Born: San Antonio
Education: Bachelor’s degree, business administration, University of Texas; MBA, Texas A&M University-Kingsville
What is the best business lesson you’ve learned?
I spent 30 years in the oil service business. I tell people I wasn’t nearly as smart as I looked in 1981 when oil was $50 a barrel, or as dumb as I looked in 1986 when oil was $8 a barrel.
I think you are never as good as you look at the top or as bad as you look at the bottom. The corollary to me is that as you look at a situation, it’s never as bad as it looks at the bottom or as good as it looks at the top. So you really have to maintain a healthy skepticism about every situation that you look at and have a significant amount of humility.
What traits or skills are essential for a business leader?
It’s this notion of integrity and wholeness, along with a willingness to make the hard decisions and accept accountability for those hard decisions, and being able to connect with all constituents.
What universal truths have you learned about leading a business?
Reward those who make it happen, and don’t keep people that you can’t trust.
What types of business books do you like to read?
I enjoy biographies of successful people and leaders. It helps you in understanding how people have gone through difficult situations and been successful.
Staff on staying visible to employees: I think that when you are in a position where people are somewhere between uncertain and skeptical, perhaps some even down into the cynical, if you don’t fill that vacuum for people coming on board, you are giving the power to those people who are cynical and skeptical.
Check your ego. You want to be a good CEO? Get the heck out of your people’s way and let them do their jobs. I have a respect for the people doing the job that they know more about their job than I do because they do it every day.
A production manager on a floor knows 10 times as much about what a production manager on that floor should be doing than I do. Why would I go in and interfere with him?
It’s my job to make sure all the managers in our company are good managers. It’s not my job to get in the way of them doing a good job.
Be patient. People like me are very impatient. We have to have the discipline of patience that, once you set objectives and goals, and you agree upon them, you allow the management to accomplish what they are setting out to do. To me, that is leadership.
If you look at surveys about job satisfaction today, usually the biggest problem is not pay. The biggest problem is nobody will let me do my job, and I don’t know what my job is. I don’t know what my responsibilities are. Those kinds of negative trends kill morale in a company.
If people don’t know what’s expected of them, it’s going to have a negative impact all around.
Encourage collaboration. We benchmark (managers) against each other. We have meetings several times a year looking at these benchmarks. We have classes where the good performing managers are educating the poorer performing managers in one particular area or another as to how they can do better.
Usually you’ll have one guy doing well in one area of responsibility and another doing well in another area of responsibility, and they can help each other out. It’s our job to provide the forum to make sure that whoever is doing the best job around the country in any given area has the opportunity to share how he is doing it with his comrades.
Listen to your customer. We stay very close to our customers and listen very hard when our customers have a complaint about anything. If we stay close to him, we’ll never be too far from doing the right thing.
At our national sales meeting we have each year, we have three or four customers come and speak to us about what they expect from our company.
Have personal relationships with the customer.
Look at business through the eyes of the customer and determine what’s important to him. What’s important to him may not be what’s important to us all the time. We look to learn as much as we can about what he wants and what his needs are, and we try and fill those needs.
To me, the customer is always right, even though he may be unreasonable at times. He’s paying you your paycheck. He’s buying a product from us at a price we agreed to.
If he wants to complain, we’re going to listen. Usually, if we pay attention to him, we’ll be better as a company because we’re doing things our customers want us to do.
Accept all opinions. I don’t necessarily want people to see things the way I do. We have a variety of opinions, and everybody expresses them. Our CFO is our main risk assessor, and he always takes a company-liability view of everything. That’s his job to do that.
It goes back to the empowerment. We empower people to say what they think. We want them to give us their opinion. We don’t want people saying, ‘Yeah, this is what Bill wants, so I guess this is what we’re going to do.’
That’s the last thing I want to have happen. I want people that are going to speak their minds. They’re not going to worry about somebody not liking what they say. They know they are not going to be criticized if they are critical.
Seek out input. Human nature being what it is, people would much rather be in charge of their own destiny than to have somebody else dictating to them as to what they’re going to do.
The only thing in our company that is dictated from the top down is that we will have an excellent safety program. The safety program itself is built up by the lower-level production people.
