Jan/Feb 2018 Chief Executive Magazine by Chief Executive Group

Solving Problem Directors | Cyber Lessons from the Military | Tackling the Talent Gap JANUARY/FEBRUARY 2018

Inside the Boeing CEO’s Plans for a Manufacturing Revolution

MUILENBURG’S

MOONSHOT

A NEW REPORT

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Januar y/Februar y 2018 No. 292 FEATURES COVER STORY 22 MUILENBURG’S MOONSHOT

Boeing CEO Dennis Muilenburg is looking for nothing short of “step-function improvements” at the $94.6 billion aviation and defense behemoth. How he gets there could shape the future of manufacturing worldwide. By J.P. Donlon

RISK MANAGEMENT 32 THE NEW RULES OF CYBERSECURITY The man who built the U.S. Army’s cyber command says online threats are going to get worse before they get better. But that doesn’t mean leaders are powerless. Hard-learned lessons from the war for cyberspace. By Lieutenant General (Ret) Rhett A. Hernandez

INNOVATION 40 R&D’S MID-MARKET CONTRARIANS These five CEOs found ways to overcome the challenges of fostering an innovation culture and devoting resources to R&D. Here’s how they do it. By Dale Buss

GOVERNANCE 48 DEALING WITH DIFFICULT DIRECTORS 40

Three strategies to help get your board back to business—and protect you from an activist attack. By C.J. Prince

TALENT SUMMIT 60 YOUR TEAM IS YOUR FUTURE There’s no substitute for great talent—but how do you find, nurture and retain the people capable of delivering on your vision, your goals and your growth strategy? By C.J. Prince

CEO ROUNDTABLE 64 STOCKING THE TALENT PIPELINE How businesses are taking the lead on bridging the talent gap. By Jennifer Pellet

CEO ROUNDTABLE 68 THE HERO AND THE GUIDE There are many types of CEOs. Which one are you, and which one do you need to be? By C.J. Prince 32 COVER PHOTO BY JIN LEE/BLOOMBERG VIA GETTY IMAGES

C O N TE NT S EDITOR-IN-CHIEF

Dan Bigman EDITOR-AT-LARGE

Jennifer Pellet MANAGING EDITORS

Kimberly Crowe Patrick Gorman PRODUCTION DIRECTOR

Rose Sullivan CHIEF COPYEDITOR

Rebecca M. Cooper ART DIRECTORS

Carole Erger-Fass Gayle Erickson Alli Lankford RESEARCH EDITOR

Melanie Nolen CONTRIBUTING EDITORS

Dale Buss Daniel Fisher Craig Guillot C.J. Prince Jeffrey Sonnenfeld ONLINE EDITOR

DEPARTMENTS

Lynn Russo Whylly EDITOR EMERITUS

J.P. Donlon

8 EDITOR’S NOTE

PUBLISHER

Talent is Everything

Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net

11 LEADERS

PUBLISHER, CORPORATE BOARD MEMBER/ DIRECTOR OF EVENTS, CHIEF EXECUTIVE GROUP

11 Is Silence Golden? Board Members on Vocal CEOs

Jamie Tassa 615-592-1506 | jtassa@chiefexecutive.net

14 Law Brief Get Ready for the EU’s Kafkaesque Data-Privacy Rules

VICE PRESIDENT

Phillip Wren 203-930-2708 | pwren@chiefexecutive.net

16 Crash Course Go Time

DIRECTOR, BUSINESS DEVELOPMENT

Lisa Cooper 203-889-4983 | lcooper@chiefexecutive.net

18 Dealmasters Brand Burnishing by Attrition

DIRECTOR, BUSINESS DEVELOPMENT

Liz Irving 203-889-4976 | lirving@chiefexecutive.net

19 On Management Battling Boss Blaming

DIRECTOR, BUSINESS DEVELOPMENT

Gabriella Kallay 203-930-2918 | gkallay@chiefexecutive.net

54 REGIONAL REPORT

DIRECTOR, BUSINESS DEVELOPMENT

The Southwest Urban areas in the Southwest are picking up speed. By Craig Guillot

Marc Richards 203-930-2705 | mrichards@chiefexecutive.net BUSINESS DEVELOPMENT COORDINATOR

Rachel O’Rourke 615-592-1198 | rorourke@chiefexecutive.net

72 LAST WORD

MARKETING DIRECTOR

My First Year Was a Disaster How a former Accenture CEO turned failing leadership into growth. By Mike Salvino

Debra Menter 203-889-4978 | dmenter@chiefexecutive.net CLIENT SERVICES ASSOCIATE

Ashley Gabriele 203-889-4989 | agabriele@chiefexecutive.net

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 292 January/February 2018. 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.

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BDO ACCOUNTING www.bdo.com 5 CEO AND SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES www.chiefexecutive.net/compreport INSIDE FRONT COVER, PAGE 1

Across the globe, one business challenge has the ear of CEOs like few others: innovation. 12/11/2017

preview

SIX IN 10 SURVEYED EXECUTIVES think the chance to avoid falling behind their competitors has passed. Much of the anxiety from today’s business environment ties back to commitment—or lack thereof—to innovation. On the upside, new findings shed light on the practices that successful innovators use to innovate. Developed by InnovationOne and The Conference Board, the survey polled a global audience of over 400 business leaders. Based on their responses, individuals fell into one of two groups: high innovators and low/lagging innovators. For CEOs looking to make their companies competitive amid unprecedented competition, taking these innovation-focused steps could go a long way.

CEO TALENT SUMMIT www.ceotalentsummit.com 59

Monday, December 11, 2017

Did Jeff Immelt fumble the GE handoff? Once considered the best-managed company in America, General Electric has suffered a series of crushing blows to its reputation. What lessons can be gleaned for the rest of American industry?

The CEO parent trap. You've made it to the corner office, but you want your kids to understand the value of work and to have compassion for humanity. Here's how to make sure your kids turn out to be productive, empathetic members of society.

CHIEF EXECUTIVE NETWORK www.chiefexecutivenetwork.com 67

From SaaS to XaaS. Cloud computing is transforming the way business is done and this model is sweeping across B2B sectors from transportation to printing and jet engines. As the playing field levels, the only difference is how you treat the customer. Here's how to move forward in this XaaS-based world.

CYBER FORUM https://www.businesscyberforum.com/ 39

Manage risk by betting small and often. Growth requires taking and managing risk. The most successful leaders do not simply mitigate risk, they also identify and assess the risks that will fuel their next expansion or acquisition. Three key things can help you create processes that identify, scope and manage risks in your business. We'll challenge you to think differently and move beyond what's comforable. The age of smart manufacturing requires new ways of leading. At the 2018 Smart Manufacturing Summit, we'll recharge your imagination as you engage with some of the most innovative industrial minds of our time. SMS18 is the place for manufacturing CEOs who are looking to create a fearless culture of constant learning and innovation, embrace new digital technologies, attract and develop extraordinary leaders for their company and create growth and profitability in a

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1) Spread innovation beyond R&D. High innovators think of innovation as a strategic imperative for the entire enterprise—not just the R&D department. This alone is a major factor in separating the two cohorts and gives high innovators a statistically significant advantage. Why do executives often fail to make a holistic commitment to innovation? Often, their strategic planning and marketing focuses too much on their current domain and on short-term results, overlooking early signals of disruption to their markets. 2) Commit to a culture of innovation. High innovators use culture management to promote transparent and collaborative cultures. This represents one of the biggest factors that distinguishes them from lagging innovators—it separates the cohorts by a margin of nearly two to one. The comments from the survey respondents speak volumes—particularly those classified as lagging innovators. They advocate for the mere basics of culture development, tools, processes and metrics. 3) Measure, measure, measure! High innovators also place a major premium on using metrics to measure innovation. Executives who want to improve their company’s metrics game plan should consider the case of SaskCentral. The financial institution was facing deregulation and competition from new entrants using digital technology and new business models. After spending time reconnecting with its customers and employees and restructuring its operations, SaskCentral began quarterly reviews of its innovation roadmap and projects, using various product, customer and cultural measures. It has since gone on to achieve its highest net income to date. Overall, no silver bullet exists. But a good start would entail extending the commitment to innovation across the whole organization, making it a top cultural priority, and leveraging all that metrics can offer. —Victor Assad and Ataman Ozyildirim Read the full article online at ChiefExecutive.net/JF18-Innovation

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ENEWSLETTER www.chiefexecutive.net/newsletters 7 GRANT THORNTON www. www.grantthornton.com OUTSIDE BACK COVER HARVARD BUSINESS SCHOOL www.EXED.HBS.EDU 3 INDIANA ECONOMIC DEVELOPMENT www.astatethatworks.com INSIDE BACK COVER JACKSON LEWIS P.C. https://www.jacksonlewis.com 20, 21 LEADERSHIP CONFERENCE https://www.chiefexecutiveleadershipsummit. com/ 29 MITSUBISHI HEAVY INDUSTRIES GROUP www.mhi.com 30, 31 RECRUITER.COM www.recruiter.com 17 RHR INTERNATIONAL www.rhrinternational.com 10 SENIOR EXECUTIVE NETWORK www.seniorexecutivenetwork.com 71 SIBSON CONSULTING www.sibson.com/talent-assessment 27 SMART MANUFACTURING SUMMIT www.smartmanufacturingsummit.com 46, 47 STRATIVITY CONSULTING https://strativity.com/ 15 THAYER LEADER DEVELOPMENT GROUP https://www.thayerleaderdevelopment.com 9

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CEO BRIEFING THE COMPLIMENTARY E-NEWSLETTER FROM CHIEF EXECUTIVE MAGAZINE ALL NEW, featuring insights on the trends and developments you need to lead with confidence: • LEADERSHIP • GOVERNANCE • GLOBALIZATION • GROWTH • TECHNOLOGY • TRADE • CYBERSECURITY • RISK • COMPENSATION • CORPORATE CULTURE • TALENT MANAGEMENT • FINANCE • LAW • CEO POSITIONS OF THE WEEK AND MORE

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F R O M T H E E D I TO R CHIEF EXECUTIVE OF THE YEAR

TALENT IS EVERYTHING

BG BECKY HALSTEAD PHOTOS

The Plain at West Point

IF JIM COLLINS COULD ONLY OFFER JUST ONE piece of advice to CEOs, what would it be? That was the question put to him at the Chief Executive Network’s annual leadership summit in Denver this fall, where he was the keynote speaker. His answer was unequivocal. “Get the right people on the bus,” he said, quoting his famous maxim about talent. No surprise. As anyone who reads this magazine knows, no matter the era, no matter the industry, getting the right people on your team and helping them thrive is the wellspring of all success. That’s why we’re thrilled to announce a new partnership with The Thayer Leader Development Group at West Point (TLDG), a group of extraordinary retired Army officers dedicated to the advancement of American organizations. For more than 200 years, The U.S. Military Academy at West Point has been one of our nation’s great strengths, molding generations of young people to take their place leading both military and civilian organizations. Passing on the lessons developed there is the cornerstone of TLDG’s mission. Starting this issue with Lieutenant General Rhett Hernandez (Ret), the man who built the Army’s Cyber Command, sharing his best practices for cybersecurity (p. 32), we’ll feature new voices from Thayer in the pages of Chief Executive. And from October 1 to 3, 2018, we’ll co-host an exclusive Talent Summit at West Point for CEOs, uniting the unique experience and insights of these incredible leaders with the best thinking from America’s C-Suites (ceotalentsummit. com). We’ll also be developing additional programming for the next generation of corporate leadership—stay tuned. The partnership is aimed at helping fulfill a critical part of our mission. At both the 2017 Leadership Summit and also our Talent Summit a week earlier in Orlando (see p. 60), chief executives from all over the U.S. told us that as the economy has improved, the hunt for the best and brightest, at all levels of their organizations, is getting tougher. Retaining them, especially high-potential millennials who will form the next generation of leaders inside their organizations, is the biggest challenge of all. With the aid of TLDG, we’re hoping to help you meet those challenges, to keep your bus full—and headed in the right direction. —Dan Bigman, Editor, Chief Executive

8 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2018

2018 SELECTION COMMITTEE STAN BERGMAN Chairman and Chief Executive, Henry Schein 2017 CEO of the Year

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

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

MARK WEINBERGER Chairman and Chief Executive, EY 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

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Your Hidden Leaders? Data from the CEO 1000 highlights how a solution to the perceived shortage of top talent at many companies may be hiding in plain sight.

leaders, both in terms of their own longterm motivation and resilience and their ability to influence and galvanize others.

Shape the Culture. To open a better path to the top for women, companies also need to create a culture that enables women to be tomorrow’s leaders. That means making sure that B “throughout their careers, women $13.93 billion are given the key assignments that help build critical knowledge, 34,251 skills and credibility necessary for 58 the business leader roles in the 8 C-Suite,” says Cristina Jimenez, partner and co-leader of RHR In2009 ternational’s Diversity and Inclusion 5.45 Services.

The table below summarizes The Data on Difference two groups of CEOs on the CEO A 1000. Scan down each column Average Annual Revenue $13.56 billion and it’s clear that they are fairly similar in education, background, Average Number of Employees 41,599 financial performance, company Average Age 57 size. It isn’t until the bottom row Average Tenure 4 that the difference becomes clear. Group A is dramatically smaller Average Year Started 2013 than Group B—and, as you’ve Average Financial Rank 5.72 probably guessed, Group A is female, while Group B is male. Attended Top 25 Undergrad? 25% 18% It’s no secret that women Encourage Potential. Coaching Attended Top 15 Grad? 47% 45% are underrepresented among and development also play key Has Graduate Degree? 64.41% 57.17% the CEO ranks—but these figures roles. Growth assignments can from the CEO 1000 database be “supplemented with early and Internal Hire 78% 79% provide a striking illustration of ongoing career discussions enStarted Career at Company 25% 25% that reality. couraging women to take risks and Average Years at Company 20% 22% Often, statistics underscore demonstrate courage when aiming women’s abilities in the top job. for the top role,” says Jimenez. Average Years Before Becoming CEO 16% 13% On average, they run larger “Women need consistency in canHow Many on CEO 1000? 59 941 companies, rank slightly better in did feedback regarding any gaps, terms of financial performance, along with mentoring and active that create talent leakage,” Rubin says. and are somewhat more likely to sponsors.” Leadership is increasingly important have attended top schools. As the CEO 1000 data shows, to companies, and companies essen“Not surprisingly, the data indicompanies prefer to look within for tially work against themselves when they CEO successors. By boosting efforts cate that female CEOs are at least as allow that leakage to continue. To help qualified and successful as their male to develop women, companies can tap remedy that situation, they can take counterparts,” says Deborah Rubin, into this often-overlooked source of top steps to nurture women leaders: senior partner and practice leader cotalent and expand that internal pipeline to head of Board & CEO Services at RHR keep the new leaders coming—including Build the Pipeline. “While clearly definInternational. tomorrow’s CEOs. ing the experiences and skills required for If ability and performance do not any successful CEO, organizations need explain the difference in the number of For more information about to continue tailoring their talent developmale and female CEOs, what does? RHR International, ment approaches to also address the While a variety of reasons may contribvisit rhrinternational.com specific organizational challenges and ute, a key one lies within the company’s or call +1 312 924 0800. needs that women encounter as they control. move through their careers, versus rely”The relative scarcity of women in the ing upon a general model derived from top leadership role strongly suggests what is more typical of men,” says Rubin. that for many organizations, the current For example, RHR’s research highlights process for developing a leadership pipeline continues to have inherent flaws the importance of authenticity for women

L E A DE R S

IS SILENCE GOLDEN? We asked board members whether CEOs should take public stances on political issues. Their response? It’s complicated. BY MELANIE NOLEN SHOULD CEOS TAKE A STANCE? As a director, do you encourage your CEO or other company representatives to publicly take a stance on current political or social issues?

36%

YES, to the extent that the issue relates to the company’s operations and is in line with our mission and values

26%

NO, I feel taking a political stance can harm the company in the end

24%

NO, I don’t believe companies should have a political voice

11%

YES, but only after they discuss it with the board YES, our CEO and company representatives can speak publicly on any issue they deem fit

YES, but only our CEO has the right to speak publicly on such issues

Respondents were asked to select all that apply.

AMERICA’S CEOS SEEM TO BE MORE vocal than ever about social and political issues of the day. But whether that’s a good thing for companies is a matter of debate. A recent poll of 459 public company directors by Corporate Board Member, our sister magazine, suggests that board members are deeply divided on the issue. Twenty-six percent of those surveyed opposed their company’s top executive taking a public stance on controversial issues, citing the potential for negative fallout. At the same time, 36 percent support speaking out in

cases that relate to a company’s mission and values, suggesting that taking the pulpit is appropriate—at least sometimes. Fueling the debate is the hard, cold fact that plenty of CEOs have gotten in hot water for taking positions on polarizing issues like the NFL national anthem protests and North Carolina’s “bathroom law,” with their companies suffering from boycotts and bad press as a result. Several directors participating in the survey noted that fiscal, rather than social, responsibility should be where leaders’ loyalties

JANUARY/FEBRUARY 2018 / CHIEFEXECUTIVE.NET

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L E A D ERS lie. “People [do not] invest in companies because they want to hear somebody’s personal, political, social or corporate view,” says Louise Forlenza, chair of the audit committee and a member of both compensation and nom/gov committees at Innodata. “They invest in the company because they believe there will be shareholder quality there. To get up there because a corporate CEO has a pulpit to basically tell the world what they think—that’s not what investors are looking for.” Despite such concerns, some directors expressed discomfort with the prospect of stifling CEOs for fear of repercussions and still others drew a distinction between political issues and social issues, particularly those likely to have an impact on customers, employees or other stakeholders. “Social issues, or government policies, that could affect the company or its employees are different than speaking out on ‘political’ issues,” noted one respondent. “Discrimination of various kinds, for example, is a social issue that can also become a political issue. I would support a CEO speaking out on behalf of the company on such issues, as long as he or she had the board’s support.”

