Sue Ostrowski

Bonds have historically been an investment of choice for those looking to diversify their portfolios. Today’s market is no different, but the challenge comes in determining what types of bonds to invest in and the length of time to invest, says Jim Bernard, CFA, senior vice president and director of fixed income portfolio management at Ancora Advisors LLC.

“A prudent move right now in our opinion is to focus on bonds maturing within a three- to seven-year time period,” says Bernard. “Interest rates are very low right now, so it may be tempting to go out to longer dated bonds to get yield. But most investors should be very careful about locking their money up for too long a time. If interest rates increase, the value of existing long dated bonds will likely decrease materially in value. It would then be a long time until maturity before investors get their money back at par value.”

Smart Business spoke with Bernard about the value in U.S. fixed incomes markets and the primary risks faced by investors.

Can you put today’s interest rate environment into historical perspective?

Interest rates have been historically low for three years, and that low interest rate environment is probably going to last another three years, possibly longer. If you keep money in short-term CDs, you will get what you are getting today, which is close to nothing.

Interest rates will begin to increase when the economy and/or market improve. Or, if those things don’t occur, but commodity prices or inflation spiral up, then interest rates will also go up. However, we don’t see a materially better economy for the next few years, and although there may be slight job growth, we think the job market will remain very difficult.

What are the primary risks fixed income investors face today?

First, how can you get any legitimate return on your money without buying long-term bonds or bonds of questionable quality? If you buy a low-rated bond, the probability of getting your all money back at maturity declines.

To get a decent yield, you have to go to long maturity bonds that are going to be due in 15 to 30 years. The risk is that if interest rates were to go up materially in the future, then the value of your bond declines materially.

For instance, if today, you buy a good, AA 15-year corporate bond that yields 4.5 percent, that is great for today. But if in four years interest rates go up and an 11-year bond is trading at a yield of 8.5 percent, the face value of your bond would go down to about 65 cents on the dollar to be yield competitive in the higher interest rate environment.

At that point, you have a decision to make. You are earning 4.5 percent, but you could buy a new bond to earn 8.5 percent. However, the only way to do that is to sell your bond at 65 cents on the dollar. Do you want to take a loss to get more income, or are you going to continue earning 4.5 percent while others earn 8 percent? That’s the dilemma.

That’s why three- to seven-year bonds may be the best move today. If you construct a portfolio of these bonds, for an average maturity of five years, interest rates may go up in three or four years. In that instance, you may not be happy in the short term, but you’re going to have access to your money at face value in the next one to three years, which is better than 10. The price of those bonds will go down but they will mature at face value, and you will know what the future value is and know when that is coming back to you.

How do you view the current municipal bond market?

We like municipal bonds and think they are a good value, but people have to be very careful of what they buy.

We recommend bigger rather than smaller issuers in this uncertain market. There may be municipal defaults on the smaller end of the spectrum over the next few years, as opposed to states and larger issuers.

If a $15 million sewer district bond were to fail, the state of Ohio would survive, even if bondholders didn’t get back all of their money. However, if a multibillion dollar issuer were to fail and not pay back bondholders 100 cents on the dollar, that would have huge ramifications. Issuers with significant size may be too big to fail, but every municipality may not be bailed out.

Are non-U.S. dollar denominated sovereign bonds a good investment?

U.S. currency has been weak against other currencies over the last decade or so. Our view is that until we adequately address our fiscal problems here in the U.S., the dollar will continue to do worse than currencies of countries that are more fiscally disciplined.

We don’t know what the ultimate outcome is going to be with the euro, but we are very concerned. The yen is also uncertain. But we have identified five to seven currencies that we believe are better fiscally positioned and have been more responsible from a budget perspective. We would rather own their government debt than ours because we believe their currency will do better than ours.

We recommend buying three- to seven-year non-euro zone bonds in countries with solid economic positioning and finances.

What are the keys to being an effective long-term fixed income investor?

You have to understand the structure of the bonds you are looking to buy. Is this a bond in which you have a high degree of confidence that you will ultimately get all of your money back? With stocks, you want growth and higher earnings, but with bonds, you care a lot about the issuer’s balance sheet and less about their income statement, because the balance sheet will ultimately determine whether you are going to get your money back.

Jim Bernard, CFA, is senior vice president and director of fixed income portfolio management as well as an investment advisor representative of Ancora Advisors LLC, (an SEC registered investmentadvisor). In addition, he is also a registered representative and a registered principal of Ancora Securities, Inc. (Member FINRA/SIPC). Feel free to contact him at or (216) 593-5063.

You don’t need a crystal ball to plan your risk management strategy for 2012. You do need an advisor with an understanding of the market and the right expertise.

“As far as rates go, we see a casualty market that is starting to firm,” says Kevin J. Pastoor, CPCU, a managing director of Aon Risk Solutions. “Some low and medium hazard firms are still receiving low single-digit rate decreases, but the size of the decreases, as well as the numbers of firms receiving them, are both continuing to abate. We see this trend continuing in 2012 and rate increases becoming more the norm. Increases are already being seen for higher hazard classes of business and where limited competition exists.”

