Sept/Oct 2011 issue

CEOs and Government Must business leaders also be statesmen?

Should You Blog?

CEOs share their personal social media strategies

Roundtable: China’s Future

CEOs discuss developments in the world’s fastest-growing market

CEO of the Year 2011

Ford’s Alan Mulally on leading in challenging times

SEPTEMBER/OCTOBER 2011

CEOs and Social Media

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contents

September/October 2011 No. 254

Cover Story

25

CEOs and Social Media

With momentum building around the marketing potential of Twitter, Facebook and Google+, how can companies leverage the medium—and how personally involved should business leaders be?

by Dale Buss

06

Editor’s Note

08

Letters

25

ersity within groups and etween groups. ns for CEOs are direct: k” inside groups and ween groups. How to -enhanced groupthink is article.

features

oupthink

a process of conformed, alization that comes y when group members o hold similar beliefs. It inadvertently, by dom-

ications for e direct: oupthink” oups and nflict groups.

discourage dissent or or it can develop withen powered by group Once present, groupsly robust in that it esults: the more group ike, the better and hapch reinforces their conThus, groupthink sions via a positive feedoes not self-correct. ps form spontaon interests or are or specific purposes, e for the slightest of groupthink is pervafor producing poor

upthink” was coined in Whyte, an organizational esearched by Irving chologist. Groupthink wned the failed Bay of uba during the Kennedy nd the disbelief that the tack Pearl Harbor in substantial evidence. merges when groups are here members know one e long-standing workand personal friendships s good esprit de corps.

22

12

CEO Chronicles

SPX’s Chris Kearney incites innovation • Campbell Soup’s Doug Conant on nurturing engagement • Société Générale’s Severin Cabannes seeks diversity • CEO Watch: Novartis CEO Joe Jimenez goes for growth.

20

CEO Confidence

Confidence has hit a 10-month low.

21

Chief Concern

Leaders must take a stand on government policy.

by Gary Shapiro

22 Uncommon

All these factors are often good, but they can also engender complacent discussions and the lack of critical, disruptive arguments, and thus lead to flawed outcomes.

No group is immune from groupthink.

Recognizing Groupthink

Janis called out eight warning signs, organized under three types, that can help identify groupthink.

Type I: Group overestimations of itself: 1. Illusions of invulnerability.

Members are inordinately optimistic, ignore obvious dangers and take unwarranted risks.

2. Illusions of superior morality.

Members exaggerate the positive 32 ethical consequences of their actions and downplay the negative ones.

Type II: Closed-mindedness: 3. Rationalization. Members explain away and discredit warning

0105_TOC.indd 3

Wisdom

Be wary of Internet-generated groupthink.

signs that contradict the group’s conclusions.

32 4. Stereotyping. Members reject

What works and what doesn’t. those opposed to the group by characterizing them as ignorant, mis- by Howard Stevens and Geoffrey James guided, prejudiced, spiteful or malicious.

38

Raising Sales Force Effectiveness 26th Annual CEO of the Year

Ford’s Alan Mulally urges his fellow CEOs to persevere in Type III: Pressures toward uniformity: nurturing economic growth.

5. Self-censorship. Members reject dissenting views that run counter to 41 the group consensus.

What’s Next for China? China’s future depends on overcoming 6. Illusions of unanimity. Members falsely assume complete agreementsignificant hurdles. • Under a Watchful Eye: Is Governance and count silence as consent.

Inhibiting Corporations’ Ability to Help Shape U.S. Economic 7. Pressure to conform. Members coerce other members to support Policy and Recovery? the group’s consensus with veiled threats of implied disloyalty.

8. Mind guards. Members appoint themselves to police the group and purge it from adverse information and dissenting views.

CEO Roundtables

Antidotes to Groupthink Poison

september/october 2011

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The key for resisting groupthink,

september/october 2011

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Chief Executive Research

Private Company CEO Compensation The media is wrong about CEO compensation.

52

CEO Essentials

The View from Social Media Should CEOs have personal blogs?

by John Kador

54

Special Section: CEO Legal Guide

Chief Executive’s first annual guide to how to find, hire and work with corporate law firms. By C.J. Prince

65

Executive Life

Top Wheels: Part I The five best cars for work. By William J. Holstein and Michael Jordan

71

Flip Side

Take One Tablet and Call Me in the Morning Introducing sneakers with speakers, tables with tablets and more.

by Joe Queenan

EO & Executive Compensation Report for Private Companies,” ChiefExecutive.net/compresearch

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final word 72

Garrotted by Red Tape

Correction: Chief Executive’s July/August issue (“Finding Your Achilles Heel”) erroneously reported that David Greenwood, CEO of Geron Pharmaceuticals, resigned. In fact, David Greenwood was appointed CEO when Thomas B. Okarma, Ph.D., M.D., was ousted.

65

CHIEF EXECUTIVE, USPS # 431-710 (ISSN 0160-4724) is published bimonthly by Chief Executive Group, LLC with executive and editorial offices at One Sound Shore Drive, Suite 100, Greenwich, CT 06830.

Wayne Cooper, president. Copyright 2011. Published and printed in the United States. All rights reserved.

Reproduction in whole or in part without permission is strictly prohibited. Annual subscriptions are $196.

U.S. single-copy price is $13.95. Periodicals postage paid at Greenwich, CT and additional mailing offices.

POSTMASTER: Please send change of address to Chief Executive, PO Box 15306, North Hollywood, CA 91615-5306. For subscription inquiries, call 818-286-3119. All reprint and permission requests should be made to The YGS Group. Phone: 800-290-5460, ext. 125.

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ChiefExecutive.net | Chief Executive Magazine

CEO http://chiefexecutive.net/

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contents

September/October 2011

features

Globalization & Technology: Embrace Tomorrow’s Strategies Why you can’t recruit or retain today’s customers with yesterday’s strategies.

by Robert Bloom

Three Attributes to Diagnose Organizational Health (Performance Isn’t One of Them) Findings from a decade-long research project

by McKinsey & Co.

by Scott Keller and Colin Price

Storytelling: A Tool to Engage and Align Employees Every company should have its own Iliad or Odyssey to create a higher sense of purpose and mission to those who work there.

What CEOs Can Learn from the Mailman Lessons from the USPS for the U.S. CEO.

by Bill Baker

States and Tax Incentives—What You Need to Know Thinking of starting a new business or relocating an old one? Here’s a guide to credits and incentives that make the most sense.

Employer Tax Changes Triggered

By Health Care Reform Beyond the controversial individual mandate, here are the key provisions that directly affect all employers.

by Robert M. Donnelly

by Dean Zerbe

by Vishal S. Petigara

Is Your Company Missing the Boat on Pricing Opportunities?

Most companies are timid when it comes to price increases, but expert price optimization can be a solution.

Design for Conflict: Why You Should Have a Few Fights in Your Company Sometimes a little tension can produce more creativity and productivity.

by Ed Sullivan

by Greg Kesler and Amy Kates

How to Mine Social Media Feedback Three-fourths of businesses don’t know what their customers are saying about them and 31 percent don’t measure the effectiveness of social media. Here’s how to use social media intelligence intelligently.

What CEOs Need to Know About New Governance Developments Despite judicial rejection of the proxy access rule, companies will have to defend their position on executive compensation and stay vigilant about union pension fund activism.

by James R. Copland

by Ashish Gambhir

Making Litigation Management Work for You Overwhelmed by legal action you barely understand? Some disputes can be resolved more economically—and LM can help align legal strategy with business goals.

by James D. Shields

The Only Three Things a Leader Should Focus On—Brains, Bones and Nerves As a leader, deciding where to spend your time is by far your biggest challenge.

Five Ways to Get the Governance We Want The key to good corporate governance remains a strong commitment to ethics.

by Steve Odland

Top Three Security Concerns Every CEO Should Know Most security breaches are not caused by a Trojan horse from outside, but from human error and poor security discipline inside.

by Mark Boltz

IBM’s Corporate Evolution

by Design In June, IBM celebrated its centennial. What can other leaders learn from Big Blue’s legacy?

Entrepreneurial CEO

How to Deliver Superior Customer Service The CEO of a small Connecticut bicycle business shares his four-point framework for delivering on value for the customer.

by Steve Hamm

by Chris Zane

by Rajeev Peshawaria

Top 10 International Tax Pitfalls Operating across borders brings tax complexity. Here’s how to get it under control.

by Rono Ghosh, Jack O’Meara and Allan Smith

always available BOOKS in Review GETTING PRACTICAL ABOUT PRACTICING INNOVATION

By Bob Donnelly A review of The Innovator’s DNA,

by Jeff Dyer, Hal Gregerson and Clayton Christensen (Harvard Business Review Press)

CEO BRiefing ceo confidence index

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editor’s note

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Art Direction Fastlane Production Rose Sullivan Director

Why Everyone Is Going Social A new book, The Social Organization, by two Gartner analysts, Anthony Bradley and Mark McDonald, sums up the popular conceptions of social media (SM) technology since its emergence at the beginning of the last decade.

Social media doesn’t deliver real business value and can waste a lot of employee time. Social media poses unacceptable risks to privacy, IP protection, regulatory compliance, HR infractions and customer service. Social media is just another marketing channel. Get a Facebook page, open a Twitter account, give your CEO a blog, and load some cool videos on YouTube and you’re done. All you need to do is provide social media technology and the rest will happen on its own. After all, that’s how it happens on the Internet. You don’t need a business justification for social media because it’s so cheap and you can’t anticipate or measure the benefits anyway.

The hype surrounding social media is, indeed, astounding. Its adherents claim it will do everything except cure cancer. But the folks at Gartner who have studied this phenomenon at hundreds of companies caution business leaders against dismissing its possibilities out of hand, or worse trying to capitalize on this technology in a ham-fisted way. True, it can deliver little value and waste time if one goes about it the wrong way.

Yes, it can pose risks, but these can be mitigated and managed like any other. Bradley and McDonald argue that SM isn’t just another marketing channel but that success requires a lot more than flogging the technology itself. And, most importantly, one can measure the benefits, which is good because it can be a lot more expensive than it appears.

This brings me to this issue’s cover story, which seeks to open a conversation about how leaders can best get their arms around this beast we call social media. (See p. 25.)

As the story underscores, many CEOs are frustrated by their inability to incorporate the technology into their business strategy in ways that are familiar or compute the standard ROI analysis. Nonetheless, big bets are being made. As we reported in an earlier cover story on Ford’s Alan Mulally last November, Ford earmarked a fourth of its marketing budget to advance its brand through social media and reaped big rewards in selling its Fiesta.

We aim to pursue this conversation about this and related technologies, including mobility and cloud computing at our CEOtech conference, “The CEO’s Role in Harnessing Emerging Technology,” to be held on October 18 and 19 on the campus of Stanford’s Graduate School of Business in Palo Alto, Calif. Speakers such as eBay’s John Donahoe, San Francisco Giants CEO Larry Baer, MicroStrategy’s Michael Saylor and Kaiser Permanente’s George Halvorson will be on hand to share experiences and insights in leveraging these technologies in ways that improve customer relationships, raise operational efficiencies and advance sales and marketing goals in ways that are new and cost effective. The time to register is now: www.ChiefExecutive.net/CEOtech. Hope to see you there.

Copy Chief Rebecca M. Cooper Contributing Dale Buss Editors Cheryl Einhorn William Holstein Geoffrey James Michael Jordan John Kador Robert Lawrence Kuhn C.J. Prince Joe Queenan Howard Stevens Photographer Paul O. Colliton Online Associate Karin Moyer Editors Fayazuddin A. Shirazi CEO Entrepreneur Robert M. Donnelly Publisher Marshall Cooper VP, Associate Phillip G. Wren Publisher 203/930-2706 pwren@chiefexecutive.net VP, Sales Central Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net VP, Director, Frank Rosa Integrated Sales 203/930-2708 East frosa@chiefexecutive.net Director, Business Cristina Vittoria Development 203/930-2707 cvittoria@chiefexecutivegroup.com

Director, Business Mark Lamborn Development 304/543-2505 WV, VA, NC, SC mlamborn@chiefexecutivegroup.com

Director, Business Catherine Hanson Development 770/569-0825 chanson@chiefexecutivegroup.com

Director, Online Michael Bamberger 203/930-2709 mbamberger@chiefexecutive.net

Wayne Cooper Marshall Cooper Chairman & President Chief Executive One Sound Shore Drive, Suite 100 Greenwich, CT 06830, 203/930-2700

06 chiefexecutive.net SEPTEMBER/OCTOBER 2011

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letters

Chief Executive of the Year 2011 Selection Committee Cloud’s Big Promise Six mistakes CEOs make in the cloud

Dan S. Glaser

CyberSabotage How to bulletproof your company

Maximize Marketing Five strategies to boost CMO effectiveness

Eight Extreme CEOs They scale mountains, race motorcycles and defy death

july/AuguST 2011

Chairman and Chief Executive, Marsh Hugh Grant

CEO OF THE YEAR

Chairman, President and Chief Executive, Monsanto 2010 Chief Executive of the Year Fred Hassan

Driven!

Chairman, Bausch & Lomb

John J. Vitas President

Where Alan Mulally Is Steering Ford

C. Robert Henrikson Chairman, President and Chief Executive,

Accordingly, Ford has taken a hit in the marketplace based on the just released J.D. Power & Associates quality rankings [on which it dropped 18 spots from last year’s list]. They appear to have gotten their act together, but it will take some time to get the egg off their face.

A-C Equipment Services Corp.

Milwaukee, Wis.

MetLife William Hickey

Pensions Not the Problem

President and Chief Executive, Sealed Air Christine Jacobs Chairman, President and Chief Executive, Theragenics Kristian P. Moor President and Chief Executive, Chartis William R. Nuti

A Few Things About Those Six Things Cover.indd 1

6/16/11 10:25:52 AM

Former Chairman and Chief Executive, NCR Steve Odland Former Chairman and Chief Executive, Office Depot Thomas J. Quinlan III President and Chief Executive, RR Donnelley Jeffrey Sonnenfeld President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management James Turley Chairman and Chief Executive, Ernst & Young

c ontact us

Chief Executive Group, LLC One Sound Shore Drive, Ste. 100 Greenwich, CT 06830 www.chiefexecutive.net Letters to the Editor Address above or letters@chiefexecutive.net Advertising & Custom Publishing 847.730.3662 advertising@chiefexecutive.net Events, Roundtables & Conferences 847.730.3662 advertising@chiefexecutive.net Fax: 847.730.3666 Subscriptions Chief Executive, PO Box 15306 North Hollywood, CA 91615-5306 circulation@chiefexecutive.net Reprints 800.290.5460 x125 chiefexecutive@theygsgroup.com Back Issues & Customer Service circulation@chiefexecutive.net

I have a great deal of respect for what Mr. Mulally has done with Ford (“The Road Ahead,” July/August 2011). I also have faith in their products, having personally purchased a 2011 Lincoln MKX for my wife and a 2012 Focus for my daughter.

Both have navigation systems with in-car technology interfaces (MyLincoln Touch, MyFord Touch and SYNC).

However, I would add a caveat to the sixth tenet (“Stay inventive during tough times”) in the article’s list of six things CEOs can learn from Mulally: If you’re going to stake the company’s future on cutting edge technology, you better make sure it works. The MKX is a great vehicle in most respects, but it has been plagued with problems from day one with the MyLincoln Touch and SYNC interfaces.

There are connectivity issues along with issues with the voice recognition and the system in general just shutting down for no reason. Ford Customer Care has been very understanding and acknowledged that they are having problems, but as of this writing they still don’t have a solution.

Unfortunately, Ford failed to show courage as stated in the first tenet (“Display courage in the face of adversity”), by initially denying the problem existed.

Their press releases stated that the system was very intuitive and the buyers just needed more training (a contradiction in terms). They went so far as to blame the dealers for not spending enough time with customers at delivery. Try telling that to my tech-savvy wife.

Certainly, public pension funds continue to face financial challenges caused by the recklessness of Wall Street. But leaping to the conclusion that public pensions are the reason behind lagging competitiveness, increased outsourcing and states’ budget challenges (“Pension Pickle,” May/June 2011) is absurd when in most states pensions represent a small portion of budgets. In fact, the Center on Budget and Policy Priorities determined that pension contributions average just 3.8 percent of state and local budgets.

The article also fails to note that in most states, the majority of pension benefits are paid for with employee contributions and investment returns—not tax dollars.

The article also ignores the growing panic Americans feel about retirement.

As corporations switched from pensions to individual 401(k) plans, the retirement prospects of middle-class Americans have suffered. For example, The Wall Street Journal recently reported that the median 401(k) account balance for near-retirees was less than one quarter of what they’ll need to maintain living standards.

It’s also curious that one of the companies quoted in the article froze its pension plan for rank and file employees, yet the executive team continues to receive generous pension benefits. According to Titan Industries’ 2011 Proxy, its CEO will receive a “Normal Supplemental Retirement Benefit,” of $44,000 a month. Pensions work for corporate executives, but not for their employees, nor for lower paid public workers like police officers, firefighters and teachers?

Diane Oakley Executive Director National Institute on Retirement Security Washington, D.C.

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It may work in poker,

but it’s not an effective talent strategy.

Introducing The CEO and Executive Compensation Report for Private Companies, a groundbreaking report that will:

• H elp you craft compensation practices that motivate and reward the right activities, attitudes and outputs by your executive team

• Enable you to attract and retain the right senior talent

• Provide benchmarks on your own compensation relative to your peers While there is a lot of attention placed on CEO compensation at America’s largest public companies, until now there has been almost no reliable data on private companies. Existing surveys rely upon job-seekers and other unreliable sources.

In developing The CEO and Executive Compensation Report for Private Companies, Chief Executive Group gathered data and best practices on over 1,600 current CEO and senior executive positions at 680 companies. Plus, we’ve gathered best practices specific to private companies, including phantom equity, appreciation rights and other innovative techniques you can use to better align your team.

For additional information on The CEO and Executive Compensation Report for Private Companies, please visit ChiefExecutive.net/compreport

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ceo chronicles

Going for

Game-Changers

SPX’s Chris Kearney on spearheading a search for Big Ideas

by Jennifer Pellet

Z

SPX’s Chris Kearney

Much has changed at SPX since CEO Chris Kearney first joined the company as vice president and general counsel in 1997. At the time, the company was a Muskegon, Michigan-based U.S. automotive supplier with less than $1 billion in annual revenue.

By the time he took the CEO seat in 2004, a seemingly endless stream of acquisitions—21 in 2000 alone, and about 98 total, says Kearney—had transformed SPX into a multi-industry provider of engineered solutions. Bursting at the seams in its Michigan offices, the company relocated to accessible, business-friendly Charlotte, North Carolina, the hometown of United Dominion, a diversified manufacturer it had recently acquired.

Enter Kearney. “We were at a point were we had to mature and figure out what we really wanted to be going forward,” he recalls. After sifting through a portfolio of businesses that spanned nine business platforms and identifying those with the most growth potential, Kearney set about divesting the company of the rest. The result? SPX became a global company focused on servicing three broad end markets: energy, food and vehicle services.

From there the former automotive supplier motored along pretty well, reporting annual revenue growth of between 8 percent and 10 percent until the economic downturn hit. “We started to see a dropoff in 2009,” says Kearney, who notes that SPX closed 16 facilities, reduced headcount by 13 percent during the rough

patch and reduced its debt. “We used that bad time pretty wisely and did some significant restructuring.”

In 2010, as signs pointed to recovery, Kearney set a course for growth with the launch of an initiative geared toward generating promising innovations. The cornerstone of the effort was the formation of a centralized Innovation Council charged with identifying and developing gamechanging technologies—SPX’s most cru-

“We were at a point were we had to mature and figure out what we really wanted to be going forward.” cial challenge going forward. Made up of scientists, engineers, lawyers and marketing executives, the Innovation Council hosted 25 idea webcasts with employees.

“The challenge was, ‘If we would allow you to do anything you wanted to in terms of launching new products or breakthrough ideas in new businesses, what would you do?’” explains Kearney. The series of webcasts netted approximately 170 ideas, which were winnowed down to 10 over the course of a year.

“We knew that to get traction on this initiative, we needed a real process that

required this corporation to put money where its mouth was by funding those best ideas,” reports Kearney. “So what followed was a Socratic dialogue with the business, where we went through a selection process and chose 10 ideas to [put a total of between $10 million and $15 million behind].”

