Chelan David

Saturday, 26 May 2007 20:00

International business

In today’s global economy, American companies are afforded tremendous opportunities to diversify business risks and capture additional market share. However, there are corresponding risks to the rewards that are associated with conducting business internationally.

Highly volatile, any given currency fluctuates 1 percent during a 24-hour period, points out Gary Loe, vice president at Comerica Bank. This volatility translates into the need to manage the risk of rising or falling foreign exchange rates.

“Identify your exposure and establish a floor or worst-rate scenario,” advises Loe. “Protect that rate by using one of your foreign exchange hedging vehicles.”

Smart Business spoke with Loe about the basic principles of foreign currency hedging, what the current environment looks like and how to best strike a balance between risk and return.

How does foreign currency hedging work?

A foreign currency exposure is typically created when a company imports, exports or establishes an offshore physical presence. Due to potential valuation change from one currency to another, the result is currency risk. This risk will require active management or risk transfer. Whichever occurs, a currency hedge program should be investigated. Different companies will have a different hedging profile. Hedging is the tool to address currency risk.

What are the different types of foreign currency hedging vehicles?

There are three basic vehicles, although there are variations upon these three.

The first type is a spot transaction, which is the immediate buying or selling of one currency for another. Using the market price today, settlement usually takes place within two business days. A company that only transacts using spot trades is typically accepting the most risk.

The second vehicle is a forward contract. The price is locked in immediately, but settles on a date in the future. Monies do not change hand until that stipulated future date. Theoretically, the forward price can be the same as the spot price; however, the forward price, based on interest rate differentials, is usually either higher (premium) or lower (discount) than the spot price.

Finally, there are option contracts that provide the company the right, but not the obligation, to purchase or sell a specific amount of foreign currency for a specific date in the future. For this right, the purchaser of the option pays a premium which is payable immediately. This cost is determined by many factors including the option strike price, current spot price, forward adjustment (interest rates), market volatility and forward date.

When creating a hedging plan, what strategies should be considered?

First, it is important to note that there is no one best way to create a hedging plan. Each company may determine to use different tools that apply to its individual situation.

However, one consideration that should be taken into account is how much exposure you have. Are you conducting business in U.S. dollar terms or foreign currency terms? Even if conducting in U.S. dollar terms, your company can still be exposed to exchange rate movements if your foreign party is or feels forced to change those terms due to exchange rate movement. Developing a budget or other financial analysis can help identify foreign exchange exposure. Typically, a company will establish a budget or forecast, then choose the vehicles to use and subsequently validate them against the company’s appetite for risk.

What does the current environment for foreign currency hedging look like?

Most industrialized countries have freely open markets in foreign exchange such as the U.S. dollar, Euro, British pound, Japanese yen and Canadian dollar among many others. The foreign exchange market is the largest market in the world with more than $1.5 trillion (U.S.) traded daily. This is bigger than all the stock and bond markets in the world put together. Therefore, the market is very liquid.

There are, however, countries where it is very difficult to impossible to physically deliver currency. China is one such place that curbs its money flows. This is due to Chinese central bank restrictions. Regulations in some countries can change constantly so it can be important to stay in touch with your bank’s foreign currency adviser.

How can a business best strike a balance between risk and return when hedging in foreign currencies?

Probably the term with more weight is risk. Your company is probably not in the game of foreign exchange speculating. It is most likely buying or producing a product for sale or providing a service for sale. Therefore, it should concentrate on what it does best.

Most companies would be better served by eliminating as much foreign currency risk as possible. However, some business situations cannot completely eliminate risk. In this situation you can try to set a downside floor with the use of such vehicles as options. Setting a floor with an option or leaving an order to buy or sell on a stop-loss basis can also leave potential upside returns on a hedging strategy.

GARY LOE is vice president at Comerica Bank. Reach him at (800) 318-9062 or gloe@comerica.com.

Wednesday, 25 April 2007 20:00

Setting a good example

The ethical breaches at Enron, Tyco and Adelphia vividly illustrate the damage that can occur when the leader of a company chooses to act in an unscrupulous manner. The profound lack of ethics on display can cost employees, officers and shareholders dearly.

To circumvent such problems, it is important for top management to set a good example. After all, an environment conducive to high ethical standards is good for business. Companies that behave ethically are rewarded in the form of loyalty, honesty and productivity from employees, customers and suppliers.

