Is California's Housing Problem that it has too Many Houses?

No.

Below is a chart of residential vacancy rate by state from the 2010 US Census.

California has the second lowest vacancy rate among the 50 states and DC.  California builders may have built the wrong kind of housing in the wrong places, but overall, they did not build too many houses. 

Note that Florida and Arizona have very high rates, but their rates are always high, because so much of their housing stock is seasonal--I suspect vacation homes drive a lot of what is happening in Maine, Vermont and Alaska as well.  Nevada has had the largest increase in vacancy over the past 20 years, rising from about 10 percent to 14 percent. 

Are commercial property values rising or falling?

This might seem like a simple question.  But it is not.

The Moodys/REAL Commercial Property Price Index (CPPI), produced at MIT, says they are still falling:

Green Street's Commerical Property Price Index says they are rising:
 

 
Which one is correct matters.  If Green Street is right, and prices are only 12.6 percent off peak, then commercial properties by-and-large have equity (loan-to-value ratios rarely exceeded 80 percent on commericial properties).  If MIT is right, we are still in deep trouble.
 
Both sources do a good job explaining their methods.  For MIT:
 

The Moodys/REAL commercial property index (CPPI) is a periodic same-property round-trip investment price change index of the U.S. commercial investment property market based on data from MIT Center for Real Estate industry partner Real Capital Analytics, Inc (RCA). The methodology for index construction has been developed by the MIT/CRE through a project undertaken in cooperation with a consortium of firms including RCA and Real Estate Analytics, LLC (REAL). The index has been developed with the objective of supporting the trading of commercial property price derivatives. The index is designed to track same-property realized round-trip price changes based purely on the documented prices in completed, contemporary property transactions. The index uses no appraisal valuations. The methodology employed to construct the index is a repeat-sales regression (RSR), as described in detail in Geltner & Pollakowski (2007). The data source for the index is described in detail in a white paper available from RCA.


The set of indices developed so far includes a national all-property index at the monthly frequency, national quarterly indices for each of the four major property type sectors (office, apartment, industrial, retail), selected annual-frequency indices for specific property sectors in specific metropolitan areas, and primary markets quarterly indices for the top 10 metropolitan areas in the major property types. The annual indices are produced in four versions, beginning in January, April, July, and October of each year. These are respectively named the calendar year (CY) index, the fiscal year ending March (FYM) index, the fiscal year ending June (FYJ) index and the fiscal year ending September (FYS) index.

The RCA Database

The commercial property index is based on the RCA database which attempts to collect, on a timely basis, price information for every commercial property transaction in the U.S. over $2,500,000 in value. This represents one of the most extensive and intensively documented national databases of commercial property prices ever developed in the U.S.

The Moodys/REAL CPPI and the TBI

The Moodys/REAL CPPI index is a complementary information product to the transaction based index (TBI) also published on the MIT/CRE web site. Both the CPPI and the TBI are based purely on transaction price data. The TBI is based on NCREIF property sales prices data, while the CPPI is based on RCA sales prices data. Thus, the TBI is based on a smaller population of more purely institutionally held properties. The TBI is based on a hedonic regression methodology whereas the CPPI is constructed with a repeat-sales methodology. The TBI is published with history going back to 1984 but only at the quarterly frequency, and only at the national level (for the four major property types), whereas the CPPI includes monthly and annual frequencies and more geographic regional break outs. The CPPI is a variable-liquidity price-change (appreciation return) index, while the TBI includes total return and demand and supply-side indexes.

For Green Street:

Green Street’s Commercial Property Price Index is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted.

Two features that differentiate this index are its timeliness and its ability to capture changes in the aggregate value of the commercial property sector.

• Timeliness: Other indices are based on closed transactions, and therefore convey info about market prices from several months earlier. Also, the Green Street index value for a given month is released within days of monthend, whereas other indices have a sizeable lag. As shown below, the Green Street index spots inflection points earlier than other indices.

