A host of unresolved economic issues ranging from taxes to trade is forcing many of the nation’s business leaders to spend increasing amounts of time away from their management responsibilities, studying the politics of macroeconomics and meeting with Washington lawmakers.
Yet, CEOs admit, it’s been a poor return on investment. They say they can’t find the clarity they need to be able to move their companies forward. Seven CEOs interviewed say they need clarity on issues such as taxes, healthcare, financial reform, immigration, energy and free trade. They also say they won’t stop spending time on Washington. “The first thing CEOs want is for government to know that they want to be part of the solution,” says Larry Burton, executive director of the Business Roundtable.
But “the vast majority of actions by business have been wholly ineffective” at getting policymakers to consider friendlier business rules, says Fred Smith, chairman and CEO of FedEx, who estimates he’s spending 15 percent more time in D.C. these days focusing on regulatory issues and taxes. “We’ve realized that we had to become even more attuned to macroeconomic issues as they relate to government actions,” he says. Yet he feels that Washington is “not listening” to businesses’ arguments for off-shoring and lower taxes “and there is no clarity. There is not a receptive audience.”
Smith cites the change in the political landscape as much as the financial contractions for the uncertainty. “We have a more activist, regulatory- oriented government that has certain things on its agenda,” he says, citing climate change and new transportation regulations. For instance, Smith mentions new work rules for truck drivers and pilots that he says were precipitated by events that had nothing to do with hours worked. The changes “are not based upon quantitative analysis, but rather by ideology,” and often after a single crash, unrelated to driver hours, occurred. “The particulars become general.”
Smith is concerned that the government does not understand the economy and calls the Federal Reserve’s decision to flatten the yield curve by printing money to buy bonds “a very bad thing with all kinds of unintended consequences.” He worries not only about rising commodity prices, but also that the monetary manipulation will force companies to recalibrate anticipated returns for their pension plans—meaning that funds with shortfalls Smith is concerned that the government does not understand the economy and calls the Federal Reserve’s decision to flatten the yield curve by printing money to buy bonds “a very bad thing with all kinds of unintended consequences.” He worries not only about rising commodity prices, but also that the monetary manipulation will force companies to recalibrate anticipated returns for their pension plans— meaning that funds with shortfalls between their assets and future liabilities could be in an even bigger hole in a few years if bond yields stay low. In response to the economic uncertainty, Smith instituted shock absorbers that enable FedEx to quickly “flex up or down” to consolidate routes and alter the size of the company’s reserve fleet quickly in response to business needs. “You can’t be in a capital-intensive business like ours without some navigational plans,” he says.
Smith’s bottom line: “The U.S. is not a friendly place for capital these days. Business has become something to be controlled and tempered rather than encouraged.” As evidence, he cites Congress’s “complete misunderstanding of trade” and off-shore activity, which, he says, actually create good jobs in the U.S. that support overseas growth. Smith doesn’t think the election results will lead to greater clarity on these key issues: “I think it is difficult for the uncertainty to change in any material way.”
Like Smith, the other CEOs interviewed are unhappy about the direction of the country and are angry and disappointed at Washington’s policies. This lack of confidence in the Obama Administration and Congress is causing leaders to hold off in making any strategic changes, a bad omen for the economy. Companies are also hoarding cash—more than $1 trillion, according to a recent report by Moody’s Investors Service— feeling too uncertain about the economy to invest in expansion. Research and development spending at major companies also fell for the first time in more than a decade, according to Booz’s annual poll of the top 1,000 publicly traded companies globally.
Waking Up Washington
“I am treading water,” reports Jim Henderson, chief executive of Dynamic Sales, a small St. Louis-based construction and commercial supply company. “While I’d like to do things, my hands are tied by Washington and I can’t make smart decisions.” He’s struggling with his company’s healthcare costs, unsure if he should stay with his current insurance provider and its increasing premiums or change companies and potentially lose his grandfathered policy. At the same time, he’s been unable to access credit; Henderson asked his long-time bank for a loan a year ago and still has not been granted the funds.