SILENT MAJORITY Has your CEO ever taken a stance publicly on a political or social issue?

54% NO

8% 10%

12 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2018

YES, both on a personal level and on behalf of the company

YES, on a personal level

20% I don’t know/not to my knowledge

NOT MUCH NEGATIVE Did your CEO’s public statement affect the company?

48%

YES, unfavorably

YES, favorably

51%

Few Speakers, Little Fallout

The past year has seen plenty of high-profile CEOs step into the limelight on controversial matters, vocal CEOs are still far from the norm. Merck’s Ken Frazier, Disney’s Bob Iger, Tesla’s Elon Musk, Salesforce’s Marc Benioff and Goldman Sachs’s Lloyd Blankfein are among those who chose to take their opinions on political and social issues public. Yet, the majority of directors have yet to experience a vocal CEO firsthand. Only 26 percent of respondents reported leaders taking a public stance on a political or social issue. Among those who did, fear of repercussions proved unwarranted. Just 1 percent reported the company experiencing a negative impact as a result. Still, directors are understandably concerned about the prospect of the kind of fallout that befell companies like Target and Papa John’s as a result of public statements.

YES, on behalf of the company

It had no impact

DO CEOS CONSULT BOARDS BEFORE SPEAKING OUT?

Before making a public statement on social issues, does your CEO consult the board?

23%

Never or rarely

All the time

13% 55%

It depends on the issue

Most of the time

DO BOARDS HAVE A PLAN FOR CEO COMMENTARY FALLOUT?

Does your company have a crisis management plan that deals with the potential backlash emerging from a CEO or someone representing the company speaking publicly about a social issue or participating in a political or social event?

30% YES,

but it is not specific to political or social statements

26% NOT FORMALLY,

but we have discussed this as a board

15%

NO, all company representatives clear such actions with the board first

14% Other

7% YES,

and we have implemented guidelines across the company

6% NO,

we do not see any downside to speaking publicly about our views and values

5% NO,

we feel the benefits outweigh the risks

SHOULD BOARDS 57% HAVE A SAY? What role should the board play when it comes to C-Suite executives making social or political statements?

As a result, most (57 percent) agree that boards should be, at a minimum, informed prior to a public statement—and ideally involved in the decision to make it. “I believe the CEO should make the ultimate call on speaking out, but the CEO has a duty to inform the board,” said the director of a financial firm. “The board should never be surprised by the CEO’s decision.” Many respondents suggested that directors should have a say in any statement made. “As the board’s responsibility is to represent the interests of the shareholders of the company,” said a director at a large-cap industrial company, “it is critical that [directors] are involved, at a minimum in an oversight role, in any policies of the corporation, especially if they are publicly stated.” Yet, among directors whose CEOs have taken a public stance, 23 percent said he or she never or rarely consults the board in these matters. While directors cannot stop a CEO from speaking out, some argued that the board should take action if a CEO’s decision negatively impacted the company. “The board shouldn’t muzzle the CEO,” explained the committee chair of an energy company, “but it has the obligation—rather than the right—to take action against an individual who makes a public statement that harms the company. Everyone has the right to say whatever they want, but that right doesn’t protect you from consequences if the comments harm others.”

The board should be consulted prior to any public statement

30%

The board should have the right to take action against a C-Suite executive who makes a public statement that harms the company

22%

The board should encourage C-Suite executives to speak publicly to reinforce the company’s views and values and prevent scandals

board cannot prevent a C-Suite executive from speaking publicly 13% The about social issues but can prepare against media backlash should messages be misconstrued

The board has no role to play in a C-Suite executive speaking on behalf of the company

JANUARY/FEBRUARY 2018 / CHIEFEXECUTIVE.NET

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LE AD ER S LAW BRIEF \ DANIEL FISHER

GET READY FOR THE EU’S KAFKAESQUE DATA-PRIVACY RULES

Understanding the EU’s 261-page General Data Protection Regulation rules is a must for companies doing business in Europe or collecting personal data from EU residents.

NEXT MAY, U.S. COMPANIES WILL BE forced to contend with EU data privacy regulations that make the Sarbanes-Oxley Act look simple by comparison. Don’t be fooled by the singular in the title: The EU’s General Data Protection Regulation runs 261 pages and covers every conceivable use of data about EU residents that could in any way be described as “personal.” The new rules prohibit private parties from collecting or processing information on criminal offenses or “related security measures,” for example, with or without the consent of the subject. Lawyers are debating what this means, but it seems to run smack into U.S. Treasury rules that require financial institutions to cross-check foreign transactions against the Office of Foreign Assets Control list of terrorist organizations and other banned entities. The fines for violating OFAC regulations can run to millions of dollars. The fines for violating GDPR can run to 4 percent of a company’s global revenue. Which one do you obey? “It’s a direct conflict of law, and there’s no answer yet,” says Miriam Wugmeister, a partner at Morrison & Foerster who advises clients on global data privacy matters. The criminal data rule is just one of many GDPR provisions that have U.S. lawyers scratching their heads—and legions of consulting firms peddling solutions to problems that may or may not exist. The new regs cover any company that collects or monitors information that could reveal identity or sensitive data like buying habits and sexual preference of people within the borders of the EU. They include the much-debated “right to be forgotten,” requiring companies to delete embarrassing information that has no compelling social purpose. The GDPR might even cover companies that engage in the routine security measure of

14 / CHIEFEXECUTIVE.NET / JANUARY/ FEBRUARY 2018

tracking IP addresses of devices accessing their networks. “If that’s monitoring,” asks Wugmeister, “who isn’t monitoring?” Some of the GDPR paranoia is misplaced. First, it only applies to companies that deliberately seek to do business with people in the EU. That means U.S. firms that occasionally serve European customers who find their websites, read them in English and pay in dollars probably don’t have to worry about GDPR at all. Second, the new rules don’t apply to companies that do business with EU citizens outside the EU. The words “citizen” and “resident” don’t even appear in the text of the GDPR; the regulations apply to data-processing activities affecting people on EU soil. A U.S. company that employs a French green-card holder in its New York office isn’t covered, but if it has employees in Paris, it most certainly is. Assuming a company does routinely interact with customers within the EU, the third test is whether it is “monitoring” or “profiling” the behavior of those individuals. Here’s where the trouble begins. The definition of these terms is still fuzzy but could include virtually every form of interest-based advertising, where companies accumulate data from online sources to direct ads toward specific individuals. If that’s the case, U.S. firms must obtain unambiguous consent each time they engage in profiling. It can’t be ignored or hidden in fine print. “The consent bar has definitely been raised,” says Stuart Levi, a partner in the data privacy practice at Skadden Arps. “It can’t be ambiguous, and you can’t assume consent from inaction.” One of the biggest burdens for U.S. companies will look depressingly similar to the record-keeping rules under Sarbanes-Oxley. Companies subject to GDPR must build an entire compliance infrastructure—including privacy officers and designated “representatives” subject to EU law—whether or not they actually break the rules. “Failure to have your own governance and accountability policies is its own violation,” says Wugmeister. Bring in the lawyers and consultants. It’s going to be a busy next few months.

T H O U G H T L E A D E R S H I P P R O V I D E D B Y S T R AT I V I T Y

CHANGE RESILIENCE AS A CORE COMPETENCE OR

SURVIVAL OF THE RESILIENT BY LIO R A R US SY

LET’S TALK ABOUT YOUR NEXT transformation. You are probably wondering why since you are still working on the current one. Well, there will be a next one and then another one following right after. Transformation is no longer an event or a project. It is the new state of normal in organizations.

“

“I will sign up for the new transformation if you guarantee its success,” I was told by the CEO of a major industrial organization. “There are no guarantees,” I responded. “The only guarantee is failure for not trying,” I concluded. We live in a world of constant experimentation influenced by new technologies and evolving customer’s preferences. It is a constant pursuit of customer relevance. Being behind the eight-ball on a technology or missing new customer trends can wipe your competitive advantage in a very short time, hence the constant state of transformational and experimentation. In fact, the transformation you are leading now is not heading towards a definite destination. It is evolving in its nature and will look different in two years’ time.

THE ABILITY OF AN

ORGANIZATION TO ADAPT FASTER THAN ITS COMPETITORS TO A WIDER SCOPE OF NEW CAPABILITIES WILL DETERMINE ITS CHANGE RESILIENCE AND ABILITY TO BE RELEVANT TO

The shift from destination-based transformation to constant evolution transformation requires a shift in organizational core competence. If the traditional competencies will be changing, then what will be the core competencies moving forward? The answer is the ability to change fast. In short, change resilience. The ability of an organization to adapt faster than its competitors to a wider scope of new capabilities will determine its change resilience and ability to be relevant to customers in the future.

CUSTOMERS IN THE FUTURE.

”

—LIOR ARUSSY

® UNITED STATES • CANADA • UNITED KINGDOM • AUSTRALIA

Developing change resilience is a critical task to condition the transformation for success. If there is one thing I’ve learned from leading dozens of transformations worldwide it is that change is dependent on the

human factor more than ever before. Failure does not happen due to lack of budget or time. It is often a derivative of what do employees bring to the transformation with them. In some organizations, employees clung to the past with nostalgia and, therefore, brought with them their worst fears. Those fears eroded and ultimately eliminated the planned transformation. Others, on the other hand, were inspired by the future and saw it as a way to help them fulfill their cause. They brought their biggest hopes with them, and it was these hopes that fueled the success of the transformation and often accelerated it. Developing change resilience is about aligning the organization around the new crucial skill set for success: adapting to change, fast and wide. The future of organizations lies not only in traditional research and development but also in their ability to evolve while retaining the commitment to the cause, the purpose that drives their business, and the sense of impact on the world. Discover your cause and align your people to focus their decisions, behaviors, and actions to fulfill it. Avoid people defining themselves from the perspective of their tools and processes. Doing so will make them more fearful and, therefore, reluctant to experiment with the new. By focusing on the purpose, we are giving them a permission to experiment with the new without feeling that they abandon a part of their past or admit the past was a mistake. Being purpose driven will allow your organization a faster path to change and transformation and, with it, a constant evolution of your customer’s relevance. Lior Arussy is the CEO of Strativity Group, Inc., an experience and culture design firm, and the author of six books including the soon to be released Next Is Now. LArussy@strativity.com

LE AD ER S CRASH COURSE \ JENNIFER PELLET

GO TIME To succeed at succession, keep things simple, says J.D. Power CEO Finbarr O’Neill. Get the right guy—and get out of the way.

J.D. Power’s Finbarr O’Neill has been through his share of leadership successions, having led three companies—Hyundai Motor America, Mitsubishi North America and Reynolds & Reynolds—before joining the global market research company a decade ago. While gearing up to make way for his own successor in March, O’Neill shares insights on getting succession right. Leadership transitions are a tricky business. As a veteran of the process, what advice would you give companies on identifying a CEO’s successor?

Companies should really be looking at where they need to take the company. What will our industry look like in three to five years and what kind of leadership do we need to help us get there? Often, they’re so busy looking at the track record of the horses—how many races run and their times—they forget to consider what kind of course they have to run. Did that play out in any of your own CEO succession experiences?

I was recruited to Mitsubishi based on my track record at Hyundai. [Editor’s Note: O’Neill quadrupled U.S. sales for Hyundai in his first 18 months as its CEO.] Like Hyundai, Mitsubishi needed to sell more cars, but its problems were deeper. In hindsight, its biggest issue was not having enough product in the pipeline. If Mitsubishi had been looking at what it really needed, I might not have been the top choice. At J.D. Power, you took over from the company’s visionary founder. What was that transition like?

I joined in March of 2008 and the company had a going away party for David Power in April. Eight months later he was still there. When an iconic leader is walking around at 5 p.m. and chatting with people, who are they going to listen to? So clearing the way for progress was my first challenge.

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That must have been awkward.

The genesis for him bringing me in was an awareness of the need for change and part of that involved him moving on to a rich and rewarding retirement. The problem was that no one had the gumption to sit in front of him and plainly talk about that. But our conversation was very straightforward. Typically, a founder wants what is best for the business so if you keep it to that topic, you reduce—not eliminate, but reduce—the risk of the whole thing coming off the rails. CEOs increasingly face technological challenges such as digital disruption and cybersecurity. How does that factor into the qualities companies and boards look for in a business leader?

The world is changing…so understanding technology is an important CEO criteria for a lot of companies. But that does not necessarily mean someone who can write code or who had the original great idea—a founder type. You have to be facile, but you should not be one of those folks who runs around mouthing phrases like big data, machine learning and AI as if that itself is a strategy. It has to be about who the clients are and what will help you solve their problems. After 10 years at J.D. Power, you’re now stepping down. How are you applying what you’ve learned in planning your own exit?

It is ultimately up to the board to choose a CEO; my role is to facilitate his or her transition, and to keep the company focused until the new CEO comes in. I hope that I can inject some value in the final stages by talking to the lead candidates about the culture and [advising] the board. Because cultural fit is critical. Even if you have a great vision, if you’re not able to bring the culture along with you, it becomes a millstone around your neck. Edited for clarity and length.

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LE AD ER S

DEALMASTERS \ PATRICK GORMAN

BRAND BURNISHING BY ATTRITION

Acquisitions dragging you down? Sell ’em!

Doug Hammond, CEO of NFP

SOMETIMES SELLING OFF the companies you’ve bought makes the most sense, as Doug Hammond, CEO of NFP, discovered when his company was hit hard in the 2008 financial crisis. COO at the time, Hammond had pitched in on the acquisition spree that grew the company and now found himself on the other side of the table—charged with helping the company refocus by selling off dozens of entities over three years. Named CEO in 2013, Hammond worked with private equity firm Madison Dearborn Partners to bring the insurance brokerage and consulting firm private three months later. Here’s what he’s learned from his deal-making experience. When Consolidation Makes Sense. Many of

the 70 businesses we sold between 2009 and 2011 were good-performing businesses that we had acquired rapidly in the early days, and those businesses were designed, intentionally, to operate separately. After the financial crisis, we wanted to transform our business into really one NFP and to advance a much more consolidated vision and value platform for the business. We knew that many of those businesses wouldn’t fit, so we bit the bullet and sold off a big chunk of our assets. We ended up deleveraging pretty rapidly, but the more important part of it, at the end of the day, was making sure

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that we had an aligned value structure within the business. We had acquired many fantastic assets with great people and real strategic niche businesses, but they weren’t complementing one another. The view was to take 250 or so independent operating subsidiaries, each operating under a different brand, and create a vision that everyone would buy into and then pull the company together to approach our markets, our clients and our employees in a more effective way. The Key to Selling at Volume. NFP had histor-

ically done 30-plus acquisitions per year, so when we restructured the business as part of the brand consolidation, we leveraged the deal team that was responsible for all the acquisitions. They partnered with the operations team to instead focus their efforts on the disposition initiative so that both teams together could concentrate on a smooth transition process. Acquisitions Ahead. When we look at acquisitions [today], I would say that certainly we need to focus on the appropriate strategic fit. We need to focus on strategic long-term economic performance of those businesses and understand exactly how they’re going to complement what we do and set long-term expectations, so there are no surprises tied to what the deal looks like once the business is acquired. Fit vs. Finances. You can find a great strategic fit and you can find a great business from financial performance perspective, and it can solve a real niche for you. But if you have a disconnect with respect to fundamental values and the nature of the people who are operating within that business, if those values are inconsistent, then I think you run the risk—and it’s a big risk—of spoiling everything you’ve built. So, for us, the deal-killer is usually an incompatibility relative to values and culture.

LE A DERS ON MANAGEMENT \ JEFF SONNENFELD

BATTLING BOSS BLAMING

In the face of adversarial activist campaigns, boards and management must work together to get their message out—instead of folding like lawn furniture. IN THE FACE OF AN UNPRECEDENTED wave of high-performing, honorable CEOs forced from top office as a consequence of the short-term mindset of shareholder activism, boards are examining alternatives to boss-blaming reflexes. Who takes the fall when the team loses? The well-paid coach, of course, with little appreciation of yesterday’s triumphs or patience for the promise of tomorrow’s performance. For example, last summer, General Manager David Griffin was fired by the owner of the Cleveland Cavaliers. Sure, he led the team for three seasons, culminating in the Cavs’s first-ever national title—the NBA champions in the 2016 season—but that was last year. Despite successful strategies and star recruiting (e.g. LeBron James and Kevin Love) that helped snag last year’s title, his accomplishments were swiftly wiped out by his losses in the 2017 finals to the Golden State Warriors. At least sports owners own the enterprises they govern. With merely 1 to 3 percent of ownership, activists launch hostile tweet storms and media campaigns to shake down boards for board seats. Activist proxy campaigns in 2016 jumped 42 percent over 2012. Using dirty-trick maneuvers borrowed from the playbooks of political opposition research, activist investor tactics have included massive media blitzes promoting misleading apples vs. oranges financial analysis, slide decks with damaging, distorted snapshots of the career mishaps of board directors, canvassing of CEOs’ neighbors, foraging through leaders’ trash, approaching their children in bathrooms for access to Facebook accounts and printing slanderous misstatements. Few boards are prepared for such nasty public battles. Of the 37 proxy fights that did make it to a vote last year, 27 were won by management. Thus, one might imagine that boards would feel more confident. However,

directors are often wrongly counseled to settle with activists for fear of reputational damage and expensive proxy battles. Roughly half of last year’s proxy battles were settled, with activists invited onto the board, while 15 years ago, only 17.5 percent of proxy battles were settled prior to a vote. FTI research examining 300 activist campaigns between 2012 and 2015 found that CEOs were three times as likely to be replaced within 12 months of an activist joining the board. The remedy for this requires preparation, partnership and fortitude through: Spirit & Solidarity: Benjamin Franklin intoned, “We must all hang together or, most assuredly, we shall all hang separately.” The strategy of many activist firms is to confuse investors while dividing and conquering the board fearful of humiliation. Bullies who invade schoolyards and boardrooms are beaten only with collective action. Listening & Learning: Just as executives are not interchangeable parts, activists are not identical. Some bring good ideas, fresh perspectives and constructive, collegial, trustworthy temperament. Home Depot, Yahoo and Microsoft are just a few of the great firms that benefited greatly from constructive engagement with activist investors. Fight with Facts: Running out of distressed targets, activists stormed such healthy firms as Apple, Dell, P&G, Honeywell, ADP and DuPont, often with faltering performance themselves far in the shadows of the global icons they’ve targeted. Proper industry yardsticks are essential. For those under assault, perhaps it’s worth reminding investors of this fun fact: According to a recent Fortune study, activist funds have beaten the S&P Index only three of the last eight years.

