March/April 2019 Chief Executive Magazine

Going On Faith | What Cs Really Earn | Pot In Your Workplace | CEO Life Lessons

MARCH/APRIL 2019

GOING

UP

As UTC breaks apart, Judy Marks leads Otis Elevator on a tech-fueled quest for growth

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C ONTENT S

M A R C H/A P R I L 2019 No. 299

FEATURES COVER STORY 22 GOING UP Otis Elevator got driverless decades before Tesla. Now the company is ready for its next lift: A.I. capabilities— and being spun out by United Technologies. Judy Marks shares her plan to lead the 166-year-old transportation giant into a technology-forged future.

By Dan Bigman

WORKPLACE 30 REEFER MADNESS Marijuana is legal. And it isn’t. Confused? You’re not alone. Welcome to the labor issue of the decade.

By C.J. Prince

22

CEO VOICES 36 WORKING WITH TRUMPTRADE No matter how talks turn out, the White House’s hard-line policies created deep uncertainty for CEOs over the last two years. Here’s how you’ve adapted.

By Dale Buss

COMPENSATION 42 HOW TO PLAY ON PAY IN 2019 Our latest deep-dive into private company compensation offers up a rich trove of insights—and a few to-dos—for CEOs looking to lure and retain top executives in a tough market.

By Wayne Cooper and Gabe Perna

REFLECTIONS 50 HOW TO LEAD A longtime CEO’s letter to his children.

By John T. Williams 30

SPECIAL REPORT 56 ABOUT YOUR CYBER SPEND Hacking is the dark side to digital transformation.

How to protect yourself without breaking the bank.

By Russ Banham

56 COVER PHOTO BY CELESTE SLOMAN

C O NTE NT S EDITOR

Dan Bigman EDITORS-AT-LARGE

Jennifer Pellet Jeffrey Sonnenfeld Jeffrey Cunningham DIGITAL EDITOR

Gabe Perna PRODUCTION DIRECTOR

Rose Sullivan CHIEF COPYEDITOR

Rebecca M. Cooper

64

DEPARTMENTS 6

ART DIRECTORS

Carole Erger-Fass Gayle Erickson Alli Lankford RESEARCH EDITOR

Melanie Nolen CONTRIBUTING EDITORS

EDITOR’S NOTE Dead Men Walking

9 LEADERS 9 Have Faith What happens when you bring your religious values to work?

14 Law Brief / Daniel Fisher Lawyers Run Wild

Russ Banham Dale Buss Daniel Fisher Craig Guillot C.J. Prince EDITOR EMERITUS

J.P. Donlon PUBLISHER

Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net

16 Crash Course / Jennifer Pellet Prioritizing Parity

PUBLISHER, CORPORATE BOARD MEMBER/ DIRECTOR OF EVENTS, CHIEF EXECUTIVE GROUP

18 Black Swans / Jeffrey Cunningham The Endurance of Elon Musk

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

20 On Leadership / Jeffrey Sonnenfeld Rule of Law or Law of Rulers?

Phillip Wren 203-930-2708 | pwren@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT

64 CEO2CEO Leading Growth What if the old rules for change no longer apply?

By C.J. Prince

67 REGIONAL REPORT The Northeast Amazon is out but the region is soldiering on with efforts to build on science and tech strengths.

By Craig Guillot

72 LAST WORD

Lisa Cooper 203-889-4983 | lcooper@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT

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

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

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

My Kind of Fearless Here’s a novel way to build a technology company: Earn more than you spend and go slow.

By Aytekin Tank

Rachel O’Rourke 615-592-1198 | rorourke@chiefexecutive.net CLIENT SUCCESS MANAGER

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

CHIEF EXECUTIVE GROUP Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 299 March/April 2019. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2018 by Chief Executive Group LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Stamford, CT, and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive Group, PO Box 47574, Plymouth, MN 55447.

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CEO CONFIDENCE BOUNCING BACK

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Insights from the Chief Executive Group’s CEO Confidence Index, a widely followed monthly poll of CEOs, and discussion topics from the Chief Executive Network (CEN), our nationwide membership organization that helps C-Suite executives improve their effectiveness and gain competitive advantage (ChiefExecutiveNetwork.com).

CAPITAL GROUP capitalgroup.com Inside front cover CEO AND SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES chiefexecutive.net/compreport 21

AFTER DROPPING SHARPLY AT THE END OF 2018, CEO confidence in current and future business conditions improved in the first two months of this year. Our February poll of 312 U.S. CEOs clocked a rating of current conditions at 7.3 out of 10, up from 7.2 in January and 7.2 in December. Confidence in future conditions was also up, to 6.8/10 in February from 6.6 in January and 6.4 in December.

CEOs we spoke with said their revived optimism stems from economic conditions that remain robust, including solid consumer demand, strong earnings and easy access to capital. Many cited an ongoing reduction in government regulations as another major reason for their positive outlook.

Still, Washington’s dysfunctional politics continue to drag on confidence. Concerns include government shutdowns, a reversal of the pro-business reforms enacted during the past two years, labor shortages, tariffs, potential interest rate increases by the Fed and an uncertain economic outlook.

The proportion of CEOs expecting revenues to rise over the next 12 months increased from 74 percent in December to 79 percent in February. Similarly, more CEOs are also forecasting an increase in both capital expenditures (from 53 percent in December to 62 percent in February) and profits (from 71 percent to 74 percent). Some 56 percent of CEOs polled are expecting to add to their workforce in 2019 (compared to 57 percent in December).

—Melanie C. Nolen, Research Editor

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CEO CONFIDENCE LEVEL IN BUSINESS CONDITIONS ONE YEAR FROM NOW (12-month trailing, as of February 2019)

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F RO M THE E D I TOR CHIEF EXECUTIVE OF THE YEAR

DEAD MEN WALKING WHEN SEN. KAMALA HARRIS, THE CALIFORNIA Democrat who jumped into the race for the White House last month, floated a “Medicare for all” plan that would dump private health insurance, one man’s response was blunt, and hardly what you’d expect from someone serious about becoming the Democrat’s pick to take on Donald Trump in 2020.

“You could never afford that. You’re talking about trillions of dollars,” the man said, adding, “To replace the entire private system where companies provide healthcare for their employees would bankrupt us for a very long time.”

Then, when media darling Alexandria Ocasio-Cortez, who represents New York in the House as a Democrat, floated an idea to plunk down a 70 percent marginal tax rate on income over $10 million, another voice, also hoping to take on Trump, piped up.

“Why should we punish it? What’s the American dream? The American dream is to create opportunity,” he told CNN. “The American dream is to rise above your standing in life. Now, we’re going to be providing punitive tax rates for people who have succeeded?”

What kind of crazy, naïve truth tellers say such things? Who are these renegade politicos, daring enough to take such rational, middle-of-the road stands? Well, they’re businessmen, of course—and not just any businessmen, but Michael Bloomberg and Howard Schultz, two of the most successful, entrepreneurial CEOs of the past 100 years. If you haven’t heard, they’re both running for president. We wish them luck—they’re gonna need it. A recent Gallup poll found Americans aged 18 to 29 (of both parties) are as positive about socialism (51 percent) as they are about capitalism (45 percent). That’s a 12-point decline in young adults’ positive views of capitalism in just the past two years—hardly the right primary climate for either of these guys.

Strike one: They have this problem, common among many successful CEOs, to call bullshit on things and confront the truth, even when it isn’t popular (see above). After years of dealing with hard realities on a day-today basis, they’re stuck with this horrible habit. That won’t play well on Facebook, that’s for sure.

Strike two: They’ve both built multi-billion dollar global businesses that employ thousands. How do enthusiastic political activists engage with such figures in 2019? “Go back to Davos,” yelled one heckler at a recent Schultz book signing. Sigh.

Strike three: They’re rich. Really, really rich. In our day and age, that’s an immediate disqualification. No matter how you made your fortune, it’s a sin to have one (unless you’re cool, like Steve Jobs, or on TV, like Kim Kardashian). That explains the Harris camp’s too-predictable response to Bloomberg. “Attacked by billionaires for fighting to make sure every American has healthcare,” tweeted a Harris spokeswoman. “What a shock.”

So here we go, into 2020. God help these guys. God help us all.

—Dan Bigman, Editor

6 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

2019 SELECTION COMMITTEE DAN GLASER President and Chief Executive, Marsh & McLennan

MARILLYN HEWSON Chairman and CEO, Lockheed Martin 2018 CEO of the Year

NEAL KEATING President and Chief Executive, Kaman

TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries

MAX H. MITCHELL President and CEO, Crane Co.

ROBERT NARDELLI Chief Executive, XLR-8

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

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

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

TED BILILIES, PH.D. Chief Talent Officer, Managing Director, AlixPartners

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

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CEO THE LIFE CYCLE OF THE CEO 1000

THE MIDDLE PHASE

BY PAUL C. WINUM, SENIOR PARTNER, PRACTICE LEADER CO-HEAD, BOARD & CEO SERVICES

This is the fourth in a series addressing the imperatives and challenges CEOs face through the entire spectrum of the role—from job preparation to exit.

AFTER HAVING SUCCESSFULLY COMPLETED the preparation and entry phases, CEOs must effectively lead their organizations through a period of continual evolution in order to realize the expectations of all the stakeholders. Having managed the transition challenges outlined in part three of this series, leaders may be tempted to relax and settle into a comfortable operating cadence. In today’s rapidly changing market and competitive landscape, that mindset can be deadly. After assuming the reins of leadership and completing their first year on the job, the best CEOs often dial up the tempo and push their organizations toward ever-more ambitious goals. Below are four questions CEOs are advised to ask and answer during the middle years of their leadership tenure.

How does the strategy we have had in place need to change in response to changes in the ecosystem in which we operate?

When a new CEO enters the role, he or she often inherits the strategy of the predecessor. Given the “permanent whitewater” that CEOs must navigate in the ever-changing technological and market landscape, effective CEOs need to regularly determine how the strategy of the company needs to be updated in response to changes in that landscape. Depending upon industry sector, the average tenure of CEOs in the CEO1000 Tracker is between five and seven years, and a lot can change during those middle years of a term. The rapid pace of technological innovation compels CEOs to determine how the fields of data analytics, artificial intelligence, robotics and other technology-enabled platforms can catapult and disrupt their businesses. An annual strategy review and update should be a part of every CEO’s leadership process.

Are there changes I need to make in my leadership team to maximize our ability to execute our strategy?

As the strategy of the company is regularly refreshed, CEOs simultaneously have to look at the capabilities of the functional and business leaders to deliver the evolving strategy. Does the strategy include expanding into new geographical markets? Do we have sufficient expertise to ensure our information security?

What know-how do we need to effectively utilize e-commerce and social media marketing channels? Does the leadership team possess the will and skill to fully engage the workforce in the execution of our strategy? The best CEOs in the middle phase of their tenure take a hands-on, ongoing involvement in evaluating and developing the talent of the organization.

582 OF THE CEO 1000 FALL IN THIS 2-10 YEAR RANGE

Average CEO 1000 Tenure: 8.2 Years/Median 5 Years Source: Chief Executive CEO1000 data

vestors, employees, other industry leaders and, for some CEOs, regulators. Each year, particularly as the strategy evolves, CEOs are advised to make a list of these stakeholders, rate the quality of their relationship with each, and construct action plans to strengthen each relationship as needed. In order to stay on top of the latest trends, insights and technology, new relationships may need to be cultivated.

How can I ensure that my board will have well-prepared internal succession candidates to consider when I am ready to hand over the CEO role?

Good CEOs realize that their personal engagement in succession planning is essential, and the grooming of a successor takes years, not months. Potential successors need to be tested and developed through a variety of leadership roles and challenges. The same goes for the other mission-critical roles on which the organization’s future success will depend. Great CEOs lean into this imperative actively and in partnership with their boards.

How can I strengthen my/our relationships with the key stakeholders of our organization?

There is an array of important stakeholders with whom CEOs need to sustain strong relationships in order to effectively lead.

These include the members of the board, key customers, in-

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

LE ADERS

HAVE FAITH What happens when you bring religious values to work?

BY DALE BUSS

AZRA KHALFAN WAS ON A PLANE from New York City to Dubai when a PepsiCo executive sat down in the next seat.

Khalfan’s company, Plaques by Azra, had done some work for the food giant. They expressed mutual admiration of then-PepsiCo CEO Indra Nooyi, in part because of the Hindu principles she utilized in her leadership.

A Muslim wearing a headscarf, praying, and eating only halal food during the 13hour flight, Khalfan also was reading between the lines of her seatmate’s reactions

to her expressions of faith that day.

“I felt in effect this man was telling me that what I was doing was right, and he put me in touch with his global supply-chain manager,” Khalfan recalls. “He liked that I took these things seriously.”

In an increasingly secular age—only 50 percent of Americans said they were a member of a church or synagogue last year, down from 62 percent in 2010, according to Gallup—the idea of CEOs publicly discussing or displaying their faith may seem anachronistic at best. At worst, it can

Nature Nate’s Honey CEO Nathan Sheets says biblical values-based leadership resonates with millennial employees who prize authenticity.

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

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LE A D ER S

“My faith isn’t a barrier in any way—it’s just who I am.”

—Azra Khalfan, Plaques by Azra

lead to high-profile PR misfires, such as the blowback Chick-fil-A’s Dan Cathy got for his outspoken opposition to gay marriage before he retreated to more private views on the subject.

But as many corporate leaders struggle to reposition their companies and brands as standing for some sort of sublime purpose beyond mere dollars and cents, business leaders such as Khalfan and Cathy— whose company famously still keeps all its stores closed on Sunday, despite billions of dollars in lost potential revenue—have been talking about conviction all along. The result is a surprisingly resonant message for stakeholders, especially young employees longing for authenticity, empathy and integrity in their workplace.

“There’s a perception fed by the public sector more than anything else that faith doesn’t have a part to play in the workforce,” says Nathan Sheets, founder and CEO of Nature Nate’s Honey, a food company in McKinney, Texas. “But that seems disingenuous. Where the culture is today, especially millennials, they’re all about authenticity and transparency.”

Faithful CEOs include Walmart CEO Doug McMillon, who regularly talks about his Christian beliefs in speeches, often proclaiming, “God is good.” Mark Hogan,

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the chief global advisor and a former board member of Toyota Motor, attends mass daily when he can—an easier commitment in Detroit and in Brazil, where he spent most of his career, than in heavily Shinto Japan.

“My faith is one and one with me, not separate,” says Shmuel Gniwisch, a Hassidic Jew whose Montreal-based family outfit, BNSG Capital, has owned and started many companies, including e-commerce giant Ice.com.

“We’ve invested in more than 30 companies, and our responsibility is to pay forward into them. It’s not only about the money. We’re working for a greater purpose.”

Communicating his faith “isn’t standing on top of a milk crate and saying, ‘This is what you need to do,’” says Gniwisch. “It’s in the little things, the discussions around every business table, the details that you drop into a conversation.”

For instance, Gniwisch likes to note that God created the world in six separate days.

“So I use that story to point out how we need to celebrate ‘little wins’ in whatever we are doing, meaning you don’t necessarily have to ‘go big’ all the time,” he explains.

Sheets tries to lead with six characteristics that he says are drawn from biblical passages such as 1 Corinthians 13. “Be loving, faithful, compassionate, creative,” he says. At its plant, Nature Nate’s encourages employees to drop cards into a box recommending fellow employees who are living out a “beatitude”—one of the prescriptions that Jesus Christ delivered in his Sermon on the Mount. Optional Bible studies are available during work hours.

And if he has to fire someone, Sheets says, “We’ll do it honorably and compassionately. Maybe that impacts us negatively from a bottom-line perspective, but that’s OK. We’ll make it up in other ways.”

Bryan Owens, CEO of Unclaimed Baggage Center, in Scottsboro, Alabama, says that honoring the company’s commitments is one expression of his Christian faith.

“We’re fastidious about that,” he says. “We don’t pay things before they’re due but never after they’re due.”

Joel Manby developed his Christian “servant leadership” philosophy as CEO of privately held Herschend Family Enter-

LE A D ER S

“My faith is one and one with me, not separate.” ­ —Shmuel Gniwisch, BNSG Capital

tainment and wrote a book about it, then brought those principles to his tenure as chief of publicly held Seaworld—where secular problems such as a tarnished brand and a shareholder activist ended his time at the helm in 2018.

He says that “leading with love” as an expression of a leader’s Christian faith “matches very well with what millennials need today.

They want more empathy, more workplace and life balance, and a vision of an entity that goes beyond making money.”

Richard Merrill, president and CEO of Fellowship of Companies for Christ, an Atlanta-based organization with chapters in 30 states and nearly 40 countries, says such approaches come naturally to CEOs with genuine faith. “If you’re running a business by Biblical principles, you should be conducting business with integrity and caring for employees and customers,” he says. “If you do that, it doesn’t become exclusionary or judgmental. It becomes not only what millennials and Generation Z are looking for but also good business practice.”

Khalfan agrees. “My faith isn’t a barrier in any way—it’s just who I am.” She says she runs her company by Islamic values: doing business fairly, being honest, providing value and having good relationships.

This kind of leadership brings challenges, of course. Gniwisch’s company once voluntarily relinquished its legal right to a building it had just purchased in downtown Montreal because the Jewish owner of an adjacent building complained in rabbinical court—not a forum recognized

by Canadian law—that he had first right of refusal to the structure.

