Los Angeles (1224)

Monday, 26 January 2009 19:00

Consistent communication

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As chairman and president of Broadcore Inc., a 70-employee telecommunications firm, you’d expect Monty Ferdowsi to be fixated on communication.

And although Ferdowsi says his fixation is not only because Broadcore is in the communications business but also because he believes that communication is the cornerstone to making sure his employees know what to do and how he expects them to do it.

“A leader should continually share the passion and energy with his or her employees and execute on their day-to-day tasks to help reach their goals and the vision,” he says.

Smart Business spoke with Ferdowsi about how to articulate your vision for maximum buy-in and how to make sure no one loses sight of the big picture.

Q. How do you develop a vision?

An effective leader must provide a clear vision of the future for the company and get strong buyin from all the employees on the value of the products and services the company is providing.

But the vision does not just come. It begins to articulate a direction where the company should move to by understanding what customers and clients value. That gets reverse-engineered into what people value, understanding the technology that leads to the products and what those products have value on.

(You should) have articulated that well in advance so that becomes the vision of a leader in the company. The products and services that people value reverse-engineer into what needs to be done in today’s time to be able to have the company move forward.

A great leader articulates the vision and will continuously have that vision in his mind and will continuously do things that will lead to the success of the vision, definitely not thinking short term, to personal interests or doing things that are easy and fun. Instead, leaders must continuously think about the long-term vision. If the leaders can continue to keep that vision clear in their heads, it’s easy to not do fun or easy things short term that get in the way of getting into those pitfalls.

Q. How can a leader share the vision with employees?

By communicating the vision continuously so the employees get the message. The vision may be crystal clear for the leader. He may say it once, and the employees may say, ‘OK, I’ve got it.’ But then they go home and they have a burger and forget about it.

So the passion that a leader has for that vision has to be continuously communicated. There must be continuous reinforcement.

A lot of companies with good products have a great vision, but they articulate it once, put it on their Web site, and it’s gone. People forget about it. And if employees forget about it, eventually everybody forgets about the vision. The leaders who have articulated it understand the vision much better than anybody else, so they have to continuously communicate that to the rest of the team.

Q. How do you reinforce your message?

In the form of meetings: group meetings, staff meetings, leadership/management meetings. It is communication in different forms. Most of it has to come in the form of face to face. But some of it can be collateral that we’ve built, like when we go to the customer and say, ‘Hey, look at this great brochure and our great services.’

But at the company level, you can’t just create a brochure and give it to folks here. It has to be one on one so they feel the message, and it has to be continuous so they won’t forget about it.

Q. What are the keys to making sure your communications are successful?

The short, one-word answer to your question is ‘listening.’ First, hear out your clients to hear what they really want. Then, listen to your employees to hear what they learn from clients and also to find out what they want from the organization and understand their point of view. They are the most important stakeholder in the success of the organization: clients and employees. Continuously listening to them is a better form of successful communications than continuously telling them.

Executing on what’s important is rather easy, but if you tell people and they don’t execute and they don’t understand, it can be difficult.

Q. How do you get employees to understand and buy in to the vision?

By developing a culture that is focused on customer first and providing a valuable product and service. Tell them, ‘You’ve got a truly valuable product and service that customers value, and if you provide that service, we’re going to be successful.’

The culture has to be customers come in first, and we have to have valuable product that customers would want. ... By developing a culture that is customer-first, then additionally providing a valuable product and service, the buy-in from employees is rather easy.

HOW TO REACH: Broadcore Inc., (800) 942-4700 or www.broadcore.com

Friday, 26 December 2008 19:00

The power within

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The days are long past that energy was so cheap you could afford to waste it. Now, financial and environmental concerns have made saving energy a priority for every business. When done right, you can expect to achieve a savings of 20 to 30 percent off your current monthly utility bill, with minimal investment.

Getting started on saving can be as simple as making employees aware that energy efficiency is a priority for your company. Employees who regularly turn off lights and computers at home don’t bring that same mindset to work. By recruiting employees to help manage your company’s energy usage, you can start to save money.

Sixty-six percent of readers surveyed by Smart Business say they expect energy costs to continually increase over the next 12 to 18 months. Full dedication to efficiency is necessary to maximize savings, as energy authorities say halfhearted efforts get similar results.

