It’s hard to sustain long-term business growth with short-term strategies. That’s what Michael E. Uremovich discovered in 2006, shortly
after assuming his new role as chairman and CEO of Pacer
International Inc., an intermodal and logistics freight transportation
Pacer’s former management team had made 14
acquisitions leading up to an initial public offering in 2002, sidestepping the challenging and often expensive task of dealing with acquired
owners and fully assimilating the acquired companies.
important not to disappoint investors in the early stages after going
public,” Uremovich says. “So the former management team chose not
to address some of the strategic acquisition issues, until the company
became more mature. It was clear to me that I needed to act and redirect the company in order to stimulate growth.”
Much of the capital raised during the IPO went toward reducing
acquisition debt, not infrastructure consolidation, and soon the company’s revenue and earnings growth slowed. Incongruent computer
systems were costly to run and failed to satisfy customer needs, while
a patchwork leadership team failed to operate under a unified vision.
Now, Uremovich would have to tell shareholders that he needed to
make a number of changes, some of which would require significant
Uremovich is regarded as a logistics industry guru, who helped revolutionize the business. He was a member of a team that invented the double-stack train, where one cargo container rides atop another, doubling
the train’s capacity for transporting goods and reducing costs. He also
served as managing director of the worldwide transportation practice
for Coopers & Lybrand and was a principal at Booz Allen Hamilton.
Prior industry experience gave him knowledge about the needs of customers, which he quickly put to work as part of a plan to reinvigorate
growth at Pacer.
Uremovich spent his first days as CEO listening to Pacer’s staff discuss
key business issues. His initial impression was that many of the conversations centered on internal problems and not the needs of customers. Then,
through in-depth financial reviews, he discovered that $400 million, or
roughly 25 percent, of the company’s annual revenue was unprofitable,
which represented nearly $20 million in lost opportunity. To Uremovich,
that was conclusive proof that the company’s division leaders were not
focused on the right priorities.
“All you had to do was be a fly on the wall and listen to the conversations,” Uremovich says. “Everything I heard was ‘we’ oriented, no one was
talking about our customers.”
Pacer was structured in five autonomous business units, each headed by
its own president. One of Uremovich’s first goals was to work with each
business leader to make his or her division profitable.
“I asked each of the presidents to come to me with a plan to get the
business moving,” he says. “I wanted the plans to be tightly focused,
because I also felt that we were focused on too many things and not all
of them were important. So I asked each president to focus on six
things, and I stated that I expected some of those to be customer initiatives.”
An example of one initiative that delivered increased revenue by satisfying customers occurred in the company’s transport service unit. The team
began a focused sales campaign offering heavy haul services to customers, but the initiative also included a program to improve safety and
reduce claims. As customers gained confidence in the safety of their
cargo, they began buying more of the specialized trucking services.
“I’ve never been a fan of scorecards, because they only measure where
a company’s been, not where it’s going,” Uremovich says. “I prefer benchmarking against future business objectives because it’s more effective in
Several things happened as Uremovich maintained a vigilant schedule of
monthly follow-up meetings with each division leader, tracking the
progress of the initiatives. First, he discovered that he benefited from the
discipline of a monthly review schedule, because he avoided distractions
and remained tightly focused, and second, he also found that some of his
management team didn’t buy in to his vision of a unified company or could-n’t execute on the critical few components, so he began making changes.
“I think I was guilty of the same mistakes that many CEOs make,
because we’d all like to believe people will see the right path, but that’s
not always true,” Uremovich says. “I tried a couple of public executions,
in the hopes it would be a motivator, but in hindsight, I think I should have
acted more quickly.”
Now two years later, three of the five company business units have
turned around, one is improved and one is still struggling.
Create operational efficiencies
Pacer was operating a number of systems and programs, including four
disparate general ledger systems, the remnants from acquired IT infrastructures. The result was higher costs and more frequent mistakes.
Without a common financial or human resources system, there were multiple people involved in processing every transaction, creating the opportunity for costly errors.
In addition, customers were unable to track their cargo through a single
portal as it passed from one Pacer transportation division to another,
including the invoicing and payment application processes. That created
back-office redundancies, and it failed to meet customer demand for a single logistics provider with a seamless process.
But developing an ERP system for a company the size of Pacer is expensive, and while the decision was ultimately made to build a single platform
using SAP, Uremovich had to manage the expectations of investors, telling them to expect some short-term pain in order to realize long-term
“I communicated to the shareholders the importance of integrating
to one system across all service units, because ultimately, it would
drive profitability and growth,” he says. “Fortunately, there was recognition on the part of the shareholders that this had to be done; in fact,
most shareholders thought we should have done it earlier. But the
potential size of the commitment was substantial, in excess of $35 million in capital.”
Uremovich says that Pacer was experiencing another post-acquisition hangover — out- of-control spending.
“I’d give us a C-plus in terms of spending control in today’s business
climate,” he says. “I instituted more rigorous control processes and
new rules of engagement about who can approve expense accounts.
I wanted to encourage the staff to think and act like responsible owners.”
As the development of the new data system moved forward,
Uremovich was able to reduce operating costs and make staff reductions. In addition, Uremovich changed the company’s employee
bonus program to support his cost-control and customer-focused initiatives. Instead of earning a bonus only on the company’s performance, employees can now earn half of their bonus based upon the performance of their business unit, while the other half is based upon full
company results. And under this new bonus plan, employee turnover
has been reduced by 50 percent.
Focus on service
“Taking over as a CEO who needs to make significant investments,
does have a higher risk for failure, especially for a while,” Uremovich
says. “So it’s not for people who are risk averse, but it’s also an opportunity to achieve something. In my opinion, you can never go wrong
under those circumstances by focusing on the customer, because somebody out there better pay attention to those people.”
