For starters, new proxy requirements require fuller disclosures on CEO succession, board directors’ qualifications and experience among other changes. U.S. companies, including American Express, Bank of America and Whole Foods are among a growing number of companies that are currently targeted by shareholders for these issues. The Laborers’ International Union of North America (LIUNA), for example, filed proposals with at least 14 companies asking them to detail succession planning policies and put them to a vote in their annual meetings. LIUNA’s proposals ask companies to “adopt and disclose a written and detailed CEO succession policy,” but stop short of demanding a list of potential candidates for the top job. The expectation is that activism will only increase, especially from other institutional investors and hedge funds. There could be no more opportune time than amid the contentious 2010 proxy season to bring together subject matter experts with public company directors to assess what’s shaping today’s agendas.

Egon Zehnder’s Justus O’Brien believes that shareholder activism is only likely to increase more significantly among small-cap companies. Larger companies who have grown more accustomed to the advances of shareholders are better prepared. “In some sense,” O’Brien said, “smaller-cap companies are more vulnerable.” The legislative and regulatory apparatus is facilitating greater involvement in proxy access, and providing “opportunities for activists to inquire about board qualifications, director qualifications, board composition, diversity issues and CEO succession planning so there’ll be many other points of entry into greater activism on boards.”

The result of that activism isn’t necessarily negative. “One of the interesting insights from our discussions is that the pressure being brought to bear on companies by activists isn’t always necessarily negative and may result in creating more value,” O’Brien said. “Clearly, boards need to really stay in touch with the major shareholders, and talk to them proactively to maintain some control…Also boards benefit from having a good board selection process, clarity around what you’re looking for and clarity around what the appropriate composition of the board is.”

If you serve on an audit committee, you should keep your seatbelt fastened—and perhaps tightened a bit—given the challenges and priorities ahead, suggested Jeff Cunningham. KPMG’s Mary Pat McCarthy noted that new mandates from the SEC and the Internal Revenue Service (IRS) are commanding directors’ attention. Since the publication of the examiner’s report on the Lehman Brothers bankruptcy, the SEC has sent “Dear CFO” letters to financial institutions asking for details on the use of “repurchase agreements” and securities lending transactions. The IRS has proposed a new rule that would require companies to disclose in their corporate tax returns any uncertain tax positions. And oversight of risk—financial and non-financial—was cited as the top concern where KPMG earlier this year polled audit committee members attending the ACI’s annual Audit Committee Issues Conference.

Tone at the top—and in the middle—continues to be a key area of concern for audit committee members, according to McCarthy, particularly in the light of the pressures on companies to achieve results in a difficult economy. Also front-and-center: the uncertainty created by the changing regulatory and legislative landscapes. The implications of new tax policy and healthcare reform warrant robust discussions at both the board and committee level. And, of course, the impact of the economic environment on the company’s financial statements and dis-closures—from fair value to goodwill impariments to pension liabilities—continues to demand sharp focus and attention. Finally, “how audit committees and audit committee chairs interact with the head of internal audit has popped up on the radar for many audit committees,” McCarthy said. “The audit committee should have a robust relationship with internal audit, one where you really get to know each other. The lines of communication should be direct and wide open.”

The Securities and Exchange Commission (SEC) is requiring more disclosure on the backgrounds and experience of its directors and the roles they serve, leading to the imperative question: Is there a new profile of the director emerging? Egon Zehnder’s George Davis believes so: “Boards are starting to look at their own succession planning now…and make sure that their experience aligns with the company’s strategy.”

Plenty of debate ensued over what and who is most influencing the changing profile of today’s public company board director. Do times like these require the broad capabilities of a generalist or the more  finely tuned experience of the specialist? Davis believes the answer is dependent on the business cycle. “Are you in a turnaround, growth or diversification play? These are the kinds of issues that are determining the new-director profile,” he said. How to balance the size of the board while bringing on new skill sets is another area of tension. “At that point, there’s always tension about keeping the board the same size and trying to bring new skills into the boardroom, and what are the mechanisms to influence change, and how do you do that,” Davis said. “There’s no right or wrong answer.” There are some pre-qualifiers, however. Given the growing complexity of the board’s responsibilities, the new director needs ample time to invest in board service.

The other critical characteristic of the new board director, Davis said, is patience.  “The pound-on-the-table director of the 1960s-era movies is gone. You have to be very subtle, and I think a great point was made about people-influencing skills. The role of the director has changed and to be effective you need to stay current. Even if you’re recently retired, to be a well- serving director, the new directors are going to have to think about keeping themselves fresh and current.” Part of remaining current is to be constantly evaluating both yourself and your peers, which requires that boards engage in healthy dialogue about “how they’re doing and how you’re doing.

“The very real question,” he said, “Is whether you are going to be open enough to have that dialogue within your boardroom. I think that’s part of this new profile.”

