Decoding Stats: Separating Facts from Fabrications, P. 34
What Trump’s Tax Reform Plan Means for You, P. 36
Insights from the Smart Manufacturing Summit, P. 38
JULY/AUGUST 2017
JULY/AUGUST 2017
HENRY SCHEIN’S STAN BERGMAN
2017 CEO of the YEAR
C I TAT I O N L A R G E C A B I N F A M I LY I N N OVATI O N . PERFORMANCE. L E A D E R S H I P.
REALIT Y MEETS YOUR MISSION We bring vision to life by giving it shape, infusing it with power and maintaining it with expert hands. When your mission requires efficient, innovative aircraft, our new large-cabin family transcends all expectations. See why we remain aviation’s leader at Cessna.com.
U. S . + 1 . 8 4 4 . 4 4 .T X TAV
|
INTERNATIONAL + 1 . 3 1 6 . 5 1 7. 8 2 7 0
©2017 Textron Aviation Inc. All rights reserved. Cessna & Design, Citation, Citation Latitude and Citation Longitude are trademarks or service marks of Textron Aviation Inc. and may be registered in the United States.
Citation Latitude
Citation Longitude
CONTENTS
July/August 2017 No. 289
FEATURES COVER STORY
20 2017 CEO of the Year
Henry Schein’s Stan Bergman: How culture eclipses everything. By J.P. Donlon
TALENT DEVELOPMENT
30 Employing Apprenticeships
How earn-while-you-learn models can address America’s shortage of skilled workers. By C.J. Prince
DATA DIVE
34 Statistics: How Good Are They?
How to safeguard your business from data-driven distortions of reality. By Peter Haapaniemi
TALKING POINTS
36 What You Need to Know about Tax Reform It’s complicated. Here’s how to plan for it. By Gordon Schonfeld
CEO SUMMIT
38 Smart Manufacturing Graduates
CEOs share strategies, tactics and opportunities for 21st-century manufacturing. By Russ Banham
20
CEO ROUNDTABLES
48 Build American: The Case for Making It Here
Companies—and the communities in which they operate— are overcoming the challenges of reshoring. By Jennifer Pellet
36
52 Securing Capital to Grow and Innovate How can companies fund investments in the latest technology and equipment? By Jennifer Pellet
PURE AGRIBUSINESS
When it comes to growing food and businesses, there’s one state that’s got the perfect climate for both. Michigan. Our weather patterns and soil variety help us grow everything from cherries to Christmas trees. Our food and agriculture industries contribute over $101 billion to the state’s economy. Which makes Michigan a top pick for your agribusiness.
michiganbusiness.org/pure-agribusiness
CONTENTS
DEPARTMENTS
EDITOR-IN-CHIEF Michael Winkleman EDITOR AT LARGE Jennifer Pellet
6 Editor’s Note
MANAGING EDITOR Patrick Gorman
CAMP COUNSELOR AT WORK By Mike Winkleman
PRODUCTION DIRECTOR Rose Sullivan
9 Inbox
CHIEF COPYEDITOR Rebecca M. Cooper
The Changing Faces of Leadership When Founders Flounder—Lead, Learn or Leave 17
CEO of the Year Criteria Explained: Reputation/Beacon of Excellence
ART DIRECTORS Carole Erger-Fass Gayle Erickson CONTRIBUTING EDITORS Russ Banham Dale Buss Craig Guillot Peter Haapaniemi C.J. Prince Gordon Schonfeld Jeffrey Sonnenfeld James Wynbrandt
Are CEOs Being Held to a Higher Standard? From the Archives Ten Minutes With Mercedes-Benz’s Dietmar Exler Summer Reading Examing Pay Practices
ONLINE EDITOR Lynn Russo Whylly
Honoring Boeing’s Dennis Muilenburg
EDITOR EMERITUS J.P. Donlon
58 CEO Tech
CYBERSECURITY: THE BATTLE CONTINUES You can’t eliminate the threat, but you can limit your vulnerability. By Peter Haapaniemi
PUBLISHER Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net VICE PRESIDENT Phillip Wren 203-930-2708 | pwren@chiefexecutive.net
63 Economic Development REGIONAL REPORT: THE WEST Migration—by businesses and workers—is fueling growth in America’s Western states. By Craig Guillot
72
DIRECTOR, BUSINESS DEVELOPMENT Lisa Cooper 203-889-4983 | lcooper@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT Liz Irving 203-889-4976 | lirving@chiefexecutive.net
72 Plane Advantage
DIRECTOR, BUSINESS DEVELOPMENT Gabriella Kallay 203-930-2918 | gkallay@chiefexecutive.net
HOW TO BUY A BUSINESS JET Follow these seven steps to smooth your jet-buying journey. By James Wynbrandt
DIRECTOR, BUSINESS DEVELOPMENT Marc Richards 203-930-2705 | mrichards@chiefexecutive.net
80 Time Capsule
MARKETING DIRECTOR Jason Golden 203-889-4978 | jgolden@chiefexecutive.net
WORKING IN A PROTOTYPE How today’s CEO office can help foster innovation. By Jim Keane
80
CLIENT SERVICES ASSOCIATE Ashley Gabriele 203-889-4989 | agabriele@chiefexecutive.net VICE PRESIDENT, HUMAN RESOURCES Melanie Haniph
Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 289 July/August 2017. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2017 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Stamford, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive Group, PO Box 47574, Plymouth MN 55447.
Subscription Customer Service Chief Executive Group, PO Box 47574, Plymouth MN 55447
p: 800-869-6882 e: cex@kmpsgroup.com w: chiefexecutive.net/magazine
CONTROLLER Steve Hallem CHIEF OPERATING OFFICER Scott Budd Wayne Cooper EXECUTIVE CHAIRMAN
Marshall Cooper CHIEF EXECUTIVE
CHIEF EXECUTIVE GROUP 9 West Broad Street, Suite 430 Stamford, CT 06902 | 203-930-2700 WWW.CHIEFEXECUTIVE.NET
that you can explore and execute your strategic alternatives with PNC.
DEBT ADVISORY
M& A
Sixth largest bank in the U.S.1 and a top 5 arranger2 of traditional Middle Market loan syndications
A preeminent Middle Market investment bank focused on best-in-class mergers & acquisitions advisory services3
ESOP
IPO ADVISORY
Relationship-based ESOP expertise with $3+ billion in capital committed to over 150 ESOP companies across the U.S.
A premier Equity Capital Markets and Investor Relations Advisory firm advising roughly 250 IPOs, follow-ons and block trades since 20134
CORPORATE & INSTITUTIONAL BANKING I Whether your strategy involves growing your company with access to the right capital, or transitioning ownership to enable a strategic direction, PNC can help. With a family of capabilities and specialized advisors that offer sophisticated advice and hands-on transaction support, there’s no alternative we can’t help your company explore. For more information, please contact Terry Begley, Chief Executive Officer, Corporate Banking, at terry.begley@pnc.com.
FINANCING
|
CAPITAL MARKETS
|
M&A ADVISORY
|
ESOP SOLUTIONS
|
IPO ADVISORY
1 Federal Reserve, Sept. 2016, https://www.federalreserve.gov/releases/lbr/current/. 2 According to Thomson Reuters LPC as of Jan. 2016. 3 Merger and acquisition advisory and related services are provided by Harris Williams LLC. Harris Williams LLC is a registered broker-dealer and member of FINRA and SIPC and is a wholly-owned subsidiary of PNC. Harris Williams & Co. is the trade name under which Harris Williams LLC and Harris Williams & Co. Ltd. conduct business. 4 Certain equity capital markets advisory services are provided by Solebury Capital LLC, a registered broker-dealer and member of FINRA and SIPC and is a wholly-owned subsidiary of PNC. PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). Banking and lending products and services, bank deposit products, and treasury management products and services are provided by PNC Bank, National Association, a wholly owned subsidiary of PNC and Member FDIC. Investment banking and capital markets activities are conducted by PNC through its subsidiaries PNC Bank and PNC Capital Markets LLC, a registered broker-dealer and member of FINRA and SIPC. Certain banking and lending products and services may require credit approval. ©2017 The PNC Financial Services Group, Inc. All rights reserved.
CIB CB PDF 0417-061-510004
EDITOR’S NOTE
CHIEF EXECUTIVE OF THE YEAR
2017 SELECTION COMMITTEE
Camp Counselor at Work
Whether it’s people and people or people and robots, teamwork makes the difference. By Mike Winkleman
CATHY ENGELBERT CEO, Deloitte LLC GAIL HANUSA, CORPORATE COMMUNICATIONS, BOEING
IN PUTTING TOGETHER AN ISSUE of a magazine, editors are always looking for two things that may seem to be in opposition to each other: breadth of coverage and a unifying theme. This issue certainly has the first, from manufacturing to cybersecurity, from private aircraft to economic development, from tax policy to misleading statistics, from changing CEO CEO Summit participants on a tour of Boeing’s aerospace facility. offices to changing CEOs. If there’s a central theme to this issue, it’s probably teamwork. This comes across in Russ Banham’s coverage of our Smart Manufacturing Summit, which talks not only about how well robots and people are starting to work together, but also details Cisco’s approach to reskilling its supply chain employees to give them a chance to remain part of the team even as talent needs change. It underlies the approach to cybersecurity that one expert notes involves “every piece of the business.” And it’s the key to making apprenticeship programs work (page 30). Most of all, it’s what makes this year’s CEO of the Year, Stan Bergman, tick. Stan took over a family business in 1989 and has managed to keep the family ethos alive, despite building annual sales to $13 billion. He says that, by his estimation, a good manager is someone who would “run a good summer camp,” someone who could “get everybody to play well in the sandbox.” So committed is Stan to the importance of teamwork that when we dispatched a photographer to meet him at the company’s Sparks, Nevada, distribution center, he was reluctant to pose alone. His contention was that the credit for his win goes to his team; it’s the team that has driven Henry Schein to the heights it’s hit, and hit consistently. Hence the photo of Stan with the entire distribution center team on pages 20-21 and photos of him with other Team Schein members on the following pages. The photo on this page speaks to another kind of team: the manufacturers who came together in Seattle in May for SMS, here shown touring Boeing’s Everett, Washington, plant. And while the tour was just one of many parts of a very full conference schedule, it reinforced almost every theme addressed during the Summit. To learn more about those, turn to page 38. Reach Mike Winkleman at mwinkleman@ChiefExecutive.net.
ChiefExecutive.net KIMBERLY-CLARK’S TIPS FOR RECRUITING DIGITAL NATIVES As hiring and training tech-savvy talent becomes increasingly challenging, Kimberly-Clark has developed a solution that uncovers and engages with creative thinkers. They share four pointers that can help all CEOs ChiefExecutive.net/MJ17blackrock
06 / CHIEFEXECUTIVE.NET / MAY/JUNE 2017
TALENT PLANNING IDEAS FOR MIDDLEMARKET COMPANIES Researchers found that fast-growing companies are more likely to have a welldefined talent-planning process. Other successful ideas include aligning talent planning with the business strategy and leading by example. ChiefExecutive.net/JA17MiddleMarketTalent
DAN GLASER President and Chief Executive, Marsh & McLennan FRED HASSAN Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries ROBERT NARDELLI Chief Executive, XLR-8 WILLIAM R. NUTI Chairman and Chief Executive, NCR THOMAS J. QUINLAN III President and Chief Executive, RR Donnelley JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management RANDALL STEPHENSON Chairman and Chief Executive, AT&T, and 2016 CEO of the Year MARK WEINBERGER Chairman and Chief Executive, EY MAGGIE WILDEROTTER Chairman & CEO, Grand Reserve Inns Exclusive Advisor To The Selection Committee TED BILILIES, PH.D. Chief Talent Officer, Managing Director, AlixPartners CONTACT US Corporate Office Chief Executive Group, LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 | Fax: 203.930.2701 ChiefExecutive.net Letters to the Editor letters@ChiefExecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 | Fax: 847.730.3666 advertising@ChiefExecutive.net Reprints Phone: 203.889.4974 hdewing@ChiefExecutive.net
Passionate innovator. Exceptional leader. Valued client. Congratulations, Stanley Bergman Chief Executive Magazine’s 2017 CEO of the Year
For everything you’ve accomplished, for all the people you’ve helped, for all the good you’ve done, we say Congratulations, Stanley! You truly embody the spirit of Henry Schein’s “Mosaic of Success” – helping your company thrive while serving the best interests of all.
Accountants and Consultants © 2017 BDO USA, LLP. All rights reserved.
www.bdo.com
T H OU GH T L E A DE RSH IP PR OV ID E D BY R H R IN T E R N AT IO N A L
EDUCATION: THE FIRST RUNG ON THE LADDER NOT SURPRISINGLY, CEOS ARE A WELL-EDUCATED GROUP. But, there are many educational pathways that lead to the top, according to the CEO1000 Tracker, a data-based tool developed by Chief Executive Group and RHR International, the premier firm in the development of top management leadership of Global 1000 companies. Nearly all CEO1000 CEOs have an undergraduate degree, and close to two-thirds have post-graduate degrees. Of that latter group, the MBA is the most common. But nearly 4 out of 10 have other types of upper-level degrees, including MD, JD and ME degrees. A handful (2%) do not have college degrees at all. In terms of which undergraduate schools CEOs attended, the University of Pennsylvania tops the list, followed by Harvard and MIT. But CEOs come from a wide range of schools. Indeed, the top 10 undergraduate schools attended account for only about 15% of the CEOs. All told, there are more than 400 undergraduate and 260 graduate schools represented. Interestingly, CEOs from the more traditionally chosen private schools—Harvard, Yale and MIT—tend to be relatively older, with an average age above 61. On the other hand, for graduates of schools such as Purdue, University of Michigan and Georgetown University, the average age is closer to 50. This may suggest a generational shift away from the traditional choices. Most CEOs did not attend top-tier undergraduate schools, and the split between public and private institutions is fairly even. (It’s worth noting, however, that among U.S. college students in general, only
Unde
Private
T AT st com o
(25
32%
E
GR
DE 0%
10
80
60
40
45% Gra
19%
20 0
E EL
55%
te dua
40
y Academ Service
81%
m
80% 60
0.2% a radu te
tate Public/S
about 20% attend non-profit private undergrad institutions.) Thus, the type of undergraduate school attended appears to make little difference in the making of a CEO. But the picture shifts noticeably for graduate schools, with both the top-tier and private schools becoming more prevalent. Overall, this suggests that the route to the executive suite is wide and varied. This is underscored when looking at education and the financial performance of companies together— there is no clear correlation between those two factors and a “premier” education does not necessarily make for a successful CEO. In fact, less than 15% of CEOs of top performing companies attended top-tier undergraduate schools. What’s more, some of the CEOs who don’t have a degree head up large, successful companies—witness Facebook’s Mark Zuckerberg. The lesson, it seems: While very important, education is just one of many ingredients that go into shaping the CEO to handle the complexities and challenges that are part of the job. As Dr. Paul Winum, senior partner, practice leader, Board & CEO Services, at RHR International puts it, “RHR consultants have worked with thousands of CEOs over the decades who have formal degrees from a wide range of universities, just as the CEO1000 Tracker shows. What we have found, however, is that successful CEOs are best schooled by the experiences resulting from the ambitious leadership challenges they have taken on throughout their lives, not their formal education.”
m -T OP y ad D T itive b E D EN pet
6
G
IN ASSOCIATION WITH
OL ) HO n rate C S o IER issi
TE LIC/STA S. PUB EMY V E T A CAD PRIV VICE A VS. SER 8% 70% 52% 60 7% 50 4 40 30 20 1% 10 te 0 d rgra ua
CEO 1000
Un
gra der
te dua
No
CEO CEO ones Y 0 N 0 10 Todd J kerberg COMPA uc arkets Z RANK M r rk e a p M u lez ublix S Gonza P rd a h ic k R 85 o o y acke Faceb John M 99 bbVie rket ve a A o M L s d m 0 o o 11 hole Fo l Stops & T W 179 Trave Love's y Stores 201 Countr
Yes
L
VE
% 98
% 61
2% o 20 N ree g 0 de
9%
er n rth tio Fu uca te ed ua ad r G rde ate n u U ad gr
GREES
UT DE
ITHO CEOS W
GRA
DD
EGR
4% 3% 1 % 7% 4% 2% 1% 7% 8% MBA Oth e JD r M MS MA
EE T
YPE S
63%
Unk n LLB own/o ther PhD edu cati Doc on tora MD te
For more information about RHR International, visit rhrinternational.com or call +1 312 924 0800.
C
1
IN A
INBOX
IN THIS SECTION Sonnenfeld on Failing Founders > 10 CEO of the Year Criteria/Reputation/ Beacon of Excellence> 12 CEOs Under the MIcroscope > 12 From the Archives > 12 Ten Minutes with Mercedes-Benz's Dietmar Exler > 14 Read This Now > 16 CEO Comp Report: Pay Practices > 16 Honoring Dennis Muilenburg > 17
The Changing Faces of Leadership EARLIER THIS YEAR, CEO TURNOVER SPIKED IN JANUARY AND FEBRUARY, but it has since tapered off. In May, the number of CEOs who left companies—80—was the lowest monthly figure since December 2010, according to the Challenger, Gray & Christmas executive coaching firm. Nevertheless, that’s still a sizable number, and more than 470 CEOs left the top job in the first five months of the year. What’s more, it’s not just a matter of numbers. Many recent departures have involved high-profile executives and brands, such as Howard Schultz leaving Starbucks or Jeffrey Immelt leaving GE—moves that garner a lot of attention. The reasons for recent CEO turnover have varied. Some came as the result of careful longterm planning, such as Muhtar Kent’s departure from Coca-Cola. Others were more abrupt responses to performance-related pressures, as with the departures of Klaus Kleinfeld and Mario Longhi from Arconic and U.S. Steel, respectively. Others stemmed from the need to adapt to rapid technological shifts—witness Mark Fields’s leaving Ford as the company resets it focus to the world of self-driving cars. And some followed age-old patterns, as with Stefan Larsson’s departure from Ralph Lauren due to differences with the iconic founder. This all underscores just how challenging the CEO’s role continues to be. It’s a job that can be unforgiving, and executives often find that they need to adjust to relentless change—either by adapting or by moving on. —Peter Haapaniemi For more information on all of these transitions, visit www.ChiefExecutive.net/ ceo1000-tracker.
