When Punit Shah saw that people were no longer paying premiums for completed real estate development projects in 2008, he knew that his company needed to get out of the construction business.
“We saw where the market was going and we had to take reactive measures to make sure that our future was protected and the future of our employees was protected,” says Shah, the president and COO of Liberty Group of Cos., a Clearwater, Fla.-based real estate company with 400 employees.
To keep the company profitable, Shah has implemented a new business strategy to grow through aggressive acquisition of existing properties.
Smart Business spoke with Shah about the keys in investing in growth through acquisitions.
What is your approach to new acquisitions?
Any acquisition that we’re buying has to have a value-add component to it and have a big upside that we can conservatively rely on to have a long-term gain in.
One thing that really makes us different is our ability to analytically look at every piece of information upfront. That makes it a lot easier for us on the back end, because we know what we’re getting into and we know how to proactively deal with whatever is coming our way.
So it’s something that we think may tie up equity or capital for a really long time and then have minimal returns, we usually pass on that deal, because we want to make the most and highest return that we can on our equity. We also want to make sure that it’s a safe investment, because right now is not the time to be making risky investments. Now is the time to be making investments that you are 100 percent confident in and that you’ve got a reasonable return on the money that you are putting at risk.
We’re not forecasting tremendous numbers with a forward-looking basis. We’re buying what we deem to be profitable as-is right now. As the market improves overall, as the economy improves, as our management team goes in there and adds more professionalism in overall management of the asset, we see that all as value-add opportunity.
What criteria do you use to evaluate investments during due diligence?
The most primary thing is location and demand generators. We want to be conservative and consider all different options, whether if there is a terrorist attack, what that would do to the core business of the hotel, during recessions, what happens during peak periods. So we look for diverse demand generators. We look for location of course. Then we look at the physical plans of the hotel or whatever the asset is. We look at the long-term intrinsic value of the asset itself but also the submarket and the overall region. We want to know if this is something that is going to be sustainable and is there going to be a demand generator for this property 10 years from now. As far as my ranking, it would go in that order.
We’re looking just for the best products that we can find, and we’re filtering out anything that doesn’t meet our core criteria. We’ve been very diligent about establishing that criteria upfront and knowing what we’re pursuing.
What mistakes can you make when pursuing acquisition opportunities?
The biggest thing anyone can do if they’re getting involved in what we’re doing is make sure they spend the time, money and resources on the due diligence. It’s almost turning into the height of the market again on a different scale, because people are just buying things sight unseen, guns blazing and not necessarily knowing what the repercussions are because there are a lot of legal complexities when dealing with distressed assets. I’ve seen a lot of people who are just jumping in all at once without understanding the risks involved with those investments. The other thing is real estate and cash-flowing businesses are still businesses and you have to have great management and employees to make those investments profitable. You can’t just buy an assisted living facility or hotel and expect just because you got a good deal on it, it’s going to turn profitable. It’s not like land. There is an inherent business component to it, and a lot of people fail to realize that when they are looking at these types of deals.
How to reach: Liberty Group of Cos., (727) 866-7999 or www.libertyg.com
Successful retirement plan financial management requires careful coordination on the part of the employer. Without the knowledge to properly manage the plan, plan sponsors could face serious repercussions, says Gary Gausman, a senior consulting actuary at Towers Watson.
“For plan sponsors to manage their programs, there are four main areas to focus on — benefits policy, funding policy, investment policy and accounting policy,” says Gausman. “There are a number of things you can do in each area, and there is a lot of interaction between them that you need to be aware of.”
Smart Business spoke with Gausman about the keys to successful retirement plan financial management.
What do plan sponsors need to know about their benefits policy?
Look at the plan design to determine benefits that are going to be earned in the future and how you are going to deliver those. Also, look at your exit strategy for legacy liability. Employees have already earned benefits for service rendered to date, and there’s liability associated with those that you need to deal with. With legacy liability, there are former employees who are retired and are currently receiving benefits, those who have terminated employment and are not earning additional benefits but are entitled to benefits in the future, and active employees.
Retirees are receiving a monthly benefit and there’s not a lot the employer can do because benefits have already been earned and are being received. But you can mitigate the risks associated with retirees by purchasing an annuity contract from an insurance company to take that liability off your hands.
For those who have terminated employment who have not yet started their benefits but are entitled to future benefits, consider offering them the benefit in one lump sum payment. If someone is 45 and entitled to $1,500 a month starting at age 65, perhaps that person would rather get a lump sum now equal to the value of those payments. That removes some employer risk. Annuity benefits are payable until the person dies, which might not be for decades. But if you pay a lump sum equal to the actuarial value of the payments, you are done.
With active employees, look at plan design. Traditional plans are final average pay plans, where if you work for a company for 30 years, you get, for example, 1.5 percent of your final average pay per year, or 45 percent of your final average pay, starting at age 65. The risk to the employer is that the benefit is indexed to what the employee earned, for example, in the last five years before retirement, which could spike dramatically in an inflationary period. As a result, many employers have shifted to a career average approach, in which benefits are instead based on what the employee earned ratably over his or her career.
How can employers address funding policies?
To maintain the tax-qualified status of plans, employers must satisfy various rules, including putting in a certain amount of money every year. Historically, some have put in the bare minimum, but in 2006, new rules said that, in addition to satisfying minimum funding requirements, you also have to maintain a certain funded ratio, which is the assets of the plan divided by liability, to continue to operate the plan according to all of its intentions and be able to take advantage of funding exemptions. For example, if a plan allows lump sums, it must maintain an 80 percent funded ratio in order to be able to pay out lump sums
If a company is just trying to satisfy the minimum funding rules while maintain that 80 percent ratio, additional volatility in the contribution amount could ensue. Companies could instead consider a more generous funding pattern to develop a cushion so that in lean years, when plan assets may have dropped and business results aren’t up to expectations, you can draw on that excess. This funding policy could involve, for example, contributing a certain percentage of pay each year.
In the 1990s, when things were going well, some companies took their eye off the ball. They didn’t have to make minimum contributions because their assets were doing so well, and in many cases, that has come back to bite them, as they haven’t built up the excess they now would like to have.
How can investment policies impact employers?
For years, employers chased returns and forgot about liabilities in the plan and how those would play out over time. In the last 10 years, that strategy has not worked well, as the stock market has been very erratic. As a result, when liabilities increase, assets may decrease, creating an even wider gap. Employers are taking a more focused look at investments, trying to better match assets and liabilities so that if liabilities increase, assets increase, as well, and the gap will not change as much. With the transition to cash balance type plans that allow employees to take lump sums at termination, you need to make sure you have the liquidity to pay those out. And to do that, employers need to look at investments in a different light and better align them with their liabilities.
How do accounting policies play into the mix?
When implementing pension plans, companies made certain elections, and they are mostly tied to those. If you change your accounting policies or methods, it must be to a ‘preferred’ method. For example, many companies chose smoothing in their accounting policies. Depending on the methods chosen, this could mean that if assets tanked last year, they would not have to recognize the full decrease in one year, but rather could spread it out over up to five years. That’s been fine, but the trend in accounting is toward ‘mark to market’ accounting, which eliminates smoothing. The auditor wants to know exactly what your assets and liabilities are based on current market conditions, i.e., current interest rate market and current asset markets. This can have implications for a company’s investment policy and funding policy, for example. By understanding each of these areas and how they work together, companies can position themselves for successful retirement plan financial management and minimize their risks.
