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Who`s Best for Corporate Coffers?

Financial Executive magazine cover story, September 2008

By Stephen Barlas

Arguably the longest and highest-profile presidential campaign in history, its days are now numbered. Here are some insights on what U.S. businesses can expect — beginning on Jan. 20, 2009 — Day One of the new administration.

During their campaigns for president of the United States, both Sens. Barack Obama (D-Ill.) and John McCain (R-Ariz.) have beaten — like dusty rugs — on corporate executives, and sometimes corporations.

They have battered mortgage executives for their severance packages. The two have wrapped their rhetoric around the necks of auto executives for shortsightedness. McCain tells pharmaceutical companies they “must worry less about squeezing additional profits from old medicines.” Obama promises to prevent drug companies from “abusing their monopoly power through unjustified price increases.”

To rein in executive compensation, Obama sponsored a voluntary “say on pay” bill. McCain has gone further, backing a mandatory vote by shareholders.

The two sometimes seem to be competing for the William Jennings Bryan “Populist of the Year” award. The times make their anti-corporate rhetoric understandable, if not necessarily justifiable. And, given their “villainization” of corporations, it is not surprising that neither candidate has tossed out a lifeline to companies sinking in a recession, some of which face borrowing costs of crippling magnitude.

Kingman Penniman, president of KDP Investment Advisors, says the rate of default on corporate high- yield bonds was somewhere around 2 percent in June. He expects an increase to 6 to 8 percent in 2009.

“This raises the premium on risk,” he explains. “There is a tremendous amount of reservation on the part of each of them [Obama and McCain] to come up with a solution at this time to a situation as volatile as this. They are probably trying to keep their powder dry as long as they can to see what unfolds,” says Penniman.

The Candidates, the Issues

Regardless of which candidate a senior finance executive is personally backing, it’s a good time to consider what it would be like if either McCain or Obama is elected, and which would be a better choice for the U.S. economy and business. For financial executives, the choice for this 2008 election is not easy. It is much less clear than either 2000 or 2004, when George W. Bush faced Al Gore and John Kerry, respectively. Obama and McCain are “peas in a pod” on numerous issues of importance to U.S. corporations.

They are essentially twins on immigration reform, foreign investment in the U.S., global warming and the need for industries to become more energy efficient and produce more energy-efficient products. Even on corporate taxes, the similarities between the two are striking.

Both would drop the corporate income tax rate, though Obama would not go as low as McCain. Both would continue the Bush tax cuts for those earning less than $250,000 a year. In fact, argues Alan Viard, a resident scholar at the American Enterprise Institute, one could make the argument that Obama is apt to be the deeper slasher of taxes.

A Democratic Congress would likely block a number of McCain’s proposals. It would likely approve many of Obama’s proposed new tax cuts aimed at correcting income inequalities, such as a new $1,000 work credit, an expanded child care credit and an expanded tax credit for low-income savers — all of which are income limited in an effort to restrict them to families earning less than $150,000 a year. “McCain is proposing more tax cuts; Obama will get more through,” Viard says.

Still, there are some differences between the two. Their positions on the AFL-CIO’s agenda are a chasm apart. Obama is more protectionist on trade; although without Sen. Hillary Clinton (D-N.Y.) to worry about, the Illinois Democrat has been softening his talk about the North American Free Trade Agreement’s shortcomings.

McCain has pushed for more U.S.-based oil and gas drilling, including offshore exploration, something Obama had opposed. In early August, however, he softened his position, saying he’d accept some offshore drilling. But even here the dichotomy is narrow, with McCain having pushed hard for higher auto-efficiency standards via sponsorship of legislation in 2002, two years before Obama arrived in Washington, and began to introduce his own gas-saving bills.

Many Beltway business lobbyists express an off-the-record, begrudging, “best of two evils” preference for McCain, citing his expected opposition to union-organizing legislation, his free-market orientation and his opposition to federal pork spending. Obama, meanwhile, is seen as a traditional liberal, reflexively hostile to corporate interests.

Tom Lehner, director of public policy for the Business Roundtable, which is neutral in the presidential race, says: “If Obama wins, expect him to reach out to outsiders and academicians without Washington experience. That’s been done in the past, with mixed results. Nell Minow and Rich Ferlauto are the kinds of people he might appoint as [U.S.] Securities and Exchange Commission commissioners.” Minow is editor and co-founder of the Corporate Library and Ferlauto is director of pensions and benefits policy for the American Federation of State, County and Municipal Employees (AFSCME). Both are strong proponents of investors’ rights.

