With the recession and credit crunch affecting virtually all sectors of the economy, a greater proportion of company acquisitions today involve distressed companies. Whether the seller or target company is already in bankruptcy proceedings or simply experiencing financial difficulties, these deals present unique challenges, says Ann Gelfand, managing director of Aon Risk Services Central Inc.
When a company finds itself in financial distress, it often sells off noncore assets, subsidiaries or the entire company. The goal of the seller is to maximize the amount of cash it receives, which often means compromising on deal points such as indemnity terms. Even if a seller makes it a priority to keep the indemnity cap low, its financial condition may cost it the bargaining power to achieve this. The likely result is that the seller is forced to accept indemnity terms (high cap and/or escrow) with which it isn’t comfortable.
Smart Business spoke with Gelfand about how to do deals with financially distressed companies.
How can both parties get comfortable enough to close a deal?
In many instances, transaction liability insurance products can provide a solution. In the seller-friendly deal environment of past years, representations and warranties insurance (RWI) was used to supplement a relatively low seller indemnity cap for breaches of reps and warranties, resulting from the buyer’s lack of negotiating leverage or as an accommodation to the seller by replacing or reducing an escrow.
Distressed deals come with their own unique issues, for which RWI can offer a valuable solution. In these deals, it is critical to minimize cash escrows yet still offer a buyer protection against contingent liabilities. A seller-based RWI policy can be written to insure a large percentage of the seller’s indemnity obligation to the buyer. For example, the seller may agree to a high cap but would be able to insure most of that indemnity obligation.
Alternatively, if a buyer is purchasing assets from a seller in financial trouble, the buyer will likely have the leverage to negotiate favorable indemnification terms. The issue is whether that indemnity offers true protection for the buyer if the seller is unable to satisfy its indemnity obligation.
The survival period for the reps and warranties (and the related seller indemnity) usually extends from one to three years (often longer for tax, environmental and title reps). Moreover, even if the buyer negotiates an escrow of purchase price as security, the escrow will likely only cover a portion of the indemnity cap.
How does this apply to bankruptcy situations?
Potential buyers of bankrupt companies (or of their assets or subsidiaries) can usually perform due diligence and negotiate the purchase agreement to include customary reps and warranties. Because of the need to maximize the return to creditors immediately upon the sale, however, those reps and warranties usually will not be backed by any seller indemnity for breaches discovered after closing, as reps and warranties do not survive the closing. In a bankruptcy sale in which the buyer cannot negotiate indemnification, a buyer-based RWI policy could be written in excess of a retention of approximately 5 percent of the purchase price, providing recourse for the buyer where otherwise it would have none.
Are there other insurance solutions for transactions?
Whether a company is looking to emerge from Chapter 11 bankruptcy or contemplating a transaction outside of bankruptcy, tax uncertainties often arise and may get in the way of the business goals of the parties. Tax insurance is invaluable in these situations.
For example, in one situation, a plan of reorganization required the funding of an escrow account to backstop a tax indemnity covering ‘golden parachute’ excise taxes under Code Section 280G. This effectively required the creditors of the company to wait up to six years for the IRS statute of limitations to lapse before funds could be paid. A tax insurance policy insured the former executive who was the beneficiary of the escrow in the event of a successful IRS challenge. Funds equal to the policy limit were released from the escrow account and paid to the creditors of the estate.
Bankrupt companies will often hold net operating loss carry forwards (NOLs) that can be used to offset taxable gains. Code Section 382, however, limits the ability of the successor company to use the historic NOLs going forward, except in limited circumstances. Whether or not these tests have been satisfied will require a determination by counsel and would leave the estate and/or the successor company with a tax bill should such determination be challenged by the IRS.
A tax policy ensuring that the Code Section 382 limitations have been properly applied would provide comfort to the parties to proceed with the transaction. The policy would cover tax, interest, penalties, contest costs and a gross up. Such a policy could insure the estate if it is required to provide a tax indemnity. Alternatively, it could ensure that the successor corporation will obtain the economic benefit expected.
Note that tax issues involving utilization of NOLs are not unique to bankruptcy and can arise in other deals, as well. Recent TARP legislation also enhanced the availability of NOL carry backs for various transactions.
RWI and tax insurance are the insurance products most commonly used in distressed deals, along with coverages such as environmental insurance. But outside of these areas, it is often possible to craft unique insurance solutions to address unusual issues that may arise in a distressed deal.
Transaction liability products can make the difference between completing a transaction or not, and the value is even apparent in distressed deals, in which the ability to close a deal can alter the future of the company.
Ann Gelfand is managing director at Aon Risk Services Central Inc. Reach her at (314) 719-5187.
John Stroup was not taking over a company in trouble when he was named president and CEO at Belden Inc. in late 2005. The electronic cable designer and manufacturer provides cables for a variety of industries and was doing a good job, with revenue hitting the $1 billion mark in 2005, up more than $350 million from the year before.
But Stroup saw a flaw that he believed needed to be addressed.
“The thing that has been my greatest challenge at Belden and continues to be my greatest challenge is really creating consistent alignment within the organization and being able to execute on what we believe to be important on a daily basis,” Stroup says.
What separates the average companies from the great ones is often the discipline and focus they give to the things they do best. Each fall, Stroup noticed that employees just don’t seem to have the same focus on company priorities that they had in January and February.
“Other things creep in that people want to work on,” Stroup says. “People are well-intended and it’s not like these ideas are bad ideas. But in any organization, and most notably a company, it’s not so important to determine what you’re going to work on. Often it’s more important to figure out what you’re not going to work on, because you just don’t have endless resources.”
Stroup wanted to find a way to keep his 7,500 employees focused on the things that mattered most to the success of Belden.
