July/August '14 Issue by Chief Executive Group

Leveraging Technology

Best practices from the Smart Manufacturing Summit, p. 38

Cheap Energy is Prosperity The truth about energy, p. 14

Aiming for Longevity

How to build an enduring company, p. 50

Fun Cars for CEOs

Your guide to weekend rides, p. 66

INTRODUCING THE

2014 CEO OF THE YEAR Walt Disneyâ&#x20AC;&#x2122;s Bob Iger

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CONTENTS

July/August 2014 No. 271

COVER STORY 22

CEO of the Year: How Bob Iger Remade the House that Walt Built Even iconic brands need fixing from time to time. But instead of the easy fixes, Bob Iger played the long game by addressing Disney’s cultural issues head-on.

By J.P. Donlon

Editor’s Note

CEO Watch • Jim McCann on new growth for 1-800-Flowers • Steve Bradshaw on BOK’s Oklahoma story • POV: Author Robert Bryce on energy math

Thought Leader What CEOs Should Learn from Target’s CEO Resignation How to protect your company—and your own reputation—from devastating cyber attacks.

By Mark Taylor

Chief Concern The New CEO Equation: Solving for X and Y They’re under 40, leading $1 billion-plus companies and largely untested by adversity. What does the future hold for Gen X and Y CEOs?

By Dr. Thomas J. Saporito

32 20

CEO Confidence CEOs Expect Pre-Recession Level Business Conditions

Mid-Market Report Employment and Revenue Growth Still Strong Sixty percent of mid-market firms reported improved overall performance in the first quarter of 2014.

Information Technology Achieving Alignment Is your enterprise platform still aligned with your strategy?

By Russ Banham

2014 Smart Manufacturing Summit The Future of Manufacturing The concept of a never-ending journey, rather than an endpoint, serves as a powerful mantra for the U.S. manufacturing sector’s comeback.

By Jennifer Pellet

JULY/AUGUST 2014

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CONTENTS

July/August 2014 No. 271

Leadership The Secrets of Corporate Longevity How important is endurance—and what does it take?

By William J. Holstein

Book Review Keep it Simple, Stupid… or Vice-Versa

Does good karma make good business reading?

By Joe Queenan

Economic Development Regional Report: The West A state-by-state look at what Western states have to offer businesses.

By Warren Strugatch

PORT E R L A N REGIO T THE WES

Executive Life Five Best Fun Cars for CEOs Here’s how to maximize your weekend assets.

By William J. Holstein with Scott Oldham

Flip Side Meanies Test Are sociopaths in suits running Silicon Valley?

By Joe Queenan

Final Word Mobility Is the Issue; Not Inequality

PORT

AL RE REGION

T THE WES

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 271, July/August 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 2013 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 $198. 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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CONGRATULATES CEO OF THE YEAR

BOB IGER All of us at H2O Plus appreciate the opportunity to be part of the Walt Disney Parks and Resort experience.

H2O Plus, the global leader in marine skincare and Official Provider of Walt Disney World 速 and Disneyland 速 Resort In-Room Amenities, is proud to provide marine-rich spa and bath collections for resort guests to enjoy.

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The Best Tips, Tools, Insights & Practices for CEOs EXCLUSIVELY ONLINE NOW 10 Leadership Lessons from the U.S. Navy Seal Who Led the Osama bin Laden Mission A graduate of the University of Texas at Austin, Admiral William H. McRaven recently gave the commencement address at his alma mater, and offered graduates 10 lessons from his SEAL training that every leader can benefit from. WWW.CHIEFEXECUTIVE.NET/JATOC1

3 Comedy Techniques That Can Improve Your Leadership Skills From storytelling to reading behavioral cues to engaging an audience, learning comedy skills can make you and your staff more productive, successful and happy. WWW.CHIEFEXECUTIVE.NET/JATOC2

Why the Only Successful Companies in the Future Will Be Software Companies Your products and services are the foundation of your business. Without them, you have no business. But everything else—how you attract and touch customers, how you partner with suppliers, how your employees interact both internally and externally—everything else is software, and software is the only true competitive advantage every business can possess. WWW.CHIEFEXECUTIVE.NET/JATOC3

Caterpillar CEO Doug Oberhelman Speaks at the Smart Manufacturing Summit In his keynote speech, Oberhelman spoke about innovation at Caterpillar and how the 85-year-old company stays ahead of its nearly 100 competitors. HTTP://WWW.CHIEFEXECUTIVE.NET/JATOC4

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Are You Ready for the Coming Additive Manufacturing Revolution? In 2013, systems and services revenue for additive manufacturing reached $3 billion. That’s after growing 35 percent last year, and “there’s no reason to expect that it won’t grow as rapidly this year,” says Deloitte Director Mark J. Cotteleer. WWW.CHIEFEXECUTIVE.NET/JATOC5

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EDITORS NOTE

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Art Director Raymond Palmer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi

Is U.S. Manufacturing on the Mend? Does manufacturing have to take place on our own shores in order for the U.S. to have an innovative and competitive economy? There is no ready or simple answer. Fifty years ago, during the high-water mark of American economic dominance, 29 percent of the workers in the U.S. were in manufacturing. Today that figure is closer to 11 percent. Historically, “invented in the USA” meant made in the USA. Today, that no longer holds true. Apple can design and distribute iPods, iPhones and iPads in the U.S. without having any significant production facilities here at all. But manufacturing in the U.S. is making a comeback; and if it is poised for bigger gains in the future, it will be due to a number of forces, not least of which is the advent of what we call Smart Manufacturing—the joining of Big Data, smarter enterprise software and automation with lean production techniques. (See page 38.) Driven partly by rising labor costs offshore and the desire to produce closer to one’s customers, more U.S. companies are producing at home. Factory employment has been growing over the past four years, reaching 12 million. And electricity costs in the U.S. are a fraction of what European manufacturers face. According to Eurostat, the average cost per kilowatt-hour of electricity in USD for Germany, France and Italy was 35 cents, 19 cents and 28 cents, respectively, in 2012. For the U.S., that cost is 12 cents. But it isn’t just the cost equation. As Lawrence Summers, President Obama’s first director of the National Economic Council pointed out, “Technology is accelerating productivity in mass production to the point where even China has seen manufacturing employment decline by more than 10 million jobs over the most recent decade for which data is available.” Skeptics, however, point to that fact that manufacturers report difficulty in finding skilled workers, a subject of continuing concern and of this magazine’s continuing coverage. It is an open question whether the recent separation of innovation from manufacturing comes at the price of learning and creation of capabilities that will generate future innovation. Fortunately, the emergence of smart technologies and new tools, such as data analytics and additive manufacturing (3D printing) are leveling the playing field for everyone. Even in a world linked by big data and instant messaging, the gains from smart systems and co-location are open to those with the energy and nimbleness to leverage them. (For more on manufacturing’s evolution, see the Chief Executive Special Manufacturing Edition, packaged with this issue.) To be certain, it is unlikely that manufacturing will regain in absolute terms the share of the workforce it once did. Globalization has driven rising productivity rates around the world more or less equally. The one major factor that remains unequal is taxes. Alexander Cutler, CEO of Eaton, a power transmission company, told MIT’s Suzanne Berger, a political science professor, “if you put a job in Canada, you know what the regulations and taxes will be. In the U.S., there are competing philosophies in Washington, and rules can flip overnight. Global tax regimes have changed markedly since the 1990s, when U.S. corporate tax rates were competitive. Today, the 35 percent rate sticks out. We’re now the highest since Germany and Japan have reduced their statutory rates.”

Contributing Editors Russ Banham Dale Buss William J. Holstein George Nicholas C.J. Prince Joe Queenan GraphicDesigner Rob Cassella Online Editor Lynn Russo Whylly Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net

Director, Business Development Lisa Cooper 203/889-4983 lcooper@chiefexecutive.net

Director, Business Development Liz Irving 203/889-4976 lirving@chiefexecutive.net

Director, Business Development Dave Wallace 203/930-2705 dwallace@chiefexecutive.net

Marketing Director Michael Sherman 203/889-4978 msherman@chiefexecutive.net

Vice President Phillip Wren 203/930-2708 pwren@chiefexecutive.net

Wayne Cooper Chairman & President

Marshall Cooper Chief Executive

One Sound Shore Drive, Suite 100 Greenwich, CT 06830, 203/930-2700

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Hasbro is proud to congratulate

BOB IGER for being honored with Chief Executive’s CEO of the Year award – and for continuing the legacy of celebrating the kid in all of us.

CEO WATCH | CASE STUDY

1-800-Flowers’ Second Blooming Jim McCann on sowing the seeds for future growth at a mature company. By

Jennifer Pellet

THE CHALLENGE You’re facing one of the biggest hurdles of leadership—fixing a business that isn’t broken. You’re the founding CEO of the world’s largest florist, 1-800-Flowers, which has thrived for more than 35 years under your nurturing touch. You grew a business that people said couldn’t be scaled from a single New York flower shop into a retail chain and telemarketing powerhouse whose operations took root across the country. Next, you became an early pioneer in Internet sales and took your company public. But while revenues are now over $1 billion and your floral and gift company has operations in 70 countries, you know that you can’t rest on your laurels if the business is to continue to grow. THE BACK STORY Jim McCann was working as a social worker and part-time bartender when a barstool regular mentioned plans to sell his floral shop. Having just started a family, McCann was looking for a business with growth opportunity. He put in a few Saturdays at the store, found that he enjoyed it and took the plunge, picking up the operation for $10,000. “I wanted to build a business, not just a flower shop,” he recounts. “So six months later, I opened up my second shop and we averaged one shop every six months or so.” Then came McCann’s lightning-in-a-bottle moment: changing the company’s name to 1-800-Flowers. In hindsight, the brilliance of the moniker may seem obvious, but at the time the market was dubious. “Everyone told us it would never work,” says McCann. “People don’t need to be able to order flowers 24 hours a day, they don’t need a seven-day guarantee.” In all fairness, the naysayers were not entirely wrong. The company’s first telemarketing station averaged less than 40 calls a day—calls, not orders. But while the concept wasn’t an instant hit, McCann’s company soon reaped the rewards of the publicity generated, in part, by its very critics. “It was so novel that we got a lot of free ink, both people saying it was crazy and people saying it was revolutionary,” says McCann. “It wasn’t an instant hit but the press we got helped us become a brand.”

Given its maverick culture, it was only fitting that 1-800-Flowers also become one of the early adopters of Internet sales, staking its claim on the virtual marketplace early on by working with AOL and CompuServe. “It was probably 1996 when we realized that our business couldn’t continue to grow in a telephonic environment—we needed to put all our bets on the Internet,” says McCann. Similarly, when the social and mobile sales channel began to gain traction, the company took a proactive approach, becoming one of the first companies to enable transactions on Facebook. THE HURDLE Just as a rising tide lifts all boats, a drought can ground them. 1-800-Flowers did not emerge unscathed from the tumble the gift industry took during the economic downturn. Unable to stem losses with cost-cutting measures, the company had to resort to laying off some of its workforce. “In 2008, we clearly couldn’t continue to fund the dozen and a half projects we had under way,” says McCann, acknowledging that allocating resources becomes tougher during a difficult economy. “So we made a bet on social and mobile commerce, because we felt it was clear that it was going to take over the world.” Still, investors grumbled about the cost of continuing to invest in the rosy future of mobile sales. “It was painful to be pouring money into something that wasn’t going to produce anything for some time,” recalls McCann. “It’s tough to sit around with a board of directors saying, ‘You just had a layoff for the first time in your company’s history and you’re still pouring money into social and mobile?’” THE RESOLUTION McCann persevered and today 1-800-Flowers is back on a growth track, one strengthened by its efforts to reach for customers through social media and the mobile market. “Bricks and mortar was the first wave, the 800-number was the second and the Internet was the third,” says McCann. “But I think that the

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WHO: Jim McCann, Founder & CEO, 1-800-Flowers.com BRANDS: Fannie May, The Popcorn Factory, BloomNet, 1-800-Baskets, FruitBouquets.com and Celebrations.com BOOKS: Stop and Sell The Roses: Lessons from Business and Life, A Year Full of Flowers: Fresh Ideas to Bring Flowers into Your Life Every Day and Talk is (Not!) Cheap (2014) FORMER OCCUPATION: Social Worker, St. John’s Home for Boys

fourth wave will be the biggest. There are five billion mobile phone contracts in existence in the world and only six billion people. There are 450 million people who use Facebook monthly. The wave is just unquestionable.” To catch the wave, 1-800-Flowers has charged its dedicated social marketing team with finding ways to build relationships with consumers that go beyond sales transactions. The company’s 2013 #JustBecause campaign was one outgrowth of that effort. Launched on the AMC Reality Show “The Pitch,” #JustBecause let users share their stories and memories about gifting, which then spread across the social technology universe via Facebook, Twitter, Instagram, YouTube, Google+ and other destinations. Back in September of 2013, when the team told McCann that the company would hit one million likes on Facebook by February of 2015, he challenged them to do it by Valentine’s Day instead. “While they didn’t quite make it, this spring we hit 967,000 likes,” says McCann. “When someone likes you

on Facebook they’re giving you permission to access a lot more information about who they are and what they like to do, as well as the opportunity to reach out and engage them.” THE LESSON Changing your business model to adapt to the capabilities of new technology while staying true to the philosophy and relationships on which the company was built can be tricky. For McCann, efforts to morph his company to leverage all the different customer touchpoints technology provides are all an extension of the same value proposition his first floral shop provided its local customers. “All I’m trying to do is mimic the relationship I had with people back on 1st Avenue 35 years ago,” he says. “They’d ask for restaurant recommendations or say, ‘Gee, I’m having a party and I could use some ideas on decorating and food.’ Those are the dialogues we had with our two or three dozen regular customers, and now those are the dialogues we can now have through social technology.” JULY/AUGUST 2014

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CEO WATCH | CEO PROFILE

Steve Bradshaw’s Oklahoma Story Over the last two decades, while scores of other regional banks struggled or were snapped up by nationals, BOK Financial has quietly thrived, expanding its operations from 20 branches within Oklahoma to nine West South Central States. Notably, the bank escaped unscathed from the mortgage-lending crisis that scuttled so many financial institutions during 2008 and 2009. In fact, BOK took a contrarian approach during that turbulent time, one that ultimately paid off, recounts Steve Bradshaw, who took over as president and CEO of BOK Financial last year. “A lot of banks were getting out of the mortgage business and independent firms were closing up because risk was elevated— but the returns were being elevated in that space as well,” he says. “We saw that as an opportunity to jump in and, as a result, we tripled that business. It went from being almost nonexistent in terms of earnings for us to accounting for 15 percent of our earnings by 2012 and about 13 percent last year.” However, things were not quite as rosy when Bradshaw first joined BOK back in 1991. Just a year prior, the Tulsa, Oklahoma-based business had faltered and been placed into Federal Deposit Insurance Corporation receivership. Concerned that the bank would get gobbled up, depriving Oklahoma energy businesses of their go-to financial institution, wealthy local oilman George Kaiser bought it himself for about $60 million. “George is an amazing entrepreneur,” recalls Bradshaw, who sold his own small retail securities firm to Kaiser and joined BOK to help it establish a new consumer investment business. “He had a bold vision for the bank—and you know what? It was right.” Under Kaiser’s ownership, BOK set its sights on expanding into neighboring markets. The bank now operates in Oklahoma, New Mexico, Arizona, Arkansas, Texas, Colorado, Kansas, Missouri and Utah. Today, it is a $27.4 billion corporation providing commercial and consumer banking, investment and trust services, mortgage origination and servicing, and the TransFund electronic funds transfer

“We won’t give someone else the opportunity to buy [an asset] at a fire sale price and earn 20 percent or more when we can work it ourselves.” network. That general description, however, doesn’t quite capture the bank’s specialty—an expertise in energy lending and a commitment to seeing investments through. “Typically when banks have a nonperforming asset, they can’t get rid of it fast enough,” explains Bradshaw. “Our approach is to work it internally. We won’t give someone else the opportunity to buy [an asset] at a fire sale price and earn 20 percent or more when we can work it ourselves.” The result is a balance sheet with more nonperforming assets but fewer charge-offs—and ultimately a better total shareholder return than like-sized peers. BOK also continues to leverage a formidable legacy of serving the energy sector. Kaiser, who made the bulk of his wealth in oil gas businesses, still owns about two-thirds of BOK. “Energy producers know that they’re dealing with a bank that understands the business and isn’t going to run for the hills when commodity prices come down,” says Bradshaw. “You’ve got a lot of [energy] operators out there who have been in this business for 30 years and know what it’s like to have a bank suddenly call them up and say, ‘My board is not comfortable; we need to be out.’ We are usually in for the duration. We grew up in the industry and it’s important to us.” In fact, the bank actually has its own dedicated petroleum engineering staff, which evaluates the reserves of clients to provide guidance on loan amounts and terms. That deep understanding the capabilities of its clients and the energy space has helped the bank remain the lender of choice in Oklahoma and expand into new markets populated by energy producers.

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CEO WATCH | CEO PROFILE

Together those strengths have enabled BOK to deliver 14.42 percent annual return from January 1992 through March 2014. However, like all financial institutions, the bank is now grappling with the cost of complying with intensifying regulatory requirements—which will translate to an estimated incremental expense of between $10 million and $15 million in 2014 alone. Heightened regulatory requirements are also hitting the bank on another front, adds Bradshaw. “In two years it will feel like success if we manage to meet all of those heightened requirements, but if we’ve done that and we haven’t grown the bank, that’s not a win. Internally, I’ve been driving home the message that our growth initiatives are just as important as meeting the regulatory expectations.” To that point, Bradshaw is determined to continue to grow BOK’s share of markets like Texas, where the bank has small footholds in the Dallas/Ft. Worth and Houston markets and to work toward getting a piece of the expanding healthcare industry market. “Our part of the country seems to be seeing a disproportionate amount of growth in areas like assisted living, acute surgery, memory care, skilled nursing,” says Bradshaw, who says BOK has been ramping up its governance capabilities around the regulatory elements and underwriting risks specific to the healthcare industry. “We plan to attack the healthcare industry the same way we do energy. Early

WHO: Steve Bradshaw, President & CEO, BOK Financial WHERE: Tulsa, Oklahoma SIZE: $27.4 billion FIRST JOB: Local Federal Savings & Loan LEISURE INTEREST: Cooking SPECIALTIES: Risotto, Thai and Indian cuisines FAVORITE TEAM: Green Bay Packers

returns are positive and it offers a good opportunity for above-market growth.” BOK has also consolidated its investment business and is expanding its sales force and product portfolio. “Most recently we introduced a new world energy fund,” explains Bradshaw. “If I can lift loan growth and if I can lift asset accumulation in the investment management business where the margins are good, those are my two best levers to continue to grow EPS in an otherwise challenging rate and regulatory environment. So that’s the focus right now.” —Jennifer Pellet

ANDREW ROBERTS

THORN & ROSES THORN “I will do anything that is basically covered by the law to reduce Berkshire Hathaway’s tax rate,” said Warren Buffett recently. “For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.” So a political favor for the wind industry induces a leading company to misallocate its investment resources for un-economical purposes. Is this the real “Sage of Omaha” talking?

ROSE Chief executives from the nation’s biggest broadband providers say they want a free and open Internet, too. The only catch is that they don’t think the Federal Communications Commission (FCC) needs to impose utility-style regulations on broadband services in order to do it. In a recent letter to the FCC, CEOs of big broadband providers, such as Lowell McAdam of Verizon, Randall Stephenson of AT&T, Robert Marcus of Time Warner Cable and Brian Roberts of Comcast, warned that reclassifying broadband into a Title II public utility would threaten new investment in broadband infrastructure and jeopardize the spread of broadband technology across the U.S. They said if such action is taken by the FCC—it’s one of the options being considered—it would result in slower Internet speeds for everyone and a deepening of the digital divide.

