Gerry Salontai’s greatest lesson as the president and CEO of The Kleinfelder Group Inc. is that successful change initiatives always begin within the organization. When Salontai first attempted to reposition the nearly 50-year-old engineering and consulting firm to meet the emerging needs of global clients, he launched a rebranding effort targeted toward changing the external perception of the firm. But the firm’s internal perception never changed, and employee owners continued to make autonomous decisions about which of the firm’s vertical markets, such as energy and education, they would support in each of the firm’s offices. Ultimately, the rebranding strategy failed. Then the firm’s largest client, Exxon Mobil, declared that it would reduce its contracted consulting firms from 50 to 15, and Salontai once again initiated change in order to meet the shifting customer needs. But this time, he started inside the firm.
“Given the changing needs of our customers, the obstacles to our long-term growth strategy soon became apparent,” Salontai says. “We’d be better off focusing on fewer markets, fewer clients and provide them with a wider array of services, but we didn’t have the service model to compete with larger firms. We really needed to build our technical capabilities and our employee owners’ disparate vision of our firm was an impediment to growth.”
Salontai faced the challenge of negotiating the most radical change in the history of the firm. Given the employee ownership structure, the only way to sustain growth at the then-$80 million firm was to work through the firm’s existing staff in forging a new vision of the firm as well as a new business plan and model.
Craft a new vision
Historically, Kleinfelder had followed a geographic expansion strategy, and the firm’s previous leaders had drawn a line in the sand at the Mississippi River in creating the firm’s eastern boundary. About 75 percent of the firm’s business came from California and now clients needed global coverage. In addition, acquisition had been the primary method for driving growth, but the transactions left the firm with a patchwork of fiefdoms, where each local manager selected his or her office’s area of specialization primarily based upon their own technical strengths and passion.
To build consensus among the firm’s employee owners about steering in a new direction, Salontai turned to a strategic planning process. He says setting a new direction through strategic planning is most effective when leaders coax and persuade people to change, rather than demand compliance. While the notion of using a business plan as a change agent may not be original, Kleinfelder’s business plan structure is unique. The written plan outlines the firm’s growth strategies over a five-year period on a single sheet of paper that contains only three goals, with each one defined by four strategies. Salontai insists that the plan’s brevity forces everyone on the team to decide what’s really important as they built consensus about the firm’s direction.
“The value of a short plan is that every word matters,” Salontai says. “The goals support the core values and the long-term vision, and everyone in the organization gets a copy. Because it’s brief and easy to understand, it’s easy for our leaders to drive the plan throughout the entire organization.”
A survey of 150 employee owners, who represented the top 10 percent of the company’s leaders, provided input about the changes that were necessary for growth. A 17-member planning committee sifted through the feedback and created the plan. One of Salontai’s key strategies was creating a planning committee composed of diverse, emotionally neutral people who could take an unbiased look into the future when crafting their recommendations.
“The committee came from all areas of the company, such as human resources and accounting and across the various geographic and market sectors,” Salontai says. “I avoided people who would dominate the conversations or sway the planning process toward their own vested interests.”
The original plan dovetailed with Salontai’s vision of a reinvented firm, narrowly focusing on fewer vertical market segments that would be universally supported by all the firm’s offices. To create a sense of urgency about the need for change, Salontai continually reminded the committee that the firm faced two options: It could move forward and become an industry consolidator or remain behind and be part of the consolidation.
While the planning process created some initial consensus about the need for change, convincing a group of professionals who are also owners isn’t easy, and Salontai says that when he initially floated the idea of narrowing the firm’s focus to fewer market segments, some of the firm’s 12 senior leaders were not on board with the idea. So his next tactic involved winning over a group of key influencers to help spread the word and bring along the balance of the staff.
“I have a sounding board that’s composed of roughly 12 champions who are principal owners in the firm,” Salontai says. “I worked on convincing a few of them at a time and they, in turn, convinced their direct reports that this was the right strategy. It’s like using a phone tree to build consensus. It’s natural that people gravitate toward certain key influencers; I just won them over so they could help me drive the change.”
Build up your capabilities
As Salontai narrowed the number of vertical markets supported by the firm, he began increasing the firm’s technical capabilities offered under each major market segment. The consolidation and expansion decisions were reached by reviewing client expectations, the needs imposed by the increasingly global economy and recommendations from a previous peer review.
“In 2003, we went through a peer review and one of their suggestions was that we restructure vertically to accommodate our clients,” Salontai says. “We took their recommendations and then began a phase of organic growth by developing our existing staff and hiring additional employees. Both moves have allowed us to increase our technical offerings for each market. As a result, we’ve opened more offices and have made only two small acquisitions in recent years.”
Another belief of the firm’s previous leaders was that the firm could function like a basketball team, because employees were capable of playing above their heads in meeting client demands. But the technical requirements in the expanded client contracts couldn’t be achieved solely through a stretch environment, so Salontai began building the firm’s technical expertise. However, he soon discovered that the firm’s senior leadership team was stretched too thin to support an aggressive organic growth strategy.
“We only had four or five senior leaders, and they were all wearing multiple hats,” Salontai says. “We had one person functioning as both the CEO and COO, and some people were running several states as well as handling training and development. They couldn’t do anything well, so they were really bogging down the company.”
Salontai hired two new senior leaders and reorganized the responsibilities of the senior leadership team, so that each manager could focus on specific tasks. Now, a firm chief operating officer focuses strictly on operations and that move has doubled the firm’s profitability. Salontai also appointed a chief marketing officer, a chief administrative officer and a chief technical officer, who expanded the firm’s technical capabilities by providing clarity and clout to the firm’s narrowed vertical market focus. Many of the key strategies designed to enhance the firm’s technical capabilities were developed through the strategic planning process.
“Now more than 40 future company leaders are learning from their more experienced peers, and we’ve organized formal mentoring programs, which support each practice group,” Salontai says.
He also notes there wasn’t a single indicator that pointed to the need to reorganize the firm’s senior leadership team, rather he observed managerial stress and missed milestones, which influenced him to make the change. He says leaders often make observations in a number of areas before making critical decisions and refer to it as their gut instinct. Salontai says that bringing people through such a radical change process was a difficult and challenging task.
“Not everyone saw the value in these structural changes,” he says. “Some people questioned why we needed the additional overhead and worried about how adding additional management would reduce their access to Gerry. They saw that the firm was moving from being a family organization to more of a corporation, like General Electric, and not everyone was comfortable with so much change.”
Create continued support for change
Despite the fact that the firm has achieved substantial growth, Salontai says he knows some doubters of his vision still remain. But he says the tipping point toward change occurred as the firm started to achieve success under the new plan, and he used the results to sway the majority of the holdouts. Showing that the company achieved $301 million in fiscal 2008 revenue, up more than $120 million from just three years before, certainly helped with that process.
