Feeling the Heat

Your company's carbon footprint; fewer enforcement actions at the SEC; midsize accounting firms join forces against the Big Four; the cost of being sued; the end of annual reports on paper; automatic 401(k) enrollment; and more.

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Global warming is so hot that Corporate America is seeing green.

About 75 percent of respondents to an October 2006 survey by The Conference Board are measuring their carbon footprint, or the amount of direct and indirect carbon their operations emit. Half of the companies — 90 percent of which had revenues of $1 billion or more — have implemented programs to reduce or offset greenhouse gases, according to the final report, “Carbon Footprint: A Growing Management Concern.”

“We’ve seen a sea change in attitude over the last two years,” says Craig Ebert, executive vice president at consulting firm ICF International. And in action: the number of companies recognized by the U.S. Environmental Protection Agency as climate leaders (companies that are cutting their greenhouse gases) has grown from 11 in
2002 to more than 100 today.

One reason is regulation. “It will be a carbon-constrained future,” says Josh Margolis, managing director with Cantor Fitzgerald Environmental and Energy Brokerage in San Francisco. For example, California Assembly Bill 32, passed last summer, requires state greenhouse-gas emissions to drop to 1990 levels by the year 2020.

In addition, “investors and analysts are saying that companies’ bottom lines are affected by climate change,” says Mindy Lubber, president of Ceres, a Boston-based environmental organization. And businesses viewed as laggards are being targeted by environmental groups. In October, for instance, the Rainforest Action Network rebuked Wachovia Corp. for what it termed a “forest policy [that] is out of step with 21st-century business values.”

Companies are also finding that reducing their environmental impact can boost results. In 2003, Sonoma Wine Co. purchased a 60-year-old plant in Graton, Calif. While the existing facility and equipment could have sufficed, management made several energy-saving improvements, such as installing more efficient boilers and jacketing the stainless-steel cooling tanks to retain temperature. Consequently, even as production doubled, energy use increased just 13 percent. “We’ve seen an almost immediate payback,” says president and acting CFO Dennis Carroll.

Some companies are going even further to reduce emissions. Shaklee Corp., a Pleasanton, Calif.-based personal-care products producer, became the first company certified by the Climate Neutral Network as being “climate neutral”; that is, it reduces or offsets all of its greenhouse and global-warming gases. Among other steps, the company supported the installation of solar photovoltaics in Sri Lanka, which both offset its greenhouse-gas emissions elsewhere and provide energy to area villages. “Our intent is to help today’s developing countries become tomorrow’s markets,” says CFO Ed Dunlap.

Still, it’s difficult to determine just how much more companies are doing to reduce their emissions, says Charles J. Bennett, co-author of the “Carbon Footprint” report. What’s clear, however, is that “carbon constraints are going to change markets for the rest of our lives,” says consultant Ebert. “If you don’t understand that, you’re at a disadvantage and you’re going to miss opportunities.” — Karen M. Kroll

Quality, Not Quantity

The Securities and Exchange Commission brought just 574 enforcement actions in fiscal-year 2006, the fewest since 2001. But the agency insists it is not going soft on crime.

“This has been a banner year for enforcement,” said SEC chairman Christopher Cox in a prepared statement announcing the figures. “The SEC went 10–0 in trial-court wins this year — our first perfect year in memory. This indicates the SEC is bringing the right cases, and getting solid results.” However, the SEC is feeling pressure from the Government Accountability Office, which announced in October that it is investigating the SEC for, among other things, how it tracks and gauges the success of its investigations.

“The raw numbers are not as important as the significance of the cases themselves,” counters Russell Ryan, a former assistant director of enforcement at the SEC, who argues that the agency is pursuing more-complicated cases, which involve lengthier investigations.

The SEC does admit that budget constraints and reduced staffing contributed to the lower numbers. The commission’s budget has remained flat at $888 million over the past two fiscal years, and the number of enforcement staffers has declined by 3.5 percent. A hiring freeze and turnover of senior positions haven’t helped, says Ryan, now a partner with King & Spalding LLP.

