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Your recent cover story on growth strategies ("Ready, Set, Grow?" May) was very timely. Growth is incredibly valuable, and many companies will wait too long to step up their investments in it.
Our latest work is relevant to this topic on two fronts. First, our research on how capital markets value growth versus return has proven very insightful and will be documented soon in Morgan Stanley's Journal of Applied Corporate Finance (the article is called "Postmodern Corporate Finance"). It turns out that return on capital makes old assets look better than new assets, misrepresents the value of new investments, and stifles investments in growth.
Second, we have done considerable research on capital deployment and have found that over many different time periods, both for the whole market and for numerous individual industries, the companies that invest in the business (that is, capex, R&D, cash acquisitions, and so on) generate much higher share price returns than those that deploy their capital to buy back shares. If a company wants to achieve valuable growth, it has to invest in growth and not just give the money back to shareholders. Of course, standing in the way of this is an obsession with EPS, which nearly always benefits from buybacks.
Investing in and delivering growth is extremely valuable, and most companies would create more wealth for their shareholders if they invested more in the business.
Gregory V. Milano
Co-Founder, Managing Partner, and CEO
Fortuna Advisors LLC
Power from the People
"Putting the 'New' in Revenue" (Topline, April), which focuses on the role of the chief revenue officer, presents valid points on both sides of the top-line growth objective. However, there is a third point missing from the equation.
Shouldn't top-line, profitable growth be a concern for the C-suite and the company's entire workforce? Most employees (people, after all) want to see their companies win big for their customers, community, and, yes, for their families as well. Might organizations be limiting revenue potential by focusing on one point person?
Are the employees who make up an organization's people portfolio (that is, its talent) not already consumers of your product or service? Don't they have family and friends who use this product or service? If the answer is yes, then how might executives strategically incorporate employees' knowledge into the management processes that reach beyond department boundaries and traditional mechanisms? What value would be created if all employees had an opportunity to contribute revenue-sharing ideas?
What might be the quality of ideas over time as employees learn from executives about the critical factors around the approval decision-making process? What might executives learn about the overall people portfolio and the rising talent? What efficiencies might be gained as collaboration increases? Rather than focus on what one organization can get, perhaps it's time for a new revenue-generating model that optimizes the value found in the power of people.
The Infusion Group LLC
Apex, North Carolina
Expanding the Terms
Your article "Lien on Me" (April) was excellent and of real benefit to your readers, but as a corporate attorney who frequently works on such financings, I feel compelled to point out several other considerations.
Traditional commercial banks also provide receivables-based financing in the same manner as finance companies. The definition of "eligible account" is perhaps the key business and legal element of such transactions. The definition is often quite elaborate, stretching for nearly a page, and greatly narrowing the borrowing base from what businesspeople commonly expect, and as you note, prescribing commercial terms for dealing with borrower customers. In a recent transaction for one of my clients, there were 15 exceptions and carve-outs, including a very general one that allowed the lender to exclude anything from client customers as to which it had any concerns.
Lenders often seek to include in documentation language that allows them to take control of the proceeds of the receivable collateral at their discretion, even in the absence of a default. If they exercise such a right, the results are likely to be devastating to a borrower.
As is true with other financings, lenders are seeking to expand the definition of events of default beyond standard ones (such as failure to make payment, procure insurance, and so on) to include "general insecurity" about the borrower's business. Those considering such a financing need to make sure they work closely with experienced advisers.
Law Office of Martin B. Robins
Buffalo Grove, Illinois
Target-date funds, in general, need to be carefully considered ("Sea Change," April). I found that a lot of the target-date fund families included large allocations of junk bonds in their funds, even those that are actively marketed to retirees and those near retirement. In some of the families, junk bonds approached 13% of the bond portfolios in the "retirement" or 2010 funds.
In regards to wrapping a plan with an advice service, there are two things to consider. First, is the provider accepting the ERISA risk for the advice? [According to several attorneys I know], "co-fiduciary" has no meaning nor force of effect under ERISA. In our contracts, we specifically state and accept that we are the ERISA Section 3(38) investment manager (fiduciary) for the plan and accept the transfer of investment-selection risk from the sponsor because we are discretionary fiduciaries on behalf of our clients.
Independent ERISA Fiduciary
Deschutes Investment Advisors
Dealing with Fraud
To say that Sarbanes-Oxley cannot prevent fraud because management can override internal controls is only half of the story ("Fraud Case Casts Doubt over Sarbox Exemption," Topline, January/February). According to the Code of Ethics of the Institute of Internal Auditors, there is a pathway of actions that should be taken when fraud is discovered: it should be reported to management. If it is found that management is involved in the fraud or refuses to address the breakdown in internal controls that allowed the fraud to take place, then the internal audit management or executive should report the fraud to the internal audit committee. Ultimately, the CEO and CFO are responsible for the management side of the corporation and the board is responsible to the stockholders. Fraud should never be accepted beyond the risk appetite of the company. The checks and balances are in place, but they must be understood and followed.
North Bay CFO
Santa Rosa, California