Reader Mail: Does Citigroup’s Reverse Stock Split Signal Sell?
August 28th, 2009 | Posted by stockPosted by: Lauren Young on August 28, 2009
Here’s one from the reader mailbag. What’s your advice for this reader on Citigroup’s (C) reverse stock split?
I need some advice. My husband and I are a young newly married couple and we invested in Citigroup when it was 3.50 and bought 1350 shares. Will this split be a positive turnout, or should I take my little earnings and run? We don’t need the money at this time, but I would also hate to see it flush down the drain. Any advice would be greatly appreciated!!! Please…..help.
See my earlier BusinessWeek story on reverse stock splits for some additional background.
Stock Market Climbs to 10-Month High
August 21st, 2009 | Posted by stockPosted by: Ben Levisohn on August 21, 2009
On Aug. 21, the Standard & Poor’s 500-stock index closed at a 10-month high of 1,026.13. The move purged Monday’s 2% drop from the collective consciousness and put the S&P 2% on the week.
The new high confirms what I wrote yesterday – that markets are poised to head higher, not lower, at least in the near term. InvesTech Research’s Jim Stack, citing historical precedent, says he expects another 10-12% from the market. He points to the average gain from the market in the sixth to tenth month following a market bottom. That would suggest the S&P 500 could close out the year around 1120, or up 65% from its low on March 9.
If you’re long the market, are you holding on for more gains? Is anyone buying?
Milhaven faces hefty tax penalty Radio host is fined $500,000 for opening a Roth IRA shelter
August 21st, 2009 | Posted by taxBy By Jim Gallagher • jimgallagher@post-dispatch.com > 314-8390
Publication: St. Louis Post-Dispatch (Missouri)
The Internal Revenue Service wants radio personality McGraw Milhaven to pay a $500,000 fine. His offense: avoiding less than $1,000 in taxes.
Milhaven, the morning show host on KTRS, has been caught up in the government’s war against abusive tax shelters. He, and others in the same position, say the IRS is levying giant fines meant to punish millionaires and big corporations on people who aren’t rich and didn’t intend to break the law.
“I don’t have it. I could sell everything I own, and I doubt that I’m worth $500,000. It depends on how much I could get for my Sandy Koufax signed baseball,” said Milhaven, 42.
Milhaven has been a fixture on St. Louis radio for a decade and formerly worked at KMOX. He revealed his tax problems on his KTRS show this week. “I’m being persecuted,” he adds.
The IRS publishes a list of suspected tax shelters. A taxpayer with such a shelter, or something “substantially similar,” must report it at tax time. If not, the tax law makes big fines almost automatic: $200,000 per year for a corporation and $100,000 per year for an individual.
It doesn’t matter how much money was sheltered or whether the taxpayer knew about the IRS list.
Milhaven says he had no idea the IRS frowned on his tax maneuver. “My accountant tells me it’s legal,” he said. “I wasn’t taking a midnight flight to the Cayman Islands.”
An IRS spokesman declined to comment, saying the agency can’t comment on an individual taxpayer’s situation.
Milhaven says his trouble began when his accountant, Douglas Mueller of MPP&W PC, recommended a way to lessen his taxes. The plan went like this:
Milhaven would create a corporation. Into that corporation would go the money he makes from speeches, appearances and endorsements outside of his KTRS pay.
He would also open a Roth Individual Retirement Account. Money in a Roth IRA can grow tax free, and its owner can spend it without penalty once he turns 59 1/2. That makes it a popular – and legal – way to avoid taxes. However, a taxpayer Milhaven’s age can only contribute $5,000 a year to a Roth.
Milhaven’s IRA would invest in Milhaven’s corporation. The corporation could then pay out its profits into the IRA, avoiding the $5,000 contribution limit.
The IRS has been going after Roth IRA tax shelters since at least 2003, when the Grant Thornton accounting firm in Kansas City drew the tax agency’s ire over shelters marketed to its clients. That year, the agency added to its prohibited list the practice of using a Roth to invest in a taxpayer-owned company unless the Roth pays a fair price.
In papers given to Milhaven, the IRS argues that his shelter violated that warning. The tax agency proposed $400,000 in fines for Milhaven’s corporation, and $100,000 against Milhaven himself. The case is now in the IRS appeals process.
Cases like this have been popping up around the country, said Alex Brucker, an employee benefits lawyer and director of the Small Business Council of America, which is campaigning to change the law.