“We must all hang together or, most assuredly, we shall all hang separately.” —Ben Franklin

JANUARY/ FEBRUARY 2018 / CHIEFEXECUTIVE.NET

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THOUGHT LEADERSHIP PROVIDED BY JACKSON LEWIS

THE SPEAK OUT EVOLUTION: Employers Must Re-Examine Their Sexual Harassment Prevention Programs In 1986, more than 20 years after the enactment of the Civil Rights Act of 1964, the U.S. Supreme Court in Meritor Savings Bank v. Vinson first recognized sexual harassment as a form of unlawful sex discrimination. Today, more than 30 years after that landmark decision, claims of sexual harassment are grabbing headlines again, at a pace and intensity like never before. In fact, Time Magazine just announced that their Person of the Year is “The Silence Breakers: The Voices That Launched a Movement.” Employers must be prepared. Sex harassment cases may result not only in corporate and individual liability, but also in dilution and deterioration of a company’s brand and reputation. Companies should evaluate their harassment prevention programs and consider taking practical measures, such as the following: 1. Model. It starts at the top. Corporate leaders must model expected behavior so that the company can align a zero-tolerance policy with a zero-tolerance reality. 2. Message. Employers must message their expectations with respect to appropriate and inappropriate conduct: a) Disseminate—directly from C-Suite officials—robust policies prohibiting harassment based on any protected class, including sex; b) Include in such policies a clear reporting mechanism, which requires employees to report workplace harassment and provides multiple avenues to raise issues; and c) Establish and communicate strong policies against retaliation. 3. Train. Conduct targeted training programs, tailored to different employee populations. Include in such trainings clear expectations on what employees should do (not just what they should not do), as well as bystander intervention strategies. Consider creative and interactive training platforms for supervisors and employees, with in-person simulations and role-playing, as well as web-based e-training when live training is not feasible. Conduct separate training for those in the organization responsible for conducting investigations. 4. Manage. Employers must promptly manage situations when they arise. This means that employers

should conduct timely, unbiased and thorough investigations of all allegations. They should take prompt, remedial action to stop inappropriate conduct and ensure it does not recur. 5. Monitor. Employers should monitor continuously the workplace to measure the eﬀectiveness of their prevention programs. It is not enough to conduct check-the-box training. Employers should consider broader measures, including but not limited to the following: • Evaluate readily available data, such as historical complaints and existing climate survey results, to identify trends and areas of vulnerability. • Initiate various means of employee engagement, including roundtables, electronic touchpoints, surveys, and 360 evaluations of leadership.

Nadine Abrahams is the co-leader of the General Employment Litigation practice group and represents management in employment cases in federal and state courts and before administrative agencies. C

• Revise performance evaluation metrics to include accountability for upholding equal employment opportunity and harassment prevention standards. • Ensure a meaningful connection between parts of the organization responsible for diversity and inclusion initiatives and those responsible for equal employment opportunity and harassment prevention compliance efforts. Too often, each operates in a vacuum. There is no one-size-fits-all solution. The key is for each organization to identify the right combination of measures designed to create and maintain a harassment-free workplace. Attorneys at Jackson Lewis have focused on the importance of prevention since the firm was founded in 1958 and have trained thousands of boards, leaders, managers and employees on anti-harassment, anti-discrimination and anti-retaliation principles. Employers with questions should contact a Jackson Lewis attorney with whom they regularly work or the authors of this publication.

Samia M. Kirmani is the co-leader of the Workplace Training Practice Group and concentrates her practice in employment counseling, training, policy development, and litigation on behalf of management.

The recent influx of harassment claims will be a main topic at the Jackson Lewis Corporate Counsel Conference (March 14-16, 2018, in Miami), which will feature a keynote presentation by Anita Hill. Don’t miss it.

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C OVE R STORY

MUILENBURG’S

MOONSHOT BY J. P. D O N LO N Boeing CEO Dennis Muilenburg is looking for nothing short of “step-function improvements” at the $94.6 billion aviation and defense behemoth. How he gets there could shape the future of manufacturing worldwide.

f anyone thinks U.S. manufacturing is in decline, have them talk to Dennis Muilenburg. After serving as Boeing’s COO, the Iowa native and aerospace engineer took over the top job from Jim McNerney in 2015, and he has been on a tear ever since, driving the nation’s leading aerospace and defense company—and America’s biggest exporter—to find another gear to compete in an increasingly complex, global and interconnected world. The reason is simple: Opportunity. The growth in commercial airplanes has been paced by worldwide passenger growth of 5 percent to 6 percent a year. But in places like China and India traffic growth runs as much as 15 percent a year. Every year in Asia, 100 million people fly for the first time on an airplane, and estimates are that barely 20 percent of the world’s population has ever flown in a commercial airplane. This is a big, high-scale growing manufacturing sector that companies like Boeing need to fuel for the future. It’s about a $7.5 trillion marketplace over the next 10 years. “In order to compete in this environment,” says Muilenburg, “we cannot continue to just improve incrementally. Incremental productivity improvements of 1 percent to 4 percent a year will not allow

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us to compete in the future. We are focused on step-function improvements that are measured in 20 percent, 50 percent, 70 percent to 90 percent increments in some of our key value chains inside of our factories.” Getting there won’t be easy. Boeing’s scale is almost unimaginable. From its headquarters in Chicago, the $94.6 billion juggernaut employs more than 140,000 people across the U.S. and in more than 65 countries. In the U.S. alone, Boeing employs 50,000 factory workers and 45,000 engineers. Muilenburg’s ambitions obviously have big implications for the rest of American manufacturing as well. While the prevailing narrative is that nothing can be done to stop the continuing decline of U.S. industry at the hands of cheap global labor and disruptive technology, Muilenburg is staking his company’s future on technology unlocking productivity gains and on finding growth in new parts of the value chain. It’s a playbook worth reviewing as manufacturers across the U.S. seek to find and hone advantages to win in an ever-more competitive world. According to recent analysis of current industry trends and performance, the McKinsey Global Institute finds that the U.S. could boost annual manufacturing value-added by up to $530

DANIEL ACKER/BLOOMBERG VIA GETTY IMAGES

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/ CHIEFEXECUTIVE.NET

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billion (20 percent) over current trends by 2025.

Four Keys to Transformation The key, of course, is productivity, and Muilenburg has been pushing this hard using a variety of tools: 3D printing, digital throughputs, selective automation. For example, production speed has been rising steadily in its Renton, Washington, facility, where the company builds its 737s—among the most widely used passenger aircrafts in the world today. In 2016, it was building 737s at a rate of 42 a month in the same space that was originally created to build 17 a month. At the end of 2016, it ramped up that line to 47 a month and is on track to begin producing 52 a month this year, then 57 a month in 2019. Soon the facility will be building roughly two 737s each day—the highest production rate the company has ever had in commercial airplanes. Muilenburg outlines four big ideas that are yielding transformative steps: Driving Modularity. This involves bringing commonality into Boeing’s manufacturing systems in terms of major subsystem assem-

blies and integrated subsystems coming in from one’s supply chain. A good example is flight deck commonality and parts interchangeability across various product lines, such as common flight system displays in a 737 that are also used in advanced defense aircraft like the KC-46 tanker for the military. Value-added Automation. Introducing automation will streamline supply chains inside factory spaces. For example, the 787 Dreamliner built in Boeing’s Charleston, South Carolina, features something the company refers to as a “quodbot,” an automated device that drills holes and places thousands of fasteners that previously had been done manually. What once took five days is now down to little over a one-day process. Step-change improvements in flow time also produce significant improvements in quality and safety. “These are the kind of automation advances that not only reduce cycle and flow time, but reduce cost,” says Muilenburg.

On-Demand Customization. Using 3D-printed parts, Boeing offers customers specific features that can uniquely differentiate aircraft for customers. Customization that previously would have disrupted its

As the Chinese middle class grows, passenger traffic follows… 2006

2016

Middle Class 100 million

Passenger Traffic (RPKs)*

2026

x2 300 million

600 million

*Revenue Per Passenger Kilometer

-240 billion SOURCE: IATA/TDM OXFORD ECONOMICS/CAAC/BOEING CMO 2017

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-840 billion

-2,050 billion

production lines is now widely embraced in its factories and is a part of its overall manufacturing capability. Digitizing Manufacturing Operations. Using data analytic engines to monitor and guide operations on the plant floor boosts efficiency. The idea is to tie all operations in an end-toend lifecycle value chain all the way from engineering to manufacturing to support. “We’re seeing these digital threads creating advancements of 70 percent to 90 percent improvement in flow time, significant improvements in first-time quality,” Muilenburg says. “This will have a dramatic step-change improvement in how we build and compete for the future. These four big ideas are things that we’re driving across the entire company and our supply chain as part of our manufacturing transformation.”

A Conversation At Chief Executive’s Smart Manufacturing Summit in Seattle last May, Muilenburg advised the 200 or so CEOs in attendance to think about manufacturing transformation in terms of end-to-end lifecycle transformation of how products are designed, built

...As will demand for planes ...As will demand for planes 2016

China

2016

Rest of China the world Rest of the world

14% 3,190 14% 3,190

2036 2036

25% 16,300 25% 16,300

“NO SINGLE TECHNOLOGY OR TECHNIQUE IS THE KEY TO SUCCESS. IT’S DIGITALLY CONNECTING ALL OF THESE APPRAOCHES.”

and supported. In his view, this is “smart globalization” that goes hand-in-hand with smart manufacturing. It’s not about moving manufacturing assembly to take advantage of labor arbitrage, but improving manufacturing capability around the world to grow the pie and add jobs globally to increase competitive advantage. For example, although Boeing has about 80 percent of its supply chain jobs here in the U.S. the company continues to grow its supply chain presence overseas. It builds parts in Melbourne, Australia for the 787 and manufactures Apache attack helicopter fuselages through a joint venture in India. A finishing center in Zhouzhuang, China, takes delivery of 737s from the Renton factory and provides seats and paint for delivery to Chinese customers. At SMS, we talked to Muilenburg to learn more about his key concepts, and how he was transforming Boeing. Here are excerpts from that conversation: In your assembly of aircraft, a complex unFleet Composition dertaking, which set of tools—3D printing, Fleet Composition 8,000 Internet of Things or cloud computing— 8% 7,500 has most improved8,000 your operations? 7% 8% 7,000 No single technology7,500 or technique is the 7% 12% 6,500 7,000 key to success. It’s digitally connecting all of 6,000 6,500you think about an 12% these approaches. When 6,000 airplane, it’s about a5,500 million parts flying in 5,000 5,500 close formation. It has to work every time. 4,500 5,000 Digitally designing and connecting it is a 4,500 big powerful idea for4,000 us because it not only 3,500 4,000 improves flowtime but improves 5% quality and 5% 3,000 3,500 5% safety at the same time. 10% 5% 2,500 3,000 This idea of 3D printing is particularly 10% 2,000 2,500 critical as we get into more composite parts 1,500 2,000 in on-demand customization, because in the 1,000 1,500 past variability in our manufacturing lines 500 Now, we can 1,000 has been difficult to handle. 2% 2% 0 500 create purposeful variability in our produc2016 2036 2% tion lines that adds value0for customers. This 2%

71% 71%

Freighters Medium/Large passenger widebody Freighters Medium/Large passenger widebody Small passenger widebody Small passenger widebody

Single aisle Single aisle

78% 78% 2016

Regional jets Regional jets

2036

JANUARY/FEBRUARY 2018 / CHIEFEXECUTIVE.NET L

/ 25

represents a big shift in how we design and manufacture. So you’ve moved beyond prototyping? We’re well beyond prototyping. We are moving directly into implementation. Advanced manufacturing capabilities don’t become real until you put them into the factory. And the people who know how to make this work are the people who build airplanes. They have the best ideas; they know what works and what’s theoretical. Put them into the hands of our mechanics and they surprise us every time with how much they can do.

But not every supplier is at the same level. They’re all at very different levels, which is why we have people to tailor our digitization approach for different company sizes. We spend a lot of time and investment in training and building capacity in our small business space because often we find the best ideas are in small businesses. We have a value-engineering project where we encourage our supply chain to bring ideas to us about things we could change inside of Boeing. That pipeline has a little over 2,000 ideas in it right now that we’re just moving our way through and implementing.

House Speaker Paul Ryan and Muilenburg talking to employees during a town hall at Boeing’s plant in Everett, Washington.

How has technology changed the way you operate with your supply chain? About five years ago, we launched a project called “Partnering for Success,” the purpose of which was to create a singular integrated Boeing voice with the 14,000 suppliers in our global supply chain. The majority of them are small and medium-size businesses. In many cases, helping them ramp up capability and not hear dozens of different voices from Boeing was critical. It also creates better technology transfer and better process connectivity. As part of this plan, we’re digitally connecting into every part of our supply chain. Keep in mind that 70 percent of every airplane that goes out the door is built in our supply chain.

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How are you addressing the talent gap? The STEM talent pipeline in the U.S. is woefully short of what we need. Not only for aerospace but for big industrial STEM generally. The global competition for talent is more severe than ever. We need to train future engineers and manufacturers on these leading-edge techniques, the digital threading, which is a different manufacturing job than what much of our workforce was originally trained in. We’re engaged at the front end of the pipeline all the way down to the grade school level now. That’s a big investment we make that involves hands-on learning and vocational training. We use our aerospace school in the Puget Sound region

STEPHEN BRASHEAR / STRINGER / GETTY IMAGES

What advice would you give to a small or mid-size manufacturer who wants to supply Boeing? Obviously, competitiveness is a big deal to us, so cost and quality are important. The ability to deliver reliably is also critical. Because we crank out airplanes when we say we’re going to deliver them our supply chain must be synchronized. We’re also looking for teammates willing to make targeted investments in digital transformation in a way that’s good for them and good for Boeing. Also, the most important competitive challenge we face is building the future talent pipeline for aerospace manufacturing jobs of the future. We need kids who are interested in manufacturing and can see the advanced nature of those jobs. Our small business suppliers are great ways to attract and inspire and build that pipeline for the future.

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“INSTEAD OF ALL-ROBOTIC FACTORIES, WE FEEL THE FUTURE WILL SEE GREATER INTEGRATION OF PEOPLE AND ROBOTS WORKING TOGETHER.”

to drive vocational training, machining skills and aerospace manufacturing skills to create a pipeline for the future, as well as internship programs with colleges, early career rotation programs and continuous training for our in-house workforce. We treat this as a total lifecycle investment. In our employee base, we talk about it as our long-range people plan. I’m a firm believer that the most important investment we make is in our people. That’s why I call it our “People First” strategy, because it enables our future. AT&T uses massive online courses to reskill people. Does Boeing offer something similar? We’re doing quite a bit of that. For example, we just recently ran one on what we called Model-based Systems Engineering. The idea is to retrain our engineers. Thousands of engineers are taking online classes and the feedback is fantastic because they love the learning. We’re doing it in a virtual way that’s affordable and enables cross-learning within the enterprise because it’s connecting different sites and constituencies that might not have been connected in the past.

J.P. Donlon is a consultant and editor emeritus of Chief Executive.

What differences in how Boeing manufactures will we see five years from today? You will see new advanced manufacturing techniques, including heavy use of composite materials. For example, we’re opening a new composite wing center up in Everett that is building the wings for the 777X. It will be the largest composite wing ever built. You will also see greater customization in our factories through the use of additive manufacturing throughout the value chain, both in the factory and out in the field where we do support including spare part gen-

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eration. Expect to see greater automation. Instead of all-robotic factories, we feel the future will see greater integration of people and robots working together. What are the returns on artificial intelligence? What kind of future vision do you see as to the role of AI? Some of our AI work goes hand in hand with automation. The key is to look for AI implementation where it adds value. For example, the intersection of AI with data analytics clearly optimizes operations. This helps in growing our services business. One of the biggest AI applications is identifying value-added services that build data-rich airplanes to optimize flight profiles, such as optimized fuel burn or whatever value proposition is most valuable to a customer. What will likely be the next big innovation in travel? For example, 20 years from now will we be loading aircraft differently? That could certainly be part of it. When you consider end-to-end optimization of the customer experience, the ground segment is important. How do you get to the airport? How do you process through the airport and get on the airplane? How do you deal with security? I expect to see changes in the technology of travel itself. It’s difficult to predict how fast the technology will evolve, but you can bet that with the amount of capital investment it will happen. We’ll see revolutions in propulsion technology, electrically powered airplanes and maybe flying taxis. High-speed transportation will become more economical and offer the capability to go anywhere in the world in one to two hours on supersonic, hypersonic aircraft. That business model still needs some work, but the technology is moving fast enough that that will happen. We anticipate that a low-earth-orbit space travel business ecosystem will develop as access to space becomes more affordable. Also, low-gravity manufacturing in space will eventually become practical, and there will be a transportation network to do low earth orbit. I’ve always been a fan of deep space exploration—that will happen too. Before 2030 we’ll put the first person on Mars—and he or she will get there on a Boeing rocket.

2018 LEADERSHIP CONFERENCE NOVEMBER 8-9, 2018

POINTE HILTON SQUAW PEAK RESORT | PHOENIX, ARIZONA

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Offshore wind farms are gaining traction with investors.