Clockwise: Starbucks’s Howard Schultz, Coca-Cola’s Muhtar Kent, U.S. Steel’s Mario Longhi, GE’s Jeffrey Immelt, Ford’s Mark Fields, Ralph Lauren’s Stefan Larsson, Arconic’s Klaus Kleinfeld
INBOX
From left: Groupon’s Andrew Mason, Snap’s Evan Spiegel, Twitter’s Jack Dorsey, Uber’s Travis Kalanick
When Founders Flounder— Lead, Learn or Leave THE NEW YORK TIMES RECENTLY featured a critical piece on the “bro culture” of tech startups titled “Jerks and the Start-ups They Ruin.” Trade media speculation abounds over the futures of founders like Snap’s Evan Spiegel, Twitter’s Jack Dorsey and Uber’s Travis Kalanick. Snap suffered huge, unexplained earnings misses, and Spiegel shows an unwillingness to apologize for past privacy breaches. Dorsey has struggled to run multiple firms simultaneously as CEO. Videos of Kalanick’s explosive outbursts have gone viral, and his tenure was marred and then derailed by multiple charges of sexual harassment in Uber’s culture, management turnover and legal charges over tax deceit, among other matters. In 2012, CNBC labeled ousted Groupon founder Andrew Mason the worst CEO of the year, citing goofball antics more appropriate for an overgrown kid than a company leader—especially of a company with a market value of more than $3 billion. At both American Apparel and Lululemon, power-obsessed, autocratic founders intoxicated by their greatness have crossed the line with abusive, and even indecent, conduct. Clearly the very fiery temperament of a flamboyant founder that drives bold entrepreneurial ambitions during a company’s inception can backfire later. Yet there are profound strategic and cultural risks to replacing founders, as edgy entrepreneurial vision is stifled by formulaic planning documents and
the spark of spontaneity suffocated by rigid processes. Sociologist Max Weber refers to this growth of bureaucracy as a needed “institutionalization of charisma.” The founder’s words and actions become canonized in dogma that ironically undermine the founder’s vision. After retaking the reins of the enterprise he founded, Michael Dell complained to me: “People were afraid to make changes to the business model I left them, but I [had] changed that business model six times. A business must stay fresh and change with the context. It is not a religion to be worshipped.” How have successful founders like Michael Dell, Bill Gates, Larry Ellison, Jeff Bezos and Mark Zuckerberg overcome this growth challenge? Here are four ways Leading New Life Phases. Founders must shift power from themselves as a hub via spokes to delegated authority figures. Examples of this include the Bill Gates/Steve Ballmer relationship at Microsoft and the Mark Zuckerberg/ Sheryl Sandberg relationship at Facebook. Similarly, Larry Ellison yielded authority at Oracle to Mark Hurd and Safra Catz as CEOs. Top-Level Mentoring. Early on with the company he founded in his college dorm room, Michael Dell wisely pulled into board service such wise advisors as Teledyne co-founder George
10 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Kozmetsky and former AMR CEO Don Carty, who served as vice chairman. Zuckerberg similarly tapped the wisdom of elder statesmen like Don Graham of the Washington Post Co., Netflix CEO Reed Hastings, Netscape co-founder Marc Andreesen and PayPal co-founder Peter Thiel, as board advisors. Self-Critical Culture. At Netflix, a culture of “freedom and responsibility” gives employees the flexibility to pursue “sustained A-level performance” in areas such as revenue, viewings and earnings targets rather bogging them down with clunky controls, processes and policies. Similarly, Amazon’s Jeff Bezos allows his opinions, once voiced, to be overruled. As he noted in a 2017 letter to shareholders in reference to his response when his team proposed original show productions that he personally didn’t like, “I wrote back right away, 'I disagree and commit and hope it becomes the most watched thing we’ve ever made.'... it's a chance for the team to weigh my view, and a quick sincere commitment to go their way.” Mission Alignment. Too often the venture capitalists on the board have a shorter exit time frame than the impassioned CEO who is building for greatness rather than building to flip. Ensuring alignment with the board and key stakeholders is critical. —Jeffrey Sonnenfeld, Yale School of Management
We applaud
Chief Executive Magazine in honoring
Stanley M. Bergman as this year’s CEO of the Year in recognition of his undisputed ambition, governance and business acumen in making Henry Schein, Inc. a leader in both the domestic and international pharmaceutical markets.
Mark L. Claster Chairman, Board of Trustees Michael J. Dowling President & CEO
INBOX
CEO OF THE YEAR CRITERIA EXPLAINED
Reputation/Beacon of Excellence/Community EVERY SERIOUS CONTENDER for CEO of the Year has a stellar track record across every aspect of leading a business or they wouldn’t be in the running. So when the time comes to choose from a roster of superstars, the Selection Committee generally needs to look further. Often, that means looking beyond industry entirely into what individuals have done to positively effect change on a broader scale. “Every CEO who gets to the table has done a nice job financially and has been a leader in the business community, or they wouldn’t have been nominated,” says Mark Weinberger, CEO of EY and a longstanding member of the committee, who notes that several winners have stood out for devoting time and attention to build more than just their own companies. “We look for those who take on things they don’t need to in order to improve the overall business environment or society as a whole.” Reflecting on previous recipients, Weinberger cites two who stand out for their performance on this criterion.
AT&T’s Randall Stephenson Stephenson stepped up to the plate to lead the Business Roundtable at a time when he was also guiding AT&T through transformational change. “Chairing the Business Roundtable is a role that takes tremendous energy and time,” says Weinberger. “Randall advocated for business issues broadly for several years and also sits on the board of the Boy Scouts. When you look at things like that layered on top of his [achievements] as a business leader, to me that really distinguishes the world’s best.” Monsanto’s Hugh Grant “Hugh is known for his work to support diversity and building an inclusive environment where people can be comfortable bringing themselves to work,” says Weinberger. Grant supports inclusivity by tying executive compensation to diversity metrics and meeting regularly with the company’s 13 resource groups, and he serves as a prominent leader in the community. Both Monsanto and Grant individually have won numerous accolades relating to fostering diversity and a positive work environment, including awards from Glassdoor, Diversity Inc., Forbes and CR Magazine. —Jennifer Pellet
Are CEOs Being Held to a Higher Standard?
What does the uptick—a 36 percent increase—in forced CEO turnovers for ethical issues really mean? FORCED TURNOVERS FOR ETHICAL LAPSES rose to 5.3 percent of all global CEO successions from 3.9 percent over the last five years, according to consulting firm PwC’s recent Strategy & 2016 CEO Success Study, which notes that the jump represents a 36 percent increase. While the overall number of forced CEO transitions due to ethical lapses remains relatively small, the fact that the figure is growing bears scrutiny. What’s more, the increase was more 2012 dramatic among the largest companies in the U.S. and Western Europe—up by 68 percent when comparing such successions between 2007 and 2011 (4.6 percent) to those between 2012 and 2016 (7.8 percent). The good news? Rather than more wrongdoing at large companies, PwC attributes these figures to increased public scrutiny of CEOs and their behavior, stricter governance and regulations, the 24/7 news cycle, the ethical risks inherent to doing business in emerging markets and through global supply chains, as well as the increased reliance on digital communications such email, text messaging and social media, which create per-
manent records of misconduct. PwC analyzed CEO successions among the top 2,500 public companies worldwide for the study, and defined a forced removal of a CEO as one being the result of a scandal or improper conduct by the CEO or other employees, such as fraud, bribery, insider trading, environmental disasters, inflated résumés and/or sexual indiscretions. In addition to positing reasons for the bump in forced turnover, the study pointed to 2017 several measures companies and their leaders can take to lessen the risk of CEO removals: Establish a Culture of Integrity. Clearly communicate the company’s values and ensure that every employee understands how they translate to the work they do every day. Match Your Metrics. Vet the ways in which you evaluate performance to ensure that your company isn’t inadvertently pressuring workers to bypass rules. Create Controls: Put processes and financial controls in place to help minimize opportunities for unethical behavior. —Patrick Gorman
% 36
12 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
CHIEF EXECUTIVE ARCHIVES
Brand-Name CEOs: Plaudits and Pitfalls IN 2002, when Chief Executive wrote about “The CEO as Brand,” brand-name CEOs weren’t new—but they were the rage, with Perdue Farms’ CEO Jim Perdue selling chickens on TV, joined by Remington’s Victor Kiam demonstrating razors and Chrysler’s Lee Iacocca claiming “the buck stops here.” Names like Steve Jobs, Richard Branson and Jack Welch were already well known. While the piece was generally supportive of the CEO as brand, it did caution that “creating a culture around [a CEO’s] personality can make the corporate brand more vulnerable. …when egos get in the way, CEOs can grow arrogant. They stop listening to trusted advisors and begin to breed negative energy, reflecting that back on the company.” Yale’s Jeff Sonnenfeld, then as now a frequent contributor (see page 10) and commentator on CEO behavior, pointed out that [GM’s Roger] Smith “became shorthand for a generation of managerial puppetry.” One other challenge the authors noted was “passing on the brand identity [one CEO has] developed to a successor.” Given Jeff Immelt’s announcement that he’s leaving GE (see page 9), it’s interesting to remember that Jack Welch’s own departure from GE in 2001 left Immelt himself with “a difficult task: to create a name for himself in the wake of his famous boss’s departure and to develop an equivalent emotional bond. Among Immelt’s first, and some say defining, moves was stepping up to donate $10 million to the September 11 disaster fund just two days after the terrorist attacks.” —Mike Winkleman
National Shooting Sports Foundation®
America’s Firearms Industry Real Growth. Real Jobs. Real Impact. 2008
2016
% Change
166,200
301,123
+81%
$19.1 billion
$51.3 billion
+168%
Federal Taxes
$1.5 billion
$3.8 billion
+156%
State Taxes
$1.3 billion
$2.7 billion
+107%
Excise Taxes*
$352 million
$838 million
+138%
Total Jobs Total Economic Impact
*Used pursuant to the Pittman/Robertson Act for Wildlife Conservation
The economic growth America’s firearms and ammunition industry has experienced over the years has been nothing short of remarkable, driven by an unprecedented number of Americans choosing to exercise their fundamental right to keep and bear arms. The National Shooting Sports Foundation, the trade association for the firearms industry, has released its latest Firearms and Ammunition Industry Economic Impact Report, showcasing the industry’s impressive growth.
Learn more at nssf.org/impact
NSSF.ORG
INBOX
10 MINUTES WITH
DIETMAR EXLER
CEO, Mercedes-Benz USA
EXLER’S KEY PRINCIPLES
1 2 3
Don't rest on your laurels— but use a lead to build a bigger lead. Leverage opportunities to build the culture you want your company to have. Create effective new channels for communication between top management and employees, and with key partners.
GERMAN AUTO COMPANIES operating in the U.S. started 2017 keeping their heads down, posting record sales, making great vehicles here—and hoping to stay out of President Trump’s crosshairs on trade issues. However, after America’s president said that Germany was “very bad” for flooding the U.S. with cars and posting a record trade surplus in 2016 on his trip to Europe in May, they seemed to give up on lying low. Through a trade group, a group of foreign automakers responded with a television commercial touting their American-made vehicles. Since being named president and CEO of the best-selling luxury brand in America in early 2016, Mercedes-Benz’s Dietmar Exler has emerged as an important spokesman for the premium-segment group, which also includes archrivals BMW and Audi. The 49-year-old leader has emphasized improving the brand’s relationships with dealers, for example. Before Trump’s trip and remarks, Exler talked with Chief Executive Contributing Editor Dale Buss about the challenges of heading up the sales, marketing and administrative aspects at the German-American hybrid. Here are excerpts from their conversation: DALE BUSS: Congratulations on your recent U.S. success. Can you build on it? DIETMAR EXLER: We had a great 2016 but in 2017 that doesn’t mean much per se. What it does mean is that we are focusing on the right things and what we do resonates with customers. We still have the youngest, freshest product lineup in the industry. And we continue to focus on the customer experience with dealers and how we can provide the best one for them. The Mercedes brand is doing well in the big shift in American consumer preferences toward SUVs. Yes, we’re celebrating 20 years of SUVs; it’s been pretty much a success story. Back then our first one was called M Class. No one was really sure how it would turn out. But now the [successor, renamed] GLE is shaping the segment. Your parent, Daimler, employs more than 3,500 people making GLEs and other SUVs in Vance, Alabama. Will the
14 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
company be expanding your production in the U.S. somehow? I can’t share our long-term production strategy. We’re a global company, producing all around the globe. We produce in Alabama right now, and we’re doing a heck of a job to squeeze more than is theoretically possible out of production down there. How important is it for Mercedes-Benz and your brand that some of your vehicles—in this case, some of your best SUVs—be made in the U.S.? That’s a difficult question to answer. The industry data I’ve seen, by the Automotive Alliance in Washington, indicates that for the vast majority of American consumers, “made in the U.S” is important—but not as important as reliability or functionality. Actually, in Alabama last year, we made more than 310,000 cars, and we sold 340,000 cars in the U.S. overall. So from that perspective, a very high percentage is actually made in the U.S. And what we make in Alabama isn’t at a “knock-down” facility. They all have enough U.S. content to qualify with official corporate and government guidelines as being made in the U.S. The company has caused quite a stir by moving its headquarters from New Jersey to near Atlanta, where you’re building a new facility. You were part of that decision before you actually became CEO early last year. What have you learned about how to move a headquarters? We have about 500 people here right now; 300 are new and 200 have been with Mercedes and transferred. You’d better have your act together regarding the culture you want to create, or the 300 new people will create it for you. For example, we pushed for a paperless office five or six years ago, and it didn’t quite work. But when we came [to Atlanta] to a temporary building, we didn’t have storage and we had to go paperless. And it worked because 300 people didn’t know any different. We also are building a much more communications-focused culture than before. We ask honestly critical questions of our people to push ourselves forward, and by the same token, their feedback is very direct.
Thought Leadership Content Provided by Rhode Island Commerce Corporation and the Greater Providence Chamber of Commerce
WHY ADVANCED MANUFACTURERS ARE CHOOSING RHODE ISLAND The birthplace of the Industrial Revolution, Rhode Island today is an emerging leader in manufacturing innovation. General Electric recently opened operations in the state, joining venerable manufacturers like Electric Boat, Raytheon and Textron. Now first in New England for advanced industries job growth, according to the Brookings Institution, and the second-best state in America for innovation and entrepreneurship, according to the U.S. Chamber of Commerce, R.I. offers exciting new opportunities for funding, partnership and support in advanced manufacturing.
This past spring, Gov. Gina Raimondo convened the first meeting of her Manufacturing Advisory Council, comprised of industry leaders who are helping her set policy and work on issues important to manufacturers. The governor also submitted what the Rhode Island Manufacturers Association called the most pro-manufacturing budget in memory. And the state recently hosted three days of manufacturing- and maker-focused pop-ups in the I-195 Innovation & Design District. There, the Wexford Innovation Center is breaking ground on facilities for anchor clients like the Cambridge Innovation Center and Brown University. New construction is also underway for the University of Rhode Island’s state-of-the-art College of Engineering facility. And the state is home to one of the first and best-known colleges of art and design in the U.S., the Rhode Island School of Design. For more than 20 years, a statewide nonprofit organization called Polaris MEP has provided competitive manufacturing business improvement programs to over 750 R.I. manufacturers, helping them achieve sustainable and profitable growth. And in the past two years, the state has been moving forward with plans to create an Innovation Center for Design and Manufacturing to help entrepreneurs scale up and bring ideas to prototype and eventually to market. The state’s Industry Cluster Grants are encouraging local manufacturers to work together to solve
problems, exchange ideas and develop talent, while its Innovation Vouchers are allowing manufacturers to unlock their capacity for innovation by funding up to $50,000 in R&D assistance from an R.I. university, research center or medical center. Among the recent recipients of these vouchers, two local manufacturers, Desmark Industries and Cooley Group, have both partnered with the University of Rhode Island to turn innovative research into new products made in-state. Within the economic toolbox the governor developed for businesses and workers, manufacturers are eligible for incentives like the Qualified Jobs Incentive program, through which companies expanding their workforce in R.I. or relocating jobs from out of state can receive annual, redeemable tax credits for up to 10 years. And the Rebuild R.I. Tax Credit can help manufacturers fill financing gaps in real estate projects with redeemable tax credits covering up to 30 percent of a project’s costs.
START THE CONVERSATION The Rhode Island Commerce Corporation and the Greater Providence Chamber of Commerce are here to help both new and established manufacturers access these and other opportunities in the state. Connect with us at: 401.278.9100 business.development@commerceri.com
INBOX
Read This Now
SUMMER READING EDITION CEOs take one of three approaches to their summer reading, depending on whether what they seek on holiday is business inspiration, complete escape from work —or some of each. HISTORY IS A FAVORITE REFUGE for escapists such as Michael Morrison, CEO of Datawatch, who plans to read The Last Stand of the Tin Can Sailors, an account by James D. Hornfischer of a World War II sea battle. Selections by M’lou Walker, CEO of Zicam, include A Pearl in the Storm, a story about rowing across the Atlantic by Tori Murden McClure. And Norman Radow, CEO of Radco Cos., has been eyeing Hero of the Empire: The Boer War, a Daring Escape, and the Making of Winston Churchill, by Candace Millard. A second stratagem involves straddling business and pleasure. Tom Mahoney, CEO of ITA Group, an employee-engagement consultancy, will be reading Payoff: The Hidden Logic That Shapes Our Emotions, by Dan Ariely. America’s Generations in the Workplace, Marketplace, and Living Room Living, by Chuck Underwood, is the targeted read of Neil Kleinberg, CEO of DiliVer, an M&A-due-diligence software company. Similarly, Meditations, the true classic tome by Marcus Aurelius, will be a page-turner for Darin Brannan, CEO of ClearData, who wants to “get back to what I fundamentally believe in and how I can apply it to my life and work today.” And Gopi Koteeswaran, CEO of LatentView Analytics, will be poring through Sapiens: A Brief History of Mankind, by Yuval Noah Harari. Unapologetically, even summer reading is all about business for some CEOs. That’s why Ross Sapir, CEO of Roadway Moving, plans to read Leaders Eat Last: Why Some Teams Pull Together and Others Don’t, by Simon Sinek. Alfred Sanchez, chief of the Greater Miami Chamber of Commerce, will be reading Rise of the Robots, by Martin Ford, because of his interest in “the issue of the quickly evaporating pool of good jobs” in the U.S. and globally. And it’s clear that some CEOs can’t get too much of the best business advice: Alon Ozery, founder of Ozery Bakery, said he’ll be “re-reading an old favorite: Raising the Bar by Gary Erickson,” which he called “a wise and inspiring book for entrepreneurs and dreamers who wish to build a value-driven company and make a real difference in this world.” And who wouldn’t want to do that—even on summer vacation? —Dale Buss 16 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
CEO COMP REPORT
Companies Need to Up Their Pay Practice Game ACCORDING TO CHIEF EXECUTIVE’S ANNUAL compensation survey, many companies follow best practices for motivating CEOs and other senior executives, but most don’t. Larger private companies, along with private equity- and venture capital-owned companies, as well as employee-owned companies, are likely to follow best practices, but others are lagging behind. BEST PRACTICES Our survey found that 40 Public company best percent of companies do not practices can and should have formal long-term incenbe applied to private tive plans, and among those companies, starting with: that do, a mere 23.5 percent ∫ Valuing company equity regularly. use performance-based vest∫ Strong governance and ing rather than time-based oversight. vesting. This is not consistent ∫ Developing time horizons with public company practices. to measure performance. Not surprisingly, our survey found that larger companies by revenue behave more like public companies (see chart). Eighty-five percent of companies with revenues from $250 million to $499.9 million led the pack, followed by 80 percent for $1 billion companies and 62 percent for those between $500 million and $999.9 million. In terms of ownership, 80 percent of employee-owned companies reported formal annual incentive plans, followed by PE-owned (73 percent) and VC-owned (63 percent) companies. Other types of ownership, such as sole proprietorships, partnerships and family businesses are far behind the top three. — Steve Rose COMPANIES WITH ANNUAL INCENTIVE PLANS BY REVENUE <$2M
26%
$2–$4.9M
26%
$5–$9.9M
29%
$10–$24.9 M
42%
$25–$49.9 M 29% $50–$99.9 M $100–$249.9 M
43% 56% 85%
$250–$499.9 M $500–$999.9 M $1 Billion+
62% 80%
For more information about the Chief Executive CEO & Senior Executive Compensation Report, visit ChiefExecutive.net/compreport
Dennis Muilenburg Honored for Leadership in Manufacturing
Chief Executive Editor-in-Chief Mike Winkleman, Chief Executive Network Chairman Bob Grabill, Chief Executive Group CEO Marshall Cooper, The Boeing Company CEO Dennis Muilenburg, Chief Executive Group Chairman Wayne Cooper, Chief Executive Editor Emeritus J.P. Donlon
Chief Executive recognizes The Boeing Company CEO Dennis Muilenburg for his commitment to excellence and focus on engaging employees. DENNIS MUILENBURG, CHAIRMAN, president and CEO of The Boeing Company, was honored with Chief Executive’s 2017 Leadership in American Manufacturing Award at the fifth annual Smart Manufacturing Summit in Seattle on May 16. The award is bestowed on the CEO whose organization’s dedication and commitment to excellence in manufacturing stands out among his or her peers. Muilenburg’s focus on Boeing’s employees and on creating an environment that breeds success is a big reason why he was named the 2017 honoree. “Dennis is fiercely dedicated to the people and culture at Boeing,” Chief Executive Group CEO Marshall Cooper said. “He knows that people bring their best when they are empowered and inspired.” Boeing supports 1.5 million manufac-
turing jobs in the U.S., and its Everett Site facility in Washington is the largest manufacturing building in the world by volume, producing Boeing’s 747, 767, 777 and 787 aircraft and employing more than 30,000 workers. “We have a passion for manufacturing and we have a passion for leadership in this area,” Muilenburg said at the Smart Manufacturing Summit. Advanced technology such as 3-D printing is changing Boeing’s manufacturing practices, according to Muilenburg. The company has moved beyond using 3-D printing technology for prototyping purposes and is leveraging it to create instantly available customization options for its manufacturing operation. “The idea of 3-D printing selectively is going to be very important to us,” Muilenburg said. “In the past, things like variability in our manufacturing lines have been very difficult to handle—even
frowned upon. Now, we can create purposeful variability in our production lines that adds value for customers. That’s a big shift in how we design and manufacture for the future.” Muilenburg and Boeing’s manufacturing team encourage the use of advanced technology and practices and believe that turning these solutions over to those who best understand the job tends to yield optimal results. “In my view, some of these advanced manufacturing capabilities don’t become real until you put them into the factory—you force it to be real,” said Muilenburg. “The people who know how to make this work are our operators, the people who build airplanes. The best thing we can do is take some of these advanced capabilities and put them into the hands of our mechanics. They surprise us every time with how much they can do.”—PG
JULY/AUGUST 2017
/
CHIEFEXECUTIVE.NET
/ 17
Sometimes what you know is who you know
Deloitte Private delivers audit and assurance, tax, consulting, and risk and financial advisory services tailored to the needs of private companies. Giving clients just one advisor to know for a whole lot of knowhow. Connect at deloitte.com/us/private. Copyright Š 2017 Deloitte Development LLC. All rights reserved. 19 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016
THOUGHT LEADERSHIP CONTENT PROVIDED BY DELOITTE
Is your company “doing” digital or “being” digital? It’s no secret by now that technology’s advance is disrupting industries across the economy. What is surprising is the large number of companies that aren’t yet accounting for it. By Doug Palmer, principal and digital strategy leader, Deloitte Consulting LLP
ACCORDING TO “ALIGNING THE ORGANIZATION FOR Attendees at a recent Private Companies DBriefs its digital future,” a study conducted by MIT Sloan webcast on the topic offered a few suggestions. of respondents Management Review and Deloitte Digital of more They want leaders to help align their organizabelieve digital than 3,700 business executives, managers and anations for digital transformation, including clearly technologies lysts from organizations around the world, some 87 communicating the company’s digital strategy will disrupt their percent of respondents believe digital technologies to employees. They also want leaders to better will disrupt their industry. At the same time, however, understand digital trends and the impact of techindustry. only 44 percent say their company is adequately prenology on the business. paring for such upheaval. Interestingly, mid-market businesses were slightly more aware of the problem (88 percent) The DBrief shared three overarching focus areas covered in but also less prepared to tackle it (38 percent). Deloitte’s recent private company issues and opportunities There are plenty of reasons for this collective unpreparedreport: ness. Many are tied to internal issues, such as a lack of agility, complacency, an inflexible culture or a company position that 1. Reimagine a digital future. Many companies that are bedigital is not a priority. hind the curve on digital adoption are simply failing to ask the What happens at companies that aren’t right questions. Instead of addressing problems as they crop prepared for a digital transformation is up, these companies should consider the potential impacts pretty predictable: typically, they throw of digital technology on their organizations over the coming say their company money at piecemeal investments in decade. With that in mind, they can develop a digital strategy is adequately select technologies and limit their apthat addresses current market realities but also includes two or preparing for such plication, instead of fostering wholesale three business initiatives that will have the greatest potential to upheaval. changes that align their organization accelerate movement toward the longer-term destination. and strategy around the new technologies. 2. Shift the cultural mindset. Tightly controlled decision makAnd that highlights the difference between “doing” digital ing can be hard for many private and mid-market companies to and “being” digital. The Deloitte/MIT study suggests that develrelinquish. But true digital transformation means exploring new oping an effective digital strategy is critical but when it comes portfolio approaches, encouraging risk-taking and accepting to the middle market, it’s a tale of two halves. Only 56 percent the risk of failure as part of that process. characterize their employer as integrating its digital strategy into the company’s overall strategy. Less than that (46 percent) 3. Approach talent needs differently. Companies shouldn’t called their company’s digital strategy “forward looking” and just match job openings to resumes. New recruits will also need focused past the next two years. Even fewer—44 percent—beto be able to bridge the gap between the company’s traditional lieve their strategy is “clear and coherent.” culture and where it wants to be. That means soft skills will The question now is: What can the other half do to better often trump technology knowledge when it comes to driving prepare their organizations for digital disruption? digital transformation.
