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De-risking Pension Plans

As Seen in CFO Studio Magazine Q3 2016 Issue

NO ONE-SIZE-FITS-ALL APPROACH BUT GUIDANCE NEVERTHELESS

De-risking benefit and pension plans, a trend set in motion by the recession, new reporting requirements for pension liabilities, and waves of baby boomers reaching retirement age, was the discussion topic at a World-Class Companies CFO Dinner held recently at MetLife Stadium, and hosted by CFO Studio. The unfunded liabilities that pensions represent on a business entity’s balance sheet can hurt the company’s ratings from debt agencies and its attractiveness to investors. De-risking strategies are intended to mitigate three primary issues: the effects of market volatility on monies invested in the pension fund, interest rate risk, and consequences of events that do not meet actuarial assumptions, such as having a large number of employees reach retirement at the same time.

“There are always differences between reality and those assumptions,” explains Claude Draillard, Vice President, Finance, Dassault Falcon Jet Corp., the evening’s discussion leader. Two frequently encountered discrepancies are “when the population changes dramatically and when the rate of return on the assets is much lower than planned. In both cases, you need to fund those differences at some point … and that could impact your cash.”

There is no one solution related to de-risking a pension plan. “De-risking can take widely different forms once you have analyzed your population,” said Mr. Draillard.

Some de-risking strategies include offering retiree buyouts or purchasing an annuity that effectively transfers pension obligations to a private insurance company. “Is it in your company’s best interest to offer retirees a lump-sum payout instead of monthly pension payments? These are questions that must be kept in mind,” says Mr. Draillard. “It’s important to analyze the situation all the way to its final outcome.” He adds, “Decisions made today about pensions will have their full effect for the company’s financials in as long as 30 or 40 years.”

New Job for CFOs

Pension plan management, once an assignment of the benefits department, is now on the finance agenda. The actions the CFO takes depend on the circumstances of the company’s populations and how the pension plan relates to your long-term strategy, explains Mr. Draillard.

“There are many questions regarding this. Where is the emphasis in your company? Is it in keeping cash for the short term or is your company more interested in making sacrifices with an eye to the future?” he asks.

“Pensions are an important tool in the box to help with retention,” says Mr. Draillard. His company’s plan is richer than most in order to do so. “It has become not only a retention tool but it helps us attract seasoned professionals. Aircraft mechanics make up a shrinking population. A pension is meaningful to a mid-40s [FAA-licensed] professional. It isn’t as important to millennials as it is to these seasoned professionals.”

Cash-flow Negative

According to Cerulli Associates, a leading research firm specializing in asset management and distribution trends worldwide, America’s pension system will turn cash-flow negative this year. This deficit will continue to increase as baby boomers retire. “This has significant impact on CFOs and must be kept in mind when creating a de-risking plan,” asserts Mr. Draillard.

A CFO Studio business development partner, Isaac Buchen is Leader of PwC’s Pension Risk Management practice. At the dinner he recommended “a series of steps that will allow plan sponsors to understand the nature of risks embedded in the current plans, establish key risk-management approaches, and embed a culture of periodic monitoring to make sure that the risk-management steps are having the desired effect.”

Mr. Buchen explained in an interview that “plan sponsors generally have four levers at their disposal to address pension risk:

• Benefit lever or changes to the plan design, including offering lump sums to terminated vested participants,

• Investment lever or changes to the overall asset allocation,

• Contribution lever or developing a strategy of how to fund the plan and potentially making non-cash contributions, and

• Insurance lever or buying annuities for participants from an insurance company.”

As the dinner discussion drew to a close, the group gathered in the Jets Green Room at MetLife Stadium overlooking the field where the CFO guests watched the New York Jets play the Buffalo Bills.

Participants left the discussion with an understanding that there is a clear trend toward de-risking benefits and pension liabilities, and that the actual approaches taken are many, depending on the industry, the composition of groups covered by the pensions, and strategic priorities.

Premier Customer Care as a Competitive Edge

As Seen in CFO Studio Magazine Q3 2015 Issue

CFOs have an important role in improving the customer experience

Improving customer experience can add more than $1 billion in revenues for large businesses, according to data from Forrester Research. Happy customers make follow-on purchases, recommend your product or service to others, and limit churn. No wonder more and more CFOs are taking a closer look at customer satisfaction scores (measuring if an organization is reaching its own customer satisfaction goals); net promoter scores (measuring customer loyalty and customers’ likelihood of recommending a product or service), and customer effort scores (measuring the customer’s difficulty getting desired results from the company).

Customer care was the discussion topic at a recent CFO Studio Executive Dinner for CFOs of World-Class Companies. An intimate group of finance executives from some of the region’s largest, most successful, and highest-performing organizations gathered for dinner, wine, and conversation at the Blue Morel Restaurant and Wine Bar in Morristown, NJ. The evening was sponsored by Yorktel, a communications technology provider, and hosted by CFO Studio and Real Estate Strategies Corporation.

