In an economy in which profits are hard to come by, survival is not a given and there is extreme social unrest, business ethics is an issue of global importance. And there’s no reason to risk losing your company’s profits, your own personal assets or, potentially, your freedom by not being informed or by making faulty decisions.
Bette Walters, adjunct professor at Delaware Valley College, says that businesses are in a period of massive upheaval, and business owners need to take a fresh look at their ethics as they struggle to survive.
“There are a host of roles and responsibilities attributed to business now that historically haven’t been there,” Walters says. “How are you supposed to reconcile these new expectations and requirements with your basic obligation to make a profit?”
Smart Business spoke with Walters about how ethical missteps can doom you and how education can help you avoid making critical mistakes.
What are the big global business ethics issues that are affecting businesses today?
The No. 1 issue is loss of trust. To paraphrase Ben Franklin, ‘Glass, china and reputation are easily cracked and never well mended.’
Fraud, malfeasance and a lack of professionalism have broken trust in business, governments and institutions on a global scale. People around the world are pulling back from spending and investing. They’re angry and confused and want someone to blame. Governments are struggling to address basic human needs, stabilize the financial system, punish wrongdoing and establish new standards. Businesses are struggling with the right course of action — for example, do you outsource, or bring some jobs back to the U.S.A.? What if you have a headquarters in Michigan but make most of your profits in Europe? There are no simple answers.
The underlying causes of the current global economic crisis are complex, and they won’t be remedied by hasty legislation and throwing money at solutions — there will not be a quick fix.
How are those issues changing the way businesses are run?
Corporate compliance, governance and risk are high on the agenda. Some key concerns include determining what constitutes compliance, when and how do you conduct investigations, how do you train your employees, how do you police activities, who should govern and how, what are the risks of a business — not just traditional economic and political risks but social risks — and what is the social responsibility of the enterprise?
The federal government and shareholders are getting deeply involved in the pay structure of many corporate executives. The U.S. government has issued sweeping proposed regulatory reforms imposing new rules on how corporations are run.
Roles and responsibilities are in a state of flux. Businesses must not be paralyzed by fear or pretend they are not undergoing a time of great social unrest. Change is going to happen. The question is whether business will be ahead of the curve — and influencing the outcome.
How can educators get students to consider the implications of global business ethics?
Educators should include ethical considerations in everything they teach. They can explore the costs of both impropriety and the appearance of impropriety — and how those costs can act as a deterrent. Tracing history and relating it to the issue curve (societal pressure builds — you get action at the apex of the curve and compliance thereafter) helps students understand that business must be alert to the world around it and operate within ethical bounds.
On the positive side, focus on how you can use ethics to enhance your brand for both customers and employees. Why waste your efforts generating profits by ignoring society’s needs and expectations and inviting ruin? Use the issues to foster innovation and create a sustainable business.
What are some mistakes that businesses make?
Examining cases involving short-term thinking in the interest of immediate gains, not taking the time to understand how the underlying subprime mortgage investments were structured, not studying the numbers, ignoring questionable practices, not considering intended and unintended consequences of legislation and regulations, and disregarding laws. Businesses need to be aware that actions have real consequences and frame discussions regarding what we need to do to establish a better framework for decision-making. Whether it is how you treat employees or how you set up your reserves, there are many choices to be made; the question is, how to do make the best choices?
What can be done to rectify the situation?
The business needs to apply its skills, consider why and how bad behavior has occurred, and what needs to be done to restore prosperity and faith in free enterprise. As we work toward a new standard of best practices, a business needs to actively participate if it wants a result that accurately reflects a profit motive and legitimate business needs.
How can executive education help?
Executive education helps educators understand the needs of business and helps executives identify the trends, risks and opportunities arising out of the current global business environment. Working on oral presentation skills, developing sensitivity to issues and the environment of business, considering what is happening among the regulatory community, and learning how to work with stakeholders to maximize your opportunities for success and to minimize your risks all go toward creating a sustainable business model. An ethical framework and strong corporate culture are essential to survival. Education can help you learn how to deliver the hard no.
Bette Walters is an adjunct professor at Delaware Valley College. Reach her at email@example.com.
A year ago, as the nation’s economic backslide began to pick up speed, AmeriQuest Transportation Services was a company that had just about everything in order. The provider of fleet management services, which generated $500 million in sales last year, was nearly on pace to meet its sales plan.