87%
44%
Learn more at www.deloitte.com/us/pcio Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee(“DTTL”), its network of member firms and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.
PHOTOGRAPHY BY MICHAEL SEXTON
Henry Schein CEO Stan Bergman and EVP and Chief Administration Officer Gerald Benjamin with the entire team at the companyâ&#x20AC;&#x2122;s distribution center in Sparks, Nevada.
JULY/AUGUST 2017 2017 20 / CHIEFEXECUTIVE.NET / JULY/AUGUST
2017 CEO of the YEAR By J.P. Donlon
Henry Scheinâ&#x20AC;&#x2122;s Stan Bergman: How Team Culture Eclipses Everything JULY/AUGUST JULY/AUGUST2017 2017 // CHIEFEXECUTIVE.NET
/ 21
CEO OF THE YEAR
Stan Bergman leads one of the bestperforming Fortune 300 companies you’ve never heard of. The 2017 Chief Executive of the Year built a global distributor of dental, veterinary and medical products whose share returns since its 1995 IPO are up 1,300 percent—almost double that of Berkshire Hathaway.
W
hat started as a storefront pharmacy in Queens, New York, during the Great Depression is now a Fortune 300 provider of healthcare products and services with sales edging up on $13 billion this year. Henry Schein went public in November 1995 at a split-adjusted price of $8 per share; the stock recently hit $183. By any measure, the company has done well by its shareholders, yet it is not run solely for their benefit. At meetings with shareholders, CEO Stanley M. Bergman is explicit: “We say we do not exist for the investor. Instead, we say we are committed to making sure the business does just a little bit better each year. The consistency of our performance is reflected in our stock price.” Born and educated in South Africa, Bergman immigrated to the U.S. in 1976 with his wife, Marion, and joined Henry Schein in 1980 after working as a consultant for BDO. At the time, Henry Schein was a closely held catalog business, yet it had a tightly knit patriarchal culture based on employee and customer loyalty. “Henry [Schein] would go on vacation to Florida,” recalls Bergman. “While there, he would see Smucker’s jelly and come back with a case for everyone in the company. For Thanksgiving, everyone got a turkey; at year-end everyone got a case of wine.” In November 1989, Jay Schein, the founder’s son and at the time the chairman and CEO, died, and Bergman was tapped to run the company. Bergman had promised both Jay Schein and the Schein family he would continue to
22 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Stan Bergman, Chairman & CEO, Henry Schein
provide a great place to work and grow the business. Yet the company had two key challenges: The distribution business was not doing well, and there was virtually no management of expenses. Driven by a culture that cared about people, Henry Schein’s infrastructure was far too expensive. For every dollar it gave in salary, it paid out another $1.20 in benefits. Bergman and his team needed to transform the company into a profitable venture while simultaneously guarding the culture it prized. A few years earlier, President Reagan had signed legislation that allowed the generic drug market to take off. As a result, Henry Schein’s generic drug business had skyrocketed, as had its dental supply business, including items such as masks and gloves, the use of which became mandatory in response to infection risks then said to be prevalent. Ultimately, the pharmaceutical business was sold to provide the Schein family with liquidity. However, the distribution business—then at break-even—had reached an inflection point. The company needed a cost structure that would support a profitable business. The response from Bergman and his team was twofold. They decided to transform the company’s catalog business into a leading platform for dental technology and, later, veterinary products. Dentists and vets know their work, but not all are proficient in the business of running their practices. For example, at that time dentists didn’t know what to do with computers, so Henry Schein educated them, creating the largest installed base of computing systems for the profession in the process. Over time, the company became the trusted partner in practice management solutions for dental and animal health practices. Bergman also moved to “industrialize the culture,” his characterization of the shift to rationalize Henry Schein’s culture into one that cared about people but provided benefits in a way that the company could sustain with scale.
You’ve blazed the trail. We’re proud to follow. Today’s business landscape requires leaders of vision and teams committed to following their lead. KPMG is proud to salute Stanley M. Bergman of Henry Schein for being named CEO of the Year. Your path to success and dedication—and that of Team Schein—provides a guide and inspiration for us all. The success of an organization hinges on its people. kpmg.com
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 681296
CEO OF THE YEAR
Over the past 10 years, Henry Schein boasted a total average annual return to shareholders of 14.83 percent.
Bergman with Team Schein members in the company’s Nevada distribution facility, which houses dental and medical supplies and products.
“We gave birth to a culture today where the values are constant, but the culture adapts,” he says. “We err on the side of higher benefits and probably a little bit less in compensation. People looking for long-term employment are generally comfortable with the benefits at Henry Schein. Those looking for something more short term probably will not last because our salaries are not the highest.” The combination of early digitization and refining the company’s values-based corporate culture gave Henry Schein a secure platform for consistent growth. Its 10-year total annual average return to shareholders as of the end of 2016 was 14.83 percent. Its EPS CAGR over the same period is almost 12.5 percent. But the “secret sauce,” if there is one, is its team culture, according to Bergman, a quiet, self-effacing leader. “There’s no room for Heisman Trophy winners here,” he says. “The best team wins. You can have people who are not great individually but can really win when united, and you can have the greatest people who are not functioning as a team, and they lose.” Now, the biggest challenge Bergman faces is ensuring the culture adapts. The company has 21,000 people spread over 33 countries and serves one million customers through 3,000 suppliers. Its dental business accounts for 48 percent of revenue, followed by animal health at 28.7 percent, medi24 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
cal at 20 percent, and technology and value-added services at just under 4 percent. An average of 174,000 cartons are shipped daily through 62 distribution centers. The business is heavily regulated, and product recalls are often a problem to execute. It also has formidable competitors in companies such as McKesson, Amerisource Bergen and Patterson Cos., many of which have taken a page or two from the Henry Schein playbook. The business today has many more moving parts than when Bergman took control in 1989. Chief Executive caught up with Bergman at the company’s headquarters in Melville, New York. Excerpts from that conversation follow. Ninety percent of what you sell is what others sell. Why are you double the size of your competition when everybody has access more or less to the same products? The success of Henry Schein is largely dependent on our philosophy of balancing the needs of our constituents. On the one hand are our suppliers. We want those who work closely with us to be very successful. For example, we are the exclusive distributor in this and other countries for Colgate, one of the best brands in the world. They really know how to do marketing. In the dental space, they have an outstanding sales force. But we are their exclusive distributor in the dental space, not in the retail space. And they work with us because
AN UNPARALLELED EXPERIENCE Range. Speed. Comfort. The G650ER™ is truly in a class all its own. Our proud commitment to service takes you with confidence from New York to London* and everywhere else your spirit beckons. This is Gulfstream. The world’s finest aviation experience. GULFSTREAM.COM
SCOTT NEAL | +1 912 965 6023 | scott.neal@gulfstream.com *Theoretical range with eight passengers, four crew and NBAA IFR fuel reserves. Actual performance will be affected by ATC routing, operating speed, weather, outfitting options and other factors.
CEO OF THE YEAR
“[Social responsibility is] not about issuing the check.... It’s about engagement of the company in making a difference.” we help them. Of course, we carry P&G and all the rest, but we have a special relationship with Colgate based on a kinship of philosophy as it relates to the societal role of business. They are very philanthropic, as are we. In addition, there are our customers. Yes, we want to sell more product to them, but our goal is to help our customers succeed. Most of them are small to medium-size businesses. We want to help them operate a better business so that they can provide better clinical care. Because if you only worry about the clinical care, you will not be around in a competitive market, and if you only care about making money, well, you’re not discharging your responsibility. Our philosophy is based on the notion of what a good family financial advisor does: People don’t buy stocks anymore—yes, you can do that, but generally, families seek somebody who will help them manage their assets. And then we have our field sales consultants, who are trained in SME management for each of the different specialties. So we have our suppliers and our customers, and bringing the two together is our Team Schein philosophy. This is what I mean when I say we “industrialized” our culture.
WHY STAN BERGMAN? Cathy Engelbert, CEO, Deloitte “Stan Bergman transformed Henry Schein from a specialty generic drug and dental products supplier to a global medical, dental and veterinary products distributor, and associated technology services provider. All the while, he emphasized a family business culture focused on teamwork, recognizing successes and giving back to the community.” Dan Glaser, President and CEO, Marsh & McLennan “Stan is the epitome of a great leader. He skillfully navigated changing times in a dynamic industry to ensure his company continues to improve value to customers and deliver strong earnings growth to shareholders—all while setting the bar for the highest ethical and professional standards.”
You’ve said that your secret sauce is your company’s devotion to social responsibility. But almost every company has a social responsibility program. Do you feel that what you do directly helps the company enjoy bigger profit margins or higher returns? Yes, absolutely. It’s not about issuing the check. Yes, we do that. It’s about engagement of the company in making a difference. You’ll find Henry Schein people in American Dental Association meetings. There’s somebody from Henry Schein in that building in Chicago working with dentists to advance the profession several times a week. One of the most successful philanthropic community service programs in dentistry is a program called Give Kids a Smile. Until healthcare reform was passed you had to
Excerpts of comments from Chief Executive’s CEO of the Year Selection Committee
Fred Hassan, Chairman, Zx Pharma; Partner/Managing Director, Healthcare, Warburg Pincus “A strategic driver and culture carrier, Stan shows what a business leader can do for society. He makes business look good.” Tamara Lundgren, President and CEO, Schnitzer Steel Industries “Over a multi-decade period Stan has been able to reinvent his company while enabling it to stay relevant and to maintain its leadership position, as well as stay true to its core mission.” Robert Nardelli, CEO, XLR-8 “Congratulations, Stan, on being selected as this year’s CEO of the Year. You join a very distinguished list of very successful leaders.”
26 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Our third constituency is our investors. We’ve been clear with Wall Street from day one: We promise our investors we will do everything we can to provide them with a consistent rate of return. It’s not necessarily going to be the highest, but we’re focused on consistency. And we promise to take our earnings and turn them into cash.
Tom Quinlan, President and CEO, LSC Communications “Stan Bergman’s sustained performance, shareholder value creation and impact on his community has been great over a very long time.”
mance in an industry where it’s hard to distinguish oneself. His ability to adapt his company’s culture, change his product mix and change his business model over time made for a standout performance.”
Jeff Sonnenfeld, CEO, The Chief Executive Leadership Institute, Yale School of Management “His long-term commitment to his enterprise, leading it through vital life stages, renewing his strategy yet preserving the firm’s vital culture, sets him apart from his peers.”
Mark Weinberger, Chairman and CEO, EY “He’s a great choice for having sustained performance, but more importantly sustaining his organization’s values.”
Randall Stephenson, Chairman and CEO, AT&T, 2016 Chief Executive of the Year “He’s been named CEO of the Year, but it’s not due to his performance of just the last year. He’s managed to sustain outstanding perfor-
Maggie Wilderotter, Chairman and CEO, Grand Reserve Inn ”Stan Bergman balanced the ambition to achieve with the discipline to focus on consistent performance. He is a great example for CEO’s of what success looks like for employees, customers and shareholders.”
Congrats on your achievement, Stanley! Weâ&#x20AC;&#x2122;re so proud to partner with you.
athenahealth.com
CEO OF THE YEAR
“If you’re going to manage a team at Henry Schein, the test I like to give is, ‘Can that guy run a good summer camp? Will he get everybody to play well in the sandbox?’” be very poor to get dental care, or you had to be one of the fortunate people who had dental insurance, or you had to have money. So we worked with the American Dental Association to found Give Kids a Smile, where we arrange for dentists to provide kids with free dental care at 2,000 sites around the country. We’re not providing the procedures, but we’re there bringing in supplies and sitting at the tables shoulder to shoulder with the dentists. I would submit to you that this put us in a completely different relationship with our customers than just writing a check would. Now, you can’t say to people, ‘Part of your job is to do philanthropic work or social work.’ People need to want it. I believe people are at Schein because they see something special in our culture that encourages this. I mentioned our close relationship with Colgate. We get together with them based on shared philanthropic ideas. I met the CEO of Colgate sitting at the table of the dean of NYU dental school. NYU’s dental school graduates the largest number of dentists in the country. It does outreach with many clinics, and Schein and Colgate work with them. Working together with our constituents is not only a good thing, I believe our shareholders appreciate it. There are studies—one from Babson and one from Harvard—that show that companies with a purpose that are engaged in finding ways to make society a better place have higher rates of return. Attracting the right people with the right skills must be very different for a company approaching $13 billion than for a smaller company. How do you go about looking for new team members? It’s not easy. You have to make sure your management subscribes to the DNA. So how do we get management? Three ways: First, we grow from within—but we can’t keep up because we’ve grown faster than we’ve been able to grow from within. We have a philosophy of promoting from within. Several of our senior managers do not even have a university degree. Second, we go outside to recruit, but that is not so easy. It’s not unheard of to have a dozen interviews to meet all of senior management. It may take as long as a year—something we get criticized for—but we want to be careful that we’re not hiring on technical merit alone. The test I like to give is, ‘Can that guy run a good summer camp? Will he get 28 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
everybody to play well in the sandbox?’ Third, about 25 percent of our sales are in joint ventures where we own less than 100 percent, but more than 50 percent. We get talent that we couldn’t afford to hire, because they’re partnering with us in the way they would partner with private equity. [In turn], we provide an orderly way for them to liquidate their positions. This allows us to gain enormous talent. Because it’s not possible for any one company to have all the expertise that one needs. What advice would you offer entrepreneurs who are trying to build up their closely held companies and establish a bigger market for themselves? It’s all about people and results—but mostly about people. Perhaps in real estate it’s about finding the right location, but our business is a people business. Our lead director is Phil Laskawy from EY. I would submit to you that he brings more to our board than you can imagine, because we are closer to EY than to a product company. We’re a people business. The question is, how do you get all these people to work together? And that’s what you focus on. Go get the best talent—make it the best that you can afford. Make an environment where people like to work and have everybody working together for the betterment of the customer. It sounds easy. It’s not easy. The execution is difficult.
We are proud to congratulate
Stan Bergman as Chief Executive magazineâ&#x20AC;&#x2122;s 2017 CEO of the Year and salute all of our good friends at
Team Schein for their important contributions to the outstanding success of Henry Schein, Inc.
Beijing | Boca Raton | Boston | Chicago | Hong Kong | London | Los Angeles | New Orleans | New York Newark | Paris | SĂŁo Paulo | Washington, D.C.
Proskauer.com Proskauer Rose LLP | Eleven Times Square, New York, NY 10036-8299 | 212.969.3000 | Attorney Advertising
TALENT DEVELOPMENT
Employing Apprenticeships How earn-while-you-learn models can address America’s shortage of skilled workers.
P
BY C.J. PRINCE
atrick J. Dempsey, president and CEO of Barnes Group, a global industrial and aerospace manufacturer and service company, knows the value of apprenticeships because he began his career with one. At age 16, he became an apprentice at a shipbuilding company in Ireland, learning welding techniques, among other skills. Although he did go back to school for both his BA and his MBA, it was the apprenticeship that set him on course for his future success. “I realized very early on the power of learning from others and working as a team toward a common goal,” he says. “I believe apprenticeships instill those values from the very beginning of a person’s career, giving them a solid foundation upon which to build and enabling them to go on to do great things, both in the workplace and in society as a whole.” When Dempsey took over Barnes Group, he ramped up 30 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
the company’s apprenticeship program, which currently has 124 apprentices in place. “It’s something that is very near and dear to my heart,” he says. But Barnes Group is in the minority of American companies offering such apprenticeships. Unlike European countries, such as Germany and Switzerland, that have made apprenticeships a preferred career path, the U.S. has maintained a focus on the four-year college degree. “Our educational system pushed everybody to go to college and forgot about the technical trade,” says Linda Wood, trainings program coordinator for Oberg Industries, a diversified manufacturer with more than 750 employees worldwide. Wood, who once taught in the public school system, says the overemphasis on college diplomas is misguided. “We’ve created this conundrum here in the U.S. where we’re grading schools based on how many kids go to college and anyone outside of college is left holding the bag,” she says. As a result, the U.S. has been at a disadvantage in the war for talent, particularly as it relates to manufacturing. “We are coming up on a large deficit of people due to a perceived lack of attractiveness of manufacturing and
Opposite page: Dow Chemical welcoming new apprentices to its Seadrift Operations; Dow apprentices learning on the job. This page, from left: Barnes Aerospace machinist Miroslaw Zywicki working with apprentice Yenuel Martinez; Barnes’s Tim Callahan, a tool design analyst, instructs apprentice Dave Dobai.
people having the necessary STEM skills required for them to be successful,” says Dempsey. The skills shortage continues to grow. Over the next decade, 3.4 million manufacturing jobs will become available as baby boomers retire and the economy expands, but 2 million of them will go unfilled due to the widening skills gap, according to a 2015 study by Deloitte and the Manufacturing Institute. This projection comes despite the fact that 80 percent of manufacturers say they are willing to pay above-market rates in areas where talent is hardest to find. Apprenticeships provide a solution for companies willing to invest up front. They offer participants a debt-free “earn-while-you-learn” alternative to the traditional college route, as they typically begin receiving a salary from the moment they’re accepted and, at the same time, earn credits toward an associate’s degree at a local community college. “Our apprentices pay absolutely nothing for the 26 college credits we provide to each of them,” says Wood. “By the time they’re 21, they are making a good wage and can afford a home. We have many people with four-year college educations applying to come into our apprentice program because, quite frankly, they can’t find a job.”
