By Ken Monroe, FBA Chairman
California’s 1.4 million family-owned businesses are in the fight of their lives.
Some have been shuttered since March, still waiting nervously for an all-clear from state officials. While their revenue stopped, the bills kept coming. And many voluntarily kept paying wages, health benefits and other costs to take care of their greatest asset: their employees.
Other businesses benefited from the “essential” tag (or so they thought) and were allowed to continue operations. But staying open during the stay-at-home order meant limited operations and large drops in revenue, yet higher costs to modify how we work to protect workers and customers.
The point is regardless of the size or industry, few businesses have made it through the past few months without major harm.
With California reopening, there seems to be a light at the end of the tunnel. The question now at hand is this: will state lawmakers allow that light to shine and help business power an economic comeback? Or will our prospects dim under short-sighted policies that throw more burdens and new costs on employers, slow job creation and kill future growth?
There are several areas where lawmakers can show whether they are friend or foe to family-owned businesses, including how they deal with new taxes, restrictive contracting rules and predatory lawsuits.
Another threshold test will be workers’ compensation. California employers have historically paid among the highest costs for workers’ compensation insurance. A lot of these costs do not benefit the workers who truly need it – instead money is skimmed away by lawsuits and outright fraud.
As a result of COVID-19, a new workers’ compensation threat has emerged: a “presumption” that all COVID-19 cases should be blamed on work and, therefore, eligible for workers’ compensation benefits.
Let me be clear: employers support – and pay for – our workers’ compensation system as an important safety net. We do our best to keep workers safe and healthy. When accidents or illnesses occur because of work, our workers should get the medical care and benefits they need.
Presumptions turn the system inside out. Instead of providing these benefits for work-related injuries or illnesses, employers will pay for any instance when a worker gets sick – even if the illnesses was caught a home from a family member or out in public from a stranger.
In early May, Gov. Gavin Newsom enacted an emergency presumption, when most of our state was still closed down.
As Californians get back to work – and back to their own personal lives – blaming all COVID-19 cases on work is unfair and unjustifiable. Worse, it will cost employers billions of dollars to pay benefits that have nothing to do with work.
If lawmakers expand or extend the workers’ compensation presumption – as several have proposed – it would deal a devastating blow to family-owned businesses. Jobs will be lost, or not brought back. Economic recovery and growth will be dampened. And, ironically, it will depress the tax revenue our state leaders need to restore public services, such as education and community health.
Business will be the engine of the economic recovery. For state lawmakers, the choice is clear: are they friend or foe?
Ken Monroe is president and CEO of Holt of California, a major Central Valley Caterpillar dealer, and chairman of the Family Business Association of California. This op-ed first appeared in the Bakersfield Californian.
Both family businesses and private companies tend to struggle with the decision of when and why they should bring outside professionals on to their boards of directors. It’s not uncommon for us to hear things such as:
“Should I have a board that includes outside directors? Why?”
“I don’t want someone telling us what to do. What if they take over and we can’t do what we want to do? Will they slow us down?”
“It will cost us money to put outside board members on our board, and we will have more work to do. Will they want to look at our company financials?”
“Who would we ask to be on our board?”
We have heard these questions, concerns and reasons time and time again about why companies believe they should — or should not — have outside board members.
I have had the honor of sitting on a couple of family owned boards, and have immensely enjoyed the privilege of doing so. I haven’t chosen to do so based on any of the reasons suggested above. Rather, I have done so because I believe I bring an opportunity for the CEO to ask for advice, provide a different perspective all while remaining objective because I am not wrapped up in the internal operations of the company.
Outside board members enjoy and feel good when a CEO asks questions that complement their experience. It helps the CEO make objective decisions — having someone they can bounce a problem off of, as well as see all sides of a problem and help find the best solution. For me, having a banking background in addition to strategic and leadership skills-set, I have been able to provide an outside perspective that has helped identify strengths, or something the CEO might want to be aware of. Candidly speaking, I may initially question something, but it truly is for the good of the company. Creating an opportunity to broaden a company’s perspective is helpful and provides the CEO an opportunity to both weigh and debate the facts from knowledgeable people who are on their side.
Statistics show there are a higher percentage of companies that make it through a crisis and a downturn in the market with outside directors. Remember, board members do not manage the company they ensure the company is well managed. A board of advisors may be something to consider in a family or privately held business. It’s important to talk through the objectives and the skill set of who you would like to invite on to the board and why.
For the benefit of this strategic initiative, I asked FBA Past Chairman David Lucchetti, President and CEO of Pacific Coast Building Products, a family-owned business, why they have outside directors.
“I think it’s important because an outside board member offers a different business knowledge and an outside perspective,” Lucchetti said. “This outside perspective helps provide a good checks and balances system. They can help the family business to see beyond what they’ve always done by raising important questions, and helping the business make future decisions.”
Elliot Eisenberg, Ph.D. GraphsandLaughs, LLC September 1, 2019
The Great Recession of 2008 is firmly in the rearview mirror, we are now enjoying the longest recovery in U.S. history, the unemployment rate is near a 50-year low, wage growth is pretty good, inflation is virtually non-existent, and the stock market is just a few percentage points off its all-time high. Yet, talk of recession is increasingly common. And it’s not surprising, given the weakening global economy, the decline in exports, the soft energy and transportation sectors, the ailing agricultural markets, and of course, the overarching U.S.-Sino trade/currency/tech war. That said, while the next recession may well not arrive till 2021, it is not entirely clear what will cause it.