Salontai uses a formal communications plan to continually reinforce his vision and travels to more than half of the organization’s 16 regions each year to review the firm’s strategic plan with the firm’s employee owners using a town-hall setting. Then, during the course of the year, he conducts conference calls for employee owners every six weeks that detail the company’s results and ties them back to the firm’s progress toward its five-year strategic plan.
“Really the top tactics for driving growth and change are authoring a strong message, believing in it and then communicating it over and over again,” Salontai says. “Then once you’ve achieved success, be sure and point that out to people because they will start to believe once they see that it will actually work.”
As an example, Salontai says that some employee owners were initially concerned that marketing additional engineering and technical services to existing clients wouldn’t be backed up by seamless execution and that unhappy clients would defect. In fact, the opposite happened. Marketing additional services to clients and expanding the firm’s technical capabilities created synergies, referrals and additional business opportunities. By continually reinforcing the positive outcomes from increased teamwork and the firm’s new cross-selling strategies, Salontai has engendered greater levels of behavior change.
“People really fall into three categories when it comes to dealing with change,” Salontai says. “There are those who are afraid of change, the group in the middle who tend to be supportive but are unsure, and those who are knocking down the door to initiate change. It’s really the CEO’s job to bring the changes forward, bring the middle group along and pacify the last group. But you have to do that without letting the group that needs comforting bog you down.”
HOW TO REACH: The Kleinfelder Group Inc., (858) 320-2000 or www.kleinfelder.com
The U.S. Small Business Administration (SBA) has been loaning money to Americans to start, build and grow businesses since 1953. However, many business owners may not realize that these loans do not require a lengthy approval process or a long-distance relationship with a faceless loan processor.
Through its Preferred Lender Program (PLP), the SBA grants some banks the authority to underwrite and approve loans for small businesses. And while borrowers must qualify, SBA loan authorization can take as little as 24 to 48 hours, which is great news for small business executives, given the current lending climate.
“Preferred lenders have full authority to underwrite and approve government-sponsored SBA loans because they are charged with looking out for the SBA’s interest,” says Albert Lee, vice president of Business Banking for Fifth Third Bank, Tampa Bay. “SBA loans were designed to facilitate access to credit for businesses that might otherwise have trouble securing funding.”
Smart Business spoke with Lee about why SBA loans are a viable option for business owners.
What types of business loans are available through the SBA?
Business owners can receive funding to grow or expand their business, including purchasing equipment, property, making leasehold improvements or just meeting operating capital requirements through the SBA’s loan program and portfolio of loan products. The SBA’s 7(a) loan program, for example, has a maximum loan amount of $2 million. Sometimes new companies don’t have a lot of assets or collateral to borrow against, so this program was designed to help those companies succeed.
What are the qualifications?
In some respects, the term ‘small business’ is misleading, because a company can qualify for one of the SBA loan programs if its after-tax income is less than $2.5 million or its tangible net worth doesn’t exceed $7.5 million. There are at least 1,200 businesses that fit that profile in the Tampa Bay area. Applicants must meet the bank’s lending criteria, and business owners must not be under indictment or on parole or probation. Other qualification criteria include loan size, type of business, use of proceeds and the availability of funds from other sources.
Is there a business ownership requirement for borrowers?
The borrower is required to have a cash investment stake in the venture. The SBA has a minimum requirement of 10 percent equity, although the local bank’s loan requirements take precedent, and those will most likely require the borrower to have 20 to 25 percent equity ownership in the business or even a higher amount.
How does the loan approval process work?
Business owners may apply through their local bank. A checklist is available that outlines the necessary documentation borrowers must furnish, and there’s also an eligibility questionnaire that helps borrowers gauge their ability to qualify. After the borrower completes the application, the local banker underwrites and approves the loan, using the bank’s lending criteria, and then submits the package electronically to the SBA. Authorization is usually issued within 24 to 48 hours, after which the banker will put together the loan terms for the borrower, including how the funds will be used. If the business needs to use the funds for a different purpose down the line, the banker has the authority to modify the loan documents to meet the business need.
How do SBA loans differ from traditional loans?
In theory, the SBA does not decline loans based upon a lack of collateral, whereas traditional loans require the borrower to demonstrate sufficient cash flow and collateral and execute personal guarantees. SBA loans do not necessarily have to be fully collateralized as long as any and all available collateral has been offered. The term of the loan is driven by the use of the proceeds, although the lending terms can be stretched to accommodate a longer time period than most conventional loans.
Historically, SBA loans have been unfairly characterized as cumbersome, when, in fact, the SBA loan process has become very user-friendly. Today’s process is highly streamlined and banks have authority to meet the needs of small business owners without the red tape.
ALBERT LEE is vice president of Business Banking for Fifth Third Bank, Tampa Bay. Reach him at (813) 306-2414 or email@example.com.
When Peter Nelson was applying for the president and CEO job at California Water Service Group back in 1996, he wanted to learn a little bit about his potential employer. He decided to drop in for an unannounced visit at one of the local offices.
“I received a call from a headhunter about the opportunity here at Cal Water, but I really didn’t know much about them,” Nelson says. “So I walked into the local office and said to the service representative, ‘Hey, I’m applying for a job with this company. What’s it like to work here?’
Over the next 45 minutes, the representative gave him a copy of the annual report, and three other people in the office came out to speak with him about the company. He also asked what the rep would change about the company, and the man replied that he’d like to have more tools to service customers. The board of Cal Water was searching for a CEO who could grow the company through acquisitions, and for Nelson, the local office visit cemented the deal, because it validated his ideas on how the company could grow. The only way for Cal Water to expand would be through improving its service image. In order to acquire municipal or independently operated water districts, Nelson would need a compelling value proposition for the local customers, and that value is most often created by one thing — improved service.
In order to do this, Nelson had to create a plan, involve his employees and then work to improve.
Create a plan
To validate his initial assumptions and establish his action plan, Nelson spent his first two months on the job talking with staff members.
“I spent time in one-on-one meetings with my direct reports, visited with the staff in all our locations and went out into the field with meter readers,” Nelson says. “I heard a lot of good ideas about how to improve service, but what was needed was a vehicle to get those ideas into place, because they weren’t being acted on.”
Nelson says that installing a continuous improvement process starts with a return to the basics, and that includes listening to the voice of the customer.
“In order to get more structure around creating a customer service ethic and to get that ingrained as part of your corporate culture, you have to start by measuring your results because you need data to track how you’re progressing,” he says.
Nelson began by reviewing water industry data, which produced a list of 69 customer needs. He prioritized the needs according to customer importance and then surveyed customers for performance feedback, establishing a performance baseline for the organization.
