What management expects: evaluation of the tax department and its executives.

For the past several years, Tax Executives Institute's Corporate Tax Management Committee and its counterparts in the local chapters have undertaken activities and programs focused on what management expects of, and how it evaluates, the tax department and tax executives. In this article, the committee summarizes the data developed from these activities and analyzes its significance and implications.

Introduction

As a result of intense global competition, controlling costs and assessing effectiveness and value of operations are omnipresent factors of daily life in business.(1) In this context, corporate staff functions are increasingly subjected to scrutiny, reorganization, and sometimes elimination.(2) Determining and proving the tax department's value to a company is no longer a once-a-year exercise of listing accomplishments; rather, it is an inherent part of daily management.(3)

While evaluation as both a discussion topic and an essential job responsibility has become constant, information on how performance evaluations of tax departments are conducted is not readily available. Tax involves both knowledge- and technology-based sets of tasks; this area has lagged behind the more process-based tasks of a business enterprise in evaluation techniques.(4)

Traditional evaluation of tax department performance is fairly subjective in approach -- the computation of theoretical tax savings; avoidance of surprising tax or accounting deficiencies or losses; and integration of the tax function into the business-planning process. The language used in many of the "modern" evaluation systems -- under the rubric of reengineering, 360-degree feedback, benchmarking, and the like -- focuses on different approaches to value. Information about these approaches is critical for tax executives, since an alternative to providing value in the newly measured ways is outsourcing.(5)

The solution to the evaluation process is often stated to be "better communication of the department's value." This is certainly accurate, but it raises the question of what factors the persons to whom such communication is directed regard as indicators of positive value. The content of the value concept for the tax department in the reengineered workplace is a topic on which there are many opinions and impressions, but not a lot of data.

To help develop information regarding evaluation, TEI's Corporate Tax Management Committee surveyed TEI's membership on various aspects of the process as actually conducted in their companies. The committee also sponsored sessions with the principal evaluators of tax departments -- Chief Financial Officers -- at which they expressed their expectations of the tax department, as well as their thoughts on evaluating the function. The information gathered from these sources suggests some plain, albeit not highly specific, trends in respect of expectations and performance evaluation. These data are not statistically based, but nevertheless provide concrete evidence of directions and ideas.

Committee Survey

In March 1995, the Corporate Tax Management Committee prepared a survey to solicit information from member companies regarding the processes and measures for evaluating the tax department. The survey was submitted to each TEI chapter, with the request that it be forwarded to the companies represented by the membership; a few chapters consolidated their members' information into a single-chapter response.

The survey questions addressed:

* The regularity of performance evaluation of the tax department;

* The specific measures or targets taken into account in the evaluation;

* The extent and nature of benchmarking activities and pursuit of "best practices" in the tax department;

* Specific questions related to the use of the effective tax rate as a measurement of tax department performance, and whether business managers are judged on pre-tax or after-tax results; and

* Use of outside consultants to critique tax department effectiveness.

The questions were open-ended, not only to gather objective information about practices, but also to elicit descriptions of those practices, their usage, and unique features.

The Corporate Tax Management Committee received 47 company and 5 chapter responses to the survey. The responses were summarized to ascertain if there were any clear trend lines that would show how performance of the Tax Department is conducted and measured.(6)

Central Trends

The following trend lines were apparent in the survey responses:

* Tax department performance is internally reviewed in every case;

* Internal statements of objectives and goals are consistently used;

* Principal factors mentioned in stated objectives focus on tax planning, tax savings, IDR responses, and costs;

* Business units are judged mostly on a pre-tax basis;

* Little benchmarking or work with "Best Practices" is being conducted;

* Third parties are rarely used to evaluate the tax department.

Implications of the survey responses are, as follows:

* Objective external measures of evaluation or measures based on third-party comparisons are difficult to find;

* Internal goals and objective measures are traditional, except for the increased emphasis on IDR responses;

* There is heavy emphasis on the value of tax planning;

* Personal development and other features of contemporary management processes are not evident; and

* Many tax departments appear to be taken for granted.

Performance Measurements

Among the more frequently used formal performance measurements mentioned are the following:

* Tax planning strategies and savings;

* Tax audit results;

* Effective tax rates;

* Compliance deadlines; and

* Department budgets.

In addition, several companies use the following measurements:

* Response time for IDRs;

* Time and resources required to file returns and perform other tasks;

* Feedback from internal customers on customer service;

* Cash-flow targets/repatriation of cash; and

* Contribution to the bottom line.

