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A Friend at the SEC?

A kinder, gentler SEC?; forget about metrics; how outsourcing can turn violent; General Motors and Ford hit the junkyard; why the CIA is hiring accountants; watch out for shady pension consultants; and more.
CFO Staff, CFO Magazine
July 1, 2005

June was a kind month for the business lobby. Not only did Securities and Exchange Commission chairman William Donaldson throw in the towel, but President Bush quickly nominated Rep. Christopher Cox (R-Calif.), widely viewed as sympathetic to business interests, as his successor.

"Donaldson was asked to help restore investor confidence and he deserves credit for doing so, but we did think the pendulum had swung too far," remarks David Chavern of the U.S. Chamber of Commerce, which has been a loud critic of the cost of Sarbanes-Oxley compliance and the SEC's aggressive enforcement actions. "We're hopeful Representative Cox will be able to move the pendulum back."

In many ways, the regulatory terrain was already softening. Enforcement director Stephen Cutler, whose tenure was marked by soaring company fines, bowed out last May. Democratic commissioner Harvey Goldschmid, with whom Donaldson sided on several votes that raised the ire of the business lobby, had already announced his plan to leave this summer. In addition, Bush's 2006 budget request of $888 million for the agency represents a 3 percent cut after several years of substantial increases.

Cox's history suggests that he could further ease business worries. His claim to fame in the securities world is his authorship of a bill restricting shareholder lawsuits, an effort that ultimately led to the Private Securities Litigation Reform Act of 1995. More recently, he cosponsored legislation to delay the Financial Accounting Standards Board's requirement that companies expense stock options. As chairman, he could try to shelve expensing, not to mention shareholder proxy access, a pet issue of his predecessor.

But hold the hosannas. There's no guarantee Cox will provide the sort of relief that the Chamber of Commerce and others seek. Donaldson, after all, surprised many with his activism. And while the SEC pleased the business community in May by rebuking auditing firms for overkill on audits of internal controls, those same auditing firms were among Cox's top political contributors during his congressional career.

Moreover, changing the SEC's interpretations of Sarbox is a lengthy, formal process, even if Cox is amenable, and any rule spelled out in the legislation itself is unlikely to change. But Cox won't get a free pass from business lobbyists. Says Chavern: "We will keep pushing and fighting the SEC when we think they've gone over the line." — Tim Reason


Lose the Yardstick

Greg Hackett, a business guru who brought benchmarking and best practices to the corporate lexicon, has a new message for finance: forget about metrics.

Hackett says that most of the gains from measuring have been made, and that now firms spend too much time counting and computing only to make incremental improvements in efficiency. "It's time to move on," he says. "You can polish the apple only so much."

So what has turned Hackett from a preacher of metrics and benchmarking to a critic of the practices? He says there is now a better alternative to all the number crunching: "Outsource the damn stuff," he advises. "If you're still running a shared-service center, you're way behind the curve."

Hackett says he recommends outsourcing not just because it works, but because it allows companies to focus on other things. In particular, he believes finance should start looking for outside threats to the business. "In this time of rapid change, someone needs to be on the lookout for what is going to kill the company," he says. "If the bulk of your resources are still being spent crunching numbers, there's not a lot of time for looking over the horizon." — Joseph McCafferty


Uncle Sam Wants Accountants

While most MBAs and accounting graduate students will move on to jobs on Wall Street, the Big Four accounting firms, or corporate finance departments, a growing number of them are donning dark suits and sunglasses and joining the ranks of federal agencies like the CIA and the FBI.

The U.S. government will hire as many as 13,000 professionals for business-related functions in the next two years, according to Marcia Marsh at the Partnership for Public Service, a Washington, D.C.-based nonprofit that promotes government employment opportunities. Many of them will be hired by the Internal Revenue Service, where new audit and enforcement initiatives are driving the need for accountants and financial analysts. But other agencies, like the FBI, the Securities and Exchange Commission, and the Department of Labor, are actively recruiting finance types, throwing themselves head-on into competition with private-sector employers such as consulting firms.

"Clandestine Services is one of our biggest areas of MBA hiring," says Harold Tate, chief of the CIA's recruitment center. The division of the CIA taps business grads to help gather intelligence from human sources. "The discipline in terms of being able to problem solve and make quick, sound decisions based on little information takes a kind of mental agility that many MBA holders have," says Tate. The CIA also looks for forensic accountants and business analysts. A typical assignment: tracking international cash flows to identify money-laundering patterns.


