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Waste to Burn

How one company is turning carpet scraps into energy; executive perks revealed; a new model for paid analyst coverage; why the SEC rejected Cisco's options-expensing proposal; flying on a bankrupt airline; CFO melts Ben and Jerry's image; and more.
CFO Staff, CFO Magazine
November 1, 2005

Gas, oil, and electricity are expensive these days. Maybe it's time to switch to landfill gases, agricultural waste, and carpet scraps.

Some companies are doing exactly that. Just last month, Shaw Industries Inc., a carpet manufacturer based in Dalton, Ga., flicked the switch on a new waste-to-energy conversion plant that will turn the 30 million pounds of carpet scraps that it produces each year into 50,000 pounds per hour of steam energy for carpet processing.

Shaw CFO Ken Jackson says that not only will the plant provide a source of cheap fuel, it will also save on waste-disposal costs and produce cleaner emissions than fossil fuel-fired boilers. "Hopefully, we can use this initial project as a model for the future," says Jackson. Shaw has 17 other plants around the country that could use waste-to-energy conversion technology.

The plant, located next to Shaw's Springdale residential carpet plant in Dalton, is expected to save the company an estimated $3.5 million a year in fuel costs. Siemens Corp. developed, built, and runs the $10 million to $15 million plant, which will provide 80 percent of Shaw's steam energy needs for the Springdale facility, according to Siemens figures. Shaw provides the carpet waste and buys the steam energy created from Siemens at a fixed rate, says Clark Wiedetz, Siemens's energy business development manager.

Shaw is not alone in the hunt for alternative energy sources. Agricultural giant Cargill Inc. operates a variety of waste-to-energy conversion plants. In Iowa Falls, Iowa, the company expects to open a biodiesel conversion plant — which converts soybean oil into synfuel, a liquid fuel obtained by fermenting agricultural byproducts — in 2006. It already operates a landfill-gas initiative, which captures methane emissions from a nearby landfill in Fargo, N.Dak., and eight wastewater-treatment facilities at beef-and pork-processing plants, which capture methane emitted from treatment lagoons. "The eight wastewater-treatment facilities alone save Cargill about $8 million per year," says Mark Klein, spokesman for Cargill Meat Solutions.

Wiedetz claims that companies could consider a waste-to-energy plant, and other alternative fuels, if they are spending more than $4 per 1,000 cubic feet of natural gas. (Current prices are in the neighborhood of $14 per 1,000 cubic feet.) But waste-to-energy plants aren't always feasible. Back in 1996, American Rice looked at the cost of burning rice hulls for steam energy, but abandoned the idea because it was not economical.

Forgotten projects could find new life, however, if energy prices continue to climb, says Wiedetz. "There are so many ways to efficiently convert waste to energy," he says. "And with fuel costs doubling and tripling, companies are going to take notice." For example, American Rice says it may look at the issue again if natural gas prices continue to rise. — Laura DeMars


Executive Perks Exposed

Companies are revealing more about the extras they bestow on executives, such as country-club fees, insurance, the use of corporate-owned housing, and the use of corporate jets for personal trips.

These perks, which have often been hidden from the eyes of regulators and investors, are getting more notice at the urging of the Securities and Exchange Commission.

Research by Nixon Peabody partner John Partigan, who specializes in disclosure issues, found that 42 percent of the Fortune 100, including Northrop Grumman, Verizon, and Procter & Gamble, have voluntarily revealed more about executive perks in their 2005 proxy statements. "We should see more companies following their lead and disclosing more," says Partigan.

P&G disclosed a raft of extras that it gave CEO A.G. Lafley, including paying for his personal security, personal use of aircraft, and paid-for financial counseling, which alone cost $80,000. "We've included more information [on executive perks] this year in response to what our shareholders are asking for," says P&G spokesperson Terry Loftus.

The voluntary openness comes as the SEC is cracking down on companies and executives who run afoul of disclosure rules that cover these benefits. In April, Tyson Foods paid a $1.5 million penalty and former chairman and CEO Donald Tyson paid a $700,000 penalty for failure to disclose more than $1 million in perks such as housekeeping, telephone service, and lawn and auto maintenance. (The SEC requires disclosure of personal benefits if their value exceeds $50,000 or 10 percent of an executive's annual salary and bonus.)

