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ARTICLE ILINC The founding, growth and eventual acquisition of the ILINC Corporation is a typical small...

ARTICLE

ILINC The founding, growth and eventual acquisition of the ILINC Corporation is a typical small example of technological entrepreneurship. ILINC was founded in 1993 by a professor (the author) and two students, Degerhan Usluel and Mark Bernstein, at Rensselaer Polytechnic Institute. Later the name was changed to LearnLinc to match the name of its popular product and eventually LearnLinc entered a triple merger in early 2000 with Gilat Communications and Allen Communications to form the Mentergy Corporation (NASDAQ). The Research: It all began with an idea, and that idea eventually became a research project. In the late 80’s and early 90’s, my scientific colleagues and I were working on the application of computing and communication technologies to science and engineering education. After producing several multimedia projects, I turned my attention to the management of large quantities of educational materials on networks. The early focus was on the modularization of materials and the ability to store and retrieve those modules in an object oriented fashion. I had served as an IBM Consulting Scholar and was a frequent speaker at conferences on multimedia on networks. At one point I was invited to present my vision of the future of networked multimedia education to a group of executives that included several key executives from AT&T. That speech led to an invitation to Bell Laboratories to discuss potential cooperation and to present my vision to a broader and more technical audience. Apparently the speech was a great hit with the audience, because the AT&T Executives asked me to create a prototype of the vision -in partial collaboration with scientists from Bell Laboratories. The negotiation of the contract for this work took longer than most since I felt I had a significant interest in the pre-existing intellectual property and also wanted to maintain the rights to derivative work from the earlier work. This required some careful legal negotiations. Eventually an agreement was reached which granted rights to AT&T for all software newly created for this project, but it protected the earlier work I had done and allowed me to make further developments based upon it. The contract was written as a contract with deliverables and due dates rather than as a “best efforts” grant. The contract and deliverables caused several faculty members I invited to decline to participate because of the difficulty of working under the pressure of deadlines in an academic environment. Nevertheless, Rensselaer and I entered the contract with AT&T and began work on the project. The resulting prototype would allow distant learning on networks by using ISDN video conferencing and by using the same ISDN lines to network the distant learning sites. My team of students and staff and I also managed to make several of the pre-existing multimedia education projects work in this environment. I was pressed into service for presentation after presentation to AT&T executives, engineers, and customers over the next few months. At the same time, the Bell laboratory engineers began to Figure 1 D. Usluel-M. Bernstein-J. Wilson port the code into potential AT&T products including the WorldWorx project. Later the WorldWorx product was released in a global introduction, but (as we shall see) the product never caught on since the technologies were moving so quickly that it was out dated upon its release. The Opportunity: No technical person is ever satisfied with the first version of any software product, and I was no exception. So much had happened in computing and communications over the course of the project and the ensuing months, that I became convinced that it needed to be done quite differently in order to take advantage in the advances in object communication and multicasting - just to name two items. I went back to my colleagues at AT&T and proposed that we start all over from scratch to create a different kind of prototype that would take advantage of all the new things. I was easily able to get the technical staff at Bell labs excited. They could see exactly what I was talking about, but the proposal went absolutely nowhere with the business units. They wanted to focus on getting out product, and (in their opinion) they had what they needed. The Rensselaer and Bell Laboratories technical staffs commiserated and schemed, but no further options presented themselves, and I moved on into other projects while continuing to work on the preliminary design - adding new features with each advance in computing. One of the other projects in my laboratory, The Design and Manufacturing Learning Environment (DMLE), had a bright young graduate student, Degerhan Usluel, working on it, and he became fascinated with my plan for a network of educational objects -all communicating across the internet and distributing voice, video, and data to every site. Degerhan Usluel had been an undergraduate electrical engineering student who decided to come back for an MBA in entrepreneurship. As a student he had already founded one computing company that he turned over to his father before leaving for graduate school. Young, brilliant, naïve, and fearless, Degerhan was the ideal person for discussions about the future of collaboration on networks. One day, Degerhan showed up in my office to announce that he was beginning to plan for his upcoming graduation and that he wanted to share that plan with me. He explained that he did not want to go to work for a large company and that he wanted to start a business in software and that he wanted to do that in collaboration with me. It came as a bit of a surprise when he told me that he wanted to start up his own company rather than go to work for one of the big companies recruiting him. When I asked him what kind of company he wanted to start he told me "Something in the computer and network field, but I am not sure exactly what, but I want you to be the President." Moreover, he had recruited one of his classmates, Mark Bernstein to join him in the venture. Mark had been a “Top Gun” salesperson for Computer Associates prior to joining some friends in a startup computer disaster recovery firm called CPR. The firm had been a reasonable success, and Mark’s sales skills were certainly a factor. After discussing several different possibilities, I pulled out a file that I had been keeping with the details of the design for a distributed learning environment that would run on the internet and utilize communicating objects on students and faculty machines in a peer – to peer architecture. I also pointed out that we could use multicasting to distribute the video and audio while using the multi-casting and agent technology to manage the bandwidth on the network. This was needed to keep bandwidth requirements from getting out of hand as more and more sites were added. I did not point out to Usluel that no one had really been able to make multicasting work reliably and that most of the Internet did not support it anyway. I was confident (foolishly) that these were all solvable problems. The fact that several major computing companies had tried and failed did not dissuade us. The Team: Thus ended the opportunity recognition portion of the formation of LearnLinc. The team building portion began immediately thereafter. Usluel, Bernstein, and I vowed to start a company and began meeting regularly in my basement and sunroom. Usluel’s assignment was to build the software from scratch. Bernstein took the lead in the opportunity evaluation phase as he looked at the market and identified competitors and potential competitors. Fortunately, there were no actual competitors using the technology they envisioned! Unfortunately, no one had ever made the underlying technology work reliably! I served as President and mentor while Usluel became Vice-President for Technology and Bernstein became Vice President for Sales, Marketing, and Business Development. I began serving as a part time President and full time Chairman of the Board using my 20% consulting time from Rensselaer, my weekends, my evenings, and my holidays. It was agreed upon up front that at the end of 1-1.5 years, I would either quit Rensselaer and join ILINC LearnLinc or step down as President and CEO, recruit a replacement and serve on the board. The decision would be a joint decision of the Founders. Working with local attorneys, they created a Founder's agreement that granted 40% of the founder's stock to me and 30% each to Usluel and Bernstein. The agreement provided for potential future situations -such as a founder leaving. They also incorporated as the ILINC Corporation, obtained a Federal Tax ID, registered with the State, obtained the ILINC.com domain name, and opened bank accounts. The Exit Agreement: Deciding what their exit strategy would be was one of the easiest tasks that they had to accomplish. It took about ten minutes to decide that all three founders wanted to create a successful public company, that would define a new category of software and change the world. They were not interested in creating a "lifestyle" or a "hobby" company, and did not think they wanted to keep it as a privately owned company. They wanted to build a company, Figure 2 Mark Bernstein, Jack Wilson, and Degerhan Usluel accept one of the many awards given to ILinc go public or be acquired, and then go on to doing other things. If only the other tasks were as easy. Now they had to create a prototype, develop the pitch, and raise the money. The Prototype: The prototype was created out of bits and pieces of my work augmented by some new materials prepared by both Wilson and Usluel. Bernstein worked on the pitch with lots of kibitzing from Wilson and Usluel. Start-Up Funding -A Bootstrapping Process: Funding was a tougher problem. After discussion with a number of other successful entrepreneurs, such as William Mow, founder of Bugle boy industries and Mike Marvin, co-founder and Chairman of MapInfo corporation, Paul Severino , founder of Bay Networks, industry executives (especially from GE and IBM), and with lots of encouragement from Mark Rice, then Assistant Professor and Director of the Center for Technological Entrepreneurship, the founders decided to try to fund the company by bootstrapping the company through the sales of software for future delivery. With Wilson’s contacts and Bernstein’s passion and sales experience, they felt that they had a chance to do this without having to go to venture capitalists at an early stage. Wiser and more experienced executives (such as Warren Bruggeman, GE Executive and Chairman and primary investor in MapInfo) counseled them on the futility of this approach, but they decided to give it a try anyway. Bernstein’s passion and Wilson’s persistence carried the day. They obtained enough contracts for future delivery of software to fund the company in the early days of growth. First customers included IBM, AT&T, GTE, Sprint, Office Depot, and Harper Collins Publishing (News Corp.). An article in Success magazine later described our improbable success story as a variation on the old story of Pop-eye the Sailor Man’s friend Wimpy. Wimpy would wonder around asking folks for hamburgers while promising them that he would “gladly pay you Tuesday for a hamburger today.” In our case we promised that we would gladly give them software next year for a $300,000 (give or take) payment today. Although that does not sound like a compelling offer, we had many takers. Early customers included IBM, AT&T, GTE, Sprint, Office Depot, Aetna-United Healthcare, and Harper Collins Publishing (News Corp.). Building the Product: They were now to step eight of the entrepreneurship path. They had to do it. For that they turned to Usluel, because he had to build the product that I envisioned and Bernstein promised. And he did. When the software was delivered, it managed to satisfy all but one of the early customers and eventually even that customer grudgingly conceded that ILINC LearnLinc had delivered what they had promised, if not quite exactly what the company wanted. First Round of Venture Capital: ILINC then entered a rapid growth phase with very little working capital -depending upon cash flow to finance the each new step. When the monthly “burn rate” (the amount of cash spent each month) reached about $100,000 per month, the founders decided that it was finally time to visit the venture capitalists. Because the company had no track record, the founders were financing the shortfalls in the cash flow with bridge loans against receivables, but these had to be personally guaranteed by the founders. Signing monthly personal guarantees of $40,000 or so began to make them all a bit nervous, because none of them had the income to really handle this and only I had any assets! They went to a local venture capital firm called Exponential Investors who helped to arrange several hundred thousand dollars of financing in cooperation with some New York State business development funds. It was also time for me to decide. My partners encouraged me to come in full time, but I decided that it would be better to go back to Rensselaer and recruit a more experienced CEO for the company. I felt that I would be able to continue to help with the vision and direction, but that the company would benefit from someone with past experience in creating new ventures. A new CEO, Jim O’Keefe, was recruited who had just completed another start-up that had been acquired. The Next Two Rounds: The next few years saw ILINC grow substantially, if not painlessly, and two more rounds of financing in single digit millions brought investments from GeoCapital Investors and the Intel Corporation. The multi-million dollar investment from Intel was one of the turning points for ILinc. Intel had a video card, the ProShare card, that could be inserted into micro-computers to allow one to play live video and do video conferencing. They also partnered with Microsoft to create a software/hardware solution for video-conferencing on networks. They were building servers that would receive the video streams from several computers in a conference setting and then compose that video and send it to all participants. The problem was the factorial increase in bandwidth as additional computers were added. (Bandwidth scaled as n! or n*(n-1)*(n-2)*(n3)*(n-4)........). Thus if one went from two participants in conference to ten, the bandwidth scaled from 2x to 3,628,800x. This essentially made it impossible to serve more than a few computers in a conference. The ILinc architecture, which I had developed and Degerhan Usluel implemented and perfected, managed all this video bandwidth by keeping unused video off the network and introducing concepts now common in all conferencing systems -such as the ability to "Raise a hand" to request attention from the leader and the server. Intel heard that ILinc had solved the scaling problem, but perhaps did not believe it fully. They sent a representative to our office for a confidential demonstration covered by non-disclosure agreements. I asked them how many simultaneous participants they were able to serve and they suggested that it was less than ten. At one point an Intel representative asked me how many simultaneous sites ILinc could link up with video, audio, and screen-sharing. Since we did not have the resources to equip many sites, we really did not know for certain. The mathematics told us that we should be able to do a very large number of sites, but we had not done it. The Intel representative then asked whether we could do more than 50 sites, and I said “sure.” Under my breath I added –“probably.” Intel then cobbled together a large number of sites which was less than the 50 but more than 20 and we were asked to do a demonstration. It worked. At that point Intel told us that they were willing to invest, but that we had to have a side-by-side venture capital partner that would make a matching investment –which we quickly (but not easily) accomplished. We were also invited to develop a presentation for then CEO, Andy Grove, to do at a major software conference. According to many of my friends, Andy Grove was even more difficult and demanding to work with than Steve Jobs. Having worked with Jobs earlier in my career, I knew this was a high bar. They asked that I fly out to Santa Clara and meet with Grove to do a demonstration and answer his questions. I took the trip with some trepidation, but also knowing that the investment was already a done deal. His staff set me up in a demonstration room in which we had several computer simulating multiple remote locations. I was told that “Dr. Grove will come in at 11:15 am and then you will do the demonstration for precisely 15 minutes. At 11:30 he will begin to ask you questions. At 11:45 he will promptly depart for another meeting.” They sternly instructed me not to depart from the script and not to engage in small talk. The instructions were consistent with everything I expected. Sure enough, at precisely 11:15 Andy Grove came in and introduced himself. We sat down together at a computer, and I began to demonstrate the product. I did not get too far until he asked his first question about our screen sharing protocol. Then he followed up by asking how we had been able to do so many simultaneous video sites when his folks only were able to do eight or so –and that took a big fast server to pull off! I explained that it was not really all that hard. We simply recognized that only two video streams at any time were necessary and we used agent technologies to shut off those streams that were not going to be used. We shut off those streams at the source, while standard multipoint video conferencing solutions dealt with them all at the video-conferencing server level. We set up a simple protocol of hand-raising that would allow any participant to ask for the floor –much as legislators ask for the floor in congress. That prompted another question and then another. 11:45 came and went but Andy Grove was still sitting at the computer asking me to demonstrate one point after another and firing off questions like he was giving a doctoral candidate an examination. That put him on my turf, and I was enjoying myself immensely. His staff got more and more nervous, but they were quite careful not to interrupt him. They kept giving me dirty looks, but Andy Grove just kept on asking questions and clicking on buttons. It was nearly 1 pm when he left with a smile and a big handshake. I could not have found him to be a nicer or more interesting guy. When he delivered his speech, my partner Mark Bernstein was there to provide his support. It was one of the highpoints of our early years. Figure 3 Andy Grove, CEO of Intel, and Mark Bernstein when Andy presented LearnLinc to thousands of attendees at a major national convention after Intel invested millions in ILinc and also adapted its software to some Intel products. As noted above product development and financing went through several cycles as ILINC released new versions of LearnLinc and arranged new rounds of financing. Fortune described ILINC as: “Interactive Learning International Corp. (ILINC), a two-year-old company in Troy, New York, has shown what's possible in today's world of limited telecommunications bandwidth. ILINC's interactive training programs can be transmitted to users' PCs over local- and wide-area networks, as well as high-speed communications links such as ISDN (integrated services digital networks). A live instructor can appear in a window on the screen and address students in dozens of locations. He can launch video and audio clips for all the "class" to see and hear. And at discussion time, a student can click on a "raise hand" icon to get the floor.” 1 In 1998, the Wall Street Journal said: "'It's great -- by using it, we've cut our travel expenses substantially,' says Gary Schweikhart, a spokesman for Office Depot, an office-supply company in Delray Beach, Fla. Office Depot first took its corporate training sessions online in May 1996. It was one of the first customers of Interactive Learning International Inc., or ILINC, a Troy, N.Y., maker of distance-learning software. Since then, about 1,500 Office Depot employees have completed online training, on everything from how to write a business letter to how to use the company's proprietary order-taking system. 'We were in a situation where we were doing a lot of training of trainers' in order to have enough qualified instructors to teach employees at 629 stores and 68 sales offices across the country, says Doug Kendig, the company's manager of training technology. 'We had to deputize a lot of people [to train employees], and you don't always get the best results that way.' But now Office Depot uses the ILINC software for about 20% of its training, with classes in Florida, California and Texas using just six instructors. 'I think it's fantastic,' says Jeannette Perez, who works in Office Depot's commercial credit-card department. 'It just holds my attention more, because you're interacting with the computer.' 2 1 REPORTER ASSOCIATE Alicia Hills Moore Copyright © 1996, Time Inc., all rights reserved 2 Wall Street Journal –Thursday August 6, 1998. Figure 4 Wall Street Journal; Aug. 6 1996. The Plot Thickens: The company was becoming successful but experiencing growing pains and pinched financing. Moreover, they now had some very significant competitors. Without patents on the underlying technology, the fast followers were able to reverse engineer the LearnLinc product. Although their earliest efforts were crude and unreliable, there was no reason to believe that they would not get steadily more powerful. These competitors were also much better funded. ILinc was founded in 1993 by people who knew the “old rules” of entrepreneurship. They focused on revenues, tried to achieve positive cash flow, and minimized the acquisition of venture capital. Their competitors were living in a “new-new world:” the dot-com era of the tech boom. They raised ten times the venture capital and thus had a far more powerful sales and marketing enterprise. There were times that the LearnLinc product was only being discovered after one of its competitors had gone into a company and sold them on the concept. For big companies like Aetna-United Health Care, there was a process to evaluate competitors for big purchases. After Centra had sold them a pilot, LearnLinc was chosen as the corporate provider. In general, it is difficult to rely on your competitors to sell your product. Going Public: By the summer of 1999, the founders felt that it was time for LearnLinc to raise much more funding and to grow substantially. The new CEO had been replaced by an interim CEO, Mike Marvin, and then by Degerhan Usluel. I continued to serve as Chairman. The Board decided to hire an investment banker (Michael Kane and Associates of California) and met with a selection of other entrepreneurs to decide how to best go forward. They identified three potential paths: ? Do an IPO. ? Get acquired by a complementary company ? Enter a partnership with (and receive an investment from) a complementary company that would build upon their joint strengths and allow them to grow faster. From the beginning, the group leaned toward some kind of business alliance or acquisition. Although the excitement and financial reward of the IPO was attractive, they felt that the glory might be short lived. They knew that LearnLinc needed a much larger sales force and needed to be much larger financially to crack the very large enterprise accounts that could allow them to reach the next level of development. Although they had sold product to IBM, AT&T, Lucent, MCI, Computer Associates, Aetna, United Health Care, Boeing, Flight Safety, and many other large accounts, these tended to top out at less than million dollar accounts. In order to grow and dominate the market, they needed to be able to crack that barrier. An IPO could bring them the funds necessary to grow, but it would take time and management attention to hire the people and create the systems needed to handle the growth. The company’s advisors suggested that an IPO would likely value the company at $100 million to $200 million. Perhaps it could be more, but that would depend upon timing and market excitement. They also suggested that an acquisition would probably only bring about $50 million, but that the acquisition might leave the company better positioned to grow over the coming years. Given the anticipated lock-up periods for founders stock, the founders tried to evaluate the options as they would look one year into the future, rather than at the transaction date. The Triple Merger - LearnLinc becomes Mentergy: Eventually we decided to agree to be acquired by Gilat Communications. The deal closed on February 29, 2000. Gilat paid 1.5 million shares (gross before commissions) for LearnLinc. On February 29, Gilat closed at $35 per share making the value of the deal $ 52.5 million at closing. Because of the use of bootstrap start-up funding, venture capitalists held less than 50% of the company at the close. During the same period, Gilat acquired Allen Communications from the Times Mirror group for $23 million in cash. Over the next six months, the three companies were blended into one company - known as Mentergy. The companies had a complementary set of strengths. LearnLinc was the market leader in live-on-line eLearning. Allen Communications had an impressive established customer base, a large skilled sales force and specialized in web and CD-ROM based CBT. Gilat brought expertise in satellite communications and interactive learning over satellites. The plan was to create a blended learning approach that was “technology agnostic” and could provide the best eLearning solutions for a variety of different learning needs. The target market continued to be corporations and corporate training. At first the market loved the combination. By March of 2000, Mentergy had a market capitalization of over $500 million. Plans were developed for a secondary offering both to cover the expenses of the triple merger and to provide additional development and marketing resources, but the declining stock market made that a difficult task. The situation was complicated further by a misguided effort to create a headquarters for Mentergy in Atlanta, Georgia (when most of the employees were in New York, Utah, and Israel) and by management confusion caused by the difficult communication process with key management personnel and the Board Chair in Israel. Wilson, Usluel, and Bernstein had agreed to remain involved for at least six months after the merger. I severed my ties in frustration as soon as allowable. Usluel and Bernstein persisted longer in a futile attempt to get the company back on track. By 2002, Mentergy was in bankruptcy. The company was broken back into several pieces. The ILinc portion was purchased by EDT Learning from Arizona. They renamed themselves ILinc in honor of their successful product, which continues to be used in many major American corporations. In hindsight, there would be many things that might be done differently if we had to do them over again, but I hope that the reader can see how we were thinking as we made each decision.A new venture is expected to be attractive, timely, durable, and anchored in a product or service that creates or adds value for the buyer. How did ILINC fit with this description? How did ILINC fit with trends in economic forces, social forces, technological advances, and political and regulatory changes? ARTICLE ILINC The founding, growth and eventual acquisition of the ILINC Corporation is a typical small example of technological entrepreneurship. ILINC was founded in 1993 by a professor (the author) and two students, Degerhan Usluel and Mark Bernstein, at Rensselaer Polytechnic Institute. Later the name was changed to LearnLinc to match the name of its popular product and eventually LearnLinc entered a triple merger in early 2000 with Gilat Communications and Allen Communications to form the Mentergy Corporation (NASDAQ). The Research: It all began with an idea, and that idea eventually became a research project. In the late 80’s and early 90’s, my scientific colleagues and I were working on the application of computing and communication technologies to science and engineering education. After producing several multimedia projects, I turned my attention to the management of large quantities of educational materials on networks. The early focus was on the modularization of materials and the ability to store and retrieve those modules in an object oriented fashion. I had served as an IBM Consulting Scholar and was a frequent speaker at conferences on multimedia on networks. At one point I was invited to present my vision of the future of networked multimedia education to a group of executives that included several key executives from AT&T. That speech led to an invitation to Bell Laboratories to discuss potential cooperation and to present my vision to a broader and more technical audience. Apparently the speech was a great hit with the audience, because the AT&T Executives asked me to create a prototype of the vision -in partial collaboration with scientists from Bell Laboratories. The negotiation of the contract for this work took longer than most since I felt I had a significant interest in the pre-existing intellectual property and also wanted to maintain the rights to derivative work from the earlier work. This required some careful legal negotiations. Eventually an agreement was reached which granted rights to AT&T for all software newly created for this project, but it protected the earlier work I had done and allowed me to make further developments based upon it. The contract was written as a contract with deliverables and due dates rather than as a “best efforts” grant. The contract and deliverables caused several faculty members I invited to decline to participate because of the difficulty of working under the pressure of deadlines in an academic environment. Nevertheless, Rensselaer and I entered the contract with AT&T and began work on the project. The resulting prototype would allow distant learning on networks by using ISDN video conferencing and by using the same ISDN lines to network the distant learning sites. My team of students and staff and I also managed to make several of the pre-existing multimedia education projects work in this environment. I was pressed into service for presentation after presentation to AT&T executives, engineers, and customers over the next few months. At the same time, the Bell laboratory engineers began to Figure 1 D. Usluel-M. Bernstein-J. Wilson port the code into potential AT&T products including the WorldWorx project. Later the WorldWorx product was released in a global introduction, but (as we shall see) the product never caught on since the technologies were moving so quickly that it was out dated upon its release. The Opportunity: No technical person is ever satisfied with the first version of any software product, and I was no exception. So much had happened in computing and communications over the course of the project and the ensuing months, that I became convinced that it needed to be done quite differently in order to take advantage in the advances in object communication and multicasting - just to name two items. I went back to my colleagues at AT&T and proposed that we start all over from scratch to create a different kind of prototype that would take advantage of all the new things. I was easily able to get the technical staff at Bell labs excited. They could see exactly what I was talking about, but the proposal went absolutely nowhere with the business units. They wanted to focus on getting out product, and (in their opinion) they had what they needed. The Rensselaer and Bell Laboratories technical staffs commiserated and schemed, but no further options presented themselves, and I moved on into other projects while continuing to work on the preliminary design - adding new features with each advance in computing. One of the other projects in my laboratory, The Design and Manufacturing Learning Environment (DMLE), had a bright young graduate student, Degerhan Usluel, working on it, and he became fascinated with my plan for a network of educational objects -all communicating across the internet and distributing voice, video, and data to every site. Degerhan Usluel had been an undergraduate electrical engineering student who decided to come back for an MBA in entrepreneurship. As a student he had already founded one computing company that he turned over to his father before leaving for graduate school. Young, brilliant, naïve, and fearless, Degerhan was the ideal person for discussions about the future of collaboration on networks. One day, Degerhan showed up in my office to announce that he was beginning to plan for his upcoming graduation and that he wanted to share that plan with me. He explained that he did not want to go to work for a large company and that he wanted to start a business in software and that he wanted to do that in collaboration with me. It came as a bit of a surprise when he told me that he wanted to start up his own company rather than go to work for one of the big companies recruiting him. When I asked him what kind of company he wanted to start he told me "Something in the computer and network field, but I am not sure exactly what, but I want you to be the President." Moreover, he had recruited one of his classmates, Mark Bernstein to join him in the venture. Mark had been a “Top Gun” salesperson for Computer Associates prior to joining some friends in a startup computer disaster recovery firm called CPR. The firm had been a reasonable success, and Mark’s sales skills were certainly a factor. After discussing several different possibilities, I pulled out a file that I had been keeping with the details of the design for a distributed learning environment that would run on the internet and utilize communicating objects on students and faculty machines in a peer – to peer architecture. I also pointed out that we could use multicasting to distribute the video and audio while using the multi-casting and agent technology to manage the bandwidth on the network. This was needed to keep bandwidth requirements from getting out of hand as more and more sites were added. I did not point out to Usluel that no one had really been able to make multicasting work reliably and that most of the Internet did not support it anyway. I was confident (foolishly) that these were all solvable problems. The fact that several major computing companies had tried and failed did not dissuade us. The Team: Thus ended the opportunity recognition portion of the formation of LearnLinc. The team building portion began immediately thereafter. Usluel, Bernstein, and I vowed to start a company and began meeting regularly in my basement and sunroom. Usluel’s assignment was to build the software from scratch. Bernstein took the lead in the opportunity evaluation phase as he looked at the market and identified competitors and potential competitors. Fortunately, there were no actual competitors using the technology they envisioned! Unfortunately, no one had ever made the underlying technology work reliably! I served as President and mentor while Usluel became Vice-President for Technology and Bernstein became Vice President for Sales, Marketing, and Business Development. I began serving as a part time President and full time Chairman of the Board using my 20% consulting time from Rensselaer, my weekends, my evenings, and my holidays. It was agreed upon up front that at the end of 1-1.5 years, I would either quit Rensselaer and join ILINC LearnLinc or step down as President and CEO, recruit a replacement and serve on the board. The decision would be a joint decision of the Founders. Working with local attorneys, they created a Founder's agreement that granted 40% of the founder's stock to me and 30% each to Usluel and Bernstein. The agreement provided for potential future situations -such as a founder leaving. They also incorporated as the ILINC Corporation, obtained a Federal Tax ID, registered with the State, obtained the ILINC.com domain name, and opened bank accounts. The Exit Agreement: Deciding what their exit strategy would be was one of the easiest tasks that they had to accomplish. It took about ten minutes to decide that all three founders wanted to create a successful public company, that would define a new category of software and change the world. They were not interested in creating a "lifestyle" or a "hobby" company, and did not think they wanted to keep it as a privately owned company. They wanted to build a company, Figure 2 Mark Bernstein, Jack Wilson, and Degerhan Usluel accept one of the many awards given to ILinc go public or be acquired, and then go on to doing other things. If only the other tasks were as easy. Now they had to create a prototype, develop the pitch, and raise the money. The Prototype: The prototype was created out of bits and pieces of my work augmented by some new materials prepared by both Wilson and Usluel. Bernstein worked on the pitch with lots of kibitzing from Wilson and Usluel. Start-Up Funding -A Bootstrapping Process: Funding was a tougher problem. After discussion with a number of other successful entrepreneurs, such as William Mow, founder of Bugle boy industries and Mike Marvin, co-founder and Chairman of MapInfo corporation, Paul Severino , founder of Bay Networks, industry executives (especially from GE and IBM), and with lots of encouragement from Mark Rice, then Assistant Professor and Director of the Center for Technological Entrepreneurship, the founders decided to try to fund the company by bootstrapping the company through the sales of software for future delivery. With Wilson’s contacts and Bernstein’s passion and sales experience, they felt that they had a chance to do this without having to go to venture capitalists at an early stage. Wiser and more experienced executives (such as Warren Bruggeman, GE Executive and Chairman and primary investor in MapInfo) counseled them on the futility of this approach, but they decided to give it a try anyway. Bernstein’s passion and Wilson’s persistence carried the day. They obtained enough contracts for future delivery of software to fund the company in the early days of growth. First customers included IBM, AT&T, GTE, Sprint, Office Depot, and Harper Collins Publishing (News Corp.). An article in Success magazine later described our improbable success story as a variation on the old story of Pop-eye the Sailor Man’s friend Wimpy. Wimpy would wonder around asking folks for hamburgers while promising them that he would “gladly pay you Tuesday for a hamburger today.” In our case we promised that we would gladly give them software next year for a $300,000 (give or take) payment today. Although that does not sound like a compelling offer, we had many takers. Early customers included IBM, AT&T, GTE, Sprint, Office Depot, Aetna-United Healthcare, and Harper Collins Publishing (News Corp.). Building the Product: They were now to step eight of the entrepreneurship path. They had to do it. For that they turned to Usluel, because he had to build the product that I envisioned and Bernstein promised. And he did. When the software was delivered, it managed to satisfy all but one of the early customers and eventually even that customer grudgingly conceded that ILINC LearnLinc had delivered what they had promised, if not quite exactly what the company wanted. First Round of Venture Capital: ILINC then entered a rapid growth phase with very little working capital -depending upon cash flow to finance the each new step. When the monthly “burn rate” (the amount of cash spent each month) reached about $100,000 per month, the founders decided that it was finally time to visit the venture capitalists. Because the company had no track record, the founders were financing the shortfalls in the cash flow with bridge loans against receivables, but these had to be personally guaranteed by the founders. Signing monthly personal guarantees of $40,000 or so began to make them all a bit nervous, because none of them had the income to really handle this and only I had any assets! They went to a local venture capital firm called Exponential Investors who helped to arrange several hundred thousand dollars of financing in cooperation with some New York State business development funds. It was also time for me to decide. My partners encouraged me to come in full time, but I decided that it would be better to go back to Rensselaer and recruit a more experienced CEO for the company. I felt that I would be able to continue to help with the vision and direction, but that the company would benefit from someone with past experience in creating new ventures. A new CEO, Jim O’Keefe, was recruited who had just completed another start-up that had been acquired. The Next Two Rounds: The next few years saw ILINC grow substantially, if not painlessly, and two more rounds of financing in single digit millions brought investments from GeoCapital Investors and the Intel Corporation. The multi-million dollar investment from Intel was one of the turning points for ILinc. Intel had a video card, the ProShare card, that could be inserted into micro-computers to allow one to play live video and do video conferencing. They also partnered with Microsoft to create a software/hardware solution for video-conferencing on networks. They were building servers that would receive the video streams from several computers in a conference setting and then compose that video and send it to all participants. The problem was the factorial increase in bandwidth as additional computers were added. (Bandwidth scaled as n! or n*(n-1)*(n-2)*(n3)*(n-4)........). Thus if one went from two participants in conference to ten, the bandwidth scaled from 2x to 3,628,800x. This essentially made it impossible to serve more than a few computers in a conference. The ILinc architecture, which I had developed and Degerhan Usluel implemented and perfected, managed all this video bandwidth by keeping unused video off the network and introducing concepts now common in all conferencing systems -such as the ability to "Raise a hand" to request attention from the leader and the server. Intel heard that ILinc had solved the scaling problem, but perhaps did not believe it fully. They sent a representative to our office for a confidential demonstration covered by non-disclosure agreements. I asked them how many simultaneous participants they were able to serve and they suggested that it was less than ten. At one point an Intel representative asked me how many simultaneous sites ILinc could link up with video, audio, and screen-sharing. Since we did not have the resources to equip many sites, we really did not know for certain. The mathematics told us that we should be able to do a very large number of sites, but we had not done it. The Intel representative then asked whether we could do more than 50 sites, and I said “sure.” Under my breath I added –“probably.” Intel then cobbled together a large number of sites which was less than the 50 but more than 20 and we were asked to do a demonstration. It worked. At that point Intel told us that they were willing to invest, but that we had to have a side-by-side venture capital partner that would make a matching investment –which we quickly (but not easily) accomplished. We were also invited to develop a presentation for then CEO, Andy Grove, to do at a major software conference. According to many of my friends, Andy Grove was even more difficult and demanding to work with than Steve Jobs. Having worked with Jobs earlier in my career, I knew this was a high bar. They asked that I fly out to Santa Clara and meet with Grove to do a demonstration and answer his questions. I took the trip with some trepidation, but also knowing that the investment was already a done deal. His staff set me up in a demonstration room in which we had several computer simulating multiple remote locations. I was told that “Dr. Grove will come in at 11:15 am and then you will do the demonstration for precisely 15 minutes. At 11:30 he will begin to ask you questions. At 11:45 he will promptly depart for another meeting.” They sternly instructed me not to depart from the script and not to engage in small talk. The instructions were consistent with everything I expected. Sure enough, at precisely 11:15 Andy Grove came in and introduced himself. We sat down together at a computer, and I began to demonstrate the product. I did not get too far until he asked his first question about our screen sharing protocol. Then he followed up by asking how we had been able to do so many simultaneous video sites when his folks only were able to do eight or so –and that took a big fast server to pull off! I explained that it was not really all that hard. We simply recognized that only two video streams at any time were necessary and we used agent technologies to shut off those streams that were not going to be used. We shut off those streams at the source, while standard multipoint video conferencing solutions dealt with them all at the video-conferencing server level. We set up a simple protocol of hand-raising that would allow any participant to ask for the floor –much as legislators ask for the floor in congress. That prompted another question and then another. 11:45 came and went but Andy Grove was still sitting at the computer asking me to demonstrate one point after another and firing off questions like he was giving a doctoral candidate an examination. That put him on my turf, and I was enjoying myself immensely. His staff got more and more nervous, but they were quite careful not to interrupt him. They kept giving me dirty looks, but Andy Grove just kept on asking questions and clicking on buttons. It was nearly 1 pm when he left with a smile and a big handshake. I could not have found him to be a nicer or more interesting guy. When he delivered his speech, my partner Mark Bernstein was there to provide his support. It was one of the highpoints of our early years. Figure 3 Andy Grove, CEO of Intel, and Mark Bernstein when Andy presented LearnLinc to thousands of attendees at a major national convention after Intel invested millions in ILinc and also adapted its software to some Intel products. As noted above product development and financing went through several cycles as ILINC released new versions of LearnLinc and arranged new rounds of financing. Fortune described ILINC as: “Interactive Learning International Corp. (ILINC), a two-year-old company in Troy, New York, has shown what's possible in today's world of limited telecommunications bandwidth. ILINC's interactive training programs can be transmitted to users' PCs over local- and wide-area networks, as well as high-speed communications links such as ISDN (integrated services digital networks). A live instructor can appear in a window on the screen and address students in dozens of locations. He can launch video and audio clips for all the "class" to see and hear. And at discussion time, a student can click on a "raise hand" icon to get the floor.” 1 In 1998, the Wall Street Journal said: "'It's great -- by using it, we've cut our travel expenses substantially,' says Gary Schweikhart, a spokesman for Office Depot, an office-supply company in Delray Beach, Fla. Office Depot first took its corporate training sessions online in May 1996. It was one of the first customers of Interactive Learning International Inc., or ILINC, a Troy, N.Y., maker of distance-learning software. Since then, about 1,500 Office Depot employees have completed online training, on everything from how to write a business letter to how to use the company's proprietary order-taking system. 'We were in a situation where we were doing a lot of training of trainers' in order to have enough qualified instructors to teach employees at 629 stores and 68 sales offices across the country, says Doug Kendig, the company's manager of training technology. 'We had to deputize a lot of people [to train employees], and you don't always get the best results that way.' But now Office Depot uses the ILINC software for about 20% of its training, with classes in Florida, California and Texas using just six instructors. 'I think it's fantastic,' says Jeannette Perez, who works in Office Depot's commercial credit-card department. 'It just holds my attention more, because you're interacting with the computer.' 2 1 REPORTER ASSOCIATE Alicia Hills Moore Copyright © 1996, Time Inc., all rights reserved 2 Wall Street Journal –Thursday August 6, 1998. Figure 4 Wall Street Journal; Aug. 6 1996. The Plot Thickens: The company was becoming successful but experiencing growing pains and pinched financing. Moreover, they now had some very significant competitors. Without patents on the underlying technology, the fast followers were able to reverse engineer the LearnLinc product. Although their earliest efforts were crude and unreliable, there was no reason to believe that they would not get steadily more powerful. These competitors were also much better funded. ILinc was founded in 1993 by people who knew the “old rules” of entrepreneurship. They focused on revenues, tried to achieve positive cash flow, and minimized the acquisition of venture capital. Their competitors were living in a “new-new world:” the dot-com era of the tech boom. They raised ten times the venture capital and thus had a far more powerful sales and marketing enterprise. There were times that the LearnLinc product was only being discovered after one of its competitors had gone into a company and sold them on the concept. For big companies like Aetna-United Health Care, there was a process to evaluate competitors for big purchases. After Centra had sold them a pilot, LearnLinc was chosen as the corporate provider. In general, it is difficult to rely on your competitors to sell your product. Going Public: By the summer of 1999, the founders felt that it was time for LearnLinc to raise much more funding and to grow substantially. The new CEO had been replaced by an interim CEO, Mike Marvin, and then by Degerhan Usluel. I continued to serve as Chairman. The Board decided to hire an investment banker (Michael Kane and Associates of California) and met with a selection of other entrepreneurs to decide how to best go forward. They identified three potential paths: ? Do an IPO. ? Get acquired by a complementary company ? Enter a partnership with (and receive an investment from) a complementary company that would build upon their joint strengths and allow them to grow faster. From the beginning, the group leaned toward some kind of business alliance or acquisition. Although the excitement and financial reward of the IPO was attractive, they felt that the glory might be short lived. They knew that LearnLinc needed a much larger sales force and needed to be much larger financially to crack the very large enterprise accounts that could allow them to reach the next level of development. Although they had sold product to IBM, AT&T, Lucent, MCI, Computer Associates, Aetna, United Health Care, Boeing, Flight Safety, and many other large accounts, these tended to top out at less than million dollar accounts. In order to grow and dominate the market, they needed to be able to crack that barrier. An IPO could bring them the funds necessary to grow, but it would take time and management attention to hire the people and create the systems needed to handle the growth. The company’s advisors suggested that an IPO would likely value the company at $100 million to $200 million. Perhaps it could be more, but that would depend upon timing and market excitement. They also suggested that an acquisition would probably only bring about $50 million, but that the acquisition might leave the company better positioned to grow over the coming years. Given the anticipated lock-up periods for founders stock, the founders tried to evaluate the options as they would look one year into the future, rather than at the transaction date. The Triple Merger - LearnLinc becomes Mentergy: Eventually we decided to agree to be acquired by Gilat Communications. The deal closed on February 29, 2000. Gilat paid 1.5 million shares (gross before commissions) for LearnLinc. On February 29, Gilat closed at $35 per share making the value of the deal $ 52.5 million at closing. Because of the use of bootstrap start-up funding, venture capitalists held less than 50% of the company at the close. During the same period, Gilat acquired Allen Communications from the Times Mirror group for $23 million in cash. Over the next six months, the three companies were blended into one company - known as Mentergy. The companies had a complementary set of strengths. LearnLinc was the market leader in live-on-line eLearning. Allen Communications had an impressive established customer base, a large skilled sales force and specialized in web and CD-ROM based CBT. Gilat brought expertise in satellite communications and interactive learning over satellites. The plan was to create a blended learning approach that was “technology agnostic” and could provide the best eLearning solutions for a variety of different learning needs. The target market continued to be corporations and corporate training. At first the market loved the combination. By March of 2000, Mentergy had a market capitalization of over $500 million. Plans were developed for a secondary offering both to cover the expenses of the triple merger and to provide additional development and marketing resources, but the declining stock market made that a difficult task. The situation was complicated further by a misguided effort to create a headquarters for Mentergy in Atlanta, Georgia (when most of the employees were in New York, Utah, and Israel) and by management confusion caused by the difficult communication process with key management personnel and the Board Chair in Israel. Wilson, Usluel, and Bernstein had agreed to remain involved for at least six months after the merger. I severed my ties in frustration as soon as allowable. Usluel and Bernstein persisted longer in a futile attempt to get the company back on track. By 2002, Mentergy was in bankruptcy. The company was broken back into several pieces. The ILinc portion was purchased by EDT Learning from Arizona. They renamed themselves ILinc in honor of their successful product, which continues to be used in many major American corporations. In hindsight, there would be many things that might be done differently if we had to do them over again, but I hope that the reader can see how we were thinking as we made each decision.

