Chief Executive March/April 2014 by Chief Executive Group

CEO2CEO Summit

Takeaways on leading change, analyzing data and more, p. 36

Mobile Workforce

Transform your workplace with next-gen technologies, p. 52

EVA & Private Cos.

Can the popular public company metric work for you? p. 42

Life After CEO

Business leaders reflect on life after the corner office, p. 29

MARCH/APRIL 2014

GE and the Future of American Manufacturing Why CEO Jeff Immelt believes manufacturing has a bright future in the U.S.

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reasons why Michigan Means business

• Michigan’s economy is at a 10-year high

• 220,000 new jobs added, unemployment down 40% to 8.4% (as of 12/13) • Personal income up 3.5%, matching the national average • A $1.5 billion budget deficit eliminated, saving $20 billion in long-term liability ($2,000 per resident) • A job-killing Michigan Business Tax replaced by a flat 6% Corporate Income Tax, catapulting the state’s tax ranking from #49 to #7 • Leads the nation with 88,100 new manufacturing jobs since 2009 • State taxes reduced by at least 80% for businesses of all sizes • Workers’ compensation premiums decreased by 7% per year the last two years, the best of any Midwestern state • The Michigan Unemployment Trust Fund holds a $1.5 billion surplus, versus a previous $3.9 billion unfunded liability, eliminating tax penalties • The state’s “rainy day” development fund has grown to $505 million

michiganbusiness.org

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Michigan has the perfect climate for success. The waters are just fine for business in Michigan. A wave of new thinking has businesses more involved and motivated. The environment is more collaborative. The research is more accessible and the talent pool is accomplished and skilled. Combined with business taxes reduced by over 80% and redesigned incentive programs, business comes naturally in Pure Michigan.

1.888.565.0052 michiganbusiness.org/CE

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CONTENTS

March/April 2014 No. 269

COVER STORY 24

Jeff Immelt on the Future of GE—and of American Manufacturing The CEO of GE shares his views on the forces that will drive companies to re-shore production.

By J.P. Donlon

Editor’s Note

CEO Watch • KPMG’s John Veihmeyer on leading radical transformation • Trex’s Ron Kaplan on reinvigorating a failing manufacturing firm • POV: Norvatis CEO Dan Vasella on the future of Big Pharma

Thought Leader Leading a Revolution in Education Companies and business schools need to work together to develop the business leaders of the future.

By John Chalykoff, Ph.D.

Chief Concern The CEO as Team Leader Individual commitment to a group effort—that is what makes a team work, a company work, a society work, a civilization work.

By Dr. Thomas J. Saporito

30 20

CEO Confidence CEOs Begin 2014 with Higher Confidence—and Expectations

Mid-Market Report Growth Continues for Middle Market Companies Reporting an average revenue growth of 5 percent in the fourth quarter, middle market companies continue to generate jobs.

Mobility in the Workplace Goodbye, Cubicle Farm—Hello, Office of the Future Today’s increasingly mobile workforce warrants a corresponding evolution in office design. Here’s how CEOs are answering that call.

By Russ Banham

CEO2CEO Summit 2014 Leadership and Opportunities in the Age of Smart Takeaways on leading change, leveraging logistics and harnessing data analytics from our CEO speakers and panelists.

By Jennifer Pellet

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CONTENTS

L REPO A N O I G RE TH THE NOR

E AST

CEO Roundtables The Profit Power of Purpose A state-by-state look at what the Midwest has to offer businesses.

By C.J. Prince Getting Advanced Analytics Right How to put knowledge to work in the 21st century.

By Jennifer Pellet

Economic Development Regional Report: The Northeast A state-by-state look at what the Northeast has to offer businesses.

By Warren Strugatch

Transitions Life After CEO Eight business leaders weigh in on forging a life after leaving the corner office.

By Patricia O’Connell

Performance Is EVA the North Star of Management Metrics?

Here’s what economic value added, lauded by some as the ultimate performance measurement, can do for your company—and what it can’t.

By Russ Banham

Book Review Drifting Away Does chronicling Goldman Sachs’ organizational meanderings make for a good read?

By Joe Queenan

Executive Life Far, Farther, Farthest… Sometimes you need more than just a quick getaway—you really need to escape. And when you do, these three dreamy destinations let you know you’re not in Kansas anymore.

By Michael Gelfand

Flip Side You’re Only Pretty As You Feel

Final Word The Truth About Income Inequality

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 269, March/April 2014. 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 2013 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 $198. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306.

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The Best Tips, Tools, Insights & Practices for CEOs EXCLUSIVELY ONLINE NOW The 10 Biggest CEO Losers of 2013 Which CEOs made the most egregious errors in 2013? Forbes’ Sandy Adams compiled a diverse roster of bosses’ mistakes that cover a range of behavior, from obliterating their companies’ stock value to making appallingly offensive statements that earned ridicule and in one case, a boycott of the company’s products. READ MORE ONLINE >

Narcissism as a Predictor of Company Performance The dean of Australia’s Macquarie Graduate School of Management (MGSM) has conducted a study into the level of narcissism as a leadership trait among CEOs at the U.S.’s top 100 companies. The survey identifies the least narcissistic CEOs. READ MORE ONLINE >

Superbowl Moments—Every Business Has One Every company faces a “Superbowl moment,” a make-or-break time when customer service really counts and every employee’s head should be in the game. The coordination leading up to the Big Game provides a good metaphor for the planning discipline that’s required for businesses to excel in their big moments—or suffer the consequences if they do not. The question is, will your company be ready? READ MORE ONLINE >

Must a CEO be Attractive to Succeed?

www.chiefexecutive.net/ceobriefing

Is beauty in the eye of the shareholder? In a new study conducted by researchers at the University of Wisconsin, hiring good-looking executives is good for the bottom line. The study, “Beauty is Wealth: CEO Appearance and Shareholder Values,” deployed a “facial attractiveness index” to value the appearance of 677 chief executives from the S&P 500. “Attractive” bosses received better compensation—but more than that: share price can rise if the CEO is “attractive.” READ MORE ONLINE >

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EDITORS NOTE

Immelt’s Challenge to All CEOs In our conversation with GE’s Jeff Immelt (p. 24), we asked him about the issue of income inequality, whether CEOs should be concerned and what they might do about it. First, it should be noted that much of what is written and said on this topic is suspect. Scott Winship, who was formerly of Brookings Institution, is now with The Manhattan Institute and has studied income inequality over the last decade, finds that even the best academic research is often flawed. For example, a higher percentage of low-income Americans own their homes free of mortgage debt than do upper-income Americans. Some 28 percent of households in the lowest-income group and 31 percent in the next-to-lowest group owned their homes without a mortgage in 2012. More seniors are in the lower two quintiles, and many have paid off their homes. In the top quintile, 11 percent of households own their homes debt-free, the smallest share of any quintile—a counterintuitive result. Much of this data doesn’t get factored in the public analysis. One reason for income inequality, says Winship, is the differing number of earners per household in upper and lower quintiles, as women moved into the workforce in record numbers in the 1980s. If there were more one-earner households, the distribution of income would be far more even. Another change is the shrinkage in household size at the bottom of the income scale, adding to a false perception of increased inequality. This situation is due to the increased longevity of today’s seniors and to the higher numbers of divorced people and single-parent households. As Donald Boudreaux, professor of economics at George Mason University points out, “there is no economic theory that suggests income inequality is evidence of an economic failure. Simply put, more wealth for rich people does not mean less wealth for everyone else. Unlike in centrally planned economies, in the U.S., rich people can create more wealth rather than resorting to seizing it from others.” Is everyone else worse off

because Mark Zuckerberg or Warren Buffett are multi-billionaires? That said, the biggest concern underlying the implication that income inequality has led to social immobility is captured in Immelt’s observation that, “people have been through a lot. They’ve lost their faith in big institutions, big companies and government.” Speaking of business leaders in general, the GE chief executive added, “We’re naive if we don’t think people are pissed…. None of us can complain about the way people feel.” His solution is for CEOs everywhere to redouble their efforts to grow their businesses, expand the economy and create more jobs in the process. Of course, he admitted, this approach will be tough, as the government’s policies are not conducive to growth and aren’t likely to change over the next two and a half years. In the 1980s, for example, the rich got richer and the poor got richer. After the economy took off in 1983 in the wake of a severe recession, incomes for every quintile, from the top 20 percent to the bottom 20 percent, rose. The poverty rate also declined through the end of the decade. But over the last five years, the opposite policies have been followed, so basically we are getting the opposite results. The incomes of the top 20 percent have still been rising, but the incomes of everyone else—the bottom 80 percent—have been falling. The foundation for job creation and rising real wages and incomes is capital investment, which finances the opening of new businesses and the expansion of existing ones. Capital investment increases the productivity of workers by providing them with more advanced tools and equipment to work with, and it increases the demand for workers, bidding up their wages to the level of their increased productivity. “We will all have to do it in our own way,” Immelt said. “It means competitiveness; it means exporting, and it means all kinds of things only we can do more about than government can do.”

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Art Director Raymond Palmer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi Contributing Editors Russ Banham Dale Buss Michael Gelfand C.J. Prince Joe Queenan Warren Strugatch EVP, Publisher Geri FitzGerald 203/930-9798 gfitzgerald@chiefexecutive.net

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

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

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

Director, Business Development Sean Pesce 203/930-2708 spesce@chiefexecutive.net

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

Marketing Director Michael Sherman 203/889-4978 msherman@chiefexecutive.net

Wayne Cooper Chairman & President

Marshall Cooper Chief Executive

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

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CUSTOM TRAINING FACILITY State-of-the-art workforce training facility through a partnership with Bossier Parish Community College PRO-BUSINESS CLIMATE Lowest business taxes for new manufacturing operations in the U.S., according to the Tax Foundation and KPMG LED FASTSTART® Customized workforce recruitment and hands-on simulation training in company operations STRATEGIC LOCATION Ideal location at The Port of Caddo-Bossier plus state investments in site infrastructure and equipment improvements ROBUST INCENTIVES Tailored incentive package to meet specific project needs

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CEO WATCH | CASE STUDY

Shoring Up Trex CEO Ron Kaplan on building your way out of a crisis. by Jennifer Pellet THE CHALLENGE You’ve been hired to turn around a manufacturer struggling under high overhead coupled with an enormous load of debt and inventory. Its stock price has dwindled from a high of $50 to hover at the $8 level. Bearing north of $130 million in debt, the maker of high-end decking, railing, fencing and trim is clearly in dire straits. THE CONTEXT While Ron Kaplan knew going in that he was being recruited to restore Trex to profitability, he didn’t know quite how bad things were until his second day on the job. “One of the things they hadn’t told me was that the company was in violation of [several] bank covenants,” he recounts. “I was rather cross about that, because I’d quit a good job where I was happy.” However, Trex’s precarious financial position back in 2008 had a silver lining—it clarified his next move. “When your back is against the wall, you don’t have to agonize over what you need to do,” Kaplan notes. “You just do it.” Over the next few months, Trex shed 35 executives and embarked on a massive reorganization of everything from its compensation system and its production process to the very products it sells. One of Kaplan’s first big changes was to take $80 million of inventory literally spread across pastures in West Virginia and Virginia—that the company had rented for that purpose—down to approximately $18 million. The move enabled the company to pay down its burdensome debt. THE HURDLE Early on, Kaplan scuttled plans to trim costs by moving manufacturing overseas or trimming workers’ benefits. “I said, ‘Just leave the factory where it is,’” he recounts, noting that the cost of shipping products to the U.S. market would far outweigh any savings in labor costs. “And don’t talk to me about how we’re going to cut wages or benefits.” Instead, the company’s management shored up morale by handing out bonus checks of around $500 to each of its workers and told them: “You haven’t seen a bonus check in years, but if you play ball with us, there will be more.” It was a gamble that Trex could ill afford at the time but one Kaplan felt passionately about. “I’ve been in manufacturing for 40 years now and it’s my anecdotal observation that too many managers try to solve problems off the backs of their workers. But you don’t cut your way to success. Our approach was that we were going to build our way out of this situation.”

WHO: Ron Kaplan, CEO of Trex WHERE: Winchester, Virginia SIZE: $325 million LEISURE PASTIME: Shooting FAVORITE GUN: Marlin .35 Remington

THE RESOLUTION Kaplan recruited executives from his previous companies and tasked them with applying lean manufacturing principles to the company’s operations and finding the product that would return the company to growth mode. “The old decking that we used to make—which was called an unshelled product—would stain and fade,” explains Kaplan. “Our market research showed that if we could defeat those two issues, we could move the market share needle. So we told R&D, ‘You guys have one year to develop a product that we can guarantee won’t stain or fade for 25 years.’” The result was the 2009 market debut of a low-maintenance line of proprietary, premium-priced composite decking called Transcend, which incorporates a shell around the composite boards to protect them from staining, fading and scratching. THE ENDGAME Today, Trex’s stock price is a healthy $66 and the company is debtfree. What’s more, the company now sells in 35 foreign markets, up from two in 2008. “We’re generating gross margins around 35 percent, while only at a capacity utilization of about 40 percent,” notes Kaplan. “So you can imagine the leverage and the growth opportunities we have, because we’ve more than doubled the size of the business without any capital expenditure, which is a nice place to be.” What’s next for the company? “We’re working on using portions of our existing technology in areas completely outside of decking and railing,” says Kaplan. “I’m excited about that. I don’t have any announcement yet, but that’s what we’re working on.”

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CEO WATCH | CEO PROFILE

Navigating the New Normal Listening to John Veihmeyer brings to mind the old saying, “May you live in interesting times.” His message: today, companies across every sector face an inordinate number of global challenges, many of which will demand radical transformation. After 36 years at the global audit, tax and advisory services firm KPMG, Veihmeyer would certainly have the perspective to know. “I don’t care what sector you’re in, everybody feels like they have a new normal today,” asserts Veihmeyer, who is chairman and CEO of KPMG LLP. “Whether it’s back office transformation around finance and HR or front-end functions around approaching customers, companies are looking at literally transforming the way they operate.” A wide range of forces—from technological innovations to threats around cyber security—are driving this transformational need, but sweeping regulatory change is the most top-of-mind among business leaders, he says. In a recent KPMG survey of 1,092 mid-market company top executives, respondents cited growing regulatory pressure from governments around the world as their top risk. “It’s across every industry sector,” notes Veihmeyer, “and every agency of federal and state governments has been active from a regulatory standpoint.” While regulatory change is generally viewed as a matter of compliance, the types of regulatory action today—think Dodd-Frank and the Affordable Care Act—can necessitate fundamentally changing operational models. Companies in the healthcare industry not only need to build the systems, processes and controls to comply with the ACA, they also need to figure out if their former revenue models will work within the new framework. The same holds true for financial services firms adapting to Dodd-Frank. “Companies come to [the] advisory side of our business asking, ‘How do I take this regulatory environment that I now have to operate in and evolve my business models [and] my operating system in a way that enables me to have a competitive advantage?’” explains Veihmeyer, who says the advisory business is growing more rapidly than KPMG’s other units. (KPMG Americas, the division Veihmeyer leads, delivered strong growth in 2013, with revenues rising by 6.7 percent, driven by a 16.4 percent growth in advisory revenues, a 7.4 percent increase in tax and a 0.3 percent increase in audit revenues.) Coming during a conversation just before Target’s massive—and embarrassing—cyber security breach, Veihmeyer’s prediction that “every CEO who might read this will have been in a conversation with his or her team in the last month about a recent cyber threat” proved prescient. “There’s a growing realization that it’s virtually impossible to keep all the threats out and that part of what you have to be able to do is react quickly,” he says. “You need to be able to identify and clamp off a security breach immediately, not to allow it to linger for an hour or three hours or, God forbid, a 24-hour period.” Responding swiftly to a crisis is an area Veihmeyer had to contend with relatively recently, when KPMG’s Scott London admitted to disclosing privileged information to a friend and was convicted of insider trading last year. “We responded as quickly as we became aware… and we got a lot of credit for that full transparency,” he says,

WHO: John Veihmeyer, Chairman & CEO, KPMG WHERE: New York City PASSION: The KPMG Family for Literacy Program noting that the firm’s partners called each of its clients to inform them of the situation and then issued a press release—all within hours of discovering the issue. “The reaction from our stakeholders was consistent with the idea that the measure of an organization is not whether you have one person who inexplicably does something totally inconsistent with the organization’s values; the measure is what the company does about it when they identify it,” he notes. Clearly, KPMG faces challenges itself, but the firm also, in a way, a beneficiary of them, deriving business from helping its clients manage and adapt to change. “Ten years ago, our advisory business was largely based on helping companies assess their controls, risks around those controls and forensic-type skills,” Veihmeyer says. “In the last five, it has completely transformed, so we are [now] actively engaged with our clients in areas like disruptive technologies—whether that’s the cloud or applying analytic capabilities to all the data that people are now accumulating.” KPMG has had to transform its own operations to address that new reality, he adds, noting that the company has staffed up in areas like data analytics and behavioral psychology. “A decade ago, the requests from our clients were much narrower—project management around an IT implementation, for example. Today, it’s ‘I want to transform my finance function.’ That means pulling 10 to 12 disciplines within our firm together into one project team to be a seamless provider.” Veihmeyer, who spends 85 percent of his time on the road, devotes a considerable amount of his time to reinforcing the company’s culture and developing its talent pool through town halls and smaller group meetings during his travels. Ultimately, for KPMG, the human element is the trickiest part of staying current, he says. “You can get the technology right, you can get all the process design right, but if you fail to focus on the fact that you’re going to be asking your people to change the way they’ve been doing something for 10 years, then you will suboptimize the investment you’re making in everything else.”

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CEO WATCH | POINT OF VIEW

Fixing What Ails CEOs The career of former Novartis CEO Dan Vasella began in medicine, expanding first to business and, more recently, to coaching and advising CEOs. CEOs’ greatest gift, he argues, should be teaching those on their way up. by J.P. Donlon Wracked by a series of childhood illnesses (TB and meningitis) and family losses due to cancer, Dan Vasella initially chose a career in medicine. He practiced as a physician in Switzerland until 1988, when he accepted an offer from Sandoz AG, the Swiss pharmaceutical giant, to take a sales job with the company’s U.S. affiliate. The switch from medicine to business gave him the opportunity to do work that could benefit, in his words, “not one or a hundred but thousands” of people. He rose rapidly in Sandoz’s marketing organization. In 1992, after a series of successful management assignments in the U.S. and Switzerland, he was named CEO. A few years later, Vasella helped engineer what was then one of the largest mergers in Big Pharma by joining Sandoz and its rival CibaGeigy to create Novartis. Vasella was named CEO of the new company and retained that position until January 2010. He was appointed chairman of Novartis’s board of directors in 1999 and stepped down in that capacity this time last year. No stranger to controversy, Vasella’s annual compensation drew criticism from otherwise stolid Swiss, particularly when the company offered a departure payment of 72 million Sfr ($78 million) if he agreed not to share knowledge of Novartis’ secrets with the outside world when he retired. In Switzerland, he soon became the poster boy for public indignation over highly compensated executives, which led to a referendum at the end of 2013 on capping executives’ pay. (It failed to pass.) In addition, he took heat from fellow Swiss executives for naming a Californian, Joe Jimenez, a non-doctor, as his CEO successor. During his 14-year CEO legacy, he pushed Novartis to invest in new areas of healthcare, such as generics and led efforts to expand the company’s presence in China. He also spearheaded the acquisition of U.S. eye-care company Alcon, which ultimately positioned Novartis as a global leader in one of the healthcare industry’s fastest-growing segments. Today, Vasella is dedicating his time to coaching and training CEOs of multinational and emerging companies. A longtime proponent of executive learning and development, he launched a customized course with Harvard’s Business School on management and leadership in his first year as CEO of Novartis. That program is still running today. He also started another program where executives taught younger talent. He is working with McKinsey & Co. as a private advisor to for high-level client executives—one of Vasella’s personal passions—because he believes that a shortage of talent tends to limit opportunities for growth. Also, he serves on the board of directors at PepsiCo and American Express. Towards the end of his tenure as CEO, he realized that Novartis, along with the rest of Big Pharma, was undergoing a tectonic shift. The problem was that the medical future would be nothing like the medical past. For very complex diseases, such as cancer, the question of finding a cure became problematic. It was better to think in terms of cures, in plural, because every patient is different and the frontiers of molecular medicine have reached the point where the question is no longer, “does

it work?” but “does it work for him/her?” It’s a challenge with which pharma is still trying to catch up. This situation is coupled with the fact that the regulatory apparat—the FDA and related agencies—is like WWI generals still fighting the last war, as far as medical science is concerned. Chief Executive caught up with Vasella during a recent visit to New York.

What does the future hold for Big Pharma? First, if pharma does not innovate, they have no right to exist. Generics have an absolutely clear role to play, and I’m for it. But if we want progress in medicine, we need innovation. So the question is what has happened to innovation in traditional pharma? The process of discovery and development of molecules has become increasingly expensive, and that has led to ever-increasing prices for drugs, which in itself is a problem. So with the healthcare costs increasing due to demographic trends, drug costs are increasing, too. This creates an environment of multiple pressures in the whole healthcare system. More companies will disappear; consolidation will continue. But having said that, we have had several successes, for example, in cancer therapy. In addition, regenerative medicine will play an increasing role in the future. We are not short of knowing what has to be done. There are lots of unmet needs.

