January/February 2016 by Chief Executive Group

The People Pipeline How top companies create leaders, p. 28

Cybersecurity Safeguards Protect your business from theft and sabotage, p. 44

Is Income Inequality Real? CEOs weigh in on Americaâ&#x20AC;&#x2122;s leading social issue, p. 50

Succeeding at Succession How to ace the leadership transition, p. 64

JANUARY / FEBRUARY 2016

THE CULTURE ADVANTAGE Southwest Airlines CEO Gary Kelly talks about getting the people factor right

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CONTENTS

January/February 2016 No. 280

FEATURES 34 Cover Story

How Culture Creates Competitive Advantage Southwest Airlines CEO Gary Kelly shares practices and insights on getting the right people on board.

By J.P. Donlon

28 Talent Management

The 2016 Best Companies for Leaders Meet 40 companies that excel at nurturing leaders— and find out what you can learn from them.

By Dan Weinfurter & J.P. Donlon

38 Talent Summit

Winning the 2020 War for Talent Part II of takeaways and highlights from the 2015 CEO Talent Summit in Dallas, Texas. By C.J. Prince

44 Cybersecurity

Getting Serious About Cyber Safeguards Attacks on large companies make headlines, but smaller companies, too, suffer cyberattacks. Here’s how to protect your business. By Bill Holstein

50 Social Economics 44

How Real is the Income Inequality Issue? CEOs weigh in on whether we’ve really got a problem— and what, if anything, should be done about it.

By Dale Buss

54 Economic Development

Regional Report: The Southwest Three States. Two Countries. One Economy.

By Warren Strugatch

58 CEO Roundtables

• Building Leaders Who Build the Future: Aligning Talent Strategies With Business Goals • How Agile Are You When It Comes to Talent? • Leadership Transition: How to Succeed at Succession By C.J. Prince and Jennifer Pellet

38 02 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

C O V E R I L L U S T R AT I O N B Y M AT T D O R F M A N

CONTENTS Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Art Director Alex M. Konsevick Associate Copyeditor Carl Levi

Online Editor Lynn Russo Whylly

DEPARTMENTS 8 Editor’s Note 10 CEO Watch

• McGraw-Hill Education’s David Levin on leading a digitization drive • FM Global’s Tom Lawson on managing risk • CEO confidence in future business conditions sinks lower

Contributing Editors Dale Buss Michael Gelfand Bill Holstein Tom Pettibone C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld

22 Making

Technology Work

The Two Faces of Cybersecurity

In the race to beef up security measures through electronic surveillance, the crucial “human factor” is often overlooked.

By Tom Pettibone

VP, Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net

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

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

24 Sonnenfeld

Director, Business Development

203-930-2705 mrichards@chiefexecutive.net

Effective CEO-Board Partnerships

Watch out for these five warning signs that you’re in danger of being thrown overboard.

By Jeff Sonnenfeld

Successful board-CEO relationships demand trust, communication and alignment.

68 Executive Life

By Dr. Thomas J. Saporito

18 Chief Concern

20 Mid-Market Report Middle Market Leaders Anticipate Softer Growth

Securing the Helm

Making the Most of Mobile Gadgets By Michael Gelfand

72 Flip Side

Don’t Sink to Their Level How to ace the naming game.

By Joe Queenan

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 280, January/February 2016. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306. Subscription Customer Service: p | 818.286.3119 e | cexcs@magserv.com w | chiefexecutive.net/magazine

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Marc Richards

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

Marketing Director Jason Golden 201-889-4978 jgolden@chiefexecutive.net Wayne Cooper Executive Chairman

Marshall Cooper Chief Executive

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

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ChiefExecutive.net TIMELY CONTENT TO HELP YOU RUN YOUR BUSINESS

DAN GLASER President and Chief Executive, Marsh & McLennan FRED HASSAN Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus ROBERT IGER Chairman and Chief Executive, The Walt Disney Company 2014 Chief Executive of the Year CHRISTINE JACOBS Former Chief Executive, Theragenics Director, McKesson

DAILY BEST OF THE WEB

We scour dozens of websites so you don’t have to. Top stories for CEOs to help you start your day

CEOS IN THE NEWS

TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries ROBERT NARDELLI Chief Executive, XLR-8 WILLIAM R. NUTI Chairman and Chief Executive, NCR

Advice from successful CEOs, along with news and information about your industry peers

THOMAS J. QUINLAN III President and Chief Executive, RR Donnelley

CEO INSIGHTS

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

Insider information from experts on leadership, strategy, operations, marketing, sales, manufacturing and much more

PLUS

Important lists and rankings you can reference all year long, including: Best & Worst States for Business • Best Companies for Leaders CEO Confidence Index • CEO of the Year • Annual Wealth Creators

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MARK WEINBERGER Chairman and Chief Executive, EY MAGGIE WILDEROTTER Executive Chairman, Frontier Communications C O N TACT U S Corporate Office Chief Executive Group, LLC One Sound Shore Drive, Suite 100 Greenwich, CT 06830 Phone: 203.930.2700 | Fax: 203.930.2701 www.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

APRIL 6-7, 2016 • MILWAUKEE, WI HOSTED BY HARLEY-DAVIDSON Join peer CEOs at Chief Executive’s 4th annual Smart Manufacturing Summit. As with past events, manufacturing CEOs will discuss with their peers the key strategies and tactics involved in 21st century manufacturing. HIGHLIGHT: Harley-Davidson CEO Matt Levatich is a

featured speaker and will host attendees on a private tour of the company’s engine production facility. FOR MORE INFORMATION:

SmartManufacturing.ChiefExecutive.net

EDITOR’S NOTE

The Challenges to Growth and Leadership J.P. Donlon

The CEOs we are grooming today will need to prepare to lead a very different mix of people.

PREVIOUS GENERATIONS fretted about the world having too many people. Today’s problem is too few. Writing in The Wall Street Journal Online, Greg Ip reports on how demographic trends are altering the U.S. economy in subtle ways that many of us do not notice. Owing to lengthening lifespans and declining fertility, the workforce in most developing countries is rapidly aging. Sorry, President Obama, our biggest challenge is not climate change but an inability to replace skilled workers. Yet, many of the economic consequences stemming from these demographic changes are only now apparent. Simply put, companies are running out of workers, customers or both. In each case, economic growth suffers. As a population ages, what people buy also changes, shifting more demand toward services such as healthcare and away from durable goods such as cars. Among advanced countries, the working-age population will shrink 26 percent in South Korea, 28 percent in Japan and 28 percent in both Italy and Germany, according to the UN. Brazil’s working-age population will edge up 3 percent, while both Russia’s and China’s will contract 21 percent. The U.S., by contrast, is fortunate. Its working-age population will grow 10 percent by 2050. However, it will still shrink as a percentage of total population from 66 percent to 60 percent. Because the growth of an economy depends upon more workers and rising productivity, the U.S. economy will experience a drag on growth for several decades. This means it is imperative for current business leaders to grow future leaders equipped to face the workforce and productivity challenges ahead. On page 28, we feature the top 40 Best Companies for Leaders (BCL), public companies of at least $1 billion in annual revenue that create in-

08 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

depth processes for developing, educating and training future leaders within their ranks. We also feature the top 10 privately held companies that are ahead of most of their peers in leadership development. Among the five criteria Chief Executive and our partner GrowthPlay closely follow are the formal leadership processes in place and the commitment level of the CEO to bringing along talented people two to four levels below. For example, GE’s Jeff Immelt likes to teach strategy to GE’s middle managers at Crotonville, the company’s famous off-campus retreat in Westchester County, New York. P&G’s A.G. Lafley likes to mentor various individuals deep in the ranks to get a sense of what challenges they face and what remedial actions may be necessary to round out their experience. “As CEO, a tremendous amount of my time is focused on customers and shareholders, but my two most important internal priorities are setting or validating strategy and allocating resources, both human and financial,” says John Lundgren of Stanley Black & Decker, whose company returns to the 40 BCL ranking after a hiatus of several years. Lundgren likes to interact in groups or one-on-one with up-and-coming leaders to discern what they are learning and how this might be transferred to other parts of the organization. During our CEO Talent Summit in Dallas (see page 38), a great deal of discussion was spent on managing the expectations of millennials in the workforce. More than one in three American workers today are millennials (adults age 18 to 34 in 2015), and this year they surpassed Generation X to become the largest share of the American workforce, according to new Pew Research Center analysis of U.S. Census Bureau data. The CEOs we are grooming today will need to prepare to lead a very different mix of people.

I LLU ST R AT I O N BY T I M TO M K I N S O N

Demographic trends are reshaping the workforce. By J.P. Donlon

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CEO WATCH

CEO INSIGHT / MCGRAW-HILL EDUCATION’S DAVID LEVIN

Leading a Digital Transformation Two years into his CEO tenure, David Levin is leading a learning curve as McGraw-Hill Education transitions toward software-based products. By Jennifer Pellet IN THE SUMMER of 2013, David Levin was wrapping up a seven-year tenure as CEO of London-based multinational media company UBM when a mystery opportunity came his way. “A search firm told me they had a perfect fit for my background in media transitions and technology—but they couldn’t tell me what it was yet,” he recounts. “So we had this bizarre set of encounters while they interviewed me without telling me anything about the sector or the company.” Initially intrigued, when Levin discovered that the CEO post was at newly created McGraw-Hill Education—an entity formed when McGraw-Hill Cos. sold its education unit to Apollo Global Management—his interest level plummeted. “I said, ‘I know its legacy, I know its structure

and I know where it is in the market. I have zero interest.’” His reluctance was understandable. After all, poor performance and poor prospects for growth were why the unit—which focused on the pre-K through grade 12, higher education and professional services markets— had been sold off by McGraw-Hill in the first place. Activist investors pressured the company to make the divestiture, arguing that the education unit’s deteriorating prospects were hobbling its more profitable ratings and financial businesses. Over time, however, Levin came to believe that the new entity’s growth prospects were not quite as dismal as the market supposed. It helped that its current mission— to transform McGraw-Hill Education

10 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

from a textbook publisher into a provider of education technology— aligned well with Levin’s leadership experience. At UBM, he had been charged with shifting the company’s business models from print to live events and online communities. “I found the underlying area of what will be happening with education and technology very exciting,” he explains. “My predecessor, who was coming up for retirement, had begun a series of important moves to position the technology base. The challenge of turning what the market deemed a non-growth company into a growth company was very exciting. By the fall, I had moved from being completely disinterested to being completely captivated.” Since taking the helm in January of 2014, Levin has moved swiftly on that transformation imperative. While McGraw-Hill Education still sells the pricey textbooks for which it’s best known, the company is steadily moving away from traditional publishing toward software-based learning materials that will be sold through subscriptions. The change goes far beyond simply digitizing text so that students can download textbooks rather than purchase them or view class materials on PDFs. “By injecting software into the product, you’re not only able to provide the content but to produce rich streams of data for the student and the instructor about what’s working and what isn’t working,” explains Levin, who says that the technology will ultimately provide a customized learning experience. For example, when students complete a questionnaire at the end of a chapter, the software can use those answers to reconfigure itself to customize the learning experience. “It can say, ‘before you go on to the next chapter, you need to understand this concept,’” explains Levin, who notes that McGraw-Hill Education is investing $175 million a year on developing its own

CEO WATCH

proprietary learning software. “It can provide a set of gates and highlight the content that that particular student may need to review.” Furthermore, data on how students engage with the software can be shared with teachers, who can use it to identify what topics to review in class or where individual students are struggling. The learning software is already gaining traction. In the 12 months ending September 30, 2015, digital sales accounted for 43 percent of all text sales in higher education, a bump from 27 percent in 2013. While the company is still operating at a loss, Levin is confident that things are moving in the right direction. “We knew as we went through that [transformation] that the challenge was ‘What’s our right to exist,’” says

WHO

David Levin, CEO of McGraw-Hill Education REVENUE

$2 billion BORN

Harare, Zimbabwe FIRST JOB

Selling women’s scarves at Harrods STRONGEST INFLUENCE

“My parents; they made choices and sacrifices to ensure we didn’t grow up under a racist government.” BUSINESS MOTTO

“A point of view is a view from a point.” LEISURE ACTIVITY

Hiking, skiing RECENT READ

Washington’s Crossing, by David Hackett Fischer. “I’m doing a little immersion in U.S. history.”

Levin. “Every business needs a raison d’être. This year, we flipped the business model very aggressively.” Reflecting on what he would tell other CEOs embarking on a transformation journey, Levin offers advice gleaned from “If,” a famous Rudyard Kipling poem, to “keep your head when all about you are losing theirs and blaming it on you.” He recounts, “When I was 13 years old, I became smitten with that poem and it has become my touchstone since then— and I commend the rest of the poem as core life advice. The only thing in life you can control is your own behavior. When you are shaping a culture, you need to be aware of how people respond to you because they will emulate how you lead, how you behave and how you act.”

CEO CONFIDENCE

CEO Confidence in Future Business Conditions Sinks Lower CEOS’ FAITH IN FUTURE BUSINESS CONDITIONS (12 months from now) continues to drop. Overall, respondents to Chief Executive’s November 2015 survey showed a reduction in CEO confidence, down 2.7 percent from October—and down 9.7 percent the beginning of the year. Large-company CEOs, with $1 billion-plus in revenues CEO’S EXPECTATIONS FOR BUSINESS CONDITIONS A YEAR FROM NOW (ON A SCALE OF 1-10)

6.2 6.15

6.1 6.0

6.03

6.00

5.9 5.8

5.8

5.7 5.6 $1B+

$100M-$999M

$10M-$99M

<$10M

COMPANY REVENUE SIZE

12 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

and the most exposure to international markets, have the least faith in future business conditions, registering a 5.8 on a scale of 1 to 10. By comparison, larger mid-market firms with revenues from $100 million to $999 million had the highest expectations, registering a 6.15 out of 10. Smaller mid-market firms with revenues between $10 million and $99 million were not far behind at 6.03, while small businesses came in at 6.00. “This has to be the most pathetic economic recovery on record,” one CEO commented. Another told Chief Executive that decisions are on hold “because of uncertainty about where interest rates are headed and concern over the lack of leadership in the current administration and the inability of Congress to accomplish anything.” “I don’t see an end in the near future of this weak cycle, as whenever one sector starts to pick up, another slows down,” one CEO said. Another added that, “during the ’80s, I saw a groundswell of optimism as government lowered taxes and reduced regulation. There is none of that kind of optimism now.” Overall, 44 percent of CEOs anticipate their revenues will increase less than 10 percent next year, compared with 30 percent that expect revenues to rise more than 20 percent. Read more at www.chiefexecutive.net.

From Superhero Tech to Space Exploration

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Frank St. John VP, Lockheed Martin

in Florida. The military superstate has emerged as an undisputed strategic gem for the company, providing

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FLORIDA BUSINESS ADVANTAGES

CEO WATCH

CEO POV / FM GLOBAL’S TOM LAWSON

The Ultimate Insider After 36 years at FM Global, Tom Lawson stepped into the CEO role to “sustain success while avoiding complacency” at the 180-year-old property insurance giant. By Jennifer Pellet

REMEMBER MURPHY’S LAW? When it comes to identifying and mitigating risk, the pessimistic prophecy that “anything that can go wrong will go wrong” can serve a CEO well. After all, you need to understand the hazards facing your business before you can take steps to fend them off—which is where FM Global comes in, says CEO Tom Lawson. “Our focus is on helping our clients understand the risk, quantify it and do things that will prevent the loss from happening,” he explains. But if you’re imagining a field inspector with a clipboard counting sprinkler heads, think again. FM Global has 1,800 engineers who collect 1,500 data points on every client facility they visit. The company then crunches that data to help its clients identify vulnerabilities and guard against them. “I can tell you which of your thousands of locations is most prone to loss, how big that loss will be and why,” explains Lawson. “That’s pretty powerful information that gives you better decision-making ability.”

Given its 95 percent renewal rate, FM Global’s clients seem to agree. Lawson, who took on the CEO role in August of 2014, inherited a stable, successful company. Still, in the business of managing risk, there’s always the risk of the unforeseen. The challenge going forward is to spot emerging risks, such as cyber threats and regional geopolitical unrest, and harness technology to proactively address them. “We’re an engineering-based company so analytics are not new to us, but we’re finding new ways to use our data to be more predictive and to give our clients more options and even better information about their facilities,” says Lawson. “We have a great business model, great clients and great people—my job is not to screw it up.” In a recent interview, Chief Executive

14 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

spoke with Lawson about his approach to leading a company steeped in the world of risk management. Can you give us an example of how risks and prevention technology are evolving? The hazards facing business range from things particular to a given industry to things that all businesses face, such as the need to be more efficient and to make the best use of the capital expenditures you can afford. Recently, for example, we came out with new guidelines on inrack automatic sprinklers. Getting adequate protection at warehouses sometimes requires putting rows of sprinklers inside storage racks rather than on the ceiling so that they’re closer to any fire that starts. Using our full-scale fire testing and analytics

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CEO WATCH

WHO

capabilities, we came up with a way to have fewer sprinklers in the racks. The new, more efficient technology also allows our clients to use lower-capacity water systems, so ultimately you have fewer things in the way, better protection and less cost. For a 500,000-square-foot warehouse with an 80-foot ceiling, the cost of installing a system of traditional sprinklers, fire pumps and water tanks would be about $4.5 million. Based on this new technology it could fall to as low as $2.6 million. What sort of emerging risks are businesses facing today? Right now, everybody is talking about global warming and how it might increase the potential for flooding, particularly along the coast. For example, we let one of our clients in Minnesota know that, first, their facility was in a flood zone; second, how much water they could expect; and third, how much damage that would do. They undertook a comprehensive flood mitigation program. They made sure emergency measures, such as backup generators and ways to raise stuff up off the ground, were in place. They also installed flood grates on below-grade openings to keep water out of the building. Otherwise the facility

Tom Lawson, CEO of FM Global WHAT

Mutual insurance company dedicated to property risk management SIZE

5,300 employees, $18.8 billion in assets RECENTLY READ

The Last Kingdom, by Bernard Cornwell LEISURE ACTIVITIES

Collecting trains

would have been down for months. That was a great example of engineers identifying exposure and the client focusing on controlling its own destiny. Had they not taken action, not only would the facility have been damaged, but it would have had a huge impact on their bottom line. What’s the thinking behind your Global Resilience Index, which ranks 130 countries on their ability to prevent disruption or return to normal after disruption happens? The idea is that when choosing a place to build or buy a facility, companies need to know the hazards in order to make an appropriate decision. We rank all of the countries and update our ranking annually because things change, particular-

ly [geopolitically]. You probably won’t be surprised to find politically unstable countries like Venezuela at the bottom, but you may not realize a country is prone to earthquakes or is totally dependent on foreign energy. If you’re working with a supplier who is at the bottom of the list, you might want to look for another vendor or supplier. Or if you’re choosing a place to build or buy a facility, you may want to gauge nonphysical hazards like how corrupt is the government, allegedly? What are your plans for the company going forward? We’re working on expanding our cyber coverage, which we’ve provided since 2002, when it wasn’t talked about much. We plan to use our science and technology to offer the same level of assessment and mitigation coverage with cyber threats as we do with fire and flood hazards. Overall, our challenge is to continue to get better. How do we do what we do more efficiently? How do we get better at predicting the future? The engine of the company is fine. You just want to keep it running efficiently, tune it up, add a few cylinders if needed and go into different things. You can’t just rest on it. You’ve got to keep going.

