November/December 2019 Chief Executive Magazine

Strategic CHRO Secrets | Waste Management: After The Apocalypse | Back To Schools

NOVEMBER / DECEMBER 2019

HOW AMAZON DOES IT An exclusive look at decision-making inside the world’s most pioneering digital company.

BY RAM CHARAN

L E T T H E R E V O L U T I O N B E G I N.

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C ONTENT S

N OV E M B E R /D E C E M B E R 2019 No. 303

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FEATURES COVER STORY 26 HOW AMAZON DOES IT An exclusive study of decision-making inside the world’s most pioneering digital company.

By Ram Charan

TALENT MANAGEMENT 32 THE SECRETS OF THE

STRATEGIC CHRO Here’s how to tap the expertise of this key business partner.

By Omar Ishrak, CEO, Medtronic, and Carol Surface, CHRO, Medtronic

32

THE CNEXT INTERVIEW 40 ‘THE FABRIC OF AMERICA’

David Steiner led Waste Management back from ruin by restoring worker pride—and finding his best 17 executives.

Interview by Rick Smith

GLOBAL MARKETS 50 THE CHINA VIEW One insider shares his thoughts on what CEOs need to know now.

Interview by Dan Bigman

40

CEO SUMMIT 61 CREATING A CULTURE THAT

NEVER QUITS What it really takes to hire and retain the best in a fierce job market.

Plus: 2019 Patriots in Business Awards

By C.J. Prince

CEO ROUNDTABLE 65 LEADING AUTOMATION How to drive culture and employee engagement in the workplaces of tomorrow.

By Jennifer Pellet

50

COVER PHOTO: REUTERS/ALBERT GEA

K I M A R I E YOW E L L VP, Talent Development Quicken Loans

“ MICHIGAN IS A PLACE WHERE YOU CAN GROW, BE CREATIVE AND LIVE YOUR BEST LIFE. ” In Michigan, you don’t have to choose between working and having a life. High-paying specialized jobs and a low cost of living are huge draws for our talented workforce. And our business-friendly environment and global relationships make Michigan just as attractive to businesses. Whether you’re a job seeker or job maker, come to Michigan or get left behind.

Visit michiganbusiness.org/pure-opportunity

C O NTE NT S EDITOR

Dan Bigman EDITORS-AT-LARGE

Jennifer Pellet Jeffrey Sonnenfeld DIGITAL EDITOR

Gabe Perna PRODUCTION DIRECTOR

DEPARTMENTS

Rose Sullivan 56

CHIEF COPYEDITOR

Rebecca M. Cooper

8

CEO’S NOTE

ART DIRECTORS

Carole Erger-Fass Gayle Erickson Alli Lankford

The VC Industrial Complex

10 LEADERS Back to Schools Want to make sure you’ll have the workers you need for the future?

Start developing them early. Very, very early.

16 Transformation / Patrick Lencioni Joy Is the Leading Indicator 18 Law Brief / Daniel Fisher Opioid Opportunists 20 On Leadership / Jeffrey Sonnenfeld Here We Went Again

RESEARCH EDITOR

Melanie Nolen CONTRIBUTING EDITORS

Dale Buss Ram Charan Fred Engelfried Daniel Fisher Craig Guillot Patrick Lencioni C.J. Prince EDITOR EMERITUS

J.P. Donlon

ECONOMIC DEVELOPMENT 56 REGIONAL REPORT: THE MIDWEST In the nation’s heartland, several states stand out for their pro-growth business climates. By Craig Guillot

PLANE ADVANTAGE

PUBLISHER

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

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

68 PILOT PROBLEMS What the looming shortage means for private aviation.

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

Liz Irving 203-889-4976 | lirving@chiefexecutive.net

LAST WORD 72 WHY WE DO WHAT WE DO On the true rewards of leadership. By Fred Engelfried

DIRECTOR, BUSINESS DEVELOPMENT

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

STATEMENT OF OWNERSHIP U.S. Postal Service Statement of Ownership, Management, and Circulation 1.

Publication Title: Chief Executive. 2. Publication No. 431-710. 3. Filing Date: 10/1/19. 4. Issue Frequency: Bi-monthly.

5. No. of Issues Published Annually: 6. 6. Annual Subscription Price: $99.00 7. Complete Mailing Address of Known Office of Publication: 9 West Broad Street-Suite 430; Stamford, CT 06902. 8. Complete Mailing Address of Headquarters or General Business Office of Publisher: same. 9. Full Names and Complete Mailing Addresses of Publisher, Editorial Director, and Managing Editor: Christopher J. Chalk, (Publisher); Dan Bigman, (Editorial Director/ Editor-in-Chief); Dan Bigman (Managing Editor); address same. 10. Owner: Chief Executive Group, LLC, 9 Broad West Broad St.-Suite 430; Stamford, CT 06902; Wayne Cooper, 10 Woodside Dr. Greenwich, CT 06830; Marshall Cooper, 35 Anderson Road, Greenwich, CT 06830 11. Known Bondholders, Mortgagees, and Other Security Holders Owning or Holding 1 Percent or More of Total Amount of Bonds, Mortgages, or Other Securities: None. 12. Not Applicable. 13. Publication Title: Chief Executive. 14. Issue Date for Circulation Data Below: July/Aug. 2019. 15.

Extent and nature of Circulation: Requested Mail Subscription a. Total No. of Copies (Net Press Run): 45,715; 45,599.

Paid and/or Requested Circulation: (1) Paid/Requested Outside-County Mail Subscriptions Stated on Form 3541 (Includes Advertisers’ Proof and Exchange Copies): 22,070; 21,027. (2) Paid In-County Subscriptions: None. (3) Sales Through Dealers and Carriers, Street Vendors, Counter Sales, and Other Non-USPS Paid Distribution: 0; 0 . (4) Other paid or requested distribution outside USPS: 0; 0 b. Total Paid and/or Requested Circulation [Sum of 15b(1), (2), (3), and (4)]: 22,070; 21,027. d. (1) Nonrequested Distribution (By Mail and Outside the Mail): 21,661; 22,861. (4).

Free Distribution Outside the Mail (Carriers or Other Means): 0; 0. f. Total Distribution (Sum of 15c and 15e): 43,731; 43,888. g. Copies Not Distributed: 1,984; 1,711. h. Total Distribution (Sum of 15f and 15g): 45,715; 45,599. i. Percent Paid and/or Requested Circulation (15c/15fx100): 50.46%; 47.91%.

Marc Richards 203-930-2705 | mrichards@chiefexecutive.net

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 302 September/October 2019. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2019 by Chief Executive Group LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33.

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CHIEF EXECUTIVE GROUP EXECUTIVE CHAIRMAN

Wayne Cooper CHIEF EXECUTIVE OFFICER

Marshall Cooper

Jamie Tassa CHIEF CONTENT OFFICER

Dan Bigman MANAGING DIRECTOR

Scott Budd VICE PRESIDENT, HUMAN RESOURCES

Melanie Haniph

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CH I EF E XECUT IV E RE SE A RCH

CEO OUTLOOK REMAINS CAUTIOUS THANKS TO WASHINGTON CHAOS Insights from Chief Executive Group’s CEO Confidence Index, a widely followed monthly poll of CEOs, and discussion topics from the Chief Executive Network (CEN), our nationwide membership organization that helps C-Suite executives improve their effectiveness and gain competitive advantages. For more information, visit ChiefExecutiveNetwork.com.

CHIEF EXECUTIVE’S OCTOBER POLLING OF 296 CEOS, which took place shortly before President Trump’s announcement of a “phase one” trade deal with China, found confidence in both the current business climate and expectations of 2020 stagnating, as business leaders paused to assess strategy amid the increasing political, trade and economic volatility.

CEO confidence in current business conditions remained relatively flat during the third quarter, and our October reading of 6.8 out of 10 on our 1-10 scale points to a continuation of the trend. CEOs’ outlook for the next 12 months is showing some signs of increasing confidence—revenue and profit expectations rebounded in October after a steady decline through the third quarter. However, our overall read on CEO optimism (see below) remains 9 percent behind October 2018 levels and 7 percent below this year’s peak.

And, despite strong consumer spending and declining interest rates—coupled with reduced regulations and greater tax breaks—CEOs remain cautious about committing to new projects and capital spending.

They cite the upcoming Presidential election, trade and continuous talk of a looming recession as major hurdles preventing them from deploying cash.

Just 46 percent of CEOs expect to increase their capital expenditures over the next 12 months—a multi-year low.

When asked which presidential candidates would be most favorable to their business if elected, President Trump garnered 70 percent of the votes, despite some CEOs saying he is not necessarily their candidate of choice—but the one who would be least detrimental to their business. Biden came in second, with 19 percent of the votes. —Melanie Nolen, Research Editor Top Recent Discussion Topics From Chief Executive Network Metrics for measuring company culture; changing management structure as company grows; next-gen marketing; new market sector penetration best practices; impact of tariffs/economic forecast for 2020—is a recession coming, and if so how we do prepare? —Rob Grabil, Chief Exexutive Network

CEO CONFIDENCE LEVEL IN BUSINESS CONDITIONS ONE YEAR FROM NOW 7.00

6.84

6.78 6.66

6.55

6.72 6.46

6.44

OCT '18

NOV.

DEC

JAN '19

FEB

MAR

APR

MAY

JUNE

Chief Executive’s CEO Confidence Index is measured on a scale of 1-10.

6 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

ASSOCIATED AIRCRAFT GROUP flyaag.com 71 CHIEF EXECUTIVE NETWORK chiefexecutive etwork.com 31, 47 CEO AND SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES chiefexecutive.net/compreport 48, 49 CNEXT CNext.us 38, 39 CYBER RISK FORUM chiefexecutive.net/cyberforum Inside back cover DELOITTE R.E. AND LOCATION SERVICES deloitte.com/us/locationstrategy 15 GALT & COMPANY galtandco.com 22, 23 HARVARD BUSINESS SCHOOL exed.hbs.edu/go 5 MANUFACTURING BENCHMARKS chiefexecutive.net/kpireport 7 MICHIGAN ECONOMIC DEVELOPMENT CORP. michiganbusiness.org/pure-opportunity 3 NATIONAL SHOOTING SPORTS FOUNDATION nssfrealsolutions.org 9 OPEN SYSTEMS INTERNATIONAL, INC. osii.com 17 PURE INSURANCE pureinsurance.com Outside back cover RHR INTERNATIONAL rhrinternational.com 13

6.95

6.60

AD INDEX

6.18

JULY

AUG

6.36

SMART MANUFACTURING SUMMIT chiefexecutive.net/SMS 21

OCT

TEXTRON txtav.com Inside front cover, 1

6.24

SEPT

THE UNIVERSITY OF ALABAMA ua.edu 19

Key Benchmarks For Manufacturing Companies

Utilizing data from more than 400 manufacturing companies, this 360+ page digital report will help you identify opportunity areas for your company to improve price realization, profit margins and asset and inventory utilization.

Uncover cost reduction opportunities and get the most from your R&D, marketing, sales and other investments.

KEY PERFORMANCE INDICATORS INCLUDE: • Revenue growth rates • Channel mix • Price realization • Ebitda margins • Inventory levels and turns • Cost of goods ratios • Property, plant and equipment investments and utilization • Receivables, payables and cash-to-cash cycle times • Marketing investments and returns • Sales expenditures and returns • R&D investments and returns • Quality, rejection and on time delivery rates • Overhead ratios • Employee mix and revenues per employee type

Pre-order the digital report and save $500, for a total cost of $1995 with code BFM500.

To order your copy of the report, contact Melanie at 615-592-1169 or visit ChiefExecutive.net/KPIreport

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C EO’ S NOTE CHIEF EXECUTIVE OF THE YEAR

THE VC INDUSTRIAL COMPLEX FOR TRUE FANS OF HEALTHY MARKETS, Monday, Sept. 30, 2019, is a day to celebrate. That was when reality finally caught up with WeWork. After a string of petty, self-dealing episodes by CEO Adam Neumann that resulted in his stepping aside, the company pulled its S1 filing, effectively ending its chances at going public, at least for now.

A worrisome sign for the tech market?

For the economy? Hardly. In an era that has become increasingly out of touch with reality, WeWork’s stalled IPO is a huge win for American business. While there is much to admire and like about America’s startup culture, a powerful, self-interested Venture Capital Industrial Complex has bastardized it, threatening our free market system.

The signs are everywhere. When they should be focused on value, customers and profit, too many young entrepreneurs use dollars raised and private money valuations as their KPIs. “Secondaries,” “bridge financing” and “rounds A, B and C” have become the nomenclature of the startup crowd, signaling false sophistication. WeWork was the ultimate example. Softbank’s latest $2 billion investment pumped the company’s valuation to $47 billion. That’s for a startup losing some $700 million a quarter.

Why weren’t they WeBust already? Because venture capital too often resembles a pump-and-dump scheme: Each investor buys in, hypes their piece and waits for the next guy in line to buy in—at ever-increasing valuations.

The ultimate kill, of course, remains an IPO, where payouts can be obscene.

The regulatory environment, unfortunately, has created a world in which a growing retail investor base has ever fewer stocks to choose from. According to the St. Louis Federal Reserve Bank, the number of U.S. publicly listed companies per million people stood at 30.0 in 1996 and dropped to just 13.4 in 2016. It’s a situation ripe for abuse.

Crunchbase, which tracks VC investments, currently counts 498 “unicorns,” private companies with valuations exceeding $1 billion. They roam a universe in which only 1,667 public companies in the U.S. have valuations exceeding $1 billion, suggesting serious unicorn inflation. Insiders know the score: In a 2016 survey of 889 venture capitalists 91 percent said unicorns are overvalued. There was no difference in the response between the 40 percent of VCs who claimed to have themselves invested in a unicorn versus the 60 percent who had not had such good fortune.

Of course, the VCs are hardly acting alone. They are abetted by a network of self-interested lending institutions, business schools and professional service firms looking to make a few bucks, as well as beleagured media outlets for whom photogenic young CEOs are essential to fueling magazine sales and page views (see Holmes, Elizabeth).

Don’t get me wrong: I don’t fault anyone for trying to build something or invest in something new—even when the effort results in failure. But we can’t allow the Venture Capital Industrial Complex to keep perverting capitalism as it has. Thankfully, the market seems to be catching on. It usually does.

—Marshall Cooper, CEO, Chief Executive Group

8 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

2020 SELECTION COMMITTEE DAN GLASER President and Chief Executive, Marsh & McLennan

FRED HASSAN Former Chairman, Bausch & Lomb; Partner, Warburg Pincus

NEAL KEATING President and Chief Executive, Kaman

TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries

MAX H. MITCHELL President and Chief Executive, Crane Co.

ROBERT NARDELLI Chief Executive, XLR-8

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

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

ARNE SORENSON President and Chief Executive, Marriott International 2019 CEO of the Year

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

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

CONTACT US CORPORATE OFFICE Chief Executive Group LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 Fax: 203.930.2701 ChiefExecutive.net LETTERS TO THE EDITOR letters@ChiefExecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 Fax: 847.730.3666 advertising@ChiefExecutive.net REPRINTS Phone: 203.889.4974

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L E ADERS

BACK TO SCHOOLS Want to make sure you’ll have the workers you need for the future?

Start developing them early. Very, very early. BY DALE BUSS

“The persistent threat to the industry that we have to address is that there’s going to be a shortage of people with advanced manufacturing skills and interest in going to manufacturing companies.”

—Blake Moret, CEO, Rockwell Automation

ROCKWELL AUTOMATION called for innovations from American kids ages eight through 17 years old in its “You Make It Challenge,” and three finalists will vie for the top prize in November. Louisa Wood, from Bayside, Wisconsin, suggested applying A.I. and sensors to sump pumps to cut basement flooding. Makai Samuels-Page of Atlanta designed an “anti-bully backpack” with a camera that would record in live time. And Michael Wilbourne of Roanoke, Virginia, conceived of a micro-flush toilet with an above-ground chamber to make third-world sanitation easier and cheaper.

Through their schools, the finalists all will receive a company grant to the local FIRST youth robotics program, and the winner will get a $7,500 “maker’s kit.” So while the Milwaukee-based factory-automation giant won’t be turning their inventions into products, maybe the three youngsters will consider Rockwell Automation as a potential employer someday.

“The persistent threat to the industry that we have to address is that there’s going to be a shortage of people with advanced manufacturing skills and interest in going to manufacturing companies,” says Rockwell Automation CEO Blake Moret. “We have to address it early with STEM-based education, starting when future workers are very young.”

Rockwell’s initiative is just one example of how savvy employers are getting increasingly involved with future workers at

10 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

ever-younger ages, mostly through schools.

So high-school trainees now are tending intravenous lines for hospital patients in north Texas and learning the basics of weapon-component manufacturing on a trailer truck in Connecticut. Middle-school kids in Delaware are about to start learning coding via a program that was started for college students. And elementary-school children in northern Indiana are being regaled with the wonders of working in the region’s many recreational-vehicle factories.

The employers involved are trying to address their acute labor needs as well as giving back to their communities, with a strategy that fits well when school funding is tight in many places, vocational education is coming into vogue, and the value of a college education increasingly is questioned.

Going far beyond traditional measures such as raising funds for schools, serving on advisory boards, providing mentors and supplying some equipment, these companies are charging into local schools with their own curricula, personnel, hardware, software and an overall agenda for shaping the educational institutions—and the graduates they put out—more to their liking.

Digging Deeper

“The only way to solve all these issues and a shortage of talent is to dig deeper into the education system, not only to provide college students with some additional skills before

“This is not a quick-turn deal.

You must focus on it and have a plan.”

—Josh Smith, CEO, Metova Opening of an elementary school STEM center in Brillion, Wisconsin, sponsored by Ariens.

they enter the workforce, but also at the high-school level to introduce some different types of professions,” says Martin Fiore, tax managing partner of the U.S. East region of Ernst & Young.

The consulting firm farms out staffers who help teach high-school classes with engineers and other professionals. “Right now, most high school kids have no idea what our company does,” Fiore says, “and, if they do, they have no idea of what types of skills are needed.”

Such efforts are helping kids adjust to their own new worlds, as well. “High school is the new ‘college,’ and middle school is the new ‘high school,’” says Cheryl Aquadro, K-12 vertical-market director for Johnson Controls. “Middle-school students now are being called upon to start making plans and decisions to be life-ready, not just college and career-ready.”

The Glendale, Wisconsin-based leader in commercial HVAC installation sponsors summer STEM camps for middle-schoolers.

Company staffers help them apply technologies to their interests. One would-be young fashion designer, for example, fabricated wardrobe accessories, inserted battery-powered light sticks in them and then directed a runway show for fellow campers.

In North Richland Hills, Texas, the Birdville Center of Technology and Advanced Learning is producing a growing vein of professionally prepared high-school students and presumptive future employees. The $17 million campus churned out nearly 2,200 skill-certified graduates in 2018, up from about 1,600 in 2017 and about 500 in the first class after the school opened in 2009.

American Airlines buys tools for the kids enrolled in the aircraft-mechanic sequence there. Bell Helicopter finances a program in drone piloting and sponsors a drone-building competition. Medical City, a local hospital, hires about 130 interns from Birdville each year. And Gulf States Toyota recently bought a 2019 Corolla for the school so that auto-mechanic students could work on the

CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019 / 11

LE A D ER S

“When they graduate, many of these kids will want to come back and work for us,” —George Sakellaris, CEO, Ameresco

vehicle while the company scouts the class for candidates for a two-year post-secondary training program offered by the automaker.

