CFO.com.June

CFOJune 2012 | www.cfo.com

What Happens When the Boomers Retire?

Staging The London Olympics

Keeping Zipcar In the Passing Lane

Six MuSt-haveS for Cloud

ContraCtS

WatChing out for

eMerging riSkS

Saving the planet can yield big savings, too

Green Is Good

Sustainability projects make good

business sense at Henkel Corp., says

Jeff Piccolomini

GE Capital

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1cfo.com | June 2012 | CFO

Cover photo by Michelle Nolan. This page, clockwise from top right: Ryan Donnell, Rick Friedman, Roy Shakespeare, photo-illustration by Stephen Webster

38 ›› On The Record

Let the Games BeginThe 2012 Summer Olympic Games start next month in London, and LOCOG CFO Neil Wood is counting on their success.

Interview by Edward Teach

60 ›› Take-Away

Driving LessonsZipcar CFO Ed Goldfinger talks about creating metrics that fit the business. Interview by Marielle Segarra

People to Watch

44

Green Is The New LeanDoing more with less is what many sustainability initiatives are all about. That’s why CFOs are embracing them. By Alix Stuart

50When The Boomers GoThe coming retirement of the baby boomers could leave businesses short of critical knowledge and skills. Make sure that doesn’t happen to your company. By Russ Banham

FeaturesJune 2012 Volume 28,

No. 5

contents

Art Hicks Jr., CFO & COO of Cybex International

50“Just like the accommodations that were made when women entered the work-force in large numbers a gen-eration ago, similar accommodations must be made for older workers.” ›› Joel Reaser of NOWCC

2 CFO | June 2012 | cfo.com

Clockwise from top right: Michael Klein, Hugh Kretschmer/Getty Images, James Yang,

James Steinberg, Thinkstock

contents

18 | Accounting & tAX

“Flush with Cash” Has New MeaningA rise in Corporate America’s free cash flow and capex could be a healthy sign. ◗ By Kathleen Hoffelder

Tax Rules Roil Financial SectorProposed rules for implementing FATCA may have broad implications for U.S. banks. ◗ By Kathleen Hoffelder

20 | cApitAl MArkets

A Better Way to Borrow?Unitranche loans offer the advantages of speed, simplicity, and savings. ◗ By Vincent Ryan

24 | growth coMpAnies

A New Risk Factor: The JOBS ActWhy some companies are including the law itself as a risk factor in their IPO filings. ◗ By Sarah Johnson

26 | huMAn cApitAl

Show Us the TalentA prominent HR group wants companies to disclose detailed information about their human capital. ◗ By David McCann

29 | risk MAnAgeMent

An Emerging ConcernThe number and impact of emerging risks are rapidly growing, say experts. ◗ By Sarah Johnson

Do Your Internal Auditors Have the Right Skills?Companies are putting a premium on critical thinking and data-mining expertise. ◗ By Sarah Johnson

31 | strAtegy

IPO ConfidentialA provision of the JOBS Act enables pri-vate firms to simultaneously pursue an IPO and a sale without disclosing confi-dential information. ◗ By Vincent Ryan

Do Mergers Add Value After All?The perception that mergers and acqui-sitions destroy shareholder value may be out of date. ◗ By Andrew Sawers

35 | technology

Before You Sign That Cloud ContractIf you decide to use cloud-computing services, be sure your contract with the provider gives you maximum protection. ◗ By Rob Livingstone

Up Front4 ››From the editor7 ››letters

11 ››topline Banks ease up on loan terms ◗ companies are slow to pull the trigger on buybacks ◗ small businesses spend more time on federal taxes ◗ M&A transactions fall ◗ effective tax rates rise ◗ CFOs are guardedly optimistic about the economy ◗ and more.

57 ››FielD notes Perspectives from CFO Research

Made for Each OtherBoth separately and together, mobile devices and cloud computing are in-creasingly supporting corporate growth, according to the latest findings from CFO Research. By David Owens

By the Numbers

20

26

18

31

June 2012 Volume 28, No. 5

CFO, Vol. 28, No. 5 (ISSN 8756-7113), is published 10 times a year, with combined January/February and July/August issues, and distributed to qualified chief financial officers by CFO Publishing LLC, 51 Sleeper St., Boston, MA 02210(executive and editorial offices). Copyright ©2012, CFO Publishing LLC. All rights re-served. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of CFO Publishing LLC. Requests for reprints and permissions should be directed to FosteReprints, (866) 879-9144; E-mail: [email protected]; website: www.fostereprints.com. Subscriptions: U.S. and possessions: 1 year $65; 2 years $100; 3 years $130; foreign, 1 year $120 U.S. funds only. Periodicals postage paid at Boston, MA, and additional mailing offices. POSTMASTER: Send address changes to CFO, P.O. Box 1233, Skokie, IL 60076-8233. CFO is a registered trademark of CFO Publishing LLC. SUBSCRIBER SERVICES: To order a subscription or change your address, write to CFO, P.O. Box 1233, Skokie, IL 60076-8233, or call (800) 877-5416; or visit our website at www.cfo.com/subscribe. For questions regarding your subscription, please contact [email protected]. To order back issues, call (617) 345-9700, ext. 3200. Back issues are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms.

If you believe that people are your greatest assets, as the old cliché goes, then you need to read “When

the Boomers Go,” by contributing editor Russ Banham (page 50). The leading edge of the baby-boom generation reached age 65 last year, and the retirement of that enor-

Oldies but Goodies››

4 CFO | June 2012 | cfo.com Kory Addis

strategyFor a variety of reasons—lack of opportunities, switching costs, or, most likely, organiza-tional inertia—many compa-nies allocate essentially the same resources to the same business units every year. But companies with higher levels of capital reallocation generate significantly higher total returns to shareholders, according to “How to Put Your Money Where Your Strategy Is,” at www.mckinseyquarter-ly.com (registration required).

leadershipDrawing on the “liberal art” aspects of organizational change, CFO Stan Rubin of Ocean Bank will tell how to in-spire finance teams to achieve excellence at CFO magazine’s Corporate Finance Excellence conference in Dallas on June 24–26. See the Conferences page on cfo.com.

frOm theeditOr

EdITOR’S PICkS

mous cohort is just beginning. When the boomers depart, their skills, knowl-edge, and experience will go with them. Banham reports how companies like Lockheed Martin Space Services and Duke Energy are preparing for this by transferring intellectual capital from older workers to younger em-ployees, through mentoring programs and software tools.

Of course, a growing number of people are planning to work beyond age 65, whether in their current jobs or new ones. As Banham found, older workers are increasingly finding jobs not just in private companies but also at short-staffed government agencies. One such federal worker recently re-tired for good—at 92.

Not everyone is enamored of age and experience, though. In an eye-opening 2010 book called Managing the Older Worker: How to Prepare for the New Organizational Order (Harvard Business Review Press), Peter Cappelli and Bill Novelli write that many com-panies are reluctant to hire or retain older workers—even though evidence shows that “on virtually every dimen-sion that is relevant to employers, older workers come out ahead of their younger colleagues.”

Why the reluctance? Misguided ste-reotypes and simple prejudice are big reasons. But nearly 9 out of 10 compa-

nies say their greatest concern about hiring older workers is the conflicts that would result when younger super-visors manage them, according to Cap-pelli and Novelli.

Their book addresses this concern. “Younger managers don’t really know how to manage older workers,” they contend. Like the green lieutenant who ignores the advice of the grizzled sergeant, younger managers typically take an authority-driven approach that doesn’t acknowledge older employees’ greater experience and, often, exper-tise. A far better way to manage older workers, the authors suggest, is to col-laborate and lead by example.

P.S. If people are valuable assets, then companies should disclose more information about those assets. At least that’s what the Society for Hu-man Resource Management believes. But CFOs aren’t exactly welcoming the society’s proposed standard for human-capital disclosure with open arms, as David McCann reports in “Show Us the Talent” (page 26).

Edward TeachExecutive Editor

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w Procuring Efficiently While the procurement function has often been seen as a tactical weap-on, we’ve continually seen procure-ment get a seat at the strategic table with forward-thinking procurement professionals (“The Rise and Rise of Procurement,” May). I think this is dependent on the approach of the pro-curement group.

The procurement function can be-come more strategic by moving past compliance and working to understand how the company it’s a part of can get its arms around what it is spending

Knowledge by DegreeYour article “Too Much Data, Too Little Judgment” (May) reminds me of the times in my career when I was responsible for hiring people for financial analysis and planning positions.

On the one hand, I found that people, especially those with CPAs and public accounting backgrounds, had a hard time dealing with “imperfect data” and the related ambiguity in-

herent in such information. While their training and educa-tion was good for specific duties such as auditing and taxes, it was not relevant to such areas as financial planning and analysis, where more creative and judgmental decision-making is required.

On the other hand, I have found that accountants and fi-nancial professionals who have broader-based training and education, such as CMAs, are better at the type of thinking and problem solving that is needed for decision making and the advice that today’s CFOs need.

Edward Safran, CMA, CFMManaging Partner & Chief Risk Officer

Omega Options Trading Group Chelmsford, Massachusetts

With maverick spending, Aberdeen Group estimates that U.S. companies lose nearly 25% of every dollar spent. In order to gain visibility into spend, companies must ensure that the pre-approved-spend process is as easy and intuitive as filing an expense report; otherwise, massive opportunity is lost. Creating this “pull” mentality will en-able employees to efficiently spend on contact, will call out areas of opportu-nity for procurement, and will allow spend to be benchmarked. In my view, this is how procurement gets its stra-tegic role.

Mark VerbeckChief Financial Officer

Coupa SoftwareSan Mateo, California

w Don’t Hide“Keep It Secret” (Topline, May) raises a very real concern about the risk in sharing spreadsheets. In addition to the points raised by Bill Jelen, I would add that ideally you should not hide columns within your spreadsheets. It’s much better practice to keep all rows and columns visible in working areas and then create output sheets with all of the information that needs to be shared. These pages can then be shared as valued sheets (i.e., formulae saved as values) or, even better, as was suggested, as PDFs.

Myles ArnottVia E-mail

w No Woman, No CryAt the risk of sounding misogynistic, I’m wondering why CFO would de-vote its cover to a celebration of female CFOs. I have no doubt that the women featured in this article (“Risk Takers, Career Makers,” May) are all compe-

on and why. Procurement often suf-fers from a lack of visibility into what it is spending on as a result of spend deflection or “maverick spend.” I re-cently spoke to an employee of a large financial company who told me about his requisition of a stapler that had to be approved by the CFO. That was the last time he used the company’s pro-curement solution.

Jud Guitteau/theispot

LETTERS

Send to: The Editor, CFO, 51 Sleeper St., Boston, MA 02210,or e-mail us at: [email protected] include: Your full name, title, company name, address, and telephone number. Letters are subject to editing for clarity and length.

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tent, perhaps even brilliant finance officers, but so what? Even the story’s introduction, which begins, “Like their male counterparts, female CFOs have taken many paths to the top spot,” ar-gues against the type of exceptionality upon which the concept of the article is premised. I’d be glad to read an analy-sis of why women are underrepresent-ed in the C-suite and what material problems that causes for business. But a simple series of profiles of CFOs who are notable solely by virtue of their gender seems at best retrograde, at worst a total waste of time.

Frank RimaldoVia E-mail

w Still Opposed to FIN 48 FIN 48 is absurd and meaningless, in terms of disclosure that will assist fi-nancial statement users (“FASB Stands Pat on Reviled Tax Rule,” May). Its only use, really, is for the IRS.

Think about it: you’re assessing whether a tax position is sustainable or not. But you’re asking that decision to be made—and audited—by the same people who are filing the tax returns. If they're incompetent in making the tax determination on the tax return, they’re going to be incompetent in de-termining whether there is sufficient basis for the judgment.

There are also literally scores of management decisions that will affect the tax provision and cause radical changes in financial outcomes. Back in 2010, for example, GE reversed a deci-sion to return foreign earnings to the U.S. and decided to “permanently” in-vest them overseas. The change in the tax provision boosted net income by nearly 7%.

Every good CFO knows that the place to manipulate earnings is the tax provision, because analysts (and most auditors) haven’t got a clue of what is happening there. A better—and sim-pler—reporting would be to treat all in-come tax as a contingent liability on the For more, see “CFOs Behaving Badly” on cfo.com

LETTERS

Among the reader responses:

Batman ChargedFrom a blog post on a finance chief who got carried away with a baseball bat:

A few weeks ago the CFO of Talos Partners, a merchant bank that does structured financing and strategic eq-uity investments, decided he’d had enough. He appar-ently was trying to convince his CEO of something, but it seems the message wasn’t getting across. So he stormed out of the room and returned “holding a full-sized baseball bat over his shoulder with both hands,” according to the Salt Lake Tribune. (Hat tip to CFO Jour-

nal for finding this.) Anyway, 59-year-old CFO Mark E. Oleksik eventually calmed down. He is being charged by police for using a dangerous weapon in a fight, although he never swung the bat.

I have no doubt that many CFOs would like to have a 30-ounce piece of white ash stored under their desk to brandish at their CEOs from time to time, if they could get away with it. I’m not making light of what Oleksik did, but I think we need more CFOs like him.

By that, I mean CFOs with backbone. The CFOs behav-ing badly are not the Oleksiks of the world; [they are rather] the CFOs who are rolling over for the CEO. Clearly, this is what happened at JPMorgan Chase as the company’s chief investment office built up a $100 billion position in risky bonds and derivatives. For five months there was no treasurer in place at the company, so oversight would have fallen to CFO Doug Braunstein. Why wasn’t he standing up to Jamie Dimon and demanding an accounting of the [office’s] activities?

Give me a CFO who doesn’t care about being loved, does have definite points of view, and is not spending all of his or her time wiping the noses of employees.

Best of the BlogsVincent Ryan

Rare to find someone who has the courage to stand up for what’s right! Especially when they have their personal compensation on the line. More power to the likes of Mark E. Oleksik. —Karen

Unfortunately, even Mr. Oleksik was too late to stop this CEO from blow-ing tens of millions of investors’ [dollars] on private jets, New York apartments, and luxurious vacations. —Talos Partners Shareholder

Really good article, and right on target. Good for Mark. I usually have a bat in my office, but only because I love baseball. —Gene Jones

CFO Mark Oleksik hits the local news.

Oleksik photo courtesy KUTV, Salt Lake City

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Editorial Offices


balance sheet at the statutory rate and then increase or decrease the liability as the statute of limitations closes and the tax returns are finalized with the au-thorities. The results would be far more accurate than the “crystal ball” account-ing voodoo that means absolutely noth-ing to financial statement users, creates a road map for the tax authorities for audits, and allows for CFOs to wildly manipulate earnings.

PaulVia E-mail

◗ The Trouble With Absorption CostingThis is exactly the problem we are try-ing to illuminate in our work on lean accounting (“Lots of Trouble,” March). Orest Fiume and I were both CFOs of companies that were adopting the Toyota Production System and real-ized that our old-fashioned standard cost accounting would drive poor de-cision making. We jointly wrote Real Numbers: Management Accounting in a Lean Organization to help communi-cate this problem. Thank you for your article on this important topic!

Jean CunninghamVia E-mail

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Banks Ease Terms For Business LoansFiercer domestic competition is making U.S. banks more flexible on spreads, interest-rate floors, and other costs to borrowers.