Earth-Friendly Energy How to power the planet— and keep it green. Scientifically speaking, the trend is clear: the Earth is getting warmer. While debate will likely continue over the causes of global warming, the most recent National Climate Assessment released by the Trump administration holds that human activities and emissions of CO2 and other greenhouse gases are “the dominant cause of the observed warming since the mid-20th century"—and most scientists agree. As a result, momentum has been building around the urgent need to reduce that impact. Scientists have risen to the challenge by developing renewable energy sources that help minimize CO2 emissions and making conventional thermal-power genera-

tion based on fossil fuels more energy efficient. Companies, in turn, have been getting on board with implementing these solutions in increasing numbers. As of April 2017, nearly half of Fortune 500 companies had set targets to shrink their carbon footprints and, by December, 117 companies had pledged to use 100-percent renewable energy by 2020. Many, including Apple, Walmart, Mars and Ikea, are working with members of their supply chains on similar sustainability goals. That proactivity is not solely about a desire to be good corporate citizens; businesses are also moving toward renewable energy because it’s good for the bottom line. While such

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MHI VESTAS OFFSHORE WIND

projects were once dismissed as complex and cost-prohibitive, today’s technologies are advancing at a rapid rate, bringing down costs and making the energy sources more accessible. Here are three areas of development for CEOs to watch:

1. Improving traditional energy.

Thermal power stations burning fossil fuels such as oil, natural gas and coal still feed more than 60 percent of electricity demand, and they’re likely to be a substantial part of the future energy mix. But society is increasingly vocal in calling for reductions in CO2 emissions from thermal power generation and significantly higher efficiency, both of which make the planet safer. Gas Turbine Combined Cycle (GTCC) technology is one way to satisfy expectations for greener power. While traditional, simple cycle gas turbine plants average 40 percent efficiency on natural gas and around 25 percent on fuel oil—with the majority of the energy wasted— GTCC technology effectively recycles heat emitted by gas turbines and has increased thermal efficiency to 62 percent, soon to be 65 percent with the next generation. Similarly, Integrated Coal Gasification Combined Cycle (IGCC) technol-

ogy reduces CO2 emissions by first gasifying the solid coal fuel before it is fed into the gas turbine to generate electricity. Exhaust heat from the gas turbine is then used to generate electricity by the steam turbine. Plants featuring Mitsubishi Heavy Industries’s IGCC are 10 percent to 20 percent more efficient than existing coal-fired power plants. Another way to improve the efficiency of fossil fuels is via carbon capture utilization and storage (CCUS) technology, which extracts CO2 from exhaust gases and emissions from power plants and stores it safely away from the atmosphere. Although undoubtedly one of the more expensive solutions to deploy, companies like MHI are working on ways to bring cost down while boosting efficiency. Recently, two large-scale first-generation projects using MHI’s CCUS technologies have been deployed, including NRG and JX Nippon Oil & Gas Exploration’s Petra Nova project. This project is currently the world’s largest CCUS project on coal-fired flue gas to date. The project removes up to 1.6 million tons of CO2 from coal generation each year and is expected to boost production at West Ranch oil field in Texas from around 300 barrels per day to 15,000 barrels per day.

2. Getting the most out of the earth.

The benefits of geothermal power abound; it is sustainable, producing none of the greenhouses gasses emitted by fossil fuels, and is also much more consistent in its generation capacity than other renewables. But only recently have companies begun to make long-term investments in this power source. Geothermal heating and cooling systems, for example, have been gaining popularity. They use underground looping pipes to tap the earth’s constant temperature to regulate building climate, which translates not only to a lower carbon footprint but also to significant savings in gas and electricity bills. Google’s new Bay View, California campus, for example, will use an

underground geothermal system for climate control—without a drop of fossil fuel. Global demand for geothermal solutions is driving up the market, which will reach $57 billion by 2024, according to Delaware-based Global Market Insights. The U.S. currently has the highest geothermal electricity capacity, but it accounts for a tiny fraction of the country’s energy sourcing. Much smaller countries

ROI down the road. Yet wind power has struggled to take off in the U.S., largely because of a reluctance to invest in technology that had not yet reached maturity. But recent investments in offshore wind farms in the Atlantic around coastal cities in Massachusetts, New York, Maryland, New Jersey and Virginia show that tide may finally be turning. This past October, MHI Vestas Offshore Wind, which has not yet

GLOBAL DEMAND FOR GEOTHERMAL SOLUTIONS IS RISING Others 10.1% New Zealand 4.9% Japan 6.0% Indonesia 8.9%

U.S. 28.5%

WORLD TOTAL Approx. 8.88 million kW (as of April 2005)

Italy 8.9% Mexico 10.7% are learning how to depend more on this energy source. For example, geothermal is now the top supplier of electricity in Kenya; and El Salvador plans to get 40 percent of its electricity from geothermal by 2019.

3. Expanding wind.

The U.S. Department of Energy estimates that offshore wind in the U.S. has a technical resource potential of 7,200 terawatt-hours (TWh) of electricity generation per year; for perspective, consider that 1 TWh per year can power approximately 90,000 homes. Even if only 1 percent of the technical potential is recovered, nearly 6.5 million homes could be powered by offshore wind energy. While the upfront price tag for offshore wind development is still high compared with other renewables, the long-term benefits, including a much lower cost of energy, promise a high

Philippines 21.7% made a major investment in the U.S., announced it would put $35 million into testing the world’s most powerful wind turbine, the V164-9.5 MW, at South Carolina’s Clemson University. Thanks to current investments in offshore wind, businesses with facilities in coastal cities should benefit from dramatically lower energy costs down the road. As a result of investment across energy markets, companies will soon benefit from a much more diversified portfolio of energy sources, including renewables and friendlier fossil fuel. The result? Lower costs, greater sustainability, and a healthy planet for centuries to come.

For more information, visit www.mhi.com. For our online media, visit spectra.mhi.com.

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CY B ERS E C URI T Y

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The man who built the U.S. Army’s cyber command says online threats are going get worse before they get better. But that doesn’t mean leaders are powerless. To win, focus on your culture and your people to create a sense of urgency to protect what you value and ensure you’re ready for the threats focused on you. Some hard-learned lessons from the war for cyberspace.

y 37-year career in the U.S. Army spanned the digital revolution we continue to experience today. From being assigned to the Army’s first digitized division to leading the army’s human resources command during a time of war, to creating, in 2010, a global command with 17,000 cyber professionals charged to not only conduct defensive operations, but when directed, to be able to do offensive operations, I witnessed and helped lead the transformation of our military into a new age. Over that time, the ability of cyber threats to try to take advantage or limit America’s ability to conduct uninterrupted operations—both militarily, and commercially—increased dramatically. Yet, until recently, many leaders assumed that, despite the occasional interruption, these adversaries would not have the ability to seriously interrupt operations. We took our freedom to operate in cyberspace for granted. That assumption is no longer true. There is a

growing threat from sophisticated cybercriminal networks and individual actors that might have a political cause or something that they want to try to impact through cyberspace. Most significant are the growing cyberthreats from nation-state actors—especially Russia, China, Iran and North Korea—that have the potential to commit not only cybercrime or espionage, but launch disruptive and potentially destructive attacks. Iran’s capability, in particular, has grown significantly from a 2012 attack on the U.S. financial sector. Iran is no longer only taking a disruptive approach; it now has destructive capability as well. North Korea has also demonstrated a growing ability to successfully target institutions around the world. America’s sophisticated, networked critical infrastructure— our financial institutions, our electrical grid, our telecommunications sector—also make the U.S. potentially vulnerable to nation-states as well as cyber-terrorists who have a clear intent to do us harm, but only lack capability for the time being. Our ability to operate in cyberspace from now

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BY LIEUTENANT GENERAL (RET) RHETT A. HERNANDEZ

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on will be predicated on our ability to defend and conduct appropriate cybersecurity—if we expect military operations to continue, or we expect businesses to bring the value that we intend.

The bad news is that it is going to get worse before it gets better. Cybercrime is going to explode as an industry. In addition to today’s sophisticated cybercriminal networks, technology is converging to the point where any individual can easily take advantage of tools to do something to others that would put them at risk. Almost half of all breaches result from criminal or malicious attacks already, and as the tools to commit cybercrime become easier for individuals to use, it will create an increased number of new opportunists seeking new markets and new partners, creating more threats across the world. The Internet of Things (IoT) in particular brings increased opportunity for cybercriminals. IHS forecasts that the number of IoT devices will grow from 15.4 billion devices in 2015 to 30.7 billion devices in 2020 and 75.4 billion in 2025. It is already relatively simple for even unsophisticated adversaries to take control of IoT devices and harness their computing power as part of a botnet, significantly increasing their ability to disrupt a company’s online operations by flooding its network with data in a denial of service attack. But the growth of IoT also dramatically increases the threat of direct penetration of corporate networks, especially through supply chains and third-party relationships. As IoT and frictionless machine-to-machine data flow becomes ubiquitous, corporate leaders will see their cyber risks grow substantially. Where is all that data from all those IoT devices going? Who has access to the data in your company? Are those vendors and customers doing enough to secure their networks? These are the questions that will keep CEOs up at night and requires attention now. Healthcare is a good example. The $28 billion global market for electronic medical records is expected to surpass $36 billion by

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2021, according to Kalorama Information. All this sensitive personal information is a rich target for cybercriminals, and the number of IoT devices, including wearables and implants, is making it ever more vulnerable. Beyond that, the ability for criminals to seize control over these personal medical devices and hold their users for ransom is growing. Last year’s WannaCry ransomware outbreak affected thousands of hospitals and reportedly targeted medical devices for the first time as well. Cybercriminals are just beginning to think about the ways in which they can leverage their abilities. Any belief that if we pay them it will be okay will break down. You can’t trust agreements between people with values and people without values. Paying them will not ease the pain. Defining and mitigating the risk to prevent these threats from making you a victim is the key. And if prevention fails, your resiliency will depend on how prepared you are to recover and restore operations. Taken together, the overall threat from cybercrime will result in far more expense to companies—not just from the breaches themselves, and working to prevent them, but also from litigation and, in all likelihood, additional regulation. Breaches at companies over the last year, especially Equifax, generated increased scrutiny among lawmakers and regulators around the country—and on Capital Hill. Expect a growing push for companies to start to do some of the necessary security basics.

VICTOR HABBICK VISIONS/SCIENCE PHOTO LIBRARYGETTY IMAGES

Cybercrime Will Continue to Explode

THE KEY QUESTIONS TO ASK Why would they attack us?

Hard-Learned Lessons to Consider In this environment, the main issue for CEOs and top leaders isn’t which software to buy. When it comes to cybersecurity, culture is the most important thing because people are the weakest link. It isn’t just in corporate America. In every large organization, including the Army, where high discipline and high standards are expected, people often fall short, given the anonymity the virtual world provides. In my experience, soldiers—and employees—often fail to remember that a risk to one is a risk to all. A worker who would never think of leaving the door to a factory unlocked will think nothing of clicking on a malicious link from an unknown sender or using a weak personal password to protect critical company data. A 2017 Verizon study found 81% of hacking-related breaches leveraged either stolen or weak passwords. So how do you lead in this volatile environment? Here are 10 ideas on where to start. 1. Lead from the Top and Keep It Simple. First, figure out how to make policies simple. If it’s too hard to follow a directive, your people won’t follow it. In addition, complex policies take more time, stealing time from your business. Your people are pretty creative—if you’ve put something in place and they don’t like it, they’ll find a way not to do it, or a way around it. In simple terms, find ways to protect people from themselves.

What are our crown jewels and where are they; who can access them; how do we know they’re protected? How do we know threats are not in our network? What are our most significant vulnerabilities and risks? Do we have a framework to address cybersecurity and to ensure hygiene? Do we have a culture of cyber-risk awareness and is the policy for personal responsibility and accountability clear? Do we have visibility across our supply chain and is cybersecurity built into our contracts? What is our risk appetite, and do we have an enterprise approach to risk management? Are we ready to respond to a breach?

Source: NACD Cyber-Risk Oversight, Director’s Handbook Series

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A recent Ernst and Young survey of 1,200 C-Suite leaders at the world’s largest organizations found worry and weakness when it comes to cybersecurity. ay their cybersecurity function doesn’t 89% S meet their organization’s needs 87% Say they need up to 50% more budget 64% Say malware attacks increased in 2017, compared to 52% in 2016; phishing is up 64% vs. 51% 57% Don’t have or have an informal threat intelligence program 48% D on’t have a security operations center (in-house or outsourced) 17% Of boards have sufficient knowledge of effective oversight of cyber risks Only 12% feel it’s very likely they would detect a sophisticated cyber attack

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2. Don’t Be Overconfident. It is very easy for adversaries to take advantage of companies that may not have invested in the appropriate measures with respect to cybersecurity. Overconfidence makes it worse. People tend to think they are better than they actually are. This is human nature. If you find threats in your network, and you ask the people doing the forensics where other threats are, the answer will likely be, “there’s no one else, that we’re aware of.” The reality is you get so close to the problem that you think you’re better than you really are. Change your mindset to believe that anything your organization can do, your adversaries can do, and in some cases, do it better. Finally, think about changing your perspective and assume cyber threats are in your network, and see how this may change an organization’s thinking. 3. Collaborate and Communicate. Too often, we’re not communicating in terms that other people understand. Be sure your IT decision-makers speak English, not tech, and make sure they can be understood by everyone around them—up and down the leadership chain. That’s critical to companies because boards and management are talking past each other too often today. They’re not communicating in terms each can understand. It’s also critical that teams are transparent and work across silos. A personal anecdote: The first meeting I had when I was starting up the Army’s cyber command was like a negotiation between North and South Korea. On one side of the table, were the people who did IT, on the other side were the people who did intelligence. They had their arms crossed looking at each other. I could feel the

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WHAT LEADERS SAY

Changing a culture is hard, and harder when people are the weakest link. Most importantly, demonstrated leadership from the top is essential to change. It’s pretty clear to an organization if the leaders have not embraced the need for a cybersecurity culture. Make a point of discussing cybersecurity openly—and reinforce the message as often as possible. Then, ensure your actions match your words.

tension in the room and said, “Relax, I’m just trying see where we are, as we prepare to stand up to command.” The IT people looked at me and said, “We’ve been responsible for defending these networks. And those intelligence people over there, if they gave us the intel we needed to have, we could defend these networks.” And the intelligence people looked at them and said, “If you had a need to know, I would tell you.” That was not a good place to start when it came to building better cybersecurity, where the first question you need to ask is, “Who else needs to know?” and information sharing is critical to success. 4. Know That Technology Is Always Changing. Far too often, you will hear IT people say, “I could have stopped it if I only had this.” But the reality is that resources are finite, and technology is always changing. It’s not an issue of not having the right technology. How do you mitigate the most significant risk? Given the technology you have, how can you leverage your people? How can you leverage your processes? What do they need to do differently? Because you can’t go buy every widget and gadget that you think is going to solve every problem. There are so many products out there, and everybody is claiming to do something. Where to start? Do not buy anything until you have 100 percent visibility into your network. Anything you can’t see, expect that someone else can see it and use it as a point of entry and a point of vulnerability. Also, invest in capabilities that are part of an integrated, automated, real-time prevention platform. 5. Recognize that Threats Are People. The threat is not malware. It’s people. You have to know and think about what do you have that they want? What are the crown jewels of your organization that would be most valuable to a cybercriminal? And then you have to understand their capability and intent to threaten that information. Not everything is a threat to you. But what you need to address are threats that bring the most significant risk to what it is you value the most.

6. Compliance Isn’t Cybersecurity. In many organizations there’s still a false sense of security that compliance equals cybersecurity. Compliance does not equal cybersecurity. Compliance says that you are compliant on this particular thing that you’ve been told to do, and compliant at this particular moment in time. Too many companies are focused on compliance at the expense of mitigating and managing risk. We bring that on ourselves because every time there’s an incident, somebody thinks about what happened. How can I prevent it? And then they try to think about what compliance measure can we put in place? This whack-a-mole approach of constantly chasing threats does not work, and an enterprise risk-management approach is required. You will always be managing risk. Everything brings some risk to your networks, data and systems. You will never eliminate all risks, but you can focus on what matters most to reduce risk while increasing resiliency to your business.

“YOU WILL NEVER ELIMINATE ALL RISKS BUT YOU CAN FOCUS ON WHAT MATTERS MOST TO REDUCE RISK.”

7. Monitor the Right Metrics. Given the amount of cybersecurity information available, monitoring the right metrics is no easy task. Each company must determine what’s important and the right metrics to assure the mission, not more metrics, is better. Consider distinguishing between leading and trailing indicators. From a cybersecurity standpoint, focus on the leading indicators, particularly as you work to anticipate how to mitigate risks against a constantly evolving threat landscape. Minimize your view of snapshots in time. While they may look good, it’s only a view at that time, compared to tracking trends and patterns. Metrics should be easy to understand, concise and relevant, while enabling discussion and decision making. While each company is different, all consider metrics related to confidentiality of their information, integrity of their data and availability of their systems. Poor cybersecurity measures can impact all three. The hardest one, and the one that concerns me the most, is the integrity of the data. What happens when an attacker is able to change your data and you don’t know it’s

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Do the Basics. Identify and patch all known vulnerabilities. Require multi-factor authentication, not just passwords, for access to your systems. Limit the number of people who have has access to the most important parts of your network. Be sure to guard your back door—supply chains and third parties. Examine the Impact. Take the time to think about the impact of cybersecurity on your company. What’s the worst that could happen? Are you addressing it? Get Your Board Right. Look hard at your directors to be sure that they’re suited for today’s world. Do you have cyber expertise on your board? Be Ready. Rehearse your incident response plan. Some 38 percent of U.S. companies have no plan, and of those with a plan, one-third have not reviewed it since it was initially developed, according to the National Association of Corporate Directors.

been changed? Today, all our systems depend on data and if you can no longer trust the integrity of the data, you have a significant problem. In my view, that’s the most dangerous threat we face in the future and one you need to prepare for today.

