Keep it private

By Guest    September 2, 2009

Did you know that every time you install a Facebook application, you give that application developer ALL of your personal profile information and access to your friends information? That developer could be anyone from a reputable company to a teenager in a foreign country. Did you want to provide all that personal information? Well, you did. And so did I and almost every other Facebook user. Most of us simply click on a pop-up box without reading or understanding all the legal fine print.

Internet companies are by default operating around the world and need to comply with the laws in countries where their users reside. Guest contributor, Nicholas Cheung explains the Facebook incident which also highlights considerations for designing your company’s privacy policies.

Global Privacy Implications for Facebook

Last month, the Office of the Privacy Commissioner of Canada (OPC) issued a report on Facebook after months of investigation into the privacy practices of the popular social networking tool.  In the report, the OPC found that third party applications had unfettered access to personal information that they didn’t need, kept personal information long after accounts had been deactivated and did not make it easy for users to delete their accounts.  Last week, Facebook relented and agreed to make the requested improvements to its privacy practices.

The benefits of these changes are significant as Facebook will make the changes applicable to all users worldwide, not just in Canada. Quite the achievement for the OPC since Canadian users only account for about 12 million of the 250 million users across the globe.

There are over a million developers for the third party applications (such as quizzes and games) in Facebook.  Not only were these developers obtaining access to personal information above and beyond what they needed for their applications, it was virtually impossible for Facebook to protect this data once it was obtained.  Under changes that will take about a year to develop, Facebook will allow users more control over the data being accessed by these third party developers.

Canada is fortunate to have strong privacy laws which apply from coast to coast.  Our federal privacy sector law, the Personal Information Privacy and Electronic Documents Act (PIPEDA), applies to all private sector organizations across the country unless a substantially similar law exists in that province.  Our federal privacy commissioner is an officer of Parliament (similar to the U.S. Congress) and independent of the government of the day.  She enforces our privacy laws and acts as a privacy advocate.

Unfortunately, the U.S. does not have a federal private sector privacy law or a federal privacy commissioner and it may be time to renew the debate over the merits of having either.  The instances of identity theft occur so frequently that it is almost a fact of life.  However for those that are affected, it can take years to rebuild their reputation or have devastating financial consequences.  Just ask Ben Bernanke, the chairman of the U.S. Federal Reserve Bank whose wife lost her purse that contained her checkbook and social security number at a Starbucks.  If it can happen to him, it could surely happen to you.

Sometimes it is possible to change the world in a small way.  Well, at least one emoticon at a time maybe.

Guest contributor Nicholas Cheung is the contributing author of The Canadian Privacy and Data Security Toolkit for Small and Medium Enterprises which is available for purchase at Knotia..

Taxing your cell phone

By Trishan Arul    June 19, 2009

Few people realize that the IRS requires employers to allocate a portion of the cost of any employer provided cell phone to personal use and tax that as a benefit to employees. Everyone who doesn’t work for the government realizes how ridiculous this is – its bad enough that employees have to carry around a mobile device and be available 24/7 but to tax them for it is adding insult to injury. Plus most personal use has no additional cost to the employer due to carriers “free nights & weekends” pricing plans.

The IRS has raised public awareness of this issue by proposing simplified plans for determining how much to charge employees for their personal use. I applaud them for trying to simplify this calculation. Its disappointing that they don’t recognize that taxing personal use of a cell phone makes no sense and should be scrapped. You would be surprised to learn how few comments are normally received on such proposals (less than 100 is typical).  Just a few well considered responses can change the direction of regulations & legislation, which is why I have begun to submit comment letters to government agencies and elected officials on topics that affect me and my clients. Instead of just complaining, we can actually make positive changes with a bit of effort. My comment letter on this proposal is below. If the issue affects you, I’d encourage you to also submit a comment.

Having worked in both a Fortune 100 company which tried to implement the previous requirements and with small businesses, I can confidently state that the amount of work being imposed by the IRS is completely out of proportion with both the benefit and the spirit of the law. When these rules were enacted, cell phones were an executive perk. Today they are a necessity for almost every level of employee. Stand alone cell phones are no longer used in businesses – smart phones are the only type of device routinely issued to employees and this is for the primary purpose of receiving email communications while away from the office/computer. Cellular carriers tie all devices to a mobile number which then provides the additional benefit of voice calls. That benefit has turned into a burden due to the IRS regulations. Further, due to the plans most carriers offer with free weeknight & weekend minutes, there is normally no additional cost to the employer for the majority of personal use by an employee.

Employers should be able to deem personal use to be minimal under certain simple conditions:

1. The mobile device receives employer email or other non-voice communication
2. The employee is expected to regularly carry the device during non-business hours
3. There is minimal (<10%) or no additional cost to the employer for the typical employee’s personal use of the device (plans that offer free weeknights and weekends would meet this test automatically since that is when the majority of personal use occurs)

Please consider easing the burden on both employers and employees with a common sense approach to this issue.