A HEALTHY ROI To be sure, there are significant upfront costs, including tuition, educational materials and labs, apprentice compensation and benefits, recruiting and marketing, and overhead. Apprentices are typically paired with mentors who oversee their progress, an additional time-suck. But the return is big, says Dr. James Weinstein, CEO of Dartmouth-Hitchcock Health System, which launched an apprentice program in 2014 to train medical assistants for its new primary care clinic in Lebanon, New Hampshire. “It’s a rural community and we didn’t have the workforce we needed there, so we needed a way to attract new talent, younger folks.” In the first go-round, more than 2,500 people showed up to apply for 250 apprentice spots. The program cost of approximately $59,700 per medical assistant apprentice was offset by a $48,000 per-apprentice reduction in overtime costs and $7,000 per apprentice in increased revenue from medical appointment bookings, according to an independent study done by the U.S. Department of Commerce and
Case Western University. “Whatever it’s costing us to train these people, we’re reducing overtime expenses, physician turnover and staff burnout; and we’re increasing our appointments book and improving preventive care completions with over 40 percent internal rate of return on our investment, which is amazing,” says Weinstein. “You don’t get that kind of return in the stock market.” Weinstein doesn’t share the fear that some CEOs have about investing big bucks to train apprentices only to have them poached by a competitor. “That’s always a possibility,” he says, noting that so far, the program has a 90 percent retention rate. “But when you invest in people, when you train people and when you invest in their future, you get loyalty and you create a culture of caring.”
A MODEL FOR ALL INDUSTRIES Today, more than three-quarters of apprenticeships in the U.S. are in manufacturing, but the model is rapidly expanding across industries, with programs springing up in healthcare, IT, advanced manufacturing, transportation and logistics and energy. “Apprenticeship is really just a model for training that can apply to almost any industry or occupation,” says Sarah Steinberg, vice president of global philanthropy for JPMorgan Chase. In 2015, Houston Community College received a $4.2 million grant to develop apprenticeship programs with a host of companies, including JPMorgan. The bank will ultimately hire 43 apprentices from HCC; they will undergo a yearlong information technology apprenticeship and then be transitioned into full-time roles with the company. “This gives us the ability to fill a pipeline of skilled workers,” says Steinberg. “It’s also a good way of recruiting a more diverse population. If you’re just going to hire people out of the top bachelor’s degree programs, there are a lot of reasons why that doesn’t end up being the most diverse group.”
JULY/AUGUST 2017
/
CHIEFEXECUTIVE.NET
/ 31
TALENT DEVELOPMENT
Dow Chemical isn’t worried about poaching, either. “I see why it would be a concern, but at the end of the day, people want to work for Dow because they see a safe, secure, profitable company,” says Carie LaFond, public affairs leader for Dow’s HR communications. In 2015, after a brief pilot period, Dow initiated an apprenticeship program in the U.S. (as it has done for many years in Europe) in an effort to address the shortage of qualified talent. “We also have an aging workforce here at Dow, so for us, the apprenticeship program is not only filling that immediate gap, but it’s letting us use the knowledge we have in our current workforce and share that knowledge with the new resources we’re bringing in,” explains LaFond. Dow currently has more than 100 apprentices across Michigan, California, Texas and Louisiana, with a 95 percent retention rate, and has plans to expand. “We want to target not only high school graduates but
our country’s veterans,” she adds. “We’ve found TO LEARN MORE that veterans already about the steps smart have a lot of the skills and companies are taking to knowledge we need.” find, hire, train, engage LaFond acknowledges and retain talent, that apprenticeships can register for the CEO be a harder sell to parents Talent Summit at who may have had their CEOTalentSummit.com hearts set on a college education for their kids. But she is quick to add that the apprenticeship program is a debt-free path to an associate’s degree. “And then you’re going to have an opportunity to work for a company where one of the benefits is tuition assistance” for those who want to go on to earn a bachelor’s. “It’s really a door-opening experience,” she says.
SEVEN STEPS TO A SUCCESSFUL APPRENTICESHIP PROGRAM In 2014, President Obama’s Advanced Manufacturing Partnership piloted an apprenticeship program with Alcoa, Dow Chemical and Siemens and two colleges in California and Texas to customize training and close the skills and unemployment gaps. The three companies partnered with the Manufacturing Institute on an “Employer’s Playbook for Building an Apprenticeship Program.” An excerpt follows: Build the business case. A strong business case for apprenticeship will secure leadership buy-in, detail cost and time requirements and promote accountability for success. Identify stakeholders and outline milestone dates for implementation. The business case should be based on your goals for building your workforce. Partner up. Collaborating with the right partners allows you to leverage existing networks and learn best practices. Partners could include local community colleges and high schools;
company coalitions; and public entities and labor market intermediaries, such as local chambers of commerce. Focus on the framework. Designing a program to build the skills your organization needs is crucial. Classroom curriculum will introduce theory and concepts, while on-the-job training reinforces and further builds knowledge; the two should work in tandem. Make sure to invest in a collateral support network that includes mentors, coaches and peers. Be smart about marketing. Common overseas, apprenticeships are viewed as less than desirable in the U.S. Invest in creative branding to attract candidates and target multiple groups with unique approaches. Choose wisely. Develop a fact-based, multi-step, structured selection process that will gather information from many sources, including résumé, standard screening tests, formal
interviews and simulations. Track your progress. Set clear metrics for measuring success and a system for monitoring program performance. Monitor your apprentice’s success as you would an employee’s— through fact-based feedback and performance assessments. Be sure also to assess the effectiveness of classroom training and make changes where necessary. Flexibility is key, particularly in the startup year. If something isn’t working, change it. Have a transition plan. Ideally, all apprentices will have the opportunity to move into full-time roles with the company. Once those positions have been identified, the onboarding plan should be developed well in advance to ensure a smooth transition. Guide these new employees through the process with coaching and celebrate the apprentice’s achievement and make sure they know they are valued.
Source: “Employer’s Playbook for Building an Apprenticeship Program,” co-produced by Alcoa, Dow Chemical, Siemens and the Manufacturing Institute, 2014
32 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
“Organizations do not need ‘bosses.’ Organizations need leaders who will be coaches, facilitators and mentors.” – Stanley Bergman We salute you, Stanley Bergman, on being named Chief Executive’s CEO of the Year and an admired problem solver — 28 years and counting.
Copyright © 2017 United Parcel Service of America, Inc.
DATA DIVE
STATISTICS: HOW GOOD ARE THEY? WRONG RIGHT
7%
US unemployment rate
US unemployment rate
7% 0.2%
6
0.1% 5.5%
5
US GDP change
4 3 2 1 0
A
Fake news is a problem, and the Pew Research Center reports that 64 percent of Americans think it is creating significant confusion about current events and issues. And it’s not just the politically driven websites that are making things up: In April, the Securities and Exchange Commission filed fraud charges against three public companies, seven stock promotion firms and 27 individuals (including two CEOs) for “alleged stock promotion schemes” in which supposedly independent writers published positive analyses while “being secretly compensated for touting company stocks.” Statistics are often at the heart of fake news and other misleading reports. Sometimes the numbers are intentionally twisted or fabricated to make a point. Other times they have simply been unintentionally misinterpreted. Either way, as executives look to research to help guide decisions, they should keep an eye out for data-driven distortions of reality. 34 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
WRO
NG
3 1 0
-0.2% -0.4 -0.6 -0.8
5.5%
5
JAN 2014
RIGH
US GDP change 0.2% 0.0
T
MAY 2015
0.1%
-0.4 -0.8
JAN 2014
MAY 2015
JAN 2014
B
DOES IT PASS THE SMELL TEST?
In judging statistics, executives can bring two powerful weapons to bear: common sense and experience. Do the numbers in a study seem unrealistically high—for example, “There are 1 million taxis in New York City”? If the data doesn’t line up with what you know about the world, be skeptical. “If you had no idea that things were that bad, they probably aren’t,” writes Joel Best, author of Stat Spotting: A Field Guide to Identifying Dubious Data. At the same time, make sure your own biases aren’t getting in the way of that skepticism. As a National Geographic visual-data specialist recently said, “Let’s be honest: Not everybody is willing to look further into a chart if the result confirms what they want to believe.”
MAY 2015
C
SAYS WHO? CONSIDER THE SOURCE.
Who did the research and the reporting? Who funded it? Who stands to gain from the claims being made by a study? Is it an organization with a financial or political agenda? Is a publication cherry-picking findings to make a study more newsworthy? Watch for conflicts of interest behind the research, sensational headlines and claims that don’t seem to be backed up by the data. Fortunately, the Internet not only makes it easy to spread false information, it also makes it possible to quickly look into the sources behind reports. As statistics writer Joel Best has noted, “Every statistic is the product of a series of choices made by the people who produce, process and report the data.” Consider that chain as you consume the numbers.
BY PETER HAAPANIEMI
RIGHT
WRONG Annual Revenue
Cumulative Annual Revenue $350M
$3,000M
$300M
$2,500M
$250M
$2,000M
WRONG
$1,500M $1,000M
$150M $100M $50M $0M
2004
2006
2008
2010
2013
2014
2004
2006
2008
2010
2013
2014
D
WHAT AND WHO DID THEY MEASURE?
Studies will vary in rigor: A quick online survey will be less structured than a long-term academic study employing control groups. Here, key questions revolve around samples: How large was the sample? Was this an opt-in study where anyone could participate—which tends to attract those with strong negative or positive views—or was it one that used a scientifically determined sample population? It can also be useful to look at what the study asked. In a recent TED Talk, data journalist Mona Chalabi cited a widely reported study in which 41 percent of U.S. Muslims said they support jihad. But another question in the study found that the vast majority defined jihad as personal, peaceful religious struggle rather than violent holy war—a data point that was largely ignored in press reports.
E
WHAT ARE THEY REALLY COMPARING?
Putting two sets of statistics side by side can imply comparisons that are simply not accurate. Looking at the sheer number of murders, rather than percentages of murders in, say, New York vs. Albany, would not really be useful. It’s also important to remember that correlation does not mean causation: Two sets of statistics may have similar trend lines but no meaningful relationship. To illustrate, a Spurious Correlations website has calculated close correlations between thousands of disparate data sets, including the divorce rate in Maine and U.S. margarine consumption (99.26 percent correlation); the number of lawyers in Puerto Rico and the number of people who die from falling out of bed (95.70 percent); and online Black Friday revenues and the number of people killed by dogs (99.56 percent).
HOW ARE THEY DISPLAYING THE DATA?
Even if the statistics are correct, the way they are presented in charts can be misleading. Some common mistakes (or techniques, if one is trying to mislead) are shown above. A. Data points are omitted, time scale is uneven—the results look like a constant increase. B. Two sets of unrelated data on one chart create the impression they are linked. C. 3-D rendering makes identical amounts seem different. D. Cumulative amounts rather than annual amounts create a false impression of growth. E. Use of truncated Y axis starting above zero makes small fluctuations look dramatic. Today’s tools make it easy for virtually anyone to churn out charts that lead to erroneous conclusions—intentionally or inadvertently.
ILLUSTRATION BY ALEX REARDON
$500M $0M
RIGHT
$500M
Chart sources: Cogent Legal, National Geographic, BBC, Gizmodo JULY/AUGUST 2017
/
CHIEFEXECUTIVE.NET
/ 35
TALKING POINTS
WHAT YOU NEED TO KNOW ABOUT: TAX REFORM
IT’S COMPLICATED BY GORDON SCHONFELD
Here’s how to plan for it
On April 26, the Trump administration handed U.S. CEOs a generous gift in the form of a new tax reform plan. Designed to simplify the tax code and foster economic growth, it is a blueprint for how the administration intends to put more money in the hands of businesses and individuals alike. The plan’s business measures include reducing the business tax rate to a flat 15 percent; taxing profits on a “territorial” basis (i.e., earned only in the United States and not overseas); encouraging the repatriation of cash held overseas by levying a one-time tax if the cash is brought home; and eliminating tax breaks for special interests. For individuals, there are proposals to consolidate the current seven tax brackets into three (i.e., 10 percent, 25 percent, and 35 percent); double the marital standard deduction to $24,000; provide relief for families with child- and dependent-care expenses; get rid of “targeted tax breaks that mainly benefit the wealthiest taxpayers”; preserve deductions for home ownership and charitable gifts; repeal the Alternative Minimum Tax; repeal the estate tax; and repeal the tax on small businesses and investment income that helps fund the Affordable Care Act.
36 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
REALITY GETS IN THE WAY There’s just a slight problem: It’s improbable that the plan will find its way into law in the near future. Here’s why: Few Specifics. The plan— which consists of a few bullet points on a single piece of paper—lacks crucial details, such as the rate at which it would tax repatriated cash, the income levels to which the proposed individual rates apply and which tax breaks it would eliminate.
Congress Has Other Ideas. Congressional Republicans have been working on their own tax agenda for years and want to cover much more ground. Their reaction to the Trump plan was telling: a polite press release that praised it for providing “critical guideposts” for the real work to be done. Reconciliation. Final legislation will be achieved through a complicated congressional process called reconciliation, which depends on the passage of a federal budget resolution that itself is the subject of lengthy and intense negotiations. Passage of the law will require a minimum of either 51 or 60 votes in the Senate, depending on whether the
How to Pay for It? The administration expects the plan to pay for itself by stimulating economic growth that would flood the Treasury in tax receipts. But most economists think the growth rates needed to fund the plan are unrealistically high. Exploding the National Deficit and Debt. The Tax Policy Center estimates that by 2026, the tax measures proposed by the Trump campaign in 2016 (the closest detailed equivalent to the new plan) would cut federal revenues by $6.2 trillion and raise the national debt by at least $7 trillion. These are staggering numbers, especially for the majority of Republicans who espouse balanced budgets and shrinking the debt. The Pass-Through Problem. The plan’s 15 percent business tax rate would presumably apply not only to larger corporations, but also to the various
pass-through entities (e.g., partnerships, S corporations, LLCs) that are the tax structures for most middle-market and small businesses. Since pass-throughs are typically taxed at the much higher individual tax rate of their owner(s), this would be a huge boon for the owners. It would thus be an open invitation to all individuals to reclassify themselves as pass-throughs for tax purposes—a mass gaming of the system resulting from a plan whose avowed goal of simplifying the system would seem to discourage such gaming. Corporate Tax Rates Are Already Low. The rationale for reducing corporate tax rates is that the U.S. corporate rate—currently 35 percent— is much higher than in most of the rest of the world, which puts U.S companies at a major competitive disadvantage. But reality doesn’t support this conclusion: J.P. Morgan calculates that most U.S. corporations pay an effective rate of closer to 20 percent. T he Clock is Ticking. Congress must pass new laws for health care and infrastruc-
ture spending, hammer out the next federal budget and address the nation’s debt limit before it can deal with tax reform. At press time, Congress has only about six working weeks to do all of this. Don’t Forget the Fed. Even without tax reform, the Federal Reserve is committed to raising interest rates to prevent inflation. Fed rate hikes would almost surely offset whatever gains in economic growth the plan might generate.
WHAT CAN CEOS DO? Considering the Trump plan’s vagueness and the likelihood that any legislation will be significantly different, preparing for it will be challenging for CEOs. But according to Joseph J. Perry, partnerin-charge of tax & business services at accounting and advisory firm Marcum, the plan at least offers important things to think about now. Most notably: Possible Major Implications for the Individual Owners of Pass-Throughs and Their Shareholders. Individual tax rates will come into play here.
CEOs might have to decide whether to take home their cash windfall as income or reinvest it in the business. Compensation and Benefits Plans Might Need Reconfiguring. Again, this will depend on the level of individual tax rates. If rates fall enough, the attractiveness of compensation and benefits tax advantages will decline as well. Managing the Business’s Cash Flows Could Become Harder. If the tax treatment of capital expenditures (which is on Congress’s agenda but not included in the Trump plan) changes. Potential shifts in the timing of CapEx investments would directly affect the size and availability of cash flows. Take the Time to Process and Plan. On a positive note, business leaders should have plenty of time to consider the possibilities that a new tax law will present and plan ahead. By consulting with their tax advisors and playing out multiple scenarios, they can position themselves and their companies for the range of outcomes.
JULY/AUGUST 2017 /
CHIEFEXECUTIVE.NET
/ 37
ILLUSTRATION BY RICHARD BORGE
included tax cuts are intended to be permanent. There are 52 Senate Republicans, so Democratic votes will be required—hardly a slam-dunk in today’s hyper-partisan environment.
SMS SUMMIT
Smart Manufacturing Graduates
T
CEOs share strategies, tactics and opportunities for 21st-century manufacturing. BY RUSS BANHAM
he future of manufacturing has arrived—and what a future it is. The digitization of the endto-end manufacturing process promises enhanced product quality, streamlined operations, increased productivity, lower costs, reduced waste and shorter time to market. In today’s high-tech factories, the use of composite materials is already resulting in lighter, stronger, more flexible, more durable and less expensive machine parts. 3-D printers punch out single components that used to require hundreds of parts. Giant robots safely assemble complex modules in collaboration with people. And cloud-based machine learning and data science systems are connecting the end-to-end production process to generate insightful information that improves decision making. The digital transformation of manufacturing is a historic event altering hardened foreign production and supply chain trends, in which production was pushed overseas to reduce labor costs. Thanks to the extraordinary efficiencies and cost savings of smart manufacturing, in which data-powered machines efficiently and cost-effectively control the process of making goods, expectations are in place for a rebirth of manufacturing on American shores. The business opportunities presented by the digital transformation of manufacturing drew more than 200 CEOs of midsized and larger manufacturers to Seattle in May to attend the fifth annual Smart Manufacturing Summit, hosted by Chief Executive and cosponsored by The Boeing Company. “Manufacturers have a rare opportunity to leverage digital technology to partake in a renaissance of American manufacturing,” said Wayne Cooper, executive chairman of the Chief Executive Group, which publishes Chief Executive, in his opening remarks.