A company lacking ethical standards is destined to fail, points out Satinder Dhiman, a professor of management at Woodbury University. “Without an ethical framework, business or any kind of exchange is not possible,” he says.

Smart Business spoke with Dhiman about the importance of ethics in a business setting.

How should a company go about developing a culture of ethical business behavior?

A company’s culture is not something that can be mandated from above; it has to be nurtured. An ethical framework and processes have to be developed at every level of the organization. Although top management can initiate certain processes and provide a clear message about the importance of proper conduct, the culture is determined from the grass roots up.

How important is it for management to align their behavior with their beliefs in regards to ethics?

If there is one way that humanity has discovered, in regards to effectively changing behavior, it is role modeling. There is no other way to affect change in a group setting. People learn more by watching their leaders than by listening to their speeches. It is of paramount importance that employees and staff get a consistent message from the top leaders and that these values are aligned.

How should a company’s ethical standards be communicated to employees?

We can use modern technologies like e-mail, we can have bulletin boards, we can have town hall meetings, but what really matters is how a company practices ethical principles on a daily basis. The ethical framework has to be tangible in a company’s daily conduct.

Nothing underscores a message as forcefully as when a company takes a stance on an issue that has lasting ethical implications. In this manner, you communicate the message in a way that employees are acutely aware of where management stands. You can have it written all over the walls, but if you don’t live it, then it won’t be effective.

If a breach in ethics does occur, what steps should be taken to rectify the situation?

This is a question that has been asked many times since the collapse of Enron. The first step would be not to justify or rationalize the breach and to admit there is a problem. The chiefs of Enron kept saying until the end that they had done nothing wrong. If a breach has already occurred, it is important to be honest. They say that when you speak the truth, you don’t have to worry about remembering. If you try to gloss over things, it adds insult to injury and worsens the matter. Also, after admitting that there is a problem, it is important to establish a preventive mechanism so that you have early warnings about these kinds of things happening in the future.

How have new technologies affected ethical issues in businesses?

New technologies have impacted business because information is more easily accessible and more universally available. I remember someone saying that it is not that there is more crime today, it is just that there are more reporters. Technology has made news about scandals mainstream and more available to public scrutiny than ever. There is no hiding anymore. New technologies have made things more transparent.

There are also more preventive mechanisms in place. The stock market crash about 80 years ago may not happen today because we have mechanisms in place that warn us early of potential problems. This is the salutatory effect of technology.

SATINDER DHIMAN is associate dean of business and a professor of management at Woodbury University. Reach him at satinder.dhiman@woodbury.edu or (818) 252-5138.

Wednesday, 25 April 2007 20:00

Trading up

Trade cycle financing, which refers to a variety of financing solutions, provides importers and exporters with a number of beneficial features. It allows for financing inventory both domestically and internationally. It allows the full sales cycle to be financed at one time, or it can be separated by different stages, such as manufacturing inventory and collections. Credit-worthy clients can receive financing which may be used for domestic and international transactions.

“Trade cycle financing is managing cash flow for a given period of time, and it can be related to an importer or an exporter,” explains Tim Murphy, first vice president for Comerica Bank. “It allows a bank to assist customers in managing the purchase and sale of their inventories over a defined period of time.”

Smart Business spoke with Murphy about trade cycle financing, what it is geared toward and how a company can benefit from this type of financing.

Who is trade cycle financing geared toward?

It is geared mainly toward importers and exporters, who traditionally have a fairly well-defined period in terms of the financing they need.

We measure the full trade cycle, which is from inventory purchase to manufacturing to collection time. Once we’ve understood the cycle and understand the client needs, we finance the cycle on an ongoing basis.

Trade cycle financing can also work well for distributors, both domestically and internationally. This method of financing is not geared toward a new company that needs to build inventory.

How can a company benefit from this type of financing?

It is a cost-efficient method of financing. Customers only borrow what they need for a given purchase or for a given supplier.

This keeps their landed costs lower. It also allows them to get a better handle on their international banking charges.

Most companies that use trade cycle financing do not have the goods very long in their possession; some just drop ship the goods and never even touch them.

What payment mechanisms are available?

A number of different financing methods can be used: letters of credit, open account, cash in advance and purchasing or selling on collections. All of these tools can be adapted into trade cycle finance. For example, if you sell on a collection basis, we may be able to advance or discount that collection. Or if you’re buying on open account, we may be able to refinance that purchase from overseas.

