Jan Feb 2015 issue

Best Companies CEO2CEO Highlights for Leaders How top firms nurture talent, p. 36

Insights on pursuing growth in tough times, p. 52

Top Tech Trends

Seven innovations you need to understand, p. 48

Finding the ROI on ERP How cloud computing changes the game, p. 42

JANUARY/FEBRUARY 2015

LES WEXNER

L BRANDS CEO The Thoughtful Entrepreneur

CONTENTS

January/February 2015 No. 274

FEATURES 28 Cover Story

The Man Who Changed How America Shops Leslie Wexner, founder and CEO of L Brands, has an acute ability to understand customers and consumer fashion goods. More importantly, he can put this understanding into action. By J.P. Donlon

28

36 Best Companies for Leaders GE Returns to the Top... Again

What do the best companies at leadership do to nurture talent?

By Ken Carroll & J.P. Donlon

42 Information Technology How to Bite the ERP Bullet

CEOs need to merge their disparate IT systems to keep growing—but must do so carefully. The cloud can help.

By Bill Holstein

48 Technology Trends

Seven Technologies that Will Change Your Business Which technologies, applications and products will most impact our lives—and businesses—in 2015?

By Warren Strugatch

42

52 CEO2CEO Summit

Growing Your Business in Tough Times

CEOs share perspectives on driving innovation.

Plus: Insights from 2015 Lifetime Achievement Award winner—Dow’s Andrew Liveris.

By Jennifer Pellet

56 CEO Free Speech

The Real Cost of Free Speech Have CEOs essentially lost their first amendment rights?

By Cheryl Einhorn

60 Economic Development

Regional Report: The Southwest

In the Southwest, Texas is the Leader. Hands Down.

By Warren Strugatch

56

COVER PHOTOGRAPH BY JONATHAN ROBERT WILLIS

JANUARY/FEBRUARY 2015

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CONTENTS

January/February 2015 No. 274

DEPARTMENTS 06 Editor’s Note On Character

By J.P. Donlon

26 Sonnenfeld Signposts

A new, regular column by Yale’s Professor Jeffrey Sonnenfeld looks at why a scorched earth approach to advocating shareholder interests isn’t good for anybody.

08 Feedback 10 CEO Watch Mike George’s digital journey at QVC • DBV’s Pierre-Henri Benhamou on marketing innovation • POV: SAP’s Bill McDermott looks to maintain an edge

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20 CEO Confidence

Optimism Bouncing Back

Weatherman Collects Tools of the Trade Continuing Chief Executive’s series on leaders with notable collections, meet Joel Myers, owner of 6,300 weather instruments.

By George Nicholas

68 Executive Life The Magic Touch

22 Mid-Market Report Perfecting Performance Management

Few mid-market companies feel their employee-development efforts are up to snuff.

By Jennifer Pellet

24 Making

Technology Work How to Survive the “Customer Apocalypse” Solutions are designed, developed and changed in a collaborative and agile environment.

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By Jeffrey Sonnenfeld

66 CEO Passions

18 Chief Concern

Pope Francis: A Transformational CEO

By Dr. Thomas J. Saporito

Activism Inside Out

Concierge services bring executivelevel assistance to your personal endeavors.

By Michael Gelfand

71 Flip Side

Absence Might Make the Heart Grow Fonder

Maybe it’s time to give politicking a pause.

By Joe Queenan

72 Final Word

State Subsidies Grow More Common and Costly

By Alan Trefler

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 274, January/February 2015. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306.

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Finding The Needle in the Haystack is Just The First Step The Mid-Market Talent Experts Executive Recruiting

Talent Development

Employer Branding

Succession Planning

Assessment

Compensation

ransfordtalent.com

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CONTENTS

EXCLUSIVELY ONLINE NOW 6 Key Congressional Changes That Will Affect Your Business Many CEOs and company owners were among the voters and political contributors who fueled the Republicans’ success on November 4 in reclaiming the U.S. Senate. The election padded the party’s majority in the House of Representatives and successfully defended some key governorships, while also adding blue-state victories in Illinois, Massachusetts and Maryland.

WWW.CHIEFEXECUTIVE.NET/JFTOC2

Unleashing High-Potential Talent in Your Organization High-potential talent is a critical business differentiator in the human age.

Organizations that successfully identify, develop and maintain a steady stream of “ready now” leaders gain measurable financial performance advantages over their peers.

WWW.CHIEFEXECUTIVE.NET/NDTOC3

Managing Disaster Risk: Five Behaviors to Overcome Disaster planning typically only makes the top-five list after something has happened. Understanding our predispositions, however, may help us correct problem behaviors.

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Thinking Small: Lessons Big Businesses Can Learn from Startups If your company’s success has started to plateau or you suspect you’re starting to rest on your laurels, Craig Malloy’s advice is simple: Think small. Re-learn the lessons of your early entrepreneurial days to avoid falling into a rut of complacency.

Private-Company CEOs’ Cash Compensation Up 24 Percent, on Average Private-sector-company CEOs saw their cash compensation jump 24 percent in fiscal 2013 compared to the previous year, to a total—including salary and bonuses—of $662,404, according to Chief Executive Research’s “CEO & Senior Executive Compensation Report for Private Companies 2014-2015.”

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In-house R&D vs. Outsourcing— Making the Right ProductDevelopment Decision Manufacturers constantly look for new technologies to improve processes, cut costs and expand the breadth and depth of products they provide to customers.

But how do you decide on the best way to get access to the needed technology?

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EDITOR’S NOTE

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer

On Character IN HIS RECENTLY PUBLISHED BOOK Character: The Ultimate Success

Factor, Jack Phillip London, the former CEO of CACI International, a $3.8 billion technology and professional services company, argues that there is really one thing that guarantees success: character. Among the clever elements in his book is a reference to the first-century sculpture, the Bocca della Verita, located in the church of Santa Maria in Cosmedin in Rome. A legend in the Middle Ages said that if a person told a lie with his or her hand in the mouth of the sculpture, it would be bitten off. It’s unknown if anyone fell victim to the Bocca, but it would be nice if Rome would lend the sculpture to our nation’s capital just to torment our politicians with a dare.

Consider the remarks that MIT economist, healthcare advisor and architect of Obamacare (and Romneycare) Jonathan Gruber made about the passage of the Affordable Care Act. On numerous videotaped occasions he said it couldn’t have happened without deception and reliance upon “the stupidity of the American voter.” Such remarks are breathtaking in their candor and arrogance because, as we all recognize, elite progressives know what’s best for the average citizens, even if they do not realize it themselves.

What’s farcical, however, are the denials by the president and Nancy Pelosi that Gruber didn’t really do much to shape Obamacare. This, despite the numerous video-recorded press conferences from 2010 onwards, which both cited Gruber by name as the uber-expert intellectual upon whose insights they relied and whose convoluted construction for the law they followed. It reminds one of Groucho Marx’s famous line,

“Who are you going to believe, me or your lying eyes?”

So it is refreshing to meet someone whose character is genuine and steadfast, such as Les Wexner, the subject of this issue’s cover story. In an era when the media represents business leaders as variants of Bernie Madoff or Jeff Skilling, it’s a relief to encounter a modest entrepreneur, who started his first store in 1963 with a $5,000 loan from his aunt, and is pretty much the same fellow who Forbes ranks as the 80th richest man in the world today. In defining leadership, author London quotes former Chief of Naval Operations Admiral Arleigh A. Burke, who said it’s about “understanding people and involving them to help you do a job.”

Regard for his associates is a cornerstone of Wexner’s success. He tells the story of the first time he had an office building built for his company. He was asked if he wanted a rear entrance for the employees. “Certainly not,” he replied.

“Everybody should come and go through the front door. I was told that was crazy— that distribution and maintenance people, etc., would be coming into the same entrance as executives and bankers.

And I said, “Yeah. In human terms, we’re all the same. If you have a different job, why wouldn’t you go in the front vs. the back door?”

Perhaps it is also revealing about Wexner’s character that he draws much personal inspiration from the life and career of George Washington, who began his career as a humble surveyor with no formal education. The Virginian had many challenges and responsibilities, as well as some notable reverses in life, but he was steadfast in his character, taking counsel from his core values and faith.

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Graphic Designer Rob Cassella Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi Contributing Editors Cheryl Strauss Einhorn Michael Gelfand William J. Holstein George Nicholas C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld Warren Strugatch Alan Trefler Online Editor Lynn Russo Whylly 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

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

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Wayne Cooper Chairman & President

Marshall Cooper Chief Executive

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

With our climate, business grows year round in Florida.

vering Florida’s Corporate leaders all over the world are disco (the 4th largest GDP n ourishing business climate. $800+ billio t and 0% personal in the U.S.), the #1 tax climate in the Southeas s to thrive. income tax provide a rich landscape for businesse competitive And our streamlined regulator y environment and and prepare for costs make it easy to plant your roots in Florida ct climate for business. perennial success. Consider Florida. The perfe

FEEDBACK

Power to the People Robert Bryce (July/August 2014, “Cheap Power=Prosperity”) has an exceptional ability to simply and powerfully examine energy sources in relation to their economic and environmental attributes. As Bryce describes, energy density is the key variable. In general, there is a trade-off between energy density and the size of the “footprint.”

In his book Power Hungry, Bryce notes that billions of people live in energy poverty, expending labor to gather wood and other biomass to meet their lighting and cooking needs.

To deny them the prosperity that can come from fossil fuels or nuclear energy is unconscionable. New

2015

technology has been developed that provides a path to integrate renewable energy and traditional fuels together to enhance energy security, equity and sustainability.

Bryce’s thinking is soundly based on the fundamental premise that while governments can pass laws that warp the economics of energy, no one is going to violate the laws of physics.

We need a national energy policy that’s grounded in physics. When creating energy policies, there must be a focus on applying the basics of science and engineering. To quote Mr. Bryce, just “do the math.”

Dean Oskvig President and CEO Black & Veatch’s Energy Business

TELL US WHO SHOULD BE THE 2015 CEO OF THE YEAR

Chief Executive invites you to nominate an outstanding Chief Executive who has held his/her current position for at least five years, and who has excelled in the criteria noted here: ✔ Courage

✔ Innovativeness

✔ Leadership

✔ Employee engagement, leadership development and internal people processes

✔ Vision ✔ Demonstrable impact on company, industry and business in general ✔ Sustained performance ✔ External benchmarks: customer value and shareholder value created

✔ Moral dimension, personal character (is there a coherent “higher” purpose?) ✔ CEO respect/beacon of excellence/reputation ✔ Degree of difficulty

NOMINATIONS ACCEPTED AT:

ChiefExecutive.net/CEOoftheYear2015 08 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

Chief Executive of the Year 2015 Selection Committee 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 Tamara Lundgren President and Chief Executive, Schnitzer Steel Industries Robert Nardelli Chief Executive, XLR-8 William R. Nuti Chairman and Chief Executive, NCR Thomas J. Quinlan III President and Chief Executive, RR Donnelley Jeffrey Sonnenfeld President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management Mark Weinberger Chairman and Chief Executive, EY Maggie Wilderotter Chairman and Chief Executive, Frontier Communications Solutions

C O N TACT U S Corporate Office Chief Executive Group, LLC One Sound Shore Drive, Suite 100 Greenwich, CT 06830 Phone: 203.930.2701 | Fax: 203.930.2700 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 Back Issues Back issues are $33 each. For back issue availability and additional order information, please contact us at: Phone: 203.930.2701 circulation@chiefexecutive.net Subscription Customer Service Chief Executive, P.O. Box 15306 North Hollywood, CA 91615-5306 Phone: 818.286.3119 | Fax: 800.869.0040 cexcs@magserv.com www.chiefexecutive.net

CEO WATCH / CEO PROFILE

WHO

Mike George, CEO, QVC SIZE OF COMPANY

$8.6 billion LEISURE PASTIME

Collecting political memorabilia PRIZED POSSESSION

Letter from John Quincy Adams

QVC’S MIKE GEORGE

Beyond Television

By Jennifer Pellet ONCE UPON A TIME, QVC—and oth-

er television-shopping networks—catered, seemingly, to the couch potatoes of America. Its broadcasts extolled the benefits of food choppers, cubic zirconia jewelry and the like, employing a talk-show format to entice viewers to dial in to join the conversation—and to make a purchase.

Over time, however, perceptions of QVC as a low-end retail channel have been disabused by the caliber of both its celebrity hosts and the products they hawk. For example, the network regularly features upscale offerings, including fashions from high-end designers (Isaac Mizrahi, Diane von Furstenberg), upscale cosmetics (Bobbi Brown, Clinique) and state-of-the-art kitchen tools (a $529 Vitamix).

This coupling of high-profile brands and engaging, interactive programming

has long been what distinguishes QVC from competitors, explains Mike George, CEO of QVC, which does $8.6 billion in sales annually and is a wholly owned unit of Liberty Interactive. “We have always felt that it is our mission to be the editor and the curator of great product selection,” he says. “Amazon can be the universal product catalog.

That’s not our business. Our business is to present to you these great items every day that we’ve carefully gone out and selected and curated.”

The Drive to Digital However, in recent years, that model has been morphing to accommodate what can only be described as a massive consumer shift toward digital retail platforms. During the 2013 holiday shopping season, U.S. brick-and-mortar retailers saw about

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half the foot traffic they experienced three years prior, according to ShopperTrak. Meanwhile, online retailer Amazon claimed to have had its best holiday season ever, citing 36.8 million items ordered worldwide on Cyber Monday alone.

QVC, which launched its first website in 1996, is well-positioned to continue to benefit from consumers’ migration to Internet shopping.

Already, 43 percent of its current business is on e-commerce, with mobile sales accounting for about 40 percent of e-commerce revenues. QVC’s performance against peers will be easier to track going forward thanks to a tracking stock Liberty introduced for the division in October (QVC Group, trading as QVCA and QVCB). The move will allow the market to distinguish QVC’s performance from that

How Global Customers Compare* 89

88

87

88

25

86

25

25

22

24

1,390

1,450 1,150 1,190 1,020

US

JP

DE

UK

IT

US

Retention Rate (%)

JP

DE

UK

IT IT

Items per Customer

US

JP

DE

UK

IT

Spend per Customer ($)

*Based on 2013 sales metrics

of the rest of the company’s Internet businesses (Backcountry.com, Evite, CommerceHub, Bodybuilding.com, Provide Commerce).

“We’ve found that the tracking stock approach gives you most of the benefits of a full spinoff at less cost and complexity,” explains George, who notes that to maintain its growth trajectory QVC will need to continue to evolve to meet changing consumer shopping habits. “Our customer keeps evolving, and how she wants to engage with us has moved from a passive, linear television experience to a very immersive, multi-channeled experience. She is ordering product from her mobile phone while watching her kids’ soccer games, engaging with us on Facebook and commenting on her iPad while watching her favorite cooking program.

Our view is that if we can stay at the forefront of moving with her to where she’s going, this business can continue to grow and expand over time.”

Toward that end, QVC is developing second-screen experiences geared toward fans of its most popular programs, such as the “In the Kitchen with David” cooking show. An iPad application allows viewers watching the show to receive real-time communication synced with events on the show, such as opportunities to submit questions, details about the products being featured or recipes for the dishes being prepared.

Going for Global Growth Given the favorable headwinds driving domestic sales, George remains

optimistic about QVC’s growth prospects at home. At the same time, however, he plans to continue to break into new markets as part of an international expansion strategy launched in 2010. In addition to the U.S., the company currently sells in the UK, Italy, Japan and Germany.

“About one-third of our business is outside the U.S. and we want to keep growing that number,” he says. “We will open in France next year and our goal is to keep opening a new market every 18 to 24 months. These markets take many years to grow to a certain scale, so it’s not a short-term proposition; but history will show that these are great 10-year and 20-year plays for the company.”

Thus far, QVC has found that its model translates well overseas and that sales and buying patterns are relatively consistent across borders (see chart, above). For example, the average spend per year, number of items bought and the retention rate for consumers is similar across country markets.

“Obviously we’re tailoring the product mix to the market and the programming reflects the local culture, but the core of what we are doing is amazingly consistent around the world,” notes George, who states that international growth will be a major focus going forward. “Global expansion will look different over time. We’ll be expanding into more emerging markets, where we will need a leaner model and which may involve acquisition activity in addition to ground-up building. That’s the next horizon.”

Thorns and Roses Paranoia festers in an Ecuadorian embassy.

THORNS Julian Assange has launched an attack on GOOGLE, saying the search giant has turned “big and bad,” and characterizing its executive chairman Eric Schmidt as a government agent trying to further U.S. “imperialist” ambitions. The Wikileaks founder, who is under Justice Department criminal investigation for leaking thousands of classified diplomatic cables, lashes out at the Internet giant in his upcoming book. Assange, who has spent the past two years claiming asylum to avoid facing rape accusations, also detailed connections between Schmidt and the U.S. establishment and implied that Google is acting as a front to enact U.S. foreign policy.

PAPA JOHN’S CEO John Schnatter didn’t just attend a ROSES funeral in Spring Hill, Tennessee, for Gordon “Gordo” Schaffer, a 22-year-old employee who was murdered while working the late shift at one of the company's stores earlier this month. According to Schaffer's sister, Devan Cronin, who wrote an emotional post on Facebook, Schnatter arranged for Papa John's to pay her younger brother's medical bills and funeral expenses. In addition, Papa John's sent 25 delivery cars to the funeral escorted by the Spring Hill police department.

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CEO WATCH / CASE STUDY

DVB’S PIERRE-HENRI BENHAMOU

Bringing Innovation to Market By Jennifer Pellet doctor specializing in pediatric gastroenterology who teamed up with two partners—Engineer Bertrand Dupont and Professor Christophe Dupont—to explore a novel idea: a diagnostic patch able to detect cow milk allergies in children. The idea soon evolves into a potential treatment for dangerous allergic reactions to cow’s milk and peanuts, for which there are currently no effective treatments. After failing to interest a pharmaceutical company in the concept, you and your partners decide to use your own funds to develop a product. By 2006, you’re on your way to developing not only a diagnostic device but a possible treatment for such allergies. The problem? You’re running out of money.

The Context Those who feel as if they’re hearing far more about life-threatening food allergies than they did a few decades ago are absolutely right. According to the CDC, the number of American children with food allergies has increased by 50 percent since the late 1990s. Why this is happening is a matter of much debate; but for those whose food allergies trigger anaphylactic symptoms, everything from lunching in a school cafeteria to traveling by plane can become a potentially life-threatening situation. In the

PATCHWORK A less invasive way to deliver medicine

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past, the treatment for severe allergies has typically been avoidance and epinephrine injections administered at the onset of symptoms.

