July/August 2018 Chief Executive Magazine by Chief Executive Group

Private Equity Confidential | Data’s Dark Future | Dean Kamen’s Tech Tips | Human Side of Lean JULY/AUGUST 2018

MARILLYN HEWSON LOCKHEED MARTIN

CEO OF THE YEAR

At the leading edge United Technologies congratulates Marillyn Hewson on being named Chief Executive magazineâ&#x20AC;&#x2122;s CEO of the Year and for her outstanding leadership of the Lockheed Martin Corporation. Her vision and integrity play a vital role in engineering the future of aerospace. From the F-16 and C-130 to the F-22 and F-35, UTC has been proud to collaborate with Lockheed Martin in bringing game-changing innovation to our nation and allies. UNITED IN INNOVATION www.utc.com

OTIS PRATT & WHITNEY UTC AEROSPACE SYSTEMS UTC CLIMATE, CONTROLS & SECURITY

C ONTENT S

July/August 2018 No. 295

FEATURES CEO OF THE YEAR 20 THE RIGHT STUFF Passionate, poised and relentlessly methodical, Lockheed Martin’s Marillyn Hewson has proved to be the right leader for risky times. And now she’s Chief Executive’s 2018 CEO of the Year. By Dan Bigman

BOOK EXCERPT 40 BIG NANNY IS WATCHING YOU In a new book, former Homeland Security Director Michael Chertoff argues that unless our legal structures change, the main casualty of the Big Data revolution won’t be our privacy—it could be our autonomy. An excerpt. By Michael Chertoff

CEO ROUNDTABLES 54 MANAGING CYBERSECURITY IN THE NEW REALITIES OF IoT Your devices, systems and technologies can all talk to each other—and with cyber criminals. Here’s how to realize the benefits of connectivity without compromising security. By Jennifer Pellet 40

58 THE MOBILITY REVOLUTION Imagine if everyone at your company performed with the passion of pro baseball sensation Shohei Ohtani. Crazy thought, right? The man who helped bring lean manufacturing to America four decades ago doesn’t think so. Welcome to the Harada Method. By C.J. Prince

TRANSITIONS 64 SO YOU WANT TO BE A PE CEO? Running a private equity portfolio company comes with unique challenges and a high level of stress. Before you take the plunge, make sure you’re cut out for the job. By C.J. Prince

COVER PHOTO BY ERIN SCHAFF

C O N TE NT S EDITOR-IN-CHIEF

Dan Bigman

EDITOR-AT-LARGE

Jennifer Pellet

MANAGING EDITORS

Kimberly Crowe Patrick Gorman DIGITAL EDITOR

Gabe Perna

PRODUCTION DIRECTOR

Rose Sullivan

CHIEF COPYEDITOR

Rebecca M. Cooper ART DIRECTORS

Carole Erger-Fass Gayle Erickson Alli Lankford RESEARCH EDITOR

Dale Buss Daniel Fisher Craig Guillot C.J. Prince Jeffrey Sonnenfeld James Wynbrandt

DEPARTMENTS 6

Melanie Nolen

CONTRIBUTING EDITORS

EDITOR’S NOTE Five Ways to Ease Your Cybersecurity Worry

9 LEADERS

EDITOR EMERITUS

J.P. Donlon PUBLISHER

9 Lessons in Disruption Dean Kamen on Coping with Tech-Driven Change

Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net PUBLISHER, CORPORATE BOARD MEMBER/ DIRECTOR OF EVENTS, CHIEF EXECUTIVE GROUP

14 Law Brief Just Say Pay

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

16 Crash Course Cashing Out

VICE PRESIDENT

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

18 On Management Exit Lessons

DIRECTOR, BUSINESS DEVELOPMENT

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

74 REGIONAL REPORT The West Tech expertise and a strong quality of life are bolstering vibrant economies. By Craig Guillot

DIRECTOR, BUSINESS DEVELOPMENT

Liz Irving 203-889-4976 | lirving@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT

Gabriella Kallay 203-930-2918 | gkallay@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT

83 PLANE ADVANTAGE Members Only How to navigate the latest iteration of private aviation membership programs. By James Wynbrandt

Marc Richards 203-930-2705 | mrichards@chiefexecutive.net MANAGER, STRATEGIC PARTNERSHIPS

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

88 LAST WORD Getting Wellness Right Why most efforts to build a heathier workforce fail— and how to make yours work. By Laura Putnam, M.A.

Debra Menter 203-889-4978 | dmenter@chiefexecutive.net CLIENT SUCCESS MANAGER

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

CHIEF EXECUTIVE GROUP EXECUTIVE CHAIRMAN Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 295 July/August 2018. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2018 by Chief Executive Group LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Stamford, CT, and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive Group, PO Box 47574, Plymouth, MN 55447.

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VICE PRESIDENT, HUMAN RESOURCES

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Steve Hallem MANAGING DIRECTOR

Scott Budd

Congratulations to Marillyn Hewson, CEO of Lockheed Martin, winner of Chief Executive Magazine’s CEO of the Year Award In today’s fast-paced global market, timing is everything. You want to protect, grow or transform your business. To meet these challenges we offer clients small teams of highly qualified experts with profound sector and operational insight. We’II ensure insight drives action at that exact moment that is critical for success. When it really matters. alixpartners.com

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IT’S AN UNHAPPY TRUTH that 50 percent of first-time CEOs will fail—but you don’t have to be one of them. Here are two reasons new leaders often fumble—and ways to guard against them.

CEO AND SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES 52, 53 ChiefExecutive.net/compreport

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CHIEF EXECUTIVE NETWORK 71 ChiefExecutivenetwork.com

Monday, December 11, 2017

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

COLUMBIA BUSINESS SCHOOL 29 gsb.columbia.edu/execed

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

CONNECTICUT ECONOMIC DEVELOPMENT 38, 39 ctforbusiness.com

1. Failure to adjust leadership style to a new context. Most leaders view the way they lead as inherent to them—their views, personality, strengths and the things that have worked for them in the past. Yet, leadership style must be situational—CEOs must lead in a way that meets the specific needs of the organization and its people. For example, a turnaround might require a heavy-handed, highly decisive leadership approach for some time, while a continuous improvement assignment likely requires a leader who encourages and rewards innovation, taking a more enabling approach to leadership. In the latter case, a new leader who pushes for sweeping change before winning over the hearts and minds of the people may create unnecessary noise. The quantity and pace of change required should be the key driver of the style needed—not personal preference or past experience.

DELOITTE R.E. AND LOCATION SERVICES 15 deloitte.com/us/locationstrategy

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

Manage risk by betting small and often. Growth requires taking and managing risk. The most successful leaders do not simply mitigate risk, they also identify and assess the risks that will fuel their next expansion or acquisition. Three key things can help you create processes that identify, scope and manage risks in your business.

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2. Failure to assess the leadership team. Rather than enter the role with a preconceived plan for existing team members in mind, a new CEO should do a thoughtful assessment of the talent and the morale in order to make strategic decisions. • If the team is talented but has low morale, a good CEO will take time to build morale before raising or drastically changing expectations. • If the team has high morale but is weak on talent, the CEO can develop the talent (if the charter allows time for that) or strategically upgrade where most necessary. • If the team is low on talent and low on morale, the CEO should move out much of the team and import fresh, highly skilled talent. • If the talent is highly skilled and has high morale, the team will be capable of embracing significant changes in charter and expectations. The key is to make changes that are strategic, not reactionary. To Succeed, Assess and Adapt Too often, CEOs lead in the way that served them in their last roles— even though the likelihood of that style being as effective for a different organization with a different team and a different charter is low. Instead, a thoughtful assessment of the charter, the team and the broader organization should guide incoming CEOs toward the best style to take the organization from where it is to where it needs to be. Taking the time to strategically assess and adapt within the new context will dramatically reduce the risk of failing in your new role.

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Emily Bermes is CEO of human capital consulting firm Emily Bermes + Associates.

WOUNDED WARRIOR PROJECT 81 woundedwarriorproject.org ZURICH INSURANCE 47 zurichna.com

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

FIVE WAYS TO EASE YOUR CYBERSECURITY WORRY AT OUR RECENT CYBER RISK FORUM in San Francisco, in partnership with our sister publication Corporate Board Member, I got a chance to interview CISOs from Aetna, Rockwell Automation and Dell, as well as Michael Chertoff, the U.S. secretary of Homeland Security during the Bush era (an excerpt of his new book, Exploding Data, runs in this issue). It was a great event, and here are my five favorite takeaways for CEOs and board members from the session: Be realistic. “If somebody says, ‘Oh, I never want to have an intrusion,’ that’s like going to the doctor and saying, ‘Doctor, I never want to be sick for the rest of my life,’” said Chertoff. “It’s not realistic. But if you can reduce the severity and the frequency and Former U.S. Secretary of Homethe consequences, you are then healthy from a cyber land Security Michael Chertoff standpoint.” Know your role. “Your value as a businessman and businesswoman is your understanding of what is important to the company,” said Adam Hickey, deputy assistant attorney general for National Asset Protection. “What it needs to survive and to grow and to thrive? Is that information? What information? Where is it stored? You can provide strategic guidance to folks in IT, as well as resources that shape the cybersecurity posture.” Stay strategic. “In my experience,” said John Scimone, chief security officer of Dell, “it’s generally more beneficial and meaningful to keep [discussion] at a higher level. You can easily get distracted when you start getting into the technical weeds or whatever’s on the front page of the Times that morning… instead of looking at a company’s structure for technology governance, risk governance, roles and responsibilities, lines of accountability.” Use your geek. This is essential when working with boards, said James Routh, chief security officer at Aetna. “Every single board has a designated board geek [DBG],” he said, “and the designated board geek is the person that all board members turn their head to when there’s a critical decision around IT. Nine times out of 10, when the debate and discussion happens about a particular topic in a board meeting, the DBG is going to weigh in. And if you prep the DBG, then that helps the whole board dynamic and starts to demystify the uncertainty.” Talk it out. Above all else, remember—cybersecurity is still an emerging field. “I think it’s important that board members and CEOs realize that at every CISO meeting that we go to, one of the agenda items is how should you report to your board,” said Dawn Cappelli, chief information security officer of Rockwell Automation. “Nobody can figure that out. So I think we need to have conversations and figure it out.” —Dan Bigman, Editor, Chief Executive SAVE THE DATE: Our next Cyber Risk Forum for CEOs and directors will be held March 4, 2019, in San Francisco. For more information: businesscyberforum.com

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

DAN GLASER President and Chief Executive, Marsh & McLennan

FRED HASSAN Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus

TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries

ROBERT NARDELLI Chief Executive, XLR-8

THOMAS J. QUINLAN III Chairman, President and Chief Executive, LSC Communications

JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management

MARK WEINBERGER Chairman and Chief Executive, EY Exclusive Adviser to the Selection Committee

TED BILILIES, PHD Chief Talent Officer, Managing Director, AlixPartners

CONTACT US Corporate Office Chief Executive Group LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 Fax: 203.930.2701 ChiefExecutive.net Letters to the Editor letters@ChiefExecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 Fax: 847.730.3666 advertising@ChiefExecutive.net Reprints Phone: 203.889.4974 hdewing@ChiefExecutive.net

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

CEO1000: INSIDERS VS. OUTSIDERS Chief Executive recently introduced the class of new 2017–2018 CEOs on its CEO1000 Tracker. Among the group were 128 new CEOs, 92 were insiders and 36 were hired from outside the company. While all new CEOs face some common challenges, there are also differences in the integration agendas for each group. RHR International’s Deborah Rubin and Paul Winum, co-heads of the firm’s board & CEO services practice, have helped hundreds of CEOs manage the different challenges—and strengths—of each position. Some key ideas:

nal 36%TOP OUTSIDE HIRE

URCE HIRE

TOP INSIDER HIRE

External

SOURCE OF HIRE

GAIL BOUDREAUX Anthem (No. 31)

Internal

DOUG MCMILLON Walmart (No. 1)

Of the 128 new CEOs on the CEO1000 over the past year, insiders far outnumber outsiders—but each situation has challenges.

nal 92% OUTSIDERS: BUILD CREDIBILITY

New CEOs coming from outside the company have the advantage of a fresh perspective and no personal investment in safeguarding prior decisions. They can more easily make difficult decisions about current people and priorities than those who were originally involved in setting them. However, they do need to invest time to learn the business and culture of their new organizations. Even if their mandate involves a turnaround, understanding what currently exists can provide insight into key areas to leverage or evolve and enable the new CEO to earn credibility within the organization. New CEOs can be surprised at the amount of time needed to build trust and rapport with individual board members, yet few regret the investment. These CEOs need to develop a strategy and build alignment with their boards and senior teams, assessing the capability of management teams they inherit and addressing any gaps quickly. New CEOs coming from the outside need to be particularly sensitive to the symbolic impact of every early decision and action they take, as they tend to be watched closely for signals regarding their values and agendas. Unintended messages can quickly erode confidence or respect and can be difficult to undo. INSIDERS: BUILD THE TEAM New CEOs rising from inside the organization know the company and the culture well. They have firsthand knowledge of the businesses and leaders, a broad internal network, a track record and credibility. But one of their unique challenges is assessing and recontracting their relationships with former peers. Changing key members of the management team can be difficult for insiders, who typically have had strong relationships with their colleagues. Harry Levinson, one of the most respected management psychologists of the last 50 years, wrote eloquently about how difficult it is for a new CEO promoted from within to fire his or her peers, comparing it to “psychological fratricide.” However, ensuring that one has the right team and building buy-in among this group is a key early challenge to address.

Establishing a working partnership with the board presents another unique challenge for the insider. Many at the board level have known the new CEO for years and may have difficulty adjusting their perceptions to fit his or her current role. New CEOs have expressed frustration at the “avuncular” attitude some board members unconsciously adopt versus seeing them as a new but highly capable leader of the enterprise. Candid conversations about expectations, leveraging the chair or lead director and investing 1:1 time can help recalibrate these relationships and perceptions. FOR BOTH: MANAGE THE HANDOFF One of the key challenges for any new CEO is managing the handoff from the outgoing predecessor. There are some subtle differences in how to best handle the transition between insiders, who already have an existing relationship with the incumbent, and outsiders, who have to quickly build a partnership within the transition period. Insiders must establish their own voice and agenda—which is particularly challenging when the outgoing CEO remains engaged as a board member. In this same situation, outsiders must find a way to be respectful of the previous regime while finding the right time to introduce their own path forward. Both outgoing and incoming CEOs need to discuss their new roles, key milestones and timing and how they will leverage the outgoing CEO’s contribution without encroaching upon their own leadership prerogatives. The challenges of this balancing act are why nearly half of the CEOs and directors we spoke with for our research on CEO transitions said it is best for the outgoing CEO to exit from the organization with no overlap—and only 3 percent thought the outgoing CEO should take a board position.

For more information about RHR International, visit rhrinternational.com or call +1 312-924-0800

L E A DE R S

LESSONS IN DISRUPTION

Want the lowdown on coping with technology-driven change? Learn from the master. BY DALE BUSS

SERIAL DISRUPTOR DEAN KAMEN invented the Segway personal transporter, the iBOT articulating electric wheelchair, the low-cost Slingshot water purification system and the LUKE advanced prosthetic arm for injured soldiers. Of late, he’s been busy at his new Advanced Regenerative Manufacturing Institute at the old Millyard in Manchester, New Hampshire, producing human tissue to implant into sick and injured people. “Everyone’s excited that we’re introducing a new industry to replace a textile company here that once ran the largest industrial complex in the United States,” says the legendary technologist and innovator. The 67-year-old CEO of DEKA Research & Development has used technology to make the lives of millions of people worldwide easier, safer, healthier and more sat-

isfying. Along the way, he even found time to create a not-for-profit that gets school kids interested in being the next disruptors. Given Kamen’s pedigree as an innovator extraordinaire, he’s uniquely equipped to offer perspective and advice on most CEOs’ deepest, darkest fear: being blindsided by disruptive technology. Fortunately, Kamen says, more CEOs than ever “have expertise in at least one form of technology. The age of American business being led by MBAs may at least be waning.” Today’s CEOs are relatively well informed about innovations in artificial intelligence, machine learning, blockchain, 3-D printing, advanced robotics, the Internet of Things, machine learning, next-generation genomics, software robotics and virtual and augmented reality—and eager

Technology innovator Dean Kamen at an event held by FIRST Robotics, the nonprofit he founded to nurture tomorrow’s technologists.