• Weighting: This index is weighted by asset value within each property sector, and therefore it provides a gauge of changes in aggregate values. Most other indices are equally weighted.

So the big differences are: (1) MIT looks only at transactions, whereas Green Street looks at current negotiations; (2) MIT's valuation model gives equal weight to all properties, while Green Street's valuation gives greater weight to expensive properties than to cheaper properties; and (3) MIT has a much broader sample, because REITs would rarely buy properties as inexpensive as $2.5 million.

So which index is correct?  It all depends on context.  While I would be a little leary of using "negotiated price" as an indicator of value (as opposed to closed transactions), the timeliness of Green Street's data does give it an advantage.  For REIT's trying to determine strategy, the Green Street index is probably better.  For banks making loans to smaller properties--or for individual investors thinking of buying small office buildings--the MIT index is more relevant. 

Mortgage Defaulters can be good credit risks.

Transunion performed a study that shows that households whose only default is on their mortgage are pretty good credit risks. Reuters does a story about it, and I have seen the powerpoint deck on it, but I can't find a link to the powerpoint.

The long story short is that sometimes people stop making payments not because they are deadbeats, but because the economy kicked their legs out from under them. Such people are good prospective credit risks.

The problem with rubber meeting road

In general, high gas prices are a good thing, in that they partially internalize the externalities of driving. But in the middle of a recess... (ahem, recovery), they create a real problem--the people who can least afford them are hit particularly hard by them. I am glad that at least the payroll tax was cut, but it would have been better for the cut to have been targeted.

A Plot of Effective Marginal Tax Rates and Per Capita GDP by State

State Taxes and GDP 2

Jared Bernstein recently posted a scatter plot of Federal Marginal Tax Rates and GDP growth, and found no correlation between the two. The graph above depicts the top potential marginal effective tax rate by state as calculated by the Tax Foundation (I will explain their calculation below) against GDP per capita by state. The correlation is actually positive, at about .2. If one removes the "DC effect," the correlation drops to about .19.

The top rate number I use from the calculation is the number produced under the GOP tax plan from late 2010, since they essentially got everything they wanted from the president in their tax deal. State taxes also move fairly slowly, so there is some persistence in the data across time.

I would not use this plot to argue that taxes on the richest cause higher living standards; but it sure is hard to argue that they cause living standards to fall.

A testimonial to homeownership.

I am reading Howard Bryan's The Last Hero: A Life of Henry Aaron.  The first few chapters are especially interesting, as they are about life in Mobile, Alabama in the early 20th century.   

Henry's father, Herbert, did something that few African-Americans did in the American South after Reconstruction: he owned his own home:

For Herbert, ownership meant protecting his family from outside forces that could, at any time, take away what he had... 

Herbert purchased two adjascent lots for fifty-three dollars apiece on Edwards Street and began culling wood.  Herbert collected ship timber from Pinto Island.  Young Henry, all of six years old, collected wood from abandoned buildings.  Some of the wood came from houses that had partially burned down, and some of the original walls of the house still contained deeply discolored streaks, charred from fire.  Herbert construction a six-to-twelve-foot triangular gabled roof above the front door.  He used the smaller, miscellaneous pieces of wood for the inside walls.  The floor was made of yellow pine.  Like most of the houses of the South, the structure itself stood on concrete blocks...

"The only people who owned their houses," Henry would often day, "were rich people, and the Aarons...."

...Herbert fought for his space, but he used non-traditional weapons..."

Walkability

The word is ugly (can't we come up with something better?), but intriguing.  One can go to a web site, and get a "walk score" for any address in the country.  Stephanie Yates Rauterkus and Norm Miller have a paper that shows that in Birmingham, Alabama, walk scores in the center of town have a mild impact on property values. 

The concept of a "walk score," a metric for how easy it is to not use a car to do things, is fun.  But so far as I can tell, the walk score presented on the web site is somewhat arbitrary; I have no idea how it was calibrated (although they do say "Street Smart Walk Score gives more weight to amenities that are highly correlated with walking. In addition, multiple amenities in each category count towards your score—for example, we count 10 restaurants to reflect the depth of choice that walkable neighborhoods offer.")