Uremovich’s final growth strategy was to drive Pacer toward
becoming a world-class intermodal and logistics service. He says that
customers are more interested in reliability than price, so demonstrating service consistency is vital as is providing a one-stop shop that
offers customers the flexibility to select the most effective mode of
For example, customers often need to contract with multiple firms,
transporting freight from ships to railroad containers to trucks, which
increases costs and decreases reliability. Under Uremovich’s unified
service model, customers can switch between rail and trucks, while
still keeping their entire shipment of goods in the care of one provider.
Uremovich also renegotiated many of the company’s rail contracts,
using his years of industry experience and relationships, to create
more favorable terms that will benefit customers and improve margins.
“A number of things changed in the industry around the 2004 to
2005 time frame, and now there are really only two rail providers,”
he says. “So the terms and conditions in those contracts are vital
in determining a firm’s competitiveness in the transportation
Uremovich also insists that the firm’s senior executives visit customers, and he personally conducts new business pipeline reviews
with the company’s sales staff, so he can keep tabs on what’s important to customers and be involved in landing the top four or five
prospects on the list. Now that division leaders operate under a unified vision, sales staff cross-sell services to clients, which has
increased growth and revenue.
So far, his solutions seem to be on target. While 2007 operating
income was below 2006 levels, it was above all other years since the
IPO and revenue increased over 2006 by 4.3 percent to $1.9 billion.
“We really were a creature of private equity,” Uremovich says. “Our results were never bad, but I couldn’t see a way that we could sustain
long-term growth, given our structure. When funding is used to make
acquisitions and create exit strategies for investors, it works in the
short term, but play that out 25 or 30 years and it stops working. As
companies become more mature, you really have to address the long-term strategic issues to sustain growth.”
HOW TO REACH: Pacer International Inc., www.pacer.com
Just 90 days ago, unprecedented levels of fear existed among businesses and consumers about the stability of the U.S. banking industry. Now, strong banks are getting a boost from the U.S. Treasury’s Capital Purchase Plan (CPP), which is investing $250 billion in banks that have been approved to participate in the program by primary regulators and the U.S. Treasury. The program has been successful in quelling fears and restoring confidence and both consumers and businesses will benefit from banks’ strengthened balance sheets, which frees up funds for lending.
“Anything the government can do to add stability to the banking industry overall is a good move,” says Brian Keenan, president and CEO of Fifth Third Bank, Tampa Bay. “We have been making loans all along, but CPP will allow us to be more flexible with strategic lending opportunities.”
Smart Business spoke with Keenan about how consumers and businesses will benefit from the Treasury’s investment in banks.
How does CPP enable banks to lend?
The CPP is part of the $700 billion Emergency Economic Stabilization Act, signed into law in October. Through the CPP, the government will invest in senior preferred shares of financial institutions, and then encourage the banks to buy back the shares from the government when the markets stabilize. It is designed to help strengthen the balance sheets of many U.S. financial institutions by helping them raise their capital levels. This additional capital positions banks to weather volatility in the economy and to extend credit to qualified businesses and consumers.
Is this program a bailout?
The term ‘bailout’ is not appropriate for this program. It’s really intended to be an investment in banks, which will generate a return for U.S. taxpayers in addition to stimulating the economy. The CPP is designed to assist financial institutions in fulfilling their important economic role of making loans to businesses and consumers and getting all of us closer to our goal of a stronger U.S. economy. I realize that Americans aren’t necessarily comfortable with their government investing in financial institutions, but keep in mind that these are investments, which have to be paid back when the economy rebounds.
How does the program restore confidence?
One benefit of the CPP is an increase in confidence, and we have already sensed greater calm among our customers because they feel the U.S. banking system has stabilized. People were panicked to the point that they were considering withdrawing their money from banks altogether, which is not the right thing to do. As financial institutions, like Fifth Third Bank, are approved for a Treasury investment, it sends a signal of strength to their customers, not only because of a boost in capital levels but because the Treasury has suggested that it will only invest funds in healthy institutions. Also, the increased coverage limits provided by the FDIC are helping depositors feel reassured about the safety of their money.
How will the Treasury’s investment benefit consumers and businesses?
When the CPP invests in strong banks, it provides them with additional capital, which increases their ability to extend credit to qualified businesses and consumers. As barriers are removed, banks will be better able to maintain and increase lending levels to strong businesses to ensure their operations are uninterrupted. This is designed to increase economic activity and reduce some of the negative impact of the current economic environment.
The additional capital should also make it easier for qualified borrowers to get mortgages and other types of loans, and we’ve recently seen a drop in interest rates, which is helping homeowners refinance to more affordable terms. The CPP gives banks more flexibility to help those who may be facing foreclosure or having difficulty making payments on other kinds of obligations.
What else can banks do to help customers in these difficult economic times?
The economy is still highly volatile, making it difficult to plan. We’re spending more time consulting with business executives, helping them forecast for the first quarter and budget for 2009 interest expenses. We’re also working with consumers to reduce banking fees, evaluate their portfolios and plan for their retirement. It’s important for businesses and consumers to review their finances proactively and initiate conversations with their banker if there’s even the slightest chance they might fall behind on business loan or mortgage payments. With strengthened balance sheets as a result of CPP, your banker has more options to help you get through these turbulent economic times.
BRIAN KEENAN is president and CEO of Fifth Third Bank, Tampa Bay. Reach him at (813) 306-2453 or email@example.com.
The SEC’s proposed change from Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS) has many executives scratching their heads. Rumors persist about whether the change will ultimately affect private companies, and the 2014 compliance date for public companies requires further clarification. As the SEC takes final comments about the proposed change, CEOs must separate truth from fiction to understand the true business impact of IFRS and prepare to comply with its passage.