Partigan says the SEC is working on new rules for executive compensation, and it could require additional disclosures. A time frame for the new rules has yet to be set. — Jim Montalto


Et Tu, Ben and Jerry's?

In its mildly Utopian mission statement, Ben and Jerry's Homemade, the socially conscious Vermont ice cream maker, testifies to the company's commitment to create "economic opportunities for those who have been denied them."


Apparently, the company's former CFO, Stuart "Mickey" Wiles, decided he deserved some economic opportunities, too. So he created them for himself — to the tune of more than $300,000. In September, the office of the U.S. Attorney for Vermont announced that while serving as Ben & Jerry's CFO from 2000 to 2004, Wiles charged personal expenses to his company credit card and issued company checks for nonexistent obligations, using the funds to pay his own bills. Wiles, who also allegedly scammed the company into paying $58,000 for an addition to his home, agreed to plead guilty to wire fraud.

While Enron, WorldCom, and a few others have garnered most of the attention, scores of financial frauds at smaller companies have recently come to light. Although Ben & Jerry's may seem an improbable target, smaller companies can be an easier vehicle for corruption. (Although it has been a subsidiary of Anglo-Dutch conglomerate Unilever since 2000, Ben and Jerry's operates separately from the company's other holdings.)

The problem is largely one of corporate structure: there was no one looking over Wiles's shoulder to approve his expenses, says Lawrence E. Mitchell, a law professor at George Washington University who specializes in ethics and corporate law. "It is realistic in a company like that to expect the CFO to have substantial discretion in terms of writing checks," he says. Adding an extra level of scrutiny can be inefficient, Mitchell says, "but [small companies] may need to start doing it."

CFOs are uniquely positioned to commit fraud, and when they do, it gets expensive. A study by the Association of Certified Fraud Examiners last year found that fraud committed by high-level executives caused a median loss of $900,000.

Meanwhile, those who like their ice cream sans scandal can take heart. A Ben and Jerry's spokesman said in a statement, "This situation, while unfortunate, appears at this time to be an isolated one that in no way reflects on the character of the outstanding people who work for Ben & Jerry's." — Rob Garver


When Your Ship Comes In, Beware

This summer, the U.S. Court of International Trade gave CFOs one more thing to think about when they certify the accuracy of their companies' annual reports: customs regulations.

In two harshly worded rulings issued in July, the court blasted Ford Motor Co. for understating the value of machinery it imported from Japan. The errors, which appeared in statements to the U.S. Customs Service between 1987 and 1992, prompted the court to levy fines of more than $20 million.

In words that should cause any executive to take notice, Judge Nicholas Tsoucalas wrote, "Ford did not have mechanisms in place to check whether its policies were working." A company's "good faith" attempt at compliance, he wrote, "cannot merely be the appearance of an effort."

Customs regulations have often been overlooked by large corporations, says Susan Kohn Ross, partner in the Los Angeles office of law firm Rodriguez O'Donnell Ross Fuerst. But the combination of tougher customs enforcement after 9/11 and tougher standards for corporate executives after Sarbox has made customs compliance vitally important. "The ruling sent shudders through a lot of boardrooms," adds Kohn Ross.

One area that is particularly important — and that got Ford into trouble — is making certain that amendments to the stated value of imported goods are disclosed to Customs. This requires systems to check the actual value of imported materials against the value stated on the documentation that shipped with them.

Ford says it is disappointed in the court's decision and will appeal the case. Regardless of the outcome, the requirement that the CFO's signature appear on a company's annual report should prompt them to examine customs compliance. "Sarbanes-Oxley tied it all together," says Kohn Ross. "If you don't have adequate internal controls over trade functions, how can you certify those financial statements?" — R.G.


These Instruments Won't Play

Of all the ways companies might price their employee stock options to comply with FAS 123R, market-based valuations won't be one of them — at least not for now. In September, the Securities and Exchange Commission put the kibosh on proposals like the one made by Cisco Systems Inc. to create a market for instruments that would mimic employee stock options and generate prices that could be used in expense calculations.

Cisco had proposed auctioning off a set of "reference options" to institutional investors concurrent with each stock-option grant, and then using the highest bid price as its expense per option.

