2010 Proxy Season Voting Rule Changes and impact to the CFO

By: Tracy Levine, President, Advantage Talent, Inc.

The big news this proxy season is the SEC’s vote to prohibit brokers from discretionary voting of stock the firm holds for their clients, in Board Elections.  Shareholder Advocates see this as a hard won victory that has been in the works since 2006.  Corporations worry that the new rule will be disruptive to the functioning of Corporate Boards and the Proxy Process.  For many years there has been a fight brewing with large activist shareholders and corporations.  Corporations have been mostly successful in keeping shareholder activists’ candidates out of the Proxy and off of the Director Slate.  Campaigns to change the rules have mostly been unsuccessful.  With the SEC approving the amendment to NYSE Rule 452, the activist groups may have achieved their goal in a roundabout way. 

A.) What does this new rule mean to a CFO?  In most companies the CFO is ultimately responsible for all SEC filings, including making sure that the proxy is mailed out to shareholders on time for the Annual Board Meeting.  This process has been getting easier with the advent of e-Proxy Voting.  In the past, the proxy votes were tallied to see if there was a quorum to elect the typically unopposed slate of Directors.  With the success of blocking non-management nominees from the slate, the activist shareholders were left with two choices: (1) Wage an expensive legal battle or (2) Vote no or withhold votes for the proposed slate.  Voting No or withholding votes most of the time did not effectuate change.  Brokers typically cast their clients’ votes with management.  It was not their job to be activists.  Therefore, the corporation was able to fairly easily reach a quorum for their chosen slate.

With the amendment of NYSE Rule 452, corporations may not be able to get a quorum as easily as before when activist shareholders choose to vote no or withhold votes.  Corporations can no longer depend on the Brokers to be the deciding vote and the votes used to reach a majority quorum.  CFOs may have to start to budget more money to send out more notices to garner shareholder votes in order to reach a quorum.  It could be a very expensive exercise.  Complicating this issue is the new access to E-Proxy voting.  It is cheaper for the company but so far shareholder voting has not gone up but instead has gone down with the transition to E-Proxy Voting.

 B.) What does this new rule mean to a CFO?   Numbers, Numbers, Numbers.  Now all shareholders will be holding management more accountable on a quarter to quarter basis.  Management may be in the untenable situation of being afraid to carryout good long term strategic plans because in the short term the plan does not produce immediate results or has a temporary negative impact due to implementation costs.

C.) What does this new rule mean to a CFO?   On the positive side, CFOs who have been in the position of having to tell the CEO and Board of Directors….NO, now have a powerful ally in the shareholders.

For a good summary of how the Amendment to NYSE Rule 452 may affect your corporation read:  Willkie, Farr, & Gallagher, LLP: Discretionary Voting by Brokers Prohibited in Director Elections

Read the SEC Announcement at http://edgar.sec.gov/rules/sro/nyseamex/2010/34-61292.pdf

20 Questions for determining whether a Contractor is a W-2 vs. 1099 Independent Contractor

By: Tracy Levine, President, Advantage Talent, Inc.

Becoming an Independent Contractor is a great way for Executives in transition to earn money in this tight economy. For Corporations that have downsized and need help, Executive Consultants can be the answer. However, it is important that Companies engage these Consultants correctly. The IRS and DOJ are cracking down on employers who claim contractors as 1099 contractors when they are not. There is much more to a contract than negotiating the hourly rate. When negotiating a contract, it is important to consult the appropriate professionals, such as, an attorney and/or a tax accountant or go through a Executive Staffing firm. In fact, under the IRS Code most Financial Executive Consultants do not qualify as 1099 Contractors!

Employee status under common law. Generally, a worker who performs services for your Company is your employee if you have the right to control what will be done and how it will be done. This is so, even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. If an employer-employee relationship exists, it does not matter what it is called. The employee may be called an agent or independent contractor. It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. (IRS Publication 15, Circular E, 2008 Pg. 8)” The IRS has provided examples of what is and is not a W-2 Employee vs. a 1099 Independent Contractor.

The corporation that classifies a W-2 employee as a 1099 Contractor faces the following fines:

*A breakdown of back tax penalties(http://tinyurl.com/5u0d):

15.30 % Social Security Tax (on income up to the cap, plus 2.9 % of income above that cap),

20.00 % Federal Income Tax, +6.20 %

Unemployment Insurance, 41.50 % of the contractor’s pay (IRS 3509).

If it is determined to be intentional, there can be jail time involved.

