G-20 Mulls Sustainable Recovery

Last year when the G-20 convened in November it was billed as the Bretton Woods II. The global economy was in the throes of a banking crisis that rivaled the Great Depression of the 1930's. Central bankers and political leaders were struggling to formulate the right mix of policies to strike the proper balance of interventionist programs needed to arrest the accelerating economic decline brought on by the frozen credit markets. Most believe it worked.

Today in Pittsburgh, conferees will begin to assess weather the accommodative monetary policies, massive capital infusion programs and historic low interest rates can continue to stabilize the global banking system and bear fruit of real economic growth. Though economic growth appears to have emerged in the US and the EU, there is a concern that recovery has become too dependent on the massive government stimulus programs. The development of a stimulus exit strategy will certainly be on the G-20 agenda. How to sustain economic recovery without the massive government spending programs is the primary challenge that G-20 leaders need to address.

Global trade agreements and a consistent tax policy across G-20 domiciles will also be areas of focus for conferees. Regulatory tax arbitrage is an issue that G-20 countries are keen to address. The days of utilizing domiciles with favorable tax laws to protect assets and revenue derived from a domicile with a less accommodating tax structure is an area that all tax hungry G-20 countries want resolved. Recognizing taxable revenue streams and repatriating capital gains taxes are particularly pressing concerns considering the massive budget deficits many countries are confronted with.

Global trade issues and the East/West balance of trade continues as concern for conference participants. The fall of the dollar and China's growing reticence to continue their purchase of US government debt is an interesting backdrop to the brewing trade spat over US tariffs imposed on the importation of tires manufactured in China. China has retaliated with an examination of US trade practices and American's need to keep their fingers crossed that China continues to regularly appear at the government bond auctions with its sizable check book.

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Risk: trade, recession, political, economic

Mom and Pop Go Chapter 11

The Wall Street Journal ran an interesting article about the devastating effect the recession is having on family owned businesses. The SBA estimates 90% of U.S. businesses are family-owned. During 2008 about 4.3 million businesses with 19 or fewer employees closed according to the Bureau of Labor Statistics. If 90% of those firms were family controlled businesses more then 3.8 million families have lost their livelihoods and most likely have also lost a considerable amount of personal wealth. This drastic dissipation of wealth and family control of assets is yet another blow to the middle class. Its impact of entrepreneurial activity and capital formation initiatives may create additional headwinds for the economy seeking to overcome the deep recession.

John Ward a professor at Northwestern University observed "that the economic downturn is really just the latest setback for family-run businesses. In the 1970s and '80s, exorbitant income taxes and estate taxes forced many to close. Before that, the anti-establishment movement during and after the Vietnam War made many children reluctant to take over the family business."

Beth Wood, a family business market development specialist at MassMutual observes that family businesses are "often steeped in tradition and not as flexible to change, tend not to have formal plans in place to respond to crisis. They've seen reductions in top line revenue that they just can't react fast enough to. Problems securing credit in this recession have also prevented some family businesses from getting the funding they need."

Ms. Wood makes an interesting observation about the importance of business agility. The need to assess the rapidly changing market dynamics is a critical exercise that SMEs must undertake. Business as usual will not get it done. SMEs must begin to transform itself to better align its business model to rapidly changing markets. Conducting a thorough risk assessment and opportunity discovery exercise is critical to creating a sustainable business enterprise. Sum2's Profit|Optimizer is a critical tool that helps SME managers assess risks, spot opportunities and initiate actions to achieve business growth and profitability.

Family owned enterprises must overcome the gravity of generational business cultures that inhibit and resist change. SMEs will survive and thrive if they can identify emerging opportunities the current business cycle is creating. SME's will survive and thrive if they have the will, resourcefulness and a supportive culture to change. These are the qualities required for long term sustainability and growth. Business as usual is giving way to a "New Normal," where adaptability to structural market changes are keys to asset preservation and wealth creation.

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Risk: family trusts, asset preservation, small business, bankruptcy

Rutgers Job Study: Full Employment By 2017!

Rutgers University has released a sobering study on expected recovery rates in employment levels for the United States economy. The study, America's New Post-Recession Employment Arithmetic indicates that the employment deficit has grown so large that it may take until 2017 for the nation’s labor market to return to its pre-recession level.The study, released by the Edward J. Bloustein School of Planning and Public Policy is a cause for concern. The study reports that the US economy has shed over 7 million jobs since the recession officially began in December 2007. This has reduced the total number of jobs in the United States by 5.8%, the largest drop during any downturn since World War II. The authors of the study, James W. Hughes and Joseph J. Seneca, project that the employment deficit will total 9.4 million private sector jobs by the end of the year.

The study estimates that if the economy adds more than 2 million jobs annually starting next year, it would take until August 2017 – more than seven and a half years – to both recover the jobs lost since December 2007 and create new positions for the roughly 1.3 million people who join the labor force each year.

Hughes and Seneca believe that a recovery in 2017 may be an optimistic assumption. An economic expansion that lasts for seven years is about 50 percent longer than the average for postwar recoveries. Hughes and Seneca refer to the last ten years as “The Lost Employment Decade,” because the U.S. is on track to finish this year with 1.3 million fewer total jobs than it had in December 1999. “This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade” the report states.

The past decade has witnessed a startling reversal in economic fortunes for the US economy. The U.S. finished the 1990s with 19 million more private sector jobs than it had at the start of the decade. Approximately 16 million jobs were created during the 1980s. Before the recession, annual rate of job growth was about 1 million jobs per year, about half of the growth rates of the previous two decades.

