Leslie Stevens-Huffman

As discrimination and harassment claims continue to rise, an up-to-date employee handbook has become a practical and affordable first line of defense for beleaguered employers. Between legal costs, court costs and settlement fees, an employer’s tab for a single claim now averages $100,000 to $250,000.

“A well-written handbook not only communicates the company’s policies and procedures, it nips problems in the bud by establishing the framework for a professional work environment,” says Elise Vasquez, labor and employment partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Vasquez about the all-important role of an employee handbook in preventing lawsuits and claims.

What are the traditional components of an employee handbook?

Every handbook should start with a statement from the company, which establishes the expectations for a professional work environment where people are treated with dignity and respect, and violations won’t be tolerated. Other bare bones policies include:

• Equal employment opportunity and anti-discrimination — Make sure your policy covers all protected classes including disabled workers and applies to promotions and compensation as well as hiring practices.

• Employment verification and eligibility (I-9) — Require new hires to provide proof of their eligibility to work in the U.S. within 72 hours.

• Anti-harassment — Prohibit all forms of workplace harassment and retaliation, not just sexual harassment.

• At-will employment — Make it clear employment is not for a guaranteed time period and can be terminated at any time by the employee and employer.

• Family and Medical Leave Act — A must-have policy for companies with 50 or more employees.

• Maternity/paternity leave — Your policy should cover all California laws that pertain to disability pregnancy and paternity leave.

• Written acknowledgement and right to revise — Reserve your right to revise the handbook and include a receipt, which states that the employee has received, read and understood the material.

Should employers include other policies based on recent changes in the law?

Employers bear the burden of proof in wage and hour disputes. Employers, therefore, need to include a break and meal period policy for all their non-exempt workers consistent with the most recent California Supreme Court decision in Brinker Restaurant Group v. Superior Court of San Diego.

Another good practice is to include policies governing employee sick time, vacation, jury duty, and other forms of paid or unpaid leave.

Lastly, a policy setting forth the unacceptable or acceptable use of social media during work hours — especially on company-issued technology — is recommended and ensures compliance with California’s Social Media Privacy Act.

What are the best practices for enforcing the rules?

Employers must have systems in place to enforce the mandatory anti-harassment and discrimination policies and complaint procedures. Likewise, employers should not impose non-mandatory policies and procedures they do not intend to follow.

Inconsistent enforcement and subjective decisions will favor the litigious employee. Close loopholes, clarify gray areas and ensure reliable application by providing complementary policy training for employees and managers. Managers play a key role by modeling appropriate behavior and consistently enforcing the policies and procedures.

How often should employers review and update their handbook? 

Employers should revise their handbooks annually at the end of the year. This ensures compliance with any new laws moving into the new year. Should you need to revise a policy sooner, notify employees via a companywide email and, where possible, include a copy of the policy with an acknowledgement in employees’ paychecks. While no policy is foolproof, an employee handbook is a cost-effective way to reduce risk when combined with open communication, consistent enforcement and appropriate training.

Elise Vasquez is a partner in labor and employment at Ropers Majeski Kohn & Bentley PC. Reach her at (650) 780-1631 or evasquez@rmkb.com.

Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC

Whether your wish list includes manufacturing, medical, transportation or technology equipment, how you finance major purchases may not only impact the return on your investment but the success of your entire company.

“Financing decisions impact cash flow and a company’s ability to capitalize on opportunities or respond to adversity,” says David Beckstead, Pacific Region sales manager for the Equipment Financing Division at California Bank & Trust. “Executives need to weigh their options carefully before making a decision.”

Smart Business spoke with Beckstead about the need for prudent financing decisions when purchasing machinery and equipment.

What should executives consider as they are reviewing various financing options?

The rule of thumb is to match the financing terms to the life of the asset. In other words, it’s best to use short-term financing for short-term business needs, and longer-term financing for long-term business assets such as equipment that will generate revenue or reduce operating costs for the foreseeable future.

You can avoid finance charges and interest by paying cash, but leasing the equipment or borrowing the funds lets companies preserve capital for other purposes. You should also consider the tax implications and the ultimate cost of the equipment along with your ability to make a substantial down payment to secure a traditional bank loan.

When does leasing make sense?

Leasing makes sense when companies want to preserve cash for future growth or expansion, they need flexibility or they don’t have a lot of cash to put down. Since leasing companies usually maintain ownership of the asset, companies can upgrade or return the equipment should their needs change. For example, you can align the lease terms with a customer agreement or upgrade to a bigger, faster model as your company grows. Plus, most leasing companies don’t require a down payment and it may be possible to negotiate a longer-term payment plan, improving cash flow.

