The recent drop in real estate prices may have been painful for sellers, but for those looking to buy homes, the decline in values coupled with the decrease in mortgage lending rates may spell the best opportunity in years. It appears the decline in the market may have leveled off and, historically, the leveling off period has preceded the next market upturn.
Best of all, buyers can still secure mortgages that don’t require huge down payments.
“The bottom of the market may be in sight,” says Tony Taveekanjana, senior vice president for the Residential Mortgage Division at Fifth Third Bank (Tampa Bay). “The number of new housing permits has started to increase and the prices of resale homes are no longer declining. All of this points to a leveling off in the market. The current market conditions have increased the affordability index for qualified buyers, but the key is not to wait too long because more stringent loan qualifications may be coming.”
Smart Business learned more from Taveekanjana about how buyers can cash in on the current real estate market.
What are the best opportunities in the market?
Here in Florida, we’ve had a substantial decline in home prices. The weather is great, the schools are good; so for many people, this market represents a golden opportunity to own a home. Foreclosures aren’t for everyone. However, those houses are often best for people with good home improvement skills and a lot of time to put some TLC into the property. But with real-estate-owned properties, you might be able to secure the house and the financing directly from the bank currently holding the property. Look at each bank’s Web site for available properties and seize the opportunity because banks have no motivation to be property owners. Even if a well-tended resale property is best for you, the average loan amount for a home here in the Tampa area is now below $200,000, and that opens the door for some very attractive loans.
Is it still possible to get a loan without a large down payment?
An FHA loan allows you to finance up to 97 percent of the home’s purchase price, if the loan amount doesn’t exceed $292,500. So you only need 3 percent down, and of that 3 percent, part of it can be used toward closing costs. The interest rate is also very competitive; it’s comparable to what banks and mortgage lenders are charging for 30-year fixed loans. If you have a military background, you can get 100 percent financing through a VA loan for loan amounts up to $417,000.
Are adjustable rate mortgages still a good way to go?
If you don’t plan to be in your home for more than five years, adjustable rate mortgages with a fixed period of three to 10 years can still be a good vehicle to get into the market. Starting interest rates are in the low 5 percent range, so if you know you want to take advantage of the current prices and perhaps move into a different home in a few years or use your home as an investment, this type of loan is still better for those buyers than a 30-year fixed mortgage.
Have lending qualifications changed?
Lenders are looking for security, so having a good FICO score, a low debt-to-income ratio as well as history of no late payments, especially no late mortgage payments, is important. But if you don’t meet all the qualifications, you may still be able to jump into the market by following one of these recommendations: First, before applying for a loan, get a copy of your credit report and clear up any errors. If you don’t have a stellar history, you may have time to establish a better track record before home prices return to preslide levels, and second, consider an FHA or VA loan if you have a less than perfect credit. The qualifications are asset-driven, not credit-score-driven. So if you have money in the bank and a low debt-to-income ratio those loans could be a possible option.
Why is the timing vital?
Besides the fact that you want to get into the market before real estate values begin to rise, banks have not yet fully instituted rate premiums for less-qualified borrowers. But, that change may be coming and very quickly we might see risk-based pricing where lenders raise interest rates for borrowers who don’t meet all the criteria. The qualification guidelines will only get tighter from here and, as home values begin to rise, you’ll qualify for ‘less house,’ unless your income rises substantially.
TONY TAVEEKANJANA is senior vice president for the Residential Mortgage Division at Fifth Third Bank (Tampa Bay). Reach him at (813) 306-2609 or Tony.Taveekanjana@53.com.
Darren Richardson was constantly managing through either the high end of the current business cycle or the low end. No sooner would Mad Catz Interactive Inc. celebrate a profitable year, then the five-year peak marketing cycle of the latest Xbox or PlayStation console would end, dragging the company’s customized product line down with it.
Following the last roller-coaster ride in 2006, Richardson, who serves as president and CEO of the computer and console gaming accessory manufacturer, decided it was time to reposition the company away from all the peaks and valleys.
“Everyone in the company had worked very hard, and in 2005, we had a record good year,” Richardson says. “Then in 2006, we had a record bad year, and we gave back all the profits we had made the previous year. It felt like all our efforts had been for naught. After doing some analysis, I came to the conclusion that we needed to change our positioning and move away from being a high-volume, low-priced supplier to a low-volume, high-priced leader.”
Richardson locked himself in his office for four days after the company reported a loss for fiscal 2006, getting down into the SKU-level detail for each product at every retail account and creating a mini profit and loss statement for every placement. The analysis paid off because it was after that data review that Richardson decided to change the company’s entire value proposition, a decision that later benefited the bottom line.
After the close of the company’s 2006 fiscal year, Richardson and his team set out to reposition Mad Catz during the next 12 months. Despite backing away from some business, the company’s revenue for fiscal 2007 remained relatively unchanged. Most notable, however, was the fact that its gross margin percentage nearly doubled in 2007, generating $25 million in gross margin versus the $12.6 million in gross margin it earned during the prior year. That gross margin swing returned the company to profitability and allowed Richardson to pay down debt. Richardson says his main lesson was that generating unprofitable sales revenue doesn’t always translate to shareholder value.
Walk away from unprofitable customers
Any CEO who says it’s easy to walk away from revenue has never done it. There’s both security and cachet for companies that attain high levels of market share and Mad Catz previously aspired to reach the top position. But for a company with $100 million in annual revenue in a cyclical niche industry, the line between profit and loss at its current margin was precariously thin.
“When you looked at our numbers from a high level, overall for each product and customer, everything looked OK,” Richardson says. “But there can be hidden costs associated with selling to large retailers, so you have to look at the detail. You have to consider the freight and logistics costs, and with some accounts, the cash-to-cash cycle can be lengthy, and then you also have to consider the company’s overhead in servicing the account. In addition, we often had the company’s operating capital tied up in unprofitable products, which precluded us from expanding beyond the cyclical hardware marketplace. After looking at the numbers in great detail, I presented my idea to the management team, which was basically that we make every product profitable. It came as a bit of a surprise to everyone because it was the opposite of anything we’d ever done before.”