Day One: Jan. 20, 2009

Regardless of which man lands in the Oval Office in January, the U.S. corporate world will find itself confronting a president who will be much less sympathetic to business positions on a range of issues than his predecessor George W. Bush. Add to that the likelihood of a more heavily Democratic Congress and the picture gets even more pessimistic. Nowhere will the change be starker than at the SEC.

Under Chairman Christopher Cox, the commission has not been as cuddly with business as groups as the U.S. Chamber of Commerce would have liked. Nonetheless, the agency under either McCain or Obama may make the Bush SEC look like Valhalla. “They have to be scared,” says one Washington lobbyist for shareholder groups, referring to the business community and particularly the outlook at the SEC. “It won’t be good for them either way; even with McCain, they won’t have the kind of salad days they have had with George W. Bush.”

Corporate reporting issues rarely draw headlines; so neither McCain nor Obama has been outspoken recently except for their comments on executive pay. But those with long memories may remember McCain as the Republican running buddy for Sen. Carl Levin (D-Mich.), both of whom pushed hard in the wake of the Enron scandal to resurrect a bill — Ending the Double Standard for Stock Options Act — which first came up for a Senate vote in 1994.

When the Enron scandal broke, McCain brought the bill back, saying on the Senate floor in February 2002: “This double standard is exactly the kind of inequitable corporate benefit that makes the American people irate and must be eliminated. If companies do not want to fully disclose on their books how much they are compensating their employees, then they should not be able to claim a tax benefit for it.”

Obama has been just as critical of the use of stock options. He said in New York on Sept. 17, 2007: “It’s bad for business when boards allow their executives to set the price of their stock options to guarantee that they’ll get rich regardless of how they perform. It’s bad for the bottom line when CEOs receive massive severance packages after letting down shareholders, firing workers and dumping their pensions; or when they throw lavish birthday parties with company funds.”

McCain and Obama’s similar positions on executive compensation and stock options raises the possibility that whomever becomes the next SEC chairman may steer the agency in an anti-business direction on upcoming issues, like the U.S. moving toward using International Financial Reporting Standards (IFRS), which Cox has been championing under Bush.

Neither Obama nor McCain have addressed the issue in campaign speeches thus far, and neither sits on the Senate Banking Committee, which has jurisdiction over such issues. But key Senate Democrats such as Sen. Jack Reed (D-R.I.), chairman of the Banking Committee’s Securities Subcommittee, have made it clear they will ensure that the SEC decelerates consideration of U.S. corporate use of IFRS once Cox leaves the SEC.

Corporate transparency will definitely be a watchword for 2009. Both McCain and Obama complained and assailed the “bailout” feature of the Federal Reserve’s rescue of Bear Stearns Cos. Inc. taking a populist tack by inveighing against corporate greed. They did not raise major objections to the underlying action, nor to the Fed’s extension of the program through Jan. 30, 2009. But Fed loans to investments banks will get very close scrutiny in the next Congress.

Obama supports new standards on how investment banks manage liquidity risk, which has been neglected in the past. Disclosure requirements would be heightened. “Though transparency cannot rectify everything that has gone wrong, it is imperative that we enhance information flows to shareholders and counterparties of financial institutions in order to increase market discipline, as well as greater disclosure of off-balance sheet risks, such as exposure to structured investment vehicles,” Obama says.

McCain’s 15-page economic plan does not mention regulation of investment banks. When U.S. Treasury Secretary Henry Paulson announced his plan to rescue Bear Stearns, McCain said it was “not the duty of government” to bail out irresponsible lenders. But that is about as much as he said overall on the subject.

A detailed profile of McCain, which appeared in The Washington Post on Aug. 1, quoted an anonymous financial markets expert who said he met with McCain this summer. The source told the Post that McCain spoke about the subprime crisis “only ‘in platitudes,’ relying on populist political talking points.” McCain did not seem to understand economics, or to be interested in the subject, said this person, who insisted on anonymity to discuss the meeting.

But McCain’s Teddy Roosevelt-like view of big business makes him just as likely as Obama to sign onto the corporate reporting/transparency legislation that Democrats — emboldened by the removal of a Bush veto threat — will undoubtedly be sending to 1600 Pennsylvania Ave. next year.

An example of the kind of Democratic bill that may land in a new president’s lap — and be signed — is Rep. Barney Frank’s (D-Mass.) Extractive Industries Transparency Disclosure Act (H.R. 6066). This legislation would force all U.S. natural- resource companies to report royalty, tax, profits and other payments they make to foreign governments for extraction rights to the SEC, to give shareholders a sense of whether the company was pursuing risky strategies with perhaps undependable Third-world countries.

