CFO - 2012 July August

7/26/2019 CFO - 2012 July August

1/64

FOJULY/AUGUST 2012 | WWW.CFO.COM

FINANC

TRAINING TH

DELL WAY

THE 201WORKING

CAPITA

SCORECARD

RECIP

FOR PROFIT

AT POPEYE

No one ever thoughtimplementing Dodd-Frankwould be easy

At Exelis, DefenseNever Rests

Lessons FromJPMorgansBotched Hedge

UnfinishedBusiness


2/64

In the United States, insurance coverages are underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company. Certain coverages are notavailable in all states. Some coverages may be written on a non-admitted basis through licensed surplus lines brokers. Prior results do not guarantee a similar outcome. Risk engineering services are

Since 1912, our mission has been

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Cover photo-illustration by Stephen Webster. This page, clockwise from top

left: Matthew Furman, David Plunkert, Stan Kaady

38UnfinishedBusinessTwo years after the passage

of the Dodd-Frank Act, the

laws implementation is

far behind schedule, and its

success is still in doubt.

By Randy Myers

46Too Much OfA Good ThingWorking capital is piling up at

Americas largest companies.

By Russ Banham

51The 2012 Working

Capital Scorecard

The best and worst performers

in 20 industries.

FeaturesJuly/August 2012

Volume 28, No. 6

CONTENTS

DODD-

FRANK

ACT

Our business has four keyareas that align well withwhere our government cus-tomers are headed, basedon their public comments.

Peter Milligan, CFO of Exelis

34

34On the Record

Defensive ManeuversDefense contractor Exelis

is ready to adjust to an era of

reduced Pentagon spending,

says CFO Peter Milligan.

Interview by Edward Teach

60Take-Away

Recipe for ProfitsPopeyes Louisiana Kitchen

CFO Mel Hopetalks about

collaborating with franchisees

to grow the business.

Interview by Marielle Segarra

People to Watch

Mel Hope

1cfo.com | July/August 2012 | CFO


4/64

2 CFO| July/August 2012 | cfo.com From top to bottom: Miguel Davilla, courtesy Make Meaning, Bloomberg/Getty Images, Gordon Studer

CONTENTS

15 | ACCOUNTING & TAX

Renewed ConcernsAbout RenewablesKey tax credits for investments in

renewable-energy projects could soon

begin to expire. By Kathleen Hoffelder

The Second-Greatest RiskCFOs of multinational companies rank

transfer-pricing risk just behind globalcompliance. By Kathleen Hoffelder

18 | CAPITAL MARKETS

Finding Life after DebtAn acquisition saves a software

company from crushing leverage.

By Vincent Ryan

Private EquitysPicky AppetitePE firms are craving service and health-

care targets, according to a new survey.

By Vincent Ryan

21 | GROWTH COMPANIES

Hands-On GrowthThe finance chief of Make Meaning says

the start-up has what it takes to bring

customers through the door. Can it keep

them coming back?

By Marielle Segarra

23 | HUMAN CAPITAL

Training at Dell: Here,There,And EverywhereThe computer giants financial-education

programs rely on a mix of long-distance

and local learning. By David McCann

26 | RISK MANAGEMENT

The Hedge That WasntJPMorgan Chases $2 billion tradingmiscue is a costly lesson in how not to

protect against potential losses.

By Vincent Ryan

29 | STRATEGY

Hawaiians Big Apple VentureHow Hawaiian Airliness CFO prepared

for the launch of an ambitious new

route. By David Rosenbaum

Euro Slide Sparks

M&A InterestThe weakening currency makesEuropean assets more attractive.By Andrew Sawers

32 |TECHNOLOGY

Digging Out from Big DataUnstructured data is piling up in corpo-

rate computers, making compliance

and other tasks far more difficult.

By David Rosenbaum

Up Front4From the Editor

7Letters

11Topline The Supreme Court upholds the Affordable Care ActFASB andthe IASB approve two accounting methods for lease expenses mostCFOs expect employees to delay retirementCEO turnover rises com-panies have cash but wont spend it, says a recent survey and more.

55BUSINESS OUTLOOK

Duke University/CFOSurvey Results

Muddling ThroughCFOs continue to hire, but are less

optimistic. By Kate OSullivan

58 FIELD NOTES

Perspectives from CFO Research

Putting Social Networks to WorkCompanies are finding real economic value

in cooperation and social media.

By Josh Hyatt

By the Numbers

18

21

23

32

July/August 2012

Volume 28, No. 6

2.5%The average bywhich U.S. CFOssay they willexpand theirfull-time domes-tic workforceover the next12 months.


5/64

2012 AT&T Intellectual Property. All rights reserved. AT&T, the AT&T logo and all other AT&T marks contained herein are trademarks of AT&T Intellectual Property and/or AT&T affiliated companies.

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Why should it take forever to fix it?Business responds faster because

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In here, intelligent data automates all the right

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data that reports an accident is already at work fixing it.

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possibilities teaching data how to do more.

To learn more, visit att.com/business


6/64

CFO, Vol. 28, No. 6 (ISSN 8756-7113), is published 10 times a year, with combined January/February and July/August issues, and distributed to qualified chief

financial officers by CFO Publishing LLC, 51 Sleeper St., Boston, MA 02210( executive and editorial offices). Copyright 2012, CFO Publishing LLC. All rights re-

served. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,

mechanical, photocopying, recording, or otherwise, without the prior permission of CFO Publishing LLC. Requests for reprints and permissions should be

directed to FosteReprints, (866) 879-9144; E-mail: [email protected]; website: www.fostereprints.com. Subscriptions: U.S. and possessions: 1 year

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a subscription or change your address, write to CFO, P.O. Box 1233, Skokie, IL 60076-8233, or call (800) 877-5416; or visit our website at www.cfo.com/

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are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms.

Kory Addis

LEADERSHIPGeneral Mills CFO Don Mulligan

will explain how to build top-

notch finance teams at CFOs

CFO Rising: The Future of Fi-

nance conference in Las Vegas,

September 30October 3, 2012.

See www.cfo.com/conferences.

ACCOUNTINGIf you want expert advice on

presenting financials in an

easy-to-comprehend way, check

out Painting withNumbers,by

former high-tech CFO Randall

Bolten (John Wiley, April, $39.95).

Among other things, youll learn

why pie charts are bad, why

a natural P&L is good, and

why you should never, ever be

sleazy about the vertical axis.

See www.johnwiley.com.

GLOBAL BUSINESSBritish economist Roger Boo-

tle won the 250,000 Wolfson

Economics Prize in July for his

analysis of how countries could

leave the euro with the least

amount of fuss. See How to

Break Up the Euro on cfo.com.

FROM THE

EDITOR

EDITORS PICKS

There have been numerous accom-

plishments (however controversial),

including the establishment of the

Financial Stability Oversight Council,

the Consumer Financial Protection

Bureau, say on pay shareholder vot-

ing, and hedge-fund registration and

reporting. But some of the thorniest

provisions of the law remain on the

drawing board, such as the Volcker

Rule, which would limit banks propri-

etary trading. One seasoned observertold Myers that implementing Dodd-

Frank wouldnt be finished until at

least well into 2013.

Even partial progress on Dodd-

Frank is too much for those who con-

tinue to insist that the law is unneces-

sary or worse and should be repealed,

either in whole or in part. One promi-

nent critic of the Volcker Rule has been

Jamie Dimon, the superstar CEO of

JPMorgan Chase. It was more than a lit-

tle embarrassing for Dimon, therefore,when JPMorgan revealed in May that

its chief investment office had lost at

least $2 billion on an ill-advised trade

(The Hedge That Wasnt, page 26).