Gary Gausman is a senior consulting actuary at Towers Watson. Reach him at (818) 623-4763 or Gary.Gausman@towerswatson.com.
Insights Human Capital Solutions is brought to you by Towers Watson
John Kanas and the new owners of BankUnited knew that they had a big task ahead of them. They had just spent $45 million of their own funds to buy a bank that was hemorrhaging money and had cost the Federal Deposit Insurance Corp. nearly $6 billion in losses.
“For maybe a year or more, the company was fighting all of the rumors about its demise,” says Kanas, the chairman, president and CEO of BankUnited, which employs 1,300 people today. “Its earnings were collapsing. People were guessing as to what was going to happen with the company. The morale of the employees was very low… so you can imagine that emotions were running at fever pitch.”
After a lengthy selection process, the bank bid had been awarded to a group of private equity firms led by Kanas, the former head of North Fork Bancorp and a veteran in the banking industry. The group had made it publicly clear that their intention was not to tear the bank apart, but with a new strategy and the right people, rebuild the failing institution. As they entered the bank the day after winning the bid, they were met with a rush of flashbulbs, newspaper reporters and what seemed like a small army of FDIC officials. It was time to get to work.
Communicate the strategy
Kanas and his investor team knew early on that they wanted to transition BankUnited from a wholesale, residential mortgage originator into a commercial bank. When you are undertaking a new strategy, it’s important to quickly let people know where they fit in or don’t fit in to mitigate uncertainty and get started down the new path.
“The first thing we did was immediately seek out those people that we knew we wanted to retain as partners, that we knew could play a very important role in the company in the future under its new structure and assure them that their jobs were safe, that they would in fact be retained and that we would be relying on them to help us in our partnership in the future,” Kanas says.
Months before winning the bid, Kanas’ group had used an extensive due diligence process to gain access to a number of the company’s employees and identify which ones would be helpful in executing their new strategy.
“It was an ongoing process, but we knew the day we walked in who some of those people were,” Kanas says. “So for two or three days, we did nothing but sit down and explain ourselves to those people so that they could buy into our strategy moving forward. I would say the week was largely dedicated to getting people comfortable with who we were and understanding where everyone stood.”
There are also employees who likely aren’t going to be relevant to your strategy. Managing the expectations of these people also needs to be a priority.
“So we very quickly reached out to those people and let them know that there wasn’t going to be a role for them,” Kanas says. “Then we explained to them what our severance policy would be for them, gave them time to adjust their personal lives and made it clear that we intended to move swiftly to do that.”
You need to be very transparent with employees to allay their fears during this initial transition period when tensions are likely to run high.
“It was important to sit down with the people who were left and say, ‘OK, look, this is an unpleasant business — identifying these people and then sort of paring down the ranks,’” Kanas says. “‘We want to do this very quickly but we also want to do it intelligently and not make mistakes. You’re going to have to bear with us for a few weeks.’ And when the process is over … we promised that we would then sit down and let the core of our employees know that we’re done with this. Those of you that have been selected to stay now have a job. Some of you will have a job for one or two years depending on what your function was in the bank and some of you we hope to retain for the rest of your career. We tried to get to those people quickly and let each one of them know where they fit in that spectrum.”
Kanas knew that Florida would be the perfect home to structure a commercial bank that could gear its success toward products and services for midmarket and small businesses. The next step was convincing people to buy in so they could go out and execute that strategy with enthusiasm.
“So first is get the right people on the bus,” Kanas says. “Second is get those people in a room and overcommunicate with them every day. Make it very, very clear what the strategy is and leave no room for misinterpretation that anyone could misunderstand where we were going, how we intended to get there and what we needed from them as a buy-in or commitment if they wanted a commitment back from the company.”
Kanas and many of the investors had successful backgrounds in business, particularly at North Fork, which had grown from $28 million in assets to one of the largest banks in America under Kanas’ leadership. Pointing to this past success, they diligently spent the first couple of months meeting with the retained employees one-on-one, with small groups or even up to 300 employees at a time, to talk about the new model and why it would work. They were also transparent about the fact that they had literally bought in to the turnaround strategy by committing their own money to buy the company.
“So it was important for our new partners and our new employees in Florida to understand that we were very, very serious about this,” Kanas says. “We’d put our family money into this and we intended to work hard along side of them to help them create the vision.”
To get buy-in for your vision, it also helps to give people goal-connected incentives. Offering stock in your company is one way to achieve that short term and long term. From the beginning, Kanas’ investment group was clear about its hopes to take the bank public but also let people know that whoever helped the company achieve that goal would share in its ownership.
“We did take it public earlier this year and we have about 120 people who are equity partners with me in the company who have major roles in the institution,” he says. “So they are not just employees. They’re owners. To the extent that we will be successful in the future, these people will be able to share in that success directly.”
As you move forward, you can then maintain employee buy-in by communicating your company’s progress on the strategy.
“It’s continuing to let people know that the company’s strength is building every day,” Kanas say. “The earnings stream of BankUnited is very strong so its book value is going up every day. So for those people who own part of it with me, the value of their investment is going up every day… and everybody knows that eventually people recognize the intrinsic value of a company over time. So I think that it’s not hard to keep our people encouraged because they’re so proud of the success that they’ve achieved on a quarter to quarter basis.”
Build your talent pool
In the end, the bank let go about 350 people. So in addition to retaining the key employees, the company needed to find and attract new employees who had the skills to execute its new strategy.
“We were looking for people who had extensive experience in the Florida market, who had existing customer relationships that we could attract to the bank and would help lead us to build a commercial bank,” Kanas says. “We said that we were going to start immediately mining the market for that talent.”
One way to attract talent is to share your vision in a way that communicates it simply and memorably.
“We actually coined in that first couple weeks the term ‘building Florida’s bank,’” Kanas says. “We said, ‘We think we can come here and take the skeleton of this company and build Florida’s bank on it, and you can be part of it.’”
To reach a national talent pool, the company also put out an advertisement in The Wall Street Journal and The Miami Herald.
“It said, ‘If you’re an unhappy Florida banker and you’d like a new home, call us. We’ll change your life,’” Kanas says. “We ran that both on the Internet and newspapers for 10 days and we got 7,000 applicants and 3,000 from New York alone and the rest from Florida.”
As they narrowed down the potential candidates, the company also looked for one, a successful track record and two, the right personality.
“We’ve had great success with hiring people outside of the industry, not bankers, who have come from other industries that require the kind of skills that we think are important in banking today, people who can sell, people who are confident in themselves, people who are engaging and like other people and communicate well,” Kanas says. “So we try to find those people and we find it’s much easier to teach them the technical side of banking than it is to try and change their personality.”
After going through half a room full of resumes, the company was able to hire roughly 250 people to come in and help retool the company.
“We knew that there was a level of frustration among people in Florida who were good bankers stuck in institutions that for one reason or another couldn’t go forward,” Kansas says. “Either they were handcuffed by regulators or handcuffed by inadequate capital positions or some combination of both. We invited them to bring their careers to us and it was overwhelmingly accepted.”
Instead of just trying to fill jobs, Kanas looks to hire people who can complement the company’s strategy, and then works them into it.