“We were just a little behind our plan, and we were also building some new products and offerings,” says Doug Clark, the company’s founder, president and CEO.
Taken at face value, AmeriQuest seemed to be positioned well for an economic downturn. But when Clark reviewed the company’s strategy with his management team, they became concerned that they were looking at the future with a magnifying glass instead of binoculars. Short-term gains would mean nothing if the long-term health of the company wasn’t secure.
Clark and his team soon found themselves at a crossroads.
“The question we had as a team was whether we should continue to invest in these products and offerings, or do we stop and therefore (affect) our ability to make plan,” Clark says. “In the end, everybody took the long view, and we came to a consensus that we should be investing in the people necessary to make our company have better offerings and more strategic offerings.”
The decision to focus on long-term goals ultimately cost AmeriQuest a chance to make plan. But as the calendar pages turned, it became clear to Clark that the long-term move was the right move.
“Our team took the long view, they were hurt in the short term because they did not make plan and our bonuses weren’t what they usually are,” he says. “But it was absolutely the correct thing to do, because we started to reap the benefits in the first quarter of this year. Everybody hung in there, did more with less and kept their eyes on that long view.”
Over the past year, Clark’s challenge has been to maintain that long-range view and build it into the culture at AmeriQuest, while maintaining a realistic outlook for his employees as the daily news reports continue to bombard everyone with economic horror stories.
Build a sturdy stool
The culture at AmeriQuest is supported by a four-legged stool: transparency, collaboration, trust and confidence. They’re four principles you need to cement in the minds of your people during prosperous times, so that they’ll have the right mindset during trying times.
“Transparency and collaboration build trust among the working group, and through those three endeavors, everybody has a high degree of confidence,” Clark says. “With that resulting confidence, you will come into work with the attitude that we will persevere and we will win.”
Construction of that organizational stool needs to begin in your office, with the help of your management team. You need to decide how you want to communicate and also model the values that you want your employees to embrace.
“You have to start at the top,” Clark says. “I’d like to believe that the people who work with me in this organization truly believe that there are no hidden agendas, that there is nothing being kept from them and we are transparent. Ultimately, the culture is embedded by doing what you say you are going to do, and that keeps filtering down through the organization. The management team builds collaboration by ensuring that there are not walls being built between divisions, and that helps build trust.”
At AmeriQuest, transparency and collaboration are enabled through a great deal of in-person contact between top management and the employees in the field. The company has four offices: the headquarters in Cherry Hill, N.J., and additional offices in the Chicago area, McLean, Va., and Coral Springs, Fla., in addition to sales staff dispersed throughout the country. Clark and his management team maintain consistent contact with the other offices either by logging air miles or getting on the phone. But maintaining open lines of communication is the key.
“It’s particularly challenging when you’re not all in one place,” he says. “But we spend a lot of time on conference calls or in face-to-face meetings just trying to accomplish what we set out to accomplish. We’re a fast-moving organization, so we need that constant communication among us.”
It can be tempting to look for an easy solution to communicating, particularly in the current economic climate, when there is so much else you could concern yourself with. But Clark says now, more than ever, is the time when your people need to see you and hear from you.
There is no way around it: Promoting and maintaining your cultural principles is going to involve a lot of hard work from many different people.
“There is no one silver bullet for this,” Clark says. “It’s blocking and tackling to maintain the culture. It doesn’t come from books or once-a-year meetings where you tell everyone that this is the culture you’re going to have. It’s every day, you have to live it and adhere to it. And if you’re not adhering to it as part of the team, you should be called out on it.”
Part of communicating is modeling the right behavior. In tough financial times, when sales might be lagging and customers are hesitant, it can become easy for people to begin playing the blame game when a sale falls through or an account dries up. That is a recipe for cultural disaster. To build a collaborative culture, you need to set an example, from the top, that demonstrates a willingness to shed light on internal conflicts.
“If there is a dispute, I don’t take one person’s word for it,” Clark says. “I bring everyone who is affected into the decision circle. Everybody knows that. They know that if they have a complaint about someone or something, we’re not going to whisper down the lane. We’re going to address it and meet it head on.
“The other part to that is I try not to let things linger. If there is an issue out there, if it is a morale issue or a financial issue, we try to explain where we are and why we’re doing what we are doing. We want to communicate our reasoning with everyone. They might not end up agreeing with it, but at least they know the reasons why we’re going down a particular avenue. It’s all about continual reinforcement through your actions and words. That is how a culture is created and sustained from the top.”