For Nelson, establishing customer service excellence as a part of the company culture was vital to achieving his growth plan because Cal Water’s union environment didn’t offer him the variable compensation options that many CEOs rely on to help drive key business initiatives. The organization’s growth would have to be supported by employee pride and a desire to service customers above and beyond their expectations.
“The next step is to train your employees on the continuous improvement process,” he says.
Nelson used trainers and conducted the training in-house. Employees went through these sessions every day.
“It’s vital that they understand how to interpret the voice of the customer as part of a continuous improvement process,” he says.
The vice president of human resources and the vice president of operations over-saw much of the training because those leaders are key to getting the training accomplished.
“Those VPs must work on getting rapid pull-through on any concepts that you’re teaching because it can take up to seven years to get a continuous improvement process fully implemented,” Nelson says.
Once the staff completed initial training and reviewed Cal Water’s first set of customer feedback scores, the staff was divided into teams of up to 14 employees by service location. Each team was led by a manager, who also acted as the team’s coach and a water quality expert. Because the customer survey results are measured by each service locale, the continuous improvement teams are charged with developing solutions that raise customer perception within their assigned geographic service area.
Teams met weekly, and they designed and presented a business plan around a suggested quality improvement to an officer review panel every 90 days.
“The plan must include step-by-step details outlining the problem, the analysis of the problem and the suggested improvement,” Nelson says.
Every member of the team must present to the panel, which is composed of other employees and three or four officers of the company.
“This step is vital because not only are we bringing forward ideas, but we’re teaching employees about the continuous improvement process and we’re building their confidence and presentation skills,” he says.
The presentation doesn’t always have to be a brand-new idea; they can also present an update on how a previous business plan is progressing. Under this system, he had 870 employees presenting in an open forum every 90 days.
“What you’ll find by installing this kind of process is that the employees build skills and talents they didn’t have before, or in some cases, it brings those talents to the surface and that helps you develop people as well as improve customer service,” Nelson says.
He says nearly every employee has stepped up through this process.
“It helps that they are part of a team because they can rely on each other and the team environment also helps in interpreting the voice of the customer, because they can discuss what the data really means,” he says.
In addition to requiring employees to articulate the prospective value of their ideas to customers, Nelson requires the teams to estimate the cost and the return to shareholders as part of their business plan. For example, if the customer service improvement plan calls for increased capital investment, the team must present a recommendation about how to finance the improvement, how many additional customers can be serviced through the proposed investment and when the company can expect to recapture the costs.
One of the best suggestions to come out of this process was improving customer satisfaction in Bakersfield.
“The customers were reporting a problem with water pressure and with water quality, and after the team conducted their analysis, they recommended that we build a new treatment plant,” Nelson says.
Although that idea would result in a major capital expenditure, the team moved forward with that recommendation and investment. In another service location, the customers complained about a strong chlorine taste in the water in the mornings. The team monitored the water quality and recommended a device that regulates the chlorine dispersal.
Work to improve
As a final step toward building an organization entrenched in continuous improvement and customer satisfaction, Nelson includes expectations in performance plans and implements continuous improvement process training for the employees of newly acquired companies immediately.
“This is part of the expectation of working here — it’s not voluntary,” Nelson says. “You always get some push-back from new employees when you acquire a company because it’s a change and so that’s to be expected.”
To get them on board, he spends time talking with the employee groups telling them why they do this and why it’s important. Once they complete the training, it helps them understand the process and overcome some of their fears, so they begin training with new employees right away. While a few opt out, most stay because it’s a better deal for many of these employees to work for Cal Water because the compensation, benefits and security are better and it has a larger footprint, which opens the door to increased career opportunities.
“That value proposition at least gets them to move forward with the training, and once they’re engaged, they generally don’t want to go backward,” Nelson says.
Every six months, he establishes a new set of objectives for his 20 field managers and six headquarters managers that support his corporate goals of providing excellent service, developing employees, delivering shareholder value and communicating well.
“You don’t want to set objectives that are too long-term because things change, and you can’t make corrections,” Nelson says.
He has eight officers on personal performance contracts with him, and he checks in on their progress every Monday. Additionally, they spend the day together once a year to select one major initiative for that year.
“If you just always focus on goals and objectives it gets routine and people can lose their enthusiasm,” he says. “I like to select one annual initiative that will really make a difference and focus on that. The officers are then charged with communicating the initiative and how each employee can contribute.”
By doing these things, Nelson has increased Cal Water’s service connections by more than 100,000 and has grown revenue from $210 million when he started in 1996 to $367.1 million in 2007. The company has made numerous acquisitions under his leadership, and he’s achieving the board’s original charge by delivering growth.
“It’s a great question to ask how customer satisfaction is tied to business performance, and I think it’s one that CEOs should ask themselves all the time,” Nelson says. “Good service is the key to customer retention, and when you have it, everything just seems to work better.”
HOW TO REACH: California Water Service Group., (408) 367-8200 or www.calwater.com
Since the advent of Sarbanes-Oxley, the role and the responsibilities of the audit committee have become vital.
“The audit committee must act in a proactive manner to monitor and assess risk mitigation activities within the company,” says Diane Wittenberg, CPA, partner for Audit and Business Advisory Services at Haskell & White LLP. “Members should ask hard questions of auditors and management and have authority to effectively execute their charter.”
Smart Business spoke with Wittenberg about how to build and engage an effective audit committee.
What constitutes an effective committee charter?
The charter defines the authority, functions and mission of the audit committee. Weak charters define only the minimum duties, such as simply reviewing financial statements, whereas strong charters spell out committee responsibilities in detail and encourage member participation. These are the major areas of responsibility that should be included in the committee’s charter:
- Oversee the accounting and financial reporting processes and the financial statement audits of the organization.
- Appoint, compensate and oversee the external auditor and ensure that his or her skill set is matched commensurately with the complexity level of the organization.
- Establish procedures for receipt and treatment of complaints in accounting, internal control or auditing matters, including anonymous submissions from employees.
The charter should stop short of directing the committee on how to carry out its duties; members should use interpretation and judgment in executing the committee’s mission.
Which tactics lead to effective execution?
Audit committee members should ask candid, frank questions of the external auditors about their assessment of the skills, controls and attitudes of management and others within the organization. Every quarter the committee should meet with the auditors without management present to ask questions and solicit opinions. Members should feel confident that management is aware of the financial reporting risks and has instituted the necessary internal controls to mitigate the risks and then implemented monitoring procedures to ensure effective operation of those controls. The committee chair must establish a culture that allows each member to act independently so the members can ask the critical questions to assure the proper level of stakeholder security.
How does member composition impact committee effectiveness?