Question : A new venture is expected to be attractive, timely, durable, and anchored in a product or service that creates or adds value for the buyer. How did ILINC fit with this description? How did ILINC fit with trends in economic forces, social forces, technological advances, and political and regulatory changes?

In: Operations Management

Describe the potential social, economic, and cultural implications associated with the Baby-Friendly Hospital Initiative. Describe how...

Describe the potential social, economic, and cultural implications associated with the Baby-Friendly Hospital Initiative.

Describe how the registered nurse can overcome the obstacles to make the Baby-Friendly Initiative a success.

250 words or more please

The Baby-Friendly Hospital Initiative (BFHI) is a program developed by the World Health Organization (WHO) and the United Nations Children's Fund (UNICEF) to promote breastfeeding in hospitals and birthing facilities worldwide. Since the program was launched in 1991, breastfeeding initiation, duration, and exclusivity have increased globally, a trend largely attributed to changes in hospital policies and practices brought about by the BFHI. This article provides an overview of these practices and policies, the institutional benefits of achieving BFHI certification, and the process through which health care facilities can do so. All nurses—whether they work in maternity care or another nursing specialty in a hospital, ambulatory, or community setting—can play a role in promoting societal health through their support of long-term breastfeeding as recommended by the WHO and UNICEF.

It is well documented that breast milk is the best choice for newborns and infants, providing protection against many common causes of infant morbidity. Exclusively breastfed newborns and infants have lower rates of otitis media, respiratory infection, gastroenteritis, urinary tract infection, conjunctivitis, and thrush than those who receive only partial or no breastfeeding.1, 2 Breastfeeding has also been found to reduce the risk of type 1 and type 2 diabetes, childhood leukemia, overweight and obesity, and necrotizing enterocolitis.3-5 There is also evidence that breastfeeding is positively and significantly associated with a child's intelligence (as measured by IQ score) at all ages, even when birth weight and such parental factors as intelligence, educational level, social class, and age are statistically controlled for.6

Figure. Photo by Mon... Opens a popup window Opens a popup window Opens a popup window

Although obstacles to long-term follow-up have hindered efforts to document the maternal benefits of breastfeeding, there is evidence that breastfeeding for one year or more reduces the mother's risks of breast and ovarian cancers, cardiovascular disease, and type 2 diabetes.4 An analysis of data from the National Institute of Child Health and Human Development on more than 1,300 families found an association between breastfeeding and positive changes over time in “maternal sensitivity,” or heightened responsiveness to infant cues.7 Likewise, exclusive breastfeeding is inversely associated with postpartum depression.4, 8, 9 While depression during the third trimester (as measured by the Edinburgh Postpartum Depression Scale) is associated with lower rates of breastfeeding, exclusive breastfeeding at three months postpartum is associated with significantly decreased depression scores.8 Such findings, which suggest that breastfeeding may reduce depressive symptoms, underscore the importance of recognizing prenatal depression as a risk factor for early breastfeeding cessation and of offering extensive breastfeeding support to new mothers who show signs of depression. Achieving breastfeeding self-efficacy within the first week postpartum is positively correlated with both breastfeeding exclusivity and duration through six months postpartum.10, 11

Taken together, the benefits of breastfeeding are enormous. A 2010 cost analysis used pediatric disease data collected by the Agency for Healthcare Research and Quality, 2005 breastfeeding rates (the most recent available at that time) calculated by the Centers for Disease Control and Prevention (CDC), and 2007 dollars to estimate the potential health and financial benefits of breastfeeding. The analysts concluded that if the proportion of U.S. mothers who followed the medical recommendation of exclusively breastfeeding their infants for at least six months after birth were to rise from 12.3% to 90%, it would prevent more than 900 deaths per year and save the United States approximately $13 billion in annual health care expenditures.12 Despite evidence of the pediatric and maternal benefits of breastfeeding, however, many countries, including the United States, have low levels of breastfeeding, with the CDC reporting that only 22.3% of U.S. mothers were exclusively breastfeeding through six months in 2016.13 This article describes the Baby-Friendly Hospital Initiative (BFHI) developed by the World Health Organization (WHO) and the United Nations Children's Fund (UNICEF) to promote breastfeeding throughout the world. It discusses the hospital policies the BFHI advocates and factors that contribute to breastfeeding success. It explains the BFHI certification process (in which hospitals that complete the process are designated as “Baby-Friendly”), institutional benefits associated with certification, and the practices through which all nurses can support long-term breastfeeding and associated societal health.