Be a realistic cheerleader
With negative economic news seemingly at the top of every news broadcast and on the front page of every newspaper business section, you might feel like you’re swimming upstream in the fight to salvage your employees’ collective morale.
Swimming against the current might not always represent the best course of action.
You need to instill in your employees a belief that they and the company will endure, that times will get better and the revenue streams will pick up speed at some point. But you can’t overcompensate for bad news by attempting to slant your employees’ perception of reality.
Clark says you need to accentuate the positive whenever possible, but you also need to give your employees the straight scoop when the news isn’t as good, otherwise you’ll lose credibility and the stability of your culture will suffer.
“Part of a leader’s job is to be something of a cheerleader but not to the point of being unrealistic,” Clark says. “You need to cheerlead by conveying that you will continue to do the right things and this will all pass at some point. I tell my people that if we all co
ntinue to do the right things, we’ll be in a position to take advantage of things when the economic tide does turn.”
Remaining positive while conveying a realistic outlook requires a balancing act, especially when you and your team have to clean up after a mistake or perform a course correction.
“The key to the balancing act is that, on a macro basis, you say that your company is still doing well, that we’re still profitable or whatever positive points you have that you can accentuate. But if you have to say something that is negative, do it in a way that conveys disappointment without destroying confidence.”
Acknowledge mistakes and shortcomings without deflating the people involved even more than they already are. Instead of harping on what went wrong, use negative incidents as teachable moments and opportunities to reinforce a team-first mentality.
“If somebody missed their numbers or quotas or whatever or if there is bad news somewhere else along the line, a lot of times people will beat themselves up worse than you or I could beat them up,” Clark says. “For you to sit there and tell them they missed their numbers this month, that’s really not the right way to manage in good times or bad times. However, in bad times, it’s particularly important to create a dialogue during which you can find some solutions to correct the problem, whatever it might be.
“That doesn’t mean that you can just tell someone, ‘You did a bad job, but that’s OK,’ and pat them on the back. In a situation where a person already recognizes that they haven’t accomplished what they were supposed to accomplish and there is already negativity in their thought process, you need to acknowledge the problem, then work together with the people involved to correct it. Look at what you need to do moving forward. Don’t look back at what you’ve already done.”
Take the long view
When taking a long-range view that looks past the potholes immediately ahead, Clark goes back to a lesson he picked up from the published works of business mogul and Google investor Ram Shriram: The head of a company has to work on the business, not in it.
You’ve hired people to take care of the day-to-day operations. Your job is to make sure that those people are put in the best possible position to carry out their daily and weekly tasks by ensuring that the company is in the best possible position to succeed when times are good and endure when times are trying.
“Positioning the business to weather a down economy is something that falls onto senior management,” Clark says. “That is a major responsibility of senior management in any company. You need to look to the future and what you think the future is going to hold, then act accordingly.”
Acting accordingly means using the information at your disposal to paint the most accurate long-range picture that you can. If the projections say revenue will begin to swing upward, you might make preparations for additional hires or reduce travel restrictions. If projections aren’t as positive, you might need to rein in spending.
“Entering the fourth quarter of 2007, I was really advising our management team to enter 2008 in almost a hiring freeze,” Clark says. “The last thing you want to do is hire in January and lay off in August. That turned out to be the right advice, but more importantly, the management team followed that advice. That is why we need to get out of the details of the company and take the visionary view.
“In the end, your decisions will probably be driven by three things: cash, employees and customers. You want to accumulate cash, keep your good people and keep your good customers. That should be your focus in this economy.”
How to reach: AmeriQuest Transportation Services, (800) 608-0809 or www.ameriquestcorp.com
Abington Memorial Hospital
1200 Old York Road
Abington, PA 19001
Richard L. Jones Jr.
President and CEO
About Abington Memorial Hospital is a regional referral center for orthopedic surgery, neurosurgery, cancer and cardiac care. Among its lists of specialized areas are cardiac, cancer, stroke, senior health, and metabolic and bariatric surgery. Abington Memorial became the first acute care hospital in the region to receive Magnet designation, one of the highest forms of recognition for nursing.
