While high-profile cases such as Tyco, WorldCom and Enron garner the headlines, companies of all sizes can be affected by corporate fraud. The types of schemes used to misappropriate funds vary in nature but are similar in the fact that they can be extremely costly.
“The Association of Certified Fraud Examiners estimates that the typical organization loses approximately 5 percent of its annual revenue to fraud,” says Kevin Yardumian, vice president of Gumbiner Savett Inc.
Smart Business spoke with Yardumian about corporate fraud and how to go about implementing fraud controls.
What types of corporate fraud are most prevalent?
There are two basic types of corporate fraud we come across quite frequently: financial statement fraud, which involves the misstatement of financial information by the company’s management, and asset misappropriation schemes, which involve an employee using his or her position within a company to misappropriate company assets or resources. While both types of fraud can have a devastating effect on an organization, asset misappropriation is more common.
Some asset misappropriation schemes that we’ve seen include:
- The establishment of a shell company, which submits fraudulent invoices to the victim company. The invoices may be for nonexistent shipments or services or may reflect inflated amounts for legitimate shipments or services provided by a third party that have been diverted through the shell company. This type of fraud is particularly common in companies that purchase goods or services overseas.
- Shipments of inventory to unauthorized recipients. This is very common among companies that don’t have accurate perpetual inventory systems but instead rely on periodic physical counts.
- Check tampering and forged endorsement schemes
- Payroll fraud involving fictitious employees
- Employee kickbacks
- Diversion of cash receipts
- Fraudulent commission schemes
In addition to financial losses, what types of collateral damage can a company sustain?
The majority of employee-related fraud involving publicly held companies is never prosecuted because of the impact that public knowledge of the fraud could have on public confidence in the company and the company’s stock price. For private companies, knowledge of fraud can diminish a lender’s confidence in the company’s management. It may also encourage additional fraud due to the perceived lack of controls in place to detect and defer fraud.
How should a business go about implementing fraud controls?
When working with business owners to establish an anti-fraud program within their organization, we typically go through a four-step process. First, we help the business owner understand some of the fraud schemes that are most common for his or her particular type of business, which we base on factors such as the industry and company size. Secondly, we identify the assets within the organization that are susceptible to fraud. Next, we develop and implement a system of controls to detect and deter fraud within the organization and to safeguard the assets susceptible to fraud. Finally, we establish a program for monitoring compliance with the system of controls and for updating the controls as necessary.
How important is it to have open avenues of communication for employees who suspect foul play?
Very important. While every organization should have a system of controls in place designed specifically for that organization, having an open line of communication with employees is something that is important for all organizations because it helps establish an anti-fraud culture. Some of the basic steps an organization can take to establish an anti-fraud culture include:
- Providing anti-fraud training to employees that focuses on identifying warning signs of fraud
- Establishing an ethics officer within the organization who meets regularly with employees
- Developing a corporate code of conduct that spells out acceptable versus unacceptable behavior and specifies penalties for violations
- Establishing a mechanism for fraud to be reported by employees on an anonymous basis, such as a whistle-blower or fraud hot line
If a company suspects that fraud has occurred, what steps should be taken?
If a company suspects that fraud has occurred, it should contact an anti-fraud professional to assess the damages and to implement controls to prevent additional losses. There is very powerful technology available to assist with this process. That being said, the best time for a business owner to contact an anti-fraud professional is before he or she suspects fraud.
The majority of our fraud-related work is related to implementing controls prior to the suspected occurrence of fraud, in essence, a preventive maintenance engagement. Although sometimes when we perform this type of engagement we find that fraud actually has occurred, it just wasn’t previously suspected or detected.
KEVIN YARDUMIAN is a vice president of Gumbiner Savett Inc. He is a certified fraud examiner as well as a CPA and works closely with business owners to minimize their exposure to fraud. Reach him at (310) 828-9798 or email@example.com.
Trade-cycle financing refers to an assortment of financing solutions targeted towards companies that import and/or export. Every company has a unique sales cycle; each distinct phase places different challenges on a company's finances.
“All companies have a trade cycle specific to their industry and company operations,” explains Caroline Brown, first vice president of Comerica Bank. “The cycle involves the purchase of raw materials, the manufacture of goods, an inventory period, the shipment of product, and, ultimately, the collection of funds and receivables.”
Smart Business spoke with Brown about trade-cycle financing, how a company can benefit from this type of financing and what types of payment mechanisms are available.
What is trade-cycle financing?