The Federal Government is not the only one cracking down on employers who misclassify W-2 Employees as 1099 Independent Contractors. Many states have become aggressive on preventing what they see as Corporations not paying taxes that are duly owed. In this economy where budgets are short at the Federal and State Levels, the agencies are demanding stricter adherence to employee tax laws.

Some of the red flags for the IRS include a former employee hired back as a 1099 Contractor. A contract-to-hire where the employee starts off as a 1099 employee then converts to a W-2 Employee. If someone is acting as a Contract Interim CEO, CFO or Controller for a company while the company looks for a permanent solution, or while someone is out on sick leave or maternity leave, under the IRS 20 Questions (see below) these situations would probably fail as a 1099 Contract Position.

According to information published by the IRS, around $64 million in taxes and penalties were collected from over 800 companies that misclassified workers in the most recent year reported. These numbers are only going to continue to go up as the IRS has promised to randomly audit several thousand companies. The Federal Government Accountability Office estimated that employee misclassification resulted in the underpayment of an estimated $2.72 billion in Social Security taxes, unemployment insurance taxes and income taxes in 2006, the last year for which figures are available.

It is important for both Companies and Interim Executives to set up the appropriate relationship in the beginning for the protection of everyone involved. In the current environment, now is not the time to be a do-it-yourself contract negotiator and leave out the experts. A full summary can be found at http://www.irs.gov/pub/irs-pdf/p15a.pdf .  If you fill out a Form SS-8  (http://www.irs.gov/pub/irs-pdf/fss8.pdf), the IRS will help you determine whether the contract employee should be classified as  a W-2 Employee or a 1099 Contractor.

For information on how Advantage Talent, Inc. can help you, please contact Michael Levine at Mlevine@AdvantageTalentInc.com.

The following is a list of 20 questions the IRS uses to determine if a worker is an independent contractor or employee. The answer of yes to any one of the questions (except #16) may mean the worker is an employee.

1. Is the worker required to comply with instructions about when, where and how the work is done?
2. Is the worker provided training that would enable him/her to perform a job in a particular method or manner?
3. Are the services provided by the worker an integral part of the business’ operations?
4. Must the services be rendered personally?
5. Does the business hire, supervise, or pay assistants to help the worker on the job?
6. Is there a continuing relationship between the worker and the person for whom the services are performed?
7. Does the recipient of the services set the work schedule?
8. Is the worker required to devote his/her full time to the person he/she performs services for?
9. Is the work performed at the place of business of the company or at specific places set by the company?
10. Does the recipient of the services direct the sequence in which the work must be done?
11. Are regular oral or written reports required to be submitted by the worker?
12. Is the method of payment hourly, weekly, monthly (as opposed to commission or by the job?)
13. Are business and/or traveling expenses reimbursed?
14. Does the company furnish tools and materials used by the worker?
15. Has the worker failed to invest in equipment or facilities used to provide the services?
16. Does the arrangement put the person in a position or realizing either a profit or loss on the work?
17. Does the worker perform services exclusively for the company rather than working for a number of companies at the same time?
18. Does the worker in fact make his/her services regularly available to the general public?
19. Is the worker subject to dismissal for reasons other than non-performance of the contract specifications?
20. Can the worker terminate his/her relationship without incurring a liability for failure to complete the job?

www.AdvantageTalentInc.com

A Shift in the Burden of the Liquidity Crunch

Liquidity is tight.  CFOs are doing whatever they can to keep a reserve of ‘dry powder’ cash.  This includes stretching account payables as far as possible, even if it means alienating some long term vendors.  Many vendors have been slammed by a surge of unpaid bills.  Now these same companies are receiving notifications that customers are going to take longer to pay.  The following is typical of the wording included:

“We are changing our payment policy to 90 days effective (Month/Day), 2009. Please plan your cash flow requirements accordingly.”

                With these two simple sentences, the CFO of one company is effectively sharing the credit pressure with another CFO.  Changing the payment policy puts additional pressure on the vendor to increase their bank borrowings and to increase the timeframe in which this company takes to pay their vendors. An end to this cycle does not seem to be possible in the near term, as the economy continues to experience negative momentum.  As a result the accounts receivable DSO (days sales outstanding) will continue to increase, and an associated increase of time to pay vendors.  To make this less painful for all parties involved, CFOs are taking steps to improve their partnerships by being open as to why the action of stretching the payment cycle is being taken.  Sending a clear message that the steps are not arbitrary and will not be forever goes a long way.