10. Keep Asking Questions. The last thing is to be engaged and keep asking questions. When I started cyber command, the only thing I knew was that I had a lot to learn. I counted on my experts to help inform me on what I needed to know, and I talked to a lot of outside people to get their views. Then, it was important to move quickly beyond the basics and to ask tough questions in order to close the gap between your expectations and reality. Get engaged, as opposed to saying, “Well, that’s the cybersecurity people, or that’s IT, or that’s not important to me.” That doesn’t send the right message, and it doesn’t allow you to do the necessary strategic thinking and work required to appreciate what needs to be done to protect your business—and to ensure your mission.

Lieutenant General (Ret) Rhett Hernandez was the first commander of the U.S. Army Cyber Command, responsible for the operations and defense of all Army networks and transforming the Army’s approach to cyberspace. He is part of

8. Get a Second Opinion. Second opinions matter—be careful of group-think. Bring in outside experts. It’s great to confirm your ideas, but it is even more valuable to get fresh thoughts and ideas from outside your organization.

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the Thayer Leadership Development Group at West Point and serves as the West Point Cyber Chair to the Army Cyber Institute. He serves on a wide range of boards and as president of CyberLens, LLC, focusing on leadership, strategic planning and risk management.

GORODENKOFF/GETTY IMAGES

WHAT TO DO NOW

9. Practice, Practice, Practice. If you do nothing else, prepare for a breach and be ready to respond. The best way to be ready is to train over and over and over again. Everything depends on it—your company value, your reputation. Have a strong incident response plan, have it reviewed and updated routinely, and most significantly, rehearse it, with internal and external participants, until everyone knows what’s required if they have to respond. I’m sure it won’t go as planned, but I can guarantee everyone will be ready to adjust as needed.

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INNOVATI ON

R&D’s MID-MARKET CONTRARIANS These five CEOs found ways to overcome the challenges of fostering an innovation culture and devoting resources to R&D. Here’s how they do it.

esearch and development spending by U.S. business has finally begun increasing robustly as the economic recovery has continued, reaching $499 billion—the most spent by any nation in a single year—in 2015, the most recent year for which data is available. What’s more, the business sector’s share of those outlays rose to a record 69 percent. For mid-market companies, there’s even bigger news: Many are contributing more than their fair share to the R&D boom. It’s always been a struggle for medium-sized enterprises to innovate apace with larger rivals because of resource constraints

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BY DA L E B U S S

and other limitations. Yet, a bunch of middle-market outfits are demonstrating that a strategic approach, tight focus and dedication to success in R&D starting at the top and extending down through the ranks of the organization can produce stunning results, making these progressive companies competitive with larger rivals and blessing them with an innovation pipeline that helps them remain profitable players for the long haul. Ariens, for instance, is an old-line Midwestern maker of mowers and snowblowers that has achieved five years of 20 percent compound annual growth largely because of

new products and features that stem from its commitment to innovation. That R&D orientation is evident in a decision to build a $10 million new R&D center and design studio, as well as an ongoing internal conversation via social media about innovation. “For us, innovation is an everyday activity,” says CEO Dan Ariens. “It’s not something that we just decided, where we’re going to engage in an innovative direction. And innovation is an ongoing, moving target. You’re never there; you’ve never arrived.” Internal innovation also helps Dr Praeger’s Sensible Foods, a New Jersey-based

Key Takeaways: Commitment is Key: Robust internal R&D is a differentiator for top mid-market firms.

Culture is Key: Baking R&D into your company culture boosts success rates.

Lead the Charge: CEO involvement helps companies overcome innovation hurdles.

Keep it Close: Extensions rather than “blue sky” initiatives reduce risk.

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Secrets of Successful Innovation Internal innovation is a clear hallmark of successful mid-market companies. Here are some ideas on how CEOs can boost their companies’ R&D quotient: Success can be found close to home: Of total middle-market innovation investment, 42 percent is devoted to projects aimed at existing markets and deploying existing knowledge, according to the National Center for the Middle Market (NCMM). These initiatives typically produce comparable payoffs to riskier ventures. Consider adventurous projects: Aim

maker of better-for-you frozen foods, to lead change in a rapidly evolving market by ensuring creation of its own new menu items rather than farming out R&D. A similar dedication enabled Brillio, a New York-headquartered tech consulting company, to develop a new services group that zoomed from nothing to eight-figure revenues in just two years. In fact, an outsized commitment to investing in innovation is a major distinguishing characteristic of “growth champions” of the mid-market—those 10 percent of companies identified by the National Center for the Middle Market (NCMM) as the biggest gainers over time. Outsized dedication to R&D helped these champions produce consistent revenue growth of more than 10 percent a year. The most successful mid-market companies are 32 percent more likely to consider investments in new products and services to be essential and 28 percent more likely to feel the same way about investments in new processes, according to Center research. “This is investment not just in new products and services but also in their own internal processes and just innovating how they do things as a company,” says Doug Farren, managing director of the Columbus-based NCMM, which studies the U.S. middle market.

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part of your resources at “out there” targets that will reach unfamiliar markets or employ new knowledge. The fastest-growing middle-market companies reach that status in part by being good at blue-sky R&D. Optimize your resources: If a company is going to depend on its own innovation, CEOs must make the most of who and what they’ve got. That means encouraging cross-depart-

Innovation ROI Mid-market companies that grow the most spend double the average on R&D—six percent of revenues versus just three percent—compared with the average for their industries, according to research by Simon-Kucher & Partners, a monetization consulting firm. “Market leadership cannot be achieved and also not retained from imitation, but only through innovation,” says Georg Tacke, co-CEO. The obstacles to depending on internal-innovation strategies are enormous for midmarket companies. Without the scale and size of Fortune 1000 outfits, often they are forced to make choices between significant investment in R&D and other, more urgent needs such as new equipment, a fresh IT platform or more employee training. They may be complacent with a steady sales-growth rate of several percentage points off existing products. Because mid-market outfits on average are about 30 years old, according to the NCMM, they often have a built-in risk aversion “where they’re not willing to bet the whole company on a product or service where the payoff may be great, but the risk is just as great,” Farren says. This is where leadership comes in.

mental interaction, not just relying on a distinct R&D team, and strong engagement by senior leaders, including top marketing and IT executives, the NCMM advises. Build up an infrastructure: While encouraging innovation from all over the company, chiefs should ensure that there are formal processes in place for generating, selecting and implementing innovative ideas—though not so formal the inventiveness is stifled, advises the NCMM. Cull quickly: Being smart with R&D resources means recognizing—and jettisoning—losing ideas quickly.

Where a mid-market company succeeds in making its own R&D a differentiator, there’s usually a visionary CEO behind it. “The companies that drive and recognize and foster it,” Farren says, “have recognition at the highest level that innovation is going to be ‘something we do,’ and they drive it and foster it.” But perhaps surprisingly, success with internal innovation doesn’t require mid-market CEOs to go uncomfortably far afield from what has made their companies hum. Focusing innovation on familiar markets and employing institutional knowledge, rather than venturing out into unmapped “blue oceans,” results in similar profitability and value capture as riskier initiatives, according to the Center for the Middle Market. So the common denominator of success is a devotion to R&D and internal innovation of whatever stripe. Here’s how the five innovative mid-market companies referenced above do it:

Ariens: An “Out There” Approach Innovation has been a pillar since Henry Ariens and his three sons invented the first American-made rotary tiller in 1933,

Think early about monetization: “The excellent companies, large and mid-market, have monetization people in their R&D teams exactly from Day One,” says Georg Tacke, co-CEO of Simon-Kucher & Partners consultants. Be open to new ownership influences: One advantage of the surge in private-equity investments in mid-market companies is that they often bring general management experience and domain-specific expertise to their investments, which, in turn, can boost R&D and innovation at the company, says Doug Farren, managing director of the NCMM.

dramatically improving farmers’ ability to aerate soil and raise plants. Then Brillion, Wisconsin-based Ariens created a residential version of the tiller to tap into suburban demand for both grass mowers and snow blowers. Ariens’s fourth-generation CEO nurtures an innovation culture so Ariens can stay ahead of the monsters of his business such as John Deere and Toro. “We have to be nimble and quick and so we must be much more motivated to come up with brand new things,” he says. “We let our people freely think and go way out there, and when we need to pull it back in and ask, ‘Does this thing become real or not?,’ we pull it back in.” Proof of this operating philosophy lies in Ariens’ decision more than a decade ago to engineer a huge improvement in the mechanics of its snow blowers by increasing the size of its impellers and improving the integration of the throwing mechanism with pulleys and the engine. Market share lurched upward. After falling behind in “zero-turn” lawn mowers, the most popular type with American consumers, Ariens redoubled its R&D over the last couple of years and came up with a worthy new zero-turn platform that is the basis of 20 new prod-

“INNOVATION IS AN ONGOING, MOVING TARGET. YOU’RE NEVER THERE; YOU’VE NEVER ARRIVED.” t DAN ARIENS, CEO, Ariens

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ucts that the company launched for the 2017 season. “We’ll get some share back,” Ariens vows. An unfortunate example of the flip side of Ariens’ “out-there” attitude toward innovation was the company’s early and failed foray into all-electric products about a decade ago. “We were too soon on the market and on the technology,” he muses. The company has an internal blog, open to all employees, for sharing ideas for R&D advances. “Encouraging intellectual curiosity” is crucial, the CEO says. “When your universe of employees is engaged in the discussion and in meeting the challenge, you get a whole lot more return for your invested resources.”

“WE’RE IN THE BUSINESS OF INNOVATION, SO IT WAS EXTREMELY CRUCIAL FOR ME TO FIGURE OUT A WAY TO MAKE INTERNAL INNOVATION AN ONGOING PROCESS.”

Brillio: Commitment, Customer, Culture

This Jersey City, New Jersey-based company’s business is to work with clients in a number of industries to help them innovate with and monetize digital technologies for business advantage. But CEO Raj Mamodia knew his company could do a much better job of innovating for itself after Brillio was spun off from parent Collabera in 2014. “We’re in the business of innovation, so it was extremely crucial for me to figure out a way to make internal innovation an ongoing process,” he says. “After all, we use disruptive technology to help our customers compete and innovate better.” In boosting Mamodia’s own R&D, Mamodia applied three “c’s.” “Commitment of capital” requires a “focus on making progress on those ideas” where Brillio wants to innovate; a “customer” filter means “all the innovation and R&D has to be addressed to customers’ concerns;” and the internal “culture” must allow “the ability to fail,” but also the capacity “to learn from it.” Results followed: A new digital and

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RAJ MAMODIA, CEO, Brillio

analytics services group created internally from nothing in 2014 already contributes eight figures in in annual revenues for the nine-figure company, a substantial contribution to Brillio’s top line. “Many companies get to that kind of revenue only after seven or eight years,” Mamodia says. “And we figure double those revenues” in 2017.

Dr Praeger’s Sensible Foods: Pioneers in Processed Foods One of the pioneers of vegetarian processed fare nearly a quarter-century ago, Elmwood Park, New Jersey-based Dr Praeger’s Sensible Foods plans to super-charge its growth to more than 30 percent a year from the recent 20 percent-plus range after diversifying into gluten-free foods such as a mushroom risotto veggie burger, all developed internally and included in a recent spate of 11 new SKUs. Being headquartered near New York City gives the company access to lots of new ideas about veggie cuisine sprouting from the local foodie scene. Then Dr Praeger’s turns its development experts loose. It recently hired a new R&D director: Jeff Dworzanski, now director of innovation marketing, previously with Popcorn Indiana. Vertical integration of its manufacturing also helps tighten product cycles and maximize the advantages of internally based R&D. “R&D is the lifeblood of the company,” says Larry Praeger, CEO of the company founded by his late physician father. “If you don’t have cutting-edge items coming out, you’re not going to survive. But you must have the capabilities in-house to create them. That way we can be sampling a new idea within a week, and another week for production and then we’re traying it—versus a

three-month wait to go outside and have someone else develop the idea.”

Graeter’s: CEO-Driven Innovation The Cincinnati maker of premium ice creams has never strayed from its smallbatch “French pot” process that’s akin to making ice cream at home, giving it the richness of more cream instead of more air, though it has spread geographically in the Midwest outside its Queen’s City origins. At the same time, the $50 million, 146-year-old company has become an industry leader in creating new varieties, eliminating artificial colors and flavors and introducing a lower-calorie product using a natural sweetener. And Graeter’s has done so by amping up internal R&D compared with a few years ago. Much of the difference has been that Bob Graeter, a scion of the family-owned company and director of quality assurance, has shed other duties to focus on product innovation. His biggest project was spending countless hours reformulating Graeter’s vanilla for consumers’ new “all-natural” sensibilities, working with ingredient vendors to get just the right new recipe. He also came up with a new flavor, Cheese Crown, based on a best-selling cheese Danish that Graeter’s also produces under an auxiliary baking business. “That never could have come from someone outside the company,” Graeter says. The advantage of internal R&D is amplified by Graeter’s ownership of 41 ice-cream stores around the Midwest, as well as the presence of 12 franchised stores, “giving us a lot of feedback on new ideas,” he says, “that’s quick and efficient.”

Penton: “IF YOU DON’T HAVE CUTTING- Reintroducing Risk EDGE ITEMS David Kieselstein arrived at the helm of New York City’s Penton in 2012 “with COMING OUT, a mandate to turn the company into an YOU’RE NOT innovative professional services providGOING TO er” from a traditional business-to-business publisher and media company with SURVIVE.”

t LARRY PRAEGER, CEO, Dr. Praeger’s

Dale Buss is a regular contributor to Chief Executive and other business publications.

iconic titles such as Industry Week magazine. “So creating a consistent culture of innovation,” he says, “was going to be important.” It worked: Informa, a UK-based company in similar segments, acquired Penton in November of 2016 for £1.2 billion, citing how its purchase would add “breadth and balance” to Informa’s own portfolio. Kieselstein left Penton at that point. But part of what attracted Informa was how he had redefined Penton’s bailiwick as “any information that could appear on a smart phone” of its B2B user base. Penton had doubled its capital expenditures budget; turned over 60 percent of its staff; set up a shared-services model for technologies while retaining customer-facing marketing operations; and encouraged staffers to just throw new ideas at Penton’s 100 product lines. Kieselstein also says he began celebrating “every win and every innovation” at the same time that he “reintroduced the idea that we could take risks,” reinforcing the new innovation culture at quarterly “town halls.” New products and platforms flowed, ranging from a tool for tracking global inventory of airplanes available for purchase, to the Equipment Watch app, which Kieselstein calls “the Cars.com for big yellow equipment.” And Penton’s margins have improved by more than 50 percent for the company that had a $388 million annual run rate.

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2018 Manufacturing Summit

Participating CEOs and executives can look forward to gaining practical, hard-won wisdom on: • Implementing techology from AI to IoT • Avoiding pitfalls and costly mistakes when adapting new techniques • Understanding state-of-the-art tech, and what’s around the corner • Learning from some of the nation’s most respected manufacturing leaders • Being inspired and challenged by peer CEOs from across the nation

June 6-7, 2018

Co-Hosted by

Columbus, Ohio This 2-day event for industry leaders offers unparalleled insights, networking opportunities and exclusive tours of Honda manufacturing facilities.

GOVERNA N C E

DEALING WITH DIFFICULT DIRECTORS These three strategies will help get your board back to business— and protect you from an activist attack.

BY C . J. P R I N C E

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hen billionaire hedge fund manager Nelson Peltz fought for a seat on Procter & Gamble’s board this past October, CEOs watching the drama unfold could have been forgiven for cheering P&G on from the sidelines. In recent years, corporate boards, and CEOs themselves, have come increasingly under fire from shareholder activists waging public, and often combative, campaigns to influence everything from site selection to M&A decisions to product strategy. Peltz winning by such a slim margin that recounts were warranted was encouraging, suggesting the hope that not every proxy battle need end in management capitulation. However, the battle came at a high cost. The consumer goods giant spent around $60 million attempting to fend off Peltz, whose firm, Trian Fund Management, owns a $3.5 billion stake of P&G. That price tag may be above average, but all proxy fights take money, time and focus away from the business of managing the company, which may explain why so many campaigns end in settlements, often including a board seat for the activist. The percentage of shareholder campaigns in

BOOSTING BOARD EFFECTIVENESS What action did your board take as a result of an assessment process? 35% Add additional expertise to the board 31% Change composition of board committees 15% Diversify the board 15% Provide counsel to one or more board members 15% Not re-nominate a director 14% Use an outside consultant to assess performance 10% Provide disclosure about the board’s assessment process in the proxy statement

A-DIGIT/GETTY IMAGES

which activists obtained at least one board seat rose to 46 percent, from 41 percent in 2016 and 29 percent in 2012, according to FactSet’s Sharkwatch. It’s worth noting that shareholder campaigns aren’t aimed only at big companies anymore. In 2016, companies with market caps of less than $2 billion accounted for 78 percent of all targets, up from 72 percent in 2015 and 70 percent in 2014, according to Activist Insight. In 2017, two-thirds of all U.S. campaigns targeted companies with market caps below $500 million, FactSet reports. With such heightened scrutiny, boards can’t afford even the whiff of complacency or dysfunction lest they become targets. Given that shareholder activists often complain about board skillsets and expertise, CEOs need to ensure there are no weak links around the table. And yet, according PwC’s 2017 Annual Corporate Directors Survey, there are plenty of weak links in America’s boardrooms. The study found that almost half of directors thought that at least one director on their board should be replaced; one-fifth said two or more should go. “The pressures that directors are feeling from their institutional shareholders

32% We did not make any changes

SOURCE: PwC ANNUAL CORPORATE DIRECTORS SURVEY, OCTOBER 2017

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SHOULD SOMEONE ON THE BOARD GO? NEARLY HALF OF DIRECTORS SAY YES

46% of directors say

someone on their board should be replaced. WHY?

