to look not at the insurance companies but at articles like this for irresponsibly provoking panic.

And that’s what this blogpost is about. What happened with this article is not in principle different from what happened with Shirley Sherrod. An initial article, given a massively misleading headline (just as the Sherrod video was massively out of context), provoked knee jerk reactions in the media and in our politicians.

The issue here is not insurance companies. This story is about instinctive, knee-jerk, swaying-in-the-wind, irresponsible reactions by the press and by government officials. 

That’s two times in just one month. How many more times before they get it right? 

It’s simple. Check your facts; don’t repeat gossip; tell the whole story. 

Note: I emailed the writer of the original Bloomberg article, David Evans, about 30 hours ago, telling him of this blogpost, and linking him to my previous blogpost on the subject.  I wanted to make sure I got his perspective, as he’s clearly been researching this article for sometime, and I think has been busy with fielding it since its publication last week.  However, as of this posting, I have yet to hear back from him. If I do, I will happily repeat here anything he chooses to say. 

Who Can You Trust to Rake Muck if You Can’t Trust the Muckrakers?

Last week, some reporters at Bloomberg came up with a pretty aggressive headline: Fallen Soldiers Families Denied Cash as Insurers Profit.

National Public Radio was not far behind: their headline read: Life Insurance Firms Profit From Death Benefits.

Holy profiteering, Batman! Did BP pay Prudential insurance to kick them off the front page? This one is pretty juicy. You don’t get much lower than the bottom-feeding off the bereaved families of those who made the ultimate sacrifice for their country.

 As the NPR story puts it:

Survivors of service men and women are told they’ll get a $400,000 life insurance payout. They don’t. Instead, Prudential — which has a government contract to provide life insurance for military families — keeps their money.

And as Bloomberg further explained, in a story about mother Cindy Lohman:

“You can hold the money in the account for safekeeping for as long as you like,” the letter said. In tiny print, in a disclaimer that Lohman says she didn’t notice, Prudential disclosed that what it called its Alliance Account was not guaranteed by the Federal Deposit Insurance Corp., Bloomberg Markets magazine reports in its September issue.

Is That Really Muck You’re Raking?

Now, Trust Matters readers know that I have been more than occasionally critical of untrustworthy behavior in the financial services sector. But something about this one just didn’t feel 100% right to me. 

I contacted a close friend who is a financial planner. “Is this as bad as it sounds?” I asked.

“Not really,” she said. “Pretty much that’s what happens to everyone. Someone dies, they really don’t want the check showing up at the graveside service, or worse yet at a wake.   Most families prefer to separate decisions about the distribution of money from the events memorializing someone’s death.”

She continued, "It just feels wrong to bury someone and then deposit a big check that was triggered by that very death. Creepy, basically. So the insurance companies, at least the ones I’ve seen, send you something that says you can have the money whenever you want, meanwhile we’ll put it in an interest-bearing account. The interest rate may be well below market – the spread on funds is pretty much how insurance companies make their money in the first place — but it’s not unusual. And they’re not in any big hurry to send benefits out to civilians either, as far as I know.”

At this point, the plot wasn’t exactly thickening—in fact, it was sort of thinning, as far as I could tell. Further articles suggested that the insurance company was not in a big hurry to tell people that they could get their money quickly, or that the interest rate was low, and that some of their actions could be interpreted as acting like banks.  But this looked like a small print kind of issue, the sort of garden-variety obfuscation that we have come to expect from things like credit cards and insurance policies.

Bad? Sure, but suddenly all those headlines about veterans and the VA began to seem a little misleading. This wasn’t about the VA, or veterans, at all.  We weren’t getting the whole picture, I feared.

Well, Something’s Getting Raked

Meanwhile, things were popping. Suddenly NY Attorney General Andrew Cuomo was sending out subpoenas about the scam. Defense Secretary Robert Gates pledged to help the VA in its investigation. The VA itself had already gotten into the action. And of course, congressmen had a (predictably outraged) opinion. Finally, there’s talk of a class action lawsuit pending.