By: Tracy Levine, President, Advantage Talent, Inc.    TLevine@AdvantageTalentInc.com

Dashboards:Managing the Information Flow for Meaningful Strategic Planning

Ultimately, it is up to the CFO to make sure that the financial information that is shared with other members of the Executive Management Team, the Board of Directors or the Private Equity Group accurately reflects the true health of the company and the performance of the company so that relevant strategic planning can be implemented.  To help streamline the information and to have a more timely flow of information, many companies are using Dashboards with varying degrees of success and satisfaction.

A good dashboard delivers information in a customized manner that is tailored to the industry and the individual company.  Effective dashboards all have the following characteristics: 1.) Includes meaningful key performance indicators; 2.) User friendly summaries that are timely and transparent so that management can be proactive instead of reactive in running the business; 3.) Allows management to use a collaborative approach to create best practices; 4.) Effectively and accurately tracks performance indicators, such as, profitability, backlog, cash flow requirements, inventory levels, receivables management, etc.

Some of the red flags of an ineffective dashboard are the following: 1.) Reams of data that provides minimal insight; 2.) Lack of ability for customization which is particularly a problem for businesses that have grown rapidly through acquisitions where each subsidiary is using a different system; 3.) Excessive readjustments to information, incomplete information or incorrect information that renders the reports minimally useful; 4.) Lack of buy in by management of the importance of assuring the information is entered in a timely manner.   Most managers are expected to do more with less time and resources.  They are forced to prioritize their work and filling in the information for the dashboard rarely makes it to the top of anyone’s list.  This is particularly true of sales management which is typically paid on closing deals not on the amount of reports that are filled out.  Getting buy in by others and showing them the value of participating is vital to gathering complete financial data.

The Financial Professional’s Role in Communicating with the Sales Organization

        Many managers from both the Accounting Team and the Sales Team have made the same observation.  Communication between Accounting and Sales is often like trying to mix oil and water.  It’s not done easily.

        In this case, flexibility is ‘king’ when it comes to communications between Accounting and Sales.  The Financial Professionals thought process is ‘I need all of the important information, at the right time, in the right format, and it must be accurate’.  The sales manager and members of the sales team think ‘I’m being held accountable by management to hit my sales numbers … forms, what forms; I don’t have time for paperwork?’

         The Accounting team must become more flexible in their communications with the Sales teams, and must in fact ‘sell’ to the Sales team why certain information provided by the Sales organization to Accounting is required to fully support the Sales organization, and that Accounting can help Sales teams sell more products/services when information flow is effective.  The Accounting team needs to know which vendors to pay first to assure there is adequate inventory to sell during the next spike in demand.  Financial Managers also need to understand sales trends so that requests may be made to the bank for funding of special sales initiatives.  Without good information flow, both Accounting and Sales will be frustrated, and the Sales team will sell less than they otherwise should.

Personal Bankruptcy and its effect on your ability to get a job

By Tracy Levine, President, Advantage Talent, Inc.

Nothing is more taboo to discuss for a Financial Executive than personal bankruptcy.  It seems to many that somehow it is more shameful than the CEO down the street who also filed for bankruptcy. Unfortunately, for many Americans and particularly financial executives personal bankruptcy has become a reality. As the news reports show, people across the board have been directly affected by brokerage firm closings, bank closings, company closings or company downsizing. Home foreclosures continued to rise throughout the end of 2008 and beginning of 2009. Economists are not predicting a quick recovery.

For anyone who has applied for a financial position recently you know that it has become common practice for firms to run a “routine” credit check. It is my understanding that Section 525 of the U.S. Bankruptcy Code prohibits discrimination based solely on bankruptcy.  Typically, no one will come right out and say that they will not consider a candidate based on personal bankruptcy but will come up with numerous other excuses that are not prohibited by law.

Traditionally, companies are not keen on hiring a financial executive that has gone through personal bankruptcy. There is the perception that somehow the personal bankruptcy has a direct correlation to a persons’ financial acumen and that a company is at a higher risk of white collar crime by an employee that has filed for bankruptcy or that a bankruptcy directly correlates with the person’s ability to be an intelligent effective manager of the company’s assets . There are no statistics to bear out either of these erroneous beliefs.

As we have seen with the executives of Bear Stearns and Lehman and the alleged ponzi scheme orchestrated by Madoff, a good credit rating does not equal financial acumen or correlate with extreme honesty and effective management of the company’s assets.  In the current economy, corporations need to shift their prospective or miss out on possible exceptional candidates. Candidates need to be up front and honest about personal bankruptcies with a short explanation and then focus on what skills they bring to the table. Honesty goes a long way in overcoming obstacles. 

CFOs Driving Corporate Growth

CFOs Driving Corporate Growth

By:  Michael Levine, Principal, Advantage Talent, Inc.