In a perfect world, the audit committee would be composed of individuals who have audit, accounting and industry knowledge, but in reality, most committees have a blend of members with different strengths. Members who don’t have industry or product knowledge should go through training so they understand the risks and the financial statements. For example, audit committee members in a manufacturing company should understand the metrics for that industry, such as days sales in inventory and accounts receivable turnover, to assess if the company’s performance is in line with its peers. At least one member of the committee should be an independent financial expert who possesses the following attributes:
- Knowledge of GAAP and financial statements and the ability to use GAAP principles in connection with estimates, accruals and reserves
- Experience in preparing, auditing, analyzing or evaluating financial statements with a level of complexity that is comparable with the organization
- Understanding of internal control processes and audit committee functions
What are the most effective committee and meeting structures?
Three to four members is an ideal size so discussions and decision-making processes are streamlined. Note that having an odd number of members is preferable for reaching a quorum. In public companies, the audit committee should meet at least quarterly so it can have the required communications with the external auditors and maintain its momentum and continuity. Set an annual meeting schedule at the start of the year and send committee members the minutes from the prior meeting and the next agenda two to three weeks before the next meeting. This practice ensures that discussions remain strategic and that the committee spends less time on administrative tasks.
How should the committee assess its performance?
The committee should monitor its performance and assess its effectiveness at least annually, perhaps as part of a retreat, especially as it relates to the appropriateness of its charter in order to make recommended changes to the board of directors. In addition, the committee should review the performance of its individual members through self-evaluation checklists or by hiring an outside firm to do an evaluation. In private companies or non-profit organizations, the committee usually conducts a self-assessment and public companies often use an outside evaluator. The committee should use a continuous improvement process to implement changes after reviewing evaluation feedback.
DIANE WITTENBERG, CPA, is a partner for Audit and Business Advisory Services at Haskell & White LLP and audit committee chair for the Discovery Science Center in Santa Ana. Reach her at (949) 450-6334 or firstname.lastname@example.org.
In the quest to stem rising health care costs, more executives are initiating dependent audits with some surprising results. On average, 8 to 12 percent of the plan’s covered dependents don’t meet the eligibility requirements, and one in four is an ineligible spouse, not a child. While audits often produce savings, employers should consider a few best practices to optimize the return and preserve employee good will during the process.
“The savings opportunity will vary depending upon the company’s premium contribution for dependent coverage, the employee base and the scope of the audit; however, in most cases, there are significant savings to be had,” says Greg Mansur, national leader of Administrative Performance Review Services at Watson Wyatt Worldwide. “Companies must look at their demographic profile, cost-sharing structure and potential ROI under different scenarios, and then define an audit scope and timing for the project.”
Smart Business spoke with Mansur about the potential savings and the best practices around dependent eligibility audits.
How have ineligible dependents crept onto group coverage rolls?
Benefit packages are vital in recruiting and retaining employees, so human resource professionals are often reluctant to make employees jump through hoops to prove eligibility. Initial enrollment is often completed online, and there’s no practical way to require or submit eligibility documentation during this process. Employees do a better job of adding dependents to a plan than removing them. It’s just too easy to forget that your son or daughter is now finished with college and is no longer eligible for benefits.
Comprehensive audits, where all of the dependent population is verified for eligibility, are a relatively new phenomenon and haven’t been part of the traditional audit budget for HR. With word spreading about the potential savings, more CEOs and CFOs are requesting dependent audits.
What should CEOs consider when determining the appropriate audit scope?
It’s possible to develop savings scenarios based upon the demographics of the employee population because historical data dictates that certain profiles yield certain returns. While a comprehensive audit costs more, it produces the greatest return and allows the company to work from a clean slate in maintaining savings by initiating enhanced validation procedures. Alternatives include auditing a random sampling of employees or specific employee segments, but can have limitations by being too narrow in scope to realize significant savings or potentially alienating groups of employees.
What are the best practices for launching an audit?
The first step is to establish an effective audit communications plan. It’s important for CEOs to articulate why the audit is necessary and to help employees see how this effort is good for everyone. Communicate the simple message that maintaining an affordable health plan works for the benefit of every employee; I think that message makes more sense in an era of greater cost sharing. Of course, explaining that an audit might occur means giving employees advanced warning about the timing and any documentation they must furnish. This gives them time to ‘self-audit’ the dependents they have enrolled and remove those who are ineligible, saving employees from an uncomfortable situation when the audit does occur. An amnesty period where employees may remove ineligible dependents without repercussions is always a great way to start an audit.
What happens during the subsequent audit phases?
Continue to articulate the audit process and the timeline and spell out the ramifications, such as the date when all unverified dependents will be removed from coverage. Many employers outsource the verification process because they lack the internal resources and the technology, and trained representatives can advise employees about how to obtain documentation, such as duplicate copies of marriage certificates.
Finally, establish an extension/appeals period to allow employees to challenge an audit decision and to allow those who have been nonresponsive extra time to produce supporting documents prior to removing their dependents. These extra measures can help to demonstrate the fairness of the process.
How can employers maintain dependent eligibility and savings?
Initiate a policy requiring employees to present eligibility documentation when new hires sign up for benefits or existing employees add dependents to group coverage. Some employers are requiring employees to sign affidavits or check pop-up boxes online stating that they understand the health plan eligibility rules and the penalties for noncompliance. Randomly audit a few employees each month who have dependent coverage to make certain the dependents are still eligible and request documentation if needed. Be sure to communicate to employees that ongoing audits are now standard operating procedure. With greater rigor and oversight, the corporate culture will change and employees will do a better job of self-policing the eligibility of dependents.
GREG MANSUR is the national leader of Administrative Performance Review Services at Watson Wyatt Worldwide. Reach him at (818) 623-4780 or Greg.Mansur@watsonwyatt.com.
Is your company’s annual bonus expense in line with its recent financial performance? Do top performers receive a larger bonus than their lower-performing peers? The current economic climate is the perfect reason to review your company’s bonus and incentive plans.
During prosperous times, employees come to expect bonuses, and the company has less trouble justifying the expense. So bonuses lose their meaning and become automatic or entitlements. If there’s little to no growth in your company’s 2009 forecast, now’s the time to revisit those incentive plan fundamentals and make the necessary adjustments.
“Now that executive compensation is subject to new SEC disclosure rules, CEOs are realizing that the same philosophies around executive bonus and incentives must cascade down through the organization,” says Ann Costelloe, San Francisco office practice leader of executive compensation for Watson Wyatt Worldwide. “They’re wondering how they can justify paying employees profit sharing or incentives if the company’s financial results are lower than the prior year, yet still incent employees to achieve stretch goals.”
Smart Business spoke with Costelloe about how executives can calibrate employee bonuses and incentives to mesh with 2009 forecasts and still maintain motivation.
What’s the first step to calibrate annual bonus and incentive plans with results?
Executives should start at the macro level by revisiting the philosophy behind the plan to make certain it’s still appropriate. Next, make certain the plan is motivating employees toward the main business drivers. At all times, a plan should be self-funding in that the incremental gain to the company should more than pay for the bonuses to employees. If it’s a profit-sharing plan, where all employees share in the overall company results, should you pay employees the same percentage if the company doesn’t achieve a profit increase? Or is the percent of profit shared appropriate and affordable given the financial performance of the company?