Trade-cycle financing is a type of financing solution that is designed for importers and exporters. It can help them in financing inventory, whether it be for domestic or international purchases. This method of financing allows banks to customize financing over a certain period of time, which can vary from company to company.
How can a company benefit from this type of financing?
Primarily, a company can benefit from increasing its working capital. Importers and exporters can use funds from trade-cycle financing to support the purchase of raw materials, inventory and manufacturing costs.
Trade-cycle financing can also cover expenditures all the way up to the collection period. During this phase, there may be a lot of cash outlays with staffing, materials and other costs, depending on the complexity of the product and no funds coming in. Using trade-cycle financing to secure additional working capital can be extremely beneficial for a company under these circumstances.
What payment mechanisms are available?
Primarily, the payment options are cash in advance, letters of credit, documentary collection and open account. The decision of which payment mechanism to use depends on a number of different factors: the negotiation between buyers and sellers; the relationships that have been established; potential collateral sources; and how customized the product is. Another consideration is the value of the product: A company may be more willing to take a risk on a relatively inexpensive product versus one that is quite expensive. The country involved with the transaction is also important, as some countries have specific commercial risk and others have more political risk. Depending on all of these different criteria, the terms of the sale might vary.
What risks are involved with trade-cycle financing, and how can these risks be mitigated?
The risks vary depending on if you’re an importer or an exporter. For example, if you’re an exporter who has manufactured a product, the safest way to sell is on a cash-in-advance basis. In this case, you’re receiving funds before the product is ever shipped. However, the risk is you’re going to limit your sales and growth opportunities. If you’re an importer, the safest term would be open account sales because you’re not required to pay for a product until you have received it, inspected it, and, oftentimes, even sold and collected on it.
What role does insurance play with trade-cycle financing?
Insurance is another way that companies mitigate their risk. With foreign receivables,in addition to political risk, there is a risk of nonpayment. Insurance can help banks finance receivables for up to as much as 180 days. Cargo insurance covers the risk of your product being damaged or lost. Insurance can also be used as a financing tool and to handle in-transit inventory where a product may be manufactured, housed or even drop shipped in another country.
How can a company determine if it is qualified for trade-cycle financing?
The profile of a trade-cycle-finance customer is an established company with two to three years of successful business operations. It should have a proven track record and be able to show financial strength, profitability and a positive net worth. Also, it should have a predictable and well-defined trade cycle because a lender is lending on the specific period of time that it takes to receive the order to the time money is collected. Importers or exporters looking for additional working capital should contact a trade specialist to help them find the right product.
CAROLINE BROWN is first vice president of Comerica Bank. Reach her at (562) 590-2525 or firstname.lastname@example.org.
Employee stock ownership plans, or ESOPs, are the most common form of employee ownership in the United States. Originating more than 80 years ago, ESOPs were first recognized by the government in 1974. Now thousands of companies have these plans covering millions of employees.
Among other things, ESOPs can be used to provide shareholder liquidity, to motivate and reward employees, and as an attractive form of debt financing. “There are many ways a company can benefit from an ESOP,” points out Michael Savoy, managing director of Gumbiner Savett Inc.
Smart Business spoke with Savoy about ESOPs, how they have evolved and the benefits they provide.
How have ESOPs evolved over the years?
Employee stock ownership plans have been around since 1916 when Sears Roebuck decided to fund its pension plan primarily with company stock. The basic concept was that the employees’ ownership of Sears stock was not only a good retirement benefit, but was also an excellent way to motivate employees to improve the company’s profitability and thus, the value of what they owned. In the early 1970s, the concept caught the eye of Senator Russell Long of Louisiana, who was the chairman of the Senate Finance Committee, and the whole idea gained momentum within the government. In 1974, with the help of Senator Long, the concept of employee ownership was formally recognized by the federal government. Since then, a series of tax laws has been enhanced and modified to provide tax incentives that encourage employee ownership.
How can a company benefit from the establishment of an ESOP?
Firstly, a business owner can, under certain circumstances, sell their shares to an ESOP and either defer, or in some cases, completely avoid paying taxes. Companies can also make tax-deductible contributions to ESOPs, which result in a tax shield that creates value. Employees who purchase all or part of a company through an ESOP have a unique opportunity to build wealth via the underlying stock appreciation without assuming any personal liability. Finally, one of the most important benefits that companies can realize from the establishment of an ESOP is what I call the productivity benefit. Published studies have shown that companies report significant productivity improvements after establishing an ESOP.
In what ways can ESOPs spur employee motivation?
