Whatever Happened to Doing the Right Thing?

In survey, U.S. executives say morality improves brand image, sales; many blame media for mistrust of corporations. Plus: Some companies dumping dividends, Nash Finch under the gun, and Harrah's says its tables are clean.

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The bottom line motivates Americans, while a sense of “doing good” motivates Brits—at least when it comes to corporate social responsibility.

This was the takeaway from a recent survey of more than 300 executives by BritishAmerican Business Inc. (BABi), a transatlantic business organization representing some of the largest transatlantic corporations. Communications company Peppercom also participated in the survey.

When Americans were asked what the main business benefit of being a responsible corporate citizen is, their number-one response was “improving brand image.” One-third of the respondents replied “increase sales,” according to the survey. Doing the right thing was apparently way down the list

Their British counterparts agreed on the top issues. However, they valued them in a different order, listing the overall “license to operate” as their number-one concern, while sales finished in only seventh place, the survey found.

Both sides of the Atlantic, however, overwhelmingly agreed that “ensuring trustworthy financial reporting,” “business ethics,” and “ensuring good governance” are most important for their company.

“It’s interesting to note how our sampling confirms a number of preconceived perceptions of what is important to American and British business executives,” said Alison Holmes, managing director of BABi. “Clearly, transparency in reporting financial numbers is the most relevant and important benefit to almost anyone dealing with the public markets these days.”

Nevertheless, American business executives laid some of the blame for the recent market downfall on the media. Altogether, 70 percent of U.S. respondents reported that the media has either blown a few scandals out of proportion or unduly damaged the market reputation of all public companies.

On the other hand, 59 percent of British respondents thought the media created a place for debate on what proper corporate governance should be, and 25 percent said they believe the media has been balanced and objective in uncovering important issues of corporate governance.

Remarkably, despite the recent spate of accounting scandals, American companies are still not prepared for potential exposures to vulnerability. According to the study, companies have not taken the necessary steps to ensure protection and preparedness should there be a financial crisis.

As proof, when asked whether any company can be confident that it has protected its financial stability, almost 62 percent of total respondents said “no,” according to the study.

Only 27 percent of the overall respondents claim their corporations are conducting any research to determine vulnerabilities, and just 16 percent have conducted workshops to simulate real crisis scenarios. Nearly a fifth of respondents believe their companies have taken no steps at all.

“The fact that one fifth of these senior, seasoned executives believe that their respective companies have done nothing to prepare themselves for any type of financial crisis is shocking,” said Edward Moed, managing partner of Peppercom. “Following the devastation that these financial scandals have created in the U.S. marketplace, you would think most companies would be really digging deep to understand what vulnerabilities exist and then prepare as effectively as possible through planning and crisis simulation exercises.”

Interestingly, three out of five of the U.S. respondents believe the United Kingdom will soon face similar scandals. However, 53 percent of U.K. respondents do not believe that to be the case.

Axing Dividends

While President Bush is actively promoting the value of dividends by proposing to make them tax-exempt, a number of major companies are cutting back these investor payouts.

For example, on Tuesday El Paso Corp., the largest U.S. owner of natural-gas pipelines, said it plans to cut its dividend by 82 percent to save cash so that it can pare its hefty $25 billion in debt. It also said it will sell $2.9 billion in assets this year.

El Paso said it would reduce its annual dividend to 16 cents from 87 cents. This move will save the company $425 million a year.

“We have moved aggressively to address many of the issues that affected our industry and our business, and we are confident that the company is headed in the right direction,” El Paso chief executive William Wise said in a statement.

Now, keep in mind that due to its collapsed stock price, El Paso’s dividend yield was 10.86 percent, the highest of any company in the Standard & Poor’s 500 Index.

El Paso is just one of about a dozen U.S. energy companies that have cut or suspended their dividend payouts in the past year on the heels of the collapse of Enron Corp. and energy trading in general, according to Bloomberg.

In late January, CMS Energy Inc. suspended its dividend, which was $1.46 per share in 2001 and $1.09 per share in the first three quarters of 2002. The embattled energy company said the suspension of the dividend will save about $100 million in 2003.

“By conserving cash, our liquidity is strengthened, and we are in a better position to meet the challenges facing our company and our industry,” chairman and chief executive Ken Whipple said in a statement.

And on Tuesday, Goodyear Tire & Rubber Co., the world’s largest tire company, said it would stop paying a dividend after 66 consecutive years.