While none of those seedlings have germinated into products or services as of yet, several have serious potential, he reports. “There were five or six exciting ideas that are under development and which we’re tracking on a regular basis,” he says. “One of the best is a breakthrough wireless broadcast technology that gets about 10 times the coverage of a normal cell tower and costs about 25 percent less to operate. We believe it provides a terrific solution for rural parts of the world that lack infrastructure.”

But perhaps more than any one idea, Kearney is most excited about the cultural shift that the program has brought to SPX. “To the extent that you can find breakthrough ideas and create these new breakthrough businesses, you will have the opportunity to up the ante in a bigger way on change,” he says. “And when you are successful with it, that success becomes very contagious.”

“So the most important thing is igniting this passion and interest in innovation and bringing your businesses more in touch with their end markets—which is what we think we’re doing,” he adds.

“That’s the new frontier in the next stage of development for us.”

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photo: Tina Celle

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Chris Kearney behind the wheel of an SPX-donated Ford Mustang Challenge race car that was auctioned off for charity.

InBox: M&A Takeaways The percentage of successful deals rose during the global recession, report deal-makers.

While many expected the global recession to be a challenging time for deal-making, a recent study by KPMG reports the reverse. The number of deals made between January 2007 and July of 2009 considered to be successful actually rose to 31 percent versus 27 percent in the last period studied, (See M&A Success Report, at right). The study, A New Dawn: Good Deals in Challenging Times, suggests the boost in success rates is likely a result of increased scrutiny, leading companies to ensure not only that they were doing the “right” deals, but also paying close attention to deal execution and integration. “In the more difficult environment, acquirers knew their deals would be under close scrutiny from shareholders and the market, and they made sure that their deals were well executed, for the right reasons, and at the right price,” says Dan Tiemann, KPMG’s global transaction services leader.

When asked what they would do differently in their next deal, most survey respondents cited better due diligence (19 percent) and faster implementation/integration (17 percent) “Some companies start integration planning before deal agreements are even signed to ensure expected synergies from the deal can be realistically achieved,” says Steve Miller, national lead of KPMG’s U.S. Integration Services team “Embedding speed into the process is critical.”

M&A Success Report The Number of M&A Deals that Enhanced Value Rose during 2007-2009 M&A Success Report The Number of M&A Deals that Enhanced Value Rose during 2007-2009 100% 100%

17% 30%

17%

34%

31%

30%

34%

31%

39%

35%

43%

39%

35%

43%

31%

31%

27%

31% 31%

30% 30%

34% 34%

37% 37%

53% 53%

39% 26%

39%

32% 32%

31%

31%

1997 - 1998

1999 - 2000

2000 - 2002

2004 - 2005

2005 - 2006

2007 - 2009

Whose 1997 - 1998 Sellers Market?

Whose Sellers Market?

1999 - 2000

2000 - 2002

2004 - 2005

2005 - 2006

2007 - 2009 Corporate

0% 0%

Enhance Enhance

Buyers Buyers

Buyers Buyers

26%

Balanced Balanced

Neutral

Reduce

Neutral

Reduce

Sellers Sellers

Buyers Corporate Buyers

For more from KPMG’s A New Dawn: Good Deals in Challenging Times, visit www.ChiefExecutive.net/M&ATakeaways

september/october 2011

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ceo chronicles

Rules for Leaders

Doug Conant, former CEO of Campbell Soup Company

“Behavior matters,” asserts Douglas R. Conant, who recently retired from his post as CEO of Campbell Soup after a successful 10-year run. “It’s not just what you say, it’s what you do, and it’s what you do every moment—for CEOs in particular.”

Conant, who recently partnered with consultant Mette Norgaard to write TouchPoints: Creating Powerful Leadership Connections in the Smallest of Moments, is on something of a mission. The veteran of successful turnaround efforts at Nabisco and Campbell is urging CEOs to recognize the importance of every exchange with employees, no matter how small. “You’re on display 24/7,” he notes. “It’s not the words on the wall, it’s how you show up in every interaction.”

It’s CEOs who look for and act on every opportunity to deliver that authenticity who succeed in engaging employees, he notes. “That’s when they will go the extra mile to advance the agenda— where the relationship is viewed as a principle of honor rather than a transactional relationship of a good day’s pay for a good day’s work.”

Conant honed that leadership philosophy over years of working to reengage disenfranchised employees at both Nabisco (where he revitalized the floundering Planters and LifeSavers brands and launched Snackwells while head of marketing at the $3.5 billion company) and Campbell Soup Company, where he took the CEO seat only after the global food company had frittered away half its market value. “When I came into Campbell I told the board, ‘You can’t talk your way out of something you behaved your way into,’” he recounts. Three years into his corporate culture-building program, “The Campbell Promise: Campbell Valuing People. And People Valuing Campbell,” the company was back on track. It went

Illustration: Pablo Lobato

Z

Thorns &Roses Thorn When Congress passed the Dodd-Frank omnibus overhaul last year it also handed compensation consultants a full employment benefit with a Say-on-Pay provision allowing shareholders to vote on executive compensation.

Drum roll for the big result. Shareholders at 98.5 percent of companies approved, with only 39 of 2,532 companies reporting a rejection. The vote is non-binding—meaning companies don’t have to change anything even if shareholders disapprove. So what exactly was the point?

Rose The $4 billion carmakers, both U.S. and foreign, are now investing in their North American operations marks a sharp reversal from past plant closings and layoffs. Toyota is putting $1.3 billion in an assembly plant in Mississippi.

Ford is spending $600 million to overhaul a plant in Kentucky. Let’s hope the industry gets it right this time.

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ceo chronicles

on to deliver double-digit increases for the next five years.

While quick to note that the longterm perspective of the company’s founding family shareholders—who hold about half its shares—helped, Conant feels that all CEOs can boost results by nurturing engagement. “There are lots of opportunities to validate good behavior, create clear direction and give employees energy,” he says. “You just have to be vigilant.”

So how can CEOs transform otherwise ordinary interactions into powerful leadership moments? Conant outlines three steps: Listen Intently. CEOs often feel besieged with interruptions—from casual hallway chats and phone calls to text exchanges. But each of those communications are also opportunities to influence employees. Careful listening lets you make the most of them.

Frame the Issue. Before you move to action, take the time to summarize what you’ve heard. In addition to ensuring that you understand this issue, framing the problem can help the employees embroiled in it to gain clarity around the issue.

Advance the Agenda. When people come to the CEO with an issue, they want to make progress. Work with your employees to identify the next steps to take and who will take them—whether that means making a decision then and there or connecting them to someone who can help.

Driving Diversity Like most financial institutions

these days, Société Générale is adjusting its exposure to crises, says Severin Cabannes, one of three deputy CEOs who serve under chairman and CEO Frédéric Oudéa. “Our new strategy is growth at lower risk,” he asserts, echoing a sentiment widely held by today’s CEOs. “We have implemented new limits in terms of market risk appetite, stress test limits and value-at-risk limits. But we’re also changing what I call the culture in terms of risk management, which involves greater awareness of the real risk reward of each operation.”

The Paris, France-based global banking concern, which holds $2,259 billion

in assets, is also pressing forward on a topic getting a bit less play in today’s economy-obsessed environment: diversity.

Although Société Générale has a presence in 82 countries around the world and just 60,000 of its 160,000 employees—or 37 percent—are French, its management is predominantly French. “Of the top 50 players, only 20 percent are non-French,” reports Cabannes, who says that the company is working to address that disparity as well as a dearth of women managers.

In Fact Compiled by John Kador

01 Annual sales per square foot for Apple, Tiffany and Best Buy retail stores, respectively: $4406, $3070, $880 02 Number of people with more than $1 million to invest in 2010, up 8.3% from 2009: 10.9 million 03 Percent of Americans who have saved less than $25,000 for retirement: 39 04 Percent who saved more than $500,000: 7 05 Percentage of private-sector workers with pension plans in 1979 whose plans were defined-benefit: 62 06 Today: 7

Z

Société Générale’s Severin Cabannes

“We have two [objectives] among our diversity requirements—to promote women and to promote non-French colleagues,” he notes, adding that Société Générale has a future leaders program geared toward furthering those goals.

“Our internal mid-term objective is to get from 20 to 35 percent.”

The effort is as much about business as reputation, he adds. “When you have different perceptions, different viewpoints on a team, you create value,” says Cabannes. “Our ambition on this is not only for the sake of image.”

But perhaps most ambitious of Société Générale’s targets is its push for global growth. The bank has set its sites on three milestones: ranking among the top five non-U.S. banks in the U.S., among the top three retail banks in Central and Eastern Europe and Russia, and among the top five corporate and investment banks in Europe. “We are a global bank, even if our first footprint is Europe,” says Cabannes, who notes that Société Générale has a leading international position in equity derivatives, a strong geographic presence abroad and sector expertise, particularly in natural resources and energy. “The U.S. represents 20 percent of our total revenue, and we anticipate maintaining that share as we pursue significant potential for growth in Russia, Eastern Europe, Africa and the Middle East, as well as in retail banking in France.”

07 Change in the number of U.S. stock listings from its peak in 1997: -43% 08 Factor by which listings in international exchanges, (primarily Hong Kong, China, and India), exceed those trading on U.S. exchanges: 8 09 Percent of the world’s $7.9 trillion amount of gold owned by the U.S. government: 4.9% 10 Amount of gold, in tons, everyone would receive if all the gold in the world were evenly distributed to the subscribers of Chief Executive: 3.75 11 Value of those shares based on the price of gold on July 12, 2011: $188.1 million 12 Minimum number of times the calculation of the Consumer Price Index (CPI) has been “improved” since 1980: 20 13 Official rate of inflation, measured by the current CPI: 3.2% 14 As measured by the “unimproved” CPI: 10.7% 15 Minimum percentage of mortgages in Las Vegas that are currently “underwater”: 70 16 Change in the number of passengers from March 2007 to March 2011 at Las Vegas International: -13.7% 17 At San Francisco International for same period: +24%

Continued on p. 18

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ceo chronicles > ceo watch

New Growth Strategy for Novartis CEO Joe Jimenez faces mature markets in the U.S. and Europe and must grapple with the structural changes in R&D productivity facing Big Pharma

by J.P. Donlon

Z

Novartis CEO Joseph Jimenez

Big Pharma is facing rapid structural changes in several areas of its traditional business. Drug discovery is increasingly expensive and generics are grabbing more and more share while pressure on margins continues unabated. Many blockbuster drugs are coming off patent in record numbers. Pfizer’s best selling Lipitor, for example, comes off patent in November of this year. Next year, Merck faces patent expiration for its top-selling asthma medication Singulair. Most firms are struggling to maintain spending on R&D investment amid cost cutting and slowing economic growth. Meanwhile, governments everywhere are seeking ways to control healthcare costs and are looking to cap the drug prices their public health systems are willing to pay.

The Swiss giant Novartis aims to transform itself from a pharmaceutical company to become a broader-based health care company over the next five to ten years. To do this it has been strengthening its core competence of science-based innovation while focusing on five high-growth segments of healthcare: Pharmaceuticals, eye care, generics, consumer health and vaccines and diagnostics.

When he was named chief executive in February 2010, Joseph Jimenez had to fill some big shoes, replacing Daniel Vasella who ran the company for 14 years.

Jimenez is neither a physician nor a scientist; he isn’t even Swiss. Born in Walnut Creek, Calif., he earned a bachelors degree at Stanford and an MBA from Berkeley in 1984 before joining Clorox in nearby Oakland. This launched a career in consumer package goods that ultimately led to H.J. Heinz where he became president and CEO of its North American business.

While Jimenez was serving as president and CEO of Heinz Europe from 2002 to

2006, Astra-Zeneca chairman Percy Barnevik asked him to join the Anglo-Swedish pharma company’s board where he served until 2007. Vasella then tapped him to join Novartis in April 2007 as divisional head of its consumer health unit.

“When I first joined, some skeptics said, ‘This guy’s not a physician or a scientist. Are we sure we want him leading us?’” he recalls. “When I became CEO, those who didn’t know me from the phar-

The Swiss giant Novartis aims to transform itself from a pharmaceutical company to become a broaderbased health care company over the next five to ten years. maceutical division had the same reaction.

It was a legitimate question, and it wasn’t until I proved myself with that division that I got the kind of support that I have today.”

Jimenez is fortunate that his predecessor left a robust pipeline at a time when others are running close to empty. In addition, the company’s pharmaceuticals are running ahead of the industry in key areas of R&D productivity. Its median success rate for approvals in pre-clinical trials is 72 percent vs. the industry’s 64 percent.

In Phase III trials the comparable figures

are 82 percent vs. 67 percent respectively.

But even Novartis faces a big hole when the patent for its $6 billion blood pressure drug Diovan expires. It has no replacement for the U.S. market, which may experience flat growth for the next five years until the pipeline kicks in. In the meantime, Jimenez is betting that the BRIC countries will generate the growth that Europe and America is not offering.

The affable Californian sees his mission as growing faster than market rates in all of five segments—no small achievement if he can pull it off. “Five years from now I want to be able to look back and say, ‘We’ve taken this pharmaceutical company and turned it into a broad-based health care company.’” Recently Chief Executive caught up with Jimenez at the Palace Hotel in New York during a brief visit.

So what’s your strategy for growing faster than the market?

We approach R&D differently than most health care or pharmaceutical companies. Ten years ago, to develop a blockbuster drug one needed to target a broad therapy area like hypertension with large patient groups. After a while a new compound was developed that might be incrementally better than the rest. Then the company would build a massive sales force to market it. Our approach is different. We take what we call a pathways approach, where we seek to understand the pathway of a particular disease. We usually start with rare diseases.

Doesn’t that limit you, though?

Well, it does. But if you look at the pathway for a rare disease, it usually has a genetic basis in one or two mutations, so it’s a very homogeneous type of a disease.

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ceo chronicles > ceo watch

Novartis led the industry with NME approvals since 2007 in the EU and US New molecular entity (NME) approvals for selected companies 2007 - 2010

EU EMA 12

Novartis 8

Astra Zeneca

5 4

6

5

4

BMS Roche/Genentech

Bayer

2

7

Pfizer/Wyeth J&J

Sanofi-Aventis Eli Lilly

6

11

2

2 2

2 2

1 1

1 2 2

0

Notes: Novartis includes co-developed or co-marketed products from Ciba Vision, QLT, Index, Genentech: does not include vaccines; Pfizer includes products or Pharmacia + Wyeth; Merck includes products of Shering Plough + Organon; Roche includes products of Genentech; J&J includes of Janssen + Centocor + RWJohnson Source: FDA and EMA

This allows us to develop a compound that will interrupt that pathway. But the molecular pathway of that disease is also active in many other diseases, so we will develop the compound in a very rare indication, but then expand it mechanistically to other disease areas once it’s proven that it can interrupt the pathway.

A perfect example is a drug that we launched last year called Ilaris, which we developed for gouty arthritis. It’s a rare autoimmune disease that affects less than 10,000 people globally. The marketing people said, “Why would we do this if there are only 10,000 patients?” The key to this disease is a pathway called interleukin-1, which happens to play a role in severe gout, which affects 3.5 million people. So we have a compound that works in this rare autoimmune disease that is linked to a pathway that is consistent with a bigger disease like acute gout. We’re about to get approval for this compound for use for acute gout. This is a different approach from developing a blockbuster drug 10 years ago.

This suggests a wholly different model of recovering R&D costs to make such a strategy work.

Over the next 20 years, companies will be compensated not on the drugs that we sell but on delivering a positive patient outcome. It’s increasingly no longer about the transaction of selling a pill. Payers,

Compiled by John Kador

18 Incidents of suspected mortgage fraud in 2010: 70,472

US FDA

Merck/SGP GSK

In Fact

physicians and regulators don’t want seven out of 10 people who get a drug not to respond to the drug. So if we offer, let’s say, a companion diagnostic and the right therapy, there will be much greater receptivity to the prices charged and that will enable us to recover our cost of R&D. Sounds great in theory. Does it work in practice?

It’s working already. Novartis has the greatest number of new drugs approved by the FDA and also in Europe—more even if you combine Pfizer and Wyeth and combine Merck and Schering-Plough.

How far in the future will your pipeline provide profitable growth?

We have one of the best pipelines in the industry. We’re about to lose patent protection on Diovan, a blood pressure drug that is our largest [source of revenue]. It’s a $6 billion drug on a $55 billion company, so it’s a substantial piece. But because we have a robust pipeline thanks to the Novartis Institute of Biomedical Research using this pathways approach, we are able to offset patent expirations in a way that some of our peers can’t. For example, we just launched a breakthrough multiple sclerosis drug that is the first oral therapy for multiple sclerosis, which is taking off. We have a drug called Lucentis that we market outside the U.S. (Genentech has it in the U.S., and we

19 Percentage change in such incidents since 2000: +1,900 20 Number of bank failures as of July 2011: 51 21 Difference in state gasoline taxes per gallon between the lowest taxed state (Alaska at 8 cents) and highest (Connecticut at 51.9 cents): 43.9 cents 22 Difference in the average retail price per gallon of gasoline between the two states as of July 2011: two cents 23 Percentage increase since last year in roadside calls to AAA from drivers who have run out of gas: 14

24 Amount of loans outstanding to small businesses at the end of March 2011: $609 billion 25 Change from a year earlier: -8.6% 26 Average time, in hours and minutes, Americans watch TV each weekday in 2010, up 5.4 minutes since 2007: 2:31 27 Change in the 4 hours and 24 minutes Americans spent in work and workrelated activities each day in 2010, compared to 4 years earlier: -25 minutes 28 Amount lost by the inability of the 50 states to collect online sales taxes in 2011: $10.1 billion 29 Price paid at auction by a Dallas doctor for a “PORSCHE” vanity license plate: $7,500 30 Percent of vehicles with personalized tags in Virginia, which has highest penetration of vanity plates in U.S.: 16 31 Total earnings of federal savings banks, or thrifts, in 2010, the first profitable year since 2006: $6.6 billion Sources 1 The Wall Street Journal; 2 World Wealth Report, Capgemini and Merrill Lynch; 3-4 Scottrade; 5-6 Employment Benefit Research Institute; 7-8 Capital Markets Advisory Partners; 9-11 Comptroller of the Currency, Chief Executive research; 12-14 Shadowstats.com; 15 U.S. Department of Housing and Urban Development; 16-17 M.I.T. Airline Data Project, Bureau of Transportation Statistics; 18-19 Financial Crimes Enforcement Network, Department of Treasury; 20 FDIC; 21-22 Chief Executive research; 23 American Automobile Association; 24-25 FDIC; 26-27 American Time Use Survey, Department of Labor; 28 University of Tennessee; 29 Texas Department of Motor Vehicles; 30 The Wall Street Journal; 31 U.S. Office of Thrift Supervision

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Z market it outside the U.S.). It’s for macular degeneration, and it continues to grow significantly.

What is telehealth and why is it important to Novartis?

E-health or telehealth is the interface of technology and healthcare. For example, look at social networks that are emerging. PatientsLikeMe.com is a web site for patients with rare diseases to come together and talk about the disease.

When we were having trouble recruiting patients for a clinical trial of our multiple sclerosis drug, Gilenyal, physicians promoted the drug on the site and helped enroll more people in clinical trials. That enabled us to get the drug to market faster.

We’re also investing in a chip-in-apill technology connected to remote patient monitoring. It’s a microchip in a pill. When a patient takes the pill and it digests, it sends a message to a server that confirms that that patient took

their medication. If the patient doesn’t take the medication they get a message saying, “We noticed you didn’t take your Diovan today. Why not?” Or, “Is there some problem?” This is with no human intervention. The technology already exists.

If, for example, 50 percent of patients stop taking the drug, those are lost sales for us. So we have a vested interest in ensuring that that patient continues to take that medicine. The physician has a vested interest in ensuring that patient stays on medication to ensure a positive outcome.

But does the insurer have a vested interest in paying for this?

That’s the question. They would if they believed that the lack of compliance from the patient resulted in more cost such as greater hospitalization. The onus is on us to demonstrate to the payer that this is a good deal.

Novartis CEO Joseph Jimenez

As a freshly minted CEO what do you see as your personal strategic challenge?

Novartis has been a loose collection of divisions, meaning each of the five divisions has historically been very autonomous. There’s a huge amount of duplication of work that is transactional in nature, like financial reporting that doesn’t add value—duplicating this five times in 70 countries.