THORNS & ROSES

Minimizing Job Opportunities

Ivory Tower Thought Control

When asked by The Wall Street Journal what effect minimum wage hikes would have on her business, SALLY SMITH, CEO of the 1,000 unit restaurant chain Buffalo THORNS Wild Wings, responded, “One of the unintended consequences of rising minimum wages is youth unemployment. Almost 21 percent of our team members are under age 21. When you start paying $15 an hour, are you going to take a chance on a 17-year-old who’s never had a job before when you can find someone with more experience?”

Protest incidents at the University of Missouri and YALE UNIVERSITY underscore the need to bulldoze these schools and start over. The overall story from these and other institutions ROSES in recent years provides plenty of examples of what happens when a half century of monolithic progressive leadership for institutions metastasizes. The result is a level of thought-policing that’s more invasive than ever, encroaching on every action and aspect of student life. There is no place for academic freedom in such places: there is only the constant tug of war over safe spaces, speech codes, thought crimes, infringement, victimhood and privilege.

16 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

GET YOUR PEOPLE THE RECOGNITION THEY DESERVE Chief Executive cordially invites you to apply for the First Annual

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CHIEF CONCERN

Effective CEO-Board Partnerships Successful CEO-board relationships demand trust, communication and alignment. By Dr. Thomas J. Saporito

A HEALTHY RELATIONSHIP between a CEO and a board can be a tremendous asset to a company. That happens when the board goes beyond being a legally required body—responsible for vigilance and protecting shareholder interests—to a strategic body that works hand-in-hand with the CEO to help the company thrive. But too often, CEO-board relationships are tense or even worse. Some CEOs—especially newer ones—want to control their boards or at least appear in control. And boards sometimes have their own ideas of the direction the company should take, ones that diverge from the ambitions of the CEO. These situations are problematic. How can CEOs increase the quality of their relationships with their boards? They must remember that successful CEO-board partnerships revolve around a few key dynamics: trust, communication and alignment on strategy and pace of change. In fact, we asked more than 120 board directors of mid-sized companies across industries what makes CEO-board relationships tick, and 89.2 percent agreed that effective partnerships are based on high levels of trust. Trust is intangible and there aren’t

many specific or easy steps one can take to build it. Nevertheless, steadfast CEOs move toward it effectively. Successful CEOs and boards will work together to anticipate where their relationship may hit a rough patch or go off-track and agree on steps they will take together to address such an issue if it arose. Also, when the CEO actively keeps the board abreast of developments in the business, a more trusting and cooperative environment develops naturally. Effective partnership between a board and a CEO also depends on consistent communication. They should discuss and reach agreement on objectives, performance expectations and business priorities—so the company’s leaders are all looking in the same direction. Open and regular communication is the oil that goes between the gears and allows for effective problem-solving. In addition to formal, robust strategy discussions and performance reviews between the CEO and the board, the CEO should look for opportunities to pick up the phone for regular check-ins with the board chair or select members. Accordingly, lunch meetings, small talk and impromptu calls also pay off. The experience of Steelcase, the

DR. THOMAS J. SAPORITO is chairman and CEO of the consulting firm RHR International.

18 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

publicly traded furniture company based in Michigan, brings to light the dynamics it takes to get this relationship right. Steelcase underwent a CEO succession two years ago, and incoming CEO Jim Keane took steps to ensure a positive and continually productive relationship with his board. First, he invested time to get the relationship off on the right foot, meeting with the chairman and other board members to get to know them and discuss the future of the company. Keane also sought their input on business matters, both during and after his transition into the CEO role. At one point, when he was in the process of assigning people to different roles in Asia, Europe and elsewhere, he decided to get the perspective of the board chairman first—rather than make the assignments and later inform the board, which would have been within his rights. “Including the board in the decision-making process creates a collaborative environment,” says Guy Beaudin, an RHR International senior partner who has worked closely with Steelcase. “A key reason that Jim’s relationship with his board has been so successful is that they established explicit roles and expectations on both sides of the equation.” Keane himself agrees. “There is a lot of gray area regarding the responsibilities of the board and of management. Having an ongoing dialogue that defines those roles is critical for building a successful CEO-board relationship,” he says. When trust, communication and alignment on strategy and pace of change exist simultaneously between the CEO and board, CEOs can do something they almost never get to do on a day-to-day basis: be vulnerable, brainstorm and truly partner with their boards. In the life of a company and CEO, such moments can be invaluable.

PERSPECTIVES: VIEWPOINTS FROM OUTSIDE COUNSEL

CYBERSECURITY AND THE ROLE OF LEADERSHIP Recent reports of network intrusions and disruptions, thefts of electronic data, and other significant cyber incidents confirm the increased and continuing risks that cybersecurity presents for businesses. In a recent survey by PricewaterhouseCoopers of U.S. executives, security experts, and government personnel, “76% of respondents said they are more concerned about cybersecurity threats this year than in the previous 12 months.” The Director of National Intelligence has predicted that “[r]ather than a ‘Cyber Armageddon’ scenario that debilitates the entire US infrastructure,” it is more likely that there will be “an ongoing series of low-to-moderate level cyber attacks from a variety of sources over time.” The frequency and scope of recent cyberattacks and the corresponding increased costs and harm make the cyber threat a key business and governance risk that requires immediate and regular attention by business leadership. Cyber threats create financial, reputational, legal and regulatory risks. Direct financial costs from a cyberattack reportedly exceeded $150 million in some recent intrusions. Organizations victimized by cyberattacks also have faced increased pressure to hold business leaders accountable for perceived lapses in preparing for or responding to those attacks. Last year, Target’s board of directors removed the company’s CEO following a data breach, and ISS recommended that Target shareholders vote against directors who served on the audit and corporate responsibility committees. The legal consequences of cyber incidents include private lawsuits by individuals whose personal information has been compromised, shareholders alleging failures by the board and senior leadership, and other third-parties allegedly affected by a breach. Companies may also face investigations and

enforcement actions from government agencies, as federal and state regulators and law enforcement agencies increasingly direct their attention toward cybersecurity. Organizations should take steps to limit the risk of and resulting harm from a cyberattack before it happens. Companies should ensure adequate board oversight of cybersecurity and should conduct periodic risk assessments. Senior leadership also should ensure that the company has implemented adequate preventative measures and controls and that these are being periodically reviewed and updated as necessary. Technology is a critical component of defending against a cyberattack but training and education also are key elements of an effective cybersecurity program, since employees remain a significant source of potential vulnerability. Companies should also have a comprehensive incident response and business continuity plan that can be implemented quickly in the event of a breach. Proper incident response can limit the extent of the resulting harm, including financial loss, reputational harm, and civil and regulatory liability. A response plan should provide clear lines of responsibility for each of the significant issues likely to arise following a breach and should be tested before an incident occurs. Given the risks of a cyber incident, it is essential that boards and senior leadership take an active role in planning for a potential attack and ensuring that appropriate steps are taken to place their companies in the best position to limit the resulting harm should an incident take place. For a more comprehensive review of cybersecurity and the role of leadership, go to www.paulweiss.com.

LORIN L. REISNER, PARTNER Paul, Weiss, Rifkind, Wharton & Garrison LLP Former Chief of the Criminal Division of the U.S. Attorney’s Office for the Southern District of New York, Lorin supervised the investigation and prosecution of securities fraud and other complex white-collar crime, cybercrime, corruption, and terrorism, among other federal crimes. Lorin oversaw many of the most significant and successful cybercrime investigations in the country. He regularly counsels clients in connection with government investigations, complex litigation and the legal and regulatory risks associated with cybercrime.

RICHARD C. TARLOWE, COUNSEL Paul, Weiss, Rifkind, Wharton & Garrison LLP Former Chief of the Complex Frauds and Cybercrime Unit of the U.S. Attorney’s Office for the Southern District of New York, Richard helped develop novel approaches to combating cybercrime and oversaw some of the country’s most significant cyber and complex white-collar cases. Richard counsels clients on high-stakes litigation matters, including strategies to help institutions manage the complex risks and consequences of cyber incidents.

MID-MARKET REPORT

Middle Market Leaders Anticipate Softer Growth Staffing challenges, government regulations and competition are expected to hamper growth.

NEARLY TWO-THIRDS of middle-market companies reported improved performance for Q3 2015 versus a year ago, according to results of the National Center for the Middle Market’s 3Q 2015 Middle-Market Indicator survey. Yet many leaders expressed feeling cautious about the future, with only one in five business leaders expecting a more favorable business climate in the short term. What’s more, survey respondents’ anticipated revenue growth for the next 12 months was at the lowest level measure in the past year. While one-half of companies reported anticipating higher sales in the next quarter, middle-market leaders do expect a modest increase in profit margins over the next 12 months, with financial services companies anticipating the greatest gains. Companies across all segments and industries also reported planning to continue to invest 10 percent of annual revenue in R&D in order to fuel growth. The statistics, tables and charts to follow offer a snapshot of how the middle market is performing and what’s in store for the rest of the year.

Employment Growth Rate Remains Consistent Middle-Market Growth Over The Past 12 Months 3Q'15

4.1%

Confident

Somewhat confident

Somewhat not confident

Not confident

3.2%

2.4% Small Businesses 1.7% Large Businesses

Percentage of Middle-Market Companies Expecting To Add Jobs 3Q'14

Global Confidence Falls, But Domestic Confidence Remains Strong

NEXT 12 MONTHS

47%

3Q'15

36%

GLOBAL ECONOMY 3Q'15

11%

38%

2Q'15

12%

46%

3Q'14

14%

31%

20%

25%

39%

Revenue Growth Outpaces S&P 500 But Expected to Decline

17%

21%

Middle-Market Growth Over The Past 12 Months

26%

NATIONAL ECONOMY 3Q'15

24%

2Q'15

25%

3Q'14

23%

3Q'15 48%

48%

44%

12%

16%

19%

ANTICIPATED REVENUE GROWTH FOR THE NEXT 12 MONTHS was at the lowest level measured in the past year 20 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

4.1%

12%

15%

14%

7.2%

NEXT 12 MONTHS

4.7% Past 12 Months S&P 500

Percentage of Middle-Market Companies Projecting Positive Revenue Growth 3Q'14

3Q'15

64%

49%

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MAKING TECHNOLOGY WORK

The Two Faces of Cybersecurity In the race to beef up security measures through electronic surveillance, the crucial “human factor” is often overlooked. By Tom Pettibone VIRTUALLY EVERY TIME we pick up the paper or turn on the television, we hear about yet another breach of data security at companies like Target, Home Depot, Sony, OPM, Hilton or even the Defense Department. Cybersecurity has even featured prominently in the 2016 presidential campaign. The mantra to corporate executives seems to be “if you think you haven’t been hacked, think again.” Nearly all CEOs place cybersecurity at or near the top of their concerns. According to PwC’s 2015 CEO survey, nearly 45 percent of U.S. CEOs say they are ”extremely concerned” about cyber threats and a lack of data security. So where should a CEO focus? Often, the primary focus of cybersecurity is to hire experts and acquire expensive tools that scan computers and networks electronically to identify and remove viruses, worms and other malware based on their “electronic signatures.” We call that “electronic surveillance” and experts like Symantec, Mandiant and Kaspersky are in high demand by companies all over

the world to do this work. While electronic surveillance is critical, it is only one facet of cybersecurity. The other, the “human factor,” is much more mundane. This component consists of rules, procedures, controls, training and constant reminders to physically secure critical assets and data. Examples are controls restricting physical access to crucial facilities, multi-factor authentication, rules to never access unknown websites (phishing), never insert an unknown thumb drive and policies to never leave one’s computer unsecured (as in a taxicab or to be used by unauthorized people). We refer to these common sense procedures as the “human factor.” According to 37 percent of IT professionals polled at Infosecurity Europe 2014, the human factor (rogue employees) continues to be the biggest threat to information security. (For more on combating this threat, see CE’s cybersecurity feature story on p. 42). In the case of Target, where 40 million customer accounts were stolen, the perpetrator gained access via a

password stolen from an air-conditioning vendor. At Horizon Blue Cross Blue Shield (BCBS), data on over 800,000 insured individuals was at risk when computers were stolen by construction workers following Hurricane Sandy. At Anthem BCBS, where data on 80 million customers was accessed, the bad actors gained entry when an employee fell victim to a successful phishing campaign. Finally, at the U.S. Office of Personnel Management (OPM), the 127-page security SF-86 forms of at least 14 million secret and top secret government and military employees were stolen, most likely through the lack of multi-factor authorization (ID + password + a second security factor). Unfortunately, the human factor is not as exotic as electronic surveillance and often receives less attention and funding. Expert cyber firms that focus on electronic surveillance, such as Mandiant, Kaspersky and Symantec, are frequently in the news with discoveries, challenges and conquests. Unfortunately, the tedious and boring process of managing and enforcing human factors simply doesn’t sell papers. The importance of human factors is underscored by the International Standards Organization (ISO) framework of controls. This framework, known as ISO 27000, is used by companies to manage their cybersecurity initiatives. Of the 113 ISO controls, 68 percent fall into this category, while the remaining 32 percent are electronic surveillance. Clearly, we need to be sure that human factors in cybersecurity don’t get shortchanged. If by better managing human factors, we prevent malware from entering the system, electronic surveillance can be enhanced. If we can get folks to always close the screen door, the bugs don’t get in, don’t bite people and don’t need to be hunted down and eradicated.

TOM PETTIBONE is a founding partner of Reston, Virginia-based Transition Partners Co. (www.TPCO.us), an IT management consulting firm.

22 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

OHIO IS REVOLUTIONIZING THE TECHNOLOGY INDUSTRY. DISCOVER HOW AT JOBS-OHIO.COM/OHIOTECH

BIG DATA KNOWS WHAT WILL HAPPEN IN THE FUTURE.

THAT’S WHY IT’S MOVING TO OH1O. IBM. Alliance Data. Teradata. JPMorgan Chase. The list of best-in-class data-driven companies thriving in Ohio is growing by the day. Hmmm. What do they know that you don’t? THE FUTURE IS HAPPENING IN OHIO. GET THERE FIRST.

26143_JO_Big_Data_Chfexec_r1_CR.indd 1

8/3/15 5:15 PM

SONNENFELD

Securing the Helm Jeffrey Sonnenfeld

CEO tenure hovers around eight years, with roughly 25 percent of leadership turnover at major firms due to overt terminations.

IN RECENT YEARS, CEOs have been replaced by credible, if not always eager, independent directors from their own boards at prominent firms, such as DuPont, United Airlines, Delta Airlines, GM, Citigroup, Starwood Hotels and Saks Fifth Avenue. Investors welcome diligent boards that hold CEOs accountable for chronic performance failings, financial reporting irregularities and ethical or legal misconduct in office. On occasion, however, there are suspicions that a lone performance issue, such as a single bad quarter or an inquiry from a regulatory authority, has played into the personal, unfulfilled midcareer ambitions of a director or two. Contrary to past CEO entrenchment, CEO tenure hovers around eight years, with roughly 25 percent of leadership turnover at major firms due to overt terminations. These five warning signs can help a CEO detect a diligent board with diminishing confidence: 1. Increased executive sessions by board members that leave the CEO on the sidelines. These sessions are a best practice to ensure candid exchanges. At the same time, board members often run out of genuine current knowledge at these sessions and rely on past information, unsupported hunches and personal biases. 2. Information requests coming from the lead director or non-executive chairman. These appeals distance you from your board members and increase the likelihood that someone is avoiding contact with you and using a more benign messenger. 3. Requests for clarity on the use of your time, your travel, your expenses, etc. This may suggest someone is building a negligence or misconduct case against you. 4. Elevated board consultations with activist investors, regulators, auditors, board counsel and your own management lieutenants—without your involvement or without your knowledge of the nature of their inquiries.

5. Public statement of reassurance that the board is fully supportive of you— raising the idea that your position was even a target of concern. You may recall Jimmy Carter’s reassurance that he was 1,000 percent behind vice presidential running mate Thomas Eagleton, just before he replaced him on the ticket with Sargent Shriver. When such signs emerge, try to regain confidence of the board by: 1. Maintaining regular one-on-one dialogues with each director to detect any dissension early on, to address emerging concerns before coalitions develop solidified positions and to fortify interpersonal trust. 2. Develop an informal process for updating your board in an ongoing way to keep members informed of your thoughts, hopes, fears and plans during the long gaps between quarterly board meetings. 3. Ask to attend an executive session of the board toward the end of the meeting to shed light on any concerns or to provide additional data, explanations and forecasts to help correct misconceptions or dangerous groupthink biases. 4. Request a written performance review by the compensation, nominating or executive committees of the board. 5. Suggest your own performance improvement plan and schedule. What added focus can you offer? In the past, many active CEOs were on too many outside boards; but now, at most, the norm is just one outside board with half of S&P CEOs sitting on only their own companies’ boards. Finally, retain your good humor to reduce dysfunctional tensions that hamper openness and future plans. In 1967, Clark Kerr, when dismissed as president of the University of California, announced, “I left the presidency just as I had entered it, fired with enthusiasm!”