Although scandals involving hedge funds and options backdating could increase caseload, Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, cautioned in October that the agency would retain its focus on outcomes. “We do not expect to bring 100 enforcement cases regarding stock options; we are focusing on the worst conduct. But we do expect to bring more cases.” — Sarah Johnson

Strength in Number-Crunchers

Accounting firms unite! A group of midsize firms are forging a formal alliance in an attempt to offer an alternative to the Big Four.

In October, 22 accounting firms announced that they will conduct business under the name Baker Tilly USA, a wholly-owned subsidiary of UK-based Baker Tilly International, to try to gain scale in an industry dominated by the Big Four and a handful of second-tier firms. Under the agreement, the alliance, which until now had collaborated under a loose affiliation, will use the Baker Tilly name to solicit business from larger clients. Varying member companies will be brought on board according to a client’s needs, and revenues will be divided among those companies involved based on the percentage of work each handles, says Bob Ciaruffoli, chairman of Baker Tilly USA and CEO of member firm Parente Randolph.

“We’re working together to attract those companies that we can’t handle independently,” says Ciaruffoli. “The alliance enables us to more effectively serve clients by strengthening our capabilities in Sarbox compliance, auditing, and tax services.”

The idea isn’t new. BDO Seidman formed an alliance in 1993 that now has 198 member firms. Tom Riley, a principal at TFG CPAs and a member of that alliance, says it enables smaller firms to be competitive by giving them access to services they would otherwise be unable to provide. “It has allowed us to provide customers with quicker answers,” he says.

Three other groups — Moores Rowland International, The Leading Edge Alliance, and Moore Stephens North America — could announce plans within a year to create formal alliances from the informal networks they have built. Together with Baker Tilly USA, they would represent about two-thirds of the nation’s top 100 accounting firms, says Allan D. Koltin, CEO of PDI Global Inc., a marketing consultant for accounting firms.

Koltin thinks the alliances could gain ground among midsize firms while Big Four firms remain tied up with Sarbox work. “There is a call for more firms with worldwide resources,” he says. — Laura DeMars

Sue Nation

The cost and frequency of legal disputes at large U.S. companies continue to surge. A study by law firm Fulbright & Jaworski LLP found that large companies (more than $1 billion) face an average of 556 lawsuits worldwide and spend an average of $34 million on legal costs. The survey of 422 members of in-house counsels also found that 89 percent of respondents reported at least one new suit filed against their company in the past year. “By far the biggest driver of legal costs over the last few years is the cost imposed by electronic discovery,” says Robert Owen, a partner at Fulbright & Jaworski. He says many companies employ an army of junior attorneys to cull through thousands of E-mails, Word files, spreadsheets, and databases collected on hard drives during the discovery process. The survey also found that 63 percent of respondents undertook at least one internal investigation in the past year that required outside counsel.

Where Will the Next Suit Come From?

Areas that worry in-house counsel (respondents allowed to choose more than one)

48% Labor/Employment
40% Contracts
26% Regulatory
24% Intellectual property/patents
24% Class actions

Industries facing the highest number of lawsuits (average, per company):

Insurance: 1,700

Energy: 364

Retail: 333

Financial Services: 300

Verbatim

“The move to fair-value accounting is going to be a complete disaster. At some point you are going to need a Ph.D. in accounting to figure it all out.”

— Stephen Giusto, CFO of Resources Global Professionals

Paper Tigers

Log on to any public company’s Website and with relative ease you can access current financial data, including regulatory filings. It’s so easy, in fact, that for the past five years corporations have been campaigning to do away with the slick, costly annual reports they mail to shareholders.

The Securities and Exchange Commission seems likely to agree. On December 13, it will rule on whether firms can just direct shareholders to the online version of their annual reports and mail paper copies only upon request. As the SEC recently approved a similar proposal from the New York Stock Exchange, its own rule will likely pass.