Compensation Objections

By Trishan Arul    April 8, 2009

This is a follow up post to my plan to deal with egregious executive compensation. The basics are simple:

1. Compensation above a reasonable limit (3X the President’s salary or ~$1.2M) is taxed at a special rate of 90%. Such compensation is not deductible to the company and incurs a penalty tax of 10X the amount paid.
2. Such compensation must also be approved by an absolute majority of voting shareholders with no proxy voting allowed, i.e. it must be actively approved by the people who actually own the company but up until now have zero control over compensation policies.
3. Long term compensation which is tied to the indexed value of the company and paid out over at least 5 years is subject to regular rates with no limit.

This rewards long term value creation and virtually eliminates the incentive to game the system for short term profits while taking risks with other people’s money. It truly aligns the interests of management with that of its owners instead of the “heads I win, tails you lose” structure that has dominated compensation for the past 10+ years. There are many objections to reforming compensation and I wanted to respond to some of those below.

• Hurts the US competitiveness since the best people will leave – The United States is the largest most vibrant economy in the world. The opportunity to work in a democratic capitalist country with a strong rule of law provides people with a greater chance of success than anywhere else. And US citizens are subject to income tax on their worldwide income. So if people really want to leave the country, renounce their citizenship, and work in another country, let them. Ask Russian Mikhail Khodorkovsky how the legal system works for billionaires in some other parts of the world.
• High tax rates will discourage work and reduce economic output – This is true at confiscatory tax rates which is clearly the case with a 90% rate or really anything above 50%. So this proposal might discourage some people from working. However, the people who truly create economic value do so over the long term, such as entrepreneurs building companies, and they wouldn’t be affected by this proposal at all. They will still be able to earn billions, they just won’t get it paid out in a single year. Anyone who truly believes that they are valuable shouldn’t be discouraged by such a prospect.
• Paying people based on what their successors do is unfair – Even when executives leave a company, they still will be paid out over five years. The notion that top management has an immediate impact on the results of a large enterprise is dubious. Changes in strategy and execution for companies that size take years to occur. Worst case scenario is that the first few years results are based on the executive’s work and the last couple years are the result of their successor. Maybe this would give imperial CEO’s a reason to do better succession planning. Would Sandy Weill at Citibank really have jetisoned Jamie Dimon and installed Chuck Prince if his pay was at stake? I doubt it and Citi shareholders & employees would have suffered less.
• Private companies don’t have a stock price – Any private company that is large enough to pay an employee over $1M/year can afford to obtain a professional valuation each year. In fact IRS Section 409A requires that any company granting stock options must set a FMV for its stock using a formal valuation. So this is already a requirement for large companies.
• Government should not interfere with the free market – I agree completely, if it is a properly functioning, fair, and free market. Executive compensation is hardly set in an open market by the owners of the company. While it may not be practical for widely held, public corporations to give all shareholders a say on compensation, the current system is clearly broken and needs to be fixed.

Another long post, but I think the topic deserves more national discussion. Reforming the incentive pay system would go a long way towards avoiding the reckless behavior that has imperiled the world economy. And rewarding only those who really create economic value is the right thing to do.

Bonus Bailouts

By Trishan Arul    March 24, 2009

Despite a couple good weeks in the stock market, the public is still very upset about the AIG bonus payments. The amount of money and the fact that these are guaranteed payments for the very people who brought down AIG is appalling to say the least. There are many good reasons to pay people bonuses, but this is about more than that. It is about the public resenting executives who unconscionably enrich themselves while leaving their companies and the economy in shambles.

Last weekend, I met a pilot from Virginia who was in town for layover. Over drinks he asked my opinion on this issue while stating that he was a “free market guy”. That’s good to know, but this has nothing to do with free markets. This is another example of powerful people gaming the system for their own benefit – when things go well its a private free market so they should be paid as much as possible; when things go badly then the government needs to step in because its not their fault and they shouldn’t have to suffer with lower pay. Same line of reasoning for CEOs – each year their pay gets set (at least partially) by comparing it to the pay of other CEOs and since every company wants to believe their CEO is above average, they need to get paid above average. Guess what happens to the average in the following year? The median pay spirals upwards with no ceiling, no link to performance, and certainly no shareholder input. Oh, and the Board of Directors approving the pay consists of CEO’s from other companies who like the system just fine. Great system if you’re an executive at that level. But it is nowhere near a properly functioning free market.

