Being Your Brand | CEO Election Prep | Bribery Basics | Lencioni: Love Your Meetings
SEPTEMBER/OCTOBER 2019
SEA CHANGES PLUS: ‘Growth Guy’ Verne Harnish On The One Skill Every CEO Must Have Now
CARNIVAL CRUISE LINES CEO ARNOLD DONALD SAVED THE SHIP ONCE. CAN HE DO IT AGAIN?
DA RY N KU I P E R S CEO, Boxed Water Is Better ®
“ THE STARTUP
CULTURE IN MICHIGAN IS LIKE NO OTHER. �
Michigan has always attracted renegades, visionaries and risk-takers. Our diverse workforce, business-friendly environment and low cost of living are a few of the many reasons so many innovative startups choose to come here. If you want to start or grow your business, Michigan is the place to make it happen. Get here or get left behind. Visit michiganbusiness.org/pure-opportunity
C ONTENT S
S E PT E M B E R /O C TO B E R 2019 No. 302
FEATURES COVER STORY 26 SEA CHANGES
26
As Arnold Donald’s turnaround of Carnival Cruise Lines hits stormy seas, it offers lessons for any CEO struggling with transformation. By J.P. Donlon
CEO ESSENTIALS 36 LISTEN TO SCALE Engaging customers has always been a critical CEO skill, but to win in the age of Amazon, Verne Harnish, bestselling author of Scaling Up and Mastering the Rockefeller Habits, says it’s become downright existential. Here’s what he means, and how to do it right. By Dan Bigman
WASHINGTON 44 A BUSINESS AGENDA FOR 2020 In the run-up to the next election, CEOs—regardless of party— must push Washington to adapt pragmatic solutions to help the nation. Here are six places to start. By Steve Odland
TOOLBOX 52 BRIBERY FOR BEGINNERS How to keep your globally dispersed operations running “clean” when local business practices don’t work that way. By Russ Banham
44
EVENT HIGHLIGHT 56 CEO OF THE YEAR 2019 Business leaders celebrate Marriott’s Arne Sorenson.
CEO ROUNDTABLE 63 MAKING MERGERS WORK
Strategy is important, but culture is the true lynchpin of success. By C.J. Prince
CEO ROUNDTABLE 66 PREPARING THE NEXT GENERATION How to build the leadership pipeline your company needs. By Jennifer Pellet
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COVER PHOTO BY STEVEN FREEMAN
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C O NTE NT S EDITOR
Dan Bigman EDITORS-AT-LARGE
Jennifer Pellet Jeffrey Sonnenfeld DIGITAL EDITOR
Gabe Perna PRODUCTION DIRECTOR
Rose Sullivan CHIEF COPYEDITOR
Rebecca M. Cooper
DEPARTMENTS 8
58
EDITOR’S NOTE
ART DIRECTORS
Carole Erger-Fass Gayle Erickson Alli Lankford RESEARCH EDITOR
Bad News
Melanie Nolen CONTRIBUTING EDITORS
10 LEADERS 10 The You Tube Tempted to channel your inner Iacocca and become the face of the brand? Some tips from those who’ve done it. 14 CNEXT Interview / Pat Russo Survival Strategist
Russ Banham Dale Buss Fred Engelfried Daniel Fisher Craig Guillot Patrick Lencioni EDITOR EMERITUS
J.P. Donlon
18 Game Plan / Fred Engelfried Avoiding the Ambush
PUBLISHER
Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net
20 Transformation / Patrick Lencioni A Chief Executive’s Stage
VICE PRESIDENT
Phillip Wren 203-930-2708 | pwren@chiefexecutive.net
22 Law Brief/ Daniel Fisher Supremely Conservative
DIRECTOR, BUSINESS DEVELOPMENT
Lisa Cooper 203-889-4983 | lcooper@chiefexecutive.net
24 On Leadership / Jeffrey Sonnenfeld You Got Mobbed
DIRECTOR, BUSINESS DEVELOPMENT
Liz Irving 203-889-4976 | lirving@chiefexecutive.net
58 ECONOMIC DEVELOPMENT Regional Report: The Southeast Pro-business climates continue to drive growth in this corner of the nation, with states like North Carolina, Tennessee and Florida attracting an outsized share of the nation’s business investment. By Craig Guillot
69 MEETINGS
DIRECTOR, BUSINESS DEVELOPMENT
Gabriella Kallay 203-930-2918 | gkallay@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT
Marc Richards 203-930-2705 | mrichards@chiefexecutive.net MANAGER, STRATEGIC PARTNERSHIPS
Real Time With Remote Workers Distributed teams may be the future, but you’ll still need quality face time. How to maximize the value of your visits. By Jennifer Pellet
Rachel O’Rourke 615-592-1198 | rorourke@chiefexecutive.net CLIENT SUCCESS ASSOCIATE
Jake Holmon 203-889-4974 | jholmon@chiefexecutive.net
70 LAST WORD Staying Human Technology can improve patient outcomes—but so can personal interaction. By Stan Bergman
CHIEF EXECUTIVE GROUP EXECUTIVE CHAIRMAN
Wayne Cooper CHIEF EXECUTIVE OFFICER
Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 302 September/October 2019. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2019 by Chief Executive Group LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Stamford, CT, and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive Group, PO Box 47574, Plymouth, MN 55447.
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Melanie Haniph
KENTUCKY THE RED TAPE REDUCTION STATE Every day, Governor Matt Bevin and Kentucky government officials wear Red Tape Reduction lapel pins to demonstrate their resolve to eliminate burdensome, job-killing regulations. Together, we are creating the most probusiness state in America, catering to the needs of business and cutting red tape in the process. Our pro-business initiatives resulted in record investment and job creation. And we’ve only just begun. When you locate in Kentucky, We’ll cut through red tape – and roll out the red carpet. Contact us today. (800) 626-2930 • ThinkKentucky.com
MAKING BUSINESS STRONG. CUTTING RED TAPE.
CH I EF E XECUT IV E RE SE A RCH AD INDEX
CEO CONFIDENCE: CAUTION FLAGS ARE OUT
CAESAR’S ENTERTAINMENT caesarsforum.com Inside back cover
Insights from Chief Executive Group’s CEO Confidence Index, a widely followed monthly poll of CEOs, and discussion topics from the Chief Executive Network (CEN), our nationwide membership organization that helps C-Suite executives improve their effectiveness and gain competitive advantages. For more information, visit ChiefExecutiveNetwork.com. CEO CONFIDENCE IN CURRENT BUSINESS CONDITIONS FELL 2 percent in August to its lowest level since September 2017. At 6.8 out of 10, on Chief Executive’s 1-10 scale, a drop of 12 percent year over year and 6 percent since January. Forward-looking confidence also plummeted in August, to 6.2/10, down 6 percent month over month, 14 percent year over year and 7 percent since January. Trade is by far the biggest single issue affecting confidence in our preliminary findings based on 247 respondents, with 63 percent of surveyed CEOs saying President Trump’s tariffs on China are having the most influence on their outlook. The tight labor market and the upcoming Presidential election also ranked high on CEOs’ list, at 42 percent and 40 percent respectively. When asked about the Fed’s decision in late July to reduce interest rates, 59 percent of CEOs say it had no impact on their outlook for the rest of 2019 and 72 percent say they doubt the Fed will succeed over the coming months in sustaining the record U.S. economic expansion. More than any single issue, CEOs we polled say it is the constant uncertainty and frequency of policy changes that weigh most on their outlook. Many said it is becoming very difficult to move fast enough to keep up or set a course they can stick to. For this reason, only 47 percent of those we surveyed anticipate increasing their capital expenditures over the next few months, and 20 percent say they will cut them. —Melanie Nolen, Research Editor Top Discussion Topics From Summer CEN Meetings
Economic outlook, including the potential impact of tariffs on manufacturing companies; Preparing for a slower economy; Technology investments (what and how much to invest); Succession planning due to mass baby-boom generation retirements; Rising healthcare costs; Strategic planning and execution; Best practices for developing high potential leaders/managers. CEO CONFIDENCE LEVEL IN BUSINESS CONDITIONS ONE YEAR FROM NOW 7.14
CHIEF EXECUTIVE LEADERSHIP SUMMIT chiefexecutiveleadershipsummit.com/ 31 CHIEF EXECUTIVE NETWORK chiefexecutivenetwork.com 25, 33 CEO AND SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES chiefexecutive.net/compreport 42, 43 CEO TRUSTED ADVISERS ceotrustedadvisers.com/ 23 CNEXT cnext.us 50, 51 DELOITTE R.E. AND LOCATION SERVICES deloitte.com/us/locationstrategy 19 ENTERPRISE FLORIDA Floridathefutureishere.com/freedom Outside back cover HEALTHCARE CEO SUMMIT chiefexecutive.net/healthcaresummit 7 KY CABINET thinkkentucky.com 5 MICHIGAN ECONOMIC DEVELOPMENT CORP. michiganbusiness.org/pure-opportunity Inside front cover, 1 NATIONAL SHOOTING SPORTS FOUNDATION nssf.org 9
7.11
NEXT LEVEL LEADERS nextlevelleadersseminar.com 21
6.95 7.00
6.78
6.84 6.72
6.60
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PURE INSURANCE pureinsurance.com 3
6.46
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6.16 Aug. ‘18
CHIEF EXECUTIVE CEO E-NEWS BRIEFING ChiefExecutive.net/Briefing 35
Sept.
Oct.
Nov.
Dec.
Jan. '19
Feb.
Mar.
Apr.
May
June
July
Chief Executive’s CEO Confidence Index is measured on a scale of 1-10. August preliminary poll had 247 responses.
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RHR INTERNATIONAL rhrinternational.com 13
Aug.
SENIOR EXECUTIVE NETWORK www.seniorexecutivenetwork.com 71
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F RO M THE E D I TOR CHIEF EXECUTIVE OF THE YEAR
BAD NEWS THIS SUMMER, OUR CURRENT economic expansion turned 10, the longest ever recorded—a 120-monthplus slo-mo rebound from the Great Recession that’s added more than 20 million new jobs and, according to The Wall Street Journal, increased the net worth of U.S. households by a staggering $47 trillion since 2009. Happy birthday? Not so much. When we polled CEOs in August, uncertainty was on the rise. An increasing number of leaders are now planning to pump the brakes on both capital spending and hiring in the months ahead. The biggest worry rhymes with Smariffs, but that’s hardly the only concern. All would make surprisingly great highschool garage band names: Late In The Cycle. Bad Brexit. Korean Aggression. Impeachment. Green New Deal. Strait of Hormuz. Ladies and gentleman, please welcome…ELIZABETH WARREN AND THE REGULATIONS! In late July, the Fed cut rates for the first time in over a decade, “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.” Fed speak for “uh-oh.” Four Contrarian Thoughts
Amid this darkening mood, allow me to toss out a few points: One: Unlike streaks in baseball or Jeopardy, economic expansions don’t just tire out and stall. According to research by Glenn Rudebusch, an economist at the Federal Reserve Bank of San Francisco, a recession is no more likely to hit in the tenth year of an expansion than it is in the fifth year. So, theoretically, good times—or not-so-bad-times—can last forever, unless we talk ourselves into a recession or someone does something really stupid (always a possibility—see above). Two: At least one very sharp China hand I talked with this summer had an optimistic case on trade worth sharing. Nick Pinchuk, CEO of toolmaker Snap-on, has decades of experience operating in China, and he’s betting on a Xi-Trump deal—some kind of deal—just after the 50th anniversary of China’s revolution in October and (shocking!) just in time for the 2020 U.S. campaign to ramp up. Here’s hoping Nick is right. Three: While our polling of CEO confidence has slumped since The Christmas Of The Great Tax Cut, confidence remains—at least by historical measures—in “good” territory. Along with everyone else, CEOs have been predicting a slowdown to start in about 18 months for almost two years now. And still things are pretty good. Four: The current moment reminds me of what my first mentor, a wonderful, generous New York Times editor named Jack Lynch, used to tell me while we were covering the dot-com bubble and the ensuing bust. Whenever I pegged a company’s stock movement to some ephemeral geopolitical shock or talked about The Stock Market as if it was some monolithic thing, Jack, who recently passed away, would chide me for being intellectually lazy. “It’s a market of stocks, Sunshine,” he’d say. “Not a stock market.” It’s a good reminder for uncertain times like these: Every company—and every CEO—gets to have a say about its future, no matter the news. Thanks, Jack. —Dan Bigman, Editor
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2020 SELECTION COMMITTEE DAN GLASER President and Chief Executive, Marsh & McLennan
FRED HASSAN Former Chairman, Bausch & Lomb; Partner, Warburg Pincus
NEAL KEATING President and Chief Executive, Kaman
TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries
MAX H. MITCHELL President and Chief Executive, Crane Co.
ROBERT NARDELLI Chief Executive, XLR-8
THOMAS J. QUINLAN III Chairman, President and Chief Executive, LSC Communications
JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management
ARNE SORENSON President and Chief Executive, Marriott International 2019 CEO of the Year
MARK WEINBERGER Former Global Chairman and Chief Executive, EY Global Limited Exclusive Adviser to the Selection Committee
TED BILILIES, PH.D. Chief Talent Officer, Managing Director, AlixPartners
CONTACT US CORPORATE OFFICE Chief Executive Group LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 Fax: 203.930.2701 ChiefExecutive.net LETTERS TO THE EDITOR letters@ChiefExecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 Fax: 847.730.3666 advertising@ChiefExecutive.net REPRINTS Phone: 203.889.4974
MAKING A DIFFERENCE FOR A SAFER AMERICA The firearms industry welcomes participation in the national conversation to make our communities safer. Our trade association, THE NATIONAL SHOOTING SPORTS FOUNDATION, has long advocated for effective solutions to prevent access to firearms by criminals, children and the dangerously mentally ill. We run programs that make a real difference.
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Practical solutions that protect lives and preserve our citizens’ liberties – making a difference for a safer America.
L E ADERS
THE YOU TUBE Tempted to become the face of the brand? Changes in technology make it easier and cheaper than ever before. Tips from CEOs who’ve done it. BY DALE BUSS THE SETTING: A DARK, computer-generated backdrop, swirling with what seem to be shards of glass. Low-key electronic music rises. A heavyset man in a suit is sitting there, arms crossed. Cue the voice over: “I’m Patrick Ghilani, CEO of MRI Software,” he says. Cut to Ghilani, now against a white background. He speaks directly to the camera: “MRI Software provides solutions for those who operate, invest and manage large-scale real estate,” he says, deliberately enunciating each and every syllable. “What our solutions do is allow these people to better enable how their clients live, work and play in the communities that they build.” More than 35 years after Lee Iacocca stared into a TV camera and challenged America to buy a K-car (“If you can find a better car, buy it”), a whole new generation of CEOs is rediscovering the power of personality in building their brand. Changes in technology make it cheaper than ever to harness Internet channels and expand this time-honored marketing method with podcasts, blogs and YouTube videos featuring company owners. Ghilani is headlining online marketing videos, hosting podcasts and leading the annual users’ conference. He is appealing to business-to-business customers for Cleveland-based MRI’s real estate software—not trying to conjure thousands of dollars out of the pockets of ordinary
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American consumers. And MRI is only a nine-figure relative small fry, not a multi-billion-dollar giant. “The reality boils down to why would consumers, buyers and clients really be intrigued by seeing the leader up there?” says Ghilani. “It’s got to boil down to the leader’s ability to generate trust, confidence and transparency.” CEO Mike Walters began anchoring podcasts for USA Financial, aimed at recruiting advisors to the Ada, Michigan-based company by covering topics such as how to deal with new financial-industry regulations. “It’s a good way to incubate them and move them along, especially if they’re wanting to just dip their toe in the water and don’t want to fully engage with our team yet,” Walters says. “Now we’re running [that] about 18 months after an advisor first listens to my podcast, they typically start doing business with our firm.” Dan Sandberg grew up in the radio business and now finds his vocal talent handy as the host of podcasts for Brembo North America, which makes performance brakes. For several years, the CEO of the U.S. arm of the Italian manufacturer recorded podcasts for internal consumption only, featuring interviews with intriguing guests such as race car drivers. But word-of-mouth spread via social
media, enticing the company into creating a series of 35- to 45-minute “Brembo Red” podcasts—named for the its distinctively red brake calipers—available to all on iTunes. “We felt we could upgrade our [guests] and even include some customers if we went public,” Sandberg says. David MacNeil has taken this art form all the way to the ultimate marketing stage: the Super Bowl. He started out several years ago appearing in marketing videos for his company, WeatherTech, which makes customized automotive floor mats and other aftermarket products in Bolingbrook, Illinois. Starting in 2014, MacNeil made his story of made-in-America manufacturing the centerpiece of annual Big Game TV ads, initially with an actor playing MacNeil. He soon stepped in himself. “I thought it was important to let our customers know that the belief in American manufacturing, American workers and using American suppliers was important to me as the company owner,” MacNeil says. “It has resonated, and once you put yourself out there as a ‘front man,’ I think
it needs to be reinforced. I still do some voiceovers for our radio spots and even had a cameo in our last Super Bowl spot.” Want to give it a try? Here are a few tips from CEOs who’ve done it:
“Authenticity always matters,” says Louie Gentine, right, the second CEO of familyowned cheesemaker Sargento to star in national TV spots.
