Wealth CEO Outlook for 2015 Creation Index Which CEOs do best by their shareholders? p. 37
Leaders share insights on the coming year, p. 50
Marketplace Lending Where SMEs are turning for capital, p. 32
Corporate Incentives
Weighing alternatives to annual cash bonuses, p. 68
NOVEMBER/DECEMBER 2014
HOW CRONY CAPITALISM HURTS US ALL
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CONTENTS
November/December 2014 No. 273
COVER STORY 26
Why Cronyism Hurts Us All Cronyism tips playing fields, derails innovation and, ultimately, breeds cynicism and downright outrage among the American public. But what’s to be done about it?
By C.J. Prince
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Editor’s Note
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CEO Watch
26
• Grant Thornton’s Ed Nusbaum on steering global growth • NASDAQ’s Bob Greifeld on navigating a future • POV: Harman’s Dinesh Paliwal on taking over from a founder
16
CEO Confidence Index Highest CEO Confidence Rating in Seven Years
18
Chief Concern Where Have All the General Managers Gone? A dearth of talented GMs is creating a senior executive talent gap.
By Dr. Thomas J. Saporito
20
Mid-Market Report How Mid-Size Companies Can Boost Operational Effectiveness Four steps to gaining—and hanging onto—operational excellence.
18
24
Making Technology Work How CEOs Can Fix Data Sprawl It’s 2014. Do you know where your data is?
By Heinan Landa
32
Finance Marketplace Lending to the Rescue Where SMEs can go for financing when banks won’t play ball.
By John Kador
37
Wealth Creation Index CEO Wealth Creators In the seventh annual CEO Wealth Creation Index, we highlight the top performers who have held their jobs for at least three years.
By J.P. Donlon, Drew Morris and Bennett Stewart
37
NOVEMBER/DECEMBER 2014
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CONTENTS
November/December 2014 No. 273
46
Talent Development HR Meets Big Data How analytics are helping companies identify and develop top talent.
By William J. Holstein
50
Outlook: Optimism at Last 2015 CEO Outlook
50
CEOs share their hopes and concerns for the year ahead.
By Dale Buss
56
Economic Development Regional Report: The Midwest A state-by-state look at what the Midwest has to offer businesses.
By Warren Strugatch
64
CEO Passions Crazy About Cars Meet auto aficionado Michael Fux.
PORT E R L A N REGIO THE MID
By George Nicholas
W E ST
68
Executive Life The Bonus Round Non-cash rewards and more frequent recognition are attractive alternatives to the traditional, year-end practice of handing out cash bonuses.
By Michael Gelfand
56
71
Flip Side I’m Game Can your kid’s mad skills in Warcraft get him a job?
By Joe Queenan
72
Final Word A Call to Free-Market Arms
Cover Illustration: Noma Bar Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 273, November/December 2014. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 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 Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306.
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02 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Finding The Needle in the Haystack is Just The First Step The Mid-Market Talent Experts Executive Recruiting
Talent Development
Employer Branding
Succession Planning
Assessment
Compensation
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The Best Tips, Tools, Insights & Practices for CEOs
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3 Ways CEOs Can Close the Enterprise Risk Management Capability Gap
Where to Find Growth Opportunities Within Your Company
Enterprise risk management is a top priority today. Understanding these three data disconnects can help CEOs close the gap.
How will businesses create value for shareholders three or five years from now? Most companies expect to continue growing faster than the overall economy, but our recent research suggests otherwise.
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How to Focus Your Sales Team on the Right Effectiveness Metrics
How CEOs Can Become “Superfans” for Their Companies
Volume and growth are typical sales metrics. But these two points don’t necessarily link sales with strategy. WWW.CHIEFEXECUTIVE.NET/NDTOC2
How to Groom Your Team to Become Tomorrow’s Leaders For an organization to grow, identifying and grooming the future leaders of your company is of utmost importance. However, despite all the books available on leadership, there remains a significant gap in leadership skills within the corporate hallways of America.
When a CEO is not excited by his/her job or role, that lack of passion spills over to others and they, in turn, may not be passionate about the company or about their job. Here are five ways to turn that around.
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How to Help Your CMO Survive and Thrive CMOs are often hired to lead the company to new heights through marketing, but rarely is their role well-defined. CEOs can and should help.
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The Real Value of Key Performance Indicators
A First-Time CEO Talks About Lessons Learned in His First Year
Planning anticipates the inevitable, but if you are not contemplating the inevitable, then you will be surprised when it arrives. WWW.CHIEFEXECUTIVE.NET/NDTOC6
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04 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Formerly president of a high-tech firm, Alex Lintner talks about how he brushed up on the insurance industry and built relationships with customers. WWW.CHIEFEXECUTIVE.NET/NDTOC9
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EDITOR’S NOTE
Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Graphic Designer Rob Cassella Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper
From the Editor During the 1990s, Al Gore pushed ethanol endlessly, delighting environmentalists and the progressive left. By 2005, a Republican-controlled Congress and Republican president succumbed to the intensive lobbying by environmentalists, and corn farmers delighted to sell more product. They mandated subsidized ethanol for billions of dollars per year. But the dawn of clean energy did not happen. Ethanol companies were using taxpayer money, not their own, to buy up all the corn—regardless of the cost’s driving up prices for corn—around the world. The biggest negative impact was on poor people, who needed corn for food. In addition, the process behind making ethanol turned out to be far more resource intensive than environmentalists claimed, which meant that the cost was not coming down anytime soon—regardless of mandates. (It didn’t help matters when the production of corn ethanol released nitrous oxide, a gas with 300 times the global warming potential of carbon dioxide.) Predictably, the ethanol mandates and subsidies crippled the very capitalism that was supposed to optimize biofuel production. Eventually, the environmental lobby wised up and began lobbying to end the practice they fought so hard to put in place. By 2010, Gore, by then an Academy Award winner, admitted his reasoning was flawed; and despite earlier claims for a scientific basis for subsidizing ethanol, he said it was simple politics. “One of the reasons I made the mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in Iowa because I was about to run for president,” he told Reuters. The above is an atypical example of cronyism, in that the practice was ultimately reversed but not before the damage was done both to people and to corn production. Most of the favors to connected industries live indefinitely in the federal tax code, which grows exponentially. Our cover story on page 26 examines why this practice is hurting everyone, including business itself. Solyndra, for example, failed after being hailed as a poster child of successful government grants’ helping an innovative business. The company received three awards totaling $535 million in stimulus funding. Soon after the company filed for bankruptcy, an FBI search of the homes of Solyndra CEO Brian Harrison and company founder Chris Gronet revealed that the firm gave several top executives monthly bonuses ranging from $44,000 to $60,000 just before the company filed for bankruptcy. In short, says Russell S. Sobel, visiting scholar in entrepreneurship at The Citidel, “government-granted privilege does not increase prosperity for the vast majority of American workers and investors.” So, what should be done about cronyism apart from kicking corporations off welfare? Perhaps the best answer came a year ago at the Heritage Foundation, when Utah Sen. Mike Lee said, “The first step in a true reform agenda must be to end this kind of preferential policymaking. Beyond simply being the right thing to do, it is a prerequisite for earning the moral authority and political credibility to do anything else….” Why should the American people trust our ideas about middle-class entitlements when we’re still propping up big banks?
06 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Associate Copyeditor Carl Levi Contributing Editors Dale Buss Michael Gelfand William J. Holstein C.J. Prince Joe Queenan Warren Strugatch Online Editor Lynn Russo Whylly Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net
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CEO WATCH | CASE STUDY
Bob Greifeld: Navigating Nasdaq’s Future By
Jennifer Pellet
THE CHALLENGE The year is 2003. You’re taking the helm at the world’s first electronic stock market, which, until relatively recently, was owned and operated by a regulatory organization but is now its own publicly traded entity. The resulting massive cultural change in the organization is taking place against a backdrop of industry disruption, as technological advances and globalization transform the way capital markets function. Meanwhile, startups, unburdened with legacy technology, are edging into your turf. THE CONTEXT “Early on, we went through the ‘Are we going to make it?’ phase,” recalls Bob Greifeld, CEO of Nasdaq OMX Group. “During my first six months here, we were burning money every day and didn’t have much of a balance sheet. We had to figure out where we were going.” The road he chose involved aggressive global expansion and growth, as well as a move toward becoming a provider of technology and corporate solutions. Nasdaq’s 2007 merger with the Scandinavian exchange group OMX AB was a huge step, coupling Nasdaq’s electronic trading platform with the Stockholm-based stock market’s global technology services business and customer base. THE HURDLE From technological glitches to failed merger attempts, Greifeld has faced plenty of potholes and detours along the road to growth, most notably a trading delay during Facebook’s 2010 initial public offering (IPO) and a brief but momentous mid-day market shutdown in 2013. Those snafus were said to have cost Nasdaq high-profile listings. Despite its reputation as the market of choice for technology company IPOs, Twitter and Alibaba subsequently opted to list on the NYSE. A further reputational blow came in 2011, when efforts to take over rival New York Stock Exchange in 2011 were thwarted by regulators. The nation’s hallmark exchange has since been gobbled up by industry upstart Intercontinental Exchange (ICE).
THE RESOLUTION Despite these hiccups, under Greifeld’s tenure, Nasdaq ultimately went from running one U.S.-based equity market to owning and operating 26 global markets for trading stocks, bonds, derivatives and commodities. In addition to steering the OMX deal, he led the acquisitions of the Philadelphia Stock Exchange, the Boston Stock Exchange and Europe’s Nord Pool, among others. Nasdaq also now supports more than 80 exchanges, which rely on its technology to operate local markets; and it has developed a robust corporate-solutions arm, which focuses on helping private companies navigate the IPO process and transition to life as a public company. “We have the ability to interact with our listed companies in a multitude of ways to help them with the difficult transition of becoming public companies,” says Greifeld, who notes that the corporate-solutions business and market-technology exchanges
IPOS ON THE RISE YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NUMBER OF NASDAQ IPOS 343 59 49 54 152 128 156 153 25 33 89 78 72 126 137
NUMBER OF U.S. IPOS 376 120 165 132 294 254 235 240 58 60 169 149 150 243 219
Sources: Thomson, FactSet, Bloomberg *Data as of September 23, 2014
08 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Chief Executive of the Year 2014 Selection Committee
Bob Iger Chairman and Chief Executive, Disney 2014 Chief Executive of the Year Dan Glaser President and Chief Executive, Marsh & McLennan Fred Hassan Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus Christine Jacobs Former Chief Executive, Theragenics Director, McKesson
WHO: Bob Greifeld, CEO, Nasdaq
Robert Nardelli Chief Executive, XLR-8 William R. Nuti Chairman and Chief Executive, NCR Thomas J. Quinlan III President and Chief Executive, RR Donnelley Jeffrey Sonnenfeld President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management Mark Weinberger Chairman and Chief Executive, EY
Tamara Lundgren President and Chief Executive, Schnitzer Steel Industries
Maggie Wilderotter Chairman and Chief Executive, Frontier Communications Solutions
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Reprints Phone: 203.889.4974 hdewing@chiefexecutive.net
SIZE: $1.9 billion in net revenues PASTIME: Collecting tortoises and turtles INFLUENCED BY: “Bill Gates, who said he never succeeded in anything he tried the first time. I use that as a guiding principle.”
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currently bring in $550 million and are continuing to grow. “Our corporate-solutions business has products and services to make sure to assist with every piece of activity you have to undertake as a public company.” Having suffered through a post-financial-downturn dearth of IPO activity, Nasdaq is also now enjoying the fruits of an IPO renaissance. In 2008, the total number of new listings fell to an abysmal 58, of which Nasdaq only netted 25. However, IPO activity has been on an upswing in recent years, with 243 companies going public in 2013, 126 of those on Nasdaq. (See table, p. 8). THE ENDGAME Today, Nasdaq’s stock price is $42.89, significantly up from its 2003 price of $8.10, and Greifeld is optimistic about Nasdaq’s future. “We’re No. 1 and No. 2 in the space we compete in for 90 percent of our revenue, so we’re in a position of strength,” he says. “We have a pretty clear strategic direction in each of our businesses, so at the end of the day, it comes down to making sure that we execute well.”
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NOVEMBER/DECEMBER 2014
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CEO WATCH | CEO PROFILE
Grant Thorton’s Ed Nusbaum: Managing Global Growth By
Jennifer Pellet
Economies worldwide were still grappling with the aftermath of a colossal financial crisis when Ed Nusbaum was appointed global CEO of Grant Thornton in 2010. At the time, the accounting giant had operations in 100 countries—many of which were significantly affected, one way or another, by the downturn. “The U.S. [and] Continental Europe were hurt significantly, the UK not quite as badly, but places like Australia [and] Canada were doing fine—and China was still booming,” he recalls. “It impacted different countries in different ways, and dealing with that from a global perspective was challenging.” Still, by 2012, the accounting powerhouse was logging a $10.4 percent growth rate. Revenues continued to climb in 2013 with a jump of 8.1 percent to $4.5 billion, affirming Grant Thornton as the fastest-growing accounting firm in the world for two years running. Under Nusbaum’s tenure, it also extended its global reach. Today, the firm operates in more than 130 countries with offices outside the U.S. accounting for about 71 percent of revenues. Given his success steering the company toward stronger revenues and a larger global footprint, Nusbaum’s unanimous reappointment to a second three-year term by the firm’s board of governors back in March came as little surprise. However, the pressure is on to continue the firm’s global growth path. “I think the biggest concern of companies right now is that the world is in such flux, nobody knows if the recovery is real, how long it will last and what the implications are,” says Nusbaum. “For example, there are clear signs of recovery even in places like Spain and Greece, but a lot of uneasiness [exists] about how resilient that recovery is and how long it will last. And, of course, everybody’s worried about whether or not they should be investing more in Asia.” Coupled with the various political conflicts unfolding around the world, those concerns are making everyone— companies, investors, consumers, employees—uneasy. Uneasiness, history has taught us, tends to dampen economic growth. CEOs today also point to the U.S.’s onerous regulatory environment and high corporate tax rate as crippling business growth and—by extension—economic growth. At the same time, there is some merit in efforts to enact stronger controls, says Nusbaum, who acknowledges that accounting firms have benefitted across the board from the
10 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
WHO: Edward Nusbaum, CEO, Grant Thornton SIZE: $4.5 billion MEMBER: Financial Accounting Foundation’s Board of Trustees, Global CEO Committee LEISURE PASTIME: Bicycling
need to comply with more stringent requirements, but also argues that those measures have helped curtail fraud. “Five years after Sarbanes-Oxley, if you asked CFOs—not CEOs— whether they were better off, they would say they were,” he says. They have better controls, better systems and less hassle from crazy ideas about derivatives. So some good has resulted from it. There’s no doubt in my mind that some good has also come from Dodd-Frank. “Going forward, the challenge will be for both businesses and the accounting firms that service them to promote changes in regulation that can help businesses but still protect investors,” he adds. “Our role is to find out how we can benefit our clients; but more importantly, what’s right for the overall business community and the capital markets system.”
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CEO WATCH | POINT OF VIEW
Harman’s Dinesh Paliwal
How to Re-Invent a 60-Year-Old Company By
J.P. Donlon
Replacing a founder-entrepreneur and transforming the business at the same time is no small matter. Harman CEO Dinesh Paliwal, 57, advises CEOs who find themselves in this position to “never completely ignore the founder. Keep him informed. Make him feel he is part of it. If you abruptly cut the founder off, then you invite trouble or a boardroom coup because an outgoing founder has board members who love and adore him.” For Paliwal, who spent 22 years with ABB, the SwedishSwiss-based $50 billion global energy and industrial conglomerate, taking over from a founder CEO was especially demanding. Having co-founded Harman Kardon in 1953, a
12 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
company noted for its premium audio products, Sidney Harman was struggling with more than a succession problem. He had sold his company to Beatrice in 1976 only to buy it back in the 1980s, then face competitive turbulence and the need to revamp operations to get it back to fighting trim. Two different CEOs came—and went. Each clashed with the founder and his board, which was comprised of numerous friends of Harman’s, including, at one point, his daughter. Paliwal, who had worked and lived in six different countries, including the U.S., China, Switzerland, Singapore, Australia and his native India, was brought in first as vice chairman prior to continued on pg. 14
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CEO WATCH | POINT OF VIEW becoming CEO in July 2007. “When I was first interviewed,” he recalls, “I told Dr. Harman that I needed room because I’m decisive. I don’t want to be second-guessed every day.” Around this time, Goldman Sachs and KKR had made an $8.3 billion offer for the company, only to pull the plug when internal problems proved bigger than they were led to believe. At the time, credit markets were also drying up. Faced with an existential crisis, the board, including Harman, turned to Paliwal asking, “What will it take to keep you?” “It will take a few years, but] I will fix it. However, I need the freedom to choose my team and do the right things,” he responded. Given that Dr. Harman, who died in 2011, was dividing his time between running the company and his philanthropy and political interests (he served briefly as Undersecretary of Commerce under President Carter), he accepted Paliwal’s terms, if a bit reluctantly. Early days were bumpy. A profit warning sent the stock price plummeting. More trouble followed when German car makers began blacklisting Harman automotive audio products. And for good measure, they were 18 months behind on every product in the pipeline. Paliwal remembers telling Harman’s board and remaining investors that if they expected all of the company’s problems to be fixed by next quarter they should take their money elsewhere. But he promised something they had not been getting: monthly updates. In addition, he revamped the entire management team of 10 executives, retaining only one person from the former regime. Soon, the board, too, started to change with the addition of two Europeans and one Asian executive. Today, the Stamford, Connecticut company is a $6 billion, 16,000-employee enterprise with half of its revenue coming from in-vehicle infotainment and the rest made up of lifestyle and professional products and systems. The acquisition of Dallasbased AMX, which develops hardware and software solutions that simplify the way people interact with technology, gives Harman an edge as a leading supplier of turnkey AV solutions. The move prompted Raymond James analyst Tavis McCourt to upgrade the stock from Outperform to Strong Buy. The company continues its audio innovation with Clari-Fi, a new technology that uses four algorithms to restore the dynamic range of digital music that has had to be compressed in order to be streamed. Soon, it will be available in portable earbuds, autos and to music-streaming sources for a nominal cost. With 6,000 engineers throughout the company, Harman continues to push on all technological fronts. Recently, Chief Executive spoke to Paliwal at his company headquarters. With so many problems facing you in your first days as CEO, how did you know where to start? My first days on the job were spent in Germany because our business there was about to go up in smoke. I showed up there asking to understand the nature of the problems. That first week, I did five town hall meetings and visited all four German customers. I was declared dead on arrival. They said KKR was coming in and would take everything 14 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
away from us, including R&D. I said, “No, no, no, you don’t understand. That’s not me. Give me a fighting chance.” I was in Germany twice every month. I would come home basically to sleep. We had two headquarters; one in Washington, D.C. and one in L.A. Both were political, Washington was for Sidney and L.A. was for his wife, Jane Harman (the former U.S. Representative for California’s 36th congressional district). I told Henry [Travis of KKR] that neither made sense. Either we do it in New York or somewhere in Connecticut, where the cost base was lower but access to Europe was good. So we started here [in Stamford] with one person, my secretary, at first, because no one from D.C. or L.A. wanted to move. We built a corporate team from scratch—a brand new chief of tax, treasurer, head of internal audit, CFO. You had to reinvent the company from the ground up. No kidding. This may surprise you, but my first hire was a chief human resource officer (John Stacey), We had no human resources, so I said, ‘You and I have to do a lot of heavy lifting in creating, first of all, the top team, and then the bench.’ Today, we review 400 executives every year. I personally go through 400 people. That’s massive work, but I need to do it. We came from $2.9 billion sales to $6 billion this year— in seven years—and our profitability is robust with a $22 billion auto backlog. This requires a different mindset, so we give people the opportunity to make mistakes, to take risks and see where they fail and where they succeed. At the same time, I’m a big believer in promoting from within. That’s what we did at ABB. Creating a strong culture sends a signal that people can have a tremendous career here. Harman used to bring everybody from outside. But today, my board of directors is happy to see I’ve got not one, not two, but three or four people capable of replacing me. Taking 4,500 people out of a company of 12,000 couldn’t have made you very popular. And 4,500 people were relocated. Do you think I would get positive notes from everybody? No. I told my head of communications, I won’t look at any of those internal messages until we get past this. I told people in a series of town hall meetings that these were difficult times. We’re changing the course of the company. We need to establish the right cost base, because without the right cost base and without the right innovation, there is no future. The result is that we have shifted our business. It used to be a hardware, silver-box-driven business. In 2007, 75 percent of the value-added came from hardware. Today, it’s the reverse—75 percent of the value-added comes from applications, system design and system architecture solutions. When I came in, 100 percent of engineering was in five countries: Germany, UK, France, Italy and Switzerland. Today, 66 percent of engineering is in best-cost
countries: Hungary, Poland, Romania, China, India, Mexico and Brazil. Eighty percent of our North American manufacturing is where it should be—in Mexico; we have 11 production lines in Hungary, two in China, two in Brazil and one we’re opening in India. We still have manufacturing in the U.S., and I want to keep it here because missioncritical things for BMWs, Audis and Porsches and Harley Davidsons contain ultra-high-end audio systems. What is behind your acquisition of AMX? Bank of America worldwide, Deutsche Bank, Goldman Sachs, IBM, Boeing and a lot of the three-letter government agencies are using Harman enterprise automation. And no, it’s not like ERP (enterprise resource planning) software. We leave that to SAP. It is basically data and video management. If the CEO of Deutsche Bank wants to communicate to all employees worldwide, he will want to do WebEx, video and audio conferencing. We will manage that. We’re the engine. We supply the network hub and the switching of audio and video. And we do the security encryption—the digital signage. That’s a big deal. For example, when you go into any Apple store, when you see the digital signage, (the numbering)—each store has probably 50 terminals—[we manage] what is shown on the televisions in one store versus the rest of the stores worldwide through our hub and our network
So you’ve become a software company. In many ways. There’s no change to strategy, but directionally, Harman is going to be a leader in all three connected spaces: the connected home, the connected car and the connected enterprise. We’re also heavily invested in [the] cloud and cybersecurity. Cars were never designed to be used as computers, so they don’t have any safety layers to protect from the bad guys, the hackers. With more and more devices on cars and greater computer power, there are risks and vulnerabilities that we hadn’t considered until now. So we have designed the software and have shared it with many car companies, and it’s based on very similar structure of what banks do—in fact, what I used to do in my former company. When you supply a nuclear power plant or a pharmaceutical plant, you build in safety layers to keep the bad guys out. What’s the biggest challenge you face going forward? My biggest challenge is the bench; it’s the people. We’ve grown very fast in the last couple of years. Do we have enough people who can manage this fast, breakneck speed of growth? Hiring people from outside takes time to indoctrinate them in our culture. How do we pull more people from the machine we have, and how much risk can we take? That’s a challenge. I’m not saying I have an answer for that. But it’s something I think about a lot these days.