The FBI has also been a longtime recruiter of people with finance and accounting backgrounds. Hiring at the Bureau has been up overall since 9/11. "They might be tracking terrorist financing or working in our financial-crime division, which focuses on things like mortgage fraud, health-care fraud, and identity theft," says a spokesperson.

But federal agencies aren't the only ones stepping up their efforts to attract accounting and finance grads. A recent study by the MBA Career Services Council found that consulting firms increased recruiting at 67 percent of schools.

Standing out in the recruiting crowd can be a challenge for federal agencies, since signing bonuses and repayment of school loans are uncommon perks in government job offers. But it's the mission of the agency that attracts candidates, says the CIA's Tate. "They're not coming here to earn a bunch of money," he says. "They know that." — Kate O'Sullivan


Autos Rattle the Junkyard

The downgrade of Ford and General Motors debt to junk status has created plenty of turbulence in the bond markets. The high-yield sector in particular was choppy all through May and into June, as managers of bond funds that are restricted from holding junk became forced sellers of the automakers' bonds, pushing prices down across the market.

But to most observers, it could have been a lot worse. "Things have definitely settled down after the huge volatility," says Merrill Lynch credit strategist William Chen, who notes that volatility had already crept up ahead of the downgrades. Because they were anticipated, the downgrades were easier to digest. "Compared with [the end of April], right now the demand for high-yield debt is higher," says Chen. Also, the debt market in general continues to be attractive to corporate issuers. The yield on Treasury debt keeps falling, even while the Federal Reserve attempts to raise rates, creating tremendous opportunities to borrow on the cheap, in spite of widening spreads.

The row over the entry of the two automakers (with a combined aggregate debt of more than $350 billion) into the junk-bond universe caused the spread on investment-grade, 10-year, triple-B debt to widen about 10 to 15 basis points in May. The result was an appreciable figure, but not a catastrophic one, bringing the overall risk premium to about 150 basis points.

Spreads were higher for junk, but not enough to stop deals from getting done. Samuel M. Hopkins II, chief accounting officer at Richmond, Va.-based James River Coal Co., admits his cost of borrowing (with the issue on May 26 of $150 million of seven-year notes priced at 559 basis points over Treasuries) "came in higher than what [the company] thought," but refuses to say by how much. "We were just pleased that there was some demand," he says.

Given Merrill's May 26 prediction that the yield could move even lower, to 3.8 percent, by year-end, opportunities should continue for rate-savvy issuers to shave a few points off borrowing costs. — Ed Zwirn


Playing Both Sides

There is one more offender to blame for poor pension-plan performance: biased investment advisers. A Securities and Exchange Commission staff report released in May brought to light a host of suspicious practices by pension consultants. The report, which is based on an investigation launched in 2002, suggests that advisers recommended particular money managers regardless of how well those managers fit clients' needs.

Among the conflicts the SEC cited were payments the consultants received from the money managers based on trade volume. Pension advisers also organized conferences that money managers paid to attend, ostensibly to win over plan sponsors who attended for free, alleges the report. More than half of the pension consultants who were investigated had provided products and services to both pension-plan sponsors and the money managers they were paid to recommend. (About 70 percent of pension funds use consultants, according to a survey by Greenwich Associates.)

Such conflicts could damage plan performance, say pension experts. "A corrupt consultant can cost a plan 10 to 15 percent of its value within five years," says Edward Siedle, a former SEC attorney and founder of Benchmark Financial Services Inc., which has been investigating conflicts of interest for pension funds since 2001.

So far, though, the issue has not ignited widespread concern among plan sponsors, according to Judy Schub, managing director for the Committee on Investment of Employee Benefit Assets of the Association for Financial Professionals. She says most large companies add in-house expertise to the advice they receive. Stuart Shears, vice president and treasurer of Hercules Inc., which has a $1.5 billion pension plan, says that while the conflicts may exist, companies do their own due diligence on money managers. "We do not blindly follow the recommendations of our pension-plan consultants," says Shears. "We wouldn't necessarily go with someone just because they are on [a consultant's] approved list."

From a legal standpoint, companies are unlikely to be vulnerable to employee lawsuits unless the issues were readily detectible, which they do not appear to be, says Lonie Hassel of Groom Law Group. To that end, the SEC and the Department of Labor published a list of tips to help companies ferret out any potential conflicts their pension advisers may face.