THE INTERNATIONAL BFHI

Launched in 1991 by UNICEF and the WHO to increase support for breastfeeding in facilities that provide maternity care, the BFHI is the global standard for hospital support of breastfeeding. Mothers who deliver at institutions that follow BFHI practices are more likely to initiate breastfeeding and continue breastfeeding their infants for at least six weeks postpartum than mothers who deliver at institutions that do not.14-17 The BFHI was founded on 10 evidence-based practices for promoting breastfeeding (see The Ten Steps to Successful Breastfeeding).

Box. The Ten Steps t... Opens a popup window Opens a popup window Opens a popup window

Institutional factors can promote or impede breastfeeding. Perrine and colleagues analyzed data from the Infant Feeding Practices Study II, which surveyed 1,457 women who had given birth to a single healthy child in a U.S. hospital between 2005 and 2007 and intended to exclusively breastfeed for periods ranging from less than one month to more than seven months.18 The women answered survey questions during their third trimester and approximately every month after giving birth for about 10 months. Initially, more than 85% of the women surveyed planned to breastfeed exclusively for three months or longer, but only 32.4% of the women met their intended breastfeeding goal, and 15% had stopped exclusively breastfeeding before hospital discharge. When the researchers investigated hospital practices, they found that the percentage of women who breastfed for as long as they intended rose with the number of BFHI practices the hospital followed. When hospitals followed none or only one of the Ten Steps to Successful Breastfeeding (Ten Steps), only 23.4% of the women met their intended breastfeeding goal, compared with 46.9% of the women whose hospital followed six of the Ten Steps. Successful breastfeeding was nonsignificantly associated with breastfeeding within one hour of giving birth, not giving the infant a pacifier, and rooming-in (mothers and infants remaining together throughout the hospital stay), and cessation or disruption of breastfeeding was significantly associated with administering formula to healthy breastfeeding infants.18 Similarly, a Hong Kong study found that policies prohibiting hospitals from accepting free formula from manufacturers reduced in-hospital formula supplementation and increased both in-hospital exclusive breastfeeding and breastfeeding duration.19

Unfortunately, institutional adherence to BFHI guidelines is not optimal even among hospitals that have achieved BFHI certification. In a study of 915 mothers who gave birth at four BFHI-accredited birthing facilities in Maine, only 34.6% of the mothers reported that their hospital followed all seven of the BFHI practices the researchers investigated, and 28.4% reported receiving a gift pack containing formula—a practice prohibited by the BFHI because of its association with breastfeeding cessation.15 In a study from the United Kingdom that included 1,130 mothers, fewer than 18% were happy with the breastfeeding information they received during pregnancy from health care professionals, fewer than 50% reported receiving adequate information on how to find breastfeeding support after birth, and more than 92% of those who stopped breastfeeding by six weeks postpartum said they would have liked to have continued beyond that point.20

THE BREASTFEEDING REPORT CARD

National breastfeeding data are collected by the CDC and documented in the Breastfeeding Report Card, which provides information on breastfeeding practices in all states, the District of Columbia, and Puerto Rico. This report card is published every two years, most recently in 2016 (

www.cdc.gov/breastfeeding/pdf/2016breastfeedingreportcard.pdf

).13 The report card indicators are based on the breastfeeding goals outlined in the U.S. Department of Health and Human Services (DHHS) Healthy People 2020 initiative. For health care facilities, the aims are to reduce the proportion of newborns who receive formula in the first two days of life and to increase the proportion of live births that occur in facilities that provide recommended care for lactating mothers and their infants. The results of the last report card are positive, showing that U.S. breastfeeding levels continue to rise incrementally, with 2013 rates exceeding those of 2011 for the proportion of newborn infants who started to breastfeed (more than 81% versus 79%), were breastfeeding at six months (nearly 52% versus 49%), and were breastfeeding at one year (nearly 31% versus 27%).13, 21 But despite these improvements, Healthy People 2020 targets for breastfeeding duration and exclusivity are not yet being met (see Table 1). In 2013, the Healthy People 2020 targets of at least 60.6% of infants still breastfeeding and at least 25.5% of infants still exclusively breastfeeding at six months were met in only 12 and 16 states, respectively.13 In addition to breastfeeding rates, the report card includes data on such “breastfeeding support indicators” as the percentage of live births that occur in institutions receiving Baby-Friendly designation, the number of international board-certified lactation consultants per 1,000 live births, and the number of La Leche League leaders per 1,000 live births.

Table 1 Opens a popup window Opens a popup window Opens a popup window

In 2015, the CDC reported that policies and practices of maternity units had improved nationally since 2007, but that more work was needed to ensure that all women receive breastfeeding support and education during their hospitalization.22 According to this report, the percentage of U.S. hospitals that incorporate the majority of practices recommended in the Ten Steps increased from 29% in 2007 to 54% in 2013, but of the 3,300 maternity hospitals in the United States, only 289 had been certified as Baby-Friendly.22

BABY-FRIENDLY CERTIFICATION

When institutions achieve Baby-Friendly status, not only does it help them meet Healthy People 2020 targets and improve national health outcomes, but the certification process can strengthen the organizations’ leadership and increase staff competence. When a hospital commits to the work involved in achieving this designation, it can stimulate new ways of thinking among all nursing staff, the maternity team, and the facility's administration. In addition, with Baby-Friendly certification, a facility meets the Joint Commission's maternity care standards for exclusive breastfeeding.23

Baby-Friendly certification is awarded when a facility has successfully implemented the Ten Steps and the International Code of Marketing of Breast-Milk Substitutes.17 The 13-page BFHI Self-Appraisal Tool, which a facility uses to appraise its current practices as part of the certification process, breaks down each of the Ten Steps into several substeps in the form of yes–no questions. For example, step 1—“Have a written breastfeeding policy that is routinely communicated to all health care staff”—is followed by 11 substeps, such as, “1.1 Does the facility have a written breastfeeding/infant feeding policy that establishes breastfeeding as the standard for infant feeding and addresses all Ten Steps to Successful Breastfeeding in maternity services?” (The BFHI Self-Appraisal Tool is available online at

www.breastfeedingor.org/wp-content/uploads/2012/10/using-bfhi-self-appraisal-tool-2011.pdf

.) It is important to note that these policies should take effect on pediatric units, EDs, medical–surgical units, ambulatory surgical units, outpatient units, and any others in which a mother or infant may be admitted for care.17

Training of maternity nursing staff is formal, consisting of 20 hours of instruction, including 15 sessions required by UNICEF and the WHO and five hours of supervised clinical experience to ensure clinical competence.24 Other health care providers (physicians, midwives, physician assistants, and advanced practice RNs) involved in labor, delivery, maternity, or newborn care require at least three hours of breastfeeding management education and should thoroughly understand the benefits of exclusive breastfeeding, the physiology of lactation, and which medications are safe to use while breastfeeding. Health care providers who are unable to describe or demonstrate breastfeeding skills are expected to provide mothers with appropriate referrals to others who can.24 To practice in accordance with the International Code of Marketing of Breast-Milk Substitutes, institutions must not accept free or reduced-cost supplies of breast milk substitutes and feeding supplies. In addition, any educational material given to mothers must be free of commercial identifiers, such as logos. Staff members are forbidden to receive gifts in the form of nonscientific material, equipment, money, or meals from producers of breast milk substitutes or artificial nipples and bottles.24

A prospective cohort study of 2,560 mother–infant pairs in public hospitals in Hong Kong investigated the effects of the BFHI guidelines on breastfeeding rates for 12 months following birth or until the cessation of breastfeeding.19 A total of 1,320 mothers delivered before and 1,240 delivered after the hospitals had implemented the guidelines. Investigators found that the proportion of mothers exclusively breastfeeding during hospitalization rose from 17.7% before guideline implementation to 41.3% afterward, and median duration of breastfeeding increased from eight to 12.5 weeks. Increased formula supplementation was associated with higher rates of breastfeeding cessation.

THE ROAD TO BABY-FRIENDLY STATUS

In the United States, implementation of the BFHI occurs in four phases, called the “4-D Process.” The four phases are as follows 25:

* The Discovery Phase is the first phase, in which staff learn what BFHI practices include and all that they entail. In this phase, the facility or institution must register with Baby-Friendly USA (BFUSA) and submit a completed BFHI Self-Appraisal Tool, a letter of support from its chief executive officer, and a completed facility data sheet (a sample of which is included in the online BFHI Self-Appraisal Tool). It should be noted that all forms must be completed online by one of two facility personnel authorized to use the BFUSA portal.

* The Development Phase is the planning phase, in which the facility plans how to implement and sustain the Ten Steps. In this phase a committee is formed to oversee the process, including policy development and staff training. There are specific time frames associated with each task in this phase and, starting at this point, phase fees are required. (A fee schedule is available at

www.babyfriendlyusa.org/get-started/fee-schedule

* The Dissemination Phase is when all facility staff members who may be affected by this policy receive an orientation. Facilities must establish a breastfeeding education program for pregnant women and new mothers and begin collecting breastfeeding data from patient medical records and audits of maternity care practices.

* The Designation Phase occurs after the facility submits a “Request to Move Letter” to BFUSA. This must include data demonstrating that the facility has met the specific guidelines.

According to the BFUSA website, as of June 9, 2017, 440 U.S. hospitals and birthing centers had been designated as Baby-Friendly (for a regularly updated list, see

www.babyfriendlyusa.org/find-facilities

). In 2007, only 2.9% of U.S. births occurred in facilities with the Baby-Friendly designation, and this figure has grown to about 21.5%, exceeding the Healthy People 2020 target of 8.1%.

Bumps in the road. The process for achieving Baby-Friendly status may seem simple, but implementation can be difficult. A qualitative study that included 31 participants, representing midwifery, medical, nursing, and ancillary staff from six Australian maternity hospitals, found that the understanding and personal views of staff, as well as a “bottle-feeding culture,” were often at odds with BFHI objectives.26 Unpaid education time further impeded the goals and stressed staffing levels. A San Francisco hospital found it took eight years to achieve Baby-Friendly status, with challenges including health care providers with limited breastfeeding knowledge, hospital practices that did not support rooming-in or skin-to-skin contact between mother and infant, and little breastfeeding education overall.27

Hospital policies and lack of breastfeeding education on the part of staff are not the only impediments to achieving Baby-Friendly status and improving breastfeeding rates. Population characteristics such as language barriers, homelessness, substance abuse, and poverty can present challenges as well.27

ACHIEVING SUCCESS

The Guided Infant Feeding Technique (GIFT), an educational program based on the Ten Steps, was introduced to 1,086 participants from 35 Louisiana hospitals between November 2008 and February 2012.28 Within 30 months, the number of hospitals that had achieved GIFT certification rose from nine to 24. Subsequently, Louisiana's breastfeeding rates, as documented in the CDC's Breastfeeding Report Card, increased from 50.7% ever breastfed in 2007 (the year before the program was introduced) to 60.9% ever breastfed in 2016, though this rate is still well below the Healthy People 2020 target of 81.9%.13, 29 Similarly, among mothers giving birth in a large multicenter medical institution in Chicago, rates of exclusive breastfeeding throughout the hospital stay rose from 38.6% to 53.5% over a four-month period after nurses completed a 20-hour BFHI education program.30

Other facilities that achieved Baby-Friendly designation noted that the following factors contributed to their success 31:

* involvement of all staff, not only nurses

* financial assistance in the way of grants, which help offset educational fees

* ongoing technical assistance with data collection

Maintaining momentum. Once an institution has been designated as Baby-Friendly, it is important to maintain the momentum that was involved in attaining that status and to continue practicing in accordance with the BFHI. A study that included 915 women who gave birth in one of four Maine hospitals that were BFHI accredited either before or during the study period found that adherence to the Ten Steps was not optimal. Only 34.6% of the women reported that the hospital followed at least seven of the steps, with 35% of the women who gave birth at hospitals working toward Baby-Friendly status and 28% of the women who gave birth at hospitals that had already achieved Baby-Friendly status reporting that they had received gift packs containing formula upon discharge.15 As the number of BFHI-accredited hospitals grows, follow-up on practices will be an important area of continued nursing research.

SUPPORT FOR BREASTFEEDING

Health care facility programs. The DHHS has included the promotion of breastfeeding in its Healthy People 2020 objectives since 1990. Professional organizations, including the Association of Women's Health, Obstetric and Neonatal Nurses, the American College of Obstetricians and Gynecologists,32 and the American Public Health Association,33 encourage health care facilities that serve childbearing families to maintain programs that support the successful initiation and continuation of breastfeeding.

One of the difficulties women and families face in continuing to breastfeed after hospital discharge is lack of support, and it has been shown that support after discharge can increase continued breastfeeding rates. For example, in one study, 27 first-time mothers received weekly telephone calls from a lactation consultant for three months after discharge, and then once monthly for the next three months or until the infant was weaned. At six months postpartum, 73% of the women were still breastfeeding exclusively, compared with the hospital's baseline breastfeeding rate of 38%.34 In a larger study conducted in Italy, 114 first-time mothers were randomized into two groups: an intervention group receiving weekly structured telephone counseling by a midwife for the first six weeks postpartum, and a control group having routine postnatal visits with a physician at one, three, and five months postpartum. Overall breastfeeding rates in the intervention group were significantly higher than those in the control group, and postpartum rates of exclusive breastfeeding were consistently higher at one month (76.4% versus 42.4%), three months (54.5% versus 28.8%), and five months (25.5% versus 11.9%).35

Peer counseling is also effective in promoting breastfeeding, as demonstrated in a study of 990 women who were receiving services from Michigan's Special Supplemental Nutrition Program for Women, Infants, and Children. Women who participated in a peer-counseling breastfeeding support program in addition to receiving prenatal services were significantly more likely to initiate breastfeeding and to continue it for six months than were those in a control group who received prenatal counseling but no peer counseling.36 A systematic review of 31 qualitative studies found that the mere presence of a supportive person who is available to assist with breastfeeding and with whom the mother has a trusting, sincere rapport can increase rates of continued and exclusive breastfeeding.37

To be effective, breastfeeding support must be culturally appropriate, thorough, specific, consistent, and delivered both prenatally and postpartum. In a qualitative study in Maryland, women reported that, though they were encouraged to breastfeed because of the benefits it offered, they were not given specific oral or written information.38 Only one of the 75 women interviewed reported having received consistent information and support both at the hospital and from the pediatrician after discharge. She was also the only one interviewed who, at 10 months postpartum, reported never having given her child formula.

Workplace support is also essential in promoting continued breastfeeding. Although many women stop breastfeeding when they return to work, participation in a workplace lactation program is associated with exclusive breastfeeding at six months.39 Furthermore, Section 4207 of the Affordable Care Act amended the Fair Labor Standards Act to require employers to provide time and space for new mothers to express breast milk for their infants for up to one year after birth.40 Informing patients of this protection may substantially increase the likelihood that they will continue breastfeeding after returning to work.

Public perception. Others’ negative attitudes about breastfeeding in public spaces can discourage exclusive breastfeeding. In a survey conducted by the New York City Department of Health and Mental Hygiene, more than half of the 1,979 respondents believed women should breastfeed in private only.41 Patients should be informed that breastfeeding in public is sanctioned by laws in 49 states (all except Idaho), as well as the District of Columbia and the U.S. Virgin Islands.42 For more information on state breastfeeding laws, visit the website of the National Conference of State Legislatures at

www.ncsl.org/research/health/breastfeeding-state-laws.aspx

CONCERNS ABOUT BFHI ENFORCEMENT

While most health care providers would agree that the BFHI can help improve outcomes for mothers and infants, the initiative has faced criticism that it is, in some cases, too rigidly enforced and may even interfere with nursing judgment. Some have expressed concerns that, with strict enforcement, mothers who have had an operative delivery may not be provided adequate time to recover before being encouraged to initiate skin-to-skin contact with their infant and begin breastfeeding.43 Some nurses have expressed the belief that hospitals need to reduce rates of cesarean section before embarking on this initiative. The BFHI prohibition against pacifier use has also been questioned, because pacifiers have been associated with a reduced risk of sudden infant death syndrome.43 Finally, some articles in the popular press have suggested that new mothers are being made to feel guilty if they cannot or choose not to breastfeed, and some nurses, midwives, and physicians echo this sentiment, voicing discomfort with hospital policies that prohibit infant formula from being provided without a medical order.

Whether following an operative delivery or a long labor and vaginal birth, it's clearly important for exhausted mothers to be carefully observed during the postpartum period when engaged in skin-to-skin contact, breastfeeding, or bottle feeding.44 The BFHI does not prevail on mothers to breastfeed when it is unsafe for them to do so, and with appropriate observation, infants will be moved to a separate sleep surface if the mother is drowsy. Regarding pacifier use, since it is associated with shortened duration of both exclusive breastfeeding and any breastfeeding, the American Academy of Pediatrics recommends delaying the introduction of pacifiers to healthy infants born at term “until breastfeeding is well established,” generally at three to four weeks after birth.44 While BFHI practices support new mothers with breastfeeding, offering them the assistance of lactation consultants, midwives, and nurses, it is important that mothers who choose not to breastfeed are never made to feel guilty or uncomfortable.

RECOMMENDATIONS

At Jacobi Medical Center in New York City, before mothers give birth, we host “Baby Showers” for patients and their families. At these showers, we provide gifts, food, and extensive breastfeeding education. RNs and nursing students from a local university have been active participants in organizing and presenting at these events. Such experiences are invaluable. At a time when so much clinical learning occurs in simulation, this is one area in which hands-on learning is best.

Upon discharge after childbirth, breastfeeding mothers receive written information that includes telephone numbers they can call for support. We also invite new mothers to participate in a breastfeeding clinic within a week of giving birth. At the clinic, the mothers are evaluated by a lactation specialist, and the infants are weighed and examined by a pediatric health care provider. The lactation counselor observes breastfeeding, offering assistance as needed. This visit incorporates a support group, led by a health educator, in which mothers are encouraged to share what has helped them with breastfeeding. In addition to educating the mothers and families, the clinic provides an opportunity for medical and nursing students to participate and learn more about breastfeeding. Both RNs and local nursing students have led some of the groups.

Although the data suggest that the numbers of women breastfeeding exclusively are increasing, significant improvements must be made if we are to meet Healthy People 2020 targets. All nurses can help promote breastfeeding in their practice and in speaking with their friends and neighbors (see Implications for Nursing Practice). We must also work to include breastfeeding education in the curricula of nursing and medical education programs.

In: Nursing

n October 2010, Tom Chong was on his way to his office and thinking about several...

n October 2010, Tom Chong was on his way to his office and thinking about several issues he would have to deal with in the coming weeks. Chong was Jextra Stores (Jextra) country manager for the Neighbourhood Markets Division in Malaysia. One issue involved a conversation with the mayor of Klang, a town near Malaysia’s capital city of Kuala Lumpur. Chong had been seeking to expand to Klang for some time. The mayor surprised Chong with an offer to help with land zoning if Jextra would help finance a new primary school (or at least Chong thought that was what he had been asked for).

The second issue involved the job performance of Arif Alam, Jextra’s top-performing buyer. Alam, a buyer of fresh fruit and vegetables, consistently negotiated better contracts than Jextra’s fifteen other buyers and, Chong believed, better than Jextra’s competitors. The contracts negotiated by Alam certainly contributed to the excellent financial performance of Jextra Malaysia. Nevertheless, Chong could not help wondering if there was more to the picture than he was aware of. The retail industry in Malaysia was notorious for buyers accepting money and gifts from suppliers. A few days ago, Chong had accidentally overheard two of his accounting employees speculating that Alam must be accepting gifts, or even taking bribes—how else could he get such good contracts?

Chong was not sure what to do. Should he con- front Alam? Or, to use one of his English colleague’s

favorite expressions, should he let sleeping dogs lie? Chong knew that his boss expected him to aggres- sively grow the business, so perhaps it would be best to accept the mayor’s offer and deal with Alam later.

Jextra Malaysia

Jextra Stores, a large Asian retailer, was based in Hong Kong and was owned by Sim Lim Holdings, a large publicly traded industrial group. Sim Lim Hold- ings was traded on the Hong Kong and London stock exchanges. Jextra operated retail stores in Hong Kong, China, Philippines, Viet Nam, Malaysia, Thailand, and Singapore. The company operated supermarkets, hypermarkets, and convenience stores.

Jextra entered Malaysia, a stable and prosperous nation of 28 million multi-ethnic people, in 2005 and was very successful. The company operated super- markets in Malaysia using the name Neighbourhood Markets. There were now ten Neighbourhood Mar- kets, and breakeven had been reached quickly. Jextra was planning to enter the Malaysian convenience store sector in a few years. Although other Asian and European retailers were entering Malaysia, Tom Chong saw plenty of growth opportunities for super- markets, and his boss in Hong Kong had approved an aggressive five-year investment strategy.