What role does insurance play with trade cycle financing?

When you’re talking about trade cycle financing, there are really two types of insurance. The first is cargo insurance, which covers the merchandise from warehouse to warehouse. This protects both the bank that may be lending on the goods as well as the buyers and the sellers.

The second type of insurance is a policy for commercial and political risk. Some policies allow financial institutions to assist their clients in the purchasing of finished goods or raw materials and shipping to or from their overseas locations. This can be a big advantage because they are able to finance almost all of the costs. Let’s say a client needs to buy raw materials for his factory in Mexico. He will submit all of his purchase orders and the bank will finance those purchase orders up to 180 days. This allows him to take the raw material to his plant in Mexico, manufacture the product, sell the product, get paid for the product and then repay the bank. The advantage to the client is that he’s only made one advance and his reporting is minimized.

How can a company determine if it is qualified for trade cycle financing?

If a company is truly an importer, exporter or distributor, then it probably qualifies. Most banks would like to have at least three years’ worth of financial statements for a new client. What we’re looking for is a defined trade cycle where we can determine when the client needs to buy, who they’re selling to, and how long the period is. Trade cycle financing is not for the purpose of building inventory.

TIM MURPHY is first vice president for Comerica Bank. Reach him at (562) 463-6530 or tim_murphy@comerica.com.

Wednesday, 28 February 2007 19:00

Real estate strategy

Corporations that own their buildings might find it advantageous to lease back their real estate holdings. By deploying a sale-leaseback strategy, capital tied up in real estate can be redirected toward an entity’s core business.

The current investment climate makes this strategy particularly attractive, given the high demand for corporate real estate. “The outlook for corporate real estate, especially properties leased by credit tenants on a long-term basis, looks extremely good now and for the foreseeable future,” says Keith Yearout, a senior associate, investment properties for CB Richard Ellis.

Smart Business spoke with Yearout about sale-leaseback transactions, how companies can benefit from such an arrangement and why the environment for leasing back commercial properties is so favorable right now.

How does the practice of leasing back real estate holdings work?

A sale-leaseback transaction entails the sale of corporate real estate and the simultaneous commitment to a long-term lease, generally 10 years or longer. This strategy allows a company to redeploy the capital that had been tied up in ‘sticks and bricks’ into the core business. You effectively control the property after the sale, and can even retain the right to buy back the property at a pre-agreed price.

How can a company benefit from such an arrangement?

The biggest benefit of a sale-leaseback transaction is the ability to increase a company’s financial flexibility by offloading real estate at attractive price levels and redeploying the proceeds into its core business to yield a higher rate of return than it would otherwise get from owning its real estate.

Another advantage of a sale-leaseback transaction is that it improves the balance sheet by reducing the negative impact of depreciation and interest on your income statement. It also provides off-balance sheet financing, hedges against obsolesence, and may help you avoid or reduce tax liability.

What considerations should be taken into account when deciding if this is a viable strategy?

In determining if a sale-leaseback strategy makes financial sense, a company needs to ask itself the question, ‘Is our corporate rate of return on our core business greater than the yield we get from owning our real estate?’

Due to functional obsolesence, most commercial buildings depreciate in value over time so the sale-leaseback strategy makes sense for many companies — though it’s not without risk.

One potential pitfall includes the possible forced relocation at the end of the initial lease term. At the end of a lease without any renewal options, a tenant may be forced to either negotiate an extension at current market rates or relocate. To prevent such a situation, a company should consider employing a long-term lease or ensuring that the initial lease agreement includes renewal options that allow the tenant to renew at pre-determined rates.

What are the first steps that should be taken if a company decides to lease back its real estate?

Once a company decides to explore a sale-leaseback transaction, the first step should be to request a disposition proposal including an ‘opinion of value’ from a commercial broker who specializes in the sale of income-producing real estate. My team at CBRE provides this service free of charge, and the proposal includes a detailed sale-leaseback vs. own analysis. This helps the company to determine if it makes sense to continue to own its real estate or invest capital back into the core business.

In addition to engaging a qualified commercial broker, a company should also consult its tax adviser to make sure that any potential tax liabilities generated from the transaction are fully considered. It is possible to defer a considerable portion of the tax liability, and having a tax adviser on the team with specific knowledge in this area is very beneficial.

