High Ethics: How Does Roofing Measure Up?
Sometimes it seems that capitalism itself is under siege. The current business pages are filled with enough scandals to rival the criminal activities in the sports and entertainment sections.
While the $20 billion roofing industry has its share of misdeeds, roofing is too tight-knit to let people get away with much. Legitimate repairs and even catastrophic product failures have been adequately addressed by any company that wants to stay in the roofing business. So “the invisible hand” of economics that protects consumers keeps many roofing excesses in check.
Certainly there are examples of criminal conduct: equipment theft, worker’s compensation premium fraud and dodging warranties. The State of New Jersey Special Commission released a scathing report on pervasive waste on school roofing projects (Roofing Contractor, Jan. 2001, pg. 78). While some contractors may think that they’re the only straight shooter in town, roofing abounds in examples of excellent corporate governance where profits and ethics work together.
Do the Right Thing“Price it right, and do it right.”
That’s been the slogan for Florida Roofing and Sheet Metal Contractors Association (FRSA) members for more than 50 years, says Executive Director Steve Munnell. Since its founding in 1922, the organization has striven to promote contractor integrity and involved itself in licensing, insurance and codes. FRSA has the second largest member self-insurer’s fund (worker’s compensation) in the state. Rapid growth, storm repairs and a transient population have made a dynamic environment for roofing contractors, but making an honest dollar in Florida is still possible.
“Our members are proof you can do it the right way, pay the price ... and still make money,” says Munnell, who continually monitors and participates in legislation. “We have a good licensing law right now. We have a real problem with enforcement.”
The FRSA fields numerous complaints about roofing work, nearly all regarding non-members. On its Web site the association spells out consumers rights, offers basic roofing information and refers visitors to its 550 members. While FRSA still publishes a consumer brochure and fields lots of calls, the Internet provides a fast and cheap way to reach consumers who are becoming more savvy about home repairs.
“More and more consumers are getting on the Internet and contacting us that way,” says Munnell. “We like to get them through the Internet. A lot of our members have their own web sites. As we continue on, in the next few years, that’s going to become really important.”
Even the abundance of information is not enough to protect consumers. Florida is one of 22 states that license roofing contractors, yet is still ripe for fraud and those who skirt around requirements. FRSA has been fighting a pitched battle with homebuilders about licensing exemptions for roofing work. General contractors can sub out roofing work to self-employed workers who don’t have a state license, thereby avoiding paying some of the nation’s highest worker’s comp for roofers.
This is mainly done for new homes, but Munnell says his members are getting approached by people with an exemption certificate. All the roofing contractor has to do is pull the permit and he doesn’t pay worker’s comp premiums, even though he’s exposing himself and the building owner to a host of liability problems. FRSA’s Group Self Insurers Fund was founded in 1955 and works aggressively to keep workers safe and return premiums back to the members, but Munnell sees exemptions as a problem for consumers and roofing contractors.
“We need to make it more difficult to get exemptions. Right now it’s too easy,” says Munnell. “We have a huge problem with unlicensed contractors and high workers compensation rates.”
While some may scoff at government regulation, the battles in Florida and elsewhere show that people do take them seriously. More than keeping the honest people honest, they set a benchmark for consumers and competitors. The incentive for most is to concentrate on service rather than vice to make the sale. Florida is also one of 15 states that has a consumer recovery fund, where claimants can recover up to $25,000 in damages. Funded by licenses, the idea is to offer consumer protection without making stricter standards. In practice, there are shortcomings: this year the fund ran out of claim money by August.
Of course, the 28 states that forgo licensing have had ample opportunity to address the issues, and some of them do have requirements for public works and residential construction. Market forces are still relied upon as the great regulator, but the effort continues to standardize contracting like building codes. Factory Mutual Research Corp. announced in late 1998 that it was going to issue a roofing contractor approval standard nationwide. The initiative met with skeptics and roadblocks as the industry struggles to come to a consensus about policing itself or looking for outside monitors.
Taking StockOne organization that continues to give capitalism a good name is Berkshire Hathaway, a holding corporation in the truest sense. By recognizing long-term value and quality assets, Chairman Warren Buffett and his team of managers have increased the company’s per share book value 194,936 percent from 1964 to 2001. The antithesis of a corporate raider, Buffett acquires companies at sale prices, builds from within and holds on for the long term. Berkshire does this all while paying billions in taxes and employing thousands of American workers.
The company bought Johns Manville in 2001, which some observers saw as not only good for the venerable roofing manufacturer, but for the industry as well. Jerry Henry, chairman and CEO of Johns Manville, found it refreshing when Buffett personally expressed to him the three fundamentals that he seeks in his managers: ethics, intelligence and energy.
“Ethics ... was by far the most important,” says Henry, who believes that the companies cultures were in sync about the importance of business integrity. “I think it meshed and it reinforced it really.”
Buffett also sent a letter to executives of all the companies that listed seven points. The first one: “We can afford to lose money, even a lot of money. We cannot afford to lose reputation, not even a shred of reputation.” Henry, who has spent his career in public companies, thinks some integrity for American companies was lost in the 1990s as insane growth raised the bar for everyone. Even Buffett was ridiculed in 1999 for tiny gains. It was only the fourth time the company failed to outperform the S&P 500 since 1965, and Buffett was discarded by some observers as stuck in the past.
What is in the past is JM’s crippling asbestos litigation. Henry is eager to focus on the business and making sales projections, in a way that enables him to sleep at night. Because there are no barriers to entering the roofing business, Henry remains concerned about industry-wide practices such as bid shopping, which saps company strength and product development. Over time, it’s not healthy for companies to race each other to the bottom.
“There’s a little bit of the culture in the industry to do that,” says Henry. “We need to stop that kind of stuff .... What happens when you get to the bottom? You crash.”
Not only does the Berkshire Hathaway culture ensure a stable future for Johns Manville, but it also reinforces a solid business model to enhance customer loyalty. Educating building owners and others in the decision-making process about distinctions in the company and products will be one initiative.
“We need to involve the CFOs of these companies to understand the life-cycle costs,” explains Pat McEvoy, senior vice president of Johns Manville’s Roofing Systems Group. “Basically sell products and sell value and customer service. That’s going to lead this industry out of the morass of selling commodities.”
Over SellingThe New Jersey report spelled out a problem that is pervasive in school districts around the country. Poor roofing performance has created an atmosphere where companies are essentially blocked out of the bidding process. School administrators are desperate for performance and many argue that they are paying too much for questionable roofing solutions. The situation proves that the money is out there, so it’s a matter of opening the process more and educating everyone in the food chain. At least in New Jersey, some feel that it’s a very tall order.
“I was encouraged at the findings, but I was amazed at the level of corruption,” says Doug Wicks, a former project specialist for the state prison system and now a self-proclaimed agitator. He spends a lot of time weeding out the problems unearthed in the SCI report because he hasn’t seen any results. “[The report] seems to have had more affect outside of New Jersey....I have a feeling the feds are getting involved. I think that’s the only way to clean it up because I don’t think these people can self-correct. They have tremendous resistance to change.”
Wicks uses administrative law actions and other tools to ensure that the billions of dollars that New Jersey recently allocated for school repairs isn’t wasted. He knows that some see him as an iconoclast, but he insists that he’s fighting for good roofing at a fair price. He gets calls from around the country about similar situations, but he’s particularly worried about the future of legitimate contractors in his state.
“The guys who are trying to make an honest living are getting disillusioned,” he admits. “The only thing going on here is public projects. It’s either bid that and play this game or bid nothing at all.”