Tom Chong

Tom Chong, a Hong Kong native, had been in his posi- tion for eight months, and expected to remain there for another two to three years. Malaysia was Chong’s first assignment as country manager. Prior to moving to Malaysia, Chong held various positions in corporate headquarters in Hong Kong, and then moved to Malay- sia as finance director. After two years in finance, he moved into his current role as country manager for Neighbourhood Markets. His new assignment in Malay- sia was his first experience with real operational issues and proft and loss responsibilities.

Chong reported to a Regional Operating Officer responsible for Singapore, Malaysia, and Thailand, and was in constant contact with the CEO and the CFO of the Supermarket and Hypermarket Divisions of Jextra in Hong Kong. Chong was evaluated based on various financial measures, including Economic Value Added. As a country manager in a young market, the number of new stores opened was an important element in his overall evaluation, and a factor in deter- mining his career prospects. In a fast-growing market like Malaysia, a failure to open new stores would be viewed negatively at corporate headquarters. The number of new stores opened would also be a factor in determining his discretionary bonus. In recent years, Chong’s performance had been among the best for Jextra managers of his age and experience.

A New Store in Klang

Jextra was doing well in Malaysia and actively seeking to expand. Chong and his team had identified a poten- tial site in Klang for a new Neighbourhood Market. Klang, a town located about 30 km west of Malaysia’s capital, Kuala Lumpur, was growing and was viewed as an attractive location for a new store. Although the potential site was not zoned for retail and commercial purposes, it had good road access and plenty of space for parking. Chong knew that several other retailers were also interested in expansion in Klang, especially with the opening of a new highway connect- ing Klang to the southeastern edge of Kuala Lumpur.

At a recent meeting between Chong and the mayor of Klang:

Chong: As you know, we have identified Klang as one of the most attractive cities in Malaysia for Jextra investment. We are interested in opening a Jextra Neighbourhood Market there.

Mayor: We are pleased that you are considering our city for your next investment. Klang is a growing community, and the new highway makes our city much more attractive as a place for families to live and commute to the capital. Where does your investment analysis stand?

Chong: We have done some preliminary work. We have identified some potential sites. There is one site of interest near the new sports arena, and we have had some conversations with your offcials since the land is currently not zoned for commer- cial use. Unfortunately, our previous investments in Malaysia have all encountered diffculty with land development. Our newest store was delayed by more than eight months because of zoning issues. We hope that will not be a problem in Klang.

Mayor: We have a unique community in Klang, and want to protect our cultural heritage. We scrutinize

all proposed real estate developments very carefully. With your store, perhaps we can help each other.

Chong: Can you be more specific?

Mayor: Our community is growing quite rapidly, and we have a lot of young families moving in. We des- perately need a new primary school. Without it, families may choose to live elsewhere. People do not want to live in a city with inadequate school facilities. Unfortunately, our school budget is quite tight, and we may not be able to build the school for at least two years. If Jextra were willing to consider supporting a primary school development fund, I am sure I could speed up the land zoning process.

Chong: Interesting....Can you tell me a bit more about the primary school project? Do you have any preliminary estimates of the cost?

Mayor: My Director of Schools has told me that we need about 350,000 ringgit to make up a budget shortfall for a new primary school. Jextra’s support would greatly help the community. Also, if you were to build your store on the proposed site, road and electricity developments would be necessary. A fly- over at the intersection of Jalan Mantin and Jalan Subang on the east side of the site would be nec- essary to ensure smooth traffic flow. We would, of course, expect Jextra to help pay for the flyover. I understand one of your competitors in Shah Alam [a community close to Klang] helped pay for a new fire truck when they entered the market. This is quite normal for new investment in Malaysia.

Chong: Well, Mr. Mayor, thank you for your time. We will continue with our analysis, and certainly hope that we can do something that is good for Klang and good for Jextra.

With that, Chong left the meeting. The conversa- tion with the mayor had caught him by surprise. The mayor’s zoning proposal was unexpected, but could certainly speed up development. However, Chong was not sure what he asked for. Was he being asked to pay the entire 5 million ringgit or just a part of the cost? Would he pay for it before the pri- mary school was built, or after? Would he pay the city or a contractor? If he said no, would that mean a denial of the zoning change?

Chong made a few calls, and learned that the mayor’s sister was on the school board and was one of the major supporters of a new primary school. Chong also learned that planning for the flyover had started several months before Jextra had ever expressed an interest in the nearby site. In addition, Jextra had already determined that traffic to and from the store parking lot would be routed through the west side of the lot, using a lightly used commercial street and not on either of the roads close to the planned flyover. Chong wondered about the mayor’s motives in asking Jextra to pay for the flyover.

Jextra Business Conduct Code

Jextra’s Business Conduct Code was very clear: employees could not offer benefits to third parties in connection with business matters (see the Appendix for excerpts from the Code). If Jextra were to contrib- ute to a primary school, the benefit would be a contri- bution to a school development fund, and the benefit would go to the school and the community, not indi- viduals. Chong had discussed a hypothetical situation with a Malaysian friend who was also a lawyer (he did not reveal the specifics of the mayor’s request). He was told that Malaysian law was unclear in the area of business payments for social purposes made spe- cifically for regulatory approval. He was also told that although not widespread in Malaysia, the practice of businesses contributing to city projects was common in Klang and other areas around Kuala Lumpur, and the local mayor prided himself on being able to obtain these payments for schools and roads in particular.

Jextra’s corporate office in Hong Kong had a small group of employees that managed the Jextra Social Fund. The Jextra Social Fund provided funding for various social and educational programs, mainly in Hong Kong. One of the fund’s specific initiatives was providing university scholarships in Hong Kong for children of lower-income families. As Jextra expanded in Asia, the fund was slowly looking at ways to contribute to more local programs.

However, Chong knew that recently there had been some concerns in the Philippines involving the Jextra Social Fund and some funds for a community center in a city in which Jextra planned to build a store. Chong did not know the details, but the rumors were that much of the money went to local politicians instead of the community center. Not long after the incident, Jextra’s country manager in the Philippines was transferred back to Hong Kong to a position that looked like a demotion.

Legal in Malaysia?

Chong thought that the primary school contribution could be illegal in Hong Kong if it circumvented the

Jextra Social Fund. But, perhaps this was normal practice in Malaysia. Chong’s friend said that some local lawyers would probably advise him to make the payments, but to keep the school and flyover pay- ments independent, which would blur the line as to whether the behavior was indeed illegal. Complicating the issue was the question of the expected outcome from the primary school payment. If the school pay- ment speeded up the development process, it could be legal; if it was necessary to make the payment solely as a prerequisite to obtaining the permit, it could be considered a bribe. If the payment was made after the store was built and went directly to a school board budget for future operating expenses, would that be illegal? Chong did not know the answer to these questions.

Various scandals involving alleged bribes and cor- porate contributions had contributed to the recent“retirement” of various elected officials in Malaysia. Both state and federal politicians were using “clean government” as part of their political platforms. The State Investment, Trade and Industry Committee Chairman said that his government would separate itself from the historically tight ties between business, government, and political campaign contributions. At the federal level, the government had promised that foreign direct investment in Malaysia would become transparent, and that giveaways to foreign investors would stop (exactly what giveaways he meant were never specifically identified).

Chong knew that, in the last year, there had been several foreign investors who were rumored to have helped fund different government programs in exchange for favorable treatment. So far, there was no evidence that any of these efforts were illegal or even of much interest to voters and legislators. When a European electronics company opened a new plant in Malaysia, there were many rumors that the company paid a substantial amount of money to a government“education fund.” Chong’s teammate from his football club told him confdentially that the company had paid 2.5 million ringgit to the fund, and that the fund was controlled personally by the Industry and Development Minister, a well-known businessman turned politician, whose wife was dean of the Communications School at the Malaysian Institute of Technology.

Jextra’s Competitors and the

Mayor’s Offer

Chong was aware that Super-Value, one of Jextra’s competitors, was also actively looking at Klang for a new store. Would the mayor make the same offer to Super-Value as he had made to Jextra? If so, when would the offer be made, and would Super-Value be willing to accept it? Perhaps Super-Value was inter- ested in the same site as Jextra. Before Chong could even consider agreeing to the mayor’s primary school request, he needed to think through the details. How would he get the money for the school? Would he identify it in the investment proposal, or try to hide it with other items? Should he get legal advice on his possible criminal liability in Hong Kong? What if he went ahead with the payment, and the money ended up not going to the school? If the press found out, Jextra and Chong could be in big trouble.

Perhaps the best approach would be to decline the mayor’s offer and work through regular channels to get the zoning approval. If that was successful, he would worry about the fyover request later. On the other hand, he did not want to lose access to a prime retail site, and his boss, who was aware of the Klang site, wanted an update on the project next week.

Category Management

A very simplified view of Jextra’s category manage- ment and buying process is as follows. Category managers (CMs) were responsible for driving cate- gory direction and leading an operationally efficient category team to deliver the budget within the frame- work of the corporate goals. A key area of responsi- bility for category managers was working with suppliers to determine the products to order, together with their negotiating prices. For a new supplier, establishing a relationship with a category manager was crucial in getting its products listed by Neigh- bourhood Markets. Category managers negotiated contracts, rebates, equipment, placement, incentives, and other financial and logistical arrangement for their category. Neighbourhood Markets in Malaysia had category managers for product lines such as fruits and vegetables, meat, frozen foods, and beverages. Product buyers managed the bundling of orders and actual buying from suppliers at the negotiated prices. Over and above this organizational setup, there were few defined processes, leaving a fair amount of lee- way to the category managers because they decided what to order and what not to order.

Arif Alam

Arif Alam was 32 years old, and had been with Jextra in Malaysia since the company entered the market. He had worked his way up from a sales apprentice position to category manager for fruits and vegeta- bles. His responsibilities included building and man- aging contacts with suppliers, listing suppliers and products, negotiating prices, and working closely with buyers to ensure that the supplier relationship was smoothly managed.

As Alam’s boss, Chong had a reasonable under- standing of how the Malaysian buying process worked, but he did not know all the details, and cer- tainly was not involved in day-to-day activities. What Chong had learned over the past few months was that there were ample opportunities for CMs to exploit the system for personal gain. One typical scheme involved company samples and rewards. Most suppli- ers provided CMs with a large supply of product sam- ples that could be sold on the grey market. CMs and their spouses often traveled extensively to product presentations of certain suppliers. These events usu- ally took place at luxury hotels, and often in resort set- tings. Since Alam was a CM for fruits and vegetables, he might be provided with other products, such as small appliances like toasters or coffeemakers. Another typical scheme was for suppliers to provide rewards tied to performance and sales. These could range from household appliances to expensive jewelry and watches. These rewards could be kept or sold. There were even cases where companies owned by relatives of CMs had to be paid by suppliers in order for the suppliers to get their products sold by Jextra.

Besides his suspicions that Alam was accepting gifts, or even taking bribes, Chong had heard rumors about a scheme between Alam and his father-in-law. Alam referred suppliers willing to be listed for a new product to his father-in-law who, as a side job, ran a trading agency that “established contact to Jextra Stores.” The agency received a commission of 0.5 percent for all goods covered by the agency agree- ment. It was rumored that Alam rarely listed suppliers and products not covered by the agency.

Bribery

The bribery issue was particularly troubling. Bribery of retail buyers was as old as the retail industry itself. The bribery process works as shown in the following exam- ple. A buyer who paid 50 ringgit for a pair of blue jeans the previous year negotiates a 45 ringgit price based on a larger order. Another clothesmaker offers the same pants for 42 ringgit each. In order to retain the big order, the first vendor matches the 42 ringgit price and gives the buyer 2 ringgit for each pair of blue jeans. The bribe is undetectable, because the buyer sets up a phony company that serves as a middleman in the transaction. The vendor bills the retailer for 42 ringgit a pair and funnels the 2 ringgit to the buyer through the dummy corporation, calling it “an agency commission.” After the deal is done, the vendor keeps the order and the retailer pays less for the pants than a year ago. The buyer looks good because the price paid was lower than a year ago. The buyer believes,“I deserve the money because I am helping the com- pany.” For a few years, the retailer may benefit by hav- ing lower costs. Longer term, the retailer’s costs may increase because the buyer has an obligation to the vendor and may end up paying less-competitive prices. The retailer may also end up with merchandise that is inferior in quality and difficult to sell because it was purchased by a corrupt buyer.

Chong’s Decision

Chong had a dilemma. Although he suspected that Alam was involved in “dirty” buying, how could he find out? His colleagues might know, but they could be involved in the same activities. Jextra was doing well and, as far as Chong knew, except for bribery, most of the behaviors were not criminal in Malaysia. What if he set up an investigation? If he found noth- ing, he could alienate his people and lose personal credibility. He might find that large parts of his prod- uct category management were engaged in similar actions. What should he do then? The whole busi- ness might be at risk if he were to shut it down. He could lose his top CMs and disrupt supplier relation- ships. Plus, how would he actually investigate the CMs—hire an outside investigator? Talk with suppli- ers? Find a disgruntled employee? Spy on his employees? This was all new to him.

Proving any of his suspicions would be difficult. Alam was a respected member of the team. Aside from rumors and hearsay, Chong had no real evi- dence of bribery or kickbacks. Alam’s lifestyle did not seem out of the ordinary. Chong would need clear evidence, and an outside investigator would mean added cost. The investigation could take months, or even years, and Chong might be gone from Malaysia by the time the process was com- pleted. In addition, this would take a lot of his time, and he was already working almost 60 hours a week.

Chong needed to keep growing the business and meet his financial targets. It was critical for him to deal with the mayor’s proposal appropriately and ensure that Jextra’s chosen site did not end up with one of his competitors. Maybe he should wait before doing anything about Alam.

Appendix: Excerpts from Jextra’s Business Conduct Code

Summary

Jextra is an international company with a strong rep- utation for providing quality products. We continually seek to deliver the best results for the Company the highest return to our shareholders, and the most beneficial service to our customers.

Ethical conduct is defined as conduct that is mor- ally correct and honourable. To maintain our valuable reputation and to build on our success, we must conduct our business in a manner that is ethical as well as legal. This Business Conduct Code estab- lishes Jextra’s commitment to following ethical busi- ness practices. It details the fundamental principles of ethical business behaviour, and defines the responsibilities of all directors, officers, associates, and Company representatives.

Jextra is committed to conducting business lawfully and ethically. Every associate is obligated to act at all times with honesty and integrity. We expect you to bring good judgment and a sense of integrity to all your business decisions. While it is not possible to list all policies and laws to be observed, or all conflicts of interest or prohibited business practices to be avoided, this Business Conduct Code details the company’s expectations for associate conduct, and helps associ- ates make the right decisions. Associates are expected to know the company’s policies and comply with them.

Applicability

Associates who supervise others have an important responsibility to lead by example and maintain the high- est standards of behaviour. If you supervise others, you should create an environment where employees under- stand their responsibilities and feel comfortable raising issues and concerns without fear of retaliation. If an issue is raised, you must take prompt action to address the concerns and correct problems that arise.

You must also make sure that each associate under your supervision understands our Code and the policies, laws, and regulations that affect our workplace. Most importantly, you must ensure that employees understand that business performance is never more important than ethical business conduct.

As a Jextra employee, you are expected to comply with both the letter and the spirit of our Code. This means you must understand and comply with all of the company policies, laws, and regulations that apply to your job, even if you feel pressured to do otherwise. Our Code also requires you to seek guidance if you have questions or concerns, and to cooperate fully in any investigation of suspected violations of the Code that may arise in the course of your employment.

Bribery

It is illegal to pay or receive a bribe intended to influ- ence business conduct or behaviour. Our guideline goes beyond the standard set by the law, and prohi- bits any activity that creates the appearance of any- thing improper, anything that may embarrass the company or anything that may harm our corporate reputation. No assets of the company or other funds may be used to bribe or influence any decision by an officer, director, employee, or agent of another company, or any governmental employee or official.

It may be acceptable to entertain or provide minor gifts to guests or suppliers, as long as the expenses are reasonable, consistent with good business prac- tices, and do not appear improper. Any gift, enter- tainment, or benefit provided must be modest in scope and value. You should consult with your super- visor if you have any questions about whether any gift-giving activity is appropriate. Never provide a gift, entertainment, or benefit that contravenes any applicable law or contract term or that is large enough to influence, or appear to influence, the reci- pient’s business decisions.

Associates should not accept money, gifts, or excessive entertainment from any guest, contractor, or supplier at any time. For more information on gifts, entertainment, and related issues, see the Conflicts of Interest guidelines.

International laws strictly prohibit giving, promis- ing, or offering money, or anything else of value, directly or indirectly, to officials of foreign govern- ments or foreign political candidates in order to obtain or retain business or any improper business advantage. Never give, promise, offer or authorize, directly or indirectly, any payments to government officials of any country.

Conflicts of Interest

Associates must avoid any situation in which their personal interests conflict with the interests of Jextra. If a circumstance arises in which your interests could potentially conflict with the interests of Jextra, it must be disclosed immediately to both your supervisor and Human Resources for review. Associates should be vigilant about recognizing potential conflicts. You must always consider whether your activities and associations with other individuals could negatively affect your ability to make business decisions in the best interest of the company or result in disclosing

nonpublic company information. If so, you may have a real or perceived conflict of interest. Below is a list of potential conflicts of interest.

l Owning a substantial amount of stock in any com- peting business or in any organization that does business with us.

l Serving as a director, manager, consultant, employee, or independent contractor for any organisation that does business with us, or is a competitor—except with our company’s specific prior knowledge and consent.

l Accepting or receiving gifts of any value or favours, compensation, loans, excessive entertain- ment, or similar activities from any individual or organization that does business or wants to do business with us, or is a competitor.

l Taking personal advantage of a business opportunity that is within the scope of Jextra’s business—such as by purchasing property that Jextra is interested in acquiring.

Related Party Transactions

Employees and immediate family or household mem- bers may not serve as a supplier or customer of the Company, or otherwise engage in business dealings with the Company, without the written consent of a member of the Executive Management Team. You or a member of your immediate family or household may not accept business opportunities, commissions, or advantageous financial arrangements from a cus- tomer, supplier, or business partner of the Company. You may not purchase for personal use the goods or services of the Company’s suppliers on terms other than those available to the general public or estab- lished by Company policy. You may not take advan- tage of any business opportunity that you learn about in the course of your employment.

Questions:

1.What cross-cultural differences may be at play in the Jextra case? What factors are motivating the key players in this case?

2. Regarding the requests for roads and schools, does Chong understand exactly what the Mayor has asked of him? Is he correct to assume that this may be a request for a bribe? What are Chong’s options as to how to proceed? What are your concerns for Chong going ahead with a contribution to the school? What are your concerns for Chong refusing to contribute?

3. Considering the need to be a manager with a global mindset, what should Chong do with his suspicions regarding Alam?

In: Operations Management

On April 2, 2017, Elon Musk announced that Tesla produced 25,000 cars in the first quarter,...