Business lending in the Unit-ed States may have turned a corner. Domestic banks

and U.S. branches and agen-cies of foreign banks reported easing terms for commercial and industrial (C&I) borrowers in the first quarter of 2012, according to the Federal Reserve’s quarterly survey of senior loan officers. The banks also reported that demand for such loans had in-creased. While they aren’t chang-ing their yardstick for who gets credit, many banks are softening loan terms for large and middle-market companies.

About 58% of the 81 financial institutions surveyed said they cut the spread over cost of funds that they charge borrowers, and 32% said they reduced their use of interest-rate floors. About 17% said they lowered the other bor-rowing costs that come with a line of cred-it. This is a change from the Fed’s January survey, when banks reported that lending standards and terms were static. Standards and terms for small companies, however, remained basically unchanged.

A more positive economic outlook doesn’t appear to be driving the changes on C&I terms. Nor did many bank officers cite a higher tolerance for risk or an improve-

ment in their bank’s capital position. In-stead, almost all domestic U.S. banks said “more-aggressive competition” from other banks and nonbank lenders had forced them to respond with softer terms.

Greater demand for C&I loans carried over from the fourth quarter of 2011. Among the reasons the banks cited for the lift in demand were companies’ need to finance accounts receivable, to invest in plants or

ToplineStatS of the month

Michael Austin/theispot

The U.S. unem-ployment rate for May rose from 8.1% in April.

8.2%

The Consumer Confidence Index declined in May for the third month in a row.

64.9

The Credit Managers’ Index fell in May for the second consecutive month.

54.6

banking


Sources: U.S. Bureau of Labor Statistics, The Conference Board, National Association of Credit Management

or more. And by some accounts, only about a third of buybacks are ever fully executed.

Indeed, when CFO last examined the pace of buybacks, in July 2010, nearly half the companies with share-repurchase au-thorizations hadn’t bought back any shares. Today, by contrast, all 565 companies have bought at least some shares, and 67 compa-nies have repurchased 100% of the shares they said they would buy.

But among firms that have buyback plans of $200 million or more and announced their plans prior to March, 20 have bought back 8% or less of their allotment as of the first quarter, according to S&P Capital IQ (see chart). The slowest repurchaser, Lam Research, bought back only $12.5 million worth of common stock out of a $1.6 billion total authorization. (On May 15, Lam an-

nounced an accelerated stock re-purchase agreement, under which a company buys back shares immediately from an investment bank, which borrows the shares it sells to the company.)

With equity markets slumping, it could be a good time for compa-nies to be in the market for their shares, says Michael Gumport, founding partner of MG Holdings/SIP, a corporate finance adviso-ry firm. “With short-term, small corrections—10% to 15% over a month, for example—buybacks tend to pick up,” he says.

But when the market falls for an extended period, buybacks “dry up,” says Gumport. Instead of buying their stock when prices are low, companies “get scared like everybody else when they don’t know what the future holds, and they move into a conserve-cash mode,” he says.

That habit causes the majority of share-buyback plans to be un-profitable. Over the last 10 years, “the average company has made zero on stock buybacks, and a long list of companies have lost money,” says Gumport. “They’d have done better just putting

their money in the bank.” ◗ V.R.

equipment, and to finance acquisitions. They also at-tributed the shift in demand to customers switching banks.

The Euro-Zone Effect The euro-zone crisis con-tinued to affect some kinds of lending. Some U.S. banks reported tightening on loans to financial institu-tions headquartered in Eu-rope and their affiliates or subsidiaries, as well as to U.S.-based nonfinancial companies that have signifi-cant exposure to European economies.

But fewer banks report-ed doing so than in Q4 2011. The larger effect from the euro-zone crisis, at least currently, is the aggressive-ness of overseas banks in pursuing U.S. business cus-tomers: two-thirds of do-mestic U.S. banks that nor-mally go head-to-head with European banks said they saw less competition from them last quarter.

The picture the survey painted for residential real estate lending was murkier. While more banks on net reported increasing resi-dential real estate mortgage assets, “several large banks said that they anticipated reducing their exposures somewhat or substantially,” the survey said. Although some banks reported in-creased demand for resi-dential real estate loans, a majority said they were less willing to originate loans eligible for sale to govern-ment-sponsored enterprises.◗ VincEnT Ryan

Thinkstock

Many U.S. companies currently have ac-tive share-repurchase programs, which will enable them to bump up their stock price or earnings per share in coming months. But will they use those programs?

In the past 12 months, 565 U.S.-based firms have announced share-repurchase programs, worth $185.9 billion. But their ac-tual purchase activity has been somewhat subdued. Data provided to CFO by S&P Capi-tal IQ shows that U.S. firms have collectively repurchased a little more than one-third of the dollar amount of shares—$68.8 billion—that their buyback programs allow. (The data is for programs that are still active, and the transactions include both tender offers and open-market deals.)

The pace of repurchases is not unusually slow: buyback programs can run three years

Topline

Plenty of Ammo Left In Buyback Plans


CAPITAL MARkeTS

▼

Lam Research $1,600 1%

Cytec Industries 200 1

Piedmont Office Realty Trust 300 1

TJX 2,000 1

Cameron International 500 1

Symantec 1,000 2

Whole Foods Market 200 2

FMC 250 2

MKS Instruments 200 3

Praxair* 1,500 4

QLogic 200 5

Air Products & Chemicals 1,000 5

Warnaco Group 200 6

Dun & Bradstreet 500 6

Target 5,000 7

TW Telecom 300 7

Foot Locker 400 7

Weyerhaeuser 250 7

Silgan Holdings 300 7

Laboratory Corp. of America $500 8%

*Completed a previous $1.5 billion buyback program in Q1. Source: S&P Capital IQ

Buyback authoriza-tion ($M)

◗ Balky Buyers(Share repurchase programs of $200 million or more announced before March 2012)

% repur-chased (by end of Q1)

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Topline

Nearly two-thirds of small businesses surveyed by the National Small Business Association spent more than 40 hours on federal taxes last year, a 7% jump since the year

before. Sixty-four percent of the 350 NSBA members surveyed said

they spent more than 40 hours dealing with federal taxes in 2011, including calculating payroll and self-employment tax, filing re-ports, and working with their accountants. Forty-six percent of respondents spent more than 80 hours.

Tax-code complexity may be partly to blame for the increase, says Todd McCracken, president of the NSBA, a trade group. “There are a lot of expiring temporary measures in the tax code that have been enacted over the last few years, and we’ve also

changed the way we’re doing payroll taxes,” he says. “All of that is on the administrative side for small companies.”

Indeed, the majority of re-spondents said that when it comes to tax compliance, the ad-ministrative burden is a bigger challenge than the tax bill itself. “We often talk about the over-all burden of how much we pay in taxes, but especially from a small-business perspective, the burdens of administering our tax code are at least as large,” Mc-Cracken says. “For small com-panies, so much of it is keeping track of all of your activities in the way the IRS wants you to, in order to support your various deductions.” On the whole, re-

spondents ranked income taxes as their most significant admin-istrative burden, followed by payroll taxes and sales tax.

The small-business respondents generally supported reform-ing the tax code. Seventy-three percent favored reducing corpo-rate and individual tax rates and deductions, and 53% support-ed a solution similar to the “fair tax,” a proposal backed by the NSBA and others that would replace all income and corporate taxes with a national sales tax.

Of the respondents, 42% are S corporations, 32% are C cor-porations, and 13% are limited liability companies. Most operate in the manufacturing, professional services, construction, and retail industries. ◗ marielle Segarra

Small Businesses Spend More Time on Taxes

growth companieS

Blank CheckQ: When I have no sales of a product in a particular region, Excel leaves those cells in the pivot table blank (Fig. 1). If my data has blanks instead of zeros, Excel assumes that a column is a text column. How do I get rid of the blanks so my calculations

are not affected?Ask MrExcel

Bill Jelen

A: When pivot tables first came out, there was no way to correct this problem. After much outcry from accountants everywhere, Microsoft gave us a way to solve the problem. Follow these steps:

1. Select one cell in the pivot table to display the PivotTable ribbon tabs. On the Options tab, click the Options icon.

2. In the PivotTable Options dialog, select the Lay-out & Format tab and enter 0 in the For Empty Cells Show text box. Click OK (Fig. 2).

The result is that the blanks in the values section of the pivot table are shown as zeros. If you don’t like using zeros, you can enter anything in the For Empty Cells Show text box. Some people like to use dashes (—) or n.a. in the formerly blank cells. Either works just as well as a zero.

Figure #1

Figure #2

If you would like to submit a question to Bill “MrExcel” Jelen, go to CFO’s Spreadsheet Community Center at www.cfo.com/spreadsheets.

Time Spent On Federal Taxes in 2011

1 to 10 hours 10%

11 to 20 hours 10%

21 to 40 hours 17%

41 to 80 hours 19%

81 to 120 hours 18%

120 hours + 28%Note: Numbers do not add to 100%, due to rounding.Source: NSBA survey of 350 members

Thinkstock

Senior finance executives most often say they’re “very likely” to use their cash reserves for the following purposes:*

Fund ongoing operations

Acquisitions

Expand operating

activities and head count

*Partial list. Respondents were allowed to choose multiple answers.Source: “The New Era of Value Discipline” (CFO Research 2012)

CFOs See Growth AheadLike doctors standing

over a slowly improv-ing patient, senior

finance officers in the United States remain guard-edly optimistic that the country will realize at least moderate economic growth this year, according to a re-cent global survey.

Seventy-eight percent of U.S.-based CFOs foresee economic expansion this year, second only to the 86% of finance executives in In-dia who forecast growth in the next 12 months, accord-ing to the fifth annual Amer-ican Express/CFO Research Global Business & Spending Monitor. The U.S. findings are consistent with results from last year, when 79% of U.S. finance chiefs predicted growth. Among all respon-dents, lofty economic ex-pectations fell to earth this year, with 64% anticipating growth, compared with an almost-giddy 75% last year.

Paul Reilly, CFO of Arrow Electron-ics in Colorado, says that companies that survived the economic downturn are focused on constructing a strategic vi-sion that doesn’t sway with every pass-ing economic indicator. “We can’t be overtaken with enthusiasm in a period of expansion,” he says. “Nor can we allow ourselves to think, in a period of con-traction, that things are only going to go down and stay down.” Reilly was among the 20 senior finance executives around

the world interviewed for the study, which included a survey of 541 CFOs in Asia/Pacific, Europe, Latin America, the Middle East/Africa, and North America. Overall, finance leaders echoed Reilly’s sentiment, extolling the virtues of ap-plying discipline to finding and delivering value.

As wary as they are, CFOs seem more inclined to spend and invest than they were last year. In 2011, 62% of all respondents said their companies were de-liberately pursuing “cash-preservation” strategies. This year, more CFOs say they are likely to tap their cash reserves than say they aren’t. Among U.S.-based respondents, 56% say that their companies are likely to increase head count;

59% said they would likely invest more in expanding market access. Juan Figuereo, CFO of Newell Rubbermaid, the Atlanta-based consumer-products giant, says that his company will focus on gaining trac-tion in new Latin American and Asian markets, where, he says, “there is some level of initial investment required, but it’s relatively small.”◗ joSh hyatt and Celina RogeRS

the economy

To download this year’s Global Business & Spending Monitor, “The New Era of Value Discipline,” go to cfo.com/research.

62% of senior executives surveyed said their firms were pursuing a deliber-ate cash-preservation strategy.

45% of senior executives surveyed say their companies plan to spend down cash reserves.

2011

2012

Increase R&D

spending

27% 26% 25% 25%

bookshelf

Robert shiller is well known for having foreseen both the dot-com and the housing bubbles (he is a co-creator of the s&P/case-shiller home Price Indices), and for his pioneering work in behavioral finance. In Fi-nance and the Good Society (Princeton University Press, April, $24.95), the yale econo-mist comes to praise finance, not to bury it. “finance,” he writes, “despite its flaws and excesses, is a force that po-tentially can help us create a better, more prosperous, and more equitable society.”

After examining the often unappreciated value contrib-uted by finance profession-als, shiller reminds us that finance has already helped build a better world through inventions like amortizing mortgages and mutual funds. Instead of shying away from financial innovation, he ar-gues, we should embrace innovation that can improve people’s lives. that could in-clude everything from, say, derivatives for consumer prices and real estate risks to indexing the tax system for income inequality (the great-er the inequality, the greater the tax progressivity).

“the key to achieving our goals and enhancing human values is to maintain and con-tinually improve a democratic financial system that takes account of the diversity of human motives and drives,” concludes shiller. CFO

DEfEnDing financE

▼

Thinkstock 15 cfo.com | June 2012 | CFO

May was another slow month for mergers and acquisitions in North America. As of May 29, there were 254 deals with a total disclosed value of $88.3 billion for the month, according to data from Mergermarket. That’s a drop from May 2011 of 40% by deal count and 22% by dollar volume.

CFOs were clearly interested in acquiring as of the first quarter, but they are not pulling the trigger on deals. In the March Duke Uni-versity/CFO Magazine Global Business Outlook Survey, 39% of the 477 CFOs surveyed said they planned to buy in the following 12 months, and 14% planned to sell all or part of their companies.

Even in the middle market, the segment that has buoyed U.S. merg-er numbers in the past year, metrics are down, according to Robert W. Baird & Co, an investment bank. Deal count was off 11% year-to-date as of the end of April, and dollar volume was off 22%.

The European debt crisis may be to blame for companies’ hesi-tance, Baird analysts say. “In view of concerns about weakening trends in Europe weighing on growth elsewhere, signs of a broader economic recovery may be needed for M&A performance to strength-en,” Baird predicted in a report released in May.

Still, certain sectors are humming. As of May 11, energy had the highest amount of U.S. M&A activity measured by dollar volume, $40.1 billion, followed by consumer foods ($17.1 billion), industrial products and services ($12.9 billion), and biotechnology ($12.4 billion), accord-

ing to Mergermarket.M&A activity tends to

stall in the summer, so a sudden burst of deal mak-ing in any industry after May is unlikely. But Baird says if Europe’s crisis does not “short-circuit” financing, “the pieces remain in place for an upturn in the global M&A market.” Analysts point to positive variables such as credit-market accessibility, pressure on private equity to invest capital, and cash-rich corporate balance sheets, combined with limited pros-pects for organic growth. ◗ v.R.

The effective tax rate (ETR), or so-called real tax rate after expenses and tax off-sets, was a volatile statistic during the

financial crisis. The volatility has subsided for most firms amid the economic recovery, according to one study. At the same time, in-dustrial companies have seen their ETRs rise.

A May PricewaterhouseCoopers report covering the ETRs of 324 industrial product and service companies across the aerospace,

chemicals, transporta-tion, and industrial man-ufacturing sectors shows that the average three-year ETR through the end of 2011 was 26.3%, up 0.7% from the year-ago tally of 25.6%.

Tax losses and chang-es in valuation allow- ances were key areas cit-ed as having negative ef-fects on ETRs. Specifical-ly, 26 companies claimed this category as having an unfavorable impact, to the tune of about 1.1%.

But the study found some bright spots in the chemicals sector, which typically has in-vested in high-growth emerging markets. “Our analysis shows stronger recovery in the chemical and industrial manufacturing sec-tors than in engineering and construction sec-tors, where conditions are still challenging for some companies,” the report said.