There have been many criticisms of

Dodd-Frankit goes too far, it doesnt

go far enough, its too complex, its a

brake on the economy, and so on. But

as Myers reminds us, its hard to fault

the motivation behind this sweeping

overhaul of the nations financial sys-

tem. After all, it wasnt long ago that

the government was forced to pump

trillions of dollars into the system to

keep it from failing, while millions of

people lost their jobs, their savings,and their homes.

Elsewhere in this issue we offer the

latest installment of one of our most

popular features, the annual working

capital scorecard, done in cooperation

with REL Consulting (Too Much of a

Good Thing, page 46). See how your

company stacks up against some of the

best (and worst) performers in work-

ing capital management in Corporate

America. CFO

Edward Teach

Executive Editor

4 CFO| July/August 2012 | cfo.com

On July 21, 2010, President Obama signed into law

the Dodd-Frank Wall Street Reform and Consumer

Protection Act. Two years later, regulators are still hard at

work putting the mammoth law into effect. Although they

have written thousands of pages of rules, they are far from

finished, as contributing editor Randy Myers reports in our

cover story, Unfinished Business (page 38).

Dodd-Frank at Two


7/64

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8/64


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working. Jobs, and the skills needed

to perform them, are also changing,

so some jobs are becoming obsolete;

others are having some or all of the

tasks automated; and many jobs have

expanded the use of technology, thus

requiring workers to perform them in

new, and different, ways.

The anticipated drama of the baby

boomers exit hasnt really material-

ized, thanks in equal measure to the

poor economy, delayed retirement

plans, and unprecedented opportuni-

ties for older workers. While the age

wave may be hitting some industries

harder than others, the earlier con-

cerns simply havent come to pass. In

fact, many older workers have fared

better in the down economy than their

younger counterparts.

Dr. Katherine L. Y. Green

Green Consulting Group LLC

Chevy Chase, Maryland

wThe Bright Side of the Cloud

Cloud computing is a way that smallcompanies can allocate much-needed

resources to other, more beneficial top

drivers, such as sales and marketing

(Made for Each Other, June). When

smaller companies begin to realize that

software as a service is the best way to

manage data, they will see the inherent

benefit that the cloud presents.

Darrin Marion

Via E-mail

develop an integration process for the

postmerger period, a failure due to:

(1) not understanding how to achieve

revenue and cost synergies; (2) not re-

taining key employees and customers;

and (3) not understanding the corpo-rate culture of the acquired company.

Can a company right a poor post-

integration process? The answer is yes,

but it will cost a heck of a lot of share-

holder value. Although there remain

questions about the value of M&A,

companies today need to continue

making acquisitions in order to stay

competitive.

Richard Summo

Via E-mail

wAnother BurdenThe other burden, besides taxes, that is

even more significant to those affect-

ed is audits (Small Businesses Spend

wHow to Succeed at M&A

In my experience, the main reason formerger failures is poor management

in the postmerger integration phase

(Do Mergers Add Value After All?

Strategy, June). Most companies fail to

Stephen Webster

LETTERS


Go to The Real Reason Companies Arent Investing on cfo.com to see howreaders responded to this post (and to add your own thoughts as well).

Its the Equity Risk Premium,StupidThere are plenty of justifications companies can give

for why they arent allocating capital to new projects

or buying assets, but most of them tend to be prettyvague. Uncertainty, whether due to the state of the

global economy, the European sovereign debt crisis,

or federal regulatory creep, is my least favorite excuse

that CFOs give.

The truth is, theres a far better apologia that com-

panies could present for not investing, and its rooted

in a classic principle of corporate finance. Im speak-

ing of the equity risk premium, a key ingredient in the calculations finance

departments make to decide whether to invest in a project. As Professor

Aswath Damodaran of New York University defines it, the ERP is the ex-

tra return that investors collectively demand for investing their money in

stocks instead of holding it in a riskless or close-to-riskless investment.

A key point is that the value of the ERP is affected by the entire stockmarket, not just the individual companys shares. So the overall risk aver-

sion of equity investors affects the ERP.

And therein lies the problem. In the wake of the financial crisis, the

Facebook IPO debacle, and developments in high-frequency trading, the

perceived risk of holding an equity portfolio has increased. Investors want

a higher return to compensate for the risk. The equity markets, as embod-

ied in the ERP, are dampening business investment.

BEST OF

THE BLOGS

VincentRyan

No Dire Straits

For Boomers

In regard to the worry

over baby boomers leav-

ing the workforce, the

institutional-knowledge

challenge is being solved

in many ways, and is cre-

ating less turmoil than projected by many business analysts

(When the Boomers Go, June). Many people age 50 and

over are staying on because they need, or want, to continue


10/64

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MANAGING EDITORSusan Kron ([email protected])

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CFO Research

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Editorial Advisory Board

David W. Devonshire, EVPEVP/CFO Retired,

CFO, Motorola Inc.

Bruce Edwards, Chairman Emeritus,

Powerwave Technologies Inc.

David E. Farber, The RVH Group, Merrill Lynch

Frank R. Gatti, CFO & SVP, ETSJames C. Johnston, President, Johnston Co.

Stephen Payne, Americas Working Capital Leader,

Ernst & Young LLP

Albert A. Pimentel, CFO & COO, McAfee Inc.

Ellen B. Richstone, Former CFO, Rohr Inc.,

Sonus Networks, and Luminus Devices Inc.

Kenneth J. Sanginario, Principal, NorthStar

Management Partners

Debra Smithart-Oglesby, Former CFO,

First America Automotive

Editorial Offices

More Time on Taxes, Topline, June).

Sales-tax audits can be brutal, and

IRS audits can take months, a year, or

moreand large amounts of employee

and tax-attorney time.

Ronald J. Cappuccio, J.D., LL.M. (Tax)Via E-mail

COLI Is A-OKYour story Key-Person Insurance: A

Cash-Flow Caveat (May) provided

important information on this in-

creasingly popular tactic.

Corporate-owned life insurance

(COLI) has long provided numerous

benefits to shareholders and high-

producing, quality executives who

help to maximize shareholder value.COLI provides nonqualified plan spon-

sors with a cost-efficient asset that

offsets the liability of the participants

account balances on the plan sponsors

balance sheet. For example, plan spon-

sors can use COLI policies to mirror

the rate plan that participants earn in

their voluntary nonqualified deferred-

compensation plans. As a result, COLI

helps companies reduce future liabili-

ties, with an asset that should consis-

tently grow in value. And with non-qualified retirement plans increasingly

important for many executives earn-

ing more than $150,000 annually, COLI

facilitates effective asset-liability man-

agement.

Contrary to what is stated in the

articles last two paragraphs, there

was no 2004 regulation that led to the

COLI market being essentially dead

from 2004 to 2010. By contrast, COLI

has continued to grow in popularity

since that time. In 2004, the COLI BestPractices Provision was first proposed

and later became law as part of the

Pension Protection Act of 2006. The

measure and its high standards were

widely supported by the industrys

leading practitioners.

Mike Powers

Executive Director

The Todd Organization

Cleveland



11/64

IBM, the IBM logo, ibm.com, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might betrademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. International Business Machines Corporation 2011. All rights reserved.

How a car dealer is driving a safer business.

As the world becomes more interconnected, threats and risks are growing exponentially. Fortunately, ona smar ter planet, we have the tools to help protect critical data and business continuity. Gruppo Intergea isa midsize company with about 460 employees that sells cars in Northern Italy. They wanted to improve thesecurity of their IT infrastructure a critical part of their daily operations. With help from IBM and its BusinessPartners, Gruppo Intergea implemented a smart security solution that can proactively scan their data acrosstheir network to identify threats and block them before they can damage business operations. So Gruppo

Intergea can be protected not only from known security threats, but also from other vulnerabilities that maynot have been on their radar. As a result, their network can stay up, and their data stays safer. To see how IBMand its Business Partners can help your midsize business work smarter, visit ibm.com/engines/auto.Lets build a smarter planet.