The answer was to start using hoshin planning, which is a systematic planning methodology that was developed in Japan.
“It allows a company to literally on one piece of paper be able to identify the key breakthrough priorities that are important to us,” Stroup says.
All he needed to do now was determine which key priorities would make it onto that paper, develop a plan to achieve those goals and do it in a way that Belden’s employees would support.Get to what matters
When you’re trying to bring order to your business and devise a strategy for how to get things done, it’s crucial that you do things in the right sequence.
“The execution of your plan is entirely different than the development of your plan,” Stroup says. “Those two things really need to be done separately and they need to be done sequentially. Otherwise, you’re going to have great execution but on the wrong things, or you’re going to pick the right things, but you’re not going to execute any of them very well.”
Your first step should be to pull in your critical thinkers and get down on paper the most important things that matter to your business. Make an agreement that this list will not include personal pet projects that don’t serve the greater good of the business.
“It’s not about, ‘Here’s the thing I want to do,’” Stroup says. “It’s really got to be a very thought-based process with as much data as you can possibly get to be able to accurately identify those things that are truly strategic.”
Be purposely divergent in the beginning to allow for the consideration of all ideas that fit this mold.
“Then I ask each one of those people to dive into more detail in their specific areas, which allows them to involve others in the process,” Stroup says. “We have eight to nine different things we’re really looking at in detail and within each of those eight to nine teams, we probably have no more than eight to nine people. So in our company, we probably have nearly 100 people that are involved in the process. But we have nine to 10 people who have oversight in the final decisions of the working of the plan itself.”
As you’re selecting people, be thoughtful about how the experience will help the individuals chosen.
“The company may benefit from an individual being on a particular subject, but that individual might actually benefit more from being on another subject because that’s an area where they really need to develop,” Stroup says. “So we really try to take both into consideration when we develop the teams.”
At some point, you need to change from being divergent to convergent and get your list boiled down to the essentials.
“The process you use to converge can be as simple as voting around the room or as authoritarian as the CEO saying, ‘Look, these are the three things we are going to work on,’” Stroup says. “It sort of depends on the style of the leader and the style of the company.”Stick to it
A business plan is the equivalent of a personal exercise plan: If you don’t act on it, nothing happens.
“If we all ate well and exercised every day, our health care costs would be cut in half,” Stroup says.
Sticking to a business plan requires that same type of daily commitment.
“It’s all about a culture of discipline,” Stroup says. “I don’t think there’s any way to do it quite frankly if you don’t have a CEO that embraces and lives that culture of discipline. If the CEO doesn’t, you create an opportunity for everybody to feel like it’s OK that they took Wednesday off or took Friday off or they felt it was OK not to follow up.”
It comes down to setting expectations for everyone.
“The limited amount of time you have with any individual means you have almost no opportunity to observe and follow up on how they spend their time,” Stroup says. “I start by setting expectations. If my expectations are not high enough, then people are going to have tons of opportunities to waste time. I try really hard to make sure my expectations are such that there isn’t a lot of free time.”
While you can’t establish tight bonds when you have thousands of employees, you do still need to have conversations and be out there with your people and talking to them about how they are doing.
“You can find out pretty easily whether or not somebody really is trying and struggling to perform as opposed to somebody that isn’t performing but isn’t really trying very hard,” Stroup says. “That’s a pretty easy thing to do if you invest the time with people.”
To make sure everyone sticks to the plan and is making regular progress, Stroup has his employees develop their own metrics that are specifically tailored to their responsibility at the company.
“Operations have had metrics for years,” Stroup says. “Whether it’s quality, on-time delivery, productivity, safety — the operations team has had metrics forever. One that is a little bit less straightforward is human resources. But of all the groups we have in Belden, I’d say the human resources group has done as good a job as anyone, if not better, of identifying really good metrics to determine whether the things they are doing are making a difference.”
The solution for the HR team was tracking employee engagement — how good is each employee at understanding the things he or she does and how the employee connects to the company’s goals.
“It really tries to get at just how effective and engaged our employees are,” Stroup says. “Our human resources team has a measure for that every month and they measure it every month.”
Employees who struggle or slip on their metrics are not going to be punished just for ha ving a bad day, week or month.
“It’s OK with us if you are behind plan because we purposely create stretch objectives,” Stroup says. “Reaching our objectives is very difficult and it’s OK if you fall short. But it’s not OK if you are not vigorously trying to figure out why you fell short and what you feel you need to do differently to get yourself back on track. That’s what we’re focused on.”
Making the metrics public provides a little extra incentive and instills some competition in the effort to get better.
“There’s one thing that everybody wants to know and that is, ‘What’s the score?’” Stroup says. “I know I always tried a little harder when the scoreboard was on. I’m a big believer that everybody needs to have a scoreboard and they all need to be turned on.”
Stroup wants his employees to always be trying to win.
“It’s not OK just to go out and work hard,” Stroup says. “We want to win and when we don’t, it sort of irks us a little bit. We want to figure out what we didn’t do or what we did do that mattered.”Don’t quit
Stroup has received confirmation as to the success of his plan each year at the company’s annual board meeting.
“Every year, we’ve revisited the list of strategic issues and opportunities,” Stroup says. “We have not changed any of our issues and opportunities. We have exactly the same list. It gives our associates confidence that we are working on the right things. And if we continue to execute well on those things, we’ll continue to deliver the kind of improvement we have over the last three or four years.”
Under Stroup’s guidance, Belden’s revenue has risen from $1.25 billion in 2005 when he took over to $2 billion in fiscal 2008.
Even though the company has made great strides, Stroup says you have to always be pushing for more.