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LE AD ER S

while other companies are using bacteria to transform waste into liquid fuel. “If the ExxonMobils of the world think they’re oil companies as opposed to energy companies,” he says, “they might end up in trouble.” In particular, Kamen fiercely believes in the bountiful potential of his current focus, human tissue engineering. “There were ages of things: electricity, the Industrial Revolution, the golden age of physics,” he says. “Now we’re approaching the golden age of biology, the basic understanding of life, of the human genome. In doing so, we will transform medicine and people’s expectations of how they deal with biological issues, including aging.”

Kamen with a prosthetic arm developed by DEKA for wounded soldiers.

FIND ROLE MODELS

“Most CEOs don’t understand the word ‘failure’ and are so afraid of it that many great opportunities never even get the chance to grow.”

to leverage their potential. In fact, Kamen says, “CEOs in general have become highly sensitive to the fact that the power of a new technology can be so great that they need to worry about it. With their global brands and reach and finance and distribution, they didn’t used to think that they had to worry about little companies. Now they know they’re at their peril if they don’t.” How can CEOs approach the constant threat of disruption? We asked Kamen, and he gave us seven pointers: BE A “TECHNOLOGY CEO”

The days when a typical American CEO could leave technology decisions and implementation to others are over. Chiefs should be leading technology discussions and personally familiarizing themselves with potential disruptors and levers. CEOs of large companies with funds to invest amid this flush economy should be “looking at every kind of technology from the perspective of, ‘How could this add value or reduce costs in my industry?’” Kamen advises. “So then you can leverage that technology properly.” WATCH THE BIOTECH SPACE

Kamen points to biotechnology in general as a field whose transformative potential is only now becoming clear. Startups using plant-based proteins to make “meats” are upending livestock processors, for example,

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Kamen cites a number of current and former CEOs whose facility with new technologies has given their companies a huge edge. Andrew Liveris, chief of DowDuPont, “is amazing,” he says. “He knows where to place his bets on creating the workforce of the future and what kinds of technologies he needs to anticipate becoming critical.” Former Qualcomm Executive Chairman and CEO Paul Jacobs, Kamen says, “is a very smart technology guy who ran a big organization.” The chairman of Royal Dutch Shell, former DuPont CEO Charles Holliday, also “gets it.” And Rockwell Automation CEO Blake Moret “is always ready to disrupt his own industry and processes,” Kamen enthuses. EMBRACE FAILURE

Kamen’s renowned approach includes the idea that “failing is OK,” as long as people “are moving in the right direction,” says Susan Kuczmarski, a leadership author who has studied him. As Kamen puts it, most CEOs “don’t even understand the word ‘failure’ and are so afraid of it that many great opportunities never even get the chance to grow. “I say to these guys, ‘If you can try something, even if it doesn’t work, and you can learn a lot from it quickly, it wasn’t a failure but an investment in moving forward,’” he says. “I’m prepared to fall down, and as long as I fall down seven times and stand up eight times, I didn’t fail.”

LE A D E RS

Kamen with FIRST Robotics team Leones Francés of Gomez Palacio, Durango, Mexico, at a championship match.

“Chiefs should be leading technology discussions and personally familiarizing themselves with potential disruptors and levers.”

BLAZE NEW TRAILS

Kuczmarski says Kamen “makes a living finding problems—that is, consumer problems that he can solve with new products and new technologies. He has no interest in searching for ways to improve existing products and services.” Rather than take the road less traveled, “he builds a brand new highway.” Kamen says his approach has been to bring scientific and technology innovations to fruition, then let others commercialize them. “If I can make the technology work, I give it over to the big guys who can scale it quickly,” he explains. “It may not be the smartest business strategy, but it gives me more opportunities in one lifetime to work on a whole host of different kinds of problems that I think need to be solved.” He contrasts his approach with that of Elon Musk, the CEO of Tesla, SpaceX and other enterprises pushing the edge of technology in various ways. “With the scale of his successes, [Musk is] overwhelmingly a better business person than I am,” Kamen says. “He focuses more on large-scale businesses; I focus on technologies to enable those large-scale businesses.” NURTURE THE NEXT GEN

He holds more than 440 patents, but nothing excites Kamen more than his involvement in building FIRST, For Inspiration and Recognition of Science and Technology, a program in which hundreds of thousands of American schoolchildren now participate. Kamen next plans to take FIRST to a global stage. “We’ve made a sport where every kid

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can turn ‘pro,’” he says. “These kinds of skill sets are going to lead to millions of career opportunities.” Ken Stafford, a professor at Worcester Polytechnic Institute and a longtime associate of Kamen, says that FIRST “is what really drives him. It sounds cheesy, and it’s unusual in that most successful people have a product that they believe in, but his product is inspiration.” Kamen also has a full-size, well-lit softball field on the grounds of his home—for DEKA employees to use. But outside of softball—and his family—Kamen doesn’t indulge many diversions from his life’s work, Stafford says. “If you have a hobby that’s more important to you than doing the work he wants you to get done, you’re not the kind of person who should work for him.” BE WARY OF GOVERNMENT

Even if CEOs can get a handle on it, Kamen is wary about the capacity of governments and even entire societies to deal with the impact of new technologies. “Certain kinds of technologies are becoming so powerful that they’re even affecting the capability of governments to manage processes and infrastructure,” he says. “It’s shaking up the way we view our government and maybe its relationship to the people, and to the world.” The growing implications of technology to impinge on all areas of human life and society are one reason, Kamen says, that technological purveyors and the general public have become so political about technology-induced change. “It affects everything,” he says. “And I’m not sure government is keeping pace with the rate at which technology can and should offer solutions to really critical human needs.” This is where enlightened business leadership can help build the “infrastructures and ecosystems of resources” that are going to solve problems that are technological at their roots, he says. “It takes a huge amount of teamwork. But on the other hand, almost every big success started with someone who had a big idea and courage—and the organization turns out to be the long, long shadow of some individual who stood up and said, ‘We can do this.’”

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LE AD ER S LAW BRIEF \ DANIEL FISHER

JUST SAY PAY

Public/private lawsuits threaten companies with rough justice.

REUTERS / LEAH MILLIS - stock.adobe.com

Want to avoid defending your business model in court? Follow Mark Zuckerberg’s lead and fall on your sword.

Daniel Fisher is a writer, communications consultant and former senior editor at Forbes.

SOME OF THE BIGGEST LAWSUITS pending in federal courts today involve products that are completely legal, heavily regulated and used by millions of consumers every day. But none of that matters when private lawyers join forces with public entities to sue. Then it’s mostly a matter of how unpopular the industry is—and how many billions of dollars it can pay to be rid of the litigation. Opioid manufacturers and distributors are in a fight for survival as hundreds of cities, counties and states sue them over the costs associated with addiction. Never mind the fact the Drug Enforcement Administration sets the number of opioid pills that can be manufactured each year and tracks each one from factory floor to retail pharmacist’s window. Private lawyers working under contingency-fee contracts are using novel theories of public nuisance law to seek billions of dollars in damages for the industry’s supposedly reckless marketing and distribution practices. California cities tried to use similar theories to sue ExxonMobil, Royal Dutch Shell and other big oil companies over global warming. They didn’t seek the usual remedy for a public nuisance—eliminating the nuisance—because removing gasoline from the market would cause riots in the streets. They sought billions of dollars for an “abatement fund” to cover infrastructure they say will be needed as global warming causes sea levels to rise. A federal judge recently dismissed the suit, noting that the dangers should be addressed by political branches and that “using lawsuits to vilify the men and women who provide the energy we all need is neither honest nor constructive.” Still, such cases face thickets of court rulings that often make them seem impossible to win. By recruiting hundreds of

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municipal plaintiffs and even entire states, plaintiff lawyers know they can present such a serious financial threat that fiduciary responsibility requires target companies to consider settling. “It’s what you might call a shock and awe strategy,” says Mark Behrens, co-chair of the public policy practice group at Shook, Hardy & Bacon, a prominent corporate defense firm. “It’s that fiduciary duty that can compel a defendant to settle, even if there’s a high probability of winning on the merits.” The shock-and-awe strategy started with tobacco, where private lawyers and state attorneys general used the threat of lawsuits by all 50 states to wrest a $200 billion settlement from cigarette manufacturers (not incidentally, it included more than $14 billion in fees for the lawyers). Many of the same lawyers moved on to firearms, pharmaceuticals and even supposedly defective Intel microprocessor chips. Is there any way to combat public/private litigation? Congress passed a law to end the firearms lawsuits, and industry associations like the U.S. Chamber of Commerce are pushing laws to limit when and how governments can hire private lawyers. They’ve also won reforms in most states to reduce the size of bonds that defendants must post before they can appeal large verdicts. But the best tactic may be humility. Once your company appears on the front page of The New York Times or a member of Congress starts calling for hearings, it’s too late. The trial lawyers have marshalled their forces and are getting ready to attack. Then it’s best to follow Facebook CEO Mark Zuckerberg’s lead and take responsibility for everything. His appearance before Congress after revelations about the misuse of personal data may have derailed the next big public/private lawsuit, Behrens says. “He was well coached,” Behrens says. “He did a masterful job of dissipating public anger.”

THOUGHT LEADERSHIP CONTENT PROVIDED BY DELOITTE

Think the Talent Shortage Is Bad Now? Just Wait. FOR MUCH OF THE LAST 10 YEARS, EMPLOYERS HAVE ENJOYED a relative abundance of talent across most job functions. The Great Recession’s layoffs, consolidations, restructuring, and offshoring meant that there were more workers in the US than job vacancies. Yes, it continued to be tough to find skilled workers such as maintenance technicians, engineers, and nurses, but most companies were able to have their choice of candidates from a pool of talent hungry for work. Not so, any longer. The employer’s market has given way to a talent shortage that affects companies across industries and regions. As of April 2018, US unemployment dipped to 3.9%[1], a 17year low, and the Bureau of Labor Statistics (BLS) cited 6.47 million job vacancies, higher than the 6.35 million the agency reported as unemployed[2].

While the national picture is worsening, not every region is experiencing the supply and demand imbalance equally. As companies open new locations in more favorable talent markets, workers are voting with their feet as well: BLS reports that while the national average tenure for software engineers is just 35 months, it is lowest in the tech hubs of San Francisco (27 months) and Seattle (28 months)[8]. When adjusted for cost of living, traditionally high-paying markets become less economically viable. A Deloitte analysis found that cities such as San Francisco, New York and D.C. fall outside of the top 20 in salary rankings when adjusting for cost of living, while less expensive secondary markets, such as Dallas, Detroit, and Phoenix, move toward the top.

CEOs must ensure that the footprint is contributing to (and not inhibiting) the talent strategy.

For CEOs, finding and keeping great talent could get a lot harder. Just when the US economic engine needs new workers to grow, the early years of Baby Boomer retirements are upon us, causing an aging workforce issue that is forcing many companies to scramble for the next generation of leaders. Additionally, companies cannot find sufficient numbers of workers with the right skills and qualifications for the jobs they are creating in advanced fields. For companies seeking workers engaged in science, technology, engineering, or math (STEM), the situation is dire: while the US is growing its number of technology capable workers, the increasing need for these skills will likely amplify the supply/demand imbalance for years to come. According to the Smithsonian Science Education Center, by the end of 2018, 2.4 million STEM positions in the US will go unfilled[3]. The talent supply pressures are exacerbated by shrinking immigration numbers. The American Immigration Council estimates that 20-25% of the US STEM workforce is composed of foreign-born workers[4]. According to Axios and the US State Department, international students in the US dropped 17% in 2017, mostly due to declines in visas for students from India (down 28%) and China (down 24%)[5][6]. BLS estimates that by 2024, the US will have an additional 73,000 job openings in mathematical science and over 1,000,000 openings in computer occupations[7]. Robotics and process automation will eventually help alleviate some of the imbalance, but most of the gains will likely be in transactional or repetitive work, with widespread adoption still years away.

To navigate a talent market that is likely to tighten for years to come, CEOs must challenge their teams to identify the root causes of pain in the talent strategy: What positions and skills are difficult to find and retain, and why? How will our needs change in the next five years? CEOs must also ensure that the footprint is contributing to (and not inhibiting) the talent strategy. By positioning the company in locations that provide sustainable, local pools of skills while also being a draw for national talent, CEOs can gain a strategic advantage over competitors who struggle with talent acquisition and retention. Darin Buelow (dbuelow@deloitte.com) is a principal at Deloitte Consulting LLP and leads the Real Estate & Location Strategy practice. [1] Bureau of Labor Statistics, 2018, https://www.bls.gov/news.release/jolts.nr0.htm [2] Bureau of Labor Statistics, 2018, https://www.bls.gov/news.release/empsit.nr0.htm [3] “The STEM Imperative”, Smithsonian Science Education Center”, 2018, https://ssec. si.edu/stem-imperative [4] “Foreign-born STEM Workers in the United States”, American Immigration Council, 2017, https://www.americanimmigrationcouncil.org/research/foreign-born-stem-workers-united-states [5] Stef W. Kight, “The disappearing Chinese student visa”, Axios, 2018, https://www.axios. com/foreign-student-visas-dropping-china-india-trump-81e70609-9fa7-43eb-8f40-ccfef9fe3fa5.html [6] US Department of State, 2018, https://travel.state.gov/content/travel/en/legal/visa-law0/visa-statistics/nonimmigrant-visa-statistics.html [7] Stella Fayer, Alan Lacey, and Audrey Watson, “STEM Occupations: Past, Present, and Future”, US Bureau of Labor Statistics, 2017, https://www.bls.gov/spotlight/2017/science-technology-engineering-and-mathematics-stem-occupations-past-present-and-future/pdf/science-technology-engineering-and-mathematics-stem-occupations-past-present-and-future.pdf [8] “Employee Tenure Summary”, Bureau of Labor Statistics, 2016, https://www.bls.gov/ news.release/tenure.nr0.htm

Learn more at www.deloitte.com/us/locationstrategy ABOUT DELOITTE: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

LE AD ER S CRASH COURSE \ JENNIFER PELLET

CASHING OUT

Ready for your next act? Tips from Big Ass Fans Founder Carey Smith on selling up shop.

TO THE FOUNDER OF A COMPANY, a business is like a child. You’ve tended to and nurtured it through the years, agonizing over decisions, celebrating triumphs and sweating through missteps. Time flies by and then suddenly, somehow far sooner than expected, your baby is all grown up and moving on into the world—without you. “It’s the fastest 20 years you will spend in your life, and you’re not quite ready for it to end,” says Carey Smith, who recently sold the cooling systems company he founded in 1999. “It is ending, and you knew that because selling is a lengthy process, but somehow you’re still not prepared.” Smith’s Lexington, Kentucky-based company has grown steadily over the last decade from six people and $34 million in annual revenues to 800 employees and more than $260 million in 2017. While there was no burning need to exit, he was approaching age 65 with no heir apparent in the wings and offers pouring in over the transom. “It was sort of like when you decide you want a cookie, and then all of a sudden you start seeing cookies,” he recounts. The desire to do right by long-standing employees who owned stock appreciation rights (SARs) in the company also drove his decision. Because of the way the company was structured, a portion of its eventual $500 million price tag was disbursed among 140 employees. “Writing $48.8 million worth of checks to people you’ve worked with for years is a really good feeling,” says Smith. “A lot of them told me, ‘This is life changing.’”

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Selling, however, proved a more arduous personal and professional journey than Smith anticipated—one he emerged from with plenty of newfound knowledge to share: 1. Know your number. Unless you’ve unloaded a company before, you’ll have a lot less expertise about setting a sales price than your potential buyers—but you do know what it’s worth to you to let it go. “These guys will find all sorts of ways and reasons your company isn’t worth what you think,” says Smith, who insisted on, and ultimately got, his asking price. “Part of negotiating is to say, ‘Hell no, get out of my life if you can’t give me what I need.’” 2. Invest in outside expertise. Don’t cheap out when hiring bankers and lawyers for the transaction, warns Smith. “We have lawyers in Kentucky, but for this we went to New York and got the best lawyers available. This is one of those things in life, like good doctors or good childcare, where paying more ends up being the best bargain.” 3. Establish an internal team. Selling demands time and resources, not all of which can be outsourced. Meanwhile, you and your employees still have a business to run. Smith designated a team of six employees who worked full time on the sale process for six months, and “it was still hard,” he says. 4. Get all the way out. Resist the urge to let investors buy part ownership in your company. “That’s like the camel putting its nose under the tent. At the end of the day, the camel will be in the tent, and you will be out in the desert.” 5. Find a new purpose. “Anyone who has bootstrapped a business feels forever associated with it in some way. You want it to succeed the way you want a child to succeed, but you have to divorce yourself from that and recognize that it’s not you and you are not it. It belongs to someone else now, and it’s time for you to move on and do other things.”

