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Sunday, January 1, 2012

CFO SPOTLIGHT – Dan Sebastiani, Heffernan Insurance

As CFO of Heffernan Insurance Brokers, Dan Sebastiani provides strategic direction and support for financial decision making, maintains financial service provider relationships and is involved in mergers and acquisitions. Like many CFOs he's also responsible for the company's human resources and corporate governance functions.

Formed in 1988, Heffernan is one of the largest independent insurance brokerage firms in the nation. It provides comprehensive insurance and financial services products to a wide range of businesses and individuals. Headquartered in Walnut Creek, California, the firm operates offices in San Francisco, Petaluma, Palo Alto, Los Angeles and Orange, California; as well as in Portland, Oregon, St. Louis Missouri and New York City. Heffernan has been named the Best Place To Work - Medium-Sized Brokers by the insurance trade press.

Recently, the 410 employees of Heffernan were offered an attractive new benefit - an Employee Stock Ownership Plan, or ESOP. Dan led the effort and in the following interview with CFO Evolution, he discusses the challenges of creating an ESOP and the benefits his firm expects the program to generate.

Q. How did your management come to the decision to provide an ESOP to your employees?

A. It's pretty well documented that successful employee stock ownership programs increase productivity and profitability as well as improve employees' dedication and sense of ownership in a company. With an ESOP, employees are incented to perform as well as possible, because their personal wealth is tied more closely to the firm's financial performance. We believe our company's culture and workforce supports this and that the program will be successful. One interesting statistic is that in the U.S., ESOP participants have three times the total retirement assets (including 401(K) plans), as comparable employees in non-ESOP companies.

Q. Is there a potential downside to the ESOP?

A. Well, yes. The potential downside is that if our employees don't feel empowered to make decisions at every level of the company, and our stock drops in value, they would likely be very unhappy as a group. Fortunately, decision making is pushed down as far as possible in our firm. We hire the best in our business and we expect them to not only manage their individual responsibilities, but to also operate collaboratively when delivering a service or product to our customers. Again, this kind of training and culture works well with employee ownership.

Q. How did you structure your ESOP?

A. We are delivering 16 percent of our firm's total equity to employees through the ESOP. This is a first step in getting a good feel for the program. We have the flexibility to either maintain this level of employee ownership or to grow it in the future if that appears to be the right strategy. Ours is a traditional leveraged ESOP, meaning we borrowed funds from the bank, and in turn, loaned the monies to the ESOP for purposes of acquiring the stock. There is an impact to our income statement because of the annual ESOP contributions, but the expense is treated much like a non-cash expense. The tax-deductible contribution expense provides the ESOP with the funds necessary to repay the loan. Each regular, full-time employee has an employee participant account, to which shares are allocated, annually, based on compensation. Shares are allocated over a 10-year period while vesting occurs over a six-year schedule.

Q. What is your advice to other CFOs and CEOs who are contemplating an ESOP?

A. We believe the ESOP reflects our commitment to our employees, provides a unique employee benefit, and is aligned with our culture and the vision of our founder, Mike Heffernan. It may not be the right fit for other companies. However, if a company is serious about an ESOP, my advice is to be sure to align yourself with a professional team that is very experienced. The ESOP consultants, accountants, lawyers, and bankers that you engage are key to satisfying the myriad of IRS and Department of Labor requirements. In addition, the ESOP is an ERISA governed plan and subject to annual audit (by an independent auditor). Thereafter, having a realistic timeline that keeps everyone on schedule is important. There will be hurdles and being rushed increases the potential for issues down the road.

Q. Turning to more general questions; what is your advice to CFOs about how to be a trusted strategic advisor to the CEO and other senior managers?

A. At every opportunity, chime into strategic discussions with input that adds value. Whether you're in a budget planning session or the initial meetings around a new acquisition, being there early in the process gives you a chance to be more deeply involved. Ultimately, it's your core business that drives everything, so in our case that's sales.

Q. How do you approach that at Heffernan?

A. In my case, because we are sales-oriented, I turn to our sales managers for details about new prospects, new products, potential deals, shifting of local economies, new initiatives and behind-the-scenes logistics that emerge for the firm. I've spent a lot of time building solid relationships with our sales teams with the objective of creating a strong bond of trust. I recognized that these people are key knowledge holders of the organization and, for that reason, I needed strong relationships. That trust enables me to get quick detailed answers and give value-added insight to our CEO and senior team. In turn, I provide whatever I can for sales people who need to know about the bigger picture and why the firm does things the way it does, what its appetite is for certain kinds of deals, and so forth. My point here is that CFOs should hone in on the parts of the organization that drive the most revenue in the doors and work very closely with them.

Q. Any final advice?

A. Poor economic conditions are usually accompanied by a rise in fraud; from your clients and even your employees. This is a good time to have another look at your internal financial controls.


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