Frank, who is chairman of the House Financial Services Committee, held two hearings on his bill in the past session of Congress; but an anticipated Bush veto has kept it tied to its moorings.

Trade and Global Competitiveness

Given the current state of the economy and unemployment, as president, either Obama or McCain will have to address the competitive position of U.S. companies abroad and their attractiveness as investment magnets at home. Discussion about NAFTA has exposed a fairly sizeable rift between the two, with Obama implying during the primaries, that he might make considerable changes in the agreement.

On his Web site, Obama states: “NAFTA and its potential were oversold to the American people” and that he will “use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement that fail to live up to those important benchmarks.”

Trade is one issue where McCain is a traditional Republican. He traveled to Canada, Colombia and Mexico in June — much to the dismay of the AFL-CIO — and tried to split the difference on the issue, voicing understanding for the loss of jobs that trade agreements have sometimes led to, adding, in typical McCain fashion: “But for me to give up my advocacy of free trade would be a betrayal of trust.”

Skirting specifics on certain areas of world trade, neither candidate has descended very deep into, much less said anything penetrating on this issue. And though the Doha round of World Trade Organizations talks collapsed amid squabbling in early August, experts say WTO liberalization is critical to U.S. business hopes for new markets for export trade.

Perhaps of equal importance to business is access of foreign companies and foreign financing to U.S. markets. This is particularly important as businesses have looked overseas — especially to China and the oil-rich Gulf countries — for sources of capital, often hoping to attract investments in sovereign wealth funds. Investments in U.S. businesses by sovereign wealth funds, foreign governments and foreign companies must be reviewed by the Committee on Foreign Investment in the United States, known as CFIUS, if the acquisition target has some national defense or critical infrastructure component.

Composed of federal financial officials, CIFUS uses as its guide the Foreign Investment and National Security Act, a bill Congress approved last year that made some changes in the operation of CFIUS in the wake of the 2006 proposed acquisition of some U.S. ports by Dubai Ports World, a government-owned entity based in the United Arab Emirates. According to a private equity lobbyist in Washington, both Obama and McCain supported FINSA, and both are “generally supportive,” he says, of foreign direct investment in the U.S.

Corporate Taxes

Encouraging foreign sovereign wealth funds and companies to invest in U.S. companies is one thing; helping U.S. companies invest in themselves is another. Certainly, a reduction in the corporate income tax from 35 percent to 25 percent, which McCain has proposed, would do that. But there is little chance that McCain would get that 10 percentage-point rate cut through a Democratic Congress.

Democrats have been open to reducing the corporate rate as they understand U.S. companies pay considerably higher rates than their foreign competitors. Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, supports a reduction of the rate to 30.5 percent, which is still considerably above the 28.5 percent average within the Organization for Economic Cooperation and Development member countries.

Obama would “pay for” the loss in federal revenue by, among other things, increasing the tax on capital gains and dividends and eliminating corporate tax law benefits. One Washington business lobbyist points out that Obama has spoken consistently about eliminating or reducing the ability of U.S. companies to defer payment of taxes on foreign-earned income. “If a company is trying to compete overseas,” she says, “deferral makes a lot of sense.”

Closing corporate tax “loopholes,” such as the ability to defer taxes on foreign income has been part of the AFL-CIO’s agenda for years; union leaders have been decrying corporate “inversion” since the turn of this decade, complaining that companies are locating overseas to avoid paying U.S. taxes.

The AFL-CIO’s agenda would resonate with Obama in numerous areas. When the union endorsed Obama in June, it noted that Obama has a 98 percent voting record on “working families” issues, compared to just 16 percent for McCain.

One of the highest-priority issues for unions is passage of the Employee Free Choice Act, a bill that would allow workers in a company to decide to be represented by a union based on a majority of them signing cards to that effect. There would no longer have to be an actual election. That bill passed the House by a vote of 241-185 in early 2007; but when it came to the Senate floor in June of that year, Democrats could only muster 51 votes in favor, nine short of the 60 needed for cloture, meaning the end of debate and start of a vote.

Obama voted for cloture; McCain against. David Chavern, executive vice president, chief operating officer, the U.S. Chamber of Commerce, says: “Obama has come out full force in favor of union card check legislation and a whole host of pro-union legislation.”