They form their own safety committees in the plant. They get to put the safety program in place, evaluate it, manage it and distribute safety bonuses to their employees. It’s all done through empowerment to the lower-level production management.
There’s nobody up top that’s dictating what the safety program will be. You could find some situations where you would have a top-down approach to safety where there would be a meeting of very top-level people and they would dictate what a safety program would be all the way down to the lower-level people. Then it wouldn’t be their program at the lower levels, and it wouldn’t be implemented that way at the lower levels.
It does give them ownership.
Don’t fear mistakes. We make mistakes and fail all the time. You just get up and get going again. My mantra is, just don’t make the same mistake twice.
I don’t pound my people, or myself even, for making a mistake. If you’re not making mistakes, you’re not trying to improve. But at the same time, you don’t want to be dumb and continue to make the same mistakes over and over. That’s definitely the wrong thing to be doing.
That’s the way I communicate it to our people. Don’t worry about making a mistake. Don’t look over your shoulder. Let’s learn from our mistakes when we make them. Let’s not make the same one twice.
HOW TO REACH: Trussway Ltd., www.trussway.com or (866) 999-8787
Finding the right people for your company is very important. The entire process of recruiting, interviewing,hiring and training is time-consuming and expensive. Losing newcomers before they ever become productive can be devastating. The best way to assure that once you find the right people they will perform well and stick around for the long haul is to get them thoroughly indoctrinated into your company’s philosophy and culture. If they feel an early sense of commitment and ownership, they are much more likely to stay with the company.
“Effective onboarding is one of the keys to employee retention,” says Dr. Michael Wesson, Department of Management, Mays Business School, Texas A&M. “The more quickly employees adapt to your culture and become fully productive, the better chance you have that they will become long-term employees.”
Smart Business talked with Wesson for more insight on effective onboarding.
What is onboarding?
Onboarding should be seen as the process by which employees are brought up to speed in terms of work performance and become organizational ‘insiders.’ It is not something that simply happens during the first week of employment; for most jobs the process can take from six months to up to a year. In order for an individual to become immersed in your culture and assimilated into the business, there are six key areas that newcomers need to thoroughly understand and adapt to. These areas are organizational goals and values, history, politics, language (slang and jargon), people, and performance proficiency.
Why is onboarding important?
Research clearly shows that effective onboarding leads to higher levels of organizational commitment, job satisfaction and lower levels of turnover among organizational newcomers. Employees tend to be overwhelmed when they start a job with a new company. There is a lot to learn in a very short period of time, especially when you expect them to start performing well right away. Simply having them fill out a W-2 and showing them where the restrooms are won’t cut it. It is potentially the single best period of time to share with employees what the values and goals of the organization are and what is expected of them. Too many companies squander this unique opportunity.
What are some of the keys to proper onboarding?
Planning is one of the main keys to success. What are the most important things you want your employees to adapt to and learn? When is the optimum time for them to learn this information, who is the best person to provide it, and what is the best method to convey the information to them? Many companies are moving towards providing computer-based orientations. My research shows that while this can be effective in delivering some types of information, it is sorely lacking in its ability to deliver much of the socially rich content that is arguably the most important. Bringing in people as part of a group helps them to adjust they have an immediate network of employees in a similar situation and they are more willing to ask questions.
Involving the CEO or other high-level managers is also important it sends new employees a signal that they are important to the organization and that the values being shared with them are not simply words on a written page.
What are some of the most common mistakes in onboarding?
The most common mistake is assuming that employees will just ‘pick it up’ in a short period of time. Managers mistakenly think that a good orientation program is too expensive. However, the cost of losing employees because their expectations aren’t met or are taking longer to master their jobs, and the amount of time supervisors spend poorly covering the same information is much more expensive to organizations in the long run. One other major mistake is assuming that your experienced new hires don’t need onboarding help. I have research that shows that new employees with significant amounts of experience are perhaps the most difficult group to truly socialize to values of their new company partly because they think they know everything already.
Understanding that the socialization process starts well before new employees show up on their first day is also important. Research shows that impressions newcomers get during the recruitment and selection process, and even the signals companies send during salary negotiations, affect incoming expectations and attitudes. These attitudes are hard to change once a new employee starts work. Let employees in on the company culture up front. Send them information after they are hired, but before they actually start. Give them as much information as possible.