What I can say is this: my house in Bethesda received a much lower walk score than my house in Pasadena, and yet I almost never used my car during the week in Bethesda, because I could walk the .85 miles to the Red Line metro stop to get to work, and because for me driving in Washington was a much worse option than driving in LA (believe it or not!).  Both places are comparable in terms to walking to amenities in the evening.

So if we are going to do walk scores, we need to look at how often people in different neighborhoods, well, walk.  I am guessing my USC colleagues Gen Giuliano, Lisa Schweitzer and Peter Gordon, have done some work along these lines, and there seems to be a trove of data at Minnesota.

Can Google's Chromebook Break Windows?

Summary.  Google is right: Windows is an old, creaky, virus-ridden product that deserves to be replaced by something better.  But to displace an established computing platform you need to do a lot of things right, and Google hasn't shown the focus and coordination needed to pull it off.  Unless there are dramatic changes in Google's Chromebook plans, I think they are likely to fail.
   

Google's Chromebook vision is seductive: sleek and simple net-connected notebook computers, backed by the world's biggest web company, replace the bloated, unstable Windows PCs that dominate the desks and laps of the computing world.  Google painted that picture at its IO developer conference last week, and it tantalized a lot of people:

"Google...might have just changed the industry."  -Engadget (link)

"Microsoft could lose billions in sales to Google's Chromebook."  -Beta News (link)

"Google Chromebooks will likely seduce businesses."  -Tech Republic (link)

"Chromebooks may just be the next best solution for small to medium-sized businesses looking to untether from Microsoft Office."  -PC World (link)

I wish it were true.  Windows deserves to be replaced.  It's just plain old, weighted down with decades of compromises and tweaks.  The OS steadily degrades as you use it, and the security software companies will tell you privately that it's impossible to fully protect it from hostile software.  I'm sure that with a clean start we could do better.

So I love Google's idea.  Unfortunately, the Chromebook as currently defined is woefully unready to take on Windows.  It may capture some niches and verticals, but it won't have a major effect on the industry unless Google makes major changes to it.  And some of the biggest barriers to its success are inside Google itself.

In case you're a new reader to my blog, I should give you a brief background on myself, so you'll know where I'm coming from on this issue.  I worked at Apple for a decade, where I was a front-line soldier in the Mac vs. PC war.  I was part of Apple's competitive analysis team and later managed it, and I was in charge of the main Mac vs. Windows marketing team.  Throughout that time, my co-workers and I spent a huge amount of time studying platform transitions -- how computing platforms were displaced in the past, and how could we apply those lessons to defeating "Wintel."

What we found was daunting.  Once a computing platform is established, it's not enough to make a product that's better overall.  You have to duplicate the core benefits of the current product, and be so much better in some areas that you overcome the users' natural resistance to change.  Even when Mac had a graphical interface and the PC was still stuck with DOS, we could convert only a small fraction of the PC installed base.  Users were too attached to their PC programs and all the arcane keyboard commands they had memorized to use them.  Most people moved to graphical interfaces only after Microsoft offered Windows on the PC, which allowed them to keep access to their old software while they gradually came up to speed on Windows.

So when Google brags about the advantages of Chromebooks, I'm completely unimpressed because they are more than wiped out by the enormous sacrifices in basic compatibility and productivity that most people would have to make in order to move off Windows.  The most fundamental problem is Google Docs.

There's no way to put this politely: As a replacement for Microsoft Office, Google Docs stinks.  Its word processor is adequate but limited, its spreadsheet is rudimentary, and its presentation program is so awkward and inflexible that it makes me want to throw something.  In terms of usability and features, Google Docs is about where Macintosh software was in 1987.