For property, Pastoor sees more of the same: rates increasing in 2012. According to estimates from reinsurance company Swiss Re AG, 2011 will be the most costly catastrophe loss year on record, with $350 billion in total disaster losses. Approximately $108 billion of those losses will be covered by insurance, making 2011 the second most costly year on record for insurers, trailing only hurricane-plagued 2005, which had $123 billion in insured losses. Pastoor says these losses are increasing the pressure on rates.

“In Q4 of 2010, we were seeing average rate decreases of 6.3 percent,” he says. “By Q3 of 2011, rate decreases were less than 0.5 percent on average across all business segments, with our largest customers (with greater worldwide exposure) seeing a 2.3 percent average increase in rate.”

Smart Business spoke with Pastoor about what companies can expect in 2012.

What factors are affecting the 2012 outlook?

The high catastrophe losses in property and challenges facing the casualty market, such as tort issues and medical inflation, are having a negative impact on insurance company profitability. In addition, continuing low interest rates are negatively impacting insurance company investment income results. Also, many insurance companies have taken significant reserve releases (reserves are the surplus an insurance company holds to protect against incurred but not reported losses) over the last several years so the ability to prop up profitability with reserve releases has diminished.

However, these issues are not having the impact that many had predicted: significant rate increases and a tightening of coverage terms. This is mainly due to two factors. First, the industry still has considerable excess surplus. Second, we still don’t see consistent underwriting and pricing discipline. While commercial lines pricing has turned from negative to more flat over the last half of 2011, competition still remains fairly intense as companies are looking to maintain market share.

What are some of the emerging risks for 2012?

Two important emerging or evolving risks for businesses to consider are contingent business interruption and security and privacy risk. The Japan earthquake and tsunami, as well as flooding in Thailand, have increased awareness of the importance of understanding your supply chain risk and the effect it has on your contingent business interruption.

Contingent business interruption coverage is intended to respond when your supplier can’t operate and supply you with needed product and, therefore, you can’t operate. What was learned from the Japan disaster is that these policies respond differently. For example, some only respond when the disruption to your operations is caused by a direct supplier. If a supplier of your supplier is the business that suffered the direct loss, you may not be covered.

It’s critical that you understand your supply chain so that you can make sure you are purchasing appropriate coverage from both a language and limits standpoint. Working with a broker or agent with specific expertise in this area is critical.

Security and privacy risk is another evolving area. Security and privacy risk stems from the destruction, loss or unauthorized disclosure of information, including trade secrets, customer lists, or data such as personally identifiable information (credit card, Social Security or bank account numbers). This risk includes third-party liability, fines and penalties, as well as significant reputational harm.

Data breaches are becoming more frequent, more sophisticated and more financially damaging. In fact, 78 percent of Fortune 1,000 companies have suffered a breach. However, you do not need to be a large company to suffer a loss because virtually every organization has this type of data on customers and employees. Every company should conduct a data privacy and network security review.

You should also work with a broker or agent who understands this coverage, as base policy forms vary widely and usually need to be customized to ensure maximum coverage.

How will this outlook affect companies’ insurance purchasing and risk management programs?

With the market starting to firm, companies need to be more diligent when it comes to managing risk. Insurance companies are being more careful in how they deploy capacity.  As such, the better your risk profile and the more complete you are in terms of how your information is presented, the more likely you are to be one of the companies that is still seeing favorable pricing.

Work with your broker or agent to get the data right in terms of your exposures. For property, this means you need to know your facilities’ secondary characteristics, such as the year built, type of roof, number of stories, etc. Provide details of your loss control and safety programs. Explain the details of any large losses and what you have done to make sure they don’t occur in the future.

It’s critical that you work with a broker or agent who understands your risk and the marketplace and who knows how to present your risk in the appropriate light. Remember, the reality of your situation is never worse than an underwriter’s assumption if information is missing.

Kevin J. Pastoor, CPCU, is a managing director of Aon Risk Solutions. Reach him at or (248) 936-5346.

With a plethora of real estate signs posted around town, it may seem like a simple task to go out and find a new location for your business.

But it’s not that easy. And businesses that do not start planning 12 to 18 months out may find themselves forced into an unsuitable space or paying more than they would have if they had planned ahead, says George J. Pofok, CCIM, SIOR, senior vice president of CRESCO Real Estate.

“Very often, businesses wait until the last minute to start looking because they are focused on growing the business and real estate falls into that, ‘We’ll get to it when we get to it’ category,” says Pofok.

Smart Business spoke with Pofok about how early planning can increase your odds of a successful business move.

How early should a business start thinking about a new location when considering a move?

If you’re in a lease situation, you want to start looking 12 to 18 months ahead of the expiration of your lease agreement. Part of that depends on the size and type of company; larger companies and specialty niche type companies typically need to be even further ahead, and if you are a smaller manufacturer or office user that occupies 3,000 to 5,000 square feet, you can probably get away with nine to 12 months.

The process may take even longer for new construction, which will involve land acquisition, building design and multiple layers of financing, as well as dealing with the state, county and municipality about building permits, economic incentive and low interest loans. Because you’re dealing with government entities, things tend to progress more slowly than they would in private enterprise.

What should a business be looking for in a new location?