With leasing you can usually deduct the lease payments as a business expense on your tax return, and on short-term leases the rental expense may provide a better tax benefit than depreciating the asset. You may be able to transfer the risk of ownership to the leasing company depending on the type of lease.

How can executives research the market and secure favorable leasing terms?

Prioritize your needs, and then search for the best combination of rates, terms, flexibility and customer service by contacting several firms. Bank leasing companies usually have high underwriting standards but lower rates, while finance companies can be more lenient lenders but generally charge higher rates. Vendor finance companies are a third option and are generally the most flexible about taking back or exchanging equipment. However, they usually charge higher rates.

Beware of upfront payments and fees, hefty residual payments, pay-off fees and other clauses that may boost the overall cost of the equipment. In fact, it’s a good idea to ask a knowledgeable third party to review the agreement so you don’t forsake the benefits of leasing by accepting disadvantageous terms.

What should executives look for in a leasing firm?

Always consider a firm’s reputation, check its references and read its contract before requesting a quote. Contracts differ between companies and impact everything from tax deductions and residuals due at the end of the lease to the responsibility for servicing the equipment. Finally, select someone you trust. Your financing partner should provide funding and be committed to your success.

David Beckstead is Pacific Region sales manager for California Bank & Trust Equipment Finance. Reach him at (949) 457-0458 or david.beckstead@calbt.com.

Website: Business owners and entrepreneurs can visit our Business Resource Center.

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Whether your day in court resulted in a jubilant victory or disappointing defeat, the verdict may not stand as thousands of cases are appealed in California every year.

Given the complexity of appellate law and the uniqueness of the process, savvy executives don’t wait until the trial is over to devise a winning strategy.

“Any company that is concerned about a trial outcome, good or bad, needs to be thinking about the possibility of an appeal from the outset,” says Susan Handelman, a partner at Ropers Majeski Kohn & Bentley PC. “It can hurt your chances if you wait until the last minute to understand the process or seek expert advice.”

Smart Business spoke with Handelman about the appeals process and the benefits of proactive preparation.

When is it possible that a company will face an appeal?

Once a judgment is entered in the trial court, the losing party has the ability to seek a review of the judgment by a panel of appellate judges. Appellants often cite a procedural error or the way the law was applied by the trial judge or jury as the impetus for their appeal.

After reviewing written submissions from both parties, the appellate court has the option to affirm, modify or overturn the lower court’s verdict, or even order a new trial. Because it puts the original outcome back up for grabs, this can mean that an appeal can be, for both parties, a truly crucial interaction with the court system.

How does the process differ for appellants and respondents?

Appellate court proceedings are very different from those in trial courts, given that the judges focus on the actions of the lower court instead of hearing lengthy factual arguments and witness testimony to reach a decision.

The appellant is responsible for initiating the appeal and generally has the burden of proving that a prejudicial error was made in the trial court. The respondent must validate their win by providing a thorough and accurate accounting of the trial and must legally and factually support the efficacy of the original decision.

Since the appellant files only two written briefs and the respondent gets only one brief to make their case, it’s imperative that the attorney’s logic, reasoning and legal arguments resonate with the appellate judges.

How long does the appeal process take and what’s involved? 

An appeal can take anywhere from 18 to 30 months once the appeal is filed. If the parties don’t want to wait, they may have an opportunity to settle their differences in the interim by participating in mediation that is fully or partially funded by the court.

Having an appellate attorney who knows the ropes is critical because, other than briefing, the only presentation to the appellate panel is an oral argument that lasts just 30 minutes and must be on point.

Since success in appeals court hinges on different issues and tactics than a traditional trial, some companies take a long view and hire an appellate specialist from the outset to monitor important litigation.

Is the appeal final or are there more options?

The decision made by the appeals court isn’t necessarily the end of the road. The party that lost can request a rehearing by the appeals court and they may try to appeal the decision all the way up to the California or U.S. Supreme Court.

However, it takes considerable time, money and expertise to continue the appeals process and you may run out of options, since the high courts don’t hear every case.

The bottom line is that waiting and seeing is not the most viable strategy when an appeal can be a real game changer.

Susan Handelman is a partner with Ropers Majeski Kohn & Bentley PC. Reach her at (650) 780-1759 or shandelman@rmkb.com.

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[caption id="attachment_30767" align="aligncenter" width="200"] Dr. Glen Taylor, Director of MBA Programs for Global Innovation, California State University, East Bay

Yi Jiang, Assistant Professor and Associate Director for MBA for Global Innovators, College of Business and Economics, California State University, East Bay[/caption]

Whether it is for technology or consumer products, the global market is now the best place to grow sales and profits. To fully realize the potential of these opportunities, executives must undergo a paradigm shift, strategically analyze data and build alliances before the first dollar changes hands.