Find captive audiences: Starring in var-
ious video forms besides TV, for audiences that are essentially closed-circuit crowds, is a relatively new twist on the CEO-asstar phenomenon. For about 10 years, Paul Glantz, CEO of Emagine Entertainment, has starred in pre-movie, turn-off-yourcell-phones videos on the silver screens of the 13 theater complexes owned by his Troy, Michigan-based company. “It’s imperative for us to differentiate ourselves from our competitors,” says Glantz. “If in some small, intangible way I can play a role, then at some point that small intangible occasionally will drive theater guests to us instead of others.” Be authentic: While usually amateurish
and sometimes annoying, car dealers starring in their own local TV ads nev-
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LE A DE RS Don’t expect to like it: Often CEOs are
“The reality boils down to why would consumers, buyers and clients really be intrigued by seeing the leader up there?” says Ghilani, “It’s got to boil down to the leader’s ability to generate trust, confidence and transparency.”
ertheless have always comprised “one of the best examples of CEO connectivity on an authentic basis,” says Greg Portell, lead partner in the global consumer practice for A.T. Kearney consultants in Chicago. Louie Gentine is the second CEO to star in national TV ads for Sargento, the Plymouth, Wisconsin-based, family-owned cheesemaker, following in the footsteps of his father, Lou Gentine. The latest Sargento campaign emphasizes family ownership with a timeline and old photos. “Authenticity always matters, and when you see Lou and I in the commercials, that’s pretty much how everyone at the company sees us every day,” Gentine says. “And we’ve got recent market research which shows that people associate Sargento with being a family-owned company more than any other cheese brand. That makes an instant connection.” Make it entertaining: Glantz has dressed
up as a Jedi knight for videos that have run before Star Wars sequels and more recently as a baby shark, after the popular Internet meme. Ghilani says he gets “passionate and theatrical in providing what otherwise seems like boring information—but is extremely exciting to our company and hopefully our clients.” Sandberg says Brembo’s “challenge is in making our podcasts entertaining. You want to find a human angle, maybe talking about employees. It doesn’t have to be about brakes. Sometimes we add a co-host. The key is that you can still market your product but you must have that human connection and entertainment value.”
busy running companies and must be talked into “going Hollywood” by their marketing folks. CEO Alessandro DiNello was hesitant to star in a TV ad for Flagstar, the Troy, Michigan-based regional bank holding company. Flagstar had signed an endorsement deal with Blake Griffin, a pro-basketball star traded to the Detroit Pistons in 2017, and marketers wanted to pair Griffin’s life-long ascension in the sport with DiNello’s own rise from accounting student to the spearhead of an impressive corporate turnaround. “They thought this would resonate most with the public,” says DiNello. “They said you’ve got to take one for the team here. I was a reluctant participant because it’s just not my style.” He did it anyway. Domino’s CEO Ritch Allison was chagrined by the demands when he starred for the first time in one of the company’s national TV ads, early this year. “It’s surprising how many people it takes and how long it takes,” he says. “I shot for three hours.” The time-crunch for podcasts is much lower. Sandberg has a production-quality microphone installed in his home office. And Walters says, “For each 15-minute podcast, I have maybe an hour or an hour and a half into it. It’s even quicker if I’ve got a guest.” Prepare for the results: After they see his
vignettes, Glantz finds Emagine patrons seeking him out via email to discuss his in-cinema ads and other topics. “I don’t invite them, but they find me,” he says. “I’m not hiding from anyone.” But sometimes marketing that features CEOs can turn bad quickly, and catastrophically, in an era of instant communications and hyper-intensive public reactions. “You want to provide a bit of creativity in the business environment but not mess up a huge brand,” Portell says. “When celebrity CEOs were on the rise, you could control the messaging. But now the access points are 360 [degrees], so when a CEO does something bad, everyone is going to see it.” In other words, don’t expect to hear “Hi, I’m Mark Zuckerberg...” anytime soon.
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T H O U G H T L E A D E R S H I P P R O V I D E D B Y R H R I N T E R N AT I O N A L
CEO THE LIFE CYCLE OF THE CEO 1000 AVOIDING THE CEO DEATH CYCLE
BY PAUL WINUM, SENIOR PARTNER, PRACTICE LEADER CO-HEAD, RHR INTERNATIONAL BOARD & CEO SERVICES Over the past year, RHR International and Chief Executive Group have partnered on the publication of a series of articles entitled The Life Cycle of the CEO. (ChiefExecutive.net/ tag/life-cycle-of-a-ceo). That series addresses five phases in the average tenure of a CEO, outlining the key tasks and challenges that must be managed for a successful term. On the other side of the ledger, however, are CEOs who are not successful and wind up leaving their organizations prematurely. This article will address the most common reasons that contribute to CEO failure in the hope that other CEOs can avoid this fate, which can have a devastatingly negative impact on all enterprise stakeholders. Poor Company Performance While nearly every company will be faced with headwinds at one time or another, how CEOs deal with those headwinds will determine a board’s willingness to support the sailor in navigating the storm. Having assessed hundreds of CEOs and CEO succession candidates over the decades, my colleagues at RHR and I have seen repeated patterns in the psychological makeup and decision-making that drives the leadership behavior of CEOs who fail. Some of the derailing patterns include: • Levels of arrogance and hubris that cause a leader to disregard feedback from others or the market about the need to change; • An inability to make accurate evaluations of key talent or to replace leaders who lacked requisite capabilities fast enough (many of whom were former peers in the case of internal successors); and • Failure to develop alignment and effective partnerships with their boards. Ethical Lapses The number of CEOs who were dismissed in the last few years for improper conduct personally or by members of the organization is staggering. In 2005, Harry Levinson, the highly-lauded management psychologist, used the term “recrudescent narcissism” to describe situations in which an executive with a healthy amount of ego responds to the deference and obsequious behavior of others toward him or her. The combination results in those narcissistic leaders thinking that the rules and norms of society do not apply to them and they display egregiously poor judgment.
IN THE LAST YEAR, 116 CEO1000 CEOS DEPARTED— NOT ALL OF THEM AS PLANNED.
15 were fired
SOURCE: CHIEF EXECUTIVE CEO1000 DATA
9 resigned or left by ‘mutual agreement’
How to Avoid the Death Cycle While each situation and CEO leader is unique, following the guidelines below will reduce the likelihood of an early departure and maximize the prospects for a full lifecycle: • Know thyself. The best leaders have a high level of self-awareness with a good sense of both their strengths and weaknesses. • Seek the counsel of others. While a healthy ego and a strong dose of self-confidence helps a CEO persevere in the face of adversity, maintaining humility and inviting the perspectives of others—whether board members or other stakeholders— are critical success factors and aids in shaping the best decisions and actions. • Critically assess the talent you need to execute. • Actively shape the culture of the organization you lead. Make sure you have ways to gauge that culture and ensure messages about values, methods, and expected results are fully received. Remember, an unexamined organization is not worth leading, and an unexamined leader is not worth following.
When executives are dismissed because of misconduct within the enterprises they lead, it is usually due to the leader not giving sufficient attention to the culture of the organization. These leaders often emphasize performance over methods. The message these leaders convey, subtly and not so subtly, is “you will be judged on the results you get, not how you get them.” ®
For more information about RHR International, visit rhrinternational.com or call +1 312-924-0800
T HE CN E X T IN T E RVI E W
SURVIVAL STRATEGIST Patricia Russo, who led Lucent’s remarkable revival after the telecom crash of 2002, dissects disruption.
This is the third in a series of discussions with CNEXT Leaders. In partnership with Chief Executive, CNEXT matches some of the world’s most respected former CEOs with current leaders to help solve critical problems. If you are interested in a confidential conversation about CNEXT and its mentoring and advisory services, e-mail Inquiries@C-NEXT.com
PHOTOS BY STEVEN FREEMAN
In 2002, Pat Russo took the helm of a company drowning in debt and decimated by the dot-com disaster. One of just six women CEOs leading Fortune 500 companies at the time, Russo deftly steered the company through the monumental challenge of retrenching after seeing its revenues slashed nearly in half, all the while bolstering morale among remaining employees. Under her steady hand, Lucent survived the crisis, regained profitability and went on to strengthen its market positions in emerging areas like optical and wireless networks. Today, Russo serves as director of General Motors, Merck & Co., Hewlett Packard Enterprise and KKR. Chief Executive recently had the chance to talk with Russo about leading a company in times of turbulence. Excerpts of that conversation, edited for length and clarity, follow. The telecom crash hit early in your tenure at Lucent. How did you respond? When I took the job—I joined on the first day of January of 2002—the expectation was that the market would decline about 5 percent. As it turned out, the market declined almost, in our case, 50 percent. So what started out as a $19 billion revenue plan ended up in one year to be $12 billion.
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And, I will tell you, our cost structure was set up for $19 billion. So as you can imagine, revenue was dropping like a rock. All of this happened in my first four or five months. It was stunning. We immediately just had to jump into action to save the company. We ended up having to do two convertible equity raises in order not to run out of cash… But we got into action. We formed a plan. We realized early on that being perfect was the enemy of the good. Our mindset became one of survival. We had to make very tough decisions very quickly and execute them. We focused on the things we could control. We can’t control revenue right now. We can control costs. So we chipped away at our breakeven point. Actually, we hacked away at our cost structure because time was not on our side. As you go through a reduction of half of your work force, how do you hold onto your key people and keep them motivated? Look, it is exhausting. It is not at all fun. It’s incredibly unfortunate because we obviously couldn’t keep all of the people that made that company what it was during its booming
time. How do you keep people motivated? For the people who I worked with, including the folks on the senior team, it was about saving the company. It was a matter of pride. It was a matter of working to preserve the assets as best we could, given the situation. If you looked back at Lucent’s genesis, you could argue it was Western Electric in the Bell system so there was passion around we have to make this happen. None of us like it, but our job is to save this company for as many of our employees as we possibly can,
for our customers, for our retirees. There was a sense of obligation that I felt, and I know the senior team felt, and that’s how you do it. What key lessons would you pass on about leading in a time of crisis? I learned there is a distinction between managing and leading. The planning, what actions will we take, who will do what by when, are management activities you do. But if you’re the leader of a group of people,
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T HE CN E X T IN T E RVI E W in a really trying time, who you are and how you show up is really important. So I distinguished managing and leading. What do I mean by leading? For example, I never used words like, “I hope,” [as in] “I hope we get through this.” I said, “We will.” That’s just a simple example, but language from the leader of an organization in times of stress— body language, facial expressions and the words you choose—really matter. That was one of the key learnings. Another is, especially for an organization used to doing things comprehensively, holistically, systemically, was that the perfect can be the enemy of the good. When you have to make quick decisions, roughly right is what you have to solve for because time is of the essence. Also I learned, and everybody learns this, you cannot over-communicate. Say it, say it again and then say it again. Also, celebrate your successes. It’s important to find ways to help feel good about something. I measured how we were doing three ways. The first was, are we doing
“Language from the leader of an organization in times of stress—body language, facial expressions and the words you choose—really matter.” what we said we would do? You could still be burning cash, but if you’re doing what you said you would do, that’s something to acknowledge. The second was progress. Is it better than it was last quarter or the last time we measured it? It was important to me that we celebrated progress. And the third measure is, how much further do we have to go? I never said to the organization, “We could go bankrupt,” but I was very honest and realistic about the severity of the situation and the toughness of the actions that we would have to take. I have found that people within an organization generally know when there is trouble. They see it, they know it. They want to know that you acknowledge
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it and you’ve got a plan. The last thing you want to do is sugarcoat a real problem when everybody else knows it’s a real problem. So genuineness in communication, authenticity in communication, being honest about the reality of the situation was helpful and, frankly, necessary. Every now and then, I sat in my office with my CFO when it felt like the sky was falling. And what I learned is the sun comes up tomorrow. It does. You get to get up again and go fight the good fight. And you have to hang on to your optimism. From a personal standpoint, it’s important to hang on to that so you can keep doing what you need to do. You spent a year at Kodak, the stepchild of any conversation around disruption. The company holds more patents in the digital photography space than any other company so it wasn’t that they didn’t see change coming. What went wrong? What I have seen time and time again is it is really hard to disrupt a core business when it is contributing the bulk of your revenue and profits. But that is actually the time that you should start. It is just very difficult. The margins in digital photography are nothing compared to the historical margins in the film business. What was being disrupted was the biggest and most profitable part of their business. And that is very tough. I have nothing but the greatest respect for CEOs of public companies who say, “Listen, here’s what’s happening. Here’s how much our profits are going to go down so that we can invest in the new business that’s going to disrupt our current business.” So how do established companies approach that? I think it depends to some extent on your strategy. To sit on a depreciating asset and not look for and invest in what replaces that really suggests you are executing a harvest strategy If you have a growth strategy, you’ve got to find a way to leverage your core assets and your core business while investing in what will be replacing that. That is not always easy. GM concluded that transportation as a service embodied in autonomous vehicles is
a place where there is a lot of future potential. Mary Barra has very clearly said, we will disrupt ourselves. What’s the best way to invest in disrupting yourself? There are ways. Large corporations have utilized venture efforts to tap into technological developments. Companies have formed their own venture funds where they become investors in a bunch of startups, some of which will fizzle out, some of which will become something significant. And so they use that as a mirror, if you will, on what’s out there and what should we be attuned to. That’s one way to have a bit of a reality check. Second, leadership has to create room for investment risks to be taken. Obviously, you’re prudent about it, it’s calculated. But you have to be willing to make some investments to see if you can’t create some moon shots in the newer spaces if you’ve concluded that you need and want to be there. And that may mean bringing some people in with a different perspective who don’t come from the core business. It’s a combination of elements that can lead to the creation of new businesses within these larger, more longer-standing corporations. How do you manage culture in an environment where all these changes are happening in such an aggressive way? The cultural work that leaders do has to start with the mission and purpose of the organization. What are the behaviors that I, as the leader, or we as a leadership team, feel are important? What are the values that are critical that we’re going to hold people accountable for in addition to producing the financial results? There needs to be that contextual framework from which you then take whatever actions you take to create that behavior and drive that cultural change. GM’s mission is is zero emissions, zero crashes and zero congestion. That is a very big statement about what the company is committed to with respect to its product portfolio, to the environment, to the objective of participating in transportation as a service, autonomous vehicles. It starts with clarity around what you are trying to accomplish and what behaviors are necessary
to get it done. Then you lay out a plan for driving that change within the organization, starting with the leadership team. What has been the role of mentoring in your career? It is always valuable and often necessary to seek advice and counsel from people who can help you think more broadly and test your hypotheses, the way you’re potentially attacking an issue. Throughout my career, there have been people, generally people who were at a higher level in the organization than myself, who had more experience than I did, who I would get advice from. It’s not always the same person. It changes with time. And sometimes it even changes with what the set of issues are that you want to get some help thinking through. The CEO job is a lonely job. There are a lot of things you can’t just go talk to your team about. So having a relationship with your lead independent director, the chair of your board or your board members, which you can use as a sounding board, is very helpful. It plays an important role. I personally do a lot of mentoring work with leaders that I’ve known over the years. It was helpful to me, and I hope it’s helpful to them.
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LE AD ERS GAME PLAN \ FRED ENGELFRIED
AVOIDING THE AMBUSH
How to head off getting cornered for the ask.
Fred Engelfried is director/chair of North Coast Holdings and its subsidiary Lewis Tree Service, a board member of Lewis and president of the participative management firm Market Sense.
I’VE BEEN WITH CEOs many times when they’ve been “ambushed” by someone needing a decision. It can happen in person, in voice mails, emails and texts. It happened to me, typically around 5:30 p.m. as I was thinking about packing it up for the day. Notably, most of those same CEOs were highly effective decision-makers and yet, many of them got a bad rap by some on their leadership teams for seemingly being indecisive. How could that be? Think of your own environment…is it that uncommon that senior executives present you with well-intended requests, often “on the fly,” supported more by qualitative than quantitative arguments. “We’ve got a real shot at cracking this national account if we can have a $2.5 million specialized machine on the floor by September.” Some of us might say, “Get the order and I’ll authorize the machine,” others could say, “Show me the ROI,” but its doubtful any of us would say, “Consider it done.” Another similar query might be, “Our volume has gone through the roof, can we add another four people?” We’re busy, patterns develop and, rather than engaging in a spontaneous Q&A to find out more (with us being the “Q”) or to repeatedly push back for more information that doesn’t come, it can become easier to say, “I’ll get back to you.” Unfortunately, the sequel is likely to be, “Have you had a chance to think about it yet?”, making us appear indecisive. When such frustrations are vented to me, I am not at a loss for words in sharing my own guidelines. I’m preaching to
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the choir, I know, but here are rules of engagement to head off those who tax your patience the most: • Timing is everything. A “fly-by” request or one tucked in at the end of a conversation or the end of a day will not be well received. Schedule a meeting and send me any background information beforehand. That way our time together will be spent evaluating rather than explaining. • When asking for guidance, present two or three solutions, noting the one you would pick if it was yours and yours alone to make. It doesn’t have to be the one I might pick, but it does have to demonstrate that you have thought through an issue. • Quantify why you want to do something, not just what you want to do. Asking for more resources without a fact-based rationale will lead us to a discussion of opinions and likely either no response or a definitive “no.” • If the decision you require involves money—and many do—think of it as coming out of your own pocket. If you were a shareholder, would you view your request differently? More to the point, why seek support or approval for something you wouldn’t do on your own? • If the decision doesn’t go your way, don’t ask for reconsideration unless you’re better prepared and/or circumstances have changed substantially. This isn’t about who is the better debater. • If you get the decision you hoped for, don’t keep “selling.” You got the order, and we’ve both got things to do. Ambush communications, if initially tolerated, can become patterns of behavior. Unchecked, they can wear you down, change your mood and, perhaps worst of all, affect your value of the messenger. My advice: Invest the time to reconfirm expectations with those who need it. You’ll both be better for it.
THOUGHT LEADERSHIP CONTENT PROVIDED BY DELOITTE
Confidential: Should We Move Headquarters? Boss—I wanted to follow up on our discussion last week about our ongoing challenge of finding and retaining top talent at headquarters. As you know, we have several dozen key positions that have been open far too long, and we struggle to find the right fit locally or to convince out-of-state candidates to move here. The increasing cost of living, tax burden, and poor travel accessibility impacts our recruiting appeal, as does our aging building and outdated workplace. I think it may be time to evaluate how our current location is impacting our ability to achieve our long-term plans and provide the Board with options for HQ. Please let me know what you think. Regards, ...