The ruling, says FedEx CFO Alan B. Graf Jr., “will obviously save us a tremendous amount.” In fact, the savings on printing and postage could be considerable; nearly 30 percent of companies pay $100,000 or more for printing alone. And in anticipation of the conversion, FedEx and other companies have enhanced their online financial presentations. According to the National Investor Relations Institute, 35 percent of companies have created a separate online version of their report — for less than $20,000 apiece — that investors can view without downloading. CEO Jeff Eichel says almost 2,000 companies pay his firm, IR Solutions, to post interactive or digital reports on its AnnualReports.com Website.

But here’s the rub: more than 80 percent of investors still want a printed version, according to a Withum Smith & Brown survey. “It has larger resolution, the pictures are clearer, it’s more portable, and it can be filed away,” says George Stenitzer, vice president, communications, at Tellabs, which has surveyed its shareholders’ preferences for the past four years. Only 54 percent of investors over the age of 65 go online, he adds.

Still, even if the SEC grants a choice, firms need to put more effort into their reports, says Mike Guillaume, editor of Enterprise.com’s Annual Report on Annual Reports. Too often they take the easy way out with print versions. “Simply copying and pasting a 10-K hardly qualifies as an annual report,” he says. Moreover, given all the disclosures now required, many of the reports are simply a big “yawn,” he adds. — S.J.

Flying the Unfriendly Skies

What are your biggest complaints about air travel?

Cramped seating: 75%

Security-screening delays: 58%

Declining service on board: 49%

Flight delays: 47%

Cost: 30%

What additional safety measures would you consider tolerable?

Fingerprint scans: 73%

More-expensive luggage screens: 64%

Retinal scans: 54%

Extra carry-on searches: 42%

Body searches: 8%

How do you make traveling easier?

Travel without checked baggage: 53%

Travel less frequently: 32%

Take a car or train when possible: 28%

Travel in First Class: 17%

Use private planes when possible: 12%

Source: CFO magazine survey of 106 finance executives. Respondents could choose more than one answer.

For Some, Enrollment Is the Beginning — and the End

Enrolling employees in the company 401(k) plan involuntarily is a surefire way to boost participation rates, a new study reports, but it also creates a group of investors who don’t manage their plans well.

The survey, conducted by human-resources consulting firm Hewitt Associates, finds that when companies automatically enroll new employees in their 401(k) plans, 91 percent continue to participate. Companies that rely on voluntary enrollment experience a participation rate of just 68 percent.

However, employees who are enrolled automatically are not the most active investors. They tend to leave their investments in overly conservative funds, are less likely to rebalance their portfolios, and contribute less on average than those who opt in to the plan through traditional means.

“While automatic enrollment is proving to be an effective tool for getting employees into the 401(k) plan, it isn’t a cure-all for helping people meet their retirement needs,” says Pamela Hess, director of retirement research at Hewitt. She says companies should avoid setting the default contribution rate too low and should encourage automatically enrolled investors to diversify their holdings. — Joseph McCafferty

Participation Rate

Automatic enrollment: 91%

Voluntary enrollment: 68%

Contribution Rate

Automatic enrollment: 6.8%

Voluntary enrollment: 8.0%

Investments in Equity

Automatic enrollment: 48%

Voluntary enrollment: 67%

Account Activity

(Made at least 1 transfer in 2005)

Automatic enrollment: 9%

Voluntary enrollment: 18%

Source: Hewitt Associates

Speech Therapy

Finance executives are increasingly taking the stage to communicate corporate strategy to analysts, shareholders, employees, and boards. But many of them readily admit they’d rather hold a lightning rod in a thunderstorm than a microphone on stage.

Little wonder, then, that presentation coaching is a growing industry. Options range from self-help software to seminars and classes to one-on-one coaching. Two of the largest training programs, offered by Communispond and Dale Carnegie Training, provide a service whereby speakers are videotaped to analyze their skills and bad habits. Executives also learn how to project their voices and smile, use humor, and speak extemporaneously. The American Management Association offers executives a course in public speaking, as well as seminars on presenting and projecting a positive image. The cost of the two- or three-day seminars ranges from $1,495 to $1,995.

