Every Issue
News & Reviews
Edited by Scott Ladd
LEGISLATION
JOBS Act Aims To Help Raise Capital
The Jumpstart Our Business Startups (JOBS) Act, which recently became law, is designed to enhance the ability of new and fledgling public companies to raise capital. The ramifications of the new bill, and the opportunities available to smaller businesses, are considerable.
The drive toward easing capital formation restrictions comes after a concerted effort by U.S. business groups, including the U.S. Chamber of Commerce. Proponents of the law believe it will encourage badly needed capital injections for smaller companies; critics say it could expose investors to some financial harm.
The SEC, which will have regulatory oversight, is soliciting public feedback on several critical provisions.
Perhaps the key element of the legislation is that it creates a new category of public company. These new organizations, called Emerging Growth Companies (EGC), are defined as companies with annual gross revenue of less than $1 billion during their most recent fiscal year. That designation holds in the first year after company revenue exceeds $1 billion, and during other on-ramping phases.
BUSINESS COSTS
Low-Cost Cities for Business
Cincinnati, take a bow. The “Queen City” was at the top of Competitive Alternatives, the most recent KPMG survey of the least-expensive areas in the United States for conducting business.
The study concentrated on the country’s 27 metropolitan areas with populations in excess of two million. Cincinnati was cited for its low cost of facility leasing, transportation and property taxes.
Atlanta was rated the second most cost-competitive location in the large-cities category, ahead of Orlando, Tampa and Dallas-Fort Worth. Among the other cities that fared especially well were Baltimore, St. Louis and Cleveland. At the other end of the spectrum, not surprisingly, San Francisco and New York were rated as the highest-cost cities.
Hartley Powell, a principal in KPMG’s Global Location and Expansion Services practice, said the study enables companies to perform a “quick scan” of locations to determine which markets can offer a most advantageous business environment. In all, he said, 26 cost components were used to analyze markets and measure cost-effectiveness for businesses.
“The study is particularly valuable for its measurement of significant factors that contribute to business operating costs and which often vary by location, including costs associated with taxes, labor, facilities, transportation and utilities,” said Powell.
Digging a little deeper, the study finds that certain factors strongly affect how particular cities are regarded as more business-friendly. Atlanta’s effective income tax rate and advantages in competitive business costs, notably in transportation and leasing, gave it a leg up. The labor force of Dallas-Fort Worth was less expensive, and Baltimore benefitted from relatively low lease pricing and property taxes.
On the flip side, San Francisco and New York labor under high real estate prices — leasing and purchase — and a tax structure that made it difficult to compete with some of the other more affordable metropolitan areas.
“While business costs are a major component of the site-selection process, organizations should carefully consider non-cost factors that influence the business attractiveness of different locations,” Powell added.
The baseline cost index as established by KPMG is set at 100 points, and is defined as the average of business costs in the four largest U.S. metropolitan areas: New York, Los Angeles, Chicago and Dallas-Fort Worth. Below the 100-point index falls the less expensive area. Cincinnati was rated at 95.9, while San Francisco stood at 104.5.
SUCCESSION PLANNING
Preparation Key for Business Preservation
With uncertainty surrounding the current estate tax law, families inheriting closely held businesses could be subject to unexpected estate tax liabilities following the death of the patriarch or matriarch owner. That, quite possibly, could force owners to sell assets to satisfy the tax estate demand.
With credit markets still functioning below par, a growing number of family business owners are feeling trapped with no viable exit strategy, notes Henry Paula, a tax principal with national accounting firm Reznick Group. Paula says that private business owners who are collectively sitting on billions of dollars in assets nevertheless often neglect succession and estate planning.
And they do so at their own peril, Paula suggests. “The more closely held the company, the more likely the owners have most of their wealth tied up in their business, which can create both a personal and a corporate financial crisis,” he adds.
“Without solid estate and succession planning, heirs could find themselves with a company languishing without strong leadership and possible tax bills at a maximum marginal estate tax rate of 35 percent, excluding state inheritance taxes, depending upon the size of the estate and potential legislative changes,” Paula says.
Proper succession planning for closely held businesses can:
▪ Help with a more viable exit strategy for owners.
▪ Promote the continuation of a family business as an ongoing concern.
▪ Avoid or reduce costly taxes on ownership transfers.
TAX POLICY
Tax Executives Sour on Prospects for 2012 Tax Reform
In its sixth annual survey of leading tax executives on the direction of tax policy, Washington, D.C.-based law firm Miller & Chevalier Chartered found this year that executives were pessimistic about much getting accomplished in a presidential election year. This is despite repeated calls from the business community for fundamental tax reform.
Though none of the respondents believe basic tax reform is likely this year, many were more optimistic about reform in 2013 or 2014.
Still, executives expect a rigorous debate through the presidential and congressional elections on tax policy issues, including the potential for proposals
that might reduce — or increase — business-related taxes. Respondents included a broad cross-section of leaders from major corporations and trade associations in the United States and abroad.
“Expectations for tax legislation are low for the remainder of the year. Respondents see the pending presidential and congressional elections, coupled with the split in congressional control, as likely putting a significant damper on the tax legislative agenda for the remainder of 2012,” said Miller & Chevalier member Marc Gerson, a former majority tax counsel to the House Ways & Means Committee.
At the time of the survey (conducted in March), a majority — 61 percent — said they anticipated an Obama reelection (although most preferred former Massachusetts Gov. Mitt Romney, the presumptive GOP nominee), with the Republicans securing majorities in the Senate and the House of Representatives.
Romney is preferred for his more favorable view of business tax policy, fundamental reform and competitiveness on a global scale.
The upcoming elections will have the most significant impact on future tax policy, respondents predicted, while just 7 percent said Obama administration priorities would be the biggest factor in tax policy changes.