“We can only declare victory if two things happen,” Stroup says. “One, there is really a process that has been developed that is sustainable. And secondly, it’s in fact delivering the expected result. You cannot have just one. If you get the results without the sustainable process, you haven’t really done what you needed to get done. And if you develop a process, but it’s not giving you the desired results, then again, you’re not going to be happy.”
How to reach: Belden Inc., (314) 854-8000 or www.belden.com
As the recent outbreak of H1N1 has once again shown, the threat of a disease-related crisis to your business is real. If not properly handled, disease in the workplace can cause serious and expensive consequences, including high levels of absenteeism, loss of productivity, business interruption and increased liability claims. And if not well managed, the situation can also lead to significant risk to your business’s reputation.
“Many stakeholders are beginning to question existing crisis preparedness in their organizations and are finding it difficult to provide the levels of reassurance expected,” says Mary Walkenhorst, health care practice leader at Aon Risk Services.
Smart Business spoke with Walkenhorst about the questions you should be asking to ensure that your organization is prepared to cope with a pandemic or another crisis of similar size and scope.
What does a business need to consider in a pandemic?
To limit the spread of the infection, medical and government authorities are likely to temporarily close schools, nonessential public services and places where large numbers of people gather, such as public transportation hubs. In that case, your organization needs to consider the impact, especially in relation to increased absenteeism, that this would have on normal operations.
Much of the impact during a pandemic will be from absence from work. Some of those absent will have the virus, while others will be unavailable as they provide care for family members or look after children who are not in school. You have to make sure that you include these ‘additional’ absences on top of expected infection rates in your planning.
In addition, an increasing number of telecommuters will help reduce the number of employees who need to travel to and from work and reduce the chances of workers contracting the virus. Establish a work-at-home policy and make the technical infrastructure available. Also, cross-training for critical jobs will allow staff to fill in for absent co-workers. Identifying critical functions, determining necessary skills and planning for training will help you achieve this.
Is an existing business continuity plan enough to deal with a potential pandemic?
Existing business continuity plans are likely to focus on an interruption following a loss of use or damage to physical assets. A pandemic-induced interruption is different because, although physical infrastructure is intact, human capital is affected. Have you considered the adequacy of existing plans to cope with a pandemic? For example, are plans in place to ensure that all response and recovery teams can replace team leaders and members if they are unavailable?
Many organizations have invested in the development and implementation of business continuity planning. However, only a minority have subjected these plans to testing and given the nominated recovery teams the opportunity for a dress rehearsal. You need to subject your existing business continuity plan arrangements to rigorous testing using a pandemic-based scenario, then use the results to refine the plan.
For example, existing processes for facilities management may prove insufficient in a pandemic. You need to identify where existing processes need to be improved and address increased cleansing, increased use of disinfectants and other cleaning products, washing of uniforms, increased inspection, and the shutting down of air conditioning and climate control systems to minimize spread throughout facilities.
A pandemic will necessitate a series of temporary measures to ensure critical business functions are maintained. Consider making arrangements for segregating teams, providing dedicated transport and staff accommodation near the workplace and ensuring access to health care for staff.
Government and health authority understanding and knowledge of pandemic flu is continually evolving. You need to create a process to gather expert advice and up-to-date information from local health authorities, government and other relevant specialists to assist in formulating your plans and identifying individuals at the greatest risk.
How can a business address security during a pandemic?
Public services that are taken for granted will be stretched, and their availability should not be assumed. This could have wide-ranging implications for law and order, and security arrangements should be reviewed to ensure they are adequate.
Make sure your organization reviews its security protocols and makes the necessary arrangements to fill potential gaps if emergency services are unable to respond.
How can a business ensure its supply chain?
There will be widespread disruption to the normal shipping and receiving of goods and services necessary to sustain business. In addition, travel restrictions will limit the movement of people. You need to establish alternative supply and delivery chains and consider the potential impact if transport restrictions are implemented.
Most organizations heavily rely on suppliers for key services and may outsource entire functions to specialist partners. Given the heavy reliance on third parties, review their contingency plans to make sure they are adequate for a pandemic.
How important is communication in the midst of a pandemic?
Even in advance of a pandemic, fear, anxiety and rumor will affect work force behavior. When the pandemic actually hits, this situation will worsen, and providing timely and accurate information will prove critical.
Before that happens, you need to develop and implement an effective communication plan so that staff can be updated as the situation develops.
Mary Walkenhorst is the health care practice leader at Aon Risk Services. Reach her at (314) 854-0702 or email@example.com.
Joe McKee did indeed hold the title of president at Paric Corp., but it wasn’t a role he felt too comfortable with just yet.
“I was somewhat insecure in my position and just hoping people would believe in my leadership and want to stay around,” says McKee, reflecting back to 2001 when he was appointed to lead the construction management firm.
McKee’s confidence didn’t exactly surge when his father and company founder, Paul Joseph McKee Jr., got up and spoke to the employees not too long after he took charge.
One of McKee’s first projects as president was to clearly define the core values that Paric employees were expected to follow in their work. McKee was pretty proud of the efforts of his team, and as it turned out, so was his father. But the words his father used to express how he felt left McKee breaking into a cold sweat.
“‘These are wonderful,” the elder McKee said, speaking to a gathering of the entire company. “If you don’t believe in these values and you’re not willing to dedicate yourself to these values, you can get up and leave now.’”
It wasn’t quite the way the younger and still tentative McKee would have put it. But less than 24 hours later, he saw the wisdom in his father’s words.
“I started thinking about it, and by that night, lying in bed, I realized he was so very right,” McKee says. “You can’t be afraid to say that. It’s no different than when you’re raising your family. You can’t be afraid to say to your kids, ‘Hey, if you’re not going to live by my values or my rules, once you reach a certain age, you’re going to have a choice to make.’”