“We can help Birdville supply a higher quality of technician into the Toyota program and into dealerships as well,” says Toby Gustavus, workforce-development consultant for the Houston-based outfit that distributes cars across five Southern states to 158 dealerships that depend on more than 3,000 service technicians.

Metova helped develop a new computer-science course that is now required by the state of Arkansas as part of each high school’s core curriculum. The Franklin, Tennessee-based application-software company also hosts small groups of students at its offices in Little Rock, Arkansas, to see what it’s like to program. Metova ends up hiring interns as early as 11th grade.

“At first, it can be a little overwhelming to kids, but once they see it in action, it removes all the mystery,” says Metova CEO Josh Smith. “They start out fearing that they can’t find a job close to home, but then they realize we’re here, and we do work for cool companies like Dropbox, and then they know they don’t have to go to the coasts to work on cutting-edge stuff.”

Ariens Co. has been a pioneer in deep school involvement. In 2007, a science teacher brought the idea of building a STEM education center to Dan Ariens, CEO of the major lawn-equipment maker based in Brillion, Wisconsin. The company employs about 1,000 people in the town of about 3,000 people. Ariens built such a center at the local high school and then, three years ago, helped open another center in the town’s elementary school.

Some companies capitalize on commercial relationships with schools. Ameresco, a provider of green-energy systems to schools and other large buildings, has supplied a curriculum and instructional “solar carts” to two schools in Hamilton, Indiana, to help teach about renewable resources. The Farmington Hills, Michigan-based company gets to dangle future-career possibilities in front of hundreds of impressionable young minds, engaging them with exercises such as calculating the output of the solar-energy

12 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

panels that power their schools, based on the position of the sun.

“When they graduate, many of these kids will want to come back and work for us,” says Ameresco CEO George Sakellaris. “And they can be productive right away, especially if we put them through our co-op program.”

Of course, many companies continue to focus on involvement in the lowest part of the labor funnel: colleges and universities. In 2017, Ernst & Young, for example, piloted a program it called Day One Ready, establishing a curriculum at the University of Dayton that helped equip students with skills for starting with the firm. In just a year, the company nearly tripled the number of new graduates that it hired from Dayton, to about 40.

“We felt universities were teaching a lot of classes for getting a degree and for understanding how to make good judgment calls, but not in certain skills that would advance individuals’ careers right away when they headed into an organization,” Fiore explains.

Here are some tips for partnering with schools: Press the envelope: Some new-era school

administrators can move as nimbly as entrepreneurs. Ernst & Young, for example, wanted to get Day One Ready going quickly after conception—and found the University of Dayton very willing. “We were very surprised because they were very agile,” Fiore says. “We had our first whiteboard session in May, and we had the program up and running by September.”

Respect the classroom: Schools still build a certain sanctuary around the educational process, and employers should heed those boundaries. “You have to integrate and collaborate with them when you’re dealing with students and their time during school hours,” says Nick Lambrow, regional president of the Delaware region for Buffalo, New York-based M&T Bank, which is developing a coding academy for middle-school students in Wilmington, Delaware.

Focus on instructors: They are key to

converting the vision behind a corporate partnership effort to results in the local class-

NUMBER

447

BRUCE VAN SAUN CEO, CITIZENS BANK

BANKING FROM SCRATCH

In a new series of interviews with high-performing members of the CEO1000, Citizens Bank CEO Bruce Van Saun tells Chief Executive and RHR International about what he learned by creating a financial powerhouse from a “white canvas.”

AFTER 25 YEARS ON WALL STREET, Bruce Van Saun got tapped for the CFO role at RBS amid the turmoil of the financial meltdown. He’d been a CFO for a long time and aspired to be a CEO, but, as he says, “I figured this was a great, big job full of challenges and something that I wanted to tackle. As it turns out, when you take state aid and you get a bailout in Europe, you have to simplify the company and sell off pieces. And one of the things that ultimately got on the block was the divestiture of Citizens.”

That’s Citizens Bank, based in Rhode Island. The RBS board asked him to take over as CEO, spin it off from RBS and take it public as a stand-alone entity, which he did in November, 2015 in the largest commercial bank IPO in U.S. history. Since then, Van Saun, 447 on our CEO 1000, has built Citizens into a super-regional with $160.5 billion in assets and enough banking talent and financial sophistication to lead bond underwriting and M&A deals for large corporate clients. In this excerpt from a recent interview, he talked about his first moves as CEO and his evolution as a leader. (The full interview is available at ChiefExecutive.net/ceo1000.)

Talk about the evolution of Citizens since the IPO. Job one was try to figure out where we could grow to get leverage back into the balance sheet and get back to the scale to be profitable, while at the same time looking at the zero-base of expenses and extracting inefficient use of expense dollars so we could self-fund the catch-up in technology and functions [like HR and risk management] and go out play offense and hire some really good talent.

We benchmarked ourselves very carefully against peers. We knew what the gaps were. The first order of business was get the plan and have the board endorse the plan, and then go get the people to actually execute the plan.

I brought in a very experienced team, most of whom had worked in the mega banks, a number of whom were at JPMorgan. Some big bank experience that were really enthusiastic about the opportunity to make an impact and shape a bank, where, to a large extent, it was a white canvas.

What are some of the initiatives that helped spur growth?

We thought we had a good opportunity to move up-market into the mid-corporate space, still not going head-to-head every day with the mega banks. If we were going to attack that, we needed to bring in bankers with industry expertise. So we had to build out some industry verticals. We’ve added 50 or 60 senior coverage bankers who come from other banks with long careers, a lot of wisdom, good relationships, and they ultimately brought those clients with them, over time, to the bank.

We have a brand new cash-management platform we’re putting in place.

Today, we can win business against the mega banks where we’re competing head-to-head with them, and we can lead a transaction, or we can win an interest rate, hedging transaction against JPMorgan, against B of A, which was a hard thing to do five years ago when I started.

On the consumer side, there was a significant amount of change. In terms of customer expectations, branches were becoming less important but still important. We had too much space, and our branch was dedicated to transactions. You had to start migrating the transactions to smart ATMs and mobile channels so you can do remote deposit, capture and take a picture of a check—a lot of technology change.

There’s been a lot of challenges with that. How do you get that customer interaction model right? How do you use data to personalize offerings to your customers so you don’t waste their time? We’ve done a lot there.

How would you say your leadership style has evolved?

When you’re CEO, you realize how important having great people in the seats is. If you get the great people, you want to empower them. You don’t want to have an authoritative style. You want to let people align on the vision and the key objectives, and then give people the running room to go do their thing.

I came up through the CFO track, so I’ve always been good with finance and strategy. But as a CEO, the soft skills are quite important. How do you motivate different people? What makes people tick? Leading one executive on your team is going to be different than perhaps another executive. That’s an art that you learn over time.

You just pick those things up along the way. Then, you just have to have a good level of self-awareness to say, “Okay, what are my strengths? I probably don’t need to spend that much time trying to perfect my strengths. But there are things where I have gaps, where I just didn’t have to call on those skills earlier in my career, that I really need to beef up, and I need to work on those things.”

So never be satisfied. Constantly look for ways that you can improve and challenge yourself and grow, even when you get to be a CEO.

Now, we can do [things] beyond just simple loan syndications. We do bond underwriting; we do M&A; we do sophisticated interest rate and foreign exchange risk management. ®

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

LE A D ER S

Students at work in the Ariens STEM Center at Brillion High School.

room. Scope them out. “Establish relationships with them, even go to conferences of vocational teachers,” advises Gustavus.

and accountants,” says Thor CEO Bob Martin. “That they don’t have to leave Elkhart.”

Stay committed: “This is not a quick-turn

Gamify everything: Turning curricula and

individual lessons into “gamified” activities is the surest way to engage Generation Z. Goodwin College in Connecticut, for example, has equipped a trailer with a mobile manufacturing lab that familiarize kids with table-top CNC machines, 3D printers and measuring devices that are typical in the area’s defense-equipment plants.

Instructors ask students to estimate the number of ball bearings in a plastic cup, then show them to how to figure it out quickly: take one out, weigh it, then weigh the cup. “They can see that math works for them,” says Gary Minor, senior director of college relations for the East Hartford, Connecticut school.

Start early: Thor Industries goes to kids as

young as fifth grade in schools around its Elkhart, Indiana, headquarters with a roadshow that includes building Lego versions of its RVs and hearing a pitch from a local TV news anchor. “We let them know we have line people and sales people and engineers

14 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

deal,” Smith says of partnerships with schools. “You must focus on it and have a plan. Make sure you allow people to dedicate time to it. It takes years. But we are producing qualified people that we can hire now.”

Spread the benefits: Some companies invest with little hope of hiring the output of their largesse. Pratt & Whitney, for instance, helps fund high-school trips for the Goodwin mobile lab. “It only helps the many supplier manufacturers that support Pratt & Whitney,” Minor explains. “But they’re the ones that need the workers.”

Take a broad view: Metova last year launched what it called a Cyber Range cybersecurity curriculum at the University of Central Arkansas even though the company already had sold its cybersecurity arm.

“Anything that is good for the state is good for our company and will have a growing economic-development impact, and these growing companies will have needs outside of cyber,” Smith says.

THOUGHT LEADERSHIP CONTENT PROVIDED BY DELOITTE

Is it time to look for manufacturing locations beyond China?

FOR THE LAST SEVERAL DECADES, CHINA HAS ATTRACTED production facilities across nearly every industrial sector. But as China’s cost advantages erode and trade tensions escalate, some may be having second thoughts. Apple, for example, recently revealed it has asked its suppliers to analyze the cost impacts of shifting 15-30% of production capacity from China to Southeast Asia destinations.1 For others, it is becoming more critical to proactively evaluate options for alternate low-cost manufacturing locations.

China’s evolution as a destination for Western manufacturers accelerated after its entry into the World Trade Organization in 2001.

As U.S. and European firms shifted high labor content factories to lower-cost markets, China attracted an increasing share of deployments, many locating in Special Economic Zones (SEZs) especially set up to accommodate export-oriented production. China’s advantages were numerous, chiefly its vast pool of relatively low-cost labor, tax holidays, and a regulatory environment that made it easier for foreign manufacturers to set up shop quickly. Western companies flocked, and China’s coastal SEZs, most notably those with close proximity to ports, started to fill up. Production and management wages along the coast started to increase faster than inflation, and companies began to deploy farther from the ports in order to keep labor and real estate costs low.

Over time, China’s middle class gained economic purchasing power, and Western firms began to deploy factories oriented to serve the domestic Chinese market. One example is a number of Western auto factories that located to China, not to export vehicles back to the West but to serve local demand. This second wave of China manufacturing deployments added further demand for labor and management, as well as for production sites that were well-served by infrastructure and utilities.

China’s economic priorities began to shift over the last 10-15 years.

China placed greater emphasis on attracting higher-value manufacturing, research and development, and automation.2 Western companies seeking to deploy production to China could generally anticipate double-digit annual wage escalation along the coast, fewer tax benefits, and a tightening regulatory environment. China’s dramatic action to stop production to alleviate emissions impacts in advance of the 2008 Summer Olympics in Beijing brought global attention to the environmental challenges associated with its rapid expansion. 3 Western producers seeking to sell into the China marketplace faced increasingly challenging headwinds in terms of regulatory obstacles, poorly-enforced protections of intellectual property, and preferential considerations for domestic competitors. In 2015, China released its Made in China 2025 strategy, a plan to upgrade its domestic manufacturing value chain. The strategy set goals to increase the domestically-produced content of specific high-value industries such as automotive, aerospace, IT pharmaceuticals, semiconductors, medical devices, machinery, and robotics to 40% by 2020 and 70% by 2025.

On top of this backdrop, the current environment of trade tensions resulting in increased U.S. tariffs on China-produced goods has prompted companies to consider alternative options. Over 80% of American companies surveyed by the U.S.-China Business Council in 2019 reported that trade tensions have affected their business operations in China, an 8% increase from 2018.4 Furthermore, the

share of U.S. companies that have moved or plan to move operations out of China increased to 18% of 2019 respondents, compared to just 10% in the prior year. 5 While China might still be a logical solution for production operations, companies would be well-advised to consider the tradeoffs of alternate locations.

What are the potential options? Due to wage advantages, Vietnam, Indonesia, Malaysia, Thailand, and India are among the common Southeast Asian candidates for manufacturers looking to expand beQuick Take: yond China. Indeed, since June 2018 China may no longer be the over 30 Chinese companies have de facto choice for low-cost announced plans to set up or manufacturing in Asia. expand production abroad, with Average Annual Salary for 70% going to Vietnam.6 But the Manufacturing Workers (USD, 2018)7 reality is that companies need • China: $10,520 • Thailand: $7,846 to undertake a holistic view of • Malaysia: $7,210 costs and operating conditions, • Indonesia: $5,027 beyond labor arbitrage, to opti• Philippines: $4,056 mize location strategy. For exam• India: $3,927 ple, Western companies should not • Vietnam: $3,812 expect the same scale and manufacturing ecosystem advantages that they may realize in China. Infrastructure limitations (crowded highways, long lines at the ports, power outages) may be a challenge in several ASEAN locations as local authorities try to keep up with the needs of new industrial entrants. Finding new suppliers and service providers is not a given in each location. Operational risk factors, taxes, customs/duties, and entity structuring issues must be well-understood.

Evaluating manufacturing location alternatives and opportunities should be part of every company’s global footprint strategy, as the mix of costs, risks, and industry ecosystems across the low-cost country spectrum continue to evolve. While China may continue to be a viable manufacturing location, the changing operating and cost environment should prompt every company with production capacity in Asia to understand its location options and potentially plan for change.

Darin Buelow (dbuelow@deloitte.com) is a principal at Deloitte Consulting LLP in the Real Estate & Location Strategy practice.

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

“Is it time to look for manufacturing locations beyond China?” is an independent article and has not been authorized, sponsored, or otherwise approved by Apple Inc. 1 Lauly Li and Cheng Ting-Fang, “Apple weighs 15-30% capacity shift out of China amid trade war”, Nikkei, June 19 2019 https://asia.nikkei.com/Economy/Trade-war/Apple-weighs-15-30-capacity-shift-out-of-Chinaamid-trade-war 2 United Nations Conference on Trade and Development, “China’s Development Trajectory: A Strategic Opening for Industrial Policy in the South”, December 2014 https://unctad.org/en/PublicationsLibrary/ osgdp20144_en.pdf 3 Jonathan Watts, “Olympics environment: Beijing shuts all building sites and more factories to clear the smog”, The Guardian, July 28 2008 https://www.theguardian.com/sport/2008/jul/29/olympicgames2008. china 4 Member Survey, US-China Business Council, August 2019 https://www.uschina.org/sites/default/files/ member_survey_2019_-_en.pdf 5

Ibid

⁶ Neoma Tran, “Goodbye China: Chinese manufacturers look to Vietnam”, Vietnam Insider, August 15 2019 https://vietnaminsider.vn/goodbye-china-chinese-manufacturers-look-to-vietnam/ ⁷ JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania, December 2018 https://www.jetro.go.jp/ext_images/en/reports/survey/pdf/rp_firms_asia_oceania2018.pdf

Learn more at www.deloitte.com/us/locationstrategy ABOUT DELOITTE: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

LE AD ERS TRANSFORMATION \ PATRICK LENCIONI

JOY IS THE LEADING INDICATOR

Want to know about problems before they derail your company?

Watch employees’ enjoyment at work.

Patrick Lencioni, president of The Table Group, is the author of 10 business books, including The Five Dysfunctions of a Team.

EVERY RESPONSIBLE CEO looks for indicators that will help identify potential problems in his or her business. Most prefer data-driven metrics because they provide objective evidence of a coming trend or potential problem. A spike in inventory is a reliable indicator of an imminent sales decline. A drop in Net Promoter Score signals trouble with customer loyalty.

As reliable as those metrics are, by the time they appear in a CEO’s dashboard, the problem may be too far along to prevent. The best indicators are those that provide the earliest warnings possible. For instance, one of the best early predictors of a financial downturn is employee morale.

One company I’ve worked with is famous for industry-leading financial results and employee satisfaction. During a semi-annual employee survey, they noticed a slight dip in a particular area of the survey. Employee confidence dropped from “extraordinarily high” to “not-quite-as-extraordinary-but-still-lightyears-ahead-of-most-competitors,” which would have left most executives resting easy or even continuing to boast about the result.

The executives at this company mildly freaked out. They looked under the covers and discovered some serious and looming trends that were about to impact customers. They are now taking steps to address them, hoping that the problems haven’t already taken root in the culture. Had they dismissed the barely pink flags in the employee survey, those problems would be growing still.

This all begs the question, what is the best leading indicator for a CEO who wants to identify problems as early as possible? The answer is as esoteric as it is hard to measure: joy. When employees begin to lose their sense of joy in the work they do, trouble is coming even if that trouble seems far off on the horizon. But what exactly is joy?

Joy is the root word of enjoyment, which is a little more tangible and observable than joy itself. When people enjoy their work, not the idea of that work but the day-to-day experi-

16 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

ence of doing it, the likelihood of success is exponentially higher. It is no surprise that the airline and the fast-food chain with the most enthusiastic and joyful employees have the best financial performance in their industries.

Those employees aren’t joyful because their company is making more money; their companies make more money because their employees are joyful. As it turns out, most customers want to work with people who are glad to be doing their jobs. So it is reasonable to assume that a decrease in enjoyment would signal a coming decline in performance.

So, how can a CEO assess the joy within an organization? I wish there was a reliable metric, but there’s not. Yes, there are employee surveys. But by the time data comes in, the problem may be so far along that it requires invasive surgery rather than preventive care.

What CEOs can do is observe and interact with good people at all levels of the organization, looking for early signs of frustration or resignation. One CEO I recently met runs an international, well-respected medical complex. He likes to go to his hospitals, often in the middle of the night during swing shifts, to interact with employees who won’t recognize him, to see their day-to-day experiences. At my firm, The Table Group, I try to sit back and observe my colleagues to see if they are smiling and laughing while doing the most ordinary parts of their jobs, or whether they seem to be dreading them. It’s not scientific, I know, but neither is it disconnected from reality.

The best CEOs trust that they can do this. They’ve seen the early signs of morale problems in the past and regretted not acting on their hunches that something was wrong.

It’s not that they will stop doing employee surveys and other data-driven indicators to rely completely on intuition. That would be ridiculous—but they understand that the job of a CEO is to tap into his or her intuition and experience to identify problems before any meter on their dashboard turns red.

And the best CEOs will actually find joy in doing that.

Š 2019 Open Systems International, Inc. All rights reserved.

LE AD ERS LAW BRIEF \ DANIEL FISHER

OPIOID OPPORTUNISTS

Watch out for the hidden costs of having a product that’s too popular.

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

WHEN AN OKLAHOMA JUDGE ordered Johnson & Johnson to pay $572 million for causing that state’s opioid crisis, business leaders were understandably distressed. Not only did J&J have a tiny share of the market—estimated at around 1 percent—but the state didn’t present evidence of a single physician who prescribed its products improperly because of J&J’s marketing tactics.

The company recently settled with two Ohio counties accusing it on the same grounds, hoping to push off federal multidistrict litigation.

Watching the charges play out, it’s reasonable to ask: If J&J can be held liable for creating a “public nuisance” by selling a perfectly legal product under a government-approved label, who isn’t liable? Alcohol kills tens of thousands of people a year, and cell phones probably aren’t far behind. Distracted driving is a major cause of death on the nation’s roads.