DR. MICHAEL WESSON is in the Department of Management at Mays Business School, Texas A&M. Reach him at (979) 845-5577 or Wesson@tamu.edu.
The leading banking institutions across America and across the world have built their businesses and their reputations on their ability to serve all customers, big and small. When dealing with government entities, both as depositors and borrowers, the same thing holds true. Government banking involves working with all types of customers that have different kinds of needs.
“They certainly have different guidelines that they have to follow,” says Tim Kreitzer, principal relationship manager with Wells Fargo Bank in Houston. “Sometimes they are more demanding of a relationship manager’s time because of the audits they have to go through, the budget process and the state regulations.”
Smart Business asked Kreitzer about the differences between traditional and government banking and how a bank can better serve its governmental clients.
How can a bank start a government banking program?
The opportunity that exists within a group is greatly benefited by the strategic partners the bank already has in place. In Houston, treasury management is a wonderful partner to work with in regard to government banking. When cities and school districts see the program, they’re just amazed at what they can do with it. public finance has the ability to be a lead-in with the entities, and it can ease concerns over bond issues. Institutional Brokerage is very important as well. We have these strategic alliances already built in so it’s kind of a natural fit to utilize them. And it’s important to start with a great team from the beginning.
What’s the key to moving forward when just starting out with a government banking program?
The key is to understand the industry and that starts with understanding the entity. What does it do? Who are the decision makers? How are their roles impacted by changes in accounting rules or changes in state legislation? You have to account for things a little differently when you’re a city. The co-mingling of funds is highly discouraged. You don’t want to put one bond issuance with money from another bond issuance, because it would get a little complicated as far as determining if the proceeds were dispersed properly. On the financial side, when they’re looking to borrow money, is it a tax-exempt deal or is it nontax-exempt? And that’s where public finance would be able to help out.
Is government banking conducted on a larger scale than traditional banking?
One of the great things about our market is that we have very small entities tucked away in the corners of the market and there are large, complex entities as well. We’ve got them on both sides. It’s all a great revenue-generating business and the word-of-mouth that comes back when you work well with an entity is very rewarding.
What is the biggest difference in need between government banking and other types of banking?
Most of it has to do with understanding what people involved in government banking are required to do, how they’re required to do it and when they’re required to do it, because their accounting rules are different. Their balance sheets look different.
We’re used to looking at an entity in regular banking and seeing how much money it’s making. In government banking, you have to make sure that it’s allocating its resources in the proper channels. It is not necessarily making money. You have to look at a budget that says ‘income equals expenses,’ not necessarily one where you’re showing a profit, which is the way it should be.
And with accounting and auditing procedures, you have to be responsive because it will have auditors in annually as required by state statute and you have to be responsive to those needs. When it needs confirmation of collateralization or balance or interest rates, you need to have that information available in a timely fashion.
Is government banking regulated by state or federal government?
This is something that’s statewide and so we keep an eye out for legislative changes. Texas legislation is currently in session so by June there will be new laws that impact municipalities by the fall, so we need to stay on top of that.
Selling depositories is a sales cycle that can last between one and five years. Our local management recognizes that. We have to become a resource to an entity that might not be our client. You need to make sure you do it right. There may well be an opportunity for business with them down the road.
TIM KREITZER is principal relationship manager with Wells Fargo Bank in Houston. Reach him at (713) 383-1608 or email@example.com.
“We got together and made the decision that we really would be well served by creating a strategic plan,” say Buenz, president of Advanced Aromatics. “We involved most of the employees in the company to look at our strengths and weaknesses. From that effort, we developed a strategic plan for the company.”
Advanced Aromatics has grown about 10 percent a year since the strategic plan was conceived in 1995. Revenue in 2005 totaled about $39 million at the naphthalene and naphthalene-derivatives manufacturer. Smart Business spoke with the company’s president about the importance of being a good communicator and enjoying your work.
Q: How do you find the right employees?
We want first to understand internally what we want that person to do. Do a lot of networking and a lot of listening.
It’s important that more than one person on the team is involved in the hiring process or the interview process. If it’s a key position, you’re going to want to have input from the sales and marketing and manufacturing, and as many different viewpoints as you can get or as time allows.