HEADQUARTERS RELOCATIONS ARE OFTEN THE MOST challenging decisions for companies to make, not because of technical requirements but due to the impacts on large numbers of employees and executives. They are typically considered and debated for years, usually with no decision or action taken, and even relegated or deferred to a future year (and potentially a future leadership team). Unfortunately, companies who shoulder the ongoing penalties of operating in poor headquarters locations don’t typically experience improving conditions, while the costs of transition escalate year over year. For some, an exasperating battle for talent, a regulatory change, or pressure from the Board to move is the impetus to finally analyze relocation options. Headquarters relocation strategies can vary significantly. Some companies redeploy just the top layer—an executive relocation of as few as 8-10 leaders—while others seek to minimize disruption by siting a so-called “second HQ” with several hundred positions in an (ideally) improved talent market. The most significant move is a full “lift and shift” of the home office to a new city, an action that impacts every position but with uncertain outcomes: some may or may not be offered a role in the new location, while others will decline to move. The “second HQ” strategy has received an enormous amount of publicity in the last two years, but it is not a new phenomenon. With a second HQ, companies can alleviate growth constraints at the home office, maintain their existing talent base, and gain direct access to a new regional talent pool. This strategy can enable companies to achieve “employer-of-choice” status in multiple locations while minimizing disruption to the business. Naturally, it won’t improve hiring or operating conditions at the current headquarters, and requires more administrative finesse to function seamlessly across multiple geographies, but for many companies, a second HQ is a logical choice to address several of the pain points impacting a legacy headquarters location. Regardless of the strategy for headquarters, the decision analysis should objectively evaluate each deployment scenario against the status quo. By varying the functional configuration, location, and timing, management can prepare a package of options that highlights the strengths and weaknesses of each, as well as an estimate of Capex and Opex impacts. CEOs should be mindful to eliminate noise and bias from the analysis, as everyone involved will have an opinion, especially on location. Objectivity and data reliability are key success factors to prize over speed in headquarters relocation assessments—the team
will need the time and resources to prepare a rigorous analysis untarnished by personal preferences. To find appropriate candidate locations for headquarters, agree on the weighting of Critical Success Factors prior to pulling the analysis together. Headquarters location candidates should typically provide a significant number of benefits in terms of ease of operations and cost management over the current state. These often include: • Access to talent (executive, managerial, finance, IT, HR, etc.) • Ability to improve and right-size the workplace • Ease of access to key customers and industry players, either locally or through a hub airport with relevant direct flights • A locational “image” that is aligned with the company’s brand and values • Opportunities to improve the company’s tax position How should CEOs drive a headquarters relocation project? First, if the business case supports relocation, undertake a detailed site selection and incentives negotiation process to help ensure that the business is making the best choice, both for now and the future. If done well, the organization shouldn’t have to move again for a long time. Second, break In 2014, Toyota the initiative down into manageable announced it would projects, such as headcount/funcmove its North American tional planning, location strategy and incentives, facility planning headquarters from and execution, change manTorrance, CA to Plano, TX, agement and communications, enabling it to bring together relocation management, etc., four separate Toyota entities each with interconnected proand operate in a location closer gram oversight. Additionally, to its manufacturing footprint. while the circle of executives who are aware of the move will By the end of 2017, it had be small at first, the timing and shifted 3,700 positions transparent nature of the CEO’s to a new campus in North communication with employees Texas, and has grown to will be critical. Be clear about why the business is moving headquarover 5,000 jobs as of ters or opening a second headquarters, early 2019.1,2 such as improving access to talent and customers, reinforcing connections with the industry and who it serves, etc. On face value, moving headquarters can seem like an impossible task, one that is too costly and disruptive to ever undertake. But it can unlock strategic opportunities for the enterprise in terms of talent access, workplace transformation, and cost management that may be unachievable in a company’s legacy location. Darin Buelow (dbuelow@deloitte.com) is a principal at Deloitte Consulting LLP and leads the Real Estate & Location Strategy practice. As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. 1. https://www.dallasnews.com/business/toyota/2017/05/08/toyota-picked-plano-move-shaping-region 2. https://www.dallasnews.com/business/real-estate/2019/03/27/toyota-growing-operations-west-plano-expanded-office-lease
Learn more at www.deloitte.com/us/locationstrategy ABOUT DELOITTE: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.
LE AD ERS TRANSFORMATION \ PATRICK LENCIONI
A CHIEF EXECUTIVE’S STAGE
Meetings are time-consuming, boring and, ultimately, ineffective. But they don’t have to be.
Patrick Lencioni, president of The Table Group, is the author of 10 business books, including The Five Dysfunctions of a Team.
IF YOU WERE GOING TO EVALUATE a surgeon’s skill, where would you want to observe her? In the operating room during surgery, right? What about an actor? On stage, of course. And how about a teacher? Clearly, in a class with students. You get the idea. Now brace yourself: What would be the best setting for evaluating a CEO? There is only one answer: in a conference room having a meeting with his or her executive team. As hard as that might be to accept, what else could it be? Yet, many CEOs openly complain about meetings—which is ridiculous. Imagine a surgeon complaining about the operating room or an actor about the stage. You’d probably advise them to change careers. But somehow, we’ve come to accept that it is reasonable to dread meetings. This deserves a closer look. To be fair, CEOs hate meetings for a good reason—most of them are, indeed, awful. They are boring and unfocused, yielding far too little benefits. But they shouldn’t be. In fact, the blame for that boredom and lack of focus falls squarely on the person leading the meeting. Fortunately, there is a workable solution. To embrace that solution, CEOs must first change two preconceived notions about meetings. First, they must accept that meetings are not inherently bad; improving them is possible. Second, they must embrace the notion of having more meetings. That’s right, more meetings. Bear with me. The single biggest problem with executive team meetings is “meeting stew.” Too many CEOs are like cooks who go into the cupboard and pull out every ingredient, mix it into a single pot, and then wonder why it tastes so bad. That’s what happens when they try to cram everything from strategy to tactics to administrivia into one weekly staff meeting, confusing participants as to whether they’re supposed to be
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brainstorming, making decisions, voting or just receiving information. What they need to do is create greater context by having separate meetings for different topics. At the risk of being prescriptive, CEOs should be having four different meetings with their leadership teams: daily meetings to exchange administrative information (5–10 minutes only!); weekly tactical meetings to review progress and solve near-term problems (45–90 minutes); ad hoc strategic meetings to take on singular topics that require more extensive analysis and problem-solving (2–4 hours for big, hairy topics); and quarterly off-site reviews for assessing the state of the company, the landscape of the industry and the dynamics of the team (1–2 days). If that sounds like too many meetings, add it up and you’ll find that it is no more than 15 percent of a leader’s time, which is easily justifiable. No leader could credibly claim that she shouldn’t spend 15 percent of her working hours with her executive team—as long as those meetings are compelling and effective. And the best way to accomplish that is to ensure the meeting has plenty of conflict. That’s right. One of the biggest reasons leaders find meetings boring is a lack of healthy tension and disagreement. No one leaves an intense problem-solving meeting bored and frustrated. They are exhausted and relieved. Exhausted because they were engaged and anxious about the outcome of the conversation, and relieved because they can go back to their teams with clear marching orders based on a rigorous and unfiltered exchange of ideas. Achieving that is entirely possible. I’ve seen so many CEOs go from dreading meetings to relishing them simply by avoiding meeting stew and inciting productive conflict. I like to think that they now see their meetings as an actress sees a play, a surgeon sees an operation or a teacher sees a class. And I love to hear them proudly admit that meetings are their favorite part of being a CEO.
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LE AD ERS LAW BRIEF \ DANIEL FISHER
SUPREMELY CONSERVATIVE
What will conservative new justices on the nation’s highest court really mean for business?
Daniel Fisher, a former senior editor at Forbes, has covered legal affairs for two decades.
THE U.S. SUPREME COURT’S FALL term is sprinkled with business cases—none as momentous as the Obamacare lawsuit of 2012—but a useful window into how the court’s two newest justices, Neil Gorsuch and Brett Kavanaugh, will treat matters such as employment discrimination and environmental law. The good news for business is both justices are solid conservatives likely to join decisions limiting the scope of clean-water regulations and racial discrimination claims. The bad news is that like the other conservatives on the court, Gorsuch and Kavanaugh are likely to split with business on fundamental issues of law, including whether federal regulations preempt jury trials in state court. The court’s conservatives may also split with big business on one of the highest-profile cases of the session: whether Title VII prohibiting employment discrimination on the basis of “sex” includes “gender.” Corporate America is in virtual lockstep in favor of the plaintiffs, with organizations from Altria Group to the American Independent Business Alliance saying a broader definition will make it easier to hire and retain gay and transgender employees. Opponents are mostly religious organizations that believe Congress meant biological sex when it passed Title VII in 1964. Justice Gorsuch, as an appellate judge, joined a 2009 appellate decision allowing a transgender person to state a claim under Title VII, but he also voted in favor of Hobby Lobby’s religious rights in another decision that the Supreme Court upheld in 2014. Kavanaugh is known more for his work in administrative law than religion and could be a wild card on the definition of “sex.” The court’s conservatives are more likely to deliver a victory for business in Comcast v. National Association of African American-Owned
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Media, in which a black-owned media company accuses the cable giant of engaging in a conspiracy with diverse characters, including Rev. Al Sharpton and the NAACP, to deny it carriage on Comcast’s systems. The oft-overturned Ninth Circuit Court of Appeals allowed the plaintiff’s case to proceed by dramatically loosening the standard for racial discrimination claims. The Supreme Court will probably overturn that decision, reinforcing the traditional legal requirement that plaintiffs show discrimination was a “but-for” cause—if not for the action, the result would not have happened—of a company’s decision, not merely one factor among many. Comcast could represent “the new court majority’s push deeper into employment law as a way to tighten standards for proving discrimination,” said Thomas Saunders, an appellate partner with WilmerHale. Business may also win big in County of Maui v. Hawaii Wildlife Fund, challenging another Ninth Circuit decision interpreting the Clean Water Act to govern the release of any pollutant that reaches groundwater that ultimately flows into “navigable waters” covered by the CWA. The Trump administration opposes the Ninth Circuit decision, which more closely aligns with the Obama administration’s expansive view of federal power to regulate the environment. Justice Kavanaugh largely made his reputation by opposing regulatory overreach with decisions urging Congress to state more precisely what it wants federal administrative agencies to do. Lawmakers hate that, of course, since it’s easier to blame onerous regulations on unelected bureaucrats than themselves. But by reducing the scope of bureaucratic authority, the Supreme Court could make regulations more predictable. “If you’re trying to make an investment decision but you don’t have a lot of certainty because the next election can flip the rule, you don’t have consistency,” says James Copland, a senior fellow at the Manhattan Institute. “Even a bad rule can be tolerable if you can price it into your products.”
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LE AD ERS ON LEADERSHIP \ JEFFREY SONNENFELD
YOU GOT MOBBED
Beware of crowdsourced wisdom—it’s even more dangerous than you think.
Jeffrey Sonnenfeld is senior associate dean, leadership studies, Lester Crown professor in management practice at Yale School of Management, president of the Yale Chief Executive Leadership Institute and author of The Hero’s Farewell. Follow him on Twitter @JeffSonnenfeld
PUBLIC ADVOCATES, INVESTIGATIVE journalists, government officials all routinely call out leaders for deceit or incompetence. Sometimes they get it wrong, yet their false narratives are quickly embraced and propagated by the masses. Thus, virtually every CEO must now be ready to correct misconceptions that, once aired, take on lives of their own, thanks to the presumed “wisdom of crowds,” wrongly celebrated by herds of cynical journalists, market worshipping economists, social network sociologists and cognitive psychologists. Journalist James Surowiecki’s 2004 best-seller, The Wisdom of Crowds, lauded the collective instincts of groups. But public opinion often suffers from the same decision-making flaw that frequently leads to misdiagnoses in the medical field: “premature closure,” or a failure to consider reasonable alternatives once an initial conclusion is posited. Summed up by the adage, “When the diagnosis is made, the thinking stops,” such decision-making bias can have devastating consequences. Fifty years ago, Yale’s Irving Janis termed a similar mass pathology “groupthink,” in which a lack of dissent and healthy debate results in poor decision-making. As Charles MacKay’s pioneering three-volume 1841 book, Extraordinary Popular Delusions and the Madness of Crowds chronicled, some of history’s biggest disasters can be attributed to crowd-following, from a rash of witch burning in Salem to the Dutch tulip bulb bubble. We’ve seen examples in government recently, with career civil rights activists like Vice President Joe Biden and House Speaker Nancy Pelosi being ambushed by deviously misguided accusations of racial bias from self-styled “progressives” in their own party. White House Senior Advisor Jared Kushner had to fend off critics of his Mideast economic plan, which challenges their investment in the status-quo of entrenched conflict. Connecticut Governor Ned Lamont regularly
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contends with the recycling of three-year-old anecdotes about the exodus of prominent hedge fund titans due to the spiraling tax hike tactics of his predecessors. In the business world, Jamie Dimon of JPMorgan had to correct widespread misconceptions that $9 billion of honest but reckless “London Whale” trading losses were the result of fraud. Boeing CEO Dennis Muilenburg faced down media whisper campaigns that intentional wrongdoing was behind the tragic downing of two 737 Max jets, and Johnson & Johnson CEO Alex Gorsky battled to combat false accusations by the plaintiff bar regarding the safety of his company’s talcum powder with piles of objective scientific reports. Going further back, Lee Iacocca of Ford and Chrysler was caught off-guard by charges deeming the Pinto more dangerous than other subcompacts of that era. The heroic late Patricia Dunn, as board chair of Hewlett-Packard, had to fight false accusations that she conducted surveillance of fellow directors to stop the flow of confidential leaks—an assertion that was covertly planted across the media by fellow HP director Tom Perkins in an effort to settle a board politics score. Having studied dozens of such cases above and worked with scores of honest CEOs struggling to be heard over the wind, I’ve learned that to conquer specious conventional wisdom CEOs must: 1) Engage the media promptly and in person so that the other side of the story is heard. 2) Counter the critics immediately, respecting their legitimate questions. 3) Counter with facts rather than simply by attacking character. 4) Provide background for highly credible objective surrogates. 5) Enlist government officials as arbiters of truth. As field-based scientific maverick Louis Pasteur said, “Chance favors the prepared mind.”