Since "replicating all of the terms and conditions of employee stock options with a market instrument is difficult," outgoing SEC chief accountant Don Nicolaisen said in a statement, "we have significant doubts...as to whether it would be possible to design an instrument that would achieve the measurement objective of FAS 123R."

Yet some argue that Cisco's proposed reference options would have mirrored the terms and conditions of employee grants quite well. John Finnerty, a professor at Fordham University's Graduate School of Business and former member of the Financial Accounting Standards Board's Option Valuation Group, notes that, like employee options, the market options included nontransferability, lack of a secondary market, and the risk of forfeiture or cancellation. The sticking point, in his opinion, is that the instrument wouldn't mirror the expense to the company of granting the options, which is generally higher than the value to employees. According to his research, the value an employee gets from an option that vests in four years could be more than 30 percent lower than the potential cost to the company of redeeming the option.


Market valuations for employee options are not a lost cause yet, though. In a statement separate from Nicolaisen's, SEC chairman Christopher Cox encouraged further proposals and noted that an "appropriate market instrument" would have "some distinct advantages over a model-based approach."

For its part, Cisco says it is pushing ahead with the idea. Says CFO Dennis Powell: "We will continue an open dialogue and pursue an approach that will lead to an objective, market-based valuation." — Alix Nyberg Stuart


Fraud Factors: Signs That a Company Could Be Cheating

Amid the scores of financial scandals that have come to light during the past few years, corporate watchdogs have offered a slew of reasons why companies go astray. Researchers Jared Harris and Philip Bromiley of the Carlson School of Management at the University of Minnesota found that three characteristics are present at companies that misrepresent their finances.

  1. The company's performance has consistently lagged behind the average performance of its peers. Companies that cook the books are not generally leaders in the industry.
  2. The company suddenly performs better than it had historically. Although a symptom of financial misrepresentation rather than a cause, sudden strong performance can be a smoking gun.
  3. The CEO receives a high proportion of compensation as stock options. The research shows it's not just the amount of the options, but their proportion of total compensation that creates a motive to fudge the numbers.

Director's Cut

It's not easy sitting on a board these days. Not only has the time commitment nearly doubled, but the risk of getting sued has also increased. For this reason, corporate directors are demanding — and getting — more dough.

A new study finds that directors' pay at the 200 largest U.S. companies is up 11 percent, to an average of $195,000 in 2005. And those who sit on or chair committees do even better. "The audit committee chair makes as much as a 50 percent premium," says Thomas Shea, managing director at Pearl Meyer & Partners, the consulting firm that conducted the study. He expects directors' pay to continue to rise.

The upward pressure is due to the difficulty companies have finding competent candidates who are willing to devote more time to the job. Shea says that directors are also cutting back on the number of boards they sit on.

A. Clinton Allen, a director at piano maker Steinway & Sons, says he cut back from six boards to five. He serves on three audit committees and says it is, indeed, a demanding job. "No matter what they pay the audit committee, it's not enough." — Joseph McCafferty


Flying on Bust Airlines

You might not be piloting a company through Chapter 11 bankruptcy, but there's a good chance you'll be flying on an airline that's broke.

With Delta and Northwest joining the Chapter 11 club, which already hosts US Airways and United, business travelers could see fare hikes and fewer flights as these struggling airlines attempt to right themselves.

Higher fuel prices, which are passed down to travelers as surcharges, are already nudging up ticket prices and will continue to do so. Northwest and Delta are reducing their capacity by about 15 percent, while overall demand for business seats remains strong, putting further pressure on prices.

Combine that with the chance that bankrupt airlines will be forced to consolidate or even shut their doors, and business travelers are likely to get squeezed. "There are still too many airlines, hubs, and seats for travelers, so expect more mergers or liquidations," says Ray Neidle, airline analyst at Calyon Securities.

The good news, however, is that major moves that will have a bigger impact on prices and flight availability could still be a long way off. "There won't be any new mergers or liquidations within the next year. That's just too fast for this industry," says Caleb Tiller, a spokesperson at the National Business Travel Association. He predicts that long bankruptcies will drag out the process. Instead, Tiller expects to see mergers in the next two or three years as airlines try to become more efficient.