DBV Technologies’ treatment, Viaskin Peanut, takes another approach by aiming to desensitize patients to peanuts by administering low doses of the proteins through the skin. (The company is also developing Viaskin Milk and Viaskin HDM to address allergies to milk and to dust mites.)

Similar attempts to desensitize allergic individuals using injections and oral medications are also being studied, but epicutaneous, or non-invasive delivery through the skin, has advantages, explains CEO Dr. Pierre-Henri Benhamou. (Benhamou is the “B” in DBV; the “D” stands for Dupont brothers and the “V” is for Viaskin.) “When you inject a product, it goes all over the body, whereas with a patch, you target just the small cells at the surface of the skin,” he says. “You expose the immune system of the skin to the peanut—it’s a very targeted administration. So there is no protein passing into the bloodstream to provoke shock and anaphylaxis.”

WHO

Dr. Pierre-Henri Benhamou, CEO of DBV Technologies WHERE

Bagneux, France LEISURE INTEREST

Mid-20th Century American Art FAVORITE ARTISTS

Mark Rothko and Jackson Pollock shunned private capital, instead choosing to take the Bagneux, France-based company public on NYSE Euronext.

“We had a very successful fundraising of 20 million euros in 2012, and we raised another 30 million euros last year,” recounts Benhamou. Determined to see its product through commercialization independently, the company didn’t stop there. In September, it filed for another IPO, this time on NASDAQ, raising another 104 million euros.

The Endgame Comfortable with The Hurdle Developing any pharmaceutical product is a cost- and time-intensive endeavor and Viaskin has been no different. Financing the research and development and subsequent clinical trials involved required an influx of capital, which, in turn, resulted in Benhamou’s being asked to step down for a time. “In 2006, investors put $12 million into the company and asked me to turn management over to a professional,” he recounts. “It was a catastrophe.”

The Resolution In 2010, the company brought Benhamou back. Still in need of financing, this time the company

JANUARY/FEBRUARY 2015

the contents of its coffers, DBV is now focusing on finishing the clinical development of Viaskin, particularly Viaskin Peanut, and getting ready to bring the product to the U.S. market.

While the company initially entertained the idea of partnering with a major U.S. pharmaceutical company, ultimately Benhamou and his partners opted to fly solo. “We’ve had a lot of interest; but we feel that for this product to be very successful, we need to stay independent,” he explains. “We have more expertise in food allergy than Pfizer or Merck or anyone else right now. Our objective now is to build DBV 2.0.”

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The Challenge You’re a French

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“Louisiana’s custom-fit solutions are providing the education, technology and workforce CSC needs to advance its next generation information technology solutions.”

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CSC is utilizing Louisiana’s custom-fit solutions to establish a next-generation technology center to provide cloud computing, cybersecurity and big data technologies. What can Louisiana do for your business? Find out at OpportunityLouisiana.com/CustomFit.

CEO WATCH / CEO POV

SAP’S BILL McDERMOTT

The Overdog Thinks He’s an Underdog

By J. P. Donlon

TOWARDS THE END of his recently published biography, Winner’s Dream: A Journey from Corner Store to Corner Office, Bill McDermott, SAP’s CEO admits that the company “had to embrace simplicity.” As he told his employees in its suburban Philadelphia headquarters, “Things at SAP are too complex, too hard.” This was not news to anyone. “Inefficient internal processes were one of the top complaints on our latest employee survey,” he observed.

Headquartered in Walldorf, Germany, with locations in more than 130 countries, SAP has a dominant worldwide share in enterprise resource planning (ERP) software and software-related services. All major companies, along with most mid-market companies, use some form of ERP software. It’s the DNA that knits all operations within a company— productions, sales, accounting, payroll, you name it—into a seamless whole.

The problem is that it can get really complicated; and if installed with too many adaptations, it can get messy.

Since the board named him sole CEO early in 2014 (he had been co-CEO with Jim Hagemann Snabe since 2010), the former Amityville, Long Island deli owner and youngest executive officer at Xerox has taken major steps to

transform SAP. “We’ve got to simplify how we give our customers our innovation and our technology. CEOs around the world want to get complexity out of their organizations so they can grow,” he says.

This partly explains why SAP saw continued, broad market adoption of SAP HANA, the real-time, cloud-based business platform. HANA is at the core of the company’s “Run Simple” strategy: integrating all SAP solutions on a single business platform in the cloud. SAP now has more than 4,100 SAP HANA customers and more than 1,450 customers for its HANA business suite. SAP’s HANA is also evolving into the leading development platform with more than 1,600 startup companies’ building applications on SAP. The corporate-software industry is undergoing a rapid shift from packaged software that customers run on their computer systems to software run over the Internet in remote data centers, making data easier to manage, analyze and use on mobile phones.

SAP specializes in providing a mix of business applications for companies, from accounting and human resources to supply-chain software, but it has come under pressure from rivals that offer cheaper services over the Internet

or in the ”cloud.” SAP, as Europe’s largest software firm, aims to boost the proportion of its software sold via the cloud to compete with arch-rival, U.S.based Oracle and purely cloud-based competitors, such as Salesforce.com.

But there is a slight downside.

Analysts say the accelerating switch from packaged software to so-called “cloud” software would shave about 200 million euros off a previous profit forecast. Packaged software sales are recognized immediately, while cloud orders are booked as sales over the life of a multi-year contract. McDermott insists the transition is both necessary and, in the longer term, more profitable for SAP, whose revenues approach 17 billion euros.

A natural-born salesman, McDermott nonetheless considers himself an “underdog.” In explaining why he wrote his book, he says, “I never forgot where I came from. I want to give people a blueprint towards being a winner through having an original dream. That dream sustained me through good and bad times, and my working life actually became my life’s work because I had the dream. I want everybody to have the dream.”

TURN HERE FOR THE Q&A➻A JANUARY/FEBRUARY 2015

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: Q CEO WATCH / CEO POV

In your book, you write, “Historically, SAP software was not known for being user-friendly but instead, for its somewhat clunky interfaces.” That seems to resonate with a number of CEOs we’ve talked to about SAP. So, what have you done to address this issue?

Bill McDermott: We have focused on the “consumerization” of software so that user experience is our most important priority. We’ve always been good at mission-critical business processes. But we weren’t as good as that individual user’s looking at the screen and saying, ‘wow, this is as pretty as Facebook.’ That’s what we’re doing now. It’s a major change, a major transformation. Our new user-interface technology is called Fiori. It is the same user interface whether you’re running a cloud or an enterprise application.

Because most of the Fortune 1000 companies already use some form of SAP software, you are migrating to the middle market for future growth. This must represent some challenges, because mid-market firms can’t afford the same total suite of enterprise software that big companies can, plus the fact that the complexity with which your software has historically been associated might put a few people off. How do you overcome that?

BM: I couldn’t agree with you more.

That’s why we have become the cloud company, powered by HANA. In 2010, none of our revenues came from the cloud. In 2014, we’ve become the No. 2 company in the world in the cloud.

We’re No. 1 in the world based upon the number of users that consume our software through the cloud. So we’ve transformed the company to be the cloud company, powered by HANA. A small, midsized company 16

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today can procure our software in the cloud without investing in the hardware, the infrastructure and the expensive consultants to install it.

They can simply consume it out of the cloud, pay a service fee on a monthly basis and pay as they go. So you are radically reducing the complexity that stands between the company that you’re trying to serve, which is consuming your software, and SAP’s provisioning that software to as many customers around the world as possible. The company we are today is very different from the company we were five years ago.

Going back over your career, Xerox, Siebel, Gartner, the Amityville delicatessen—what was the biggest learning for you, as a leader?

BM: I’ve learned so much from all of them. But I have to say my first lesson at age 16 was the most important: If I don’t get the customers to come through that door and I don’t understand who my base is, I don’t make payroll and I go out of business.

At that time, I had a deal. I had a $5,500 note on the business, I either paid it back—$7,000, with interest— in 12 months or less, or I would lose everything I put into the business. So, for my first venture, that was really, truly a character-making experience, and that’s where I got my whole focus on the customer.

But I must say, Xerox was quite amazing, also. I always wanted to come into this big Manhattan beautiful city

JANUARY/FEBRUARY 2015

and take on the world. For a kid from modest means from Amityville, Long Island, this was the dream. When I was 21, I went to the Top of the Sixes for an interview and lined up against these kids in gorgeous suits and fantastic degrees from the best schools. I was there in my $99 suit from the mall that I charged on a credit card, and I was wondering, ‘Man, how do I pull this thing out?’ I did what I was good at, which was talking to people. I knew exactly why I was there. I was there because I was going to get my dream job that day, and I wanted it more. And that passion of wanting it more is every bit in my heart and my soul today as it was then. I felt like my life was on the line, because if I didn’t get that dream job on that day, then maybe none of this would have happened.

The other lesson I’ve learned is to always remain humble. I am more humble today, on the launch of this book, than I might have been when I was 16 or even 21 years old. But I also have to stay immensely hungry.

I’m constantly looking around the corners for the next big thing. We just conducted an acquisition of Concur, because I believe that the business network is even bigger than the social network. The idea of helping companies manage their business within the company is super-important. But managing business between companies is even more important.

Explain.

BM: For example, I left a large manufacturer just yesterday who’s

building huge engines. And these engines serve the global economy in many, many ways. But they don’t make much money on the hardware; they make all their money on the services.

So, think of a world where you’re running on the HANA data platform from SAP. And everything is in real time, including all the equipment that you have and the performance of the hardware that you sell to your customers.

What if you could predict through simulation technology when you were likely to have a breakdown of a key part within a key engine? And what if, in a frictionless way, that part could be ordered by the business network and [if you could put] that order bid out to the global competition to get the best possible price?

And what if, once it’s procured, seamlessly, totally digitally, with no paper, it could be delivered to the customer site and matched with the perfect technician who has the precise skills for that part and that particular engine? That particular company could improve its profitability by more than 50 percent on that one idea of leveraging a business network.

That is doing business between companies. That’s the big idea.

A cynic might say that what you’re describing is still a fantasy. What do you tell skeptics?

“

BM: I tell them it’s fair to be a skeptic; but if you choose to be a cynic, you have to be better than the facts. Today, $600 billion in commerce is getting done on that particular business

130 COUNTRIES WITH SAP LOCATIONS

17 BILLION SAP REVENUE IN EUROS

1,600 SOFTWARE COMPANIES WHO HAVE BUILT APPS ON THE SAP PLATFORM

network—between companies. So you say, “Well, what’s the big deal about $600 billion?” If you take Amazon, Alibaba and eBay and combine them, that’s 50 percent more commerce that runs through the Ariba business network, owned by SAP today, than all three of them combined.

Now, you lay on Fieldglass, a business network we own, to manage contingent labor in a business network. The No. 1 issue for CEOs today is dealing with the idea of temporary labor. Because they have critical projects, they ask themselves, “how do I get the skilled people to do this project? After the project’s over, what do I do with the people? How do I disband them or get them to do something different?” It’s an industry growing at 40 percent per annum in

It’s fair to be a skeptic; but if you choose to be a cynic, you have to BE BETTER THAN THE FACTS.”

the U.S. and in Europe.

In addition, consider the travel and expense move that we made with our acquisition of Concur. What do business travelers hate to do? I can’t stand filling out expense reports or even keeping track of this junk— because I’m a busy guy.

If you take land, air, hotel, food, entertainment and all the expenses thereof, it’s now managed in your iPhone or whatever device you choose to use. It’s automatically, digitally updated in your ERP system for the benefit of your CFO, so you’re in compliance. And by the way, now you have a best-run business because everything is taken care of financially; but more importantly, your productivity, your time and your life are enriched through technology.

Now, why do I think the network is the future? Because on all those land exchanges—take Uber as an example, the fastest-growing ground transportation company in the world— they’re a partner. Every time they pick you up, we make money. Let’s take the hotel industry. There are hotels that you favor. Every time you check into a room on the network, we’re making money. Let’s think about the air travel that you take. Every time that you choose a certain ticket on a certain airline, we’re making money.

But the best part is that you’re making more money. Because 80 percent of the travel that is done today gets done outside of the travel department, and do you know why?

Because you can get a better deal on the open Internet than your travel department could have imagined, because of the real-time exchanges that take place in a real-time network called the Internet. And now, if you’re running Concur, you’re not only getting the best deal, but the financial people back at your company are happy because it’s reconciled in the system of record within the financial walls of your company.

JANUARY/FEBRUARY 2015

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CHIEFEXECUTIVE.NET

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17

CHIEF CONCERN

POPE FRANCIS

A Transformational CEO

By Tom Saporito

THERE’S THIS COMPLEX, GLOBAL “BUSINESS,” thousands of years

old, that finds itself steeped in its own history, embroiled in controversy and struggling to reconnect with its base while remaining relevant in a quickly changing landscape. Sound familiar?

Enter a new leader: Pope Francis. In his year leading the Catholic Church, he recaptured segments of disenfranchised people and completely re-energized a moribund behemoth. According to an April 2014 article in Inc. magazine, Pope Francis’ approval ratings with American Catholics hovers at 88 percent, and nearly three-quarters of Americans generally view him with favor. He also made it to the top of Fortune’s 2014 list of the World’s Greatest Leaders and was named Person of the Year by Time for 2013.

Having worked with many CEOs who are transformational leaders, I see themes in the Pope’s words and actions that resonate with hallmarks of transformational leadership in the business world. As Dan Hilferty, CEO of Independence Blue Cross, put it, “Pope Francis might, in fact, be charged with the greatest corporate turnaround in the history of man.”

In my view, here are three key strategies the Pope has used that are simple, yet nuanced and powerful.

Change the conversation. If the course, so far, is any indication, it seems that changing the platform of conversation can indeed be a game-changer. Pope Francis essentially said, “We can’t go forward if we can’t talk”—and then shifted the emphasis of the conversation’s content.

In little more than a year, he turned the gyroscope to allow a more complex level of dialogue. He also invited a

mix of voices to the table. Rather than brushing issues of controversy under the carpet, the Pope acknowledges them and seeks to do better. “Pope Francis demonstrates that strength and humility can live in the same neighborhood,” says Denise Morrison, CEO of Campbell Soup.

Change the tone. Right out of the gate, Francis profoundly shifted the tone with five words: “Who am I to judge?” One of his first moves was to institute an inclusive process of requesting input from the dioceses around the world. He also boldly redefined the Roman Curia’s role and its players, changing out people in positions of influence to bring more diversity and openness and to create a forum for dialogue. All of these actions signaled a new leadership model that invites and includes diverse points of view.

Connect with the people. Pope Francis has shown the people in numerous ways that he is one of them. Whether it is living in a hum-

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ble apartment, wearing plain black shoes or driving his old car rather than taking the Pope-mobile, his choices convey that he is an ordinary citizen who understands the concerns of ordinary people. He knows the power of symbolism. He’s touched the institution in a personal way, and he speaks and acts in a manner with which people can connect. “He clearly gets that messaging and appearances set the foundation for the seismic shift required for transformational change,” says Hilferty.

From a succession standpoint, Pope Francis has brought to the Catholic Church what every board strives for during the CEO succession process: the right leadership at the right time for the right reasons. While his predecessor was an academic whose leadership approach was more “protect and defend,” Francis used many levers to open the doors for input, reflection and accountability. With numerous paths to leadership, there’s likely to be a difference between a leader who came up the ladder from the factory floor versus the finance department.

While what Pope Francis accomplished is nothing short of amazing, this story is still being written. He faces the delicate and complex task of being a non-divisive change agent.

How does he engage one segment without alienating another? Does this reframed conversation have legs?

Time will tell. But in the meantime, we’d all do well to glean lessons from what he’s shown us to this point—with all its wisdom and grit.

DR. THOMAS J. SAPORITO is chairman and

CEO of the consulting firm RHR International.

This article is part of a series on leadership.

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12/1/14 6:03 PM

CEO CONFIDENCE

CEO Confidence Near Highest Levels Since 2008 CEO CONFIDENCE INDEX

THE CEO CONFIDENCE INDEX, Chief Executive’s monthly gauge of CEOs’ expectations for business conditions over the next 12 months, dropped 4.2 percent from November to December, landing at 6.47 out of a possible 10. Though optimism took a tumble since November, this is still the second-highest rating CEOs have given since July 2007. The third and fourth quarters of 2014 have proven the most encouraging in the past decade, with the Index measuring 6.44 in September, 6.36 in October and 6.75 in November—all multiyear highs.

Perception of current conditions stayed virtually unchanged in December with a rating of 6.20 out of 10 compared to 6.19 the previous month.

CEOs’ ratings of current conditions stayed above six for the fourth consecutive month—the first such streak since September 2008.

Despite the record-high ratings from CEOs, many respondents made cautious and critical comments.

Many concerned the ongoing impact of healthcare spending, increased regulatory burden and a lack of trust

in the leadership in Washington D.C. As the CEO of a large manufacturing company put it, “The White House and the bureaucrats are killing the economy and preventing the resurgence of the American spirit.”

The CEO of a mid-market manufacturing company provided commentary more in-line with the ratings received in the survey: “2014 was a record year and we anticipate 2015 to be even better. Sustainability projects are helping make a big difference in our profitability.”

When asked the forecast of their own businesses over the next year, 79 percent of CEOs said they anticipate revenue growth—nearly half of which are expecting growth more than 10 percent. Over half of CEOs surveyed plan to increase their firms’ headcount, as well as capital expenditures, in the next 12 months. Plus, fully twothirds of CEOs anticipate growth in profitability next year. It is clear that despite the vocal segment who are concerned with the economic outlook, regulatory policies and Washington gridlock, the vast majority of business

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leaders anticipate a boom year in 2015.

As has been the case for the past few years, CEOs of the smallest companies (less than $10 million in revenue) are the least optimistic cohort.

Their average rating for expectations for business conditions over the next 12 months was 6.39, bringing down the overall average. CEOs of companies with $10 to $100 million in revenue provided an average rating of 6.51, and the biggest companies’ CEOs rated expectations at 6.49. It seems much of the recent gains have benefited the largest businesses. Optimism for the next year seems to be following this trend.

Based on our insight provided by CEOs, 2015 is shaping up to be the most productive and profitable year for American businesses since the financial crisis. Though concerns with government policies and uncertainty stemming from gridlock and the Affordable Care Act weighed heavily on CEOs minds for the past few years, optimism for the economy now seems to be in full bloom. The next 12 months could very well be the harbinger of a decade of economic boom.

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MID-MARKET REPORT

Perfecting Performance Management Few mid-market companies feel their employee-development efforts are up to snuff.