Great disparity was found when Egon Zehnder I studied the revenues and board composition of the Standard & Poor’s 500. While 24 percent of the S&P 500’s revenues are derived from countries outside the U.S., only 6 percent of the total number of directors serving the S&P 500 are foreign nationals. These results underscore a need for diversity that goes beyond gender and ethnic frameworks. “I think this is a new worry, and I think what some shareholders are looking for in their directors is a global mindset. It doesn’t matter if you’re at a large- mid- or small-cap company because companies of all sizes are going into foreign markets,” Davis said.

The hot topic of executive compensation commanded the attention of Boardroom Summit delegates as it has outside the boardroom. Leading that discussion was Marc Hodak who suggested that compensation be looked at holistically. The job of the board, he said, is to strike the best balance among competing needs of the company. “You want to be looking at how much do we need to pay managers to retain them, to attract and retain new recruits, how they’re being motivated, and how those incentives are aligned with shareholders,” Hodak said. At the time, the board needs to be achieving “retention and alignment goals at the lowest cost to shareholders.”

Adding an executive summary to the Compensation Disclosure & Analysis (CD&A), filed annually with the SEC, was one practice that may help aid disclosure and understanding. “I think this is a terrific idea,” Hodak said, “partly because your shareholders and your institutional investors are looking for simplicity and understanding. It occurred to me that if you’re putting together an executive summary, it forces the board to be clear itself on what the objectives are, and how you’re trading them off in a very compact and deliberate way.”

One of the board’s key functions—in fact, some governance experts argue that there is no more important job for the board—is CEO succession planning. The SEC has said it will revise its policy promulgated in part by the numerous instances where a company’s in inability to make a successful CEO transition has led to devastating losses in shareholder value. A recent survey conducted by Egon Zehnder found that while 70 percent of respondents said the boards on which they serve did have a CEO succession plan in place, some 53 percent said the succession process “wasn’t very good.”

A thoughtful succession plan provides a forum for internal candidates to be groomed. And internal candidates are preferred because study after study has shown that CEOs hired externally tend to command higher salaries and be more prevalent in companies with no succession plan in place. Even so, how to keep internal candidates who may be competing for the top job “satisfied” as they vie for position also requires careful planning. “Overall, succession planning needs to be a very thorough and thoughtful process and a regular part of the board agenda,” said Egon Zehnder’s KimVan Der Zon. In most cases, outside consultation will significantly ensure that there is a full understanding of the capabilities of the internal candidate that align with a company’s needs at the time.”

The SEC’s New Cooperation Tools
With its announcement, the SEC issued a revised version of its Enforcement Manual containing a new section entitled “Fostering Cooperation.”  The new manual discusses the “wide spectrum of tools available to the staff for facilitating and rewarding cooperation.”  In particular, the manual highlights five tools, many of which have long been used by criminal prosecutors.

Randall J. Fons and Brian Neil Hoffman of Morrison & Foerster LLP are co-authors of this blog.

First, as of the announcement, the director of the Division of Enforcement (or senior officers designated by the director) may enter into cooperation agreements with individuals or entities involved in an investigation.  According to the new commission policy, such an agreement may be provided to “a potential cooperating individual or company prepared to provide substantial assistance to the commission’s investigation and related enforcement actions.”  If the signer cooperates “fully and truthfully,” provides “substantial assistance,” waives the statute of limitations, and satisfies other requirements, the staff will agree to recommend to the commission that the signer receive cooperation credit or, in some cases, make a specific enforcement recommendation.

Notably, cooperation agreements will not bind the commission, which could approve enforcement action (or ignore an enforcement recommendation) despite the staff’s agreement.  This differs significantly from criminal cooperation agreements, which make explicit the specific terms to which prosecutors are bound.  The new SEC cooperation agreements, in contrast, allow for the commission to reject the agreements and, presumably, instruct the staff to bring any enforcement action that the commission, in its discretion, feels is appropriate.  Thus, entering into a cooperation agreement with the staff will not provide certainty that the signer will get the “benefit of the bargain.”

Second, the commission may now enter into deferred prosecution agreements.  Under these agreements, which have long been used by criminal prosecutors, the commission can agree “to forgo an enforcement action” against the individual or company if the individual or company, among other things, cooperates, enters into a long-term tolling agreement, and complies “with express prohibitions and/or undertakings during a period of deferred prosecution,” generally not to exceed five years.  For example, the agreement could require payment of disgorgement and penalties, or that an entity under investigation engages an independent compliance monitor.  In addition, the agreement could require the signer to “agree to either admit or not to contest underlying facts that the commission could assert to establish a violation of the federal securities laws.”  A failure to comply fully with the agreement could result in an enforcement action based, at least in part, on the admissions or uncontested facts in the deferred prosecution agreement.  Significantly, the SEC’s deferred prosecution agreements can be made available to the public upon request.