There are roughly one thousand cases involving the Roth IRA scheme and other tax shelters that fall under the severe penalties, he estimates.
“Of course it’s not fair,” Brucker said. “The penalty is disproportionate to the crime.”
Last month, the Los Angeles Times reported that the owners of a local commercial printer faced $1.3 million in penalties for a tax-shelter scheme that helped them avoid only $8,385 in taxes.
The large fines were designed to punish big corporations and major tax cheats, not small fries like Milhaven, Brucker said.
Sen. Ben Nelson, D-Nebraska, has proposed a bill that would let the IRS lower the fines if a taxpayer had an acceptable excuse and make fines proportionate to the amount of taxes evaded.
Others are less sympathetic. “The IRS is especially looking at Roths because they are a breeding ground for hanky panky,” says Ed Slott, a certified public accountant and publisher of Irahelp.com. “Once money is in a Roth it’s tax-free forever, so people find all kinds of schemes and scams to put money in Roths.”
Milhaven says his tax shelter, which was created in 2004, never really worked. After a couple of years, his accountant discovered that one of Milhaven’s largest employers was making out checks to Milhaven, not his new corporation. So, Milhaven dismantled the corporation and filed in 2007 amended tax returns – in effect reversing the whole effort – before the IRS learned of it.
He ended up paying an added tax bill of under $1,000.
August 20th, 2009 | Posted by stockPosted by: Ben Levisohn on August 20, 2009
Can the Standard & Poor’s 500 go higher? The Aug. 17 selloff, which saw the S&P 500 drop 2%, prompted hand-wringing about an imminent market collapse. And even S&P 500 recovers some of the losses (it’s up 2.5% since and is now back over 1,000 at this writing), investors remain focused on when stocks will finally correct. BusinessWeek’s Ben Steverman supplied five indicators to watch for signs of a market reversal. As my colleague Aaron Pressman wrote on Aug. 6, “Even as the stock market continues to push higher, investors remain doubtful.”
It’s not hard to see why. Much of the economic news seems grim. Unemployment continues to rise. Consumers are hoarding cash and are unlikely to return to their spendthrift ways. Oil is back over $70 and some economists worry it could derail a fragile recovery. And although earnings and revenues surprised to the upside this quarter, both are down over 30% from last year. No wonder investors are questioning how the market can go any higher.
But don’t be shocked if it does. Bloomberg collected estimates from eight strategists and only one, Barclay’s Barry Knapp, predicted a 2009 yearend close below 1,000 (Knapp’s prediction: 930), while JPMorgan strategist Thomas Lee predicts the S&P 500 will finish 2009 at 1,100. The average was 1,034. Linda Duessel, an equity market strategist at Federated Investors who was not included in Bloomberg’s roundup, says she wouldn’t be surprised if the S&P closed around 1,200 by the end of the year.
Perhaps that’s just a sign of experts being overly optimistic. A recent Merrill Lynch study found that 75% of money managers were optimistic about the market’s prospects, which DailyFinance’s Tim Catts seizes on as a sign of an impending selloff. Maybe it’s smart to grow cautious when the rest of the crowd turns strongly bullish (or bearish, for that matter). But in my former life as a trader, I learned that there is no “should” when it comes to how the stock market behaves. Bad news can just as easily spur a round of buying, and good news can precipitate a selloff. Markets rarely perform to a set of preconceived notions.
Keep that in mind the next time someone tells you what the market should be doing.
Bonus Question: Is the S&P 500 more likely to finish 2009 at 800 or 1200?
Coffee Break / IDB grants tax freeze, extensions
August 20th, 2009 | Posted by taxBy The Commercial Appeal
Publication: The Commercial Appeal (Memphis, TN)
The Memphis and Shelby County Industrial Development Board on Wednesday granted an amendment to Evergreen Packaging’s 2007 tax freeze.
The company requested an amendment to add 5,073 square feet to its property; the expansion is expected to add 20 jobs in the short term, with the possibility of 15 to 31 jobs
being added later.
In other business before the IDB:
Monogram Food Solutions LLC, a Memphis meat snack company, was granted a request to exclude netting from its tax freeze, saving the company nearly $600,000 in taxes during the next 14 years.
Southern Steel was granted an extension to close its tax-freeze application.
Main Street gets help
The Center City Development Corp. approved forgivable loans Wednesday for a Main Street restaurant, Sauces, and a South Main retailer of urban fashions and athletic footwear, Sneak Peek.