“To sustain growth and allow the next generation of Americans to have a better life, we have to rethink globalization, identify opportunities and be contributors to the global economy rather than consumers,” says Dr. Yi Jiang, associate director of MBA Programs for Global Innovation at California State University, East Bay.

Smart Business spoke with Jiang and Dr. Glen Taylor, director of MBA Programs for Global Innovation at California State University, East Bay, about the process of identifying and making the most of ripe opportunities in the global marketplace.

What prevents U.S. executives from capitalizing on the best global opportunities?

Taylor: U.S. executives need a different approach to analyze and select global opportunities because our country is no longer the dominant market in the world. Our loss of supremacy means that we need to learn how to do business in other countries that don’t always comply with our culture and business practices. We must put ourselves in their shoes and see things from their perspective.

Jiang: We’ve had a tendency to view globalization in simplified terms and think of other countries as a resource for outsourced services and cheap labor. But when executives apply a different perspective to the analysis process and develop innovative products and solutions, they stand the best chance of succeeding outside the U.S.

What’s the first step in the identification process?

Taylor: The first step is demographic analysis, but unless executives take a deep dive into the data, they may overlook emerging trends and target the wrong customers. For example, a superficial analysis of Chinese demographics reveals no net population growth, but an in-depth study shows that social change is under way and people are urbanizing at the fastest rate in the world, adding tens of millions of new global consumers each year. This creates unprecedented demand growth.

Jiang: Each country has regional and generational differences that create unique opportunities on the consumer side. U.S. executives must consider dynamic industry cycles and a county’s openness and resources before attempting to position each country in the holistic picture of global strategy.

What’s the next step?

Jiang: Travel to the country to experience the culture, validate your hypothesis, and establish strategic business partnerships and networks. You’ll need seamless collaboration to understand the cultural nuances and build a supply chain. Infusing yourself in the culture will help you identify additional opportunities, since the best ideas often come from prospective partners, suppliers and customers.

Taylor: Business relationships are like a marriage, so prospective partners must get to know each other before making a commitment. And your travels may yield additional opportunities, especially if you view things with an eye for the innovations being developed in other markets.

What else must executives do to succeed in the global marketplace?

Jiang: Remember that global opportunities and situations are fluid, so what seems like a great idea today may not work tomorrow. Conduct extensive scenario analyses so you are prepared to perform under a variety of circumstances, and keep your finger on the pulse of prospective customers by garnering feedback through open source social networking.

Taylor: The key is to search out opportunities in global markets to develop innovative products and services that build on our strengths while embracing new ideas from other countries.

Dr. Glen Taylor is director of the MBA Programs for Global Innovation at California State University, East Bay. Reach him at glen.taylor@csueastbay.edu.

Dr. Yi Jiang is associate director of the MBA Programs for Global Innovation at California State University, East Bay. Reach her at yi.jiang@csueastbay.edu.

Insights Executive Education is brought to you by California State University, East Bay

Monday, 31 December 2012 19:11

How to avoid a legal fee dispute

It’s easy to forget about costs when you’re embroiled in a lawsuit, but you could end up winning the trial and losing the fiscal war if you let the litigation tab spiral out of control.

“Business owners can be bamboozled by a litigation attorney when they’re in the heat of battle,” says Kim Karelis, a partner and expert witness with Ropers Majeski Kohn & Bentley PC. “Avoid disputes by negotiating a reasonable fee schedule in advance.”

Smart Business spoke with Karelis about the best ways to avoid and resolve a legal fee dispute.

What is a legal fee dispute?

Attorneys usually charge a flat fee for routine tasks like reviewing a contract or setting up an LLC, so novice executives may experience sticker shock when they receive a bill from a litigation attorney if they don’t perform adequate due diligence. The lack of a formal fee schedule can sometimes lead to a dispute and additional litigation if the two parties can’t resolve the issue.

What should business owners know about hiring a litigation attorney?

Refuse block billing and question vague descriptions for services when negotiating a retainer agreement so you can compare and determine whether an attorney’s fees are reasonable and customary. Only the senior partner should bill for in-house strategy meetings involving several staff members and you shouldn’t pay bloated fees for photocopies, phone calls and secretary time.

Consider the cost for expert witnesses, court filling fees and depositions, and estimate your true ROI by comparing the total tab to what you may gain or lose by going to trial.

Finally, be wary of an attorney who seems unreasonable or wants to bill for every single second. Lawyers should be willing to negotiate, especially in this market.

What else can business owners do to prevent legal fee disputes? 

