NEW FEDERAL CONTRACTOR DISCLOSURE RULES HOW DOES IT AFFECT COX AND ITS EMPLOYEES

THE FINANCIAL VALUE OF GOVERNMENT ACTIVITIES INSIDE THE CORPORATE ENTERPRISERandy L. NewTodd M. SteinKitchens New Cleghorn LLC, Attorneys at LawDecember 4, 2013

Purpose of this Presentation

Help in-house and business outside counsel to better model and present government issues inside the business enterpriseIllustrate how an external affairs operation can present government issues as a business caseIllustrate logical (and illogical) linkages between:What government is doing/thinkingWhat the CEO wants the business to be doing/thinkingWhat the CFO wants to fund

Aim, Ready, FireOr Not: What Most Businesses Do NowGeneral counsels/regulatory VPs are tasked to manage the governmentThe CEO/CFO hear at report time a mere battle reportManaging the government is viewed as either An unfortunately necessary expenseA feeding trough of taxpayer dollarsA looming undefined risk Media/trade associations/cocktail party chatter REALLY drive the enterprises issues list (which is never written down or shared)Short term losses are not fixed/ wins arent locked in long termThe employees hear from management about issues that are anti or pro business -- whether they matter to THIS business is not discussed and/or is assumed without proof

When Businesses Dont Even Aim, Why?ASSUMPTIONREALITY MANY TIMESGovernment activities do not impact our business in a significant wayThey do but you havent examined financially the dependencies you have on government policyWhat is good for our industry is good for usNot if you identify specific detailed government propositions and compare with other industry playersOur trade association/industry group represents our views alwaysYour trade association/group has influence which it uses in part to maintain its position of influence with key playersPoliticians would never help unless we pay to play and we wont do itFair as to some legislators; not fair when you have information useful to them and not fair as to agency employees and courts reviewing laws and regulationsWe can just work around whatever the government doesAt what cost and with what certainty

When Businesses Aim But Dont Fire, Why?ASSUMPTIONREALITY MANY TIMESThere is no way to effectuate positive change at the federal or state levelArgument + evidence + sustained resource application = change over time

We are SURE we are safe from negative change The enterprise has not examined itself for regulatory dependencies AND/ORa compete business strategy has not been examined for future dependencies AND/ORThe DC and state lobbyists are happy talking

Working around government activities costs money and diminishes valueThe external affairs function is not presented or examined as a business case

Taking a Business Case Approach to External Affairs.The Client:FARMCO

The Goal:Increase the shareholder value of FARMCO

The Strategy: All interactions with government should MAXIMIZE the NPV of each line of business of FARMCO and the value of the total enterprise

The Tactics:

The Role of External AffairsEnable the business units to increase the shareholder value of FARMCO by:Reducing expense caused by governmentIncreasing revenue from government or restricted by government (in any way)and??

The Role of External AffairsEnable the business units to increase the shareholder value of FARMCO by:Reducing expense caused by governmentIncreasing revenue from government or restricted by government (in any way)THERE IS NO OTHER GOAL

How is shareholder value best measured?Simple view does the shareholder have more cash at the end of the effort including all of the incremental expenses and all of the revenue?More responsible view What is the Net Present Value (NPV) of the investment in the effort?The differences:NPV asks about inflows and outflows of cash and their value over timeNPV asks about the risk associated with each inflow and outflowNPV asks whether other alternative ways of investing capital produce more reliable inflows and/or less risky outflows

Textbook-type ExampleNew product line initially costs FARMCO 100K. Annual recurring costs are 5K a yearCash inflows expected at 30K for only 6 yearsFARMCO expects a return on all investments of 10% -- meaning the investment must produce more than FARMCO could get elsewhereThe mathT=0 -$100,000= -$100,000 PV. T=1 ($30,000 - $5,000) / 1.10 to first power = $22,727 PV. T=2 ($30,000 - $5,000) / 1.10 to second power = $20,661 PV. T=3 ($30,000 - $5,000) / 1.10 to third power = $18,783 PV. T=4 ($30,000 - $5,000) / 1.10 to fourth power = $17,075 PV. T=5 ($30,000 - $5,000) / 1.10 to fifth power = $15,523 PV. T=6 ($30,000 - $5,000) / 1.10 to sixth power = $14,112 PV. NPV = 100K 108.8K = $8881

Using a Value Approach on Any Business Case Model

What is the project?What extra revenue or reduced cost can it produce for FARMCO over what period of time?What are the odds that the result can be reached?What resources must be expended?What other business or regulatory projects compete for these resources?

NB: Dont get fancy with the word resources it is all money and peoples time is money

More Formal Process Inside any EnterpriseStep 1: Create and winnow the enterprises lines of business to identify those that are material to success.Step 2: In ONLY those material lines of business, identify the enterprises product/services (Services for our purposes) that are at risk of adverse effects of, or might enjoy the beneficial effects of, a change in regulation or law.Step 3: Reach an unbiased, informed assessment of the range of government policy outcomes that could reasonably happen.Step 5: Determine the chances of success of obtaining (or risk suffering) each outcome.Step 4: Marshal internal resources to measure potential NPV gains or losses from different government policy outcomes (given likelihood of success).Step 6: Order all enterprise targets by real likelihood of obtaining favorable NPV result.Step 7: Redirect external affairs efforts and identify personnel and resources necessary for success.

STEP 1: Winnowing Winnow the enterprises lines of business to identify those that are material to success:Line of business 1 what is the NPV of the existing case over the planning period?Is that line of business material to enterprise success or not?Line of business 2, etc.