I like to understand a person’s goals and objectives. What have they enjoyed in prior work experiences? What have they considered successes? What are their longer-term goals?
Hopefully you have taken enough time to develop a relationship with this person before you enter into an employment arrangement.
Q: How do you develop a vision?
You can put something down on paper and you can talk about it, but it depends on doing a lot of talking and a lot of listening. We started back in the mid-1990s doing work across the company with all employees, doing a lot of interviewing and discussion, to work through the strengths and weaknesses that we had in the company.
Hopefully, a company is going to be mature enough that they will be able to examine their strengths and weaknesses. Examining what the marketplace is telling them at the time. Understanding your people are your strengths.
Go to your people and get input from them. Move from there to enunciating a strategy. It should take time to mature and develop that strategic statement.
Once you have developed that mission statement, you have to walk the talk and mold your business to fit the vision that you have. It’s not done overnight. You have to keep reinforcing that statement. It’s a continual process, and it has to be measured.
Q: How do you convey the vision to employees?
It’s not a one-time event. You have to do it, I won’t say on a daily basis, but as frequently as possible. Have face-to-face communication with your employees. Put things out in print form for your employees, but face-to-face communication is as important, if not more important.
The managers throughout our company have specific groups that they are responsible for. It might be R&D, it might be operations or it might be maintenance. Use the organizational structure to communicate downwards. It’s my personal style that I like to know all the employees in the company and use that opportunity to gauge whether the word is getting out.
Q: What are some keys to being a strong leader?
Try to enjoy something out of every day. Be able to make good, timely decisions. Be pretty comfortable with risk.
Any decision that you make has risks associated with it. The key is to have an innate sense of what risks are acceptable. What are the boundaries, both positive and negative? Be able to make a decision based on the information that is presented to you.
Give good, constructive feedback to employees. Give assignments, lay out plans and then give feedback to the individuals concerned as to how they have performed. If something is not working, it needs to be communicated as quickly as possible so they can make a correction. I want them at the end of their career to feel like they have accomplished most of the goals that they have set for themselves. Stay in touch with your customers. Even though I’m not the person that is taking the order or setting the price, I want to know how he or she feels about our company.
I want to meet and know as many of our customer contacts as is possible so that we do not simply have a paper relationship but a personal relationship. I want people to feel good about the endeavor that they are involved in with my company.
HOW TO REACH: Advanced Aromatics L.P., (713) 296-7505 or www.advancedaromatics.com
That procedure was not the norm even in the most romanticized days of oil- and gas-drilling operations, and it is less so today, particularly for landowners on whose property companies drill. Today, landowners must grapple with a complex range of legal and environmental issues, and many are best dealt with by involving attorneys who specialize in oil and gas issues and environmental liability.
“Landowners should work with attorneys to protect their property regarding oil- and gas-drilling operations, because there is such a disparity in knowledge and sophistication, especially among landowners who are fairly new to the process,” says Thomas S. Hoekstra, chair of the Energy and Environmental Law Practice groups in the Dallas office of Godwin Pappas Ronquillo LLP.
Smart Business spoke with Hoekstra about how landowners can protect themselves as much as possible from the legal and environmental problems associated with oil and gas production.
What is the key issue regarding drilling operations on private property?
One key issue is the prevention of petroleum releases, or spills, affecting ground water and surface water, which may result in additional contamination of subsurface aquifers. Similarly, releases of natural gas into the atmosphere can result in significant environmental issues.
Most companies in the industry today are sophisticated about preventing the environmental problems associated with the production and transportation of petroleum and natural gas.
Landowners, especially those who are relatively inexperienced in mineral leasing, are often less knowledgeable. They need to ensure there is no contamination of the soil or subsurface aquifers from crude oil or natural gas drilling that will affect them or their neighbors.
How can releases of hazardous substances adversely impact landowners?
Off-site migration of contaminants that are the byproducts of drilling can also be a problem. For example, if contaminants migrate off-site into an aquifer and contaminate the drinking water source for a neighbor’s livestock, the landowner may be a target of litigation, even if the drilling company is the culpable party.
The landowner might have claims against the drilling company, and probably would, but he still has the problem of the migration of contaminants off his property onto adjacent property.