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LE AD ERS ON MANAGEMENT \ JEFFREY SONNENFELD

EXIT LESSONS

What can we learn from a rash of untimely CEO departures?

REUTERS / Robert Galbraith

Eric Schmidt’s post-Novell Google triumph is proof that CEO comebacks are possible.

Jeffrey Sonnenfeld is senior associate dean for leadership studies and Lester Crown professor in management practice at Yale University and president of the Yale Chief Executive Leadership Institute.

SUMMER BEGAN WITH A series of back-to-back surprise leadership exits at more than a dozen firms, including Petrobras, Qualcomm, WPP, Air FranceKLM, JCPenney, Xerox, Campbell Soup, Mattel, Samsonite, Athenahealth, Gamestop and ServiceMaster. Equilar recently reported that the median tenure for S&P 500 CEOs is now five years, but many of these leaders didn’t even survive two— and all left abruptly. These unplanned transitions offer lessons to sitting CEOs: Build a resilient board. Fearful of their own fragile reputations, directors often fail to back management in the face of outside attacks. Just days after the Athenahealth board rejected a low-priced bid from an aggressive activist investor firm, a suspicious chain of misleading—if not outright malicious—reports surfaced about the personal life of CEO Jonathan Bush. This activist firm seemed to employ a similar mudslinging approach to drive Klaus Kleinfeld out of the CEO spot at Arconic. Brazilian state oil company Petrobras sacrificed Pedro Parente to break a nine-day truckers strike over oil prices. Accomplish your mission—fast. Having failed to revive legacy brands like Barbie and American Girl, Google alum Margo Georgiadis left the CEO spot at Mattel after just over a year. Marvin Ellison recently abandoned JCPenney, apologizing on his way out the door for disappointing 2018 Q1 results and slow progress in consolidating operations and building branded store departments and omnichannel retailing.

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Vet your opportunities. Departing CEOs should take a lesson from Jamie Dimon. After being fired by Citigroup in 1998, he patiently reviewed great opportunities before taking the CEO post at troubled Bank One, which he then fixed and sold to JPMorgan Chase. Home Depot veteran Ellison recently jumped from JCPenney to No. 2 home improvement retailer Lowe’s. Following a predecessor who was in office for 13 years, Ellison came into the job just after a Q1 report showed healthy revenue and earnings growth despite poor spring weather for home building and remodeling. With the coming construction-friendly summer months, his timing could prove ideal from a benchmarking expectations perspective. Watch for the rebound. Reputations can be restored by the right next move. After great star power as CTO of Sun Microsystems, Eric Schmidt left the foundering local network software company Novell in seeming disgrace, then staged a successful return to the frontiers of technology and innovation. Schmidt brilliantly led Google for 17 years of unprecedented growth, effectively erasing the shadow of his Novell setback.

Exit with dignity. Beware of the board’s lawyers scripting your public exit message. No one believes that a healthy CEO in the prime of life is quitting for more quality time for unspecified new opportunities. Pfizer CEO Jeff Kindler lost out in a board political battle that was wrongly and damagingly explained as due to “Kindler’s exhaustion.” Bush managed to step down from Athenahealth without succumbing to the blame game, stating, “It’s easy for me to see that the very things that made me useful to our company and cause in these past 21 years are now exactly the things that are in our way.”

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EDPNC .C O M

CE O OF T H E YE A R

Passionate, poised and relentlessly methodical, Lockheed Martin’s Marillyn Hewson has proved to be the right leader for risky times. And now she’s Chief Executive’s 2018 CEO of the Year. BY DA N B I G M A N

The Right Stuff

hen former U.S. Defense Secretary Robert Gates was summing up his thoughts on leadership a few years ago, he laid out a list of what he called “pragmatic visionaries,” a handful of rare individuals who “envision a new way forward” but were also “practical, with the skill to build broad support for and implement their vision.” It’s a pretty good list. Ronald Reagan’s on it. So are Margaret Thatcher, Deng Xiaoping and Nelson Mandela, along with Steve Jobs, Bill Gates, Jeff Bezos and Howard Schultz. And so is Marillyn Hewson, the chairman, president and chief executive of Lockheed Martin—and Chief Executive’s 2018 CEO of the Year. Robert Gates was pretty perceptive. Passionate, poised and relentlessly methodical (as you would expect from her industrial

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PHOTOS BY ERIN SCHAFF

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Team Hewson The six EVPs at the top of Lockheed Martin all have decades of experience at the company, a big advantage in a volatile time.

AERONAUTICS $20.1 billion/39 percent of 2017 sales

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$14.2 billion/28 percent of 2017 sales

Executive Vice President Orlando P. Carvalho Years at LM: 37 Engaged in the development and support of military aircraft, including the F-35 Lightning II, which generates 25 percent of Lockheed’s overall net sales.

engineering background), Hewson, 64, seems uniquely cast for her role at this particular moment in time, a chaotic era with Russia and China reasserting their strategic aspirations globally while the new president has deepened the political divide in Washington—far and away her largest customer. Hewson has thrived under the pressure. Since taking the reins of the world’s largest aerospace and defense company on January 1, 2013, total shareholder return for Lockheed over her tenure has been 309 percent, versus 107 percent for the S&P 500. Rising global defense spending bodes well for the future. Under Hewson, the $51 billion (sales), company has doubled down on defense and moved away from dalliances with civilian IT businesses, ground though a difficult purchase of helicopter maker Sikorsky and, most importantly, rolled out the world’s most advanced warplane, the F-35, the most complex, arguably most vital and, at around $400 billion overall, definitely priciest weapons platform ever developed for the U.S. Department of Defense. “It gets a lot of scrutiny by Congress, it gets scrutiny by the

ROTARY AND MISSION SYSTEMS Executive Vice President Dale P. Bennett Years at LM: 37 Builds and supports military and commercial helicopters and ship and submarine mission and combat systems, including the Black Hawk and Seahawk helicopters and Aegis fleet missile defense system for the U.S. Navy.

administration, scrutiny by the Department of Defense, by the media,” she says. “It’s always front and center.” The bravura performance was lauded by the CEOs on this year’s CEO of the Year Selection Committee. “Marillyn has led her company with tremendous vision and integrity,” says Tamara Lundgren, CEO, Schnitzer Steel. “And the results have shown through both financial and operational performance, as well as the diversity and loyalty of the people she leads.” “It’s been a year of strong candidates,” says Mark Weinberger, CEO of EY, “but Marillyn demonstrated exceptional leadership, proving to be an exceptional role model and exceptional person—something we need in business, especially today.” Her ascent to the top job at Lockheed was hardly preordained. After an ethics scandal engulfed Chris Kubasik on the eve of his taking over as CEO, the board turned to Hewson, then EVP of the company’s vast electronic systems business. It proved a lucky break—for Lockheed. After 30 years of increasing responsibility at the company, Hewson put her deep network of connections

PHOTOS COURTESY OF LOCKHEED MARTIN

MISSILES AND FIRE CONTROL

SPACE

CORPORATE

$9.5 billion/19 percent of 2017 sales

$7.2 billion/14 percent of 2017 sales

Executive Vice President Richard F. Ambrose Years at LM: 18

Bruce L. Tanner Executive Vice President & Chief Financial Officer Years at LM: 36

Executive Vice President Frank A. St. John Years at LM: 31 Provides air and missile defense systems, tactical missiles and airto-ground precision strike weapons systems, including the Terminal High Altitude Area Defense (THAAD) and PAC-3 interceptor programs.

R&D, design, engineering and production of satellites, strategic and defensive missile systems and space transportation systems, including Trident II submarinelaunched ICBM and NASA’s Orion spacecraft.

and visceral understanding of Lockheed’s culture, customers, products and history to work immediately. She met with buyers at the Pentagon and around the world and found Lockheed had an engineering approach to customer service, often talking more than listening. She made international expansion a priority, eventually raising the total share of overseas revenue to 30 percent from 17 percent. She invested heavily in digital transformation and, above all, pushed to successfully launch the F-35. It was a long, long way from where she’d started. The daughter of a struggling single mother of five (her father died of a heart attack when she was 9), she grew up in Alabama and earned her bachelor’s and master’s (in economics) at the University of Alabama. After school, she worked as an economist at the Bureau of Labor Statistics before joining Lockheed Martin’s Marietta, Georgia, plant as an industrial engineer in 1983. She was usually the only woman in the room at meetings. Over the next three decades, she worked her way up through the company and held leadership positions in

INTERNATIONAL Richard H. Edwards Executive Vice President Years at LM: 34

four of the company’s five divisions. Chief Executive recently sat down with Hewson at the company’s headquarters in Bethesda, Maryland, for a wide-ranging conversation on the state of the world, the state of the business and a master class in how to lead 100,000 employees through a chaotic era. What follows is edited for length and clarity: Chief Executive: Thank you for making the time today and, again, congratulations. Thank you, it’s really an honor. This weekend, if all goes right, your company will launch a spacecraft to Mars. What’s that like? We, as a company, have been on every one of NASA’s Mars missions from the beginning. It’s never routine, and it’s always exciting. I was just out in Denver with our team there that put that satellite together and just the excitement about being in a position to have a satellite land on Mars, all the scientific work that it’s going to do, it’s exciting. And risky. You deal with technical risk, scientific risk, political uncertainty—and

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Rocket Fuel Hewson’s tenure has been exceptionally good for Lockheed’s stock performance, which outperformed the S&P 500 by more than double since Jan. 1, 2013. 450 400

non-state actors. So it’s not just one situation where you have one great power against another great power. This is very asymmetrical; it’s intercontinental; it’s all very unpredictable and challenging. And that’s the difference I see. I’ve been with this company 35 years, and this really is different. This is very different.

Lockheed Mar tin

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you do so on a global stage. What’s your assessment of geopolitical risk at this point in history? Most of our customers are governments, 99 percent of our business. So I travel a lot, and I talk to a lot of those leaders, and what I hear from them is that this geopolitical environment we’re in today is probably more unpredictable and chaotic and uncertain than they’ve ever faced in the past. It is a very challenging environment, and it’s accelerating. This is my sixth year as CEO, and every year I step back and reflect on it, I can’t believe I’m saying this, but it’s even more unpredictable than it was before. What’s got everyone so unnerved? We’re seeing a situation where a lot of countries have been investing significantly in their military, and it’s becoming much more of a strategic power competition between Russia and China, particularly. But also when you look at Iran and you look at North Korea, there are just all of those challenges that we face around the world. Even in Europe, they have Russia’s assertiveness in that theater. They have the influx of refugees coming out of Syria and other areas that they’re dealing with terrorist and

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What’s your take on the Trump administration’s policy on trade? It’s hard to tell what it is sometimes, and our polling of the CEO community is very split. We’re a big proponent for free trade. I Jan. 1, 2013 = 100 believe trade does drive the world economy. It’s important for our economy. I do share the concern that we want to make sure that we have agreements that are fair. One of the things that’s most important to us in the aerospace and defense industry is protection of our intellectual property. We don’t do a lot of trade in China because of the work we do, but I know companies that do. [China’s] desire to take all of their intellectual property if they’re going to do work there, those are concerns, those are unfair relationships that need to be addressed. At the same time, the whole issue around NAFTA, around TPP, the need to have these multilateral agreements and things of that nature are worthy of really understanding and moving forward on. How have you found dealing with the current administration different from other administrations? How is Washington changing under the new administration? I think what’s different with this administration, for at least my time in my role, is the focus on reducing regulations, making it more competitive for us on the world stage [and] getting our tax rate at a reasonable level, [allowing us to] look at the infrastructure we need to get in place and really focus on economic growth. For the president’s first meeting in the White House, he invited 12 to 15 CEOs, I was among that group, and his question was, “What can I do to reduce the barriers for you to create jobs and drive your businesses?” That was hugely welcomed, and he went around the room and let each one

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of us share what would make a difference. I spoke up about regulation, because I think it’s been a huge impact on small and medium-sized businesses, not just large businesses like Lockheed Martin. What’s it like to negotiate with the President? I won’t say I negotiated with him. I think he encouraged us to get to an agreement between the U.S. government and Lockheed Martin on the lot [of F-35s] that we’re in the midst of negotiating. So he certainly had an impact on that and accelerating those negotiations and his focus on making sure the American people got a good price. I would say those were elements that encouraged the negotiation to get completed. With the F-35, that’s 25 percent of your business. How do you manage risk like that? How do you handle it on a day-to-day basis? For me personally, as a CEO, it’s something I engage a lot of my own personal time in. I have regular reviews on the program; I spend time in Fort Worth where we have the final production of the aircraft. I travel to different sites where the work is done, and I meet directly with our leadership team on it. I’m working directly with our customers

and listening to them on what their concerns are so that we can address them. I’m out around the world because remember, this is a program with not just the three services within the U.S. government buying the aircraft—the Air Force, the Navy and the Marine Corps. In addition, we have eight international partners. Not only is it our largest program relative to our revenue, it’s also the largest program in the Department of Defense. It gets a lot of scrutiny by Congress, it gets scrutiny by the administration, scrutiny by the Department of Defense, by the media. It’s always front and center. How do you manage something like that, with this level of complexity, that many people, that many locations and customers? I’m looking to an executive vice president that’s running that business. Once a quarter, he has to review with me that program alone—How is it performing?—as well as his normal quarterly performance review. That is how I manage the business, for quarterly reporting and for monitoring it for our board. Beyond that, I am engaged directly with the Pentagon on this program. We do program reviews with the Pentagon; I’m in those reviews, I’m at the top seat at the table. Do you go there or do they come here? I go there, but I also go to Fort Worth, and they come to Fort Worth if they want to see the production in place. In the past week, I’ve been on program discussions with my team four times at a minimum. Even though I have the regular review of monitoring how the program is performing, there are always things we’re working on. At some point, I engage in reviews of where we are in that process, or as we roll out to a new customer. I was in Fort Worth last month because the Koreans just received their first aircraft. I go to every one of those roll-outs; I’m there to speak and to participate with the customers. When I go to Europe, I’m meeting with ministers of defense and chiefs of air forces on this F-35 program. They want to know that I’m committed, that I’m engaged, that I’m looking after what’s important to them as a buyer of what we

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We aimed for the moon and never looked back. Congratulations to Lockheed Martin CEO Marillyn A. Hewson, Chief Executive magazineâ&#x20AC;&#x2122;s 2018 Chief Executive of the Year. Your visionary leadership has helped shape the success of your organization and our community, both now and for the future. Through meaningful partnerships with our schools and universities, dedication to STEM education, and continued investments in our workforce, you have a powerful and positive influence on Orlandoâ&#x20AC;&#x2122;s innovative economy. For so many reasons, this award is as richly deserved as it is impressive.

Orlando.org

Marillyn A. Hewson, Chairman, President & CEO 2018 Chief Executive of the Year Chief Executive magazine Thank you to Lockheed Martin for choosing Orlando and investing in our community for more than 60 years. See the whole story at Orlando.org/LockheedMartin

By the Numbers

69%

U.S. Government: $35.3 B

30% Net Sales:

$51.0 B

U.S. International Customers: $15.0 B

U.S. Commercial and Other: $700 M

10%

Increase to Annual Dividend

$2.0 B Net Earnings

provide and as a partner to them in helping them keep their people safe. I’ve built a lot of relationships around the world with our customers that I find are critically important. One of our philosophies in this company is put the customer at the center of everything we do. When you got here, though, that might have been a little bit different from the initial feedback you got? That’s correct. I’ve definitely seen a change in our organization, and what’s best to me is getting the unsolicited comments from our customers who say they see a difference. I took over as CEO on January 1, 2013, and I had my first leadership meeting with all of my vice presidents and up in the corporation, roughly 300 people, at an offsite. So from January 1 up to that point, I was able to do a listening tour [with customers] and then come in to my team and say, “This is what I’m hearing, and this is what we’re going to do about it. We are going to improve our customer focus. And we’re going to make sure that it’s customer first in everything we do.” Then I basically tasked my team to put together a customer relations summit. We brought in customers to speak to us about how they viewed us and how they saw our relationship. I had workshops in that summit.

