Ernie Godshalk is a professional director currently sitting on two public boards; a director of the National Association of Corporate Directors/New England, Ernie is well known to the local director community as a thoughtful commentator on board service.
His current view of the world economy is that it is recovering slowly but subject to substantial risks, and heading the list are the precarious nature of the Euro (I parenthetically note today’s report of further weakening in the Euro countries’ employment) and the international risks created by Iran and perhaps Pakistan. In light of this view, I asked how a board should go about enterprise risk management.
Godshalk’s view is that, while his boards discuss risk virtually every meeting and care is given to identifying who is responsible for watching which risks, there are indeed some existential exposures which cannot be controlled by the company and consequently cannot really be monitored.
Ernie expressed concern as to the impact of any Euro failure on the highly leveraged Deutsche Bank, and rejected the view that a Euro failure in the long run would not represent a substantial risk for United States businesses. Certainly, identifying non-European markets for the purchase of parts or the sale of goods, and the shortening of lead times, can mediate the Euro risk to some extent, but substantial risk will remain given the international nature of United States business.
What are the problems most plaguing our economy, aside from major geopolitical risks? We discussed excessive US regulation; we further debated whether over-regulation was an annoyance and a marginal expense but not an ultimate depressor of United States business. Godshalk noted two factors in the American environment that he thought were significant: first, our high tax rate and, second, our immigration policy.
Noting the internationalization of business in general, even domestic United States companies have substantial opportunity to relocate operations and profits overseas. Higher United States tax rates drive that flight abroad.
Immigration is an oft-cited problem, as it has become difficult to obtain visa approval for persons with requisite skills to drive technology businesses. Even more anomalously, I suggested that we are now bringing foreign students to the United States and transferring our own sophisticated technology to them and, then, refusing to allow them to stay; it is the forced exportation of our technological advantage.
Asked about the biggest problems in serving as a director these days, Godshalk noted two: first, failure of boards properly to address CEO succession; and, second, the inordinate time which boards must apply to risk assessment, say-on-pay, proxy solicitation and the like, which diverts the board from its strategic mission of “adding value” and making the company business better.
Finally, I asked Ernie about the current state of the M&A market. From a strategic acquisition standpoint, he believes that good deals are available. The strategic advantage should be in either technology or in sales (for example, efficiency in marketing multiple lines). In response to the suggestion that an improving M&A market has caused an increase in EBITDA multiples, particularly for strategic acquirors, Ernie noted that there are many companies that are for sale, there is pent up sales demand, and many enterprises with VC and PE money remain well “behind plan” by reason of the recent business recession, and consequently are favorably priced.
The issue of over-regulation of United States business is and will remain a significant discussion. Two days before our meeting, the Congress passed and sent to the President the JOBS Act, which rolls back some of the Dodd-Frank regulatory requirements at least for businesses that are now going public with sales less than $1,000,000,000 (which is not all of them, but surely most of them). Now that the Federal Administration identifies relationship between regulation and employment, it is possible that bi-partisan efforts (so hard to achieve in so many areas) will nonetheless continue to address these issues of over-regulation which Godshalk believes drive companies abroad and waste director time in boardrooms.