THORNS & ROSES THORN By promoting its two presidents to serve as co-chief executives instead of founder and CEO Larry Ellison, is Oracle setting itself a course that has derailed other big companies? The move seemingly marries the product oversight of Mark Hurd, former CEO of Hewlett Packard, with the legal and financial expertise of Safra Catz, a 15-year Oracle veteran. But with Ellison remaining executive chairman and in a position to call the final shots, the company faces the same challenges that have mired other co-CEOs, who often end up in an unhappy “two’s-a-crowd” situation.
ROSE Does Wonder Woman know about this? Facebook’s Sheryl Sandberg now has her own comic book. Bluewater Productions is launching a new comic book series about her life. Female Force: Sheryl Sandberg will be available in print and digital. But can she leap tall buildings in a single bound?
NOVEMBER/DECEMBER 2014
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CEO CONFIDENCE
CEOs Offer Highest Confidence Rating in 7 Years 7-Year Comparison 9/2008 - 9/2014 7.0 6.0 5.0 4.0 8
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The CEO Confidence Index, Chief Executive’s monthly gauge of CEOs’ expectations for business conditions over the next 12 months, registered a 7-year-high in September 2014. Confidence levels for one year out are up 5.3 percent with a ranking of 6.44 out of 10, compared with 6.11 in August. In September, respondents rated current, overall business conditions as 6.18 compared with a 5.88 rating in August, an increase of 5.2 percent. The trend in confidence levels for 2014 has been encouraging, with ratings hovering around or exceeding 6.0. However, CEOs are cautiously optimistic about the future. September figures confirm a gradual, slow-growth outlook, with 46.3 percent of CEOs surveyed predicting either no growth or growth of less than 10 percent for the coming year. Interestingly, nearly 50 percent of all CEOs surveyed indicated confidence levels between 7 and 10, with only 12 percent listing levels of 4 or less. “Our economy is gradually improving due to increased energy production in the U.S., which is helping reduce our deficit,” said one CEO respondent. Regarding CEO views on growth prospects, some executives cited the government’s failure to invest in infrastructure. As one CEO said, “The U.S. Congress is failing to show leadership in the critical area of infrastructure investment in transportation and public utility infrastructure– water, [sanitation], drainage and public buildings.” He also stated that the nation’s aging infrastructure warrants more than mere maintenance. Adding some uncertainty to CEO mindsets is the ongoing threat to global business interests from geo-political terrorism, particularly in the Middle East. Some 53.8 percent of the CEOs
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cited terrorism as a concern. “I am concerned that the ISIS phenomenon will soon affect global business in a severe way,” said one CEO. “They seem intent on disruption.” In the wake of the 2008 economic meltdown, confidence levels were a roller coaster ride, dipping below 2.0 and spiking to nearly 6.0 between 2009 and 2010. The volatility of the rankings reflected a prevailing mood of uncertainty. However, confidence levels in January 2009 were up a staggering 31.8 percent from December 2008. But by February 2009, confidence fell off a cliff and dipped some 26 percent compared with the previous month. A low rating of 1.54 for the one-year outlook in February 2009 was followed by wild spikes throughout 2009 and 2010. In 2011, a gentle rolling upward trend began, and today, CEO confidence levels reflect less volatility.
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CHIEF CONCERN
Where Have All the General Managers Gone? A dearth of talented GMs is creating a senior executive talent gap. By Dr. Thomas J. Saporito In logistics, just-in-time (JIT) deliveries are scheduled to arrive at the precise moment items are needed for assembly lines or retail sales. Any break in the supply chain results in empty shelves or parts bins and a consequential loss in revenue. Leadership pipelines are similar. Gaps in the talent development system can leave organizations short of individuals who have been carefully groomed to move quickly into senior roles just as they are needed. As economic conditions improve, organizations are realizing they face a “talent gap” that will hamper their ability to grow the business. With few exceptions, the clients I work with today are concerned about their ability to maintain an uninterrupted flow of talented individuals at the general manager level who can be “called up” to the corporate team as opportunities arise. “The general manager position is an excellent stepping stone for advancement to the senior executive ranks. It provides a solid foundation for the next phase of intense development and experience necessary to fully prepare individuals for the C-suite,” says Denise Morrison, president and CEO of Campbell Soup Company. During the recent downturn, however, many organizations sold off or consolidated their smaller businesses, thus eliminating opportunities for GMs to hone their skills by overseeing a business unit’s marketing and sales functions, as well as the day-to-day business operations. The largest Fortune 500 firms like Proctor & Gamble or GE, have both well-funded programs and a wealth of GM development opportunities they can exploit as conditions warrant. Executives move in, grow and move up on a continual talent-development cycle. However, most companies don’t have that luxury. So what can the average-sized organization do to leverage its expansion scenarios?
percent of senior executives polled agreed that their organization is effective at developing the next generation of leaders. In fact, developing talent and building succession plans are routinely rated as the areas in which companies are least effective. More troubling, though, is that these items are also rated lower on “importance,” meaning that the teams recognize it as an issue, but it’s not the most pressing item on their agenda.
CEO Acts as Culture Catalyst Just as JIT systems require that the retailer at the end of the supply chain can accurately predict demand for its products, companies should begin thinking about future general managers in their earliest stages of recruiting and make their development a priority on an ongoing basis. This requirement goes beyond the scope of the human relations department and should be made part of the leadership culture by the CEO. The companies that do this well talk about it all the time; and as a result, they have a solid pipeline of general management talent and other senior staff leaders, as well.
Dynamic Leadership Progression
Build a Sense of Urgency
Development programs need not be highly structured and formal, but they should be aligned with the strategy and culture of the company. Think of executive development in three stages, with general managers in the middle. Early development (feeds into GM role) focuses on instilling a generic set of leadership skills and sharpening technical ability. Success at the general manager level answers the question of which leaders can make the critical transition to senior levels. High performance as a GM indicates that an executive can be developed for specific corporate roles. When opportunities for revenue growth appear, it is vital that organizations have talented individuals developed, seasoned and ready just-in-time to meet the challenge.
Even now, some senior leaders still haven’t made the connection. In a recent RHR International research study, fewer than 50
Dr. Thomas J. Saporito is CEO of RHR International.
18 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
CEO PERSONAL RISK INDEX
CEOs Rank Privacy/Data Security as Their Top Personal Risk What—if anything—would rock your world? From super storms to cyber threats, unpleasant and unexpected crises inevitably crop up as we motor through our lives. Chief Executive recently partnered with PURE Insurance in the first of a series of quarterly surveys on the types and levels of personal risk CEOs face, and how comfortable they are that they have taken steps to guard against potential blows. Key areas of concern were: • Privacy/Data Security (threats that compromise the security of your confidential information and the risks to your identity). CEOs rated this threat a 6.5 out of 10 on average, but only 36.7 percent of respondents felt they had strong protection in place. • Geopolitical terrorism (risk created by unrest in other regions and/or the threat of terrorism) was the second-highest perceived personal risk, rated most highly by CEOs who do business in the Middle East, South America and Africa. Only 33.9 percent of CEO respondents felt they had strong protection against this risk. • Personal liability threats (which includes threats of lawsuits—frivolous or bona fide—relating to a car accident, personal injury or other private matter) also ranked as significant, with an average rating of 4.47. While
most respondents (64.6 percent) felt they had adequate protection against this type of risk, many echoed one respondent’s sentiment that “employers have to get more support from the legal system to discourage people from false allegations. A coalition of employers insisting on justice for employers is critical.” • Concern about damage to personal property (homes, cars) from fire, theft and natural disasters was lowest with a rating of 3.90. Most CEOs (78.5) reported being comfortable with their level of protection for this risk. Most of these threats are low probability/high impact risks. However, just as leaders wouldn’t expose their companies to even low-probability risks and generally have risk management professionals on their teams, CEOs should take steps to mitigate personal risks to themselves and their families. As Barry Hart, CEO of Protapes, noted, “I would urge all to protect their businesses and their families to the greatest extent possible with regard to those issues we can control. There are, of course risks that are beyond our control, such as natural disasters and terrorism. We can still do our best to be well-informed and proactive in mitigating these risks.”
Perceived Risks & Protection Privacy/ Data
Consider Privacy/Data Security a High Risk
57.3%
Geopolitical Terrorism
Average
Liability Threats/ Threats of lawsuits
36.7%
Physical Damage and Natural Disasters Physical Security/ Family Security 0.0
1.0
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Low
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Comfortable with Level of Protection From Privacy/Data Security Threats
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Respondents were asked to rate the degree to which this type of risk affects themselves and their families on a 1 to 10 scale with 10 being very high and 1.0 being no perceived risk. Respondents were asked to use the same scale to rate their comfort level with the steps they have taken to mitigate those risks.
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MID-MARKET REPORT
How Mid-Size Companies Can Boost Operational Effectiveness Four steps to gaining—and hanging onto—operational excellence. While most mid-market executives rate themselves highly on operational effectiveness, many report having difficulty making improvements stick. More than two-thirds of respondents in a recent survey by the National Center for the Middle Market at Ohio State University said that they have difficulty sustaining gains they make in operation. The good news? Research suggests that there are steps that business leaders can take to boost success and increase the staying power of initiatives, such as: • Manage operations as a four-part system. Operational improvements tend to last longer when they are comprehensive and systematic. Breaking operations into four parts—problem-solving, daily management, strategic alignment and people development—and fine-tuning them both individually and in concert can help ensure better performance.
• Stay close to the front lines. Companies where top managers are visible and engaged on the shop floor generally have a better understanding of customer needs and are able to solve problems faster. • Identify and employ a formal method. While many mid-size companies rely on informal methods of pursuing continuous improvement, research shows that those who use formal methods, such as Six Sigma, get excellent results. (For more information on formal methods, see tables below.) • Communicate the larger strategy across operations. Widespread understanding of what an organization is trying to achieve is critical to ensuring that people working in operations can do their part to make sure the strategy is successful. They can act on their own initiative and make suggestions to keep costs down.
Who’s Using What Operational Method—and How Well Is It Working?
MM Firms Implement Some Operational Method Method Implemented
Six Sigma
Lean
17%
17%
Large Firms
41%
Implement Some Operational Method
Extremely/ Very Effective
Method Implemented
71%
55%
Evaluating Improvement Methods
MM Firms
73% Extremely/ Very Effective
46%
Six Sigma
Lean
58%
Advanced Manufacturing Techniques Theory of Constraints
13%
12%
7%
63%
Customer Satisfaction Profit Margin Changes
47%
71%
43%
23%
Employee Satisfaction
Advanced Manufacturing 8% Techniques
Insufficient Base
Theory of Constraints
3%
72%
30%
68%
Customer Satisfaction Profit Margin Changes
37%
73%
32%
72%
54%
41%
TQM
Use to Evaluate OPS
Most Important
Productivity 12% Changes TQM
Large Firms
73%
Insufficient Base
Toyota Production System
1%
Insufficient Base
Toyota Production 5% System
Insufficient Base
Other Operational Theory
2%
Insufficient Base
Other Operational 5% Theory
Insufficient Base
20 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Hours of Training Employees Receive
57%
3% 50% 1% 20%
Productivity 16% Changes Employee Satisfaction
72%
4%
Hours of 2% Training 27% Employees Receive
55%
IT TAKES EXPERTISE TO STAY AHEAD. To succeed today, you need industry expertise and transformative advice to drive your business forward. Find out what CohnReznick thinks at CohnReznick.com. Forward Thinking Creates Results.
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MAKING TECHNOLOGY WORK
How CEOs Can Fix Data Sprawl It’s 2014. Do you know where your data is? By Heinan Landa
After the resignation of Target’s Gregg Steinhafel and the company’s significant stock drop following the security-breach incident, we all know more than ever that protecting company data is a C-level imperative. If customers don’t trust that their information is safe at your company, they will stop buying from you. However, to protect your company’s data, you need to know where, exactly, it is—which, in an era of data sprawl, is more difficult to discern than it sounds.
Data, Data, Everywhere Even when a company’s corporate network is protected, whenever employees take files home on laptops, tablets and smartphones or share them using services like Dropbox, they are disseminating data. Mobile devices used outside the corporate firewall are prime targets for remote data theft by cyber criminals. Not only can data residing on a mobile device be accessed, but communications between mobile devices can be accessed when the data is in transit. Additionally, unprotected home PCs and laptops provide easy access to corporate data. In essence, mobile devices and file-sharing solutions that have not been secured are gateways into corporate networks, where hackers can steal proprietary information and confidential, personal customer data. This data sprawl exposes your company to significant risk. Plus, because your data is everywhere, your IT resources can no longer manage content in accordance with company—or government—compliance obligations. Statistics suggest that this is a bigger issue than most companies realize. Eighty-nine percent of IP professionals surveyed by Dimensional Research reported that their mobile devices are connected to corporate networks. Sixtyfive percent said that they allow employees’ personal mobile devices to connect to corporate networks. Mobile devices are increasingly under attack. The 2014 Symantec Internet Security Threat Report stated that 38 percent of mobile users have experienced mobile cybercrime in the past 12 months, with unprotected personal tablets and
24 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
laptops being favored entry points. At the same time, more and more consumers are conducting financial transactions on mobile devices. Over the 2013 holiday season, more than 40 percent of all e-commerce was done on mobile devices.
When, What and How to Share Creating a file-sharing policy is critical to protecting your company’s data. Employees must understand that they cannot store, share or distribute work documents through nonsanctioned file-sharing solutions on company-owned devices or any hardware that connects to the company network. Your corporate file-sharing policy should clearly define the types of file-sharing platforms that can be used (or not), devices on which file-sharing platforms can be used and files that cannot, under any circumstance, be shared through filesharing platforms. Implementing a secure, company-controlled filesharing solution is the only way to completely protect your organization. When you begin assessing what you want in an internal file-sharing solution, consider the following: • Are there any compliance standards that must be met? • What kinds of devices do the files need to be shared with? • Do your employees need to be able to send colleagues links to files and folders for collaboration? • What other needs must be addressed? Just this past June, hackers broke into the credit and debit card systems at Albertsons and SuperValu, two of the nation’s most popular grocery stores. It will be interesting to see how this most recent breach affects leadership at these organizations. The bottom line? Now, more than ever, CEOs need to be aware of and involved in all aspects of an organization’s security. A security breach on your watch can send your company—and your professional reputation—on an irreversible downward spiral. Heinan Landa is the CEO of Optimal Networks (www.optimalnetworks.com), a Rockville, Maryland-based IT company that works with CEOs to provide comprehensive and strategic IT support, management and consulting services.