If employees own a piece of the business, they do things differently than if they are just employees. At an ESOP semina I attended, a CEO related a story about a receptionist that now owns a piece of her company. The receptionist was put in charge of purchasing office supplies. All of a sudden, she started taking bids and shopping around for the best prices. This resulted in the company saving tens of thousands of dollars. This is just one aspect of productivity improvement, and it illustrates how people at all levels take pride in ownership.
How do ESOPs create a shareholder liquidity alternative?
Most business owners today have the majority of their personal net worth tied up in their business. Through the use of an ESOP, they are able to sell some, or all, of their company to employees. They can still maintain control of their company, and thus diversify their assets while in most cases paying absolutely no taxes on the transaction.
What is the difference between a nonlever-aged ESOP and a leveraged ESOP?
The difference is that no borrowing takes place with a nonleveraged ESOP while borrowing takes place with a leveraged ESOP. A nonleveraged ESOP is similar to other tax-qualified pension or profit-sharing plans. A company can make annual tax-deductible contributions, generally limited to 15 percent of employee salary, to an ESOP in the form of cash or stock in the company. If you donate additional shares of stock to an ESOP, not only is the company getting a tax deduction for the value of those shares, but there is no cash coming out of the company.
In a leveraged ESOP, the company borrows money, either through the shareholder or a third party, such as a bank, to repur-chase shares from the existing shareholder. In the case of a leveraged ESOP, the limit for annual tax-deductible contributions is 25 percent of employee salary. An additional benefit is that payments of both principle and interest are tax deductible.
How do ESOPs create value?
Aside from the potential productivity improvements, there are also many economic benefits. As we discussed earlier with nonleveraged ESOPs, if you donate shares of stock, your company is making no cash contributions, and thus, tax savings are realized simply through the issuance of additional shares of stock. For instance, if a $1 million dollar contribution were made in the form of stock, a company with the 40 percent corporate tax rate would be saving $400,000 in taxes and there would be a $400,000 cash flow improvement. There is no other type of vehicle that allows this type of transaction.
MICHAEL SAVOY is managing director of Gumbiner Savett Inc. Reach him at (310) 828-9798 or email@example.com.
Routine screening allows for the early detection of colorectal cancer while it is still highly curable, as well as the detection of growths, or polyps, that might eventually become cancerous.
The disease affects tens of thousands of Americans each year, most of which develop the disease after age 50. “Colorectal cancer occurs in approximately 130,000 Americans yearly,” says Dr. Bennett Roth, chief of clinical gastroenterology, director of the Digestive Disease Center and medical director of the UCLA Center for Esophageal Disorders. “It is the third most common cancer and the third leading cause of cancer death in women and second most common in men.”
Smart Business spoke with Roth about colorectal cancer, who should be screened and what procedures are available.
What is colorectal cancer?
Colorectal cancer (CRC) is a malignancy arising from the lining of the colon or rectum that, if undiagnosed and untreated, will potentially lead to obstruction of the bowel, bleeding and/or spread to vital organs, such as the liver. The majority of CRCs begin as benign polyps, which may mutate over time into malignancies. While, perhaps, no more than two out of 1,000 polyps become malignant, there is no way to know which of these will, and therefore, it is recommended that most polyps be removed, once they are identified.
What are the symptoms of colorectal cancer?
Many colon cancers may be asymptomatic and discovered only at the time of screening. Presenting symptoms include abdominal pain, change in bowel pattern, rectal bleeding or iron deficiency anemia. Unfortunately, the prognosis o those patients presented with such symptoms is less favorable than when this disease is found in an earlier, asymptomatic stage.
Who should be screened?
It is recommended that everyon be screened for this disease. The primary goal of screening is to discover the forerunners of cancer, i.e. polyps or, at the least, cancer in its earliest stages. For those individuals lacking significant increased risk factors, screening is recommended initially at age 50. For those with first-degree relatives having history of CRC diagnosed before age 60, screening should be initiated at age 40. For those with two or more first-degree relatives having CRC or a first-degree relative with early onset CRC (before age 50), screening should begin at an age equivalent to 10 years prior to the age of onset of the relative's cancer. Follow-up screening is dependent upon the findings at the time of the index examination as well as the type of screening performed.
What types of screening tests are available?
Fecal occult blood testing (FOBT) is recommended yearly. If positive, a full colonoscopy is recommended. This strategy leads to a reduction of mortality from CRC of 33 percent over 13 years. Unfortunately, while the sensitivity of the test is high greater than 90 percent the specificity is low. Therefore, the major benefit of this strategy is in identifying those in need of a colonoscopy.