The questions are: What results should we be rewarding? Are there specific business drivers and return (e.g. return to shareholders) that we must achieve and exceed before we can afford to pay a bonus? Should employees still have an opportunity to earn the same bonus if they meet individual goals, but the company misses its broader target?
What’s the next step?
Establish companywide financial goals that include the appropriate amount of growth that is both achievable and affordable but by no means a given. This is the first step to assuring that the employees’ collective performance will fund the bonus expense. Then cascade the goals down through management to each division, group and individual. Understanding the extent to which company performance versus individual performance will impact an employee’s personal reward is critical. I advocate giving employees no more than three goals, so that an individual isn’t juggling too many targets. A goal that impacts only a small fraction of an employee’s ultimate reward (e.g. 10 to 15 percent) will likely receive no attention versus goals that impact a significant portion of the reward. Bonuses and incentives should be earned for achieving results, not completing activities, and if it’s a true incentive plan, those who achieve at higher levels should earn larger bonuses than their lower-performing counterparts.
When determining the bonus amount that will motivate employees, there’s no one-size-fits-all number. Instead, the percentage must coincide with the company’s philosophy, the industry, the maturity level of the company and the targeted return to shareholders.
How should plan changes be communicated?
Initially, the CEO should communicate the plan change, including the reasons behind it, because employees are much more likely to embrace change if they understand why it’s necessary. Employees need to understand how bonuses payments are calibrated to company-expected results and to what extent the bar for performance measurement has changed. CEOs should then provide periodic updates, detailing how the company is tracking toward those goals. This strategy creates line of sight between the employees and the company’s mission, and it also keeps the employees focused and motivated, especially if they’re working toward stretch goals.
Which plan structures are the most effective?
I don’t favor all-or-nothing plans because they can be a little scary, and they often fail to motivate employees. A scaled system, which financially rewards employees at a level that’s commensurate with their performance, is fair and the expense is calibrated to the achievement. The key here is to ensure that employees at all levels know what performance, outcomes and results are expected and how they will be measured so that rewards line up with results delivered.
I also encourage employers to set aside a pool of funds to reward and retain top performers. It’s best if the opportunity is embedded within the plan structure because you don’t always want to be managing by exception. If your company is hitting or exceeding its bonus plan targets every year, there’s a good chance the plan isn’t working properly because the bar is set too low. When a plan is structured correctly, you won’t hit the goal every year, nor will you consistently miss or overachieve.
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.
Back pain is big business.
Annually in the U.S., people miss nearly 93 million work-days because of back problems and spend $4 billion on spinal products. With so much need, it would seem that an emerging medical device company like NuVasive Inc., which develops products and techniques for minimally disruptive spinal surgery, could grab a foothold in the marketplace with ease. But when Alex Lukianov assumed the CEO role in 1999, the company was struggling against its larger, entrenched competitors. Armed only with his vision for building a swift company culture as a slingshot, Lukianov took on the challenge of slaying the industry Goliaths.
“To compete against Medtronic and (Johnson & Johnson), you have to take on an offensive posture,” Lukianov says. “And that offense has to have a clear mission and a purpose, because to be a dragon slayer, you have to attract like-minded personalities and expect outstanding results.”
Lukianov had an extensive background in the orthopedic industry, including a stint as division president for direct competitor Medtronic Sofamor Danek, before coming to NuVasive. He says he thought carefully about the depth of the challenge before committing to the assignment. For example, at a large company like Medtronic, Lukianov says he could always pick up the phone and secure resources to tackle a problem, at the much smaller and struggling NuVasive, there’d be no one on the other end of the line to help. And the new position would entail uprooting his family from New York and moving to the West Coast. Still the idea of building a major league company from the ground up was an opportunity he just couldn’t pass up.
Shortly after arriving, Lukianov may have had second thoughts about his decision, when the company was down to having only enough cash in the bank to cover two weeks of expenses. But Lukianov is an optimist, so he rolled up his sleeves, started raising money and began installing a new secret weapon a swift response corporate culture. Since that time, he’s led the company through an initial public offering in 2004, which earned him a promotion to chairman and CEO, and then on to record-setting revenue, including $154 million in 2007.
The need for speed
Lukianov’s passion for swift response was partly influenced by his previous work experience. It’s not that his prior companies were unresponsive to the needs of the marketplace, the culture just didn’t go far enough to create a true competitive advantage. In his first CEO role, Lukianov says he finally had the chance to create a more complete culture, and given the circumstances, speed was the best cure for the company’s problems.
Surgeons buy NuVasive’s products, and Lukianov says that instinctively, surgeons want everything yesterday, so building a culture that would appeal to them was vital. Also, the pace of innovation at larger, more bureaucratic organizations can be slow. Greater speed in the design, implementation and sales of new products would enable Lukianov to drive productivity and greater output with a smaller staff and capture market share quickly. The business case for speed was clear, but to implement a culture built on swift response, Lukianov says CEOs need to start by letting the staff know why speed is important.
“To create an environment predicated on high standards and excellence, you have to let everyone know why it’s important, so they become emotionally invested in the outcome,” Lukianov says. “Investing in a culture really isn’t important if the plan is to build up the company and then flip it, because in that case, management is really not all that concerned about what happens to the people. There’s an emotional investment that leaders make when they build a culture, and you can’t really make the investment unless you’re committed for the long haul.”
Although Lukianov has named his cultural initiative “Absolute Responsiveness,” and he uses the cheetah as the culture’s symbol, he’s gone beyond rhetoric and T-shirts by putting some teeth into his cultural vision. Lukianov refers to NuVasive employees as shareowners, and almost every employee has a stake in the outcome.
“I just can’t imagine attracting the kind of people you need to drive 50-percent-plus growth rates unless they have a stake in the outcome,” Lukianov says. “I don’t think the equity has to be a lot, but it can be very effective if it’s done systematically.”
He opened a distribution center in Memphis adjacent to FedEx, so surgeons are assured of receiving their product orders overnight his stated goal is to never miss a surgery. He also reviews dashboards each month that track the company’s responsiveness on all its deliverables, and he uses a balanced scorecard for measuring performance and holding people accountable to his high achievement standards.
Each dashboard measures the company’s progress in specific functional areas, from the 40 products currently under development and their anticipated release dates, to the degree of sales force penetration for each product the company sells in every market. So far Lukianov’s plan is working because the company has been granted 48 U.S. patents and has another 134 pending, most of them coming under his leadership, and revenue is growing more than 50 percent.