Sauces, 95 S. Main, won a $30,000 loan that owner Jeff Johnson said would be used to build a year-round outdoor dining patio and a second bar, along with marketing and working capital.
Johnson said he’s focusing on attracting more Downtown residents and workers to Sauces.
Sneak Peek, 515 S. Main, is aiming for an Aug. 28 opening, said owner Kevin Brumfield, who secured a $17,460 loan. Brumfield lost his lease in his original location, 652 Marshall, after less than a year in operation.
The forgivable loans turn into grants if the recipients stay in business and follow certain requirements.
FedEx, USPS renew deal
The U.S. Postal Service and FedEx Express announced Wednesday they have renewed an agreement covering Global Express Guaranteed.
The Postal Service’s premier, date-certain international delivery service reaches more than 190 countries and territories.
It has been available since 2004 at thousands of participating postal retail locations nationwide, and through Click-N-Ship online at usps.com. Shipping labels and packaging feature both Postal Service and FedEx logos.
Learn about social media
“Continuing the Conversation,” a social media seminar presented by Howell Marketing Strategies , will be held from 1 to 5 p.m. Aug. 27 at the Memphis Brooks Museum of Art , 1934 Poplar.
Tickets are $50 . Seating is limited and registration is required. Deadline is Aug. 25.
For details, call 521-1453 or visit howell-marketing.com.
Crabtree & Evelyn closes
Upscale bath and body product store Crabtree & Evelyn, 7615 W. Farmington in Germantown, will close at the end of the month.
This follows the Woodstock, Conn.-based company filing for Chapter 11 in July.
Everything in the store is currently 30 percent off. For details, call 754-9622.
——————–
Well said
John D. Rockefeller:
“Good leadership consists of showing average people how to do the work of superior people.”
The Mercenaries in Facebook’s Midst
August 19th, 2009 | Posted by innovIn 2007, when Facebook founder Mark Zuckerberg was pressed about when his company would sell shares to the public, he said he was in no rush. “I don’t think four more years is too long for employees to wait to cash out,” he told me at the time.
Two years on, his employees beg to differ. A $100 million share buyback has been oversubscribed as current and former Facebook employees stampede to cash out some of their shares.
O.K., I could totally understand this impulse if we were talking about, say, Seesmic, Ooma, RockYou, or any other Web company whose frothiest days are arguably in the past.
Fast Growth
But this is Facebook, a company that’s generating more than $500 million in revenue just five years after its birth in a dorm room. It grew twice as fast as its presumed challenger Twitter in July. The following month, Facebook became the fourth-largest site in the world. Only Google (GOOG), Microsoft (MSFT), and Yahoo! (YHOO) are larger.
And yet a flood of employees rushed to sell their stock for a price that values the company at just $6.5 billion, never mind that the buyers of those shares are the very ones who invested in Facebook at a $10 billion valuation the month before the tender offer was made. In May, Facebook said a Russian company called Digital Sky Technologies would buy at least $100 million of Facebook common stock from current or former employees.
I’m pretty certain that a few years from now, when Facebook does go public, I’ll be writing about the $100 million deal that gave Russian investors a chunk of Facebook on the cheap, and the boneheaded employees who gave up too soon.
But in the meantime, I have a more immediate concern: What has happened to the startup work ethic in Silicon Valley? Time was, the region was teeming with believers—be it believers in a company or believers in the sometimes naive, lottery-ticket hope that options would make them billionaires. People who work at the most highly valued startup in Silicon Valley and rush to sell for a smaller valuation—just as an IPO is starting to look likely—aren’t believers. They are mercenaries. What’s next? Giving up options altogether for a bigger paycheck?
Averting Risk
I’ve railed loudly against the growing tendency to avert risk in Silicon Valley. I’ve derided venture capitalists and entrepreneurs alike for their short-term focus. But if the employees of the Valley’s hottest company can’t be bothered to buy and hold a while, why should their investors and founders?
Full disclosure: When in the earlier part of the decade we saw the rise of so-called partial liquidations, or the ability of founders to cash out some of their shares before an initial public offering, I was all for them. I do think founders, who slave for years and typically take small salaries, deserve to cash out a small portion of their equity—say, to put a down payment on a house or pay off student loans. But that’s because they’re still investing everything else they have in building that company.