In fairness, there are some things Google Docs is great at.  It's fantastic for collaborative editing; using Docs plus a Skype session can be a thing of beauty for brainstorming and working through a list of action items.  But as a replacement for Office, the apps are so limited that using them is like watching a Jerry Lewis movie: you keep asking yourself, "why is this happening?"  I tried very hard to use Google Docs as the productivity software for my startup, and eventually I gave up when it became clear that it was actually destroying my productivity.

If I sound frustrated, it's because I am.  I remember back in 2005 when a startup called Upstartle created Writely, an online competitor to Microsoft Word.  The product was evolving quickly, and as I wrote at the time, I thought it had a good chance of eventually growing into a real challenger to Word (link).  Then Google bought Writely and bundled it into Docs, and I thought "that's even better, now development will really accelerate."

Instead, the evolution of the product has been snail-like.  Six years after the acquisition, the word processor component of Google Docs is improved, but still very primitive compared to Word.  The official Google Docs blog lists lots of new features the team is adding (link), but there are even more missing.  For example, only last month did they add pagination to the word processor.  Part of the problem is that the team is spending a lot of time adding features that have nothing to do with competing with Office.  I sat through a session at Google IO last week on Google Docs, and the main theme was that they are transforming Docs into an online storage system like Dropbox or Box.Net.  The team has added semi-random features like the ability to store videos, do OCR on photos, and sync between devices.  Meanwhile, their presentation module can't even do transitions between slides.

Rather than doing the unglamorous work of competing with Office, the Docs team seems to be chasing after the latest shiny new startup category.  Google says those sexy features were high-priority requests from Docs users, but if so that just shows what's wrong with Google's development process.  The people it should be trying to please are current Office users, not the unusual people who were willing to give up Office for the current mediocre version of Docs.  Get a roomful of Office users and ask them if they'd rather have OCR of photos or a printing architecture that works in most browsers.  As Mom used to say, "you can't have dessert until you finish your peas."  It looks like no one at Google is telling the Docs team to finish its peas.

The limitations of Google Docs are going to be unacceptable to most Office users.  The problem is not that most people create slides with transitions, but they don't want to be cut off from that sort of advanced feature if they ever need it.  The loss of potential future productivity is what keeps people away.

I know, I fought this battle extensively at Apple.  There's a reason why apps have long feature lists -- the feature count drives sales.

Even if a user could come to terms with the limited features of Google Docs, good luck if you need to share your work with the majority of computer users who are still on Office.  Moving documents back and forth between Office and Google Docs routinely mangles some of the features of Office documents.  Now you're not just limiting your own productivity, you are annoying your business partners and coworkers.

Since Google does not seem to be focused on fixing Docs, it's theoretically possible that some other app developer could create an online replacement for Office that really works, and offer it on Chromebooks.  But who would want to invest in that area when Google Docs is there as a competitor?  Docs is just good enough to hinder innovation, but not good enough to take out Office. 

Besides, Google did a couple of sessions at IO comparing web app development to native app development.  They all concluded that web app development was better for content-playing applications, and that for productivity apps you need native software.  And native software is exactly what Chromebooks won't run.

It makes you wonder if the app guys at Google ever talk to the Chrome guys.

So Google can say all it wants about long battery life, instant on, support costs, and invulnerability to viruses.  Those are all problems that PC users put up with because they are unwilling to give up the advantages of Office and the rest of the PC apps base (think about it, if those issues really motivated people, Macintosh would have 80% share in PCs).  I could picture an IT manager looking at the lower costs of Chrome and wanting to force users off Windows, but that will just produce a user revolt.  I know very few IT departments that are willing to take on that sort of battle.  Maybe some very cost-conscious schools and businesses might force users to switch to Chrome, but for the vast majority, as long as Office is not challenged, neither is Windows.

Ironically, if Google really wanted to replace Windows, Android would probably be a better OS for the job.  It has more momentum, and you can write native software for it.  But that's blocked by Google's own internal politics, which has assigned Android to phones and tablets and Chrome to PCs.