Does the new world, which pharma now occupies, require a different kind of leader than the kind of leader we have seen thus far? That’s an interesting question. What kind of attitude do you have to have in order to lead successfully? I believe you have to deeply care about what you’re doing. If it’s just to make money, then change industries. Go somewhere else. But [in the future], you [will] have to be preoccupied about bringing better therapies to people. If you do that successfully, people will pay for it. The margins may not be as large as they used to be. The market is not as large as it used to be because a lot of volume is being met with generics; but still, for people who do the job, there will be ample room.

As a former CEO and current board member, what do you think of situations where the former CEO is brought back from retirement, such as P&G bringing back A.G. Lafley or JCPenney recalling Mike Ullman? These are emergency situations. They always point towards two things. The board has been taken by surprise, either because the CEO decided to leave or they got under such pressure that they had to ask the CEO to leave, and because they had not prepared the succession discussion well in advance. In my experience,

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Chief Executive of the Year 2014 Selection Committee

David Cote Chairman and Chief Executive, Honeywell 2013 Chief Executive of the Year Dan Glaser President and Chief Executive, Marsh & McLennan Fred Hassan Chairman, Bausch & Lomb Senior Partner, Warburg Pincus Christine Jacobs Former Chief Executive, Theragenics Director, McKesson Tamara Lundgren President and Chief Executive, Schnitzer Steel Industries Robert Nardelli Chief Executive, XLR-8 William R. Nuti Chairman and Chief Executive, NCR Thomas J. Quinlan III President and Chief Executive, RR Donnelley Jeffrey Sonnenfeld President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management

talking about succession when it’s theoretical is almost not worth having. The important thing is to understand what the timeframe is. The immediate question is who are the internal candidates? Do we believe in them? Should we go outside? What is the risk profile if we go outside versus inside? Let’s take JCPenney. When you hear that somebody is being brought back, do you tend to believe that the board made a mistake in so far as it had no succession plan? Does it suggest that in desperation they went back to the guy they knew? It’s a question of what industry and what stage the company is in. If you’re in a crisis mode, you don’t experiment. You call back somebody you really know well, and you don’t risk another adventure. So you cannot detach the situation in which a corporation and its board finds itself.

In your current capacity of a McKinsey advisor to various client companies, what exactly do you do? For example, there is a CEO of a tire company who had difficulty in improving productivity and was losing market share. Listening to him, it was all about margins and productivity. He never had thoughts about what the purpose of the company was or what kind of tires they should make. What would the tires stand for? Safety? Longevity of the tires as compared to competition? So we talked about what he imagines his people were thinking about what they were making. In addition to me, there were four to six CEOs in the same discussion. We had a long conversation about purpose and how to go about it. We asked who was in his top team and how he interacted with them. We would finish by asking, “What sort of help do you think you need most?” Some people respond by saying that they want to work more on one topic. This sometimes shifts to one-on-one coaching. I coach some CEOs every six weeks for three hours, with a break in between. We talk about whatever they want to talk about. It ranges, for example, from a crisis at home, to strategy, or to a top team issue.

Mark Weinberger Chairman and Chief Executive, EY Maggie Wilderotter Chairman and Chief Executive, Frontier Communications Solutions

C ONTACT US Corporate Office Chief Executive Group, LLC One Sound Shore Drive, Suite 100 Greenwich, CT 06830 Phone: 203.930.2701 | Fax: 203.930.2700 www.chiefexecutive.net Letters to the Editor letters@chiefexecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 | Fax: 847.730.3666 advertising@chiefexecutive.net Reprints Geri FitzGerald, EVP, Publisher Phone: 203.930.9798 gfitzgerald@chiefexecutive.net Back Issues Back issues are $33 each. For back issue availability and additional order information, please contact us at: Phone: 203.930.2701 circulation@chiefexecutive.net Subscription Customer Service Chief Executive, P.O. Box 15306 North Hollywood, CA 91615-5306 Phone: 818.286.3119 | Fax: 800.869.0040 cexcs@magserv.com www.chiefexecutive.net

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CEO WATCH | POINT OF VIEW

What single issue or challenge do you see most often? Often, it’s a question of loneliness, the top team, one’s legacy or working with the board and with the non-executive chairman.

What most often tends to derail a CEO? First, most of these people are extremely gifted, dedicated and hardworking. Problems arise when they don’t have stable emotional relationships. This could concern a spouse, partner, children or friends. The danger becomes enormous if either alcohol or sex is involved. Some start affairs, which you would say are stupid or childish, but CEOs have emotional needs like anyone else. People don’t talk about this, but it is real.

As a Swiss and a physician, what do you make of what’s happening with Obamacare? A nation like the U.S., which is a leading nation in the world, should be able to deliver healthcare and make it available to everyone in the country. The question is: what is not working perfectly well in the system? I would suggest to you that the tort system in the U.S. is a disaster. So are the waste and the poor quality of certain services. The problem is, everybody is focused on costs; but if I have a factory that doesn’t work properly, the first thing one should do is not to cut costs. First, you work on quality and then costs go down. Ask why does it cost so much more to treat a diabetes patient here than in the U.K.? It’s not just because of salaries of physicians; it’s also a question of what is being done at what stage of the disease. Waiting until somebody has complications before you intervene, is much more expensive. In the U.K., they intervene earlier in a preventive way.

Unfortunately, it’s complex, not simple and easy. It is also a system where you need to have everybody enrolled, but where it’s cheaper not to enroll and pay a fine—it’s not going to work.

Proving that idiocy truly has no bounds, Spain’s Secretary of State for Energy, Alberto Nadal, signed a draft “royal decree” taxing sunlight gatherers. The government threatens fines of as much as 30 million euros for those who illegally gather sunlight without paying a tax. The tax, labeled a “backup toll,” is high enough to ensure that it will be cheaper to keep buying energy from current providers.

ANDREW ROBERTS

THORN

ROSE After concluding that CGI Federal, the IT contractor responsible for building the defect-ridden online health insurance marketplace, HealthCare.gov, has not been effective enough in fixing the intricate computer system underpinning the Obamacare website, HHS officials, according to the Washington Post, are signing a deal worth roughly $90 million with Accenture. 14 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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2/14/14 2:18 PM

SMART

MANUFACTURING SUMMIT

Join your fellow CEOs to celebrate America’s manufacturing comeback with top industry leaders & experts. PEORIA, IL | MAY 20-21, 2014 Chief Executive magazine and Caterpillar are pleased to present to you our 2014 Smart Manufacturing Summit. This intimate event is limited to just 125 CEOs plus the thinkers and doers who are writing America’s manufacturing comeback story. For information on how to be a part of this exciting conversation, please visit SmartManufacturingSummit.com

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12/16/13 9:22 AM

THOUGHT LEADERSHIP

Every year, U.S. businesses look to universities for their next generation of leaders. Corporate America is committed to developing new leaders, and many businesses have elaborate training and rotation programs for their new hires. Still others dip into the talent pool early, auditioning prospective hires through internships and summer jobs. But the digital age requires different approaches. It’s time for these tried and tested models to be augmented by new ones that make business a partner in the educational process that I characterize as the “co-creation of knowledge.” New opportunities are emerging. Even though they are still in the embryonic stages, they have the promise to change business education as we know it. In the interests of our students and the future of American business, it’s time to systematize these experiments. Universities no longer have a corner on knowledge. Pretty much everything anyone wants to know can be found on the Web. Much of this wealth of information is also well-packaged, including the MOOCs (Massive Open Online Courses: Cousera, Udacity, EdX) and the video lectures from Khan Academy. As a result, universities need to refocus their missions away from knowledge retention and basic understanding— which, for many students, can be achieved on their own—to application and insight. This refocus has been termed “deeper learning,” and its aim is to refine students’ judgment. This higher-order learning is best achieved by utilizing real-time, real-world issues in a strong relationship with business. In much the same way that professional schools in the health sector and health-care organizations operate cooperatively, business schools and businesses must work together to co-create the educational experience, focused on application and insight, as students progress through the program. This opportunity, of course, requires a new level of commitment on both sides, which presents challenges in terms of different perspectives. Quite simply, business and business academics are fundamentally unsure of each other. Businesses, for the most part, would like to see schools run as businesses, which implies there should be more teaching and less research. (And if there must be research, it should be practical.)

VEER

Leading a Revolution in Education Companies and business schools need to work together to develop the business leaders of the future. By John Chalykoff, Ph.D. On the other hand, even though academics welcome the philanthropy of businesses, they often seek to keep them at arm’s length to ensure that these enterprises don’t become so involved that they infringe on the basic rights and responsibilities of the Academy. However, it’s time for a change in approach and in attitude. Evidence suggests that new and effective models are emerging, such as tying consulting projects to classroom work. The recent phenomena of problem-based learning labs that deal with real-time company issues instead of stagnant cases are promising developments—and more so if the business professionals are actively involved. However, these concepts can be extended further. Consider, for example, possible business courses with shared responsibilities between professors and employed business professionals that might be named, for example, the People’s United Bank Course in Finance or the UBS Seminar in Operations Management. Regardless of the name, the implication is that the professor and the business professional will constantly refresh the course with both theory and practice. In effect, these courses would become mini problem-based learning labs. For some time now, American business schools have put action into learning. The next step is to put learning into action. Business schools and businesses are in the unique positions to jointly produce the next generation of business leaders and thus have a responsibility or “duty,” to work together. American business education can still lead the world by taking the next step in educational excellence—a move toward strong partnerships between business schools and businesses. John Chalykoff, Ph.D. is dean of John F. Welch College of Business, Sacred Heart University.

16 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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2/14/14 2:06 PM

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8/21/13 1:36 PM

CHIEF CONCERN

THE CEO AS TEAM LEADER By Dr. Thomas J. Saporito Profitability/ROI

High Performing Teams 4%

Estimates of company performance relative to peers

HIGHER EQUIVALENT LOWER

Low Performing Teams

Employee Engagement

High Performing Teams

13%

12%

45%

23% 65%

CHECK THE MIRROR The CEO must own the process. While many organizations pay lip service to the team concept, their CEOs make solo decisions, perhaps after “touching base” with staff members. To build a solid foundation, CEOs must determine that they really want and need a multi-disciplinary, cross-functional team. Once certain, they need to make this objective clear to all stakeholders, especially board members and prospective team members.

ANALYZE GOALS Wise CEOs recognize that the strategic plan defines the mix of talents required on the team. Time Inc. CEO Joseph A. Ripp recently applied this principle after deciding that investing in technology and new-product development was a huge priority. He added Amazon’s Colin Bodell to his senior team specifically to drive the identification and acquisition of best-in-breed technology. In a recent study of senior teams by RHR International, 97 percent of high-performing teams indicated that their group is properly structured to achieve strategic goals versus only 70 percent of lower-performing teams.

ASSESS TALENT Many CEOs inherit large “grandfathered” teams, consisting mainly of their predecessor’s direct reports. The CEO “team leader” must match the challenges defined by the strategy review with the abilities in this talent pool. Most CEOs will not be capable of performing this task alone. This is not the time for a “gut check” on essentially

50%

87%

96%

The popular vision of the “lone hero” CEO leading the corporation to record profits is far from accurate in today’s increasingly complex operating environment. One individual simply cannot keep pace with the massive changes witnessed during the last five to ten years. To adapt, organizations are rapidly shifting to a shared-leadership model, where a carefully selected senior executive team aligns with the CEO to collectively drive the business forward. This transition, in turn, demands a cultural shift from functional responsibility to an enterprise-wide mindset. While every organization is unique, the following six steps offer an overview of the best practices that distinguish high-performing senior teams that add value to their organizations from lower-performing teams that miss the mark.

Low Performing Teams 5%

unknown entities. Have each prospective team member professionally assessed against the specific needs outlined by the strategic plan. These objective, psychological profiles provide a scientifically based, solid foundation for team membership decisions.

RESTRUCTURE WISELY Our research indicates that new leaders, on average, take less than four months to begin making changes in the structure of their senior teams. Some move even faster. Within weeks of his appointment as CEO, John Chen swiftly ousted the COO, CMO and CFO of BlackBerry. While it may be tempting to act swiftly, keep in mind that draconian measures may not be required. Addressing performance gaps with a rigorous executive development program could accelerate productivity more rapidly than building a team of all-stars from the open market.

FIND YOUR FOCUS Most teams struggle with what is truly important—for the enterprise, the business functions they lead and for themselves as a team. In our study, 93 percent of high-performing team members polled said that their team was very effective at prioritizing the most important issues. How do these groups attain such an overwhelming edge? The discipline required flows from the CEO, who acts as gatekeeper against the mundane, the unqualified and the unnecessary.

HAVE AN ENGAGED LEADER Forty-two percent of the high-performing team members in our study indicate that their leaders are highly effective (or even exceptional) when it comes to inspiring action. These CEOs demonstrate commitment by providing the resources necessary for achieving organizational goals and removing barriers to team functioning. In contrast, only 9 percent of lower-performing teams said their leader inspired them. To let everyone know where he stands, Randy Papadellis, CEO of Ocean Spray, often refers to himself as the “chief alignment officer.” Ultimately, savvy CEOs take the lead role, focus the attention of individual executives beyond their own functional responsibilities to an enterprise point of view and collaborate with them to drive superior performance throughout the organization. Dr. Thomas J. Saporito is chairman and CEO of the consulting firm RHR International. This article is the second in a six-part series.

18 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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2/14/14 2:26 PM

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

Talent Development

Employer Branding

Succession Planning

Assessment

Compensation

ransfordtalent.com

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12/16/13 10:32 AM

CEO CONFIDENCE

CEOs Begin 2014 with Higher Confidence—and Expectations CEO Confidence Index 6.14

5.29

2014 CEO Confidence By Company Size

16%

6.14

6.16

6.23

6.02

INCREASE Overall

Jan. - 2013

<$10M

$10-99.9M

$100M+

(Company Revenue)

Jan. - 2014

The CEO Confidence Index, Chief Executive‘s monthly gauge of CEOs’ expectations for business conditions over the next 12 months, had an average rating of 6.14 out of a possible 10 in January, indicating increased optimism from CEOs for the new year as compared to 2013 (see chart above). Last January, the average rating was just 5.29, 13.8 percent lower. CEOs who fill out the survey are given a guide in which six corresponds to a rating of “good.” This marks the first time since 2011 that CEOs have kicked off the year expecting business conditions to be better than “good” over the next 12 months. These expectations for overall business conditions were certainly buoyed by the fact most CEOs are expecting substantial improvements in their own businesses as compared to last year. Expectations for revenue, profit, employment and capital expenditures all increased significantly in January 2014 from the previous year. More than 44 percent of CEOs expect to increase the number of employees at their firms over the next 12 months. In one of the most telling statistics about business confidence, expectations for capital expenditures have also increased. Nearly 50 percent of CEOs expect increased capital expenditures over the next 12 months, compared to less than 40 percent expecting such last year. Increased investment within a business is a strong indicator of a CEO’s confidence in his or her company’s growth strategy. This is complemented by the fact that 74 percent of CEOs

expect increased revenues this year and 69 percent anticipate increased profits. Less than 10 percent of CEOs are expecting decreased revenue and only 14 percent plan to decrease capital expenditures compared to 2013. Not surprisingly, outlook varies greatly by industry. CEOs of government or non-profit organizations have the highest level of confidence, rating their expectations for overall business conditions at 7.57—a whopping 23 percent higher than the average rating. The next three most optimistic industries are high tech/ telecom, energy/utility and professional services. The least confident CEOs operate in the real estate space, rating their expectations at 5.00, 19 percent lower than the average. The next least optimistic are in retail trade, health care and financial services. In a trend that has unfortunately continued over the past several years, CEOs of smaller companies (less than $10 million in annual revenue) are the least optimistic about what 2014 will bring (see chart, above right). This cohort’s average rating for expectations for overall business conditions of 6.02 this year was still optimistic, but lower than the 6.23 rating from CEOs of businesses with $100 million in annual revenue and the 6.16 rating from CEOs of companies with between $10 million and $100 million in revenue. CEOs are certainly expecting a better 2014 than 2013, but significant risks and uncertainty are still quelling outright enthusiasm.

Expected Revenue Growth Jan. 2013

6.9%

21.6%

Up over 20%

39%

Up 10 to 19.9%

Jan. 2014

9.6%

20.6%

43.7%

Up less than 10%

20 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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2/14/14 2:04 PM

Are you ready for proxy season? Read this first. By Ram Charan, Dennis Carey, and Michael Useem “Boards That Lead is a must for anyone who sits on a major corporate board—or wants to understand them.” – The Wall Street Journal, January 16, 2014

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2/7/14 1:01 PM

MID-MARKET REPORT

Growth Continues for Middle Market Companies Reporting an average revenue growth of 5 percent in the fourth quarter, middle market companies continue to generate jobs. More than half of U.S. middle market companies—defined as those with annual revenues between $10 million and $1 billion—reported improved company performance in 2013, according to The Middle Market Indicator, a quarterly business performance and economic outlook survey by the National Center for the Middle Market at Ohio State University. Revenue grew at 5 percent in the fourth quarter, which marks the slowest quarterly rate of increase during 2013 and a decline from the year earlier rate of 7.0 percent, when middle market companies were rebounding from the recession. Those results, however, outpace the performance of the broader market by a wide differential—underscoring the middle market’s stability and its critical role as a driver of the U.S. economy. Analysts anticipate a meager 1.0 percent increase in revenue for the S&P 500 in the fourth-quarter (flat to the 0.9 percent estimated at the beginning of the period and a fraction of the growth expected from the middle market).

Revenue Growth > 5x S&P 500

Middle market companies also continued to generate jobs, with roughly four in ten expanding their workforce in the fourth quarter. Employment at middle market companies increased 2.5 percent in the period, in line with gains over the past year. Prospects for future growth are lower than earlier in the year as middle market executives face concerns about healthcare costs, domestic regulations and the ability to generate revenue during 2014. Looking ahead, middle market companies anticipate revenue growth of 4.3 percent, a decline from the 5.0 percent reported growth for the previous twelve months. However, that subdued outlook still outpaces broader market expectations. Middle market companies have grown more confident about the global economy, with 56% reporting they were at least somewhat confident in global prospects, up from 33% a year earlier. Confidence in the U.S. economy remained steady, while faith in the local economy improved marginally.

Employment Continues to Grow

4Q ’13

5.0

4.3

MIDDLE MARKET GROWTH OVER THE PAST 12 MONTHS

% Past 12 Months S&P 500

1.0

4Q ’13

2.5

NEXT 12 MONTHS

MIDDLE MARKET GROWTH OVER THE PAST 12 MONTHS

% Next 12 Months S&P 500

0.8

of middle market companies reported positive revenue growth

% Small Bus.