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CEO WATCH | POINT OF VIEW

Cheap Power = Prosperity Energy is the pillar upon which economic growth is built. “The difference between the developed world and everybody else,” says author Robert Bryce, “is [affordable] electricity.” But simple math and basic physics show that chasing energy sources with low power densities will not get us to where we need to be.

by J.P. Donlon Climate change, pollution, famine, war, water shortages, terrorism; it’s enough to give one “collapse anxiety,” but is it accurate? Not according to Robert Bryce, an energy writer-researcher who has been covering business since 1989. His books, Power Hungry, and the recently published Smaller Faster Lighter Denser Cheaper are exhaustively researched handbooks on how technologies, particularly in energy are making our lives better—and greener. In April 2010, he joined the Manhattan Institute as a senior fellow in the think tank’s Center for Energy Policy and the Environment. That we are doomed to scarcity and shortage, says Bryce, is the view advanced by neoMalthusians and the “de-growth” movement, whose prescriptions by now are familiar: Nuclear energy is bad. Genetically modified food is bad. Coal isn’t just bad; it’s evil. Oil is bad. Natural gas, once thought to be OK, is now bad because the process used to obtain it—hydraulic fracturing—is bad. These all must be replaced by Earth-friendly sources like renewables. Catastrophists claim that we are running out of essential commodities. We will surely pay for our sins against Earth. Rubbish, asserts Bryce. The neo-Malthusians have overlooked a critical factor that has improved conditions for mankind for centuries: Innovation. We are continually making things “Smaller, Faster, Lighter, Denser, Cheaper”—hence the title of his new book. The ability to innovate not only makes us richer, it allows us to do more with less. Nor, says Bryce, is it dependent on ideology. “It might even survive Republicans and Democrats,” he quips. Business leaders and investors, he argues, must keep this in mind and not be dissuaded or discouraged by the incessant drumbeat of doom. He unabashedly celebrates business and the entrepreneur because they are driving the trend toward smaller, faster, lighter, denser, cheaper. He quotes the 2013 book Conscious Capitalism, written by his friend and fellow Austin resident, Whole Foods CEO John Mackey. “Two hundred years ago, 85 percent of the world’s population lived in extreme poverty (defined as less than $1 a day); that number is now only 16 percent.” Other examples innovative technologies that allowed us to do more with less include: • Over four decades Americans have tripled the number of miles flown; yet domestic oil consumption increased just 30 percent. • In 1970, it took 4,842 Btu to move a single passenger one mile in a car. By 2008, that figure had declined to 3,501 Btu, a reduction of about 28 percent. • In 1990, sulfur dioxide emissions were 23 million tons. In 2005, they were just 14.7 million tons, according to the EPA. • Between 1978 and 2013, Intel increased the computing power density of its best chips 78,000-fold while shrinking its circuits more than 130-fold. Like them or not, argues Bryce, hydrocarbons and nuclear are denser sources than renewables. They allow us to produce large amounts of energy from relatively small pieces of land. If you want to replace U.S. coal-fired capacity with, say, wind, then find a land area the size of Italy—or the combined area of Kansas, Missouri and Iowa. Keep in mind that the U.S. already has more wind capacity, about 60,000 megawatts in 2012, than any other country.

Chief Executive of the Year 2014 Selection Committee

David Cote Chairman and Chief Executive, Honeywell 2013 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 Tamara Lundgren President and Chief Executive, Schnitzer Steel Industries Robert Nardelli Chief Executive, XLR-8 William R. Nuti Chairman and Chief Executive, NCR Thomas J. Quinlan III President and Chief Executive, RR Donnelley Jeffrey Sonnenfeld President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management Mark Weinberger Chairman and Chief Executive, EY Maggie Wilderotter Chairman and Chief Executive, Frontier Communications Solutions

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Continued on page 64. 14 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2014

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THOUGHT LEADER

What CEOs Should Learn from Target’s CEO Resignation No company—big or small—is safe from potentially devastating cyber attacks. Here’s how you can protect your company—and your own reputation. By Tom Pettibone When Gregg Steinhafel, Target’s CEO since 2008, abruptly resigned in May, the company’s recent weak financial performance clearly factored into the change. However, the massive 2013 holiday-season data breach involving 40 million credit cards and 70 million customer records must also have been a factor. Certain cybersecurity warnings appear to have been ignored. In mid-2013, Target installed FireEye, a $1.6 million sophisticated malware (malicious software) detection tool with online monitoring by Target employees in India. On November 30, the tool flagged someone downloading malware onto Target computers (possibly Russian hackers). The Indian employees notified the security team in Minneapolis. Then, apparently nothing happened. No action was taken. Subsequently, for three weeks, the hackers copied credit card and customer data, temporarily staging it on other Target computers until wholesale data transfers could be masked in normal business transactions. Finally, on December 12, the U.S. Department of Justice contacted Target after receiving reports of fraudulent charges. The rest is history. Brussels-based SWIFT is member-owned cooperative through which the financial world conducts global business operations. Consisting of 10,000 banking organizations, securities institutions and corporate customers in 212 countries, it exchanges millions of standardized, financial messages every day. At a recent conference, CEO Gottfried Leibbrandt described the dire situation facing businesses all over the world: • “It’s a bad, scary world out there and it’s getting worse. The cyber threat is very real and persistent. If you are not paranoid yet, you should become so.” • “While cyber criminals are getting ever better organized and funded, we now also have state actors, focusing on not just snooping but disruption.” • “We… require networks that are designed to meet the highest standards in terms of confidentiality, integrity and availability.” • “Data protection is core to what we do and cyber-security is part of our DNA, not an afterthought.” • “We fully support the EU Cyber Security strategy consisting

of: Networks that operate across borders,” standards (such as ISO 27001-2). A robust (European) ecosystem of experts and providers.” While most CEOs acknowledge information security is a top priority, it is often addressed ad-hoc after a data breach occurs (i.e., the car engine has seized). The Target incident changes that paradigm, suggesting a more proactive and methodical approach involving an Information Security Management System (ISMS) built on ISO 27001-2 standards. Companies have standard processes for accounting, procurement and HR; why not have an information security system? The U.S. Department of Homeland Security urges CEOs to ask the following questions: • How is our executive leadership informed about the current level and business impact of cyber risks to our company? • What is our plan to address these risks? • How does our program apply industry standards and best practices? • How many and what types of cyber incidents do we detect in a normal week? What is the threshold for notifying our executive leadership? • How comprehensive is our cyber-incident response plan? How often is it tested? With an ISMS tailored to your company (one size does not fit all), you will be alerted to security breaches having high impact to your company. You get the red light warning that something bad is about to happen and you can take proactive action with and through your security team. Properly constructed, the alerts cannot be masked or ignored. It’s a dangerous world out there. Take the first step. Find out what security framework you have, compare it to your industry best practice and develop a plan for improvement. Your shareholders, partners and employees will be reassured; and most important, you will have taken an important step to protect your company’s assets from security risks. Tom Pettibone is a founding partner of Reston, Virginia-based Transition Partners (www.TPCO.us), an IT management consulting firm.

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BOB IGER MAKES EXCELLENT HAPPEN. Congratulations to Bob Iger, 2014 CEO of the Year. New Balance is inspired by all you’ve accomplished with The Walt Disney Company. We look forward to continuing to work with you to Make Excellent Happen.

As to Disney properties/artwork: © Disney.

CHIEF CONCERN

The New CEO Equation: Solving for X and Y They’re under 40, leading $1 billion-plus companies and largely untested by adversity. What does the future hold for Gen X and Y CEOs? By Dr. Thomas J. Saporito Ready or not, Generation X and Y now have their feet in the door of the C-suite. According to Forbes, 20 companies with market caps higher than $1.8 billion have CEOs under the age of 40. Thousands of smaller organizations have Gen X and Y leaders at the helm. Many more are working their way upward in the more traditional approach. By all accounts, this new cohort of CEOs has already produced some outstanding examples of leadership. Just how does each generation generate exceptional leaders? I have found that all superior CEOs share several key success behaviors. This CEO “DNA” includes passion for an idea; an intense, competitive need to be on top; the urge to drive projects to completion; and a strong belief that “if I put my personal print on something, the result will be better because it reflects my vision and discipline.” These traits are time-tested and observable by looking at a cross section of exceptional leaders over the past 100 years. Henry Ford (20th Century), Alan Mulally (Boomer), Jeff Bezos (Gen X), Marissa Mayer (Gen X) and Mark Zuckerberg (Gen Y) would all score exceptionally high if assessed for these key, leadership behaviors. Observing the current class of CEOs, an important question comes to mind: Is their success sustainable and scalable over the life cycle of an organization? This context is vital because many startups operate with a simple organization model that allows the enterprise to grow rapidly. However, such speed usually comes with a cost. It robs new CEOs of the time to develop personal insights and to process knowledge gained from extended, organizational experience—vital leadership assets that come from life, practical expertise gained by time on the job and the opportunity to learn from the occasional bloody nose. As a result, overlapping and conflicting agendas from multiple constituencies can overwhelm new leaders. In addition to directors and team members, external forces begin to exert pressure, especially if the company goes public. An IPO brings investors, shareholders, analysts, banks, the media and government agencies to the table. The magnitude of this challenge in the digital age is something even Henry Ford could not begin to imagine.

Mark Zuckerberg is a perfect example. During Facebook’s IPO in 2012, Zuckerberg received a dressing down from Wall Street analysts for, well, dressing down. Wearing a “hoodie” and jeans to a New York City investor meeting was a sign of immaturity, charged Michael Pachter, a research analyst for Wedbush Securities. The single biggest pothole on the next generation’s road to success is being oblivious to the dangers outlined above. Without awareness developed through either personal insight or professional guidance, young leaders can quickly get in over their heads. Groupon’s Andrew Mason found this out in 2012 when he was named to the “Worst CEO of the Year List” by Herb Greenberg of CNBC. Greenberg wrote, in part, “He [Mason] was an accidental manager, a software engineer who somehow stumbled into an executive position.” To skirt disaster, new leaders should be constantly vigilant for any business education and/or experience gaps. A multigeneration senior team, with a wide range of complementary experiences, can reveal blind spots and circumvent “generation group think.” Mentors and advisors who have “been around the block a few times” can also be invaluable sources of information. According to a study by the Kenan-Flagler Business School at UNC, approximately 80 million Millennials are about to enter or are already in the workplace. The good news is that many have the right DNA to succeed. With the proper guidance and development programs, they will learn to build awareness, seek self-insight and tap into human resources, such as veteran executives, mentors and trusted advisors. A report by Boston College on creating tomorrow’s leaders shows that Johnson & Johnson, General Electric, Northrop, Marriott and Raytheon, along with other top-line companies, have already set up programs to assist X and Y executives with their journey. With this combination of nature and nurturing, the latest cohort of leaders will continue to learn and grow, gaining the wisdom necessary to become outstanding CEOs worthy of their places in history. Dr. Thomas J. Sapporito is CEO of RHR International.

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CEO CONFIDENCE

CEO Optimism Is Ongoing

May’s survey suggests a slow return to pre-recession-level business conditions.

10.0 8.0 6.0 4.0 2.0 0.0

The CEO Confidence Index, Chief Executive’s monthly gauge of CEOs’ expectations for business conditions over the next 12 months, rose 1.2 percent in May compared to the prior month. CEOs rated their expectations at 6.16 out of a possible 10, indicating that they believe business conditions will be “good” a year from now. (Six corresponds to a rating of “good” in the survey CEOs complete each month). The rating of current conditions also rose 1.2 percent from April, landing at 5.82 out of 10. A year ago this time, CEOs rated their expectations for conditions now to be a 5.86, proving that they have been prescient in anticipating improvements in business conditions. Current conditions have not been rated above a six since September of 2008. This optimism indicates a true belief that business conditions have turned a corner and we are on the path to pre-recession conditions in the eyes of CEOs. This positive outlook was not just at the highest level for overall business conditions. Looking at the data for individual improvement at the CEOs’ own firms, we see a marked increase in expectations compared to a year ago. In May of 2013, only 33.7 percent of CEOs expected to increase their number of employees over the next year. In May of 2014, this figure has jumped dramatically to 50 percent—a 48.3 percent increase from last year. Similarly, two-thirds of CEOs were anticipating an increase in revenue last year, compared to more than 76 percent expecting growth in revenue this year. Expectations for increase in capital expenditures also improved 5.2 percent from last year, but this number is still relatively low, with only 48.6 percent of CEOs expecting to increase their capex over the next 12 months.

Comments we received from CEOs still showed a lot of pessimism and concern with government uncertainty, regulatory burdens and foreign relations issues. Many CEOs believe these external factors could affect business conditions dramatically, as well as the prospects for their own firms. One consistent thread from CEOs who are more optimistic about business conditions is comfort with constant change. It seems that only by factoring uncertainty and constant change into the business model can CEOs assuage their concerns about macro conditions. The CEO of a commercial printing company provided insight into how his firm and some competitors have been able to weather the storm: “Those who have transformed to a different business model will thrive. Our business is now driven by technology that adds considerable value to our customers’ marketing and communications campaigns. The old maxim, ‘change or die’ has never been more true than today in our industry.” “Demand is tied directly to the performance of our clients,” noted the CEO of a middle-market, professional-services firm. “Our clients in manufacturing, high tech and health care are generally improving revenues, although holding in check employment growth and capital expenditures. There continues to be a ‘lid’ on the economy despite favorable factors. We have used this time to increase investments in technology and talent training to improve efficiencies in service delivery. While revenue has grown, we, too, have checked our headcount growth. Our firm is back from the 2008/9 recession, but we continue to crawl and not walk our way back.”

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MID-MARKET REPORT

Employment and Revenue Growth Still Strong

Sixty percent of mid-market firms reported improved overall performance in the first quarter of 2014.

Confidence Remains High—and Highest Closest to Home

The erosion in revenue and employment growth mid-market companies reported during the second half of 2013 reversed course during the first quarter of 2014, according to results of the Middle Market Indicator, a quarterly business performance and economic outlook survey by the National Center for the Middle Market at Ohio State University. CEO, CFO and other C-Suite respondents reported significant increases in both areas over the past 12 months. Middle-market companies reported a year-over-year increase in revenue growth of 6.5 percent for the past 12 months, outpacing by far the 0.5 percent revenue growth experienced by the S&P 500 over the same period. What’s more, 46 percent of middle-market companies reported having a larger workforce than one year ago, a significant increase over the 39 percent of companies that reported having grown their workforce in the fourth quarter of 2013. Confidence in the economy is also continuing to expand, with 57 percent of middle market leaders at least somewhat confident in the global economy, a bump from the 40 percent reporting that level of confidence one year ago.

Global Economy 1Q ‘14

15%

28%

43%

4Q ‘13

16%

27%

44%

National Economy 1Q ‘14

Middle Market

1Q’14

4Q’13

1Q’13

3.7 % 3.2 % 2.5 %

2.2 %

2.1%

16%

4Q ‘13

20%

1Q ‘13

22%

20%

41%

15%

45%

20%

23% 20%

44% 14%

1Q’14 64 % Confident/ Somewhat Confident

4Q’13 65% 1Q’13 58%

Revenue Growth Strong, But Expected to Slow

Employment Growth Expected to Continue NEXT 12 MONTHS

13%

1Q 25% 35% 34% 6% ‘13 1Q’14 57 % Confident/ Somewhat Confident 4Q’13 57% 1Q’13 40%

Middle Market

PAST 12 MONTHS

14%

PAST 12 MONTHS

NEXT 12 Months

1Q’14

4Q’13

1Q’13

PAST 12 MONTHS

NEXT 12 MONTHS

1Q’14

4Q’13

1Q’13

6.5 % 4.5 % 5.0 % 5.8 %

S&P 500

4.3 % 4.9 %

0.5 % 2.2 % 3.9 %

5.6 %

1.9 %

N/A

22 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2014

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CohnReznick is an independent member of Nexia International

INSIGHT CAN CREATE IT. 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.

Joe Torre 2014 National Baseball Hall of Fame Electee

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2014 CHIEF EXECUTIVE OF THE YEAR

How Bob Iger Remade the House that Walt Built 24 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2014

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Even iconic brands need fixing from time to time. But instead of the easy fixes, Bob Iger played the long game by addressing Disney’s cultural issues head-on with a three-pronged strategy, making it a stronger, more profitable company with greater depth in its overall brand. The takeaway for CEOs is that, yes, culture—and persistence— matter. / By J.P. Donlon Few people appreciate that when Walt Disney died in 1966, he left a company that was very different from the one he started in 1923. Even Mickey Mouse had changed numerous times over the years. Today, Bob Iger presides over The Walt Disney Company, only the sixth CEO in its history, a very different company from the one Walt knew; but in important ways, it is very much the same. The technology and delivery may be different; but at its core, Disney remains an entertainment company that’s all about memorable characters and storytelling. When he became CEO in October 2005, Iger faced a time of extended turmoil. The preceding five years had been marked by a hostile takeover attempt, a shareholder revolt, a board in conflict and years when performance fizzled. The once leading animation department hadn’t had a hit in years. The brand had become somewhat tarnished and employees no longer believed in Disney’s greatness. One of Iger’s first tasks was to make peace with dissident shareholders Roy Disney and Stanley Gold and to convince them to drop their lawsuit challenging the choice of Eisner’s successor. Once this undertaking was behind him, Iger set about transforming Disney, surprising friend and foe alike, since transformative change was not expected from an insider. Having earned a degree in Television and Radio at Ithaca College, the Long Island native began his career as a weatherman in Ithaca, New York and moved up the ranks of network TV to become chairman at ABC. After Disney bought the network in 1996, he became Eisner’s heir apparent. As he outlines in the following interview at Disney’s Burbank studios, Iger quietly started to implement a different vision. What Disney lacked, Iger sought to acquire. In 2006, the company bought Pixar Animation Studios in a $7.4 billion deal he personally negotiated with Steve Jobs. In 2009, he negotiated a similar deal for Marvel Entertainment for $4 billion. In 2012, he hit the jackpot by convincing George Lucas to have Disney take over Lucasfilm and the rights to Star Wars. (Star Wars VII is now in production.) In each case, Iger’s hands-off policy has allowed the individual units to continue being creative. Certainly, the recent blockbuster Frozen, based on a Hans Christian Andersen tale, which topped $1 billion at the box office worldwide, suggest that Disney is on a tear. The $45 billion company with 175,000 employees has grown too large to be run from the top down. It now comprises four divisions and five key brands, Disney, ESPN, ABC, Marvel and Pixar. It also consists of cruises and theme parks around the world. The most ambitious is Shanghai Disney, now under construction and

due to open in 2015. Observers reckon it will be Iger’s capstone achievement. (His current contract expires in June 2016.) The payoff has been dramatic. During Iger’s tenure through the end of the 2013 fiscal year, Walt Disney’s total shareholder return was 202 percent. In other words, if you invested $100 at the beginning of his tenure, your investment would have been worth $302 at the end of 2013. In addition, the company’s share price recently hit an all-time closing high of $79.23 in February. The stock was just $23.81 when Iger became CEO. What’s more, the company’s market cap reached $130 billion for the first time ever. Other recent milestones from last year include: • Revenues and profits reached new highs for three years running. • Film releases generated the best box office results in Disney history. • Record attendance at company theme parks in California, Florida, Tokyo and Hong Kong. • Consumer products divisions posted its first $1 billion profit year—without fully benefiting from the Star Wars bonanza following the acquisition of Lucasfilm. In addition to Disney’s animation app for iPad, six of the 10 most popular downloads on Amazon Kindle were Disney apps. ESPN’s user traffic on mobile devices exceeded that on desktops. Always admired, Disney topped last year’s ranking by the Reputation Institute, a private firm that measure’s consumer’s perceptions. In 2012, it ranked 17. It ranks ninth overall in Fortune’s list of the most admired and second on Barron’s 100 most respected companies. With the possibility of Iger’s stepping down less than two years off, the contest over who will replace him looms. The departure of Disney Media Networks co-chairman Anne Sweeney, one of the company’s two top television executives—along with ESPN head John Skipper—focuses the spotlight more intensely on two candidates: resorts chairman Thomas Staggs and CFO Jay Rasulo. In 2010, Iger had the two switch jobs, a move that gave Staggs his first operational experience and Rasulo involvement in financial decision-making. Some industry observers expect Iger to appoint a second-incommand before he departs. Iger declines to comment apart from saying that his successor, “needs to be someone who can adapt and not necessarily take the old playbook, the old rules, the old habits or the old culture. He may need to shift focus, culture or whatever to continue to maintain success and that great brand position that we’ve got in the world.”