“We’ve generally thought that we have the best accounting standards here in the U.S.,” says Rick Smetanka, CPA, partner-in-charge of audit and business advisory services for Haskell & White LLP. “Now, given the growth in international equity markets, it’s become clear that we need to get on board with the rest of the world or risk being left behind. However, with any change, there’s often uncertainty and misinformation in the air, and the inevitable change to IFRS is no exception.”
Smart Business spoke with Smetanka to understand the reasons behind the change to IFRS and to extract the truth about its impact on U.S. businesses.
What’s the real likelihood of this change occurring?
It’s a myth that this change will never take place because the U.S. has the best accounting standards in the world. While we’ve been focused on the credit crisis and the slowing economy in this country, one by one the countries in Asia and the European Union have adopted these standards. The reality is, given the growth in India, China and other international markets, U.S. capital markets have been getting relatively smaller so we’re no longer the dominant global force that we once were. This time it’s not a bluff; the global standards are coming.
Won’t this change strictly impact public companies with international operations?
There’s no truth to the myth that your company must have international operations to be affected. This new way of reporting will apply to public domestic companies whether they have international operations or not. While it’s true that the changes will impact public companies first, ultimately, IFRS will likely spell the death of U.S. GAAP. Even private companies, especially those posturing for a buyout or an initial public offering (IPO), will be impacted or face the possibility of having to recast their financials under international standards to complete M&A or other financing transactions.
Full implementation isn’t scheduled until 2014; what’s the rush?
While 2014 is the proposed implementation date for most U.S. public companies, those companies will also be required to report their 2012 and 2013 financial statements using IFRS for comparison purposes. Further, a select group of approximately 100 of our largest public companies may actually start reporting under the standards beginning in 2009. Given the systems changes that need to take place, the companywide education and preparation efforts that will be required, and a realistic implementation date of 2012, CEOs should start planning for the transition sooner rather than later.
Aren’t the international standards quite similar to U.S. GAAP?
The rumor that the two sets of standards are very similar is not completely true. U.S. GAAP is a rules-based system and IFRS is referred to as a principles-based system, which is subjective in nature and much more flexible. As a result, more judgment will be required of financial statement preparers and auditors and there is a potential that standards will be interpreted differently based on international and political bias. As an example of differences between IFRS and U.S. GAAP, the U.S. uses historical cost-based accounting for fixed assets like equipment and land; under international standards, companies may report those assets at current fair values with periodic changes in fair value being recorded in that period’s earnings.
Won’t compliance simply be accounting’s responsibility?
This transition will have a far-reaching impact on many facets of a company. Expect the change to IFRS to impact everything from executive compensation because it will change how profit is calculated to how CEOs communicate with investors, shareholders and analysts. It will also change the ways companies work with lenders, because debt covenant structures and debt service ratio calculation methods will also change. Expect that IT will be heavily involved, as the company’s internal and external financial reporting and data tracking systems must be adapted. Lastly, CEOs should expect that the change to IFRS will require additional investments to educate and train employees. Ultimately, increased comparability of financial information is expected to provide a solid long-term return on these investments.
RICK SMETANKA, CPA, is the partner-in-charge of audit and business advisory services for Haskell & White LLP. Reach him at (949) 450-6313 or RSmetanka@hwcpa.com.
Given the volume of news about the credit crisis, most executives might surmise that business loans are difficult, if not downright impossible, to secure in today’s lending environment.
But Chad Loar, vice president and middle market team leader for Fifth Third Bank, is on a mission to set the record straight. He says that business loans are still available, but taking a shotgun approach to the market will no longer work. Instead, executives should conduct research and prepare detailed documentation before approaching a lending institution, because a pragmatic approach is best.
“The financing spigot has not been turned off,” says Loar. “Many regional banks have taken the initiative to identify distressed loans in efforts to price risk accordingly as well as exercise opportunities to sell a portion of these loans to raise capital and be in a good position to grant new loans. But lending policies have tightened and terms have changed, so business owners need to prepare before approaching a lending institution.”
Smart Business spoke with Loar about the available sources of working capital and the best practices for securing funding.
What types of funding are available?
Traditional business lines of credit and loans for owner-occupied real estate are still available along with financing for merger and acquisition transactions, although in general, repayment time frames have shortened for leverage buy-outs that consist of unsecured loans. Instead of seven to eight years to repay an unsecured acquisition note, business owners and private equity groups need to realize that repayment terms for such unse-cured notes in this economy now only warrant four to five years at the most and must meet qualification requirements imposed by the shorter amortization schedule.
Which lending markets offer the best opportunity?
Super regional banks continue to fund new loans, but are being much more stringent and conservative, whereas community banks with surplus capital are poised to take on higher risk. If you have an existing banking relationship, start there because the bankers are familiar with your business and it helps to have an established track record. The continued expansion of factoring companies also provides funding that’s secured by accounts receivables or inventory. SBA loans are another option. If your business is growing and creating new jobs, investigate whether you can secure variable rate demand bonds through your city or county. Last, investment bankers and private equity groups are still offering funding in exchange for an equity stake in the business, although that market has tightened considerably.
What’s the secret to securing financing?
First and foremost, business owners must furnish complete, accurate and timely financial reporting. It is imperative that the company’s financial and accounting staff closes the books timely and reports the financials statements to the bank or financial institution within a specified timeframe. Also, the lender will want to review the past, present and future financial health of your business. So bring audited financial statements for the last three fiscal years as well as a year-to-date statement.
A written business plan is the best way to provide the lender with all the required information but, whether it’s part of a business plan or a separate handout, be sure to include a forecast for the balance of 2008 and 2009, including a revenue pipeline report. Lenders want to review the documentation that supports your top line projections. The business plan should also contrast your company’s performance in major financial categories, such as SG&A and R&D expenditures, against standard industry benchmarks and include a strengths, weaknesses, opportunities and threats (SWOT) analysis as part of the presentation.
