On November 4, the nation will choose either Democrat Barack Obama or Republican John McCain as its 44th President. The winner will inherit a mess. Wars in Iraq and Afghanistan, a crisis in the credit markets, a painful housing bust, and soaring energy and commodity prices head the list of thorny problems awaiting the successor to George W. Bush.
How should the next President deal with those problems? When we asked nearly 400 CFOs what advice they would offer, we discovered that they have plenty to say. Moreover, their comments make it clear that, regardless of political affiliation or what color state a CFO may live in, finance executives are following this election very closely. You might even say passionately, given the intensity of many of their responses.
Not surprisingly, most CFOs are deeply concerned about the economy. They want it fixed, and fast, with lower taxes and less regulation the most proffered advice. But they are keenly interested in other issues as well, and far more likely to diverge in their prescriptions. Many want a clearly articulated, multifaceted energy policy, for example, but some emphasize offshore drilling while others prefer incentives for alternative energy. A few call for deporting all illegal immigrants; others want to speed the legalization process.
As for the war in Iraq, many finance chiefs want the next commander-in-chief to withdraw U.S. troops, while others urge him to "damn the torpedoes" and "stay the course." Clearly, there are no easy choices ahead. Perhaps one CFO summed it up best when he simply offered "Good luck."
It's Still the Economy, Stupid
By the time the Democratic and GOP conventions drew to a close, the economy had replaced the Iraq war as the nation's number-one concern. Finance chiefs are quite clear about what specific aspects of the economy merit immediate attention: inflation, the state of credit markets, and tax policy rank as the top three issues facing their businesses. (For more on how CFOs view related economic and credit issues, see "Battered But Not Broken.") Those three economic concerns also number among CFOs' most pressing personal worries, along with the war and homeland security.
The top personal worry for CFOs, however, is energy policy, although there is wide disagreement regarding just what to do about it. Energy policy is also among CFOs' most critical business concerns, with many drawing a clear connection between rising energy costs and the risk of inflation.
"Our input costs have gone up and then our freight costs have gone up. So we pass that on to customers in surcharges," says John Lemmex, controller at Bayer Material Science, a specialty-chemicals company. "But that creates an issue for the overall economy, because those prices are going to ripple." Illustrating how many companies are moving ahead with price increases as they face ongoing margin pressure, Lemmex points to industry giant Dow Chemical, which announced in June that it would boost prices by 20 percent and then followed that hike with a 25 percent increase in July. "It makes it easier for us to go and raise prices when someone is leading like that," Lemmex says.
Kevin Burke, a vice president of finance at Solutia, another specialty-chemicals company, likens rising inflation to a circular reference in an Excel spreadsheet. "The price increase just keeps going around and around," he says. Burke has seen the cost of a key raw material, sulfur, rise in concert with the cost of oil. "It's a byproduct from oil refining and we used to get it more or less for free," he says. "But now it's gone up quite significantly." Burke says he worries about fluctuation in the value of the dollar and its impact on the price of oil, and urges the next President to put pressure on speculators.
To boost the dollar, many finance executives say the next President must tackle the budget deficit. Although more than half of federal spending is devoted to mandatory programs like Medicare and Social Security, CFOs note that the Iraq war, projected to cost more than $1 trillion, has put a serious dent in the budget. "The wars [in Iraq and Afghanistan] area key issue because of the tremendous deficit that is building," says Joe Franzese, head of finance for the Bank of Ireland in the United States. "How do we get out of there in the safest way so that we don't destabilize the region? That would have so many effects on the deficit and the currency."
Even CFOs who have benefited from the low dollar by expanding their businesses into international markets acknowledge that the weak currency's link to inflation is a concern. "Having a deflated currency is not exactly where you want to be," says Rob BonGiovanni, the recently retired CFO of Curtiss-Wright Flow Control.
Austan Goolsbee, a professor of economics at the University of Chicago and a top adviser to the Obama campaign, assigns blame for the weak dollar to the policies of the current Administration. "We've seen flagrant mismanagement of the macroeconomy over the last eight years," he charges. "The apparent lack of care for huge trade imbalances and deficits has put heavy pressure on the dollar, which sets the stage to make the problems of commodity price inflation far worse." Obama, he says, proposes to shrink the budget deficit in part by raising the tax rate on capital gains and dividends to 20 percent from 15 percent for those making more than $250,000 a year.
Aware that raising taxes is a sensitive issue, Goolsbee is quick to claim that "taxes as a share of [gross domestic product] in the Obama plan will be the same as they were under Ronald Reagan." Still, practically any tax hike will face resistance from some CFOs. "If you raise taxes, you will sink the economy," predicts one survey respondent.
John McCain opposes raising the capital-gains tax and would instead address the deficit in part through job creation, says Taylor Griffin, a senior adviser to the McCain campaign. The Arizona senator also plans to make George Bush's 2003 tax cuts permanent. (For more on the candidates' tax policies, see "How Taxing?" at the end of this article.)