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COVER STORY
WHY
CRONYISM HURTS US ALL
Cronyism tips playing fields, derails innovation and— ultimately—breeds cynicism and downright outrage among the American public. But what’s to be done about it? By C.J. Prince The summer showdown over the Export-Import Bank, which ended in something of a stalemate in September, as Congress authorized a nine-month extension of the bank’s authority, brought to center stage a mounting discontent— on virtually all sides—with the increasingly codependent relationship between business and government. Ex-Im Bank, which in fiscal year 2013 backed $37.4 billion of U.S. exports worldwide (about 2 percent of all U.S. exports), has since become a battered symbol of cronyism. According to the Heritage Foundation, fully two-thirds of Ex-Im financing benefited a single company: Boeing. Analysis by the Mercatus Center at George Mason
Key Takeaways • Charges of cronyism are no longer a right vs. left issue—critiques are now coming from across the political spectrum • Ultimately, a lopsided distribution of power hurts everyone, disenfranchising the public, eliminating healthy competition and hindering the kind of innovation that fuels true growth • CEOs must take proactive steps to change public perception and cynicism about business by eschewing opportunities to wield influence inappropriately and educating the public about how healthy business growth benefits communities
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ILLUSTRATION BY NOMA BAR
University further concludes that the top 10 companies supported by Ex-Im, which include Caterpillar, GE and Applied Materials, accounted for 97 percent of the loan guarantees made in 2013. Meanwhile, critics of the bank argue, the risk for the financing is borne largely by individuals; taxpayer exposure for Ex-Im’s loan guarantees is expected to exceed $140 billion by the end of 2014. “It’s the quintessential example of cronyism,” says Veronique de Rugy, senior research fellow at the Mercatus
Center at George Mason University. “Ex-Im is relatively small but serves primarily very large companies; and in the process, it creates a lot of distortion in the capital markets. It also creates a totally [uneven] playing field because there are just a few exporters getting subsidized, while most are not. So, essentially, it’s the government picking winners and losers.” Boeing, for its part, claims that without the government support, it would be at a competitive disadvantage vis-à-vis foreign competitors that receive state support. But in a climate of cronyism, it’s a zero-sum game; providing cheaper financing to foreign competitors puts U.S. companies at a disadvantage, as Delta CEO Richard Anderson has pointed out numerous times. “I don’t understand why my government finances my state-owned enterprise competitors in foreign countries that really are governments, not airlines,” Anderson said in July. The problem is hardly limited to Ex-Im. Concerns about giveaways to connected corporations have reached a boiling point, generating more and more controversy and outcry on both sides of the political divide. Conservatives point to examples like Ex-Im and Solyndra, the California-based solar company that went bankrupt after receiving $535 million in federal loan guarantees, while progressives point to special subsidies, tax loopholes and powerful lobbying by wealthy companies, such as Boeing and General Electric as evidence that the relationship between government and business has crossed the line well beyond benign partnership. Meanwhile, the average citizen, soured by declining real personal income, has become increasingly cynical about what he views as neo-mercantilism or crony capitalism that appears to benefit the elites at the expense of ordinary people. According to a new global survey, the CNBC/BursonMarsteller Corporate Perception Indicator, the U.S. public is divided on whether corporations are a source of “hope” (36 percent) or “fear” (37 percent), while in China, 84 percent say corporations are a source of “hope.” More than half of the U.S. public said “strong and influential” corporations are “bad,” even if they are promoting innovation and growth, while in China, 74 percent embrace strong corporations as “good.” Some of those feelings may be due to cultural differences, but not all. And perceptions, even flawed ones, can have unfortunate consequences for business, even those whose commercial interests have little connection to government.
A Pervasive Problem Cronyism, hardly a recent invention, has ebbed and flowed over the decades, but it appears to be on the rise today. “The whole notion of meritocracy has come under attack and has been displaced by notions of cronyism or kleptocracy or something similar,” says Jonathan Macey, Sam Harris Professor of NOVEMBER/DECEMBER 2014
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COVER STORY
corporate law, corporate finance and securities law at Yale Law School. Examples of corporate welfare abound—from energy tax breaks and fast food subsidies to endless patent protection for big pharma and bailouts of behemoths pulled back from the brink by Uncle Sam’s long and generous arm. The Cato Institute estimates that federal subsidies to corporations cost taxpayers almost $100 billion every year. Sadly, only a fortunate few benefit from this largesse. Small and midsize businesses lack the lobbying funds or personal coffers to make huge campaign contributions and therefore have little power to sway legislation. “Even if you’re a profitable, midsize business, if you’re talking about an outlay for one lobbyist coming in at $250,000 a year—and you need three or four of them at least, that’s a bit of a problem,” says Nick Sorrentino, editor of AgainstCronyCapitalism.org, who says the uneven playing field is analogous to high-stakes poker. “If the minimum to get into the tournament were $20, that would be fine. But with the big companies, GE and Boeing, it’s $10,000 just to get through the door. A lot of the people who have chips, who want to play and want to parlay that [stake] into becoming a large company, they’re not even allowed in the game. It really is pay for play.” The lopsided distribution of power in the field is evident in the uphill battle faced by innovative startups that find themselves besieged by new regulations that inhibit their
growth. “Cronyism destroys innovation,” Sorrentino says simply, pointing to Uber and Airbnb as recent examples of disruptive companies that have faced numerous municipal and state regulations designed to hold them back. While local regulators do have some legitimate concerns for safety of consumers’ using ride sharing and individual room rentals, it’s hard to tell how much of the reflexive regulatory action is owed to those anxieties and how much is a salve for lost municipal tax revenue and the economic bite for well-connected, traditional hoteliers and taxi and limousine companies. Tesla Motors has been locked in battle with the New Jersey Motor Vehicles Commission over the rights to sell its electric cars directly to consumers, bypassing franchise dealerships. In April, New Jersey passed new regulation prohibiting such direct sales. Tesla CEO Elon Musk accused Governor Chris Christie of bowing to pressure by the state auto dealership lobby, which argued that Tesla’s factory model creates a “vertical monopoly and limits competition.” In his blog post on the subject, Musk notes that “the rationale given for the regulation change that requires auto companies to sell through dealers is that it ensures ‘consumer protection.’ If you believe this, Governor Christie has a bridge closure he wants to sell you! Unless they are referring to the mafia version of ‘protection,’ this is obviously untrue. As anyone who has been through the conventional auto dealer
Standing on Our Own Donald P. Grasso, CEO of Rytec High Performance Doors, offers a small-business perspective on big-company cronyism. Chief Executive spoke with Donald P. Grasso, CEO of Rytec High Performance Doors, about how cronyism affects small businesses. Here’s what he had to report. “Rytec is a company with 200 employees that makes products that conserve energy. It’s a successful, market-leading company that my employees and I have built with no help from Washington at all. We don’t get any credits from the U.S. Treasury to subsidize our products. We’re too small to have the voice that GE has through their lobbying efforts. We’re not a Solyndra, where we’ve given money to the Democratic Party to get that quid pro quo of a subsidy. Government had no part in building this company—nor do they shoulder any of the risks. And if we fail, the government will not be there with a safety 28 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
net to keep us from failing. We’re doing it the old-fashioned way—working through the private sector. “It is companies my size that have been adding jobs year in and year out. I’m proud of that and the fact that our sales are up and we’re hiring again this year. We’re doing it by standing on our own—without having that voice in government. Frankly, I’m glad we don’t have that voice because I wouldn’t want to be dependent on government in that way nor do I think that is its role. But the big companies shouldn’t be getting that treatment either. If the federal government is interested in making it easier for those companies to do business, they should start by taking another look at our taxation policies. “Personally, I don’t even want to take the time to understand the Byzantine methodology of crony capitalism. I will keep my head down and continue to work hard to make innovative products that meet the needs of the market. I will focus on my business, on our customers and try to develop products that meet their needs. That’s how we built this business and that is how we will continue to grow.”
THE CRONYISM RESOURCE TOOLBOX To end crony capitalism, arm yourself with information and get active. Here are a few resources to get you started.
0
AgainstCronyCapitalism.org
0
Cato Institute (Cato.org)
Former CEO of global investment firm Cambridge Associates, AgainstCronyCapitalism.org follows too-cozy relationships between government and business and shines a light on egregious cases of cronyism and corruption via articles and news analysis.
This public-policy think tank promotes individual liberty, limited government and free markets. Led by CEO John Allison, who is also the former chairman and CEO of BB&T, Cato conducts independent research and publishes a plethora of white papers authored by more than 60 fellows exploring government, politics, finance and international economics, among other topics.
0
The Great Deformation: The Corruption of Capitalism in America
by David A. Stockman
In this scathing analysis of the economic and political mess in the U.S., Stockman takes politicians and businessmen to task, blaming both for the cronyism and recklessness that has thoroughly undermined the market economy and corrupted our capitalist principles. Having been both a Reagan-era budget director and later an investment banker and private equity investor, Stockman skillfully identifies the sins of both sides and how they’ve put us so deep in the hole.
0
Crony Capitalism in America: 2008-2012
by Hunter Lewis
From shady zoning regulations in small towns to billion-dollar bailouts on Wall Street, cronyism is rampant in U.S. capitalism today. With engaging anecdotes and detailed solutions, Lewis gives a well-rounded picture of what’s gone wrong on the Street and on the Hill—and what we can do to fix it.
0
Intellectual Takeout (intellectualtakeout.org)
A non-partisan, educational 501(c)(3) institution based in Minnesota, Intellectual Takeout slices and dices academic, think tank, government and historical research into digestible articles on lobbying and rent seeking, pricing basics and free-market capitalism vs. crony capitalism, among many others.
0
Conscious Capitalism
by John Mackey and Raj Sisodia
In this book, Whole Foods Market co-founder John Mackey and professor and Conscious Capitalism co-founder Raj Sisodia discuss the intrinsic good of both business and capitalism. Presenting some of today’s bestknown enterprises, they show how these two influences forces can—and do—work most powerfully to create value for all stakeholders.
NOVEMBER/DECEMBER 2014
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CHIEFEXECUTIVE.NET
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COVER STORY
purchase process knows, consumer protection is pretty much the furthest thing from the typical car dealer’s mind.”
Too Big to Fix? Part of what perpetuates the problem is that those companies that have achieved enough size and influence to upend the system aren’t really motivated to do so because they benefit from that very system. Those business leaders wind up saying one thing but doing another. Consider CEO Charles Koch’s 2011 op-ed in The Wall Street Journal decrying cronyism and corporate lobbying for special favors. Yet Koch Industries spent more than $10 million lobbying in 2013 alone on more than 60 energy-related bills, according to government watchdog OpenSecrets.org. And they’re not alone. “Everybody points to the Koch brothers and tries to make them look like super, super bad guys,” says Macey. “The fact is that you’ve got massive amounts of political activity going on by all sorts of special interest groups. We would have to stop all this stuff by everybody.” In other words, companies of all sizes, even those who seem to benefit from the kindness of congressmen, would have to recognize that if cronyism is bad for some, it’s bad for all. “The problem we’ve had is that you have this strata of businesses at the very top of the economy who form a kind of crust, and the dynamism of the economy, the thing that keeps it going— competition, entrepreneurialism—begins to die off,” says Sorrentino. “It’s like an algae bloom on top of the economy. There’s no oxygen reaching down into the economic lake. It works for Boeing and GE, but that’s just short-term thinking. Eventually it will kill them, too.” This is why Sorrentino and others believe the only way to fix the system is to dismantle it—because if there is no system, there is no way to game it. “Get rid of the regulations, get rid of government programs, get rid of the tax loopholes,” says
30 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
“If the minimum to get into the tournament were $20, that would be fine. But with the big companies, GE and Boeing, it’s $10,000 just to get through the door.” Randall G. Halcombe, DeVoe Moore professor of economics at Florida State University and author of Producing Prosperity. “The smaller government is, the fewer favors it can bestow.” Dismantling the system might not be achievable in the near-term, but the climate of discontent is growing and is no longer a right vs. left issue. “One interesting thing about this backlash against cronyism we’ve seen over last five or six years is that it really spans the political spectrum from left to right,” Halcombe notes. “The critiques of cronyism come from all over the political spectrum.” Indeed, the subject has become increasingly divisive even within the GOP, as evidenced by Congressman Eric Cantor’s June primary defeat in Virginia to Tea Party challenger, Dave Brat, which sent Boeing’s stock tumbling. Cantor, well connected to the big-business wing of the party, was a staunch supporter of Ex-Im Bank. “This [relatively new] branch of the Republican party seems to really believe in free markets,” says Arthur MacEwan, professor emeritus of economics at the University of Massachusetts Boston. “The establishment likes to talk about free markets, but many of the policies don’t support it.” One of the clearest examples, he says, is the bailout of the banks that caused the mortgage-lending crisis. “Yes, if you’d let those banks fail, it would be damaging to all of us. But it amounts to a subsidy, a way they can get capital very cheaply. They’re then able to influence the regulations, and those allow them to operate just the way they were operating before.” If protectionism were eliminated, if companies had to face consequences and risk, they might behave more responsibly. But in the near term, small and midsize company CEOs must compete as best they can, eschew any opportunities to benefit from cronyism, and speak out on the subject. Business leaders also have to do more to change Main Street’s perception of business. “The perceived linkage between business health and middle class prosperity has been substantially weakened” because of the recent financial crises, says Nick Pinchuk, chairman and CEO of Snap-on, a Fortune 500 manufacturer of shop equipment products and automotive diagnostic tools. “We have to do more to educate the public, to reinforce the notion that if companies do better, it’s better for the community. As business leaders, we recognize that we are stewards of the investors’ capital, but we are also somewhat stewards of the prosperity of the middle class, and we have to act that way.”
FINANCE
Marketplace Lending to the Rescue Where SMEs can go for financing when banks won’t play ball. By John Kador
Key Takeaways • Traditional banks often frustrate SMEs looking for financing of under $250,000 • Dozens of new, non-bank financing alternatives have emerged to meet the needs of SMEs • Marketplace lenders match individual borrowers with lenders • Marketplace lenders create markets where none existed before
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A decade ago, Frank McDonnell, owner of TurnStyle Brands, a Portland, Oregon-based distributor of premium outdoor scooter products, thought he had a good relationship with his local bank. And why not? Before starting TurnStyle Brands, McDonnell was a banker himself, a portfolio manager for Deutsche Bank. He thought he knew the business. That was then. After the financial meltdown of 2008, McDonnell’s banker started ducking his calls. Loan applications that used to take weeks now took months; and despite meeting additional documentation requirements, TurnStyle Brands was usually turned down. Applying for an SBA-backed loan was even more frustrating. Then, the CEO got an email from Amazon. If TurnStyle Brands needed credit, the online retailer could help. McDonnell hadn’t even known Amazon was in the commercial-credit business. It was this former banker’s introduction to an entirely new set of alternatives, non-bank financing for small businesses, all of which can be lumped under the general heading of “marketplace lending” (see sidebar, “What is Marketplace Lending?,” p. 34). Amazon turned out to have an aggressive lending program, especially for vendors like TurnStyle Brands, which was doing a seven-figure annual business on Amazon. Within 24 hours, TurnStyle Brands had an unsecured $100,000 loan with regular payments
over a six-year term at 14 percent interest. Today, technology, innovation and Big Data are making possible a new, more affordable generation of financial services specifically suited to small- and medium-sized enterprises (SMEs) that remove banks and credit card companies from the transaction. The development comes at a time when SMEs are ill-served by traditional banks. Consider access to capital. Only 39 percent of companies with revenues of less than $5 million succeeded in securing bank loans during the first quarter of 2014, according to the Pepperdine Private Capital Access Index report. In fact, despite a net loosening of credit for big businesses, lending standards for small businesses tightened in 2011 and 2012—a trend expected to continue as banks pursue the largest and most profitable loans. (See “Tighter Lending Standards,” below.)
Exploring Online-Credit Options After his Amazon loan experience, McDonnell wondered if there were other, even more affordable, non-bank financial alternatives. A quick search revealed a dazzling array of non-bank online marketplaces for credit-worthy, would-be borrowers. McDonnell’s research led him to Lending Club, a San Francisco-based company that started off as a peerto-peer lending site (matching individual lenders with
Tighter Lending Standards 80
Large Business Loans Small Business Loans
60
Percent
40
20
0
-20
-40
-60 2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
CHIEFEXECUTIVE.NET
/
Source: Office of the Comptroller of the Currency, Survey of Credit Underwriting Practices
NOVEMBER/DECEMBER 2014
/
33
FINANCE
What is “Marketplace Lending?” “Marketplace lending” describes a set of market-making services that match individual borrowers to lenders through an online platform that underwrites the loan and facilitates the transaction without the involvement of traditional banks or credit card companies. The lending platforms offer information about the credit-worthiness of the borrower, and investors then take positions in the notes in what is essentially an auction. Investors usually accept fractional shares in large numbers of individual notes so that the occasional default will not significantly impact their returns. Once a note attracts sufficient investors, a loan is originated and serviced. Platforms charge borrowers a one-time origination fee and lenders a monthly service fee. Marketplace loans are typically funded by specific
individual borrowers) and transitioned into a company that also finds opportunities for institutional capital. Five days after filling out a simple online application, he received an approval for $100,000 at 5.9 percent payable over three years. “No tricky math,” McDonnell says. “The interest rate was a third of other financing alternatives that were available to me and it was funded within a week.” TurnStyle Brands used the infusion of capital to add two new product lines and hire two additional employees. “Small businesses are fed up with banks,” says Charles Moldow, general partner at Foundation Capital in Menlo Park, California. “During the recent economic downturn, when small businesses needed access to credit more than ever, many banks essentially stopped offering loans and called in lines of credit,” he says, adding that two out of every five SMEs saw their credit lines threatened between 2008 and 2012. Non-bank lending alternatives seek to fill that void. Dozens of credit marketplaces claim to match investors to borrowers who need capital. While interest rates and terms for these alternative-financing options vary widely, competition is clearly lowering lending rates across the board. These third parties are perfecting the business of monetizing liquidity in ways that traditional banks
individuals or institutions that are lending their own money, often on a fractional basis, at interest to specific borrowers. For example, a note of $100,000 to a small business may be funded by $1,000 investments from 100 different lenders. Interest rates are a function of the calculated risk that the borrower will repay the loan and range from as low as 6 to as high as 25 percent. As borrowers repay the notes, the principal and interest payments are apportioned to the individual lenders in proportion to their fractions. Each marketplace lender deploys sophisticated underwriting algorithms to assess the credit-worthiness of borrowers. Lending Club, for example, rejects individual applicants with FICO scores lower than 660 and debtto-income ratios below 30 percent, a set of thresholds that it says excludes over 80 percent of applicants.
currently cannot touch. Just as web-based sites such as Expedia and iTunes disrupted travel agencies and the music industry, respectively, sites such as Lending Club, Prosper, Dealstruck and many others are allowing SMEs to find the financing they need quickly and on more attractive terms than ever before. Prior to the introduction of marketplace lending, the alternative-lending industry was a last resort for SMEs, focused on shorter-term loans and higher rates. For example, some merchant cash-advance loans, cash flow loans and revenue loans still demand annual percentage rates (APRs) of over 100 percent or control of a company’s receivables or payments. However, now alternatives level the playing field. Sites like Fundastic (www.fundastic.com) aggregate information about non-bank loans, many of which feature APRs of 10-20 percent. “Because the loans are funded directly by their investors, the marketplace lenders are able to scale quickly without worrying about the capital reserves on their balance sheets,” explains Yun-Fang Juan, CEO of Fundastic. Marketplace lenders take origination fees from borrowers and investors. Juan notes that marketplace lending is often the only realistic option if a CEO needs working capital of $25,000 to $100,000. “The reality is that most banks don’t want to continued on p. 36
34 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Fewer SME Loans
% of small loans going to non-residential, non-farm recipients
60
50
40
30
20
10
0
1995
2000
2005
2010
Source: Federal Deposit Insurance Corporation: authors’ calculations
The fraction of non-farm, non-residential loans of less than $1 million—a common proxy for small-business lending—has dropped from 51 percent in 1998 to less than 29 percent today
When Service Companies Need a Loan Lacking the physical collateral to secure a loan, service companies often struggle to access financing—and do so more than ever in today’s lending climate. “In the past five years, getting small loans from banks has become impossible,” says Bryan Caplovitz, CEO of Austin, Texasbased Simply Speaking, a service that matches speakers with organizations that need keynote speakers. “Either the banks are looking for us to borrow larger sums than we need or [they] demand collateral.” Founded in 2001, the company enjoys a recurring revenue stream from subscriptions and is profitable. Yet,
when Caplovitz looked into funding expansion with a $25,000 cash advance on the company’s merchant account, the fees and interest rates—80 percent annualized interest—proved prohibitive. Instead, he opened an account with Lending Club; submitted his documents online; and within hours, received an email that Simply Speaking was approved a $25,000 loan. Caplovitz accepted a two-year, unsecured business loan at a fixed 12 percent interest. The funds were deposited in Simply Speaking’s checking account within five days.
