March/April 2016

PRIVATE AVIATION REPORT THE FUTURE OF BUSINESS TRAVEL, p. 64

MARCH / APRIL 2016

SNAPSHOT: DIGITIZATION IN

THE MIDDLE MARKET

HOW TO ATTRACT (AND KEEP)

p. 22

TECH TALENT p. 58

GUARDING YOUR DATA IN THE DIGITAL AGE p. 55

THE

DIGITAL TRANSFORMATION WHAT YOU NEED TO KNOW ABOUT

ISSUE

MACHINEt LEARNING p. 36

GETTING A RETURN ON YOUR IT INVESTMENT p. 54

HOW CRITICAL IS DIGITIZATION

TO YOUR BUSINESS? DOWNLOAD THIS APP AND SCAN OUR COVER TO FIND OUT details, p. 2

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CONTENTS

March/April 2016 No. 281

FEATURES 30 Intellectual Property

How to Navigate Patent Purgatory

CEOs of small and medium-sized companies face very different challenges than Apple and Samsung do.

By William J. Holstein

36 Big Data

The Data Revolution

50

Here’s what you need to know to get the edge Big Data and machine learning can offer your business.

By Dale Buss

44 Corporate Governance

A Healthy Approach to CEO Illness

How should companies cope with a leader’s health crisis?

By Laurie Stevens, M.D. and Steven S. Rolfe, M.D.

46 Economic Development

Regional Report: The Northeast

A new approach to downtown development is reinvigorating the Northeast Corridor. By Warren Strugatch

SPECIAL EVENT COVERAGE

50 COVER STORY 30

Driving Digital Transformation

Reinvent your value proposition—before someone else does.

By Jennifer Pellet

54 CEO ROUNDTABLE

Making Digital Change Happen

How do you steer a company through digital transformation?

58 CEO ROUNDTABLE

How to Know If You Have the Digital Talent to Win

CEOs discuss building a technologically proficient workforce.

64 Plane Advantage 64

SCAN OUR COVER FOR MORE ON DIGITIZATION!

Follow these quick steps to view our first digitallyenhanced, animated cover.

02 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

Download the Aurasma app, launch it and swipe through the tutorial.

Tap the white Aurasma ‘A’ menu icon.

The Future of Business Travel

New developments in personal and business aviation may transform the way you do business. By Mark Patiky

From the bottom menu bar, choose the search icon ( ) and type thedigitalceo. When an image of the cover appears, tap on it, then choose follow.

Tap the viewfinder ( ) icon, aim your phone at the magazine cover and enjoy the introduction to our Digital Transformation Issue.

Y O U K N O W I T. W E K N O W I T.

E X P E RT I S E M AT T E R S .

Becoming a leader doesn’t happen by chance. Like you, we built our success on years of insight and refinement – so you can count on the best travel experience anywhere in the world.

To learn more, visit netjets.com/knowit or call 877-JET-4456

NetJets is a Berkshire Hathaway company. Aircraft are managed and operated by NetJets Aviation, Inc. NetJets is a registered service mark. ©2016 NetJets IP, LLC. All rights reserved.

CONTENTS Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Art Director Alex M. Konsevick Associate Copyeditor Carl Levi Contributing Editors Dale Buss Bill Holstein Tom Pettibone Mark Patiky C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld

10

DEPARTMENTS 8 Editor’s Note

24 Sonnenfeld

A Recipe for Trust

10 CEO Watch

• Huntington Ingalls’ Mike Petters on steering a spinoff • CCL’s Bill Pasmore on navigating change

• Oklahoma Attorney General Scott Pruitt on regulatory abuse

Every leader’s actions strengthen—or diminish—a company’s reservoir of trust.

By Jeffrey Sonnenfeld

28 Private Company

Compensation

Getting Compensation Right The majority of private companies understand the value of incentivebased compensation as a strategic incentive, yet most fail to harness its potential.

20 Chief Concern

Succeeding as an Interim CEO

How boards and temporary chiefs can work together.

Dr. Thomas J. Saporito

Excerpted from Chief Executive’s Executive Compensation in Private Companies report

22 Mid-Market Report The Mid-Market’s Digitization Landscape

72 Flip Side

Clouding the Imagination Watch out for the dark truth inside the cloud’s silver lining.

By Joe Queenan

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 280, March/April 2016. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2016 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.

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CEOS IN THE NEWS

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CEO INSIGHTS

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

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

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

MARK WEINBERGER Chairman and Chief Executive, EY

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CHIEFEXEC.COM

EDITOR’S NOTE

Who Bears the Cost of Overregulation?

J.P. Donlon

Companies need to be near areas that attract talented people imbued with new technical skills.

“WORSE THAN ILLINOIS” was the recent Wall Street Journal editorial headline that commented on the announcement that GE, which had moved from New York to Fairfield, Connecticut in 1974, was ditching the Nutmeg state for Boston— yes, Boston, as in the home of “taxachusetts.” To be worse than Illinois in terms of business environment is to be in the eighth circle of business-unfriendly hell.

In our annual survey of CEO sentiment about the Best and Worst States to do business, business leaders ranked Connecticut 45th in 2015. It had dropped from 44 the previous year. Tellingly, the Nutmeg state’s ranking on just its tax and regulatory environment was lower than Illinois (#48) and New York (#49), but still above that of California at 50th overall.

Chief Executive, which is based in Greenwich, Connecticut, takes no pleasure in this development. But we’ve noticed over the years that our home state has been on a spending and regulatory binge. In addition, Connecticut was one of six states that lost population in fiscal 2013-2014, according to the U.S. Census and, as the Journal editorial noted, a Gallup poll in the second half of 2013 found “that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too.”

Not long ago, I was interviewed by NPR about why our annual survey consistently ranked California the least friendly state for business for 11 straight years. The economist they had scheduled opposite me in the radio interview insisted that California was getting a bad rap not only from us but numerous other state rankings, such as the American Legislative Executive Council (ALEC) and the Tax Foundation. Californians, who called into the live program, ranted about Texas presuming to steal businesses away.

08 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

Former governor Rick Perry came in for some heavy vitriol. “Who would want to live in Texas anyway?” said one clearly agitated caller.

I responded by saying that trashing Texas does not make California more desirable to job creators. If the GE decision proves anything it shows two truths: Companies are mindful that in a new era of digital transformation they need to be near areas that attract talented people who are imbued with new technical skills; and that business sees heavy regulation and an inhospitable business climate as additional taxes.

In the last Republican debate, presidential contender Ben Carson made a point of saying that regulation, both federal and state, was burdening the private sector unnecessarily—a point also made by Oklahoma attorney general Scott Pruitt (see p. 10). These costs are not insignificant. As the Competitive Enterprise Institute documents in its recent annual report “Ten Thousand Commandments,” the so-called hidden tax imposed by the regulatory state has reached $1.88 trillion.

Quoting from the report, Peter Roff, a U.S. News & World Report contributing editor and longtime observer of the Washington scene, noted that, “If U.S. federal regulation was a country, it would be the world’s 10th largest economy, ranking behind Russia and ahead of India.”

The real problem is that business doesn’t actually pay the full burden.

These costs are borne by consumers who pay inflated prices for the products and services they buy and by workers whose wages have been held down in part as a result of the regulatory burden. This issue inevitably leads to lower levels of growth and prosperity—about which our policy-makers going forward should think long and hard.

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

Business may be the direct recipient, but the ultimate costs are passed on. By J.P. Donlon

CEO WATCH CEO POV / ATTORNEY GENERAL SCOTT PRUITT

Curbing Regulatory Overreach Oklahoma Attorney General Scott Pruitt argues that regulatory abuse is a hidden tax on the economy and a job killer. By J.P. Donlon THE GROWING regulatory burden is one of the biggest drags on the economy, inhibiting business expansion and job creation, yet it is barely mentioned by either party in this presidential election year. One politician who has actually taken action to slow down the bureaucratic tide is Oklahoma attorney general Scott Pruitt.

Since becoming AG in 2010, Pruitt, 47, has filed or joined at least a dozen lawsuits against federal agencies.

Even when the Sooner State isn’t an actual party in litigation, Oklahoma often submits a legal brief against the federal government. Whether it is water usage, immigration or banking laws, Pruitt is more often than not one of the principal agents of regulatory pushback.

The legal justification for his court

challenges is preserving federalism, chiefly the rights of states to conduct their affairs under the Constitution.

He set up the nation’s first “federalism unit,” which seeks to halt instances of federal overreach by every legal means possible. When he became chairman of the Republican Attorneys General Association, he created the group’s “Rule of Law” campaign to help members research cases related to state autonomy. (Some 27 fellow AGs from other states have coordinated cases with Oklahoma.) Though criticized for partisan antipathy for the White House’s liberal policies, Pruitt claims he is merely trying to reassert limits over executive power and would do the same regardless of the president’s political affiliation. He maintains that the American system of government

10 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

is under attack by an administration unwilling to respect the constitutional limits on the executive branch.

The former state senator from Broken Arrow, a Tulsa suburb, has generally positioned himself as a champion of limited government.

And sometimes the courts defeat his challenges, as in the case of King vs.

Burrell. The plaintiffs used an argument advanced by Pruitt in another lawsuit that hinged on the language used in the Affordable Care Act that said tax credits were to go only to individuals in state-based exchanges. Last June, the Supremes sided with the broader interpretation of the statute. Pruitt recently spoke with Chief Executive in New York following an address to the Manhattan Institute.

Q

What concerns—for your own state and for the country—are driving your actions?

There has been a continued concern that I, and many attorneys general across the country, have with respect to a lack of respect for the rule of law.

This administration has been unapologetic in its view: Even when a statute places parameters upon the executive branch, if it’s inconsistent with their policy position, they proceed anyway.

They know that the litigation process is glacially slow, and they try to achieve through regulatory or executive action that which is not permitted by the statutory framework—nor, sometimes, the Constitution.

This lack of respect for the rule of law by the executive branch in that regard affects not just our state but our federal system. The EPA’s Clean Power Plan, for example, would affect every farmer and rancher, oil and gas operator and private property owner in the state of Oklahoma with incentive to use dry creek beds on their own land.

It would impact their ability to use their private property in a meaningful way. We were able to achieve a victory here by getting an injunction against the EPA’s unlawful action.

Have you calculated the economic harm to Oklahomans had this gone through?

It’s been estimated that that rule alone would cost almost $41 billion to citizens across the country. This is difficult to measure because the percentage increase for electricity rates varies. But it’s clear that by having an anti-fossil fuel strategy with respect to the generation of electricity, and the shuttering of the coal generation across this country, you’re going to see double-digit increases to consumers in most, if not every, state in the country as a result of the president’s climate action agenda.

Our focus is on the illegality of the

EPA’s overreach. But it involves more than just higher electricity rates, which would rise by double digits across the country. Three things—the ozone rule, the Clean Power Plan that’s out presently and the previous match rule— alone will reduce coal generation in this country by over 60 percent. When you combine natural gas, oil and coal together, it traditionally represented 70 percent of the baseload electricity energy of this country.

So, if you have an anti-fossil fuel agenda, you’ve got to ask the question, what are you going to replace it with?

Environmental groups say replace it with wind and renewables, but that’s fanciful. That’s just not going to happen. It’s unreliable. It’s also very costly, absent subsidies. So, apart from constitutional and separation of powers issues in play, there are real work consequences for citizens across this country.

What do you say to critics who argue that your lawsuits and other actions are partisan in nature, and that during the Clinton era, the lawsuits against Clinton tended to be bipartisan, or in some cases Democrats versus a Democratic president?

First, in the most recent example of the Waters of the United States, there actually were Democrats who joined that litigation as well. But second, it’s about how the executive branch operates in conjunction with the legislative branch, the checks and balances of our federal system. The president’s

attitude in many instances, such as immigration, is to disregard lack of action

by Congress. We ought to care about that as a country. The president doesn’t have the authority to fill in the gap or pinch hit for Congress when they don’t act the way he wants them to act.

That’s not how our system works.

It’s important also to make sure that our regulatory bodies do not change the rules after the fact. It creates regulatory uncertainty. Industry can’t know what’s expected of them. The result is paralysis, which effects economic growth, because you can’t plan, or allocate capital and hire personnel over a three-to-five-year period when agencies, on a whim, could change the rule one way or the other.

What impact do you feel your efforts have had thus far?

We have an injunction against the EPA’s unlawful action with the Waters of the United States. We have an injunction in the immigration [executive order]. We won the mercury case against the EPA when they created that [anticarbon mercury] rule, which would have cost $4 billion to $5 billion, the benefits were less than $10 million.

Because the cost-benefit analysis was so askew they just disregarded it. We sued and won.

You assert that Dodd-Frank legislation benefitted big banks but hurt community banks. Can you elaborate?

Dodd-Frank codified too big to fail. It actually said the federal government

MARCH/APRIL 2016

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CEO WATCH

has the authority to come in and save large financial [institutions that didn’t exist before 2008.] In doing so, it created obligations on community banks in this country.

If you’re a bank in Oklahoma and your asset base is $1 billion or half a billion dollars, you have the same obligations placed upon you that Wells Fargo, Citi and Bank of America do.

Those entities, who have trillion dollar assets, are better able to navigate the regulatory maze created by DoddFrank. So what’s happened? Our community banks have to spend hundreds of thousands of dollars adding compliance officers for issues that they didn’t create, nor for which they are responsible. It’s affecting the survivability of these banks. There are less than 6,000 community banks in the country when there used to be over 12,000 to 15,000.

This law benefits larger banking institutions over smaller ones.

The same thing is happening as a consequence of the Affordable Care

Act. What has happened as a result?

Substantial merger activity. Smaller entities and rural hospitals across the country can’t afford to stay in business. As a result of Washington’s involvement, power in healthcare is being concentrated in a few insurance companies and fewer providers.

Access to healthcare, just like access to banking and capital, is being affected.

What can business leaders do if they, too, are concerned about this phenomenon?

There are a couple of things. I see businesses that are refusing to yield to the pressure. Some are actually suing themselves. There are many examples where farm bureaus, chambers of commerce and individual businesses have responded to the unlawfulness of Dodd-Frank or EPA regulation.

I hate to say it this way, but at times you’ve got to draw the sword when you’re forced to. This administration

has put us in that position. In some instances it helps develop a prescription as to where we go from here.

Congress has been willing to delegate its authority to administrative agencies because it makes them less responsible for anything that might happen. It’s much easier for someone in Congress to go back to their citizens and say, “I didn’t do that. The EPA did that.” So Congress has got to get back in the business of making laws and taking its job seriously, and not delegating its authority to administrative agencies.

Secondly, the courts, through litigation, need to deal with the deference to administrative agencies. There is a place for regulation, but not the regulation you see today. The demand and control approach that increasingly comes from Washington D.C. has to be dealt with. It has to be done through policy initiatives as well as legal initiatives from private industry. Business leaders and associations need to be on the front lines doing this.

Regulatory Accumulation is a Bipartisan Problem IF ONE READ the Code of Federal Regulations at 300 words per minute on a full-time basis, it would take the average American reader nearly three years to get through just the version of the CFR published in 2012, according to Patrick A. McLaughlin, a senior research fellow at the Mercatus Center at George Mason University. That’s about 58 times longer than it would take to read through the five volumes currently published in George R. R. Martin’s fantasy saga, A Song of Ice and Fire. Or 220 times longer than it would take to read through The Lord of the Rings from the original by J.R.R. Tolkien.

President Obama not only oversaw the greatest increase in regulatory restrictions in a single term, his first, but as of 2014 he has edged past President George W. Bush as the president with the greatest total increase in restrictions since 1976. The DoddFrank Wall Street Reform and Consumer Protection Act contains more regulatory restrictions than any other law passed during the Obama administration. Dodd-Frank is responsible for creating 27,669 regulatory restrictions. By contrast, other laws passed by the administration contain fewer than 5,000 restrictions.

There is a 40-year bipartisan trend of regulatory accumulation, with the last two presidents adding the most regulatory restrictions. However, some presidents, such as President Clinton and President Reagan in his second term, were able to significantly restrain the growth of regulation. Future presidents will need to determine how to effectively manage the cumulative effect of regulation and maintain the necessary conditions for entrepreneurship and growth.