At this point, I was reminded of yet another sad tale in the news lately: that of Shirley Sherrod. The lesson there, if you’ll recall (I know it was way last week), was not to jump to knee-jerk conclusions about apparently valid information that turned out to be taken out of context.

Except the Sherrod story came from an avowed right-wing vigilante; this story comes from Bloomberg News. I continue to believe there’s a very, very big difference.

And yet: how to make sense of this? How could experienced reporters from a business network come up with a headline about veterans, loaded with trigger-cues, but with a backstory that said nothing unique about veterans?

The answer started showing up a day later—from another business-savvy outfit not known for its radical politics, the Wall Street Journal Marketwatch. Read for yourself:

Randy Binner and Kevin Barker, life insurance analysts at FBR Capital Markets, questioned the [death benefit] outcry on Thursday.

"We find the very sharp and rapid regulatory response to this surprising and apparently unfounded," they wrote in a note to investors.

Accounts that life insurers offer to set up for beneficiaries are a long-established product feature that is optional for consumers, who can choose to take a lump sum in cash instead, the analysts said.

In fact, the practice is the essence of what insurers do everyday, they added.

"Investing funds ultimately due to customers in the general account to earn a spread over what is paid out quite simply describes the business of insurance," Binner and Barker wrote.

How Much Muck Can a Muckraker Muck if a Muckraker Isn’t Raking Muck?

Seems to me the worst case financial story here is another depressingly familiar tale of low-grade small-print-itis by the insurance industry. Hardly great, hardly trustworthy behavior—but far from the next great scandal either.

The much bigger story, I fear, is another mainstream news source failing to put a story into context. 

I’m one who believes that incompetence offers a far better explanation for screwups than do conspiracy theories; this is not a Breitbart situation. Maybe the reporters just didn’t appreciate that what they were seeing was insurance-related, rather than veterans-related. Though for a business news organization, that’s not too great either. The big problem is, the results—lack of context—are in the same category as Andrew Breitbart.  

So now who do we believe?

A couple key disclaimers: I am not an expert in insurance, or in the workings of veterans’ affairs. I have not spoken to the Bloomberg reporter on the case. I could therefore soon have egg on my face, so I will be watching the weekend news reports with interest to see if there’s an angle I’ve missed, and if I owe a mea culpa I’ll be on it quickly.

But one thing makes me think my gut may be right on this: Prudential closed up strongly on both Thursday and Friday.  And whatever else markets do, I believe they price pretty well. 

Institutionalizing Trustworthy Social Behavior

I am an occasional correspondent with Jim Peterson.

Jim’s resume is built for perspective. He is American, but has worked in Europe for many years; he is a lawyer, but also was 20 years in-house with the CPA’s at a Big 4 Accounting firm.

Finally, for many years he wrote a column for the International Herald Tribune. These days he writes a blog, Re:Balance. One of his enjoyable posts suggested all you needed to know about Bernie Madoff was that Donald Trump suggested he (Madoff) habitually cheated at golf.

Jim has well thought out and well backed-up opinions about many of the issues of our times: Madoff, accounting scandals, international relations.

I asked him the other day if he’d be willing to pontificate at a very high level How To Fix The World. Well, anyway, the world of perfidy, scandal and untrustworthiness in business. Here’s his response:

Of course, that’s difficult — especially when talking more broadly about basic principles on which societies regulate themselves. Your partner Stewart’s piece on school-kids the other day resounds — and causes me to mention the book "Nudge,” by Richard Thaler and Cass Sunstein, two really smart guys from the University of Chicago. There is discussion there that compares the results of coercive, top-down law enforcement with the setting of normative behavior by broadly-achieved social consensus, and where to draw the line on the tolerance level for deviant behavior.

My own examples and contexts would include, for example, the complex issue of drinking age rules on college campuses, the neighborhood decisions on cleaning up after dogs, and (as I remember) the de facto legalization of marijuana use in Central Park back in my early New York days.

As put in "Nudge," pedestrians don’t stop at cross walks because it’s illegal to jay-walk, in other words, but because it’s the social convention that cars generally won’t run you down (but there’s always the possibility).