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All the customer-facing leaders, vice presidents and up, in our corporation came here, about 150 of the leaders of the corporation. We spent two days on what are we going to do about it; out of that, we put together a set of actions and went about working down those actions. Every time I speak to groups, up until today, I always talk about it; I make sure the tone at the top is “This is number one. We’re going to put the customer at the front of everything we do.” I was pretty brutal, frankly. I said, “You know, I go in and talk to customers, and I hear stories about somebody answering their smartphone in the middle of a customer meeting. Now why would you ever do that? Right? Or they come in with their talking points, and they just drill and they’re not listening; they’ve got an objective for the meeting, but they’re not listening to the customer.” At the end of this summit, all of my direct reports, as well as this group of 150 some-odd people, we signed a commitment together on the action plan that we were going to go put in place. It was a big board up on the stage. We wanted to make sure we did it on the stage, so everybody saw it. We made a commitment. And I have not let that languish over the years. You can let things get stale if you don’t continue to keep the focus on them. That’s important. And that’s the thing. Because there are great companies, Wells Fargo comes to mind most recently, that had a terrific culture and a really great heritage, and then something went terribly wrong. How do you continue to monitor that, and how do you stay engaged? And how do you communicate that to 100,000 people? Well, I do a quarterly webcast for one thing, so at the end of every quarter, I report out on the financials, I report out on achievements and I talk about the things that are important. We put in something that we call next-gen LM, but it’s basically a framework for the corporation and for employees to think about the things that are important to us. Starting first and foremost with our core values, do what’s right, respect others, perform with excellence. If we do those things, if we meet our

Congratulations to the 2018 CEO of the Year, Marillyn Hewson. Columbia Business School Executive Education is proud to have been a part of your learning and development path. You are truly an inspiration to us all.

Visit us at www.gsb.columbia.edu/execed

commitments to our customers by performing with excellence, if we treat one another and our suppliers and our customers with dignity and respect, if we do what’s right, that we have a foundation of integrity in our business—the rest of the business will take care of itself, and that is, to me, foundational for a company. I talk a lot about how we as a company have to make hard choices and decisions that allow us to remain competitive. [For example,] we’ve got to do some restructuring in our organization—maybe it means we’ve got to shut down a site; other times we’re increasing in another area, but it’s important to help people know there’s rationale for why we’re doing the things we’re doing. Every business problem I’ve ever faced where things went awry, I would chalk up to miscommunication or lack of communication. Listening and responding is what makes the difference in any business. Some people find it tedious to keep saying the same things over and over again. I think you’ve got to do that; you’ve got to constantly do that.

Do you feel that being an insider gave you a leg up when you got into the top job? Did you grok the culture here in a way that maybe somebody from the outside didn’t? Yes, I really do think it makes a difference to come up through the organization. I can put myself in people’s shoes. I had worked in four of the five business areas when I took over as CEO. So not only did I understand the business, know what our products were and what we were trying to achieve and the strategies of those various businesses, but I knew a lot of people. Are you able to reach down into the organization in ways that perhaps somebody might not that didn’t have your network? I don’t call somebody in Fort Worth and say, “What’s really happening on the F-35?” That’s not my style. But I do get a lot of unsolicited input from people. I can’t tell you how many e-mails I get every day from employees, and I respond to every single one of them. If they take the initiative to send me an e-mail, they deserve a response. We’ve built a very strong trust relation-

Chief Executive of the Year 2018 Selection Committee

From left, top: Thomas J. Quinlan III, Chairman, President and CEO of LSC Communications; Dan Glaser, President and CEO, Marsh & McLennan; Jeffrey Sonnenfeld, President and CEO, the Chief Executive Leadership Institute, Yale School of Management; Tamara Lundgren, President and CEO, Schnitzer Steel Industries; Fred Hassan, Chairman, Zx Pharma and Partner/Managing Director, Healthcare, Warburg Pincus; Mark Weinberger, Chairman and CEO, EY; Robert Nardelli, CEO, XLR-8. From left, bottom: JP Donlan, Editor Emeritus, Chief Executive (non-voting); Exclusive Adviser to the Selection Committee Ted Bililies, Ph.D., Chief Talent Officer, Managing Director, AlixPartners (non-voting); Stan Bergman, Chairman and CEO, Henry Schein and 2017 CEO of the Year; Dan Bigman, Editor, Chief Executive (non-voting). Photographed at the Nasdaq Marketsite in New York City, March 12, 2018.

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Leadership has a name: Marillyn Hewson Leadership. It is a trait Marillyn Hewson has demonstrated throughout her career at Lockheed Martin, as well as in the roles she has taken on boards and foundations. It is no surprise to us that her fellow CEOs have selected Marillyn Hewson, Chairman, President and Chief Executive Officer of Lockheed Martin Corporation, as Chief Executive magazineâ&#x20AC;&#x2122;s 2018 CEO of the Year. It is an honor she has earned through her dedication to her company and the stakeholders it serves. Marillyn, from your business colleagues at PwC, we extend to you our congratulations on this well-deserved recognition and wish you continued success. www.pwc.com

The People Factor

100,000 Total Employees

7,200+ International Employees

49,000

Engineers, Scientists and Information Technology Professionals

One in Five Employees is a Veteran

ship on my leadership team. Not long after I took over as CEO, I put us all on the same incentive plan, so it’s not one business area competing against another. We’re all set up to achieve the financial, operational and strategic objectives of the company that we commit to our board of directors and to the shareholders that we’re going to do; we do it collectively. That’s built a lot more collaboration across the businesses. How much time do you spend working on the business as opposed to in the business? The first thing I do every year, September–October, is lay out the business rhythm for the coming year. So we’re operating on the business rhythm that we set up back in October of last year. It involves outlining when the quarterly reviews are with the businesses. We have a monthly meeting with my leadership team, with a dinner the night before and then a full day on strategy. What are we doing on talent? That’s outlined for the year. We have a strategic planning meeting that we outline for the year; we have strategic business reviews throughout the year on certain lines of business. We have new business reviews on things we’re pursuing, current business opportunities. We compete for things like the advanced piloting system,

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the training system for pilots, things like that. We come together and we look at how is that going? What kind of help does the team need; how are we pursuing that to win it? So that rhythm gets outlined and everybody then can fill in their rhythm behind. I want to get it out early so they can plan on it. Then I also outline what my international travel is. There are certain things I do every year, certain conferences, certain air shows I attend. Then within that, what are certain countries I want to get to? Then countries ask me to come do things, like come speak in the UAE to the Global Aerospace Summit. I round that out with customer meetings while I’m there to make the most of my time in-country. Last year, I had 12 international trips; maybe the year before was 14. I try to get out to our major facilities around the country as well. I probably travel 40 to 50 percent of my time. Is it tough to feel like you’re driving the company, as opposed to being driven by the company? I imagine that’s what getting the cadence ahead of time is all about? That is what it’s all about, and I don’t feel like I’m being driven by the company, I feel like I am driving the company for that very reason. I set an agenda for the year, and I’m conscious of what only a CEO can do, versus what my team can do. I don’t micromanage because I think that’s not healthy for a company. Now, when we talked about something like the F-35, I’m gonna be down and in on that program if I think I need to be, but on an ongoing basis, I look to my EVPs to be sort of like COOs. They’re running their lines of business; they are reporting out to me, so I can keep a beat and monitor how the business is going. Every week we have a staff meeting, all of us at the table, at this table. Some of them are based in Texas and in Colorado, but they’re on the phone. Every week they provide a situational report on their business. It’s not an activity report; it’s the highlights of what we all collectively need to know that’s going on with the business. Each of the functional organizations does a similar thing. So I’m not being managed by, but in fact I am leading the business and driving where

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Lockheed Across America Headquarters

Bethesda, Maryland

Rotary and Mission Systems

Space

Headquarters: Washington, D.C.

Headquarters: Denver, Colorado

Aeronautics

Headquarters: Fort Worth, Texas

Missiles and Fire Control

Headquarters: Grand Prairie, Texas

400+

Global Facilities

Countries with International Employees

my priorities should be. And my priorities are frankly around the growth of the business, growth in innovation in the business. We hear so much from CEOs these days about digital transformation. How has business changed in the time you’ve been in business? And where do you see all this going? I’ve seen a lot of changes come into the business. You think about being an industrial engineer with all the paper on the floor; today on the shop floor, there is no paper and everything’s electronic. It permeates all the way from design to the build to delivery and sustainment of the platforms we have. We’ve got this whole digital thread that we’re working through. It’s moving so quickly, but we’re trying to stay ahead of it. We formed an office of digital transformation, a whole team of folks. We’re making large investments in this as a company as we continue to take advantage of it. If you look at things like our satellite manufacturing, we’re in the process of building a $350 million facility outside of Denver—all of the efforts we need to build small to large satellites in the same factory, much more efficiently, much more affordably, robotic capability, all of that.

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How does all this digital transformation change what you’re looking for in terms of the leadership you bring into the company? First of all, we’re going to be looking at not only who we bring in but the people we have today and reskilling them as our business environment changes. We’re already focused on “What are the critical skills?” Some will go away as we use bots and things like that. How do we reskill the people who are in those jobs today so that they’re doing more of the higher value-added work and letting the machines do a lot of the other work? But hiring people in, we spend a lot of time identifying the kind of talent we need with data scientists, with folks who are into autonomy engineering or the whole range of advanced manufacturing capabilities. We’re already working on bringing that talent in. In fact, our chief technology officer is working directly with human resources on identifying those critical skills we need today, that are in demand today, but also for the future. And we’re aligning all of our teams around that. You’ve been very public about your worries about STEM education in the U.S. What do you see as the gaps right now? And what do you think needs to happen over the next 20 years or so to make sure the country continues to have the people it needs? Well, one of the gaps is that we just aren’t getting enough students to go into STEM fields. Not just at the university level but all the way down into high schools. I did some recent work with the [Trump] administration, looking at getting more computer science in high schools. There are schools that don’t even have a single course around computer science. We’re just not prepared. I give the administration credit that there’s a focus on that, working with business. Of our philanthropy dollars, half of them go for STEM education, K-12, university and beyond. The other half is for military and their families because that’s important to us. But my biggest concern is that gap we’ve got, particularly to get more women and minorities interested in coming into the field.

CONGRATULATIONS

2018 CEO OF THE YEAR

A G R E AT E R T R A J E C T O R Y. Every journey starts somewhere. Marillyn Hewson’s began at The University of Alabama, learning principles of business strategy and leadership. She’s been climbing ever since.

M A R I L LY N H E W S O N | C L A S S O F 1 9 76 CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER – LOCKHEED MARTIN

“When I first got in my job, I always dreaded that was going to be the question in every interview, ‘OK, you’re the first woman CEO of Lockheed Martin. What is that like?’”

We’re not getting enough of them coming into STEM. You’ve got to create an environment that inspires them so that they see these are the kind of jobs they want. I was engaged with the Institute of Engineers looking at this very problem back in the ’80s. We said, “We’re seeing this gap. It’s coming.” One of the things that was really compelling to me then, and it hasn’t changed today, is what our young people see in entertainment, whether it’s cable TV, whatever. Who are their role models? Are they engineers, are they innovators or are they in other fields? Parents or teachers can encourage our kids to go into those fields, and we can try to get their excitement up. But if they’re watching some television show that has the role model of the engineer as some quirky person that is really smart, but, you know... Socially inept. Exactly. Is that what they want to be? Is that what that young woman wants to be? Or does she want to be “the beautiful investigator?” We have got to get even the entertainment industry involved in this. Because frankly, what are the signals that we’re giving to our young people in this country? I think it needs to be government; it needs to be industry, all sectors of industry; it needs to be nonprofits, all working together on this very important problem. To that end, do you feel like a role model? You’re one of seven women currently running a Fortune 100 company. As I look at why we are where we are right now, I think it’s around the pipeline issue. I mean it takes time to get the experience I’ve gained, to get to the role I’m in. We need to accelerate it. It will accelerate in the coming years. In our company, about 22 percent of our leaders are women. That was not the case when I started over 30 years ago. We just didn’t have a lot of women in leadership. I was probably the only one in the manufacturing environment when I came up through the ranks so many years ago, often the only woman at the table. What we have to do is keep driving that in a really deliberate fashion, to get more women in the pipeline, starting with what

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we were just talking about. In the STEM fields, to get them the education to come into the workplace—and then opening up the door for them. Women can compete. As I came into the workplace, I might have been among the few women, but I was in the door, I performed. It’s about performance and getting experience and building your experience. Do I think it’s important to be a role model? I absolutely do. When I first got in my job, I always dreaded that was going be the question in every interview. “OK, you’re the first woman CEO of Lockheed Martin. What is that like?” And I admittedly dreaded that question because I thought, you know, I just want to be recognized as a leader of Lockheed Martin, not a woman leader of Lockheed Martin. Over the past five to six years, I’ve realized that it is important for me to acknowledge the fact that as a woman leader, I am a role model for other women to achieve that level. But I just wanted it to be recognized that it wasn’t because of gender that I got here, it was because of the opportunities I had, because of the experience I gained, because of the performance results I had that I achieved this level. I have had that discussion with people like Phebe Novakovic [of General Dynamics], Mary Barra [of General Motors] and others who are my female peers as CEOs, and they have all had the same experience. One final question. You look at Elon Musk and SpaceX, Jeff Bezos’s Blue Origin—can Silicon Valley disrupt your industry? Frankly, I think that’s a good thing for the energy and the excitement and the innovation that they’ve brought into the market. You should always be open to competition. The thing that an entrepreneur like Elon Musk did, as he moved into the industry, was raise a lot of excitement around space. I think we’re going to disrupt ourselves, and we’re going to continue to invest in the space business and be the best we can be in that. And compete right alongside anybody that wants to compete. Dan Bigman is editor-in-chief of Chief Executive.

THE MOST ADVANCED SUBS ON EARTH ARE BUILT IN GROTON, CONNECTICUT

Inside the

ARSENAL OF THE NATION

CONNECTICUT’S AEROSPACE and defense industry produces some of the most awe-inspiring and sophisticated products in the world, including geared turbofan jet engines by Pratt & Whitney, King Stallion helicopters by Sikorsky and fast-attack submarines by Electric Boat. But another important piece of equipment is a customized Renegade truck trailer owned by Goodwin College. The 44-foot trailer houses the school’s Mobile Training Lab, a crucial platform for equipping skilled workers. Various pieces of manufacturing equipment can be wheeled on and off for each company’s specific training needs. Goodwin has used the Wi-Fi–enabled trailer to instruct more than 1,000 employees at 28 Connecticut companies in the last couple of years. “If companies are in the thick of production, we can actually back this thing up in their parking lot, and employees can come out for a three- to four-hour training program and then shoot back in to finish their shift,” says Mark Scheinberg, president of Goodwin, located in East Hartford, Connecticut. The mobile lab is just one example of how business, education and the state

government are working together to keep Connecticut the unrivaled Arsenal of the Nation after two centuries. Home of renowned American manufacturing revolutionaries, including Samuel Colt and Eli Whitney, Connecticut remains the heart of the U.S. defense and aerospace industries today. FOCUS ON GROWTH It’s home to a “big three” of aerospace and defense manufacturing: the Electric Boat division of General Dynamics, headquartered in New London; the Pratt & Whitney division of United Technologies, in East Hartford; and the Sikorsky Helicopter division of Lockheed Martin, based in Stratford. Equally important, there’s a network of about 4,500 small and medium-sized supplier firms stretched across the state. Aerospace and defense count for about 5 percent of the state’s economic output and 51 percent of its exports. Revenues are approaching $30 billion a year, in line with global expansion and demand for planes and rising U.S. defense spending. Combined, more than 60,000 Connecticut residents work

GOODWIN COLLEGE: TRAINING COMES TO YOU

directly in the sector, with another 31,000 jobs supported. “It’s a great time to be in aerospace and defense manufacturing in Connecticut, with a big resurgence in manufacturing,” says Max McIntyre, vice president of Farmington, Connecticut-based New England Airfoil Products, which makes turbine blades. “And the state is intent on making sure we succeed.” Gov. Dannel Malloy’s administration has done three main things in this regard. First, it focused on securing the big three for the future. It pulled the companies together “to talk about our needs and how they can best be matched,” says Maura Dunn, Electric Boat’s vice president of human resources and administration.