Hiring a referral from a trusted colleague is probably your best bet, but you still need to get everything in writing and seek an outside opinion before signing an agreement if you’re unfamiliar with litigation costs.

Establish a budget and a goal for the action and consult several attorneys to see if they’re reasonable and attainable.

Lastly, nip potential problems in the bud by reviewing invoices and questioning any unreasonable charges you find in a timely basis.

What happens if a dispute arises? 

Clients have the right to seek arbitration by a panel consisting of neutral attorneys and a layperson who will decide the appropriate amount of attorney’s fees through an informal, low cost proceeding administered by the local bar association. The losing party has the right to pursue a court trial. However, they must act quickly and file the paperwork within 30 days of the loss.

What are the legal standards that apply to legal fee disputes?

A signed retainer agreement takes precedent when a fee dispute arises. If none exists, the court will attempt to determine a fair charge for the attorney’s services, in part by assessing whether his fees are unreasonable or unconscionable.

While the courts tend to side with clients, especially when the attorney’s charges are vague, there’s little sense in taking chances when the problem is avoidable.

How are legal fee disputes usually resolved?

Most executives and attorneys don’t want to air their dirty laundry in public, so they try to resolve their disputes through informal, private discussions and by consulting an outside expert.

While few disputes end up going to trial, the chances increase when emotions run high and business owners don’t do their homework.

Kim Karelis is a partner and expert witness with Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2012 or kkarelis@rmkb.com.

Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC

Business leaders often rely on intuition when making critical decisions, but according to The Economist Intelligence Unit, executives dramatically increase their chances of success when they incorporate facts and data into the decision-making process.

Global companies experienced a 26 percent improvement in performance over the last three years when big data analytics were applied to the decision-making process. And now, those data-savvy executives are forecasting a 41 percent improvement over the next three years.

“Although beliefs and instincts help executives make expedient decisions, they aren’t always good decisions,” says Dr. Chongqi Wu, assistant professor of management for the College of Business & Economics at California State University, East Bay. “Business leaders become better decision makers when they take advantage of data and the facts derived from data analysis.”

Smart Business spoke with Wu about the benefits of incorporating big data and analytics into the decision-making process.

Why is fact-based decision making superior?

Although intuitive decision making is simplistic and quick, a lack of underlying data makes it hard for executives to diagnose and correct problems when something goes wrong. Instead of compounding the problem by making another bad decision, executives can drill down into the data to determine the cause of misfires and use factual analysis to set a new course. Actually, studies show that cumulative improvement is hard to obtain when executives react to problems instead of using facts to make prudent business decisions. And since most of your competitors are probably using data, companies that base decisions on gut feel or instinct are at a competitive disadvantage.

What types of decisions or problems are best solved by big data?

In general, data-driven decision making works better at an operational or tactical level since there are relatively fewer risks involved. In fact, when aided by technology, data makes it easy to automate rudimentary tasks and decisions. For example, it’s hard to imagine how Amazon or Wal-Mart would fare if they relied on managers’ instincts to replenish stock levels, when a computer can synthesize inventory changes and sales trends and place orders automatically. On the other hand, strategic decisions still require intuition and judgment, but injecting data analysis and modeling into the process can significantly improve the odds of success. Don’t think of gut-based and fact-based decision making as competing concepts because they actually complement each other. For instance, cross-functional teams often use data to project outcomes and validate the return on proposed programs or new products. It also helps diverse teams build consensus by using facts instead of politics and personal preferences to reach conclusions. Remember, strategic decision making still requires risk taking and gambling, and success may hinge on market timing, execution and luck, but data not only makes executives better decision makers, it makes them better gamblers.

What’s the best way to incorporate data into the decision-making process and corporate culture?

First, executives need to lead the way in supporting cultural change by acknowledging the importance of data in the decision-making process. Next, use data modeling to project probable outcomes and evaluate ideas, since facts and knowledge generated from analyzing big data provide a common ground on which we can better debate our ideas. Start with something simple like a marketing program or packaging change, since you usually have ample data to identify untapped opportunities and customer behaviors. In fact, the process of collecting and analyzing data and generating knowledge gives you a better feel about customers, markets and risks.

Finally, force your team to analyze data by asking questions during the evaluation process so they learn how to marry facts and instincts.

Do executives need copious amounts of data to conduct modeling and analysis?

It’s hard to estimate how much data executives need, but simply put, we need as much relevant data as possible. However, there’s no reason to wait; my advice is to start small and start immediately because there’s no need to invest in expensive systems or software. Purchase information from third parties or tap free sources to validate ideas and use economical cloud services and SaaS programs to analyze the information and begin collecting in-house data. Finally, run an experiment or test to see how much data you actually need to project the return on a small marketing project or idea.