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2014 CHIEF EXECUTIVE OF THE YEAR

When you became CEO in 2005, you seemed to face a triple challenge of trying to put the brand right and build revenue— but also to fix the culture—all in the face of having to follow a well-established leader. What did you set as your priority? While I had very specific and ultimately well-articulated strategic priorities for the company, my rallying cry to the troops was that I wanted Walt Disney to be among the most admired and respected [companies] in the world. First, I wanted Disney to be admired and respected by the employees, “cast members,” as we call them fondly; because if we ultimately were going to be admired and respected by our shareholders and by our customers, it had to start at home. This also tied in with what I wanted to do around cultural change, which I’ll come back to. After our employees, our investors and our consumers were also important. I created three primary strategic priorities for the company. One: Invest most of our capital in creating high-quality, branded content and experiences. Two: Embrace technology and use it aggressively to enhance the quality of our product and thus the consumer experience. To enhance what I’ll call “distribution” and thus access to our product. And lastly, to get closer to our customer by becoming more efficient as a company. Technology had to become a significant middle name for the company. In addition, the third strategic priority was to invest much more aggressively in global growth because we had become too U.S.-centric. Interestingly enough, I came from a meeting with a group of folks at our company who are working on the agenda and presentations for an upcoming Disney board of directors retreat, which we do every June. The aim is to analyze and present to the board a strategic growth initiative through 2025. We’re beginning with the strategic priorities of the company, which are the same as what I created in 2005. To what degree were you bothered by the fact that your predecessor had made comments to the effect that you were not up to the job, combined with press reports at the time that you were a “well-scripted CEO” but probably not a big, strategic thinker? I prefer not to comment on or dwell on what any specific person said about me or believed about me when I got the job. I will say that even though I was the only internal candidate, and I knew the company and the board extremely well, there was a desire by many to bring great change to the company, because we had been through what had been a pretty difficult period. There was a feeling that any inside candidate would essentially perpetuate the status quo. This [attitude] motivated me because not only did I feel that I had a lot to prove, but I felt that I had a real opportunity to be an internal change agent. Besides, I was fairly thick-skinned at that point because I had been through a lot of that. In hindsight, what was the most difficult challenge? Clearly, it was shifting the culture from a company that did not believe in itself as much as it needed to [do], to a company that

believed in itself and its future, was optimistic about its future and respectful of its product and its leadership.

What did you have to do to make that happen? There were a lot of things. One of them was to redirect or disband, as the company had known it, its strategic planning arm. I thought the individual businesses needed to own more of their strategy, as opposed to being owned by the corporate entity. It was important for each business to take more responsibility and accountability for its own strategy. The company had grown very large, particularly after the acquisition of Capital Cities/ABC. And it was operating in many changing and dynamic businesses. While it had made sense to create overall strategy at the center, we had grown so large and were operating in such dynamic businesses that I thought that actually slowed decision-making down, lessened accountability and created at some level—more inadvertent than purposeful—of mistrust, where business units didn’t feel as trusted as they needed to be by the corporation. What had served us well in the past was no longer optimal. So how do you manage the company differently today? While we still have strategic planning, it’s reconstituted with a different mission. For one thing, the business units create their own strategies. I want them to fit into a framework of the company, and they need to be consistent with the company’s strategic priorities. But a different strategy for each business had to emanate from the businesses and be implemented by the businesses. In addition, most key business decisions that were being made needed to be made by the individual businesses, with either the approval, knowledge or even involvement in an advise-and-consent sense of the corporation. The business units had to feel not only a sense of empowerment but a sense of ownership over their own destinies—and thus a sense that they were trusted. If they could not be trusted, then instead of taking away the freedom and responsibility from them, we had to get new people. Shortly after becoming CEO, you struck a deal with Steve Jobs and Apple to put a Disney app on the then new video iPod and iTunes. Why was it considered controversial at the time? That was a huge step—or a very loud signal to the company that technology could be viewed as friend, not foe, or as opportunity, not threat. It affirmed that we were willing to take risks and were willing to challenge the status quo of our own businesses, willing to enter partnerships with technology companies and willing to embrace technology as a path to a much brighter future. This was probably the loudest message I could have sent to this company about change. Let me pause here so I can show you one of my prized possessions. [Holds up framed photograph of him shaking Steve Jobs’ hand on stage at an Apple event.] On October 1, 2005, I officially become CEO of The Walt Disney Company. Three weeks

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Steve Jobs shaking hands with Bob Iger on stage at an Apple event. It was the most empowering thing I could ever have done. We moved on. But what was interesting to me about this was it was a lesson. It was probably the first time I ever owned up to something like that in such a way. Looking back, it was relatively trivial, but it was unbelievably empowering. And the respect that people had for me for doing that actually put me in such a stronger, better position with everybody. It taught me that if you failed, you have an ability to not just accept the failure and attempt to understand it but to be accountable for it. [Owning up to failure] offers the best chance to recover from it. It’s a lesson I’ve taken with me throughout [my career]. If something fails as a direct result of your decision and you take responsibility for it, you’re much more likely to endure than if you do the opposite. later, I showed up on stage with this guy who, to the world, was our mortal enemy, because he controlled Pixar. In the court of public opinion, Steve Jobs was right and Disney was wrong. He wasn’t necessarily right about his opinions of Disney—but he was winning the perception battle. I showed up on stage at an Apple event, when he’s announcing the video iPod, and this picture commemorates our deal. Going back to your question, these moves were not only designed to set us up in terms of future growth but to start shifting a culture and becoming a company that believed in itself again. I say this not to be critical of what happened before. But times had changed, and the needs of the company were very different. I took advantage of being a new CEO to make these moves. And they led to tangible, cultural change within the company.

Was there an instructive failure in your own career that helped form who you are today as a leader? My parents, my father in particular, instilled in me a great work ethic and a level of ambition. A lot of it came from a desire to prove that I was up to challenges. I still feel that in me, by the way. I seek new challenges so I can prove that I’m worthy of more. That’s driven me in many ways. Early on, I learned that if you owned your own failure, or embraced whatever disappointment, it was probably the best way to process and overcome the failure and disappointment. I remember early in my ABC Sports days a relatively trivial mistake had been made on a weekend sporting event on Wide World of Sports, where we simply missed a story that we should have had. In a Monday-morning session that the former head of ABC Sports, Roone Arledge, had, which was typically a postmortem of what went on during the weekend, whatever we had missed came up. There was silence around the room as Roone questioned what happened. At the time, I was young and low-titled and said, “It was my mistake. I missed that.” There was complete silence in the room. Everyone looked around. Here, I had admitted in front of the brass of then ABC Sports, including the head of it, that I had made a mistake.

Shanghai Disney is one of the biggest investments that you’ve made on your watch, perhaps one of the biggest in the company’s history. How does it fit into your priority of expanding global growth? Setting aside the investment Walt made in central Florida to create Disney World, the biggest investment we made in our history was buying Capital Cities/ABC, —a $19.5 billion gutsy investment by Michael [Eisner]. Pixar was the second-largest at $7.3 billion. Shanghai Disneyland is the third. In terms of non-acquisition, organic investment, it is the biggest. No question. In terms of the company’s future, it is the most exciting. You’re looking at the most populous city in the most populous country in the world. [It’s] a market that Disney is known in but one in which we haven’t really penetrated deeply [until now] for a variety of reasons. It has the potential to ground our brand or build a foundation for our brand in China that could pay off for generations to come. In terms of global growth, it’s just huge. We’re already bringing our movies to China, and China is now the No. 2 movie market in the world, but [it’s] growing, and will become the No. 1 movie market by the end of this decade or the very beginning of the next decade. The movies that we make—Marvel, Pixar, Disney, Star Wars— are not only valuable brands in China, but these franchises will all have a presence eventually in this park. It certainly sets up our movie business better in what will be the No. 1 movie market in the world. Clearly, there will be consumer products opportunities that grow from this. But more than anything, it’s people having a connection to Disney, an affinity for Disney, and an experience with Disney that will serve the brand and its businesses well for a long time. Acquiring ESPN along with ABC didn’t seem very important, but it became a Cinderella, contributing around 45 percent of Disney revenues. Where do you take them from here? Technology has the potential to be ESPN’s biggest friend in terms of growth. Because ESPN’s mantra or guiding principle is to serve the sports fan anywhere, anytime, technology can give the fan even more access to what the fans are most passionate about. A primary JULY/AUGUST 2014

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2014 CHIEF EXECUTIVE OF THE YEAR Diluted EPS

Financial Snapshot

Since Mr. Iger became CEO, EPS has grown at at CAGR of %14

20%

18.5% 17.1%

16.3%

15%

$4.0

14.0%

$3.38

AGR 14% C

$3.5

$3.13

$3.0 $2.52 $2.24

$2.28

Source: Company Reports

$2.5

$2.03

$2.0

10%

$1.5

6.7%

5% 5 Year %

10 Year %

(1) Total Annual Average Return to Shareholders

5 Year %

10 Year %

(2) Net Income Compound Annual Growth

5 Year %

10 Year %

EPS (CAGR)

(1) 5-year return is for 9/26/08-9/27/13; 10-year return is for 9/26/03-9/27/13 (2) Net income attributable to shareholders

example is smart mobile devices. Such devices enable you to watch your favorite sport, your favorite athlete, your favorite team, wherever and whenever you want. And that gives ESPN a tremendous opportunity to serve their fans in even more impactful ways. Not only will technology enable ESPN to cover sports better, cover more sports and give the fan an even better experience, but it will provide much more accessibility than ever before. That should power ESPN’s growth rather significantly over the next decade. Mobile technology is the most exciting thing—by the way, not just for ESPN—but for our other businesses, Disney, Marvel, Pixar, ABC and all of our critical brands.

Having been on the board of Apple since late 2011, what takeaways have you been able to incorporate into Disney and what influences has Disney had on Apple? Apple today is what Steve Jobs created—high quality, relentless pursuit of perfection when it comes to their products and unbelievable attention to design and aesthetics. Everything they do adheres to those values and attributes of the brand. I observed from Steve and adopted some of his priorities as our own. Seeing him do it gave me even more impetus or drive to do similar things—or to do what I had wanted to do anyway. There are similarities in what I brought to Apple. For example, we’re both big believers in the power of brands and the need to continue to feed brands with innovation. I bring a little bit more experience as a CEO of a global company perhaps. I like to think that I can offer some advice and perspective to Tim Cook, who I respect tremendously, as a relatively newer CEO. Obviously my media experience is valuable, as I am the only board member with that experience. I’m now more of an elder statesman. Is it true that Steve Jobs once called you up after seeing a Disney film and said, “Bob, that movie sucks.” That’s true. He did. Steve and I used to talk a lot; and frequently, he called me on weekends because it was a great time for us to not only catch up but to muse about all sorts of things. One afternoon, he called to say, “Hey, Bob, my son and I just went to one of your movies, and it sucked.” And I said, “Well, you may think it sucked, but it did $100 million in box office this weekend, so there are a lot of other people [who] thought otherwise. And while I think

$1.76

$1.60

8.2% $1.19

$1.0 $0.5 $0.0

2005

2006

2007

2008

2009

2010

2011

2012

2013

that there were some things about the film that could have been better, I respectfully disagree.” I liked being challenged by him in that regard because even if I disagreed with him, there was always a kernel of truth to what he had to say. There was always something; it wasn’t completely wrong. It drove me to want to demand even more perfection and excellence. He had that impact on me. In fact, I talked about this at our management retreat last fall—the relentless pursuit of perfection. While it can easily be a turnoff, something that you’d want to run from because who needs that kind of criticism, I always took it as being constructive. Steve Jobs may have been Disney’s largest shareholder, but if I ever said to Steve on a call, “You are a member of the board,” or “You are our largest shareholder,” he’d say, “Stop. I do not want to be called either. I want to be thought of by you as a trusted advisor and a friend.” Anytime I mentioned board member or shareholder, he reminded me of that. Finally, I decided to accept him as a trusted advisor and a friend, and he proved to me over time that that’s exactly what he was to me.

If Walt were alive today, what do you reckon he might say about you? Funny you would ask. I spoke with Diane Disney, one of his daughters, about that before she died. I actually wrote her a note: “If Walt were to see those gorgeous cruise ships plying the oceans, or even Walt Disney World, or imagine Shanghai, what would he think?” Interestingly enough, for a guy from the Midwest, he had a real curiosity about the world. He would be blown away to know that China would be the home to a product that was so much a part of who he was and what he stood for—Disneyland. But if he also saw Pixar, or Star Wars or Marvel—think of the storytelling and the characters and the places that these stories exist. [Take] ESPN, for that matter. I think he would be unbelievably proud. This is a bit presumptuous of me, but what the heck, maybe I’ve earned the right to be and also to see, on any list about brand respect and admiration that exists in the world today. [This is] a company that he founded; the brand that he created is still at or near the top of those lists. I mean, what could be a better affirmation for the principles that he embedded in the company that he created?

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2014 CHIEF EXECUTIVE OF THE YEAR

Back (L>R): Weinberger, Cote, Hassan Front (L>R): Glaser, Jacobs, Nardelli, RHR International’s Tom Saporito

Why Bob Iger?

With a formidable list of finalists, members of the 2014 Chief Executive of the Year selection committee faced a tough choice, but they concluded that Disney’s Bob Iger merited the honor. Comments from each of the judges follow:

“He’s done brilliant job developing and implementing a strategy in a complex and ego-filled industry [while] making it look effortless.” —Dave Cote, Chairman and CEO, Honeywell, and 2013 Chief Executive of the Year “Bob is a visionary and innovator who consistently delivers terrific performance across a diverse portfolio of businesses.” —Dan Glaser, President and CEO, Marsh & McLennan “He has been an architect of a very good culture. He’s also a talent nurturer. He’s also an innovation driver. These three legs of the stool have made Disney a very, very strong force in its own area.” —Fred Hassan, chairman, Zx Pharma and partner/managing director, Healthcare at Warburg Pincus. “Iger displays the personal courage, leadership and talentbuilding awareness of a classic leader. I give him full credit for staying on top of the culture issues that are important in today’s world.” —Tamara Lundgren, President and CEO, Schnitzer Steel Industries “Given our business climate in 2014, I think history and performance matter. Bob has done all of this with a sense of community and workforce sensitivity.” —Christine Jacobs, former chairman and CEO, Theragenics, and director, McKesson “Bob Iger has reinvented the Disney brand since his inception as CEO. His performance has been outstanding. He’s been able to execute his vision and build a great team.” —Bill Nuti, Chairman and CEO, NCR

2014_CE_JA_CEOY_Iger.indd 30

“He’s been a disruptive innovator in taking the entertainment industry to another level using new media and new technology. He took a great brand and made it better, which isn’t easy to do.” —Tom Quinlan, President and CEO, RR Donnelley “Bob Iger has done a masterful job of laying out a strategy that encompasses strategic acquisitions, cultural transformation and value. He has been able to activate those strategies and drive innovation, as we said, towards transformation. I think he’s got [a] company that really makes family dreams come true.” —Bob Nardelli, CEO, XLR-8 “Bob has managed to guide the ship of Disney through storms in every port that he inherited. He’s built tremendous growth globally through technology. He’s become a paragon of good governance, as well as a tremendous global icon, an enterprise icon.” —Jeff Sonnenfeld, President and CEO, Chief Executive Leadership Institute, Yale School of Management “Bob has demonstrated understated courage and created tremendous value for all of his stake holders. He has created an immensely diversified, talented team and has left it in a great position for the future.” —Mark Weinberger, Chairman and CEO, EY “Bob Iger took over Disney when it was stalled and in something of a governance mess. He succeeded in sorting through all this and raised both internally by fixing the culture and externally by brilliant acquisitions. He is a person of great character, who is not afraid to step out of his comfort zone to do the unexpected.” —Maggie Wilderotter, Chairman and CEO, Frontier Communications

6/13/14 2:02 PM

Live: 7.5 Trim: 8 Bleed: 8.25

Live: 10.25 Trim: 10.75 Bleed: 11.0

A LEADER TO FOLLOW Congratulations to Bob Iger on being named Chief Executive’s CEO of the Year. We salute you for fostering innovation and encouraging the pursuit of excellence.

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6/9/14 7:03 PM

14-0619-14-A_Bob_Iger_CEO_Magazine_Ad_8x10.75_FIN

01/10/13

June 9, 2014 7:03 PM

/Volumes/PrintPhoto/Jobs/360_Creative/2014_360_Creative_Jobs/14-0619-

Bob Iger

AE_Networks_L_Strip_Corp6_4C_Tag_NEW_FIN_U.eps, 14-0619_UP_TravisFimmel_Phase_1293_Silo_alt.tif, 14-0619_WAHLBURGERS_MARK_12082013_ZD_84_5.tif, 148.0x10.75

8.25x11.0

7.5x10.25

John Hering Annie

100%

CEO Mag. Caleb

Nuno 06/09/14

Kamna

Nuno F. 1

07/01/14 Terrie P.

CMYK

INFORMATION TECHNOLOGY

Achieving Alignment Is your enterprise platform still aligned with your strategy? By Russ Banham

Key Takeaways • Identify the handful of core performance indicators vital to CEO decision-making • Determine the various metrics that provide insight into each of these performance indicators • Assign ownership of each metric to an individual who is responsible for its timeliness, accuracy and continuing usefulness • Invest in a cloud-based Enterprise Performance Management system that offers cascading, drill down capabilities and visually arresting graphics • Refresh this EPM system constantly with new key performance indicators.