“Energy efficiency is a mindset,” says Hal Snyder, vice president of customer programs, Southern California Gas Co. and San Diego Gas & Electric. “Being energy-efficient is important to the community you serve and helps your ‘triple bottom line,’ — people, infrastructure and company.”

Why managing energy use is important

Energy efficiency is a prime example of what you don’t know can hurt you. Few people are aware that energy-efficient business desktop computers are available that cost about $10 a year to operate and are about 75 percent more efficient than typical PCs. Installing certain models of smart thermostats allows you to program them wirelessly through the Internet, allowing for temperature adjustments without physically being at the facility. Also, new smart electric meters translate energy wattage use into dollars and allow you to track energy use online.

“Companies struggle with the return analogies,” says Scott Lyle, senior vice president of operations, Arden Realty Inc. “Get started with the low-hanging fruit, tackle the easy-to-fix energy issues and build from that.”

ENERGY STAR, an Environmental Protection Agency and U.S. Department of Energy program, along with your utility provider and local city hall can help you reduce energy waste by providing regional energy-efficiency tips, financial incentives and energy audits of facilities.

ENERGY STAR endorses more than 50 types of products, which are identifiable by a label that indicates the amount of energy it will require during average use and will tell you the savings you can expect by choosing that product over products that aren’t approved by the ENERGY STAR program. Purchasing the proper equipment and carrying out good habits will reduce your energy expenses exponentially. For example, you will use 30 to 35 percent less energy using an ENERGY STAR battery charger or power adapter over conventional products.

By changing purchasing habits and being more cautious of efficient equipment operation, you’ll immediately reduce your energy bill. By purchasing ENERGY STAR-qualified products, you’ll use about half the amount of electricity that would be used without the efficient product. For example, when a computer is placed in sleep mode, it uses 75 percent less energy and a copier uses 40 percent less energy.

Most businesses use 25 percent of their energy on lighting. Compact fluorescent bulbs last longer than traditional bulbs and use 75 percent less energy. Even if it means renovating your entire lighting system, you’ll see a return on your investment in anywhere from five months to three years.

“Perception of energy efficiency holds more businesses back from pursuing plans,” says Glen Mounts, certified engineering operations executive, Marriott Hotel. “In the early days of energy-use awareness, the use of compact fluorescents didn’t perform as well as expected. Compact fluorescents have come a long way since then and is having to prove its worth again.”

What you need to know

Performing an energy audit of your business is the first step. This is often performed for free or at a minimal cost through your utility provider. In this audit, you’ll learn what areas of your business are using the most energy. You’ll then be able to work on a strategy to reduce waste.

By visiting the ENERGY STAR Web site at www.energystar.gov, you can compare your company’s energy use to similarly sized companies within your industry and region.

“Everything that consumes power needs to be looked at for efficiency and is monitored by your utility provider,” Lyle says. “ENERGY STAR is accessible online and provides tips and can direct you to organizations that provide rebates.”

After your energy audit, you’ll need to strategize a plan of action and goals, and then formally deliver the message to employees.

“Every two to three years, technology makes itself more efficient,” Lyle says. “Think about that and consider the age of the equipment you’re using. After you’re aware of all available finances and what requires capital to fix, start setting goals and benchmarks. Document progress and hurdles in your energy plan.”

Assigning an employee to manage energy initiatives and communicate them to the staff will help keep everyone involved and informed about the process. You may want to take things a step further and provide training to employees that can explain operating methods and procedures to reduce energy use, along with ways to monitor and report collected data. ENERGY STAR provides free online training sessions for employees and is a good place to start.

“Get as many people involved as possible,” Mounts says. “Educate them with energy-minded staffers or use online and utility provider tips to back ideas up with actionable steps.”

If you’ve ever thought about improving your company’s energy efficiency, now is a great time to get started.

“It’s a great time to jump aboard the energy-efficiency train,” Lyle says. “There’s money being offered for you to basically help yourself save more. Educating employees is a big part of the process. While every employee may not touch the process, they will need to be behind the mandate.”

When establishing a project timeline, consider attainable energy grants, rebates and tax breaks weighed against necessary operational changes to accomplish goals. Once you know what you need to change to be more efficient and what finances you have available, you’ll be able to better chart progress and predict the time frame for the return on your investment.