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FINANCE
Eight Ways to Access Financing Amount
Interest
Term
Collateral
Bank Loans
$200K +
< 10 %
7+ years
25+ hours / 2 - 6 months
Required
Term Loans
$5K - $500K
8 - 15 %
1 - 5 years
1 - 2 hours / 1 week
Personal guarantee
Cash Flow Loans
$200 - $1M
25 - 90 %
6 - 12 months
10 - 30 minutes / 3 days
Personal guarantee
Merchant Cash Advance
$200 - $2M
70 - 350 %
3 - 12 months
10 - 30 minutes / 1 week
Not required
Revenue Loans
$10K - $1M
15 - 40 %
1 - 3 years
10+ hours / 4 weeks
Not required
85% of Accounts Receivable
15 - 25 %
1 - 3 months
1 - 2 hours / 1 - 3 days
Account Receivables
Equity Crowdfunding
$50K - $5M
Equity
5+ years
25+ hours / 3+ months
Not required
Marketplace (peer-to-peer) Lending
$3K - $200K
6 - 25 %
2 - 5 years
30 - 60 minutes / 2 - 7 days
Not required
Factoring
Effort/Timeline
Source: Fundtastic, Chief Executive Research
continued from p. 34 bother with loans of less than $25,000 and they want the note to be fully collateralized,” she says. Business owners used to turn to merchant cash advances for this need. Now they have platforms such as Lending Club, Prosper, Funding Circle, Dealstruck and Fundastic offering help, with new sites launched every month.
Frank McDonnell, CEO of Turnstyle Brands
Debt Crowdlending Marketplace lending is essentially crowdlending, or crowdfunding without any equity changing hands. Borrowers pay interest to the investors who they can persuade to fund their loans. For example, Carlsbad, California-based Dealstruck offers SMEs a term-loan product plus a capital line of credit to high-growth startups who don’t meet the credit
36 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
or size standards of banks. Dealstruck’s team aggregates the borrowers and does all the underwriting. Then, the company invites accredited investors to participate. That’s where the crowd comes in. Investors can either buy into loans on a fractional basis or buy the whole note. Notes average about $100,000, with typical interest rates of 10-20 percent, depending on risk. Dealstruck takes a first position on assets of the business and also gets a personal guarantee from the CEO. “Our goal is not to disrupt banks, but we fill a liquidity vacuum to enable businesses to access fair, transparent capital to grow healthfully,” says Dealstruck CEO Ethan Senturia. Jake Hansen, CEO of ZTelco, an Internet service provider and telecommunications company in San Diego, looked for financing at a time when massive growth severely strained its accounting system. “We were basically unlendable as far as our bank was concerned because our accounting was in such flux,” says Hansen. The company did, however, have collateral in the form of a data center and number of cell towers. Hansen submitted an online application to Dealstruck, which inspected ZTelco’s operations and approved a loan of $100,000 at 12 percent within 48 hours. The funds were in ZTelco’s bank account two days later. “The interest rate was very doable, given our profit margins,” says Hansen. “No bank could touch the efficiency of this process.”
CEO Wealth Creators In the seventh annual CEO Wealth Creators Index, we highlight the top performers who have held their jobs for at least three years. by J.P. Donlon
WEALTH CREATION INDEX More than ever, CEOs have been under scrutiny. The public looks to business leaders to create new jobs, but in order to do that they have to generate real economic value— as opposed to mere accounting value as measured by GAAP metrics. Creating value is, after all, what CEOs are paid to do. But how should it be measured? For our seventh annual index, Chief Executive partnered with EVA Dimensions’ CEO Bennett Stewart and Great Numbers!’s CEO Drew Morris. We ranked the top 100 public companies of the S&P 500 where the CEO has been in place for at least three years (see p. 39). Similarly, we also ranked the top 40 midmarket companies (see p. 43) from the Russell 3000 in two tiers: upper mid-market companies with revenues between $500 million and $1 billion, and a lower mid-market tier of companies with revenues between $100 million and $500 million. While there is no single measure that is perfect, we relied on two key underlying metrics: • MVA, or market value added, is the spread between a firm’s overall market value and the total capital that’s been invested in its net business assets. It is the value added to, or deducted from, the owner’s investment in the business. It equals the owners’ wealth, measures the firm’s franchise value, and represents its aggregate NPV (net present value). Increasing MVA is the key to creating wealth and driving total shareholder return. • EVA, or economic value added, measures a firm’s economic profit—it is profit after subtracting a full, weighted average cost of capital, and after correcting accounting distortions. EVA increases when costs are cut, assets are managed judiciously, and when management invests new capital, including R&D and ad spending, to profitably grow the business over the full cost of the capital. Current common methods of measuring corporate performance are based on earnings, earnings growth and return on equity (ROE). While these have their place, it is possible for companies to take actions that increase earnings that do not create value, often in the hope of gaining stock analyst upgrades. Looking at performance from an EVA/MVA perspective corrects accounting distortions that are legitimate but do not offer a true picture of economic value. Using these metrics more accurately reflects which companies are generating wealth after factoring in their true cost of capital. Topping the ranking this year is MasterCard, a Purchase, New York-based technology company in the global payments industry. It helps to have a business model that has proved wickedly successful at throwing off cash. The company returns to the top of the Wealth Creation Index (WCI). Then-CEO Robert Selander won in 2009. MasterCard operates the world’s fastest payments processing network connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries.
38 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Since he assumed the role of CEO in 2010, Ajay Banga has accelerated the evolution of the $8.3 billion company, setting a vision and defining a culture that saw the company quickly shift from its historical focus on issuing banks. Ajay established a three-pronged strategy to diversify the business by: • Growing the core business (credit, debit, prepaid and commercial); • Diversifying across geographies and customers (expanding relationships with non-traditional segments); and • Building new businesses (addressing the increasing convergence of the physical and digital worlds). The result has been a 47.4 percent total annual average return to shareholders over the last five years. In addition, the company lured international customers with a mobile payment network, MasterPass, that lets people purchase with a simple click. At the mall, for example, MasterPass lets users tap a device at a cash register or scan a digital barcode. When online, customers can load any credit card—even if it’s not a MasterCard—onto a digital wallet. The company is developing a platform giving people the ability to pay for items while they wait in line or browse in stores. Observing that 85 percent of the world’s transactions are still in currency, Banga has declared a “war on cash” to nudge as many consumers as possible toward electronic payments, preferably processed by MasterCard. Although competition to handle payments is intense in the U.S., the wider battlegrounds are in countries like India and Brazil, which have vast numbers of people without bank accounts, and a growing middle class. IT and financial services, food & beverage, food retailing and healthcare service providers are all well represented in this year’s rankings. In addition to MasterCard, firms such as Fastenal, Monsanto, Discovery Communications, Precision Castparts and for-profit educator DeVry have all been consistent performers ranking among the top 100 wealth creators since the WCI’s inception in 2008. Not all of these companies use EVA specifically but they clearly manage assets in highly efficient ways. After all, the essence of EVA is sales less operating costs less the full costs of financing business assets—as if the assets had been rented. It consolidates income efficiency and asset management into one net profit score. To sum up, regardless of the method used, companies that consistently make our list practice three managerial precepts: 1. Operate efficiently by cutting wasteful costs; 2. Grow profitably by investing and building the business while covering the cost of invested capital; and 3.Purge ruthlessly by abandoning uneconomic activities that can’t cover the cost of capital.
MVA Margin
3 Year EVA Momentum EVA Margin Market -Implied Momentum
Change In Score
2013 Score
CEO
2014 Score
Overall Rank
Company
1
Mastercard
Ajay Banga
100.0
99.6
0.4
A
A
A
A
2
Cerner
Neal Patterson
99.6
99.0
0.6
A
A
A
A
3
Kansas City Southern
David L. Starling
99.3
100.0
-0.7
A
A
A
A
4
Monster Beverage
Rodney C. Sacks
99.0
99.3
-0.3
B
A
A
A
5
Brown-Forman
Paul C. Varga
98.7
97.8
0.9
B
A
A
A
6
Monsanto
Hugh Grant
98.4
97.2
1.2
A
A
B
A
7
T. Rowe Price
James A.C. Kennedy
98.1
97.5
0.6
A
A
B
B
8
Fastenal
Willard D. Oberton
97.8
98.1
-0.3
B
A
A
A
9
Harley-Davidson
James L. Ziemer
97.5
96.3
1.2
A
A
B
B
10
Whole Foods Market
John P. Mackey
97.2
98.7
-1.5
A
A
B
B
11
O’Reilly Automotive
Gregory L. Henslee
96.9
94.4
2.5
B
A
B
A
12
Avago Technologies
Hock E. Tan
96.3
89.5
6.8
B
A
B
A
13
Alliance Data Systems
Edward J. Heffernan
96.0
54.2
41.8
B
B
A
B
14
Discovery Communications
David M. Zaslav
95.7
96.9
-1.2
A
B
B
B
15
Paychex
Martin Mucci
95.3
96.0
-0.7
B
A
B
A
16
Precision Castparts
Mark Donegan
95.0
75.7
19.3
B
A
B
A
17
F5 Networks
John McAdam
94.7
92.0
2.7
B
A
B
A
18
Harman International
Dinesh C. Paliwal
94.4
61.6
32.8
A
B
B
B A
19
Pall
Eric Krasnoff
94.1
84.6
9.5
B
A
B
20
Under Armour
Kevin A. Plank
93.8
93.5
0.3
B
C
A
A
21
Amphenol
Adam Norwitt
93.5
94.7
-1.2
B
A
C
B
22
Moody’s
Raymond W. McDaniel, Jr.
93.2
83.7
9.5
A
A
C
A
23
Wynn Resorts
Stephen A. Wynn
92.9
92.6
0.3
C
B
B
A
24
Roper Industries
Brian D. Jellison
92.6
95.7
-3.1
C
B
A
A
25
Colgate-Palmolive
Ian M. Cook
92.3
84.3
8.0
C
A
B
A
26
Equifax
Richard F. Smith
92.0
95.3
-3.3
B
B
B
B
27
W.W Grainger
James T. Ryan
91.7
91.1
0.6
B
A
C
B
28
Home Depot
Francis S. Blake
91.4
83.1
8.3
B
B
C
B
29
Cognizant Technology Solutions
Francisco D’Souza
91.1
86.5
4.6
B
B
C
B
30
Cabot Oil & Gas
Dan O. Dinges
90.7
91.4
-0.7
B
B
C
B
31
Constellation Brands
Robert S. Sands
90.4
89.2
1.2
A
B
C
B
32
IFF
Douglas D. Tough
90.1
77.6
12.5
B
B
C
B
33
Intuitive Surgical
Gary S. Guthart
89.8
96.6
-6.8
C
A
C
B
34
Scripps Networks Interactive
Kenneth W. Lowe
89.5
94.1
-4.6
C
A
C
B
35
TJX
Carol M. Meyrowitz
89.2
67.1
22.1
B
B
C
B
36
Sherwin-Williams
Christopher M. Connor
88.9
87.1
1.8
B
B
C
B
37
AMETEK
Frank S. Hermance
88.6
95.0
-6.4
B
B
C
B
38
Hershey
John P. Bilbrey
88.3
92.3
-4.0
C
B
B
B
39
Chipotle Mexican Grill
Steve Ells
88.0
90.4
-2.4
C
C
B
B
40
Praxair
Stephen F. Angel
87.4
93.8
-6.4
C
B
B
B
41
Sigma-Aldrich
Rakesh Sachdev
87.4
91.7
-4.3
C
A
B
A
42
Nike
Mark G. Parker
87.1
81.9
5.2
C
B
B
B
43
Xilinx
Moshe N. Gavrielov
86.8
86.1
0.7
B
A
C
B
44
BlackRock
Laurence D. Fink
86.5
87.4
-0.9
B
C
B
C
45
Edwards Lifesciences
Michael A. Mussallem
86.1
90.7
-4.6
B
B
C
C
46
Tiffany & Co.
Michael J. Kowalski
85.8
88.0
-2.2
C
A
B
A
47
Red Hat
James M. Whitehurst
85.5
92.9
-7.4
B
B
C
B
48
Fiserv
Jeffery W. Yabuki
85.2
66.8
18.4
C
C
B
B
49
Honeywell
David M. Cote
84.9
87.7
-2.8
B
B
C
C
50
PPG Industries
Charles E. Bunch
84.6
52.1
32.5
B
C
C
C
51
Walt Disney
Robert A. Iger
84.3
69.3
15.0
B
B
C
C
52
Range Resources
John H. Pinkerton
84.0
75.4
8.6
B
C
C
B
53
Robert Half
Harold M. Messmer, Jr.
83.7
88.9
-5.2
B
B
C
C
54
Coca-Cola
Muhtar Kent
83.4
90.1
-6.7
C
A
C
A
55
CVS Caremark
Larry J. Merlo
83.1
69.0
14.1
A
C
C
C
Lessons From the WCI that Can Help Every Business Become More Valuable An analysis of the past seven years’ Best and Worst Wealth Creators’ profiles reveals five reasons businesses excel: 1. The design of the business. The most powerful reason for a business’ prospering, or failing has to do with how it makes money. Two-time best wealth creator MasterCard is a good example, because of its “tollbooth” for non-cash payments and the network effect it enjoys. 2. Wise management of capital. IBM, not ranked this year because of short CEO tenure, is a seasoned practitioner of managing its portfolio of businesses (and, thus, its capital investment) as evidenced by its 2005 exit from the PC hardware business and the impending sale of its low-end server business. 3. A strong brand. Here, great examples include MasterCard (a priceless, status brand) and T. Rowe Price (squarely on the side of the investor). 4. The design of what a business offers. A business’ products and services, is another pivotal factor in succeeding or not. Witness, for example, Whole Foods (exceptionally wide selection of natural and organic foods). 5. The mindset of its leader—intent. What do you as a leader want and how serious are you about it, really? This is not about beating up the sales force for better results. Rather, it’s about wanting to grow and then figuring how, specifically, your business will do so—by harnessing a great business design, value proposition, brand, suite of offerings, etc. —Drew Morris
For a complete ranking of all S&P 500 companies, visit ChiefExecutive.net/WCI2014
NOVEMBER/DECEMBER 2014
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CHIEFEXECUTIVE.NET
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39
WEALTH CREATION INDEX
Ranking CEO Wealth Creation By Bennett Stewart and Drew Morris
Our ranking is based on the performance of companies in the S&P 500 index (and their CEOs) for the three years ending on June 30, 2014. Only companies for which the CEOs were in their roles for the entire July 2011 through June 2014 period were ranked. Not ranked are the 18 REITs in the June 30, 2014 S&P 500 Index. (Also, Facebook, which went public in May 2012, was not ranked due to incomplete data for the measurement period.) For this year’s wealth-creation ranking (see p. 40), we’ve adopted a methodology recommended by Bennett Stewart, CEO of EVA Dimensions. CEO performance was assessed using four measures based on the concept of economic value added (EVA). EVA is the profit remaining after subtracting the full cost of capital for the business—known as economic profit. The first measure, EVA Momentum, shows the trend in the growth of the firm’s EVA profits over the past three years. It is better at measuring wealth-creation over time than growth in sales, EBIT, EBITDA or earnings per share, since it only counts profit growth after covering the full cost of capital, including a minimum shareholder return to compensate for risk. The second measure, EVA Margin, shows how profitable the firm is per dollar of sales. Its value combines pricing power, operating efficiency and how well assets were managed into a single net margin score. The third measure, market-implied momentum (MIM), measures the expected long-run growth rate for economic profits that are reflected in the company’s stock price. It shows how well the CEO has positioned the company for continued profitable expansion—through initiatives targeting growth markets, innovations, brand value and operations excellence— as far as investors can tell. The final measure, MVA margin, is a wealth-creation index. MVA, or market value added, is the difference between a firm’s
market value and the capital it has invested in business assets expressed as a percent of sales. The higher it is, the better— there’s more shareholder wealth—and a greater franchise value stemming from the business. All of the measures were computed for each company using June 30, 2014 share prices and the most recently reported financial data up to, but not after, June 30, 2014. The measures were then ranked within their industry groups to arrive at percentile scores. A company’s final score is a weighted combination of the four percentile scores. The best-performing companies in each industry rise to the top, and those at the very top consistently outperform their industry peers across all four measurement categories. They exhibit outstanding profitability, an exceptional rate of profitable growth, a premium stock price and justification for continued confidence in their future success. Please note that because we changed the scoring methodology this year, last year’s scores, shown for comparison, were recalculated using the new methodology described above. The top-50 companies in the ranking delivered an average total shareholder return (TSR) of 86.2 percent between July 2011 and June 2014 (the period covered in the reported financials). The bottom-50 companies’ TSR averaged 37.5 percent, while the actual TSR for all of the scored S&P 500 companies was 68.9 percent. The top-50’s median TSR was 77.7 percent; the bottom-50’s was 38.4 percent. As the table at bottom shows, the top-50 companies in the wealth-creation ranking far outperformed the bottom-50 companies and the scored S&P 500 between July 2011 and June 2014. [Note: Total Shareholder Return = share-price return percent plus reinvested dividends, expressed as a percent.]
A Validity Check on the Ranking Method Total Shareholder Return
July ‘11 - June ‘14
Top 50 Average 86.2% Median 77.7% Bottom 50
Average 37.5%
Median 38.4% All Scored S&P 500 Actual 68.9% Drew Morris (drew.morris@greatnumbers.com) is CEO of Great Numbers! It helps executives discover the full potential of their upside’s elements: value propositions, persuasive ads, product designs, and others, and forge them into a prosperity design—a blueprint for delivering on all that potential.
40 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
Bennett Stewart (gbstewart@evadimensions.com) is CEO of EVA Dimensions, a firm that helps corporate management teams to make better decisions and create stronger incentives by bringing the best practices in EVA in-house. The firm also provides EVA-based equity research to institutional investors.
2013 Score
Change In Score
3 Year EVA Momentum
EVA Margin
Market - Implied Momentum
Keith D. Nosbusch
82.8
83.4
-0.6
C
A
C
C
Estee Lauder
William P. Lauder
82.5
89.8
-7.3
C
C
C
B
58
Cintas
Scott D. Farmer
82.2
70.8
11.4
B
B
C
C
59
Leggett & Platt
David S. Haffner
81.9
54.9
27.0
C
C
B
C
60
Starbucks
Howard D. Schultz
81.2
80.9
0.3
C
B
C
B
MVA Margin
CEO
2014 Score
Rockwell Automation
57
Overall Rank 56
Company
How to Move Up in the
61
Linear Technology
Lothar Maier
80.9
82.8
-1.9
C
A
C
A
62
Vulcan Materials
Donald M. James
80.6
80.3
0.3
A
F
A
B
63
United Parcel Service
D. Scott Davis
80.3
85.5
-5.2
C
B
C
C
64
Sandisk
Sanjay Mehrotra
80.0
23.6
56.4
C
B
C
B
65
Microchip Technology
Steve Sanghi
79.7
62.8
16.9
C
A
C
B
66
Sempra Energy
Debra L. Reed
79.4
17.4
62.0
B
C
C
B
67
Starwood Hotels & Resorts
Frits D. van Paasschen
79.1
81.2
-2.1
C
B
C
B
68
VF Corp
Eric C. Wiseman
78.8
73.9
4.9
C
C
C
C
69
Intuit
Brad D. Smith
78.5
78.8
-0.3
C
A
C
C
70
Alexion Pharmaceuticals
Leonard Bell, M.D.