FROM FORMAL REVIEWS TO PERFORMANCEBASED COMPENSATION, most mid-market companies

have tools in place to evaluate and drive employee performance. Yet, few of those efforts are viewed as effective by company leaders, according to the National Center for the Middle Market at Ohio University’s recent survey of more than 300 C-suite executives from midmarket firms.

For example, while 73 percent of respondents said that their companies’ base-pay increases were set on performance levels, just 34 percent felt the practice was very effective. The perceived effectiveness of efforts like formal reviews, goal-setting and informal feedback was

What Do You Do to Develop Employees, and How Well Does It Work? % Firms Conducting Practice

% Rate as “Very Effective”

Pay Increases Based on One’s Level of Performance Over the Previous Performance Cycle

73%

34%

Formal Performance Review Discussions at the End of the Performance Cycle

70%

28%

Setting Individual and/or Team and/or Organizational Goals for the Next Performance Cycle

66%

Providing Informal Feedback on Performance Throughout the Performance Cycle

66%

23%

Other Monetary Compensation (e.g Bonuses) Based on One’s Performance Over the Previous Performance Cycle

66%

46%

Periodic (e.g Midyear, Quarterly, etc.) Formal Discussions to Review Progress Against Goals

59%

Non-Monetary Rewards (e.g. Formal Recognition, Development Opportunities, etc.)

57%

28%

lukewarm (see chart, below). In fact, the only practice respondents ranked as “very effective” was “other monetary compensation” or offering bonuses based on performance. What’s more, a whopping 35 percent of respondents graded their companies at a “C” or below on overall effectiveness of performance management.

Why do so many attempts to improve performance yield so little? Respondents cited managers who aren’t comfortable making “tough calls,” holding people accountable, failing to maintain consistent standards and providing constructive feedback. What’s more, managers lack training in performance management and find the process too time-intensive.

Top 5 Performance-Management Obstacles Managers Are Uncomfortable Making the “Tough Decisions” and Holding People Accountable

15%

Managers Lack Training in Performance Management

18%

55%

Managers Use Inconsistent Standards

13%

54%

Managers Are Not Good at Giving Effective Performance Feedback

20%

The Progress is Too Burdensome (e.g., Takes Too Much Time)

21%

= Not at All an Obstacle

27%

10%

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52% 50%

= Moderate to Strong Obstacle

How Would You Grade Your Company on Performance-Management Effectiveness?

26%

16%

60%

26%

21%

10%

10% 3%

2% A

A-/B+

B

B-/C+

C

C-/D+

D

1% F

IT TAKES EXPERTISE TO STAY AHEAD. To succeed today, you need industry expertise and transformative advice to drive your business forward. Find out what CohnReznick thinks at CohnReznick.com. Forward Thinking Creates Results.

Joe Torre 2014 National Baseball Hall of Fame Inductee

cohnreznick.com CohnReznick is an independent member of Nexia International

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9/12/14 11:40 AM

MAKING TECHNOLOGY WORK

How to Survive the “Customer Apocalypse”

By Alan Trefler

RECENTLY, THE OWNER of a New York hotel decided to fine wedding couples $500 of their deposit funds for each negative review posted online by any of their guests. The policy produced a firestorm of complaints and nearly 700 reviews eviscerating the hotel. The bad press only spread from there.

The irony of this stunningly customer-unfriendly decision is that it showed that the innkeeper understood how dramatically social-media-savvy customers can affect a company’s reputation. Today, customers have no qualms about using the Internet to attempt to destroy businesses that displease them. When you consider that about 1.4 billion consumers now spend 22 percent of their time online, the ability to inflict damage electronically is profound.

What’s more, that practice is by no means limited to the B2C marketplace.

Approximately 43 percent of B2B companies now acquire customers from Facebook, reflecting how important the digital customer has become to this market.

The potential for disaster is growing exponentially as young consumers gain buying power and continue to use social media to influence the market’s acceptance or rejection of a business.

Engaging with this new breed of

customer requires revamping your organizational structure and culture so that customers are always at the heart of your operations. Here are three ways to begin that transformation: 1. Cross-pollinate technology development. Just as plants may benefit from combining DNA from multiple sources, your company can benefit by combining the DNA of its IT and business people. This concept requires blowing up the traditional software-development model in which the business team sends requirements over to IT and waits patiently for IT to unveil a solution—one that often fails to meet the needs of both the business and its customers. Instead, business and IT people must collaborate on technology development with a focus on the language of business, not the language of programming. Solutions must be designed, developed and changed in an agile environment of phased, iterative and continuous improvement to reflect the changing needs of customers and the business.

A large European telecom, for

these questions reflect the waterfall-development mindset where the plan and its costs must be defined up front. In an agile environment, where solutions are built in phases, instead of insisting on all the facts up front, CFOs need to make business-grounded decisions about project direction and then supplement these with feedback loops and validation via intermediate results. This tight-interval control ensures that outcomes for a given project will be good—or that it can be stopped before much time and money has been expended.

3. Consider new executivecoordination roles. Forward-thinking CEOs now see customer processes as so critical that they are establishing chief process officer roles that elevate the visibility of customer processes, making sure the leverage points that will materially affect the customer experience are addressed across all lines of business, departments, geographies, products and services. In tandem, CEOs are expanding the chief customer officer oversight role to ensure that

Solutions are designed, developed and changed in a collaborative and agile environment. example, implemented a new model for solution development with collaboration between the IT and business units to address shortcomings in its B2B customer experience. The team broke a large project into phases to transform the experience with a centralized product catalog and an all-inclusive view of the customer that includes personalized price lists, integrates customer-retention programs and creates a standardized view of all customer data aggregated from multiple legacy systems.

2. Rewire the CFO function. For any project, the CFO will ask: How much will it cost? What are we getting for that money? While important,

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the customer experience is at the center of the organization’s functions.

A customer apocalypse cannot be avoided simply by creating a hip social-media presence. Successfully engaging with the modern customer requires revamping your organization’s structure so that customer processes are integral, seamless parts of every business operation. It’s the key to not just surviving—but thriving—in a world where a customer apocalypse is just one Tweet away.

ALAN TREFLER is a founder, CEO and chairman of Pegasystems, a Boston-based digital software and CRM systems firm.

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12/1/14 11:28 AM

SONNENFELD SIGNPOSTS

Activism Inside Out

In his new regular column for CE, Professor Jeffrey Sonnenfeld looks at when investor advocates cross the line.

BOTH MICHAEL DELL of Dell and

Andrew Liveris of Dow Chemical lead U.S.-based $60 billion technology-driven global enterprises. However, their jobs differ in a crucial way—one that may challenge the future vitality of all public companies in our celebrated free enterprise system. The same week that Dell celebrated the one-year anniversary of his firm’s $25 billion privatization, which allowed an escape from the short-term pressures of activist investors, Andrew Liveris’ strong performance was under a scorching activist attack.

No Good Deed Goes Unpunished Ironically, at the close of November’s Dow Analyst Days, where Liveris won universal praise, he faced a vicious smear-campaign-style attack from the hedge fund Third Point LLC. This came despite the fact that over the past five years Liveris led Dow’s stock from just over $5 a share to more than $50 a share, as well as through a $8 billion share buyback and hefty dividend increase. Total shareholder returns outperformed the S&P 500 and chemical industry S&P on one-year, three-year and five-year bases. All this was matched by robust expansion in key markets and healthy employment growth.

Happily, the week ended in a peaceful détente, with Dow agreeing to add four new independent directors, including two candidates promoted by Third Point, a holder of two percent of Dow’s shares.

Prometheus Unshackled In a similar vein, Dell survived a high-profile, distracting, hostile attack

from “activist” investor Carl Icahn in 2013. The billionaire investor used TV interviews, social media tweets and open letters–notably one titled “Let the Desperate Dell Debacle Die”—to demonize CEO Michael Dell and his proposal to buy back and take private the company he had founded at age 19.

Michael Dell summed up his view of Icahn’s antics in an interview with Forbes, “It’s a big poker game to him.

It’s not about the customers. It’s not about the people. It’s not about changing the world. He doesn’t give a crap about any of that.”

After prevailing in the battle, Dell triumphantly led his company’s reinvigoration by transforming the way Dell designed, produced and distributed personal computers, laptops, tablet devices, servers, enterprise systems and cloud computing. Today, he continues to steer his company through bold moves into cloud computing, networks, data storage, analytics and services— including a six-year plan to spend $18 billion on 40 significant acquisitions in these spaces. The third quarter of 2014 found the company celebrating soaring results, with domestic shipments up roughly 20 percent while the industry overall was up just 4.3 percent.

However, the chief reason Michael Dell is envied by his peers these days is that privatization brought his firm a priceless unity of ownership, leadership and strategic mission. As he wrote in The Wall Street Journal, “Privatization has unleashed the passion of our team members, who have the freedom to focus first on innovating for customers in a way that was not always possible when striving to meet

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the quarterly demands of Wall Street.”

Dell remains, as always, his own company’s disrupter-in-chief. He sees his business not as a religion to be worshiped, but as a dynamic entity. Similarly, Liveris is known as an “internal activist” respected for his ability to continuously reinvent Dow. Both CEOs see great long-term value in their integrated businesses as a competitive edge and have fought short-term pressures to dismember their enterprises.

Financial vs. Market Capitalism The lesson? Vigilant CEOs have a right, and even a duty, to resist self-motivated activism that adds nothing. It’s worth noting that it wasn’t so very long ago that investors who resorted to such antics were called by the less salubrious term “green mailers.”

Many healthy, nimble global businesses such as DuPont, PepsiCo and Time Warner have also wrestled with the costly strategic time and energy distraction of venomous activist investor campaigns. At the same time, many of these same activists successfully catalyzed important, timely value-enhancing strategic focus at firms such as HP, Home Depot, Yahoo!, Chesapeake Energy and Sotheby’s.

However, what has changed is that with 6,000 publicly listed corporations on our major exchanges and roughly 6,000 hedge funds bumping into each other, there is a grave danger. This danger is similar to the good-governance crusades post-Sarbanes Oxley.

The tools used to punish the bad guys are too clumsily being employed to undermine the good guys. This can’t be good for long-term investors—or for the industrial base and economic health of this nation.

JEFFREY SONNENFELD is senior associate

dean, leadership studies, Lester Brown professor of leadership practice, Yale School of Management; president of the Yale Chief Executive Leadership Institute, and author of The Hero’s Farewell and Firing Back.

Th

e

COVER STORY

n a M

Cha

Who

nge

d a c i r e Am s p o h S

How

Leslie Wexner, founder and CEO of L Brands, has an acute ability to understand customers and consumer-fashion goods. More importantly, he can put this understanding into action.

BY J. P. DONLON • PHOTOGRAPHS BY JONATHAN ROBERT WILLIS 28 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

JANUARY/FEBRUARY 2015 /

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COVER STORY

7 At 7,

he is the longest-serving CEO of a U.S. public company. He ranks No. 80 on Forbes’ list of the 400 richest people, boasting a net worth of $6.8 billion.

His record of successful retail ventures includes, among others, The Limited, Express, Limited Too, Victoria’s Secret, Bath & Body Works, Pink and La Senza. In 2014, L Brands’ sales reached $11.4 billion.

What’s more, 99 percent of the company’s stores are cash-flow positive, with average dollar inventory turns at 3.9 times vs. just 2.8 five years ago. The company operates 2,942 specialty stores in the U.S., Canada and the UK. Its brands are sold in 600 additional, franchised locations worldwide.

Wexner opened his first store in 1963 at the age of 26. The experience, he recalls, was “like being shot out of a canon with no helmet.” He had borrowed $5,000 from his aunt to start a rival store to his father’s. He called it “The Limited” because he offered a limited selection of shirts, blouses and pants. Ten years later, he had expanded to 41 stores, proving that a narrow focus was a winning strategy. The Limited went public in 1969, enabling the company to finance its expansion. By 1979, it was oper-

ating 318 stores and Wexner was thinking of branching out to new brands. In 1980, he launched Express, which targeted younger women with more forward-fashion clothes and dynamic colors.

The pivotal inflection point came when he snapped up a chain of lingerie shops he spotted in San Francisco called “Victoria’s Secret.” He confesses that he knew little about the business when he bought it in 1982, which proved just as well since its owner was facing bankruptcy. The shop’s merchandising was borderline salacious, geared toward a male point of view.

Wexner’s insight was to turn that around and offer merchandise that appealed to a women’s perspective. At the time, most women dreaded the bra-buying experience, which usually involved visiting an obscure area of a department store to sort through a dizzying array of similar-looking products. Wexner changed all that. He wasn’t the first to come up with a lingerie chain, but his natural curiosity about presenting fashion led to experimentation that, in turn, led to a marketing phenomenon. Today, the Victoria’s Secret Fashion Show is a television hit that attracts viewers interested in the

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celebrity models who showcase the brand.

By 2007, Wexner had exited the apparel business, selling a controlling interest in The Limited and Express to Golden Gate Capital, saying that he wanted to concentrate his business in lingerie and beauty. Walking into his outer conference room, one is surrounded by several hundred scent bottles, candles and perfumes.

The word “vanilla” appears on a generous number of them. In addition, L Brands has a significant $2 billion volume in direct-channel growth with more than 20 percent margins. According to Barclays retail analyst Matthew McClintock, the company’s international business “should reach at least $1 billion of revenue within five years (vs. $220 million today). On a gross-retail basis, international sales should surpass $3.7 billion by 2018 vs. an estimated $700 million today.”

However, what is most interesting about this retail mogul is that, on a personal level, he is quiet and introspective, not the theatrical impresario one might expect of an entrepreneur in fashion. An avid reader of historical biographies, Wexner sees the life and career of George Washington as instructive not just for himself but for all leaders. “This guy bootstrapped himself from a simple background where he was not formally educated,” he says, “and he’s able to hold his own with great minds like Thomas Jefferson, John Adams and Ben Franklin. Essentially, this is a farmer’s son who didn’t go to grade school and wasn’t raised in a big city. I find it inspiring that he could challenge the great minds, was open to learning and yet was humble at the same time.” Biographies of Robert E. Lee, FDR (“both fascinating”) and Douglas MacArthur (“don’t like him, but I find him interesting”) also figure in his private leadership reading.

The following are excerpts from Chief Executive’s visit with Wexner at his Columbus, Ohio headquarters.

To what degree have Internet or digital firms like Amazon, eBay and Zynga disrupted traditional retail or affected your business?

To the extent that the customer sees a product as a commodity, it changes

behavior. If someone wants a wristwatch, he can go to the Internet to find the best deal because all Rolexes are created equal and you can buy them on the Internet.

The same is true of, say, Levis and items where the product has limited variability.

Ten years ago, we didn’t think that cameras or cars were commodities, but we know that most cars are shopped for first on the Internet.

Other things, such as scent or perfume have emotional content. If you know what perfume you want and you’re not curious about what the next new scent is, I can’t deliver that experience. However, if you are curious, I can. In retailing, there are always countervailing ideas. Today, people relish the opportunity to get in their cars and drive two miles to spend $3 for a cup of coffee at Starbucks. Nevermind that you can make the same cup of coffee at home using Starbucks coffee for about a dime a cup.

How do you differentiate successfully when market forces seem to conspire to make everything a commodity?

We amplify the emotional content. One could argue that all Ferris wheels are Ferris wheels; the emotional experience of an amusement park is much the same.

So why do people travel 2,000 miles to go to Disney World? It’s the whole package. It’s the Disney experience.

The best retailers—Bloomingdale’s, Marshall Fields, Selfridges—always understood that creating an emotional experience lay at the heart of their success. They have always understood this. One of the niftiest, emotional experiences in retailing today is Costco. It is tremendously entertaining to go there. Sometimes, I go there because I’m just curious about what’s going on and what the current deal is.

How does one explain the success of an Apple store? Everyone knows what the next phone looks like. It’s bigger than the last phone. I don’t really have to go there to see it. My kids don’t have to go there this week because they bought one last week, but they want to go there anyway.

They want to look around, soak up the atmosphere and see the people. Whether it’s Victoria’s Secret or Bath & Body Works, it’s about theater.

For much of your career, you were identified as a successful apparel retailer and the founder of The Limited stores. What changed?

The question is, “How do you define yourself?” I began thinking very early by defining myself as a merchant on broad terms.

Understanding customers is a higher order of perception than whether I’m an expert in women’s apparel.

I began to sense 15 years ago that there was less emotional content in apparel.

SUPERIOR SHAREHOLDER RETURN 1 YEAR TOTAL RETURN(%)

Foot Locker 63.2 Home Depot 27.4 Tiffany & Co. 20.9 L Brands 18.5 Ann Inc. 15.9 Fast Retailing 15.3 Li & Fung 12.2 Walgreen Co. 8.0 TJX 6.2 Buckle 4.6 H&M 4.1 Wal-Mart Stores 2.9 Gap 2.8 Target -0.9

S&P 500: 14.0 S&P 500 Retail Index: 5.4

3 YEAR TOTAL RETURN(%) Fast Retailing Home Depot Foot Locker TJX Gap L Brands Walgreen Co. Inditex Ann Inc. H&M Wal-Mart Stores Best Buy Buckle Tiffany & Co.

40.5 40.2 38.1 29.0 27.8 26.5 25.5 18.4 15.0 13.2 13.0 11.4 10.9 10.1

S&P 500: 19.2 S&P 500 Retail Index: 20.6

The field was crowded. Stores were replicating themselves. It was the same stuff at multiple prices and multiple qualities. There was some advantage when production went offshore, but now everybody uses the same base of supply, so there’s no advantage. I told the board, “Let’s think about this.” I picked lingerie and beauty because I thought we could transfer our skills to different categories and carve out areas where we could be more dominant as specialists rather than one of 30 guys in a shopping center selling clothing to young women.

Some observers note that you follow a method that they describe as experimental—fail early and cheaply, learn and go forward.

Assuming you agree, do you do this consciously or by instinct?

I am an entrepreneur, but I don’t jump out of airplanes without a parachute.

Risk-taking doesn’t bother me, but the question is, “How do you test things and learn?” I might have enormous confidence in the ideas I am launching, but I still want to see how they work in the real world.

A fashion retailer, who bats close to Babe Ruth’s average, say .333, belongs in the Hall of Fame. When this business was smaller, I could see how many mistakes I made.

The question is, “How do you recover from mistakes?” Whether it is testing a color

L Brands’ ranking in the retail world 5 YEAR TOTAL RETURN(%) L Brands Foot Locker Home Depot TJX Inditex Ann Inc. Giordano Fast Retailing Tiffany & Co. Buckle Ralph Lauren Gap Bed Bath & Beyond Walgreen Co.