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Given the feverish pace of global business, the time to gauge a company’s performance and act upon this information has compressed. To ensure that business functions are performing in alignment with strategy, organizations rely upon Key Performance Indicators (KPIs) to provide timely assessments of potential problems and opportunities. Without such clarity, CEO decision-making is compromised. Managing performance with spreadsheet-based KPIs was the way to go for a couple of decades; but now that business is global, extensive supply chains feeding manufacturing and commerce are conducted on tablets and smartphones, KPIs must be delivered to business owners faster and more accurately. These metrics must be as dynamic as business itself, altering and evolving to adjust to new opportunities and competitive threats. Otherwise, CEO decisions will be based on outdated, inferior and possibly inaccurate performance data. It’s a small wonder that only 54 percent of CEOs in the 2014 CEO Global Survey by consultancy PwC are satisfied with their ability to execute on their strategic visions, impeded in steering the business forward by what PwC calls “alignment gaps,” the misalliance of plans, forecasts, performance data and strategy. Without real-time business intelligence, CEOs risk making foolish decisions. One problem is the vast number of Key Performance Indicators in many organizations. A consultant quoted in this article cites a client company that tallied more than 400 KPIs. Making credible sense of so many performance signals to confidently allocate corporate resources is simply asking too much of business leaders. And it’s daunting to business managers to prioritize the vast volume of KPIs to know which metric is more important than other metrics—the “market share” KPI or the “profitability” one? Another snag is that KPIs often are written in stone and not regularly reassessed and refreshed to address new initiatives or new threats, thereby ensuring the business is on track with strategic objectives. Sticking to the same gameplan when a competitor has just unleashed a disruptive technology is no way to respond quickly to the resulting market upheaval. The solution to these challenges is, in large part, technological. Modern, cloud-based Enterprise Performance Management (EPM) systems offer the means to gather wideranging data to compile up-to-the-minute KPIs. These metrics inform on which tactics are working and which are not, rolling up in real time to a small set of KPIs that assist senior business decision-makers to craft informed and fast course corrections, if needed. “The CEO’s job isn’t to peruse all the organization’s KPIs, just the most important ones relevant to strategy,” says Scott Brennan, managing director of the enterprise performance management (EPM) practice at Accenture. “For example, someone needs to be looking at

“As you gain further insight into your business, you will find different trigger points that alert you to what is happening performance-wise. You then turn those trigger points into KPIs.” —Stephen J. Sheinbaum, CEO of Merchant Cash and Capital

working capital KPIs like ‘days sales outstanding’ and ‘days inventory outstanding.’ But those KPIs then need to cascade upwards and be tied to the company’s strategy.” A handful of vendors of EPM solutions have designed their software to provide this cascading effect. “KPIs need to be cross-functional with each department assigned a particular KPI or set of KPIs that then roll up into a corporate scorecard, so the CEO can get a complete perspective of the most important activities across the business,” says Paul Turner, senior director of product marketing and strategy at Adaptive Insights, a leader in the cloud-based EPM market. Such a cascade of KPIs is in place at Merchant Cash and Capital. “I have a master dashboard that pushes to me each day the consolidated KPIs drawn from each business owner or unit operator responsible for managing their respective KPIs,” says Stephen J. Sheinbaum, founder, president and CEO of the New York-based alternative financing company, which has loaned more than $600 million to merchants since its founding in 2005, purchasing future revenues from the companies at a discounted rate. “I can drill down into the consolidated KPIs to get more granular detail, if needed. But, the important stuff for me to ensure our performance is aligned with strategy is in place.”

Information Overload Before enterprise performance management technology even enters the picture, a company needs to define the KPIs that best tell its tale from a strategic standpoint. Consultants advise starting with buckets like financial performance, customer satisfaction, operational performance, marketing effectiveness and employee performance. Then, they can devise a set of pertinent KPIs within each of these buckets. Merchant Cash and Capital follows this approach, parsing its KPIs across four buckets—sales, customer retention, underwriting performance and financial performance. Within each category JULY/AUGUST 2014

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INFORMATION TECHNOLOGY

are specific metrics used to gauge performance. In the sales bucket, for instance, are “cost per acquisition” and “revenue per acquisition” KPIs. As mentioned, there are an enormous number of KPIs that companies can leverage to measure performance—so many knobs and gauges that business leaders are compromised in understanding where the business is today, much less where it is going. Such was the case at Retale, a Chicago-based shopping provider platform that aggregates and publishes daily and weekly retail deals and discounts from local area businesses from its six offices on four continents. “In the beginning, we were tracking way too much data, had too many KPIs,” says Christian Gaiser, Retale founder and CEO. “This led to information overload. We decided to narrow that down.” Among the company’s most important current KPIs are “sales bookings,” “active mobile users,” “usage patterns” and “content engagement.” This winnowing process depends on the type of business a company is in, its strategic goals and the various tactics pursued to achieve these objectives. In the “financial performance” bucket, a company may want to measure net profit, gross profit margin, economic value added, return on

assets and the cash-conversion cycle. To gauge the success of “marketing efforts,” KPIs like conversion rate, cost per lead, market share and website page views may provide the answers. To ascertain “employee performance,” revenue per employee, average employee tenure and employee engagement scores may provide the insight. Brennan says roughly 50 KPIs are a good sum to feed no more than a dozen KPIs on the CEO’s dashboard. The challenge is determining which KPIs are right for the organization. Turner advises that companies steer clear of metrics that are not forward-looking—information guiding the company into the future. “KPIs must be proactive, tracking where the company is going, not where it has been,” he says. “Tracking historical sales doesn’t tell you much more than how you did last quarter or last year. Measuring ‘days sales outstanding’ today and then comparing it to your DSO forecast for the quarter is information you can act upon.” Karen O’Leonard, vice president of benchmarking and analytics research at consulting firm Bersin by Deloitte, shares this view. “The bottom line is to ensure [that] the KPIs track the criticality of where your organization is this moment and where it needs to be,” she says.

Speedier, Smarter Forecasts Like many firms, NorthStar Financial Services wanted to easily and efficiently access its performance data to ensure alignment with strategy. Thwarting this objective was the firm’s reliance on spreadsheets. “We were manually typing the monthly financial summary-level numbers into Excel spreadsheets,” explains Andrew Rosenberg, NorthStar Financial Analyst, “and we didn’t have a report to provide to the board until a month after the financials were entered.” NorthStar, an Omaha-based holding company for several subsidiaries that each offer unique services within the financial-services industry, currently manages approximately $224 billion in assets. The long time period that it took to create the financial reports made tracking performance against forecasts an exercise in futility, which was also made worse by the fact that NorthStar is a consolidated entity of 11 different reporting units, each with their own sets of KPIs. Although performance data feeding the KPIs arrived on a constant basis, aggregating and analyzing this information proved too Herculean a task in the spreadsheet environment. When questions about data accuracy arose, determining where a number might be wrong was like looking for a needle in a haystack. Much more surety and agility was needed for

NorthStar’s business leaders to make confident decisions. These aims have now been met, thanks to the firm’s investment in a cloud-based enterprise performance management system and its use of a 12-month rolling forecast. The former feeds the latter. “We have a dashboard system in which different KPI owners receive their performance data in real time, which is then aggregated into a set of KPIs for senior business-decision leaders,” Rosenberg says. “If the CEO wants to drill into a particular KPI, he can double click it and get more granular detail. If there is a question about data integrity, the system offers a simple way to go easily through the numbers.” Such comprehensive, up-to-date and reliable performance data assists the firm’s monthly forecasts, which help it react quickly to competitive opportunities and threats. In effect, the former one-year roadmap is adjusted monthly, based on current performance metrics. “The KPI owners are looking at data that is relevant to their functions and color-coded so they can quickly ascertain problems,” says Rosenberg. “Our ability to re-forecast is easy and fast, taking just a few seconds. No longer does it take a month to provide a report to the Board; we’re down now to about three days.”

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INFORMATION TECHNOLOGY

To select among the hundreds of KPIs to garner such actionable information, Accenture encourages the use of scenario-based exercises. “You create a scenario in which you examine, for example, a competitive threat like the impact of a disruptive technology introduced by a competitor,” Brennan says. “If the impact is thought to be substantial, you might elevate ‘time-to-market’ as a key KPI—how long it takes to get a product off the drawing board and into the marketplace. You then watch this KPI closely.” Robert Mittelstaedt, dean emeritus of the W.P. Carey School of Business at Arizona State University, agrees that the purpose of KPIs is to “have managers keep their eyes on specific things to identify early warning signs of trouble—areas you might need to look at in more detail,” he says. “To do that, you have to decide what are the most important things to watch for in the first place. These are the KPIs that will deliver truly strategic benefits to the business.” Other management experts agree. “The organization’s focus, capital and talent need to be pointed toward the critical elements that matter,” says Casey Kirkpatrick, principal partner (strategy) at consulting firm PwC. He warns that selecting KPIs without carefully understanding the related business priorities can result in a misalignment between the overall business strategy and management behavior. At Merchant Cash and Capital, “customer retention” is a KPI bucket, in which metrics include measuring the data on customers that have not received funds in ten days, five days, three days and two days. At Retale, key buckets, such as “sales bookings” and “usage patterns” are informed by metrics like “booking amount per client” and “volume of active mobile users,” respectively. Just as companies parse KPIs into different buckets, the KPIs themselves can be fragmented into insightful silos of information, says Leonard. “Many businesses use ‘employee turnover rates’ as a key metric, but we suggest you break down this KPI into more meaningful components like the turnover rates for critical roles—the high performers [who], were you to lose them, would cause significant business and financial damage,” she explains. Sheinbaum has pursued this fragmenting approach to great success. “We used to have a single metric describing our media spend against our sales, which was was instructive to a point,” he says. “We then broke this down into ‘number of deals per spend.’ Then, we went further, developing metrics for number of deals per digital marketing spend, per direct mail spend and per call center spend. We’ve recently broken

it down even more, measuring, for instance, the number of deals per call center spend using a particular script and the number of deals per digital marketing spend using a particular type of art work.” Kirkpatrick concurs: “A KPI needs to bridge the gap between the strategic intent and operational execution.”

Fast Forward Since the world of business is not static, occasionally KPIs must be refreshed to address external market events like a major merger in the industry vertical, as well as internal events like a leadership change. “We’ve found that KPIs are not a onceand-done affair, but [are useful as part of] an evolutionary process,” says Sheinbaum. “As you gain further insight into your business, you will find different trigger points that alert you to what is happening performance-wise. You then turn those trigger points into KPIs.” Sheinbaum’s dashboard rolls up all the company’s KPIs into a set of metrics relevant to his needs as CEO. If he has a question about a metric, for example, “media spend against sales,” he can double click on the KPI to dig into the data informing it for a more complete narrative. Mittelstaedt says EPM systems offering these drill-down capabilities have become a decisionmaking necessity. “The science of how performance data is displayed is crucial to being able to understand and act on the information presented,” he explains. (See Sidebar: Speedier, Smarter Forecasts, p.34) Many EPM dashboards present KPIs with red, yellow and green lights, directing viewer attention to urgent matters. If a CEO sees a red light illuminating the “employee turnover” KPI, he or she can double click into the reasons why this is so, right down to the manager in HR who noted the loss of a key software engineer in her region. “You want to make it incredibly easy for everyone to see their KPIs, ideally personalized to their specific responsibilities and updated constantly,” says Turner. “The whole goal here is to make quick, informed decisions when vital performance information rears [up]. If the DSO (Days Sales Outstanding) metric indicates sales are down this week in a particular geography, you can discount the price on products in that area to sell more.” Leonard shares this view. “You want a system that provides accurate, timely business intelligence that tells you where you need to be investing your capital in [the] future,” she says. “Focusing on the red flags is important. More important is having a plan in place to act upon [them].”

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6/13/14 2:10 PM

OMD Congratulates

Bob Iger 2014 CEO of the Year

2014 SMART MANUFACTURING SUMMIT

The Future of Manufacturing The concept of a never-ending journey, rather than an endpoint, serves as a powerful mantra for the U.S. manufacturing sector’s comeback. By Jennifer Pellet In kicking off Chief Executive’s 2nd annual Smart Manufacturing

The anecdote underscored the fact that a massive transfor-

Summit, Doug Oberhelman recounted feeling intimidated just before

mation is under way in the manufacturing world. American

speaking at a gathering of technology executives. “I looked out at this

companies are clawing their way back to competitiveness—

audience of all these 30-year-old tech people and thought, ‘This isn’t

after nearly a decade of seeing production move to cheap-

going to be much fun,’” said the CEO of Caterpillar, which hosted the

er-labor overseas producers—by leveraging advances in areas

event at its global headquarters in Peoria, Illinois. “But as I got going,

like additive manufacturing, automation, robotics, wireless

it got better, because I realized we are doing things at Caterpillar

and connected devices. The articles on the pages to follow

that are equal to, if not more advanced than that of almost any tech

aim to help leaders on that journey by providing highlights

company in the world. We just do it in a different way—using all those

from the insights, knowledge and experiences shared at this

products to get things done that we need to get done.”

year’s Summit.

How Caterpillar is Preparing for the Future Excerpts from J.P. Donlon’s interview with Caterpillar Chairman and CEO Doug Oberhelman at the Smart Manufacturing Summit. What does Smart Manufacturing mean to you? I’m not an engineer, manufacturing engineer, designer or anything else, but there’s nothing I respect more than engineering and manufacturing. The iPadization of our world—four years ago I couldn’t imagine using an iPad—has changed the way we all think about everything from reading emails to Internet research to how we can apply that to absolutely anything in our supply chain and in our manufacturing. We’ve got thousands of smart Ph.D.s who live, breathe and dream about this stuff, but now the technology tools are there to make it so easy that even I can apply some of this stuff. We could not have pursued our path on lean manufacturing without the tools that are out there today. We struggle and struggle to make headway, and then a technology breakthrough comes through and we jump to the next plateau. I can’t wait to see what tools we’ll have in manufacturing to help our customers in another decade. Do you see it as a “speed to market pathway,” a “customization tool” or something else? Yes, yes and yes. The only thing holding us back is not being able to think big enough about this. I go back to 1900 and the guy in his

field with a horse and mule who could never imagine a different world. Think about what the world will look like in 100 years. It will be very exciting for us. How do you see additive manufacturing—3D printing—being integrated into CAT? We’re in the early days of this. There are some applications where 3D printing will be fabulous. It will take the labor out. Anybody can do it in his or her basement, in a shop or in a manufacturing facility. But I’m not sure it’s going to replace everything we do. For instance, say we’re in a job site in the Panama Canal or some other remote place and something fails in the machine. Will there be enough raw material in that service truck to hit a button to create the part right there and install it? Is that where we’re going to be in 2114 or sooner? I don’t know. Or will it be around more mass-produced parts where we control the input and the output? The idea is really, really interesting. I don’t know that we will be able to make a piston in a high-pressure cylinder on the spot because there’s so much technology in that. But think about that horse and mule. There’s a lot coming that we’re going to have to grow our way into.

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Chief Executive’s J.P. Donlon interviews Caterpillar’s Doug Oberhelman

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2014 SMART MANUFACTURING SUMMIT

billion. About $10 billion of that came out of our mining business, while the rest of our businesses held in there. So, intentionally, we’ve tried to diversify into three or four major, strategic business plays: construction equipment, mining, energy and transportation, financial services—some other things to smooth the overall cycle. We’ve done pretty well, but the next piece of that is to take inventory out of the chain and be responsive to our dealers and the customers’ needs so that when demand picks up, we can serve it faster without our typical inventory issues—having too much or too little or having it in the wrong place.

Do you use it for prototyping now? It’s used a lot for prototyping, for plastic parts and for lots of things that come out quickly. But how far it will go will depend on how far we can take that technology and the [material] inputs that go into it on the spot. Will it take a lot of the cost out or will it add cost? What about the “Internet of Things” where sensors and other connecting devices are integrated in the manufacturing process and also in the product itself? The industrial Internet, Internet of Things or whatever it’s called is about to change our world. I experience it in different ways day-to-day in my life and in my job. You never really know what’s hooked up to you and what isn’t. But again, coming back to that machine in the field, it’s about letting the owner of that machine know everything about what’s going on out there so that the productivity rises greatly with the fleet of machines on a job site by having everything hooked up together. For example, take one of our asphalt pavers, who has to rely on a hot mix plant five miles away with a storm coming, road construction in the way and an accident that blocks the hot mix plant. His [paving machine] stops for two hours while he can’t move. Now imagine an Internet of Things where all of that is connected so that the hot batch isn’t poured until the paver can come through in twelve minutes time. Think about the efficiency in our world if that gets done. There’s tremendous opportunity coming with this Internet of Things. When will this world be fully realized? Probably not for a long time—but the companies or the industries that get that done early will win big. I’d like to think we’re going to be one of those. Caterpillar has a unique enterprise strategy that has recently undergone an update. Can you talk about that and its significance going forward for your customers and your suppliers perhaps? We’re trying to shorten our lead time—our order-to-ship date—to soften the cycle. At Caterpillar, we lost 40 percent of our top line from 2008, 2009. We remained profitable, but it was a struggle and it was painful. In 2013, we lost 17 percent of our top line, $11

If you had the president’s ear and you could ask him [for] one thing that would help the business environment, what would it be? It would be around infrastructure, which might be a bit selfish but would certainly help the entire industry and help our nation. We peaked in this country in infrastructure spending as a percent of GDP in the ’80s and we’ve been going downhill ever since. Meanwhile, most of our competitors, including China, Thailand and a lot of other developing countries, are still raising their infrastructure spending to GDP [ratio.] For me, long term, that’s going to be a losing proposition. You made a significant investment in China where you mentioned having 100 competitors now. How do you see that evolving in the future? Today, we have 26 plants there, about 15,000 people, 24 dealers and our full business model underway. So if you buy a machine from a local dealer here, that experience would be very similar to what we’re doing in China. China is the largest construction-equipment market in the world, by a factor of two or three, depending on the cycle. One hundred to two hundred million people a year moving to a middle class. We know what’s coming in terms of construction equipment. They are in a tremendous transformational stage in their economy. They’ve gone from a really backward developing country to a modern powerhouse and that’s brought all kinds of advantages but tremendous stresses and strains in the financial system, the economic system and the social system. I am very optimistic that they will continue to manage through this in a very different way than they have and that we’ll still see growth there, probably double the rest of the world. I don’t predict that China will take over the world and run everything, as we thought Japan would do back in the ’80s. They’re going to see hiccups, but it should be over time a very good market for all of us. A fourth of the people on the planet, more or less, a lot more coming, and [an] urbanization and modernization rate that will take the next 20 years to fill out. We’re going into China with the philosophy that we want to be a leader there. We want to meet the Chinese competition in their own backyard, so when they come out of China and attack us in the U.S., which they’re starting to do today, we know who they are and we know how to combat them.

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Caterpillar’s Dave Bozeman

Caterpillar’s Journey to Enterprise Excellence No matter how good you are and how far you’ve come, there’s always room for improvement—that was the central message Dave Bozeman, SVP of Caterpillar’s Enterprise System Group shared with Summit attendees. Caterpillar, the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel electric locomotives, has come a long way over the last decade. A decade ago, the large, diversified manufacturer faced the challenge of aligning all of its various brands and operations around a central organizational DNA and boosting production efficiency. The company addressed the challenge by creating the Caterpillar Production System, which encompassed three key elements: its operating system, management system and cultural system. The three components together, not one independently, make the system work—and it does work. Caterpillar measures its progress on four key components—people, quality, velocity and cost. Under people, for example, the metric is recordable injury

frequency, which dropped from 6.5 to 0.79 over the past decade— or 51,000 injuries prevented. Similarly, approximately 500,000 defects were avoided due to quality performance enhancements under CPR, and 700,000 of 1 million vehicles were shipped on time. At the same time, the company reported a record increase in cash flow. Caterpillar, however, does not intend to stop there. The next step is to take a deeper dive within to find more opportunities for improvement. Already Bozeman has targeted several: pursuing a more holistic, connected system for its divisions, achieving a more disciplined culture and boosting the company’s lean expertise. He urged attendees to do the same, asking themselves: • How has my business evolved over the years? • Has evolution hindered my performance? • How siloed is my business? • Where are my hidden factories (i.e. repair bays) and how can I apply lean to them? • Do we deliver on our customer requirements?

Panel: Making Smart Manufacturing Work Three veterans offer their experiences, observations and insights on implementing smart manufacturing. Who: Raj Batra, President of Industry Automation at Siemens What: A leader in automation technology products engineered and manufactured for all industrial sectors. On the forces driving Smart Manufacturing: Product complexity has doubled over the past 15 years. The number of sellable products has gone up by about 250 percent and the time-to-market—the whole innovation cycle to bring products to market—has been drastically reduced. We also have [demand for] mass customization, productivity and efficiency. In traditional manufacturing, those were at opposite ends of the spectrum—and

there was a lot of cost to be able to accomplish them. Our view is that the only way to do this is to digitize the enterprise. You simply have to talk about the real and virtual worlds, to simulate product design and tie that to manufacturing technologies because anyone who studies manufacturing process knows that 80 percent of manufacturing costs are predetermined in the product design phase. So to not be able to simulate design and tie that to manufacturing processes means really missing out on something. On recognizing opportunities: It’s always interesting to me that in the U.S. we’re somewhat comfortable aging factory assets.