At what point should landowners involve attorneys in leasing?
The earlier the better, particularly if they are relatively new to the process. These days, with oil at $60 a barrel, anybody can go out and drill for oil and gas.
So it makes sense for inexperienced landowners to work with attorneys to protect them against potentially expensive environmental problems.
How can attorneys provide guidance to landowners?
The simple answer is to help them minimize risks and maximize financial benefits from the lease. Attorneys can help draft and execute a lease that allows them to obtain the highest royalty, bonus and delay payments available from that lease. They can advise landowners about their risks and exposures, depending on the sophistication of the lessee company that is going to develop the minerals on the land.
The attorneys will make sure that the landowners require the lessee to have the appropriate insurance, determine that it has sufficient financial capabilities to respond to any damages not covered by insurance and take all proper precautions in building the pad site for drilling. They also can advise the landowner about what the company must do with the saltwater byproducts associated with the oil and gas coming out of the ground, and how it must handle the drilling mud and other materials used in the completion of an oil well that might have to be treated as a hazardous waste.
Finally, the attorneys can make sure that when the production cycle is completed, the property is returned as completely as possible to the condition it was in prior to development.
How does the landowner benefit from involving an attorney early in the process?
The most significant benefit is saving money in the long run. Even though the landowner may spend some money up front, he can more successfully avoid the environmental problems and associated costs that can be incurred if something goes wrong during the lease development. For example, if the drilling company goes broke, its insurance lapses, or it just abandons the lease, or does not or cannot restore the lease. The landowner may be facing major expenses with no means of recovering such costs from the drilling company. The landowner’s liability for these major costs can be prevented with proper management.
THOMAS S. HOEKSTRA is chair of the Energy and Environmental Law Practice groups at Godwin Pappas Ronquillo LLP’s Dallas office. Reach him at firstname.lastname@example.org or (214) 939-4496.
The survey was developed by Accountemps, the world’s first and largest specialized staffing service for temporary accounting, finance and bookkeeping professionals. Conducted by an independent research firm, the survey includes responses from more than 1,400 CFOs from a random sample of U.S. companies with more than 20 employees, and 536 full- or part-time office workers.
“While other perks are important, what really matters at the end of the day is that the manager personally thanks employees for a job well done,” says Phil Willingham, senior regional vice president for Accountemps in Houston.
Smart Business spoke with Willingham about the importance of recognition and what employers can do to make sure that employees know that their work is being appreciated.
Why was the simple thank you ranked high among the nontangible incentives?
Workers are most motivated by recognition of achievements. Employees want to know that their input makes a difference and is valued. A simple thank you is a sincere form of appreciation that an employee’s work is not taken for granted. It is important for managers to know that this simple gesture can make a huge impact and have a positive influence on morale.
How much appreciation is appropriate when it comes to giving recognition?
Giving praise for the sake of giving praise is not a good practice. It should be genuine and heartfelt. Managers also need to be careful about favoring one employee over another. Well-deserved praise needs to be spread out among employees.
Another good way to appropriately praise is to praise entire teams or departments for work well done. This is particularly effective if done publicly in a meeting, in memos or via the company newsletter.
Why the need for so much recognition?
Businesses today are having an increasingly difficult time finding qualified professionals. There is a shortage of talent across many industries. Retention is a challenge that businesses want to minimize. The easiest way to retain workers is helping to make people feel valued for their work. In the war for talent, companies have to recognize that employees have a lot of options, so doing things other than just providing a job is important.
What should managers do to recognize the accomplishments of their staff?
The survey shows that saying thank you is the most effective way. Other types of recognition are also important, such as making sure that tenure and anniversaries are publicly announced and celebrated.
I’ve also seen a trend where managers have taken this idea to a more personal level and connected with the employee by being attentive to what the employee likes to do outside the workplace. In this way, the gift or recognition has a personal touch to it. For example, if a worker is an avid rock climber, perhaps giving them a gift certificate for equipment or a book on the subject. Tying the recognition gift to something the employee is passionate about shows that the manager cares.
What other ways can managers increase the level of recognition and communication?