It drove home the idea for McKee, now Paric’s president and CEO, that you have to follow your convictions and say what’s on your mind if you’re going to be successful in business. It’s what has helped him guide the firm to nearly $300 million in revenue today.
“It really starts with you as the leader of the company,” McKee says. “If you have a set of values and you don’t live them, people know. We talk a lot about core values and we’re not afraid to talk about them. I know a lot of people have them on cards and have them on their walls, but they don’t ever talk about them. We really try hard not to do that.”
McKee knew he needed to engage his employees and speak to his customers about the things he felt the company needed in order to be successful.
“Where people fail is being afraid to lead,” McKee says. “I love sports and what I have found is like most things in life, if you play not to lose, you’ll lose. If you play for the love of what you’re doing and you try to do your best and play with reckless abandon, you’ll do a great job. Too many people in today’s world play not to lose, so they never end up leading.”
Here’s how McKee played to win by being himself and, in the process, developed stronger ties with his customers and his 250 employees to help Paric succeed.Be curious
If you’re always talking, it’s hard to learn anything new. It’s a lesson that McKee’s grandfather taught him that remains with him to this day.
“You ought to use your ears twice as much as you use your mouth,” McKee says. “It starts there. It starts with listening to your customers first and foremost.”
Get the process rolling by asking questions about how you can serve your customers better and then listen to their response.
“They will tell you if you listen close enough what you are good at and what your strengths and talents are,” McKee says. “If you’re not afraid to ask, they will tell you what you need to work on or how you need to improve as a company because you are always striving to get better. If you take the time to listen and ask questions, you will be amazed at what you can find out.”
When you’re asking for questions to help support your business, you are also showing people that you don’t have all the answers and that you’re open to hearing their feedback on how to do things better.
“If you’re judgmental, you’re not going to get very far,” McKee says. “If you’ve already got the answer, then don’t ask the question. You have to ask genuine questions and be genuinely interested and curious. If you’re not, people know in a heartbeat, and you will not get good feedback. People will become defensive and they won’t truly share.”
McKee recalls a meeting where Paric was looking to obtain a job for a local educational institute.
“I’m generally an intuitive person and I’m constantly learning,” McKee says. “We ended up in the presentation where we were supposed to be talking about Paric, instead, we spent a good part of the day talking about how education should work.”
While it may have seemed like an unrelated tangent, the discussion helped Paric build a valuable relationship with this client.
“If you understand your customers and what they are trying to accomplish, it’s amazing how much you can learn and how much more effective you can be in bringing great service to them,” McKee says. “You can never have too much information.”
You need to live by the same spirit of curiosity with your employees.
“You start with having a real clear vision of where you’re going and what you’re trying to accomplish,” McKee says. “We kind of talk about it as a no-excuses culture. Our view of the world is if there is a challenge, it’s everybody’s challenge to figure it out and we all need to get in the boat and figure out how to solve it.”
By placing the burden to find a solution on the entire group, you avail yourself to more possible answers.
“You have to focus on delivering the best value for that customer,” McKee says. “So it starts with that strong vision about what you’re trying to accomplish. Then you empower the people and give them the freedom.”
Spend time walking around your office and taking an interest in what your employees are doing.
“You might just happen to hear an employee talking about a challenge or a problem,” McKee says. “That just happened the other day. They were working on a challenge on how to build something. I just happened to stick my head in and I gave them a couple good ideas and I watched that team go and they had to figure it out. It was pretty cool to see and that was allowing that interaction to happen.
“I learned a long time ago that where I really got a good education was having my thoughts or beliefs and ideals challenged in the freshman hall or with my friends outside the classroom. That’s where I truly grew as a person. It’s no different with employees and customers. It’s those interactions that add value. What I try to be to my employees and with customers is somebody that brings value to them.”Build trust
If you want people to buy in to you as their leader, you need to earn their trust. That can sometimes mean different things to different people.
“People tend to think trust today is to make everybody happy,” McKee says. “We preach here that to have trust is to have a mutual level of respect. Trust starts when you can share your true beliefs and say what you truly think. In our world, we call that creative tension. In a good debate, if you have differing opinions and thoughts, that’s a good thing to share because in that, you will find a better solution. In today’s world, we’re so busy trying to make everybody get along that we fail sometimes to really get to true trust where you can have a debate with trust and honesty.”
McKee poses a hypothetical situation in which an individual at the end of a failed project exclaims that he knew that the problem, which doomed the project, would probably happen.
“And you think, ‘Well, why didn’t they say something?’” McKee says. “Because they didn’t trust the group and they didn’t feel comfortable enough to put that out there.”
You can take a long step toward earning trust by admitting your own faults and weaknesses to your people.
“In my organization, I’m 41, and I’ve learned a little bit about myself,” McKee says. “I run really hard, and I will leave people behind. So what my team has, I tell them they have a two-by-four and any time I’m getting ahead of them, they have permission to whack me in the head, and I can slow down and listen. … When you empower people to help you with your weaknesses, it’s amazing how much better you get when they can help you, and then likewise, you start to learn how to help them.”
Obviously, the discussion of a person’s weaknesses works both ways. The goal of offering your expertise and showing your employees that you’re still learning is to convince employees that success is a team effort and that you need everyone bringing their skills to the table.
“When you find a really good team, when they are together, you might have a hard time finding the leader,” McKee says. “In a great team, everybody is doing their part. While there may be one guy that the ultimate decision comes to, they get so good that they never have to get to the ultimate decision. They work so good that you just get there.