Flexible sigmoidoscopy is a limited endoscopic examination of the rectum and lower portions of the colon. It is often combined with FOBT as a screening strategy. Unfortunately, 40 to 50 percent of polyps may arise proximal to the reach of this examination and, if unassociated with a positive FOBT, may be undetected.
Barium enema is a relatively limited and rarely used means of screening. There are no studies demonstrating efficacy of this modality although it is included in the list of available screening tests.
Colonoscopy has become the primary screening modality for most patients. It has greater than 90 percent sensitivity and affords the opportunity for obtaining biopsies as well as the removal of polyps.
What is the appropriate interval level for follow-up screening?
For average-risk patients, if no polyps are found, repeat examination at 10-year intervals is recommended until age 80 unless medical co-morbities indicate potential reduction in life expectancy or excessive procedural risk to warrant cessation of screening. If polyps are detected, follow-up examinations may be recommended at three- to five-year intervals, depending upon the number, size and type of polyps discovered. If a cancer is found and treated, a follow-up colonoscopy should be done at the one-year anniversary and, if negative, at three years and every five years thereafter. For those at increased risk (family history of sporadic CRC), screening at five-years intervals is recommended. For those with extremely high risk (familial cancer syndromes), screening every two years may be recommended.
How helpful are these tests in detecting colorectal cancer in its early stages?
Screening has been shown to reduce the incidence and mortality of CRC by as much as 35 to 75 percent. Unfortunately, only 45 to 55 percent of adults in the U.S. have been appropriately screened. This is the result of many factors including lack of public awareness, fears and concerns about the nature of screening tests, physician apathy, and inadequate insurance or third-party coverage. The statistics are even worse for racial and ethnic minorities.
DR. BENNETT ROTH is chief of clinical gastroenterology, director of the Digestive Disease Center and medical director of the UCLA Center for Esophageal Disorders. Reach him at BRoth@mednet.ucla.edu.
Chief, clinical gastroenterology
Director, Digestive Disease Center
Medical director, UCLA Center for Esophageal Disorders
When planning an exit strategy, business owners that own their buildings might find it advantageous to sell their real estate holdings separately from the business itself. By implementing such a strategy, additional real estate proceeds can be procured while the company’s financial statements are fortified.
The current environment is favorable for those looking to sell commercial real estate holdings. A number of factors, including the potential for above-average returns, attract investors to corporately-owned real estate.
“The market for investment real estate is experiencing a level of liquidity that we’ve not seen before,” says Jim Vondran, an investment properties specialist with CB Richard Ellis.
Smart Business spoke with Vondran about the benefits of selling a company’s real estate holdings separately from the business itself, why the market for corporately-owned properties is so robust and who should be consulted prior to a sale.
Why should a business owner consider selling the company’s real estate holdings separately from the business itself?
Typically when a business is being sold, the real estate assets are included as a part of the sale. Unfortunately, when corporate real estate is included as part of the business sale, the party selling the business may have left a considerable amount of money on the table. This is because when the buyer is placing a value on the real estate, they generally are looking at the book value of the real estate, which may be very different from what the potential market value of the real estate could be. In most cases, the value of real estate with a long-term lease in place is considerably higher than the value the business is carrying the building on its books for. Selling the building in a separate transaction can help the business owner to unleash that higher value.
In addition to higher real estate proceeds, what other benefits can be achieved?
There are multiple benefits above and beyond just the increased proceeds via the separate sale. The biggest one in a situation involving a business being sold is how the sale improves the company’s financial health. The sale provides the company with an infusion of cash without additional debt being incurred. Also, the negative impact of depreciation and interest on the income statement is eliminated when the building is sold. In addition to the benefits on the company’s financial statements, prospective buyers for the company may prefer the flexibility afforded by being in a leased facility when compared to being in an owned facility.
What is the current environment for the sale of corporately-owned real estate?
We’ve overseen the sale of a number of corporately-owned properties in the first half of 2007 and investors’ appetite for these types of properties remains healthy. Investors are attracted to corporate real estate in particular because it tends to provide a better return when compared with other income-oriented investments like treasury bills, municipal bonds and corporate bonds. As of today, the 10-Year Treasury Bill rate is at less than 5 percent. By contrast the cap rate for corporate real estate with a ten year lease can range from 6 percent to 9 percent. In general, single-tenant, net leased assets tend to attract a larger pool of investors, as they tend to be more “hands-off” in nature when compared to a multi-tenant asset.
If a business owner is considering the sale of their business, what steps should they take in order to determine whether it makes sense to sell their building separately?