Now that they’ve won in Oklahoma, ever-inventive trial lawyers are sure to test the public nuisance theory with cell phones, alcohol and other products, as they’ve already done with guns, lead paint and global warming. But history suggests they won’t get far. Congress responded to a wave of nuisance litigation against gun manufacturers in 2005 with a law barring most claims over crimes committed with their products. And federal judges on both coasts have rejected public nuisance lawsuits against big oil companies.

“As a tort expert, I know that sometimes something comes along that society gets in an uproar about, and courts relax traditional standards to assign blame,” says Victor Schwartz, author of a popular text on tort law and co-chair of the Public Policy Practice at Shook Hardy & Bacon in Washington. “But right now (the Oklahoma opioid) opinion looks confined to what was before it.”

18 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

The lesson business executives should take from opioid litigation is that sometimes a product is too successful for its own good, Schwartz says. And when that happens, courts can get awfully creative at finding ways to hold companies liable for the harms their products cause, regardless of what most people would consider to be the normal standards of tort law.

That’s what happened with asbestos, a miracle substance that saved untold lives during World War II as a fireproofing material but also had the unfortunate side effect of causing the deadly cancer of the chest lining known as mesothelioma. Dozens of companies have been driven into bankruptcy because they handled the stuff at some point, often with little or no evidence they did anything wrong.

Now it’s the pharmacutical industry’s turn in the grinder. Schwartz’s advice to clients who are troubled by what happened to J&J is to take a hard look at their own products and the potential liability that might arise from them. One danger sign is a niche product that is suddenly selling like hotcakes—like fenfluramine and phentermine, once-ignored drugs that, when combined, became fen-phen, a wildly popular weight-loss cocktail that generated billions of dollars of liability after doctors learned it also caused pulmonary hypertension and heart valve abnormalities.

The biggest potential liability is over failure to warn. For that, Schwartz recommends companies hire tort lawyers to examine proposed warning labels for flaws worth suing over. He gives his clients an example from a long-ago trip to the Baltimore Aquarium, where he observed a strange thing: If a shark passed up a piece of meat that was thrown into the tank, all the other sharks did too.

“If you get a plaintiff lawyer who okays a warning, his brothers and sisters are very unlikely to bring a claim,” says Schwartz, laughing. It’s understandable for executives to hate trial lawyers, he adds, but “hate isn’t a good emotion. If hiring a plaintiff lawyer can help you, why not?”

A G R E AT E R T RA J EC TO RY Every journey starts somewhere.

Marillyn Hewson’s began at The University of Alabama, learning principles of business strategy and leadership. She’s been climbing ever since.

M A R I L LY N H E W S O N | C L A S S O F 1 9 76 CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER – LOCKHEED MARTIN

LE AD ERS ON LEADERSHIP \ JEFFREY SONNENFELD

HERE WE WENT AGAIN

$47 billion?

We should’ve known better.

20 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

ate of more than 3,000 unrelated acquired businesses, encompassing intercontinental cables, surgical supplies, retail inventory systems, baby diapers, home security alarms and commercial lending.

The company’s practice of flamboyant toga parties and boisterous bravado created a strategic smokescreen of confusion that analysts failed to see through for far too long. When the smoke dissipated, Kozlowski and his finance chief, Mark Swartz, were accused of stealing $150 million and sent to prison, and the company collapsed.

WeWork, which changed its name to the We Company, seems to be honest about truly becoming a “wee” company. Beware of believing bosses who rely on: 1) Big Mouths: CEOs like Steve Jobs, Elon Musk and Tom Edison were effective self-promoters but had substance to sell— not just sizzle like Neumann. Those who questioned Enron’s Jeffrey Skilling or Theranos’s Elizabeth Holmes were threatened.

2) Big Momentum: Worldcom’s Bernie Ebbers, a barroom bouncer and motel owner, was so busy stapling together businesses that he didn’t have time to hire a general counsel, leading to prison for him and the then-largest U.S. corporate bankruptcy.

Dizzying rollups like US Office, Valeant and Tyco fueled their growth by more growth— until they collapsed.

3) Big Money Manias: Driven by backers like Softbank’s Vision Fund, real estate experts shrugged their shoulders and jumped in on the WeWork frenzy, akin to Salomon Smith Barney’s Jack Grubman fueling the Worldcom fraud.

4) Big Magic: No scientist could understand the mystery of Theranos’s technology and the company’s CEO refused to show them. Yet, overly busy marquee political names eagerly hopped on board in pursuit of relevance and riches.

In the end, you don’t need to be Bethany McLean to size up a CEO with a plan so bold it defies basic accouting. Just remember: if something seems too good to be true…

CREDIT: WEWORK.COM

Jeffrey Sonnenfeld is senior associate dean, leadership studies, Lester Crown professor in management practice at Yale School of Management, president of the Yale Chief Executive Leadership Institute and author of The Hero’s Farewell.

Follow him on Twitter @JeffSonnenfeld

INVESTORS IN WEWORK SHOULD sing the Beatles 1964 lament, “I Should’ve Know Better.” WeWork’s IPO plan floundered when its $47 billion valuation plummeted 80 percent the week it was supposed to price—and for good reason.

As I pointed out several months ago in multiple outlets, bombastic founder and now ex-CEO Adam Neumann’s sale of over $700 million of his own shares just ahead of an attempted IPO was a sign that his real estate empire, the largest office space holder in New York, London, San Francisco and Washington, D.C., was a house of cards.

His sale of a trademarked use of “WE” back to his own company and covert ownership of several of the buildings that he leased to WeWork was classic self-dealing.

Neumann’s global shared-space office complexes sprawl with fun foosball games, bean bag furniture and Nespresso machines for nomadic 20-somethings, but the glam factor couldn’t hide the huge financial gap of $47.2 billion of long-term lease commitments and only $3.4 billion in short-term leases to tenants revealed in his S1 filing.

The unrealistic market growth expectations brought losses of $120,000 a minute and $5,200 per customer, in contrast to longstanding successful global competitors. For example, the truly pioneering 40-year-old Serve Corp. of Australia is now in 34 countries, and newer competitors like Mindspace, Knowtel and IWG/Regus are gaining momentum.

Furthermore Neumann’s owner-controlled governance system permitted naming his own board and his wife selecting a successor if he were incapacitated. We’ve seen such abuses before. Tyco was founded in 1960 as a government supplier of advanced technical materials. After just a decade under “Deal a Day Dennis” Kozlowski, it had morphed into a dizzying conglomer-

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T H O U G H T L E A D E R S H I P P R O V I D E D B Y G A LT & C O M PA N Y

WHEN BETTER MEASURES DON’T PRODUCE BETTER RESULTS

I

N FEBRUARY 2019, Institutional Shareholder Services Inc. (ISS) announced it would add Economic Value Added (EVA) metrics to its quantitative Pay for Performance methodology, correctly stating that these metrics are key indicators of corporate performance. Simply put, EVA measures economic profit (EP), or earnings after a charge for the capital used to generate those earnings. While these are not yet a part of ISS’s quantitative CEO Pay for Performance test, this development will certainly help raise awareness of economic profit in the boardroom, and for good cause.

It is well documented that the shareholder returns of publicly traded companies are driven by investors’ expectations of future economic profit growth.

(See “What Investors Want,” at right) It is also well documented that higher levels of executive compensation are not generally correlated with superior total shareholder return (TSR) performance.

(See “Pay is Not Performance,” opposite page.) So, introducing a new measure like EVA or economic profit and linking it to compensation may seem like a logical step in the right direction.

But why doesn’t tying CEO compensation to economic profit growth lead to greater shareholder returns?

Ensuring CEOs and managers focus on and achieve the economic profit growth needed to sustain superior shareholder returns takes more than just introducing a new measure and linking it to compensation. The 2 percent of Fortune 500 companies that have been able to deliver top quartile shareholder returns, within respective peer groups, for five consecutive years go beyond measurement alone, as co-authors Scott Gillis, Lee Mergy, Joe Shalleck wrote in Beliefs, Behaviors, &

Results. They are manWhat Investors Want aging for economic Shareholder returns are driven by investors’ profit growth. A study expectations of future economic profit growth

by INSEAD, “Are You Intrinsic Value1 (Really) Managing for $MM Value?”, evaluated per1,000,000 - Implied Relationship (R2)=92% formance of EVA-centric companies in 2000 and found two-thirds of those that managed 100,000 EVA outperformed the total shareholder returns (TSRs) of 10,000 their industry peers. In contrast, companies that only adopted an economic profit 1,000 1,000 10,000 100,000 1,000,000 measure and perhaps Market Equity Value ($MM) linked it to compensation, lagged their peer Calculated as the sum of discounted economic profit growth plus equity investment.

TSRs, because they Source: Factset, Galt & Co. Analysis likely did little else to change the way their trying to achieve and how they will company is managed. (See “Manage ultimately measure success.

What Matters,” opposite page.)

1

What do the value-exemplar companies do differently?

The companies that deliver superior shareholder returns and sustain these over time relentlessly apply five core principles to manage economic profit growth: 1. Establish the Right Definition of Winning: The ultimate objective of a publicly traded company is to deliver superior returns over time for its stockholders. While revenue, earnings and return on capital are important measures of performance, it is ultimately the economic profit and cash flow growth that drives shareholder value. Leaders of successful organizations establish this as an unambiguous and singular definition of winning.

As a result, their organizations are absolutely clear on what they are

2. Capitalize on Concentrations of Value: Economic profits, shareholder value contribution and, most importantly, economically profitable growth potential are always concentrated by market, company, business and business segment (i.e., by product, customer, channel, etc.). In fact, in many Fortune 500 companies, less than 40 percent of the capital employed is generating over 100 percent of the company’s shareholder value, while 25 to 35 percent of the capital employed is destroying shareholder value. If a company can understand where and why economic profits are concentrated and how that concentration is likely to change in the future, management will have a tremendous competitive advantage in deciding where investing time, effort and capital is most likely to drive shareholder value growth.

Pay is Not Performance

Manage What Matters

2018 Total CEO Compensation $MM

10-year TSR1 Differential vs Industry Average

Companies that manage for economic profit growth, not just measure it, deliver superior shareholder returns

CEO compensation is not well correlated with Total Shareholder Returns (TSR)

50.00

Implied Relationship (R2)=0% 5.0%

40.00

2.9%

+4.6%

Companies that manage EP outperformed industry averages by 2.9%, while companies that only measure EP, underperformed by 1.7%

30.00 0.0% 20.00 -1.7% 10.00

-5.0%

Companies Managing EP Growth

2

Companies Measuring3 EP Growth

0.00 -50%

-30%

-10%

10%

30%

1-Year Total Shareholder Returns1 Total Shareholder Returns as of 8/31/19 Source: Factset, Galt & Co. Analysis

1

3. Manage to a Focused and Prioritized Value Growth Agenda: Just as economic profits are concentrated, so too are the opportunities a company has to drive economic profit growth.

Jim Kilts (who, as CEO, turned around the performance of three of the world’s most notable consumer brand companies: Kraft Foods, Nabisco, and Gillette) calls it staying focused on “doing what matters.” As he describes, “It takes guts to say these are the things that really matter and I’ll pay absolutely no attention to the rest.” Successful leaders know that nothing gets done when their organizations try to do too much.

4. Differentiate Strategies and Allocate Resources Differentially: CEOs who delivered superior customer and shareholder value emphasize that strategies must define how a business will differentiate itself from the competition in order to capture a

50%

1

Total Shareholder Returns as of 8/31/2019 (2) 18 EP Managed companies from 13 industries identified based on language found in publicly available filings, transcripts, and presentations indicating management of business or strategic decisions based on EP or other economic profit measures (3) 25 EVA Measured companies from 22 industries identified based on language found in publicly available filings, transcripts, and presentations indicating measurement of EP or other economic profit measures.

Source: Factset, Company Filings, Galt & Co. Analysis

leading share of the economic profits.

However, many businesses simply try to optimize performance of the existing business model. We call this “optimizing a sub-optimal business model.” Instead, businesses should ask themselves if they are pursuing the value-maximizing business strategy in the first place—that is, one that results in growing the highest possible share of the market’s economic profit pool.

5. Build the Organizational Conditions and Capabilities to Manage Value: Executives face two key challenges in delivering and sustaining superior shareholder value growth.

First, they need to ensure the strategies and resources are in place to maximize the economic profit growth of each business unit and the entire corporation. Second, they must establish the organizational beliefs and conditions that increase the odds

that the daily decisions and actions of hundreds of managers across the company are aligned with shareholder interests.

Getting a business to focus on and sustain superior economic profit growth takes more than just introducing a new measure of profitability and linking it to compensation; i.e., “measuring value will not maximize value.” It requires the CEO and all leaders within the company to adopt a common definition of winning and align their strategies, resource allocation and performance management decisions to that objective. Only then can a company be confident in its ability to sustain superior shareholder returns over time.

The Authors John Reuter, Managing Director, Galt & Company and Zubin Chandra, Consultant, Galt & Company.

C OVE R STORY

HOW AMAZON DOES IT

26 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

An exclusive look at decision-making inside the world’s most pioneering digital company. BY RAM CHARAN

T

The digital age demands high-velocity, high-quality decisions, yet decision-making in traditional companies is hindered by so many hierarchical layers, coordination committees and standing councils that their very survival is at stake. Without algorithms and data at the center of their decision-making, traditional companies cannot compete with today’s digital giants. In 1994, Amazon started creating the greatest revolution in decision-making with one of the oldest cornerstones of success in business: customer obsession. For his new book, The Amazon Management System, world-renowned business advisor, author and speaker Ram Charan drew on publicly available information and interviews with high-level ex- and current Amazon employees to crystalize some of the ideas and insights developed by Jeff Bezos and his team. This excerpt details how CEOs and their senior and middle managers can increase the velocity and quality of their decisions to gain an upper hand against their traditional competitors.

Amazon’s Jeff Bezos focused on the oldest of old business principles—extraordinary customer obsession to the level that each customer is treated individually—and turned it into the ultimate business purpose of his company. As everyone knows, digitization was the engine that enabled the company to treat each one of its more than 100 million customers as if they were shopping at a corner store in a small town. But the true magic in how Amazon built this system isn’t just technological—it’s organizational. It’s all about making better decisions and making them fast. Here’s how they do it—and how you can, too.

HIGH-QUALITY, HIGH-VELOCITY DECISION-MAKING

Five rules can guide you toward high-velocity decision-making: 1. Recognize there are two types of decisions. To achieve high velocity, Bezos empowers his organization and categorizes all decisions into two types. Type 1 decisions “are consequential and irreversible or nearly irreversible—one-way doors... If you walk through and don’t like what you see on the other side, you can’t get back to where you were before,” Bezos wrote in a 2016 shareholder letter. Such decisions should go through a “heavyweight” process—being made slowly and methodically with great deliberations and consultation—to ensure a high-quality decision. Taking type 1 decisions too lightly is a potentially fatal mistake.

Type 2 decisions refer to those that “are changeable, reversible—they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through,” wrote Bezos. These decisions “can and should be made quickly by high-judgment individuals or small groups.” As CEO, you should identify the Type 2 decisions and delegate.

The distinction between two different types of decisions and, thus, two different types of decision-making mechanisms must be crystal clear. It beats bureaucracy, analysis paralysis and improves, over time, people’s judgement in decision-making.

REUTERS / RALPH FRESO

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Jeff Bezos with children from ‘Club for the Future’

Bezos places huge emphasis on fighting conformity, avoiding group thinking and resisting the conventional thinking that achieving harmony is desirable.

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REUTERS/CLODAGH KILCOYNE

2. Don’t make all decisions by yourself.

No matter how hard-working you and your top team are, there are only 24 hours in a day. As your business continues to grow, if decision-making remains concentrated at the top, sooner or later, you and your top executives will become the biggest impediment to rapid growth.

3. Don’t wait for all the information. As Bezos wrote in his 2016 shareholder letter, “most decisions should probably be made with somewhere around 70 percent of the information you wish you had. If you wait for 90 percent, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course-correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”

4. Don’t require approvals that are lengthy and must go through large numbers of hierarchical layers. When multiple functions actually need to be involved in approving a Type 2 decision, you can transform the traditional sequential process into a simultaneous dialogue for high-velocity, high-quality decision-making. For example, Amazon project teams are free to choose between internal services and external vendors. In the traditional sequential selection and approval process described earlier, this could take two to three months and often result in poor quality because distortion and information flow takes place.

Amazon is a continuous invention machine. It has developed the fastest invention process. It involves a clear, written definition

of the product to be developed in excruciating detail both in terms of outputs and inputs. The senior people select a leader, and the leader selects an integrated cross-functional team—they call it a separable, single-threaded team—whose full-time job is to deliver the project. They do nothing else.

They think and act on the project continuously until it is delivered and operational.

I have personally observed putting this methodology in one, large company. They developed a new idea in eight weeks, and they changed the intensity of competition in their industry. This methodology has done wonders for velocity and shortening the cycle time of decision-making.

5. Don’t wait for everyone to agree. Everyone has experienced postponed decision-making due to one or a few people’s objection or absence. In some cases, in a drive to have consensus, one person can exercise veto power. Sometimes a decision is made and then reopened in the third meeting, which is very frustrating, energy-draining and time-consuming—and the quality of decision, by definition, is poor.

To solve this deadlock, “disagree and commit.” Bezos did that when his team wanted to greenlight an Amazon Original show that he felt should be dropped, responding, “I disagree and commit and hope it becomes the most watched thing we’ve ever made.”

Just imagine how long that call would have taken if the team had to educate, persuade and finally earn commitment from him.

After all the facts are considered and all thoughts are expressed, as Bezos wrote in a shareholder letter, “if you have a conviction on a particular direction even though there’s no consensus, it’s helpful to say, ‘Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?’ By the time you’re at this point, no one can know the answer for sure, and you’ll probably get a quick yes.”

This is a two-way, rather than a oneway, approach. Leaders can use it for high-velocity decision-making, and leaders should also be prepared to practice this principle themselves, as Bezos did in greenlighting that Amazon Studios original program.

CONTROLLING FOR QUALITY

REUTERS/CARLOS JASSO

Now that you’re making high-velocity decisions, how do you make sure they’re high-quality?

1. Find the best truth. In traditional companies, due to the inevitable delay, distortion and manipulation as information is relayed through layers from bottom to the top and the fact that data resides in silos, many decisions are made far from the truth, the whole truth and nothing but the truth.

Rick Dalzell, former Amazon CIO and Bezos’ right-hand man, has written that Bezos “tries to find the best truth all the time.” This may sound self-evident, but it is a big challenge for traditional organizations usually characterized by strict hierarchy, managing by fear and a command-and-control modus operandi. As a devotee of customer service, he seems to have learned from Toyota’s culture of seeking the root cause of any defect. He actually recruited a high-level guy who was an expert at Toyota in making sure that everyone can detect any defect and take action.

At Amazon, each metric is owned by a human being. If the owner finds a significant anomaly, even if it comes from only one customer, the owner is required to search through to the root cause of that anomaly.

That means looking all the way back to the beginning of the process through to the actual customer experience.

Bezos does this himself, personally looking at data, seeking out any defects, then asking people to diagnose the root cause, which could be a root cause across a system in the company. For example, when the topic of lengthy hold times for customer calls came up during an executive meeting, he picked up the phone and called customer service himself to demonstrate the discrepancy between what he was being told—that one-minute hold times were typical—and the reality—his hold time on that call was over four minutes.