Employees are a different animal. Silicon Valley was founded on the belief that stock options were worth something—and that something was a big windfall at an exit, when the whole company watched that ticker crawl across the Nasdaq for the first time, calculated their paper net worth, and popped open the champagne. Does it always work out? Of course not. But that is why it’s considered high risk, high reward. How has this gotten so lost on people? Are we just so jaded that we can’t believe in promises anymore, even at a company like Facebook?
I’m a part-time employee for TechCrunch, and I don’t have stock. (Something I’d like to change, if you’re reading this, Michael Arrington.) But let’s say I did, and an investor came in and valued TechCrunch at $30 million, where several independent surveys have recently pegged its net worth.
Drink the Kool-Aid
Let’s also say they offered to buy employee shares at that price. I can’t imagine selling. TechCrunch is growing, we have an incredible staff and a solid balance sheet at a time few media companies do. If I truly believed TechCrunch were a flash-in-the-pan that $30 million was the most it would ever be worth, I wouldn’t be wasting my time to work there now. Maybe I’m drinking the Kool-Aid—but since when did that become a negative when you work for a company?
There was a fear when people started flooding out of Microsoft and into Google that they were only there for the money. As far as I’m concerned, that same fear was validated as many of those same people later flocked to Facebook. If Facebook were my company, I’d look closely at who is selling—and why. Some folks legitimately need the money. But others, I would suspect, are in it more for the money than for love. That’s what I call a mercenary.
Now, the deal lets employees sell up to only 25% of their stock. But how long do you think they’ll stick around once the rest is vested? And how hard will they work to build something they’re not sure will ever be worth more than $6.5 billion?
August 18th, 2009 | Posted by taxBy Michelle Saxton Charleston Daily Mail, W.Va.
Publication: Charleston Daily Mail (West Virginia)
Aug. 18–CHARLESTON, W.Va. — Several other states have canceled their sales tax holidays due to the economy, but Gov. Joe Manchin says West Virginia can afford it.
Residents looking to buy refrigerators, windows, light bulbs, laptop computers or other home appliances and personal office equipment will get
a tax break starting next month if they choose certain energy-saving products.
The state plans to hold its second Energy Star sales tax holiday, and it will be expanded to three months — Sept. 1 through Nov. 30, Manchin announced Monday.
During that time, West Virginians will be exempt from paying the 6 percent sales and use tax on qualifying Energy Star products priced at up to $5,000 per purchase.
“That’s a $300 savings,” Manchin said.
Benefits include providing taxpayers a financial break, giving retailers a shot in the arm when they need it most and reducing the state’s carbon footprint in the environment, Manchin said.
“It’s going to really stimulate our economy, getting people to remodel, maybe people who are putting off building,” Manchin said.
The governor said the Mountain State is in a better financial position than other states to offer the savings to consumers.
“We manage better,” Manchin said. “The facts are what they are.”
“We’re really watching very closely your tax dollars,” the governor added. “We’re not going to throw caution to the wind, and I’m not going to do something we can’t afford to do just for it to sound popular, be popular. This is something that we can do. We have put money aside to do it.”
Money for the Energy Star sales tax holiday was not coming from general revenue, Manchin said, but from about $12 million state Attorney General Darrell McGraw’s office identified from successful litigation in an anti-trust case involving credit card companies.
“I am happy that the work of the Attorney General’s office is being used to provide tax relief and contribute to energy conservation,” McGraw said in a prepared statement.
The anti-trust case involved agreements between MasterCard and Visa with retailers that required merchants to charge the same administrative cost for a debit card and a credit card even though the costs differed, Chief Deputy Attorney General Fran Hughes said. The agreement also would force merchants to accept the debit card even though the risks are greater, she said.
Hughes added that all branches of state government were involved in the settlement case, and that it specifies how the $12 million is to be used.
“This was set aside, and it’s in trust,” Hughes said. “It can only be used for a sales tax holiday.”
Monday’s event included representatives from Lowe’s, The Home Depot, Simonton Windows and other businesses that carry the Energy Star label. Appliances were on display, along with a sign reading, “Go Green! Save Money!”
Taxpayers were expected to save about $3 million this year from the program, Manchin said, adding that the program could continue at that rate for about four years. That money will be used to reimburse the tax department so the state can continue running its operations, he said.
“We’re holding that money and when that money is gone then we have to look, from public policy, do we have the ability to continue it or not?” Manchin said.