Hughes and Seneca believe that this will force states into fierce competition to realize job growth. States must respond by creating desirable environment for business based on costs, affordability, business climates, support infrastructure, labor force quality and tax policies.

We believe that joblessness and unemployment continue as significant threats to economic growth. The conception of the unemployment rate as a lagging indicator is emerging as a lead driver inhibiting economic recovery. High unemployment continues to inhibit consumer spending and works against a rebound in the housing market and related construction industries. Retailers are already bemoaning the bleak forecast for this years holiday shopping season. State and local governments reeling from dwindling tax receipts are beginning to crack under the strain to fund basic community services, public schools and social assistance programs.

The structural dysfunction of the American economy is a critical issue that must be addressed. A concerted program aimed at the development and incubation of SME manufactures will encourage the entrepreneurial energy and kick start badly needed economic drivers to ignite a recovery. Sum2 advocates the adoption of The Hamilton Plan and the creation of an SME Development Bank to reestablish sustainable growth and national prosperity.

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Risk: unemployment, job creation, SME, political stability, recession

PCA Goes To The Lonesome Valley

On Monday came the not surprising news that Peanut Corporation of America (PCA) has filed for bankruptcy.

The practice of selling food additives laced with salmonella bacteria makes it difficult to win back the trust of customers that had been so grievously violated.

PCA knowingly shipped contaminated products that has caused nine deaths and has sickened 637 people in 44 states. PCA's salmonella laced peanut paste has contaminated 2,226 processed food products. A full list of recalled products can be found on the FDA website. These potentially criminal acts by PCA's management has demolished the PCA corporate brand making it impossible to continue as a going concern.

The Chapter 7 bankruptcy filing will liquidate the company. This strategy will protect the PCA shareholders in the privately held firm from the significant legal liability that this event has created. It does not however protect PCA's company management and accomplices that knowingly shipped contaminated products from potential criminal prosecution. Criminal persecution of those involved should be pursued and if anyone is found guilty punishment must be severe.

PCA released its contaminated product into a large and extensive supply chain. Many leading brand food processing manufacturers that use PCA's peanut paste as an ingredient in their packaged goods products have suffered severe reputational damage to their product and company brands. Though PCA's corporate liability may be mitigated with the bankruptcy filing, aggrieved consumers will continue to have have legal recource by filing suits against the major consumer product companies that are still in business. This could make for a record breaking class action product liability suit.

Unfortunately this tragic occurrence could have been prevented. PCA's actions demonstrate a disturbing ambivalence toward effective sound corporate governance practices. Companies that willingly sacrifice risk management and ethical business practices for the sake of short term profits consistently undermine corporate sustainability. All may not result in a dramatic corporate implosion like PCA. But ultimately the song of corporate liquidations remains the same. Unemployment for workers, aggrieved consumers, community desertion, tortured consciences and and in some instances criminal prosecution.

RIP PCA.

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Risk: corporate goverance, ethics, risk management, legal

Honda Motors Practices Enlightened Capitalism

Amidst all the layoffs, business closures and shutdowns the hard edge of capitalism is a painful experience far too many people are forced to endure. During times of plenty, the relationship of labor and capital is harmonious and symbiotic. Both parties recognize the value that each bring to the corporate community and each parties enrichment and well being is served by the degree of harmony present in that relationship. During down business cycles management may resort to layoffs to preserve the enterprise. Unfortunately this often causes resentments and hard feelings on the part of workers who have lost the means of earning a living. When workers return to their jobs this can cause problems and hurt an affirmative corporate culture that is critical to maintaining a sustainable business enterprise.

In the face of the meltdown in the automobile manufacturing sector, Honda Motors is one of a very select few that is not resorting to layoffs. Honda Motors known for product quality and leadership in product innovation and business processes is also highly respected for its treatment of employees. Honda Motors places great emphasis on the creation and maintenance of an affirmative corporate culture to sustain profitability and market leadership.

Honda Motors decision to restructure the work force, and give workers a period of paid leave until business conditions improve speaks volumes about how management respects and values the contribution labor makes to the long term sustainability of the enterprise. Any remuneration workers receive during the leave will be paid back to the company with unpaid overtime when the workers return to the production line.

The value of good will on the Honda Motor balance sheet has increased exponentially. The sustainability of an affirmative corporate culture will drive profitability, product innovation and market leadership for the many years to come.

We applaud Honda Motors for this innovative and enlightened response to the current market challenges.

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Risk: sustainability, labor relations, corporate culture

Lousiville Business Community Iced Over

The massive ice storm that raged across the US this week has left a path of devastation in its wake. Particularly hard hit was the jewel of the Ohio River, Louisville Kentucky.

Damaging ice covers the entire region and the three largest electric utilities estimate that over 700,000 people are without power. This type of disaster has an immediate impact on small and mid-size businesses. Many small businesses are shuttered due to an inability to access power. Service oriented and home based businesses are also particularly hard hit by the power outages due to their dependency on digital technologies.

Business closure means that cash registers are not ringing. During these lean times of a deepening recession weaker businesses are particularly susceptible to the negative impact of these events. A single day of lost revenue can be the difference in a small businesses ability to maintain itself as a going concern.

The importance of having a set of contingency plans to accommodate these types of business interruptions is critical even more so due to the difficult business cycle we are now confronting.

The implementation of a sound practice program as advocated by Sum2 helps businesses to address these types of risks. The Profit|Optimizer helps managers craft an effective sound practice program. Sound practices incorporates plans to mitigate the negative effects of business interruption events and initiate actions that maintains profitability during the most adverse market conditions.

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Risk; business continuity, sustainability, disaster planning