“One of my biggest wins as a leader is seeing Paric people do great things without me and watching Paric people grow. When you start to see that happen and you know you gave people an opportunity or created an opportunity and they took it and ran with it, you get that virtuous cycle of people believing in themselves and making great things happen. It reinforces to you as the leader, ‘Hey, I’m on the right track here.’”
What it really comes down to is taking the time to invest in relationships with your people and teaching them to do the same with your customers.
“Take the time to build those relationships,” McKee says. “We talk with our employees about building one-of-a-kind relationships where we get to know our customer in a way that other people don’t. To truly become a partner, that’s where that starts. To be a partner, you have to earn somebody’s trust. That comes from doing a great job, helping them solve a problem and helping that customer grow and be successful at what they are doing. It comes with being invested in that customer’s vision and what they are trying to deliver on.”
How to reach: Paric Corp., (636) 561-9500 or www.paric.com
Mike Castellano is like a compass. He knows that to move his company forward, he must first point his employees in the right direction.
At Esse Health — a physicians group with 78 physicians and Castellano as CEO — that alignment comes from shared values. With the company stretched across 28 locations, that common ground is especially important.
“No matter what business you’re in, (your values are) your ideologies,” says Castellano, whose company reported fiscal 2009 revenue of $85.6 million. “That’s the glue that holds people together. You’ve got to get a consistent ideology, because if you don’t, you’re at odds all the time. You are oil and water.”
Using his networks, Castellano starts by recruiting employees who already share his values. He then reinforces those core beliefs so his 410 full-time and 100 part-time employees can focus on moving the company forward.
Smart Business spoke to Castellano about building a value-driven team to achieve your goals.
Network first; recruit second. First and foremost, you have to have an eye for talent. You have to surround yourself with the best and the brightest managers. I look for people that share values with me personally. That’s how I was attracted to the organization.
We can always go out and buy a book of business, spend a lot of money and bring people in through that mechanism. But if they don’t have the same value structure, that’s a short-term proposition.
Conversely, if you recruit people based on values, you can accomplish just about anything because you’re the same kind of person. The challenge is it takes a lot more time to find people because you have to spend a lot more time to get to know them.
Before we even have a position, I am always on the lookout for good talent. You just sit and talk to them. When you’re recruiting somebody for an open position, you’re restricted with some of the questions you can ask. But when you’re not recruiting for a position, you’re just trying to get to know somebody, you can ask whatever you want. So you ask about their background, their family, of course professionally, and then you ask other people that they’ve come in contact with.
Take time to identify values. In our particular case, we look for people with compassion. If I’m talking to somebody and they tell me, ‘Gee, I’m interested in making the most money,’ and that’s the first thing or second thing they said, that’s probably not gong to be a good fit. If they’re looking for the next step, not a long-term relationship, that’s probably not a good fit. So a lot of things really relate to family values, integrity, work ethic. Anybody would look for their educational credentials and their work experience. You see all those on paper. You can’t get the things I’m looking for, related to values, just from a piece of paper. You’ve got to sit down and get to know the people.
Other leaders probably wouldn’t like to hear this because it takes so much time, but always be on the lookout for good talent. Whether you need somebody today or not, you keep up with them and you keep your network alive. Somewhere down the line, you might need somebody. I’ve had more success finding key management people through the informal networking process than through job boards and recruiting.
It really is just an investment in a cup of coffee. It takes 30 minutes, a cup of coffee at one of the local coffee shops and now I have another contact. Then when I have a position that I have to fill, I’ll either pick up the phone or e-mail specific contacts that I know that may be interested or may know someone that is interested in that role.
It’s an investment in time upfront, but I think that investment in time is well worth it because when you hire people based on their values, you have people for a long-term relationship.
Define and reinforce your values. We have an exercise we go through with the new employees, and this is after they’ve been here for several weeks. We go through the orientation and part of that is the value exercise. So we’ll go through each value and ask each new employee what that value means to them, give us their definition of the value. Our HR department does that and I actually get a copy of all those notes. It’s interesting to see how consistent they are with each other and with our values. It just tells us we did a good job in recruiting.
You just keep reinforcing them. I don’t walk into one of our offices without reinforcing or recognizing someone for doing something that relates to our values, our mission, our vision, part of our strategic plan. When I see somebody spending extra time in a clinical setting with a patient — more time than they actually have — that’s consistent with our mission. And as I see that, I’ll either send a note or if I’m there I’ll just recognize them for it by saying thank you. I’m a note-writer; I send a lot of notes around. I think that personal touch is important to reach out to the people.
We use an acronym [REALITY] that helps us remember those (values as respect, excellence, accountability, leadership, integrity, teamwork). And then at the end, we put the letter Y and say, ‘You make it reality.’ It helps people remember it. At one time, I had them written on my wall, but that’s not even necessary anymore. It’s not like next year they’re going to be different.
If you pick up this group of people and now they’re making motors in a manufacturing environment, the values are going to be the same because that’s what people are about, that’s their ideology. It’s not like you have to reinforce the values. You have to reinforce the rest of the plan, which are the objectives, and keep everybody together on that common path.
How to reach: Esse Health, (314) 851-1000 or www.essehealth.com
Born: Vermillion, S.D.
Education: Bachelor of science in electrical engineering, University of the Pacific, Stockton, Calif; MBA, Washington University in St. Louis
What was your very first job?
I grew up in California, picking tomatoes at a farm in the Central Valley as a freshman in high school. My father used to get up and he would drive two of my buddies and myself. We had to be at the farm at 5 in the morning and you then got on a bus.