If a business owner is contemplating the sale of their business, they should consult a commercial real estate professional that specializes in the sale of income producing properties and request that they provide a disposition proposal that includes an opinion of value. This will help the company to at least begin the discussion of whether or not it makes sense to sell the building separately or include it as part of the sale of the business.
In addition to contacting a qualified commercial real estate professional, the company or business owner should consult their tax advisor to make sure that any potential tax liabilities are fully considered.
JIM VONDRAN is an investment properties specialist with CB Richard Ellis. Reach him at (513) 369-1325 or firstname.lastname@example.org.
In some instances, the best way for a company to increase its presence is by acquiring another business. Such a move can bring access to a broader geographic market and customer base while providing cost savings through improved distribution channels.
Companies hoping to complement internal growth initiatives through an acquisition may turn to acquisition funding. “Acquisition funding is the combination of funding sources needed to complete an acquisition or merger of another business,” explains James Wade, vice president of Comerica Bank’s Western Market.
Smart Business spoke with Wade about acquisition funding, how acquisition transactions are typically structured and the importance of utilizing debt properly.
How are business acquisition transactions typically structured?
As a commercial banker, we typically are working with an established company that is looking to expand its geographic presence in a similar business, vertically integrate for synergistic cost savings or diversifying from a concentrated product or service. Relatively small transactions can be financed by increasing an existing line of credit or funding a new term loan without the need for additional funding sources. This method of financing an acquisition will typically be 100 percent supported by assets.
Larger transactions require more thought, planning and fund sources and there are usually not enough assets to support the amount needed to complete the acquisition. A company can use cash, unencumbered assets, senior debt, seller’s debt (typically subordinated to the senior lender), outside subordinated debt and venture capital.
Why is it important to work with a bank that has experience funding acquisitions?
Time is of the essence when purchasing another company. An experienced lender will help guide the process, increasing your chances of a successful close. It is also important to engage experienced legal and accounting assistance when structuring an acquisition. The effective cost of the transaction may increase if a deal is not structured properly.
What do lenders look for when deciding whether to fund an acquisition?
When there are not enough assets to support a loan, credit decisions are based on the strength and consistency of historical cash flow, management experience and the outlook of the industry.
How can a company increase its chances of having the financing request approved?
Communicate as early as possible about your plans to make an acquisition with your financial partners. Share your vision of the combined companies post merger or acquisition. Have a short-term plan (how you plan to combine the companies) and a long-term plan (how you will be more competitive in the future). Detail the critical components that are going to make this transaction successful. For example, stating you can save $300,000 per year by eliminating the sellers’ salary, country club membership and car allowance is more effective than stating you will save a lot of money combining the companies. Work with your accountant to prepare a closing balance sheet (this will require knowing if you are making a stock or asset purchase which will be negotiated between you and the seller with the advice from your attorney and accountant).
How should a company proceed if its primary lender is unable to fund the entire acquisition?
After evaluating the purchaser’s business and personal assets, talk with the seller. There can be tax advantages for a seller accepting a note. Also, the seller is likely motivated to complete the transaction and has the most knowledge of the business. Your senior lender will most likely require the seller debt be subordinated and may limit principal and interest payments. If additional funds are necessary, your banker, accountant and attorney can provide referrals for subordinated debt and outside equity providers.
Why is it important for a company to be prudent about the amount of financing it acquires?
Utilizing debt the right way can be powerful and provide the capital needed to grow a profitable successful company without diluting the owner’s interest in the company. However, acquisitions add an element of risk to a business. Combining cultures, system integration and facility consolidation are just a few of the issues a company will face after an acquisition. It is important to not affect the long-term competitiveness of a company because the debt service is limiting its ability to invest in people, infrastructure and technology.
How important a role does timing play in acquisition transactions?
Timing is important because there will be fees associated with extending deadlines. Also, the purchaser is at a disadvantage if the seller is having second thoughts. The seller may try to renegotiate terms and conditions or cancel the transaction. Work with your financial advisers before setting deadlines and structure extensions into your agreements.
JAMES WADE is vice president of Comerica Bank’s Western Market. Reach him at (619) 652-5778 or email@example.com.
With interest rates still very low, it could be an opportune time for businesses to purchase the space they occupy. Not only does owner-occupied commercial real estate safeguard against dramatic rent increases, but it also provides a tax advantage.
“One benefit is the depreciation. That’s the depreciation you don’t get when you lease but you do receive when you buy,” explains Joe Yurosek, senior vice president and regional group manager at Comerica Bank.