 

Many CFO’s ask me how to increase their job longevity.  There is only one answer to this question.  Expand job responsibilities beyond assuring the financial statements are presented on time.  The senior financial executive has to be actively involved in the growth of his or her company.

 

Through my CFO and Controller Roundtables and direct communication with many senior financial executives, I’ve learned about ways financial executives are driving the growth of their companies.  Examples that fuel the internal corporate growth engine include:

 

1      Utilizing a variety of financing vehicles to obtain additional liquidity.

2      Working with the executive team to develop sales professional compensation, which rewards salesmen for focusing on sales with greater profitability. 

3      Working with sales reps in the field when they encounter perceived internal corporate “red tape”.  In many cases, there are opportunities to streamline processes by easing overly restrictive controls or eliminating previously unidentified bureaucratic bottlenecks.

4      Initiating meetings with industry specific business strategists to provide guidance for growth.

5      Evaluating and improving health and other corporate insurance policies to attract and retain employees.

6      Developing tax strategies, which produce significant savings to free up cash for other productive uses.

7      Finding value in liabilities by taking aggressive stance on discounts by vendors, and getting rebates on credit cards, all of which provide cash for growth.

8      Relocating plant controllers to the factory floor vs.‘ivory tower’ offices.  This allows them to better see what is going on in real-time.  They are part of the floor team and therefore are more accessible to concerns which otherwise would not be communicated to the proper parties for action.

9      Negotiating with banks to reduce account and credit card fees.

10   Doing homework on competitive vendors and using information to achieve best pricing without necessity of changing vendors.

11   Securing State tax credits for software installation (training credit) and Federal Income payroll tax credits for certain geographic areas.

12   Developing strategies on timing of inventory purchases to balance tax reduction, holding costs, and pricing trends.

13   Working with the purchasing department to develop policies and procedures for inventory, supplies, and even capital expenditures to eliminate waste and maximize rebates.

14   Analyzing sales profitability by vendor, and subsequent vendor selection.

15   Analyzing sales profitability by customer, and subsequent ‘firing’ of certain customers.

16   Implementing travel and entertainment policy to maximize cash flow and eliminate waste.

 

Several CFOs are taking an outward focus and evaluating business opportunities that create competitive advantages.  Examples include:

1      Expanding current business territory to increase profitability with limited investment.

2      Creating a strategy and business plan to enter a new business sector.

3      Going on sales calls to better understand challenges being faced by sales reps in the field.  One such sales call resulted in development of a customer financing plan with an independent financing company which allows the customer to make payments over time, and also mitigates corporate A/R exposure, helps collect past due accounts and allows company to increase the size of customer orders.  As a result, finance is viewed as an asset to the sales team rather than an adversary. 

4      Investing strategically in IT (Information Technology) to improve customer experience when interacting with the company website, providing easy product catalog access, allowing customers to efficiently perform their own inquiries on product features, appearance, availability and secure order status updates. 

5      Creating online E-Commerce solution allowing customers to purchase directly online which provides for cost savings in customer service areas and improvement of customer satisfaction at the same time.

6      Selecting facility sites for maximum strategic advantage.

 

By taking on responsibilities that improve profitability and growth of the company, the senior financial executive should be able to better position his or herself for a long-term relationship with their current employer.  Come to one of the roundtable meetings and learn about what your peers are doing to drive growth in their companies.   Also, contact me with other questions or ideas at mlevine@advantagetalentinc.com.

Originally published in the CFO Advocate-The Newsletter for the CFO Roundtables.

Corporate Cost Containment in Tough Economic Times

As the economy continues to create challenges for companies, many are searching for ways to cut cost. Included in the list that follows are some common and some not so common examples of what companies are telling us they are doing to survive and thrive:

• Reduce hiring and/or terminate underperformers

• Encourage employees to take pay cuts

• Find sublease tenants for underutilized properties

• Identify new sources of revenue

• Hire firms that specialize in cost containment strategy to help (logistics audits, telecom, etc.)

• Review all items on income statement and determine which need reduction/elimination

• Use zero based budgeting and determine ROI for each expenditure

• If you have a sourcing department, use them to pressure pricing concessions

• Create a ‘CFO Bounty’ to pay employees for identifying cost cutting ideas over certain thresholds

• Re-negotiate fees for Tax and Audit and Legal services, etc.

• Shift to a ‘pay for performance’ compensation model. Reduce base and increase commission/bonus where possible.

• Consider purchasing a company that is a supplier to you to reduce overall costs

• Elimination of 401K match

What are some of the steps your company is taking to deal with Cost Containment in the current economic environment?