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Beer slogans to explain the rules of the Economy? March 14, 2007

Posted by Jordi in accounting, corporate governance, insipid, SEC.
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Corporate leaders and their network of elites (former SEC Chairmen and Treasury officials) are gearing up to chip away at the post_Enron regulatory structures. I am agnostic about whether that is a good idea. I did note that the “all star”panels that CNN was falling all over itself to gawk at (like the celebs arriving at the Oscars on teh red carpet) was notably absent of the legislators who passed the law, institutional investors who may favor the corporate governance changes, or any critics of corporate governance.

This passage stood out as an example of the way complex regulatory and economic problems can get boiled down to supposedly “common sense” heuristics. Like when someone says “they moved the goal posts.” The role of a beer ad in defining a conundrum of common sense is even tastier (and less filling!)!

Buffett, Greenspan push for new rules – Mar. 13, 2007
But SEC Chairman Christopher Cox said it is difficult to meld both accounting principles and rules.

“This debate about principles versus rules is like ‘Tastes great versus less filling.’ Ideally, you want the best of both,” he said.

The issue here is the melding of a principle of judgment or best information about a company and rules which impose informational discipline (akin to market discipline- it shakes out the chaff and limits the ability of managers to wriggle away form bad news or honest accounting).

Instead of an explanation from the head of the freakin’ SEC as to why this is hard to do, we get the beer metaphor. Does his shoulder shrugging (Gee! I’d like to have my cake and eat it!) make investors feel better?


Merck 4Q Earnings Plummet 58 Percent January 30, 2007

Posted by Jordi in accounting, Business-Society Issues, Organizational Environment, pharmaceutical.
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Merck 4Q Earnings Plummet 58 Percent – New York Times
Merck & Co. reported Tuesday that fourth-quarter profit plunged 58 percent despite higher revenues as the drugmaker took a slew of charges for restructuring costs, an acquisition and increased legal reserves, mainly for its withdrawn painkiller Vioxx.

I want to make two points about this news.

For a long time Pharmaceutical companies have built up their image as powerhouses of innovation.  And they often are, but there is some mythmkaing in with the reality.  Much of their money goes into direct to consumer advertising.  So, patients ask their doctors for a particular brand name.  Isn’t this an example of changing your environment? Who are the stakeholders  in delivering prescription drugs to patients?  Is society, reflected in ineffective delivery of most needed drugs to sickest patients, a legitimate stakeholder?  Also, much of their “innovation” comes from acquisitions.  That is fine, but it suggests that big pharma is a really a middle man between true innovators and end-users.  Like a bank, regulatory agency manager, and marketing firm rolled into one.  (Brian, you wanna weigh in here?).

Second,  and I am even further out on a limb here.  What is up with the term “restructuring costs”?  It just puzzles me.  I feel like it implies that these are “one-time” costs and nto part of “normal” business.  Financial markets and their  stakeholders (buyers, sellers, analysts, regulatory agencies) all build their tools in a world of projecting normalcy (and it seems stability) into the future to estimate NPV, for example.  But, if you are managing a global economy in a complex environment, aren’t their _always_ restructuring costs.  Is there something to be gained from dropping the linguistic and accounting myth of these costs being extraordinary and to start building accoutning and financial systems that reflect the epxectation of resturturing costs?  Ok, accountants, now you weigh in.