Rabbi Danielle Eskow, who runs Online Jewish Learning, from Brookline, Massachusetts, and instructs hundreds of students around the world in the Torah, says that it’s difficult to “scale the company and make money while staying consistent

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with faith-driven values. The company can’t lose money on a student, but we don’t want to turn people away when the mission is to bring people closer to the Jewish experience.”

Not surprisingly, sometimes leading with faith creates opposition and even outright controversy for CEOs. Sheets fired someone for performance recently, but the ex-employee shot back with an accusation of gender and age discrimination—and of hypocrisy by a Christian organization.

“Generation Z might be the first post-Christian generation, certainly in the United States, so you’ve got all of these cultural forces and some legal forces against you,” Merrill says. “If you lead with your faith, you can be subject to various attacks.”

Steve Green, a dedicated conservative Christian and the billionaire founder and owner of Oklahoma City-based Hobby Lobby, a chain of craft and home-goods stores, drew the ire of progressives in 2014 by getting the U.S. Supreme Court to exempt for-profit companies like his from the contraception coverage requirement in Obamacare.

Then Green announced that he was going to build a $500 million Museum of the Bible just three blocks from the U.S. Capitol in Washington, D.C., which opened in 2017. Hobby Lobby had to pay a $3 million fine and return Middle Eastern artifacts after federal prosecutors said the company got caught up in an antiquities-smuggling scheme; Green blamed naiveté.

McMillon’s evangelical views might have caused him to oppose a proposed religious-liberty bill in Arkansas, where Walmart is headquartered, in 2015. McMillon tweeted that the legislation “threatens to undermine the spirit of inclusion present throughout the state.”

Nonetheless, persevering is an integral part of the experience for CEOs of faith, and so are the rewards. “One reason we’re so successful is that I run the company by my faith and my tradition,” says Eskow. “It makes work every day so much more meaningful and gives me motivation and drive.”

THOUGHT LEADERSHIP PROVIDED BY INVEST IN ISRAEL

ISRAEL: WHERE INNOVATION LIVES Looking to supercharge your business? Here’s where to do it.

To find the right geography for foreign direct investment, CEOs need to know what they’re looking for. “If you’re going to the Middle East to look for oil, you can skip Israel,” Berkshire Hathaway CEO Warren Buffett once said. “If you’re looking for brains, look no further. Israel has shown that it has a disproportionate amount of brains and energy.”

He should know. He’s purchased stakes in Israeli companies such as industrial and aerospace equipment manufacturing company Iscar, wireless network software provider eVolution Networks, electronic component distributor Ray-Q Interconnect and agricultural electronic control unit designer AgroLogic.

Brains and energy are certainly high on the list for U.S. CEOs facing a skills shortage stateside—and that’s why so many are turning to Israel. With the highest concentration of Ph.D.’s and engineers per capita in the world as well as more than 6,000 active startups and hundreds of VC funds, the country has long been known as “the Startup Nation.”

“But that story is evolving,” says Ziva Eger, chief executive at Invest in Israel &

“If you’re looking for brains, look no further.

Israel has shown that it has a disproportionate amount of brains and energy.”

—Warren Buffett, CEO, Berkshire Hathaway

ICA, a foreign direct investment initiative of the Israeli Ministry of Economy and Industry. “With mature companies being sold for billions of dollars.” As an example, she points to the 2017 sale of autonomous driving tech company Mobileye to Intel for $15.3 billion.

While Israel’s R&D activity is certainly a draw—more than 300 multinationals have R&D centers there—the country isn’t just for idea incubation anymore. Manufacturers, both highand low-tech, are benefiting from the nation’s advanced manufacturing capabilities. And by co-locating R&D

and production in Israel, companies stay more nimble and adapt more quickly to new technology developments that might otherwise disrupt their businesses. “It makes the production process much more dynamic and enables a far more efficient ‘learning-by-making’ process,” says Eger.

The financial incentives don’t hurt, either. In January, Intel—which saw exports from Israel rise by $300 million, or 8 percent, in 2018 on the heels of similar growth the previous year—announced it had chosen the country as the site for a new $10 billion chip-making plant. Numerous countries where Intel has a presence, including Ireland and Singapore, had thrown their hats in the ring. But with its new deal in Israel, Intel will enjoy a corporate tax rate of 5 percent and will receive a government grant of approximately $815 million, or 9.1 percent of the total investment.

Capital grants will be a common theme for future companies considering FDI in Israel, particularly those in life sciences, automotive, aerospace and heavy industry. “You can get up to a 30-percent subsidy of investment in fixed assets when building a factory here,” says Eger.

CEOs can also enjoy a very stable economic climate; in the face of persistent global economic volatility over the past decade, Israel’s economy has seen consistent GDP growth above the average for OECD countries, and unemployment below 4 percent.

Foreign investment is not without its challenges, including legal and logistical hurdles and regulatory red tape. But Invest in Israel can help businesses navigate every step of the process of finding a new home on foreign soil—and access to innovation makes the potential return well worth the effort.

LE AD ERS LAW BRIEF \ DANIEL FISHER

LAWYERS RUN WILD

Multimillion dollar settlements that benefit no one who was actually harmed have the Supreme Court asking: Should lawyers earn money for nothing?

Daniel Fisher, a former senior editor at Forbes has covered legal affairs for two decades.

IN ORAL ARGUMENTS BEFORE THE U.S. Supreme Court last fall, the justices wrestled with a seemingly absurd question: Should lawyers be able to earn a fee for negotiating a settlement that pays their clients nothing?

The case, Frank v. Gaos, represents the latest turn in an argument that has raged since a little-known committee amended Rule 23 of the Federal Rules of Civil Procedure in 1966 to allow multiple plaintiffs to join what became known as a class action. The rule was designed to facilitate civil rights lawsuits where numerous people suffered the same wrong, such as racial discrimination. But plaintiff’s lawyers have transformed it into a multi-billion dollar moneymaking machine. Securities class actions yielded $6 billion in settlements in 2016 and another $1.5 billion in 2017, with plaintiff’s lawyers typically collecting 20 percent or more of each agreement. (Defendants rarely risk going to trial, given the potential for enormous damages.)

Congress and the Supreme Court have repeatedly stepped in to address abuses in the class-action business, but entrepreneurial plaintiff lawyers always seem a step ahead. Frank v. Gaos, for example, deals with a mechanism lawyers dreamed up to deal with a perennial problem with class actions: Very few of their supposed clients ever bother to fill out the paperwork to claim their settlement money. Claim rates in consumer class actions rarely exceed fractions of a percent, with the rest of the money either going to lawyers or back to the settling company in a wink-wink arrangement where plaintiff lawyers know the real settlement negotiations are over how big their fee will be.

To get around this lawyers came up with cy pres, legal Latin roughly meaning “as

14 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

good as,” under which they give up on distributing money to their clients and hand it to unrelated charities instead. There are constitutional objections to this—how can parties with no connection to a lawsuit win money from it?—but also conflicts of interest. Lawyers tend to direct cy pres awards to organizations close to their hearts.

Frank v. Gaos challenges an $8.5 million settlement between Google and 129 million search engine users in which lawyers kept $2.2 million for themselves and directed the rest to six charities, including Harvard, Stanford and Chicago-Kent College of Law, which happened to be the alma maters of some of the attorneys negotiating the deal.

One of the grateful recipients, the Stanford Center for Internet and Society, already had received millions of dollars in grants from Google, meaning the settlement was a tax-deductible donation to an organization it would have supported anyway.

All this struck attorney Ted Frank as distasteful, if not downright illegal. The head of the Center for Class Action Fairness, Frank intervenes in class action settlements that he believes are abusive or represent collusion between lawyers hungry for fees and defendants eager to end litigation.

“If you think class actions are supposed to benefit the class, these charitable donations have nothing to do with that,” Frank says.

Ah, but they do serve an important purpose: They end any chance of litigation by the class members, for the modest price of a $2.2 million fee to lawyers who claim to represent them. This conflict lies at the heart of every class action, and the Supreme Court has pecked away at it with decisions enforcing contracts shunting disputes off to arbitration and limiting securities class actions. But the justices seemed little inclined to end the cy pres game this session. In oral arguments, they fumbled toward the easier solution of dismissing the case on jurisdictional grounds, leaving for another day the argument over whether it is legal for lawyers to pay themselves fees for nothing.

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LE AD ERS CRASH COURSE \ JENNIFER PELLET

PRIORITIZING PARITY

Voya Financial CEO Rod Martin delivered on both performance and a personal passion with a drive for diversity.

WHEN VOYA FINANCIAL SPUN out of Dutch-based ING Groep NV in 2013, CEO Rod Martin found himself essentially building a name—and a culture—from scratch. Hived off and rebranded, the retirement and investment firm felt more like a 7,000-person startup than a trusted financial institution, he recounts. “In many ways that was a huge advantage,” Martin says. “We got the chance to kind of dust off the vision and values and think about what kind of company we wanted to be.”

Early on, this answer emerged: a company at the leading edge in diversity and inclusiveness. Even today, the financial sector is famous for a lack of gender parity, and the company Martin inherited was no exception. At the time, only two of his direct reports were women and none were minorities—something he and his board aimed to change. “We started at the top of the organization with strong support from our lead director and our board that our leadership needed to really reflect the marketplaces that we serve,” says Martin, who credits that effort for boosting performance over the ensuing years. “That, along with the brand we built, has been a differentiating factor for us.”

Since its IPO, Voya’s share price has risen at roughly twice the rate of its industry peers, up 140 percent since its IPO, and the company returned nearly $5 billion—roughly the amount of its IPO market cap—to shareholders in the form of share buybacks.

Return on equity is also up by 700 basis points since the company went public. On the diversity front, seven out of nine of Voya’s business units are now run by women, half its executive committee members are women and women make up 38 percent of the company’s independent directors, reports Martin, who sees a direct link between those metrics.

“I don’t think it’s an accident that our results are a multiple of the S&P,” he says.

“Having diverse points of view has enabled

16 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

us to see around the corners with the challenges and issues we face. It forces us to have a more complete, thorough and thoughtful conversations rather than jump to, ‘I’ve seen this before and I know the answer,’ as we make decisions. That’s important because a lot of the challenges business are facing today haven’t been seen before so we don’t always have the answers.”

Martin has little patience for peers who claim to struggle to deliver on diversity due to the paucity of qualified candidates for board seats. “That’s baloney,” he says. “We accomplished this in two and a half years.

We have absolutely demonstrated the ability to find people with diverse backgrounds and experiences who have been highly additive to our board.”

While Voya tackled the candidate challenge by being highly “prescriptive” when working with search firms and seeking referrals, the company did not need to compromise on criteria. “In each and every case, we have had a deep set of options from which to pick,” says Martin. “You will find that not all candidates will have board experience, but everyone has to have their first chance at bat—including male CEOs.” The $8.6 billion company’s commitment to inclusiveness also yields a trickle-down talent effect, garnering accolades that make it an employer of choice among women and minority talent.

In 2018, Voya was one of the only two financial companies on Bloomberg’s gender equality index list, and the workplace inclusion nonprofit Catalyst includes Martin on its roster of CEO Champions for Change.

For Martin, however, the rationale extends beyond potential business benefits to a broader societal goal. “I really wanted to demonstrate that not only that it can be done, but what can be done with it,” he says, noting that he, like many CEOs, wants to see a world of equal opportunities for his daughter. “I’m personally passionate about it. It needs to change, and we have demonstrated in a relatively short time that it can change. It’s time.”

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LE AD ERS BLACK SWANS \ JEFF CUNNINGHAM

THE ENDURANCE OF ELON MUSK

Jeff Cunningham is editor-at-large at Chief Executive Group and a professor of leadership at ASU’s Thunderbird School of Global Management. He was formerly publisher of Forbes and CEO of Zip2, Elon Musk’s first startup. He is founder of business trend poll Thunderbird Opinions and YouTube interview series IconicVoices.tv.

Challenges Inspire Him

After eBay acquired PayPal, Musk took his $100 million-plus and invested it in Tesla, SpaceX and SolarCity. It was like a gambler cashing in his chips only to turn around and build a casino. He lives for the challenge of a big idea.

He also doesn’t know how to keep a secret. Musk had a “Secret Master Plan” for Tesla, then he went and told the world: 1. Build a sports car.

2. Use that money to build an affordable car.

3. Use that money to build an even more affordable car.

4. While doing above, also provide zero emission electric power generation options.

P.S. Don’t tell anyone.

When the term sheets came back, he noticed one of his leads, VantagePoint Capital, forgot to sign a page. According to Bloomberg, the firms’ managing partner, Alan Salzman, was coyly trying to derail the funding round. When he confronted Salzman, as Musk later recounted, “The only reason he wanted the meeting was for me to come on bended knee begging for money so he could say, ‘No.’” Musk concluded, “What a f — -head.”

In Ashlee Vance’s biography of Musk, he quotes Antonio Gracias, one of Musk’s closest friends, as saying “Most people who are under that sort of pressure fray. Elon gets hyperrational.”

Hyperrational was what Tesla needed.

Musk convinced his investors that if they didn’t pay, he would cover it and dilute their holdings. They handed over $20 million.

“Because I was willing to invest everything that I had, the other investors were willing to keep Tesla alive,” said Musk.

He Makes People Believe

He Is Relentless

The reason behind this urge to share was to inspire Tesla for the journey. He was the primary funder of an automotive company with no dealer network and no advertising, and that meant the ride was going to get bumpy.

Sure enough, by the summer of 2008, the company had yet to produce its first car, and GM was heading towards bankruptcy.

The financial markets fell apart in the middle of Tesla’s round of fundraising.

Once-daring venture investors were now looking for sure things, and Musk admitted, “Trying to raise funding for a startup electric car company in the face of GM going bankrupt was a very challenging endeavor.”

The deal closed at 6 p.m. Christmas Eve, 2008, and Tesla produced its first car that year, the Roadster, with an engine based on Nikola Tesla’s 1882 design. The company went public in 2010 at $17 per share. If not for Musk’s determination, Tesla could have ended up a battery unit of a post-bankrupt GM. Tesla will face more challenges as it fulfills its founder’s vision, as Musk’s 7 percent recent headcount reduction indicates. But his willingness to devote “extreme effort and relentless creativity” is what matters most as Tesla’s market value propels past GM, Nissan, Subaru, Ford, Chrysler and Mercedes (Daimler). You could call it a feat of endurance.

Wired Differently

What makes Elon Musk a role model for CEOs? When the world bets against him, he doubles down.

According to Business Insider, Tesla was on the brink of bankruptcy. Musk put the options in front of his investors.

18 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

REUTERS / BRIAN SNYDER - STOCK.ADOBE.COM

“THAT’S THE PROBLEM with vacations,” Elon Musk deadpanned after PayPal’s board ousted him as CEO while he was off on a break in Australia. The 6’1” South African entrepreneur and co-founder of Zip2.com (where I succeeded him as CEO in 1999), was out of a job.

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LE AD ERS ON LEADERSHIP \ JEFFREY SONNENFELD

RULE OF LAW OR LAW OF RULERS?

Is the business community really ready for the ethical and legal complexities that come with globalization?

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

“WE DO BUSINESS ONLY WHERE there is rule of law, not the law of rulers,” business leaders often tell me. At a time when law and lawlessness can be easily confused, that may be easier said than done.

A good example is the U.S. State Department’s warning Americans to “exercise increased caution” in traveling to China, citing “arbitrary enforcement of local laws” that could prevent visiting U.S. citizens from returning home. Even as we approach $700 billion in U.S.-China trade this year, 13 Canadian citizens have been detained since their homeland’s high-profile arrest of Meng Wanzhou, the daughter of Huawei’s founder and its CFO. The detentions are reportedly retaliation for the apprehension of Wanzhou, who has been charged with wire fraud and violating U.S. sanctions.

Companies and countries—the EU’s Vodaphone, Britain’s BT and the Japanese government—have since been reevaluating partnerships with and canceling purchases from the telecom giant. The U.S. is reportedly thwarting Huawei’s efforts to build nextgen wireless communications worldwide.

But sometimes, it appears, the price of sticking to one’s principles is too dear.

The Saudi government’s brutal murder of Washington Post columnist Jamal Khashoggi initially prompted a similar response.

JPMorgan’s Jamie Dimon, Blackstone’s Steve Schwarzman and Uber’s Dara Khosrowshahi courageously pulled out of Saudi’s economic forum, known as “Davos in the Desert,” in October. Journalist Andrew Ross Sorkin withdrew as a moderator, and his employers, The New York Times and CNBC, followed suit, triggering a stampede. The heads of the World Bank and the IMF initially balked, then joined the exodus.

BlackRock CEO Larry Fink followed suit with a marked lack of enthusiasm,

20 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

saying, “...we do business with families, the kingdom and the government. We have been there 15 years. We don’t know who was responsible for the murder… our future business with them is something I am not ashamed of.” Subsequently, several European nations, including Germany, Finland and Demark, announced they will halt arms sales to Saudi Arabia against the backdrop of a devastating Saudi-triggered war in Yemen.

Yet, the U.S.-Saudi economic relationship encompasses far more than $40 billion in trade. The Saudi government’s Public Investment Fund (PIF) owns significant stakes in businesses worldwide, including $3.5 billion in Uber. When ownership of Saudi Aramco transferred to the PIF, it became the largest sovereign wealth fund in the world, with assets of $2 trillion. Since then, the PIF has committed tens of billions to deals with GE, Lockheed Martin and Blackstone.