Third, the commission may now enter into non-prosecution agreements.  Like the deferred prosecution agreements, the non-prosecution agreements must be approved by the commission itself.  Moreover, non-prosecution agreements will be used only in “limited and appropriate circumstances.”  As the name suggests, the commission agrees that it will not pursue an enforcement action against the signer if the individual or entity, among other things, cooperates “truthfully and fully” and complies “with express undertakings.”  These agreements, “in virtually all cases,” will not be available to individuals who previously violated the securities laws.

Fourth, the SEC announced streamlined procedures for transmitting to the Department of Justice requests for immunity from criminal prosecution.  The commission delegated to the director of enforcement the authority to make these requests.  Prior to this change, the commission itself had to approve such requests before the staff could approach the Department of Justice.

Finally, the SEC staff will continue to be able to enter into proffer agreements.  These are agreements “providing that any statements made by a person, on a specific date, may not be used against that individual in subsequent proceedings,” except for impeachment purposes, to rebut later contrary evidence, or to support charges of perjury or obstruction of justice.  The staff, however, may use information learned during the proffer session to advance its investigation.  Any assistant director or higher-level supervisor may approve a proffer agreement.  These proffer agreements, along with oral assurances that no enforcement action will be taken against an individual or company, represent the most basic cooperation tool in the SEC’s toolbox.

New Framework for Evaluating Cooperation by Individuals
In addition to announcing the implementation of its new cooperation “tools,” the SEC issued a new policy statement on how it will assess cooperation by individuals.  Following its own lead from 2001, when the commission spelled out in its Seaboard Report the factors it considers in assessing the cooperation of entities, the SEC identified four considerations in assessing the cooperation of individuals:  (1) the level of assistance provided by the cooperating individual in the investigation; (2) the importance of the underlying matter in which the individual cooperated; (3) the societal interest in ensuring that the cooperating individual is held accountable for his or her misconduct; and (4) the appropriateness of cooperation credit based upon the profile of the cooperating individual.

The new policy statement details numerous specific factors that are to inform each of the four considerations.  For example, when assessing the assistance provided by an individual (consideration one), the commission and its staff will assess the “value” and “nature” of an individual’s cooperation.  Among other things, the commission will consider whether the individual voluntarily cooperated or was otherwise compelled to cooperate, and whether the individual was the first to approach the SEC.  When assessing the importance of the matter (consideration two), the commission will assess the “character” of the investigation and the “dangers to investors or others presented by the underlying violations.”  When assessing society’s interests (consideration three), the commission will determine the “severity” of the individual’s misconduct, the “culpability” of the individual, the “degree to which the individual tolerated illegal activity,” the “efforts undertaken by the individual to remediate the harm,” and the “sanctions imposed on the individual” by other agencies.  Finally, when assessing the appropriateness of cooperation credit (consideration four), the commission will review the individual’s history, “demonstrated…acceptance of responsibility,” and “opportunity to commit future violations.”

The SEC’s New Specialized Unit Chiefs
Finally, many months after Khuzami announced the creation of five new specialized enforcement units, the SEC has announced their leadership:

• Bruce Karpati, assistant regional director for the New York Regional Office, and founder and head of the former Hedge Fund Working Group; and Robert Kaplan, assistant director of enforcement in Washington D.C., will be co-chiefs of the Asset Management unit.  This unit will focus on hedge funds, investment advisors, and investment companies.
• Daniel Hawke, director of the Philadelphia Regional Office, will head the Market Abuse unit.  Sanjay Wadhwa, assistant regional director for the New York Regional Office, will serve as deputy chief.  This unit will focus on large-scale market abuses, complex manipulation schemes, and insider trading.
• Kenneth Lench, assistant director of enforcement in Washington D.C., will head the Structured and New Products unit. Reid Muoio, assistant director of enforcement in Washington D.C., will serve as deputy chief.  This unit will focus on complex derivatives and financial products.
• Cheryl Scarboro, associate director for the Division of Enforcement, will head the Foreign Corrupt Practices unit.
• Elaine Greenberg, associate regional director of the Philadelphia Regional Office, will head the Municipal Securities and Public Pensions unit.  Mark Zehner, regional municipal securities counsel in the Philadelphia Regional Office, will serve as deputy chief.
  

The SEC also created the Office of Market Intelligence to analyze and address tips.  Thomas Sporkin, deputy chief in the Office of Internet Enforcement, will lead this new office.

Enforcement Investigations Are as Complex as Ever
When Khuzami took office 11 months ago, he almost immediately announced various changes to the Enforcement Division.  Khuzami promised a flatter, more efficient division, with more streamlined processes, tighter controls, timely actions, and new enforcement tools.  He now has delivered at least the structure and processes to make good on these promises.  Although the SEC historically has claimed that cooperation by individuals is an important factor in its consideration of enforcement matters, it now for the first time has articulated policies, and put tools in place that provide guidance on when, how, and why an individual can cooperate in an investigation.  That guidance, along with Khuzami’s other changes, will make navigating an SEC investigation as complex as it has ever been.

