You’re on the Board,BP
The Full Story – Regulatory Update
Social Media
College Consumer Quiz
Ratings Agencies, New Developments

You’re on the Board at BP and…frankly, you wish that you were not on the Board at BP.

The situation is still evolving, and there is more than enough blame and incompetence to cover all sides of the issue, both private and public sector. However, there is at least one valuable board-level observation, and it has to do with the risks of subcontracting. BP owns the lease on the well, Transocean owned the rig, and Halliburton was charged with sealing the well right before the explosion. Obviously, subcontracting has not eliminated liability, either actual or perceived. So, therefore, how does any Board in a complex situation like this ensure that appropriate policies and procedures are in place and adhered to by their subcontractors? Subcontractor liability-not an easy discussion, but one that deserves board attention, especially when you consider the number of firms that are now extensively utilizing subcontractors, even on a simpler scale, such as toy manufacturing in the Far East or offshore customer service.

“Pick Your Battles” might be appropriate board counsel to Angela Braly, Wellpoint’s CEO. Several months ago we commented on her aggressive verbiage testifying before Congress. In May, she sent a letter to President Obama chastising him for his attacks on the healthcare industry. Even before this, the company became a target when they stated they would raise individual policy prices in California by as much as 39%. Then in April, they withdrew their California rate increases, stating that there were errors in the filings, requiring them to resubmit to the state regulator. The next day the stock fell 10%. At the annual meeting, as well as internal company meetings, there has been heated discussion relative to the company’s current position in the media spotlight.

Ed Note:Every board should realize and counsel its executives that, regardless of whether they are right or wrong, playing tough guy with the media is not a battle you are likely to win (in this case, add in Congress and now the White House, and you are really playing a high stakes game).

New Buzzword: “Biosimilars” These are generic versions of existing big name biotechnology therapies.

Ed Note:Any company related to or investing in the biotech industry should realize that “biosimilars” are reviewed entirely differently from other generic drugs. Why? Because the FDA is asking the companies to conduct extensive clinical trials with biosimilars which do not apply to the introduction of regular pharma generic drugs.

Big Time Debt. From 1989 to 2010, US Federal debt soared from 45% of GDP to 69%. Japan, in the same time frame, has gone from 14% to 106%, and the UK from 30% to 75%. Source: Standard & Poor’s.

Ed Note:These numbers do not take into account other liabilities, for instance government pension liabilities, or obligations to the Social Security Trust Fund. This is total debt, the accumulation of multiple years of annual deficits impacting exchange rates, product pricing, infrastructure investments and foreign policy to name a few. For Fin Com consideration going forward, Corporate America, when it issues its debt, will have a powerful competitor for new money in the US government.

Mergers and Anti-Trust. If your company has cash or attractive equity and you are contemplating related acquisitions, it would be worthwhile to watch the Obama administration relative to anti-trust related action in the UAL – Continental Airlines merger.

Ed Note:To date there has been much tough talk from the Justice Department’s Anti-Trust Division which, in normal times, might dampen enthusiasm for M&As. In spite of this, and even given the slow economy, and tight credit, M&A activity is slowly returning to life. A good measure of reality and analysis of your M&A plans beforehand can be both cost effective and avoid public embarrassment, along with the negative impact on shareholders, customers and employees. Trying and failing is usually never a positive turn of events.

Did you Know? There has been an amendment submitted in the Senate, sponsored by Senators Hutchison (R, TX) and Landrieu (D, LA) to exempt companies with less than $150 million in market cap from (SOX) internal control audits? The House has already passed a similar reform.

Ed Note:This is not an insignificant amendment, but one that can easily get lost in the financial regulatory reform currently under consideration. Perhaps a brief call to your trade association or Washington lobbyist might be appropriate. Occasionally, good things come in small packages, amidst chaos.

Interesting Economics. Discounter Wal-Mart, which had good times in bad times, is now seeing, with the beginning of the recovery, customer traffic and sales continue to decline for the fourth consecutive quarter. The cause appears to be pricing competition from discount rivals. Wal-Mart, facing store saturation, can do little in the way of domestic expansion, so the answer is cost control and price reductions.

Ed Note:These numbers are interesting because in the recession consumers flocked to lower priced discounters, finding better deals and private label branding. Now that Wal-Mart model appears not to be working as well. The question is, is the consumer trading back up and willing to pay more, or, did Wal-Mart’s competitors follow their business model, resulting in too much discount competition? Will the result for Wal-Mart be a drop in volume, loss of market share and pressure to reduce already low prices? Definitely some strategic considerations and trends to track.

Social Media is A BIG DEAL says Procter and Gamble, relative to their new Dry Max technology utilized in their Pampers products. Several parents felt it was causing a rash on their babies and they were not getting an adequate response from P&G. As a result, they started a Facebook crusade, which so far has 9,000 followers, along with 2 Pampers lawsuits. The Dry Max product was just introduced this March, and the Pampers brand represents $8.5 billion in revenue.

Ed Note:Social media (Twitter, Facebook, YouTube) as a means to justly or unjustly take on Corporate America is a serious tool. If your board has not discussed your company’s response to the impact of social media in a crisis situation, they should. Are you as a board member aware of whether your company monitors various social network media relative to comments about the company’s products or activities?

Footfalls of the Mighty as Apple surpasses the $230 billion market cap of Microsoft.