The bottom line is that business loans will not be granted without professionally presented and thorough documentation.
What else should executives know about the current lending climate?
Understand the banker’s position and educate yourself, so you can approach the lending market pragmatically, because the current climate also results from of a lack of liquidity in global markets. Owners should plan for a longer due diligence process and higher interest rates. Business loan approval is now taking around 30 days and as long as 60 days, if property is involved and appraisals are needed. While it’s still possible to secure working capital or other debt needs, lenders are spending more time scrutinizing deals, so owners will be more successful if they prepare thoroughly and research the market before approaching a lender.
CHAD LOAR is vice president and middle market team leader for Fifth Third Bank in Tampa Bay. Reach him at (813) 306-2452 or firstname.lastname@example.org.
Most CEOs are all too familiar with the nearly 15 percent average annual increases in the direct cost of health insurance and the subsequent impact on the company’s bottom line. It’s when companies begin expanding through mergers and acquisitions that the indirect costs and the inflexibility of most health insurance plans become apparent.
With vast regional differences among health plans and coverage provisions, health insurance issues often impact business expansion initiatives.
Mike Lutosky, employee benefit broker with Westland Insurance Brokers, says that there is no need for CEOs to become victims of the business cycles of the health insurers a situation which has been further exacerbated by industry consolidation, causing average HMO premiums to double over the last few years. He says that what CEOs need is an effective strategy that provides an alternative to traditional health insurance.
“What’s your current strategy to control health coverage costs? If you are waiting until 60 to 90 days before your current renewal and then merely reacting to the increase that your health insurer dishes up, you aren’t strategically dealing with the issue,” says Lutosky.
Smart Business spoke with Lutosky about how CEOs can incorporate self-funding into their overall strategy for controlling the cost of health care.
What is self-funding?
Self-funding is an alternative to fully insured group health insurance plans. Instead of an insurance company collecting premiums and paying your claims, the company funds the program, sets the rules and has control over paying claims. More than 60 percent of U.S. companies offering benefits use a self-funded program.
What are the qualifications for offering a self-funded program?
Companies in any industry with as few as 50 employees should consider implementing a self-funded program. Frequently, CEOs who want to establish their firm as an ‘employer of choice’ prefer self-funded programs because they have greater flexibility in terms of plan design, claims payment thresholds and claims processing speed.
Because consumer satisfaction with health insurance is based upon personal experience, employee satisfaction is much higher when companies offer a self-funded program that avoids yearly swings in premiums and coverage limits. With greater consistency, employees feel more secure and have fewer reasons to look for new opportunities.
How can CEOs benefit from self-funding health coverage?
CEOs will regain an enormous amount of control with a self-funded program. Financially, there is an increase in cash flow through the ability to recapture the use of plan reserves, and the company will earn interest on the money held in reserve. Self-funded plans comply with federal guidelines instead of state-mandated laws, and there is a reduction in most of the state-imposed taxes. Not only are the administrative fees lower through a third-party administrator than through traditional health insurance plans, but with a self-funded plan you see where every penny spent on health care goes.
I worked with one company that wanted to make an out-of-state acquisition. There was a key employee in the new firm who was vital to the business, but because the plan offered here in California was more expensive and did not offer a comparable level of benefits, the acquisition was impacted. With a self-funded plan, this kind of scenario can be avoided. You have the flexibility with self-funding to design a separate plan for a group of key employees when merging or acquiring.
How can CEOs limit risk with a self-funded program?
We protect against catastrophic loss by purchasing reinsurance from an A+ rated carrier. Because the market is plentiful, there are numerous choices for CEOs when selecting a reinsurance company. With the average monthly HMO premium standing at $250 to $300 for each employee, self-funding your benefits program makes more financial sense than ever. In more than 20 years, we have only had a handful of employers move back to a fully insured program for financial cost reasons.
What are the steps to initiating self-funded health coverage?
Self-funding is a much more proactive way of dealing with the issues associated with providing employee health coverage than the reactive process of soliciting competitive bids 60 days prior to renewal. We start by educating CEOs about self-funding. Then we provide a financial analysis to see if it is financially viable for the organization to consider self-funding. Next, we design a comprehensive transition plan for the company and its employees.
Self-funding gives CEOs a strategy and a plan to better understand and deal with the financial impact of escalating health care costs. This strategy gives CEOs a large measure of financial control and understanding that does not exist in a fully insured program.
MIKE LUTOSKY is an employee benefits broker with Westland Insurance Brokers. Reach him at email@example.com or (619) 641-3276.
Sometimes, executives are so busy pursuing the American dream that they forget to protect the hard-earned assets they have accumulated along the way. Vacation homes, jewelry, boats and cars are frequently part of a burgeoning list of assets acquired by executives, while board-of-director roles, managerial assignments and international business travel are some of the responsibilities that accompany success. Each possession and professional activity needs to be evaluated by a broker for potential physical loss or liability exposure, and insured accordingly.
Approximately 70 percent of clients are underinsured, according to Michelle Baxter, personal lines broker with West-land Insurance Brokers. “It is more expensive to rebuild a home than to build it because of demolition and debris removal costs,” says Baxter. “Many homeowners fail to take those expenses into account when they calculate their homes’ replacement cost, if they aren’t advised by a professional broker.”
Smart Business spoke with Baxter about how to close coverage gaps and reduce liability exposure with personal insurance.
How often should I meet with my broker?