78.2
74.2
4.0
B
A
D
C
71
EQT Corporation
Murry S. Gerber
77.9
60.7
17.2
C
C
C
B
72
Wisconsin Energy
Gale E. Klappa
77.6
78.5
-0.9
B
A
D
B
73
Autozone
William C. Rhodes, III
77.3
68.0
9.3
B
A
D
A
74
Southern Company
Thomas A. Fanning
76.9
69.9
7.0
C
A
D
B
75
Dollar Tree
Bob Sasser
76.6
73.6
3.0
C
B
C
B
76
Danaher
H. Lawrence Culp, Jr.
76.3
71.1
5.2
C
C
C
B
77
Regeneron Pharmaceuticals
Leonard S. Schleifer
76.0
79.1
-3.1
A
A
D
C
78
Mohawk Industries
Jeffrey S. Lorberbaum
75.7
57.3
18.4
A
D
B
C
79
Comcast
Brian L. Roberts
75.4
58.8
16.6
B
C
C
C
80
Allergan
David E.I. Pyott
75.1
73.3
1.8
C
B
C
C
81
FMC Technologies
John T. Gremp
74.8
65.3
9.5
C
B
C
B
82
Franklin Resources
Gregory E. Johnson
74.5
78.2
-3.7
B
A
F
B
83
Larry Page
74.2
76.0
-1.8
C
A
C
C
84
Limited Brands
Leslie H. Wexner
73.9
80.6
-6.7
C
A
D
A
85
Snap-On
Nicholas T. Pinchuk
73.6
65.9
7.7
C
C
C
C
86
Pinnacle West Capital
William J. Post
73.3
85.8
-12.5
C
C
C
C
87
FMC
Pierre R. Brondeau
73.0
86.8
-13.8
C
B
C
C
88
Flowserve
Mark A. Blinn
72.6
31.5
41.1
C
C
C
B C
89
Lowe’s
Robert A. Niblock
72.3
46.6
25.7
C
C
C
90
Costco
James D. Sinegal
72.0
84.0
-12.0
B
C
C
C
91
H&R Block
William C. Cobb
71.7
77.9
-6.2
C
C
B
B
92
Norfolk Southern
Charles W. Moorman, IV
71.4
72.6
-1.2
C
A
D
B
93
Waters
Douglas A. Berthiaume
71.1
85.2
-14.1
C
A
C
C
94
Seagate Technology
Stephen J. Luczo
70.8
64.1
6.7
B
B
D
C
95
DaVita
Kent J. Thiry
70.5
76.3
-5.8
B
C
C
C
96
Meadwestvaco
John A. Luke, Jr.
70.2
27.3
42.9
C
C
B
B B
97
Cincinnati Financial
Steven J. Johnston
69.9
63.1
6.8
C
C
B
98
NVIDIA
Jen-Hsun Huang
69.6
66.2
3.4
B
B
F
C
99
Ameriprise Financial
James M. Cracchiolo
69.3
55.2
14.1
C
C
C
B
100
Quanta Services
James F. O’Neil, III
69.0
65.6
3.4
B
C
C
C
Rankings In publishing this list, Chief Executive aims to show CEOs where they stand with respect to their peers as well as how to go about improving one’s standing. Getting better will require several actions that the company’s CEO, division heads and general managers can take. At the corporate level: • Use EVA and the EVA Margin and EVA Momentum ratio statistics, to assess profitability, profitable growth and wealth-creation throughout the company. • Manage your portfolio of businesses from a wealthcreation perspective. This includes opportunity sensing—entering lucrative or fast-growing businesses—as well as putting businesses making sub-par contributions into other hands or shuttering them. Set the contribution hurdle rate to maximize economic-value creation. • Ensure that the company’s capital structure is right. This affects the capital charge and invested capital. Equity is more expensive than debt, but too much debt can kill a company. • Avoid overpaying for acquisitions or stock buybacks. • Pay managers bonuses at all levels for increasing EVA, and give them the tools and training to help them do so. At the business unit level: • The general managers of businesses need to find the best things they can do to boost operating results. At all levels: • As did the leading Wealth Creators, put together a prosperity design for your company. How, exactly, will you achieve uncommon success? How will you improve: customers’ feelings about your company and its offerings, your value propositions, the promises your brands represent, etc.? How will you get all you can out of your assets, including your intangible assets? • Finally, manage internal and external risks across the company and its aggregate risk-reward profile by taking a wide-angle lens to what could happen. —DM
Source: EVA Dimensions LLC
Acknowledgement: We thank Spencer Stuart for their helpful information on CEO tenure. Disclaimers: EVA Dimensions, its owners, employees and/or customers may have positions in the securities listed in this article. The information provided is based on material EVA Dimensions believes to be accurate and reliable. However, its accuracy and completeness and conclusions derived there from are not guaranteed. Great Numbers!’s Drew Morris has no stake in any of the companies mentioned.
NOVEMBER/DECEMBER 2014
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CHIEFEXECUTIVE.NET
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41
WEALTH CREATION INDEX
A Look at a Few of the Best Companies
This year we’ve profiled two S&P 500 companies in the top ranks that we haven’t written about previously and for the first time, a mid-size company, to provide a fresh set of management insights. These write-ups reflect company events and performance up until June 30, 2014. By Drew Morris
Three Top Wealth Creators
Cerner
Neal Patterson In seven years of best-wealth-creator profiles, never has a company seemed so well led, in so many areas. Cerner’s annual Total Shareholder Return over the past 15 years (as of 9/5/14) was 25.23 percent, compared with the S&P 500’s 4.6 percent, according to Morningstar. That performance came about because of Cerner’s underlying business and the leadership that spawned it. Cerner is a healthcare IT company started in 1979, and run since by co-founder and CEO Neal Patterson. Cerner has an asset-light, highly scalable business design and plays in a high-growth market space. The company mines it for solutions it can deliver early with superior value propositions: prominently, employing operational efficiency for its customers and ideally engendering a high switching cost.
These days, Cerner is riding market demand for its electronic medical-records solution, one of the very few that meets Federal standards. Meeting them qualifies Cerner’s customers, hospitals and other healthcare providers for a preferred reimbursement rate from Medicare and Medicaid. The amounts involved are not chump change, so Cerner is now an obvious choice to help its customers make more money, something struggling facilities welcome. Cerner excels at seeing embryonic market needs, then takes the risk to address them, and it does so creatively and well. Fueling this growth is Patterson’s passion to enable improved and lower cost health-care delivery through interoperability and higher quality outcomes.
Harley Davidson 9
Keith E. Wandell
Harley gets a lot right: creating a passionate “customer tribe” through its Harley Owner’s Group (repeat sales, price premiums); extensive customization capabilities; flexible, as well as surge manufacturing, so as to meet sudden spikes in demand; and a reputation for quality. Harley’s challenge is an aging core U.S. market, resulting in slow growth. There are, however, large, fast-growing, lower-end motorcycle markets in China and India, and Harley is reaching out to a broader demographic with their Street line of cycles. Russell 3000 Index ($500M - 1B)
8
Interestingly, Harley’s badass, black-leather-brand image creates both enthusiastic fans in one group and those who don’t relate (a larger group). So Harley’s opportunities to scale worldwide are, in a sense, limited by its brand. Harley’s management recognizes this situation and is trying to evolve. Establishing more culturally resonant brands overseas and leveraging its customer cultivation, design and manufacturing expertise could have wheels, but it surely won’t be easy.
Boston Beer Martin F. Roper
Founder Jim Koch took his great-great grandfather’s recipe for beer and, with the help of two pals from his Harvard Business School days, formed Samuel Adams Beer. That company, which evolved into Boston Beer, has delivered a compound average total annual return of 39.8 percent over the past three years and 24.6 percent over the past 10 years. Why? For Jim, Boston Beer’s now CEO Martin F. Roper, and their brewmasters, including Dr. Joseph Owades, it’s all about the products, well-honed methods for concocting and making great ones and their passion. To capture as much share of the beer-drinker stomach as possible and to drive overall product velocity, they now make a wide variety of craft beers. They keep experimenting—their beers are voted on by their 42 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
communities and in worldwide beer-tasting competitions (and discontinued if appropriate). The company has even funded a division, Alchemy & Science, to serve as an R&D lab for new beer ideas. Further enhancing their value proposition, Boston Beer introduced its Freshest Beer Program, an inventorymanagement initiative that prevents their beer from sitting in distributors’ non-temperature-controlled warehouses for too long. To show they’re serious, Boston Brewing will buy back beer that’s past its peak-freshness date. What’s more, they’re good guys—as evidenced by the fact that they shared their excess hops with other craft brewers, at cost, during a 2008 shortage.
Change In Score
3 Year EVA Momentum
EVA Margin
Market - Implied Momentum
MVA Margin
Taser International
Patrick W. Smith
Aerospace & Defense
100
98.6
1.4
A
A
A
A
Universal Display
Steven V. Abramson
Electronics & Office Equipment
100
97.2
2.6
A
A
A
A
-2%
3
Marketaxess Holdings
Richard M. McVey
Consumer Services
100
100
-0.4
A
A
A
A
36%
4
Wisdomtree Investments
Jonathan L. Steinberg
Diversified Financials
99
98.1
1.3
A
B
A
A
29%
5
AAON
Norman H. Asbjornson
Construction
99
95.7
3.5
B
A
A
A
39%
6
Cohen & Steers
Martin Cohen
Consumer Services
99
98.8
0.2
A
A
B
A
16%
7
Financial Engines
Jeffrey N. Maggioncalda
Consumer Services
99
98.3
0.5
A
B
A
A
32%
Company
CEO
Industry
3 Year TSR CAGR % (2014-6)
2013 Score
1 2
Rank
2014 Score
Midmarket Wealth Creators (revenues between $100m and $500m)
45%
8
Healthstream
Robert A. Frist, Jr.
Healthcare Providers & Services
99
99.4
-0.8
A
B
A
A
30%
9
Sun Hydraulics
Allen J. Carlson
Conglomerates & Machinery
99
99.6
-1.1
B
A
A
A
15%
10
Computer Programs & Systems
J. Boyd Douglas
Healthcare Providers & Services
98
97.7
0.6
A
A
B
A
6%
11
Pdf Solutions
John K. Kibarian, Ph.D.
Semiconductors & Semiconductor Equipment
98
97.3
0.8
A
B
B
B
56%
12
Home Bancshares
Randy Sims
Banks
98
96.8
1.1
B
A
B
A
43%
13
Multimedia Games Holding
Patrick J. Ramsey
Hotels Resorts & Cruise Lines
98
98.5
-0.8
A
A
C
B
103%
14
Balchem Corporation
Dino A. Rossi
Chemicals
98
97.9
-0.4
B
B
A
A
11%
15
RBC Bearings
Dr. Michael J. Hartnett
Conglomerates & Machinery
97
97.5
-0.2
B
B
B
A
21%
16
Cognex
Robert Willett
Electronics & Office Equipment
97
99.2
-2.0
C
A
A
A
36%
17
Bank Of The Ozarks
George G. Gleason, II
Banks
97
96.4
0.6
C
A
A
A
40%
18
Western Alliance Bancorp
Robert G. Sarver
Banks
97
93.2
3.6
A
B
C
A
50%
19
Cyberonics
Daniel J. Moore
Healthcare Equipment & Supplies
97
96.2
0.4
A
A
C
B
32%
20
Bofi Holding
Gregory Garrabrants
Banks
96
85.4
11.0
B
A
C
A
76%
Market - implied Momentum
MVA Margin
Construction
100
100
0
A
A
A
A
52%
Michael J. Covey
Paper & Packaging
99.7
98.6
1.1
A
A
B
A
10%
3
Dorman Products
Steven L. Berman
Auto & Suppliers
99.4
99.7
-0.3
A
A
A
A
41%
4
IPG Photonics
Valentin P. Gapontsev, Ph.D.
Electronics & Office Equipment
99.1
99.1
0
A
A
C
A
5%
5
Gentherm
Daniel R. Coker
Auto & Suppliers
98.9
94
4.9
A
B
A
B
56%
6
Grand Canyon Education
Brian E. Mueller
Diversified Consumer Services
98.6
93.2
5.4
A
A
C
A
48%
7
Boston Beer Inc.
Martin F. Roper
Food & Beverage
98.3
98
0.3
B
B
A
A
36%
Industry
3 Year TSR CAGR % (2014-6)
3 Yr. EVA Momentum
EVA Margin
Steven R. Rowley
Potlatch
CEO
2013 Score
Eagle Materials
Company
2014 Score
1 2
Rank
Change In Score
Midmarket Wealth Creators (revenues between $500m and $1b)
8
Signature Bank/NY
Joseph J. DePaolo
Banks
98
94.5
3.5
C
A
B
A
32%
9
Align Technology
Thomas M. Prescot
Healthcare Equipment & Supplies
97.8
94.2
3.6
A
A
C
B
36%
10
Aqua America
Nicholas DeBenedictis
Utilities - Other
97.5
98.9
-1.4
B
B
A
A
17%
11
FEI Co.
Dr. Don R. Kania
Electronics & Office Equipment
97.2
98.3
-1.1
B
B
B
B
34%
12
Ansys
James E. Cashman, III
Software
97
96.4
0.6
B
B
C
B
12%
13
Astronics
Peter J. Gundermann
Aerospace & Defense
96.7
96.7
0
A
A
C
B
70%
14
Forward Air
Bruce A. Campbell
Freight Transportation
96.4
97
-0.6
C
B
B
B
14%
15
White Mtns Ins Group Ltd.
Raymond Barrette
Insurance
96.1
93.4
2.7
A
A
D
A
14%
16
MSCI
Henry A. Fernandez
Media
95.9
87.5
8.4
C
A
B
A
9%
17
Tootsie Roll Industries
Melvin J. Gordon
Food & Beverage
95.6
56.5
39.1
C
C
B
B
7%
18
East West Bankcorp
Dominic Ng
Banks
95.3
92.1
3.2
C
A
C
A
22%
19
Methode Electronics
Donald W. Duda
Electronics & Office Equipment
95.1
66
29.1
A
C
C
C
68%
20
Choice Hotels Intl.
Stephen P. Joyce
Hotels Resorts & Cruise Lines
94.8
86.4
8.4
B
A
C
A
23%
For a complete mid-market ranking, visit ChiefExecutive.net/WCI2014
Source: EVA Dimensions LLC
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Learn To Grow When Your Markets Arenâ&#x20AC;&#x2122;t FEATURED SPEAKERS: Leslie Wexner Chairman and CEO L Brands
Howard Janzen President and CEO Cool Planet Energy Systems
Jeff Silver CEO Coyote Logistics
Andra Rush Chairman and CEO Rush Trucking
Andrew N. Liveris President & CEO Dow Chemical
Eric Spiegel President and CEO Siemens USA
Eric Fyrwald President & CEO Univar
Brainstorm your challenges in interactive panel discussions and dynamic roundtables with our featured speakers and your CEO peers this December 4th at the NYSE.
Presented by
Leslie Wexner Chairman and CEO, L Brands
Lifetime Achievement Award Join us to honor Leslie Wexner, a retailing legend and the current longest-serving CEO of a Fortune 500 company. Leslie nurtured a $5,000 investment in 1963 into a $10 billion company whose brands include Victoriaâ&#x20AC;&#x2122;s Secret, Bath & Body Works, Henri Bendel and others. Through the years, Wexner has grown and spun off top retail brands such as Lane Bryant, Abercrombie & Fitch, Lerner New York, Express and his flagship property, The Limited, as the retail environment has evolved.
For more information about the CEO2CEO Leadership Summit, visit ceo2ceosummit.com or call 203-889-4974.
HR Meets Big Data How analytics are helping companies identify and develop top talent. By William J. Holstein
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TALENT DEVELOPMENT
Guy Halfteck, a former commander in the Israeli navy who earned a Ph.D. from Harvard University in game theory, had always been intrigued by what he saw as a core problem facing companies: how do you identify the best people to hire? Resumés are notoriously inaccurate and misleading. Studies show that interviews are not as effective as managers think they are. Plus, getting applicants to fill out questionnaires, whether online or off, produces poor results. It’s even hard to persuade techsavvy people in their 20s and 30s to sit down and fill out a questionnaire by hand. “Hiring is very challenging and difficult,” explains CEO Halfteck. “Job seeking for people is also very challenging and difficult. I was determined to find a better way.” His search led him to game-playing, which may seem trite at first glance but is actually quite profound. He discovered that if job applicants can escape the formality of an interview process, they open an authentic window into how they really behave and think. So Halfteck launched a company called Knack, headquartered in Palo Alto, California, which provides simple online and mobile games similar to Angry Birds that companies can use to screen job applicants. In less than 10 minutes of game playing, during which the player must react to and interpret facial expressions of customers in a restaurant, Knack gathers enough information to make key judgments about her potential. The company applies its own algorithms, written
by data scientists and behavioral neuroscientists, and runs them on Amazon.com’s cloud-computing server farms. “We are able to get very quick insights into personality characteristics, decision-making capabilities and the overall soft skills that a person has,” Halfteck says. “We can measure those attributes and use the data to predict whether that person will be a successful employee.” Big Data has taken on somewhat of an ominous overtone following the disclosures of massive spying by the National Security Agency, but that is not stopping CEOs from continuing to explore new ways to exploit the advantages of massive computing and data crunching know-how. Already in use for mass-marketing endeavors, those tools are now being applied in one of the dark corners of the corporate world—human resources. “It’s kind of astonishing how poor the analytics have been in human resources given how much money goes into it,” says Peter Cappelli, a management professor and director of the Center for Human Resources at the University of Pennsylvania’s Wharton School of Business. “Most companies haven’t bothered to try to figure out who is the best employee or why they quit.” But CEOs are starting to realize that they can get smarter about the entire lifecycle of human resources—recruiting, hiring, onboarding, training, measuring performance, retaining and predicting departures—and they can do all those things in relatively cost-effective ways. Companies
Knack’s job-screening program assesses applicants as potential hires by having them play a video game in which they react to and interpret facial expressions of restaurant customers
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from the Fortune 100 down to regional restaurants, hotel chains and hospitals are embracing the new analytic tools. “This is going to forever change how senior executives manage and interact with their work forces,” says Max Simkoff, founder and CEO of Evolv, a privately held startup in Silicon Valley that provides tools to help companies improve their HR capabilities. Evolv is one of the many small, non-traditional players to emerge at the intersection of information technology, human resources and psychology. “When you look at who is buying our solution, it’s typically someone in the C-suite,” Simkoff adds. “They don’t relegate it to the HR department.” To be sure, potential hazards can arise from any major corporate initiative that borders on becoming a fad. The most obvious is that companies come to depend on their analytic tools at the expense of basic common sense—the human factor. “A lot of companies have said, ‘We’re just going to use our software to screen the candidates. It’s cheaper,’” says Cappelli. “But that has largely been a disaster.” It’s also a highly fragmented field with different vendors offering different tools for the various pieces of the employee’s lifecycle. Even eHarmony, the online matchmaking service, has sought to apply its romance algorithms to unraveling the mysteries of the employeeemployer relationship.
The Holy Grail for any CEO is to combine data from the recruiting process into onboarding and assessing how an employee performs over time and whether he is at risk of leaving. However, that information is difficult to achieve, even by investing in large software packages from Oracle, SAP or IBM. “All the big guys have suites of options you can put under the same umbrella, but the issue of integrating them remains difficult,” says Cappelli. “I don’t know that anyone is really good at that.”