How does the current investment environment look for corporate real estate?

We are experiencing an unprecedented amount of liquidity in the investment real estate market resulting in record high prices for corporate real estate. Investors seeking income-producing vehicles are being drawn to corporate real estate due to its ability to provide superior returns compared to treasury bills, municipal bonds, corporate bonds and other income-oriented investments including certificates of deposit. With baby boomers nearing retirement age over the coming years, more investors are shifting from capital accumulation mode and reallocating into income-producing investments. As a result, we currently have more capital chasing corporate real estate than we have product available.

KEITH YEAROUT is a senior associate, investment properties for CB Richard Ellis. Reach him at (513) 369-1334 or keith.yearout@cbre.com.

Wednesday, 31 January 2007 19:00

Leadership abilities

Having effective leadership in place is essential for any business to thrive. Normal day-to-day activities require a leader who conveys a clear vision, inspires confidence, communicates clearly and operates ethically.

The importance of strong leadership is magnified in the event of a crisis. And at some point, every entity will be faced with a crisis of some sort. Being properly prepared to handle the inevitable calamity can make a good leader a great one, says Mark Relyea, adjunct professor at Woodbury University.

“We define our leadership capabilities by our performance in crisis situations,” he points out. “Everything that you are as a leader becomes exemplified when you’re thrown into a crisis.”

Smart Business spoke with Relyea about how to avoid common mistakes that leaders make during crisis situations, how to reduce employee fear and anxiety, and the importance of situational leadership.

What are the first steps that management should take in the event of a crisis?

Long before we ever find ourselves in crises, we should have recognized that we’re going to face them and implement processes that are going to help us deal with them.

Organizations strengthen themselves and prepare for critical incidents by instituting sound leadership practices. You want to make sure the people in the organization know they’re capable of addressing a crisis, minimizing damage and bringing the incident to a successful conclusion. If you have an organization put together like this, when a crisis comes, you’re ready.

What are some common mistakes that leaders make during a crisis and how can these be avoided?

Probably the biggest mistake leaders can make is failing to maintain their credibility. People are watching over us at all times, so it’s important to lead by example and do what we say. Perceptions are everything to the credibility of a leader.

Another common mistake is that when leaders are thrown into crises situations, they feel like they have to take an autocratic leadership approach. It’s usually a mistake to suddenly hold yourself responsible for coming up with all of the answers if you don’t normally do this. During a crisis, the leader needs to make the final decisions, but not excluding the management team that he or she has depended on in the past.

Finally, in times of crises, it’s human nature to become frustrated with other people, but leaders need to avoid venting because it doesn’t usually help. Instead, these feelings need to be replaced with positive action. You want to replace complaints and blame with sound problem analysis and good tactical communication.

How should communication be handled?

Communication is everything to a leader, especially in a time of crisis. Good leaders are capable of presenting clear, consistent messages. Colin Powell says that good leaders are great simplifiers. Keep it simple, but make sure people understand the message.

Some of the messages can be sent out in writing, but there is no replacement for the spoken word when it comes to motivating people. Spoken words are powerful. A leader needs to be out, be seen and be heard. Also, leaders need to keep their personnel informed about what the problem is and what they’re doing to resolve it.

How can employee fear and anxiety be reduced?

It’s important to address employee fear and anxiety, because if you can reduce these issues, people will perform better. Every organization is going to have a crisis at some point, so employees should be prepared.

You want to implement practical exercises like walkthroughs. When you’re hit with a crisis, you want to frame it as a challenge — an opportunity to solve a problem.

One thing you don’t want to do, however, is burden employees by giving them tasks that they can’t handle. Be positive in your communication and make sure the action plan is being followed. The bottom line is that confidence and being positive is contagious. Team members have to believe that they can handle the problem and they have to see their role as far as the solution goes.

What type of leadership style tends to be most effective in a crisis situation?

The type of leadership that is appropriate is situational and will be determined by the nature of the problem and the people that you are working with. Sometimes, the problem will require that the leader take a directive approach. Other times, the problem will call for creative personnel to be given a long leash.

A leader needs to be aware of what type of leadership is going to inspire the people that he or she is depending upon.

MARK RELYEA is adjunct professor at Woodbury University. Reach him at MFRelyea@lasd.org or (909) 709-6887.

