Embracing This Milestone 500th Blog Post As An Opportunity For Transformation

Do you recall the zeitgeist of our society in January 2009? The global economy was collapsing, a Second Great Depression was threatening, and the first African American President in the history of the United States swept into office on the rhythms of Yes We Can.

At that moment, I realized that a business educator and management consultant with complementary Academic Qualifications (AQ) and Professional Qualifications (PQ) might be able to find something interesting to editorialize about on a weekly basis. And thus I launched the blog AQPQ.org.

Now, roughly 500 weeks later, I’ve achieved this 500th milestone post. How am I celebrating?

By deciding that it’s time for transformation.

Why? Because the world itself has been transformed during the past decade. A global economy in utter ruin in 2009 is, by and large, in fairly robust shape today.

But what of the health of our society and natural environment? Sadly, they appear to be evolving in the opposite direction.

In the meantime, the structure of the internet has been transformed too. Consider, for instance, the world’s most popular web site platform WordPress. When I launched AQPQ in 2009, I selected it because of its singular focus on blog hosting.

But today, WordPress’ home page invites potential customers to “Build your beautiful site today. Everything you need for a website that works for you.” It barely mentions the word “blog.”

So I’ve decided to embrace this 500th post as an opportunity for transformation. I will conclude my utilization of the blog format to express my editorial views, and will shift my commentary to alternative publishing venues.

To be sure, I’ll continue to utilize this web site to describe my professional activities. Nevertheless, I’m ready to embrace an indisputable truth: a structure that provided a strong foundation for my editorial expression a decade ago may no longer represent an ideal venue for me today.

500 iterations of any endeavor is a good run. After 500 blog posts across a decade of global transformation, it’s the right time to embrace the future.

Who Is Actually Managing The Dow Jones Sustainability Indices?

Dow Jones, a bedrock institution of Wall Street, has been providing financial information and data analysis to the investment markets in the United States for more than 130 years. Many American investors naturally assume that they can depend on the Dow Jones Sustainability Indices (DJSI) to identify corporations with superior sustainability track records.

But when they do so, are they actually relying on Dow Jones’ expertise? According to a 20 year old Swiss organization named RobecoSAM, it (and not Dow Jones) is the firm that “assesses the world’s largest companies via its Corporate Sustainability Assessment (CSA), which uses a consistent, rules-based methodology to convert an average of 600 data points per company into one overall score. This score determines inclusion in the DJSI.”

Hmm. According to this information, American investors who depend on the DJSI are really relying on the expertise of RobecoSAM. So, if they trust the analytical capabilities of RobecoSAM’s analysts, they can presumably depend on the DJSI. Can’t they?

Perhaps not. According to a different 20 year old Swiss organization named RepRisk, it (and not Dow Jones or RobecoSAM) produces data that “is used for the Media and Stakeholder Analysis component of the assessment. RepRisk’s ESG risk screening, identification, and analysis complements the detailed industry-specific questionnaire and extensive documentation that companies provide as part of the annual CSA for the DJSI.”

Yikes! So American investors who depend on the DJSI are really relying on the expertise of RobecoSAM and of RepRisk. Those two firms are performing the analytical work on the indices. Dow Jones, meanwhile, is simply adding its brand name to the product.

Is that a concern? To be fair to RobecoSAM and RepRisk, perhaps not. After all, their analysts may be skilled and objective professionals.

And yet there is a reason why the DJSI isn’t named the RobecoSAM and RepRisk Sustainability Indices. American investors would clearly prefer to rely on the Dow Jones Sustainability Indices. But do those investors truly understand who is actually managing the DJSI?

Libor Chickens

Are you familiar with the Libor scandal? Sixteen global banks have been accused of (and many have paid massive fines for) manipulating the London InterBank Offered Rate. The Libor index is utilized to determine the interest rates that establish payments on a very large number of variable rate loans around the world.

If you happen to have a credit card, a personal home mortgage, or an automobile lease with an interest rate that varies with “market conditions,” the odds are high that your rate varies with Libor’s daily fluctuations. Indeed, it’s possible that you have been influenced by the Libor manipulation scandal without even knowing it.