Midsize businesses are the engines of a Smarter Planet.


12/64

PRUDENTIAL RETIREMENT

ITS TIME TO

RETHINK RISK.

2012. 1Based on fund sponsor rankings in Pensions & Investments, February 2011. 2Pensions & Investments2011 Annual Money Managers Directory. 3LIMRA Group Annuity Risk Transfer Survey, 1Q12. Guarantees arebased on the claims-paying ability of the insurance company and are subject to certain limitations, terms andconditions. Products issued by The Prudential Insurance Company of America (PICA), Newark, NJ 07102.Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and itsrelated entities, registered in many jurisdictions worldwide.0202597-00001-00

WE CAN HELP YOUR DB PLANMEET THAT CHALLENGE.

PENSION PLAN RISKS ARE UNPREDICTABLE.Market risks

remain top of mind in a rapidly changing economic

environment. But asset/liability mismatch, rising life

expectancy and changing regulations will likely increase

volatility in the long run.

NOW IS THE TIME YOU AND YOUR ADVISORS NEED A

TRUSTED PARTNER. At Prudential, were leading the waywith innovative risk transfer strategies, from a separate

account product that closes out pension liabilities, to

flexible new solutions for underfunded plans that enhance

participant security.

OVER 135 YEARS, WEVE KEPT OUR PROMISESthrough

sound money management and superior financial

strength. For strategies that meet the challenges of

managing pension risk, Prudential is the company more

and more plan sponsors and advisors rely on.

PRUDENTIAL FINANCIAL

Currently manages assets for 23 of thelargest 25 corporate plans1

$118 billion in DB assets2

7th largest DB money manager2

2nd largest manager of US

pension buy-outs3

5th largest active institutional manager

of US fixed income2

To arrange a free market

assessment of your

organizations

pension risk, contact

Glenn OBrien, Managing

Director, Prudential

Pension & Structured

Solutions, at 860-534-2440.Download

our white paper on new DB solutions

at www.prudential.com/pensionrisk

PRUDENTIAL FINANCIAL

KEEPING PROMISESNew solutions for retirement benefit obligations


13/64

The U.S. Supreme

Courts ruling that

upheld the constitu-

tionality of virtually

the entire Patient Protection

and Affordable Care Act will

have major repercussions

for businesses as they weigh

whether to change their em-

ployee benefit plans over thenext two years.

Many companies expect-

ed the court to strike down

the individual mandate, a

decision that could have un-

raveled the entire law. But

in a 5-4 decision issued on

June 28, the court ruled that

the mandate, which requires

most U.S. citizens to obtain

some health coverage if they

dont have it, is constitu-

tional because it falls under

Congresss taxing powers.

The court did strike down

part of the law, ruling that

states have the option to

keep their current Medicaid

funding even if they decline

to expand their Medicaidprograms.

Starting in January 2014,

firms with more than 50 em-

ployees that forgo providing

health insurance to full-time

employees will be required

to pay a no coverage pen-

alty. That per-employee

penalty, however, will be

less than what virtually all

employers currently payfor providing health insur-

ance. Employees that do not

receive insurance through

their companies may be able

to purchase it through fed-

erally subsidized insurance

exchanges in each state.While the courts deci-

sion creates some certainty

for companies, CFOs ini-

tial reaction to the law was

largely unfavorable. Some

worried that the law opens

the door for more federal

regulation, which they said

is preventing businesses

from investing in expansion.

They also said the complex-

ity of the law will make ithard to calculate the cost of

hiring additional employees

as they enter into the bud-

geting process for 2013.

Despite the ruling, the

Affordable Care Act is sure

to remain a contentious is-

sue both in Congress and

in the upcoming November

elections. VINCENT RYAN

ToplineSTATS

OF

THE

MONTH

Kevin Dietsch/Landov

HEALTH CARE

Annual rate of salesof new homes inMay, the highestmonthly rate sinceApril 2010.

369K

Rise of new autosales in June froma year earlier.

22%

Increase in ordersfor durable goodsin May, after twoconsecutive monthlydecreases.

1.1%

High Court UpholdsHealth-Care ReformThe Supreme Courts ruling leaves companies with decisions to make.

Protesters and supporters gath-

er in front of the U.S. Supreme

Court as they await a ruling on

the Affordable Care Act.

Sources: U.S. Census Bureau,

Autodata Corp.



14/64

Topline

BOOKSHELF

THE BEST IS

YET TO COME

Do you ever throw

down your newspaper or

iPad in disgust after read-

ing the latest news about

jobs or budget deficitsand fret about the inevi-

table decline of the United

States? Stop worrying,

advises Daniel Gross, the

economics editor of Yahoo

Finance. In his new book,

Better, Stronger, Faster:

The Myth of American

Decline...and the Rise of

a New Economy(Simon &

Schuster, $26), Gross as-

sures us that our current

economic slump is just atemporary setback. Were

not Japan or the British

Empire, he says, nor is

China quite the juggernaut

that its cracked up to be,

for that matter. Bad things

have happened to the U.S.

economy many times be-

fore, yet it always emerg-

es from the experience,

well, better, stronger, and

faster.

Restructuring is a corenational competency,

Gross declares, pointing

out that the United States

rebounded faster from the

Great Recession than its

peers. Drawing on his ex-

tensive travels in the U.S.

and abroad, Gross pres-

ents much evidence of

new green shoots of pros-

perity.CFO

After months of heat-

ed debate, the Fi-nancial Accounting

Standards Board and

the International Account-

ing Standards Board split

their differences in June,

deciding to allow compa-

nies to account for lease

expenses on the balance

sheet using one of two ap-

proaches, depending on

the type of lease. The two

methods the standards-setters agreed on were the

right of use approach

(Approach A) and the

whole-contract method

(Approach D).

The two approaches differ greatly

from each other, but together they seem

to satisfy a variety of constituents, as

well as the boards. Approach A takes the

right-of-use

asset of a lease and amor-

tizes it in a straight-line fashion, while

Approach D lets the lessee allocate leasepayments evenly throughout the lease.

The boards decision clarifies how to

account for equipment leases and real es-

tate leases: equipment leases should fall

under the right-of-use approach, and real

estate leases should fall under the whole-

contract method. In earlier discussions

at the joint board meeting,

FASB originally opted for atwo-method model and the

IASB favored a one-method

model. But after a second

vote, both boards agreed on

the dual approach.

Several market partici-

pants say they would wel-

come the combination of

the two approaches. I be-

lieve it is the approach that

will appeal to the greatest

number of people affectedby the standard, says Dee

Mirando-Gould, a former

associate chief auditor with

the Public Company Ac-

counting Oversight Board and now direc-

tor at MorganFranklin, a business consult-

ing and technology solutions firm. The

two-lease model is closer to the econom-

ics of leases in that some leases transfer

ownership rights [for which the whole-

contract method is best], while others

merely transfer a right of use, adds BillBosco, president of lease-accounting firm

Leasing 101 and a member of a FASB/

IASB working group that provides input

to the boards.

FASB and the IASB will publish a joint

exposure draft on the topic in the fourth

quarter of 2012. KATHLEEN HOFFELDER

LEASING

Two Ways about ItFASB and the IASB have agreed to allow two approaches toaccounting for lease expenses on the balance sheet.

IN

SEARCHOF THE

NEXT

BIG

THING

Is a percentage of your firms

budget invested in pursuit of

major innovations?

How much of the innovation

work is your firm doing?

Yes No

39% 61%

Transformational

Moderate

Incremental

44%

24% 32%

15%If yes, what percentage?

I believe it is theapproach that willappeal to the greatest

number of people af-fected by the standard.