You can imagine the cost reduction that could potentially be gained if we were able to consolidate this. One of my biggest challenges is figuring out how to maintain the autonomy of the divisions while capturing some of the synergies associated with becoming a broader-based health care company. This is something that the company really didn’t face in the past because pharma was so dominant, but pharma has moved from about 80 percent of our total to 50 percent of our total sales because of the growth of the other divisions.

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CEO Confidence

CEO Confidence Hits Ten-Month Low Following a drop in June of more than 12 percent, CEO confidence continued to weaken in July. Hitting a ten-month low, confidence levels fell to only 5.28 out of a possible 10. The Index, Chief Executive’s monthly gauge of CEOs’ perceptions of overall business conditions, has seen a 17.4 percent drop from February’s 2011 high of 6.39. Only 41 percent of CEOs expect business conditions to be at least “good” in the next year, a 13 percent drop over the last month and a 42 percent drop from February. CEOs also rated current business conditions 4.65 out of 10.

Expectations for the future seem to be pessimistic across the board; profit, revenue, hiring and capital expenditures all took a hit. Only 60.6 percent of CEOs expect to see an increase in revenue over the next year compared to 74 percent in April and May and 63.7 percent in June.

Of those who do expect to see a revenue increase, 55 percent expect the increase to be less than 10 percent.

Profit outlook is also dim, with roughly 52 percent of CEOs expecting to see increased profits as compared to June’s 55 percent and May’s 65.5 percent. CEOs are so wary of future business conditions that more than 66 percent expect that the size of their workforce will either stay the same or decrease over the next year. Those who plan to hire will do so in a limited way; 74 percent of hiring CEOs will increase their workforce by less than 10 percent. This does not bode well for the 9.2 percent of U.S. workers who were unemployed in June.

Another indication of the weak economy is CEOs’ hesitation to invest in their own company; 42 percent of CEOs expect not to see an increase in capital expenditures over the next year. Of the 40 percent that do expect to increase capital expenditures, 60.6 percent will increase their investment by less than 10 percent. Philip

What do you expect overall business conditions to be like one year from now on a 1 - 10 scale? (10 = Excellent) 30.00%

24.3%

25.00%

20.7%

20.00%

15.1%

15.00%

13.1%

5.00% 0.00%

9.2%

8.8%

10.00%

1.2% 10

3.2%

2.8% 9

8

7

6

5

4

3

2

1.6% 1

% of Results

Grantham, managing director for Columbia Consulting Group confirms the numbers: “There is a level of ‘risk adversity’ in the executive marketplace that we have not witnessed in a long time. In prior recoveries, most CEOs have taken a ‘glass half-full’ approach to the future. In this environment, there is no willingness to make any significant commitments until the economy demonstrates that it is growing again.”

And most CEOs seem to think that American businesses are being stifled by over-regulation, a consistent theme for the CEO Confidence Index. One CEO said, “our business is being regulated to death by the federal government with more new regulations coming with the establishment of the Consumer Financial Protection Bureau… enough already! Congress wants business to get going and hire more employees but the regulatory environment for our business is driving us just the opposite direction.”

As businesses continue to be uncertain about the future, the country’s recovery will be weak. As one CEO put it, “Investment in business needs to be rewarded, not penalized. Creativity and entrepreneurship are what has built this great nation. Why does this administration want to destroy the essence of the U.S.?”

Online Content Chief Executive ’s Full Historical CEO Confidence Index Data (From October 2002 to present) is available at: www.ChiefExecutive.

Net/CEO-Confidence

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Uncommon Wisdom

Beware Groups The Internet is generating “groupthink” inside groups and greater conflict between groups.

by Robert Lawrence Kuhn

The Internet changes how we think, feel and behave, and the consequences are profound, ubiquitous and irreversible.

Although access to 250 million websites and the collective thinking of the world’s population is now the new normal, our mental transformation is as subtle as it is astonishing.

A friend, on vacation in a remote area with no Internet, had to change hotels because his teenage daughter became so distraught. My granddaughter was playing simple games on her mother’s iPhone before she could talk. A passenger was heard cursing the airplane’s Internet

system as being too &#($! slow, as if, at 35,000 feet above Colorado, loading any of those 250 million websites in seven seconds instead of two seconds was a violation of his God-given rights.

Using search engines alters the structure of our memories: how we remember is literally different. The more we use search engines, the less we remember the facts themselves, but the more we remember how to find them. This is a useful adaptation (as long as we have Internet access), but it does confirm fundamental mental change. My concern is how the Internet is affecting groups. CEOs should

be concerned as well, because corporate decision-making is affected. A common but massive mistake is to assume that by making diverse ideas and opinions easily available, the Internet will make people more open to new ideas and more willing to consider opposing opinions. Not so.

Because we self-select sites we visit, the Internet pushes people to reinforce their own preconceived ideas and opinions, such that groups solidify more internally due to the attractive forces of common belief but fragment more externally due to the repulsive forces of opposing belief.

This mental malignancy metastasizes in

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two ways: less diversity within groups and more alienation between groups.

The implications for CEOs are direct: More “groupthink” inside groups and more conflict between groups. How to deal with Internet-enhanced groupthink is the subject of this article.

The Perils of Groupthink

Groupthink is a process of conformed, suboptimal rationalization that comes about subliminally when group members feel constrained to hold similar beliefs. It may be generated, inadvertently, by dom-

The implications for CEOs are direct: More “groupthink” inside groups and more conflict between groups. inant leaders who discourage dissent or manage by praise, or it can develop without leadership when powered by group loyalty and pride. Once present, groupthink is perniciously robust in that it feeds on its own results: the more group members think alike, the better and happier they feel, which reinforces their conformed behaviors. Thus, groupthink enhances bad decisions via a positive feedback circuit that does not self-correct.

Although groups form spontaneously by common interests or are brought together for specific purposes, groups can emerge for the slightest of reasons. As such, groupthink is pervasive in its potency for producing poor decision-making.

The term “groupthink” was coined in 1952 by William Whyte, an organizational analyst, and was researched by Irving Janis, a social psychologist. Groupthink is said to have spawned the failed Bay of Pigs invasion of Cuba during the Kennedy administration and the disbelief that the Japanese would attack Pearl Harbor in 1941 in the face of substantial evidence.

Groupthink emerges when groups are more cohesive, where members know one another well, have long-standing working relationships and personal friendships and where there is good esprit de corps.

All these factors are often good, but they can also engender complacent discussions and the lack of critical, disruptive arguments, and thus lead to flawed outcomes.

No group is immune from groupthink.

Recognizing Groupthink

Janis called out eight warning signs, organized under three types, that can help identify groupthink.

Type I: Group overestimations of itself: 1. I llusions of invulnerability.

Members are inordinately optimistic, ignore obvious dangers and take unwarranted risks.

2. Illusions of superior morality.

Members exaggerate the positive ethical consequences of their actions and downplay the negative ones.

Type II: Closed-mindedness: 3. Rationalization. Members explain away and discredit warning

signs that contradict the group’s conclusions.

4. Stereotyping. Members reject those opposed to the group by characterizing them as ignorant, misguided, prejudiced, spiteful or malicious.

Type III: Pressures toward uniformity: 5. Self-censorship. Members reject dissenting views that run counter to the group consensus.

6. Illusions of unanimity. Members falsely assume complete agreement and count silence as consent.

7. P ressure to conform. Members coerce other members to support the group’s consensus with veiled threats of implied disloyalty.

8. Mind guards. Members appoint themselves to police the group and purge it from adverse information and dissenting views.

Antidotes to Groupthink Poison

The key for resisting groupthink,

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uncommon wisdom > beware groups

Janis argued, is attentive decision-making. What this means in practice is trying to make the group aware of problems with the consensus and offer alternatives. To do this, someone in the group has to be critical. Encouraging critical thinking is not easy, but it is possible. (See sidebar at left.)

In the Real World

Consider this example from China, which needs leaders who can overcome groupthink. Li Yuanchao, head of the ruling party’s (CPC’s) Organization Department with the mission to recruit, train and promote first-rate officials, singles out for criticism those who are “benign and

Thirty Ways to Resist Groupthink 1 Encourage open discussion.

2 Examine all alternatives.

3 Bring in new perspectives.

16 Reward those who are shown to speak truth (with hindsight).

17 Do not assume that silence means agreement.

18 Leaders should avoid giving an early opinion.

Because groupthink is so insidious, comfortable and prevalent, it is a constant challenge for CEOs. This is especially so in the age of the Internet.

19 Do not come to early consensus.

20 Take time to think through major issues.

21 Rotate job positions.

22 Cast jobs against type to disrupt an “old boy” network.

4 Develop a culture where dissent is appreciated.

23 When the stereotypical “yes-man” emerges, expose him/her.

5 Dissent should not be misinterpreted as disrespect for the group’s consensus.

6 Designate a “Devil’s Advocate” by assigning someone to ask hard questions.

7 Rotate the group’s Devil’s Advocate every meeting.

8 Ask each member, in some sequence, to play the role of “critical evaluator.”

uncontentious.” So in addition to requiring positive traits for leaders, Li prioritizes the fight against groupthink.

Because groupthink is so insidious, comfortable and prevalent, it is a constant challenge for CEOs. This is especially so in the age of the Internet. Only the proactive administration of psycho-social antidotes can counteract the poison of groupthink.

24 Assign several independent groups to work on the same issue.

25 Divide the group into subgroups and have each critique the others’ ideas.

26 Develop competition among subgroups.

27 Invite new members into the group (preferably people not well known).

28 Encourage members to discuss the 9 Teach the art of adversarial conversation.

Robert Lawrence Kuhn is an international corporate strategist and investment banker who advises multinational corporations on doing business in China.

He is senior advisor, office of the chairman, Ernst & Young. A longtime counselor to China’s leaders, he is the author of How China’s Leaders Think: The Inside Story of China’s Past, Current and Future Leaders and The Man Who Changed China: The Life & Legacy of Jiang Zemin.

10 Force members to present contradicting views (objections or doubts).

11 Focus on sensitive subjects by revisiting tough decisions.

group’s ideas with trusted people outside of the group (respecting confidentiality).

29 Test new ideas on other, independent groups.

30 Run a pilot program (where applicable).

12 Challenge assumptions and arguments even after decisions are made.

13 Appreciate the benefits of bickering.

14 Reward creative deviance (even if not successful).

15 Reward critical thinking.

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cover story

CEOs and Social Media

With momentum building around the marketing potential of Twitter, Facebook and Google+, how can companies leverage the medium—how personally involved should business leaders be? by Dale Buss

key takeaways 1. Social media isn’t going away—CEOs need to decide how to handle the medium.

2. ROI numbers and other data mostly aren’t available. CEOs must rely on other criteria.

3. Personal involvement is a separate consideration from corporate involvement.

4. Despite the challenges, an increasing number of CEOs are opting to engage in some form of social media.

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cover story

As chief of Hyundai in the American market, John Krafcik has driven the company right into the social media ocean— without taking the plunge himself. The president of Hyundai USA spends up to an hour and a half each day monitoring Twitter and Facebook feeds about the company, its brands and products, but Krafcik does so under an alias and doesn’t contribute to the social stream of consciousness.

“Right now, social media is a wonderful opportunity for me to listen and really feel the pulse of what’s going on,” Krafcik says. “But if I get out there in it myself, I want to make sure I can be committed to stay and deliver. And the time constraints are considerable.”

Krafcik’s dilemma is common to CEOs these days. First, chiefs often figure crucially in whether their companies will

“ Social media is an extension of social behavior, and social discourse is hugely important in business. That means the ROI is the highest in the world.” heavily engage in the fast-changing and often arcane world of social media marketing and communications, weighing the unprecedented hype surrounding the genre with their memories of the last great Promising Technology. And second, more and more company heads are deciding whether to “tweet” under their own names, post leader-worthy thoughts on Facebook or Google+, pal around on LinkedIn, appear in a video destined for YouTube or blog under their own monikers on corporate web sites.

Such decisions face heads of more B2B companies as well as consumer-facing enterprises. BAE Systems Inc., for instance, is the $18-billion U.S.-based unit of the giant British defense and security contractor, and CEO Linda Hudson blessed her communications department’s full-on launch into social media last year as a way “to engage with a community of thousands each day, including the users

What new or alternative marketing or media channels are you evaluating?* companies typically are cutting at least 5 of our products.” She did so even though percent fromcommunities print, television and outdoor information in her business “often is heav61% Social media and online advertising budgets. ily restricted or nuanced,39% and aInternet poor media channels This is happening even with most choice of words or a misplaced 39% Mobile relationship marketing CEOs feeling that the answers they decimal can hurt shareholders or even want aren’t keeping pace with the quesendanger customers.” 36% Online content delivery 25% is User-generated content andkicked media up by the rise of social tions being Social media involvement deepening quickly at most companies. far, social 24%SoMobile Web Site media, including concerns about corporate transparency, digital security media draws only about 2 percent of mar24% Mobile app development and brand vulnerability. One of the bigketing expenditures at Atrion Networking 22% Experiential events gest criteria for their decisions is return Corp. even though the $60-million, War18% Place or location-based advertising on investment.

The typically tiny finanwick, R.I.-based company is immersed cial outlays required to participate—a in the infotech world. But Ford already is messaging 17% Point-of-sale 20-something marketing staffer or two to spending about 25 percent of its mammoth 14% Online video segment syndication field tweets and post tactically on social marketing budget to leverage its early 13% Affinity network group formation media networks, for example—can pay off auto-industry leadership in social media. hugely but also engender outsized And the overall trend is clear: Social *More than 600 marketing executive survey participants all options that applied.

PR selected disasters. media investments are gaining an average Source: CMO Council, The 2011 State of Marketing Many CEOs remain frustrated because of 5 percent this year at the 600 member practically no one has been able to quancompanies of the CMO Council, the most tify returns yet. “There is not [a single] of any type of marketing, while surveyed

What new or alternative marketing or media channels are you evaluating?* 61% Social media and online communities 39% Internet media channels 39% Mobile relationship marketing 36% Online content delivery 25% User-generated content and media 24% Mobile Web site 24% Mobile app development 22% Experiential events 18% Place or location-based advertising 17% Point-of-sale messaging 14% Online video segment syndication 13% Affinity network group formation *More than 600 marketing executive survey participants selected all options that applied. *Source: CMO Council, The 2011 State of Marketing

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way to answer the ROI question,” says Jason Breed, the social-media practice lead for Accenture. But David Sable insists the returns are immeasurably great. “Social media is an extension of social behavior, and social discourse is hugely important in business,” says the CEO of Young & Rubicam, one of the world’s largest marketing agencies. “That means the ROI is the highest in the world.”

So at this point, many companies are wading into the social-media milieu with CEOs relying only on anecdotal evidence and even gut feel. LinkedIn provided the high-quality candidates that led to the last three high-level hires

by Atrion, for example. Language Line has tripled sales to $300 million over the last two years in large part by surrounding its over-the-phone interpretation services, for 911 dispatchers and others, with social media marketing and communications. “Language is a social activity,” says Louis Provenzano, CEO of the privately

“ We use it to get our brand out there and for any promotions, announcements of new service areas… and then we watch how it spreads compared with what we’d have to pay for print or radio.” held concern based in Monterey, Calif., “so to us it’s very obvious that we need to be active in the growth of social media.”

Based in Paramus, N.J., Megabus.com is the largest unit of Coach USA, a unit of U.K.’s Stagecoach Group. Megabus has grown to a $120-million company in just five years by providing Internet purchase of low fares on intercity travel among 60 North American cities.

And social media is in large part responsible for its takeoff, as company spending has risen to nearly $100,000 this year from about $20,000 the first year.

“It’s one of our largest demographics that tends to be involved in social media, of course,” says Dale Moser, CEO of Coach USA. “We use it to get our brand out there and for any promotions, announcements of new service areas— anything new and different. And then we watch how it spreads compared with what we’d have

Social Voices Here’s how eight CEOs personally feel about—and address—social media:

STEVE HANNAH

The Onion Chicago Does he or doesn’t he? The ex-newspaper editor hankers to contribute to The Onion’s vast brand following on social networks; “It’s the way our audience communicates with each other,” he said. But he doesn’t.

Why? “Being of Irish extraction,” Hannah quips, “I can’t even say ‘hello’ in 140 characters. Besides, I don’t believe I have anything particular to say. And I’m awash in a sea of information all day long, anyway. I want to simplify my life... On a personal level, this is not the way my social circle and my friends do things.”

TIM HEBERT Atrion Networking Warwick, R.I.

Does he or doesn’t he? Spending about 30 minutes a day personally engaging in SM, Hebert focuses on LinkedIn because that’s where he can interact most with clients. The company ranks all of its clients on their strategic importance, and Herbert isn’t surprised to find that those clients who “friend” him on Facebook tend to be the most important.

Why? With 70 percent of employees toiling away from headquarters, networking internally as well as externally is literally existential for Atrion. Hebert wants to be there. “People like the fact that I’m very transparently the same person on Facebook and in person,” he says. “But I don’t share information that’s too personal.”

LINDA HUDSON BAE Systems Arlington, Va.

Does she or doesn’t she? Hudson began blogging internally for 40,000-plus employees, and after several months acknowledged the practice as “invaluable.” She has also established a Twitter account. “It is my intent to engage on Twitter to comment on current events and offer my thoughts on important topics.” But Hudson hasn’t started to do so yet.

Why? “While I think it’s important that BAE Systems be represented in social discourse,” Hudson says, “I don’t think that voice necessarily needs to come from the top.” Among other reasons: Her time “is limited and valuable.”

JOEL MANBY

Herschend Family Entertainment Atlanta Does he or doesn’t he? The company owns amusement parks, including Silver Dollar City in Missouri and Dollywood in Tennessee, and Manby was the CEO featured in the second-ever episode of CBS’s “Undercover Boss.” But he refrains from personal SM accounts for now.

Why? Manby would rather defer issues and attention to individual park managers and Herschend’s other executives. “Most things brought by customers who might approach me via social media should be handled at other levels,” he says. “And I don’t know if I could keep up with blogging.”

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cover story

Social Voices Continued.

How CEOs personally feel about—and address—social media:

MILES NADAL MDC Partners New York

Does he or doesn’t he? “The shoemaker’s children can’t go barefoot,” says the head of a media holding company that specializes in SM. So, yes— Nadal tweets three favorite quotes a day and re-tweets articles he likes. But he doesn’t have a Facebook page or blog.

Why? He likes Twitter because “it brings me closer to our talent pool.”

But he doesn’t do Facebook because “it would have to be too personal,” and Nadal would have security concerns. “As a person running a public company, the most important persona I have is my public persona.”

LOUIS PROVENZANO Language Line Services Monterey, Calif.

Does he or doesn’t he? His goal is five SM transactions a day, seven days a week. Hundreds of clients and potential clients—sheriffs, airport directors and others who must deal with limited-English constituencies—interact with Provenzano.

Why? “If you can take a hot topic like immigration, and humanize it with an incident, and ask what people would do, it’s an excellent way of spreading our mission,” he says. Besides, “If I’m waiting for my luggage, that’s enough time to make a statement about something that goes out an all my social-media feeds at once.”

DAVID SABLE Young & Rubicam New York

Does he or doesn’t he? Sable now blogs a memo of observations and quotes that he’s sent out every Monday for 20 years. It has become “an institution,” he says, and lately draws 10,000 unique visitors a week, a 70-percent increase over two years ago.

Why? “A CEO’s job is to communicate—to be the central communicator of and for the company,” he says. “I’m just careful about what I say, and only what I want to get repeated. That way, it’s no more or less dangerous for a CEO than for any citizen.”

JULIE SMOLYANSKY

Lifeway Foods Chicago Does she or doesn’t she? As head of a better-for-you foods brand, Smolyansky figures pioneering consumers expect to see her on social media as well as the brand. And, in fact, her personal Facebook page is her corporate one—and vice versa. She also tweets her opinions and her finishes in 5K races.

Why? Why not? Security concerns about social media “are the biggest bunch of crap,” Smolyanksy says. “Of course you have to be smart about it: If I was having a high-level meeting, I wouldn’t be tweeting that information unless I wanted the world to know.”

to pay for print or radio to get the same kinds of demographics. That would be hundreds of thousands of dollars each time, compared with very little for social media.”