As for another troubling aspect of the economy — the credit crunch — McCain supports the approach the Federal Reserve and its chairman, Ben Bernanke, have taken thus far, says Griffin. Steps like extending banks' access to the discount window through January are "the best things we can do to restore liquidity," he says.
In early 2006, Obama introduced the "Stop Fraud Act," noting the deterioration of lending standards that ultimately contributed to the subprime-mortgage crisis, the housing downturn, and the wider credit crunch, says Goolsbee. The bill never became law. But the Illinois senator was also an early supporter of a successful plan, proposed by Rep. Barney Frank (D–Mass.) and Sen. Chris Dodd (D–Conn.), to facilitate the rewriting of mortgages to enable more borrowers to make their payments. "Senator Obama has been way, way ahead of the curve in thinking about credit and financial markets," says Goolsbee.
Sixty-seven percent of CFOs say the credit markets are of high importance to their businesses. But they generally acknowledge that the President doesn't hold much sway over credit. Still, "the next President can play some role in stabilizing the economy," says Stewart Smith, finance chief at The Ohio Police and Fire Pension Fund. "Budget and economic policies are clearly important, but so are tax policies." Smith says a lack of confidence among consumers, investors, and lenders has spurred the credit crisis and could be remedied in part by boosting individual savings rates. He suggests decreasing or eliminating taxes on savings to encourage people to put more money away.
While typically opposed to government intervention in financial markets, CFOs strongly support the federal takeover of mortgage giants Fannie Mae and Freddie Mac, according to a separate survey conducted in late August by CFO and Duke University. Seventy percent said they approved of the dramatic move.
Needed: An Energy Plan
Campaign debate over the country's energy problems has lately devolved into a heated argument over offshore oil drilling, and with the selection of Alaska governor Sarah Palin as the Republican Vice Presidential candidate, drilling in the Arctic National Wildlife Refuge has surfaced again as a major point of contention. CFOs think the two sides should step back and come up with a coherent energy policy first.
"We presumably created an Energy Department in the U.S. because we felt that it was really important. It's a cabinet-level position. But frankly, we don't really have a comprehensive strategy," says Joe McCarthy, finance chief at Sunrise Growers FrozSun Foods, a California-based seller of frozen fruit.
Many CFOs advocate a kitchen-sink approach. "We need to attack the problem on multiple fronts and signal to the world our seriousness about dealing with our own energy dependence," says Smith. Wind, solar, biofuels, offshore drilling, nuclear power, incentives for further alternative-energy development, and conservation efforts should all be on the table, say many finance executives. "The key is a slow and steady approach toward these initiatives and our government being serious about our efforts," says Smith. "Lip service and gas-tax holidays will not cut it."
BonGiovanni of Curtiss-Wright believes offshore drilling "would be pragmatic and would have a psychological impact across the world. It would show people that we are not fully dependent on foreign oil." At the same time, he admits that such exploration would be "phenomenal" for his company, which makes valves and pumps used in oil drilling. Then again, Curtiss-Wright would also supply parts to makers of nuclear power plants or wind farms, so the company would benefit from other initiatives as well.
The Bank of Ireland's Franzese would like to see the United States boost the amount of energy it derives from wind. "Wind is one strategy we must pursue," insists Franzese, who observed the widespread European use of wind power during a previous job. "It's here, it's available, and it works."
McCain and Obama both say they have comprehensive energy plans. "Senator Obama has proposed a $150 billion program of research and development and alternative-energy deployment over 10 years," says Goolsbee. "He views alternative energy as a great possibility for the economy as a whole. It's a means of rejuvenating the hard-hit manufacturing and construction sectors in the U.S." Obama also proposes conservation efforts, including a $7,000 tax credit for advanced vehicles — cars that use alternative energy sources.
A key element of McCain's energy plan is a proposal to build 45 nuclear power plants. He also wants to encourage the development of hybrid and electric cars, and hopes to speed the engineering of lower-emissions vehicles by offering a $300 million prize to anyone who can design a next-generation car battery. "Senator McCain's plan is an all-of-the-above approach to ensuring our energy future," says spokesperson Griffin. "We won't be able to move off of oil all at once. We have to phase in alternative sources."
Neither plan may be the answer, says Dale Hosack, CFO of Western Container Corp., a bottler of Coca-Cola products. "As a country we have to change our mentality, and that's really hard," he says. "How do we change our entire national concept of the way we operate? To me, the key trait in the next President is not his economic policy or his energy policy but his leadership skills. We need someone who can get people to change."
While energy and the economy dominate the national conversation this election season, there are other issues that matter to CFOs, too, including personal concerns that may have little relevance to their companies. For example, finance executives rate the wars in Iraq and Afghanistan as an issue of significant personal importance, but they score the conflicts much lower when considering their relevance to their businesses.