A long-term agreement on the 2001-03 individual tax cuts passed during the Bush administration isn’t likely to happen in 2012, the tax executives said. As for how congressional initiatives will be funded the rest of the year, they cited U.S. taxation of international operations (62 percent), industry-specific taxes or fees (51 percent) and reductions in spending (33 percent).
HEALTH CARE
Directors Focus on Health Care Solutions
Boards of directors are finding the cost of providing and maintaining health care benefits daunting, and the battle over the fate of federal health reform legislation, now in the hands of the Supreme Court, is only making things more uncertain, legal and business experts noted during a recent Directors Roundtable conference in Chicago.
The late-March forum was scheduled to cover potential remedies to the rising price of health care programs. One subject of conversation was a health care strategy frequently used decades ago that has fallen into disuse over the years — the provision of onsite medical services at corporations as a potential means of reining in costs.
According to a report in the Chicago Law Bulletin about the conference, expert speakers noted that several Fortune 100 companies have gone this route and are showing positive results in cost containment and employee satisfaction. Companies over the years moved away from hosting medical facilities on their own premises.
Besides the financial issues to be discussed prior to making such a decision, there are many legal questions that have to be answered, said attorney Kevin Ryan, a Chicago-based partner of Epstein Becker Green, who served as a panelist.
“It can be a little more complex than just saying, ‘why don’t we just hire a physician and put him in the office next door?’ ” said Ryan. He pointed out in the Bulletin account that, by Illinois law, a corporation cannot set up a medical practice; doctors and other medical personnel would have to create their own legal entity so the business enterprise could avoid a potential conflict of interest.
The Directors Roundtable is a national organization that promotes conferences and events to examine key governance issues of the day, ranging from health care and rising costs to regulatory matters and issues of finance and enterprise development.
BOOKSHELF
The Power of Habit: Why We Do What We Do in Life and Business
by Charles Duhigg
Random House, $28.00 274 pages
The basal ganglia is a golf ball-sized lump of tissue in the brain, the importance of which was not well understood until the early 1990s. It was then that a team of scientists at Massachusetts Institute of Technology noticed that rats with impaired basal ganglia developed problems with tasks such as remembering how to open food containers.
By surgically implanting tiny sensors into the test animals’ brains, the scientists were able to track the way the brain responded as rats hunted for chocolate in a labyrinth. There were no set patterns of behavior as the rats sniffed out the chocolate. To the casual observer, it appeared as if the animals were idly meandering about. The electronic sensors told a different story, however: the rodents’ brains were working furiously as they navigated the maze.
Once they discovered the exact location of their sweet reward and made repeated excursions, the trip through the maze became familiar.
And the rats’ brain activity went from racing into overdrive to automatic pilot. “The rats didn’t need to scratch the walls or sniff the air anymore, and so the brain activity associated with scratching and smelling ceased,” reports Charles Duhigg reports in The Power of Habit, a fascinating exploration at how the brains of humans and rodents alike operate, how we acquire and fasten on to powerful patterns of behavior and what we can do to make lasting changes in ourselves.
Citing the observation in 1892 by the social psychologist William James that our lives are but “a mass of habits,” Duhigg — an award-winning investigative business reporter at The New York Times, who holds degrees from Yale and Harvard Business School — declares, “Most of the choices we make each day may feel like the products of well-considered decision-making, but they’re not. They’re habits. And though each habit means relatively little on its own, over time, the meals we order, what we say to our kids each night, whether we save or spend, how often we exercise and the way we organize our thoughts and work routines have enormous impacts on our health, productivity, financial security and happiness.”
According to a Duke University study, he reports, 40 percent of the actions we perform every day are determined by our habits, not conscious choices.
At the same time, Duhigg treats us to a series of illuminating case studies showing how we can harness that power for good. Aluminum-maker Alcoa Inc., the U.S. Army, Alcoholics Anonymous and The Indianapolis Colts have all employed insights into how we humans form habits to, by turns, make workplaces safer, stanch violent street riots in Iraq, produce championship-caliber football teams and enable dipsomaniacs to sober up and reconstruct shattered lives.
“AA, in essence, is a giant machine for changing habit loops,” Duhigg writes. “And though the habits associated with alcoholism are extreme, the lessons AA provides demonstrate how almost any habit — even the most obstinate — can be changed.”
One of the book’s chief findings is the existence of a “keystone habit,” which abides in both individuals and organizations. By altering just one behavior it’s possible for the results to cascade with life-altering, game-changing force.
At the individual level, there was the case of Lisa, whose life was impossibly chaotic. She was 60 pounds overweight, unemployed, broke and divorced when she made the decision to quit smoking. “Over the next six months, she would replace smoking with jogging and that, in turn, changed how she ate, worked, slept, saved money, scheduled her workdays and planned for the future. She would start running half-marathons, and then a (full) marathon, go back to school, buy a house and get engaged.”
Breaking just that one negative activity resulted in profound, systemic change. At Alcoa, for example, an overhaul in the company’s safety program by former CEO Paul O’Neill, over the objections of skeptical directors, managers and stockholders, led to dramatic improvements in not just the company’s safety record but in employees’ attitudes. Workers were empowered to shut down the assembly line.
Eventually, they began speaking up about ways to make product and processes work more smoothly, and morale and productivity rose and revenues and profits soared to record levels.
It is not hyperbole to say that The Power of Habit is one of those books, like Dale Carnegie’s How to Win Friends and Influence People that is destined to remain both popular and useful for years to come. People from every background — from business executives, educators, doctors, lawyers and generals to rank-and-file factory workers and mechanics, students, soldiers and the cop on the beat — will be looking to Duhigg for both inspiration and self-help advice long into the future.
— Paul Sweeney (easysween@aol.com) is a freelance writer in Austin, Texas.