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Honeywell’s Terrence Hahn, XLR-8’s Bob Nardelli & Siemens Industry’s Raj Batra

If you have an iPhone that’s more than six months old, you really feel outdated and out of touch, but we’ll have an automation asset at the heart of productivity enhancement that is 25 years old. You simply can’t get productivity out of a 286 computer, which in some cases is the equivalent of what you have, maybe even one step before that. There are big productivity gains to be had through automating asset modernization. Who: Bob Nardelli, Founder of XLR-8, Senior Advisor to Cerberus Capital Management What: An investment and consulting company specializing in emerging companies. On the Smart Manufacturing imperative for mid-size firms: As you start to scale a company, smart manufacturing becomes increasingly important. When I was running GE transportation, we were doing something similar through brute force, manually getting data and focusing on cost, quality and customer experience. What Smart Manufacturing does is to bring a level of speed and the ability to digest Big Data. Collecting big data is easy. Using it is the challenge, and Smart Manufacturing lets us do that. I would encourage the 197,000 companies out there today that are between $500 million to $1 billion in revenue to not be intimidated by smart manufacturing, but to embrace it and start, maybe one sensor at a time, working your way through connecting those key elements of the process critical to quality and [essential] to your customers. You either have to innovate or you’ll evaporate. Start small, keep adding the sensors, keep adding the information and work with CRM—that will be the best way to keep growing and scaling your business. On where to start: Get the key individuals from your factory—from the shop floor to the superintendent—all in a room and talk about the major issues you’re having. Is it an inability to fill orders within a committed timeframe, so you’re paying penalties or paying to expedite air freight? What is the biggest bottleneck you have? What piece of equipment tends to go down the most? Put all the issues, challenges or opportunities on a whiteboard. Then, talk about [how] to control those using very simple dashboards. It’s not that complicated. You just work through it in a very deliberate, thoughtful and unemotional way to bring out the issues,

and then figure out the best way to digitize or systematize those so that it helps you be able to scale your business. Otherwise, you will be handicapped by the limits of what you can see and how you can react. Who: Terrence Hahn, President and CEO, Honeywell Transportation Systems What: A $3.6 billion global business, Honeywell Transportation Systems develops and manufactures innovative, automotive technologies, including the Garrett Turbochargers. On building on legacy systems: This is an opportunity to build off of strengths that you have. Everybody in this room is a leader because [he or she] defined a business model and led a team to be successful in executing that. The Smart Manufacturing environment is now putting new tools in that maybe accelerate the pace at which you can execute those business models. Having that information on hand is extremely important, but it doesn’t mean you have to abandon what you have in place. It’s really about looking at your vision for the future and then working backwards to the point you are today, rather than, “Where am I today, and where [are] all the places that I could go?” The latter sometimes leads to people not ending up in the place they had ultimately envisioned. The same thing is true with IT systems; map out where you want to go so that people are collecting information in the right way. On the talent component: Once you’ve created your vision of the future and you know your strategy to get there, you need to think about how you’re developing the talent to make that happen. In the pre-Smart Manufacturing world, the floor supervisor potentially became the supervisor of a set of groups or a part of the building and then [he or she] became in charge of the plant, then all the plants and so on. The skill set was just handling larger and larger organizations and to really seeing your entire product line. Now, that manufacturing leadership career path [must] touch many other places. Has a manufacturing leader been in an IT organization to understand that? Has a manufacturing-leadership candidate been in an engineering or technology organization? Have they had exposure to applications engineering?

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MANUFACTURING SUMMIT: CEO ROUNDTABLE

Value Creation in the Era of Smart, Connected Products In 2012, for the first time, the number of devices connected to the Internet surpassed the total number of humans on the planet. By the end of the decade, predictions call for as many as 50 billion smart, connected devices. The proliferation and stitching together of these intelligent machines, sensors, tools and controls into vast, interconnected webs has given rise to the buzz phrase, “Internet of Things” (IoT)—and to the sense that this new world affords great opportunities, if only we can grasp how, exactly, to seize them. “We can connect factories to the Internet and [use those connections] to monitor, control, optimize and automate them and so forth,” James (Jim) Heppelmann, president and CEO of PTC, told CEO participants in a roundtable discussion cosponsored by Chief Executive and PTC. “But just because you can do something doesn’t mean you should. That is, it doesn’t mean there’s a real economic value associated with doing [these things].” Clearly, however, there can be. As with most technological advances, the trick will be to be strategic about how we harness the power of these capabilities. (For details on making the most of IoT opportunites, see sidebar, this page.) Manufacturers, in particular, can benefit greatly from the ability to collect data from products, product systems and other “things” connected to a computing infrastructure to control, service and upgrade the production process, as well as to drive better decision-making and expand innovation. At John Deere, for example, WorkSight technology connects the company’s equipment to monitoring dashboards that enable managers to see where their vehicles are, evaluate their performance and diagnose potential issues in real-time so that—in theory—failing parts can be replaced before the machinery even breaks down. The company has now turned those capabilities into a new business offering called FarmSight, which does the same thing for farmers and more, enabling them to access real-time data from both their equipment and their fields.

To Make the Most of Your Company’s Internet of Things Opportunities, Ask Yourself: 1. What features are worth investing in? 2. Where should we put functionality—in the product, in the cloud or in a new delivery vehicle? 3. Should we choose an open or a proprietary system? 4. What data should we capture and how do we analyze it? 5. How can we protect and secure the system? 6. Should our company consider turning our new capabilities into new businesses? 7. What role should we adopt in moving outside our niche to develop a broader, integrated approach for the sector in which we play? 8. Is it better to go it alone or look to create strategic partnerships? 9. Should we consider rethinking our current distribution or service network? 10. Do these new capabilities call for a change in our business model? —Compiled from remarks by PTC’s Jim Heppelmann “Monitoring the productivity of different fields might affect the farm’s strategy for what seeds to plant, how dense to plant the seeds and how much fertilizer and irrigation to put on next spring,” explained Heppelmann, who added that FarmSight is something of a departure for the tractor company. “Suddenly, John Deere finds itself acting more like a software company, multiple levels removed from being a tractor company. That kind of thing is still an experiment because the farther you go with it, the more you may end up competing with people who don’t even have tractors and are pretty potent competitors.” Opening new lines of business will, in turn, raise a host of challenges, noted several CEOs. “For those of us who are traditionally B2B businesses, the challenge is that we’re all going to be becoming more B2C if we’re going to move up and down the channel that way, rather than horizontally,” noted Terrence Hahn, president and CEO of Honeywell Transportation Systems. “You’ll have to identify those unmet user needs and bring them back.”

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MANUFACTURING SUMMIT: CEO ROUNDTABLE

By its very nature, data-centric technology is always a pricey and dicey investment for companies, involving a hefty capital spend and the challenge of ensuring that new capabilities are leveraged appropriately. “A lot of people talk Big Data and they collect all of it, but they don’t know what to do with it,” noted Bob Nardelli, founder, chairman and CEO of XLR-8. Having been down the implementation road before, many CEOs dread the prospect of reconciling new and existing systems. “We’re in the process of globally implementing SAP and I’ve got another monitoring system in place,” noted Michael Reed, The Manitowoc Company’s vice president of operations. “The struggle we have is how to tie all this together into one system so that we’re not going back and forth trying to figure out, ‘Where is my data coming from now?’” To avoid drowning in a deluge of indecipherable data, CEOs need to take the time to identify key criteria and develop a dashboard that will present the most-needed data in a meaningful way, asserted Jay Pittas, president and CEO of Remy International. “Most processes and most applications have a handful

of critical parameters that define what you’re doing well or not doing well,” he pointed out. “So you have to put some smarts into what you watch. Otherwise, you’ll get overwhelmed.” However, the data you need now may not be the same data you’ll need tomorrow if your company should decide to pursue the new opportunities and markets that the IoT offers. “I think you’ve got to start with the business side first,” said Microsoft Business Solutions’ Colin Masson. “It’s understanding what it is, in your product or your portfolio, that you can turn into a service. Is your business system flexible enough for you to turn that into a product service offering; and if so, how do you price it?” The exciting part of this opportunity is that it’s another way to enhance business models and the value proposition—and it’s not just for big companies,” agreed Hahn. “Everybody’s got a chance to play further down the economic ecosystem of the business [each is] in. It’s about understanding that economic model, that market map and figuring out how to use the tools you have to collect that value. It’s a pretty exciting time.”

2014 Leadership in American Manufacturing Award On Day One of the Summit, Chief Executive’s Marshall Cooper presented Doug Oberhelman, CEO of Caterpillar, with the 2014 Leadership in American Manufacturing Award. “Whether it’s next generation power trains, alternate fuels or engine efficiency, Cat is leading the way,” said Cooper, noting that since taking the company’s helm in 2009 Oberhelman has integrated sustainability into Caterpillar’s core businesses, accelerated investment in R&D and strengthened the company’s balance sheet despite a difficult economic climate. “Both professionally and personally, Doug is also incredibly generous with his time and expertise, serving as a trustee in the Easter Seals Foundation and as chairperson of the National Association of Manufacturers,” Cooper said. “For all these reasons it is our great honor to present him with this award.”

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MANUFACTURING SUMMIT: CEO ROUNDTABLE

Manufacturing’s Challenges and Opportunities Of the numerous challenges faced by manufacturing companies today—including intense global competition, cost pressures and adapting to new technology, finding and keeping skilled labor seems to loom among the largest in the minds of today’s business leaders. “Our No. 1 issue is finding quality people,” Louis Girard, chairman of Carter Control Systems and the Tulcan Group, told CEOs gathered for a roundtable co-sponsored by the Indiana Economic Development Corporation (IEDC). “The problem with our specific industry is that there are not exactly a lot of places to go to learn forging. It’s an old art, so we have to teach it.” Similarly, Allied Motion Technologies struggles to recruit skilled workers for its machine shops, reported Rob Maida, CFO. “Finding the right level of engineering talent has always been a big issue for us,” said Maida, whose company manufactures brush and brushless DC motors and encoders. “We’ve actually been working with some of the college campuses to offer appropriate internships and to bring people through training programs at our solution centers.” At a time of relatively high unemployment, why are manufacturing companies facing a dwindling talent pool? A negative perception about manufacturing careers among students, parents and even high school guidance counselors is one reason, agreed CEOs participating in the discussion. “Guidance counselors are basically incented to send people off to college because that’s how a lot of public schools are graded—by how many graduates go on to college, so that works against this sector,” noted Pierre Custeau, senior director at Oracle Marketing Cloud. The rising sentiment that jobs involving roll-up-the-sleeves physical work are somehow inferior isn’t helping, pointed out Rollance Olson, who serves on the board of Fabrinet Company. He recalls struggling when he employed technicians who installed replacement parts while running an automotive parts distribution business. “It’s an industry that doesn’t get a lot of respect,” Olson noted. “The simple fact of the matter was that these people worked with their hands, and trying to get people to come into that industry was a monumental problem. There was a whole stigma associated with getting dirty that we had to [overcome].” A dearth of vocational training programs has also fueled the issue, added Victor Smith, Secretary of Commerce for the IEDC, who noted that Indiana is addressing that head on as part of its attempt to lure businesses to the state by providing a skilled work force, tax breaks and other incentives. “We’ve brought technical vocational

education back to every high school,” reported Smith. “We’ve also put state money into working with groups of companies to develop basic curriculum for certification programs in each of 13 regions of Ivy Tech, our statewide community college system.” Companies that hire vocational high school graduates, who will also have taken classes toward a certificate at the community college, will receive a tax break on that new hire’s wages for his or her first five years of employment. “We’re really incenting employers to get involved in the program,” explained Smith. Manufacturers themselves are also finding ways to address the issue, often by working with local colleges, broadening their criteria for talent, attempting to boost the reputation of manufacturing-sector jobs and finding other ways to lure skilled workers. Dyson Corporation, a Cleveland, Ohio-based fastener and forgings house that is part of the Tulcan Private Equity Investors group, found that establishing an apprentice program and making a practice of recruiting from the military helped the company find talent. “I would encourage everybody looking for quality people to look to the military,” said Girard, who noted that the company essentially gave up on finding experienced skilled workers in favor of recruiting hard workers who could be trained. “We’ve found that the military is a great training ground for manufacturing talent.” Similarly, Phil Hauck of United Conveyor Corporation, prefers to focus on work ethic over a specific skill set. “Welding and fitter welding positions are very difficult to fill, so we’ve effectively given up on people with the right pedigree walking in the door,” he explained. “We interview for character. We look at how they were raised, down to the level of projects they did with their fathers growing up. We’ll take a good farm guy over almost anybody in the city, and we’ll handle training if we think they have what it takes.” Chris Assenmacher, CEO of Carter Control Systems, agreed. “If we find people who have the drive, the ambition and the character to work hard, I’ll train them,” he said, noting that those qualities can be tough to come by, as well. Finally, some business leaders report success recruiting skilled workers with those tried and true lures: better wages and opportunities for advancement. “If you offer the right package, you get the right talent—and that doesn’t mean money,” said Nitin Kulkarni, vice president of customer management at Honeywell. “It means training [and] career opportunities. We haven’t had trouble getting and retaining people.”

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LEADERSHIP

The Secrets of Corporate Longevity

How important is endurance? And how to know if you have what it takes. By William J. Holstein In an age when Microsoft can pile up tens of billions in cash in a little more than two decades, one might well argue that firms should live fast and—having served their purpose—die young. But more and more theorists, including Arie de Geus, a former strategist for Royal Dutch Shell; Jerry Porras of Stanford University and James Collins, a well-known consultant, now argue that companies with staying power tend to be market-success stories, as well. In fact, when Collins and Porras teamed up to study 18 corporate centenarians, they found that the group collectively outperformed America’s stockmarket by a factor of 15 since 1926. Longevity is, of course, a relative term. Autenrieder, a German brewery, is the oldest-known commercial establishment, having been founded in 1650, the same year in which Japan’s two longest-living, sake-makers Kaganoi and

Key Takeaways • Enduring companies articulate a vision of how the company contributes to a greater cause and embed that vision in their corporate culture • Longevity demands a long-term view of addressing the needs and desires of all constituencies—top management employees, shareholders, suppliers, customers, communities and others • Leaders should set an example through their own work ethic and attitude toward conspicuous consumption • Family-run companies must make sure that the emerging generation understands the connection between performance and reward

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es.

Yukawa were founded. The Dutch porcelain maker Royal Delft was established a few years later in 1653. America, too, has its share of 300-plus-year-old entities. Shirley Plantation, the oldest active plantation in Virginia and one of the oldest family-owned businesses in North America, dates back to 1614. In terms of oldest continuously operated businesses, the U.S. can cite Cigna (1792), State Street (1795), Crane & Co. (1801), DuPont (1802), Colgate (1806) and many more (see table, p. 52). What accounts for these impressive lifespans? Achieving this degree of longevity “doesn’t happen by accident,” answers Mary Kier, CEO of Chicago-based search firm Cook Associates, who has written extensively on the subject. “It happens to companies that have character. It happens when owners or CEOs or chairmen know how to keep their composure, even in times of economic crisis, and how to invest their money wisely to sustain the long term. It happens when employees feel it is their company, too. They do what’s right all the time. If they do that, they have a better chance of longevity and sustainability.” One of the keys at large, publicly traded companies like General Electric, Kier says, is the practice of identifying and grooming high-potential managers from within. “CEOs come from within and stay a long time,” she says. These annual systems of evaluating high potentials, also seen at Johnson & Johnson, IBM and other top public companies, are essential to building in durability for the company as a whole. “If you know that your future is well planned out and you are part of that planning, it certainly is going to be a sustaining factor,” Kier concludes. Kier says she sees different longevity formulas in private versus public companies. “It’s a special formula with a familyowned company,” she continues. “There is a spirit and almost a faith in wanting to do what’s right, not just for their own family and their ownership structure, but for the people who work for them. There is a soul that emanates from a family company when you realize you have a lot of people counting on you.” That’s a philosophy embodied by Franklin Park, Illinoisbased Bretford Manufacturing. Christopher Petrick’s grandfather founded the company in 1948, just after World War II. His father, David, next ran the company; but at age 48, he stepped back to become chairman of the board. In his place, he installed a non-family member as managing director, while he waited to see if his son, Chris, would be able to take the job. Three years ago, Chris, after working his way up the ranks, became CEO of the privately held company, which sells tens of millions of dollars worth of technology-compatible furniture for schools and businesses each year and employs 350 people. Now, it’s up to the 46-year-old to continue building the company and hopefully keeping it alive for the next generation. He knows history isn’t kind to third-generation,

family-business leaders, who often aren’t as committed or as successful as their forebearers. “Third generations blow it,” Petrick sighs. “That’s been hanging over my head since the day I started.” The foundation of Chris Petrick’s strategy to endure is stunningly simple: “by doing the right thing.” Bretford makes 95 percent of its products in America and is certified as a carbon-neutral company. It offers 12-year guarantees for its products like audiovisual trays and computer work stations— far longer than most of its competitors—and conducts rigorous testing. “A lot of the companies we compete with don’t take the time to make sure their product is completely safe,” Petrick says. “They’ll do everything to make it look like they do; but in the end, they don’t. We do it because it’s the right thing to do. We do the environmental stuff and we manufacture in the U.S. because those are the right things to do. If you’re trying to do the right thing, most of the time, people will honor that and respect it and make a decision to buy our products.” Not all of today’s CEOs think about the longevity of their companies. Probably a majority—certainly in publicly traded companies—are squarely focused on quarterly earnings and realize that their job tenures will last a few, short years, at best. And families can become complacent and allow their products to grow stale or succumb to feuds that destroy their businesses. Nevertheless, far-sighted CEOs exist in familyowned companies, in publicly traded companies where families own minority stakes and in some large publicly traded companies where the family role has diminished or never existed, such as Corning.

Globe Union Group’s Michael E. Werner

Structure Plays a Part Michael E. Werner, president and CEO of the North American division of Taiwan-based Globe Union Group, a $700 million a year, publicly traded maker of plumbing equipment, argues that the companies with the best shot at longevity manage to combine the best family values with the realities of having at least some shares traded publicly. “I’m a firm believer that if a senior-management team thinks about the future and about stewardship, almost doing JULY/AUGUST 2014

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LEADERSHIP

A Sampling of America’s Oldest-Surviving Companies

Century Bancorp’s Barry Sloan, Linda Sloan Kay and Marshall Sloan

it with a servant type of mentality, the company will prosper for a long time,” says Werner, who is based in Chicago and who previously ran his family’s business before selling it. “The best case is when you can couple that with the high-performance expectations of a public company. We want to combine the best of both worlds. In a public company, you can’t become complacent because you’ve always got people looking over your shoulder challenging you.” It turns out that how you run your company and manage your family are both essential to pulling off a generational transition and thus, achieve longevity. Barry R. Sloane, 59, president and CEO of Century Bank in Medford, Massachusetts, is contending with how a family-dominated but publicly traded firm builds its core values into its culture and ultimately decides whether to pass the business to a third generation. His father, Marshall M. Sloane, founded the bank 45 years ago and is now 88. He still comes to work every weekday as chairman. Barry worked outside the family business for 19 years but returned six years ago to become CEO. His sister, Linda Sloane Kay, is executive vice president. Between them, Barry and Linda have five children, but none are involved in working for the bank yet. It was Marshall Sloane who decided in 1987 to mimic the way the Ford family structured its holdings in Ford Motor and took the bank public on NASDAQ with two classes of shares, A and B. The public owns A shares but have no vote. The family owns 90 percent of the B shares, and therefore dominates any vote. “It was an enormously important, strategic decision because it allowed us to focus on the long term and not be obsessed with quarter to quarter performance, even though we are,” says Barry. “But strategically, we can look at the long term.” The bank, with $3.5 billion in assets, is growing strongly and has enjoyed record profits for four years in a row. When a customer calls the bank, she hears a recorded message that thanks her for calling “our family’s bank and yours.” In an era when big banks have taken over so much of the industry and have lost any personal connection with

Year Founded

Industry

Caswell - Massey

1752

Perfume

Lorillard

1760

Tobacco

Pittsburgh Post Gazette

1786

Newspaper

Cadwalader, Wickersham & Taft

1792

Legal

Cigna

1792

Insurance

State Street

1792

Banking

Jim Beam

1795

Distillery

DuPont

1802

Chemicals

Colgate

1806

Consumer Goods

Wiley

1807

Publisher

Hartford

1810

Financial

Citigroup

1812

Banks

Remington

1816

Firearms

Brooks Brothers

1818

Clothing

Sources Wikipedia, Company Reports

their customers, Century Bank seeks to differentiate itself by emphasizing its family values and personal touch. “This is our bank,” says Sloane. “That’s a good thing. It’s yours, too, now. We want you to feel that way. We would never sell a product to a customer that our family wouldn’t buy.” No tricky instruments, such as reverse mortgages, subprime loans or variable annuities. “We don’t believe in those things,” adds Sloane, who approves every loan the bank makes. The family values come through, also because Sloane wants to pay his people well, support the communities where his bank has branches and contribute to local political candidates—not to mention satisfying shareholders. “It’s all about doing the right thing,” he says, echoing the view of other longevity-minded CEOs. Sister Linda’s two children are older and have migrated to New York City where they are involved in different careers. Barry’s three sons are only 15, 14 and 11 years old. However, the family has established policies that will govern whether any of the children work at the bank. “We have quite specific guidelines,” Sloane says. “Any member of the family must have a master’s degree in business or an allied field and they must have a minimum of five years working experience in an allied field away from here. You must have those experiences elsewhere to manage this legacy.”

