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The Global 100: ...and the Rest

Bribery and corruption; the Middle East; OPEC; Enron; commercial paper; global terrorism; dollarization; safety in numbers; Bermuda inversion; the Final Four; epidemic disease.

28Jun

Bribery and Corruption

"Few men," George Washington once said, "have virtue to withstand the highest bidder." Roughly 200 years later, the United States optimistically passed the 1977 Foreign Corrupt Practices Act, which told U.S. businesspeople not to tempt the virtue of others.

Despite protests that it would place American companies at a competitive disadvantage, the act prohibits them from bribing foreign officials. But since 1997, American companies have had less to complain about, as the United States and 33 other countries ratified the Anti-Bribery Convention of the Organization for Economic Cooperation and Development, making it a crime for their citizens and corporations to bribe foreign officials.

Bribery and corruption remain among the most unpredictable elements of international — and domestic — business. The United States still ranks behind 12 other developed nations on Transparency International's Bribe Payers Index, which ranks countries according to their perceived levels of corruption. And even with the best intentions, detecting and prosecuting bribery that takes place overseas is difficult, if not impossible. The Securities and Exchange Commission, responsible for enforcing the FCPA among American issuers, settled three cases in 2001. Among them was IBM Argentina's effort to win business through kickbacks at a government-owned bank, which IBM itself reported to the SEC. No wonder SEC chairman Harvey Pitt is encouraging self-regulation.

The Middle East

The conflict between Israel and the Palestinians represents the most serious political risk in the world today. At stake are the defense of a key democratic nation, the welfare of the Palestinian people, and preservation of the steady flow of oil.

Having initially shown relatively little interest in the region, George W. Bush is now trying to assume a leading role as peacemaker. That role is complicated by the rise of extreme Islamic fundamentalism, which threatens to destabilize Arab governments in the region, and by U.S. attempts to promote an anti-Iraq alliance.

It remains to be seen whether diplomatic efforts from the likes of U.S. Secretary of State Colin Powell or Saudi Arabian Crown Prince Abdullah will succeed in bringing Ariel Sharon and Yasser Arafat any closer to the peace table. After all, in the Middle East, one person's grounds for optimism are usually another's cause for despair.

Meanwhile, the dependence of the region's own economies on the export of oil, coupled with the reemergence of Russia as a major exporter of petroleum products, should keep the specter of another Arab oil embargo at bay — at least for the time being.

OPEC

It's been more than 20 years since the last oil shock triggered a global recession, in 1979, and the U.S. economy has since become more energy efficient and less dependent on the Organization of the Petroleum Exporting Countries (OPEC). Meanwhile, the cartel has repeatedly had trouble enforcing production quotas that would bolster prices. Still, OPEC continues to have significant influence on the U.S. economy, given that its oil accounts for about a quarter of total American consumption.

Since December 1998, when crude oil hit a low of around $10 a barrel, the cartel has again attempted to restrict production — this time successfully. In 2002, turmoil in the Middle East pushed prices significantly beyond January's level of $18 to $19 a barrel, reaching a six-month high of $28.35 on April 4 before falling to around $26 in May. OPEC member Iraq suspended oil exports on April 8 to protest Israeli policies and U.S. support of Israel, and called on other Arab oil-producing countries to follow suit. But Saudi Arabia and other OPEC members pledged to maintain the global supply of oil, and Iraq has since lifted its embargo.

OPEC still controls 75 percent of the world's known oil reserves, and in the long term it could exercise even more influence on the market. Meanwhile, the steep increase in the price of oil this year could slow the recovery of the U.S. economy from recession, particularly since this recovery has been led by consumer spending, not business investment.

Enron

It may have been the last act of the New Economy stock market bubble, but it ain't over yet. While the commodities trader wallows in bankruptcy, every publicly traded counterpart engaged in remotely similar financial engineering is getting the cold shoulder from investors. Unfair? Perhaps. But in the stock market, perception counts. And creative finance based on such off-balance-sheet vehicles as special-purpose entities is now perceived as sinful, even if the SPEs aren't named Raptor or Chewco.

As a result, CFOs are being pilloried for qualities shareholders once celebrated. This crisis of confidence promises to persist long after former Enron CFO Andrew Fastow's fate becomes clear. And the marching orders for finance, at least for now, are to generate cash flow from organic growth, produce transparent financial statements, and disclose as much as possible.