Year founded 1912
Key services Level-two trauma center, heart center, cancer center, Human Motion Institute, stroke center
Albert Einstein Medical Center
5501 Old York Road
Philadelphia, PA 19141
Barry R. Freedman
President and CEO
About The Albert Einstein Medical Center is a teaching hospital that offers a full range of services, including specializations in eight areas. Among the hospital’s focuses are behavioral health, geriatrics, heart care, kidney and liver transplants, neurosurgery, orthopedics, and women’s and children’s services. The medical center is one of Albert Einstein Healthcare Network’s seven main facilities.
Year founded 1866
Key services Level-one regional resource trauma center, level-three neonatal intensive care unit, behavioral health center, kidney and liver transplants
Cooper University Hospital
One Cooper Plaza
Camden, NJ 08103
John P. Sheridan Jr., President and CEO
About Cooper University Hospital and a few of its additional campuses are undergoing a nearly $600 million upgrade and expansion project to improve services. The hospital, which has six signature programs, including a neurological institute and radiosurgery program, recently opened a new $220 million patient-care pavilion. Cooper University Hospital has received NRC Healthcare Market Guide study’s consumer choice award four years in a row.
Year founded 1887
Key services Level-one trauma center, Bone & Joint Institute, Cancer Institute, critical care medicine, neurological center
Hahnemann University Hospital
Broad and Vine Streets
Philadelphia, PA 19102
Michael P. Halter, CEO
About Hahnemann University Hospital was the first hospitals in the Philadelphia area to perform a kidney transplant and has continued down that path. An affiliate of Drexel University College of Medicine, Hahnemann specializes in heart, bone marrow, kidney, pancreas and liver transplants. The American Heart Association has recognized the hospital as a leader in coronary artery disease and heart failure treatment.
Year founded 1885
Key services Level-one regional resource trauma center for adults, aeromedical transplant program for critically ill, cardiac, transplantation program
Hospital of the University of Pennsylvania
3400 Spruce St.
Philadelphia, PA 19104
Garry L. Scheib, Executive director
About The Hospital of the University of Pennsylvania was named one of the top 10 hospitals in the U.S. in 2008 by the U.S. News & World Report. The hospital was ranked the best in the Philadelphia region in more than a dozen categories, including cancer, heart surgery, digestive disorders and kidney disease. It’s also among the nations leader in rehabilitation.
Year founded 1874
Key services Cancer center, cardiac care center, diabetes center, plastic surgery center, transplant center
Our Lady of Lourdes Medical Center
1600 Haddon Ave.
Camden, NJ 08103
Mark T. Bateman, CEO
About Our Lady of Lourdes Medical Center is a regional referral center in the Delaware Valley for prenatal, rehabilitation and dialysis services. Lourdes is one of the larger providers of cardiac services in the area, and the hospital is the only one in the state approved to perform kidney, pancreas and liver transplants. The hospital has been recognized by the American Hospital Association as a leader in community outreach.
Year founded 1950
Key services Bariatric surgery, cardiac services, dialysis center, organ transplantation, rehabilitation center
Thomas Jefferson University Hospital
111 South 11th St.
Philadelphia, PA 19107
Thomas J. Lewis, President and CEO
About Thomas Jefferson University Hospital continues to rank among the country’s top hospitals according to ratings by U.S. News & World Report. The hospital is known for its cancer and cardiology center and is one of only a few hospitals in the country to have both a regional trauma center and a federally designated regional spinal cord injury center. The hospital has not been affiliated with the university since 1995.
Year founded 1825
Key services Trauma center, spinal cord injury center, rehabilitation services, cancer center, radiation oncology
Virtua West Jersey Hospital Voorhees
101 Carnie Blvd.
Voorhees, NJ 08043
Michael Kotzen, Vice president and COO
About Virtua West Jersey Hospital Voorhees is one of the region’s leaders in most babies delivered. The hospital’s maternity center, neonatal intensive care center and pediatric intensive care unit serve expecting parents and those with children needing complex surgeries or dealing with serious medical conditions. Virtua Voorhees also focuses as a hub for community-based health education programs.
Key services Cancer program, asthma management, diabetes education and treatment, education center, maternity center
The seeds of today’s ocean cargo insurance were sown centuries ago on a Chinese river, where boat traders shifted cargoes one to the other to spread the risk of loss. That way, if a boat was lost, the merchants would not suffer a total loss of cargo.
Today, although the terms of insurance have become more complex, the same basic principles hold true, says Jay Frank, a vice president at ECBM Insurance Brokers and Consultants.
“Buyers of insurance need to know that each cargo shipment really is a joint venture on the part of the ship owners or operators and cargo owners,” says Frank.