JEFFREY SONNENFELD is senior associate dean for executive programs and professor in the practice

of management, Yale School of Management, and past chairman of Blue Ribbon Commission on CEO Succession of the National Association of Corporate Directors. 24 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

I LLU ST R AT I O N BY T I M TO M K I N S O N

Watch out for these five warning signs that you’re in danger of being thrown overboard. By Jeffrey Sonnenfeld

“Fireman’s Fund… a brand name that has

been in existence for more than 150 years will fade away.”

- Insurance Journal January 12, 2015

“Chubb to be acquired… for $28.3 billion.”

- Investor’s Business Daily

The high net worth insurance market is undergoing massive change. There’s no better time to explore PURE. Founded in 2006 with a unique membership model for the most responsible owners of the finest-built homes, PURE has sustained annual growth of 40% or more every year and maintains a remarkable 96% annual member retention rate.i Today, our membership spans nearly 50,000 successful individuals and families from across the U.S., including many former Fireman’s Fund and Chubb policyholders. Our growth is fueled by our commitment to alignment of interests, the support of an elite network of the finest independent brokers, and the unique combination of superior service and significant savings.

S U PERIOR SERVICE

SI G NI FI CANT SAVIN GS

Our exceptional member experience starts with licensed adjusters receiving claims, not call center reps as is customary, so you’ll tell your story once and begin the settlement process immediately. PURE Member Advocates® provide conciergelevel support to help members prevent losses and then make life easier when one occurs. They’ll even research claims and pay to prevent them from recurring. These are just a few reasons why we have the highest member retention in the category.

We’re designed to have highly competitive rates. For starters, our member-owned model affords a lower cost of capital, which is reflected in our premiums. Further, we restrict membership to those less likely to submit frequent or frivolous claims. What’s more, our Risk Managers offer personalized advice to help keep members safe and reduce risk to their property. For these reasons and more, members report average annual savings of more than 25% on their homeowners insurance.ii

Annual Member Retention Ratei

Average Annual Savings on Homeowners Insuranceii

$2,701

$2,232

AFTER SWITCHING FROM

CHUBB

FIREMAN’S FUND

If you insure your home for $1 million or more, you should explore PURE. Contact a PURE-appointed independent insurance broker Visit explorepure.com Call 888.815.PURE Annual member retention rate as of Sep ‘15. iiAverage annual savings on homeowners insurance for members nationwide who reported prior carrier premiums from Jan ‘11 through Sep ‘15. Actual savings, if any, may vary. PURE® refers to Privilege Underwriters Reciprocal Exchange, a Florida-domiciled reciprocal insurer & member of PURE Group of Insurance Companies. PURE Risk Management, LLC, a for proﬁt entity, (PRM) serves as PURE’s Attorney-In-Fact for a fee. PURE membership requires Subscriber’s Agreement. Coverage is subject to insurance policies issued & may not be available in all jurisdictions. Visit pureinsurance.com for details. Trademarks are property of PRM & used with permission. ©2015 PURE. PURE HNW Insurance Services, CA Lic. 0I78980. i

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TALENT MANAGEMENT

2016 Best Companies for Leaders

Meet 40 companies that excel at nurturing leaders—and find out what you can learn from them by Dan Weinfurter & J.P. Donlon EACH YEAR SINCE 2005, Chief Executive has sought to identify those companies that excel in leadership development. In partnership with GrowthPlay (www.growthplay.com, previously Chally Group), a sales and leadership research and consulting firm headquartered in Chicago, we canvas world-class companies through a questionnaire and interviews in order to learn what they are doing to identify and nurture people three or more levels down the chain from the CEO. The final, top-40 ranking consists of public companies with over $1 billion in revenue, and the top 10 on the list scored within several points of one another. Rankings are affected by a company’s reputation among its

peers as a source for well-rounded talent. The percent of senior management recruited from internal talent pools is another criterion. (See box, right, for the full criteria.) Similar to 2015, some attrition among last year’s winners explains why previous winners don’t appear on this year’s list. Furthermore, because it would be inappropriate to compare private companies with larger public companies that enjoy greater resources, we rank large, private organizations with in-depth leadership development programs separately (see p. 30). Of the companies surveyed, 83 percent have headquarters in North America and 71 percent have international operations. The majority of industries represented included professional, scientific and

28 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

HOW WE RANKED THE BEST COMPANIES FOR LEADERS The following five criteria were considered in evaluating companies. 1 Having a formal leadership process in place 2 The commitment level of the CEO to the leadership development program as measured by the percent of time spent 3 The depth of the leadership funnel as measured by the percentage of senior management positions filled by internal candidates as well as the percentage of middle management positions filled by internal candidates 4 The number of other companies that report recruiting from the company being evaluated 5 A shareholder value performance metric based on 10-year growth or decline in market capitalization technical services (30 percent); manufacturing (25 percent); information, media and telecommunications (18 percent); and finance, insurance and real estate (16 percent). For the second year in a row, GE tops the list as the “Best Company for Leaders” with EMC Insurance moving up from No. 4 last year to come in just a fraction below. Hitachi Data Systems leaped to third, from ranking No. 23 in 2015. Among the remaining top 10, Johnson Controls (No. 5) is new to the list this year, and 3M moves up to No. 8 ranking from No. 11 in 2015. VF Corporation (No.

TOP 40 BEST COMPANIES FOR LEADERS IN 2016 2016 CHANGE 2015 1

COMPANY & CEO

General Electric/Jeffrey Immelt

EMC Insurance/Bruce Kelley

IBM/Virginia Rometty

Hitachi Data Systems/Jack Domme

P&G/A. G. Lafley

IBM/Virginia Rometty

EMC Insurance/Bruce Kelley

Johnson Controls/Alex Molinaroli

Verizon Communications/Lowell McAdam VF Corporation/Eric Wiseman

2015 COMPANY & CEO

■ —

VF Corporation/Eric Wiseman

Verizon Communications/Lowell McAdam

Southwest Airlines/Gary Kelly

3M/Inge Thulin

Wipro /T. K. Kurien

P&G/David Taylor

The Cooper Companies/Robert Weiss

Dow Chemical/Andrew Liveris

■

—

Owens Corning/Michael Thaman

3M/Inge Thulin

■

—

Lafargeholcim/Eric Olsen

Xerox/Ursula Burns

■ —

Fluor/David Seaton

Ingersoll Rand/Michael Lamach General Mills/Ken Powell

Wipro/T. K. Kurien

Southwest Airlines/Gary Kelly

Hormel Foods/Jeffrey Ettinger

Ecolab/Douglas Baker, Jr.

Esterline/Curtis Reusser

Stanley Black & Decker/John Lundgren

Arthur J. Gallagher/J. Patrick Gallagher

The Cooper Companies/Robert Weiss

Sprint/Marcelo Claure

✱ —

Sprint/Marcelo Claure

Maxim Integrated/Tunc Doluca

Hormel Foods/Jeffrey Ettinger

Accenture/Pierre Nanterme

Caterpillar/Douglas Oberhelman

Cardinal Health/George Barrett

Nielsen/Mitch Barns

Bristow Group/Jonathan Baliff

Hitachi Data Systems/Jack Domme

Nielsen/Mitch Barns

Ball Corporation/John Hayes

Maxim Integrated/Tunc Doluca

Cardinal Health/George Barrett Coca-Cola Enterprises/John Brock

DENTSPLY International/Bret Wise

Coca-Cola Enterprises/John Brock

Huntington Bancshares/Stephen Steinour

Paychex/Martin Mucci

Dentsply International/Bret Wise

HNI/Stan Askren

Royal Caribbean Cruises/Adam Goldstein

Inter RAO/Anatoly Gavrilenko

Salesforce/Marc Benioff

29 30

■ — ■ —

Huntington Bancshares/Stephen Steinour

Bristow Group/Jonathan Baliff

Harman/Dinesh Paliwal

HCL Technologies/Anant Gupta

Hyatt Hotels/Mark Hoplamazian

Tata Group/Cyrus Mistry Shoppers Drug Mart/Dominic Pilla

✱ — Konecranes/Panu Routila

■ —

ArcBest/Judy McReynolds

Hyatt Hotels/Mark Hoplamazian

■

Synovus/Kessel Stelling, Jr.

Ecolab/Douglas Baker

Shoppers Drug Mart/Dominic Pilla

Paychex/Martin Mucci

Aon/Gregory Case

Hewlett-Packard/Meg Whitman

37 38

—

■ —

Xerox Ursula Burns

Harman /Dinesh Paliwal

Arthur J. Gallagher / J. Patrick Gallagher

Monsanto/Hugh Grant

HIGHER RANK THAN 2015

LOWER RANK THAN 2015

NO CHANGE

■ NEW ✱ RETURNING TO THE LIST AFTER AN ABSENCE OF TWO YEARS OR MORE JANUARY/FEBRUARY 2016 /

CHIEFEXECUTIVE.NET

/ 29

TALENT MANAGEMENT

6) and Dow Chemical (No. 10) both held their rankings in the top 10 listing of companies identified having impressive leadership development processes. P&G and Deloitte, which normally place in the top two positions among the public and privately held firms respectively, both experienced CEO transitions in 2015. Given that points are allotted for the amount of time a company’s CEO spends on leadership development, their scores would have been a bit lower than normal and this may account for the slippage in rank. Hitachi Data Systems reported 100 percent internal promotions, conferring the maximum of 25 points, which raised its score significantly. Ecolab enjoyed market cap growth from $7.834 billion to $32.570 billion, which helped boost its overall score. Johnson Controls, Owens Corning and Fluor are all new to the list this year. Stanley Black & Decker returns to the list this year; the pre-merger Stanley appeared in the rankings several years ago. Their rankings reflect

“

OUR PEOPLE AND OUR BRANDS, IN THAT ORDER, ARE OUR MOST VALUABLE ASSETS AND WE ARE GENUINELY COMMITTED TO DEVELOPING OUR PEOPLE TO THEIR MAXIMUM POTENTIAL.

”

—Stanley Black & Decker CEO John Lundgren a generous amount of CEO time spent on leadership development, having a formal leadership process in place, the depth of the leadership funnel filled by internal candidates and number of the number of other companies that recruit talent from their company. Stanley Black & Decker CEO John Lundgren likes to mentor his people, either alone or in groups, and encourages what he calls “boundery-less” behavior. “Our people and our brands, in that order, are our most valuable assets and we are genuinely committed

to developing our people to their maximum potential,” he says. “I spend as much time as possible with our early-career, high-potential associates to ensure that they understand our values and our strategy and that they are being given appropriate opportunities to develop their leadership skills. It’s hopefully as motivating for them as it is for me. I always learn something in the process.” DAN WEINFURTER is the CEO of

GrowthPlay (www.growthplay.com).

10 BEST PRIVATE COMPANIES FOR LEADERS Because private companies operate in a much different business environment than public companies, they have their own ranking. Black & Veatch takes the top position for the private company list, followed by AlliedBarton Security Services, both with impressive leaps from 2015 rankings. Newcomer to the list is HAVI Group, which ranked third on the top 10 listing. 2016 CHANGE 2015

COMPANY & CEO

2015 COMPANY & CEO

Black & Veatch/Steven Edwards

Deloitte/Frank Friedman

AlliedBarton Security Services/William Whitmore

Hilti/Christoph Loos

HAVI Group/Theodore Perlman

Dell/Michael Dell

Hilti/Christoph Loos

Transplace/Thomas Sanderson

■ —

1 Deloitte/Cathy Engelbert

MWH Global/Alan Krause

Transplace/Thomas Sanderson

Black & Veatch/Steven Edwards

Day & Zimmerman/Hal Yoh

AlliedBarton Security Services/William Whitmore

Dell/Michael Dell

Belron/Gary Lubner

Westfield Group/Edward Largent

Day & Zimmermann/Hal Yoh

CRST International/David Rusch

NAACO Industries/Al Rankin

■ —

HIGHER RANK THAN 2015

LOWER RANK THAN 2015

NO CHANGE

■ NEW

30 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

KEY TAKEAWAYS FROM THE LEADERSHIP RESEARCH LEADERSHIP DEVELOPMENT ROI

Comparing the long-term growth in market capitalization of public companies with their final scores for leadership development can offer justification for investment in developing leaders. The comparison covered the 10 years from 2005 to 2015, a period long enough to minimize short-term and situational fluctuations. In terms of the contribution to growth potential, the top 15 percent of the Best Companies for Leaders show greater market cap growth than the bottom 15 percent—suggesting that having and executing development programs seems to have a big ticket impact on organizations.

SUMMARY 10-YEAR PERFORMANCE COMPARISON*

MARKET CAPITALIZATION GROWTH 2015

111%

64%

Bottom 15 percent of the Best Companies

Top 15 percent of the Best Companies

PARTICIPANT COMPANIES* *Includes companies where public data is available for 2005 to 2015.

TOP 5 DEVELOPMENTAL OPPORTUNITIES TO WORK WITH LEADERS

When asked how CEOs are investing time developing leaders, the majority of the participants reported that coaching and feedback for skill development are the main areas of focus.

50%

47%

42%

Coaching and feedback for skill development

Mentoring one-on-one

Informal information exchange sessions

TOP 10 GREATEST CAUSES OF LEADERSHIP DERAILMENT

Survey participants were asked to give their top three causes of leadership derailment. Here is a summary of the top 10 causes reported overall: 1

LACK OF TEAMWORK/ COLLABORATION

Lack of team orientation; Driven by personal ambitions versus team success; Not cultivating network

INSUFFICIENT TRAINING/ DEVELOPMENT

Failure to unleash talent; Lack of commitment to learn; No formal training process; Lack of focus from top management

EGO/ARROGANCE/ MICRO-MANAGEMENT

Failure to recognize/reward team for success; More interested in themselves than their reports

NO CLEAR STRATEGY/ VISION

Not developing/executing strategy; Behaviors that conflict with organizational values; Business acumen

LACK OF LEADERSHIP QUALITIES

Failure to lead/develop/inspire/engage; Lack of dedication to employees

INABILITY TO CHANGE

Lack of innovative thinking; Failure to adapt; Lack of flexibility

POOR LEADERSHIP SELECTION

Lack of hires with good leadership skills; Poor job alignment

LACK OF TRUST

Lack of trust, integrity, loyalty; Betraying trust

EMOTIONAL INTELLIGENCE/ SELF AWARENESS

Inability to make hard people decisions; Lack of effort for self-development

INABILITY TO DELIVER RESULTS

Lack of prioritization, time management, accountability

LEADERSHIP DEVELOPMENT PROGRAMS RISING By Bruce Sevy, Ph.D., Managing Director, GrowthPlay Analytics

For the past six years, we’ve tracked key markers of the state of leadership development: the proportion of organizations who report having a formal leadership development program and the specific components comprising those programs. The six-year trend toward formal leadership development could not be more clear. Over the years, we’ve seen a steady and significant increase in the proportion of organizations who report having a formal leadership development program. At the beginning of this decade only half of survey participants reported having such a process. For the last two years, the proportion has hovered in the low 80s. This is very good news and clear evidence that more and more organizations value leadership and are willing to invest in developing their leaders.

PERCENTAGE OF ORGANIZATIONS WITH A FORMAL LEADERSHIP PROGRAM IN PLACE

68%

75%

78%

83% 82%

53%

2010 2011

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2012 2013 2014 2015

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COVER STORY

HOW CULTURE CREATES

Southwest Airlines CEO GARY KELLY shares practices and insights on getting the right people on board. By J.P. Donlon

WHEN SOUTHWEST AIRLINES (SWA)

began operations in 1971, it had three airplanes and a route structure that included just three cities in Texas. It was not much more than an idea that Herb Kelleher drew up on a cocktail napkin at the Saint Anthony Hotel in San Antonio, Texas. Today, Southwest is an international carrier with 700 airplanes approaching $20 billion in annual revenues and topping $1 billion in net income. From the beginning,

COMPETITIVE TIV ADVANTAGE

the company built its competitive advantage around a simple, efficient operating model and a culture unique to air travel. The most astonishing factoid about Southwest is that it has not had a single layoff in its 44 yearsâ&#x20AC;&#x201D;a stunning accomplishment in an industry that leads the economy in bankruptcies, re-organizations, mergers and companies that have disappeared. Think Eastern and Pan Am. â&#x17E;ź

COVER STORY

“If you take great care of your people, they’re going to take care of the customers and that should take care of everything else.” Consider also another astonishing factoid. Southwest gets a lot of resumés from people who want to work there. Last year, it received 178,299. Gary Kelly, the company’s CEO who has been with the airline for 29 years, 15 of them as CFO, says, “We pay about the same for our airplanes and pay about the same for gas. That doesn’t leave a whole lot of cost left. So we have to be more productive with the workforce, which is about a third of any airline’s cost structure.” SWA is known for its policy of hiring for attitude and training for skill, but what keeps the culture machine humming is the careful leadership and management of it. In the begin-

ning, this effort was led by Colleen Barrett, who passed the baton on to SVP for Culture & Communications Ginger Hardage. After Hardage retired, Linda Rutherford took on the role. The position reports directly to the CEO and the person in it oversees the culture throughout the company. “I don’t know how to fly an airplane,” Kelly explains. “I can’t change the oil in an engine. Even some of the customer service things, I would have to be trained on. So it’s really a team effort.” It’s not rocket science. Storytelling is part of the culture that binds people to a purpose. A Dayton, Ohio customer agent offered to take a customer’s pet hamster to the agent’s home for a

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month while the customer visited a sick mother in another city. A five-year-old boy waving enthusiastically at an SWA plane taxiing along a tarmac got a thrill when the pilot opened his window and waved back. The boy’s mother captured the incident on camera and sent it to the company in appreciation. Dining in a Dallas restaurant one evening, Gary Kelly and his wife were astonished when a waiter came to their table to say that two SWA pilots also at the restaurant had recognized the couple and anonymously paid their bill. They also sent a note of appreciation— written on a cocktail napkin a lá Herb Kelleher. Any company can create a competitive advantage from its culture by instilling processes designed to keep it going. At Chief Executive’s CEO Talent Summit in Dallas, J.P. Donlon spoke with Gary Kelly to learn how SWA does it.