Wednesday, 31 January 2007 19:00

Private banking

Each client in private banking has a relationship with his or her own private banker. Beyond credit needs, private-banking clients have available and may draw upon other specialists like securities/investments, trust services, insurance and financial planning.

Smart Business spoke with Mark Nakamaru, a senior vice president and group manager of Private Banking at Comerica Bank, about what types of services private bankers provide, how individuals and businesses alike can benefit and what factors to consider when looking for a private banking partner.

What are some of the services that private bankers provide?

Their primary focus is to address the financing needs of their clients, although in some cases, this extends to the businesses that they are associated with. Service-related companies such as law firms, CPA firms and medical practices are some examples of private banking businesses. Private bankers provide one-stop banking including customized credit facilities, a full array of deposit products, securities investments, asset management, insurance and financial planning. One private banking relationship manager can help deliver all the financial needs for both an individual and his or her business.

How can a company benefit from private banking lending options?

With any business, there is a need for a multitude of services and products. We provide a wide array of services such as traditional depository products, treasury management, merchant services and foreign exchange, to name a few.

Also, a company benefits from a private banker’s ability to customize service needs, as well as banking the principals of the company. Private bankers have the ability to underwrite, structure and approve loan requests in-house, providing quick decisions and customized loans for clients.

How do stock option loans work?

Let’s say a senior executive of a company has stock options that are coming due in six months. He has a tremendous opportunity today on an investment he wants to take advantage of. We can structure a loan for him today with repayment to come from the stock options he will eventually exercise. There is some risk to this. He may not want to exercise his stock options if the stock price drops below the strike price. But we will look for ways to mitigate this risk and structure this loan for him.

How can a company use a mortgage as collateral for a loan?

We can establish a line of credit for a business using the equity in the owner’s personal residence or commercial building as collateral. This may provide a lower interest rate and extended terms on the line of credit. A start-up company, for example, could benefit from this type of loan as it provides additional collateral.

The process to establish this type of loan mirrors the steps one would take to borrow individually for an equity line of credit.

What types of questions should one ask when looking for a private banking partner?

I would inquire about the approval process for loan requests. Does the prospective partner use loan centers for approval or does it have the ability to underwrite and approve loans in-house? There could be advantages or disadvantages with either, depending on your needs. Another key issue is the lending limit of the bank. If it is a small community bank, there are restrictions as to how much money it can lend. A client who is looking for a large credit facility would not be well served by a bank with a house limit that cannot match his credit needs.

The lending experience of your private banker should also match your credit needs. A real estate investor, for example, should ask if the bank actively participates in this market. If so, your private banker should have the real estate experience to help facilitate the real estate loans you require.

Remember, all banks will tell you that they provide great service. Before choosing a bank and/or private banker, have a face-to-face meeting. The candidate should be quite convincing in its commitment to back up its claims.

MARK NAKAMARU is senior vice president and group manager for Private Banking at Comerica Bank. Reach him at (213) 486-6263 or mnakamaru@comerica.com.

Sunday, 31 December 2006 19:00

Workers’ compensation

Recent legislative changes in California have altered the landscape of workers’ compensation. It is crucial for companies to be aware of these reforms when evaluating current insurance plans.

One way to revisit workers’ compensation plans is by conducting a collateral review, which typically centers around collateral on loss-sensitive workers’ compensation programs such as large deductible or retrospectively rated plans. “Some of the initial collateral calculations from several years ago do not now reflect current regulatory or credit risk requirements,” says Dennis Olsen, area senior vice president for Arthur J. Gallagher & Co.

Smart Business spoke with Olsen about the types of collateral that are available, how often collateral should be reviewed and what should be done to prepare for a collateral review.

What is the basis for carrier collateral requirements?
Typically, these types of programs require collateral for two reasons. One is that the insurance carriers themselves have statutory regulations that require them to collateralize self-funded losses. The other reason that they require collateral, aside from the regulatory requirements, is that they want to avoid a credit risk. Insurance companies don’t want to be on the hook for claim payments below the deductible layer.

What types of collateral are available in the market?
The most common form of collateral that is requested by insurance carriers is a letter of credit. But there are many other types of collateral that are used on occasion, such as surety bonds, trust programs and cash.