Last year’s Energy Star sales tax holiday ran from Sept. 1-7 and applied to qualifying products valued at up to $2,500.
Qualifying appliances have Energy Star labels, and retailers selling those products are asked to display signs at their businesses about the upcoming tax holiday.
Annual energy spending for typical households in the United States was about $2,200, Manchin’s office said, but those who use Energy Star products were estimated to save 30 percent a year, or close to $700.
For more information, visit www.wvtax.gov/EnergyStarSalesTaxHoliday.html or www.energystar.gov .
Contact writer Michelle Saxton at michelle.saxton@dailymail.com or 304-348-4843
To see more of the Charleston Daily Mail, or to subscribe to the newspaper, go to http://www.dailymail.com . Copyright (c) 2009, Charleston Daily Mail, W.Va. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com , call 800-374-7985 or 847-635-6550 , send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
Question No. 1 for Managers of Innovation
August 18th, 2009 | Posted by innov“”Why should I follow you?”
When you introduce your vision to have your company be more innovative, you may think your employees will ask about cost, potential audience, probable success rates, how long will it take to get to market, and the like. And they will. Out loud.
But the first (unasked) question that pops into their heads is going to be: “Why should I follow you?” By which they mean: “Why should I believe you are going to take us where we need to go?”
Even though they are (probably) not going to ask you those things directly, you need to answer their unspoken concerns before you do anything else. Otherwise, you are not going to get either their full attention or their best work.
So how should you address their concerns, spoken or not? Our answer has three parts. We are not going to discuss the theory of innovation leadership. We’re going to talk about the deliberate practice, giving you the essential principles to employ. We guarantee that if you put these into practice, you will become a much more effective leader, especially when it comes to innovation.
1. Focus on the Essential
Innovation leaders focus on the essential, vs. the important. It’s easy to spend your time on the important—for example, coming up with a new product to satisfy the salesforce’s desire to offer something new. But necessary as that is, doing so isn’t really going to inspire anyone.
In contrast, creating a culture that celebrates failure—because if you don’t take risks, you will never develop a game-changing product or service—or believing that great ideas can come from anywhere are essential beliefs that can shape everything your organization does.
Here’s another way of thinking about this: The important is rational; essentials are emotional. The important you put on a to-do list; essentials goes on a to-die-for list.
2. Stay Above the Drama
Recessions/transitions/restructurings are by definition temporary. Understanding that is key to your ability to focus on the desired outcome and the kind of organization you want to build.
What it comes down to is this: Are you shaping the future, or reacting to your perception of it?
Here’s an easy way to tell. Check your emotional state.
• Do you act like a victim? (If you complain about anything, the answer is yes.)
• Are you looking for someone or something to blame? (If you are using the recession as a excuse, for example, the answer is yes.)
If you answer yes to these questions and others like them, you have allowed yourself to be part of the drama. This is not a good thing for the leader of a team, a brand, or a company because you—and the company—are wasting energy and focusing on the wrong things.
3. Lean into Adversity and Find Opportunities
We have written a lot about this during the economic downturn.
But adversity isn’t going to end just because the recession does. There always will be a competitor who does the unexpected and up-ends your market. You can bet in the coming months consumers are going to demand something you just can’t provide today. Financing that you were absolutely certain was going to be there suddenly won’t be.
When those things occur, conservative managers act as they always have: They slash marketing budgets. They hunker down and go the safe route. (“Hey, I know—instead of doing something daring, why don’t we line extend our best product?”)
Want to change history? Don’t be one of those people. Stick to your growth strategy. ALWAYS.
Believe in yourself, and if you need inspiration to stay the course, borrow from the best. Warren Buffett made his fortune by following an adage he came up with a long time ago: “Be fearful when others are greedy—be greedy when others are fearful.”
If you apply these three ideas, people will be able to supply their own answer when they initially question your vision.
Why should your people follow you? Because you have demonstrated by words and actions that you understand and live these three pillars of innovation leadership, in the best and worst of times.
Turning Corporate Taxes into an Innovation Spur
August 17th, 2009 | Posted by innovIn particular, innovation economics holds that market forces alone often do not produce optimal outcomes and that public policy, including tax policy, that corrects these mismatches can enhance societal welfare.