Even huge, long-established companies without obvious connections to the social media zeitgeist also have gone all-in. They include Best Buy, where CEO Brian Dunn has become a world-leading apostle of social-media marketing. “Best Buy’s message has to be where people are, and today, that means being on social networks,” says the chief of the Minneapolis-based consumer-electronics and appliances retailer.

“ If I’m waiting for my luggage, that’s enough time to make a statement about something that goes out on all my social-media feeds at once.”

Otherwise, a company “risks not being in the conversation at all. Over time, I believe that can be fatal to a business.”

But does that mean CEOs must be personally involved in “the conversation?” That decision can make the questions surrounding social media even more acute. Dunn’s unequivocal answer is, absolutely: His personal Twitter account has 5,000 followers. Jeff Joerres, CEO of the biggest private employer in the world, Glendale, Wis.-based Manpower, also tweets about important global labor-market news and has a personal Facebook page that has picked up more than 1,000 “friends”—including 700 Manpower recruiters around the world.

“I was at the World Economic Forum” in Davos, Switzerland, earlier this year, Joerres recalls, “and while I’m speaking about the shortage of talent in China, I also have a tweet going out with my 140-character observation about the latest U.S. unemployment-claims report. And look at those who followed it: newspapers, magazines, university people and human resources executives from all over. Many of them end up tweeting back or e-mailing me.”

Even banal social-media missives by CEOs can be effective attention-getters, conversation starters and brand builders, especially if the chief is communicating with a restricted group, maintains Eric Darr, executive vice president of the Harrisburg (Pa.) University of Science and Technology. “For those minutes, I feel like I have

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the CEO’s attention,” he says. “It makes you feel special, like having the CEO’s cell phone number.”

But many other CEOs remain ambivalent about devoting their own precious resources to social media—daunted by the time commitment, heeding security experts’ warnings about exposing their thoughts and movements digitally, wary of conceding any of the insularity that gives them some of their authority, concerned about making a costly mistake in some sort of social media forum, or just dubious about what they consider a fad that still has to prove itself. (See “Should CEOs Have Personal Blogs?” p. 52.)

BAE’s Hudson, for instance, has launched an internal blog but so far has refrained from using her own professional account on Twitter. “I’m not ready to travel down that road until I’m convinced that I have the time, and processes in place, to use the tool responsibly and effectively for the betterment of my business,” she says. “And once you initiate engagement on social media, expectations are high about recurring content—and it takes time.”

For Gary Hirshberg, vanguard of the organic-food movement and a hero to Millennials as founder of Stonyfield Farm, it seems that blogging and tweeting should come naturally. But they don’t to the CE-“Yo” of the Londonderry, N.H.-based yogurt company.

Much of his misgiving is generational, believes the 49-year-old.

He still believes in “personal conversations” and likes to go out and make about 150 speeches a year before audiences of real people. And, Hirshberg says, “I can never seem to get the time:” He has a blog, but he only makes about 10 entries a year.

But lately, social media has been growing even on Hirshberg.

For fun, he filmed a video about the wonders of organics that was paired as a YouTube “rap-off” against another organic-company CEO, Seth Goldman of Honest Tea, and has picked up more than 72,000 views. He’s willing to use social media to parry opposing views on industry issues. And increasingly, Hirshberg allows staffers to excerpt his speeches and put them on his Facebook page.

“I have to admit that it’s unbelievably effective,” Hirshberg says. “I get more feedback from my Facebook page than from anything else I’m doing.”

Blog Guidelines Hundreds of IBMers (though not CEO Sam Palmisano) have blogs. In 2005, IBM published a set of rules to guide for IBMers who wanted to blog. The guidelines offer good general guidance for anyone—including CEOs—thinking about starting a blog.

• Speak in the first person.

• Respect copyright and fair use laws.

• Safeguard confidential and proprietary information.

• Protect company clients, business partners and suppliers.

• Respect your audience and your coworkers.

• Add value.

• Don’t pick fights.

• Be the first to respond to your own mistakes.

• Adopt a warm, open and approachable tone.

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Raising

Sales Force Effectiveness

What works and what doesn’t.

by Howard Stevens and Geoffrey James

Conventional wisdom says that the Internet is making sales jobs obsolete, that those sales teams who remain consist primarily of extroverted go-getters and that selling is an art that’s only measured at the end of each fiscal quarter. Unfortunately, conventional wisdom is dead wrong. Scientific research into what actually works—and what doesn’t—inside today’s most effective selling environments reveals that the conventional wisdom about selling is not just incorrect, but a recipe for failure. Here are the four most important things that CEOs need to know about successful selling into today’s unconventional business world.

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sales effectiveness

Fact 1: The Internet makes sales professionals more important. There is no question that the Internet has changed the way companies interact with customers. Customers can now get product information at the same time as the sales rep, not just about the sales rep’s offerings, but the offerings of all of the rep’s competitors. As a result, customers can now configure and key takeaways order products and manage the shipment 1. While many say the Internet is eliminating the need for a sales force, of those products across the web without hard data counters that claim. the need of a sales professional.

2. 39 percent of a company’s success at winning customer loyalty depends on the effectiveness of salespeople.

Conventional wisdom says that this power, in the hands of the customer, 3. The “80-20 rule” of sales is a myth; in most organizations, top 20 percent producers generate just 52 percent of all sales revenue. should make sales professionals less 4. Reassigning or replacing the bottom 20 percent performers is more important. But that turns out not to be the effective than attempting to teach the top 20 producers’ techniques case. Research into how companies are to the rest of the team. deploying salespeople suggests that the Internet has created a net increase in the demand for sales professionals, but with this proviso: the individuals who thrive in today’s environment must possess a different and more extensive skill set.

Take, for example, the travel industry, which once provided employment for tens of thousands of travel agents whose main responsibility was booking airline tickets. Today, of course, most people make their plane reservations directly online, eliminating the need for professional help. However, despite the commoditization of its key product, demand for travel agents remains high, according to the U.S. Bureau of Labor Statistics. Rather than making travel agents obsolete, the Internet has created a new market for more complex services (such as luxury travel) to a more sophisticated class of customers. What was once a clerical sales job evolved into a solutionbased sales job.

Similarly, many once believed that the Internet would mitigate or eliminate the need for a sales force to sell computer technology. With a wide variety of computer hardware, software and services available online, companies would simply find whatever computer products they wanted for the lowest price possible. However, while relatively simple products, like personal computers, became commodities, the Internet paradoxically began to create a demand for a higher level of sales activity.

Because basic computer’s power became so cheap, companies discovered they could use that power in ever-more-complex and interesting ways. Doing so, however, often required expertise that the company itself did not have, or lacked the ability (or interest) to obtain. Computer firms like IBM thus began to focus on selling and providing services to help companies harness all that cheap computing power.

A key insight explaining why sales as a profession will not only survive, but become increasingly critical is realizing that a purchase (especially in the business-to-business world) is first of all a decision to outsource. If the purchasing company decided to in-source that product or service, they would have a manager overseeing that function. As a replacement for that internal control, sales professionals are often required to act

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Bottom 20% replaced

By average and above salespeople

Top 20% of salespeople

$119.7 Million

$104 Million

sales effectiveness

=

$223.7 Million Total Sales

Source: Chally Group Worldwide

* Based on a broad, cross industry sample from 900 B2B sales forces ** By Arun Sharma at the University of Miami (Fla.)

Sales Effectiveness is Critical to Loyalty WHY CUSTOMERS REMAIN LOYAL 39%

Effectiveness of the Sales Professional

22%

Perceived Quality of Product or Service

20%

Breadth of Offering

19%

Value for the Price

Perceived product or service quality counts for only 22 percent of customer loyalty success, value for the price is another 19 percent and breadth of offering brings it to 61 percent. A full 39 percent of success depends on the effectiveness of salespeople and the added value they personally bring to customers. The bottom line? Despite what many salespeople may claim, companies lose more business due to inadequate sales efforts than to quality or price— which means boosting sales effectiveness is critical to success.

Going Beyond the Interview Most salespeople are hired after interviews where they get the chance to sell their experience, capabilities and any other feature, function or benefit they can. Subjective criteria are usually used to evaluate their answers.

It is not surprising, then, that so many bad hiring decisions are made in a sales force. The unstructured interview is only slightly more predictive of on-the-job success than the 5050 chance you get with the flip of a coin. World-class sales forces do not leave their hiring decisions to chance.

Top sales forces… …employ statistically validated, job-specific assessment tools. …put candidates in a simulated selling environment to ‘test-drive’ their abilities. …let the candidates ride with existing salespeople to glimpse behaviors in the real world. …go the extra mile.

as “surrogate managers” to the companies they serve. In these high-profile markets, customers care less about salespeople with the “traditionally trained sales skills” than their general management savvy and ability to understand business, as well as their effectiveness at customer advocacy to protect their interests within the vendor organization.

Similar shifts inside almost every industry can be observed. In fact, the Internet has made the role of the sales professional more important than any other element of the sales environment, including price.

Fact 2: Sales roles have become differentiated and specialized. Conventional wisdom says that the best sales professionals are hard-driving mavericks who can drum up business, develop opportunities and close deals like crazy. If you get enough of these types on board, you can point them at opportunities anywhere and everywhere, and they’ll make money for your firm.

Though frequently accepted inside the executive suite, that theory is deeply flawed. The most successful companies tend to have organizations that are extremely complex, and comprise anywhere from two to five distinct sales and customer facing roles. (For a sample sales specialty map, visit www.ChiefExecutive. net/SalesEffectiveness.)

While many of those job roles have a superficial similarity (many involve “selling” for instance), the types of activities and competencies that prove successful vary widely. Research, including more than 400 validation (actuarial) studies, has identified the distinct characteristics, skills and competencies needed for success in different types of sales roles that specifically distinguished strong from poor performers in the same roles.

More critically, the strengths and weaknesses of very top performers made them specialist “savants” limiting the ultimate flexibility. This helps explain why the best salespeople often fail in management, just as the best surgeons don’t make the best hospital administrators, or the best artists don’t run the top museums.

The research also demonstrates that while some roles may demand some of the stereotypical “go-getter” sales behavior, other roles are just as likely to favor employees with less showy strengths, like strong analytical skills, the ability to empathize with customer problems or a

deep understanding of complex business issues. Because of this, few, if any, individuals are likely to be successful in more than a few of these many roles.

This is important, because many companies, when faced with market changes or difficult economic times, tend to pluck top performers from their jobs and reassign them to roles with markedly different requirements, assuming they will flourish in their new position. However, the characteristics that make an individual successful in one role may not only provide little preparation to help them succeed in another, it often actually hinders their chances.

Failure to understand this can have devastating consequences. In most organizations, top producers generate more than half of all sales revenue. And, statistically speaking, top producers are rare, representing one out of every 15 qualified applicants and only one in every five people hired. Moving such valuable and rare resources into roles where they’re unlikely to be successful is a recipe for lost opportunities, lost revenue, and unhappy employees.

The specialization of sales roles suggests that, rather than reassigning top performers to new roles in response to economic challenges, CEOs (and the sales management working under them) should keep the top 20 percent of high producers for each role in place. Meanwhile, other personnel should be moved into specific sales positions based upon their individual skill sets and competencies compared with the requirements of that role.

The best analogy for sales force alignment is perhaps that of sound financial investing. Companies should keep their top producers, which offer a high return on investment, but also diversify by adding individuals with growth potential to their organization, for some of these individuals will ultimately generate profit.

Fact 3: Universities and colleges now produce top sales professionals. Conventional wisdom is that top sales professionals don’t need anything other than a high school diploma—if that—in order to sell. While they might need some technical training to sell a particular product, and may need to learn some sales skills, what’s important is that they have the right personality.

This misconception has cost companies dearly. U.S. firms alone spend $7.1 billion on sales training every year, and

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in some industries, the costs associated with the development of a single salesperson can be in excess of $100,000. With expenses that high, it can take as long as two years before any profit is realized from those new sales hires.

Yet, as we saw above, selling is not a generalist profession any longer, but is differentiated and specialized, which puts an enormous burden on companies to bring their sales personnel up to speed, if they’re hired simply because they seem to have the “right personality.”

As an alternative to the very expensive process of training sales professionals from scratch, an increasing number of firms are hiring people who have taken sales courses and programs inside colleges and universities. Such individuals enter the job market already trained in basic business concepts, like profit and loss analysis, information technology, account management, relationship building skills, market analysis and product/service promotion and distribution, as well as specific expertise in key business disciplines, like supply chain management.

Obviously, it is greatly to the

Participate in the World Class Survey Chally Group Worldwide, which does research into sales effectiveness, frequently surveys buyers to find out which vendors they really like doing business with, and why. Chally compiles the responses and then gives awards to the companies that customers praise the most.

Chally Worldwide creates a final report describing what’s working (and what’s not) in the world of selling. If your firm participates in this process, it will get a free copy of the summary results from what your clients had to say about you and your competitors. You will also receive a copy of the executive brief summarizing the findings.

To get involved, go to www.worldclass-sales.com

advantage of the hiring firm when sales job candidates already understand the basics of selling and have already identified the areas where they’re most likely to be successful. There are now more than 50 sales-oriented business curricula across the globe producing exceptional graduates who “ramp up” 50 percent faster than the average candidate, and are 35 percent less likely to turnover. Moreover, these graduates already have demonstrated the aptitude and desire to work in sales, and are therefore more focused and in-tune with the numbers and the processes designed to get the numbers.

While these programs differ in the details of their approach, all seek to help train sales specialists who can combine an expert knowledge of sales strategy with a parallel expertise in a targeted field of business. The programs benefit both business and students by aligning educational goals with the realities of the employment market. Today’s sales profession is moving towards a training model where universities provide the groundwork upon which corporations build specific specialties that are needed inside that sales environment.

Fact 4:. Selling is now more science than art. Sales consultants often suggest that companies study the techniques of the “A” players—the top 20 percent—to identify the most effective techniques and use that knowledge in training the rest of the team. But the math doesn’t work.

The charts on page 36 assume a typical 200-person sales force for a company with annual sales of $200 million. Contrary to the popular “80/20” rule, the top 20 percent performers actually produce 52 percent of top-line revenue. Furthermore, even though sales grew by 5 percent by training the middle, the result was limited: $94.5 million (x) 5 percent, or $4.5 million.

Applying Total Quality Management (TQM)—a data-driven methodology for using standards, measurements and repeatable processes to find and eliminate the sources of sales failure—reveals the real problem: the bottom 20 percent who are losing money. Reassigning or replacing the bottom 20 percent with just “average” sales people will increase production by a minimum of 9 percent. Training the rest of the sales force to get a 5 percent gain now brings an additional $5.7 million.

And TQM can be taken even further by studying what type of people fail and not hiring them in the first place.

Xerox: Trials to Hire Xerox’s global imaging division employs many of the recruiting and selection techniques that personify a world-class hiring effort. To maintain their 1,400-person sales force throughout North America, they: • Implement a capabilities test.

• Send a candidate into the field to ride with one of their peers.

(There is no better source than another sales rep to tell if this person is going to make it and be a team fit.)

• Have prospective sales team members meet with two or three sales managers, and ultimately the VP of sales or the president.

• Perform extensive reference checking to dig down to the third and the fourth-level person.

• Find employees willing to be customer service focused, spending time asking questions about how they like to be satisfied as a customer in their own lives.

Who’s Wooing Your Customers?

Do you know who tomorrow’s competition is? Success in your marketplace depends on competitive position, yet even the best competitors suffer higher rates of customer churn than desired. In fact: • 60 percent of lost customers come as a surprise.

• 80 percent of deserting customers rated their vendor as good or very good.

• The most frequent cause of a major customer loss not only came as a surprise, it came from an unexpected source.

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sales effectiveness

Staples: Generalists and Specialists

APPLYING TOTAL QUALITY MANAGEMENT TO SALES DEBUNKS CONVENTIONAL WISDOM

Traditional sales forces used to exist in product-centric worlds. Manufacturing, marketing and sales were aligned by products. Customers now demand that sales forces exist in their world. Their world is business issue-centric, not product-centric, and salespeople need a thorough understanding of the customers’ business issues to add value.

Organizing around customers creates many challenges for a sales force, but despite the inherent challenges, customers are now demanding that sales forces re-align to serve them.

Corporate Express, a division of Staples, addresses that by organizing its sales force around different customers’ needs. The company offers more than 100,000 products spanning several different lines such as supplies, furniture, information technology and others. To maximize efficiency, its salespeople who serve small and mid-sized customers operate as generalists. They target many different types of customers within geographaries.

But with its larger and more sophisticated and more valuable accounts, Corporate Express organizes its sales force around particular market segments like health care, education and government. In these segments, their buying processes and product needs warrant individualized attention that a generalist sales force cannot provide. Knowledge of hospital systems, educational institutions and government procurement processes is a major requirement of these customers, and Corporate Express has responded by structuring themselves to satisfy the market segments specific buying needs.

Contrary to conventional 80/20 rule wisdom, the top 20 percent of sales performers actually produce 52 percent of top-line revenue. A commonly proposed improvement method is to study techniques of these top 20% sales representatives and train the middle 60% with those techniques...

The following charts demonstrate the application of sales improvement techniques at a hypothetical company with 200 salespeople and $200 million in sales.

Middle 60%

Bottom 20% of salespeople

$6 Million $150K/person

Top 20% of salespeople

$90 Million $750K/person

= $104 Million $2.6M/person

$200 Million Total Sales

...but improving the performance of the middle 60% of the sales force by 5 percent only represents a meager 2.25% improvement in sales.

Applying the Difference

Middle 60%

Bottom 20% of salespeople

$6 Million $150K/person

Top 20% of salespeople

$94 Million

$104 Million $2.6M/person

=

$204.5 Million Total Sales

A BETTER WAY Reassigning or replacing the bottom 20% of salespeople with average or above-average performers will increase sales to $223.7 million—for an 11.85% performance gain (shown below). Next, train the rest of the sales force and get an additional 5% gain.

Exclusive Online Content Visit www.ChiefExecutive.net/ Saleseffectiveness for additional articles on building sales effectiveness, including: • Are Great Salespeople Born or Made?

• A Sample Sales Specialty Map • Methodology Overview of Chally Group’s World-Class Sales Databases and Metrics • Applying Total Quality Management to Sales Efforts

Bottom 20% replaced

By average and above salespeople

Top 20% of salespeople

$119.7 Million

$104 Million

=

$223.7 Million Total Sales

Source: Chally Group Worldwide * Based on a broad, cross industry sample from 900 B2B sales forces ** By Arun Sharma at the University of Miami (Fla.)

36 chiefexecutive.net september/october 2011

WHY CUSTOMERS REMAIN LOYAL 3236_salesforce.indd 6

Effectiveness of the

8/23/11 9:37 PM

Where are stars born?

Chief Executive’s Best Companies for Leaders survey, done in cooperation with Chally Worldwide, is the premier effort toward identifying and recognizing excellence in leadership development. The top companies will be featured in the January/February 2012 issue of Chief Executive.

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Hubble observes infant stars in nearby galaxy. Photo: NASA, ESA and the Hubble Heritage (STScl/AURA)

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ceo of the year 2011

C e l e b r at i n g the 2011 CEO of the Year

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In July, more than 200 CEOs gathered at the New York Stock Exchange to honor Ford Motor Company’s CEO, Alan Mulally as Chief Executive magazine’s CEO of the Year. Mulally was the 26th CEO to receive the award, joining the ranks of such luminaries as Microsoft’s Bill Gates, GE’s Jack Welch and Intel’s Andy Grove.

Chosen for the honor by a panel of CEO peers, Mulally stood out among the year’s final contenders for achieving a seemingly insurmountable challenge—bringing the American icon back from the brink of bankruptcy, noted Hugh Grant, CEO of Monsanto and outgoing CEO of the Year, in presenting the award.

“He championed and inspired a giant turnaround effort that led to extraordinary performance and extraordinary results.”

Grant echoed the thoughts of many in the crowd that night when he praised Alan Mulally for “using adversity in tough times as a springboard for innovation” and “balancing the needs of owners, employees, customers and stakeholders at large.”

Photos: Paul O. Colliton Studio

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ceo of the year 2011

01

02

NYSE Euronext CEO Duncan Niederauer also called out Mulally’s pursuit of innovation in the face of both a precarious financial situation internally and global economic uncertainty—conditions that might well have sent others running for the hills. Ford could have acted like a car company and simply introduced a new car, he said, “but Alan said, ‘We’re more than a car company, we’re a technology company.’”