You get on the bus, and no one spoke English and we didn’t speak Spanish. You were picking tomatoes from 6 in the morning until you got back on the bus at 5 at night. It can easily hit 100 to 105 degrees. After doing that for two months, he asked me, ‘Son, do you think it’s important that you get an education and perhaps do something at a higher level? Or do you want to do good, honest, hard work in the field all your life?’
He got his point across.
Whom do you admire most in business and why?
Steve Jobs. He has really taken an unconventional approach to many of his businesses. Having grown up on the West Coast, I had some roommates and folks go to work at Apple, and it was interesting how they described the early days of Apple.
This would have been back in the mid to late 1970s. To see what’s been accomplished today is really incredible. The creativity and shareholder wealth shows there are many approaches. If you looked at Steve, you wouldn’t say he has taken your stereotypical approach to being a CEO.
What would be the first thing on your bucket list?
I think it’s a combination bucket list with my wife and I. Both of us would like to visit every one of the national parks in the United States. She’s visited more of them than I have, but it’s something we have talked about doing but haven’t done.
Jim Gloriod has 19 years of experience working in insurance, 12 of which have been with Aon. He currently serves as the resident managing director of the St. Louis office of Aon Risk Services. Gloriod specializes in helping companies in the energy and construction industries manage their risks.
Q. How will managing risk help your bottom line?
It’s important when it comes to managing risk and buying insurance to make informed decisions like you make any other decision in your organization as far as capital allocation goes. If you’re making informed decisions, which provide you with coverage for losses when they occur, that will help protect your balance sheet and income statements whether it’s from a first-party loss, such as a fire, or a third-party loss, such as a products liability claim.
Q. Are companies facing different risks today, and what are those risks?
Absolutely companies are facing risks that appeared remote just a couple of years ago. Some of the risks are lack of credit, reduced consumer spending and the counter-party risks that they may face. I think that the other important thing is that many of our clients or many organizations are under pressure to reduce spending and they have less resources within their organization, so it’s a balance of how do you properly protect your balance sheet and your income statement while having less resources and spending less money.
Q. Are companies cutting the amount of insurance they buy, and what should companies be covered under today?
People are buying the insurance differently than they were before. Companies are analyzing the retention that they take, the amount of limits that they buy and what coverages are absolutely necessary to have. They need to make sure that they are meeting their statutory requirements as well as loan covenants. But in addition to that, companies need to really look at what risks they are facing and make individual decisions on how critical those risks are to their organization and where should they buy insurance versus where do they have the ability to cut back.
Even in this economic climate, intellectual property and technology transactions are growing areas.
“Technology transactions cover a very broad area and are getting more and more sophisticated,” says Spencer Garland, practice group manager for intellectual property and technology transactions at Greensfelder, Hemker & Gale, P.C. “To have a successful technology transaction, all parties must do a lot of homework to determine exactly what is being granted or transferred, the limitations involved, and the protection, if any, that is available.”
Smart Business spoke with Garland about how to approach technology transactions and how to ensure that you have the proper protections in place when licensing intellectual property.
What is a technology transaction?
Basically, it is a business transaction in which technology or intellectual property is an important element. As a result, a wide variety of transactions are included in the field, not just licensing or transfer of intellectual property such as patents, trademarks, copyrights and trade secrets.
Other types of transactions include acquisitions and sales of technology businesses, software development and distribution, Internet and Internet hosting applications, data processing, telecommunications, outsourcing, and information security and privacy. Sometimes the transactions are a combination of many of these.
How do you protect your intellectual property for a technology transaction?
Each situation is different. Much depends on the intellectual property involved and the type of transaction. Say you run a company that has invented a device, and you believe it has commercial value. Let’s assume that the invention is patentable and its highest value is not in your core business, so you want to license it.
To protect it, you can apply for a patent, keep it as a trade secret or file for a copyright on the software. If the device can be copied easily, a patent may be the best protection because if the patent is issued, you generally can exclude others from making or selling the device for the term of the patent.
If it can’t be copied easily, then maintaining it as a trade secret might be best. If software is involved, there are copyright considerations, as well. This is just one example, and it requires a lot of investigation to determine what protection can or should be obtained.
You also protect the value of your invention by strategically crafting a licensing strategy. There are many considerations and moving parts. For instance, should the license be exclusive or nonexclusive, broad or limited, or include sublicensing rights? The answers can depend on a good analysis of the applicable markets for the invention. The issues are complex, and knowledgeable professionals in this field will help you a great deal.
What’s the difference if you are a licensor or licensee?
Licensor and licensee interests in a license agreement are very different, but there is at least one common goal — both licensor and licensee want to make money. There are the usual financial issues regarding license fees and royalties, but a license agreement is also about allocating risks, costs and rights between the licensor and licensee. These include infringement risk and indemnity responsibility, allocation of development responsibility, product liability risk, minimum royalty requirements and limitations on liability, among many others.
Many of these issues are resolved based on the relative investment each party makes and the financial reward each party stands to gain from the commercialization of the licensed property. Bargaining power is also a critical factor. These license agreements can be very simple or extremely complex.
How do electronic information security and privacy affect technology transactions?
We read frequently about entity theft and theft of sensitive and personal information — for instance, account numbers, Social Security numbers, health records, credit card numbers and the like. Many laws require the protection of this personal information, for instance HIPAA for health care information and institutions, and the Gramm-Leach-Bliley Act for financial institutions.
Also, the new ‘Red Flag Rules,’ scheduled to be effective Nov. 1, published by the Federal Trade Commission and other U.S. government agencies, require financial institutions and a wide variety of other businesses that grant credit to develop and implement identity theft prevention measures. Think online banking, credit card processing, health insurance and the like. These issues affect technology transactions because agreements that permit access to or storage of such information must provide for its protection.