“We believe very strongly that the key to the success of any large company is embedded in its human talent,” Kanas says. “So unlike other banks that will go build a branch on the corner of Fifth and Main and then a month before it opens put an ad in the newspaper to try and find somebody to go manage it, we don’t do it that way.”
Instead, the growth strategy is to find the best of the best, get their buy-in and continue to build the company with talented people who can grow the business. For example, the company went ahead and hired a group of people in Orlando before it even had a branch in the market, using those employees to open two branches there more than a year later.
“So we build little energy centers all over the state around successful people who can come to understand our strategy, and we will do that anywhere in Florida,” Kanas says.
He says the key to building a strong company is also not trying to do it on a shoestring.
“We didn’t try to find bargain basement employees,” Kanas says. “We found people who were truly distinguished in their field, and we pulled them out of very good jobs at other banks. I guess that’s another way of saying it’s more expensive than you think it’s going to be. It’s more work than you think it’s going to be. But it’s also a lot more rewarding than you think it’s going to be if you succeed.”
Last January, BankUnited went public in one of the largest bank IPOs in U.S. history. Today it is one of the most capitalized banks in the country, with more than 90 branch locations and $11 billion in assets.
“This is a company that has a clear purpose and a laser-like vision that I believe that our employees understand,” Kanas says. “We’re growing organically at a rate that impresses even me. If you take the second quarter growth in loans and annualize it, we’re growing the commercial component of the bank at over 60 percent a year —and in Florida that’s really saying something. … So I guess the only similarity between the old company and this one is the name.”
How to reach: BankUnited, (877) 779-2265 or www.bankunited.com
1) Identify new business strategy and which people support it.
2) Get the buy-in of the people who are staying.
3) Build your talent pool to complement the strategy.
The Kanas File
Chairman, president and CEO
Born: South Hampton, New York
Education: Long Island University
How do you retain good people in this environment?
Because we’ve shared our vision with them and continued to share ad nauseum, we keep them excited about where the company’s going. And, of course, they can look over their shoulder at the tremendous success that we’ve had so far and know that they’re part of it. So there is a high level of enthusiasm and excitement in our bank. And frankly in the banking business today, it’s hard to find a place that’s growing and that breeds a level like this of enthusiasm any place else, certainly any place else in Florida if not the whole country.
Kanas’ turnaround takeaways:
- One of the things is don’t ever underestimate the complexity of the problem and realize that when you’re reshaping a company that’s had a failure, that there are probably a lot of other bad things that you’ll find out six months into it that you didn’t know when you took the first step. So always make the assumption that it’s going to be harder than it looks and be prepared to deal with that.
- These things are always much more work than you think that they’re going to be. For people who are going to take a challenge like this, it’s important to understand that you cannot do this halfway, that this is a total and complete immersion and it’s a total and complete commitment and you have to be committed with every bone in your body and every molecule in your brain to make it a success…Probably most people haven’t been as successful as they thought they would be because sometimes from the outside, a good management team, and I don’t mean me but the team, can make a job look easy, but it’s not.
Business partnerships, like marriages, usually start out well. A shared vision, the excitement of being able to do it the way you know it should be done, a mutual respect for each party’s skills and contribution to the success of the venture. But many partnerships, like many marriages, end in bitterness and recrimination. Particularly if your business partner surprisingly turns out to be a crook.
Operating in countries of the undeveloped world, it was usually legally required, as part of the terms for the grant of a business license to a foreign entity, to take on a “local partner.” This local partner was chosen for their alleged influence and ability to assist the business to prosper. However, more often than not, the term “local partner” was just a euphemism for “thief.” They used their influence to create problems which only they could solve in order to extort money from the owners.
Sadly such venality is everywhere. A friend of mine, here in the U.S., recently received a good offer to buy the company he had built up over many years. Without him there would have been no company, the decisions he had made and the risks he ran had paid off, it was his experience and reputation that gave the company value. Unfortunately, as it turned out for him, by an accident of history from the early days of the company, he was only a 50 percent shareholder. The other 50 percent had been transferred over by one of the original partners some years before to a respectable certified public accountant. This partner had no particular experience or aptitude in my friend’s business; he played his assigned role as a stereotypical accountant, overseeing the bookkeeping in between his other roles in other companies. He involved himself in local good causes and gave his time and skills to his church as chair of the finance committee. He never gave cause to believe he was anything but competent, honest, and worthy.
Although they were not personally close, my friend seems to have liked and respected his partner, and acknowledged the contribution his sensible counsel and honest watch had played in the success of the company. By no means was he a contribution to its success of 50 percent, but my friend accepted the situation as it was and was perfectly content for his partner to benefit equally. When a larger company interested in purchasing the company outright approached them, it was obviously a joint decision, one that the accountant wholeheartedly approved of. After doing their due diligence the buyer indicated they wanted to retain my friend for his skills and experience and offered to pay him for his half of the shares over two years. They felt that within their own staff they had the accounting resources they needed and so planned to pay off the other partner in cash at signing. Everyone seemed happy.
But then, shortly before signing, the accountant ambushed his partner by announcing that if he wanted his cooperation and agreement to get the deal done my friend would have to pay his partner more money out of his proceeds of the sale. Overcome by greed, the accountant saw an opportunity to blackmail his partner into giving him more. He did not try to justify his behavior, he knew he had no legal or moral right to take what wasn’t his, he just saw a way of stealing without consequences.
Is there really any fundamental difference between a street thug threatening someone to hand over their wallet and this otherwise respectable and upright professional extorting money from his partner? Both are common thieves, but the accountant’s professed ethics and integrity makes him a more contemptible crook.
Next time he is sanctimoniously sitting in his church, congratulating himself on his windfall, perhaps there will be a reading from the Book of Matthew, chapter 10, verse 36 — “And a man’s foes shall be they of his own household.”
Julian K. Hutton is president of Merlin Hospitality Management, where he oversees the company’s hotel management and distressed asset management operations, drawing on 20 years’ experience in the worldwide travel and hospitality industry. Reach him at firstname.lastname@example.org
Have you been in “protect mode” ? a little cautious about taking chances with your business? Have you been waiting for sure signs that it’s time to invest in your company’s future?
Then you are the company leader economist Brian Beaulieu of the Institute for Trend Research wants to reach. At a recent Vistage All City meeting in Columbus, he encouraged those in the room to get out of “protect mode” and start taking risks and acting like entrepreneurs again by upping their game and being aggressive while market conditions are favorable for doing so.
Beaulieu says business leaders have the next 14 months to strengthen their company’s market position during this current period of economic recovery ? leading indicators show the potential for a milder recession late in 2013 and early 2014, followed by three years of economic growth.
He addressed about 150 CEOs of midsized companies and challenged them to be smarter than the curve. His message that now is the right time stemmed from signs of a recovering economy, low interest rates and the fact that banks are lending again, among others.
Beaulieu’s suggestion that by the time 2015 rolls around and the economy moves into a three-year growth spurt, being ahead of the curve will put your business in a great market position to maximize business growth. It makes sense, and here are his tips on how to get started.
What businesses should do in a recovering economy
Getting out of protect mode in a sense means leaving your comfort zone. Beaulieu challenged the CEOs in the room to do that, to sell boldly where they have never sold before, to determine where they need to be so they can capture market share and identify new markets that they can create.