I like the Chromebook vision, and some day I'm sure something will replace Windows.  But Google is utterly unready for the hard, unglamorous work needed to make Chromebook succeed, both in terms of its products and in terms of its internal organization.  Unless Google makes major changes, Chromebook will probably be yet another failed Google initiative that will have us asking "what happened?" a couple of years from now.

Kind of like the way we talk about Jerry Lewis.


Three steps to fix Docs

If Google truly wants to replace Windows, it needs to focus Docs on that task.  Stop the sexy but esoteric stuff like automatic translation of street signs in photos (something that most people don't really need their word processor to do), and make sure the basics like printing work properly.  Here are my top three priorities:

1.  Make it look like an application.  The user interface in Docs is primitive, an awkward mix of web page and application.  It is extremely intimidating to a normal user.  Here's the window I get when I edit a word processing document in Google Docs:

You're looking at two inches of stacked-up interface cruft, including three separate menu bars and 58 different clickable items.  Hey Google, aren't you embarrassed by this?  I didn't think anyone could make the Office ribbon toolbar look efficient, but you managed to do it.

You might be saying to yourself, "well, that's just what happens when you run an app in a browser."  That's no excuse.  If you can't make a browser-based app easy to use, you should give up the pretense that you'll ever replace Windows.

2. Take full advantage of HTML 5.  Google gave a great pitch at IO on all the wonderful new graphical features in HTML 5 and its associated technologies: groovy things like 3D transforms, text bound to a curve, animation, and huge numbers of fonts.  Very little of this graphical power has shown up in Docs.  Google should make Docs (and especially its presentation module) a showcase for the great things you can do with HTML 5.

3.  Make Docs extensible.  No matter how well Google focuses its development, it won't be able to quickly match all of the features in Office.  That's why Docs desperately needs a plug-in architecture.  One of the reasons WordPress became a leading weblog tool is because it enabled developers to easily extend it with a blizzard of widgets and add-on modules. Google should do the same with Docs.  Then rather than Google being responsible for covering all the features of Office, the development community could share the burden.  I bet that with the right plug-in architecture, and a widgets store built into Docs, Google could have a more complete office suite than Windows within 24 months.  That would make Chromebooks a truly potent competitor to Windows, and a product worthy of Google's enormous skill and ambition.

Some stuff from Weimer School meetings worth thinking about.

1) Albert Saiz showed how rent is endogenous with respect to interest rates.  At the urban fringe, where land has no value, rent is equal to construction cost multiplied by the interest rate.  This pins down urban rents.  When interest rates fall, so do rents at the fringe.  Nevertheless, land values rise, because people want larger structures (because of falling rent), and so they demand more land.  Consequently, rent-to-value ratios fall as interest rates fall.

2) Ingrid Ellen showed that REO properties produce crime.  The interesting part--they induce violent crime, rather than property crime.  The data set she put together, which used block faces, instead of census blocks, was awesome.

3) Len Lin may have solved why real estate appears to have better Sharpe Ratios than stocks.  If they were really better, one could arbitrage between real estate and stocks.  But because real estate is illiquid--it takes a long time to sell it--one cannot arbitrage it.  When one adjusts formally for illiquidity, the Sharpe Ratio of real estate is the same as stocks.

4) Stephanie Yates Rauterkus presented some promising work that suggested that "walkability" near CBDs enhances value, but elsewhere might not.

It was a really good few days.  I learned a lot of other stuff too.

Chutzpah

I was talking to a reporter the other day about policies to write down principal for some home buyers.  He told me that banks objected, saying that it would create moral hazard.  Which is sort of like Newt Gingrich defending the sanctity of marriage.

Martin Feldstein says raise taxes, but not rates

While figuring out tax incidence-who actually bears the burden of the tax--is difficult, my guess is that his proposal, which would limit all deductions to two percent of adjusted gross income, would raise revenue, simplify the code, reduce deadweight losses (i.e., economic inefficiency), and produce a more progressive tax code.  It is the last of these that I am not sure about, but if we also raised the top rates to their Clinton-era levels, then one gets a more progressive code too.  I have seen no evidence that raising the top marginal rate from 35 to 39 percent would produce substantial deadweight loss.