Goodyear said eliminating the 12 cents per share dividend will boost its annual cash flow by about $84 million.

“The elimination of the dividend is an important step in a series of actions the company is taking to improve its financial flexibility in light of recent disappointing results and challenging economic conditions,” said Robert J. Keegan, president and chief executive officer, in a statement.

(Editor’s note: President Bush wants to eliminate the double taxation of dividends. A bonanza for shareholders? Maybe—but some critics and CFOs contend that launching a regular cash-dividend program is more trouble than it’s worth. To find out more, click here.)

Nash Finch Faces SEC Probe; Auditor Resigns

Management at Nash Finch said the Securities and Exchange Commission’s Division of Enforcement has launched a formal order of investigation of the company.

In addition, Deloitte & Touche LLP resigned as the company’s independent accountants, according to a Nash Finch regulatory filing.

The food distributor added that since Deloitte was appointed on July 29, 2002, there were no disagreements between the company and Deloitte on any matter of accounting principles or practices, financial-statement disclosure, or auditing scope or procedure.

Nash did note, however, that during the period of Deloitte’s engagement, certain information came to Deloitte’s attention that Deloitte determined might materially impact the fairness or reliability of previously issued audit reports or future financial statements.

“However, due to Deloitte’s resignation, Deloitte was not able to conclude what effect, if any, these matters have on the company’s previously issued or to be issued financial statements,” Nash Finch management added in its regulatory filing.

Last October 9, the SEC began an informal inquiry into the company’s practices relating to “count-recount” charges assessed to the company’s vendors. These charges have been recognized as a reduction of cost of sales during the period billed, the company noted.

It added that Deloitte advised the company and its audit committee that, as of the date of Deloitte’s resignation, the company had not provided Deloitte with sufficient evidence for it to conclude that the company’s accounting practices for count-recount charges were appropriate, according to the filing.

Philadelphia Suburban, Harrah’s: We’re Clean

Not all SEC investigations uncover wrongdoing.

Management at Philadelphia Suburban Corp. yesterday said the regulatory agency undertook a comprehensive review of the company in connection with an acquisition plan announced last year. According to Dow Jones, that review has raised no major issues with the water utility.

The SEC reviewed Philadelphia Suburban’s S-4 registration form related to its planned acquisition of Pennichuck Corp.—a deal that the two utilities called off earlier this week. The commission apparently examined Philadelphia Suburban’s annual report, added the wire service, citing comments made by company officials on a conference call.

“We’d been wondering when our card would come to the top of the deck and we would face an SEC review,” CFO David Smeltzer reportedly said in a conference call. “The number of comments we received we felt were few and minor, and we’re near the process of wrapping that up now. We feel good about our filings for the time being.”

In yet another auditing-related matter, Harrah’s Entertainment Inc. said voluntary reaudits of its financial statements dating back to 1999 have been completed by Deloitte & Touche, and no changes or adjustments are necessary.

“In a period during which many corporations have come under scrutiny for unethical business practices, it is especially gratifying for me to lead a company with a longstanding tradition of integrity,” said Gary Loveman, Harrah’s president and chief executive officer, in a statement. “I am also proud to serve with a board that demands the highest-quality governance practices and has the highest percentage of outside directors among major casino operators.”

Short Takes

  • Knight Trading Group Inc. said CFO and treasurer Robert I. Turner has decided to retire. Knight said that group controller John B. Howard will serve as acting CFO, effective immediately, during the search and transition process.

Howard has been with Knight since 1998. Previously he was a senior manager in the securities industry practice of PricewaterhouseCoopers.

“After eight wonderful and energizing years, I am looking forward to spending more time with my family before exploring new opportunities,” said Turner in a statement.

  • The Warnaco Group Inc. Wednesday announced that its plan of reorganization became effective and the company has formally emerged from Chapter 11. It added that it continues to search for a permanent CEO and CFO, as well as candidates for its board of directors. Until the search is concluded, James P. Fogarty of Alvarez & Marsal will continue to serve as CFO.
  • Citigroup Capital Trust IX, a unit of Citigroup Inc., issued $1 billion in 30-year Trust Preferred Securities. They were rated Aa2 by Moody’s and Single-A by Standard & Poor’s.
  • Fannie Mae issued $1 billion of three-year global callable notes, priced to yield 2.66 percent or 101 basis points over two-year U.S. Treasuries.

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