Dee Mirando-Gould,

formerly of the PCAOB

Source:

Duke University/

CFOMagazineGlobal Business

Outlook Survey12 CFO| July/August 2012 | cfo.com


15/64

from last year.

But not all is doom and

gloom, according to Jim

Morrison, CFO of plastics

compounding firm Teknor

Apex and chair of the

AICPAs Business Indus-

try Executive Committee.

Morrison does not con-

sider the 2-point drop thatdire, considering the index

has dropped 9 to 10 points

in some years. We might

have been in a holding pat-

tern for a while, but we are

going to resume growth,

Morrison says. It may not

happen right away. Theres

still optimism that over the next year, we

will be on a growth pattern rather than a

downward spiral. K.H.

CFOs looking for a promotion

may take heart from the latestannual survey of CEO succes-

sion from consultancy Booz &

Co. Last year, the percentage of top

bosses who departed the worlds 2,500

largest companies rose to 14.2%

thats 355 CEOs who moved outfrom

11.6% in 2010.

The improved outlook for the econ-

omy may be partly responsible for the

acceleration in CEO turnover. Boards

are increasingly seeking new leaders

to help drive growth in a recoveringglobal economy, the survey authors

write. But theres at least a hard bar-

gain, if not a catch: the need to ride the

upswing places a distinct burden on

those newly elevated CEOs to prove

More

CEOs Go

A majority of executives surveyed by

the American Institute of Certified Public

Accountants in the second quarter said

their companies have enough cash or

have increased their cash this year, but

they remain reluctant to deploy it.Forty-three percent of the 1,250 senior

executives in the AICPA Business and

Industry Outlook Survey said their com-

panies have about the right amount of

cash currently, while 36% said cash as-

sets have increased from the first quar-

ter to the second quarter of 2012. Almost

half of those surveyed were CFOs, while

22% were controllers. Sixty-nine percent

represented privately owned firms.

But 24% of the total respondent base

said they were hesitant to

deploy their excess cash, an

increase from 20% who felt

that way last quarter. Only

12% said they would actu-

ally use it.The reluctance to spend

cash may stem from an

overall negative take on

the economy. The AICPAs

CPA Outlook Index dropped

two points, to 67 from 69,

from the first quarter of

2012 to the second. Similar-

ly, expectations for revenue, profit, and

employment growth slid this quarter,

though they were essentially unchanged

Have Cash, Wont Spend

24%of those surveyed

said they were hesi-

tant to deploy their

excess cash, up from

20% last quarter.

themselves early in their

tenure.

Overall, 2.2% of CEOs

lost their jobs because of

merger-and-acquisition ac-

tivity, 2.2% were forced out

for other reasons, and the re-

maining 9.8% planned their

departures.

Good news for CFOswith their eye on the CEO

role: so-called insider CEOs,

those promoted from with-

in the firm rather than ap-

pointed from outside, serve

longer and, more important,

create more value for share-

holders. From 2009 to 2011,

these CEOs firms outper-

formed local market indexes by 4.4%,

compared with 0.5% for external CEOs.

The bad news: those insider promo-tions are harder to get. In 2011, 22% of

CEOs were appointed from outside,

compared with just 14% back in 2007.

The Booz survey makes no mention

of the role of CFOs in succession plan-

ning. It does, however, carry advice to

newly appointed CEOs from Andre-

Michel Ballester, CEO of the Italian

company Sorin Group: The first is-

sue is to create a leadership team very

quickly, making decisions on who are

the keepers and who are the leavers in

the first few weeks.

And therein lies a warning: CFOswho dont get the top job themselves

should quickly cement their relation-

ship with the successful CEO candi-

date. In fact, recent research by recruit-

ing firm Korn/Ferry suggests that 28%

of CFOs leave their company within

two years of an external CEOs ap-

pointment. If another internal candi-

date gets the CEO role, there is only a

10% chance the CFO will leave for new

pastures. ANDREW SAWERS

HUMAN CAPITAL

CASH FLOW


-0.6%

-2%

0

2

4

6%

Insider Outsider

-1.3%

3.9%

5.1%

3.6%

2.2%

4.4%

0.5%

09-1106-0803-0500-02

Source: CEO Succession Report: 12thAnnual Global

CEO Succession Study (Booz & Co.)

The Insiders EdgeMedian shareholder returns of companies

where the outgoing CEO had been promoted

from within vs. recruited externally.

The bad news: insiderpromotions are harderto get. In 2011, 22% of CEOswere appointed from out-side, up 8% from 2007.

Thinkstock


16/64

Topline

Even employees who have tra-

ditional pensions will be work-

ing longer than they planned

and their bosses know it.In a recent survey con-

ducted by CFO Research in

collaboration with Prudential

Financial, about 70% of senior

finance executives said they

believe their companies em-

ployees will be forced to delay retirement because of insufficient

savings. (CFO Research and Prudential conducted similar surveys in

2009 and 2010.) The 186 finance executives surveyed work at large

and midsize companies, all with defined-benefit (DB) pension plans

with assets of at least $250 million. Employers also said that employ-

ee benefits are critical to attracting and retaining talent, with three-quarters agreeing that employee satisfaction with benefits is impor-

tant to the success of their company.

So whats a CFO to do? The survey suggests that finance execu-

tives are exploring new ways to manage those financial risks that

pose threats to both a companys bottom line and an employees

nest egg. This years survey found an increase in the percentage of

companies likely to transfer DB plan risk to a third-party insurer.

Because pension plans are guaranteed, employers have to pay extra

if the investments underperform. With that in mind, we are fig-

uring out a way to move future risks off of our companys balance

sheet, said the CFO of a health-care company. While only 5% of

respondents had transferred DB plan risk to a third-party insurer,43% said they were likely to do so within two years, up from 30%

in 2010.

Finance executives in the study also said they will explore prod-

ucts that can dampen the markets volatility and encourage employ-

ees to keep their own investments in defined-contribution plans

intact. These executives are becoming more interested in exploring

how using strategies such as target-date funds, stable-value prod-

ucts, and guaranteed-income products might help bolster employee

retirement investments. JOSH HYATT AND DAVID OWENS

RETIREMENT PLANS

To download the report, The Future of Retirement and

Employee Benefits, go to www.cfo.com/research

Retirement:

A Recalculated Risk

If you would like to submit a question to Bill

MrExcel Jelen, go to CFOs Spreadsheet

Community Center at www.cfo.com/spreadsheets.

A RefreshingChangeQ: Ive discovered that

some of the underlying

data in my pivot table is

wrong. After I correct a

number, the pivot table

does not appear to include

the change. Why does thishappen, and how do I hold

on to my updates?

A: There is an important concept to understand

about pivot tables: When you create a pivot

table, all the data is loaded into memory to allow

it to calculate quick-

ly. Changing the

data on the original

worksheet does not

automatically up-

date the pivot table.

You need to se-

lect a cell in the

pivot table. The Piv-

otTable ribbon tabs will appear. On the Options

tab, click the Refresh icon to recalculate the pivot

table from the worksheet data (see Figure 1). The

result should be that the pivot table is updated.

One word of caution: Making changes to the

underlying data could cause the table to grow.

For example, if you reclassify some records from

the East region to the Southeast region, be awarethat clicking the Refresh button will cause the

table to grow by one column. If there happens to

be other data in that column, Excel will warn you

and ask if it is okay to overwrite those cells.

AskMrExcel

Bill Jelen

Figure #1

AnticipatingDelaysMore than

two-thirds ofCFOs expectemployees tohave to putoff retirement.