Little surprise then that by January’s annual gathering in Davos, members of the Saudi delegation were once again meeting with top Western executives, even sharing a panel stage with the likes of Total’s Patrick Pouyanne and Morgan Stanley’s James Gorman. The prevailing sentiment? A scant four months later, it was apparently time for business as usual with Saudi Arabia.

Meanwhile, Renault CEO Carlos Ghosn languishes in jail, refused Western counsel, access to family and release on bail by the Japanese government as it pursues as-yetto-be-proven charges of financial misconduct. Until his very public arrest, few knew that Japan denies basic legal due process to accused parties.

Corporate titans often claim to be stoked for the globalization of industry and the opportunity it represents. However, is the business community really ready for the ethical and legal complexities that come with globalization? As Dorothy said, on arriving in the Land of Oz, “Toto, I don’t think we’re in Kansas anymore!”

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C OVE R STORY

GOING UP Otis Elevator’s products made the leap from human operators to automation decades ago, now it’s ready for its next lift: A.I. capabilities—and being spun out by United Technologies. Judy Marks shares her plan to lead the 166-year-old company into a technology-forged future.

A INTERVIEW BY DAN BIGMAN

bout 2 billion people around the globe touch Otis Elevator’s products each day—from the Empire State Building to the Eiffel Tower to the Burj Khalifa, and hundreds of thousands of mid-rises in between. But few riders ever think about the complicated mechanics hidden in the walls, nor do they fret about being vertically catapulted thousands of feet in mere seconds. They take it for granted that the product will work as it should, which is just how the company’s president, Judy Marks, wants it. “We love that people don’t think that they’re at risk when they use our product,” she said.

But don’t mistake reliable for prosaic, because the Internet of Things has opened the door to a whole new way of using the safety elevator invented by Elisha Graves Otis in 1853. For example, A.I. technology will allow passengers to be grouped by destination, thereby increasing speed and capacity by at least 25 percent, and offer them more valuable information along the way. On the maintenance side, predictive analytics will forecast potential issues so that parts can be fixed before breakdowns occur, minimizing out-of-service incidents for customers.

The challenge of bringing the lift into a new era is what attracted Marks to helm Otis, which is in the process of being spun out into a $12 billion standalone entity by parent company United Technologies. Every elevator has tons of data on it, says Marks, an electrical

22 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

PHOTO BY CELESTE SLOMAN

CHIEFEXECUTIVE.NET // MARCH/APRIL MARCH/APRIL2019 2019 // 23 23 CHIEFEXECUTIVE.NET

engineer by background who joined the company in October of 2017, following stints at IBM and Siemens. “How we apply that technology, how we become part of the mobility stream, to us and to me, is what was exciting. How do you optimize this incredible distributed infrastructure of tools, technology, and most importantly, employees and colleagues and be able to provide more value?”

To move the business forward, Marks knew she needed buy-in. She countered resistance among the company’s 68,000-plus employees with a simple strategy: “You communicate, communicate and communicate,” she said. “You share what you know as soon as you know it, but then you share some specificity in terms of where you’re going.”

Marks spent her first 100 days at Otis meeting with employees and getting a handle on the company’s strengths and weaknesses. She put iPhones in the hands of nearly all of Otis’s technicians so they could get comfortable with the technology, and went live with Yammer, Microsoft’s enterprise collaboration tool, so that decentralized employees around the world could share information and feel connected.

“Change is hard in any industry,” Marks added. “It’s all about, can you build a culture where change is consistent, where you’re communicating effectively and where people buy in and are part of the change agents?”

With the right tools and an emphasis on creative thinking, Marks believes Otis can. “We started this industry. We are going to lead this industry. And not only are we going to lead it with technology—we will lead it with the best service, the best people and with new innovations.”

Chief Executive spoke with Marks onstage during our recent CEO2CEO Summit in New York (highlights, p. 63). What follows was edited for length and clarity:

what we see emerging as a digital industrial in the future is a different passenger experience that goes with that, so these are exciting times.

What does the elevator of the future look like?

In the future, you won’t need a credential to get you through the turnstile and onto an elevator. It will already know it’s you and tell your iPhone, “Go to [elevator] H. It’s here.” If you’re the first person there in the morning, it will turn on the lights.

A.I. will help us with condition-based maintenance. Over 350,000 of our elevators every day send us their status so we know what’s working, what’s happening in buildings. With access to that data, we can tell you when a like elevator somewhere else may have a wear and tear issue and needs some preventive maintenance. It will then become predictive and prognostic in the future. The goal will be to know when an elevator will go down two days beforehand so we can send the part and the mechanic now and avoid you having any downtime as a customer.

Tell us a little about Otis’s operations

You run one of the largest transporta-

around the world.

tion companies in the world—one that’s

We are truly a global business that does business locally, with 1,000 or so branch managers across 200 countries and territories. We deal with a distributed work environment with repeatable processes and autonomy every day. Our largest employment base is in China, 16,000 Chinese locals. That’s the largest single market right now for vertical transportation due to the building going on, especially in the tier three and four cities.

We work around the clock. Most mornings, I start with China and Asia. And on any given day, we do 120,000 service calls. So we are a pure-play in terms of vertical transportation, however, we are doing it more than anyone else anywhere in the world.

not well understood.

We’re at a fascinating time in our business, which is the only U.S.-headquartered elevator company left in an industry going through significant change. We are one of those industries that has migrated from human operated to autonomous. You all take that for granted. There’s no longer an elevator operator in the elevator. But that wasn’t the case until people felt comfortable that they were going to be safe in an autonomous environment.

We move more people than fly. At Otis alone, two billion people a day touch our product throughout the globe. And they do it with the confidence that they will get from point A to point B, from floor 1 to maybe the top of the Burj Khalifa at over 2,700 feet tall, or take one of our escalators and then safely get on a metro. They believe that they will enter reliable equipment. And

24 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

You started out as an electrical engineer at IBM. How did your career lead you to Otis?

Tell us about your first 100 days coming into a new company in a different industry. How did you go about assessing the business?

In the beginning, you try to understand your strengths, the gaps, where the investments have made, where you can get better yield. I focused on getting out and visiting our employees to listen, share the vision, to meet customers and to go to installation sites and maintenance sites. I wanted to be visible so that the employees understood, “There’s someone there who’s listening to us, but more importantly who knows where she wants to take the company.” That’s how you get that buy-in.

We’re a $12.5 billion business so there’s no way that daily decisions on 120,000 service calls and thousands of new equipment installations can happen centralized at our headquarters in Farmington, Connecticut. So the challenge is: How do you prioritize? How do you empower all of your employees so they can deliver every day? And how do you put the systems in place that allow you to make sure you’re mitigating risk and yielding for the shareowners?

How did what you heard inform your plan for the company?

That’s the challenge we all face. What questions do you ask? What’s important? What’s not? How do you synthesize

CELESTE SLOMAN

In IBM’s federal division, I was a systems engineer with a mission focus, serving the U.S. government and government allies with some very complex systems. I had the opportunity to watch technology unfold through the ‘80s,’90s and 2000s there. I learned very early, that it’s all about the people and the connection of the people and technology and serving customers.

I went to Siemens in 2011 and eventually rose to be its U.S. CEO. So I had the opportunity to lead about a $25 billion business with about 50,000 colleagues, about 60 manufacturing plants. Then I received a call to see if I’d be interested in leading what is truly an iconic industrial company.

JUDY MARKS Born: 1963, youngest of three children.

Hometown: Philadelphia suburbs.

Family: Married with one grown daughter.

Education: Lehigh University, 1984; Earned bachelors in electrical engineering in three years.

First Jobs: Learned value of customer service working at her father’s suburban Philadelphia department store in high school.

After college she joined IBM and landed her first management job at 23 after three years with the company.

Career Highlights: Named President, Otis in 2017; Prior: CEO of Siemens USA, Jan-Oct 2017, EVP, Global Solutions at DresserRand from 2015-2016; President and CEO of Siemens Government Technologies from 2011-2015 and President of two different businesses at Lockheed Martin, which she joined after her IBM division was acquired by Loral and then Lockheed Martin.

Other: Director of Hubbell; Board of Visitors for the University of Maryland College of Computer, Mathematical and Natural Sciences. In 2017, named to the Top 50 Most Powerful Women in Technology and received the Excellence in Leadership Award from the International Society of Automation.

Very Social: Active LinkedIn Influencer with 320,000 followers.

that information, and then how do you act quickly? One of the things I did was require that any briefing be given to me the night before. I’ve never really agreed with having meetings where people brief at you.

Let me digest the information and then synthesize and allow the people to come up with some of the solutions. If you probe and ask the right questions, it’s amazing what you’ll get out of it.

I also asked to receive all the material our salespeople get on a daily basis so I could get up to speed quickly. I was the first outsider to run Otis who didn’t come from within or from the industry so I needed a rapid acceleration to the learning

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

/

25

During her first 100 days, Marks circled the globe twice to meet with Otis’s 68,000-plus employees.

“The question is, what value propositions can we come up with? What business models can we come up with?” curve. I did that with a lot of late nights and by asking a lot of questions. And you know what you’ll find in your workforce?

People want to share what they know.

That’s your strength.

What questions did you ask?

Growing up in retail in a small family business, the value of a customer and the immediate impact of that on your family’s income is something you learn and never forget. So I always focus on customers and value that input. It’s not about sending out a survey.

It’s not about a net promoter score. It’s about, are we meeting what you need and want? And then, more importantly, is that what we’re measuring? If our KPIs aren’t attuned to what customers want, then we’re going to think we’re excelling [when that might not be the case].

Otis has operated as a part of a much larger entity, $60 billion UTC since 1976.

How will being spun out affect your strategic plan?

We’ve benefited from being part of UTC, and now we need to spend the next 18 to 24 months figuring out how we drive new investments that allow us to play in the in the new world. We’ve been a great

26 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

cash contributor to the business, but we have not had earnings growth in far too many years so we have to change things, to create some oxygen through additional margins that allows us to invest more in innovation because the digital piece of our business, being able to come up with data usage that we can’t even envision today is what’s exciting and where we’re going.

And to do that, you need investment. You need talent. You need partnerships because it will not all happen inside Otis. I’m not going to hire 50 data analytics experts.

I’ll look for people with different business models and different ideas.

How do you foster a culture of embracing that kind of radical change across an employee base of 68,000?

Change is hard in any industry. It’s all about building a culture where change is consistent, where you’re communicating effectively, and where people buy in and are part of the change agents.

We have mechanics of all ages. We have Millennial mechanics who come out of the apprentice program. We have “perennials,” mechanics who are at the latter end of their career but who have the knowledge base to really understand the nuances of some of our customers and the install base. You have to think what’s the best way to share information with everyone. Everyone learns in different ways.

There are lots of tools. We use Yammer.

It’s very effective.

What does innovation look like for a company like Otis?

We’re proud of the iconic buildings, like the Empire State Building, the Eiffel Tower and the Burj Khalifa, the tallest building in the world, that we’re in.

But at the end of the day, the majority of the buildings we both serve and service are mid-rise office buildings, schools, churches.

So we have to basically serve an entire community, from the most exacting high-rise customer to a school board.

If you’re a developer in New York, the last thing you want is to give up some of your space for elevators or anything else

GOING STEADY After leaving UTC, Marks will need to move Otis into a higher gear. $14

$12.5

$13.0 $12.0

$12

$11.9

$12.3

$12.9

$10 Dollars in Billions

that you can’t rent or sell, so the optimization is getting more people safely in smaller spaces and moving them more efficiently. The developers and the architect want that. Then general contractors who contract with us really only care about two things: cost and schedule. Will you be done on time, and will you hit the cost you committed to?

The equipment market is just under a million elevator units sold a year. We’ve got about 17 percent market share in that. So we have to appeal to lots of different communities with lots of different needs all happening simultaneously in every metropolitan city in the world.

On the service side, we are a logistics company. We have to get parts to the right place at the right time everywhere on the globe. And if we replace an escalator or an elevator already in a building, we need to do it in the most rapid, least intrusive way we can without stopping movement. And the two million portfolio we manage is not all Otis. So we do that for other people’s equipment as well.

$8 $6 $4

$2.6

$2.6

$2.3

$2 $0

2013 Net Sales

2014

2015

$2.1

2016

Operating Profit

$2.0

2017

$1.9

2018

Source: UTC annual reports

that do business in cash and no matter how hard you work on ethics and integrity, people can get tempted.

So once a month we go out to wherever they are—Indonesia, Mexico, Asia—and we celebrate and revel in employees who actually were tempted and did the right thing.

Where do you see growth coming

How do you set the bar for accomplish-

from for Otis now? How do faster,

ing that across all of your branches?

better, smarter maintenance, installs,

A few ways. We have a common set of KPIs we use across the globe because the product is relatively standard and the service we provide needs to live up to those service standards. So we measure every branch the same way, whether they’re doing new equipment or they’re doing service.

Also, even though English is the language of our company, we have everything translated into 23 languages. We make every message native, and we make it local.

We also have a translate button on Yammer, an internal social network where we share best practices. When people post in, say Mandarin or Portuguese, you can just hit translate and it reads right out.

We started a program called “Do the Right Thing” to celebrate people doing what’s right. That’s important when you’re doing business in as many countries as we are because you have to make sure you’re doing business in a clean, compliant way.

Even today there are still some countries

innovation all come together as growthdrivers?

When you look macroeconomics across the globe, we’re a GDP kind of business.

There are about 15.5 million elevators in the world today and we’re adding 900,000 every year, which will grow at GDP and GDP-plus for the service side of the business. We believe elevators will stay pretty stable in terms of new equipment. The service market, which accounts for 55 percent of our business and has far better margins, will continue to grow. But we believe the whole passenger experience market and our part of being part of the end-to-end mobility chain are the real growth areas.

The question is, what value propositions can we come up with? What business models can we come up with? Nobody has access to two billion people a day. It may be a short period of time we have that access. Think about the value of what that’s worth.

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

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WOR KPL AC E

Marijuana is legal. And it isn’t.

Confused? You’re not alone. Welcome to the thorniest labor issue of the decade.

BY C.J. PRINCE LAST MAY, FOOD SERVICES AND FACILITIES MANAGEMENT COMPANY Sodexo fired a Massachusetts food supervisor after she tested positive for marijuana. It was standard policy—the employee, Bernadette Coughlin, had fallen at work, breaking her arm, and protocol required a mandatory drug test following an injury. Although Coughlin’s job was not “safety sensitive,” Sodexo’s policy was clear: One strike and you’re out.

There was just one problem: The policy was written well before the state voted to legalize recreational marijuana use in 2016. Coughlin maintains she never imbibed on the job, but rather had vaped the night before. It was a reasonable assertion given that tetrahydrocannabinol, or THC, the main active ingredient in cannabis, is detectable days or even weeks after use. Sodexo now faces a wrongful termination suit, though it was technically complying with U.S. federal law.

Sodexo is far from alone right now as thousands of American companies—across nearly every geography and industry—struggle to navigate what is fast becoming the most treacherous minefield in labor law: workplace drug policy. As of the last midterm elections, 10 states and Washington, D.C., had legalized marijuana for recreational use for adults over 21 and 31 states had legalized medical marijuana; of those 31, 12 ordered companies to make accommodations for medical marijuana users. That means companies with a zero-tolerance policy related to marijuana can easily run afoul of state law—even as that state’s law conflicts with federal law, under which marijuana is still a Schedule 1 controlled substance and illegal in all forms. The result is a new headache for CEOs who must somehow balance issues of unsettled law, privacy, insurance requirements—and, in

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019 / 31

‘When employers start looking at whether someone is under the influence, there are no hard and fast standards.’ many cases, workplace safety.

“Confused and concerned,” is how Bob Kill, CEO of manufacturing consultancy Enterprise Minnesota, sums up how his clients are feeling with regard to marijuana legalization and workplace drug policy: Medical marijuana has been legal in Minnesota since 2014, but it’s the looming prospect of legal recreational use that has employers reeling. Recreational legalization bills were introduced in both chambers of state government in January, and most expect some version to pass within the next year. Once that happens, Kill expects employers to begin random drug testing, if they haven’t already, to ensure workplace safety—but what they’ll do about the results remains unclear. “Even if someone tests positive, would it be legally within your right as an employer to take action?” Kill asks. “That still hasn’t been worked out.”

Given the rapidly shifting ground, it’s not surprising that so many workplace drug policies are out of date. According to HireRight’s 2018 Employee Screening Benchmark Report, 38 percent of HR departments lack a policy to accommodate either medical or recreational marijuana use. “That is the big void,” says Kill, who recently consulted an attorney to get some perspective on the topic for his own company’s policy. “She said that’s what everyone is asking now: ‘What do I put in my employee handbook?’”

Complicating matters further, the Trump Administration has been virtually silent on the subject, other than former attorney general and longtime marijuana foe Jeff Sessions reversing an Obama-era policy that said federal authorities would defer to state laws with regard to marijua-

32 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

na prosecution. “[Sessions] basically said, ‘We don’t recognize the statutes passed by the states and if we choose, we will federally prosecute companies and individuals because the states are trying to thwart the federal acts that have been passed,’” said Stephen Cates, a faculty member for graduate programs in Purdue University’s Global School of Business.

“But then he did nothing, and now he’s out, so who knows?” says Kathryn Russo, a principal with law firm Jackson Lewis. “At the moment, nothing is happening at the federal level. Supposedly, Trump supports letting the states deal with it—supposedly, but you never know.”