2.0

Middle Market Companies Growing More Confident in Global U.S. and Local Economies

2.3

4Q ’12

NEXT 12 MONTHS

% Large Bus.

of middle market companies expect to add jobs

4Q ’12

Global Economy

U.S. Economy

Local Economy

56%

64%

76%

V S . O N E Y E A R A G O (4Q ‘12)

33%

63%

71%

22 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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2/14/14 2:05 PM

Are Your Top Executives Looking For Greener Pastures? Retain Your Top Talent Before They Walk Out The Door Find out how with the all new

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12/15/13 6:48 PM

BEN HIDER

COVER STORY

24 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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2/14/14 2:04 PM

GE CEO Jeff Immelt on the Future of GE—and of American Manufacturing

BEN HIDER

Not long ago, materials were cheap and labor was expensive. Today, the reverse is true, which is why it makes sense to re-shore production in many sectors. But more importantly, the product is increasingly part of the process, driving more companies to embed their know-how and innovativeness with the product itself, says GE CEO Jeff Immelt. That and the prospect of cheaper energy due to the fracking revolution will boost manufacturing in America. By J.P. Donlon

Jeff Immelt has led GE for 12 years, becoming CEO four days before the September 11 attacks, weathering that and other so-called “blackswan” events, including two recessions, during his tenure thus far. Coming from the company’s healthcare division, he reshaped GE by focusing on energy, healthcare and transportation while selling several divisions he inherited from Jack Welch—including plastics, insurance and NBC Universal Media—that once represented 40 percent of sales. He pushed an expansion that now brings 65 percent of sales from outside the U.S., up from 30 percent when he started. After Boeing, GE is the country’s largest, single exporter. Immelt tripled GE’s R&D spending to six percent of non-financial revenue. In the process, he acquired about $115 billion in assets and received $7 billion from those he sold. In the following conversation with Chief Executive editor-inchief J.P. Donlon at the 2013 CEO2CEO Leadership Summit at the NYSE, Immelt discusses some of the strategic changes he has initiated, including bringing some of GE’s manufacturing back to the U.S. in line with the changing economics of production and innovation. A number of experts have been saying for years that such moves are overdue. In their 2009 article, “Restoring American Competitiveness,” in the Harvard Business Review, Gary Pisano and Will Shih argue that “offshoring has been devastating whole U.S. industries, stunting innovation and crippling capacity to compete long-term.” Harry Moser, an MIT-trained engineer and founder of the Reshoring Initiative recently told Forbes, “Many companies that offshored

manufacturing didn’t really do the math. As many as 60 percent of the decisions were based on miscalculations.” At a 2013 conference on the future of manufacturing, Immelt presented GE as a company with manufacturing in its DNA. “We’re all about additive manufacturing and advance spot welding,” he said. “If you look at a company like ours, at our core, we are a materials company. Gas turbines, jet engines, MRI scanners—that’s who we are.” At last December’s Leadership Summit, he underscored this fact by adding that GE Capital, once 50 percent of the company’s revenue, will shortly represent only 30 percent going forward. At last December’s Summit, Immelt shared his thinking on a wide range of competitive issues facing CEOs everywhere, but he offered a detailed look at manufacturing’s future both at GE and for business in general. Here are some highlights. In the early years, you were often compared to your predecessor. Now that you’ve significantly changed the company you inherited, do you still get compared, and do you care? I’ve been asked about following Jack in probably 120 different languages and a thousand different ways. I always answer more or less the same way. Leadership is a one-act play in business and you’re really supposed to do what’s right in the era you live in. What I look for in the people [who] work for me is [individuals] who have their own sense of self and comfort with themselves to take leadership and take the company in their own direction. It’s easier to replace a really bad CEO than a good one; but some-

MARCH/APRIL 2014

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CHIEFEXECUTIVE.NET

2/14/14 2:04 PM

COVER STORY

Jeff Immelt, Chairman and CEO of GE

times you don’t have that choice. And when you replace a good one, you need to drive change every day but pretend nothing was ever wrong. That’s kind of the way I’ve handled it at GE. I don’t look back, but [I do] drive the things that I think are most important for the company going forward in the era in which we live. You’ve boosted earnings from manufacturing at GE. Since the country desperately wants the U.S. to revive manufacturing and the jobs that come with it, tell us what GE is doing specifically to revive manufacturing from within and what is needed for the country at large to expand its manufacturing base. Our best industrial businesses are [those] with a very strong competitive mode—not just from a technology and engineering standpoint but also from a process and manufacturing [position].This isn’t the romantic view of manufacturing that is so in vogue today. This is more about competitiveness and competitive advantage. I’ve been with the company 31 years and my longtime, good friend Bob Nardelli (former CEO of GE’s Power Systems), who I know is here in the room, can back me up on this. In the 1980s, U.S. labor was expensive and materials were cheap for probably the first 20 years of my career. This did not generally help good labor-management relations. As a result, most of us saw it our task to outsource manufacturing, to move it to low-cost countries. This continued through the 1990s and into the very early 2000s. Today, materials are expensive and labor is relatively inexpensive. Today, the product is the process, more or less. And labor is a lot more flexible. If you look at an aircraft engine, the content of labor is probably less than 5 percent. We have two hours of labor in a refrigerator. So it really doesn’t matter if you make it in Mexico, the U.S. or China. Today it’s really about globalization, not about outsourcing; it’s how do I capture markets faster than the competition? The nature of manufacturing, itself, has changed. That’s why we care more about it. Look at big engines, which are big, technical miracles. We’re inventing the process and the product at the same time. Probably the last generation of, let’s say, G-90, which powers

a [Boeing] 777 would have been 50 percent GE content, 50 percent outsourced. The next generation engine, which is called the G9X is probably going to be 70 percent content, 30 percent outsourced. Because we’re inventing the process while we’re inventing the product, we have strong, competitive advantage in manufacturing here, and I think that’s likely going to be the case as time goes on. Now, as a global traveler like many of the CEOs in this room, when I go to Beijing, Munich, Moscow, South Africa or Brazil, they don’t sit down and say, “Hey, Jeff, tell me about your financial-service business.” They say, “Tell me about your industrial business and tell me how we can move more manufacturing here.” It’s the way countries view competitiveness today. There’s no way to build a country’s wealth without building middle-class manufacturing jobs. And every country recognizes that. Let me make one other point because most people in this room—and many of your readers—have been impacted by the emergence of China. The second biggest trend that people don’t really talk much about is the evolution of resource-rich countries from natural resource production into industrialized economies. This includes Latin America, Africa, Russia, the Middle East, Canada, Australia and Asia. Twenty years ago, when oil prices were high, Saudis bought apartments in Paris. Now, they’re re-investing back in their country. We see this going on everyplace. Industrial capability has become the calling card in almost any country that we go to today. This will be true for all of our businesses in the room. You’ve spent a lot of time in Washington on the president’s council. Tell us, what does the country have to do to provide a sufficient platform for manufacturers to succeed? I always start the answer to this question with, I’m a Republican. I was then and I am today. I say this so people don’t assume that this is all part of fat-cat Washington insider stuff. When you’re asked by the government to do something, you’re supposed to say yes. At least that’s what I told my mother. What I learned on the council was that there are four things that drive a country’s competitiveness. It’s true for the U.S. and every country that I ever went to. It starts with education. We need more engineers and we need more welders. Engineers create jobs and engineers create companies. In advanced manufacturing, welders create productivity and we need both of those. In Vietnam, the government provides 5,000 people with welding degrees every year. You can go to Vietnam and build a plant that’s very competitive from day one because of what the government’s done. The second thing is infrastructure. This is where I disagree with many Republicans; we need to improve infrastructure. [The New York Times’] Tom Freedman came to one of the GE meetings last week and he said that flying from Beijing to JFK is like going from the Jetsons to the Flintstones. There’s some truth to that. The third thing is the focus on small and medium business, which is an amazing engine of growth. I’d say they’ve gotten hammered in this downturn. For every job in GE, there are eight in the supply chain. We need to worry about these eight in the supply chain and how they’re doing.

26 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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And the last one is regulation. If we want jobs, we have way too much regulation. It’s grown geometrically over the past 20 years. Those are the four things that any government must stay focused on. And this is true globally. If you formed another council today, there are not 17 other ideas besides these four that would be as critical. Did you ever mention the necessity to roll back regulation to the White House? What reaction did you get? I’m not here to go down the political path. What we try to do is show projects, not debate policy or philosophy about the EPA or FDA or things like that. But, for example, when you go to do a deep seaport in Charleston and it takes eight years to get permits for it, there’s something wrong. Civilization has been doing deep seaports since the ancient Egyptians. So there ought to be a better way to get things done. Eight years isn’t what success looks like. The U.S. has one advantage in the fact that states are now the entrepreneurs. If Texas is getting all the jobs and Connecticut isn’t, maybe that should tell us something. GE is so broad that we’re in every state; and let me tell you, there are a lot of differences between Connecticut and Texas. If you’re not willing to hustle and compete every day, you’re going to lose. Government is now the same way. Those of us who are global travelers and see what the world is doing see the opportunity cost of doing nothing. Our job [as CEOs], is to be able to look our employees in the eye and say, ‘you’re going to be able to compete any time, any place, with anybody. We’re going to make that commitment to you.’ That’s the best we can do as business leaders. You have said it might not be possible to do a whole jet engine using 3D printing but that one can do enough content to shrink development by as much as 50 percent and maybe even take 25 percent of the cost out of the engine. What has been your experience, not just with engines but other parts of your business? Most of what’s happening with additive manufacturing has been in consumer products. For example, how do you make the iPad casing better or things like that. This is going to take maybe a decade to evolve. But we’ve got 10 parts that are going into the next-generation engine—let’s say the G90 or Leap X engine. The most sophisticated case we have right now is a fuel nozzle that’s going from 28 parts down to 1. The scrap and time savings are huge. A decade from now, you might see as much as 25 percent of an engine made through additive manufacturing. It will likely begin with uniquely shaped parts, like a calumniator and a CT scanner. These are very highly welded that normally involve a lot of scrap. In addition, we acquired a company called Morris Engineering in Cincinnati because it is an entrepreneurial manufacturer. We needed some entrepreneurial manufacturing spirit inside GE, so we had to acquire some of that talent. We may have to acquire more. The second thing we’ll see is a lot of opportunity for 3D printing in repair shops. We do a lot of locomotive repairs and a lot of healthcare engine repairs. The ability to do a one-off part in a continuous flow will offer great advantage over the next decade. In addition to additive manufacturing, we’ll be spending a lot

of R&D on materials, novel processing, welding and braising. Five years ago, we spent $50 million a year on manufacturing technology—pure technology. I bet now we spend close to a half a billion dollars a year on manufacturing technology. Let me explain. Each time you launch a new engine, you go down a learning curve. If we can take six months out of the learning curve, that’s tens of millions of dollars of profit at GE. So we’re spending a lot of time trying to think of how to better achieve that [opportunity]. A lot of readers tell us that it’s increasingly difficult to find skilled workers. Maybe you don’t feel it as acutely as they do, but describe the worker who we need for the future and what steps GE is taking to try to secure that type of person. Waves of skilled workers have been retiring, starting at least 30 years ago. It’s particularly acute in industries like the oil and gas business. About two or three years ago, we initiated apprenticeship programs like those in Germany and those we had in GE going back decades. In addition, we embrace the community colleges in a very significant way. For example, in Schenectady, New York, we have Hudson Valley Community College and in Cincinnati we’ve got Cincinnati College. The kids work four hours and then attend school six hours. The community college programs are critical for us. Thirdly, we’ve made a commitment to hire 1,000 veterans every year. We’re now finishing our second year with three more years to go. We’re trying to provide the bridge between what they’ve been trained to do and what they can do next. About a month ago, I was up in our aviation plant, in Burlington, Vermont. The stations now are a combination of automation and physical work. But without a strong computer background, you’re not going to be able to do what’s required. Tomorrow’s production worker will have to know lean manufacturing, teaming and any number of social skills in addition to physical skills and computer skills. GE is among the few companies that can handle this [situation] by ourselves, but big businesses and small businesses alike ought to be working together on ways to get these pipelines really working. There are anywhere from 1.5 to 2 million jobs open in the U.S. as we sit here today that are not being filled. For example, GE Capital has a lot of customers who run trucking companies. There isn’t a trucking company in the country that doesn’t have dozens of open jobs that they can’t find people for. You once said that using big data productively is the Holy Grail for you, particularly since GE has invested $1 billion in creating big data services. Share some of your experience about getting one’s arms around this [opportunity]. This is actually something worth thinking about if you’re an industrial company. I can’t say there was any one day when suddenly something became obvious, but it had been gnawing at me for a while. I became increasingly aware that more and more sensors and computing devices have been integrated into our products. Let’s say you’re flying in a Boeing 737 and you look out at the engine. It has maybe 20 sensors in it. Gas turbines might have 50 sensors, a numeric scanner has continuous data. One turbine blade is probably capable of generating a couple gigabytes of data

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COVER STORY

a day. So you have this incredible data coming together on one site. The physical world and the analytical world are coming together. This is a big theme. Number two, from a customer standpoint, increasingly our customers talk about their relationship with us in terms of the ability to not have any unplanned downtime. So increasingly in the businesses we’re in, there are these critical infrastructure technologies where the entire customer relationship is defined in terms of availability, productivity and output—with more of our service agreements being aligned with [these issues]. Coming to grips with this is hard. So this is how we’ve thought about it. We went to Silicon Valley and hired 1,000 people who joined GE to help us with this. Our thesis is, “yeah, you could go to work for the next social media site or you could come to work for us and figure out the future of flight or the future of healthcare.” So far, we’ve been able to attract people. We embed it in our service agreements. We don’t look at this as an adjunct business; we look at this as a way to enhance the value of our service business. We’ve launched maybe 30 different applications; we’re at about a $6 million run rate at the end of this year of new value in our service contracts. Everything I’ve seen so far says if you’re an industrial company, this is something you better understand, you’d better own, you better think about. Who’s going to have the analytical layer around your products? We’ve decided that we need to fight for that and it’s taken a lot of time and effort. Now, we don’t want to be an Oracle or Microsoft. But I want our gas turbines to operate better than anyone else’s because we have all the information about how the analytics work around that asset. And in order to do that, we had to make incremental investments in data science and user interface to make it real. What role does the “Internet of Things,” or what GE calls the “Industrial Internet,” play in GE’s future? If you run an industrial company, analytics are going to be a part of your future. So if you’re thinking that you won’t have to become astute on data, software and analytics, you’re in the wrong place. It will permeate all of our industrial businesses. The second thing I’d say is you will probably have to go outside to get the right talent to allow you to make it as successful as it can possibly be. And the third thing I would say is get on with it now. No matter what you call it, it’s going to have a meaningful impact in your customer interface and the way you treat employees. Sensors are in all our products, so we get continuous data off of our installed base of gas turbines, jet engines and MR scanners. You have to reach agreements with your customers about how the data gets used and how it gets treated. For example, if we can save one percent on fuel efficiency in our installed base of jet engines, that’s worth $3 billion to airlines around the world. In the industrial world, small changes have a huge impact in terms of the outcomes for customers. And that to me is where the significance lies. For most of my GE career, I thought there were industrial companies and software companies and never the two shall meet. And all of

“If you run an industrial company, analytics are going to be part of your future... It will permeate all of our industrial businesses.” us have software suppliers. Oracle has been a GE supplier for a long time. They’ll say to you, “Don’t worry about any of this stuff, we’ll do it for you.” But if you abdicate to that point, if you leave the analytics to your software supplier, you will lose your customer interface. And maybe [you’ll] lose your customer value proposition. You’re not going to be able to generate the right outcomes for your customers. You do this at your own peril. In recent speeches, President Obama advances the issue of income inequality. One can barely avoid media reports comparing CEO compensation to the lowest-paid worker. Switzerland, of all places, just had a referendum about capping CEO compensation. Is this something that CEOs should be concerned with? And what, if anything, should they do? The answer to the first question is yes. If you’re in this room, you know one of the things you never learn until you’re CEO is the importance of context. I knew how to run a business when I became CEO of GE. But I didn’t really know how GE fit within the world until I became CEO. You can’t teach people; you’ve got to kind of learn it on your own. So if you look, broadly speaking, people have been through a lot. They’ve lost their faith in big institutions, big companies and government. So we’re naive in this room if we don’t think that people are pissed and that’s going to last a while and it manifests itself in a lot of different ways. Then you say, okay, what’s the road out? What is the pathway to a solution? If you reduce CEO compensation and double everyone else’s salary and the growth of the U.S. is zero, there’s not one problem that gets solved. Wealth and equity, healthcare, social security—I could go down the list. Not one of these problems gets solved. If the economy can grow 3.5 percent consistently, then we’ve gone a long way to resolve this. So from 1982 to 2007, the U.S. economy grew 4 percent a year with no inflation. Give us a few of those years and you’ll see more jobs, better paying jobs, lower deficit and more opportunity. We will all have to do it in our own way in our own companies and be thoughtful about it, and none of us can complain about the way people feel. But the only way out ultimately is to make the economy grow faster. And that means competitiveness; it means exporting and it means all kinds of things that the people in this room can do more about than the government can do over time.

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MOBILITY IN THE WORKPLACE

ANDREW ROBERTS

Goodbye, Cubicle Farm— Hello, Office of the Future

Today’s increasingly mobile workforce warrants a corresponding evolution in office design. Here’s how CEOs are answering that call. By Russ Banham The definition of the office, as we have long known it, is changing. For some employees, today’s office is in the palm of their hands. They “go” to it when it is most productive for them to go. For others, the office is a physical space, where they book a desk like a hotel room, convene with colleagues in a living room-like pod and drop off their toddler or dry cleaning down the hall. There are still plenty of ’80s-era offices, mazes of cubicles with “real” rooms for senior executives along the periphery. And there are variations on all the above, each seeking the optimal means, one presumes, to increase workforce productivity, optimize operational efficiency and drive profitable business results. Given these many manifestations, what, then, is an “office?” Interestingly, the Latin root of the word, “officium,” translates as “service, duty, function and business.” An office, thus, is not a room but a realm of engagement where collective activities toward a shared purpose occur. With this as a backdrop, Chief Executive reached out to companies creating their own unique “offices” to explore the various virtual and physical configurations they developed and what factors and goals shaped those approaches. Work-life integration objectives, a desire to extend employees’ produc-

Key Takeaways • Today’s work-from-anywhere culture demands rethinking the traditional workplace • Companies that embrace a virtual office must empower employees with technologies like mobile business apps, video conferencing and other cloud-based solutions • Physical office spaces are moving toward flexibility through hoteling, desk-sharing and open-floor designs

tive hours to address geographic time zones and a desire for greater workforce engagement were factors in their decisions. Demographic considerations also played a role, specifically the entrance of the Millennial Generation into the workforce. A recent report by Millennial Branding found that 45 percent of Millennials would choose workplace flexibility over pay when it comes to selecting an employer. More than anything, the primary impetus for this revisionist thinking is technology, particularly social media, mobility, Big Data analytics, business apps, video conferencing and, above all, the cloud. Such next-generation technologies as integrated voice, instant messaging and chat features are other, coveted tools. By empowering employees with these innovative, efficient

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“The beautiful thing about technologies like social media, business apps, mobility and data analytics in the cloud is that people can attend to their tasks wherever they are in the world, whenever it is best.” —Christopher Cabrera, Xactly

ANDREW ROBERTS

and cost-effective technologies to communicate, collaborate and even transact business, the need for convening in a physical space is muted. Workplaces such as the one in TV’s “The Office” are not entirely passé. Companies like office furniture designer Steelcase prefer that workers brainstorm together in a physical environment, often one with shared workspaces, lunch tables affixed with technology networks, walls adorned with more flat screen monitors than a sports bar and a cafeteria called WorkCafe with a bistro ambience. Other businesses, like financial services firm State Street, espouse the concept of the untethered office—with no assigned desks, changeable work locations and flexible work schedules. These work arrangements depend on an analysis of an organization’s business operations, its culture and the specific skill sets it seeks to recruit and retain. Take the case of Adaptive Planning, a privately held provider of planning, budgeting and forecasting software. “We’re a company of knowledge workers and they’re all over the world,” says CEO John Herr. “Since we have a high-velocity business model, much of what they do is over the cloud, through email and on the phone. Our 200-plus employees and 200 channel partners are largely connected through video and technology tools, also over the cloud. We only meet in person with about half our 2,000 customers (in 25 countries), if that much.” While there is a physical space for employees to gather at the company’s Palo Alto, California headquarters, they only visit when they happen to find themselves in the area. There are no assigned offices or even seats for employees, as Adaptive Planning prefers hoteling, a more cost-effective way of utilizing real estate, Herr explains. “Several studies indicate that employees spend, at most, 30 percent of their time at their desks, so we decided to provide unassigned workstations that everyone can use when they need to,” Herr says. Although the workstations are, in fact, cubicles, they are made of clear glass, offering a sound barrier but less of a sense of confinement. Throughout the environs are large, flat-screen video monitors broadcasting key company metrics like new customer wins, as well as videos of employees extolling the company’s culture and mission. Each month, Herr hosts a party for employees and their families—if they are in the neighborhood. (Everyone wore Hawaiian shirts at a recent gathering.) Sabbaticals are permitted and encouraged.

This blending of work with life lifts employee morale, encouraging greater employee satisfaction. “Our [turnover rate] is below 5 percent,” Herr boasts. “People who have to leave here don’t want to leave.”

At the Speed of SoMoClo Andrew Borg has studied the metamorphosis of the office during the last few years (he also coined the popular term SoMoClo, which stands for social connectivity, mobility and the cloud). “What is empowering this transformation is the ability to provide knowledge workers with content, communications and collaboration tools that are based on the same Internet transport protocol, allowing content to be easily shifted from any one device to any other device or channel,” says Borg, research director in enterprise mobility and collaboration at Aberdeen Group. “Knowledge workers are able to access files whenever and wherever they are. This opportunity, in turn, fosters greater collaboration.”

“I’ve never told anyone what the office hours were and no one has ever asked me. We permit total flexibility. You could go on vacation and no one would know.” — Patrick Renna, Boloco That notch up in collaboration offers solid business benefits. In Aberdeen’s most recent study, organizations that practice what the firm calls “Enterprise Social Collaboration,” performed 79 percent higher from an operational efficiency standpoint than those that didn’t, and they achieved a 30 percent higher employee retention rate. Says Borg, “If collaboration is ultimately about increasing operational efficiency and productivity of the workforce, it is the CEO’s job to provide the strategic framework that fosters this collaboration.” CEOs like Christopher Cabrera are doing just that. Cabrera is the founder of Santa Clara, California-based Xactly, a fast-growing provider of sales compensation software, aligning sales incentives with strategic objectives. “We’ve got the fancy cafeteria and the massage therapist, but this is not why people choose to work for us,” he says. “It’s our work culture that draws and keeps talent.” Xactly espouses shared office spaces and SoMoClo for everything else. “The beautiful thing about technologies like social media, business apps, mobility and data analytics in the cloud is that people can attend to their tasks wherever they are in the world, whenever it is best,” Cabrera says. “Every single app we’ve selected to run the company employees can use anywhere.” MARCH/APRIL 2014

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Blurb engineers gather in the office’s communal area for a “hackathon”—the modern-day brainstorming session.

He calls the company a “meritocracy,” where employees come to the office when they need to, a level of flexibility that took some getting used to at first. “I’d be here at 6:30 p.m. and see that the parking lot was empty and it would bug me,” the CEO concedes. “I’m here, why aren’t the others? Then, I’d go home and see on my tablet at 9 p.m. that everyone was logged on and back working.” In this regard, employees were using a wide variety of cloud-based technologies, including Workday for closing the books, consolidations and reporting; GoToMeeting, an online meeting, desktop-sharing and video conferencing software tool; and Hoopla, a sales motivational app. “The irony is that we are a cloud-based provider ourselves and have these giant servers on-premise to do what we do, yet we don’t have a single server on-site for our own needs—everything is in the cloud,” Cabrera says. Despite having eight physical work sites around the world, the cloud is where ServiceSource International also conducts most of its business. “We don’t really have a headquarters per se,” says Mike Smerklo, CEO of the San Francisco-based provider of recurring revenue-management solutions. “Of our 2,800 employees, 54 percent are Millennials. As long as they stick to our core values of putting the customer first and doing the right thing, we trust them to do their best at whatever time that might be.”