THOUGHT LEADERSHIP PROVIDED BY THE STATE OF CONNEC TICUT

From cutting-edge attack submarines to next-gen helicopters and jet engines, Connecticut’s unrivaled ecosystem of 60,000 precision manufacturing workers and 4,500 high-tech suppliers craft the future—and keep America safe. It’s an intergenerational industrial culture unlike any other, bred over 200 years.

The state then reached agreements with each prime contractor for a commitment to stay and keep investing in Connecticut. The Department of Economic and Community Development (DECD) also worked creatively with the big three to free up assets on their balance sheets, such as stranded state tax credits for R&D that they could use to reinvest in Connecticut. GENERATIONS OF INNOVATION Second, state officials acted to ensure that suppliers remain not just viable but prosperous. “There are a lot of very specific processes and quality requirements and a whole ecosystem of suppliers who do things like electron beam welding and x-ray airflow testing,” explains Colin Cooper, CEO of Whitcraft Group, a jet engine component manufacturer in Eastford, Connecticut. “They are vital for an industry that tends to be high complexity but low volume.” The state initiated an investment-oriented incentive program called First Five that has helped large suppliers such as EDAC Technologies win big contracts by “creating skill sets and capacity that is truly unique and is extremely valued by our worldwide customer base,” says Ben Adams, president and CEO of the Cheshire, Connecticut-based company. DECD also launched a $75 million Manufacturing Innovation Fund to strengthen predominantly small companies throughout the supply chain. It helps manufacturers with capital expenditures such as computer system upgrades and technical assistance. The fund also has given companies up-front financing of cost-saving green energy installations. Optimizing human capital has been

a third important focus of the Malloy administration. Connecticut’s manufacturing workers have always been considered iconic, the lifeblood of the state’s aerospace and defense bulwark. “They’re second-, thirdand maybe even fourth-genPRATT & WHITNEY'S MIDDLETOWN PRODUCTION LINE eration manufacturing ented magnet high schools on campus, people who have a strong skill set with their post-secondary certificates in manuhands and who are innovators,” says Chris facturing fields such as CNC machining DiPentima, president of Pegasus Manufacand four-year and master’s degrees in turing, a Middletown, Connecticut, division manufacturing disciplines. of Leggett & Platt Aerospace. “They have good intelligence to problem solve. They’re READY FOR THE FUTURE an extension of engineering on the plant The state also facilitated formation of the floor.” Aerospace Components Manufacturers, The Manufacturing Innovation Fund which now consists of more than 100 will foot half the bill for company-specific members in one of America’s single largtraining of “incumbent” workers, up to a est industry clusters. And DECD organizes total cost of $100,000. The fund has also and finances suppliers’ trips to the major dramatically expanded what had been annual aerospace show in Europe, where a significantly underutilized apprenticethey can rub shoulders with clients from ship program. Pegasus, for example, has around the world. been able to hone and fill many more A revolutionary new aspect of the pubapprenticeships around its specific needs lic-private cooperation is that Connectifor welders and tube fabricators. cut’s big industry players have detailed Higher-education institutions also have their anticipated future employment been gearing up with expansion of STEM needs for the state. “We’ve broken out our and advanced manufacturing programs. trades requirements for the next 20 years, The University of Connecticut has been and we understand right to the belly able to graduate 70 percent more engibutton what kind of people we’ll need,” neers than before. The state and federal Dunn says. governments have invested nearly $40 All of that helps Connecticut stay on million to triple the manufacturing enrolltop in aerospace and defense. “We’re a ment at Connecticut’s matrix of 16 other high-cost state, so how are we beating universities and community colleges. people in India and China and Mexico And Goodwin College offers a range and the southeastern United States?” says of manufacturing programs, including DiPentima. “We have a more productive curricula for the state’s middle and high workforce that does things faster.” schools, its own two manufacturing-ori-

B O O K E XC E R PT

BIG NANNY IS

WATCHING YOU 40 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2018

In a new book, former Homeland Security Director Michael Chertoff argues that unless our legal structures change, the main casualty of the Big Data revolution won’t be our privacy— it could be our autonomy. An excerpt. JAMES’S EYES POP OPEN, PRYING HIS THOUGHTS

from slumber. Once again, he has woken up at 5:43 a.m. James always does. The monitor never lets him linger in bed. He sometimes wonders what the early 21st-century “snooze function” might have been like. He has never experienced such a thing but has seen it in a few old movies. In modern 2084, the ideas of the previous century have not been deemed relevant, and most of the media have been destroyed. James has no such luxury. At the optimal awakening time, the monitor, already aware of his sleep phase, begins playing sounds to generate his awakening. The audible portions are supposed to be relaxing. James has chosen beach waves that remind him of his childhood on Cape Cod. Nearly inaudible portions connect with his subconscious, causing his body to begin waking, whether he wants to or not. Today he gets up quickly. Previously, the monitor’s neural scan of James determined that he had been too slow in pulling out of a deep sleep, so it has increased the amount of subliminal communication. James doesn’t know what it would be like to wake up late; the thought is so foreign to his prescribed daily routine that it occurred to him only after he had seen one of those old movies. After James showers and makes his way toward the

kitchen, the monitor presents him with three healthy breakfast options matching his weight, age and health history. He is glad that he is still young enough to be allowed bacon, and he chooses a breakfast burrito heavy in kale and infused with egg whites. If he eats more than what is presented, the questioning begins. The same thing happens if James refuses to eat. The last time he attempted to skip breakfast, the monitor had detected his failure to accumulate the necessary caloric intake and, since this information was coupled with the fact that his daily bloodwork showed a rise in his white blood cell count, James was deemed too ill to work and was sent to bed. Entering his travel pod, he begins his commute to the office. Upon James’s arrival, he is greeted by the monitors stationed outside the building: “Welcome, James Jones. The morning meeting begins at 9 a.m. in conference room B. Six out of eight attendees have arrived and are stationed in the room. Marcos is 2 minutes and 46 seconds away from arrival.” “Chipped” at birth, James is accustomed to having his location known and available to others. Initially developed as an expensive and optional parental security feature to ensure that rescue would be quick in case of kidnapping or accident, the chips were eventually de-

JULY/AUGUST 2018 / CHIEFEXECUTIVE.NET

/ 41

manded by everyone. Mass production and government help have made them affordable. Because of their usefulness in convicting criminals, society has come to accept them. Therefore, anyone who wants to find James can do so. As a by-product of the chip, his life’s history can be played out as a simple series of circular patterns that rarely shift. It isn’t as if he consciously thinks about it. His behavior morphed because he just doesn’t want to be part of the interrogation that inevitably comes if he happens to be in the wrong place at the wrong time. Life is easier if his transit patterns match what is expected. Although he CONSIDER THE COMBINATION already knows OF THINGS ALREADY ON THE everyone in the MARKET: FACIAL RECOGNITION, conference room, AUTOMATED CARS, PERVASIVE as James enters, CLOSED-CIRCUIT TV IN MANY his “eyeglass” implants identify CITIES AND SOME COMPANIES’ each participant USE OF BIRD’S-EYE CAMERAS by name. This OVERLOOKING WORKSTATIONS... technology is relatively new, and James still finds it odd to view the world in “assisted mode.” As he scans the room, an indicator showing each person’s name is tagged in his vision. If he desires, James could probe for more information— his colleagues’ education and work background, intelligence score, family members and even medical history—by accessing the visual Internet database. After first receiving his eyeglass, James had regularly gone back to review meetings from his colleague Amy’s perspective, hoping he might catch how often she had glanced his way. At first, she was stealing quick looks. She stopped doing this when the monitor flagged her viewing patterns Excerpted and as being irrelevant and a waste of corpoadapted from rate resources. James thinks Amy might Exploding Data, be interested in him, but it is too hard to Reclaiming Our Cybersecurity in the find a legitimate reason to reach out to her. Digital Age, copyright Eventually, he gives up. 2018 by Michael Crime rates have fallen tremendously. It Chertoff, reprinted is too hard to do something illegal when the with the permission of crime is almost always captured by either the publisher, Atlantic an eyeglass or one of the scanning moniMonthly Press. tors installed as part of every streetlight. All rights reserved.

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Homeowners installed their own scanning monitors when criminals began to target homes without such devices. The monitors proliferated, and on a vast scale. It wasn’t mandated; it was as if the network spread on its own. The dramatic drop in crime rates is due to not only the increased surveillance but also the increased ability of the organization to predict bad thoughts, ideas and ultimately actions. This started as an improvement to the archaic lie-detector testing. Eye movements were first mapped to speech. This data was then processed with behavior recorded by the myriad sensors and video cameras throughout the city. From this data, predictive analytics are able to identify predisposition to erratic and even dangerous behavior. Thoughts that cross a high negative threshold are automatically reported to the police. James shakes himself out of his daydream. He isn’t sure if the authorities can piece together his random thoughts into a coherent stream, but he does not doubt for a second that he is being monitored. Unsure of what thoughts might trigger a report to the police, James finds it simpler to focus only on the task at hand. Friends are a distraction, and he always ends up wondering which one of them is an agent. James wonders about just what is, no longer about what might be. FUTURE/PRESENT If this scenario seems far-fetched, consider the combination of things already on the market or in development: facial recognition, automated cars, pervasive closed-circuit TV in many cities and some companies’ use of bird’s-eye cameras overlooking workstations and voluntary (so far) microchips implanted in employees. Of course, the effects of using any one of these devices may be good or bad. Unfortunately, too often government policy-makers, judges and everyday consumers poorly understand the consequences of the Big Data revolution. The effects of Big Data collection are playing out faster today than ever before. Information sharing has allowed new tech-

Aetna congratulates Marillyn Hewson, chairman, president and CEO of Lockheed Martin, on being honored as Chief Executive â&#x20AC;&#x2122;s 2018 CEO of the Year.

We thank you for your partnership in inspiring people to reach their health ambitions.

ÂŠ2018 Aetna Inc. 2018065

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nologies to be created at an ever faster pace. Technologies designed for security and classified by governments now quickly find their way into everyday consumers’ hands. The commercial drive to enhance marketing tools also drives relentless innovation in the ability to collect and exploit data. Because today’s information and networks have so many connection points, it is harder and harder to prevent information from leaking. Information doesn’t disappear readily—it sticks. Taken together, these features of modern information technology have sped up the spread of ideas and our personal information. As an unintended by-product, however, growing interconnectivity has had the effect of dramatically increasing threats to our security and privacy. The proliferation of wirelessly connected devices—often mobile—expands the THE RISE OF BIG DATA CAPABILITIES surface area of network entry points through IS OFTEN CRITIQUED FROM THE which hackers can penSTANDPOINT OF LOSS OF PRIVACY. etrate our information BUT WHEN TECHNOLOGIES COLLECT, and communication CATALOG AND EXPLOIT DATA... THEN networks. By the same PRIVACY IS TOO NARROW A CONCEPT. token, the centralized collection of our personal data by government and corporations means it is far easier for hackers to steal that data at a huge scale. So, consider the following recent cyber data threats: Equifax, the credit agency, loses data pertaining to 143 million Americans; Yahoo has 3 billion users’ accounts compromised; and the U.S. Office of Personnel Management, the government’s human resources agency, has highly sensitive security files relating to over 25 million employees and applicants stolen, perhaps by a foreign nation. History does show that technological changes bring with them social and normative changes, allowing societies to adapt. So, the development of the automobile led to the adoption of safety requirements and the regulation of traffic patterns. Because in modern democracies people ultimately define the rules that determine or restrict their behavior—the social contract—the rules must adjust to meet the needs of the day. But new technology doesn’t always fit

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within the existing social construct. Trying to force it into an outdated legal system may even break the system. Eventually people react by demanding fundamental changes to the rules. It falls to elected officials, administrators and courts to recognize changed circumstances and then reconstruct legal and policy standards. WHEN WE LOSE CONTROL As the social contract is renegotiated, a return to basic principles and values is necessary. Standing outside the outmoded paradigms and automated legal categories, we must redetermine what our core social and ethical values are. What’s in danger and what needs protection? Often the constitutional principles of liberty, security, freedom of expression and association and independence must be weighed against each other, possibly with the interests of society balanced against the rights and interests of the individual. The rise of Big Data capabilities is often critiqued from the standpoint of loss of privacy. But when technologies collect, catalog and exploit data—much of which is willingly submitted by people—or when data is collected in open public spaces, then privacy is too narrow a concept to reflect what may be at risk. What is actually at stake is the freedom to make the personal choices that affect our values and our destiny. A person can be manipulated and coerced in many ways, but the most ominous involve the pressure that comes with constant, ongoing surveillance of our actions. Our parents shape our behavior not only by teaching us as children but also by the examples they set. They hope to instill strong value systems in their children, even as they hope that their children will gain new opportunities, ideas and experiences to mold them. As we grow older, we have more and more opportunities to choose our own way and explore new ideas. But that freedom can be undermined when we lose control of information about ourselves—our actions, beliefs, relationships and even our flaws and mistakes. Modern analytic tools have the potential to form a detailed picture of almost any

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

CYBER’S PAINFUL PRICE

The 2017 cyber loss numbers are in, and they’re enormous. Is this the wake-up call companies need? The figures are in for the total estimated business losses in 2017 resulting from cyber attacks, and they paint an ominous picture of the future of business in the cyber threat landscape. Willis Towers Watson estimates over $4 billion in financial and economic losses across 150 countries from the 2017 cyber attacks like WannaCry, NotPetya and others. Some industries, such as consumer goods, pharmaceutical, and shipping/logistics, lost upwards of $600 million each in 2017 due to systems outages, disruptions in production and operations and malware’s impact on sales. These hard numbers have pushed companies into action as many boards and executives are looking at ways they can prevent and overcome future attacks. In a recent Willis Towers Watson survey, we found that 96 percent of board members think they don’t spend enough on cyber overall. By 2021, the global cyber spend on IT security technology is expected to grow to $113 billion (up from $75 billion in 2016). While boards are making significant technology investments, they are still stagnant on addressing their cyber risk from their human capital. RAISING CYBER IQ Cyber threat exposure through corporate employees poses one of the biggest unanswered threats to the organization. A whopping 58 percent of cyber breaches in 2017 can be attributed to human capital error through employee negligence or malfeasance. However, while corporate spending on cyber technology is projected to massively increase in the coming years, investment in human capital cyber solutions remains low, only anticipated to grow from $1.4 billion in 2016 to $2.3 billion in 2021. It’s important for boards and corporate leaders to recognize the incongruency between the corporate cyber spend and the high level of cyber risk they face from their human capital. A company can only get so far in its cyber risk mitigation through a focus on technology alone. Technology will inevitably evolve, with

new threats emerging and old vulnerabilities being identified with startling regularity. However, a workforce with a high cyber IQ can serve as a foundation for cyber risk management across an organization. While the development of such a workforce is a significant undertaking, it is an important one, and one that is vital toward future cyber risk protection. ONGOING EDUCATION One of the common factors of organizations that suffer major data breaches is an inability to create an ongoing learning environment that encourages employees to keep up with relevant business trends. This includes the latest threat landscape and being current on the tactics being used by malicious actors to penetrate corporate cyber defense, as well as understanding how to circumvent them. Willis Towers Watson has found that over the past 12 months, nearly 50 percent of employees have spent less than 30 minutes in cybersecurity training. It’s no wonder that less than 50 percent also claim to not have a “cyber smart workforce.” Boards must understand this through line and commit resources to the development of a cyber development program that not only encompasses training but ongoing education of employees. Cyber readiness and aptitude need to be integrated into the corporate culture. The development of such a culture will also increase cooperation across cyber defense and IT teams, ultimately improving cyber risk mitigation. As these programs and resulting skills become more prevalent, the prevalence will follow in the talent market, as more employees across industries build cyber proficiency and evolve into hybrid job roles that involve cyber. Companies are on board with investing in organizational cyber defenses but still need guidance in how they spend it. As the corporate cyber threat landscape evolves, the corporate workforce must evolve with it.