On April 2, 2017, Elon Musk announced that Tesla produced 25,000 cars in the first quarter, setting a new company record.1Within two weeks, Tesla’s market value zoomed past Ford Motor Company (which manufactured more than 1.5 million cars per quarter) and General Motors (which made more than 2.5 million cars per quarter) to become the most valuable U.S. car manufacturer.2Elon Musk used the occasion to needle his naysayers, writing on Twitter: “Stormy weather in Shortville.”3By most measures, Elon Musk was on a roll: Beyond promising to scale Tesla by a factor of 10 between 2015 and 2018, Musk was vowing to deliver fully autonomous driving and an automated car-sharing service.4To support hisaggressive plans, Tesla was constructing a giant battery factory in the desert outside Reno, Nevada. Everything about the factory was massive: when complete, it would be the largest building in the world.5This so-called “Gigafactory”would require $5 billion in investment and would ultimately produce 105 gigawatt hours (GWh) of battery cells per year, more than the entire capacity of the world’s li-ion(lithium ion) production in 2015.6Musk also wanted to turn Tesla into a renewable energy company.In the fall of 2016, Musk made another big bet by orchestrating Tesla’s acquisition of the rooftop solar installerSolarCity, where Musk was the chairman and largest shareholder. While the automotiveand solar businesses were starkly different, Musk insisted that they were part of Tesla’s goal of “accelerating the advent of sustainable energy.”7The Gigafactory plus SolarCity would transform Tesla from an automaker into what Musk called the “world’s only vertically integrated energy company offering end-to-end clean energy products to our customers.”8In his spare time, Musk wasalso the CEO of the commercial space flight company SpaceX. Musk insistedthat SpaceX would begin transporting people to Marsby 2025, achieving his stated goal of making humanity a “multiplanetary species.”9Transforming transportation, pushing forward renewable energy generation and storage, and colonizing Mars: such was the scope of Musk’s ambition. Little wonder that a former colleague said that “Elon thinks bigger than just about anyone else I’ve ever met.”10Even though Tesla and SolarCity were unprofitableand burning cash, for Musk the question was always: what’s next? For Musk’s board and shareholders, the question was different: was Musk, as his biographer put it, “a being sent from the future to save mankind from itself or a slick businessman dragging foolish investors along on grand cash-burning bets?”11This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets2Elon Musk’s VenturesElon Musk was born and raised in South Africa, and made his way to Canada in 1989 at the age of 17. Staying with relatives and working odd jobs, Musk enrolled in Queen’s University in Ontario and then transferred to the University of Pennsylvania, where he earned degrees in economics and physics. He began a PhD program in applied physics at Stanford, but dropped out in 1995 to start an online map and directory firm called Zip2 with his brother. They sold the company to Compaq for $300 million in 1999. Musk used the money from the sale to launch another startup called X.com, an online bank. In 2000, X.com merged with Confinity, another startup,which ran a money transfer service called PayPal. The combined firm took the name PayPal in 2001 with Musk as the CEO and largest shareholder until the firm was sold to eBay for $1.5 billion in 2002. SpaceXNot content with founding and selling two successful startups, Musk founded Space Exploration Technologies, better known as SpaceX, in 2002. He told a reporter in 2003 that “I like to be involved in things that change the world. The Internet did, and space will probably be more responsible for changing the world than anything else.”12Reaching Mars was the long-term goal, and Musk claimed in 2012 to be on track to get a manned spacecraft to Mars in 10–15 years. In the shortterm, however, SpaceX concentrated on the commercialization of near-Earth exploration.13Musk invested some $100 million of his own money in SpaceX and nearly lost it all when SpaceX struggled to achieve a successful test launch of its first rocket. By 2006, SpaceX had won contracts to take commercial and NASA satellites into space despite not yet launching a rocket. Its first three launch attempts ended in failure. By September 2008, SpaceX was on the brink of collapse. As a colleague recalled, “Everything hinged on that launch. Elon had lost all his money, but this was more thanhis fortune at stake—it was his credibility.”14The launch succeeded, however. Then, in July 2009,SpaceX had its first successful paying mission.15In May 2012, SpaceXbecame the first commercial firm to successfully dock a vehicle with the International Space Station (ISS), and later that year it delivered its first load of cargo to the ISS.16In late 2013, SpaceX carried out its first successful launch of a commercial satellite. SpaceX achieved another milestone in December2015, when it successfully landed a rocket after launch.Musk saw reusable rockets as an essential step toward making spaceflight truly affordable. SpaceX executives estimated that reusing rockets could cut its launch prices by 30%, from around $61 million to $43 million per launch.17SpaceX advanced further toward this goal in March 2017, when it successfully launched and landed a previously flown Falcon 9 rocket. Elon Musk was not the only high-profile technology entrepreneur to pursue ventures in space. Amazon founder and CEO Jeff Bezos, the second-richest person on Earth, founded spaceflight company Blue Origin, which directly competed with SpaceX. In November 2015, Blue Origin was the first company in history to successfully launch and land a rocket during a mission to space, proving to the world that reusable rocket technology could work.18As of March 2017, Blue Origin was focused on launching its first crewed flight into space and building heavy lift rockets to further compete with SpaceX. In order to ensure the company had enough money to accomplish its goals, Bezos pledged to sell $1 billion of his Amazon stock each year to finance Blue Origin.19Despite these successes, launching rockets into space remained a risky activity, and SpaceX had lost a few rockets and payloads over the years. On September 1, 2016, a SpaceX rocket exploded on the launch pad at Cape Canaveral. While no one was hurt, the loss was a particularly high-profile one This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Elon Musk’s Big Bets717-4313because the satellite on board was to be used as a part of Facebook’s effort to bring Internet access to regions of Africa, the Middle East, and Europe.Such setbacks had a significant financial impact on SpaceX: in 2015, SpaceX’s revenue declined 6% after multipleyears of strong growth, and the company recorded a wide operating loss of $260 million following multiple years of small but positive operating income (see Exhibit 1). An early 2015 funding round valued SpaceXat approximately $12 billion, making it oneof the most valuable venture-backed private companies in the world.20Meanwhile, the revenue generated by SpaceX’s success in near-Earth missions provided the capital to continue working toward the ultimate goal of regular space travel to Mars.While SpaceX sought to address Musk’s dreams in the stars, he also had great ambitions for revolutionizing travel on and under the Earth’s surface. The Hyperloop, The Boring Company, and Neuralink In August 2013, Musk announced his idea for yet another revolutionary mode of transportation, dubbed the Hyperloop, which Musk claimed would be a faster and cheaper replacement for high-speed rail. Inspired by pneumatic tubes once used to shuttle documents around offices, it would transport passengers at speeds of more than 700 miles per hour in pods enclosed in underground steel tubes under near-vacuum conditions. Given his other obligations, Musk did not attempt to commercialize the idea, but published an open-source white paper describing the technology. A few startups picked up the idea and began developing the technology. One of them, a firm called Hyperloop One, held a demonstration in the Nevada desert in the spring of 2016, propelling a sled one-half mile down a test track at speeds of over 300 miles per hour. The startup had raised $150 million for the venture through January 2017.21At the end of 2016, Musk tweeted the launch of a Hyperloop-like venture called The Boring Company, which would build underground tunnels to combat traffic. Days after the tweet, he boughtthe website BoringCompany.com and staffed a SpaceX engineer to oversee the new venture.22Finally, in the spring of 2017, Musk started yet another company, called Neuralink, which sought to merge the human brain with computers. Musk planned to be CEO of both new startups. TeslaAlthough Elon Musk was the face of Tesla, he was not one of its founders. The company was started in 2003 by Silicon Valley engineers with the goal of producing a high-performance electric sports car. Musk joined the company in 2004 (two years after launching SpaceX) as its chairman and led its fundraising efforts, which netted $7.5 million in its first round. Musk became CEO in 2008, by which time he had invested $55 million of his own money. The company raised $260million in its 2010 IPO, the first American car company to go public since Ford in 1956.23At the end of 2016, Musk remained the largest shareholder in Tesla with a 20.8% ownership stake in the company. By March 2017, Tesla had raised over $9.3 billion in financing (see Exhibit 2a). Musk articulated a grand vision for Tesla and the broader electrical vehicle (EV) industry as the key to sustainable transportation, in the context of the looming disaster of climate change. As he put it in 2011, “[I]n order to change the infrastructure such that we avoid having some sort of catastrophic situation [acentury from now], we must act now, because we’re talking about changing what will probably be 2 billion cars. You don’t just change that overnight. A whole industry has to be born.”24Musk saw Tesla’s role as bringing that industry into being, with the long-term goal of creating an affordable electric vehicle. Because the cost of electric vehicle technology, particularly battery technology, did not permit the construction of an appealing mass-market electric car in the early 2000s, Tesla and Musk decided to enter the market at the high end and move down-market over time. Musk, tongue-in-cheek, revealed This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets4Tesla’s “secret plan”in 2006: “1. Build sports car; 2. Use that money to build an affordable car; 3. Use thatmoney to build an even more affordable car.”25True to the plan, Tesla’s first production vehicle, released in 2008, was a high-performance and high-priced sports car called the Roadster. Tesla only manufactured 2,500Roadsters,but it demonstrated that an electric car could deliver superior performance. The 300 horsepower Roadster went from 0to 60 in 3.7 seconds, had a top speed of 125 mph, and sold for about $110,000 in 2009. Tesla’s next vehicle was a luxury performance sedan called the Model S that was released in 2012 and designed to compete withMercedes, BMW, and Audi. It was priced starting at $70,000, although optional features (such as a larger battery to provide longer range) could push the price well past $100,000. While not by any means a truly “affordable”car, total Model S sales rose from under 5,000 in 2012 to150,000 by September 2016.26Initial reviews for the Model S were very positive. In 2013, Consumer Reportsgave the first model its highest rating ever, a 99 out of 100, and Motor Trendnamed the Model S its Car of the Year. Two years later,Consumer Reports gave an all-wheel-drive version of the Model S a score of 103 out of 100 for its combination of power and efficiency, prompting itto rescale itsscoring systemto bring the Model S down to a perfect 100. Surprisingly, reliability problems with the Model S led Consumer Reportsto revoke its recommendation in late 2015, citing “a worse-than-average overall problem rate”based on a survey of 1,400 Model S owners.27Tesla’s reputation suffered a further blow when threeTesla vehicles were damaged by battery fires in 2013, caused when the battery pack, which was installed in the car’s undercarriage, was damaged by striking roadway debris. Although no one was hurt in the accidents and Tesla pointed out that fires happenedat a far higher rate in gasoline-powered cars, the fires raised potentially damaging concerns about battery safety. Tesla’s stock fell nearly 4% on the news,and the National Highway Traffic Safety Administration (NHTSA) opened an investigation. In response, Tesla announced in early 2014 that it would modify the Model S to raise its ground clearance at highway speeds and that it would reinforce the vehicle’s underbody armor in order, in Musk’s words, “to bring this risk down to virtually zero.”28The NHTSA subsequently closed its investigation, saying that “a defect trend has not been identified.”29Safety concerns were renewed, however, when a Model S caught fire while charging at a supercharger in Norway in January 2016, completely destroying the vehicle. Tesla, which ultimately traced the cause to a short circuit, insisted this was an isolated incident and pointed out that vehicles had been charged at supercharging stations 2.5 million times without incident. Norwegian officials concluded that it represented an isolated event.30Tesla released its next vehicle, an SUV called the Model X, in late 2015, and it had sold and delivered about 37,000of the vehicles by March 2017.31Like the Model S, it received rave reviews for its performance, but also faced quality issues in the early months after its release, including problems with the vehicle’s unique falcon-wing rear doors and, more seriously, a faulty seat latch that in some cases allowed the rear seats to fold forward during a collision, which led to arecall of 2,700 vehicles in 2016.32Shortly after the launch of the Model X, Tesla announced the availability of a package of self-driving features, which it called “Autopilot.”The system used cameras, radar, GPS, and other sensors to provide semi-autonomous highway driving, keeping the car in its lane, changing lanes when necessary, and maintaining a safe following distance.Musk and Tesla described the system as a “public beta,”recommending that drivers keep their hands on the wheel and remain alert and readyto take control at all times. It soon became clear that drivers were not heeding such warnings, posting videos of themselves reading or watching videos while letting the car drive itself.33In May 2016, a Tesla driver was killed while driving in Autopilot mode when neither the car’s sensors nor the driver detected a tractor-trailer crossing the highway and the vehicle collided at full speed with the trailer. The Tesla driver was reportedly watching a movie at the time of the crash.34Tesla responded by releasing This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets102016, it had a range certified by the EPA at 238 miles and an estimated sale price of about $37,500.87In 2015, Audi, Mercedes, and Porsche announced plans for electric luxury vehicles that would compete with the Model S and Model X.88EV manufacturers faced unavoidable trade-offs between cost and rangeof batteries. Tesla had, with the Model S and Model X, chosen to maximize range by equipping them with a large battery:a 70 kWh or 85 kWh battery delivered an EPA-estimated range of 240 to 265 miles,respectively, on a single charge. In 2016, Tesla announced the availability of 100 kWh battery packs for both vehicles, pushing the estimated range of the Model S over 300 miles.89But that range came at a cost: the size of the battery contributed heavily to the vehicles’price, which could be as high as $135,000. Other manufacturers had opted to sacrifice range to cut costs. Nissan’s Leaf, for example, originally came with a24-kWh battery that gave the car a range of 84 miles per charge, while BMW’s i3 had a 22-kWh battery that delivered a range of 81 miles.90Offerings from Volkswagen and Mercedes similarly had smaller batteries with ranges between 70 and 90 miles. Tesla and other automakers partnered with major technology companies, including NEC, LG Chem, Samsung SDI, and Panasonic, to supply battery technology for their vehicles. Early in its history, Tesla had made the choice to construct its battery from existing industrial-grade li-ioncells manufactured by Panasonic, rather than build or outsource a battery specially designed for its vehicle, as other EV manufacturers had done. The form factor cells used by Tesla were slightly larger than an AA battery and were commonly used in consumer electronics. Tesla worked with Panasonic to optimize the cells for its vehicles.Energy StorageIn addition to electric vehicles, energy storage for residential, business, and utility use was a major potential market for battery technology. The widespread adoption of renewable energy sources such as wind and solar would require significant increases in storage capacity. Falling renewable energy costs(the cost of solar panels had fallen over 85% between 2007 and 2014)had led to increaseduptake around the world.By 2015, the world was adding more renewable generating capacity than that of gas, coal, and oil combined. In many European countries, wind and solar accounted for over 20% of electricity generation, and Germany had set a target of getting 80% of its energy from renewables by 2050.91To reach such goals, renewable energy generation would have to be paired with large-scale storage capacity, most likely in the form of batteries, allowing energy generated by solar panels or wind turbines to be stored for use when the sun was not shining or the wind was not blowing. As well as facilitating renewable energy use, load-balancing for electric utilities was another potential application; massive batteries could permit utility companies to avoid the necessity of firing up so-called “peaker” power plants to meet peak demand. Instead, utilities could draw power from batteries at times of peak demand and recharge them when demand was low. As Musk put it in 2015, “you can basically, in principle, shut down half of the world’s power plants if you had stationary storage.”92Tesla saw this as an important secondary market for its batteries; in fact, Musk estimated in 2015 that the long-term capacity demand for stationary energy storage would be roughlydouble the demand for batteries for electric vehicles.93Indeed, in September 2016, Southern California Edison announced it would purchase 20 megawatts of Tesla batteries to plug into one of its substations, charging them up during times of low usage and discharging them at times of high demand.94To take advantage of the energy storage market, Tesla announced in early 2015 its Tesla Energy suite of battery packs, designed to provide stationary storage for residential, commercial, and utility-scale applications. The residential product, called Powerwall, was designed for load-shifting (charging This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Elon Musk’s Big Bets717-43111when rates werelower and discharging when rates werehigher), to provide backup power during outages, and to be used in conjunction with rooftop solar applications, storing surplus solar energy for use when the sun was not shining. The Powerwall battery pack provided 6.4 kWh of energy storage, at a price of approximately $3,000. Multiple battery packs could be installed together for greater capacity if needed.In October 2016, Tesla unveiled the Powerwall 2, along with solar roof-top panels that integrated directly with the energy storage system, at an event in Los Angeles. The new Powerwall for residences had more than double the capacity of the first edition (14 kWh) and contained a built-in power inverter (a previously needed separate piece of hardware). The second edition was also priced higher at $5,500. Although the residential system garnered the most attention, Tesla executives anticipated that commercial and utility-scale applications would be much larger; Musk estimated that 5–10 times more capacity would be deployed at industrial and utility scale than at the consumer scale. A few months after the launch of Tesla Energy, Tesla CTO Straubel said that about 70% of reservations had been for the industrial-scale Powerpack and 30% for the residential-scale Powerwall.95Musk claimed the demand for Tesla’s energy storage solutions had been “staggering”in the first few months after announcing the product. By the end of the second quarter of 2015, Tesla reported that it had received more than 100,000 battery reservations, worth $1 billion if they turned into sales (whichMusk admitted they might not).96Musk insisted that, in order to realize the goal of transitioningthe world’s electricity generation to renewable sources, Tesla hoped other battery companies would join Tesla in building “Gigafactory class operations of their own.”He also said that Tesla would continue its policy of “open-sourcing”its information technology related to the Gigafactory and battery manufacturing.97The opportunity to manufacture batteries for various energy storage solutions, whether targeted for electric vehicles or renewable energy, demonstrated such great potential to Elon Musk that he made the bold move to further vertically integrate Tesla by merging the electric vehicle and battery manufacturing company with SolarCity, an alternative energy sourcing and storing company.Tesla’s Renewable Energy Division: Solar CityTesla and SolarCity haddeeply linked histories and close ties. SolarCity’s founders, brothers Lyndon and Peter Rive, were Musk’s cousins;and it was Musk,by all accounts,who encouraged them to look into the solar energy business in 2004. Musk became chairman and a major financial backer when SolarCity was founded in 2006,and was its largest shareholder when it went public in 2012. He remained chairman and the largest shareholder in 2016. In addition, Tesla CTO Straubel sat on SolarCity’s board, and the firms shared one additional board member.98For most of its history, SolarCity positioned itself as a solar energy provider; it purchased solar systems and installed them for residential, business, governments, and ultimately utility companies. It covered the cost of the installation and maintenance of the system and charged customers for the energy produced by the system. Residential customers could pay as little as zero for the installation and pay a monthly fee for the electricity produced by the system, typically ata cost lower than that charged by the local utility.99The option to transition to solar power with no up-front costs had spurred adoption, and the number of SolarCity installations grew rapidly, with the installed customer base reaching 300,000 by the time Tesla acquired the company in November 2016.100Revenues had also increased significantly, from $60 million in 2011 to $538 million for the year ending June 30, 2016. Despite rapidly increasing revenues, SolarCity’s debt levels grew at a much quicker pace (see Exhibit 6 for SolarCity financial data).This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets12Since SolarCity had not historically manufactured solar systems, it had benefited from the falling price of solar panels, which had enabled the cost of its rooftop installations to decline from $4.73 in 2012 to$2.84 per watt of generating power in 2016. In 2014, however, SolarCity acquired panel maker Silevo. The acquisition made SolarCity, in the words of Peter Rive, “the most vertically integrated solar company in the world.”101To that end, SolarCitybegan construction on a $750 million factory in Buffalo, New York,where it would manufacture solar panels in 2017. SolarCity officials claimed that the new panels would be as much as 30% more efficient than the commodity solar panels it was currently purchasing. These efficiency gains, combined with a simplified manufacturing process and the scale of production, had the potential of even further reducing the cost of residential solar installations to $2.50/watt.102Declining costs for producing solar translated into greater competition for SolarCity. The residential and commercial markets for solar installation were both highly competitive. According to one analyst, the top 10 residential solar installers in 2015 represented 58% of the market, with SolarCity leading at 35% (Vivint Solar was second at 11%). On the other hand, the top 10 producers in the commercial market represented only 42%, with SolarCity leading at 14% (SunPower was second at 7%). “The fragmented commercial developer landscape is largely the result of bottlenecks in the customer origination process that make it difficult for any individual player to consistently grow,” said noted one research analyst. SolarCity would need to defend its lead position among two different sets of competitors,while at the same time, barriers to entry were falling.103To do so required high spending; SolarCity’s sales, administrative, and research costs were $438 million in the first half of 2016, 42% greater than revenue of $308 million.104Such a high level of spending meant that SolarCity needed to find a solution to its continuing need for financing. Further indicating its commitment to the renewable energy business, Tesla first announced in June 2016 a proposal to acquire SolarCity. The acquisition offer was all-stock, in which each share of SolarCity would be exchanged for a fraction of a share in Tesla. This exchange ratio of stock represented a value of $26.50–$28.50 per share of SolarCity and a total equity value of $2.6–$2.8 billion. Tesla’s shareholders did not react positively to the announcement; the next day Tesla’s stock price fell by 10.5%, while SolarCity’s stock price rose 3.3%.105In the context of the SolarCity acquisition, Musk pointed out that renewable energy generation had long been a part of Tesla’s vision. “The point of all this,”he wrote in July 2016, “was, and remains, accelerating the advent of sustainable energy.”Indeed, the original “master plan”written by Musk in 2006, though focused on Tesla’s EV business, included the goal of becoming “energy positive”by providing “zero emission electric power generation options,”partly through partnership with the then newlyfounded SolarCity.106SolarCity had begun offering home energy bundles including solar panels and battery backup using Tesla’sPowerwall battery packs earlier in the year, and for Musk the merger was a natural progression. Musk argued that there was considerable overlap between the two companies’ potential customer bases, that Tesla’s design and manufacturing experience would benefit SolarCity’s solar panels, while SolarCity’s sales, distribution, and installation capabilities could serve Tesla customers.107Tesla claimed $150 million in cost synergies that would be unlocked in the merger (see Exhibit 7). JP Morgan’s research reporton the initial offer cast doubt on the customer overlap: “Absent a detailed explanation (at this time) we are struggling to see brand, customer, channel, product or technology synergies.”108(See Exhibits 8 and9.) Several analysts criticized the proposed deal as adding to Tesla’s already daunting challenges of scaling battery and vehicle production, but Musk insisted that Tesla would benefit from creating a “smoothly integrated and beautiful solar-roof-with-battery product. We can’t do this well if Tesla and SolarCity are different companies, which is why we need to combine and break down the barriers inherent to being separate companies.”109In anticipation of the completion of the merger, Musk announced a new solar roof product which replaced a traditional roof with glass tiles that contained This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Elon Musk’s Big Bets717-43113power-generating solar cells. Musk later claimed that Tesla’s solar roofing material would cost less than traditional premium roofing materials, even before factoring in savings from electricity generation.110SolarCity’s financial struggles also contributed to skepticism aboutthe proposed acquisition. The company struggled to become profitable and its operating losses were mounting—totaling nearly $980 million for 2014–2015, leading to considerable doubts about merging two companies that were steadily burning through cash, to the tune of an estimated $2.5 billion combined in 2016.111(See Exhibits 3b and6b for Tesla and SolarCity cash flow data.) The Wall Street Journal wrote that “Tesla latching on to SolarCity is the equivalent of a shipwrecked man clinging to a piece of driftwood grabbing on to another man without one,” while Forbes wondered how the already-indebted Tesla could carry SolarCity’s $5 billion long-term debt load.112Some critics argued the acquisition was aneffort to save SolarCity from its debt obligations, which grew 13x from 2013to 2016. “This deal has everything to do with debt. Call it a bailout, call it what you will....SolarCity is one bad economic downturn away from going belly up,” said one analyst.113Musk and Tesla responded by pointing out that SolarCity’s debt position and cash flows appeared to be worse than they really were because SolarCity used debt to finance rooftop installations that generated revenue over time through long-term leases and power purchase agreements.114Tesla revised its offer for SolarCity on August 1, 2016, in part due to SolarCity announcing that its 2016 forecast for megawatts installed would be 10% lower than previously expected. The new acquisition offer was about $300 million lower than the initial offer at $25.83 per share, representing a $2.6 billion equity valuation.115This price for SolarCity was 10x higher than the average revenue multiple of SolarCity’s publicly traded peers (see Exhibit 10). On the other hand, $25.83 per share was well below SolarCity’s all-time-high closing price of $86.14 set in February 2014 (see Exhibit 11).Corporate governance issues were also debated. The required number of shareholders from both companies to approve the merger was considerably lower than normal. JP Morgan’s research remarked: “The proposal requires the majority approval...from shareholders accounting for 39.44% of economic interest in Tesla(50% of shareholders excluding Elon Musk’s interest of 21.12%) and 38.73% of economic interest in SolarCity(50% of shareholders excluding Elon Musk’s interest of 22.54%).”116Due to conflicts of interest, several board members of both companies had to abstain from voting on the merger. On the Tesla side, Elon Musk and Antonio Graciasrecused themselves because they served on both boards. On the SolarCity side, five of eight board members recused themselves given their various connections to Elon Musk and Tesla. This left two independent board members, Donald Kendall and Nancy Pfund, who were solely responsible for approving the merger on behalf of the SolarCity board.117In the end, investors sided with Musk against the skeptics. After the boards of both companies approved the proposed merger in August, shareholders overwhelmingly approved the acquisition in November, with over 85%of Tesla shareholders voting in favor of the deal.