Randall Fons (pictured) is a Denver-based partner in the Securities Litigation Enforcement and White Collar Practice at Morrison & Foerster LLP.  He spent 18 years in the enforcement division of the Securities & Exchange Commission, including stints as Regional Director of both the Commission’s Central and Southeast Regions.  Brian Neil Hoffman is a Denver-based senior associate in Morrison & Foerster’s Securities Litigation Enforcement Practice. He has substantial commercial litigation experience.

Let’s address the turnaround process as if all constituents are in favor of proceeding through to the end, when a restructured entity emerges.

There are many causes that contribute to business failure.  According to a study conducted by the Association of Insolvency and Restructuring Advisors only 9 percent of failures are due to influences beyond management’s control and to sheer bad luck.  The remaining 91 percent of failures are related to influences that management could control, and 52 percent are internally generated problems that management didn’t control.

Businesses fail because of mismanagement.  Sometimes it is denial, sometimes negligence, but it always results in loss.  Mismanagement is most often seen in more than one of multiple areas:

• Autocratic management, overextension
• Ineffective, non-existent communications
• High turnover neglect of human resources
• Inefficient compensation and incentive programs
• Company goals not achieved or understood
• Deteriorating business, no new customers
• Inadequate analysis of markets strategies
• Lack of timely, accurate financial information
• History of failed expansion plans
• Uncontrolled or mismanaged growth

Will Rogers once said, “If you find yourself in a hole, stop digging.”  Good advice for directors and managers with the responsibility to lead a company.

Turnaround specialists are often an excellent choice when these circumstances are present.  They bring a new set of eyes, trained in managing and advising in troubled situations.  These experts are either practitioners or consultants.  Turnaround practitioners take management and decision-making control as the chief executive officer or chief restructuring officer.  Turnaround consultants on the other hand advise management, perhaps the same management that failed before. The Turnaround Management Association (TMA) was formed in 1988 and has grown to 8,600 members around the world who represent multiple constituencies working in the industry.  TMA sponsors a Certified Turnaround Professional (CTP) program with strict reference checking requirements and testing of a body of knowledge to become certified.  Approximately 500 CTP professionals are registered today.

The key is to build enterprises that future buyers want to invest in.  Investors/buyers look for:

• Businesses that create value.  Consistency period to period.
• High probability of future cash flows.  History of performance and improvement, or the promise of cash.
• Market-oriented management team.  Focus on producing revenue.
• Ability to sell and compete; develop, produce, and distribute products; thrive and grow.  Track record or demonstrated changes in the right direction.
• Fair entry valuation.  Realistic return potential.
• Exit options.  Realize high ROI at the time of their resale.

There is a process of recovery and investment.  It is based upon the fundamental premise that there is a lack of management when companies are in trouble.  You must conduct fact-finding to assess the situation, then prepare a plan to fix the problems.  You must implement the planned courses of action by funding the process and building a team to carry it out.  Then monitor the progress and make changes where necessary.

Specifically, the changes will require disclosure concerning:

• The relationship of a company’s compensation policies and practices to risk management, when those compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company;
• The grant date fair value of equity awards in the Summary Compensation Table, replacing the prior approach of requiring disclosure of the amounts of compensation expense recognized for financial reporting purposes;
• The potential conflicts of interest that compensation consultants may have when performing services for the company, focusing on disclosure of fees paid (subject to a $120,000 threshold) for executive compensation services and for additional services;
• The background and qualifications of directors and nominees for director, describing the experience and skills that led the company to choose the director or nominee for the board;
• Other public company directorships held by each director or nominee over the past five years;
• Legal proceedings involving a company’s executive officers, directors, and nominees for director, including disclosure covering the past ten years and covering a significantly expanded list of relevant proceedings;
• The board of directors’ consideration of diversity in the process by which directors are considered for nomination to the board;
• The leadership structure of the board, including whether the company has combined or separated the roles of chairman and principal executive officer, and why the company believes that its leadership structure is appropriate for the company, as well as a discussion, in some circumstances, of whether and why, a company has a lead independent director;
• The extent of the board’s role in the oversight of risk; and
• Voting results, which are to be provided on a significantly accelerated basis under cover of Form 8-K.
  ]]> http://www.directorship.com/mofo-sec-ex-comp/feed/ 0 http://www.directorship.com/five-corporate-tax-issues-every-board-member-should-understand/ http://www.directorship.com/five-corporate-tax-issues-every-board-member-should-understand/#comments Wed, 21 Oct 2009 16:16:52 +0000 Kate Barton http://www.directorship.com/?p=11587 Board members may think of tax issues as the purview of lawyers and accountants: important, but probably best left to specialists. Yet boards need to stay current on tax matters for two main reasons: value and risk.