SOURCES OF CYBER ATTACK LOSSES

58%

Employee negligence or malfeasance

23% Hack

10% Social 7% engineering

Denial of service

Unknown SOURCE: Willis Towers Watson Reported Claims Index

ANTHONY DAGOSTINO Global Head of Cyber Risk Willis Towers Watson

individual’s activities. It is extremely difficult today to “opt out” of the data stream. Modern life generates data as a necessary part of the convenient services we enjoy. Information collected today is necessarily broader than what was collected in years past; it lasts longer; and it is put to more uses. But those who collect and aggregate that data have an increased power to influence and even coerce our behavior—possibly through social shaming and financial TODAY’S EXPLOSION OF incentives and penalties. BIG DATA IS OFTEN Today’s explosion of JUSTIFIED AS PROMOTING Big Data is often justified HEALTHY LIFESTYLES... BUT as promoting healthy lifestyles, convenient UBIQUITOUS SURVEILLANCE IS A marketing and even CLASSIC TOOL OF OPPRESSION, AS easier and more informed EPITOMIZED BY THE BIG BROTHER political engagement. But OF GEORGE ORWELL’S 1984, WHICH ubiquitous surveillance WATCHES CONSTANTLY. is a classic tool of oppression, as epitomized by the Big Brother of George Orwell’s 1984, which watches constantly. Are we on the verge of inviting this oppression surveillance into our own lives, albeit in the deceptively benign guise of a “Big Nanny” who watches over us “for our own good?” BEYOND THE INTERNET The data explosion raises risks to more than our freedom. The expansion of online networks that are connected to physical systems and that even control their operation has dramatically expanded the ability of malign individuals to interfere with the physical world. This affects everything from generating the electricity that powers the grid to the performance of our automobiles. This expansion of network-controlled mechanical systems places an increasing burden on governments, private parties and ordinary citizens to be able to secure their computers and systems against a surge of attacks from around the world. Traditional rules governing security and liability must adapt to and address these burgeoning threats. And this necessity to protect our world may conflict with the very real concern about the growing collection of our personal information. One point should be clear. While it is

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customary to refer to modern Big Data developments as a result of the Internet, that is an oversimplification. These developments were caused by changes in the way we collect, store, transmit and analyze data, as well as in the interaction between digital transmissions and the operation of control systems that regulate our physical world. As I will describe, a confluence of circumstances drove these changes. Certainly, the creation of the Internet was one, driven by the need for a flexible communications system that could survive natural or manmade destruction of the normal methods of communication. Other strides in data collection and analytics are the result of a new national security environment in which threats are no longer nation-states but instead online enemies who can be detected and thwarted only by monitoring the global movement of people, money and communications. And even more profoundly, data has become valuable as a tool for targeted marketing and as a means of reducing the cost of executing commercial transactions. In short, the data revolution was powered by, and powered, the transformative expansion of our global economy. Yet, these revolutionary changes in the use of data have far outpaced our legal and policy architecture. We want to establish rules of the road to reconcile the competing demands for security, privacy, autonomy, economic growth and convenience. But as security expert Bruce Schneier has observed, our legal system can be slow to adapt to technological change. We should not try to fit new technologies into the procrustean bed of existing outdated legal doctrines. What we need is to go back to basics: setting forth a clear understanding of the values we want to preserve, the challenges the world of Big Data presents and how our legal system should evolve to address those challenges. THE HISTORY OF DATA To put this effort in context, it’s worth recalling that we have historically recognized the need to restructure our laws and policies when confronted with a techno-

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logical disruption. We are actually in the third of three transformations in the history of surveillance and data (or information) collection. I call these periods Data 1.0, Data 2.0 and Data 3.0. Data 1.0 refers to a time when information was collected prior to the invention of automated recording devices, such as cameras, telephones and tape recorders. After writing was invented, records were limited to handwritten or printed notes or drawings. These were observations of what was seen or heard through face-to-face interaction or what was read in another handwritten record. The reliability of this material depended upon the communicator’s ability to mentally record MINING DATA HAS PROVIDED and transmit it, MANY BENEFITS, WHILE IT ALSO ENABLES either by telling someone else or by PERNICIOUS USES....WE MUST LEARN TO writing it down. MANAGE IT IN A WAY THAT PROTECTS But the first INDIVIDUALS WHILE ENABLING BENEFITS transformation TO SOCIETY AS A WHOLE. in the handling of data came with the invention of the printing press. This allowed broader dissemination of information and the ability to store writings in libraries. Even so, retention, dissemination and usability of written information were restricted by limitations on storage space, reproduction and modes of communication. Data 2.0 refers to the time period after the invention of photography and telephony in the 19th century. Photographs allowed for superior recollection of events through reproduced images. Somewhat more comprehensive visual recording came with the arrival of video. Telephones enabled communication over longer distances more quickly. But telephones and microphones also allowed for deeper access into personal lives from remote locations via wiretaps and electronic surveillance devices, or “bugs.” These technologies made life much more convenient, but at the same time they opened up new methods of surveillance. As I will explain, after a struggle, our laws governing these data technologies need to evolve to strike a balance between these values. Data 3.0 is today’s increasingly digital

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world. Since the 21st century began, photographs are recorded no longer on film but in bytes of information that can be stored indefinitely, copied easily and transmitted worldwide instantaneously on computers and smartphones and at will. As data storage memory systems improve, more and more data is captured and stored. Data 3.0 is also characterized by the advent of data analytics—using computer software to examine vast troves of data, reaching conclusions that humans could not reach on their own. Mining data has provided many benefits, while it also enables pernicious uses. All this available data comes with societal consequences. We must learn to manage it in a way that protects individuals while enabling benefits to society as a whole. And this is unlikely to be the last chapter in the evolution of how we handle data. We can imagine a Data 4.0—already prefigured with modern-day robots and artificial intelligence—in which embedded software in human beings creates true cyborgs: hybrid human machines. The initial steps toward this vision can be seen in the proliferation of wirelessly connected implanted medical devices like insulin pumps and pacemakers, as well as computer-driven limbs used to rehabilitate neurological or other medical deficits. WHAT WILL WE PROTECT? In thinking about how the law has evolved and should evolve, it’s fundamental to clarify what values we want to preserve and rebalance. In the world of Data 1.0, the law primarily protected a privacy interest in physical spaces through property rights. At the time of the signing of the U.S. Constitution, the rule was that judicial permission was needed to search and seize in private physical space. When Data 2.0 arrived, technology like the telegraph and telephone shrank physical distances between spaces. The law adapted to protect a privacy interest in personal conversations, requiring a warrant to intercept conversations, even over publicly located telephone wires. Today, Data 3.0 technology is again changing what is at stake. The sheer

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amount of personal data recorded, stored and analyzed is staggering. New technologies have further blurred the line between what is public and what is private, and information once collected does not readily disappear. While we will always be concerned about our privacy in physical spaces and communications, the advent of mass collection, storage, ...PROTECTION OF OUR WAY OF analysis and distribution of personal data LIFE MUST MOVE BEYOND A RIGHT means that we must also TO CONCEAL OUR DATA AND INTO consider how we control A BROADER RIGHT TO CONTROL data generated by or OUR DATA, EVEN WHEN HIDING about us, even if it was IT OR PRIVATELY MAINTAINING not collected in what we might generally consider IT BECOMES TECHNOLOGICALLY personal physical space. IMPOSSIBLE. What should we protect? Privacy is too narrow a value: it covers concealing only behavior that is sheltered from others in a private space or on privately designated communications facilities. In a world irreversibly governed by ubiquitous Data 3.0, hiding or obscuring behavior is impossible. I argue that what we can and should care about is the broader value of autonomy, which is at the very core of freedom. Autonomy is the ability to make our own personal choices, restricted only by transparent laws and also influenced by social norms affecting our reputations within our communities. Autonomy is fundamental to human nature and respected in a modern, democratic society. Under the democratic ideal and the rule of law, citizens are bound only by law and regulations openly and democratically adopted and objectively enforced. Less coercively, our conduct is affected by norms honored within our own civil society institutions and communities. These principles—the essence of the rule of law—are eroded when the availability Michael Chertoff of ubiquitous personal data means that served as secretary of any data holder (official or private) can use the U.S. Department psychological manipulation, shaming and of Homeland Security financial incentives and penalties to influfrom 2005 to 2009. ence and possibly coerce almost every facet A former judge, he is co-founder and execof human behavior: what we watch, see and utive chairman of The eat; how we behave; and to whom we relate. Chertoff Group. When government has total access to your

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personal information, the practical reach of its authority is almost limitless, transgressing the formal constitutional or statutory limits of official power. Just as alarming, unfettered access to that data can allow private enterprises or groups to pressure, manipulate or incentivize personal behavior without any public accountability. As is illustrated by the increasing phenomenon of online bullying, communities with which we have no connection can use data about us to retaliate or annoy us if they don’t like our political or even aesthetic opinions. OPTING FOR CHOICE To preserve space for lawful personal choice means that we must have significant control over data about ourselves—our likenesses, the things we do, our thought processes and decisions. A world in which every step we take factors into auto insurance or marketing, or allows the government to predict and regulate our behavior, would be a substantial constraint on our freedom of belief, our relationships and our actions. Essentially, it means we would become programmed. We are moving in that direction. We have always been worried that Big Brother might force his way into our home and compel obedience under his watchful eye. But Big Brother need not beat down the door. We are currently rolling out the red carpet to welcome him. And Big Brother is not just the government but also foreign nations, organized criminals and even private companies. Indeed, as we incessantly record one another, we become Little Brothers and Sisters. At a fundamental level, people should be aware of what is being done with their data, and they should make a choice about how to deal with it. Put another way, protection of our way of life must move beyond a right to conceal our data and into a broader right to control our data, even when hiding it or privately maintaining it becomes technologically impossible. Unless we take stock of our new digital environment and its consequences, we may lose not just privacy but also freedom and autonomy in the name of convenience.

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i Average annual savings on homeowners insurance for members reporting prior carrier premiums from Jan. 2011 through Apr. 2018. Actual savings, if any, may vary. PURE® refers to Privilege Underwriters Reciprocal Exchange, a Florida-domiciled reciprocal insurer and member of the PURE Group of Insurance Companies. PURE Risk Management, LLC (PRM), a for-profit entity, serves as PURE’s Attorney-In-Fact for a fee. PURE membership requires an executed Subscriber’s Agreement & Power of Attorney. Visit pureinsurance.com for details. Trademarks are property of PRM and used with permission. ©2018 PRM. All Rights Reserved. 44 South Broadway, Suite 301, White Plains, New York 10601. PURE HNW Insurance Services, CA Lic. 0I78980.

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C EO ROUNDTAB LE

MANAGING CYBERSECURITY IN THE NEW REALITIES OF IoT Your devices, systems and equipment can all talk to one another—and to cyber criminals. Here’s how to realize the benefits of connectivity without compromising your security. BY JENNIFER PELLET CONNECTIVITY OFFERS boundless business opportunities. From allowing for more accurate forecasting to shortening production cycles and streamlining supply chains, the gathering, analyzing and sharing of data by smart devices and machines enables a wide range of improvements and efficiencies. But it also makes security exponentially more difficult. Each and every Internet-connected

Dan Larkin, director of fraud prevention at PNC’s Enterprise Fraud Group, at a cybersecurity roundtable discussion held at Chief Executive’s recent Smart Manufacturing Summit and co-sponsored by PNC. “For example, a trusted vendor of yours is compromised, and then someone goes in and researches your company’s e-mail history with that vendor,” he explained. The information mined is then used in an

“It comes down to controlling access. Does a person have the access and privileges they actually need to do their job or do they have way too many?” —Dan Larkin, PNC Allied Motion Technologies’s Robert Maida, Kohler’s Amy Meyer, PNC’s Dan Larkin

device—whether it belongs to your company or one you do business with—represents a point of vulnerability. Cyber saboteurs might infiltrate any one of them and daisy-chain from there to gain access to your most sensitive data and critical systems. And then there are the humans using them. Efforts to gain entry to corporate IT systems by way of employees have grown more sophisticated in recent years, said

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elaborate scheme to create realistic-seeming e-mails requesting payment or access to valuable data. “They’ll set up a whole website,” said Larkin. “Then they’ll hijack that e-mail account and contact you to say, ‘Hey, here’s a link to a whole new billing system for the recent shipment we just sent you,’ or ‘We’re having an audit on our primary accounts right now, please send payments to this one

going forward.’” Farooq Kathwari, CEO of Ethan Allen, reported experiencing such a scheme firsthand. “It was an exchange between one of our suppliers and a team member that took place over the course of a few days and looked [legitimate],” he said. “Then the supplier asked that we send money to a different bank, and our people made a mistake and did.” Kathwari, who was able to work with the bank to recover most of the funds, said his company is targeted, one way or another, by cyber thieves on a daily basis. Being able to mitigate the risk of attack or, when a breach occurs, recuperate swiftly begins with an understanding of the most prevalent vulnerabilities and the methods cyber criminals use to target them. Participants in the roundtable discussion discussed three problem areas and outlined steps that can be taken to address them.

At Kwik Lok, CEO John Rothenbueler brought in an independent firm to audit its computer system and provide employee cybersecurity training. “Then our IT department sent out an e-mail trying to trick people,” he said. “We’ll do that again this year and every year from now on.” Larkin urged CEOs to also consider incentive programs that recognize and reward employees for following cyber protocol. “Make it worth their while to be on

E-mail Compromises

While companies are assaulted by nefarious e-mails on a daily basis, most attempts to introduce malware or gain entry by e-mail communication are easily detected. “Seventy percent of the emails we get are spam,” reported Ted Hamilton, president of plumbing at Elkay Manufacturing. “Our first line of defense is making sure we do a good job of trying to weed out as much as we can.” Still, the fact that more sophisticated efforts, such the one Ethan Allen’s Kathwari described, can and do still meet with success suggests companies would do well to devote more time and resources to cybersecurity training. Many report doing just that. In the wake of its e-mail incident, Ethan Allen instructed its bank that any request to change a payment path be confirmed by phone before being carried out and also embarked on an employee training initiative. Because executives with the authority to move money tend to be the most frequent targets of business e-mail schemes, Elkay took an extreme measure: using e-mail settings to prevent the company’s CEO from opening any e-mail attachments that come from outside the company. “The two most vulnerable people are the CEO and the CFO, so that’s where you need to focus,” said Hamilton.

the lookout and sound the alert,” he said. “These phishing campaigns are getting harder and harder to spot.” Insider Issues

In some cases, employees or ex-employees intentionally open a door for cyber criminals, noted Robert Maida, vice president of Allied Motion Technologies, who cited a company that was decimated after a key employee stole intellectual property (IP) and turned it over to a competitor in China. “You’ve got to be really diligent about who has access to your IP,” he said. “The largest vector of vulnerability is still the person in the seat.” Agreeing that insider theft or malfeasance is a significant threat, Larkin advised CEOs to lock down valuable data and IP. “It comes down to controlling access,” he said. “Does a person have the entitlement and privileges they actually need to do their job or do they have way too many? To me that, along with managing your outbound traffic, is a key part of managing internal threats.” Trusted vendors given access to areas like inventory and billing systems represent an extension of this type of threat. Companies need to not only vet their own protec-

From left: Chief Executive’s J.P. Donlon, John Rothenbueler of Kwik Lok and Mike Donoghue of Rain Bird

JULY/AUGUST 2018 / CHIEFEXECUTIVE.NET

/ 55

tive measures but also those of any partner who has access to their systems—which can be tricky on both sides, noted Cliff Lindholm, CEO of Falstrom. “As a smaller manufacturer in the defense industry, we had to go through compliance with the NIST standard,” he said. “They gave us a list of a 100 different line items of deliverables and said, ‘Comply with these,’ with no funding and no guidance on how to go about it.”

“Your business’s resiliency and recovery will be tied to how well your backups are designed.”