State courts seem to be reading that laissez faire attitude as permission to side with employees. Before 2017, Russo says employers never lost medical marijuana cases. The case law went overwhelmingly in favor of employers largely because marijuana is illegal under federal law. But last year, three cases found for the plaintiffs. “Some state courts are saying, the federal government isn’t enforcing it, so we’re going to enforce state law that says you need to accommodate,” she says.

Courts are likely to see many more cases. Quest Diagnostics, the medical testing company, has reported that five out of 16 industries—transportation and warehousing, retail trade, public administration, finance and insurance and wholesale trade—saw double-digit growth in positive drug tests between 2015 and 2017, with marijuana being the most commonly detected substance.

The Impact on Hiring

That’s causing CEOs headaches not only on the legal side, but on the talent front, particularly where marijuana use is legal. “Some

people are stopping drug testing because the unemployment rate is so low,” says John Kramer, CEO of Cambridge Engineering, a manufacturer of heating systems based in Chesterfield, Missouri (where medical marijuana is legal). The numbers appear to back him up: According to a survey by the Employers Council, 10 percent of Denver employers that screen for drugs had dropped marijuana as of 2016, the most recent date for which data are available.

“I don’t feel loosening hiring standards is the answer,” says Marc Braun, president of Cambridge Engineering. He’s also navigating the opioid epidemic, which has ravaged the labor market across the country. “[That] is a larger problem and a bigger challenge than legalization of marijuana, but the legalization of marijuana surfaces that and creates even more urgency around it.”

It also creates agita for CEOs who are trying to keep their workplaces safe. In a factory with potentially lethal machinery, drug testing keeps a lid on accidents—and lawsuits. “I am a chemical engineer by training and for the first 20 years of my career I had random drug testing,” he says.

“I believe it allowed for me to have someone else holding me accountable, and I viewed it as a helpful element to me. So we’re looking at all the policies and how to be supportive, rather than punitive.”

In cases where a position is not safety sensitive, some employers are choosing to, as quietly as possible, make exceptions to their own rules in order to hold on to their most valuable people. Stanley Jutkowitz, senior counsel for employment law firm Seyfarth Shaw, recounts a recent call from a client describing just such a dilemma. “They said, ‘We’ve got a problem. One of our star employees just tested positive, he or she was not under the influence and we don’t want to lose that person. Do we have to fire them?’” The position was not safety sensitive. Ultimately, the CEO chose to keep the employee.

But cherry-picking when to follow policy can put a company on shaky ground. “You can change how you administer your policy, but you really have to be mindful of being consistent in that approach, so you don’t attract discrimination claims,” says Don Lawless, labor and employment partner in Barnes & Thornburg’s Grand Rapids office.

One of the key challenges for CEOs and their CHROs trying to decide whether to continue testing is that detection for marijuana-related impairment is an imperfect science. “When employers start looking at whether someone is under the influence, there are no hard and fast standards as to what the heck that means,” says Jutkowitz.

“That to me is the critical issue,” adds Russo. Say, for example, a forklift operator you’ve hired tells you he has a medical marijuana card. He says he will never use it at work, only at home. “And he tells you, ‘I can still come in and drive the forklift.’ A lot of employers struggle with that because how do you really know?”

The Trouble with Testing

While conventional wisdom has been that despite the presence of THC in hair and urine samples, impairment is short-lived,

MARIJUANA LEGALIZATION BY STATE LEGALIZED

DECRIMINALIZED

MEDICAL & DECRIMINALIZED

FULLY ILLEGAL

MEDICAL

(as of January 2019)

Source: DISA Global Solutions

POT POLICY other, newer studies indicate that marijuana use impairs beyond the intoxication window, says Todd Simo, M.D., chief medical officer for HireRight. “People say, ‘I’m no longer intoxicated, no longer acting funny,’ but when they try to do psychomotor skills or some complex functions like running machinery or driving, they are still impaired.” In fact, there are conflicting reports as to whether high levels of THC in the bloodstream even correlate with high levels of impairment—or if it’s just the opposite.

This uncertainty is not just a problem for employers. Law enforcement agencies struggle to assess impairment levels in drivers. In advance of the much-anticipated legalization of marijuana across Canada, a report co-produced by the European Monitoring Centre for Drugs and Drug Addiction and the Canadian Centre on Substance Use and Addiction found the percentage of Canadian drivers fatally injured in vehicle crashes who tested positive for drugs (40 percent), now exceeds that of drivers testing positive for alcohol (33 percent). And, unlike breath alcohol detection tests, which are cheap, reliable and easily administered roadside, a breathalyzer for cannabis does not yet exist.

Simo says oral tests can narrow the usage window to within a day or so, but still can’t assess level of impairment. “Everyone is struggling with [defining] the level of acute intoxication,” says Simo. “That’s all been figured out for alcohol, but with marijuana, it’s still virgin territory.”

The issue puts employers in an almost impossible position. “I can’t stress enough how much we need technologies that are able to tell whether or not someone is impaired. It’s the missing piece,” says Braun.

But a breathalyzer-equivalent commercial product will take time, leaving companies to grapple with this on their own. “And there are risks in all of it,” says Michelle Lee Flores, a national labor lawyer with the law firm Akerman who works with California companies responding to legalization. “[Legalization] is putting employers in the position of, ‘I have to do something and I feel like I’m going to be damned if I do and damned if I don’t.’ Every road that’s an option feels like there is a risk involved.”

34 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

The law on marijuana use is still murky, but some workplace best practices have emerged that can help CEOs stay out of court: • UNDERSTAND YOUR STATE RULES. Make sure your HR chief understands the specifics of the laws governing each state where your company operates. For example, while California and Colorado have legalized both medical and recreational marijuana, neither mandates protections for medical marijuana. Maine, however, has extended medical marijuana protection to recreational users. “So if a recreational user has a positive drug screen, you have to have a compelling business case to discharge that person,” says HireRight’s Simo.

• KNOW YOUR RISK TOLERANCE AND EMPLOYEE PROFILE. In working with internal and/or external counsel, identify the safety-sensitive positions for which exceptions will not be made, even for medical marijuana. That way, “if an employee seeks an accommodation, you can say, ‘we can’t accommodate you in this role, but if we transition you to this role, we can,’” says Simo. Also understand how changes to drug testing policy will impact your liability coverage.

• BE CLEAR ON THE REGULATORY RULES. Jobs that are regulated by federal agencies, such as the Department of Transportation, typically don’t require accommodation because federal law prevails.

But compliance with the Federal Drug Free Workplace Act, which applies to federal contractors and grantees can be a bit trickier.

Some employers believe that with a federal contract, they can have a zero-tolerance policy. However, in recent cases in Connecticut and Delaware, courts did not agree.

• CLARIFY YOUR POLICY. If cannabis has been legalized in your state, employees may assume they don’t have to worry about a positive drug test. Be specific regarding which jobs still carry a zero tolerance and which would accommodate medical marijuana. If you operate in more than one state, you may need individual supplements to the corporate handbook to address all the various laws.

Above all, know that employment law as it relates to cannabis remains a moving target for the foreseeable future. “This whole legalization of marijuana, even though it’s becoming widespread, is still really early days,” says Seyfarth Shaw’s Jutkowitz. “People are going to have to go through a few years of court battles and uncertainty before we get any definitive standards.”

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C E O VOI C E S

WORKING WITH TRUMPTRADE No matter how talks turn out, the White House’s policies have created deep uncertainty for CEOs over the last two years. Here’s how you’ve adapted.

BY DALE BUSS

A

lot of business leaders support President Donald Trump’s attempts to reform trade with China, to open markets there, to knock down barriers to American exports and, most of all, force Chinese compliance with international law for IP protection. But if you wanted to see the short-term impact of Trump’s efforts to remake the rules of global trade, January’s Detroit auto show was a pretty good place to go.

It was a somber affair, especially when you consider that the U.S. auto industry has been enjoying the softest of soft landings after several years of record sales. Dependable newsmakers Sergio Marchionne, the deceased CEO of Fiat Chrysler, and Nissan-Renault chief Carlos Ghosn, languishing in a Tokyo jail, were gone. Meanwhile, reminders of how electric cars and autonomous driving are turning the industry upside down were all over the hall.

But in the cavernous, hushed Cobo Center, the real cloud following CEOs was the president’s policies on trade—and a bigger sense of foreboding than they’d felt since the global financial collapse in 2008 presaged a major crash in auto sales.

36 36 // CHIEFEXECUTIVE.NET CHIEFEXECUTIVE.NET // MARCH/APRIL MARCH/APRIL 2019 2019

“The one thing our industry craves is clarity because of our lead times,” William Ford Jr., executive chairman of Ford Motor, said in an on-stage interview. “Right now there’s very little clarity… It makes it hard for businesses to operate. We make decisions, and they’re billion-dollar-plus decisions, and we’re doing it right now kind of flying blind.

That’s not the way to do it.”

German auto executives at the show worried about President Trump’s threat of a 25 percent tax on European luxury-car imports; U.S. tariffs on European steel and aluminum imports were pinching domestic CEOs; many were concerned about how a deceleration of the Chinese economy would devalue huge investments in China by Western auto companies; and the trade mess was freezing most CEOs in their tracks.

Guangzhou Automobile Group of China (GAC) felt the biggest punch to the gut. After several years of showing its wares in the lobby—alongside other marginal players, including radio stations, not-for-profit groups and supplier organizations—GAC finally moved into the big time of the show floor inside Cobo.

GAC staged a huge, glitzy exhibit around a concept, the Entranze EV utility vehicle, aimed at American consumers. But ironically, because

NAIAS.COM

Quiet moments at the 2019 Detroit Auto Show.

CHIEFEXECUTIVE.NET CHIEFEXECUTIVE.NET // MARCH/APRIL MARCH/APRIL 2019 2019

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“Right now there’s very little clarity... it makes it hard for businesses to operate.”

BILL FORD, FORD MOTOR of China’s trade war with Trump, GAC’s prospects of importing any production car to America now are at their lowest ebb ever.

“Tariffs won’t bring more manufacturing and jobs,” said Dan Sandberg, North America CEO for Italian brake-maker Brembo.

“We can’t find enough people to work now.

Where would we get more people anyway?”

The auto industry, of course, is far from alone. CEOs across every sector have spent the last two years trying to discern what to do in the face of Trump’s trade policy— whether they agree with his goals or not.

Their impulse toward paralysis is reminiscent of when President Obama’s regulatory war on business prompted a capital strike

by CEOs and produced chronic slow growth during his administration.

Some CEOs are just waiting things out.

Others are moving tactically, passing along higher costs or seeking duty-free loopholes.

Still other leaders are accelerating long-term decisions on production and business investment, hoping they haven’t bet the wrong way.

“Policymakers don’t really comprehend the fact that global supply chains have to be borderless, so CEOs are having to rethink their supply chains,” says Craig Giffi, leader of the U.S. consumer and industrial-products practice for consultants Deloitte.

“They’ll have to make products based on where they sell them, but in some cases that becomes economically unfeasible. They need to hedge their bets on a supply chain that’s increasingly vulnerable to global politics.”

Nowhere is this more clear than in Wisconsin, a state that helped Trump win in 2016 but where his approach to trade is likely to make a repeat problematic in 2020. It’s a telling microcosm for business throughout the U.S. After two straight years of record sales and profits, for instance, Helen

38 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

Johnson-Leipold, CEO of Racine, Wisconsin-based Johnson Outdoors, is scrambling for ways to mitigate the impact of tariffs on a product line that relies heavily on manufacturing in China. Cindy Brown, CEO of Chippewa Valley Bean, a kidney-bean producer in Menomonie, canceled two scheduled expansion projects. Apple-supplier Foxconn is rethinking its Wisconsin factory.

Husco International CEO Austin Ramirez is also rethinking recently announced plans for U.S. expansion, including at the Waukesha, Wisconsin, headquarters of the maker of components for auto and construction-equipment markets. That was because Husco gets about one-third of the components used in its North American plants from Chinese suppliers, and the higher tariffs on these components were costing an extra $1 million a month.

“Right now we have an incentive not to manufacture products in the U.S. that require Chinese-supplied content,” Ramirez said at a public forum in January. “I think there are much more targeted actions that the administration could take to punish China’s bad behavior while still protecting free trade, fair trade, and allowing U.S. manufacturers like Husco to build our business around the world.”

Of course, not everyone disagrees with the White House. President Trump “is the first one actually saying enough is enough,” says Tom Shorma, CEO of WCCO Belting, a maker of industrial fabrics in Wahpeton, North Dakota, that has been hit by tariff-related price increases on raw materials imported from China. “All his predecessors simply kicked the can down the road. This president is saying we’re not going to kick the can down the road anymore.”

Still, says Jonathan Gott, principal at A.T.

Kearney consultants, in Washington, D.C., “Donald Trump is driving this, but his concerns are widely shared by CEOs. It would be welcome if IP concerns could be resolved, for instance, but CEOs are asking if there will be collateral damage—and is it worth it?”

CEO VOICES

CEOs, of course, don’t have the luxury of academic debate over the issue. Chief Executive reached out to business leaders across the nation to get a sense of how you’re handling the third year of TrumpTrade. Here’s some of what we heard: STANDING PAT: Some CEOs say they have little choice but to do nothing. “Business is frozen,” Ramirez said, “because these tariffs might go away tomorrow, they might go away in two months, they might be permanent. That really handcuffs us.”

Other CEOs are making a tactical choice to maintain the status quo as the tariff drama plays out because it would be riskier to do anything else for now. “CEOs just raise the hurdle rate that they need to make a particular investment and still know that it’s going to be profitable,” says Jeff French, managing partner for consumer industrial products for consultants Grant Thornton. “But now with more projects on the edge of the hurdle rate, CEOs won’t do them right now until there’s more clarity.”

BOOSTING PRICES: Crystal Morris, president of Tampa-based Gator Industries, which makes musical-instrument accessories, was sitting on price increases that she would spread over the company’s thousands of SKUs after a 10-percent tariff kicked in last fall on the 70 percent of her goods that are made in China. “We’ve thought about

which products we could raise prices on and which we wouldn’t be able to,” Morris says.

“But you can’t just change the price—maybe only once a year. It’s a pretty arduous process.”

BEING TRANSPARENT: Shorma, of WCCO Belting, believes being transparent with his customers can relieve much of the pain of having to raise prices after new tariffs. “There’s the challenge for how to plan,” he says. “But if companies are open and able to communicate effectively with customers, and put a structure in place [for price increases] that’s transparent and directly attributed to the tariff, we haven’t had a lot of pushback from customers.”

APPEALING FOR EXEMPTIONS: Companies can request exemptions from the steel and aluminum tariffs if they prove they can’t find what they need domestically. Tens of thousands of companies have applied, but few have been processed. Gator’s Morris determined that her company wasn’t even eligible to apply. “We were enthusiastic about filing one,” she says. “I mean, is this who we really want to be penalizing? A company that sells guitar cases to musicians and band cases to students?”

ENHANCING FLEXIBILITY: Some CEOs have begun “renegotiating terms or moving parts of their supply chain,” French says. “They’re getting impatient.”

Mahle CEO Jorg Stratmann is among chiefs who have realized “the need for more flexibility in our entire value chain, making it more systematic in our own operations and with our suppliers.” The chief of the Germany-based auto-parts maker says he’s “used to managing our business without barriers and producing and sourcing com-

“I mean, is this who we really want to be penalizing?

A company that sells guitar cases to musicians?”

CRYSTAL MORRIS, GATOR INDUSTRIES CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

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“I make the assumption that [the aluminum tariffs] are going away, and if they don’t, it’s gravy.”

CRAIG BOUCHARD, BRAIDY INDUSTRIES

Dale Buss is a regular contributor to Chief Executive and other business publications.

ponents in the areas with the best costs, but [this] has changed with the tariffs.

“We’ve been trying to mitigate by moving production and localizing products and having intense discussions with customers.”

REBOOTING THE SUPPLY CHAIN: A.T. Kearney’s Gott says some CEOs are also moving up decisions about their supply chains “not just to shift out of costs but also to reduce risks in a much more fraught relationship.”

Some CEOs we spoke to are looking to move Chinese production to Mexico, now that the new North American Free Trade Agreement (NAFTA) has taken shape. And it’s becoming a seller’s market for owners of industrial capacity in Vietnam, Indonesia, India and other countries that give Western companies a non-Chinese manufacturing outlet.

FINDING LOOPHOLES: Many U.S. manufacturers can get “drawbacks” that compensate them for higher tariffs if the end goods they make in America end up as exports. WCCO Belting, for instance, receives drawbacks from its exports to more than 20 countries. CEOs also can look to move output to foreign-trade zones in the United States where they can escape many customs, duties and tariffs. There are more than 230 foreign trade-zone projects and about 400 subzones across the country.

LOOKING BEYOND: Some CEOs insist they can see past the craggy landscape of current trade tensions. Craig Bouchard, CEO of Braidy Industries, has been building relationships and an oversubscribed customer list for the aluminum sheet steel that his company is supposed to begin turning out of a new $1.7billion mill in Ashland, Kentucky, in 2021.

40 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

“If the [current aluminum] tariffs go away, we’re still in good shape,” Bouchard says.

“I make the assumption they’re going away, and if they don’t, it’s gravy. Every decision we make is based on sound business logic and good customers and suppliers. Our goal is to be the low-cost producer of high-quality aluminum in the world. I think that will be the case the day we open our door.”

Some CEOs are willing to bite their lips, bide their time and back their president, in part because “China hasn’t been as remotely available a market as anywhere else in the world,” says Harding of TMF. “The CEOs of U.S. companies operating in China have had their hands massively tied behind their backs. Whatever the changes we get, that will be better rather than worse.”