He explains, “When your workforce is predominantly Millennials, you need to make it easier for them to work with the highest degree of social interactions they’re used to, technologically speaking.”

Meeting in the Cloud ServiceSource employees also use a vast array of cloud-based tools, including Chatter to convene in an open forum and post updates relevant to the business, Tidemark for forecasting and planning, Salesforce.com for Customer Relationship Management and Brain shark for online training. That’s just the teaser. Add to these Jibe for social media collaboration, VMWare as a virtual desktop, Box for online document management, Eloquent for marketing automation and video conferencing at all work sites for Monday staff meetings and more ad hoc virtual consultations. Similarly, at Boloco, a fast-growing chain of casual dining establishments, much of what gets accomplished business-wise at is in the cloud. The Boston-based company’s 22 restaurants sell upscale burritos like the Tikka Masala, either booked in advance by patrons on their tablets or ordered in person from a digital kiosk. Boloco has its own social media presence on Facebook. If a diner dislikes a dish and posts his or her displeasure, the message makes its way to management, which provides the customer loyalty points toward a free burrito on the next visit.

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“We have more than 29,000 employees globally and we employ technologies, such as remote access to enable them to work from anywhere in the organization.” “Technology is [woven] into everything we do here, and that includes not relying on a 100 percent presence in the office to get things done,” says Patrick Renna, acting CEO and CFO. “I’ve never told anyone what the office hours were and no one has ever asked me. We permit total flexibility. You could go on vacation and no one would know. General Managers ‘show up’ via video conferencing and GoToMeeting. Sometimes you can hear a baby crying or a dog barking in the background.” Renna epitomizes the freedom presented by the alternative workplace. “The office is what I carry in my pocket,” he says of his iPhone. Packed in the mobile device are cloud-based business apps like Concur for business-reimbursement expenses, Paylocity for paying employees, NetPOS for point-of-sale data, TripIt to book business trips and Dropbox to share files. “If I lost my phone, I’d be in trouble,” he acknowledges. At State Street, this work freedom is writ large. “We have more than 29,000 employees globally and we employ technologies, such as remote access to enable them to work from anywhere in the organization,” says Chris Perretta, executive vice president and CIO at State Street in Boston. “We continue to build out technologies and spaces geared toward making flexible work easier. This would include flex centers in our facilities globally, our ‘bring your own device’ philosophy and and work-from-home capabilities.” State Street began an IT transformation process in 2010 that helped it re-engineer work processes internally. “We implemented new technologies, such as our private cloud and large data utilities that allow us to improve system performance and access to the data our employees and clients need,” Perretta notes. “The design of our physical space and the technologies we deploy provide the flexibility our employees need. For instance, our employees don’t necessarily have to sit at the same desk every day—they can work from any geographic region or from home and still work collaboratively.”

Come Live Here Many companies, of course, prefer to have employees gathering together in an actual, physical place, where they can bounce ideas off each other at the old water cooler (okay, premium Nespresso machine). At Yahoo, CEO Marissa Mayer made a splash when she declared, “No more working from home!” to optimize collaboration at the embattled online company, much to the chagrin of employees used to coding software in their pajamas.

Not surprisingly, Steelcase, which has been manufacturing office desks, chairs and file cabinets for more than a century, prefers workers at the worksite. In the 1960s, the company’s steel desks were omnipresent—scenes from TV’s “Mad Men” look like Steelcase marketing brochures from the period. Today, the Grand Rapids, Michigan-based company ($2.9 billion in estimated 2013 revenues) manufactures work environments designed to engage the workforce, inspire collaboration and improve the user experience—the interface between humans and computers. (See Sidebar: Designing the Office of the

Figuring the Configuring Designing an optimum work environment depends on an understanding of ethnography—the study of how employees currently work or would like to work. Ethnographers examine the daily activities of employees, record these experiences and then analyze the results using complex statistical models. Process innovations are then introduced to effect a more creative and fruitful working environment. Ethnography can also guide more productive interactions between people and computers. At PeopleFluent, a provider of mobile, social and cloud-based talent-management solutions, employees (and customers) use a novel HR system called Mirror, through which they collaborate in highly productive ways. An employee simply types a question into the portal and the responses instantly arrive in many forms, via video, email, an internal or external white paper, an archival webcast and even social media interactions. “By making work simpler and richer, the employee becomes more engaged, efficient and productive,” says Charles Jones, PeopleFluent chairman and managing partner of Bedford, a $1.4 billion private equity firm specializing in software technology investment. Jones believes that the new office environment is a derivative of digitalization. In other words, the availability of technologies like mobile business apps and other cloudbased solutions are drivinga new ways of working on-site and offsite. “I’m an aging Baby Boomer who spends winters in Florida and summers in Nantucket and I work wherever I happen to be, thanks to digitalization,” he says. Mirror is part of this trend, a way for employees to get fast, detailed answers to questions, wherever they may be, at any time of the day—social collaboration on steroids. Its name is based on the company’s desire for employees to look into the system the first thing in the morning (or afternoon or night), much like an actual reflective mirror. “We are in this period of extraordinary social experimentation, where consumer technology trends are merging with business needs,” Jones says. “And it’s unstoppable.”

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Designing an Office of the Future

Ready to rethink your company’s workspace? Here are four components to consider in the redesign process. • Think of the workplace as part of the communication strategy. “Body language must match verbal language for employees to feel integrity in your communications,” explains Jim Hackett, CEO of Steelcase, a manufacturer of work environments. “Employees may not believe your words about collaboration and a non-hierarchical culture if they spend their days in cubicles with sizes and locations determined by pay grade.” • Embrace freedom and choice. CEOs work hard to build a diverse organization, but the traditional workplace forces everyone to work according to rigid standards. Consider hoteling and other policies not just as a way to free up real estate but as a way to give each employee more control over where and how he or she works. • Prioritize collaboration. Individual work can happen anywhere, but collaborative spaces are a challenge. “In traditional offices, conference rooms are scarce and poorly equipped with the technology tools teams need to be effective,” Hackett says. “Build offices around the ways people need to collaborate.” • Enable virtual meetings. Rather than investing in a single, high-end video conferencing room, give thought to basic video throughout the work environment. Once relationships are formed face-to-face, video can extend these relationships and help teams communicate more effectively across distances.

Future). “The office represents in a very important way what is social about work,” says longtime CEO Jim Hackett. “It is a place where people engage with other people, connecting with them in proximate ways and also through technology,” Hackett adds. “These differences in connection depend on the type of organization, with some enterprises expecting people to work traditional working hours and others preferring more flexible work arrangements. The stereotype of the ‘office’ no longer applies.” It certainly doesn’t apply to the WorkCafe at Steelcase headquarters. Designed to be both a hub and a haven, WorkCafe supports almost anything employees want to do—catch up on work, with colleagues, the news, and, of course, eat. Not at Formica-covered restaurant tables, either. A variety of different workspaces populate the environment, including open and closed meeting areas, a Starbucks lounge, a stand-up bar and spaces that accommodate sit-down, perch and standing work postures. Blurb also has a novel notion of “office.” The San Francisco-based provider of online tools that assist everyone from authors and companies to Grandma to make their own bookstore-quality books promotes an environment that its founder and CEO Eileen Gittins calls “loungey and living roomy, the kind of place where you want to sit down and congregate.” Adding to the relaxing open-plan design is a series of refectory tables set up “family style,” Gittins says. “Our workspaces mimic life spaces. We want our people to sit down with different colleagues they don’t see every day, creating community and collegiality. We promote a culture of openness, transparency and authentic experiences, and it has worked for us.” To date, Blurb authors have created more than 2 million books since the company’s founding in 2006. At headquarters, free lunch is delivered to employees every

Wednesday. Yoga classes are given twice a week. A virtual private network connects the entire staff of software developers, engineers and management, permitting ad hoc work arrangements. Business apps proliferate, from Adaptive Planning for budgeting and forecasting to MicroStrategy for data analytics and Google Docs for everything else. When Blurb redesigned its office space two years ago, the CEO wanted it built around how different employees preferred to work. For instance, a 30-foot long refectory table dominates engineering, where workers sit across each other in two long lines sharing ideas and problems. Other employees are clustered in pods—the more creative people sitting on “comfy bean bags,” says Gittins. The entire back wall of the office is a painted whiteboard scrawled with metrics and work-related messages.

Working It Out Certainly these various revisionist work concepts are intriguing, but are they earning their keep? Smerklo says ServiceSource’s employees are a fully engaged and productive lot, generating higher customer satisfaction and employee-retention metrics. “We’ve measured this and compared it to our top-line growth, which is higher,” he says. “I truly believe we are creating a work environment that fits the Millennial generation model—tomorrow’s business leaders today. “Millennials are notorious for staying with a company two or three years and then moving on—for whatever reason,” he adds. “We’re doing all we can to ensure that does not happen here.” Ultimately, the purpose of a workplace is to foster connections. “It helps people connect to each other, to technology, to work processes and to the culture of the organization,” Hackett says. “It also makes it easier for CEOs and other executives to be better connected and engaged in the dynamics of the business.”

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Opportunities in the Age of Smart B y J e n n i fe r Pe l l e t Having survived the Great Recession, corporate America remains mired in a difficult era, one characterized by continuing cost pressure, a dearth of skilled workers and ongoing economic uncertainty. What’s more, the era of cheap resources, it is argued, is over. Once-plentiful supplies of everything from petroleum and metals to water and even clean air are in jeopardy. At the same time, new and promising technological advances offer tantalizing opportunities for those able to embrace and leverage their potential. In December, more than 175 CEOs gathered at New York City’s NYSE/Euronext to explore the challenges and opportunities facing leaders during Chief Executive’s CEO2CEO leadership Summit. Our cover story interview with GE’s Jeff Immelt (see p. 24) and the excerpts featured on the following pages capture some of the takeaways shared during the event’s presentations and panel discussions.

(From left) CE’s J.P. Donlon, Honeywell’s Dave Cote, XLR-8’s Bob Nardelli, Cardinal Health’s George Barrett and Senn Delaney’s Jim Hart

Panel: Smart Leaders, Smart Teams Leading change is always difficult, and cultural change is perhaps most challenging of all. Yet CEOs often face the task of creating, transforming or aligning companies around a corporate culture. To follow are excerpts from the remarks of CEO panelists who shared their experiences with overcoming this these unique challenges.

Who: Bob Nardelli, Chairman of XLR-8 Background: Former CEO of GE Power Systems, Bob Nardelli led a successful turnaround initiative as CEO of Home Depot before founding XLR-8, an investment and advisory company. On transforming company culture… When I came into Home Depot, I found three types of associates. One was, “Thank God you’re here. This is going to be great.” Another was, “I know the kind of guy you are, and there will be too many KPIs (key performance indicators), too many measurements. I’m leaving.” I called the third type energy drainers. Their

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attitude was, “We’ve been here longer than you and we’re going to outlast you.” As a result of that atmosphere, to do what the board wanted me to do, we brought in about 125 officers. Without creating that team, we would not have been able to go from $45 billion to $90 billion in five years.

Who: George Barrett, Chairman and CEO, Cardinal Health Background: After joining Cardinal in 2008, Barrett steered the company toward a strategic shift—focusing on drug distribution rather than medical-device manufacturing—successfully rallying employees around the new direction. On prioritizing…. When you come into a new situation, even if it’s a relatively high-performing organization, [invariably], there are 1,000 things you see that you want to fix. But the reality is there are six that matter and you don’t know what they are in the beginning. There was a moment along the way where I realized, “I think I know that if we get these six things going in the right direction, all the rest will just be a rounding error.” It just won’t matter. At some point, those five or six things really light up. Then, it becomes much easier because you are not asking your people to do 1,000 things. On getting honest feedback… Once you get into a certain position of leadership, an ecosystem forms around you to make you feel good. The larger the organization, the more dangerous that is. You have to actively fight it, which can mean giving voice to a heretic or encouraging debates that may make people a little uncomfortable. Otherwise, you’ll always have folks telling you that everything is great—even if it’s not. People are smart; they actually know what’s happening in your organization and they’re waiting to see if you know it. When you demonstrate that, it’s actually very liberating for them.

Who: David Cote, Chairman and CEO, Honeywell Background: A veteran of first GE and then IT-industry supplier TRW, David Cote joined a floundering Honeywell in 2002, not only leading the company back from the brink, but turning it into a definitive, millennial success story. On communicating… When I got to Honeywell, the business hadn’t been doing well and three of the last four general managers had been fired, so I stood the risk of being next. I assumed that everyone on the leadership [team] knew that things weren’t going well. During one of my first weeks there, after a full-day event of presentations by senior leaders, I asked the union leader, who was there, what he thought and he said, “I don’t know what you’re complaining about, it all sounds pretty good to me.” That night, I spent three hours writing my comments for the next morning, when I absolutely blistered the business, saying, “We need to face facts. Here are the facts.” I was fully prepared for everyone to hate me; but afterward, employees came running up to say, “It’s about time someone told the truth here.” That was a huge insight for me, that people think that just saying everything is great all the time is how you maintain morale, but it’s not. On fostering communication… As a CEO, it’s more important to be right at the end of the meeting than it is to be right in the beginning of a meeting. If you approach it that way, it causes you to run the meeting a hell of a lot differently than [how] you used to [do it]. Because when you start in an organization, and as you’re moving up, it’s important for you to have the answer and to convince people and bring them along. But when you go into a [leadership] job, you don’t know all the facts, and the only way you can flesh it out is for people to have a discussion about it and for you to be almost a bystander or facilitator of the discussion. That’s tough to do, but you make better [more informed] decisions as a result.”

Favors from Florida Under Governor Rick Scott’s leadership, Florida went from freefall to fiscally sound, paying down $3.5 billion worth of debt and bringing unemployment from 11.1 percent to 3.5 percent. How did Scott do it? As he told CEOs, “When I came into office I said, ‘We’ve got to create a state where businesses can prosper better than anyplace else.’ To do that you’ve got a right-sized government, pay down debt, get rid of regulation when you can and cut every tax you can so your businesses can prosper better than businesses anywhere in the world—and that’s what we’ve tried to do.”

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(From left) CE’s J.P. Donlon, Alliance Data’s Ed Heffernan, ForeSee’s Larry Freed, TiVo’s Tom Rogers

Panel: What Every CEO Needs to Know About Data Analytics Three data analytics experts weigh in on what collecting and deciphering customer intelligence can do for your company—and what it can’t. Don’t Over-Delegate Who: Tom Rogers, CEO of TiVo What: Operating at the center of a continuing convergence of traditional media, technology and advertising, TiVo’s 2012 purchase of TRA, an audience research tech firm, expanded its repertoire as a provider of viewer data. On getting started: An important exercise for every company to go through is, “How do my customers benefit from what I know? And how can I help them with their business in a unique way, by virtue of the insights I have, that they wouldn’t otherwise be able to ascertain on themselves?” That filter of collecting and using data both for driving your own product—but also in terms of enabling a distinctive relationship between you and your customers—is a very important way to approach it. On the No. 1 mistake in adopting analytics: Over-delegation to the head of IT or the CIO by a CEO who says, “We’d better do something, I don’t really know this area, but the head of IT sure does. Let me hand it over to them.” If you do that, you will get back a big-plan architecture of how to over-engineer something—similar to the NSA monitoring 300 million phone calls to get 300 good leads a year on terrorist accounts. CEOs have to start from the position of what will be useful. Start with, “Here’s what I need to know that I don’t know” and hand out the assignment of what you need to engineer to be able to get that, as opposed to, “Come back to me with a great information plan.” We’ve seen, over and over again, money going down the tubes on that kind of process. On privacy concerns: I don’t think we’ve begun to hit the

really tough issues on the privacy front. I think the question around who owns the data—the people collecting it or the people being measured—will get more and more severe. Already, 28 percent of people say they actively take steps to avoid being detected by advertisers. I actually think that understates the number of people who try to do that. With smartphones, we have a billion people walking around with pocket-computing processing power and total cloud connectivity, increasingly using that phone for purchases of all kinds, not to mention searches and social interactions. The amount of data being generated on all of us each second of the day because these devices are always on is just enormous.

Realizing Results Who: Ed Heffernan, CEO of Alliance Data What: A provider of marketing, loyalty and credit solutions, Alliance Data collects and analyzes retail data to help its partners better understand their customers. On analytics ROI: The most successful programs that we’ve seen all have similar traits, which essentially start with understanding who your customers are. You would be shocked to learn that a lot of people think their customers may be one type, when in fact they’re very, very different. To get to that information, what you want to do is get into your transactional data or what your customers are buying from you over a certain period of time. Then, take that transaction-based information and overlay who they are—demographic, psychographic information—to get a very big picture, by cluster, of your customer base so you can go like crazy at your most profitable ones. Not all customers are created equal, so [use that understanding of the various clusters to make sure that you] don’t waste your time spending a lot of money on folks who aren’t profitable. By doing that, your ROI goes through the roof. You learn from these campaigns—each and every time a campaign is run. You refine them, you refine the messaging; and the longer you do it, the higher the ROI. On the buy-in cost of effective analytics: I think the ticket’s a million bucks for a soup to nuts [initiative]. The data,

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itself is not going to be that expensive. The real cost is the analysts and the algorithms that actually figure out what the data are saying—insights like, “This 10 percent of my customer base drives 8 percent of my profits, so I need to pay attention to them” and, “What’s that one extra thing that will get them to purchase one extra piece of whatever I’m selling each year?” Everyone has a tipping point, and the idea is to identify the tipping point, which could be different for 100,000 different segments. The data is probably 10 percent of your costs, analytics is probably 80 percent and the final 10 percent is what we call the omni-channel distribution system, which is a fancy way of saying that understanding the messaging you need to deliver to your customers doesn’t do any good if they never see it. You need to be able to take the data, make sense of it, get the insights, wrap it in marketing and then find the appropriate channel to reach these people—whether that is direct mail, traditional media or social media. On the need for commitment: You’re either in this or you’re not. You can’t wing it and you can’t go with, “Yeah, I’ll give this one a shot or that one a shot, or someone told me I bought a software package, so I’m all set.” This is a long-term, expensive commitment. It’s not a marginal piece of your marketing budget or your advertising budget. This is more and more going to be the focus of your marketing and loyalty efforts. If you want to get into it, you’ve got to jump in with both feet and make whoever is running the data-driven marketing analytic piece of the budget an equal to whoever was running general brand marketing. Otherwise, [your effort] gets relegated to the back office and it will fail.

Leverage What You Have Who: Larry Freed, CEO of ForeSee What: Headquartered in Ann Arbor, Michigan, Foresee employs customer-experience analytics to deliver customer-satisfaction measurement; proven, predictive analytics; usability analysis and rich,

observational data. On making the most of analytics: You can get better by just being focused on it. Every company has data of some sort lying around. The first focus is internal. In every aspect of your business, start to ask people to bring data to the table, not just what they think, but actual data. Hiring smart people with analytics backgrounds helps a great deal. Don’t put them in a corner of the building. Make them be part of the key team. Make sure that each of your executives, who reports into your management team, uses data and holds his or her people responsible, as well. It’s easy to forget about that stuff because we’re all smart people, but sometimes we’re not as smart as we think we are. Changing that mindset will actually change your organization more than anything else. If you start bringing [in] a bunch of outside vendors and you’re not committed to [full use of data and analytics] within your organization, it will fail, in my opinion. You’ve got to start embracing it and saying, “We’re going to use this data to help us make decisions and change the way we do business.” On getting started: As a general rule, don’t freak out. You’re not missing the boat at this point. This stuff is all new. It’s not sas if you are so far behind [that] you can’t catch up. I find that a lot of people get so caught up in the hype that the fundamentals of the business—of what you are trying to do—gets lost. I would caution anyone against a response like, “I read this in the paper; oh my gosh, I’ve got to have it” and focus more on building out a sophisticated, yet basic at the same time, data strategy that will help you better understand your clients and who you want to go after in terms of prospects. You’ll need to give up information from your systems about what people are buying, what people are talking about [and] what they’re interested in. Get some data from the outside and usually you can find a company that can handle all of this for you. Make a commitment; and two or three years from now, I bet you’ll look back and say, “Wow, I don’t know how I lived without that.”

Digital Disruption Must Start At The Top James McQuivey, principal analyst at Forrester Research and author of Digital Disruption, gave CEO2CEO attendees a sneak peek at some of the digital tools and platforms raising customer expectations and what their companies can—and must—do to participate in digital disruption.