2. Imagine the possible change. In addition to the best truth in a static sense, Bezos takes it one step further, i.e., always using future-back perspective, thinking about how things will change going forward. For example, back in 2005, most Amazon executives were against Bezos regarding launching

Prime, i.e., $79 membership per year to enjoy two-day shipping for free. The objection was well-founded. Given an $8 logistics cost per order, assuming 20 orders a year on average by each Prime member, shipping would cost $160 a year more than the $79 membership fee. Diego Piacentini, an ex-Apple executive, reported that “…every single financial analysis said we were completely crazy to give two-day shipping for free.”

What gave Bezos the unwavering conviction despite the siege from all?

The key factor was his undying devotion to customer obsession and having the conviction that it would be made fiscally prudent. Bezos took a future-back perspective, asking the obvious but Amazon warehouse commonly neglecton the outskirts of Mexico City, Mexico ed question: How will the shipping cost change?

He believed it would drop. Why? Because when customers spend more, Amazon’s volume will increase, and that increased scale would help Amazon negotiate lower prices from shipping vendors and decrease the amount of fixed-cost allocation of each shipment. In addition, with continuous system upgrades, Amazon’s logistics system would continue to “drive down Amazon’s transportation costs by double-digit percentages each year.” In addition, the frequency of customer interaction will provide more data, and data is equity.

3. Combat group thinking. Bezos places huge emphasis on fighting conformity, avoiding group thinking and resisting the conventional thinking that achieving harmony is desirable. He expects people to challenge him.

He demands a quality discussion with people bringing in new ideas, different perspectives and, even better, disruptive thinking. He “believes that truth springs forth when ideas and perspectives are banged against each other, sometimes violently,” writes Stone.

Amazon’s Leadership Principles state that leaders are “obligated to respectfully

Even when you make the right decision in the business sense, if you put the wrong person in charge, the endeavor will probably fail.

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Amazon Spheres, Seattle WA

Among all the inputs, the most important one is probably people.

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REUTERS/LINDSEY WASSON

challenge decisions when they disagree, even when doing so is uncomfortable or exhausting; they do not compromise for the sake of social cohesion.” Amazon employees well understand their obligation, not only to the company but also to the customer and to the shareholder. Also, as John Rossman, former director of enterprise services at Amazon, writes in The Amazon Way, employees have learned that disagreeing with senior executives is actually beneficial to their careers at Amazon.

I personally observed Ray Dalio, founder and co-chairman of the world’s largest hedge firm, Bridgewater Associates, in his meetings for one full year and saw him very effectively seek opposing viewpoints. Also, he made it easier for people to disagree with him when he often said, “Here is my view, and I could be wrong.” He developed a mobile app that he would use several times in a meeting to get honest input from participants anonymously.

Each person in the meeting votes yes or no on a decision and explains why. Every word of the “why” is recorded. Later, all that information is analyzed.

This process was implemented at the investment firm Matrix Capital. After Matrix founder and CEO David Goel implemented the dialogue process, I observed several sessions where the company’s executive team members logged their candid opinion about whether or not to approve a deal and the underlying detailed logic behind their decisions in the mobile app. The data collected during those sessions was analyzed on a longitudinal basis, which yielded biases analysis, conviction analysis, assumptions analysis and logic analysis, and the process improved the

judgment quotient of the whole team.

4. Test through the experiment. When people have genuine disagreements or when the future is murky, rather than endless debates, fuming arguments and efforts to persuade one another, Bezos opts for an experiment. Brad Stone, author of The Everything Store, vividly captured such a scenario back in 2001. “As usual, Bezos battled his marketing executives. They argued that Amazon had to be on the airwaves to reach new customers. As Amazon’s losses mounted, Bezos’s opposition hardened.”

How to make a decision when two viewpoints are so opposite? Bezos asked the marketing department to run TV commercials in two cities, Minneapolis and Portland, and then measure the additional local purchases they helped generate.

The test went on, the result came back, and the conclusion was clear, “not enough to justify the investment.” Based on this powerful test, Bezos decided not only to cancel all TV advertising, but also to make drastic changes to the marketing department. Today, by any measure, Amazon is the number-one brand in the world—and this was achieved through very little mass advertisement or traditional marketing effort. That is because having a customer experience on an individualized basis that is second to none earns customer admiration for the company.

Experimenting is a natural habit in Amazon. When they do their operating plan, they provide a narrative of learning from the previous year.

5. What if a decision goes wrong? “We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages,” Bezos stated in a 1997 shareholder letter. “Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.”

What’s unique about Amazon’s way of learning? The secret weapon is mid-course adjustment. They ask questions such as what factors should have been considered but did not, what assumptions had been made and why some of them were not reasonable, what critical technology breakthrough was bet on and why it did not happen as expected, and

the list could go on. Among all the inputs, the most important one is probably people.

Even when you make the right decision in the business sense, if you put the wrong person in charge, the endeavor will probably fail.

Amazon management emphasizes and measures input metrics all the way through.

The reason is that if the inputs are right in terms of timing, quality and quantity, the goals will be achieved. This is deep in the culture.

SCALING HIGH-VELOCITY DECISION-MAKING

In essence, decision-making is about making choices. Tough decisions force us to choose between two goods or weigh two evils. There is no perfect solution, and everything has two sides—the upside and the downside.

In a commencement speech at Princeton University, Bezos asked, “Will you choose a life of ease, or a life of service and adventure?”, “Will you wilt under criticism, or will you follow your convictions?” and “Will you be clear at the expense of others, or will you be kind?”

Of course, Bezos didn’t expect every audience member that day and every future reader of the speech to choose paths like service over ease and clarity over diplomacy, but for people in Amazon, he demands that everyone follow the same principles and methodologies that deliver good decision-making.

Now for the $1 billion question: How to scale high-velocity and high-quality decision-making as your company grows?

1. Crystalize the consistent principles.

In his first shareholder letter back in 1997, Bezos explicitly set forth the decision-making principles of Amazon (see sidebar, right): Why go through what was surely an onerous and taxing effort? The obvious answer is so shareholders can make informed investment decisions regarding Amazon. It’s also so customers can be more willing to build a trust-based, long-term relationship with Amazon. But, much more importantly, it is for all current and future people working in Amazon, so that every single one of them can clearly understand the decision-making logic and is able to make the right choice when duty calls.

2. Specify the consistent methodology, standard operating procedure (SOP).

AMAZON’S DECISION-MAKING PRINCIPLES We will continue to focus relentlessly on our customers.

We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or shortterm Wall Street reactions.

We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.

We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.

When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.

We will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments.

We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses.

We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.

We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.”

Source: 1997 Letter to Shareholders, Jeff Bezos

THE CHRONOLOGY OF GOOD DECISIONMAKING Getting to HighVelocity DecisionMaking 1. Recognize two types of decision-making.

2. Don’t make all the decisions by yourself.

3. Don’t wait for all the information.

4. Don’t require approvals that are lengthy and go through large numbers of hierarchical layers.

5. Don’t wait for everyone to agree.

Controlling for Quality 1. Find the best truth.

2. Imagine the possible change.

3. Combat group thinking.

4. Test through the experiment.

5. What if a decision goes wrong?

Scaling High-Velocity Decision-Making 1. Crystalize the consistent principles.

2. Specify the consistent methodology.

3. Reinforce the consistent approach in every decision.

To order the book on which this article was based, which will be available December 8, 2019, visit amazonmanagementsystem. com.

On June 9, 2004, we witnessed a brilliant innovation in human management practices.

From that day on, Amazon embarked a crusade against PowerPoint presentations and bullet points, and a journey toward what evolved into “Six-Page Narratives.”

If you doubt this methodology’s significance, you are not alone. PowerPoint has become the second language of business. Some companies have a stand-alone functional department devoted entirely to producing PowerPoint presentations.

But Bezos’s was not a capricious whim, but a well-thought-through decision to embrace the value of narrative memos that were often time-intensive endeavors involving multiple iterations. Many Amazonians recalled this practice vividly even after they left the company. In The Amazon Way, Rossman wrote, “I can’t tell you how many of my weekends were consumed by this writing and editing process.”

In my teaching at Northwestern University, I required my students to write in two pages, clearly, concisely and to the point, their case analysis. The purpose was to train their brains to sort out what matters from what does not matter and to write that in a way that a teenager could understand it.

And I read each paper and made comments.

Why the huge investment of people’s time and efforts? And why do Amazonians present and past revere it so highly?

As Bezos noted in a 2012 interview with Charlie Rose, “When you have to write your ideas out in complete sentences and complete paragraphs, it forces a deeper clarity of thinking.” Authors are forced to run complete analyses, distinguish between subtle nuances, articulate their logic, prioritize various ideas and take full accountability for specific proposals. There is no wiggle room, no hiding place or no safe haven. Everyone has skin in the game and is held accountable.

Another cultural shock for newcomers to Amazon is that nearly every meeting starts with attendees sitting in silence and reading the narratives for 15-30 minutes. This is because business meeting attendees typically begin interrupting presentations on the very first slide, without an understanding of the full picture the presenter has in mind, and the discussion begins to deteriote.

As Bezos noted in the same interview with Rose, “Executives are very good at interrupting....” So reading memos together is a very effective way to ensure that everyone is well-equipped for a high-quality discussion afterwards. As a result, Amazon’s meetings rarely end without clear decisions or specific actions. As ex-Amazonian Samir Lakhani put it, “Bezos has given all employees a standard SOP for ensuring the basics get done well.”

3. Reinforce the consistent approach in every decision. One of Bezos’s most conspicuous traits is consistency. He actually attached the 1997 shareholder letter to every single letter afterwards, probably both as a constant reminder to himself, and as a powerful proof to the customers, shareholders and all employees at Amazon.

In 2010, Bezos noted that “customers who browsed—but didn’t buy—in the lubricant section of Amazon’s sexual-wellness category were receiving personalized emails promoting a variety of gels and other intimacy facilitators.” He “believed the marketing department’s emails caused customers embarrassment and should not have been sent” and called for a meeting, reported Stone.

In the meeting, executives “argued that lubricants were available in grocery stores and drugstores and were not, technically, that embarrassing. They also pointed out that Amazon generated a significant volume of sales with such emails. Bezos didn’t care; no amount of revenue was worth jeopardizing customer trust. It was a revealing—and confirming—moment. He was willing to sacrifice a profitable aspect of his business rather than test Amazon’s bond with its customers.

It is such defining moments that convince others of what is important to you and how you will make decisions in tough situations.

As Rossman wrote in The Amazon Way, Amazon’s “principles aren’t slogans printed on wall posters and coffee mugs. They are lived and breathed every day by Amazonians from the CEO on down.” We have cross-checked this with the employees and ex-employees who admire this practice.

I urge readers to reflect on each of the Amazon decision-making mechanisms described here as potential ways to improve your organizations for high-velocity, high-quality decision-making.

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SECRETS OF THE STRAGEGIC

CHRO HERE’S HOW TO TAP THE EXPERTISE OF THIS KEY BUSINESS PARTNER.

BY OMAR ISHRAK, CEO MEDTRONIC, AND CAROL SURFACE, CHRO, MEDTRONIC

WHAT IS THE PRIMARY ROLE OF YOUR CFO? Chances are, if you asked that question of 25 CEOs, you would hear similar answers: managing the financial actions of the company, financial planning, financial risk management, record-keeping, financial reporting and similar responsibilities. What if you asked the same question about the CHRO? Other than consensus on the role of leader of the HR function, the responses likely would vary widely—if the CEO thought the role extended beyond functional leader at all.

As CEO and CHRO for Medtronic, we see this lack of role clarity as a significant missed opportunity. A close partnership characterized by aligned priorities and clearly defined roles is imperative to driving Medtronic’s business strategy.

Leading an effective and efficient HR team is important, of course. But it’s table stakes. Your CHRO should play an active role, along with his or her executive peers, in driving business results.

How, exactly, should that happen? The lack of CHRO role clarity was the driving factor behind the CHRO Global Leadership Board’s (CGLB) work to examine the role in the context of today’s business environment and establish a global standard of excellence for it. Working with a research team from Gartner and with input from highly successful CHROs and CEOs across a range of industries, board members developed a model that defines what they see as the

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“I trust her 100 percent,” says Omar Ishrak of CHRO Carol Surface.

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We believe the CHRO’s role as the board’s leader of human capital is one of the role’s most interesting and important evolutions.

high water mark for the role CHROs can and should be fulfilling within their businesses.

At Medtronic, this model serves as both a framework and consistent reminder of the importance of priority alignment for us in our work together. Let’s take a look.

THE WORLD-CLASS CHRO

Serving as the HR functional business leader is the foundation of the CHRO’s role.

CHROs also are expected to either come into an organization with, or quickly acquire, business acumen specific to the company they are serving, as well as to work with executive peers to shape and influence business strategy.

These three areas of expertise are considered non-negotiable: they are essential for success in this—and any—C-Suite position.

The five pillars that sit atop the model’s foundation outline the key responsibilities that define a world-class CHRO (see table, below). These pillars require the CHRO to step beyond HR functional management to

truly lead the business in the critical areas of talent strategy, enterprise change and company culture, as well as to serve as a trusted advisor to the CEO and the board.

The CHRO role as outlined by this model is much richer and more complex than that of functional leader, and we believe it captures the full potential of the CHRO and what the CEO should expect from him or her.

It’s important to know that this model wasn’t developed in the echo chamber of HR professionals. It was tested, validated and adjusted after extensive interviews with current and former CEOs of largecap companies across a range of industries globally. The model’s advantages are many.

It provides role clarity for CHROs and the CEOs they work with, leading to closer priority alignment and clear expectations for performance. It is flexible across industries and companies of all sizes and is applicable whether you are in growth or contraction mode. It’s also flexible internally; the

MODEL OF A WORLD-CLASS CHRO

DRIVE BUSINESS RESULTS Board’s Leader of Human Capital

Creator of Talent Strategy

Enterprise Change Leader

Driver of Culture and Purpose

Trusted Advisor and Coach

Plan and Support CEO Succession

Ensure Critical Role Staffing

Challenge the Status Quo

Link Purpose to Culture

Advise and Coach the CEO

Build ShareholderSupported Executive Compensation

Design Talent Management Processes

Plan Strategic Enterprise Changes

Measure and Communicate the Culture

Mazimize the Senior Team Effectiveness

Surface and Respond to External Trends

Direct Strategic Workforce Planning

Manage Stakeholder and Advocate for Employees

Hold Leadership Accountable for the Culture Promise

Coach and Develop Key Enterprise Talent

Business Acumen

Business Strategy Development

Understand the business model, financials, external markets and customers.

Stage and influence business strategy and partner with executive peers to move the organization forward.

Functional Business Leader Create a future-focused, financially disciplined team to run the HR function.

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CHRO’s time allocation can easily shift to support business needs. And the model is aspirational. Very few CHROs enter the role with strength and experience in each pillar—but the model defines a world-class standard for how the CHRO role is performed by leading practitioners today and in the foreseeable future. And, increasingly, CEOs are demanding that level of expertise from their CHROs. MODEL IN ACTION

At Medtronic, the world-class CHRO Model guides our work together in support of the company’s business goals. For example, early in both of our tenures with the company, there was a need for a focus on succession planning for several key roles within the company, and that is where Carol spent much of her time as the board’s leader of human capital. Then, Medtronic completed an acquisition that doubled the size of the company overnight. While we didn’t abandon talent and succession planning, we made an immediate pivot to assess our organizational design, to ensure it fulfilled and aligned to our overall business strategy and supported the upcoming integration.

At the same time, Carol’s focus shifted to that of enterprise change leader, driver of culture and purpose, and HR functional expert during a lengthy period of acquisition planning and integration. The model accounts for the flexibility that is required to support the dynamics of a rapidly changing business landscape.

We believe the CHRO’s role as the board’s leader of human capital is one of the role’s most interesting and important evolutions. The human capital pillar charges the CHRO with identifying external trends that impact the business and bringing them to the attention of the CEO and the board. In today’s environment of rapid-fire information sharing, this role is key. For example, Carol recently helped us navigate the new expectations brought about by the #MeToo movement in a way that not only supports our ethical responsibilities but also helps to drive the culture we are committed to at Medtronic.

Culture is another area that requires us to

be closely aligned. We’re fortunate that our company mission has remained the same over 60 years, through leadership changes and as the company has grown into a global presence. Our leaders and employees are passionate about our mission. To maintain that focus and passion as our industry and company continue to change and grow, we have to ensure that there is a clear connection between our mission and our words, deeds, actions and incentives, among other things. We need to make sure that our leaders are behaving in ways that uphold the mission, and that we hold them accountable to deliver against that intent through performance and incentives. Operationalizing culture at scale is a daunting challenge and, while the CEO bears ultimate responsibility for this, the CHRO’s role in connecting the dots for employees at all levels cannot be underestimated. We believe the driver of culture and purpose role is a critical one, and it is one where we are aligned and intently focused.

These are just a few of the many examples of the model at work within Medtronic.

Clear expectations and focus alignment, along with trust in and respect for each other, are the hallmarks of our partnership.

If you are looking to strengthen your CEO/CHRO partnership to drive business results, consider the following:

If you limit your expectations for the CHRO role to just the classic ‘pay everybody the right amount, on time, and make sure we have good benefits,’ you’re missing 90 percent of the opportunity.

CEOS: ASK FOR AND EXPECT MORE FROM YOUR CHRO

• Expand your thinking. If you limit your expectations for the CHRO role to just the classic “pay everybody the right amount on time and make sure we have good benefits,” you’re missing 90 percent of the opportunity. The model outlines the many areas a world-class CHRO can and should provide leadership value.

• Identify the critical skills the CHRO needs in support of your business.

Leading a function and leading a business require different skills. Today’s CHRO role requires a wide range of strengths beyond the expected people management and coaching skills. The ability to use data and analytics to drive strategy and organi-

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Expectations of today’s CHRO are higher than ever and will continue to increase.

zational design is key, along with a structured way of thinking. People-assessment skills are critical; we believe they are one of the most important strengths a CHRO can have. Deep understanding of organizational dynamics is important, as is the ability to identify the impact of external and internal trends to the business. And the CHRO must be comfortable challenging the status quo so he or she can serve as a true advisor and partner to the CEO and the board. These are the talents we consider vital to the CHRO role at Medtronic, but every organization is different. The model is customizable, setting the stage for the CEO and CHRO to work together to identify the specific skills and areas of focus that best fit the company’s current state, desired state and leadership culture.

• Use the model to drive discussion and alignment. It’s a great tool for candid conversations about priorities. Many CEOs don’t have a clear idea of where CHROs spend the bulk of their time. This model offers a framework for a contracting discussion about where the CHRO should focus, given the business model, the cycle the business is in and other factors. That discussion should lead to expectation clarity and provide a clearer framework for performance evaluation.

• Demand more. Without question, the HR function has its roots in administration and what was once called “personnel.” And, in many companies, HR is responsible for a great deal of operational execution, such as talent acquisition, employee relations, payroll and benefits administration. But the CHRO role must evolve. There are so many factors in today’s environment that impact business success: social media, customer and employee activism, changing employee expectations of jobs and the work environment, the gig economy and many more. The CHRO is uniquely positioned to be able to help companies navigate these murky waters. Understand that—and help your leadership team and board understand it as well.