As emerging markets develop and compa-nies increasingly expand into these territories, more companies will benefit from the lower tax rates within developing countries, said Mi-chael Burak, U.S. and global industrial prod-ucts tax leader for PwC, in a statement.

Tax incentives improved the ETRs of 23 companies in the study. Companies benefit-ed from incentives by 2.6% of their ETR, on average. Twelve companies reported domes-tic manufacturing deductions and 9 had re-search-and-development credits. ◗ kathleen hoffelder

Effective Tax Rate Rises For Industrials

Tax


Source: Mergermarket (as of 5/29)

MaY dISMaY

-60%

-50

-40

-30

-20

-10

0%

-40%

-22%

Decline from a year

ago in dollar volume of

deals

Decline from a year ago in # of M&A deals

in North America

U.S. Deal-Making Chills

▼

M&a

Topline

M&A image: Nemanja Sekulic/Getty Images

26.3%The average three-year ETR through the end of 2011, up

0.7%from a year ago.

Source: PwC

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BENEFITS INVESTMENT?

The turn of events is good news to one analyst who tracks cash-flow data. “It’s the first truly healthy sign since before the recession,” says Charles Mulford, a professor of accounting at Georgia Tech and director of the uni-versity’s Financial Analysis Lab.

Mulford’s latest report, an analysis of nearly 3,000 companies in various industries, shows that free cash margin (free cash flow as a percentage of reve-nue) increased during the fourth quar-ter of 2011 after six straight quarters of decline. Free cash margin for compa-nies with a market capitalization great-er than $50 million rose to 4.54% for the 12 months ended December 2011,

up 0.13% from 4.41% in September 2011, according to data supplied by Cash Flow Analytics, a firm where Mulford serves as director of research.

Free cash margin increased in 3 industries, decreased in 10 industries, and was stable in 31 during the Decem-ber 2011 reporting period, according to the report.

In the midst of the recession, com-panies cut capex, giving a lift to cash flow. But those cuts stemmed largely from conscious efforts to lower head count and reduce expenses. In the 12 months ended December 2011, how-ever, capital expenditures rose to 3.41%, up from 3.29% recorded in Sep-

For years, nonfinancial companies have put off spend-ing and hoarded cash. Now, for the first time since the

financial crisis, they are stepping up their capital expendi-tures even as they fill their coffers.

“Flush with Cash” Has New MeaningA rise in Corporate America’s free cash flow and capex could be a healthy sign.By Kathleen Hoffelder

››

MIchael Klein

accounting & tax


tember. Such a convergence of forces has been rare in the past. “This is the first reporting period since before the recession that we’ve seen increased spending on capital expenditures and increases in inventory [while] no lon-ger seeing a decline in free cash flow margin,” Mulford says.

Defense Cash Flows RiseDefense firms in particular improved their free cash margin performance over the year. Free cash margin for the defense industry rose to 10.14% for the 12 months ended December 2011, up from 5.53% in September 2011 and 4.20% over the 12 months ended Q4 2010. The increase in defense cash flows comes despite an overall reduc-tion in government spending, as the Department of Defense reduced its discretionary base budget by $2.6 bil-lion from 2010 to 2011. “The defense contractors are doing a remarkable job generating cash in the face of a difficult operating environment,” Mulford says.

The construction-materials sector and the coal industry, in contrast, had some of the worst free cash margins last year. Free cash margin in Decem-ber for the construction-materials sec-tor fell by 1.62% from September 2011. The coal industry fared worse, experi-encing a 4.99% decline.

Despite the overall bounce in free cash flow, the economy may not be out of the woods just yet, cautions Mul-ford. “We might see another down-turn, but this is the healthiest I’ve seen it,” he says. “Anytime you have an economy that’s growing at 2.2%, you’re always on the precipice of falling back-

Thinkstock

Tax Rules Roil Financial SectorProposed rules for implementing FATCA may have broad implications for U.S. banks.

◗ One might think the “foreign” in the Foreign Account Tax Compliance

Act relates to only a handful of firms. But proposed FATCA regulations have such a broad extraterritorial reach that

they’re taking on renewed importance for many U.S. financial institutions.

First enacted by Congress in 2010, FATCA applies to any U.S. bank that makes dividend payments or interest payments to a non-U.S. entity. (The law was originally created to police noncompliance by U.S. taxpayers us-ing foreign accounts.) Under proposed Internal Revenue Service rules, these banks would be required to withhold the interest or other payments they make to foreign financial institutions (FFIs) that fail to report certain ac-count information to the IRS. If a U.S. bank failed to withhold as required, it would be liable for the withholding tax, plus potential penalties and interest.

The proposed rules require the withholding agent to determine wheth-er or not an FFI is in compliance with the 2010 law. The rules also require banks to use separate account identi-fiers for different types of entities and to abide by strict information-reporting standards. “We understand it [FATCA] creates a significant undertaking for fi-nancial institutions,” IRS commissioner Douglas Shulman said when the pro-posed rules were issued in February.

Currently, U.S. institutions do not have to report information on their ac-counts with foreign banks and other entities, says Adrienne Baker, partner at Dechert, an international law firm. Under the proposed rules, “U.S. insti-tutions will end up being withhold-ing agents,” says Baker. A recent Baker Hostetler report went even further, say-ing that U.S.-based payers of dividends or interest income would be “essential-ly deputized enforcers for the IRS.”

Financial-services firms have sev-eral concerns about the rules, includ-

Together at LastFree cash margin rose in Q4 2011…

…and so did capital expenditures (% of revenue)

3%

4

5

6

7

8%

Dec’11

Dec’10

Dec’09

Dec’08

Dec’07

2%

3

4%

Dec’11

Dec’10

Dec’09

Dec’08

Dec’07

3.41%

Data for nonfinancial companies with market capitalizations greater than $50 million.

Source: Georgia Tech Financial Analysis Lab

ward. These are positive results for which the CFOs that run these com-panies should be applauded...but you can’t let up.” CFO

ing how to identify which accounts in each business unit must comply with FATCA. In a recent KPMG survey, 31% of 150 U.S. bank respondents cited account-identification requirements as their biggest compliance challenge under FATCA.

Companies are also concerned that they will not have the systems in place to handle all of the required compli-ance steps, says Laurie Hatten-Boyd, a national tax principal at KPMG. “It’s very important that they have their teams in place,” she says. “Right now they need to have steering commit-tees with IT, operations, and their tax departments all together addressing this.” Some financial-industry CFOs are keeping tabs on FATCA through meetings with steering committees and regulators, but others are still edu-cating themselves, she notes.

The IRS plans to release final regu-lations by September. But discussions in IRS and Treasury Department meet-ings have already surfaced about ex-tending the initial deadlines. The IRS says FFIs will be able to register their account information in an online da-tabase starting on January 1, 2013, the first effective date for U.S. documenta-tion compliance with FATCA. ◗ K.H.

3%

4

5

6

7

8%

Dec’11

Dec’10

Dec’09

Dec’08

Dec’07

2%

3

4%

Dec’11

Dec’10

Dec’09

Dec’08

Dec’07

4.54%

“We under-stand [FaT-ca] creates a significant undertaking for financial institutions.”

›› Douglas Shulman, IRS commissioner

ReaDy foR a ChangeFinance and accounting employees surveyed in the latest Randstad Engagement Index said the following:

Editor’s Choice 49%

would explore new job options when the market picks up.

12%would take a pay cut to keep their jobs.

25%would work longer hours without a pay increase.


First created in 2005, a unitranche facility is a faster way to borrow than the traditional structure for senior and mezzanine debt. The latter is of-ten more complex, because it requires companies to use several lenders— often a bank, a mezzanine fund, and another capital provider—for each credit, according to Ted Koenig, chief

A Better Way to Borrow?Unitranche loans offer the advantages of speed, simplicity, and savings. By Vincent Ryan

James Yang20 CFO | June 2012 | cfo.com

capital Markets

executive of private investment firm Monroe Capital.

In a unitranche facility, a single lender, usually a specialist in business-development financing, provides the entire credit, works with the borrower, and slices up, or “tranches,” the loan for other investors. The advantages to the borrower: the convenience of a one-stop shop for financing and a re-duced risk that the deal will fall apart. Also, because of the way the loan am-ortizes, unitranche borrowers often pay less interest than they would using traditional financing.

Borrowers typically use unitranche facilities for refinancings, recapitaliza-tions, dividend transactions, and any

financing where they want speed and minimal hassle. Because of its high success rate, unitranche lending is also particularly useful for companies fi-nancing a buyout in the currently ane-mic mergers-and-acquisitions climate, says Koenig.

To be sure, the number of uni-tranche deals is small compared with traditional loans. Still, unitranche fi-nancing has picked up in the last two years, according to S&P Capital IQ. Monroe Capital has done 12 unitranche transactions in the last eight months, including financing the acquisition of Fabco Automotive, a transportation parts supplier, by middle-market pri-vate-equity firm Wynnchurch Capital in October.

Wynnchurch settled on a uni-tranche facility for a couple of reasons, says vice president Neel Mayenkar. For one, it produced a lower cost of capital, because the entire loan amor-tized over time, unlike a typical hybrid loan deal, where only the senior debt amortizes, Mayenkar says. Using a uni-tranche structure also made the financ-ing process easier, he says. The deal “didn’t require as much micromanage-ment as it would have had I dealt with two lenders the whole time,” Mayen-kar says. “I was able to focus more on the deal and the diligence.”

As another benefit, the up-front interest rate on the deal was competi-tive, but the economics will pay off even more down the road, says May-enkar. “By year three of the transac-tion, fewer dollars of interest are flow-ing out under this structure,” he says. Mayenkar cautions, however, that the payoff for other borrowers will depend on things like the cash-flow character-istics of their businesses and how they

The deal “didn’t require as much micromanagement as it would have had I dealt with two lenders the whole time.” ›› Neel Mayenkar, VP of Wynnchurch Capital

Middle-market companies and leveraged-buyout firms are returning to the recent past with a hybrid loan

structure that simplifies the use of subordinated debt and offers companies a lower cost of capital.

››

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envision paying down the debt.One potential drawback of uni-

tranche facilities: a borrower is typi-cally not aware of the intercreditor agreements that govern its loan or what portion of the loan is owned by the various lenders, according to a paper by Practical Law Co., an online publisher for attorneys. This setup could cause problems for borrowers if they need additional financing or cove-nant waivers, Practical Law added. CFO

Desperate for YieldTreasurers are seeking the slightest pickup in returns on their short-term cash, provided the risk falls within corporate investment guidelines.

◗ During an April press conference, Federal Reserve chairman Ben Ber-

nanke said U.S. monetary policy was in the right place—no tinkering needed. While that may have come as good news for the financial markets, the Fed’s commitment to near-zero inter-est rates continues to be a thorn in the side of treasurers and CFOs.

What’s their problem? They don’t know where to invest the cash that has piled up on their balance sheets. Tradi-tionally safe investments are providing virtually no real yield. CFOs and trea-surers “are in the most difficult place they’ve been in their careers,” says Paul Montaquila, vice president of fixed in-come at Bank of the West. “Treasury rates are paltry, and agencies offer only a bit of a pickup [in yield].”

But some companies have begun


to loosen their typi-cally conservative at-titudes toward liquid-ity management, says Montaquila. Instead of keeping to 30-to-60-day thresholds for short-term cash, now they’re willing to go out nine months to a year on a term certificate of deposit, he says. “With Treasury bills trad-ing at 20 basis points, a 50-to-60 basis point return [on a term CD] is abso-lutely worth it,” he says. Since the Fed is sticking to its guns on interest rates until at least late 2014, such CDs don’t expose a firm to much maturity risk.

In general, treasurers are slightly more willing to take on a reasonable amount of risk if they stand to get paid for it, says Montaquila. As proof, he points to last March, when the two-year Treasury bill was trading at a “whopping” 37 basis points. “Buyers rejoiced and gobbled it up,” he says. “At the right levels, companies will ex-tend out on the curve.”

deadbeat banksThe Treasury Department revealed in May that most of the 343 banks that received capital injections under the troubled asset Relief Program would not be able to repay their debt to taxpayers in the near future, if ever. ›› See more in “The Shadow over Community Banking,” CFO.com.

Editor’s Choice

But most quality investments within the risk parameters of cash managers are still not compensat-ing investors enough. While some have tout-ed nonfinancial cor-porate bonds, for ex-ample, as a safe place to stash cash, the sec-tor is expensive right now, Montaquila says. And while the bonds of financial-services firms may offer a treasurer a 100-to-200 basis point

pickup, many banks have been down-graded so often that they fall outside the limits of allowable risk.

There is a clock ticking for some companies, though. First, many trea-surers have been keeping cash stashed in non-interest-bearing bank accounts. These accounts have been an attrac-tive parking spot because of a tem-porary guarantee from the Federal Deposit Insurance Corp. But, barring congressional action, FDIC insurance coverage on these accounts will cease at the end of 2012.

Second, proposed new regulations for the money-market-fund industry have cash managers wondering if in-vesting through these vehicles makes sense anymore. A survey by Treasury Strategies suggests that if the Securi-ties and Exchange Commission enacts regulation that affects returns, treasur-ers would consider moving money into separately managed accounts, govern-ment securities, bank money-market savings accounts, CDs, and commercial paper. As a result of the FDIC coverage and money-fund regulation develop-ments, “entities will have to take those funds and place them somewhere,” says Montaquila. ◗ V.R.

capital markets

Source: Yahoo Finance

Rock-Bottom Interest RatesU.S. Treasury yield curve, 5/15/12

0%

1

2

3%

30y10y5y3y3m

2.93%

Traditionally safe invest-ments are providing virtually no real yield. “Treasury rates are paltry, and agencies offer only a bit of a pickup [in yield] .”

›› Paul Montaquila, VP at Bank of the West

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The FuTuRe OF FinanCe

ing even further, listing the Jumpstart Our Business Startups (JOBS) Act itself as a risk factor.

During one week last month, at least 13 companies, including HomeTrust Bancshares, Plesk, and LegalZoom .com, warned investors in their Securities and Exchange Com-mission prospectuses that the regulatory relief provided by the JOBS Act could actually be a turnoff. “We cannot be certain if the reduced disclosure require-ments applicable to emerging-growth companies will make our common stock less attractive to investors,” Cimarron Software wrote in its S-1 form last month.

The trend may reflect an un-intended consequence of the act, says Michael Stocker, a partner at law firm Labaton Sucharow who represents institutional investors. In their filings, notes Stocker, companies are saying that because they “are willing to take advantage of the related standards for disclosures under the JOBS Act, one real risk is that they will be punished by investors, since investors won’t be getting as much information and they may have less confidence in how the companies are doing.”

So-called emerging-growth companies—those that take in less than $1 billion a year in revenue—can wait up to five years after their IPOs before following all of the rules that larger listed businesses do. They can submit two audited financial statements to the Securities and Exchange Commission

instead of three; they can avoid hold-ing say-on-pay votes; and, most signifi-cant, they are not required to get their auditors’ sign-offs on internal controls over financial reporting.

These companies spell out their exemptions under the JOBS Act in the new risk-factor disclosures. At the same time, they note that they will lose

their emerging-growth status before five years if their rev-enue increases beyond $1 bil-lion, their market cap exceeds $700 billion, or they issue more than $1 billion in nonconvert-ible debt.