Yurosek spoke to Smart Business about commonly overlooked real estate financing options, the pros and cons of fixed and variable rates and why a business that already owns property might want to consider refinancing.
What factors should a CEO or business owner consider when looking at commercial real estate?
No. 1, does the CEO or business owner want to have an opportunity to participate in any price appreciation of a building which they wouldn’t participate in if they leased it? That’s an advantage that should be taken into consideration when deciding whether to lease or buy.
The second benefit to owning real estate is that there are some tax advantages, as the building itself is depreciable. This means, the owner gets to depreciate the building and the improvements over the useful life of the building, which offsets an owner’s taxable income.
A third benefit to owning real estate is securing your location beyond the time that may be available with a lease agreement. This may be very important when business owners need geographic-specific locations near ports and freeways or simply need to secure parking or storage space. It’s also important for growing companies to secure contiguous properties to make room for manufacturing or distribution growth. Non-adjacent properties can lead to operating inefficiencies. When you own a property, you guaranty yourself the security of a long-time location.
What are some methods that businesses can use to finance real estate?
The most active method used today is fixed or variable rate bank or institutional debt financing. Bank financing typically involves up to a 75 percent loan to value on purchased property with a mortgage style amortization. In this case the buyer is required to put up 25 percent of the purchase price. A popular alternative product that is really attractive would be tax free or taxable industrial revenue bond financing.
There are also Small Business Administration products that offer benefits as well, including programs that require as little as 10 percent down. Also, owners should contact their local municipalities, because often they have economic development programs and are willing to pass on financing support by way of low-cost money or loan-guaranty programs.
What types of businesses can benefit from industrial development revenue bonds?
There are some limitations on eligibility. Usually you have to be a manufacturer, but you can also be a nonprofit organization. But, if you qualify, tax-free rates further reduce your borrowing costs.
With respect to revenue bond financing, the buyer will be utilizing the credit strength of the bank or financial institution that issues the letter of credit in support of the revenue bonds. The bank then takes a deed of trust on the subject real property.
What are some factors that a business owner should consider when deciding whether to use a fixed or variable rate?
The buyer’s tolerance for risk is one factor. When you choose a fixed-rate loan versus a variable-rate loan, you are hedging against increasing rates. Obviously, if rates don’t move or if rates decline, buyers are better off with a variable product.
Another factor would be a business’s ability, or lack thereof, to absorb increased interest costs on a variable rate loan. Most business owners like to know what their fixed costs are so they prefer to lock in rates or use interest rate swaps to trade variable rates for fixed rates. By using rate swaps, a business owner can effectively create a fixed rate.
Alternatively, variable rates do allow for repayment flexibility. Some owners prefer to pay off their loans early. A variable rate gives owners flexibility to make early repayments.
What advice would you give to a business owner who wants to refinance the property that the business already owns?
Today’s rates are still at low levels, so a business with a variable-rate real estate loan might want to lock in a fixed rate or swap a variable rate for a fixed rate and reduce future interest rate risks. It’s still a good time to lock in and move from a variable-rate to a fixed-rate loan.
Call your banker and get rate quotes. Ask your banker about fixed products and swap products. Some owners may be in a position to also take advantage of existing price appreciation when refinancing. This could be a good time to cash out by refinancing the building and using the additional proceeds to reinvest in the business. Refinancing is an alternative to selling a building if new capital is needed.
JOE YUROSEK is senior vice president and regional group manager at Comerica Bank. Reach him at (714) 435-3998 or firstname.lastname@example.org.
In today’s litigious environment, no business is immune from employee lawsuits. Regardless of a company’s size or the sector it operates in, if there are employees on the payroll, then there is the potential to be sued for wrongful employment practices. Possible claims include, but are not limited to, harassment, discrimination and wrongful termination. Defending an employment claim, even if it is groundless or fraudulent, can be prohibitively expensive.
“Employment claims are a reality of the current workplace environment, and there is no way to prevent these claims from being made,” says Linda Pierce, area vice president for Arthur J. Gallagher & Co. “There are ways, however, to reduce the inherent risks and impacts of employment-related claims.”
Smart Business spoke with Pierce about how companies can protect themselves against employment practices claims, the importance of Employment Practices Liability Insurance (EPLI) and how to go about selecting an appropriate coverage.
What kinds of employee lawsuits are most common?
The three most common types of employment claims continue to be harassment, discrimination and retaliation [including wrongful termination]. According to statistics from the Equal Employment Opportunity Commission (EEOC) for the year 2006, the top three bases for alleged discrimination were race, gender and national origin. The EEOC charges filed on behalf of men claiming harassment also saw an increase.