As a result, businesses and institutions that use or store sensitive personal information must investigate and understand which laws affect them and how to implement appropriate protection.
What are the consequences of failing to do due diligence?
There can be significant consequences for all types of technology arrangements. As an example, let’s say you’ve invested heavily creating a business to make and sell widgets based on a patent you have obtained. Just before you start manufacturing, you get a cease-and-desist letter saying you are infringing a third party’s patent and must cease operations.
To your chagrin, you discover this is true. You may then have to enter into an onerous license with X or even close your new business. By thoroughly researching your right to use your patent to make widgets in advance, you might have dealt with this problem before you made a big investment.
Spencer Garland is the practice group manager for intellectual property and technology transactions at Greensfelder, Hemker & Gale, P.C. Reach him at (314) 516-2613 or firstname.lastname@example.org.
When the Casino Queen moved locations in 2007, it quickly became apparent to General Manager Tom Monaghan that some customers weren’t happy with the new space. And so, a $2.1 million entertainment venue will soon open to feed customer satisfaction.
But getting from Point A to Point B isn’t quite that easy. Step one and step two — realizing there’s a problem and talking with customers to understand its root — boil down to communication. And multiple forms at that.
To really communicate and understand your customers’ needs, you have to reach out to them in multiple ways, Monaghan says. Casino Queen, which brought in revenue of $160 million in 2008, uses three forms of focus groups and reaches customers through mail and strategically placed feedback boxes.
Listening is just the beginning, though. The most important aspect is the follow up, Monaghan says.
Smart Business spoke with Monaghan about how to effectively communicate with customers.
Make sure you’re gathering information from a range of customers. (The best way to communicate is) by being engaged with them. We do focus groups on an ongoing basis.
You get a group of people together, (let’s say about) 30, and you let them express their thoughts, their concerns verbally in the sense that you have controlled questions: What are your likes; what are your dislikes?
But you limit it to a smaller amount of questions that pertain to the company overall, and you give them the opportunity to speak.
When I’m doing it, if I’m doing it myself, I usually have somebody with me that’s recording their response.
A lot of the times you will secure the groups within your best players for their input because obviously they’re the most important to you.
That’s one format. The other way we’ve approached it here is by using an outside firm, (which) was randomly selecting groups of people off the floor in larger amounts, as much as 50, and direct questions would be answered and asked. The way they did this, it was a lot easier to compile the information. You would give them grading of excellent, poor, good, and they would only respond to the question in that format. There was not a verbal update, and … this was a computerized version so all the grading on the property or the product was instantaneous.
Maintain strong one-on-one communication with customers. One of the most important things is when you’re on your floor, you’re engaged with your customers, you’re talking to your customers.
When we talk about me being on the floor, indirectly that is a focus group because you’re listening to your guests on a one-on-one basis. I don’t necessarily solicit them with a list of questions; it’s usually just a, ‘Hi, how are you? How is everything going? Are they treating you right?’ And the guests will immediately take that opportunity to either (say) everything is fine, or if there’s some other things on their mind, they’ll share it with me.
You can call it whatever you want, you can call it quality time, sometimes it’s just as simple as your recognition to them as a regular customer. It’s really not that they’re giving you information a lot of times; a lot of times it’s just that you’re recognizing them.
Provide options for feedback. In our direct mail pieces that go out to our rated players, there is a direct e-mail address to me that is inclusive of it. So if you’re one of our players and you get the direct mail piece and you either want to compliment about something that went on or you have a complaint about something that went on, they have a direct contact to me.
It works very well for me in the sense that if there is some customer dissatisfaction, and I don’t care if it involves multiple departments, I can follow up on it immediately. And usually it’s less than a 24-hour time frame, I’m getting back to my guests letting them know what I found out about the problem, how we’re correcting the problem and resolving any issues they may have.
Follow up. Communication is the key but, more importantly, the follow up. So if someone expresses they had a wonderful experience, you have to be sure you go back and thank the employees that were named in part of making that experience great, or if there’s a problem, you find out what created the problem, communicate back with the guest and inform them of the changes that will take place in the future that will prevent it from happening to them again.
It really doesn’t matter if it’s the employees and/or the customers, the communication part of it is a lot of times people make many suggestions, but for one reason or another, it’s something that you can’t accomplish, you can’t just let it go. You have to explain to the employee and or the guest. Like all of this input that we got on the showroom, if for some reason, financially, we were unable to do it, it’s my responsibility to explain to them why, but that it’s not something we’re going to give up on, and we’ll proceed with it if we can.
And so there’s always follow-up. We have direct mail pieces that go out monthly. So anything new that’s going on, on the property, it can be updated to the guests monthly besides internal signage.
A good example (of follow up) is when we start construction on this new room, as the construction walls go up before the demo starts, our marketing team will wrap the outside of the drywall so our guests will know what this new room is going to look like from an exterior elevation as well as a blueprint or footprint of what the room will look like internally. It’s kind of like you asked for it, you got it, here it is.
How to reach: Casino Queen, (800) 777-0777 or www.casinoqueen.com
Torkel Rhenman saw a lot of promise and opportunity in his new company when he took over as CEO at The Solae Co. in March 2008.
The company studies the benefits of soy protein and helps companies produce and market soy-based products. Rhenman felt like the time was right for the company to make a big move with people looking for healthy food ingredients.
He spent his first month doing a lot more listening than talking.
“I listened to as many employees and leaders as possible to really get a feel for the situation and the circumstances that we’re in,” Rhenman says. “It’s developing your own sort of view of all the things that we’re working on. What kind of personal change and touch do I want to make to the direction we’re going as a company?”
But as he looked deeper into the company’s makeup, Rhenman felt like the foundational core values that any company needs in order to be successful were not clearly identified at Solae.