“Social consciousness is greater now than ever,” Snyder says. “Wearing a tie-dye shirt doesn’t cut it. You’ve got to be more aggressive and be open to free information, which will save your business money, while making wise environmental decisions.”

Friday, 26 December 2008 19:00

The Royo file

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Born: Spain

Education: AM, MBA and Ph.D. from Harvard University

What was your very first job?

My father worked for IBM in Spain his whole life, and IBM used to have these big exhibits in Madrid, Spain, and they needed somebody to demonstrate the PC. This was the early days of the PC, they needed someone to demonstrate the new capabilities of the first generation, and I’ve always been a geek at heart, and my father asked me — I was 14 — if I wanted to do that for the better part of the summer. I got to make a little bit of money in what I was doing, and it was a good realization that a lot of people are interested in this stuff.

Whom do you admire most in business and why?

The easy answers are the Steve Jobs and the Bill Gates of this world, but I find myself more following a person like what I understand (late Disney President and COO) Frank Wells was like. A person behind the scenes without getting or clamoring for any glory — and here I am talking to the press. Just make sure the trains get there on time, and the real focus is on execution and doing the right thing by our customers and employees.

What is the best business advice you’ve ever received?

I had a professor at Harvard business school, his name was Ed Schau, who actually used to be a congressman from Silicon Valley, who told me, always focus on the long-term and make sure that you’re leaving behind some footprints. And I know that sounds hokey, but it’s about doing the right thing.

If you could be one superhero, who would you be and why?

It would be Spider-Man because my 4-year-old daughter is madly in love with him, and I would make her the happiest child in the world.

NASDAQ Ticker: ASCMA

Tuesday, 25 November 2008 19:00

3 Questions

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Toni Corsanico has worked as a travel manager at Westinghouse Lighting Corp. for 15 years. By organizing the travel needs of the company’s 2,500 employees, she can better police company spending by employees. Using vendors, publishing an annual travel policy and detailing price caps on all facets of travel, she tracks where the business’s travel dollars go.

Q. Is a travel policy important for companies of all sizes?

Yes. Companies want to save money regardless of their size, and a travel policy is key in that formula. Having a travel policy means your company has a plan that will allow them to predict the company’s future needs based on the reports and adjust that to economic changes within or outside of the company. The annually updated policy is a playbook that forecasts travel for upcoming trips, which should be validated on a case-by-case basis depending on how beneficial it is to the company.

Q. What types of problems can arise within a company that can affect the travel budget?

If a company is experiencing difficult economic times — aside from the economy and events that affect every business, they may need to lay off employees depending on the magnitude of the issue. Steps taken before more drastic measures can include altering budgets, such as travel. We have cut back on intra-company travel significantly and put the bulk of our travel dollars toward traveling to meet the needs of our customers. We still needed to meet with employees in other states, but that travel wasn’t in the budget so we utilized videoconferencing, which is very effective for several reasons. With videoconferencing, you can save money on air travel and food, meet with more people at once, stay in the comfort of your own office, and bypass the lines and delays. You’re not trying to impress co-workers or prove dedication to service like you are with clients. Videoconferencing and teleconferencing works 99 percent of the time.

Q. What are companies’ biggest concerns with travel?

The first concern when there is a problem and before there’s a problem is the cost. Budgets fall apart, and everything becomes unhinged. There are lots of things that can go wrong with travel. Overstepping your budget unnecessarily isn’t one of them.

Tuesday, 25 November 2008 19:00

Take a break

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The American Jobs Creation Act, signed into law in 2004, includes a tax benefit for certain domestic production activities. Designed to aid small U.S. manufacturers that are engaged in domestic production, the tax deduction can benefit a wide swath of businesses ranging from software firms to construction companies.

“The legislation enhances the ability of certain domestic businesses to compete in the global marketplace,” says Valerie Colin, senior vice president of Gumbiner Savett Inc.

Smart Business spoke with Colin about the domestic production activities deduction and how to take advantage of the tax credit.

What is the domestic production activities deduction?

An eligible taxpayer is allowed a deduction for tax years beginning in 2005 or 2006 equal to 3 percent of the lesser of the taxpayer’s qualified production activities income for the tax year or the taxpayer’s taxable income (adjusted gross income in the case of an individual). The deduction increases to 6 percent for tax years beginning in 2007, 2008 and 2009 and to 9 percent for tax years beginning after 2009. The deduction is subject to a 50 percent wage limitation. Every business in the manufacturing industry should be looking at this as a tax deduction.