How can executives gain the confidence to make data-backed decisions?

You’ll gain the confidence you need to make data-backed decisions by realizing that great decisions don’t always produce great outcomes. For example, it’s a great decision to have Kobe Bryant take the final shot when the Lakers are behind, because his field goal percentage is 45.4 percent. But, even though Kobe gives the Lakers the best chance to win, data shows that he’ll miss about 55 percent of the time. No matter how much data we have collected and how capable of analyzing the data we have become, we will never fully understand all the risks or be able to predict the future because luck and timing still play a role in determining the success of an idea. Don’t forsake your instincts or completely change course; just recognize that incorporating data and facts whenever possible will absolutely make you a better decision maker.

Dr. Chongqi Wu is an assistant professor of management for the College of Business & Economics at California State University, East Bay. Reach him at (510) 885-3568 or chongqi.wu@csueastbay.edu.

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While executives generally recognize the need for a good accountant or lawyer, they often overlook the importance of a strong banking relationship. A bank not only provides the banking services and funds needed to grow, experienced bankers can provide expertise and the financial solutions you need to stay ahead of the competition.

“Your banker can provide a competitive advantage for your company by being a valuable resource for financial expertise,” says Pamela Campbell, senior vice president and San Diego regional manager for California Bank & Trust. “An annual checkup is a great way to see what you could be missing.”

Smart Business spoke with Campbell about the benefits of periodically evaluating your banking relationship.

Why is it important to evaluate your banking relationship on a periodic basis?

Professional bankers can identify potential barriers to success and proactively recommend a customized range of solutions before the need arises. They anticipate your needs as a result of taking time upfront and on a regular basis to meet with you to understand the specifics of your business. They tap into and share industry knowledge and ideally are given the opportunity to analyze your financial position through receipt and review of financial statements. For instance, if your goal is to market products overseas, your banker should, first, understand your goals and, second, suggest appropriate international banking services that will help make your strategic transition into new markets more effective. The relationship you build with your banker today can eliminate uncertainty and assist in achieving your immediate and long-term goals. This forward planning eliminates unnecessary stress and will yield dividends down the road.

What should executives consider when evaluating their banking relationship?

It’s critical to consider not only your business’s current needs, but also its future aspirations by asking these questions:

Is your banker responsive and knowledgeable? Do you have someone at your bank you can rely on when your banker is not available? Your banker, along with the support of his or her team, should return your calls, texts and emails, and take responsibility to answer any questions or solve problems that may arise. He or she should not only understand your industry but also be able to identify appropriate solutions and take a hands-on role in helping you solve your business problems through referral to professionals within your community.

Is the senior management team local and accessible? The fate of your loan may reside with a group of distant strangers. Having the ability to meet the local management team and share your business plan is an important part of building a solid banking relationship.

Is your banker willing to invest time in building a relationship? Does your banker engage in an ongoing dialogue with you? Is he or she willing to meet on a regular basis or whenever the need arises? It takes two willing parties to have a productive relationship.

Can your banker explain the bank’s lending philosophy? If your banker cannot do this, he or she won’t be as effective in serving as your advocate during the loan approval process. A seasoned banker, within a reasonably short period of time, should be able to determine whether the bank will be able to support your company’s lending needs. Their ability to review a transaction upfront and identify the strengths, and mitigate any potential weaknesses, will save your company time and provide the clarity to plan for the future.

Is your banker invested in the local community? They will then not only understand the market and economy but also be committed to the success of their clients.

What would executives hope to uncover or discover during this evaluation process?

The evaluation should reveal whether your bank’s vision, policies, philosophy and staff align with the strategic direction of your company. Determine whether your bank possesses the credit appetite, expertise and services to grow with your company. For example, some banks may not be a good fit because they cater to a specific industry niche or maybe don’t offer the services you need to sell your products online or overseas. Your evaluation should reinforce your decision to stay or highlight the need for change.

What shows that changing banks is warranted?

First, do you have a banker assigned to your relationship? Your banker should be someone you can count on to solve problems, respond to requests in a timely manner, offer guidance, and even refer you to additional resources like attorneys, accountants and/or consultants who can help you develop and/or execute on a financial forecast or a business plan. Your banker should be part of a team of professionals you can rely on for support. You should consider a change if your current banker is unwilling to spend time with you, is nonresponsive when you have a request, or can’t explain the pros and cons of various loan or deposit products or what you need to do to qualify for them. If your bank can’t deliver when opportunities arise, you may need a different bank.

What should executives consider when selecting a new bank?