Back at the auto show, Joerg Weisgerber, CEO for North and South America of Hella Electronics, a Germany-based producer of automotive lighting and electronics components agreed that Trump going after Chinese protectionism in general is “a good cause,” he said. “But are all these issues with tariffs producing a great result?”

It’s still too soon to tell—the jury is out on whether President Trump will be able to pull off a historic revamping of the global post-war marketplace, or whether he’ll simply drive the economy into recession.

Weisgerber, for one, takes solace from the results of Trump’s efforts to remake NAFTA. For all the angst caused by his saber-rattling, in the end, provisions of a new, as-yet-unratified trade agreement didn’t result in much material change. And that was okay by him. “I was nervous, nervous, nervous” about the replacement for NAFTA, said Weisgerber. “But in the end it wasn’t that much different.”

Take your business to the

NEXT LEVEL.

C O MPE NSATI ON

HOW TO PLAY ON PAY IN 2019 Our latest deep-dive into private company compensation offers up a rich trove of insights— and a few to-dos—for CEOs looking to lure and retain top executives in a tough market.

BY WAYNE COOPER AND GABRIEL PERNA

ALL DATA FROM CHIEF EXECUTIVE RESEARCH’S 2019 CEO & SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES FOR MORE INFORMATION: COMPREPORT.CHIEFEXECUTIVE.NET

4242/ /CHIEFEXECUTIVE.NET 2019 CHIEFEXECUTIVE.NET/ MARCH/APRIL / MARCH/APRIL 2019

E

very CEO knows top execabout their 2017 fiscal year compensation utive talent is at a premilevels and practices, as well as their current um right now. To help you and expected cash compensation levels for $300,000 get a handle on pay across CEOs and senior executives in 2018. Some $262,000 the top of your organiof our key findings: $250,000 zation, Chief Executive $223,500 n After the CEO, the next highest paid Research surveys compa-$212,000 $212,000 senior executive title is President, with nies across the U.S. for our $197,000 $200,000 $190,600 a median total compensation package of annual CEO & Senior Executive Compensation $170,400 $262,000.

Report for Private Companies, the largest $150,000 n The other highest median total compenstudy of its kind. sation titles are the COO ($223,500), CFO For this edition, we surveyed 1,631 $97,000 ($212,000) and CSO ($212,000) companies in April, May and June of 2018 $100,000

$144,800

Perks Benefits

SENIOR EXECUTIVE COMPENSATION BY TITLE

$50,000

Equity Gains New Equity Bonus

MEDIAN $0 $300,000

Base Salary

Chairman

President

COO

CFO

CMO

CSO

CIO

R&D

HR

$262,000 $250,000 $223,500

$212,000

$212,000 $197,000

$200,000

$190,600 $170,400 $144,800

$150,000

$100,000

$97,000 Perks Benefits

$50,000

Equity Gains New Equity Bonus Base Salary

$0

Chairman

President

COO

CFO

CMO

CSO

CIO

R&D

$260,000

$262,000

HR

TOP QUARTILE $600,000 $520,000 $500,000

$400,000

$300,000

$340,000

$330,000

$321,600

$301,600

$312,000

$200,000

$200,000

Perks Benefits

$100,000

Equity Gains New Equity Bonus Base Salary

$0 $600,000

Chairman

President

COO

CFO

CMO

CSO

CIO

R&D

HR

$520,000 Source: CEO & Senior Executive Compensation Report for Private Companies compreport.chiefexecutive.net $500,000

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

$400,000

/

43

COMPANIES WITH FORMAL ANNUAL INCENTIVE PLANS n Private

BY COMPANY REVENUE 100%

93%

90% 79%

80% 70%

71%

72%

$50M to $99.9M

$100M to $249.9M

75%

62% 60%

55%

50%

30%

40%

38%

40% 30%

20%

equity and venture capital-funded companies typically do a better job of consistently valuing and communicating equity gains than other types of private companies. n Best-performing private equity and venture capital-backed enterprises know the value of strategic incentives for CEOs and top managers, yet more than half of private companies fail to use many of these tools.

10%

Missed Opportunities

0% <$2M

$2M to $4.9M

$5M to $9.9M

$10M to $24.9M

$25M to $49.9M

$250M to $499.9M

$500M to $999.9M

$1B +

BY OWNERSHIP TYPE 100% 90%

86%

80% 68%

70% 58%

60% 50%

61% 55%

47% 42%

40% 30% 20% 10% 0% Sole Proprietorship

Partnership

Family Business

Employee Owned

Private Equity Owned

Venture Capital Owned

Other Investor Owned

Source: CEO & Senior Executive Compensation Report for Private Companies compreport.chiefexecutive.net

The order and relative levels vary significantly by industry and ownership type, of course. For example, heads of R&D are among the highest paid executives in tech and pharma/biotech industries as well as in venture-capital backed companies. n Just as with CEOs, total compensation packages for other senior executive positions tend to increase with the size of the business—but not at as fast a rate of acceleration. n Many senior executives are compensated with equity or phantom equity plans, but the gains in these instruments are not frequently measured. n This causes total true compensation numbers to not be captured each year for a majority of private company executives. n

44 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

Our study also found that CEOs are often inadvertently blindsided by departures due to surprisingly simple, and avoidable, missteps: They’re reactive, not proactive. Too often, CEOs wait until an important member of their team leaves because they feel underpaid relative to peers or industry benchmarks.

They don’t use all the elements of a compensation plan. Many companies fail to incorporate long-term incentives in compensation plans, or, when they do, neglect to review and update them annually.

They don’t have an overall compensation strategy. We find a surprising number of CEOs don’t pay star members of their executive teams differently than other members nor do they pay top quartile compensation packages for critical positions to attract star performers for key role.

Three Easy Tune Ups

Below are three simple strategies you can use to maximize the impact of your compensation plans.

More detailed information on salaries, bonuses, equity grants, benefits, perks, as well as how these elements vary by company size, industry, ownership type, geographic region and other variables is available in the full 2018-2019 CEO & Senior Executive Compensation Report for Private Companies: CompReport.ChiefExecutive.net.

COMPANIES WITH FORMAL LONG-TERM INCENTIVE PLANS 1. Pay Stars Like Stars

Based on our research, we find that far too many companies average out executive compensation across their entire team in search of “fairness.”

Those companies run big risks. They lose the ability to pay the key superstars that they need to really fuel growth. Or worse, they have a superstar on their team being paid an average executive salary—and he or she will leave for greener pastures.

The best practice here is a blended mix of talent levels and compensation across the team, one that pays more for what’s more valuable. A superstar top-quartile executive (paid a superstar top-quartile executive salary) is not going to be warranted in every position. Smart companies will differentiate having a great vs. a good person in certain functions—and will pay them accordingly.

There’s no set rule here—every company will need to figure out the right formula.

For instance, if you run a mature private equity-backed manufacturing company that’s growing at a decent rate with strong cash flow, your CFO may be one of your most important executives. This CFO may have to deal with banks, make sure they don’t trigger any of the loan covenants and lead cost control initiatives. The importance of the role could warrant a “superstar” CFO and commensurate top quartile compensation.

Getting the formula right isn’t rocket science, but it will take some focus. You’ll need to weigh: n What stage of growth your company is in (e.g., early stage and not yet profitable vs. mature) n Your industry and business model n Compensation benchmarks for your industry and specific roles n Your ownership model (e.g. venture capital vs. private equity or family owned) n Your overall balance sheet Once you do that, you can figure out who on your team should be given a superstar salary and who just needs to be a good performer. Once you get there, you can

BY COMPANY REVENUE 100% 90%

83%

80% 70% 60%

53%

50% 40%

33%

32%

<$2M

$2M to $4.9M

34%

36%

55%

48%

45% 37%

30% 20% 10% 0% $5M to $9.9M

$10M to $24.9M

$25M to $49.9M

$50M to $99.9M

$100M to $249.9M

$250M to $499.9M

$500M to $999.9M

$1B +

BY OWNERSHIP TYPE 100% 90% 80% 71% 70%

65%

66%

60% 50% 40%

37%

35%

30%

30%

30%

Partnership

Family Business

20% 10% 0% Sole Proprietorship

Employee Owned

Private Equity Owned

Venture Capital Owned

Other Investor Owned

Source: CEO & Senior Executive Compensation Report for Private Companies compreport.chiefexecutive.net

better understand how you should divvy up the executive compensation pie by further benchmarking what rivals are willing to pay. This can also lead to potential opportunities to recruit superstar executives to fill specific needs.

2. Formal Pay Programs Pay Off

When it comes to valuing, updating and communicating the benefits of executive compensation programs—specifically incentive programs— our research finds that there is a huge gap in best practices among American companies. These differences are based largely on size, and in an economy with plenty of options for talented executives in almost every industry, this can represent a significant—and preventable—risk

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

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45

ELIGIBILITY FOR LONG-TERM INCENTIVE PLANS

BY COMPANY REVENUE 100% 90% 80%

91%

CEO Other Senior Management

83%

All Other Management

70% 70%

70% 60%

65% 62%

60%

30%

54%

50%

50% 40%

70%

68%

67%

86%

75% 76%

75%

All Employees

90%

82%

56%

43%

40% 31%

38% 32%

32%

29%

21%

20%

30% 25% 22%

26% 19%

18% 14%

16% 12%

17%

10% 0%

0% <$2M

$2M to $4.9M

$5M to $9.9M

$10M to $24.9M

$25M to $49.9M

$50M to $99.9M

$100M to $249.9M

$250M to $499.9M

4%

2%

$500M to $999.9M

$1B +

Source: CEO & Senior Executive Compensation Report for Private Companies compreport.chiefexecutive.net

The problem can be compounded when CEOs don’t communicate the value and progress of the program. that CEOs should not overlook.

According to the new CEO & Senior Executive Compensation Report for Private Companies, 93 percent of companies with $1 billion-plus in revenue had a formal longterm incentive plan with equity, updated annually. But among smaller companies, with revenue in the $10 million to $24.9 million range, only 54.6 percent had formal incentive plans in place, and among companies with less than $10 million in revenues, less than 40 percent did.

When you look at ownership type, it’s a similar story. More than 85 percent of private equity-owned companies have a formal annual incentive program. Meanwhile, fewer than half of sole proprietor and partnership-owned businesses have one.

It’s a clear disadvantage for smaller companies competing for talent. Even in small private companies that do have some kind

46 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

of long-term incentive program in place, far too often our research finds that they are informal and don’t get updated annually.

This deprives the CEO of a powerful opportunity to rival the compensation programs offered at public companies and bigger private companies as well.

The problem can be compounded when CEOs don’t communicate the value and progress of the program, leading executives to discount their value—making them potential flight risks or headhunting targets.

Whatever you do, make sure your incentive plan aligns with the long-term goals of the company. And make sure you’re loud and clear in communicating the value—whatever it is—to your team.

3. Pay for Performance—Somehow

Many CEOs must figure out how to shape a compensation plan without being able to dole out equity. CEOs who run family businesses, for instance, may not be able to offer what a private-equity funded enterprise can. A few suggestions: n Be more generous on salaries and longterm bonuses. n Come up with long-term incentive program alternatives to equity, such as synthetic equity. In this case, you can approximate stock, a stock plan or an option plan.

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BASIS FOR TOTAL AMOUNT OF BONUS PAYMENTS

BY OWNERSHIP TYPE 100% 90% 80%

Tied to a formula

84%

Accomplishment of performance objectives Discretion Individual negotiations

73%

Other

69%

70%

63%

62%

59%

60%

40%

52%

52%

52%

48%

50%

42% 43%

40%

37% 34%

26% 14%

10%

35%

32%

30% 20%

46%

43%

12%

6%

6%

Partnership

11%

10% 10%

8%

Family Business

7%

5%

4%

0% Sole Proprietorship

26%

Employee Owned

0%

0%

Private Equity Owned

Venture Capital Owned

8%

Other Investor Owned

Source: CEO & Senior Executive Compensation Report for Private Companies compreport.chiefexecutive.net

Our research finds there’s still a surprising amount of room for improvement in many comp plans. ix in short- and long-term bonuses M plans based on performance.

This may seem like common sense, but our research finds there’s a still a surprising amount of room for improvement in many comp plans. For instance, CFOs in family-owned businesses, on average, had bonuses equal to 15.4 percent of their salaries. Compare this to CFOs in private equity companies, where the average was 29.3 percent of their salaries.

Yes, PE executives theoretically take on more risk, but they are often getting equity to compensate for that risk. The data shows there could be lots of potential room for increasing performance pay as part of the mix in a non-PE setting. In any case, it’s worth taking a second look.

n

Wayne Cooper is chairman of Chief Executive Group.

Gabe Perna is digital editor of ChiefExecutive.net.

48 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

One Last Thing

Many times, CEOs may think they won’t lose a key member of their C-Suite for a simple reason: location, location, location.

It is true, many people don’t want to uproot their lives and the cost-of-living factor can’t be ignored when considering a move. But overall, our data finds members of executive teams—especially those in the top quartile—are competing on a national basis.

There are differences, but they’re not as pronounced as you’d think. For instance, the median CMO salary in the Mid-Atlantic is $225,200—the highest-paying region. The lowest-paying region is East North Central, where the median CMO salary is $188,600. That’s a gap, but not an extraordinary one—and hardly an unbridgable moat.

On the flip side, this can be good news for recruiting. If you’re looking to nab talent from a rival in a pricier region, you may not have to pay as much as you’d think, especially if you make sure the other parts of the package are appealing— and you know how you stack up to the competition.

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HOW TO

LEAD A LONGTIME CEO’S LETTER TO HIS CHILDREN

BY JOHN T. WILLIAMS After 50 years leading in three different industries (newspapers, broadcasting and manufacturing) John T. Williams, CEO of Hagerstown, Maryland-based Jamison Door Company, decided to sum up lessons from his experiences to help his adult children make their way in business—and life. “They are both wonderful people, successful in their careers,” says Williams, “and I thought maybe they would enjoy reading some ideas I had. Decency and good values need to be emphasized often.”

When we read Williams’ letter, we found it plainspoken, moving and profoundly useful, encapsulating the best in what it means to be a business leader, so we asked if we might share it on ChiefExecutive.net. Due the overwhelming, enthusiastic response we received, we are publishing an edited-down version for our print audience as well. We hope you get as much out of it as we did— and pass it along to someone in your life that you’d like to see succeed. —Dan Bigman, Editor

50 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

W

HILE SO MANY BOOKS have been written on the subject of management, those I’ve read could generally be summarized in the title of the book to such an extent that it wasn’t really necessary to go to the trouble of reading the entire treatise. In Execution (The Discipline of Getting Things Done), it took the author a few hundred pages to say that it’s important to actually do what you say you are going to and to take action. So I’m a bit cynical about the value of many business books, especially those written by people who have never run an organization.

These ideas that have guided me through the years and may or may not have value to anyone else. Most of us must learn from our own experiences rather than from what others have been through. But here goes…

SURROUND YOURSELF WITH REALLY GOOD PEOPLE When I joined Ernst & Ernst in San Antonio in 1971, I often heard about Walter Beran, a Baylor graduate who started out in what was then a sleepy town and progressed to be in charge of the firm’s Los Angeles office and to serve on the firm’s governing board. Beran was an inspiration. I asked people who knew him what made him so good. The answer I received was that while he was certainly technically competent, he seemed to always surround himself with excellent people. That led to good results and so he, himself, always looked good.

The lesson I learned was to try to hire the best and brightest, build a team and work to facilitate their performing at the highest levels.

Many years later, when I met Beran while traveling with President Jimmy Carter and about 70 others to Guyana to observe their election of a president, I told him of the influence he had on my career. He seemed to appreciate hearing my story.

SEEK HIGH-RISK, HIGHREWARD POSITIONS Larry Franklin was a sharecropper’s son who rose to become president of an NYSE corporation, Harte-Hanks, where I worked

for him. Like all of us, he had shortcomings but he offered sage advice along the way.

One nugget was that if a person is ambitious and believes in himself, he should always be willing to accept a high-risk, high-reward position.

High risk necessarily involves the possibility of failure, but one can assess the situation and decide if one’s talents offer a good chance of succeeding. But one should not take the risk if the potential reward— recognition, money, advancment—is not quite large.

LET’S GET MOVING ON THIS The single biggest takeaway from my Wharton education came from an offhand remark by Don Regan, head of Merrill, Lynch, Pierce, Fenner and Smith. He spoke at a seminar attended by about 15 students and led by Wharton’s dean, Willis J. Winn, who was also chairman of the Federal Reserve Bank of Philadelphia at the time.

Regan later served as secretary of the treasury and then as President Reagan’s chief of staff. While I don’t recall the subject, I do remember that Regan and Winn were talking about a pressing issue and I distinctly remember Regan saying in a rather sharp tone, “Let’s get moving on this.”

This Wall Street titan was clearly a man of action and not one who would tolerate studying a problem to death. I learned that there is a time to move on addressing a problem or taking advantage of an opportunity. His remark that day had a major influence on my business career.

TWO KEYS TO TURNAROUNDS Turnaround situations are can be draining, but the rewards can also be quite large.

The three biggest turnarounds I had were the Bryan-College Station Eagle, Gray Communications and Jamison Door. The San Angelo Standard Times, Harte Hanks Community Newspapers in Dallas and Garden State Newspapers had similar characteristics.

