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Business Briefs: May The following business briefs are brought to you by the May issue of Financial Executive. Information on how to subscribe to FE is located at the bottom of this page. Business Briefs:
Survey: Private Firms React to Rules, Too
While new accounting regulations have placed a spotlight on public companies, companies of all sizes, both public and private, are reacting. In a survey of privately held businesses by Robert Half Management Resources (RHMR), 58 percent of CFOs said they are implementing new practices in response to these regulations. These new practices include changing their firm's accounting procedures and enhancing their organization's internal audit function.
CFOs were asked, "In light of new corporate governance standards, what steps has your company taken or does it plan to take to ensure greater control of accounting processes?"
Among the 58 percent who cited a specific action, their responses were:
Thirty-seven percent of the 1,400 CFOs polled indicated they are not taking any of the above steps, and 5 percent don't know what steps, if any, they would take.
"Private businesses need to be aware of areas in which vulnerabilities may exist within their organizations," said Paul McDonald, executive director of Robert Half Management Resources. McDonald recommends that all companies have in place a system of internal checks and balances that integrates core business functions within a strong corporate governance framework. He added that the Sarbanes-Oxley Act could have a ripple effect on private businesses: "Private firms planning to go public, to obtain major financing, enter into
long-term agreements with public corporations or be acquired by a public entity will need to address accounting and financial disclosure requirements mandated by the Act."
High-Tech Firms Still Using Options
Equity programs in the high technology industry are proving both adaptable and resilient, according to a new study by Buck Consultants, "Underwater Stock Option Exchange Programs in High Technology." The survey tracked high-tech companies' evolving response to underwater stock options over a two-year period ending last December.
The supplemental option grant was the strategy used most frequently to address the issue of underwater options - fully 70 percent of the surveyed high-tech companies with underwater options used this approach. Nearly one-third of this group used a supplemental grant more than once. However, the stock market's continued decline since April 2002 meant that many of these companies exhausted their ability to grant supplemental options without ever solving their underwater problem.
Many of these companies used one or more option exchange programs, in which option holders voluntarily exchange underwater options for alternative consideration. In Buck's examination of 71 such exchange programs executed between April and December 2002, 94 percent used the cancel/delayed option re-grant, in which optionees receive new options after the six-month-and-a-day waiting period. A key feature of this program is that the company avoids an immediate earnings charge.
"One of our most striking findings is how many high-tech companies adopted option exchange programs," said Ted Buyniski, a principal in Buck's compensation consulting practice. "Their faith in the power of equity programs remained high through extremely difficult conditions."
Exchange programs remove a large number of underwater options from overhang, replacing them with new, in-the-money shares and - in theory - renewed motivational value. The justification for such an investment is the expectation that, as the economy improves, these revitalized equity interests will enhance the company's recovery.
But the industry's faith in equity programs is also taking more sophisticated forms. Buyniski pointed out that the exchange program design reflects a new sensitivity to the concerns of investors and regulators. "This is especially true among larger companies, which were less likely to include officers in exchange programs (43 percent), less likely to offer a one-for-one exchange rate (29 percent) and more likely to reset vesting schedules (71 percent)," he said.
These companies represented six high-tech industries: telecommunications, semiconductors, networking, hardware, Internet and software/software services. Fifteen percent of the participants had revenues exceeding $1 billion; two-thirds had revenues below $250 million.
Brand and Image Management Changing
Troubled companies, a weak economy, mergers and acquisitions, terrorist threats, accounting scandals and shifting customer priorities are triggering radical changes in the ways companies are managing their image and branding strategies. Themes being sounded by top image and branding executives at The Conference Board meetings thro-ughout the world point to major shifts in ahead in brand strategies. The Conference Board is seeing six major trends:
Employee Absence Costs Keep Rising
The total cost of time-off and disability programs continues to rise, albeit very slightly, based on the "2002 Survey of Employers' Time-Off and Disability Programs," conducted by Mercer Human Resource Consulting and Marsh Inc. Time-off and disability program costs averaged 15 percent of payroll in 2001, up from 14.6 percent in 2000, the survey found. Data for 2002 has not yet been analyzed.
For an employee earning $40,000 annually, this translates into $6,000 paid for time away from work. This cost equates to 39 days of absence per employee per year -- 27 scheduled days and 12 unscheduled days -- up one day from 38 days the previous year. Unscheduled absences -- including incidental absence/sick days, salary continuation, short- and long-term disability and workers' compensation costs -- also rose, to 4.7 percent of payroll in 2001 from 4.4 percent in 2000 and 3.9 percent in 1999.
The survey of 723 U.S. employers was conducted jointly by Mercer and Marsh, both operating units of Marsh & McLennan Cos. Its respondents included employers with as few as 100 employees, as well as employers with more than 10,000 workers. The surveyed plans covered 6,158 employees, on average.