A trust program provides an alternative to a letter of credit and allows the insured to place negotiable securities into a trust account where the carrier can access the trust assets. The advantage of this option is that the insured is able to earn an investment income on those securities and they don’t impact their balance sheet as a letter of credit would. Trust programs also tend to be less expensive, with savings of up to 50 basis points over letters of credit.

Surety bonds, over the last several years, have not been widely used, as the surety bond market has been restricted.

When should collateral be reviewed?
We normally recommend that collateral be reviewed twice a year. When an insured has been on a loss-sensitive program for a period of time, there tends to be a pyramiding of letters of credit. Currently, we’re in a market where it’s especially important to do the review twice a year because there have been quite a few changes over the last few years. In states like California, where there has been recent workers’ compensation reform, the loss development on claims has been dropping rapidly.

How should a business prepare for a collateral review?
The first step is to do a comprehensive claim review and to evaluate individual case reserves, plans of actions and the potential for closing old claims. The second thing we recommend is to do an actuarial analysis and project ultimate losses using current loss development. This should be done in conjunction with the collateral reviews that are done twice a year.

Insured companies that have former carriers holding collateral often will discover that these carriers will only allow an annual claim review. Typically, the second evaluation is going to be done without a claim review, but it is still important to do a real study to evaluate what the estimated loss reserve is for those open cases. That is then used to negotiate with the insurance carrier as to how much collateral you really need to be holding.

What other factors should be considered when negotiating collateral?
In the past, few collateral agreements specified adjustment time frames or even the loss basis for reducing collateral. Some insurance companies are now more willing to define specific security terms, which will greatly ease future collateral reduction negotiations. If you’re negotiating collateral with the current insurer, you want to bring the leverage of the pending renewal to the negotiations. In a lot of cases, a reduction in old collateral or waiving collateral requirements on the renewal policy can be negotiated. There is also the potential for replacing older forms of collateral by consolidating letters of credit or by substituting letters of credit with cash or trust programs.

DENNIS OLSEN is area senior vice president for Arthur J. Gallagher & Co. Reach him at (818) 539-1323 or Dennis_Olsen@ajg.com.

Wednesday, 30 November 2005 19:00

R&D checkup

Detecting problem areas at an early stage is essential for a business to succeed. It’s also important that, once identified, these problems be fixed judiciously.

In this sense, Positron Emission Topography (PET), a medical technique used for early detection and evaluation of diseases, parallels the business world. As Dr. Mike Phelps, the inventor of PET and the chair of Molecular and Medical Pharmacology at UCLA says, “It’s not just detecting disease earlier, but it’s improving the accuracy with which you understand what you’re dealing with, and from that, getting more quickly to the right treatment.”

Smart Business spoke with Phelps about the technique he pioneered, the spiraling cost of health care and the challenges involved with raising private funding.

How important are innovations such as PET in helping identify medical problems early?

One, treatments have better responses at early stages, and two, the complexity of the treatment — both in the treatment itself and the costs — expands as the disease progresses.

So it’s important to detect a disease earlier from that regard, and of course, the prognosis gets worse for the patient as the disease progresses. It’s probably reasonable to say that we can cure greater than 90 percent of all cancers right now if we could detect them when they’re truly just a primary cancer — they’re only in the organ where they originate and they’re still encapsulated at that point.

But once they spread beyond that, they start to infiltrate the organ they’re in, they start to spread to other organs. The prognosis gets bad, the treatments get complicated and very costly.

In pioneering this technique, what challenges in the research and development phase did you face?

There were a lot of technical barriers to overcome. We were developing a camera to be able to watch and measure the biology and biochemistry of disease in patients that had never been done before. Of course, we also faced a lot of problems in terms of FDA approval and the reimbursement.

At the time that PET came to the clinical world, all the previous approaches to reimbursement and FDA approval had been changed and much more evidence was required. So we had to develop all of the basic science and clinical evidence to show that it would change and improve the care of patients.

How does PET improve medical delivery for patients?

It’s well-proven that PET has about a 93 percent accuracy in diagnosing Alzheimer’s three-and-a-half years before the conventional approach can make a diagnosis of probable Alzheimer’s. So it makes that diagnosis early, and with a single test, as opposed to years of repetitious tests trying to make and improve the diagnosis.

Could health insurance premiums decline as diseases are detected earlier?

It’s not so much about detecting disease earlier. The question is, can you develop a better way to manage the resources that you have for health care in such a way that you lower costs and improve quality?