Evaluator Panels

At TEI's 1995 Annual Conference, the Corporate Tax Management Committee presented a session entitled "What Management Wants From Its Tax Executive: Evaluating the Corporate Tax Department." The session featured presentations by three chief financial officers: Roy E. Claverie of Ingram Industries, Inc.; Glenn E. Harder of Carolina Power & Light; and Jan H.M. Hommen of the Aluminum Company of America. Similar programs have been conducted at the chapter level.(7) For example, the San Francisco Chapter held a program entitled How Can the Tax Function Best Satisfy Your Needs?, which featured a senior financial executive panel consisting of Michael E. Cromar, Vice President and Chief Financial Officer of GATX Capital; and Jim Williams, Chief Accounting Officer of the Bank of America.

Annual Conference Program

At the Annual Conference, Roy Claverie stressed the importance of the connectivity and participation with the operating units of the company. He even suggested that one factor to take into account in judging the tax department is the number of visits to, and projects with, the business units.

Glenn Harder pointed out that to be successful, tax people must first and foremost be business people who can talk in business language and not just Code sections. To do this, the effective tax executive must develop not only good communications skills, but also a good knowledge of his or her company. And good knowledge of the company is not just historical information -- it includes how the business climate, products, customers, and locations are changing. This knowledge, when combined with the executive's knowledge of taxes, leads to real tax-planning strategies that then must be communicated to management and others.

Mr. Harder stressed the importance of getting out into the business operations to build information networks, as well as to educate employees about potential tax savings. One of Mr. Harder's criteria for judging his tax staff's effectiveness is to look at whom others in the company turn to for input and advice. He finds that the tax staff who get the most interesting and diverse projects, who get the calls from the field for advice, and who participate in important projects are usually the most effective.

Jan Hommem expects his tax staff to be smart and possess good business sense. Speed and accuracy in the performance of one's work is obviously necessary, but tax personnel must also be flexible and deliver a high degree of customer satisfaction. He stressed the importance of shortening the time devoted to tax compliance work ("cycle time"); this will permit more time for tax personnel to work creatively, i.e., on tax planning.

In response to questions about how goals and expectations are set for the tax department, what measurements are used to evaluate performance, and what management and leadership traits are expected of a tax director, the panelists made the following observations:

* Tax Department goals should be tied to the overall corporate goals;

* Goals can be condensed into two broad categories: cost savings or value creation and effective tax service;

* Cost savings expressed in terms of tax dollars saved may need further explanation because it may raise a question whether more dollars should have been saved;

* Measuring effectiveness is usually subjective, but can be achieved through surveying customers on their satisfaction with the tax department for support, innovation, timeliness, and technical knowledge;

* Effective tax rate is not a critical or effective measurement of tax department performance because of the effect that accounting rules, business strategies, and regulatory requirements may have on the determination of the rate;

* In addition to good analytical and communications skills, a tax director must be a good coach who can develop these same skills in his or her staff; and

* A tax director must exhibit a high degree of integrity.

San Francisco Chapter Program

During his presentation to TEI's San Francisco Chapter, Michael Cromar stated that his company's focus is on developing a primary competitive advantage. As such, what he looks for in his tax executive and staff, as well as others in the organization, are "value-added" employees -- ones who can find a need, build or design a "product" around that need, and market that "product" by building a customer base.

Mr. Cromar does not use mathematical measurements such as effective tax rate or tax savings to measure the effectiveness of the tax department. Rather, he looks at a macro-based evaluation -- what issues are being dealt with, what alternatives are being pursued, and how aggressive a position is being taken. Each factor is evaluated on a case-by-case, item-by-item basis. He also looks at the extracurricular activities or "additional effort" expended by the tax staff. Do they participate in groups such as TEI? Do these activities add value to the corporation? Are they an indicator that the tax function is being well managed? In addition, Mr. Cromar looks for the competitive spirit exhibited by the tax staff members.

In determining whether his tax director is doing a good job, Mr. Cromar listens to the organization. Is it aware and knowledgeable of the tax department? Does it use the tax function? Does it seek out the tax function or its director? He cited the need for the tax function to be brought in at the beginning of transactions when it can add value, rather than at the end to "fix things up." He also looks at ways in which the tax department participates in the company.

Jim William's observed that taxes are more important in business units that are experiencing consolidation and aggressive competition. Managers are no longer judged by their "contribution margin," he said, but rather on a return-on-equity or risk-adjusted after-tax basis. As such, there is a need for the tax department to become a true partner with the business, and for tax personnel to become educators and advocates for how taxes can make a difference and should be considered in business decisions.