You need to have projections on where you see the growth of the company, both in terms of sales and in where your industry is heading. I would also encourage you to talk with your employees and see how their current space functions, because oftentimes, managers are not in tune with the product flow or distribution flow. For example, in the distribution sector, the people who are driving the tow motors and delivery vehicles on a daily basis may be able to offer valuable suggestions on how to set up your warehouse and eliminate some of the redundancies and improve company logistics.

What do you need to consider regarding location?

As you’re looking at moving, you need to take into account your employees and where they live. Are you currently centrally located? Are you drawing a mix of people from the east side and the west side? Companies are often concerned that if they move from the east side to the west side that they are going to lose valuable employees who live on the east side.

You also want to look at the location of your customer base. If you are a warehouse distribution company, where are you sending your products? You want to be as close as possible to a prominent freeway so that you can eliminate the downtime of your drivers going to and from your building to the freeway. If you are looking at a location that is 20 minutes from the nearest freeway, you have 20 minutes to your building and 20 minutes back, leaving your drivers to spend valuable time just commuting to the freeway.

And if your drivers are earning $20 to $25 an hour, adding that up on a daily basis can contribute significantly to your bottom line.

How can starting the search early help your negotiating power?

If you wait too long, you can be forced into a making a bad decision. It hurts your leverage and negotiating power with an owner or landlord. This typically happens when a company’s lease is expiring or already has expired, and has waited too long to start its search.

If a landlord knows that you need to make a decision, they can stick to their numbers because they know you need to make a move and make a decision now. But if you’re planning things out, you can negotiate and lay out your needs a little better, and focus more on finding a location that is really geared toward what you need in your business.

How can an outside expert assist you?

Searching for a new location requires a combination of internal and external expertise. Nobody knows your business better than you, so it is imperative for you to gather information to provide an internal perspective and share that information with the external service provider. This is a team effort. Making the right real estate move will help the future direction of the company.

The external provider should ask the right questions to help pinpoint your needs. Are you currently feeling any pain? Is there something in your current space that doesn’t work for you? For example, are you currently in a 14-foot clear building that prohibits you from keeping additional inventory on hand because you don’t have the space? If you move to an 18-foot clear building, can you rack higher and have additional inventory on hand so that your customers don’t have to potentially wait for a delivery?

It’s really the job of the service provider to set and manage expectations. For example, a business may have a 40,000-square-foot building, however, it has low ceilings and multiple demising walls separating the manufacturing or warehouse area. Today, this is typically an inefficient way to operate. Many companies still have it in their minds that they occupy 40,000 square feet and that is what they need. But when the external provider takes them into market and shows them a wide-open 40,000 square foot space, it makes them rethink whether they actually need that much space. It is critical to consider all the efficiencies and inefficiencies of a building.

George J. Pofok, CCIM, SIOR, is senior vice president of CRESCO Real Estate. Reach him at or (216) 525-1469.

With increasing health care costs, smaller employers are exploring innovative approaches to fund their employee benefit plans to save money. Risk retention groups (RRGs) or “captives” can generate savings for some larger employers that self insure their plans. Captives are now catching on with smaller employer groups between 25 and 500 employees. Smaller employers are becoming more educated and starting to understand how risk management works with their health plans. By pooling their employees and risk with other employers within a captive, it can be a creative way to save.

Now, smaller employee groups are gaining access to those same cost reduction strategies that were only being provided from larger employers through these risk retention groups, or group captives, says Steve Freeman, president of USI in San Francisco.

“For employers that want to influence their claims and have a direct impact on their total cost, a captive may be a great alternative,” says Freeman. “However, if employers are risk averse and are fine with paying premiums with no underlining data or guarantee of the next renewal, this is not for them.”

Smart Business spoke with Freeman about how a risk retention group can give employers more control and create greater transparency in their health insurance plan.

How does a risk retention group work?

An RRG is a liability insurance company owned by its members, which are employer groups. These captives are now being developed for groups of smaller employers, which allow them to self-fund and to participate in the profits of their stop loss premiums. Variability in smaller groups is higher and predictability is lower, giving smaller employers the opportunity to pull themselves into a larger group to reduce their risks.

For example, a company with 10 employees has a 10 percent chance that claims in a given year will exceed the expected amount by at least 70 percent. With an employer of 100 people, that number falls to 5 percent, and, at 1,000 employees, that risk is less than 1 percent.  By banding together to create a larger pool, smaller companies can reduce their risk.

How can a company get started?

Employers have established these captives with other employers that are typically in the same industry, share similar risk characteristics, or that are located in the same area. If a company is part of an association, it can start there. Because captives are fairly new, the association may not be aware of one, but the employer can ask whether there are any other employer groups of the same size and industry that would be interested in self-funding, and thus starting a captive.

Obviously there are laws governing RRGs since you are creating an insurance company that you are a member of and that you own, so there are risk and reserve requirements. You have to work with someone who understands those laws, how the RRG should be administered and how profits are paid to participating members. It is critical to work with someone who’s done this before and who understands the laws regarding these programs.

How can an RRG help create transparency and lower costs?

The real premise behind the popularity of these programs is that they allow smaller employer groups the ability to pool themselves into a larger group, self insure and obtain data on their claims utilization,  allowing them to influence employee behavior, which drives down health care cost.