Why was this tax deduction adopted?

This legislation was a part of the American Jobs Creation Act of 2004, which enacted IRC section 199, a new tax deduction, related to domestic production activities. The legislation replaced the export tax benefit that was ruled inconsistent with U.S. obligations under various international trade agreements. It is available to all U.S. taxpayers that qualify whether their sales are domestic or foreign because the deduction, for the most part, is based on where the goods and services are produced rather than sold. The legislation repeals the Extraterritorial Income regime effective for transactions after Dec. 31, 2004, with certain transition rules.

What activities qualify for the deduction?

The tax deduction targets manufacturing and production activities within the United States. It incorporates a very broad definition of manufacturing. The act extends the definition of manufacturing and production to benefit handlers of agricultural products, software companies, film production, construction companies, engineering firms, architectural firms, and electric, gas and water companies — in addition to typical product manufacturers.

How is qualified production activities income calculated?

Qualified production activities income (QPAI) is an amount equal to the excess (if any) of the taxpayer’s domestic production gross receipts (DPGR) over the sum of: (1) The cost of goods sold (CGS) allocable to such receipts and (2) other expenses, losses or deductions, other than the domestic production activities deduction, that are properly allocable to such receipts.

For a business with only one line of business, QPAI will be the same as gross income, CGS will be the same as total cost of goods sold and other expenses will be the same as total expenses. For businesses with multiple lines of business, these amounts will need to be allocated.

In what ways has Congress eased the burden of calculations for small manufacturers?

There are a couple of simplified formulas that smaller taxpayers may use. There is something called a ‘simplified deduction method’ to allocate and apportion deductions between DPGR and non-DPGR, assuming some of your product is imported or produced overseas or you have multiple lines of businesses, some of which qualify and some of which do not. This is available to taxpayers with average annual gross receipts of $25 million or less. The average is based on the three taxable years prior to the current year.

In addition, there is a ‘small business simplified overall method’ to allocate the CGS and deductions based on relative gross receipts. These further simplified computations are available to those with average annual gross receipts of $5 million or less.

How can a business best take advantage of the credit?

If a company is a widget manufacturer producing all if its goods in the U.S., it’s very simple. For 2008, assuming there’s a profit, the deduction would be 6 percent of the net income before the deduction. Simply put, if the net income before the deduction were $100,000, the deduction would be $6,000, therefore, the taxable income would only be $94,000. In this example, the total wages would also need to exceed $12,000 since the deduction is limited to 50 percent of wages. The deduction requires information to be reported on Form 8903. When a company has several different types of activities, some of which involve U.S. manufacturing, some outside the U.S., etc., it is best to consult with your CPA.

Once you understand the ins and outs of what qualifies and how the allocation formulas work, you may be able to restructure some of your operations or materials purchases to maximize the deduction by increasing the percentages of domestic activities. The more complicated the business, the more likely some additional cost accounting mechanisms may need to be implemented to capture the most deductions.

VALERIE COLIN is senior vice president of Gumbiner Savett Inc. Reach her at (310) 828-9798 or vcolin@gscpa.com.

Sunday, 26 October 2008 20:00

3 Questions

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As strategy director for iCrossing, Rob Garner creates search marketing strategies for clients throughout the U.S. and Europe. Robdevelops high-ranking campaigns for competitive terms, monitors trademarks and brands in organic and paid search, works withmedia teams to integrate search into media plans and provides search engine marketing and design training to clients. He has been aspeaker at many industry conferences, including ad:tech, SIS, SES, Search Engine Watch LIVE, Rackspace Customer Event and theVeriSign Executive Conference. Additionally, he writes a bimonthly column for MediaPost Publications’ Search Insider that providesinsight into search campaign management experience and best practices.

Q. What are the main concerns of companies contacting you for search engine optimization needs?

Many companies seek SEO and paid search services for direct-response-type initiatives or lead-based campaigns. Many other clientssimply want to generate qualified traffic to their sites or use search for branding. One increasing trend involves clients who use searchfor reputation management and other public-relations-related functions.