Certainly services and fees are important, but also consider the bank’s niche, its structure, and chemistry with the management team and staff. A community-oriented bank familiar with your industry may be the best bet for small to mid-sized companies because it is committed to helping the region thrive. This understanding of the local community combined with access to banking professionals who support your company with personalized service and proactive solutions will help you achieve your goals. A solid banking relationship reduces stress and helps you focus on the execution of daily activities. There’s no need to settle for a transaction-oriented bank when it’s possible to gain a competitive advantage through relationship banking.

Pamela Campbell is senior vice president and regional manager for California Bank & Trust. Reach her at (858) 623-1930 or pamela.campbell@calbt.com.

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Busy executives probably haven’t read Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, so they may be surprised by the broad impact of the regulatory changes to over-the-counter (OTC) derivatives trading. In addition to fundamentally changing the way the market operates, the new laws could impact your bank’s appetite for risk, your ability to borrow funds and even your company’s hedging strategy.

OTC derivatives are traded and negotiated  without going through an exchange or other intermediaries to hedge or speculate on risk. They were largely unregulated until this act.

“Any time there’s a fundamental change in the way a market operates executives need to understand the big picture,” says Scott Fung, DBA, associate professor of finance for the College of Business and Economics at California State University, East Bay. “At a minimum, the changes require increased knowledge of the interdependent relationships between the various parties, better decision making and a review of your risk management strategies.”

Smart Business spoke with Fung about the potential impact of the new derivative regulations and how executives should prepare.

Why should executives pay attention to the new derivative regulations and their market impact?

Following the financial crisis, policymakers decided that a lack of transparency and regulations in the OTC derivative market caused system-wide instability, so they created a regulated environment and increased the oversights and reporting requirements.With any legislation, there are reverberations throughout the business community and the possibility of unintended consequences, especially when the derivatives market provides the following key economic functions:

  • Price discovery. Derivatives trading provides key information on the value of the underlying assets and serves as a predictor of future prices.
  • Operational advantages. The derivatives market offers lower transaction costs and additional market liquidity.
  • Informational and allocation efficiency. Derivatives trading enhances available market information and resource allocation.
  • Business advantages. Derivatives allow companies to engage in risk management by facilitating hedging strategies and by reconfiguring risk and return trade-offs. The market allows unwilling risk holders to transfer risks for a fixed price, which frees up cash for other investments and business expansion.

What are the legislation’s key provisions and who will be impacted?

The new legislation establishes the regulatory framework for the governance of the OTC derivatives markets and vests oversight authority in the Commodity Futures Trading Commission and the Securities and Exchange Commission. The intent is to provide greater oversight and transparency for derivative transactions such as credit default swaps, commodities and equity swaps. Although the regulations primarily apply to swap dealers and major swap participants, they also impact commercial end-users, financial institutions and corporations. Key provisions include:

  • Changes in execution processes and price discovery of OTC derivatives.
  • Changes in central counterparty clearing and clearing requirements, trading activities, capital requirements and margining of OTC derivatives.
  • Changes in the reporting of transactions and record-keeping requirements.

How are these provisions likely to fundamentally alter the OTC derivatives market?

The structural changes are supposed to improve the efficiency, stability, innovation and sustainability of derivatives markets by reducing the possibility of default, system-wide risk and financial crisis. In turn, this will improve the stability and functionality of the markets and financial institutions, ultimately impacting U.S. and global businesses. But it is unclear how these regulations will impact transaction costs, margin and collateral requirements. It’s also unknown whether they will actually curtail risk or tighten the credit market by limiting financial institutions’ hedging options along with their ability to customize derivative contracts. It will be interesting to see if the regulations produce changed trading activities and characteristics, so stay tuned.

How will the regulations impact U.S. businesses?

Any regulation that impacts the market or financial institutions impacts businesses because there’s an interdependent relationship between the various parties. Ultimately, the performance of financial markets and financial institutions affect corporate decision-making, financing opportunities, risk management and so forth. Possible benefits include enhanced functionality and stability of financial institutions, better performance of derivatives contracts, and the opportunity for end-users and institutions to better manage risk. Plus, the increased transparency and availability of information along with additional oversight could increase market participation, thereby boosting market liquidity. Possible downsides of the legislation include cost increases resulting from system complexities including transaction costs, collateral and margin requirements, and diminished customization capabilities.

How should executives prepare for the new regulations and the subsequent market changes?

Executives need to understand the interdependent relationship between financial markets, financial institutions, their suppliers and clients to see how their capital supply and financial resources could be affected. They should consider how they’re managing risk, as they may benefit from the enhanced usefulness and performance of derivative contracts. They also should look out for emerging opportunities and new financing products that may spring up. Executives need to understand the regulations’s intricacies to uncover new opportunities for risk management, financial innovation and ultimately value creation.