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Longevity and the Family Business: Tricky Transitions Chris Petrick, CEO of Bretford Manufacturing, does not know yet whether any of his three children will be interested in running the company because the eldest is just a freshman in high school. Chris and two brothers and a cousin are still managing the transition in control of the company from his father, David, and an uncle. They just completed the purchase of the company from their elders. Cousin Matt, 44, is the director of product development and management. Chris’ younger brother Tad, 43, is director of design. Brother Joel is an owner but is not involved in management. They have two outside directors on their board to create balance. “They provide a nice, neutral ground when my dad and I aren’t seeing eye-to-eye on things,” Petrick says. Altogether, there are seven children in the next generation, Generation Four. Chris’ kids know that his

The way Sloane and his wife, who is a scientist and teacher, manage their home life seems inextricably linked to the issue of generational transition at the bank. “In my house, the kids’ first responsibility is their academic performance,” Sloane explains. “We expect only the best performance from my children. They have to earn the things they have, whether it’s a computer game or a new basketball. It has to come with achievement. Hopefully, they will always connect achievement with reward.” The boys are assigned household chores and they make deals with their parents that link their academic performance with where they get to go to summer camp. In addition, the family shops a great deal on Walmart.com, where prices are rock bottom. “When we go shopping, we’re bargain shoppers,” Sloane says. “In our family, we hate to waste.” All of which may create the next generation of leadership at Century Bank, helping it live up to its name.

Corning: Consistency at Work It is possible for the CEOs of publicly traded companies to take the long view, even if the founding family is no longer involved in the business. That seems to be the case at Corning, which was founded in 1851 by Amory Houghton, Sr. Shares were controlled completely by the family until after World War II, when the company issued the first shares to outsiders in 1947. The percentage of shares held by outsiders kept increasing over the decades, even as the Houghton family remained active in management. The company survived the vicissitudes of many business cycles, such as the boom-and-bust of fiberoptic cable, which was its major product when the market crashed in 2001. James Houghton, a family member who had stepped back from the business and was serving on the

company makes some of the things they see at school and have even helped him to develop new products for charging, syncing and securing mobile devices in schools. “Wouldn’t it be cool, Dad, if you had plugs in a couch and you could just plug in?” they asked one day. In fact, couches with recharging plugs have emerged as one of the company’s most popular product lines. When the time comes, he plans to ask his children, “What do you want to do? Who do you want to be? If that means working at Bretford, that’s great. If not, you’ve got to have another plan.” He clearly agonizes about the transition because with so many family members involved, “it gets messier and messier. There are parts of me thinking maybe this is the last generation.” Still, he has hope. He doesn’t want the third generation to fail.

board, returned to the CEO role after the telecommunications meltdown to guide the company back onto a winning path. But he has now been retired for 10 years and no family member is involved in the business. Moreover, with 1.5 billion shares outstanding, the Houghtons are no longer considered major investors, according to standards set by the SEC. Yet, Wendell P. Weeks, chairman, CEO and president of the company today, argues that it is his job and the job of everyone at Corning to manage the company in a way that it can survive another 160 years. “Our goal is not peak performance during our brief time at the helm of this great company but rather sustainable performance,” Weeks told shareholders in May. That often means the company leans against the wishes of Wall Street, for example, by insisting on a hefty research and development budget when many financial analysts would like to see those dollars flow to the bottom line. “We’re part of a values-based culture where how we do things is just as important as what we accomplish,” Weeks said. “We’re here because we define Corning by something other than our stock price or what the media says about us.” It’s more than hollow rhetoric. Corning has consistently managed itself for the long-term, in part because it knows that the town of Corning in upstate New York and nearby towns, as well, depend on the company for economic survival. Weeks’ formula for Corning’s longevity—being a values-based culture that seeks sustainable performance—is similar to what many family-owned companies seek to achieve. It proves that publicly traded companies can, in fact, play for the long term. The bottom line: Ensuring that a company endures is not a sudden decision. It takes meticulous long-term planning. And CEOs, whether family members or not, must manage the day-to-day business as a sustainable legacy. JULY/AUGUST 2014 /

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BOOK REVIEW

Keep it Simple, Stupid… or Vice-Versa Does good karma make good business reading? By Joe Queenan

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Americans really do love books about simplifying life. They honestly believe that life—and that includes corporate life—can be streamlined and rationalized to make things function more smoothly. You know, the way they do things in India. Embrace the Chaos: How India Taught Me to Stop OverThinking and Start Living is an exquisite example of this genre. Once upon a time, author Bob Miglani, a sales rep turned angel investor and inspirational speaker, had a good job. Things were going well; but then, he started overthinking. He started stressing. His career stagnated. One day, he decided to accompany a friend on a business trip to India, where he had grown up. The experience would change his life. His friend was overwhelmed by the sheer madness of daily life in India, where nothing ever seemed to run on time, where nothing could be controlled. But Miglani was not overpowered. He just loved the place. A classic, Type A in the United States, Miglani quickly adopted a more mellow mindset when he returned to his native land. Trappedin a taxi in a monstrous trafficjam, he simply sat back and relaxed. When his flight to Delhi from the sacred mountain got canceled, he learned to go with the flow, to chill out, to stop trying to make sense of things. He allowed himself just enjoy the ride. Or, in that case, to not enjoy the ride, as it had been canceled. When he got back to New Jersey, Miglani was a changed man. He had embraced the chaos, and the chaos seemed more than ready to return the favor. This illustrates one of the strange paradoxes of modern life: It is possible to go to India and return to New Jersey a changed man. But it is difficult to return to India after having experienced enlightenment during a trip to New Jersey. The Garden State is just not that kind of place. Miglani derives all sorts of insights from his numerous trips to India over the past 20 years. But most of them sound like the things you read on car decals: insipid bromides and assertions of dubious validity. “Waiting for perfection” will get you nowhere, he declares. Well, it certainly seems to have worked for Michelangelo and Mozart. Later, he asserts: “If we only stop and listen to our own inner voice, we can find all the answers we seek and move forward in the direction we really want to go in life.” Really? You mean the way Josef Stalin listened

to his inner voice? Or Attila the Hun? Or Bernie Madoff? That inner voice? The fact is, embracing the chaos might work in India, where chaos seems to be a national pastime. But it will probably not work here. Once you start embracing the chaos, you run into serious sanitation problems. This is what the French call “banana tourism,” or slumming. It would be a bad idea if CEOs or physicists or air traffic controllers or prison wardens or stock brokers or cardiologists started embracing the chaos. As the old saying goes, “Never trust an airplane pilot who embraces the chaos.” Maliki seems to believe that he has stumbled onto something positively earth-shattering during his many trips to India. But in fact, everything he has to say can be summed up in a few famous song titles: “Don’t Worry. Be Happy,” “The Best Things in Life Are Free,” “Keep Your Sunny Side Up” and don’t forget that fabulous angst-easing lyric: “Take it easy. Take it easy. Don’t let the sound of your own wheels make you crazy.” Embrace the Chaos: How India Taught Me to Stop Over-Thinking and Start Living, by Bob Miglani (Berrett-Koehler Publishers, $16.95, 168 pp.)

Being There: Take Two Ram Nidumolu has not let the sound of his own wheels make him crazy. Not judging from Two Birds in a Tree: Timeless Indian Wisdom for Business Leaders. The author, a social scientist, entrepreneur and consultant, starts off by unilaterally declaring that contemporary business leadership no longer works and needs to be replaced by “being-centered leadership.” This is the kind of management style that involves “the effort to lead from a place of seeking to realize leadership.” The road map for the journey to being-centered leadership consists of four vital steps: “Recognize a higher reality, or the larger context of business (sat);” “experience this recognition through your consciousness (chit);” “anchor this experience in a mindset that promotes joy (ananda);” and “lead by example from this place of anchoring so that you become a being-centered leader (atmana) in thought, word and deed.” If this formula sounds suspiciously close to Donald Trump’s The Art of the Deal, so be it. One can only hope that the success of Two Birds in a Tree will lead to Two Condors in an Even Bigger Tree: Timeless Bolivian Wisdom for Business Leaders and Two Self-Actualizing Canadian Geese on an Ice Floe: Timeless Eskimo Wisdom for IT Guys. Two Birds in a Tree: Timeless Indian Wisdom for Business Leaders, by Ram Nidumolu (Berrett-Koehler Publishers, $18.95, 216 pp.) JULY/AUGUST 2014

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BOOK REVIEW

Just Breathe… and Power Down Yoga Wisdom at Work: Finding Sanity Off the Mat and on the Job is a bit more technical than the other two books about the wisdom of the mysterious East, though no less touchy-feely. Maren and Jamie Showkeir, well-traveled entrepreneurs and yogic consultants, have written more of a handson primer, teaching business people how to integrate the wisdom of yoga into their daily lives. Particularly worthwhile are the sections on practicing ahimsa, taking measures to avoid the non-squandering of vital energies (brahmacharya) and of course, conscientiously developing svadhyaya. The authors strongly recommend the occasional practice of pratyahara by scheduling a “technology fast:” turning off phones, computers and televisions and not answering e-mails. One caveat: At companies such as brokerage firms or hospitals or even Indian restaurants, where employees are not being paid to indulge in brahmacharya, much less pratyahara, it is probably best to conduct a technology fast in your own spare time. Yoga Wisdom at Work: Finding Sanity Off the Mat and on the Job, by Maren and Jamie Showkeir (Berrett-Koelher Books, $15.95, 208 pp.)

Complicating Simplicity Why is it that books about making life simple always seem so complicated? Cindy Wigglesworth’s SQ21: The Twenty-One Skills of Spiritual Intelligence is a case in point. A veteran of the human-resources field, Wigglesworth says that there may be as many as nine different kinds of intelligence in the human mind, including Physical Intelligence, Cognitive Intelligence, Emotional Intelligence and Spiritual Intelligence, none of which seem to be practiced at the federal level. Since she does not identify the five other kinds of intelligence, it is still possible that the somewhat less important varieties could include Online Intelligence, Macrobiotic Intelligence, Polyunsaturated Fat Intelligence and Trailer Park Intelligence. Not to mention that old standby, DWI Intelligence.

As if nine different types of intelligence weren’t enough, Wigglesworth proclaims that there are also four distinct quadrants containing 21 different skills of spiritual intelligence. Most purveyors of mystical wisdom stick with three or four or seven or ten laws or principles or tips. Twenty-one is a weird, unwieldy number. The 21 skills include: “Experience of Transcendent Oneness” and “Breadth of Time Perception.” Natch. There are also nine steps to shift to the higher self and three core exercises to support SQ development. All in all, “Don’t Worry, Be Happy” makes a whole lot easier approach to life. SQ21: The Twenty-One Skills of Spiritual Intelligence, by Cindy Wigglesworth (Select Books, $24.95, 240 pp.)

Monks on Money-Making Business Secrets of the Trappist Monks sounds suspiciously like one of those faddish snap-books along the lines of Boardroom Tactics of the Knights Templar or Marketing Secrets of Helen of Troy. But in fact it is a quite serious and often fascinating read. This is largely because running a monastery is a business in itself and the Trappists have been doing it for a long time. The author, who started two highly successful software companies, has spent the past 17 years hanging around Trappist monks in South Carolina. From them, he has learned the virtues of selflessness, patience and detachment. But he also learned to keep things simple. And the program has made him very, very rich. One day, the author asked the monastery’s abbot how he and his monks managed to accomplish so much with so very few resources. The answer was, “We’re not amateurs. We’ve got a track record here.” “We just trust the process,” was the answer. “This is a 1,500-year-old tradition. We just trust the process.” The process, mind you. Not nine processes. Not 21 processes. The process. As Buddhism’s Siddhartha himself once put it: “Embrace the chaos. Wear comfortable shoes. And keep it simple, stupid.” Business Secrets of the Trappist Monks: One CEO’s Quest for Meaning and Authenticity, by August Turak (Columbia Business School Publishing, $29.95, 182 pp.)

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ECONOMIC DEVELOPMENT

T R O P E R L A N O REGI T S E W E TH

A state-by-state look at what Western states have to offer businesses. By Warren Strugatch

Chief Executive’s newest Regional Report offers an in-depth look what many denounce as the country’s most anti-business at the pros and cons of doing business in California, Nevada, Utah, environment. Chief Executive readers rank the Golden State— Colorado, Wyoming, Idaho, Washington, Oregon and Montana. the nickname is difficult to cite without a smirk—perennially last in the Best & Worst States for Business rankings. Once In California, people call it the Big Wake-Up Call. After half a century headquartered in a Los Angeles suburb, synonymous with economic opportunity and personal striving, Toyota North America announced in May that it would relocate California today is a state where pride of place among business to new facilities north of Dallas, Texas. CEO James Lentz owners is considered, if not gauche, then hopelessly naive. attributed the decision to the company’s need for consolidation, Circumstances color the reaction. The epicenter of ease of collaboration and logistical improvements. He wanted America’s post-war car culture, Southern California was once to centralize the auto manufacturer’s operations, now spread home to Japan’s Big Three, two of them Torrance neighbors. out among several states, bringing it closer to global suppliers In recent years the auto-manufacturing cluster has effectively and transport channels. Lentz insisted he had no problem with evaporated. Nissan, formerly based in Gardena, relocated California’s business climate, nor was the $40 million incentive to Tennessee in 2005. Last year, Honda began emptying its package offered by Texas Governor Rick Perry more than a Torrance North American headquarters and replanting itself minor factor in determining the move. in Ohio. Toyota’s move impacts about 3,000 employees based in The chief informed state and local officials of the relocation the company’s 100-acre facility—2,000 in sales and marketing, plan just moments before announcing it publicly. Inevitably, another 1,000 in financial services. A smaller number of the news rankled. Talk of companies leaving California and employees in Kentucky and New York will also be affected. taking their jobs with them is dry kindling in the state fireplace, More than 36,000 corporations left California from 1990 to a reliable “don’t get me started” conversation starter. Talk of 2010, about a tenth of them resettling in Texas, according to the seemingly endless cycle of new tax bills, service cutbacks the corporate-move database maintained by Oakland business and regulatory proposals spur a highly vocal reaction to analyst Don Walls. Along with the absence of corporate real 58 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2014

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How The States Stack Up Grading: A = EXCELLENT B = GOOD C = FAIR X= NONE Rank Best/Worst States 2013

GDP GDP Per Top Corporate Rank 2013 Capita 2013 ($) Tax Rate (%)

Right to Work State

Quality of State Service

HQ Incentives

Jobs Incentives

Green Incentives

Nevada

55,693

Yes

Utah

37,867

5% flat

Yes

Colorado

30,306

4.63% flat

Wyoming

54,284

Yes

Idaho

31,948

7.4% flat

Yes

Washington

47,157

NA*

Oregon

48,064

7.6%

Montana

33,192

6.75%

California

46,079

8.84% flat

Sources Bureau of Economic Analysis, Tax Foundation, Census Bureau, Interviews with site selectors active in the region, The New York Times Government Incentives Database, U.S. Department of Energy, StatsAmerica.org. * In the Tax Foundation’s corporate tax rate rankings, Washington is listed as not available. Officially the state has no corporate tax; instead it collects an array of alternative taxes that are difficult to rank.

estate tax, Texas’s often-cited benefits include lower living the RSH Group, an Orange County site-selection consultancy. costs, fewer regulations and the tough-to-define-but-everyone- Companies “don’t feel they’re getting their money’s worth from agrees-it-counts pro-business environment. their California taxes,” says Renzas. Last year’s personal income For all the attention paid to Texas, nine-tenths of the tax increase, the downsizing of statewide as well as local economic corporate traffic goes elsewhere, according to Walls’ data. development programs and the expansion of competitive Individuals follow the economic carrot towards other western relocation offers from other states helped additionally sour the and Rocky Mountain states. After Texas and Nevada, the top state’s image in the eyes of business owners and chiefs. The magnet states were Arizona, Oregon, Washington, Colorado, Global Warming Solutions Act, with its mandated greenhouse Idaho and Utah. While Texas pulled in the most transplants, gas emissions reduction schedule, is particularly galling. the dollars went disproportionately to Nevada—about $5.7 “California now relies on its past to attract companies,” he says. billion of California capital between 2000 and 2010, according “You can only do that for so long.” to a study done by the Manhattan Institute. One interpretation: John Kabateck of the National Federation of Independent wage earners follow specific jobs, while entrepreneurs create Business calls California a “tragic paradox.” “We are a state of great natural beauty, abounding in research hubs, a well-educated startups closer to home. work force, enormous entrepreneurial vitality and incredible California (No. 50) Dreamland amenities,” says Kabateck, who represents the state on behalf A mix of fresh, local talent and experienced California of the organization. “But what’s disheartening is that these transplants characterizes the start-up sector across the Western elements are overwhelmed by the burdensome and onerous and Rocky Mountain states. Washington’s appeal to Silicon business climate.” He lists his grievances: sales tax, income tax, Valley refuges makes the state “a magnet for entrepreneurs corporate tax, oil and energy tax, minimum wage and others, each and highly qualified technical people,” says Michael Schutzler, the highest, or among the highest, of any state. CEO of the Washington Technology Industry Association. “California is anti-business,” asserts Matthew Szuhaj, director Washington’s rapidly expanding technology cluster outpaces at Deloitte Consulting in the San Francisco Bay area. “There the ability of schools to produce qualified workers. “We go are a host of things the state could do to improve its business on recruiting expeditions all over the country and fill our climate, but the economy is not hemorrhaging. There is still a companies with people from everywhere else,” he adds. Keynote robust eco-system for innovation. Consider that the amount of speeches at association events have featured such icons as Bill venture capital invested in California today is greater than all other states combined.” Gates, Howard Schultz and Jeff Bezos. Opportunities in neighboring and nearby states suck in talent Talk of California’s tarnished appeal eludes Ryan Black. The and capital. In California, outbound companies outnumber SoCal native never looked beyond his San Clemente roots when inbound about ten to one, estimates James Renzas, principal of seeking a corporate headquarters for Sambazon, the fruit juice JULY/AUGUST 2014

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ECONOMIC DEVELOPMENT

company he and his brother cofounded in 2000. “Southern California is a beautiful place,” he states. “I travel around the world. I think where we live is a little crowded, but I wouldn’t trade it. It’s wonderful.”