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Donlon with Nestlé Waters’ Kim Jeffery

Case Study: Leveraging Logistics, Networks and Supply Chains for Competitive Advantage How Nestlé Waters’ overhaul of supply chain practices revolutionized a product category and outflanked powerful competitors in the beverage industry. In 1980, the bottled water category accounted for a paltry $250 million; today, Nestlé Waters alone is a $4.7 billion business. Kim Jeffery, chairman of Nestlé Waters, recounts how reinventing the packaging, processing and distribution of water transformed his company into a major player in the bottled refreshment marketplace. In 1980, bottled water was mostly sold as tap water replacement. If you had really bad water, you might get a five-gallon jug delivered to your home or pick up a gallon in the household cleaning aisle. We decided that the U.S. market for water had the potential to be bigger, so we set about purchasing all of the 100-year-old assets of spring water companies in North America, Poland Spring being the first of them. By 1987, I had hit upon the notion that we should have our bottled water available in [single-portion sizes] to compete with soft drinks. It took us two years because we didn’t make any of our own packaging and the soft drink bottle manufacturers wouldn’t make anything for us. But the day that we put them next to carbonated soft drinks and juice products in convenience stores the business started to take off. We reinvented ourselves as a refreshment beverage, rather than a tap water replacement, and that’s when the supply chain story began because that’s when we started growing fast. We [knew that] what companies like Coke and Pepsi do really well is direct to store distribution and muscling everybody out of the way on the shelf. However, they don’t do manufacturing particularly well, because if you have 400 SKUs, you’re constantly changing over, which means your equipment is a little slower and you’re shipping to regional warehouses and then on trucks to stores. In 1994, we decided that we needed to be vertically inte-

grated as a manufacturer of packaging, which nobody did in those days. Everybody bought their packaging from a middle man. Today, we produce 20 billion bottles of water a year inside our plants. The soft drink companies didn’t do any of this stuff. They make some of their own water bottles now, but not all of them. So if you put together the advantage of using a warehouse system, making your own packaging with dedicated lines that make 1,200 bottles a minute versus 600-a-minute for soft drink manufacturers, we have a disruptive business model with a much lower cost to market than Coke and Pepsi. That allowed us to survive when they got into the bottled water business and started lowering the price on us. They didn’t understand our real cost of manufacturing, because they’d never been inside our plants. We’re maniacal about cost. For example, we started using cardboard trays for our cases, then we went to pads, and now we’re reconfiguring to go to [eliminate] corrugated on the bottom of the case or a “barefoot case.” Our caps used to be white, then we figured out that just by taking the pigment out of our caps we would save $1 million dollars. We constantly do this. To make $500 million a year, we have to sell a billion cases of bottled water, because we make 50 cents a case. Coke and Pepsi would rather not sell water if they’re going to make 50 cents a case. It costs us 70 cents per case to get our product to our customers. The soft drink companies still take $3 dollars a case. Four years from now, bottled water’s going to be the No. 1 beverage in America. Today it’s No. 2, but we’re gaining six percent a year in volume increases, and soft drinks are declining two or three. It’s just a matter of time before the lines cross.

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The Power of Procurement A Q&A with Nicolas Reinecke, an expert principal at McKinsey & Co. and author of Procurement 2020. Why is the supply chain system so critical for today’s CEOs? Over the past 30 to 40 years, the ratio of external value creation in companies went from about 45–50 percent to close to 80 percent on average, for the Fortune 500. That is, about 80 percent of the value your company creates is created outside of your own four walls, by employees working for your suppliers. An obvious example is when you buy a basic raw material, such as PET and turn it into a bottle, but sometimes it can be very complicated. For example, if Boeing has two or three components of, say, an engine crucial to its business, it better make sure to have a supply chain that works for those particular parts. This becomes increasingly true for cases whereyou’re buying intellectual capital, research and development, rather than a physical asset. The fact that it makes up 80 percent of your value creation, means that as a CEO, there’s no way that you can afford to neglect it. Why is the role of procurement often overlooked? In a more complex business environment, like a manufacturing environment, for example, procurement management often gets lost in technical features, product features and innovation, because those are just more sexy, particularly in businesses that aren’t under a great deal of margin pressure. In those cases, successful CEOs tend to delegate this cost watchdog role to the person that, in principle, owns this 80 percent external value creation, typically the chief procurement officer. That can be a very successful business practice, having that individual be the watchdog of the penny. How does having a global procurement infrastructure, many different touch points, change the order of magnitude? That the world is global, your customers are global and that, potentially, suppliers are global, is a fact of life. We can pretend we can focus on maybe Europe, India and China, but the reality is that two weeks ago the number of mobile phone subscribers in Africa actually exceeded the number of mobile phone subscribers in the entire North American continent, which shows that the world is growing in places where we might not necessarily be looking. Running a supply chain across all of these places is not a trivial task, but there is such a thing as economies of skill. In other words, a handful of rock stars in a department can make or break the function. They can lead a global organization, but they have to have the ability to leverage themselves across different countries. It’s a very, very difficult thing. Few companies that do this really well. Can you give us an example of a company succeeding at this globally and how they go about it? We see Exxon-Mobil as the Toyota of procurement. They have two things that work well. First, they have a cost mindset in an industry that typically is not necessarily cost mindful. With that mindset, if you find out that 80 percent of your costs go to external

McKinsey & Co.’s Nicolas Reinecke

parties, it becomes front and center on the CEO’s agenda. Second, they have a relatively military command and control structure that they run the business with, and the two things together are just a perfect marriage. Have any companies used procurement to transform the fundamental nature of their business? P&G is an interesting example. Again, they have the cost focus, but at the same time, they decided that they want to have 50 percent of their products or the innovation of these products, to come from outside sources. They gave a slogan—“not invented here, proudly found elsewhere”—to the procurement function and said, “Run with it.” Many of the P&G products that you consume today actually stem from innovation that the procurement function found and introduced into the organization. That was a pretty smart way of saying, “Let’s take this cost focus, that’s the top level thing that we want to do, but let’s give it a little bit of flavor. Let’s give it a little bit of additional strategic advantage.” What advice can you offer business leaders about trying to get procurement right? Three things are important. No. 1, the procurement function is a bit of an elephant graveyard. Whoever doesn’t make it anywhere else ends up in procurement. There are exceptions, but not many. So, realizing that this is an important productivity lever and then going after it and having it in your center, would be the first thing. No. 2, if you look at where some companies are today in procurement, you’ll see that sometimes the gap is significant and the journey that it will take to close the gap is significant as well. So any change you initiate will take years to execute. If you start changing today, don’t ask yourself how you can catch up to where folks are today, ask yourself how you can catch up to where people will be in a few years’ time, because the world is not going to be the same in three years. Make sure that you’re actually aiming for the right target. No. 3, realize that this is a marathon, not a sprint. You can go for short-term cost savings by reducing the thickness of your plastic or printing three colors instead of four, but the real name of the game is finding something you can stick with, do over years to come and let slowly grow. MARCH/APRIL MARCH/APRIL 2014 2014 / / CHIEFEXECUTIVE.NET CHIEFEXECUTIVE.NET / / 4141

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Technoserve’s Rajiv Tandon, EisnerAmper’s Jerry Ravi and EisnerAmper’s Peter Bible

Leveraging Intangible Assets:

How to put knowledge to work in the 21st century Your company may be known for the tangible products or services it delivers, but those likely account for just a fraction of what your company really brings to the table. An estimated 70 percent of the value of the average company is intangible, depending on upon such assets as the ability to innovate, maximize intellectual property and exploit proprietary networks. The core goal of the smart economy is to take these invisible assets, which competitors cannot easily duplicate because they are unique to one’s company and culture, and monetizing them for growth. Intangibles are the new raw materials of the 21st century, agreed attendees at a roundtable cosponsored by advisory and CPA accounting firm EisnerAmper, in partnership with Chief Executive magazine. “You look at what was considered to be an intangible back in the ’50s, ’60s and ’70s and then into the Millennium, and it’s really gone from—I won’t say bricks and mortar, but from things that are more tangible toward more and more to what I call ‘the ether,’” said Peter Bible, a partner with EisnerAmper. Bible pointed to the grocery chain Wegmans as an example of gold to be gleaned in the ether. The retailer turned their shopping carts into valuable tracking devices with GPS-like technology in the handles. The technology can be used to identify high-traffic areas of the store and to help suppliers with shelf selection, driving higher sales. “There’s a company that took something that was probably never on anybody’s radar screen as an asset—a shopping cart—and turned it into one,” said Bible.

Key Takeaways • Intangible assets, such as innovation, intellectual property and internal networks are the raw materials of the 21st century • To maximize and monetize a company’s hidden assets, CEOs have to create a culture of smart risk-taking rather than fear • Managing risk effectively is a key intangible asset that is difficult to quantify but disastrous to go without

In some instances, simply understanding changing consumer needs and making the necessary changes to cater to those needs can be an invaluable, intangible asset. Former Home Depot CEO Robert Nardelli recalled a significant change at the home improvement chain that led to much-improved customer service and sales. “The old adage was, once the consumers got in the store, we wanted them to get lost because they would spend more time in there. Fast forward. Time became much more important to people, so something as simple as putting up aisle signs, so they could get to where they wanted to go immediately” made a big difference, as did the introduction of self-checkout at the big-box store, said Nardelli, founder & CEO at XLR-8, an investment and advisory company. It’s no secret that for services companies, one of the chief intangible assets is the employee network itself, and the innovative thought and creativity that leads to valuable new products and

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services. “We have found that this intangible in our organization is an informal network of people,” noted Rajiv Tandon, CEO of Technosoft. “Most of the innovation doesn’t come through formal HR structures. It comes through that informal network of people who cut across different departments. We are trying to continuously identify those networks and drive all the innovation through them.” One of the ways the company drives that, he added, [is] to formally award outstanding innovation. That’s all part of creating a culture that inspires creativity and cross-network collaboration, said Alex Raymond, Founder and CEO of Kapta. “You also want to make sure that the open door extends to the fact that a lot of people fail, so removing the fear of failure when you’re trying to push the envelope and really kind of move business forward [is essential].” That’s an edge that more nimble 20-person companies have over their 20,000-person, bureaucracy-laden competitors, noted Kirk Tobias, president and COO of Carlton Technologies. “We’re seeing that in our business. We see that our larger competitors maybe don’t have the same drive or the same culture in their organization to really create that value at the end of the chain.” What they may be missing, an intangible, to be sure, is that startup drive that leads to innovation. “The hustle usually creates opportunity. There will be mistakes along the way, but the value really comes from the hustle.” At the same time, CEOs in many industries have to balance their promotion of risk-taking with the need to keep the organization secure. “In the financial services business, the penalty for being wrong, particularly in a consumer transaction, is very high,” noted Jim Deitch, CEO of TeraVerde Management Advisors, a mortgage banking and financial services advisory firm. Oftentimes, the hidden asset is perfecting a process for not getting things wrong, “How does one get a process that [will] get it right 100 percent of the time

Lewis Tree Service’s Fred Engelfried and iSend’s Steve LaBella

and do it efficiently? That knowledge base for providers of financial services that get it right [is] a very big intangible, both in terms of efficiency and in terms of protecting reputational risk.” Managing risk is at least partly a function of having all the necessary information and also knowing what you don’t know, pointed out Jerry Ravi, a partner in the Consulting Services Group with EisnerAmper. “You need to talk to stakeholders, regulators, auditors, everybody around you. What are the key data points that we could then use and mine? Technology has evolved in a way where we can be much more nimble.” It takes the right CEO to set the tone, creating a culture that values both prudence and smart risk-taking. Mitch Kemp, managing director of Stage-Gate International’s USA Value Center, recalled a time early in his career working for a large financial services company, where “the fear of failure was so large that kind of nothing ever happened.” It took a change at the top—a new CEO coming in and resetting the cultural tone. “He would say to some of the younger product development people, ‘I’d rather give you money and have you lose it—but don’t—than not give you an opportunity to grow through failing and redoing things,’ that cycle that a lot of the future innovation comes from.” MARCH/APRIL 2014

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Nestlé Waters’ Kim Jeffery, Senn Delaney’s Jim Hart, Nationwide’s Anne Arvia

How a CEO’s Focus on Organizational Purpose Elevates Performance Engagement—or more importantly, the lack thereof—is a perennial issue for American businesses. Roughly 50 percent of the country’s workers are not engaged at work, according to results of Gallup’s The State of the American Workplace survey. Worse yet, another 20 percent are actively disengaged. To get a sense of the potential impact of these impersonal statistics, imagine 20 percent of your employees roaming the halls spreading discontent and another 50 percent showing up for work intending to simply put in the minimum required of their jobs and go home. Sound like a pretty dismal scenario? Yet, that’s exactly what’s going on at most workplaces in America—and a simple reason is at the crux of the problem. To feel passionate about both their work and the company that employs them, employees need more than defined responsibilities and goals; they need the kind of inspiration that comes from alignment around a clearly defined purpose—one they can feel passionate about. “Inspiration is, in a large part, rooted in a sense of purpose, about serving something larger than your,” Jim Hart, president and CEO of Senn Delaney, a Heidrick & Struggles company, told

Key Takeaways • Does your organization have a clearly defined corporate purpose? • Do your employees understand the “why” behind what your company does? • Do they understand their role in achieving it? • Are you willing to make the hard decisions necessary to remain true to your organization’s purpose? CEOs gathered for a recent Chief Executive roundtable held in partnership with Senn Delaney. As an example, Hart pointed to SunEdison, a company that builds and operates solar plants around the world and defines its purpose as to “Transform Lives Through Innovation.” To illustrate the way that purpose plays out, the company put together a video about the impact that bringing electricity to an impoverished village in India had on the local community, from giving children the light they needed to study in their homes to enabling residents to feel secure walking home at night.

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“SunEdison embarked on the process of defining their purpose and, as a result, their values and how they were going to align all of that,” explains Hart. “In six months, they saw a 26 point improvement on strategic alignment, a 17 point improvement on employee engagement, a 12 point improvement on agility and innovation, a 16 point improvement in collaboration, a 19 point improvement in ethics, a 19 point improvement in positive spirit of the organization and a 12 point improvement in [financial] performance. Their CEO has said that ‘probably the two greatest things that have occurred are that the level of energy and alignment and of performance inside the company are off the charts.’”

Omnicom’s Tom Harrison

The Purpose Problem Unfortunately, identifying a purpose isn’t as straightforward as it sounds, noted several roundtable participants. Tom Harrison, chairman emeritus of Omnicom, recounted a conversation with a client during a branding exercise during which board members were asked three questions and had no trouble with the first two: “What does the company do?” and “How do you do it?” The third—“Why do you do what you do?”—stumped them. “They couldn’t really articulate an answer,” says Harrison. “So I said, “Until we can get to the ‘why’ we can’t even begin to look at the branding process, because you need to understand the purpose for which you exist. It’s hard to do, but when you get it, like this company [eventually] did, it is really a home run.” For many companies, “purpose” is defined at inception. “Often, the purpose of an organization is its story,” noted Laura Garnett of Garnett Consulting, who cited Starbucks and Zappos as examples. “Why was the company started? Who was the

founder? What was the founder’s passion—his or her personal story—and then that lives on as the purpose of the organization for the next CEO and the next after that. When companies start without that original purpose or story, then they lose out because they have to manufacture it later on.” In a similar vein, companies that start out with a clearly defined purpose often lose sight of it over time. In such cases, the company often begins to flounder as employees lose a sense of direction, as well as the incentive necessary to drive success. “Sometimes you can bring back the purpose, the story of how they started, and rally the troops around the individuals that are still there that are very focused on that,” noted Len Tannenbaum, CEO of the investment firm Fifth Street Finance. In other cases, it is employees themselves who can most effectively identify the purpose that they can rally around, noted David Deutsch, president of David N. Deutsch & Company. “I ask my people,” he said. “I say, ‘So if we were going to go out of business tomorrow what would people miss the most?’ And then that gets people thinking [about] what the secret sauce is. That’s how we come about it.” For John Meyer, CEO of Arise Virtual Solutions, that conversation itself can be invaluable. “The process of going through and getting everyone to create that idea, that single purpose, whatever it might be, is as important as the message itself,” he said. “If it’s just a ‘Here’s what it is’ from above, then you’ll find that it withers away over time. The CEO just doesn’t have time to keep saying it over and over and hoping people adopt it.” Defining a purpose is just the beginning. As a company grows and evolves, hanging onto that sense of purpose despite external—and internal—pressures is a constant challenge for leaders. “I founded my company for a reason, and I don’t want that to change,” says Shane Mayes, CEO of Onshore Outsourcing. “We’re growing pretty quickly, and we have smart managers coming on board who are way smarter than me, and who find more efficient ways to make money. But those are not always consistent with why I created the company and what I’m trying to do, which is something I’m trying to never lose. Our purpose, our reason for existence, has helped us transcend different evolutions of our business model already, and I think it can go forever. That’s my dream.” While the road to establishing an organization’s purpose, aligning employees behind it and sustaining that alignment over time can be arduous, the benefits are well worth the journey. “A clear and compelling, heartfelt purpose becomes a magnetic north to align people around, and then you all move in the same direction,” explains Hart, who notes that companies that have a defined and well communicated purpose enjoy many benefits, including improved financial performance, customer trust and brand reputation. “A clear purpose inspires employees—increasing their engagement, satisfaction and productivity—reduces turnover and attracts the best talent.” MARCH/APRIL 2014

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ECONOMIC DEVELOPMENT

T R O P E R L A N

REGIO THE

T S A E N O RT H

A state-by-state look at what the Northeast has to offer businesses. By Warren Strugatch How well is the Northeast doing? Its $3 trillion economy, fueled by the Knowledge Economy centered on the cities of New York, Boston, Philadelphia and Washington, D.C, and the heavy lifting provided by still-vital manufacturing prowess, produces some 20 percent of the goods and services. Much of America’s wealth is produced here, and much value accrues here. Three of the nation’s wealthiest states, based on per capita income are here: Connecticut, Delaware and the territory of Washington D.C. Of the country’s 75 wealthiest counties by per capita income, 44 lie in the Boston-Washington corridor. But look a little closer, and the picture turns less rosy. In 2012, the last full year for which economic growth is available, U.S. GDP grew 2.5 percent. It’s notable that every one of the 11 states that constitute the Northeast registered below-average growth. Maryland topped the regional rankings at 2.4 percent; the giant economies of New York and New Jersey both limped along at 1.3 percent; and Connecticut, alone among the 50 states, showed a negative GDP of -.1 percent. Led by aggressive governors doubling as their states recruiters-in-chief, Texas and Florida—as well as other sun-belt

states—have been siphoning off a substantial chunk of the region’s economy, luring a steady stream of corporate chiefs to expand or relocate in warmer climates. Not surprisingly, much of the nation’s job-creation activity has taken place away from the Northeast. When Bright.com, an aggregator of job postings and resumes, calculated which cities offered job hunters the most opportunities, greater Seattle topped the list. Greater Schenectady, alone among Northeastern cities, made the top 30. Chiefs in the Northeast are increasingly beset by wanderlust, eyeballing states and regions around the country—and sometimes overseas—for expansion opportunities, or to relocate headquarters and operations entirely. It’s not just incentives and subsidies that draw them out of the region. Chiefs complain about such issues as aging infrastructure, punishing climates and housing costs that deter new or relocating employees. Tax rates are, and have long been, an irritant; of the 10 worst states on the Tax Foundation’s state business tax climate index, five are in the Northeast. Add to that such factors as unionization and government bureaucracy, and the pace of out-migration comes as no surprise.

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How The States Stack Up Grading: A = EXCELLENT B = GOOD C = FAIR X= NONE Rank Best/Worst States 2013

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

Right to Work State

Quality of State Service

HQ Incentives

Jobs Incentives

Green Incentives

New Hampshire

$38,119

8.5%

Delaware

54,871

6.7%

Maine

42,121

8.93%

Rhode Island

45,381

Vermont

43,015

8.5%

Maryland

40,057

8.25%

Pennsylvania

43,935

9.99%

Connecticut

45,012

New Jersey

46,925

Massachusetts

39,133

New York

38,921

7.1%

45,832

9.975%

Washington, D.C.

(4)

(2)

(3)

C (1)

(5)

(3)

C B

(1)

A (1)

B A

1 Programs and incentives target restricted upstate locations 2 Business processes have been streamlined 3 Reflects implementation of NJ Opportunity Act (2013) job creation, expansion and relocation incentives 4 Businesses in NYC face additional unincorporated business tax of 4% on pass-through entities and sole proprietorships; corporations pay 8.85% general corporation tax 5 First Five program augments and combines Connecticut incentive and tax credit programs to encourage job creation

Many of the Northeast’s chief appeals—as a location for “This is testament to our history as an economic powerhouse. headquarters, for access to capital, for access to technological We’ve always had the talent and the capital and we’ve done innovators and as a gateway to export markets—have dimin- well. We’ve done very well. As a result, perhaps we’re a little ished in recent years. Other regions have caught up and, in more complacent, a little less scrappy.” some cases, edged ahead. Yet, technology companies continue Often criticized for handicapping their own employers by to move their headquarters to New York, Boston and Phila- dint of heavy taxation burdens, sluggish permitting processes, delphia, observes Dennis Donovan, head of worldwide site and overly zealous bureaucratic processes, state governments selection services at Wadley-Donovan-Gutshaw Consulting across New England and the Middle Atlantic states increasin Bridgewater, New Jersey. “The Northeast is one of the few ingly market themselves, without irony, as business friendly. areas in the country that offer companies a global platform All of the Northeast states have developed economic revitalizafor conducting business,” Donovan says. “Given supply-chain tion plans over the last several years, intended to help startups demographics, there are more and more regional suppliers” for get off the ground and to deter established businesses from whom a Northeast location can mean meaningful reductions entertaining the offers of roving economic development teams in fulfillment times.” He adds, however, that, “unless you are from other states and, increasingly, other countries. serving a regional market, and have a compelling reason to be Karl Seidman, president emeritus of the Northeast Ecohere, it’s very tough to compete here.” nomic Developers Association and a senior lecturer on urban The region’s historically high tax burden, once justified planning at M.I.T., contends that the region’s governors have by superior infrastructure, arguably better educational sys- become increasingly solicitous to business. “There has been tems and more expansive government services, have become quite a lot of attention over the last few years on retention of increasingly archaic and onerous. The Tax Foundation’s existing business and attraction of new businesses,” he says. annual State Business Tax Climate Index names New York “The Northeast has a lot of assets including its skilled and New Jersey the worst and second-worst states, respectively, work force, its university and public school systems and the in the country ranked by business tax. Of its 10 lowest-ranked opportunity to live car-free lives in walkable urban centers,” states, no fewer than six are in this quadrant. he continues. “Governors in every state know their political “The Northeast is the most competitive marketplace in the fortunes are tied to how well the state does in terms of business world, bar none,” says Thomas Stringer, a New York-based site retention and job creation. They want to get it done, and they selection consultant and principal at Ryan, a tax advisory firm. want to get it done right.” MARCH/APRIL 2014

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ECONOMIC DEVELOPMENT

New Hampshire (No. 26): Gaining Ground

Rhode Island (No. 37): Taxing Matters

Top-ranked by Chief Executive readers in the Northeast, New Hampshire has historically functioned as an extension of the Greater Boston area. The Granite State has lagged behind Massachusetts in post-recession economic recovery; only now is it regaining all the jobs lost in the Great Recession. Manufacturing productivity continues to grow, although hiring is, and is expected to remain, sluggish. Fastest growth will take place in business services, leisure and hospitality, education and healthcare. New Hampshire’s lack of sales tax has burnished the state’s reputation for being anti-tax. The Tax Foundation ranks it 7th lowest in tax burden in the country and 8th in its State Business Tax Climate Index. New Hampshire spends upwards of $39 million a year on business incentive programs, the most popular being corporate income tax credits and cash grants.