Smaller employer groups typically don’t get claims data and have no idea what their underlying claims experience is, so can’t act to influence it. Transparency allows employers to see the actual use of their health plan. For example, the volume of inpatient and outpatient claims, the number of office visits of primary care physicians versus specialists and types of ER visits. If the ER is being overused, you can provide motivation for employees to seek other methods of more efficient and cost-effective care. Employers also can see the types of drugs being used, and whether employees are using brand name drugs versus generics. If there is a high number of individuals with chronic conditions who are not enrolled in disease management programs, an employer can provide incentives to enroll folks, which will improve employee health, productivity and absenteeism rates and lower costs.

At the end of the day, if you can reduce your claims, you will reduce your costs.

How can employers determine if this is right for them?

If employers are looking for short-term cost reduction, a captive isn’t for them. Employers need to have a commitment to the long-term success of the captive. This is not a one-year solution or a short-term view. A captive is not for all small businesses.

It’s all about risk management and being able to manage your claims. The largest piece of insurance premiums — 85 percent — is claims. So if you can impact claims up to a certain level, you can reduce costs.

Within the captive, you may have a 50-person employer that can only take on $20,000 of liability per person, and a 200-lives employer that can take on $100,000. Each employer wants to make sure that the risk corridors are properly set for their risk tolerance, and premiums will be based on the amount of risk that each company adopts. Each employer group is underwritten independently at a different rate, depending on the level of risk it wants to take, demographics and plan design.

As employers seek cost-effective ways to continue offering health care benefits to their employees, RRGs, or captives, are becoming a more attractive option. A captive allows employers to share the cost of their liability for funding their benefits plans by pooling costs with other employers. And by providing transparency, it allows employers to target wellness and disease management programs right for their population, resulting in a healthier work force.

Steve Freeman is president of USI San Francisco. Reach him at (925) 472-6772 or

Recent changes to the Small Business Administration’s 504 loan program have made it easier for small business owners to obtain loans. The definition of businesses that qualify has been expanded, and a reduction in the paperwork requirements has sped up the application process, says Ralph Barnett, executive vice president, SBA/Real Estate division, at Bridge Bank.

“When this was rolled out in February 2011, the SBA set criteria that weren’t very well received by the banks and the small business community,” says Barnett. “So it has modified the program to make it easier for small businesses to qualify for loans.”

Smart Business spoke with Barnett about how to take advantage of the SBA program to decrease the amount of your loan payments and increase your business’s cash flow.

How does the 504 loan program work?

The loans are used for real estate or major fixed asset transactions. One of the unique things about the program is that the bank makes the first positioned loan on the collateral and the SBA does a second, or junior, position on the same collateral. That encourages banks to lend, because there is a much lower advance rate on the property.

In the past, the program was only used for new acquisitions, but the SBA recognized that many small business owners also own their buildings, and the value of those buildings has fallen significantly as a result of the recent recession. This caused many lenders to ask borrowers to make significant payments to reduce their principle balances, and some lenders were even calling notes early or refusing to renew.

As a result, and as part of the Small Business Jobs Act, the SBA modified the 504 program to accommodate requests for refinances. This relieved much of the pressure felt by small business owners, and helped to minimize additional turmoil in the real estate market.

Who is eligible?

Some businesses may not be eligible for traditional bank financing, perhaps as a result of loan to value restrictions or insufficient financial performance. These businesses may, however, qualify under the SBA loan program. To understand the criteria, borrowers should seek advice from Preferred SBA Lenders — lenders who have been carefully selected by the SBA based on their performance history, including the demonstration of a high level of proficiency in processing and servicing SBA-guaranteed loans. In general, the SBA program enables borrows to receive up to $5 million in financing, and the lender can theoretically refinance projects as large as $20 million.

Most borrowers are seeking to refinance their real estate loans that may be about to adjust, or are reaching the point where a balloon payment is due. They’re seeking to take advantage of the favorable rate environment we’re in, and to improve their cash flows. Refinancing through the SBA program can provide a significant advantage for small businesses.

How has the program been modified?

The criteria have been expanded, and the application process has been streamlined. These changes are an incentive for banks to be active in lending to businesses hurt by the credit crunch, and for those businesses to continue to borrow and invest in their operations. In the past, the process was quite onerous, and could take six to eight months for a small business to obtain financing. Additionally, business owners felt burdened by some of the exhaustive requirements for information, so the SBA recently relaxed some of those requirements, making the process more efficient.

The SBA also recognized that, not only do small businesses need the ability to refinance their debt, but they also may need to draw out cash on that same property. We are starting to see businesses stabilizing and growing again, and they need to get working capital. So now the program allows for cash out, which it has never done before, to be used for future operational needs.

Finally, the SBA has adjusted loan ratios. Previously, there were cases in which the bank might make a million-dollar loan and the SBA would come in for $100,000 or $200,000. But it’s the SBA portion of the loan that has low market rates fixed for 20 years, which banks don’t offer. The SBA wanted to encourage banks to make loans and wanted small businesses to benefit. So they only thing it now requires is that the bank loan and the SBA loan be equal, essentially taking the loan and splitting it with the SBA. This modification is very advantageous to both the bank and the small business borrower, who gets access to a favorable below-market, 20-year fixed rate.