Such illicit price manipulation activities are not simply a banking phenomenon. Would you believe, for instance, that poultry producers are now accused of utilizing a Libor type price manipulation conspiracy for chickens?

Given that few of us are experts in poultry pricing, it may be helpful to explain this conspiracy by defining a metric called the Georgia Dock Chicken Index. Each week, the Georgia Department of Agriculture estimates the cost of producing a pound of chicken. It then distributes this cost estimate (or “Index”) throughout the industry, and firms utilize it to determine the prices of chicken purchase transactions across the United States.

So how is this Index allegedly manipulated? Well, it is calculated by taking an average of the individual cost estimates that are provided by eight to eleven chicken producers. And if those producers intentionally overstate their individual cost estimates, the Index is inflated as well, and the prices for selling chickens are likewise overstated. Naturally, higher chicken prices inevitably mean more revenue for chicken producers.

Can the situation be rectified? Well, no; at the moment, it cannot. Apparently, the Director of the Dock Chicken Index at the Georgia Department of Agriculture says that he is frustrated because “I was told I could not make any changes without clearing them with the Advisory Board.”

So who sits on this Advisory Board? Representatives of the chicken producers!

My goodness. Is there anything that we consumers can do, or anywhere we can go, to escape the type of Libor price manipulation scheme that is allegedly being employed in the meat production industry?

Hey, perhaps we can avoid meat entirely and simply eat fruit. Fruit producers aren’t manipulating their prices … are they?

Well, actually … they are indeed doing so. Apparently, there is a “banana cartel” that is engaging in price fixing schemes across Europe. It seems as if there may not be a single sector in the entire global economy that is free of price manipulation.

Politics and Civility

Have you noticed how brutal the American Presidential campaign has become? Whether it is Republican Governor Chris Christie mocking Marco Rubio as the boy in the bubble, or Democratic Senator Hillary Clinton accusing Bernie Sanders of smearing her reputation, the quality of the political discourse descends to new lows with every passing week.

One cause of this regrettable behavior might be the “hooting and hollering, cheering and jeering” debate audiences who prefer to gleefully scream at each “smackdown” instead of listening to rational discourse. But would a quiet, thoughtful, conversational debate be feasible today?

Although we all have short memories, we merely need to reach back to the previous Presidential campaign to recall such an event. On October 22, 2012, President Obama and Governor Romney engaged in a debate with moderator Bob Schieffer of CBS News. The audience was silent, the candidates were seated next to each other, and the moderator was focused on encouraging intelligent discussion instead of exuberant insults.

That’s not to say that the conversation was completely civil. At the 1 hour, 24 minute, and 50 second mark, for instance, Governor Romney icily responded to the President’s interruption by declaring “I’m still speaking!”

Indeed, throughout the event, neither candidate made any attempt to hide the fact that he didn’t care much for the other. And yet they produced a substantive conversation that revealed two very different philosophies about government policy.

Perhaps our culture has changed dramatically in just three brief years. It’s possible that we’re now living in a very different era of political discourse. Nevertheless, do we have anything to lose by giving an experienced news anchor an opportunity to manage a similar conversation between opposing candidates?

Halloween Time For DraftKings and FanDuel

Saturday is Halloween! On that day, we’ll all don costumes that hide our true identities, and we’ll indulge in behaviors that would be questionable on any other day.

But financial service organizations don’t wait until Halloween to mask their activities, do they? Do you recall, for instance, AIG’s sales of credit default swaps prior to the 2008 global economic collapse?

In essence, these swaps were insurance contracts that were designed to reimburse lenders in the event of widespread defaults. But AIG didn’t have the capital to cover these contracts when defaults soared at the start of the Great Recession. That’s why the federal government decided to spend $182 billion of taxpayer funds to bail out the insurer.

So why didn’t government regulators stop AIG from writing these insurance policies in the first place? They didn’t do so because AIG didn’t structure the contracts as insurance policies. Instead, the firm swathed these transactions in the costume of swaps contracts, thereby masking their risks and avoiding insurance oversight regulations.