12 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

WORD COUNT

The CFR vs. popular literature CODE OF FEDERAL REGULATIONS GAME OF THRONES SERIES *(1-5) HARRY POTTER SERIES COLLECTED WORKS OF SHAKESPEARE THE BIBLE (KJV) THE LORD OF THE RINGS THE HUNGER GAMES TRILOGY

103,079,294

1.77 mil

1.08 mil

885k

788k

= 98 hrs

= 60 hrs

= 49 hrs

= 44 hrs 473k = 26 hrs

302k = 17 hrs

*OFFICIALLY KNOWN AS A SONG OF ICE AND FIRE. SOURCE: REGDATA.ORG

= 5,727 hrs

UNIVERSITY PARTNERSHIP Targeted state investment will triple the number of computer science graduates in three to five years PRO-BUSINESS CLIMATE Ranked top 10 for lowest state/local taxes for new facilities, relocations and facility expansions for a variety of firm types TARGETED INCENTIVES Customized, competitive incentive package to offset facility operating and relocation costs LED FASTSTART® Customized workforce recruitment assistance, including in-state and out-of-state job fairs CREATIVE REAL ESTATE SOLUTION Mixed-use urban riverfront development funded by performance-based grant

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CEO WATCH CEO INSIGHT / CCL’S BILL PASMORE

Why Companies Fail at Change Hint: You’re one of the reasons. By Jennifer Pellet

BETWEEN 50 PERCENT and 70 percent of organizational change initiatives fail—and that’s just criminal, says Bill Pasmore, author of Leading Continuous Change: Navigating Churn in the Real World. “If change were something we had laws about, most leaders of organizations would be in jail, prosecuted for the amount of time and money they’re wasting,” he points out. “We throw people in jail for stealing $100 from a store, but you can waste a billion on a failed merger or other change effort and everyone shrugs and says, ‘That’s just business.’”

Undertaking a complex transformation effort is no easy feat. Leaders steering such an effort must simultaneously manage transitioning to a new business model and cultivating the talent pool for that business, as well as the relationships, knowledge base and a host of other facets of the challenge. Meanwhile, a single, significant misstep—from poor communication to failure to engage employees—can scuttle the whole initiative.

At the same time, continual evolution is critical for a business— virtually any business—to survive.

Companies that stubbornly stick to their knitting risk sharing the fates of change-shunners like Blockbuster, Borders Group and Kodak. “Those companies waited too long,” says Pasmore. “If you look historically at what happens, the point at which most businesses are best prepared to move into a new line of business is at the peak earning point of the old model. But, boy, it takes courage to say, ‘I see the future; we need to go there.’”

The good news? Understanding the four facets of a business trans-

Changes fail not because they’re bad ideas, but because they’re poorly executed.” formation can help leaders boost their chances of successfully steering change, says Pasmore.

1. Know what you need to change.

“You need to understand where you need to go and what it will take to get there,” explains Pasmore, who urges CEOs to take a step back and thoroughly consider the possibilities ahead of them. “It’s a discovery process and not something one person

14 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

can do on his or her own.” Plan to call upon experts—internal and external—with a range of expertise to create an integrated picture of what you need to do.

2. Decide on your priorities. The possibilities are endless—but since resources tend to be finite, you’ll need to home in on what’s most important and makes the most sense for your business.

3. Do it well. “Changes fail not because they’re bad ideas, but because they’re poorly executed,” says Pasmore, who says lack of communica-

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CEO WATCH

tion often hinders execution. “People don’t communicate adequately, and they create resistance—instead of buy-in—by failing to engage employees.” Because change is a team effort, clear and continuous communication is essential to success.

as a barrier to learning if a CEO isn’t careful. “If you don’t build a process for learning and recognizing early warning signs, your own commitment to success will block information from coming to you and [prevent] you from listening when it does.” Decide on metrics and measurements to assess the progress being made toward your vision and develop a plan for addressing any issues you identify along the way.

WHO

Bill Pasmore, Senior Vice President, Center for Creative Leadership WHAT

Global provider of leadership education SIDE GIG

Professor, Columbia University’s Teachers College

4. Learn along the way. “It can be really hard for people who are [passionate about accomplishing] something to learn what’s work-

ing and what’s not on the journey,” explains Pasmore, who points out that commitment to change can act

CEO CONFIDENCE INDEX

CEOs End 2015 on a Sour Note, Rating Their Confidence in Future Business Down 9.4 Percent From January CEO CONFIDENCE IN OVERALL FUTURE BUSINESS CONDITIONS FINISHES YEAR DOWN 9.4% FROM JANUARY (on a scale of 1 to 10) 6.8 6.71

6.7 6.6

6.52

6.5 6.45

6.4

6.41

6.48

6.33

6.3 6.23

6.25

6.2

6.14

6.1 6.06

16 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

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R EM PT SE

AU

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‘15 UA RY JA N

CEOS’ CONFIDENCE IN THEIR PROSPECTS for future business started out in January 2015 on a high note (with a rating of 6.71 out of 10, with 10 being the highest) and finished out the year on a low one (with a rating of 6.08). Factors like a weak economic recovery, flat manufacturing sales, increased terrorism and cybersecurity threats all played a part in CEOs’ confidence.

“The economy will not improve until it is clear that we have an administration in Washington, and specifically in the White House, that is business friendly, instead of the current president who seems to be anti-business and

6.08

DE

6.09

6.0

interested only in global warming,” one CEO said.

CEOs of mid-market companies with revenues of between $10 million and $1 billion, had less concern about future business conditions than their larger counterparts (companies with revenue $1B+). Larger firms had the least confidence in future business conditions, registering a 5.73 overall, while mid-market firms averaged a 6.07, a nearly 10 percent higher rating. Small company CEOs had the most positive outlook for the future, having rated business conditions 12 months out a 6.25 out of 10, nearly 30 percent higher than mid-market CEOs.

CEO CASE STUDY/HUNTINGTON INGALLS’ MIKE PETTERS

Getting a Spinoff into Ship-Shape Mike Petters sailed through a transition from division president to CEO of a $6.7 billion public company.

By Jennifer Pellet

Mike Petters at the 2013 christening ceremony for the Gerald R. Ford, the first of the U.S. Navy’s next-generation aircraft carriers.

The Challenge You’re the newly appointed president and CEO of a spinoff company saddled with a huge amount of debt in an economy still reeling from an economic crisis. Your main business— building warships for the military—is grappling with quality concerns, a glut of capacity, damage from Hurricane Katrina and the prospect of budget cuts by your main client, the Pentagon. Your first and foremost challenge: managing construction of a new class of nuclear-powered aircraft carriers.

The Context Huntington Ingalls was formed in March of 2011, when Northrop Grumman decided to spin its Newport News shipyards off as a separate company, citing a lack of synergy with its other businesses. The move thrust Mike Petters, formerly the division’s

president, into the CEO role at a $6.7 billion public company—one with a time horizon far removed from Wall Street’s comfort zone.

“In the beginning, we surprised people who wanted to know where we would be next month or next quarter when we said, ‘we’re going to tell you where we will be in 2015,’” says Petters.

“We like to remind people that we’re not a quarter-to-quarter business.”

The Resolution However, Petters quickly proved his metal. Huntington Ingalls posted solid operating profit for 2013 and subsequent years, shed unprofitable legacy contracts and inked a new deal to build nuclear-powered aircraft carriers for the Navy.

The improved prospects did not go unnoticed; the company’s $41 launch share price had more than doubled by

2014 and today stands at a formidable $126.68. In fact, Huntington Ingalls’ success has led some to question why Northrop Grumman jettisoned it in the first place.

The Hurdle One might expect the CEO of a company deeply embroiled in building a $12.5 billion nuclear aircraft carrier to be most concerned about defense budget politics. But it’s fostering employee engagement that Petters points to as his biggest challenge. “Market challenges, political pressure, stakeholder stuff—all of that is significant, but none of it will happen if we don’t find ways to keep our people engaged in what we’re doing,” he says.

The Solutions Petters invests a lot of personal effort in addressing the engagement

MARCH/APRIL 2016

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CEO WATCH

issue, spending about half of his time on human capital and leadership development and engagement. Under his direction, the company launched a leadership networking program.

Employees in leadership roles—from front-line supervisors on up—are brought together to work on case studies. “It was started on the premise that there’s probably nothing in our business that we’re seeing for the first

Petters on the flight deck of the USS Kearsarge (LHD 3), docked for repair at Newport News Shipbuilding in Newport News, Virginia.

WHO

Mike Petters, CEO & President WHAT

Huntington Ingalls WHERE

Newport News, Virginia SIZE

$6.7 billion MILITARY SERVICE

Lieutenant, U.S. Navy; “In our family, the question wasn’t whether you were going into the service, it was which service are you going to join?”

EARLY LEADERSHIP EXPERIENCE

“Working with my father on our family farm. By the time I was 15, I was responsible for a spray crew.”

FAVORITE FILM

Twelve O’Clock High CURRENTLY READING

The Boys in the Boat,

by Daniel James Brown

time—so how do we build a network so that our leaders can call on people who may have seen a particular problem before?” explains Petters. “It gives us the chance to help our leaders understand how we think about things as a group, but also to work with people from different parts of the business.”

While Huntington Ingalls offers formal incentive programs around metrics involving safety, quality, cost and schedule, Petters believes in going a lot further. “It’s a bit shortsighted to suggest that we can incentivize someone to be a better person,” he says, adding that the company also offers

a lecture series for senior leaders and conducts Gallup surveys to explore what “moves the needle” in terms of engagement. “My view is that getting the least empowered person in the company to confidently contribute to your team is your day job as a leader— and we want to give our leaders the tools to do that.”

“We need to be more thoughtful about folks who have great ideas but don’t feel empowered to participate,” he says. “This is a complex issue with lots of pieces to it, but it’s certainly what drives our business—and ultimately what will be the key measure of our future success.”

THORNS & ROSES

Silicon Valley’s Skeleton in the Closet

A Climate Change Plan: Getting Warmer Now

A thorn to SILICON VALLEY, where more than 200 women in positions of power (top executives, founders and venture capitalists) participating in a recent survey detailed THORNS sexism they said they had experienced working in the region. Business Insider reports that some of the signs of sexism were egregious and overt: “Once a client asked me to sit on his lap if [I wanted him] to buy my products. I told my boss and when my company didn’t do anything about it, I asked to be taken off that client—it’s not like they can fire the client.”

“The inspiration for this survey came out of the incredible conversation from the Ellen Pao & KPCB trial,” wrote one of the survey’s creators. “Most men were simply shocked and unaware of the issues facing women in the workplace.”

Copenhagen Consensus president and Skeptical Environmentalist and Cool It author Dr. Bjorn Lomborg welcomes news that BILL GATES is joining with 19 governments and 28 billionaires ROSES from 10 countries to create a multibillion-dollar public-private coalition to fund clean- and renewable-energy research. “This could be a game changer,” he said. “More than all of the hot air of Paris, this is what could finally help toward a solution to global warming.” However, he added, making fossil fuels obsolete will require redirecting money being wasted on climate policies. “Globally, according to the IEA, we will waste $3 trillion subsidizing inefficient, existing wind and solar technology over the next 25 years, which will reduce temperatures by just 0.02°C (0.03°F). That money would be far better spent on green energy innovation.”

18 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

CHIEF CONCERN

Succeeding as an Interim CEO How boards and temporary chiefs can work together. By Dr. Thomas J. Saporito

EARLY LAST OCTOBER, the CEO of DuPont stepped down after struggling for months against a strong U.S. dollar and weak Brazilian agricultural markets. A board member and veteran U.S. executive took over as interim chief as the company looked for a replacement.

Weeks later, United Airlines announced that their new CEO had suffered a heart attack and would be on medical leave indefinitely. Another interim appointment: the firm’s general counsel took over as acting CEO and announced he would remain in that position until the former CEO’s return.

These are just two of many scenarios in which an interim CEO appointment may be necessary. A range of events—death, firings, scandals or acts of God—can lead to the appointment of an interim chief. And there is no standard for who will take the reins between permanent CEOs. At DuPont, it was a board member; at United, the general counsel; and in other instances, it will be someone from elsewhere in the company—or even outside it.

Some interim chiefs are lame ducks—for example, a board member who steps in for a while to show the world that someone has a hand on

the company’s rudder. Other interim chiefs will be charged with executing a turnaround, and still others will come from executive management and may want to stir the pot, create change or even contend to be a permanent replacement.

What do all of these scenarios—indeed, any interim CEO appointment— share in common? The devil is in the dynamics: Each one carries distinct organizational and psychological implications for the company at which it takes place, as well as the people involved, which will largely define the job at hand for the interim chief.

What kind of platform does the acting chief have to create change? Is he or she a contender to take over in full? What are the limitations, personally and professionally, for the person who is trying to get things done in this interim position? These are some of the questions that will help a board and an interim chief define the role of a particular interim appointment.

It falls on the appointee and the company’s board to be clear about their intentions for the interim chief’s role, to understand what the resulting mandate will be and to develop a plan to manage

the transition from start to finish.

“When I was appointed Target’s interim CEO, I had the benefit of strong support and clear guidance, which helped me succeed in moving the organization forward. The clarity and my collaborative working relationship with the chairman of the board, Target’s leadership team and the full board of directors ensured our collective success in driving the business and preparing the enterprise for new leadership,” says John Mulligan, COO of the retailer Target.

Mulligan provides an excellent example of an effective interim chief.

He took the job in May 2014, moving up from his CFO post upon the previous CEO’s resignation. He and the board were abundantly clear about his role as acting CEO—he was there to lead the company until they found a new chief.

Thanks to this clarity during the leadership transition, Mulligan performed very well and returned to the CFO spot after four months at the helm—before being promoted to COO. The need to name an interim CEO arises for a slew of reasons, and each appointment is different. That said, circumstances are almost always sudden and unexpected, investors and other stakeholders are often spooked and it is a challenge for any acting chief to excel.

The performance of an acting chief is as dependent on governance as it is on the effectiveness of the individual interim CEO. Accordingly, boards and their appointees should take immediate steps to understand the unique dynamics of an appointment—and the resulting roles and expectations of the interim CEO— and remember that the ingredients for a successful acting chief don’t stop at finding the right appointee.

DR. THOMAS J. SAPORITO (tsaporito@ rhrinternational.com) is chairman and CEO of RHR International, a global firm committed to the development of top management leadership.

20 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

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MID-MARKET REPORT

The Mid-Market’s Digitization Landscape Companies are eager to embrace digital transformation, yet struggle to achieve it.

DIGITIZATION EFFORTS ARE UNDER WAY at the majority of middle market companies, according results of the National Center for the Middle Market (NCMM)’s “How Digital Are You?” survey report. More than half of respondents said they have deployed, or are in the process of deploying, digital initiatives. That is, they are working to convert manual, paper-based or offline business processes to online, networked, computer-supported processes that facilitate a real-time operating and decision-making environment.

While such efforts are widespread, they continue to be hampered by cumbersome legacy systems, a lack of internal expertise, a resistance to outsourcing and a lack of management support. As a result, company leaders say they have a long way to go before digitization can deliver on its promise of business transformation.

The statistics, tables and charts on this page offer a look at where middle market companies stand on the road to digitization, what efforts they’re making to travel it and which obstacles stand in their way.

What Hurdles Stand in the Way?

Top obstacles to digital efforts are a lack of management support, inadequate talent and insufficient knowledge.

Significant Obstacle Somewhat of an Obstacle

MANAGEMENT SUPPORT 35%

36%

MAKING THE BUSINESS CASE 13%

45%

EMPLOYEE BUY-IN/CULTURE

How Important is Digitization?

63% of middle market leaders say that digitization is very or extremely important relative to other business priorities.

9%

What Companies Are Looking to Achieve

Nearly half of all digitization efforts in middle market firms are geared toward improving efficiency and cutting costs.

17%

of middle market leaders say digitization is very or extremely important

44%

DIGITIZATION IS NOT A PRIORITY 13%

41%

GETTING SENIOR MANAGEMENT SUPPORT 17%

40%

STAFFING/TALENT

63%

28%

19%

22%

49%

29%

22%

65%

TALENT/FINDING TALENT 13%

50%

46% Chiefly to improve efficiency, cut costs, etc.

Extremely Important Very Important Somewhat Important Not Very/At All Important

Chiefly to improve revenue, connect with consumers, etc.

Gain full visibility of business by digitizing all processes, leading to a 360 degree view of consumer and operations.