“We measure four key areas on the scorecard including financial results, adherence to internal processes, customer knowledge, and personal growth and development,” Lukianov says. “There’s a progress review, and every employee is graded each quarter, but what really makes our scorecard different is that it not only measures achievement of short-term financial goals but progress toward the company’s long-term objectives. We have a goal of reaching $500 million in revenue and to be GAAP profitable, and every person in the organization can tell you how we’re going to get there and what their part is in reaching the goal. In many organizations, senior management is well-versed on the long-term objectives, but it’s critical for everyone to understand their role.”
Customers are second
There aren’t many CEOs who could drive their company’s stock price to more than $40 a share when the bottom line isn’t yet in the black and investors are third on the chief executive’s priority list. But under the Lukianov philosophy of prioritization, things are just as they should be.
“I think everything I’ve been taught over the years about putting the needs of the customer first really isn’t the best way to do things,” Lukianov says. “We do not put the customer first at NuVasive. The first priority is your internal staff, your second priority should be the customers, and your third priority is your investors. If you take care of No. 1 and No. 2, No. 3 (the investor) gets everything they want.”
Lukianov’s group of No. 1 priorities has been growing. When annual revenue reached $60 million, Lukianov approached the board with the idea of moving away from the company’s contracted sales force and hiring an internal team. Lukianov says he believed he could achieve faster growth through dedicated sales representatives who were trained in the culture of Absolute Responsiveness, possessed greater knowledge of the company’s product line and unique surgical approach, and could serve as the face of the organization to the surgical community.
“Our product allows the surgeon to approach the spine from the side, not from the back or the front, so it’s less invasive for the patient,” Lukianov says. “We train surgeons on cadavers here in our operating rooms, but it takes in-depth knowledge to explain the technique to surgeons and convince them to attend the training. You need commitment and dedication to be successful, and I just didn’t see any way to sustain 50 percent growth rates when we couldn’t retain business because of the churn in the sales force.”
Despite laying out the business case for taking on the fixed expense, Lukianov says that it took him three months to convince the board and other members of senior management about the soundness of his plan, and while he eventually got the green light in June 2006 and has since hired more than 220 sales reps, with so much at stake, he spends a great deal of his time monitoring the team’s performance and ROI.
“I think before you go forward and ask for this kind of commitment and investment, the company has to have achieved a certain level of success, so it’s all about the timing of the request,” Lukianov says. “We had been through the IPO, the restart was well on its way, and we had just passed $60 million in revenue, so I thought this investment would take the company to the next level and beyond.”
In addition to holding reps accountable for their individual performance via scorecards, Lukianov holds quarterly webcasts where he reviews the entire sales team’s dashboard and its progress toward reaching the company’s revenue goals. He is also personally involved in the hiring process for each sales rep.
He insists that only A players will fit NuVasive’s culture of Absolute Responsiveness and reach his high productivity standards. He uses 10 criteria to evaluate prospective new hires but finds that the genuine A players think of themselves as lucky. Lukianov says he is a lucky man, and since he believes that success is perpetuated by like-minded individuals, being lucky is the litmus test for prospective sales representatives at NuVasive.
“I ask during the interview if the applicant considers themselves to be lucky,” Lukianov says. “Then I watch for their body language in response to the question. I think when a person feels lucky and has an attitude of gratitude they will fit in to the culture and be successful with our high standards.”
Building an in-house sales team has also enabled the company’s growth plan. Lukianov has been able to leverage the group’s marketing expertise and their expense through several acquisitions of new products and technology that were poised for market, only requiring the addition of a ready, willing and able marketing team. Two of the most recent acquisitions include the January 2007 acquisition of technology and assets from Radius Medical LLC, a privately owned company that makes bone graph strips, and in May 2008, NuVasive announced the intent to purchase the Osteocel Biologics business from Osiris Therapeutics Inc.
Sustain the culture
As a company grows, it can be a challenge to sustain the corporate culture, especially one that fosters speed and innovation. But Lukianov anticipated the problem, and installed a number of processes to assure that the culture endures beyond any growth pains.
“I work extensively with our management team to make certain the culture is perpetuated, especially for all the new employees who are joining what has become a much larger organization,” Lukianov says. “So we’ve developed a cultural immersion program for new employees. For starters, every single person we hire goes through a training program on our products, anatomy and surgical techniques, then they must pass a knowledge test as a condition of employment. We want every person in the organization to be a subject matter expert, understand how our products and techniques differ, and can interface with a surgeon.”
In keeping with Lukianov’s high-performance philosophy, and as an introduction to the company culture, employees must pass the exam with a score of 90 percent or better, if they fail to do so, they must retake the exam. The motivation for high achievers includes $500 for a perfect score and $250 for those who score 95 percent.
“It’s a very difficult test, and people are petrified to go through it, but it brings new people together and teaches them about the company and our values,” Lukianov says. “We also perpetuate the culture, continue the educational experience and have a little fun, by playing a game we call spinal jeopardy at meetings and by giving annual cheetah awards and spot awards like ‘cheetah in the wild,’ where we recognize an employee who goes above and beyond in exemplifying the culture. When you constantly reinforce the culture, it doesn’t just become the flavor of the month, and there’s no way the culture won’t endure through growth.”
HOW TO REACH: NuVasive Inc., www.nuvasive.com
There’s a belief among business leaders that change is just a part of growth. That might explain the history of Garden Fresh Restaurant Corp., where there’s been no shortage of change or long-term growth since Michael Mack and a partner purchased two Souplantation restaurants in 1983.
The company operates a chain of casual dining restaurants that go by the name Souplantation in Southern California and Sweet Tomatoes elsewhere. Mack, the company’s co-founder and CEO, has expanded the company to 109 locations in 15 states during that time (the company doesn’t disclose revenue, but online estimates put it at more than $100 million), but it was not without navigating through a few twists and turns along the way.
In order to sustain growth over a quarter century, Mack’s list of successful change management feats includes guiding the company through an initial public offering and then returning it back to private status.
“At the time, going public was a viable option because it served as a financing vehicle to support growth,” Mack says. “It worked well for the first five years, but we expanded too rapidly, and we compounded our problems by some missteps in pricing and menu selection, and soon, our quarter-over-quarter performance was uneven. At the same time, the public environment changed with the advent of Sarbanes-Oxley. Very few businesses actually function well quarter over quarter, so the next logical move for us was a return to private status, which was a decision that also made our shareholders and board very happy.”
While the road to sustained growth is never straight, Mack insists that CEOs can navigate change successfully, by keeping everyone on the team aligned with the CEO’s goals.
So what’s a guy with an undergraduate degree from Brown University and an MBA from Harvard doing in the salad business?
“Originally, my partner and I got into the restaurant business because we wanted to become entrepreneurs in an industry where the competitive barrier was not technology,” Mack says. “We wanted to be in a business where the competitive advantage came from people.”