Harald Henn, vice president and CFO of Mercedes-Benz USA, served as the dinner discussion moderator. “People often think in terms of product, rather than service, or they think process instead of culture. But all of these things have to coexist to be successful,” said Mr. Henn.

“The CFO’s job is to create growth, and you can’t do that without customers,” said Richard Veldran, CFO of Dun & Bradstreet. “Regardless of your industry, customer service is essential.”

“No matter what your role is, we all have to focus on the customer experience every day,” said Ronald Gaboury, CEO of Yorktel. “All the executives are, in effect, partners in serving customers.”

“The level of customer care a company provides is a distinct competitive advantage or disadvantage,” said Andrew Zezas, publisher of CFO Studio magazine and CEO of Real Estate Strategies Corporation. “With today’s CFOs becoming more and more strategic, they are becoming more focused on how they can help support their companies in delivering the highest level of customer care.”

Gunther Mertens, vice president and CFO of Agfa Corporation, said he believes that C-level executives, regardless of the business function for which they have primary responsibility, have to be concerned with providing high-quality customer service to ensure that their company is serving the customers end-to-end. “Customer service is more than recruiting and managing order-takers,” said Mr. Mertens. “It is about managing the process from the sale to delivery to support. If you hire the right people throughout that process, your business becomes a trusted partner.”

“To really support business, I have to be in the know about the customers, said Burkhard Zoller, CFO of Evonik Corporation. Mr. Zoller is in the specialty chemicals industry and pointed out that while the Internet allows some consumer companies, such as Mercedes and Avis, to have access to immediate customer feedback, business-to-business organizations have to actively seek out feedback on the customer experience.

Maximo Nougues, CFO of Maquet Medical Systems USA, agreed. “Today, in the medical engineering industry, the customer experience has become much more important than it has ever been.”

Mr. Nougues went on to explain that sales is just the first step in winning and retaining business. “The moment you earn a customer’s business, you are at a disadvantage because now you have to earn their business every day. The competition then has the advantage of being unknown.”

“Even if customer service isn’t your direct responsibility, it is your responsibility as a leader in your company to demonstrate to the other employees that you are focused on customer service,” said David Wyshner, senior executive vice president and CFO of Avis Budget Group, Inc. Mr. Wyshner also said that among the typical numbers and descriptions contained in an annual report, Avis dedicates a few pages to the “voice of the customer,” because that sheds light on corporate performance.

Mr. Henn shared the fact that Mercedes benchmarks customer service not just against companies within the auto industry, but against outside industries as well — from hospitality to e-commerce — to find customer care best practices.

Robert Costantini, executive vice president and CFO of ORBCOMM, Inc., summarized: “Nothing [in business] happens unless you have customers, so you better have happy customers. A CFO will always deal with customer service at some point. Proactive CFOs get on it on the front end.”

Corporate Governance and the CFO

As Seen in CFO Studio Magazine Q3 2015 Issue

A discussion of the good, the bad, and the ugly in dealing with corporate governance

Navigating the relationships between members of the board and the company’s executives is an important skill for a CFO to master. In order to successfully fulfill their leadership roles within their organizations, finance executives have to refine their approach to corporate governance.

Recently, CFO Studio hosted its Executive Dinner at Al Dente in Piscataway, NJ, where guests gathered over food and drink to discuss their experiences working with and serving on boards. The dinner meeting was one of a series of gatherings of CFOs, which was underwritten by BDO, an assurance, tax, financial advisory, and consulting firm; and hosted by Real Estate Strategies Corporation, a corporate real estate advisory and consulting firm.

Michael Mardy, executive vice president and CFO of Tumi Holdings Inc., a wholesaler and retailer of a range of travel and business products, led a discussion entitled “Corporate Governance: The Good, the Bad, and the Ugly.” Mr. Mardy has served on several boards throughout his career, including Green Mountain Coffee Roasters, Inc. and ModusLink Global Solutions, Inc.

“Once they hit a certain point in their lives, a lot of people want to become board members,” said Mr. Mardy. “But, it’s probably vastly overrated as a gig you can have in retirement. Generally, it is a lot of work, it exposes you to legal liability, and it exposes you to working with other people who might be problematic.”

“When you manage a board, you realize the world of corporate governance is imperfect, at best,” said Mr. Mardy. “It can be dysfunctional. It can be contentious. It can be counterproductive to managing the business.”

Private Equity vs Venture Capital

The executives discussed governance under private equity (PE) and venture capital (VC) structures, with guests agreeing that the goal of both types of firms is to improve the company’s financials and move on, leaving the company stronger than when the investors entered.