40.8 39.9 32.6 27.1 24.8 21.4 21.0 20.4 20.0 16.4 16.4 13.1 12.5 12.4

S&P 500: 15.1 S&P 500 Retail Index: 20.1

10 YEAR TOTAL RETURN(%) Buckle Inditex Fast Retailing TJX L Brands Ralph Lauren H&M Tiffany & Co. Foot Locker Li & Fung Home Depot Ascena Retail Grp. Gap Walgreen Co.

22.5 20.9 20.0 19.7 18.6 17.0 14.7 14.6 12.1 12.1 12.0 11.1 8.3 7.5

S&P 500: 8.3 S&P 500 Retail Index: 9.7

SOURCE: JP MORGAN AND COMPANY REPORTS

JANUARY/FEBRUARY 2015 /

CHIEFEXECUTIVE.NET

/ 31

COVER STORY

SELLING SECRETS Wexner bought a failing lingerie store and turned it into a national phenomenon by understanding emotional appeal.

In retailing, data is everywhere. In fact, there are mountains of it. Has data analytics changed how the industry deals with the customer to achieve, in your phrase, a “more truthful, bias-free environment?”

Our business is much like the movie business. There are some rascals like Steven Spielberg who know how to make movies, but the real skill is that he knows what movies to make. From E.T. to Schindler’s List, he has more of the high-grossing movies than anybody else.

You can’t get that from data mining.

Maybe you can project consumption of 12-ounce Coca-Cola, but how you get from Coke to Cherry Coke to Lemon Coke to 10-calorie Coke doesn’t come from data mining. Our skill as fashion merchants is to have a nose for finding latent demand and knowing what’s next. Sometimes market research is like giving radar to a hunting dog. It makes him dumb.

45% 1

SALES ($)

7,848

‘09

32 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

‘10

9,661

‘11

‘12

10,773

11,384

‘14F 2

‘13

OPERATING INCOME ($)1

UP

132%

You appear to put a high value on employee engagement. What do you do to make this happen?

Whether it’s walking around, going to other people’s meetings, listening to the tone of things [or] going to stores, it’s all about encouraging people and expressing curiosity about their lives and their careers. People have selfish interests—and that’s perfectly normal. However, they also have involvement in various communities, which is something we encourage.

For example, we support the James Comprehensive Cancer Center [at OSU].

People bike-ride and ask friends to sponsor them. They’ll ask friends to buy their cookies or have a bake sale to raise money. Amazingly, people who work in stores

8,727

10,328

1,505

1,878

1,665 1,743

1,231 811

‘09

‘10

‘11

‘12

‘14F 2

‘13

1 On like businesses, on an adjusted basis 2 Represents the high-end of the full-year previous guidance plus projected third quarter beat to guidance

AVERAGE DOLLAR TURN

2.8

‘09

3.6

3.7

3.6

‘11

‘12

‘13

3.9

3.1

‘10

SOURCE: COMPANY REPORTS

‘14F

COURTESY LBRANDS INC.

or a store size, we test close to our beliefs.

Fashion merchants have to constantly believe that what they are doing is obsolete.

You’re constantly testing just to find your way into the future. This philosophy is so engrained in our company DNA that whopper mistakes become less likely.

Some may think of me as stubborn, but I see it as having a deep keel that supports the ship in the face of headwinds, crosswinds and the like. The deepness of keel just means that there’s steadiness that may seem slow to some, but [it] allows me to take an interactive approach to risk in managing arguably the riskiest industry in business.

For example, when we bought Lane Bryant, we borrowed 50 percent more money than we had in net worth. [We] literally bet the ranch on an acquisition—and we paid back that debt in about three months. I was pretty confident that I knew what I was doing. If not, we would have been terminal.

We’ve probably invented 30 businesses with $45 billion to $50 billion in market cap and spun them off. This represents hundreds of thousands of employed associates. This is one of our proudest accomplishments.

UP

Les Wexner “discovered Columbus� and built a retail empire.

Maybe you should discover Columbus too.

Congratulations, Les, on your Lifetime Achievement Award.

Your partners and fellow CEOs at the Columbus Partnership are proud to have you here helping make Columbus one of the greatest environments anywhere in the world for businesses and families.

www.columbusregion.com or contact Alex R. Fischer, President and CEO The Columbus Partnership 614-225-0500 arf@columbuspartnership.com

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COVER STORY as far away as Texas participate in the 50-mile bike ride event here in Columbus.

People who are associated with the business in Hong Kong and in the Mideast not only ride the same day, but they’ll get up in the middle of the night because they want to ride at the same time [that] everybody else in Columbus is riding. This is extraordinary. I put a lot of stock in stuff like this. More stock than I do in the data.

We didn’t ask them to do it. It’s a familial thing where children might mirror the behaviors or the standards of the parent.

I feel lucky because I work with the best people in the world. I can measure it not only by their performance in their jobs but how they live their lives, how they participate in their communities.

Conventional wisdom says that the U.S. is over-stored and that any real growth will have to come from international expansion. What’s your view?

I’ve always ignored that. I began hearing these statistics about American retailing 40 years ago. Yeah, America has more square footage per capita than any country in the world and we’re adding more every year. So what?

If we’re over-stored with Kmarts or Sears, then we have some obsolete businesses. I go to Easton [Town Center in Columbus] and see people waiting in line.

So it’s business-specific and it’s site-specific. There’s always been more retail space than was needed, yet some retailers need more. Costco and Starbucks absorb more retail space all the time. Yeah, some big-box retailers are struggling, and maybe there is an overall glut of square footage by a factor of two, but great retailers can’t get enough.

Having said that, we are very enthusiastic about international retailing, in part because we’ve got great brands in the U.S.

Im

have enormous confidence in the ideas I am launching, but I still want to see how they work in the real world.”

It begins with whether one has proven momentum and success in the core business, in the core market. I look at retailers that are successful over time, whether it’s H&M in Sweden or Inditex in Spain. They continue to be successful in their own markets.

Still, one must be sensitive to crosscurrents in international business. Just because Americans love chocolate chip cookies doesn’t mean Brits will. Oatsies don’t mean much to Americans, but they mean a lot to people in the UK. People told us to go to Brazil because everything is growing to the sky. Well, it’s a lot more complicated than that. Do people in these markets have a popular percep-

tion of your product? Can you perform and execute in that market? And can you make money?

We’ll expand our square-footage internationally. By 2016 and beyond, we’ll expand North America by a magnitude of 5 or 6 percent. That’s on a very big base. Five years ago, we had virtually no stores outside the U.S., but we’ll expand our international stores about 35 percent next year on a base of 1,000. We’ve got a heavy concentration in Canada, England, the Mideast and Southeast Asia. In the next few months, we’ll be opening a number of stores in China, having tested stores in Hong Kong.

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JANUARY/FEBRUARY 2015 /

CHIEFEXECUTIVE.NET / 35PM 11/21/2014 1:43:45

THE 2015 BEST COMPANIES FOR LEADERS

GE RETURNS TO THE TOP… AGAIN

BY KEN CARROLL & J.P. DONLON IN THE LEADERSHIP PIPELINE, management advisors Ram Charan, Stephen Drotter and Jim Noel deplore “the lack of effective talent development within organizations.” Today’s companies need effective leaders at every level and in every location. To deliver on results, CEOs can’t do it on their own. They need more fully performing leaders than ever before.

Each year since 2005, Chief Executive has sought to identify those companies that excel in leadership development.

In partnership with Chally Group Worldwide (chally.com), a sales and leadership research and consulting firm headquartered in Dayton, Ohio, 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 more than $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. Similar to 2014, some attrition among last year’s winners accounts for why previous winners did not appear on the 2015 listing. Because it would be inappropriate to compare private companies with larger, public companies that enjoy greater resources, we list separately the ranking of large, private organizations with in-depth, leadership-development programs. Of the companies surveyed, 85 percent have headquarters in North America and 64 percent have international operations.

The majority of industries represented included professional, scientific, and technical services (20 percent); manufacturing (18 percent); information, media & telecommunications (16 percent); and finance, insurance, real estate (10 percent).

GE tops the 2015 list as the “Best Company for Leaders” with IBM coming in just a fraction below. P&G moves to No. 3, ranking at a very close range. In the top 10, moving up from the 2014 list are EMC Insurance (No. 4), Verizon (No. 5), VF Corporation (No. 6), Southwest Airlines (No. 7), and The Cooper Companies (No. 9), all of which Continued on pg. 38

36 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

Companies were scored on five key criteria: 1 2

3

4

5

Having a formal leadership process in place The commitment level of the CEO to the leadershipdevelopment program as measured by the percent of time spent The depth of the leadership funnel as measured by the percentage of senior management positions filled by internal candidates The number of other companies that report recruiting from the company being evaluated A shareholder value performance metric based on 10-year growth or decline in market capitalization

2015 Ranking

Company / CEO (2014 Rank)

2014 Ranking

Company / CEO

1

General Electric / Jeffrey Immelt (3)

1

P&G / A.G. Lafley

2

IBM / Virginia Rometty (2)

2

IBM / Virginia Rometty

3

P&G / A.G. Lafley (1)

3

General Electric / Jeffrey Immelt

4

EMC / Insurance Joseph Tucci (26)

4

Accenture / Pierre Nanterme

5

Verizon Communications / Lowell McAdam (14)

5

Unilever / Paul Polman

6

VF Corporation / Eric Wiseman (11)

6

Dow Chemical / Andrew Liveris

7

Southwest Airlines / Gary Kelly (18)

7

McDonald’s / Donald Thompson

8

Wipro Ltd. / T. K. Kurien

8

Monsanto / Hugh Grant

9

Cooper Companies / Robert Weiss (36)

9

Hormel Foods / Jeffrey Ettinger

10

Dow Chemical / Andrew Liveris (6)

10

General Mills / Kendall Powell

11

3M / Inge Thulin (23)

11

VF Corporation / Eric Wiseman

12

Xerox / Ursula Burns

12

W.W. Grainger / James Ryan

13

Ingersoll Rand / Michael Lamach

13

Caterpillar / Douglas Oberhelman

14

General Mills / Ken Powell (10)

14

Verizon Communications / Lowell McAdam

15

Hormel Foods / Jeffrey Ettinger (9)

15

TJX Companies / Carol Meyrowitz

16

Esterline / Curtis Reusser (40)

16

Sprint / Daniel Hesse

17

Arthur J. Gallagher / J. Patrick Gallagher

17

Maxim Integrated / Tunc Doluca

18

Sprint / Marcelo Claure (16)

18

Southwest Airlines / Gary Kelly

19

Maxim Integrated / Tunc Doluca (17)

19

DENTSPLY International / Bret Wise

20

Accenture / Pierre Nanterme (4)

20

ADP / Carlos Rodriguez

21

Caterpillar / Douglas Oberhelman (13)

21

HNI / Stan A. Askren

22

Nielsen / Mitch Barnes

22

McKesson / John Hammergren

23

Hitachi Data Systems / Jack Domme

23

3M / Inge Thulin

24

Ball Corporation / John Hayes

24

Konecranes / Pekka Lundmark

25

Cardinal Health / George Barrett (27)

25

Ecolab / Douglas Baker, Jr.

26

Coca-Cola Enterprises / Muhtar Kent

26

EMC Insurance / Bruce Kelley

27

Huntington Bancshares / Stephen Steinor (37)

27

Cardinal Health / George Barrett

28

Dentsply International / Bret Wise (19)

28

Green Mountain Coffee Roasters / Brian Kelley

29

Royal Caribbean Cruises / Adam Goldstein

29

RPM International / Frank Sullivan

30

Salesforce / Marc Benioff

30

Emerson Electric / David Farr

31

Bristow Group / Jonathan Baliff

31

Comcast / Brian Roberts

32

HCL Technologies, Ltd. / Anant Gupta

32

Shoppers Drug Mart / Domenic Pilla

33

Tata Group / Cyrus Mistry

33

Barnes Group / Patrick Dempsey

34

Shoppers Drug Mart / Dominic Pilla (32)

34

Cash America International / Daniel Feehan

35

Hyatt Hotels / Mark Hoplamazian

35

Dangote Group / Aliko Dangote

36

Ecolab / Douglas Baker (25)

36

The Cooper Companies / Robert Weiss

37

Paychex / Martin Mucci (39)

37

Huntington Bancshares / Stephen Steinour

38

Hewlett-Packard / Meg Whitman

38

Citigroup / Michael Corbat

39

Harman / Dinesh Paliwal

39

Paychex / Martin Mucci

40

Monsanto / Hugh Grant (8)

40

Esterline / Curtis Reusser

TOP

40 BEST COMPANIES

FOR LEADERS IN 2015

THE 2015 BEST COMPANIES FOR LEADERS

Continued from pg. 36 reported impressive leadership-development processes. New to the top-10 rankings this year is Wipro (No. 8), which made the list in prior years.

Except for 2009, where 3M led the list, and 2010, when the nod went to JPMorganChase, the top honor has been a back-and-forth contest between P&G and GE. After a three-year run, P&G has again been toppled by its GE rival. The difference, narrow as it is, lies in the number of other companies that report recruiting from these leadership incubators. (See Criteria No. 4.) For its part, developing people is embedded in GE’s culture and is integral to its growth.

“It’s how we’ve sustained a 130-year record of innovation and reputation for leadership—and how we solve the toughest challenges for our customers and society. We invest significantly in

our employees to meet the needs of those we serve,” according to Susan Peters, GE’s SVP, human resources. The Fairfield, Connecticut conglomerate spends more than $1 billion on learning and development each year to help employees at every level and career stage.

Crotonville, its global leadership institute, serves at the forefront of thinking in leadership, strategy and innovation; is the first corporate university in the U.S.; and is the epicenter of GE culture. Some of GE’s best-known initiatives—WorkOut, CAP, Six Sigma, Lean Six Sigma—took shape at Crotonville. Today, GE leaders are focused on speed, simplicity and impact.

It offers multi-year rotational programs for emerging and experienced leaders to build functional expertise, global experience and a strong foundation Continued on pg. 40

TOP 5 DEVELOPMENTAL OPPORTUNITIES When asked methods in which CEOs are investing time developing leaders, the majority of the participants said coaching and feedback for skill development is the main area of focus.

57%

Coaching and feedback for skill development

48%

Informal informationexchange sessions

43%

Mentoring one-on-one

To deliver on results, CEOs can’t do it on their own. They need more fully performing leaders than ever before.”

10 BEST PRIVATE COMPANIES FOR LEADERS Because private companies operate in a much different business environment than public companies, they have their own ranking. Deloitte once again takes the top position, followed by Hilti, which scored a fraction below. Dell moves up from No. 6 to ranking No. 3.

2015 Ranking

2014 Ranking

Company / CEO (2014 Rank)

Company / CEO

1

Deloitte / Frank Friedman (1)

1

Deloitte / Barry Salzberg

2

Hilti / Christoph Loos

2

PwC / Bob Moritz

3

Dell / Michael Dell (6)

3

Transplace / Thomas Sanderson

4

Transplace / Thomas Sanderson (3)

4

American Infrastructure / A. Ross Myers

5

MWH Global / Robert Moser, Jr. (9)

5

Clark Construction Group / Robert Moser

6

Black & Veatch / Steven Edwards (10)

6

Dell / Michael Dell

7

AlliedBarton Security / William Whitmore (7)

7

AlliedBarton Security / William Whitmore

8

Belron / Gary Lubner

8

Day & Zimmerman / Michael Yoh

9

Day & Zimmermann / Hal Yoh (8)

9

MWH Global / Alan Krause

10

NAACO Industries / Al Rankin

10

Black & Veatch / Len Rodman

38 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

Best Practices for Identifying and Developing Leaders How do leading companies make the most of potential talent within the organization?

Nearly every organization today espouses some version of the mantra, “our people are a critical, competitive asset.” The most successful ones tend to take that statement literally, making sustained efforts to assess, manage and increase their stock of employee talent. In particular, many maintain formal programs to develop high-potential individuals for future leadership roles. But companies follow a range of approaches in choosing to adopt these programs and in the ways they implement them. What did the best companies identify as best practices for corporate high-potential programs?

High-Potential Programs Because creating and maintaining a formal program represents a substantial investment of resources with largely long-

term benefits, the study looked at smaller firms (under $1 billion in revenue) and larger ones separately. Specific, highpotential programs prove to be not very common among smaller companies, with only 8 percent reporting them among the top three types of options favored for leadership development. In contrast, 56 percent of larger firms rank them in the top three.

For reference, the most common categories overall are coaching and mentoring, action learning, assessment and high-potential programs.

Defining Potential High-potential programs can vary widely in their scope, approach and degree of success.

The initial challenge in making any program succeed is simply having a clear definition of “high potential.” Seventy-one percent of all companies surveyed and 83 percent of larger ones reported

having a definition for the term.

While the study did not investigate approaches taken by the firms that have not defined the concept, establishing a definition of “high potential” offers numerous benefits. Besides helping make the process fair to potential candidates, a formal definition provides a foundation for designing an effective program and makes it possible to measure results in a meaningful and consistent way.

Among all the companies studied, those whose leadership development efforts ranked in the top 15 percent grew their market capitalization by 122 percent over the 10 years ending in 2014—while those in the bottom 15 percent grew by only 37 percent. Given these figures, a closer investigation of how highpotential leadership programs are best implemented promises to pay substantial dividends for talentfocused organizations.

FORMAL PROCESSES Survey participants cited coaching and mentoring as the No. 1 development opportunity within a formal process. Here are the top five development programs:

52%

Coaching and Mentoring

49%

Action Learning/Developmental Assignments

39%

Assessment and Feedback

34%

High-Potential Programs

34%

Exposure to Senior Executives

One technique for developing leadership talent falls outside the range of formal programs, and so it deserves special mention: positioning high-potential individuals to serve as board members for other organizations. Thirty-six percent of all companies surveyed place future leaders on the boards of other firms.

JANUARY/FEBRUARY 2015

/

CHIEFEXECUTIVE.NET

/

39

THE 2015 BEST COMPANIES FOR LEADERS

GE spends more than $1 billion on learning and development each year to help employees at every level and career stage.”

Continued from pg. 38 for future leadership roles. Some 4,000 next-generation leaders are in the program today. One-third of GE’s senior leaders are program graduates.

Clearly, a CEO will reap the benefits of an organization that enjoys superior leadership development. But this opportunity does not depend on having one’s own Crotonville. Part of the challenge is that organizations don’t know their people well enough to understand the strengths and weaknesses of their bench. But CEOs who take it upon themselves to tackle this challenge will realize the benefit in better, overall performance.