Evolv CEO Max Simkoff
Digging Into Dilbert Whereas Knack’s specialty may be in assessing potential new hires, Evolv concentrates on understanding the health and efficiency of an existing workforce. Its tools,
HR Tips from Moneyball In the movie “Moneyball,” the manager of the Oakland A’s, played by Brad Pitt, decides to rely on a geeky subordinate to embrace a computerized statistical-based model for evaluating his players. The manager, Billy Beane, goes up against decades of prevailing baseball wisdom, but wins in the end. Like Beane, many CEOs can glean insights into their employees such as: • New employees learn in different ways. If they are visually oriented, they should have a visually oriented trainer, whereas, if they are more cognitive, they should receive computer-based training. • Geography—think commuting time—often plays a role in employee tenure. Using big data analytical tools, companies can analyze the zip codes where workers live to see which geographies have clusters of successful longterm employees. • Resist recruiting the overqualified. One company operating in Mexico was pleased to discover that it could hire candidates with engineering backgrounds to work at its call centers. But most of the new hires soon bailed because—big surprise—engineers didn’t want to be in a call center talking to people on the telephone.
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• Frequent departmental transfers are a predicator of departure. Moving around internally is often a sign that an employee is at risk and needs intervention. • Understanding the interaction between workers and their supervisors is crucial. New tools can measure whether workers feel empowered or feel that supervisors are too heavy-handed. They can help supervisors understand how to manage different employees with different styles to maximize all their productivity.
TALENT DEVELOPMENT
Evolv’s Nate West (standing) and Greg Davis (seated) reviewing product screens
developed by industrial organization psychologists and data scientists, look at how long it takes a worker to come up the learning curve to do his or her job properly, at productivity once an employee is performing well and at attrition—or why someone quit. It can study the impact of a supervisor’s conduct and whether the pay level was a factor in a decision to leave. It combines that info with external data from different industries and geographies to offer CEOs insights into how to identify, develop and encourage their best workers. Its customers skew toward larger companies, but it says customers with as few as 1,000 employees can benefit from its predictive analytics. In most cases, “we’ve improved productivity by 10 percent, lowered attrition by as much as 35 percent and lifted customer satisfaction scores by 4.9 percent,” says founder Simkoff. “What that means for senior executives is they can optimize and improve their existing workforce to deliver better performance.” As with any technology solution, Simkoff acknowledges that algorithms should never replace human judgment. “Tools like ours are about supporting executives to make better human decisions,” he says. In practice, the way Evolv’s technology works can be glimpsed at The Results Companies, which is based in Fort Lauderdale, Florida and has roughly $120 million in sales. Results helps other companies outsource their business processes and operate call centers or any sales
or service function. Forty percent of its employees are in the U.S., 40 percent in the Philippines and 20 percent in Mexico. “If training and experience and having customer interaction is important to your business, analytical hiring and measurement is suited for any size organization,” says Alec Brecker, Results’ CEO. The company’s software rates prospective hires with a color-coded system in which red means “don’t hire,” yellow means “hire with caution,” and green means “hire.” By concentrating on hiring green candidates, it has increased the tenure of its own employees by more than 20 percent, Brecker says, and it has helped customers increase the tenure of their employees by 5 to 8 percent. One of the most intriguing possibilities is introducing customer-satisfaction data into the mix so that a CEO can know what type of employee is best at making customers happy. “That data is constantly being fed back and reviewed to ask, ‘How do we tweak the hiring profile of people?’” Brecker says. The company’s tools also can increase the total amount of sales per employee and reduce the number of customer complaints that a health insurance provider, for example, faces every day. If safety is a priority in a manufacturing company, The Results Companies can screen applicants in terms of their attitudes toward being careful. The bottom line? CEOs now have tools that can give them unprecedented insight into how to hire the right employees and maximize their performance. NOVEMBER/DECEMBER 2014
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OUTLOOK: OPTIMISM AT LAST
2015 CEO OUTLOOK by Dale Buss
As they head into 2015, U.S.-based CEOs wonder if the economic glass is half-empty or half-full both in the United States and around the world. And for the first time since the Great Recession, their collective expectations for the New Year tip toward steady growth and a smoother path for doing business despite lingering questions about the strength of economic recovery. Not since 2007 have American CEOs held a rosier net view of the near-term future. “I think the glass is half-full,” said Sally Smith, CEO of Buffalo Wild Wings, the fast-growing casual restaurant chain. “But we’ve been through five tough years, and it’s definitely still sitting right at the halfway mark.”
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The biggest potential hiccup CEOs see? “Geopolitical craziness that would shut down entire markets to us if people get nervous,” said Bob Paul, CEO of Compuware. Annually, Chief Executive magazine talks with a handful of CEOs, diversified by size, industry and geography, about their outlooks. This year’s group includes a wide swath of notable consumer and business-to-business companies. We asked them three questions: What is in your crystal ball for your company and your industry for the year ahead? What is your outlook for the U.S. and global economies? And what issue or challenge are you most concerned about? Here are synopses of what they said:
Wooing the Net-Conscious Shopper Kathryn Bufano CEO Bon-Ton Stores
The economy is steadily improving but not as quickly as everyone would like. In the middle of the country, unemployment rates have improved in most markets, and—hopefully— our business will see an uptick in 2015. Also, if you look at how shopping and GDP plummeted last winter because of poor weather, we should see the benefit in the first quarter in terms of relative performance. We’ll benefit from some general lifts. Our home business right now is pretty strong. Gasoline prices have been falling on a relative basis, and that frees up money and helps consumer spending. But the retailing business is evolving; and in the department-store sector, the influence of e-commerce and the Internet is very strong. So we’re initiating an “omni-channel” initiative called “Let us find it,” [so that] when a customer is in our store and wants an item, we’ll find it via Internet from anywhere within our store footprint or e-commerce and get it to her. Plus, everyone is competition now, not just department stores. So, we have to be very aggressive in terms of wooing and holding on to our consumer and making it exciting to shop in our stores. Headquartered in Milwaukee and York, Pennsylvania, the company operates 273 stores in 26 states and had fiscal-2013 revenues of $2.8 billion.
Bullish On Housing Opportunity Eduardo Cosentino CEO Cosentino North America
We’re continuing distribution and sales expansion in North America with a new product, called Dekton, which has more decorating capabilities than our well-known Silestone. We also are adding sales and service centers, with 27 now and estimating that we’ll have 34 open by the end of 2015. We expect to grow around 20 percent in the U.S. in 2015, faster than market growth, so we’ll pick up [market] share. Housing remains full of growth opportunities in most parts of North America. We expect it will grow faster in the coming years, and we [plan to] tap into that both in the remodeling market and in new-home construction. Our first market is the U.S. and our second is Europe. We have suffered in some countries in Europe during the last two
years. But trends were changing markedly in 2014 because the economy is recovering, and we’re growing at a good level in Europe now. With growth, however, one of our biggest issues is finding and developing the right professionals to staff our centers. Turnover of employees will be a challenge in coming years, too. With North American headquarters in Houston, the Almera, Spain-based company makes architectural surfaces and has global revenue of more than $450 million.
Can Middle Americans Afford Retirement? Roger Crandall CEO MassMutual
The insurance industry has been going sideways partly because the industry is missing distribution opportunities. But sales of our core product, whole life insurance, were up 18 percent through the first half of the year because we’ve been investing in distribution, in career agents who are licensed to sell our products. We’ve been far exceeding industry growth rates and will continue to do so in 2015. However, the unfortunate reality is that American consumers aren’t doing all that well. The recovery in real estate and equity markets has benefited wealthy Americans but not Middle America. So, there is general financial unpreparedness by Americans for retirement—less than $25,000 in savings, on average. That’s a little bit scary. We’re starting to see glimmers of recovery in the U.S. economy, and I’m optimistic that, next year, it’ll perform best of the major economies. But the challenge is there’s not enough growth to make a dent in the under-employment problem. And day-to-day headlines are problematic—from the cost of health care to the biggest international uncertainty we’ve seen since the Cold War. I’m optimistic that the U.S. economy will perform best of the major economies, particularly compared with Japan and Western Europe. Headquartered in Springfield, Massachusetts, the company is a leading mutual life insurer, with revenues of $27.6 billion in 2013. Housing-Driven, Credit-Wary Jay Gould CEO American Standard Brands
We’re anticipating growth of about 9 to 10 percent next year, about two times the industry growth rate, so we’ll be getting market share. We’ve got expanded availability of products and
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OUTLOOK: OPTIMISM AT LAST
a broader relationship with [wholesaler] Ferguson, which Getting the Itch to Build provides higher margins than our big-box retailers. Plus, we David Hannah have two innovations that will be hitting the market over the CEO next several months that I can’t talk about right now. Reliance Steel & Aluminum The industry will be mostly driven by continued increases in home prices. That curve seems to have flattened, but the most recent data suggests an 8-percent year-to-year increase [in 2014] in the top 20 metro markets, and that bodes well. Next year will be better than this year. We’re still in catch-up The limiting factor is credit conditions; consumers’ ability to mode because so much of our business is non-residential construction—bridges, poles, water works, energy infrastrucqualify for mortgages is still a real challenge. ture and so on. It’s the laggard in terms of recovery from the We’re looking at 2.5- to 3-percent GDP growth next year 2009 recession. We’re still a good 20 percent off what we think with liftoff as early as mid-year. And we’re not expecting the “normal” should be in this area. weather-related challenges in the first quarter that we had This year, we’ve actually started to see steel mills, our in the 2014 first quarter, which alone would be a four-point suppliers, talking more about big projects, which means that swing in GDP. Embedded in this [projection] is the expectation that the companies are having some confidence in business to invest world political scene will remain unsettled. There could be in major projects out into the future. There have been a few attempts at that kind of recovery before, but they’ve always short-term shocks, but our forecast can’t anticipate that. been sidetracked. Based in Piscataway, New Jersey, the company manufactures bath The U.S. industrial economy has been recovering since and kitchen products and had 2013 revenues of $1.1 billion. 2010 but plodding along at a very slow pace. If we can get some more bright spots like the auto industry, the economy should Demand for improve next year over this year. Transformative IT My one concern is some crazy event that causes uncertainty. David Goulden It could be related to what’s going on in the Middle East or CEO something [that] happens here at home or our politicians create EMC Information Infrastructure some mess that creates uncertainty going forward. Headquartered in Los Angeles, the company is the nation’s The way businesses and consumers use information tech- largest metal-service-center operator and had 2013 revenues of nology is undergoing a once-in-a-generation transformation. $9.2 billion. Companies and governments have huge investments in existing technologies. But they also need to adopt newer technologies to Stores Need Stuff to Sell stay relevant in this new era. So, they look to partner with techA.J. Khubani nology providers who can help them run existing technologies CEO more efficiently in order to free-up resources to invest in newer TeleBrands [solutions] to become more competitive. Within the IT industry globally, enterprise spending on IT has lagged worldwide GDP growth for the last couple [of] years. This may be a first for a non-recessionary economic environment We’re looking very strong for 2015 because of our product in my 30-plus-year career in technology. What makes me hopeful lineup, which includes the Pocket Hose and the SpinMop. We that this will change is the pace of new technologies that are also have a bunch of new products launching in December 2014 coming to market and enjoying rapid adoption by early movers, that will be a kickoff, including a software cleanup product who set the direction that others eventually follow. called WinCleaner. The entire category of direct-response I’m most concerned about geopolitical stability at the global merchandise will do well, but I think we’ll pick up share. Most level and political paralysis in Washington. The biggest drag on of our merchandise is sold in brick-and-mortar stores, and corporate capital investment is uncertainty about the future. retailers are looking for stronger products. We live in a world and an era that yearns for calm, pragmatic Also, the economy seems to be improving, just using the leadership to inspire confidence and investment in the future. stock market as a predictor. I don’t expect major progressions Headquartered in Hopkinton, Massachusetts, the company provides or sudden jumps in the economy but rather to continue on the data storage, security and other IT services and is the largest part of slow-growth path we’ve been on, which is probably healthier. EMC, which had 2013 revenues of $23.2 billion. We sell to 100 countries around the world, too; and when the
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U.S. does well, it means the rest of the world does well. My biggest concern is that TV viewership continues to decrease every year. But it’s mostly young people dropping off, and our biggest market is 40-year-olds and up. Headquartered in Fairfield, New Jersey, the nation’s largest direct-response TV seller of consumer goods had 2013 revenues of more than $1 billion.
Glistening Gullets Kevin Klock CEO Talking Rain
We’re really bullish on our growth. Usually, with a brand of this size, by now you’ve saturated the category. However, there’s so much category opportunity remaining for us, including convenience stores, which now are only 6 percent of our retail sales—but should be significantly higher. And we’ve gone against competitive threats and we’re winning. We’ll continue to see a steady decline in consumption of carbonated soft drinks. But more interesting is how high can the energy-drink category go? For a long time, consumers drank soft drinks for two purposes: as a pick-me-up and as refreshment. Energy drinks are capturing those looking for alternatives for a pick-me-up, and we’re capturing those looking for refreshment. We also see a great opportunity to go global. There’s a tremendous amount of money but not a lot of places for companies to put their cash. Yet, my concern will always be the consolidation of distribution in our industry. You look out there and see that it’s getting more and more consolidated; you’ve got Monster Energy now, for instance, moving into the Coca-Cola system. That further reduces the opportunity for small companies to expand their availability. Headquartered in Preston, Washington, the company is best known for selling its Sparkling Ice beverages and had 2013 revenues of more than $400 million.
“Consumers are coming off of a couple of years of frugality fatigue. They’re just tired of saving and holding back.”
U.S. economy in general, unemployment is down, real wages are going up, consumer-credit availability is good and the mortgage-default rate is plummeting. So, a lot of the headwinds are behind us. Consumers are coming off a couple of years of frugality fatigue. They’re just kind of tired of saving and holding back. You can look at the glass as half-empty or half-full, but a lot of people saw the worst economy in their lives and now people are cautiously getting back into the water. In Western Europe, it’s evolving nicely but remains a couple of years behind the U.S. We are happy with our progress in Asia. And there are other areas of the world that are healthy, such as many Latin American countries. Headquartered in Boca Raton, Florida, the company sells consumer brands ranging from Nuk pacifiers to Holmes air purifiers had 2013 revenues of $7.4 billion.
Hiring Leads the Way Harley Lippman CEO Genesis10
We’ve just had close to the best two months we’ve had in almost three years, and we have a lot of growth in all of our core clients—which is a good sign. To a certain degree, our industry is a bellwether for the overall economy, and they’re hiring a lot of our people. What’s happening with the economy is complicated. Full-time jobs have declined significantly; what’s increased is part-time jobs. One reason for this [phenomenon] is that employers have cut workers below the threshold for coverage under the Affordable Care Act. Consumers Feeling That’s very disturbing. President Obama has ignored the Tailwinds Jim Lillie real issue here. It’s not sustainable. And the longer people CEO are out of full-time work, the harder it is for them to get back Jarden into work. That can only be debilitating for our economy in the mid- and long-term. Worldwide, we have somewhat of a recovery, but it’s We see three- to five-percent organic growth for Jarden complex. Europe is stagnating and some of that is due to next year and expansion of our margins. We expect capital China’s grabbing some of its growth. And we have greater expenditures to be two to three percent of revenue. challenges than in a long time—especially in the Middle Because of the seasonal nature of many of our prod- East—with ISIS and the Iran nuclear threat. ucts, we tend to have a four- to six-month visibility curve The New York-based company specializes in IT consulting on their future. And I’m not pessimistic. If you look at the and staffing and had 2013 revenues of about $200 million.
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War for Talent Rages Again Susan Marks CEO Cielo
We’re seeing 25-percent growth this year for our company and I think we can continue to keep up that compounded annual growth rate next year. We have a really strong team and business model and provide a lot of value to our customers. It’s the right strategy and the right execution. I’m extremely bullish about the domestic economy, too, and generally globally. Certainly, in many markets, the war for talent is back—if it was ever gone. Companies are starting again to really find that they’ve got to work harder in that area than ever. There are horrible pockets of the U.S. economy; but generally, the unemployment rate for people with college degrees is only about 3 percent. I’m more cautious about some of our foreign markets. Europe has been slower than the U.S. but is starting to recover somewhat, and we grew even through the worst of the European recession. One challenge for our industry is that as the economy improves, some customers are deciding, “We’ll build this function internally.” But we also like to urge people to pay attention to their own internal-development programs and help them. Smart companies do that. Based in Milwaukee, the company—most recently known as Pinstripe—is a “talent solutions” provider and had 2013 revenues of more than $100 million. Autos Keep On Chugging James O’Sullivan President and CEO Mazda North American Operations
We see a slight increase next year on the retail side because the car “park” in the U.S. continues to age significantly. Cars are lasting a lot longer, but there are pressures to replace them. Financing is readily available. Also helping growth is strong sales of small crossovers, which is getting a lot of outflow from sedans. On top of industry volume, we’re also seeing our average transaction prices go up. Customers come in and want a lot of content, which is good news. The mix keeps improving. Fuel prices are still top-of-mind with consumers, but the best news for the U.S. economy is what we’ve been able to do with oil production domestically and how it affects energy strategy. That helps dramatically. Of course, we’re still trying to push the envelope on fuel economy to meet CAFE standards. [Certainly], there are headwinds, especially challenges in Europe. There’s also a big worry bead on what’s happening in China, which is a big driver of the overall global economy.
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The company is headquartered in Irvine, California, and is the U.S. arm of Mazda, a Japanese automaker with revenues of more than $26 billion in 2013. Unlocking Capital for Growth Bob Paul CEO Compuware
We are splitting off the slow-growing mainframe-services part of our business and going private through acquisition by an equity company for $2.5 billion. We’re now the market leader in applications-performance management, one of the hottest IT categories out there. Due to the level of focus on going private and the work we’ve done on innovation for future growth, I’d be very disappointed if all we did is clear the 20-percent-sales-growth milestone next year. I think it’ll be steady-as-she-goes for the economy. Mid- to low-single-digit growth is our expectation for next year. It’s all about how capital is used. It is available for organizations to invest and grow, and what is the rate of innovation that drives new opportunities and value for business? What concerns me is [that] expectations around shareholders of public companies are changing, whereby investors want more short-term use of capital—meaning, are you going to provide a dividend or be doing share repurchasing to artificially prop up the share price? In our case, it’s been more than $100 million a year in dividends. That’s capital that isn’t being put to use for innovation. Based in Detroit, this IT provider focuses on helping companies optimize applications and had fiscal-2014 revenues of $721 million.
Beware of Undertow Issues Sally Smith CEO Buffalo Wild Wings
We have a very robust three-year strategy, as well as for the longer term. We’ll continue to open about 90 to 100 new restaurants a year from 2014 through next year, and we’ve invested in some new fast-casual, small brands: PizzaRev and Rusty Taco, which are great concepts. Fast-casual, in general, will continue to grow and do so against traditional casual-dining restaurants. One concern is growing government policies and regulations coming at a greater pace, especially the Affordable Care Act. It’s a challenge because more than 40 percent of our employees are under age 21 and aren’t even looking for health-care coverage. But we’ve always provided health care and we’ll figure out a way to do it. The minimum-wage issue is big, too. If that brought additional pressures on our wages, we would look for different ways to automate. We’d probably hire more experienced people and I’m
afraid [that possibility might] price high-school students out of jobs. The economy will remain at about its current pace—not robust growth in 2015. Consumer demand is coming back, but every economic report seems to send a mixed message. The Minneapolis-based company operates 1,030 casual-dining restaurants and had fiscal-2014 revenues of $1.3 billion.