  Appropriately planned taxes can enhance a company’s overall value by improving corporate earnings, strengthening the PE ratio of company shares, and influencing the way analysts perceive and cover the enterprise. Tax issues are also closely tied to risk. When companies engage in tax planning, they are interpreting laws, an activity made risky by the possibility of disagreement between the company and tax authorities. If not property controlled, tax issues can lead to a finding of material weakness by auditors. Tax planning is therefore a crucial part of risk management.

  To understand the impact that tax matters may have on value and risk, boards should be familiar with five main areas: tax cash management, international taxation, tax-efficient supply chain management, transfer pricing and inbound investment.

  Tax cash management
  Prudent tax planning can unlock one-time or annuity cash flows trapped inside a company. Although tax is one of the largest expenses on the income statement, companies often fail to consider tax issues when trying to improve their overall cash management. This year, Ernst & Young surveyed more than 500 executives from major companies. Only one in four respondents said that their firms considered taxes when reviewing cash management practices.

  One of the first things a company should consider is whether it is making the maximum appropriate use of available tax credits. For example, in an emerging area such as climate change, many firms have not yet looked into available offsets for their existing or planned investments in clean technology. Most companies know about the federal research and development (R&D) credit, but they overlook eligible expenses such as investment in plant and equipment designed minimize the environmental impact of R&D. Numerous government programs supply tax credits, deductions and abatements to companies that conduct environment “scrubs” of their business.

  Many states and cities offer incentives comparable to those at the federal level, such as credits and grants for companies that provide employee training and development programs. Opportunities in this area are growing now that a number of states have launched their own economic stimulus programs.

  Companies may also be able to free up cash by reviewing their transcripts and accounts at the federal, state and local levels. Many companies fail to recognize that interest and penalty miscalculations pose a serious problem for corporate taxpayers. The rules for calculating interest are highly complex, and governments may lack the resources needed to make such calculations accurately every time. If a review does reveal overpayments, these can be kept as cash or applied to another tax liability.

  Reviews of transcripts and accounts typically focus on income tax, but can also include sales and use tax, property tax and state employment tax. Concerns about overpayment have led many companies to look especially hard at indirect taxes. For example, opportunities exist to review property taxes and examine whether the plant and equipment on a piece of land can be appropriately depreciated to lower a company’s tax burden.

  With many states facing budget problems, state and local governments are concerned about revenue shortfalls. Legislatures have raised taxes and closed loopholes, increasing the complexity of filing returns and preventing some companies from meeting their compliance requirements. In response, some firms are considering whether to outsource the compliance function related to sales and use tax, a step that can lower costs substantially.

  
  In addition to federal, state and local taxes, companies are seeking to manage cash flows linked to foreign taxes. Among the questions board members should be asking in this area:

  • How can companies ensure that they are effectively reducing their foreign tax without triggering US tax?
  • How will proposed international legislative changes affect the company, particularly its cash flow, effective tax rate and business objectives?
  • Has the company taken full advantage of opportunities to access foreign tax credits, cash held offshore, or both from its international operations?

  International taxation
  The international arena presents companies with a distinct series of tax challenges. First, there has been a marked increase in information-sharing by global authorities. Agreements to exchange tax information between countries have existed for decades, but recently the cooperation has intensified: more countries are using the agreements, and doing so more frequently. Governments worldwide want to lower deficits and stimulate their economies, and they are looking for uncollected revenue from corporate taxpayers. Companies must prepare for increased tax controversy, assembling a defense before it is needed. All planning should be amply and contemporaneously documented, something not always done in the past but now considered a best practice.

  Second, the Obama Administration is weighing plans to reform deferral of overseas income earned by US multinational corporations. It’s still unclear what shape such reform might take, but significant change is possible, with the likely result that US multinationals will pay higher taxes on income earned abroad. Certain planning approaches can secure companies’ tax position regardless of how the law may change, and more firms are investigating these approaches as a possible hedge against future uncertainty.

  
  

  Supply chain management
  Tough times have prompted multinational corporations to scrutinize nearly every aspect of their supply chain in an effort to lower costs. Companies are seeking ways to rationalize their supplier base, rethinking the locations where they manufacture goods, and considering whether to outsource (or insource) manufacturing and distribution.

  Although greater operational efficiency can reduce costs, high taxes will erode the savings. For that reason, firms are looking to make their supply chains more tax-efficient. They are asking where their most valuable intellectual property is located, a consideration relevant even for companies that are not manufacturers. Services companies, for example, can enter into global contracts in a variety of locations.

  Taking a comprehensive approach to tax-efficient supply chain management raises its own operational challenges. Companies must decide whether qualified staff will be willing to move to the chosen location, whether exit taxes will be due when facilities are relocated, and what information technology costs will be incurred in integrating disparate operations.