Ed Note:Two great companies, but it does demonstrate the tremendous impact that several hits in a row (iPod, iPhone, iPad) in the consumer electronics game can have on a company’s fortunes. Compare this to Sony’s last consumer win, which was the Walkman.

CEO and Chairman. “Keep them both,” is what shareholders said to James Dimon of JP Morgan Chase. The shareholder proposal to split the roles, proposed by CalPERS, was supported by only 34% of the shareholders.

Political Spending. Based on the recent Supreme Court decision, political spending by corporations, unions, and, to a lesser extent, political parties on candidates may have unleashed a gusher. This is an area where boards should play a definite role and not cede that spending authority to the CEO or the government affairs department.

Ed Note:Our suggestions are the following: A committee (governance) review of the actual Court decision and what it reasonably allows. This should be followed by a discussion of how the company will develop its political contribution policies, and at what level and how will the policies be monitored? This is exactly the type of situation that could generate a very embarrassing media story for the board.

The Return to Yesteryear. Successful consumer investor C. Dean Netropoulos already owns one vintage brewery name and has purchased another hoping to resurrect them. To test the manner in which you spent your years in higher education, fill in the blanks: Pabst _________ and _______, the Beer that made Milwaukee famous. Answers are at the close of the Letter.

One Deep Breath before your company overreacts to the core US inflation rate of less than 1%, the lowest in 44 years. This number excludes any changes in food and energy prices. We have always felt that the term “core inflation,” which excludes these two items, is an absurd metric.

Ed Note:Keep in mind, this is not a global statistic, and inflation is growing in places like China and Brazil. When discussing strategic plans that utilize this core inflation number, just remember that there are very few consumers who do not eat, drive cars, and heat or cool their homes.

Hardball at the FDA is the game being played with Boston-based Genzyme. The company has agreed to pay a $175 million penalty to Federal regulators in connection with longstanding manufacturing problems. These problems have caused a significant drop in revenue, due to the curtailment of certain product manufacturing. The consent decree potentially goes further, regarding transferring operations to another plant with ongoing penalties for noncompliance.

Ed Note:The FDA says it found tiny particles of trash in drugs made by Genzyme, including steel, rubber and fiber.

Ed Note:In this case, there are two board issues. What should be the Board’s role in risk management relative to reviewing quality control policies? Also, there is a corporate governance impact, as shareholder activist Carl Icahn moves to nominate several directors. This QC problem has provided him with additional shareholder leverage, and now the FDA has confirmed some of his statements regarding management.

Good Deal, Bad Deal. It appears that, while in bankruptcy, General Motors was able to wipe out significant debt, and cut out unprofitable brands; but it still is saddled with major labor costs. The plan was, new hires would come on for approx $25/hour, vs. $60 for current workers. This compared with $48 for Toyota’s non-union operation. However, the fine print in the union agreement states that GM cannot add new workers at the lower rate until it re-hires all laid off workers for union jobs the company adds. In the same contract, the notorious “jobs bank” was eliminated and is winding down. This program allowed laid off workers to remain on the payroll with full pay and benefits.

Ed Note:From a strategic standpoint, the GM employee base has to expand significantly before it can hire lower cost new workers, making it competitive with non-union shops. Is GM going to be playing labor cost catch up for the foreseeable future and did they lose a major opportunity in the negotiations that took place in bankruptcy? Comments on The Exchange. Click here.

Comp Committees, the Next Worry? A recent WSJ editorial discusses the possibility that companies will give up offering health insurance benefits and simply pay a fine to the Federal government under the new healthcare law, resulting in a substantial cost savings.

Ed Note:The issue is an extremely complex one, and subject to modification by Congress, but we mention it so that a committee member is aware that this is an alternative being discussed and analyzed at some larger companies. However, this potential cost savings must be balanced against a possible employee-relations crisis.

Target Those Ratings Agencies? In a recent amendment to the Senate’s overhaul of financial regulation, it voted 64-35 to change the process of who rates complex bond deals. Under the new provision, the SEC would establish and oversee a powerful credit rating board serving as a middleman between issuers and the ratings agencies. This board would select which agency provides the “initial ratings” for structured bonds. These are instruments that are comprised of income streams such as auto loans or credit card payments.

Ed Note:Avoiding any political commentary, we have always felt that the credit ratings agencies played a significant role in the recent economic turmoil. There was no question that a definite conflict of interest existed, since the ratings agencies were paid by the issuers to rate the quality of the instrument that the issuer was issuing. Whether the proposed board is the final or even an appropriate action, at least it is some action to begin to rectify an absurd and conflict-laden relationship between the two parties, issuer and rator.

Dividends and Taxes. Hidden in the various legislative and regulatory items coming out of Washington are some interesting taxes or look-alikes. Specifically, on dividends (unearned income) there will be a 3.8% tax increase for Medicare.

Ed Note:Numerous companies are already discussing the impact of this tax on dividends and to what extent it makes that vehicle a less attractive item to shareholders. Well worth a Fin Com discussion.

Quote of Note: A recent WSJ article, discussing the BP crisis, described Interior Secretary Ken Salazar as someone, “Who wouldn’t know an oil drill from a dental drill.”

Ed Note:Tough day to be a Washington bureaucrat.

Answers for The Return to Yesteryear:Pabst is “Blue Ribbon” and Schlitz is “the Beer that made Milwaukee famous.” Obviously college tuition was not a complete waste.

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