Your broker should review your portfolio annually, including an evaluation of all of your assets and your lifestyle. The broker should ‘shop’ your coverage needs among several markets to determine the best value and insurance carrier for you. I say value as opposed to price because coverage should be placed with an A-rated carrier and certain markets cater to high-wealth individuals, so their policies contain clauses that provide protection for the kinds of exposures that executives frequently have. Saving on premiums in the short run often can cost you more in the long run.
What is my broker’s role in reducing my exposure to loss and managing my needs?
You should have one broker who should place all of your coverage with one insurance company.
Primarily, this allows your broker to view your entire lifestyle and portfolio of assets for gaps in coverage and potential exposure. For example, if you purchase a vacation home and secure the insurance coverage through escrow at closing, that policy might have liability limits of $300,000. Meanwhile, your personal umbrella policy is with another carrier and it provides coverage for losses that exceed $500,000, resulting in a coverage gap of $200,000, which could be avoided by having one broker who oversees all of your needs. Hiring occasional or full-time workers, such as a nanny or housekeeper, can also increase your exposure, as does renting out a vacation home, so all of this must be taken into consideration.
Also, placing all of your coverage with one carrier is generally more cost-effective because it allows for premium credits and elimination of costly redundant coverage.
Finally, your broker should be the first person you call in the event of a loss. When you report a potential claim to a carrier, all insurance companies are notified regardless of whether the claim gets paid. In some cases, especially where the claim may be below your deductible, it might be best not to report it at all. Your broker will know what the right answer will be for each situation.
What are examples of personal lines protection that executives should consider?
Your broker should suggest a personal articles floater if you own jewelry, rare wines, collectables, musical instruments or fine art, and all items should be appraised. This will cover the items at full value against loss or mysterious disappearance without a deductible. If you own a condo as a primary residence or as a rental property, you have personal liability exposure that extends beyond the master policy written on the condominium association. For example, if a fire starts in your unit and damages other units, you might have financial responsibility to others.
Extended replacement cost coverage for homeowners is another recommendation. It provides additional protection in the event you discover that you are underinsured after a loss. For example, if you have purchased $500,000 in replacement cost coverage for your home, and after a fire you find that it will actually take $550,000 to replace it, the endoresement clause will provide for $550,000 in replacement coverage automatically; you need only pay the additional premium. Also, you don’t have to settle for coverage limits provided by the California Earthquake Authority. A professional broker has access to other markets that provide broader coverage for reasonable rates.
What are the other benefits of working with a professional broker?
Brokers can assist executives with busy lifestyles by recommending appraisal firms, companies that will scan valuable documents or videotape your belongings, so you have a catalog of your assets. They can also assist in calculating accurate replacement cost values for your properties. As your wealth builds, so does your exposure to loss and your need for professional guidance. It takes years to build the American dream; it only takes a few minutes to lose it.
MICHELLE BAXTER is a personal lines broker with Westland Insurance Brokers with 20 years insurance experience. Reach her at (949) 553-9700, (800) 541-9663 or firstname.lastname@example.org.
It’s rare that CEOs are promoted from within organizations these days. Given the increasing pressures of the position and the need for quick results, many boards turn to outside hires when the CEO position is vacated. It’s rarer still that company employees would nominate one of their peers for the top job in the company and that the board would heed their suggestion.
But that’s exactly what happened in January 2005 when Mike Klayko became CEO of Brocade Communications Systems Inc.
Considering that the company’s previous CEO and the vice president of human resources had just resigned because of a stock backdating scandal, Klayko entered the role when the company was in crisis mode.
“It was a tough time,” Klayko says. “The company situation was turbulent, and we had lots of internal and external pressures on us, and suddenly, I was the new boy in the CEO suite. The easiest thing would have been to stay in my position as head of sales and marketing or go look for something else. After all, I had been with the company since 2003, and I knew the industry and the sales and marketing division well. When my peers came to me and said that they wanted me and would support me to become the new CEO and I received support from the board and my wife, all of the pieces just came together.”
Surrounded by shattered trust, Klayko says that he needed to rebuild confidence both internally and externally, but he says that he also knew that rebuilding trust takes time.
In addition, another situation waiting for Klayko was the fact that even prior to the stock backdating crisis, the excitement among employees in the company had waned, organic growth had subsided and Brocade had become reliant on a very small product base. In short, he says, the company was stagnant.
In order to establish a platform that would serve as a launch-pad for new growth initiatives, Klayko prioritized his initial repositioning efforts on increasing accountability, establishing a shared vision and creating a new culture. Klayko says that executing his plan consistently, over time, would eventually return trust to Brocade.
“My initial assessments of the situation and what to do about it were somewhat easy to make because I had the benefit of being with the company for a while,” Klayko says. “I also knew what my skill sets were, and I wanted to maximize the strengths that I have as a leader, which are setting direction, executing consistently, and holding myself and others accountable. Because of the turmoil, I wanted to get everybody on the same page, and we needed to increase accountability for performance to get the company moving again. You need to have a shared sense of goals and accountability because you’ll never get anywhere as an organization with everyone swimming upstream.
“I kept a high percentage of the management team when I came into the CEO role because we needed to hit the ground running. I know that as single individuals, people in a company can’t change things; when we are all united behind the cause, we can make significant progress.”
Klayko says that he used goal-setting sessions to establish a common performance framework for Brocade. He placed himself and his direct reports on performance contracts and held his performance open to scrutiny and comments from his team.
“I solicited feedback from the employees about how they wanted to hold me accountable and I combined that with how I wanted to hold myself accountable. I created a performance contract for myself and posted it on the intranet for everyone to review and they could also comment about how I was doing,” Klayko says. “Performance contract accountability now cascades down in our organization, and everyone is granular to the same vision, and we all have common financial goals and objectives.