In providing advice to the next President, finance chiefs consistently urge a renewed focus on domestic issues. "Focus internally on things like infrastructure, energy prices, and domestic issues," writes one survey respondent. "Lessen involvement in Iraq and Afghanistan and build a stronger United States from within."
When they enter voting booths in November, CFOs will have to reconcile their personal and professional priorities and decide which candidate's platform suits them best. Many have noted that neither McCain nor Obama offers a perfect fit, but nearly all plan to vote. As of late July, a majority (63 percent) were poised to vote for McCain, 26 percent for Obama, and a full 10 percent were undecided or had other candidates in mind.
As they prepare to fill out their ballots, most CFOs would likely admit that the Presidency of the United States is one chief-executive slot they don't aspire to. But should they ever have the opportunity, most seem prepared to offer some very detailed policy plans.
Kate O'Sullivan is a senior writer at CFO.
Debating the True Impact of Corporate Tax Rates
The contrasting proposals on corporate rates offered by John McCain and Barack Obama have revived an old debate about the effects of taxation.
For starters, McCain wants to lower the top corporate tax rate from 35 percent to 25 percent, while Obama says he will hold the rate steady. On the other hand, the Illinois Democrat proposes to eliminate capital-gains taxes on start-ups and small businesses. Obama also wants to give small businesses a health-tax credit and research-and-development incentives. Meanwhile, McCain pledges to expand and extend R&D tax credits, and promises to allow businesses to write off their investments in equipment immediately.
Proponents of reducing the corporate tax rate say it would put U.S. companies on a more level playing field with companies in other industrialized countries. The conservative American Enterprise Institute argues that a higher corporate tax reduces the tax base by encouraging companies to invest elsewhere, thus offsetting any revenue gains. Recently, in an analysis of effective corporate tax rates in 85 countries, a team of economists from the World Bank and Harvard University found that increasing the rate by 10 percent reduces the ratio of investment to gross domestic product by 2 percent. They also confirmed that high rates encourage companies to use more debt financing, which is tax deductible but riskier.
But are corporate taxes in America really as high as commonly supposed? The Tax Foundation reports that U.S. corporate taxes are 50 percent higher than for the average country in the Organisation of Economic Cooperation and Development and second only to Japan. However, such figures refer to the statutory tax rate, not the effective rate that firms actually pay once tax breaks are factored in. If all such special exceptions were eliminated, says a 2007 report by the Treasury Department, the top corporate tax rate could be reduced to about 25 percent (versus the current 35 percent) without changing the level of tax revenue currently collected. — Alan Rappeport
Gauging the Returns Companies Reap from Their Political Contributions
The power of corporate largesse in politics was first demonstrated in the Presidential election of 1896, when corporate contributions helped Republican William McKinley outspend his Democratic opponent, William Jennings Bryan, by a stunning margin: $16 million to $600,000.Today, companies continue to spend heavily on political donations, and not just to candidates: so far in this election cycle they have donated $214 million to business-backed political action committees and have spent a whopping $1.3 billion on lobbying.
What do companies get in return? Researchers have found that companies with high lobbying expenses outperform both benchmark companies and companies that spend nothing on lobbying. As for contributing to politicians' campaigns, in studying 25 years' worth of corporate political contributions, academic researchers recently found that the average company reaped $156.6 million more in annual compounded returns per year compared with noncontributing companies with similar risk characteristics. But it's not all good news: according to a study from a professor at the University of Minnesota, increased campaign contributions correlate to increased litigation risk. From 1996 to 2005, 13.4 percent (222) of public companies that donated to political campaigns were sued by the Securities and Exchange Commission for alleged accounting and auditing violations, or in class-actions. That compares with 8.4 percent of the total 11,825 public companies sued for the same reasons over the same period.
A survey of 255 directors of Russell 2000 companies conducted by Mason-Dixon Polling & Research found that corporate boards have mixed feelings about political contributions. Two out of three directors said that political advocacy and spending don't give their companies or industries "favorable legislative, regulatory, or tax treatment." Yet 63 percent agreed that "effective and active political advocacy by our industry, including fund-raising and spending, is essential to our industry's competitiveness and bottom line."
So how much corporate money is being raised by the current Presidential candidates? According to the Center for Responsive Politics, as of early September, Obama had received $90.3 million from companies in10 business sectors, compared with $61.2 million for McCain. As for contributions from finance chiefs, in an analysis of data from Congressional Quarterly's Money Line, CFO found that 144 donors who listed their occupation as "CFO" or "Chief Financial Officer" contributed a total of $242,865 to McCain in the 2007–08 election cycle (as of July 31). Over the same period, CFO found that Obama had collected $446,826 from 316 such donors. — Kate Plourd