A successful change in a bad situation requires two basic steps: First, listen to what the regular employees have to say. They generally understand what needs to happen, and they want to be heard. Secondly, fire

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019 / 51

somebody at or near the top who everybody knows needs to be gone but nobody thought the “new guy” would actually take that step.

Firing that person gets rid of an expensive, non-performing person. More importantly, it gives the new leader instant credibility as one with good judgement and who will make necessary, important decisions.

ANY DUMB BASTARD CAN FIRE SOMEBODY This was one of several sayings by one of my favorite people at Harte-Hanks, Jim Lonergan, an eloquent, silver-haired gentleman who was publisher of the Wichita Falls Times and Record News. His view was that it is easy to offload an employee but it takes a skilled manager to get someone to significantly improve their performance.

While some workers are simply incapable of performing, others can be led, coached and encouraged to raise their game with special attention in the form of training, more specific guidance and letting them know we believe in them. Jim’s view was that saving an employee is far more difficult than just firing them, but the rewards are worth the extra time and effort.

I AM JUST A HUMAN CHEMIST As publisher of the local paper in Bryan-College Station, Texas, I was invited to tour the state prison in Huntsville, by W.J. Estelle, the head of the Texas Department of Corrections and one of the most charismatic people I ever met. His prison housed dangerous felons. Estelle was considered a tough but fair corrections officer. On our tour he frequently stopped to visit with inmates and seemed to enjoy a mutual respect with them. Over the course of the day, I asked him how he saw his job.

His reply was that he was just a human chemist, trying to put the right people in the right situations so they could function competently and effectively together as a team to run a model prison system. Although a subsequent federal lawsuit by an inmate led to a federal judge changing the way the system was run and causing the departure of Estelle, his understanding of his role has always been an important one to me.

52 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

ARE YOU A SALESPERSON OR A CONSULTANT? “Maybe I made your ad too goddamn big!,” was Jim Lonergan’s answer to advertisers who complained about the lack of response to their ads. He cited a tiny ad that ran in newspapers nationwide that simply said: “Feet Hurt?” and then sold a salve that helped relieve pain. The ad succeeded by effectively communicating a simple message to people with foot discomfort.

Lonergan told complaining advertisers that he knew his newspaper worked. It could sell houses, cars and bicycles and fill jobs every day. He then worked with the advertiser to look at the items and prices in the ad, the layout of the ad, the store hours and the whole marketing and sales strategy of the merchant and then design a more effective ad. The ad salespeople became consultants to the businesses they served.

That approach can be used in many situations. At Jamison Door, salespeople are often able to overcome the objection that our doors are too expensive by demonstrating that when you tally the total cost to own a door over its life—including repair and maintenance, energy costs, downtime costs and other operational expenses—Jamison doors are quite reasonably priced. Our most effective folks are consultants rather than just salespeople.

WHO’S WATCHING YOUR STORE? Another Jim Lonergan story is about two furniture stores that were across the street from each other. When Store A would put up banners announcing a sale on outdoor furniture, Store B would quickly respond with a similar promotion. Store A would promote couches, and Store B would respond in kind. On and on it went. Soon Store B went out of business.

After padlocking his business, the owner of Store B walked across the street and asked his competitor, “What did I do wrong? Every time you had a sale, I matched it.” The owner of Store A said, “Simple. We had two people watching my store and nobody watching yours.” The moral is obvious: each organization must certainly be mindful of the competition, but

must have its own strategy and implement it well to be successful.

SET THE GOAL, THEN SOLVE THE PROBLEM Many human interactions involve problem solving in some form. The higher the degree of potential for real conflict, the more important it is to agree on the goal. Often, in a contentious exchange, competing goals make agreement far more difficult. Political players excel at this because their goal is frequently to win an election or embarrass the other guy rather than solve a problem.

If people can agree on the goals at the outset of any discussion, resolution will be easier.

CHOOSE GOOD SUPPLIERS OF ALL TYPES Several of the mistakes I’ve made along the way relate to this topic. At Jamison, when we were negotiating to buy HCR, the air door company, I provided our banker with every bit of information I had about that company and he seemed both satisfied and impressed. I went over the terms of our proposed purchase agreement with him.

He assured me there was no problem with their financing the deal.

Yet, 12 days before the expiration of our purchase agreement he told me his bank couldn’t do the deal after all. Matt Wyskiel, my son-in-law and major Jamison stockholder, who was still working at the Mercantile Bank at the time, put me in touch with their affiliate bank in Hagerstown, which ended up financing the transaction.

The lesson is to have a relationship with more than one bank and keep all informed on a regular basis. This advice holds true for all key business relationships.

LOOK FOR CLUES During the four years I worked in the Harte-Hanks corporate office, the company was in a growth mode and there was a clear vision of where we wanted to go under President Bob Marbut’s leadership. Marbut had periodic meetings of the planning task group, a combination of key corporate staff and operating group presidents. He brought in speakers on a variety of topics

to stretch our thinking. One had been chief planner at both Xerox and IBM. His simple, but important, message was look for clues about the future and plan accordingly.

What is happening today that will impact your people, company, industry and country tomorrow? His statement echoed Wayne Gretzky’s admonition to look at where the puck will be, not where it is.

An example is CNN, which launched June 1, 1980. At the time I just didn’t see how a 24-hour newscast could be successful. A few years later [my wife] Carol and I were at a small dinner party at Atlanta developer Tom Cousins’ plantation house near Albany. Ted Turner and Jane Fonda, then newlyweds, were there.

I asked Turner what made him think CNN would be successful. He brushed off the question with a wave of his hand and said, “Oh, I knew it would be successful.

I was just afraid that ABC, NBC, or CBS would do it first.” I remember thinking what incredible vision he had to see what others didn’t and to act so decisively on his instincts.

Leaders of organizations have to look for clues and keep their headlights on bright.

Just as doing today’s job well is important, so is positioning a company for the future.

DON’T FEAR THE UNCONVENTIONAL

DON’T F’EAR THE UNCONVENTIONAL

A product’s name often determines its success or failure. When Harte-Hanks bought the newspapers in the Dallas suburbs there were six different titles, making promotion of the group difficult. One long night several of us spent a few hours trying to find one name we could possibly use for all the papers. We found that we were precluded from most common newspaper names due to competitors in one or more markets. We ended up deciding to do all group promotion under the banner of Harte-Hanks Community Newspapers.

I have regretted that decision many, many times because one of the names proposed was Champion. So we would have had the Plano Champion, Mesquite Champion, Lewisville Champion, Allen Champion, etc. The promotion possibilities were endless: “Your Community has a Champion!” But nobody

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019 / 53

had ever named a newspaper Champion before, so we decided to just stick with what we had. It was a really bad call. Largely because we would have been the first to use an untraditional name, we failed to see what a great job we could have done promoting a group of Champion newspapers.

take a fresh look at how one fills key positions and make a judgement about what skillset is required for a person to be successful. It may not be necessary to have done the exact same job previously.

WHY HIRE GENE MAUCH?

When people apply for a job they make themselves vulnerable in many ways. It is important to let them know you appreciate them offering themselves for consideration and having an interest in your organization.

Treat them with great respect, and seek to understand how they and the organization might fit. If you tell them you will get back with them by a certain time, do it.

When I was being considered for the publisher’s job at the Dallas Times Herald it was struggling against the increasingly dominant Dallas Morning News. The owner, Times Mirror, had previously made two bad choices for publisher and needed to get this one right. After our first meeting, they told me they would call the next week to set up a visit to the paper in Dallas. The call actually came about three weeks later.

When they finally made a decision to hire someone else, I heard about it from others days before I got a call from anyone at Times Mirror. This was a company with Picassos hanging in their corporate dining room, elegant tastes, great conversation—a prestigious company with a sterling reputation. After that experience, I vowed to treat applicants like customers.

Gene Mauch was a professional baseball player and manager known for being the winningest manager from 1960 to 1987 never to have won a league pennant. When he managed the Philadelphia Phillies in 1964, the team had a 6 ½ game lead in the National League with 12 games left to play and were starting a seven-game homestand.

The Phillies lost 10 games in a row to finish tied for second place.

I’ve wondered about the thinking of teams that hired Mauch after that collapse. I suspect the discussion went something like, “Let’s hire old Gene. He knows baseball and knows how to manage a ball club. I know he never won a pennant, but he’s come real close.” Not much thought was given to looking for someone with a great skill set who hadn’t yet had a chance to manage a major league team.

I always felt that I was pretty good at running an organization when given the job, but I wasn’t that good at getting the big jobs, often because I hadn’t run a bigger newspaper. The jobs went to the Gene Mauch’s of the world who had worked at bigger papers even if they hadn’t necessarily done very well there.

I was probably given the [CEO] job at Gray Communications and at Jamison Door because both situations were desperate and nobody else wanted those jobs. When I went to Gray, I had never run a public company with TV stations, newspapers, a car rental agency and fixed base operation but I had other skills that let me be reasonably successful. I didn’t know anything about doors when I went to Jamison but I knew the importance of finding good people and building a team that could take the company to a much higher plane. I believe I was successful both at Gray and Jamison even though I had not previously run identical companies. The message is to

54 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2019

BE RESPECTFUL OF JOB APPLICANTS

LEARN TO LISTEN Often, in our personal interactions and in public discourse, we talk at or past each other. When we disagree with another person we frequently either avoid a discussion or seek to convince the other of the wisdom of our viewpoint. Learning to listen and seeking to understand the points the other person is trying to make is a better approach. One trick is to relax your tongue when listening rather than thinking about what you are going to say in response. In discussions in business where alternatives are being considered, this will almost always lead to superior decisions.

TREAT EVERYONE WITH DIGNITY My mother’s mother insisted I read Walt Whitman’s “I Hear America Singing,” a poem about the beauty of Americans of all skills working, each crafting his own products and using their God-given skills. It implicitly glorifies the fact that each person’s skill set is important and that we can all use our unique talents to build great things together. Mutual respect among people at all levels of an organization is essential to a good, decent and ethical organization.

A corollary suggestion is to treat employees like they are volunteers. Volunteers do jobs because they want to and believe they are doing something meaningful. It doesn’t take much to make them want to go somewhere they are appreciated. The same goes for employees.

YOU WILL BE THE BEST The Optimist Clubs in San Angelo sponsored the Little Olympics, a competition for elementary school students. Events included broad jumping and races of various lengths. Since I wasn’t good at any of those I asked the volunteer coach, Lee Gregg, if I could just help him in some way. One day after practice he said, “There’s one kid here that will be the best at whatever he chooses to do in life. And that kid is you.” Nobody had ever said anything like that to me before. What he said that day stuck with me and helped me believe in myself.

Every day we have the opportunity to compliment people, tell them we admire some skill they have or some attribute they possess.

With a few words we can give people reason to see their potential even if they don’t see it in themselves—and words cost nothing.

TACKLE TOUGH ETHICAL DECISIONS While occasionally not clear, right and wrong actions are often obvious. Newspapers and broadcast stations have more than their share of ethical decisions because of the pervasive influence of what they print and broadcast and because of how they program the content of what they air. There are enormous pressures to publish or not publish many stories and decide on the

prominence of how they are played.

As a struggling suburban paper in Plano, we published a story about the raging theft of T-tops from a certain brand of sports cars. The dealer who sold that brand never ran another ad. We did what was right, but we paid a real price.

Henrik Ibsen’s Enemy of the People details the kind of conflict faced daily by the media.

His story tells of the man who determined that the mineral baths in a resort town were toxic. He thought he would be a hero for saving lives, but he was instead determined an enemy of the people for destroying the economic base of the community.

MORE THAN A GOLD WATCH My father was not an introspective man. He abhorred the theoretical and insisted on the practical. Life was pretty black and white, right or wrong. He was the most moral and ethical person I ever met. If he brought home a pencil from work, he would have put a nickel in the petty cash box. Counselors, psychiatrists and psychologists were all unnecessary in his way of thinking because if we just listened to and helped each other, those types wouldn’t have a role to play.

One day he said that when he retired he didn’t just want a gold watch. He wanted to be able to say that his life counted for something more important. The message of that remark was burned into my soul. One’s life needs to count for something, and money isn’t the only scorecard.

MAY THIS BE YOUR GUIDE Those were the simple words my mother wrote in my first Bible after I accepted Christ at the age of seven at the First Baptist Church in San Angelo. There’s a lot of advice a parent can give a child, but none more important than that. I often think of what the world would be like if all of us followed Jesus’s teachings and treated each other with caring, respect and compassion.

The fact that Jesus surrounded himself with sinners and preached forgiveness is comforting. His teachings help us understand what is important in life and to put events in perspective. “What profits a man if he gains the whole world but loses his soul?”

CHIEFEXECUTIVE.NET / MARCH/APRIL 2019 / 55

S P ECI AL R E PORT

ABOUT YOUR CYBER SPEND Hacking is the dark side to digital transformation.

How to protect yourself without breaking the bank.

BY RUSS BANHAM

F

or years, cybersecurity at Prime Equipment Group was confined to strong firewalls and an off-the-shelf anti-virus/ anti-malware package. After all, the privately held Columbus, Ohio-based manufacturer of poultry processing equipment, with annual revenues of $40 million and 150 employees, was relatively small. They were confident that their size and niche business would not interest cyber criminals. All that changed when they relocated into a much larger facility in June 2018 to

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address a growing backlog.

“We got some press on our fast growth, which raised our visibility,” says company president Joe Gasbarro. “Articles noted not just our new manufacturing facility, but also some of the disruptive technologies we were beginning to use.… Suddenly, we were on the radar screen for hackers.”

A barrage of both mass phishing and personalized spear phishing attacks ensued. “Just last week, I got an e-mail from one of the owners of the company

TA B TE X T TA B

After media attention that raised its public profile, family-owned Prime Equipment Group found itself targeted by hackers.

FROM LEFT: NICK, JOE, GENO AND MIKE GASBARRO

asking for a ‘favor,’” Gasbarro says. “He wanted me to wire 30,000 euros from the remaining balance on a particular project to an account in Spain, to pay a vendor. It wasn’t unusual to forward money ahead of schedule, but it wasn’t common either.

I mentioned the request to our CFO, who investigated and discovered the e-mail was a targeted spear phishing attempt.”

Days after talking with Chief Executive, Gasbarro forwarded another e-mail he had just received that appeared to be from a company officer. It asked that he click on a link to update the person’s contact information. His suspicions aroused, he called the officer, who confirmed the e-mail was fraudulent.

“Something I didn’t have to think all that much about in the past is now very much on my mind,” Gasbarro confides. “I’m worried mostly about our cash, but also about the theft of our design and engineering blueprints. I’m also worried about a

“I’m worried mostly about our cash, but also about the theft of our design and engineering blueprints.” ­­ JOE GASBARRO, PRIME EQUIPMENT GROUP

disruption in business. We’re so busy we can’t afford one day down, much less two or three.”

Digital technology tools have been a boon for business, making operations leaner, more efficient and customer-focused. But the big downside is the growing cost of protecting the organization from their inherent security flaws. All corporate information security budgets are finite, making

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EVERY COMPANY IS AT RISK

“We have an enormous volume of customer data, making us a target.”

CHRISTINE SEARS, PENN NATIONAL

it imperative for CEOs to ensure that capital is properly allocated to mitigate the most important cyber risks.

This is far easier said than done. The list of defenses is formidable. Software measures alone include state-of-the-art firewalls, network security, anti-malware, anti-virus, identity management, access control, penetration testing, cloud security, intrusion detection, network monitoring, application security and endpoint security. Many companies also shell out to hire in-house information security personnel or outside expertise and to train their workforces to beware phishing and spear phishing attacks.

Slicing up this big pie into the right-sized pieces is delicate surgery. “Companies have trouble figuring out their optimal cybersecurity spend,” says Syed Ali, who leads Bain & Company’s cybersecurity practice.

“Not just midsize companies, but even many large enterprises don’t look at cybersecurity in a top-down strategic manner to know where the money should go.”

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Certainly, the need for more thoughtful budgeting has never been greater. A 2018 survey of 3,600 chief information security officers (CISOs) conducted by Cisco reported that nearly half of all cyberattacks cost victim organizations more than $500,000 on average. Those are the lucky ones: Eight percent of the survey respondents endured more than $5 million in direct and indirect costs and 11 percent suffered losses between $2.5 million and $4.9 million.

Small wonder that nearly six in ten companies in EY’s 2018 global information security survey increased their cybersecurity budgets last year. What is alarming is that the survey’s 1,200 respondents (a mix of CISOs, CIOs and other technology executives) say the budget increases are not nearly enough to fight a winning battle. An astonishing 87 percent say their budgets need to increase by at least 50 percent, yet only 12 percent anticipated an increase of more than 25 percent in the coming year.

While large enterprises arguably have more capital to spend on cybersecurity, midsize and smaller businesses at risk of attacks must also fund measures to fend them off and mitigate damage.

Take regional insurer Penn National Insurance. The company has sustained thousands of the fraudulent emails on a daily basis for several years, reports CEO Christine Sears. “Like all insurers, we have an enormous volume of customer data, making us a target,” she says.

These customers include both businesses and consumers, since Penn National provides a broad array of commercial and personal lines of insurance policies, including workers compensation, automobile insurance and various liability insurance products, among others. Data is the lifeblood of an insurance company, guiding underwriting and pricing decisions, as well as those involving claims administration and resolution. “We simply must have a very disciplined approach to cybersecurity, as our risk resilience is part and parcel of the trust that policyholders place in us,” Sears says.