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C OVE R STORY
SEA CHANGES
As Arnold Donald’s turnaround of Carnival Cruise Lines hits stormy seas, it offers lessons for any CEO struggling with transformation. INTERVIEW BY J.P. DONLON
PHOTOS BY STEVEN FREEMAN
J
ust 18 months ago, it was all smooth sailing for Miami-based Carnival Corporation & plc. Its share price at a 10-year high, the $18.8 billion company was logging the highest profits of its 45year history. But at a time when consumer-facing companies are just a bad quarter or two away from a stock drop, success stories can go sideways fast—even for a celebrated CEO like Arnold Donald. Credited with steering Carnival’s revival over a six-year tenure, Donald now finds himself in the position of having to do it all over again. Weighed down by softening demand for cruises in the European market and a U.S. policy change
that abruptly put a stop to its cruises to Cuba, Carnival has lowered its guidance for the remainder of 2019 and, at press time, its shares were lingering around $48, down from a high of $71 in January. That’s not all. In June, Donald found himself in court with Carnival pleading guilty to charges that the company had violated terms of a probation from a 2016 pollution conviction by continuing to dump “gray water” in prohibited places such as Alaska’s Glacier Bay National Park. The transgressions proved costly, dealing Carnival both a reputational hit and a $20 million fine. If there’s a silver lining here, perhaps it’s this: It isn’t the first time headwinds have taken the company off course, and it’s come back stronger
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“WE WERE THE FIFTH-LARGEST PURCHASER OF AIRLINE TRAVEL IN THE WORLD, BUT NOBODY KNEW THAT, INCLUDING US, BECAUSE EACH BRAND WAS DOING IT INDEPENDENTLY.” each time. In fact, when Donald first took Carnival’s helm in July of 2013, two seismic events had just rocked the company. Earlier in the year, a power outage on one of its ships triggered a breakdown in the sanitation system, leaving 4,200 passengers dealing with raw sewage and fecal matter. The headlines were not kind. Worse yet, that major mishap followed an even more dire disaster the year prior, when one of its ships capsized off the coast of Italy, killing 32 people. Together, the two incidents shook consumer confidence and sent both bookings and share prices plummeting. Donald, who had served on Carnival’s board for 12 years prior to the major mishaps, was brought in to steer it back to profitability. Although he had never run a cruise line, Donald knew the company’s fundamentals and felt he could get the business on track. He was right. Five years into his tenure, its market cap had jumped from $27 billion to $44 billion and return on invested capital had doubled. One of the keys to that turnaround was a listening tour he undertook upon taking the job. Most CEOs who assume a new leadership position move quickly to replace senior executives with their own people. Instead, Donald made it clear he wanted to listen to both the current leadership—some of whom had wanted his job— and to people throughout the organization. “I learned some very basic things,” he says. “If you listen carefully to the world, it will reveal itself to you. If you listen carefully to your guests, they will tell you what you need to do to exceed their expectations.” Today, Carnival operates nine brand lines and its 107 cruise vessels (one more than the surface fleet of the Russian navy) represent one of the largest cruise fleets in the world. Nearly half of all global cruise guests will sail on a Carnival Corporation
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brand in 2019. Micky Arison, whose father, Ted, co-founded the company in 1972 with one ship, remains Carnival’s chairman. While Donald acknowledges that Carnival is once again navigating stormy seas, he argues that its overall outlook remains robust “A confluence of circumstances did cause us to lower our annual guidance,” he says, “starting with the unforeseen change in U.S. policy that halted our cruises to Cuba. We also had one of our newest ships that had to come offline for some unscheduled repairs, and we are seeing some softness in the European sector. We continue to pursue recovery through adjustments to marketing and overall capacity among them. All this to say, the outlook for our company and our industry remains robust.” Still, the industry as a whole also continues to grapple with the challenge of getting more vacationers on board with the cruise vacation concept. Carnival comprises roughly half of the $45 billion industry, but that industry is tiny compared with land-based vacations. All the cruise ship cabins in the world add up to less than 2 percent of all hotel rooms. Struggle is nothing new for Donald. Growing up poor in New Orleans in the era of segregation, he was the youngest of five children in a family that welcomed a total of 27 foster children over the years. Despite the fact that neither of his parents finished high school, he attended Minnesota’s Carleton College and graduated from Washington University in St. Louis and the University of Chicago Booth School of Business. His business career spans nearly four decades, with a variety of senior leadership positions in several industries, including 23 years at agri-chemical company Monsanto and chairman/CEO positions with Merisant, parent company of the Equal sweetener brand. Affable and self-effacing (“I’m from New Orleans, I like people”), Donald is clearly
a temperamental fit for the job: intensely interested in others, he loves to cultivate his reputation as a card counter at the blackjack table and for being an enthusiastic dancer. During a recent visit with Chief Executive, he reflected on what he learned while fixing Carnival and how he’s coping with today’s headwinds. Excerpts, edited for length and clarity, follow. What is the big lesson you’ve drawn from leading through Carnival’s comeback and its more recent ups and downs? Listen, listen, listen. The key to most solutions is for everyone to clearly understand the problem and to have shared ownership of a clearly understood “what success looks like.” You had no experience in the cruise industry when you came in to Carnival as CEO. What led you to take the job? Having been on the board for 12 years, I got a surprise phone call from our lead director, but running the company never crossed my mind. I almost said no on the spot because I had basically retired. Micky Arison thought enough of me to ask me to consider it when a lot of people would’ve killed to have the job. Considering Micky could’ve hired anybody he wanted, I thought I’d at least have a conversation with him. Through that conversation, I saw the platform and opportunity it represented. I also thought it would be a lot of fun and realized that I should’ve been begging for the job. What kind of shape was the company in? Both the company and the industry had languished a bit—share prices had been flat or declining for a few years. The core business was profitable. Even in tough times when fuel prices tripled, the company always made money. But most importantly, it was still a great value relative to the equivalent land-based vacation and was a tremendous experience for guests. It’s just that there had been a series of perfect-storm-type events, some self-inflicted, some industry-wide that had led to mediocre or poor financial performance on a relative basis. And then, before I took over, we faced several disruptions that received
widespread media attention that proved very negative for the industry. Tell us about what you learned during your listening tour. The core essence of our business is exceeding guest’s expectations. We have nine world-leading brands. Each one caters to a different psychographic—not demographic—segment. For example, we pay Steve Wozniak to lecture on Seabourn Lines and he, at times, pays us to sail on Carnival, which is a completely different brand, because he likes the social atmosphere and the general community experience on Carnival. Some people want to be pampered, and some want to socialize. It’s two very different types of products. So, I learned that each brand had its own community. And if we understood well what resonated with that community, each of those communities in the general public are large enough to more than fill our ships at great pricing. I learned from our people that we didn’t have in place the best listening tools to hear our employees and be able to capture what they could do with the diversity of thinking to help us create extraordinary solutions. I also learned that we were not leveraging our scale. We were the fifth-largest purchaser of airline travel in the world, but nobody knew that, including us,
Round Trip Donald rallied Carnival shares for years. Now he needs to do it again. $70 $60 $50 $40
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because each brand was doing it independently. I learned that the best way to address this was not to centralize, but to get the brands to communicate, coordinate and collaborate across the company in order to capture the diversity of thinking, but at the same time, leverage the scale. One example of this is our revenue management tool, YODA, which six of the brands had a share in developing. Individually, maybe one or two could have financed it, but the rest of the brands were too small to have taken on such a big project. Just the sharing of learning and the sharing of what’s going on in their businesses has improved revenue management overall. The tool was better than what each had to work with beforehand. What operational changes have you made as a result of this? We did a market research study, basic stuff. But as opposed to each brand doing its own market research study, we did one collectively. Because we did that, we did a much deep-
er market research study and actually spent less money than if each brand had done its own. Coming out of the study we understood better how the brands are differentiated and how they resonate with different communities and psychographic segments. We then reorganized our communications and media strategy around what each brand needed to deliver to its particular guests. That is constantly being refined, and it’s made a difference in terms of being effective and attracting the right people to each brand. If somebody gets on the right cruise, they will be cruisers for life. If they get on the wrong one, they may not be. But even worse than that, the most powerful marketing tool we have is word of mouth. We can advertise and talk all we want, but if you tell your best friend, “Hey, I’m telling you, this cruise thing’s pretty cool,” they’re more likely to go on a cruise. An okay experience is not good enough because when that person goes home and their friends ask how the cruise was, the answer “it was okay” doesn’t make anybody really want to go. We’ve seen disruption in the hotel and transportation industries with Airbnb, Uber and Lyft. How concerned are you about disruption in the cruise industry? The beauty of the cruise industry is that it’s tiny. We’ll maybe sail as an industry 30 million people this year. There are 1.4 billion travelers a year, with over half a billion vacationers a year on the planet. The city of Orlando attracts something like 70 million tourists a year. Las Vegas sees 40-something million. Venice does 24 million or 25 million The entire global cruise industry is the size of one major tourism city, and not even that in some cases. So, we’re so tiny. Therefore, when you say disruption we’re not anywhere near a mature industry. We’re underpenetrated in every market in the world. We’re capacity-constrained because there are only so many shipyards. The most the industry can grow in a year is 7 percent off a small base. It will be tough for anything that involves being on the ocean, that requires a vessel, to be instantaneously disruptive because there’s limited shipbuilding capacity.
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2019 LEADERSHIP CONFERENCE
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Advance your company’s growth, talent, execution and leadership strategies. HEADLINE SPEAKER: VERNE HARNISH
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“INNOVATION BY DEFINITION IS DIVERSITY OF THINKING... YOU INCREASE YOUR PROBABILITY OF INNOVATIVE THINKING IF YOU HAVE PEOPLE WHO REALLY ARE DIFFERENT FROM EACH OTHER.” How do you get cultural buy-in with 120,000 employees across hundreds of countries around the world? It’s a challenge. But when I first came, I did the listening thing. When I pulled the top leaders together—keep in mind, some of those leaders loved me as a board member but never thought I was going to be running the company because some actually wanted the job—I made it clear that I wasn’t interested in having my own team. I could see some things needed improvement, but there were a million things going right that I didn’t even know about because I’d never run a cruise line. I asked the top guys, “What does success look like for you and your family five years from now? What does success look like for you and your brand or department five years from now? What does success look like for you professionally as an individual five years from now?” Some hadn’t worked together before, so I paired them up. We conducted trust exercises so that we could get them to rely on each other. I was looking for mutual buy-in. When you present intelligent people with the same facts they tend to reach similar conclusions. We also tried this exercise with 70 leaders from around the world. It was tricky insofar as in some cases English was their third language, let alone their first. After these exercises, they were all fired up. “For the company to be successful going forward, this is what we need to do. Let’s go.” I said, “Well, if I had told you this from the outset, you wouldn’t feel this way. You feel this way because you own it. You came up with the solution by yourselves, and now you own it. But if we just go out and tell the rest of the organization that, it’s not going to work because as soon as you hit a bump in the road, they won’t own it. We have to do the same thing with the people that report into you.” In addition, we had to engineer diversity. The simple reason is that it’s the right thing
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to do, but put that aside. Businesses thrive over time through innovation. Innovation by definition is diversity of thinking. It’s thinking outside the box. You increase your probability of innovative thinking if you have people who really are different from each other. If you purposely engineer a team of talented people who are truly diverse who are aligned around a common objective, where the process is to work together to drive true inclusion so everybody has an equal voice, everybody gets rewarded in the end. You have to put the right processes in place. I engineered a diverse team, brought in some folks who were ethnically diverse and who were gender and background diverse. I wanted one person on the leadership team who didn’t have a college degree. I have a man who was born and raised in Communist East Germany on my team. His manner and behaviors are dramatically different from a woman raised in Philadelphia who was a travel agent. Such people wouldn’t naturally work together, but by creating an environment where they understand what they share in common and have a common objective, they become a powerful force, and you multiply that across the leadership team. You mentioned the importance of learning experiences from elsewhere. Do you take notes from other hospitality businesses? Absolutely. We stole innovations from Disney. I look at everything and ask, “Will it fit for us, and can we improve on it?” If it just fits and it works, that’s good enough. But if we can improve on it, that’s even better. We look at everything from the automobile industry to pure service industries. We’re looking for practices and behaviors, tools that we can use to exceed our guests’ expectations. At any of [Disney’s] parks, you’ll notice
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“I PURPOSELY ENGINEERED DIVERSITY AT THE TOP. I DIDN’T TRY TO PROGRAM THIS AT THE ENTRY LEVEL AND HOPE THAT PEOPLE WOULD PERCOLATE TO THE TOP OVER TIME.” when a Disney employee talks to a child, they usually bend over or kneel to get eye-level with the child. It’s a subtle thing that enhances the interaction. We’re constantly studying little things like that or big things like lighting technologies. You’re one of three or four African-American business leaders of Fortune 500 companies. How do you feel about being in a club that has diminished in numbers? The lack of diversity in the C-Suite and the relative lack of diversity in board representation is a challenge for American business. It’s sad that since the ’80s the number of African American CEOs on that scale that you just referenced has peaked maybe at 10, but whatever the number, it’s very few and far between. This is not a good thing. Consider what someone like Ken Frazier was able to do at Merck. Without more people like that the country will miss out because businesses won’t be as successful and they’ll be surpassed by competitors. What should businesses do about this? Start with people who are diverse themselves. When I came here, I purposely engineered diversity at the top. I didn’t try to program this at the entry level and hope people would percolate to the top over time. I brought in a young man, Orlando Ashford, who had been very successful running a profit center at an HR consulting firm. I hadn’t met him, but I knew enough about him. I made certain that I had people below him who knew how to run a cruise business because he had never run a cruise business. I made sure the people above him would put him in a position to be successful, but with enough authority where he can leave his own footprint. Oprah Winfrey became the godmother of Holland America’s Statendam where
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her Girlfriend Cruises twice created a great deal of excitement. This never would’ve happened if Orlando hadn’t come here. But it wasn’t just the one event. He’s generated brand excitement. Meanwhile, on the leadership team, he’s an HR expert, so that expertise can be shared across the entire team. Similarly, [Carnival Cruise Line President] Christine Duffy came out of the travel-agent community. She had run a service business but never a cruise business. Now she runs the Carnival brand. If one was just ticking boxes, neither she nor Orlando would’ve gotten their jobs. Leaders have to think outside the box and be innovative in selecting people. People have to own it and believe it really matters. If they don’t, it will never happen the way it should. Is there a reward system for hiring “outside of the box” as you put it? I haven’t had to set up a formal metric because there’s enough interaction and contact that people can see its importance. I can see whether or not it’s happening and have a conversation with people if it’s not. When we do people reviews, on occasion I’ve said, “Ah, you’re a little light on diversity here. Let’s talk about that. What are you going to do about it?” We’re not perfect. Far from it. At the top, we have much more diversity today than we had five years ago, and it’s going to continue. What else should people know about you? I came from humble beginnings. I grew up in poverty. I have a loving family. I enjoy people and genuinely care about them. What do they want to achieve? If I can play some small role in helping them achieve what they want, I get a huge amount of personal satisfaction out of that. I think people know that, but that’s the one thing I want people to know about me.… and that I’m a diehard Saints fan, go Drew Brees!
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Listen To
Scale
Engaging customers has always been a critical CEO skill, but to win in the age of Amazon, Verne Harnish, bestselling author of Scaling Up and Mastering the Rockefeller Habits, says it’s become downright existential. Here’s what he means, and how to do it right. INTERVIEW BY DAN BIGMAN
I
n the late 1990s, Verne Harnish picked up a copy of Titan, Ron Chernow’s powerhouse biography of John D. Rockefeller. For some, it was interesting history. For Harnish, it was a page-turning how-to, a guide to the practices and processes of one of history’s greatest business minds. The book confirmed many of the things Harnish observed in great companies as a longtime entrepreneur and founder of the world-renowned Entrepreneurs’ Organization, especially the need for priorities, solid data and a set rhythm for operations. Four years later, he released Mastering the Rockefeller Habits, a slim, detailed guide to putting these principles to work. It became an international bestseller. In 2014, he followed with Scaling Up, an update he dubbed “Rockefeller 2.0.” It expanded
on his original work, detailing a virtuous cycle for growing a business by attracting the right people, creating a differentiated strategy, executing that strategy—and making sure you had enough cash on hand to weather the inevitable bad times. It’s since become one of the most influential bestsellers of the past decade. Nurturing high-growth “Gazelle” firms is Harnish’s passion—and business—but given his interest in Rockefeller, I couldn’t resist asking him what the most powerful CEO of the Gilded Age would make of the C-Suite today—what’s changed and what hasn’t. What follows is a transcript of our conversation, edited for length and clarity. It’s been more than 20 years since you published Mastering the Rockefeller Habits. What would Rockefeller recognize about business today, and what would he not?
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What’s more impressive is what hasn’t changed. He understood the need for getting data in from the field on a daily basis. He had one of the bleeding-edge telegraph systems right in his home. Today, you have some slightly different technologies, but I dare say that a lot of leaders still don’t really have good daily visibility into how well their company is running, particularly mid-market firms. That amazes me. Number two, one of the most important of what I call “leader KPIs” is getting a lot of quiet time for thinking. He worked from home every morning and didn’t go into the office until lunch. Today, with all this influx of connectivity and technology, I don’t think we’re getting necessarily more important information, but everything seems to have been raised to the urgent. It’s giving us less time to really think, and ponder, and read, which is critical to the creative and innovation process, which is what you’ve got to accelerate if you want to keep up. I was enamored by the fact that he was into this kind of daily walk and talk in the morning and the evening. He had lunch every day with his nine directors and— when you speed forward 100 years—the late Steve Jobs’s key to leading was with famous walks and talks with people. Bill Campbell, who was Steve’s coach, would do their walk and talk on Sunday. Steve had lunch almost every day with [Apple design
chief] Jonathan Ive. He understood that it’s important to choose who you break bread with on a daily basis. How’s the role of CEO changing in this era, and how is it not changing? Our mid-market leaders, they’re faced with too much innovation. They’re faced with too many good ideas. And where we’ve got to kind of loosen up the Fortune 500, we need to tighten up the scale-ups within the economy. I think part of what happens is we keep trying to apply MBA management techniques to these growth firms, and that’s been the bigger failure. What do you see as the big challenges facing mid-market CEOs? There are just a lot more shiny objects. That’s number one, which is distracting. Number two, Rick Kash, former vice chairman of Nielsen, noted in his book, How Companies Win, that in 2007, we crossed a significant line. In [the past], there was more demand than supply. I don’t want take anything away from some of these family-run dynasties all through the last half century, but truly, if you just showed up, you had the business. It was all a drive around the planet on the supply-chain side, to do better, faster, cheaper. Now, through the Internet, you can do business with anyone at anytime from anywhere. The fundamental shift that has to be made is get your head out of the cost
2019 CEO LEADERSHIP CONFERENCE N ov. 7-8, 2 0 19 / Da lla s , T X
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Lea r n M o re: C hi e fExe c u ti ve Le ad e rs hi pS u m m i t . c om
S p e a ke r s I nc l ud e :
Scaling Up: How a Few Companies Make It...and Why the Rest Don’t Verne Harnish, bestselling author, Scaling Up
Mission-Driven Leadership Mark Bertolini, Former Chairman & CEO, Aetna
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Thriving in Chaos Corinne Hancock, Chaos Coach, Former Director of Clinics for Project CURE
Preparing for and Leveraging Business Cycles Alan Beaulieu, CEO, ITR Economics
Worst to First: Turning Around an Organization David Marquet, CEO and Former Commander of the USS Santa Fe
HARNISH: HERE’S WHAT TO ASK YOUR CUSTOMERS and supply side of the business, and get it refocused on the demand and price side of the business. So we’ve really been pushing our CEOs to push the supply chain side of the business down closer to the front line, and get much more focused on understanding the customer side of the business, like they’ve understood the supply side of the business for the last five decades. How do you do that? How do you begin to become a more customer-centric CEO? First of all, we’re spending literally every day talking and interacting with customers. Everyone loves to talk about how Steve Jobs disliked focus groups. But he would spend most of his afternoons grabbing hold of a customer issue and tracking it through Apple, almost to the chagrin of everyone else in Apple. It could almost feel like micromanagement. But that’s what we did with Sanjeev Mohanty in India. Sanjeev had the job of CEO of Benetton India, a brand that’s not been doing particularly well and was getting crossed as a fashion brand in India by Levi Strauss. So the first thing we had Sanjeev do is on a daily basis get back in touch with both his employees and his customers. He very simply put a card into each store that said, “Hey, if you have any problems, complaints, concerns, issues, ideas, e-mail me directly.” That was open to both the employees and the customers. These began flowing in on a daily basis. Sanjeev would read—like Warren Buffett reads the headlines of newspapers from all over the world to get an idea of what’s happening in marketplaces—the subject lines of all of these emails coming in from the customers. He had a whole team that was responding to all of them. So, he was first getting a good gut feel for just what was happening on the frontlines with the customers and employees. One of my favorite stories was when one of the leading politicians in India emailed him. He’s having some troubles with some acid-wash jeans that he had gotten at Benetton. Sanjeev jumped at the opportunity to talk with him, and he was able to head off at the post a production problem they were having with these acid-wash jeans. Within two years, Benetton rose to be
1. “How are you doing?” Get them talking about themselves immediately. They want to talk about them, not us. Ask them detailed follow-ups. Maybe I want to know, “Hey, what’s your bonus type?” I don’t want to know what your bonus is. But what’s your bonus type? Because if I know that, and then I can frame my product to help you get your bonus, that’s a huge win. So, first, I want to find out what’s going on with them. 2. “What’s Going on in Your Industry/Neighborhood?” Talk more generally about what’s happening in your industry if it’s B2B or what’s happening in your neighborhood if it’s B2C, and begin to get some insights into how they’re thinking, what’s going on in their industry. 3. “What Do You Hear About Our Competitors?” The third question, which people are often reticent to ask, is really the most insightful. Because if you don’t think your customers are being pounded by your competitors, your head is in the sand. I get more and better intel about my competition through the customer’s eyes than I do through my own eyes. The only way you win is to be different in the marketplace. The only way to know that you’re really different is to get this intel from customers and how they perceive you versus that competitor. 4. “How are we doing for you?” The point of the fourth question is that it should be asked last, not first. There’s a tendency to ask “how are we doing” first—but that’s not customer centric, that’s “us” or “me” centric. Customers (people!) want to talk about their favorite subject: themselves.