If there is damage to the ship or cargo, all of the cargo owners participate under a “general average adjustment” that is covered under the cargo policy.
Smart Business learned more from Frank about how to minimize your risk when transporting cargo internationally and what to look for when selecting a broker.
What do business owners need to know about insuring product for international transit?
If you are in the position of frequently shipping — either importing or exporting — it’s a good idea to have a broker who does that kind of business. It’s also important to use an insurance company that is a major underwriter of cargo insurance and that can be a source of information and service.
There are other insurance companies that do not underwrite cargo insurance in any great volume. Therefore, their support would be a lot weaker than that of an insurance carrier that has experienced underwriters, adjusters and claims correspondents in many lands.
What should a business owner look for in a broker?
You want to have at least a medium- to regional-sized broker who has experience with ocean cargo coverage so the broker can offer advice when needed and will know which insurance carrier is most receptive to your product and the ports you ship to and from.
It’s wise to interview two or three brokers to find one whom you feel has the knowledge and insurance company contacts you require.
What are some common mistakes insureds make when transporting products internationally?
In order to collect an ocean cargo claim, you have to be able to prove insurable interest. Shipping documents, which include invoices, insurance certificates, purchase orders or contracts, delivery receipts with exceptions, survey reports, carriers written confirmation of nondelivery and a summation of the claim are required.
The documents will indicate the INCO TERMS — standard terms used in international contracts, such as free on board delivered or point of purchase — so that title would transfer at the buyer’s warehouse or at the shipping point. If the documents are not properly aligned and the insuring party has no insurable interest, it’s likely you will not collect your loss. Also, it’s best to make sure the insurance coverage is placed in the U.S. insurance market.
The terms of the American cargo policies can be quite comprehensive. Insurance policies from other countries can be very deficient. You want to be paid in American dollars, and you want any disputes to be settled in American courts. To allow a foreign placement of coverage puts you at a disadvantage.
What should business owners look for when purchasing ocean cargo insurance?
Look carefully at the insuring terms and conditions. There are a variety of insuring terms available under a cargo policy, such as Perils of the Sea, which is well defined in the history of ocean cargo underwriting, because it dates back 350 years to Lloyd’s of London. Perils of the Sea can be enhanced to include specific optional perils, such as theft and contamination. Or you can go to an All Risk policy that puts you in a much better position because you don’t have to cherry-pick a specific peril and risk an uninsured loss.
If it is All Risk, it would include all perils except those that are specifically excluded. A few that could be excluded, depending on the product, could be breakage, rust or contamination. If those are important to your insurance coverage, you have to be sure your policy includes those perils — which are very often excluded by underwriters who are looking to collect your premium but avoid the most likely loss.
Rust is a good example of that, when shipping metals. If they are exposed to either freshwater or seawater, they can sustain a great deal of damage. If your cargo is being shipped in a vessel that has a problem with leakage or sweating, having a policy that includes rust coverage would be very important.
What other factors can affect your policy?
The previous loss experience of the insured is going to sway the underwriting opinion of the insurance carrier. For instance, a client who imports steel from a foreign company may have a five-year history of water damage or rust claims that the underwriter will very likely not want to insure because that importer is doing something wrong, whether it is picking the wrong ships or not properly protecting the product while it’s under way.
Independent survey companies will examine your product and the ship at loading and comment on the condition of both. Then a surveyor at the offload port can do the same to identify if damage occurred in transit. Proof of claims could depend on the surveyor’s reports. If so, how did it occur? Did it occur on the ship, or did it occur prior to being loaded?
Jay Frank is a vice president with ECBM. Reach him at (610) 668-7100 x1302 or firstname.lastname@example.org.
Education: Bachelor of science degree, communications, Temple University; Juris Doctorate, University of Louisville
First job: Delivering newspapers for the Millville (N.J.) Daily Republican at age 11
What is a universal truth you’ve learned about leadership?
Credibility takes a lot of hard work and time to be established, but it can be destroyed in seconds. In order to be an effective leader, you need to have credibility at all levels of the organization.
What is your definition of success?
Success is having fun every day at work. It’s working with people you love and seeing them grow to their maximum potential. In the end, success is having a job you love because it means never having to work again.