But it’s not as daunting as it seems, if you consider his company’s Phase Management Objectives for “late recovery” and “early growth” recessionary phases. His list was rather extensive, but here are some that caught my attention from a marketing perspective:
1. Establish tactical goals which lead to strategic achievement. 2. Review and uncover competitive advantages. 3. Invest in customer market research to understand what customers value. 4. Add sales staff. 5. Begin advertising and sales promotions. 6. Increase prices. 7. Find the answer to “What’s next?” 8. Open distribution centers. 9. Use cash to create new competitive advantages.
Time to plan for growth
Now that you have a list of potential steps to take, you should feel a lift in your own spirit and an eagerness to return to your entrepreneurial roots. I know I did. What I took away was that the next few months are not about being passive — they are about being aggressive, pioneering new territory and taking risks. The next 14 months are critical to business growth and success. If we don’t position our companies to excel during the 2015 through 2017 growth years, our businesses may not survive the next recession which is sure to come.
Now is the time to plan for growth and invest in our businesses future. It is time to kick in our entrepreneurial passion, which for some of us means removing our Band-Aids, clearing the dust from our eyes and emerging from the day-to-day minutiae so we can refocus and find renewed energy.
Clear the path for enthusiasm
We need to clear the way for strategic, visionary, innovative work — the stuff CEOs love to do. In Beaulieu’s words, it is time to stop focusing on all the recessionary chatter that zaps our enthusiasm. It’s time to get back to leading our companies toward the future.
Whatever you do, don’t wait. Now is the time to shore up your game to position your business to maximize its potential for growth in 2015 and the two following years. Even though 2015 may seem like a long way off, in reality, it is not.
Positioning our companies for growth is really about the action we take in the next 14 months as the current economy is in recovery. So invest the time and resources needed to make the most of these next few months. The time is now.
Kelly Borth is CEO and chief strategy officer for Greencrest, a 21-year-old brand development, strategic marketing and digital media firm that turns market players into market leaders. Borth has received numerous honors for her business and community leadership. She serves on several local advisory boards and is one of 25 certified brand strategists in the United States. Reach her at (614) 885-7921 or email@example.com or for more information, visit www.greencrest.com.
When Jim Bolch took over as president and CEO of Exide Technologies last year, the 122-year-old battery company was doing well.
It had fallen on tough times in the first part of the last decade, but the previous CEO had remedied that and gotten the organization back on track.
“He did a lot of tough love, if you would, to put the company back on track and did a very good job of it,” Bolch says. “But what came away from that environment is the company became very risk-adverse. The people were very reluctant to take accountability for decisions and sort of step out.”
His initial gut-feel told him he was going to need to change the mindset of the organization in order for it to continue improving.
“My challenge is, as I’ve sort of coined it, moving the company from a ‘don’t lose’ mindset to ‘play to win,’” he says. “People were scared of making a mistake. With 10,000 people, [we had] to change their mind and say, ‘It’s OK; it’s time to grow this company and time to win the market,’ and we’ve spent a lot of time over the last year doing just that.”
Build your case
While Bolch initially suspected that the company needed to change its mindset, he wanted to test that theory before he moved on it.
“Early on, you develop some hypothesis, but you want to go out and test them, so a little bit of it was collecting data to test, but also it’s starting to build some consensus as you go along,” he says.
He spent only two weeks of his first three months on the job actually in the office. The rest of the time, he was out traveling to more than 20 countries, touring his factories and talking to different employees, customers and investors.
As he met with each of these different constituents, it was important for him to ask a lot of questions to make sure he was gathering as much information as possible.
“The questions vary depending on where you are and who you’re talking to,” Bolch says. “Typically, if I’m talking to employees, one of the first set of questions I start to ask is, ‘Who are your customers? How does what you do add value to your customers?’ … If people don’t really understand how they’re going to add value, then we have a problem.”
He also asks a lot of questions around how do they do their job, how do they know that’s the most efficient way to do their job, and if they had an idea on how to do that better, how do they implement it.
With customers, the questions are different and more focused on asking them how Exide can do better — what do they like about doing business with the company, what don’t they like, are they responsive, and are they innovative?
“Especially with a customer, asking more open-ended questions, you can learn a lot,” he says.
Then with investors, it’s yet another set of questions.
“With investors, it’s all about expectations — what would cause them to want to invest in our company, what would they expect to see back from that,” he says. “With them, a lot is results, a lot is transparency and understanding of the direction of the company and what we’re trying to do to improve.”
As he traveled and talked to people, he started to see evidence that supported his theory that the mindset had to change. For instance, he went to visit a plant in Kansas City, Kan., that made the company’s industrial products. One of the things he asked them about was how often they went to another plant two hours away in Salina, Kan., which is where he was headed next, to share best practices.
“The room was just silent,” Bolch says. “The simple fact was they had never been there. It wasn’t part of the culture to operate as a global company. It was just small local entities.”
Turn hunches into plans
As a result of his travels and conversations, Bolch thought he knew what needed to happen to start changing the company’s mindset, but he needed the right people in place. He made some changes to his team, and about three months after he started, he took the new senior management offsite for a week to put together a new plan and get their buy-in for it.
“It’s about getting them engaged in the process,” he says. … “We did a lot of prework of understanding where the business was and where it could go. A lot of that is really externally based. You have to look outside the company. You get too internally focused, and that’s a problem. Look outside the company. Look at how you deliver to your customers.”
They brought in both customers and investors to talk about plans.
“I don’t think they had had that as much in the past,” Bolch says. “We weighted the pros and cons. It wasn’t necessarily a smooth process. There was some disagreement along the way, but in that, you build understanding. At the end, we came out as one team that was committed to the plan.”
That formalized plan — no longer just a hunch — had three main components: one Exide, driving competitive operations and global growth through innovation.
The first part was necessary because the company was divided up in a lot of different ways both geographically and businesswise. It wasn’t just in the Midwest that people had very little knowledge of what happened in other areas — it was everywhere — so he wanted to knock down the walls. Going forward, a plant could make multiple products instead of just one and a salesperson could sell multiple products instead of just one. It also meant doing some restructuring. Senior leaders were supportive of this, even though it left their jobs in jeopardy.
“What tells you a lot about the people is the way they go about it — if they really engage and say, ‘Yep, we think this is the right thing for the company. I’m not sure what it ultimately means for me, but I want to be a part of it,’” he says.
The second big part about driving competitive operations centered on making the plants and processes more efficient and cost-effective as well as being a leader in the environmental field. They used objective measures to identify the five most important activities to work on — continuous improvement, environmental health and safety, preventative maintenance, energy efficiency, and equipment standardization and cost reduction. Bolch says he looked at the operating metrics for all the plants to make these determinations.
“You can look at who has the best quality measures in terms of defect rates or who has the most productive work force in dollars per part, those kinds of things,” he says. “Then there’s also the subjective version — when you go to visit a plant, you can say, ‘This is a well-run plant.’ Typically it’s the more objective measures to say if you’re getting good results. Chances are, all the other stuff is going to be good too, at least on a consistent basis. Random is never good when it comes to things like that.”
Then the third part about driving innovation was key to developing new technology based on what customers were telling them — they had to play to win.