When the refinance program was first introduced in February, the level of applications remained low; conditions were still too restrictive. Since the modifications in October, however, the number of applications has increased tenfold. The door is now wide open for small businesses to take advantage of this beneficial government program.

What does the SBA look for in applicants?

Like all lenders, the SBA wants to lend to borrowers who can demonstrate their ability to repay the debt. To mitigate potential risk, the SBA and the bank will review the most recent 12-month repayment period to make sure the business has the ability to meet the terms and conditions of the note, and that it can make on-time payments.

That being said, the SBA also realizes that most small businesses have been impacted by the recession to some degree, and it has made some favorable adjustments to the program to accommodate for that impact. So even if the borrower’s business has had significant losses in the not-too-distant past, as long as the business has stabilized in terms of revenue and cash flow, and there is evidence that it can repay the loan, the bank can generally provide financing without requiring certain ratios for the past three years.

Ralph Barnett is executive vice president, SBA/Real Estate division, at Bridge Bank. Reach him at or (408) 556-8334.

Even though he’s on sabbatical this year, Professor Rakesh Sarin can’t just walk away from teaching. He says he enjoys teaching the MBA and Executive MBA program students and is learning too much from them not to teach at least one class. He particularly enjoys teaching the Executive MBA students, as he says they bring new challenges.

“EMBA students are lot more engaged on conceptual issues, even though they have to balance work and study,” says Sarin, who holds UCLA Anderson’s Paine Chair in Management. “They also can apply their new knowledge to their careers immediately, as they already hold full-time jobs.”

Smart Business spoke with Sarin about how the EMBA program differs from the MBA program and how it can change the way you think in your own business.

How does the EMBA program differ from the MBA program?

Students in the EMBA program have more experience. Their primary goal is learning to enhance their careers. It really changes the nature of the discussion in the class.

EMBA students are generally very well prepared. They are used to meeting deadlines and managing their time; you don’t have to monitor whether they are preparing for the class.

Whereas in the MBA program students are focused on learning concepts; in the EMBA program students like to challenge concepts and see extensions of them as they apply to real life. Some of that goes on with MBA students, as well, but they tend to focus more on being sure they can apply those concepts to their homework and exams. EMBA students also think about exams, but more as a reflection of their understanding of the material, and not so much as a goal. They are more interested in how to apply the concepts they learn to the real world.

It’s interesting to talk to them because they tend to bring their own ideas and experiences into whatever concept we are covering. They’re also not afraid to offer their own opinions. The answer might not be what I had in mind, but they are thinking of it in a different way, and I find that very refreshing.

How does their work experience translate to the classroom?

One example is when we were doing a case in which students had to decide whether they were going to put more money into a marketing campaign of a dealer promotion, or put more money into consumer promotion, meaning they would give coupons directly to consumers. There was a student who had faced a similar situation at his job at a major corporation and he was able to provide a lot of input on what he did. Another example is when I was talking about something that happened a couple decades ago. Because of one student’s work experience, he was able to update us on what had happened since then.

Our students are very willing to share their experiences, which helps solidify what they learn. As a result there are a lot of things from the classroom that they are able to apply very quickly to their careers, and are then able to come back and talk about their own real-world applications. From an instructor’s perspective, it’s very refreshing to hear, ‘I learned this in the classroom, and here’s how I’m going to now try to apply it to my work situation.’

How does the EMBA program impact the way students think?

It helps them with decision making and changes the way they think to become more analytical.

The program really emphasizes analytical thinking and how to use it to make real-world decisions. We try to not just teach regression analysis, for example, but how to use regression analysis to improve the forecasting of what you are doing in your company and improve decision making.

How do study groups encourage students to work together?

I find that students in learning teams build closer relationships and are more willing to help one another out. They may be competitive in the classroom when they are discussing something, but within their groups, teamwork reigns. I give two kinds of assignments in my class in which students can work together in groups. In the first, they work together to submit group assignments. In the other, they can work on problem sets as a group, but must submit assignments individually. It can be hard to judge because I only see the output, but I get a greater sense of the entire team contributing.

Sometimes the more goal-oriented MBA students tend to outsmart themselves by delegating someone to do the primary work. Then, when I ask questions, I can see someone is on top of it, but the other group members are less engaged. I don’t see that in EMBA students. Someone might be carrying more weight than another person, but they have all talked about it and have all engaged in the assignments they have been given.

Those relationships often far outlast the classroom. Those 70 students in the program move from one class to another, and are together for the whole year. That builds relationships and further enhances the value of the EMBA program.

Rakesh Sarin holds UCLA Anderson’s Paine Chair in Management. Reach him at (310) 825-3930 or

Obesity can have a significant impact on employers, in health care and workers’ compensation costs and in lost productivity.

Health care costs for obese employees are as much as 21 percent higher than costs for those at a healthy weight. In addition, overweight or obese full-time workers with other chronic health conditions miss 450 million more days of work each year than healthy workers, costing businesses $153 billion in lost productivity, according to a Gallup poll. When you consider that Centers for Disease Control estimates say that one-third of Americans were obese in 2010 and that six in 10 are overweight, that creates a significant impact on U.S. businesses, says Steve Martenet, president of HealthLink.