Nevada (No. 8)

transportation system; and integrated rail, road and airport connections exert appeal. “The natural environment and recreational opportunities are huge plusses,” says Howard Gelt, real estate attorney and State Economic Development Commission member. State GDP is $258 billion. Government has targeted advanced manufacturing, bioscience, defense, energy and agriculture, as well as such creative fields as design and publishing. Colorado’s 6.2 percent March unemployment rate surpassed the national average, 6.7 percent. Jobs grew at a 3 percent rate last year, outpacing predictions. Colorado’s tax burden ranks 19th lowest out of the 50 states, and the state ranks 19th on the Tax Foundation’s Business Tax Climate. Colorado spends at least $995 million per year on incentive programs, predominantly on sales tax refunds, exemptions or other sales tax discounts, per the The New York Times. Top incentives go to manufacturers and agricultural interests.

The fastest-growing state for nearly two decades before the Great Recession, Nevada more recently has led the country in per capita job losses, shedding 200,000 during the downturn. The state still depends heavily on gambling and tourism, which employs one out of four workers. State GDP growth lags the national average, and April’s 8.5 percent unemployment rate was higher than every state but Rhode Island. Favorable cross-sector hiring news in early spring offered Nevadans some encouragement; signs of a construction industry rebound are evident. Nevada’s tax burden ranks 42nd out of the 50 states and is No. 3 in the Tax Foundation’s Business Tax Climate Index. “Nevada doesn’t have a corporate income tax and that makes a huge difference,” says site selection Wyoming (No. 18) consultant Deane Foote. Still, this fall, a margin tax initiative Wyoming “has been in a slump the last couple of years,” notes imposing a two percent revenue tax comes to a vote, which “a JPMorgan Chase in its Wyoming Economic Outlook. The slump lot of business owners will watch carefully,” says Mike PeQueen, “likely reflects disruptions caused by the inroads made by natural principal of Hightower Advisors in Las Vegas. Nevada spends at gas as a source of electricity generation.” Wyoming’s $32 billion least $33.4 million per year on incentive programs, predominantly GDP grew just 1.4 percent over the past 12 months. JPMorgan sales tax refunds, exemptions and other discounts, according to Chase predicts better times ahead: “The robust energy outlook The New York Times. New legislation allocates incentives to movie is a plus for the state.” Unemployment fell to 4 percent in March, production, targeting Southern California’s cluster. significantly below the national rate. Wyoming’s tax burden is the lowest in the country, and the state topped the Tax Foundation’s Utah (No. 13) State Business Tax Climate Index. Wyoming spends at least Utah’s economy continues to expand. The state’s $111.8 billion $89.4 million per year on incentive programs, predominantly dollar GDP grew at a 3.4 percent clip last year, a Rocky sales tax refunds, exemptions or other discounts, stated The New Mountain high. Durable-goods manufacturing accounted York Times. Top incentives go to trucking companies, alternative for nearly a third of the increase. Utah dominates many state energy concerns and manufacturers. business-climate rankings, topping the ALEC-Laffer State Economic Competitiveness Index seven consecutive years. Idaho (No. 28) Still, local leaders worry about underfinanced education, Idaho’s economy, after decades of strong performance, has lack of church-state separation and the need for tougher slowed to a crawl. Idaho’s GDP, at $58.2 billion, continues environmental controls. “Some people have problems with the to grow at a lackluster pace, slower than all but three states. Mormon influence,” says consultant Foote. Utah’s tax burden The Gem State “lags the nation and the West on the road ranks 23rd lowest out of 50 states, and the state ranks ninth to recovery” and will continue to do so over the short term, in the Tax Foundation’s Business Tax Climate Index. Utah says economist Brian J. Greber, director of ECONorthwest spends at least $207 million per year on incentive programs, research center at Boise State University. Key Idaho industries predominantly sales tax refunds, exemptions or other are agriculture, food processing, lumber and wood products, discounts, as stated by The New York Times. Top incentives go machinery, electronics manufacturing and mining. Idaho’s tax burden ranks 24th highest out of 50 states, and the state to manufacturers, in particular, aerospace concerns. ranks 18th in the Tax Foundation’s State Business Climate Colorado (No. 16) Index. Idaho spends at least $338 million per year on incentive Legalization of marijuana brought the state much attention, programs, predominantly sales tax refunds, exemptions new revenue expectations and anecdotal accounts of higher, and other discounts, according to The New York Times. Top inbound migration. Such factors as proximity to California; incentives go to trucking firms and agricultural concerns. a well-educated workforce; Greater Denver’s public 60 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2014

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CEO PERSPECTIVES:

WHY WE’RE HERE Who: John F. Jastrem, Chairman and CEO, Callison Architecture Holding Site History: Established in Seattle in 1975, Callison moved to the U.S. Bank Centre in downtown Seattle in 1994. The firm leases three of 44 floors in the 580-foot tall tower, which it designed. Callison has more than 400 employees at headquarters and another 600-plus working out of 11 offices worldwide including New York, London, Shanghai, Beijing, Guangzhou and Dubai. Why Seattle?: “Our location here provides us with access to our markets in Asia, in particular China. We have offices in Shanghai, Beijing and Guangzhou and have done business in some 78 cities in China. Access to Seattle-Tacoma International Airport is very important as we are a global firm. I fly once or twice a week and put in over 150,000 miles a year.” Reason for Location: Seattle was hometown of founder Tony Callison, who cultivated relationships with chiefs at such local firms as Nordstrom, Amazon, Microsoft and Boeing.

Who: Jason Zickerman, President and CEO, The Alternative Board Site History: Established in 1990 by Allan Fishman, who took space in a series of St. Louis office buildings. Fishman relocated to Colorado in 2000, where he set up headquarters in a series of office buildings in Aspen, then Denver. In 2007, new chief Jason Zickerman purchased a two-story, 24,000 square-foot office building in Westminster and moved operations there. Why Westminster?: “We are centrally located between Denver and Boulder. We have plenty of parking. We are next to state trails where employees can ride, go biking and hiking in their off time. I enjoy rock-climbing nearby. We have beautiful views of mountains and we’re just 12 minutes from my home.” Reason for Location: “The natural beauty of Colorado and appeal of its outdoor lifestyle.”

Who: Yehudit (Dita) Bronicki, Director and CEO of Ormat Technologies Site History: Founded in 1965 as Ormat Turbines Ltd. in Yavne, Israel, the renewable-energy company moved to the United States in 1972 when its principals, Lucien and Dita Bronicki, immigrated. The company scouted for office space in California, Utah and Nevada before deciding on Nevada. Main production facilities are in Yavne. Why Reno?: “We outgrew our space and moved nearby to Reno.” Reason for Location: “Nevada has no corporate tax. Nevada has a substantial number of geo-thermal plants, which was the direction we were expanding our activities as a company. We received support from the legislature. We set up first in Sparks in 1986, then moved to Reno in 2006.”

Who: Ryan Black, CEO and Co-founder, Sambazon Site History: Ryan Black and two co-founders started out renting about 3,000 square feet of office space in San Clemente, California, in 2003. Four years later the expanding company moved to its current business park location, absorbing about 10,000 square feet. Why San Clemente?: “We may have the best climate in the world, and the whole surf and action-sports industry is here.” Reason for Location: “My brother Jeremy and I grew up in Southern California. We were both living here and it made perfect sense to us to bring our product up from Brazil. Here in Southern California you have a really health-conscious and educated population.”

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ECONOMIC DEVELOPMENT

Montana (No. 31) Montana’s small-but-robust economy ($34 billion GDP) paced the national economy pre-2008, but those days seem long ago. Government is the major employer, followed by health care, retail, mining and agriculture sectors. Bankruptcy filings have been at least double the national rate since 2009. Health of the energy sector is a major economic determinant. Unemployment, chronically low by national standards, has been steadily dropping since the winter of 2010, and it was 5.1 percent in March. Montana’s tax burden ranks 37th out of 50 states, and the state ranks seventh in the Tax Foundation’s Business Tax Climate Index. Montana spends at least $101 million per year on incentive programs, predominantly cash grants, loans or loan guarantees, per The New York Times. Top incentives go to oil, gas and mining interests.

Washington (No. 33) Washington State’s economy continues to grow slowly, with employment rising in most sectors, except for aerospace and the federal government. Despite sector growth, aerospace giant Boeing has been transferring jobs out of state, recently announcing that its headquarters will move, and Microsoft has taken down the “Help Wanted” signs. Local economists see continuing revenue and workforce growth by Amazon and point to resurgent software, construction, financial-service firms, hotels and restaurant sectors. Hiring is costly; the minimum wage of $9.32 leads nation. Washington’s GDP was $325 billion in 2012. The Tax Foundation ranks Washington’s

tax burden 26th out of 50 states and ranks the state sixth in its State Business Tax Climate Index. Washington has neither personal nor corporate taxes, but it does collect alternative revenues, including a business & occupation tax and a gross receipts tax. The state spends over $2.35 billion per year on incentive programs, according to The New York Times, predominantly for sales tax refunds, exemptions and discounts, as well as corporate income tax credits, rebates and reductions. Top incentives go to manufacturers and agricultural concerns.

Oregon (No. 38) Oregon continues to create jobs, making up for Great Recession losses. Last year’s 2.3 percent growth rate outpaced the 1.6 percent national average, accelerating in March to its strongest pace in nearly a decade. State economist Mark McMullen calls the expansion “a full-speed recovery” in a state struggling to sustain growth outside of its capital, Portland. Advanced manufacturing, clean technology, forestry products, high technology and outdoor gear and activewear are the state’s five targeted industries. Oregon’s GDP was $195 billion in 2012, growing at a 4 percent clip that outpaced the other Far West and Rocky Mountain states. Oregon’s tax burden ranks 16th highest out of 50 states, according to the Tax Foundation, and its business tax climate ranks 12th. Oregon spends at least $865 million per year on incentive programs, per The New York Times, predominantly property tax abatements and corporate income tax credits. Top incentives go to film and construction industries.

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Aloha, Renewable Energy Hawaii once had a strong sugar and pineapple-plantation agriculture. Today, much of that land lies fallow. According to Peter Rosegg, Hawaiian Electric spokesman, that land may once again be returned to fuel and agriculture. At Campbell Industrial Park in western Oahu, Hawaiian Electric has built and operates a 110-megawatt combustion-turbine power plant that runs on renewable biodiesel, including waste products such as animal fats and agricultural run-off. The power company intends to develop local biofuel suppliers using native organic materials. Biofuel candidates include jatropha, a hardy tropical bush with oil-filled seeds; switch grasses and algae. Hawaiian Electric has contracted several suppliers and continues to seek more. Near total dependence on imported crude oil impacts daily life on the islands for everyone, adding to the urgency of engineering renewable-fuel solutions, Rosegg continued. “To offset oil’s high prices and extreme volatility, all new contracts for renewable energy such as wind, solar, waste to energy and geothermal are long-term, fixed price agreements that provide a growing hedge against oil.” “Many renewable-energy contracts we have signed in recent years are already competitive with oil prices, and will become even more so as oil continues its erratic upwards spiral,” says Rosegg.

Alaska Employment: Less Government, More Private Sector Traditionally dependent on public-sector employment, Alaska is moving toward a more market-oriented economy, as government spending in the 49th state continues to shrink. Federal spending contracted 4.9 percent last year and this year’s forecast calls for 3.8 percent shrinkage. Most of the spending cuts involve support for military bases. “The military is a massive player in Alaska’s economy,” says Dianne Blumer, state labor commissioner. In addition to employment on bases, “many civilian jobs are tied to the military,” she adds. In a state where 1 percent annual growth impresses, the oil and gas sector—a signature Alaskan industry—grew 3.5 percent last year, offsetting jobs lost to federal cutbacks. The healthcare sector is booming, having created more than 10,000 jobs over the past decade. Leisure and hospitality jobs are also expected to grow, especially in food services and bars. Attracting cruise ships is an economic driver. Nearly a million cruise ship passengers visited the state last year and traffic could exceed that benchmark this year, for the first time since 2008. “The Alaska visitor industry has become one of the state’s most important economic engines, bringing in new dollars from outside the state and creating a significant amount of jobs and spending,” notes the McDowell Group, which studied Alaska’s visitor industry last year. Among their findings: cruise passengers spend less in Alaska than airline passengers, on a per-person basis. JULY/AUGUST 2014 /

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CEO WATCH | POINT OF VIEW

Continued from page 14. “Regardless of what you think about carbon dioxide or climate change,” says Bryce,“the best way forward is to embrace natural gas and nuclear.” Fortunately, business is pioneering new technologies such as TerraPower, a private company, bankrolled in part by Bill Gates, that is pursuing a novel traveling wave reactor design. (The company’s vice chairman is Nathan Myrvold, former Microsoft CTO and holder of a doctorate in theoretical physics from Princeton.) Such initiatives, he says, will further propel the competitiveness of the U.S., which already enjoys the cheapest cost of electricity among the 27 member nations of the EU. What are the biggest myths about energy? The biggest myth is that we’re running out of energy. The reality is that we’re just beginning to understand the availability of energy resources that we have, particularly here in the U.S. Remember, it was as recent as 2005 that ExxonMobil CEO Lee Raymond said that natural gas production in North America has peaked. ExxonMobil is a pretty savvy outfit, but they got it wrong. What’s happened since 2005? U.S. natural gas production has increased 41 percent. The myth that we’re running out of energy has been predominant now for a century, and what keeps happening? Innovation. It’s evident in oil and gas exploration, in the downstream sector, in refining, and also in the way that we’re consuming energy. We’re becoming incredibly more efficient. Yet this myth that we’re running out of energy continues to prevail. It’s what certain sectors of society use to justify their rent-seeking and this has been damaging to the U.S. economy. What will play out with the endlessly debated Keystone XL pipeline and what do you reckon the delay has cost the economy? It’s really impossible to estimate the economic costs of the delay. In my view, the Keystone XL pipeline doesn’t matter anymore. Why? Because if you look at the amount of oil by rail loading capacity that has been built in North Dakota and is being built in Alberta and North Dakota alone, it represents a million barrels a day; Alberta, another million barrels a day. Keystone was designed for 800,000 barrels a day. So, the combination of the new push for moving more oil by rail has in many ways obviated the need for Keystone. Clearly, moving oil by pipeline is a safer and cheaper. But at this point, with the new rail information in place, the oil producers in

the Bakken and in Canada are realizing, “We have more flexibility to move our oil by rail.” So this continuing delay on Keystone has led to a predictable response—oil is getting to market by rail instead of by pipeline. You make a compelling case that the cheaper the energy, the better for the economy, especially for middle and lower wage earners. Yet, the prescriptions from the policy elites is to make energy more costly. Why? It intrigues and horrifies me how the de-growth idea has become more mainstream. It is being carried by the most famous and probably the most influential environmentalist in America, Bill McKibben. In getting himself arrested protesting the Keystone pipeline in front of the White House, McKibben said he wants a twentyfold reduction in global hydrocarbon use. And no one ever questions it. Instead, the reaction is, well, of course, that’s what we need to do to prevent climate change. This is a radical agenda, and it’s something that represents an incredible threat, not just to the U.S. economy, but to the global economy. These people want to take us backward. They believe fundamentally that to go forward, we have to go backward. This is silly on its face. For example, one of the prescriptions being advanced is having a global referee to decide who gets to use what energy. We’re going to cede our sovereign power to some unelected entity that gets to decide what size car we drive or how many miles per year we can fly? Yet, Sierra Club attracts corporate, as well as individual, donations. How do you account for that? Former Mayor Michael Bloomberg gave the Sierra Club $50 million to fund their “Beyond Coal” campaign. Again, this is deeply silly. Yes, the Sierra Club is fighting coal-fired power plants here in the U.S., but they’re also fighting them, with other environmental groups, around the world. Since 1973, coal consumption has grown faster than any other form of energy on an absolute basis. Over the last 10 years, coal use has grown as much as the growth in oil, natural gas, nuclear and hydro combined. You can say “Beyond Coal” if you have other forms of energy to tap. But how do you say you want to go to “Beyond Coal” to someone who doesn’t have electricity? That is not just economically objectionable, it’s morally objectionable.

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These are people in many countries who are living in dire energy poverty, and they’re desperate for electricity. If they choose coal because it’s the cheapest option for them, my message to them is, you do what you need to do. But some of these environmental groups are actively trying to block them. China and India clearly intend to generate more electricity using whatever sources at their disposal. So what is the solution? The challenge is to find cleaner combustion technology. And it’s happening. The move in India now is not to use standard combustion technology, which is pulverized coal, but to use supercritical technology, which wrings more power out of each kilogram or ton of coal consumed. And it’s a cleaner process. Is coal clean? Well, generally, no. But the alternative, which is to have no electricity at all, is worse.

Denser Energy is Green Energy* When it comes to generating more energy with less—what used to be called “productivity”—it is important to understand the idea of power density or the amount of energy per unit weight (gravimetric energy density) or per unit volume. Pioneered by the Czech-Canadian scientist Vaclav Smil, power desnsity is expressed in watts per square meter and allows ready comparisons among energy sources.

Nuclear

56 W/m2

Average Natural Gas Well

53 W/m2

Oil Stripper Well (produce 10bbls/day)

27 W/m2

Solar PV

6.7 W/m2

Wind

1.2 W/m2

Corn Ethanol

0.05 W/m2

Coal

*Most large modern coal-fired power plants generate electricity with power densities ranging over an order of magnitude, from just around 100 W/m2 to 1,000 W/m2, based on good quality bituminous coal. Owing to the myriad variables that would figure into any such calculation, i.e., above-ground, below-ground, rank of coal, etc. actual figures will vary widely.

“Power density,” which is a measure of the energy flow harnessed in a given volume or mass of an energy source, is a key concept in your book. Given the basic physics involved, why is so much money spent developing fuel sources that have low power densities? Never underestimate the power of the image of so-called green energy. Why are so many people intrigued by these projects? Because they have this imprimatur of being green, and most simply don’t understand the basic physics behind it. I want the public to understand the basic physics and math of energy. Many of these “green” investors are chasing the subsidies, and therein lies one of the big issues. Look at what, in fact, some of the utility executives and independent power generators have said, “Why are they putting money in solar?” With regard to the big solar projects being built in California, I remember one CEO saying that these projects have some of the lowest risk he’s seen as a utility executive. Why are they de-risked? Because the government is providing them with massive subsidies.

Couldn’t technological innovation help boost the power density of some low-density renewables? No. Wind energy is constrained. We’ve seen bigger and bigger wind turbines. Yes, they’re more powerful, but because they’re bigger, you have to space them further apart. According to numerous studies, including analyses that I’ve done myself on the power density of wind energy, it’s one watt per square meter, period. End of story. Elvis has left the building. That’s it. Biofuels are a fraction of that, maybe a third of a watt per square meter. Countries like Germany and Denmark have pulled back on wind—why? They’ve pulled back on renewables in general because they have come to understand the incredibly high cost. Since 2000, Germany spent roughly $100 billion subsidizing renewable energy, and what are the Germans doing now? They’re going to close their nuclear plants because the Green Party in Germany is so powerful, and they are going to replace them with lignite-fired—low-rank coal-fired—power plants. This is their CO2 strategy? This is how they’re going to save the climate? Makes no sense whatsoever. And further, when you talk about competitiveness, the biggest industries in Germany are going to the German government saying, “We need a rollback on this Energiewende project—that’s the name for their renewables effort—because it’s simply pricing us out of the market.” Industry will flee Germany if this continues. BASF, the biggest chemical maker in the world, recently said that moving all of their operations from Germany to the U.S. would save on the order of $700 million a year in energy costs. So, industry gets it. What do you make of one of the great buzzwords in contemporary business: sustainability? It’s one of these squishy words frequently used by marketing people, particularly by European companies that can mean anything you want. I’ve never seen a definition. In fact, I know [Whole Foods CEO] John Mackey was invited to speak on sustainable business practices somewhere, and he responded, “When you send me a definition for ‘sustainable,’ I’ll give you an answer on my giving a speech.” Of course he never heard back. On one level it’s a buzzword that is devoid of meaning, but which has no value in practice. However, there is also an insidious antigrowth side—anti-economy, anti-jobs. For example, I received an email the other day from the Environmental Law Institution (ELAW), which is trying to block a coal-fired power plant in India because building a power plant there would destroy this fishing village. Think about it. A wealthy environmental interest group in the West wants to prevent development in India because it is concerned about climate change. So they want these fishermen to stay poor and live in their huts because it’s cute? This is fundamentally disgusting. What actions should business leaders take from the ideas in your book? It’s up to business leaders to survey their own businesses and determine if their processes are smaller, faster, lighter, denser, cheaper. If so, it should be positive for them and their customers because they are doing more with less. That’s what we humans have been trying to do since we started walking upright. Getting from here to there faster. Making it smaller, making it denser. This is our nature. And a lot of this palaver is a distraction. If it ain’t profitable, it ain’t sustainable.