the number-one fashion brand in India. You can imagine who was disrupted by that: Levi Strauss. So, the end of that story is today, Sanjeev is running half the globe for Levi Strauss. They poached him away. He’ll tell you it was this daily routine, not unlike Sam Walton five decades ago. Walton would get in his pickup truck or his plane and spend most of the week talking to customers, talking to employees, and shopping competitors, getting his head out of the business—and into the marketplace. Get out of the supply chain side and get in the demand side of the business. Everybody talks about these unicorn companies that go to $1 billion in about half the time it’s traditionally taken. They really have two things in common. One of those is they’re all focused on the demand side. They don’t supply anything. Uber didn’t own any car, Airbnb doesn’t own
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“WHAT THEY ARE BRILLIANT AT IS BETTER UNDERSTANDING THE CUSTOMER...THEIR LIKES, THEIR DISLIKES, THEIR UNIQUENESS...” any properties, and Amazon doesn’t really make much of what it sells—nor do Google and Facebook. What they are brilliant at is better understanding the customer: what they are doing just before, doing right now, doing next, their likes, their dislikes, their uniqueness and using their understanding of the customer to then drive demand for us poor suppliers, in oversupplied markets. Who’s making all the money? The demand engines, not the supply engines. That’s what we’re pointing out. They understand what’s getting in the way of the customer and removing it? No. That’s a piece—but a small piece. That’s thinking supply chain. Yes, one of the things that we’re teaching leaders is that if you’re doing anything that’s hard for the customer, it’s just dead on arrival. Nobody wants hard today. But anyone can focus on making stuff easier. The big difference with the unicorns is they understand the demand side like we used to understand the supply side, and what do they use that for? To throttle price. In the olden days, everyone just had a price. Today, price changes by the minute. That’s why traditional retailers are getting killed. They put a sticker on something and maybe change it when it’s time to put it on sale. My book on Amazon, the price will vary from $15 to $21 in a week. It’s this ability to understand demand and use it to drive price—sophisticated pricing versus sophisticated cost—this is the message we’re trying to get across to all CEOs. The airline industry lost money for decades. Now, they’ve had four of their best years—including 2018. One of their CEOs was quoted saying that he had 1,500 people on a particular route in a day, and there are only 1,200 different prices. So they’ve
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screwed up 300 times. Same with Uber. Taxis have the same price for an eighth of a mile. Uber’s price is based on demand and their understanding of the movement of the customer, not the supply. So, that’s the first thing they have in common. All the unicorns have a second thing in common—they have figured out how to get the most people on their bus to get the most brands engaged in the business model. For instance, the other reason why Jeff Bezos is the wealthiest person on the planet is that first, he made it very easy to do business with Amazon. But more importantly, he understands moment-by-moment the demand curves on any particular product that they’re offering and is able to throttle price to take advantage of that. Number three, it’s the millions of people who have voluntarily provided detailed reviews—he has tapped into the crowd. That’s why the fastest growing part of Amazon right now is their search. They’re the biggest threat to Google they’ve ever had. If you’re looking for any particular product, you don’t go to Google. You don’t even go to the manufacturer—if they even know who that is— they go right to Amazon because Amazon has the reviews. And what they paid those millions of people to write those is nothing. So if you’ve got millions of people supporting your business model for which you have to pay zero, that’s a really good business model. If you’re not digitally born, how do you begin to make this change? You need to tap into the brains of your employees. If you think you as the CEO and your senior team are smart enough alone, that’s your first fatal mistake. It took ego to get started, but it’s going to be your ego that crushes the business. So it starts with tapping into the broader knowledge of your employees. Very specifically, I’d share the story of my partner John Ratliff. He scaled up a sizable call center business through 24 acquisitions. This is not Facebook or Google. This is call centers, 650 employees. He created an app on Salesforce [to solicit ideas from employees]. When he launched it in his first 90 days, he got 10,000 ideas from his employees. Many of
QUICK TIP: POP POSITIVES Use this smart survey follow-up to strenghen salespeople. those ended up delivering millions of dollars of EBITDA to John’s customers, which made them stickier. In the call center business, the average profitability is four percent. John drove that to 21.8 percent. That’s better than Apple’s profitability last year. Step two is to really begin to engage your customers in conversation. One of our early clients was a company called Citizen. They only had seven major government agencies as clients. They’re a government contractor. B2G, if you would. Their very first 90-day theme, we called it CMI, customer satisfaction investigation. They engaged in reaching out to 20 of the key people within these government projects they were working on. It looked like they had seven customers but really, within each of those, there were hundreds of people that would influence those projects. At the end of 90 days, they discovered about $87 million worth of additional business they could mine within their existing seven clients. Then last, you begin to engage the broader tribe, if you would, or hive. In the old days, like when I did The Rockefeller Habits, I wrote it, published it, and it was in the marketplace. With Scaling Up, I said, “Hey, why don’t I put 500 copies out to the market and get their feedback and input?” [Readers] came back and said, “You may be the ‘Growth Guy,’ Verne, but your baby is both ugly and stupid.” Several of them gave me volumes of critique down to specific wording of sentences. I put my tail between my legs and rewrote all 70,000 words. I guarantee you it would not be approaching 400,000 copies out in the marketplace if I had not set my ego aside and tapped into our own employees, our coaching partners, our customers and the broader market in order to shape that product, that IP. So, that’s how us mere mortals do this.
Our focus is helping CEOs and leadership teams frame the right questions. That’s why we’re very precise about the four questions you ask a customer. What you really need to hear from a customer so it doesn’t waste your time. So, yes, you’ve got to listen, but it’s better if you can drive it with the right questions. (See sidebar, p. 39.) It really is about the CEO and the leadership team immersing themselves with the customer and the marketplace, and spending a lot of time talking about that at their weekly meeting. It really does come down to that: What are you discussing at your weekly meeting? Internal issues or what’s happening in the marketplace? That’s one of your key metrics. The percentage of time spent at your weekly meetings: What are you talking about?
So, it seems the fundamentally most important skill of our time for a CEO is listening—as opposed to creating culture, mastering technology and all of that? Let me preface it, though, with one thing: My favorite quote of all time, “We have the answers. It’s the question we do not know.” In the early days, you had to have the answers. Today, if you think you have the answers, that’s your fatal mistake. It’s the ego problem.
A lot of folks would rather just deal with things within the walls of their companies. Precisely. And that’s where it comes around full circle. That’s the technology all the unicorns are using—A.I., machine learning and technologies to monitor and gather insights about the marketplace that are difficult for mere mortals to handle. So you really do have to get on that side of the equation—on the customer side.
When his partner John Ratliff was scaling his national call-center firm, he did something interesting with the standard Net Promoter Survey, says Harnish. As you’d expect, he had his frontline service people call those who scored a 0–6. He then had his call-center managers ring the 7s and 8s. “They weren’t upset, but he wanted them to hear what little We’re running a survey and would love your input. Please let us know what you think below. things they could do better.” Thanks for participating! The real innovation, he says, was having his salespeople call the How likely is it that you would recommend 9s and 10s. “They were restricted this company to a friend or colleague? from asking for referrals, etc. Not at all likely Extremely likely Instead, he just wanted them to 0 1 2 3 4 5 6 7 8 9 10 hear why these ‘promoters’ scored the firm so highly.” The result: It pumped up the salespeople, who are so used to hearing negatives, and gave them specific stories and examples of happy customers they could share with prospects, “and most importantly, they knew precisely the reasons why the happiest clients valued the firm—which they could reinforce in their sales process.” Smart.
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WASHI NG TON
A BUSINESS AGENDA FOR 2020
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In the run-up to the next election, CEOs— regardless of party—must push Washington to adapt pragmatic solutions to help the nation.
HERE ARE SIX PLACES TO START. BY STEVE ODLAND
INCREASINGLY, THE NATIONAL CONVERSATION is focusing on capitalism and its track record. As part of this debate, critics are targeting the public faces of the free market: America’s CEOs. That’s a pity—and a serious potential loss for the nation. America’s CEOs are among the most pragmatic, effective problem-solvers we have as a country. If business leaders sit on the sidelines in this turbulent time or offer weak or self-serving solutions, the U.S. will have lost a crucial source for some of its best potential ideas. America can only have a future even brighter than its storied past if business leaders take the risk of entering the public square to make the case for sound public policy in the nation’s interest. We have a responsibility to the country to engage, not retreat, in this political season. It starts with an understanding that the free market has been the greatest engine for generating prosperity in history. Capitalism has raised living standards and lifted more people out of poverty than any other economic system. Like any system, it is not perfect. Capitalism is an organic system that must morph over time to adjust to societal changes and demands. Business leaders must lead the change so that societal frustration with its shortcomings does not overtake its powerful benefits. We can start by running our companies balancing the roles of multiple stakeholders in creating long-term value. We can remember these stakeholders by our title, CEO: Customers, Employees and Owners. That’s only the beginning, though. Despite obvious personal and political differences among chief executives (we are human, after all), there are six issues we all can—and must—rally around and champion in the election season ahead:
Steve Odland is the president and CEO of The Conference Board, and the former chairman and CEO of Office Depot and AutoZone.
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FIGHT CRONY CAPITALISM From regulatory loopholes to tax carveouts to other preferential treatments, crony capitalism diminishes the performance, reputation and public image of our free-market system. CEOs must not practice but instead battle cronyism if capitalism is to survive. For the economy to function at its best, business and government need to interact to craft policies for the nation’s best interest—for regulation, taxes and trade, especially. Free and open markets ideally yield the best outcomes. But sometimes it is necessary for government intervention to level the playing field and protect the participants. Such intervention may not evenly benefit every interest, but it must benefit society as a whole, and the benefits must outweigh the costs. Crony capitalism is a government intervention or “deal” unjustified by a market failure and benefiting a narrow private interest. The federal government, for instance, shields domestic sugar producers from foreign competitors through import tariffs, quotas and other means. As a result, U.S. consumers and businesses that use sugar pay about twice the global price. Another example: Under the Jones Act, vessels transporting cargo between U.S. ports must be built in America and staffed by American crew. These rules insulate the maritime industry from international competition but, to society’s loss, increase costs and decrease commerce. Such arrangements are not “pro-market” policies and are widespread. They inefficiently allocate society’s resources, which in turn yields less value and innovation. If enough participants in the global business community view America’s economic climate as skewed with favoritism, they will invest their capital elsewhere. The country’s competitive advantage will take a hit—and with it, the prosperity of businesses as well as that of consumers. And, most importantly, societal trust in capitalism will erode. Business executives should explain why Washington must change its ways. Among other steps, they can push for further tax and regulatory reforms that diminish special interest power and allow the best ideas to prevail in a free marketplace. Business leaders also must lead by example and reject crony deals, making the case against favoritism so strongly that our society adopts an ingrained aversion to it. Without a concerted effort by the business and policy communities, crony capitalism will continue being the rotten apple that spoils the entire bushel by turning people off of even legitimate free-market forces.
INCREASE OPPORTUNITY FOR ALL Inequality is top of mind for many these days. Most solutions call for free everything paid for by enormous tax increases or redistribution of wealth. Following World War II, the U.S. economy enjoyed a quarter century of extraordinary growth, which fed broad-based prosperity. The proverbial rising tide really did lift all boats. But since the 1970s, growth generally has slowed while inequality generally has grown. The 2008 financial crisis exacerbated the issue. But let’s be careful. If inequality is defined by identical outcomes, then it leads to policies of redistribution. If inequality is defined by equal opportunity, then we can focus on policies to level the playing field while allowing for the dynamics of free market incentives to work. We need to incent people to work hard, to save, to invest capital and to take risk in order to drive innovation in society. The ability to benefit from the fruits
of one’s labor is the engine of creativity, innovation and economic growth. It is what has created an economy in the U.S. that is the envy of the world. The system can and should generate more prosperity for more people. And to that end, the nation’s CEOs must help more Americans climb the economic ladder. Sustaining capitalism requires an America in which everyone has a fair chance. Trying to enforce equality through outcome-driven tax- and command-based redistribution schemes would stifle growth and innovation, leading to less wealth all around. True equality of opportunity would preserve and leverage free-market forces, expanding them down to every rung of the economic ladder. One of the primary ways we can drive equal opportunity is to improve access to and quality of the nation’s education system.
IMPROVE U.S. EDUCATION Education is the key that unlocks robust opportunity in a healthy, dynamic capitalist system. It provides the tools for access to rewarding careers. A stronger educational system would raise incomes for all and make communities and the companies within them more competitive. CEOs should champion reform across the education spectrum, from early childhood to K-12 to postsecondary education, and mid-career workforce development. Given that business is the ultimate consumer of education, CEOs are well positioned to make this case. Consider early learning: Countless studies have demonstrated that children who get a strong start go on to lead healthier, more prosperous lives; this, in turn, improves the competitiveness of the nation’s workforce and its prosperity—an everybody-wins outcome that executives should explain to both policymakers and the public. Business can strengthen society and the sustainability of capitalism by calling for increased availability of high-quality early learning, particularly for children at greatest risk. On the K-12 front, students are graduating from high school at a higher rate than ever before, but graduation rates are
an inadequate measure of learning. Most public high school graduates’ reading and math skills, for instance, fall short of what they need in college or the workplace. Executives should explain that improving real outcomes would require boosting student readiness, improving teacher quality and raising the quality of what is taught. Then there are post-secondary education and workforce development, the realm in which business has the most direct, immediate impact. Companies should advocate improving needed skills rather than simply increasing the number of post-secondary degrees awarded. Businesses should form alliances with higher education institutions. For example, FedEx partners with Western Governors University, which teaches through online, competency-based education. There, employees are rated according to their mastery of new skills rather than how much time they spend in the learning process. This can accelerate completion while enhancing learning. Businesses can do only so much on their own, however. CEOs should urge public decision-makers to fund postsecondary education, training and retraining for America’s most disadvantaged individuals, including those who have lost their jobs due to global competition. They also should advocate dismantling regulatory barriers and disincentives to innovation in workforce development—for example, eliminating rules that make it difficult for students to obtain federal loan aid for programs that are not based on credit hours. The good news, as mentioned above, is that some in the business community already are advocating policy reforms, enacting programs and forming partnerships. More companies should follow suit. Moreover, taking such actions would situate executives well to enter the public square and advocate for sustaining capitalism and equality of opportunity with conviction, backed by the confidence of practicing what they preach.
The ability to benefit from the fruits of one’s labor is the engine of creativity, innovation and economic growth. It is what has created an economy in the U.S. that is the envy of the world.
FOCUS ON FISCAL HEALTH As the federal debt and the interest on it rise rapidly, they divert our nation’s
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economic resources from more productivity-increasing, opportunity-boosting investments—both private and public. If left unaddressed, this mushrooming national debt increasingly will diminish opportunity for all, particularly for the younger generations who ultimately will be saddled with financing it. Business leaders know from close observation and experience that debt must be serviced, and that trust lost in the financial markets is hard to regain. Our nation, irrespective of ideology, has become inured to exponentially growing debt, apparently believing that “it can’t happen here.” It is never pleasant to deliver bad news; but the business community is the best equipped in this difficult time to do it. The nation must re-attain stable and sustainable finances, or it will meet an existential moment for capitalism; and the alternative is almost unthinkable. The nation faces dramatic demographic changes with the baby-boom generation retiring and birth rates falling below replacement rates. We will have fewer workers to support more retirees for years to come. Washington must hold down spending, but there are limits to feasible spending restraint because of the cost of an aging population. But the federal Treasury will need even more revenue to achieve its expansive visions. Business executives must explain that the nation needs a tax system that is internationally competitive, incentive-efficient and revenue-sufficient. We also need an immigration policy that fills the needed labor and skill-set gaps. Many Americans believe that the nation’s fiscal problems center on Social Security. Business leaders need to explain that though there is a Social Security challenge, the real problem lies in the exploding costs of healthcare.
DEFUSE THE HEALTHCARE BOMB Rising healthcare costs, which have far outpaced overall inflation, require continually higher insurance premiums that challenge family budgets, business budgets and the federal budget. Households do not fully understand how their employers’ struggle with rising health costs has caused the stagnant wage growth for which CEOs—and capitalism itself—often bear unfair public criticism. If capitalism is to regain public trust or even to survive, health costs must be brought under control. The clear public impulse is to make healthcare free, at the expense of the already bare federal Treasury. Instead, business leaders must harness capitalism’s free market incentives to ensure that all Americans have access to quality, affordable care. A bipartisan approach to fixing the Affordable Care Act’s (and Medicare’s) problems could start by offering all households single-purpose refundable tax credits for purchasing insurance. Doing so would take the best ideas from both political sides: greater access as an American value and more competition to drive affordability and efficiency. If the tax credits covered the cost of comprehensive but lowpriced plans, driven by consumer choice and value in the marketplace, then every consumer would have access to quality care. Those who want higher-priced plans would be responsible for the incremental cost. In this way, every provider and every plan would be motivated by market incentive to deliver true value: high quality at low cost. Removing ineffective regulations would also lower the cost of care. For example, efficient plans must be able to market across state lines. A natu-
ral market for affordable care may only occur within a particular part of a state rather than statewide. For that reason, plans must be allowed to price locally, where the cost of doing business varies from, say, an affluent city to a more rural area. Allowing the broader insurance market to operate in metropolitan areas that cross state lines would further boost competition. These ideas are by no means a cure-all. Healthcare costs have grown so large and are growing so fast that if the nation cannot achieve greater value at a lower price tag, all public and private budgets will explode. But sustaining capitalism through competition in healthcare just makes sense, and CEOs can champion such policy innovation.