  Transfer pricing
  Used correctly, knowledge of transfer pricing can serve as a risk management tool, a means of reducing taxes and a hedge against uncertainty. Annual surveys conducted by Ernst & Young show that transfer pricing consistently tops the list of international tax issues facing multinational companies. Transfer pricing has grown more complex as regulations and audit practices have evolved, and closer collaboration among worldwide tax authorities virtually guarantees that it will continue to be a concern. Two of the main issues uncovered in our surveys relate to permanent establishments and tax controversies.

  Permanent establishments are taxable presences formed (often inadvertently) when personnel or property are located in a new country where a company has not set up a formal place of business. They can stem from something as simple as having salespeople repeatedly attend trade shows or exhibit products overseas, even for brief periods. Income tax treaties may afford some protection from this risk, but often a taxable presence is created anyway. If so, the best approach usually is to admit that a taxable presence exists and establish an agreement to treat it favorably. Companies that wish to avoid creating a permanent establishment must understand thoroughly any income tax treaties relevant to its overseas business.

  Tax controversies related to transfer pricing are common, and can be expected to become more so. Usually they involve two governments fighting about which one gets to tax the same dollar of corporate income. These disputes speak directly to the issue of where value is created in a company’s global supply chain. Government A might believe, for example, that a foreign-owned factory located inside its borders contributes more value than the company’s other supply chain components. Government A therefore maintains that it should get the largest share of tax remuneration. But another country may play a role in that supply chain as well, leading Government B to argue that it, too, deserves a cut. Companies caught in the middle of such disputes may be subject to double or even triple taxation, an undesirable outcome.

  Techniques exist to help companies anticipate and avert tax controversies. Firms can establish an Advance Pricing Arrangement (APA), an agreement between a tax authority and a multinational enterprise that determines the appropriate transfer pricing method used for intercompany transactions. Because APAs deliver a high level of confidence in the correctness of a company’s transfer pricing methods, they can save time and reduce risk by shielding taxpayers from litigation.

  APAs can be unilateral, bilateral or multilateral. Under a unilateral APA, a company may negotiate an appropriate transfer pricing method with a single tax authority for use in a single country. Bilateral or multilateral APAs are agreements between a corporate taxpayer and one or more foreign tax administrations allowing multiple governments to pre-agree that a specified amount of profit will be allocated to one jurisdiction rather than another. APAs are complex to set up in some jurisdictions, but they can be extremely helpful under the right circumstances.

  Inbound investment
  Today’s international business environment provides companies with unprecedented opportunities to invest in the Americas. The global trend currently involves foreign multinationals buying US corporations. This has forced US firms to become familiar with matters they may not have dealt with before, such as tax rules governing payments to a foreign parent.

  Companies contemplating their first investment in the Americas, or seeking to supplement their acquisitions in the region, may find approaches that were cost-prohibitive in the past are now attractive options. Recent shifts in profitability and asset valuation, for example, may have lowered the cost of tax-effective supply chain management. By working together more closely, different parts of the organization may be able to reduce the cost of cross-border cash movements and better manage overall financial risk. Inbound acquisitions may also create tax-inefficient structures that could, in turn, present opportunities for the company to rationalize its international tax structure.

  Staying on top of legislative changes
  All of these issues must be viewed in the context of the rapid and broad-scale changes taking place in Washington. Board members have a responsibility to ensure that management remains up to date on legislative initiatives, particularly those involving healthcare reform and energy. The details are complex and change almost daily, but the stakes are high, so companies must spend the time needed to understand these matters adequately. In particular, boards should ensure that the corporate tax department stays current on legislative developments. One step companies can take in this direction is to require tax directors to give the audit committee quarterly briefings on any new developments. In fact, this is now considered a best practice.

  Board members who stay abreast of the five tax issues outlined above will be doing their companies a service. In the process, they may also find themselves acquiring a more holistic view of the enterprise. Taxation may be the purview of accountants and attorneys, but it touches so many parts of the business that boards must pay attention to it as well.

  Kate Barton is Americas vice chair of tax services at Ernst & Young, LLP.

  The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.

  ]]> http://www.directorship.com/five-corporate-tax-issues-every-board-member-should-understand/feed/ 0 http://www.directorship.com/learning-from-lehman/ http://www.directorship.com/learning-from-lehman/#comments Wed, 21 Oct 2009 16:16:25 +0000 Ron Ashkenas http://www.directorship.com/?p=11586 Over the last two years, we’ve experienced the unhappy consequences of the unmanaged complexity of the world economy—culminating in the dramatic and traumatic collapse of Lehman Brothers, the forced sale of Merrill Lynch, multiple bailouts, Treasury liquidity programs, and government stimulus packages. We’ve seen what happens when you combine financial products that even Warren Buffet couldn’t understand with a fragmented regulatory system in a global, 24/7 environment. We’ve also seen the results of too much complexity on individual companies, such as General Motors, which collapsed under the weight of too many brands, too many models, and too many programs; or even Starbucks, which got into trouble by introducing too many products into too many stores, and losing its core focus on the coffee experience.