“It’s time to grow this business, and it’s time to establish ourselves as what I like to refer to as a company of choice — first choice for suppliers and people who want to work here for employment, first choice for investors,” he says.
Communicate your plan
As he began to move forward, the next step was to communicate the company’s new plan to each different constituent group. He did this through various venues, such as an all-company webcast, internal newsletters, in-person and starting an annual meeting.
“Although you have to craft the format differently, I believe you have to be very consistent with the communications, whether it’s your employees or customers or suppliers or investors,” Bolch says. “You can’t have different messages. You have to have a consistent strategy and talk to them and adopt it to their viewpoint a little bit. You can’t create different ones for different people — it doesn’t work.”
He says you have to start with a simple message.
“Making it a simple message is very hard,” he says. … “You have to be able to communicate not only to your senior people but also be able to reach somebody who is working on a factory floor who may not speak English, and translate it and be ruthless and streamline the message down.
“When you do that, it means you have to be very clear about what you have to do. If you use a lot of words, you don’t have to be so clear. If you use very few words, you have to be much more clear.”
That’s why he ultimately came back to just those three big ideas of one Exide, competitive operations and global growth through innovation.
“That seems to translate well and people understand it,” he says.
But he couldn’t simply leave it at just those three things. He also had to explain what those three things really meant to each constituency, and that meant tailoring that consistent message in different ways.
“It depends on their ability to understand, and what’s important to them,” Bolch says of how you do that. “If you’re talking to senior leaders in the company, you can be very explicit, and you can back it up with a lot of details.”
Then it’s different if you’re talking to a lower-level person in the company.
“They can be very intelligent, but they may not have all the knowledge to absorb it,” he says. “You tend to want to state it in more basic terms so they can appreciate it, and give them examples of how they can contribute because I believe that everybody at the beginning of the day, wants to come in and make the company a better place — I’m just optimistic that way.”
Then it’s a completely different approach when you go outside your company and talk to your customers.
“They don’t care as much how you pay your people,” he says. “What they want to know is how you’re going to run the company in a way that benefits them and how they run their business. Take those same messages and how that’s going to translate into better products or lower costs or higher quality.”
Then, lastly, Bolch had to take that same message and tailor it to his investors.
“If it’s a successful business and making customers happy and we’re engaged with employees, ultimately, there’s going to be better financial results for the company, which is what’s really of interest to them,” he says.
After he had effectively communicated the new plan to all the different stakeholders, he then went about moving the business forward. As he worked with people, he continued to reinforce the new plan.
For instance, Exide used to have one large sales force that went out and sold to car manufacturers, such as BMW and Toyota but then had a completely different sales force that sold batteries that go into forklifts. Once when he was out with a salesman in one of the car factories, he took the opportunity to further the plan.
“I would say, ‘It’s great that we’re selling them car batteries, but what kind of batteries are in those lift trucks running around?”
The salesman didn’t know, and when Bolch would ask why not and wouldn’t it be great if they were Exide, the salesman would respond that it would be nice but it wasn’t his job to know.
“It’s the classic, ‘Not my job,” so now we make it their job,” Bolch says. “As you start to unearth these opportunities, one is you change the incentives and objectives, but the other one is you really communicate where we had victories.”
After that conversation and several others like it, now Exide is seeing victories in cross-selling opportunities across the businesses.
He’s also starting to see the fruits of his labor in other areas. For instance, in the past, you could only build an industrial battery in an industrial plant or a transportation battery in a transportation plant.
“Now we’re breaking through that paradigm saying, ‘If we have the skills, and we have the capacity to build in this plant, why can’t we do that there?’” he says. “We’re doing that and generating a lot of productivity that way.”
And the numbers prove that things are changing, as net sales for fiscal 2011 improved to $2.8 billion from $2.6 billion in fiscal 2010.
He’s also seeing more engagement with employees when he communicates with them, which is a sign of success.
“The first time you do a webcast globally, it’s absolute silence because people aren’t sure what to make of the new guy,” he says. “But as time has gone on, you get more and more questions about, ‘Well, can you tell me about this? I’m really interested in this. Or I had this idea — what do you think about that?’”
He’s now getting more e-mails form employees, which is really exciting for him.
“It says to me that people are now starting to engage more and are starting to understand the business,” Bolch says. “When I go into a plant, people interact differently. It’s not just me. Our whole leadership team is reaching out like that. When you see them engage back, you know you’re making a change.”
How to reach: Exide Technologies, (678) 566-9000 or www.exide.com
The Bolch File
Born: Jackson, Miss., but I didn’t live there very long. I moved to Shreveport when I was about kindergarten age.
Education: Bachelor’s degree in mechanical engineering, Tulane University; Master’s degree in mechanical engineering, University of Florida
What was your first job and what did you learn that still applies?
Mowing lawns. I was probably 10. One [thing I learned] is you probably don’t want to mow lawns for a living. I think it’s just you have to take pride in what you do. If you’re going to commit to do a job, you do what you said you’re doing to do.
As a child, what did you want to be when you grew up?
I wanted to be an astronaut. I was born in 1957, so when President Kennedy wanted to go to the moon, I was like 5 years old so it was an impressionable age I suppose. I used to write letters to the people at NASA when I was a kid, and they would write me back. I had two problems. Once I was 12 years old, I was already over 6 feet tall. And at that time, you couldn’t be an astronaut if you were over 5 feet 10 inches, and also I didn’t have perfect vision. I was written out of the program early on. I had to go be an engineer instead.
What’s the best advice you’ve received?
‘Trust, but verify.’ I think I it is critically important to empower your team, but periodically you need to drill down to ensure that you are getting the whole story and you are comfortable with the direction.
What’s the best book you’ve read lately?
‘Unbroken.’ It’s a story of a WWII army aviator. It was a young man who went into the army at a young age, but he was ultimately shot down and stranded in the Pacific and was a prisoner of war, and it was an incredible story of someone’s personal story and how they survived and how they conquered incredible things. It was pretty inspirational.
When was the last time you reviewed your business’s insurance coverage?
If you’re not doing an assessment at least annually, you may not be covered as things continue to change at your company. And if you’re just continuing to pay your insurance bill without evaluating what you are paying for, you may find yourself underinsured should a disaster strike your business, says Jeffery Reisner, CPCU, CWCC, who leads the Real Estate Insurance Practice at Neace Lukens.
“Things can change quickly,” says Reisner. “For example, FEMA has been changing the flood plains over the last two years, and a property that wasn’t formerly in a high hazard flood zone may now be. Building codes may have changed forcing you to pay for mandated property upgrades to damaged property. Due to economic conditions, you now have a high vacancy issue. These all have unique challenges and exposures to address. Especially if you have a large mixed use real estate portfolio, you really need to keep in touch with your insurance broker and risk manager to ensure that your coverage is up to date and you can address these exposures in case of a disaster.”
Smart Business spoke with Reisner about doing a coverage analysis of your business and how doing so can help you determine the right amount of insurance for your company.
How do you determine the right coverage and amount of insurance for your business?
Start with a coverage analysis, regardless of whether you are a small business or a large multi-state or multi-location insured. Many times, a small business has a higher risk as it generally will not have an in-house risk manager to review its insurance coverage. This leaves the owner ultimately reliant on his or her broker. A small business also may not have the financial resources to recover from an uncovered loss or disaster.