PHOTOS COURTESY OF STEPHEN M. KELLER / SOUTHWEST AIRLINES

Gary Kelly talks with employees at a company celebration at the College Football Hall of Fame

Explain how your talent strategy aligns with your business strategy.

GARY KELLY: I’m very proud of the fact that we’ve never had a layoff. When I started in the ’80s, we had 5,000 employees. We’ve obviously grown significantly since then. So it’s not just a lack of layoffs. We offer great jobs that pay well and have a terrific healthcare program, a wonderful retirement plan and flight privileges that our employees really enjoy. It is a great experience. But it’s never just one thing. It’s a combination of many things that helps make us successful. We have a decades-long reputation of being a great place to work that attracts people to want to join the Southwest family. We’re probably the only company in 2009 during the depths of the recession that didn’t have a layoff. And, of course, the other remarkable thing about the company is that we’re an airline, an industry notorious for failures and bankruptcies. In fact, every major airline that existed when I first started in the 1980s is gone. They’re either gone entirely or were recreated through bankruptcy. It’s quite an indictment of the industry. Conversely, it illustrates what the risks are. For us, we focus on our people and we’ve held true to that over the last 30 years. If you take great care of your people, they’re going to take care of the customers and that should take care of everything else.

GK: We have a passion for what we do and we look for people that share that passion. Our mantra is, we hire for attitude and we train for skill. Since our early days we seek people who don’t just have the skill, but also have the passion and the attitude to take care of each other and to take great care of our customers. We work hard to identify that. Many people want to be a part of a team like this. But many times we’ll have employees that say, “You know what? This just isn’t for me and it’s not the right fit.”

What do you seek in people? Obviously when hiring pilots or maintenance there are technical skills, but what are the other criteria and how do you know how to get it?

The company has grown from 5,000 people to 47,000. How do you maintain standards and the culture when you’re many times your initial size? GK: If you’re going to have a team,

What screens do you use to confirm that the people you hire have the right stuff as far as SWA is concerned? GK: It’s probably more art than science, but every person who gets hired has to go through our people department. We have a process. We don’t use a personality test, but we talk to people, and we look for signs. For example, we look for people who are humble and have a great sense of humor. You can ask the right questions to figure out if somebody really is going to be a good fit. If someone comes in and is rude to the receptionist, that’s not for us. We look for good-hearted people who want to work hard and serve others.

you’ve got to invest the time to create the relationships. The bigger the company gets, the more effort it takes. We use a variety of techniques to do that. Right near my office is a group called Internal Customer Care that keeps track of important things happening in our employees’ lives. It could be marriages, births or sad things that are happening. It alerts us to reach out and do the appropriate thing. I get a pile of thank you notes and in turn I send out thank you notes. It’s creates a very human connection. It’s basic, but very meaningful. That’s why we put the heart symbol in our logo. We’re not the American Heart Association, but our employees believe in the heart and when we deviate from living by the golden rule, people call each other on that. It makes for a very powerful culture. When I spoke to you on the telephone a few weeks ago, you were writing notes to various employees. That must take a lot of time out of your busy life. GK: But that’s what families do. Families share stories. Families have a history. Families like to come together. And families write notes. And they share joys and share sorrows. That’s just what we feel like we have here at Southwest. Southwest’s competitive model has been fairly well established since its inception. Why haven’t other startups or other airlines disrupted you? GK: The last 15 years have been really interesting. The world has changed a lot and in that period, we have more low-fare, low-cost competition than ever before. Most have difficulty matching the total package. Southwest offers great service and low cost which is an unbeatable combination. If you have one or the other, you might win. If you don’t have either, you’re probably going to lose. We work hard to have both. We have more competition today. Nobody has a single aircraft tight focus like we do. Nobody operates on a point-to-point basis. Nobody has the heart, as well the attention to low cost. So it makes us unique and again that’s a great competitive advantage for us.

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CEO TALENT SUMMIT

CEOs checking out a jet engine at Southwest Airlinesâ&#x20AC;&#x2122; Training and Operational Support (TOPS) facility

WINNING THE 2020 WAR FOR TALENT Part II of takeaways and highlights from the 2015 CEO Talent Summit in Dallas, Texas. By Jennifer Pellet

AT A TIME when demographic shifts, technological innovations and intensifying competition are dramatically reshaping workplaces, finding and retaining top talent is more important than ever. The pages to follow capture some of the insights and best practices shared by CEOs participating in the 2015 CEO Talent Summit in Dallas, Texas.

P H O T O G R A P H S BY J E F F S P U R LO C K

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CEO PANEL / DEVELOPING LEADERS IN A COMPLEX, CHANGING WORLD CONCEPT: THREE CEOS WEIGH IN ON MANAGING MILLENNIALS, “CALIBRATING” THE TALENT POOL AND NURTURING DEVELOPMENT. WHO Graham Weston, Founder and Chairman of Rackspace, a $2 billion managed cloud computing company ON MANAGING MILLENNIALS The core of our workforce is young, because they are people who grew up with the Web. Yet, if you want to hire seasoned people, they tend to be older. The millennials don’t appreciate [older employees’] experience. If it made you a better you today, awesome. Bring that to work. But your experience? Young people, millennials, just can’t see how that experience [is relevant]. ON PERFORMANCE REVIEWS Beauty is in the eye of the beholder. The same employee with a different manager may have a very different review. This is very hard to standardize. If you say that there is this bias, that it’s really based on fit, maybe fit [between manager and employee] is actually what you should be measuring. My fear is that a lot of performance reviews actually do more harm than good, that there is a whole lot of time put into it, and very little performance comes out of it. Many of our best people have said that they considered leaving the company when they got a performance review where they didn’t see eye to eye with their manager.

Performance reviews can backfire, Rackspace’s Graham Weston told CEO attendees

WHO Bryan Kennedy, CEO of Epsilon/ Conversant, a $2 billion digital marketing company ON TALENT CALIBRATION We do

H OW TO MOTIVATE , LE A D A ND RE TAIN M ILLE NNI A L E MPLOYEE S

“Your company does annual performance reviews. But millennials want real-time feedback. You’re going to make me wait a whole year to find out whether I’ve improved or not? They want weekly, monthly or at least quarterly feedback.” DAN SCHAWBEL Managing Partner of Millennial Branding, a Gen Y research and consulting firm JANUARY/FEBRUARY

2016 /

CHIEFEXECUTIVE.NET

CEO TALENT SUMMIT

work out the bottom end of our organization. We do it in a very humane way, but when we cannot find the right role for the right individual, then it simply doesn’t work for our business to keep somebody on board who makes everybody else’s job that much harder, because they’ve got to carry the freight. So talent calibration is a really huge piece of what we do. ON SUCCESSION As you get up higher in the organization, a really robust succession-planning exercise is something we believe really strongly in. Not only does it set you up with a clear roadmap of where the next crop of leaders are, but those leaders that are in that process begin to develop that muscle for themselves, thinking about how to groom and develop a talented organization. WHO Robert Weiss, President and CEO of The Cooper Companies, a global medical device company ON TEAMWORK Team playing is extremely important. You can have five superstars in a basketball team, but they can’t play at all together. We want individuals [who] are bright, people who push me. But, importantly, you don’t need someone that is marching to a different beat and a contrarian just to be a contrarian. There’s a fine line in challenging and putting your best thoughts forward, and you don’t want to suppress that. ON USING A COACH In every one of my four executive meetings a year, the coach panels all the people [who] are gonna at-

Harman: A CEO-CHRO Partnership WHEN JOHN STACEY joined

Harman International Industries in 2008, the high-end audio equipment maker did not have a great track record as far as human resources working in partnership with business. In fact, Stacey’s new boss, CEO Dinesh Paliwal, had churned through HR executives at a fast clip at his previous company, ABB. “I knew I had a challenge ahead of me in terms of working with him,” said Stacey. But Paliwal’s view changed over the next several years,

as Stacey was able to demonstrate the tremendous value of a close partnership between CEO and CHRO. “We would talk first about business objectives, and from that would flow people expectations” rather than the other way around, said Stacey, who is able to use the goals and objectives from Paliwal to implement resource solutions to maximize results and efficiency. The two speak constantly, and Stacey not only has a key place at the senior management table but is also invited to

tend that meeting, finds out what’s on their minds, finds out if they have some tough questions they really don’t want to ask in a group. After the meeting, the coach likewise canvases all of the attendees to find out if

GM: BRINGING OUT TH E B E ST IN PEOPLE

customer meetings with Paliwal to get to know all aspects of the business. “It’s open and constant communication. Even overcommunication sometimes,” noted Stacey, who has been invited to meetings he didn’t think were relevant to his position. But that communication is what enables Stacey to implement targeted personnel solutions that have helped the company nearly double its revenue to $6.5 billion and grow to 25,000-plus employees from 12,000 in 2008.

there’s something I did, unbeknownst, that really annoyed people or turned them off. So it keeps the dialogue open directly, as well as indirectly. A coach, for me, has been a very valuable add.

“We’ve decided that culture emerges from the bottom up. Yes, it is clear that the leaders need to set the tone, and it is clear that values and strategy are set from the top. But it is also clear that if you can engage people from the bottom up and co-create and meet somewhere in the middle something remarkable can happen.” MICHAEL ARENA Chief Talent and Development Officer, General Motors

CEO PANEL / THE CEO’S ROLE IN ATTRACTING AND RETAINING TOP TALENT CONCEPT: THREE CEOS WHO TAKE A HANDSON ROLE IN NURTURING TALENT SHARE WHAT THEY’VE LEARNED. WHO Cathy Englebert, CEO of Deloitte, the largest professional services firm in the U.S. ON COMMUNICATING WITH HIGH POTENTIALS When I was five months pregnant with my first child, I resigned from the firm because I had this vision that I couldn’t juggle it all. Deloitte then came to me and said, “Wait a minute. You’re on our high-potential list.” But guess what? They had never told me that. So that’s another lesson learned—making sure we’re communicating around the leadership development in a way that employees know where they stand within the company. ON LISTENING AS A TOOL When I first started meeting with our senior management teams, it was me just talking about my vision. Then, I went to one of our teams up in New England, and they structured the meeting [so] that they were all going tell me what their vision was for themselves and their careers—and a lot of them talked about family and health and well-being. They were inspired. I was inspired. It’s just changed the way I can connect with people.

Ur, qui te delendu cillaboresti de none conem eum sectatur? Hictam cus eum ipsa volupta natiae. Ut aute nem et quo odipsapis

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Deloitte’s Cathy Englebert urges CEOs to be more proactive in communicating with employees about their career potential

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CEO TALENT SUMMIT

WHO Mike Ullman, former Chairman and CEO of J.C. Penney, one of the largest U.S. apparel and home furnishing retailers ON BEING ASKED TO RETURN TO J.C. PENNEY I said, “Absolutely, but I don’t want to be paid. I don’t want anybody to think I want to profit from the disaster. And by the way, since you don’t have any cash, you couldn’t pay me anyway.” That was kind of the attitude I had, in the sense that 43,000 people lost their jobs during the difficulty, and our people were pretty beat up. ON BECOMING MORE TRANSPARENT Basically, “Never admit mistakes” was kind of the mantra of the past, because if you made a mistake, or if you got out of line, you were no longer in the succession plan to be the chairman or store manager. ON GETTING PEOPLE ALIGNED ON THE RIGHT PATH I would say, first, they have to believe that we can do it. So the leader’s job is to say, “I see where we can go. It’s not me that’s gonna get us there.” We have to get there, and there will be some stragglers, some people who are wounded along the way; but generally, the people who hung in there during the toughest of times were the ones who had the courage and the commitment and the knowledge of what to do. WHO Robert Weiss, President and CEO of The Cooper Companies, the No. 3 healthcare company in the world ON GETTING HIGH POTENTIALS NEW EXPERIENCE I’ve made a career

J.C. Penney’s Mike Ullman shared his experience rallying employees around a comeback vision

of moving people around different areas. I moved my general counsel into the chief operating officer [role]. Some people think that’s kind of a weird transition, but it’s worked extremely well. The knock on my chief strategy officer was that he didn’t have line experience. So recently I kind of fixed that. He had a great vision, and I said, “Go out and execute on your vision. You’re now in charge of women’s healthcare.”

ON GROWING AS A LEADER: One of the things I had to get a little better at was being a good listener. It’s easy to talk, much harder to be a good listener. That doesn’t always come intuitively for everyone. So there are clearly things I had to reexamine for myself, and I got my 360 in when I got my coach. I learned to do things differently that I think made me a better mentor and a better coach of other executives.

L E A DE RSH I P AND THE NEW P R IN C I PLE S OF INF LUENCE

“If you want people to be compliant, manage them. But if you want people to be engaged, managing them doesn’t work. Human beings don’t engage by being controlled. The way people engage is by getting there on their own steam. The technology of engagement is self-direction. When people have more autonomy over aspects of work, they’re more likely to engage and do great work.” DANIEL H. PINK author of three long-running New York Times bestsellers, A Whole New Mind, Drive, and To Sell Is Human.

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2/4/14 4:49 PM

CYBERSECURITY

GETTING SERIOUS ABOUT CYBER SAFEGUARDS Attacks on large companies make headlines, but smaller companies, too, suffer cyberattacks. Here’s how to protect your business. by William J. Holstein

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CHUCK PROVINI knows he has a bright red bullseye painted on his back. As CEO of startup Natcore Technology, he hopes to develop technologies that will render the use of silicon crystals to make solar energy panels obsolete. Provini’s Rochester, New York-based company, which works with U.S. Department of Energy research labs, among others, to develop new technologies, represents a threat to China’s solar energy industry. ¶ China’s position in solar energy is based on silicon, and the Chinese are targeting solar energy as a strategic industry of the future. The Chinese show no hesitation in trying to crack open the IT systems of American companies and

government agencies to obtain proprietary information—despite President Xi Jinping’s promises to the contrary. “Small companies do not typically have the budget to build all the great and wonderful things that bigger companies do, and they still get hacked,” says Provini, who dealt with top-secret issues while serving in the U.S. military. “So you try to create several boxes that people cannot access and keep as many things away from the Internet as possible.” One of his large shareholders in the cyber intelligence business was the first to recommend that Provini keep his secrets in different modules not connected to the Internet. “That’s what you learn—to keep modules that are independent and accessible only on a need-to-know basis. Sometimes the simplest mechanisms are best.” Not everyone can follow Provini’s example. In fact, the vast majority of small and medium-sized businesses (SMBs) don’t have that option. Trends in the business world demand that smaller companies establish computerized supply chain connections with their larger customers and more connectivity, rather than less. This connectivity, in turn, creates vulnerability. DOORS WIDE OPEN The hackers who breached Home Depot and Target won entry through suppliers. It is precisely because of their connections with larger companies that SMB companies get targeted.

“A lot of smaller company CEOs are saying, ‘It won’t happen to me,’” says Devon Nevius, executive vice president of Upward Technology in Portland, Oregon, which provides Internet security for about 50 small companies in that region. “They’re saying, ‘It’s more of a Home Depot thing.’ But that is naïve.” Cloud computing, or the use of large company server farms to store data and use software on demand, is a hotly debated piece of the emerging debate about cybersecurity at SMBs. Some smaller company CEOs believe that basing crucial information in systems managed by Amazon Web Services, IBM or Microsoft makes their data and intellectual property safer because the big IT providers boast the latest technologies and the best brainpower. Others argue that the systems those big companies use to store the data of thousands of companies makes them an increasingly attractive target for cyber villains and that it is only a question of time before they get hacked. Many smaller companies use a hybrid form of cloud computing, meaning that some data and some functions are based in the cloud while others are located on-premises. Trying to understand the security implications of hybrid systems can be difficult as well. Other technological trends also open doors for the bad guys. Many SMB CEOs haven’t realized that doing something as simple as outsourcing a call center creates an opening

because of the application program interface (API) used to link the call center company and the customer. It can be attacked and employed as an entry point into all the company’s systems. Elsewhere, the trend called the Internet of Things (IoT)—the massive linking of sensors, cameras and computers—promises big productivity gains but will only intensify the security challenge. PROTECT AND SECURE Interviews with computer security experts and consultants across the country—many of them young and brash but nonetheless well-informed—suggest that outside of a few regulated industries, such as banking and insurance, the majority of SMB CEOs have not taken sufficient steps to protect themselves. Hackers pursuing technical secrets may target start-up companies in fields such as solar energy, genomics, pharmaceuticals, nanotechnology and other fields where American companies hold global advantage. More established companies that sell highly specialized equipment to aerospace and defense industries are also targeted. (See sidebar, p. 44.) Hackers don’t necessarily infiltrate smaller technology companies for what they have today—they may be more interested in what they can access once a smaller business establishes an alliance with a large company or is acquired. The cyber thieves can insert viruses and malware that

KEY TAKEAWAYS 1

Small Is Not Safe Cyber attacks target small and mid-size businesses, too

Secure Your Whole System Safeguards must cover your whole IT infrastructure and all its vulnerabilities

Seek Outside Help Have a trusted outside partner monitor your systems for malware, viruses and worms

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CYBERSECURITY lie dormant in a system until they are activated, which may be years later. The attacking software can even work its way up through different levels of approval within a company’s system until it is accepted as legitimate. Other types of hackers seek information that can be sold on the “dark” Internet, the part that ordinary folks never see, and they go after the personal data of people who do business

with hospitals, law firms or retailers. The dark Internet is where hackers exchange code and brag about their exploits. The worst sort of hackers, however, are company insiders who have a beef with top management. They have security clearances—and axes to grind. Most companies with less than $1 billion in sales a year cannot afford full-fledged IT departments with a

dedicated chief security officer, and therefore may have only a handful of people managing a large, complex problem. Furthermore, when IT departments are aware that they have vulnerabilities and approach top management for funding to fix the problems, they are often denied that money. To compound matters, they fear that if they reveal too much about security gaps to their CEOs, they will

How I Survived a Cyber Attack by the Chinese Military FireEye, the Internet security company, introduced one of its clients, a chief security and information officer, to Chief Executive with the understanding that his identity would not be revealed. He works for a Midwest-based company that sells high-tech industrial automation equipment to Boeing, Airbus, Lockheed Martin and the U.S. Navy, among other customers. Its annual sales are about $200 million. Here is his account of being hacked. “I was out on the golf course on a Saturday in May 2013 when my CEO called. This was everyone’s worst nightmare. He told me he was having trouble with the company’s email system and asked me to check it out. I looked at email on my phone and sure enough, we had problems. It was the canary in the coal mine because our email server had its own private network to the Internet. That network was being saturated with data leaving the building. “We didn’t know what was going on for a couple of days until we looked at where the traffic was going. All of it was going to one location in Shanghai and we didn’t have any customers or operations there. The information being targeted was export control documents we had filed with the U.S. government to export equipment to the UK, India and Spain. But it seemed like the real target was the U.S. Navy because what we were exporting was similar to what we make for the Navy. Whoever was doing this wanted to take an easy route to help their own Navy. “With help from FireEye, we discovered they had been on our systems for two months before we found them. The forensics work showed that they did a lot of poking around and knew what they were looking for. They had set up a process for getting the data out by compressing the files so they could be exfiltrated. “We stopped them manually in mid-exfil-

tration and they couldn’t get back in. Which meant they did not have time to clean up and cover their tracks. We could see all the trails they had left. Our whole directory of emails and passwords had been compromised. They had taken a lot of documents and RFPs, but they had not yet taken our drawings, which are the secret sauce. If they had gone for the drawings first, it would have been better for them.