  At the same time, however, there’s another story beneath the headlines: For most managers, dealing with complexity has become an ongoing, day-to-day challenge: keeping up with constant e-mails, attending innumerable meetings, connecting with the right people across the matrix to make decisions, coordinating processes across cultures and time zones. It’s exhausting, and many managers are frustrated, overwhelmed, and worried that they might unintentionally be creating the next Lehman.

  But it doesn’t have to be this way. While some of the complexity that managers experience comes from globalization and new technologies, a large portion is of their own making. If we want to prevent the next Lehman, and if we want companies to be more successful and managers to be more energized and innovative, then directors have a responsibility to insist that simplification be part of the executive agenda.

  Four Sources of Complexity
  Nobody gets up in the morning with the intention of making the organization more complex. Rather, like weeds in the garden, complexity continually insinuates itself into the fabric of a company in four principle ways: through changing structures and reporting relationships; through product design and proliferation; through the evolution of work processes; and through unconscious managerial behaviors. Directors need to challenge executives to address each of these sources of complexity, both individually and in combination. Here are some brief descriptions of these complexity-creators and a few ways that directors might work with their executive leaders to counter them:

  Structural complexity: Organizational structures are like biological organisms in which cells continuously grow, split, and reform. Reorganizations don’t happen alone, but rather are initiated by executives to align people by function, product, geography, business unit, customer, or some other factor in an attempt to be as competitive and efficient as possible. At the same time, managers add or combine units due to acquisitions or internal growth; and they add or subtract layers based on people’s capabilities and their beliefs about how many people should report to any one manager. The result of all this seismic structural activity is that many organizations end up being fragmented, sprawling, and confusing, without a clear logic to how things were put together—leading to unnecessary costs, poor communications, and the danger that high-risk or poorly performing units get lost in the maze. For example, AIG’s structural complexity was one factor that allowed a small, under-the-radar unit to operate in a way that almost destroyed the company.

  To counter this type of complexity, directors should ask executives questions such as:

  • How does the structure of the company directly support and advance the business strategy?
  • Can most employees explain the logic of how the company is organized?
  • How many levels of management are there between the CEO and first line supervisors?

  Product complexity: Products and services are the lifeblood of any organization, and managers are constantly looking for new ways to satisfy and delight customers. Unfortunately, it is much easier to add new products than to subtract—so most companies end up with vast portfolios of products and services that are costly to maintain, control, update, support, and sell. In addition, many product developers focus on the technical elegance of their products without worrying about whether their customers, or their own internal colleagues, truly understand how they work and what will happen to them over time. This kind of complexity was clearly at play in the financial crisis, as investment banking wizards created collateralized debt obligations (CDOs) and other arcane securitized products that neither customers nor their own risk managers fully understood—until it was too late.

  To counter product complexity, directors should ask for thorough reviews of new products and services to make sure executives fully understand how they work and the risks involved. In addition, directors should make sure that managers are reviewing the entire product portfolio with an eye towards sunsetting and retiring products as appropriate.

  Process complexity: Most work in organizations is done through processes. Sometimes these are highly structured and disciplined, such as with manufacturing activities. At other times, the processes are loose and ad hoc. However, no matter how much rigor and six sigma-type efforts managers put into process management, the processes continually evolve and change as new people get involved, new issues emerge, and new ideas are introduced. Changing organizational arrangements and new product requirements further complicate processes, often making it difficult for people to understand how things really get done. The result is that companies often find themselves with convoluted decision-making, multiple committees, un-ending budgeting and planning cycles, and general lack of control. For example, many of the problematic financial institutions in the past year found themselves with fragmented and inadequate risk management and forecasting processes that left them unprepared for the downturn.

  To counter process complexity, directors should first agree on the key processes that are most critically in need of being controlled and disciplined (such as risk management, new product commercialization, or succession planning). They then need to periodically ask executives to walk through the “map” of these processes to make sure that the right controls are in place, that roles are clear, and that cycle times are appropriate.

  Managerial complexity: In addition to structures, products, and processes, managers also cause complexity through their own ways of directing and leading organizations. Particularly in dynamic environments, when processes and structures don’t provide clear guidance, managers create the neural networks that give people direction about what to do and how to do it. When managers are clear with their instructions, they can actually reduce complexity. But when managers unintentionally give nebulous assignments, open-ended deadlines, conflicting instructions, mixed messages, and foster fuzzy accountability, they create enormous amounts of additional complexity and confusion. For example, leading up to and during the financial crisis, executives at many of the financial firms gave their people extremely mixed messages about continuing or stopping product transactions, were unclear about what data was needed for decisions, and rewarded people for poor performance.