“Venture capital firms tend to have a very long-term horizon, whereas the PEs manage year-to-year and quarter-to-quarter,” said Andrew Savadelis, CFO of Angion Biomedica, a biotech company.

“Private equity firms are not interested in just betting on a venture,” said Mr. Mardy. “They’re interested in betting on a business. They’re not only dealing with the leverage, but they develop a strategy, and actively manage that strategy to get the company into the right kind of business model. In approximately five years, they have liquidity, and take their money to the bank, before they raise their next fund. VCs are completely different.”

Michael Van Patten, vice president at Smart Tuition, a software company for managing tuition and school enrollment, has worked with PE-owned companies, VC-owned companies, and public companies. “I’ve got a lot of experience with different corporate governance bodies,” said Mr. Van Patten.

He added that PEs tend to be more interested in managing the business, but this can create the danger that they will be micromanagers. “They want to control the company, and would leverage the company to the hilt. They don’t have as much invested,” said Mr. Van Patten. “The VCs would put more money in and not worry about the leverage, so they don’t have to have control of the company.”

Leveraging the Strength Of the Board

“The CFO’s ability to manage a board is critically important to the success of the organization, both on the private equity side, as well as the public company side,” said Mark Giamo, partner at BDO. “You can’t underestimate the ability of the executives to manage the board. Managing the board means taking as much from the board as you can, finding their strengths and leveraging them to run your business, for governance purposes, or whatever it may be. Get everything you can out of your board. But managing also means managing their expectations.”

Lisa Van Patten, principal consultant at NetSuite, an integrated cloud business software provider, offered a different perspective. “To me, it’s the other way around,” she said. “It’s not that I want to manage my board. I want my board to manage us. As a CFO, your biggest fear is that you’re going to have a rogue CEO and a board with absolutely no oversight. You want to know they are really watching our backs. You want to know that they’re making sure, ‘Have you covered yourself here, because there’s a risk?’ That is what corporate governance is supposed to be. As a CFO, I could be personally liable for what the CEO does.”

“The biggest leverage that you have is the 404,” said Bob Dennerlein, executive vice president and CFO of Dialogic, service providers and application developers, referring to a section of the Sarbanes-Oxley Act that deals with internal controls. “You’re partnering with the CEO at that point. It’s a great defense mechanism against any kind of pressure that you might feel. If you had a strong audit committee chairman, you’ve got an advocate on the board, and that makes it easier.”

Ray Cardonne, CFO of DLB Associates, a privately held engineering consulting firm, has past experience in finance roles at public companies. He explained that when he and the CEO at a public company would disagree about a strategy, the board’s audit committee served as a neutral advisor.

“The audit committee meeting was typically the day before the full board meetings,” said Mr. Cardonne. “The general counsel and I would attend the audit committee meetings and it was a way to work things out without having to go in front of the full board. After the audit committee, the GC and I would have a telephone call with the CEO to explain the outcome and say, ‘This is what the outcome is, just so you know what to expect going into the board meeting the next morning.’”

Mention of a pre-board meeting preparation sparked more dinner conversation about how decisions involving the board are really made — before the actual meeting. “I think many CFOs need to gain a better sense of how to be more politically savvy,” said Lalit Ahluwalia, CFO of biotech company Ferring Pharmaceuticals. “You have to be able to build a network with the board members, so that you build your own credibility with them.”

Brian Giambagno, CFO of Action Environmental Group, a provider of waste collection services, agreed. “More big decisions are made at the bar before or after the board meeting than during the board meeting,” he said. “Everybody knows everybody.”

Is the Board’s Decision Final?

The group also acknowledged that there are many times when the CFO cannot press the board on what he or she truly believes is the right decision. In fact, many times, a CFO has to back down.

“You can say you will do the right thing [for the company’s financial health] even if you have to lose your job, but at the end of the day, it’s much easier said than done,” said Walter Cirillo, treasurer of AeroGroup International, a privately held company.

“It’s all about the personalities, and, I hate to say it, but in many ways, it’s survival. The bottom line is, unless you’re being asked to do something illegal, most of the time, you’re just going to go along with the CEO, or with the board, because that’s part of the job.”

Baldeep Dua, CFO of Kirusa Inc., an international software company, agreed with Mr. Cirillo. “Unless it’s illegal, you’re made to go along with the CEO or the board,” she said. “As a CFO, you’re a strong voice in the boardroom. All you can say is you have an opinion. If there are five or 10 people who agree on a strategy, and you disagree, your voice is important, but may not be the loudest. Ultimately you have to do what the team says. You should have a strong opinion, but you cannot override, no matter what your reservations may be.”

Andrew Zezas, publisher of CFO Studio and CEO of Real Estate Strategies Corporation, summed up the consensus of the group. “However the decisions are ultimately made, it is important to fight when necessary to do what you believe is right for the business,” he said. “Ultimately, the board may know about financial engineering, but you know how to run your business.”