It’s not all on the manager’s shoulders. The employer can also encourage employees to motivate and cheer each other on. It is the manager’s job to create a sense of community among the employees that he or she manages. Push them to go to lunch together, brainstorm ideas (which shows employees they are ‘in it’ together and that the manager doesn’t have all the answers), come together to solve problems, provide mentors to employees (demonstrating that you care about their future), and recognize employees by making them a mentor to a less experienced employee.
In addition, having a formal and systematic approach to the employee review process is critical.
Are there times when employees ought to recognize their managers?
Absolutely. Managers should be recognized for significant work milestones, tenure, production performance and other accomplishments. However, employees need to be careful, since their gestures of appreciation may be viewed by other workers as wanting to gain favor with the manager. One way to avoid this is to include all team members in the recognition.
PHIL WILLINGHAM is the Houston senior regional vice president of Accountemps, a division of Robert Half International. Reach him at (713) 623-4700 or email@example.com.
When Trevor Turbidy was named president and CEO of Trico Marine Services Inc. in August 2005, it had been less than six months since the company had emerged from bankruptcy. Today, those problems seem a distant memory as the company whose 830 employees provide marine support to the oil and gas industries expected to post 2006 revenue of more than $230 million, well ahead of its 2005 revenue of $182 million. Turbidy says the key to the quick turnaround was the company’s ability to identify employees who wanted to be part of the solution and fix the problems to get the company back on its feet. Smart Business spoke with Turbidy about how to empower employees in challenging situations.
Find employees with the right attitude. Building the right team was critical to our success. We relied heavily on those people who wanted to increase their responsibility and brought in new people to replace those that weren’t up to the challenge.
The world is full of what I call idea assassins, dream killers or naysayers. Having employees who have a can-do attitude made the difference between success and failure.
I’ve seen numerous examples of people who thought because they were smart, they didn’t need to work as hard as their peers. They would glide by on intelligence.
What separates the good from the great sometimes appears like a small difference. What it means to us is you may stay a few extra hours to give the book one last read or look at the numbers one more time. People didn’t settle for mediocrity. They didn’t settle for good. They wanted to be perfect.
No matter how bright you are, everybody needs to have a strong work ethic and a positive attitude to drive change.
Push people to achieve. There’s frequently people who literally just didn’t have anything positive to say or would never have ideas on how to improve things. They could tell you how things were wrong, but they never came with a solution.
They didn’t want to take ownership of the problem. They didn’t want to help fix the company. There were a number of cases where people had the opportunity to increase their responsibility and chose to stay in their current job as long as the company would let them.
People who took on increasing responsibility got increasing reward. Give people increased responsibility. Push people to achieve more. You’re sometimes amazed by how much people can actually do. We amazed ourselves with how much we could accomplish in a short period of time.
If you let people do what they have been doing forever and people get in their comfort zone, change is tough. People don’t like change. The status quo is easy because it’s what you know.
Take advantage of the market. We’d be fooling ourselves to think that if we had restructured the company and the business environment for our services had continued to turn down, that we’d be successful. We wouldn’t be.
You need to have financial results. You need to have the ability to empower your team to take advantage of what’s going on in an improving market. We corrected the balance sheet and gave ourselves the ability to take advantage of an up market.
Keep it fresh. Empower your team to look at other opportunities. We want people to question each other, and we want people to challenge each other. It’s got to be based on forming a strong team, actively communicating with that team and delegating responsibility and holding people accountable.
What makes people excited about our organization is the ability to impact change. We look for people who embrace positive change. We allow them the running room to shape the company.
Typically, it means either changing someone’s title, area of responsibility or role. If people are in the same spot, doing the same thing, interacting with the same people, they tend to think the same. You’ve got to give people a new challenge, whether it’s a different geographic area to focus on, a different role or more responsibilities. That shakes them up, that gets them out of their comfort zone, and they’ve got to re-energize for a new challenge.
Be straight as an arrow. Put integrity and ethics first. We’ve seen the rollout of Sarbanes-Oxley. We’ve seen what that occurred from.
You’ve got to be ethical, honest and trustworthy ... with everyone in all your constituencies you interact with. We’ve seen numerous examples of people who bent the rules or ignored the rules and were able to convince others to do the same.
You have to lead by example. You have to be straight as an arrow. The world doesn’t expect anything less from people who are filling management at companies, and they don’t tolerate it.