As such, a corporate tax code based on innovation economics would seek to explicitly promote the international competitiveness of American businesses and encourage innovation by lowering the effective rate, but doing it in ways that also provide strong innovation incentives. There are three things Congress should do:
First, Congress needs to spur R&D spending by altering the tax code. Lawmakers should expand the R&D tax credit by increasing the Alternative Simplified Credit rate from 14% to between 20% and 40%, depending on how much investments are increased. In addition, it’s time to broaden the definition of qualified R&D from beyond that involved in inventing a product to that involved in developing a production process. Congress should also broaden the current flat credit for collaborative energy-related research to any area of research and expand the rate to 40% from 20%. Taking these steps would make the U.S. R&D tax credit among the five most generous in the world.
Second, investment in new capital equipment—machinery, computers, and software—is needed because it is through such purchases that innovation spreads. One way to do this would be to let firms write off investments in capital equipment in their first year instead of having to depreciate investments over a number of years.
Third, for business to get the full benefits from new equipment, they need higher-skilled workers. Providing a carrot for on-the-job education, Congress should allow employee-training expenditures to be counted as qualified expenditures for the Alternative Simplified R&D Credit.
Even if conventional economists can be persuaded that these activities are subject to market failures that tax code can help correct, many may still resist, arguing that the nation can’t afford new incentives and that more innovation would be spurred if we instead paid down the national debt. The short answer is that it’s more effective to target these kinds of innovation-enhancing activities than to simply reduce the debt in the hope that interest rates fall.
But it is possible to have more innovation tax breaks and lower deficits. Congress could repeal the portion of the 2003 Jobs and Growth Tax Reform & Reconciliation Act which reduced the top individual tax rates on dividend income to 15% for investors in the top four tax brackets and 5% for investors in the bottom two tax brackets. In addition, Congress could raise top marginal rates back to the Clinton era rates or even slightly higher.
One way not to pay for these is to limit deferral of foreign source income, as the Obama Administration has proposed. Such a move would raise less revenue than expected, and by raising corporate taxes, move us in exactly the opposite direction we should go in.
In short, the U.S. is at risk of losing its global competitive advantage and with it faster per-capita income growth. To effectively respond will require the nation to take concerted and strategic actions in a host of areas, including reform of the corporate tax code to transform it into an energetic tool to support private sector efforts to innovate and be more productive.
As Michael Mandel has written in BusinessWeek, the current U.S. recession is due in part to a shortfall in innovation and competitiveness. Those lags, in turn, can be traced to the U.S. corporate tax code. U.S. statutory and effective corporate tax rates are high compared to those of other nations. Moreover, the code provides only minimal incentives for companies to invest in the building blocks of innovation: research, new capital equipment, and labor skills. It is time to redesign the tax code to help turbocharge the U.S. innovation engine. Doing so will improve U.S. competitiveness, not only by reducing international tax differentials, but by also spurring more domestic investment in research and development, productivity-enchancing capital expenditures, and worker training.
Unfortunately, many Washington economists—principally neoclassical economists—oppose using the tax code to explicitly spur innovation and do not believe that the U.S. is in competition with other nations.
At a Washington tax economist forum, I recently presented the recommendations of a new report from the Information Technology & Innovation Foundation, which I founded and run, calling for making the U.S. corporate tax code more internationally competitive. One prominent congressional tax economist countered that “economists agree that while companies may compete, nations do not.” In other words, there is no need to make the tax code more competitive since the long-term welfare of the U.S. economy is unrelated to what other nations do.
The reality is that countries do compete for mobile, high-value-added jobs, and increasingly they use their tax code as a key tool. Average corporate tax rates among the 30 OECD nations have declined by at least 15 percentage points over the last 30 years, to under 35%. In 2007, economists Michael Deveraux, Ben Lockwood, and Michela Redoano found that the desire for nations to be internationally competitive has been the principle driver of these declines.
Even if neoclassical economists were to acknowledge that our tax code needs to be more competitive, most would counsel cutting the marginal rate, not adding or expanding particular incentives to cut the effective rate. William Gale, director of the economic studies programs at the Brookings Institution, sums up this view in a debate on a National Journal blog: “The sine qua non of meaningful tax reform is to clean out and rationalize the exclusions, exemptions, deductions, and credits in the tax system.” Translation: Get rid of incentives for innovation and just give everyone the same low tax rate.
