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Bailout money and events at resort hotels do not mix, say many in Congress. But what of the business those events generate?
David McCann, CFO.com | US
March 3, 2009
These days, where is the line between a frivolous junket and a legitimate business event?
That, it seems, depends on who you ask. News that Northern Trust Bank had flown hundreds of employees to the Northern Trust Open, an annual PGA Tour golf tournament in Los Angeles, resulted in a scathing letter from Representative Barney Frank (D-Mass) and 17 other members of Congress.
The bank, which sponsors the tournament, received about $1.6 billion from the federal government's Capital Purchase Program last fall, and news that its employees had attended parties, concerts, and other client events at the tournament did not sit well with Washington lawmakers.
"This behavior demonstrates extraordinary levels of irresponsibility and arrogance," Frank and his fellow congressmen wrote. "We insist that you immediately return to the federal government the equivalent of what Northern Trust frittered away on these lavish events."
Meanwhile, Senator John Kerry (D-Mass) has proposed legislation that would prohibit firms that take government funds from hosting, sponsoring, or paying for any conferences and events unless they get a waiver from the Secretary of the Treasury for events they believed to be "directly related to the operation of the business." A violation would result in a $100,000 fine plus reimbursement to the government for the cost of the event.
But how does one define "directly related to the operation of the business"?
Northern Trust claims that "more than 2,000 clients and prospects from around the globe participated in activities" at the Los Angeles tournament, "including three financial education seminars for our personal and institutional clients."
In a reply to Frank's letter, Northern Trust CEO Frederick Waddell said that the bank's "client educational and entertainment activities have all been within applicable guidelines under the Capital Purchase Program." It also noted that the events would have taken place even if the bank had not received government funds (which, Waddell noted in a separate open letter to stakeholders, the bank had not sought, but agreed to accept at the government's request).
But not all financial institutions have been so brave in defending their events as legitimate business. The same day that Northern Trust received Frank's letter, Morgan Stanley said it would eliminate all client events at a May PGA Tour event in Ohio, the Memorial Tournament, which it is sponsoring for the ninth straight year.
Clearly, though, the top Congressional whipping firm is AIG, which last fall canceled more than 160 meetings and events that would have cost a combined $80 million. Even so, the company was excoriated in the media for holding an event that marketed AIG's annuity products to independent sales representatives who had brought the company some $100 million in sales that year. Largely underwritten by sponsors, the event cost AIG a mere $23,000.
One unintended result of all this legislative and media outrage, says the National Business Travel Association, has been "a chilling effect on the entire travel community. Companies that have never taken a cent of government assistance are canceling meetings and events because they are afraid of being attacked as wasteful."
Roger Dow, CEO of the U.S. Travel Association, said in a release, "For every case of wasteful spending, we are seeing scores of instances in which the game of 'gotcha' has forced businesses to cancel legitimate activities that would have grown their bottom lines and generated jobs and economic growth for local communities."
Indeed, the USTA claims that meetings generate more than $100 billion a year in spending, produce $16 billion in federal, state, and local tax revenues, and support approximately one million jobs.
Ten of the largest hotel companies recently seized on that point when they jointly bought advertising space on the websites of two publications aimed at legislators, The Politico and Roll Call. "Want to lose one million more jobs? Just keep talking," the ads warned government officials." (Both Roll Call and CFO are owned by The Economist Group.)
Former NBTA chairman Kevin Iwamoto, a longtime travel and procurement executive at Hewlett-Packard before recently taking a vice president role at meetings-technology company StarCite, told CFO.com that he is "outraged" at the inconsistency of the message. "To say that meetings should stop, at the same time you're saying you want the economy to get going, makes no sense. Meetings are essential to getting business done," he said.
Potential economic harm to the meetings industry aside, should companies that received taxpayer funds spend money on lavish company events? Clearly, it is the lavish nature of events that irritates lawmakers, but what if those events generate a positive return on investment?
Unfortunately for companies looking to defend their marketing activities, tracking their ROI is not an exact science. "I don't think the meetings industry has been really effective in defining in a dollars-and-cents way what the value of meetings is," said StarCite's Iwamoto.
Still, what most corporations spend on meetings and events is often a minute portion of SG&A. In its letter to Barney Frank, Northern Trust noted that it had a net income last year of $795 million, and paid for its golf event with normal operating funds.
Or take the Arizona event that caused AIG so much trouble. Even the total event cost of $343,000 would be considered immaterial for financial reporting purposes, and more than 90 percent of that was paid for by third-party sponsors. By all reasonable accounts, that meeting was a legitimate business expense with a direct role in helping generate $100 million in revenues.
Yet AIG has also acknowledged that many of the other meetings it canceled did not have sufficient business justification — an admission that gives critics plenty of ammunition.
Perhaps not surprisingly, the answer is better financial controls. "If you have a strategic meetings management program, with goals and objectives, policy-compliance measurement, full visibility into all of the meeting activities going on, and the budget attached to those activities, you can then assess which meetings are more essential to your business and which you can do without temporarily," said Iwamoto, whose company provides strategic meetings management services.
Indeed, Iwamoto noted, corporate meeting professionals have been frustrated over the years in trying to educate their companies' top executives as to how many meetings are being held and their various cost factors — something that often is under the execs' radar. "It's ironic now that those leaders are under public scrutiny and are scrambling for the answers as to why they're having meetings and what the costs are," he said.