Password and Port Problems

Security-minded companies adopt policies requiring that passwords are strong, updated regularly and kept safe from prying eyes. But all of those precautions can be rendered useless by a single default password left in place or hardwired onto a device connected to your system. Manufacturers and third-party service providers often ship or install devices with such entry points in place to enable easy remote access for maintenance purposes, explained Larkin, who said that cyber criminals routinely scan systems for such devices. Sen. Mark Warner’s (D-Va.) Internet of Things Cybersecurity Improvement Act seeks to ban the practice of hardwiring passwords and set standards for security protocols, but the bill is still in review. In the meantime, backdoor entry points can be patched over, but “many organizations fail to take the steps to have their IT folks

Roundtable Participants Top row, from left:

Jay Nerenhausen, CEO, Nercon

Wayne Johnson, CEO, Accuform

Farooq Kathwari, CEO, Ethan Allen

Cliff Lindholm, CEO, Falstrom

J.P. Donlon, Editor Emeritus, Chief Executive

Joel Slank, General Manager, Rockline Industries

John Rothenbueler, CEO, Kwik Lok

Ted Hamilton, President, Plumbing, Elkay Manufacturing

Mike Donoghue, Vice President, Rain Bird

Frank Bezon, CFO, Haltec

Daniel Johnson, CEO, Pureflow

Jerad Higman, CEO, Masaba

Brian Miller, CEO, ProVia

Robert Maida, Vice President, Allied Motion Technologies

or whoever has been responsible for that relationship make sure servers and other resources connected to your network are patched,” Larkin said. “Ask your service providers, ‘What level of security do you bring to the table? Are there hard-coded passwords in there? What’s the reset capability? Will you need to access our system for maintenance?’ If so, set up some protocols for how they do that—don’t give them carte blanche access.” In a similar fashion, company firewalls need to be proactively managed. Firewalls are designed to deny unauthorized access to your systems—but the applications on your network that require Internet access to function do so by opening holes, or ports, in your firewall. Often, these ports remain in place long after they’re needed and become potential points of vulnerability in your security. Companies should regularly scan their systems for open ports and close any that the business does not require to be open.

Not Pictured:

Jeff Dunham, COO, SSW Holding

Jeremy Frank, President & Co-Founder, KCF Technologies

Dan Larkin, Director of Fraud Prevention, PNC

Paul Ludwig, CEO, Hydro Electronic Devices

Bottom Row, from left:

Amy Meyer, Vice President, Kohler

Ben Brock, CEO, Astec Industries

Paul Reitz, CEO, Titan International

56 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2018

Boost Your Broad Measures

Locking down access by limiting privileges helps mitigate all of these risks, said Larkin, who also suggests companies address the broad spectrum of vulnerabilities by bringing in an outside expert to conduct a “red team” exercise. “Have them attack to see if they can compromise your networks,” he suggested. “Do that a few times a year.” Minimizing the scope of data stored on accessible devices is another critical step in protecting your company, as is conducting frequent and comprehensive backups of crucial data. “Your business’s resiliency and recovery time will be tied to how well your backups are designed,” said Larkin. Since no network can be made impenetrable, it’s also critical to be prepared to cope with a cyber event when it occurs, noted Elkay’s Hamilton. “Someone is going to get through eventually,” he said. “So it’s about how quickly you can isolate it, clean it up and keep the information contained.” Larkin, who spent 24 years with the FBI before joining PNC, urged companies that suffer a cyber breach to contact the federal agency, which has a wealth of useful data on the hacking community. “If something happens, contact the FBI, because they may know something about the threat actors behind it,” he said. “[In a ransomware attack, for example], they may know if the attackers are credible in giving you the keys to unlock your networks or if they will leave a back door and come back and hit you again.”

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C EO RO U NDTAB LE

THE MOBILITY REVOLUTION Global transportation is experiencing dramatic change. What will it mean for your business? BY C.J. PRINCE

“When you start digging into [mobility technologies], you see it affects education, it affects healthcare— it affects pretty much every business.” —Mark Patton, Smart Columbus

FROM AUTONOMOUS VEHICLES to drone taxis to Hyperloop tunnels that can shrink commute times by 75 percent, the digital revolution is, without a doubt, disrupting transportation. New mobility technologies promise to not only transform how people move about but revolutionize the way a company’s supply chain operates, how products are delivered to customers, where employees live and work. The quartet of disruptive technologies driving this change—connected, autonomous, shared and electric—won’t just impact the mobility industry. “When you start digging into [mobility technologies], you see it affects education, it affects healthcare—it affects pretty much every business,” said Mark Patton, vice president of Smart Columbus at the Columbus Partnership, a group of CEOs that includes those of the 70 largest companies in the city. Smartening Cities

Some advancements are further along than others, but there’s no question that cities are getting smarter, agreed participants at a CEO discus-

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sion that took place at Chief Executive’s Smart Manufacturing Summit and was sponsored by Jobs Ohio, a private nonprofit designed to drive job creation and new capital investment in the Buckeye State. In order to attract and retain businesses, in part by making employees happier, cities are investing in new infrastructure, working on collaborative pilots in partnership with local manufacturers and other businesses to find the safest, most reliable and most cost-efficient solutions to mobility challenges. One of the cities furthest along is Columbus, which, in 2016, won the U.S. Department of Transportation’s Smart Cities Challenge, a $50 million grant, which it then more than matched with $90 million in private sector money. The goal? “To take some new smart mobility solutions and apply them to challenges and problems that almost every mid-sized city will have,” said Patton. “So the thought is, if we learn here, we can use that in lots of different places.” Smart Columbus, Ohio State University and local partner companies such as Honda, American Electric Power and Siemens, among others, are now working on safer, smoother, smarter transportation to create a kind of “cooperative mobility ecosystem,” as Ted Klaus, vice president of strategic

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“We’ve very much realized that, in order to solve these bigger issues, we need partners.” —Ted Klaus, Honda R&D Americas

research at Honda R&D Americas, called it. In the past, Honda wasn’t much for collaborating, preferring to keep strategy and proprietary technology close to the vest to shield intellectual capital from competitors, said Klaus. “Our brand just depended on ourselves. But we’ve very much realized that, in order to solve these bigger issues, we need partners.” The car manufacturer’s goal for the project is threefold: to create technology that makes mobility more enjoyable and freeing; to eliminate conflicts, such as collisions and congestion; and to make the world more carbon sustainable. “All three of these come back down through what we call ‘the pursuit of quality,’ because you can keep making vehicles as smart as you want, but they’re never going to see down the road two miles and through buildings,” said Klaus. He pointed to one tangible example of that: the development of smart vehicles that can communicate with one another, with trucks and buses and with smart intersections to make autonomous driving safer. “So it’s kind of a combination of making the vehicle smart and having it talk to other smart vision systems,” he explained. Another use for the technology involves a highway concept Honda calls “Safe Swarm,” which allows vehicles, in communication with one another, to behave like schools of fish, safely parting for emergency vehicles or, potentially, for public transportation vehicles, which could cut down on commute times for workers living in the suburbs. Safety First

Some participants voiced skepticism about how soon autonomous vehicle technology would be ready for rush hour. Tom Brown, president of Cap & Seal, pointed out the recent fatalities in driverless cars and doubted that current sensor technolo-

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gy would keep people safe with driverless 18-wheelers on the road. “The technology is not even close,” he said. Klaus acknowledged that autonomous driving technology is still in the very early stages. “We are working very hard to go on a step-by-step movement from infancy towards maturity,” he said. “I can say, from Honda’s viewpoint, we’re very bullish about the potential outcomes, but we’re very stoic and rational about the time it will take to get there.” To get there safely, and as quickly as possible, companies have to be willing to collaborate more closely, said Tom Kleino, president of L&L Products, which makes composite devices for OEMs. “It takes everybody being ready with our technology at the same time, which means working closer together rather than in silos, like a lot of the labs are today,” he said. In general, “there are a lot of people covering their work, not showing their work, and we need to be more collaborative.” Uber agrees, said Mark Wood, the ridesharing company’s senior operations and logistics manager. Uber is currently working with Cincinnati Collaborative to create a mobility lab that will share data, conduct studies, engage employers and activate designers to help create a strategic transportation plan for the Cincinnati region. One of the projects, a “curb of the future” study, examines ideal pickup and drop-off spots to ensure they don’t interfere with traffic and public transit. “So, of course, [that means] rideshare but also taxis, personal vehicles, on-street parking, pedestrians, bike-share programs, delivery trucks,” said Wood. “There are any number of people who are trying to use that same curb space, and we want to make it useful all throughout the day.” One of Uber’s goals is to help companies attract and retain talent by making commutes easier. A hundred years ago, Wood said, corporate headquarters were typically located in urban centers. “That’s where jobs existed, so that’s where people lived,” he said. But today, many more people are commuting from suburbs and rural areas,

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“We’re not here to replace transit by any means, we’re here to augment it.” —Mark Wood, Uber

and it isn’t efficient for public transportation to cover all those locations. “We’re not here to replace transit by any means, we’re here to augment it,” said Wood. Public transit routes may be able

acquired by Michelin Tire. He pointed out that the UAE and companies there are testing drone taxis for both cargo delivery and human passengers. That’s an area that will receive significant R&D support, Wood predicted. “To build additional highways or expand highways is extremely costly,” he said. “So, can you make that commute vertical? I think that’s a goal of a lot of different people.” Up, Down and Over

Smart Columbus’s Mark Patton, Honda Americas’s Ted Klaus, Uber’s Mark Wood

to serve 90 percent of an employee’s trip, and Uber is looking to fill the last 10 percent. “The hope is, you maintain your employee base, you can recruit from further away and those employees won’t have trouble getting to your door,” he said. Changing how we commute will reduce road congestion and, by extension, deterioration, noted Glenn Richardson, managing director for advanced manufacturing with Jobs Ohio. “I know it’s early stage and it will take time, but I’m very excited about the regenerative nature of this,” he said. Another commuting challenge new technology may help solve is traffic congestion, which can be a turnoff to employees, both near and far. “You might only be 20 miles away, but it’s going to take you two hours to get to work,” said Mark Spanial, plant manager for Shimadzu Precision Instruments, an aerospace company in Long Beach, California. Employees are regularly delayed by freeway accidents and mileslong traffic backups. Recently, the endless commute drove one valued employee to leave. “He just up and quit,” recalled Spanial. Such losses are frustrating for employers already challenged to keep critical, highly skilled positions filled. “We’re still using existing infrastructure to get people to and from work,” noted Mohsin Zulfiqar, divisional managing director of Fenner PLC, which was recently

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Klaus agreed that “three-dimensional mobility” will be a must in most cities. “Time is money, so the certainty of being able to move from point A to point B in dense urban areas is going to be a requirement of the future,” he said. Hyperloop technology, which can transport cargo or passengers on dedicated tracks at speeds of up to 670 miles per hour, will also help, said Patton, who recently viewed the Hyperloop One test track in Las Vegas and came away impressed. Asked by Greg Reitz, vice president of IT at Lewis Tree Service, to look seven years out, Patton predicted greater cohesiveness between transportation methods—instead of one app for Uber and another for subway transportation, we might soon have one app that controls all public and private transportation options and allows for payment, scheduling, parking reservation and so on. “You’ll know the price, pay one time, pay it for the month, pay it by the use, pay for parking. All that stuff is just not integrated today,” he said. “In seven years, there’s the possibility of a real ecosystem here.” Klaus was quick to add that nobody—not even the mobility experts—knows exactly which of these technologies will pan out as real-world solutions. “My crystal ball that’s 28 years polished has all these cracks and fissures, and I just can’t see the future any better than maybe some of you,” he told attendees. But with multiple pilot projects going on simultaneously, he added, they’ll have a better shot at figuring out what works—as long as they stay focused on the consumer rather than the inventions. “Technology for technology’s sake doesn’t work,” he said. “You have to figure out a way to serve people.”

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SO YOU WANT TO BE A

PE CEO? Running a private equity portfolio company comes with unique challenges and a high level of stress. Before you take the plunge, make sure you’re cut out for the job. BY C.J. PRINCE

en Breier never expected to be running a company backed by private equity. In 2014, he became CEO of public company Kindred Healthcare just as it was completing a $1.8 billion hostile takeover of home health provider Gentiva. He helmed a successful merger that included finding $100 million in synergies while retaining 99 percent of the Gentiva team, then went on to deliver year-over-year growth and a spot on Fortune’s list of “Most Admired Companies” every year. Yet, the stock price remained volatile, slumping from a high of $25 in 2014 to around $11 by mid-2016. “After the Gentiva deal, we were suffering from several years’ worth of reimbursement and regulatory changes in other parts of the business,” says Breier. “That had done some real damage to our earnings and had driven leverage higher than what we expected or wanted. Our balance sheet needed to be reworked.”

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Enter private equity. Approached by a PE firm in 2016, Kindred’s board opted to initiate a competitive bid process. The result was a complex hybrid deal in which TPG Capital, Welsh, Carson, Anderson & Stowe and insurance company Humana teamed up to buy Kindred, breaking it up into two companies, one spun off and owned by Humana and the other owned by the private equity firms and run by Breier. It took nearly 18 months to hammer out, but the deal to take Kindred private was finally done in December of last year. “I like to say it was partly inspiration, partly desperation

months later that person is not standing,” says Mike Lorelli, operating partner for mid-level private equity firm Falconhead Capital. “Those statistics frighten off some people, but that’s probably a good thing because the people who are scared off are probably not right for the job.” In an effort to figure out what makes a successful PE CEO candidate, search firm Russell Reynolds analyzed 75 PE buyouts to identify the characteristics shared by both the most successful and the least successful CEOs. For starters, while industry experience was key, PE experience mattered a

“I’m not sure it’s better or worse, but it’s different. It’s the proverbial devil you don’t know.” —BEN BREIER, CEO KINDRED HEALTHCARE

and a lot of perspiration until we finally got there,” says Breier. While due diligence was thorough and Kindred’s shareholders agreed the $810 million deal seemed right, Breier, as a public company CEO who had never led a PE portfolio company, had his own trepidation about the new structure. “You have people putting in a significant amount of capital, and they have a determination around wanting to get returns on that invested capital. I’m not sure it’s better or worse, but it’s different.” He knows the pressure to deliver will be considerable and, with a new kind of owner, the future unknown. “It’s the proverbial devil you don’t know.”

A Short Shelf Life Breier’s concerns aren’t exactly unfounded. Turnover among private equity CEOs is notoriously high. According to AlixPartners’ 2017 annual private equity survey, 73 percent of CEOs are replaced during the investment life cycle, and 58 percent are gone within two years. Even CEOs brought in by the PE firm don’t have an especially long shelf life. “The hard fact is that, half the time, when we do change the CEO, nine

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lot less than one might think: of the top 25, only one CEO had led a portfolio company before. “So you look at background and you can see from the data that the successful ones have a long track record in the industry. They’ve had P&L in the industry. They’re more focused on high growth and less on cost takeout,” says Mark Adams, a consultant who works with Russell Reynolds’ board & CEO advisory group, as well as the private equity and global insurance practices. But while there are some hard commonalities, a lot of the differentiators relate to style—good communication and collaborative skills, an “even-keeled demeanor,” the tendency to be “humble” and the ability to empower others. Lorelli, who has run four PE portfolio companies, adds that there is a big demand for leaders with traditional CEO backgrounds “because they know when it’s done right, when it’s done with precision, when it’s done to huge scale.” Perhaps the greatest determinant of success in the role of PE CEO is the ability to honestly self-evaluate and approach the opportunity with a cool head. “It always sounds so enticing when someone says we

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have this company, and we just invested and it’s going to be three years of growth and a great payout—it all sounds great,” says Lenny Castiglione, CEO of PE-owned OB Hospitalist Group. To evaluate the deal, he adds, “You have to take emotion out of it.” To begin the self-assessment, consider the following questions to help you determine whether running a PE portfolio company should be your next act. Can you be satisfied executing your sponsor’s strategy? In most cases, PE investors have an investment thesis that plots the path from point A to point B and need a good steward to take the company there. “The exit strategy has been baked into the deal,” says Matt Brubaker, CEO of FMG Leading, a strategy and human capital advisory firm, and operating partner at WindRose Health Investors, a New York-based private equity firm. “So you’re not really formulating a strategy, in the traditional sense. If you have a deep appetite to do that, it would be very frustrating.”

was owned by Ares Capital until it was purchased last year by Gryphon Investors. “The smart PE firms realize they have a ton of financial technical expertise; that’s what they know how to do. But they don’t know how to do operations or strategy or human capital,” he says. “The good ones hire CEOs who know how to do that.” He adds that the key is to know what is expected going in—where their role ends and yours begins—so you can be realistic about what you’ll be satisfied with. Can you cope with being micromanaged? This depends both on the individual PE firm’s style and your own perspective, as one CEO’s micromanagement is another’s collaboration. In almost all cases, you will have a lot more interaction with your board as a PE CEO than you did with even the most involved public company board. “If you’re super collaborative, that can be a lot of fun,” says Brubaker, “but if you’re testy, that can be a real challenge.” Lorelli says the level of micromanagement will depend on the PE firm. “There