I think such a proposal would need to be phased in--it would be a shock to lots of different markets, but I like the thinking behind it.  

BE UNETHICAL, BE NO.1!

IF YOU BELIEVED WHAT’S WRITTEN ABOVE, YOU’RE THE FIRST ONE WHO DESERVES TO BE KICKED OUT OF YOUR COMPANY. IF WORK IS SALVATION, THEN ETHICS IS RELIGION!

From Gold to Goldman, even Warren Buffett can go wrong. His decisions and mistakes are both man-made. The latest which caught camera lenses around the world was his “personal error” in understanding dealings of David Sokol (one of the strongest contenders for the Berkshire crown) with his company’s capital. It all started last fall, when on December 13, Sokol picked up lubricants maker Lubrizol as the only name (of the 18 that Citi had put forward to him) worth investing in within the short term. He asked a Citi representative to request James Hambrick, CEO of Lubrizol, for a meeting concerning a stake purchase that Sokol was (personally) interested in. Between January 5 & 7, 2011, Sokol bought 96,060 Lubrizol shares at $104 per share (at a total investment of $10 million). Eight days later, he suggested to the Oracle himself to buy Lubrizol shares. On March 14, Berkshire announced a $9.7 billion all-cash buyout of Lubrizol for $135 per share (representing a 28% premium on the closing stock price, during the previous trading session – not too high as many reckoned). That very day, Buffett had openly said, “Lubrizol is exactly the sort of company with which we love to partner.” That the target was impressive was not difficult to see. Its numbers for the past five years looked strong. Sales had risen by a CAGR of 10% since FY2005, touching $5.4 billion in FY2010. So buying a company in this vertical – at much less than 2x of its annual revenues – sounded a “fair deal”. Numerically, yes. Ethically, it wasn’t.

Sokol, who was the Chairman and CEO of NetJets (a business aviation company, 100% owned by Berkshire) and Chairman of MidAmerican Energy Holdings Co. (89.8% owned by Berkshire), apparently had not disclosed the fact that he had made profits to the tune of close to $3 million ($2.98 million to be precise), at least not until Buffett learnt the details of Sokol’s insider trading act on March 19. Ten days later, Sokol, despite having been widely regarded as Buffett’s protégé (Buffett bought his views on multi-billion dollar deals & praised his art of fixing problems in companies under Buffett’s umbrella), and having brought before the company an asset as promising as Lubrizol, was relieved of his duties and resigned. But that was not the end.

Buffett has set stock investments standards in the past. Now, he is in for some lessons on how to treat an unethical employee. On April 27, 2011, Berkshire issued an 18-page report, accusing the 55 year-old of “misleadingly incomplete” disclosures (about his Lubrizol dealings) and violating “the duty of candour” he owed to the company. The matter is in SEC’s court now, and Buffett has confirmed his co-operation “with any government investigations relating to this matter.” For him, the star – but unethical – employee is already an outsider!

So, is Buffett right in firing one of his top managers and then allowing the judiciary to take over and prosecute him if found guilty? And how should you deal with an unethical divisional CEO (or any employee, for that matter) like Sokol?

Fire unethical employees immediately. And then file a civil or criminal litigation directly on the accused.

Incidences like this have been as much a lesson for the likes of Sokol, as they have been for Buffett. It was his mistake that he did not act on Sokol’s ethical lapses in the past. Buffett should have thrown him out of the Berkshire outfit long back and taken him to court – not once, but twice – for putting Berkshire’s image at risk. Digest this: About a year back, an Omaha civil court fined Sokol-led MidAmerican Energy to pay $32 million to a group of shareholders. Reason: the company had manipulated the book of accounts of one of its projects. As per the court’s ruling, the CEO was found guilty of “intentionally” falsifying bottomline calculations, so that some minority shareholders are excluded from the benefits arising out of the project. Even in 1999, when Sokol had joined the Berkshire family, with Buffett acquiring his MidAmerican Holdings company for $2.1 billion, MidAmerican shareholders had sued him for using personal relationships and deceit to convince the board. Their claim: Sokol had cheated the shareholders of $140 million, through sale of MidAmerican for a lower $35.05 per share (despite the company being worth $37.37 a share). The charges were proven and in 2003, the court ordered him to settle the lawsuit by paying up $7.5 million to the plaintiff.