*! #*

“AFTER AWHILE, THIS SORT OF THING STARTS TO PISS YOU OFF.”

“The Mandiant people at FireEye told us that the attack was similar to other attacks by a unit of the People’s Liberation Army called simply Unit 61398. They had been tracking these guys and knew their patterns. This unit represented what they called an Advanced Persistent Threat (APT.) “After we stopped them, we went into a remediation. We had to do things like check all the software on our servers to make sure we had current versions and therefore there no vulnerabilities. We had eight different locations in the world where we

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had a connection to the Internet. Think of that like having eight doors into your house that someone could get in through. I consolidated that to one door and put new technology into that one system. That was better than having cheaper equipment in eight locations. “We also had to change everybody’s passwords. We figured out that the attack started out from a phishing email. They got somebody to click on something that created a beachhead into our network. “How did I keep my job? It wasn’t like we were completely unprepared. We had a firewall and virus protection. But realistically, if someone is good and they want to target you, they are going to get in. There is no way to stop it. The key question is how fast can you limit it. Unfortunately, we didn’t have intrusion detection software. “I was lucky that we had several people on our board who had gone through different kinds of attacks and they supported me as I put together a remediation program and made a presentation to the board. When I explained what I needed to prevent this from happening again, they supported me. I would not have gotten the money if I hadn’t been attacked. “The Chinese tried three more times after that to get back in, but they couldn’t. After a while, this sort of thing starts to piss you off.”

be held responsible. “IT departments are way behind,” says Andrew Ostashen, co-founder of Boston-based Vulsec, another consultancy that specializes in smaller companies. “They’re constantly climbing up the hill while the hackers are on top of the hill throwing rocks at them.” He notes that many SMBs have 10- and 12-year-old firewalls that cannot properly analyze the data flowing in and out of a company’s systems. THE PEOPLE PROBLEM One reality is that if the attackers can make direct contact with the people inside a company, they can almost certainly use employees’ social media postings to learn about their technological competencies and their personal interests. That helps them create special “come-on” messages, or phishes, that are so well-tailored that even a trained employee will click on an Internet link, introducing a virus or malware into the company’s systems. ”The human is the weakest link,” says Ostashen, an “ethical hacker” who assaults companies’ systems to demonstrate their weaknesses. “If I can get to the human, I can almost always get in.” These types of attacks are also called remote social engineering attacks. Another reality is that employees in all sizes of companies increasingly want to use their own smart phones or iPads to connect to their companies’ central nervous systems, whether from home or on the road. This creates another avenue the hackers can use if those communications are not encrypted. Employees who lose a company laptop loaded with sensitive information can create major problems. Add it all up and it’s clear that CEOs of SMBs face a tremendous challenge in maintaining the vital flow of information and the creative exchanges among people inside their companies—and with business partners—without increasing the risk of getting hacked. And many are in de-

nial about it, says Ostashen. “I go into a company and provide a roadmap for how to fix their problems, then go back six months later and find that the problems are actually worse,” he says. “Top management did not want to spend the money. They wanted to accept the risk.” One executive who argues he and fellow CEOs of smaller companies are doing a solid job of protecting themselves is Ross Buchmueller of the PURE Group of Insurance Companies, based in White Plains, New York, a privately held firm with about $500 million a year in premiums (sales.) “The reality is that everybody is trying to harden their systems,” he says. While he operates in a sector where regulators ask him about

“

unwanted attention, Buchmueller declined to identify a vendor that provides a software agent which sits on his company’s computers and servers looking for an intruder before that attacker can secure any data. “The first rule of having great security is not telling everybody what you do,” he says. He also hires consultants to “stress” or attack PURE Group systems to find weaknesses. Then he meets with the ethical attackers— without his internal IT people in the room. “That way, we can get the kind of candor we need and know we aren’t kidding ourselves about how our internal team is doing,” he explains. One decision that any CEO faces in seeking external help is whether to hire a neutral third party, such as PwC

IT departments are way behind. They’re constantly climbing up the hill while the hackers are on top of the hill throwing rocks at them.”—Andrew Ostashen, Vulsec

Internet security, he says it’s really his affluent customers he has to protect— or risk losing their business. ”We’re asking tens of thousands of wealthy families to allow us to manage their risks, which means protecting all the information they share with us,” Buchmueller explains. “We spend a lot of time worrying about how to do that.” Buchmueller hired an expert to be in charge of his technology infrastructure, and the company’s core on-premises data center is managed with help from Oracle and IBM, using the latest encryption know-how. The company does use a cloud application from Salesforce.com that helps it manage relationships with customers, but he’s confident it is well-protected. Reflecting the sensitivities of being a CEO who speaks publicly about his IT system, thereby possibly attracting

(the former PricewaterhouseCoopers) or a company that offers cybersecurity products and services. “We provide a level of objectivity because we do not have products to sell—some CEOs find that valuable,” says Quentin Orr, head of PwC’s cybersecurity practice, based in Philadelphia. “The perspective we’re offering is not tied to any one product.” Often, says Orr, smaller companies have an IT executive who wears multiple hats and tries to do the best possible security job, but lacks the necessary training and resources. “We often find a sleepy IT staff that’s been in place for many years,” he says. “They have a mentality of just trying to keep the lights on.” This can backfire in a big way. For example, after a small healthcare information company suffered a

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CYBERSECURITY breach, it became clear the company had mishandled sensitive information belonging to its two largest customers, presumably hospitals or physician groups. The firm had a contractual obligation to notify the customers of the breach—and both terminated their relationships with the smaller firm, forcing it to declare bankruptcy. “If you’re a small company handling the data of big companies, they are not going to cut you any slack,” Orr warns. “They want you to step up to their level.” The advantage of dealing directly with a security firm as opposed to a neutral third-party is that it may possess deeper expertise. “It’s the difference between going to a medical generalist and a specialist,” says

“

We’re asking tens of thousands of wealthy families to allow us to manage their risks, which means protecting all the information they share with us. We spend a lot of time worrying about how to do that.”—Ross Buchmueller, PURE Insurance

Joshua Goldfarb, chief technology officer of FireEye in Milpitas, California, which has emerged as one of the most visible Internet security firms. “If you have a cold or fever, you might go to a general practitioner. But if you need orthopedic surgery, you’re going to go to an orthopedic surgeon. We’re the surgeon. A new customer can tap into all the experience we have built up over a decade of experience as an organization.” Last year, FireEye, which markets its own hardware and software, acquired a highly specialized computer forensics firm, Mandiant, that has been a leader in identifying and tracking government-sponsored or government-sanctioned hacking or-

ganizations, particularly from China. It calls those organizations Advance Persistent Threats (APTs.) That acquisition enables FireEye to help its customers anticipate the “threat vectors” coming from other countries. Altogether, it has 3,700 customers in 67 countries. FireEye’s core offering is what it calls a “virtual execution engine” complemented by dynamic threat intelligence to identify and block cyber-attacks in real time. “But if a company wants to partner with us, to operate in the world we live in, then we are happy to offer our solutions as a service,” Goldfarb adds. Goldfarb offers CEOs two pieces of advice. The first is to adopt a balanced

BILL HOLSTEIN (www.williamjholstein.com) is a New York-based business journalist and author.

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approach toward security, which is part prevention, part detection and part response. If a bad guy wants to get into your systems, the chances are that he can—no matter what prevention measures are in place. One reason is that traditional perimeter-based defenses are breaking down, partly because of more distributed computing systems and partly because of the proliferating use of handheld devices. “If an attacker wants to come after you, they will find a way in and we need to mitigate the incident before the attacker is able to get the information he wants,” Goldfarb advises. The second is to find a security partner who understands your business and takes a systematic approach to defending it, rather than merely trying to apply Band-Aids. “A partner should approach security in a holistic way,” he says. “If the discussion consists of a bunch of buzz words and tactical type approaches that are not guided by an overall strategic approach, it may not be an adequate partner.” The bottom line? If you haven’t adopted an Internet security strategy, it’s way past time to get started.

The Power of the Network Effect Allow your team to benefit from the experience of peer senior executives with comparable roles and responsibilities at noncompetitive companies. Let your them find solutions in Senior Executive Network (SEN) group sessions designed to explore issues and clarify options and actions steps, including: • Benchmarks for projects and outcomes • Clarifying what’s working (and what’s not) • Developing individual skills, and management methods, learning from shared experience Imagine a more effective and motivated team with enhanced skills and new relationships, focused on driving your bottom line.

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Tap into the Power of the Network Effect >> Visit www.SrExec.com Or call Rob Grabill at: 785-832-0303

$ SOCIAL ECONOMICS

CEOs weigh in on whether we’ve really got a problem—and what, if anything, should be done about it. By Dale Buss

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ERRATIC ECONOMIC GROWTH, immigration, Benghazi, Iran, the Trans-Pacific Partnership, ISIS, over-regulation, reining in China, repealing Dodd-Frank, Syria—the list of issues potentially shaping the 2016 presidential election is long indeed. ¶ But “income inequality” could become one concern that defines the race. What’s more, because they’re at the center of this issue, American CEOs should have a role in shaping it. Income inequality, of course, is one of those byproducts of capitalism, like technological innovation, job dislocation and household migration. It’s always been more of a description of one facet of Western market capitalism than an indictment. But the disparities between the wealth of the top 1 percent of Americans and what’s left for everyone else are in the crosshairs of political critics more than ever before, as the gap has grown and as the newest generation of voters swings decidedly toward a more liberal—nay, even socialistic—perspective. Much of the new argument over income inequality, of course, has been fueled by the early-2014 publication of a 700-page treatise by the French liberal economist, Thomas Piketty, Capital in the Twenty-First Century. In it, the author basically argues that today’s high levels of economic inequality are an increasing problem because of how they challenge the underlying incentives in, and ideals of, democracy—that capitalism doesn’t self-correct toward greater equality and that governments can and should do some things about it all. He proposes a progressive, annual tax on capital rather than on income, arguing that it “will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.”

Embracing Piketty as a new rationale for higher taxation may be hypocritical for progressive American politicians who have done just fine materially under current “inequality.” However, they have been able to leverage his freshly clothed argument to exacerbate the alienation felt by the millennial generation, which has come of age in an era of diminished expectations. In fact, of all the issues facing the world today, “social and economic inequality” ranked as No. 1 amid the top three in a late-2015 survey of more than 1,000 millennials in 125 countries by the World Economic Forum, tabbed by 56 percent, beating out climate change and environmental preservation, named by 42 percent, and education, identified by 33 percent. Meanwhile, capitalist apologists have fueled this issue by seeming tone-deaf to such concerns. In the run-up to the 2012 election, eventual Republican candidate Mitt Romney largely succeeded in dismissing the income-inequality issue as predicated on “envy” and “class warfare.” And the issue remained largely verboten for conservatives. Now, however, Republicans are contributing to the discussion, largely by blaming rising income inequality on the Obama administration, which in their view has stagnated middle-class wages and overburdened business with the Affordable Care Act and other new regulations. In one GOP presidential debate, for instance, candidate Rand Paul, the U.S. senator from Kentucky,

also blamed the problem on the Fed’s policy of “artificially keeping interest rates below the market rate, [so that] average ordinary citizens have a tough time earning interest, have a tough time making money.” Yet, the same debate also indicated that a particular subset of capitalists might be vulnerable to bipartisan criticism as the entire politico-economic system deals with the income-inequality issue: CEOs. A moderator, no less than Gerard Baker, editor-in-chief of The Wall Street Journal, noted that 50 years ago, “the average CEO of a big corporation in this country earned 20 times the average salary of one of his or her workers. Today, that CEO earns about 300 times the average salary of a worker.” New SEC rules requiring publicly held companies to publish the “pay-equity ratio” between CEOs and rankand-file workers also are highlighting a sort of culpability of business leaders in contributing to the issue. All the attention is helping make CEO income Exhibit A in progressives’ arguments for greater economic equality. CEOs have mostly been silent on income inequality; and when they do speak, often it’s been circumspectly, dealing with, for instance, the pay-equity issue inside their own companies but not with the broad implications of income inequality. Chief Executive has spoken to several CEOs on the topic and gathered comments others have made. Here are some highlights of what business leaders have to say:

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SOCIAL ECONOMICS

MOBILITY THREATENED “IT’S A HUGE PROBLEM that our society faces in the imbalances and economic opportunity. I don’t begrudge anyone’s right or ability to be awarded for accomplishments where they earn that income. But where I’m most concerned is where you end up creating imbalances in economic opportunity that block whole parts of our population out of that opportunity. “If you lose the ability to gain and move up, that’s where we face the greatest risk. And as far as the pay-equity ratio is concerned, I don’t know if it’s a problem across the whole economy or just in certain [sectors]; but if the government bails out an industry, and in a few years that industry is reaping obnoxious bonuses again, that’s bad. There’s not a direct correlation between outrageous CEO salaries and social upheaval; it’s just that our society has an increasing gap between the rich and the poor.” —Seth Goldman, CEO of the Bethesda, Maryland-based Honest Tea unit of Coca-Cola in a recent interview with Chief Executive

What’s Acceptable Inequality? “Extreme inequality should not be ignored—or worse, celebrated as a sign that we have a high-performing economy and healthy society. Yes, some level of inequality is built into capitalism. As Piketty argues, it is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good? That’s something we should have a public discussion about…. [But take] a look at the Forbes 400 list of the wealthiest Americans. About half the people on the list are entrepreneurs whose companies did very well…. I don’t see anyone on the list whose ancestors bought a great parcel of land in 1780 and have been accumulating family wealth [only] by collecting rents ever since…. Rather than move to a progressive tax on capital…. I think we’d be better off with a progressive tax on consumption…. Philanthropy also can be an important part of the solution set.” —BILL GATES, SEATTLE-BASED CO-FOUNDER, FORMER CEO OF MICROSOFT AND PHILANTHROPIST IN THE GATES NOTES BLOG BY BILL GATES, OCTOBER, 2014

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$ Worse Is Not The Case

“It’s not right to say we’re worse off. If you go back 20 years ago, cars were worse, health was worse, you didn’t live as long, the air was worse. People didn’t have iPhones. [Though] it is true that income inequality has kind of gotten worse. [Still,] You can’t take the compensation of every CEO in America and make it zero; it wouldn’t put a dent into [the problem]. What really matters is growth.” —JAMIE DIMON, CEO OF NEW YORK-BASED JPMORGAN CHASE IN A SEPTEMBER 2015 INTERVIEW WITH BLOOMBERG

BUSINESSES NEED TO STEP UP

“INCOME INEQUALITY is the most pressing domestic issue. Most people are still being excluded from opportunities to better themselves and achieve prosperity. This is not something that can be solely solved by government programs and policies, so businesses need to examine their own programs and policies. “At Atrion, we are trying to do our small part by increasing our minimum wages to $13 an hour [and other measures]. But few businesses are [doing likewise], instead aggressively fighting suggested minimum wages while paying their executives excessive salaries and wages. Our federal government is going to have to force corrective behaviors in the form of regulations around wages, healthcare and taxes.”

—Tim Hebert, CEO of the Warwick, Rhode Islandbased IT services company Atrion Networking, in a recent interview with Chief Executive

“Our federal government is going to have to force corrective behaviors in the form of regulations around wages, healthcare and taxes.”

CAPITALISM STILL BEST OPTION “THERE’S NO ECONOMIC SYSTEM IN THE WORLD that drives income equality as the primary variable that doesn’t make [almost] everyone in the society worse off—particularly the people at the bottom. Socialism is a seductive idea. I talk to college students all the time who say we need to have more taxes and give out more welfare, but there’s nothing that can be done about income inequality: The free market is tested every day, billions of times, as decisions are made. Getting something done is really beyond the scope of government. But we do need leadership to change people’s minds so the country drifts less in a socialist direction.” —T.J. Rodgers, CEO of the San Jose, California-based semiconductor producer Cypress Semiconductor in a recent interview with Chief Executive

“The free market is tested every day, billions of times, as decisions are made. Getting something done is really beyond the scope of government.”