• Ask the right questions. Whether you are

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evaluating a current CHRO or interviewing a prospect, ask yourself the following questions: Do you trust her? Is he looking three to five years ahead to determine talent strategy? Does she have a firm grasp on business dynamics within your industry as well as your company? Is he able to connect the dots between your company’s mission, values and every other aspect of the business? If the answer to any of these questions is no, you have a right to expect more.

CHROS: ASK FOR AND EXPECT MORE FROM YOUR CEO

• Don’t underestimate the impact of your role. Research indicates that many CEOs are unclear about where CHROs spend their time, as well as where it should be spent. If you’re spending the bulk of your time running the HR function, you’re missing a real opportunity to impact your business strategy and drive business results. Use the model as a starting point for a conversation with your CEO about where you can add value— and then develop a plan to do just that.

• Ensure HR priorities are aligned with business priorities. Research shows that approximately 60 percent of CEOs are rethinking the HR function. Understanding what your CEO is thinking and where his or her priorities lie should guide where you spend the bulk of your time. Make sure the two of you are aligned and check in frequently to make sure you remain aligned.

• Build and maintain a strong bench. The pillars outlined in the model require a lot of time and effort. But the day-to-day needs of the HR function never go away. As CHRO, your role is to ensure you have a strong HR bench to keep those very important functional areas that directly impact employees moving smoothly. Build that bench, empower it and focus the bulk of your attention on the aspects of your role that directly drive business success.

• Know where your strengths and weaknesses lie. Expectations of today’s CHRO are higher than ever and will continue to increase. Understand where you already

Surface says shared respect for data-driven insights factored into the success of her partnership with Ishrak.

provide value, and where you need to grow.

The CGLB has developed a self-assessment diagnostic against the competencies in the model that is helpful to both aspiring CHROs and sitting CHROs who might be operating only in part of the model. Take advantage of this and other tools and use the results to guide conversations with your CEO about growth opportunities.

PARTNERSHIP IN ACTION

Strong partnerships generally offer personal satisfaction. But they drive business results as well.

In 2014, Medtronic entered into an agreement to acquire Covidien, a move that essentially doubled the size of the organization, expanded its global presence and positioned it as the world’s largest medical device company. An acquisition of that size is the ultimate test of the CEO/CHRO partnership, since it impacts nearly every aspect

of the business. Working with our peer executives, we were able to bring two large organizations together relatively seamlessly, from a people, talent, culture and organizational structure perspective, while continuing to deliver on the financial commitments we made to our external stakeholders and to ourselves. That could not have happened without a strong partnership driven by clear expectations, focus alignment, trust and respect.

Generally speaking, the more you expect, the more you get. The tenets of the Model for a World-Class CHRO help strengthen the CEO/CHRO relationship and add value to the organization. However, it doesn’t happen overnight. It is an exercise in shifting key responsibilities for the function, educating the board and sometimes peer executives, and in overall change management. In other words, it is a multi-year process. But in our experience, it is well worth the effort.

Omar Ishrak has served as chairman and CEO of Medtronic since June 2011. Medtronic is the world’s leading medical technology company, with $30 billion in annual revenue, and operations reaching more than 150 countries worldwide.

Carol Surface joined Medtronic as senior vice president and CHRO in 2013. She leads Medtronic’s human resources strategy for 90,000+ employees worldwide.

Special thanks to CGLB members Kevin Cox and Nazneen Razi, who provided background and insights into the development of the model and its implications for business success.

For more information about the Model for a World-Class CHRO, visit https://www.nationalacademyhr.org/sites/default/files/ Becoming_a_World-Class_CHRO_Whitepaper(1).pdf to download the white paper, Becoming a World-Class CHRO: A Practitioner-Defined, CEO-Validated Model and review a webinar that provides an overview of the model and highlights ways it can be leveraged and support and resources on the horizon.

CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019 / 37

ROOSEVELT HAD CHURCHILL

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

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TH E C N E X T I NTE RVI E W

‘THE FABRIC OF AMERICA’ David Steiner led Waste Management back from ruin by restoring worker pride— and finding his best 17 executives.

INTERVIEW BY RICK SMITH

This is the latest in a series of discussions with CNEXT Leaders.

In partnership with Chief Executive, CNEXT matches some of the world’s most respected former CEOs with current leaders to help solve critical problems.

If you are interested in a confidential conversation about CNEXT and its mentoring and advisory services, e-mail Inquiries@C-NEXT.com

PHOTOS BY IAN SPANIER

WHEN DAVID STEINER joined Waste Management as deputy general counsel in 2000, the company was still reeling from accounting and insider-trading scandals. Working with then-CEO Maury Myers to bring the garbage-hauling and disposal enterprise back on track, Steiner moved swiftly up the ranks to become its GC and then CFO, before succeeding Myers in 2004, just three-and-ahalf years after coming into the $14.9 billion revenue company.

As CEO, Steiner restored flagging employee morale, delivered strong financial performance and repositioned the company as a leader in the growing recycling sector before stepping down in 2016. During a recent interview with Chief Executive, he shared lessons from his 12-year tenure. Excerpts, edited for length and clarity, follow.

How do you think about disruption as a leader in this state of the world? What aspects of it do you really feel are more difficult today than 10 or 15 years ago?

I think that the American businessman has to realize that the outside environment has changed. In my dad’s generation, if you ran GE, you made a little bit more money than

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all the other people who worked there, and you were revered as a business leader. Today, you make a lot more money than the people who work there, and you may not be revered as a business leader. The current environment in the U.S. is not necessarily business-friendly. You need to realize that. The Business Roundtable letter on the purposes of a corporation was actually very well done.

It really makes a CEO sit back and think, “How can I make this corporation work for all of the constituencies?”

Coming out of World War II, you had a very hierarchical society. You had a hierarchical business setup. You gave an order, and people went and did it. Now that just doesn’t work.

You have to figure out how to get all the people within the company to work for you. Then, how do you get that company to work for the other constituencies? It’s a complicated world.

But it’s a world that you have to learn to deal with as a leader. It really all comes back to what I believe is the fundamental principle of leadership: It’s not about you. It’s about how you make a company succeed.

Waste Management, prior to you arriving, got in trouble for effectively cooking

the books. Eventually, the top officers had to pay fines of over $30 million personally, and the company suffered a $1.7 billion earnings restatement.

Waste Management was was one of the top growth stocks in the early ’90s. What happens with a lot of growth companies is once they can’t grow anymore, they try to find other ways to grow earnings. Sometimes they go down paths that probably aren’t the best. So it was basically three years where there was absolutely no stability and two different management teams that ended up with two of the three largest write-offs in the history of corporate America.

How did you end up at the company?

I was actually a practicing lawyer in New Orleans. A friend of mine said, “Look, why don’t you come talk to this company in Houston? They’re always looking for lawyers.” So I went and talked with them, and they offered me a job. I thought, “Well, gosh, if I’m gonna take a job in Houston, I probably ought to interview with more than one company.” So I did.

Then, the recruiter called and said, “Look, we want you to come talk to Waste Management.” By this time, I had three job offers, and I was going to pick one of them. I said, “No, I think I’ll pass. They’ve got SEC issues. They’re

CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019

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a garbage company. Why would I wanna go there?” And she said, “Look, we’ll have you back at your desk in New Orleans by noon.

You come over and interview with the general counsel, for the job as deputy general counsel.” And I said, “Okay, I’ll do that.”

I interviewed with him, and he was very impressive. He was either going to do something bigger at the company or at another company. So I thought I could go in as deputy general counsel, maybe in 5 or 10 years, I could become general counsel of Waste Management, a Fortune 150 company, a nice way to end a legal career.

So I took the job. Six months later, they promoted him into operations, and I became general counsel. Fourteen months after that, I became CFO, and a year after that, CEO. So basically, in three and a half years, I went from deputy general counsel to CEO. I tell everybody that I am the living, walking embodiment of better-lucky-than-good because the company that I turned down in 2000 was Enron.

“I am the living, walking embodiment of betterlucky-than-good, because the company that I turned down in 2000 was Enron.”

So all of a sudden you’re the CEO, thinking about the path forward. What’s that like?

My greatest weakness when I took over Waste Management was I had no idea what I was doing. I’d only been in corporate America for three years, and I certainly didn’t expect to become CEO three years after I joined the company. My greatest strength was that I had no idea what I was doing. So I could look at all of those white elephants and ask, why are we doing it that way?

I realized very early on that if you were going to have a strategy that worked, you better have a strategy that folks bought into. How in the world do we get all of the input that we need from all of those levels to come up with a proper strategy and to come up with what the company stands for? Very early on, I developed action teams, about 8 to 10 people in

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each team. They were about 8 to 10 teams, so roughly 100 people throughout the company, and then the senior leadership team.

We basically started the process of first getting to know each other, because these were 100 people that had never met each other before. Then we started to say, okay, what is it that we want to build here? You know, what is it that we want to stand for? What are we going to do from a strategic point of view in the next five to seven years?

The first 18 months, we spent a lot of time together debating these types of things. You get in and you run a company, and you realize that a mission statement and a need to have people want to go to work every day are really core to running the business—more important than the strategy.

What we get paid for as a senior team is to make big change, not incremental changes.

How will we think differently to do that? Obviously, some people were never going to buy in, and you have to change those folks out. But we spent a lot of time giving everyone a chance to vocalize their concerns. I tried as hard as I could to allow that freedom of speech.

One time, I was in a business meeting, and I did something to someone that shut them down. It was clear that I had bullied them into my opinion. My CFO came to me afterward and said, “Look, I just want to let you know that in that meeting you sort of bullied that person into your position and shut them down, and I don’t think that was healthy.”

I was going to argue, and I thought, “You know what? If I argue with him, he will never give me that feedback again.” So I said, “I appreciate that. That was wrong. I hope you’ll point it out to me again the next time I do it.” That night, before I left, I left a note on his chair, saying, “Thanks for correcting my bad behavior. If you ever see it again, here’s your free pass to tell me I did it again.”

The point is, it doesn’t matter if you’re right. What matters is: Are you getting honest feedback? I was never going to get honest feedback if I tried to tell him I was right and he was wrong.

Transparency is so important to any CEO. How did you set up an environment that enabled that?

It was interesting, when I would walk into a party here in Houston, Texas, and someone would ask, “What do you do?” I’d go, “I’m the CFO at Waste Management.” They’d go, “Okay, great” then move on to talk to the guy from Continental Airlines or, you know, a more interesting company. Then, when I became CEO, I’d walk in, and they go, “What do you do?” And I’d go, “I’m the CEO of Waste Management,” and they’d go, “Oh, I wanna talk to you.”

I wasn’t a different person 18 months later or a year later. I just had three different letters behind my name. So I tried as hard as I could to not bring those three letters with me when I went into a room. I’m not going to tell you I was always successful. The reality is even if I tried to leave those three letters behind, the people in the room still saw those three letters, right?

But I can tell you that over the 15 years that I was CEO, it got to the point where I could sit down with the top 300 people in the company and feel like I was getting—you never get 100 percent unvarnished truth— but I always felt like I was getting 80 percent to 90 percent. As a CEO, boy, if you can get to 80 percent, 90 percent, that’s a huge win.

was in iterations. We went from 125 to 100, to 80, to 60, to 47, to, you know, 28 to 17.

Every time we would go through that list and say, “Okay, who are our 100 best? Who are our 60 best? Who are our 40 best?” We ended up with the 17 best operators that we had in the business. It wasn’t “let’s fire a team and replace the team.” It was “let’s take a big team and make a more efficient, smaller team with the best people on the team.”

What was your experience in terms of getting the right people on the bus and having to move some people out?

Waste Management was a very distributed business. We managed it a little bit, we developed strategy at the corporate level, but the rubber met the road at places in the field.

When I took over, there were about 125 people in the field. Imagine trying to meet with and get your message to 125 people. It’s really, really hard. When I look back at it, the more important thing that we did—more important than trading out people because we certainly didn’t immediately do that— was we went from 125 in the field and about 20 corporate officers to 17 managers in the field and about 10 or 12 corporate officers.

You could get in a room, have a conversation and get stuff done. That’s 30 people out of 55,000 employees. It really allowed us to get focused on what we wanted to get done.

When I traded people out, it wasn’t firing someone and bringing someone else in. It

How did you manage your time and your schedule?

Every quarter, we would close the books on the 10th of the 3rd month and, as soon as those books got closed, we had about 17 days before we reported earnings. We would back off and say, “Okay, from the release of earnings, we need about a week to prepare it. Then the prior two weeks we’re going to go through with our business leaders face-to-face and talk to them about their business.”

In 15 years, we probably did 10 or 12 different iterations of what those meetings looked like. We were always trying to improve them.

I’m not sure we ever quite got it right. But it was a chance for us to spend two weeks sitting with our people in the field. We would have a particular topic. “This quarter, we’re also going to talk about HR, so bring your HR team.

This next quarter, we’ll talk about operations so bring your operations team. We’re going to talk about finance, bring your finance team.”

I’d spend about an hour-and-a-half on the

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business, then an hour-and-a-half meeting people, saying hi and thanking them for working with us. As I was leaving a waste-to-energy plant, the fellow giving me the tour said, “You know, this is the first time that a senior manager has ever come to our waste energy plant.”

I said, “Really?” He goes, “Well, you know what, that’s wrong. A long time ago, some guy that was president of the company came, but he just sat in a room with our business guys for about 20 mimutes and left. He didn’t really talk to anyone.”

And I thought, holy cow, here’s someone who just took an opportunity to connect with the business, and instead of turning it into a positive, turned it into a negative. They remembered that he didn’t talk to anybody.

That was a big [reminder] for me. You have to connect with the business, but you also have to connect with the people.

We had a gentleman by the name of Jim Schultz, who was a showman. He was a former Air Force pilot. We’d have these big meetings of 1,500 folks in the company. He’d ride in on a white horse and go, “The safety patrol is here.” He developed something that really became the focus point for our safety at Waste Management.

We had an incident that still chokes me up. We had a driver in the Bay Area, which is where I grew up, who had taken some medication and was drowsy. On a major

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freeway, he hit a car. He didn’t even put on his brakes. The gentleman in the car was a former 49er football player, now working for a health club. His license plate was L-I-F-C-HN-G-R. We killed him. Jim met with his widow and she said, “I don’t want this to be in vain,” and he became the face of our safety program.

We had an award that we call the LifeChanger Award. Every year, when we had our big meeting and gave people accolades, that was the award that everybody wanted to listen to because Jim had done such a great job of making it personal. I had a sister who got killed in a car accident because she wasn’t wearing a safety belt. So I stood in front of those folks and told that story about how important it is to wear your safety belt: “I’m not telling you this, because it’s in a manual, and I’m not telling you this because it’s company policy, I’m telling you this because I want you to get home safe.”

Never talk to people in terms of “here are the rules. They are one, two, three, four.”

Talk to them in terms of “here’s how you can make your life better.” People remember stories. They don’t remember rules.

It sounds like the culture really did change over your tenure at the company. Is that the case, and if so, how did it change?

Absolutely no doubt the culture changed. But the one thing that we had going in was what I call the fabric of America. We have these folks who drive a garbage truck, work on the back of a garbage truck slinging garbage, work at that landfill or work in that accounting office.

These are the folks who made America what it is, right? They got a job so that their kids could live a better life than they lived. When you look at what makes America great, you don’t have to look a heck of a lot further than Waste Management, right?

Let’s not kid ourselves, it’s not the sexiest industry in the world. We were at a place where all they read about in the paper was how horrible their company was because their senior management was committing fraud and this and that. But they still had pride in what they did every day, which was go out and keep America clean. The core belief: I’m going to do a hard job for the sake of doing a hard job. And I will go home tired

so that my kids can live better lives than I live. We always had that. What I needed to do was make them proud of that again.

How do you get it to when this person goes to their PTA meeting and someone says, “Oh, you work for Waste Management. I’ve seen what they do. They’re pretty cool,” rather than, “Oh, you work for a garbage company.”

So that’s what we were trying to do.

When we first started out with our branding campaign, people go, “Oh, you’re looking to reach customers, you’re looking to reach different groups.” Yes, of course, we’re looking to reach those different groups. But our employees were always at the forefront.

Was there a moment where you thought, hey, I feel like we’re out of the woods?

Remember, I took over in 2004, coming off of the recession of 2003. We started to get some traction. We had pretty much gotten everyone’s buy-in, and we were ready to sort of break out when the Great Recession hit in 2008. Obviously, we had to do a lot of different things during that period. And in 2011, we had a pretty bad year, 2011, early 2012.

I went to my board, and I said, “Look, I thought I had this thing to where it sort of almost ran itself. It’s clear to me that some of the old bad habits are creeping back in.

So I’ll have to sort of put the whip to the organization over the next 12 months. If the organization doesn’t respond, then we’ve got a problem. Then we’ll have to maybe look for someone else to do this because if it doesn’t respond, maybe I’m the wrong guy.”

I’ll never forget, I was out with an investor and told him that story. He said, “Wow, you must be under a lot of pressure from your board.” I laughed, and I said, “I’m not under any pressure from my board.” I said, “The day my board puts more pressure on me than I put on myself, is the day I walk away from the business,” right? This has nothing to do with external pressure. This is the pressure I’m putting on myself.

We took that 12-month period, and that’s when we got down to the 17 folks and had our best years. You take a look at the stock price or earnings or however you want to measure it, employee satisfaction, after 2013, and you’ll see a new record every year. To

me, that was the most gratifying. It was the hardest part of my career for sure.

My goal in 2012 was to say, “Okay, do I really have the hearts and souls of these folks? If I don’t, then we’re going to have to do something different.” Those 17 folks who were managing our areas, they knew exactly what needed to be done. We also put some nice financial incentives in there. Sure enough, they performed. If you mix a little bit of cohesive teamwork with a little bit of financial incentive, you can create some pretty great stuff.

How did you handle the succession process, up to and including the transition to a new CEO? Gosh, it wasn’t really so hard. You know, the CEO before me had a five-year contract, and after four years, he said, “I’m not gonna be back after the fifth year.” He had three imperfect candidates for CEO, one of whom was me. I certainly knew I was way imperfect for the job.

“Never talk to people in terms of, ‘here are the rules. They are one, two, three, four.’

Talk to them in terms of ‘here’s how you can make your life better.’”

I was CFO, we were on the road together a lot, and one time I said to him, “Maury, why don’t you just extend for another year, and it gives you another year to figure out who your successor is and make the right decision?”

“David,” he said, “I’ve done this a lot of times, and after about five years, your stuff starts to get stale. People stop listening to you.” And that always stuck with me.

Given that, I always thought “where is the prime time for a leader?” In other words, a new person comes in full of vim and vigor.

They’re just going to change the world, but they don’t know anything about the business. So they need a little bit of seasoning before they can really change the world.

Then, after a few years, it becomes your program. And that new guy or new gal with

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“Generally, you will get blindsided by something that you never saw. I can’t tell you what the situation will be, I can only tell you that it will surprise you.” vim and vigor comes in and goes, “Hey, why don’t we change that program?” And you go, “Wait a minute. That’s my program. You can’t change that.” So after a certain number of years, you become stale, a defender of the faith. It doesn’t matter if the faith is right or wrong, you defend it.

So every five years, I would look at myself and say, “If I can’t reinvent myself, then it’s time for me to go.” After my third five-year plan, I said, “No one should probably do more than three five-year plans. I better really get to work on developing a successor.”