In judging the effectiveness of the tax department, Mr. Williams considers the following measurements:

* The department's relationship with taxing jurisdictions and its success in handling tax litigation;

* Its creative new ideas for reducing taxes;

* The cost of the department and productivity gains;

* The processes by which returns are prepared and audits handled;

* Benchmarking and management of tax function;

* Competency and continuous education;

* Skills at advocating, consulting, and negotiating; and

* Evaluation of the department from a service perspective.

Like most of the other evaluators, Mr. Williams does not place great significance on the effective tax rate in judging performance because of the lack of comparability with other companies and the numerous questions that need to be asked. Rather, he looks for a different' kind of effort from his tax department -- one that adds to the bottom line and responds to the needs of a company experiencing consolidation and aggressive competition.

Conclusion

The responses to the survey show that tax departments are evaluated on the basis of traditional measurements -- meeting compliance deadlines, tax dollars saved through planning, results of tax audits and the like. Perhaps these responses are a function of how the survey was structured or may simply represent the view of the individual tax executive.

The comments of the evaluators, on the other hand, suggest that they take a much broader view in the way they evaluate the tax department and its executive. This perspective is reflective of the evaluators' span of responsibility and what "turns on" bosses in general. As Barry Eigen pointed out in his book, How TO THINK LIKE A Boss AND GET AHEAD AT WORK, the qualities that turn bosses on are:

1. Vision: The ability to see the organization and its goals in total.

2. Initiative: The ability to get started on your own.

3. Risk Tolerance: The willingness to try new things even though success may be uncertain.

4. Trustworthiness: Honesty and follow-through.

5. Confidence: The willingness to say "I don't know," "I made a mistake," or "Other people have good ideas, too."

6. Leadership: The ability to motivate and direct others, to build a team.

7. Courage: The willingness to think independently and stand up for your opinions.

8. Communication: The ability to write and speak clearly and succinctly.(8)

The comments of the evaluators are loud and clear with respect to these items -- vision through the executive's creativity and knowledge of the business, communication through the executive's ability to speak the business language effectively, and leadership through the executive's ability to exude enthusiasm and instill staff teamwork and creative thinking. They also strongly emphasized the modern-day demands to provide superior customer service and add increasing value to the business enterprise. In the final analysis, these broader-based measures appear to be the real-world measures by which the performance of the tax department and its executives are judged.

(1) E. Lawler & J. Galbraith, New Roles for the Staff Function: Strategic Support and Services, in Organizing for the Future pp. 65-82 (1993). (2) See, e.g., T. Moore, Good-bye, Corporate Staff, Fortune p. 65 (Dec. 21, 1987). (3) J. Fitz-enz, Benchmarking Staff Performance: How Staff Departments can Enhance Their Value to the Customer Pp. 4-23 (1993). (4) E. Lawler & J. Galbraith, supra note 1, at pp. 77-78. (5) J. Fitz-enz, supra note 3, at p. 22. (6) This article identifies the central trends and measurements, but a summary of the detail responses is available to TEI members upon written request. (7) A report of the October 1, 1995, program of the Minnesota Chapter appeared in the November-December 1995 issue of In addition, the Kansas City Chapter sponsored a program in January 1996. (8) Barry Eigen, How to Think Like a Boss and Get Ahead at Work p. 10 (1990).

RAYMOND F. DOUGLAS is Senior Vice President and director of Taxes for Dean Witter, Discover & Co. He is currently Chair of Tax Executives Institute's Corporate Tax Management Committee and has previously served as Region IX Vice President and on the Institute Board of Directors. He is a past president of TEI's San Francisco Chapter and currently serves as a member of that chapter's Board of Directors. Mr. Douglas received a Bachelor's of Science degree from Northwestern University, a MBA (Taxation) degree from Golden Gate University. He is a certified public accountant in the State of California.

PATRICK J. ELLINGSWORTH is Chief Tax Attorney & Associate General Tax Officer for Atlantic Richfield Company. He is currently a Vice Chair of Tax Executives Institute's Corporate Tax Management Committee and is a member of the Board of Directors of the Los Angeles Chapter. Mr. Ellingsworth received a B.A. degree from St. John's University (Minnesota), a M.A. degree from the University of Minnesota, and a J.D. from the University of Chicago Law School.

JAMES P. McAndrews III is Vice President-Corporate Tax and Tax Counsel for Freddie Mac. He is a member of Tax Executives Institute's Corporate Tax Management Committee and the committee's ad hoc task force which compiled the responses to the survey referred to in this article. He is a member of TEI's Baltimore-Washington Chapter and is a certified public accountant licensed in the District of Columbia and Virginia and a lawyer admitted to the bar in Washington, D.C., Pennsylvania, and Virginia. He received a B.S./B.A. degree from Georgetown University and a law degree and a Masters of Law in Taxation degree from the Georgetown University Law Center.