Richardson began taking steps to make each product and each retail placement profitable, knowing that if his ideas failed, he would stop manufacturing the product. His team approached each customer and presented ways to make the relationship more of a win-win situation.
“We didn’t leave anyone high and dry,” Richardson says. “But we did collaborate with each customer about improving our profitability. In some cases, we were able to start using our customer’s supply chain instead of ours because they were open to the idea. Leveraging their system affords us better logistics pricing, and secondly, you have to look at where you bring value. We don’t bring any value in terms of logistics it just adds to our operating costs.”
While the margin improvement plan was successful, some products were eliminated. The subsequent reduction in revenue caused Richardson to reduce the company’s head count by 20 percent to 165 employees.
He says he favors sharing the pain across the company when forced to make staff reductions, and while Mad Catz initiated most of the terminations, not everyone embraced the change in strategic direction, and some people left of their own accord, giving Richardson a little less control over the outcome.
“It was tough for some people because I really think they thought it was the wrong thing to do,” Richardson says. “I was surprised when a couple of people left. In retrospect, I wish I would have fought a little harder to keep some really good people who didn’t stay. It was especially hard on our salespeople because they had to fight for the business initially, and then they had to go back and try to make it profitable.
“During times of change, you really have to spend time talking with a lot of people, and you do a lot of traveling. The toughest part of repositioning the company was the downsizing and convincing everybody that this was the correct strategy, and of course, the investment community always takes a wait-and-see attitude.”
The positives from the downsizing not only included a reduction in overhead, Richardson says it made the company more nimble and ready for the next phase, which included adding back more profitable growth. In addition, he says that he’s made one more permanent adjustment from his business analysis experience: He now requires the sales staff to complete a thorough profitability analysis before he agrees to a new customer relationship.
Eliminate peaks and valleys
Richardson’s ultimate goal was to develop markets that were not only more profitable but less cyclical in order to achieve sustained top-line and bottom-line growth. By selling more products directly out of China, where they were manufactured, rather than out of California, Richardson sped up cash collections to an average of 60 days rather than the previous average of six months. With greater margins and improved cash flow, he paid down $25 million in debt, which ultimately freed up cash and credit lines for new acquisitions and the development of new products for emerging markets.
“To understand the challenge, you have to take a step back for a moment and look at where we were positioned,” Richardson says. “When you write to the console game market, your product is tied to that specific piece of hardware. When you write for the video game market, those games run on computers, so the hardware essentially remains the same, so sales are more level and the market opportunity is larger.
“The best way to take advantage of the PC market was to tie more of our gaming accessories to software, not hardware. We changed our business model to include more products created for gaming software by expanding our licensing agreements.”
Creating unique controllers, joysticks and steering wheels for all the major sports leagues games through licensing agreements gave Mad Catz a more stable revenue stream at high margins, while strategic acquisitions broadened the company’s capabilities, product lines and markets.
Specifically, the acquisition of Saitek, a leading provider of PC game accessories, PC input devices, multimedia audio products, chess and intelligent games in November 2007, added nearly $43 million in revenue to Mad Catz’s top line at margins that were generally higher than those for Mad Catz existing products. In addition, it moved Mad Catz forward into the PC marketplace and strengthened the company’s position in Europe, where it had achieved only 22 percent of its 2007 sales prior to the acquisition.
“We made some strategic acquisitions in some adjacent categories that use the same skill sets, and they’ll allow us to leverage our existing distribution system, so they make sense for us,” Richardson says.
The combined results from all of Richardson’s 2007 initiatives allowed him to reduce prices for some products late in the year, while maintaining margin improvement. That move helped Mad Catz regain some of its earlier lost revenue. Reduced prices and the advent of new accessories create value for the ultimate end customers, the gamers, who are always seeking the thrill of a new gaming experience.
Take control of your destiny
Richardson’s final steps of Mad Catz’s repositioning plan included moving the company back into the game publishing business. The company is creating software for the next generation of hot games that fall under the emerging category called social gaming, where the gaming experience requires greater levels of human interaction by participants. This time around, Mad Catz won’t merely ride along on the coattails of the console makers during the marketing upsurge phase, it will publish the games and manufacture the customized accessories, bundle the products and exercise much greater control over its own destiny.
“While I think that adding incremental growth capability has been the right move for our company, it has to be achieved through the right products that can achieve our desired value position and stabilize our revenue,” Richardson says.
Along those lines, the company also just started marketing a new interactive audio device that sits outside the ear, allowing music listeners using iPods and MP3 players to engage in the listening experience while remaining more aware of their surroundings. The new product capitalizes on the company’s existing distribution system and further diversifies its product lines.
The complete suite of new products has helped Richardson achieve his ultimate goal of repositioning the company as a value leader by enhancing its position with major retailers such as Best Buy, Wal-Mart and GameStop. Mad Catz is no longer simply a niche vendor of low-margin products to the big box stores. Richardson has the sales team acting as category specialists offering both a suite of high margin, emerging technology products along with space and product placement expertise to retailers.
While Mad Catz has increased its head count back up to 260 employees, primarily through acquisitions, the assimilation process is challenging for a company of its size, and the pressure is on Richardson and his team to show more top-line growth in 2008 and a return for the acquisition expense.
“To move a company to a position where it shows consistent growth can take many years, and you have to be incredibly persistent because you are bound to hit some bumps along the way,” Richardson says. “My advice to other CEOs is to really do some soul-searching when you hit a difficult year and agree on a strategy quickly and act on it decisively. We really didn’t have a lot to lose after 2006, so there was nothing holding us back from making the changes. Now, you can actually see some improvements, and that’s helping everyone feel better about our direction.”
HOW TO REACH: Mad Catz Interactive Inc., www.madcatz.com
Mike Murphy is committed to the idea that quality and continuous improvement drive comprehensive business results.