04

05

Photos: Paul O. Colliton Studio

03

“There has never been a time when CEOs were needed more than today.”

06

01 The NYSE Euronext 02 Ethan Allen’s Farooq Kathwari, Biglari Holdings’ Sadar Biglari, Biglari Holdings’ Dr. Phil Cooley 03 Gabelli Asset Management’s Mario Gabelli 04 Joan and Bill Hickey of Sealed Air 05 Presdo’s Eric Ly 06 International Flavors & Fragrances’ Douglas Tough, Havas Worldwide’s David Jones, Ernst & Young’s Sam Fouad

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07

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09

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In receiving the honor, Mulally noted that he was accepting the recognition on behalf of everyone at Ford Motor Company. He went on to acknowledge that the business community continues to face a challenging environment, but urged today’s leaders to persevere. “There has never been a time in history when CEOs were needed more than today,” said Mulally. “Leadership is so important and so needed in so many areas—economic development, energy independence and security, environmental sustainability. It’s an honor to be here tonight and to serve with the CEOs who continue to provide economic growth, great opportunities and great careers.”

07 NYSE Euronext’s Duncan Niederauer, Chief Executive Group’s Marshall Cooper, Ford’s Alan Mulally, Chief Executive’s J.P. Donlon, Monsanto’s Hugh Grant, Chief Executive Group’s Wayne Cooper 08 NCR’s Bill Nuti, NCR’s Gary Daichendt and MetLife’s C. Robert Henrikson with his wife, Mary 09 Entertainment Media Ventures’ Sandy Climan 10 Bausch & Lomb’s Fred Hassan with his wife, Noreen 11 Enterprise Holdings’ Pam Nicholson 12 Marsh & McLennan’s Brian Dupereault, Snap-on’s Nick Pinchuk, EnerSys’ John Craig 13 Uniworld’s Byron Lewis.

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ceo roundtable

What’s Next for China?

Already the world’s second-largest economy, China’s future—and the future of companies doing business there—depends on overcoming significant hurdles.

Jennifer Pellet

For the last decade, talk has swirled around the market potential of China—and for good reason. By far the world’s most rapidly growing major economy, China is fast on its way to becoming the world’s biggest luxury goods market. Chinese consumers already buy more cars than people in any other country, based on a forecasted 13.5 million in 2011 versus the 12.6 million that U.S. consumers are expected to purchase. What’s more, the country’s central government, which has demonstrated a formidable commitment to setting and achieving long-term goals, has made increasing domestic consumption a top priority.

Photos: Paul O. Colliton Studio

by

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“At the end of 2012, there will be a whole new generation of leaders coming through, and who they are and what they think will be a big determinant of how China goes forward.”

Given these facts, business leaders’ near-obsession with gaining a foothold in China is understandable. But a host of frustrations—from difficulty navigating the political landscape and hiring and retaining quality talent to intellectual property theft and onerous export controls—have long hindered global companies’ efforts to do business in China.

And with China now poised for massive transformation, including a complete change of leadership in 2012, the hurdles are about to get a lot higher. “At the end of 2012, there will be a whole new generation of leaders coming through, and who they are and what they think will be a big determinant of how China goes forward,” Dr. Robert Lawrence Kuhn, senior

advisor to the office of the chairman at Ernst & Young, told CEOs gathered for a Chief Executive roundtable discussion held in partnership with Ernst & Young.

In 2012, China will usher Xi Jinping, currently vice-chairman of China’s Central Military Commission, into the role of Communist Party Chief and a year later Xi will take over as president. Next year will also see a changeover in the nine-member Politburo Standing Committee—the apex of Chinese political power. At the same time, China continues to struggle to address the imbalances between rich and poor—in particular the challenge of transmigrating 400 million rural poor to urban areas. It also faces the prospect of a drop in the economic growth rate of 9 to 10

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“ With the high increase in standards of living, people have a lot to lose, so I really don’t see the kind of pressure that would lead to a super Tiananmen Square.” —Dr. Robert Kuhn 03

“ There’s a better than 50 percent chance that the current political system in China doesn’t last.” —Anil Gupta

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01 Ernst & Young’s Robert Kuhn 02 Fifth Street Capital’s Len Tannenbaum 03 Ernst & Young’s Sam Fouad 04 Met-Pros’ Ray De Hont 05 Monsanto’s Hugh Grant 06 Michael Dingman’ Chair in Global Strategy & Entrepreneurship Anil Gupta

percent that it has enjoyed for nearly 30 years.

Even among experts on Asia, opinions differ on how these changes will play out. Anil Gupta, visiting professor at INSEAD and author of Getting China and India Right, sees a “better than 50 percent chance that the current political system doesn’t last.”

“Of the 10 percent growth rate in GDP, 1 percent has come from an increase in labor, about 5 percent has come from an increase in capital due to China’s capital

“ In China, you have capitalists working in a communist system; in Japan, you have communists working in a capitalist system.” investment and about 4 percent is from productivity growth,” he told roundtable participants, noting that the low-hanging fruit in both labor and capital has now been plucked. “If you look at the infrastructure spending, once you’ve built a high-speed train, do you [get the same return when you] build a second? China’s investment will continue but there is no reason to believe it will continue to

increase. And the easy growth in productivity has been done, so there’s no reason to believe that will accelerate.”

Anti-government protests are also on the rise in the China, added Gupta.

“Unrest is no longer confined to rural areas, it’s now happening in urban areas among people who are educated,” he said. “Tensions in the society are increasing, and increasing rapidly, because what you have is an economic democracy. As a friend of mine in Tokyo once told me, ‘In China you have capitalists working in a communist system, in Japan you have communists working in a capitalist system.’”

Kuhn, however, predicts a period of caution during the political transition followed by a government movement toward a democratic approach more hospitable to foreign businesses. “The next generation of leaders are sophisticated and knowledgeable, and stability will be their highest priority,” said Kuhn, who is an advisor to the Chinese government and author of How China’s Leaders Think. “And with the high increase in standards of living, people have a lot to lose, so I really don’t see the kind of pressure that would lead to a super Tiananmen Square.”

Still, given China’s importance to today’s global economy, the very possibility is daunting. “Fifteen years ago it wouldn’t have mattered, but now it sure does,” said Brian Duperreault, CEO of Marsh & McLennan Companies. “This isn’t Egypt. This is a big deal.”

But the possibility of political unrest

is just one of the challenges the changing landscape in China presents for companies doing business there, agreed CEO roundtable participants.

Regulatory Roller Coaster While widely criticized, the U.S. regulatory environment can look logical and orderly when compared to China, where intellectual property theft has been rampant and environmental concerns have long taken a backseat to job and revenue creation. Copycatting and substandard manufacturing conditions are still concerns, but the dizzying speed of regulatory movements to rectify them can be nearly as unsettling—as can their favoritism toward state-owned and homegrown enterprises.

John Craig, CEO of EnerSys, recounted a recent experience with environmental policy. While the company employs U.S.level environmental protection standards for its industrial battery manufacturing factories in China, many manufacturers there did not. “About a month ago, the government walked into more than 300 factories and said, ‘Close your doors,’” he reported, noting that the surprise inspection was reportedly a result of the fiveyear plan China debuted in March. “We were back up 24 hours later because of our standards, but out of those 300 factories only a handful are open today and probably 50 percent will never re-open.”

While EnerSys weathered that experience well, the incident raised concerns.

“My question is are there other significant

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changes coming about which U.S. businesses should be aware?” he asked.

The answer appears to be yes. “You’ll want to watch out for new laws in mergers and acquisitions, which on the surface are designed to be anti-competitive,” responded Kuhn. “But a good piece of it is to protect Chinese companies from being squeezed off too early.”

Province Power Struggles Competition between local markets can also be a minefield for foreign companies looking to operate across China. “In the U.S., it doesn’t really matter if you’re in Illinois or Kansas in terms of policies, but in China it makes a huge difference because the power is centralized in the provinces,” explained Kuhn. “The provinces are really like independent countries, with tremendous deal-making power.”

Businesses should tread carefully as they expand into new provinces, as having won a special consideration from one province may translate negatively with its neighbor. “If you look at the competition between the Yankees and the Red Sox, that’s nothing compared to the provinces,” said Kuhn.

The bottom line? Businesses need to adopt a localized approach. “You see a very different market in Shanghai than in

Chongqing,” agreed Nick Pinchuk, CEO of Snap-on. “This isn’t one $13 billion market, it’s several markets of a couple hundred million dollars that you have to deal with differently.”

Wage Woes Gone are the days when global businesses could hire English-speaking Chinese talent for a song. “The price we’re paying for a programmer at one of our companies is almost the same in the U.S. as it is in Beijing,” reported Leonard Tannenbaum, CEO of Fifth Street Capital. “If you’d told me that five years ago, I’d have said, ‘You’re crazy.’ And the price of manufacturing is so crazy in China now that people are going to Thailand and elsewhere.”

Rising demand has also brought a war for talent. “People are, frankly, totally underqualified for the roles they’re getting,” says Douglas Tough, CEO of International Flavors and Fragrances. “If you can speak English and Chinese and have any Western training, you’re just constantly moving on because a lot of companies are squabbling over a very small supply of people.”

Nationalistic pride intensifies that retention challenge, added Sam Fouad, Americas emerging markets leader at Ernst & Young. “The nature of loyalty in China is associated more with working for

a state-owned enterprise than with staying with the brand where you began.”

“In the old days a foreign company was the place to be because you were going to learn, but today they would rather work for a state-owned enterprise,” agreed Duperreault. “As far as they’re concerned that’s where the action is and where the power will be—and that’s an issue for all of us. At the end of the day you need Chinese people working in your company and it’s going to be harder and harder to acquire those people.”

Ultimately, however, it’s a challenge businesses must figure out how to overcome, he added. “China is big and it’s only going to get bigger, whether it grows at 9 percent or 5 percent. That’s not the question; the question is: ‘Will my company be big in China?’ You need a strategy.”

It’s also becoming increasingly apparent that attempting to translate strategies proven successful in the West is not the answer. “China is changing faster than any country in the history of the planet, so the management playbook that we learned in the West will be of limited use,’ summed up Pinchuk. “So one of the biggest challenges in China is giving up those lessons and having a completely different culture in terms of how to approach business.”

Online exclusive

Z

Marsh & McLennan’s Brian Duperreault, International Flavors & Fragrances’ Douglas Tough, Digital Power’s Amos Kohn and TD Ameritrade’s Fred Tomczyk

Roundtable Participants John Allen, Chairman & CEO, Greater China • John D. Craig, Chairman, President & CEO, EnerSys • Raymond J. De Hont, Chairman, President & CEO, Met-Pro • J.P. Donlon, Editor-in-Chief, Chief Executive • Brian Duperreault, President & CEO, Marsh & McLennan Companies • Sam Fouad, Americas Emerging Markets Leader, Ernst & Young • Hugh Grant, Chairman, President & CEO, Monsanto • Anil Gupta, Michael Dingman Chair in Global Strategy & Entrepreneurship Smith School of Business University, University of Maryland • David Jones, Global CEO, Havas Worldwide • Amos Kohn, President & CEO, Digital Power • Dr. Robert Lawrence Kuhn, Senior Advisor, Office of the Chairman Ernst & Young • Nicholas T. Pinchuk, Chairman, President & CEO, Snap-on • Dr. Thomas J. Saporito, Chairman & CEO, RHR International • Leonard Tannenbaum, CEO, Fifth Street Capital • Fredric J. Tomczyk, President & CEO, TD Ameritrade Holding Corporation • Douglas D. Tough, Chairman & CEO, International Flavors & Fragrances

Are China’s SOEs Destroying Capital?

Visit www.

ChiefExecutive.net/ ChinaRoundtable for excerpts from a discussion on the real competitiveness of state-owned enterprises.

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ceo roundtable

Under a Watchful Eye Is governance inhibiting corporations’ ability to help shape U.S. economic policy and recovery? by

C.J. Prince

Photos: Paul O. Colliton Studio

In the wake of the global economic crisis, and with the sluggish recovery still sputtering, CEOs have had to lead their companies through unprecedented and prolonged uncertainty. They’ve been forced to keep one eye on the road ahead and one on Washington, where politicians debate a host of reforms—regulatory, healthcare, financial—that have the potential to greatly hinder rather than help companies’ ability to get moving again. And the collective lack of confidence in Washington’s savvy to craft stable economic policy has held corporate leaders back from taking the kinds of risks necessary for private-sector growth.

But while those in the boardroom can articulate what’s wrong with the strategy devised by U.S. political leaders, that message is not being heard on Capitol Hill, agreed attendees gathered for a roundtable discussion about whether governance is inhibiting corporations’ ability to help shape U.S. economic policy and recovery. The reasons for that disconnect are manifold, according to CEOs at the roundtable, held in partnership with Korn/Ferry International, a global provider of talent management solutions.

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For starters, a mutual distrust and misinformation has plagued both sides. Even top leaders in Congress don’t necessarily know how the private sector functions, said Steve Odland, former CEO of Office Depot, who recalled a meeting with a wellknown senator. “He said, ‘You’re a public company. You’re in the public sector.’ And I said, ‘No, Senator. Public companies are actually in the private sector.’ So there’s this confusion here. I think public companies have come under duress from government because they’re viewed as part of the public holdings, rather than as accessing public capital.” Opening the lines of communication between the business sector and government is critical, he added, if for no other reason than education. “If not, I’m afraid that public companies will become more and more socialized, and as that happens, I think there will be less and less access to public companies.”

And U.S. government will likely continue to adopt policies that make it more challenging for companies to succeed. The cost of labor and doing business in the U.S. is just one example. “We manufacture in the United States against all odds,” said Farooq Kathwari, chairman and CEO of Ethan Allen Interiors. “You know what the cost of labor in Mexico is? About $5,000, everything included. In Honduras, it’s $3,300. And people in Honduras are moving to Nicaragua—that’s $2,800. Over here, in North Carolina and Vermont, with everything included, it’s $35,000 to $40,000. And on top of it, our taxes are high, our energy costs are high.”

J.M. Allain, president and CEO of Trans-Lux Corporation, pointed out that 20 years ago, policies in China were unfriendly to U.S. business, but over the past two decades, the conversations with local governments in China brought about significant change. “We took the power as American businesses,” he said. “We took the power that we had and we changed policy and mindsets in China. But we can’t do it here. The government doesn’t listen to us here, but they did in China.”

CEO as Statesman Part of the problem is that not all CEOs have chosen to engage in the conversation or spent time honing their Beltway skills.

“Let’s face it—CEOs have tended to fall into two camps: Those who are open to engaging in Washington, and those who would have to be subpoenaed to come to Washington,” said Nels Olson, co-leader of the board & CEO services practice at

Korn/Ferry. “Being astute and having a good understanding of the issues of the day, and being able to be conversant in those issues, are incredibly important.”

And so, too, is spending time developing relationships with leaders in Washington so those channels of communication remain open, Olson added. “It’s not just flying in or having your lobbyist on the ground deal with it, but building those relationships when you don’t have a crisis or a particular issue so that you have sufficiently informal relationships that you are credible when you call.” Companies like Wal-Mart and Microsoft both learned through painful experience that having more than an arm’s length relationship with government can be trouble. “Once you do that, if there’s a feeling that there’s some arrogance involved, there are ramifications for that,” he noted.

Ram Charan, author and consultant, pointed out that the next genera-

“ The whole economy feels like a bunch of turtles with their limbs drawn in right now.” tion of leaders are not being trained to take an active role in Washington. “For the last 30 to 40 years, the general thing has been the business of business is business. That’s where we have the nose to the grindstone,” he said. “As CEOs engaged in leadership development and succession planning, how many companies really devote time and energy so that these upcoming leaders have political savvy?”

That will be a key arrow in the quiver for future CEOs, who will need to take a more proactive role in educating the public about how the economy really works, rather than leaving that task to government. “It’s a time for vision, a time for executives who really can see forward, have courage, and be statesmen,” said Melanie Kusin, vice chairman and senior client partner in Korn/Ferry’s board & CEO services practice. The new leader is the anti-autocrat, she noted, a listener who is actively pushing the envelope and taking risks, but also fiscally responsible.

“You must be extroverted, you must be out there. It doesn’t work just to stay inside.”

Because of the tumult in recent years,

many CEOs and directors have, in fact, stayed hunkered down, managing for recessionary times to get through the crisis, and ultimately ceding the megaphone to the media. The 24-hour news cycle has taken the role of educating the public, greatly impacting consumer confidence with just a single sound bite. “Our interest rates are all over the place, daily, and it’s all based on consumer confidence,” said Allain. “We have no ability to know what will happen tomorrow because of that bloody 10-second spot that’s going to come on. Will it be positive or will it be negative?

And we have to react, every six seconds.

More importantly, we have to deal with what our consumers and our employee reactions are, and that’s what’s tough.”

Thanks to the prolonged recession, increasingly short-term outlook and harsh regulatory environment, CEOs and boards have been thrown on the defensive, far less willing to take risks.

“Boards are becoming like turtles,” said Odland. “The turtle is a marvelous reptile, but the turtle needs to have its limbs and its head out of the shell to move ahead. Boards have drawn in and become less and less risk-taking in investment, not only in how they spend their money, but how they act and confront. And as a result, we’re sitting here in our shells and not moving. The whole economy feels like a bunch of turtles with their limbs drawn in right now.”

In that climate of fear, management has misplaced its focus, added Bill Hickey, CEO of Sealed Air. “What we have here is a structure where we’re forcing companies and boards to focus on the three C’s—control, compliance, and compensation— when they should be focusing on strategy, talent and execution,” he said. “Until we break that model, we’re just not going to get out of the problem we have.”

Speaking with One Voice Olson pointed out that the growing membership in the Business Roundtable—more than 200 now from about 134 a year ago—does illustrate an awareness among CEOs that they need to be involved in the dialogue. But even when they engage in the political debate on key issues, CEOs often differ on the message.

Hickey recounted his efforts as a member of the executive committee of the National Association of Manufacturers to get government attention and help rebuild manufacturing in the U.S. “It’s amazing that even within the business community,

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“ Until we address the idea that we have to rebuild trust, this conversation doesn’t really go anywhere.” —John Foley

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“ CEOs have tended to fall into two camps: those who are open to engaging in Washington, and those who would have to be subpoenaed to come to Washington.”

—Nels Olson

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there’s a lot of disagreement, there are a lot of different approaches,” he said. As a result, government hears a muddled collection of messages that is easier to ignore.

“I remember going in with four CEOs to meet with one senator. We spent probably a good hour and 15 minutes with him. At the end, he said, ‘I’ve heard what you said, but somebody will come tomorrow from business with a different viewpoint, and

someone was here yesterday from business with a third viewpoint. So I’m not going to react.’”

Chris Kearney, chairman and CEO of SPX, suggested that CEOs need to lead the debate by speaking in a unified voice through the credible organizations that exist. “And then all of us having the courage to take advantage of the opportunities we have to voice those opinions, either

through television media or through op-ed pieces, to try and help educate people,” he said. Government has become largely irrelevant with regard to business in the U.S., he and others pointed out. “It doesn’t work. The only time decisions are made is when we get to the brink of very dangerous situations like we are right now—and look what’s happening. I think business, through the right forums, has to

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step forward and be the reasonable broker that government fails to be, because they’ve abdicated that responsibility.”

Kathwari added that CEOs have to not only participate in the conversation, but set the agenda for the debate. “If we allow government to set the debate, if we

allow these analysts to set the debate, we deserve what we get.”

By taking a more active role, business can begin to heal some of the rifts between various constituencies to move the debate forward. “There’s a lack of trust between government and business.

There’s a lack of trust between investors and Wall Street. There’s a lack of trust between customers and business,” said John Foley, president and CEO of LEVEL. “Until we address the idea that we have to rebuild trust, this conversation really doesn’t go anywhere.”