In an assessment, your insurance broker will identify any changes in exposures in your business -— past, present and future — and then review your current insurance program and go over the policy in detail. He or she will identify current coverages and whether there are any weaknesses or uncovered areas in the policy. Insurance is broken down into multiple segments, including property, general liability, auto, management liability, etc., and each of those has its own exposure and challenges.
Your broker will go over each of those areas and then make recommendations for coverage, possibly with a side by side analysis.
Is doing an assessment a time-consuming process?
It can be, particularly if your business has a real estate footprint across the country. If your locations are primarily in what is considered low hazard areas geographically, it’s a little easier. But if you have property in catastrophe-prone areas, such as the flood-prone banks of the Mississippi, or high wind areas in the Gulf of Mexico or on a major earthquake fault line, it can be a more complex process. With the unusual weather-related events we have had lately it has been difficult to predict.
It also depends of the mix of properties in your portfolio. If you have a blend of multi-family, office space, light industrial and commercial, each one of those presents a different challenge both from a property and general liability standpoint.
How does the assessment or due diligence process work?
As mentioned before, your broker will want to look at your current policy, location schedule and statement of values so that he or she can identify the types of property in your portfolio, profile of the properties and where they are located.
The broker will then start their due diligence by conducting a survey of each property with the on-site property managers or whatever other resource they have access to. This will involve identifying items as simple as construction, square footage, age, and fire and life safety features. With the more challenging or larger properties, utilizing a broker’s loss control department or risk management personnel to visit the site is always an efficient way to evaluate a property’s exposures. An exposure analysis checklist can assist even a smaller business in its coverage review.
Your insurance needs should be assessed yearly, at minimum, but if you have a large portfolio with an extensive footprint across the U.S., you may want to do a quarterly or midterm review. This is something that every business needs to do. Often businesses simply continue to renew and pay their insurance bills without considering what they are paying for and whether their needs have changed.
How can you identify the right broker for your needs?
Choosing a broker is a huge issue, and you should interview several brokers to find the right match for your needs. Too many business owners simply bid out what they believe their insurance needs to be to several brokers in hopes of achieving some cost savings.
While important, price shouldn’t even be part of the initial conversation with the broker. Instead, the broker should ask questions about your business in order to start assessing your needs.
You should be asking questions, as well, to determine what the broker is going to be able to bring to the table, besides a quote.
Any broker can obtain a quote for you. But when a large loss occurs, is it just going to be you and your assigned adjuster mediating a loss? Or is your broker’s team going to be your ongoing advocate to help you begin your road to recovery?
Ask whether your broker is specialized in the market segment in which you do business. You want a broker that is an expert in your field, as you are. Ask about the broker’s relationships with the insurance carriers he or she represents. Also ask for referrals and call several of the broker’s current clients. Lastly, what other services and resources does he or she bring to the table? Price obviously is an important consideration, but after a major loss, the support and services provided by your broker can make a significant difference in how quickly your business can recover.
Jeffery P. Reisner, CPCU, CWCC, leads the Real Estate Insurance Practice at Neace Lukens. Reach him at (216) 446-3336.
When Gary Kovacs joined Mozilla Corp. a year ago, the company was on track to release the next version of its browser, Firefox 4.0., with immense anticipation from the user community. While everyone was excited about the 2011 release, Kovacs also saw that approximately 15 months were lapsing between each update. With the increasing speed of innovation, he knew the company couldn’t afford waiting another year or longer to introduce Firefox 5.0 if it wanted to stay competitive. Fifteen months might as well be 15 years in the Internet space.
“What I came in and helped all of us understand, which is something that everybody knew but we didn’t really internalize, is the market’s moving at a different pace than it did even a year ago, and our mission is to lead in the creation of the open Internet that gives the user choice,” says Kovacs, CEO of Mozilla. “Lead means continuing to push new features, new products at a pace that is ahead of others in the market, and we weren’t doing that.
“Coming in as a leader, what I understood and I think everybody understood is that the pace of the Internet is moving at a very rapid rate. We needed to continue to evolve our offerings and our processes and organization to keep up and to continue to lead. That requires some changes and adjustments.”
While Mozilla had already been growing when Kovacs arrived — generating $104 million in revenue in 2009 — his ability to expedite change through his leadership has been instrumental in expanding the company’s scope, offerings and size over the last year. By reenergizing Mozilla’s mission through swifter execution on several key initiatives, Kovacs has made sure Firefox remains a leader in the evolution of the Internet.
Reframe the issues
Transitioning the Firefox browser to a rapid-release cadence was just one opportunity Kovacs saw for Mozilla to move quicker in adapting to the change around it. However, one of timeliest areas he wanted to address when he came in as CEO was how to handle the Internet privacy issue of Web tracking. After many months of going back and forth, the company had still not reached a decision on whether or not to add a “do not track” feature to Firefox 4.0, which would enable users to opt out of being tracked by websites they visited online. So to get closer to a decision, Kovacs says he needed to put the issue into a different context for his 350 employees.
“Sometimes I make the decision and surface it and socialize it with the group,” he says. “Sometimes I just facilitate the decision getting made. A practical example would be on do not track. I asked a question. I felt this wasn’t exclusively my decision to make, but I felt we had to make one. … I asked, ‘What’s stopping us from making a decision?’ — which is a really different question than, ‘What do we think we should do?’ ‘What’s stopping us from making a decision to implement this?’”
When a decision is at standstill, asking people to examine it from a new perspective can help them identify what are the most significant roadblocks and obstacles to progress.
“I call it the yellow car syndrome,” Kovacs says. “You don’t realize all the yellow cars on the road until you buy one, and then you realize all the yellow cars on the road. After you see the behaviors a few times, you start to recognize them. The behaviors sound like this: When a team or a group or a community is debating on an issue, they start covering the same points and then they cover them again. At that point it’s like ‘OK, done. Time for a decision.’”
When the same, familiar answers came back about the do not track feature, Kovacs reframed the issue for his team again, this time as a question of mission accountability.
“I came back and said, ‘Our mission is to lead the Internet where users are in control and choose, and this is an issue with privacy where users aren’t in control” he says. “‘So do we think some solution is going to be needed this year?’”
Everyone agreed it was.
“Then our only question was are we truly going to be a leader or are we going to wait until somebody else develops something and then fast follow it?” Kovacs says. “The former was the only one that felt right to people. I said, ‘OK, then the harsh reality is, we’re going to have to take a step sometime before knowing the final outcome because the answer can’t be created until you take many steps toward it. Let’s take this first step.’”
Sometimes getting people to see the urgency of taking action begins with getting them to think about choices in new ways. Reframing an issue as how it ties into your vision, mission or core values for instance can help people who are caught up in the initial challenges of a decision see the larger value and implications of making a change. Once Kovacs got his people to redefine Mozilla’s mission and vision of leadership, the team recognized the necessity of making changes to execute both moving forward.
“Everybody to the core said, ‘Absolutely. Time to lead. Time to move,’” Kovacs says. “Once we created that highest order vision, which really tied closely to our mission of leadership of the open Internet, then the work of leadership turned into the work of management, just making sure the processes and structures were in place to actually drive what everybody wanted to do anyway. But it was really calling that out and making that something that was visible.”