“I look at core values as being foundational, noncompromising values that we all have to live with and agree to,” Rhenman says. “It’s sort of the guiding light for all the decisions that we make. Are we living by our core values? Some of that was not clearly there. My experience has been that when I look at companies that have been in the media, many of them have gotten into trouble and been on the front page with bad news because they haven’t defined their core values.”
Rhenman believed that a firm set of core values would provide direction for employees and ensure that the $1 billion company and its 3,500 employees would avoid the fate of others who strayed from their foundation and later paid the price for doing so.
“It is helping to define what people view as gray areas,” Rhenman says of the reasoning behind core values. “You ask people to use good judgment, but everybody’s good judgment might be different. What you need to do then is to define and help people work through, ‘OK, here are the things that we view as foundational for us in our company that we will not compromise on. It helps tie everybody together.”
It was through this early dialogue that Rhenman came up with the four values that would serve as Solae’s foundation: safety and health, ethical behavior, respect for people, and environmental stewardship.
“Many of the companies we work with, they share similar core values,” Rhenman says. “It fits both internally as well as externally. It’s something the leadership team has to work through in terms of what makes sense for us as our core values. What’s going to bind us together?”
Recognizing the need for core values was the easy part. Getting people to accept them as part of their everyday work was where the real challenge began.Use external examples
The need to implement a list of core values struck some people at Solae as unnecessary or the equivalent of attempting to fix something that wasn’t broken. So Rhenman had to prove to his people that this was in fact a needed move and something that would benefit the organization.
“That is a challenge,” Rhenman says. “You have to make it personal. You have to really try to take examples that people connect with and say, ‘Yeah, that could have happened to us.’ It has to start from the top. I have to be a role model for it, and I have to ask the same from all my leaders to be role models and champions for our core values.”
Rhenman used case histories and put together presentations using stories of situations that happened outside of the Solae world to drive home his message.
“We take examples of things that happen in the external world and then we discuss it and say, ‘If we face something like this, what would we do?’” Rhenman says. “It really gets people to understand our thinking and helps get us aligned.”
As the process moved along, Rhenman also put some of his employees in the position of conducting some of the training sessions.
“The best way to really understand what we mean is to be put in charge of the training,” Rhenman says. “If you have to teach it to others, you really have to understand it. We do a lot of that.”
The expectation is that everyone will eventually take their turn in getting up and talking to their peers.
“It’s getting people to think it through themselves,” Rhenman says. “It’s not only that other people hear from their peers, but it’s themselves getting involved and getting into it. Hearing from others creates this expectation that, yeah, everybody is living this and everybody brings up examples that they saw themselves. What caused that? What was the behavior that caused it? What can you do to prevent it?”
The core values became ubiquitous, appearing throughout the company and on the agenda at regular meetings. The first part of each meeting would now be dedicated to talking about one of the company’s core values and its importance to the organization.
“It could be an external event that we have seen, or it could be just a reminder of something to get people in the forefront of thinking about it,” Rhenman says.
The intent was to show the importance of core values to an organization. But Rhenman didn’t want employees to think that just because you have core values, all of your problems are solved.
“It’s something every company needs to have,” Rhenman says. “But that alone is not what makes a great company. If you don’t have it, it’s hard, in my personal view, to have a sustainable and great company, and you put it at risk.”Use internal examples
When it comes to driving changes through an organization, don’t forget that leading by example is often the most effective means of getting people on board.
For example, two of Rhenman’s core values are ethical behavior and respect for people. In attempting to convey how important these ideals were, Rhenman had to be honest in admitting that he did not have all the answers.
“One of the things I do very openly is talk about my own development gaps,” Rhenman says. “I talk about my own experience in my development gaps and how I worked on it throughout my career. I have my own leadership team go through and talk about their leadership gaps. In terms of self-awareness, it’s OK to share your gaps. If you want to work on closing gaps or improving those areas, most people want to help you. Hiding your gaps is not of interest, either for yourself or for the company.
“Being more transparent and open and honest is going to help both the individual leader and the company.”
Rhenman wanted his employees to know that while he preached the importance of these core values in the way Solae did business, it didn’t mean that he was without flaws.
“You have to have that willingness to learn,” Rhenman says. “You can pick many leaders that are fantastic role models and are very successful in their industry, but for every such leader, you can probably find one or two things they have as a development gap. You don’t have to be great in everything. But you have to have a combination of strengths and knowledge of gaps and know, ‘How do I compensate for those gaps?’”
Revealing your own weaknesses is a great way to show employees you are not above them or better than them in terms of needing improvement.
“I’m a driver and very results-oriented, and my natural tendency was always to solve as many problems as possible,” Rhenman says. “I’m very aware of this, and I’ve learned that I need to spend as much time today on coaching and people development and employee engagement as I do on business issues. My balance has really shifted.”
By being open about your own faults, you further encourage your employees to look inwardly at their skills and to feel more comfortable bringing up concerns they might have and to endorse your core values.
“They know they can come in and ask questions and who the right people are to ask for advice to make sure we stay inside our core values,” Rhenman says. “They get to the same calibrated thinking of what good judgment means.”
When Rhenman looks at his company today, he sees an organization in which people have a better understanding of the company’s foundation and how that supports what they do on the job each and every day.
“As a leader, it makes your life so much easier knowing you have the foundation to stand on and you can focus on driving business results,” Rhenman says. “Core values are important for employees. And it’s important for me as the leader of the company because it makes me feel proud of what we are and what we stand for. People will look for companies they respect in terms of the core values that they have.”
How to reach: The Solae Co., www.solae.com or (314) 659-3000