How can a company protect itself against employment practices claims?
All employers should have current policies and procedures in place that adequately reflect legal obligations on the part of the employer as well as expectations the company has of its employees. Employers should also undertake training of human resources staff, management and even rank-and-file employees on issues affecting the workplace. Employment Practices Liability Insurance is also an essential insurance product to have in place in order to lessen the economic impact of employment claims.
What is Employment Practices Liability Insurance?
Employment Practices Liability Insurance is designed to provide coverage for companies and individuals acting on behalf of the company for defense costs and losses including judgment and settlements for employment claims, such as harassment, retaliation, wrongful termination and discrimination. Some EPLI products provide some coverage for claims of harassment and discrimination brought by third parties, such as vendors, customers and clients. Typically, EPLI policies are written on a claims-made or a claims-made-and-reported basis.
What risks can be mitigated by having EPLI in place?
First and foremost, EPLI can mitigate the financial impact of employment claims. Defense fees alone can be devastating to a company’s bottom line. Jury verdicts continue to favor employees, making pretrial settlements more desirable for employers. Employment Practices Liability Insurance is an effective way to manage the uncertainty of financial loss from employment claims that, due to their very nature, cannot be adequately ascertained before they occur.
Secondly, many EPLI products have risk management enhancements that, if used effectively, can reduce the risks of taking employment actions that could result in claims. For example, some risk management enhancements provide access to employment attorneys who can provide guidance to employers in addressing tricky employment situations as they arise.
What considerations should be taken into account when selecting coverage?
Like other insurance products, factors concerning risk shifting and risk retention should be considered. Prospective insureds need to consider what level of retention is realistic to bear and what aggregate limits of liability would adequately protect them in the event of a loss. Other factors, such as the nature of the business, the nature of the work force, the history of employment-related claims and, in the case of third-party coverage, whether the company provides goods or services to the general public, need to be taken into account as well.
How important is it to work with an experienced insurance carrier when selecting EPLI coverage?
It is important to work with an experienced insurance carrier and an experienced broker in selecting EPLI coverage. As with other management liability insurance, terms and conditions of EPLI coverage should be reviewed and negotiated. The particular claims handling of the insurance companies should also be considered in the process of selecting what insurance product best suits the needs of the insured company.
LINDA PIERCE is area vice president for Arthur J. Gallagher & Co. Reach her at (818) 539-1390 or email@example.com.
In today’s global economy, American companies are afforded tremendous opportunities to diversify business risks and capture additional market share. However, there are corresponding risks to the rewards that are associated with conducting business internationally.
Highly volatile, any given currency fluctuates 1 percent during a 24-hour period, points out Gary Loe, vice president at Comerica Bank. This volatility translates into the need to manage the risk of rising or falling foreign exchange rates.
“Identify your exposure and establish a floor or worst-rate scenario,” advises Loe. “Protect that rate by using one of your foreign exchange hedging vehicles.”
Smart Business spoke with Loe about the basic principles of foreign currency hedging, what the current environment looks like and how to best strike a balance between risk and return.
How does foreign currency hedging work?
A foreign currency exposure is typically created when a company imports, exports or establishes an offshore physical presence. Due to potential valuation change from one currency to another, the result is currency risk. This risk will require active management or risk transfer. Whichever occurs, a currency hedge program should be investigated. Different companies will have a different hedging profile. Hedging is the tool to address currency risk.
What are the different types of foreign currency hedging vehicles?
There are three basic vehicles, although there are variations upon these three.
The first type is a spot transaction, which is the immediate buying or selling of one currency for another. Using the market price today, settlement usually takes place within two business days. A company that only transacts using spot trades is typically accepting the most risk.
The second vehicle is a forward contract. The price is locked in immediately, but settles on a date in the future. Monies do not change hand until that stipulated future date. Theoretically, the forward price can be the same as the spot price; however, the forward price, based on interest rate differentials, is usually either higher (premium) or lower (discount) than the spot price.
Finally, there are option contracts that provide the company the right, but not the obligation, to purchase or sell a specific amount of foreign currency for a specific date in the future. For this right, the purchaser of the option pays a premium which is payable immediately. This cost is determined by many factors including the option strike price, current spot price, forward adjustment (interest rates), market volatility and forward date.
When creating a hedging plan, what strategies should be considered?
First, it is important to note that there is no one best way to create a hedging plan. Each company may determine to use different tools that apply to its individual situation.
