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Thomas and His Washington Friends
[October 09, 2007]

Thomas and His Washington Friends

(CFO Via Thomson Dialog NewsEdge) Congress weighs a possible legislative response to the spate of China-sourced recalls; Delaware courts take a hard look at cozy relationships between boards and management; XBRL takes another small step toward reality; and more.

Following the summer of the recall, a reliance on Chinese suppliers may get more costly if the political response to recent food and toy debacles gains traction. At press time, members of Congress were hard at work on legislation to increase fines to as much as $50 million for companies that sell tainted products and to make independent testing mandatory for makers of children's products.

Among the key early proposals are H.R. 2474, sponsored by Rep. Bobby Rush (DIll.), and two bills, S.1847 and S.1833, cosponsored by senators Dick Durbin (DIll.) and Bill Nelson (DFla.). They all address fines and testing, and S.1847 further calls for increased funding and enforcement authority for the Consumer Products Safety Commission (CPSC), which oversees some 15,000 consumer items.

In August, the House of Representatives Subcommittee on Commerce, Trade, and Consumer Protection asked 19 companies, including Mattel, Target, and RC2 Corp., maker of the 1.5 million recalled Thomas the Tank Engine toys, for detailed written information and oral testimony regarding suppliers in China. Two days before responses were due, Mattel issued a recall of three sets of products, bringing its summer total to 10. Subcommittees in both the House and the Senate planned to review the information supplied by companies, and to consider potential CPSC reforms. Meanwhile, an import safety working group headed by Health and Human Services Secretary Michael Leavitt is expected to issue its report next month.

With increased funding, "the CPSC may become much more aggressive in terms of the amount and the frequency of fines it seeks for not reporting potential defects," says Jeff Margulies, a partner in the Los Angeles office of Fulbright & Jaworski. Even in the absence of new regulation, companies will likely feel the pressure to step up quality control, thus adding cost, he says.

All the tumult has prompted fears of a regulatory backlash. "We need to make certain that innocent sellers in the supply chain are not unfairly held responsible for unknowingly using tainted products," says Jeremie Waterman, senior director for greater China at the U.S. Chamber of Commerce, which was still preparing a formal response at press time.

Meanwhile, the market for product-recall insurance has grown by about 25 percent in the last year, according to Bill Harrison, managing director of the crisis-management practice at Aon Corp. Such coverage may be worth a look, given that product liability and property insurance have specific exclusions for recalls. The insurance covers everything from the cost of destroying recalled products to consulting fees for post-recall reengineering. Harrison says that so far premiums have not increased, due to some existing overcapacity in this insurance segment. -- Alix Nyberg Stuart

Toys, and MoreCompanyProduct# of units affectedFisher-PriceSesame Street, Geotrax, other toys1 millionMattelBarbie accessories, Sarge toys925,000Springs Windows FashionsBasic Blindz windows blinds140,000Wal-Mart (Sam's Club)Outdoor torches138,000HayesOutdoor candles83,000Jo-Ann StoresChildren's watering cans6,000Raleigh AmericaBicycles1,200Life Is GoodChildren's hooded sweatshirts400Source: Consumer Products Safety CommissionCrisis? What Crisis?

Whether it's a product recall, service outage (Internet phone company Skype experienced a two-day blackout in August affecting 220 millionplus users), or another crisis du jour, knowing when and how to communicate to various constituencies can go a long way toward minimizing the damage.

Often overlooked in such situations is the investor-relations department, which consultants say can do much more than simply act as a liaison between a company and Wall Street. Smooch Reynolds, CEO of executive-recruiting and consulting firm The Repovich Reynolds Group, says the IR department should be regarded as a valuable resource in any number of situations. Not only is it often the gateway into a company (as one example, a recent survey by the National Investor Relations Institute found that IR professionals are 50 percent more likely to be the first contact for activist investors as compared with CFOs) but, according to NIRI Interim CEO Linda Kelleher, the function is increasingly focused on strategic issues such as competitive intelligence and shareholder-board action.

Lee Wyatt, CFO of HanesBrands, was glad to have the chance to establish the roles and responsibilities of his company's IR department from the ground up. HanesBrands was spun off from Sara Lee last year, giving Wyatt the chance to "make sure that as CFO I wasn't taking on too much, [so I rely on] the investor-relations department to make sure we speak with a common message and with the appropriate level of detail depending on the audience."

