Conscious Capitalism – A New Paradigm

capitalismThe idea that a growing economy benefits all classes has a long history of acceptance. It has been embedded in political rhetoric for the past half-century, regardless of party – in fact, John F. Kennedy is credited with the saying, “A rising tide lifts all boats.”
 
The theory – popularized as “trickle-down economics” – presumes that economic policies that help the wealthy eventually benefit everyone. It’s led to federal legislation reducing taxes on the wealthy and easing corporate regulation, as well as Supreme Court decisions increasing the legal rights of corporations, bringing them in near-parity with natural beings.
 
Despite expectations that the country as a whole would benefit from these measures, the results have been disappointing. Consequences have included a growing income disparity between the wealthiest members and the rest of society. It’s also led to an increase in national debt and significant corporate abuses of public trust, such as the manipulation of energy and securities markets. As a result, citizens and corporate leaders are rejecting the old paradigm and exploring a new model for capitalism.

Failures of Traditional Capitalism

The 1990s savings and loan failures, Enron’s manipulation of electricity prices in 2001, and the mortgage securities crisis in 2008 are major examples of the negative consequences of capitalism. In the view of many business and citizen leaders, corporate greed and uncontrolled capitalism have also had the following general negative effects.

1. Lack of Equality and Opportunity

The most public critic of the current capitalist system has been Pope Francis. In an apostolic exhortation issued November 26, 2013, he asserted that “today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.” The Pope goes on to say that the minority who do benefit “reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.”
 
Businesses overtly resist the efforts made by governments – which have the responsibility of protecting the rights and interests of their citizens – to pass laws or regulate corporate activities. All this, even as the wealthy benefit the most from publicly owned assets and exorbitant government contracts.
 
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The Responsibilities & Duties of a Modern CFO

cfo lettersOver the past couple of decades, the role of the modern CFO has been, and continues to be, redefined. The advent of new technology allowing for enhanced data collection and analysis tools—as well as operating management’s demands for reliable real-time information—has extended the CFO’s responsibility to all aspects of the company.
 
International commerce and expanded regulatory oversight in culturally diverse customer and employee bases complicates decisions and increases risk. As a result, the CFO’s authority and responsibilities over traditional finance, accounting, and treasury functions has intensified and expanded to satisfy an exhaustive list of internal, external, and regulatory stakeholders, many of whom have conflicting interests.
 
Just as businesses have become more complex, diffused, and subject to greater risks—many of which are unidentified—the CFO function has evolved into a multi-focused position with unprecedented requirements for responsiveness and accuracy. Yesterday’s bean counters are as passé in a modern public corporation as Ford’s Model T on the highway.

Best Practices of the Modern CFO

In a 2013 report coauthored by the Association of Chartered Certified Financial Accountants (ACCA) and the Institute of Management Accountants (IMA), Jeff Thomson, president and CEO of IMA, detailed various factors that have changed the CFO function. In addition to traditional finance duties, modern CFOs are expected to work in collaboration with others throughout the organization, direct integration of key business processes, stimulate change and business transformation, and be trusted business advisors to CEOs and boards of directors.
 
The report identifies several priorities modern CFOs have that their predecessors did not. These are the consequence of increased regulations, globalization, industry and business transformations, aggressive stakeholders, and the adoption of complicated financial and operating reporting requirements. While the actual duties of a CFO vary according to industry, company dynamics, and historical precedents, an effective CFO in the 21st century must excel in each of the following practices.

1. Communications

Whether talking to the board of directors, delivering financial data to stock analysts, investment managers, and regulators, or detailing performance metrics to fellow officers and employees, the importance of clear, crisp, and relevant information delivered in an understandable format cannot be overstated. Knowing what to say, when to say it, and how to present it has become a critical component of a CFO’s responsibility.
 
As Robert Hoglund, CFO of Consolidated Edison, recognizes, “Communication is essential in every aspect of the business…ultimately I need to persuade people to my point of view.” While CEOs can expound upon such nebulous subjects as mission, vision, goals, and culture, CFOs are expected to bring real data to the table, to put the “meat on the bones” for gimlet-eyed regulators and anxious money managers.
 
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How to Maximize Social Security Benefits

social security moneyIn 2004, Social Security benefits were projected to account for 40% of a baby boomer’s post-retirement family income, and almost all baby boomer retirees were expected to receive benefits, according to a Social Security Administration study. But Dean Baker, co-director of the Center for Economic and Policy Research, thinks those projections were conservative. Today, according to Baker, Social Security payments account for 90% of income for one-third of all seniors and more than 50% for two-thirds of them. For unmarried seniors, the dependence upon Social Security is even greater, accounting for almost three-quarters of their income.
 