However, one consideration that should be taken into account is how much exposure you have. Are you conducting business in U.S. dollar terms or foreign currency terms? Even if conducting in U.S. dollar terms, your company can still be exposed to exchange rate movements if your foreign party is or feels forced to change those terms due to exchange rate movement. Developing a budget or other financial analysis can help identify foreign exchange exposure. Typically, a company will establish a budget or forecast, then choose the vehicles to use and subsequently validate them against the company’s appetite for risk.
What does the current environment for foreign currency hedging look like?
Most industrialized countries have freely open markets in foreign exchange such as the U.S. dollar, Euro, British pound, Japanese yen and Canadian dollar among many others. The foreign exchange market is the largest market in the world with more than $1.5 trillion (U.S.) traded daily. This is bigger than all the stock and bond markets in the world put together. Therefore, the market is very liquid.
There are, however, countries where it is very difficult to impossible to physically deliver currency. China is one such place that curbs its money flows. This is due to Chinese central bank restrictions. Regulations in some countries can change constantly so it can be important to stay in touch with your bank’s foreign currency adviser.
How can a business best strike a balance between risk and return when hedging in foreign currencies?
Probably the term with more weight is risk. Your company is probably not in the game of foreign exchange speculating. It is most likely buying or producing a product for sale or providing a service for sale. Therefore, it should concentrate on what it does best.
Most companies would be better served by eliminating as much foreign currency risk as possible. However, some business situations cannot completely eliminate risk. In this situation you can try to set a downside floor with the use of such vehicles as options. Setting a floor with an option or leaving an order to buy or sell on a stop-loss basis can also leave potential upside returns on a hedging strategy.
GARY LOE is vice president at Comerica Bank. Reach him at (800) 318-9062 or firstname.lastname@example.org.
To circumvent such problems, it is important for top management to set a good example. After all, an environment conducive to high ethical standards is good for business. Companies that behave ethically are rewarded in the form of loyalty, honesty and productivity from employees, customers and suppliers.
A company lacking ethical standards is destined to fail, points out Satinder Dhiman, a professor of management at Woodbury University. “Without an ethical framework, business or any kind of exchange is not possible,” he says.
Smart Business spoke with Dhiman about the importance of ethics in a business setting.
How should a company go about developing a culture of ethical business behavior?
A company’s culture is not something that can be mandated from above; it has to be nurtured. An ethical framework and processes have to be developed at every level of the organization. Although top management can initiate certain processes and provide a clear message about the importance of proper conduct, the culture is determined from the grass roots up.
How important is it for management to align their behavior with their beliefs in regards to ethics?
If there is one way that humanity has discovered, in regards to effectively changing behavior, it is role modeling. There is no other way to affect change in a group setting. People learn more by watching their leaders than by listening to their speeches. It is of paramount importance that employees and staff get a consistent message from the top leaders and that these values are aligned.
How should a company’s ethical standards be communicated to employees?
We can use modern technologies like e-mail, we can have bulletin boards, we can have town hall meetings, but what really matters is how a company practices ethical principles on a daily basis. The ethical framework has to be tangible in a company’s daily conduct.
Nothing underscores a message as forcefully as when a company takes a stance on an issue that has lasting ethical implications. In this manner, you communicate the message in a way that employees are acutely aware of where management stands. You can have it written all over the walls, but if you don’t live it, then it won’t be effective.
If a breach in ethics does occur, what steps should be taken to rectify the situation?
This is a question that has been asked many times since the collapse of Enron. The first step would be not to justify or rationalize the breach and to admit there is a problem. The chiefs of Enron kept saying until the end that they had done nothing wrong. If a breach has already occurred, it is important to be honest. They say that when you speak the truth, you don’t have to worry about remembering. If you try to gloss over things, it adds insult to injury and worsens the matter. Also, after admitting that there is a problem, it is important to establish a preventive mechanism so that you have early warnings about these kinds of things happening in the future.
How have new technologies affected ethical issues in businesses?
New technologies have impacted business because information is more easily accessible and more universally available. I remember someone saying that it is not that there is more crime today, it is just that there are more reporters. Technology has made news about scandals mainstream and more available to public scrutiny than ever. There is no hiding anymore. New technologies have made things more transparent.
There are also more preventive mechanisms in place. The stock market crash about 80 years ago may not happen today because we have mechanisms in place that warn us early of potential problems. This is the salutatory effect of technology.
SATINDER DHIMAN is associate dean of business and a professor of management at Woodbury University. Reach him at email@example.com or (818) 252-5138.