Murphy, president and CEO of Sharp HealthCare, is so convinced about his theory that since 2001, he hasn’t led just one major quality initiative at Sharp, he’s led multiple projects using Malcolm Baldrige evaluation criteria and Lean Six Sigma improvement processes to make sweeping changes at the not-for-profit health care organization.
Murphy has also engaged the expertise of quality gurus from General Electric and the Disney Institute, and he’s even given new clout to the voice of the customer by inviting unhappy patients to speak about their experiences to Sharp’s management team.
“When I looked at the feedback from our stakeholders, who are the patients, physicians and employees, all the data pointed to the fact that we were doing OK, not great,” Murphy says. “I knew we could do better. I think focusing on quality is the right thing to do, and then everything else you need to accomplish just falls in line.”
Focusing on quality also aligned the organization with emerging trends in the health care industry, which means pushing providers and executives toward a greater focus on quality. Many health insurance carriers are now measuring patient satisfaction with their health care providers and posting that information on their Web sites, and many private and government health plans have initiated or announced plans to reimburse providers through pay-for-performance systems.
In addition, there’s extreme competition for health care workers, and it’s only forecasted to get worse as the baby boomers retire. That situation presents huge challenges for Murphy because Sharp is one of the largest employers in San Diego County with more than 14,000 employees, who are in the driver’s seat when it comes to choosing employers.
By starting with a focused plan, listening to feedback and then implementing Lean Six Sigma programs, Murphy has been able to make quality the engine that drives Sharp HealthCare.
Start with a master plan
When Murphy took the helm at Sharp in 1996, he found a health care organization in the midst of a huge financial crisis. After succeeding in turning the organization around, Murphy says the timing was finally right to get serious about quality at Sharp HealthCare.
“We had just been through some very challenging times,” Murphy says. “It was 1999, and for my first three years in the job, all my efforts had been focused on making financial improvements. Now, it was finally time to look at strategic planning and where we could go from here. The strategic plan is a vital component to launching a quality initiative because all of your improvement activities need to be focused around achieving your organization’s vision and goals.”
Murphy had his eye on the Malcolm Baldrige award from the outset and created a new vision for the organization that doubled as a quality master plan.
The Baldrige award is given annually by the president of the United States to businesses that are judged to be outstanding in seven areas: leadership; strategic planning; customer and market focus; measurement, analysis and knowledge management; human resource focus; process management; and results.
Murphy named his plan “The Sharp Experience.” The plan featured six pillars of excellence: quality, service, people, finance, growth and community, which mirror the seven evaluation criteria for the Baldrige award.
The plan became the center of Sharp’s quality improvement universe around which all improvement projects orbited. Murphy employed a number of different quality improvement methodologies, some concurrently, including the Baldrige and Lean Six Sigma processes. Keeping the plan at the center of all quality improvement activities eliminated confusion among Sharp’s employees and also provided focus for the organization.
“I used multiple quality improvement methodologies because each system offers its own unique structure for evaluating your current processes, identifying performance gaps and creating solutions,” Murphy says. “So looking at our operation through each system’s criteria took us to a higher performance level. As a CEO, if you use different quality processes, you have to be careful that the different processes aren’t in conflict with each other. The way to avoid conflict or duplicity is to tie everything back to your company’s specific improvement plan.
“If a review of any area of your current operation using a different quality evaluation process suggests that improvements are still needed, that change will take you further toward your overall vision, so it brings value.”
Listen to the voices
Feedback plays an important role in any quality improvement process.
“There was a book that came out in the 1990s called, ‘If Disney Ran Your Hospital: 9 1/2 Things You Would Do Differently,’ and it was revolutionary in the health care industry because it brought a new way of thinking about service and customers,” Murphy says. “We studied Disney, and we ended up hiring consultants from the Disney Institute to help us begin our first quality improvement initiative. We started by reviewing feedback from focus groups comprised of our three stake-holder groups patients, physicians and employees and we used their feedback to identify our initial 12 major project areas. An example would be the goal of improving patient satisfaction, which, of course, ties back to one of our pillars of excellence.
“Next, we needed to develop an infrastructure to drive our process. We organized a senior leadership team made up of 26 midlevel managers and VPs, called the model developers, to establish a structure. The model development team devoted more than half their working hours to quality during the first four to six months of the program, and they were tasked with recommending a quality improvement structure and a communications system.”
The model developers recommended 100 different action teams, and more than 1,000 employees, including physicians, volunteered to serve on the teams.
“It’s important to provide your quality improvement teams with all the tools they need and the complete leeway to investigate the challenges and recommend solutions because no
one knows the answer about how to improve quality before you begin,” Murphy says.
Sharp conducted quarterly leadership development sessions where the model developers were trained on the fundamentals of the quality improvement process, and the model developers, in turn, passed the information along to their teams.
“With more than 1,000 employees involved, it was really never a problem getting employees to buy in,” Murphy says. “Also having so many members of your senior leadership team involved in the process pulls everyone together. The projects dealt with small components that support the main goal, such as increasing patient satisfaction by reducing wait times in the emergency room. The teams made recommendations about how to improve the process, and those were referred back to senior management for approval.
Surveys were used throughout the process to benchmark progress.
“We were constantly measuring the voice of the customer through patient satisfaction surveys and employee satisfaction surveys,” Murphy says. “If we didn’t think we were making enough progress, we changed the tools or our solutions based upon the feedback we received.”
Gauging progress by collecting employee feedback was vital to measuring quality improvement progress.
“We set annual goals for our organization’s progress tied to each pillar, a process that served as a spark plug to help drive us forward, and we reviewed our goals and our progress each year during our annual employee meeting. In addition, we included those major goals in the performance plans for everyone at the line-manager level and above. It gets everyone focused and engaged when you bring the performance criteria into individual plans, and the employees were excited at our annual meeting when they saw how we had progressed through the various cycles of improvement as documented by the feedback from the stakeholder surveys.”