GET SMARTER ON TRADE At the moment, politics dominates the conversation, which often includes mischaracterizations of trade—especially the corrosive notion that it’s a zero-sum game, in which one country’s benefit must come at the expense of another. Business leaders should make the case that open but fair trade policies would generate more prosperity for more people than protectionism. Moreover, a pro-trade message with broad appeal must also acknowledge those harmed by trade and address their hardships. Trade makes America more competitive and provides its citizens with higher living standards. The typical consumer derives nearly one-third of his or her purchasing power from trade. And lower-income consumers arguably are the biggest beneficiaries because trade makes more goods more affordable. Make no mistake: open trade creates higher living standards. But business leaders must advocate for modernization and equalization of trade agreements. While trade benefits America as a whole, it has diminished or eliminated entirely the paychecks of some workers. Such hardships do not mean that the U.S. should preserve existing jobs artificially by protecting them from globalization and technological change that proceeds around the world. Doing so would prevent competition from driving the economy forward, which would allow other nations to take
the lead and make America poorer and less competitive. Rather, the dislocations from trade should compel public policies to better soften the blow and help those individuals access prosperity. To that end, business leaders should press for a national policy for economic adjustment beyond the current Trade Adjustment Assistance system. It should be available to all workers experiencing involuntary unemployment for reasons other than their own conduct. Such a program would create incentives for returning to work. It could include wage insurance, which would pay workers a fraction of any income loss associated with a new job, regardless of the reason for the unemployment, for a two-year period following the initial job loss. It should include health insurance, too—and not confront individuals with a choice between an available but lower-paying job, and unemployment with health insurance. It should also include a greater commitment to job-search assistance and training in new skills. Many such benefits are now available under restricted circumstances but should be universal. CEOs can rise above the political mudslinging that seems to dominate this issue by pushing a program of fair trade paired with strong policies for helping those hurt in the process. Doing so would help the public understand that the common good and good business practices are not only compatible but also mutually necessary.
CEOs should champion reform across the education spectrum, from early childhood to K-12 to postsecondary education, and mid-career workforce development.
AND SO… Shared values, including a belief in capitalism, long have pulled our country together. Now, economic insecurity and fear, including distrust of capitalism, are pulling it apart. Fewer than half of America’s millennials, for example, see capitalism in a positive light. That generation will someday take the reins of the U.S. economy, and thus their skepticism should ring alarm bells for any CEO wanting to sustain the American system. U.S. executives have the skills and experience to unite all Americans by making the case for sustaining capitalism—and the nation.
CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2019 / 49
ROOSEVELT HAD CHURCHILL
WHO DO YOU HAVE? CNEXT matches the world’s most successful former CEOs with today’s top executives to solve critical challenges
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TOOL B OX
BRIBERY
FOR BEGINNERS How to keep your globally dispersed operations running “clean” when local business practices don’t work that way. BY RUSS BANHAM FRED DAVIDSON WAS STIFLING in the unbearable heat that midsummer’s day in 2002. Temperatures in the corrugated steel warehouse late that evening hovered around 100 degrees. Weeks earlier, Davidson’s company, Energold Drilling, a global drilling solutions company that operates 270 rigs in 24 countries across the Americas, Africa and Asia, had imported several drill rigs into the country. The rigs were blanketed now in a fine layer of dust. For nine hours straight, the customs agent ticked off one problem after another with the rigs’ components, none of them actual regulatory infringements. It was a test of wills between the two men. “It was not a lot of money he wanted, but in no way were we going to set a precedent,” says Davidson, Energold’s president and CEO. He’s referring to the customs agent’s unspoken expectation of a payment to release the rigs to the operator. “If I was going to shed a few pounds of weight in that warehouse, he was going to shed a few pounds with me,” he says. Finally, the customs agent backed down and released the equipment. “I had sent a clear message that we would never solicit preferential treatment for a bribe,” Davidson says. It is now 42 years since the Foreign Corrupt Practices Act (FCPA) came into law in the U.S., yet bribery continues to be the “cost of doing business” in many countries worldwide, with the United Nations estimating that corruption eats up at least 5 percent of the world’s GDP, a shocking figure. Any CEO looking to do business in emerging markets is likely to run into it, so learning to navigate bribery is an essential skill in places like India, Mexico, Argentina, China, Russia, Vietnam and Serbia—all of which rank in the middle of the pack on the U.N.’s list of top offenders. “Some companies just pay [the bribe], figuring it’s the cost of doing business and they won’t get caught,” Davidson says. “But it’s a slippery slope.” An Uneven Playing Field
One good reason to avoid making payoffs? The civil and criminal sanctions for anti-bribery violations are significant and sobering. The FCPA authorizes the U.S. Securities and Exchange Commission to bring civil enforcement actions against company officers, directors, employees
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and stockholders. If determined to have committed the violation, they must disgorge the ill-gotten gains, pay substantial civil penalties and may be imprisoned. In 2018, 16 companies paid a record $2.89 billion to resolve FCPA cases. Most recently, giant retailer Walmart settled an eight-year-long investigation by the Justice Department into charges that its overseas operations in China, Brazil, Mexico and India violated the FCPA. The department alleged that company personnel responsible for maintaining internal accounting controls were aware of compliance failures relating to improper payments made to government officials by third-party intermediaries representing Walmart in the countries. In some cases, the insufficient control failures, which helped Walmart open stores faster than it otherwise would have been able to, had been reported to senior company executives. In June, the company agreed to pay $282 million to settle civil and criminal charges. ‘Competitive Injustice’
As a result of this kind of high-profile prosecution, “we’ve seen significant reduction in bribery-related crimes by U.S. companies in the past dozen years,” says David Montero, author of the book Kickback, which provides an in-depth historical look at corporate corruption. “For roughly 30 years, FCPA criminalized commercial bribery overseas, but enforcement was laughable,” he says. “The Justice Department had one full-time prosecutor, literally the same guy from 1977 to 2005. No one gave the law much thought.” That’s no longer the case. While stricter anti-bribery oversight and enforcement resulted in fewer companies offering payments in a country for preferential treatment, they have not curtailed the practice of corrupt government individuals asking for one. The payments typically are billed as “surcharges” and “commissions” to help companies mask the real purpose in skirting the law. “Paying a bribe comes at a cost, but not
paying a bribe also comes at a cost—in ‘lost’ contracts, slow licensing timeframes, and other unnecessary delays and bureaucratic roadblocks,” says Montero. “Further incentivizing a bribe is the knowledge that a competitor will pay one and get away with it.” He’s referring to companies in countries not signatory to the OECD’s Anti-Bribery Convention or bound by the FCPA and similar laws. Such companies, says Daniel Wagner, CEO of consultancy Country Risk Solutions, “not only are legally permitted to pay bribes, they’ll often receive a tax deduction for the amount paid, putting their competitors at a distinct advantage.” Among countries permitting tax deductions for bribes showed to be a necessary part of a transaction are Austria, Belgium, France and Germany. This preferential treatment is a “competitive injustice” to companies that refuse to pay bribes, says Jim Nelson, president and COO of Parr Instrument Company, a manufacturer and seller of chemical reactors and pressure vessels in 75 countries. “It hurts us financially and ticks me off personally when I find a competitor that’s not bound to the FCPA paying a bribe without a care in the world,” says Nelson. “Bribery is a continual problem,” says Jon R. Tabor, CEO of Allied Mineral Products, a manufacturer of monolithic refractory products for a myriad of industrial applications. The company has 12 plants in eight countries, including China, India, Russia, Chile and Brazil, and a sales presence in more than 100 countries. “We’ve been asked and refused to pay bribes in Russia, China, India and elsewhere,” Tabor says. “Once you start paying, you get a reputation for it—and it never stops.” Davidson agrees. “You pay just one person
“We’ve been asked and refused to pay bribes in Russia, China, India and elsewhere. Once you start paying, you get a reputation for it—and it never stops.” —Jon R. Tabor, chairman and CEO, Allied Mineral Products
CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2019 / 53
PROBLEM PARTNERS IN THEIR GLOBAL EXPANSION STRATEGIES, MANY COMPANIES partner with third-party organizations that understand the regulatory, economic, political and cultural factors of doing business in a particular country. These parties include distributors, agencies and consulting firms, often with close government connections that can help unravel the hairball of red tape tying up foreign business. The risk is that these partners will offer a bribe to do the untying. According to the 2018 Anti-Bribery and Corruption Report by corporate investigations firm Kroll, nearly half (45 percent) of companies rely on third-party partners to enter foreign markets and conduct business abroad. The figure represents a six percent increase from the firm’s prior-year study. How honest are the third parties? In the respondents’ due diligence to select a partner, 58 percent uncovered legal, ethical or compliance issues. “Third-party risks are the most significant corruption challenge for a company expanding overseas,” says Pamela Passman, CEO of the Center for Responsible Enterprise and Trade (CREATe), a non-governmental organization promoting anti-corruption best practices. “The further you move away from relying on your own employees abroad, the higher the bribery risk.” Missing Cues CEOs tend to rely on their own instincts when vetting intermediaries. “They just don’t dig into the firm’s past history to learn how it really operates,” says Arthur Middlemiss, a managing partner at global litigation firm Lewis Baach Kaufmann Middlemiss, and formerly the director of JPMorgan Chase’s global anti-corruption program. “You hear, ‘Roberto is honest, knows everybody and is the guy who’ll help you do business in Bolivia.’ That’s the moment you need to step back and question why Roberto is in this position in the first place. What if he’s the brotherin-law of a government minister looking for a kickback? To confirm his reputation for honesty, you need to dig into his business dealings.” If these evaluations indicate a third party is reputable, it’s wise to have them sign a contract that requires strict adherence to the company’s anti-bribery provisions in its code of conduct. “We hired our first internal general counsel last year in part to draft written agreements that our distribution partners must sign with regard to FCPA compliance,” says Jon R. Tabor, CEO of Allied Mineral Products. “I keep asking myself why we didn’t do it sooner.” To strengthen third-party compliance practices, another smart practice is to follow the framework within the ISO 37001 Anti-Bribery Management System standard, published in 2016 by the International Organization for Standardization. “The standard is getting a lot of attention around the world, as it should,” says Passman. “It provides for independent verifications and audits of third-party partners. If the evaluations indicate issues with the third party, you’re required to make this public. You can also benchmark your company’s anti-bribery program against others that have built a culture that values ethical behavior.”
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and the word gets out, and now you’re expected to pay everyone,” he says. “It’s like quicksand—you put your foot into it, and it gradually sucks you in.” Human Nature
Why do companies risk their reputations in committing these crimes? They figure they’ll get away with it, says Montero. “In my research, I discovered that only about 20 percent of companies (that engage in bribery) ever get caught,” he says. “While the fines may look astronomical, they’re miniscule relative to the value of selling in an overseas market.” Still, fewer companies are taking the risk. “The fines are an impediment, but it’s really the risk of imprisonment and disbarment from a country (to procure business in the future) that are starting to make a positive difference,” says Patrick Moulette, head of the anti-corruption division of the OECD’s Directorate for Financial and Enterprise Affairs. Since the OECD Anti-Bribery Convention entered into force in 1999, 560 individuals and 184 business entities have received criminal sanctions for foreign bribery. At least 125 of these individuals were sentenced to prison, with 11 of them receiving five-year prison terms. At present, more than 155 criminal proceedings are underway against 146 individuals and nine business entities. Several of the defendants are CEOs. According to Montero, citing an OECD survey of 427 bribery cases adjudicated worldwide, in 41 percent of these cases, managers approved the bribery payment, and in 12 percent of the cases, the CEO was aware a payment would be made. A refusal to pay does not always mean a company will be blocked out of a foreign region. In countries like India, where it’s common for low-level customs agents to ask for small bribes to get goods off a dock, it simply stalls the proceedings. “It doesn’t mean you can’t transact business in the country; it just means it will take a bit longer,” says Bill Pollard, a partner at Deloitte Risk and Financial Advisory, who specializes in anti-bribery
due diligence and post-bribery detection. A World of Differences
Different industry sectors also confront different bribery scenarios. Corruption in the pharmaceutical industry, in which doctors abroad typically are bribed to offer patients certain drugs, is different than corruption in the oil and gas sector, where kickbacks to foreign governments to be permitted to operate in a region are a major compliance issue. While it is considered prudent to rely on third-party intermediaries in many foreign markets, companies must conduct extensive due diligence on the practices of these partners. If the third-party firm engages in bribes to obtain or retain business, the company it represents could be in violation of FCPA and other anti-bribery regulations (see “Problem Partners,” p. 54). Ultimately, the value of the opportunity must be weighed against compliance risks. That’s what software solutions company BlackLine is doing. “There are countries where corruption is standard business practice that we will not do any business in—period,” says CEO Therese Tucker, whose company has sprouted offices in the UK, Australia, France, Germany, Singapore and Japan in the past six years. “Even if the country represents a significant market, it’s just not worth it to us.” At each of its offices, BlackLine hires local employees. To ensure they understand and appreciate the company’s strict compliance with FCPA and other anti-bribery regimes, Tucker has an external legal consultant draw up detailed, 60-page-plus employment contracts that include a Code of Conduct. Wagner from Country Risk Solutions advises all companies expanding globally to draft anti-bribery codes of conduct governing actions by their employees and third-party partners. Employees that fail to follow the code should be made liable for disciplinary actions, including termination of employment. Contracts with third parties in violation of the code should be terminated. In both cases, individuals should be reported to relevant authorities. “The code of conduct should be clear that local business
practices are never a justification for paying a bribe,” says Wagner. Regrettably, blowing the whistle on a government employee who asks for a payment doesn’t necessarily curtail the practice. Davidson recalls being asked for a kickback by a customs agent. “I went over the person to his superior and told him what happened,” he says. “Two days later, I got a call from the same customs agent. He doubled the payment. That told me people up the chain were getting a percentage (of the bribe).” Reducing Rogues
“It hurts us financially and ticks me off personally when I find a competitor that’s not bound to the FCPA paying a bribe without a care in the world.” —Jim Nelson, President, Parr Instrument Company
Even the most punitive code of conduct may not thwart the aims of rogue employees convinced they can conceal paid bribes as a legitimate expense. To ensure this is not the case at Energold Drilling, Davidson monitors their expenses “to the point where I’m all over them like a bad rash,” he says. “It’s one thing to take a client to lunch, but we will not tolerate lavish gifts or a paid weekend away at a luxury hotel.” Technology can be a means to discern suspect business expenses, says Deloitte’s Pollard. “A data scientist can develop an algorithm that mines the financial and accounting data looking for excessive travel, sales and marketing expenses in countries perceived to be corrupt,” he says. “By putting this information on a dashboard, CEOs and other senior executives are cognizant of the compliance risks to drive proactive responses.” CEOs must also set a clear tone at the top that bribery and other forms of corruption will not be tolerated. As BlackLine’s Tucker emphasizes, “Our reputation is more important than any single market or transaction.” Davidson concurs. “In business and in life, your reputation is everything,” he says. “Aside from the legal ramifications and ethical considerations, bribery is just bad business.”
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.
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2 0 1 9 C EO OF THE YE AR
CELEBRATING MARRIOTT’S
ARNE SORENSON
BUSINESS LEADERS GATHERED IN JULY to celebrate Arne Sorenson, president and CEO of Marriott International, who was chosen as 2019 CEO of the Year by a selection committee of his CEO peers. “Since becoming CEO in 2012, Arne has taken bold and strategic action,” said Marillyn Hewson, CEO of Lockheed Martin and last year’s honoree, noting that Sorenson’s effectiveness as a leader is reflected in Marriott International’s financial and business performance. “The company’s revenue has soared from $12.7 billion to nearly $21 billion over the last five years alone.” In accepting the award, Sorenson expressed gratitude to the 730,000-plus people who wear a Marriott name badge every day. “I get to work with that group of associates around the world all the time,” he said. “They do work which is much more important than the work that I do, and they do it with pride, with energy, with a desire to win. And if we can create that kind of sensibility across a platform in 130 different countries, it is an amazing thing to be part of.” Event photos by Ben Hider
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Marriott International’s Arne Sorenson, flanked by Marriott’s Bill Marriott and Lockheed Martin’s Marillyn Hewson, both former CEO of the Year honorees.
