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

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.

Cost Cutting without Sacrificing Human Capital

In the current economy, corporations are asking Senior Management to take a closer look at the bottom line and cut costs.  This creates a koan for the CFO.  The dismal state of the economy has necessitated that corporations eliminate jobs for short term survival and economic health.  A global approach using cold hard numbers and math is the deciding factor on the percentage of jobs that have to be eliminated. 

A common concern among CFO’s is how do you keep from decimating and sacrificing the company’s human capital that will be needed when it is time to turn the company in a positive direction or to support growth when the economy rebounds.

Companies are taking the follow actions to reduce cost without sacrificing the human capital that they had already invested in developing.  The following were some of the steps being taken: 

1.) Reducing work week hours;

2.) Implementing partial month furloughs;

3.) Creating situations where employees can job share; and

4.) Reducing the pay of employees.   

These measures save money for the company while allowing the company to retain more of its human capital.  However, it creates a unique environment that management has to address.  Many employees just see these steps as a precursor to the next reduction in force.  Senior Management needs to clearly communicate their vision for the future of the company and how the employees are an integral part of this success.

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.

Banks vs. other investors including Private Equity Groups and Public Shareholders

We are hearing the following from CFOs and Senior Fiancial Executives.

     Banks are still doing business but in a decidedly different manner than before.  This has created some rather unique situations.  Banks appear to be trying to be proactive and thoughtful in handling what seems to be the next inevitable bump in the road…..the rising corporate bankruptcy rates resulting in corporate loan defaults.

Banks vs. other investors including Private Equity Groups and Public Shareholders

     Many companies have several investors, the bank that provides the securitized loan; the Private Equity Groups who provided seed money along the way and the public shareholders.  Typically, the goals and objectives of these groups are in line with each other in the short run and in the long run.

 

     Most bank agreements contain language that states upon default/foreclosure, the bank has the legal right to replace senior management.  Typically, this standard clause is never executed before the banker pulls the line of credit or the bank, in corporate bankruptcy situations, as the primary creditor just liquidates a company’s assets to recoup money.  Banks are not in the business of running corporations.  In an apparent strategic move banks may decide in some instances that liquidation of assets is not an option because of the current state of the economy and a different strategy needs to be employed. 

 Scenario:

  • A bank may have issued credit to several companies in similar lines of business. 
  • One business seems to have weathered the storm better than their peers and is not currently in violation of the bank covenants and considering the environment seems very likely to be able to survive the economic downturn in the long run and eventually become profitable once again.  The senior management is solid.  However, unless some other source of money from another investor is infused into the company it looks like the company will within a short period of time be in violation of their loan covenants.
  • The second business has already breached their loan covenants and the loan is in default.

     The old ways may in some instances be passed over for a new strategy.  The banker is approaching the company that has strong management with an interesting proposition.   We know that you will probably break your loan covenants during the next quarter.  However, we feel comfortable with Management and want to make a proposal to you.   When the loan covenants are broken, we have the ability to pull your primary source of financing and/or fire everyone in Senior Management.  However, we will let you keep your loan and your job but with one catch.   We are going to be ousting the management of another business whose loan is in default and will be merging this business with your company, leaving you as the Management of the new entity.

     While this may be a proactive solution on the bankers’ side, it is not without side effects for Senior Management, private equity investors or public shareholders.   Senior Management is left to assess how to manage and merge two companies in a successful manner that does not derail the stability of their original business.  The private equity groups and shareholders are left with their investment significantly diminished, and a company unrecognizable when compared to the company they originally invested.  Only time will tell whether out of the box moves like this by bankers will be beneficial or harmful in the long run.

Bank Covenants and Senior Management:

     Most Banks have always viewed senior management as part of the mix when deciding whether or not to issue any type of corporate loan, securitized or non-securitized.  Now it seems that this informal review is becoming a bit more formal when it comes to small cap and mid cap companies.  It seems that some banks have already started, and others are going to be possibly following suit by adding the following line in loan agreements, “Firing the CFO other than for cause, triggers a loan default.” 

     The rational for this additional written covenant given to a CFO last week follows:  “Bankers have developed trust and confidence in the CFO that they will do the right thing in administering the credit agreement and in managing the business ethically.”  When the banker sees the CEO firing the CFO for reasons other than for cause, a huge “red flag” is raised.  From past experience this normally signals a change in what the bank signed up for when the loan was granted.

     One CFO who started off on the banking side explained that in bad times, numerous situations occur to cause more tension between the CEO and CFO.  In closely held public and private companies, independent of size, the CFO or Senior Financial person is put in the position of saying “no” to Management that is used to being able to keep their “sacred cow” departments, employees or perks or initiating any idea without regard to serious analysis of ROI (Return On Investment).  In difficult economic environments every allocation or use of a company’s assets are important to the company’s growth and/or survival.   In these types of showdowns, history shows the Senior Financial Executive is left to confront management and many times is forced to resign or is fired for “cost” cutting reasons.  In the perception of many bankers, particularly as it relates to small or mid cap companies, removing the CFO or Senior Financial Executive as a “cost” cutting measure or forced resignation is typically not considered a positive strategic business move and signals possible Senior Management problems that can lead to credit issues.

     Most Bankers consider the Senior Financial Executive, typically the CFO, an integral strategic and operations Executive, not someone who just gathers the numbers and publishes the reports.  A firing not based on cause, or forced resignation is interpreted as a sure sign that there is a disagreement related to the strategic and operating goals of the company among Senior Executive Management. This results in concerns on the banker’s part.

 

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?