Scott Fung, DBA, is an associate professor of finance for the Department of Accounting and Finance, which is part of the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-4863 or scott.fung@csueastbay.edu.

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It takes years for an owner to build a business, but only a few weeks for an unscrupulous employee to destroy all of that hard work by committing multiple acts of fraud. Approximately 75 percent of employees have stolen from their companies at least once over the course of their careers, according to the International Foundation for Protection Officers, and about half of those offenders will steal again.

The risk is greatest in small to mid-size companies with limited staff, where one person is solely responsible for processing financial transactions and signing checks.

“Executives are asking for trouble if they don’t background check prospective employees or segregate financial transactions because the accumulated losses from internal fraud are capable of bringing a small company to its knees,” says Charlie Ott, a vice president and regional manager for security at California Bank & Trust, a wholly-owned subsidiary of Zions Bancorporation.

Smart Business spoke with Ott about the growing risk of employee fraud and the most effective ways to prevent it.

What are some common types of internal fraud?

Trusted employees, with access to the company’s bookkeeping system and bank accounts, can siphon off funds by setting up phony vendors in the accounts payable module and paying erroneous invoices. Or, they may surreptitiously switch account numbers in the online bill pay system and use company funds to pay personal credit cards, mortgages and car payments. Some use software to replicate blank check stock or insert their name into the payee line. Other times, they submit phony receipts on expense reports or deposit company checks into their personal accounts.

Fraudsters spend every day looking for opportunities and honing their craft, and they’re bound to succeed unless you are vigilant and take a few preventative measures.

Which preventative measures are most effective?

Internal fraud starts with people. So even if you hire referrals from trusted employees or family friends, it’s critical to conduct several interviews, a background investigation and reference checks before extending an offer. Repeat offenders often target small businesses due to their lax vetting practices, and background checks aren’t that expensive when you consider what’s at stake.

Once you have established strong hiring practices, consider opportunity. Based on your business and accounting practices, where do opportunities exist for an employee to defraud your business? What controls are in place to deter employees from defrauding your business? You can mitigate opportunity by making it difficult for fraudsters to conceal their deeds, which is done by apportioning accounting and banking duties among several employees and conducting random checks on financial and banking activity. As an example, have one person open the mail and enter invoices into the system, another approve the payments, and a third person sign the checks, make deposits and reconcile the monthly bank statement. Finally, safeguard the company’s legal filings and resolutions so fraudsters can’t access sensitive company information and use it to open up a phony bank account. Typically, fraudsters test the waters by stealing a small amount of money to see if anyone notices, then they increase the frequency and volume of their illicit activities. Also, they typically act alone; rarely do they act in concert with someone else, as that raises the risk of getting caught.

Is there a way to minimize the risk of check fraud and counterfeiting?

Keep cancelled checks and blank check stock under lock and key, and only release small batches of checks as necessary. Take advantage of your bank’s fraud prevention programs like positive pay and reverse positive pay, which are specifically designed to spot and stop payment on counterfeit, altered or forged checks. Even if your company is small and writes very few checks, you can still look for altered, forged and counterfeit checks or account anomalies by using online banking to view activity and photos of cancelled checks. Finally, don’t let the bank statement sit on your desk; nip fraud in the bud by reviewing your statement the minute it arrives.

What can executives do to avert technology breaches and phishing?

Every company should have virus protection software and a firewall installed on its network, and executives should ask their banker about programs like Trusteer that are specifically designed to spot fraudulent or suspicious electronic banking activity. Keep hackers from gaining access to accounts by using a standalone computer to process banking transactions, utilizing dual authentication and having two people approve transfers of funds between accounts. Educate employees on the risk of phishing and fraudsters’ tactics so they aren’t duped into providing passwords or login information. Never allow multiple users to use the same password or logon name. Keep passwords under lock and key, changing them from time to time, especially when an employee leaves or takes on different responsibilities.

How can executives help prevent fraud?

Don’t be so consumed with growing your business that you overlook the need to establish rigorous accounting policies and procedures or communicate a zero-tolerance policy for deviations. Inspect what you expect by ensuring accounting procedures are followed and seek professional advice by commissioning an outside audit annually. Spot irregularities by reviewing accounting and banking activity at least once a week and ask questions so employees know you’re paying attention. Ask about a sudden increase in invoice activity, the addition of a new vendor or a large change in account balances. Spend time with employees and have lunch in the cafeteria occasionally because you might be surprised at what you learn by just hanging around.