Health care is 15 percent of the GNP. It’s growing at five times the GNP, and if we’re not careful, it’s going to become the GNP. The largest expenditures are in the treatment and care of patients, not the diagnosis.
The largest number of mistakes that alter the care of patients and the costs is in the diagnosis.

If you can make the diagnosis quicker and more accurately, then you reduce the number of tests that are being used to make that diagnosis. The quicker you can get to the right answer, the better you can get to the right treatment and the care of patients. In addition to just being earlier, it is important that resources are better utilized.

You are the principal or co-principal investigator of more than $150 million. How do you manage this type of budget?

Very carefully. It illustrates our ability to compete nationally to get funds like that, but managing funds after you get them is quite a different issue. When we get them, we propose something that the review process said was important and worth money.

What follows, though, is how you use the funds to execute not only what you agreed to do, but to motivate people to come up with new ideas constantly.

What challenges have you faced in getting prospective donors on board with your mission?

It is very much like in business when you’re starting a new entrepreneurial company and trying to convince investors of the level of your convictions and your beliefs, and that you can execute what you say.

Most of our donors are people who have been through that. They’re smart people who have had good ideas and they’ve been successful.

You try to get them to come to a common place with you — to share a belief with you. Even on gifts in a university setting, most often the most important thing that the donor will actually provide is not his money, but his commitment to you, and his ideas.

Dr. Mike Phelps is the chair of Molecular and Medical Pharmacology at UCLA. Reach him at (310) 825-6539 or mphelps@mednet.ucla.edu.

Friday, 24 November 2006 19:00

Feeling the pinch?

The impact of Hurricane Katrina has had a lingering effect on many facets of the American economy.

Certainly, insurance carriers have felt the pinch. As demand for reconstruction projects rose following last year’s devastating hurricane, so did payouts — often in multiples of what the carriers had expected to pay.

Now, says Deborah Freeland, area senior vice president for Arthur J. Gallagher & Co., underwriting requirements are much more stringent. “The days of just picking up the phone and getting true blanket coverage, where a group of buildings is covered with a single limit, regardless of the value stated for the individual buildings, are long gone,” she says.

Smart Business spoke with Freeland about demand surge, how a company should go about getting an appraisal and the importance of obtaining valuations from certified appraisal professionals.

Why has there recently been an increased demand for appraisals from insurance carriers?

The tremendous property losses resulting from Hurricane Katrina highlighted the fact that many of the insured properties were scheduled as having values well below what would normally be considered a true replacement cost under normal circumstances. Add the increase in costs associated with the demand surge following the hurricane and resultant flooding, and the carriers were paying out multiples of what they expected to pay to replace these undervalued buildings. Many carriers now require independent verification of building values as a condition to binding coverage.

What is demand surge, and how does this impact values?

Demand surge is essentially post-event inflation. After a disaster affecting a large number of buildings, as insurance dollars roll in for reconstruction, there is much demand for limited construction materials and labor. This drives up building reconstruction costs. The greater the number of buildings affected, the larger the total economic impact and the greater the demand for goods and services that increased the demand surge. Generally, over time, as more of the buildings in an area are rebuilt or repaired, the demand for contractors, laborers and materials begins to drop off, and costs stabilize.

How should a company go about getting an appraisal?

Contract with one of the many appraisal firms or an independent, certified appraiser. A referral from someone you trust, who has used a firm’s services in the past, is the best way to find a resource.

If you don’t have a referral, the Web site of the American Society of Appraisers (www.appraisers.org) is an excellent reference. It lists certified appraisers by discipline, location and specialties. Costs may be much less than you would think. Right now, however, there is so much demand for appraisal services, it does pay to call several to compare prices.

Also, it is important to note that there are many types of appraisals. Insurance contracts generally cover replacement of the building with one of ‘like kind and quality,’ so we would usually ask for a replacement cost appraisal and specify that it is for insurance purposes, or request a reconstruction cost appraisal, which includes additional loading costs that might be incurred following a loss.

How do valuations from a certified appraiser differ from those of insurance carriers?

Most insurance carriers do not provide full, certified appraisals. Instead, they use computerized programs that take general building data and develop an estimate of the cost to construct a building. These are a good tool for checking to see whether the values they are given for a building appear to be in the ballpark and flagging out buildings that appear to be undervalued. However, these programs require the user to make certain subjective assessments, and the programs also incorporate generic assumptions that may not apply to a particular building. Often, a more detailed analysis done by a certified appraiser may show that the estimates obtained using these programs are not even close to being correct.