15%

Oversteps the boundaries of his/her oversight role

14%

Reluctant to challenge management

12% Aging

10%

Lacks the right expertise

SOURCE: PwC ANNUAL CORPORATE DIRECTORS SURVEY, OCTOBER 2017

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and activists as well as other stakeholders is causing board members to become more critical of the performance of their peers, and they’re coming to the conclusion that there is no room on the board for directors who aren’t adding value,” says Paul DeNicola, managing director in PwC’s Governance Insights Center. “The bar has certainly been raised around director expectations.” At the same time, with velocity of change at a whiplash-inducing rate, boards have to be ready to react quickly to a new strategy— whether related to product diversification, expansion into new markets, acquiring new businesses and so on—and the board may then need a new set of skills to match the new strategy. Whatever the individual case, director seats are precious, and CEOs and lead directors must be able to move quickly to weed out problems to make room for what they most need. The following are three strategies for strengthening your board to help keep activists at bay. ASSESS PERFORMANCE AND TAKE ACTION. While annual assessments are ubiquitous across public company boards, their effectiveness varies greatly depending on the objectives set ahead of time and whether the evaluation is a “checkthe-box” governance exercise or a real commitment to better the board. If you suspect you have a problem, but are not sure where the fault lies, individual director evaluations, rather than overall board assessments, can uncover weak links, says Dennis Carey, vice chairman and co-leader of Korn Ferry’s board services practice. “Sometimes, the key question of whether there are outlying directors who are not contributing in a way that’s meaningful to shareholder value gets lost in the rhetoric.” If you already suspect you know who the problem is, assessment can provide the formal evidence you need to make a change, says Jerre Stead, CEO of IHS Markit, who has served on more than 30 public company boards. “To me, it’s a very helpful process because it sets the situation up.” Stuart Levine, former global CEO of

Dale Carnegie Associates and current board consultant, agrees, recalling his experience as a lead director for a large Nasdaq company. “We had one of those toxic directors and it was really distracting the CEO and the board. By commissioning an independent assessment, it affirmed all the side conversations and made it more systematized.” In that case, the toxicity manifested as chronic negativity and a tendency to take the board down a rabbit hole of details better left to management. “Directors are helpful when they input on strategy, succession planning and they understand their lane,” says Levine. “This particular individual took a very myopic, tactical view when we really needed to be talking about strategy.” Perhaps most importantly, boards need to be prepared to take action following an assessment. “If you learn you have an issue with a director’s performance, and then you put the results in a drawer and don’t touch it, it’s not really that effective,” says DeNicola. He does note some promising improvement in that area: PwC’s 2017 survey found that than two-thirds of directors (68

“IF YOU LEARN YOU HAVE AN ISSUE WITH A DIRECTOR’S PERFORMANCE, AND THEN YOU PUT THE RESULTS IN A DRAWER AND DON’T TOUCH IT, IT’S NOT REALLY THAT EFFECTIVE.” t PAUL DENICOLA, PwC

percent) said their boards had taken some action in response to their last assessment process, compared with less than half (49 percent) the previous year. KNOW WHAT CAN BE COACHED—AND WHAT CAN’T. Problem directors run the gamut, from the unengaged absentee to the aggressive naysayer. In some cases, with a little helpful direction, the problem behavior can be corrected. Stead recalls his experience as a lead independent director on a board that brought in the CEO of a public company who was bright and successful. “But he wanted to shift everything to the way his board had done it. That’s an instant chemistry problem,” says Stead. “I sat him

Private Companies Need Good Boards, Too Because private company boards are not subject to the same regulatory requirements as those of public companies, board composition tends to be different. “There are a lot more instances of directors being either family members or friends,” says attorney David A. Rubenstein, partner at Drinker Biddle & Reath in Chicago. “They are often asked to come on the board either for loyalty reasons or collegiality reasons and not necessarily for expertise.” That can create unique challenges public companies don’t typically face. A prime example? Family tiffs seeping into the boardroom. “There are things that go back even a generation where there’s just this bad blood and it chips away at the collegiality,” says Rubenstein. “It’s very hard to deal with because these issues are grounded in emotion rather than a ‘prudent person,’ ‘reasonable business’ perspective.” And because board members are typically friends or colleagues of the CEO, it can be that much more

awkward and challenging to take action to remove the offending director. Rubenstein recalls a situation with a privately held company in Chicago, which had a board member who was proving to be an obstacle, but who was employed with the company’s lender. “So they were very hesitant to remove that person,” he says. “Instead, they elected ‘close corporation status’ and just eliminated the board.” Rubenstein advises CEOs of private companies to look at the most successful public company boards for best practices and to avoid filling board seats with yes-people who just rubber stamp their views. “You want a board that’s going to challenge management and take its obligations seriously, who will ask questions without being combative,” says Rubenstein, adding that boards should seek candidates who have experience not only in a company like yours, but in other areas of your supply chain. “And the more due diligence you do upfront, the less likely you’ll have these problems later on.”

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Lessons from Peltz v. P&G Hedge fund investor Nelson Peltz’s bid for a seat on P&G’s board may have been more sensational and more expensive than most, but the case holds some instructive lessons for CEOs who find themselves the target of a disgruntled investor. Listen to your shareholders. If your company has been struggling, as P&G was, with lackluster share price, stagnant organic sales growth and lost market share in key product areas, take your shareholders’ concerns seriously and avoid taking a defensive posture, says Bill Nelson, partner and head of the corporate practice group at Haynes & Boone, an international corporate law firm, which has helped midsize companies defend against activists. “These campaigns are brought because the shareholder feels like they aren’t being listened to,” he says. “If your CFO is taking time to listen to their concerns, you may be able to forgo some of the pain that comes from a proxy fight.” Talking with investors one-on-one, your CFO may also be able to assuage concerns over short-term results by explaining why the company’s long-term strategy will ultimately bear fruit. Don’t settle reflexively. The majority of boards

choose to settle before the contest escalates to P&G levels. “They think they will ultimately lose the fight and then have to pay for the distraction,” says Igor Kirman, partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz. Sometimes, it’s a good idea, he adds. “Every once in a while, you’ll have an activist who adds value and has good ideas and a skeptical, helpful approach,” adds Kirman. “But that’s certainly not always the case.” If you have legitimate reasons for not wanting to give up a board seat, then, as P&G CEO David Taylor and his board did, prepare to defend those reasons with cogent arguments and clear data. Think like a shareholder. Get out in front of a potential campaign by proactively addressing weak areas. “Really examine those things that institutional shareholders find important,” says Nelson. For example, if a division of the company has been underperforming for more than a year, expect shareholders to push for divestiture—or a clear strategy for rebound. Recently, he adds, shareholders also have focused on increasing board diversity and the frequency of board renewal. “To the extent that you’re behind the times in those areas, you need to update those policies.”

down and said, ‘I never want to hear that again.’” He let the director know how his style was coming across to the group and suggested a better approach. “He got it right away and helped us make some good changes later.” In another case, Stead’s board brought on a former state governor, knowing the risk was his lack of public board experience. “When he started moving toward a bureaucratic approach to things, I had to sit him down and say, ‘We elected you because you’re very bright and have a lot of great experience, but this is a reminder that this is a private institution and you’re not running for election to make sure it’s a CYA,” says Stead. “That’s all it took.” Other cases aren’t so simple. “If difficult constitutes not doing preparation or talking too much, you can coach that,” says

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Betsy Atkins, founder and CEO of Baja Ventures and board member at Cognizant, Home Depot Supply and Schneider Electric. “But if difficult means you are unable to let go of your strongly held view when the board moves on from a topic and makes a decision different from the one you are advocating—that is very hard to remediate.” The board cannot afford to waste time convincing one truculent board member who remains unmoved after vigorous, lengthy debate, adds Atkins, who is also a columnist for Chief Executive’s sister publication, Corporate Board Member. “At a certain point, it becomes very disruptive. You have to either support your colleagues or self-select that you’re no longer productive. Or you’ve forced the governance committee or lead director to look at a rotation. That’s hard because it often happens with

very smart board members.” When disruption rears its head, CEOs and their lead directors have to be willing to nip it in the bud, because with only four to six meetings per annum, “that’s not a lot of time to get a lot of important things done,” says Bonnie Gwin, vice chairman and co-managing partner of Heidrick & Struggles’ global CEO & Board Practice. “You’re building chemistry quickly, and you have a working group that has to come together quickly and be highly effective.” Too often, boards will let the director stay and simply remove him or her from committee work, says Atkins. “They hold their noses and continue. A lot of people are uncomfortable with confrontation. And board renewal is not a concept that boards actively embrace as a whole.” Yet, investors are looking more critically at director tenure, zeroing in on boards that they believe are not refreshing often enough, are not adequately diverse or have a disproportionate number of directors near retirement age. But the turnover numbers suggest that isn’t yet having a strong impact on action. “One of the striking things to me in our survey was that 46 percent of directors say at least one director should be replaced. And if you look at the turnover in board seats last year, it was less than 10 percent,” says DeNicola. “That makes me think there’s a disconnect between what directors may think on one hand and what they’re actually doing to refresh the board on the other.” HIRE SMARTER. Naturally, catching problems in the recruitment stage saves the board a lot of time and trouble. But while board independence has improved dramatically over the years, CEOs and Nom-Gov committee chairs still fall prey to familiar habits. “I’ve seen too many add a friend of a friend of a board member or somebody who lost their fast ball years ago and is looking for something else to do,” says Carey. “The whole rigor around the board selection process needs to be much more enhanced than it has been historically.” In addition to getting diverse, independent slates of candidates, one of the

“I SEE THE MOST PROGRESSIVE BOARDS PUTTING NEW DIRECTORS THROUGH AN INTENSIVE PROCESS TO GET TO KNOW THE COMPANY.” t DENNIS CAREY, Korn Ferry

most crucial pieces, often underutilized, is rigorous reference checking. A candidate who looks perfect on paper from a skills and expertise perspective may prove to be oil to the board’s water—and that isn’t something you’ll see on a CV. “You have to speak to their former colleagues, people who have been on boards with them in the past who can tell you exactly what it was like working with them,” says Clare Hart, CEO of Sterling Talent Solutions. When Stead chairs a board, he insists that every director interview a new candidate. “I’m not usually a consensus guy because I think it slows things down, but in this case, it’s really important,” says Stead. If even one director has a problem that can’t be assuaged with discussion, “we probably won’t add the person.” Once the director is on board, give them the tools they need to be helpful, says Carey. “I see the most progressive boards putting new directors though an intensive process to get to know the company.” For example, at Sterling Talent, Hart organizes “board education days” where new directors can meet with executive committee members who don’t typically attend board meetings but have P&L responsibility, including the head of client services, head of sales, chief technology officer and chief product officer. “It’s kind of a deep dive to help them better understand and frame the business,” she says. Even with the most diligent hiring practices, there are no guarantees—and hindsight is 20/20. Most important is the willingness, when necessary, to take action swiftly so that negative energy is not allowed to linger in the boardroom and become a vulnerability that activists can exploit. “Any time you have to tell someone, ‘This just isn’t going to work,’ it’s tough,” says Stead. “But when you’re the CEO, that’s part of the job.”

C.J. Prince is a contributing editor at Chief Executive who specializes in management, leadership and corporate philanthropy.

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EC O N O M I C D E VE LOPME NT

REGIONAL REPORT

THE SOUTHWEST URBAN AREAS IN THE SOUTHWEST ARE PICKING UP SPEED. BY CRAIG GUILLOT

#Ranking in the 2017 Chief Executive Best & Worst States for Business (ChiefExecutive. net/2017-Best-Worst-States)

THE SOUTHWEST CONTINUES TO grow as a hub for tech, finance and data centers, attracting companies with a business-friendly environment, high quality of life and relatively low cost of living. Many of the region’s urban areas, including Phoenix, Denver and Salt Lake City, are some of the fastest-growing in the nation, thanks to a flight to livable metropolitan areas. In Texas, Dallas is a growing destination for corporate headquarter relocations, and in New Mexico, Facebook is doubling down on its data center investments in Los Lunas. Stretching into the Southeast, Arkansas is seeing a surge in investment from Chinese companies, while Oklahoma is fueling new development in wind power.

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1 TEXAS LONE STAR STATE CONTINUES DIVERSIFICATION BEYOND ENERGY While a slump in oil prices has been impacting Texas’s economy, many of its urban areas are still growing. A recent forecast by Oxford Economics put three Texas counties in the top five for expected GDP growth through 2021. Bryan Daniel, director of economic development and tourism for the state, says that from Dallas to San Antonio to Houston, the state is moving well beyond energy. “We’re seeing a much more diverse cross-section of companies looking at Texas. It’s the diversity that is driving significant economic development here,” Daniel says.

DALLAS, TEXAS The third-largest city in Texas, Dallas is home to 20 Fortune 500 company headquarters.

Clark Golestani, president of emerging business and global CIO at Merck, said they were attracted to the “innovative and collaborative community,” which includes Dell Medical School and Austin Healthcare Council. 9 ARIZONA

Jamba Juice recently relocated its headquarters from Emeryville, California, to Frisco, Texas. CEO David Pace said the company was looking for a place that had competitive costs, an attractive cost of living, central location and access to talent. Toyota opened the doors of its new North American headquarters in Plano in May, and last year, W.W. Grainger opened a new facility in San Antonio. While Houston remains an energy capital, it is seeing strong growth in life sciences and healthcare. San Antonio is experiencing strong momentum in advanced manufacturing and cybersecurity, Daniel says. In July, Merck announced it would locate its fourth global tech hub in Austin and create 600 additional jobs.

PHOENIX LEADING NATION IN POPULATION GROWTH The Census Bureau reports that Maricopa County, which includes the metro Phoenix region, is now the fastest growing county in the nation. The area has a population of 4.2 million and is growing at 2 percent, something officials attribute to quality jobs, an affordable cost of living and moderate weather. Chris Camacho, president and CEO of the Phoenix Economic Council, says companies now see the region as a “West Coast alternative to Los Angeles or the Bay Area.” In February, Symantec acquired Tempe-based LifeLock for $3.2 billion and extended a major presence from the Bay area into Phoenix. Benchmark Electronics also announced in October it will relocate its headquarters from Angleton, Texas, to Tempe. Benchmark CEO Paul Tufano noted the company’s partnership with Arizona State University and said it’s an “ideal location to drive organizational alignment and attraction and develop top-notch talent.” In total, 85 new companies have expanded to greater Phoenix in the past two years, Camacho says. Despite its rapid growth, there’s a “local movement mentality,” Camacho says, and Thrillist recently identified Phoenix’s Warehouse District as one of the most popular in the country. Tech giants such as Galvanize and WebPT have attracted an influx of young creatives, and the number

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announced a $100 million expansion and 540 new jobs, something Mark Paul, president of Stryker’s neurovascular division, credited to the area’s “talented workforce and first-rate education.” Utah is trying to overcome its growing talent shortage with the Pathways Intern program where participating companies hire high school senior interns and prepare them for the workforce. Hale says the program has been so successful it has been duplicated in the diesel tech, life sciences and IT industry. 13 COLORADO

PHOENIX, ARIZONA Tech startups are taking over Phoenix’s warehouse district, evidence that it’s considered an affordable and business-friendly urban alternative to the Bay area.

of tech companies in the city has grown to 350 from only 60 in 2012. Belmont Partners, which is owned by Bill Gates’ Cascade Investment Group, also announced in mid-November that it will invest $80 million in a high-tech “smart city” development outside of Phoenix. 12 UTAH RELOCATING PRISON PAVES WAY FOR BIG GROWTH IN THE SILICON SLOPES Prisons don’t typically come up in conversations about economic development, but it’s big news in Utah. When the Utah State Prison is relocated in the next few years, it will open up for development 20,000 acres of prime real estate near the Silicon Slopes. “We’re the only city I know that will have all of this land only a mile from the international airport,” says Val Hale, executive director of the Utah Governor’s Office of Economic Development. State officials are already studying the potential to create an inland port in the area to serve the West Coast. Both Amazon and UPS have announced projects in the area in the past year. Swiss company Stadler Rail also broke ground in October on a $50 million manufacturing facility in Salt Lake City, where it will build tram vehicles for transit authorities around the country. Stadler CEO Martin Ritter credited the location to the city’s “skilled, educated and dedicated workforce” and quality of life. Medical technology company Stryker also

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MILE-HIGH CITY INVESTS FOR THE FUTURE The Metro Denver Economic Development Corporation projected the city’s economic growth rate would reach 2.4 percent in 2017. Developers credit long-term planning decisions, infrastructure upgrades and efforts to enhance the city’s international reputation. There have been new investments in light rail lines, shuttles and bike lanes. Plus, the Denver International Airport, which served 60 million passengers in 2017 and is now the nation’s fifth-busiest airport, will add another 39 gates by 2021. Jeff Romine, chief economist and strategic advisor at the City of Denver, says the city is continually investing in the future of a next generation economy and global connectedness. “It’s really driving where things are going and how things are happening.... We’re continually making investments to make sure this city can grow in a rational and meaningful way,” Romine says. The Mile High City’s growth as a hub for tech and financial services is largely attributed to the productive workforce and high quality of life, Romine says. San Francisco-based Gusto, formerly known as ZenPayroll, launched a second office in Denver in 2015. Optiv Security, which is preparing to move to a new headquarters in downtown, has been making new acquisitions and was recently named one of the country’s fastest-growing private companies, with $2 billion in revenues in 2016. The OED also notes a number of “gazelle” firms in the city, organizations that are rapidly growing with proven success

SALT LAKE CITY, UTAH Swiss train manufacturer Stadler Rail will build commuter trains for Caltrain in Utah, employing up to 1,000. and potential to raise money and jobs. Organizations such as CyberGRX and GoSpotCheck are experiencing steady growth. PaySimple, an online payment solution for 17,000 companies, recently announced a $115 million private equity investment. Tech firm Businessolver also recently celebrated its third anniversary in the city and has since grown its workforce from 30 to 160 employees. As in other southwestern cities such as Phoenix and Salt Lake City, many firms are opting for Denver over places like Boston or the Bay Area. “They have a 20-minute commute, a lower cost of living and what sounds like a good life. These firms and talented employees are choosing Denver for this reason,” Romine says.

state’s] power comes from renewables,” Snodgrass says. Those renewable energies will also help power new businesses coming to the state. Snodgrass says Oklahoma made 48 deals during FY 2017, resulting in $2.37 billion in investments and more than 5,000 projected new jobs. She says they’re also experiencing an increase in foreign direct investment. Swedish-based Alfa Laval broke ground in October on a 68,000-square-foot “competence center” in Broken Arrow, and Logistyx Technologies announced in June it will move its headquarters to Tulsa. MedXM also announced in March 2017

17 OKLAHOMA FUELING THE WINDS OF ECONOMIC DEVELOPMENT In May, Enel broke ground near Billings on what will be one of the largest wind farms in the country. Once fully operational, Thunder Ranch will have the ability to generate enough energy to power nearly 90,000 homes. The company has eight wind farms already in operation in the state and also recently started construction on its Red Dirt wind project. Deby Snodgrass, Oklahoma secretary of commerce and tourism, says the state is now the third-largest producer of wind power in the U.S., and that it employs more than 8,000 Oklahomans. “People generally think of Oklahoma as an oil and gas state, but our energy portfolio has been expanding for decades. Nearly 30 percent of [the

BILLINGS, OKLAHOMA Renewable energy is powering Oklahoma’s economy; it recently passed California to become the No. 3 state in wind-energy capacity.