“Many Americans receive their health care through their employers, and obesity impacts not only general health care costs but also other costs,” says Martenet.

Smart Business spoke with Martenet about the impact of obesity on businesses and what they can do to combat it.

How can employers begin to combat the obesity epidemic?

Biometrics can provide a snapshot of the health of your employees. If 75 percent of your work force is classified as obese, you are looking at a very different solution than if that were 5 percent. The higher the percentage of obese employees, the more those people are costing your business.

Once you understand how much obesity is potentially costing you, you can determine the best plan of attack to try to manage that. It starts with creating a culture around general health and wellness and fitness, and a culture around transparency in which employees know how much benefits actually cost — just not what the co-pay is — and then create awareness around what employees can try to do to positively impact those costs.

How can biometrics help improve health?

It’s a matter of education. Once they understand where they are in terms of BMI and their health conditions, it’s easier to get people to adopt certain behaviors and take steps to address those conditions. Biometrics lets them know what shape they are in and allows them to understand what they need to start doing to take control of and improve their overall health. If people know they have a certain BMI and understand what that will mean in 10 or 15 years, they may be more willing to take actions today to address that so they will be healthier in the longer term. Being healthier will ultimately cost them, and their employer, less in premiums for health insurance.

How can employers make employees care about costs associated with obesity?

Educate them about how health care is financed, how much employers are paying in premiums and that premium costs are tied to claims. The more claims a company has due to unhealthy lifestyles and obesity, the more you’re going to pay in premiums, which is potentially less that employees have to take home in disposable income. That makes it real that there is a dollars and cents impact on employees.

Educate them through meetings, e-mails or brown bag lunches. Another effective way is a quarterly statement that shows employees their total compensation package: This is cash compensation, this is vacation compensation, this is how much your health insurance premium is, this is how much goes to the 401(k). Then they get a total picture of what that employer is funding.

Once they understand how much the employer is really paying for health insurance you can start educating them on what drives that premium. That presents opportunities to make real changes in their personal behavior, managing chronic conditions and improving their lifestyle. They can see that what they do is directly related to premium costs and their overall compensation. If one segment of the pie gets too big, other segments — such as pay or 401(k) contributions — get smaller

How can you encourage employees to participate in wellness programs?

Employees are more likely to buy in to an employee-led initiative if they have a hand in creating the program. That said, however, you have to lead by example. If management is not involved, it’s easy for front-line associates to not take it seriously. Executives have to be part of the health screenings and be active in their participation in the program.

How does obesity impact workers’ compensation costs?

Obese workers are more prone to injuries on the job, and it takes longer for them to recuperate from those injuries, driving up workers’ compensation costs.

According to a Duke University survey, employees with a BMI of 40 or higher had 11.65 claims per 100 full-time employees, at an average cost of $51,091 per claim and 183 lost work days. Employees with a healthy BMI had 5.8 claims per 100 employees, at an average cost of $7,503 and 14.19 lost days. When you look at the numbers, they are staggering.

How can childhood obesity impact employers’ costs?

In much the same way that employees do. Medical costs for obese children are higher, and if they have health problems, that leads to lost productivity for the parent. If a parent is at work and worried about an obese child and the social ramifications of obesity, they are not truly focused on what they need to be doing at work. It’s a little more difficult to address, because what you do in the workplace may not make it home.

However, employers can offer educational materials that go down to the child’s level about eating healthy. Employers also have the option of purchasing wellness products built around creating a culture of health.

Ask your health plan administrator what services it offers around health and wellness to help create a culture of health and wellness in the organization.

Steve Martenet is president of HealthLink. Reach him at (800) 624-2356 or

Thursday, 19 January 2012 15:49

As American and world markets remain volatile, many companies are striving to further lean out their operations.  Cutting waste out of an organization requires calculated decisions and requires managers to take a hard look at all areas of a company to assess how changes will affect operations.

Whether looking to cut costs by improving efficiencies, renegotiating contracts or reducing the work force, it is important for companies to consider the big picture. Managers must also involve those at the highest levels of their company, including board members.

“It is essential that directors become more involved in the day-to-day operations of the firm,” says Adam Wadecki, manager of operations, Cendrowski Corporate Advisors LLC.

Doing so is important, Wadecki says, because directors bring a different perspective than the management team and can help the firm’s members see issues from another angle.

Smart Business spoke with Wadecki about how to become a leaner company and streamline operations.

How do you define a lean organization?

A lean organization is one that can quickly convert its resources into cash. The time it takes to convert resources into cash is equivalent to the time it takes the firm to convert raw materials into finished goods, finished goods into receivables and, finally, receivables into cash.

An organization becomes lean by decreasing the time between each of these steps. Many organizations track the average time spent in each of these conversion processes; however, a more thorough analysis will look at not only the mean time spent in each process but also at the distribution of the time spent in each process. This analysis should be included in an organization’s risk management strategy, as decreasing time to realize cash will help the organization improve its working capital management.

What steps can an organization take to start becoming leaner?

With respect to production processes, lean manufacturing and Six Sigma are probably the most widely used tools. Each of these has gained in popularity in the last 20 years. Accountants also have developed tools to use when assessing operations, generally under the guise of internal control.