CEOs Need Transformation Help John Veihmeyer Global Chairman KPMG
We’re really optimistic and confident about at least the next year and beyond in our business. We’re seeing stronger growth in our non-audit businesses, tax and advisory; we’ve been investing heavily and taking market share, and the market-
place is healthy. The audit business is more of a GDP-growth type of business. Almost [all CEOs indicate] that they’re in the midst of, or soon will be embarking on, a transformation. We have the broad expertise and skills to help them do that—to deal with regulatory matters and disruptive technologies—and to outperform their competitors. But we’re in a talent business, and competing for it will always be a primary issue. Also, we need to make sure we’re putting new technologies into our service, as well as helping clients adjust. The U.S. economy is well positioned for moderate but steady growth. There’s an upside if D.C. can settle some things like immigration reform, trade agreements and tax reform. Globally, it’s a very mixed picture. Europe will be in very slight recovery, but there are still some risks on that front. And in China, there’s significant growth, but it’s slowing. Headquartered in New York, the global audit, tax and advisory firm reported fiscal-2013 revenues of $23.4 billion.
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ECONOMIC DEVELOPMENT
T R O P E R L A N O
REGI T
T S E W HE MID
A state-by-state look at what the Midwest has to offer. By Warren Strugatch In the late ’70s, William C. Kennedy Sr. was working mentor younger executives on their own time, reflecting as a registered pharmacist in Salem, Ohio, selling such the neighborly spirit that characterizes the Midwestern products as compounded lotions to individuals and farmers. business style. Among his bigger sellers was a moisturizer that reduced In Indianapolis, Hoosier Gasket Corporation got cow udder inflammation; sales peaked during the cold its foothold overseas when a major customer, Chrysler, Midwestern winters. When he observed that the compound signed a contract with a Russian tractor manufacturer. “We also moisturized human dry patches, he got an SBA loan and piggybacked on the deal,” said Hoosier Gasket’s international began commercializing the mixture for humans under the vice president Oleg Gostomelsky. With the support of Jeff name—amber pun alert—Udderly Smooth. Jackson, president and CEO, Gostomelsky continues to pay it Using packaging that comically featured bovine hide forward by promoting Indiana’s expanding network of exportpatterns, Kennedy pitched the moisturizer to regional retailers. training programs. He regularly teaches seminars himself to Sales went national when a fledgling account—the big Phar- a new generation of exporters. Mor drugstore chain, headquartered nearby—began stocking The advantages of internationalism expand revenues while the mixture chain-wide. A guest on Oprah Winfrey’s TV show helping offset seasonally dependent sales. “In the U.S., we’re touted the lotion on air; sales skyrocketed. predominantly a skin moisturizer for the dry winter months,” Kennedy envisioned a global market. Learning export says Kennedy. “In the UK our products are used as a chamois basics from seminars at the International Trade Assistance cream for athletes year round.” Center at Youngstown State University, Kennedy and his team Kennedy’s international orientation, it turns out, is a attended trade missions and reached out to distributors on hallmark of Northeast Ohio—and emblematic of the entire three continents. Today, Kennedy’s company sells Udderly Midwest. According to the Brookings Institution, the Smooth in twelve countries, while continuing to bolster Youngstown metropolitan area paced U.S. export domestic growth. growth between 2009 and 2012. During that period, the value Neighborly help from area businesses, government of regional exports shot up 22 percent, totaling $4.7 billion. agencies and nonprofit institutes helps many Midwestern The rising tide of greater-Youngstown exports—led by companies land their first overseas customers. Experienced metal products, vehicles and agricultural commodities— globalists from locally headquartered multinationals often helped area businesses weather the recession. Now, it
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How The States Stack Up Rank GDP Per Top Corporate Best/Worst GDP Right to States 2014 Rank 2013 Capita 2013 ($) Tax Rate (%) Work State
Quality of HQ State Service Incentives
Education Jobs Workforce Quality (K-12)/ Green Incentives Quality Incentives Post-Secondary
Indiana
6
16
44,775
7.5 flat rate
Yes
B+
B
A-
B+
B
B/B
North Dakota
12
47
68,803
4.53
Yes
B+
C
B-
B
C
B+ / B
Wisconsin
14
20
45,993
7.9 flat rate
Yes
B
B-
B
B
B
B/B
South Dakota
15
48
48,696
0
Yes
A-
C
B-
A-
B-
A/B
Iowa
19
30
48,703
12
Yes
B+
B
B
B+
B+
B+ / B+
Nebraska
21
36
52,582
7.81
Yes
B
B-
B-
B+
B-
B+ / B
Missouri
22
22
42,708
6.25
No
B-
C
B-
B
B-
B/B
Kansas
26
31
45,665
7
Yes
B+
B
B
B-
B+
B+ / B-
Ohio
27
73
45,576
n/a*
Yes
B
B
B
B+
B
B+ / A-
Minnesota
34
17
53,340
9.8
Yes
C-
B-
C
B
B-
B+ / A-
Michigan
45
13
41,252
6
Yes
B-
B
B+
B+
B-
B- / B
Illinois
48
5
52,119
9.5
Yes
C
C
C+
C+
D+
C/A
* Ohio does not have a corporate income tax, but uses a gross receipt tax Sources: Bureau of Economic Analysis; Tax Foundation; Census Bureau; Interviews with site selectors Larry Gigerich, Darin Buelow and Tracey Hyatt Bosman; National Right to Work Legal Defense Foundation; The New York Times Government Incentive Database; U.S. Department of Energy; StatsAmerica.org
drives economic recovery. Benefits of exporting accrue to business- and consumer-product manufacturers alike. In a report issued last winter, HSBC Bank found globally focused consumer goods companies were “twice as profitable as their domestically oriented peers.” As a case in point: Benton Harbor, Michigan-based Whirlpool, is the white-goods giant whose $18 billion annual revenue stream splits half domestic, half international. Increasingly, the manufacturer who concentrates solely on domestic markets is a rare bird. “One of the reasons our manufacturers are doing so well is that exports have been so strong these past five years,” says Mike Ralston, president of the Iowa Association of Business and Industry. “Exporting’s profile has been raised. Just about every company, regardless of size, is exporting now.” Expect that trend to continue.
Indiana (No. 6): Inventing Incentives Hammered during the Great Recession, Indiana’s sluggish recovery is edging back to 2007 employment levels. Bright spots include recreational vehicle manufacturing, growing at the rate of 7.5 percent annually and a vibrant life sciences sector. There’s “effective economic development at the state level,” says Darin Buelow, a principal with Deloitte’s Real Estate & Location Strategy services in Chicago. “They are winning major projects and then some,” including Nestlé’s large production plant in Anderson. The Tax Foundation ranks Indiana 22nd highest out of 50 states
in tax burden, and 10th in business tax climate. The Hoosier State spends over $921 million a year on incentive programs, according to The New York Times state subsidy database.
North Dakota (No. 12): Going for the Gas Thanks to oil and gas, North Dakota’s economic output has more than doubled since 2002, approaching $50 billion a year in 2013. Gross domestic product rose 5.4 percent over the previous year. Other growth industries include real estate, agriculture and mining. In July, unemployment sunk to 2.8 percent in America’s tightest labor market. Says Deloitte’s Buelow: “The overriding challenge today is the labor shortage.” The Tax Foundation ranks North Dakota 35th out of 50 states for tax burden and ranked its business tax climate 28th. The state’s “been very proactive in [readjusting] its tool kit in terms of incentives,” says Tracey Hyatt Bosman, managing director at Biggins Lacy Shapiro & Company, a commercial real estate firm in Chicago. North Dakota spends over $32.9 million a year on corporate incentives, according to The New York Times subsidy database.
Wisconsin (No. 14): Steadily Adding Jobs Wisconsin’s economy continues to inch forward; job recovery proceeds at a 1.5 percent pace. Trade, transportation and utilities, the Badger State’s major cluster, contracted in 2013 before rebounding early this year. Healthcare expansion is
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ECONOMIC DEVELOPMENT slow but steady. Professional and business services are bright spots, although growth is measured mainly in temporary jobs. Gov. Scott Walker beat back a recall effort led by labor opponents of his right-to-work initiatives, pleasing many in the business community. Larry Gigerich, managing director of the Ginovus site selection firm in Indianapolis, lauds the state for “tremendous improvement” in business climate, citing recent financial reform and tax cutbacks, which aligned corporate tax procedures and depreciation rules with federal law. The Tax Foundation ranks Wisconsin 5th highest out of 50 states in tax burden, and 43rd in business tax climate. Wisconsin spends over $1.53 billion a year on incentive programs, according to The New York Times state subsidy database.
South Dakota (No. 15): A Need for Speed South Dakota’s economic recovery has been “surprisingly slow,” according to JPMorgan Chase’s Economic Outlook, exacerbating the discrepancies between the Mount Rushmore
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State and its booming shared-name neighbor to the north. Finance and insurance comprise South Dakota’s biggest cluster, followed by agriculture; government services account for nearly 12 percent of GDP. Ginovus’s Gigerich calls their education system “very good; as a result, their work force is very prepared. They have an excellent work ethic.” The Tax Foundation ranks South Dakota’s tax burden 3rd lowest out of 50 states and ranks its business tax climate second. The state spends over $27.8 million per year on incentive programs, according to the subsidy database of The New York Times.
Iowa (No. 19): A Turbulent Recovery Trail Iowa’s post-recession recovery continues in fits and starts; JPMorgan Chase forecasts acceleration in Q4 2014 through at least 2015. Finance and Insurance tops the cluster chart, followed by Government and Manufacturing. Iowa’s “outsized exposure to agriculture is a benefit” declares JPMorgan. Job growth trails the national rate, but the state’s 4 percent unemployment rate beats the national average handily.
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ECONOMIC DEVELOPMENT
St. Louis: Fighting Ferguson Turmoil The August 9 shooting of Michael Brown, age 18 and community; the operation would create about 200 jobs. As unarmed, by police officer Darren Wilson cast Ferguson, Centene’s chairman and CEO Michael Neidorff said: “This Missouri into the international spotlight. Brown’s death is the right thing to do for the community, state and our sparked weeks of protests, violence and looting in the St. shareholders. It is time for action, not talk.” Louis community, generating heated and wide-ranging Most employers affected by the turmoil were of course discussion of racial inequality and economic opportunity in no position to announce initiatives. “The impact has been across the Midwest and beyond. mostly on small businesses, and it’s been devastating,” says As scenes of protest and looting played out in the media, Steve Johnson, executive vice president of the St. Louis local and state economic development officials and business Regional Chamber. leaders sought to convey that they were addressing the When Chamber staff canvassed Ferguson businesses issues without acrimony, spurring the healing, and helping offering assistance, the big demand was for plywood, to the region move forward. “The Ferguson news has come barricade doors and windows. “Some small businesses up with executives—less from the perspective of impacting were out of business for a few weeks,” Johnson says. “They their view on St. Louis and Missouri as a place to do live day to day.” business, but more from the perspective of community and The Chamber and other business organizations neighborhood development,” says Robert Hess, executive contributed to a pair of emergency small-business managing director in charge of global corporate services relief programs that funneled over $1 million to struggling with Newmark Grubb Knight Frank in Chicago. Boardroom employers. Rebecca Zoll, head of Ferguson-based North discussion has been about “how violence/crime may impact County economic development agency, spent 14-hour inner city or suburban location decisions,” he notes. days on West Flourissant Avenue, intent on meeting Centene Corporation, a managed-care behemoth located “literally every business person along the Corridor.” Her eight miles south of Ferguson, announced plans in late message to business owners: “You are not alone and you August to open a claims center in the heart of the troubled have hope. The broader community is here to help you.”
Consequently, “Everybody in this state is looking for workers,” says Iowa business association leader Ralston. The Tax Foundation ranks Iowa 28th out of 50 states for tax burden, and 40th in business-tax climate. Iowa spends over $223 million a year on incentive programs, according to The New York Times state subsidy database.
Nebraska (No. 21): Seeking Service Expansion Nebraska has lagged national GDP growth since 2012. Softening in the agricultural sector carries over into manufacturing, much of which is farm-related. The Nebraska Business Forecast Council expects service-sector expansion to drive moderate (1.5 percent) economic growth in 2015. With unemployment standing at 3.6 percent in July, Nebraska ranked second-lowest in the country behind North Dakota. Government remains the major Cornhusker State employer, followed by finance and insurance and agriculture; other major clusters include biotechnology, transportation and logistics and software and technology. Despite growing calls for tax reform, Governor Dave Heineman’s attempt at overhaul campaign sputtered out last year, defused by opposition from business leaders, who didn’t see the numbers working. The
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Tax Foundation ranks Nebraska’s tax burden 25th highest out of 50 states and ranks its business tax climate 34th. Nebraska spends over $1.39 billion a year on incentive programs, according to The New York Times subsidy database.
Missouri (No. 22): Weak Job Recovery Missouri weathered the Great Recession pretty well but lags the Midwest in post-recession recovery. “Missouri has experienced one of the weakest jobs recoveries compared with its neighbors and the overall economy,” wrote ShowMe Institute analysts R.W. Hafer and Michael Rathbone in a June report. Civil unrest in St. Louis over the summer revealed structural, economic inequalities and displayed the vulnerability of business owners to unexpected upheaval. Following a divisive political battle, a tax cut was passed that will slice a mere half a percentage point off income tax rates over five years; more immediately, S corporations and LLCs will benefit from deductions. The Tax Foundation ranked Missouri’s tax burden 32nd out of 50 states, and ranked its business tax climate 16th. Missouri spends over $96.5 million a year in incentives, according to The New York Times subsidy database.
Kansas (No. 26): Aviation Booming who worries that sluggish population growth and Millennial Kansas ranked 11th among the 50 states in economic outlook by Generation resistance to manufacturing careers will ALEC, the American Legislative-Exchange Council, reflecting eventually deter growth. Governor Sam Brownback’s billion-dollar tax rollbacks and Tax reform “has made the state very competitive,” says adherence to the federal minimum-wage baseline. Less site selector Gigerich. Ohio ranks third in the nation in convinced, the Center on Budget and Policy Priorities forecasts terms of pro-business tax environment, according to the the Sunflower State will soon lag the nation’s economic growth Tax Foundation. A joint Ernst & Young and Council on State rate for the first time in 20 years. Economic strengths include Taxation ranked Ohio third in tax burden. Incentive offerings the aviation cluster in Wichita, claiming 30 percent of global “are not as large as they used to be,” says consultant Bosman. aviation activity and a burgeoning veterinary technology Ohio spends over $3.24 billion a year on incentive programs, corridor in the northeast. “I like the business dynamics in according to The New York Times subsidy database. Kansas,” says site selector Bosman. “There’s a lot going on.” The Tax Foundation ranks Kansas 25th out of 50 states in tax Minnesota (No. 34): Taking on Taxes burden and 20th in business tax climate. Kansas spends over Minnesota outpaces most of the nation in economic growth. The $1 billion a year on incentive programs, according to The New Gopher State ranked 66.4 on Creighton University’s Business Conditions Index in July, tops in the Midwest, and more than 10 York Times state subsidy database. points above its 2013 rating. State economic data show growth Ohio (No. 27): Needs a Population Pickup across nearly all industries, led by Construction and Health Ohio has been adding jobs at the fastest rate in the Midwest. Care gains; medical-device manufacturing continues to expand Unemployment, which fell to 5.7 percent in July, was lowest its footprint. Minnesota business owners are optimistic; this in Ohio since October 2005. Manufacturing is on the rise, spring, 52 percent of Minnesota business-service firms expect centered on the Dayton area and its export-fueled economy. revenues to rise over the next 12 months, up from 46 percent last According to Deloitte’s Buelow, the Buckeye State’s upsides year, according to a Federal Reserve Bank/Minneapolis study. include JobsOhio, “a very good, very well-funded program” Governor Mark Dayton signed a wide-ranging, tax-reform that’s “putting the pieces in place to address retention needs.” bill into law this spring that repealed much-reviled sales taxes One downside is labor supply; the state “needs population on warehousing and storage services, electronic equipment growth” in cities like Cleveland, says economist Bill LaFayette, repair and maintenance and telecommunications equipment,
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CEO PERSPECTIVES:
WHY WE’RE HERE Who: Jeff Jackson, President and CEO, Hoosier Gasket Corporation Sealing Systems and Solutions, Indianapolis, Indiana Site History: Founded in 1962 as gasket die-cutting shop in 12,000-square-foot facility in southeast Indianapolis; doubled its footprint in relocation the following year. Expanded again in 1979, adding 5,000 square feet to accommodate new screen-printing technology. In 1991, moved into 51,000-square-foot plant on the city’s east side. Continuing to add manufacturing processes, including edge bonding and rubber injection molding, the company again expanded in 2007 into its current building, a new, 130,000-square-foot corporate office facility and manufacturing plant in Keystone Industrial Park. Why Indiana?: “The company was formed by three investors, including my father. And my father was born in Indiana.” Reason for Location: “In 2006, we outgrew our facility and were being entertained by South Carolina, where we vacationed, to relocate. They offered tax relief and incentives. At that time, the city of Indianapolis stepped up and offered us abatements and interim tax relief. We decided to build in Indianapolis.”
Who: Joseph Cecere, President and Chief Creative Officer, Little Graphic Design Graphic Design, Minneapolis, Minnesota Site History: Founded in Minneapolis warehouse district in 1979, subleasing about 1,000 square feet. Relocated crosstown the following year, tripling their space. Subsequently moved downtown, taking about 8,000 square feet. In 1999, expanded again into 12,000-square-foot office space. In 2005, moved into current office location, about 18,000 square feet. Why Minnesota?: Founder “Monica Little, who was then a recent Minneapolis College of Art & Design grad, saw the local advertising industry expanding, but there wasn’t much in the way of design services.” Reason for Location: “Minneapolis is a hotbed of creativity. We have Fortune 100 clients down the block. We have longstanding relationships with local companies like Target and Wells Fargo and new clients, such as Minnesota Life, Ecolab and Timberwolf.”
Who: Charles Sukup, President, Sukup Manufacturing Co. Producer of Grain Drying and Handline Equipment, Sheffield, Iowa Site History: Founded in 1963 in a welding shop in Sheffield; then, expanded into a new facility nearby. Last year, they opened two additional facilities in Sheffield: a 45,000-square-foot office building and a 100,000-squarefoot material-handling center. Why Iowa?: “[The] major advantage of being in Iowa is we have a very well-managed state and a governor who is cognizant of what it takes for a company to be successful and grow.” Reason for Location: “We are in beautiful agricultural country, close to our market and close to our biggest competitors. We’re a third-generation family business that’s bloomed where we have been planted.”
Who: Michael Krasman, CEO, UrbanBound Software Development, Chicago, Illinois Site History: Founded in 2011, UrbanBound shares about 9,000 square feet in Chicago’s River North neighborhood with Hireology, a sister company. Why Illinois?: “There is a huge advantage to being an entrepreneur in the Midwest. In the last 10 years, both the state and the city have really focused on building a technology community here through public-private partnerships, grants and the Invest Illinois Venture Fund. And since my business partner Jeff Ellman and I both grew up in Detroit, we’re not far from home.” Reason for Location: “Chicago is a world-class city and River North is a happening neighborhood, drawing entrepreneurs, technology people and creatives. There’s a buzz to this neighborhood, a constant energy. I love it.”