Wyatt says that, thankfully, HanesBrands has not had a crisis that would force it to figure out just what IR can bring to the table in that regard, but he has no doubt that IR can play a role. "It's hard for CFOs that have been handling IR for a long time to wean themselves away," he says, "but it allows me to concentrate on other things that drive the business forward." -- Laura DeMars

Amicus Interruptus

If boards are in bed with management, recent Delaware Chancery Court rulings may go some way toward pulling back the sheets. Recent decisions suggest that the judges' patience has worn thin when it comes to stock-option dating games, executive perks, director conflicts of interest, and self-serving negotiations with private-equity acquirers. The end result could well be increased liability for directors at companies where abuses are found.

It's not so much the abuses themselves that disturb the nation's premier business court, which is traditionally friendly to companies; it's the failure of boards to level with shareholders about what companies are doing.

Take August's In Re: Tyson Foods ruling by chancellor William B. Chandler III, in which he denied the company's motion to throw out shareholder claims regarding spring-loaded options. Tyson argued that directors and managers are protected by the business-judgment rule, intended to give companies latitude to make mistakes without exposing directors and managers to liability.

The rule applies as long as they act in good faith and in the interest of shareholders. But Chandler wrote in Tyson that the board-approved proxy statement displayed such an "uncanny parsimony with the truth" as to suggest directors were "dissembling to hide earlier subterfuge." The judge added that "the deceit involved suggests a scheme inherently beyond the bounds of business judgment."

Other cases involving infoUSA Inc. and the baseball-card company Topps also drew fire from the court regarding board/management relations. There was a time, says University of Delaware legal expert Charles Elson, when the judges "might have dismissed such cases out of hand," but now they are demonstrating "a greater suspicion of management than before." -- Roy Harris

Appraising the Roof

Despite early predictions of an unusually active season, most hurricane coverage this year (as of press time, anyway) has been devoted to Katrina retrospectives rather than the chronicling of fresh disasters. If history is any guide, that means that most businesses will slip into a reflexive complacency regarding their business-continuity and disaster-recovery efforts.

But not Sprint Nextel Corp. The company weathered Katrina so successfully that it actually reduced the amount of property insurance it carried, realizing that its business-continuity efforts could withstand what Greig Fennell, manager of business continuity, calls "the worst-ever-case scenario we could imagine." Reducing its coverage was not bad news for its insurer, however; in fact, it was because of the engineering advice offered by FM Global that Sprint could make such a move. FM Global bundles property coverage with a wide range of engineering and related consulting help, providing clients with a list of recommendations on how to modify their sites to minimize damage.

As a result, Sprint did relatively simple but often overlooked things, like securing roofs more firmly. That step alone often spells the difference between a building remaining viable after a storm or becoming virtually useless.

Sprint's efforts went well beyond site improvements, however. The company established "Sprint City," a vast tent complex at the Baton Rouge fairgrounds, to serve as a staging area for service restoration. "We did suffer some damage," says Rick Burnheimer, director of risk management and environmental health and safety. "Some towers were so submerged that we couldn't even spot them from helicopters." Sprint had to take certain actions that it not only hadn't planned for (such as hiring psychologists to counsel repair people who had witnessed horrific scenes) but that actually ran counter to its stated policies, such as sending armed guards to accompany repair crews. Sprint says that an experienced business-continuity team is key to being able to respond quickly to the unexpected. Also essential is the creation and constant review of a list of Top 10 risks, which it shares with FM Global. -- Scott Leibs

Wellness May Get Better

Although the concept may be amorphous, "wellness" programs may get a very tangible boost from Congress. Senators Tom Harkin (DIowa) and Gordon Smith (ROreg.) are cosponsoring a bill that would provide tax credits of up to $200 per employee for companies that establish programs to help employees stop smoking, lose weight, monitor high blood pressure, and tackle sundry other preventive aspects of health care.

Even with the tax break, such programs represent a leap of faith. Employees often fail to stick with them long enough to show results, and calculating the return on investment can be difficult. Only one in seven companies manages to do it, and those that have found a positive result tend to be self-insured firms that can measure a drop in health claims paid.

The best wellness programs, according to Bruce Kelley, a senior consultant with Watson Wyatt Worldwide, "focus on the top medical conditions that affect your particular workforce." Other keys to success, according to John Asencio, a senior vice president at Sibson Consulting, are good data collection, consistent participation (which may hinge on incentives), and corporate culture. "If turnover [at the company] is high," he says, "employees probably won't stay long enough to make a true impact."

Worthington Industries, a metal processor with 8,000 employees in 63 plants, has offered an ever-expanding range of incentive-based wellness programs for four years, and says it has achieved a 200 percent return on its investment. Even so, its participation rate has flattened at about 60 percent. -- L.D.