0%

20

40

60

80%

Dont KnowNoYes

14%17%

69%

14 CFO| July/August 2012 | cfo.com Thinkstock


17/64

Wind-project developers or solar-

facility owners typically have tax-eq-

uity partnerships with large-companyinvestors such as Google or Chevron,

where both sides benefit: the develop-

ers get necessary capital and the inves-

tors get big tax write-offs. Corporate

investors in wind, geothermal, and bio-

energy projects are currently eligible

for the production tax credit (PTC),

which provides an income-tax credit

of 2.2 cents per kilowatt hour for up

to the first 10 years a facility is open.

They can also take the investment tax

credit (ITC), a one-time tax break of30% on their investments, or an equiv-

alent cash payment from the U.S. Trea-

sury Department.

But sooner or later, that could all

change. The PTC for wind projects,

which companies can exchange for a

cash grant, is set to expire at the end

of this year, while the geothermal and

other bioenergy PTCs expire at the

end of 2013. Treasurys 1603 grant,

which provides cash payments worth

30% of the total cost of a renewableproject, is also phasing out. Named

after Section 1603 of the American

Recovery and Reinvestment Act of

2009, the grant is now available only

to projects that began construction in

2011. Solar ITCs, meanwhile, are set to

expire in 2016.

The uncertainty surrounding the

renewable-project market is already

slowing project development. Some

participants are hopeful that Congress

will extend the credits at the 11thhour,

but typically, when lawmakers do re-

new these credits, they tend to extendthem for no more than a year or two.

Demand for tax-equity financing

already exceeds the supply of funds

available. Only $3.6 billion in tax-equity

funds will be available for renewable-

energy projects in 2012, but the demand

for renewable-project financing in 2011

was $7.5 billion, according to an Ameri-

can Council on Renewable Energy

survey last year. That source of capi-

If long-standing renewable-energy credits expire as

scheduled starting this year, companies that have

taken advantage of those hefty tax breaks for wind and solar

financing will have to consider new alternatives.

Renewed Concerns

About RenewablesKey tax credits for investments in renewable-energy projects couldsoon begin to expire. By Kathleen Hoffelder

Ferran Traite Soler

ACCOUNTING

& TAX

tal that is helping the industry grow

is going to slow down if those incen-

tives are not there, says Brent Stahl,

principal and partner at law firm Stahl,

Bernal & Davies. In fact, thats already

happening, as only those wind projects

already under way are

still receiving the tax

credits.Investors have

been lured to the

projects in the past

few years, when the

tax savings increased

dramatically. The

cash-on-cash return

that a firm is paying

a tax-equity investor

may be 3%, but in sub-

stance the tax-equity

investor is earning avery high return be-

cause its using these

tax attributes to shel-

ter or reduce the tax

burden on [its] other

income, says Mark

Regante, a partner at

law firm Milbank, Tweed, Hadley &

McCloy. In the case of accelerated-

depreciation deductions, the benefit is

like an interest-free loan from the gov-

ernment.

Before the recession, investors in

solar facilities were earning a 6% to

8% aftertax internal rate of return;

The uncertainty surrounding the

renewable-project market is already

slowing project development. Some

are hopeful that Congress will extendthe tax credits at the 11thhour.



18/64

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19/64

Thinkstock

The Second-

Greatest RiskCFOs of multinationalcompanies rank transfer-pricing risk just behindglobal compliance.

Multinational CFOs are increasing-

ly looking to avoid the double taxa-tion that can occur from manufactur-

ing a product in one jurisdiction and

selling it in another. Transfer pricing,

the movement of goods and services in

order to allocate profits, has become

a high-ranking concern for finance

chiefs of multinational companies, ac-

cording to a survey by Alvarez & Mar-

sal Taxand.

Thirty percent of the 60 large-

company senior finance executives

surveyed ranked transfer pricing astheir greatest risk, just behind global

compliance, at 32%. Transfer pricing

now they can reap an IRR

of more than 10% on the

renewable deals. If the tax

credits expire, however,

other alternatives for in-

vesting in renewable proj-ects could become more

popular. For example,

market participants have

started to discuss a master

limited partnership as a fi-

nancing vehicle, similar to

the model for pipeline busi-

nesses, says Stahl. The con-

cept would be a first for the

renewables sector.

Already-existing tax-

was also the second-highest risk for

the respondents from 158 smaller com-

panies with less than $1 billion in an-

nual revenue, with 20% saying transfer

pricing was their greatest risk, com-

pared with 23% who named global

compliance.

Once something goes wrong in

the transfer-pricing area, it becomes a

huge controversy very quickly, espe-cially if there are two countries in-

volved, says Kent Wisner, managing

director of international tax at A&M

Taxand. Even in a lower tax jurisdic-

tion like Ireland, they need tax revenue

just like the United States does.

Staying one step ahead of the tax

penalties that may accompany trade

distortions involving tangible or in-

tangible assets, for example, is a key

concern of businesses today. The risks

become more pronounced as merger-and-acquisition activity picks up.

Once a physical transfer-pricing

equity structures could

also draw new interest.

Sale-leaseback structures,

where a developer sells

a project to an investor,

could prove useful for in-vestors with short-term

horizons. And inverted-

lease structures that let

an investor lease a proj-

ect directly from a devel-

oper could also become

more popular, say market

participants. Similarly,

accelerated-depreciation

federal-tax incentives, in-

cluding credits for solar-

project investments that extend over

a five-year period, are not expiring yet

and could be more appealing with the

traditional credits going away, Stahl

says. So far, relatively few companies

have taken advantage of these incen-tives.

Interest in these alternatives varies

by market. The wind sector may need

more investor support, but the solar

industry is better equipped to stand

on its own because of its retail appeal,

says Milbanks Regante. There are

more tax-equity investors in the solar

market now than a year ago, he says,

and developers are finding ways to get

their projects financed. CFO

$7.5billionDemand forrenewable-energy

project financingin 2011

$3.6billionTax-equity financ-ing available forrenewable-energyprojects in 2012

Source: American Council

on Renewable Energy

FINANCING

SHORTFALL

structure is in place at a company,

however, keeping it operating often

becomes less of a burden to financial

executives, according to A&M Tax-

ands survey. Only 7% of the largest-

company executives surveyed saw

transfer pricing as a burden to their

ongoing operations. The survey in-

cluded responses from more than 300

financial executives, with more than70% representing smaller companies.

K.H.

Even ina lower taxjurisdic-tion likeIreland,they needtax revenue

just like the U.S. does.

Kent Wisner, A&M Taxand

THOSE LOVELY INTANGIBLES

The fact is that it is simply very difficult to identify or measure intangible

assets. High market-to-book ratios may provide indications of their existence

and value. However, after the excesses of the dot-com bubble, there is under-

standable reluctance to record them on the balance sheet.

Hans Hoogervorst,IASB chairman, in a June 20 speech

Verbatium

ACCOUNTING & TAX



20/64

Finding Life after DebtAn acquisition saves a software company from crushing leverage. By Vincent Ryan

Miguel Davilla/theispot

CAPITAL

MARKETS

approaching 10 times was off the ta-ble, says Samuelson.

By December 2010, Infor had a new

management team and profits were

growing again. But that didnt solve

the capital-structure problem: Infor

was still more than nine times lever-

aged. The company considered sev-

eral options for right-sizing its capital

structure and chose one true to its his-

tory: acquire a company that Infor and

Golden Gate could overequitize and

combine with Infor to bring leveragelevels down, Samuelson says.

Lawson to the Rescue

Publicly held Lawson Software, with

$800 million in revenues, had the scale

to help fix Infors capital structure. But

a take-private transaction for Lawson

still would not have brought Infors le-

verage down to a level that was palat-

able in the capital markets, says Sam-

uelson. And as the company was tryingto close the deal in 2011, the earthquake

in Japanese occurred and the euro-

zone crisis flared up, making the debt

markets difficult again.