Q. What figure can a client expect as a return using SEO?

It’s not uncommon to see a minimum of 10 times return on their investment. Considering that natural search benefits typically lastmuch longer than one year, the returns go much higher. The most successful clients have also carefully determined a value on variousactions throughout their Web sites, implement regularly and track conversions to great detail.

Q. How can SEO fuel growth?

SEO can fuel growth by creating qualified visibility and brand trust in keyword spaces that might not have otherwise been found. Arecent Google study showed that companies found in paid and natural search areas had lift across multiple branding metrics, includingincreased awareness and affinity. Searchers trust their search engine brand, and the impact of being found at No. 1 for an importantkeyword in the natural search results is almost priceless in terms of building credibility. By also measuring direct response and lead-based results from SEO, it’s often easiest to make a business case for reinvesting in the channel. The benefits from a direct responseand branding level are tremendous and natural search should be at the top of all marketing priorities.

Sunday, 26 October 2008 20:00

A taxing decision

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One of the most important decisions a new business will make is selecting an appropriate tax entity. The form of tax entity that is chosen will have a major impact on future outlays to Uncle Sam.

Because all types of tax entities contain business-related flexibilities and restrictions it pays off in the long run to seek help from qualified advisers upfront.

“It is paramount to seek professional advice from competent advisers in structuring a business,” says David Thaw, vice president of Gumbiner Savett. “The cost of these services is often insignificant compared to the benefits and savings that can be derived from choosing the right entity form.”

Smart Business spoke with Thaw about the importance of properly structuring one’s business, how tax structures of various entities differ and the dangers of operating under the wrong tax entity.

What factors should be considered when choosing a tax entity?

One of the first decisions a start-up needs to make is the form of the business — whether or not to incorporate, organize as a Limited Liability Company (LLC) or a partnership. The selection of the proper form of business requires balancing tax and business considerations. From a business perspective, ownership and management structure and liability protection are key factors in choosing the type of entity for doing business. Additionally, consideration must be given to each stage of the entity life cycle: formation, operation and exit. From a tax perspective, an important factor is whether business profits or losses will be taxed directly at the entity or owner level. Another salient factor is whether the economic arrangement between owners allows for the efficient sharing of profits and losses. Other issues include exit and/or succession strategy, state and local taxation, movement of assets, and compensation and benefits.

What are the advantages and disadvantages of incorporation as a C corporation?

From a tax perspective, an advantage of the C corporation form is that the corporation can issue various classes of stock conferring different ownership and economic rights onto its owners, and there are no restrictions on the number and type of shareholders. The financial flexibility and well-understood legal body of law surrounding the corporation may result in a broader array of investors compared to other entities when the company seeks capital.

Another advantage is that the corporation and its owners can participate in tax-free reorganizations with other corporations and/or owners. A possible disadvantage of being taxed as a C corporation is ‘double taxation.’ That is, profits are subject to a corporate-level tax and subject to an additional level of tax at the owner level when the corporate profits are distributed.

How do the tax structures of C corporations, S corporations and partnerships (LLCs) differ?

As mentioned previously, a C corporation is subject to double taxation and allows for multiple ownership classes. Since the C corporation is a taxpayer, however, losses can be trapped at the corporate level and are therefore unavailable to reduce the owner’s current tax liability. Also, a C corporation allows for different types of owners (i.e., exempt organizations and foreign taxpayers).

An S corporation generally does not pay federal taxes at the entity level, rather, its profits and losses are reported on the shareholder’s tax returns. An S corporation, however, may be subject to corporate-level state and local franchise or income taxes, typically imposed at reduced rates. The ability to pass through profits and losses may be quite attractive compared to the C corporation. The S corporation, in contrast to the C corporation, is faced with restrictions upon the number and type of shareholders. Additionally, the S corporation can only have one class of stock outstanding, which may limit profit and loss sharing arrangements.

A partnership or LLC taxed as a partnership does not pay federal income tax. Some states do impose taxes upon partnerships or LLCs. Like the S corporation, partnership profits and losses are reported on the partners’ tax returns. Similar to the C corporation, there is no limit or restriction on the number or type of partners. Furthermore, a partnership offers flexibility in the allocation of profits and losses.

What type of entity is most effective when transferring a business to family members or key employees?

One way to transfer a business interest to a family member or a key employee is through the use of a Family Limited Partnership. The formation of such entities can provide significant advantages and planning opportunities in reducing estate taxes, facilitating family succession and protecting assets.