Not all emerging-growth companies preparing for an IPO have included the law as a risk factor, but they may want to consider it, says Thomas J. Murphy, a partner at law firm McDermott Will & Emery who helps companies with their public offerings. “It’s cheap in-surance and good disclosure to call out for people [the] places where you differ from other public companies,” he says.

The additional disclosure implies the company using it is trying to be comprehen-sive, says Murphy. Moreover, the lines of text may help the company later on if it runs

into trouble. “If an emerging-growth company has a failure of its controls and has to restate its financial state-ments, the disclosure is going to be a plus when that company defends itself against a lawsuit,” says Murphy. “The business can respond by saying, ‘We warned you that there weren’t auditors

In the aftermath of Facebook’s initial public offering in May, smaller, lesser-known companies are prepar-

ing for their own debuts on U.S. stock exchanges. Naturally, they are alerting investors in public filings that their small stature and lack of public-company experience can make investing in their stocks a risky endeavor. But some are go-

››

Alex Nabaum24 CFO | June 2012 | cfo.com

GROWTH COMPANIES

A New Risk Factor: The JOBS ActWhy some companies are including the law itself as a risk factor in their IPO filings. By Sarah Johnson


looking independently at this.’”But the plaintiffs’ bar may have a

retort, suggests attorney Stocker. “All the disclosure says is that because of the JOBS Act, the company’s stock may not trade [at] as high a volume or [for as] good a price as you may hope,” he says. “It’s not saying because of the JOBS Act you may get a nasty surprise at the end of five years.” CFO

New Board For Private GAAPThe Financial Accounting Foundation’s action ends months of heated debate.

◗ Finance chiefs of privately held companies will no longer be faced

with the difficult and costly task of applying public accounting standards to their situations. In May, the Finan-cial Accounting Foundation (FAF) established a new council to improve standard setting for private compa-nies. The decision comes after scores of comment letters, roundtables, and heated discussions that often pitted the Financial Accounting Standards Board against the American Institute of Cer-tified Public Accountants. (The FAF is FASB’s parent organization.)

The new Private Company Council (PCC) will be the go-to body for pri-vate-company accounting issues and will advise FASB on all things related to private companies. It specifically will have to determine whether U.S. generally accepted accounting prin-ciples need to be altered to better ad-dress private companies.

The council is similar in scope to

what the AICPA origi-nally proposed back in 2009, when a blue-ribbon panel recommended a separate body with stan-dard-setting ability for private-company account-ing. Unlike what FASB had favored, the PCC will report to the FAF’s board of trustees, which will select the council’s chair-person and staff of 9 to 12 members. The board will also create a Private Com-pany Review Committee, which will have primary oversight responsibilities for the PCC.

In some respects, the new PCC re-porting regime will differ dramatically from the original recommendations. The council will be smaller, for exam-ple, and will hold more frequent meet-ings, with at least five a year in its first three years of operation. The PCC will also be required to provide quarterly written reports to the FAF’s board of trustees.

“This group needs to be indepen-dent. It needs to be able to look at things fresh and then advise FASB and also take its own actions, which would then be brought to FASB,” says John Taylor, vice president of research and a CFO Task Force point person at the National Venture Capital Association. “We wanted to make sure actions com-ing from the council would be as close to veto-proof as possible.”

Is 1 GAAP Better Than 2?Establishing the council strikes an important balance in recognizing that

Houses of BluesMidmarket executives say the housing market is the top barrier to growth in 2012, according to a Deloitte survey. Government budget challenges slipped from number one in 2011 to number two, followed by health-care costs, consumer confidence, and the European debt crisis.

Editor’s Choice

the needs of public- and private-company finan-cial-statement users, preparers, and auditors are not always aligned, FAF president and chief executive officer Teresa S. Polley said in a state-ment. The plan, she not-ed, “ensures comparabil-ity of financial reporting among disparate compa-nies by putting in place a system for recogniz-ing differences that will avoid creation of a ‘two-GAAP’ system.”

Although some industry partici-pants have said that having multiple sets of accounting standards would not be a problem since they already exist amid certain Securities and Ex-change Commission reporting re-quirements, others feel more of a one-GAAP system would be more beneficial.

For its part, the AICPA does not favor a one-GAAP accounting system, although it does support the new stan-dards body. Gregory Anton, chairman of the board of directors of the AIC-PA, said in a statement that a “one-size U.S. GAAP does not fit all companies, especially smaller privately held busi-nesses.”

The AICPA believes more work needs to be done when considering the accounting needs of small and midsize enterprises. It plans to launch an “other comprehensive basis of ac-counting” financial-reporting frame-work just for SMEs and for those that do not need to comply with U.S. GAAP. ◗ KAthleeN hoFFelder

“this group needs to be independent. It needs to be able to look at things fresh and then advise FASB and also take its own actions.”›› John Taylor, National Venture Capital Assn.

The standard was drafted by the SHRM’s Investor Met-rics Workgroup and released in April for a 45-day public review. “A significant portion of the value of organizations remains unaccounted for in investment communications,” the group wrote of the stan-dard’s purpose in its execu-tive summary. The guidelines are intended for public com-panies; compliance would be voluntary.

The SHRM aims to win approval of the standard from the American National Standards Institute (ANSI), something it doesn’t expect to happen until late this year. Af-ter that, the society hopes to persuade investor groups and analysts to insist that compa-nies provide the information.

Laurie Bassi, a human-cap-ital management consultant who chaired the workgroup, predicts that companies al-ready known to be leaders in human-capital management will be the first to embrace the standard. “When it catches on, some of the laggards will come along,” she says. “They probably won’t do so with great enthusiasm in the beginning, but that’s how standards can begin to change things.”

Six Degrees of DisclosureCurrently, few companies disclose anything about their human capital other than succession plans for top ex-ecutive positions and broad summaries of human-capital-related risks. The proposed standard asks companies

to provide information in six areas: spending on human capital, ability to retain talent, leadership depth, leader-ship quality, employee engagement, and a narrative human-capital discus-sion and analysis (see “People Talk,” facing page). Bassi says most compa-nies already have most, if not all, of this information on hand.

But the standard does not go into great detail about the requested information or how it should be disclosed. That was intentional, says Bassi. “One of our objectives was that the standard be easy to love and that it not create unnecessary work,” she explains.

A consequence of that stance could be that com-panies’ disclosures would lack comparability, at least at first. But that may change over time. “As investors gain experience interpreting the data and a historical track record is created, the metrics will become increasingly use-ful,” the workgroup predict-ed in its executive summary.

Polar ReactionsIt remains to be seen wheth-er the SHRM can convince analysts and finance chiefs to pay attention to the standard.

Peter Wahlstrom, an equity analyst at Morningstar Investment Services, says the disclosures wouldn’t help him ar-rive at investment decisions. “I don’t think the value extracted from receiv-ing this information, at the proposed level of detail, will outweigh the incre-

A proposed standard for corporate disclosure of hu-man-capital information has provoked mixed reactions

from CFOs and analysts. But the group behind the standard, the Society for Human Resource Management (SHRM), be-lieves that it can convince investors to demand such disclo-sure—and that companies will ultimately provide it.

Show Us the Talent A prominent HR group wants companies to disclose detailed information about their human capital. By David McCann

››

Hugh Kretschmer/Getty Images

Human capital



mental cost incurred by the company to provide it,” he says.

On the other hand, Keith Mills, an equity analyst at Trillium Asset Man-agement, says that human-capital analysis “is critical input in analyzing the probability of a company generat-ing its return on invested capital that’s above its weighted average cost of

Thinkstock

Aye on PAyOnly 19 of 927 Russell 3000 companies that held shareholder “say on pay” votes by mid-May received a thumbs-down, according to Towers Watson. Last year, shareholders voted down executive compensation at less than 2% of the companies required to hold these advisory votes. ›› See “The Say on Pay Is Yes,” CFO.com.

Editor’s Choice

finance chiefs. “The human-capital disclosure requirement should not be pursued,” commented Pete Hastings, finance chief of ISR Group, a private company that provides technical ser-vices to unmanned vehicles. “The ef-fort required to pull together mean-ingful data will be significant and will waste the time of very busy people.”

But Dennis Milosky, CFO of Tech-nical Instruments, a microscopy prod-ucts and services supplier, called the idea “a step in the right direction.” It is common practice, he noted, to replace full-time-equivalent employees with outside contractors in order to get around head-count budgets. “Those costs are all too often buried in other categories,” he said. “If this informa-tion were disclosed, it would be far easier to evaluate the true efficiency of an organization. ”

To backers of the proposed stan-dard, the criticisms miss the point. While it may take years—or even a de-cade—before the standard is generally accepted, Bassi says the proposal is “a good first step, and in fact almost any standardization effort starts this way. It will be revised over the years and gain acceptance. Let perfect not be the enemy of good.” CFO

capital.” Investors want companies to “build productive, ethical, and sustain-able organizations over the long term,” he says, and “analysts should be aware of all inputs that will contribute to this outcome.”

A recent CFO.com article on dis-closing human-capital information drew similarly polar reactions from

“I don’t think the value extracted from receiving this information, at the proposed level of detail, will outweigh the incremental cost incurred by the company to provide it.”

›› Morningstar’s Peter Wahlstrom

1. Spending on human capital

a. Total amount spent on employees (salaries, benefits, taxes)

b. Total amount spent in support of employees

c. Total amount spent in lieu of employees

d. Total amount invested in training and development

e. Total head count and total full-time equivalents at the end of the period

2. Ability to retain talent

a. Voluntary and total turnover

b. Broken down by subset of EEO-1 job types

c. Industry standard formula of (# of terminations during the period)/

(average active head count during the period)

3. Leadership depth

a. Percentage of defined positions that have an identified successor

b. Percentage of open defined positions filled internally during the period

4. Leadership quality

a. Index of relevant questions from employee survey

b. Information on the response rate and methodology/tool

5. employee engagement

a. Index of relevant questions from employee survey

b. Information on the response rate and methodology/tool

6. Human capital discussion and analysis

a. Narrative to provide context and discussion of the reported metrics

b. Disclosure of any material risks or any other material information related to human capital

Source: Society for Human Resource Management

The proposed standard says companies should report on the following six human-capital-related areas.People Talk

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Gordon is particularly concerned about emerging risks—the kind that mate-rialize rapidly, seemingly out of nowhere, and wreak havoc. Accordingly, he monitors economic devel-opments and regulatory ac-tivities in the 60 countries where his company does business. When the Euro-pean debt crisis took shape last year, he pored over the company’s cash holdings in overseas financial institu-tions and examined those banks’ stability.

By their nature, emerg-ing risks are difficult to an-ticipate. “An emerging risk is either something we’ve never seen before or some-thing we haven’t seen for a long time,” says Max Ru-dolph, owner of Rudolph Financial Consulting. They can do extensive damage. The Euro-pean debt crisis, the Japanese earth-quake and tsunami, the Arab Spring uprisings—these once-emerging risks all had a ripple effect in 2011 on supply chains, commodity costs, and liquidity.

Experts say such risks are grow-ing. “The interconnected nature of the global economy is increasing the speed at which emerging risks arise and cas-cade, as well as the magnitude of their impact,” says Alex Wittenberg, partner

and head of global risk at management consultancy Oliver Wyman Group.

A new report from Oliver Wyman suggests that executives understand the threat. Seventy-eight percent of more than 200 executives surveyed in the report said they want to increase their capabilities when it comes to managing emerging risks. As it stands, the same executives said they devote just 28% of their risk-management ef-forts, on average, to emerging risks.

To make maximum use of the time they do spend on emerging risks, CFOs should keep close tabs on mar-ket trends, global economic develop-ments, and regulatory activities, and be prepared to jump into action quickly. During the European debt crisis, for

example, Quintiles moved some of its cash around to mitigate the risk of chang-ing currency rates. The ex-ercise even made Gordon aware of a new risk: chang-ing overseas banks can take longer than expected.

Learning From ExperienceFinance chiefs can also use their past experiences to identify and address emerging risks. New to Coupa Software this year, CFO Mark Verbeck is still smarting from his previous company’s last California state-tax audit. Since he joined the spend-manage-ment software firm, Ver-beck has put new process-es in place based on what he learned at his former

employer so that Coupa will be bet-ter prepared when the tax man comes knocking.

CFOs can also stay abreast of emerging risks by reading about the is-sues facing other businesses or talking with their colleagues through peer ex-changes, board memberships, and net-working events. Some senior finance executives in the health-care industry, for example, attend conferences and roundtables to hear how other com-

Like many CFOs, Kevin Gordon is preoccupied with risk. The finance chief of Quintiles, a company

that provides services to pharmaceutical and medical-device companies, says risk management is on his mind “every minute of the day.”

An Emerging ConcernThe number and impact of emerging risks are rapidly growing, say experts.By Sarah Johnson

››

29cfo.com | June 2012 | CFOStephen Webster

RISKMANAGEMENT

panies are preparing for impending health-care reform under the Patient Protection and Affordable Care Act.

Some groups publish periodic re-ports ranking emerging risks from highest to lowest level of concern. A recent report by several professional organizations polled the people who live and breathe risks—risk managers. They cited financial volatility most often as a top-five emerging risk, fol-lowed by failing governments and cybersecurity (see chart, above).

Executives may want to compare rankings like these with their own internal risk lists. To be sure, one company’s emerging risks may not be another’s; they vary depending on business size, strategy, and financial strength. That said, another perspec-tive could help companies see their blind spots. Indeed, as many compa-nies may have learned this past year, “a lot of [risk management] is being aware of what’s going on in the world around you,” Verbeck says. CFO


Top Emerging Risks Cited by Risk Managers

Source: 2011 Emerging Risk Survey of risk managers, sponsored by the Casualty Actuarial Society, Canadian Institute of Actuaries, and Society of Actuaries’s Joint Risk Management Section. Multiple responses allowed.

Do Your Internal Auditors Have The Right Skills?Companies are putting a premium on critical thinking and data-mining expertise.

◗ Ten years after the Sarbanes-Oxley Act made financial controls job one

for internal auditors, companies want auditors to shift some of their atten-tion to operational risks.

A recent survey by the Institute of Internal Auditors (IIA) found that just over one-quarter of corporate inter-nal audit work this year will focus on operating risks. The survey of 461 in-ternal auditors in North America also found that compliance risks will make up 15% of internal audit efforts and Sarbox testing will take 12%.

The findings suggest that compa-nies are looking for a wider range of skills from their internal auditors than

they did a decade ago. “In the wake of Sarbanes-Oxley, there was a huge risk for companies that failed early [Sar-box] 404 audits,” which tested the ef-fectiveness of their internal controls over financial reporting, says Richard Chambers, president and CEO of the IIA. As a result, “internal audit was heavily focused on that area,” he says.

But times are changing. The IIA survey found that analytical and criti-cal thinking is the skill that companies are seeking most in internal auditors this year, named by 73% of respon-dents. Next are communication skills (61%), data mining and analytics (50%), general IT knowledge (49%), and business acumen (46%).

These results reflect a growing trend, Chambers says: internal audi-tors are evolving from finance and compliance cops to advisers and ex-perts who can opine on broader mat-ters, including strategic risks to the business. The financial crisis stalled some of that progress, since it led com-panies to downsize many internal au-dit teams, he admits. But in other ways, the credit crisis may have been good for the role, Chambers says. As regula-tors called on managers and boards to improve their oversight of risk man-agement, the executives in charge may have given more responsibility, and prominence, to the internal audit team.