38 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
ILLUSTRATIONS BY JOHN HERSEY
THE JOURNEY AHEAD Many large U.S. manufacturers are well along in leveraging these opportunities, among them Boeing, Stanley Black & Decker, Siemens, ThyssenKrupp and Cisco, whose current and former CEOs and other senior executives leaders gave presentations at the Summit. Many leaders of midsize companies in attendance were there to learn more about advanced manufacturing before making an investment. Several expressed concern about competing to win the skillsets needed to operationalize the new technologies, while others brought up the challenge of recruiting workers to run the machinery. Nevertheless, the overwhelming consensus was that the opportunities of smart manufacturing are significant enough that companies should dive in now rather than risk playing catch-up down the road. Many midsize manufacturers are hungering for technologies to make operations leaner and more agile. Thanks to the resurgent U.S. economy and growing market demand, the timing may be right to allocate capital in smart manufacturing initiatives. Certainly, the collected responses of the attendees
after the Summit indicated that many are eager to follow the lead of larger manufacturers like Stanley Black & Decker. “A dozen years ago, so many manufacturers were offshoring to get their labor and wage rates and materials costs as low as possible, including us,” said John Lundgren, former CEO and current chairman of the maker of industrial tools, household hardware and security products. While this tactic reaped dividends at the time, it did little to produce continuous improvements in operational flexibility, risk management, data transparency and the elimination of waste. When The Stanley Works and Black & Decker merged in 2010 to form Stanley Black & Decker, Lundgren ushered in an end-to-end digital transformation strategy. “We became vastly more efficient, more agile and operationally leaner,” he said. “In 2000, we had 4.5 working capital turns. Last year, we had 10.6 working capital turns, versus industrial peers that were in the 5 to 6 range. Our digital transformation strategy was the jump-starter of the combined company.” JULY/AUGUST 2017
CHIEFEXECUTIVE.NET
/ 39
SMS SUMMIT NEW WAYS OF MAKING STUFF Smart manufacturing presents value across the value chain. A case in point is engineered composite materials— that is, materials that contain at least two constituent parts. The range of composites is limited only by the imagination, with different types of metals, resins, polymers, ceramics and natural fibers blended in different ratios to form the material. As attendees learned on a tour of Boeing’s Everett plant, the aerospace company is at the frontier of using advanced composites. Both its 787 Dreamliner passenger aircraft and the new generation of 777X jets currently under development are composed of diverse materials that improve fuel efficiency by making the aircraft lighter without adversely affecting strength and durability. Other manufacturers employ composites to build structures that have unique properties like thermal and electrical conductivity. “We’re seeing interest in different types of composites across many different manufacturing entities,” said Bryan Dods, CEO of the Institute for Advanced Composites Manufacturing Innovation, a twoyear-old public-private partnership that seeks to increase composites production capacity and jobs. “We’re working with a manufacturer of compressed gas storage tanks to develop a new generation of tanks with 75 percent composite materials.” The way structures are created is also changing as manufacturers adopt new technologies like 3-D printing— making an object from a three-dimensional digital design by laying down many thin layers of a composite material in succession. For the most part, the technology is used for rapid prototyping—physically printing out a 3-D design within hours, as opposed to days with a traditional development process. While 3-D printing can be used to make virtually anything, cost is a challenge. “In a part-to-part comparison with traditional manufacturing,
3-D loses out in most cases because it’s expensive,” said Duann Scott, head of business development and strategy for digital manufacturing at Autodesk, a provider of 3-D design, engineering and entertainment software. Still, Scott sees massive potential for mainstream manufacturing applications as 3-D design software and additive manufacturing processes become more seamless. “Right now making a small part using 3D printing requires up to six pieces of software to get the print from the design stage into the machine and out,” he explained. “If there’s a mistake, it can take 24 hours to find the cause.” Autodesk has narrowed down the process using a single simulation software solution called Netfabb that shares a common installer, file format and process definitions. “It can make small parts in minutes and complex ones in hours,” Scott said. “We can even make parts better than can be made traditionally, such as with holes that curve, rather than the straight holes made using a drill.” Another advantage to 3-D printing is the ability to design and make large assemblies as a single part. GE Digital, for instance, was able to 3-D print half of a machine, paring down 900 separate components to just 16, including one component that previously had 300 different parts, reported Paul Boris, former vice president and head of Manufacturing Industries for GE Digital. Not only were the printed parts 40 percent lighter and 60 percent cheaper, but the process trimmed the number of suppliers from about a dozen to
40 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
one. “This is true optimization of the supply chain,” said Boris, who left GE Digital in May for the chief operating officer post at Vuzix, a maker of virtual reality technologies.
ROBOTS AND PEOPLE Another iteration in advanced manufacturing techniques, robotics, is often viewed as a way for manufacturers to reduce labor costs. The truth is more nuanced: Rather than replace people, robots efficiently and safely take on certain tasks, augmenting the work still being done by people. “We’re not going to see an exclusively robotic factory, but we will see the optimum use of robots and people,” said Dennis Muilenburg, CEO, president and chairman of Boeing. An example is repetitive, unsafe and monotonous tasks that can cause ergonomic injuries and injuries. “Our goal is to balance our EHS [environmental, health and safety] initiatives with our productivity initiatives,” said Muilenburg. “Robots allow our employees to work safely, faster and at less cost.” Greater strides will be taken in future to allow for robots and people to collaborate more effectively, said Sujeet Chand, senior vice president, advanced technology, and chief technology officer at Rockwell Automation, a provider of industrial automation and information products. As an example, he cited a company that produces electric vehicles. “The company wanted a way to enhance collaboration between people and robots, whereby the robots would pick up 14 heavy battery packs
WE HAVE AN EDUCATED, TALENTED AND DIVERSE WORKFORCE EAGER TO CHANGE THE WORLD. IMAGINE WHAT THEY’LL DO FOR YOUR BUSINESS. The only thing as impressive as our current workforce of 9.7+ million is our future one. Our colleges and universities are among the nation’s top performers of R&D and commercialization of technologies. So while we’re helping you succeed with today’s talent, we’re also preparing tomorrow’s. Discover what a future in Florida means for your business at floridathefutureishere.com or call 877-YES-FLORIDA.
SMS SUMMIT and put them in the chassis of the car, and then people would wire the battery packs together,” Chand said. The challenge in this scenario was worker safety—the risk of injury because of the close proximity of employees to large robotic equipment. The company wanted to maintain the highest standards of worker safety without the need to build safety enclosures for the workers, which would decrease manufacturing speed and
Lade pointed to the use of smaller industrial robots deployed in the assembly of components inside a smartphone as evidence. In the past, highly customized automation equipment was required to undertake this task. Since the product essentially has a one-year life cycle, the manufacturer had to write off the capital equipment each year as new automation equipment was needed. “Robots not only allow for more functionality to be crammed
of the world’s data was generated last year,” said Batra. “Yet, only 0.5 percent of it has been used or analyzed. We’re in a data-driven environment and the only way to really capture this is with digitization. So if you’re not in the business of digitizing your manufacturing operations—and small and midsized enterprises have a long, long way to go—you’re at risk of missing the boat.” Digitizing is the first step toward reaping the productivity and efficiency
productivity. Rockwell’s solution was to embed extremely sensitive sensors in the robots. “If the robot touched a person, it stopped what it was doing immediately,” said Chand. “The risk of a person getting hurt is very, very minimal.” He added, “The future of robotics is collaborative robots.” David Mindell, a professor at MIT and the co-founder and CEO of Humatics, agreed. “Robots present huge opportunities for reducing stress and strain, bringing average workers up to the skill level of the most skilled workers,” said Mindell, author of Our Robots, Ourselves. “The factory of the future is a place where people and robots have this very well understood relationship to each other.” Other speakers affirmed this prospect, predicting substantial growth in the robotics market. “Twenty percent of our business is coming from robotics, with lots of different companies making collaborative systems,” said Herb Lade, vice president, global solutions and services, at Cognex, a manufacturer of machine vision software and sensors used in robotics applications. “The payback [for the investments in robots] is in the 12- to 14-month range, with an overall 20 percent reduction in production costs.”
into a smartphone, they do it at a more manageable cost basis,” Lade said.
gains promised by the data connectivity of the IoT. Muilenburg acknowledged that Boeing is just beginning to create what he called a “digital thread” connecting the company’s machines, processes and systems, from design to manufacture to customer delivery to service. “We’re about 10 percent of the way there now,” he said. ThyssenKrupp, a global manufacturer of elevators and escalators, is leveraging the IoT for improvements in the maintenance of its transport systems, work that represents a large share of the company’s revenue. “When an elevator broke down in the old days, we’d send someone to fix it,” said Rory Smith, director of strategic development, Americas at ThyssenKrupp Elevator Americas. “We’ve now embarked on data-driven maintenance, using the IoT to know when an elevator will break down before it actually does.” ThyssenKrupp partnered with Microsoft in the project, dubbed MAX. Here’s how it works: Data emerging from sensors and semiconductors affixed to the elevator to gauge its performance is sent every 12 hours through a 4G LTE modem to a control center in the cloud. Based on an algorithmic analysis, specific maintenance protocols are advised. “The data tells
DIGITAL THREADS If smart manufacturing were an orchestra, the Internet of Things (IoT) would be the conductor. By digitally transforming the end-to-end product life cycle, data can be extracted in the cloud from the manufacturing value chain to make products much closer to market demand. “Cloud-based analytics give you all the feedback you need on how your [manufacturing] assets are really performing,” said Caglayan Arkan, general manager, worldwide manufacturing and resources industry, at Microsoft. With the IoT, the goal is for billions of intelligent devices, machines and other sources of data to connect and provide instant business value. “When you go to a factory and you look at all the sensors and actuators and every piece of machinery on the floor, even something as simple as a little power supply in every panel, it’s all generating tremendous amounts of data,” said Raj Batra, president, digital factory, at Siemens USA, the U.S.-based division of the large German industrial manufacturing conglomerate. The challenge for companies is processing this data, he added. “Half
42 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
“It’s always all about people. People – good, honest, smart, hardworking people – are at the root of every success.” -Stanley Bergman
We couldn’t agree more. Here’s to one of the finest, leading the best – Team Schein. Congratulations, Stan. ®
carecredit.com
SMS SUMMIT us everything—every door opening, every movement, every time it goes from one floor to the next,” said Smith. “Our goal is to never have an elevator fail, fixing it before it does.”
THE TALENT DIVIDE Smart manufacturing presents extraordinary opportunities to all manufacturers. But finding the talent to make the best of these tools is a major challenge for many companies. This talent comprises both highly skilled individuals able to maximize the potential of these new technologies and lower skilled workers who can operate the machinery. Regarding the latter, the tasks are not necessarily traditional production jobs. Augmented virtual reality devices like Microsoft’s HoloLens provide the means for less skilled individuals to take on highly skilled manual tasks. The headset has a holographic computer built within it that lets users see, hear and interact with complex machines. In other words, a user need not be trained how to operate a new machine or to fix it; HoloLens duplicates the equipment in a virtual environment to provide real-time instructions. This opens up vistas of employment opportunities for less skilled individuals. The problem is finding and retaining these workers. Several midsize manufacturers cited employee absenteeism and failed drug tests as key recruitment and retention challenges. Others like Lori Osterback-Boettner, chief of staff and senior director of supply chain operations at Cisco Systems, cited the need for employees and other stakeholders to buy into a manufacturer’s digital transformation as a critical challenge. The IT and networking provider embarked on such an effort two and a half years ago with regard to its 24,000 supply chain partners across 25 locations in 13 countries. Cisco outsources manufacturing to these locations and was in the thick of reimagining itself as a software, not a hardware, provider. “We realized that the core of our
product was really changing, and if we didn’t change and adapt we would not survive,” said Osterback-Boettner. She equated Cisco’s digital transformation to driving a car at 50 mph while changing the tires. “We had people moving from hardware engineers to software engineers, from being in a factory using capital equipment to using new technologies,” she said.
As she unveiled the digital transformation strategy across the supply chain, Osterback-Boettner made it clear that workers had a choice: They could retrain and possibly relocate and stay with the company, or they could move on. Most chose to stay. “We’ve not had any significant attrition,” she said. Her point resonates in that manufacturers will either need to attract employees who are already adept at using web tools, big data analytics, machine learning, natural language processing and other evolving technologies, or retrain the current workforce to acquire these skills. “Our biggest strategic concern is hiring the talent we need for the future,” said Muilenburg. “This is why the STEM pipeline is so important, teaching about these leading-edge technologies down to the grade school level.” Some companies are solving the skills gap by retraining workers left
44 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
behind when their employers moved production overseas. For example, Shinola, a Detroit-based manufacturer of luxury watches, leather bags, bicycles and accessories that blend mechanization with artisanal cool, is leveraging its home city’s once dormant local manufacturing workforce by training workers to become skilled craftsmen. In many ways, Shinola and sister company Filson (Bedrock Manufacturing is the parent of the two iconic American brands) indicate that manufacturing need not be high-tech smart to succeed. At both companies, Bedrock is emphasizing high quality merchandise with an America ethos—in Shinola’s case Made in Detroit. In doing so, Bedrock has provided much-needed jobs in a down on its luck city once considered the temple of U.S. manufacturing. Unskilled people from in and around the Motor City were hired and trained to become skilled watchmakers at Shinola. “We pay more than the minimum wage and provide an environment in which people feel they are providing value, making things that they can feel a sense of pride and ownership about,” explained Steve Bock, president of Bedrock. As the Summit concluded, spirits were high among the attendees that they were at the threshold of momentous change for the better, assuming their embrace of smart manufacturing. “For American manufacturing to compete in future, we need to be the best,” said Muilenburg. “Incremental improvements of 1 to 4 percent just won’t do it. To win, we need substantial and continuous improvements in product quality, leaner operations and skill sets. The convergence of information, engineering and manufacturing provides the opportunity to achieve these aims.” Seizing this opportunity, the world will clamor once again for products Made in America. Russ Banham is a veteran business journalist and author of 26 books.
Congratulations to the 2017 CEO of the Year
STANLEY M. BERGMAN Here at Abaxis we are inspired by your achievment and proud to partner with Henry Schein.
www.abaxis.com
RISK UNCOVERED:
Understanding the hidden exposures of the affluent lifestyle You have worked hard to earn your success. As a CEO, you’re careful never to expose your company to unnecessary risk and litigation. On a personal level, you’re thoughtful about your investment strategy and your estate planning. But when it comes to protecting yourself and your family, have you gone the extra mile with your insurance coverage? The trappings of a wealthy lifestyle carry their own specialized kinds of risk that standard insurance companies aren’t prepared to handle: multiple homes, spread around the world, that require domestic staff; luxury automobiles and watercraft; high-value art and wine collections; and board positions in multiple notfor-profit organizations. Today’s litigious society creates an environment in which multimillion-dollar judgments are all too common. High net worth individuals often realize too late that they have uncovered personal liability exposures that open them up to the possibility of devastating legal judgments. A recent survey by Forbes found that while 80% of people with investable assets of $5 million or great-
er think their wealth alone makes them a target for a liability lawsuit, 40% of them carried less than $5 million in liability coverage and 21% had no liability coverage at all. Liability risk often exists in places that many would not expect, and being underinsured can lead to devastating outcomes. While many insurance companies will provide separate coverage for different residences, automobiles and boats, few companies look at coverage in a cohesive fashion, and this creates the potential for unintended gaps in coverage. Consider the following: Daily life. Given their often complex lifestyle, high net worth individuals face a unique set of liability risks in their day-to-day lives. Certain important questions may be easily overlooked simply because they aren’t the type of questions many others need to consider. For example, what is their liability when they lend a ski chalet or a beach house to friends? If they entertain frequently, are they adequately covered? What happens if a guest is injured in their pool? If they
THOUGHT LEADERSHIP CONTENT PROVIDED BY PURE INSURANCE
buy expensive jewelry, art or antiques while traveling abroad, are they automatically covered? When fine art, wine, antiques and jewelry within a home exceed the value of the house itself, is the proper insurance in place? Is valuable art covered if it’s on loan to a museum or taken aboard their yacht? And speaking of the yacht, in addition to the vessel itself, does coverage also extend to the crew and things such as potential pollution hazards? Domestic staff. The luxury of being able to afford domestic staff carries its own kind of risk. Wealthy employers can suddenly find themselves the target of a lawsuit by a once-trusted driver, personal assistant, childcare provider, housekeeper or caretaker for alleged improper employment acts such as wrongful termination, discrimination or sexual harassment. Plus, the more people who have access to your home and assets, the greater the chance of fraud or theft—whether it’s the employees themselves behaving unethically or an outside criminal using them as a gateway.
Board positions. Serving on the board of a not-forprofit entity can expose an individual’s wealth to the legal issues of the organization. For instance, if a lawsuit against a country club exceeds the club’s Directors & Officers coverage, the board members can be sued personally, which is why it’s critical that board members have their own coverage in place. PURE Insurance was built from the ground up to focus exclusively on the personal property and casualty insurance needs of a very select group of high net worth individuals. Its unique member-owned model provides financial strength, capital flexibility and, not least of all, a strong alignment with their members. Their insurance policies are highly customizable so that individuals get the coverages and limits that suit them. This helps to eliminate gaps that could result in significant financial loss—and untimately jeopardize the legacy that they will one day pass on. This member-owned structure enables PURE to charge fair and
accurate pricing, not the highest the market will bear. An example is its reinvention of the pricing structure for higher limits of liability coverage. Historically, limits over $10 million were priced in a very arbitrary manner; PURE’s new approach looks at the individual risk factors of the member, often resulting in significant savings. PURE has also designed its services to make its members’ lives easier. For example, Member Advocates (a resource that’s unique to PURE) take care of the administrative tasks associated with resolving claims and reducing risk. In the event of a claim, a single licensed claims adjuster assists in every step of the claims process so that the story only needs to be told once. Then, Member Advocates reach out to help members prevent similar losses from happening again—even offering financial assistance for qualifying claims. Insurance is one of the few things that people buy but hope to never use. But there is no better comfort than knowing you have an ample safety net in place no matter what unexpected situation arises.
PURE is the only member-owned insurer designed exclusively for owners of homes insured for $1 million or more.
Contact a PUREappointed independent broker, call 888.814.7873 or visit explorepure.com to learn more.