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as well as lowering income taxes and estate and gift taxes. Minnesota spends over $239 million per year on incentive programs, according to The New York Times database.
Michigan (No.45): Reinvesting in Detroit Michigan holds the dubious distinction of being the nation’s worst-performing state (ALEC’s 2014 Rich States, Poor States report), while bringing up the rear in economic outlook, by trailing only Vermont (No. 49) and New York (No. 50). Recent metrics suggest better days ahead: Michigan led the Midwest in GDP growth (2.7 percent versus the nation’s .4 percent hiccup) between July 2013 and July 2014, says the Fed’s Chicago branch. University of Michigan Ann Arbor economic forecaster George Fulton predicts job growth over the next two years in trade, transportation and utilities; professional and business services; and construction. In Detroit, the city’s filing for municipal bankruptcy has prompted business leaders to begin reinvesting, reversing decades of decline. Statewide, the elimination of Michigan’s business tax in favor of a corporate income tax, easier access to venture capital and growth of the R&D sector have given cheer. The Tax Foundation ranked Michigan 21st highest out of 50 states in state and local tax burden and 14th in business tax climate. Recent upgrades to incentive programs are paying off, says site selector Gigerich. Michigan spends over $6.65 billion a year on incentive programs, according to The New York Times state subsidy database.
Illinois (No. 48): Ill-Annoy Illinois faces—or perhaps avoids facing—three serious structural problems: a yawning $45 billion budget deficit, escalating health care costs and persistent high unemployment. Illinois could be “the California of the Midwest—without the technology or the sunshine,” says Gigerich drily, referring to the state’s highly regulated business climate, abundant nuisance fees and deferred-maintenance infrastructure. Real GDP growth has lagged the U.S. recovery rate since 2010. An Allied Van Lines survey ranked Illinois tops in the nation for out migration; border-hopping business owners blame the “Ill-annoy factor” as they cross state lines into Indiana and Wisconsin. State bright spots include energy sector expansion and slowing bankruptcy and foreclosure rates. Manufacturing continues to rebound, albeit slowly, according to the Chicago Federal survey; JPMorgan Chase predicts continuing recovery through at least 2015. Chicago remains the business capital of the Midwest, controlling 77 percent of the state’s economy. Yet, Chicagoland’s economic metrics have trailed national rates since the late ’90s. Insiders worry that pension and unfunded liabilities reduce municipal finances to a house of cards. The Tax Foundation ranks Illinois 13th highest out of 50 states in terms of tax burden and 31st in businesstax climate. Connections play outsized roles in getting government assistance; politics “gets further involved than it should,” says BLS’ Bosman.
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CEO PASSIONS
Michael Fux with his Bugatti Veyron
Crazy About Cars
In the first of a new regular column on CEOs with a penchant for collecting everything from fine art to swords and bone china, Chief Executive introduces Michael Fux, owner of 135 automobiles. by George Nicholas Michael Fux was five when he first drove a car, turning the wheel as he sat on the lap of his grandfather who worked the pedals. “At that moment I fell in love with cars,” he says. The CEO of high-end mattress maker Comfort Revolution says his favorite cars are his Ferraris. He owns 21 of them and visits the factory, which he calls “a Mecca for people who love Ferraris,” at least once a year. “But I’m an equal opportunity guy, so I like McLarens, Porsches, Astons, Rolls-Royces and Lamborghinis. I love BMW, MercedesBenz and I also like great American cars.” His everyday car is a Mercedes S65. Asked how many cars he owns, Fux (rhymes with Dukes) answers, “Maybe 135 to 150. I’m not sure,” because he’s always buying or selling a car. When Rolls Royce customizes a color for him it agrees to use Fux in the name and not sell that color to anyone else. Fux also collects motorcycles, mostly HarleyDavidsons. He lives in Miami and houses his collection in temperature-controlled garages in Florida and New Jersey. He sends as many as eight truckloads of cars to charities’ outdoor fund-raising events. An active philanthropist, Fux arrived in America from Cuba with his family when he was 15, and lived in a one-
bedroom apartment in a seven-floor walk-up with Salvation Army furniture. He opened a makeshift tire and battery business within a year. His next venture was as a manufacturer of zippered blankets that had $72 million in sales its first year but went into bankruptcy two years later. A maker of foam mattresses for hospitals hired him to expand its products into the consumer market. Sales reached almost $80 million by the second year but “when the company was sold and the product cheapened I decided I didn’t want to stay,” explains Fux, who invested $3,000 to start another mattress company and sold it when its sales were approaching $300 million. After sitting out his five-year non-compete agreement, he founded his present company in 2009, selling a minority interest to Sealy in 2012. He now manufactures for Sealy, which is selling his company’s products to international markets. Always busy, he still makes time for cars. In fact, he recently bought four during one week in August, all in custom colors. They included a BMW i8 hybrid, “which totally surprised me because it rides as well as any sports car and gets 76 miles to the gallon,” says Fux. See images of the car collection on p. 66
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CEO PASSIONS
1941 Lincoln Continental
Fux with part of his Ferrari collection
1953 Buick Skylark
Silver car: A BMX Z8, the first car in Fux’s collection; Red cars: Two Mercedes Benz SLRs
Interior of a Rolls Royce Drophead
Rolls Royce Drophead Convertible
Fux demonstrates a butterfly door on one of his McLarens
1941 Lincoln Continental Convertible, formerly owned by Rita Hayworth
Fux on his custom-made 146 HP Harley Davidson
Michael Fux with some of his cars in an air-conditioned New Jersey garage that had been a family gym. Photos: Hector Diaz
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One of Fux’s 21 Ferraris
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EXECUTIVE LIFE
The Bonus Round Non-cash rewards and more frequent recognition are attractive alternatives to the traditional, year-end practice of handing out cash bonuses, giving CEOs a new way to say “thank you” and reward top talent. By Michael Gelfand As yet another calendar year races toward its inexorable end, many C-suite executives will soon be confronted with the recurring conundrum of how best to divide up the budget allotted for rewarding employees with year-end bonuses. But before you start slicing up that bonus pie, maybe it’s time to consider whether cash bonuses are the best way to reward your employees for all of the hard work they have done throughout the year. There’s no arguing that cash bonuses aren’t here to stay, but there are a number of reasons why CEOs may want to revisit how—and how often—they reward employees. For starters, while most employees do look forward to receiving an annual bonus, that single payment comes after a full year of work, meaning that there can be a significant disconnect between 68 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
the reward and when the hard work occurred. Even when the employee’s performance has been consistently exemplary, the correlation between the behavior that generated the reward and the timing of the one-off reward itself may not resonate the way you hope. In fact, 51 percent of workers say that increasing the frequency of rewards is the best way their company could improve its incentive plans, according to a recent survey by Staples Advantage. What’s more, there’s a massive cultural change afoot in the workplace. Baby Boomers are rapidly reaching retirement age, leaving Millennials poised to dominate the work force. One issue this transition brings to light is that while older workers still think of rewards on an annual basis, their iGeneration counterparts largely believe that rewards and recognition are de rigueur
and should be bestowed on them in the moment, in context and with sincerity. This different view demands that leaders consider new approaches to incentive programs.
Bonus policies are evolving around a new workforce’s perspective “Money doesn’t matter as much as it did two generations ago,” says Lynn Carter, who recently retired as president of Capital One Bank, a division of Capital One Financial Corporation. “It should be interesting to watch as industries evolve around this change and align what they do to speak to this new generation.” Younger workers tend to be more lifestyle-oriented than previous generations, more concerned with work-life balance than sheer income potential. Companies will increasingly face the challenge of responding to that new perspective, predicts Carter, who also notes that employers in today’s economy may not have the resources to delight employees through financial rewards. “[Companies] have to be sensitive and ask them what they want, because this generation’s workforce probably won’t have the kinds of opportunities that my generation had in terms of earning potential,” she says. “Instead of just handing someone a pile of money at the end of the year, that may mean giving them entrepreneurial capability, or enabling them to be more creative in the workplace. To some people, a bonus may mean less structure than older generations wanted or enjoyed. Companies will have to respond in new ways.” Non-cash incentives—ranging from career-enhancing carrots and social recognition of performance achievements to deeply personalized and distinctive rewards of significant value—may actually send a more powerful message of appreciation to your employees, and can help generate an equally genuine response in return. But how you decide to say thanks should be unique to your company and its strategy, says Patrick Quirk, CEO of Achievers, a leading employee success platform and SaaS provider based in San Francisco. “Each of our clients’ approaches is different, as they should be.” “Companies like Deloitte spend a good amount on reward programs that give their employees opportunities to use Expedia to take big trips,” says Quirk. “CVS, on the other hand, which is focused on pharmacies and retail shops, isn’t going
Financial Incentives
to necessarily spend as much as a consulting firm, but they reward their employees with Apple products, such as iTunes cards, iPads and iPhones.” In some cases, companies offer star employees paid time outside of the office spent to give back to their communities by pursuing philanthropic work. “For some of our clients, we tie their social recognition rewards toward corporate responsibility opportunities,” explains Quirk. “And in other cases we have concierge services for personalized goals that employees either choose for themselves or have chosen for them by someone who knows them well.” For instance, someone may want to apply their reward toward giving someone else a puppy, or sending their grandparents on an Alaskan cruise, he says. “Someone once redeemed for a diamond ring for his fiancée,” says Quirk. “Another person redeemed their rewards for solar panels for their house, while someone else chose a honeymoon trip to Italy. The options are only limited by the bounds of your imagination, and there’s usually nothing we can’t fulfill.” In addition to its concierge program, Achievers has agreements with reloadable credit cards and online merchants that can help employees transform rewards into merchandise or services they can select for themselves.
Bonuses should reflect a higher calling, not just money “Strategically, whether you’re giving out a cash bonus or a non-cash bonus, you need to make sure there’s clarity around what you’re doing for the folks you want to motivate,” explains Carter. “If their bonus or reward is going to be tied to the performance of the entire organization, they need to know what role they play in achieving it. But more than that, bonuses and rewards can’t just be tied to goals,” she says. “I believe that corporate culture is a driver of behavior. If people don’t fit in, they don’t thrive, and if they don’t have good leaders they don’t feel tied and motivated, meaning you won’t get the most out of them regardless of how you reward them.” Carter notes that one of the big reasons she chose to work with CEO Richard Fairbank at Capital One was that the culture and values of the company were clearly tied to the strategy of the company, and that was attractive to her and the other executives
Effectiveness % of respondents answering “extremely” or “very effective”
Performance-based cash bonuses
60
Increase in base pay Stock or stock options
52 35
Nonfinancial Incentives Praise and commendation from immediate manager
67
Attention from leaders
63
Opportunities to lead prjects or task forces
62
Source: June 2009 McKinsey global survey of 1,047 executives, managers and employees from a range of sectors
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AD INDEX Albuquerque Economic Development, Inc. abq.org 61 Arkansas Economic Development Commission arkansasfavorsthebold.com 63 Lynn Carter, president of Capital One Bank (retired)
on Fairbank’s team. “Having any incentive for a team member that isn’t connected to what you’re trying to achieve doesn’t get you the fullest bang for buck,” she says. “Motivation doesn’t always come from a monetary incentive. Maslow’s hierarchy of needs, which is a psychological theory about human motivations, says that while people need to earn a living and have a roof overhead, there’s usually a higher calling motivating your people.” Soliciting employees’ feedback on the work environment is another, more subtle, way to provide recognition. “Asking someone how they think things are going is a huge opportunity, it makes them feel included and can inspire them to produce more and more,” Carter says. “We’ve all worked for people we liked and some we didn’t, and you know the difference: You’ll work a 17th hour for someone who you’d walk to the Gates of Hell for.”
Reward programs can drive your people to be better performers Recognition is a different type of currency, one that really doesn’t cost you or your company anything to spend and that often buys lots of good will, loyalty and productivity. Coupled with traditional rewards like the annual bonus, recognition in the form of a letter from the CEO acknowledging a job well done, or a top executive taking a project team out for a casual lunch following a milestone in an SAP implementation program can be extremely beneficial to everyone involved, she says. “One thing I did, from a developmental perspective, was to let my team members be keynote speakers at big events, which gave them visibility with their peers and helped them to develop new skills,” explains Carter. “My sense is that they felt they were really progressing personally, and it fueled their hopes for their careers.” Annual bonuses will continue to be an important component of employee compensation, but noncash motivators, such as praise from immediate managers and the opportunity to lead projects or task forces, are already proving effective. Nonfinancial incentives are likely to become even more effectives as more Millennials join the workforce. As leadership teams adapt how they manage and motivate to this influx of younger employees in the workforce, they will likely find that frequent rewards and recognition can reinforce their corporate values, increase productivity, improve customer satisfaction and help retain top talent. And what company doesn’t want that? 70 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2014
CohnReznick CohnReznick.com 21 Greater Fort Lauderdale Alliance lesstaxing.com 07 Indiana Economic Development astatethatworks.com inside back cover Jobs Ohio jobs-ohio.com/gamechangers 25 Louisiana Economic Development OpportunityLouisiana.com 59 Michigan Economic Development Corp. michiganbusiness.org/CE inside front cover NetJets NetJets.com 17 PURE Insurance pureinsurance.com 65 Ransford ransfordtalent.com 03 Sprint sprint.com/business outside back cover Stein IAS steinias.com 11 Wisconsin Economic Development corp. Advance.InWisconsin.com 13
FLIP SIDE
I’m Game
Can your kid’s mad skills in Warcraft get him a job? Job seekers are increasingly listing the skills they have developed in role-playing games such as World of Warcraft on their resumes. According to The Wall Street Journal, a growing number of savvy video game players believe that their proven ability to bring satanic druids, malignant warlocks and morally flawed dwarves to their knees can translate into meaningful activity in the real world. No one ever felt this way about checkers. Many older people, none of whom have ever experienced the thrill of these games themselves, believe that spending hours and hours and hours, and sometimes even decades, locked in a dark room playing video games, only coming out once every four days for a snack, is a complete waste of time, and wrecks your eyesight, and impedes social development and makes it hard to get dates. The participants, by contrast, believe that playing complicated video games—not Pong, not Super Mario—teaches young people how to organize, delegate authority, lead missions, identify objectives, and destroy adversaries. All of which could come in handy in sales, marketing, money management and even public relations. The Journal says that a number of major corporations, including IBM, would welcome a World of Warcraft veteran at the company if only because interactive games teach players how to work together with strangers they may never actually meet. The Journal specifically mentions an individual who landed a job as director of marketing and communications at the University of Michigan, after including extensive World of Warcraft experience on her resume. Yes, the successful job seeker—defying the myth that only boys play video games— was a woman. I agree that such skills should be included on resumes, if only to help a young job applicant explain what he’s been up to for the past 15 years. Employers don’t like resumes with huge gaps between jobs or CVs where the job seeker has no work experience whatsoever. But if the aspiring employee can list 15 years of playing war games eight hours a day on his resume, it proves that he hasn’t been wasting his time skateboarding
or hanging around outside the fast-food outlet or watching television or selling drugs. Employers value this. The idea of listing game-playing skills on a resume should not be limited to video games, however. Poker is a brilliant game that teaches participants the ability to keep a straight face, never give away one’s hand, play reasonable hunches. These skills are enormously useful in the world of business, particularly on Wall Street, particularly during hostile takeovers. The same is true of bridge, pinochle and blackjack. Card games that should probably not be listed on a CV include whist (too antiquated), Old Maids (too juvenile), canasta (too exotic) and three-card monte (borders on the criminal). And for obvious reasons, a job applicant should never write under the space for Work Experience: “I have played an awful lot of Fish.” Skills developed playing board games might also be included on job applications. Chess, Backgammon, Parcheesi and Go are obvious examples of traditional games that teach skills that can be used in the real world. Risk falls into that same general category, as do Monopoly, Stratego and Clue. Due to their somewhat juvenile nature, neither Candy Land nor Chutes and Ladders should be included on a CV, as they might give the prospective employer the wrong idea about the level of maturity the job seeker has reached. This is especially true if the job applicant is seeking a position that involves moving around large amounts of money. A number of games fall into a somewhat gray area. Mastery of Bingo might not be the sort of thing one would hasten to include as a skill on a serious resume. Bingo lacks that cutting-edge, plugged-into-the-zeitgeist aura. Moreover, the very word “Bingo” just doesn’t sound as convincing as “World of Warcraft” or “Final Fantasy IX” or “Assassin’s Creed.” Neither does Trivial Pursuit or, for that matter, Boggle. For obvious reasons, cribbage, euchre and pick-up-sticks should never be listed on a resume. Employers don’t mind it if job hunters goof around a bit. But they don’t want things to plunge into the realm of the ridiculous. NOVEMBER/DECEMBER 2014
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FINAL WORD
A Call to Free-Market Arms There is a growing perception that our capitalist system is “rigged” toward the powerful and inaccessible to average citizens. Meanwhile, our political system has ground to a halt, mired in dysfunctional party politics and posturing. As a result, CEOs have generally disengaged from the ridiculousness that has become Washington, D.C. But leaving the battlefield does not mean the war has ended. The current attack is on inversions, which have captured the attention of all Americans as a symbol of greed and give the impression that American business is rotten (this, despite the fact that fewer than 50 inversions have occurred since 1982). Inversions are simply the latest front of a wider war, one in which labor unions motivate their members by distorting the realities of executive pay, the media obsesses on those rare instances of corporate abuse and provides the narrative that such anomalies are the norm and academia teaches an alternate—or fantasy –reality. Then, there is inequality, which President Obama has called the defining issue of our time. The book by French economist Thomas Piketty, Capital in the Twenty-First Century, makes the case that inequality is no accident but rather an expected result of capitalism that can only be reversed through state intervention. In fact, Piketty preaches that capitalism is inherently at odds with democracy. These ideas are not confined to fringe economics circles: Piketty’s book is the all-time best selling title of the publisher, Harvard University Press. “Face reality as it is,” advises legendary CEO Jack Welch, “not as it was or as you wish it were.” If we, as business leaders, do not act now to change the realities and perceptions of our free-market system, change will be forced upon us. We have a terrific product to work with: we know that the vast majority of CEOs uphold the high ideals of integrity and trust upon which our free market system is based. And we also know the positive role that free-market capitalism has in our
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society. Arguably, no other organization of mankind has done more to improve the well-being and quality of life of more people in human history. But not enough people share this view—or are even exposed to this perspective. We propose that CEOs act in three ways, together and individually: 1. Initiate systemic change—Remove the regulatory burdens, market-distorting preferences and crony capitalism that undermine the integrity and effectiveness of our system— even when we have benefitted from such programs in the past. 2. Change perception—Combat the perception that capitalism is inherently unfair, and we must educate people about the unique power of the free market to spur innovation and fuel economic growth. 3. Ensure mobility—Restore the ideals of our meritocracy. This means engaging with people throughout our society and making business more inclusive. As CEOs, individually, we have the ability to act in each of these areas. The next time we rub shoulders with local or national politicos, it’s up to us to let them know that business leaders support transparency and the removal of marketdistorting preferences; it’s incumbent upon us to speak out frequently about the power of free markets to spur growth innovation and improve the human condition; and we need to pick up the phone and reach out to local schools to give kids, who otherwise wouldn’t have such access, exposure to our businesses. Granted, changing public perception and countering the mass media is no easy challenge. But by each of us taking up the fight in our own backyards with purpose, we CEOs have the ability to stop the enemy before they breach our final defenses. Our future depends upon it.
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