Roundtable Participants

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SPX’s Chris Kearney, Sealed Air’s Bill Hickey, Yale University’s Jeffrey Sonnenfeld, Steve Odland, Korn/Ferry’s Ana Dutra, and Leader to Leader Institute’s Frances Hesselbein

J.M. Allain, President & CEO, Trans-Lux • Ram Charan, Speaker & Author • Wayne Cooper, Chairman and President, Chief Executive • Ana Dutra, CEO, Leadership and Talent Consulting & EVP, Korn/Ferry International • John Foley, President & CEO, LEVEL • Frances Hesselbein, President & CEO, Leader to Leader Institute • William Hickey, President & CEO, Sealed Air • Farooq Kathwari, Chairman & CEO, Ethan Allen Interiors • Chris Kearney, Chairman & CEO, SPX • Melanie Kusin, Vice Chairman, Board & CEO Services, Korn/Ferry International • Steve Odland, Former Chairman & CEO, Office Depot • Nels Olson, Vice Chairman, Co-Leader, Board & CEO Services Practice, Korn/Ferry International • Thomas J. Quinlan, President & CEO, R.R. Donnelley & Sons • Jeffrey Sonnenfeld, CEO of the Yale Chief Executive Leadership Institute, Yale University’s School of Management

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chief executive group research

Private Company CEO Compensation By Quartile

Media Wrong About CEO Compensation

Total Compensation 2010*

Private Company CEO Compensation By Quartile $1,400,000

Total Compensation 2010* $1,200,000

$1,400,000 $1,000,000

Most CEOs earn nowhere near the compensation of their public company counterparts, according to results of an exclusive Chief Executive Group study of 789 CEOs of privately held companies, which represent the overwhelming majority of firms in the economy.

$1,200,000 $800,000 $1,000,000 $600,000

Private Company CEO Compensation By Quartile Total Compensation 2010*

$800,000 $400,000

$1,400,000

$600,000 $200,000

$1,200,000

$400,000 $0

25th Percentile

Median

Base Salary 25th Percentile

Bonus Median

75th Percentile

Average

$200,000

Benefits

$800,000

Perks 75th Percentile

$600,000

*Based on a survey of 789 CEOs of private companies conducted in April and May of 2011.

Source: Chief Executive Group LLC, “The 2011Bonus CEO & Executive Compensation Report forBenefits Private Companies.” Perks Base Salary Equity

$400,000

$0

Equity

$1,000,000

Average

$200,000

*Based on a survey of 789 CEOs of private companies conducted in April and May of 2011.

Source: Chief Executive Group LLC, “The 2011 CEO & Executive Compensation Report for Private Companies.”

Median CEO Compensation 2010 (in $000s)

$0

Median

25th Percentile Base Salary

Bonus

Average Equity

75th Percentile Benefits

Perks

*Based on a survey of 789 CEOs of private companies conducted in April and May of 2011.

Source: Chief Executive Group LLC, “The 2011 CEO & Executive Compensation Report for Private Companies.”

Public vs. Private Company CEO Pay at Large Companies*

Median CEO Compensation 2010 (in $000s) 10000

Public vs. Private Company CEO Pay at Large Companies* 8000

The $9 million pay package the average S&P

10000 6000

500 company CEO brought home in 2010 Median CEO Compensation 2010 (incauses $000s) hysterics in the media. But the vast majority of

8000 4000

PublicCEOs vs. Private Company CEO Pay at Large Companies* don’t take home anything close to that,

6000 2000 4000 0 2000 0

S&P 500 (Median Rev = $8.3 B)

S&P 400 (Median Rev = $1.6 B)

Large Private Cos. (>$1 B)

Base S&P 500 (Median Rev = $8.3 B)

Bonus Equity S&P 400 (Median Rev = $1.6 B)

Other Large Private Cos. (>$1 B)

*Over $1 Billion in Revenues

Base

Bonus

Equity

Other

*Over $1 Billion in Revenues

Median CEO Compensation 2010 (in $000s) Public vs. Private Company CEO Pay at Middle Market Companies*

Median CEO Compensation 2010 (in $000s) 2500

Public vs. Private Company CEO Pay at Middle Market Companies* 2000 2500 1500 2000 1000 1500 500 1000 0 500 0

S&P 600 (Median Rev = $590 MM)

Upper Mid-Level Private Cos. (Rev = $250 to $999 MM)

Base S&P 600 Bonus (Median Rev = $590 MM)

EquityMid-Level PrivateOther Upper Cos. (Rev = $250 to $999 MM)

* Revenues Between $250 Million and $1 Billion.

Sources: Equilar for public company data, ChiefExecutive.net/compreport for private company data.

Base

Bonus

Equity

* Revenues Between $250 Million and $1 Billion.

Sources: Equilar for public company data, ChiefExecutive.net/compreport for private company data.

Other

according to a study of 789 CEOs conducted in April and May of 2011 by Chief Executive Group.

8000 In fact, the report showed a median compensation 6000 package of just $405,000 for private company CEOs with at least $5 million of company revenue—a 4000 hurdle representing just the largest 20 percent of 2000 U.S. companies.

0 The S&P average private company 500 S&P 400 CEO pay package Large Private (Median Rev = $8.3 B) (Median Rev = $1.6 B) Cos. (>$1 B) for companies with more than $5 million in revenue was $1.3 million in 2010—up Base Bonus 4.4 percent Equity from the Other 2009 average. But only the top quartile surpassed *Over $1 Billion in Revenues the million-dollar mark.

“Big company compensation numbers grab headlines because the numbers are eye-popping— and are readily available in public filings,” says Wayne Cooper, co-author of the 2011 CEO & ExecMedian CEO Compensation $000s) utive Compensation Report for 2010 Private(in Companies.

“But there are 5.7 million companies in the U.S. and Public vs. Private Company CEO Pay at Middle Market Companies* only 6,473 of these (0.13 percent) are public.”

“By surveying more than 780 CEOs themselves 2500 in one of the most complete efforts at measuring 2000 private company compensation ever undertaken, 1500 we found surprising results,” adds Chief Executive Group’s Michael Bamberger, who co-authored 1000 the report. “With half of CEOs at substantial pri500 vate companies earning less than $405,000, mak0 ing a generalization about CEO payUpper based on Private public S&P 600 Mid-Level Cos. 10000

(Median Rev = $590 MM) Base

Bonus

(Rev = $250 to $999 MM) Equity

Other

50 chiefexecutive.net september/october 2011 * Revenues Between $250 Million and $1 Billion.

Sources: Equilar for public company data, ChiefExecutive.net/compreport for private company data.

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Prevalence of Perquisites company averages is equivalent to saying all actors are overpaid based on what Adam Sandler and Johnny Depp make.”

The median cash compensation for CEOs of private companies with revenue of between $250 million and $999.9 million was 3.8 times the median for CEOs of private companies with between $5 million and $9.9 million in revenue, and the gap was even wider at larger companies. For example, the median compensation for private company CEOs with revenues over $1 billion was 7.8 times that of the $5 million to $9.9 million revenue group.

Yet, the top quartile compensation was $1,045,000—which means that almost threefourths of private company CEOs earned less than $1 million in 2010.

In addition, the perks the vast majority of CEOs enjoy (see Prevalence of Perquisites, at right) are rather modest. Access to personal tech gadgets and a company car hardly ever approach the likes of Dennis Kozlowski’s $6,000 shower curtains. In fact, only 4.5 percent of private company CEOs have personal access to a company jet.

More information about the 2011 CEO & Executive Compensation Report for Private Companies, which includes information on base salaries, bonuses, equity gains, benefits and perks and how CEO compensation varies by company size, industry, type of ownership and geographic region, can be found at ChiefExecutive.net/ compreport.

The median private company CEO benefits and perks package was valued at $30,000, with just 4.5 percent of CEOs getting personal access to a company jet and 11.5 percent receiving a gross-up on the tax on perquisites. The average S&P 500 CEO received a benefits and perks package valued at $243,000 in 2010.

Prevalence of Perquisites

The median private company CEO benefits and perks package was valued at $30,000, with just 4.5 percent of CEOs getting personal access to a company jet and 11.5 percent receiving a gross-up on the tax on perquisites. The average S&P 500 CEO received a benefits and perks package valued at $243,000 in 2010.

PERSONAL TECHNOLOGY (CELL PHONES, IPADS) EMPLOYMENT CONTRACT

GOLF/COUNTRY CLUB MEMBERSHIP

COMPANY CAR OR ALLOWANCE

20.3%

93.2% 33.4%

64.1%

17.6%

TAX GROSS UPS FOR TAXABLE BENEFITS PERSONAL TRAVEL

11.5% 10.6% PERSONAL ACCESS TO COMPANY AIRPLANE

4.5% 3.4% INTEREST-FREE LOAN

12.4% SPOUSE TRAVEL

14.7%

32.1% 34.1% PARKING

ESTATE AND FINANCIAL COUNSELING

SEVERANCE AGREEMENT

Source: “The 2011 CEO & Executive Compensation Report for Private Companies,” ChiefExecutive.net/compreport

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HEALTH/FITNESS/ GYM MEMBERSHIP

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ceo essentials

The View from Social Media Should CEOs Have Personal Blogs?

The fifth of a six-part guide on boosting personal effectiveness. by

John Kador

ACTION STEPS TO STARTING A CEO BLOG • Identify your audience

On January 12, 2010, Royal Caribbean International faced a public relations crisis. A magnitude 7.0 earthquake devastated Haiti, a popular destination for a number of the 22 cruise boats that Royal Caribbean operates. Should the company suspend its scheduled cruise-ship calls on Haiti’s private Labadee resort, which was undamaged on the island nation’s northern coast? Or should it continue its calls to Labadee, risking the perception that it was indifferent to human suffering?

Central to the cruise line’s crisis management strategy was a blog written by Royal Caribbean International’s president and CEO, Adam Goldstein. In it, Goldstein engaged with members of the media, customers and the public in advancing the message that the cruise line’s decision to continue making cruiseship calls, far from being motivated by greed or indifference, had humanitarian benefits.

In his blog, Goldstein noted not only that Haiti’s beleaguered government requested that the cruise line continue its calls, but also offload needed relief and medical supplies every time a boat landed. His central message: Royal Caribbean was a part of the solution. The CEO blog was repeatedly cited in news reports and some media outlets took one or more blog posts as the basis of news stories, significantly amplifying the impact of the blog, according to Goldstein.

Royal Caribbean’s strategy is to connect with its guests at as many levels as possible and that includes their relationship with the CEO. It’s not that Goldstein thinks his blog replaces a formal corporate communications infrastructure. “My blog offers the

• Be interesting and blog frequently

• Think before you post

• Start with an introductory statement of your blogging goals

CEO an informal channel to communicate the company’s branding messages,” he notes. “While news releases are a necessary element of our communications, they are to my blog what formal wear is to business casual. The blog allows me to speak in a way that was not available to our brand 10 years ago. The blog is a unique tool for me to convey news, highlight the contributions of my colleagues to our business and provide insight into the varied aspects of my life and role as CEO.” CEOs Who Blog

For CEOs who’ve been living in a cave for the last 10 years, a personal blog—short for web blog—is a frequently updated website of personal reflections, insights, news, musings and information, all dispensed in a direct and conversational style that invites discussion. A small but growing number of CEOs have decided it’s a good investment of time to share their thoughts about the

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trends and issues they face, ask questions that genuinely bewilder them and, to varying degrees, talk about their personal lives, hobbies and passions. In most cases, links to the CEO web sites are prominently featured on the corporate web site.

There’s not exactly a rush by executives to publish personal blogs. Chief Executive estimates that less than three percent of CEOs currently blog in any meaningful way. CEOs who choose not to blog usually say they do not understand the medium or don’t have the time. Others point to a handful of risks—from being quoted out of context to sparking controversy—which are very real. So if you don’t have a CEO blog, there’s no reason to feel left out. Yet a growing number of CEOs have started blogging (See “CEOs and Social Media,” p. 25).

Tom Glocer, CEO of Thomson Reuters, started his blog because he was personally interested in social media and citizen journalism. There are basically two ways CEOs can learn about emerging technologies, he says. One way is to hire a consultant or commission a study. But Glocer preferred another approach: he decided to plunge in and learn it himself. “As I experimented, I found I liked blogging,” he says.

Like most CEOs, he occasionally writes internal memos to employees. But when he posted these same memos on his personal blog, Glocer was surprised by how the simple fact of posting them increased their exposure and credibility. More employees offered thoughtful comments than ever before. “I came to the conclusion that in the eyes of my associates, my memos have greater legitimacy because they are hanging out there for all of the world to see,” Glocer says. The blog earns added credibility because Glocer publishes all signed comments—positive and critical.

Glocer doesn’t believe every CEO is cut out to have a personal blog. He suggests CEOs ask themselves if they are comfortable writing their own staff announcements, news releases, etc. “If you find the act of writing short messages a burden, then you probably shouldn’t take on a blog because it will be painfully obvious to everyone that you’re not having fun.”

Blogs and Thought Leadership

The CEOs who take the plunge into blogging offer various reasons for doing so. Creating the opportunity to have informal conversations with customers, employees, partners and the media is a common motivation. Some CEOs target their blogs to get in front of a situation and appoint themselves thought leaders.

Sue Allon, CEO of Allonhill, a Denver-based provider of credit risk management services, started her blog to help establish her company’s reputation as a trusted independent party in the area of mortgage securitization due diligence. With her own name so identified with the company, building trust and a close association between the company and her personal brand became the strategic goal of her blog.

Her CEO blog has delivered benefits both externally and internally, according to Allon. “As an external recruiting tool, the blog has been stunningly effective,” she says, adding “we recently hired a top-notch COO who reached out to us after reading the blog.” The company found a candidate tightly aligned with Allonhill’s values and saved a hefty executive recruiting company fee in the bargain.

Much of what Allon blogs on is focused on Allonhill’s organizational culture, which she considers critical to building the company’s reputation for diligence and integrity. “A recent survey determined that more than 95 percent of employees could articulate the corporate mission,” she says, a level of engagement few

companies can match. “One way I know that our analysts are going to do their job properly is to have confidence that they buy into our mission.”

Penny Herscher, CEO of FirstRain, is fearless in mixing the personal with the professional in her blog, “The Grassy Road: A CEO at Work and Play in Silicon Valley and Beyond.” Based in San Mateo, Calif., FirstRain is a business intelligence monitoring company that helps executives ensure that they never miss critical events impacting their business. In her blog, Herscher recently mused about kite flying on Maui and company picnics, in addition to offering practical advice on how to run a board meeting and implementing a new vacation policy.

“It’s beneficial for potential customers, partners and associates to have a good sense of who I am, and to understand my thinking and the culture of FirstRain,” says Herscher, who gets up at each day at 5 a.m. to blog. The payoff? Negotiations with potential customers often become easier, she reports.

“The blog creates a level of intimacy in negotiations that the customer controls if they choose to bring up a recent blog post.”

For the next several years, blogging is unlikely to be included in the job description of most executives. For now, CEO blogging is entirely optional, a nice-to-have supplemental channel for communicating with internal and external audiences, undertaken exclusively because individual CEOs sense its power. It’s like a high-wire circus act: With proper training, the risks are manageable but the impact is huge.

But CEOs take note: as social media becomes more integrated with traditional communications and reporting structures, blogging (in whatever form the rapidly evolving technology develops) will become more indispensable. The question, then, is whether there is an advantage to starting a blog sooner rather than later?

“ While news releases are a necessary element of our communications, they are to my blog what formal wear is to business casual.”

CEO Online Exclusive Visit www.chiefexecutive.net/blogging for additional articles on effective blogging, including:

• Chief Executive’s Top Ten CEO Blogs • The Risks of CEO Blogging • Do’s and Don’ts for CEO Bloggers • Checklist: Is Blogging Right for You?

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the ceo guide to leading law firms - a special sponsored supplement

THE 2011 CEO GUIDE TO LEADING LAW FIRMS The right one can serve as intimate confidant or sage adviser, and can cut through layers of obfuscation to get to the heart of a matter.

But a good lawyer is hard to find.

Chief Executive is pleased to present our first-ever CEO Guide to Leading Law Firms. Broken down by litigation sector, each alphabetical list of firms was compiled by our team based on firm experience and reputation. The Guide is intended to provide CEOs with a starting point for building new relationships.

While our first law firm guide focuses primarily on large firms, we look for your input and recommendations on mid-sized or boutique firms. Please drop us a line and tell us about great law firms you’ve encountered during your worklife at leadinglawfirms@chiefexecutive.net for consideration in future CEO Guides.

CHIEF EXECUTIVE’S LEADING LAW FIRMS COR P OR AT E L AW

GENERAL C O MME RC IA L

LAW FIRM

HQ LOCATION

LAW FIRM

HQ LOCATION

Boies, Schiller & Flexner LLP Covington & Burling LLP Cravath, Swaine & Moore LLP Davis Polk & Wardwell LLP Dykema Gossett PLLC (See profile, p. 59) Gibson Dunn & Crutcher LLP Irell & Manella LLP Jenner & Block, LLP Jones Day Kirkland & Ellis LLP Latham & Watkins LLP Munger, Tolles & Olson LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Quinn Emanuel Urquhart & Sullivan LLP Sidley Austin LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Sullivan & Cromwell LLP Wachtell Lipton Rosen & Katz Weil, Gotshal & Manges LLP Williams & Connolly LLP

New York, NY Washington, DC New York, NY New York, NY Detroit, MI Los Angeles, CA Los Angeles, CA Chicago, IL Washington, DC Chicago, IL Los Angeles, CA Los Angeles, CA New York, NY Los Angeles, CA Chicago, IL New York, NY

Arnold & Porter LLP Cleary Gottlieb Steen & Hamilton LLP Covington & Burling LLP Cravath, Swaine & Moore LLP Davis Polk & Wardwell LLP Debevoise & Plimpton LLP Dykema Gossett PLLC (See profile, p. 59) Gibson Dunn & Crutcher LLP Jones Day Kilpatrick Townsend & Stockton LLP (See profile, p. 60) Kirkland & Ellis LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Proskauer Rose LLP (See profile, p. 56) Quinn Emanuel Urquhart & Sullivan LLP Sidley Austin LLP Simpson Thacher & Bartlett LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Sullivan & Cromwell LLP Wachtell Lipton Rosen & Katz Weil, Gotshal & Manges LLP White & Case LLP

Washington, DC New York, NY Washington, DC New York, NY New York, NY New York, NY Detroit, MI Los Angeles, CA Washington, DC Atlanta, GA

New York, NY New York, NY New York, NY Washington, DC

Chicago, IL New York, NY New York, NY Los Angeles, CA Chicago, IL New York, NY New York, NY New York, NY New York, NY New York, NY New York, NY

Continued on page 62

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Beyond the Billable Hour Faced with the challenge of curbing litigation costs, companies are shunning hourly fees in favor of alternative and fixed fees.

by C.J. Prince Amy Schulman’s frustration with the billable hour began long before she became general counsel for Pfizer, the world’s largest pharmaceutical company, in 2008. “As a young lawyer, I had a sense of disbelief that anything I was doing could be worth the amount it was being billed out as,” says Schulman, who recalls that her grandfather, a federal judge, earned less than most first-year associates.

“That seemed very disproportionate.”

As a partner with DLA Piper, before joining Pfizer, Schulman became even more convinced that the traditional billable hour—with time measured in as little as tenths of an hour and almost completely divorced from the ultimate results—was not fostering real partnerships with clients. “There was a profound disconnect between what was really valuable and the metrics that had grown up around time-keeping,” she says.

Beyond Billable Hours Soon after she joined Pfizer, Schulman sought to change that. With the twin goals of reducing the company’s legal spend and enhancing the value of its relationships with outside firms, she spearheaded the Pfizer Legal Alliance, a collaborative partnership between Pfizer and 19 law firms, down from the more than 100 firms the company was working with when she joined. Those firms now handle about 75 percent of Pfizer’s legal matters. Under the terms of the alliance, Pfizer negotiates one flat fee per law firm for the entire year, and that fee rarely changes. As a result, the company has cut its legal spend by 15 to 20 percent annually and benefits from collaborative teams from different law firms who aren’t afraid to work together to help devise solutions to Pfizer’s thorniest legal challenges. “We have firms that truly mix it up.

It enables us to not reinvent the wheel every time because we have law firms committed to us and know that we’re committed to them. We’re building long-term relationships that are mutually rewarding so neither side feels taken advantage of,” says Schulman.

Pfizer is one of a growing number of companies rejecting the traditional billable hour in favor of more creative and strategic alternative fee

Design Your Own AFA Looking for an alternative to the billable hour? Here are some alternative fee arrangement (AFA) suggestions from the Association of Corporate Counsel, which created the ACC Value Challenge to help law firms and their clients find win-win solutions that align value and cost.