While the addition of skills will diversify companies’ audit teams, internal auditors should not be well rounded “just for the sake of it,” cau-tions Chambers. Rather, executives should decide what skills their audi-tors need after assessing their com-panies’ unique, industry-specific risks and priorities. ◗ S.J.

Think Stock

Financial volatilityFailed and failing

states

684238323232

684238323232

684238323232

Cybersecurity/ interconnectedness of

infrastructure

68% 38%42%

32% 32%32%

Oil-price shockChinese economic hard landing

Regional instability

fraud doesn’t take a holidayThe Association of Certified Fraud Examiners suggests that companies require all employees to take regular vacations. “a lot of cases that are brought to us or that we read about are brought to light when some-one is filling in for someone else,” says Andi McNeal, director of research at the ACFE. ›› See “How to Prevent Workplace Fraud,” CFO.com.

Editor’s Choice

are serious about going public and that acquirers may there-fore lose their chance to buy them at an attractive price.

The JOBS Act enables companies to submit a draft S-1 statement for confidential review by the Securities and Exchange Commission before they go public. That gives sellers even more leverage, allowing them to put com-petitive pressure on acquirers without publicly disclosing information like trade secrets and names of key customers. (Companies will still be able to share their confidential registration statements with individual potential buyers.)

In the past, all IPO filings were public, which may have kept some companies that were considering a sale from filing at the same time, notes Bill Kelly, a partner at Da-vis Polk & Wardwell. “Those companies [previously] had to choose between filing publicly [versus] not filing and not having a credible IPO al-ternative,” he says.

Now, however, the issuing com-pany “[doesn’t] have to tip its hand,” says Michael Nall, founder of the Al-liance of Merger & Acquisition Ad-visors. Further, under the new law, a company that used the dual-track

strategy to drive up its selling price would have little to lose. Even if the IPO fell apart, if the company filed privately, it would not face the stigma that often comes with pulling an offer-ing, Kelly adds.

As a result, more companies may pursue the dual-track strategy. “Now they can sort of have their cake and eat it, too,” says Kelly. Some studies have

shown that dual-track companies sell at a 20% premium to other companies.

Still, businesses that file confiden-tially may give up some of the ancillary benefits of a highly visible share offer-ing. Often, a public IPO filing can indi-cate that a company is doing well, “and

[that] visibility helps with customers and recruitment,” Kelly says. By attracting out-side buyers, a public filing can also stoke competition for a company, says Nall. “There’s no doubt that the bigger the number of potential buyers, most often, the higher the price, because the company gets bid up,” he says.

Since they lack the exten-sive networks of large compa-nies, small companies in par-ticular may benefit from filing publicly. “Private companies keep a very tight circle, and inevitably there is a trade-off,” Nall says. At the same time, says Kelly, “if a company has a competent banker, it should know who the potential ac-quirers are, and the company shouldn’t have to file some-thing [publicly] with the SEC in order to attract them.”

The JOBS Act also gives pre-IPO companies more latitude in testing the waters of the public mar-ket. The firm’s advisers can premarket an offering, even before filing with the SEC, to gauge how much interest inves-tors have in a firm’s shares. This new rule allows companies to gather more information before deciding whether to sell or go public, says Kelly. CFO

IPO ConfidentialA provision of the JOBS Act enables private companies to simultaneously pursue an IPO and a sale without disclosing confidential information.By Vincent Ryan

James Steinberg

strategy

The Jumpstart Our Business Startups (JOBS) Act has thrown a new wrinkle into the “dual track” strategy, in

which late-stage private companies pursue an initial public offering while they negotiate with acquirers. Companies often use this strategy to signal to potential buyers that they

››

›› strategy Continues on page 32


32 CFO | June 2012 | cfo.com Thinkstock

Strategy

Do Mergers Add Value After All?The perception that mergers and acquisitions destroy shareholder value may be out of date.

◗ For years, debate has raged over the value of mergers and acquisitions.

Studies have tended to find that M&A is a surefire way to destroy shareholder value in acquiring firms. Yet, compa-nies keep making acquisitions to grow market share, expand geographically, and diversify into other industries.

A new study suggests that the con-ventional wisdom is at least incom-plete. True, the November 2011 report, by researchers at the M&A Research Centre at Cass Business School in Lon-don, shows that most deals don’t add value to share-price performance in the three-year period after they are an-nounced. But the study, which exam-ined more than 3,000 UK acquisitions by UK companies between 1997 and 2010, also found that successful deals create more value than unsuccessful deals destroy.

While about 60% of acquisitions in the study failed to create value, the net share-price returns of all acquirers were positive. During the 40 days after

an acquisition, net cumula-tive abnormal returns (the difference between actual returns and a market in-dex) were about 6%, equal to an average of about £178 million (about $287 mil-lion) in value per deal.

One possible explana-tion for this result: sav-vier dealmakers. “These days, more companies of a certain size will have a corporate-development or a strategy department and will look for deals and tar-gets, so they have a lot of experience,” says Anna Fa-elten, deputy director of the M&A Re-search Centre and author of the study.

The longer-term picture, from 4 months before until 36 months after a deal, shows that overall, acquisitions create value in the run-up to a deal, with acquirers’ share prices outper-forming the market index at a peak of 7.5% in the 2 or 3 months after a deal (see chart above). From then on, out-performance starts trending back to-ward just 1% after three years. The re-search suggests that acquirers can take advantage of this trend “by including shares in the deal consideration offered to target shareholders” and then timing

the deal to coincide with a peak in the share price. (The findings also suggest that the more cash in the mix, the more successful the deal.)

Ultimately, Faelten contends, the idea that up to 70% of M&A deals destroy value is dated. “People have been using those numbers for a very long time,” she says, add-ing that some of the influ-ential studies date back to the 1980s.

The UK government’s Department for Business,

Innovation and Skills commissioned the study, “The Economic Impact of M&A: Implications for UK Firms,” in the wake of public furor over Kraft Foods’s 2010 acquisition of UK con-fectionery group Cadbury, a transac-tion that began as a hostile bid. Not only does the research fail to “provide any evidence that hostile takeovers are value destroying in the long run,” but it also shows “that acquirers involved in hostile deals generate more sharehold-er value compared with those involved in friendly takeovers,” the study says.◗ AnDrew SAwerS is editor of Cfo euro-

pean Briefing, a Cfo online puBliCation.

60%of acquisitions in the study failed to create value, but the net share-price returns of all acquirers were positive.

*Long-term adjusted total return for acquirers, adjusted to the FTSE All-Share Index. Sample: 3,272 UK acquisitions between 1/1/97 and 12/31/10.

Source: “The Economic Impact of M&A: Implications for UK Firms,” November 2011

Positive returns For Acquirers

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Flawed ForecastsGlobal 1,000 companies are missing their quarterly working-capital forecasts (including inventory, receivables, and payables) by up to 23%, according to a study by REL Consulting. That amounts to as much as $600 million for a typical Global 1,000 company, with $29 billion in annual revenue, says REL.

Editor’s Choice

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Get a “wet-ink” contract. Ear-ly on, cloud adopters were most-

ly consumers and small businesses that agreed to cloud contracts online in the form of a click-through “I Accept” but-ton or a similar mechanism. In almost all instances, these contracts con-tained clauses that allowed providers

to amend the terms of the agreement unilaterally. This approach is not ideal for most businesses, and it presents a potential risk if the vendor’s changes are not in a company’s best interest. If cloud initiatives are critical to busi-ness, companies should seek a fully encapsulated “wet-ink” (original) con-

tract that cannot be changed without approval by both parties.

Secure minimum functional-ity. Companies that can negoti-

ate with their providers should ensure that their contracts include minimum- functionality standards. This is espe-cially important in software-as-a- service (SaaS) contracts that allow vendors to terminate parts of their ser-vice portfolios. If a company depends on services that have been terminated, it could essentially be pushed out of its contract.

Safeguard the right to termi-nate. To upgrade and maintain

their services, providers may add or remove key features. If any of these changes alter the application’s func-tionality, companies should be able to terminate their contracts without penalty. Businesses should also try to ensure that vendors will provide them with assistance and host their data while they transfer to another service.

Demand full disclosure. It is not uncommon for SaaS provid-

ers to use other providers for different cloud services. Companies should en-sure that vendors offer assurances on privacy and data residency throughout their cloud network. They should also determine whether these contracts will affect their regulatory and compli-ance obligations if some of their pro-vider’s own service providers are for-eign-owned.

Maintain the right to audit. Companies should make sure

35cfo.com | June 2012 | CFOJeffrey Coolidge/Getty Images

TECHNOLOGY

Before You SignThat Cloud ContractIf you decide to use cloud-computing services, be sure your contract with the provider gives you maximum protection. By Rob Livingstone

When a business moves to the cloud, it hands off its servers, its networks, and even its data to its provider.

All that it has left is a contract. Given this, CFOs need to en-sure that their cloud contracts are comprehensive, balanced, and enforceable, preferably in legal jurisdictions that suit the needs of their companies. Here are six actions to take before signing a contract:

››

1

2

3

4

5

their contracts allow them to employ an independent and qualified audi-tor to validate their provider’s perfor-mance under the contract. The role of cloud auditor is clearly explained in Section 2.4 of the National Institute of Standards and Technology Cloud Ref-erence Architecture.

Guard against mergers and acquisitions. The cloud land-

scape is volatile, and a provider may be bought by another outfit at some point in the future. Make sure the cloud contract is an irrevocable guar-antee of continuous service and is binding on all parties and their suc-cessors through the provider’s supply chain. Contracts should also exclude the possibility that users can be ter-minated without cause at the vendor’s convenience. ◗ Rob Livingstone is a

Consultant and former Cio and a regu-

lar Contributor to Cfo.com.

36 CFO | June 2012 | cfo.com Thinkstock

to wake up” and moderate their pages daily, says Jim Belosic, CEO of Short-Stack.com, a custom Facebook app cre-ator. The new design includes analyt-ics tools, a spot for a horizontal photo banner, room for customizable apps, and a time line that invites companies to describe their corporate histories.

Timeline enables businesses to of-fer content that goes beyond wall posts and fan “likes,” Belosic says. For ex-ample, companies can use the cover-photo feature to grab customer atten-tion. The cover photo gives companies “more of a chance to make a quick impression,” says Jennifer Fournier, owner of Canadian bookstore Chat Noir Books. Chat Noir’s cover photo, a reader substituting a book’s cover for his face, won the bookstore a spot on a PCWorld.com list of best business cover photos.

“You have to be able to say, ‘Here’s my patent, and this is why I’m going to crush the competition and continue doing so for the next 10 years.’ If you can do that, you’re having a great day.”

—Patent attorney Anne Culotta in “Welcome to the IP Bubble,” CFO.com

Verbatim

Facebook Users, Meet timelineThe social network’s new layout can help users increase customer engagement.

◗ In March, Facebook forced all busi-ness users to adopt Timeline, its

new page layout. The change may cause companies to put more effort into maintaining their Facebook busi-ness pages, but the new design may also help them increase customer en-gagement, experts say.

The switch to Timeline has already “caused a lot of page administrators

Going DigitalBig data and digital marketing Become top strategic priorities.

›› Digital business initiatives involving big data, cloud computing, and social media are becoming a strategic priority for many companies, according to McKinsey & Co. More than half of nearly 1,500 C-level executives

surveyed by the consultancy in April said both big data and digital marketing (including social media) were among their top 10 strategic priorities.

But many respondents also said their companies lacked the resources and the organizational structure to capitalize on such initiatives. Almost half of the executives surveyed said their companies were investing too little in digital ini-tiatives to meet their goals. Thirty-six percent of CEOs said their digital business initiatives were funded at the right level, while only 29% of CFOs said the same.

Still, executives are somewhat optimistic about the value of digital business initiatives. A third of respondents predicted digital business would increase their company’s operating income by at least 10% in the next three years. They tended to place more value on some initiatives than others: 44% said they out-performed their competitors using big data and analytics more significantly than they did using any other digital strategy, followed by 32% for digital mar-keting techniques and 28% for social tools or technologies.

◗ mArIelle segArrA

At Kraft Foods, the Nabisco divi-sion has “done a great job adding a lot of company history” to its Oreo cook-ie Facebook page, says Belosic, using Timeline to include photos, events, and milestones. “I can see that they’re real-ly a part of American culture,” he says. “They’re more than just a cookie,”

The new design also gives compa-nies an opportunity to publicly account for past blunders. “Smart companies will include their mistakes and will fol-low those with what they did to correct them,” says Cliff Figallo, senior site curator at Social Media Today, a social-media discussion website. Netflix, for example, has not removed posts about last year’s roundly criticized rate hike. “They’re a web-savvy company and un-derstand the need to learn and change fast,” Figallo says. “That will be reflect-ed on Timeline.” ◗ bonnie evans

6

29%Percentage of CFOs who say their digital busi-ness initiatives are funded at the right level

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For the London 2012 Olympic Games, 2.5 square kilometers of industrial land in East London has been transformed into green space. Wood’s office overlooks the new site.

Are the Olympic Games still on time and on budget?Yes on both counts. We have two separate budgets, two separate organizations deliv-ering the games. One is the Olympic De-livery Authority, which is the public entity that’s responsible for building a lot of the infrastructure. That’s publicly funded and is largely complete in terms of its work. It has delivered below budget.

Then there’s my organization, the organiz-ing committee, which is a private company, privately financed. We are on budget, and ours is approximately £2 billion [$3.1 billion].

That figure is where you started from, several years ago. That is exactly where it started. Not only have we maintained our costs within that original budget estimate, but we have also managed to deliver within the revenues we’ve been able to raise.

What are you spending the money on?The single biggest area is venue overlay [temporary facilities and infrastructure]. About 20% to 25% of our budget goes in that, which is unusually large for [an organizing committee]. That’s because we based our bid around lots of temporary build; we didn’t want to leave a lot of white elephants.

Technology is the next biggest area. About 20% of our budget goes to the technol-ogy infrastructure required for the Games—everything from the results and scoring systems to the communications systems that enable folks to communicate between ven-ues and back to the international broadcast centers.

What are the sources of your funding?The single largest source of our income is local sponsorship, where we’ll raise about

The Summer Olympic Games are syn-onymous with competition, glory, inter-nationalism—and, lately, prodigality. The 2008 Olympics in Beijing cost $43 billion; today its facilities are rarely or never used. Athens reportedly spent $11 billion on the 2004 Summer Games, double the original budget, and many millions more to maintain vacant ven-ues. Montreal needed 30 years to settle all of its bills for the 1976 Olympics.

Will London, which hosts the 2012 Olympic Games in July, avoid such a legacy? Neil Wood thinks so. On leave as a partner with Deloitte, the 47-year-old Wood has been CFO of the London Organising Committee of the Olympic and Paralympic Games (LOCOG) since its inception in 2005. Before that, he was instrumental in putting together Lon-don’s successful bid for the Games, an effort for which he was made a Member of the Order of the British Empire.

With a workforce of some 200,000 people, including up to 70,000 volun-teers and about 100,000 contractors, LOCOG is responsible for staging the Games. (The Olympic Delivery Author-ity handles the big investments in per-manent venues and infrastructure.) Wood spoke with CFO in April about what remains to be done.

Let the Games BeginThe 2012 Summer Olympic Games start next month in London, and Neil Wood is counting on their success.