By redefining the challenges at hand, you can help your team turn the corner to move forward on a tough decision. However, to balance a participative decision-making culture with efficient execution, you have to have mechanisms to hold people accountable to progress. By providing your people time constraints and clear responsibilities, you can give them input and encourage dialogue without letting a participative culture turn stagnant.
“Doing anything where it involves the ‘I’ word — ‘I think’ or ‘We’re going to do this because I say so’ — that’s death,” Kovacs says. “There are organizations that benefit from that type of leadership. It’s not here. That doesn’t mean that you have to be slower than if it was just you, but you have to be much more inclusive in your leadership style. … The second thing that is negative is if we confuse communal with no need for crisp execution.
“People will follow you, but they want to know that you are going to execute crisply, effectively and things are going to get done. You are going to stay true to your word. If you say you are going to do something or the organization says it’s going to do something or starts to do something, they’ll do it. So the execution, the metrics around that, the processes around execution, getting things done is really critical. And the negative, of course, is if it’s just sort of arm-wavy and nothing gets done.”
If you want to remain competitive, you can’t afford to let your organization stall in its decision-making. Ensuring decisions are made decisively is easier if you set parameters to steer people toward the end result by keeping everyone accountable to progress.
After asking each of his senior leaders if a week would be long enough to research the different aspects of a do not track decision, Kovacs gave them the time period to investigate the issues and then report their findings to the rest of team. He also set a two-week time limit on the final decision. In two weeks, a call would need to be made one way or another. When the team regrouped before the deadline, it reached a decision in favor of the Do Not Track feature.
“Then we moved right to ‘OK, let’s talk about how we are going to execute this over the next three weeks,” Kovacs says. “‘How are we going to communicate it? How is it going to get built into the product? Who is going to own each piece?’ We put a dashboard of operations to it. That’s my approach. You give people an opportunity, but you don’t give them an infinite time to exercise their opinion. You time-bound it, you make it specific, and then you execute based on that.”
Explain your reasoning
If you were in Mozilla’s corporate office, you would see huge boards and monitors constantly rolling user feedback from mechanisms built into the Firefox product, beta channels and its external channels pushed out into the user community. Mailing lists, briefings and community meet-ups that Kovacs attends also provide ongoing consumer feedback to help the company make decision about its direction and product.
Yet while Mozilla relies heavily on input from its user community, Kovacs understands that the company is never going to please every one of Firefox’s 400 million users with a decision.
“If I make a decision or send an email or think through a strategy or even ask an opinion, I’ll get a wide range of feedback that will be everything from, ‘Hey, that’s great. I love it,’ to really in-depth how it could be better, to ‘You’re an idiot, and I’m not sure why you are leading that organization and that’s the dumbest thing I’ve ever heard,’” Kovacs says. “If you are uncomfortable with who you are and uncomfortable receiving that kind of feedback in as plain form as it comes sometimes, it’s not going to work.”
Although it’s probably impossible to have every customer back your decision every time, when you communicate why you made it clearly and assertively, you make it easier for people to meet you halfway and buy in to it long-term. That’s why once Mozilla decided internally to implement its do not track feature — being the first in the market to do so — Kovacs made sure the company reached out fully and transparently to its user community, using every one of its community touch points to explain and discuss the reasoning behind the decision.
“We posted,” Kovacs says. “We blogged. We helped them understand our rationale. We shared all of that, and we expected some to be upset with it. What came back was ‘I’m not happy that you did it, because we don’t have the full solution, but I really get why you did it and once I understood it, I think it was the right thing.’
“You can’t manage by averaging the opinion because then you please no one. In the end, there is a judgment call that needs to be made. What we have learned and what I certainly have learned and has been reinforced … is people will accept a decision. They’ll accept a judgment, but what they also expect is that you’re clear about how and why you made that decision.”
In order to inspire confidence in the long-term vision of growth, transparency is critical. Even if people don’t agree with some decisions you make, if you are clear that you have the mission and core values guiding your choices, they will be able to buy into your judgment as a leader.
“People see you make those decisions – and we’ve made lots of them in the last six months – where we’ve had to say this might result in more revenue, or might be more interesting or might move us in a better direction short-term, but it wouldn’t be good for the mission so we don’t do it,” Kovacs says. “The mail that we get back constantly is ‘Way to go. Way to stand up.’
“You have to be comfortable servicing that point of view, comfortable taking feedback, but the most important piece then is over some period of time, and not too long [saying], ‘OK, we’re going west and we’re going west for these reasons. I’m going to communicate it openly ? but we’re going west.’ Then sometimes there is sort of a hailstorm of negative feedback and you have to push through it. If you believe and you create that belief for the right reasons, then you push through it. It works.”
How to reach: Mozilla Corp., www.mozilla.com
The Kovacs File
Born: Toronto, Canada
Education: completed undergraduate and graduate degrees at the University of Calgary
Who are your role models for success?
My father — due to his outstanding integrity, fairness and keen ability to clarify thoughts — and Lou Gurstner. I admire him for his steady resolve, absolute simplicity and clarity of thought in the face of tough obstacles. I also find Reid Hoffman extremely inspirational as a leader.
Who were your mentors in transitioning to the role at Mozilla?
I had some of the greatest people who have led major organizations and major missions both in the Valley and globally. I’m very pedantic about this. I sat down with them prior to coming to Mozilla. I asked their opinion. I involved them in the decision and then I put the touch on them. I said, ‘Look, I’m going to need help and perspective, and I would love to be able to come to you. I gave them a frequency — we’ll have a glass of wine or we’ll have a dinner — and I’m going to be thoughtful and mindful of your time. I think I can give something back to you. So we created a little bit of a mentorship agreement. When I faced some of the toughest challenges or decisions or issues, I relied on the mentor network to help me navigate through them.
What can California do to create a better environment for business?
We have to improve our fiscal plans and budget in order for businesses to be more effective. I think as a state we need to take steps to make major improvements to the primary education system in California. Great education is fundamental to the success of future generations.
What is one part of your daily routine that you wouldn’t change?
Every morning, I get to enjoy my first cup of coffee with my family. This helps to keep me grounded and allows us to spend quality time together. Also, some sort of physical activity is essential in my day to day.
Smart Business spoke to Lee Dresie, a partner at Greenberg Glusker Fields Claman & Machtinger LLP, about ensuring that your business does not assume all the risk in a transaction by carefully examining form contracts.
Form contracts account for more than 80 percent of all agreements used to complete business transactions today. That percentage may be even higher when it comes to commercial real estate transactions like the ones you signed to acquire a corporate headquarters or satellite offices.
Unfortunately, many executives do not carefully review the specifics of a form contract before signing. Instead, they assume the form contract to be an agreement equitable to both parties. However, unless the form is an industry-neutral form such as one from the AIR Commercial Real Estate Association or Commercial Association of Realtors, terms in a standard form contract are designed to favor the party that presents it.
To limit your company’s risk, it is vitally important to be able to recognize and negotiate unfavorable provisions out of form contracts. This may necessitate a call to in-house or outside counsel with expertise in the area.