Type of AFA

Description

Examples

Ideally Suited For

Fixed Fee per Matter

Affixes an “all-in” price for all legal work relating to a particular matter.

• Pay X to handle a particular type of commercial real estate transaction.

• Pay Y to handle the defense of a single-plaintiff employment litigation up to trial, with an additional fixed amount to try the case.

Situations in which certain component pieces of work are distinct and measurable such that client and law firm can agree upon a workable fee schedule.

Flat Fee per Period

• Monthly flat fee to Typically covers distinct categories cover advice and of services during counsel requests on regulatory issues of a the course of a specified period. certain type; • All-in “per diem” fee for trial representation for whole trial team.

Situations in which distinct pieces of work need to be performed on a recurring basis, and the client wants to create an economic incentive for the law firm to staff and perform the work more efficiently.

Incentives/ Performancebased Hold Back/Success Fees

Aligns interests by tying a portion of law firm compensation to outcomes achieved.

(Can be used in conjunction with any of the valuebased fee options described above).

Situations in which the client is able to define success (entirely or in part) according to objectively measurable markers that the law firm can help attain via strong performance.

Hybrid

Combination of • Flat fee for handling one or more of the litigation plus per above approaches diem for trial and sucon a given matter cess bonus outcome. or for a portfolio.

• Percentage of fees billed will be set aside by client and paid to the law firm subject to a multiplier depending upon the extent of success achieved (e.g. win a motion to dismiss, win a jury verdict).

• Opportunity for bonus based on results achieved and value delivered (e.g., resolve a matter below a specified amount, close a deal by X date).

Source: Association of Corporate Counsel (www.acc.com/valuechallenge)

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Situations where client and firm wish to be flexible to address various touch points differently and reward results.

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the ceo guide to leading law firms - a special sponsored supplement

Boca Raton Boston Chicago Hong Kong London Los Angeles New Orleans New York Newark Paris São Paulo Washington, DC

Health Care Reform Q&A with James Napoli Chief Executive: How will health care reform (HCR) affect current health benefit plans?

James R. Napoli: We are actively counseling our clients on how to ensure that their plans are compliant with the new mandates. We review plan design, revise plan documents and related materials, and negotiate new or revised service provider agreements. Long-term, a growing sentiment among employers is, “Why should we stay in the business of delivering health care?” Employers are beginning to run a cost-benefit analysis as they consider whether to continue providing coverage or position their employees to receive coverage through the state health insurance exchanges that are scheduled to go online in 2014.

HCR has also spurred the movement towards wellness programs and defined contribution health plan designs under which employees are encouraged to take a more active role in their health care through incentives to engage in healthy lifestyles and having a higher financial stake in their health care. Time will tell, and ultimately forces within the market within which a particular employer plays will influence whether the employer stays in the business of delivering health care to its employees or shifts that burden to the state health insurance exchanges.

CE: What about wellness programs?

JN: In HCR, Congress and the Administration have endorsed wellness programs and encouraged their proliferation by raising the level of rewards that may be offered. The challenge is that there are at least four Federal laws that need to be consulted when preparing and implementing wellness programs and these laws do not necessarily provide the same rules or guidance.

We help our clients navigate the hidden pitfalls within these laws and related regulations.

Highlighted Recent Engagements: •R eviewed the constitutionality of the health care reform legislation as it applies to both private and public sector employers, and the impact the legislation has on private and public health care industry employers.

•A dvising clients regarding the transfer of their retiree medical benefit obligations to third-party VEBAs. • Assisting clients in the development of support services to state health insurance exchanges.

•A ssisting clients in developing compliant wellness programs that are projected to save millions of dollars annually in health care related expenses.

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Chambers USA has said: “Clients praise this large and talented group for its deep and broad expertise in all aspects of employee benefits and executive compensation law.”

Legal Practices:

CE: What is the future of retiree medical programs?

JN: In a recent survey of nearly 600 employers, 78% of the respondents expect the opening of the state health insurance exchanges in 2014 to have an impact on their retiree medical programs. In other words, the introduction of the state health insurance exchanges in 2014 presents a potential opportunity for employers to shift coverage for their retiree population to the exchanges and limit their FAS 106 accounting liabilities in the process. We have witnessed this type of shift in the steel and auto industries where employers shifted retiree medical obligations to VEBAs run by non-employer boards. Come 2014, rather than VEBAs, the shift in retiree medical obligations may be to the state exchanges. Of course, there are many legal and other considerations for employers well in advance of implementing this type of strategy.

How We’re Different:

Health Care Reform Task Force Our Health Care Reform Task Force partners with clients to navigate the evolving health care legislation and understand how the new laws impact their businesses.

Together, our lawyers and clients are developing and deploying effective legally compliant strategies and tackling complex issues such as: • addressing short and long term changes; • reviewing and updating employee benefits plans to comply with new rules and regulations; and • interfacing with regulatory agencies to help understand and shape legislation.

• Health Care Reform • Employee Benefits • Executive Compensation • ERISA Litigation • Health Care • Labor & Employment • Employment Litigation & Arbitration • Tax

Our cross-practice, interdisciplinary Health Care Reform Task Force is comprised of more than a dozen lawyers from our employee benefits, health care and labor practices giving us the breadth, depth and experience to help you navigate the new health care legislation.

Health Care Reform Law Handbook: Task Force members James Napoli and Paul Hamburger authored the handbook The New Health Care Reform Law: What Employers Need to Know (A Q&A Guide) published by Thompson Publishing Group. With almost 600 to-the-point Q&As, the handbook is an essential resource for anyone implementing HCR.

THE FIRM Founded in 1875, Proskauer is a global law firm widely recognized for its leadership in a variety of legal services provided to clients worldwide from offices in Boca Raton, Boston, Chicago, Hong Kong, London, Los Angeles, New Orleans, New York, Newark, Paris, São Paulo and Washington, DC. The firm has extensive experience in all areas of practice important to businesses, not-for-profit institutions and individuals.

Rory Judd Albert ralbert@proskauer.com 212 969 3005

Paul M Hamburger phamburger@proskauer.com 202 416 5850

James R Napoli jnapoli@proskauer.com 202 416 5862

Andrea S Rattner arattner@proskauer.com 212 969 3812

Michael S Sirkin msirkin@proskauer.com 212 969 3840

For more information visit: www.proskauer.com

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the ceo guide to leading law firms - a special sponsored supplement

arrangements (AFAs) that align compensation with performance objectives.

According to an April survey by integrated media company ALM Legal Intelligence, 88 percent of law firms surveyed believed that AFAs were “here to stay” and most expected double-digit growth in their use of AFAs through 2015. Smaller law firms are more likely to initiate AFAs than their big-law brethren (57 percent vs.

24 percent respectively), according to the survey, but larger firms are more likely to have experience with a wider array of complex arrangements, including flat fees with shared savings and defense contingencies. (See sidebar, “Design Your Own AFA,” p. 55.)

In general, the most popular types of AFAs are flat fees, which ensure that the risk of cost overrun is shared by the firm and helps both sides forecast budgets more accurately; blended rates, which set an agreed-upon hourly rate that applies to all lawyers working on a matter regardless of seniority, thereby encouraging more efficiency; and contingencies, which specify that a firm will be paid only if it achieves an agreed-upon result for the client. The contingency, which is sometimes added to a flat fee as an incentive for a positive outcome, operates much like bonuses that reward positive performance inside the company.

Shifting Incentives Although the movement toward AFAs is growing, alternative arrangements still accounted for just 25 percent of total firm revenues in 2010, according to the ALM survey. “There is an enormous amount of inertia,” says Nigel Holloway, vice president of research at ALM Legal Intelligence, adding that much of that lies on the corporate side with general counsel, or CEOs themselves, either not having enough information about AFAs or being unwilling to demand them from their law firms.

Some fear their companies will get short shrift under a more cost-efficient arrangement, says Patrick Lamb, partner with Chicago litigation firm, Valorum Law Group. “If you say, ‘I want to reduce our legal spend by 35 percent,’ the immediate assumption people have is, ‘I’m going to get lower quality by doing that,’” he says.

“But the reality is that when you’re paying for an outcome instead of the number of hours it takes to get to that outcome,

people will figure out ways to get there in a much more efficient manner.” Valorum, for example, has begun employing some Six Sigma techniques to gain efficiency internally and now outsources much of the document review that used to take junior associates hours—at $300 a pop— to handle.

Building a relationship more as strategic partnership and less pay-by-the-hour nets other benefits, says John Zieser, chief development officer and general counsel for Meredith Corp., a $1.4 billion media marketing company which owns such high-profile brands as Better Homes and Gardens and Parents, and 12 local broadcast stations. Like Pfizer’s Schulman, Zieser once worked for New York-based law firm Sullivan & Cromwell and he reached a similar conclusion about the billable hour. “If you hire an outside counsel on a strict basis of paying him or her between $300 and $500 an hour, the bottom line is they are incented to maximize the billing hours,” he says. “It’s very easy, especially for large bureaucratic law firms that are not driven by clear tangible results to focus on billable hours.”

By using retainers with some incentive on the back end for its many acquisition and licensing deals, Meredith has been able to hold down costs and get better results. Zieser recalls the arrangement he worked out with law firm Holmes, Roberts & Owen for a licensing deal with real-estate franchiser Realogy. “This was a situation where there were a lot of different issues involved and if it wasn’t properly managed, the legal costs could have been enormous,” he says. The two sides agreed on a forecast of about six months to complete the deal. If it closed in four months, the outside counsel would receive a bonus for the early completion; if the deal stretched on to eight months, the law firm would eat the cost of those two months’ work. “We wanted to put parameters around it that tied the law firm to achieving the result we wanted, which was a very efficient execution of the transaction that gave due consideration of the risk,” Zieser says. “Now we do most of our large acquisitions and licensing arrangements that way.”

Zieser also sends out a request for proposal for any new meaningful piece of outside counsel business and has at least two or three firms bid on the business. “And it will be very clear that we’re looking for

Should You Fire Your Lawyer?

Once closely intertwined with outside counsel, it can be tough to part ways— particularly when your law firm has been with you for years. But in the current still-struggling economy, you also need to ensure that you’re getting the best bang for your legal buck. Here are five questions to ask your attorneys to figure out whether you’re all in it for the long haul—or if it’s time for a change.

1. Are you willing to negotiate alternatives to the billable hour? Find out how wedded the firm is to convention. If your attorneys can’t think outside the box regarding fees, how creatively will they approach your next legal challenge? “It’s very rare these days to see a law firm that says, we work on the billable hour and only that,” says David Susler, associate general counsel for National Material, L.P. 2. How can we share risk and reward going forward? Your attorney should be able to articulate how the firm would participate in the upside of a successful resolution of your next legal issue, says John Zieser, general counsel for Meredith Corp. “The corollary to that is, how are you going to share in the pain if the solution is not achieved in a way we like it to be achieved?”

3. How are you increasing efficiency internally to control costs and ensure greater value for us? Even if you’re comfortable paying by the hour, you don’t want to be double-billed for a junior associate’s training or pay for costly document retrieval. Is the firm investing in enterprisewide document-sharing technology and project management software? Are they outsourcing nonessential functions?

4.What kind of transparency can you offer us? You’re entitled to visibility into how your attorneys are running a case on your behalf, including their processes for basic tracking and measuring and for managing resources to cap legal costs.

5. How will you be a strategic partner for us going forward? Naturally, you’re hiring a law firm for expertise in a particular matter, but you also want a trusted advisor that can add value by truly understanding your business and objectives. “I typically will steer away from law firms that have a ‘this is the way we’re going to do it and if you don’t like it, that’s tough’ attitude,” says Zieser. “In this day and age, things are so challenging you have to have partners that are creative in solving problems.”

58 chiefexecutive.net september/october 2011

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the ceo guide to leading law firms - a special sponsored supplement

Legal Specialties:

California Illinois Michigan North Carolina Texas Washington, D.C.

THE FIRM Dykema is consistently recognized as one of the top 150 law firms in the United States. Its nearly 350 attorneys and professionals serve business clients—from startups to Fortune 100 companies—from 11 offices in California, Illinois, Michigan, North Carolina, Texas and Washington, D.C. Dykema not only provides legal counsel but strategic leadership, which helps clients skillfully address their most sophisticated and complex business issues. A trusted partner, Dykema seeks to deliver outstanding results, unparalleled service and exceptional value in every engagement.

KEY INDIVIDUALS Dykema’s business is aligned around five departments. Rex E. Schlaybaugh, Jr. serves as Dykema’s Chairman and CEO. Peter M. Kellett directs Litigation, a 150-lawyer group that provides world-class dispute resolution services; Jeffrey M. Dalebroux directs Business Services, helping clients reduce risk and maximize business opportunities through mergers and acquisition activity, commercial finance and tax planning; Allen J. Sternstein directs Intellectual Properties, focusing on copyrights, patents and trademarks; Cameron H. Piggott directs Real Estate and Environmental, covering everything from real estate financing and property management to environmental enforcement; and, Leonard C. Wolfe directs Regulated Industries, providing experienced counsel in all matters of government policy (insurance regulatory work, lobbying) and health care (licensure, accreditation, quality assurance). Dykema also features three industry groups—Automotive, Financial and Energy—with each providing an interdisciplinary team of legal professionals whose diverse skills are focused on that particular industry. Aleksandra A. Miziolek directs the Automotive Industry Group; Richard E. Gottlieb directs the Financial Industry Group; and Albert Ernst directs the Energy Industry Group.

• Corporate Finance • Bankruptcy • Tax • Automotive and Products Liability • Business and Commercial • Employment • Financial Services Litigation • General Litigation • Pharmaceutical and Medical Device • Real Estate • Environmental • Government Policy and Practice • Health Care • Trademark • IP Transactional • IP Litigation

How we’re different: • We provide strategic leadership as well as legal counsel • Our commitment to finding maximum efficiency and value is unmatched • We understand client business issues in the most detailed and nuanced way

Client Specialties: • Auto industry (automobile companies, suppliers and OEMs) • Financial industry (banks, mortgage lenders and servicers, credit companies) • Energy industry (providers, distributors) • Regulated industries (health care, government policy) • Real estate and environmental • Corporate finance, capital market, taxation • Biotech and Life Sciences • Insurance

Rex E. Schlaybaugh, Jr. rschlaybaugh@dykema.com 313 568 5370 Peter M. Kellett pkellett@dykema.com 313 568 6668 Jeffrey M. Dalebroux jdalebroux@dykema.com 312 627 2136 Allen J. Sternstein asternstein@dykema.com 312 627 2143 Cameron H. Piggott cpiggott@dykema.com 313 568 6575

For more information visit www.dykema.com

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Leonard C. Wolfe lwolfe@dykema.com 517 374 9178

8/23/11 10:16 PM

the ceo guide to leading law firms - a special sponsored supplement

Atlanta Augusta Charlotte Denver Dubai New York Oakland Palo Alto Raleigh San Diego San Francisco Seattle Stockholm Taipei Tokyo Walnut Creek Washington Winston-Salem

Corporate Espionage at Kilpatrick Townsend The Department of Justice recognizes the threat – so should you.

It’s the hacker in the internet café in Eastern Europe.

It’s the former joint venture partner, who is now your competitor.

It’s the previous consultant or supplier that has access to your system.

It’s the former employee, whom you trusted.

Kilpatrick Townsend seeks to protect its clients’ proprietary and sensitive information, and consequently, their future.

Corporate Espionage Specialists James F. Bogan III

Partner jbogan@kilpatricktownsend.com

Audra A. Dial

Partner adial@kilpatricktownsend.com

Scott L. Marrah

Partner smarrah@kilpatricktownwend.com

Clay C. Wheeler

Partner cwheeler@kilpatricktownsend.com

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Today, more than ever before, threats from companies operating in China and other emerging markets have elevated this risk. Recent examples include instances where “corporate spies” placed in positions of trust by U.S. employers have left those companies with critical information and delivered that information to global competitors.

Kilpatrick Townsend continuously monitors developments in this field and counsels clients on ways to protect their intellectual property from corporate espionage and other threats. Through security audits and compliance checks, we work with our clients to safeguard their confidential business information before it is at risk. If it is compromised, we have extensive experience in civil and criminal litigation to protect trade secrets and confidential information and have worked closely with law enforcement officials in cases where our clients were victimized by such crimes.

Because commercial exploitation of trade secrets is often facilitated by dishonest employees and contractors, thorough management of employee and contractor activities is critical to trade secret protection. Our Technology Litigation, Outsourcing Labor & Employment and Special Investigations and White Collar attorneys regularly collaborate to provide clients with comprehensive, multi-faceted approaches that ensure maximum protection of their intellectual property.

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THE FIRM Kilpatrick Townsend is a full-service international firm with 18 offices in the United States and abroad. Our attorneys are fully engaged in the success of the firm’s clients. We deliver legal solutions and innovative, results-oriented counsel for corporations at all stages of the growth cycle, from the challenging demands of financial transactions and securities to the disciplines of intellectual property management. A close collaboration between the firm’s practice areas ensures that we are well-positioned to serve a wide range of our clients’ needs.

Our success as a multinational business law firm is measured by the results we achieve on behalf of our clients, and we take pride in the long-term relationship we foster with our clients. Those who hire us once, typically hire us again. Our firm is dedicated to hiring diverse cross-industry and cross-practice area talent and to our overriding objective of client satisfaction.

LEGAL SPECIALTIES Litigation: Including bankruptcy, complex business litigation, environmental, insurance recovery, Native American law and technology • M ore than one-third of the firm’s litigation partners were honored by their attorneys in The Best Lawyers in America® 2011.

• Eight litigation practice areas received a top 10 national ranking The Best Lawyers in America® 2011, including Alternative Dispute Resolution, Antitrust, Appellate, Construction, Eminent Domain and Condemnation, Environmental, Insurance and Native American Law. • The Special Investigations & White Collar Crime team consists of members with backgrounds ranging from former Assistant United States Attorneys in the Southern District of New York and Eastern District of North Carolina to a former senior Department of Justice official to a former military judge to leaders in the corporate governance arena and veterans of significant internal investigations.

Intellectual Property: The full complement of IP procurement, counseling and litigation • Obtained a $304 million jury verdict, the largest amount ever awarded in a trademark infringement action.

• W e have handled more than 400 patent cases over the past five years, ranking our practice among the busiest in the nation by Corporate Counsel Magazine (January 2011).

• Kilpatrick Townsend has more attorneys ranked in The Best Lawyers in America® 2011 for Intellectual Property than any other firm in the nation.

• Our trademark attorneys are among the top five firms in the number of attorneys recognized as first-inclass by World Trademark Review, March 2009.

Technology Transactions: Outsourcing, licensing and joint venture agreements • Kilpatrick Townsend’s IT Outsourcing practice was nationally and internationally ranked by Chambers and Partners (2011).

Law Firms” ranked Kilpatrick Townsend nationally in the areas of Corporate Law, Mergers & Acquisitions Law, and Securities/ Capital Markets Law. Construction & Infrastructure: All aspects of transactions and litigation • In 2011, Chambers USA named Kilpatrick Townsend a top four construction law firm in the United States, and reports that “The depth and breadth of this team is extremely good.”

• The Construction and Infrastructure Projects Team ranked top ten nationally for the number of attorneys named by The Best Lawyers in America® 2011.

Employee Benefits, Labor & Employment: Counseling, benefits and litigation • Kilpatrick Townsend was selected as a “Go-To- Law Firm” by General Counsel of the nation’s top 500 companies, according to a survey conducted Corporate Counsel Magazine, January 2011. The firm was specifically recognized by clients in the areas of Labor & Employment, Intellectual Property, Litigation and Securities.

• Kilpatrick Townsend’s Employee Benefits practice received a top 10 national ranking for the number of attorneys named in The Best Lawyers in America® 2011.

Business and Finance: Including mergers & acquisitions, JVs, licensing, securities, financing, tax, real estate and capital markets • More than one-third of the firm’s Corporate partners were honored by their peers in The Best Lawyers in America® 2011.

• US News Media Group and Best Lawyers inaugural “2010 Best

For more information visit www.kilpatricktownsend.com

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the ceo guide to leading law firms - a special sponsored supplement

Continued from page 54

an alternative fee arrangement where they can win, but we win too,” he says. To make sure internal staff is on the same page, all legal staff that reports to Zieser have a piece of their bonus tied to their respective outside counsel budgets, which gives them a clear incentive to work out similar arrangements to keep costs down. As a result, Meredith’s legal expenses have gone down “considerably” in recent years, says Zieser.