NeiL WoodCFO, London Organising Committee of the Olympic and Paralympic Games

oN The RecoRd


Wood photo by Roy Shakespeare;other photos courtesy of London 2012 Olympic and Paralympic Games

◗ London 2012 mascots Welcock and Mandeville

◗ Beach volleyball is scheduled to take place at the Horse Guards Parade.

◗ After test events, the BMX track was made faster and more competitive.

£700 million. That was the target we set in 2005 when the economic envi-ronment was looking pretty buoyant. The good news is that we’ve hit that target, and we closed our sponsorship program at the end of last year. We will also raise about £600 million from ticketing revenues, and there we’ve al-ways balanced three priorities: afford-able tickets, full venues, and our rev-enue targets.

The third large source of income is the two elements of funding that we received from the International Olympic Committee (IOC). One is its fixed contribution, and the other re-lates to the international sponsors, the top sponsors. The total that has been swirling about between those two ele-ments is about £600 million.

How much of the revenue from the Games goes back to the IOC?There are two ways that money goes back to the IOC. One is it gets a roy-alty on all sponsorship and ticketing income. The second way is if we were to make a profit at the end, then 20% of that profit we pay back to the IOC. But it’s looking like we’ll have a balanced budget rather than a profit.

What issues, if any, have been keeping you up nights?The biggest issue, and it’s an ongoing one, is cost management. The eco-nomic model of an [operating com-mittee] is quite interesting. There’s no direct link between the cost of deliv-ering what you have to deliver and the revenue you can raise. As a result, we’ve had to operate with very, very fine levels of contingency. And we’ve had to be incredibly focused on cost control, incredibly disciplined as an organization.

How many finance staffers do you have helping you keep costs under control?There are just over 100. The two big-gest elements of my team are financial


Neil Wood, CFO, LOCOG

ON THE RECORD

control, which is the basic finance back office, where I have about 30 staffers; and then a proportionately large finan-cial planning team of about 35 staff-ers. That’s quite a large planning team compared to the size of the control team, but it’s been essential to enable us to control the cost base.

China spent $43 billion on the Beijing Olympics. What will be the total tab for the London Games?We’ve got our core budget of about £2 billion. Then there’s the public- sector budget of £9.3 billion, the bulk of which has gone for building the in-frastructure in the Olympic Park. That will almost certainly come in under budget. There’s about £500 million headroom in that budget as we speak, and they’re largely done with their program now. An important point to make there is that about 75% of that spend will remain in legacy. So a lot of that has to do with dealing with basic infrastructure in that part of London, burying power lines, cleaning up the environment, and so on.

The Olympic Park is in East London, correct?That’s right. It is on an area of land that was largely derelict for many years, really since the Second World War. The Games have been a catalyst for redeveloping that part of London, and it’s fundamentally transformed now. The largest new urban park in the UK in over 100 years has been put in.

As the Games approach, what’s left on your agenda?We’ve still got a significant propor-tion of our job to do. A lot of our over-lay is necessarily delivered very late in the day. For example, this year is the Queen’s Diamond Jubilee, and one of our venues, beach volleyball, is right in the center of London, in an area called Horse Guards Parade, where we’ve got to build a temporary 15,000-seat arena. That can only be done once the

celebrations of the Queen’s Diamond Jubilee are over, which is not until June. That’s just an example. Generally speaking, our overlay program will run right up until the end of June, begin-ning of July.

Once the Olympics are over, how long will it take you to wind up the committee’s work? We’re trying to wind up very quickly. We’ve been working on it for almost two years now. In parallel with all the work we’re doing to organize and de-liver the Games we’ve also had a little project called our dissolution project, to make sure we have an orderly and rapid dissolution. Ultimately we plan to put the company into formal liqui-dation in June of 2013. What will hap-pen is that on September 10, the day after the closing ceremonies of the Paralympic Games, the majority of the paid workforce will go. At that stage we’ll probably have about 500 peo-ple still on our books, compared with about 6,000 staff at Games time. By the end of 2012, that number will have fallen to about 100 people.

For you, 2013 will mark the end of 10 years working on the Olympics. What are you going to do for an encore?Take a holiday. [Laughs.] I’m a partner with Deloitte. I’ve been on a very long- term secondment. And my intention is to go back to Deloitte.

◗ IntervIew by edward teach

the bloomin’ Olympics:The new Olympic Stadium will serve as the venue for athletic events as well as the Games’ opening and closing ceremonies.

Courtesy of London 2012 Olympic and Paralympic Games

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NEW REPoRTS

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FROM CFO MAGAZINE

The 1st Annual

WOMEN IN FINANCEAWARDS GALA & WORKING SESSION

More than three hundred people attended CFO’s inaugural Women in Finance Working Session and Awards Gala on May 15 in New York City. The half-day celebration fea-tured engaging keynotes and panels designed to address the concerns

of women in senior finance positions across all in-dustries. At the awards luncheon, CFO recognized a group of twenty female CFOs from the world’s largest companies. Later this month, you can see more about this fun, festive, and energizing event, including video interviews and Q&As with the award winners. Check out CFO.com in late June.

Special Thanks To Our Sponsors:

Congratulations 2012 Honorees

For SponSorShip inFo contact: Deborah hatcher, conference Sales Director, at 212.488.4707 or [email protected].

• Patricia M. Bedient, Weyerhaeuser • Janet F. Clark, Marathon Oil • Pamela J. Craig, Accenture • Marcia A. Dall, Erie Insurance • Christa Davies, Aon • Caroline Dorsa, Public Service Enterprise Group • Elyse Douglas, Hertz

• Jody H. Feragen, Hormel Foods • Victoria D. Harker, AES • Martina Hund-Mejean, MasterCard Worldwide • Patricia Little, Kelly Services • Susan R. McFarland, Fannie Mae • Ann Marie Petach, BlackRock • Barbara Smith, CMC

• Tracey T. Travis, Ralph Lauren • Theresa E. Wagler, Steel Dynamics • Robin L. Washington, Gilead Sciences • Kathy Willard, Live Nation Entertainment • Gina Wilson, TIAA-CREF • Meryl Zausner, Novartis

Speakers Lorraine Hack, Kim. A. Keck, and Barbara Smith

Speaker Barbara

Tannenbaum

CFO’s Kate O’Sullivan

Attendees Linda Smith and Ana Bastiani-PosnerHonoree Awards

CFO’s Lissa Short and honoree Ann Marie Petach

CFO’s Marie Leone, speakers Eileen A. Kamerick and Ellen B. Richstone

Attendee Joan Robertsen

Networking Reception

Green Is The new

LeanDoing more with less is what many sustainability initiatives

are all about. That’s why CFOs are embracing them.

CFO | June 2012 | cfo.com44

By Alix StuArtPhotograPh

by Michelle NolaN

Before Jeff Piccolomini joined Henkel Corp. in 1997, he was

dubious about corporate efforts to address environmental concerns— a “typical skeptical CFO,” as he puts it. A CPA by training and a longtime finance executive, Piccolomini wasn’t accustomed to dealing with the kind of green goals that the German-owned personal-care company had

set in motion, such as reducing car-bon emissions.

Today, as Henkel releases its 21st annual sustainability report—which details plans to become three times more efficient in energy and water us-age by 2030—Piccolomini has changed his mind. “I’ve really become a con-vert,” he admits. As president and CFO of Henkel’s North America unit, he now

8Jeff Piccolomini, president and CFO, Henkel Corp.

cfo.com | June 2012 | CFO 45

believes that sustainability “is a very positive thing, and the right long-term view that all companies should have.”

To be sure, sustainability is still largely about doing good, and making customers and employees feel good about that good. But as saving the plan-et takes on an increasingly practical fo-cus, many finance executives find them-selves in the midst of sustainability efforts at their companies, and explain-ing their own conversions. “We’re good folks and we care about our neighbors,” says Art Hicks Jr., CFO and chief operat-ing officer of exercise-equipment manu-facturer Cybex International. “But quite honestly, we get paid to run a success-ful business, and environmental issues have become bigger business issues in the past few years.”

Piccolomini says that Henkel’s cus-tomers usually appreciate green-orient-ed changes, such as reduced packaging. Plus, he adds, “I can’t think of a time when we were faced with a project that was a candidate for sustainability but didn’t make good business sense,” he says.

European companies like Henkel are generally ahead of their U.S. peers in terms of their sustainability efforts, in part because of tighter environmental regulations on the continent. But Amer-ican businesses are catching up. Close to 80% of large U.S. companies now have a sustainability function, if not a chief sustainability officer. (The main reason for these new positions—ahead of cus-tomer and employee expectations—is to address energy costs, according to re-cent research by Ernst & Young.) Sus-tainability reports are becoming nearly as common as 10-Ks, and environmental issues are one of the top categories in proxy proposals this year.

Finance has little choice but to embrace the movement, and many CFOs are doing just that. According to E&Y’s re-search, 65% of finance chiefs at companies with $1 billion or more in revenues said they were “somewhat” or “very” involved with sustainability initiatives. That shouldn’t be surprising: going green is generally in harmony with the traditional CFO mantra to do more with less. In fact, it’s ripe for the rigorous analysis that finance does so well. Here, we examine three areas of sustainability in which finance executives and their staffs are playing major roles: capi-tal expenditures, sustainability reporting, and investor re-lations.

Ryan Donnell46 CFO | June 2012 | cfo.com

Capital Expenditures:

Return on Green InvestmentGiven the attention paid these days to building methods and manufacturing processes, CFOs can barely sign a lease with-out considering the environmental impact. The big question: Will investing in greener materials and processes pay off within an acceptable time period?

When Cybex built a new manufacturing plant in Minne-sota five years ago, the $1.4 billion company decided that it would benefit from making the facility as green as pos-sible. “We have adopted lean manufacturing practices, and

“I’m kind of a skeptic, so

I make sure we revisit projects one to two years later to make sure we got the projected results, and also to learn for future projects.”

Art Hicks Jr., CFO & COO of Cybex International

GReen Is The new Lean

we find that they go hand in hand with sustainability efforts, particularly when you’re talking about eliminat-ing excess materials and reducing hazardous materials,” says Hicks.

To that end, Cybex invested in a $3.5 million paint-ing system that minimizes the energy used in coating its products. The Minnesota facility also recycles the water used for painting several times, reducing wastewater, and then keeps it in holding ponds to cut down on pol-lution. At the same time, Cybex installed machines that laser-cut steel used in its products to decrease waste, and spent $70,000 on energy-efficient lighting.

The return on investment from such large projects can be uneven, though many CFOs say they track it rigor-ously. At Cybex, Hicks says the lighting paid for itself in less than two years in the form of lower energy costs and tax incentives, but he is still waiting for the plant to show a return, thanks to the drop-off in sales volume that ac-companied the recession. Meanwhile, he is now consid-ering installing a wind turbine to generate some electric-ity for the plant, with an expected payback period of two years or less (though he is mindful of the potential dis-ruption to bird migration patterns the turbine may pose). “I’m kind of a skeptic, so I make sure we revisit projects one to two years later to ensure we got the projected re-sults, and to learn for future projects,” Hicks says.

Most companies (close to 70%) require sustainabil-ity projects to clear the same payback hurdles as other kinds of projects, according to E&Y research. Only 20% permit a longer payback time. UPS is one company that is willing to relax the hurdle rate for projects that gen-erate a sustainability benefit, says Kurt Kuehn, CFO of the $53 billion shipping and logistics giant—particularly

when it comes to the new vehicles that the company is trying out, including all-electric trucks, hydraulic and electric hy-brid trucks, propane trucks, composite “plastic” trucks, and trucks fueled by liquefied natural gas.

“We see vehicles as a rolling laboratory,” Kuehn says. The goal is to build and maintain a portfolio of truck options for different driving conditions, economies, and climates. Over time, he expects those options to help minimize costs and bolster the company’s reputation. In its latest sustainability report, UPS proudly noted that it reached a milestone in 2010 of 200 million miles driven in alternative fuel and advanced-technology vehicles since 2000.

State and federal tax incentives can go a long way toward shifting the ROI calculation. In fact, guiding the tax depart-ment to explore such options may be one of the biggest ways a CFO can contribute to the sustainability agenda, says Steve Starbuck, leader of E&Y’s climate change and sustainability


*Multiple responses allowed.

Source: October– November 2011 Ernst & Young survey of 272 companies with revenues >$1 billion

How involved is the CFO with your sustainability initiatives?

Most important drivers of sustainability agenda in the next two years*

Ranking of top three stakehold-er groups driving sustainability initiatives (weighted average)

0% 10 20 30 40%

Suppliers

Analysts

NGOs

Policymakers

Shareholders

Employees

Customers37%

22%

15%

7%

7%

6%

3%

0% 10 20 30 40%

Suppliers

Analysts

NGOs

Policymakers

Shareholders

Employees

Customers37%

22%

15%

7%

7%

6%

3%

0% 20 40 60 80%

Government regulation

Revenue generation

Managing risks

Stakeholders’ expectations

Cost reduction74%

68%

61%

56%

37%

Sustainability by the NumbersCustomers want it, cost reduction is driving it, and CFOs are dealing with it.

52%

Somewhat involved 35%

Not involved

13%

Very involved

Tax incentives “can make a very significant difference to payback models, so it’s important that the CFO make the connection between tax and sustainability.”—Steve Starbuck of Ernst & Young

Stan Kaady

services for the Americas. Tax incentives “can make a very significant difference to payback models, so it’s important that the CFO make the connection between tax and sustain-ability,” he says.

Some companies may be able to tap alternative energy sources with little or no investment, thanks to incentives. Spice-maker McCormick & Co. recently struck a deal with Constellation Energy to have the utility install solar panels on the roof of one of its Maryland manufacturing facilities, with no up-front investment from McCormick. McCormick’s only obligation is to buy all of the facility’s energy from Con-stellation over the next 20 years, with rates starting at below-market levels.

The deal makes sense for Constellation because of deep subsidies that come through state and federal tax incentives, says Mike Smith, the utility’s vice president of solar and en-ergy efficiency. “In some states we can make the economics work for the customer, in others we can’t,” Smith says, noting that the “sweet spot” states right now are Arizona, California, Maryland, Massachusetts, and New Jersey.

Sustainability Reporting:

Getting SeriousFor large companies, producing an annual sustainability re-port has become almost mandatory. “Being a sustainable company is good business, and it’s also good business to help your key stakeholders understand your sustainability efforts,” says Mary Rhinehart, senior vice president and CFO of Johns Manville, the building-materials manufacturer. The company published its first sustainability report in March, called We Build Environments. “To remain competitive, it is important that our customers are aware of what we are do-ing in this area,” says Rhinehart.

While the contents of sustainability reports still vary widely—some are little more than glossy brochures, with few unique metrics—many are gaining in rigor. Kuehn says UPS’s report has evolved over time. “Our environmental footprint wasn’t something we had thought explicitly about,” recalls Kuehn, who helped create UPS’s first sustainability report about 10 years ago when he headed investor relations. “But we did have a rigorous metrics and analysis environment, in-

cluding a lot of activity-based costing. So we took one of those models, and instead of creating an output of cost, we created an output of carbon. For me, it was an ‘Aha!’ moment.”

Now, UPS’s report catalogs an impressive array of met-rics, including gallons of fuel used per ground package de-livered, carbon emissions by business segment, and miles logged with alternative fuel. To make sustainability this quantitative, finance must be heavily involved, experts say.