As a result, Golden Gate Capital

financed the $2 billion Lawson unso-

licited takeover separately and kept

the company a stand-alone entity. But

the PE firm eventually combined the

companies this year, after it and Sum-

mit Partners kicked in $1 billion of new

equity. Infor used $600 million of thatsum to pay down debt. At the same

time, Infor obtained a $3.4 billion first-

lien bank loan and raised $1.9 billion

in a public bond issue, one of the larg-

est post-credit-crunch refinancings in

high tech.

Those transactions lowered the le-

verage of the combined Infor-Lawson

to 6.5 times EBITDA. The addition of

Lawsons cash flow also helped. Infor

Acquisitions have killed many companies, but Informay be one of the few saved by one. Leveraged to the

hilt two years ago, the company, which makes enterprise-

resource-planning software, has returned from the brink of

a major restructuring. A merger with fellow ERP software

recalls Samuelson; the debt was in-

credibly inexpensive, and we could get

as much as we wanted. So Infor went

from financing acquisitions almost en-

tirely with equity to a more tradition-

al leveraged-buyout-type capital struc-

ture, he says.The companys pro forma lever-

age after the 2006 deals was 6.5 times

EBITDA (earnings before interest,

taxes, depreciation, and amortization).

Then the economy nose-dived, and

Infor suffered large declines in EBIT-

DA and profits, pushing its leverage to

10 times EBITDA. Although servicing

debt was never an issue, the ability

to refinance debt certainly at anything

vendor Lawson Software, combined

with an injection of equity capital, was

the key factor in Infors revival.

I think a lot of people thought

the endgame would be bankruptcy or

some kind of negotiated restructuring

with existing lenders, says Infor CFOKevin Samuelson. But Infor avoided

that outcome.

How did Infor get so deep into

debt? In 2006, it was a four-year-old

company owned by private-equity firm

Golden Gate Capital and humming

along at a good clip. But that year it

spent $2.5 billion on acquisitions in a

short period of time. The credit mar-

kets had opened up to software firms,



21/64

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22/64

Stephen Webster

now has a window of six years be-

fore any meaningful maturities and

$350 million to $400 million of free

cash flow after debt service. The com-

pany is now looking to spend heavily

in international markets in the next 18months, and going public is also on its

radar screen. With the proceeds of an

[initial public offering], we could pay

down debt and get to a more normal-

ized public-company debt level, says

Samuelson. For Infor, at least, there is

life after debt. CFO

Private EquitysPicky AppetitePE firms are craving

service and health-caretargets, accordingto a new survey.

Private-equity firms have been

choosy investors this year, express-

ing a preference for service and health-

care companies for potential takeovers

and greater portfolio exposure. Ac-

cording to financial sponsors, both in-

dustries will provide superior value in

the current economic climate.

The second-quarter Rothstein Kass/CFOMidsize Private-Equity Firm Ba-

rometer surveyed PE firms with assets

of $150 million to $1 billion and found

that 52% of deals these firms completed

so far in 2012 were in the service sector.

Health care, including pharmaceuticals

and biotech, came in second, at 31%.

A substantial chunk of the 85 PEfirms polled said they were weighing

service-industry deals, particularly

in the IT services, financial services,

and insurance subsectors. When asked

about catalysts for service-sector value

creation, 41% of survey participants

said service firms will get a lift from

the recovering economy this year. The

service sector is also offering reason-

able valuations and plentiful deal op-

portunities, participants said.

On the health-care front, a major-ity of the PE managers (61%) said they

had either increased their holdings in

health care, were weighing deals, or

were investigating future investment.

By subsector, 34% of those surveyed

cited instruments and supply compa-

nies as targets; about 28%, diagnostics;

just under 24%, home health care; and

about 22%, appliances and equipment.

The PE managers surveyed were

mostly unified about what will spur

value creation in health care: the agingpopulace. Health care is rapidly evolv-

ing, with advances in everything from

cancer-fighting drugs to noninvasive

diagnostics and health-care analytics,

says Jeff Somers, a principal in the

private-equity group practice at Roth-

stein Kass. These diverse and innova-

tive companies offer a wealth of op-

portunities to PE firms looking to take

nascent technologies to the next level.

Of course, by focusing too much on

services and health care, PE firms couldsow the seeds of lower returns. Somers

warns that a clustering of deals in

BIG DOGS IN DERIVATIVES

Six financial-services firms account for

an excess of 75% of derivative assetsand

liabilities carried on the balance sheets

of a cross-industry sample of 100 U.S.

companies, according to Fitch Ratings.

The firms are JPMorgan

Chase, Bank of America,

Goldman Sachs, Citi-

group, Morgan Stanley,

and Wells Fargo.

The notional amount

of all derivatives held

by the 100 companies

was about $300 trillion

at year-end 2011.

Editors

Choice

services or health care could have an

impact on deal flow and valuations.While PE firms are optimistic about

opportunities, the deals in front of

them obviously havent been com-

pelling enough to move them off the

M&A sidelines. The vast majority of

the 85 funds in the Rothstein Kass

survey have closed one or no deals to

date in 2012. Thirty-five percent have

closed two to three deals, and 11% have

done four to five transactions.

Rothstein Kass, a provider of pro-

fessional services to alternative invest-ment firms, polls PE fund managers

quarterly. V.R.

CAPITAL MARKETS

Source: Second-quarter Rothstein Kass/CFO

Midsize Private-Equity Firm Barometer

Top three reasons service companies

will provide value in 2012

Lift from

improving

economy

Reasonable

valuations

Plentiful

opportuni-

ties to do

deals

0%

20

40

60

80%

41% 38% 33%

Top three reasons health-care

companies will provide value in 2012

Aging

populace

Innovation in

drugs, treat-

ment, or

diagnostics

Health-care

legislation

0%

20

40

60

80%66%

33%22%

Where the Deals ArePE firms say service andhealth-care companies are thebest bets for 2012.



23/64

Now, Lipschitz is hoping his win-

ning streak will continue at Make

Meaning, a start-up experiential re-

tail chain where he is finance chief. At

Make Meaning stores, customers de-

sign, decorate, and make the productsthey buy, whether candles, jewelry,

stationery, soap, or other crafts.

Experiential retail, says Lipschitz,

draws customers to stores by provid-

ing a hands-on, interactive experience

that they cant get elsewhere, includ-

ing (and especially) the Internet. The

idea isnt new; many chains have in-

corporated experiential retail into

their stores for years. Customers at

L.L. Beans flagship store in Freeport,

Maine, can take kayaking, archery, and

fishing classes. Children marvel at the

lifesize toy soldiers and giant floor pi-

ano at the FAO Schwarz store on Fifth

Avenue in Manhattan. Other chainsoffering experiential retail include

American Girl, Lego, and Apple.

But Make Meaning is taking the idea

a step further. Although its stores do

sell cards, candy, and other products

for children, most of its business comes

from customers crafting their way to

the cash registerwhether putting

decorations on cakes, brushing paint

onto ceramics, or melting wax into can-

dles. And thats the whole point.

There is a big difference between

doing something for the experience,

which really is kind of the pottery-

store model, versus doing something

with a commerce objective in mind,

and basically letting you personalize

your product, says Sucharita Mul-

puru, retail analyst at Forrester. It

sounds like these guys are about activ-ity first and commerce after.

Crafting a New Business

Since its launch less than two years

ago, Make Meaning has opened four

storesin Manhattan; Scottsdale, Ari-

zona; and Dedham, Massachusetts, a

Boston suburb. So far it has seen more

than 300,000 visitors, and 12,000 peo-

ple have signed on as members, at an

annual cost of $36 for individuals and$149 for families. The firm now has

about 200 employees, and though Lip-

schitz wouldnt disclose sales numbers,

he says they have

exceeded manage-

ments expecta-

tions.