Rhode Island continues to lag the rest of New England in economic recovery. Growth of gross state product remains tepid, and unemployment is still high at 9 percent. The New England Economic Partnership forecasts “moderate” hiring over the next few years, paced by job hiring in construction, financial services, office services, leisure and hospitality, education, healthcare and technology. Rhode Island’s 7 percent sales tax, second-highest in the U.S., handicaps retailers and burdensome estate taxes hasten out-of-state retirements. The Tax Foundation ranks Rhode Island 6th highest for tax burden out of 50 states, and ranks it 46th in its State Business Tax Climate Index. Rhode Island spends over $356 million annually on incentives, according to The New York Times. The most popular programs are sales tax refunds and corporate income tax credits. Food companies are the top recipients.

Delaware (No. 27): A Pro-Business Legacy

Vermont (No. 39): Population and Labor Force Declining

Job growth continues to edge forward at under 2 percent annually, while the unemployment rate seems stalled at 7 percent in Delaware, where more than half the nation’s publicly-traded companies are incorporated—courtesy of the state’s pro-business corporate law. Dominated by companies owned or controlled by the DuPont industrial family, the state’s $66 billion GDP is driven by banking, chemicals, pharmaceuticals, technology and healthcare. Increased worker compensation costs darken prospects in the construction industry. The Tax Foundation ranks Delaware’s tax burden 20th lowest in the U.S. and ranks it 13th on its Business Tax Climate Index. Delaware spends over $43 million per year on incentive programs, according to The New York Times, predominantly cash grants, loans and loan guarantees, as well as corporate income tax credits. Top incentives go to the finance industry.

Maine (No. 35): Job Growth Continuing Maine’s chief industrial products are paper, lumber and wood products, electronic equipment, leather products, food products, textiles and biotech products. Key employers include shipbuilders and construction firms. Maine assembled four consecutive quarters of positive job growth in 2013, the first year that’s happened since 2008. Job growth is expected to continue this year and next at the rate of about 4,000 new jobs annually. The Tax Foundation ranks Maine’s tax burden 9th highest in the country, and ranks the Pine Tree State 29th in its State Business Tax Climate Index. Maine spends over $504 million per year on incentive programs, according to The New York Times, primarily sales tax refunds and exemptions. The lion’s share goes to manufacturers.

Energy, food, forestry and transportation are Vermont’s key industries. Vermont’s labor force and its overall population declined last year, deepening concerns of local business leaders. The New England Economic Partnership forecasts economic growth in most sectors except government through 2017, with construction, leisure/hospitality, business services and natural resources adding jobs. The Green Mountain State spends over $407 million per year on incentive programs, according to The New York Times, primarily sales tax refunds and exemptions. The top recipients are manufacturers, followed by agricultural interests.

Maryland (No. 40): Regulation Rising Heavily reliant on federal government spending, Maryland’s economy suffered from federal budget cutting and other effects of sequestration last year. Sector growth is led by transportation services, concentrated on the Port of Baltimore and connected intermodal services. The Free State is also a major center for life sciences research and development, home of the country’s fourth-largest biotech cluster. Administrative services, largely dependent on the federal checkbook, employ large numbers. Regulatory and tax changes have added complexity and increased tax bite, according to the Tax Foundation, which ranks Maryland 15th best in the nation, and 41st in its State Business Tax Climate Index. The Maryland Chamber of Commerce is pressing to reduce the corporate tax rate. The state spends over $554 million per year on incentive programs, according to The New York Times. Corporate income tax credits and sales tax refunds are the most popular programs; agricultural concerns are the top recipients.

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CEO PERSPECTIVES:

WHY WE’RE HERE Who: Denise M. Morrison, CEO and President, Campbell Soup Company Site History: Campbell opened its headquarters and operations in Camden, New Jersey, in 1869 and has remained there. In 2007, the company completed a $132 million expansion, adding an 80,000-square-foot employee center and acquiring several adjacent properties slated for development as an office park. Why New Jersey?: Campbell values the access its Camden location provides to Washington, D.C., New York City and Philadelphia, just across the river. The company extolls the region’s transportation infrastructure and proximity to such colleges as Rutgers, the University of Pennsylvania and St. Joseph’s. Bottom Line: “We applaud the efforts of New Jersey state officials to be pro-business. In working with local and state governments, we strongly supported the new economic development reforms in the recently passed New Jersey Economic Opportunity Act of 2013. The economic development incentives and tax credits under the Act will make Camden and the Gateway Office Park we are working to develop adjacent to our headquarters an alluring home for companies.”

Who: Chip Bottone, CEO and President, FuelCell Energy Site History: FuelCell Energy was founded in Danbury, Connecticut as Energy Research Corporation in 1969, operating out of a 72,000-square-foot facility it still owns. The company was reincorporated in Delaware in 1999 and renamed FuelCell Energy. It maintains power-generation plants in nearby Torrington as well as Bridgeport. An additional plant was recently opened in Hwasung City, South Korea. Why Connecticut?: FuelCell Energy has remained in Danbury to tap the “skill set and stability of our work force, about 250 well-educated people.” Bottom Line: “There has been improved communications between government and private industry in Connecticut, not just to save jobs but to create jobs. I talk with the governor and his commissioners on a fairly regular basis. When we had to put people on a shorter work week in the Spring of 2012, for example, they worked with us to pay some of the differential so people kept their benefits. We’ve also had projects that couldn’t get done in the initially specified time frame, and they got certain legislation passed so we could continue and get financing.”

Who: Edward Price, CEO and President, PCI Synthesis Site History: Ed Price founded PCI, a custom chemical-manufacturing company, in 1996, in a 5,000-squarefoot chemical plant in Leominster, Massachusetts. After a 2005 fire destroyed the plant, the company moved to an acquired 70,000-square-foot facility in Newburyport. Why Massachusetts?: Price built his company locally to tap over 20 years of chemical development and manufacturing experience he’d obtained at other companies in metro-Boston. The region’s strong cluster supports a deep specialized labor pool and provides valuable networking opportunities. Bottom Line: “Our main advantage is our location and being within Boston’s huge Life Science cluster. As the FDA has made the regulatory environment more stringent, communication with clients has become more important. We’re active in the Mass Biotech Council and meet often with clients, prospects, investors and collaborators. There’s a huge amount of outsourcing in this industry, and we’re part of that.”

Who: Mike Granby, President, Red Lion Controls Site History: Red Lion Controls was founded in York, Pennsylvania in 1972. The industrial-control manufacturer company has acquired companies in New York, Alabama and St. Louis and consolidated them in York, employing about 200 people. Why Pennsylvania?: Competitive labor and fixed costs, large engineering labor pool and good logistics. Bottom Line: “There are several advantages to manufacturing in Pennsylvania. Real estate and overhead costs are very reasonable; we are able to get very competent staff for manufacturing and engineering. Engineers tend to stick around without the churn of Silicon Valley. As for logistics, we can ship in and out very easily. We do an awful lot of next-day delivery and this is valuable.”

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ECONOMIC DEVELOPMENT

Who: Dave Thuro, President, Thuro Metal Products Site History: Dave’s father, Albert Thuro, a machine-tools engineer, founded TMP in 1971 as a hydraulic-fittings manufacturer and aircraft defense supplier. In 1976, the company purchased a 9,000-square-foot manufacturing facility in Amityville, New York. In 1982, the company purchased and moved into its present plant, a 25,000-square-foot building in nearby Brentwood. In 1998, TMP doubled its footprint, expanding into an additional 27,000 square feet of adjacent assembly space. Since 2010, it has invested nearly $4 million in new machinery, equipment and plant renovations. Reason for Location: The company’s roots span over two generations are in the Long Island/New York market. Bottom Line: “We stay in New York because of the highly skilled work force and access to lower-skilled labor. What we do is very specialized and getting entry-level help is very important to us. The region has a large population of Hispanics and we can hire very diligent, hard-working people at $9 an hour. I’m not sure you could hire for less in the south.”

Pennsylvania (No. 43): Unemployment Uptick

New Jersey (No 46): Housing an Albatross

After keeping below the national unemployment rate since the start of the Great Recession, Pennsylvania rose above it in September 2012 and is still struggling to restore jobs lost since late 2007. Hydraulic fracking of the Marcellus Shale formation has created new jobs and generated enormous wealth, as well as produced turbulence and unexpected downsides. Natural gas prices have dropped. The state’s key industries, including Energy, Advanced Manufacturing, Technology and Agri-business comprise a $570 billion economy, sixth in the nation. Education and healthcare continue to expand, and tourism is on the rise. In terms of tax burden, the Tax Foundation ranks Pennsylvania 10th highest in the country and 24th on its Business Tax Climate Index. The Keystone State spends around $5 billion a year in order to attract or retain companies, according to The New York Times. Sales tax refunds and corporate tax credits are most popular, targeting manufacturers in particular.

New Jersey trailed the nation in most economic indicators in 2013. Housing was a sore point; the Garden State has the second-highest percentage of homes in foreclosure than any other state after Florida. Real GDP rose at barely half the national rate. Job growth lags the U.S. pace; employment remains submerged below its pre-recession peak. Even the IT sector has retreated, disgorging 3,600 jobs. Hurricane Sandy destroyed enormous swaths of the state’s housing and infrastructure, providing construction jobs—albeit temporary—in its aftermath. On the bright side, manufacturing exports are growing again. Healthcare, logistics and life sciences companies are posting Help Wanted signs. Geographically, the state’s position between New York City and Philadelphia benefits companies that need access to both markets; it’s also a strong location for national distribution, says incentives advisor Jim Damicis, a senior vice president with Camoin Associates. New Jersey Connecticut (No. 44): Hampered by High Taxes executives gripe about taxes, and the Tax Foundation bears Connecticut’s economy is shrinking. The Nutmeg State ranks them out; the state is ranked second highest of the 50 states, 50th in the Department of Commerce’s Bureau of Economic Anal- and its business tax climate ranks second to last. Gov. Chris ysis. High taxes, budget gimmicks, regulations and unfunded Christie has proposed 10 percent corporate tax cuts and a 10 government pension liabilities exasperate business owners and percent property tax credit in—he has said little on the subject. entrepreneurs across the state. Employment growth post-reces- New Jersey spends nearly $700 million per year on its Grow sion continues at about two-thirds the national rate, set back by NJ incentives program. Grow NJ “is gaining a lot of momenongoing job loss in the finance and insurance sectors, traditionally tum in the business community,” says Adam Tkaczuk, NorthConnecticut’s wheelhouse. The Tax Foundation ranks Connecti- east practice head for business incentives at Duff & Phelps. cut’s tax burden 3rd highest in the country, and ranks the state “They’re tough but fair, and projects are well-funded once you 42nd on its Business Tax Climate Index. Connecticut spends over qualify.” Corporate income tax credits and sales tax refunds $850 million per year on incentive programs, according to The were the most popular incentives; top beneficiaries were print New York Times. Most popular programs are sales tax refunds media companies and biotech firms, according to The New York and exemptions, and corporate income tax credits. Times database. 50 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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VEER

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ECONOMIC DEVELOPMENT

Washington, D.C. (not ranked): Private Pathway Contrary to public image, Washington, D.C., is not strictly a government town; only one out of every six workers is on the public payroll, according to A1Source. Still, many companies depend on government contracts; contractions in federal spending hurt, and last fall’s sequestration kneecapped economic activity. Headquarters to nearly a tenth of the nation’s Fortune 500 businesses, Washington—the nation’s first planned city—also hosts many association headquarters, national law firms and major banks. Other professional service providers are major employers. In recent years there has been growth in Information Technology and Telecommunications. Metro D.C. continues to spread out into the northern Virginia suburbs. M&A dealmaker David Braun moved his office to Tysons Corner in McLean County, Virginia after 15 years across the street from the White House. In three years, “I’ve seen enormous growth in terms of corporate headquarters moving in,” he says. New neighbors include Hilton Hotel Corporation’s worldwide headquarters, and the Gannett Company building is within view. The Tax Foundation ranks the District of Columbia 20th lowest out of 50 states, and 44th in the Business Tax Climate Index.

New Yorkers pay the highest property tax rate in the nation, according to the Tax Foundation, shelling out 12.8 percent of their income to the government. The state ranks dead last in the Tax Foundation’s 2014 State Business Tax Climate Index. New York (No. 49): Transition Time

New Yorkers bid farewell to popular billionaire mayor Mike Bloomberg last November; his successor Bill DiBlasio, a career politician, took office calling for new taxes on the wealthiest New Yorkers. While New York City residents have seen their per-capita income outpace the national rate over the past two decades, upstate residents have fared less well; the Empire State has lagged the nation’s post-recession recovery in recent quarters and the manufacturing sector has eroded enormously. New York’s demographics are troubling. Its population is Massachusetts (No. 47): Federally Focused graying and prone to migration. While inbound migration has Massachusetts’ recovery from the Great Recession has been more than offset outbound, recent arrivals are generally poorer fitful; the Bay State has outpaced the national economy in and non-English speaking; those exiting generally relocate in job growth and real GDP in some quarters, lagged behind in states with lower taxation, reduced regulation and brighter others. The labor market has favored employers, who have economic visages. In terms of business environment, the state’s steadily raised their hiring standards. Knowledge is the high taxes, regulatory zeal and reputation for bureaucratic currency of the realm in Massachusetts, which continues to nitpicking hamper economic growth. New Yorkers pay the highest property tax rate in the nation, graduate a steady stream of some of the nation’s best-educated and top-earning professionals. Key economic sectors are according to the Tax Foundation, shelling out 12.8 percent of biotechnology, finance, healthcare and tourism. Deeply reliant their income to the government. The state ranks dead last in on federal dollars to support its health, defense and higher the Tax Foundation’s 2014 State Business Tax Climate index. In educational sectors, last year budget cuts, tax increases and January Gov. Andrew M. Cuomo announced a $2 billion slate of spending prohibitions sucker-punched the state economy. economic growth and tax reform proposals, calling for slashing Executives grimace at state taxation levels; the Tax Founda- both property and corporate tax rates. The plan would freeze tion ranked Massachusetts 8th highest in tax burden and 25th property-tax rate increases, provide a tax credit for New York in State Business Tax Climate Index. The recently enacted City renters, and raise the exemption for estate taxes from $1 computer and software services tax was slammed as “most million to $5.25 million. The governor also proposed cutting burdensome in the nation” by the Massachusetts Taxpayers the top corporate income tax rate to 6.5 percent from 7.1 percent Foundation. Massachusetts spends at least $2.26 billion per and to eliminate taxes altogether for manufacturers upstate. year on incentive programs, according to The New York Times. A series of business-incentive proposals would tap the brainSales tax refunds and corporate income tax credits are the power of the state’s university system, spur technology-based most popular subsidies. The top beneficiaries are manufac- industries, encourage companies to expand without relocating turers, followed by the energy industry. and encourage start-ups by cash grants. 52 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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What’s New in Economic Development in the Northeast What do you do when you’re responsible for economic development in a region that’s been battered by economic downturns and lagging the national pace of recovery? All 11 states of the Northeast have introduced new economic stimulation plans, programs and policies over the past three years. The programs typically focus on advanced technology, but not always; emphasize mentoring, knowledge-sharing and tactics to tap regional brainpower and networking prowess; seek to integrate federal funding into state and local initiatives; and focus on targeted industries and clusters. Variously, the programs seek to foster greater collaboration between educational systems and private enterprise, streamline government processes, reduce red tape, foster exporting, help entrepreneurs get funded and reduce the tax bite to startups. Others aim to encourage informal networking and mentoring, promote regional identity, or leverage the people-moving power of their mass transit systems. For these programs to succeed, they need to “address their regulatory processes and make government easier to navigate, make investments in their infrastructure and make sure tax rates are not too onerous for business owners,” says Karl Seidman, an Urban Studies and Planning professor at M.I.T.. As past president of the Northeast Economic Developers Association, Seidman oversaw a landmark research survey called, “Innovation in State Economic Development,” which was released last fall, and assessed new state plans. The study is available through NEDA.org. Here are some highlights according to the NEDA.

expanded to provide tax incentives to additional larger companies that create at least 200 new jobs within two years or invest upwards of $25 million. A $250 million initiative called Connecticut Innovations was launched to recruit fast-rising technology firms. The $200 million Connecticut Bioscience Innovation Fund now finances targeted bioscience projects aimed at lowering healthcare costs or improving healthcare delivery. A $50 million allotment new goes to bridge repair and upgrades. CTNEXT provides free growth-advisory services including mentorship by serial entrepreneurs and innovation vouchers worth up to $10,000 for consulting and other business services.

Start-Up New York

Pennsylvania has passed a series of business tax reforms, including elimination of capital stock and franchise taxes, increase in the net operating loss cap, deductions for start-ups and tax simplifications. Its new Small Business Champion Network helps entrepreneurs and startups launch businesses and tap government services, consolidated state loan programs into a single $1.1 billion pool and increased funding for tourism efforts that double as business recruitment. Other programs include Innovate PA, which sells tax deferrals to insurance companies and earmarks revenues to venture funds and biotech incubators. The state’s R&D Tax Credit program was expanded to $50 million, with $11 million earmarked for small businesses. A $12 million Place-Based Initiative called Partnerships for Regional Economic Performance Regions (PREP) assembles economic development service providers across the state to orchestrate hyper-local business matchmaking services. Discovered and Developed in Pennsylvania (D3PA) funds $10 million a year to programs that promote entrepreneurship, increase technology transfer or strengthen communities economically. Research for Advanced Manufacturing in Pennsylvania (RAMP) connects local manufacturers with the technologies and brainpower of Carnegie Mellon and Lehigh Universities. —WS

Start-Up NY deploys incentives and 10-year tax deferrals to stimulate university-linked business investment and start-up activities within designated campuses, mainly upstate. In addition to universities, as many as 20 state properties will be designated tax-free communities and partnered with universities to encourage startups. Employees at Start-Up NY communities will be exempt from income taxes. The state’s long-standing business incubator program will be expanded to include ten new hightech innovation centers. The New York State Innovation Venture Capital Fund will provide $50 million annually for seed and early-stage funding. Tax credits for film post-production have been increased by more than $18 million annually. A program called Global NY focuses on encouraging export deals between startups and overseas markets, while seeking to entice foreign direct investment in the state.

Reinventing Connecticut Connecticut introduced Small Business Express, a $180 million funding effort that offers loans up to $350,000. A subsidized training and employment program allows manufacturers to defray training costs for new hires. The First Five program was

Grow NJ The New Jersey Economic Opportunity Act of 2013 streamlines five existing economic development incentive programs into two: Grow NJ, coordinating retention and incentive programs and job creation strategies and Economic Redevelopment and Growth, a “key developer incentive program.” Both plans focus on cluster development, targeting life sciences, transportation/ logistics, finance, manufacturing, technology and healthcare industries. Revised in 2011, the state’s Business Retention and Relocation Assistance Grant Program, or BRRAG, awards business tax credits and incentives to businesses that create at last 25 new jobs. A $1.75 billion Urban Transit Hub tax credit program waives taxes for projects constructed within nine designated transportation hubs.