Both Prime Equipment and Penn National recognize the dire threat represented

by a successful and especially punishing cyberattack. Whereas Penn National has budgeted targeted capital resources to defend the organization for some time, Prime Equipment is just beginning to figure out the optimal defensive posture. “We don’t have a CISO, so we’re still studying where we can get the biggest bang for the buck,” Gasbarro says.

“CEOs must insist on a comprehensive accounting.”

SLICING UP THE PIE

in between. In today’s fast-evolving digital and data landscape, answers are not easy to come by. “While many companies may know which data they need to protect, very few can tell you with a high degree of confidence where this data resides,” says Ali. “Obviously, that is not an acceptable answer; CEOs must insist on a comprehensive accounting.”

Assuming this information is forthcoming, the organization is positioned now to assess potential risks. A good start is to study how other businesses have been breached. “We look for common patterns in these breaches, such as the lack of software patching,” says James Shira, global chief information technology officer at professional services firm PwC. “We then perform an assessment of our ability to defend against these patterns, which helps illuminate the specific exposures.… By drawing these parallels, we can better prioritize our capital resources.”

Max Solonski, chief security officer at publicly traded BlackLine, a provider of financial and accounting automation software, conducts formal risk assessments guided by the ISO 27001 framework, one of the most respected information security standards worldwide.

“Drawing from different sources, we review a variety of threats, such as current trends in cyberattacks and common exploitation methods,” Solonski says. “Then, we prioritize identified risks as applicable to our environment and allocate capital to establish controls that mitigate or minimize those risks.”

To assist the risk assessment process, Penn National CIO Britta Schatz leverages the insurer’s competence in measuring client loss exposures to calculate and score its

This puzzlement is the norm in many companies, since there is no such thing as a cookie-cutter cybersecurity budget, where, say, 50 percent is allocated to software tools, 30 percent to hiring additional cybersecurity staff and 20 percent to workforce training. “The cybersecurity budget must be based on each company’s unique business strategy, which indicates which data needs to be protected the most,” says Carolann Shields, CISO at audit firm KPMG. “We evaluate how these risks apply to our known environment—which systems or data are more important that others, where those systems or data are located, and how they are accessed.”

Ali at Bain & Company agrees with this approach. “The most important question CEOs must ask their IT leaders is, ‘What is our highest priority in terms of the data we must protect?’” he says. “A pharmaceutical company might designate clinical trials data as its primary cybersecurity concern, whereas a manufacturer or an oil and gas company might decide to allocate the bulk of its security budget into strengthening the supply chain, and a healthcare company that’s highly regulated for patient data privacy might select this as the risk to focus on.”

KPMG, for instance, has identified client data as its highest cybersecurity priority.

“Since we are constantly embracing new technologies on behalf of our clients, we make sure to budget the capital to build cybersecurity into these solutions from the start and throughout their development,” Shields says.

THE WHERE AND HOW

The next question a CEO should ask IT is where the high priority data is stored—on premises, in the public cloud or somewhere

SYED ALI, BAIN & CO.

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Follow the Cyber Money In 2019, companies will allocate 39 percent of their cybersecurity budget to technology, 31 percent to process and 30 percent to people, according to a survey of 1,300 firms conducted by WillisTowersWatson and ESI ThoughtLab. Additional findings follow.

SPENDING TRENDING UP Average cybersecurity by($m) industry ($m) Average cybersecurity spending spending by industry

Average cybersecurity spending by industry ($m)

Companies plan to boost cybersecurity spending by 13 percent this fiscal year. $12 $12 $9 $12 $9 $6 $9 $6 $3 $6 $3 $0 $3 $0 $0

Financial services

Consumer markets

Manufacturing Insurance

Life sciences/ healthcare

Platform company

Technology

All

Financial Last year services

Manufacturing Insurance Consumer Current year Energy/ Next year markets utilities

Life sciences/ healthcare

Platform company

Technology

All

Energy/ utilities

Current year year Last year Consumer Insurance Manufacturing Financial Energy/ Next markets services utilities

SPENDING BY INDUSTRY AND MATURITY

Life sciences/ healthcare

Technology

Platform company

All

0.35% Last Current12.5 year percent Nextofyear On average, companies spend their revenue on cybersecurity. year

0.25% 0.30% 0.35% 0.20% 0.25% 0.30% 0.15% 0.20% 0.25% 0.10% 0.15% 0.20% 0.05% 0.10% 0.15% 0.00% 0.05% 0.10% 0.00% 0.05% Percent ofPercent revenueof revenue

Percent of revenue

0.30% 0.35%

0.00%

Financial services

Insurance

Life sciences/ healthcare

Platform company

Technology

All

Insurance Manufacturing Financial Energy/Leaders Intermediates Average Beginners Consumer markets services utilities

Life sciences/ healthcare

Platform company

Technology

All

Consumer markets

Intermediates Beginners Consumer Financial Energy/ markets services utilities

20%

Manufacturing

Energy/ utilities

Leaders Insurance Manufacturing Average

23%

Life sciences/ healthcare

Platform company

Technology

All

17%

14%

23% 20% 28% 17% Protection, detection and identification get a bigger piece of the pie than response and recovery.

21% 20% 26% 18% Beginners

14% 17%

Beginners

BeginnersTHE WHERE

Intermediates

MONEY GOES

Intermediates 20%

21% 20%

19%

19%

Identify

Identify

Detect

Protect

Detect

Protect

Detect

20%

Protect

26% 25% Respond

Recover

Respond

Recover

Respond

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28%

28% 26% 25%

20%

Leaders 20%

Leaders

Average

23% 21%

20%

Beginners 19% Intermediates Intermediates Identify Leaders

Leaders

25%

Recover

17% 18% 18% 18% 18% 18%

14% 17% 18% 17% 18% 18%

Source: WillisTowersWatson & ESI ThoughtLab

known cyber risks. “We’ve defined and documented 75 specific cyber vulnerabilities, which we track and measure on an annual basis to assess changes in their likelihood of occurring and potential impact,” Schatz says. “We also add any new risks that are identified to our risk register throughout the year and then re-rate all risks annually.”

This process helps guide Schatz to determine the optimal composition of her security budget. “If the annual assessment indicates we’ve made adequate improvements in hardening the firewalls and anti-virus/anti-malware software, we may lower the expenditures in these areas and allocate the capital to something else, like training or the hiring of additional staff,” she explains.

All the interviewees’ security budgets have increased in the past year, in line with survey findings. “Our budget is rising every year, with an increasing proportion of it spent on people,” says Shields. “We’re looking to recruit top security talent, which is in short supply and expensive.

We’re also spending more capital on training our junior security professionals, enhancing their skill sets. Anyone who joins our team must have their CISSP (certified information systems security professional) within six months, which we consider to be baseline training.”

Solonski puts a designated portion of his security spend toward education, with the capital funding different types of training based on the annual risk assessment. “One year you might provide training to salespeople on their infosec responsibilities, but the next year you might decide that more of the budget should go toward training data engineers on new security roles and concepts,” he explains.

Like the other security specialists, Solonski believes qualified people are equally if not more important than sophisticated tooling. “Since it is not possible to completely eliminate all risks, breaches will occur,” he says. “A sound, tested incident response plan will help minimize the damage, but it requires effective controls to detect the incident and highly skilled people to contain it as soon as possible.”

“There’s no point in having all the shiny tools like the latest intrusion detection software if you don’t have a solid foundation.”

BRITTA SCHATZ, PENN NATIONAL

Time is of the essence. “If you detect within 10 minutes that someone has broken into the network, not much data will be stolen,” he says. “What you don’t want is to detect someone downloading data four months after the break-in. Tools provide visibility, efficiency and convenience, but you need people who understand your specific environment to make intelligent decisions, especially when responding to an incident.”

SMALL BUSINESSES, BIG RISKS

While larger enterprises have more capital to address growing cyber exposures, midsize and smaller businesses must be more careful and considerate when putting together their security budgets. Shields’s advice is to focus on the fundamentals.

“There’s no point having all the shiny tools like the latest intrusion detection software if you don’t have a solid foundation,” she says.

“There’s much to be gained by effectively managing the configurations of the servers and firewalls and having good identity access management practices—providing access to data based on specific work responsibilities,” she says.

To improve Prime Equipment’s risk preparedness, Gasbarro is considering the value of a cybersecurity consultant. “Our IT team has so much on its plate right now, incorporating new technologies to enhance our equipment value proposition,” he explains. “I’m open to any and all advice.

What I’ve seen these last few months has made me realize we’re just as vulnerable as anyone else.”

Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.

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ROOSEVELT HAD CHURCHILL

WHO DO YOU HAVE? CNEXT matches the world’s most successful former CEOs with today’s top executives to solve critical challenges

LEADERS HELPING LEADERS

CNEXT.us

in partnership with Chief Executive

C EO 2 C E O SU MMI T

LEADING GROWTH

We kind of have a love-hate relationship with change.”

—Lior Arussy, Strativity Group

TODAY’S COMPANIES FACE the need to grow quickly while also fending off industry disrupters by embracing new technology, attracting top talent and being innovators in their markets, agreed CEOs who gathered for the 2018 CEO2CEO Summit, held in December at the Apella Alexandria Center in New York. But fast growth requires a culture that adapts to new market conditions or shifting consumer demand—which means significant change. That’s challenging for most humans, as Lior Arussy, founder of Strativity Group and author of Next is Now: 5 Steps for Embracing Change, explained in his keynote address. “We kind of have a lovehate relationship with change,” he said.

Employees resist change not because of fear of the future but “a fear of the past,” he told attendees. More specifically, concern that the change will cast the employee’s life’s work, heretofore, in a negative light. “If employees are defining themselves by the tools or processes they’ve always used, management needs to help them understand that, though the tools have changed, they

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What if the old rules for change no longer apply?

BY C.J. PRINCE

will have the same crucial impact—indeed, a greater, more creative impact.”

To do that, though, CEOs need to understand their own resistance to the evolution of leadership. “The CEOs I work with are dealing with the biggest crisis in their life,” Arussy said. The leadership style they developed years or decades ago isn’t working with a new generation of workers. “They resent those millennials saying, ‘I want to understand why.’ Deep down [CEOs are] thinking, ‘Nobody explained that to me. I worked 30 years to get to my job. I don’t need to explain anything to you.’ But those answers do not work anymore.”

To drive change, CEOs need to build a culture of trust: if employees trust management, they’ll get on board; if management trusts employees, they’ll abandon micromanagement and instead, empower employees to co-create with customers, which then leads to brand strength and, ultimately, growth.

“This is the power of creating change resilience,” said Arussy, “where every employee is the CEO.”

STAKEHOLDERS & BUSINESS TRANSFORMATION

Impactive Capital’s Lauren Taylor Wolfe urged CEOs to focus on ESG initiatives that will offer business benefits.

WHEN IT COMES TO SUSTAINABILITY, CEOs have been caught between competing demands: the need to embrace environmental, social and governance (ESG) initiatives (or activist investors will make trouble for you) and the mandate to maximize return to shareholders every single quarter (or activist investors will make trouble for you).

Those goals, however, are really only incompatible when the ESG initiative doesn’t make sense, said Peter Langerman, CEO of Franklin Mutual Advisers. “If it’s, ‘I should do something that’s kind of silly, but makes me look good from an ESG perspective and I’m giving up return,’ that’s where the structure breaks down,” he told CEOs. “There really shouldn’t be an inconsistency between ESG and returns because, long term, you’re doing the right things with ESG so it ought to be beneficial.”

Start with the business case and invest only in the ESG initiatives that will lower your cost of capital, attract and retain talent or boost your bottom line, said Lauren Taylor Wolfe, founder and managing partner of Impactive Capital, an investment firm combining activism with ESG

engagement. Wolfe saw this transformation firsthand as a director with HD Supply, when the board realized its staggered model was keeping its ISS scores near bottom. “So that was excluding us from a lot of the pools of capital that we’d otherwise have,” she said.

When the board changed that, scores went up and the company found itself included in a much wider variety of ETFs. “That lowered our cost of capital,” she said.

To avoid conflict with investors, be proactive rather than reactive, added Betsy Atkins, who sits on the boards of Wynn Resorts, Cognizant, Schneider Electric and Volvo Cars. At Wynn, Atkins called SASB and asked what sort of ESG moves would be applicable to Wynn’s industry.

SASB recommended addressing air quality in Wynn’s casinos, where smoking is sanctioned.

“We said, ‘We can’t have a no-smoking policy— we’re in the sin industry, so that’s a non-starter,” said Atkins. But in the discussions, SASB came up with other options. “So it’s not just this rigid set of rules. They will work with you. You have to pick what works for your industry and what works for your brand.”

THINKING DIFFERENT IT’S NOT EVERY FOUNDER who would risk customer ire by incorporating a swear word into his company’s name. But Carey Smith, former CEO of Big Ass Fans, isn’t a fan of playing it safe. “We did a lot of advertising in magazines, and we had to stand out from the crowd,” said Smith, who recently sold the company for $500 million. “That worked very well.”

While CEOs throughout history have achieved growth by thinking differently, the time frame has compressed dramatically, noted Keith Denham, managing principal of CohnReznick Advisory, who pointed to Henry Ford’s bold decision in the early 20th century to hike worker pay and cap their hours. “But he probably didn’t feel the pressure that each of you, as CEOs, face on a daily basis,” Denham said. “The speed of how things are moving today is really causing [leaders] to think differently and move forward with profound change at a pace that hasn’t been seen before.”

With that comes sizable risk—and significant reward, when the instinct is right. From the early days of Big Ass Fans, Smith bucked con-

from left: Keith Denham, Dane Atkinson and Carey Smith

vention when he opted to manufacture in the U.S. and sell direct to the market. “It allowed us to control the quality and we were fanatics about quality control,” he said. “Additionally, it allowed us to talk to our customers, which is the key to product development—knowing what your customers are thinking.”

Not all big bets pay off, but the willingness to fail fast and learn from those missteps provides the lasting value, said Dane Atkinson, currently CEO of analytics platform SumAll and previously chief of six other companies. “There are so many easy ways to get caught up in your own success,” he said. “I try to cultivate a process that your bigger KPI is your own development, your own ability to miss some opportunities but overall, gain throughout the cycle of insanity.”

We did a lot of advertising in magazines, and we had to stand out from the crowd.”

—Carey Smith, Big Ass Fans

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BLITZSCALING: THE LIGHTNING-FAST WAY TO BUILD COMPANY VALUE WHEN REID HOFFMAN, CO-FOUNDER OF LINKEDIN, worked at PayPal in its early days, the company’s growth was far outpacing the capabilities of its lean staff. As problems cropped up with the payments software, irate customers flooded customer service inboxes. Management faced a weighty decision: either scale back growth and put out the fires or ignore the blaze and go for broke.

They chose the latter, unplugging the phones and continuing to grow at 2 percent to 5 percent per day. “That was obviously disorienting, because ignoring your customers is a surefire long-term recipe for failing, but short-term, it was very useful,” said Hoffman.

The gambit indeed paid off and PayPal was ultimately able to restore faith in its brand. That was Reid’s first experience with “blitzscaling,” or the Amazon-ian style hypergrowth that necessitates CEOs “prioritizing speed over efficiency in the face of uncertainty,” explained Chris Yeh, who co-authored Blitzscaling: The Lightning-Fast Way to Build Company Value with Hoffman.

Blitzscaling is not just for startups, Yeh said. Established companies can apply its rules—or rule-breaking, more accurately—to a new product launch or a new line of business, assuming the circumstances are right. To make the high risk worth the potential reward, consider these five criteria for successful blitzscaling: 1) Big market. If you want to build a big business, you need a sizeable market, said Yeh. “But what’s less intuitive is your focus is not just on the present market, but the future market as well.”

2) Massive distribution. To build at a rapid clip, you need a surefire way to get your Next Big Thing in front of people, said Yeh. “Dropbox built a great product, but what Dropbox also did was to build a viral marketing engine that allowed them to get so many people on to Dropbox.”

3) High gross margins. Hypergrowth requires a hefty cash infusion, but some businesses—particularly established companies—have a hard time attracting private equity capital. “The higher the margin, the easier it is to finance [the project] out of revenues,” said Yeh, adding that, for public companies, higher gross margin can also have the benefit of increasing revenue multiples, which boosts the company’s value in the market.

4) Network effects. Your product should be one that increases in value as more people use it or enter the platform, said Yeh, noting high-profile examples such as eBay and Craigslist. “What’s really powerful about network effect is the fact that it makes an early lead being the first to scale almost insurmountable.”

5) Product market fit. Having the right product market fit won’t guarantee your success, but not having it will guarantee failure, said Yeh, pointing to Groupon as a classic example of a product that has a lot of buzz, but in the end, disappoints both buyer and seller. “Without that product market fit, Groupon is doomed to fail.”

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Prioritizing speed over efficiency in the face of uncertainty can power a company past a growth hurdle.”

—Chris Yeh, author, Blitzscaling

TA B TE X T TA B

EC O N O M IC D E VE LOPME NT

REGIONAL REPORT

THE NORTHEAST

Amazon is out, but the region is soldiering on with efforts to build on science and tech strengths. BY CRAIG GUILLOT NEW YORK’S SELF-INFLICTED woes are the big news in Northeast these days.

Before plans were scuttled by pushback, Amazon’s announced intent to split its HQ2 headquarters between New York City and Arlington, Virginia was expected to give the entire tri-state region a lift. Now, only Washington, D.C. will still benefit, thanks to proximity to the company’s Virginia expansion. Construction cranes and new investments in mixed-use developments are also fueling business growth in Washington, Baltimore and Boston. And in small, aging states, like Delaware and New Hampshire, there’s hope that initiatives aimed at attracting younger workers will produce results.