As pensions become increasingly rare – replaced by defined contribution plans, which are subject to the volatility of financial markets – the importance of Social Security continues to grow. In fact, the Securities Industry and Financial Markets Association claims that Social Security is now the “most prevalent and important single source of income for retirees.”

Social Security Monthly Dollar Retirement Benefits

Generally speaking, the amount of Social Security you receive is based upon your total lifetime earnings that were subject to Social Security taxes – as of 2014, maximum taxable earnings stand at $117,000 per year. In other words, the more money you make over an extended period, the more you receive when you begin withdrawing.
 
The specific dollar benefit paid to a beneficiary is the result of an SSA calculation, based upon that person’s top 35 years of earnings, adjusted for inflation. It is further affected by the age at which you begin receiving benefits. In 2014, according to the Social Security Administration, the maximum payment for an individual who begins claiming at full retirement age is $2,642 per month.
 
For help estimating your future benefits – as well as verifying your earnings each year – the SSA provides a useful online resource. Many of the criteria that determine the amount you receive, however, are actually within your control.

Social Security Age Withdrawal Options

There are several options for when you can start withdrawing your Social Security benefits.
 
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The What, How, & Why of the HECM (Reverse Mortgage)

retired black coupleMany seniors struggle to make ends meet each month. At the same time, they often own thousands of dollars of real estate in the form of equity in their home. But unless they take action, that equity remains untouchable, unable to help them out with basic living expense. What’s worse is that mortgage payments further reduce their available cash each month to pay crucial expenses.
 
A Henry J. Kaiser Family Foundation report states that more than three of four seniors over the age of 65 have equity in their homes ranging from $67,700 to $325,200. One in 20 have home equity greater than $398,500, and 1% have more than $799,850.
 
And yet almost half of elderly Americans depend upon Social Security for at least one-half or more of their income, while one of eight depend solely on Social Security. But many of these seniors have home equity that could be converted into cash income.
 
If you or your parents are “house-rich” but cash-poor, it is time to consider whether a reverse mortgage on the family home is a better alternative to traditional avenues of converting home equity into a cash asset.

Traditional Methods to Convert Home Equity Into Cash

For seniors who anticipate and desire to live in their current residence for the foreseeable future, there are a few traditional ways (not including the reverse mortgage) to convert home equity into cash:

Home Equity Loans

A home equity loan is essentially a loan extended to the homeowner secured by the lender’s receipt of a second mortgage lien on the real estate. The underlying loan may be as high as a 100% of the owner’s equity, depending upon the lender’s criteria, the credit rating of the borrower, and the negotiated repayment terms. For example, a homeowner with equity can usually borrow a lump sum equal to an amount between 80% and 100% of the equity.

Home Equity Line of Credit

A home equity line of credit (HELOC) is a line of revolving credit in an amount up to the equity value, usually with an adjustable interest rate, so payment amounts vary from month to month. Like other personal loans, the terms of the loan and the amount of credit that may be available is subject to negotiation between borrower and lender.

Cash Out Mortgage Refinancing

As interest rates move lower and/or their equity grows, many homeowners refinance so they can reduce the interest rate on the underlying loan and subsequently reduce their monthly payments or convert a portion of their equity into cash. For example, say a homeowner bought a new home in 2000 for $312,000. The 30-year, 6% fixed rate loan requires a monthly payment of $1,824.40. Today, the home has an appraised value of $350,000 and interest rates have fallen to 3.5%. The owner subsequently refinances the home at a 3.5% rate for 30 years with a monthly payment of $1,582.85. As a consequence of the refinancing, the homeowner pays off the initial mortgage, reduced his payment by over $240, and is able to pull out $30,000 of cash from built-up equity.
 
Though these methods are a means to access locked equity, they all share a host of disadvantages:

Continued Exposure to Real Estate Declines

Since the lender has “full-recourse” to the property owner if the mortgage loan is not repaid, the homeowner is liable if the proceeds of the sale of the property are less than the outstanding mortgage. Real estate with a value less than the mortgage is considered to be “underwater,” a condition in which many homeowners found themselves following the mortgage securities crisis of 2008-2009.

Payments Required for Term of New Mortgage

The homeowner refinancing his home in our example had made almost 14 years of the 30 years of payments. The refinancing – with a new loan – restarts the clock for another 30-year term, essentially adding 14 years of payments to the old due date. Retired seniors may lack sufficient income to comfortably make payments after retiring.

Delinquent Mortgage Payments Trigger Foreclosure by Lender

The legal obligation to make payments to the lender exists for the loan term. Failure to make payment can result in foreclosure and sale of the property. If the mortgage is underwater, the seniors not only lose their home, but must make up the difference between sale proceeds and the outstanding mortgage loan.
 
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