While most firms are tracking environmental metrics in spreadsheets outside normal accounting systems, “a lot of the information comes out of the accounting record,” Star-buck notes. For example, measuring greenhouse-gas emis-sions likely entails looking at the amount of electricity pur-chased, while other metrics might draw on data about how much water was used or the amount of employee travel.

Taking it one step further, some companies are now get-ting their financial auditors to sign off on their sustainability reports. “Globally, about half of companies get a third-party

UPS’s trea-sury employees

“were skeptical at first about getting involved. But, with some time, it’s been exciting for them to see how they can add value, too.”

Kurt Kuehn, CFO of UPS

Green IS The new Lean


Nearly 50% of shareholder proxy proposals this year relate to environmental and social issues, up from 40% in the 2011 proxy season.

audit,” says Starbuck. “In the U.S., that has historically been much lower, around 15%. But I can tell you that we’re seeing a lot more interest in it.” While the third party has often been a boutique firm specializing in environmental concerns, more companies are looking to their auditors for a review, says Starbuck, “because Wall Street has confidence in them.” Last year Kuehn hired Deloitte, UPS’s financial auditors, to pro-vide assurance on the company’s sustainability report, in or-der to enhance the credibility of its data. “They’re already familiar with our systems, so they can hit the ground run-ning,” he says.

Investor Relations:

From Fringe to MainstreamOn the face of things, investors are more riled up about envi-ronmental issues than ever before. Nearly 50% of sharehold-er proxy proposals this year relate to environmental and so-

cial issues, up from 40% in the 2011 proxy season, according to Institutional Shareholder Services. Proposals range from general requests, such as those pressing companies to set more-quantitative goals around energy reduction, to highly specific demands, including several asking energy compa-nies to improve the composition of fluid used in hydraulic fracturing, or “fracking.”

Historically, these types of proxy proposals have come from fringe investor groups that are tightly focused on en-vironmental issues, but lately they seem to be gaining more support from mainstream investors. The average sharehold-er support for such proposals reached 21% last year, with five resolutions garnering more than 50% of shareholder votes, according to E&Y’s data. That widespread interest suggests it is not just fringe groups that are voting yes.

For example, while pension fund TIAA-CREF, a fairly tra-ditional investor, is not in the vanguard of filing sharehold-er proposals on environmental or social issues, it is looking for “reasonable” ones to support, says John Wilson, director of corporate governance. “There’s a lot of data showing that commodity prices are rising, and it’s beginning to be better understood that scarcity of natural resources is becoming a bigger risk factor,” he says. “We are not prescriptive—we’re not going to tell a company to invest in renewable energy—but we’re looking for disclosure about your strategy and per-formance on meeting your goals.”

One area close to finance that investors have addressed with tenacity is the supply chain. Last year, for example, Ap-ple bowed to shareholder pressure and released an unprec-edented amount of data about its suppliers’ adherence to hu-man-rights standards and environmental regulations. Close to 80% of firms surveyed by E&Y are now working with their suppliers on obtaining similar data. CFO Hicks says Cybex is already reporting details for its European customers, such as how hazardous materials in its products are disposed of at the end of the products’ useful lives. “That certainly makes us think about how to design products in order to reduce the hazardous materials used,” he says.

When it comes to face-to-face meetings, though, most CFOs say investors are asking few if any questions on sustain-ability. Addressing the topic, therefore, involves a delicate balance between saying enough and saying too much. “You can get pumped up about this, but if you play it too strong, a lot of investors’ eyes kind of roll back in their heads,” says Kuehn. “What I’ve learned is to pitch this to investors as part of long-term brand investment, a sign of innovation, and part of long-term risk-management strategy.”

No matter how companies may characterize them, sus-tainability efforts are increasingly about efficiency and growing the bottom line. “We set goals for water usage and energy usage because you can’t really hit those while pursu-ing only economic benefits,” says Henkel’s Piccolomini. In the end, though, “cost reductions will flow out of using less water and less energy—they almost have to.” CFO

◗ alix stuart is a contributing editor of CFO.

Some companies, particularly smaller ones, are still blissfully unaware of the carbon emissions they may be generat-ing or how to reduce them. Last year, UPS decided to help enlighten its customers. The shipping and logistics giant rolled out a “carbon calculator” that tells customers exactly how much of an impact shipping their packages will have on the climate. Then, for as little as a nickel a package, they can pay to erase that impact, through the purchase of an offset that will help fund high-quality and third-party-reviewed projects that sequester carbon.

UPS CFO Kurt Kuehn is quick to note that the product is not a moneymaker, at least not yet. “In no way has that calcula-tor generated an ROI; we just think it’s a great way to help our customers adapt to the future, and a positive brand attribute,” he says.

It’s also a useful way for Kuehn to en-gage his treasury staff in the company’s sustainability agenda. Treasury employees screen the offsets that customers indirect-ly purchase, setting stringent guidelines to help avoid disreputable projects, like fund-ing a reforestation site that could become a parking lot five years later. “Treasury groups in most companies are pretty black and white, and they were at least a little skeptical at first about getting involved,” says Kuehn. “But, with some time, it’s been exciting for them to see how they can add value, too.” ◗ a.s.

A CustoMer serviCeUPS now offeRS caRbon offSetS to ShIPPeRS.


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could leave businesses short of critical knowledge and skills.

make sure that doesn’t happen to your company.

By russ BanhamPhoto-illustrations by stePhen webster

hanks to its sheer size, the baby-boom generation has had

an enormous impact on society and the economy at every stage of its development. The present time is no exception, as Americans born between 1946 and 1964, currently accounting for one-third of the workforce, begin to enter their golden years. Many boom-ers are postponing retirement—their nest eggs are too small, or they still have family to support, or they simply prefer to keep working. But many others are ready to retire, and sooner or later, the boomers will be leaving the workplace in droves.

T



When they do, employers face the loss of all that experience, all that in-stitutional and subject-matter knowl-edge and expertise.

“Everyone knew that boomers were getting older and would soon be retiring, but when the financial crisis hit and many stayed on, companies sort of postponed their reactions,” says Colleen O’Neill, talent manage-ment leader for North America at Mercer, the human-resources con-sulting firm. “Now boomers are leav-ing, thanks to rising 401(k) values, and it’s time to take action.”

Many companies are just catch-ing on to the impending exodus. Some are bringing in consultants to ferret out the skill-set gaps that will materialize. Others are developing knowledge-transfer and mentoring programs to get younger workers up to speed. Still other companies are creating flexible work environments where cash-strapped boomers can re-turn to work on a part-time or project basis.

For some employers, boomers waving good-bye to the office is good

The Knowledge CheCKlisTpproximately 4.6 American adults will turn 65 every minute of 2012, and by 2015 that number will increase, to 8, according to the U.S. Census Bureau. That means there is still time to get the

corporate house in order before the departures commence en masse.

The first order of business is to get the facts straight by determining the organization’s skill sets, and a good way to start is by assessing which people are truly strategic. “Some skills you can fill easily,” says O’Neill. “It’s the singular, hard-to-find skills that take a while to replace that create risk.”

Lockheed Martin Space Systems instituted a project 10 years ago to identify and assess employees’ skills to prepare for future voids in intellectual capabilities. “We realized we had senior people who were very technically expert in our

“We realized we had senior people who were very technically expert in our complex systems and would be eligible to retire in a few years. We needed to identify this knowledge and find ways to successfully transfer it.”—Tory Bruno, Lockheed MarTin space sysTeMs

news, given their generally higher pay and benefits. But the loss of human and knowledge capital is potentially dire for the bulk of organizations in industries like manufacturing, technology, engineering, and accounting. According to a re-cent poll of employers conducted by the AARP and the Soci-ety for Human Resource Management, 72% of HR managers stated that the loss of talented older workers was “a prob-lem” or “a potential problem.”

Others share this view. “Organizations are running much leaner than ever before, and there are not a lot of extra peo-ple to pick up the slack when someone exits,” says Jackie Greaner, talent management and organization alignment practice leader for North America at human-resources con-sultancy Towers Watson. “Companies need to do a better job of identifying critical skills and planning for their inevi-table loss.”

A

When the Boomers Go


complex systems, were known to our customers, and would be eligible to retire in a few years,” recalls Tory Bruno, president of Lockheed Mar-tin’s strategic and missile defense systems unit. “We needed to identify this knowledge and find ways to successfully transfer it.”

Bruno’s unit began by identifying critical skills needed by the business, and going through a detailed interview process to understand what it was that made certain employees experts. “We sought to learn what they did in their ca-reers and learned on the job, and then turned that into what we call a knowledge checklist,” Bruno says.

Armed with this data, Lockheed Martin now teaches advanced skills to less-experienced em-ployees through its Critical Skills Management Program. The program pairs up a junior em-ployee with an expert, who becomes his or her mentor. A member of the management team, typically the manager of the junior employee, is part of the equation, planning and arranging assignments for the protégé to absorb the re-quired knowledge. This three-way partnership is not without teeth, Bruno notes. “The respec-tive tasks in the process become part of each em-ployee’s performance review,” he explains. “At the end of the process, we have a graduation cer-emony, where the protégé is certified as an ex-pert by the mentor and manager.”

Corey Leal, director of finance in Bruno’s operating unit, says the program has significant financial value. “Assuring that our technical employees have the expertise needed to support our core competencies means less reliance on sub-contractors and, ultimately, greater profitability for our busi-ness,” he says.

AccelerAted leArningor some companies, traditional mentoring pro-cesses may not work quickly enough. “Seven years to transfer rare skills may be too long,” says Mercer’s O’Neill. “But if you can create ways to

accelerate this to two or three years using software and sce-nario-planning tools, you will be ahead of the eight ball.”

Duke Energy, for one, used a software tool to pass on insti-tutional knowledge. “We had lots of manuals, drawings, and other informational assets about our existing power stations and brand-new ones, but what we lacked was the human ele-ment, which wasn’t included in these documents,” says Ar-nold Fry, manager of substation engineering standards and power delivery engineering at the Charlotte, North Carolina–based electric utility.

Duke Energy scheduled a series of interviews with senior engineers, in which questions were asked about their func-tions. The responses were then digitized using the software tool. “In the old days, a younger worker would shadow an older one, who stood over his or her shoulder and said this piece is rated at that voltage,” says Fry. “This type of men-toring is fine when you have the time, but now there are too many older workers ready to retire, and far fewer younger ones to come up the ranks.

“Now when people retire, their experience is preserved and can be passed on to future generations,” says Fry. “And you are able to access knowledge from multiple people.”

The need to compress the training time frame is criti-cal in the electric power industry. “According to a recent report by the IEEE Power and Engineering Society, 51% of electric power engineers will be eligible to retire by 2014,” says Geoff Zeiss, director of the utility industry program at software-maker Autodesk. “Utilities are losing experienced workers and are having a tough time replacing them with younger workers. This elevates knowledge transfer to a stra-tegic necessity.”

What are the greatest applied-skills gaps between younger workers and older workers? (Respondents were asked to name the top two; the top five are listed here.)

0% 20 40 60%

English language(spoken)

Reading comprehension(in English)

Mathematics (computation)

Technical (computer, engineering,mechanical, etc.)

Writing in English (grammar,spelling, etc.)

16%

13%

12%

33%

51%

0% 20 40 60%

Leadership

Lifelong learning/self-direction

Written communications

Critical thinking/problem solving

Professionalism/work ethic

16%

16%

15%

27%

52%

What are the greatest basic-skills gaps between younger workers and older workers? (Respondents were asked to name the top two; the top five are listed here.)

0% 20 40 60%

English language(spoken)

Reading comprehension(in English)

Mathematics (computation)

Technical (computer, engineering,mechanical, etc.)

Writing in English (grammar,spelling, etc.)

16%

13%

12%

33%

51%

0% 20 40 60%

Leadership

Lifelong learning/self-direction

Written communications

Critical thinking/problem solving

Professionalism/work ethic

16%

16%

15%

27%

52%

|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||Are the Kids All Right?

Source: 2012 survey of 430 HR professionals by the Society for Human Resource Management/AARP

F

With many baby boomers and pre-boomers staying on in a variety of roles at their com-panies, today’s workforce is looking a bit like a fam-ily reunion, with as many as four generations sitting at the table engaging in oft-cumber-some conversations.

Getting four generations to agree on anything is dif-ficult, but in the workplace, effective communication and collaboration are imperative.

Many of the same challeng-es prevail, however. “Each generation has very distinct methods of communicating,” says Jascha Kaykas-Wolf, chief marketing officer of Mindjet, a maker of collab-orative work management software. “For instance, many pre-boomers focus on build-ing personal relationships, [while] many millennials use social collaboration tools like Facebook and Skype to com-municate and collaborate. It’s

a big struggle to keep all this intellectual capital working together effectively.”

This was the case at Cali-fornia State University in Chico, where, because it is a college campus, ages range from professors and admin-istrators nearing age 65 to students still in their teens. The wide difference in ages hindered the university’s ability to create a collabora-tive working environment in

preparing Cal State’s annual town-hall meeting, a one-day event in which students, faculty, administrators and community members gather to hear various speakers dis-cuss public-interest topics.

Thia Wolf, an English pro-fessor and director of the uni-versity’s first-year experience program, acknowledges that she and her students commu-nicate and work differently. “I’m in my mid-50s and am used to e-mail and faxing in

an office environment, where-as they are communicating using smartphones and social media on the go,” she says. “In putting together the town hall, they rebelled against me drawing up diagrams of the seating arrangements, for instance, on paper, which I planned to fax or scan and e-mail. That was too long and inefficient, they argued.”

The university tapped a Mindjet product called Mind-

jet Connect to bridge the generation gap. The software uses brainstorming and task management capabilities as well as social media and inte-grated online sources in the cloud like Google and Twit-ter to capture, organize, and communicate information. This allows a multigenera-tional team to plan and stay current on a project, no mat-ter what devices they use. So, for example, Wolf stays con-nected via her desktop with

students who collaborate us-ing their smartphones.

Banking giant Wells Fargo is tackling the same chal-lenge in a different way, pi-loting a master’s-level cer-tificate program that pairs up members of its Boomers Connection network with its Young Professionals network in Minnesota. Graduates re-ceive an MA in organizational leadership certificate from St. Catherine’s University in St.

Paul/Minneapolis. “The goal is to get older

people to work alongside younger people who work very differently than they do, and vice versa, to appreci-ate each other’s learning and work styles,” says Philomena Morrissey Satre, vice presi-dent of diversity and inclusion for the bank’s Mountain Mid-west region. This year’s grad-uating class of 12 includes seasoned banking executives as well as newer hires. ◗ R.B.

Bridging Generation Gapsconnecting workers of all ages can be a challenge.

“Each generation has very distinct methods of communicating.” Jascha kaykas-wolf of MindJet

Out and Still abOutnother way to bridge the skills gap is to hire boomers who have retired from their old jobs but still want to work. “Almost half of adults aged 65 to 69 receive wages, salaries, or income

from self-employment,” points out Samantha Greenfield, employer engagement specialist at The Sloan Center on Aging & Work.