What are the key environmental challenges Elon Musk saw as opportunities? How did he address those challenges in different businesses?

Why do you think that Tesla, with a shorter history, significantly smaller sales and virtually no history of profits was valued higher than the other American car makers? Should there be different performance metrics for startups, such as Tesla?

How are the different businesses of Elon Musk related or unrelated to each other? Would it make sense for Elon Musk to put different businesses into one corporate umbrella or would he be better off running them separately?

If Elon Musk had to divest one of the various businesses, which would you recommend him? Why? How would this divestiture help him increase performance and investors’ confidence?

In: Operations Management

This case study was developed as a joint effort by the Center for Audit Quality, Financial Executives International, The Institute of Internal Auditors, and the National Association of Corporate Directors

1. 1. Summarize the facts of the case.

2. 2. Describe the strategy (ies) of the company, and how they affected its culture.

3. 3. What audit risks were indicated as described in the case? i.e., what red flags are described that might affect your assessment of risk? Provide potential audit responses for each, using the fraud triangle where appropriate.

4. 4. Whom do you “blame” for the situation? Support your answer with specifics from the case.

5. 5. Did the audit partner act appropriately once the questionable journal entries were discovered? Under auditing standards, what is the responsibility of the auditor when a potential fraud is discovered (cite the literature – AICPA and PCAOB)

6. 6. Suppose the audit partner met with the CFO and just accepted his responses. What ethical issues might be raised (based on what we covered this semester)? (cite the literature – AICPA and PCAOB)

7. 7. Did the board and CEO act appropriately once the questionable journal entries were discovered and discussed with the partner? What is your opinion on the board – its composition and expertise? Did you note any governance issues?

About this case study:

This case study was developed as a joint effort by the Center for Audit Quality, Financial Executives International, The Institute of Internal Auditors, and the National Association of Corporate Directors. These four organizations have formed the Anti-Fraud Collaboration to actively engage in efforts to mitigate the risks of financial reporting fraud. The Collaboration’s goal is to promote the deterrence and detection of financial reporting fraud through the development of education, programs, tools and other related resources.

For more information about the Anti-Fraud Collaboration and its resources please visit www.AntiFraudCollaboration.org.

Jack Brennahan had his dream job. He had always wanted to head a manufacturing company and five years earlier he received that opportunity at Hollate when he was promoted from the CFO position. He enjoyed the work, the exciting environment he had helped create, and the people around him. As CEO, however, Brennahan understood that the buck stopped with him. He took his responsibilities seriously both in running a successful business and ensuring that the business met all regulatory requirements and ethical expectations of being a good corporate citizen. He never wanted to be ashamed of anything he read in the newspaper about Hollate. Brennahan, however, had just received a call from Cara Porcini, Hollate’s external auditor, followed immediately by a call from Mike Soltany, Hollate’s audit committee chair. They had news that stopped him cold.

Hollate

Hollate began manufacturing products for the home construction industry in the 1950s. For most of its history it comprised one division that made windows and doors for the Southeastern region of the United States. These products were sold under several privatelabel and store brand names. Seven years earlier, two years before Brennahan became CEO, Hollate acquired a Midwestern door and window manufacturer that also had a division that made roofing products. The acquisition enabled Hollate to gain access to new geographic and product markets, and also gain economies of scale in management and in raw material purchasing. Following this acquisition, Hollate held an initial public offering (IPO) and became a public company. Hollate used proceeds from the IPO to acquire a manufacturer of home siding products, a manufacturer of prefabricated sheds and garages, and two other smaller home construction product businesses.

In recent years a downturn in the housing sector impacted the entire home construction industry, including the manufactured products segment. Hollate had taken a hit in both its revenue growth and profit margins, but overall it had fared better than its peers. In hindsight, Hollate might have overpaid for that first acquisition which had occurred before the downturn. Its subsequent acquisitions, however, were made on favorable terms as they came after the early days of the downturn had driven down the valuations of many manufacturers.

Hollate now had 14 divisions throughout the U.S. and Canada. It had 2,100 employees, sales of $1 billion, profit margins in line with historical industry norms, and a market capitalization of approximately $1.5 billion. With one or two exceptions, each division was profitable and was maintaining market share.

CEO Jack Brennahan and the Management team

Brennahan had joined Hollate ten years earlier as CFO after working his way through several management positions and promotions at two other firms. While his background was in finance and accounting, he always considered himself a general manager. As CFO, Brennahan had played a leading role in integrating Hollate’s first acquisition and making it a success both operationally and financially. He also played a leading role in taking Hollate public and identifying its other acquisitions. When the previous CEO retired, Erik Hanloon, Hollate’s Board Chairman, saw Brennahan as the ideal candidate to lead Hollate’s continued growth. As CEO, Brennahan, with Hanloon’s support, spearheaded Hollate’s last four acquisitions.

Shortly after becoming CEO, Brennahan conducted a search for a CFO using a respected recruiting firm. Because Brennahan planned to continue to grow the company, he wanted a top-notch CFO with skills beyond what Hollate might need at present. In particular, he wanted someone with significant public company experience, something the other members of the top team lacked. Brennahan reflected that if he was applying for the CFO position today, he might not make the cut. In the end, Brennahan hired William Blackburt.

Before coming to Hollate, Blackburt had served as CFO of a manufacturer that had grown through acquisitions, but had reached the limits of its growth some years earlier. Because of this, he was looking for a new opportunity. Overall, Blackburt had 25 years of experience after earning his MBA and he was also a CPA. A former colleague called him extremely intelligent and hardworking—someone who was the first to arrive in the morning and the last to leave at the end of the day. The colleague also noted that Blackburt had “nerves of steel” and kept his cool under the most pressure-filled circumstances.

Blackburt believed that Hollate would not find many candidates with his level of experience directly aligned with the company’s needs. When he was offered the job, he negotiated hard for a compensation package that included significant bonus opportunities. In particular, his bonus levels were tiered so that higher awards kicked in when Hollate reached higher revenue growth levels. Under the most favorable scenarios, Blackburt’s bonus could be as high as his base salary—literally doubling his cash pay. He received no bonus at all if the company failed to meet its lowest tier targets. His pay package also included longterm incentives in the form of restricted stock. Blackburt’s contract, which he had negotiated prior to the start of the economic downturn, was closely linked to Hollate’s acquisition strategy. Because home construction was historically not a high-growth industry, it would be unlikely for Blackburt to earn even the lowest tier bonus— and essentially impossible for him to earn a higher-tier bonus—if Hollate did not make any acquisitions.

In watching these negotiations, Brennahan liked Blackburt’s aggressive nature and can-do attitude and felt that Blackburt would be a big help to him in growing the business into a leading national competitor. After finalizing Blackburt’s employment contract, the board’s compensation committee restructured Brennahan’s contract to reflect similar targets.

In addition to Blackburt, Brennahan had three others on his top team: chief operating officer Robert Sojohn, marketing and sales vice president Stan Rellon, and general counsel Margaret Mallie. Sojohn had joined Hollate to work in the company’s original manufacturing plant right after earning an undergraduate degree in engineering. In the 18 years since, he had held a variety of engineering and operational positions before being promoted to the COO position just prior to the first acquisition. Sojohn had the longest tenure at Hollate but was the youngest member of the top management team and the only one not put in his position by Brennahan.

Rellon joined Hollate nine years earlier in the marketing department. He had previous experience in marketing and sales and had done well at Hollate. Rellon’s predecessor left the company after being passed over for the CEO position. Brennahan promoted Rellon rather than conduct an external search. Mallie had been with Hollate for three years and was the company’s first general counsel. At Hollate, she spent much of her time on contracts and legal matters relating to customers, but she also worked closely with the outside firm that Hollate relied on to handle acquisitions and other legal work.

Company Strategy

Under Brennahan’s leadership, Hollate was pursuing a growth-through-acquisition strategy. The industry was undergoing significant consolidation and Hollate was well positioned to take advantage of this trend as an acquirer. Although he viewed the industry downturn as a setback that made financing new acquisitions more difficult, and he acknowledged the need to focus on efficient operations, Brennahan remained committed to growth through acquisitions. In this regard, Brennahan considered himself eager, but cautious. He did not want to get Hollate into any deals it could not handle or afford.

Brennahan planned to jumpstart Hollate’s growth as market conditions improved by making additional acquisitions with an eye towards filling in gaps in its product lines and geographic coverage. For example, Hollate was a leading supplier of doors and windows in the Southeast and Midwest, but was only a modest player in the Northwest. Yet it was a leading supplier of prefabricated sheds in the Northwest and Midwest, but had no shed operations in the Southeast. To fund its acquisitions strategy, Hollate maintained a $150 million line of credit. Its agreement with the bank included several stringent covenants, including EBITDA (earnings before interest, taxes, depreciation, and amortization) targets.

The top team spoke regularly about the growth strategy and while they all supported it, they each had a somewhat different perspective. Brennahan was looking to find “good fits” that improved Hollate’s market position. Sojohn enjoyed figuring out how to most efficiently organize all the different manufacturing plants and when he thought about acquisitions he looked at them as opportunities to improve how things worked. Rellon believed that a larger operation would improve Hollate’s negotiating position with the large, national retailers. Blackburt seemed most excited by finding and negotiating the next deal. Overall, Blackburt was the most aggressive supporter of making acquisitions and overcoming whatever obstacles hindered progress and he spoke often about his belief that Hollate could become one of the largest home products manufacturers in North America. Sojohn and Rellon were excited about the growth plan, but looked to the CEO and CFO to take the lead. Somewhat behind the scenes, Chairman Hanloon agreed with Brennahan’s plans and was a supporting voice for him on the board.

Board Of Directors

Erik Hanloon had been a member of Hollate’s board for 12 years and its chair for six. When he first joined the board, Hollate was a steady performer. He sometimes thought that “boring” might be an apt description for Hollate at that time and there were certainly no grand plans for acquisitions or public offerings in that era. Hanloon felt that the whole atmosphere at Hollate changed with the arrival of Brennahan and he came to believe that Brennahan was just what the company needed. After the success of the first acquisition and subsequent IPO, Hanloon played a leading role in promoting Brennahan to the CEO position. His positive impression of Brennahan was apparent to the other directors on the board and they respected his views. Hanloon had more executive experience than any other director, and the second longest tenure on the board.

In total, the board had eight directors including the CEO. One director was a descendant of the company founder and a large Hollate shareholder, but had no managerial experience. Two directors had significant management experience. Brennahan had worked with these two directors earlier in his career and had recruited them to join Hollate’s board shortly after he was named CEO. Two other directors had joined the board as part of two of Hollate’s acquisitions and had been chief executives at those companies. These two were also large shareholders. The remaining director, Mike Soltany, served as audit committee chair. Soltany had been identified by an outside recruiter and he had no previous relationship with Hollate.

Board Committees

At the time of its IPO, Hollate reorganized its board to include the three standard board committees: audit, compensation, and nominating and governance, all required under the listing requirements of the company’s stock exchange. Audit Committee Chair Mike Soltany joined the board two years earlier as a member of the audit committee and he had served as that committee’s chair for the past year. Soltany had served on the audit committee of another public company board, but this was his first stint as audit committee chair. While he was not a CPA, Soltany had a background in finance and was the designated financial expert on the audit committee. The two other members of the audit committee were the acquaintances Brennahan had recruited to the board. They were financially literate (could read and understand financial statements) but not particularly well-versed in accounting rules, even the most basic ones governing matters such as recognition of revenues and expenses.

One of the first steps Soltany took when he became chair of the audit committee was to select a new external auditor. While he had no cause to doubt the previous auditors, a smaller regional firm that had served Hollate well for ten years, he reasoned that because Hollate had grown significantly, and planned to continue to grow, a larger national accounting firm would bring new capabilities, experience, and geographic reach. Other than one comment by CFO Blackburt, who insisted that the previous firm was a good fit for Hollate, no one objected to the change. Soltany also believed that the board, and the audit committee in particular, needed some instruction in basic accounting matters. He brought this up to Brennahan, who was receptive to the idea. In the press of other concerns, however, this director education never took place.

Internal audit Function

The internal audit function at Hollate had not grown as fast as the company itself and currently had four people. Jonas Durand, chief audit executive (CAE), had been with Hollate for 15 years. Early in his career, Durand had worked for five years as an accountant for another manufacturing company and also for a retail company in junior level positions. He joined Hollate’s internal audit function under an experienced CAE and quickly learned the ropes of internal audit and Hollate’s business. One year after Hollate made its first acquisition, Durand’s predecessor moved out of state and left the company. Durand took over the position.

While Durand did not have a CPA or experience in internal auditing beyond Hollate, he had a deep understanding of the business and had taken a variety of professional development courses since becoming an internal auditor. The lead engagement partner of the previous external auditing firm once commented that what Durand lacked in professional certifications he made up for in his tenacity and his mindset for the auditing role: he liked to ask questions and test assumptions, he kept work relationships on a professional level, and above all, he was not easily intimidated.

The internal audit function periodically evaluated internal controls for each division and selected sites for testing on a rotating basis. Durand’s understanding of internal controls was based on standards put forward by the leading professional standards group, and included a broad understanding of material financial risk, including the risk of financial statement fraud. Internal audit mainly tested internal controls from an operational perspective, rather than testing financial reporting. Durand reasoned that the CFO, audit committee, and outside auditor could play the primary watchdog role there.

Historically, the internal audit function reported directly to the CFO. When the company went public, it also received a dotted line reporting relationship to the board’s audit committee. With the exception of the work related to special requests from the CFO, internal audit sent its written reports to both the CFO and the audit committee chair. Durand and Blackburt had talked about one day having internal audit report directly to the audit committee, but making that change did not appear to be an immediate priority for Blackburt. In practice, Durand regularly met with Blackburt and rarely with the audit committee. The dotted line reporting to the audit committee meant little more than sending reports. When Durand had a question about something he did not understand he went to Blackburt. When the audit committee asked to speak to the internal auditor, Blackburt assured the directors that he was in frequent communication with Durand and could convey Durand’s findings directly to the committee on Durand’s behalf.

As Hollate had grown, Durand enjoyed digging into the new businesses. His main hurdle, however, was the small size of the internal audit function, which limited how much it could do and frequently left it behind on its divisional reviews. When he first became the CAE he hired a junior level auditor who had several years of auditing experience at a public company. That person had further developed his skills under Durand and after six years the two worked well together. Durand had received verbal assurances from CFO Blackburt that he could hire another accountant with internal audit experience when business growth resumed or before the company made any new acquisitions. For the time being, however, Durand found it difficult even to do his normal internal audit work. Blackburt had him doing several acquisition related projects that made it difficult for him to execute his audit plan.

External auditor

LPS LLC (LPS) was an established national public accounting firm with a good reputation in the marketplace and was fully capable of auditing an issuer with multiple divisions and locations. It did not have a significant presence outside of the U.S., but could call on resources of non-affiliated audit firms that had non-U.S. operations. Much like Hollate, most of LPS’s foreign work was in Canada and that part of its audit business was growing.

Before LPS agreed to take on Hollate as a client, Cara Porcini, LPS’s lead engagement partner for the Hollate audit, had contacted Hollate’s previous external auditor. She found the previous auditor had no significant concerns regarding the integrity of Hollate’s management and had had no significant disagreements with management over accounting principles or audit procedures. Furthermore, the previous auditor said it was not aware of any fraud or illegal acts, and that all of Hollate’s financial statements had been filed on time with the SEC.

Culture

Brennahan had influenced the culture at Hollate in a way that matched his personality: hardworking, but friendly and social. And while competence and results mattered most to him, what also made the job satisfying for Brennahan was the work environment that had developed. In particular, he, his CFO Blackburt, COO Sojohn, and Rellon, the VP of marketing and sales, had developed positive professional and personal relationships. Everyone seemed to enjoy coming to work and joining the occasional friendly poker games and fishing trips on the weekends, which sometimes included managers beyond the top team. Various “fishing stories” were well known at the company offices.

At headquarters, there were few relational formalities. Everyone treated each other as equals, called each other by first names, and office doors were generally kept open. Managers took advantage of the open-door environment and frequently dropped by the offices of their colleagues to bounce ideas or seek help. This included Brennahan, who liked collaborating but did not micromanage; he tended to let his managers run their own areas.

The environment led to a sense of trust among most top managers at Hollate headquarters and a belief that they were all part of a team and working together for the same goals. Brennahan, who spent most of his time looking for potential acquisitions, and dealing with customers and investor relations issues, frequently used the word “trust” in meetings and speeches and he often told his managers he had confidence in them to do the right thing and what was best for Hollate. Formal accounting and control procedures were in place, but exceptions could be made for the good of the company. For example, if a $25,000 invoice needed to be paid quickly to ensure that a vendor shipped parts that would keep one of Hollate’s manufacturing plants running, senior managers thought little of overriding normal procedures—perhaps bypassing a step in the payment review process—to get the invoice paid on time.

The presidents and CEOs that had run the businesses that Hollate acquired had largely left the company. The managers who remained in the divisions tended to have strong operational or sales backgrounds. While they knew their businesses well, they still looked to headquarters for the nuances of public company reporting requirements. Headquarters tried to be welcoming when managers visited from the field. These visiting managers, however, came from different environments—generally nose to the grindstone working—and many did not quite know what to make of headquarters or its culture. When at headquarters, they tended to keep their visits short and focused on what they needed to get done.

The most significant cultural contrast was between management and the board of directors. Brennahan had occasionally invited different board members to attend a fishing trip, but none of them had taken him up on the offer. After a while, he mostly stopped trying, assuming that the directors wanted to maintain professional-only relationships. Directors were seldom seen at headquarters for anything other than formal meetings. Audit Committee Chair Soltany had received a few invitations and had politely turned them down. He was impressed by the track record of Brennahan and his team, but he noted to himself that he had never been a part of, or even seen, a management team as close professionally and personally as the one at Hollate. He had the impression that they were all friends and it would be difficult to be a part of that as a director. He wondered how he would approach a senior manager if he wanted to speak confidentially about a sensitive matter involving a colleague.

The board and management, despite their different styles, set a unified, if low key, tone for ethics. When Hollate went public, it introduced a compliance program and code of conduct aimed at making clear the ethical expectations for employees. The first drafts of these documents were written by an outside consulting firm. Brennahan did not have much experience with such programs and so he made few changes to what the consultant proposed.

He had initially planned to make these programs very visible, but the excitement of the public offering, the acquisitions, and managing the downturn put them on the back burner. In the end, each employee received a written copy of the code of conduct and it was posted on the company website. Individual managers were supposed to discuss it with each employee as part of their annual performance reviews, but despite good intentions this did not always happen. Overall the program received little attention. For example, Hollate had a whistleblower hotline system managed by an outside organization that sent reports to both the board’s audit committee chair and to the general counsel. General Counsel Mallie indicated she would seriously investigate any hotline tips, but since its introduction, the hotline had received very few calls and none of major importance.

Navigating the Downturn

The home construction industry had been in decline for several years: builders were constructing fewer homes, many homeowners had delayed or scaled back remodeling plans, and home sales, a frequent driver of remodeling, were below historical norms. While some industry watchers felt that the worst of the decline might be over, there were few signs of a return to previous sales levels.

When the downturn became evident, Hollate had responded by reducing costs, laying off some workers, and slowing production at its manufacturing plants. Brennahan, however, was more optimistic than most regarding the future of the industry. He believed that a turnaround would happen soon and he wanted to be well prepared for when that happened. This led him to make as few cuts as possible and instead look for efficiency gains. He encouraged his managers to look for ways to reduce spending that would not preclude a quick return to full capacity production.

To maintain revenues, Brennahan pressed his division heads to get out and close sales. He reminded them that Hollate had a great reputation as a supplier of quality products and that when retailers cut back, they could be convinced to cut back on suppliers other than Hollate. Blackburt backed this approach. When Blackburt spoke with divisional financial staff, he reminded them of Brennahan’s expectations and reiterated the need for them to reach their performance targets. Rellon pressed his divisional sales teams reminding them that the company’s larger size since its acquisitions should provide them with increased leverage when negotiating with its leading customers. Some division heads, however, felt that the talk coming out of headquarters left the impression that the company’s senior executives were so focused on obtaining results that they were ignoring the tough competitive climate in the field where people were worried about losing their jobs.

During the previous two years, raw material prices had increased sharply, but the decline in demand for housing products limited Hollate’s ability to pass along higher costs to customers. Because of Hollate’s strong position in its markets, it managed to grow its sales slightly despite the downturn, but due to rising costs it endured a steady decline in gross margins and overall financial performance. While Hollate was still outperforming its peers, its peers were performing poorly.

By the 4th quarter, the company was barely meeting the covenants related to the $150 million in debt financing it had secured the previous year to fund acquisitions. Blackburt became increasingly focused on the debt covenants. Under the debt agreement, Hollate had to meet certain quarter-toquarter requirements for EBITDA. If performance slipped further, and Hollate violated the covenants, the company would be forced to restructure its debt and put off any new acquisitions for the foreseeable future.

Stopped Cold

When Brennahan took the call from Porcini during the year-end audit and one week before the 4th quarter earnings were to be announced, he didn’t know what to expect. He quickly learned that the call was about some unexplained accounting transactions in the Storm Windows division. It seems that the external auditors from LPS had found some journal entries that they did not understand, yet when they took their questions to the Storm Windows controller, the controller was reluctant to answer. Further inquiries by the external auditors revealed a series of unsupported journal entries from Storm Windows. The entries appeared to increase inventory and reduce costs of goods sold during the 4th quarter.