By negotiating the form contract presented to him, a savvy building owner in Los Angeles was able to collect 15 years of rent from an outdoor sign company even though the sign company was prevented by law from constructing a sign on the building. The building owner had been approached by a well-known outdoor sign company about leasing the roof of his building for a large billboard. After reaching an agreement on the rent amount and term of the lease, which totaled $750,000 over 15 years, the sign company presented the building owner with its “standard” form lease. The form lease provided that if the sign company could not obtain a building permit to erect the billboard, or if applicable building codes changed, the sign company could terminate the lease with no penalty or payment. The form lease placed all risk on the building owner if the sign company could not construct the billboard.
The sign company was the expert in the field and familiar with the building permit process. Unknown to the building owner, the sign company was aware of a movement by the Los Angeles City Council to ban all new signs. Since the possible ban did not affect existing signs, the sign company was anxious to get this deal done quickly by having the billboard constructed before any ban occurred. Once the ban went into effect, all existing signs became that much more valuable.
Instead of the lease provision allowing the sign company to terminate the lease if it could not obtain a building permit, the building owner requested a different provision noting that the sign company had done all necessary investigation concerning city regulations and the availability of building permits. Because the sign company was anxious to acquire this site and get started on the construction of the billboard, the sign company agreed to replace its provision with the building owner’s provision.
Immediately after the parties signed the lease, the sign company’s engineer re-measured the distance from the proposed sign location to the nearest competing sign, since city codes provided minimum distances between billboard signs. The sign company’s preliminary measurements had been inaccurate. The sign company learned, after signing the lease, that the proposed sign location in the lease violated city codes. The sign company therefore informed the building owner that the lease was terminated because it was illegal and impossible to construct its sign. Subsequently, a citywide ban on new signs was in fact instituted, giving the sign company a second basis to claim a lease termination.
Believing that the sign company assumed the risk of an inability to construct its sign, the building owner filed suit in order to enforce the lease. The sign company vigorously protested, asserting that no court would require it to pay 15 years of rent for a sign which it could not construct.
The building owner argued that the sign company had knowingly assumed a foreseeable risk, and that the parties had re-allocated this risk to the sign company, and away from the building owner. From the judge’s point of view, the key fact arose when the building owner elected not to simply sign the form lease.
Consequently, the judge agreed with the building owner’s position and ruled in favor of the building owner for the entire 15-year term, and $750,000, despite the fact that no sign could ever be constructed. Additionally, the court awarded the building owner the attorney fees incurred in the enforcement of the lease.
This example highlights the importance of carefully negotiating all contracts, especially those presented as the other party’s “form contract.” Such form contracts extend beyond real estate transactions, and could include executive employment contracts, lending transactions, and confidentiality or non-disclosure agreements.
You can rest assured that the other party in a transaction will take the time and make the effort to carefully construct each provision to shift as much risk away from them as possible. Unless you are willing to assume all of that risk, you should spend the same time and make the same effort to re-allocate the risk back to the other side.
Lee Dresie is a partner specializing in real estate with the Los Angeles-based law firm of Greenberg Glusker. He can be reached at (310) 201-7466 or at LDresie@greenbergglusker.com.
If you haven’t done a dependent eligibility audit of your health insurance plan recently, you may be paying for benefits for people who don’t belong on the plan.
“A dependent eligibility audit provides an inspection of an employer’s health and wellness plan to ensure that dependents who are enrolled in the plan are actually eligible to be there,” says Jamie Debenham, vice president of Neace Lukens.
While some of those people may be on the plan as an oversight, others may be intentionally enrolled, and that could be costing you money, adds Brett Vogelsberger, senior account executive of Neace Lukens.
“If an ineligible dependent is intentionally enrolled, it is probably because that person needs care, and that could increase your costs,” says Vogelsberger.
Smart Business spoke with Vogelsberger and Debenham about how conducting a dependent eligibility audit can help control wasteful spending and potentially reduce your premiums.
What type of companies can benefit from performing this kind of audit?
Generally, the companies that can benefit most are those that have more than 100 employees. But not all 100-employee-plus companies would benefit if they have mostly single employees with single coverage.
Employers that have a lot of employees with family dependent coverage are most likely to benefit from an audit. In those larger employer groups, it’s a fairly frequent occurrence that there is someone on the policy who isn’t eligible to be there.
How does a company begin the audit process?
The first step is to notify employees 30 to 60 days beforehand that you are going to do a dependent eligibility audit and give them the opportunity to voluntarily terminate ineligible dependents. This provides an amnesty period, without penalty, for employees to come forward and remove that ineligible person.
Next, identify a firm that has experience with audits. The firm will send a notification to your employees who have dependents on their coverage, requesting information. If the dependent is a spouse, the notification will ask for a federal tax form filed within the last year that shows both the employee and the spouse on it.
If there are covered children on the plan, the notification will request a birth certificate and a copy of a federal tax return.
If applicable, the employee will also need to submit a divorce decree stating that he or she is required by the courts to provide coverage to a child who is not residing in the home.
Getting the documents you need can be time-consuming, both because employees are reluctant to provide them and because they forget. You should allow for at least 90 days to complete the process.
How can you overcome employees’ resistance to providing personal information?
You need to assure them that everything is HIPAA compliant and that the information will only be used for audit purposes. You can also provide them with a secure e-mail address and ask them to white out financial information, Social Security numbers and other sensitive information from the documents.
But even if an employee is uncomfortable, he or she cannot refuse to submit the required documents. Because the plan is sponsored by the employer, the employer has the right to legally dismiss the employee if the enrollment application was fraudulent or to remove the dependents from the plan for noncompliance with the documentation requirement.
From an initial enrollment perspective, employers should ask for specific documents up front in order to prevent ineligible employees from being enrolled in the first place, especially when enrolling dependents.
What do you do if you find ineligible dependents on the plan?
The employee would be notified that the dependent will be terminated as of an effective date in the future. Before health care reform, those terminations were backdated. That has become more difficult to do because of the new rescission laws, which do not allow canceling the contract as though it never existed.
How can doing an audit benefit a company?
It will certainly benefit on premiums and also from the performance of the health plan as a whole. You benefit from claims not filed by an ineligible dependent, because generally, someone who is deliberately on the plan is going to be using the plan and creating claims and ultimately spending a lot of money. In addition, over a long period of time, because the claims would be coming down, that may ultimately result in better rates.
Employees may also benefit. Most companies ask employees to pay a portion of their premium, and if getting ineligible dependents off the plan improves premiums, that benefit is going to trickle down to them.
Some employers may be reluctant to pursue an audit because they don’t want conflict, especially if they suspect that a highly paid or key employee may have an ineligible dependent on the plan. But not removing that person could be a costly mistake.
What would you say to business leaders who say the process is expensive and time-consuming?
I would tell them about the potential savings, because that is going to directly hit their pocketbook. The audit may initially seem expensive, but not compared with the savings that you will get from finding ineligible employees. There are quite a lot of dollars involved, and a significant amount can be saved as the result of performing a dependent eligibility audit.
How often should an audit be performed?
For a company with high turnover, it should be done every year, or at least every other year. For a very stable company, once you’ve done it once, you may be able to wait five or six years before doing it again.
Jamie Debenham is a vice president with Neace Lukens. Reach him at Jamie.Debenham@neacelukens.com or (216) 446-3312. Brett Vogelsberger is a senior account executive with Neace Lukens. Reach him at Brett.Vogelsberger@neacelukens.com or (216) 446-3304.