Do appraisals provide an absolute valuation, or are they subject to change?

An appraisal is a snapshot at a particular time, giving the cost to rebuild a particular building and factoring in costs of materials and labor. So, if the cost of materials goes up days or weeks after the appraisal was completed, the appraisal needs to be updated to reflect these changing costs.

Trending figures for updating appraisals are published by different valuation firms. In general, applying these to an appraisal that was conducted within the last five years will give a pretty accurate figure. Most appraisal firms will not trend up an appraisal that is over 5 years old.

DEBORAH FREELAND is area senior vice president for Arthur J. Gallagher & Co. Reach her at (818) 539-1290 or Deborah_Freeland@ajg.com.

Friday, 24 November 2006 19:00

Business law

The SEC continues to display strong interest in timely and complete document production. Increasingly, important documents reside on computers, e-mail servers and portable drives.

As a result, it is crucial for businesses to be aware of what constitutes electronic document production in this era of rapidly changing innovations to traditional modes of communication.

“Companies need to have an understanding of what type of electronic information exists, which will include essentially anything with an on/off switch such as computers, laptops, backup servers and PDAs,” says Kevin Martin, a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department. “Anything that would be backed up on a server is a potential source for information.”

Smart Business spoke with Martin about how the SEC is now responding to companies that fail to provide complete document production, how CEOs can be pro-active in identifying and managing electronically stored information and how a company should proceed if it receives a subpoena.

How is the SEC now reacting to incomplete production?

The SEC has become very heavy-handed in response to incomplete document production by corporate citizens. It has levied stiff financial penalties against companies for failing to fully and adequately respond to government subpoenas. For example, the SEC commenced actions against Morgan Stanley, Bank of America and Deutsche Bank Securities for failing to produce all of its electronic documents in a timely manner in response to SEC subpoenas. As part of Deutsche Bank’s settlement with the SEC, it agreed to pay $7.5 million to the government.

What are the possible ramifications for a company that fails to adequately provide complete documentation?

With respect to the SEC, enforcement proceedings may be brought and stiff penalties levied. In the context of civil actions, one of the major ramifications is that a court could impose spoliation sanctions against the party that has failed to produce all of its documents. With this type of sanction, a court instructs the jury that destroyed documents are presumed to be damaging to the party responsible for the destruction. This severe sanction was recently imposed on Morgan Stanley in 2005.

How can CEOs be pro-active in regard to document production?

The company and CEO should be prepared to demonstrate that they acted with good faith diligence. To this end, CEOs should confirm with company employees that the universe of electronically stored information has been identified.

In addition, CEOs should determine what to retain in accordance with their statutory obligations and company retention policies.

Finally, CEOs should create an infrastructure to manage electronically stored information and train employees on the proper use and storage of electronically stored information.

If companies take a pro-active approach to their discovery obligations, they will be in a position to certify with confidence that they have completed their document production and feel confident that they will not face problems down the road that could have and should have been avoided. For example, one of the major problems that Deutsche Bank faced with the SEC is that it had representated to the government that it had completed its e-mail document production, when in fact it had failed to produce 277,000 e-mails. Obviously, when Deutsche Bank disclosed this fact to the SEC, the SEC was not pleased, and Deutsche Bank lost credibility with the government investigators. The loss of credibility with government regulators can have far-reaching ramifications to companies that are the subject of investigations.

How should a company proceed if it receives a subpoena from government regulators?

Following receipt of a subpoena, written instructions must be sent to employees directing them to preserve documents and not to destroy or delete any data on computers.

Before responding in any manner to the subpoena, it is critical that the company first make an internal assessment of: (1) the potential universe of responsive documents; (2) the difficulty of culling the responsive documents together; and (3) the length of time needed to review the documents prior to production. The company should also assume that it may be called upon to demonstrate good-faith due diligence in responding to document production demands.

Only after these determinations are made will a company be in a position to make representations to the government as to what types of documents will be produced and when. Obviously, companies must not make promises to the government that they cannot keep and must avoid inexcusable document production pitfalls.

KEVIN MARTIN is a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department. Reach him at (310) 255-9055 or kmartin@agsk.com.