After two years, Murphy wanted to take Sharp’s quality improvement initiative to the next level, so he sought guidance from GE, a company that’s renowned for making financial improvements through the use of Six Sigma. Six Sigma was originally designed to enhance the performance and bottom lines of manufacturing companies through a defect elimination process called process mapping. It also uses the voice of the customer to determine if a step in the manufacturing process adds value or can be eliminated. The lean version of Six Sigma produces faster results and is better suited for service industries.
“What we learned from GE really gave us the ability to refine our improvement processes in a more efficient way through the Lean Six Sigma disciplines,” Murphy says. “We trained a number of our leaders and they became black belts in the Six Sigma process.
“We also started looking to other top-performing hospitals for best practices, and we learned from them. For example, we needed to streamline our coordination of out-of-network patients who come to one of our hospitals for treatment, usually through the emergency room. We visited another hospital and installed their system for coordinating those patients and their medical plan benefits, which, in turn, drove significant improvements in a number of other systems, including faster collection of insurance payments. We also changed our admitting process for emergency room patients and really shortened our wait times. Of course, shorter wait times not only improve patient satisfaction, but our staff feels better about the service they’re delivering and medical outcomes improve. So just making that one change positively impacts almost all the pillars under The Sharp Experience.”
By taking best practices from other organizations, Murphy was able to make changes quicker.
“Looking at the best practices of other health care organizations really added velocity to the quality improvement process, and the Lean Six Sigma methodology gave us a more defined structure for making evaluations and changes,” Murphy says.
He isn’t certain how many quality projects an organization can sustain at one time, but he cautions CEOs to be committed if undertaking a major quality improvement initiative because just one project can take as long as four months to complete.
Murphy’s theory encouraging CEOs to focus on quality and everything else will follow has paid off for Sharp. During the six-year quality improvement process, Sharp’s revenue increased $900 million reaching $1.9 billion for fiscal 2007. The company also won the Baldrige award in 2007.
“Quality really brings you efficiency and loyal customers,” Murphy says. “Our overall financial performance is now above the norm for a health care organization in this part of the country. Our employee satisfaction is almost at 100 percent, our patient satisfaction is averaging scores near the top quartile and employee turnover is down, averaging just 13 to 14 percent.”
Perhaps part of the Baldrige award criteria should include the phrase: Those without perseverance need not inquire because Sharp HealthCare applied two times for the Baldrige award before winning last year.
“CEOs really have to be committed before deciding to engage in a major quality initiative because it’s a lengthy process,” Murphy says. “But I think it really gives the organization direction because everyone knows where you’re going, and if you’re committed to process improvement, it will force you to look at data and make changes in your organization. The journey toward quality really never ends, and the awards are something you achieve as an organization because it takes a collective effort. Be sure and celebrate your successes along the way. It will keep all your employees engaged in the journey.”
HOW TO REACH: Sharp HealthCare, www.sharp.com
While the need for executive protection is universally recognized in publicly traded companies, CEOs of closely held companies often fail to understand that they have some of the same exposures as their counterparts in public firms. Directors and officers in closely held corporations can be sued for unfair competition, restraint of trade, wrongful termination or harassment, says Royce Sheetz, a commercial insurance broker with Westland Insurance Brokers. They may have personal liability whether the claimants are relatives, shareholders or investors.
The best time for CEOs of private firms to seek and secure protection is sooner rather than later, because as the time nears for a sale or an IPO, it may become too expensive or difficult to secure the coverage that you need.
“With all insurance, it is easier to secure coverage if you have a documented history,” says Sheetz. “As companies approach a financial event, such as bringing in outside investors, an IPO, or even the sale of the company, they will find it much easier to find adequate limits at an affordable premium if they already have a track record. Fortunately, there have been changes in coverage and availability that make securing the insurance more affordable from the outset.”
Smart Business spoke with Sheetz about how CEOs can benefit from the recent changes in executive insurance protection.
What are the policy form changes that CEOs should be aware of?
There has been an increase in flexibility when purchasing coverage that simulates a ‘cafeteria plan’ in employee benefits insurance. This enables a CEO to combine a number of different coverages in one policy under a single liability limit. Here are the types of coverage that are available and a brief description of their protection.
Directors and Officers Liability (D&O) - The directors and officers of a company make operating decisions every day, and those decisions could ultimately result in litigation by other businesses for wrongful business practices, such as fraud or unfair competition. Also, D&O provides protection in the event investors sue the executives if they don’t get the return that they anticipated.
Employment Practices Liability Insurance (EPLI) - Employment-related offenses include wrongful termination, harassment (sexual and otherwise), discrimination, failure to promote, even failure to hire.
Fiduciary Liability - This provides coverage should employees (or former employees) sue the company because the pension and or retirement plan didn’t perform up to expectations. The Enron situation of several years ago is the most obvious example of the need for this coverage, but any company with any kind of retirement plan (401[k], profit-sharing, etc.) has this exposure.
Internet Liability - Any company that uses e-mail or has its own Web site has exposures in this area.
Errors and Omissions (E&O) - This is professional liability for those companies that might need it, such as computer technology firms.
Crime Provides expanded crime coverage, such as employee theft or unauthorized credit card usage, which may not be available in a standard business package insurance policy.
Kidnap and Ransom (K&R) - Because it provides coverage should you or your employees be the victim of a kidnapping or some other form of extortion, this is very important if a company has employees traveling internationally.
How have these policy changes affected premiums?
There have been two very positive changes. First, there are more carriers offering coverage, so pricing is more competitive. Also, when these coverages were purchased a la carte, each policy was subject to its own minimum premium, which could have been $2,500 to $5,000. Now with only one policy, there’s only one minimum premium charge for all of the coverages you select.
Buying the insurance when your risk is lower will also help keep your premiums more affordable over time. It’s like buying auto insurance: it’s harder to secure and more expensive if you wait until you have an accident.