“I think that this has improved our accountability because everyone likes to be measured, people like keeping score. The boundaries are now clear and the staff knows what I’m expecting of them and everybody understands their role in the companywide performance objectives. By posting my performance goals on the intranet, I am open about what I’m doing and I’m demonstrating transparency in my communications which is helping to build trust.”
Compensation drives vision
By adding metrics to the performance plans, Klayko took the next step in further defining his performance expectations for employees, and then he put even more emphasis on the message by tying employee bonus compensation to company performance. Formerly, employees’ bonuses were predicated on individual performance, now employees also earn bonuses when the team is successful.
“We aligned metric measurements to the performance plan and employees share in bonus compensation when corporate objectives are met,” Klayko says. “In addition, their individual bonus plans are now tied to meeting total corporate objectives. For example engineering earns a bonus when they deliver new products on time because achieving that affects the entire company, and we have a per-employee, revenue-performance metric that’s included in each individual performance plan. We set a new target for companywide performance expectations twice a year.”
Klayko says that he expects managers who are at a high level in the organization to earn more of their total compensation from variable bonus structures, so he favors senior leaders having as much as 15 to 20 percent of their total compensation at risk. He also prefers using objective performance measurements over subjective ones, not only because employees will
be clearly focused on what they need to achieve but because performance clarity eliminates potential discrepancies and that engenders trust.
“Through performance plans that are reinforced via compensation structures, everyone understands their role and how it all ties together and everyone knows what they need to do as individuals in order for the company to be successful,” Klayko says. “There are no entitlements; it’s purely a capitalistic environment. We further reinforce our team performance goals at weekly staff meetings. If one area is falling behind, we call them out, and everybody looks at what they can do to help that part of the team meet their objectives. By keeping everyone apprised of the results, there are no surprises.”
Writing the playbook
Another tool that Klayko implemented to help pull his team together and to reposition the company for increased growth was the development of a strategic plan. He calls the plan the playbook, and it contains multiple chapters that outline the company’s values and specific growth strategies. Klayko developed the playbook in collaboration with his senior management team, and he shares the information with all of the constituencies he touches on a frequent and consistent basis.
“We’ve grown quite a bit from just over 1,000 employees to 1,400 due to some acquisition activity,” Klayko says. “So we have new people coming in all the time, and we use the play-book to get them up to speed and on the same page quickly with what we want to achieve. We share it with everyone: investors, shareholders and customers. Not only does it keep everyone together, but having and articulating our goals from a written plan guarantees communication consistency.”
Having made some recent acquisitions, Klayko says that he also opens up the playbook to the employees of the newly acquired organizations and asks for their input and feedback as part of his assimilation plan. Exposing newly acquired workers to the plan gets them on board with Brocade’s mission quickly.
Klayko doesn’t stop at just receiving opinions from new employees. Following another recent acquisition, Klayko also sought input from the entire base of acquired customers with the goal of showing all 27,000 of them a unified front from the company and its representatives. His theory is that delivering consistent messaging to clients will create loyalty and retention.
Klayko says that he frequently takes the pulse of the organization to see if his playbook is still the right game plan for Brocade and to assess if he’s achieving his goal of instilling a new corporate culture through effective communication of his plan.
“We do one big survey each year, but intermittently, we conduct pulse surveys to test the effectiveness of our messaging,” Klayko says. “We survey to assess our employees’ understanding of the strategy of the company and the role that they play because understanding enhances employee engagement. I also spend more than 75 to 80 percent of my time in front of employees and customers so I can judge their level of understanding on a firsthand basis.”
Klayko says that, in his view, one of the questions on the annual climate survey is a true litmus test of employee opinion about the company culture: “I look at whether an employee would refer their best friend to work at the company as a pulse check on how we’re doing,” he says. “Consistently, the response is that 75 percent say they would recommend Brocade Communications as a good place to work to one of their best friends, and that statistic alone tells me that we are on the right track.”
By the middle of 2006, Klayko says that he was satisfied with the progress of Brocade’s cultural shift, the execution of the business plan and the increased performance accountability within the company, and subsequently, he increased acquisition activity to move Brocade away from its vulnerable position as a one-trick pony.
Revenue for the company in 2007 was $1.2 billion, up 65 percent from 2006 further validating that Brocade was past the crisis, and the firm was actively engaged in revenue-increasing activities.
Klayko says that while he wasn’t seeking the endorsement from his peers to become Brocade’s CEO, as it turned out, he’s glad he received it.
“Being recognized by my peers for this opportunity wasn’t a goal that I had set for myself, but I’m glad that the opportunity arose,” Klayko says. “I think that there are two things that I’ve learned from becoming the CEO of Brocade Communications: One is that I sincerely believe that if you prioritize the success of others and if you truly help the people around you succeed, you will be a better CEO. The other thing I’ve learned is that you should really try to understand what you’re good at, focus on using those skills, and then surround yourself with great people who are good with all the rest. If you follow those guidelines, success will follow.”
HOW TO REACH: Brocade Communications Systems Inc., www.brocade.com
Fraud can be financially and emotionally devastating for any CEO, whether the company is publicly traded or privately held. While most chief executives would agree that segregation of duties (SOD) provides the best prevention and may even be the ultimate cure for a slew of fraud-related problems, they often don’t think the problem can happen to them.
The most frequently asked questions about fraud are: Does my business really face risk? And does that risk justify the expense of segregating duties and instituting controls? The answer to both of those questions is “yes.” All CEOs face the risk of fraud-related loss, yet it is possible to institute a cost-effective control system by applying a pragmatic approach to the segregation of duties review process.
“For many CEOs, it’s hard to justify the time and resources needed to go through a formal SOD analysis because they don’t believe their business is at risk when they are surrounded by tenured, loyal associates,” says Lee Buby, SOX 404 practice leader for Haskell & White LLP. “But it takes incentive and opportunity to commit fraud, and, unfortunately, it’s the more tenured employee that has the greatest opportunity.”