AVERAGE AMOUNT MIDDLE MARKET COMPANIES SPENT ON DIGITIZATION PROJECTS OVER THE PAST 12 MONTHS

12% OF REVENUES

TOO HARD TO USE/NOT THE RIGHT STUFF 14%

46%

NOT ENOUGH KNOWLEDGE OF WHAT TOOLS WOULD BE BEST 12%

55%

TOO EXPENSIVE 25%

48%

VENDOR MANAGEMENT 9%

45%

OTHER 18% 9%

22 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

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SONNENFELD

A Recipe for Trust Jeffrey Sonnenfeld

After the waves of food-borne illness hit the Chipotle fast food restaurants, Steve Ells’ confidence wilted to queasiness.

SINCE FOUNDING CHIPOTLE 23 years ago, the visionary Steve Ells built a colossus of 1,900 restaurants based upon branded principles of wholesome high-quality fast food ingredients and animal welfare, brazenly teasing the standards of his competitors over processed foods along the way. Now with waves of food poisoning in his own restaurants, his confidence has wilted to queasiness.

Over the past six months, each time Ells announced that they turned the corner on safety, there was yet another mass outbreak of suffering customers—five people in Seattle; then 234 in Simi Valley, California; 64 in Minnesota; 140 Boston College students. Ultimately, the number of victims topped 500.

Many required hospitalization, suffering norovirus and E. coli outbreaks of uncertain origin—despite closing 43 restaurants.

Investors suffered heavy losses as this once high-flying stock dropped more than 30 percent and sales fell by 16 percent. Nonetheless, the restaurant chain is reluctant to identify its suppliers. Chipotle continues its high-velocity growth, throwing thousands of new hires into high-speed food assembly lines.

In 1993, 623 people across several Western States suffered from E. coli poisoning traced to undercooked burgers at Jack-in-the-Box restaurants. More recently, Yum! Brands stumbled into serial mass food poisoning fiascos at its chains. Food quality scandals at Chinese Taco Bell, Pizza Hut and KFC chains forced Yum! to split off the China business, formerly its strongest division.

Similarly, in 2012, Taco Bell customers from around the U.S. were felled by salmonella poisoning in meat and by E. coli in vegetables in 2010 and 2006. Company reassurances were coupled with denial and finger-point-

ing. In his autobiography, the CEO actually bragged about stonewalling the media.

Recall the dismissive but empty pronouncements in New Orleans by Homeland Security’s Michael Chertoff and FEMA’s Michael Brown after Hurricane Katrina in 2005 and the disdainful sneers of BP CEO Tony Hayward in the 2010 aftermath of the massive Gulf Coast oil rig explosion. Then there were the false assurances of safety from top officials of Tokyo Electric Power Company following the 2011 meltdown of the Fukushima Daiichi nuclear plant.

Remember, as well, when Carnival’s Micky Arison went AWOL, except for merrily cheering on a Miami Heat basketball game from the comfort of his owner’s box, while a fire onboard the Carnival Triumph stranded 4,229 passengers and its crew at sea. It was hours before passengers finally got an explanation for the power loss—and 12 hours passed before they were told of possible rescue options. The ship’s crew did not communicate, reportedly, because they did not know Carnival’s plans.

J&J’s legendary CEO Jim Burke provided a different model with his mastery of the research, embrace of critics and open pipeline to the media. In his celebrated national recall of tainted Tylenol capsules. Burke told me: “All we said was, ‘Trust us.’ We were cashing in on 100 years of trust that had been built up…. All the previous managements that built this corporation handed us, on a silver platter, the most powerful tool you could possibly have—that institutional trust is real, palpable and bankable. So that every act that every person puts into an organization that builds that trust enhances the long-term value of that business and with every improper payment or every time you put a product out that is inferior, you trade off that trust.”

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.

24 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

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

Every leader’s actions strengthen—or diminish—a company’s reservoir of trust. By Jeffrey Sonnenfeld

“Fireman’s Fund… a brand name that has

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

- Insurance Journal January 12, 2015

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

- Investor’s Business Daily

The high net worth insurance market is undergoing massive change.

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

S U PERIOR SERVICE

SI G NI FI CANT SAVIN GS

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

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

Annual Member Retention Ratei

Average Annual Savings on Homeowners Insuranceii

96

%

$2,701

$2,232

AFTER SWITCHING FROM

AFTER SWITCHING FROM

CHUBB

FIREMAN’S FUND

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

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PRIVATE COMPANY COMPENSATION

Getting Compensation Right

While the majority of private companies understand the value of incentive-based compensation, most still fail to harness their potential, according to Chief Executive’s recent CEO and Senior Executive Compensation Report for Private Companies.

INCENTIVE-BASED compensation can play a powerful role in a private company’s competitive strategy, agreed the majority of private company executives participating in a recent Chief Executive survey. Yet, a surprising number of companies lack formal annual incentive plans for executives.

Among privately owned companies with between $5 million and $9.9 million in revenue, just 42.6 percent of participants reported having such a plan.

Incentive-based compensation is far more prevalent among larger companies, with a full 81.3 percent of $1 billion-plus companies tying pay to performance in a formal, structured way.

In addition to company size, type of ownership seems to play a significant role in the use of such programs. Private equity and venture capital-backed companies, which tend to have management with broader operational experience, are more likely to use formal annual incentive-based programs, with 82.8 percent and 82.4 percent, respectively, having such plans. The figures among sole proprietorships (56.6 percent), partnerships (54 percent) and family-owned businesses (65 percent), are significantly lower.

The bottom line? Smaller firms and those with “homegrown” leadership may be missing out on potent pay-based tools for attracting, retaining and motivating executives. The charts and research on the pages to follow offer additional insights on the pay practices currently in use by today’s private companies, as well as best practice approaches to compensation private sector firms should consider.

28 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

MANY PRIVATE COMPANIES LACK FORMAL ANNUAL INCENTIVE PLANS As the charts below indicate, larger companies and companies with private equity or venture capital ownership are more likely to have implemented a disciplined approach to setting goals and linking them to some form of incentive pay. Yet even among private companies with more than $500 million in revenues, 20 percent of respondents report that their firms don’t follow an incentive-based program on an annual basis.

% OF COMPANIES WITH FORMAL ANNUAL INCENTIVE PLANS 20%

COMPANY SIZE:

UNDER $2M

37.5%

$2M-$4.9M

44.4%

$5M-$9.9M

42.6%

$10M-$24.9M

64.0%

$25M-$47.9M

33.3%

$50M-$99.9M

80.2%

$100M-$249.9M

81.0%

$250M-$499.9M

90.9%

$500M-$999.9M

80.0%

$1B-$10B

81.3%

40%

60%

80%

% OF COMPANIES WITH FORMAL ANNUAL INCENTIVE PLANS (BY OWNERSHIP TYPE)

56.6%

54.0%

65.0%

70.8%

82.8%

Sole Proprietorship

Partnership

Family Business

Employee Owned

Private Equity Owned

82.4%

63.2%

Venture Capital Other Investor Owned Owned

FORMAL SALARY PLANS ARE NOT THE NORM More than half of private companies with less than $50 million in revenues reported lacking a formal salary plan with regularly scheduled reviews. While that number increases in tandem with company size, a surprising 35.7 percent of companies with more than $1 billion in revenue also lacked such a plan, according to survey respondents. These figures may reflect a movement away from the traditional practice of conducting an annual review, which companies like Accenture, Microsoft, Gap and Medtronic have ditched in favor of providing employees with ongoing feedback. % OF COMPANIES WITH FORMAL SALARY PLAN AND REGULARLY SCHEDULED REVIEWS 20%

COMPANY SIZE:

UNDER $2M

36.1%

$2M-$4.9M

25.8%

$5M-$9.9M

25.0%

$10M-$24.9M

42.0%

$25M-$47.9M

32.3%

$50M-$99.9M

51.6%

$100M-$249.9M

61.7%

$250M-$499.9M

68.8%

$500M-$999.9M

73.3%

$1B-$10B

64.3%

40%

60%

80%

SIZE = SOPHISTICATION IN BONUS PAY Company size and ownership type factor heavily in the sophistication of bonus pay programs at private companies, with larger firms far less likely to base such compensation on individual negotiations and/or the discretion of management or the board.

BASIS FOR TOTAL AMOUNT OF BONUS PAYMENTS* Tied to a formula Discretion

Accomplishment of performance objectives Individual negotiations

80%

60%

40%

20%

THE POWER OF PERFORMANCE VESTING The majority of private companies with long-term incentive programs that offer stock options or phantom equity still vest those programs on the traditional basis of length of tenure rather than performance. However, a significant number have adopted more sophisticated vesting provisions based on performance or a combination of tenure and performance that are considered more effective in aligning and incentivizing employees.

VESTING OF EQUITY INCENTIVES

68.6%

COMPANY SIZE:

UNDER $2M

$2M$4.9M

$5M$9.9M

$10M$24.9M

$25M$47.9M

$50M$99.9M

$100M$249.9M

$250M$499.9M

$500M$999.9M

$1B$10B

11.7%

*Numbers reflect that some companies base bonus pay on a combination of factors so totals can equal more than 100 percent.

Performance Based Time Based Both

LEVERAGING LONG-TERM INCENTIVE PLANS REQUIRES RESOURCES Many private companies look for ways to compete with the upside their public sector counterparts can offer by compensating senior executives with equity or phantom equity. However, due to the time and resource commitment entailed, this practice tends to be more prevalent among larger firms and/or companies backed by private equity or venture capital funding. % OF COMPANIES WITH FORMAL LONG-TERM INCENTIVE PLANS (BY COMPANY REVENUE) 20%

COMPANY SIZE:

UNDER $2M

30%

$2M-$4.9M

42%

$5M-$9.9M

29%

$10M-$24.9M

35%

$25M-$47.9M

37%

$50M-$99.9M

52%

$100M-$249.9M

65%

$250M-$499.9M

76%

$500M-$999.9M

67%

$1B-$10B

69%

40%

60%

80%

Sole Proprietorship

37.5%

Partnership

BEST PAY PRACTICES Looking for ways to make your pay practices fuel your company’s performance? Consider these compensation best practices shared by top performing companies: USE all components of compensation—salary, bonuses, benefits, perks and equity incentives—in a cohesive and integrated fashion.

HAVE a formal equity program with at least annual re-pricing of the value of stock and option holdings.

% OF COMPANIES WITH FORMAL LONG-TERM INCENTIVE PLANS (BY COMPANY OWNERSHIP)

30.5%

19.7%

37.9%

Family Business

51.1%

Employee Owned

74.4%

Private Equity Owned

Source for all data: CEO and Senior Executive Compensation Report for Private Companies

82.4%

38.8%

Venture Capital Other Investor Owned Owned

COMMUNICATE the value of incentive-pay programs (including bonuses, equity and phantom equity tools) regularly and clearly.

ADOPT vesting programs that are based on performance metrics rather than tenure alone.

STRUCTURE stock options and phantom equity plans for tax efficiency so that gains are treated as capital gains for beneficiaries.

For More Information visit Chiefexecutive.net/Compreport

PATENT PROTECTION

HOW TO NAVIGATE PATENT PURGATORY

CEOs of small and mediumsized companies face very different challenges than Apple and Samsung do.

By William J. Holstein

30 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

T

Timothy Kane, the CEO of an industrial heating and ventilation company, worries about it. So does Scott DeFelice, who heads a three-dimensional printing company that makes everything from artificial pieces of the human cranium to satellite parts. Plus, it’s a problem that almost wiped out San Francisco software entrepreneur Jason Bannert. ¶ The issue is patents, and it bedevils CEOs of small and medium-sized companies across the U.S. in a wide variety of industries, even sectors such as heating and ventilation that wouldn’t appear at first glance to be technology-based. Battles between Apple and Samsung Electronics dominate the headlines, but they are just the tip of the proverbial iceberg.

The U.S. patent system was designed to encourage entrepreneurs of all shapes and sizes to innovate by assuring them the opportunity to make money from their inventions for a set period of time. But the system has broken down in many crucial respects. The U.S. Patent and Trademark Office can take up to five years to grant a patent, rendering it useless in the marketplace, or it can grant a patent to a company whose product is not really novel or not very clear, setting the stage for almost certain litigation. Large companies can “borrow” technology from smaller companies and hide behind a wall of expensive litigation for years. And of course, the famous patent trolls, located mostly in East Texas, attack mostly large companies, claiming they violated patents acquired by the highly litigious Texans.

Legislation that might have addressed the patent mess was not able to get through Congress in 2015 and is almost certainly dead until after the November 2016 elections. Big interest groups such as the pharmaceutical industry and the trial lawyers who benefit from litigation helped tie up the bills.

Ironically, the absence of new legislation might actually be good for smaller companies. The intent was to make it harder for trolls to sue companies because they would have

to pay all legal costs if they lost a suit.

But the legislation might have made matters worse for smaller companies in bringing action against a large company that stole their technology, because if they failed to prevail in court, they would be responsible for all legal costs. That would have given large companies virtually free rein to exploit smaller companies’ technologies. “A smaller business is more likely to have its technology used without permission by a bigger company than it is to be sued itself for patent infringement” by a troll, says Jonathan Ellenthal, vice chairman and CEO of HaystackIQ, which helps companies search the federal database of patents and similar databases around the world.

Thus, CEOs of smaller companies, many of whom cannot afford inhouse legal departments, are caught in the crossfire and find themselves largely on their own in this modern-day version of Dante’s patent hell.

“It takes a tremendous amount of time and money and human resources to go through these fights,” says Kane, whose Goodway Technologies, based in Stamford, Connecticut, has sales of more than $30 million in 125 countries. “That’s part of day-to-day life for anybody who’s involved with patents.”

Goodway holds 35 patents that cover designs or methods it uses to

KEY TAKEAWAYS 1 Don’t Expect the Problem to Go Away Attempts to fix the plagued patent system are stymied by powerful players with conflicting interests

2 Identify the Threat

SME CEOs are more likely to have patent fights with larger companies than with “trolls” that buy portfolios of patents and then sue aggressively

3 Pick Your Patent Strategy

Effective IP protection efforts vary widely by industry and company size

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PATENT PROTECTION

repair heating and air conditioning equipment in factories and it has applied for about 20 more. It is now engaged in a technology dispute with a larger U.S. competitor it declines to identify. “The legal assets that the larger companies have and their familiarity with the nuances of the system all lead to their advantage,” says Kane.

“We have to fight for everything we get in the marketplace.”

Without a general counsel on staff, Kane relies on a three-part strategy to fight for his intellectual property (IP). He has long had a patent application attorney who understands how to describe the company’s products, but more recently Goodway added a patent litigator to review the patent applications in the event that they are

ever litigated. That builds in another layer of protection.

The third, and most recent, component of his IP protection strategy is the hiring of HaystackIQ, founded by Jay Walker, the inventor of Priceline.com and many other innovations. The firm has access to the U.S. government’s database of existing patents, issued by all companies, and searches them to find technologies that would help Kane sharpen his competitive edge or to help find new uses for Kane’s existing patents at other companies, which might choose to license them.

Add it all up and Kane believes his company has developed a reputation in his industry for vigorously protecting its intellectual property—and reputation really matters to companies

➜ PATENT PROBLEM Oxford Performance finds patent law a detriment rather than a help in guarding its 3D technology from copycats

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either thinking of suing Goodway or stealing one of its ideas. “There has to be a bit of saber-rattling to make sure your competitors are on notice that you will defend your IP,” he says.

In technology fields evolving as rapidly as 3D printing, the uncertainty over patents may prevent small startups from getting funding from angel investors or venture capitalists, says Scott DeFelice, CEO of Oxford Performance Materials, based in South Windsor, Connecticut. With about $10 million in sales, which are growing at a 40 percent annual clip, DeFelice says his company has 12 patents or patents pending in the U.S., Europe and Japan. About half his sales are outside the U.S. “There is a sort of headwind against technology start-ups because you have a technology and you go to your investors and try to raise money,” DeFelice says. “You tell your story and the investors start the due diligence. They start talking about intellectual property. You tell them, ‘We have a patent.’ But everyone sort of grimaces. Investors just don’t have the stomach for these fights. At the end of the day, many new technologies are just not protectable.”

DeFelice raised $6 million in funding in 2015 and his sales are growing rapidly, so he believes Oxford Performance Materials is past the point of being a cash-starved startup. But

THE BOTTOM LINE?

Take your patent strategy very seriously, because it can make or break your company.

he knows that larger companies are trying to figure out how his company uses a variety of different metals and plastics to make 3D parts for the biomedical industry, such as artificial pieces of a human cranium, as well as lightweight parts for the aerospace and space industries. “We are a test case,” he says. “What happens when a small company has something disruptive to large companies and industries? Can we protect ourselves through the patent law?”