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a new operation in Oklahoma City with plans to hire 400 employees over the next five years. 23 ARKANSAS CHINESE INVESTMENT SURGES In the past 18 months, the State of Arkansas has announced five projects involving Chinese companies that have netted more than $1.4 billion in capital investments. Mike Preston, executive director of the Arkansas Economic Development Commission, says the state has focused on developing key relationships in Shandong Province and has hosted and made numerous trade missions. “You have to build the trust with the government officials, everyone up from the major of the city, governor of the province on up,” Preston says. Last year, Sun Paper announced a $1 billion investment to construct a paper mill in Clark County. Textile company Shandong Ruyi Technology Group also opened a factory and added 800 jobs in Forrest City. And in October 2017, China-based Hefei Risever Machinery Co. announced it would build its first U.S. manufacturing plant in Jonesboro. Yonggang Lai, general manager at Hefei, credited the location for its convenient transport, industrial base, talent and “favorable community environment.” In November, Gov. Asa Hutchinson made his third trip to China since taking office and says he still sees “significant opportunities” for Chinese investment in the state. “Now the challenge is telling about that success and making sure that people all over the country, and really all over the world, know about that,” Preston says. 30 NEW MEXICO FACEBOOK DOUBLES DOWN IN LOS LUNAS In November 2017, Facebook reported that it would quadruple the $250 million data center investment in Los Lunas that it announced last year. The $1 billion facility currently under construction is now slated to span 2.8 million square feet across six buildings. “It’s a huge deal and validates so many of the things we’ve

been preaching and pushing about [doing business here],” says Matt Geisel, cabinet secretary of New Mexico Economic Development Department. Geisel points to the state’s “low risk” geography, compelling business climate and energy economy as drivers of development. In October, Raytheon opened a new manufacturing facility in Albuquerque to produce range monitoring and telemetry systems for the U.S. and its allies. Todd Callahan, Raytheon naval area and mission defense vice president, credited the state for its “long history of scientific excellence.” In March, Safelite opened a new contact center in Rio Rancho, where it will eventually add 1,000 new jobs. Surrounded by states that are arguable “more competitive,” New Mexico still grapples with perception, Geisel says. The economic development department is now trying to better educate companies and market the opportunities with what he says is an “incredible value proposition” of high-quality talent and a very predictable cost of doing business. “We’ve often been told by companies that have multiple locations that their New Mexico operations stack up towards the top of any other in the U.S., if not globally. It’s a business environment that delivers a lot of predictability,” Geisel says.

LOS LUNAS, NEW MEXICO Facebook’s data center will be comprised of six buildings containing 2.8 million square feet of interior space—all powered by a solarenergy grid.

Craig Guillot is a New Orleans, Louisiana-based business writer specializing in technology and economic development.

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CEO TALENT SUMMIT

OCTOBER 1-3, 2018

HISTORIC THAYER HOTEL | WEST POINT, NY

Shutterstock

IN PARTNERSHIP WITH

YOUR TALENT CHALLENGES REQUIRE FRESH perspectives and new strategies. The 2018 CEO Talent Summit will bring together CEOs in an interactive, intimate environment to discuss strategies for building high-performing organizations with a focus on human capital, talent development and retention, and corporate culture. Limited to 125 participants, youâ&#x20AC;&#x2122;ll develop new contacts and relationships from across the spectrum of American business, and come away with real strategies you can put to work right away.

BONUS Experience!

West Point is our classroom as we explore the historic campus and dive into case studies in leadership with former military officers, applying lessons of the past to present-day CEO challenges, including inspiring your team to accelerate their own leadership skill development.

FEATURED SPEAKERS: MG John Batiste (U.S. Army Retired), Retired President & CEO Klein Steel Service, Inc. Joe DePinto, President & CEO, 7-Eleven, Inc. Sjord Gehring, Vice President, Talent Acquisition & Employee Experience, Johnson & Johnson LTG Kenneth Hunzeker (U.S. Army Retired), Retired President & CEO, Vectrus, Inc. Robert F. Leduc, President, Pratt & Whitney Dan Schawbel, Author, Back to Human: How Great Leaders Create Connection in the Age of Isolation Jennifer Schopfer, Vice President, GE Transportation Digital Solutions M. Robert Weidner, III, President & CEO, Metals Service Center Institute (MSCI)

TA L E NT SU MMI T

YOUR TEAM IS YOUR

FUTURE

There’s no substitute for great talent—but how do you find, nurture and retain the people capable of delivering on your vision, your goals and your growth strategy?

Disney’s Jeff James says that how you treat employees translates to how they’ll treat your customers.

West Point, NY will be the site of the next CEO TALENT SUMMIT OCT. 1-3, 2018 To register: CEOTalentSummit.com

IT’S NOT EASY TO LIVE UP to the tagline, “The Happiest Place on Earth,” year after year. But The Walt Disney Company’s theme parks have managed to maintain their magical patina for nearly a century, thrilling customers young and old by consistently exceeding expectations. What’s behind the magic? Employees, or cast members, said Jeff James, vice president and general manager of the Disney Institute, in a keynote address to attendees at the 2017 CEO Talent Summit in Orlando. Each time a customer interacts with the brand, he or she must walk away having experienced the brand promise: “Disney is special entertainment with heart.” That, he added, all comes down to people. “The extent to which you genuinely care for your people is the extent to which they will care for

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your customers—and each other.” Just how to find the right people to deliver on your company’s brand promise, and then retain them during the ongoing talent wars, was the subject of lively discussion at the two-day summit co-hosted by Chief Executive and Brazilian aerospace company Embraer. As Gary Spulak, president of Embraer, pointed out, the more refined the company’s culture, the easier it is to identify the best candidates. “In the interview process, we can pretty much figure out within 10 to 15 minutes if they’re going to be able to work in Embraer’s culture,” he said. But with the breakneck pace of change and ongoing disruption across all industries, the requirements for talent pools are changing all the time. Spulak and others discussed the challenges of hiring skilled labor in the gig economy, as well as reskilling existing workers, while at the same time creating a culture of engagement for a generationally diverse work force. The ultimate goal for CEOs? To empower employees to be brand ambassadors who will then inspire lifelong loyalty among customers. “In today’s interconnected world, everything is shared—positive and negative,” said Omar Soliman, CEO of College Hunks Hauling Junk. “We want to move people emotionally through a positive experience. If you can make people happy, they’ll keep coming back.”

Clockwise from top left: Embraer’s Gary Spulak; Sonic Packaging’s Howard Thau; AARP’s Lori Trawinski and Newport News Shipbuilding’s Susan Jacobs; SAFT’s Terry Cooper, Navy Federal Credit Union’s Michelle Kaufman and Chief Executive’s J.P. Donlonw

HOW TO BUILD “BRAND ANGELS” OMAR SOLIMAN AND HIS COFOUNDER NICK FRIEDMAN KNEW they had their work cut out for them when they launched their company, College Hunks Hauling Junk. After all, they have to rely on college kids, most of them inexperienced and untested, to build their brand. “We have 2,025 front-line team members and they carry the entire customer experience,” Soliman told Talent Summit attendees. “They’re the face of the company, and they’re also the lowest paid. So how do you get them to be the brand?” The answer was to have a clear purpose—“Move the World”—and a very specific, detailed playbook showing team members exactly how to deliver on the message. Even more important, Soliman said, was treating employees like co-owners, giving drivers a level of autonomy and encouraging each one to run his or her truck as if it were a small business. To that end, every team member gets a business card, with the title of their choice. “We tell them, ‘You’re the brand.’ We want to empower them and give them skills to be the mayor of their town.” They also measure KPIs and give real-time feedback, something millennials crave, in a gamified system. “They’re the video game generation, and they want to know where they stand,” he said. A leaderboard keeps score of top customer service rank or top revenue rank, creating a bit of healthy competition. When a team member isn’t working out, they don’t waste time making a change. “The most expensive time in a business person’s life is the time between knowing you have to fire someone and actually firing them,” he said. “Hire slow, fire fast.”

“We want to empower them and give them skills to be the mayor of their town.” —OMAR SOLIMAN, CEO, COLLEGE HUNKS HAULING JUNK JANUARY/FEBRUARY 2018 / CHIEFEXECUTIVE.NET

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COMPETING WITH GOOGLE Headquartered in the heart of Silicon Valley, Cisco competes with the deep pockets of Google and Microsoft for top tech talent. “Our employees are surrounded by opportunity,” Jill Larsen, senior VP of Cisco’s Human Resources & Talent, shared with attendees at the CEO Talent Summit. To reduce attrition rates, Cisco has strived to make employees’ careers as challenging and rewarding as possible. For starters, Cisco offers a flexible workplace, with as many as 60 to 70 percent of employees working remotely, and plenty of opportunity for “swaps,” she said. “We take managers early in their career and swap them for six months.” Cisco is also currently building a database that employees can use to learn more about other job roles within the company to which they might aspire. “It will tell them, here’s what you need to know, the skills you need to have, the articles you should read, the people to learn about, the Ted Talks you should see,” Larsen said. Employees also enjoy a host of perks, including time off for charity work, a “fun fund” for managers to use to treat their teams to an outing, and “Connected Recognition,” which allows employees to recognize their peers with an acknowledgment that comes with a monetary reward. “We also have a ‘bring your dog to work’ policy,” Larsen added. “It sounds so silly but it really humanizes our executives, and employees love it.”

“Our employees are surrounded by opportunity.” —JILL LARSEN, SENIOR VP OF CISCO’S HUMAN RESOURCES & TALENT

WHAT KEEPS THEM ENGAGED? In an effort to measure the intersection between engagement and work environment, office furniture design company Steelcase surveyed more than 12,000 employees in 17 countries. The findings? One in three workers is disengaged, says Gale Moutrey, vice president, communications for Steelcase. And those reporting as highly engaged did not cite onsite gyms or ping pong tables. Rather, they said: We can choose where we want to work based on task We can concentrate We can work in groups and teams without disruption

Clockwise from top left: Steelcase’s Gale Moutrey with Chief Executive’s Dan Bigman; W.A. Robinson Asset Management’s Matthew Robinson; SAP’s Brigette McInnis-Day, Anheuser-Busch’s Sandro Bassili and Chief Executive’s J.P. Donlon; audience participants; Embraer Aircraft’s Maggie Laureano

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We can move around throughout the day We can easily and freely express and share ideas

GREAT TALENT IDEAS Toward the end of the two-day CEO Talent Summit, attendees were brought together to brainstorm ideas for finding, attracting, retaining and developing top talent. Here are 10 of the best: Create a mission statement specifically for attracting and retaining Tap into alumni and build relationships with professors at local schools Institute referral programs, particularly for top performers Have regular job rotation Start a formal and exceptional onboarding program Encourage employees to create video testimonials with one another Have a robust mentor program Upgrade to an online learning management system, accessible from anywhere Create opportunities for intergroup learning Gamify the workplace

Clockwise from the top: Brainstorming sessions; Etain Health’s Hillary Peckham; Vickers Engineering’s Corey Carolla; Baker Tilly Virchow Krause’s Mary Goldy

GETTING SCHOOLED

“Partner with local universities and, if possible, send an employee to teach the course you need students to take.” —TONY LEE, VICE PRESIDENT OF EDITORIAL, SOCIETY OF HUMAN RESOURCE PROFESSIONALS

About eight years ago, the University of Waterloo in Ontario had a problem: their technology graduates would immediately leave the local area to find jobs. “[The university] could never improve their reputation because they couldn’t find meaningful jobs for their grads,” Tony Lee, vice president of editorial for the Society of Human Resource Professionals, told attendees at the CEO Talent Summit. It wasn’t for a lack of corporate presence; for example, BlackBerry, formerly known as Research in Motion, Cisco and Google all had offices nearby. The university reached out to the companies to find out why they weren’t hiring Waterloo graduates. “They all came back and said, ‘Because none of them have the skills we need,’” Lee said. The university asked which skills graduates required and promised to train them. “Then the school said, ‘Tell you what—if you send us adjunct professors to teach these classes, you can get first shot at the best graduates of these programs.’ They now have more than 100 companies working with them and have sent 80,000 graduates through this program into the workforce in Canada.” The moral of the story? Partner with local universities and, if possible, send an employee to teach the course you need students to take, said Lee. “It will be well worth it from a recruiting standpoint.”

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C EO ROUNDTAB LE

STOCKING THE TALENT PIPELINE

How businesses are taking the lead on bridging the talent gap. BY JENNIFER PELLET AT A TIME WHEN COMPANIES ARE perennially starved for talent, access to a robust pipeline of skilled or at least trainable workers is paramount. Yet, the tech-centric jobs of the 21st century demand more knowledge and competencies than a traditional high school degree—or even a liberal arts college education—provides. And, thanks to fierce competition in the global marketplace, the days when companies could hope to develop this talent in-house are also long gone. How, then, can businesses hope to bridge the skills gap? Increasingly, answers lie in creative solutions involving public-private sector partnerships and education reform initiatives, agreed executives gathered for a recent roundtable discussion on workforce development sponsored by Enterprise Florida. Streetsboro, Ohio-based Delta Systems, for example, works closely with area school systems to bring STEM coursework into public school classes. “We partnered with Streetsboro High School in Portage County, sponsoring their science, technology, engineering and math (STEM) lab,” says Greg Schlechter, talent development manager at the manufacturing company. “We helped them bring in equipment and technology that they wouldn’t normally have access to in order to [jump-start] a STEM program.” Similar efforts are under way in Florida, said Pete Antonacci, CEO of Enterprise

It’s a daily task to remind our university system, our community college system and, down the line, our school boards, that preparing our students for the job market should be their highest priority. —Pete Antonacci, CEO, Enterprise Florida

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Florida, who noted that the state has been steadily working toward education reform efforts that would address the needs of its employer base. “Over the last seven years, our governor has [encouraged] our education system from top to bottom to create workers for the jobs he is dedicated to recruiting for Florida,” said Antonacci, who cautioned participants that progress requires patience and commitment. “Education systems tend to operate on their own goals, not those of the market. So it’s a daily task to remind our university system, our community college system and, down the line, our school boards, that preparing our students for the job market should be their highest priority.” Bringing Skills Training to Schools Perseverance, however, pays off for both the companies seeking skilled workers and for local students, who are able to emerge from high school equipped to qualify for jobs that pay more than minimum wage. Many also earn college credits that may help them save on college tuition, noted Schlechter, who explained that as part of another partnership in Summit County, Delta Systems and other area businesses give educational presentations on manufacturing to six school districts, each of which offer specialized vocational education in fields like automotive mechanics, aeronautics, CAD design and electronics, robotics and engineering. “Students with an interest in one of those fields can leave their home school and go to one of the schools that has the vocational classes they’re interested in,”

he said. “They can still participate in sports and programs at their home school and graduate from there, but they’re able to leave with that specialty knowledge base, as well as receive college credits due to the classwork they’ve done.” In other cases, skills development comes from extracurricular programs. In Michigan, for example, support from the auto industry coupled with state grants has fostered a vibrant robotics program that gives high school students exposure to electrical, mechanical and programming work. Each of the more than 400 teams statewide operates as its own small business, with students working in groups to design, build and market robotic projects and compete with one another at district tournaments. Private sector support is an integral component, as area companies provide mentorship and equipment to team members. “As a company, we engage very heavily with the local FIRST Robotics teams, providing financial support, as well as an introduction into what really happens in our world from a day-to-day operating perspective,” said Corey Carolla, director of HR at New Troy, Michigan-based Red Rabbit Automation for Vickers Engineering. “We talk to team members about what it would look like to transfer from their FIRST Robotics position to our company, and what that career path might look like.” In addition to learning skills applicable to the real world, students emerge with a better understanding of career options and where their career interests lie. That, in turn, helps them forge a path after graduation, noted Amy Pope-Wells, president of Tire Diva and owner of a Link Staffing services franchise in Jacksonville, Florida, who says lack of direction among young people contributes to the skills gaps reported by clients of her staffing firm. “We have employers calling us looking for talent and, at the same time, I get calls from parents whose children went off to college not knowing what they wanted to do and then come home and sit on the couch playing video games,” she said, noting that young adults are unlikely to overcome this issue on their own. “We have to begin

working as employers in our communities to start solving our own issues. We need to help these kids discover what it is that they like to do and allow them to have opportunities for success in those areas.” Education is Elementary While the bulk of private-public education initiatives target high school and community college curricula, companies are also finding ways to bring STEM learning and exposure to manufacturing and engineering careers into early education. Some report that inviting grade schoolers to tour today’s high-tech facilities can play a part

in addressing misconceptions about the manufacturing industry. “If you can engage students and parents early on—in middle school—and bring them into today’s manufacturing environments, you can shift that mindset of ‘it’s that dirty, hot facility that my grandfather got laid off from 40 years ago,’” said Schlechter. “Today, these are clean, hightech, climate-controlled environments with opportunities for advancement and where you can make a good living without coming out of college $40,000 to $60,000 in debt.” Touring automated facilities firsthand also helps combat the public perception that companies are replacing workers with robots. In truth, the jobs being transferred to robots are generally monotonous repetitive tasks that workers in developed countries shun, whereas jobs associated with robotics are higher-paying skilled vocations. “Automation actually leads to less offshoring and more reshoring, because the reason most people went offshore in the