For a long time, the accounting profession largely concentrated on what it called internal accounting controls within a business. However, the profession has since moved to a broader definition of what it labels internal control, emphasizing that operations are indeed a part of an internal control assessment.

Lean manufacturing, Six Sigma, and internal control all serve to increase efficiency and reliability, though they do so in different ways. Lean manufacturing is generally less quantitative than Six Sigma and internal control methods, but can deliver formidable results.

What types of analyses can management perform to improve a company’s operations?

Historically, managers operating in volatile environments have placed great emphasis on cash management at all levels of the organization. We see this today in the large cash balances held by many companies in spite of what appears to be a rebounding (albeit slowly) economy. This emphasis is underscored by the need of management to understand the day-to-day finances of the firm’s operations and also the ability of the firm to service any outstanding debt obligations. However, it also is important to quantify the risks to these cash flows based on the likelihood and impact of potential events. This should be an essential part of the organization’s risk management process.

How can an organization quantify risks to cash flow?

This is a process that both management and the board of directors must be involved in. Cash flow risk assessments must be performed with accurate and timely information. It’s also important to consider the human element in the risk assessment process. For instance, when directors receive risk assessments from management, they should consider management’s track record in providing these assessments. Are risks generally understated? How tolerant is management of low-likelihood risks? How does management test its risk assumptions? How are likelihood and impact estimates quantified? Management can pose similar questions to the company’s support staff.

By understanding risks, organizations can identify with a laser focus those operations in need of improvement. This process is especially important for organizations that have lean operating strategies or those that are attempting to improve their leanness; such organizations often rely on steady, predictable operations to maintain high profitability.

What are some mistakes organizations make when proceeding toward lean operations?

Organizations need to ensure that they are, in fact, ready for change before they begin implementation. To borrow a phrase from the accounting profession, a proper tone at the top needs to be set, and employees must buy in to the process.

This tone is set not only by management but also by a firm’s directors. If these individuals are not able to garner worker support, any initiative is likely to fail. Where possible, it may be advantageous to tie employee performance with company profitability in order to make sure everyone is properly incentivized; workers must believe the benefits of their activities will exceed the costs.

However, organizations must be careful not to create incentives for workers to optimize myopically rather than over the long term. This was a central problem at the heart of the current crisis that began several years ago — improper incentives that led to socially suboptimal decisions. Remember the adage, ‘What gets measured gets done.’

Adam Wadecki is manager of operations at Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or

Many business owners think of their company as a tight-knit group and their employees as a family. That may be true in good times, but what happens when something goes wrong and an employee — or potential employee — sues you?

If you don’t have employment practices liability insurance, a lawsuit could put you out of business, says Cliff Baseler, vice president, Best Hoovler Insurance Services Inc., a SeibertKeck company.

“It is such a critical part of a commercial insurance program today that every company should have this coverage,” says Baseler. “It’s important coverage to round out property and casualty insurance. It doesn’t matter if you have one employee or 1,000 employees, it is a must, and the cost is relatively small in relation to the potential costs in the event of a lawsuit. Because it’s not a question of if you are going to have an EPLI claim, but when.”

Smart Business spoke with Baseler about what employment practices liability insurance covers and the risks of failing to have it.

What is EPLI and what does it cover?

EPLI is an insurance policy that provides employers with protection against claims of discrimination, wrongful termination, sexual harassment or other employment-related claims made by employees or potential employees.

Employers may see themselves as one big happy family, but happy families can be broken up when a company has a downturn and has to lay off employees. In an age of corporate downsizing and mergers, one of the biggest areas of employment practices claims is discrimination, be it sexual discrimination, racial discrimination or, the largest single driver today, age discrimination. The second biggest area of claims in this area is retaliatory claims, for example, when someone is a whistleblower.

When the first EPLI policies were offered, coverage was related to claims associated with the Americans with Disabilities Act and only large corporations carried these policies. Today, however, coverage is much more broad and it’s gotten to the point where even very small companies need to have it.

What steps can companies take to avoid EPLI claims?

All major insurance carriers have loss prevention consultant services. Businesses should take advantage of those services, because they can help your company be proactive in avoiding suits, providing best practices and loss prevention services. Some even offer a hotline where, if you’re in a sticky situation and don’t know how to handle it, you can call and talk to an attorney before you take action. For example, if you are going to fire someone, the attorney can advise you on what documents you need to have and what steps you need to take before doing so.

Your carrier can also help you set up your employee handbook with sexual harassment and discrimination policies outlining unacceptable behavior. Having those policies in place can go a long way toward helping you mitigate these types of claims.

If a company is doing everything right, and has these policies in place, why does it need this insurance?

Any company can be targeted for an EPLI lawsuit. And even if the company is innocent of any wrongdoing, it still has to defend itself against the charges of illegal employment practices. If you are accused of misconduct, you will need an attorney to defend you. The average cost to defend a simple EEOC discrimination claim starts at $25,000 to $35,000, and that’s for a dismissal. If the claim ends up in court, you could be looking at six figures or more.

In addition, these types of suits are more plentiful in this economy. As companies lay off employees, the frequency of claims for wrongful termination and discrimination has increased dramatically.