DAVID THAW is vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or dthaw@gscpa.com.

David Thaw
Vice president
Gumbiner Savett Inc.
Thursday, 25 September 2008 20:00

Star search

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Finding a good executive can be like finding a needle in a haystack.

Just ask Caroline W. Nahas, managing director of Korn/Ferry International’s Southern California office.

“The best executives — people who can really make a difference — are tough to find,” says Nahas, whose office posted 2007 revenue of $23.2 million.

But that doesn’t mean the task is impossible.

While managing the 60 employees at the executive recruitment firm’s Southern California office, Nahas has picked up a few helpful tricks, including expanding your initial search outside of your industry to others that yield the kind of executives you’re interested in.

Smart Business spoke with Nahas about how to gain clarity about the position you’re trying to fill and how to approach an outstanding potential candidate.

Q. What should every executive know before trying to recruit someone to his or her leadership team?

First, they need to have clarity about the role for which they’re recruiting, both in terms of the content of the role but also the expectations for that role and the person fulfilling it.

Secondarily, they need to be prepared to give a scenario analysis in an honest way of why the opening exists and what the potential is given outstanding performance for the future.

Q. How do you gain that clarity about the role?

A healthy exercise, whether you’re using a search firm or not, is to actually sit down and document the responsibilities and the context of the position: The position is responsible for X, peer positions would be X, Y, and the position reports to the CEO.

So again, they know what the role is, but also what is the role in the context of the whole company and how does it fit? And then a description of the actual content of the role from the standpoint of the metrics: How large is it? Is it a transforming role?

Think about the role and responsibilities and the context in which it’s positioned. The next part would be what are the requirements needed in terms of a profile of an individual. What skills does a person have to bring to be successful in this role?

Q. How does gaining that clarity help an executive fill a role?

It just makes you cogent about what you’re discussing and projecting out to the marketplace. If you thought, ‘It’s just like everything else,’ once you document and you really think about something, then you’re able to better articulate that to individuals with whom you’re meeting.

It also really forces you to really sit down and say, ‘What is really most important here, and what are we really trying to accomplish?’ Lastly, whatever we’re trying to accomplish, ‘How does that help form the kind of person we’re seeking?’

You can also use those documents as a marketing tool to potential candidates. If someone is interested in the opportunity, then you can send it to that person and say, ‘Here is a description of the company. Here’s a description of the business that we’re discussing. Here’s a description of the role. Here are the criteria that we think are critical for this person’s success.’

Q. How do you approach a potential candidate?

I would get as much information about them as possible so that you’re armed. You may not project that information to them immediately, but you’re armed with the information to kind of shape the conversation you have initially with them.

I would call them up directly and say, ‘I have heard outstanding things about you. I know you have had an outstanding career at X company, but we have something pretty special here. I’m the CEO of this company. I would love to just get to know you.’

Get them into a conversation or a meeting, and take it from there.

Q. Once you get their attention, how do you gauge chemistry between potential hires and existing staff?

One is to do the interview and have some behavioral questions to ask that would indicate what kinds of cultures in which the person has been most successful: ‘Give me an example of where you ended up being completely wrong on a decision, and what you communicated to your staff regarding that decision.’ Do those cultures match up with who you are as a culture?

Two is to do extensive referencing. Ask the people with whom you’re referencing to not just describe the person but to describe the culture in which they were operating without giving them any leads. Have the person describe the culture and ask probing questions about that culture. See if you see any matches or some hot buttons.

The third is to do a psychological assessment.

None of these things are the deciding factor alone. All combined, do you see any trends either on the positive that match up, or do you see any hot spots that could be problematic that might not surface necessarily in an interview.

HOW TO REACH: Korn/Ferry International, Southern California office, (310) 552-1834 or www.kornferry.com

Tuesday, 26 August 2008 20:00

Economic outlook

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Hampered by a steady rise in energy prices, a downturn in the housing market and woes in the credit market, the U.S. economy has been sluggish throughout the first half of 2008. The good news, however, is that despite this confluence of negative economic indicators, the economy has shown growth.

“The U.S. economy has been remarkably resilient,” says Dana Johnson, Comerica Bank’s chief economist. “It has grown nearly 1.5 percent at an annual rate over the first half of the year, despite a rise in energy prices, a fall in housing prices and a consistently disturbed credit market.”