Like all growing

companies, Make

Meaning has had to take risks. One of

the biggest: offering so many activities,

each requiring niche expertise, un-der one roof. To keep things operating

smoothly, the company has hired top-

tier consultants, such as Elisa Strauss of

Confetti Cakes, a well-known Manhat-

tan bakery. Make Meaning is also staff-

ing its corporate office with entertain-

ment-industry experts, including vice

president of operations Don Watson,

who held the same title at the House of

Blues chain of music clubs.

When Wayne Lipschitz was controller of Wolfgang

Puck Worldwide, the firm grew from 12 units to more

than 20. As controller of The Cheesecake Factory, he helped

the chain grow from 19 restaurants to over 40. And during

his time there as CFO, the Coffee Bean & Tea Leaf chain

grew from fewer than 100 stores to more than double that.

Images courtesy of Make Meaning

GROWTH

COMPANIES

Hands-On GrowthThe finance chief of Make Meaning says the start-up has what it takes to

bring customers through the door. Can it keep them coming back?

By Marielle Segarra

Visitors decorate

cakes and watch

their candles

cool at a Make

Meaning store.



24/64


25/64

Most Fortune100 companies have substantial formal

programs for educating their top finance talent, and

Dell is no exception. But the Round Rock, Texas-based

computer giant may have a slight edge, thanks in part to its

use of a simple tactic.

Bloomberg/Getty Images

HUMAN

CAPITAL

Training at Dell:Here, There, and EverywhereThe computer giants financial-education programs rely on a mix of long-distance

and local learning. By David McCann

I dont know of anoth-

er company that combines

the two approaches, says

Tom Conine, founder of

TRI Corp., which helps

large companies design,develop, and implement

financial-education pro-

grams (Dell is a client). Going for-

ward, decision-makers have to be able

to work both virtually and face-to-

face, and the team dynamics of the two

are very different, says Conine. He

credits the dual approach to Dell CFO

Brian Gladden and Alicia Davis, the

companys director of global finance

learning and development.

The approach supports three edu-

cation programs, geared toward fi-

nance professionals with varying lev-

els of experience. In addition to the

FDP, there is the Financial Rotation

Program (FRP), for top talent with 5

to 7 years experience, and the Global

Financial Excellence Program (GFEP),generally for those with 10 to 12 years

experience who have just received or

are about to receive their first execu-

tive appointments.

Learning ThroughSimulationsDells educational effort began in 2009,

though the programs are still consid-

ered new in the companys culture.

These are contemporary programs

that deal with the realities of today,says Gladden. To that end, all three

programs feature simulations, in which

participants form teams that make

business decisions for hypothetical

companies.

The simulations in-

crease in complexity from

one program level to the

next. They require partici-

pants to make decisions rel-

ative to the entire business,

about pricing, production,cost, new products, market

direction, and more. Simu-

lations are effective because you learn

by doing, observes Conine. When

you do that, you make mistakes that

you learn a lot from. The simulations

are also competitive, and most finan-

cial people thrive around that.

The simulations force participants

to work under four different types of

These are contem-porary programs

that deal with therealities of today.

Brian Gladden,

CFO of Dell

Almost all companies of Dells size

are globalized, and most try to homog-

enize their training programs as much

as possible. They generally educate

their employees in one of two ways:

either virtually via the Internet or inclassrooms scattered around the world.

Dell, however, uses both of those meth-

ods. For example, for the third and

fourth semesters of the companys Fi-

nancial Development Program (FDP),

a two-year program for high-potential

recent college graduates and under-

graduate interns, teams work virtually

for several weeks and then convene for

a week in Austin, Texas.



26/64

stress. They have to deal with time

pressure, limited information, scarce

resources, and divergent opinions from

teammates. When you mix those ele-

ments together, observes Conine, it

makes for real-world decision makingunder conditions of uncertainty. The

simulator runs the various decisions

made through an econometric model

and spits out hard-number results.

In addition to the simulations, the

FDP calls for participants to rotate

among roles that include segment and

operating-expense analysis, intercom-

pany accounting, cash-management

analysis, pricing, corporate planning,

competitive analysis, financial services,

credit analysis, external reporting, bud-geting and forecasting, and logistics.

About 50 employees are enrolled

each year in the entry-level FDP,

which lasts two years. FDP graduates

branch off to internal audit or finance

roles. Within three years, they are eli-

gible for consideration in the Financial

Rotation Program. That lasts for three

years, with three different one-year as-

signments, many outside participants

home countries. Roles include investor

relations, assistant controllership, pro-curement (where a person would be an

analyst for a commodity buyer), opex

roles such as supporting the marketing

budget, financial planning and analy-

sis, treasury, foreign exchange, and

cash management.

There is also a tax role, which Davis

calls relatively unique to our rotation,

to understand not necessarily how to

do an accrual but how value-added tax

or transfer pricing works. Participants

dont necessarily choose which assign-ments they get, she adds, but they can

express a preference.

Thinkstock

IT PAYS TO BE PUBLIC

Three out of four CFOs (74%) received a raise in 2011, according to a survey

by Grant Thornton and the Financial Executives Research Foundation.

The average salary increase was 4%, compared with 3% in 2010. Public-

company CFOs received an average base salary of $286,500 last year, versus

$197,400 for private-company finance chiefs.

Editors

Choice

tion to certain nonfinancial-employee

groups. People from marketing, sales,research and development, and infor-

mation technology will take four mod-

ules built around the income statement,

the balance sheet, factors affecting

profitability, and key financial ratios.

As a result of the programs, Dell is

now more consistently focused on a

core set of operational financial tools,

says Gladden. A good example is in-

come variance, driving a consistent set

of tools across the firm to measure the

results of our business units, he says.Can the return on Dells investment

in the educational programs be quanti-

fied? Gladden says they pay for them-

selves through less reliance on recruit-

ers to find talent. Since he came to Dell

as CFO in 2008, Gladden has tried to

instill in his top staff the mind-set that

they are building a 25-year career at

the company, rather than just joining

to get a certain set of experiences to

make you more attractive in the ex-

ternal market, he says. This is aboutdeveloping a culture and leadership

capabilities for the long term. CFO

Studying

Financial ExcellenceAt the third program level, the Global

Financial Excellence Program, partici-

pants do benchmarking work at other

companies, which are selected based

on their reputation for maintaining

best practices. The Dell employees

work with the CFO and finance staff to

understand how the issues those com-

panies are dealing with relate to Dell.

In turn, those companies send finance

staffers to Dell for similar learning.

The GFEP participants also work ona team project; they deliver the results

to Dell chairman and CEO Michael

Dell. Last years project focused on

purpose-driven companiesthose

companies that execute against strate-

gies that are clear, concise, and brand-

ed. Key take-aways included how ev-

ery team member lives the brand at

Coca-Cola, how the business-integra-

tion processes at Stanley Works func-

tion, and how executives are involved

in recruiting at Goldman Sachs.Meanwhile, Dell is developing a

program to provide financial educa-

EDUCATING DELL

Financial training at Dell comes in three parts.

FINANCIAL DEVELOPMENT PROGRAM.Two-year entry-level program for

high-potential recent college graduates and undergraduate interns.

Areas covered include segment and operating-expense analysis,

intercompany accounting, cash-management analysis, pricing, credit

analysis,external reporting, and logistics.

FINANCIAL ROTATION PROGRAM.Three-year program for top employees

with 5 to 7 years experience. Consists of three one-year assignments,often outside participants home countries. Areas covered include in-

vestor relations, assistant controllership, procurement,

financial planning and analysis, treasury, and foreign exchange.

GLOBAL FINANCIAL EXCELLENCE PROGRAM.For employees with 10 to

12 years experience who have received (or are close to receiving)

their first executive appointments. Participants visit best-practices

companies to see how their CFOs and finance teams handle various

issues.