How would a potential employee have a claim against a company?

For example, if you have a potential employee who is 58 and very well qualified, and one who is 35 who is equally qualified, you can’t use age in your decision to hire. It’s amazing how many employers will have the discussion about the 58-year-old only being around for a few years before retiring, while the 35-year-old will probably be around a lot longer. If that potential employee learns of those discussions, and especially if they are documented, you may have a discrimination suit on your hands. This is where your insurance company’s loss prevention program can come into play to create policies to avoid this type of situation.

Another potential area of liability is if an employee leaves your company, is interviewing with another company, and someone at your company says negative things about the former employee. If that gets back to the employee, who finds out he or she didn’t get the job because of something someone at your company said, that can also result in a lawsuit.

How does third-party coverage work?

Third-party coverage is attached to your EPLI policy and covers accused wrongdoing outside your company. For example, if you have a salesperson who makes sexual advances to a client’s receptionist, and she sues your company for sexual harassment, that’s where third-party coverage would come into play.

Do EPLI policies cover prior acts?

In most cases, yes, but the caveat is that any known prior incidents and pending litigation are specifically excluded. Prior acts could be something that happened years ago, but you weren’t aware of the problem and no supervisor had been notified. But any known prior acts that might give rise to a claim would be excluded.

Cliff Baseler is vice president, Best Hoovler Insurance Services Inc., a SeibertKeck company. Reach him at or (614) 246-7475.

Most business owners know to call their accountant when they’re filing their taxes or doing succession planning, but there are other times a CPA can benefit your business.

Whether it’s making a large purchase or crafting a benefits plan, your accountant can help you make the best decisions to save you money and keep you on the right side of the law, says David McClain, CPA, MBA, a manager in tax at SS&G.

“Too often, clients will approach their CPAs after the fact with what they have done, when calling before they made a move would have given them more options,” says McClain.

Smart Business spoke with McClain about when your first call should be to your accountant.

In what situations do people often wait too long to consult with a CPA?

One of biggest situations is when a client is starting a new business or buying an existing business. When you start a business, that’s the only time you have to set the rules by which you want to play.

If you talk to your CPA after your attorney has drawn up the papers and say, ‘I’m going to be a C corp,’ there are things the CPA can do, but at the end of the day, you’re stuck starting within C corp tax laws and working from there. You lose the flexibility you would have had if you had first talked to your accountant about what you want to do with the business, what your long-term plans are, and what option works best for you.

People will often talk to an attorney first, but the attorney and the CPA need to work together to balance the legal and the financial sides to come up with the best option.

How can a CPA assist when selling a business?

Structuring a tentative deal and then approaching your accountant is a mistake. There may be options that you haven’t considered, and the tentative deal you have considered may have negative tax consequences. At that point, if you then need to restructure the deal, the potential buyer may walk away because you are too far down the path to start over.

If you’re even thinking about selling, talk to your CPA about potential structures for a deal and their related tax consequences. Then you’ll know what potential framework would be best to work within. For example, if you’re structuring the sale of your business one way, you may potentially still be on the hook for legal liability versus an alternative that would avoid that potential future liability. There are also options to defer paying tax on the sale of a business, depending on how it’s structured, so contact your CPA as early in the process as possible when starting to think about selling your business.

Why should you talk to your CPA before making major purchases?

There are so many options for depreciation and there are state and federal incentives for things such as energy-efficient property. If you approach your CPA and say, ‘Here’s what I’m thinking about doing,’ then you can look at whether it makes sense to buy new or used. An owner may lean toward buying used to save money, but there are tax laws that allow you to write off the entire purchase in one year if you buy new. So it may make sense to buy brand new instead of used.

How can a CPA assist with retirement and succession planning?

Retirement planning is tricky. There are several types of plans, and each has its own set of rules. For example, there are plans where owners can put in more money than employees and there are plans where they can’t.

First, look at how much it costs to run the plan, as they can be very simple with minimal costs or very cumbersome and have a lot of requirements that increase the cost. It’s important to talk with your CPA about your needs for retirement to make sure your plan not only meets your goals, but is also cost effective and efficient.

With succession planning, business owners often don’t think about it until much later in their careers. Who is going to run the business? How is it going to get from you to that person? The value of the business is a nonliquid asset, so there  may be estate tax. You have to determine how the person who inherits the business is going to be able to pay that tax and still have enough cash to run the business.

Business owners really need to start thinking about this earlier in the process. You may have children who are going to take over the business, so you need to figure out how they are going to get ownership. Do you want to start gifting to them during your lifetime to get that asset out of your personal estate? Do they even want to run that business? There is a whole litany of questions you need to ask to start planning.

This is an area where some people try to go it alone, but I would advise against that. With the uncertainty in the estate tax area, it could be a very expensive transaction for the person who takes over the business. If you haven’t planned correctly and that person doesn’t have the cash to pay the potential tax, it may be a significant enough tax to force the sale of that business.

The earlier you start planning, the more favorable results you will likely end up with.


Next month, learn about more ways that your CPA can benefit your business.

David McClain, CPA, MBA, is a manager in tax at SS&G. Reach him at (800) 869-1835 or