Controlling the direct cost of absence was a top priority of many respondents (49 percent), followed by reducing the cost of absence on operations (47 percent).
The survey found that average workers' compensation costs jumped by 20 percent during 2001, to $1.80 per $100 of payroll from $1.50 a year earlier. However, the findings understate the increase in workers' compensation costs because they do not fully reflect the sharp rise in insurance costs that began at the end of 2000 and was exacerbated by the Sept. 11, 2001 terrorist attacks.
"While employers of all sizes are taking action to manage their workers' compensation costs, a surprisingly large percentage don't allocate costs back to operating units, a proven way to rein in costs," says William Craig, an absence management expert at Marsh.
Workers' Compensation Cost Allocation
52% Retained at the corporate level
13% Allocate back to operating units based solely on exposure 7% Allocate according to loss history alone 17% Allocate based on both exposure and loss history 11% Use some other allocation method Source: Mercer Human Resource Consulting, Marsh Inc. Sales Tax Project Ranked Top Concern The Streamlined Sales Tax Project (SSTP), an initiative that cash-strapped states are embracing to capture more revenue from sales and use transactions, is the top issue relating to "jurisdiction to tax" facing U.S. companies today, according to tax executives surveyed by KPMG LLP. The survey also found that a majority of respondents expect this and similar tax issues to influence their company's ability to compete domestically and internationally over the next five years.
Some 31 percent of 130 respondents to a recent survey at the annual Tax Council Policy Institute (TCPI) Symposium in Washington, D.C., chose the SSTP as the number one issue relating to jurisdiction to tax - the right a government has to levy a tax. Also ranking high in the survey was the prospect of a move toward a national consumption tax (21 percent), which taxes consumers and entities on their spending rather than on earnings.
The SSTP is a state-sponsored initiative to simplify and harmonize sales and use tax codes so vendors will face fewer compliance hurdles when collecting and remitting state and local sales and use taxes. To date, businesses have complained -- and the courts have agreed -- that the current system of collecting taxes on behalf of the country's 7,600 separate taxing jurisdictions is overly burdensome.
Thirty-six states plus the District of Columbia are involved in the project and have reached a comprehensive agreement to simplify their sales-tax rules. Legislatures from those states are now translating that agreement into their own state laws, and many may do so by summer. Those states may then ask Congress to enact a law authorizing states that have significantly simplified their sales and use tax systems to require remote vendors to collect those taxes.
What's Your NQ? Sometimes it seems as though the number of odd new corporate names constructed from different, usually Latin roots -- neologisms -- has slowed sharply after a huge run-up in the 1990s. Then something reminds us that the changes keep coming, like the startling conversion of Philip Morris Cos. -- one of the world's best-known brands -- earlier this year to the Altria Group.
To test your neologism quotient (NQ), here's a list of names, some quite recent. Match the names to the industry. Answers can be found at the bottom of this page.
Corporate Governance Rating System Widened
Company executives, take note: A Corporate Governance Quotient (CGQ) has been expanded in an
effort to help institutional investors evaluate the quality of corporate boards and the impact governance practices may have on performance.
The rating was created late last year by Institutional Shareholder Services (ISS), a provider of proxy voting and corporate governance data services. ISS claims that in the service's first six months, more than 30 major institutions signed up, including JPMorgan Fleming, Alliance Capital and National City Corp. Additionally, 110 corporate issuers are using CGQ data for peer group comparison and business analysis, says Jamie Heard, CEO of ISS.
In ISS's expanded release of CGQ, the universe of companies ranked has increased to more than 5,000, up from 3,000 in 2002, and covers more than 98 percent of the U.S. equity universe. Each company is scored individually, based on 61 variables, and is ranked relative to its index and industry peer group. The key new variables added to the ratings include auditor fees, auditor rotation, changes in board size, board attendance at meetings, options expensing and corporate loans.
CGQ ratings are calculated on the basis of eight core categories: 1) board of directors; 2) audit; 3) charter and bylaw provisions; 4) laws of the state of incorporation; 5) executive and director compensation; 6) qualitative factors; 7) ownership; and 8) director education. Source data is derived from public disclosure documents, press releases and corporate Web sites, then verified by ISS's corporate governance analysts and input to the CGQ database in real time. ISS is encouraging companies to use a specially designed Web portal (www.isscgq.com) to submit any material changes related to corporate governance structure, policies and/or procedures. Updates are date-stamped, and the information is verified by ISS analysts within two business days.
Answers: 1-f; 2-c; 3-l; 4-i; 5-h; 6-j; 7-e; 8-g; 9-k; 10-d;11-a; 12-b
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