Steiner on demonstrating humility: It takes a certain amount of maturity and experience to say you don’t know or that you don’t understand, that you don’t have all the answers. It is a sign of strength rather than a weakness. In a leadership role, I think it takes time for us to realize that. I always knew I needed a lot of help. I didn’t have any epiphany; I simply learned over time that it’s always best to surround yourself with intelligent, competent people.
As David St.Clair has grown MEDecision Inc. from a one-man business in his basement in 1988 to a $50 million company, the hardest part has been allowing others to lead in areas where he lacks expertise.
“[It’s been difficult] figuring out how to allow people with the right experience, the right skills and leadership styles to lead in areas where I’m relatively weak, either by virtue of my inexperience or personality,” he says.
Through trial and error, St.Clair says he’s found a method that has led to success for him and the health care technology company’s 240 employees. It starts with understanding your own weaknesses. Then, you have to recruit people with skills in areas you fall short in. And lastly, you need to convey to employees that it’s OK to offer their opinions and even challenge the boss.
Smart Business spoke with the founder and CEO of MEDecision about how to use your employees’ strengths to balance your weaknesses and better your company.
Determine your weaknesses. It’s being brutally honest with oneself, being introspective enough to recognize and to listen to others about what you’re good at and what you’re not so good at.
Sometimes the business shows it when you try to do everything. But I think some of it is also paying attention to what you’re drawn to and what you tend to shy away from.
For me, for instance, I think I’m very, very good at taking ideas and making them real. I’m not good at making things routine. So I will try to reinvent a process, reinvent a product, every time I look at it or talk about it, as opposed to making it something that is repeatable.
There are very few people, I would argue, who have the breadth and depth to do everything very, very well. Simply pay attention to that, and be willing to bring in the right people to shore up where you’re weak.
Recruit people with the skills to balance weaknesses. In the beginning, I was always looking for what I referred to as athletes, people who are very good with a set of skills but really were in a position to help do virtually anything.
As we’ve gotten bigger, we’ve been able to go and get more specialists — people who have even greater depth in one particular area. You start seeing the opportunity to really shore up your own weaknesses and the rest of the team’s weaknesses because you can go out and look for folks who are clearly best of class.
There are many people who have a tendency to want to recruit … below them, people that they can be sure that they are going to be able to control for the next period of their own careers. You need people who are not always bright but people who are willing … to make their point because I recognize that I am not always right.
Let employees know that it’s OK to challenge you. It’s always difficult for the CEO and the founder of the company to truly be sort of one of a group of peers, so you really do have to work on it.
I have lunches with two or three of our new employees after they’ve been here a few weeks. The purpose of that lunch isn’t to talk about mission, it’s not to talk about our business, it’s to talk about each other, where they grew up, where I grew up. It really is an attempt to let them see, in so many ways, I’m just like them. I try to make it clear that I can be approached that way, as well.
Some of it is based on what happens in team meetings. Particularly the folks that have been with me for the better part of those 20 years, they’ve known us when we were smaller and much easier to deal with, and they will argue with me.
What we have to make sure is that anyone who is observing that recognizes that arguing with David is not a career-limiting move.
You have to walk the walk. What I think about all the time, and I do mean all the time, is, how are my actions encouraging? How are my actions, my approach, my body language welcoming people’s opinions? And just as important, what is it that I might be doing? How am I responding in ways that might be shutting that down? If I’m overly critical, if I’m overly sharp at a particular instance, how many people in that room has that now made worry? It’s something, particularly with the leadership team here, we talk about. It’s not the elephant in the room.
Know when to give in to employees’ ideas. There are certain areas, and this comes in areas of strategy, for instance, where I’ve said, ‘I would be much more comfortable letting go if the feedback I get uses the right words.’ In other words, if I hear that strategy being played back in discussions about what we’re doing and how we need to think of our products from other people, that tells me that our overall guide for our business has been metabolized, that the organization gets it.
It’s really this notion of, ‘Let’s have a conversation where I hear back from you how our vision, how our strategy plays into the decisions you’re making and things of that nature. The more I hear that, the more comfortable I am stepping even further back.
How to reach: MEDecision Inc., (610) 540-0202 or www.medecision.com
Just as businesses today are looking for ways to generate revenue, states are also considering how to fill budget deficit “cavities” and raise dollars in this down economy. The fastest-growing source of revenue for states is not income tax or sales tax. It’s unclaimed property, and every company has it.
States are currently in possession of approximately $20 billion in unclaimed property dollars. Auditors will actively seek out businesses that did not report and turn over this property to the state. Unclaimed property is a compliance issue that all businesses should understand and address this year and going forward.