Henderson, like Smith, is handling his Washington relationships personally. “I’m spending double the amount of time on it that I was a few years ago,” he reports, noting that thus far his efforts have not paid off. “I’m not seeing a return on investment. It [has just] taken away from the business in lost sales and production.” Still, Henderson feels a need to be involved and assumed the chairmanship of the Missouri’s leadership council for the National Federation of Independent Businesses that represents over 350,000 small businesses.
Henderson is among a growing number of CEOs who have been stirred to action. Len Tannenbaum, CEO of Fifth Street Capital and its parent Fifth Street Finance, an NYSE-listed business development lender and investor in small companies in White Plains, N.Y., also recently traveled to Washington. “I’ve never really met with politicians until now,” says Tannenbaum, who joined the Young Presidents’ Organization and traveled with one of its programs. “I felt that with the government being such an important part of the economy, it is necessary to have strong connections.”
For Tannenbaum, the visit was a learning opportunity. He met with Treasury and White House officials, five Congressmen and three Senators, asking “a lot of questions,” particularly about capital gains and the expiring Bush-era tax cuts. “I realize the magnitude of the problem and the limited solutions better,” he says.
As a result of the visit, Tannenbaum is steering his company more cautiously. “There are a lot of issues and pressure,” he notes. “Never before have I felt that I could change my mind every week. Yet all year it has been like that, zigging and zagging.” Uppermost in his mind is the challenge of balancing his capital, besides “being asked to do safer deals.” Fifth Street has become more conservative as a result—seeking to lend to companies with higher credit ratings than before. Tannenbaum also worries about rising healthcare costs at his portfolio companies, as well as difficulties trying to hire foreign nationals, which he dubs “an enormous hassle.”
Deciding not to Decide
Roslyn Stone, COO and principal of Corporate Wellness, an employee health services coordinator based in Mount Kisco, N.Y., went through a similar process. Deciding that she needed to get more aggressive about macroeconomic policy discussions, Stone recently assumed the chairmanship of the Democratic Party in nearby Pound Ridge. “I don’t remember a time when I was so concerned about the economy,” she says, noting that part of the problem is the sluggish pace of government policy. “We need to be more plugged in than ever,” she says, adding that part of the problem is that “the rules are coming out so slowly.” Changes have also increased the cost of doing business, as companies need to call on outside resources for guidance in navigating the new environment. Corporate Wellness is spending more on both legal bills and industry group memberships, reports Stone. “We need more guidance,” she says, offering the example of a membership her company has with a human resources management group. “We used to call on them once or twice a year. I’ve now given everyone a card with the login information to keep right on their desks and we’re using it all the time.”
Yet despite Stone’s new and improved Washington know-how, when it comes to coping with the uncertain economy she says she decided not to decide anything: She dumped a comprehensive strategic plan undertaken before the economic crisis began. “I thought we were too diversified,” she says, but as the recession hit she could not decide where to focus. “I found our No. 1 problem became my No. 1 asset— which I never would have expected.”
Stone isn’t alone in foregoing bold moves. Ark Investment Partners CEO Brad Reiss is also sitting tight. In contrast to Corporate Wellness, his company is narrowly focused—and it will stay that way for the foreseeable future. “I don’t want to diversify my assets now,” explains Reiss, whose company owns hotels in New York City, Quebec City, Canada, and Washington, D.C., as well as other properties as far west as Hawaii. “I don’t like where the Obama Administration is going, so it affects my policies. I can’t get a sense of how crazy things are going to get, so I have a greater bias to do nothing.”
Reiss is more concerned with security than growth at present and plans just to maintain and protect his current holdings. “Even if New York is destroyed fiscally and politically, everything else will suffer more,” he says. Not long ago he also closed all his firm’s 185 money market accounts and moved the funds into one safer short-term account. “This way I didn’t have to worry about it,” says Reiss. He reports that despite his cautious approach his legal teams still “work around the clock” doing more paperwork related to understanding the healthcare rules and ever more burdensome immigration issues for the company’s 550 employees.
A similar problem plagues Intel, which also employs many foreign nationals. “They’re in limbo,” says Intel’s Peter Cleveland, vice president of legal and corporate affairs and director of global public policy. “It’s extremely frustrating. We have 3,000, or 6 percent of our domestic workforce, in limbo. We could wait nearly 15 years for some our Indian or Chinese employees to become U.S. citizens.”