Where to find these older workers? Many have joined or-ganizations that provide skilled workers to companies need-ing them on a part-time or even full-time basis. The National Older Worker Career Center, for instance, specializes in re-cruiting and providing skilled engineers, scientists, techni-cians, and other professionals for the U.S. Department of Ag-riculture and the Environmental Protection Agency. “We’re an executive search firm, except these executives are in their 60s, 70s, and older,” says Joel Reaser, NOWCC senior vice president. “They’re tramping across ranches and farms to de-sign dams to control soil erosion, and working to develop

pesticides. Our oldest, at 92, just retired for good this time.”Reaser says the steady exit of baby boomers from the

workforce is having an adverse effect on the federal govern-ment, which can’t find enough younger talent to pick up the slack. The solution is to recruit and employ experienced re-tired people until younger workers get up to speed. “Organi-zations are not going to have an option about whether or not to hire older workers—the demographics insist on it,” says Reaser, who is 72. “This isn’t, ‘Let’s hire older people because they’re nice to have around.’ There are few other choices.”

Employers will have to adapt to an older cohort of work-ers, says Reaser. “Just like the accommodations that were made when women entered the workforce in large numbers a generation ago, similar accommodations must be made for older workers,” he says. “These include preventive health care and health maintenance, flexible work arrangements, and valuing ‘power naps’ in the middle of the day.”

Yoh, another staffing agency, also specializes in providing seasoned workers as short- and long-term temporary work-

a



ating these affiliate networks, where they take a cadre of recent retirees and bring them in on con-sulting assignments,” she explains. “We’re actually thinking of something similar here at Mercer. We have a whole category of people who are going to leave the business, and we’re investigating the idea of them coming back part-time as consultants in a more systematic way.”

The FourTh GeneraTiondding a fourth generation to the work environment is a good thing, contends Rivera. “The composition of the work-force is changing out of necessity,” he

says. “If you’re going to be competitive today, you have to appreciate the generational differences. Young people—the millennial generation—are looking for openness, transparency, and a sense of meaning in employment, whereas pre-boom-ers and boomers seek ways to spread their knowl-edge. Blending this is the real trick.” (See “Bridg-ing Generation Gaps,” facing page.)

Another trick may be to amend internal com-pany rules governing pensions. Many businesses with benefit plans stipulate that employees will receive a stated percentage of the highest salary they received in the five years before their retire-

ment, Reaser notes. “If they stay on in some capacity at lower annual compensation, they run into the risk of a lower pen-sion,” he says. “Obviously, the rules need to change.”

Changing such rules and providing flexible work arrange-ments for older workers serve yet another purpose: helping companies ease high-paid employees out the door. Mercer does this by offering a senior consultant in a leadership role the opportunity to move laterally into a client-facing posi-tion at lower pay. “This only works if you have the right con-versation with the older worker, affirming that he or she still has a place in which to contribute,” O’Neill cautions.

The concept may have appeal to boomers. “There are many boomers who no longer want to work full-time, yet wouldn’t mind moving into an encore career,” says Ted Fish-man, author of Shock of Gray, a 2010 book on the aging of the world’s population. Davison concurs. “Corporate America is recognizing that you can’t simply push the workforce out the door anymore—certainly not boomers,” she says. “You need ways of accommodating them.” CFO

◗ russ banham is a contributing editor at CFO.

ers, in its case to the telecom, technology, aerospace, life sci-ences, and entertainment industries. “Companies are look-ing for highly technical legacy experience as much as they want younger people with cutting-edge technology skills,” says Matt Rivera, Yoh’s director of customer solutions. “We dispatch older people to employers on a contingent basis or from project to project.”

One novel staffing resource is work campers—retirees with specialized skills who travel from city to city in rec-reational vehicles to fill in where they are needed. “These are sought-after workers for ‘bridge’ assignments,” says Joan Davison, president and COO of Staff Management SMX, a managed staffing and recruiting services provider based in Chicago. “They have exited the workforce, but they still want that feeling of engagement, in addition to the extra income. If they live in Minnesota, they might be enticed to spend the winter in Southern California for two months in a techni-cal capacity.” (One potential drawback: having an RV in the parking lot for two months.)

O’Neill points out that many companies are forming re-tiree networks internally. “A lot of technology firms are cre-

“This isn’t, ‘Let’s hire older people because they’re nice to have around.’ There are few other choices.”—Joel ReaseR of NoWCC

a

When the Boomers Go

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from everywhere they are,” he said.Mobile devices and the cloud, in

short, are made for each other. In the same November report, Tom Bartlett, CFO of American Tower Corp., a U.S.-based lessor of antenna space on com-munications towers, touched on what the intertwining of mobility and access can mean for his business: “Anytime you can increase functionality, ease of use, mobility, those types of things—which is what cloud computing can do—I have to believe that it’s a game-changer.” And the name of that game, of course, is growth.

It’s no secret: companies large and small are scrambling for growth. And as businesspeople

turn over every last stone in that quest, they can’t afford to spend all their time chasing down information. They need their information to catch up to them. Operational agility is key, and it’s rooted in the ability to com-municate and collaborate with anyone, anytime, anywhere.

That requires mobile technology—smartphones, tablets, laptops—and companies are busy supplying it. In a research report published this past March, titled “Uncrossing the Wires: Starting—and Sustaining—the Conver-sation on Technology Value,” CFO Re-search asked both CFOs and IT execu-tives what technologies would be most important for their companies’ success within the next three years. Nine out of 10 (89%) answered mobility, the use of mobile devices.

Almost as many of those surveyed, 75%, cited cloud computing as key to success. In fact, finance executives are increasingly saying that the path to mobility goes through the cloud. For example, in a November 2011 CFO Research report titled “Exploring New Models for Enterprise IT,” Philipp Neuhaus, CFO of Germany-based hy-giene services firm CWS-boco Inter-national, praised his company’s adop-tion of cloud-based salesforce.com for customer relationship management. “Our sales force can access it [sales-force.com] on demand quite easily

Made for Each OtherBoth separately and together, mobile devices and cloud computing are increasingly supporting corporate growth, according to the latest findings from CFO Research. By David Owens

›

89% of finance and IT executives said that mobility and the use of mobile devices would be among the most important technologies for their companies’ success in the next three years.

Field Notes

Perspectives from CFO Research


Source: “Uncrossing the Wires: Starting—and Sustaining—the Conversation on Technology Value,” CFO Publishing LLC and SearchCIO.com, March 2012. Sponsored by Cisco Systems.

CIOs Know StrategyIn your opinion, how well does your CIO understand how technology supports your company’s business strategy and generates value?

IT executives say…

Poor Excellent

2% 33% 64%

Finance executives say…

Poor Excellent

6% 46% 49%

n Poor n Adequate n Excellent

Thinkstock

operation requirements as we experi-ence increased growth.”

Smaller companies, in particular, are looking to the cloud to give them lift. Some need help managing the increasing complexity that naturally follows success. Discussing his small manufacturing company’s new cloud-based CRM system, one company’s controller said the purchase was nec-essary, “as prior to this we were man-aging through spreadsheets. Growth demanded that we implement a system that fit into our business processes.”

An executive from a small but am-bitious zoo wrote about his organiza-tion’s selection of a cloud vendor to help solve its growth problem: “Our current customer database system lacks an adequate reporting func-tion. Several similar database systems were used by different departments. Our goal is to integrate them into one [cloud-based] system and provide up-to-date BI [business intelligence] in-formation.”

The right cloud-based service can be ideal for growing on the pay-as-you-

Lifted by the cLoudIn our most recent internal technology survey of our readership, finance ex-ecutives from small and midsize busi-nesses repeatedly cited growth as the impetus for upgrading their informa-tion systems and platforms:

◗ “The main priority for upgrad-ed technology is to be able to handle growth.”

◗ “Improve customer experiences from changes made to support future business growth.”

◗ “Develop systems to support our

FieldNotes

Bringing Business Insight to IT DecisionsWhile nearly every finance chief we interviewed extolled the value of hav-ing a closer relationship with the IT organization, some insisted that the real goal should be to create closer re-lationships not only between finance and IT but between finance, IT, and the

business units.“The message is really not about the evolving relation-

ship between finance and IT,” says Jack de Kreij, CFO of Royal Vopak, a Netherlands-based bulk liquid storage provider for the global oil and chemical industries. Instead, he says, “it’s about creating an involving relationship between the busi-ness, finance, and IT.” Without involving all three parties, he warns, technology becomes the province of two expert func-tions—finance and IT—that are then denied the insights that business-unit leaders can and should bring to the table.

* * *Royal Vopak has relied for nearly a decade on its Informa-tion and Communications Technology (ICT) Board to evalu-ate technology investments. The board is stocked with lead-ers of the company’s business units, its global IT leader, and its executive board, including CFO de Kreij. “This eliminates the risk of over-professionalization of the process by technol-ogy experts, and a lack of involvement by the business itself,” says de Kreij.

Once the ICT board gets behind a proposal, de Kreij ex-plains, finance challenges that proposal from an investment perspective, reviewing key performance indicators laid out in the business case and, where metrics are difficult to es-tablish, relying on the business judgment of the board’s members.

Over the past three to five years, de Kreij continues, fi-

›› Excerpted from “The Expanding Role of the CFO: Using Technology to Drive Value for the Business,” CFO Publishing LLC, November 2011.


nance has taken on a stronger support role in this fashion, developing “decision matrices where each project is ranked from a value-creation perspective, from a complexity per-spective, and from a cost perspective.” He notes, though, that those matrices often must be filled in by people outside of finance, since finance cannot judge the complexity of an IT project.

Other CFOs we interviewed are also driving the formation of, or are at least participating in, multidisciplinary teams with the responsibility for making sure technology invest-ments make business sense. For example, at Wesco Inter-national, a U.S.-based distributor of electrical products and industrial supplies, technology investments are vetted by a balanced IT advisory council that includes members of all the functional areas of the company, including finance and IT, as well as business-unit leaders.

At another company, Eurocopter Group (Europe’s largest helicopter manufacturer), a “Strategic IM Plan” brings to-gether stakeholders across the value chain—business-func-tion chairs, together with finance and what [Eurocopter] calls information management—to seek common agreement on when and where the company should be investing in tech-nology. As a result, says CFO Dieter John, the company’s IM group has become a strategic business enabler helping to drive corporate growth.

As part of these teams, CFOs play a key middleman role between users and providers of technology, offering the translation needed to match business needs with technical capabilities. As the CFO of one company observes, “Our CIO likes reporting to the CFO because he feels a CFO can do a better job of explaining and packaging things in a way that the rest of the members of management can understand.”

MORE FROM CFO RESEARCH:To read the full reports cited in this article, go to the research page on www.cfo.com. Our research team regularly polls senior finance executives on core aspects of financial management. You’re certain to find insights that are relevant to your most pressing concerns.

Scanthis!

Editor’s Choice

go model, avoiding the need to sink large chunks of capital into hardware and systems. It also can provide the support a company needs for a flexible and dynamic growth strategy. As the zoo executive wrote, “The new sys-tem provides all the solutions we were looking for, and it also covered some areas we can utilize in the future.”

But scalability through the cloud works for large companies, too. Shaun Hughes, chief information officer of Elders Ltd., told us how an eye to the future led the Australian agribusiness and real estate company to choose a cloud-hosted ERP system. “Moving to the cloud gave us the ability to incre-mentally and economically increase the size of our IT environment in small amounts consistent with our rollout plan,” said Hughes. “We didn’t have to buy a big box.”

the mobile societyElsewhere in “Exploring New Models,” a finance executive from an Asian bank insisted that competitive advantage in the future will be driven not so much by product innovations as by technol-ogy—technology that can change the life of the customer or the way a com-pany itself does business. In large part, these changes will come from creating the so-called mobile society—placing information directly in the hands of customers, suppliers, and co-workers alike, wherever they happen to be.

Because of the mobile society, roles will change inside the company as well as out. Old ways of working won’t cut it anymore. Responding to a question

about CFO-CIO work-ing relationships in “Uncrossing the Wires,” the CFO of a large U.S. health-care provider zeroed in on a linger-ing problem: “They live in their own specialized world, be it finance or IT, and do not always understand the exact needs and limitations of the other.” Companies will need to find ways to break through these tra-ditional barriers: finance can no longer afford to be just the controller of the purse strings while IT is cast as the enthusi-astic promoter of the latest technology trend. (See “Bringing Business Insight to IT Decisions,” facing page.)

The cloud will help dissolve those barriers. “With this [cloud] service, we don’t have to care about IT infra-structure and hardware anymore,” said CWS-boco’s Neuhaus. That means that the IT function can spend more time caring about the business itself.

In a companion report to “Exploring New Models,” Abhishek Jain, associate general manager in acquisitions and alliances for France’s Schneider Elec-tric in India, said that “especially with social media and cloud computing, IT is helping companies to reach out to a larger set of customers in unique ways, which were not there three years be-fore.” He concluded, “IT is now seen more and more as an enabler to drive the top line of the company, and not

just as an efficiency mechanism to push the bottom line.”

“Cloud computing is going to untie IT’s hands to concentrate more on the business,” says Gustavo Aguirre, CIO of private health insurer Grupo OSDE in Argentina. “If it works as it should, IT will be able to stop do-ing a lot of things that have no value.” For-tunately, many of the finance and IT execu-tives we’ve surveyed are hopeful that IT is up to the challenge:

49% of CFOs think their CIOs have an excellent understanding of how tech-nology supports corporate strategy, while 64% of IT executives think so.

When your workday is no longer tied to a desk, an office, or a factory floor, “accommodating the mobile workforce” becomes the priority, as one reader said in our internal survey. “Technology is serving as the enabler, with companies now able to share in-formation instantaneously,” adds Wal-ter Wallace, instructor in the depart-ment of managerial sciences at Georgia State University’s Robinson School of Business and director of the Global Lo-gistics Roundtable. For more and more companies, the union of mobile tech-nology with emerging cloud capabili-ties is promising to be the game-chang-er they’re looking for—a true marriage made in heaven. CFO

59cfo.com | June 2012 | CFOThinkstock

“With social media and cloud computing, IT is help-ing companies to reach out to a larger set of customers in unique ways, which were not there three years be-fore,” says Abhishek Jain of Schneider Electric in India.

Driving Lessonsname ›› Ed Goldfinger

position ›› CFO of Zipcar

previous positions ›› CFO of Spotfire, a business-intelligence and analytics software company; CFO of the Latin American beverage business at Pepsi-Cola International; senior manager in the audit practice at KPMG.

notable for ›› Being finance chief of one of the largest car-sharing companies in the world. Based in Cambridge, Mass., Zipcar has more than 700,000 members in four countries.

TAKE AWAY

His taKe-aWaY: When you’re inventing a new business and innovating a new category, you have to innovate the metrics around the business, too. I actually invented one here, called “weekality.” Everyone has heard of seasonality, and there is a seasonal aspect to our business. But even within a week you have times when people are driving our cars a lot, like two o’clock on a Saturday afternoon. You also have times when the cars aren’t in use that much, like overnight during the week. One thing that came out of this analysis was the idea of an overnight program. If people are commuting into work and they want to use a car for the

evening, because they want to do errands or go on a date, they can take the car at night and re-turn it in the morning for far less than they would pay for a day rate. For us it’s a great deal, because those cars really weren’t being used much any-way. So in some ways, the secret sauce to the business is understand-ing what our trends are around vehicle use and member behavior.◗ interview by marielle Segarra

60 CFO | June 2012 | cfo.com Goldfinger photo by Rick Friedman

›› Zipcar CFO Ed Goldfinger

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