Smart Business spoke with Buby about how CEOs can achieve tight controls through a cost-effective SOD analysis.
Why is the risk of fraud greater with tenured employees?
Tenured employees know the aspects of the company’s accounting system and how to cover their tracks, so they have the know-how to commit fraud. Also, long-term associates are often not only loyal employees but also friends with the CEO, so it’s hard for any executive to imagine such a betrayal of trust. So those kinds of losses are not only the most likely, they are emotionally devastating for CEOs when they occur.
What’s the first step in a cost-effective SOD analysis?
Perform an appropriate SOD assessment that will actually identify and define every existing issue. Then evaluate each issue against the organization’s tolerance for risk. If the risk of loss is small, the CEO may choose to accept it, or he or she may be satisfied that an existing control is sufficient. Having the knowledge will allow the CEO to make cost/benefit decisions for each issue. The best assessments are customized, but to save money and resources, start with an industry template and adapt it by actually performing walk-throughs of each activity. Not every issue is equal, so you can create mitigating controls for higher-risk areas.
What is the next step?
To truly assess the risk, review employees’ access to information, not just their job description. A good analysis should include what each employee can access, physically or via technology. Assume that if an employee is able to access a function or asset, it will be accessed. This is especially important in organizations with tenured employees who have know-how of the different aspects of accounting. Once again, management can apply the cost/benefit test before instituting new controls, but at least the information is there to make an informed decision.
Doesn’t the IT audit evaluate SOD?
Management and audit teams have historically relied on IT auditors to evaluate the accessibility of an IT control environment, but this has been limited to determining whether those who have access also have a valid business purpose for it. This, by itself, does not take into consideration whether various combinations of access or assigned duties presents an SOD issue. Management and auditors must work closely with IT professionals to define and gain an understanding of access rights in order to perform the SOD analysis. This is an area where traditional SOD assessments and IT stewardship has fallen short.
How can CEOs identify the best areas for SOD?
Identify critical areas and hold the related SOD design or mitigating controls to a higher standard. For highly liquid assets that are easily convertible to cash, such as access to a line of credit or the issuance of shares of company stock at a public entity, management should always attempt to design preventive controls before settling for after-the-fact detective ones. This is one of those areas where SOD just absolutely makes sense. And don’t forget about terminated personnel when designing controls. This includes everything from protecting assets to preventing share price manipulation, bad press and disclosure of confidential information or trade secrets.
It’s not always an easy task, and it can be time-consuming, but a pragmatic approach to SOD and control decisions, based on knowledge and risk tolerance, will help reduce risk using a cost-effective methodology. Also, once the initial analysis has been performed, the maintenance time is minimal, and it can be used every time a shift in accounting duties is required or new staff is hired. It may just be the best time and money a company will ever spend because not only will it add value to the organization, it will also give the CEO peace of mind.
LEE BUBY is the SOX 404 practice leader for Haskell & White LLP. Reach him at (858) 350-4215 or email@example.com.
Employees miss three to four hours of work every time they visit the doctor, which impacts productivity. But forgoing a doctor’s visit to avoid missing work is not the best choice dedicated employees can make for themselves or their employers. One solution that’s gaining traction with employers is the on-site health center, which increases the prevalence of ongoing preventive care and reduces time away from work.
“Employers are finding that the on-site center is a used and highly valued employee benefit,” says Teresa Wolownik, consulting actuary for the Group & Health Care Practice at Watson Wyatt Worldwide. “Which is great news because employers are seeing a reduction in nonproductive time by almost three hours per visit and employees are receiving high-quality health care.”
Smart Business spoke with Wolownik about the benefits of on-site health centers and how employers can explore the feasibility of and ROI from implementing one.
Why should employers implement an on-site health center?
The 2007 annual survey conducted among 453 employers by Watson Wyatt Worldwide and the National Business Group on Health revealed that 21 percent of the surveyed companies presently have an on-site clinic and 28 percent expect to open one in 2008. I think the reason behind the trend is that the clinics provide numerous solutions. First, because the on-site services can be delivered more cost effectively than those delivered by outside physicians, the practitioners are able to spend time focusing more on preventive and lifestyle-related risk factors, not just treatment. Second, only one in four employees currently seeks preventative care, which is contributing to the rise in chronic illnesses, such as diabetes. With services available at the work site, more employees engage in preventive care services, receive ongoing management for current conditions and participate in smoking cessation or weight-loss programs. Third, employers and employees benefit from visiting a health care provider who is fully integrated with a company’s program and is familiar with its benefit plans. Last, employees view the on-site health center as a perk, which improves morale and retention.
Which companies are potential candidates for an on-site health center?
We usually say that employers with a critical mass of 1,000 or more employees at a single location are candidates. However, there are vendors that cater to smaller employers, so it’s possible to adopt a scaled model that focuses on health coaching with or without disease management and still receive many of the benefits. Most on-site centers are outsourced to third-party vendors, so employers needn’t worry about additional liability, employee privacy issues or in-house expertise.
A design and feasibility study will help to validate ROI. The analysis process includes:
- Engaging key stakeholders, such as representatives from legal, finance, benefits, occupational health and real estate, in a meeting to educate and define the objectives for the center. Include consulting experts to advise on the range of health center models and third-party vendors and discuss considerations of eligibility, cost-sharing, integration with other programs and data/measurement.
- Shaping the center’s parameters, such as whether it will be led by an M.D. or a nurse practitioner. Knowledge of your employees and their preferences is vital.
- Conducting a claims history review to help determine the types of services needed and the estimated patient volume for the center. Extract key data concerning current cost and frequency of visits, condition prevalence and proximity to local physicians to estimate adoption rates.