Intel President and CEO Paul Otellini sees the government’s policies on foreign nationals as potentially stifling domestic innovation irreversibly. Unless government policies are altered “the next big thing will not be invented here,” he warned attendees at the Technology Policy Institute Aspen Forum a few months ago. “Jobs will not be created here.” Otellini pointed out that simple matters such as the annual renewal of a core research-and-development tax credit have languished. “We cannot count on funding on a consistent basis, and from a corporate planning basis that’s very frustrating,” says Cleveland, the lobbyist. “It will be a hit to earnings.”
All this uncertainty is a double-edged sword for business groups. While some professional groups are benefitting from greater member participation, they admit to diminished clout with the White House and Congress, which ignore their policy recommendations.
For example, activism among members is much higher than usual at the National Federation of Independent Businesses, with more than 85 percent of its members reaching out to Congress during the healthcare debate. Yet members report that economic uncertainty is at an all-time high and small business optimism at an all-time low, says NFIB spokesperson Stephanie Cathcart, who notes that tax uncertainty ranks as the top concern in the organization’s member polls. “Not knowing what your tax liability will be next year is a killer,” she says.
The Business Roundtable and the U.S. Chamber of Commerce echo these concerns. “In my 36 years with the Chamber I have never seen such a large number of expired or expiring tax provisions as we are seeing today,” says R. Bruce Josten, the group’s executive vice president of government affairs. Another key worry is the sheer number of rules that need to be written to flesh out sweeping new legislation in finance and healthcare. He figures that businesses may not have regulatory clarity on some key issues for more than a decade. Indeed, a recent study by New York white shoe law firm Davis Polk & Wardwell, after looking at 23,000 pages of new financial reform law, advised that that more than 243 explicit new rules must be written and 67 studies must be conducted by 11 federal agencies alone. For healthcare, the patient protection section includes 41 explicit requirements on agencies to implement the law, requiring 38 studies and 59 evaluations. That’s a total of 97 studies just for that section and any—or all of them—could result in new regulations.
Brendan Hoffman, CEO of Lord & Taylor, says “everything we’ve done has been colored by the downturn and the uncertainty of future business and the changing landscape in D.C.” He belongs to a few lobbying groups and “I count on them,” he says. To steer his company, he’s trying to make the retail chain “skinny and lean.” The strategy for the near term is to focus on a few high-profile brands and not do anything too bold. “We want to stick to our knitting,” says Hoffman. Although the company just remodeled the flagship New York City store, “we are much more cautious about where we make investment because of the economy,” he adds.
The same is true at Jarden, a Rye, N.Y.-based consumer products company offering everything from cookware to fishing rods that employs 25,000. Chief executive Martin E. Franklin says he is delaying making decisions about capital expenditures and the future of his company’s dividend payout, as both will hinge on “what the government does.”
Jarden is the 14th-largest importer of goods in 20-foot containers from Asia, bringing in some 80,000 containers a year, and Franklin is worried about how the government is handling China. Indeed, the Obama Administration has failed to complete a single trade agreement and now the only three pending are with Panama, Columbia and South Korea. The last seems tenuous, given the collapse of talks in November.
While waiting on trade developments, Jarden is focusing on controlling costs and tightening inventories. “We put on a wage and a hiring freeze for the whole company and I had all my executives making over $200,000 a year take a 5 percent pay cut, with our top people taking a 7.5 percent cut,” reports Franklin. “I am trying to find as much efficiency as possible.” Franklin is also seeking to create policies that Washington will reward, such as a hiring plan to recruit veterans from Iraq and Afghanistan “that I found play off local government,”he adds.
But the efforts of many business leaders to move things along by engaging with policymakers have been fruitless thus far. Nothing is clearing the uncertainty.
Steve Wynn, CEO of Wynn Resorts, reports that while he’s sunk ample time into meeting with government officials, he’s as down as ever on the prospects for a better business environment “I am disgusted and worried and waiting to see how bad it is,” he reports. “The Obama Administration and current Congressional members have neither the discipline nor the training nor the intellectual competence to deal with the problems at hand.”
His takeaway? “I am a company that is 75 percent foreign and likely to be more so in the future,” he says. “Until we get rid of this President it will stay this way.”