THE ROI OF LEADERSHIP DEVELOPMENT

SUMMARY 10-YEAR PERFORMANCE COMPARISONS

Comparing the long-term growth in market capitalization of public companies with their final scores for leadership

Participant Companies*

Market Capitalization Growth 2014

Top 15 percent

122 %

Bottom 15 percent

37 %

development can offer justification for investment in developing leaders. The comparison covered 2004 to 2014, a period long enough to minimize short-term and situational fluctuations. In terms of the contribution to growth potential, the top leadership companies show greater growth than the lowest as measured by market capitalization.

*Includes companies where public data is available for 2004 to 2014.

REPUTATIONAL LEADERS Survey participants were asked to list the three companies they would recruit from when there are insufficient internal candidates for openings in their organizations. The reputational stars for leadership development are still limited to a few at the top of their game. Here are the top target companies and some of the reasons behind their status as perceived by respondents:

GE

A multinational organization with complex business units and a strong reputation for developing leaders and leading innovation in technology.

IBM

A technology and solutions frontrunner with an excellent reputation for developing leaders, reinventing business models profitably and sharing success with global communities.

P&G

Known for outstanding technical leaders, marketing expertise and leadership know-how.

Other top companies are recruiting targets, but GE, IBM and P&G are by far the most cited “reputational leaders.”

40 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

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INFORMATION TECHNOLOGY

HOW TO BITE THE CEOs need to merge their disparate IT systems carefully. THE CLOUD can help. By William J. 42 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

Key

Takeaways

1 Take Time to Plan Understanding what you hope to achieve and the best way to achieve it—offsite versus on-premises— is essential

2

ERP BULLET to keep growing—but must do so Holstein

Partner with Care Be sure to pick a reputable company with staying power and deep knowledge of your industry

3 Be Part of the Process CEO involvement is critical to organization-wide acceptance of ERP— which, in turn, is crucial to success PHOTO CREDIT: IDC

INFORMATION TECHNOLOGY

WHEN JANNA RONERT, ORIGINALLY A FARM GIRL FROM NEBRASKA, founded Image Skin Care company 11 years ago in Palm Beach, Florida, sales of her specialized skin-care products swiftly expanded to 50 countries around the world. As sales exploded, Ronert recognized that having separate information technology (IT) systems for such functions as finance, manufacturing, inventory and human resources was no longer working. “In managers’ meetings each week, all this information was flowing in, but it was a river to nowhere,” she explains. “We had to bring it together into one system.”

As CEO, Ronert did not have anyone on her staff who could install an Enterprise Resource Planning (ERP) system that would tie all those functions together, so she hired a COO, Kevin Patrick, who had deployed the systems at other companies. Patrick turned to Effective Computer Solutions, based in Ponte Vedra, Florida, which was a channel partner of the German software giant SAP. They were able to install SAP’s Business One system in about 90 days and launch it two years ago. The total cost, including equipment and training, was $300,000. The ERP system is physically located on Image Skin Care’s premises, but the company moved

other functions to cloud computing. The end result was a hybrid system—part on-premise and part in-the-cloud. “It was worth every single penny and more,” Ronert says.

THE ROI ON ERP What the system allows the company to do is to gather information on what types of its products are selling in different climates around the country and the world, giving it clues as to how to adjust its manufacturing and inventory levels.

“That’s where the deficiency had been— in capturing information from our sales arm and disseminating that to the rest of our people,” Ronert explains.

The end result has been better decision-making about how to manage the company’s product portfolio. “In Florida, where there is sunshine 300 days a year, sunscreens and protection are key products for us,” she explains. “But where I’m from in Nebraska, we only see the sun six months a year so hydration and protection from other elements becomes very important.” With sales north of $25 million a year, she anticipates migrating more functions to cloud computing.

As smaller companies reach a critical point in their growth trajectories, the vast majority face IT decisions like Ronert’s.

They are tough calls because smaller companies don’t always have separate IT

“In managers’ meetings each week, all this information was flowing in, but it was a river to nowhere...we had to bring it together into one system.”

—JANNA RONERT Image Skin Care 44 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

staffs. The company’s finance people may use Intuit’s QuickBooks for accounting, but manufacturing, supply chain, distribution, human resources and other functions have grown up with different, non-compatible systems.

Aside from needing to make better, faster decisions, CEOs of these companies find that large customers, suppliers and partners demand timely information when doing business with them. “The requirements for integration today are greater than ever before,” says Joshua Greenbaum, a consultant at Enterprise Applications Consulting, in Berkeley, California, “You have to be able to live in an extended supply chain with very complex demands and very rigorous service levels. You’d better upgrade or you won’t be able to do business.”

The advantages of basing an ERP system in the cloud—meaning in the hands of a technology giant like Microsoft or Amazon—are rooted in being able to pay a monthly licensing fee rather than having to lay out the big bucks to buy and maintain your own system.

CEOs can also easily ramp up their use of the services when their businesses enjoy a sudden spike in growth. “In a traditional environment, you go through a procurement process and then, three or four weeks later, you get a piece of equipment,” says Alex Rooney, vice president of SAP’s channel partner Vision33 in Irvine, California, “But if you’re in the cloud, I can spin up another server and expand your infrastructure in 10 minutes. You’re paying for only what you use.”

If a company’s business declines for any reason, perhaps because a peak buying season passes, it can cut back on its consumption of services and software. “It’s leaps and bounds ahead of what you can achieve with a traditional infrastructure,” says Rooney.

BEATING BACK BLOAT The great fear about implementing any ERP system, whether cloud-based or on-premises, is “bloat.” A smaller

Five Steps to a Successful ERP System

“What was driving us was not just catching up to the competition. We wanted to leapfrog the competition.”

—ANTHONY CHIRCHIRILLO Chirch Global Manufacturing

company may need to hire a consultant to help identify the right technology partner because few can deal directly with an SAP or Microsoft. SAP says 80 percent of its 263,000 customers worldwide are small or medium-sized enterprises (SMEs), but a majority of them work with SAP’s channel partners. While small company CEOs can work directly with smaller ERP companies, such as Epicor Software, based in Austin, Texas, managing that relationship can be still be tricky.

If the project comes off the rails, a company might have to hire consultants to help fix it. Delays in implementation and cost overruns can occur if the CEO does not take a personal stake in decision-making and implementation. “From my perspective, the CEO has to lead the process and be all-in,” says Anthoqny L. Chirchirillo, CEO of Chirch Global Manufacturing, headquartered in Cary, Illinois. One basic problem to overcome is building an internal consensus about the technology path because different departments within the company may fear that a cloud-based ERP system will erode their power base. “It has to be driven from the top,” Chirchirillo explains.

If done wisely, ERP systems can transform a smaller business and set P R E V I O U S S P R E A D : P H OTO C O U RT E SY O F I D C

the stage for its next leg of growth.

Chirchirillo, for example, implemented an ERP system from Epicor that was completely in the cloud. His company is in the tool-and-dye, metal stampings and metal fabrication businesses.

When he acquired the company, its software was badly out of date, so he upgraded its systems to the cloudbased ERP system over a three-month period ending in June 2011. “What was driving us was not just catching up to the competition,” Chirchirillo says. “We wanted to leapfrog the competition.”

That platform allowed him to use another cloud-based communications system to create a collaborative network among 14 multi-generational, family-held niche manufacturing companies in Illinois and Wisconsin with total revenues of more than $220 million. “They all had good skills,” he explains, “but they were fighting the trap of being looked at by our large customers as just providing a commodity.”

Now, when a large customer requests bids on a project that may require injection-molded plastic parts, powder coating, machining or other highly specialized services, the Chirch network can see the customer’s drawing on their shared cloud-based system and bid for specific parts of the order. The ERP system and other cloud-based technology thus transformed their business models.

Chirchirillo says embracing cloud-based ERP systems allows SMEs to stay focused on their core businesses and not get bogged down in managing IT systems. “SMEs have a very difficult time keeping up with the new versions of systems and having to constantly go through re-installations,” he says. “Every time a new version of a piece of software

BEGIN BY FORGING AN ➡ INTERNAL CONSENSUS among key

constituencies in your company about what you are trying to achieve. One key question is how much of your system can be offsite in the cloud versus on-premises.

You don’t want to change technical specifications after you launch.

That can lead to cost overruns and delays, known as ERP “bloat.”

PICK A TECHNOLOGY ➡ PARTNER CAREFULLY. Most

SMEs will not deal directly with an SAP or Microsoft, but rather with one of their local channel partners. Rather than a vendor relationship, this is more like a marriage in which your partner will learn your innermost secrets.

Check references to make sure the provider has strong service capabilities in your geographic area and knows your industry.

WITH CLOUD SOLUTIONS, ➡ IT IS USUALLY BETTER to accept

software that is considered industry best practice rather than insist on customized solutions.

The more customization you have, the greater the challenges of maintaining integration as different underlying programs are updated by providers. “Customization of software in the SME space should be considered a four-letter word,” says SAP’s Kevin Gilroy.

CONCENTRATE ON MAKING ➡ THE SYSTEM EASY TO USE. “The

No. 1 reason for failure,” says Microsoft’s Gordon Macdonald, “is not poor software design.

It’s because the folks in your organization don’t like using the tool and therefore don’t adopt it.”

MAINTAIN C-LEVEL ➡ INVOLVEMENT in the

implementation and take active ownership of the process, rather than relying exclusively on your partner. As the old adage goes, the more you put into it, the more you will get out of it.

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comes out, you have to go through that process.” Now Epicor manages Chirch’s system and does the software updates behind the scenes.

He takes issue with two reasons some small-company CEOs say they do not want to outsource their ERP systems—they want to retain control of their systems and they worry about data security. Chirchirillo says trying to develop and maintain one’s own internal IT department carries its own set of risks. “It’s very difficult for SME manufacturers to employ high-end IT people because of the cost factor, and they are somewhat transient,” he explains. “You run the risk of having someone who is very knowledgeable about your system leave you.”

When it comes to security against hacking, Chirchirillo notes that software companies such as Epicor have multiple layers of backups and protections and are monitoring systems around the clock. “Their processes are more secure than what the vast majority of SME companies can afford,” he says. “I actually feel we have reduced our business risk.”

The providers of ERP systems to smaller businesses are a fragmented field. The big players include Microsoft, Oracle, SAP and Sage Software, a unit of Britain’s Sage Group, but none of them appear to be dominant. There are also a raft of smaller companies such as Epicor, Intuit and NetSuite.

Business-Software.com lists 20 different competitors.

The big guys who sell through channel partners naturally argue that theirs is the best model. “If you have Microsoft combined with our channel partners, you’ve got the best of both worlds,” says Gordon Macdonald, director of the ERP management team for SMEs at Microsoft. “The manufacturer has a massive investment in innovation and tying things together from the software perspective, and the

channel partner delivers industry or region-specific solutions that are perfect for that customer.”

Says Kevin J. Gilroy, senior vice president and general manager of the global SME segment for SAP America, “Many of our channel partners develop an intimacy with the customer that the industry misses sometimes.

The CEO of a small manufacturing company in Topeka, Kansas, knows he can call that partner 24/7. He has his cell phone number and sees him in church.”

SIZE DOES MATTER Of course, smaller technology providers, such as Epicor, with $1 billion in annual revenue, argue that CEOs should have the choice of working directly with the original provider of ERP software and thereby cut out a layer of intermediaries. “We think freedom of choice is better,” says John Hiraoka, executive vice president and chief marketing officer at Epicor, which deals directly with its customers in North America. “The ability to choose between working with a local partner or the software organization provides CEOs with much more flexibility.”

The rule of thumb is that about 20 percent of SME companies buying their first ERP systems are opting for cloud-based solutions, but that figure is up from only 5 percent just two or three years ago and the industry expects the number to continue to grow rapidly. Hiraoka says non-manufacturing companies in finance, retail or distribution industries have been quicker to embrace the cloud because earlier versions of the software couldn’t handle the complexity of manufacturing. However, that is changing as the industry improves its offerings.

CEOs have also tended to locate functions in the cloud that are not seen as mission-critical, like the storage of

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“The ability to choose between working with a local partner or the software organization provides CEOs with much more flexibility.”

—JOHN HIRAOKA Epicor

emails. That, too, is changing as more embrace cloud solutions for their core functions, says Hiraoka.

He says CEOs who are considering adopting an ERP system should consider the ease of use of any software they acquire. Hiraoka naturally argues that Epicor’s software has been redesigned to make it perform just as a consumer would use Google’s search engine. Epicor’s software can be used as seamlessly on a smart phone as it performs on a desktop or tablet, he adds. For its part, Microsoft says its systems have been designed to resemble its widely used Office products, familiar to the vast majority of users.

Certainly, there are many variations on a theme. But whether CEOs choose large or small technology partners, and whether they choose to embrace the cloud or not, they do seem to be stepping up to the ERP challenge because the systems are so essential in helping the small guys get bigger.

The bottom line? Despite all the fears about ERP “bloat,” small company CEOs are embracing the tool and are increasingly basing it in the cloud.

WELCOME HOME THE

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Put their warrior experience to work for your company.

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TECHNOLOGY TRENDS

Technologies That Will Change Your Business

Which technologies, applications and products will most impact our lives—and businesses—in 2015?

by Warren Strugatch

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THE EVER-INCREASING PACE of technological change is a fact of our times. Each year, advances impact individuals, businesses and nations in various—and not always anticipated—ways. To help CEOs prepare for the threats and opportunities new technologies will bring, Chief Executive talked to experts to identify and explore the seven most significant technological trends shaping business today.

1

3D Printing

The ultimate disruptive technology, 3D printing cross-pollinates traditional printing with advanced manufacturing, revolutionizing the manufacturing process. Today’s 3D printers extrude products made from materials ranging from titanium to human tissue, allowing companies to custom-produce jet engine components and human prosthesis, human cells and hydroponic gardens.

By producing prototypes without

3D PRINTING

3D printing has the potential to slash R&D costs and revolutionize manufacturing

tooling, 3D printing enables multiple product configurations, slashes R&D costs and truncates launch times.

Low-cost mass customization becomes possible. 3D printing is poised to upend the supply chain by transforming aftermarket service. Why maintain a warehouse full of spare parts for legacy products when a third-party printer will license your specs, take over logistics and generate positive cash flow?

Gartner says worldwide shipments of 3D printers will double in 2015 over last year, exceeding 217,000 units, driven largely by enterprise demand. Overall, sales of 3D printers will reach $1.6 billion this year, on the way to exceeding $13.4 billion in 2018. The transformation from niche to mass printing has begun; industry giant HP announced plans to enter the market next year with a new technology, Multi Jet Fusion, hyped as 10 times faster than the quickest 3D printer today.

Key Takeaways 1 Digital Counterfeiting 3D printing carries enormous risks for counterfeiting, unregulated manufacturing and other intellectual property (IP) violations. Defective product exposure creates major risks and bodes epic legal struggles over liability. Naïve early-stage licensing deals can deprive IP owners of future revenue flow.

2

3

Enterprise Security The increasing connectivity of physical objects and operational networks raises major security concerns. CEOs must plan for Internet of Things (IoT) hackers’ targeting company vehicles, electronic locks, electrical systems, HVAC controls and more. Vastly increasing data flow of privileged personal and enterprise information expands security risks enormously.

Mobile Data Congestion The expansion of IoT and the proliferation of HD and 3D video are choking Internet bandwidth. Service providers must find ways to expand capacity by offloading traffic to other wireless platforms, such as WiFi, while at the same time accommodating the transmission requirements of applications.

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2

Internet of Things

3

Wearable Electronics

Google Glass’s introduction in 2014 launched Wearable Electronics into the stratosphere. After years, this sleepy category, laden with fitness bands and medical devices, was suddenly leading the news stream. Media coverage went gaga over Glass’s “Suddenly-theFuture-Is-Now” functionalities: Get GPS directions, record and transmit your voice, view weather information and of course, the Big One: take and transmit photos and video with just the wink of your eye.

Google touted Glass as ideal for mobile work processes, such as automotive repair functions and even medical surgery. Not surprisingly, public questions about privacy shadowed the launch and will continue to shape R&D and production in the category. Google is said to be exploring a contact-lens version of Glass, perhaps an end-run around privacy issues.

Got the time? Apple’s entry into the Smart Watch market, expected early this year, will likely raise the bar.

Early-to-market products, such as the Pebble Steel Smartwatch, Motorola Moto 360, Samsung Gear Live and Sony SmartWatch, won over early-adopters.

By late October, Apple and Microsoft had

WEARABLE ELECTRONICS

The most aggressively hyped tech buzzword of 2014, the Internet of Things (IoT)—a.k.a. the Smart Web of Everything, a.k.a. the Internet of Everything—will go right on buzzing through 2015 and beyond. ABI predicts more than 30 billion devices with Internet Protocol (IP) addresses will be connected by 2020.

“Growth has been in the increasing digitization of all businesses,” notes Gartner vice president Joe Skorupa. “The value is getting different systems to work together and getting and using real-time data more advantageously.” IoT means manufacturers’ integrating more (and better) data about inventory supply, customer demand and manufacturing processes and then delivering it to more tablets, laptops and smart phones. In the process, this approach will reduce manufacturing waste and accelerate production cycles.

IoT essentially involves brand managers’ instituting demand-responsive pricing to better align supply and demand and public-sector transportation officials’ untangling traffic jams by integrating real-time data flow into flexible road directionals and implementing smart traffic-signal timing. On the consumer level, homeowners are upgrading to smart locks and reducing energy costs with smart devices like the Nest, which Google acquired last year for $3.2 billion.

To preview the future, head over to one

of five IoE Innovation Centers that Cisco has opened around the world. The latest opens in Berlin later this year.

Are you ready for the fashions of the future? Eyewear, timepieces and clothing that incorporate Star Trek-style technology

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launched competitive products.

Smart clothing, or e-textiles, continues to hold promise. Researchers continue to develop wearables that enable health-monitoring and behavior-adapting technologies. Misfit has introduced what it calls the high-performance technical t-shirt. Microsoft is working on a bra that can send bio-feedback information to help suppress appetites. Other products focus on tracking your sleep, diet, heartbeat, glucose levels and more.

Expect products like haptic shoes, which will incorporate GPS systems using vibrating-sole interface and customized fitness systems designed to each user’s specifications.

4

Predictive Analytics

The brainier sibling to Business Intelligence, Predictive Analytics (PA) involves collaboration in collecting and merging continuous daily-activity data.