Something similar is happening now at a pair of online fantasy sports gaming organizations. DraftKings and FanDuel collect money from individuals who play fantasy sports games, and then pay money back if the individuals win their games. The firms refer to these services as games of skill as opposed to games of chance, and thus circumvent legal prohibitions against online gambling activities.

But isn’t this what sports bookies do when they accept wagers? They collect money from gamblers and then disburse winnings if the bets pay off. Considering that the home page of DraftKings declares Win Real Cash, while FanDuel promises Real Money, it’s difficult to perceive any difference between such fantasy sports games and gambling transactions.

That may be why DraftKings, now eager to back away from any perceived relationships with gambling operators, has discontinued its relationship with the World Series of Poker. That card game, of course, is virtually synonymous with the casino industry.

Government officials, though, don’t seem to be buying it. Five years after the Dodd-Frank Wall Street Reform and Consumer Protection Act established the Financial Stability Oversight Council to regulate Strategically Important Financial Institutions (SIFIs) like the insurers AIG, MetLife, and Prudential, regulators are deciding to make it more difficult for online gambling services to mask their financial transactions behind the label of fantasy sports games.

U.S.A. vs. Canada: A Pair Of Postal Opposites

American and Canadian societies often seem to be joined at the hip, don’t they? At first glance, it can be difficult to spot any significant differences between them.

The cosmopolitan city of Toronto, for instance, hosts a theater scene that is reminiscent of Broadway. The Calgary Stampede rodeo rivals any that are held in Dallas. And the Pacific metropolis of Vancouver has been called a “twin city” of Seattle.

If we look more closely at each nation’s economic sectors, though, we can spot some clear differences. Canada’s health care system, for example, is dominated by a single government payer. But during the debates about the Affordable Care Act in the United States, the Canadian model was severely criticized in comparison to the private insurance model.

The two nations even vary in their professional sports models. Most Canadian football and hockey franchises are situated in small cities like Saskatchewan and Winnipeg, whereas baseball, football, and basketball teams in the U.S. are often found in megalopolises like New York, Chicago, and Los Angeles. That may be why the Canadian Football League’s expansion into the U.S. was unsuccessful, as was Major League Baseball’s attempt to maintain a team in Montreal.

What other economic sectors differ? During the past month, the national postal services of Canada and the United States began to adopt very different business strategies in response to an identical challenge. Both services are struggling to adapt to significantly lower mail volumes in an era of internet communications.

The Canadian Postal Service has chosen to down size its operating infrastructure by eliminating costly home delivery activities in urban and suburban areas. Residents of Canadian cities and suburbs will now be required to pick up their mail at designated community mail boxes.

The U.S. Postal Service has proposed reductions in home delivery schedules as well, but the American Congress has refused to approve them. Instead, the U.S. Post Office is now pursuing a very different strategy, one that focuses on revenue growth.

So what is the U.S. Post Office now selling? Harry Potter stamps! American collectors have always purchased commemorative stamps that recognize illustrious American artists and dignitaries, and that celebrate great moments in American history. Although Harry Potter is certainly not an American figure, his popularity in the U.S. compelled the Postal Service to honor the fictional character in the hopes of stimulating collector sales.

Which of these conflicting strategies will prove successful? Although the Canadian service will undoubtedly reap significant cost savings from its abandonment of the home delivery model in densely populated regions, many critics are panning the decision. Likewise, the Harry Potter stamps are generating controversy in the United States.

As is the case in industry sectors from health care to professional sports, the Canadian and American strategies in the postal service sector appear to be widely divergent. At the moment, though, it remains to be seen whether one strategy will prove to be better attuned to consumer needs than the other strategy.

Spiderman Is Following Obama Care

Chalk up another defeat for advanced technology!

Last week, the producers of the Broadway mega-musical Spiderman threw in the towel. They announced that they will soon close the New York show and write off their huge losses, hoping to recoup some of their investment by launching a less expensive version of the play in Las Vegas.

Why did it fail? Some blame an uninspiring screenplay and a limp songbook. Many others, though, claim that the musical was “done in” by its own advanced technology.