I got it down to a few candidates, moved them around into a number of jobs to see how they performed. In my mind, at the very end, it came down to a very obvious choice. It was a pretty easy transition. He had become my CFO, so we spent a lot of time together.

I’ll never forget when I became CEO. I thought, I’m going to be calling the old CEO every day because I don’t know what I’m doing. Then you get the job, you sit in the chair, and you never call. You are busy doing your own thing your own way. Once you step out of that role, you gotta move out of the limelight. My predecessor taught me that you can’t have two leaders in the company.

After he left, I didn’t know what I was doing, but I muddled my way through. You’ve gotta let people learn their own way.

So it was a pretty easy transition. I think the results spoke for themselves. Although I do say that—good God—how easy is it to be a CEO from 2016 to 2019? They cut the tax rate in half, your company is growing. I never had three years like that in my 14 years as CEO—I never had two years like that.

Clearly we’re at somewhere near the end of the cycle, right? Yet, few current public company CEOs have been CEO during a

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recession. Any words of wisdom?

The reality is, you can never see the next disaster, right? Generally, you will get blindsided by something that you never saw. I can’t tell you what the situation will be, I can only tell you it will surprise you. The people who win when they get surprised are the people who can turn to the troops and say, “Okay, we have to change the strategy and do something different. Let’s get it done fast.”

I was at a company event in Oakland, California, where a big tent was set up for lunch.

So I went and sat at a table of drivers and said, “How are y’all doing?” They go, “We’re doing good.” They said, “Who are you?” And I said, “Well, I’m Dave Steiner.” They said, “Well, what do you do?” And I said, “I’m the CEO.” They said, “Oh.” They asked, “What does the CEO do?” I said, “Well, I guess I run the whole company.” And one of them looked at me and said, “You don’t run the company here.” He pointed to his manager and says, “He’s the guy that runs the company here.”

You realize if that local manager doesn’t understand what we’re trying to accomplish, the strategy, and hasn’t heard how to treat his or her employees, it’s gonna fail. So I didn’t run the business. I happened to have these three little letters. The people who ran the business were the managers out in the field. Realizing that’s where the real power, the real performance is, is crucial to running any business.

You’ve been out for a few years now. What do you miss?

You miss being around the people, going to those driver meetings and having them tell you their issues. Then going back and saying, “Hey, look, I heard this from the driver. Tell me how we can fix this.” What I realized is I like to solve people’s problems, and I like to see people become the best people they can be.

What I tried to do was show the people who worked for me that, look, business is important. We all have a commitment. We have to do our job. But our first job is to be a good friend, a good parent and a good spouse. Let’s never lose sight of that. I think that what people would say about me at Waste Management is, “Oh, he was a nice guy, and he was a family guy.” How can you be any more successful than that?

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RESEARCH

G LO B AL MAR KET S

THE CHINA VIEW ONE INSIDER SHARES HIS THOUGHTS ON WHAT CEOS NEED TO KNOW NOW. INTERVIEW BY DAN BIGMAN

N

O GLOBAL ISSUE has had more impact on U.S. CEOs in the past few years than America’s evolving relationship with China.

At a recent gathering of big-company CEOs in Washington hosted by Yale’s Chief Executive Leadership Institute shortly before President Trump’s announcement of a “phase one” deal, 64 percent said that Trump’s tough U.S. stance on China was justified, though 80 percent said they thought business confidence was suffering as a result of U.S. trade policy.

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So how does China see all this? And what does the increasingly authoritarian rise of President Xi Jinping mean for China’s relations with American companies—especially over the long haul?

For insights, we turned to Robert Kuhn, a reformed investment banker with personal relationships at the highest levels of China’s leadership, as well as decades of experience coaching American companies on dealmaking in the country.

How close is Kuhn to China’s top leaders?

Critics say he’s too close. Put it this way: When President Xi recently celebrated the 70th anniversary of communist party rule with a massive military parade, Kuhn was

REUTERS / ALY SONG - STOCK.ADOBE.COM

invited to be the English-language commentator for Chinese television.

Chief Executive caught up with Kuhn shortly before he travelled to China for the big occasion to ask him for his take on the situation and what it means for American business—not just now, but over the next few decades. What follows is edited for length and clarity.

So how does China see the trade fight?

I guess the phrase that they use is fighting and talking, fighting and talking or sometimes talking and fighting, talking and fighting. It has sort of a friendly sound, but it means that there’s a feeling that there’s no resolution

that will solve the problem, and it will go away and be back where things were about seven years ago or so, where everybody recognized both sides—but that’s impossible. Secondly, there has been an intensive campaign in the Chinese media that says that China will never succumb to external pressure, U.S. pressure. China is too dignified, too proud and will continue to be strong and resist all U.S. pressure, and that’s been a very continuous theme.

Some were quietly concerned that might have a salutary effect on reduced economic growth—which is already slowing—and, therefore, prepare the people as if it’s a nationalistic struggle.

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Human beings have shown that, in every country and every culture that we know of, people will put up with physical uncertainties or even hardships if their pride as a family, country, nation, race or whatever is affected. China is no exception.

And because of its so-called century of humiliation—where it was invaded, oppressed and humiliated by Western powers and then, ultimately, Japan—in light of that, the nationalistic spark perhaps is brighter in China than in other places.

U.S. insist upon in terms of new laws or open books or some sort of an approach or snapback—if they find an exception—and who will be the judge?

China will not allow enforcement that makes it look like it’s a schoolchild and the U.S. is the 40-year-old schoolmarm who’s watching whether or not the eight-year-old child misbehaves. China can’t have that kind of optics, but they can come to a deal where China is fully committed to IP protection in ways that will be publicly known.

How seriously does China take the U.S. worries about IP theft?

That’s a very important question, and that’s what makes a trade deal doable because from China’s point of view, they really do want to do it. It’s not a subterfuge; it’s not delaying tactics. If you go back, I don’t know, 15 years or 20 years, China said they want to do it but really put no energy behind it because it wasn’t on the high list of the things that they needed to do for their country.

But now it is a serious problem. China knows that in order to have foreign companies do business there and in order for China to be a center [for global business] it has to be a world-class center for IP protection, especially in science or technology. It doesn’t mean they’re able to do it as perfectly as they like. The problem is how is it enforceable? And what will the

But philosophically, a lot of this IP theft took place when they were a developing nation. Now, they’re a developed nation.

Do they have an understanding why people feel this needs to change now?

First of all, China is both a developed and a developing country. There are hundreds of millions of Chinese who are really poor and tens of millions of people in extreme poverty. So they actually say they’re still a developing nation. In a sense, that’s true.

If you look at GDP per capita, it’s under $10,000. But on a selective basis, you have this bi-model where you have urban and rural populations in China, and the rural population is very substantially a developing country.

China is putting a lot of energy into that and wants to change that but the target dates are 2035 and 2050 for when their rural areas will be approximately in the

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same categories as the urban areas and China could be a developed country. In fact, China’s own self-description would be that they will be a developed country—my words, not theirs—basically by 2035 and fully by 2050.

Nonetheless, your point about IP is absolutely right, and I think there is recognition of that. I’ve pointed out that a way to harmonize the U.S. position and the Chinese position—which seem gravely at odds—is by recognizing that they wanted to change over time. I use the WTO entry in December of 2001 as sort of the benchmark day they opened. At that point, China was a developing country, its GDP was $1 trillion, a trillion and a half or something, and now it’s 10, 15 times more than that. Over this time, there’s been a dramatic change in China’s position in the world economically. It’s gone from just a couple percentage points of the world’s GDP to, what is it now, 15?

That accounts for the discrepancy because in China, they said, “Why did the U.S. suddenly start a trade war or start to fight with us?” The U.S. point of view is, “Why did it take us so long to fight back?”

What don’t most people in America understand about China and its long-term ambitions, and what should we understand?

How does China see itself in the future?

I think you have to look at China’s vision, particularly as it’s articulated by Xi Jinping.

From a domestic perspective, they have three targets, 2020, 2035 and 2050. 2020 is defined as the so-called moderately prosperous society, which has a rough GDP per capita of about $10,000—it changes because of the currency rate—and it was technically double the GDP per capita of 2010.

Then, Xi Jinping added another feature that is very important in China today—it has motivated the country substantially over the last several years. He said that China cannot claim to be a moderately prosperous society, no matter how much the GDP per capita is if there is a single person in China who is living below the line of what they call absolute, or extreme, poverty. That’s maybe an arbitrary line, and people who are living just above that we would consider still very poor. But that

target has motivated an enormous output of resources and people’s time, particularly at the local party level in making sure that every person in China is somehow brought above that level from 2010 to 2020, and they’re pretty much on target to do that.

A critical component there would be what they call rural vitalization, which will bring up rural areas to roughly the equivalent of urban areas today, that is a huge difference, there is a three times difference in standards of living and they want to rectify that by mid-century. A second test would be they see themselves domestically by mid-century as having survived and jumped over the middle-income trap, so average GDP per person won’t be at the level of Western Europe and U.S. even then, but it will be in the ballpark. Nobody quite defines what that is, but, certainly, the major urban areas will be at roughly the same level of standard of living of major Western countries, which puts a lot of pressure on the environment and other kinds of issues, so it sets up all these complicating questions.

[Under these plans] they stay an integrated country in terms of economic integration and efficiency—it’s not a planned economy but it’s a coordinated economy by the government—and you see that with Beijing, Tianjin and this new city of Xiaogan, which is just out of farmland. They’re building a super-modern, 5-million-person, most-advanced-cityin-the-world kind of thing in terms of A.I. and social services and everything, literally from the ground up, from zero several years ago. And then, similarly around Shanghai and the Yangtze River Economic Belt, and then in Guangdong with Guangdong-Hong Kong-Macau Greater Bay Area, they see those three as really three dragon heads that will lead the Chinese economy in this vision.

Then, they would like to see that China

“China will not allow enforcement that makes it look like it’s a schoolchild and the U.S. is the 40-year-old schoolmarm who’s watching whether or not the eight-year-old child misbehaves.”

CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019 / 53

has a very high cultural level in terms of civic behavior and all of that. They would see, certainly, the party continuing monopolistic or perpetual rule and enforcing political stability, and they want to want to do all these other wonderful things. And I would say in science and technology, which is very important, China will—it’s a little vague in the exact words—be a leader, if not the leader, in every field of scientific importance by that time.

What do you counsel CEOs about how this will impact doing business there over the next 10, 15, 20 years there?

I think you need to look at that timeframe to really understand where China wants to be.

Because it is absolutely the case that China sees itself as not moving an inch politically in terms of the party giving up power, but really being creative and dynamic in becoming what they would like to be as the best place to do business in the world, or certainly among the best places, for sure.

In 2018, at the annual political meetings, they had a massive restructuring of the government and did some things that put the party more in control of everything, but one of the new institutions that they created de novo was the National Immigration Administration. They never had that before.

One of the purposes of that immigration administration is to attract the best and brightest foreigners—which has made the U.S. so great. China has massive challenges for that, starting with language and cultural issues and the Internet censorship, those would be the top of the list of difficulties. But nonetheless, they want to make that attraction, and they certainly have been attracting handfuls of world-class scientists by giving them fairly massive research capabilities.

Most of them have been overseas Chinese from China who became very distinguished scientists in the West for 20 years or more… and a few non-Chinese as well, but not many.

But that’s how China would like to see itself. It’s not just talk to diminish the sort of

“China is both a developed and developing country. there are hundreds of millions of Chinese who are really poor...”

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propaganda trade war thing—it’s really part of China’s strategy. They realized they have to do that in order to reach world-class capabilities as the center of business and culture and economics in the future. So, how can they do that? They are trying to figure out all different ways how to do it.

At the same time, they don’t want foreign companies to blow over the Chinese companies, and they certainly want—at the same time, in every industry of importance—major Chinese players. But attracting foreign companies to China is absolutely a part of their plan, and so the opportunity for companies is to understand China’s strategies.

The way the system works in China is that because the party is in absolute control and under President Xi in the last few years, it’s even more so in every aspect of the country. What’s called the CPC, Communist Party of China Central Committee, this organization appoints all the political appointees in the country below the politburo—all the ministers, governors, party secretary, heads of provinces, heads of cities and senior executives of all the major state-owned enterprises and within the provinces of the local state-owned enterprises.

Virtually everybody in the country other than the private entrepreneurs are directly controlled by the organization department of the party. Their careers are judged entirely by how well they are fulfilling the current strategy, which is now Xi Jinping’s. So if you’re a company, you can structure what you do—and that’s what I spend a lot of time doing—to be consistent with that plan. You know, we’re not talking about spending different kinds of money, just positioning and structuring and sometimes making subtle changes, so that the people that you work with will see your success as beneficial to their career because your success will be part of this plan.

It’s different today than it was 10 years ago, which was different from 10 years before that. So, some companies today, they can spend their lifetimes doing everything terrific and still they won’t make any progress, and others will find themselves being better able to do business today than ever

before because they have something that’s really needed and are part of the strategic plan, even on a small level.

The translation of how your particular product or expertise translates into that, that’s a case-by-case situation and some won’t work today. If you want to produce computer keyboards or toys or socks at the lowest cost level, you shouldn’t be coming to China today. You should go to Bangladesh or Indonesia or Vietnam or other places.

by the government, which wants to see expansion and greatly expand the economy in the future.

You’ve also said it’s important to have the right expectations about market share and how to do these kinds of partnerships.

Five years ago, the emphasis was in joint ventures, so the advice I was giving then

How does China see the emerging great-power competition between the U.S. and China?

I have asked that of a lot of people I know in China who are really smart about it and really see less of the severe competition than others, and feel that the way that both sides are positioning is counterproductive. I guess in terms of misunderstanding, I would use a single term, which is self-fulfilling prophecy.

The danger is that—from the U.S. perspective—what we perceive China has done in the past will cause us to create certain kinds

had to do with when you’re in a joint venture because you had to be in a joint venture. The difference today is not on the political [side]—you always need to do the political [side]—the difference today is you don’t necessarily need a joint venture. China will go out of its way to help you if you make sense in their plans.

You need to understand that if you’re going to do business in China seriously, whatever size you are, you must put on your agenda having political relations on a formal basis. That’s critical, no matter what, in China, and that’s the uniqueness about China, but the exact structure today is actually more flexible, encouraged

of rules or regulations or activities, which will in China reinforce the people who say that the U.S. is trying to contain China and to keep it down.So you have a positive feedback circle that creates self-fulfilling prophecies and negative results on both sides, so it’s a race to the extremes in terms of antagonism.

That’s the great danger, and it’s equal on both sides, that each side, as we can see, makes decisions in reaction to what it thinks the other side is doing, which confirms in the other side their worst fears, which makes them do things, which re-confirms your worst fears—and it spirals downward. That’s the danger.

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EC O N O M IC D E VE LOPME NT

REGIONAL REPORT

THE MIDWEST In the nation’s heartland, several states stand out for their pro-growth business climates. BY CRAIG GUILLOT WHILE THERE HAVE BEEN MIXED signals about the Midwest’s economic outlook, individual states all have their own success stories. Indiana’s economy is firing on all cylinders and attracting growing interest from foreign companies, North Dakota is establishing itself as a hub for the UAS industry and Michigan is manufacturing the next generation of automotive technologies.

5* INDIANA

*No. ranking in the 2019 Chief Executive Best & Worst States for Business (ChiefExecutive.net/2019Best-Worst-States)

FIRING ON ALL CYLINDERS The Hoosier State economy is “firing on all cylinders,” says Jim Schellinger, Indiana secretary of commerce. In recent years, Indiana has worked to promote its reputation on the global scale with low taxes, lower costs and reduced regulations that enable businesses to focus more on their bottom line and their employees. Foreign direct investment in the state has grown by 300 percent since 2016, and Indiana is now home to more than 1,000 foreign-owned businesses that support 193,000 jobs. “We’re working day

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in and day out to take Indiana to the next level,” says Schellinger. A critical part of that vision is propelling Indiana to the forefront of a global economy.”

In December 2018, Brazilian AgTech solutions provider Solinftec announced it will create 334 jobs and establish its first U.S. headquarters in West Lafayette. Canadian-owned Greenleaf Foods announced in April 2019 a $310 million investment and 460 new jobs in a facility in Shelbyville.

And Swedish defense and security company Saab announced in May 2019 a $37 million investment and 300 new jobs in a new facility in West Lafayette.

Indiana is securing more international nonstop flights to Indianapolis, and in February 2020, it will host Routes Americas 2020, with 800 delegates representing 80 airlines and 300 airports. “The momentum just keeps building, and we won’t stop moving forward,” says Schellinger. “We are not just committed to creating a pro-growth business climate, but to proactively attracting new businesses.”

OHIO Fast-growing healthcare firm CoverMyMeds plans a $240 million campus in West Franklinton, Ohio.

9 OHIO CONTINUED GROWTH IN THE BUCKEYE STATE New groundbreakings and expansions are proof of the Buckeye State’s value, says J.P. Nauseef, president and chief investment officer of JobsOhio. CoverMyMeds, one of the fastest-growing healthcare technology companies in the nation, announced in June 2018 it will add more than 1,000 associates in the Columbus region. And in July 2019, Total Quality Logistics announced it will construct a second building at its headquarters campus to accommodate continued growth in the third-party logistics industry.

There’s also new growth in innovative technologies, Nauseef says. This year, the FAA granted a waiver for a company to test new UAS (unmanned aerial system) technologies in the state. Sky Vision, a technology developed in collaboration between the Air Force research lab and the State of Ohio, enables unmanned aircraft systems to detect and avoid other aircraft while in flight. In July 2019, the state also launched the SMARTCenter, a 540-acre connected vehicle facility to test advanced automotive and mobility technologies.

The Buckeye State ranked in the top 10 in Chief Executive’s 2019 Best & Worst States for Business. Nauseef attributes the success to JobsOhio, a private economic development organization that allows greater flexibility when addressing a company’s needs.

“Economic opportunities developed in Ohio come with a great deal of collaboration,” Nauseef says. “Gov. Mike DeWine, Lt. Gov. Jon Husted and our legislature are engaged in keeping Ohio business-friendly with a strong budget reserve and a commitment to infrastructure.”

15 SOUTH DAKOTA EXPLORING OPPORTUNITIES IN CYBERSECURITY In recent years, South Dakota has been trying to diversify beyond its agricultural economic base. The state is targeting cy-

bersecurity as an industry that could fit the state well with “room to grow,” says Steve Westra, commissioner of the South Dakota Governor’s Office of Economic Development. Dakota State University in Madison is investing in the cyber mission with the recent completion of the Beacom College of Computer and Cyber Sciences and the new Madison Cyber Lab. “Aside from the second-to-none talent pipeline of DSU, South Dakota offers technology companies an off-the-beatenpath location that has value in and of itself.

With our low population density, lack of skyscrapers and land-locked location, our geography is an asset for intelligence security, not a liability,” said Gov. Kristi Noem in a website post.

Agriculture remains a primary driver.

Soybean processing plant Ag Processing celebrated its grand opening in Aberdeen, where it expects to process 15,000 bushels of soybean per day. “Economic development in South Dakota continues to grow and evolve…Because of South Dakota’s physical landscape, it’s no surprise we retain and recruit businesses in the ag industry—it’s a ‘natural’ fit,” says Westra.