The marching orders for accountants and analysts have yet to be determined. Without doubt, their credibility, like Andersen's, has been deeply diminished. Paradoxically, there may be a silver lining for CFOs. The fact is, investor faith can be restored only through a return to the business fundamentals. And if investors regain their faith with the help of clear-eyed, no-nonsense finance executives, they will have Andy Fastow to thank for inadvertently pointing the way.

Commercial Paper

The days of easy money are gone.

For the past decade, the commercial-paper market has provided buckets of cheap money for the short-term financing needs of investment-grade companies. Money-market mutual funds, insurance companies, and other institutional investors were eager to lend companies money for short periods and receive a few extra basis points over U.S. Treasury bills.

Times have changed. The weak economy, deteriorating corporate credit ratings, and general post-Enron skittishness have combined to stanch the flow of short-term money. The value of outstanding CP has dropped 12 percent, to $1.4 trillion, since peaking in December 2000. Paper issued by nonfinancial companies is down 45 percent, according to Moody's Investors Service. Last year, Ford, General Motors, and AT&T were forced to seek other forms of financing. More recently, Dow Chemical, Monsanto, and Deere & Co. have been lowered to a P2 rating.

The good news is, many issuers don't need the money. CP debt is often used to finance mergers or capital expenditures, with the intent of raising long-term debt down the road. With M&A activity in the tank and corporate capital budgets on hold, companies haven't needed as much short-term cash. What's more, 2001 was a record year for corporate-bond issuance. One alternative for companies that do need the funding is to provide collateral. "Investors want the paper backed by assets now," says Kamalesh Rao, a Moody's economist.

Global Terrorism

The most obvious impact on business of the September 11 attacks was the recession — which may have happened even if the attacks hadn't. But the more-delayed effects of the attacks are more enduring.

CFOs are wrestling with skyrocketing insurance prices, expensive new security measures, and profound changes in the way they view risk. Although most disaster-recovery plans worked well — particularly backup IT systems — the scale of the attacks highlighted power and communications vulnerabilities. Bank of New York, for example, got its IT systems working, but was stymied by telecom failures. The shutdown of air travel and U.S. borders affected companies hundreds of miles away from either downtown Manhattan or Washington, D.C., calling into question such long-accepted best practices as just-in-time manufacturing and outsourcing. Moreover, CFOs were forced to acknowledge the necessity of backup credit lines and the greater risk of financial leverage. And air travel remains conspicuously more difficult than before.

Yet it is an unknown menace that is hardest to combat. Investors have plenty of reasons to be jittery these days, but just how worried are they about another attack? And if one happened, how would they react?

Dollarization

What do quetzals, colóns, balboas, and sucres have in common? They're all currencies — of Guatemala, El Salvador, Panama, and Ecuador, respectively — that have either been replaced by or used in tandem with the U.S. dollar. In contrast to Europe's "big bang" conversion to the euro, dollarization has continued quietly on this side of the Atlantic, particularly in Central America, for years.

Of course, dollarization has had its own big bangs and bumps, particularly in South America. Brazil, which pegged its real to the dollar, abandoned the "real plan" in 1999, causing a painful but timely devaluation. That helped stave off the sort of financial implosion seen two years later in Argentina, which pegged the peso to the dollar for far too long in the absence of other reforms, notably reductions in deficit spending. Luckily, that crisis was contained to Argentina, but as the peso continues to slide, many economists say that Argentina's best move would be full dollarization — adopting greenbacks as the local currency. That argument is bolstered by the fact that Argentinians revere the buck and are believed to hold as much as $100 billion in offshore accounts.

Not everyone supports conversion. This spring, officials in Honduras rejected calls to replace the country's lempira. But the dollar's popularity has certainly laid the groundwork for a future euro-type currency in the Americas.

Safety in Numbers

As the misdeeds of one CFO and a global recession threatened to drag the entire finance profession through the mud, organizations like the Tax Executives Institute, Financial Executives International, and the Association for Financial Professionals helped beleaguered finance professionals defend their tax, accounting, and audit policies — and their honor.

Indeed, the FEI was among SEC chairman Harvey Pitt's top picks for private-sector initiatives "to impose additional layers of best practices, ethics, and corporate integrity" in the wake of recent accounting scandals and ethics violations. And FEI chairman Philip Livingston had Congress's ear on how to reform auditing practices, giving him a chance to express his dismay over Enron while advocating for less-onerous changes than some senators have proposed.

More practically, TEI has helped ease companies' cash-flow woes through its successful stumping for net-operating-loss carrybacks to be extended from two to five years, more-generous depreciation rules, and temporary relief from the alternative minimum tax bite. And TEI director Timothy McCormally's conversations with the IRS and Treasury led to extended filing and payment deadlines for companies affected by the World Trade Center bombings.