  It is impossible to counter managerially-generated complexity completely, since much of it is unconscious and unintentional. But directors can hold a mirror up to their executive leaders to help them make their own assessments about the clarity of their directions, the crispness of their decision processes, and the discipline applied to getting things done. In addition, directors can make sure that executive compensation plans are simple, straightforward, and geared to rewarding the right strategic actions over time versus only short-term performance. Finally, directors can insist that succession plans take into account the ability of managers to simplify their organizations.

  Simplification as a Business Imperative
  Almost every company quite naturally focuses most of its attention on growth, particularly in today’s highly competitive environment, adding more products, services, geographic locations, and employees. But what companies don’t do very well—unless they are forced by an economic or competitive crisis—is prune these growth shoots. Managers don’t like to say “no” or make choices, especially when they are trying to respond to customer needs, beat their competitors, and satisfy shareholder expectations. So, instead, managers keep adding more plants and fertilizer to the garden and end up with a tangled jungle. But to maintain healthy organizations, managers and executives need to constantly prune while simultaneously fostering growth, without waiting for a crisis to force the issue.

  The crisis of the past year forced almost every company to cut back, perhaps faster and more deeply than anyone would have preferred. But as the crisis passes, and companies move back into growth mode, it will be easy to slip back into old patterns as the lessons of Lehman and the pain of the financial downturn fade away. One way to prevent this from happening is for directors to insist that simplification become an ongoing business imperative for their companies, such that executives keep a focus on simplification not only in bad times, but in good times as well.

  Ron Ashkenas is a managing partner of Robert H. Schaffer & Associates, a Stamford, Conn., consulting firm and the author of the forthcoming book “Simply Effective: How to Cut Through Complexity in Your Organization and Get Things Done” (Harvard Business Press, December 2009). He can be reached at ron@rhsa.com.

  ]]> http://www.directorship.com/learning-from-lehman/feed/ 0 http://www.directorship.com/bayer-management/ http://www.directorship.com/bayer-management/#comments Wed, 16 Sep 2009 09:50:18 +0000 News Editor http://www.directorship.com/?p=10570 Germany’s Bayer has named a new chief executive and other key managers in a sweeping management shuffle. Bayer, which makes chemicals and pharmaceuticals, said Werner Wenning, 62, will step down as chief executive in September 2010 and be succeeded Marijn Dekkers, a 51-year-old Dutchman who is currently chief executive of U.S. laboratory-equipment manufacturer Thermo Fisher Scientific, said the Wall Street Journal. Wenning’s contract expires next year, and some analysts said they had been expecting him to retire or step down. Meanwhile, Arthur Higgins, 52, head of Bayer’s health-care unit, will leave the company in the first half of 2010, as will chief financial officer Klaus Kühn, 58. In a statement, Bayer said Higgins was leaving for “personal reasons,” and that Kühn would take early retirement. Cornelia Thomas, a pharmaceutical analyst at WestLB said the pair may be leaving because they did not get the chief executive job. Bayer said Dekkers, before taking on the CEO job, will temporarily serve as Higgins’s replacement as head of Bayer healthcare. Werner Baumann, currently an executive in the health-care unit, will take over as finance chief when Kühn leaves. Meanwhile, Thermo Fisher said Marc Casper, currently chief operating officer, will succeed Dekkers as chief executive. Bayer, one of Europe’s last chemical-and-pharmaceutical conglomerates, has long been thought to be considering a breakup, according to the report. Gbola Amusa, a pharmaceutical analyst at UBS said the arrival of a new chief executive could mean that the company is ready for such a restructuring. Dekkers carried out a broad restructuring at Thermo Fisher Scientific, including a series of divestments and acquisitions that raised the company’s revenue nearly fivefold over a seven-year period, to $10.5 billion. Two years ago, he was elected to the board of biotech firm Biogen Idec. He is a dual citizen of the Netherlands and the U.S. ]]> http://www.directorship.com/bayer-management/feed/ 1 http://www.directorship.com/pentagon-cutbacks-force-new-strategy-at-rockwell-collins/new-dialogue/ http://www.directorship.com/pentagon-cutbacks-force-new-strategy-at-rockwell-collins/new-dialogue/#comments Thu, 03 Sep 2009 18:52:28 +0000 News Editor http://www.directorship.com/?page_id=9559 April 6, 2010
  11:00 a.m. – 3:00 p.m.
  The Lotos Club (5 East 66th Street)
  New York, NY
  

  Presenting Partner: Egon Zehnder International Contributing Partners: KPMG ACI and Hodak Value Advisors
  

  The focus for this year’s annual boardroom summit will be to define and discuss the following issues in the context of today’s ever-changing regulations:

  • The New Director Profile
  • Audit Committee Challenges & Priorities
  • Getting in Front of CEO Succession
  • Activists and the Board
  • Executive Compensation

  Participation at NACD Directorship Boardroom Summits is limited to public company board directors and corporate officers.
  

  ]]> http://www.directorship.com/pentagon-cutbacks-force-new-strategy-at-rockwell-collins/new-dialogue/feed/ 0