What factors should CEOs consider when purchasing executive protection coverage?
It’s important to consider your business plan and any upcoming changes, such as bringing in outside investors, new product development, adding a location or increased hiring. All of these events increase your exposure, so it’s better to contemplate them in advance when you are making your purchase so you can select higher limits from the outset.
What role should my broker play?
In order to partner with your broker successfully, it is important to share all anticipated changes in your business. The application for coverage will ask about plans that will increase exposure and your broker will have the best advice about how to secure the coverage you need well in advance of the event.
ROYCE SHEETZ is a commercial insurance broker with Westland Insurance Brokers. Reach him at (619) 584-6400 x3261 or firstname.lastname@example.org.
Sexual harassment cases have moved beyond the stereotype of the female subordinate versus her male superior.
Today, your company can be sued by an employee, male or female, who happens to overhear vivid watercooler conversations between two co-workers.
“The courts have expanded the definition of sexual harassment, including behaviors that previously were not actionable under the sexual harassment laws,” says B. Allison Borkenheim, attorney at law with Procopio, Cory, Hargreaves & Savitch LLP. “The cost of defending a case from the day a complaint is filed through trial can be significant, even if you defend the case successfully. If you don’t prevail, in addition to your defense costs, you’ll have to pay the victim’s legal costs. Preventing the claim from happening in the first place is the most cost-effective solution.”
Smart Business spoke with Borkenheim about what CEOs can do to prevent and defend sexual harassment claims.
What is sexual harassment?
Generally, sexual harassment refers to unwelcome advances, requests for sexual favors and other verbal or physical conduct that unreasonably affects an individual’s employment. Over time, the definition has expanded to include conduct or behavior that occurs ‘because of sex,’ but is not ‘sexual’ in nature. Claims for sexual harassment can be brought for actions perpetrated by supervisors, co-workers and, under certain circumstances, third parties who interact with employees.
What is the employer’s responsibility in preventing sexual harassment?
Employers are expected to prevent sexual harassment in the workplace, and they can be held liable if the employer (or supervisors) knew, or should have known, about the harassment and failed to take appropriate corrective action.
What constitutes an effective sexual harassment policy?
Here are the best practices for administering an effective sexual harassment policy:
1. Have a written sexual harassment policy that includes a statement of nontolerance for the behavior, a plan for the employee to follow if he or she is harassed, and a process for investigating claims of harassment. This is required by law and is the first line of defense.
2. Include a nonretaliation policy as part of your plan.
3. Communicate the plan both verbally and in writing and have employees sign and retain a copy, acknowledging receipt of the policy and knowledge of the consequences.
4. Recommunicate the policy and have employees sign a new copy each year.
What actions should CEOs take to enforce the policy?
I often find that behind many cases is a victim whose feelings were hurt because no one stopped to listen or sympathize. Besides having a written sexual harassment policy, here are my other recommendations for CEOs:
1. Have good, solid human relations practices and open communications.
2. Appoint a policy enforcer, such as the HR manager who can walk the halls and personally observe and monitor employee behavior.
3. Address inappropriate behavior before someone complains.
4. Personally attend sexual harassment training and train all employees.
5. Implement a no-dating policy for supervisory staff or require that dating employees inform management about their relationship.
6. Don’t be afraid to take corrective action if it’s called for. Consider using third-party investigators in cases of alleged supervisor harassment to ensure objectivity.
7. Don’t discriminate when investigating or assigning discipline; don’t protect a highly valued employee at the expense of enforcing your policies.
8. Don’t retaliate against the person who complained about the harassment. It is illegal and provides the employee with another cause of action to pursue.
9. Screen new hires carefully. Conduct reference checks and spend time with prospective employees asking behavioral interviewing questions so you know if they are not only a technical but also a cultural fit.
Where are sexual harassment claims filed and how does the jurisdiction affect the defense?
Claims can be filed in federal court under Title VII of the Civil Rights Act of 1964, which prohibits discrimination in employment. There are effective defenses to federal claims. Several consider an employer’s policies to prevent sexual harassment. Liability may be determined by the reasonableness of the actions taken by the employee. For example, if the employer had a preventive policy and the employee unreasonably failed to take advantage of it, then the employee likely will not be able to recover damages.
Claims filed in California under the Fair Employment and Housing Act (FEHA) are more difficult to defend because an employee's failure to follow an employer's complaint procedure may not result in a complete defense to all liability. Also, California courts tend to be more generous with awards. On the positive side, in California an employee can only recover ‘reasonable damages,’ which excludes those damages the employee could have avoided with reasonable effort and without undue risk.
B. ALLISON BORKENHEIM is an attorney at law practicing in employment counseling and litigation with Procopio, Cory, Hargreaves & Savitch LLP. Reach her at (619) 515-3280 or email@example.com.
In concept, FAS 159 tracks with recent trends in accounting principles. By allowing companies to value certain liabilities and assets at current market value — even though they haven’t been sold — investors are provided with a real-time financial representation of the company. Also on the plus side, FAS 159 may enhance a company’s ability to borrow funds by providing information on appreciated values. However, as with any change, CEOs should be aware that there are advantages and disadvantages associated with a move to reporting under a fair-value standard, says Diane Wittenberg, partner of Audit and Business Advisory Services at Haskell & White LLP.
“For certain companies this may be a better way to report because it is more reflective of current values,” says Wittenberg. “However, there is a certain element of subjectivity in how the assets and liabilities are valued, so it may make it more difficult to track consistency from company to company for comparison purposes. Also, because the election decision is irrevocable, it’s important to anticipate any future negative ramifications from switching to a fair-value reporting standard before making your decision.”
Smart Business spoke with Wittenberg about what CEOs should know about reporting assets and liabilities on a fair value basis.
Are these changes mandatory and what impact will these standards have on my company’s financial statements?