20* DELAWARE PORT AND FINANCIAL SERVICES OPPORTUNITIES In September 2018, UAE-based port operator Gulftainer signed a 50-year lease to invest

$600 million in upgrades and operate the Port of Wilmington. The additions will increase container capacity from 350,000 TEU to 1.8 million TEU and could be a “game-changer” in job creation and economic growth, says Kurt Foreman, CEO of the Delaware Prosperity Partnership (DPP).

Delaware’s strength in financial services has also attracted new fintech startups. Fair Square Financial received $100 million in equity investment from the Oregon Group in May 2018, and Marlette Funding announced 200 new jobs in the state in December 2018. In total, the state’s financial services sector is on track to grow 8.4 percent between 2015 and 2020 compared to only 1.6 for the U.S. overall.

The advanced materials sector is another strong point with the new Angel Investor Tax Credit enticing venture capitalists to invest in science and technology startups.

MAINE Whole Oceans is building a state-ofthe-art recirculating aquaculture system on the site of a defunct paper mill in Bucksport.

*No. ranking in the 2017 Chief Executive Best & Worst States for Business (ChiefExecutive.net/2017Best-Worst-States)

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ny Nine Dragons, announced in October 2018 a $111 million investment to resume operations at the Old Town Mill, which had been vacant for 10 years. “We’re seeing tremendous investment back into our forest economy and new ways to use our abundant natural resources,” DelGreco says.

24 NEW HAMPSHIRE

NEW HAMPSHIRE As commissioner of the state’s new department of business and economic affairs, Taylor Caswell pledged to find ways to enhance the state’s role as a partner to business.

“We are seeing significant growth in this area, and it ranges from innovative startup companies to more recognizable names from Adesis to Solenis,” Foreman says.

One challenge is that the state needs to raise its visibility. DPP is now expanding outreach by traveling the nation and world to show businesses what Delaware has to offer. That includes a business-friendly environment, expedited permitting and easy access to decision-makers. “You can have breakfast with a member of our congressional delegation, lunch with a Fortune CEO and dinner with the Governor all in one day,” Foreman says.

35 MAINE NEW OPPORTUNITIES IN NATURAL RESOURCES Maine’s big story is making new uses for its natural resources, says Peter DelGreco, president and CEO of Maine & Co. As overfishing has led to a decline in many of the world’s fisheries, the fish farming and aquaculture industry in the Pine Tree State has been growing to meet the need. Whole Oceans is building a state-of-the-art recirculating aquaculture system on the site of a former paper mill in Bucksport. The project is expected to invest more than $250 million in the community and create hundreds of direct jobs. The company has reported that it has already pre-sold 100 percent of its production for the next 10 years.

“We have more projects like this showing up in our pipeline and people are looking for new ways to scale these technologies and provide protein for our world in an environmental and sustainable way,” DelGreco says.

Maine is also making new use of its timber stock to focus less on paper and more on things like cross-laminated timber. ND Paper, a U.S. subsidiary of Chinese compa-

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A NEW APPROACH TO DEVELOPMENT New Hampshire recently restructured its economic development initiatives and is taking a “more holistic” approach in recruiting businesses to the state, says Taylor Caswell, commissioner of the newly created department of business and economic affairs. The agency is now taking a more aggressive approach to put the state into the global marketplace with new partnerships and collaborations. The BEA will serve as a “one stop shop” for all the state’s business needs, including workforce development, Caswell says.

“We’ve been doing it in an old way for a very long time and we’re now looking to make the pieces of it all work together,” Caswell says.

Biomed and biotech continues to be a strong driver of the state economy since the Advanced Regenerative Manufacturing Institute opened its doors in Manchester in 2017. Other investments in the past year included expansions by Revision Military and BAE Systems. Norwegian cube storage company AutoStore System opened its U.S. headquarters in Derry in June 2018, and Hitchiner Manufacturing announced in April 2018 a $50 million factory and 85 new jobs in Milford.

Like many in New England, the state is also trying to attract a younger workforce to compensate for the aging population.

“We’ve been working hard to make the case that we have the strong economy and lifestyle assets to appeal to younger demographics,” Caswell says.

31 PENNSYLVANIA THE KEY TO INNOVATION Pennsylvania is striving to cultivate new homegrown businesses. The Keystone Innovation Zone (KIZ) program offers working capital to young companies to

meet needs for capital expenditures, workforce expansion and operational expenses.

In December 2018, Gov. Wolf awarded an additional $15 million in credits for more than 250 tech startups and entrepreneurs.

One such company, Soltech Solutions, makes the world’s first LED light that not only lights interiors but can support plant life. The Lehigh Valley-based company launched a Kickstarter campaign in 2016 and in July 2018 tripled the size of its base in the Lehigh Valley. “By starting a company in a KIZ and living not much more than a few blocks away, we quickly found living and working in the same community to really enhance both our business and social experiences,” says CEO Paul Hodges says.

Larger companies also continue to invest in the region. In October, gene therapy company Spark Therapeutics announced an expansion of its R&D operations in Harrisburg and the creation of more than 500 high-paying jobs. In September, Reliance Standard Life Insurance Company also announced an expansion of its headquarters in Philadelphia and the creation of 127 jobs in the next three years. Online retailer goPuff is also building 10 warehouses across the state and will create 500 jobs in the next three years. goPuff co-founder Rafael Ilishayev credited the state’s support and $400,000 from the Pennsylvania First grant.

32 RHODE ISLAND CAMPUS OF INNOVATION Rhode Island is stepping up its innovation game with the development of three new innovation campuses in Kingston and Providence funded by $122 million of private investments and $12 million from the state.

The campuses include the URI and Arizona State University Innovation Hub, which will focus on big data, cybersecurity and IoT; the Rhode Island “iHub” startup incubator and accelerator; and the Rhode Island Agricultural Innovation and Entrepreneurship Campus.

“Rhode Island is finally with intensity, focusing on its innovation economy. Whereas there have been aspirations for decades, Rhode Island is truly and intently investing in innovation and this set of announcements,”

says Stephan Pryor, secretary of commerce of the Rhode Island Commerce Corporation.

The campuses build on the growth in the Innovation and Design District, which is home to the Johnson & Johnson Health Technology Center and the Cambridge Innovation Center, says Pryor. In July 2018, Amgen broke ground on a $200 million next generation biomanufacturing plant in West Greenwich, and Rubius Therapeutics announced the acquisition of a manufacturing facility in Smithfield. “We have secured commitments from 30 companies in the past three years…We’re now trying to spread the word and let the world know about our momentum,” Pryor says.

38 MARYLAND BIG DEVELOPMENTS AND BIG OPPORTUNITIES The 3,250-acre development at Tradepoint Atlantic is bringing new excitement to Baltimore. The former steel mill site is already home to Amazon, FedEx, Under Armour and Harley Davidson, and is expected to drive 17,000 new jobs and a $2.9 billion economic impact in the coming decade. A few miles to the east, the $5.5 billion revitalization of industrial land at Port Covington will include up to 18 million square feet of new, mixed-use development and 40 acres of green space. Under Armour is preparing to construct its new headquarters there, and several cybersecurity firms have announced plans to locate in the area, dubbing it “Cybertown USA.” “These projects are breathing new life into former industrial areas around Baltimore and have the potential to transform the entire region,” says Kelly Schulz, secretary of the Maryland Department of Labor, Licensing and Regulation.

World-class research institutions such as Johns Hopkins and the University System of Maryland are driving continued growth in life sciences and bio health. In

PENNSYLVANIA Soltech Solutions, which makes LED lights that support plant life, is one of more than 250 startups participating in the state’s Keystone Innovation Zone program, which offers working capital to young companies.

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MASSACHUSETTS Online retailer Wayfair, which recently signed a lease for 395,000-square-feet in Boston’s Back Bay, is among the companies expanding operations here.

October 2018, officials broke ground on Viva White Oak, a 300-acre, $3.2 billion mixed-use development that neighbors the FDA headquarters and a new hospital.

More than 42,000 Maryland citizens now work in 2,300plus companies that generate a gross state product of more than $17.6 billion.

39 VERMONT NEW OPPORTUNITIES FOR REMOTE WORK The Vermont Employment Growth Incentive launched in January 2019 and offers reimbursements of up to $5,000 per year (up to two years) for remote workers who move to the state. It’s already raising interest among remote workers and tech companies that can base employees anywhere, says Joan Goldstein, commissioner of the Vermont Department of Economic Development.

Vermont also continues to thrive as a food and beverage hub known for grassroots businesses such as Ben & Jerrys and Keurig.

Keurig Dr. Pepper entered into a joint venture with Anheuser-Busch last year to offer a new product that creates cocktails, brews and ciders with the touch of a button. The state now has the most craft breweries per capita with many new developments supported by the VEGI incentive. “Many of these businesses started small in Vermont and have grown into great consumer brands,” Goldstein says.

The Green Mountain State is also starting to use its small size to its advantage. “Access to government and getting things changed here is unsurpassed. The governor meets with CEOs no matter how small the business is, and we figure out ways to get things done,” Goldstein says.

45 MASSACHUSETTS BANKING ON BIOPHARMA Massachusetts’ biopharma industry has grown more than 28 percent over the past decade and now employs 70,000 resi-

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dents. Nearly half of the biopharma IPOs in the past year have happened in the state, and commercial lab space has grown to a whopping 29 million square feet, says Peter Abair, executive director at MassEcon. “I don’t think anyone a decade ago, even in the most optimistic person in the industry, could have imagined this kind of growth. Yet it’s happening as we speak,” Abair says.

Boston’s Seaport district continues to grow, having radically transformed in the past decade from an undeveloped swath of land to a thriving business hub. Mass Mutual, Amazon, Vertex Pharma and PwC have all located facilities in the area in recent years. There is roughly 6 million square feet in new development in the area with the capacity to expand to 7.5 million square feet, Abair says. Wayfair also announced in December 2018 it would add another 3,000 jobs in the state.

The biggest challenge Massachusetts now faces is managing the high cost of living and the transportation issues the growth has created. “The ability to get in and out of Boston needs to be eased and it is a challenge that has been recognized and will be front and center for this administration to tackle,” Abair says.

46 CONNECTICUT CONNECTING TO NEW OPPORTUNITIES Hartford may be a small town, but it’s making a big name for itself in technology, says DECD Commissioner Catherine Smith.

In March 2018, Infosys announced it will establish a $20 million technology and innovation hub in Samford and create up to 1,000 high-tech jobs by 2022. Professional services firm PwC also announced in May it will make Stamford headquarters for its Insourced Solutions for Tax (IST) division.

The area is also growing as a hub for insurance innovation, partly enabled by the Hartford InsureTech Hub acceleration program which recently received 230 applications from startups around the world. “Due to this momentum, we’ve seen an increase in investments throughout the city. In fact, there are over 30 development projects currently underway that are adding housing, more educational facilities and making Hartford a more walkable and vibrant place to live,” Smith says.

Manufacturing in the state also continues to see “explosive growth,” Smith says.

Sikorsky, Pratt and Whitney and Electric Boat are all expanding in the state and the sector has added more than 5,600 jobs between 2017 and September 2018, a quarter of all private sector jobs added during that time.

47 NEW JERSEY STRIVING FOR A FAIRER ECONOMY New Jersey has long touted its status as top hub in the life sciences and biopharma industry, but new initiatives are now aiming to expand some economic opportunity and growth. A 64-page report, A Stronger and Fairer Economy in New Jersey, acknowledged that while the state has seen tremendous growth in some sectors, it hasn’t made the most of its assets or growth opportunities in the past decade.

Between 2007 and 2017, New Jersey added few private sector jobs, and half of the residents now take home less pay than they did before the Great Recession. “But the recession and its aftermath also taught us our greatest lesson: A stronger economy is a fairer economy and a fairer economy is a stronger economy,” said Gov. Philip Murphy in the report.

The initiative aims to double venture capital investment and create thriving and inclusive cities with more jobs and less poverty. The state hopes to achieve its goals by 2025 with four strategic priorities: investing in people, investing in communities, harnessing the power of innovation and making government work better.

49 NEW YORK AMAZON DITCHES QUEENS New York’s victory in landing Amazon’s corporate headquarters proved shortlived, scuttled by New York City-style hubris. In February, the retail giant opted to pull the plug on the deal after unrelenting protests by local activists. The $3.6 billion investment would have created as many as 25,000 new jobs by 2029, and 40,000 by 2034, with an average salary of $150,000 annually. Among other terms, the deal granted Amazon $1.2 billion in tax credits through the Excelsior Jobs

**not ranked

Program and $15 million each from the city and state to create workforce development programs focused on technology training for underrepresented portions of the workforce.

Efforts by New York Governor Andrew Cuomo and New York City Mayor Bill de Blasio to salvage the deal faltered as critics first cried foul over the incentives program and then launched an assault on Amazon’s business practices. “A number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward,” Amazon said in a statement about its abrupt turnaround.

The loss scuttled what policy analysis firm REMI estimated would have been an infusion of $186 billion for the state economy over the first 25 years.

NEW YORK In February, Amazon scuttled plans for a 500,000-square-foot corporate headquarters in Long Island City after public outcry about tax concessions.

WASHINGTON, D.C.** A BOOMING CAPITAL OF CAPITAL In November 2018, D.C. Mayor Muriel Bowser became the first mayor in 16 years to be re-elected in the capital. The city’s booming economy played a strong role in garnering support with nearly three-quarters of the vote. The latest figures from the Census Bureau put the District’s population at more than 700,000, representing a growth of more than 100,000 residents since 2010.

The recent annual report by the Washington D.C. Economic Partnership noted that since that time, developers have completed more than 622 projects in the district, totaling over $27 billion in investments and 76 million square feet of commercial real estate.

While it lost the bid for Amazon’s HQ2, the proximity to the company’s new headquarters site in Arlington, Virginia, just south of the capital, is expected to be a boon for the District. Amazon plans to add more than 25,000 jobs in the region with an average salary of $150,000.

Craig Guillot is a New Orleans, Louisiana-based business writer specializing in technology and economic development.

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L AST WOR D AYTEKIN TANK \ ENTREPRENEURSHIP

MY KIND OF ‘FEARLESS’

Here’s a novel way to build a technology company: Earn more than you spend and go slow.

Aytekin Tank is the founder and CEO of the online form-building tool company JotForm.

STARTUP GURUS URGE ASPIRING founders to take massive risks, relish failures and shoot for glory (See “Blitzscaling,” p. 64). This deceives people into thinking that entrepreneur CEOs need be “fearless” in the classic sense of the word. It’s one-sided advice that leads entrepreneurs to take unnecessary risks.

One way to approach risk is to invest everything you have in a new venture. When Captain Hernán Cortés landed in Veracruz, Mexico in 1519, he ordered his crew to burn the ships. There was no turning back.

While Silicon Valley loves stories of digital conquistadors who put it all on the line, investors only like that story in retrospect.

Venture capitalists rarely brag about portfolio companies that burned $10 million and ended up stranded in hostile territory.

Another way to approach risk is with calculation. When I started JotForm in 2006, I was working at a New York media company where I was paid to immerse myself in new technologies and sharpen my programming skills. Our editors needed custom web forms for polls, questionnaires, contests and surveys—tedious work that became a big part of my job. I asked myself if I could automate the form-building process.

That question was the genesis of JotForm.

A day job is an underrated incubator. I learned about product development, sales and customer support. Working nights and weekends, I applied those lessons to my fledgling company. I developed JotForm at a slow pace, and if I stumbled, I didn’t face financial ruin. I could sail my ships home.

Only when JotForm was as lucrative as my nine-to-five salary did I dive into building my product full-time. To me, being a “fearless” leader means operating in such a way that you aren’t plagued by fear. Instead, you confirm that you’re offering a product that you and others want. You hone the skills and experience to build it yourself. Hopefully, you do something few others realize is worth doing.

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After I quit my day job, I made the “fearless” decision to remain bootstrapped. I didn’t spend money or push especially hard, yet about 15,000 users signed up within a year. Had I taken venture capital, I would have answered to a board that wanted “exponential” growth and a fast exit. By bootstrapping, I retained control of my company.

If you want to be my kind of fearless leader, remain independent. Don’t “figure things out” on a VC’s dime. That rarely ends well.

Instead try this advice: Don’t hire anyone unless you have their first-year salary in the bank. That has been my practice since hiring JotForm’s first employee 12 years ago. 130-plus employees later, we uphold that rule. Consequently, we can invest in developing teammates who thrive rather than burn out trying to get a quick ROI. Crown cash flow queen. When you bootstrap a company, you need to earn more than you spend and operate on the money you actually have. Only governments and VC-backed startups can routinely spend more than they earn.

Do one thing really well. At JotForm, we only do forms. Focus is our competitive edge against Goliath tech companies that have made a business model of diversified mediocrity. When Adobe entered the form builder space, they didn’t stay long because the revenues, according to their executives, were too small to justify the effort. Convince bigger companies that competing with you isn’t worth it.

If you can afford your employees, your bank account is growing and you’re the best in the market at one thing, what is there to fear?

A lot. Anyone who starts a company should experience fear—of failure, competitors, regulations and all the contingencies we cannot predict. Burning your ships is not a victory over fear. It is a failure of imagination—in this case, imagining other ways to launch a great company. Try “fearless” entrepreneurship instead.

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