And while business travelers have already seen a decrease in first-class seats and airline clubs due to the emergence of low-cost competitors, experts don't expect a further reduction in frills. "Every major airline is realizing that business travelers are their most important customers," says Carlson Wagonlit Travel North America COO Jack O'Neill. He says major airlines will continue to cater to executives.

As for those frequent-flyer programs, not to worry — bankrupt airlines are always careful not to touch them. "Miles programs are a connection to the best and most-loyal customers, and the industry puts a lot of value on them," says O'Neill.

Even if an airline goes under, the frequent-flyer miles could still be saved. O'Neill says that surviving airlines would be quick to buy mileage programs if a carrier liquidates. — J.M.


Health-Care Costs: Relief in Sight?


A survey by Mercer Human Resource Consulting found that employers expect health-care cost increases to slow to 6.4 percent in 2006. However, the reduction in cost growth is due to continued cuts in benefits and other steps to manage costs. The survey indicates that if employers made no changes, the average cost increase would be 10 percent.


File under "Looney"

Imagine having Alan Greenspan, Jimmy Carter, and Paul O'Neill on your audit committee. That was the claim of Apollo Publication Corp., in a registration statement filed with the Securities and Exchange Commission in September for an initial public offering. The company also claimed that Canadian Prime Minister Paul Martin was the CFO, and that its mission was to unify world language, history, and culture.

While it's still unclear if the filing is a fraud or an elaborate joke, the SEC isn't laughing. The commission is charging Apollo, which claims to be based in Windsor, Ontario, with falsifying a registration filing. SEC spokesperson John Heine says the SEC is treating it as a potential fraud. "I don't know that we bring actions against hoaxes," he says.

The larger issue is how the offering to sell $3.6 billion of securities got as far as it did in the first place. "These guys proved it's not too hard to file a phony offering," says Kathleen Smith, an analyst for Renaissance Capital, a Greenwich, Conn., firm that specializes in IPO research. She says she has never seen such a strange filing. "I can't see any motivation beyond an odd joke," says Smith. It may also be an expensive one. At the current rate of $117.70 per $1 million in shares, the filing fee could have been as high as $400,000. The SEC wouldn't say if the fee was paid. — J.McC.


Paying for Praise?

"Paying for analyst coverage is kind of like renting a prom date," says David Mickelson, CFO of Redhook Ale Brewery, a microcap company based in Woodinville, Wash. Mickelson has regularly turned down the services of researchers-for-hire, despite the fact that Redhook is not currently followed by any Wall Street analysts.

Like Redhook, many companies have avoided paying for research because of the inherent conflicts of interest. But now, two new entries into the research arena are looking to remove the stigma of this approach. The Independent Research Network (IRN), a joint venture of Nasdaq and Reuters that opened its doors in June, will serve as a matchmaker between issuers and selected research providers. Another new firm, the National Research Exchange (NRE), launched in May, also has roots at Nasdaq: it was founded by David Weild, a former vice chairman of Nasdaq, and Hardwick Simmons, former chairman and CEO of the electronic exchange. Both firms intend to act as go-betweens for issuers and analysts, providing an insulating layer intended to lessen the perception that paid-for research is biased.

To that end, the IRN will require companies to purchase a three-year subscription period so they can't end the relationship if they don't like what the analysts write. The intermediary will also assign the analysts, to eliminate issuers' influence over analysts' writings. An independent council will mediate any complaints or disputes between participating issuers and analysts and will monitor the independence of the research providers.

The NRE, which has a similar structure, differs in that issuers will be able to choose their research providers, and subscriptions will last only two years.

While both the IRN and the NRE are still in the development stage, even CFOs who have been skeptical of paid research say these third parties could provide a solution. "An arm's-length type of arrangement could be healthy," says Ed Terino, CFO and co-CEO at Arlington Tankers Ltd., a Bermuda-based oil tanker company. And though Arlington, with coverage from four analysts, has no need for paid research, Terino says it would have been a good fit for his former employer, software firm ATG, which had no sell-side coverage.

Whether the model works depends on how investors view the setup. Says Maureen Wolff-Reid, president of investor-relations firm Sharon Merrill Associates: "If the buy side doesn't find value in it, it really doesn't pay for the company to buy it." — Kate O'Sullivan




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