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Right now many chain-restaurant operators are hunkering down, cutting costs, and hoping for a turnaround (“Table Stakes,” December 2008). But restaurants must continue to fundamentally restructure. Adapting to changing monetary and credit conditions, the diversification of society (the casual-dining sector is fundamentally a suburban, auto-centric market), and different work schedules, tastes, and preferences is important.
Casual-dining operators need to figure out how to make an urban, street-traffic-centric unit work, as well as find solutions for weaknesses in their real estate portfolios.
The restaurant industry in the United States is way overdeveloped, and some inventory needs to be taken out, creatively. In short, restaurant chains need to look to America’s changing face for clues to their future.
John A. Gordon
Predicting the Future
I think the key issue in all spheres of development is the concept of predicting the future (“Future Tense,” December 2008). Why do we consult astrologers? To determine what lies ahead. What is the need for budgeting and depreciation costs? To determine how to allocate funds for future expenses. One of the interesting forecasting models that I have seen is the Stochastic Goal Programmed Model for Capital Budgeting Decisions, by J.D. Agarwal. There are other models created by various economists, but I found this model more applicable in the current scenario with highly variable ROE and ROI.
Smart Cost Cutting
I agree that focusing on improving revenue is the surest way to maintain viability during tough times (“And in This Corner, the Price-Fighter,” December 2008). Let a third-party expert cut your expenses on a true gain-sharing model. Our expense-reduction business is up significantly at this time, but companies should continuously be reviewing expenses for opportunities to cut costs. So much focus on cutting travel expenses and head count is shortsighted at best.
When companies do not act responsibly with regard to executive compensation, they disenfranchise their employees and shareholders, and invite government involvement (“Beyond the Bailout,” Topline, December 2008). This is especially true for publicly traded companies and those seeking government assistance.
Finally a step in the right direction. However, I have a hang-up about the word must that is used in the chart: “…firms receiving federal bailout funds must….” I prefer the word shall. It places more emphasis on “has a duty to.” Better yet, it makes it clearer that the actions are mandatory, and that firms that don’t act will suffer dire consequences.
Fossil-Fuel Betas for All
The idea of fossil-fuel betas (“What Goes Down Will Come Up,” December 2008) is a great one. There are very few topics and measures in finance that appeal to investors, corporate managers, and society at the same time. This measure should be interesting to all three.
As an investor, it gives me a measure of the risk from fossil-fuel prices. As a manager, it provides a measure of risk exposure in my company to fossil-fuel prices and allows me to hedge that risk or to measure the effectiveness of different hedging strategies. From a societal standpoint, there is value to tracking the overall fossil-fuel beta of U.S. companies.
One suggestion is that you also compute a fossil-fuel beta based on accounting earnings for individual companies. Thus, you would regress changes in earnings against changes in oil prices. Managers, in particular, would find that beta useful, since so much hedging is built around more-stable earnings (rather than stock prices).
Professor of Finance
Stern School of Business, New York University
Do the Ends Justify the Means?
Businesses should reevaluate operating structures and the current business model, rather than merely cutting employees (“Cold Cuts,” December 2008). Moreover, shareholders should more closely scrutinize and potentially sack executive managers who so readily go for the ax. The rank-and-file employees did not have the authority to prepare the company on a strategic level for an economic downturn. Businesses should focus on reducing wages and benefits across the employee and executive base, rather than cutting head count. The ends do not justify the means.
E. Blake Mendez
Your article suggesting investment in green jobs as an answer to our economic problems is a good start (“The Great Green Hope,” November 2008).
It would be valuable to finance executives if you could provide some analysis of the net present value of the costs and anticipated benefits of such jobs. Any one of your six categories of green jobs could be analyzed. This type of analysis would show whether projects were not going forward because skilled employees were not available, or the project benefits simply would not recover the required investment. It also would help show whether governments would recoup the costs of job training through greater tax revenue.
Assistant Treasurer, Taxation
Teledyne Technologies Inc.
In December 2008’s On the Record with Robert F. Bruner, a passage should have read: “The big unknowns are, first, the potential amplifying impact of emerging economies. Will they be able to weather the crisis as well as the developed [not ‘the developing’] economies?”