Fees under Fire

Even as Congress examines current 401(k) plan fee structures, companies may have plenty of incentive to revisit the issue now rather than wait for any resulting legislative changes. That incentive comes in the form of class-action lawsuits launched against a number of large companies, including Lockheed Martin, General Dynamics, Bechtel Group, and nearly a dozen others.

The suits, which were launched last fall, allege that the companies violated their fiduciary responsibilities by not properly informing employees about various fees, that the fees were too high, and that plan sponsors did not adequately assess the structure of the fees.

In August, Lockheed lost a motion to dismiss. The company had argued that the complaint was too broad, but a U.S. District Court judge in Illinois disagreed. While a suit against Deere & Co. was dismissed, most others have cleared that hurdle and are moving toward trial.

Companies have long borne some responsibility for understanding fees, notes David Gensler, president of Madison Pension Services. But he says that, given the current climate, companies should diligently document every detail of their plans, including adviser fees, and review the manner in which that information is provided to employees.

That push for better paperwork may receive a further legal impetus: a recent ruling from the U.S. Court of Appeals for the Third Circuit said that employees can still be considered participants (and bring legal actions) even if they have already cashed (or rolled) out of a plan. John Nixon, compensation and benefits partner at law firm WolfBlock, says the ruling means companies will need to maintain records even after employees are no longer active participants, a requirement that may not be easy to meet if companies have changed providers. "A previous provider, which has likely been fired, probably won't be willing" to help out on such recordkeeping, Nixon says. He recommends that companies make this a requirement in future contracts. -- Kate Plourd

Another (Small) Step

CFOs may not be able to avoid the topic of XBRL for much longer. A new and more comprehensive version of the data tags that turn financial statements into "interactive data" has been completed and goes into market-testing this month. XBRL-US, the nonprofit organization hired by the Securities and Exchange Commission to develop the tags (small pieces of computer code), will work with at least 13 of the 48 companies currently filing SEC documents in XBRL to see how well the new version works, according to CEO Mark Bolgiano. Since taking over the project last year from the Financial Accounting Standards Board (which inherited it from the American Institute of Certified Public Accountants), the group has been standardizing tags for primary financial statements and footnotes, expanding the number from less than 2,500 to 15,000.

That sixfold increase means companies will have to do less customization, which should make it easier to convert the typical items found on financial statements into XBRL format, according to Bolgiano. Critics, however, are concerned that it will make XBRL more costly. "They've built a Taj Mahal when what we needed was a nice four-bedroom house," says one source close to the matter. He predicts that conversion will require substantial -- and expensive -- consulting help similar to what was required for Sarbanes-Oxley compliance. The new language as currently drafted may not satisfy one major constituency -- Wall Street analysts -- since its structure is too complex, says Eric Linder, CEO of Savanet, which makes a software tool that analysts would use to read XBRL statements.

While the SEC has not yet mandated the use of XBRL, it has invested $54 million to create the technology necessary to, as it stated last year, "pave the way toward universal XBRL." Chairman Christopher Cox's public enthusiasm for the project, as evidenced in speeches, multiple roundtables, and congressional testimony, has only heightened the expectation that XBRL will replace the current HTML-based system. There's no official word on when or whether that might happen, but the eventual public release of the final XBRL code (expected in 2008) will be a major milestone, says Jeff Naumann in the SEC's Office of the Chief Accountant, since the current EDGAR system can already handle XBRL documents. -- A.N.S.

Include Me Out

The Securities and Exchange Commission's attempt to publicize a list of companies with business ties to terrorist-sponsoring states caused quite a stir this summer. The list of more than 90 companies included a number of household names, from AstraZeneca to Cadbury Schweppes to Reuters to Xerox. Posted in June on the SEC's Website, it was accompanied by strong words from chairman Christopher Cox, who said that investors shouldn't have to wonder whether their investments "are indirectly subsidizing a terrorist haven or genocidal state."

As it turned out, the SEC's method for determining offending companies was itself indirect, and incorrect. Companies were singled out for simply mentioning Iran, North Korea, Sudan, Syria, or Cuba in their annual 10-Ks. Outraged companies, and lawmakers, cried foul, calling the SEC's method inaccurate, unfair, and based on outdated information. The list was removed weeks later and the SEC has vowed to retool its approach to identifying such companies, although it has not stated publicly when it will unveil a new list or describe its criteria for inclusion.

Investors concerned about buying stock in companies that have ties to terrorist-sponsoring states already have access to information on the issue. Several private firms not only offer lists of such companies, but say they define material ties to terrorist states more accurately and quickly than the SEC. The Conflict Securities Advisory Group, for one, maintains a list of more than 400 companies differentiated by type of business connection, which can range from equity ties to actual on-the-ground operational facilities. -- K.P.


Copyright 2007 CFO

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