Winner Take All? Income inequality is destabilizing and “responsible for the divisions in the country. The divisions could get wider. If you can’t legislate, you can’t deal with problems. If you can’t deal with problems, you can’t drive growth and you can’t drive the success of the country. It’s a very big issue and something that has to be dealt with. [We need to] make the pie grow… too much of the GDP over the last generation has gone to too few of the people.... People are trying to grapple with the reasons for it. For example, technology, media, the new economy. If you do something really well, the entire world beats a path to your door. The No. 3, No. 5, No. 400 players get nothing. It’s almost a winner take all.” —LLOYD BLANKFEIN, CEO OF GOLDMAN SACHS, THE NEW YORK-BASED INVESTMENT-BANKING GIANT, ON “CBS THIS MORNING,” JUNE, 2014

Progressive Policies Promote Inequality “The rich are getting richer; the poor are getting poorer; and the middle class is getting stuck in the middle. And that is because we have too much crony capitalism in this country… and not enough Main Street entrepreneurialism. But it is also true that the policies of this administration have made the rich much richer. The Federal Reserve prints money and the only class that earns a return in the economy is equity. So people who own equity either in their home or the stock market get richer, and people who don’t have equity get poorer. [But] it doesn’t help lift someone out of poverty to put them on food stamps. What lifts someone out of poverty is a job and relief.” —CARLY FIORINA, FORMER CEO OF HEWLETT-PACKARD AND REPUBLICAN PRESIDENTIAL CANDIDATE, IN AN INTERVIEW WITH FOX NEWS, AUGUST, 2015

DRIFTING TOWARD DEPRIVATION “THIS DRIFT OF ASSETS toward the rich carries us away from meritocracy, productivity, empathy and mobility. It can ultimately deprive us of our democracy and social cohesion. It has many causes—some irreversible. Some observers still don’t see individual wealth and income concentration trends as a threat. The truth is that an overly concentrated economy will not only hurt democracy, it will also undermine prosperity. “The changes needed may sound radical, but so did the income tax in its day. Taxes on inheritance should be much more effectively imposed, [and an overall] tax system that looks to capture a fair share of appreciating wealth is both necessary and within reach. When prosperity is not shared, education and opportunity don’t tend to be shared well either—and much of an economy’s potential talent is wasted. Top-heavy systems are prone to stalling out.” —James Stone, CEO of Boston-based insurer Plymouth Rock in a recent interview with Chief Executive

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ECONOMIC DEVELOPMENT

REGIONAL REPORT

The Southwest

Three States. Two Countries. One Economy. By Warren Strugatch ON A RECENT afternoon, a gaggle of Mexican high school students filed through the corridors of a vast maquila, one of hundreds of similar assembly plants rising south of the border and dependent on U.S. contracts. The teens observed workers doing their jobs, then broke into smaller groups to talk casually with some of the younger employees. Few factories opened their doors to school groups in the past. Today they do. The change is due in part to suggestions made by northern neighbors such as Woody Hunt in El Paso. The quality of Juarez City’s workforce matters to people like Hunt, a real estate

and investment tycoon, because he understands that the economy of the U.S. Southwest is increasingly tied to the economy of northern Mexico. Seeking to establish more cross-border regional rapport, Hunt helped spearhead the Borderplex Bi-National Economic Alliance in 2013. The group brings together business leaders, educational figures and government officials from both the U.S. and Mexico as a kind of border-blind economic-development co-op. “Woody likes to say, ‘A healthy economy on the Mexican side leads to a healthy economy on the U.S. side,’” says the alliance’s CEO, Rolando Pablos.

Texas border-crossing cities like Laredo and McAllen have for generations benefited from their geographic positioning. Increasingly, so are other cities, towns and counties across the Southwest—nowhere more so than this hardscrabble triangle defined by El Paso, Santa Teresa and Juarez City. In the summer of 2013, New Mexico’s Gov. Susana Martinez joined Cesar Duarte, her counterpart in Chihuahua State, Mexico, to announce the formation of a bi-national community encompassing Las Cruces and San Jeronimo. The governors announced a cross-border master plan to create a collaborative, world-class international trading zone. Equidistant between the seaports of Long Beach and Houston, the new cross-border region sprawls over 70,000 acres zoned for industrial, commercial and residential use. The economy clearly benefits from the presence of the nation’s newest major rail intermodal center, as well as the huge Foxconn plant in Juarez. Trade advocates credit such progressive cooperative efforts with spurring small and midsized businesses to export more aggressively. “New Mexican exports to Mexico grew by 93 percent last year,” said Jerry Pacheco, president of the Border Industrial Association, representing Santa Teresa and Sunland Park employers. “By focusing on and developing New Mexico’s border region, we can bring increased economic development and

How The States Stack Up Relocation/ Expansion Business Incentives 3 3 (HQ/Job Creation) Environment

Workforce quality (readiness and 3 availability)

Unemployment rate (October 4 2015)

Community College 7 Performance (Meeting labor market 6 expectations)

CEO Ranking

Gross Domestic Product (Real Dollars) 2 Rank/Value

U.S.

X / $15.8 T

5.0%

Texas

2ND / $1.5 T

A/A

4.4%

10th

8TH / B

Yes

Arizona

21ST / $261 B

C+ / B

A-

6.1%

24th

45TH / B-

Yes

Oklahoma

29 / $162 B

A- / A-

B+

4.3%

33rd

43 / C

Yes

Arkansas

34TH / $111 B

B/B

C-

5.1%

38th

44TH / B-

Yes

New Mexico

37TH / $84 B

B+ / C+

6.8%

35th

48TH / B

Economic Performance 5 ranking

Business 6 Tax Climate

Education 5 (K-12/Reform Effort)

Right 8 to Work

Sources: 1 Chief Executive magazine reader poll; 2 Bureau of Economic Analysis; 3 Site selector assessments from Deane Foote, Foote Consulting Group; Bill Lutrell, Werner Global Logistics; Angelos Angelou, AngelouEconomics; 4 Dept of Labor; 5 American Legislative Exchange Council (ALEC); 6 Tax Foundation; 7 U.S. Chamber of Commerce; 8 National Right to Work Foundation.

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prosperity to the entire state.” Albuquerque, long dependent on federal R&D spending, is an emerging gateway, leveraging its strong infrastructure and fortuitous location at the center of the New Mexico Technology Corridor hugging the Rio Grande. Las Cruces, near Santa Teresa and the state’s largest city after Albuquerque, has also raised its export profile. The recent opening of Union Pacific’s $500 million intermodal facility in its backyard has motivated at least a dozen companies to relocate here. “Between Albuquerque and Santa Teresa is where the concept of corridor comes into play,” says Randy Trask, manager of greater Albuquerque’s Trade Alliance program. “In a way, we’re seeing the emergence of a contemporary Camino Real trading route.” Over in Arizona, state exports are up 12.5 percent the first half of 2015, representing over $1 billion in shipments. Mexico, the state’s leading trade partner, absorbs about 40 percent of Arizona’s exports; its appetite for U.S. products increased nearly 20 percent last year. Phoenix, the state’s largest city, hopes such new programs as the Metro Phoenix Export Alliance and the Metro Phoenix Export Plan will spur exports further. When Phoenix Mayor Greg Stanton met in November with Mexico City Mayor Miguel Espinosa, the men launched their own Global Cities Economic Partnership. As more cities, towns and counties vie for position on this new Camino Real, the interconnectedness of the U.S. Southwest and Mexico’s North becomes common currency. Summarizes Pablos, “The region has three states, two countries—and one economy.”

TEXAS | #1 | AIN’T BRAGGING IF YOU CAN DO IT Texas may still be the Sunbelt’s economic center, as Waco-based economist Ray Perryman claims, but the Lone Star economy is feeling the blues.

WHY WE’RE HERE / OKLAHOMA WHO John Shotton, Chairman, Otoe-Missouria Tribe; CEO, Otoe-Missouria Development Authority SITE HISTORY All tribal businesses, with about 1,800 employees, are administered from tribal council headquarters building on Otoe Reservation in Red Rock. Operations include hotel, restaurant, five casinos, fuel delivery and online lending business. WHY OKLAHOMA “Oklahoma is not merely a place to do business—it is our home and the center of OtoeMissouria culture. We work hard to provide meaningful careers and job skills to improve the quality of life for families across northern Oklahoma.” WHY RED ROCK “This is our home.” BOTTOM LINE “Our enterprises create jobs in high growth sectors including gaming, technology, financial services, green energy and more. Profits from our tribally owned businesses are used to fund critical social programs for our elders, youth and the most vulnerable members of the tribe and surrounding community.”

The collapse of oil prices has softened the top state industry, while evaporating natural gas profits have shredded payrolls. Last year, Houston lost 6 percent of its construction and mining jobs and 8 percent of its manufacturing jobs. After a long run as the country’s foremost job creator, Texas lost that title last year to California. In addition to energy sector retrenchment, export sales were cramped by the combo of a stronger dollar and weakened overseas demand. Austin, largely unexposed to the energy sector, paced the nation in job growth last year. It may do the same this year too. Austin’s appeal to employers clearly lies with its talented, high-tech workforce. What lures A-list workers to Austin? “It’s the combination of quality of living, the relaxed culture, the outdoors alongside the urban setting, the music and the economic opportunities associated with industries that are growing,” says Mike Rollins, CEO of Austin’s Chamber of Commerce. Perryman notes the area’s “workforce advantages and presence in key emerging sectors,” particularly IT, manufacturing, finance, insurance and real estate. The area added 32,000 jobs between May 2014 and May 2015, led by hospitality industry gains, for a 7.9

percent growth rate. Perryman forecasts continued strong performance through 2016 led by growth in services, durable manufacturing, finance, insurance and real estate. A recent national study by PwC and the Urban Land Institute named Dallas-Fort Worth the top U.S. market for real estate investment, development, and homebuilding. Austin was No. 2. Locals cheer the major expansion of Fort Worth Alliance Airport, expected to enhance logistics considerably. Says Perryman: “We look for growth to continue at a strong pace.” The Lone Star State racked up some major wins last year, including the $1.6 billion Total Petrochemicals facility in Port Arthur, and General Motors’ $1.4 billion expansion in Arlington. In Austin, major expansions and relocations were announced by Google and Charles Schwab; Apple began moving employees into its brand-new hemispheric headquarters. Gov. Greg Abbott, stepping into the boots of his famously pro-business predecessor, Gov. Rick Perry, set the tone for his new administration by slashing the state’s franchise tax 25 percent. The Dallas-Plano-Irving metropolitan division added jobs at a 3.8 percent rate during the May 2014— May 2015 period; Perryman forecasts

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ECONOMIC DEVELOPMENT

WHY WE’RE HERE / NEW MEXICO WHO Andy Lim, CEO of Lavu WHERE Albuquerque, NM SITE HISTORY Leases 14,000 square feet over two floors in downtown office building. WHY NEW MEXICO “It all comes down to an earthquake and a woman. I was a student in Taiwan during the horrendous earthquake in 1999, where 4,000 people died. I knew I wanted to start a new life elsewhere. I knew a woman in Albuquerque so I came here.” BOTTOM LINE “I graduated with a MIS degree in 2004 and started Lavu, a smart-phone payment system, on my kitchen table. The region is beautiful, the cost of living is cheap and people want to help new businesses succeed. The environment here is totally pro-business; a start up gets plenty of support.”

more robust growth in 2016. Houston, hammered by the downturn in energy prices, replaced some of its lost jobs with lower-paying positions in education, health care and hospitality. “We all know the price slump is temporary and that Houston is resilient,” says Austin-based economic development consultant Angelos Angelou. San Antonio regained some luster in 2014, as the pace of job growth more than doubled to 4.2 percent.

ARIZONA | #9 | OVER THE HUMP Arizona continues its fitful post-recession recovery. The state, once a job-creating juggernaut, stands at about 80 percent of peak payroll. Some signs signal better days ahead. Glendale-based site selector Deane Foote contends his home state “is certainly over the hump. Things are very good here. New jobs are being created around the state.” He touts the new pro-business gubernatorial administration of Doug Ducey and sees international investor interest—key to the state’s past mojo—returning. Says Foote: “Foreign direct investment is coming in again from all over Asia and Europe.” 2016 should be the year Arizona regains its economic energy, says George Hammond, director of the Economic Business and Research Center at University of Arizona’s Eller College of Management. Dr. Hammond forecasts

job creation will inch past the national average this year and continue rising through 2020. Notorious in past years for aggressive recruitment policies targeting California companies over the state line, the Grand Canyon state seems poised to resume those efforts. “Arizona is the place companies come to scale up,” says Chris Camacho, CEO of Greater Phoenix Economic Council. “A company of 20 people in San Francisco can afford to be a company of 200 people in Phoenix.” Arizona added jobs faster than the national average in the 12-month period between September 2014 and September 2015: 2.3 percent compared with 1.9 percent. Greater Prescott paced state job expansion with a 3.4 percent rate during that period, followed by Greater Phoenix (2.5 percent) and metro Tucson (1.4 percent). The closely watched construction sector reversed recent contractions, enough to grow slightly last year. Software looks to be the biggest gainer long-term; Camacho projects 40 percent growth over the next 10 years. Business leaders point to Apple’s $2.2 billion new data center going up in Mesa as another turnaround sign.

OKLAHOMA | #16 | GROWTH SOONER OR LATER The plunge in energy prices hit Oklahoma hard. Oil prices dropped nearly

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in half while statewide drilling activity shrunk at a similar pace. Mining “has an outsize effect on our statewide economy,” observes Monty Evans, senior economist at the Oklahoma Employment Security Commission; about one in four jobs are energy-dependent. The downturn affects how government provides services; Evans worries that “we may well be looking at a $1 billion budget shortfall” in 2016. The bright side is diversification. The Sooner State “has achieved real economic diversity” in recent years, says consultant Angelou. “It’s attracting more technology and R&D companies.” Still, Oklahoma struggles to regain peak employment. After registering a 5.35 percent employment hike in 2013, that figure dropped to 4.49 percent in 2014 and could inch up to 4.59 percent this year, forecasts Oklahoma State University economist Dan Rickman. While acknowledging that oil and gas prices won’t rise anytime soon, Evans nevertheless forecasts that Oklahoma’s real gross state product will grow 3.1 percent in 2016. Employers worry that Oklahoma’s aging workforce could thwart expansion. Education’s a concern too. In Tulsa, the regional chamber continues to press the legislature to address the teacher shortage. Manufacturing, once a state strength, continues to decline. Over the last year, Oklahoma’s manufacturing cluster has shrunk by more than 8,000 manufacturing jobs, nearly 6 percent of its total. According to Ernie Goss, director of Creighton University’s Economic Forecasting Group, the cluster will shrink further in Q1 2016. Oklahoma City, the state’s major business center, “continues to enjoy the fruits of economic geography as economic activity concentrates along the I-35 corridor megalopolis,” writes Russell Evans, executive director of the Steven C. Agee Economic Research and Policy Institute at Oklahoma City University. Major expansions and

ECONOMIC DEVELOPMENT

relocations include Boeing’s 290,000 square foot plant in Oklahoma City and Petra Industries’ 275,000 square foot facility in Edmund. Site selector Foote calls the overall Oklahoma business environment “one of the finest business climates in the country.” He also likes its tax credits, certified real estate sites, incentive programs and welcoming attitude. “Oklahoma is saying, ‘We want you to come here,’” he says. Logistics are advantageous. As Bill Luttrell, senior locations strategist with Werner Global Logistics, puts it: “It doesn’t hurt to have I-35 and I-40 coming through your state.” Economic development policies also please. Luttrell says, “Oklahoma is a state that’s on the forefront of making things happen.”

ARKANSAS | #33 | SLOW AND STEADY Arkansas’s fitful recovery from the Great Recession continues. The Natural State will experience slow, steady growth in 2016, slower still in 2017. So goes the forecast from Michael Pakko, chief economist and state economic forecaster at the Institute for Economic Advancement at the University of Arkansas at Little Rock. He believes gross state product will increase 3.6 percent this year, up from 2.5 percent in 2015. Next year, he predicts it will fall to 2.8 percent. Pakko expects state payroll to grow 1.3 percent this year, then 1.1 percent in 2017. About one-third of the job growth will be concentrated in the professional and business sector. Regionally, the Fayetteville-Springdale-Rogers metropolitan statistical area, encompassing Northwest Arkansas and part of southern Missouri, paces the state growth curve, expanding at over 4 percent for most of the decade. “Northwest Arkansas is smoking, it’s doing so well,” says Arkansas Chamber CEO Randy Zook. The Little Rock metro area is “doing okay,” he adds. Major announcements last year

include Southwest Steel in Newport and Aerojet Rocketdyne in Calhoun County, both expansions valued at $18 million. In 2015, ArcBest announced expansion plans for Fort Smith and Nucor announced a major expansion of its Hickman sheet steel mill. Later this year, Big River Steel will open its massive $1.5 billion plant, a much-anticipated development. Business leaders would like more from the state in terms of help with workforce development. After that? Says Zook, “Better highways. Then better tax rates.”