®
THOUGHT LEADERSHIP CONTENT PROVIDED BY PURE INSURANCE
CEO ROUNDTABLE
S M A R T M A N U FA C T U R I N G S U M M I T 2 0 1 7
Build American: The Case for Making It Here How companies—and the communities in which they operate— are overcoming the challenges of reshoring. By Jennifer Pellet THERE’S AMPLE REASON TO BE optimistic about manufacturing in America these days. Output has been steadily increasing, with the biggest jump—1 percent—in April, marking the fastest rate of growth since 2014, according to the Federal Reserve. At 75.9 percent, capacity utilization is up to a 20-month high. “These numbers resonate in a state that’s so heavily dependent upon manufacturing investments,” Ian Steff, executive vice president and chief innovation officer at the Indiana Economic Development Corp., told participants gathered at the Chief Executive’s Smart Manufacturing Summit for a roundtable discussion. “Manufacturing is thriving.” Workforce quality, increased efficiencies, a stable regulatory framework and access to a large domestic market are among the factors driving this rebirth. Patriotism has also helped, according to CEOs who have had success winning market share by bringing production back from overseas. For example, Stanley Black & Decker’s decision to move toward making at least 50 percent of its products in the U.S. paid off—despite higher manufacturing costs. Customers reacted with enthusiasm when the company announced it was moving 20 percent of over $1 billion of global power tool production to
Workforce quality, increased efficiencies, a stable regulatory framework and access to a large domestic market are driving reshoring. facilities in Indiana and North Carolina, said former CEO John Lundgren. “Depending on exchange rates, initially we were between 5 percent and 7 percent higher on delivered product cost, and that was after [accounting for] savings on transportation costs and time on the water,” he said, noting that the company couldn’t recoup the bump by raising prices. “We ate that. Our customers—Home Depot, Lowe’s, Walmart—weren’t going to pay more for a product.” Stanley Black & Decker anticipated favorable publicity, but the reaction of its target market far surpassed expectations. “It turned out to be a grandslam homerun,” reported Lundgren. “My target group is 18- to 24-year-old males who build houses and bridges and things. And 35 percent of the
48 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
professional contractors building in the U.S. are of Hispanic descent and very proud to be American or to be working in America. It really resonated with them. We expected it to be moderately positive, but we got an incredible lift in market share.” For some companies, however, expanding production in the U.S. remains challenging, particularly when making products that are bought and sold on price alone. For safety sign manufacturer Accuform, having a 10,000-piece component molded in the U.S. costs 10 times what it would in China. “I would love to have larger orders like that made locally, but I just can’t afford it,” said Dave Johnson, president of the company, which fulfills smaller and less complex orders at its manufacturing facilities in the U.S. Cost gaps like that may narrow over time, suggested Mark Osmanski, CEO of Atek Companies, who added that in the meantime, American manufacturers are competing on trip time, quality and reliability. “There are buyers that really value the close connection to the complex engineered products we supply, and then there are customers who are value buyers,” he noted. “[The latter] are buying mostly from China because parts are coming here [at cost]. There’s no way China is making money doing that. There are subsidies floating through the supply chain, which I think is
something that will eventually end.” SEEKING SKILLS For other companies, moving toward Made in the USA is hampered by the lack of a labor pool. “We are looking to increase the percentage of parts and components we make in America, but one of the concerns I’ve had in the past is having enough people,” explained Alejandro Centurion, president of global manufacturing operations at The Greenbrier Companies, who reports that the railcar company’s skilled workers are often poached by employers with deeper pockets. “In one of our shops in Texas, and in other states, we have problems with our people leaving to go to other companies that can pay more than our manufacturing company. Recruiting and retaining people has been a challenge,” he said. Attracting talent may well be the biggest hurdle American manufacturing faces, agreed Jim Ver Woert, enterprise solution executive with the manufacturing training company Tooling U-SME, who pointed to two factors driving the recruiting and retention challenge. “The first is what I call the Silver Tsunami,” he
said. “More than half of the Fortune 100 companies I talk to say that half of their workforce or more is getting ready to retire within five years or less. So that’s decades worth of knowledge skill and ability walking out the door.” The younger generation’s penchant for changing employers ranks a close second, he added. “Most millennials decide after one day on the job whether they will stay long term or not,” Ver Woert said. “And the reason they make that decision to leave is that the employer doesn’t have a plan for progression, doesn’t have support training. They want to see that an employer is going to invest in them.” Companies like Cicoil are seeking to address that issue by changing the way they approach recruitment. “We needed to bring in millennials to replace employees who have been here 30 years and are now getting near retirement,” explained John Palahnuk, vice president of operations at the flat cable manufacturing company. “So we recruited by offering [college students] a good working environment and a future. We tell them ahead of time, you give us this and we will give you a path to the next position. This
is what you can be.” Manufacturers must also overcome antiquated ideas about working in a factory that are pervasive among both younger generation workers and their parents. “Kids don’t realize that they can make a good living in these jobs,” said Jim Schellinger, Indiana’s secretary of commerce. “A starting welder makes $80,000; a starting architect does not make $80,000. There’s an awareness issue in getting people to understand what great jobs these can be.” MAKING MANUFACTURING COOL AGAIN Educating young people—and their parents—early on can go a long way toward addressing that issue, several roundtable participants pointed out. “When I visit automobile manufacturers in Japan, every single one of them has school buses parked out front because they’re touring young kids around the plant, because this is not the plant of the old days,” said Schellinger. “This is a high-tech laboratory, and they get those kids in there at a young age to start to inspire and educate them about what this really is about.” Taking steps to connect with high
Roundtable Participants: Day One From left to right: Srinath Narayanan, Co-founder and Partner, Edgewater Capital Partners Aurelio Banda, President, Beckhoff Automation Marshall Cooper, CEO of Chief Executive Group Nicholas Santoleri, VP, Manufacturing Rockline Industries Jeff Sanders, EVP, Hill & Wilkinson Eric Phua, VP, Keppel AmFELS
Tom McLauglin, EVP, Center for Advanced Manufacturing Pugent Sound Chris Bopp, COO, Standard Textile Jim Schellinger, Secretary of Commerce, Indiana Ian Steff, EVP and CIO, Indiana Economic Development Corp. Guillermo Cano, VP, The Greenbrier Companies Jim Ver Woert, Enterprise Solution Executive, Tooling U-SME
Don Bockoven, CEO, Leigh Fibers Jody Fledderman, CEO, Batesville Tool & Die Alejandro Centurion, President, Global Manufacturing, The Greenbrier Companies Not pictured: Paul Boris, COO, Vuzix John Lundgren, Chairman, Stanley Black & Decker John Palahnuk, VP, Cicoil
JULY/AUGUST 2017
/
CHIEFEXECUTIVE.NET
/ 49
CEO ROUNDTABLE school students and their parents is a key element of changing perceptions about a career in manufacturing, agreed Chris Bopp, COO of Standard Textile. “It’s going to take getting involved in the community, bringing the parents in to see that this is a viable alternative for their child,” he noted. “We spend a lot time in the local community doing that.” Some companies are participating in progressive programs that not only promote manufacturing careers to graduating high school students, but give those incoming workers a head start. Indiana’s Batesville Tool & Die, for example, partnered with four other companies and the local school system to develop a co-op program to give high school students technical training and exposure to real world manufacturing work. “We actually put an Ivy Tech Community College facility in the town, and the high school kids participating in the program spend about 60 percent of their time at the high school, 20 percent of their time at Ivy Tech and the other 20 percent rotating through each of the businesses,” says Jody Fledderman, CEO of the precision metal stamping company. “So they
“At 75.9 percent, capacity utilization is up to a 20-month high. “These numbers resonate in a state that’s so heavily dependent upon manufacturing investments,” —IAN STEFF, EVP and Chief Innovation Officer, IEDC
are actually getting paid, getting their GED from high school and getting trained technically. By the time they graduate, they’re one semester short of an associate’s technical degree and it didn’t cost them a nickel.” Dated facilities and equipment can also be a hurdle, noted Paul Boris, COO of Vuzix, a supplier of smart glasses, virtual reality technologies
and products. “They want to come into a role where they’re [using] new technology,” he said. “But there’s no technology on the plant floor. They come in and are told, you can’t take that technology you’re comfortable with onto the plant floor. You’ve got to pick up a binder with dust all over it and flip through it.” “It used to be that people wanted to change their plants so they could bring clients in to show off their new stuff,” said Jeff Sanders, EVP of the Hill & Wilkinson construction company. “Now it’s, ‘I want to [update] so I can bring recruits here. The technicians’ workspace at the Bugatti dealership we built is nicer than the lobby. Their ROI is greater on retaining those technicians than it is on the next client. That’s a big shift.” The good news? Investments in painting a more accurate picture of working in today’s high-tech world of manufacturing are paying off. “You have to change the perceptions, because right now it’s ‘college equals success,’ and that’s just not true,” noted Schellinger. “In Indiana, we’re seeing that change. We’ve gotten kids in high school excited again about vocational and tech education.”
Roundtable Participants: Day Two From left to right: Mark Osmanski, CEO, Atek Companies Doug Kinninger, VP, Fi-Foil Co. Fabrication Pete Rose, Manufacturing Manager, Restek Rick McClain, COO, Milwaukee Electronics Darren Booth, VP, Manufacturing Operations, Lubrication Engineers
Andrea Chuchvara, CEO, Cosmetic Group USA Rory Smith, Director of Strategic Development, ThyssenKrupp Elevator Americas Jim Schellinger, Secretary of Commerce, Indiana Ian Steff, EVP and CIO, Indiana Economic Development Corp. Geoff O’Brien, CEO, Proper Group International
50 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Steve Hilgendorf, Director, Autodesk Mike Maupin, Director of Operations, L&L Products Stan Vandegaer, General Manager, Machine & Fabrication Dave Johnson, President, Accuform Curtis Berry, VP, Engineering, Jamison Door Co. Marshall Cooper, CEO of Chief Executive Group
Stanley M. Bergman
CELEBRATE THIS IS WHAT PARTNERS DO.
We’re proud to congratulate Stanley Bergman; chosen by his peers to be 2017 CEO of the Year. And we celebrate his years of continued service and contributions as Chairman of the Board and CEO of Henry Schein, Inc., helping the world’s largest provider of health care products and services benefit office-based dental, animal health and medical practitioners. Thank you Stanley for your extraordinary partnership. To learn more, visit beckmancoulter.com
© 2017 Beckman Coulter, Inc. All rights reserved. Beckman Coulter, the stylized logo and the Beckman Coulter product and service marks mentioned herein are trademarks or registered trademarks of Beckman Coulter, Inc. in the United States and other countries. AD-52541 For Beckman Coulter’s worldwide office locations and phone numbers, please visit www.beckmancoulter.com/contact
CEO ROUNDTABLE
S M A R T M A N U FA C T U R I N G S U M M I T 2 0 1 7
Securing Capital to Grow and Innovate How can companies fund investments in the latest technology and equipment? By Jennifer Pellet FUELED BY ADVANCES IN MATERIALS, automation, robotics and connectivity, American manufacturing has entered an era of opportunity. Innovative tools and technology capable of improving efficiency, cutting costs and enhancing the performance of factories have the potential to revolutionize processes and productivity. At the same time, a business-friendly administration in Washington and greater economic optimism broadly are opening up access to capital and debt markets for those willing to invest in the necessary machinery, software and talent to deliver on that potential. As a result, manufacturers seeking funding for equipment, expansion or M&A activity have a wide array of options, Terence Begley, CEO of corporate banking at PNC, told participants in two roundtable discussions on securing capital held during Chief Executive’s Smart Manufacturing Summit, co-sponsored by PNC. “There is a lot of money out there—bank money, private equity money, equity market money—right now for making these types of investments,” Begley noted. “The tricky part is when do you lock that financing up? Do you wait or do you do it now?” SIGNS OF A SPENDING SHIFT Despite greater access to funding, many manufacturing companies have taken a wait-and-see approach to
capital expenditures in recent years— although research suggests that may be changing. In 2016, concern about turbulence in the global economy and uncertainty around the outcome of
Several roundtable participants outlined specific funding challenges, one being that most banks are still primarily numbersoriented, relying entirely on P&L statements and tax returns to assess a company’s capitalworthiness the presidential election had many companies in a holding pattern on capital expenditures. With confidence higher this year, the National Association of Manufacturers anticipates an uptick in capital spending of about 2.1 percent, according to its NAM’s First Quarter 2017 Manufacturers’ Outlook Survey. Among survey respondents, 41.6 percent reported expecting to spend more on capital investments in 2017 relative to 2016, 39.4 percent anticipated spending to be unchanged, and just 11.7 percent expected to invest less. At the same time, many CEOs who
52 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
recognize the need to update manufacturing equipment and processes find the prospect of seeking financing for such investments daunting. In fact, the very pace of innovation driving the need to update equipment has a flip side when it comes to capital expenditures. “With smart manufacturing, the useful life of the assets we’re employing could be a lot shorter than we ever planned them to be—and the other assets, the intangibles, may play a bigger role,” said Shamus Hurley, CEO of Parkson, a provider of advanced solutions in water and wastewater treatment, who pointed out that asset-based borrowing becomes more complicated in an exponentially evolving market. Manufacturing companies that traditionally obtained financing by offering machinery as collateral now find themselves needing to fund programs to train employees on new technology or invest in proprietary software, agreed Teri Jensen, vice president, finance, of the custom packaging company Utah Paperbox. “We’ve always been able to highly collateralize our financing,” she said. “Thirty years ago, when I bought a printing press, I planned to use it for 15 to 20 years. Now the latest and greatest technology is going to be out the next year.” Such concerns are more common in today’s lending environment, and banks have developed ways of
Great leaders build great partnerships Colgate-Palmolive congratulates Stanley Bergman as 2017 CEO of the Year Thank you and Team Schein for many years of support
YOUR PARTNER IN ORAL HEALTH
CEO ROUNDTABLE addressing them, noted Jill Gateman, executive vice president at PNC. “We are completely different bankers today than we were eight years ago, and the most transformational piece of that is that we’re advisors,” she said. “We have a lot more tools and do a lot more preparation so that we can really understand a company before we go out on a call. We bring peer analysis, which is something that small privately held companies really enjoy seeing—how they stack up against peers. And it really helps us understand companies in situations like that.” “We spend a lot of time with our company prospects doing due diligence,” agreed Begley. “To be blunt, we probably are not as comfortable with collateral as we used to be, but if we believe in the company, who they’re selling to, the product and the long-term strategy, we can get a lot more comfortable.” Several roundtable participants outlined specific funding challenges, one being that most banks are still primarily numbers-oriented, relying entirely on P&L statements and tax returns to assess a company’s capital-worthiness.
“All they want are numbers, numbers, numbers, and there’s no real relationship,” said Jerad Higman, president of mining equipment manufacturer Masaba. “They give you an umbrella when there’s sunshine, and then guess what happens when it rains? They want it back.” Jamie Yelle, president of Royell Manufacturing, added that it’s tough to find lenders willing to finance organic growth for a capital-intensive company that manufactures components for the aerospace industry. “The bigger you get, the more your customer demands,” he explained, noting that bid packages for [some of our] clients can run $10 million-plus. A project of that size, in turn, requires upfront investment by Royell, which is also in the process of automating operations. “We’re going to more and more automation as we move toward 24/7 [production],” said Yelle. “So you’re talking about a half a million dollars for every asset you buy. It’s all opportunities, but to take advantage of them takes money. Getting an operating line is easy for us, but I find that banks begin to get nervous about that kind of rapid growth at some point.”
What’s more, because of the way manufacturing is evolving, the value of the type of investments some manufacturers need to make can be difficult to quantify. All America Threaded Products employs decades-old legacy CNC machinery that requires expensive maintenance and updating, rather than replacement. “Finding a way to finance the capital expenditure required to keep a 10-year-old machine running and to automate, add sensors and connect it to an ERP system becomes a challenge for us,” said Casey Broderick, president of All America Threaded Products, a division of the metal manufacturing company Acme Manufacturing. FINANCING FORWARD Often, the best solution to challenges like these is for companies to take a proactive approach to accessing capital, noted Begley, who outlined a “rainy day” strategy. “A lot of companies are taking it for granted that there’s a lot of liquidity in the markets and that they’ll be able to get money when they need it even though they don’t actually have it lined up,” he said. “But lining up extra money early
Roundtable Participants: Day One From Left to right: Teri Jensen, Vice President, Finance, Utah PaperBox Jonathan Hoffman, President, School Zone Publishing David Price, President, DeBruce Manufacturing Group
54 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Bob Petrone, VP of Finance, Lewis Tree Service
Jerad Higman, President, Masaba
Mike Winkleman, Editor-in-Chief, Chief Executive Group
Dave Golterman, CEO, KI Industries
Terence Begley, CEO, Corporate Banking, PNC Financial Services Tanya Palmer, President, Entrust Manufacturing Technologies
Erika Meciar, CEO, Laco Jay Palmer, NW Aerospace Account Manager, Siemens Industry Matt Walsh, Principal, BRPH
Cardinal Health congratulates Stanley Bergman, Chief Executive’s 2017 CEO of the Year
As we help shape the future of healthcare, we salute your commitment to leadership and innovation.
©2017 Cardinal Health. All Rights Reserved. CARDINAL HEALTH, the Cardinal Health LOGO and ESSENTIALTO CARE are trademarks or registered trademarks of Cardinal Health. All other marks are the property of their respective owners. Lit. No. 5PR17-675840 (05/2017)
cardinalhealth.com
CEO ROUNDTABLE while the lending environment is favorable is a good way to make sure you’ll have what you need when you do need it. It sounds obvious, but often it doesn’t happen.” For Erika Meciar, CEO of electronic components manufacturer Laco, a five-year growth spurt has culminated with an opportunity to gain a competitive edge—one that the company must now figure out how to fund. “Funding is definitely one of our biggest challenges at this point,” she said. Lewis Tree Service, on the other hand, recently drew on a line of credit to acquire a competitor. “We acquired a competitor primarily for their business, but also for their talent,” said Bob Petrone, vice president of finance. “Some of their people became executives at our company, so both aspects worked out to our advantage.” Companies that don’t routinely pursue growth through acquisition often lack the financial firepower to pounce when such an opportunity arises, said Begley, who pointed out that companies that see acquisition
“The worst time to borrow money from a bank is when you’re in trouble or when you have a live acquisition in the works.” —TERENCE BEGLEY, CEO of corporate banking at PNC
as a potential growth path would do well to start securing financing early. “Companies that are acquisitive by nature are often better about putting away a rainy day fund or adding to their credit line because they know the worst time to go to a bank is when you have to sign a letter of intent by tomorrow,” he said. “Those who
aren’t acquisitive by nature have the opposite problem: They don’t want to overpay for credit so they only finance for their present needs. Then when they have an unexpected need, they find it’s tricky or too expensive to get financing. The worst time to borrow money from a bank is when you’re in trouble or when you have a live acquisition in the works.” In addition to having the wherewithal to take advantage of opportunities as they arise, companies that line up access to capital now can take advantage of today’s favorable lending market. For example, CEOs with floating rate loans may want to talk with a banker about refinancing to a fixed rate. “A good relationship bank can help you design a financial plan you can live with today that hedges you against some unforeseen event or rate spike,” concluded Begley. “No one knows whether the [low interest rate environment] will end gradually or change overnight if a crisis causes credit markets to pull back fast. But there’s no question that the rate environment is changing.”
Roundtable Participants: Day Two
From left to right: Mike Odom, President, HG Weber Bryan Dods, CEO, IACMI-The Composites Institute John Rothenbueler, CEO, Kwik Lok
56 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Shamus Hurley, CEO, Parkson Terence Begley, CEO, Corporate Banking, PNC Financial Services Mike Winkleman, Editor-in-Chief, Chief Executive Group Casey Broderick, President, All America Threaded Products
Mark Haller, President, Tri-Tec Manufacturing Rick Tobin, President, Bongarde Jamie Yelle, President, Royell Manufacturing Dan Frayssinet, CEO, DP Technology
CONGRATULATIONS STANLEY BERGMAN, CEO OF THE YEAR! We are grateful for your support and the impact you have made on our healthcare markets. You continue to inspire us and we celebrate your success.
1-800-MIDMARK | midmark.com
CEO TECH
CYBERSECURITY:
THE BATTLE CONTINUES You can’t eliminate the threat, but you can limit your vulnerability. BY PETER HAAPANIEMI
W
hen the WannaCry ransomware attack was launched in May, it shocked businesspeople around the world. But security experts will tell you that it was just part of a larger, ongoing trend in which cyberattacks are constantly evolving—and becoming more sophisticated. Dealing with cybersecurity challenges is an unending battle. But CEOs can take steps to help ensure that their organizations are ready—and a good starting point is a comprehensive view of the issue. Cybersecurity needs to encompass people, processes and technologies, says T. Casey Fleming, CEO of the BLACKOPS Partners security firm in Washington, D.C., and it needs to receive top management’s attention. “This needs to be led and driven by the CEO and board,” he says. “When in a matter of hours a company can
58 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
suffer a massive reputation or brand hit, or financial or stock price hit, then it’s clearly a business problem.”
The Ever-Changing Threat Keeping business information secure is not getting any easier. The proliferation of mobile technology and connected Internet of Things devices creates an array of entry points to corporate systems. It also means that a great deal of corporate technology is outside the direct control of the IT department—including a lot of data and applications. “It’s not just about compromising a network and utilizing computers and servers to do evil things anymore,” says Christopher Ensey, COO of Dunbar Security Solutions, in Hunt Valley, Maryland. “It’s also about these new applications that are the new data troves for the really powerful or valuable corporate information.” At the same time, the tools for doing evil are widely available. Software that can be used to launch cyberattacks is increasingly easy to find, as is “crime as a service” in which, for example, criminals offer to
conduct denial of service attacks on an on-demand basis. “It’s now really easy to get into the cybercrime game as a junior player, which is fundamental to what we’re seeing,” says Roderick Jones, CEO of the Rubica security firm in San Francisco. Criminals simply don’t need a lot of technical expertise to compromise company systems. The power of crimeware itself has grown by leaps and bounds—largely because much of it is being created by nations that are targeting U.S. institutions and businesses. “These tools are being developed and then actually given to organized crime groups by Russians and others in opposition to the U.S.,” says Jones. “So there is this enormous kind of asymmetry that CEOs have to deal with."
Tightening Up the Technology In this environment, CEOs need to work on several fronts. The traditional IT department is still key to security. Thus, says Ensey, CEOs need to ask their CIOs, “Are we staying in alignment with best practices in IT for security?” That may seem obvious, but busy IT groups often fall behind on some of the basics of security, such as updating systems. It’s worth noting that the WannaCry ransomware exploited systems that had older software or had not installed a recent security patch. Meanwhile, corporate security technologies are also becoming more sophisticated. Roderick Jones points to tools such as anomaly detection, which uses rules-based systems to spot unusual patterns in network usage and user behavior, and penetration testing—the launching of friendly attacks on networks to identify weaknesses. Looking ahead, companies may turn to active defense techniques—things like embedding data with code that attacks the criminals’ systems if the data is stolen. The technology for this exists, Jones says, but its use would raise legal questions. “But active defense is an emerging area that CEOs should be aware of,” he says. A decision to use it “would have to necessarily involve the CEO in the discussion, because of the policy and reputational implications of that process.” In many IT landscapes, the cloud is an area of special concern. Having infrastruc-
ture and software provided as a service over the network naturally involves security risks that differ from those found in the traditional data center operating behind the firewall. “As a CEO of a company that is very much cloud-enabled, I think about [cloud security] all the time,” says Yong-Gon Chon, CEO of the Focal Point Data Risk in Tampa. “There’s a blessing and a curse when moving to the cloud.” The cloud offers significant benefits, such as greater flexibility and less capital expense. It also means losing a degree of control over security policies—time-to-respond when there is a breach, for example, or software patching schedules. CEOs need to balance those factors when looking at the cloud. “As a practical matter, when you’re connecting to the Internet and you’re entrusting a cloud provider with your data, there is no such thing as 100 percent risk mitigation,” Chon continues. However, CEOs should keep in mind that major cloud providers typically have very robust security—often, better than a mid-size company could maintain in-house. In addition, he says, executives should look at ways to transfer risk they can’t mitigate, for example, contracts that transfer some risk to the cloud provider, or by purchasing cyber liability insurance.