If you’re a positive influence and you echo that through the organization, you find that people embrace that. People respect that. People want to be at a company that is doing the right thing and competing well.
We tell our employees every time we have group meetings , ‘If we can’t win doing it the right way, let’s not win.’ We don’t want to be on the front page of The Wall Street Journal for something that is inappropriate. We’ll win the right way, or we won’t win.
Admit mistakes. People like to think that people in senior positions don’t make mistakes. That’s just not true. The key is you’ve got to admit your mistakes and move on, whether it’s a business mistake for an acquisition or whether it’s a mistake going in a different direction for your business or whether it’s a hiring mistake. Admit you were going in the wrong direction, salvage what you can, and move on and fix it.
We’ve hired people that we thought had the right skill set, excellent industry experience, but they didn’t mesh in our organization. They weren’t going to be successful, and we weren’t going to be successful with them.
You need to move on. Waiting generally doesn’t help. There never appears to be a good time. You always worry about it being disruptive to the organization or about the fallout from doing something quickly.
If there is any fallout, it’s generally positive. What you saw was the exact same thing the organization saw, and the people they worked under saw. Make those changes, move on and then regroup.
HOW TO REACH: Trico Marine Services Inc., (713) 780-9926 or www.tricomarine.com
Stock options have received a lot of bad press recently, especially back-dated stock options. If options were granted strictly as an incentive to increase performance by management, that would be one thing. Unfortunately, many times these benefits to management can come at the expense of the shareholders.
“My latest study shows that some managers have reduced earnings to miss important earnings targets in order to lower stock prices,” says Dr. Mary Lea McAnally, associate professor of accounting for Mays Business School at Texas A&M University. “What this does is make their option grants more valuable, but at the expense of shareholders. This earnings management is in addition to the backdating problems that we already know about.”
Smart Business discussed these findings with McAnally for further insight into how stock prices are affected.
How can granting stock options affect share prices and the shareholders?
Conventional wisdom is that managers do everything they can to increase earnings so that stock prices rise, their reputation is enhanced, their bonuses increase and the options they hold are more valuable.
But what is less obvious is the possibility that new stock option grants might entice managers to decrease earnings or even to miss earnings forecasts. The usual reaction to missed targets is a reduction of stock value, which lowers the strike price on new option grants. This is worse than backdating in some ways, because with backdating the managers just take advantage of stock price drops. What my study shows is that, in some cases, managers cause the stock price to drop.
What can be done to prevent or at least bring these actions into the open?
A company’s board of directors is its first line of defense. Boards need to be vigilant for earnings management or manipulation and, at a minimum, need to get answers when companies miss earnings targets.
While there have been some complaints about the cost and other negatives of Sarbanes-Oxley (SOX), one great benefit is the quicker and more complete disclosure of option grants. Section 403 requires registrants to report new stock option grants to the SEC within two business days. If a company reports bad news, like a missed earnings target, and then files a Section 403 report saying more stock options have been granted to key employees, that transaction is going to be noticed.
Another benefit of SOX is the requirement that audit committees have more financially literate members. These members can take a hard look at the timing of option grants, especially when earnings are disappointing.
Are there other benefits of SOX in these situations?
In general, I believe that the benefits of SOX have been misunderstood and perhaps undervalued relative to all the costs of complying with the new rules. For example, with audit committees having more financially savvy members, firms are making better financial decisions across the board, like better hedging choices and better financing decisions. Those benefits are hard to quantify, but at least one recent study finds that the stock market assigns a premium to companies with more literate members on the board and audit committee.
Some recent corporate implosions may have been exacerbated by weak boards with less oversight, and things just spiraled out of control. Before SOX, there weren’t always the proper controls that would enable or empower managers who wanted to do the right thing.
In the aftermath of the Enron and WorldCom meltdowns, accountants did take a lot of flak. One of the silver bullets of SOX is that accounting standard-setting and oversight have come under more scrutiny. Accountants have to be more on their toes and do a better job, and SOX gives them more authority. Auditors have to be more independent. And that’s a good thing because when push comes to shove with a client, auditors can point to SOX and use that as a stick. SOX is making auditors’ jobs somewhat easier and creating a bit of a boom time for the accounting profession.