“Businesses don’t often hear about unclaimed property policy because it falls under property law, not under tax law,” says Tim Dudek, a director in the tax strategies group at Kreischer Miller, Horsham, Pa. “Unclaimed property is important to businesses today because the end result is typically a cash outlay to the state.”
Smart Business spoke to Dudek about what constitutes unclaimed property and how noncompliant businesses can mitigate penalties and interest by taking action before an audit occurs.
What is unclaimed property?
Also called abandoned property, unclaimed property is any type of tangible financial asset held for a party that cannot be found. Unclaimed property is not real estate or ‘lost and found’ items. It represents the debt of one party and the asset of another. For instance, a company mails a paycheck to an employee who leaves the company. The company cannot locate the former employee so the check is never cashed by its rightful owner. After several failed attempts to find the individual, the uncashed paycheck is considered ‘abandoned property.’ The business then cancels the check and that money goes back into the company bank account. The problem: That money now belongs to the state as ‘unclaimed property.’ The cash should have been turned over to the state, but instead has been infused back into the business.
Other examples of unclaimed property include uncashed checks to vendors, accounts receivable credit balances, expense reimbursement checks, ‘expired’ gift cards (which should never expire, actually) and safe deposit boxes. The list of what qualifies as unclaimed property is pages long and includes industry-specific property.
How much unclaimed property do companies identify? What sort of revenue do states expect to collect by enforcing this tax law?
States believe that only 10 to 15 percent of companies comply and turn unclaimed property dollars over to them. Delaware (the second-smallest state) expects to collect $400 million this year just from companies remitting payment for reported unclaimed property. Assuming that less than 15 percent of companies are compliant, auditors who exercise this property law will, more often than not, turn up dollars for the state.
How will states collect unclaimed property dollars?
The states will search for unclaimed property through compliance efforts and audit proceedings. Every company must be registered with a state in order to conduct business, and because all registered businesses must file tax returns it’s very easy for the unclaimed property bureau to match these returns to abandoned property reports.
What penalties and interest could noncompliant companies face?
The state has discretion to look back an unlimited number of years for unclaimed property and charge penalties and interest for each year that unclaimed property was not remitted to the state. Some states set no penalty limits, but in Pennsylvania, the cap is $10,000.
What can companies do if they recognize they have unclaimed property recorded on their books?
The good news is that opportunities exist for companies that recognize their own noncompliance. Businesses that perform their own due diligence and determine the dollar magnitude of property they should have remitted to the state should contact their tax accountant, who can begin negotiations with the state and help the company enter into a Voluntary Disclosure Program. This program involves a contract between the company and the state. The company admits to deficiency and asks for ‘forgiveness.’ As a result, companies can save dollars and reduce administrative look-back periods. In other words, the state may agree to limit the reporting period to 10 years or less, with minimal interest and no penalties. This scenario is far better than risking the possibility of an unclaimed property audit by the state. If no reports were ever filed, a state may go back and audit for an unlimited number of years, imposing full interest and penalties on any deficiency with no chance of abatement.
The key is to understand what qualifies as unclaimed property and discuss the rules and opportunities with your accountant. Determine if your company owes money to the state, and do not assume your company will go unnoticed. The state is always looking for untapped revenue sources. Every business that is noncompliant is a target.
Tim Dudek is director of the tax strategies group at Kreischer Miller, Horsham, Pa. Contact him at (216) 441-4600 or email@example.com.
Linda York is the market diversity leader of the Philadelphia Metro and Lake Erie markets for PricewaterhouseCoopers LLP. She works with office leadership to create an inclusive environment for all employees with emphasis on minorities, sexual identity and female professionals. She has been with the company since 1996 starting as a joint human resource generalist with a recruiting role for the Philadelphia, Harrisburg and Pittsburgh offices, then spent three years as the Southeast region recruiting leader, responsible for campus hiring. In 2003, she began working in her current role.
Q. When hiring, how important should diversity be to an employer?
Always hire for the best and brightest, but that will vary depending on where you look. It’s a huge imperative when developing a hiring strategy. You need to really look at your work force, your client base and what you need to represent. Consider what your goals are. Twenty years ago, diversity was defined as diversity of gender. That was a huge goal of companies and now that gap is smaller. There are many components of diversity, but now, diversity of race is an imperative companies are working to incorporate more.