FAS 159 offers companies the option of reporting certain items on a fair value basis, but doesn’t require it. Because you estimate the fair value of your assets and liabilities, your financial statements may reflect a higher value for your company even though no transaction has taken place. The accompanying standard, FAS157, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP),and expands disclosures about fair value measurements. This statement does not require any new fair value measurements.
Do you foresee widespread adoption of these standards?
It is yet to be determined if, or how fast, companies will get on board with this new concept. For some, it’s a big change from historical reporting. For the time being, it is still an option, but it does seem that the Financial Accounting Standards Board is moving toward fair value accounting and away from historical cost accounting.
What benefits are afforded to CEOs by fair value accounting?
If your company has appreciated assets, you may be able to obtain greater lines of credit or more favorable borrowing terms given the more current information under these provisions. Also, if you’re looking to sell your company or a portion of it, a current valuation of assets may improve your return and, at least, set the stage for negotiations. As CEOs consider acquisitions, it will be much easier to see the prospective business at its present value rather than having to extrapolate the numbers. Private equity investments or debt securities that are classified as held-to-maturity are examples of financial assets that can be updated to reflect their current values, and loans or notes are examples of liabilities that can be affected in a change to fair value accounting.
Of what drawbacks should CEOs be aware?
There is uncertainty inherent in all estimates and fair value measurements, and there’s the risk that financial statements will be seen as more arbitrary with fair value because management has even more ability to affect the financial statements. Financial professionals coming into the workplace need to be trained on recognizing biases with respect to accounting estimates and fair value measurements so they can help CEOs with acquisition evaluations. They also need to be able to explain to prospective lenders and investors how they developed the company’s asset and liability values. It will be important to demonstrate consistency in how you’ve applied the fair value principles and developed your valuations to enable you to maintain credibility with investors, lenders and auditors. Although CEOs may select which assets and liabilities they wish to value under the standard, outside parties will be looking for consistency in how the standard was applied.
Last, CEOs need to consider the future. Once you go down the fair value path, there’s no turning back. Today, fair value standards may provide a great financial advantage for your company, but circumstances and market conditions change. Anticipate that change, estimate how long you will hold any asset and run predicative models to see if fair value will provide an ongoing advantage for your company.
DIANE WITTENBERG is a partner of Audit and Business Advisory Services with Haskell & White LLP. Reach her at (949) 450-6334 or firstname.lastname@example.org.
It’s been just a little over one year since the Securities and Exchange Commission (SEC) amended its disclosure rules around executive and board pay packages. The new rules require specific and more extensive reporting of prequi-sites, pension benefits, equity, non-qualified deferred compensation and compensation-related performance measures than have been reported in the past. While these new rules go further than ever before in revealing just how and how much executives are paid, making more transparent previously hard-to-find information, it’s only now that the first year of proxy statements have been filed that the SEC can make their reviews of the rules’ effectiveness. Recently, the SEC began by issuing more than 300 letters to companies requesting further information.
CEOs and boards can now begin to anticipate some of the likely changes that the SEC will require going into year two, says Ann Costelloe, San Francisco office practice leader of Executive Compensation for Watson Wyatt Worldwide.
“Certainly the results from implementation of round one of the new disclosure rules is that we’re getting a much clearer understanding of the process around executive compensation, including who’s involved and how the plans operate,” says Costelloe. “But the proxy filings fell short of actually establishing the relationship between pay and performance for the executives, and when we look to measure the pay of executives against peer companies with a similar performance, the link just isn’t clear.”
Smart Business spoke with Costelloe about what CEOs can learn from the results following the first year under the new reporting regulations and what changes to expect going into year two.
Which disclosure areas scored the worst following round one?
You can look at the proxies and see that less than 50 percent of the companies reported what the executives’ compensation-related performance goals actually were. For example, when you review the section of the proxy that describes the amount of bonus that the executive was granted in relation to the firm’s performance objectives and results, it becomes clear that, in many cases, the companies simply didn’t want to state the specific performance measurements and goal benchmarks.
Many of the proxy statements weren’t written in plain English and I think, because the process was new, many authors erred on the side of caution and included more information to the detriment of clear, concise explanation. Also, many of the proxies failed to consolidate all of the key information in one single place where the reader could easily access it. After this first round, the SEC is going back to ask for more information about the performance thresholds that are tied to executive compensation pay-outs and a more reader-friendly format.
What were some of the best elements from the proxies?
The best proxies included an executive summary that clearly listed what the executive was paid and how the pay-out tied back to performance in a condensed easy-to-read format. Also, I think after reviewing the first year’s proxies, the best proxies resulted from the cumulative work effort of HR, the legal department and finance. When the document is created solely by the legal department, it starts to take on the characteristics of a legal document and can become overly wordy and hard to understand from a layman’s perspective. Investors want to see a straightforward and transparent approach to providing the required information that is easy to understand.
What other trends have emerged in the areas of plan changes, change in control provisions, retirement or other executive benefits as a result of the new disclosure rules?
What’s really interesting is that we are definitely starting to see companies take a harder look at the business rationale for these programs. Many companies took a proactive approach in anticipation of the new disclosure rules and eliminated some of the traditional perks, like country club memberships, post-retirement perquisites and extra travel benefits. In relation to change of control provisions, we saw some organizations begin to make or consider changes (reductions) to existing arrangements, although generally companies are holding fast to the contracts that have already been executed. I think on a go-forward basis, as new contracts are negotiated or new plans are implemented, you’re going to see a more conservative approach to severance payments and elimination of some of the kickers in supplemental executive retirement plans.
What other changes should CEOs expect around reporting and what else should CEOs do to prepare for next year?
I think to prepare, companies should expect to fully explain the link between executive pay and performance. Many people think that the SEC will have higher expectations and will demand more rigor around the metrics that are used to measure executive goals and detail about how the compensation was actually earned and how the executive’s performance ties back to the compensation payment.
It will be important for the proxy author to understand the differences between the pay opportunity and the pay that was actually realized by the executive and be able to articulate it. Most importantly, start early, involve numerous members of the team in completing the metrics for the document and exercise the utmost transparency in providing the necessary information to comply with the regulations.