What should a business do about stock options from this point forward?
Stock-based compensation is a good tool to motivate managers and get their incentives perfectly aligned with those of their shareholders. It would be a shame if companies stopped using options or restricted stock because of negative market perceptions created by the recent scandals. But the hope is that the actions by the SEC and states attorneys general will be a clarion call. There’s no substitute for well-written policies, board oversight and financial reporting transparency.
DR. MARY LEA MCANALLY is an associate professor of accounting and research fellow at Texas A&M University’s Mays Business School. Reach her at firstname.lastname@example.org.
Periodically reviewing your cash flow projections will help you prepare for times when you’ll need additional sources of cash. Having good relationships established with banks, creditors and suppliers beforehand will help when you need a short-term business loan or the ability to access a line of credit.
“Business cash flow is one of the most important factors we look at when making a decision regarding a credit line,” says Alice Chen, senior credit analyst/Credit Team lead for Wells Fargo Bank, Houston.
According to Chen, a company may be profitable on paper but cash flow may still be negative: “The banker can help the company understand how it compares against others in its industry by examining its numbers against Risk Management Association ratios for similar businesses. These are the ratios we work with when determining whether to extend a line of credit, and for how much. Understanding the numbers will help a business determine where it might need to improve, and can help it obtain more favorable terms.”
Smart Business talked with Chen about ways companies can improve their business cash flow.
What is business cash flow?
By definition, business cash flow is the movement of money into and out of a business. It has been used to refer to net cash after operation in Uniform Credit Analysis (UCA), a cash flow model. It has also been referred to as operating cash flow as shown on the FASB 95 cash flow statement.
Bankers use the net cash after operation for their credit review process/analysis. We also watch the trends of net income and cash flow after operations for signals of potential problems. When cash flow after operation begins to lag behind net income, it’s usually a red flag.
Discuss the importance of understanding cash flow.
Here is a good example. Company ABC showed a pattern of consistent profitability and even some periods of income growth. For the last three years, net income for the company grew by 28 percent, from $15 million to $19 million. The company had consistently paid dividends and interests. One year later, the company filed for bankruptcy. Closer examination of the company’s financial statements revealed that it had experienced several years of negative cash flow from its operations, even though it reported profits. Sales reported on the income statement were made on credit, and the company was having trouble collecting the account receivables from its customers, causing cash flow to be less than the net income.
Is it getting easier, or more difficult, for companies to manage cash flow?
Easier, thanks to a wide variety of new technologies designed to help businesses make deposits faster, collect receivables faster, and more efficiently manage their banking operations overall. Combining a depository solution and payments processing solution at a single bank will usually speed up funding of credit/debit card payments. For example, Wells Fargo offers as-soon-as-next-business-day funding with a checking or depository account.
How can bankers help companies manage cash flow?
Managing cash flow means balancing cash inflow with cash outflow. Look for banks that offer a variety of cash management products to help customers in the areas of collections and disbursements and information, including, but not limited to, lockbox, payments processing, processing, cash management accounts, ACH collection, electronic desktop deposit, revolving lines of credit and other credit/treasury management products for business.
For example, a business owner can eliminate the need to go to a branch to deposit checks by using an electronic desktop deposit machine to deposit checks in his/her own office. Every check is imaged and saved. The data is then transmitted directly to the bank. This can help the customer reduce the check floating time and focus more on their core business. Customers can also request a revolving line of credit to help the cash flow during the collection period for accounts receivable.
How can a company finance business cash flow?
A line of credit can help a business during the times it is waiting to collect accounts receivables. When evaluating if a company is eligible for the line of credit, the bank always looks for a reliable measure of the borrower’s repayment ability. Cash flow becomes the bank’s primary focus when analyzing a company’s ability to repay the debt. Operating cash flow can be generated from the conversion of cash to inventory to receivables back to cash, which is also known as the short-term asset conversion cycle. Bankers review the conversion cycle closely to determine the borrower’s ability to generate cash and make a creditworthy decision. In addition, we can also use this information to help the company understand how to improve the cash flow.
ALICE CHEN is senior credit analyst/Credit Team lead, Wells Fargo Bank, Houston. Reach her at (832) 251-5531 or email@example.com.