Increasingly, he says, the answer to that question is no. “Patent law is to the benefit of a few large companies but it has become a detriment to many smaller companies,” he asserts.

So although Oxford pursues patents as a kind of hedge policy, it concentrates on doing things internally that will prevent the leakage of technology. DeFelice says he structures the company so that only a few people understand its “secret sauce,” using firewalls between different groups of employees. He also uses stock options to retain the loyalty of key players. He figures that one of the biggest threats to his IP would be if a larger company were able to lure away top technical talent. “The lawyers are going to hate to read this,” he says, “but patenting as a way of protecting one’s intellectual property is becoming more irrelevant.” So far, his strategy has worked.

Not everyone has been as successful as Goodway and Oxford, and the results can be devastating for a company and for the overall cause of innovation. Aaron Bannert had been

Patent law is to the benefit of a few large companies but it has become a detriment to many smaller companies.”

—Scott Felice, CEO, Oxford Performance Materials

working full-time for six months on a new mobile device application called Smart Ride that tells users what train and bus schedules are in major cities.

He got some of the data from public sources, namely municipalities and cities, and bought a license to get other data from a private company. More than two years ago, he got a letter via FedEx from a lawyer saying he represented an entrepreneur in Vancouver, Canada, who had already developed the piece of software Bannert was using before Bannert had developed it, and that Bannert was in violation of his patent. The lawyer demanded the equivalent of two years of revenue from him. “That was pretty outrageous,” he recalls. “They had no idea how my app worked.”

He ignored the approach at first.

“When you have a small business, you get tons of junk mail from people trying to scam you,” Bannert says.

But then the lawyer called and demanded payment for a license. At the time, Bannert had only a handful of employees and scant sales. “Even if you take us to court, we don’t have any money,” Bannert recalls telling him. To which the lawyer responded: “All we have to do is punch a button and we can sue you.”

The next thing he knew, he was being sued in the southern district of Florida by a company called ArrivalStar, which had a complicated MARCH/APRIL 2016 /

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PATENT PROTECTION

“

“It takes a tremendous amount of time and money and human resources to go through these fights. That’s part of dayto-day life for anybody who’s involved with patents.” —Timothy Kane, CEO, Goodway Technologies

ownership structure involving Luxembourg and the British Virgin Islands, but also an office in Delray Beach, Florida. “They were coming at me from weird places,” Bannert says.

He assumed the Canadian entity was linked to ArrivalStar, which is one of the most litigious firms in the patent arena.

Just responding to the complaint cost $350 to file with the court, but Bannert estimated it would cost $100,000 all in, which would have been just the opening of a protracted legal struggle. “It would have killed the company—I obviously had no choice,” he says. He acquired a license from them for an undisclosed price.

Efforts to contact ArrivalStar were not successful.

Even though Bannert obtained a license, the whole experience cost him so much time and money that he is now down to being a one-man company. Efforts to raise venture capital have failed because he does not have clear patents for his applications.

“If you have something you love and believe in, you have to pursue it,” he says. “But there’s always a risk that the 800-pound gorilla is going to come after you. I hate that it kills people’s drive and innovation. That’s a huge hidden cost. I gave up my savings and time to build this thing I believe in.”

Software is the most profitable field for trolls, says William J. Watkins, Jr., author of a book entitled Patent Trolls: Predatory Litigation and the Smothering

of Innovation. He is a research fellow at The Independent Institute, a libertarian think tank based in Oakland, California. “Your typical patent term runs for 20 years,” Watkins explains. “That might make sense if you are a big pharmaceutical company spending all these years developing a new drug. If the drug gets past the Food and Drug Administration, it might become the drug for cholesterol or heart disease for 10 or 15 years or more.”

But it’s “ridiculous” that software patents also last 20 years. “It allows the trolls to accumulate these software patents that are frankly worthless in many ways as far as innovation is concerned,” says Watkins. “However, it gives them the opportunity to look at newer patents and try to argue that the older patent was the genesis of the new patent.”

That’s what happened to Bannert.

Many people have ideas for how to fix the patent system, but the problem is that each constituency, whether large or small companies, trial lawyers, research universities or venture capitalists, has conflicting interests.

No sweeping reform is likely. Which means CEOs of small and medium-sized companies are truly on their own.

The bottom line? Take your patent strategy very seriously because it can make or break your company.

WILLIAM HOLSTEIN is a New York-based business journalist and author. For more of his work, visit www.williamjholstein.com

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Advice for CEOs In the Patent Trenches Develop a technology roadmap so you know which patents are critical to your company’s long-term strategy. Seek patents for only the most important ones.

Whether your patents are written in-house or by outside patent attorneys, verify that they also are reviewed by litigators to make sure they are defensible in court.

Pick your fights carefully.

Not all patent battles make economic sense.

If you get involved in litigation, look for ways to license your technology to the counterparty or, vice versa, buy a license to use theirs. Don’t insist on pushing the case all the way to completion. That consumes too much time and money.

Be proactive. Look for other companies’ patents you might license if that makes more business sense than developing a technology internally. Why invent it if someone else already has?

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TECHNOLOGY

JIM SCAPA HAS BEEN chairman and CEO of Altair Engineering for 12 years, but he’s having difficulty getting others at the Troy, Michigan-based design and development engineering company to grasp the importance of machine learning.

“I’ve suggested using it for a couple of things here recently but got persuaded otherwise,” he says. “But I still think I’m right, and I’m really persistent.”

What Scapa recognizes is that machine learning “leverages the fact that there’ s a huge amount of computing available to try to solve problems, predict the future and prescribe solutions.”

Indeed, Big Data is revolutionizing business, much as the Internet began doing a quarter-century ago, and machine learning is emerging as one of the most important tools for utilizing it.

Just as with the web before it, CEOs like Scapa realize they must use machine learning to gain a competitive advantage for their companies—or they’ll most certainly be seeing their rivals do it instead.

Machine learning is a branch of artificial intelligence that enables machines to learn on their own, without much human supervision, drinking deeply from the well of Big Data. Computers essentially write and follow their own programs based on the statistical relationships they discover in unstructured data—and are roiling industries ranging from credit cards to automobiles in the process.

“It’s speed and the ability to learn from data that gives machine learning the power to provide tremendous

insights in ways that humans could never do on their own or with basic business-intelligence tools,” says Mike Tuchen, CEO of Talend, a Los Altos, California-based big-data integration firm.

Or, as Altair’s Scapa put it, machine learning “can use algorithms to mine historical data for outcomes that are dif-

keeps automatically refining on its own,” says Raja Rajamannar, chief marketing officer for New York-based MasterCard. “So the accuracy of what we’re doing increases, while the false positives and false negatives keep declining.”

Or look at what True Fit is doing with machine learning. The Woburn, Massachusetts-based startup amalgam-

DATA BYTE

By 2014, the global quantity of information was doubling every eight months. By 2015, it was doubling every four months.

By 2020, the world will have a quadrillion times more information than it has now. ferent than with traditional simulation.”

At financial companies, for instance, machine learning can assess insider-trading activities and identify potential fraudulent activities that could trip a regulatory investigation. At utilities, machine learning can work with digital smart meters to identify sources and patterns of energy consumption in a house so that the company can “generate revenue around that data,” says Josh Sutton, the global artificial-intelligence lead for Sapient consultants.

Consider how machine learning is improving credit-card authorization by leaps and bounds. “The system learns by itself and actually keeps evolving algorithms by itself, as authentication

ates all sorts of data about an individual consumer, including purchase patterns, to curate online clothing selections just for them, and machine learning makes TrueFit more helpful as it learns more about the customer.

“It’s kind of like having a Pandora profile for music,” says CEO Bill Adler. “The data tells us your body resembles this, this is what you wear, here are the colors you like, so we can put together special recommendations and a really incredible digital experience for the consumer.”

Automatic Data Processing (ADP) has figured out how to use machine learning to advise clients which employee time cards need to be reviewed

KEY TAKEAWAYS 1

2

3

Tech’s Next Step Machine learning using advanced algorithms has emerged as a powerful Big Data tool

Overcoming Inertia CEOs may need to push the investigation and adoption of machine learning in their companies

Driving Differentiation Big Data offers huge possibilities for competitive differentiation

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and which don’t, based on previous diligence patterns of the employees— sort of like the “pre-check” feature for travelers deemed safe that the federal Transportation Security Agency initiated at airports.

Schneider Electric is applying machine learning to its growing Internet of Things platform to predict when its products—which range from sensors to programmable logic controllers—may fail, so that they can be serviced and avoid costly downtime.

The French company, which has U.S. headquarters in Andover, Massachusetts, also applies machine learning to its building-management systems to make structures more eco-friendly and comfortable for occupants.

Atlanta-based GeoDigital is using machine learning to apply its detailed three-dimensional models of the world to a number of industries. For utilities, GeoDigital can precisely locate assets as mundane as power poles and then use machine learning to recommend maintenance steps and schedules. GeoDigital’s 3D-mapping programs also are feeding the revolution in the automobile business known as self-driving.

For vehicles to be truly driverless, yet safely complete their routes, they’ll rely on a cloud of data and a flurry of instantaneous communications that will keep them apprised of all the conditions around and within the vehicle—both static, like the contours of roads, and dynamic, such as traffic conditions and whether a pedestrian is darting in front of the car at that moment—and advise them how to respond.

“What used to be acceptable becomes an impediment if you need a vehicle to make decisions on its own about whether to make a maneuver immediately, or prepare for traffic conditions a few miles away,” says Anupam Malhotra, senior manager of the connected vehicle for Audi of America. “Machine learning is how we close the gap to make truly automated driving possible.”

Big Moves in Big Data Machine learning is just one way to leverage Big Data. Here are examples of how CEOs are using a variety of tools with Big Data to advance their companies: • At TransUnion, the Chicago-based credit-scoring giant, a new data-powered product called Credit Vision is providing lenders with more granular and nuanced assessments of a consumer’s risk factors, which is helping them unearth more high-quality prospects and make more sound loans.

“This also is helping us increase our footprint with the lenders we serve and boosting the ‘stickiness’ of our other products, such as fraud solutions,” explains TransUnion CEO Jim Peck. “That helps us maintain and grow our positions with our customers.”

• Edmunds.com, the automotive-information web site, has been rolling out a new product called Car Code, which allows consumers to directly text dealers about vehicle pricing, availability, features and questions. Predictive analysis of the resulting millions of conversations turns up key findings that will help make the next texting exchanges more effective.

“Some of our early analysis showed that if a text conversation included the words ‘wife’ or ‘spouse,’” reports Avi Steinlauf, CEO of the Santa Monica, California-based company, “the final outcome was four times more likely to be an actual sale. Big Data provides a lot of actionable information like that.”

• Neil Clark Warren returned to his previous CEO position and boosted the importance of data massaging to help another Santa Monica-based company, the dating site eHarmony, recover against key competitors such as Match.com.

Actionable insights from data analytics included the fact that dating candidates from outside the U.S. are more comfortable being matched with someone who smokes cigarettes or drinks booze than eHarmony’s American members are, so it broadened the matching algorithms for overseas users.

• AccuWeather, based in State College, Pennsylvania, is leveraging the pro-

liferation of data to enhance the specificity of its forecasts down to a street address and a one-minute window, extend the length of its long-term prognostications to 45 days and add a social-media feedback mechanism that augments its reports with individuals’ photos of conditions where they live.

“These things are valuable to our clients,” CEO Joel Myers says. “And the more valuable our forecasts are, the more they improve our image and the more people realize we are the go-to source for accuracy, precision and detail.”

• Intel has used its Big Data expertise to diversify into healthcare over the last couple of years with wearable monitors, ranging from 24/7 tracking of Parkinson’s patients so they can get improved treatment to the introduction of smart headphones with sensors that can measure heart rates and which carry the lifestyle brand of rapper Curtis “50 Cent” Jackson.

• Philips North America is analyzing data from its medical monitors to predict which users will end up in a hospital in the next 30 days, helping acute-care providers intervene to alleviate chronic conditions at home and pre-empting the need for expensive readmissions to a hospital.

• AMN Healthcare Services is crunching data with predictive analytics to extend scheduling of nurses and its other contracted staffers as long as four months, with 95 percent reliability that it will work out satisfactorily for each staffer, by using patterns such as the absenteeism and overtime histories of individual nurses. That compares with the historical practice of being able to schedule out only two or three weeks—and on a hit-or-miss basis, at that.

“It’s a big dissatisfier if nurses can’t plan in advance, and nurses are about one-quarter of a hospital’s budget,” explains Susan Salka, CEO of San Diego-based AMN. “With nurse attrition at historically high levels right now, anything you can do to keep them happy is a financial benefit to you, because they’re more likely to stay.”

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TECHNOLOGY

Making Big Numbers Work

Effectively leveraging Big Data and machine learning requires more than a CEO’s determination. Here are some other considerations:

Now is the time It’s feasible now to do machine learning at scale and in real time, because of how capabilities have improved and costs have come down. Yet CEOs will have hesitations. “They’ll have difficulty maintaining trust and balance with these learning systems,” says J. Lance Reese, COO of Limu, a Lake Mary, Florida-based maker of energy drinks and other beverages.

To overcome this problem, he advises CEOs to “have more direct contact with technologists” and others who direct machine-learning systems.

Boards are expecting action Directors are the primary influencer— above CEOs or CIOs—of Big Data adoption strategies in 53 percent of the companies surveyed by Accenture and GE. Where companies are striving to make an impact with Big Data within a year or two, board members are driving much of the urgency. That’s one good reason to “make data and analytics a larger part of every board meeting,” John Kelly, leader of Berkeley Research Group’s predictive analytics practice, advises CEOs.

DATA BYTE

Over the last century, the number of calculations per second that can be purchased for $1,000 increased by 100 quadrillion percent, or about an 80 percent annual increase compounded over 100 years.

Cost cutting isn’t enough By now, using Big Data and analytics to cut costs, boost efficiency and grow existing business streams isn’t enough; they’re table stakes. The CEOs seeing the greatest opportunity to drive new revenue streams from big data are those confronting the highest level of disruption from it, CapGemini reports. Many of these companies are actually finding ways to monetize the data itself to create new lines of business.

Selectivity helps at the start The best way to begin leveraging Big Data is to “have a hypothesis and act on it and test the data to see if you can harness insights” rather than “put all the data together and see what story it tells you,” says Anshu Prasad of A.T. Kearney. That can be difficult for CEOs to do because “all the function leaders are saying, ‘I have to do something with Big Data and analytics,’ so 1,000 tulips are blooming.”

Start with experimentation Probe the capabilities of machine learning in a limited way at first. “Get someone to play around with it,” advises Altair CEO Jim Scapa. “Get a smart kid.” That’s why one of Altair’s first forays into machine learning is a project at Scapa’s alma mater, Columbia University.

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Silos can be broken Companies that best harness Big Data break down barriers to its use within and outside. Internally, that means people coming together from various business functions to work with IT to engage the Big Data agenda.

It can also mean collaborating with other companies.

Hershey CEO J.P. Bilbrey, for instance, spearheaded creation of a new consortium for data analytics by partnering with Big Data pioneer Palantir, which is getting a group of

Have a hypothesis and act on it and test the data to see if you can harness insights, rather than put all the data together and see what story it tells you.”

—Anshu Prasad, A.T. Kearney

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TECHNOLOGY

DATA BYTE

More than 20 percent of manufacturers now are investing more than 30 percent of their total technology budgets in Big Data analytics, according to a recent survey

by Accenture and GE. CPG rivals to swap data to jump in front of emerging trends that affect the industry as a whole.

com CEO Avi Steinlauf. “Tools can help, but you need smart people thinking about things in curious and intuitive ways.”

Garbage in, garbage out Machine-learning systems can’t correct wrong data and can only complement, not completely replace, human intelligence.

“It’s very good at pattern recognition and finding correlations in massive databases, but not so good at reflecting the causal structure of what’s going on,” says Jim Guczcza, chief data scientist for Deloitte Consulting in the U.S. “That’s where domain knowledge comes in handy.”

Extra bandwidth becomes available Effective machine learning reduces the need for human labor, but that doesn’t necessarily mean it should eliminate jobs. “You can certainly reduce staff and cut costs, but we see many clients looking to leverage this newly freed capacity to enable workers to provide additional value to the business,” says Chip Wagner, CEO of Alsbridge, a technology-consulting firm.