It’s important to understand Mack’s motivation because it’s an integral part to his change-management philosophy. Mack says that during his consulting days, he noticed that when leaders failed to guide their organizations successfully through a change process, it was generally because their employees no longer felt aligned with the personal goals of the CEO and the organization’s mission and vision.
Providing clarity in direction and gaining support from employees about proposed changes keeps everyone’s efforts unified toward the goal and prevents uncertainty, which can lead to execution failure.
The scope of Mack’s communications challenge has grown along with the company as it now employs more than 5,000 workers, but his personal goals have not wavered during his tenure. Much of his motivation for change has been to adapt to changing conditions in order to sustain growth.
As an example, Mack says that after expanding to 33 locations, he opted to take Garden Fresh public in 1995. At the time, his goal was to use the public offering as a way to finance expansion. He says that a common misconception shared by employees is that a public offering is the ultimate financial prize sought by founders,and it’s often part of a founder’s exit strategy. In fact, there are numerous restrictions that prevent management from exercising large blocks of stock after going public, and exiting the company wasn’t his plan. So he communicated his goals, intentions and vision for the company with employees and got his team on board with the change.
“As they go through the change process, people will draw strength from knowing that everyone on the team shares the same priorities and reasons for being here,” Mack says. “As the CEO, you should ask yourself a few questions to clarify your intentions before beginning the change process, such as, ‘What is it I personally want from the change, and what are the business goals that will result from the change?’ Then clarify your intentions with the employees. Without clarity of intentions, everyone will just flounder and flop around.”
Then in 2004, after adding 44 additional units in 10 states, Mack engineered Garden Fresh’s return to private status because the company was having difficulty generating revenue and earnings to match Wall Street’s expectations, and the costs and complexities of Sarbanes-Oxley compliance were diverting funds that could be better used for growth. He informed the staff of his decision six months prior to his return-to-private-status goal date, which gave them ample time to ask questions and digest the change.
“The next step is to articulate your plan to the executive team and let them communicate it down through the organization,” Mack says. “Many leaders think once they’ve communicated their intentions, that’s it. In fact, you have to communicate your intentions and goals over a long period of time because if you graph the way people actually jump on board with change, you’d see the adoption rate is actually shaped like a bell curve. Some people get on board right away and contribute to the change process, some come along as they hear more and start to understand, and then at the other extreme, you have the dissenters.”
Mack says he welcomes open dissenters and says it’s important for CEOs to listen to them and understand their concerns because silent dissenters can become plan saboteurs, unless they are heard. And if saboteurs emerge, Mack favors firing them.
As employees gain comfort with the proposed change, Mack’s next step is to move to the planning and implementation stage.
“Once the strategy is set, you move forward and let people know how they’ll contribute toward the change,” Mack says. “To execute change effectively, you have to be clear about the outcomes you want to achieve.”
He says that effective implementation plans are fluid and tweaked along the way because, invariably, CEOs must adapt their plans for unanticipated circumstances. He first sets macro-level business goals with his executive team and then creates microlevel outcome expectations, such as same-store EBITDA growth targets that need to be achieved by managers in the next 12 months. He keeps a pulse on the change process by reviewing his team’s progress toward the specific milestones during weekly executive meetings. Mack says he doesn’t get overly involved with the plan details, unless the implementation course starts to deviate from the main business strategy or the milestone check reveals a lack of progress.
“I’m always involved in decisions involving the critical business profitability drivers like pricing, menus and advertising, but more
often, I’m not involved in all the details, I’m more of a facilitator,” Mack says. “It’s more important to spend time getting clear about where we’re going and be a little less hung up about how we’re going to get there because that’s what creates alignment. I want to make sure what I’m doing is consistent with my values and the values of the organization.”
As an example, Mack says he’s supportive of a restaurant manager’s decision to offer menu items that appeal to local diners, but he says he’d want to know if the manager chose to make a major change from the restaurant’s primary fare, like diverting from salad as the main item on the menu.
Mack’s final change-management lesson is this: Before embarking on any major change initiative, CEOs should ask themselves if they are willing to be accountable, vulnerable and authentic to the people around them no matter the outcome.
“It’s important for CEOs to take accountability no matter what happens because that kind of openness and honesty with the organization creates alignment toward the mission and vision, and no matter how involved you are, on some level, when something goes wrong, you’re responsible,” Mack says. “When you ask yourself what you could have done differently when something doesn’t go well, it’s part of an iterative process that causes you to ask what was the outcome you intended and where it got off track.”
Accordingly, Mack admits to making a few mistakes along the way.
Besides accepting responsibility for the company’s early difficulties with large-scale expansion, Mack says he was the major architect of an ill-fated discount program designed to bring more guests into the restaurants. While guest traffic did increase, only half the goal was achieved because the meal price was too low and the program wasn’t profitable. Afterward, he took responsibility and asked his staff for input about how discount programs might work better going forward.
Creating a culture that embraces change without blame has helped Garden Fresh accelerate growth. After opening a few new locations in 2006 and 2007, the company plans to open nine new restaurants in 2008 and at least four in 2009. The new growth plan is the result of Mack negotiating through even more major changes at Garden Fresh, including the private sale of the company to investment group Sun Capital in 2005 and the creation of a new restaurant prototype in 2006.
An in-house team took on the task of creating a new concept for the restaurants that would reinvigorate expansion by reducing the barriers to entrance and profitability thresholds. The newly configured restaurant will allow more guests to dine in less space and require fewer workers.
“Most of the recommendations came from an in-house team because we’ve created a culture where people see the value in change,” Mack says. “There were no sacred cows. Everything was up for review, including how the restaurant was laid out and the way the food is merchandised.”
Mack says that on occasion, conflict erupted within the group as it debated prospective designs. In this case, he says, conflict was a good thing because there’s benefit in considering numerous options as part of a major change initiative. Ultimately, the team had to justify its creative concepts through financial models, and it also had to weigh customer feedback in making its recommendations.
For Mack, the success of the redesign initiative was indicative of the reasons he initially chose the industry because people, not technology, will dictate the difference between success and failure with the new restaurant model. All in all, that alone is proof-positive that his team remains aligned with his personal goals.
“It always comes down to this: Are we all here for the same reasons, and are we all drawn to the same goals?” Mack says. “It was a passion for people that originally drove me to this business, and creating great returns is all about having the right people doing the right things with the same set of priorities.”
HOW TO REACH: Garden Fresh Restaurant Corp., www.souplantation.com
Acquisitions can be good for business. They provide buyers with immediate revenue growth, new markets and intellectual capital while sellers have the opportunity to be financially rewarded for their efforts. But the deal’s attractiveness can quickly wane when the transaction results in a double layer of taxes for the seller or a lack of step-up in basis for the buyer. Advance planning along with knowledge of the tax implications and possible alternatives are the best ways to make acquisitions advantageous for both parties.