So the fact that Sokol has done it again (and this time against the very Buffett), comes as a no shocker, not at least to those Group CEOs & Chairmen who know how to deal with those who try and set fire to an organisation’s ethical fabric. Get rid of them – that is Bible. In a warning to Buffett’s non-action, an investor of Berkshire Hathaway has filed a lawsuit charging that “both David Sokol’s purchases and Warren Buffett’s failure to act” went against Berkshire’s policies.

Companies should be intolerant to all forms of unethical behaviour at workplace. And we are talking about everything – from insincerity, deliberate absenteeism, nepotism, being careless about information that can damage reputations, to financial frauds and cheating customers, shareholders and investors alike. Especially in the last respect, the Sarbanes–Oxley Act of 2002 (also known as the ‘Public Company Accounting Reform and Investor Protection Act’) has helped limit the number of fraudulent accounting acts that company officials have undertaken since it was enacted (in their August 2008 paper, titled, The “numbers game” in the pre and post-Sarbanes- Oxley Eras, Profs. Bartov & Cohen of Stern School of Business, conclude that, “We document a significant decline in expectations management in the Post-SOX period compared to the late 1990s. This suggests that managers have reduced their reliance on such a mechanism to just meet or beat analysts’ earnings expectations, whereas real earnings management seems to have overall increased”).

Bosses should necessarily use the whip at the slightest hint of dirty-dealing by peers and juniors. And if the deed appears unforgivable, or damaging to the organisation’s culture, using the gun and sending an attorney (to the ex-employee), is the best option. Thankfully, it is happening today in some companies.

Everyone talks about how HP’s board forced Mark Hurd and Patricia Dunn to quit following their immoral and dishonest conduct, but no one talks about how a Fortune 500 name, and the largest offprice retailer of apparel & home fashions globally (worth $20.77 billion on NYSE and making $21.94 billion-a-year in topline) TJX Companies Inc., fired an employee Nick Benson two years back, for disclosing confidential company information over the Internet (related to security concerns relating to its customers’ credit cards). He had made disturbing claims about security practices at TJX in an online forum, which could have resulted in serious damage of the store’s image.

There have been other instances, where companies have simply showed the door to those who do not respect predecided norms and rules. On November 10, 2010, within hours of the leakage of an internal memo regarding a salary hike from Eric Schmidt, the-then CEO of Google (“We’ve decided to give all of you a 10% raise, effective January 1st. This salary increase is global and across the board – everyone gets a raise, no matter their level, to recognise the contribution that each and every one of you makes to Google,” is what it read), the employeein- question was fired. The memo read: “Confidential: Internal only, Googlers only.” Critics point a finger at Google’s harsh decision, but do they even realise that they are questioning the #4 name in the 2011 ranking of Fortune’s Best Companies to Work For?

Walmart, the world’s largest retailer is another example. In March 2010, Joseph Casias, a clerk at Walmart store in Battle Creek, Michigan (who suffers from brain tumour), was given the boot after he failed a drug test. It was medical marijuana, which he claimed was allowed in Michigan. Walmart was taken to court. The ruling went in the company’s favour. On February 11, 2011, announcing his decision, US District Judge Robert Jonker said: “The fundamental problem with (Casias’) case is that the medical marijuana law does not regulate private employment.” As per Walmart’s policy, the substance was banned, and therefore, usage of it, for whatever reason, was an act of cheating the company. Many claim that when it comes to ethics, Walmart has been particularly strict only with its lower- level employees. Untrue. In March 2005, Tom Coughlin, Wal-Mart’s Vice- Chairman and #2 executive, was forced to quit after it was proven (through a 6 week-long investigation), that over the past couple of years, about $500,000 in unauthorised payments had been made to him (which were obtained by making claims on falsified third-party invoices and other expense documents).