Humans still count CEOs must combine Big Data operations with the domain expertise of actual human beings to get the best results. “You can’t just turn it all over to a machine that will do your thinking for you,” warns Edmunds.

Democracy energizes data The greatest potential for data can be unlocked by giving front-line workers essentially unlimited access to information that used to be difficult to obtain or required more senior managers to interpret. Tesla, for

[Machine learning] is never quite done and it’s never quite right, but the longer you live with it, the better it becomes. So as a CEO you need to be patient with it.”

—Chris Warrington, GeoDigital

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instance, finds that this approach improves manufacturing and quality because test engineers and others can see things in the data that their superiors have missed.

Knowing is not doing Judging by one important criterion, few companies so far demonstrate actual Big Data skills: Even though the demand for data scientists has tripled in three years, only six percent of large companies employ as much as one of them. What’s more, because data scientists with experience remain few and far between, the talent chase will get only worse. This is one reason that only 27 percent of executives surveyed by CapGemini described their big data initiatives so far as successful.

Privacy issues must be addressed Companies’ use of Big Data creates an unwelcome companion: distrust of that use because of privacy concerns. The more data that B2C companies have compiled about them, their purchases, their behavior and their preferences, the more consumers can be cautious about sharing such information and sensitive about how the data is used. One way CEOs can counter this obstacle is to openly offer benefits to customers in exchange for their private data.

For a retail chain that wants to use data it is gathering about in-store shopper behavior, for instance, this could involve offering free WiFi in the store or enhanced service from a “personal shopper.”

Make it a personal tool CEOs, including Carlos Rodriguez, of Roseland, New Jersey-based ADP, now are using machine learning to prepare more easily and effectively for board meetings and analyst updates. “Programs can go out and dig up all the information that the CEO used to have to reach for individually, package it up, apply Big Data analytics and present it to him,” says Stuart Sackman, ADP’s CIO. “For each subsequent meeting the system gets smarter and smarter in condensing and refining data.”

Patience is required Machine learning, like human learning, remains a work in progress. “It’s never quite done and it’s never quite right,” says GeoDigital CEO Chris Warrington. “But the longer you live with it, the better it becomes. So as a CEO you need to be patient with it.”

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CORPORATE GOVERNANCE

A HEALTHY APPROACH TO CEO ILLNESS How should companies cope with a leader’s health crisis?

by Laurie Stevens, M.D. and Steven S. Rolfe, M.D.

SMITH THOMAS was a highly successful CEO whose firm was a leader in its industry. Seeing himself as invulnerable, he rarely visited his physician and ignored urinary symptoms when they arose. By the time the diagnosis of bladder cancer was made, the cancer had spread and surgery and chemotherapy were necessary.

While Thomas worked whenever possible throughout the course of his treatment, he needed to be away for days at a time for treatment. Having little sense of how his condition was

affecting his employees and the company’s productivity during this time, he assured his board that he was able to function, despite declining revenues.

Although there was a succession plan in place, Thomas would not step down, even temporarily. The board held out hope that he would quickly recover and resume his position. In the meantime, the company was in a state of paralysis.

How a company handles illness in its CEO is a complicated business and a neglected subject, both in the business literature and in the

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boardroom. Waiting until a crisis hits and having to make decisions in a highly charged, emotional atmosphere is obviously far from ideal—and yet that’s exactly what generally happens.

We like to think of CEOs as forces of nature, super-humans able to conquer any adversity. We don’t usually anticipate—or prepare for—any key executive’s becoming ill, let alone the CEO. However, a serious ailment raises multiple issues, including whether to disclose the illness, plans for temporary or permanent succession, the effect on public perception and valuation of the company and ethical and legal responsibility to employees and shareholders.

Companies may be slow to address these issues for a variety of reasons.

The personality traits that lead a person to become a CEO are often the very same ones that make it difficult to reveal vulnerabilities. Companies and boards dependent on their CEOs for their success may find it difficult to consider how they will function when the CEO is no longer present.

Instead, they may deny the problem and in doing so, collude with the CEO in refusing to accept what has befallen him. Often a conspiracy of silence may be the first response.

This is what befell Apple. Steve Jobs’ struggle with his illness, his refusal to accept both appropriate treatment and counsel from his board (including Art Levinson, CEO of Genentech at the time and Andy Grove, CEO of Intel, himself a cancer survivor), is well documented in Walter Isaacson’s biography of Jobs.

It was clear the board was divided about how much to disclose: Al Gore felt they followed advice of counsel and respected Jobs’ wishes for privacy; Jerry York, on the other hand, confided

For the CEO, illness may be the ultimate challenge and worst fear— a loss of control and an overwhelming sense of powerlessness. to the WSJ, comments that were only revealed after his death, that he was “disgusted” by the extent of company concealment with regard to Jobs’ health problems.

Jobs’ approach to his illness contrasts sharply with that of Eugene O’Kelly, former CEO of KPMG who, together with his wife, wrote a remarkable book, Chasing Daylight, a forthright account of their last months together following O’Kelly’s diagnosis of an inoperable brain tumor. O’Kelly was transparent with his board, notifying them immediately of his intention to step down. This was the prelude to his approach of facing death directly and planning, as a CEO might, for the weeks and months he had remaining, determined to make the most of the daylight left.

For the CEO, illness may be the ultimate challenge and worst fear—a loss of control and an overwhelming sense of powerlessness. Whether a leader is able to cope psychologically with the realities of the illness and the treatment will determine if and to what extent he or she will be able to continue to lead the company and if necessary, make the appropriate decision about passing the baton.

Since a CEO’s reaction to a health crisis cannot be predicted—none of us truly knows how we would cope with a serious illness—companies should have plans and policies in place to handle the possibility of a leader’s infirmity.

The board’s concerns must be focused on the sustainability of the company.

In situations where the CEO’s agenda differs from the shareholders’ interests, the board must deal sensitively with the conflict, while addressing it in a

straightforward manner.

In addition to having contingency and succession plans and updating them annually—many companies do not—it is critical to create a climate in which discussing “undiscussable” matters is firmly rooted as part of board and company culture.

The board must value and model transparency and “walk the talk”—by demonstrating in its board process and in its everyday work with the CEO—that transparency and honest collaboration are essential to its work and to the culture of the company.

It may be helpful for the board to create a policy in advance on how to deal with CEO illness. Such a policy might include the following considerations: • The health of the CEO should be seen as part of the board’s evaluation process as they review the overall effectiveness and performance of the CEO. • The board should spell out the process it will use in the event of major illness and make clear the conditions under which the CEO is to report a medical illness to the board. It may be helpful to appoint a subcommittee whose

+

For a more in-depth look at this issue, visit ChiefExecutive.net/MA16CEOIllness responsibility it would be to orchestrate and facilitate conversations about the impact of the CEO’s illness on the company and to take the lead in making concrete plans for what is to happen.

But such policies work most effectively when employed in tandem with the board’s establishing and

maintaining an emotional climate that encourages a CEO to step forward and directly address the state of his health with his or her board and company, as well as the public. This dialogue generally only takes place when the board has engaged in a serious and robust evaluation process of its own that acknowledges the critical importance of an open and collaborative board dynamic. The recent example of Mary Powell, CEO of Green Mountain Power, clearly demonstrates this approach.

In the spring of 2015, shortly after being named Power-Gen Woman of the Year, Powell spoke openly to her family and colleagues, including 600 employees, about her decision to undergo prophylactic bilateral mastectomy. The procedure ultimately revealed that she was cancer-positive in both breasts. As Powell tells it, sharing her story had a profound, positive effect. Not only did she receive an outpouring of support, but she began a conversation that enabled many to speak up about their own private battles with illness and encouraged people to be proactive about seeking medical attention.

Looking back, Powell told Chief Executive that she attributes much of her ability to speak frankly about her illness to a board that mirrors her strong values of openness, authenticity and fidelity. It is the emotional resonance, she emphasizes, between the CEO and board that affirms the value of transparency and vulnerability that is the key to meaningful exchange and effective leadership of a crisis induced by illness in the leader.

STEVEN S. ROLFE M.D., is a principal of Merion Advisory Group and Boswell Group, is a psychiatrist and psychoanalyst who advises CEOs, boards and family enterprises on psychological aspects of management and leadership. LAURIE STEVENS, M.D. is a principal in the Boswell Group who advises CEOs, boards and senior leaders on interpersonal, leadership and organizational issues, and is also a practicing psychiatrist in New York City.

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ECONOMIC DEVELOPMENT

REGIONAL REPORT

The Northeast A new approach to downtown development is reinvigorating the Northeast Corridor.

By Warren Strugatch TEN YEARS AGO, the West Phila-

delphia area between Philadelphia’s Center City 30th Street Station and the neighborhoods surrounding Drexel University and the University of Pennsylvania was allocated to a post office mail sorting facility and acres of parking lots. Today, the dreary space has been transformed into Cira Centre South, one of Pennsylvania’s newest, and most vibrant, mixed-use communities. The development, planned and built by Brandywine Realty as a so-called “vertical neighborhood,” has begun reinvigorating Philadelphia’s downtown with 2.7 million square feet of office space, retail property and residential condos.

In June, the FMC chemical company plans to move into its new 49-story headquarters. The opening of the 730-foot FMC Tower will symbolically complete the community, whose mix of mass-transit oriented logistics, livework-play design and flexible office space provides a template for 21st Century urban planning—and economic hope for aging downtowns everywhere. Its location offers easy access to Amtrak

service to the east, connecting businesses with East Coast cities from Washington to Boston. The residential build-up means workers can walk or bicycle to work, rather than buy cars.

Pierre Brondeau, CEO of FMC Corporation, links Cira Center’s contemporary mixed-use environment with his company’s decision to relocate into the new tower. “Our ability to retain and attract the best talent is critical to our success,” he said. The new headquarters “will provide an office environment that encourages employee collaboration, engagement and creativity.”

“Global companies like FMC have the opportunity to expand anywhere in the world,” said ex-Pennsylvania governor Tom Corbett. “FMC chose to grow here.”

Other transit-centered, mixed-use neighborhoods have risen along the Northeast Corridor, notably Boston’s Innovation District, which occupies 23 acres of South Boston’s Fan Pier waterfront. In mid-January, GE confirmed it was relocating its global headquarters from Fairfield, Connecticut to the seaport-based Innovation District. In

46 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

announcing the move, CEO Jeff Immelt cited the appeal of being at “the center of an ecosystem” in a “dynamic and creative city.” With the relocation, GE becomes Massachusetts’ largest publicly traded company.

The District was effectively completed two years ago when Boston lured Vertex Pharmaceuticals from nearby Cambridge with $12 million in real estate tax breaks and job-creation incentive payouts. Vertex opened its $850 million corporate headquarters in February 2014, uniting its Massachusetts employees in a building featuring abundant natural light, trophy views of Boston Harbor and outdoor recreation spaces. Vertex also set aside about 3,000 square feet of classroom space for use

by Boston educational institutions. The expectation is that the company will eventually hire some of their students.

“Making medicines is a team sport that requires hundreds of people working together for many years, and these buildings were designed to bring all 1,300 of our Massachusetts employees together in one space for the first time,” said Vertex CEO Jeffrey Leiden. “As a company committed to discovering new medicines, I can’t think of a more inspiring environment—the Innovation District—in which to do business.”

DELAWARE | #20 | DIMINISHING LUSTER In 2014, a record 170,000 commercial entities named the Diamond State their official home, bolstering its rep as a business haven. But in some key categories that diamond is losing its luster.

The number of fully operational companies—as opposed to shell corporations— registered in Delaware has shrunk by about 11 percent since the decade began.

A series of federal judicial decisions has loosened its grip on the corporate legal world. Delaware’s financial services industry, in part a reflection of its pro-business allure, has also weakened, eroding profits and payrolls; a stronger 2015 suggests recovery is in process.

The state’s mature chemical cluster,

which has been anchored by the DuPont family holdings, now faces instability and job losses due to fallout from the chemical giant’s planned merger with Dow Chemical. The aeronautics sector is outpacing manufacturing, contributing over $7 billion a year to the state’s economy. Liberalized casino gambling laws permitting blackjack and similar table games boosted the gaming industry.

Wilmington and Dover, the state’s largest Metropolitan Statistical Areas (MSAs), will “continue to enjoy modest labor market progress in the near term,” forecasts PNC Financial Services Group. Meanwhile, Wilmington struggles to reverse the perception that it is a dangerous town.

says Dennis Delay, an economist with the New Hampshire Center for Public Policy Studies. Delay and other economists expect steady economic expansion through 2019. The New England Economic Partnership forecasts New Hampshire will continue to lag GDP growth and job creation in both New England and the nation.

District is thriving too. Several municipal programs are fueling the state’s biotech and marine sciences cluster through R&D grants and commercialization initiatives.

PENNSYLVANIA | #35 | IMPROVEMENT ON THE HORIZON Pennsylvania’s economy still trails the nation’s, but signs suggest improvement ahead. Ascending industries like life sciences, engineering and healthcare are expanding payrolls. Government services and corporate recruitment programs have been dialed back, reflecting a lower revenue base.

With the manufacturing cluster downsizing, workers sometimes lack in-demand skills, especially in rural areas, says site selector James Renzas of the RSH Group. In Philadelphia, new buildings have begun to sprout, after years of a static skyline—although rents in Center City remain relative bargains.

Commercial development, such as FMC Tower and development in the Navy Yard approach completion.

Northwest Pennsylvania, including Erie MSA, looks to enjoy “somewhat stronger economic growth” this year,

MAINE | #30 | TIGHT LABOR MARKET Maine’s real GDP inched forward between 2013 to 2014 at a glacial .2 percent pace. That reed-thin expansion was enough for Pine Tree State economists to sigh with relief; calming fears of negative growth. Personal income in the state grew 2.7 percent from 2014 to 2015.

A tight labor market vexes employers, who want the state to do more to rejuvenate its graying work force.

Maine’s low rate of inbound migration remains “the primary source of concern” for the Consensus Economic Forecasting Commission, a quasi-governmental group. Portland is experiencing the largest boom it has seen in years, much of it centered on the Eastern Waterfront district. The Arts

NEW HAMPSHIRE | #24 | LAGGING GDP The economy is humming, but a tight labor market—and sluggish in-migration—hampers growth. After decades of luring Massachusetts residents annually by the tens of thousands, that pace has slowed to a crawl. An overhaul of “outdated” land-use and zoning policies could help attract new residents,

How The States Stack Up CEO Rank 1 (1-50)

U.S.

GDP Rank (12 50)

X

GDP VALUE 2 ($ billions)

Relocation/ Expansion Incentives (HQ/Job 3 Creation)

Business 3 Environment

Workforce Quality (readiness and 3 availability)

Unemployment Rate (December 4 2015)

Economic Performance 5 Rank (1-50)

Business Tax Climate 6 Rank (1-50)

Education Policy/ Academic 5 Standards

X

B

B

5.0%

X

X

41

56.70

B/B

B

B

5.1%

38

14

C / B-

F

40

66.30

C / B-

A-

B-

3.2%

29

7

C/B

C

46

51.00

C- / C+

B+

B-

4.1%

42

33

C / B-

B

35

6

609.00

D+ / D+

B-

C

5.0%

41

34

C- / C

C

37

45

50.60

C/C

C+

B-

5.2%

39

45

C / C+

F

Maryland

40

15

321.30

B / B-

B-

B

5.2%

33

40

D+ / C-

D

Vermont

41

50

27.20

D+ / D+

B

B-

3.7%

49

46

D+ / B-

A

Connecticut

45

24

232.60

B+ / B

B+

B+

5.1%

47

42

C- / C-

F

Massachusetts

46

12

425.00

D+ / D+

C+

B+

4.7%

28

24

C/A

D

New Jersey

47

8

504.20

A/A

B-

B+

5.3%

46

50

C+ / B-

D

New York

49

2

1,300.00

A/A

C+

B

4.8%

50

49

C/B

C

X

X

116.40

D

C+

A-

6.6%

X

45

B- / C+

X

Delaware

20

N. Hampshire

24

Maine

30

Pennsylvania Rhode Island

Washington D.C.