Q. Should businesses have an official diversity policy or simply hire without thought to diversity?
Yes companies should have a policy. It’s good business practice. Anyone who’s looking at a company wants to know they can grow and thrive within the company. For example, someone who is (gay), will look at company policies to see if they will be fired because they are gay. In many states across the country, you can be fired for being gay, and it’s still legal. But many businesses have diversity policies that say they will not fire an employee for sexual preference and this is essential if you want to hire the best and the brightest. These policies can also help protect a business against litigation.
Q. Is it important to customers that businesses have a diverse work force?
Yes, it is very important. If we were all the same, where would our work product be? Would we be out-of-the-box thinkers? Would we be coming up with the best solutions for our clients? We feel a diverse work force the whole diversity wheel creates a higher-performing work environment that provides a better, unique product.
Business owners who have been considering selling their company may be thinking twice. A tight credit market and a displaced economy have left some wondering what opportunities are available and if the time to sell has already passed them by. While it is true that transactions in today’s climate are faced with new challenges, deals are continuing to get done.
Henry Hissrich, director of new business development at Harris Williams & Co., talked to Smart Business about what today’s market means for business owners considering a sale or acquisition and what they can do to navigate this environment.
What are the implications of today’s market to business owners considering a sale or acquisition?
The middle market, which we define as transactions less than $1 billion in value, has historically accounted for at least 90 percent of all M&A volume. In today’s volatile economic environment, that dominance is even more pronounced. Mega-deals have fallen by the wayside because of tight credit markets and, while middle market transactions have certainly felt the effects of these challenges, there is still some activity, particularly for well-performing companies.
For owners of struggling companies who are not compelled to sell, now is not the right time. Working through this period and demonstrating that the business can weather through all points of a cycle is a strategy that is likely to reap rewards once the market rebounds. Conversely, there are companies that continue to perform well or reasonably well despite the weak economy. These are the companies that will be attractive to buyers in any environment and, while multiples have declined from the peak of 2006 through the first half of 2008, valuations can still be attractive in historical terms.
What advice can you give business owners who want to sell but are concerned about timing?
The decision to sell a business easily ranks among the most difficult and important of a business owner’s career. While today’s environment is difficult, opportunities to gain liquidity or exit are available for well-performing companies.
If you are considering a sale in the near term, now is certainly a good time to get the business prepared. Once the market turns around, there will be a flood of pent-up supply, so it is best to be ready when the right opportunity arises.
Some business owners have also benefited from obtaining minority investments from private equity groups, many of whom are actively looking to partner with companies led by strong management teams. These transactions are less reliant on debt, which, in today’s market, is expensive and in short supply. Because there is an abundance of private equity capital that needs to be put to work, creative deals structures such as minority investments are becoming more prevalent. Many companies are exploring similar alternatives with success.
Are certain industries experiencing more activity than others?
Absolutely. Certain defensive industries, such as health care, technology and consumer staples, among others, are proving their resiliency in the current environment. If industry dynamics are favorable for your business and it’s performing well, you may be surprised at the exit opportunities that exist.
What piques buyers’ interests?
Companies that have a unique and tangible value proposition, effective management team, strong financial performance and compelling growth characteristics supported by sustainable competitive advantages will almost always generate interest from the buyer community. Now more than ever, businesses need to have a demonstrated track record and be able to show that they can weather difficult times.
How can companies prepare for a sale process?
The sale of a business is impacted by a variety of internal and external factors. It is important to weigh all of the factors that are important to you and look to the advice from an experienced sell side adviser to help determine the right strategy.
Business owners should prepare in a number of ways, from basic housekeeping to having a clear growth plan for the future. Owners should try to examine their business from the vantage point of a prospective buyer and address any potential concerns prior to marketing the company.
For many middle market companies, the reasons why an owner may opt to sell a business are not limited simply to market timing and returns. Knowing your objectives and the steps that need to occur to meet your goals are key for preparation.
Harris Williams & Co. (www.harriswilliams.com), a member of The PNC Financial Services Group, Inc., is one of the largest mergers and acquisitions advisory firms in the country focused exclusively on the middle market. Harris Williams & Co. represents private equity groups as well as publicly and privately held companies worldwide. Member FINRA/SIPC.
©2009 The PNC Financial Services Group, Inc. All rights reserved.
HENRY HISSRICH is director of new business development at Harris Williams & Co. Reach him at firstname.lastname@example.org or (267) 675-5900.