1.

3.

2.



27/64

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28/64

Thats what experts are saying

about a trading loss that knocked more

than $20 billion off the banks market

value, sparked probes by the Justice

Department and the Securities and

Exchange Commission, forced cred-

it-rating agencies to issue negative

outlooks for the bank, and turned thespotlight on a bank unit that was set up

to invest excess deposits but also gen-

erate a sizable profit.

According to JPMorgan, the banks

chief investment office was invest-

ing in a benchmark for credit-default

swaps designed to mitigate the banks

overall credit exposure, especially the

possibility of higher interest rates and

inflation. But the hedge was risky in

itself, and the positions in derivatives

were so large that they distorted the

market, experts say.

JPMorgan also may have failed to

fully understand its exposure because

it was relying too heavily on value at

risk (VaR), a common risk model that

estimates the potential loss in value ofa risky asset or portfolio over a certain

number of trading days.

In May, JPMorgan stated that the

trading positionsreportedly on a se-

ries of the 10-year Markit CDX North

American Investment Grade index

were riskier, more volatile, and less

effective as an economic hedge than

the firm previously believed. JPMor-

gan CEO Jamie Dimon admitted that

they were flawed, complex, poorly

reviewed, poorly executed, and poorly

monitored. Later that month at the

banks annual shareholder meeting in

Tampa, Dimon added that he couldnt

justify the mistake.

Improper from the Start

It screamed improper credit-risk

management to us from the very be-ginning, says Matthew Streeter, a

product manager at FINCAD, speaking

of when he heard about the incident.

(FINCAD is a developer of derivatives

risk-management software.)For one thing, the credit-index bets

introduced secondary risk exposures

that JPMorgan executives apparently

didnt take into account, says Streeter.

A key question to ask about hedging,

he says, is whether a hedge exposes

the insured to risk above and beyond

the risk the hedge is supposed to miti-

gate.

For another, the trades JPMorgan

was making were so large that they

were moving the market for the hedg-ing instrument, concentrating a lot

of risk on one side of the trade. Any

hedge on a $650 billion book will abso-

lutely drive the market, Streeter says.

Also, JPMorgans chief investment

office was doing what Streeter calls

speculative hedging: hedging with

the intention of making a profit. As

Ryan Gibbons, managing partner of

GPS Capital Markets, told CFOtwo

The $2 billion trading loss at JPMorgan Chase that

came to light in May stemmed from fundamental mis-

takes by risk managersin particular, the belief that a hedge

on credit exposures could both reduce the banks risk and

earn billions of dollars at the same time.

The Hedge That WasntJPMorgan Chases $2 billion trading miscue is a costly lesson in how not to protect

against potential losses. By Vincent Ryan

Jim Lo Scalzo/EPA /Landov

RISK

MANAGEMENT

The trading positions JPMorgan

Chase took were flawed, complex,poorly reviewed, poorly executed,and poorly monitored, according tothe firms CEO, Jamie Dimon.



29/64

years ago, big gains and losses from

hedging spell trouble (see Seven Pil-

lars of Hedging Wisdom, CFO.com).

When companies make money from

hedging, they tend to forget what their

core businesses are, said Gibbons. Atthe high point of the chief investment

offices performance, in 2009, it man-

aged nearly 17% of the banks assets

and generated $3.1 billion in yearly

income.

But a former finance chief at JPMor-

gan takes the stand that hedging is in-

herently risky, and that if the firm was

taking a risk, it should have expected

to get paid for it. Who says you dont

earn money on a hedge? Dina Dublon,

finance chief of JPMorgan Chase from1998 to 2004, asked CFOin May. The

only time hedging is not risk-taking is

when you sell the position you are try-

ing to hedge; anything else, youre tak-

ing risk.

Dublon said JPMorgans chief in-

vestment office was not a separate

entity when she was finance chief, but

was housed within the banks treasury

function. Whether or not her finance

department hedged credit risk depend-

ed on the price of the hedge, she said.Sometimes you do, sometimes you

dont.

What Value at Risk?

When JPMorgan revealed the loss on

May 10, it said its risk measure had

underestimated the portfolios volatil-

ity. In the first quarter, JPMorgan was

monitoring its positions using a newVaR model, which was indicating the

chief investment office unit value at

risk was $67 million. But JPMorgan

scrapped that model and returned to

an older version once the loss was dis-

covered. It restated the VaR for its first

quarter as $129 million.

A VaR of $67 million at a 95% con-

fidence level implies the [chief invest-

ment office] should not incur losses of

more than $67 million on more than

three business days during the quar-ter, wrote CreditSights analyst David

Hendler in a report. But the restate-

ment meant that the office may have

incurred losses in excess of $129 mil-

lion on three days. Hendler concluded

that the losses put in question not only

the accuracy of JPMorgans VaR mod-

els but also the data being input into

those models.

A March 2008 report by a group

of senior global-banking regulators,

Observations on Risk ManagementPractices During the Recent Market

Turbulence, noted that many banks

used VaR, but did so in conjunction

with notional limits, stress tests, and

forward-looking scenario analysis.

Firms that avoided significant un-

expected losses used a wide range of

risk measures to discuss and challenge

views on credit and market risk, said

the report.

Despite all the tools available, regu-

lators and large, complex banking or-ganizations face a tough task in judging

the riskiness of many nontraditional

commercial-banking activities, testi-

fied Federal Deposit Insurance Corp.

vice chair Thomas Hoenig to a Senate

committee in May. Trading and mar-

ket-making are high-frequency activi-ties that can take place between [regu-

lator] exams with little evidence that

they ever occurred, he stated; moni-

toring trading on a high-frequency

basis would be costly for banks and

regulators.

Hoenig is proposing a strict divi-

sion of some of the banking functions

conducted by the big universal banks

like JPMorgan. Under his proposal,

commercial banks would be allowed

to perform some investment-bankingactivities but would be prevented from

making markets in derivatives or secu-

rities and trading securities or deriva-

tives for their own account or a cus-

tomers.

But there is little enthusiasm on

Wall Street for such an arrangement.

Asked by a Senate committee in June

to comment about whether the Dodd-

Frank Acts so-called Volcker Rule,

which would limit banks proprietary

trading, could have prevented JPMor-gans loss, CEO Dimon replied that the

rule was unnecessary. CFO

Thinkstock

ESSENTIAL KNOWLEDGE

What skill sets do risk managers need? An intimate knowledge of the

business and industry (cited by 67%of respondents) and a strategic

view of risk and risk managements role (64%) above all, according to

a February survey of C-suite members by the Risk and Insurance

Management Society and Marsh. Only 25%cited insurance knowledge.

Editors

Choice

The Real VaR Steps UpAverage value at risk

at JPMorgan Chases chief

investment office

Source: SEC filings

RestatedMay 10

Reported

April 13

$0

30

60

90

120

$150

1Q12

4Q11

3Q11

2Q11

1Q11

$129

$67$69

$48$51$60

5In $ millions

The FDICsHoenig wouldbar commer-cial banks fromtrading securi-

ties or derivatives for theirown account.Thomas Hoenig, vice chair of the FDIC



30/64

CFOMAGAZINE PRESENTS

THE SECOND ANNUAL

A &MIDSIZEBU INE

CFO

Chobani

CFO

Atari Construction

CFO

Crocs

from CFOs at high-growth companies

about how they manage and fund rapid expansion

techniques for private companies

valuable perspective on the

economic outlook

by hearing from CFOs who have

successfully made dramatic changes to theirbusinesses for the post-recession world

from three days of networking

opportunities with your peers

CFO

Safety-Kleen


31/64

certain economic times like these. But

the airline is betting that the lure of

nonstop service to Hawaiicomplete

with a complimentary hot meal

Documents

CFO - 2012 July August