While appealing in its simplicity, this conventional view is based on a faith that markets work efficiently and that taxes only distort activity, leading to less innovation. But a position on taxes should be based on empirical evidence, not faith. In fact, there is compelling scholarly evidence that businesses do not capture all of the benefits of their investments in R&D, workforce training, and new machinery and equipment, particularly IT. As a result, without specific encouragement, companies will invest less in these areas than is optimal. This gap between the level of spending supported by the market alone and the social optimum justifies a role for government.
In contrast to the faith-based neoclassical economics view that dominates Washington’s economic thinking, “innovation economics” is based on a view that economies differ by time and place and the only way to make effective policy is to pragmatically analyze each situation.
Mark Foster: Elevating Risk to Its Proper Place
August 17th, 2009 | Posted by innovIn looking at the meltdown of the global economy, it’s clear that poorly planned and executed risk management was a major contributor. And while the spotlight has focused largely on the risk failures of big financial organizations, large corporations in every industry have their work cut out for them with regard to risk management.
Traditionally, risk management has been reactive, planned, and largely process-driven, with the focus on financial scenarios and compliance requirements rather than risk’s impact on corporate strategic objectives. Risk has not been integrated effectively or efficiently into corporate decision-making.
This is borne out by Accenture’s 2009 Global Risk Management Study, which surveyed the risk-management attitudes of 250 of the world’s largest companies. In our study, fewer than half the respondents said that at his or her company’s risk management is deeply involved in strategic planning and investment and divestment decisions. And only a quarter said risk management has a real stake in setting objectives and managing performance.
This is a major problem that must be addressed with haste.
Effective risk management must be based on proactive, continuous assessment of all potential risks to a company. The operational, financial, strategic, and hazard-related risks of decisions—whether in introducing a product in a new market or shutting down a manufacturing plant—must be examined through these prisms. Since all corporate decisions carry potential risk, it is vital that a company assess risk both internally and externally.
At its most effective, risk management plays an integral role in the governance process, and the head of risk management is a trusted and empowered member of the executive team, whether he or she is the chief risk officer, the general counsel, CFO, or treasurer. While the CEO is the chief risk decision maker in any organization, the person with ultimate responsibility for risk management should report either directly to the CEO or no more than one level down.
Make risk management part of performance management
To achieve the kind of change that is needed, a major cultural shift is required. Risk management must be elevated in importance, a risk-based decision-making culture must be supported, and the relationship between risk management and performance management must be recalibrated. Executive management should ensure that risk management is at the forefront of decision-making and that it is consistently applied across the organization. Any weak links in a company’s risk-management capabilities (people, processes, technology, analytics, organizational structure, policies, and communications) must be identified and addressed.
What should risk management look like in the wake of the financial crisis? A solid risk-management program should have four major goals:
• Achieve the right balance between performance and risk.
• Treat risk as a competitive differentiator to better manage the business, deliver sustainable shareholder returns, and help sustain profitability, ratings, and reputation.
• Integrate risk-management practices and procedures throughout the enterprise to ensure that growth targets are achieved while downside risks are avoided.
• Instill a culture of risk consciousness that respects and measures the importance of managing risks against reward.
Although the crisis in the financial-services industry ignited the global economic meltdown, all business sectors eventually became engulfed in it. The financial crisis simply magnified a silo-focused and reactive risk-management problem that has operated for years. Since large companies today are part of a dense web of global networks that make them particularly vulnerable to breakdowns in risk management, it’s even more urgent to fix these problems.
a proactive and dynamic program
To understand the consequences of risk for their own supply chain, customer relationships, financing, and human capital, management must be diligent about monitoring external events that could have a negative impact on their company. They must also strive to improve the quality of information and data they use in assessing risk and create a dynamic risk-management program that has the flexibility to deal with a very fluid economy. An integrated and anticipatory risk-management capability supported by the right technology isn’t just a protective tool—it can be a competitive advantage.
The good news is that the executives who participated in Accenture’s survey were nearly unanimous in their belief that current risk-management practices need to be overhauled to correct deficiencies and capitalize on emerging opportunities. Most said their companies are responding by increasing their investment in risk-management capabilities and that they expect the changes to deliver positive financial results.
It’s my belief that the swift decline in sales and revenues that many companies have experienced shocked them into action. Hopefully, that means they are focusing greater attention on risk than they have in the recent past. Just because we’ve experienced the greatest jolt to the economy since the Great Depression does not mean it can’t happen again. While risk is only one of many critical issues management must get right, it’s certainly one that needs to be addressed.
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