Celebrating Marriott’s Arne Sorenson
CEO of the Year gala attendees honor Arne Sorenson’s wife, Ruth Sorenson
Reginald Van Lee with AlixPartners’s Simon Freakley and Ted Bililies
From left: Chief Executive Group’s Dan Bigman and Wayne Cooper, Sorenson, Hewson, Chief Executive Group’s Marshall Cooper and Nasdaq’s Karen Snow
Tata Consultancy’s Dave Jordan with Tracy Reuter and Gault’s John Reuter
Nasdaq’s Brandis DeSimone, Thayer Development Group’s Dan Rice; Bookings Holdings’s Glenn Fogel, Priceline’s Brigit Zimmermann
Marriott International’s Chip Jordan, Ronald Harrison and Bill Marriott
Sorenson, Freakley, Warburg Pincus’s Fred Hassan and EY’s Mark Weinberger
American Express’s Joshua Berwitz, Anre Williams, Galt’s Alan Slatas
White Lodging’s Michael Fisher, Phil Ray, David Lanterman, Ken Barrett and Jean Luc Barone
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EC O N O M IC D E VE LOPME NT
REGIONAL REPORT
THE SOUTHEAST Pro-business climates continue to drive growth in this corner of the nation, with states like North Carolina, Tennessee and Florida attracting an outsized share of the nation’s business investment. BY CRAIG GUILLOT ALREADY HOME TO SOME OF THE nation’s fastest-growing manufacturing and tech hubs, the Southeast is reaping the benefits of investments in educational and economic development initiatives. Alabama recently logged a record year of growth with thriving foreign direct investment. Tennessee lured Mitsubishi Motors, and a merger of giants in Georgia is solidifying the state’s status as a leader in payment processing. Florida is home to some of the country’s fastest-growing metro areas, while North Carolina attracts Fortune 500 headquarters with its strong workforce. NO. 2* FLORIDA
*No. ranking in the 2019 Chief Executive Best & Worst States for Business (ChiefExecutive.net/2019Best-Worst-States)
BOOMING IN TAMPA As one of the 10 fastest-growing regions in the U.S., the Tampa-St. Petersburg-Clearwater metropolitan area attracted 51,000 new residents in 2018 and nearly 300,000 between 2010 and 2017, according to the Census Bureau. The influx of talent and
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companies is spurring a wave of growth in many sectors, says Craig Richard, CEO of the Tampa Hillsborough Economic Development Corporation. “The economic momentum is mind-boggling,” he says. “We have over 150 people moving here every day… We’re getting the attention of companies that are growing and expanding and weren’t here before. It’s a good time to be here.” New regional construction projects include the $3 billion Water Street Tampa multiuse development, led by former Fidelity Magellan Fund Manager Jeff Vinik. In October of 2018, law firm Baker McKenzie announced a new global center in Tampa that will create 300 new jobs in legal services, finance, IT, operations and more. Fortune 500 mining company Mosaic also announced plans to relocate its headquarters to Tampa, and biotech giant Amgen opened a new “capability facility” there last year. Tampa’s ongoing upgrading of infra-
FLORIDA More than $13 billion worth of new regional construction projects are under way in the Tampa Bay area.
structure included new gantry cranes and expansions that created the largest deep-water port between the Panama Canal and the East Coast, Richard says. And a three-phase plan to expand the Tampa International Airport will enable it to accommodate up to 30 million passengers per year. NO. 3 TENNESSEE ECONOMIC BENEFITS FROM EDUCATION Education and workforce alignment have been top priorities in the Volunteer State, says Bob Rolfe, commissioner of the Tennessee Department of Economic and Community Development. The Drive to 55 initiative, which offers tuition-free community or technical college tuition to high school graduates, was extended in 2018 to all adults who do not already hold an associate or bachelor’s degree. “We want to demonstrate to companies that we are investing in the workforce that will be representing their brand, the products they make and the services they provide,” Rolfe says. Those investments are paying off. Mitsubishi Motors announced in June 2019 it will invest $18 million to move its U.S. headquarters from Cypress, California, to Franklin, Tennessee. SmileDirectClub announced a $217 million expansion in Middle Tennessee that will create more than 2,000 jobs over the next five years. Volkswagen is investing $800 million and creating 1,000 jobs in Hamilton County to build its electric vehicles. And in November 2018, Amazon announced a $230 million investment and 5,000 new jobs at an “operations center of excellence” in downtown Nashville. Rolfe notes the state has seen significant momentum in headquarters, financial services and IT-related fields. Companies that have expanded or established headquarters in the region since January 2018 include AllianceBernstein, ICEE, Western Express, CKE and Delek. “They may wonder what other companies are seeing in Tennessee
and then begin to research how doing business in our state can benefit them…We are seeing the pipeline expand for companies considering Tennessee, particularly from the Northeast and West Coast,” Rolfe says. NO. 4 NORTH CAROLINA GROWTH IN GLOBAL HEADQUARTERS North Carolina is now home to 12 Fortune 500 headquarters, including the Fortune 100 company Honeywell, which is moving from Morris Plains, New Jersey, to Charlotte. Advanced Auto Parts is also moving its headquarters from Roanoke, Virginia, to Raleigh, and, in February, BB&T and SunTrust announced a merger to form the sixth-largest bank in the U.S. with its headquarters located in Charlotte. “North Carolina is without peer in supporting the talent and innovation needs of major global and domestic corporate headquarters, and these wins are further proof,” says Christopher Chung, CEO of the economic development partnership of North Carolina. While the state has a diverse mix of economic growth, the life-sciences sector is especially strong with several new major announcements in the past year. Paris-based biopharm firm Cellectis announced in March it would establish its first U.S. commercial plant in Raleigh. Gene therapy company AveXis also announced in February a $60 million, 200-job expansion of its manufacturing facility in Durham County.
TENNESSEE The Volunteer State has seen more than $3.5 billion in investments since 2014.
NO. 8 SOUTH CAROLINA GLOBAL GROWTH IN THE PALMETTO STATE A perennial manufacturing powerhouse, South Carolina set a record for total export sales for the ninth consecutive year in 2018. Top export commodities were vehicles and parts, aircrafts, nuclear reactors, boilers, machinery and parts. South Carolina now has a 16 percent market share of the entire U.S. passenger market, and top export
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VIRGINIA In addition to its Amazon H2 coup, Virginia has lured expansions by companies like Micron Technology and Merck.
countries include China, Canada, Germany and Mexico. “We’ve cultivated a globally connected economy in South Carolina, and last year’s export sales total reflects that,” said Secretary of Commerce Bobby Hitt in a press release. Aerospace has been a particularly growing sector. French aerospace supplier AHG Fasteners-USA announced in June 2019 it will open a new U.S. operations in Charleston, citing the availability of skilled workers and proximity to Boeing as major factors in the location decision. “Not only is Charleston ideally suited as a distribution hub for both domestic and overseas customers, the business-friendly climate, the support from the regional economic development authorities and other partners have been extremely welcoming,” said Francoise Montsarrat, AHG executive vice president, in a press release on the opening. AHG is the sixth company to locate in the region as part of the South Carolina Department of Commerce and Charleston Regional Development Alliances’ Landing Pad program, which supports global companies as they enter the U.S. market. NO. 10 GEORGIA A POWERHOUSE OF PAYMENT PROCESSING The Peach State continues to grow as a leader in fintech. Payment processing firms located here now handle 70 percent of all U.S. transactions. In May 2019, Atlanta-based Global Payments and Columbus-based TSYS announced an all-stock merger of equals. The combined organization will provide payments and software solutions to more than 3.5 million businesses and 1,300 financial institutions in more than 100 countries. “The new company will have dual headquarters in Atlanta and Columbus
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and will create a true Peach State powerhouse,” says Patty Watson, senior executive vice president and CIO at TSYS. Watson cited state help and TSYS programs for cultivating a talent pipeline. In addition to the work with local universities, the company’s TSYS Education Council introduces high school students to IT, computer science and software decoding. Since its inception in 2017, the council has established relationships with 13 high schools and 16 middle schools in the state, touching 8,000 students. TSYS is now working on a reskilling initiative by partnering with online education training tool Pluralsight on in-house programs that have already been used by more than 3,500 team members in Georgia. “One of our greatest innovations is our ability to drive this technology change internally without outside consultants,” Watson says. NO. 13 VIRGINIA TECH TALENT PIPELINE The Old Dominion State is still making headlines for winning Amazon’s H2 headquarters, which will create more than 25,000 jobs over the next 12 years. Virginia won largely making partnerships, talent and long-term tech talent initiatives part of its plan, says Stephen Moret, CEO of the Virginia Economic Development Partnership, citing a $1.1 billion commitment to double the annual number of computer science graduates. Virginia has seen several other prominent investments in the past year. In August 2018, Micron Technology announced a $3 billion expansion and 1,100 new jobs by 2030 to increase memory production at its Manassas facility. Merck is also investing $1 billion over the next three years to expand manufacturing operations in Rockingham County, and Hershey will invest $104 million in its facility in Augusta County. One challenge the state now faces is extending the economic success to more rural regions. Recent funding for site characterization and a $250 million broadband expansion initiative aim to help. The newly formed Rural Virginia Initiative will also combine representatives from education, government
and the private sector to analyze the issues and propose recommendations. NO. 23 KENTUCKY GROWING ITS INTERNATIONAL PROFILE Kentucky is building on record-breaking investments in recent years by raising its profile on the global scale with deepened relationships with Japan and Europe, and a new focus on China and India. “We are putting significant emphasis on recruiting investment and jobs internationally,” says Erran Persley, commissioner for business development at the Kentucky Cabinet for Economic Development. Recent prominent investments include GM adding 400 jobs at the Bowling Green Assembly Plant, and Toyota’s planned $238 million investment in expanding its Georgetown facility. Amazon also recently broke ground on a $1.5 billion Amazon Air Hub at the Cincinnati/Northern Kentucky International Airport, which is expected to open in 2021 and will support 2,700 jobs. Hemp is another growing sector for the Bluegrass State. Federal legalization in late 2018 fueled demand for CBD oil and related products. The Kentucky Department of Agriculture reported sales of hemp products grew by more than 300 percent from 2017 to 2018, earning farmers in the state more than $57 million. NO. 25 ALABAMA ECONOMIC HARVEST IN THE COTTON STATE Alabama logged record growth in 2018 with 71 projects and 286 expansions worth $8.7 billion in capital investment. Roughly half of that was direct foreign investment from companies in 16 countries, including South Korea, Japan, Germany and Canada. Auto manufacturing remains a top sector in the state, and the $1.6 billion Mazda-Toyota manufacturing facility in Huntsville is moving forward with a targeted production date in 2021. New initiatives in economic diversification are also yielding wins in other sectors. Facebook announced in June 2018 it will bring 100 highly technical jobs to the Huntsville area, and Mercedes Benz broke ground on a factory in Tuscaloosa to build EV batteries for its next generation electric
vehicles in October 2018. Shipt, a same-day, app-based delivery service founded in Birmingham, was acquired by Target last year for $550 million. The diverse economic growth is partly being driven by Accelerate Alabama, a strategic economic development plan continually being updated with refined targets and tactics. “I believe you need a strategic plan that is vibrant and current,” says Greg Canfield, Secretary of Commerce for the State of Alabama. “We launched in 2012, updated in 2016 and will probably refresh in 2020.” A new rural development office will focus on fostering growth in rural areas through long-term infrastructure issues such as transportation, high speed data service, bandwidth and workforce development, says Canfield.
KENTUCKY In March, Nucor announced a $1.35 billion mill in Brandenburg, where it will manufacture steel plates.
NO. 30 LOUISIANA BIG DEVELOPMENTS IN THE BAYOU STATE Louisiana is fostering greater tech growth with higher education investments that will produce more grads with STEM-related advanced degrees, says Don Pierson, secretary of the Louisiana Economic Development. To date, the state has invested more than $286 million to advance curriculum and training. “Louisiana’s higher education initiatives with technology and advanced manufacturing employers have been a real game-changer,” Pierson says. In total, more than 20,000 new jobs have resulted from specific projects tied to higher education partnerships. DXC Technology announced last year it will create more than 2,000 jobs over five years at its Digital Transformation Center in New Orleans. In May 2019, Cybint Solutions launched a partnership with Bossier Parish Community College to
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industry, VT Halter Marine will create 900 jobs with an expansion of its operations in Pascagoula. “So far this year, the state has announced approximately 3,200 new careers and $614 million in new capital investment in Mississippi’s communities,” says McCullough. NO. 39 WEST VIRGINIA
MISSISSIPPI At full capacity, Continental Tire’s new plant in Jackson expects to employ 2,500.
build a $22 million cyber center. And Grambling State University recently became the first college in the state to offer a bachelor’s degree in cybersecurity. Louisiana is also capitalizing on the shift in the global LNG market and has taken a prime position in the industry with Cheniere’s Sabine Pass and Sempra’s Cameron LNG projects, Pierson says. Venture Global is also proposing multi-billion-dollar projects at the eastern and western ends of the state’s Gulf Coast. “Louisiana is well-positioned to support this growing industry with global reach, attracting tens of billions of dollars in investments and the quality jobs these projects represent,” he says. NO. 38 MISSISSIPPI
Craig Guillot is a New Orleans, Louisiana-based business writer specializing in technology and economic development.
ROLLING IN NEW OPPORTUNITIES Mississippi is still riding a wave of momentum from Continental Tire’s commitment to construct a $1.45 billion tire plant in Central Mississippi. In August, the company opened its on-site employee training center. The state has since won several monumental economic development projects in various sectors in the past year, says Glenn McCullough, Jr., executive director of the Mississippi Development Authority. Amazon and Corelle Brands have both located distribution operations in Marshall County, bringing a combined 1,200 jobs to the region. Williams-Sonoma announced in December it will bring production of its furniture to the state through its wholly owned subsidiary, Sutter Street Manufacturing. On the Gulf Coast, where shipbuilding is a prominent
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NEW OPPORTUNITIES IN IT AND CYBER Exports from the Mountain State increased for the second year in a row in 2018 to reach more than $8.1 billion, according to a report from the West Virginia Department of Commerce. The state’s exports grew by more than 14 percent, almost twice the national average of 7.6 percent. While coal has been making a slow comeback and remains the state’s main export product, plastics, chemicals, metals, and automotive and aerospace materials amounted to more than $3 billion in exports. And in June 2019, the U.S. Department of Commerce Bureau of Economic Analysis reported that the state led the nation in personal income growth for Q1 2019 with a growth rate of 5.6 percent. Gov. Jim Justice said in a press release that the state economy is growing faster every day and that “our days of being dead 50th are long gone.” One area the state is looking to is IT and cybersecurity. In February, tech company Infor announced bringing 100 technical jobs to Charleston to run cloud applications for U.S. government agencies. The West Virginia Forward initiative also partnered with TechConnect WV last year to bring attention to cybersecurity educational initiatives and job opportunities to create a larger trained cyber workforce. In January, TechConnect WV unveiled its cybersecurity workforce strategic initiative to focus on training and employing state residents in the cybersecurity field. “This plan seeks to outline and coordinate stakeholders involved in providing cybersecurity education, training and employment and offers a comprehensive strategy for growing this industry here in West Virginia,” says Anne Barth, executive director of TechConnect.
C EO ROU NDTAB LE
MAKING MERGERS WORK Financial strategy is important, but culture is the true lynchpin of M&A success. BY C.J. PRINCE
WHETHER THE GOAL IS TO FIND A perfect complement to a product portfolio, eliminate key competition or realize scores of synergies, proposed mergers begin with the highest of aspirations. But in the majority of deals, something unfortunate happens on the way to a successfully combined company, agreed CEOs gathered for a roundtable discussion cosponsored by Chief Executive and AlixPartners. In fact, study after study puts the M&A failure rate at between 60 and 90 percent. “It’s never because it was a bad idea around strategy or product. It’s almost always around culture, around people,” said Ted Bililies, head of the organization & transformative leadership practice at AlixPartners. Sometimes mergers fail because the
acquiring company failed to grasp what it was buying, said Adam Aron, CEO of AMC Entertainment, who was CEO of Starwood when the company was sold to Marriott International. Aron cited the 1980 merger of Pan Am and National Airlines as an example of poor merger management. “Whatever decisions Pan Am made, just do the opposite of that.” Among other things, those mistakes included a fundamental misunderstanding of the product and of the cost structure, which led to ballooning costs.
It’s never because it was a bad idea around strategy or product. It’s almost always around culture, around people.” —Ted Bililies, AlixPartners
Putting People First
But more often than not, mergers fail because employees didn’t get behind them. “The vision wasn’t sold,” said Bililies. “The CEO did not help hearts and minds really grasp the vision and did not get
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You have to, as the CEO, be very straightforward. You need to say, ‘This is what we’ve done, this is what we stand for, this is the purpose.’” —Jay Sidhu, Customers Bank and BankMobile
that commitment. There may have been a lot of head-nodding, but they didn’t grasp, ‘What’s in it for me?’” When employees don’t get information from leadership, added Rena Reiss, EVP and general counsel of Marriott, “they’ll make it up—and usually what they make up is really bad.” Transparency is paramount. “You have to, as the CEO, be very straightforward,” said Jay Sidhu, CEO of Customers Bank and BankMobile. “You need to say, ‘This is what we’ve done, this is where we stand, this is the purpose. We’ll have 30 percent cost savings over here, and this is the criteria and the timetable we will use.’” It’s not enough to say it once, added Bililies. “I do a lot of executive coaching and CEOs will say to me, ‘I’ve told them what the strategy is. I told them where we’re going.’ And I say, “You have to tell them 10 times as much. Until you’re ready to just get nauseous, you have to keep communicating.’” When synergies are a key goal of the merger, it becomes even more important to communicate, as the anxiety that swirls around potential layoffs can be corrosive, said Christopher Missling, president and CEO of Anavex, who lived
through the merger of Hoechst AG and Rhone-Poulenc. “We had a lot of uncertainty and it was aggravated by the differences in culture.” Coupling Cultures
Combining two companies’ cultures, particularly when both are strong and distinctive, is often the greatest challenge, noted Reiss. “How do you welcome the other company into the organization without suffocating whatever it was that made it attractive to you in the first place?” That was the task Marriott set for itself when it acquired Starwood Hotels in 2016. “What you’re trying to do is get the best of both companies, to bring them together to make a one-plus-one-equalsthree as opposed to one-plus-one-equalstwo,” Reiss said. To get there, employees at both companies need to feel fully welcomed. “You need to work hard to make it clear there is no second-class citizen at the new company,” said Aron. “It doesn’t matter where you came from, it just matters that you’re here now, and that we’re all in one boat together in whatever it is that survives.” That message comes through in seemingly small gestures, such as repainting
ROUNDTABLE PARTICIPANTS Adam Aron, CEO and President, AMC Entertainment Ted Bililies, Chief Talent Officer, AlixPartners J.P. Donlon, Editor Emeritus, Chief Executive Group Alan Masarek, CEO, Vonage Alan McLenaghan, CEO, Saint-Gobain SageGlass Ira Melnitsky, CEO, Tourneau Christopher Missling, President and CEO, Anavex Jeff Paraschac, EVP, CFO, PURE Insurance
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James J. Radous III, President and CEO, UniCarriers Americas Katherine Richardson, Chief Human Resources Officer, PURE Group of Insurance Companies Jay Sidhu, Chairman and CEO, Customers Bancorp Donald (Donny) Simmons, President, Trane Commercial HVAC, North America Rena Reiss, EVP and General Counsel, Marriott International
walls in the new company colors or giving out bags with the combined company’s logo on integration day. Those are the sorts of details that signal employee equality, regardless of which company acquired the other. “People underestimate the power of symbols,” added Bililies. Leaders can be overly focused on redundancies and the bottom line and miss the opportunity to take steps that really resonate with and motivate people. Symbolic gestures go a long way for senior management as well, said Missling. In the case of the Hoechst/Rhone-Poulenc merger, he was invited to a senior management lunch with the CEO. “They all spoke French, even though the agreed-upon language [post-merger] was English. “That made the difference to me,” he said. Culture change is even harder when your company is in a legacy industry and working on transformation, said Alan Maserek, who joined Vonage as CEO five years ago to lead a shift from residential telephony to business communications. He has since led the company through seven acquisitions, totaling about $1 billion, of small and midsize B2B software companies. “You can just imagine the complexity of all this change,” he said, noting that many from the original organization, including nearly the entire management team, were not able to adapt. Even seemingly transferable skills, such as accounting, did not always cross over successfully. “You think, it’s just debits and credits, they can handle that in a B2B environment,” he said. “But almost uniformly, it’s not been the case because those who self-selected into the former environment, which was slow and lethargic, they’re just not well suited [to the new culture].” For the CEO of the target company, managing culture through the selling process can be equally challenging. When watchmaker Tourneau was bought by European retail giant Bucherer Group,
CEO Ira Melnitsky knew he might not be a part of the combined entity’s management team. “But I also had to manage a team behind me who didn’t know what was going to happen,” he said, adding that, ultimately, the entire management team remained post-merger. “But when you’re the seller, you don’t know what the acquirer will want to do or who the acquirer is even going to be.” Once the deal is done, CEOs should use all the tools they have available to communicate, ad nauseum, about the future. That means getting out to plants and business units, meeting with people and sharing the vision, said Alan McLenaghan, CEO of Saint-Gobain SageGlass, who recommends supplementing visits with social media. “I challenge CEOs today to use social media, not where someone else is writing it for you, but you’re writing it yourself,” said McLenaghan, who uses his LinkedIn account to highlight team achievements. Recently, he sent a traditional thank-you card to a team member, who then posted it on LinkedIn. “If my people are saying, ‘I got this thank you card from the CEO,’” he notes, “there’s not much I have to say about what the culture of the company is—it’s pretty much there.”