ANN COSTELLOE is the San Francisco office practice leader of Executive Compensation for Watson Wyatt Worldwide. Reach her at (415)733-4244 or email@example.com.
Politicians argue about it, unions strike over it, and CEOs pick up most of the tab for it. The rising cost of providing health care coverage to employees poses challenges for CEOs, but many feel powerless when it comes to changing or influencing such a complex system.
Understanding how the health care system works will help CEOs initiate cost-saving measures within their own company, says George “Jody” Root, partner and head of the health care practice group at Procopio, Cory, Hargreaves & Savitch LLP. Root also says that CEOs can influence cost-control efforts outside of their own companies by supporting firms that offer health care coverage to the county’s uninsured population. Support from CEOs is vital because the cost of health care for the uninsured is one of the external factors that exacerbates the rise in health care premiums for companies.
“Think of our health care system as a table with four legs,” says Root. “Every time something happens to one of the legs, the others have to adjust. The opportunity for CEOs to achieve cost management lies in their understanding of how the four parts of the system impact one another.”
Smart Business spoke with Root about how CEOs can manage internal and external health care cost drivers.
What are the factors that influence the cost of health care?
Our health care system has four separate parts:
- Two provider groups, which are the hospitals and the physicians
- The payors, which are usually insurance companies and the businesses that pay for the insurance
- The patients
These are the table legs, and they all must be level in order for the system to work properly. Frequently, something happens to one leg and the others strain under the excess weight.
In addition, there are two other factors that impact the cost of health care: One is the pervasive employee belief that health care is an entitlement, and the second factor is the cost of coverage for the uninsured population. A huge population group, almost 24 percent in certain geographic areas, has no coverage at all. When they seek treatment in an emergency room, the providers pass along those unreimbursed costs to the insurance payors in the form of higher fees, and subsequently, the insurance companies raise their premiums. This shifts more weight onto the company payors who have to pay those higher premiums for employee health coverage.
How can CEOs reduce their company’s cost of providing health care to employees?
First of all, you need to understand what coverage is available outside of your company’s health plan to make certain that every payor is doing their part. For example, in San Diego County, 25 to 26 percent of the population is Medicare-eligible. In California, there is no age ceiling for retirement, so it’s important that employers coordinate their company’s medical benefits with Medicare.
Also, some employees may qualify for Medicaid coverage for their children. Identify those employees and let them know that coverage is available for their children.
Last, encourage employees to use clinics instead of emergency rooms for nonemergency situations. Using lower cost clinics will reduce the company’s costs, and it also keeps the table level by not throwing too much weight onto the provider leg.
How is insurance coverage impacted by the four parts of the system?
Companies can provide coverage to workers three different ways:
- Indemnity plans: These plans, such as PPOs, provide more traditional coverage. Employees like PPOs because they control when and how they use the benefits; providers also favor PPOs, but employers don’t like the cost.
- HMOs: Employers like HMOs because they’re less expensive, but the other legs of the table don’t favor HMOs. New payment plans are coming that will compensate providers based upon the quality of the care they provide. This will motivate CEOs to purchase coverage based upon the quality of the plan’s providers if they want to realize the cost savings afforded under this new payment philosophy.
- HSAs: These high-deductible plans are not always popular with employees because the plans don’t measure up to their health care entitlement beliefs, but payors like them because they are less costly.
What actions can CEOs take to influence the other factors that drive health care costs?
Employee education is one of the best ways to help combat employee entitlement mindsets. Also, there’s a new plan coming to San Diego called Healthy Kids, designed to provide coverage for the kids of working families who don’t have coverage elsewhere. This will help reduce the indirect financial burden that gets placed on employers from treating uninsured children.
Also, CEOs should consider supporting two nonprofit groups in San Diego that were organized by employers to provide coverage for the uninsured population. San Diegans for Healthcare Coverage and the San Diego Business Healthcare Connection collect donations and grant money and use the funds to pay medical costs for the uninsured.
These are longer-term solutions designed to keep the weight of the table from shifting onto the business payors.
GEORGE “JODY” ROOT is a partner and head of the health care practice group at Procopio, Cory, Hargreaves & Savitch LLP. Root represents health care providers across the U.S. Reach him at (619) 238-1900 or firstname.lastname@example.org.
Most executives are familiar with the privilege that applies to conversations between themselves and their attorneys, the so-called “attorney-client privilege” frequently portrayed on television, in the movies and in novels as protecting one’s communications with one’s lawyer. But confidentiality is actually a legal principle that extends far beyond conversations you have with your lawyer.
The duty of confidentiality in California is as strong as any in the professional world. A California lawyer must protect client confidences at "every peril to himself or herself," says Bob Russell, partner with Procopio, Cory, Hargreaves & Savitch LLP and chair of the firm’s Professional Standards Committee.
“Everyone in the law firm who has access to client records, e-mails, memos or letters must hold the information contained in those documents and all communications confidential,” says Russell. “Even if the information is a matter of public record somewhere, unless the information is generally widely known, the client information that comes into the firm must be treated as confidential.”
Smart Business spoke with Russell about what CEOs should know about an attorney’s duty of confidentiality.
What does the attorney confidentiality duty cover?
Every bit of information has to be treated confidentially, even if it’s public information. For example, if your company completes a study that is released to other parties, but is not generally available to the public, and then you subsequently submit that report to your lawyer for litigation purposes, your lawyer and the law firm’s employees must treat the study’s contents as confidential. This is also true if the executive simply has a consultation with his or her lawyer about the possibility of filing a lawsuit, filing for bankruptcy or a potential merger or acquisition documents submitted to the lawyer as part of that consultation must be kept confidential even though those documents may already have been shared with other parties. The same duty that applies to your lawyer extends to all of the employees of the law firm. So a paralegal, an associate or a secretary who works on your case must keep all information confidential, including even the identity of the client.