Industry guru Eric Siegel, whose 2013 book Predictive Analytics is smart data mining’s Freakonomics, defines the field as “driving operational decisions via many individual per-individual predictions.” In other words: encoding experience.

PA sifts through reams of data to anticipate how individuals will behave in similar circumstances. Doctors, for example, will use data to predict the onset of depression for asymptomatic individuals and prescribe prophylactically. You’ll use PA to better gauge how

5

Smart Dust

Sensors have been around for decades, but recent R&D has advanced the field by emphasizing integration with wireless data-transfer protocols, digitization and other technologies. Packets of microscopically scaled nano-sensors are clustered in mobile pods and used to track environmental data—temperature change, air quality and ambient movement; identify patterns instantaneously; and send data upstream. Smart dust has become a tool of environmental-cleanup specialists, emergency-relief teams, military strategists and oceanographers, as well as energy-efficiency experts and industrial-automation engineers. While currently restricted by limited power capacity,

PRIVATE SOCIAL NETWORKS

customers will react when they pick up your product and a competitor’s off the same shelf. You’ll use PA to configure the benefits package you’ll offer your top recruits versus your lesser candidates.

PA consultants tap growing quantities of data to help marketers, for example, identify which prospects are open to persuasion versus those who’ve made up their minds. They also help customer-service managers fine-tune solutions, such as when to send an irate customer a part replacement rather than offer a refund. Using analytics, online retailers can deploy “more sophisticated solutions” than discount come-ons to reduce the abandoned-cart syndrome, says consultant Dean Abbott. For example, they can woo walkouts by substituting offers for products recently purchased by “people like themselves.”

Talent Analytics predicts not just who will pass their tests but how many tries a candidate will require, says co-founder Greta Roberts. Expect to see growing industry focus on persuasion rather than prediction. Consultants will earn fees by guiding you in applying the Uplift Model to undecided purchase-decision modalities with variable weighted criteria.

(That’s PA-speak for: Convince shoppers to buy your brand, not Brand X.)

Elite “gated” private social networks are edging into the social media scene

evolving 3G technologies will greatly accelerate data-transmission speeds— making smart dust smarter—and more essential—than ever.

6

BrainComputer Interfaces

Products that allow the human brain to control a computer without physical movement continue to evolve. John Donoghue’s work at the Brown Institute’s BrainGate project has produced remarkable breakthroughs, such as enabling a completely paralyzed woman with sensor brain implants to use a robotic arm to pour herself a cup of coffee by visualizing the process. Last fall, a research team at Chalmers University of Technology announced the first mind-controlled prosthetic arms that “work in daily life” through computer interface bone implants.

At Colorado State, researchers at the Brain-Computer Interfaces Laboratory have produced a prototype where a user can don a headset and control a small, mobile robot hands-free; real-time instructions are on a pie-menu screen interface. In Brooklyn, New York, two computer scientists used Kickstarter last year to fund Phase I of a populist, open-source brain-computer interface that promises to “give anybody with a computer access to their brainwaves.”

They’re back on Kickstarter for Phase II. Look for further entrepreneurial commercialization of recent academic research funded through crowdsourcing platforms.

7

Private Social Networks

The appeal of private social networks is not hard to figure out. Compare an exclusive country club with a crowded catering hall. You might be served similar food at both, but not just anyone can walk into the country club. These elite networks offer such lures as greater privacy, ad restrictions and—let us hope—a ban on user-posted videos of cats sliding off tables. Niche social networks like ASmallWorld beckon with exclusive event invitations and the lure of meeting “like-minded people and building long-lasting relationships.”

Elixio is a gated online community (membership to senior business executives by invitation only) that claims over 80,000 members worldwide. Affluence positions itself as the LinkedIn for the corner-office crowd, a self-described “network built around introducing…like-minded individuals all around the world.” Netropolitan Club joined the ranks of private networks in September. Pay its $9,000 induction fee plus annual $3,000 renewal fees and you’re free to socialize virtually in its private, secure and courteous environment, where online decorum is maintained by staff moderators.

Ad-free? Not exactly, but commercial messages are restricted to individual postings; no corporate brands are allowed. Expect more choices of elite networks in the future, including some developed by traditional, high-end hospitality brands.

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The ability of this country to encourage individuals to be the best they can be… is one of America’s greatest attributes.”

—ANDREW LIVERIS

RESTORING AMERICAN COMPETITIVENESS IN KICKING OFF THE SUMMIT, Dow Chemical’s Andrew Liveris shared an optimistic outlook in his keynote address to peer CEOs—and challenged them to take part in the U.S.’s manufacturing revolution. “Manufacturing is an innovation-centric activity, which should be an American advantage,” he pointed out. “The ability of this country—because of its values, its institutions and the Constitution itself—to encourage individuals to be the best they can be, entrepreneurial action and be

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able to pivot according to world we face is one of America’s greatest attributes.” The country’s geopolitical stability relative to the rest of the globe also strengthens that edge.

At the same time, he cautioned, today’s U.S. businesses must navigate an entirely new kind of competitor in the form of state-owned enterprises. “This is a quintessential issue in our times,” warned Liveris. “They have subsidized capital, subsidized energy, subsidized labor and a single goal that has nothing to

CEO2CEO SUMMIT

GROWING YOUR BUSINESS IN UNCERTAIN TIMES Sometimes you have to get out of your office to be more effective in it. That, in a nutshell, is the premise behind events like December’s CEO SUMMIT at the New York Stock Exchange, where leaders gathered to share insights and brainstorm on solutions for their most pressing business challenges. These pages offer takeaways and highlights from the event.

do with EVA: employing people. They have a very different business model than you.”

The rapid pace of change today coupled with competition from this emerging force means that if businesses are to survive they must continually find ways to add value. “You need to innovate faster than the enterprises from these nation states that are commoditizing you at the speed of light,” he said.

“As manufacturers, the biggest issue we have [in achieving that] is in training a

new, technically skilled work force.”

Coming to the Summit fresh from meeting with President Obama in Washington, Liveris added that some progress has been made on that front as part of the Advanced Manufacturing Partnership Steering Committee, on which he serves.

“The critique of this Administration is hot and heavy, especially around things like healthcare, but you have to give this Administration credit for addressing the manufacturing revolution,” he said,

pointing to the launch of five Institutes for Manufacturing Innovation where industry, academia and government partners co-invest and collaborate to nurture manufacturing innovation and accelerate commercialization. “These are national training centers that you can all contribute to, that will [enable us] to show high school kids and even younger generations that trades are noble professions, that not everyone needs to have a double Ph.D. in economics.”

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CEO2CEO SUMMIT

RECAPTURING THE POWER OF INNOVATION CONCEPT Three panelists weigh in on how best to nurture innovation and harness its power: GEORGE BARRETT CEO, CARDINAL HEALTH

“We accomplish what we measure, there is great truth to that. We also accomplish what we recognize, what is reinforced, what becomes part of our mythology. At Cardinal, we never miss an opportunity to talk about an innovation, including what didn’t work.

I would also tie diversity to innovation.

You cannot get innovation in a highly charged environment when everyone talks sounds and looks the same. You need to find different types of people to populate your leadership team.

“Finally, we, as leaders, have to give voice to the heretics. We all have those people who can drive you and other people crazy, but that is where a lot of that innovation comes from.”

RIGHT: CE ’s J.P. Donlon, Cardinal Health’s George Barrett, Cool Planet’s Barry Rowan, XLR-8’s Bob Nardelli

BOB NARDELLI CEO, XLR-8, SENIOR ADVISOR, CERBERUS CAPITAL

L BRANDS’ LESLIE WEXNER RECEIVES CHIEF EXECUTIVE ’S 2015 LIFETIME ACHIEVEMENT AWARD IN HONORING L BRANDS CEO, LESLIE WEXNER, Cardinal Health’s George Barrett praised the retailing wizard for “rewriting the history of specialty retailing.” In addition to forging powerful brands like Victoria’s Secret, Abercrombie & Fitch, Lane Bryant and Bath and Body Works, Wexner is known for philanthropic endeavors in his hometown of Columbus, Ohio.

[

FOR MORE ON LESLIE WEXNER, SEE OUR COVER STORY ON P. 28.

[

“You cannot overcommunicate. You may feel that you articulate your vision and your strategy to the point of nausea, but on any given day 3 percent or more of your people haven’t heard it before.

“If you only have a $1 to spend, you want to spend 99 cents on people. My success is routed in the success, the strength and the collaboration of other people.

“As painful as it is it is, it is always good to have a few internal activists who will challenge the status quo.”

BARRY ROWAN CFO, COOL PLANET ENERGY SYSTEMS

ABOVE: CE ’s Wayne Cooper, CE ’s J.P. Donlon, L Brands’ Leslie Wexner, CE ’s Marshall Cooper, Cardinal Health’s George Barrett

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“The thing that has spurred innovation for us is a deep conviction and shared passion that we have the chance to make a significant impact and change the world for good. The single most important thing we do is attract people of that ilk. We are in this together and linking arms. There is a tremendous foxhole bonding. Getting people who understand it, who live it and feel it in their bones is the most effective thing you can do.”

CEO2CEO TAKEAWAYS CONCEPT In group brainstorming sessions, CEOs tackled the challenges of driving innovation, building effective work environments and coping with regulatory overreach and political uncertainty.

To drive innovation • Define what it means for your company. Is it a new product, a process improvement or a new market?

• Avoid confining innovation to a single department—it should wash across the organization.

• Champion, but don’t dictate. Innovation should be bi-directional, top-down and bottom-up.

• Govern innovation efforts to validate ideas and manage the value-add they can deliver.

To harness technology • Carefully vet the build vs. buy decision • Define the technological opportunities in your industry.

• Ensure leadership is engaged in exploring new technological capabilities.

• Identify and prepare for the disruptive forces in your industry.

To cope with regulatory uncertainty • Size up your impact by joining forces with industry peers, trade

groups or local business networks.

• Hedge your bets by doing business in more than one region to reduce the risk of being derailed by a political upheaval or regulatory event.

• Be vocal about how potential regulatory action will affect your business—and the jobs you provide.

• Look for the opportunities regulation may bring.

To build an effective work environment • Recognize that your offices, not you, make the first impression on potential hirees.

• Environment plays a huge role in corporate culture, which, in turn, impacts performance.

• Charitable activities that tie into employee values boost morale and strengthen ties.

• Performance-based compensation is effective, but high-visibity recognition in the workplace also motivates effectively.

Define what innovation means for your company.

Is it a new product, a process improvement or a new market?

➼ ADDITIONAL COVERAGE OF THE CEO2CEO SUMMIT WILL APPEAR IN THE MARCH/APRIL ISSUE JANUARY/FEBRUARY 2015 /

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FREE SPEECH

THE R¤AL CO$T OF FREE SPEECH

Have CEOs essentially lost their first amendment rights?

by Cheryl Strauss Einhorn

W

We live in a society where we apply today’s media-generated standards retroactively to past actions. In an age where almost everything is public and able to be traced on the Internet, that’s bad news for CEOs. ¶ Just look at what happened recently to Mozilla CEO Brendan Eich. Eich, a founder of JavaScipt and co-founder of Mozilla, was forced to resign from the popular web-browsing creator Firefox just 10 days into his tenure after the fact that, seven years earlier, Eich had made a small donation of $1,000—in support of a California ballot initiative against gay marriage—went viral. The fallout was dire even though the initiative in question handily passed, affirming the views at the time of a majority of California voters. ➝ 56 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2015

Key Takeaways 1 Here to Stay At a minimum, be mindful of the fact that we live in an age of permanent record

2 Mindful of Mission Consider what your company is trying to accomplish and where it operates

3

4

lnclusion Spend time with employees below senior management and offer discussion forums

Set an Example Use social media to to model the kind of behavior you’d like employees to exhibit

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FREE SPEECH

Despite holding interviews and releasing statements asserting that he was committed to making the not-forprofit Mozilla welcoming to the gay community and that his personal beliefs were divorced from his professional duties, Eich was unable to allay concerns.

In an interview with CNET, Eich said, “If Mozilla cannot continue to operate according to its principles of inclusiveness, where you can work on the mission—no matter what your background or other beliefs, I think we’ll probably fail.” He also asserted: “Beliefs that are protected, that include political and religious speech, are generally not something that can be held against even a CEO.” Eich was wrong. He was unable to stem employee and customer anger and outrage. When he stepped down, Mozilla’s board of directors apologized to employees in a company blog post for “not acting like you’d expect Mozilla to act” while reaffirming that the company believes in “free speech and equality”— that apparently did not extend to Eich.

Changing Rules The story is a cautionary tale to any CEO. “Ten years ago, no one would have known that he’d made the donation,” says Professor Chris Collins, of Cornell University’s School of Industrial and Labor Relations. “Now, these jobs are more challenging.”

Peter Gleason, managing director of the National Association of Corporate Directors, says that this is a dangerous trend. “At Mozilla, it’s a social issue impacting a business issue. Do you now question whether ardent Catholics, who may not believe in gay marriage, are fit to

be CEOs? Is that discrimination in itself?

There are no clear rules.”

But “it is an unfortunate reality of the world,” says Jim Copland, director of the Manhattan Institute’s Center for Legal Policy. “The CEO’s viewpoints are held out as the company’s viewpoints.”

And the opposite is true, too. For example, while billionaire Tom Steyer, founder of hedge fund Farallon Capital Management, made his fortune in part by investing in energy and mining companies, he has since become a staunch environmentalist. Despite announcing that he plans to spend $100 million to support political candidates committed to stopping climate change, his conversion is questioned by the media and opponents.

Indeed “this is a generation of permanent record,” says Dan Benton, CEO of investment management firm Andor Capital. Benton, who also sits on five not-for-profit boards, including the Hospital for Special Surgery and Colgate University. He asserts that “all is archived and findable.” In the case of Mozilla, he adds, “the backward-facing analysis is what is disturbing. Peoples’ beliefs may change over time. I know mine have. It is not terribly fair.”

Yet Benton says that not-for-profits face different and potentially greater scrutiny than publicly traded or for-profit companies. “The standard of behavior or decorum may be greater because the organization is standing for something; it has an intangible social good and so the reputational vulnerability is greater.

Success is not measured on a profit or loss sheet or by shareholder value.”

Zack Rosenburg, CEO of the St. Bernard Project, a not-for-profit disaster-

In our bifurcated society, your perspective on one issue may tick off half the population—liberal or conservative.”

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relief program, says that running any organization is a special responsibility.

“It must trump my desires and personal beliefs. We can’t prioritize our comfort over our clients.” That being said, he does not think CEOs should be cowed into silence. “It is important for CEOs to be leaders and not shy away from what they think is forward thinking.”

Speaking Out However, that thinking must be inclusive, says Daniel Riordan, CEO of Zurich Global Corporate in North America, a multi-line insurer. “I am a firm believer in First Amendment rights; and at the same time, I’m responsible for cultivating a diverse and inclusive work environment where no one feels alienated and differences are celebrated,” he says. “This means not only race, gender, religion and ethnicity but also diversity of thought, experience and culture.”

Riordan reports that during town hall meetings with employees, he makes sure he is clear about his strategy for openness and “then, I stay and answer all of their questions because their opinions are reflective of our community and our customers. We have a right to our opinions, but we need to think about how we act on them and what we are trying to accomplish together as a company.”

Riordan sees this age of permanent record as an opportunity for CEOs to have a chance to model “doing the right thing.”

For example, after Hurricane Sandy, he and his family worked with Zurich’s employees to help rebuild homes. He posted pictures of his family’s efforts on the company website. “It’s a real positive for well-grounded individuals.”

Allen Perk, president of XLN Systems, a network-security company, agrees.

He says when people know something about him, “they know things about my character and—as such—[they] can determine things about my belief and values and whether they want to do business with me.”

Still, Tom Saporito, CEO of consulting firm RHR International, says he is very careful about what he says, aware

permanent record can be tricky. Ideally, boards should conduct more comprehensive background checks that include vetting candidates for public-speaking gaffes or a track record of making controversial statements. Do the candidate’s views align with—or at least not aggressively contradict—those of the company’s employees, shareholders and customers?

However, Andor Capital CEO Benton notes that CEO searches are often conducted by search firms. “We only get to call references. A reference check is not a background check. It’s just past performance. We rely upon the search firm to vet the candidates.” The problem, he says, is that social issues in the last five years have really become national issues, so there is a need to review

collected data differently.

What’s more, abandoning a well-skilled CEO over his personal politics can entail a different sort of fallout, notes Cornell’s Professor Collins.

“If there is a sense that the board will not really support the CEO, that may hurt its ability to attract the right person.”

Collins urges boards to work with their companies’ communications teams to think through any issues that may be sensitive before a new leader is announced. He also notes that while most CEOs who have contracts have behavior clauses that may be used to terminate a CEO, to date, there are no real rules about limiting one’s speech.

“Today, choosing a CEO requires a holistic approach,” says Collins. “It is no longer just about a technical fit. The person must also fit the company’s culture.”

To minimize the chances of a new CEO raising the ire of stakeholders, boards can: Work with the company’s communications team to think through issues of potential concern.

Consider whether a CEO candidate’s personal views mesh with the mission of the company.

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Conduct comprehensive background searches, including a look at prior political or other public speeches.

▼

Tim Tragesser, president of technology provider Polar Systems, says CEO free speech requires a fine balance. “It is a challenge,” he says. “You don’t want to be seen as pushing beliefs onto employees.

Our words can get interpreted a lot of different ways. I am cautious about supporting sides of controversial issues from a corporate perspective.”

However, “the message is not to disengage from politics,” says Copland, who notes that companies and shareholders benefit from companies engaging in issues affecting communities.

Riordan’s advice: “We all come from different environments and faiths and we don’t need to put that in a drawer, but we need to think about promoting inclusive workplaces that reflect the marketplace.”

The bottom line: There is only limited free speech for CEOs—because while everyone has a right to free speech, not everyone has the right to be CEO.

CONDUCTING CEO SEARCHES in an age of

▼

Engage Without Alienating

In the Boardroom: Vetting CEOs

▼

“that it could be taken out of context,” a tricky balance since “in our bifurcated society your perspective on one issue may tick off half the population—liberal or conservative.” Even when related to the company’s performance, say taxes or regulation, “a public stance affects the way the issue is viewed in relation to the company.”

Sometimes, context also plays a part in how a personal opinion translates publicly. Chick-fil-A CEO Dan Cathy made headlines in 2012 by taking a public stance on the radio in favor of traditional marriage. The interview was perceived as Cathy’s coming out against gay marriage, which led to LGBT kiss-ins at the company’s chain of restaurants. Yet, in 2007, when the company detailed its Christian values to Forbes, noting that it closes stores on Sundays so employees can attend church, there was no such outcry.