The show utilized complex electronic equipment to help the super hero leap across the stage and soar over the heads of the audience. When it worked properly, it was spectacular. But when it malfunctioned, it inflicted terrible injuries on its cast.

The Affordable Care Act, of course, is suffering a similar fate. The Obama Administration authorized the development of a snazzy, sophisticated, and technologically advanced platform that is designed to attract many customers to purchase health insurance. But the malfunctioning web site has inflicted grievous harm on the prospects of the initiative.

At first glance, it may appear to be a stretch to compare Spiderman with Obama Care in any respect. Nevertheless, both the producers of the theatrical play and the developers of the health care site relied on (obviously) faulty technologies to please their audiences, only to find that those very technologies actually caused their downfalls.

Is there a lesson to be learned from their common experiences? Perhaps it is that advanced technologies may indeed do more harm than good when delivering human services. When the tasks involve lifting actors into the air or enrolling consumers in health insurance plans, sometimes it is wiser to rely on human beings to achieve our goals.

Too Big To Fail: Not Just Banks!

Three years ago, Federal Reserve Bank Chairman Ben Bernanke declared that: “It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.”

He made that statement in March 2010; are you concerned about the subsequent pace of reform? Although the wheels of government may grind slowly, they are indeed propelling the engine of regulation forward.

Last week, for instance, Secretary of the Treasury Jacob Lew and his Financial Stability Oversight Council finally agreed to propose that certain “too big to fail” firms be placed under the same governmental oversight entities as global banking institutions.

Which firms? Lew didn’t say, but analysts believe that insurance companies and financial divisions of industrial companies could be declared “systemically important” and thus subject to federal oversight.

Should American citizens be pleased by this progress, or peeved at the length of time that has been required to simply generate this proposal? Indeed, at the present time, it is merely a proposal with no guarantee of conversion into regulatory law.

And yet, coming on the heels of the news that British and American authorities are finally preparing to file criminal charges against the (alleged) perpetrators of the global banking Libor scandal, Lew’s recommendation serves as a signal that the reform movement is making progress. Perhaps slow progress, but progress nevertheless.

The Smoot And The Innovation Society

If you type the phrase smoot to inches into Google, do you know what Google replies?

1 Smoot = 67 inches.

But why is 1 Smoot equal to 67 inches? And why is that precise length named a Smoot?

The term was invented in October 1958 by the Lambda Chi Alpha fraternity at M.I.T. in Cambridge, Massachusetts. Apparently, Oliver Smoot was a Student Pledge who served as the subject of the following frat house question: if M.I.T. possessed an infinite number of Oliver Smoots, how many would it need to form a human chain of persons laying “head to toe” from shore to shore across the Charles River?

To answer this question, the fraternity members escorted the young Mr. Smoot to the Massachusetts Avenue bridge, which links Cambridge and Boston. They then compelled him to be utilized as a human ruler on the Bridge’s pedestrian walkway, laying himself down, picking himself up, moving on to the next spot, and then laying himself down … over and over again.

The gentlemen discovered that precisely 364.4 Oliver Smoots would be needed to form a human chain from Cambridge to Boston. And because Oliver Smoot was – and, presumably, still is – 67 inches tall, a Smoot was immortalized as a unit of length that is equal to 67 inches.

The fraternity’s original ruler scratchings were left behind as graffiti on the walkway; they are now repainted by new fraternity pledges each year. The Massachusetts Department of Public Works and Metropolitan District Commission use those Smoot notations as official distance markings across the bridge.

You can easily view the preserved graffiti when you stroll across the pedestrian walkway on the “Boston to Cambridge” traffic side of the bridge. If you choose to do so, please dedicate a moment to considering the characteristics of the society that produced the fraternity prank that memorialized the Smoot.

Are other fraternity houses across the United States capable of formulating similar questions, whether serious or trivial? Are they then dedicating themselves to the necessary efforts to answer them? And are their neighbors allowing them to do so?

No, that’s not happening elsewhere. Each such outcome would require a noteworthy combination of individual inspiration, group perspiration, and community toleration.

These are the characteristics that nurture an Innovation Society. Regrettably, we cannot find them everywhere.