How does a law firm assure that its employees uphold the firm’s duty toward client confidentiality?
Many firms, like Procopio, conduct continuing legal education seminars emphasizing the duty of confidentiality and require employees to sign an agreement acknowledging their responsibility with respect to client information and agreeing that they will not breach the confidentiality of the firm’s clients. In addition, law firms have a responsibility to secure their files and must ensure that vendors they hire understand the need for security. For example, law firms frequently rely on off-site records storage vendors or document shredding firms. Law firms are required to contract with vendors who know how to handle the storage and shredding of secure legal documents, because outsourcing doesn’t waive the requirement for maintaining client confidentiality.
What should CEOs ask a prospective law firm about its client confidentiality practices?
First of all, be sure to ask the tough questions about how the firm will ensure confidentiality when you are interviewing a lawyer prior to representation. I also wouldn’t hire a lawyer who seems more interested in feathering his or her own nest than representing you. Any time a lawyer goes public with information about representing a client, whether it’s simply a reference on a Web site or speaking to the media about the case, that communication needs to be approved by the client. Sometimes it’s the right strategy for a lawyer to come forward during a press conference and make certain representations about you or the case, but the strategy and content of such a public communication needs to be approved by the client in advance.
To convey very sensitive information, consider requesting that your attorney communicate with you in ways other than e-mail. Unfortunately, accidents do happen and sometimes an attorney can hit the wrong e-mail command or address and send your information to another party with no way to retrieve it. Also, it is not unusual for an executive to give others (such as an assistant) access to his or her email, and sometimes communications are too sensitive, even for assistants.
Lastly, consider asking that all of the documents pertaining to the matter be returned to you once the case is concluded. This is particularly important if you wish to maintain the files, since most firms destroy client files after a set number of years established in the engagement agreement.
How does a lawyer representing a client in court deal with the duty of confidentiality?
Once you are in the courtroom, the information that is presented is governed by a different set of standards, and confidentiality is waived to the extent the lawyer is required to present the information necessary to the client’s case. However, communications between the client and his or her lawyer are still privileged; therefore, except in exceptional cases or upon approval by the client, discussions between the lawyer and the client remain confidential, may not be inquired into and won’t become part of the public record.
BOB RUSSELL is a partner with Procopio, Cory, Hargreaves & Savitch LLP and chair of the firm’s Professional Standards Committee. Reach him at email@example.com or (619)515-3244.
Concerns about excessive executive compensation, backdated stock options and earnings restatements have sent shockwaves of new regulation and compliance requirements, like Sarbanes-Oxley, crashing into companies.
Yet, despite the strong performance of many CEOs in the past two years, the pendulum has swung away from a “let my numbers speak for me” mindset to a new environment where CEOs must play the role of chief corporate communicator.
CEOs may be able to benefit from this new role by delivering truthful, consistent messages to all constituents, a practice that will restore trust in the C suite and bring control back in house, says Rick Beal, managing consultant for Watson Wyatt Worldwide. “Nobody likes surprises,” says Beal. “Communication transparency takes away the surprises and brings control back to the CEO. In fact, there’s a huge opportunity for CEOs to tell the story behind their numbers hidden within the compliance requirements.”
Smart Business spoke with Beal about how CEOs can use transparency in their communications to win back trust and control from stakeholders.
What are the best practices for communicating executive compensation compliance?
The Securities and Exchange Commission (SEC) mandated a new format for disclosing compensation information for public companies. It says that compliance is meeting the letter of the rules but not the spirit of the intent. Although companies have made good-faith attempts to provide data, many company disclosures fail to provide the ‘how’ and the ‘why’ questions and merely articulate the ‘who, what, where and when.’
We recommend that CEOs take the disclosure issues completely off the table by using an executive summary to tell the story of the executive compensation program. This executive summary should include pay strategy, the company’s labor market for executive talent, and pay and performance levels relative to peer companies.
Wherever possible, without making disclosures that would cause true competitive harm, CEOs should disclose incentive plan goals and their link to incentive payments. They should quantitatively evaluate and describe the difficulty of achieving incentive performance goals.
What are the best practices for communicating with investors and shareholders?
In public companies, the primary constituents are major shareholders, but too often CEO communication is limited to presentations to board members and stock analysts rather than building personal relationships with key shareholders. There is ample room for building a shared understanding of business objectives and governing principles with key investors without divulging insider information through one-on-one meetings.
The key is having consistency and accuracy in your message, and not letting your advisers dissuade you by advocating a no-risk position to the point that not enough information is shared. There is a middle ground, and you can utilize a good media relations team to help develop your talking points and messaging that will tell the broader story of your company’s strategy and goals.
Should CEOs be more transparent when communicating with employees?
Yes. There are huge benefits for letting employees know what’s going on in the company. Utilizing internal resources to establish a direct line of communication to employees about the philosophy, business strategy and desired culture is critical to success. More engaged employees who understand their role in achieving organizational objectives drive a 20 percent increase in performance as measured by increases in total shareholder returns.
Senior management needs to communicate at least monthly via messages that are aligned with corporate strategy and that information should be available in multiple formats, including print, electronic and face-to-face communications.
Are you advising CEOs to increase their transparency in customer communications?
CEOs have a real opportunity to carry their message and to differentiate their brand and their company with customers by letting their customers know what the company’s mission and vision is all about. You can also lead by example by demonstrating the importance of customer commitments, and you can enhance the expectation that all employees carry the organizational messages to the customer.
How does community involvement potentially reduce bureaucratic compliance for CEOs?
A positive company image can be transmitted through a good solid community relations program and through community involvement by CEOs. Getting beyond compliance requirements to build an environment of trust with all stakeholders is critical to reducing bureaucratic costs. The real opportunity begins when the improved conversation yields unexpected opportunities and raises the level of engagement among all of the constituents.
RICK BEAL is the managing consultant for Watson Wyatt Worldwide in San Francisco. Reach him at (415) 733-4100 or firstname.lastname@example.org.