“In some cases, there will be no immediate taxes generated by a tax-free stock exchange or only a capital gains rate may apply, and in other cases, you could be looking at double taxation under an asset sale,” says Gary Curtis, corporate tax partner for Haskell & White LLP. “Since the transaction often puts buyers and sellers at odds, it’s important to have enough time to look at all the alternatives and structure the deal in a way that’s best for everyone.”
Smart Business spoke with Curtis about how to avoid excessive taxation from acquisition transactions.
What determines the tax liabilities in an acquisition?
Usually buyers and sellers benefit from different acquisition transaction structures. In a taxable acquisition transaction, two of the influencing factors include:
- Whether the buyer is purchasing assets versus stock
- The entity structure of the seller
Sellers usually want a stock sale because the gain will be taxed only once at the relatively low capital gains tax rate. Buyers usually prefer an asset sale because they can purchase known assets and liabilities, as opposed to a stock transaction where they take on liabilities for all previous actions of the company, and the ‘step-up’ in basis to fair market value can be depreciated or amortized, which improves cash flow. Generally, the seller offers more warranties and guarantees to offset the unknown liabilities resulting from a stock sale, but they may get a lower sale price, as well.
How does the seller’s legal entity impact taxation?
If the selling company is set up as a C corporation, the principals may be hit by two rounds of taxation during an asset sale: income tax at the corporate level and again at the shareholder level when the proceeds of the sale are distributed. You can avoid double taxation resulting from an asset sale if the selling firm is structured as an S corporation. An S corporation or a business set up as a pass-through entity, such as a limited liability company (LLC), will generally only pay one level of tax, which will be at the capital gains rate. There may be some taxes at ordinary income rates, but these amounts are often insignificant in relation to the overall taxes.
What are the tax alternatives?
S corporations and LLC legal structures produce the least amount of tax liability during acquisition events. So if your company is currently structured as a C corporation, and you plan to keep the company for 10 years or longer before selling it, consider converting to an S corporation status.
A tax-free merger is another alternative. It occurs when one company acquires a controlling interest in the other company in exchange for its stock. The sellers don’t report taxable gain until the new stock is sold. This method is advantageous if the shareholders of the acquired company don’t want to cash out in the near future, but even if the seller wants to receive some cash from the transaction, the merger will still work as long as the seller doesn’t require more than 50 percent of the sale price in cash.
Is a 338 election a viable tax alternative?
Section 338 allows the purchasing corporation to buy the stock of another company and treat the purchase as an asset acquisition under a set of specific conditions. On the surface this sounds favorable, but there are still a few things to consider. While the transaction may not result in double taxation, the seller may still be liable for some additional taxes. While an entity change may be a solution when time allows, there are other potential alternatives to the tax implications resulting from acquisitions. Each situation requires its own unique solution that will work best for both parties.
GARY CURTIS is a corporate tax partner with Haskell & White LLP. Reach him at (949) 450-6311 or firstname.lastname@example.org.
The business case for going green is rapidly growing. Not only is the green movement good news for the environment, but it’s even better news for the bottom line as customers, suppliers and job seekers are showing a clear preference for companies that demonstrate green work-place practices. But the pressure to go green is beginning to migrate beyond the voluntary, as legislators gear up to tackle green building, sustainability and renewable energy issues. These efforts will lead to new policies and new laws. The choice for CEOs might come down to this: Go green and save now or pay later.
“No one knows for sure how far the legislation will go, but I’ve never seen as much momentum behind environmental issues as there is around the issues of going green, climate change and global warming,” says John Lormon, partner and leader of the Environmental, Land Use and Governmental Affairs Practice Group at Procopio, Cory, Hargreaves & Savitch LLP. “There are currently six bills before Congress and another 15 to 20 in front of the California Legislature, many relating to sustainability of the environment, climate change, renewable energy and carbon footprint concerns. Going green is the way to do business.”
Smart Business spoke with Lormon about how companies can meet the green challenge.
What are the benefits of going green?
Going green speaks to our core values as a society, and it is a way for businesses to demonstrate social responsibility through preservation of our natural capital in the way they conduct business. There’s plenty of evidence to show that companies can enhance their brand in the marketplace by employing sustainable practices. Today, recycling and reduced energy consumption and greenhouse gas emissions (GGEs) are part of the green movement in the workplace, but I think we’ll see an even broader definition in the future.
How far will future legislation go?
It’s hard to say how far the penalties and reporting requirements will go or what might be just encouraged behavior through incentives or mandated by law, but already we’re seeing some impact from recently adopted legislation. A city of San Diego recycling ordinance that took effect in January of this year imposes sanctions including criminal penalties for non-compliance, and new building construction and tenant build-outs are being impacted by Leadership in Energy and Environmental Design (LEED) standards as well as the U.S. Green Building Council’s benchmarks for building design, construction and operation.
California’s landmark Global Warming Solutions Act of 2006 (AB 32) is a comprehensive program of regulatory and market mechanisms to achieve 1990 GGE levels by 2020 starting in 2012. The California Environmental Quality Act (CEQA), which requires public decision makers to submit documentation of a project’s potential environmental impact, will soon require an assessment of GGE. Companies may face third-party lawsuits related to their emissions, and companies will have to report to the investors if material financial liabilities arise out of GGEs.
How should companies prepare for the new legislation?
Be sure to keep good records, especially concerning voluntary and mandatory emission reductions, since you might need that data for compliance and defense purposes under these new laws and regulations. Look at everything you can do to reduce GGE, including the possibility of buying more local products so they do not cause excess impact to the environment when they are transported. You want to identify your company’s carbon footprint as soon as possible to establish a baseline, then initiate and document your efforts to use renewable energy and to reduce and offset your emissions. Try to use renewable energy sources, such as solar or wind energy, and consider acquisition of carbon cap and trade credits. I think CEOs will benefit greatly if they take steps not just to protect their business but to enhance it by developing a green strategic plan.
What other steps can CEOs take?
CEOs can take on a leadership position in the community by gaining a better understanding of the issues. When making purchasing decisions, look at the carbon life cycle of the products that the company purchases. Recycle, allow your employees to telecommute, and develop and follow a green plan that sends a signal to your customers and employees that your company is taking steps to minimize the depletion of our natural capital and to make for a more sustainable planet.
Here in San Diego, working through Scripps Institution of Oceanography, I started a Climate Club, and we meet for informal dinners where local business leaders can connect with Scripps scientists in an interactive forum to better understand the state of the science concerning GGE and their impact on global warming. A program such as this is an excellent way for CEOs to develop strategic thinking about what is best for their corporate programs.
JOHN J. LORMON is a partner and leader of the Environmental, Land Use and Governmental Affairs Practice Group at Procopio, Cory, Hargreaves and Savitch LLP. Reach him at email@example.com or (619) 515-3217.