Smart Business spoke with Johnson about his economic outlook for the coming months.

What is your economic forecast for the remainder of 2008 and moving into 2009?

The second half of 2008 is going to look a lot like the first half where growth averaged about 1 percent on an annual rate. As we move into 2009, I see the economy accelerating gradually. Six months from now I think the problems with the credit market will be less intense and the credit crunch will be less evident. I also think by the time we reach the end of the year we will have seen a partial reversal in the runup of energy prices — particularly crude oil and gasoline.

We’re beginning to see more evidence that the plunge in building activity is beginning to slow and perhaps the bottoming-out process is underway. The drag from home building is going to become smaller as we move through the second half of the year into 2009. Finally, I think we’re going to continue getting good support to the economy from a narrowing of our trade deficit in real terms. The weakness in the dollar has been underway for about six years and decent growth abroad helps the trade deficit continue to be a source of support for the U.S. economy.

Do you anticipate continued turmoil in the financial and housing markets?

In the near term I certainly do. There are still tremendous concerns about the size of the losses that may result from further defaults, and there is no sign yet of a peak in default rates in mortgages. Until we see clearer evidence that the home price declines are beginning to subside, there is going to be a lot of concern about the condition of financial institutions that, in one way or another, are exposed to the housing market.

California has relied heavily on the subprime mortgage market. What impact will this have on housing prices in the state going forward?

House prices have already declined quite sharply, particularly since last fall, when the credit crunch cut off the flow of new jumbo and subprime mortgages. The decline in home prices has been sharper in California than in most other parts of the country. Over the next year, California home prices are probably going to under-perform against the national average by 10 percent. We are seeing a much more rapid adjustment in home prices in California in this episode than we did in the first half of the ’90s. In the past, adjustments have taken quite awhile, but this one is progressing quite quickly.

Do you expect oil prices to continue rising?

I have given up believing that I can forecast the near-term movements. I do believe that we have been in an overshoot episode. I also believe that any retracement in energy prices is likely to be quite modest compared to the run-up we've experienced over the past six years.

How will this impact the economy as a whole?

The spike in energy prices has created tremendous hardships for any heavy user of petroleum-based products. Overall, the energy price increases have created a drag equal to about $100 billion this year as compared to last year. This figure matches the order of magnitude of tax rebates that people have received. Without the tax rebates there would have been a much more visible impact of the run-up of energy prices on the economy.

One of the bright spots in the current U.S. economy is exporting. Do you expect this trend to continue?

Yes, I do. The dollar has been going sideways since March. It’s beginning to stabilize and when the Fed starts tightening, which I expect to happen sometime next year, I wouldn’t be surprised if the dollar begins to firm a bit. The dollar is very low compared to what it was a year ago, or six years ago, and is creating a good, competitive position for anybody producing goods and services in the U.S. and trying to sell them abroad. Growth abroad has slowed, but not as sharply as it has in the U.S. The combination of growing incomes abroad and the low value of the dollar signals that we will continue to see good growth in our exports in the coming six to 12 months.

DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 462-6839 or djohnson@comerica.com.

Tuesday, 26 August 2008 20:00

The Goldston file

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Born: Chicago

What was your very first job?

I was an assistant brand manager for Johnson & Johnson on the Tylenol brand.

Education: Degree in marketing and finance, The Ohio State University; MBA, J.L. Kellogg School at Northwestern University

Whom do you admire most in business and why?

I admire people who do things the right way and are innovators while they’re doing it. I have huge respect for innovators. I have 13 patents. I’m an inventor, as well, so I’m very focused on innovation and marketing. I invented pump sneakers (while the chief marketing officer of Reebok International Ltd.) and light-up shoes (as president and chief operating officer of L.A. Gear); that’s what I’m all about, and I admire people who are innovative and who do it the right way.

More Goldston: Goldston is the author of the 1992 book ‘The Turnaround Prescription.’

If you could be one superhero, who would you be and why?

I would be Superman because for most of his everyday life he melds into society and is seen as an upstanding, functioning part of society. When trouble occurs, his major goal is to go in there and solve the problem and put people on better footing, and I think there’s something to that. People don’t have to know that Superman is Superman every single day unless something presents itself that requires someone to come in and perform in that Superman fashion.

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