Pennsylvania First

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TRANSITIONS

Life After CEO

Eight business leaders weigh in on forging a life after leaving the corner office. By Patricia O’Connell

It’s heady stuff, leading a company. Along with the 24/7 pace, responsibility for thousands of employees and the constant challenges come perks aplenty—often much-

Doug Conant: CEO, Campbell Soup, 2001-2011

deserved and well-earned. But once a CEO leaves, then

Chairman, Avon Products; Chairman, Kellogg Executive Leadership Institute, Northwestern University “I will never go to an ashram; you will never find me on a golf course,” asserts Doug Conant, former CEO of Campbell Soup. While he admits it was “hard to leave” after 10 years as CEO, he was excited to start the next chapter, though he wasn’t sure what it would be. “I didn’t have a plan; I had an intention to contribute to the conversation about leadership,” he recalls. “This was a chance to codify my beliefs and share them more broadly because I believe there is a crying need for improved leadership in the 21st century.” His first step: the best-seller TouchPoints (with Mette Norgaard). He finished the book before retiring, and it came out after he left Campbell. “I went on a media tour for the book, and that was the first step. From there, it all developed organically,” he says. He launched social media platform Conant Leadership, mentors and coaches leaders and now heads the Kellogg Executive Leadership Institute. While he has kept his hand in the corporate world through his chairmanship of Avon, he has no interest in private equity, preferring to create value through “developing human capital and creating more effective leaders.”

what? Whither the support staff, the invite to Davos, the enormous office, the corporate plane (maybe), possibly the under-pinning of one’s ego? As David D’Alessandro, former CEO of John Hancock, succinctly observes: “Your self worth can drop quite a bit when you’re suddenly not that meaningful.” But stepping down from the top job doesn’t have to be a step into oblivion or low self-esteem. For many CEOs, it is merely a transition to the next theater of achievement, allowing them to find new outlets for their drive, ambition, intelligence and curiosity. Below are stories of how eight CEOs have chosen to spend “retirement.” Most are finding satisfaction in mentoring or advising other leaders, either informally or through private equity and/or board service. All share the conviction that they’ve “been there, done that” and are ready for the next stage. 54 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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David D’Alessandro, CEO, John Hancock, 2000-2005 Non-executive Chairman, SeaWorld For David D’Alessandro, retirement came sooner than he expected—10 years sooner. “I assumed I would go out at 62; because of Hancock’s merger with Manulife, I went at 52,” he says. Instead of biding his time on the board and waiting his turn to be CEO of the merged company, he opted out altogether. “To sit on the board of the company that acquired you is like selling your car and sitting in the back seat while someone else drives,” says D’Alessandro. “Still, I was a younger CEO who was essentially without a plan.” D’Alessandro spurned any and all corporate overtures for the next five years: other CEO jobs, corporate board seats, private equity stints. “I decided to reaffirm my personal relationships before I thought about getting back on the horse,” he says. He invested in real estate with one son and in restaurants with another. He wrote his third New York Times best-seller, Executive Warfare, and undertook public service assignments: a search for a new president for Boston University (on whose board he sits), a search for a new police commissioner for Boston and an analysis of Massachusetts’ financially troubled public transportation system. “These projects took the commodity I didn’t have when I was CEO, which was time,” he says. “The compensation for me was not just helping the community but that I was grounded for what came next.”

Tips for a Happy Afterlife 1. Let it Out “Once people know you’ll be stepping down, they can start thinking about how to connect with you, change the relationship or offer you opportunities that were off-limits before,” says Fred Hassan.

2. Stay Focused to the End Doing the best job you can while still at the helm can ease concerns or eliminate second thoughts about leaving. “After you’re gone is the real measure of your success,” observes Jerre Stead.

3. Expect Anxiety “The first day I drove to [The Boston] Globe was the first time in years I had any questions about whether I could do the job,” says Mike Sheehan. “Oddly, it was ok to feel that way.”

4. To Thine Own Self Be True “Think about what you are really going to miss, what you are really ready to give up,” advises Ed Kangas.

5. Know When to Fold ’Em “Don’t get pushed. Go out on top,” urges Jim Turley. Says Kangas: “You have to be absolutely certain you’re ok leaving others in charge and that you’re done being a CEO.”

Bill George: Chairman, CEO, Medtronic, May, 1991May, 2001 (retired as chairman September, 2002)

6. Be Selective

Boards: Exxon Mobil, Goldman Sachs, Mayo Clinic Bill George always anticipated stepping down after 10 years, but to what, he wasn’t sure. “I call it my wilderness experience,” he says of the first six to eight months after leaving the CEO role. He gave up his board seats, traveled, wrote and taught in Switzerland for 16 months, figuring out what he wanted to do. He now focuses his post-CEO life on four pillars: teaching at Harvard Business School (where he created a new course on leadership and corporate accountability and is professor of

7. “You Never Know Until You Go”

Most CEOs only have two speeds: “0 and 100 miles an hour,” says David D’Alessandro. “Don’t start taking whatever comes along, just to get back to 100.”

As much as you think you have things planned and in place, “you never know until you go,” says Doug Conant, quoting his then-young son’s observation about the family’s much-discussed vacation to Disneyland. MARCH/APRIL 2014

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TRANSITIONS

management practice), writing, serving on boards and mentoring/advising both young leaders and CEOs. “It took several years for it to come into place,” he says. “But it’s all built on the vision of authenticity and trying to have an impact by creating more ethical leaders.”

Fred Hassan: Chairman, CEO, Schering-Plough, 2003-2009, Chairman, Bausch & Lomb Boards: Time Warner “I’ve always believed you should reinvent yourself, so I viewed leaving Schering-Plough not as retirement but as reinvention,” says Hassan. You could say he wrote the book on it: In Reinvent: A Leader’s Playbook for Serial Success, he gives his perspective on corporate reinvention, a subject he knows well from his successful stints turning around Schering-Plough, Pharmacia and Pharmacia & Upjohn. For Hassan himself, reinvention meant joining private equity firm Warburg Pincus, which gave him a broader focus than he had as CEO and allowed him to immerse himself in the world of entrepreneurs. There were several companies in Warburg Pincus’ portfolio that Hassan was asked to helm, but he was certain he wasn’t interested in being a CEO again. However, being chairman of Bausch and Lomb did interest him, provided Brent Saunders, a former colleague from Schering-Plough, would run it. “He did the heavy lifting,” says Hassan. “For my part, I enjoy being involved and coaching CEOs where needed.” He admits the new role wouldn’t have suited him 20 years ago. “I was a natural operator, and there is a certain energy and focus required to run the ship,” he says. “As investors, we are there to give advice and support.” A big plus about his new role: “I have been able to see things that have come to fruition, and that gives me a lot of joy.”

Ed Kangas, Global Chairman, Chief Executive Officer,

Deloitte Touche Tohmatsu, 1989-2000 Director of Operations, Prai Beauty Boards: United Technologies (lead director), Tenet Healthcare (Chairman of the Board), IntelSat, Intuit, Hovanian Enterprises “Business is my vocation and my avocation,” says Ed Kangas, who works with three private-equity firms in addition to his board work and serving as director of operations at Prai Beauty, founded by his wife, Cathy. “I look for big challenges, places where I and my fellow board members can make a real difference,” he says of his post-CEO work, citing the turnarounds at Tenet and Intuit as two examples. However, he is quick to credit management and assert that the board’s job is to serve and assist the CEO. “To be an effective board member, you have to have been a CEO, because it gives you the experience and perspective, but it’s also critical that you have no desire to still be in charge,” he says. “You have to have been there, done that and be done with it.” In Kangas’ case, he was ready to leave before his partners were ready to let him go; his retirement was postponed at their request. Kangas says board service gives him the collegiality he would otherwise miss by no longer seeing colleagues and clients daily. “There are some 50 highly intelligent, creative people I get to work with regularly,“ he says. “If I just golfed or sailed, I wouldn’t get that.” The biggest benefit to not being CEO? The chance to be a coach. “When you are the CEO, you have to be the leader. In the board role, I have had much more opportunity to help others.”

Mike Sheehan, CEO, Hill Holliday, 2003-2013 Nine Advisory Boards Mike Sheehan sounded positively sanguine about handing over the CEO seat at Boston-based ad agency Hill Holliday last year. Reflecting on his 10-year tenure, he noted: “Being CEO comes at a price. Some 70 percent of my time I spent doing things I didn’t want to do, even though I did them well.” While Sheehan didn’t have a firm plan in place, he wasted little time relaxing before edging back into the business world. “The phone started ringing pretty quickly,” he says, “and within a couple of weeks, I had eight advisory roles lined up.” In fact, a recent gig advising the Boston Globe on boosting ad revenue landed Sheehan in the paper’s CEO seat—proving that sometimes life after CEO just doesn’t take. “No one was more surprised than I was, but sometimes you can’t say no,” says Sheehan.

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Spousal Support

Life after CEO may also require adjustment on the part of the spouse or partner. As Jim Turley succinctly puts it, “you have to avoid being a pain in the neck at home.” Echoes Fred Hassan, “It’s very important to work with your spouse on this. It should be an easy transition for both.” Bill George points out that both parties may not be going through transitions at the same time; there may be upheaval for one and business as usual for the other. A plus for him in retirement: being able to help his wife, Penny, in her work as an advocate for health-care change. “I can engage with her on that and be in a supportive role,” he says. For Ed Kangas, retirement has given him the chance to ramp up his work with his wife, Kathy, and Prai Beauty, a skin-care company she launched, and flex some of the expertise he acquired at Deloitte Touche Tohmatsu. “I don’t have her entrepreneurial bent, but I’m an operator, so I’ve helped train some of her key people,” he says. “I have the luxury of time now.”

Jerre Stead, CEO, IHS, 2006-2013 Executive Chairman, IHS (since 2000); Salk Institute Board of Directors; Chairman, Banner Alzheimer’s Institute For Jerre Stead, retirement after running seven Fortune 500 companies has meant being able to spend more time on the philanthropic endeavors that have long been a priority for him— including taking on a more than full-time role as Chief Recovery Officer for Colorado in the wake of last year’s devastating floods. “Before, I had to balance time. Now, I’m able to spend more energy and time helping than I could before,” he says. While devoting more time to his favorite causes was always part of the plan, so was travel with his family. Then came the call from Governor John Hickenlooper, less than three months after a planned handover to IHS’s current CEO, Scott Key. “Hobbies, travel [and] everything else have been on the backburner and will continue to be until we get the rest of the flood recovery work done,” he says. Stead credits his wife, Mary Joy, for her support in postponing their post-retirement plans. In fact, Stead always asked his wife before taking on any assignment. “I would say that I serve at the pleasure of the board, but also at Mary Joy’s. I would have stepped away anytime she asked me to, but she never did.” It was no different with the flood relief. “I asked Mary Joy what she thought and she said, ‘We just have to do it.’ So we did,” he recalls. “In hindsight, I called it a God wink because had it been two months earlier, I couldn’t have done it—and I’ve been able to help make a difference for hundreds of thousands of people.”

James Turley, E&Y, Chairman and CEO, 2001-2013 Boards: Citigroup, Emerson Electric, Boy Scouts of America, Catalyst Jim Turley says retirement gave him the chance to think about his retirement. “If you spend too much time thinking about afterward, you’re not thinking about moving the company forward,” he asserts. The timing of his departure was public knowledge, announced some two years in advance, giving companies ample time to dangle other opportunities before him. “People were calling about fulltime CEO jobs, but that’s not what I wanted,” he recalls. Since leaving E&Y as both chairman and CEO—“my view is cut the cord”—he has ramped up his involvement with The Boy Scouts of America and has taken several board seats. “Having spent my whole career in a services firm, I was looking forward to getting on the other side of the table,” he says. “Contributing and learning from fellow board members is very rewarding, and it’s more entrepreneurial.” He hopes to ramp up board work and do some angel investing, while continuing to mentor several emerging and current leaders “informally.” One thing he likely won’t be doing: playing golf. “I live on the best golf course in the state; and since I’ve retired, I’ve played once,” he laughs. MARCH/APRIL 2014

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EVA FOR PRIVATE COMPANIES

EVA AND THE PRIVATE COMPANY

What can “economic value added,” increasingly considered the public company’s preferred performance metric, do for your company? By Russ Banham Every company seeks the perfect measurement quantifying its performance against strategy. Historically, the corporate world has relied on an alphabet soup of acronyms— EPS, ROE, ROI, EBITDA and TSR, to cite a handful—for this guidance, employing these metrics to make key decisions on resource allocation, expense management and incentive compensation. In recent years, public companies have increasingly turned to an alternative method—Economic Value Added (EVA), prized as a more accurate measure of how companies perform for shareholders than many of its peers in the metrics game. Now private companies, as well, are finding favor with this metric. “EVA incents employees to think about investment and capital the same way an owner does because you pay a charge on any capital you use,” explains Tony Simmons, CEO of Mcllhenny Company, manufacturer of the iconic Tabasco brand pepper sauce. “With EVA, managers must look seriously at capital investments and question whether or not they are intelligent investments. Tying their bonus to EVA serves as the incentive.”

How Does EVA Work? Mathematically speaking, EVA is sales, minus operating costs, minus the full cost of capital, multiplied by the money tied up in the company’s net business assets. The metric is essentially an estimate of the profit generated after setting aside a full cost

Key Takeaways • From a performance-measurement standpoint, EVA brings together operations efficiency, asset management and profitable growth into a single score • From a value-measurement standpoint, EVA projections always discount to net present value to guide better decisions • By linking incentive compensation to EVA, managers think and act more like owners of the business • Like other metrics, there is still the risk of focusing more on short-term performance than longer performance horizons • By hewing only to EVA-related information, companies are more likely to cut costs than seize opportunities to grow the business • Any metric promoted by a consulting firm looking for work should raise a skeptical eyebrow

of capital charge on each of a company’s business assets, as well as the returns for shareholders. Therefore, EVA is positive when the company earns a return on capital in excess of its cost of capital. Bennett Stewart, CEO of consulting firm EVA Dimensions and co-inventor of the metric, says that in the past companies like Mcllhenny tended to overlook EVA, believing that the metric didn’t apply to them. However, private firms can use an adapted EVA model, adjusting accounting, tax and cost

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Mcllhenny’s Tony Simmons says that more than 50 percent of his own compensation is tied to his company’s EVA performance. of capital with family preferences and goals. “The main one is for the cost of capital,” he explains. “Private companies, which tend to be smaller and have less access to liquid capital, need to be sure they can finance all growth internally and conservatively. To reflect that, we often set the cost of capital one or two percentage points higher (in the EVA) than for a similar public company.” Another adjustment applies to companies filed as Subchapter S or LLCs. “These are not taxed, but their owners are,” says Stewart, “so we often have to impute a tax in the entity to account for the taxes the owners must pay (in establishing the EVA).” Although EVA is still used predominantly by public companies concerned about their share price in the market every day, private companies are now also finding it useful as a compass in running their businesses. Family-owned private companies, in particular, have found great value incorporating the ratio. (See Sidebar: A Family Business EVA Approach) Stewart argues that EVA improves an organization’s operating efficiency, asset management and profitable growth. When managers are held accountable for EVA, they are theoretically less likely to spend capital like drunken sailors. “They’ll be much more apt to continue to develop capabilities and brand value and not manipulate reported profits,” he says.

Valuing Value Creation John Percival, an adjunct professor of finance at The Wharton School of Business of the University of Pennsylvania, agrees that EVA can provide a clearer measure of success. “We have this unfortunate document called an income statement, and at the bottom of it is this number we call ‘net income’ that shows if the company is in the red or in the black,” he says. “A little black means the company got a little profit, which everyone thinks is good. The ‘unfortunate’ part is that the interest expense is subtracted but not the return to the owners of the business. Just because the company is in the black doesn’t mean it accomplished anything.” EVA, on the other hand, subtracts these returns to owners. “The objective is to earn more than the cost of capital and then measure this over time,” Percival says. “If EVA continues to rise, you’re in increasingly better shape.” Certainly, this is the goal at Avery Island, Louisiana-based

Mcllhenny. Established in 1868, the company is still family-owned and operated, and Simmons is the great-great-grandson of founder Edmund McIlhenny. As a board director in 1997, he urged the adoption of EVA, which he relied on at the time to manage Manitowoc Southeastern, an independent crane distributor, as its president and CEO. “I was young and they didn’t take it up right away; but then, another board member started investigating it and recommended that the board give it another shot,” he recalls. “My cousin Paul (McIlhenny) was CEO, and he decided to implement it in 2000.” Key to the board’s approval was its anticipated impact on compensation. “We believed it took the subjective part out of the bonus potential,” Simmons explains. “The idea is [that] the better you do as a company, the more the bonus. It shouldn’t make any difference where you start, just that you’re moving in the right direction of creating value for shareholders.” His point is that the bonus should reflect true company performance, as opposed to just revenue or profit growth, which can be misleading. Adopting EVA has proven fruitful. “Thanks to EVA, we’re using roughly the same amount of capital (in 2013) that we used in 2000, yet our revenues have doubled over this period,” Simmons says. “EVA has paid off in spades.” EVA also keeps employees honest. “By relying on conventional metrics, CEOs run the risk of employees gaming the system,” Percival says. “Managers can do things in the short run like raise prices on a product to make the rate of return look better, or they might resist expenses that will be important to the organization in the long run like R&D—all to achieve the best metrics to ensure the highest bonus.” By tying incentive compensation to EVA, employees “behave more like owners of the company, focused on the true cost of capital and not tempted by doing things that are good for them compensation-wise but may not [be] in the best interests of the business,” he says. At McIlhenny, employee incentive compensation is hinged to continuous improvements in EVA (or EVA Momentum—see below). The higher people rank in the company, more of their bonuses are at risk to EVA. “More than 50 percent of my compensation, for instance, is directly related to how well this company does under EVA,” Simmons says. “And I’m not complaining.” EVA Momentum takes yesterday’s EVA and transforms it into a ratio—the change in EVA divided by the prior period’s sales. This ratio is essentially the growth rate in EVA, scaled to sales. For example, if sales were $100 million in 2012, and if EVA increased from $4 million to $5 million from 2012 to 2013, the MARCH/APRIL 2014

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EVA FOR PRIVATE COMPANIES

EVA Momentum would be 1 percent. “EVA Momentum is the only performance ratio where more is always better than less,” Stewart says. “It’s positive whenever you cut costs, streamline assets and deliver profitable growth over the cost of capital. But, if it’s negative, watch out. That means the business is turning for the worse and you’re squandering resources that can be better allocated elsewhere.” Leveraging EVA Momentum, companies can grade the performance of distinct business lines for resource-allocation decisions. The ratio also offers the ability to benchmark against peers. For instance, if your company’s EVA Momentum is soaring; but so is the EVA Momentum of your peer groups, then you might just be riding an industry wave and merely holding the line against the crowd. While this circumstance alone might warrant paying managers a decent bonus, it does not argue for the huge rewards that would likely occur when pay is linked to earnings per share or revenues. While EVA advocates can be downright evangelical, some experts caution against overreliance on it. Lynn Stout, professor of corporate and business law at Cornell University, and author of the popular book, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public, recognizes the value of EVA, but cautions that it is not the holy grail. “There is no single, perfect accounting technology guiding companies [on] how best to operate, despite the hot pursuit for one,” she asserts. “All metrics should be viewed with skepticism, as they are generally promoted by consultants. They should be severely deemphasized, used only as tools—not drivers. The idea that EVA is `the one and only’ is ridiculous. It merely gives CEOs breathing room not to consider the more important variables driving a company’s long-term success—like employee engagement and customer loyalty.” Steve Denning, former program director of knowledge management at the World Bank, and author of the book, The Leader’s Guide to Radical Management, also thinks the notion of a single, guiding score is absurd. However, he still finds significant value in EVA. “What I like about EVA is that it measures profit in a way that takes into account the actual costs of producing this profit,” he explains. “In that sense, it marks an improvement over financial profits alone as a guiding metric.” Asked for an example, Denning provides the following: “Say you’re growing the business, but you’re doing it by pursuing a difficult cluster of customers, in which case the costs of generating profit may be greater than the actual benefit. Assuming the use of EVA, the capital would be better allocated elsewhere than in pursuit of disagreeable customers, [as] in a new product or business.”

Colin Brown, CEO, JM Family Enterprises

A Family Business EVA Approach When Colin Brown took the reins as CEO of JM Family Enterprises in 1997, he inherited a sweeping organization with three distinctly different business models. To exert a firmer grasp governing the enterprise, he sought a single, uniform metric, finding it in EVA. “I had read about it and was looking for a way to simplify communications with the business units and ensure [that] we were all operating off the same page,” he explains. “I figured we’d give it a try and brought in EVA Dimensions to implement it in 1999.” Given JM Family’s breadth and size (the private company’s revenue was $12.5 billion in 2013), one can empathize with Brown’s quest. The company then and now includes Southeast Toyota Distributors, an independent distributor of automotive vehicles; World Omni Financial, a diversified financial services company; and JM&A Group, comprising an insurance and extended-warranty business. Obviously, each of these enterprises is distinct—hence, the different operating models. Why EVA though? “The whole underlying premise of EVA is ‘are you creating value or destroying value?’” explains Brown. “We needed to have our eyes open as to whether we were doing things that made financial sense for the long-term benefit of the organization. We wanted everyone to manage their part of the company as if they were its owners.” It’s a common refrain: EVA incents employees to make decisions only in the best interests of the organization. “It’s a far better way of tying manager decisions to company performance,” Brown asserts. “They’re always trying to improve the economic value of their organization.” As an example, he cited a cost-cutting decision recently made by the management in charge of Southeast Toyota Distributors. Customers had always been offered a wide selection of accessories, like a spoiler or fog lights, that could be added to the Toyota and Scion vehicles they were interested in purchasing (Brown equated the offers to “ornaments on a Christmas tree”). While these various add-ons added dollars to the final price, they slowed down the sales and delivery process, which actually ate up money. “We decided there was too much effort and work put into certain products that didn’t really add economic value,” the CEO says. Only a few key accessories, like Internet radio, are offered customers today. Most importantly, by establishing EVA as the entire company’s guiding light, Brown says he is “no longer flying blind. We’re all on the same page now.”