Take It Personally Cybersecurity experts have long recognized that the weakest point in corporate defenses is not the technology, but the people using the technology. And today, that is truer than ever. “It’s important to remember that one single 'insider'... can render all cybersecurity hardware and software investments useless,” says BLACKOPS’s Fleming. And insiders are not just employees—think of supply chain partners, vendors and ex-employees as well. The list should also include the CEO and
JULY/AUGUST 2017
/
CHIEFEXECUTIVE.NET
/ 59
CEO TECH
other executives—people who are especially attractive targets because of their authority and their access to a wide range of company systems. The FBI reported last year that spear-phishing scams that use fake executive emails to direct payments to phony vendors had cost companies $2.3 billion in the previous three years. In essence, the criminals include details that make a recipient view the email as legitimate. To get that information, they are often making an end run around corporate security, targeting executives’ personal accounts and online activities outside the corporate firewall, as well as family members’ online activity. With all that in mind, CEOs not only need to be cautious—they might also want to rethink their own access to company information. Instead of directly accessing certain HR systems, for example, might they rely instead on reports from others? “In some ways, the less you know digitally, the better,” says Jones. “You may not want to access some of the core systems in your business, because you are the most prominent person and you’re that most obvious person that will be attacked.”
Organizing the Defense Cybersecurity is indeed a business issue, and it needs to be dealt with that way. “Cybersecurity is everything from the training department to the marketing team to HR, legal, risk governance and compliance,” says Ensey. “Every piece of the business is involved in the solution to cybersecurity challenge.” With that in mind, CEOs can: GET A CHIEF INFORMATION SECURITY OFFICER (CISO). Today, the CIO often oversees cybersecurity, but cybersecurity has grown into a separate discipline, and experts recommend
"If breaches are a fact of life, worry about the stuff you can control, as opposed to the stuff you can't control." — Yong-Gon Chon, CEO, Focal Point Data Risk
that companies name a CISO to oversee the many facets of cybersecurity. Ideally, this will be someone with a deep background in the field. Such individuals are in short supply, and some companies may not be in a position to support a CISO function. In that case, appoint a non-specialist, which will at least put a person in place who can maintain a big-picture perspective and work with outside cybersecurity consultants as needed. Also, it’s important that the CISO not report up through the CIO. “You want to be able to bring them into a board meeting separately so you get two different viewpoints,” says Fleming. “Don’t have the CISO’s reporting sanitized by the CIO.” IMPROVE COMMUNICATIONS WITH THE BOARD. Security professionals have their own perspective, and it often differs from the board’s. To help bridge the gap, CEOs can encourage CISOs and CIOs to use business language. Focal Point’s Chon also suggests using a cyber balance sheet. This lists assets and liabilities in categories such as data, human capital and so forth, with a checklist showing a risk profile for each—all of which helps the board and security experts understand each other.
60 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
ASSUME THE WORST. In reality, companies are very likely to experience breaches of their systems. Thus, it can be useful to assume that it will happen, and then give some thought to how the organization will deal with such an event. “If breaches are a fact of life, worry about the stuff you can control as opposed to the stuff that you can’t control,” says Chon, who says that key questions include, “What happens to our business when the most valuable data that we have gets stolen? How does that impact our ability to make money or our brand? How do we manage the business disruption?” The answers to such questions should be documented in a written response plan spelling out how systems and data will be recovered and how the issue will be communicated to customers, shareholders and regulators. Altogether, a lot of this puts the CEO on familiar ground. Managing financial and operational risk is central to the CEO’s job, and now cyber risk needs to be added to the list. As with other major initiatives, CEOs need to lead by example. “They must own it and they must lead it,” says Fleming. “We’re talking about a cultural change. We’re talking about policy changes and funding allocation changes. And that is all done at the CEO level.”
The 21st century economy has a 21st century address. More companies in more industries from more locations are expanding in Ohio. That’s because Ohio delivers more. More talent. More access. Better infrastructure. More robust ecosystems. It’s enough to make you rethink what’s possible. Find out what Ohio can do for your business at jobs-ohio.com.
2017 CEO TALENT SUMMIT | October 25-26 | Orlando, Florida | Co-Hosted by Embraer
Win the Talent Wars Leverage executive leadership to drive successful talent strategies
Here’s a look at the state of talent today and the steps smart companies are taking to find, hire, train, engage and retain talent.
RETAIN ENGAGE
COLLABORATE WITH INDUSTRY EXPERTS AND YOUR PEERS TO DISCUSS:
FIND
TRAIN
HIRE
∂ Countering your talent shortage ∂ Meeting your new workforces’ expectations ∂ Appealing to your multi-generational workforce ∂ Creating a culture of engagement in a multi-generational company ∂ Sharpening skills for your changing demands ∂ Adapting feedback mechanisms and approaches to performance management EXPERT SPEAKERS JEFF JAMES Vice President & General Manager Disney Institute
OMAR SOLIMAN CEO & CoFounder College Hunks Hauling Junk
2017 IN OR 26, LA D N
LORIDA O, F ND
CEO TALENT SUMMIT
C
HI
EF E
IV
E
OCTOBER 2 5A
MAGGIE LAUREANO Vice President, Human Resources Embraer Aircraft Holding
XECU
T
GARY SPULAK President Embraer Aircraft Holding
DEBORAH H. CALDER Senior Vice President Navy Federal Credit Union
STAN W. CONNALLY Chairman, President & CEO, Gulf Power Company
TONY LEE Vice President, Editorial SHRM
2017 CEO TALENT SUMMIT
OCTOBER 25-26 | ORLANDO, FLORIDA For more information, full agenda, and registration please visit:
www.ceotalentsummit.com
ECONOMIC DEVELOPMENT
REGIONAL REPORT
The West
Migration—by businesses and workers—is fueling growth in America’s Western states. BY CRAIG GUILLOT
UTAH Encompassing Salt Lake City, Provo and Park City, "Silicon Slopes" is a hotbed of entrepreneurial activity.
MORE THAN 150 YEARS AFTER the California Gold Rush, Americans are again heading west, only this time they’re in search of a high quality of life and high-paying jobs. Businesses are flocking to meet the talent, and many Western states are among the country’s fastest-growing economies. Some of the world’s largest data centers are being built in Nevada. In California, auto manufacturing is surging on the promise of clean technologies. Colorado has established itself as a global hub for cybersecurity, while Utah has carved out its own tech scene in the “Silicon Slopes.” Even in more rural states like Wyoming and Montana, there’s growing enthusiasm for entrepreneurship and tech development. NO. 6* NEVADA
Distribution and Data Center Growth in the Desert Nevada has seen a number of big tech investments, particularly in the Reno area. In January, Tesla Motors started production of lithium-ion battery cells at its $5 billion Gigafactory. While it’s less than 30 percent completed, it is projected to eventually encompass 10
million square feet and become the largest factory in the world. Apple just announced a $1 billion expansion of its data center in the Reno Technology Park, and Switch SuperNAP is constructing what will be the world’s largest data center. Jared Smith, COO of the Las Vegas Global Economic Alliance, says there has been “growth and diversification like we’ve never seen” in the southern part of the state. While Las Vegas “doesn’t run from hospitality,” he says, it’s trying to leverage its global reputation to make it known as a great place to do business as well. LVGEA reports strong growth in manufacturing and logistics as companies seek to take advantage of the city’s fast access to West Coast ports. Amazon is building an 813,000-square-foot fulfillment center in North Las Vegas, while sports apparel retailer Fanatics is building a 400,000-square-foot distribution center south of I-15. “Because of the excellent publicity we receive in tourism [and entertainment], economic diversification can go unnoted, but we’ve seen a lot of growth in manufacturing and logistics,” Smith says.
*Ranking in the 2017 Chief Executive Best & Worst States for Business (ChiefExecutive.net/2017-Best-Worst-States)
One challenge the state faces is education. The Quality Counts report, which ranks states on student performance, school financing and other qualities of K-12 public schools, put Nevada dead last in 2016. WalletHub also ranked it one of the least-educated states based on attainment. John Guedry, CEO of Bank of Nevada and founder of the Business + Education (BE) Engaged Summit to improve education, said it’s growing issue. NO. 12 UTAH
Surging Tech Growth in the Silicon Slopes Despite being known for its national parks and open desert, Utah is considered one of the most urban states, according to the U.S. Census Bureau, with more than 90 percent of the population living in urban areas. Like other Western states, access to the outdoors and quality of life are significant assets in recruiting and retaining talent. A study by the Gardner Policy Institute at the University of Utah found that the state generated more than 109,000 jobs and $9 billion in economic activity in 2015. Medical device manufacturer Biomerics announced JULY/AUGUST 2017
CHIEFEXECUTIVE.NET
/ 63
ECONOMIC DEVELOPMENT in April that it would spend $38.5 million to construct a new corporate headquarters in Salt Lake City, and earlier this year the state announced its Talent Ready Utah initiative to help fill 40,000 high-skill jobs over the next four years. Val Hale, executive director of the Utah Governor’s Office of Economic Development, says that while Utah used to be “an extraction and agriculture state,” it has quickly propelled itself into the tech and aerospace sectors. “Silicon Slopes,” an area that encompasses Salt Lake City, Provo and Park City, is a hotbed of tech entrepreneurship. The Milken Institute named the University of Utah as a top school for the commercialization of technology, and a number of locally grown startups, including Pluralsight, Qualtrics, Domo and InsideSales, have been valued at more than $1 billion each. “We led the nation last year in technology growth with a prolific growth rate that was over 6 percent. We have a lot of companies that are opening, while others are coming here to branch out and expand,” Hale says. Yet Utah must manage its growth. The Census Bureau pegged it as the fastest-growing state, with a population growth rate of 2 percent. “Our population crossed 3 million in 2016 and it will double in the next 30 years. We live in the desert, which can pose some challenges, and we also need more talent and workers,” Hale says. NO. 13 COLORADO
A Capital for Cybersecurity Cybersecurity is one of Colorado’s fastest-growing industries. Stephanie Copeland, executive director of the Colorado Office of Economic Development and International Trade, says there are more than 100 purely cybersecurity-based companies in the state employing more than 85,000 people. Last year, Colorado Springs became the home of the newly established National Cybersecurity Center, which provides collaborative
IDAHO Having invested more than $1 billion in public and private partnerships, Boise is one of the fastest-growing construction markets in the country.
cybersecurity response services to the nation through training, education and research. “The combination of the highly skilled technical workforce with the backdrop of the military that exists in the state has created this confluence of a rich environment for cybersecurity development,” Copeland says. Colorado has also seen strong growth in other sectors. In December, BP moved its Lower 48 division headquarters from Houston to Denver, calling its operations in the Rocky Mountains “an important energy hub of the future.” Amazon announced in January that it was planning a one million-square-foot fulfillment center in Aurora, and Smucker’s announced a $340 million manufacturing facility in Longmont. Google has also been expanding its presence in Boulder, where it has doubled its workforce since 2015. J.J. Ament, CEO of the Metro Denver Economic Development Corp., says that while Denver used to be known as “an energy town,” it has developed a reputation around technology. Tech firms Gusto, Partners Group and OnDeck Capital have opened offices in the past two years. The state
64 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
also continues to be viewed nationally as a lab experiment for legalized recreational marijuana. According to the Colorado Department of Revenue, the industry sold $1.3 billion in medical and recreational marijuana in 2016, generating close to $200 million in tax revenues. Copeland says that despite all the publicity it’s generating, the new industry hasn’t been “earth shattering” in moving the state’s economy one way or another. The influx of workers to the metro area is creating a significant demand for housing, yet Copeland says local regulations have created a “disincentive to build condos” and an incentive to built apartments. The Homeownership Opportunity Alliance says condo construction in Denver has fallen from 20 percent of all new housing construction in 2005 to only percent today. NO. 18 IDAHO
Locally Headquartered Companies Fueling Growth in Boise While Idaho’s economy has always been heavily rooted in agriculture and food, strong growth in those sectors has been planting seeds for further development. Through acquisitions and mergers, Boise-based Albertsons has
A REASON TO SMILE Procter & Gamble congratulates
STANLEY M. BERGMAN 2017 CEO OF THE YEAR
Many thanks to Stanley M. Bergman, Chairman of the Board and CEO of Henry Schein, Inc., for over 25 YEARS of continued partnership and dedication toward improving patients’ oral care.
© 2017 P&G
ECONOMIC DEVELOPMENT grown from fewer than 200 stores to more than 2,300 locations and $60 billion in annual sales in only five years. Last year, Albertsons announced an expansion and 300 more jobs at its Boise headquarters and expressed its intent to go public. The Financial Times reported in April that the company was considering a bid to buy Whole Foods. Other companies headquartered in the area, including SuperSaver Foods, WinCo., Simplot and Heartland Recreational Vehicles, have also seen robust growth that Clark Krause, executive director of the Boise Valley Economic Partnership, says is driving the local economy. “Many of these companies have had extraordinary growth, and that has fueled strong organic development in the Boise metro area,” Krause says. Krause says the economy is quite different than it was 10 years ago when the area was hit hard by the recession and subprime mortgage crisis. He notes the city is one of the fastest-growing construction markets in the country. Over the past several years, Boise has invested more than $1 billion in public and private projects such as the new Simplot headquarters, City Center Plaza and JUMP (Jack’s Urban Meeting Place, a nonprofit community center). The Associated General Contractors reports that between September 2015 and September 2016, construction employment rose 25 percent, the highest in the nation. “There are cranes everywhere, with lots of wonderful projects coming out of the ground,” Krause says. One challenge Idaho faces is keeping up with growth in its capital city. Boise has been ranked as one of the 20 fastest-growing cities in the country. “All of us as community leaders are very much in tune that we need to grow the city in a healthy way and not wait until it has horrendous chokes that become a problem,” Krause says. Rural areas have also been trying to diversify their economies. Doug Manning, economic development
director for the city of Burley, says while the agriculture and food industry continues to thrive in the Mini-Cassia region, growth is “spinning into other sectors.” Last year, Dow Chemical announced it would build a 60,000-square-foot manufacturing facility in Burley. NO. 24 WYOMING
Moving Beyond Energy Due to energy dependence and plummeting oil prices, Wyoming’s economy has had a bumpy ride of late. The Bloomberg Economic Evaluation of States Index ranked Wyoming dead last in terms of employment, mortgage delinquency, personal income, home prices and the stock of local companies. On the upside, there have been strong efforts to diversify the state’s economy beyond energy. Last year, Gov. Matt Mead announced the ENDOW (Economically Needed Diversity Options for Wyoming), a 20-year strategic plan to coordinate economic diversification efforts across the state. Mead said in a press release the goal is to “build on recent success in establishing technology as a fourth leg of Wyoming’s economic strength… to build on the efforts that add value to coal, minerals and natural resources… to build on our success in growing a manufacturing industry.” Local efforts are already producing results. The New Growth Alliance, which includes Campbell, Sheridan and Johnson counties in the northeastern part of the state, is aiming to diversify with tech. New Growth Alliance CEO David Simonsen says the region has been expanding its community college system; Sheridan College is nearing completion of a renovation and expansion of its Technical Education Center to produce more skilled tradespeople. Simonsen recently helped recruit a company to the region by introducing himself to a CEO at a conference. New Growth Alliance brought the CEO to the state, presented its value propo-
66 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
MONTANA The state's craft brewing industry has grown by 87 percent since 2010.
sition and offered a training program to support the workforce. “I was the only person in a room of about 200 economic developers that went up and talked to him after a presentation.… The relationship has grown and we’re in the process of getting the company into Buffalo, [Wyoming],” Simonsen said. One of the biggest challenges to Wyoming’s economic diversification efforts is that dependence on the energy sector can make it hard to recruit workers. “The fact that they pay very well when they’re operating full-bore makes it tough to compete. It’s difficult to draw people from away from those jobs into other sectors,” Simonsen says. NO. 26 MONTANA
Growing Through Grass-roots Entrepreneurship Montana is one of the dozen states that isn’t home to a Fortune 500 headquarters, but its mid-market and startup scene is bustling. Bridger Mahlum, government relations director for the Montana Chamber of Commerce, says the state has seen a surge in entrepreneurship in recent years. Roughly 10 percent of Montana’s adult population
Congratulations Stan Bergman
BD (Becton, Dickinson and Company) takes this opportunity to congratulate a true leader and humanitarian, Stanley M. Bergman, Chairman of the Board and CEO of Henry Schein, on being named 2017 CEO of the Year. We have the privilege of knowing Stan and working with him as a business partner, collaborator, philanthropist and friend. He is a remarkable leader in all respects. Stan’s impact extends well beyond his outstanding success as CEO of Henry Schein. He is a global leader in the truest sense of the term, addressing the needs of societies all around the world by furthering the causes of good health, peace and justice. He represents a standard that all CEOs can ascribe to — simultaneously advancing global prosperity and social good. On behalf of over 40,000 BD associates worldwide, we express our deep appreciation for Stan Bergman’s leadership, graciousness and good deeds that have served to improve the lives of countless people throughout the world. With appreciation from all your friends at BD.
bd.com © 2017 BD. BD and the BD Logo are trademarks of Becton, Dickinson and Company.
ECONOMIC DEVELOPMENT
WASHINGTON A lower cost of living relative to Seattle is luring tech workers—and the tech companies that employ them—to settle in Tacoma.
owns their own business, and a recent report by the Ewing Mario Kauffman Foundation says Missoula has the ninth-highest business startup rate per capita among 394 metro areas. Some big businesses are expanding: In 2015, Boeing opened a 55,000-square-foot expansion at its Helena manufacturing facility. Mahlum adds that there has been significant growth in small manufacturing—local manufacturers Spika Design & Manufacturing and Wood’s Powr-Grip are among those that have expanded in recent years—and a report commissioned by the Montana Manufacturing Extension Center at Montana State University shows positive developments in manufacturer retention and recruitment. The Montana High Tech Business Alliance estimates there are more than 540 high-tech and manufacturing companies operating in the state. “We’re seeing a lot of growth for small to medium-sized manufacturing that are either making their own product or doing a lot of subcontracting for some of the bigger companies,” Mahlum says. There has also been notable growth in the craft brewing industry, Mahlum says. A report by the Bureau of Busi-
ness and Economic Research at the University of Montana said the industry has grown by 87 percent since 2010 and provides more than 1,000 jobs with $33 billion in personal income. One challenge is cultivating Montana’s homegrown businesses into larger employers. Yet, while Montana a long history of graduates leaving the state for elsewhere, Mahlum says “new business opportunities are making it more of a career place for young people.” NO. 39 WASHINGTON
The Premiere State for STEM Work According to the U.S. Department of Commerce, Washington’s GDP grew by 3.1 percent in 2016, the third-highest growth rate in the nation. Jamie Rossman, senior economic analyst at the Washington Department of Commerce, says the state’s economic success is being driven by a highly educated population. Personal finance website WalletHub recently called Seattle the best area for STEM professionals, with the second-highest percentage of the workforce employed in STEM professions and 98 STEM openings per 1,000 residents. While Boeing moved its headquar-
68 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
ters to Chicago in 2001, Rossman notes Washington is still home to 80,000 of the company’s 100,000 jobs nationwide. Amazon is also expanding its footprint in Seattle and recently filed permits to build another 17-story office tower. The company now employs more than 40,000 people in the state. “We are Boeing. We are Microsoft. We’re Amazon. We’ve got some good growth in many areas. We have the strongest tech cluster outside of Silicon Valley…and at the same time it’s still relatively affordable to live [here],” Rossman says. Ricardo Noguera, economic development director for the city of Tacoma, says more tech firms have been expanding their workforce to the Puget Sound area due to escalating real estate values in the San Francisco Bay area. California tech company Infoblox recently announced it was expanding its Tacoma office, saying it offered strong value in cost of living and could draw on talent from Seattle. According to Zillow, a median-priced home near Infoblox’s Santa Clara headquarters is more than $1 million, compared to the median price of $250,000 in Tacoma. Noguera also notes that the retention rate of tech workers is much higher in the region, up to four years in Tacoma, compared to an average of nine months in Silicon Valley. “We’re seeing a number of tech startups starting to take shape in our city, and more investment. The cost of living and ability to grow the company and maintain the workforce are big factors,” Noguera says. NO. 44 OREGON
Rapid Growth and Expansion in Apparel Manufacturing The Beaver State has had one of the healthiest economies in the nation for the past few years with growth in multiple sectors. Chris Harder, director of Business Oregon, says tech and software development are growing rapidly, driven by the presence of Intel and a robust entrepreneurial community. Oregon remains “the Silicon Valley
PERFORMING AT HIS BEST
STANLEY BERGMAN Chairman of the Board & CEO of Henry Schein, Inc.