McCain did not vote when the Senate took up a second AFL-CIO priority in April, the Lilly Ledbetter bill (H.R. 2831), which would allow employees greater latitude to sue a company for back pay. Obama voted for the bill. McCain was one of two senators absent for the vote; once again, a labor bill failed to get 60 votes, getting 56 instead.

McCain was also absent for some key cloture votes in the Senate in May and June last year, when the immigration reform bill came to the floor. But there wasn’t any uncertainty regarding where he or Obama stood on this issue.

Both favored the Secure Borders, Economic Opportunity and Immigration Reform Act of 2007, which McCain helped write along with Sen. Ted Kennedy (D-Mass.) and Sen. John Kyl (R-Ariz.). The bill opens up a path to citizenship for illegal immigrants through a new “Z” visa and a new “Y” visa category for guest workers.

Business groups, such as the Chamber of Commerce, supported the bill — especially its new employer verification system, though the Chamber noted that some of the provisions were objectionable; but the more important objective was to get comprehensive reform through Congress, which Secure Borders generally would have been.

Health-Care Solutions Differ

Another area slated for comprehensive reform is health care. This is one of the few issues where McCain and Obama have stated substantive differences, though both agree on the need to do something about the 47 million Americans without health insurance.

McCain wants to give every family a refundable tax credit — cash towards insurance — of $5,000 ($2,500 for individuals). For those who still can’t afford insurance, even with the tax credits, McCain would work with governors to develop a best practice model that states can follow — a guaranteed-access plan (GAP) — that would reflect the best experience of the states to ensure the patients have access to health coverage.

One approach would establish a nonprofit corporation that would contract with insurers to cover patients who have been denied insurance and could join with other state plans to enlarge pools and lower overhead costs. There would be reasonable limits on premiums and assistance would be available for Americans below a certain income level.

Obama would be more aggressive about covering the uninsured. He would establish a federal insurance system open to anyone who is not covered by Medicaid or the State Children’s Health Insurance Program (SCHIP), the federal insurance program for low-income children, or whose employer does not offer health insurance. Employers who do not offer insurance to workers would have to pay additional payroll taxes.

It is unclear how Obama would force insurance companies to participate in his program, or how he would guarantee that premiums would be affordable. That would be less of an issue with McCain’s plan, since $5,000 would buy the kind of high-deductible health plan already available on the market.

Despite the press of “social issues,” such as health care and immigration, the flagging economy will probably subsume the early days of the next president.

One Washington think tank official, who worked in the George W. Bush administration, says a heightened attention to corporate governance — in the wake of the Fannie Mae and Freddie Mac problems, bank failures and corporate bond defaults — will be a priority for either Obama or McCain.

No matter who becomes president, he says, there will be close scrutiny of issues such as how compensation packages are dealt with, what the board responsibility is. “It doesn’t take a genius to see that.”

Stephen Barlas (sbarlas@verizon.net) is a freelance writer who has covered developments in Washington, D.C., for 26 years. His profile of SEC Chairman Christopher Cox in the July/August 2007 issue of Financial Executive recently won an Apex Award for editorial excellence.

CFOs and the Presidential Election:

FEI Member Survey

Results of FEI’s quarterly survey to members — conducted in early August — indicate a majority of respondents leaning toward Sen. John McCain as more favorable for their business than Sen. Barack Obama. This, at a time when overall results showed CFOs at an all-time low in economic optimism.

FEI quarterly surveys generally comprise questions on a variety of subjects based on current conditions. The following summarizes the respondent results concerning the presidential election:

Selection of the next president of the United States is currently a focus nationwide, and as CFOs gear up to hit the polls, they are evaluating which candidate’s policies best align with their companies. When asked which candidate, if elected to office, would be most beneficial to their company overall, an overwhelming majority of CFOs selected Republican presidential candidate McCain (71 percent), while only 13 percent of respondents chose Democratic presidential candidate Obama.

Respondents were also asked to gauge the impact that each candidate’s policies would have on their companies regarding issues such as health-care coverage, taxes, foreign trade/commerce, production and manufacturing costs and energy costs. On average, less than 10 percent of respondents felt that McCain’s policies would have a negative impact on any of these factors, while a majority of respondents felt that Obama’s policies would have negative impacts on taxes (87 percent) and production and manufacturing costs (60 percent). Collectively, CFOs appear to be unimpressed by both candidates' health-care policies, revealing that most do not believe that either candidate will help control health-care costs. While nearly three quarters of respondents (70 percent) stated that Obama's polices would have a negative impact on their companies, an even larger number of CFOs (74 percent) said McCain would have no impact. Only 15 percent said he would have a positive impact on their firms.