NEW MEXICO | #36 | OH SUSANA! New Mexico’s economy finally flexed some muscle in 2015. Could the reason be a more business-friendly climate? Under Gov. Susana Martinez, the state has cut taxes 24 times, reduced its business tax rate by 22 percent, curbed practices derided as “tax pyramiding” and instituted a single-sales factor for manufacturers. These and new, more generous incentive policies, such as expanding discretionary funds to lure migratory executives, have won over business owners, says Minda McGonagle, lobbyist and state director for the National Federation of Independent Businesses. Still, New Mexico—one of the most federally-dependent states in the union—continues to lag its neighbors in productivity and job creation. The Great Recession hit New Mexico hard; the state won’t return to 2006 peak employment until later this year. The legislature’s last economic forecast in September projects modest revenue growth through 2020. The economy remains rooted in its Big Three: Government, Oil and Gas, and Tourism. Federal spending supports the National Laboratories at Los Alamos and Albuquerque, as well as three Air Force bases. All have outsized footprints in the local economy. Business leaders have helped launch a series of state and local programs designed to commercialize R&D from the government labs;

results remain mixed. Private-sector expansion is paced by the healthcare industry, which accounted for more than half the new jobs created last year. Recent New Mexico job growth is fairly broad-based: eight industries added jobs and five posted losses. Manufacturing growth was flat last year. The mining sector—mainly oil and gas jobs—contracted. The economy’s bright spot is global trade. In 2014, New Mexico exports rose 39 percent in value, a pace export advocates expect will continue through 2015. New Mexico’s merchandise exports totaled $3.8 billion in 2014, supported with rising cross-border trade. Union Pacific’s new $500 billion intermodal hub in Santa Teresa has spurred a trade boom, largely involving products originating elsewhere and heading to Mexico. And vice versa. “New Mexico is a remote, lower-cost state,” observes Werner Global Logistics’ Luttrell. He notes that location in New Mexico brings access to two Tier 1 railroad intermodal sites and a strong interstate highway grid. “Depending on your supplier base, it can be advantageous to invest there.” Albuquerque continues putting the Great Recession behind it. The city and environs lost about 7 percent of jobs in 2008, a loss not expected to be recouped until 2019. Construction, though, has improved and once again drives growth. Most new jobs are in healthcare, which accounts for one out of six metro jobs. Major wins across the state include MCS Industries’ $11.1 million investment in Santa Teresa and Convergys’s upgrade in Rio Grande, creating 250 jobs. New Mexico has always attracted entrepreneurs and visionaries, says Gary Oppedahl, Albuquerque economic development director and former serial entrepreneur. “Here’s where Smokey the Bear, breakfast burritos and the atomic bomb were invented,” he says. “Big skies help people dream big.”

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CEO ROUNDTABLE

BUILDING LEADERS WHO BUILD THE FUTURE: ALIGNING TALENT STRATEGIES WITH BUSINESS GOALS By Jennifer Pellet

What are the aspects of the cultural traits or characteristics that your organization may have that make people proud and want to go above and beyond?”

—RUTGER VON POST PRINCIPAL, STRATEGY&

WE HEAR IT again and again: People are a company’s most important asset. Even the most brilliant, well-thoughtout competitive strategy simply won’t come off without the right people in the right places to make it happen. That simple truth is at the heart of one of the most elusive goals CEOs face today: aligning talent management strategies with strategic initiatives. It’s a challenge increasingly evident to today’s business leaders. In fact, according to a recent PwC study, only 12 percent of senior executives feel that their businesses and human resource leaders are both aligned in terms of recognizing talent as a strategic

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differentiator and have aligned talent practices with their business strategies. “The level of concern that CEOs reported about the ability to have the right talent in their companies to be able to further grow was at an all-time high in 2015,” Jeff Hesse, who leads PwC’s U.S. Human Capital Consulting Practice, told CEOs gathered for a recent roundtable discussion sponsored by PwC. While recruiting and retaining top performers has long been a competitive imperative for companies, trends like globalization and urbanization are intensifying the challenge for business leaders, who increasingly face a

dearth of talent in the places where they most need it. As Rob Schneider, CEO of the office and hotel furniture company Kimball International put it, “A challenge we’re very much focused on is tracking talent. How can we be the employer of choice everywhere we’re located to track the best people?” Shifting demographics is another frequently mentioned factor roundtable participants cited as fueling the talent challenge. “We have a bit of a generational gap between the 65-yearold owners and the new talent—a lot of them millennials—coming in,” said Matthew Robinson, CEO of W.A. Robinson Asset Management. “I’d really like to know how to bridge that gap.” With millennials making up an increasing portion of the workforce (See sidebar, “Managing Millennials,” below), many business leaders expressed similar concerns about attracting, retaining and developing young talent. “Our challenge is building the next generation of leadership,” asserted

Ken Bram, president of the valve manufacturing company Ausco. “At 50, I’m the youngest on the leadership team.” In grappling with all of these disparate forces that affect efforts around talent management, companies can easily lose sight of the big-picture goal of aligning talent strategies with corporate strategy—particularly if human resources is shunted off to the side. “Giving the chief of human resources a seat at the management-team table is probably the most important thing,” said Hesse, who noted that senior-level support is critical to alignment. Corporate culture plays a huge role in that alignment—or the lack thereof. Screening applicants for a good cultural fit can be just as critical as ensuring that they have the skills for the job. At Reell Precision Manufacturing, HR VP Shari Erdman addresses that need with a focus on “mission-driven” hiring. “We fit first to culture, then to position,” she explained. “We do cross-functional team interviews as

Managing Millennials AS MANY BUSINESS LEADERS are all too aware, 2015 marked the first year that millennials surpassed preceding generations to make up the largest part of the U.S. workforce. Despite their increasing prevalence within corporate ranks, the nation’s youngest workers remain something of a mystery to employers— which makes recruiting and retention all the more challenging. “For me, it’s all about increasing retention,” noted Azura Memory Care CEO Josh McClellan. “About 45 percent of our team members are millennials, so we need to find out what make them tick.” The good news? There are steps that companies can take to appeal to the nation’s newest and now largest generation of workers. PwC, which is now a year into an organization-wide talent transformation effort, found that offering up-to-date technology experience was

important to its youngest employees. “Things like having a modern technology experience are important to the millennial generation,” noted PwC’s Jeff Hesse. “It used to be that corporations had the best technology you could find; but now people often have better technology at home than at work.” Millennials also expect real-time feedback rather than annual performance reviews, which is actually a plus for the companies that provide it. “If the only feedback that a sports team gets is at the end of the season, it’s probably not going to be a very good sports team,” noted Hesse, who reports that the company’s efforts have been fruitful. “Our retention is the best it’s ever been and, most recently, we were named the No. 2 ‘employer brand of choice’ by millennials, coming in just behind Google—not bad for a stodgy old accounting firm.”

well, but to pass through the HR gate, candidates must first be culturally aligned—we have to see the passion for our culture, our values and our purpose. We’ve had great success with that approach.” Erdman looks for interviewees who are passionate about what they do, “not just passing the interview test.” What’s more, the company’s screening and alignment effort continues through the onboarding process, with new-hire and quality-of-hire surveys conducted after 30 days. “We survey the employee, the coworker and the hiring manager to see if we’re getting the cultural fit that we thought we had at the time of hire,” she explained. Reell also promotes alignment within the company by “storytelling” or sharing the stories of employees who have taken action to uphold its values. “When someone takes the initiative to stop a production line because of a quality issue, gives up their time to help a coworker or gets promoted, we try to put those stories out there to demonstrate and support our culture,” she said. Getting out in front of the hiring effort also pays off mightily in ensuring a good cultural fit. At Greenheck Group, proactive measures to build relationships with schools and to develop talent internally have helped ensure a good cultural fit, which is then strengthened as new hires move up through the ranks. “We focus a lot of attention on bringing people in out of the campuses, building really strong relationships with the schools and then doing the training to develop those people,” said Kathy Drengler, the manufacturing company’s VP of HR. “Seventy-five percent of our promotions are from within. Once you get there, the culture part is embedded.” Hesse describes that effort as building a talent brand and points out that most companies think nothing of investing resources in promoting a brand to consumers but fail to do the same to prospective hires. “Organi-

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zations that really make a priority of their talent brand, that foster relationships on campuses and come up with creative benefit packages can attract the type of people they want.” However, building and maintaining a culture of alignment may become even more challenging as an increasing number of workers become part of America’s on-demand workforce— self–employed workers who step in and out of roles once held by staffers on an as-needed basis. Some studies predict that such workers will comprise as much as 30 percent of the U.S. workforce by 2020. This, in turn, will fundamentally change the traditional employer-employee contract—and impact corporate culture. “It will be interesting to see how companies maintain their culture when a third of the workforce is made up of independent contractors,” said Azura Living CEO Joshua McClellan, who points out that many of the healthcare industry’s home health aides are independent operators on the rosters of two or three different agencies. “It’s a challenge.” The ability to cope with intermittent influxes and outflows of workers may well become a differentiator for such companies, with those able to put workers through a bootcamp training to swiftly bring them up to speed gaining a competitive edge. In the meantime, however, culture rarely receives the attention leaders claim that it warrants. In PwC’s CEO survey, 75 percent of respondents reported that culture is as important or more important than strategy to a company’s success. Yet, less than 50 percent felt that it was an item on management’s agenda or that the organization was capably and proactively managing it. Why the disconnect? Even companies that recognize the critical role culture plays in aligning talent strategies with business goals and the importance of that alignment lose sight of this big-picture goal in the day-to-day effort

to manage a growing business. It’s also a lot harder to shape or do something about, noted Rutger von Post, a principal in the Strategy& People and Organization Strategy Practice, who defines culture as an organization’s self-perpetuating pattern of behaviors, thoughts, feelings, mindsets and beliefs and suggests identifying and leveraging those patterns. “No culture is all good or all bad—every culture has strengths and weaknesses,” he explained. “So one can pinpoint the things that make an organization special, the plus column of the culture. What are the aspects of the cultural traits or characteristics that your organization may have that make people proud and want to go above and beyond?”

At companies like Southwest Airlines, culture is embedded throughout the entire talent management process. Employees identify with the company’s commitment to the customer experience and their own roles in fulfilling that commitment. That culture is so deeply embedded that it now self-perpetuates—which is ultimately the holy grail of a corporate culture that aligns talent and corporate strategy, noted Amy Ross, CEO of HumanKind HR. “At companies that do it really well, culture is embedded throughout the entire talent-management process,” she said. “It’s how they bring people through the door, it’s reinforced through performance management and it’s how they develop leaders.”

CEO Roundtable Participants ■ JAY ALTHOF President, Unison Comfort Technologies ■ RICHARD AVERITT CEO, Digital ReLab ■ LEORA BAUMGARTEN VP of Operations, NewHire ■ KENNETH BRAM President, Ausco ■ WILLIAM CHRISTOPHER VP of Research, Uline ■ WAYNE COOPER Chairman, Chief Executive Group ■ JAMES DEITCH CEO, Teraverde Management Advisors ■ PAUL DETWILER III President, New Enterprise Stone & Lime ■ KATHY DRENGLER VP of HR, Greenheck Group ■ SHARI ERDMAN VP of HR, Reell Precision Manufacturing

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■ JUNE GALE VP, ALM ■ RANDY GIER CEO, Rave Restaurant Group ■ PEERY HELDRETH Chief Relationship Officer, Farm Credit of the Virginias ■ JEFF HESSE Principal, PwC ■ TONYA HUBBARTT HR Director, FONA International ■ WILLIAM LEE President & CEO, The Lee Company ■ JOSHUA MCCLELLAN President & CEO, Azura Memory Care ■ JEFF MCCUTCHEON Managing Director, Board Advisory

■ MICHAEL O’CONNOR VP of HR, Lewis Tree Service ■ RUTGER VON POST Principal, Strategy& ■ MATTHEW ROBINSON CEO, W.A. Robinson Asset Management ■ AMY ROSS CEO, HumanKind HR ■ ROBERT SCHNEIDER Chairman & CEO, Kimball International ■ J. SEROKY President, High Concrete Group ■ JAY SHAFER CEO, a la mode ■ KATHLEEN QUINN VOTAW CEO, TalenTrust ■ GRAHAM WESTON Chairman, Rackspace

CEO ROUNDTABLE

HOW AGILE ARE YOU WHEN IT COMES TO TALENT? By C.J. Prince CEOS KNOW THEY NEED to keep their companies nimble, able to anticipate and quickly adapt to change, and to pivot in response to industry shifts without having to rebuild culture from scratch. But the talent you need tomorrow won’t necessarily be what you need today. To thrive in the fast-paced digital age, organizations need to assemble a nimble workforce of talented learners who can grow with the company’s needs, agreed CEOs gathered at a roundtable sponsored by Cisco Services called “How Agile Are You When It Comes to Talent?” The continuously changing nature and diversity of skills needed means organizations must empower their workforces with knowledge and flexibility, as well as arm them with the digital tools and technology necessary to access that knowledge any time, any place.

Seeking Skills The first step is having the right people. “You can’t have an innovative agenda, an agenda to collaborate, co-create or any of that, without having the right kind of talent,” said Jeanne Beliveau-Dunn, vice president and general manager of business enablement and strategy at Cisco Services. But the way companies are finding that talent is changing. “A lot of organizations hire to a resumé. That’s not working anymore. You can’t find the kind of skills you’re looking for,” she said. “The skills gap is real. It’s in the tens of millions and, depending on your industry, you have to think more creatively about finding that talent and

You can’t have an innovative agenda without having the right kind of talent.” —JEANNE BELIVEAU-DUNN, VP AND GM OF BUSINESS ENABLEMENT AND STRATEGY, CISCO

developing it with a learning-based culture.” Chuck Smith, president of NewHire, pointed out that companies do need to try to find the “jigsaw puzzle pieces” to fill in their skills gaps, but they also need to be able to hire entry-level talent that can be trained and brought up in the organization to fill future gaps. “The question is, how do you balance those two things when you’re a smaller company?” Smith asked. It’s important to do both, even as a small company, said Beliveau-Dunn. “We see most organi-

zations are successful when they do some strategic buys, but do a lot of build. It’s sort of like the ‘80 percent build-20 percent buy’ strategy.” On the build side, companies are employing new ways to deepen employee perspective and help them grow. BRR Architecture, for example, shifts individuals from studio to studio, said Joan Redhair, vice president. “That way, they get a more well-rounded approach or view of our business.” Enzen Global Limited’s strategy is to take experienced people who have spent 25 or 30 years in the energy sector and blend them with recent graduates who are well versed in social media and have a different way of viewing things, noted Kutty

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Prabakaran, managing director. “When you blend them, you get unique thinking and that makes a big difference.” The company also moves employees around “to recycle people,” which not only develops high potentials, but keeps top talent engaged, challenged and passionate about coming to work, he said.

Tools for a New Age Cisco has reinvented itself as a company at least five times, said Beliveau-Dunn, in part owing to having created a collaborative learning environment in which people are given information about and access to other employees who may be able to help them do their jobs better. “We have this ability to connect people to others on the fly,” said Beliveau-Dunn. “By providing vehicles to collaborate, co-create and innovate together over digital or mobile platforms, we’ve been able to really change the paradigm.” Cisco can, for example, easily “rescale” talent, or move players around into projects where they can be most useful and connect them to groups that need

their skills. “Rescaling is something that happens 80 percent of the day,” she added. That agility allows the company to make strategic adjustments as needed and to co-innovate with partners and customers to outpace the competition. “In the days of such change, it’s really going to come down to the company that plays the best team sport of innovation winning—particularly if you can take that innovation and clear a path towards execution,” asserted Beliveau-Dunn. The right technology and tools help move companies down that path. Deloitte, for example, has a knowledge repository that allows people managing projects to find colleagues who have managed similar projects successfully. By letting people drill down into the specifics of a capability area, they can find exactly the skills they need, explained Rick Harrison, national managing principal with Deloitte. “So someone might say, ‘We need some thought leadership development.’ And we have a whole service on leadership

development, so you know exactly where to go for that.” Companies are then making it easier for employees to communicate in virtual communities via chat and other open-communication technology. Once available only to deep-pocketed players, these tools can now be purchased off the shelf— or in the cloud—at a fraction of what they once cost. Scott Kinnaird, executive chairman of a la mode, pointed to inexpensive communication and productivity software such as Slack that allow workers to connect virtually but feel as though they’re in the same room. “The tools that are built into Slack enable you to just type in ‘#groupmeeting,’ and then, suddenly, Google Hangout will fire up within the app. So you’re talking to people face-to-face.” Mark Shlanta, CEO of SDN Communications, pointed out that not every geographic region is ready for newer methods of communication. SDN Communications employs 180 people, drawn from a talent pool made up primarily of South Dakota rural communities with populations of fewer than 2,000. “So when you start doing something like chat, they’re like, ‘Wow. How do you use that in the organization?’” said Shlanta. “So you have to kind of wade into these things a little bit differently.” Small communities within organizations can also be developed in a high-touch way, said Greg Clark, chief marketing officer of Caliber Collision, which has 325 locations around the U.S. and conducts weekly team engagement meetings where employees engage in team-building exercises and games. “We challenge everybody in the organization to come up with fun ways for people to just be people,” he said. “So that’s Deloitte’s Rick Harrison urged CEOs to consider “knowledge repositories” that enable project managers to identify and consult with experienced colleagues.

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why I’m really interested in the low-touch side of it, because you can accomplish the same thing and do it across the whole enterprise instead of on an individual center-by-center basis.”

Making Room for Millennials Shlanta noted that all companies have to think about how to create a culture to attract the next generation of talent, because as the baby boomers retire, the skills gap widens. “We have to import the talent. We aren’t growing it. We grow a lot of things, but we don’t grow the talent.” Ky Hornbaker, principal of United Excel, expressed a similar concern about his company, which operates fairly traditionally and may need to adopt new work systems to prepare for the future. “Collaboration is underutilized in our company,” said Hornbaker. “We come from a very traditional industry. We’re builders and designers. This idea of collaboration, to me, is so essential to the younger folks that we’re bringing into the organization. They demand it. So I’m sitting here thinking, as an older guy, that this is something we have to consider and get a team of people on board to implement it, because just the implementation of the tool to collaborate is a big deal.” To be sure, those companies that want to attract millennials must create an environment that supports them, said Beliveau-Dunn. “That means open, honest communications. It means having vehicles where they can communicate to you and tell you what’s on their mind and what they need from you, and likewise, with your customers and partners. That’s what they’re looking for.” Attendees discussed the use of crowdsourcing games and polling tools to engage employees—particularly millennials—and to solicit innovative thinking. Of Woodforest

National Bank’s 5,000 employees, 3,000 are millennials, noted Julie Mayrant, president of the bank’s retail division. “All of this gaming is sort of an expectation,” she said. “So that’s where we’re challenged to try and incorporate some of these tools while still running our business… [but] it’s less about gaming and more about creating environments for connection.” Small and midsize companies have the advantage in creating that environment, said Beliveau-Dunn. “A lot of the younger generation likes to work, actually, in smaller organizations that they connect with. So being small

shouldn’t be a problem in hiring. It should actually be a benefit in hiring, if you can figure out a way to connect your mission to the people and hire the right kind of people.” Millennials want to work in a place where they have more opportunity to engage, to drive their own impact and to learn. So while it’s challenging to compete with employers with well-known brands, when it comes to talent, smaller enterprises can use their size to their advantage. And whatever your size, the key to success is to get people working together. “Innovation,” she said, “is a team sport.”

