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NOVEMBER 13, 2006
Talk Show "There has been cost-cutting in the chemical industry and in the petroleum industry. Has it gone too deep?" — Carolyn Merritt, chairman of the U.S. Chemical Safety & Hazard Investigation Board, on the 2005 fire that killed 15 workers at BP's Texas refinery, as reported in the Houston Chronicle ELECTIONS Business Wants Its Day In Court There's more at stake than control of Congress on Election Day. Corporate groups have been investing heavily to elect business-friendly judges in 26 races in 16 states, a blitz that may break their spending record on 33 judicial races in 2004. Spending on TV ads alone in state Supreme Court campaigns has hit $8.3 million, up from $8 million spent at this point in 2004. That's the finding of New York University law school's Brennan Center for Justice and Justice at Stake, two groups tracking judicial campaigns. As contributions from political parties in these races have plummeted, from almost $1.6 million in 2004 to today's $54,200, plaintiff lawyers and groups like the U.S. Chamber of Commerce and the business-backed American Justice Partnership have filled the void, to the tune of $1.3 million. So far this year, business groups account for 94% of third-party TV-Ad spending, up from 76% two years ago. The spending strategy took root in 2004. That's when, after decades of losing big lawsuits before judges who had cozy relationships with local lawyers, business decided that high-priced legal talent wasn't enough. Trade groups stepped in, contributing $21.5 million (almost double what lawyers and labor groups ponied up) to the campaigns of friendlier judges. It's an alarming trend, says associate counsel James Sample of the Brennan Center, because outside groups are more likely to air attack ads. "The nastiness factor goes up," he says. By Lorraine Woellert   CORNER OFFICE Analyst's Report: You're Fired Wall Street analysts are crunching careers as well as numbers. If half of those covering a company downgrade its stock--say, from "buy" to "hold"--the odds increase nearly 50% that the CEO will be spending more time with the family within six months. And if just one analyst drops coverage of a company, the chance that its chief will be gone within a year goes up almost 40%. That finding comes from research conducted recently by Margarethe Wiersema, a management professor at the Jesse H. Jones Graduate School of Management at Rice University, and Mark Washburn of the University of California at Irvine, who studied Fortune 500 companies from 1996 to 2000. The "analyst effect," they say, went beyond the impact of bad performance: The study controlled for the effects of dropping revenues and profits. The results may resonate with those concerned about the high CEO turnover these days. (So far this year, 1,112 chiefs have left their posts.) "Our findings suggest that boards are not focused enough on fundamentals and too focused on Wall Street," Wiersema says. By Nanette Byrnes 
THE HOME FRONT Where You'll Get That Sinking Feeling Homeowners are particularly vulnerable to falling house prices, foreclosures, and, thus, mortgage-lending fraud in two kinds of markets these days, says Mark Fleming, chief economist at CoreLogic, a Sacramento real estate consultant: in job-distressed regions and in once-feverish real-estate markets gone cold. Fleming pinpoints the U.S. cities where prices are decelerating the fastest (such as formerly white-hot regions in California and Texas). He's also identified places where job losses in the auto and textile industries will deepen housing distress. In Memphis, for instance, foreclosures now outpace the national average by a factor of six. By Mara Der Hovanesian BRIGHT IDEAS Now That's Commuter Power How many Japanese commuters does it take to light a bulb? On Oct. 16, East Japan Railway, or JR East, began testing rubber floor mats that generate electricity when walked on. The mats, which will be at several turnstiles inside Tokyo Station for two months, work by converting vibrations into energy. For now, a mat produces just 100 milliwatts with each commuter's steps. With about 700,000 commuters entering and leaving Tokyo Station daily, that translates to about 70 kilowatts of power--barely enough to light a 100-watt light bulb for 10 minutes. Officials say if the technology gets refined over the years those stomping feet could generate much more, providing electricity for a train station's lighting and other needs. "The mats could power machines and signs that don't require much energy," says JR East spokesman Takaaki Nemoto. "But that's far into the future." By Kenji Hall THE HOME FRONT Where You'll Get That Sinking Feeling Homeowners are particularly vulnerable to falling house prices, foreclosures, and, thus, mortgage-lending fraud in two kinds of markets these days, says Mark Fleming, chief economist at CoreLogic, a Sacramento real estate consultant: in job-distressed regions and in once-feverish real-estate markets gone cold. Fleming pinpoints the U.S. cities where prices are decelerating the fastest (such as formerly white-hot regions in California and Texas). He's also identified places where job losses in the auto and textile industries will deepen housing distress. In Memphis, for instance, foreclosures now outpace the national average by a factor of six. By Mara Der Hovanesian MARKETING Seeking A Fortune In Shanghai Aaron Landis, co-founder of a Shanghai startup called Enjoy China Holdings, thought he had hit on the perfect ad campaign for his newly launched Enjoy Classifieds, a kind of Craig's List for expats and yuppie Chinese. The idea, hatched last month, was to use Shanghai restaurants and bars to distribute fortune cookies whose "fortunes" advertised the site. A slip of paper with "You will soon find your true love" would contain the URL for the site's personal ads. "Your talents will soon be appreciated" would carry the address for the jobs site. Landis, a 35-year-old St. Louis native who has lived in Shanghai for the past three years, knew that fortune cookies aren't really a tradition in China. "We think it's Chinese, and they think it's foreign," he says. Still, he clung to the idea. "I read somewhere that 99% of the people who receive fortune cookie messages actually read them," he says. But finding a local supplier was tough. At one point, after hunting without success, he and his partners (a Belgian and an Australian) considered importing the cookies from a New Jersey factory. They even thought of buying ovens and baking the cookies themselves. In need of a cookie for promotional material to show restaurant owners, Landis contacted an ex-girlfriend, who FedEx'd him fortune