This led Cara Porcini, LPS’s lead engagement partner, to contact CFO Blackburt. For the short time she had known Blackburt, she found him extremely competent and helpful. Porcini was surprised therefore when Blackburt’s explanation did not sufficiently clarify her questions about the entries. She thought about his response and felt that she must be missing something, so she went to meet with him a second time. This discussion was no better than the first. Blackburt explained that the accounting matters behind the entries were complicated, but he assured her there was nothing to worry about. Porcini did worry and she contacted Brennahan and Soltany.

After hanging up the phone, Brennahan was initially unsure what to think, but the more he reflected the more concerned he became. In his years at Hollate, he had never heard of a controller not cooperating with an external audit—such cooperation was expected. Even more perplexing was the lead auditor’s inability to get an answer from Blackburt. Blackburt was very experienced, knew Hollate’s financials better than anyone, and, Brennahan felt, was adept at making complex issues clear. If Blackburt could not explain something to Porcini, an experienced auditor and CPA, something was wrong. Brennahan’s next step was to speak with Blackburt himself. Brennahan found the situation puzzling and somewhat troubling, but he was confident that Blackburt would clarify matters.

Brennahan’s conversation with Blackburt did not go well. At first Blackburt gave a vague explanation of the entries, but then quickly expressed frustration and anger that he was being repeatedly questioned on the matter even though the books had always been clean and there were more pressing issues the company should be worried about. After finishing with Blackburt, Brennahan looked at the entries himself and could not make sense of them though he could tell that the amounts involved were significant, and he reported his impression to Soltany when he called him back about the matter.

In: Accounting

please type your response answer question # 1 1. 1. Summarize the facts of the case....

please type your response

answer question # 1

1. 1. Summarize the facts of the case.

2. 2. Describe the strategy (ies) of the company, and how they affected its culture.

4. 4. Whom do you “blame” for the situation? Support your answer with specifics from the case.

About this case study:

For more information about the Anti-Fraud Collaboration and its resources please visit www.AntiFraudCollaboration.org.

Hollate

CEO Jack Brennahan and the Management team

Company Strategy

Board Of Directors

Board Committees

Internal audit Function

External auditor

Culture

Navigating the Downturn

Stopped Cold

In: Operations Management

Based on the article below: Title: High fat diet and Endocannabiods. Question: Please write a summary...

Based on the article below:

Title: High fat diet and Endocannabiods.

Question: Please write a summary of the article, with a deeper understanding of the important informations on the high fat diet and endcannabiods. And list the Advantage and disavantage of a high fat diet and endocannabiods.

Article:

1. Introduction

Obesity is a growing public health concern that increases the risk of

inflammatory and metabolic disorders such as type 2 diabetes, fatty

liver, and pulmonary inflammation [1,2]. The incidence of obesity has

drastically increased over the past few decades. In a nationally representative

survey (National Health and Nutrition Examination

Survey, 2014) of adults in the US, the prevalence of obesity was 35%

among men and 40% among women, where linear trends significantly

increased for women between 2005 and 2014 [3]. The prolonged and

excessive inflammation associated with obesity has also been associated

with increases in certain cancers, cardiovascular disease, and Alzheimer's

disease [4,5]. While the mechanisms linking obesity and metabolic

disorders are not fully understood, several studies suggest that

alterations in lipid-mediated metabolism play a significant role [1,2,6].

These studies have led to the hypothesis that change in the blood lipidome

can be exploited to identify lipid markers as prognostic indicators

for obesity and type 2 diabetes [7].

Lipids are a diverse subset of biomolecules that are not only responsible

for energy storage and structural regulation, but also participate in complex signaling networks whose disruption results in

the pathogenesis of obesity and other ailments. A few studies have

identified several lipid and lipoprotein abnormalities among obese

patients [8,9]. For example, Hu, et al. reported decreases in HDL cholesterol

along with altered triglyceride levels in nondiabetic obese patients

[9]. Additionally, the role of dietary fat in obesity and influence

of fatty food intake on inflammatory responses are well-established

[4,10]. Obesity-associated inflammation is not restricted to impaired

lipid metabolism, but is also strongly linked with type 2 diabetes, as

obesity is associated with insulin resistance, which heightens the risk

for metabolic syndrome [11,12].

The higher prevalence of type 2 diabetes among adults supports the

assertion that aging is the precursor to insulin resistance [13–16]. While

insulin resistance, type 2 diabetes, and metabolic syndrome have been

studied within the context of age to some extent, including by us [17],

the effect of age on the lipidome and/or age-obesity interactions have

not received significant attention. However, two more recent studies

demonstrate that age exerts appreciable, lipid species-specific effects on

the brain lipidome [18] and, importantly, that age has profound effects

on the female reproductive system (oocytes) lipidome [19]. These

studies support the hypothesis that age-obesity interactions alter the

lipidome. In comparison to the lack of knowledge on the effect of

obesity and/or age on the plasma lipidome as a whole, it is known that

obesity can alter the levels of select lipid species. For example, increased

circulating endocannabinoids, especially 2-arachidonoylglycerol

(2-AG), have been associated with obesity in both humans and

laboratory animals, i.e [20,21]; however, it is not known how the endocannabinoid

system is altered within the context of age in the face of

high-fat diet consumption. The endocannabinoid (EC) system participates

in the control of lipid and glucose metabolism and dysregulation

of this system can occur following unbalanced energy intake [22]. Such

dysregulation often results in overactivity across various organs involved

in energy homeostasis such as intra-abdominal adipose tissue

[23]. Over-activation of the endocannabinoid system has been shown to

promote insulin resistance [6]. Additionally, the essential role of the EC

system in adipogenesis and lipogenesis has been reviewed in detail by

Silvestri and Marzo, et al. [22,23].

In this study, we further investigated the effects of dietary fat consumption,

age, and their interaction at the level of the lipidome using

shotgun lipidomics with electrospray ionization-mass spectrometry

(ESI-MS). Because of the paucity of data and the linear increase of female

obesity among US women in the most recent decade [3], we assessed

the blood lipid profiles of female C57BL/6 mice following HFDconsumption

for short (6 weeks), long (22 weeks), and prolonged

(36 weeks) periods to evaluate the persisting effects of feeding. To

compare lipid alterations with metabolic and liver regulation, markers

of liver homeostasis were assessed and correlations between them and

indices of glucose tolerance and insulin sensitivity with the blood lipidome

were determined. Circulating and liver levels of the two major

endocannabinoids, 2-arachidonoylglycerol (2-AG) and anandamide

(AEA), were also measured to determine the effects of HFD-consumption

and age on the endocannabinoid system.

2. Materials and methods

2.1. Animals

Experiments were performed with female C57BL/6 mice (Harlan,

Indianapolis, IN). The mice were housed (4–5/cage) and maintained at

22–24 °C with food and water available ad libitum on a 12 h light/dark

cycle in an AAALAC accredited facility throughout the study. All experimental

procedures were in accord with the latest National Institutes

of Health (NIH) guidelines and the study was approved prior to initiation

by the Institutional Animal Care and Use Committee (IACUC) of

the University of Georgia.

2.2. Dietary treatment

The diets and dietary treatment are described in detail in our recent

publication [17], where the body weight changes, metabolic and behavioral

effects of the same experimental paradigm are reported.

Briefly, 6–7 weeks old female mice weighing 16.0 ± 0.20 g

(mean ± SEM) were randomly divided into two groups (n = 8/group/

time point) and placed on either a low-fat diet (LFD; 10% kcal from fat,

D12450J, Research Diets, Inc., New Brunswick, NJ) or a high-fat diet

(HFD; 60% kcal from fat, D12492, Research Diets) for either 6, 22, or

36 weeks. The LFD diet (3.85 kcal/g) consisted of 70% carbohydrate,

20% protein, 10% fat, of which 23.5% were saturated fatty acids [SFA],

29.7% monounsaturated fatty acids [MUFA], and 46.8% polyunsaturated

fatty acids [PUFA]) (Suppl. Table 4). The HFD diet

(5.24 kcal/g) consisted of 20% carbohydrate, 20% protein, 60% fat, of

which 32.2% were SFA, 35.9% MUFA, 31.9% PUFA (Suppl. Table 4).

2.3. Blood, plasma, and liver tissue collection

Mice were sacrificed at three time points (6, 22 and 36 weeks);

considerations for the selection of these time points are explained in

detailed in Krishna, et al., body weights (BW) were recorded and liver

was collected and quickly frozen at −80 °C [17]. Blood (1 ml) was

collected via cardiac puncture and immediately split into two aliquots:

500 μl was placed in Na citrate-containing tubes, mixed thoroughly,

and the plasma was separated by centrifugation (3500 Å~g; 10 min;

4 °C). Harvested plasma was then aliquoted and placed at −80 °C until

its use for endocannabinoid and esterase activity analyses as described

in detail below. The other 500 μl of blood was immediately mixed, by

vortexing, with 1 ml of methanol:water (1.0:0.4 v/v) and then placed at

−80 °C until lipid extraction as described below. Liver (6, 22, and

36 weeks) samples were used for qPCR and endocannabinoid analyses.

2.4. Glucose tolerance test (GTT) and insulin sensitivity test (IST) areas

under the curve (AUCs)

Glucose tolerance (GTT) and insulin sensitivity (IST) tests were

performed after 5, 20 and 33 weeks on respective diets as described in

our recent study [17]. We used the blood glucose integrated areas

under the curve (AUC) in the GTT and IST tests, as calculated using the

trapezoidal method [24], to determine if mice's response to oral glucose

challenge or to insulin correlates with specific lipid metabolites (described

below).

2.5. Bligh-dyer blood lipid extraction

Phospholipids were extracted using chloroform and methanol according

to the method of Bligh and Dyer [25]. Briefly, blood samples

designated for lipidomics analysis were suspended in 1.25 ml of methanol

and 1.25 ml of chloroform. Tubes were vortexed for 30 s, allowed

to sit for 10 min on ice, centrifuged (213 Å~g; 5 min), and the

bottom chloroform layer was transferred to a new test tube. The extraction

steps were repeated a second time and the chloroform layers

combined. The collected chloroform layers were dried under nitrogen,

reconstituted with 50 μl of methanol: chloroform (3:1 v/v), and stored

at −80 °C until analysis.

2.6. Lipid phosphorus assay

Lipid phosphorus was quantified using the phosphorus assay [26].

400 μl of sulfuric acid (5 M) was added to lipid extracts (10 μl) in a glass

test tube, and heated at 180–200 °C for 1 h. 100 μl of 30% H2O2 was

then added to the tube while vortexing, and heated at 180–200 °C for

1.5 h. 4.6 ml of reagent (1.1 g ammonium molybdate tetrahydrate in

12.5 ml sulfuric acid in 500 ml ddH20) was added and vortexed,

followed by 100 μl of 15% ascorbic acid and vortexing. The solution

was heated for 7–10 min at 100 °C, and a 150 μl aliquot was used to

measure the absorbance at 830 nm.

2.7. Phospholipid characterization with electrospray ionization-mass

spectrometry (ESI-MS)

Lipid extract samples (500 pmol/μl) were prepared by reconstitution

in chloroform: methanol (2:1, v/v). ESI-MS was performed as described

previously [27–29] using a Trap XCT ion-trap mass spectrometer

(Agilent Technologies, Santa Clara, CA) with a nitrogen drying

gas flow-rate of 8 l/min at 350 °C and a nebulizer pressure of 30 psi.

The scanning range was from 200 to 1000 m/z on 5 μl of the sample

scanned in positive and negative ion mode for 2.5 min with a mobile

phase of acetonitrile: methanol: water (2:3:1) in 0.1% ammonium formate.

As described previously [30], qualitative identification of individual

phospholipid molecular species was based on their calculated

theoretical monoisotopic mass values, subsequent MS/MS analysis, and

their level normalized to either the total ion count (TIC) or the most

abundant phospholipid.

MSnth fragmentation was performed on an Agilent Trap XCT iontrap

mass spectrometer equipped with an ESI source. Direct injection

from the HPLC system was used to introduce the analyte. The nitrogen

drying gas flow-rate was 8.0 l/min at 350 °C. The ion source and ion

optic parameters were optimized with respect to the positive molecular

ion of interest. Initial identification was typically based on the loss of

the parent head group followed by subsequent analysis of the lysophospholipid.

In the event that neutral loss scanning could not confirm

the species, the tentative ID was assigned based on the m/z value and

the LIPIDMAPS database (http://www.lipidmaps.org).

2.8. Multivariate statistical analysis of blood lipids

Multivariate principal component analysis (PCA) was performed

using MetaboAnalyst 3.0 (http://www.metaboanalyst.ca/). Automatic

peak detection and spectrum deconvolution was performed using a

peak width set to 0.5. Analysis parameters consisted of interquartile

range filtering and sum normalization with no removal of outliers from

the dataset. Features were selected based on volcano plot analysis and

were further identified using MS/MS analysis. Significance for volcano

plot analysis was determined based on a fold change threshold of 2.00

and p ≤0.05. Following identification, total ion count was used to

normalize each parent lipid level, and the change in the relative

abundance of that phospholipid species as compared to its control was

determined. This method is standard for lipidomic analysis as reported

in our previous studies [27,29].

2.9. Liver endocannabinoid (2-AG and AEA) levels

2-AG and AEA were extracted from liver using a modification of the

method of Kingsley and Marnett (2007) [74]. In brief, ~0.05–0.1 g of

frozen liver tissue (exact weight recorded) was Dounce homogenized in

2:2:1 v/v/v ethyl acetate:hexane:0.1 M potassium phosphate (pH 7.0)

[total volume 5 ml; supplemented with butylated hydroxytoluene and

triphenylphosphine, 0.05% w/v each (antioxidants)] containing deuterated

standards for 2-AG and AEA (5.6 pmol d8-AEA and 518 pmol d8-

2-AG). The mixture was vortexed (1 min) and centrifuged to separate

organic and aqueous phases (1400 Å~g, 10 min). The organic layer was

removed, dried under a stream of N2 and residues dissolved in 2:2:1 v/

v/v water:methanol:isopropanol (200 μl). After filtration (0.1 μm),

10 μl of the resolubilized lipid was injected onto a Acquity UPLC BEH

C18 column (2.1Å~ 50 mm, 1.7 μm) equipped with VanGuard precolumn

(2.1 Å~ 5 mm, 1.7 μm). The mobile phase was a blend of solvent

A (2 mM ammonium acetate/0.1% acetic acid in water) and solvent B

(2 mM ammonium acetate/0.1% acetic acid in methanol). Analytes are

eluted with the following gradient program: 0 min (95% A, 5% B),

0.5 min (95% A, 5% B), 5 min (5% A, 95% B), 6 min (5% A, 95% B),

7 min (95% A, 5% B), 8 min (95% A, 5% B). The flow rate was 0.4 ml/

min and the entire column eluate was directed into a Thermo Quantum

Access triple quadrupole mass spectrometer (heated electrospray ionization

in positive ion mode). Single reaction monitoring (SRM) of each

analyte was as follows: 2-AG, [M +NH4]+ m/z 396.3 > 287.3; 2-AGd8,

[M+NH4]+ m/z 404.3 > 295.3; AEA, [M+ H]+ m/z 348 > 62;

AEA-d8, [M+H]+ m/z 356 > 63. Endocannabinoids were quantified

by measuring the area under each peak in comparison to the deuterated

standards and normalized on tissue weight.

2.10. Plasma endocannabinoid (2-AG and AEA) levels

Plasma levels of the two endocannabinoids 2-arachidonoylglycerol

(2-AG) and anandamide (N-arachidonoylethanolamine; AEA) were determined

using mass spectrometry. First, 50 μl of mouse plasma was

placed into a glass vial. Deuterated standards, 6 pmol AEA-d8 and

52 pmol 2-AG-d8 were added to each sample, followed by 2 ml of ethyl

acetate for extraction. The mixture was vortexed (1 min) and centrifuged

at 1400 g for 10 min. The organic layer (~1.5 ml) was transferred

into a clean glass vial and was dried under a stream of N2. The

residues were reconstituted in 1:1 v/v water: methanol (100 μl). After

filtration (0.1 μm), 10 μl of samples was injected onto an Acquity UPLC

system (Waters, Milford, MA) coupled to a TSQ Quantum Ultra tandem

mass spectrometer equipped with a heated electrospray (H-ESI) source

(Thermo Fisher). Chromatographic separation was carried out using an

Acquity UPLC BEH C18 column (2.1 mmÅ~ 100 mm, 1.7 μm) equipped

with a VanGuard precolumn (2.1 mmÅ~ 5 mm, 1.7 μm) at 40 °C using

column oven. The mobile phases used were water containing 0.1%

acetic acid (A) and methanol containing 0.1% acetic acid (B). Mobile

phase gradient conditions were as follows: hold at 15% A and 85% B for

0.5 min, linear increase of B to 95% in 2 min, hold at 95% B for 4 min,

decrease of B to 5% in 1 min and re-equilibrate for 2 min at the starting

conditions. The overall run time was 10 min and flow rate was 0.2 ml/

min. Eluate from the LC was directly electrosprayed into the mass

spectrometer using an electrospray ionization interface in the positive

mode. MS conditions were set as follows: spray voltage = 3500 V, vaporizer

temperature =350 °C, sheath gas= 25 units, auxiliary gas =2

and capillary temperature = 350 °C. Samples were run in positive

single reaction monitoring (SRM) mode and the following precursor-toproduct

ion transitions were used for quantification: 2-AG, [M+ H]+

m/z 379.2 > 287.1; AEA, [M+ H]+ m/z 348.2 > 287.2; 2-AG-d8,

[M + H]+ m/z 387.2 > 292.3; AEA-d8, [M+H]+ m/z 356.2 > 294.2. Scan time was

0.2 s per SRM, and the scan width was

m/z 0.01. Optimum collision energy and S-lenses conditions were determined

for each compound by using autotune software for each

analyte by post-column infusion of the individual compounds into a

50% A/50% B blend of the mobile phase being pumped at a flow rate of

0.2 ml/min. Xcalibur software was employed for data acquisition and

processing. For quantification, each calibration standard was prepared

ranging from 1 to 1000 nM by fortifying phosphate-buffered saline with

stock standards of 2-AG or AEA prepared in methanol. Quality control

samples were prepared at a concentration of 50 nM for each endocannabinoid

in triplicate. Weighted calibration curves were constructed

using 1/x as a weighting factor for 2-AG and AEA, respectively.

2.11. Plasma esterase activity

Plasma esterase activity was determined using the substrate paranitrophenyl

valerate, as previously described [31]. Production of p-nitrophenol

liberated from pNPV was monitored at 405 nm on a spectrophotometer

[32]. An extinction coefficient of 13 cm−1 mM−1 [33]

was used to convert the slopes of each activity curve to specific enzyme

activities. All enzymatic reaction rates were corrected for non-enzymatic

hydrolysis rates as we have described previously [31].

2.12. Real-time quantitative PCR (qPCR)

qPCR was performed on liver samples as described in [17,34].

Briefly, total liver RNA (20 mg tissue) was isolated using a GeneJET ™

RNA Purification Kit (Thermo Fisher Scientific, Pittsburgh, PA) and

quantified using a Take 3 plate and an Epoch microplate spectrophotometer

(Bio-Tek, Winooski, VT). RNA was converted to cDNA

using qScript cDNA SuperMix (Quanta Bioscience, Gaithersburg, MD)

and a Peltier thermal cycler (Bio-Rad, Hercules, CA). Using 3 ng of

cDNA per sample (with each sample run in duplicate), expression of

peroxisome proliferator-activated receptor alpha (PPARα), peroxisome

proliferator-activated receptor gamma (PPARγ), hepatic fatty acid

transporter (CD36), fatty acid synthase (FAS), acetyl-CoA carboxylase

(ACC), stearoyl-CoA desaturase (SCD), monoacylglycerol lipase (MGL),

cannabinoid receptor type 1 (CB1), cannabinoid receptor type 2 (CB2)

and 18S, was determined by qPCR using mouse-specific primers (Real

Time Primers, Elkins Park, PA) and SYBR Green-based master mix

(Qiagen, Valencia, CA). Amplifications were performed on a Mx3005P

qPCR machine (Stratagene) and treatment differences were calculated

as a fold change by the ΔΔ Ct method with 18S used as a house-keeping

gene (HKG) as previously reported [17,34]. Correlation between the

results from the liver qPCR and the blood lipidome was investigated as

described below.

2.13. Regression analysis between lipid features, GTT/IST, plasma

endocannabinoids, and liver homeostasis

GraphPad Prism for windows version 5.04 (GraphPad Software,

Inc., La Jolla, CA) was used for all correlation analyses comparing the

differential lipid expression via the relative abundance of features to

multiple endpoints used in the study such as liver mRNA expression

values, plasma endocannabinoid levels, and AUC values from GTT/IST.

Reported correlations meet the fairly stringent cutoff correlation coefficient

criteria of R2 ≥0.6.

2.14. Statistical analysis

All statistical analyses were compiled using GraphPad Prism for

windows version 5.04 (GraphPad Software, Inc., La Jolla, CA). For all

analysis, the experimental unit was individual animals and samples

from a total of 6–8 animals/diet/time point were assessed. For all

analyses, significance was set at p ≤ 0.05 where data are expressed as

mean ± SEM based on t-test for pairwise analysis and/or ANOVA

analysis (two-factor repeated-measures with Bonferroni post hoc test).

3. Results

3.1. Morphometric, GTT, IST, and intestinal permeability data

The lipid changes reported below were correlated to glucose tolerance

(GTT) and insulin sensitivity (IST) outcomes, which were recently

reported [17]. Briefly, HFD-fed mice were significantly heavier than

LFD mice at all three time points, and had impaired glucose tolerance.

Interestingly, HFD-feeding had the greatest effect on glucose tolerance

rather than insulin sensitivity [17]. On the other hand, while HFD decreased

IST at the earlier time points, this trend was not seen at the end

of the study due to age-dependent decreases in IST in LFD-fed mice

[17]. HFD-consumption by the female C57BL/6 mice also increased the

gastrointestinal permeability, more so after longer feeding durations

[17].