The tangible benefits of such due diligence remain to be seen, however. As pension consulting firms look to replace the revenues they will likely lose from money managers, suggests Greenwich Associates managing director Devereaux Clifford, "pension funds may end up paying the consultants even more" to make up the shortfall. — Alix Nyberg Stuart


You Must Be This Tall to Ride

While a healthy number of companies of all sizes have conducted initial public offerings so far this year — 61 as of June 10 — larger companies are leading the way. The average size of an IPO is $220 million, up 11 percent from last year. "We are seeing more well-established companies in the pipeline, and they tend to be larger," says Scott Gehsmann of PricewaterhouseCoopers's Global Capital Markets. For example, chemical company Huntsman Corp. raised $1.4 billion in February. In May, financial firm Lazard raised $855 million. Bigger deals could be an indication of a return to risk aversion in the IPO market.


Violent Reactions

For all the thought that goes into the costs and benefits of outsourcing, companies rarely consider what may be the biggest risk: the danger of employee retaliation. Ignoring it may be a mistake, however. A new study suggests that offshoring ranks as a leading cause of workplace violence, along with such triggers as salary reductions/wage garnishment, downsizing, and surprisingly small raises and bonuses.

"From 2002 forward, we've seen a dramatic increase in workplace violence," says Paul Michael Viollis Sr., president of Risk Control Strategies, the firm that commissioned the study. "With the emergence of offshoring, there have been more incidents." Indeed, Viollis is working with several companies where the decision to outsource has led to death threats and bomb threats. In one case, an employee told an executive, "If I were you, I wouldn't start my car."

On-the-job violence — which can range from sabotage to physical attacks — imposes severe financial costs, including stock-price drops, business-interruption costs, damage to the brand, and workers' compensation costs. One study shows that the average share-price drop for an unprepared company is 15 percent. There is also the threat of lawsuits: the average jury award is $3.1 million per person per incident.

From a legal standpoint, there is little wiggle room. Occupational Safety and Health Administration rules require companies to provide a workplace "free from recognized hazards." The courts interpret this to mean: (1) having a written policy on how the company will avoid workplace violence, (2) training employees and managers to deal with the threat, and (3) providing adequate security. "That's the litmus test," says Viollis. "If you don't pass all three, you are not defensible."

Some companies are making sure they do pass. Iron Mountain Inc., a Boston-based records-storage business, is training all line employees and managers to recognize and help defuse threats, according to Richard Parry, director of safety and security. "The idea," he says, "is that while you can't stop people from having problems, you can intervene in time to stop somebody from getting hurt."

Viollis predicts that as companies continue to trim their workforces, more trouble is inevitable. "We can't turn a blind eye to the risks associated with workforce cuts." — Don Durfee


On the Road Again

More business travelers will be on the move this year, as financial executives are predicting an increase in corporate travel spending for 2005. Already, the travel volume in general has returned to pre-9/11 levels.

According to a survey conducted for the Association of Corporate Travel Executives and Saber Holdings, 85 percent of CFOs say their corporate travel budgets will stay the same or increase in 2005, up from 76 percent in 2003. "The good news is that corporations are not letting security issues impede their ability to conduct more business travel this year," says ACTE president Greeley Koch.

A National Business Travel Association survey found that 50 percent of travel managers say their companies' travelers are making more trips than in 2000. Carol Devine, CEO of the NBTA, says business travel accounts for 18 percent of U.S. domestic travel and 31 percent of all travel expenses.

Some companies are increasing travel budgets as their own finances improve. Art Lorenz, director of finance and assistant treasurer at Hunter Douglas Group, says travel spending at the global maker of window blinds and shades is up about 5 percent. "Our business is strong, our sales are strong, and travel is following that trend," he says.

But while business travel volume is up, corporate travel providers aren't necessarily cashing in on the trend. That's because companies are still pinching pennies when it comes to travel. Bill McBain, assistant treasurer of Ocean Spray Cranberries Inc., says the company tries to keep travel costs low by having employees schedule multiple business meetings during one trip. It's a common strategy for saving money, adds Jack O'Neill, COO of Carlson Wagonlit Travel, North America. He says companies can save on airfare by combining multiple trips. And while that's bad news for airlines, it's good new for the hotel industry, since it extends the length of stays. Moody's Investors Service says hotels posted a 7.8 percent gain in revenue per room in 2004, and should post a similar gain this year. — Laura DeMars




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