It doesn’t matter where you came from, it just matters that you’re here now, and that we’re all in one boat together in whatever it is that survives.” —Adam Aron, AMC Entertainment
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C EO ROU NDTAB LE
PREPARING THE NEXT GENERATION
How to build the talent pipeline your company needs to thrive into the future. BY JENNIFER PELLET
Great outcomes can come from people having a great sense of safety, engagement, purpose and confidence as opposed to correlated to how much you’ve scared and pressured them.” —Ross Buchmueller, PURE
IT’S NO SECRET THAT TO BE a top-performing company, you’ve got to get talent right. It’s bench strength—now and in the future—that will give your company the ability to excel at productivity, the agility to outmaneuver competitors and the foresight to see around corners to thrive in the future. The question is, how do you not only attract star employees but also retain and develop them into the leaders that will ensure your company continues to thrive? It’s a task growing ever more complex, thanks to a tight and rapidly evolving labor market, agreed CEOs gathered for a recent roundtable discussion sponsored by Chief Executive and PURE Insurance. “I’m trying to figure out how to build the company of the next generation,” Ross
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Buchmueller, CEO of the PURE Group of Insurance Companies, told participants. “We bring in 50 college graduates a year, but then you have to be able to engage them, develop them and then put them in positions of responsibility. You need to make sure they’re ready.” For PURE, which encompasses 800 employees across 10 offices, the challenge is formidable. Having grown from 100 employees to more than 3,000 over its 42 years, CohnReznick faces a similar scenario. Charles Ludmer, principal, chief practice development officer of the accounting and advisory firm, said the influx of millennials into the workforce has been driving changes. “We’re a multigenerational organization, so we’re really dealing with getting the next generation ready, at developing millennials into being entrepreneurs and adopting the business-owner mindset we want them to have,” he said. “It’s all about transformation of culture and diversity. Forty-two years ago, it was all men around the table. Now that’s a no-no… when we put a photo in the press, there had better be diversity, the right image and reality that reflects our organization to be able to attract and keep the kind of people who will make our organization better so that we’ll [grow to] 6,000 in five years.” As the majority of baby boomers stream toward retirement, companies are having to up their games to attract and retain the notoriously fickle millennial and Gen Z workers upending traditional notions of what star employees look for in an employer. “There’s something different in
how they judge employment opportunities,” said Jeff Sonnenfeld, president of The Chief Executive Leadership Institute at Yale School of Management, of post-1980sborn workers “They make decisions about what they buy and what company they join based on qualities that have more to do with things like the company’s public image or political position. What the company stands for is so important as a magnet to attract people.” “This next generation of employees wants to work for companies that stand for something,” agreed Stephanie Linnartz, global chief commercial officer for Marriott International, who noted that Marriott CEO Arne Sorenson has taken public stances on controversial issues like immigration. “They can’t rely on the government, so it’s been very impactful for our company in terms of attracting and retaining talent to have a CEO who is not afraid to speak out on issues.” That shift also comes at a time when a company’s reputation is more difficult than ever to protect. These generations are made up largely of digital natives who crave constant connection. Members of Generation Z—50 percent of whom spend 10 or more hours a day online—have no memories of a pre-Internet world. Since many shun traditional media and rely on their social media feeds to stay up-to-speed on happenings around the world, negative messaging about a company can ding its image globally in a matter of minutes when a post or tweet goes viral. On the flip side, purpose-driven, mission-centric generations give companies a wider array of negotiating tools. Reflecting on his experience running TiVo, Tom Rogers, now executive chairman of WinView Games and CEO of TRget Media, recounted competing for talent in Silicon Valley. “We were easy hunting ground for companies like Google and Facebook, which could offer $100,000 signing bonuses,” he said. “So our tactic of holding onto people
was, ‘Do you want to be a cog in a wheel or do you want to have a voice?’ Giving them a sense that there is meaning to their
existence beyond their little corner of the world seemed to be the most valuable currency that we could put forward, and it worked decently.”
Warburg Pincus’s Fred Hassan, ISS’s Bennett Stewart, and CohnReznick’s Keith Denham
More than Money
Companies accustomed to wooing and retaining employees by financially outgunning their competition are adjusting to this new recruitment reality. “We’ve had to turn the company value proposition largely upside down in the last few years,” said Bennett Stewart, who was CEO of EVA Dimensions until the company was acquired by ISS and now leads the division as senior advisor. “The things that people want are changing dramatically.” At EVA Dimensions, most of the workforce is made up of senior level executives crucial to the company. “It’s extremely expensive to lose somebody that you really rely on and have trained for high-level work,” explained Stewart, who said that “zero turnover would be ideal.” Giving key individuals ownership stakes worked well for the company in the past. During recent years, however, EVA had to sweeten the pie even further to keep its
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The next generation of employees wants to work for companies that stand for something.” —Stephanie Linnartz, Marriott International
turnover below 7 percent. “We added development and diversity programs, and we set up a foundation so that our employees can direct our charitable investments,” Stewart said. “The [employee-employer] contract is different.” Safety First
In recognition, companies are shifting toward more nurturing cultures. Part of the shift to engaging people with a stronger sense of purpose and stronger sense of development is that you can’t tolerate certain cultural misbehavior,” said Buchmueller, who noted that GE’s well-known philosophy of trimming the bottom 10 percent of performers may no longer be the best way to motivate employees—if it ever truly was. “Great outcomes can come from people having a great sense of safety, engagement, purpose and confidence as opposed to correlated to how much you’ve scared and pressured them.” Jim Mead, CEO of PinnacleCare International agrees that encouragement is a powerful motivator. “I subscribe to the idea that our people are better off, the company is better off when people don’t feel threatened,” he said. “So I spend a tremendous amount of my time making sure that the people generating the money, enabling us to grow, understand the important role
that they’re planning: that they’re proud of the mission.” Promoting employee confidence post-merger can be particularly tricky, pointed out Fred Hassan, a director at Warburg Pincus and the former chairman of Bausch and Lomb, who spoke from experience, having been instrumental in several mergers, including that of Monsanto and Pharmacia and Upjohn. The biggest problem with mergers is the unnecessary damage in attrition that occurs,” he said. “The new company that emerges is either very arrogant… or it’s some kind of hybrid that doesn’t have a soul. For a good merger, you need to make sure the new company has a soul and purpose.” Even in the uncertain environment of a turnaround, it’s possible to build a sense of security, added Gary Fitlin, CEO of Gyrodyne. “I’m a big fan of nurturing the value in people, offering a stable environment and educating people that if you sharpen the blade too much you will miss the first quarter coming out of a recession—which you’ll never be able to make up,” he said. “The challenge with that is that markets today are very short-term oriented.” Until that changes, the pursuit of purpose may come at a cost. “I personally think this idea of running a business with a purpose and a mission is important,” said Buchmueller. “I applaud those who operate with a sense of purpose, and the markets will work themselves out in the way they work themselves out.”
ROUNDTABLE PARTICIPANTS Ross Buchmueller, CEO, PURE Insurance Fred Crawford, Senior Vice Chairman, AlixPartners Ilan Danieli, CEO, Precipio Keith Denham, Managing Principal, CohnReznick Gary J. Fitlin, CEO, President and CFO, Gyrodyne John Gow, General Manager, Associated Aircraft Group Fred Hassan, Chairman, Caret Group; Former Chairman and CEO, Pharmacia and Upjohn, Pharmacia and Schering Plough; Director, Warburg Pincus Stephanie Linnartz, Global Chief Commercial Officer, Marriott International
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Charles Ludmer, Chief Practice Development Officer, CohnReznick James Mead, President and CEO, PinnacleCare International Matt Phillips, Principal, Winged Keel Group Tom Rogers, Executive Chairman, WinView Rick Smith, CEO, CNext Jeffrey Sonnenfeld, CEO, Chief Executive Leadership Institute, Yale School of Management Bennett Stewart, Senior Advisor, ISS
MEETINGS & EV ENT S
REAL TIME WITH REMOTE WORKERS W
ITH 930 EMPLOYEES SPREAD across 68 countries and not a single company office for any of them to report to, Automattic CEO Matt Mullenweg may well be the world’s biggest advocate of the remote workforce phenomenon. As the creator of the web publishing platform Wordpress and CEO of a $1.6 billion web development company, he’s also got the technical wherewithal to bridge thousand-mile gaps electronically, enabling his army of Automatticians to collaborate and connect digitally. Yet, even Mullenweg acknowledges the inherent difficulties of managing globally dispersed employees working in isolation. “There’s a level of trust that can be built when you share a meal together that has not been replicated online,” he says. “You can get 80 to 90 percent of the way there, quite close... but periodic engagement in person definitely helps.” While few companies have made the jump to Automattic’s entirely virtual model, many are grappling with managing workforces spread across a network of offices or that encompass home-based employees. In fact, in a recent survey by Upwork, hiring managers predicted that within the next few years, over one-third (38 percent) of their employees will spend most of their
time working remotely. At national healthcare provider network First Choice Health, approximately 30 percent of the company’s 200 employees already telecommute on a permanent, full-time basis. The arrangement began as a retention effort when the company relocated and commuting to its Seattle office became untenable for many employees, explains CEO Jaja Okigwe, who adopted a remote-worker friendly model by necessity rather than intent. “If there were a place we could relocate that would pull more people in, that would be awesome,” he says. “I actually prefer human-to-human, real-time interaction, because I think that just helps people understand where you are and where you’re going and also builds a connection for them to provide feedback. When you have a remote workforce, you don’t hear what’s going on, it’s not like you’re gonna bump into them walking down the hall.”
Distributed teams may be the future, but you’ll still need quality face time. How to maximize the value of your visits.
HQ vs Off-Site Venues
While periodic face-to-face meetings often play a crucial role in engaging and aligning remote workers, approaches differ. Automattic, which jettisoned its corporate office entirely in 2016, encourages small teams of 5–10 to gather at a central location
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—Matt Mullenweg, CEO, Automattic
Getting the ROI
However you go about it, any employee gathering represents a significant investment of time, energy and money. “It won’t be an inexpensive endeavor, so it’s critically important to make sure you get the return you want from the expense of bringing these people together,” says Scott Graf, global president of the business travel management company BCD Meetings & Events. These six steps can help companies pave the way for a successful remote worker meeting: Know your who and why: “Ask yourself, ‘What is my objective, which of my virtual employees should be present and why?’” suggests Graf. “That will help you determine where and how long it should be, who should be invited and the content you need to develop.”
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Follow the 80/20 rule. An agenda packed with back-to-back, information-rich sessions is likely to backfire, overwhelming attendees, says Graf, who advises an itinerary that devotes 80 percent of total time to pursuing meeting objectives and 20 percent to giving participants opportunities to exercise, take a walk or catch up with colleagues. Give them mingle material. “If your goal is to facilitate peer-to-peer engagement, don’t just leave people to mill about a reception,” says Danielle Bishop, president of HB Hospitality, a community of independent luxury resorts hotels and meeting planners. “Add an interactive component that will bring them together and give them something to talk about.” Bishop incorporates a range of ice-breaking activities into sessions, from having flamingo ambassadors on site to holding activities like tomahawk tossing. Mandate digital detox. Armed with iPhones, it’s all too easy for telecommuters to retreat to a corner—and their comfort zone. “We don’t even use apps at our events,” says Bishop, “because we don’t want people looking down at their phones. We want them connecting.” If confiscating devices is too aggressive, “smartphone sleeping bags” can help remind people to limit their phone use. Game the seating situation. Let’s face it, given the choice, people will gravitate to sit with friends and acquaintances—so Automattic doesn’t offer a choice. “Almost all of our dinners have assigned seating,” says Mullenweg. “We have a database that tracks whether people have met before, and at each dinner we try to seat you with three to five people you haven’t met before. Since we’re a tech company we have a lot of more introverted people, so it’s a great way to meet people you wouldn’t normally meet.” Ultimately, Mullenweg, whose enthusiasm led him to share Automattic’s journey to becoming what he dubs a “fully distributed” company at distributed.blog, sees office-lessness as not only manageable but preferable—and the employment model of the future. “I think a distributed workforce is the most effective way to grow a company,” he says in a video posted on his blog. “The key is that you have to approach it consciously.”
Photo: WordCamp Europe
“It’s about three things, clarity, communication and alignment, making sure everyone has a clear idea of the mission and how they connect to it and getting us all talking with one another”
for Meetups several times a year and provides a stipend for that purpose. The company also brings its entire workforce together for an annual Grand Meetup, a week-long event that Mullenweg describes as “a really cool family reunion” featuring keynote speakers, skill-building sessions, team meetings and opportunities to socialize. “It’s about three things, clarity, communication and alignment, making sure everyone has a clear idea of the mission and how they connect to it and getting us all talking with one another,” he explains. First Choice’s Okigwe prefers to bring remote workers to headquarters, where it maintains “hotel cubes” and virtual machines so visiting employees can log in to seamlessly access their projects, on a quarterly basis. “Without that intentional investment in faceto-face interaction, we’re just training a remote workforce that could be pilfered by somebody else,” he says. “If they don’t have a connection with you and what you’re trying to do, then it’s just a paycheck, and there are a lot of other organizations where they can get that.”
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L AST WOR D
STANLEY BERGMAN / CEO AND CHAIRMAN, HENRY SCHEIN
STAYING HUMAN
Technology can improve patient outcomes—but so can personal interaction.
Stanley Bergman is CEO and chairman of Henry Schein and the recipient of Chief Executive’s 2017 CEO of the Year award. Join Bergman at the Healthcare CEO Summit (HealthcareCEOSummit. com) in October.
TECHNOLOGY HOLDS great promise in healthcare. Already, we can do things like record vital signs on a wearable device, stream that data to our doctors and use A.I. to make diagnoses, speed treatment and develop digital impressions. We can even tell a virtual digital assistant to retrieve medical information, saving time and enhancing care. But as we explore the potential of technology to expand access to quality care, my concern is that the digital age could put distance between patients and caregivers, especially among the underserved, who are least able to afford new technology and its benefits. I say this as someone who recently had very successful back surgery at Mather Hospital, located in the quaint, seaside Long Island village of Port Jefferson. Mather was equipped with all the new technology I could have wanted to make the surgery go well, but what really made the difference at Mather was the people. Every person at the hospital—from the security guards to the receptionists, nurses, surgeon and administrative staff—could not have been more welcoming and compassionate. From admittance to discharge, the good people of Mather treated me as a human being who needed healing. Human beings need real human interactions with caring medical professionals dedicated to healing us. We need to avoid the trap of thinking that technology is a panacea for what ails us. Instead, we need to keep humanity at the core of healthcare. Our challenge today is to marry the convenience and tremendous clinical advances of technology with the compassion of real human connections. Automation, for example, powered by advances in artificial intelligence, has the potential to reduce medical errors and costs. But the more people interact with computers, the less we connect with each other on a human basis,
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which is where true healing occurs. A surgeon friend of mine tells the story of a skilled colleague who, upon leaving the operating room, immediately fired up his smartphone, ignoring the patient’s family. My friend makes time after every procedure to explain to the family the status of the patient. Comforting the family as well as the patient, according to the research, results in tangible benefits, including better treatment adherence, fewer complications and reduced readmissions. This is a higher ambition than merely cutting bone and suturing skin. Of course, it’s not just the patient who benefits from this approach. The incidence of burnout among healthcare professionals declines significantly in environments that emphasize human connections, according to the Arnold P. Gold Foundation. I believe healthcare professionals want to be healers, and we must nurture environments that fulfill that desire. To this end, we at Henry Schein are pleased to serve as a founding member of the Corporate Council of the Arnold P. Gold Foundation, along with BD, IBM Watson, Medtronic and Quest Diagnostics. The Arnold P. Gold Foundation is dedicated “to infusing the human connection into healthcare.” America’s healthcare system is routinely criticized for its higher costs of care relative to other countries, with little to no improvement in results. We’re not going to fix that problem simply by strapping a digital activity tracker on everyone. We’re also not going to fix it by forcing doctors to spend more time entering data on a computer screen instead of engaging with patients. But if we embrace the idea of treating patients as human beings worthy of sincere attention and care, then we will truly put ourselves on the road toward healing each other and, perhaps, the healthcare system itself.
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