Whatever the organization, the recommendations sound a common theme. The most important skill, says Peter Handal, CEO of Dale Carnegie & Associates — the great-granddaddy of public-speaking firms — is being able to judge the audience. This is especially true for finance executives, who need to convey complex subjects to those with varying degrees of financial expertise. “We emphasize how to get to know the audience, and how to tailor your message to its level,” he says.

Hub Group CFO Tom White says that taking the Dale Carnegie course was one of the best things he’s ever done. “I used to hate speaking in front of audiences, and now I love it. CFOs study a very technical, quantitative subject. You notice when someone hasn’t had training [in public speaking].”

For those who are looking to improve their skills on the cheap, hypnotist Tom Nicoli offers a series of CDs for less than $60 that claim to hypnotize users, giving them confidence and improving their ability to speak in public. It could be just the thing for speakers who put their audiences to sleep. — L.D.

Hard Landings?

Not everyone is flying high about lower oil prices.

The cooling in jet-fuel costs since last summer sounds like good news, but it caught some airline-hedging programs off guard. Indeed, Alaska Air Group recorded a third-quarter loss of $17.4 million in October, partly due to losses tied to fuel-hedging contracts. Similarly, US Airways got clipped for $88 million when it was forced to take a charge in order to reduce the book value of some outstanding fuel-hedging contracts.

Those and other major airlines locked in prices with hedges that later turned out to be above the current market value. And the volatility of oil prices in recent months, says John P. Heimlich, chief economist for the Air Transport Association, illustrates that “hedging is still a gamble.”

That doesn’t mean airlines plan to jettison hedging anytime soon. Although the overall value of Alaska Air Group’s hedging portfolio declined, the program still saved some $27.4 million during the third quarter. Meanwhile, Southwest Airlines actually upped its hedged exposure to 85 percent for 2007. “Even with the recent decline in energy prices,” says Scott Topping, Southwest’s vice president of finance and treasurer, “our cost per gallon was up 60 percent in the third quarter [as compared with last year]. Despite that, our hedging program gained us $200 million last quarter.”

In Alaska Air’s third-quarter conference call, CFO Brad Tilden reiterated the company’s commitment to hedging. “Fuel hedging is not a strategy to create profits…. It is a strategy to reduce the volatility of our fuel expense,” he said. The airline’s raw-fuel costs have gone from $300 million a year in 2002 to $900 million this year. “What we have is a commodity that’s very material to the company and very volatile. It argues for hedging.”

Meanwhile, some fliers are seeing benefits from lower fuel costs. Several international airlines, including Virgin Atlantic, KLM, and Lufthansa, have already dropped their fuel surcharges. — Lori Calabro

Free Admission, No Tuition

Need a refresher course on accounting for derivatives? Thanks to the Massachusetts Institute of Technology and its burgeoning OpenCourseWare program, executives can now go back to school without entering a classroom.

OCW is a free educational resource that gives self-learners access to course materials published by participating schools, including MIT’s Sloan School of Management. MIT officials are working to convince other universities to add materials, and Notre Dame, Tufts, and Yale have recently signed on. Executives with a global bent can access materials from hundreds of international schools, including those in the UK, France, Japan, and China.

In many cases, lecture notes, case studies, reading lists, and copies of exams are available. “By the end of 2007, we hope to have our entire Sloan Business School curriculum online,” says OCW senior strategist Stephen Carson. Currently, 133 Sloan courses are available.

The program is funded by grants and corporate sponsors. Class materials can be obtained by anyone with Internet access, but the program does not offer credit or degrees.

So will students be interested in education without certificates? “If the information is valuable, people will seek it out, period,” says Marc Rosenberg, author of Beyond E-Learning. To access materials, go to http://ocw.mit.edu. — Gareth Goh

The Trade-offs of Offshoring

Fortune 500 companies could save a combined $58 billion annually, or $116 million per company, by offshoring many of the back-office activities currently being handled domestically, according to research from The Hackett Group. The strategic advisory firm found that companies could save $32 million a year in the finance department alone. However, Hackett estimates that the increased use of offshoring could affect 1.47 million jobs in the United States.

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