$17,400.00

X

Community College Performance (Meeting labor market 7 expectations)

X

Sources: 1 Chief Executive magazine reader poll; 2 Bureau of Economic Analysis; 3 Site selector assessments from James Renzas, RSH Group; Dennis Donovan, Wadley-Dono­van-Gutshaw Consulting 4 Dept of Labor; 5 American Legislative Exchange Council (ALEC); 6 Tax Foundation; 7 U.S. Chamber of Commerce Foundation

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ECONOMIC DEVELOPMENT

WHY WE’LL BE HERE / MASSACHUSETTS WHO Jeff Immelt, President and CEO, General Electric SITE HISTORY The “world’s digital industry company,” as GE dubs itself, traces its origins to Thomas Edison’s laboratory in New York City. GE was incorporated in 1892 when Edison’s company merged with the ThomasonHouston of Lynn, Massachusetts, then took headquarters space in Schenectady, New York. In 1974, the company relocated to Fairfield, Connecticut. After last year’s tax hike, however, Immelt went public with his disappointment, launching a well-publicized search for a new home in June.

Lured to Massachusetts by a $120 million incentive program, GE will move to an as-yet-undisclosed location in Boston’s waterfront Innovation District by 2017.

WHY MASSACHUSETTS? GE builds on what is already a significant presence in Massachusetts, with nearly 5,000 employees across the state in businesses including aviation, oil and gas and energy management. In 2014, GE moved its life sciences headquarters to Marlborough. Last year, GE announced it was relocating its energy services start-up, Current, to Boston.

REASON FOR LOCATION “Greater Boston is home to 55 colleges and universities.

Massachusetts spends more on R&D than any other region in the world, and Boston attracts a diverse, technologically fluent workforce focused on solving challenges for the world. We are excited to bring our headquarters to this dynamic and creative city.”

forecasts PNC Financial Services Group. The group sees manufacturing rebounding, professional and business services growing and consumer spending on the upswing. In Pittsburgh, gains in healthcare employment have offset losses from the natural gas sector.

Overall, Pittsburgh’s employment is at an all-time high. Harrisburg employment rose about 2 percent last year, reflecting government hiring, as well as payroll expansion in transportation and logistics. In Scranton, Tobyhanna Army Depot is moving forward with a $105 million renovation project slated for completion in 2017.

RHODE ISLAND | #37 | REBOUNDING FROM INFRASTRUCTURE NEGLECT Rhode Island inches forward on the road to post-Recession recovery. The Plantation State’s economy “has sustained its recovery, but also displays troubling signs of major structural problems,” says Edinaldo Tebaldi, economics professor at Bryant University in Smithfield. With 1.8 percent GDP growth rate, Rhode Island is again forecasted to lag behind both New England (2 percent growth) and the U.S.

(2.3 percent). Chronically postponed infrastructure repairs have relegated nearly a quarter of the state’s 1,162 bridges to structural deficiency. Many business leaders support Rhode Works, a proposed $4.7 billion infrastructure repair project linked to 11,000 new jobs.

Business owners last year gave their state government an “F” in categories like ease of starting a small business, regulations, tax code, licensing and zoning in a study conducted by Thumbtack.com, a business services firm. Gov. Gina Raimondo, citing the Ocean State’s dead-last finish in a poll of entrepreneurs, champions initiatives like the Qualified Jobs Incentive Program. Tax reform over the past two years has slashed the corporate tax rate from 9 percent to 7 percent, introduced combined reporting and eliminated sales tax on utility bills. Now, “we have a much better tax climate and economic climate,” says House Speaker Nicholas Mattiello.

MARYLAND | #40 | GROWTH AHEAD Maryland, which lagged the U.S. in GDP growth in 2014, revved up considerably in 2015, overcoming fears of federal shutdown and government

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spending restrictions. But signs of weakness remain: wages are stagnant, the housing market is soft and labor participation rates sag.

Towson University economist Daraius Irani projects the labor market will grow under 2 percent this year and then fall below 1 percent in 2018. Anirban Basu, an economist with the Sage Policy Group in Baltimore, projects 2 percent GNP growth this year. Both see the state economy retrenching within several years.

Times have been tight in California-Lexington Park, the state’s largest MSA. Unemployment rose to 6.3 percent last year, from 4.8 percent the year before; job growth was 1.2 percent. Job growth in the Baltimore market picked up but continues to lag the nation, with payroll remaining static last year after growth in the beginning of 2014. The city’s reliance on federal employment and government spending—and weak positioning in high-tech and other cyclical industries—dulls growth prospects short-term.

VERMONT | #41 | NEW TAXES AT A BAD TIME The state economy is crawling forward slower than at any time since World War II, report government economists Jeffrey Carr and Tom Kavet. Behind that dark cloud are bright spots, especially in Chittenden County and other northern districts. Corporate profits rose to a record $122 million in 2015.

The tourism industry there recorded a record 4.7 million ski visits last year.

Business owners, however, are antsy.

The Green Mountain State finished 49th out of 50 states on economic outlook in an annual Rich States, Poor States survey tracking tax rates, labor policies and regulatory burden. Vermonters groused over last year’s $30 million tax hike, which increased sales taxes and reduced deductions. Advocates cheered the new southern Vermont economic zone established last year, though officials neglected to set goals and provide funding.

CONNECTICUT | #45 | TAXING MATTERS GE broke tradition last spring when it condemned legislative plans for a $1.5 billion tax increase, including about $700 million aimed at businesses. In January, the corporation announced it was relocating to Massachusetts, lured by at least $120 million in grants, tax abatements and other subsidies.

Insurance giants Aetna and Travelers also joined the anti-tax hike chorus.

When the hikes were slimmed down then signed into law, disgruntled state legislator Themis Klarides likened the expanded tax bite to “holding up a sign at the border (telling) businesses… to get out.” Gov. Dannel P. Malloy justified the increase as funding infrastructure improvements. To ensure those improvements materialize, a transportation lock-box plan was floated this winter by the MetroHartford Alliance.

Despite governmental stumbling, New Haven economist Donald Klepper-Smith forecasts 1 percent growth this year. Still recovering from the Great Recession are the Hartford and Norwich-New London areas. The Hartford-centered insurance industry, the state’s biggest cluster, is rebuilding.

In December, Serta-Simmons agreed to hop the border and relocate 15 miles away to Windsor Locks. Norwich-New London, the state’s largest MSA, remains recession-mired, down 11,000 jobs since 2008. Greater New Haven is doing better, having recovered jobs lost in the downturn.

MASSACHUSETTS | #46 | BURST OF ECONOMIC GROWTH Massachusetts is experiencing a “burst of economic growth reminiscent of the 1990s,” asserts Alan Clayton-Matthews, economics professor at Northeast University and lead author of the New England Economic Partnership’s annual forecast. The Bay State economy is expected to add 200,000 jobs from 2015 to 2018. Fastest-growing clusters are technology, business and professional services,

leisure and hospitality, education and healthcare.

Increasingly Boston and Cambridge compete to recruit fast-growth biotechs, pharmaceuticals and other high-tech employers. New waterfront construction in Beantown draws heavily from Cambridge; Cambridge continues generating entrepreneurs pursuing their life science dreams.

NEW YORK | #49 | SOME GOOD MOVES Gov. Andrew Cuomo nettled business leaders last year by raising the minimum wage for state workers to $15 an hour, the highest in the country; such hikes drive up labor costs for the private sector as well. He regained ground by relaunching plans to renovate Manhattan’s forlorn Pennsylvania Station, an antiquated rail hub serving New Jersey, the New York suburbs and Amtrak passengers. New York is doing a “fine job” making upstate more competitive through tax abatements, say site selectors Donovan and Renzas.

Employment grew about 2 percent last year, adding about 170,000 jobs as most metro areas experienced growth. Healthcare and social services led the gainers, followed by construction; Midtown Manhattan swarms with cranes.

Professional, scientific and technical clusters pace expansion. The service industry, including jobs on Wall Street as well as in hospitals and social service agencies, drove New York City’s job growth in 2015, and should continue in 2016. Hospitality, food services and retail grew significantly as well, reflecting a surge in tourism. Last March, mayor Bill de Blasio announced a $150 million public-private partnership tasked with driving investment in life sciences. New York City’s surging economy bolstered local markets fanning out from midtown; the New York-Newark-Jersey City MSA is largest in the U.S.

NEW JERSEY | #47 | BIOTECH PROMISE Northern New Jersey’s economic mainstays—telecom, professional services, pharmaceutical research and manufacturing—show moderate growth, while education and healthcare outpace the nation. Moderate job expansion has bolstered consumer spending, aiding the retail, entertainment and hospitality sectors.

Professional services, long a Garden State mainstay, show signs of recovery from recessionary doldrums.

JPMorgan Chase’s decision to relocate to Jersey City from Manhattan yielded 2,100 jobs—and a jolt of optimism at a time when most corporate traffic was heading out of state.

While the Garden State is closely connected to both New York and Philadelphia metro economies, such local clusters as biotech and software development expect moderate growth, offsetting stagnation in pharmaceuticals, telecom and manufacturing. Infrastructure improvements, WASHINGTON, D.C. | POWERED BY including port-facility upgrades, may POLITICS fortify economic growth in the trade Washington is still the place to go if you and transportation sectors. Regulaneed to be near the federal government. tory changes from Washington have Unfortunately, that benefit doubles as roiled the financial services industry, the capital’s biggest drawback. Uncershrinking payrolls. tainty over government budget-cutting Native son site selector Dennis casts a pall over micro-economic foreDonovan, of Wadley-Donovan-Gutcasting. “A renewed push for trimming shaw Consulting, praises the state’s incentive and subsidy programs, but federal outlays would further slow growth in Greater Washington,” obwishes permitting could be sped serves PNC Financial Services Group. up. Central-state MSAs, including “Over the longer run, the Greater WashTrenton and Edison, have grown ington area will adjust to a structurally fitfully; net growth lags behind the smaller federal government.” national pace.

MARCH/APRIL 2016

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CEO2CEO SUMMIT

Summit participants after ringing the opening bell at the New York Stock Exchange

CEOs share experiences and insights on leading in the digital age

By Jennifer Pellet 50 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

TRANSFORM OR BE TRANSFORMED...

PANEL

That was the overarching message that emerged from a series of sessions on charting a course for your business in the digital age. “If information—any kind of information—matters to your business in any way, you need to take out a clean sheet of paper and look at how you’re going to reinvent your value proposition,” Jay Walker, founder of Priceline and chairman of Walker Innovation, told Summit attendees.

“You need to say, ‘Boy, I built my business in the pre-information age,’” Walker urged. “Now that the information age is here and all my customers are in it, how will I reinvent my value proposition to serve my customer above my long-term, risk-adjusted cost of capital?

Because you’re not going make a steam

Panelists Google’s Tim Reis, RR Donnelley’s Tom Quinlan and A.T. Kearney’s Anshu Prasad discussed the challenge of reinventing operations at established companies.

Rethinking Your Business Model and Strategy for the Digital Economy CONCEPT Two panelists offer insights on how companies can overcome the challenge of finding new value across all parts of the value chain.

Andy Frawley, CEO, Epsilon “We look at this sort of conversation around how you manage customers in the digital world as an investment-allocation conversation. If you have another dollar to spend, which customer do you spend it on? How would you want to do that?

“It’s got to be aspirational. [You’ve] got to sort of look beyond the corner a little bit at what you want your business to look like, which is risky. There are no two ways about it unless you just want to sit there and wait for the disrupter to show up.”

Jay Walker, founder of Priceline and chairman of Walker Innovation “If you’re thinking about digital strategy, you’re moving way too slow. You’re just not even in the game. Your disrupting competitors are not thinking about a digital strategy. They’re thinking about a

Epsilon’s Andy Frawley and Walker Innovation’s Jay Walker strategy. They’re not thinking of digital value. They’re just thinking about value.

“If you’re not feeling panic, you’re not feeling it. The war is being lost by the incumbent big players. So, if you’re not saying, ‘Gee, I hope this meeting is almost

over so I can get back and flip this sucker upside down and figure out how to reinvent this business before I’m basically the captain on the HMS Titanic,’ you don’t get it. I often feel panicked, and I’m actually a disrupter in many businesses.”

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CEO2CEO SUMMIT

PANEL

CE’s J.P. Donlon, Alexandria Real Estate Equities’ Joel Marcus, Google Life Science’s Dr. Andy Conrad

Leveraging Technology to Better Understand and Serve Your Clients and Customers

CONCEPT Two panelists discuss ways that both companies and geographic regions can foster innovation.

On the challenge of remodeling a company to be digitally transformative...

“As you contemplate transforming into a digitally complete enterprise, it’s important to understand that sometimes the greater the legacy, the greater the burden. Google is 16 years old. It doesn’t have much [in the way] of tradition. We have no culture. That allowed us to sort of adopt best practices without having to drag with it an enormous amount of legacy systems.

These transformations are enriched profoundly by having a huge corpus of data that’s old and longitudinal and where the outcomes are known, but that also represents the hurdle that it takes to really make that transformation. We’ve learned that as we’ve encountered big pharma partners and big biotech partners that were grounded in technology.”

—Dr. Andy Conrad, CEO, Google Life Sciences

52 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

On devising ecosystems for innovation…

“There are really four characteristics that you need to form a great cluster for innovation.

First, you need to have a location where people want to be. You can’t just set a cluster up in Sioux City, Iowa. Second, you need an abundant amount of risk capital.

New York struggled—despite being the bedrock of the financial industry—because historically it hasn’t had a lot of early-stage investment risk capital. Third, you need a world-class science and clinical practice. And finally you need a depth of management talent—not just people who have held jobs in Fortune 500 companies but entrepreneurial people who know how to create and start up companies.”

—Joel Marcus, CEO, Alexandria Real Estate Equities

locomotive operate on a U.S. interstate. I don’t care what the hell you do with it.”

At a time when more and more industries are disrupted by digital newcomers, the use of technology to fundamentally improve performance or extend the reach of enterprises will increasingly be the marker by which CEOs will be measured. Uber, Airbnb and other disruptors have demonstrated how quickly competitive landscapes can be upended. Today’s business leaders must adapt their strategies and business models or risk being overtaken by a new generation of bold, innovative enterprises entering traditional markets.

That’s no easy feat, admitted Stephen Hoover, CEO of PARC, the Palo Alto Research Center originally founded as a research division for Xerox. “Not everyone is big enough to have the cash flow to set up a PARC,” he said, acknowledging the challenge. Digitization can be applied to so many aspects of operations that it’s often difficult to know where to start—not to mention

overwhelming from an investment point of view.

To make transformation more manageable, Hoover suggested thinking about the potential for digitization in each of five areas of your business: interaction with customers, communicating with employees, product design, back office operations and the business model itself. He also urged companies to dedicate staffers to the task. “If you want to make a fundamental change, then you really do need a separate team focused on that,” he noted. “Disrupting yourself, if that’s what you want to do, is not a part-time job. It’s hard to squeeze it in while you’re figuring out, ‘How do I get that next customer call made?’ I know not everyone is big enough to set up a PARC, but dedicating one or two people to even explore an area can be very powerful if you get the right kinds of people.”

PANEL

Stephen Hoover, CEO of PARC, a Xerox company

Overcoming the Real-World Challenges of Digital Transformation CONCEPT Two panelists share their experiences and insights on managing security risks in their companies.

On steps to mitigate cyber threats…

“Do data-breach exercises on your firewall, your vulnerability every year. I recommend using a third-party firm that doesn’t sell products, so that they are unbiased. If Project X will be your product for the next 10 years, make sure you have a security package on it. Control who has access to it and keep it off the Internet. Keep a bubble around it.

“Train and certify your people.

Remember back when we had to do sexual harassment training?

Now, you need to do digital training; and part of that is making sure that you relate cybersecurity to the person by saying things like, ‘If you put a USB into a computer network [that causes a data breach], six

months later, we will have to lay off 600 people.’ It’s about awareness.”

—Casey Fleming, Chairman and CEO, Blackops Partners

On guarding intellectual property…

“When you consider that each one our designers is a potential path to access our network, we had better be constantly reinventing ourselves, so that if someone gets information from us, it will be dated. We have to take the attitude that people will copy us. It happens all the time, so we take it as a matter of doing business. If we run our business on the basis of no one copying us, we better not get out of bed in the morning.”