While Cathy has not changed his personal views, he gave an interview with The Atlanta Journal-Constitution earlier this year saying he’d made a mistake and that he regretted “making the company a symbol of the marriage debate.”

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ECONOMIC DEVELOPMENT

REGIONAL REPORT

The Southwest

In the Southwest, Texas is the Leader. Hands down. By Warren Strugatch

#7

#30

#20

#29

#1 #1

TEXAS: STILL ON TOP

Through the halls of the Dallas Federal Reserve Bank and into the conference room walked the A-list of the Texas business establishment last September. In came Mike Ullman, chief of JCPenney; David Seton, CEO of Fluor; and Thomas Falk, corner-office man from Kimberly-Clark. The chiefs mingled with Fed officials, were glad-handed by economic professors and business school deans and stood up and delivered plummy Texas-centric growth forecasts from the podium.

Striking the default twangy/ triumphalist tone that has come to characterize economic conversations in America’s most pro-business state, the conference started out putting the 49 states not named Texas in their place. A dean from the local McCombs

School of Business noted that, at long last, we’re starting to see phrases “like optimism, revenue growth, more hiring and GDP increases” being applied to the rest of the U.S. “Without Texas,” he added, “the nation’s economy would be stuck in slow motion.”

As they say in Houston, it ain’t braggin’ if you can do it. And Texas has indeed been doing it throughout this young century. For the tenth year in a row, the readers of Chief Executive rated Texas the No. 1 state in which to do business. Our readers also ranked the Lone Star state one of the seven best states for startups. If economic development were an oil field, Texas would be gushing.

By many indicators, possessor of the nation’s most robust economy, Texas was expected to add as many

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as 400,000 new jobs last year, more than any state save California, with its high-flying Silicon Valley, and shale-rich Nebraska. Most new jobs are homegrown, at small-but-growing Lone Star companies. But the lion’s share of attention these days goes to suburban Dallas, where Toyota is filling more than 4,000 positions at its still-under-construction location, selected after decades in Southern California. The move, like so many corporate transfers over the past decade, originated with now-departed Gov. Rick Perry’s relentless Texas salesmanship, free use of incentives and a long-running, CEO-whispering road show.

There are so many jobs that even Texas has to go outside to fill them. From around the country and around the globe, people move to

Texas at the rate of about 1.4 million a year. Residents of perennially funky Austin gripe that their way-cool town is losing hipster cred as hordes of young software entrepreneurs flow in, altering the character of the city Willie Nelson calls home. Even Houston is in the picture, anointed America’s coolest city—say what?—by Forbes in 2012.

Houston’s reign was short lived—just one year of coolness. But in 2014, the business magazine again short-listed Houston and added Austin and Dallas (of all places) to its Top Ten of Cool.

Okay, it’s Forbes. But still.

Generating the most new jobs is, no surprise, the energy sector.

Warehousing, utilities, construction, professional and business services and leisure and hospitality added to the continuing employment surge.

Few economic-development conversations start in Texas without citing the state’s tax structure. You’ve heard it before, you’ll hear it again: Texas lacks both corporate tax and individual income tax. Some celebrate this policy; others raise their eyebrows and cite compensatory costs, such as sky-high property taxes and the gross receipts tax. The Tax Foundation ranks Texas’s tax burden 4th lowest out of 50 states, and ranks the state 11th in business tax climate.

“Texas is a very desirable place

STATE STAT

The mining double-play has solidified Texas’s position as top U.S. fuel producer, accounting for over slightly one-third of the nation’s oil and well over one quarter of its natural gas. for companies to relocate due to business climate and tax structure, among the many reasons,” says John Rocca, managing director of CBRE’s strategic consulting, location analysis and economic incentives office in Los Angeles. “It’s a low-cost and favorable operating environment. It’s ideally located between the coasts. From the incentive perspective, it’s also quite attractive. In terms of the Southwest, Texas is the leader, hands down.”

The Lone Star State’s 21st century economic trajectory has been fueled by such factors as export productivity, tax advantages to employers and its former governor’s economic proselytizing. To many in the business community, Rick Perry is—despite being hauled up on abuse-of-power charges in his last days in office—a Texas icon.

“I’ve worked with six Texas

governors and Rick Perry has done more economic development than the prior five combined,” rhapsodizes Austin-based economic development consultant Angelos Angelou. For all of Perry’s CEO-whispering and free hand with incentive disbursements— historically he spent more than half the state’s budget on grants and subsidies, tallying over $19 billion a year as recently as 2013—the economic boom in Texas is not primarily a tale of cash-back deals. Economically, Texas in 2015 is much as it was in 1915—a state whose fortunes are very much tied to energy.

The No. 1 producer of oil and gas in the nation, Texas reversed a decadelong slide of oil-related revenues in 2010, just as Perry took office and shale fracking took off. The mining doubleplay has solidified Texas’s position as top U.S. fuel producer, accounting for

How The States Stack Up Rank Best/Worst States 20141

GDP Per Top Corporate GDP 1 Tax Rate (%)2 Rank 20131 Capita 2013 ($)

Right to Work3

Education Quality of Jobs Quality (K-12)/ HQ Green 4 4 4 4,5 State Service Incentives Incentives Incentives Post-Secondary4

Texas

1

2

54,465

N/A

Yes

A

A+

A

C

B / A-

Arizona

7

21

39,526

6.5

Yes

B+

A

B

B

B / B+

Oklahoma

20

29

42,670

6

Yes

A

A-

B

B

B / B+

Arkansas

29

34

39,111

6.5

Yes

B

A

A

B

D+ / B-

N. Mexico

30

38

40,431

7.3

No

B-

B+

B+

B+

C- / B

Sources: 1 Bureau of Economic Analysis 2 Tax Foundation 3 National Right to Work Committee/National Right to Work Legal Defense Committee 4 Angelos Angelou, AngelouEconomics; Martin Pupil, Colliers International; John Rocca, CBRE; David Witcher, Location Advisory Services. 5 DSIRE Database of State Incentives for Renewables & Efficiency

JANUARY/FEBRUARY 2015

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WHY WE’RE HERE / CEO PERSPECTIVE #1 WHO Alexi Venneri, co-founder and CEO, Digital Air Strike SITE HISTORY Venneri started her social media agency in 2010 at her Scottsdale kitchen table, later moving into offices at Camelview Village executive suite. Digital Air Strike merged in 2012 with Response Logix, based in San Jose, California, then expanded into 7,000 square feet at the Camelback Square complex nearby.

Last November, the agency expanded to 10,500 square feet in the same multi-tenant office building; it also maintains satellite offices in San Jose and Moorestown, New Jersey. WHY ARIZONA “We made the conscious decision to move here because of the talent. There was a little less competition for quality people here and our people are a little more committed. They spend less time in traffic and more time being productive and having fun. There’s a good quality of life.” BOTTOM LINE “Scottsdale is a relatively strategic location for a workforce, able to draw from a considerable skilled labor pool deep into the East and West valleys. The average age of the workforce in downtown Scottsdale is 30, very beneficial to a growing tech company like ours looking to expand rapidly.”

over slightly one-third of the nation’s oil and well over one quarter of its natural gas.

Jobs in this sector outpaced the rest of the state’s employment growth by a factor of five. These are high-paying jobs, too. Sector revenues, combined with high property taxes, helped fund the state’s aggressive soliciting of out-of-state employers, effectively diversifying the economy. Angelou shrugs off the suggestion that the wave of relocating employers—locals call the influx “The Texodus”—reflects pay for play. “It’s not about incentives anymore,” he insists. “Companies go where they can attract talent.”

While execs pay special attention to relocation pitches coming from states that eschew taxes, most recognize that there is no free lunch. High property taxes and the state’s gross receipts tax claw back potential savings.

Where Texas stands out may well be the efficiency with which local recruitment efforts synchronize with state outreach initiatives. While Governor Perry made his well-publicized rounds of Fortune-500 chiefs, most small and midsized companies played small ball, connecting with smalltown government officials and their

economic development field reps.

When their corporate searches drilled down to the last round, the governor’s office weighed in with matching offers, tapping such sources as the now-legendary Texas Enterprise Fund.

Usually, the combined offers prevailed.

Texas’s small cities and rural, jobhungry regions are the most aggressive dealmakers in the Southwest, if not the country. “It’s not unusual,” says site selector Angelou, “to get 10year abatements of 80 percent” off local taxes. He adds: “There are places where I can get 20-year tax abatements.”

It’s more than money deals. Texas’s small-town mayors and economicdevelopment reps know how to make red tape disappear, telescoping the permitting process down to a couple of weeks. “I was able to help a Dallas company, Dimension Capital Partners, get all the necessary permits for their data center done in less than two weeks,” reports Angelos. That halfbillion dollar project breaks ground later this year.

High-flying CEOs need good places from which to launch their flights.

Texas boasts a top-notch aviation infrastructure that avoids the hassles and inconveniences of most big-city

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air hubs. If one day, someone writes an ode to an international airport, the poem will be penned in Dallas-Fort Worth. “The access to connecting flights from DFW is terrific, in part because this is the home of American Airlines,” declares Greg Bustin, a consultant with Texas roots and plenty of frequent-flyer mileage. Love Field might even inspire a love song. Recent renovations completed in advance of local favorite Southwest Airlines’ expanded schedule have sweetened the task of flying around the country as Southwest Airlines serves more business destinations.

After 14 years of Rick Perry’s firebreathing leadership, the eyes of the Texas business community are now on his successor, former attorney general Greg Abbott. “The Texas engine has been running well. Any politician who tinkers with it does so at his own risk,” says Bill Miller, co-founder of HillCo Partners, a lobbying firm headquartered in Austin.

Business leaders expect Abbott to continue Perry’s economicdevelopment policies, including liberal use of incentives and subsidies, says Miller. He may, however, face increased scrutiny and calls for greater transparency. But no one wants to upset the Texas apple cart. “Texas is the most prosperous, most growth oriented and most job-creation focused state in the country,” Miller declares.

“We won’t put up with less.”

#7

ARIZONA: BOOM BACKLASH

Arizona experienced what economists call “a correction” last year. After years of rapid growth and overbuilding, demand caught up with supply.

Housing starts petered out and construction industry activity sagged.

George Hammond, director of the University of Arizona’s Economic and Business Research Center, forecasts the state economy to resume this

year through at least 2017, at a pace exceeding national growth. His longrun forecast sees the state’s continuing to add jobs and residents well ahead of the national average, although the pace will slow down.

Quite a few other cities have experienced housing downtowns, notes Barry Broom, president of the Greater Phoenix Economic Council.

Broom predicts that within five years, the Phoenix metro area “will be back in the top five metro regions for job growth.” The state continues to add jobs in healthcare, financial services and high tech, and Arizona State continues to graduate more holders of four-year degrees than any college in the country. “The overall economic health of the metro region and the state,” he says, “is relatively strong.”

Positives include benefits stemming from the most recent tax reform, which dropped the corporate income rate below 6 percent. Arizona

“has the ability to offer more aggressive incentive packages than in the past, including R&D tax credits and zerobased corporate tax rates, and we are going to do that,” says Broom.

Phoenix hosts the Super Bowl this year, showcasing the city’s resortstyle appeal to a national audience of corporate chieftains. Ken Van Winkle, managing partner of the Lewis Roca Rothgerber law firm and legal counsel to the city’s Super Bowl Host Committee, anticipates the national exposure will generate corporate relocations. The Tax Foundation ranks Arizona 17th out of 50 states, and ranks its business tax climate 22nd. Arizona spends over $1.47 billion annually on incentive programs.

#20

OKLAHOMA: MORE THAN OKAY

Oklahoma’s economy is driven by oil and gas; Oklahoma is doing well. The state’s economy

WHY WE’RE HERE / CEO PERSPECTIVE #2 WHO Scott Maloney, CEO, Seed Worthy SITE HISTORY Founded in an Albuquerque garage in 2013.

WHY NEW MEXICO “The start-up environment is a bit challenging but there are a lot of enthusiastic investors. Organizations like the Technology Ventures Corporation mentor technology entrepreneurs and introduce people like us to investors.”

BOTTOM LINE Having recently landed a six-figure angel investment, Maloney credits oldfashioned networking: “I went out into the community with a compelling story... and I got the investment.”

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ECONOMIC DEVELOPMENT

grew at a rate of 4.2 percent in 2013 over the previous year, compared with the national 1.8 growth; only three states showed bigger gains. Job creation was led by the leisure and hospitality sector followed by the construction industry; IT jobs led the retreat.

Oklahoma Chamber of Commerce president Fred Morgan sees developing strength in aerospace and defense, bioscience, manufacturing, transportation and distribution and financial services. The state is also a major agricultural producer, which exposes its economy to future water shortage disruption. Mining-sector jobs—that includes most energy-sector employment—are expected to rebound this year, with employment gains of 3.6 percent, according to economist Russell Evans at Oklahoma City University. Workers compensation reform has pleased employers and helped make the state more competitive, says Norman.

Incoming governor Doug Ducey gained business support on the campaign trail by talking up economic diversification, “not just more construction,” says Stuart Goodman, co-founder of Goodman Schwartz Public Affairs, in Phoenix. He also promised no tax increases. The Tax

Foundation ranks Oklahoma 38th out of 50 states and ranks its business climate 36th. Oklahoma spends over $2.18 billion annually on incentive programs.

#29

ARKANSAS: BANKING ON ITS BIG BUSINESSES

Arkansas benefits from its location near the center of the North American market, supported by excellent transportation links. The presence of six Fortune 500 companies, including the world’s largest corporation— Walmart—attracts supplier clusters and generates an annual flow of welltrained professionals and executives who part ways with their employers and become consultants and entrepreneurs. The state ranks among the lowest for cost of doing business and cost of living.

On the minus side, workforce readiness is an issue: education quality and high school completion rates remain problematic, despite being prioritized by every governor since Bill Clinton. Continuing weakening in the forestry-products sector has sapped economic value from the state, encouraging droves of people to leave the work force through age, attrition

WHY WE’RE HERE / CEO PERSPECTIVE #3 WHO Chad Richison, Founder and CEO of Paycom SITE HISTORY HR consulting and payroll services company Paycom launched in 1998 with about 2,200 square feet of Class C office space on Northwest Expressway in Oklahoma City. In 2003, the company expanded into 27,000 square feet of Class B office space. In 2011, leveraging $2 million of incentives from Oklahoma City’s Economic Development Trust, Paycom moved into a new 90,000-square-foot, three-story headquarters. Last year, it tapped an additional $1.25 million incentive deal with the city to build an 80,000-square-foot annex. WHY OKLAHOMA “I am from Oklahoma and I know the economics that exist in Oklahoma. I knew what I would be able to gain from a lower-cost but strong technology operational environment and strong technology workforce. We get a lot of good people from the [University of Oklahoma at Oklahoma City.]” BOTTOM LINE “Oklahoma City has VC forums and angel investors. We have community banks that are competitive making loans, including several that focus on startup finance. The MAPS (urban revitalization) program has really turned things around.”

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or relocation. Meanwhile, employers struggle with a work force many feel is not up to the challenges of today’s economy. Funds have begun to trickle out to long-under-used community colleges to provide training tied to jobcreation goals of specific employers.

Arkansas needs more funding and more programs like that, says Grant Tennille, executive director of the Arkansas Economic Development Commission.

The start of construction this fall on the $1.3 billion Big River Steel Mill in Mississippi County has energized the business community; the plant will eventually hire more than 500 permanent workers. The project was financed by a combination of public and private monies, including $125 million in state bonds, $12 million from the county and $2 million from the City of Osceola.

Business leaders supported Asa Hutchinson in his successful gubernatorial campaign, and expect his support for tax reform, more flexible environmental regulations and sharper emphasis on job creation. “Asa campaigned for governor promising he’d start every day phoning business leaders,” says Randy Thurman, cofounder of Government Solutions, a Little Rock lobbyist. “I believe business development is his first priority.” The Tax Foundation ranks Arkansas 12th highest out of 50 states, and ranks it 35th in business tax climate. The state spends over $431 million annually on incentive programs.

NEW MEXICO:

#30

DESPERATELY SEEKING JOB GROWTH

Perennially finishing near the bottom of many economic rankings, New Mexico finished dead last in the nation in 2013 for job growth, and it is the only state to show a net loss of jobs since 2009. Companies such as Solo Cup and Merillat Cabinets have shut down manufacturing plants. Major

local employers such as HP, Intel and Eclipse Aerospace have gone through major layoffs in the past several years.

Dependent since the 1940s on federally funded research programs at Los Alamos, Scandia National Laboratories and the Air Force laboratories, New Mexico is more dependent on federal spending than any other state.

Natural-resource exploitation, through mining and tourism, accounts for the state’s next largest chunk of revenue; still, most new jobs since 2011 have been in healthcare and social services. Emphasis in recent years on supporting high-tech startups— many of them commercializing R&D advances out of the labs—has produced a slight job-creation uptick; the University of New Mexico’s Bureau of Business & Economic Research predicts job growth will approach 1 percent this year and stay there midway through the next decade. To attract out-of-state employers, the

WHY WE’RE HERE / CEO PERSPECTIVE #4 WHO Skip Cass, CEO of Long Range Systems Site History Started in a garage in Garland in 1993, the pagertechnology manufacturer and data processor servicing the hospitality industry moved into leased office space in the ’90s. In 2007, it leased 55,000 square feet in an office building in Madison.

WHY TEXAS “Over the past 20 years, Texas has become a regional business hub. People are drawn here because of the low taxes, low cost of living, business-friendly environment and the fact that it’s a great place to raise a family.” BOTTOM LINE “Dallas is a strategic place to base a business like LRS, given the high concentration of hospitality businesses. The city has become a hub for other key industries like technology and energy. Add that it’s centrally located with a major connecting airport, and there's nowhere better for us to be headquartered.”

non-partisan Think New Mexico calls for streamlining fees and filings into one portal and establishing postperformance tax rebates for relocating and expanding-in-place job creators.

New Mexico “is competing well and offering a lot of incentives” to attract relocators, says site-selector Angelou. In November New Mexicans elected Gov. Susana Martinez to a

second term; business leaders expect she’ll accelerate efforts to woo out-ofstate employers using discretionary funds, as well as press for education reforms. The Tax Foundation ranks New Mexico 14th lowest in tax burden out of 50 states and ranks its business tax climate 38th in the country. New Mexico spends over $253 million annually on incentive programs.