“The exit strategy has been baked into the idea. So you’re not really formulating a strategy, in the traditional sense. If you have a deep appetite to do that, it would be very frustrating.” —MATT BRUBAKER, CEO OF FMG LEADING

He adds that the CEO does have to be strategic about how to get there. But at the end of the day, if your view conflicts with your investor’s view, you’re probably not going to win—and even if you do, it won’t be worth the fight. “If all your energy is spent trying to convince the investor they’re wrong, you just end up out there tilting against the machine instead of fixing the fundamentals, which is ultimately what they hired you for.” Soon enough, you’ll be gone. The “my way or the highway” modus operandi won’t be true of every PE company, says Castiglione, whose company

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are all kinds of PE firms. Some are very empowering, and some are micromanagers. I personally don’t do well when I’m being micromanaged. If you’re going to make me CEO and you hire me to do the shoveling, then get out of my way and let me finish shoveling.” At the same time, the PE firm lives and dies by its track record with investors, and it has to return that value or it will have a hard time raising the next fund, says Lorelli. A little micromanagement isn’t out of line. “They’re mindful of their scorecard, what their internal rate of return is,

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because people are going to be looking at them versus the IRR of other private equity funds,” he says. “At the end of the day, the PE company owns the business and [has] more electoral votes than you do. You have to be comfortable sharing your pillow, or it won’t be a good marriage.” Castiglione recommends speaking to at least five CEOs who have worked for the PE firm you’re considering to get a picture of how heavy handed your new partner may be. At the same time, be realistic about the level of communication required. Castiglione holds monthly financial meetings and quarterly board meetings, but he speaks to his PE partners and board weekly. “That’s not just because they demand it, but because they’re capable of giving great

“You agonize because you have loyalty, personal feelings, you like the person. Those are good reasons,” says Lorelli. “But when you’re agonizing, 11 times out of 10, you look back and say, ‘What took me so long?’” He adds that PE CEOs need to be comfortable making decisions when they only have 50 percent of the information they’d like. “By the time you have 75 percent of the information you need to feel comfortable making the decision, it is too late to make it, and one of your competitors has just outdistanced you by getting there first,” he says. “So you have to have a real comfort level with your own instincts. The stomach is really the most wonderful microprocessor.” At the same time, you can’t unilaterally

“At the end of the day, the PE company owns the business, and [has] more electoral votes than you do. You have to be comfortable sharing your pillow, or it won’t be a good marriage.” —MIKE LORELLI, FALCONHEAD CAPITAL

advice and input,” he says. It also helps set expectations and ensure his investors won’t be surprised by anything that comes up. “That’s just what you do with good business partners—you engage with them,” he says. “Nobody likes surprises.” Can you make decisions in warp speed? This won’t be unfamiliar territory to any CEO, but particularly for PE companies, which have promised a given return on a specific timeline, the wins need to come swiftly. There is precious little time to waste on strategies that aren’t working or people who aren’t working out. Firing fast isn’t easy for anyone. A study of more than 3,000 CEO and C-Suite members by ghSMART and the University of Chicago found that 43 percent of CEO candidates had a repeated pattern of either hiring poorly or not removing underperformers quickly enough.

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make big decisions to change direction—you need both input and buy-in from your PE partners. The ability to take that all in, have those conversations quickly and change course is critical. Rash decisions can also be disastrous. “It’s always a fine balance between being impulsive and being in analysis paralysis. That’s the heart of it,” says Faisal Hoque, founder and CEO of Shadoka, which manages a portfolio of technology companies. “You need data, but you also need to be a risk-taker whereby you can make faster decisions. The ability to balance those two factors—that’s experience.” How many hats can you wear? This is an issue primarily for smaller companies but can apply to any size company in a turnaround. When money is tight and support is minimal, CEOs will look more like scrappy startup founders, juggling

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TRICKS OF THE TRADE Know the deal. To avoid surprises, understanding the equity structure is critical, including details of loan covenants and investors’ preferred returns—and their potential impact on your piece. Go fast on tech. Make transformative tech investments early to reap benefits as soon as possible. In the timeframe a PE CEO is working in, installing pricey new platforms later doesn’t make sense—and may meet resistance from investors. Go fast on people. Lose the change-resitant C-players and grab game-changing talent quickly—even if it means making above-market offers. “You have to be very decisive,” says Marc Krigsman, CEO of ad data firm SQAD, backed by Clarion Capital Partners, “because the first couple of years are when you will have access to the resources and capital that the PE firm has to put to work.” Manage what matters. Be sure you’re focusing on the same things as the investors. “EBITDA trumps all when you’re dealing with PE firms,” says Kurt Schneider, founder and CEO of 4D Brands and former CEO of the PE-backed Harlem Globetrotters. “That’s a mind shift. The sooner you understand that, the sooner you’re aligned.” Watch the exits. If the company is sold at an above-market deal, the CEO may be rewarded on a performance-driven scale, such as multiple of invested capital and/or internal rate of return. Understand all the scenarios and what they may mean to you. —Patrick Gorman

C.J. Prince is a regular contributor to Chief Executive and other business publications.

multiple roles and managing hundreds of details. That’s where the stereotypical Type-A CEO personality comes in handy, says Lorelli. “Actually, we don’t have a Type-A personality—we have a Triple-A personality. We make the Type-As look like Type-Bs.” Before moving over to PE, Lorelli had twice served as division president at PepsiCo. The switch from consumer beverage giant with plenty of administrative support to CEO of Water-Jel Technologies—where he introduced lean manufacturing and oversaw a three-point gross margin improvement and 20 percent working capital reduction—was a very big change, indeed.

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“When I had to go to Staples to get something, I would walk the halls and yell out ‘Staples! Anyone need anything? I’m going now!’” he recalls. “You really have to be a roll-up-your-sleeves guy.” Those who can work without a staff and who can do double duty as CEO and COO will have a better chance of successfully leading a portfolio company to exit. “You have to be able to, in the same paragraph, work at 50,000 feet and then fly down in your helicopter and chop hedges,” he says. “Because you’re operating at both altitudes all day long.” Breier doesn’t want to guess at the chances he’ll still be CEO of Kindred a year from now. But he is optimistic, largely because he believes he chose PE partners who provided both a compelling case for shareholder value and also share Kindred’s values and goals of solving the problems of the aging American population. The pressure might be intense under new private ownership, but Breier argues it can’t be much worse than what public companies face today. “I always thought looking out three to five years to create shareholder value was in my job description as CEO. But the world of activism and hedge fund–driven ownership has gotten so overblown that it puts a lot of stress on boards and on CEOs like myself to think far more short term than mid- to long term,” he says. “In this day and age, God forbid you miss a quarter—they’ll take you out back and shoot you.” Compared with the public company firing squad? Breier figures the devil he doesn’t know might just be the better bet.

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

REGIONAL REPORT

THE WEST The area continues to leverage tech expertise and strong quality of life to bolster vibrant economies. BY CRAIG GUILLOT DRIVEN BY SOME OF THE strongest economies in the country, the West is home to inventive companies, ranging from Amazon in Seattle and the Tesla Gigafactory 1 in Nevada to several advanced manufacturing plants outside of Las Vegas. Innovation is a common theme here, with California, Oregon and Washington all logging some of the country’s best economic growth metrics in recent years. In Montana and Wyoming, tech-oriented companies are leveraging the outdoors and a strong quality of life to grow their businesses. And in Idaho, Boise remains one of the fastest-growing metros in the country. 12 NEVADA

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

MANUFACTURING A NEW FUTURE Two years since the start of battery production at Gigafactory 1 in Sparks, Tesla has made Nevada the birthplace of what could be a new global future. The rooftop solar array currently being constructed will be the largest and most powerful in the

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world when complete. Gigafactory 1 has a planned annual battery production capacity of 35 gigawatt-hours, nearly as much as the entire world’s current battery production combined. While these batteries are initially designed for Tesla vehicles, they can also be used in powerpacks and homes, something CEO Elon Musk says has the potential to change the world. In 2016, Musk told BBC that he would eventually like to see Gigafactories on every continent. “It’s exceeding expectations, and with [Gigafactory 1] has come the in-line suppliers, the vertical integration and a catalyst for other entities that are growing advanced manufacturing in general,” says Paul Anderson, executive director at the Nevada Governor’s Office of Economic Development. There is no shortage of innovative manufacturing and technologies coming to the Silver State. The Tahoe Regional Industrial Center that houses Gigafactory 1 has already sold all remaining land in the park for distribution centers, data centers and plants

NEVADA Tesla expects to continue adding employees as its Gigfactory 1 facility ramps up battery production. operated by more than 100 companies, including Panasonic, Walmart, Home Depot and PetSmart. Blockchains LLC purchased 64,000 acres in February and will be headquartered on the property. Further south in Las Vegas, manufacturing has seen strong growth, representing more than 60 percent of the companies relocating or expanding in the region. Sunshine Minting is expanding operations with a 144,000-square-foot minting facility. And in nearby Henderson, heavy equipment manufacturer Xtreme Manufacturing expanded its facility, and Progress Rail Services recently leased a 130,000-square-foot building. Anderson credits growth in the sector to tax abatement packages, fast permitting and the state’s workforce quality. Founded in 2015 and instrumental in landing the Tesla deal, the state’s Workforce Innovations for a New Nevada (WINN) has also been used as a tool to help develop and train workforce for private industry, he says. What is now challenging Nevada is its own success, Anderson says. As one of the fastest-growing states in the country, its urban communities have experienced growing homelessness, traffic congestion and what some say is unsustainable development. Billions of dollars worth of infrastructure projects in Southern Nevada should help, says Anderson. “These are problems of success,” he says. “I’d much rather be dealing with these issues than the 14 percent unemployment we had in the past.” 18 WYOMING BETTING ON BLOCKCHAIN While many state governments struggle to understand blockchain and cryptocurrencies, Wyoming is diving headfirst into the space. The state legislature recently passed five bills that promote the advancement of blockchain technology and cryptocurrency. House Bill 70, labeled the “Utility Token Bill,” passed on March 7 and is designed to

exempt specific cryptocurrencies from state money transmission laws. The SEC has yet to regulate ICOs (initial coin offerings) at the federal level, but it has issued warnings about “pump and dump” schemes. Despite some bad apples, experts say ICOs are a legitimate way for startups to raise funds. According to Fabric Ventures and TokenData, 435 projects raised more than $5.6 billion through such means in 2017. Legislators say new laws will offer benefits for blockchain companies while also ensuring there aren’t any regulatory “surprises” as the industry grows. Cryptocurrency analysts already say the state could become “America’s Crypto Valley.” “Wyoming’s legislature is the first legislative body in the world to identify these tokens as their own asset class that is going to be exempt from tax,” says Shawn Reese, CEO of the Wyoming Business Council. Wyoming is also developing a 20-year strategy that pieces together economic development, workforce and education to fuel tech growth. The Wyoming Department of Education announced in April the creation of Boot Up Wyoming 2022, an initiative to facilitate the expansion of computer science into the K-12 curriculum. The Cowboy State still faces several challenges, one of which is limited air service in many of its communities. The state recently appropriated $15 million to contract with an air service provider to offer service to a hub for several communities. Another challenge is expanding the soft skills and technical skills of the existing workforce while also trying to attract new residents to the state. According to the Census Bureau, Wyoming leads the nation in population decline, having lost more than 5,550 residents in 2017. “A population with less than 600,000 people has some inherent challenges in its ability to grow and recruit.…

WYOMING Wyoming legislature passes the Utility Token Bill to promote cryptocurrency.

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One part of that is to create places that people want to move to, so that instead of recruiting businesses, we [become] the ones recruiting the workforce and entrepreneur,” Reese says. 23 MONTANA FOSTERING BIG TECH IN TINY RURAL AMERICA Despite being one of the most rural states in America, Montana is rapidly propelling itself into the digital economy. The high-tech industry here is growing seven times faster

than the overall state economy, says Bridger Mahlum, government relations director for MONTANA the Montana Chamber of Commerce. Despite broadband accessibility issues, According to the Montana High Tech Busithe state’s high-tech ness Alliance, a dozen tech companies in industry is growing the state, including CrossTx, IronCore Labs, seven times faster than and LumenAd are expected to add more its overall economy. than 1,200 jobs in the coming year. Israeli company 4Cast recently selected Missoula as the location for a U.S. office where it will develop support simulators and predictive analytics for homeland security, defense and healthcare. 4Cast CEO Nissim Titan says the company was attracted to the talented and educated workforce in the area. “Tech is still killing it here,” Mahlum says. “We have talent, a good quality of life and prioritization from the state.” Bozeman, which only has a population of 40,000, is also making a big name for itself in tech. Oracle acquired homegrown RightNow Technologies for $1.5 billion in 2012, and former employees have since founded several successful startups in the area. Bozeman and Missoula have both

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also experienced strong recent growth in the app development sector. According to a report by ACT—The App Association, there are more than 3,700 Montana workers employed in the app economy, and that number is set to grow by more than 18 percent by 2024. While U.S. News & World Report pegged Montana with the worst Internet access, progress has been made, Mahlum says. The state has been working on expanding broadband; last year, state legislators approved $100 million in federal funds to subsidize private development of broadband in rural areas. One way to reach even more rural areas may be to use broadband over power lines (BPL), a technique that is being refined by leading telecom companies and would use existing infrastructure to push high-frequency airwaves along powerlines. “There’s already talk about what to do decades down the line with transmission lines that were based on the production of fossil fuels and how we have emerging tech utilizing those infrastructures instead,” Mahulm says. 28 IDAHO BOOMING IN BOISE Census Bureau reports show Idaho is the fastest-growing state in the nation and that Boise’s population grew by more than 3 percent in 2017, one of the highest growth rates for any metro area. Last August, Micron Technologies expanded its presence with what it says is the largest semiconductor research center for memory technology in the Western Hemisphere. The company is the state’s largest publicly traded company, employing nearly 7,000 people. In addition, Clearwater Analytics has expanded its presence in the region. Other big projects over the past year include facilities expansions near Burley for McCain Foods and for hardware product distributor Orgill in Post Falls. Japanese company Sakae Casting is also opening an office in Idaho Falls. With an unemployment rate of less than three percent, the state needs to continue to develop its workforce. “Expanding indus-

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OREGON Thanks to a thriving economy, per capita personal income is soaring in places like Portland.

try-driven training programs at community colleges and learning facilities across the state, along with the state’s career and technical education programs, are a few examples of how we’re overcoming this challenge,” says Bobbi-Jo Meuleman, director of the Idaho Department of Commerce. 42 WASHINGTON MESHING MANUFACTURING WITH TECH Several studies in the past year have ranked Washington as one of the top state economies in the country. The 2017 State New Economy Index by the Information Technology & Innovation Foundation ranked Washington third based on knowledge jobs, globalization, economic dynamism and the digital economy. Brian Bonlender, director, department of commerce, Washington State, says the economic growth is partly being driven by the convergence of traditional manufacturing and innovative technology. While both sectors have thrived independently in the state, the integration of things like aerospace manufacturing with machine learning, artificial intelligence and the Internet of Things are fueling a new sector unto itself. “We’re a state where all these things are really coming together.…We’re seeing quick adoption of these new technologies, and crossover technologies link everything from food processing to aerospace manufacturing,” Bonlender says. Spanish aerospace engineering firm MTorres, which opened an innovation cen-

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ter for advanced manufacturing in Everett in 2016, announced revenues have grown by 40 percent since the company moved to the region. MTorres is planning a second development at its facility and has secured three new contracts to help manufacture Boeing’s new 777X airplanes. And while Amazon’s search for H2 has been dominating national headlines, the company is still expanding its presence in Washington. Amazon now occupies more than 40 different office buildings around South Lake Union and will soon expand its presence from 8 million to 12 million square feet. One of the biggest challenges the state faces is managing its growth, Bonlender says. Like many rapidly expanding cities, Seattle is facing traffic issues, a lack of affordable housing and a growing problem with homelessness. “I think [managing growth] is our biggest challenge right now,” Bonlender says. 44 OREGON FOSTERING EQUALITY IN DEVELOPMENT Oregon’s economy is thriving on the surface. Unemployment has been at a low point for more than 15 months, while retail, auto dealers and manufacturers are reporting investment and job growth. Economists attribute this to the country’s general economic expansion and to an influx of young, educated workers. A recent report from the Oregon Office of Economic Analysis says the state economy “continues to hit the sweet

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