Nevertheless, we can certainly find them in The Hub of Cambridge and Boston.

The IRS And The COSO Cube

Have you been following the emerging news story regarding political bias at the Internal Revenue Service (IRS)? Apparently, the agency that regulates America’s federal system of income taxation is now under investigation for purportedly mistreating conservative “tea party” groups during its reviews of tax exemption applications.

If you’re a tax accountant, you can’t help but feel a little embarrassed about the apparent dearth of internal controls at the Service. After all, many accountants are specialists in the field of risk management; they charge significant fees to their clients for advice regarding the development of systems of internal control.

Just two weeks ago, for instance, the world’s leading committee of professional accounting trade organizations issued a new cube shaped framework that defines internal control development activities. Isn’t it unfortunate, and ironic as well, that the accounting professionals at the IRS failed to implement their own profession’s frameworks?

COSO: A Brief History

The tale of these frameworks began thirty years ago, when the five major accounting trade organizations in the United States invited Wall Street veteran James Treadway to chair a Commission to assess the causes of fraudulent financial reporting practices. The resulting report of the Treadway Commission led to the development of the first control framework in 1992, which was then slightly modified two years later.

Developed in response to concerns that were raised during the Crash of 1987 and the financial scandals of the Gordon Gekko era, the paradigm was represented by the shape of a three dimensional cube. The top of the cube displayed the three perspectives (i.e. operations, reporting, and compliance) that affect internal controls, whereas the front of the cube presented the five components (i.e. the control environment, risk assessment, control activities, information and communication, and monitoring activities) that define such controls.

In 2004, in response to concerns that were raised during the financial and corporate scandals of the Enron and Worldcom era, the Council of Sponsoring Organizations (COSO) expanded its cube into a framework of enterprise risk management. They did so by adding a fourth perspective (i.e. strategic considerations) to the top of the cube, and three components (i.e. objective setting, event identification, and risk response) to its front. And then, just two weeks ago, they defined seventeen explicit principles to support a further refined framework.

Control and Risk

So there is certainly no lack of guidance regarding the implementation and maintenance of internal control and risk management systems. But what do these frameworks mean? And how can they help us assess what recently transpired at the IRS?

First and foremost, it is important to keep in mind that internal control and risk management are not synonymous phrases. In fact, internal control is a concept that is embedded within the practice of risk management.

A competent risk manager understands that many internal controls are implemented to prevent the occurrence of troublesome events. And if prevention is impossible, additional controls are employed to detect the existence of such events. Yet there are times when prevention and early detection controls simply fail to provide efffective risk management strategies.

In other words, there are occasions when competent risk managers have no choice but to respond to occurrences of troublesome events without the control benefits of prevention or early detection. Such risk response activities are not components of systems of internal controls per se, but they do play significant roles within systems of enterprise risk management.

Prevention controls, detection controls, and response activities are the three proverbial “building blocks” of enterprise risk management. So how can we relate them to the unfolding tale of political intrigue at the IRS?

Likelihood and Impact

The COSO prescriptive framework is a fairly simple one. If a potentially troublesome event is relatively likely to occur, then the organization should develop new prevention (or detection) controls to reduce this likelihood of occurrence to tolerable levels. And if the event is expected to inflict a costly impact, then the organization should also implement new response capabilities to limit its damage.

Now let’s apply this principle to the current IRS controversy. What was the likelihood that an understaffed IRS office, struggling to manage a flood of tax exemption applications, would resort to questionable assessment tactics? This was arguably a relatively likely event, and thus more might have been done to prevent (or detect) its occurrence. For instance, the IRS might have invested in enhanced training and oversight activities.

But how much damage has the controversy actually inflicted on the conservative groups that were inappropriately investigated by the IRS? Even though they appear to have been unfairly targeted for scrutiny, there is no indication that any have lost or been denied their tax exempt status as a result of the investigations.

So an application of the accounting profession’s COSO framework might not necessarily fault the IRS for its questionable response to the controversy. Nevertheless, it might lead one to question whether the Service did enough to prevent (or detect) the occurrence of the problem.