Bold Profiles: Raymond Chung:

American Vegetable Soybean & Edamame, Inc. When looking for the ideal location, Raymond Chung, CEO of American Vegetable Soybean & Edamame, Inc., found exactly what he needed in Arkansas.

Raymond partnered with the University of Arkansas Division of Agriculture to develop a process for growing and harvesting edamame on American soil. That led to the company putting down roots in Mulberry, Arkansas.

Today, they are supplying many large supermarkets and organic food stores with the snack their customers love to eat.

Arkansas favors American Vegetable Soybean & Edamame, Inc. with advanced research and abundant natural resources. How can Arkansas Favor You? Learn how at ArkansasFavorstheBold.com.

JANUARY/FEBRUARY 2015

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CEO PASSIONS

Weatherman Collects Tools of the Trade ACCUWEATHER PRESIDENT AND CHAIRMAN Joel N. Myers has been

TAKING MEASURE Below right, Joel Myers at home with part of his antique barometers collection.

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mesmerized by the weather since he was three—a passion that continued into adulthood. At seven, he stayed up all night to watch a snowstorm. In anticipation of 1954’s Hurricane Hazel, a 14-year-old Myers roped himself to a porch railing to watch the raging storm knock down trees. That same year, he became an official observer for the Weather Bureau, now the National Weather Service. At 22, he founded his company while pursuing a Ph.D. in meteorology at Penn State.

His first office was a tiny, windowless space from which he called 25,000 prospects. Nearly all of them said no, but he kept calling. “I never doubted myself,” he says. “Failure never entered my mind.” His first client, a utility company, paid $50 monthly.

Over time, his State College, Pennsylvania-based company was able to thrive because “I was able to provide

JANUARY/FEBRUARY 2015

forecasts that were more accurate, had more value and extended further into the future,” he says. Currently, one billion people use AccuWeather’s forecasts each day. It serves 240 of the Fortune 500 companies globally, with forecasts covering 2.7 million locations in 36 languages.

Given his life passion, it’s only fitting that Myers would become an avid collector of weather instruments. He now owns what Guinness World Records says is the world’s largest collection of thermometers, more than 6,000 items, and one of the largest collections—at approximately 300—of rare and unique barometers.

The more unusual include an earring thermometer rescued from a 1650 whaling ship, one from the Yukon that gauges temperatures down to minus 100 degrees Celsius and a pill-sized thermometer like the one swallowed

by John Glenn in his 1998 mission. His barometers include one created around the year 1680, fewer than 40 years after Italy’s Evangelista Torricelli invented the instrument. Others date back to before the U.S. Revolutionary War. Myers, who has been collecting such specimens for 37 years, admires the fact that, although his weather instruments are hundreds of years old, they’re still working instruments—and often also beautiful. “Weather has been my fascination and life’s work and love,” he notes. Continuing to collect, Myers is visiting antiques dealers these days to look for barometers from the 17th and 18th centuries to fill niches in his collection.

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EXECUTIVE LIFE

The Magic Touch

Every CEO knows the importance of having the right support team in place. CONCIERGE SERVICES bring executive-level assistance to your personal endeavors. By Michael Gelfand WHETHER YOU’RE THE CEO OF a NAKED TRUTH Concierges know how to open the door to exceptional experiences

small startup, an established, mid-size private company or a Fortune 500 behemoth, both the rigorous demands of the job and the need to balance them with personal and family responsibilities can be overwhelming. To make it all work, most business leaders outsource chores, critical tasks and personal requests that they can’t get done themselves or don’t have time to do correctly. On the domestic front, a spouse or partner often takes on the bulk of those tasks; and at the office, they usually become the domain of a personal assistant. Still, there will always be times when your go-to resource can’t come through or when the critical mission at hand requires deep connections or particular expertise—times when you need to take it to the next level.

More than just advice, concierge services provide special help Concierge services are relatively new and higher levels of assistance that evolved out of the hotel-based help business travelers have long called upon when on unfamiliar turf. In the late 1990s, there were only a handful of firms in the space; but today, industry veterans estimate there are more than 1,000 concierge services around the world covering the entire spectrum of support needs, from basic everyday tasks like picking up your dry cleaning and prescriptions or walking your dog to more substantial undertakings, such as hiring the perfect personal chef or snagging one of your valued clients a reservation at a perennially

booked, five-star restaurant.

However, don’t think of concierge services as just discounted tickets to sports events or generic recommendations you might expect of, say, your platinum credit card company or a luxury hotel. From small boutique services to large, global organizations with thousands of employees, there are sophisticated concierge services—onestop shops—ready to satisfy your every need. Costs, as you might assume, vary widely and depend not only on the service requested but the area of the world you’re in at the time. Pricing is typically based on one or more of the following: hourly and day rates, a la carte charges or invitation-only, annual membership fees.

Stan Doobin, owner and CEO of Harvard Maintenance, a New Yorkbased building-maintenance and security-services company, has been a member of The Bluefish, a premier lifestyle, concierge and travel service, for four years. He touts the company as an invaluable business resource.

“Basically, whenever you need something nobody else can pull off, you call them,” he says. “[Maybe] one of your clients is in town and wants tickets to the Emmy Awards or a Victoria Secret fashion show. They save you the time and deliver on something you wouldn’t have been able to do yourself, and they make you look like a hero at the same time. You place that phone call, and— voilá—magic happens.”

Doobin recalls one instance when he was trapped with nothing to do at an industry conference during a national holiday in Brazil. “We were all really bored, and I thought it would be fun to go see Iguaçu Falls, but I didn’t know how to do it,” he says. “I made the phone call to Bluefish and 30 minutes later they had a private plane and a tour guide booked. Whatever you need, however you need it, you’ll get it, and the biggest grief they may give you is ‘Give me a half-hour.’” The value, he says, is impossible to assess

DYNAMIC DUO Bluefish’s Steve Sims worked with Virgin’s Sir Richard Branson to offer an “entrepreneurial guru” getaway benefiting charity

in purely financial terms. “Having your family and friends say ‘thank you’ from the bottom of their hearts is hard to quantify—and very unusual in today’s world.”

All concierge services are not created equally As you might expect, the type of concierge services you might want or receive in Dubuque will be different than what you might get in Dubai—as is what you’ll pay for it. “If a CEO is located in or visiting New York City or another world capital, pricing for services there will be higher,” says Katharine Giovanni, a leading concierge trainer and founder and chief happiness officer of both Triangle International (an independent concierge and customer-service training firm) and the International Concierge and Lifestyle Management Directory, a leading online concierge listing. “Some concierges charge so that the client will prepay for a block of time. They’ll say, ‘Pay me for five hours, and you’ve got me for whatever you want to do.’

Others treat it like a private club, with annual fees and with services bundled at each level based on the markets they serve.”

Quintessentially, a global, luxury-lifestyle provider, with its core business in concierge services, has key hub offices located in New York, London, Dubai and Hong Kong that are open 24/7, as well as 58 other offices located around the world. They have more than 1,500 employees poised to assist you as needed and get you access to wherever you want to be.

“We are very much known for fulfilling useful requests,” says Emma Sherrard Matthew, Quintessentially’s CEO. Recently, for example, a client requested a surprise flash mob for his family, with pictures of each family member up on every billboard. “We can help our members however we’re asked. With CEOs, their time is so precious, and they want the right support around them. They are busy individuals, and even if an army is taking care of them, they don’t always have their entourage with them.”

Quintessentially’s employees work hard to build relationships with nightclubs, restaurants and other venues to get preferential rates and treatment for its members. “Whether they want fivestar venues with lots of gold and bling, or [they] want our help finding hidden gems, we are very proactive,” says Matthew. “We cater to a like-minded group of individuals who want events that are curated especially for them and experiences in places and with people that have been vetted.”

Some concierge services specialize in a specific type of service, such as Vitesse Worldwide, which is a global, no-membership-fee VIP service that handles every aspect of travel but focuses on scoring hard-to-get tickets to Broadway shows and prestigious sporting, entertainment and special events, ranging from tickets to the Olympics or the Grammy Awards to major sport championships—with only a few days notice. Depending on the event, Vitesse will add a percentage (usually between 5-20 percent) to the cost of the tickets, and they can provide

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chauffeured ground transportation, private air-charter and concierge and executive protection services for corporate clients.

Then, there are the offerings from services like The Bluefish, for whom no request is ever too unusual. “We’re not errand boys,” says CEO Steve Sims. “We come into play when you want to take a submarine ride to see the Titanic, go to the Vatican or get backstage tickets to hang out with Sting.”

Most requests The Bluefish receives are travel-oriented, says Sims, who notes that his firm’s execution is designed to ensure clients “are not tourists when they land but insiders within seconds.” Sometimes, however, the requests go far beyond simply getting a client past the velvet rope.

For example, Sims recently received a request from a client, the CEO of a major European energy company, who was taking his new wife to Florence, Italy as a birthday gift and wanted the trip to make a lasting impression.

During their three-day stay, Sims arranged a private tour of the Acca-

demia Gallery that came with a special surprise. “At around 9 p.m., as the tour was ending, my client suggested to his wife that they ‘pop in’ to see David, Michelangelo’s iconic masterpiece sculpture,” recalls Sims. The client politely asked the security doorman if they could come in, to which the doorman replied, “Only five minutes,” and as the door opened, a red carpet led from the front door directly to the feet of David. At the base of the statue, was a dinner table set for six. “Midway through appetizers, as a string quartet performed, I let the group know that we had a local tenor ready to perform for them if that was all right. Then, the singer Andrea Bocelli came out to sing six songs, including ‘Happy Birthday.’”

While far from typical, that well-orchestrated evening demonstrates just how extensively concierge services have come from the days of liveried butlers packing picnic baskets. “This is a creative service industry, and it’s not about being subservient; it’s about delivering,” says Sims. “If you need something special done, employ someone you can rely on to get it done.”

Concierges on Call No matter where you are, where you are going or where you want to be, if you need help getting something done well, there’s a concierge service that’s right for you. To get a sense of the depth and breadth of the services out there, the International Concierge & Lifestyle Management Directory (www.iclmdirectory.com) is a great place to start. But if you prefer to cut to the chase, we’ve assembled a veritable who’s-who list of leading global concierge services for your convenience.

The Bluefish www.thebluefish.com Quintessentially www.quintessentially.com Vitesse www.vitesseworldwide.com Bon Vivant www.bonvivant.co.uk Red Butler www.redbutler.com

Pure Entertainment Group www.purentonline.com Luxury Concierge China www.luxuryconciergechina.com Ten Lifestyle www.tenlifestyle.com John Paul www.johnpaul.com/uk_en Alberta La Grup www.albertalagrup.com

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AD INDEX Albuquerque Economic Development abq.org 63 Arkansas Economic Development Commission arkansasedc.com 65 C-12 c12group.com 35 CohnReznick CohnReznick.com 23 Columbus Partnership columbusregion.com 33 Enterprise Florida perfectbusinessclimate.com 7 Greater Fort Lauderdale Alliance lesstaxing.com 19 Indiana Economic Development astatethatworks.com Inside front cover Jobs Ohio jobs-ohio.com/gamechangers. com 25 Louisiana Economic Development opportunitylouisiana.com/ customfit 13 Microsoft microsoft.com 9 PURE Insurance pureinsurance.com 67 Ransford ransfordtalent.com 3 Stein IAS steinias.com Inside back cover Wisconsin Economic Development skilled.inwisconsin.com Outside cover Wounded Warrior Project findwwp.org 47

FLIPSIDE

Absence Might Make the Heart Grow Fonder Maybe it’s time to give politicking a pause. by Joe Queenan

THE SUPER BOWL IS THE MOST POPULAR EVENT in American life;

but after it’s over, the players know that it’s time to shut up and go home. So do the owners, the refs, the agents, the cheerleaders and even the journalists who cover the event. They go home, rest up, stay out of the line of fire and keep a low profile. Most important of all, they muzzle it. They give the public a much-needed break from all the hoopla, drama, violence, hyperbole, contract disputes, booth reviews of challenged interceptions and concussions. And, oh yes, the inane half-time shows. The public couldn’t stand it if football was played all year-round. The whole country would go nuts.

Why don’t politicians understand this need to give the public a breather?

Why don’t they understand that even the most radiant, beloved star will eventually wear out his welcome? (The same is even truer for politicians, who were never all that radiant or beloved in the first place.) When a team wins the World Series at the end of October, they have a lavish celebration in the clubhouse, a big parade and a nice visit

to the White House. Then they shut up and go home until the following spring because they know that by the end of October, the public is sick of watching baseball. If the man in the street saw one more futile pick-off attempt or one more intentional walk, he’d put his fist through the television.

Politicians don’t understand this.

Politicians can’t shut up for even 24 hours after a big election. As soon as the presidential election is over, people start grinding their knives, polishing their stilettos and getting ready for the mid-terms. As soon mid-term elections are over, everyone starts shining truncheons for the next presidential election. Things immediately turn nasty. Politicians start savaging their opponents and talking about how America is broken and needs fixing.

They issue dire warnings that the American Dream is on life support.

They make the people whose party is out of power angry because it seems like they’re gloating, and they make the people who voted them into office angry because they voted them into office to reduce unemployment, boost wages and run the country properly, not to run their mouths.

The cycle of American life is organized around seasonal events we all love dearly, but that we quickly put out of our minds as soon as they are over.

We have a big Fourth of July Parade.

We don’t have another one in August.

When Halloween is over, the witches and jack o’ lanterns and black cats go

back up into the attic until next year, the same way Santa Claus and his elves vaporize the first week in January. St. Patrick’s Day parades are terrific—but would you want one every week?

American politicians are having the equivalent of a 365-day Halloween Party—a party that no one but them wants to attend. Leaders are supposed to inspire the troops, which is what leaders do in sports, private industry, education and health care. Politicians don’t do that. Politicians make everybody feel badly about everything. They posture. They cavil. They equivocate.

They lie. Their poisonous negativity creates a toxic mood in which people can’t hear themselves think.

This wouldn’t be so bad if they occasionally got off the stage. The way athletes do. The five-month gap between the Super Bowl and training camp allows the fans to forget how much they hate the refs, the announcers and the beer vendors. The months between the World Series and spring training allows the public to forget how deadly baseball can be in August. These respites, these grace periods, allow the public to re-focus—to breathe.

Politicians will not allow the public to breathe. Nothing happens without their jumping on the bandwagon and grandstanding. Nothing happens without politicians’ taking credit or assigning blame. They are like hyperactive kids who need to be sent to their rooms with no dinner and no toys.

And told to stay up there forever.

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FINAL WORD

State Subsidies Grow More Common and Costly WHILE FEDERAL SUBSIDIES and become of these investments—some of bailouts to industry get a lot of attenthem now years old—it is impossible tion, state governments regularly use to know if New Jersey is getting what tax credits, subsidies and incentives it paid for. to entice corporations to locate within Veronique de Rugy, a senior retheir borders and create more jobs. search fellow at the Mercatus Center at The problem is that the evidence of George Mason University, has comeconomic benefit to state taxpayers and piled data from the Subsidy Tracker the number of jobs actually created is 2.0 developed by Good Jobs First that often shaky. shows states that have extended cuConsider New Jersey. According mulative subsidies exceeding $1 billion to Leigh McIlvaine, a research analyst (see chart). New York State clearly with Good Jobs First, a national leads the pack with subsidy deals economic development accountabilworth $21.71 billion. “The second-highity organization, and est corporate beneficiary Jon Whiten, the deputy in the dataset, Alcoa, reKnown State director of New Jersey ceived a plum deal from Subsidy Policy Perspective, a New the Empire State in 2007, Amounts by Jersey research organizaraking in an astoundTop States tion focused on economic ing $5.6 billion to build Total subsidy dollars policy, the Garden State an aluminum plant,” (in billions) has awarded corporations observes de Rugy.

NY 21.71 more than $4 billion in tax Although Boeing, WA 13.04 LA 11.25 subsidies since 2010—an Alcoa, GM and Ford MI 10.44 average of $76 million each number among the KY 7.61 month—and the pace is biggest beneficiaries of OR 6.59 quickening. In the first state subsidies, it would IN 6.58 TX 6.38 nine months of 2014, unbe wrong to overlook MO 5.20 der new rules put in place subventions going to Big NJ 4.81 by last year’s legislative Tech. Intel, for instance, PA 4.56 overhaul of these incentive leads the tech pack with OH 4.14 programs, $1.5 billion—or 58 subsidies worth $3.8 NM 4.06 IL 3.75 $167 million per month— billion. Next up is IBM, NC 3.73 has already been awarded. which has received TN 3.51 And since the new law more than $1 billion in CT 3.47 eliminated any spending subsidies. Most of that AL 3.20 FL caps, this record-breaking financial assistance is 3.18 MS 3.08 spending spree is likely to from New York—a state MN 2.37 continue. Companies apthat is in the middle of IA 2.29 proved for subsidies don’t a full-scale advertising SC 2.12 receive them until they campaign proudly proCA 2.04 NV 1.49 meet a number of requiremoting its handouts.

GA 1.44 ments, including the numDespite its modest OK 1.16 ber of jobs they promise to tax base and many deWI 1.15 create. However, without pressed, rural counties, AK 1.01 regular reporting to the Iowa provides generous SOURCE: SUBSIDY TRACKER TOP STATES public about what has job subsidies to busi-

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nesses. In 2009, the state put together a $52 million package for an IBM customer-service center in Dubuque.

This action followed a 2007 deal for Google of more than $48 million for a data center in Council Bluffs. In 2006, Google let be known that it was interested in locating a computer-server farm in western North Carolina. When the deal for the $600 million facility was formally announced in January 2007, news reports put the value of the subsidy package at “more than $100 million over 30 years,” including the cost of a state law passed at Google's behest eliminating the sales tax on electricity and equipment used by data centers. That was a substantial amount for a project expected to create only about 200 jobs.

Utah, a state not associated with having to bend over backwards to attract business, offers generous subsidy programs delivered via the Industrial Assistance Fund, through which the state issues standard grants and “Economic Opportunity” awards.

Procter & Gamble got an unprecedented $85 million deal in 2007 to build a manufacturing plant north of Salt Lake City. The following year, Oracle got $16 million in tax credits to locate a new data center in the state.

The online merchant eBay has received more than $30 million from the state since 2008. In August 2010, Adobe Systems was offered a $40.2 million tax-credit deal for a software-development facility in Utah.

According to findings of Megadeals, a report released last year by Good Jobs First, state and local governments are offering packages reaching nine and even ten figures, while the cost per job created averages $456,000 and often exceeds $1 million. Packages once considered “trophy” awards are now becoming routine. Competition among states, ordinarily a good thing, should also demonstrate more vigilance at getting a better return.

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