cookies from a Chinese restaurant in Washington D.C. Finally, the team found a noodle factory in Guangzhou, close to Hong Kong, that sold fortune cookies for export to the U.S. and Europe. They bought 10,000. "It's working," Landis says of the promotion, which ran in about 40 restaurants and bars and cost about $2,500. Enjoy Classifieds, he says, now has "300% more postings" than its two bigger local rivals. "It's a way to really reach people and surprise them," he says. Besides, "we're giving them a cookie." By Bruce Einhorn CASHING OUT Is The Small-Bank Boom Over? The past five years or so have been heady times for community bank startups. As beneficiaries of the fallout from the last wave of big-bank mergers, they've gained disgruntled customers seeking first-name service with a smile. As a result, community bank IPOs, and their stocks (primarily traded over the counter), have soared: Of the 42 banks that debuted in 2000 and 2001, 16 have produced triple-digit cumulative stock returns over the past five years, including South Carolina's Coastal Banking (CBCO ), up 262%, and Pinnacle National Bank (PNFP ) in Nashville, up 793%. With those kinds of returns, who wouldn't want to start or invest in a new bank? In 2002 upstarts raised some $500 million to open 74 community banks. Last year those numbers leaped to a record $1.9 billion and 134 bank launches, according to Cincinnati-based Financial Stocks, which manages a private-equity fund. But with economic growth and the housing market both sliding, the $1 billion raised so far this year for such new ventures may be late to the game, warns John Stein, president of Financial Stocks. "Everyone is looking at how well people did in the past and throwing a lot more money at this at a much more difficult time," he says. Indeed, cashing out may be the smarter option now. So far this year 10 banks with charters less than 10 years old have sold for lofty prices. New York's Great Eastern Bank and Arizona's Choice Bank, for example, were bought for eye-popping prices equal to more than 40 times their trailing 12-month earnings per share and about 2.5 times book value. This may only encourage more investment, despite the bad timing. "Other small banks are going to see an opportunity to start up," says Jacqueline Reeves at the investment bank Ryan Beck & Co. By Mara Der Hovanesian Overexposed To warn students about the dangers of posting a racy or over-revealing profile on sites like Facebook.com, Indiana University at Bloomington has tacked up a thousand flyers around campus. The posters, each proclaiming "I Facebooked you!", remind students that prospective employers, among others, can view some or all of their profiles. (Facebook.com no longer limits membership to those with dot-edu e-mail addresses.) "A lot of times they're putting stuff up there to make themselves look good in front of their friends," says academic adviser Cindy Moore. "We wanted to make our students aware that the entire world can see what's there." By Lindsey Gerdes THE PENTAGON Rethinking The Safety Of Software Coded Over There Until now, the debate over the exodus of software programming to places like India has mostly focused on whether lower costs are worth lost American jobs. Now, however, a new hot-button issue is surfacing--about whether such outsourced programming is a threat to national security. A Pentagon task force is in the final stages of preparing recommendations on how to deal with the fact that some software the military buys from American companies is coded offshore. The task force is part of the Defense Science Board, an advisory group made up of volunteers from the military and industry. While the task force's deliberations are secret, the conversations its members have been having with outside experts are raising concerns in the tech industry about what the recommendations will be. "We recognize that there are real threats," says Phillip Bond, chief executive of the Information Technology Association of America, a lobbying group. "We want government to deal with this in a smart way, and we're concerned they might do it wrong." The worry is that the Pentagon might enact policies forcing tech suppliers to break off pieces of their global supply chains, making it difficult for American companies to deliver the most advanced products to the Pentagon at affordable prices. These days, computer builders, chipmakers, software publishers, and tech-service outfits all tap inexpensive programming talent in foreign countries. A government effort to fence out offshore suppliers, they fear, could bring a return to the days when too much of the stuff the Pentagon bought was custom-made--a practice made infamous by the government's much-publicized procurement of $600 toilet seats and other absurdly priced items in the early 1980s. It's not clear yet if the tech industry's fears will be realized. William Schneider Jr., chairman of the Defense Science Board (but not a task force member), says he's confident that the recommendations won't be draconian--or over-reaching. "We're concerned with the use of high-end, mission-critical software and the process with which it gets written," Schneider told BusinessWeek. There are no easy solutions, since pieces of software created offshore are embedded throughout computing equipment and software packages sold by U.S. companies. Besides, making sure the Pentagon's highly networked tech gear is secure goes beyond the issue of offshore programming. After all, Americans can be hackers and spies, too. Says Paul Kaminsky, another Defense Science Board member: "With networks, often it's the inside threat that gets you." By Steve Hamm and Dawn Kopecki Question Of The Week What would a democratically controlled Congress mean for business, the economy, or your industry? "Monetary policy and the long-run fiscal outlook--they'd be unchanged. The big economic effect would be in sectors with a great relationship with the White House now--oil, defense contractors, pharma." -- Justin Wolfers, asst. professor, business and public policy, the Wharton School "Whoever wins, the new Congress has to tackle policies on intellectual property, health care, and immigration, an issue that's tearing us apart because it's unresolved. And vocational education, which is abysmal in this country." -- Andy Grove, cofounder, Intel "Are changes in Washington coming? Probably. But it's important for both parties to remember that Americans who suffer from illness don't sign in a the hospital as Republicans or Democrats." -- Billy Tauzin, president and CEO, Pharmaceutical Research & Manufacturers of America; former Congressman (R-La.) By Cliff Edwards and Dawn Kopecki
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