16 IOWA STRONG REGIONALISM Iowa is home to some of the fastest-growing metro areas in the Midwest. An analysis of IRS data by SmartAsset found the Des Moines-West Des Moines area ranked 17th in U.S. metro areas for the percentage of tax returns reporting six-figure incomes, roughly one in every five. The economic growth and prosperity are being driven by a “secret sauce” of public-private partnerships and regional collaboration, says Jay Byers, CEO of the Greater Des Moines Partnership.

Every few years, regional leaders come together to create extensive regional vision plans to guide the area’s growth.

The most recent plan released in 2017, Capital Crossroads 2.0, was formed with the input of 3,000 residents and addressed 10 areas of work. ranging from business and governance to nature and wellness. Such collaboration

IOWA One in five Des Moines households has a sixfigure-plus income.

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20 NEBRASKA

NEBRASKA In July, Veramaris opened a $200 million production plant in Blair, where it will produce oil rich in omega-3 fatty acids.

and long-term planning are not only improving quality of life in the area but also growing the economy, Byers says. “I think we’re doing regionalism better than most other places across the country. We don’t spend much time fighting across borders, and we’re trying to speak and grow the region with one voice.”

17 WISCONSIN FOSTERING STARTUPS The Badger State continues to attract more foreign direct investment, and there’s strong growth in food manufacturing and life sciences companies that aim to leverage the state’s natural resources and educated workforce, says Tricia Braun, deputy secretary and chief operations officer at the Wisconsin Economic Development Corporation. Manufacturing remains the fastest-growing sector in the state, particularly within the food, plastics and equipment sectors, and early-stage companies in technology, healthcare and biotech continue to attract new investment, Braun says.

“We are seeing a healthy mix of startup activity, new business attraction, foreign direct investment and existing company growth— all of which underscores the strength of Wisconsin’s business climate,” Braun says.

In June 2018, Green Bay Packaging announced a $500 million expansion that will include a state-of-the-art paper mill to replace the company’s existing 71-year-old mill. It will be one of the first mills to be built in the state in decades and will enable the company to increase capacity by 50 percent, cut greenhouse gas emissions and eliminate wastewater discharge into the Fox River. Last fall, Komatsu Mining also announced a $285 million plan to build a state-of-the-art headquarters and manufacturing campus in Milwaukee.

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BOOMING IN BIOSCIENCES The Cornhusker State is riding economic momentum in life sciences and is now home to more than 1,000 bioscience companies that employ more than 16,000 people in the region. In July 2019, Veramaris, a joint venture between German-based Evonik and Netherlands-based DSM, opened a plant in Blair to produce omega-3 fatty acids through the cultivation and fermentation of natural algae. “Nebraska offers some of the best strategic business advantages in the country for bio industry firms and startups,” said Department of Economic Development Director Dave Rippe in a press release. “Our goal moving forward is to keep nurturing that momentum to grow the economy and create incredible job and career opportunities for our people.”

Google announced in February 2019 it will build a data center in Omaha as part of a $13 billion investment in data centers across the country. Scoular announced in March 2019 that it will invest $50 million in a new freeze-drying manufacturing facility in Seward with 100 new jobs, and Merck Animal Health opened a major expansion in Omaha that same month. In May 2019, Allmand broke ground on an expansion of its operations in Holdrege to facilitate increased production of light towers, generators and compressors.

24 MISSOURI SHOWCASING THE WORKFORCE The Show Me State is building a workforce for the future with a new infrastructure to boost education, training and initiatives to help employers. In July 2019, Gov. Mike Parson signed Senate Bill 68, which included several pieces of workforce and economic development legislation designed to help the state compete for businesses. “It gives us the tools we need to be more competitive and shows companies everywhere that Missouri is open for business,” says Holly Koofer-Thompson, director of communications and marketing at the Missouri Department of Economic Development.

Missouri has seen several notable deals in the past year. Amazon is currently con-

structing a fulfillment center and creating 1,500 jobs in St. Peters, and Quaker Window Products announced in October 2018 a $65 million investment over the next 10 years to expand their operations in Eldon. In July 2019, Bayer North American Crop Science Division announced a $164 million capital investment.

“The monumental investment in our state signifies Bayer’s confidence in Missouri as a solid place to do business, specifically related to agtech,” Koofer-Thompson says.

28 NORTH DAKOTA WIDE-OPEN ECONOMIC POTENTIAL Known as a small rural state that thrived on “oil and soil,” North Dakota is now being discovered by tech companies and entrepreneurs. Department of Commerce Commissioner Michelle Kommer says business leaders find the state able to get things done faster. “If someone needs something from the Secretary of State, I can just walk across the hall and get it. That’s how we work here. It usually just takes one call to get things done,” Kommer says.

One promising sector is the unmanned aerial systems (UAS) industry. In the last legislative session, the state approved an additional $30 million in funds to develop an infrastructure to support statewide beyond visual line of sight operations. North Dakota is one of only two states with federal waivers for the activity and is home to one of the country’s top aviation schools, the University of North Dakota in Grand Forks.

The Emerging Prairie co-working space and initiative has also been expanding its presence in Fargo and across the state to drive entrepreneurship, Kommer says.

“We’ve done a lot of work from a policy perspective to promote and support the entrepreneurial ecosystem. We want North Dakota to be a great place for entrepreneurs to come, grow those ideas and turn them into intellectual property.”

29 KANSAS NEW DEVELOPMENT IN THE HEARTLAND The Kansas Department of Commerce reports 2018 was an exceptional year for economic development in the state. Last year, the state added more than 11,000 new

jobs and more than $1.7 billion in capital investments. “The businesses that have made the wise choice to open or expand in the State of Kansas are making substantial contributions to the health of our economy and overall quality of life,” said Robert North, interim secretary for the Kansas department of commerce in a press release.

Notable investments in the past year have ranged from insurance and manufacturing to healthcare technology. In June 2018, insurance giant Geico announced it would establish a new service center and create 500 new jobs in Lenexa. And in July 2018, New Directions Behavioral Health also announced it would move its headquarters to Overland Park and create 566 jobs.

MISSOURI In July, Bayer announed a $164 million capital investment and the relocation of 500 high-paying jobs to Creve Coeur.

32 MICHIGAN DRIVING INTO THE FUTURE OF MOBILITY Despite lingering stories about the decline of Detroit, Michigan remains the global epicenter of the automotive industry. Fiat Chrysler Automobiles is investing $4.5 billion to grow its core brands and add production at five existing facilities in the state.

The deal will create nearly 6,500 jobs and is the biggest investment in an automotive manufacturing facility in the region in more than a decade.

“It is monumental for FCA, Detroit and the entire state of Michigan… and it’s expected to nearly double the company’s hourly workforce in the city of Detroit,” says Jeff Mason, CEO of the Michigan Economic Development Corporation.

Innovation hubs throughout the state in Detroit, Flint and Grand Rapids are pioneering an ecosystem that will shape the future of mobility in the 21st century, Mason says. PlanetM, a partnership of mobility organizations, educational institutions and

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MINNESOTA Minneapolis’s Ameriprise Financial, Target and U.S. Bancorp are among the Fortune 500 companies based in the state.

government agencies, offers grants to help mobility companies test their technologies in the region and will have at least 32 mobility pilot projects underway by the end of 2019. In January, Waymo (formerly the Google self-driving car project) announced it will establish a high-tech manufacturing family in Detroit and integrate its self-driving systems into the vehicle platforms of its OEM partners in Michigan.

“Michigan is known for putting the world on wheels more than a century ago and, as the future of transportation and mobility evolves, [it] remains the global epicenter of mobility innovation,” Mason says.

37 MINNESOTA

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

A HOME FOR EXECUTIVES The Land of 10,000 Lakes is a growing magnet for Fortune 500 executives and “tends to keep them once they come,” says Steve Grove, commissioner of the Minnesota department of employment and economic development. Grove points to a study from the Carson School of Management that surveyed more than 3,000 executives in the region. While most executives move every few years to capitalize on new opportunities, it found many stay in the Twin Cities because the large number of operational, divisional and regional headquarters enabled them to access opportunities across many sectors.

Many Fortune 500 companies base their headquarters in the state, and many others have established large divisions here.

“When you’re in a management role here, you can shift between major companies and have an interesting and diverse career….

We have the kind of business climate that talented people want to come to and stay and build companies in,” Grove says.

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Daikin Applied Americas recently invested $40 million in a facility in Faribault, creating 900 jobs. Finish company Uponor invested in a facility in Hutchinson with 140 new jobs, and Renewal by Andersen recently announced a $35 million expansion in Cottage Grove.

Sezzle, a FinTech company that used the state’s angel tax credit, is planning an IPO in Australia. “The startup ecosystem has grown really fast, and more venture capital is flowing into the state,” Grove says.

48 ILLINOIS PROSPERITY IN THE PRAIRIE STATE Moody’s reported in February 2019 that Illinois was entering an economic revival, much of it driven by a boom in Chicago and manufacturing in the southern part of the state. The research firm noted that the state had particularly impressive personal income growth compared to other states in the Midwest. Erin Guthrie, acting director of the Illinois Department of Commerce & Economic Opportunity, attributes this growth to economic diversity.

“No one sector dominates, leading to more long-term stability. The state is strong in multiple industries, including manufacturing, agribusiness and transportation and logistics,” Guthrie says.

Rug manufacturer and distributor Ruggable is planning a new production facility and 175 new jobs in Bedford Park. Entara Corporation is expanding its Chicago facility to grow its managed service offerings, and Vactor Manufacturing recently held a ceremonial groundbreaking for a new product line at an existing facility in Streator.

One area of momentum is in the technology and innovation sector, which is driven by the state’s robust digital infrastructure, venture capital networks and strong talent base, Guthrie says. Illinois is the second-largest producer of computer-science graduates in the country and awards nearly 10 percent of all the nation’s computer-science degrees.

Chicago ranks among the world’s top innovation hubs for startup funding, while tech giants like Facebook, Google and Amazon continue to add jobs.

CEO TA LENT SUMMIT

CREATING A CULTURE THAT NEVER QUITS What it really takes to hire and retain the best of the best in an fierce job market.

BY C.J. PRINCE CEOS CAN COUNT ON ONE THING heading into 2020: there will be no return to business as usual. The unprecedented speed and complexity of change has created a climate in which constant disruption is the new normal. To stave off obsolescence, CEOs need a cadre of gifted leaders in their ranks who are able to see around corners, spot looming threats and identify new opportunities for growth.

Just how to attract, nurture and retain that top talent in a fiercely competitive market was the subject of the 2019 CEO Talent Summit at West Point, where top business and military leaders shared secrets for recruiting and building extraordinary cultures that thrive in change.

That illusive competitive requirement— great culture—was at the heart of the discussion during the two-day conference.

“That is the DNA,” said Nigel Travis, chairman of Dunkin’ Brands, where he led as CEO for nine years until 2018. Travis, the author of The Challenge Culture: Why the Most Successful Organizations Run on Pushback, explained that a challenge culture requires constant dissatisfaction with the status quo.

“What exists today is not going to help you in the future—even if you invented it,” said Travis, who was also president and

COO of Blockbuster until 2004. He explained that the video rental giant ultimately went bankrupt because it failed to identify the threat from a single scrappy startup.

“We studied Netflix passively.

We sat there and watched it—you can’t do that,” said Travis. “You have to constantly anticipate your potential demise.”

To do that successfully, you need a culture that welcomes dissent and inspires spirited questioning and effective listening. “Do you, as CEOs, provide your people the opportunity to question the status quo?” he asked attendees. “Because that’s what helps you anticipate the future. Think of vigorous discourse as a way of life.” At Dunkin’ Brands, Travis instituted weekly “coffee chats” with junior employees so they would have a safe space for honest and transparent communication. CEOs must be authentic leaders, he added, noting that the tone should indeed be set by the CEO, “but you can only do that with your actions—with what you do every single day.”

“You have to constantly anticipate your demise,” said former Dunkin’ Brands CEO Nigel Travis, top. Below: CEOs touring West Point.

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HOW DELTA DOES IT HR Lessons of the U.S. Military’s Special Operations Forces

MOST COMPANIES WOULD KILL FOR THE RETENTION stats of the U.S. military’s Special Operations Forces.

Through a grueling 19-year war in Iraq, under treacherous conditions, highly skilled men and women keep on coming back to serve. “And they love what they do,” said retired Lieutenant General Frank Kearney, former deputy director for strategic operational planning at the National Counter-Terrorism Center and now a faculty member at Thayer Leader Development Group. “Why do they do that? Why do they continue to sign up to work in oppressive heat, extreme cold, under fire?”

Perhaps more importantly, how can CEOs inspire the same commitment, enthusiasm, drive and loyalty?

Kearney suggested borrowing a page from the military playbook by following these steps: 1. Hire right. Special Ops puts applicants through a battery of tests—physical, intellectual, psychological, medical, stress-testing—to ensure they’re getting people with the competency and skills to engender trust on the part of their fellow soldiers. While Kearney acknowledged most companies can’t apply such rigorous testing, they still need to do more upfront screening. “If you are using the interview as

your primary source to recruit, identify and hire people, you are not doing enough to make sure you’re getting the right talent that will stay in your organization.”

2. Train well. In the military, soldiers are constantly trained for the next level up, and they know what they’re being trained for, which improves learning. Kearney cautioned CEOs not to let training go to waste by failing to create opportunities for those new skills. Investing in talent is another way to tell valued employees you care about them. “You can’t guarantee them a job, so how do you make them feel secure? Send them to training. Give them challenges. Give them counseling, coaching, feedback. Make that a priority.”

3. Create ambassadors. Only 10 percent of those who enter the special mission unit training actually make it through to Delta Force, said Kearney, “but 100 percent say, ‘This is the best training experience I’ve had in my entire career.’”

Companies need to make sure all employees—even those who ultimately are not a good fit—have a positive experience and feel cared for. “Your organization’s reputation is the No. 1 weapon you have to recruit talent,” said Kearney. “If everybody buys into that, that reputation will precede you.”

“If you’re using the interview as your primary source... you’re not doing enough,” said retired LTG Frank Kearney, above.

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A TALE OF TWO TRANSFORMATIONS PRIOR TO ITS 2014 SPINOFF, SYNCHRONY

around what you’re

Financial had been a part of industry giant

trying to do.”

General Electric for more than 80 years. “Many

The CEO has a key

of our employees had only worked at GE, they

role in enabling that

wanted to retire at GE,” CEO Margaret Keane

change, said Doug

recalled. She knew her leadership team would

Sieg, who, as man-

have to work to bring those valued employees

aging partner of Lord

along on what was sure to be a turbulent jour-

Abbett & Co., led the

ney to being a standalone entity. “GE had a very

asset-management

strong culture,” Keane said.

firm on a shift from

Indeed, GE’s hyper-efficient, precision-based

a rules-based culture that relied on centralized

Six Sigma culture wasn’t necessarily going to be

decision-making to a more principles-based

the best fit for the new independent company,

partnership with greater collaboration. “The

which was aiming to be more entrepreneurial

CEO’s role is to set the temperature in the

and innovative. Taking the time to develop the

room,” he said. “If you want to set the tempera-

company’s new raison d’être-enabled employ-

ture in the room to ‘everybody at each other’s

ees to begin rowing in the same direction with

throats,’ you can do that. If you want to set the

enthusiasm, said Keane, noting that those em-

temperature in the room to ‘we are going to be a

ployees are now all part-owners of Synchrony,

team, we’re going to be owners, and we’re going

thanks to a granting of shares on the company’s

to thrive together,’ you can do that as well.” In

fifth anniversary in July. “Sometimes, people

Lord Abbett’s case, Sieg said he didn’t actually

say that things like culture, values, mission,

change all that much. “What I did was I switched

purpose are fluffy. But I think as you’re going

the dial to delegation and decision-making in

through this kind of transformation, you really

the field, and I’ve watched the organization just

need to communicate and get people to rally

absolutely love it.”

Revolutionaries: Synchrony Financial CEO Margaret Keane and Lord Abbett Managing Partner Doug Sieg both led complete cultural transformations at their organizations—and thrived.

USING STORYTELLING TO CREATE CULTURE

Avanoo CEO Daniel Jacobs says lessons connected to stories resonate with employees.

CULTURE CAN BE A SQUISHY THING. According to a 2018 Deloitte survey, 82 percent of senior executives believe it is a competitive advantage, and 94 percent say improving culture will increase company value. “But only 16 percent say their culture is where it should be,” said Daniel Jacobs, CEO of Avanoo, which works with companies to create positive culture shifts. Although we’ve figured out that culture is important, “we don’t yet know what to do about it.”

One of the best ways to drive meaningful and lasting cultural change is through storytelling, said Jacobs. “We’re 22 times more likely to remember a lesson or value when it’s connected to a story.” Avanoo client Choice Bank used a four-step model to develop a customer-first culture using stories: 1) Inspiration: Every week, the bank began distributing three-minute videos of employees telling stories about an experience they had

going above and beyond to delight a customer.

2) Ownership: After watching the video, employees could then share their own stories or share an idea or suggestion, which was broadcast online to the entire organization.

3) Alignment: Employees took a weekly survey to measure engagement. “We could see where there were hotspots and opportunities within the organization and could project what kinds of stories would help drive change.”

4) Impact: The results for the key engagement metrics were monitored to ensure they were headed in the right direction. From January to September, all four of the metrics rose significantly, by a minimum of 19 percentage points. “That’s not because of the technology,” Jacobs said. “It’s because we tell employee hero stories. And people really want to see themselves, and their colleagues, as doing something valuable and meaningful in their lives. The technology just supports that.”

CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019 / 63

THE CHIEF EXECUTIVE 2019 PATRIOTS IN BUSINESS AWARDS

IN PARTNERSHIP WITH THE THAYER Leader Development Group, Chief Executive was proud to honor our Patriots In Business Award winners, showcasing true excellence in the cause of supporting veterans, active duty military and their families: First Data (now Fiserv) / Large Enterprise In 2018, military-affiliated employees accounted for 9.2 percent of Fiserv’s U.S. hires. Veteran/military employees represent 8.3 percent of its total U.S. employee head count— up from 7.4 percent in 2015. When deciding between equally qualified candidates, hiring managers are encouraged to consider military service foremost among other competing factors. All HR employees and hiring managers of military-affiliated employees attend mandatory military cultural awareness training, including training on how to best coach veterans toward career growth. And the Fiserv Military Affinity Group—with 850 employee members—provides community building, networking and professional development opportunities to veteran and military employees and spouses. A founding member of Student Veterans of America’s “Roundtable Partners,” Fiserv is committed to providing employment opportunities to student veterans transitioning into the private sector. In addition, Fiserv has signed commitments with the Employer Support for the Guard and Reserve to make it easier for employees to attend drill and annual training and balance their lives during and after activation.

GeoStabilization International / Mid-Size Business GSI’s goal is to become one of the country’s leading private employers of veterans. Since 2014, the percentage of veterans in GSI’s workforce has increased from 8 percent in 2014 to 22

Right to left: Chief Executive Group’s Marshall Cooper; Thayer Leader Development Group’s Dan Rice; U.S. Army Maj. Gen. Brian J. Mennes; JDog Brands’s Jerry Flanagan; Fiserv’s Tom Higgins; Chief Executive Group’s Wayne Cooper

percent currently, with a 94 percent retention rate of veterans hired and employed. Key efforts to recruit and hire veterans include establishing a dedicated veteran recruiting leader, on-base events to interact with military members, attending more than 50 veteran recruiting events each year, creating a free 12-week “Individual Internship for Active Duty Soldiers” and transitioning military members to work side-by-side with Geohazard Mitigation Technicians. GSI partners with Soldier for Life, Marine for Life, Onward to Opportunity, The USO, Military. com, Hire Heroes USA and Military One Source, among others.