- Leveraging the expertise of a clinician with experience operating an on-site health center. The needs and considerations of an employer-based center are unique to those in the outside community. The physician expert helps you to define your desired ‘patient experience’ and then reviews the data to determine the necessary health center resources and the estimated cost of providing them.
How is the ROI determined?
Once the volume of services is estimated along with the cost, it’s compared against the actual costs of purchasing those same services in the community, which can be validated by the claims review data. Next, we look at other savings opportunities, including productivity gains from employees missing less work time to overall employee health improvements. We typically see a 2-1 ROI rate, meaning that if an employer spends $500,000 for an on-site health center, it is seeing direct and indirect savings of $1 million.
What is the role of employers during the feasibility study and center implementation?
It’s important to have executive sponsorship from the beginning and an ongoing communications campaign. Second, it’s important to select an analysis partner that uses a cross-functional team approach, which includes an experienced physician, an actuary to evaluating community versus on-site services and an attorney to advise on compliance issues. Select a partner who is also familiar with integrating the on-site center with other employer-based programs, such as EAP and disease management, and who understands the options around integrating data with your insurance carrier and/or data warehouse. Data capture is vital for accurate ROI validation once the center is operational.
TERESA WOLOWNIK is a consulting actuary for the Group & Health Care Practice at Watson Wyatt Worldwide. Reach her at (858) 523-5586 or Teresa.Wolownik@WatsonWyatt.com.
The clock is ticking toward the 2010expiration of the favorable capital gainstaxation laws enacted under the Bush administration in 2003. This portends hugeimplications for individuals and small businesses alike because small businesses areoften structured as sole proprietorships orpass-through entities, so capital gains arepassed along to the owners, and becausestock ownership is now commonplaceamong Americans. In 1980, only 13 percentof Americans owned stock, but by 1998, thatnumber had grown to 52 percent. One thingis certain, the next president must deal withthe issue, and the options include everythingfrom maintaining the more favorable rates totreating capital gains as ordinary income.
“The sunset on the Bush legislation is nearing,” says John M. Wyson, tax partner withHaskell & White LLP. “The capital gains taxnow affects so many of us that when politicians argue that the capital gains tax is a taxon the rich, they are painting with an increasingly broad brush. Business owners shouldbe more interested than ever to hear whatthe candidates are proposing.”
Smart Business spoke with Wyson aboutwhat business owners should know aboutthe expiration of the capital gains tax ratesand the current positions of the leading presidential candidates.
How do capital gains and ordinary incomediffer in terms of rates?
The most common form of ordinaryincome is salary and wages, and it is taxed atprogressively tiered rates with brackets ranging from 10 to 35 percent. If capital gainsbecome taxed as ordinary income, it will betaxed at those same rates, and there’s somehistoric precedent for that because, prior to1921, capital gains were generally taxed atthe same rates as ordinary income. Then in1921, Congress enacted favorable tax ratesfor sales of long-term capital assets. Sincethat time, the tax rate on capital gains hasvacillated. In the mid-1980s, the maximumtax rate on long-term capital gains was set at28 percent until 1997 when it was lowered to20 percent. It was reduced to the present day15 percent in 2003. Although the rates havevaried, Congress generally remained consistent by encouraging longer-term investments.
Short-term capital gains, sales of capitalassets held less than 12 months, are still generally taxed at the less favorable ordinaryincome rates.
Will the political party controlling the WhiteHouse impact the new tax rate?
It’s perceived that Republicans generallywant to lower taxes and Democrats want toraise them. However, the capital gains ratewas raised in 1986, during President Reagan’sterm, and lowered in 1997, during PresidentClinton’s term. So, the political party of thepresident does not always dictate which waythe rate will go.
What can we expect from the likely candidates we see today?
John McCain has indicated a desire toextend the 15 percent rate on capital gains.Barack Obama, as part of his ‘Tax Fairnessfor the Middle Class’ plan, supports a returnto the 28 percent maximum rate on capitalgains. Hilary Clinton has expressed her intention to raise taxes on capital gains eitherthrough a proactive change in the enactedrate or by simply allowing the Bush tax cutsto expire.
Who will be affected by changes in the capital gains tax rates?
Those affected may include the rich, middle class and even working class families;basically, anyone who holds and sells stockor other capital assets at a gain. The tax alsowidely affects small businesses. Large corporations are generally unaffected by changesin the capital gains rates because a corporation’s regular income and capital gains areeach taxed at corporate rates.
It’s worth mentioning that the capital gainstax does not apply if you don’t sell. As WarrenBuffett has said, ‘The capital gains tax is nota tax on capital gains; it’s a tax on transactions.’ As a result, wise investors, like Buffett,who are really in it for the long-term, can endup with very low effective tax rates.
What action should business owners take inadvance of the election?
Most experts agree that, regardless ofwhich party is in the White House next year,capital gains rates will likely remain at 15 percent through 2010. So, there doesn’t appearto be any urgency to trigger gains by sellingcapital assets between now and the election.However, if taxpayers have a significantamount of ‘gain’ property, they should discuss the various options of minimizing capital gains taxes with their tax adviser.
How will California capital gains tax rates beimpacted?
Unfortunately, California has no favorabletax rate for capital gains. Rather, capital gainsare taxed as ordinary income. With the topindividual tax rate in California at 10.3 percent, the extra state tax paid on capital gainscan be significant, particularly when a taxpayer is in an alternative minimum tax position and is unable to get a federal deductionfor the state taxes paid. While the expirationin 2010 won’t affect California’s rates, taxpayers always have the opportunity to expresstheir opinions and perhaps influence ratesthat nurture long-term investments.
JOHN M.WYSON is a tax partner with Haskell & White LLP. Reach him at firstname.lastname@example.org or (949) 450-6200.