STEP 2: Identifying Risks and Potential Upsides of Government ActionsExclude from study those products and services in material LOBs that do not matter to enterprise-wide NPVTHEN, identify LOB-specific product/services that are at risk of adverse effects of, or might enjoy the beneficial effects of, a change in regulation or lawService A of LOB 1, what is the external affairs driven risk/opportunity?Etc.

STEP 3: Range of OutcomesIdentify the range of government policy outcomes that could reasonable happen as to those services (whether or not the enterprise does anything)

Service A of LOB 1, what are the ranges of possible outcomes in regulation and law that would affect this serviceEtc.

STEP 4: Internal Calculations of NPV Gains and LossesMarshal internal resources to measure potential NPV gains or losses from different government policy outcomes (given likelihood of success)

Service A of LOB 1 is at risk (up or down) of a value change from regulation, what gains or losses to value are possible if government policy, regulation or law changes?Etc.

STEP 5: Chances of SuccessCreate an enterprise-wide list of services and products that are:In a material line of businessHave regulatory dependenciesThe dependencies create financial riskSomething can be done about them at a selected percentage changeThe enterprises effort matters to the outcomeEXAMPLE as to Service A of LOB 1, what likely public policy change(s) would produce what NPV result(s), and where does it rank in the enterprise list

STEP 6: Ordering TargetsOrder the services identified by the real likelihood of obtaining a favorable NPV result or stopping an unfavorable loss of NPVOrder by:NPV increase or decreaseChance of success of enterprise expenditures making a differenceAbility and willingness of the enterprise to fund the effort

STEP 7: Redirect External Affairs Efforts to Match the Study ResultsRedirect lobbying and public relations, and other activities to obtain maximum NPV valuesIdentify personnel and resources necessary for success (this does not have to be costly)Double check that should we and can we are in balance

Business Line(s)Specific Issue/OpportunityLegislative/Regulatory PropositionRegulatory Position DesiredNet Present Value of AttainmentOver Percentage Chance of SuccessAdjusted Value Lift/Loss

Illustrated End Product Project Summary

The Process Funnels Efforts and Resources

Case Study: FARMCO Suburban FarmsCore Business: Growing Fruits/Vegetables Using Suburban Farmland to Sell to High End Urban and Suburban Stores, Large Retailers, and Directly to Consumers Revenue is 8.8m with a target of 48m in 5 yearsKeys to sales growth areaccess to land at cheap prices to increase planting one acre enables 1M of revenueaffordable and reliable labor labor costs are 30% of all revenueLines of business are three: onsite retail sales, wholesale sales to upscale stores in Fulton and Dekalb and wholesale sales to regional grocers and other large retailers

Case Study: FARMCO Suburban FarmsPremises sales are $1m, targeted (5 year plan) $3mUpscale urban stores in Metro Atlanta are $2.3m, targeted $15mGroceries and large retailers are $5m, targeted $30mAll LOBs rely on real property and the current property tax bill is $100K and a fixation of management

Case Study: FARMCO Suburban FarmsFARMCOs owners contribute to all small farm associations in an amount of 20KThe owners and company spend 10K per year on their favorite officeholders, mostly stateAn expenditure of 100K more in external affairs efforts is not possible, 50K is possible but will impact the companys ability to buy land to support growth

Step 1: WinnowingWinnowing: Material Line of Business:Premises Sales Probably immaterialUrban Stores MaterialLarge Retailers MaterialReal property tax Not even material, hold by management override only

Step 2: Identifying REGULATORY RisksSales tax in urban counties likely to increaseImmigration bill is passed by Senate and not House. A significant known percentage of workforce is illegalProperty values and property taxes are increasing 10% a year20 full-time employees with health insurance health care costs are rising and there is ongoing uncertainty caused by the Affordable Care Act (ACA)

Step 3: Range of Possible OutcomesQuestions to Raise to Get to Possible OutcomesWill there be a sales tax increase? And if so, by how much?Will a federal immigration reform bill pass that will produce reliable labor? What happens if it doesnt pass? Will the status quo survive and/or will the state take action instead?Is FARMCO in a position to impact property taxes?Will the cost of health care continue to rise? And what impact will compliance with ACA have on projected growth?

Step 4: Measuring NPV of Different ScenariosThe NPV of a 1% sales tax increase which affects the urban store clients but NOT premises sales in this county is negative 1M over 5 years in depressed salesThe NPV of immigration reform that allows open use of immigrants is actually negative 100K in higher salaries if it passes (assuming in fact that more workers are available)Property tax increase would be 10% a year but immaterial ergo no NPV calculatedAssuming ACA produces cheaper policies, the NPV would increase 300K

Step 5: Chances of SuccessThe sales tax has a 60% chance of passage but good arguments against it exist including unintended effects like FARMCOsImmigration reform has a 10% chance of passing and FARMCO is not a unique public policy player and the buy into the debate price is 1MACA is passed and being implemented with a 30% risk of repeal or revision, similar buy in price for influenceRemember property tax is immaterial

Step 6: Prioritization

Urban Sales taxACA ReformImmigrationLocal Property Taxes

Step 7: Redirect External Affairs EffortsFamily redirects contributions to office holders in the urban countiesFARMCO focuses its public persona/external affairs on sales tax (for now)FARMCO follows other external affairs issues until NPV factors changeFARMCO lets others carry the water on other issues

Summary ThoughtsOur experience says this:Executives too easily conclude that politics and policy is too messy to be a reliable business driverIn-house lawyers see external affairs as an area to manage rather than an area of opportunity Companies should embrace external affairs and the political environment to maximize value for their owners

Business Line(s)Specific Issue/OpportunityLegislative/Regulatory PropositionRegulatory Position DesiredNet Present Value of AttainmentOver Percentage Chance of SuccessAdjusted Value Lift/Loss

Illustrated End Product Project Summary

Thank you.