—Farooq Kathwari, Chairman and CEO, Ethan Allen Interiors

Donlon, Ethan Allen’s Farooq Kathwari, Blackops Partners’ Casey Fleming

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CEO2CEO SUMMIT

CEO ROUNDTABLE

MAKING DIGITAL CHANGE HAPPEN

By C.J. Prince

DIGITAL CHANGE has become the one reliable constant in business, disrupting back offices, product development, marketing and a host of other key areas. While most companies understand the profound implications of the pace of this change, a great many have not worked out how to adapt their strategies to deal with it. How does one embrace the new, new thing without losing the core value on which the company was built? How does one build a nimble culture that can pivot easily enough to adapt as courses correct and markets shift? How can leaders keep the company’s culture solid during times of upheaval?

“There’s a lot of hype around digital. But a number of our clients are still asking the question, ‘How do you actually get the value out of it, really in practical terms?’” Khalid Khan, partner with global management consulting firm A.T. Kearney, told participants at a roundtable discussion at Chief Executive’s CEO2CEO Digital Transformation Summit at the New York Stock Exchange.

Attendees agreed that those for whom digital is not a native language—a camp into which most CEOs fall—should start by admitting what they don’t know. “If you’re a good leader, you don’t have to have all the answers. You need to know when to ask questions,” said Tom Harrison, chairman at Diversified Agency Services of the advertising and marketing holding company Omnicom Group.

One of the things Omnicom did early on was to pay attention to what millen-

The business will naturally evolve as you bring millennials in. It actually becomes more innovative.

It becomes more digital.

It becomes quicker.”

—JOANNA WEIDENMILLER CEO & CO-FOUNDER, 1-PAGE nials were doing, what products they were using and how they were using them. “So they become a filter, if you will,” said Harrison. “If you bring millennials into a room when somebody is making a presentation to you and they look bored or they say, ‘Never gonna use that in a million years,’ you kind of know it’s going to be garbage.”

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Joanna Weidenmiller, CEO and co-founder of 1-Page, a Silicon Valley-based recruiting technology company, pointed out that many companies are still reluctant to recruit millennials because they’re worried that they are not sufficiently leading-edge—not sexy enough—to retain the interest of this generation of digital natives. “But what happens is the business will naturally evolve as you bring these people in,” she said. “It actually becomes more innovative. It becomes more digital. It becomes quicker.”

What millennials are actually looking for is the opportunity to have their ideas heard, to be brought into the strategy discussion, she added. “The second-most important reason they join a company is because of the people they work under. They actually want

to learn from the older generation.”

Harrison agreed, noting that Omnicom’s internal research has revealed that the number one reason millennials leave their jobs is their supervisor.

“When they leave Omnicom, they don’t leave Omnicom. They leave the person to whom they report because that person seems to no longer be interested in growing that millennial’s career. The moment they feel that, they’re gone,” he said.

A company need not be a Google or an Apple in order to give millennials the excitement they crave, pointed out Khan. Any company can create a “sexy project” that would offer innovative workers the chance to create something new. “If you can, within your organization, create a brand that allows them to do exciting things that have an immediate impact—that they can see—that is what is really helping drive digital change,” he said.

That said, while millennials can add a tremendous amount, they “are not a cure-all,” noted Richard Neels, president and CEO of Employee Owned Holdings. “They need the wisdom we have. They need to understand the mistakes we have made over years and years. Neels noted that he, in turn, has learned much from the millennials he has hired and mentored. “It goes both ways and it’s very powerful.”

Howard Finkelstein, president of consultancy firm Finkelstein & Co., agreed. “You need to balance their Baskin Robbins 31 flavors a day, with so many ideas coming out of their mouths, with the fact that we’ve made a lot of mistakes in our careers. We understand timing. So it’s not a ‘we’ vs. they.’ The point is there are issues that require a balance of expertise.”

Balance is critical, added Jim Deitch, CEO of Teraverde Management Advisors. “Because you have the millennials, who have the knowledge and the attention span, but you also have my generation, who is not willing to necessarily move at that pace, and who also happens to have 75 percent of the

wealth in this country. So you’ve got to backward ‘compatibilize’ whatever you do so you don’t alienate that group going forward.”

Even the best digital expertise and most innovative strategy must be paired with operational excellence in order to succeed, said Meade Monger, managing director at AlixPartners, a global business advisory firm. “A lot of companies have the digital excellence, and they’re seeing revenues increase, but their profits are falling. Others have the operational excellence and are seeing their profits increase but their revenues falling. So the key is to really tie the business people with the digital people. That’s what the millennials are—digital people.”

The number one reason millennials leave their jobs is their supervisor.

—TOM HARRISON CHAIRMAN, DIVERSIFIED AGENCY SERVICES, OMNICOM GROUP

Innovation Isn’t Enough Too often, noted Weidenmiller, venture capitalists place much greater emphasis on innovation than on the solid fundamentals of business building.

“So you’ve got young kids starting businesses who probably shouldn’t be doing business in the first place without the correct leadership at the top,” she said. “They don’t have somebody who will sit there and say, “How are we going to build something that customers want and are willing to pay for?”

Even when you come up with the right technology, one that makes sense for the business, you also need to be able to see when that technol-

ogy has run its course and have the mature leadership in place to switch directions. “‘Long-term’ is maybe six months, and then there’s a new platform,” said Harrison. “Resiliency is a huge word in the American language today. We have to be resilient enough to be able to say, ‘That technology was really good six months ago, but look at what’s happening today,’ and we need to make this kind of investment. One of the things I worry about is not being able to see around corners well enough so that we can be proactive instead of reactive to change.”

Attendees agreed that keeping companies nimble remains a top priority—and key challenge—for CEOs. When an idea turns out to be ill-suited to the market or the execution plan is misfiring, management has to be able to quickly pivot in another direction.

Michael Marty, general manager of operations for Care.com, reflected on the failure of the popular online community news venture Patch.com, where he had previously served as VP of marketing. “We focused on the audience of readers and said, ‘We’ll figure out a way to monetize later.’ The product was popular with readers, but the advertisers weren’t really there,” said Marty.

“We failed to pivot from a very public strategy that said we’re going to do it this way. The leadership has to be able to say, ‘We’ve got it wrong. We need to shift.’ We weren’t able to do that.”

Even companies that have been successfully reinventing themselves for decades have a hard time shifting course, particularly when they are now publicly traded and subject to intense scrutiny by activist shareholders and aggressive Street estimates. DuPont, a 200-year-old company, started as a gunpowder and weapons supplier and is today one of the world’s largest chemical companies. “What they’ve done over the years with their research has just been incredible,” said Mark Turner, president and CEO of WSFS Bank. “In the last 100 years, they’ve had this wonderful dynamic of this innova-

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Weizmann Institute of Sciences’ Marshall Levin with Yale’s Jeff Sonnenfeld

tion formation curve, where they go up the curve and as soon as something in their business starts to flatten out on the curve, they’ve got something else kicking in because they’ve got R&D woven through the business.”

But recently ousted CEO Ellen Kullman was given very little time to pivot following just two sluggish quarters of earning, said Jeffrey Sonnenfeld, professor at Yale School of Management and president of Yale’s Chief Executive Leadership Institute. “A giant like DuPont doesn’t have the luxury [of time] in this day and age, with people like Nelson Peltz and others swirling overhead wanting immediate return.”

Turner noted that in recent years, DuPont had not done a great job of articulating its strategy to the Street.

“Therefore, I don’t think they attracted the right investors,” he said. “You have got to have a well-articulated strategy

and continue to articulate it well in everything you do—every earnings release, every internal statement, everything you put out.”

Investors and company insiders all need to know what is realistic for a company in a particular industry and not push that company to keep up with the latest technology that may not be appropriate for the market. For example, Turner said, online banking was more of a slow evolution than a revolution. Customers don’t necessarily want

CEO Roundtable Participants ■ ROB BREWER President, Wilderness Environmental Service ■ JAMES DEITCH CEO, Teraverde Management Advisors ■ HOWARD FINKELSTEIN President, Finkelstein & Co. ■ TOM HARRISON Chairman, Diversified Agency Services, OmnicomGroup ■ KHALID KHAN Partner, A.T. Kearney

■ MARSHALL LEVIN Executive Vice President & CEO, American Committee, Weizmann Institute of Science ■ MICHAEL MARTY Vice President & General Manager, Operations, Care.com ■ MEADE MONGER Managing Director, AlixPartners ■ RICHARD NEELS CEO, President, Employee Owned Holdings

56 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

■ ANSHU PRASAD Partner, A.T. Kearney ■ THOMAS ROGERS President & CEO, Lewis Tree Service ■ JEFFREY SONNENFELD President, Chief Executive Leadership Institute, Yale ■ MARK TURNER President & CEO, WSFS Bank ■ JOANNA WEIDENMILLER CEO & Co-founder, 1-Page

brick-and-mortar branches to go away, and it may take them time to adapt to new online products—even if those products are considered leading edge.

“Being a fast follower in our business has been a pretty darn good strategy because it’s a slow adoption curve for customers and significant barriers to entry as a very highly regulated business,” said Turner.

Regardless of the direction one takes, the way a company approaches the challenge can make a big difference—by seeing it as an opportunity rather than an ominous threat, says Rob Brewer, president of Wilderness Environmental Service. “There’s sort of this trepidation as to what’s going to happen. I look at it as a massive opportunity for us to leap-frog in front of people who can’t grasp these things quickly,” he said. “That’s one of the things that we’ve been trying to do on our end, to integrate technology into a lot of our operations, to enable us to anticipate where our customers are going to need us to be and try to get out in front of them now.”

Turner added a general reminder to his peers that as digitally advanced as we may get as a culture, technology will never replace real-time, in-person connection. “As people, we are fundamentally social, and we will always be fundamentally social. It means we’re always going to want to get out and be with other people and do things. Some of that, you can digitize away. Some of it you just can’t.”

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CEO2CEO SUMMIT

CEO ROUNDTABLE

HOW TO KNOW IF YOU HAVE THE DIGITAL TALENT TO WIN By Jennifer Pellet FOR EVERY ENTREPRENEUR hoping to found the next Uber, there are probably at least 10 CEOs looking to make sure their companies aren’t unseated by a tech-driven industry disrupter like it. New technologies like the Internet of Things (IoT), additive manufacturing, cloud computing, cybersecurity and mobile commerce are being brought together to challenge existing businesses every day and in every conceivable way.

To succeed in the digital age, today’s business leaders will need to identify and integrate the technological advances this high-tech world affords—which, in turn, requires nurturing a workforce both willing to and capable of embracing digital transformation.

“It comes down to people,” said Ian Steff, senior advisor for nanotechnology and advanced manufacturing at the Indiana Economic Development Corporation, at Chief Executive’s Digital Transformation CEO Summit. “The good news is that talent is readily accessible—you can build R&D design centers or marketing and sales teams around that talent. The bad news is that they’re just as willing to go work for your competitors. How do we recruit the kind of talent predisposed to meet those challenges and how do we hold on to it?”

It’s an issue that resonated with CEOs participating in a Summit roundtable sponsored by the Indiana Economic Development Corporation.

“The challenge we face with new talent is that they look for greener pastures after maybe a year or so, you lose the investment you made in bringing them along that learning curve,” said Gool Santchurn, CEO of Envipco. “That hap-

pens no matter what kind of compensation you give them.”

Many leaders see the challenge as generational, a need to both get talented young professionals interested in a legacy business and have them work in harmony with current employees. “Our average employee is 30-plus years,” noted George Murray, COO of Northern Engraving. “The biggest challenge is to bring in young talent and keep them actively engaged so that they don’t leave—but also bring the senior staff along for the ride.”

Often, this leads to the need to manage parallel work forces. For example, at Precision Gear, the average employee was 60 years old until just a

58 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

The good news is that talent is readily accessible. The bad news is that they’re just as willing to go work for your competitors.”

—IAN STEFF SENIOR ADVISOR, INDIANA ECONOMIC DEVELOPMENT CORPORATION

Igloo’s Mark Parrish and Lebanon Seaboard’s Kathleen Bishop

few years ago when an influx of young talent joined a company dominated by tradesmen, changing its demographic profile. “I have nine guys who are in their 20s and 30s now,” said Briggs Forelli, the aerospace gear manufacturing company’s president. “They’re on the engineering side and they ride their bicycles to work. It’s a whole different world over there.”

One Company, Two Worlds Katherine Bishop, CEO of Lebanon Seaboard, also manages two different worlds of employees—but in her case the decision was calculated.

Sales to commercial properties, such as golf courses, make up about 50 percent of her lawn and garden company’s business, with individual homeowners comprising the rest.

Like many established consumer businesses, Lebanon has been finding it difficult looking for ways to reach a consumer customer base that is increasingly engaged in social media and ecommerce.

“Even people 35, 45, 55 and older have smart phones, iPads and computers,” Bishop noted. “They may not use them the same way that a 20-yearold does, but they still have them and they expect the speed and convenience e-commerce offers. A few months ago, I decided we would never get e-commerce straightened out and vital if we kept it within our traditional business.”

Toward that end, Bishop rented a second office across town and charged her manager with moving employees proficient in e-marketing and direct-to-consumer work there, where they wouldn’t be “stifled by our old business models,” she explained.

“It marches to the tune of a different drummer now. It’s much faster—we can plan a promotion six hours in advance instead of six months. I expect them to do things quickly, fail more often, move forward and learn. My manager wasn’t

the company’s sponsorship of housing for families in crisis. “We build houses for Habitat for Humanity and we adopt families for Christmas,” explained Johnson. “Our people flock to stuff like that, volunteering their time and money.

If you develop a culture and hire people who align with your core values, the business becomes a part of their lives rather than something they just show up to do. It’s not the hard-driving corporate culture that I grew up with, but it’s a great way to live.”

It’s much faster— we plan promotions six hours in advance instead of six months.

I expect them to do things quickly, fail more often, move forward and learn.

Investing in Education

—KATHERINE BISHOP, CEO, LEBANON SEABOARD convinced that it would work, but now he says that that the difference is night and day.”

While Bishop’s separate-but-equal program seems to be working for Lebanon Seaboard, most companies look for ways to build one diverse, tech-savvy team aligned around its digital strategy, noted Daniel Johnson, CEO of Pureflow, who has found that core values that resonate companywide help align a demographically disparate workforce. He recounted rallying employees around

Several CEOs pointed out that sometimes the easiest way to find the skill set you need is to create it yourself.

While Mark Parrish, president of Igloo Products, agreed with his peers that retention is an issue, his company has chosen to commit to helping its existing employees build their technological skills. “We don’t look at it as generational,” he said. “For us, it’s about creating a culture that allows lifetime employability, as opposed to lifetime employment, although we do hope that they’ll come here for a job and stay for a career,” he said. “But you truly have to invest, regardless of age, in digital skills.

We have people recreating themselves and learning the skills required to be relevant every day.”

For an increasing number of companies, ensuring that the available

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CEO2CEO SUMMIT

Ethan Allen’s Farooq Kathwari, Lewis Tree Service’s Fred Engelfried, Indiana EDC’s Ian Steff

talent pool is equipped with the skills a company needs now trumps things like tax incentives and general investment climate, noted Indiana Economic Development Corporation’s Steff. “We recently worked with Rolls Royce on an $800 million expansion of their Indianapolis jet-engine facility,” he said.

“About 50 percent of the negotiation phase involved talking about what the public/private partnership would look like to ensure that they would have a steady pool of talent equipped with the skills that they will need not only today but 15 years from now.”

However, crucial skills aren’t always digital, several business leaders pointed out. In fact, educating younger workers on effective business communication and practices can be just as critical as bringing experienced workers up to speed on new technology. Younger workers, for example, often need to be coached to pick up the phone rather than rely solely on electronic methods of communicating with customers. After all, this is a generation that grew up texting, emailing and Face-timing with friends and family members. For many of them, building a working relationship by spending time face-to-face with a client is far from second nature.

“I have a tough time getting our staff to communicate with one another

outside of a text or email—to really communicate,” reported John Thomas, CEO of Physicians Realty Trust.

“Kids today find their boyfriends or girlfriends by text. I struggle to make sure that our people communicate with our customers in such a way that our

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customers get what they want. A hotel executive I spoke with recently told me, ‘The first person who interacts with a customer after they’ve had a bad experience is the most important person in a company,’ Texting doesn’t help that.

Email doesn’t help that.”

Companies sometimes find that workers comfortable working with technology lack foundational skills, including communication, problem-solving and negotiation skills. “You can’t just have a millennial jump in and start dealing with high-net-worth individuals,” noted Greg Richman, president of SkyJet. “It’s challenging as a leader to achieve that blend of enabling those who want it to have the online experience they want while still providing a high-level interaction for those who want personal service.”