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EVA’s Dark Side Does EVA encourage managers to take less risk in making the big decisions, such as making an acquisition, developing a new product or entering a new market? If the bonus depends on the efficient use of capital, is there the possibility that EVA might steer someone away from making such bets, given the decision’s impact on that person’s compensation? Percival thinks so. “A lot of operational people are engineers who know how to deal with metrics, particularly as they relate to their compensation,” he says. “This could encourage decisions not in the long-term best interests of the company.” Denning shares this concern, noting that EVA may encourage innovations to save money, rather than encourage innovations that add value. “The chance of an innovation to be successful at saving money in the medium-term is probably 90 percent or higher, whereas the chance of an innovation to be successful at adding value over the same period is probably 20 percent or less,” he says. “These percentages tell you that if companies rely exclusively on EVA as the sole basis of decision-making, they will systematically end up cutting costs and ignoring new opportunities to grow the business.” Simmons disagrees, commenting that strong EVA performance and increasing revenues go hand in hand. “I really don’t see how you can sustain strong EVA performance without increasing revenues,” he says. “[In] the first year or two, a lot of ideas bubble up on ways to save money and reduce capital; but once you harvest that low-hanging fruit, it becomes harder and harder to find significant cost savings. We have been an EVA company for 14 years and the bulk of our EVA performance comes from increasing revenue while controlling costs. Isn’t that what a good manager does?”

Stewart concurs. “Smart managers always run a portfolio of innovations—they put multiple irons in the fire, rather than just betting on a risky outcome. A good example is Amazon. They made bets in customer connection, same day delivery, cloud computing, the Kindle, acquisitions like Zappos and way more. And guess what? Amazon’s EVA is going up with the share price, as the other measures like EPS, ROI, margins, cash flow from operations are going down. Properly measured, EVA tells the real story about the value of innovation.” That said, Stewart doesn’t know that Amazon.com actually uses EVA. “We have not worked with them and I cannot say they formally use EVA,” he says, “but their decision making is totally EVA-consistent. They get value, somehow, as measured by EVA, and the market is rewarding them for it. But no, they are not an official EVA company.” Cornell’s Stout is not immune to the value of EVA, but she argues that it is just another elaborate way for companies to focus “on easily observable metrics at the expense of essential intangibles, such as the quality of human capital and employee and customer loyalty,” she says. “It is less than obvious to me how EVA addresses the current myopia on short-term performance.” Denning also has reservations about EVA’s possible short-termism. “Whether using traditional measurements or EVA, there is the risk [that] the firm will be solely focused on near-term business results and not long-term benefits,” he says. “The best metric for profitably directing a company is ‘positively delighting customers.’ If your customers rate your products or services high, then it is going in the right direction.” He adds, “The customer is the boss, not owners or managers.” Russ Banham can be reached at www.russbanham.com MARCH/APRIL 2014

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BOOK REVIEW

Drifting Away

Does chronicling Goldman Sachs’ organizational meanderings make for a good read? By Joe Queenan

There is more than one way to skin a cat, it is famously said, but in his ponderous book, What Happened to Goldman Sachs: An Insider’s Story of Organizational Drift and Its Unintended Consequences, Steven G. Mandis hasn’t found any of them. A one-time high-level employee who left the investment banking firm in 2004 before things turned really ugly, Mandis seems perfectly positioned to write a riveting insider’s account of the legendary firm’s rise and fall and subsequent return from the ashes—a resurrection aided, of course, by a lot of government funding. Mandis, who now teaches at Columbia University, doesn’t have the stomach for that. Or let’s just say that this is not the kind of book he set out to write. Instead, he has written a dry, dull-as-dishwater, semi-scholarly text that lacks color, passion, brio and panache. If you’re looking for Liar’s Poker-type material, anecdotes about investment bankers getting down on their knees and consuming entire boxes of dog biscuits or Gordon Gekko-style speeches, you’ve come to the wrong place. And if you’re looking for heroes and villains, you’ve also come to the wrong place. As the author puts it: “It is not my intent to glorify or vilify Goldman, nor to be an apologist for the company or for any individual or era, although I suspect I will be pigeonholed as one.” 62 / CHIEFEXECUTIVE.NET / MARCH/APRIL 2014

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Oh, yes, Mr. Mandis. You can count on being pigeonholed. The bar for books about Wall Street was set pretty high a generation ago by Barbarians at the Gate and the aforementioned Liar’s Poker. These books had a thrilling, you-are-there feel to them. And lots of recent books have followed in this tradition: They are informative, but they are also fun to read. This book is about as much fun to read as a jitney schedule. In “insider’s stories,” readers have a right to expect some humor, some gossiping, and some dishing. Well, you won’t get any of that here. Admittedly, it is hard to write a dull book about a brash, swashbuckling investment banking firm when you have characters as colorful as Jon Corzine, Henry Paulson, Robert Rubin and Lloyd Blankfein with whom to work. But Mandis has done it. He’s like a guy who took a 12-year tour of the Great Barrier Reef and came back without any photographs. What was the poor guy thinking? Mandis, in his defense, will say that it was never his intention to write a kiss-and-tell book about the firm that made him rich. He’s only interested in organizational drift. Which means that whatever went wrong at Goldman Sachs is the organization’s fault, not the fault of any individual or group of individuals. What caused the Spanish Armada to fall apart? Organizational drift. Why did the Seventh Cavalry fare so poorly at the Little Big Horn? Organizational drift. Why did the Grande Armee flop so badly in Russia back in 1812? Organizational drift. Pure and simple. Gosh-darned organizational drift. Mandis knows that organizational drift is not a sexy topic. “The frustration with the kind of analysis I’ve undertaken is that it’s tempting to ask who or what event or decision is responsible,” he writes. Yes, it is. Especially if the guy you’re tempted to ask has just written a book called What Happened to Goldman Sachs? He goes on: “We want to identify a single source—something or someone—to blame for the change in the culture. The desire is for a clear cause-and-effect relationship and often for a villain. The story of Goldman is too messy for that kind of analysis.” In other words, if you’re looking for me to call out the powers-that-be, the way Goldman Sachs renegade Greg Smith did in a famous New York Times op-ed piece a couple of years ago, when he used such terms as “toxic” and “destructive,” don’t hold your breath. In defense of this bloodless, dreary, somniferous and lethal book, What Happened to Goldman Sachs? is actually based on the doctoral thesis Mandis wrote when he was getting his degree in sociology at Columbia in 2011. That’s why it is so clinical, sterile and dull. That’s why it contains so many expressions like “normalization of deviant behavior.” To hear Mandis tell it, what happened at Goldman Sachs is pretty straightforward. The company changed. It used to be small, but then it got big. Its fate used to be in the hands of partners, but then it went public. It used to refrain from engaging in hostile takeovers. Then, it decided to ditch that policy. It used to be dependent on M&A work; then it started

focusing on trading. Most important of all, it used to put the needs of its customers first, but then organizational drift set in. “The zeal to pursue profit opportunities can lead to rationalizing of this drift,” Mandis writes. In other words, Goldman Sachs changed its business model because there was money to be made elsewhere. Lots and lots of money—if you get my drift. “Organizational drift” means that nothing Vesuvian ever occurred at Goldman; there was no sharp or sudden break with the past. No, it was more a case of the company’s gradually meandering away from its bedrock values. But few noticed, because the tectonic shift was neither cataclysmic nor abrupt. For one thing, it happened over a couple of decades. And the cast of characters kept changing. And the market changed. So the company just kind of…drifted. Thus, critics of the company’s behavior during the sub-prime mortgage crisis are never going to find a single villain or group of villains whose scalp they—or the government—can take. You can put people in jail for lying and stealing, but you can’t put anyone in jail for drifting.

What Happened to Goldman Sachs: An Insider’s Story of Organizational Drift and Its Unintended Consequences Harvard Business Review Press, 352 pp.

$28.00

MARCH/APRIL 2014

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EXECUTIVE LIFE

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Far, Farther, Farthest… Sometimes you need more than just a quick getaway—you need to really escape. And when you do, these three dreamy destinations let you know you’re not in Kansas anymore. / Michael Gelfand

Every day you’re in the thick of it. People always want a piece of you. Difficult decisions await at every corner. Lengthy meetings and presentations make your work calendar look like a monotonous wall of Lego blocks. And then there are all of the emails and phone calls... In a day and age where a CEO has to stop the elevator in between floors just to catch a break, it’s never been more important to take personal time that recharges the mind, body and soul. Sometimes a quick coffee break, long lunch or even weekend jaunt just doesn’t cut it. That’s when it’s time for a trip to someplace far removed from everything familiar, someplace so remote that you can’t help but disengage from work and relax. To that purpose, we’ve assembled a trio of such destinations—far, farther and farthest—where the sense of place and inspiring activities will force the inner you to take off the proverbial tie, shake out the cobwebs and engage your curiosity.

Far… a Mountain Escape at the Old Edwards Inn & Spa

Old Edwards Inn & Spa

The Blue Ridge Mountains of western North Carolina are a renowned destination for those seeking relaxation, recreation and adventure, and the Old Edwards Inn and Spa, which was founded in 1878, excels at giving its guests exactly what they’re looking for. Voted the 24th best hotel in the world by Travel & Leisure for 2013, Old Edwards balances easy access to both the mountain chain’s southwest plateau and the artsy town of Highlands with the inn’s transcendent tranquility and European charm. When you’re back from one of the many outdoor activities (including tennis, fishing, gem mining, hiking to waterfalls and geocaching), you can rejuvenate in the award-winning spa (voted North America’s best by Condé Nast Traveler in 2010) or challenge yourself on the breathtaking Tom Jackson-designed 18-hole championship golf course, which sits along the eastern continental divide. And then, of course, there’s the shopping (try the Acorns on Church boutique for antiques) and the AAA Four-Diamond awarded Madison’s restaurant. A wide variety of impeccably designed accommodations are available, ranging from a luxurious room in the historic inn to one of many rustic cottages and luxurious guest estates. MARCH/APRIL 2014

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EXECUTIVE LIFE

Farther... Mexico’s Allure at the Rosewood Mayakoba

Farthest… Chile’s Charms at the Tierra Patagonia Hotel & Spa

Warm, white sand between your toes and the shocking aquamarine of the Caribbean might tempt you to justify moving your company headquarters to Mexico’s Riviera, but it’s a lot easier to simply stay at Mayakoba. Surrounded by ocean and jungle, this secluded, kid-friendly 1,600acre luxury resort south of Cancun and north of Playa del Carmen sits along a mile-long beach of lagoons and unspoiled Caribbean sand near the Great Mayan Reef, the second-largest coral reef in the world. In addition to the world-class diving just offshore, Mayakoba enjoys close proximity to nearby Mayan ruins, ecology parks and more water sports than you can fathom. There are 130 exquisitely designed suites equipped with private plunge pools, rooftop sundecks, garden showers and individual docks. Add Mayakoba’s location, amenities, hospitality and ecological focus and it’s no surprise that it has received numerous awards since opening in 2008 (including an AAA Five Diamond award and the top spot on Condé Nast Traveler’s 2014 Gold List). Don’t miss indulging at the Agave Azul Sushi Bar & Tequila Library, chatting with the onsite biologist or swinging through the Greg Norman-designed, 7,000-yard, 18-hole golf course, El Camaleón, the first golf course to host an official PGA TOUR event in Mexico.

If you’re going to travel half way around the world for a vacation, the destination has to justify the effort to get there, but Tierra Patagonia does so in abundance. The flight into the heart of the Patagonia landscape isn’t easy—after departing from your home, you fly into Santiago, Chile, and from there into one of two smaller airports, then take a one to four hour car ride (depending on the airport you chose). No, it’s not exactly an easy trip, but one look at the ragged peaks of the Torres del Paine mountains and you’ll forget all about the arduous travel. The hotel is located roughly 1,200 feet from Lake Sarmiento, the biggest lake inside Torres del Pain Park (a UNESCO World Biosphere Reserve), famous for its thrombolites (rare conglomerate formations composed of sand, shells and cyano-bacterium). The hotel offers a number of outdoor excursions, including treks, horse rides, bike rides and off-road journeys to see wildlife, forests, archaeological sites, glaciers, geographic formations and other awe-inspiring scenery. The multitude of excursions on offer are categorized by three levels of difficulty and half- or full-day durations. Luckily, Uma Spa is on-site to revive tired muscles and mold you back into shape with a variety of massage and alternate therapies. All-inclusive rates are available, however the minimum stay varies depending on the time of year you visit.

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Chief Executive magazine’s New Digital Edition

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EXECUTIVE LIFE

At a Glance Old Edwards Inn & Spa Highlands, North Carolina 866.526.8008 oldedwardsinn.com Best rooms: While corporate events, family gatherings and weddings are large enough to truly take advantage of the splendor available in the trio of Guest Estates (Hutchinson House, Piermont Cottage, Rockwood Lodge), more intimate mountain getaways demand one of the Church Street Cottages. These rustic stone and wood cottages sit quietly with their secluded porches amid pastoral, landscaped lawns, and the multiple bedrooms and common areas are finely appointed in Victorian-era English manor house décor, providing a warmth and coziness that creates the perfect foreground for the stunning natural backdrop of the Blue Ridge Mountains.

Rosewood Mayakoba Riviera Maya, Mexico 888.767.9663 (ROSEWOOD) or (52 984) 875 8000 rosewoodhotels.com/en/mayakoba-riviera-maya Best rooms: If you’re looking for a luxe experience and extreme privacy, Casa Laguna for you—this 9,400-square-foot wood and stone villa sits quietly by itself on a private lagoon, providing expansive living space and limitless views of the Caribbean (as well as the golf course) thanks to floor-to-ceiling windows. Accessed by private boat, the house has five dedicated staff members, three full-size bedrooms, a state-of-the-art media room, and a full-size chef’s kitchen (with a chef to boot). Additionally, Casa Laguna boasts 3,000 square feet of outdoor space, including a private pool that overlooks the lagoon, as well as a boat dock, and outdoor shower and a private dining deck.

Tierra Patagonia Hotel & Spa Torres del Paine, Chile 800.829.5325 or (562) 2207 8861 tierrapatagonia.com Best rooms: You didn’t come here to lounge around indoors, but when you are inside, the Superior Rooms (starting at $2,250 for three nights) are perfect. They offer a king-size bed (or two twins) in a practical space with the basic comforts you’ll need after a long day of extending yourself in the glory of the extreme outdoors. (Interconnecting Superior Rooms can be combined into a Family Apartment for larger parties.) Although on the small side (387 square feet), you’ll feel like you’re living outside thanks to a stunning view of the Lake Sarmiento and the Torres del Paine mountain range right out the window. Restrained but refined interior design work that ties in the great outdoors.

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FLIP SIDE

You’re Only as Pretty as You Feel Looks might not be everything, but they sure do help. / Joe Queenan In disturbing news for homely, nondescript or just plain ugly chief executives everywhere, a study by two University of Wisconsin professors finds that a CEO’s looks have a decisive influence on the company’s stock market performance. According to economists Joseph Halford and Hung-Chia Hsu, companies run by good-looking chief executives outperform those run by less attractive men and women, in part because shareholders seem to associate good looks with brains and talent. Inadvertently, the study seems to suggest that most shareholders are unbelievably shallow, but the numbers don’t lie. Physical beauty counts—especially in the boardroom. According to the study, physically comely specimens, both male and female, are perceived to have higher self-esteem than their unprepossessing peers and are thought to be more trustworthy, more charismatic and better negotiators. The performance of CEOs on television is also highly important in this context; the better-looking the executive, the more likely he or she is to win the support of viewers. If the results of the study are to be believed, gap-toothed huckleberries with pockmarked pizza faces, no matter what their organizational, interpersonal or strategic gifts, should avoid the small screen. This is especially true in the daunting and often humiliating era of high-definition television, where the camera sees all, knows all, tells all. The study does not actually say that good-looking CEOs are smarter or better leaders than their plain-faced counterparts. It merely says that this is the way the public perceives them. This is disturbing, given that the results of the study come fast on the heels of a Wall Street Journal story investigating the fates of top-ranked executives recently passed over for the top job at companies such as General Motors, Walmart, Yahoo! and Johnson & Johnson. The consensus seems to be that there isn’t much point in staying on in a subordinate post once you’ve failed in your attempt to land the top job, because there are

probably going to be hard feelings all around. So it’s best to pack your bags and make a fresh start elsewhere. Here’s where the appearance issue really comes into play. If an executive gets passed over for the CEO position because the powers-that-be honestly feel that someone else is better suited to run the company, that’s all well and good. But what if an executive got the thumb’s-down purely because he or she had horrible skin, bad teeth, a ridiculous comb-over or was just scary looking? That’s where things get a bit tricky. Not being good-looking isn’t a crime and it certainly isn’t sufficient justification to keep an executive from attaining the post he or she has been aiming at for so many years. Medusa may have been hideous, but she was awfully good at her job. If the findings of the University of Wisconsin study are true, it bodes poorly for the gifted but unsightly. No matter how talented you are, you’re not going to land in the penthouse suite if some glamour boy or beauty queen is vying for the same position. This is where a bit of strategy comes in. To get ahead in life, people who start out ugly or terribly plain should tailor their game plans to the circumstances that confront them. Concentrate on landing a high-level post at a company where most of the senior management’s faces are pretty hard on the eyes. Once in a leadership position, hire only bland-looking people as subordinates, eliminating all future rivals for the CEO post. If recruited by a competitor, accept the position only after making sure that no one lurking in the corridors of power looks like Julia Roberts or the young Robert Redford. Plastic surgery is an obvious option, as are follicle transplants, discreet hair dying, plausible toupees and strategically managed tufts of facial hair that will distract attention from a weak chin, uneven teeth or an otherwise unappealing face. (This option is generally not available to women.) One other option for an unsightly executive is to make sure that the board of directors is packed with people whose faces could make a mirror crack. Or failing that, the blind. MARCH/APRIL 2014

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FINAL WORD

The Truth About Income Inequality True or false: Rising income inequality in the U.S. is leading to diminishing equality of opportunity. During the State of the Union address, President Obama declared that, “increasing inequality is most pronounced in our country, and it challenges the very essence of who we are as a people.” To judge by conventional wisdom, the answer is obvious, says Scott Winship, formerly of Brookings Institution and now a senior fellow at The Manhattan Institute, who has long studied equality measures. He observes that the share of income received by the top 1 percent, according to economists Thomas Piketty and Emmanuel Saez, has grown from $1 out every $10 in 1979 to $1 out of every $5. Others say middle-class wages and household incomes have stagnated. Poverty has risen. Economic mobility has fallen. “But a sober assessment of the evidence shows that, in reality, we have little reason to think that inequality is doing the damage attributed to it,” he argues. There is the question of whether the inequality that matters is really on the rise. A number of scholars using a variety of data sources have found that inequality between the middle class and the poor remains at or close to its late1980s levels.” Pointing to new studies by a clutch of economists at Harvard and University of California, Berkeley, The Economist concluded, “The conventional wisdom is wrong. Despite huge increases in inequality. America may be no less mobile a society than it was 40 years ago.” To be sure, with long-term unemployment historically high and economic insecurity still pervasive in the wake of the Great Recession, it’s understandable that many Americans have grown more concerned about the nation’s levels of inequality, but let’s look at the record. In the first quarter of 2009, when the President assumed office, median U.S. household income was $54,797. Five years later, at the end of 2013, that figure stands at $52,163 according to Sentier Research and Census data—a decline of $2,634. During this time, poverty has increased by 6.7 million to a record 46.5 million people or about 15 percent of the population. Labor force participation has dropped from 65.7 percent to 62.8 percent—a 36-year low.

What’s more, according to a report last December by Investor’s Business Daily, 400 businesses have cut workers and worker-hours to avoid the employer mandate of the Affordable Care Act, widely known as Obamacare. In the President’s defense, he did inherit a nasty recession; and under his watch, 6.3 million net new jobs were created since the recovery started in June 2009. But this compares with 13.8 million new jobs that would have been created had his recovery kept pace with the average of the previous 10 recoveries. There is a reason more people live in poverty now and why, according to polls, most people feel we are still in a recession. The economy isn’t creating jobs fast enough. The average employment-to-population ratio in the 30 years before the president took office was 62 percent and dipped to 61 percent when he assumed office. Currently, that figure stands at 58.6 percent. The best way out of poverty is having a job, but the rate at which jobs are being created has been dampened by a variety of job-killing economic policies: an explosion of federal regulations, the lack of tax reform, the uncertainty as to which federal laws will be enforced and which will not and the disastrous rollout of healthcare reform. Consider the Keystone XL Pipeline five and half years under consideration—longer than it took the U.S. to fight World War II. The State Department’s final assessment concluded that the project would not significantly add to global greenhouse gas emissions. More importantly, the report said that the project would support 42,100 jobs (direct and indirect) and add $2 billion in earnings throughout the U.S. (Of these, 3,900 were direct-construction jobs in the affected states.) Construction alone would contribute $3.4 billion (or 0.02 percent) to U.S. GDP. With the stroke of a pen (or one telephone call), the president could strike a masterful blow for reducing income inequality.

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