While it may be impossible to eliminate internal fraud, you’ll be able to minimize it as long as you’re vigilant and take a few precautions.

Charlie Ott is a vice president and regional manager for security at California Bank & Trust, a wholly-owned subsidiary of Zions Bancorporation. Reach him at (510) 808-1644 or charles.ott@calbt.com.

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Superior knowledge management (KM) is often credited with boosting shareholder value, jumpstarting innovation and improving customer service, but with little evidence to support vendors’ heady claims, executives have to rely on faith instead of facts when approving costly initiatives.

Finally, research confirms that acquiring, sharing and using knowledge in meaningful ways definitively improves a company’s return on assets, sales and operating income.

“We only had soft evidence to support the link between superior KM and the bottom line,” says Jiming Wu, Ph.D., assistant professor of management for the College of Business and Economics at California State University, East Bay. “Now after studying the results of 62 companies, we’ve confirmed the link between superior financial performance and superior knowledge management.”

Smart Business spoke with Wu about the tangible and intangible benefits of superior KM.

What is KM and what types of knowledge does it typically include?


KM generally refers to a tool or automated system where companies gather, archive, analyze, and share tangible and intangible information from a variety of sources. In most companies, knowledge is scattered across the enterprise; it resides in databases, documents, manuals and people’s heads. The disparate formats and locales make it virtually impossible to tap or review holistic data when tackling business problems, and efficiency is compromised because business units and managers operate independently.

Top-performing firms use accumulated data to solve business problems, create new products, educate employees or drive operating efficiencies. For example, KM helps managers proactively spot patterns and relationships among customer complaints, product returns and diminishing sales. In turn, they eliminate restocking costs by altering product designs or instruction manuals, which boosts goodwill, sales, market share and the bottom line.

What are the benefits of a knowledge management system?


The top benefits include:

  • Superior knowledge acquisition: Centralization allows executives to measure knowledge collection and make it a priority. Plus, a KM tool reduces the tendency for a manager to collect and hoard separate data.

  • Superior storage and retrieval: KM systems allow companies to collect, organize, codify, store, safeguard, and access institutional knowledge and data. Without a tool or program, information stored in a variety of formats and systems can’t be retrieved or analyzed, and staff turnover often results in the loss of critical institutional know-how.

  • Superior sharing and dissemination: It’s easy to share best practices and foster collaboration when everyone shares the same goals and has access to the same information. Plus, studies show that superior KM is capable of transforming run-of-the-mill companies into powerful learning organizations.

  • Superior decision-making: It’s hard to make good decisions when managers have to react to problems. KM lets them analyze suppliers, customer preferences and the competitive landscape so they can forecast the impact of a new product on revenue, accounting, manufacturing and distribution, customer service and the bottom line. Our research revealed that superior KM firms are more efficient and profitable because they use data instead of hunches to anticipate problems, establish priorities and align valuable resources.


How does superior KM create a competitive advantage?


Companies get a leg up on the competition when they use a unique resource like KM to streamline business processes, reduce production costs or accelerate R&D. They tend to originate, design, test and release new products faster than the competition, and be more efficient because products are better aligned with marketplace needs. For example, engineers can nip defects in the bud by reviewing focus group feedback and adapting the design or manufacturing process before production. Marketing can eliminate seasonal revenue dips by reviewing customer demographics and buying cycles and creating unique advertising campaigns or promotions. You’ll prevail anytime you can produce something better, cheaper or faster than others, and knowledge is the key to outhustling the competition.

What did the study reveal about the link between superior KM and superior bottom line performance?


We studied the financial performance of 62 firms in reaching our conclusions. Half the firms were deemed to have superior KM because they were better at mobilizing and applying their resources to problems and they resolved issues more quickly than other firms. On average, the superior KM firms were 5 percent better in four key categories: return on assets, return on sales, operating income to assets and operating income to sales. Not only were the superior KM firms more profitable, they garnered more income from each dollar of their assets.

How can executives tailor benchmarks and measure the return on KM initiatives?


Because KM initiatives tend to be costly, executives need to track a variety of tangible and intangible measures to gauge the return. Intangibles include the time and resolution rates for customer problems because those should improve when agents, engineers and production managers have access to centralized information. Next, look for decreased cycle times in R&D and whether you’re developing and releasing new products faster than the competition. Finally, track tangible measures, such as your company’s growth rate, revenue, market share and profitability. If you’re exceeding industry norms, it’s probably due to superior KM, because now we know that the link between superior KM and superior financial performance is no coincidence.

Jiming Wu, Ph.D., is assistant professor of management at the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3099 or jiming.wu@csueastbay.edu.

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