From left: Dowding Industries’s Christine Metts, AARP’s Michele Johnson, AARP’s Lori Trawinski

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first place was low-cost labor,” says Greg Woods, CEO of AstroNova. “So if you can use automation to increase productivity levels domestically and remove the cost of shipping, you can bring [jobs] back to the U.S.” Early education initiatives by companies like Vickers also give young students exposure to growing fields. A recent effort to introduce third-grade students to the concept of coding was a huge success, reported Carolla, who says the company used Spheros, orb-shaped toys that can be programmed and controlled by tablets, to create a fun learning experience for young kids. “We bought Spheros into third grade classrooms, turned their desks upside down and started coding them with the kids,” Carolla said. “The response is unbelievable. They ask questions, get into it and go home and say, ‘I want a Sphero ball for Christmas.’ Now we have different Manufacturing Day events through the year where people come and participate in Sphero ball competitions.”

who says Florida is a “veteran friendly” state. “We’ve got about 1.65 million veterans who make up the kind of workforce that many companies use every day and need for future jobs. These are people who are highly trained, highly skilled and who come to Florida because it’s a good place to live.” Bringing mature workers up to speed can also help address workforce needs. “People aren’t retiring at 55 and 60—often they’re looking at doing something new,” pointed out Michele Johnson, vice president of talent acquisition for AARP. “When you’re looking at upscaling talent and addressing talent needs, you should really look at this particular population.” AARP runs a “Back to Work at 50 Plus” program aimed at helping older workers get the skills they need to re-enter the workforce in a new field. The initiative connects regional employers with community colleges to help identify skills needed in local marketplaces. “Then the community colleges hopefully will develop curricula to address those needs,” says Lori Trawinski, director of AARP’s financial security team. Recognizing the different strengths of entry level and experienced workers, some companies look for ways to transfer knowledge between the two. “We’ve been providing mentoring from our more experienced technicians for [young talent],” said Maggie Laureano, vice president of HR for Embraer, who noted that intergenerational partnership helps ensure that decades of institutional knowledge doesn’t disappear forever when employees retire. While younger, digitally savvy workers have a greater affinity for technology and tools, mature workers possess knowledge and expertise—and tend to be less likely to job hop and have unrealistic expectations than their younger peers. “The millennials want to get ahead very quickly without paying their dues, and they’re very assertive in expressing their needs from a career and development standpoint,” said Laureano. “It really challenges us as companies to think about how we need to respond to that, how we need to create programs that will support that kind of employee.” Ultimately, ensuring that companies will continue to have the workforce they need to compete in the global marketplace is a national imperative. Yet, it’s one that, by nature, must be addressed at a local level by businesses, educational institutions and local governments and community leaders all working together to raise awareness and support programs that identify skills needs and create training programs to fill them.

People aren’t retiring at 55 and 60—often they’re looking at doing something new. —Michele Johnson, AARP

Multi-Generation Solutions While equipping up-and-coming generations with the skills they will need to succeed is critical to addressing market needs, attracting workers who already possess the knowledge and expertise employers need is also key. Florida’s workforce has benefitted from an influx of veterans with experience and training applicable to the private sector, said Enterprise Florida’s Antonacci,

Roundtable Participants Top row, from left:

Steve Slovick, CEO, Jupiter Life Sciences Consulting

Raymond Hauser, CEO, Hydro-Gear

Michele Johnson, VP of Talent Acquisitions, AARP

Guy Lester, Vice President, The Segal Group

Corey Carolla, Director of Human Resources, Vickers Engineering

Linda Cegelis, Recruiter, McCorkle Construction

Lori Trawinski, Director, Financial Security Team, AARP

Michelle Kaufman, VP, Employee Services, Navy Federal Credit Union

Bottom row, from left:

Gregory Woods, CEO, AstroNova Greg Schlechter, Talent Development Manager, Delta Systems Dan Bigman, Editor-in-Chief, Chief Executive Sean Helton, VP, Strategic Communications, Enterprise Florida Marc-Antoine Acra, General Director, ACRA Industries

Maggie Laureano, VP, Human Resources, Embraer Aircraft Holding Christopher Bakos, Director of Recruiting, Advanced Technology Services Pete Antonacci, CEO, Enterprise Florida Amy Pope-Wells, CEO, Link Staffing Christine Metts, CEO, Dowding Industries

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C EO ROUNDTAB LE

THE HERO AND THE GUIDE There are many types of CEOs. Which one are you, and which one do you need to be? BY C.J. PRINCE

There are certainly CEOs and CHROs and people that we’re interacting with and reading about every day that tend towards one or the other. —Ted Bililies, AlixPartners

IF YOU BOILED LEADERSHIP DOWN TO two primary styles, you might find something like this: 1) the “hero” leaders, like Steve Jobs and Lee Iacocca, who are exceedingly smart and driven, with a clear vision and strategy and who, while perhaps lacking bedside manner, always get the job done; and 2) the “guide” leaders, like Kenneth Chenault and Mary T. Barra, who excel at communicating, inspiring others and encouraging cooperation among team members to strive for a common goal. Those labels are, at least somewhat, oversimplifications. In reality, there are no pure heroes or pure guides, Ted Bililies, management director and chief talent officer for AlixPartners, told attendees at a roundtable sponsored by the management consulting firm. “But there are certainly CEOs and CHROs and people that we’re interacting with and reading about every day that tend towards one or the other.” So which is better? The short answer is: it depends. “It depends on the state of the organization at the time that person is in position,” says Yvette Segura, vice president and general manager of USAA, a financial services association serving members of the U.S. military. “Do they need more collaboration? Do they need to better leverage the talent of all the folks? Or do they need somebody in there who’s going to be that smartest person in the room and say, ‘No, this is what we need to do’?” Susan Jacobs, vice president, HR &

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administration of Newport News Shipbuilding, pointed out that her company is currently undergoing a transition period and has a new CEO leading them through it. “She is, without a doubt, a hero [leader]. She’s really very dynamic, very engaging. And she makes you believe you can do this really huge thing. I think that’s really important, especially in a time of transformation,” Jacobs said. “But I can also understand why the guides tend to be more effective in the long run.” Heroes are ideal in times of disruption, agreed Jorge Quintana, director of human resources for Champlain Cable. “But in a general daily sense, I prefer guides. But you need balance. Balance is a wonderful thing.” Underscoring that notion, Clark Perry, director, AlixPartners, cited results from a forthcoming study by leadership development consultancy, Zenger Folkman, which compared the effectiveness of each style of leadership based on thousands of criteria and found that guides were, overall, more effective than heroes, but those who had a mixture of the two did better than either one, scoring in the 90th percentile. “The research is conclusive—if they have [both of] those qualities, it has a huge impact on business outcomes,” said Perry. That made perfect sense to Wayne Johnson, CEO of Accuform, a facility identification solutions company in Brooksville, Florida. “Because that’s exactly what you want. You want a combination of both. When I think about all the great CEOs I’ve heard speak, they all have this crystal clear vision, and they can articulate it really well. But I don’t think that they think they’re going to go do it. They all believe that they have to inspire people and guide them along the way to get it done and make it happen.”

But it’s a tall order for one leader to have both sets of qualities, said Mike Todd, vice president of operations for Hydro-Gear. “I know the best is a combination person, but it’s hard to actually have it. If you’re a really strong hero, you’re going to be a hero. If you’re a really strong mentor, you’re going to be a mentor.” Some argued that the leadership qualities needed by the team or the organization really depend on the function. Hero leaders are best at setting strategy, said Johnson. “Because if you have a bunch of guides trying to set strategy, you’re probably just going to get a lot of ‘feel good’ stuff.” But for execution of that strategy, the company might be best served by a guide, said Segura. “For longevity, for succession in an organization, if you have just one or a few people making all the calls, that’s not an effective way to continue the legacy of your organization,” she noted. “You need to do that hand-off to those coming in behind you, and the guide is that personality, the style of leadership that can affect that.” But therein lies a paradox, said Matthew Robinson, CEO of W.A. Robinson Asset Management: it’s often because of hero-type skills that an individual rises to the top. “And then you’re supposed to automatically have the skill set to take care of everybody else,” he said. “So there’s a paradigm shift that has to happen there.” Ideally, the skills of guiding a team and inspiring others are acquired on the way up the ladder over the course of a career. Jacobs referred to Jim Collins’s book, Good to Great, which describes the five progressive levels of leadership. “The fifth level is where you begin to be that guide, where you’re developing people who are leaders who are then developing other people. But at different points in your career, at the different levels, you have to be something different. As you go through your leadership lifecycle, you mature, and you should change.” Robinson said that a CEO really must change in that regard, if a company is to be successful. “I’ll bet you that 90 percent of the people in my company are smarter than me at something. Actually, no—100

percent. Every single person in my company is smarter than me at something. So why would I be the hero and say, ‘This is how you have to do it?’ Where’s the creativity in that?” Having too dominant a hero at the top can also impede the company’s succession planning and, ultimately, its sustainability. Robinson recalled the period before he bought his company from his father, Wayne Robinson, in 2014. “You know what the biggest worry for investors was before I came along, and even through the transition? What happens if Wayne gets killed? What happens if the hero takes the kryptonite? Who steps up into that role who might not have all of those abilities?” he said. “As I look at this whole hero thing, it’s got some real flaws.” Grooming Millennials to Lead On the other hand, much ado is made about the preferences of millennials, and the notion that leaders have to adapt their styles to meet those needs if they want to attract and retain them. Often characterized as the “collaboration generation,” millennials are known for preferring to work cooperatively in teams. “Millennials seem to want the guide approach,” said Todd. “But maybe to the detriment [of the company]. We have to reinstall some heroes among the millennials to take on challenges and take responsibility.” In 2008, for example, companies needed heroes to step in and make powerful, critical decisions. “I think we need to make sure we’re bringing that talent along as well.” For millennials to grow into leaders with both hero and guide skills, “you have to give them the opportunity to do both early in their career—to be a hero and to be creative; to lead a project, and then to help others,” said Jacobs, adding that, in her experience, millennials do seem to want a coach more than a manager. “They want that person like

You’re supposed to automatically have the skill set to take care of everybody else. So there’s a paradigm shift that has to happen there. —Matthew Robinson, W.A. Robinson Asset Management

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their parent who is encouraging and telling them they’re to learn. “What we’re looking for is to not do the same great, and giving them an award just for showing up.” thing every day for the rest of our lives. We’ve seen a But millennials have also taught their predecessor gen- lot of our parents do that for 15, 20, 30 years and be erations some new tools, Jacobs added. “They’ve taught miserable. We don’t want that. We want to learn, and us to think differently and organize ourselves differently. once we’ve mastered a skill, we want to master a new And I do think that if you give them opskill. Does there need to be a promotion portunities early in their career, they’ll be every year, every six months? No. But we For longevity, prepared when it’s time for them to step need new projects and new learning expefor succession in an into leadership roles.” riences.” organization, if you In response to the “engage millenniAs for heroes vs. guides, millennials may have just one or a few als” movement, Champlain Cable set want both. “It is wonderful for someone people making up teams of 10 people each and gave in the beginning of their career to have a all the calls, that’s not them each projects to work on togethguide,” said Bode. “But personally, I don’t an effective way to er. “We gave them engagement starters, want someone hand-holding me my entire continue the legacy of career. I want someone I can look up to, and said, ‘Okay, come up with an action your organization. plan,’” recalled Quintana. “There were someone who says, ‘Okay, this is what —Yvette Segura, a few people in each group who ended we’re doing. Go for it.’ That’s not really a USAA up becoming the heroes.” Some of those guide—that’s more of a hero.” were expected, given their personalities. Some felt the notion of hero vs. guide “But there were a few who really surprised us as part of was misleading. “You can’t boil it down into two catethat. It was very interesting. We’re seeing the collabora- gories,” said Taylor Goodall, vice president, distribution, but we’re also starting to see, not the term hero, but tion for Dixon Valve & Coupling. “To me, the whole some natural leaders coming out.” conversation of which is better, it’s kind of like, ‘decide Todd pointed out that in a flat organization like his, which hamburger is better,’ because everybody’s got it’s hard to create opportunities for upward movement their own preference.” Some will respond better to a internally, but that millennials expect that “or they’ll guide; others to a leader, he added. go externally,” he said. “And we don’t want that. We’re But while it is more complex than black and white, investing so much in people.” Segura argued, “stereotypes become stereotypes for a As the lone millennial at the table, Rachel Bode, reason. It’s because people have the propensity to fall regional HR manager for RailWorks, said that her into a description of one versus another.” generation is often misunderstood. They aren’t looking The key is for CEOs to be introspective enough to for an easy upward climb, but rather the opportunity know themselves and the camp in which they tend to fall so they can rein themselves in when necessary. “We all know that under stress, we’ll always revert to habits, it’s just human nature,” said Perry. “That’s where situational awareness is important,” Segura noted. “You have to have that EQ to self-reflect and say, ‘if I have a tendency to just jump out there and start barking orders when things get tough, I’ve got to kind of pull back. I’ve got to recognize that and figure out, if I’m Roundtable Participants going to really enlist the support, and motivate or inspire Top row, from left: Terry Cooper, Human Resources my team, what are those things I need to do?’” Director, SAFT Jorge Quintana, Director of Human Ultimately, the way a CEO is perceived—whether Bottom row, from left: Resources, Champlain Cable Tanya Tarleton, Director of Human Susan Jacobs, VP, HR Administration, as hero or guide—can influence the company’s image, Resources, Cablecon Newport News Shipbuilding its culture, and even how it attracts and retains talent, George Rable, VP, Culture & People, Wayne Johnson, CEO, Accuform Benco Dental Bililies said. “People do make choices of who they work Cyndi Johnson, CFO, Accuform J.P. Donlon, Editor Emeritus, Chief Ted Bililies, Ph.D., Managing Director & for and who they will follow based on, ‘Where am I Executive Group Chief Talent Officer, AlixPartners Rachel Bode, Regional Human going to get the best training? Where am I going to get Matthew Robinson, CEO, W.A. Resources Manager, RailWorks Robinson Asset Management the best development?’ At the end of the day, whether Mike Todd, Vice President, Operations, Taylor Goodall, VP, Distribution, Dixon Hydro-Gear it’s perception, reality or some combination of both, Valve & Coupling Not pictured: Clark Perry, Director, Yvette Segura, VP & General Manager, people do choose companies to work for based on how AlixPartners USAA they see the leader.”

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My First Year Was A Disaster How a life-altering illness transformed a former Accenture CEO’s failing leadership into growth. BY MIKE SALVINO

s CEO of Accenture Operations from 2009 to 2016, I was responsible for 100,000 people globally, and my first year was a disaster. I promised strong profitable growth and instead delivered a negative impact— not the start anyone wanted. After a rollercoaster year, I realized that only two audiences really mattered: employees and customers. I sat down with my COO, CFO, and heads of communication and HR, and insisted on a people-centric strategy. My team thought I was crazy. Many later confided that they thought I was going to be the most colossal “flame-out” in the history of Accenture. My motivation was based on a life-altering event that occurred when my father was diagnosed with a glioblastoma, a cancerous primary brain tumor. As a result, I received a crash course on how neuroscience explains human behavior, relationships and motivation.

EACH OF US IS BORN WITH FOUR BASIC DRIVERS THAT CAN BE INCORPORATED INTO BUSINESS MANAGEMENT.

The Science of Inspiring People According to Harvard Business School professors Paul Lawrence and Nitin Nohria, each of us is born with four basic drivers that can be incorporated into business management: the drive to acquire, the drive to defend, the drive to bond and the drive to learn and create. As my father’s doctors at Ohio State University explained to me, these behaviors exist to keep us alive. When any of the four are triggered, chemicals are released in our brains. 1. Giving someone a pat on the back, a raise or other demonstration of your appre-

72 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2018

Mike Salvino is an operating partner at Carrick Capital Partners.

ciation causes their brains to release dopamine and they feel excited and engaged. 2. When we feel defensive, our brains release adrenalin and cortisol. Adrenalin compels us to make the fight or flight decision, while cortisol shuts down the parts of your body not required for “survival mode.” This impedes inspiration and creativity. 3. Positive social interactions like a good meeting or socializing, cause the release of oxytocin. People let down their guard, listen and empathize, and trust is established. 4. Collaborating with a team to learn and create releases serotonin. High serotonin levels gives people a sense of well-being and stimulates their creative process.

Applying the Science When you focus on your people, you communicate that you care, which inspires people to take pride in the business, focus more on customer needs and deliver innovation. They often work longer because they want to be there, not because they have to; and they have better ideas because they themselves are better, psychologically and emotionally. In the end, my team achieved industry-leading employee engagement. This culture change didn’t just improve employee engagement. It drove top-line growth, enabling Accenture Operations to bounce back from my first disastrous year and post 20 percent growth on $7 billion revenues. My advice? Prioritize your people and treat them well. It’s more than a nice idea, it’s the key to sustainable success for any growing business.

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