And because Zieser’s law firms understand Meredith’s business strategy, they have been able to play other helpful roles, including acting as feeders for emerging companies Meredith may want to invest in as part of its online development efforts.

“Many times, these smaller technology companies have applications that are useful for us and we may not want to buy them, but we may want to license their technology,” says Zieser, who has structured creative arrangements with several law firms in which the retainer includes some venture capital scouting, along with legal services. “So there are legal services that we’re paying for, but we’re also getting intellectual property and ideas.”

Capturing Collaboration Pfizer, too, has seen the benefits from its flat-fee structure.

Since the meter is not running for each phone call, they can turn to each other for help on Pfizer’s cases. “We’ve completely liberated our firms. They’re not punished economically by recognizing that another firm will be better at something or by collaborating with that firm,” says Schulman, who points to a recent trial win in West Virginia—the fifth win in the last six trials—as evidence of a formula that’s working; three different alliance firms worked together to try the case.

As both Schulman and Zieser attest, carving out a new legal strategy can be time-consuming up front for the general counsel or, in cases where there is no GC, the CEO himself or herself. Jeffrey Bank, CEO of Alicart Restaurant Group based in New York, admits he logged many hours setting up his legal counsel network. Some of Alicart’s law firms receive a discounted retainer, others a flat fee and still others an hourly fee.

But by strategically cherry-picking law firms with the expertise he needs, he keeps costs low even when he pays a higher hourly fee because costly errors are avoided. “It took a lot of time to set it up, but now that it’s set up it doesn’t,” he says.

“And we have found people who are very strong at what they do.”

Schulman acknowledges that Pfizer’s $500 million-a-year legal budget commands a degree of respect among large law firms eager to get a piece. But she says CEOs of any size company with any budget can work out AFAs if they’re committed. “You don’t need to have a big legal budget, but you do need to be willing to invest in the relationship piece of it,” she says, noting that all of Pfizer’s alliance firms renegotiate their fees at the end of the year. “The important thing is not to view this as a ghetto for low-value repetitive work, but as an opportunity to build real committed working relationships with valued outside counsel who will help you handle a wide range of issues.

“The process of migrating from the billable hour to a new metric of value was challenging because we didn’t have a ready-made metric of value to substitute,” she adds. “Now we do.” The growing pains can be challenging, to be sure, “but if it weren’t a challenge, it wouldn’t really be innovative.”

I N T E L L E CT UAL PROPE RT Y

LAW FIRM

HQ LOCATION

Baker Botts LLP Drinker Biddle & Reath LLP Duane Morris, LLP Fenwick & West LLP Finnegan, Henderson, Farabow, Garret & Dunner, LLP Fitzpatrick, Cella, Harper & Scinto Foley & Lardner LLP Greenberg Traurig LLP Howrey LLP Irell & Manella LLP Jones Day Kenyon & Kenyon LLP Kilpatrick Townsend & Stockton LLP (See profile, p. 60) Kirkland & Ellis LLP Morrison & Foerster Quinn Emanuel Urquhart & Sullivan LLP Ropes & Gray LLP Weil, Gotshal & Manges LLP Wilmer Hale Wilson Sonsini Goodrich & Rosati

Houston, TX Philadelphia, PA Philadelphia, PA Mountain View, CA Washington, DC New York, NY Milwaukee, WI Miami, FL Washington, DC Los Angeles, CA Washington, DC New York, NY Atlanta, GA Chicago, IL San Francisco, CA Los Angeles, CA Boston, MA New York, NY Washington, DC Palo Alto, CA

E M PL OY M E N T & L AB OR

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Akin Gump Strauss Hauer & Feld LLP Arnold & Porter LLP Baker & McKenzie LLP Boies, Schiller & Flexner LLP Epstein Becker & Green, P.C. Gibson Dunn & Crutcher LLP Greenberg Traurig LLP Jackson Lewis LLP Jones Day Kilpatrick Townsend & Stockton LLP (See profile, p. 60) Littler Mendelson P.C. Morgan Lewis & Bockius LLP Nixon Peabody LLP O’Melveny & Myers LLP Paul, Hastings, Janofsky & Walker LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Proskauer Rose LLP (See profile, p. 56) Seyfarth Shaw LLP Sheppard Mullin Richter & Hampton LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Sullivan & Cromwell LLP

Washington, DC Washington, DC Chicago, IL New York, NY Houston, TX Los Angeles, CA Miami, FL White Plains, NY Washington, DC Atlanta, GA San Francisco, CA Philadelphia, PA Boston, MA Los Angeles, CA Los Angeles, CA New York, NY New York, NY Chicago, IL Los Angeles, CA New York, NY New York, NY

TA X

LAW FIRM

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Baker & McKenzie LLP Cleary Gottlieb Steen & Hamilton LLP Cravath, Swaine & Moore LLP Davis Polk & Wardwell LLP Dewey & Leboeuf Fried, Frank, Harris, Shriver & Jacobson LLP Greenberg Traurig LLP Jones Day Kirkland & Ellis LLP Latham & Watkins LLP McCarter & English LLP McDermott Will & Emery LLP Shearman & Sterling LLP Simpson Thacher & Bartlett LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Steptoe & Johnson LLP Sullivan & Cromwell LLP Sutherland Asbill & Brennan LLP Wachtell Lipton Rosen & Katz Weil, Gotshal & Manges LLP

Chicago, IL New York, NY New York, NY New York, NY New York, NY New York, NY Miami, FL Washington, DC Chicago, IL New York, NY Newark, NJ Chicago, IL New York, NY New York, NY New York, NY Washington, DC New York, NY Atlanta, GA New York, NY New York, NY

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HEALTH CAR E & E MP L OYME NT B E NE F I T S

OS H A

LAW FIRM

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Alston & Bird LLP Covington & Burling LLP Fenton Nelson LLP Gibson Dunn & Crutcher LLP Groom Law Group Ice Miller LLP Ivins, Phillips & Barker Jones Day McDermott Will & Emery LLP Miller Chevalier LLP Morgan Lewis & Bockius LLP O’Melveny & Myers LLP Paul, Hastings, Janofsky & Walker LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Proskauer Rose LLP (See profile, p. 56) Seyfarth Shaw LLP Sidley Austin LLP Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates Steptoe & Johnson LLP

Atlanta, GA Washington, DC Los Angeles, CA Los Angeles, CA Washington, DC Indianapolis, IN Washington, DC Washington, DC Chicago, IL Washington, DC Philadelphia, PA Los Angeles, CA Los Angeles, CA New York, NY New York, NY Chicago, IL Chicago, IL New York, NY

Alston Bird LLP Baker & McKenzie LLP Epstein Becker & Green, P.C. Fisher & Phillips LLP Foley & Lardner LLP Ford & Harrison LLP Gibson Dunn & Crutcher LLP Jackson Lewis LLP Jones Day Littler Mendelson P.C. Morrison & Foerster LLP O’Melveny & Myers LLP Ogletree, Deakins, Nash, Smoak & Stewart P.C. Orr & Reno Proskauer Rose LLP (See profile, p. 56) Quarles & Brady LLP Reed Smith LLP Seyfarth Shaw LLP Winston & Strawn LLP

Atlanta, GA Chicago, IL New York, NY Atlanta, GA Milwaukee, WI Atlanta, GA Los Angeles, CA White Plains, NY Washington, DC San Francisco, CA San Francisco, CA Los Angeles, CA Indianapolis, IN Concord, NH New York, NY Chicago, IL Washington, DC Chicago, IL Chicago, IL

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executive life

TopWheels Part 1 Five Cars for Work by

William J. Holstein and Michael Jordan

When you get right down to it, there are two types of luxury cars. The first is both practical and pleasurable—the car that will actually make you look forward to your daily commute, yet won’t draw undue attention in the office parking lot. The second is the kind that simply makes your spirit— and body—soar. To help you find the right ride for your needs, Chief Executive teamed up with Edmunds.com to round up the best of the best in each category in a two-part series.

In this issue, we present five cars that offer comfort, performance and hi-tech features but are also sensitive to appearances— essential in an era of intense scrutiny of corporate leaders. These wheels will carry you in comfort, while making the kind of statement you’re comfortable with. Stay tuned for our November/December issue’s roundup of five cars that deliver powerful performance—perfect for play.

1 Value for Money

385 horsepower 4.6-liter V8 engine 16 mpg city/24 mpg hwy $65,400 Money left in your wallet Dash-mounted video monitor can be disorienting

2011 Hyundai Equus

What it says about you: You demand outstanding value for your money

Until now, Hyundai hasn’t been known for making luxury vehicles, but it has clearly challenged the Germans and Japanese with this sumptuous sedan. Think of it as all the things that you like best about the full-size Lexus LS sedan—quiet ride, effortless driving, lots of comfort, and convenience features—and a price that makes you think of Costco.

Just like a Lexus, the Korean-built Equus is a premium car, stately and imposing in appearance. It’s fully powered, with a large V8 engine up front and the rear wheels putting the power on the ground. The range of comfort and convenience features isn’t as broad as either Lexus or the premium German sedans, yet it has everything you need.

The Hyundai Equus makes a statement about money, but one about value, not excess. Hyundai has become a brand that’s about smart spending—a message today’s CEOs understand all too well.

Photos: hyundainews.com

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executive life

2 Enthusiastic but Smart

265 horsepower 3.0-liter inline-6 diesel engine 23 mpg city/36 mpg hwy $44,150 600-mile cruising range on a single tank of fuel Fussy seatbelts

2011 BMW 335d

What it says about you: You’re open to counterintuitive ideas

Here’s a shocker: Diesel power has become synonymous with performance as well as practicality. After more than decade of enormous success with a range of highly sophisticated diesel-powered vehicles in Europe, German manufacturers are slowly introducing the technology in the United States.

The diesel-powered version of the ubiquitous BMW 3 Series sedan is now widely acknowledged as the best combination of power and practicality in the BMW lineup. Yet you won’t sacrifice either BMW’s famous acceleration or its instinct for engaging handling. Even better, the fact that the BMW 335D costs less than $50,000 will silence any complaints that the boss is driving a BMW. Hey, you’re saving the planet!

Photos: bmwusa.com

3 The High-Tech American Car

Plug-in hybrid (149-horsepower electric motor supplemented by 84-horsepower 1.4-liter inline-4 engine) 93 mpg (hybrid mode); 37 mpg (gas engine-only) $43,390 less $7,500 federal tax credit High-tech hybrid is all about American innovation Slow recharging with 120-volt electric outlets

2012 Chevrolet Volt

What it says about you: You’re committed to innovation in all aspects of life

Drivers of electric-powered vehicles always fear running out of juice—or “range anxiety.” But the 2012 Chevrolet Volt makes electric power practical because it’s a plug-in hybrid. It offers an electric motor powered by a lithium-ion battery pack to deliver as much as 40 miles of quiet cruising; then a small, turbocharged 1.4-liter inline-4 gas engine kicks in to keep the car going for hundreds of more miles.

Thus, the Volt is the first electric car that is practical all of the time, not just part of the time. You recharge at home with either a fastacting dedicated quick-charger or a slow 120V power cord.

Within the cabin, the Chevy Volt looks slightly futuristic with a center console of controls that might remind you of something from Apple. This is a compact car that seats only four, yet the seats are comfortable and the highway ride is poised. With the Volt, you don’t feel like you’ve had to make many sacrifices for driving an environmentally friendly car.

Photos: media.gm.com

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What it says about you: You demand technological excellence The completely redesigned 2011 Audi A8 feels much fresher and bolder than its traditional competition, the BMW 7 Series and Mercedes-Benz S-Class.

Featuring not only voice-activated Bluetooth telephone but also a Wi-Fi hotspot for wireless Internet usage by mobile devices within the car, this Audi is ideal for business use. The satellite navigation features Google Earth. Seating in the back of the long-wheelbase L-type A8 is like being in a first-class airline seat with video screens, a refrigerated compartment and even a massage feature.

Yet, the Audi A8 also is meant to be driven. Its all-aluminum body helps minimize weight, so the 372-horsepower V-8 can help you to go faster than the heavier competition, yet also cruise farther thanks to good fuel economy.

Photos: audiusanews.com

68 chiefexecutive.net September/October 2011

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executive life

5 Luxury With a Conscience

Hybrid power (battery-powered stop-start system for 275-horsepower V8 engine) 19 mpg city/26 mpg hwy

Photos: media.mbusa.com

$101,745 Active seats change contour in the corners Irritatingly complex dashboard controls

2011 Mercedes-Benz S400 Hybrid

What it says about you: You’re always looking for smart choices

The 2011 Mercedes-Benz S400 Hybrid is the modern way to enjoy the guilty pleasure of driving a fine German luxury car without your employees or shareholders thinking you’re squandering the company’s assets. Yes, it is a full-size Mercedes S-Class, but it’s powered by a hybrid powertrain just like a Toyota Prius. This is the best of both worlds, an expression of excellence underscored by respectable fuel economy.

As in the Prius, a battery-powered electric motor shuts down the gasoline-powered engine at stoplights and then re-engages it when the lights turn green.

It’s not a hugely powerful car but it offers a great ride and superb refinements, such as television screens in the back of the front passenger seat headrests and finely stitched leather upholstery. Mercedes says its lithium-ion battery pack is lighter and therefore smaller than the competition’s, so there’s not much compromise in rear-seat space and cargo capacity. The combination of luxury and technology adds up to a car that seems smart.

William J. Holstein is the author of The Next American Economy: Blueprint for a Real Recovery; Michael Jordan is executive editor of Edmunds.com in Santa Monica, California.

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flip side

Take One Tablet and Call Me in the Morning

by Joe Queenan Whenever an amazing new technology debuts, entrepreneurs start producing accessories or applications that can be used to enhance the end user’s experience. These add-ons can range from sophisticated phone apps to elegant docking units to tiny loudspeakers to colorful carrying cases. But they also include such super-low-tech items as those cheap plastic strips that protect the screens on smart phones from scratches and nicks. This benevolently parasitic arrangement is one of the things that make America great: If you can’t have a great idea yourself, design something that can piggyback on a great idea. North Dakota, for example.

Now, however, the emphasis has shifted from devising products that can be added on to a smart phone, MP3 player or tablet computer to integrating these exciting new technologies into products where their presence would previously have seemed inconceivable. One of the most interesting of these innovations is the running shoe MP3 player. Runners often exercise while carrying MP3 players pinned to the waistband of their shorts, but because of vulnerability to criminals and speeding vehicles, this is not especially safe—especially at night—and often does damage to the music player. Also, the whole procedure is also kind of clunky. Until now. A new line of running shoes designed by the Chinese firm Beijing Karma are kitted out with MP3 players mounted in the heel of the shoe, with tiny speakers mounted in the eyelets of the shoelaces. This allows runners to stay alert for the trucks and SUVs that may be whizzing dangerously close to them on busy suburban roads, while enjoying a first-rate musical experience. Serious music buffs can even have a compact subwoofer inserted in the arch of the shoe, though initial testing reveals that

this adds about 3.7 ounces to the weight of the shoe, more than most serious runners would deem acceptable. The running shoes, which retail for $169, were the hit of the recent high-tech show in Las Vegas.

They are now the single most stolen item in stores based in Beijing Karma’s test market of Seattle.

The Thai-Pad is an even more intriguing device. This is a tablet computer that doubles as a plate; it gets its name because the inventor was dining in a Thai restaurant when the idea came to him. As the Pad Thai and red curry—or pizza or leg of lamb—are gradually scraped away from the surface of the plate, the holo-

If you can’t have a great idea yourself, design something that piggybacks on a great idea. graphic tablet computer underneath comes into view. The computer can only be seen when stared at directly from above at a distance of less than one foot. This allows diners to surreptitiously watch videos, sporting events, read magazines or check their stock portfolios while they are enjoying meals with clients or boring colleagues, without deliberately insulting the

other guests by whipping out their own tablet computers. The Thai-pad can easily be substituted for the official plates at corporate functions or banquets or weddings; it is especially useful for people doomed to spend long hours at fundraisers or Chamber of Commerce lunches. Similar units are already available in birthday cakes, guacamole dips, popcorn buckets and beer mugs.

Webcam in an Antacid is perhaps the most exciting new product of all. It is a disposable home diagnostic device that targets anyone who has a stressful job— policemen, physicians, salesmen, teachers—as well as frat boys. Mimicking the technology used in colonoscopies, a tiny webcam lodged inside an antacid tablet is ingested into the body and then transmits messages from inside the stomach, warning about ulcers or inflammation, or, conversely, reporting when irritation has subsided to the point that the user can safely resume partying. Webcam in an Antacid has a number of sister products: Webcam in an Antihistamine, High Cholesterol Webcam, Total ACL Webcam and Plantar Fasciitis Webcam, where the webcam is lodged inside a heel cushion. Needless to say, a Menlo Park, Calif.-based company has already designed a phone app that allows users of Webcam in an Antacid to share videos in real time. This is social networking at its most euphorically visceral.

september/october 2011

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final word

Garrotted By Red Tape While the country’s attention has been riveted by the debt ceiling and downgrades, there is a more ominous phenomenon that has largely gone unremarked.

As serious as the federal government’s spending problem is, it is made more so by the economy’s anemic growth rate. The U.S. economy has grown 0.4 percent and 1.3 percent respectively in the first and second quarters of 2011 after the Commerce Department revised its previous estimate of first-quarter GDP growth of 1.9 percent—nowhere near the 6.2 average post-recession growth rate of past recoveries. Despite the surge in corporate profits, U.S. employment is at the lowest levels in 28 years due in no small measure to uncertainty created by the very administration that claims it is pivoting to make job growth a priority.

In a conference call with investors, casino developer Steve Wynn, who styles himself a “ Democratic businessman” put his finger on the problem of why this is so when he said that companies he works with “are frightened of this administration,” adding that “it makes you slow down and not invest your money.”

The problem to which Wynn refers goes well beyond bashing billionaires and corporate jet users “who don’t pay their fair share” in taxes. It’s the hidden tax on everyone that dare not speak its name: overregulation. Every year economist Clyde Crews of the Competitive Enterprise Institute sizes up the costs of Federal regulatory spending and found in his analysis that in 2010 the government spent $55.4 billion to fund federal agencies enforcing regulations. But Crews reports that this figure does not come close to describing the true scope of the drag on the economy. Citing the work of economists Nicole Crain and Mark Crain who have studied the net cost of regulations, they estimate that in 2009, the true cost of federal regulations to business and consumers was $1.75 trillion or about 12 percent of GDP. This exceeds what the IRS collected in revenues, or the $1.46 trillion in pre-tax profits business earned in that same year. Critics on the progressive left have denounced the figure as grossly inflated, claiming faulty methodology—which is curious considering the methodology has not be released.

James Gattuso and Diane Katz, both research fellows at the Heritage Foundation, however, have also tracked federal regulations and found that the cost is growing substantially, which isn’t surprising considering that the Federal Register that compiles them is now over 81,405 pages long. From the beginning of the Obama administration to mid-FY2011, regulators have imposed $38 billion in new costs, “more than any comparable figure on record.” Of the 1,827 rulemaking proceedings completed in the first six month of FY2011, 37 were classified as “major” meaning they have economic impact of at least $100 million a year. No major rulemakings decreased regulatory burdens.

This trend didn’t begin with the current administration. However, the rate of such burdens has accelerated under Barack Obama. President Bush was in his third year before costs hit $4 billion—a figure Obama achieved in his first 12 months. Nor will the fire hose be turned off soon. Gattuso and Katz report that 2,785 proposed rules are in the pipeline, with 144 classified as “economically significant, ” meaning each represents $100 million annually or for a total of $14 billion in added burdens each year. Despite lip service given to reducing unnecessary regulations via executive order, the Obama administration seems to be doubling down with more rules covering energy, health care and financial services.

“Until we change the tempo and the conversation from Washington, it isn’t going to change,” Steve Wynn said during his celebrated call. We couldn’t agree more. Calling for Congressional oversight is useless. They don’t even read the bills they vote into law. And asking agencies to review their rulemaking for economic benefits is like having North Korea chairing the Conference on Disarmament, or Iran officiating on the U.N. Commission on the Status of Women. Establishing sunset provisions for all federal regulations might work, but President Obama can’t have it both ways. Having identified overregulation as a growth killer he must take steps to rein it in.

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