In general, recessions are caused by one of three things. Often, central banks raise interest rates too much in an effort to slow the economy to reduce late cycle inflationary pressures. In the process, they either raise rates too much or keep them too high for too long, driving the economy into a recession. A second reason we have recessions is due to unforeseen shocks to the economy. It might be a war or a sudden rise in energy or food prices which reduces household spending power and can cause widespread obsolescence of capital equipment because the higher price of energy makes the equipment uneconomical. A third cause, and one that has recently been the culprit is financial excesses (think bubbles) that result from overexuberance on the part of markets that lead to mispricing of assets and finally a financial crisis.
The 1973 recession was caused by a quadrupling of oil prices by OPEC. Overnight, oil went from $3/bbl to $12/bbl. Moreover, the supply of oil was severely restricted, which led to gasoline rationing and long lines at gas stations. This caused consumer spending to plummet and factories to close, crushing the economy. The recessions of 1979 and 1982 were deliberately engineered by the Fed and its then-chairman, Paul Volker. The only way to squeeze inflation, which was north of 13% at the time, out of the economy was to induce a recession. In 2001, it was the tech bubble, and in 2008 the recession was caused by the housing bubble.
But the 1990 recession was different; it had no singular cause. On one hand, it was a result of a commercial real estate bust partly caused by the S&L crisis, which in turn led to a severe drop in construction activity. But there was also a major rise in energy prices, due to Iraq’s invasion of Kuwait, which hurt consumer confidence and spending. In addition, there was the post-Cold War drawdown in defense spending, which led to a rise in unemployment. While none of these events in isolation would have precipitated a recession, collectively they did. Fortunately, it was short and shallow, but the recovery was slow and jobless.
As for what’s to come, I suspect the next recession will be caused by a confluence of factors. The trade war is already hurting GDP growth. Add to that a global slowdown, a decline in energy prices, a weakening transportation sector, feeble manufacturing activity, Brexit and other European problems, an largely impotent monetary policy as rates are already very low. If all this leads to one or two negative monthly job reports which, in turn, leads to weakening consumer confidence and spending, you probably have the beginnings of a recession. Regrettably, getting out of the next recession may take longer than usual because fiscal policy is already a spent force as we are already running historically very large deficits. And that means a much-reduced willingness on the part of Congress to cut taxes and boost spending.
The good news, the coming recession is not likely to be very deep as there are no obvious bubbles that must be punctured. And lastly, with a bit of luck, this recovery can keep on going for another few years; it is entirely possible.
There is currently widespread frustration with the performance of the global economy. Traditional policy approaches are not delivering the economic results they have in the past. In the U.S., millennials are poorer, have lower incomes, marry less often, and have fewer children than the generations before them. In Europe, the rise of previously fringe parties is unmistakable as voters express their frustrations with the status quo at the ballot box. All this has led to the rise of Modern Monetary Theory (MMT), a set of ideas that reflect a significant and unfortunate break with previous orthodoxy.
During the late 1970s, a similar economic malaise gave rise to supply-side economics popularized by Arthur Laffer. It began with the age-old observation that taxes had important incentive effects and that, in conceivable circumstances, tax cuts could raise revenue. That said, from these two well-understood underpinnings, it grew into the ludicrous idea that tax cuts would always pay for themselves. In the 1980 presidential primaries, future President George H.W. Bush called this idea “voodoo economics” and in the following decades this doctrine did substantial damage to the U.S. economy and has largely short-circuited meaningful debate about taxes.
Now comes MMT, which, like supply-side economics, makes a good observation — that fiscal policy needs to be rethought in an era of low real interest rates — but then stretches it into a ludicrous claim that massive deficit spending on job guarantees can be financed by central banks without any burden on the economy. At a moment of deep economic and political frustration, some fringe wing of the out-of-power party is again offering the proverbial economic free lunch as a politically attractive way out of a fiscal bind. Regrettably, MMT is flawed at many levels.
First, it promises that by printing money the government can finance deficits at zero cost. Not true! The government in fact pays interest on money it creates as it becomes reserves held by commercial banks and the Fed pays interest on reserves. Second, contrary to MMT, governments cannot simply print money to pay bills and avoid default. Looking back at developing nations that have employed MMT demonstrates that beyond a certain point printing money leads to hyperinflation. Third, MMT conveniently assumes an economy that does not trade with other nations. Regrettably, money printing will result in a collapsing exchange rate that will in turn boost inflation, raise long-term interest rates, encourage capital flight, and reduce real wages.
And it is not only in emerging markets where MMT has played out badly. France in the early to mid-1980s and West Germany in the late 1980s employed what now would be called MMT but both nations had to reverse course. Separately, the U.K. and Italy both had to be bailed out by the IMF in the mid-1970s because of an excessive reliance on inflationary finance.
Supply-side economics was an unreasonable extension of valid ideas. To that end, few support a return to the very high marginal tax rates that prevailed before the tax reform of the 1980s. Similarly, in an era of very low inflation, and of real interest rates of close to zero, we can and should carefully reconsider our traditional views of federal borrowing; they need at a minimum a careful and thoughtful rethink. That said, when something sounds too good to be true — as was the case with supply-side economics and is the case with MMT — it’s important to make this clear to improve debate and hopefully prevent us from making another costly and unnecessary economic policy mistake.