The globalization of finance is evident from these groups. Not long ago FEI changed its "I" from "Institute" to "International." The AFP, meanwhile, has made its mark licensing its cash-management training and accreditation program to finance organizations in Japan, Korea, and the Middle East. "The increasing activity of business transactions across borders requires the advancement of industry standards both here...and abroad," notes AFP president Jim Kaitz.

Bermuda Inversion

Renewed scrutiny of tax shelters was a given after reports that Enron used more than 800 offshore entities to reduce its tax bill. Now another practice — inversion — has been condemned in Congress as unpatriotic, prompting bipartisan anti-inversion legislation and raising the potential public-relations risk for companies using offshore shelters of any kind.

Inversion is simple: a U.S. corporation forms a subsidiary — typically consisting of little more than a mailbox — in a foreign tax haven like Bermuda, and then turns the ownership relationship upside down, or "inverts" it, so that the subsidiary becomes the parent. The U.S. corporation then transfers its foreign assets and subsidiaries to its new parent, thereby eliminating U.S. taxes on all but U.S. operations. The parent also can help reduce the remaining taxable profits at the U.S. company by charging it fees.

Existing laws attempt to stem such emigration by levying capital-gains taxes on shareholders when their shares are converted to those of the new company. Ingersoll-Rand Co., now a Bermuda corporation, asked shareholders to vote for reincorporation on November 2. Shareholders of toolmaker The Stanley Works were re-voting on a Bermuda inversion after the Connecticut attorney general challenged their initial approval of the resolution as this issue went to press.

Defenders of inversion note that it is not illegal, and say the fault lies with the U.S. tax code, which, unlike that of many other nations, taxes earnings from abroad. However, the recently introduced Reversing the Expatriation of Profits Offshore (REPO) Act has powerful sponsors in senators Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa). And if the legislative threat doesn't deter companies, the label of "tax traitor" just might.

The Final Four

Like the Hungry Hungry Hippos, the remaining four big accounting firms are gobbling up all they can of the $9.3 billion in revenues and 85,000 employees spilling out of the nearly defunct Andersen Worldwide.

At press time, the biggest battle was for the number-two spot, with $12.4 billion Deloitte Touche Tohmatsu struggling to maintain its position against $10 billion Ernst & Young International, which scooped up 95 of Andersen's U.S. public clients and affiliates in 28 countries. While DTT has acquired 66 former Andersen clients and affiliates in 14 countries, neither firm has yet released expected total revenue gains. Plus, DTT got the lion's share of Andersen's tax business, while E&Y got only its Pittsburgh offices.

The $24 billion PricewaterhouseCoopers looks likely to stay number one, picking up Andersen's Middle East, Hong Kong, and China offices and 72 U.S. clients. Number four KPMG walked away with agreements in only six countries and with 75 U.S. public clients.

However, with Andersen retaining more than 1,500 clients, the game is hardly over. Experts also expect smaller clients that once chose a big firm on the basis of reputation to shift to second-tier firms like Grant Thornton or BDO Seidman for better service — as 9.3 percent of the 385 U.S. publicly traded firms that parted with Andersen this year have done, according to Auditor-Trak. Meanwhile, revenue bases will continue to be sliced and diced as DTT and others split off consulting operations to avoid the appearance of conflict.

Some wonder if there will be any winner at all. Says one observer: "They are too busy counting the cash to focus on what is truly important to the future of a once-great profession."

Epidemic Disease

At the end of 2001, an estimated 40 million people worldwide were living with HIV or AIDS, according to the World Health Organization (WHO). While 28.1 million of them are in sub-Saharan Africa, it's not only Africa's problem: Eastern Europe and Central Asia have the fastest-growing rate of HIV infection in the world. In the Russian Federation, HIV cases have nearly doubled annually since 1998. It's estimated that by 2010, AIDS will chop 8 percent off national incomes in the worst-afflicted countries. In rich countries, there is fear that the virus could mutate, rendering advanced therapies useless. And HIV isn't alone; tuberculosis, Ebola virus, and smallpox epidemics are possible.

Epidemic diseases exact a direct economic toll in lost productivity and costly medical treatment. But disease can also create political and economic instability, leading to war and massive flights of refugees. A landmark WHO report estimated that if rich countries spent an additional $27 billion a year (just 0.1 percent of GDP) for health care in poor countries, it would have a worldwide economic benefit of $186 billion a year.

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