Hu-Friedy Dental Manufacturing congratulates our esteemed partner, STANLEY BERGMAN, for being named CEO OF THE YEAR. With an exceptional legacy of leading Team Schein, and a compelling vision for the future, Stanley is an excellent choice for this honor. Visit us online at Hu-Friedy.com ©2017 Hu-Friedy Mfg. Co., LLC. All rights reserved. [840]
ECONOMIC DEVELOPMENT
CALIFORNIA Tesla's factory in Fremont boasts a "Supercharger" where consumers can charge their cars for free in one of four public stalls.
for the outdoor and apparel industry,” he adds, and is home to such companies as Columbia Sportswear, Nike and Adidas North America. Amazon recently announced plans to construct a ninth data center in Umatilla County. The manufacturing sector is being driven by the Oregon Manufacturing Innovation Center, which opened in Scappoose in January as a partnership between state government, higher education and industries. Modeled after the Advanced Manufacturing Research Centre in Sheffield, England, the OMIC will promote research and development and training in the industry. “We’re bringing together all of these groups, economic developers, government, universities, and firms… and its goal is to help companies do R&D, create better products,” Harder explains. Michael Gurton, an analyst at Prosper Portland, says Portland has been experiencing rapid post-recession growth, with most of its large employers continuing to expand. As with a number of other West Coast cities, he says there has been strong in-migration and a big talent pool. Last year, Nike announced a $380 million expansion of its headquarters
in Beaverton; Under Armour is also expanding its 109,000-square-foot campus in Portland. Yet Gurton says Portland is increasingly challenged with affordability, homelessness and inequality. He says the city is making a number of investments through the housing bureau and trying to leverage economic development to bring more benefit to underserved communities. “And the city, from the mayor down to us, is trying to meet that challenge head-on and change how we do economic development to be more inclusive and focus on those who haven’t experienced this post-recession boom,” Gurton says. NO. 50 CALIFORNIA
A Return of Auto Manufacturing There has been a resurgence in American auto manufacturing, and nowhere is that more apparent than in California. The state’s automotive manufacturing sector has grown by 22 percent since 2011, driven by direct access to the Pacific Rim and one of the country’s top talent pools. Brook Taylor, deputy director of Governor’s Office of Business and Economic Development (GO-Biz), says growth is partly being fueled by the California
70 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Competes Tax credit program, which has been in place since 2014 and offers $240 million in annual incentives. “California is leading the next phase of automotive development, and it’s being spurred directly by a government program that is propelling these companies to make investments here,” Taylor says. It’s a big change from where California was a decade ago. In the mid-2000s, the auto industry started divesting from the state, closing a number of plants. In 2010, Toyota and General Motors abandoned their joint operations at the New United Motors Manufacturing Facility in Fremont, which was then taken over by Tesla. Taylor says the market started to truly turn around in 2011 when Tesla established its headquarters and made the base of its manufacturing operations in Palo Alto. Since then, legacy car companies such as Ford, Honda, Mazda and GM have returned and made large investments in their new technology divisions. “A lot of this was the result of a push toward electric vehicles and zero-emission vehicles, and now it’s a push toward autonomous vehicles,” Taylor says. The activity is branching out beyond consumer automobiles to buses and service vehicles, Taylor adds. Chinese company BYD, which opened a factory in Lancaster in 2013 to construct electric buses, is working on a second phase expansion that will add thousands of additional square feet and more jobs. Despite the growth, California has its challenges. The state has been noted for its high costs and what some call a “business unfriendly” environment. Yet Taylor points to the state’s economic success and says any higher costs can often be offset by incentives and access to top talent and the Asian market via West Coast ports. Craig Guillot is a business journalist and content creator specializing in technology and economic development.
“Nothing of any great consequence happens individually. Every great success requires a team, and at Henry Schein, we have an exceptional team.” Stanley Bergman
Team Schein Congratulates
Stanley Bergman 2017 CEO of the Year We celebrate this special honor and your success as our “Team Leader” for the past 28 years! Our best years are yet to come!
www.henryschein.com
PLANE ADVANTAGE
BUY
How to a business jet
m
BY Follow these JAMES seven steps to smooth your WYNBRANDT jet-buying journey.
aybe your company is outgrowing charter, or you have a demanding new client in a hard-to-reach location. Perhaps your company had a jet but sold it during the Great Recession. Whatever the reason, if youâ&#x20AC;&#x2122;ve concluded that owning a corporate jet makes business sense, youâ&#x20AC;&#x2122;ve picked an opportune time to be in an acquisition mode. Not only are several next-generation jets coming to market (for a guide, visit ChiefExecutive.net/ceo-guide-private-jettravel), but pre-owned aircraft are at historically low prices, and plenty of perfectly airworthy legacy platforms are begging for buyers.
72 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
ILLUSTRATION BY ELWOOD SMITH JULY/AUGUST 2017 /
CHIEFEXECUTIVE.NET
/ 73
PLANE ADVANTAGE
However, navigating the market for both new and pre-owned aircraft requires an experienced crew. Large sums of money and personal safety are at stake, and the transaction presents many opportunities for expensive mistakes. “It’s a complex, fast-changing environment, and it has to be dealt with by professionals on all sides,” says Jay Mesinger, CEO of Mesinger Jet Sales, based in Boulder, Colorado, citing deal components that include regulatory considerations, financing and tax strategies, and export and import logistics, as well as coming avionics mandates. “The good old days of the back-of-a-napkin or handshake deal are really gone.” “I would encourage anyone to seek counsel,” advises Johnny Foster, chairman of the National Aircraft Resale Association (NARA) and president and CEO of OgaraJets in Atlanta. “Align yourself with a professional team as if you’re going into court to go to battle.” If you’re like many CEOs, you may opt to use a brokerage firm to handle the acquisition process rather than be personally involved. And you may not even plan to be the primary user of the jet. C-suite executives are aboard less than half (48 percent) of corporate jet flights, according to a 2015 Harris survey of business jet users and flight crews, a figure that counters the myth of corporate jets as fat-cat toys. Regardless of your level of involvement in the purchase—or even how much you personally expect to use the jet—here are seven steps to follow to ensure the process goes smoothly and you get the right aircraft for your company’s needs.
1
Get Proper Representation Engage a qualified business aviation consultancy or brokerage to spearhead the purchase. Consultants offer expertise in the full spectrum of business aviation costs and operational issues, while brokerages specialize in the complex process of aircraft transactions. Consultants usually recommend brokerages to source and handle the purchase once candidate models are identified. Work with a representative who “guarantees absolute transparency through all phases of the transaction,” says Foster. The National Business Aviation Association (NBAA) maintains a directory of member brokerages and consultants, along with other services, on its website, as does NARA.
2
Identify Potential Aircraft The search for your jet begins with a detailed analysis of corporate travel needs and patterns, along with purchase and operating budgets. Consider who will be on board, frequency of usage, destinations, baggage requirements and preferred configuration. Anticipated needs and how long you plan to own the jet before upgrading
74 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
are also important in identifying candidate aircraft. For example, it doesn’t make sense to buy a long-range jet capable of transcontinental trips if most of your flights are regional. Define as well the jet’s strategic role, or “what you must have the aircraft do to be successful in your organization,” says David Wyndham, president of consultancy Conklin & de Decker, which has offices in Arizona, Massachusetts and Texas. With the case for ownership made, a consultant or broker “can work with the CFO to define a cost-effective way to get it done,” Wyndham says, adding, “The CFO typically gets paid to say, ‘No, you can’t have it.’” Your acquisition team will identify the category, models, vintage and other characteristics of jets that suit your needs and budget. Don’t expect one jet to meet all your travel needs; plan to use supplemental travel solutions as needed. According to the Harris survey, business jet users fly commercial for more than one-third (36 percent) of their trips.
3
Address Legal Issues Your company likely has in-house counsel or a law firm on retainer, “but a non-aviation attorney isn’t going to understand specific nuances of aviation transactions,” says Mesinger. An aviation attorney will know how to tailor the aircraft ownership structure or choice of entity, such as a corporation or LLC, to your company’s unique usage and tax profile. If the transaction is not structured
Discover how Executive AirShareâ&#x20AC;&#x2122;s day-based fractional program and strategic locations throughout the nationâ&#x20AC;&#x2122;s midsection and Great Lakes region let you go where life and business take you.
Visit us at ExecAirShare.com or call 866.946.4900
PLANE ADVANTAGE
4
Arrange Financing After their post-recession pullback, financial institutions are again funding aircraft purchases and refurbishments, expanding the options in the choice of both jets and financing plans. If you can put up 20 percent to 40 percent of the purchase price, instead of the traditional 10 percent, “there are lenders out there for just about any product or vintage,” says Foster. Still, arranging financing can take about six weeks, says Mesinger—longer than in pre-recession days. Plan ahead so that you’ll have funding in place by the time the search for your jet begins in earnest. Terms can be aligned to fit your ownership structure and cash flow needs through traditional debt financing or operating leases. An additional benefit to working with experienced aircraft lenders is their extensive teams of specialists, including aircraft appraisers and regulatory experts.
CARTERDAYNE/ISTOCK
appropriately, your company could be subject to additional taxes, its aircraft insurance voided or your flight operations rendered illegal. An aviation attorney will also draft the purchase contract and can draw up a corporate use policy, ensuring the aircraft is used as intended so that the cost of operation can be deducted as planned. If your company is publicly traded, the attorney can ensure compliance with SEC reporting requirements for any personal use of corporate aircraft by directors and officers.
NEW OR PRE-OWNED? The business jet market comprises both new and pre-owned aircraft, with combined annual sales totaling about 3,000 units. Last year, 2,442 pre-owned aircraft sales and leases were recorded, compared to 661 new jet sales, though factory-fresh airframes account for much more revenue ($18.4 billion for new aircraft vs. $10 billion for pre-owned). New aircraft offer the latest technology and cabin amenities, along with warranties that keep operating costs low and predictable. These airframes include both models that have been in production for years and new-tomarket aircraft like Gulfstream’s G500 and Cessna’s Citation Longitude. Newly introduced aircraft are more prone to production problems or may fail to meet promised performance benchmarks, notes Jeff Agur, CEO of consultancy VanAllen. He recommends buyers get performance guarantees in writing, for their “greater confidence, [and] also greater protections.”
76 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
Pre-owned aircraft range from almost-new airframes with only ferry time to legacy platforms that have been out of production for decades, but all have seen sharp drops in residual values, presenting a cornucopia of values for buyers. Even a 15-year-old jet is “a pretty modern aircraft,” says NARA Chairman Johnny Foster. Aircraft brokers are involved in 85 percent to 90 percent of pre-owned business jet transactions, according to NARA. Yet the industry is unregulated, and brokers require no training, certification or bond. Perform due diligence on any representative you consider working with. NARA promulgates a code of conduct and ethics for aircraft brokers that its members pledge to observe. The association has some 40 brokerage members, representing just 3 percent of the world’s registered brokers, but last year they accounted for 65 percent of the $10 billion in global pre-owned business jet sales.
TIMING IS EVERYTHING Why miss another meeting, another airport departure, another round of golf, another dinner… another opportunity?
AAG It’s about time. It’s about service. New York’s Premier Executive Helicopter Ser vice for more than 25 Years. Unparalleled Safety, Ser vice, Reliability.
Call AAG at 1.877.SIK.7676 ASSOCIATED AIRCRAFT GROUP SIKORSKY-AUTHORIZED CUSTOMER SUPPORT CENTER
EXIT
flyaag.com 7023 (05/15)
EXIT
charter@flyaag.com l 845.463.6500 l 877.SIK.7676
PLANE ADVANTAGE
6
The lender’s money is at stake, so these institutions take a proprietary interest that the aircraft is appropriately valued at purchase and retains its value during your ownership.
5
Select a Management Company Owning and operating a corporate jet is a business in itself. If you don’t want to establish a corporate flight department, a management company can provide turnkey operation, from supplying flight crews to overseeing maintenance. Whether it operates just a few aircraft or scores of them, and provides support services in-house or outsources all such work, the management company will be your partner in optimizing the ownership experience and maintaining the jet’s value. Management companies can also provide clients with significant discounts on fuel, insurance, crew training and other services through their volume purchases. Your management company should be involved from “the moment you’ve selected the aircraft” to buy, suggests Robert Molsbergen, president of Ronkonkoma, New York-based management company ExcelAire, to ensure the jet is ready to meet your needs from day one. Some companies make their jets available for charter during slack times to defray ownership costs. If that’s your plan, be sure to discuss it with the management companies you are considering, as they operate these Part 135 (charter) flights. Be wary of promises of high charter income that “make the owner believe that he can fly for free,” says Molsbergen.
Inspect the Jet You’ve searched the worldwide fleet, identified the best prospects, negotiated with owners’ representatives and settled on a price. Now comes the “prebuy,” or pre-purchase inspection to ensure the jet’s condition is as advertised. With the sophistication of onboard systems, age of aircraft on the market and costly “squawks” that various models are prone to, a thorough pre-purchase inspection is mandatory. Enlist a maintenance technician experienced with the make and model to lead the inspection. As the buyer, you get to decide where and how the inspection will be performed, and the inspection protocol can be written into the purchase contract. These inspections may last several days. “You don’t know what you’re going to find when you inspect,” says Mesinger, “and you don’t know how long it will take to correct.”
7
Establish Title Once any discrepancies discovered during the pre-purchase inspection have been resolved and the purchase price adjusted and/or corrective work performed, you can complete the purchase—assuming you’ve determined no liens or other encumbrances cloud ownership. Establishing title has always been among the most essential
78 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2017
elements in an aircraft purchase, and title companies are well-practiced in scouring FAA and other databases, where aircraft loans, unpaid repair bills and other claims are registered. But in today’s global business aircraft market, your candidate jet may be under the registry of a nation that has no centralized claims database. Title companies now have in-country agents to comb through records, and may hire local attorneys to search for claims and write a legal opinion on ownership. Once title is established, transfer is typically conveyed with the bill of sale, which records the title transfer for registration purposes.
Congratulations! Your company now owns a business jet. If you’re like most corporate operators, you’ll see the benefits on your bottom line. A recent report on S&P 500 companies by Nexa Advisors, commissioned by the NBAA, found that those using business aviation consistently outperform their competitors in financial metrics, including revenue growth, net income growth and average return on investment. Given the rising recognition of facts like these, you may need to be familiar with acquisition milestones even if you have no immediate plans to buy a jet. Brad Pierce, president of Restaurant Equipment World, who has long relied on the aircraft he pilots in building a nationwide distribution business, recounted a recent conversation with “a CEO friend who runs a multibillion-dollar company.” According to Pierce, the friend told him, “The board said I need to buy an airplane or they’re buying it for me. They said, ‘You’re wasting too much time in travel.’” James Wynbrandt is a pilot and aviation expert, author of Flying Hgh and a contributor to Air & Space and Business Jet Traveler, among others.
RESERVE YOUR SPOT
LEADERSHIP SUMMIT 2017 DENVER, COLORADO | NOVEMBER 2-3, 2017 A unique opportunity to work on your companyâ&#x20AC;&#x2122;s growth, talent, execution and leadership strategies.
FEATURING
JIM COLLINS
Best-selling author and advisor to CEOs on strategy, sustainability and growth
FOR MORE INFORMATION AND TO REGISTER, GO TO:
www.ChiefExecutiveLeadershipSummit.com
TIME CAPSULE
AD INDEX
AAG 77 www.flyaag.com Alix & Partners www.alixpartners.com
Outside Back Cover
WORKING IN A PROTOTYPE
Abaxis 45 www.abaxis.com Athena Health www.athenahealth.com
27
BDO Accounting www.bdo.com
7
Beckman Coulter www.beckmancoulter.com
51
Becktin Dickinson www.bd.com
67
Cardinal Health www.cardinalhealth.com
55
Care Credit www.carecredit.com
43
CEO Talent Summit www.ceotalentsummit.com
62
Colgate Palmolive www.colgatepalmolive.com
53
How today’s CEO office can help foster innovation. BY JIM KEANE
Keane in his workspace
WHEN I BECAME CEO, MY FIRST priority nity on the main aisle of the first floor so was to accelerate decision making we see people every day as they pass and innovation within our comthrough. We start our days and end Chief Executive Deloitte Private 18, 19 Magazine www.deloitte.com/us/private pany. As a leadership team, we THE FIRST our days together, and we work Enterprise Florida 41 40 YEARS worked to delegate decision makin a very dense environment that www.floridathefutureishere.com ing more completely. We spent fosters impromptu discussions. We Executive Airshare 75 www.ExecAirShare.com less time making lots of decisions developed a new material that allows The Greater Rhode Island Commerce and more time curating culture—build- for glass conference rooms, but “cloaks” Corporation and The Greater Providence Chamber of Commerce 15 ing an organization that makes great de- the information on the screen (it’s now a www.commerceri.com cisions. On the other hand, because we product) so we could be transparent and Gulfstream 25 www.gulfstream.com were spending more time off our floor private. Henry Schein 71 and with the rest of the organization, Our space is filled with prototypes. My www.henryschein.com we also spent less time with each other, own work space is currently built from Hu-Friedy Dental 69 www.Hu-Friedy.com which weakened our alignment and led wood two-by-fours and plastic sheets to Indiana Economic to more misunderstandings. mimic glass walls. The design team iterDevelopment Inside Back Cover We challenged our researchers and ates every week based on my feedback www.astatethatworks.com Jobs Ohio 61 designers to help us think about how we and their ideas. It explores how we might www.jobs-ohio.com could solve for what we saw as a series develop a new kind of private office as a KPMG 23 of leadership paradoxes. We need trans- place to focus and recharge, but without www.kpmg.com parency, but also privacy. We need to be the status, privilege and cost of the legaMichigan Economic Development Corp. 3 www.michiganbusiness.org/pure-agribusiness accessible, but we need to be productive. cy private offices many have left behind. Midmark 57 We need to spend time with people at Most important, the whole organization www.midmark.com every level of the company, but we also can see me working in a prototype, a powMitsubishi Heavy Industries Group follows page 16 need time with each other. We need to erful, tangible signal that, from the CEO www.mhi.com shift back and forth from individual on down, we innovate by learning, and we National Shooting Sports Foundation 13 www.nssf.org/impact work to group work, from formal to in- learn by failing. Northwell Health 11 formal, and from scheduled to ad hoc. Some were concerned that customwww.northwell.edu Our verbal language around risk taking ers would want to see perfect products, PNC 5 www.pnc.com and rapid prototyping has to be reflected but the opposite has been true. In fact, Procter & Gamble 65 in our body language—the way the orga- customers have been more willing to www.oralb.com nization sees us working every day. And provide feedback on each iteration beProskauer 29 www.proskauer.com we have to consider we are all different cause it is so clearly a work in process. Pure Insurance 46, 47 people with different ideal ways of work- Many have asked when it will be ready www.pureinsurance.com ing. for them to use in their own spaces, and RHR International 8 www.rhrinternational.com We decided to move out of the head- that gives us more confidence as we con2017 Fall Leadership Conference 79 quarters building and into an adjacent tinue to push these ideas forward. www.ChiefExecutiveLeadershipSummit.com building where our Learning Center Textron Aviation Inside front cover, page 1 www.txtav.com and Innovation Center are located. That Jim Keane is president and CEO of Steelcase, a Grand UPS 33 puts us right at the center of risk taking. Rapids, Michigan-based designer and manufacturer www.ups.com We created a new Leadership Commu- of office systems and equipment.
Congratulations to Stanley Bergman, CEO of Henry Schein, winner of Chief Executive Magazine’s CEO of the Year Award In today’s fast-paced global market, timing is everything. You want to protect, grow or transform your business. To meet these challenges we offer clients small teams of highly qualified experts with profound sector and operational insight. Our clients include corporate boards and management, law firms, investment banks, investors and others who appreciate the candor, dedication and transformative expertise of our teams. We’ll ensure insight drives action at that exact moment that is critical for success. When it really matters. alixpartners.com