CEO Roundtable Participants ■ JEANNE BELIVEAU-DUNN Vice President, General Manager, Business Enablement and Strategy, Cisco Services ■ GREG CLARK Chief Marketing Officer, Caliber Collision Centers ■ PATRICK DEAN Director of Recruiting, ATS ■ J.P. DONLON Editor-in-Chief, Chief Executive Magazine ■ DAVID ENLOE CEO, Althea ■ MICHAEL FARMAR CEO, Horizon Ag-Products ■ KAZUHIKO FUJII President & CEO, Kaneka Americas Holding

■ RICK HARRISON National Managing Principal, Deloitte ■ HARRY HERINGTON Chairman & CEO, NIC ■ ANDY HEWITT Coastal Executive, Sunbelt Rentals ■ KY HORNBAKER Principal, United Excel ■ SCOTT KINNAIRD Executive Chairman, A La Mode ■ PRABAKARAN KUTTY Managing Director, Enzen Global Limited ■ JULIE MAYRANT President, Retail Division, Woodforest National Bank ■ ROSS MYERS CEO, Allan Myers ■ JAMES NICHIPORUK VP, Strategic Account, PEAK Tech. Staffing USA

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■ PAUL O’CARROLL Managing Director, Succession Research ■ DAN OGDEN Principal, Omnibus Consulting ■ JOAN REDHAIR Vice President, BRR Architectur ■ KATIE REZIN Director, Public Affairs, A.L.M. Holding Company ■ MARK SHLANTA CEO, SDN Communications ■ CHUCK SMITH President, NewHire ■ MICHAEL ZIMMERMAN VP, Human Resources, New Enterprise Stone & Lime Co.

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CEO ROUNDTABLE

LEADERSHIP TRANSITION: HOW TO SUCCEED AT SUCCESSION By Jennifer Pellet

Studies have shown that the amount of time it takes to place a CEO is negatively correlated with its future earnings.”

—TED BILLIES, MANAGING DIRECTOR, ALIXPARTNERS

HERE’S A GOVERNANCE TEST QUESTION to pose to your board: When should you start a CEO succession plan? Correct answer: The day a new CEO takes office. The point, of course, is that it’s never too soon to start planning for a leadership transition. As dramatic as that may sound, it’s actually a fundamental truth, one borne out by anecdotal evidence on a regular basis. Lately, changes at the helm seem to be coming fast and furious. Volkswagen, United Airlines, Twitter, Google, P&G and Ralph Lauren are among

the many high-profile CEO turnovers that made headlines in recent months. Leadership transitions like these are arguably one of the most significant events in a company’s life. Plus, the cost of a lengthy search process—or, worse yet, making a poor pick—can be severe, Ted Bililies, managing director at AlixPartners, pointed out to participants at a recent roundtable discussion sponsored by AlixPartners. “Studies have shown that the amount of time it takes to place a CEO is negatively correlated with its future earnings,” he said. “You need to think of this as

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really a risk management event in your company.” Yet, while most CEOs and board members nod sagely whenever the importance of a strong succession plan is voiced, few companies can attest to having one in place—or, in many cases, even knowing what one entails. In a recent AlixPartners survey of more than 100 senior executives, 31 percent of respondents said their companies had no CEO successors identified, while 20 percent said their firms had just one potential successor identified. Organizations that lack a pipeline

of multiple, viable candidates risk having to scramble to find a successor in a hurry—which, in turn, heightens the potential for a clumsy passing of the baton. Such was the case at Cooper Companies when its former CEO retired for medical reasons. “The transition process proved more difficult than the board would have guessed at the time, with a lengthy outsourcing engagement to look at who was available and a lot of meetings,” recounted CEO Robert Weiss, who was subjected to a rigorous 360-degree review process as part of the CEO candidate vetting effort. “I had worked hand-inhand with the CEO since the early ’90s and been on the board for most of those years, so you would have expected it to be a smooth transition.” Instead, board members struggled to reach a consensus, dragging the process out.

The Insider Advantage Determined to avoid repeating the experience, Weiss and his board immediately began planning for its next CEO succession by identifying a pool of six potential successors and focusing on filling in gaps in their experience and skill sets. “We spent energy making them as good as they could be by rounding out whatever they lacked—operations background,

marketing expertise, Wall Street exposure,” he explains, adding that he made the outside consultant who had been charged with evaluating him as a CEO candidate a member of his team. “All six [CEO candidates] have been through 360 reviews, which is a good exercise to see who really wants to rise to the occasion. I think the cream will rise to the top and it will go from six to four to two over time.” This type of process—undertaken in advance and methodically identifying and developing internal candidates— helps ensure that a company won’t remain in a lengthy leadership limbo while its board scrambles to evaluate successors. For the same reason, some companies adopt emergency succession plans that cover “what if” scenarios. Citizens Republic Bancorp, for example, had an “uh-oh envelope” when Cathleen Nash, now CEO of Woodforest National, held the bank’s corner office. “It covered ‘What if, heaven forbid, I got in a car accident and ended up in a coma or died,’ what would the board do?” she explained. “We had a whole package ready with everything from press releases to organizational charts and internal communications.” Designating successors ensured that Citizens Republic wouldn’t be

left rudderless if a crisis hit, but Nash didn’t stop there. The bank also develloped a long-term, internal succession process to nurture high-potential employees, helping them get the skills they would need to be prepared to step into leadership roles down the line. Nash is now embarking on a similar effort at Woodforest National. A focus on creating internal candidates also boosts the odds for a smooth transition, noted Bililies, who works with CEOs and corporate boards on sourcing and developing senior-level talent. “In general, you want someone coming up from the inside, unless you’ve got a very, very particular need,” he said. “There are debates around this, but the fact of the matter is there are risks with an outside hire that you don’t face with an internal promotion. We think of leadership development and succession planning as two sides of the same coin.” One of the most frequent stumbling blocks in bringing in a CEO from outside is also one of the most subtle and difficult to screen for—and that’s cultural fit. Most companies find assessing a candidate’s knowledge of the industry and skill set more straightforward than figuring out whether he or she will mesh with the organization culturally.

Which criteria are used for candidate selection? “When choosing a new CEO, which one of the following have you found to be the most important selection criteria?” (Select top three) PEOPLE LEADERSHIP SKILLS

68%

EXPERIENCE WITH SIMILAR STRATEGIC CHALLENGES

63%

VALUES ALIGNMENT WITH BOARD/OWNERS

56%

SPECIFIC INDUSTRY EXPERIENCE

38%

INTELLIGENCE

28%

YEARS OF EXPERIENCE AS A CEO

27%

SPECIFIC FUNCTIONAL EXPERIENCE OTHER

Do these match your organization’s top 3 selection criteria?

17% 5%

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The Culture Conundrum “Can you articulate the culture of the organization that you currently reside in and not just the town hall speech articulation?” asked Rob Elsey, Ph.D., a director at AlixPartners, directing the question at CEO participants. “Can you break it down to actual behaviors at every level; and if you’re sitting across from somebody as a candidate, would you know the right questions to ask to know if they, in fact, could be a good cultural fit and a cultural leader?” “I can describe the culture we have very effectively,” answered Joel Trammel, CEO of Khorus. “But in translating it to an external candidate who I don’t know well, even if I asked the right questions, I would not be [confident] that I would be able to really get to the bottom of whether or not it would be a good fit.” Vetting job candidates for a good, cultural fit is a challenge at every level, pointed out several CEOs, a few of whom shared their personal approaches. Tom Rogers, CEO of Lewis Tree Service, said the best way to get a sense of whether a candidate will fit in is to simply spend time with him or her. “It’s not unusual for me to spend anywhere from eight to 12 hours with candidates,” he said. “I’m talking about meals away from the office, time in a relaxed setting to get a sense of their personality, who they really are.” Woodforest’s Nash described an unconventional approach that she found helpful in getting past the “canned” answers that candidates often deliver. “I took out magazines and scissors and had candidates cut out pictures of dogs to describe the company that they came from and how they like to work without telling them anything about ours,” she explained. “One used a Russian Wolfhound, and I knew I didn’t want a Russian Wolfhound in with my Golden Retrievers.”

The Criteria Constellation

stellation” of selection criteria produces stronger candidates and improves the outlook for a successful leadership transition. The top three selection criteria for choosing a new CEO are people-leadership skills, experience with similar strategic challenges and having values that align with those of the board members or the company owner, according to executives who participated in a recent AlixPartners survey. (See chart, p. 67.) To evaluate candidates on these multiple fronts, Elsey generally begins with a “behavioral event” interview that essentially walks through the careers of each candidate, looking at everything from how they conducted themselves and why they left previous jobs to what they excelled

at—and where they failed. Ultimately, while there is no way to guarantee a smooth CEO transition, a rigorous assessment process can vastly improve your odds of success. “When you do that chronological walkthrough of 500 or 600 data points of someone’s career, the patterns just start to fall out,” he said. “It tells you an awful lot—but not enough. Then, you add personality and cognitive assessments. How flexible are they, how learning oriented? How decisive are they? By combining all these sources of data, along with the culture and the contextual elements, you can bring the [success] rate of a hiring decision from 50/50 to 80-90 percent. In the business of predicting human behavior, that’s a very high rate.”

CEO Roundtable Participants ■ DR. VINCE BERTRAM President & CEO, Project Lead the Way ■ TED BILILIES Chief Talent Officer, AlixPartners ■ TOM BROWN CEO, Splintek ■ MARSHALL COOPER CEO, Chief Executive Group ■ JASON DELESTER, President, Good Shepherd Hospice ■ ROB ELSEY Director, AlixPartners ■ KEN FISHER CEO, Fisher Investments ■ MAURICIO ARCQ GUZMAN CEO, QualityPost

Research suggests that using a “con66 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2016

■ JIM HEFTI VP of HR, ATS ■ STEVE HOFFA President, Cannon Safe ■ AMOS KOHN, President & CEO, Digital Power ■ CATHY NASH President & CEO, Woodforest National Bank ■ ANGIE PINCIN Executive Coach Founder, Coach People ■ TIM REILLY VP of HR, Benchmark Senior Living ■ TOM ROGERS President & CEO, Lewis Tree Service

■ BILL ROHR VP of HR, Flexfab ■ JOEL TRAMMELL CEO, Khorus ■ STEVE SWIONTEK Chairman & CEO, Gate City Bank ■ ROBERT WEISS President & CEO, Cooper Companies ■ RAMESH S. V. Plant Manager, Nemak ■ RON WILDER CEO, Aligned Action ■ JEFF WOLFF President, Anchor Packaging ■ RICHARD ZUSCHLAG Chairman & CEO, Acadian Companies

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EXECUTIVE LIFE

Making the Most of Mobile Gadgets

If you’re like most CEOs navigating today’s global economy, you probably spend a good deal of time on the go. Whether you enjoy the road-warrior lifestyle or think of it as a necessary evil, having the right gear to keep you efficient, effective and comfortable can only smooth your travels— and improve your mood. With that in mind, we’ve assembled a list of gadgets—some purely practical, others slightly more focused on R&R— to keep you moving in the right direction. By Michael Gelfand

Camper Couture THE BOWLUS ROAD CHIEF may look like the riveted Airliner of yore, but one peek inside will tell you this is definitely not your father’s camper. Originally designed in 1934 by Hawley Bowlus, who built the famous Spirit of St. Louis plane, the revised Road Chief (starting at $110,000) delivers extra space and everything you need to hit the road in comfort, style and connectivity. Beyond the undeniable allure of its gleaming aluminum skin, it boasts a high-end kitchen with stainless steel countertops, air conditioning, insulated walls and fully heated floors, a 3’ x 5’ bathroom with a shower, twin beds that convert to a king-size bed and a 10-foot-wide Sunbrella awning that can be set up on either side of the exterior. There’s also a charging station for mobile devices and a 4G cellular booster if you simply can’t go off the grid. Weighing in at 2,300 pounds, the Road Chief claims to be 1.5 tons lighter than its closest competition, meaning you can easily tow it with just about any vehicle equipped with a Class 2 or greater hitch. www.bowlusroadchief.com

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There’s also a charging station for mobile devices and a 4G cellular booster if you simply can’t go off the grid.

The Keys To Portability SAY GOODBYE to clumsily working on a tiny keyboard screen. Logitech’s Keys-To-Go portable keyboard provides a convenient and ergonomically satisfying solution for iOS ($50) and Android ($65) devices. It comes in a range of colors, is spill-resistant and is equipped with familiar-feeling, full-size mechanical keys both quiet to the touch and easier to use than the typical touchpad keyboard. The Keys-To-Go connects to your device via Bluetooth—no extra connectors or adaptors necessary. It also has a rechargeable battery that delivers up to 180 hours of life between charges. www.logitech.com

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Saved By... Your Luggage Tag Device Charger

EVER FOUND YOURSELF in need of service in a poorly connected area of the country or world? Enter the five-in-one MobileLite Wireless G2 ($35). It stores enough juice to top off your smartphone twice and can provide up to 2TB of additional storage for your mobile devices using your existing flash drives, SD cards and micro SDs. Additionally, the MobileLite is equipped for multi-user portable media streaming, offers fullblown media reading capability and can serve as a Wi-Fi hotspot. www.kingston.com

SURE, YOU CAN WATCH MOVIES, listen to music and even conduct business using your smartphone during a long flight, but all that time efficiency and convenience can quickly come back to haunt you when you discover that you’ve drained the device of all its power and your car service is missing in action. Stylishly disguised as an attachable suitcase tag, the Sulan Battery Tag ($50-$70) flips open to bring your dead smartphone back to life via a built-in micro USB cord. www.jadecodesign.com

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EXECUTIVE LIFE

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High Flier DESIGNED FOR CONTROL FREAKS who demand ultra-high definition video capability, the Phantom 3 Pro ($1,259) is arguably the best prosumer-class drone there is. It takes 12 megapixel still photos, live 720p video monitoring and ultra-high definition video (4K/30 fps). Thanks to a GPS+GLONASS Dual Positioning module, the Phantom 3 Pro maintains accurate positioning even when GPS satellite signals are weak. Ultrasonic sensors help it maintain positioning indoors or outdoors—even when GPS isn’t available. Fear not, it also has built-in safeguards to prevent crashes or loss (it will head for home even if you manage to fly it outside of its operable range). www.dji.com/product/phantom-3

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FLIP SIDE

Don’t Sink to Their Level Joe Queenan

However you look at it, ‘Atlantis’ is upscale and bohemian and just basically fabulous. Think of it as a sub-aquatic Brooklyn.

GIVING A NAME TO A STARTUP is a vexing problem. Will Facebook fly? How about Whole Foods? Is Chipotle a catchy name for a Mexican eatery? What about Dick’s Sporting Goods? Or, for that matter, Starbucks? Recently, while motoring down the East Coast, I spotted an ad for “Atlantis Homes of Dover, Delaware.” A Google search revealed that the firm builds modular homes. Atlantis is the mythical, utopian society located somewhere off the coast of Greece— but possibly as far away as the Atlantic Ocean. In Greek mythology, it is thought to be the home of the god Poseidon. Plato describes it as a warlike society that angered the gods by attacking Athens, but most renderings depict it as an island where poets, philosophers, scientists and artists happily prospered until an earthquake struck and the society vanished beneath the waters of the Mediterranean. Or the Atlantic. Or the Red Sea. Or somewhere. The popular ’60s pop star Donovan wrote a song about the fated island community, whose haunting refrain runs: “Way down below the ocean, That’s where I want to be, she may be.” However you look at it, “Atlantis” is upscale and bohemian and just basically fabulous. Think of it as a sub-aquatic Brooklyn. This presents a problem for a company that makes pre-fab homes. “Atlantis” is a mythical, highly evocative name. It conjures up an aura of mystery. It may suit the luxury homes and resorts down in the Caribbean, but it doesn’t sound like anything you would find in Dover, Delaware—much less Pocomoke City, Maryland, site of another Atlantis home manufacturer.

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What’s more, because Atlantis disappeared due to an ecological disaster, it might not be such a good name for a homebuilder. It could give prospective customers the wrong idea—that the structures are affordable but doomed. To be perfectly honest, philosophers and poets have rarely lived in pre-fabs. It’s simply not the way they roll. In Sleepy Hollow, New York, the village that adjoins the hamlet of Tarrytown, where I have lived for the last 32 years, there is an upscale riverside development called “Ichabod’s Landing.” It is very classy and fairly expensive. It is named after Ichabod Crane, the goofy dork in The Legend of Sleepy Hollow who gets run out of town by a pumpkin-tossing headless horseman. The horseman is almost certainly Bram Bones, Crane’s rival for the hand of the lovely Katrina Van Tassel. Thus, Ichabod’s Landing is named after the doofus who doesn’t get the girl. Hmm. I have always been fascinated by products named after things that did not turn out well, or after people whose lives turned out badly. The Waterloo 6-Drawer Tool Box. Caesar’s Salad. Custard’s Last Stand. Aetna Insurance. Capone Photography. Even Godiva Chocolates. The names are certainly catchy, to the point that other businesses might take their lead from such innovators. Consider Icarus Airlines, Donner Party Steakhouses or Lizzie Borden Homes for Active Seniors. There are many other companies that could easily adopt a name with the hope of projecting a classy, upscale image, never realizing that the name may be hopelessly inappropriate like Scarves by Isadora, Ludwig’s Hearing Aids or Samson for Optics. Midas is a good name for a muffler company, but a bad name for a retail bank. For best results, stick with something catchy but somewhat noncommittal. Microsoft. Apple. Mitsubishi. 3M. Ford. But not Edsel.

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How to ace the naming game. By Joe Queenan

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