In the corporate world I put weight on these principles:

– Law enforcement will always be reactive, behind the social curve and typically not effective as a deterrent.

– The American reliance on good quality disclosure and investor responsibility has generally served well, and better than most other systems, but requires serious re-calibrating.

– "Tone at the top" by way of management quality is of paramount importance, trumps almost everything else in the areas of ethics trainability, and can be observed and measured from the outside if investors and other users are only willing to do the work. (And per contra, Madoff and others demonstrate that sub-standard behavior is observable and measurable.)

That’s at least what comes top of mind to me.

What comes top of mind to you?

The Trust Week in Review


Introducing The Week in Trust: a weekly look at the world through trust-related eyes.

Part news-roundup, part mind-stretching and whimsical, part commentary that didn’t have enough zip to make it into the blog, but which needs saying.

Big Story Department.  

Regulation has got to be the story this week.   Regulation, at least to my schizophrenic view of things, represents the failure of capitalism to regulate itself.  I believe that business is a higher calling, and that it ought to be capable of long-term self-interested thinking.  But you couldn’t prove that by recent history.

According to the Wall Street Journal, Wednesday’s announcement represented “the most sweeping reorganization of financial-market supervision since the 1930s.”

Bruce Carton’s most excellent Securities Docket explains in not-that-complicated language why the WSJ is not being hyperbolic.  Credit cards, exotic derivatives, small banks, private equity, hedge funds, insurance—not to mention more energy behind enforcement.  It’s all coming down the pike.

And it’s not just the finance sector.  Let’s not forget (hey it was way back at the beginning of the week) that the US Food and Drug Administration (FDA to those who can read alphabet soup) will be regulating tobacco.  That was a long time in the making, and a milestone of sorts.

Why such a sudden glut of regulation?  On some level sure, it’s the Democrats. But Democrats can’t just regulate for the heck of it, and not all of them want to anyway.

I contend it is, as I stated above, a failure of self-regulation.  Whether it’s mortgage brokers or CFPs or regional airlines or credit card companies, what precedes regulation is a mountain of self-justifying rhetoric, aimed at short-term benefit of market players against consumers: ironically, thus harming the industry long term.

But enough about regulation, it’s Friday.  Let’s raise our sights.

Who Knew Department. 

What do you do if you’re a government with an endemic social dishonesty problem?  If you’re Indonesia, you open up 7500 ‘honesty cafes,’or food stores where the responsibility of paying the right amount is left to the customer.    I don’t know of any larger-scale attempt at testing the old saw that ‘the fastest way to make a man trust you is to trust him.’  Early returns are it’s working great in schools; in government offices, not quite so much.  

Hey, it’s the principle behind vaccines—expose them to a little bit of trusting, and they’re inoculated against being untrustworthy.  Nothing new to readers of this blog.  But way more fun.

Do guns kill people, or – does lack of trust kill them?  One of those academic studies that makes you scratch your head a bit; you know there’s some truth there even if it’s cleverly hidden behind the English language.

Trust Angles Department.

It’s one thing when a bucketshop broker or a used car dealer gets accused of being untrustworthy—right or wrong, that’s the price of being stigmatized as low-trust. Ho hum.

But what if you’re known for high trust and you get accused?  Ouch.  Big Ouch.  For example, the Canadian Conference Board. Ouch, I say.

What’s it mean to trust your babysitter?  Find out.

You may think trust is down, down, down.  After all, that’s the drumbeat du jour.  But how many of you are happily using cloud computing?  What an act of trust that is.  And sometimes, maybe it lets you down.  But–have you stopped using it?  And what does that say about your level of trust.

Your Opinion Department.

PGA pro Vijay Singh is still wearing his sponsor’s golf hat.  His sponsor, interestingly, is mini-Madoff  Stanford Financial.   Hate it when that happens. 

Is he being loyal?  Or stupid?  You be the judge.  

Please give me some feedback: should The Trust Week in Review be a regular Friday feature of TrustMatters?  Enquiring minds (ours) want to know.