Then there is the Big Blue, IBM. In 2003, the company fired James Pacenza, a decorated Vietnam veteran. He was fired a day after he was caught accessing an adult chat room while at work (A fellow- worker who was a witness to his deed reported the matter to the senior management). Pacenza’s defense was that he suffered from post-war traumatic stress disorder, and that his Internet addiction helped ease his psychological problems. He had breached IBM’s corporate policy which strictly prohibited the access of adult websites at work and was fired the day after the complaint was received. Many question the iron-hand with which the top management of powerful corporations maintain work ethics, which starts from the very fundamental rules set by the company. They can continue questioning. Reality is – it is “the” right thing to do. If it’s unethical, it better be out!

Studies have proven over time why having a watertight workplace ethics policy is the way to keep your business right and pumping. A year 2010 report by Hay Group and Ethics Research Centre (US), titled, Ethics and Employee Management, made three key conclusions: “1. Positive perceptions of an organisation’s and management’s commitment to ethics is particularly important for employee engagement. Managers and supervisors should work actively to demonstrate a commitment to ethics, and encourage accountability; 2. Employees who observed misconduct were less engaged than those who did not; 67% who witnessed environmental violations were disengaged, 67% who saw the misrepresenting of financial records were disengaged, and 60% who observed insider trading were disengaged; 3. Engaged employees are more likely to report misconduct, thus reducing the company’s ethics risk.” In a year 2005 survey titled, Fast Track Leadership Survey, 1,655 employees of Fortune 500 companies were asked questions about their CEOs. Here was one of the key finding, “Nearly all (95%) say that a CEO’s business ethics remain very important and play a meaningful role in the way business gets done. When asked to grade CEOs on specific attributes, respondents said CEOs at large companies are ruthless in their pursuit of success (79%).” So ethics and passion to achieve success, go hand in hand.

As per a research paper by Profs. D. Michael Long and Spuma Rao, of University of Southwestern Louisiana, titled, The wealth effects of unethical business behaviour, unethical conduct involving illegal payments, bribery, environmental pollution and even insider trading, result in “a negative shareholder wealth effect because of increases in monitoring costs and risks to stakeholders of the firm. The results show that the significantly negative abnormal returns were persistent and cumulative for approximately one month following the announcement of unethical business conduct. Therefore, contrary to earlier studies, unethical business behaviour is not compatible with the goal of shareholder wealth maximisation.” [I am impressed that there is actually even the factor of “environmental pollution” included in this study. It will be good to see if anyone ever comes up with a study on the ethical nature of companies which are a threat to “health”, including tobacco and liquor companies. In my world, they are all declared unethical due to the very products they sell; and I would pull down the shutters on them!]

Forget about corporations, even at the State level, this holds true. One of the first documents that you will sign on being welcomed aboard by the Federal Government as an employee, is the Ethics Orientation form prepared by the USDA Office of Ethics. The introductory letter of the form opens thus: “To: All New Employees; Ethical conduct by Federal employees is critical in maintaining the American public’s trust in the integrity and fairness of its government.”

In today’s work environment, employees find all the more reasons to play dirty. Under such conditions, a true reform is needed in the name of strong rules for them – have a zero-tolerance policy when it comes to ethics at the workplace. That is the secret to a flourishing business. And for you my dear CEO, that journey can start right away. Start with ethics, and you will end-up with dollars, a satisfied lot of customers, employees, and a delighted set of shareholders.

My own beef with Trump

The Donald gives people the worst possible impression about the real estate business--the business that I study for a living. It is not principally about slapping your name on a gaudy building. It is about building 3 bedroom houses and apartment buildings; it is about building Targets and, yes, Walmarts; it is about managing class-B office buildings in suburbs; it is about distribution centers in Oconomowoc.  It is about providing environments where the bulk of people live, work, shop and build.