I do believe people should get rewarded for their efforts in creating long term value for their company and the economy as a whole. But they should also pay for failures. Entrepreneurs know this all too well. For every Sergey or Larry at Google, there are thousands of people who try to start a business and fail. Obviously timing and luck have something to do success but, IMO, the founders and executives make the most significant contributions. Success is rewarded handsomely but failure is very costly. That’s creative capitalism in a nutshell and its what makes market economies thrive. Since executives at “too big to fail” institutions (and corporate America in general) have shown zero willingness to make the system work fairly, something has to be done. Here’s my proposal:

1. Normal tax rates apply to all compensation up to a limit. Say 3 times the President’s salary – that’s about $1.2M and it will be indexed in the future. How many people will win the argument that they bring more value to the world than the President of the United States? Is earning just $1M really a hardship on anyone?
2. All short term compensation above the limit, including bonuses, is non-deductible to the company and incurs a penalty tax of 10X the amount. At the individual level, it is taxed at 90% (Congress’ current tax to recover the AIG bonuses).
3. Short term compensation above the limit must be approved by an absolute majority of shareholders each year (not just those who vote) and Directors’ cannot recommend a Yes vote on that item, i.e. if it is not actively voted, it is an abstained vote.
4. Long term compensation above the limit can be taxed at normal rates only if it is tied to the stock/value of the company relative to the overall market or industry. Long term compensation must be paid out evenly over no less than 5 years even if you leave the company.

Here’s an example: A company wants to pay its CEO $3.2 million this year which is $2M above the limit. First, over 50% of the shareholders have to explicitly agree to this at which point the company will pay a penalty tax of $20M and the CEO will pay a tax of $1.8M… was it worth giving the government $21.8M for the CEO to net $200K? Or you could give the CEO $2M in indexed stock options paid out over 5 years. If the company does well, he’ll  eventually get all that money or more but if it tanks during those 5 years then his payout suffers along with the shareholders and everyone else. If the CEO is there over 5 years then all those rolling payouts will add up to 100% of the average long term compensation, so they only have to worry about a lower level of comp for the first few years in which time they can prove that they are worth that kind of money.

This will reward long-term value creation, give shareholders a strong voice in obscene pay practices, and provide ample rewards for those who truly earn it. Note that there is still no limit on what a person could earn – this is America after all! This also solves the problem of people just getting paid when the stock market goes up – if the market rises 10% and the company stock rises 6%, did the CEO really do a good job? Regular options and restricted stock give execs an extra 6% for underperforming the market by 4%. Is that pay for performance? Let the people who truly make a difference, add value, and are deserving of multi-million pay packages get paid. Let the others stop getting a free ride based on “free market” excuses.

One of the things that isn’t often mentioned in this debacle is that the predecessor CEOs of these companies made off with tens or hundreds of millions of dollars. Money paid out because they took on massive risks & played games with the numbers just to collect short term bonuses. I actually feel bad for people like Vikram Pandit of Citibank and John Thain of Merrill Lynch – compared to Charles Prince and Stanley O’Neal these guys got stuck with a ticking time bomb, were hammered in the media, and got paid next to nothing for all that. The former CEO’s are much greater villains here and no one has asked for their money back.

Many people will have objections to my proposal. But in the interests of keeping it brief, I’ll end this post here and cover objections next time! Let me know what you think or any other ideas you have to fix a broken system.

Stimulating Entrepreneurs

By Trishan Arul    March 11, 2009

Given the companies and people whom I work with, it should be no surprise that I strongly support entrepreneurship. The sad thing about the current economic problems is that small businesses have been hit harder than big corporate giants yet NOT A SINGLE POLITICIAN has bothered to help in any meaningful way. Yes, the economic stimulus package allows for bonus depreciation but that is useless if your business doesn’t have money to buy new equipment and, despite Republicans’ fanatical belief in tax cuts, its a very poor incentive to induce spending.  A number of columnists and writers such as Thomas Friedman have advocated common sense changes to foster innovation.

Some things that will help are:

• making it easier via tax incentives for people to invest in early stage companies
• providing operating companies with loans to weather through the downturn

On the first point, Sramana Mitra (whom I have plugged before) wrote a good article on Forbes.com advocating for President Obama to add entrepreneurs to his circle of advisors. Among the changes she advocates and I support is policy that would allow:

An aspiring entrepreneur ought to be allowed to create a tax-free pool of income for use as personal venture capital. Such a pool of capital would go a long way to help kick-start new ventures.

This is just the first step in many policy changes that the government can make to help foster new businesses.

On the second point, an innovative idea related to providing financing to existing businesses was written about by Andrew Field, an entrepreneur himself, in a comment article. He advocates small business loans for every employee hired by a company. The alternative for most is to cut payroll, something that will just make the recession worse since small businesses employ most of the people in this country.

Let’s hope someone in Washington DC is listening. Or better yet, write your congressional representative and US senators and tell them how they should be allocating the trillions of our tax dollars being spent on fixing the economy! I already have.