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EXECUTIVE LIFE

Five Best Fun Cars for CEOs Here’s how to maximize your weekend assets. by

William J. Holstein and Scott Oldham to be environmentally advanced. If that’s the case, the new BMW i8 is a stunner. None of these two-door vehicles has a great deal of room, however, so perhaps an elegant but incredibly powerful sedan might be the ticket. If so, consider the Audi RS-7. All five picks have robust 0-60 mph acceleration times. We continue to believe that there is a big difference between the cars that CEOs buy and the ones that sports and entertainment figures buy. CEOs are naturally performanceoriented, but they don’t want the overly exotic Italian models or James Bond speedsters that are too expensive, require too much upkeep of their tires and brakes, and demand extra time to take them to a track. Even if you are buying a personal car, you want to feel that you are getting value for your dollars. Here are our top-five recommendations:

PORSCHE

You’ve worked long and hard and you deserve to enjoy the fruits of your labor. Buying a fun, weekend car is one obvious way to do that. Never mind what they might think at the office. This is for your precious personal time. Once again, we have teamed up with car shopping website Edmunds.com and its Editor-in-Chief Scott Oldham to offer you an intelligent range of new or recently refreshed selections. Many discerning buyers prefer two-door cabriolets because driving with the top down during the warm weather months remains a thrill. So we offer the new Porsche 911 Turbo S, the Jaguar F-Type and the Chevrolet Corvette. They all come equipped with simple, no-hassle, one-button convertible tops. But they possess dramatically different personalities. Not everybody wants to attract attention by driving topless, so some may prefer a two-door coupe that happens

Horsepower: 495 hp. JAGUAR

Price as Tested: $88,615 MPG: 20 mpg city, 28 highway Plus: The headlights are the coolest in the universe. Nit: Dashboard controls are too complex. What It Says About You: You love stylish performance.

FELINE FEROCITY: 2014 JAGUAR F TYPE V8 S This car will put a smile on your face every time you get in. It’s simply gorgeous with all the right curves in the right places. It has a really muscular stance and the front end resembles a cat’s face, particularly when the LED lights around the headlights are on. When you turn on the engine, it has more of a Ferrari sound than the quiet purr of the vast majority of Jaguar sedans. It’s hard to believe it is a Jaguar because the rear end dances when you hit the accelerator due to the sheer power that is generated by the rear wheels. The huge 5.0 liter supercharged V8 engine will take the car from 0 to 60 mph in a blistering 4.2 seconds. However, at the same time, it has all the refinements you would expect in a Jaguar. The door handles recede into the body of the vehicle, the stitching on the leather inside matches the outside color of the car and the ventilation ducts pop up out of the dashboard when you turn the climate control on. All of these details add up to a wonderfully modern and elegant vehicle. There are different versions of the F-Type, but the most powerful one is the V8 S, which we drove. The shifting mechanism is delicate and requires a bit of patience to master. It can be driven in automatic mode or shifted with paddles on the steering wheel, but both choices are capable of unleashing the power of this beautiful creature. 66 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2014

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THE GRANDMASTER: 2014 PORSCHE 911 TURBO S

Horsepower: 560 hp. Price as Tested: $210,620 MPG: 17 mpg city, 24 mpg highway Plus: The air scoops on the side of car make a dramatic statement.

What It Says About You: You seek the ultimate.

JAGUAR

PORSCHE

Nit: The small navigation system feels like it was crammed into the dashboard.

When you hang out with people who work for Porsche, you discover they have a naked and unabashed obsession with speed. They talk about their personal highest speed like other people talk about the stock market or their caloric intake. That passion has always resulted in cars that were incredibly powerful, but the company tended to resist beauty or comfort because those values might interfere with the need for speed. So, as you would expect, the third generation of the 911 Turbo S to appear in the United States, as of this year, screams with power. Its 560 horsepower—30 to 40 more than the previous generation—meaning that the car can effortlessly reach speeds of, er, the legal limit within seconds and pin all occupants to the backs of their seats. 0 to 60 mph occurs in less than three seconds. It’s slightly disappointing that there is no manual transmission, but it has a “Sport Plus” mode that shifts the car into a more aggressive driving style even in automatic. It does not shift until it hits the red line at 7,200 rpm. So why bother with manual shift? And Formula One-style paddles on the steering wheel offer that thrilling alternative, as well. Handling is superb because of the vehicle’s weight distribution. You have absolute confidence in any turn, which is the soul of skillful driving. Your heart cries out for empty pavement ahead. This Porsche is also a real beauty—with sensuous lines—and it is actually comfortable. The seats are not hard benches but rather heated and ventilated leather seats with 18 adjustable positions. The Burmester sound system is robust, so the vehicle is perfect for putting the top down and cruising. It has two seats in back, but not many adults are going to sit in them. The trunk space, under the front hood, is adequate. All in all, you can now have Porsche’s power with both beauty and utility—if you can afford it.

s . o r

y e

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A PERFECT BLEND: 2014 AUDI RS 7 The jaded attendants at the Waldorf-Astoria Hotel’s parking garage have seen every luxury car imaginable. When I drove up in an Audi RS 7 sedan, with its stunning front grille, I scanned their stoic faces for any reaction, but I saw none. The next morning, when I checked out, however, I discovered they had parked it in a special area with the Bentleys and BMW 7 Series sedans. They clearly treasured it. What the attendants couldn’t possibly know is that the car, while stunningly beautiful, contains a raging inner beast. A 560-horsepower, 4-liter, V8 engine erupts whenever the driver hits the accelerator. A sports exhaust outlet opens up and the cabin is filled with a delicious roar, much like the deep bass pipes of a medieval organ would fill a cathedral. Audi claims a 0-60 mph acceleration time of 3.7 seconds. The RS 7 model, introduced in the United States in October 2013, is built by quattro GmbH, a division of Audi, much like Mercedes has its AMG and BMW has its M performance lines. It is intended to be “maximum Audi,” the company says, and it delivers just that. It may be the perfect choice for a CEO who wants four doors for family or friends, a spacious trunk and all the beautiful touches, such as the stitching on the seats and wood inlays with aluminum striping. The 20-inch gloss-black wheels are works of art by themselves. Yet it can be driven robustly when you’re in that mood. Its suspension, engine and transmission are set-up more aggressively than other Audis and it competes against the Mercedes CLS and the BMW 6 Grand Coupe. There is no manual shift, but paddles on the steering wheel allow you to drive it like a Formula One racecar when you want a surge of adrenaline. This car offers a most satisfying combination of luxury, utility and performance.

Horsepower: 560 hp. Price as Tested: $122,545 MPG: 19 mpg city, 27 mpg highway Plus: The Bang & Olufsen sound system is incredible. Nit: Tires are vulnerable to potholes. What It Says About You: You demand excellence.

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BMW

AUDI

EXECUTIVE LIFE

A SUPERMODEL SUPERCAR: 2014 BMW i8

Horsepower: 357 hp. Price as Tested: $135,700 MPG: After about 20 miles of range on electricity, the gasoline engine should get an estimated 27 mpg. Plus: An electronic noise actuator under the rear-deck lid generates a fantastically designed exhaust note that is emitted from the stereo’s rear speakers whether it’s switched on or not.

BMW

AUDI

Nit: The rear “seats” are uncomfortably tiny and trunk space is a paltry 5.4 cubic feet. What It Says About You: You’re a Renaissance CEO, appreciating style, performance and cutting-edge technology.

You have a clear vision for the future and so does BMW. The BMW i8 is the German automaker’s new high-performance plug-in hybrid, and you don’t have to wait till the future to experience it. Zero to 62 mph in 4.4 seconds? A full charge in three hours from a regular garage outlet? Using absolutely no gasoline for a 10-plus mile commute? Yes, it’s true. It’s also one of those rare machines that’s even more stunning and desirable in production guise than it was as a concept car. The lithe bodywork that entranced the auto press is, in fact, a collection of lightweight and dent-resistant plastic panels that have been carefully sculpted with numerous functional aerodynamic details. BMW says the i8 can also travel about 22 miles and reach a top speed of 75 mph on electrons, alone. Uncorked with the gasoline engine in the lead, it will reach a top speed of 155 mph. The i8 also delivers stellar handling thanks to 50/50 weight distribution and a low, centrally mounted battery pack. Settling into the front seats requires some practice—given its unique scissor-liftstyle doors and high sill, but the car makes up for it in style. Its low-slung profile is punctuated by standard U-shaped LED headlights. Inside, a multi-tiered and layered cockpit design is, at the same time, inviting and driver-oriented, and this car uses recycled materials and naturally treated leather for upholstery and panel surfaces. The multi-adjustable power seats offer good support and long-distance comfort, and a 6-foot 2-inch test driver had headroom to spare. The bottom line is that it’s a gorgeous, technically interesting machine that puts a premium on handling.

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ad index A&E Networks aenetworks.com 31 Chartered Global Management Accountant cgma.org 13 Cleveland Clinic clevelandclinic.org/exechealth 45 Coca-Cola coca-colacompany.com 35 CohnReznick CohnReznick.com 23 Greater Fort Lauderdale Alliance lesstaxing.com 19 H20 Plus h2oplus.com 3 Hasbro hasbro.com 7 Indiana Economic Development iedc.in.gov Inside back cover JCPenney jcp.com 29 Louisiana Economic Development opportunitylouisiana.com 11 Marvel marvel.com 21 Michigan Economic Development Corp. michiganbusiness.org/CE 5 Microsoft Cloud microsoftcloud.com Outside Back Cover New Balance newbalance.com 17 OMD omd.com/north-america/global-media-agency 37 PTC, Inc. ptc.com/go/loT 47 RHR International rhrinternational.com 43 Stein IAS steinias.com 49 Tennessee Dept. of Economic Development tnecd.com 15 Texas wideopenforbusiness.com/success Inside front cover

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AMERICAN MUSCLE:

2014 CHEVROLET CORVETTE STINGRAY There was a time when the driver of a Corvette would be expected to be a guy wearing a gold chain around his neck and sporting a ring on his pinkie finger. The psychographics were not right for a CEO. The completely redesigned, seventhgeneration 2014 Corvette Stingray, however, commands respect. It is, of course, sleeker, more angular and more pleasing to the eye. Its interior is dramatically improved and it has all the latest electronic features, including a rear-vision camera on the dashboard. General Motors has used aluminum and carbon fiber to make the car lighter than ever. But what it really represents is the best in pure, unadulterated, rear-wheel power driving. It is equipped with a heads-up display that the driver sees in the windshield, like the pilot of a jet fighter would see. It shows speed and which gear you are in. That is essential information, because with the roar in your ears and your heart in your throat, it is easy to forget just how fast you really are going. Stingray is officially part of this Corvette’s name, harkening back to the 1960s.

Appropriately, the Corvette is equipped with a standard, seven-speed manual shift. You can push the car to 60 mph while still in second gear, which means that, for the vast majority of time, you don’t need to go beyond third or fourth gear. The higher gears are for when you choose to put the top down, turn up the music and cruise smoothly with a companion. That’s also a glorious way to go. To be sure, there are tradeoffs to make with a Corvette. There are no back seats, so space is limited and insurance rates shoot up for twoseat cars. But, oh, what a thrill! And at this price, you could buy matching His and Hers models for less than the cost of the Porsche Turbo S and still have cash left over. Horsepower: 450 hp. Price as Tested: $66,080 MPG: 17 mpg city, 29 mpg highway Plus: The passenger seat is equipped with a panic bar to grip, which will be essential for some spouses. Nit: There’s no windscreen to help buffer the wind when driving topless. What It Says About You: You are serious about torque.

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FLIP SIDE

Meanies Test

Are sociopaths in suits running Silicon Valley? / Joe Queenan People have started to notice that a lot of Silicon Valley hot shots are not particularly nice. Jeff Bezos’ pitiless treatment of Hachette, Steve Jobs’ need to crush adversaries and the general arrogance of so many tech titans could lead one to believe that there is something unique about the field that makes its leaders more unpleasant than everyone else. In the Hall of Fame of Really Nice People, no one would think of including Larry Ellison, Mark Cuban or even Mark Zuckerberg. The subject of tech industry unpleasantness will be treated in a forthcoming book, The Sociopaths of Silicon Valley, by Milo Yiannopoulos, who writes for Business Insider. It will also be the subject of The Good Psychopath’s Path to Success: How to Use Your Inner Psychopath to Get the Most out of Life by Andy McNab and Kevin Dutton. Yiannopoulos thinks that a certain level of CEO-level sociopathic behavior is acceptable if you believe that “technology has the power to introduce new efficiencies and new opportunities into our world, that it is or could be a transformative power for good in the world.” But he also likes sociopaths in suits because they make life more interesting. In his view, movie stars, athletes and politicians have all become politically correct, mealy-mouthed bores, whereas tech CEOs constantly shoot or tweet from the hip. Thus, foul-mouthed or mean-spirited CEOs provide laughs for the general public, starved for entertainment because everyone else has become so tight-lipped and polite. Well maybe not Alec Baldwin. Or Dennis Rodman. Or Lady Gaga. Or a host of Tea Party types. Or Putin. But you get the general idea. By the way, the flippant, diversity-loathing Yiannopoulos also thinks that newsrooms should be filled with “posh,” “independently wealthy” people—and more middle-class white men—because they will be less susceptible to accepting flattery—and even bribes—from the people they write about. In taking on the subject of people who say mean, stupid things, he is certainly not under-qualified.

McNab and Dutton believe that it is possible to behave like a psychopath, but to do so in a productive, socially useful way. Their endorsement of controlled, life-affirming psychopathic behavior has a strong grass-roots flavor: You don’t have to be a captain of industry to be nuts; anyone can join in. This is an updated version of the old saw, “You don’t have to be crazy to work here…but it helps.” The three authors seem to believe they have stumbled on something remarkable. They have not. Sociopathic behavior at the CEO level is nothing new and it has never been confined to the tech field. Henry Ford was not a nice person. Neither was J.P. Morgan. Andrew Carnegie could play hardball. More recently, we have had an army of corporate raiders, and the guys who run operations like Clear Channel and Live Nation, who do not play nice. Carl Icahn is no sweetheart and neither is Steve Cohen. Tech titans simply draw more attention to their behavior because of the size of the stakes involved, and because they work in a field that needs to ceaselessly beat its own chest in order to survive. You can mouth off all you want in the dog food business and no one’s going to write a book called Sociopaths of the Dog Food Industry. People need food and clothing and shelter, products that more or less sell themselves. But nobody actually needs an iPad. Alas, sociopathic behavior eventually draws heat. Just ask Jay Gould. Or Mike Milken. What goes around usually does come around. Get enough people mad and things start to turn sour. The media get on your case and then the feds get on your case and sooner or later the public gets tired of your act and then things turn ugly. Warren Buffett seems to have done pretty well for himself without being a psychopath. Ditto Andy Grove and Paul Allen and Scott McNeally and 1,000 other CEOs, investors and entrepreneurs. The suggestion that sociopathic behavior is to be applauded is cute, counterintuitive and, ultimately, juvenile. It is also an insult to every CEO who runs his company the way it is supposed to be run. JULY/AUGUST 2014

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FINAL WORD

Mobility Is the Issue; Not Inequality The one thing that is unequal about all the talk of income inequality is that most of it comes from politicians and the elite media. Judging by surveys by the Pew Charitable Trust and others, it is further down on the list of things most people care about. Yet President Obama calls it “the defining challenge of our time.” Senator Harry Reid says there is “no greater challenge” facing the country. Not to be outdone, Massachusetts Senator Elizabeth Warren goes further, saying “the system is rigged.” Attention is further focused on this with the publication of French economist Thomas Piketty’s Capital in the TwentyFirst Century, a book so popular with the bien pensant that if it wasn’t so full of dry data it would have been turned into a Hollywood screenplay by now. Piketty’s work in collaboration with University of California-Berkley economist Emmanuel Saez represents an impressive collection of data that analyzes income distribution over long periods of time. The share of income received by the top 1 percent, according to Piketty and Saez, has grown from $1 out of every $10 in 1979 to one $1 of $5. Some say middle-class wages and household incomes have stagnated. Poverty has risen; economic mobility has fallen. Is this true? And even if it is, does it accurately reflect the challenges America truly faces? In the first place, studies that measure income inequality largely focus on pretax incomes while ignoring the transfer payments and spending from unemployment insurance, food stamps, Medicaid and other safety net programs are conceptually flawed. By ignoring benefits such as employer-provided health insurance and showing capital gains as giant lump sums of income, such studies exaggerate income concentration. “Politicians who rest their demands for more redistribution on studies of income inequality but leave out the existing safety net are putting their thumb on the scale,” observes AEI resident scholars Keven Hassett and Aparna Mathur. Consumption is a better way to measure overall welfare than pre-tax income. Using data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, Hassett and Mathur conducted a recent study, “A New Measure of Consumption Inequality,”

and found that the consumption gap across income groups has remained remarkably stable over time. “It is not at all clear that the interpretations of the data presented by Piketty and Saez show what they say they do,” says Donald Boudreaux, professor of economics at George Mason University, and scholar at the Mercatus Center. “It is the nature of some researchers that they are comfortable with data that confirms their basic beliefs as opposed to data that contradict it. For example, there is a huge amount of fluctuation, not to mention uncertainty, in income groups. People move in and out of these statistical quintiles. Charles and David Koch may not leave the top quintile, but people in the lower groups move up and down all the time.” People generally have access to many more material possessions than they did in, say, the 1980s. An Apple iPhone 5S is equally available to a Dominos delivery boy as it is to Bill Gates and doesn’t perform any better for either person. From 2000 to 2010, for example, consumption has climbed 14 percent for individuals in the bottom fifth of households, 6 percent for those in the middle fifth, and 14.3 percent for people in the top fifth when accounting for changes in the U.S. population and size of households. The larger question ought to be whether income disparities in any way disturb the historic ability of Americans at the bottom to become the next Bill Gates or Mark Zuckerberg. With long-term unemployment and high degree of economic insecurity in the wake of the Great Recession, it’s understandable why some have grown more concerned. Scott Winship, Walter Wriston Fellow at the Manhattan Institute, has studied this since his days at Brookings. He argues that no research shows real correlation between income inequality and mobility. He says, “upward mobility is the same today as it was two or three generations ago.” Winship adds that while mobility has not changed in decades it has been stuck at unacceptably low levels for many people. The true culprits are advances in technology and the rise of globalization, which have transformed our economy, marginalizing people with low skills. In short, inequality is a distraction. Our real defining challenge is to boost economic growth and close the skills gap that widens opportunity for all.

72 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2014

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