3.2. Multivariate analysis of lipidome

Multivariate, unsupervised principal component analysis (PCA) of

spectral data comparing high-fat diet (HFD) and low-fat diet (LFD)

consumption showed distinct clustering within the blood lipidome

where diet and age were the major effectors (Fig. 1, Fig. 2). Scores plots

of all groups, for both positive (Fig. 1A) and negative ion mode

(Fig. 2A), demonstrated a striking separation between 6-week vs. 22-

and 36-week treatment groups. The separation of populations occurred

regardless of dietary treatment indicating a significant role for age on

the lipidome. However, HFD-consumption altered lipid profiles within

each respective time point where 6-week treatment (Fig. 1C, Fig. 2C)

had the most pronounced effect. Urine lipid profiles demonstrated a

similar trend (Suppl. Fig. 1). The baseline lipidome was also assessed

with PCA analysis comparing blood lipid profiles of ~5–6-week-old

mice to 6-week HFD/LFD-fed mice, indicating group differences along

with variability in the baseline lipidome, which diminished following

6 weeks of dietary treatment (Suppl. Fig. 4).

Volcano plots identified and ranked potentially important features

based on fold change and statistical significance level for age- (Fig. 3,

Suppl. Fig. 2) and diet-related (Fig. 4, Suppl. Fig. 3) effects. Age-related

pairwise comparisons within dietary treatment groups for short vs.

long/prolonged (6-week vs. 22- and 36-week) (Fig. 3A-3B, Suppl.

Fig. 2A–B) yielded the greatest number of features while 22-week vs.

36-week (Fig. 3C, Suppl. Fig. 2C) resulted in very few. Based on the

number of features altered, diet-related pairwise comparisons of LFDvs.

HFD-consumption indicated that HFD-induced alterations were

most robust following a short consumption period (Fig. 4A) with fewer

alterations following longer periods of exposure (Fig. 4B, C).

3.3. Phospholipid species

Diet- and age-dependent alterations elevated the relative abundances

of phospholipid (PL) species in blood lipid profiles of HFD-fed

mice after 6 weeks of consumption (Fig. 5A), and presented the most

changes following 22 weeks of treatment where HFD-fed mice had

decreased relative abundances of various PL species, differing from

those species affected after 6 weeks on the diet (Fig. 5A). None of the

age−/diet- changes persisted after 36 weeks of HFD feeding (Fig. 5A).

Significance analysis of lipid features was performed for all time

points within each dietary group (i.e. 6 weeks vs. 22 weeks of LFD

feeding) to identify age−/diet- alterations. These age−/diet- features

were subsequently excluded during analysis of LFD vs. HFD treatment

to characterize the effects of HFD feeding alone. Interestingly, the effects

of HFD-consumption alone did not appear following 6 weeks of

feeding (Fig. 6A). 22-week consumption demonstrated the greatest effect,

much like that observed in features altered due to diet−/age-,

although differences in PL relative abundances were bidirectional and

did not show a class-specific uniform trend (Fig. 6A). Following

36 weeks of feeding, the relative abundance of only one feature (m/z

578.3) changed due to HFD-consumption alone (Fig. 6A). MS/MS

analysis and neutral loss scanning was performed to validate phospholipid

class identities (Suppl. Table 1–2).

3.4. Fatty acyl species

Fatty acyl (FA) species altered based on diet- and age-related effects

demonstrated bidirectional effects at all three time points where the

majority of features identified were in blood profiles of mice following

22 weeks of treatment (Fig. 5B). One feature (m/z 562.8) persisted

between short- and long-term feeding, demonstrating an increase in

relative abundance in HFD-fed animals after 6-weeks followed by a

decrease after 22-weeks (Fig. 5B).

Diet alone altered the blood lipidome of the 6-week treatment group

in which HFD-consumption decreased the relative abundances of FAs

by ~2-fold (Fig. 6B). This was also observed in urine lipid profiles of

the 6-week treatment group where three features (m/z 337, m/z 385,

m/z 381) detected and altered in blood were also detected in urine with

comparable magnitudes of differences between LFD- and HFD-fed mice

(Fig. 6B). The effects of HFD-consumption alone did not persist after 22-

weeks and 36-weeks (Fig. 6B). MS/MS analysis and neutral loss scanning

was performed to validate fatty acyl class identities (Suppl.

Table 1–2).

3.5. Glycerolipid species

Most diet- and age-dependent feature alterations in glycerolipids

occurred after short- (6 weeks) and long-term feeding (22 weeks) where

changes were primarily bidirectional across groups (Fig. 5C). 22-week

feeding displayed a trend of general decreases in glycerolipid (GL) relative

abundances in HFD-fed mice (Fig. 5C). We identified one feature

that was altered after 36-weeks of dietary treatment, (m/z 708.6),

which was decreased in HFD-mice (Fig. 5C).

Resembling the pattern observed across FA species (Fig. 6B), the

majority of features altered due to HFD-consumption alone were

identified in the 6-week treatment group. Further, GL features demonstrated

species-specific increases and decreases in both blood and

urine profiles (Fig. 6C). Long-term feeding affected a few GL features

with net decreases in HFD-mice, which were no longer present after

36 weeks (Fig. 6C). MS/MS analysis and neutral loss scanning was

performed to validate glycerolipid class identities (Suppl. Table 1–2).

3.6. Liver endocannabinoids

Given that many of the species altered in HFD-fed mice were

phospholipids containing polyunsaturated fatty acids (PUFAs), and

because many of the fatty acyls correlated to derivatives of fatty acids,

we focused on arachidonic acid-containing metabolites, including 2-

arachidonoylglycerol (2-AG) and N-arachidonoylethanolamide (AEA).

Upon release, these endocannabinoids target cannabinoid receptors

(CB1 and CB2) and work together to play a role in energy homeostasis

[22]. Liver 2-AG levels decreased after 6 and 36 weeks of HFDconsumption

(Fig. 7A). Interestingly, an age-related effect was observed

where 36 weeks of HFD-feeding decreased liver 2-AG levels (Fig. 7A).

The decrease of 2-AG levels on the liver after 36 weeks was accompanied

by a significant increase of AEA (Fig. 7B). The only significant

effect of HFD on liver AEA levels was a significant decrease after

6 weeks on the diet (Fig. 7B). CB1 expression did not change while CB2

expression showed time-dependent increases in HFD-fed mice, although

these were not significant (Fig. 7C).

3.7. Plasma endocannabinoids

Plasma levels of 2-AG and AEA in the LFD-fed mice were quite

stable, apart from a slight increase after 36 weeks of feeding (Fig. 8). In

contrast, HFD-consumption increased plasma levels of 2-AG, but the

effects were bi-phasic where a significant increase was only observed at

6 and 36 weeks, but not after 22 weeks of HFD-consumption (Fig. 8A).

There also appeared to be an effect of age on plasma 2-AG within the

HFD-fed mice as shown by an increase in 2-AG levels following

36 weeks compared to 22 weeks of feeding (Fig. 8A). The effects of

HFD-consumption on the other endocannabinoid, AEA, resembled the

diet's effects on plasma 2-AG, with the only significant effect being an

increase of plasma AEA levels after 36 weeks on HFD (Fig. 8B).

3.8. Plasma esterase activity

The increase in fatty acyls and lysophospholipid species suggests

increased esterase activity. This hypothesis was addressed by assessing

esterase activity at all time points in the plasma. HFD-consumption

increased plasma esterase activity at all time points, with the most

pronounced effect following 6 weeks of feeding (Fig. 9). Although

plasma esterase activity increased following both 22 and 36 weeks, the

effect at 36 weeks was not significant (Fig. 9). It appeared that age

alone affected plasma esterase activity, indicated by heightened esterase

activity after 6 weeks of HFD-consumption followed by lower

levels at later time points (Fig. 9).

3.9. Liver qPCR data of key lipid homeostasis genes

There are many genes that encode for protein regulating energy

balance and lipid metabolism, including peroxisome proliferator-activated

receptors (PPARs) [35,36]. PPARα is best known for its major

role in lipid and lipoprotein metabolism while PPARγ is involved in

adipogenesis and insulin sensitivity [35,37]. HFD-consumption increased

expression of liver mRNA levels of PPARα, PPARγ, and CD36, a

known target of PPARγ [38], significantly at 6 weeks of HFD (Fig. 10A).

Interestingly, PPARα and PPARγ levels increased after 36 weeks of

HFD-consumption, but not after 22 weeks. Liver CD36 mRNA was elevated

at all three time points (Fig. 10A), with the magnitude of elevation

greatest after 36 weeks on HFD.

PPARγ has been shown to increase during lipogenesis, thus we assessed

the expression of fatty acid synthase (FAS), acetyl-CoA carboxylase

(ACC), and stearoyl-CoA desaturase (SCD) (Fig. 10B). HFD-fed

mice demonstrated a numerical trend of time-dependent increases

although not significant, in SCD, ACC, and FAS expression (Fig. 10B).

MGL demonstrated increased expression in mice fed HFD for 6 weeks;

however, this effect was tapered after long- and prolonged-feeding

(Fig. 10B).

3.10. Correlation between lipids, GTT/IST, plasma endocannabinoids, liver

homeostasis

We performed regression analysis to determine if changes in the

blood lipidome correlated to changes in GTT or IST, plasma endocannabinoid

levels, or gene expression of liver homeostasis markers.

Table 1A lists correlations (R2 ≥0.6) between several lipid features and

the expression of CD36, PPARα, and PPARγ mRNA in the liver. There

were only a few lipid species whose abundance correlated to changes in

these genes, including two unidentifiable FA species. Correlations occurred

at all time points with increases in TG (52:4 or 52:5) [PPARγ] in

HFD-mice at 6 weeks, decreases of DG (40:6) [CD36], PE (42:7)

[CD36], and FA (m/z 562.8) [PPARα] at 22 weeks, and an increase in

FA (m/z 438.8) [PPARα] at 36 weeks (Fig. 11). Lipid species indicated

by only their m/z value were unable to be fully characterized by subsequent

MS/MS analysis.

Regression analyses also demonstrated quite a few relationships

between changes in select blood lipids and changes in AUC from glucose

tolerance and insulin sensitivity tests after 6 weeks (Table 1B).

Fewer correlations were identified for changes in the blood lipidome at

22 or 36 weeks (Suppl. Table 3), which is not surprising given the robust

differences observed after 6-weeks of treatment. Interestingly,

several lipids such as PC (44:3) and DG (34:3), which correlated to

glucose tolerance, also demonstrated inverse correlates to insulin sensitivity.

Regarding plasma endocannabinoids, GL species (m/z 734.6, m/z

760.5) and FA species (m/z 353.2) correlated to changes in in 2-AG

exclusively within HFD-mice, whereas AEA did not correlate to any

lipid features (Table 1C).

4. Discussion

The association between increased high-fat consumption and excess

adiposity poses a major global health problem that heightens the risk of

metabolic disorders, diabetes, heart disease, fatty liver, and some forms

of cancer [39]. Growing evidence implicating a role for impaired lipid

metabolism, coupled with the advent of bioinformatics tools has

prompted efforts in characterizing the obese lipidome [40–42]. While

these studies have highlighted alterations in the plasma and/or serum

lipidome, there have been few studies examining the effects of age on

the lipidome and/or the interaction between age and obesity. Further,

the number of studies that address diet-induced obesity within female

models is quite limited, although an increased linear trend of female

obesity among US women within the last decade demonstrates the

significant need [3,43,44]. Here, we used shotgun lipidomics to assess

the effects of dietary fat consumption, age, and their interaction at the

level of the blood lipidome. We correlated changes in the blood lipidome

to changes in metabolic regulation, endocannabinoid levels, and

plasma esterase activity.

One of the most interesting findings of this study is that the effect of

age superseded the effect of HFD with regard to alterations in the blood

lipidome. These data emphasize the need to characterize and stratify

lipidomic alterations not only to diet, but also to age. The accentuated

effect of age on the lipidome between 12-week-old (6-weeks on the

diet) vs. 28-week-old (22 weeks on the diet) and 42-week-old (36 weeks

on the diet) mice indicated distinct shifts in lipid composition and/or

regulation, an interesting note since all ages fall within the mature adult

phase of C57BL/6 mice. Although multivariate analysis indicated a

slight difference between 28- and 42-week-old animals, the separation

was not as robust. With regard to dietary treatment, younger animals

presented striking lipidomic responses to HFD-consumption while older

animals had a more tapered shift, possibly a result of time-dependent

homeostatic mechanisms in response from long-term feeding. In this

regard, as we reported recently, it is interesting to note that in terms of

insulin sensitivity, but not glucose tolerance, age appears to be a major

driver of decreased insulin sensitivity to the point that the effects of

prolonged HFD feeding are overpowered by the effects of age [17].

Given the limitations of the shotgun approach along with the sheer

number of features identified in this study, we report general lipidomic

changes in terms of lipid class with alterations falling into three classes:

glycerolipids (GL), fatty acyls (FA), and phospholipids (PL). MS/MS

analysis was employed to verify these lipid species (Suppl. Table 1).

Features changing at only a few time points showed a class-specific

trend in terms of differential lipid expression; however, most changes

indicated species-specific alterations.

A few studies have demonstrated alterations in lipid classes within

rodent obesity where the majority of reported changes encompass

ceramides, cholesterols, triglycerides, and phospholipids. For example,

changes in lipid species such as lysophosphatidylcholines have been

associated with obesity, insulin resistance, and type 2 diabetes [45–47].

In agreement with some of these studies, we report elevations in PC

(38:5), PC (44:3), and PC (38:3) in the blood of HFD-fed mice, also

reported in Eisinger et al. [40]. Changes in GL and FA reported in the

current study are not in line with another study [48], but it should be

noted that the sex of the mice, feeding durations, and importantly, the

dietary composition in [48] and our study are different. It should also

be pointed out that several studies have demonstrated that HFD typically

increases the levels of TAGs and DAGs [49]. The fact that not

many of these lipids were detected in our own study is most likely a

limitation of the shotgun approach used.

As mentioned above, lipidomic alterations identified by shotgun

analysis revolved around three major lipid classes (GL, FA, and PL),

which also happen to constitute the endocannabinoid system.

Quantification of both 2-AG and AEA demonstrated several correlations

with specific blood lipids. AEA and 2-AG, both derivatives of arachidonic

acid, are signaling lipids that mediate their action via activation

of cannabinoid receptors. Further, changes in plasma levels of 2-AG and

AEA after 6 and 36 weeks associated with decreases in liver 2-AG. This

suggests that increased 2-AG levels in circulation are due to increased

mobilization from the liver, with/without concomitant decreased 2-AG

breakdown [50]. In a study by Caraceni, et al., 2-AG levels were reported

to be higher in the hepatic veins of cirrhosis patients when

compared to peripheral blood, supporting the hypothesis that the liver

contributes to circulating 2-AG levels [51]. This may also suggest that

the source of the increase in plasma 2-AG is non-hepatic, i.e. dietary

[20].

Plasma AEA levels were most affected by the diet after 36 weeks;

however, as opposed to the decreases of liver 2-AG, liver AEA was increased

after 36 weeks irrespective of diet. Together, these data indicate

that in female C57BL/6 mice plasma 2-AG is more sensitive to

HFD-consumption. Further, similar to other endpoints in this study, the

effects of HFD diet are most prominent during early (6 weeks) and late

phases (36 weeks) of the feeding trial. Circulating endocannabinoids

also appear to be more sensitive to non-dietary liver pathology than

their liver levels. For example, in certain conditions, i.e. hepatitis C,

plasma, but not liver, 2-AG was increased [52]. On the other hand,

circulating AEA was significantly higher in cirrhotic patients [51].

A novel finding is the fact that age was associated with decreased 2-

AG and increased AEA in the liver. At the end of the study (36 weeks on

the diet, 42-43-week-old), the mice were middle-aged and close to

becoming reproductively senescent [53]. While liver-specific

endocannabinoid data for female C57BL/6 mice within the context of

age are lacking, it is interesting that a recent study reported decreased

2-AG, but not AEA, levels in the hippocampus of aged mice [54]. In this

study, the decrease in hippocampal 2-AG was attributed to a concomitant

decrease of local 2-AG synthesis and increase of its breakdown

[54]. With that in mind, our data suggest that the age-dependent metabolic

changes in the 2-AG pathway that operate in the brain (hippocampus)

do so in the liver as well. In addition, the increase in liver AEA

levels at the end of the study highlights endocannabinoid metabolitespecific

effects of age. Although Osei-Hyiaman, et al. previously showed

that liver AEA levels increase following HFD, our data indicate lower

levels of hepatic AEA in HFD-fed mice [55,56]. However, it is important

to note that the dietary feeding regimen in Osei-Hyiaman, et al. was

initiated in slightly older mice, which may play a large role given our

data demonstrating the interaction of age and diet. Moreover, the

findings in the above study were based on the use of a combination of

male and female mice and thus, does not reflect the effects within females

alone. This would not be surprising since gender-specific responses

to HFD-intake have been reported in rodents, and it has even

been suggested that females are more susceptible to developing the

secondary effects of HFD-induced obesity [57]. It should also be mentioned

that adipose distribution and function differs across males and

females, so differences are expected to exist in mediators produced by

adipocytes such as endocannabinoids [57–59].

The increased circulating 2-AG levels in the female C57BL/6 mice in

our study are in line with multiple studies in obese human subjects. For

example, obese men, especially those with increased intra-abdominal

adiposity, have increased plasma 2-AG [60]. Interestingly, direct correlation

between plasma endocannabinoids, insulin resistance and

dyslipidemia has been suggested [61]. Moreover, chronic cannabinoid

receptor 1 (CB1) stimulation exacerbates the metabolic dysregulation

caused by HFD-consumption, suggesting key role for the endogenous

endocannabinoids in the process [62]. Circulating endocannabinoids

might contribute to obesity by their central and/or peripheral actions

[20]. The key role of CB1-specific over-activation by excessive endocannabinoids

is further emphasized by the fact that global CB1−/−

mice are not susceptible to HFD and liver-specific CB1−/− mice are

protected from some, but not all, of the adverse effects of HFD intake

[63]. Treatments aimed at reducing plasma endocannabinoids are

beneficial in re-balancing the metabolic dysregulation [64] and obesityrelated

inflammation [65], but not for reducing the body weight in

obese subjects [64]. Interestingly, and in line with our current data,

circulating 2-AG levels were significantly elevated in insulin-resistant

obese women [66].

Peroxisome proliferator-activated receptors (PPARs) are members

of the steroid hormone receptor superfamily of nuclear transcription

factors that are involved in the regulation of various genes encoding

proteins involved in energy balance and lipid metabolism [35,36].

PPARα is best known for its major role in lipid and lipoprotein metabolism

while PPARγ is involved in adipogenesis and insulin sensitivity

[35,37]. It has also been suggested that hepatic PPARγ may mediate the

accumulation of fat via the regulation of genes essential for de novo

lipogenesis, i.e. fatty acid synthase (FAS), acetyl-CoA carboxylase (ACC),

and stearoyl-CoA desaturase (SCD) [67]. Further, it is possible that

glycerolipid alterations can be attributed to changes in lipolysis via

monoacylglycerol lipase (MGL), one of the main lipases involved in the

catabolism of TG.

In our study, we also observed HFD-induced increases in liver

PPARα, PPARγ, and CD36. The increases in PPARα and PPARγ were

biphasic (6 and 22 weeks) and more prominent after 6 weeks of HFD

feeding, indicating that the activation of the PPAR pathways are timedependent.

PPARα regulates fatty acid β-oxidation, is activated by the

AEA analogue oleoylethanolamide (OEA), and pharmacological increases

of OEA are beneficial to diet-induced obese mice [68]. While we

have not measured OEA in our study, it is conceivable that the lack of

significant increase in liver PPARα after 22 weeks of HDF feeding was

due to sensitization-dependent downregulation. Liver PPARγ, which

showed similar kinetics to PPARα, regulates lipid and glucose homeostasis,

is elevated by a HFD [69], and approaches aimed at curbing its

activation are beneficial in obesity and type 2 diabetes [70]. Together,

the changes in liver PPAR levels are in line with the time-dependent

metabolic dysregulation of these mice, especially the sensitivity to insulin

challenge, and reflects the changes in the blood lipidome reported

here [17].

CD36 was the sole lipid homeostasis/inflammation molecule whose

expression was increased by HFD throughout the study. Increases in

CD36 were greatest at the end (36 weeks) of the experiment. CD36 is

associated with obesity, diabetes, and liver dysfunction; hence, our

findings are not surprising. Liver CD36 was previously shown to increase

due to aging [71]. Thus, the marked increase in liver CD36 at the

end of the feeding duration could be a sum of the effects of age and HFD

on its expression or, due to increased demand for hepatic lipid uptake in

the face of continued HFD-consumption. In this regard, CD36 plays a

major role on hepatic fat uptake [71].

Circulating esterases are predominantly investigated for their role in

the metabolism of drugs and toxicants, though they also metabolize

endogenous, i.e. dietary, and exogenous lipids [72]. The early robust

increase in plasma esterase that we observed in the current study might

be the result of host's attempt to maintain lipid homeostasis in the face

of excessive dietary fat. Over time, the increases in esterase activity

were still present, but less robust. This may reflect saturation of this

likely protective mechanism. In support of this hypothesis, esterasedeficient

mice are not only more susceptible to pesticides that are detoxified

by it, but also to diet-induced metabolic dysregulation and

atherosclerosis [73]. Our data indicating an age effect, i.e. decreased

plasma esterase due to age, further supports the notion that this mechanism

of metabolizing excessive dietary fat is less robust in older

mice.

In conclusion, we demonstrated an interaction between dietary fat

consumption and aging with widespread effects on the blood lipidome

in female mice. This study indicates that the effects of HFD feeding

occur in an age-dependent manner with robust responses at a younger

age. Further, we identified several associations between lipids and

metabolic and liver regulation, providing a basis for female-specific

obesity- and age-related lipid biomarkers. These findings highlight the

need for additional age-dependent tracking studies, prior to sexual

maturity into advanced age, to obtain comprehensive understanding of

the evolving lipidome with regard to dietary changes.

In: Biology