JDog Brands / Small Business Started by Army Veteran Jerry Flanagan in 2011, JDog brands is now a national franchise with over 200 locations.

In 2018, 63 percent of JDog’s corporate-level employees were veterans. The company supports 64 franchisees, the owners of which are either veterans and military family members or live by JDog’s values of Respect, Integrity and Trust. The JDog Foundation, founded by Flanagan in 2017, has donated to five different veteran scholarship funds, including the Air Force Association, Navy League Foundation, U.S. Army Scholarship Foundation, U.S. Coast Guard Foundation and U.S. Marine Corps Scholarship Foundation. In 2019, the JDog Foundation expanded its beneficiaries to include several nonprofit veteran organizations, including Operation Homefront, Fisher House Foundation, Pat Tillman Foundation and Homes For Our Troops.

PATRIOTS IN BUSINESS 2019 SELECTION COMMITTEE MEMBERS Carol Eggert, SVP, Military and Veteran Affairs, Comcast

Paul Huszar, CEO, VetCor

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Chance Mims, CEO, Academy Securities

Jason Kamiya, SVP, Diversity and Inclusion, USAA

Nicholas Pinchuk, Chairman & CEO, Snap-on

C EO ROU NDTAB LE

LEADING AUTOMATION Driving culture and employee engagement in the workplace of tomorrow. BY JENNIFER PELLET team? Everybody is kind of shooting in the dark with this. How do we engage the workforce, try not to look as lost as we are and then make sure they understand this is a continuing growth opportunity for all of us?”

For business, the “why,” if not the “how,” is clear: The advantages of the ability to streamline workflow, track and optimize each step of a process and increase overall productivity while reducing costs are indisputable. For workers, however, the upside of a transformation that will change the nature of so many jobs, if not eliminate them, can be difficult to envision—and therefore hard to embrace.

—Brad Rhorer, Conexus Indiana

WHEN IT COMES TO automation— whether on the factory floor or the white-collar workplace—the secret for success is, ironically, still people. As business leaders work toward harnessing the potential of robotics, A.I. and other technological advances in their companies, it’s people problems that gum up the works again and again, agreed CEOs gathered for a roundtable on adapting to an increasingly automated workplace co-sponsored by the Indiana Economic Development Corp.

Resistance and a dearth of the necessary knowledge, skills and expertise within the workforce, as well as the need to cope with loss-of-job fears are among the most frequently cited issues.

“Technology—robotics, IoT, Big Data—is moving at such a rate that industry and organizations all over the U.S. struggle with a plan of attack,” said Brad Rhorer, chief talent programs officer at Conexus Indiana, a manufacturing trade group.

“Where do you go first? Do you start in IT? In engineering? With your leadership

Hello Robot, Goodbye Job?

“People are concerned, ‘Is the robot going to take my job?’” said Elizabeth Denlea, manager of human resources at Ausco, a manufacturer of brakes and brake-related products. “As industries become increasingly computerized and start to move toward technology like 3D printing, they’re asking, ‘Do I have the skills and the abilities to be able to use this [new technology] and higher-level equipment?

Is the company going to help me learn how to do that?’”

The pace of change—with new technologies and advances coming into workplaces fast and furious—is also fueling anxiety among workers. “It used to be that humans could accept a certain iteration of technology changing because there was enough time between [changes] to adjust,” said Steve Jacobson, CEO of United Grinding North America. “Now the iterations are happening so quickly, the next version and the version after that are already invented

PHOTOGRAPHY BY BEN HIDER

Technology— robotics, A.I., Big Data—is moving at such a rate that industry and organizations all over the U.S. struggle with a plan of attack.”

CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019 / 65

With A.I. changes will happen even faster—so that’s going to be a bit of a struggle for people.”

—Steve Jacobson, United Grinding North America

while people are still trying to adapt to the previous one. And with A.I., changes will happen even faster—so that’s going to be a bit of a struggle with people.”

Getting employees to pick up the pace in adopting technology is already an issue for companies like public relations and marketing agency Gavin, which is working with manufacturers and companies in education and on digital communications. “We’re forcing our employees to make sure they stay ahead of the curve,” said CEO Mandy Arnold.

“Things are moving so rapidly that that’s the biggest challenge we’re up against.”

Communicating both the necessity driving the transformation and what, specifically, it will mean for workers can go a long way toward easing the journey. “You do get the fear that you’re going to bring in a robot and there goes my job and out the door I go,” says Rhorer, a former senior manager of human resources at Subaru of Indiana Automotive, who recounted overcoming that barrier at a Subaru factory moving away from manual welding decades ago. “When I started we had maybe 500 to 600 welders, but by 2001 we had zero

From left: Ziegenfelder’s Barry Allen, Tokai Carbon’s Wesley Wampler, Tokai Carbon’s Eric Gang, Chief Executive Group’s Dan Bigman

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and 1,500 robots. We really had to be purposeful in the way that we transitioned that activity and be very transparent that this was actually a growth opportunity for [workers], a development opportunity to do more than just run a stick welder. They actually get to learn how robots work, and we didn’t change our headcount.”

In industries where automation is already prevalent, communicating the clear necessity of embracing technology to remain competitive can also be a game changer in fostering employee engagement. Popsicle manufacturer Ziegenfelder, for example, recognized that the processes at its three factories, which typically produce two million popsicles a day, would benefit from of revamping production process and introducing new equipment and has been rallying employees around the effort. “We’ve been very transparent, very open—talking about it a lot in our monthly, quarterly and yearly meetings,” said Barry Allen, chief customer officer of the family-owned company. “What we say is, ‘Everybody’s job is safe. We’re going to help you grow into the next role, to learn this new equipment and advance your knowledge.’ Because our goal is not to replace the people, it’s to automate our new lines. So we’re going to be adding some higher level jobs.”

Different, But Better

In factories and other work settings, automation often translates to the elimination of repetitive, manual processes, potentially freeing human workers from dangerous and dull tasks and enabling them to use their skills in more meaningful endeavors.

Jacobson likens the automation wave to the shift away from agriculture and toward manufacturing that took place at the turn of the century. “We went from 80 percent of the U.S. population involved in agriculture to 2 percent, and what happened to all those people is that there was something else,” he said. “There will be jobs available after this turning point. And those jobs being replaced are really doing things that humans shouldn’t have to do because they’re tedious, maybe even dangerous—

they’re jobs, not careers.”

Automation brings the opportunity to learn new skills and move into more exciting roles. Getting skeptical employees on board with that concept, however, often requires an in-the-trenches approach.

At surface solutions provider Oerlikon Metco, CEO Michael Tobin finds it helpful to talk with employees about least appealing aspects of their jobs. “Go onto the floor and ask, ‘What’s the think you like to do the least?’” he suggests. “If they say, ‘well, it’s blowing off these parts,’ you bring in the robot and have the robot blow off the parts. You have to work with your workforce to try to bring their [mindset] to where you are.”

Tobin, a veteran of production-centric businesses like Toyota and Porsche, recommends turning the typical top-down implementation strategy on its head.

“You start from the ground up, involve everyone on the factory floor from the beginning by saying, ‘This is where we are and what we’re facing, this is how we plan on fixing it. What do you think is waste?” he explains, noting that it’s key to be open with employees about financials and market competition so they understand the need for improvement.

“Once the first person makes a suggestion, they all start talking and you take all the suggestions. Then you explain why some work and can be applied now, and why some don’t or need to wait until later. That way they have ownership in it, and you will see some results.”

At AUSCO, a robust training program helps employees develop new skills. “We’re very dedicated to in-house training,” said Elizabeth Denlea, manager of human resources, explaining that the company has a large matrix of in-house training available to upskill employees. “Our CEO, Ken Brown, is truly dedicated toward making sure that everybody gets a shot at the future.”

The company also draws on the experience of its long-term employees to bring new recruits up to speed on operating machinery. “We partner them with senior machinists, and they are in charge of bringing

the next generation along,” she said.

The Education Solution

Ideally, of course, next-gen workers would emerge from the nation’s education system steeped in some of the skills and knowledge companies need from today’s workforce. Not the case, said Arnold.

“I’m really concerned that the generation of talent coming out of the schools is not prepared,” she said. “We’re stating to have to think about how do we actually groom this talent to be ready?”

In some states, public-private partnerships are developing to address this gap. In Indiana, for example, high-school students have the opportunity to earn industry-valued credentials while participating in paid on-the-job training through the Indiana Department of Workforce Development’s State Earn and Learn certification program.

Across the nation, many community colleges work closely with businesses to address the needs of future employers, but there’s room for improvement in the K12 education, noted Jacobson. “European-based companies have very dynamic apprenticeship programs, so students have a pathway to technical work that starts in about 8th grade,” he said.

Choice Bank’s efforts to work with educators are broader, said Samantha Bergman, senior vice president. “The kind of work we’re doing in K through 12 is not necessarily gearing them toward paths,” she said. “We’re here to help teach them the skills they need to manage change, the soft skills they need once they join the workforce, regardless of what type of workforce they get into. It’s really taking us out of the picture and asking the teachers, ‘What are the things that your students need that we can supply regardless of whether or not it helps us?’ In the long run, that will help our workforce [broadly].”

The kind of work we’re doing in K through 12 is not necessarily gearing them toward paths.”

—Samantha Bergman, Choice Bank

CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2019 / 67

P L A N E ADVANTAG E

PILOT PROBLEMS What the looming shortage means for private aviation.

BY DALE BUSS

BUSINESS AVIATION is playing a game of musical chairs these days, as an unprecedented shortage of pilots raises the specter of a CEO showing up on a tarmac somewhere only to find an empty cockpit in the company plane.

“We haven’t gotten to the point that an aircraft is just sitting somewhere—yet,” says David Lamb, COO of Clay Lacy Aviation, an aircraft-management company. “But it’s getting tough.”

Sean Lancaster says pilot scarcity is “fortunately and by design somewhat invisible” to his clients, who are Fortune 500 CEOs, company owners and other high-net-worth individuals, “because they just get on the plane and get up and go. But operationally, for the people who work for them, it’s a real problem,” says the vice president of plane broker Bristol Associates.

Indeed, a historic pilot shortage has be-

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come a huge drag on the corporate-aviation industry, as company flight departments, charter services and fractional outfits absorb the significantly higher costs of competing for scarce pilot talent—and pass them on to their clients.

Pilots flying an upper-market Gulfstream G650, for example, now can command nearly $300,000 in compensation, about double the pay of five years ago, some experts say. Flexjet, a fractional-jet leader, boosted its compensation for second-in-command pilots by 25 percent, to about $100,000, this year.

“You can get what you want, but you’re going to pay for what you get,” says Roger Pierce, a veteran pilot and corporate-aviation director. “People with really solid experience and good reputations in the business are just being able to demand more.”

The severe pilot shortage stems from several factors that have snowballed over

time. Persistent pilot deficits within the U.S. Air Force and Navy have meant many fewer pilots exiting the American armed forces, traditionally a huge source for commercial and corporate aviation; and the boom in pilot training now is in military drones, not manned aircraft. The Federal Aviation Administration stiffened pilot-licensing requirements after a 2009 commuter jet crash in Buffalo that killed 50 people.

RETIRING WINGS

Meanwhile, about 42 percent of all active airline pilots, or approximately 22,000, will retire over the next decade, one industry survey says, with a new mandatory retirement age of 65, imposed by the federal government several years ago, looming as a main culprit. But growth in aviation will require 20,000 extra pilots a year for the next decade, Boeing estimates.

So airlines are getting more aggressive about recruiting, which puts a particular squeeze on business aviation. “It’s hard for pilots to justify not going for more time off, a schedule and more money, with an airline, and it’s a hard thing for a corporate operator to compete with,” says Sheryl Barden, CEO of Aviation Personnel International.

To make sure they and their clients aren’t losers in this game of high-flying musical chairs, business-aviation players are fighting back in these ways: Treating them better: Increasing compensation is a huge part of that. Pilot salaries in corporate aviation have increased by 20 percent to more than 100 percent, Barden says. Charter company Clay Lacy, for example, just launched a three-pronged program that includes higher salaries, an explicit career ladder and enhanced benefits that include what Lamb calls “zero-deductible, almost nocost medical” insurance, and likely will add a deferred-compensation option as a sort of retirement benefit.

Wanting to coddle pilots was one big reason Flexjet encouraged its ranks to decertify the Teamsters union in 2018.

“Now we have a direct relationship with our pilots,” says Flexjet COO Megan Wolf. “So if they want different material for their uniform shirts or invite us to

consider a new hotel in a destination city, we can make those changes quickly.”

Flipping the script: To the right audience, business aviation can make its own strong case for the lifestyle of its pilots, highlighting the clear benefits of being a business pilot over the more strait-jacketed, routinized life of a union-represented airline pilot.

“You’re more in control of things as a crew member and control your schedule to a certain degree,” says Janine Iannarelli, president of plane broker Par Avion Ltd. “And if you’re flying to California from the East Coast, once you get there, your time is yours. Business aviation is more flexible for the pilot.”

Flexjet keeps adding new second- and third-tier airports as home bases, such as Savannah, Georgia, and Tulsa, Oklahoma, “so that our pilots don’t have to live near a hub airport as they would with a commercial carrier,” explains Wolf.

Expanding the pool: The National Business Aviation Association and other corporate-aviation groups are getting more proactive about promoting their careers in schools. More aviation companies are testing ways to help would-be pilots afford aviation school, where they

“We haven’t gotten to the point where an aircraft is just sitting somewhere— yet.”

Women make up only 3 to 5 percent of the pilot population.

NOVEMBER/DECEMBER / JULY/AUGUST 2019 / 69

The NBAA’s certified aviation manager programs prepare pilots for careers in aviation management.

“Crew members generally develop close relationships with the people and companies they work for.

You have to like who’s flying you, and who’s flying has to like you.”

can run into big debt burdens such as those experienced by college students.

“It’s difficult to go and get student loans and come out a pilot,” says Craig Picken, managing partner of NorthStar Group, an aviation-recruitment outfit.

Business aviation needs to recruit more women to become pilots as well, says Joseph Smith, director of the aviation-services division of investment bank Cassel Saltpeter. “Right now, they make up only three to five percent of the pilot population,” he says.

Some in the industry are also pushing to raise the mandatory federal airline pilot retirement age to 68. “People can fly safely at that age if they’ve taken care of themselves, especially if you’ve got a more senior and a junior pilot in the cockpit together,” Barden says. “If we could stave off or slow down forced retirements by just a couple of years it would take some of the pressure off.”

Reducing the need: The aviation industry and regulators are discussing the greater possibility of single-pilot certification only for cargo flights, which would reduce pilot demand.

And, of course, the high degree of automation already employed in flying aircraft suggests a future in which artificial intelligence and robotics enable airplanes that operate entirely autonomously.

“Planes could fly themselves already; it’s probably more feasibly now than with automobiles,” Lancaster says. “But will people ride in the back? That’s the question.”

Enhancing the role: More companies are

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highlighting the importance of the pilot’s role in business aviation, especially that of the chief pilot who administers a single aircraft or a handful. “They’re the pilot of a special purpose-built small jet that helps world leaders move around, giving them a sense of ownership and pride, versus ‘driving the bus’ for an airline,” Ianarelli says. “And crew members generally develop close relationships with the people and companies they work for. You have to like who’s flying you, and who’s flying has to like you.”

Some pilots are being brought strategically into areas such as business-travel planning, maintenance, security and other aspects of ensuring that their precious human cargo travels safely.

“They’re like an executive chef; chief pilots aren’t people who just cook anymore,” says Pawel Chudzicki, aviation lead for the Miller Canfield law firm.

A BUSINESS ASSET

Partly because of this evolving role, more companies are “looking at the flight department as a major HR piece and want to attract pilots who mesh well with executives,” Picken says.

“They’re not looked at as just a commodity but as a highly skilled and highly trained asset to the company.” Pilots can be promoted to positions such as director of aviation to oversee an entire department.

More companies are taking advantage of the certified aviation manager designation course offered by the NBAA, whose enrollment is growing every year and which has trained more than 500 people since its launch in 2014, according to the Washington, D.C.based group. The curriculum credits pilot candidates for experience and prepares them for jobs as flight-department directors and managers.

“When you think about ultra-high-networth individuals who now have dedicated their lives to improving the world, they depend on their pilots,” Barden says. “That’s a great job compared with following the American Airlines flight plan every day from Chicago to Newark. You’re making a lot of decisions about travel and problem-solving, and you’re in charge of a $70 million aircraft.”

It’s About Time.

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FRED ENGELFRIED / DIRECTOR & CHAIR, NORTH COAST HOLDINGS

WHY WE DO WHAT WE DO

On the true rewards of leadership.

Fred Engelfried is director/chair of North Coast Holdings and its subsidiary Lewis Tree Service. He also is president of Market Sense, a participative management firm that has served more than 100 regional clients.

WHEN I LEFT MY second large-company experience to become president of a small manufacturing company, I did so driven by ego; I fancied the title. Soon enough, I realized I was in for some major challenges, the likes of which I had never before experienced.

At first, I was motivated by self-preservation, but, over time, I found a greater purpose. After a year of rough waters, layoffs, staff reductions, cash flow issues and more, the seas calmed, and we began an exciting journey.

Once out of the rough patch, with everyone feeling more secure and confident, an engineering manager asked me, “Why are you doing this, what’s in it for you?” I answered without thinking, a trait I had not yet mastered, and said, “George Washington slept here.” He was puzzled by my answer but not nearly as much as I. For the first time in my life, I realized how important it was to be remembered for having a positive impact on people’s lives.

The seed was probably planted early in my childhood but conveniently hidden until I was mature enough to allow it to blossom.

Recently, a group of 181 CEOs representing the Business Roundtable, including Amazon’s Jeff Bezos, American Airlines’ Doug Parker, Bank of America’s Brian Moynihan, Coca-Cola’s James Quincey and many others, formally “redefined” the purpose of an American corporation to embrace the needs of constituencies other than shareholders. It seems the CEOs of these large public companies understand now what many of us in the mid-market learned long ago—the true perks of being a CEO go well beyond increasing profits.

From that point forward, as I learned more about myself and the client leaders

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with whom I worked. I’ve come to cherish many of these perks. Here are a few: Guiding an enterprise in charting a course to the future and then leading it through its evolutionary cycles. n Testing your own limits of leadership and then expanding them. n Learning new disciplines, new processes, new technologies and new protocols. n Creating and sustaining an environment of dignity and self-fulfillment. n Sponsoring and enjoying a culture of continuous improvement, both for the enterprise and for its participants. n Mentoring the willing and coaching all, openly sharing failures as well as successes to help them grow. n Taking pride in the personal growth and accomplishments of others. n Supporting the community with both dollars and deeds. n Being respected by customers, suppliers and industry peers, as well as the governance professionals serving the enterprise. n Building a foundation so strong that it survives you. n Being remembered not only for the strength of the enterprise you guided but by the many lives you touched. n And, finally, humbly taking pride in the road you have walked and the path you have cleared for others to follow. n

After many years of working with so many clients, I was asked to become CEO of one of those clients while still maintaining my practice on a limited basis. I accepted, and when asked, “Why are you doing this?” this time the answer didn’t come as a surprise. It was not only the opportunity to continue to learn but for me to share in one place all the lessons I’d learned along the way.

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