CEO Roundtable Participants ■ KATHERINE BISHOP CEO, Lebanon Seaboard ■ BRAD CATES CEO, ProSource ■ J.P. DONLON Editor-in-Chief, Chief Executive ■ A.C. “FRED” ENGELFRIED Chairman, Lewis Tree Service ■ BRIGGS FORELLI President, Precision Gear ■ PEERY HELDRETH CRO Farm Credit of the Virginias

■ DANIEL JOHNSON CEO, Pureflow ■ FAROOQ KATHWARI Chairman & CEO, Ethan Allen Interiors ■ KETAN MEHTA CEO, Majesco ■ GEORGE MURRAY COO/President, Northern Engraving ■ JAMES O’ROURKE General Manager, Sperry Rail Service ■ MARK PARRISH President, Igloo Products

■ GREG RICHMAN President, Skyjet ■ GOOL SANTCHURN CEO, Envipco ■ PETER SCANNELL President, Rockwood Service ■ IAN STEFF Senior Advisor, Indiana Economic Development Corporation ■ JOHN THOMAS CEO, Physicians Realty Trust ■ JAMES TU Executive Chairman, Energy Focus

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PLANE ADVANTAGE

THE FUTURE OF BUSINESS TRAVEL FROM SUPERSONIC JETS TO PRIVATE PLANES YOU CAN DRIVE ON THE HIGHWAY—THESE INNOVATIONS ARE POISED TO REVOLUTIONIZE AIR TRAVEL WHILE TECHNOLOGY

that improves our lives takes a giant leap forward daily, commercial, business and personal aviation innovation has advanced at a snail’s pace over the last half century. New developments on the near horizon, however, may change all that— and, in the process, transform the way you do business forever. • Case in point: The supersonic Aerion AS2 may make traveling from New York to Paris and back the same day a reality, while the “roadable” aircraft—think flying car—could bring new meaning to the term “road warrior.”

The pages to follow offer an overview of some of the potential advances poised to revolutionize air travel, as well as insights from industry insiders and experts on the forces and innovations shaping the industry’s future.

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BY MARK PATIKY

The supersonic Aerion AS2 will cut transatlantic travel time in half.

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PLANE ADVANTAGE

BY THE NUMBERS

AERION AS2

A SUPERSONIC RENAISSANCE In 1958, a Pan Am Boeing 707 marked the dawn of the commercial jet age as it arched gracefully across the Atlantic from New York to Paris at just under the speed of sound. The seven-hour flight shrank transoceanic travel time by nearly half.

Fast-forward nearly 60 years. The newest airliners and the latest business jets are still cruising at virtually the same speed.

There was a brief glimmer of hope for a faster future when Concorde broke the “Mach barrier” 40 years ago.

Cruising at twice the speed of sound, Concorde reduced the Paris-to-New York flight time to a stunning three and a half hours. But, while the supersonic jet flew like a bullet over the ocean, it encountered a massive regulatory speed bump approaching land.

The U.S. prohibits civilian aircraft flying faster than Mach 1 (the speed of sound) over land, and European sonic boom restrictions are equally punitive.

That meant that for a considerable portion of Concorde’s journey, the sleek speedster was forced to throttle back to its most uneconomic operating regimen. So, as high as the hope for shrinking time and space, so was the cost. As a result, the plane once destined to transform jet travel was rendered a financial

MACH 1.5 TOP SPEED

FOUR 5,750 FLIGHT TIME IN HOURS FROM NEW YORK TO LONDON

FLIGHT RANGE, IN MILES

failure and grounded forever.

Now, however, a new dream of traveling faster than the speed of sound is nearing reality, but this time, it’s designed specifically for business jet travelers.

Aerion Corporation, backed by Texas investor Bob Bass, is creating a supersonic business jet that will take to the skies in 2023. At speeds of 1,000 mph, the Aerion AS2 is poised to shrink the globe in a way that the Internet cannot—by allowing face-to-face business relationships on a schedule that only Superman could

meet. The AS2 will shave three hours off current transatlantic flight times and trim more than six hours from longer trans-Pacific routes. Imagine breakfast in New York, lunch in London and a same-day return for dinner with family in New York—and that’s on your schedule, not an airlines’.

Breaking the Cost Barrier Aerion is the brainchild of brilliant aerodynamicist Dr. Richard Tracy.

After decades of research, development and demanding computational logistics, Tracy developed a breakthrough supersonic natural laminar flow airfoil, which is highly efficient at both supersonic and subsonic speeds. That means the Aerion AS2 will be practical and cost effective over its entire operating range, irrespective of any over land speed restrictions.

While Aerion engineers were conceiving and patenting the airfoil shapes that blend speed and economy in ways never before attained in commercial or military aircraft, Aerion’s co-chairman, Brian Barents, was searching for risk-sharing partners that could develop and manufacture this new-technology supersonic business jet. Last year, Airbus signed on in a partnership that will most assuredly enable the AS2 to come to market within the next seven years.

CEO PERSPECTIVE / AERION: SPEEDING AHEAD “THE CREDIT FOR THE AERION supersonic business jet goes to Dr. Richard Tracy. His breakthrough aerodynamic design, natural supersonic laminar flow technology and new construction techniques and materials, which create optimal efficiency throughout the speed range, make this new jet feasible.

“We built our business plan assuming that we would fully adhere to current global regulatory requirements. That would limit us to high subsonic speeds over the U.S. Over the

rest of the world, we would fly using existing standards that allow supersonic speeds so long as the sonic boom doesn’t hit the ground [At Mach 1.2—800 mph—the AS2 will be boom-less].

“Because our expertise is in aerodynamic design and natural laminar flow technology, it was always our intention to team with an existing aircraft manufacturer to build the airplane.

Last year, we announced collaboration with Airbus Industries, and we are working with them to

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put the airplane into production.

“As worldwide commerce expands, the need to travel longer distances more frequently is growing. We believe there is sufficient demand for an airplane like this to satisfy that need, justify the investment and make a very attractive financial return to investors. While you don’t need an airplane in this category 100 percent of the time, when you do, this capability is invaluable.

“We see this as the first in a family of airplanes. Clearly, it

could be a bigger business jet or it could be an airliner in the future. All of these proprietary technologies have application in military or commercial areas. In fact, that was the motivating factor for Airbus to collaborate with us. We have licensed them to utilize our technology in their future commercial products.

“Those are just some of the things on the horizon, and we are very optimistic.”

—Brian Barents

CO-CHAIRMAN, AERION

PLANE ADVANTAGE

The volksplane of tomorrow proposed by Terrafugia opens the prospect of flight to a vast new audience.

Geared for global commerce, The three-engine AS2 has a range of 5,400 miles (virtually anywhere on Earth with a maximum of a single refueling stop), top speed of Mach 1.5 and a stand-up, 6’ 2” high cabin with seating for eight to 12 passengers. It is a stunning tool for international business travel. Barents believes the new jet will be highly sought after by business leaders worldwide that value time, want to be there first and depend on face-to-face relationships to jump-start the engines of global commerce.

At a projected $120 million per copy, the AS2 will be about twice the price of today’s top-selling Gulfstream G650,

but it is 60 percent faster. Its forté will be high-speed, over-ocean sprints such as New York to London, Paris or Moscow, San Francisco to Tokyo or Madrid to Sao Paulo.

So who is going to buy this finetuned time machine? Major corporations exploring international markets may find the Aerion AS2 an important enhancement to an existing business jet fleet, but Kenn Ricci, chairman of fractional ownership firm Flexjet, has another vision. In November 2015, Ricci took a bold step forward and placed a $2.4 billion order for 20 Aerions up from 10, which he originally anticipated.

After polling current Flexjet frac-

CEO PERSPECTIVE / FLEXJET: ADDRESSING ACCESSIBILITY “WHAT COULD BE BETTER than being a leader in the supersonic arena? The Aerion AS2 is going to be a different kind of airplane than we ever had, and it was the ideal product for where we are going with Flexjet.

“If you are a large corporate flight department or a large company and you have a need for a supersonic jet, it will be for specific trips. It is not a plane that you would use every day, so it’s ideally suited for our

fractional business.

“Because the Aerion is so unique, we cannot provide unlimited access in the same manner as the fractional model. The number of airports where the AS2 can take off and land is limited. The new jet is 175 feet long. It is going to require 7,000-foot runways and specialized ground handling, so we do know that we are going to operate it on route-specific flights. We won’t sell shares,

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but for an additional fee, we will allow existing owners to have access on flights between specific city pairs.

Since we are evolving into Europe next year, that might be New York-to-London or Paris-to-New York.

“Right now, we have significant demand for travel across the Atlantic, and cutting the flight time from seven hours to four hours is huge.”

—Kenn Ricci

CHAIRMAN, FLEXJET

tional owners, Ricci was convinced that the Aerion AS2, designed for speed and distance, would be a winner. “It is not your everyday airplane,” he says, “but, for the times when you need it—for missions that take full advantage of its unique and extraordinary capability—it will be the most powerful business tool that you can imagine.”

THE FLYING CAR The idea of a flying car is nothing new.

In 1949, Moulton Taylor designed a roadable aircraft called the Aerocar, which he believed would introduce aviation to the masses. Only six were built. Since then, many other inventors tried and failed, but Terrafugia, founded in 2006 by an MIT Ph.D., Carl Dietrich, together with a crack team of MIT engineers, appears well on the road to revolutionizing personal air transportation.

A Plane In Every Garage?

Imagine backing out of your garage, driving to the local airfield, unfolding wings with the press of a button and, in minutes, taking off on a 300-mile journey. When you land, you merely fold the wings back and blithely drive the few remaining miles to your ultimate destination.

The Terrafugia Transition, which

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PLANE ADVANTAGE

BY THE NUMBERS

TERRAFUGIA TRANSITION

can do all of that and more, is a twoseat, folding-wing, roadable aircraft that drives at highway speeds and will cruise aloft for four hours at 100 mph.

It is part of Dietrich’s vision for making aviation safer, more convenient and more accessible.

Created for pilots with limited experience, the Transition’s advanced features include safety-oriented aerodynamics, latest-technology avionics, airbags, occupant safety cage, full-frontal crash worthiness and a ballistic whole-aircraft parachute that will bring the Transition gently back to Earth in the event of an emergency.

After nearly a decade of development, the Transition is road-tested, flight-tested and nearly ready for production. There is just one annoying hurdle: Dietrich designed the Transi-

The TF-X is Terrafugia’s newest idea. It is completely computercontrolled and can be operated from a smartphone.

100 MPH TOP SPEED

300 FLIGHT RANGE, IN MILES

TWO

NUMBER OF SEATS, PLUS ROOM FOR GOLF BAGS AND LUGGAGE

tion to fit the Federal Aviation Administration’s (FAA) light sport aircraft category, which only requires a sport pilot license that is less demanding than a conventional pilot certificate and takes half the time and money to obtain.

Regulatory Turbulence The 1,800-pound Transition, however, is 450 pounds above the FAA’s light sport aircraft weight limit. Terrafugia petitioned for an exemption and Dietrich is awaiting a response. He believes that without the waiver, the market diminishes significantly (fully licensed

pilots only), and the certification costs skyrocket. In that case, the decade-long project may be financially unrealistic and Terrafugia production may languish on the runway.

Undeterred, Dietrich is hedging his bets by parlaying years of R&D into a new, even more exciting flying car.

Prompted by the Congressional mandate for the FAA to incorporate drones into the National Airspace System, Terrafugia launched the TF-X program, a four-seat, hybrid-electric flying car with semi-autonomous vertical takeoff and landing capabilities—effectively, it is a manned drone that will not require a pilot’s certificate.

A New Vision For Personal Mobility Dietrich’s newest idea will incorporate advanced systems logic to autonomously manage the flying requirements; prevent airspace incursions; monitor weather and avoid air traffic, terrain and other hazards. It will take off like a helicopter, using electric powered rotors, and fly like a conventional airplane powered by an aircraft engine and ducted propeller. You, the “operator,” will be able to intervene when necessary to make the ultimate decisions about whether it’s safe to takeoff or land. The computer will do the rest. In the unlikely event of an emergency, the TF-X has a parachute, so all the operator will need to do is pull the red handle.

CEO PERSPECTIVE / TERRAFUGIA: GETTING ROAD READY “WHEN THE FAA PROPOSED the sport pilot and light aircraft rule, we started looking at a roadable airplane, as well as what we could do to make general aviation available to a broader segment of the population. Our analysis showed that if the Transition’s unique safety features—impact protection, benign flight characteristics and full-vehicle parachute—were to become widespread, the result

might be a significant improvement in light airplane safety.

“The Transition, which flies and drives exactly as we intended, is designed for the short commutes or getaways where you’re planning to fly for a couple of hours, then drive around when you get there. It handles well in the air, and it negotiates the highway surprisingly well for an airplane.

“Later, when the FAA was

70 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2016

tasked with incorporating unmanned aircraft in the national airspace system, we started looking seriously at the idea of a flying car for the masses that anyone can operate with minimal training.

“We also designed an electrical propulsion system with distributed system architecture to thwart any single failure.

A large number of redundant electric motors drive the rotors

for vertical takeoff and landing, and a traditional aircraft engine with ducted fan provides horizontal thrust and cruise power.

The result is our vision for tomorrow—the TF-X, a fly-bywire, computer-guided vehicle programmed not to violate FAA regulations. Just tell it where to go with your smartphone and it will take you there safely.”

— Carl Dietrich

CEO, TERRAFUGIA

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Joe Queenan

Watch out for the dark truth inside the cloud’s silver lining. By Joe Queenan

GOLDMAN SACHS recently released a report theorizing that the cure for cancer might one day be found in the cloud. Presumably, the cure for other diseases—AIDS, Alzheimer’s, Sickle Cell Anemia—could be found there as well.

The basic argument the report advances is that by sifting through the vast amounts of scientific data that will ultimately be stored in the cloud, it should be possible to isolate the best techniques for treating cancer. Because so many people will have their genome sequencing stored out in the ether as cloud computing becomes ubiquitous, studying this data should be a bonanza not only for scientists but for investors prescient enough to get into this business on the ground floor.

I hope that this is true. But it’s worth remembering that the original premise of the World Wide Web was that it, too, was going to save mankind by making humanity smarter, or at least, savvier. By having access to all the relevant data about science, economics, taxes, politics and even art, Internet users would be able to weigh the various arguments for this or that belief and arrive at the sensible conclusion. In fact, the right decision would be so obvious that only a buffoon or a malcontent or a teenager would deliberately do anything else. Thus, the Net would not only empower us; it would make us smarter.

This is not exactly the way things happened. Today, as everyone knows, the Net is polluted with pornography, stupidity and hatred. Every harebrained conspiracy theory ever concocted is out there on the Net, whether it involves the Twin Towers attack, the Oklahoma City bombing, Dealey Plaza or the Federal Reserve’s vaporous links with both Beelzebub and Moloch.

Moronic theories about vaccines, UFOs, autism, power lines and radioactive cheeseburgers are regular fare on the Net. De-

spite the abundant amount of information available to them, people still buy penny stocks, turn over their life’s savings to con artists based in Nigeria and Eastern Europe, and buy gold as a hedge against inflation, recession, everything. The sad fact is, all the information in the world cannot prevent a really dumb person from doing really dumb things, texting while driving being just the most obvious example. What’s even scarier is this: All the information in the world cannot prevent really smart people from making really dumb decisions. Smart people brought us the Newton. Smart people brought us the DeLorean. Smart people brought us subprime mortgage lending.

The theory behind the Goldman Sachs report is that doctors and pharmaceutical companies will be able to study the massive amounts of data about cancer that is available on the cloud and then devise therapies or medications based on the individual patient’s genes. This assumes that the data is overwhelmingly intelligent. But if the cloud turns out to be anything like the Net, the conclusions scientists will ultimately draw from the data could be more like this: Cancer was invented by the Knights Templar.

Cancer can be cured by juggling.

Haddock cannot get cancer.

Neither can budgerigars.

The Middle Eastern term for cancer is “Kardashian.”

Short-sellers are more likely to die of cancer than buy-and-hold investors.

Storing medical data on the cloud makes it possible for Russian hackers to alter your genome sequence and give you cancer.

Kale causes cancer, especially in the lactose-intolerant. Beets are even worse.

On a personal note, that last statement is what I tell my wife every time she tries to feed me a kale-and-beet root salad.

• • • • • • •

Q U E E N A N I LLU ST R AT I O N BY T I M TO M K I N S O N

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