The Exchange for People Strategy: P S X M a r c h 2 0 1 5 by Team PSX

The 3 Myths of Leadership Development

PSXPSXPSXPSXPSXPSXPSX MARCH 2015

The Wealth Gap Everyone is talking about it…

Why isn’t anything getting done?

GE:

To Defer or Not to

”bringing good things to life” Defer: …IN THE BOARDROOM

Unlocking the Possibilities Part 2 in a series

Is L eve ra g e the new Pa ra d ig m for Achieving Com petitive Executive Compensa tion Pla ns?

THE PEOPLE STRATEGY EXCHANGE EMAGAZINE The source for cutting edge People Strategy

M A R C H

2 0 1 5

C O N T E N T S REWARDS

Is Leverage the New Paradigm for Achieving Competitive Executive Compensation Plans?

Using Leverage to Enhance an Executive’s Retirement Income: PART 2 in a series… Submitted by Robert D. Birdsell, Grahall | EBS, LLC. PEOPLE STRATEGY

GE: “We bring good things to life”… in the Boardroom

Submitted by Michael Dennis Graham, Grahall, LLC.

IGNITING

LIGHTING THE FUSE: THE POWER OF PEOPLE:

The 3 Myths of Leadership Development Submitted by Sheila Repeta, FutureSense,Inc. and Jim Finkelstein, President and CEO, FutureSense, Inc. REWARDS:

The WEALTH GAP: Everyone is Talking About It, So Why Isn’t Anything Getting Done?

Submitted by Michael Dennis Graham, Grahall, LLC.

C O N T E N T S M A R C H

2 0 1 5

C O L U M N S 6

Letter from the Editor

Contributors

Book Stop: "Board of Directors Governance and Rewards" by Michael Graham

Shape of the Month: The Wealth Gap…

We hope you enjoy our March 2015 issue of

PSX: THE PEOPLE STRATEGY EXCHANGE Missed 2014’s issues? Find them here at JANUARY ISSUE MAY ISSUE

FEBRUARY ISSUE JUNE ISSUE

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and first of the year, 2015’s … JANUARY 2015

FEBRUARY 2015

These articles and those from our previous issues will help you to reinvent, reinvigorate, and revive all aspects of your people strategy. You can access prior issues of PSX using the links above. To paraphrase a quote from activist Bob Black, "The reinvention of people strategy means marching off the edge of our maps." So we encourage you to go forth and do not tarry in your pursuit of People Strategy excellence. We hope our publication has and will continue to support you in your mission.

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Letter from our Editor…

m a r c h

2 0 1 5

March – It’s Not Just Madness Anymore

March on. Do not tarry. To go forward is to move toward perfection. March on, and fear not the thorns, or the sharp stones on life's path. …Khalil Gibran By now all of us in the Northern Hemisphere are just sick of winter so rather than talking about the Ideas of March or March Madness I turned to Khalil Gibran for some inspiration for this month’s Editor’s Letter. No doubt in your personal and business pursuits there are perhaps both literal and figurative sharp stones. Change and managing change is difficult, but change is the basis for improvement and the only thing we can all be certain of is whether we are talking about individuals or organizations, those that are inactive will soon find that the world has passed them by.

This month in PSX we offer articles to help you keep moving in a thoughtful and innovative direction, as well as to provide spirited perspectives to keep your mind active. Bob Birdsell continues his series of articles on how to successfully revamp executive benefit plans to improve overall retirement accumulations while keeping organizational costs in check.

Letter from our Editor…

m a r c h

2 0 1 5

Michael Graham provides insight into enhanced “proxy access”, and how it is being embraced by some organizations and rejected by others. He also investigates how boards might need to change in order to embrace this trend. From FutureSense we have a thorough provoking look at the three fundamental assumptions that organizations have long held, that lead to ineffective leadership development. Last, Michael begins a series of articles on the topic of wage and income inequality. This month he sets the stage with an overview of the situation, and will delve deeper into the wealth gap in the coming months.

This and more available in our third issue of 2015! Please read on!

In the coming PSX issues: April’s issue will bring the second in a series of in-depth articles on the subject of wage and income inequality. Next month we will look at the subject from a “bottom’s up” approach considering what policies, approaches and people strategies might help to resolve this issue. We encourage you to join in the dialogue. We hope to provoke some dialogue with these and our other articles, columns, and topics. Join the conversation and become part of the robust exchange of information. To leave us your feedback, critiques, and suggestions click here. All

the best,

Edie Kingston EDITOR IN CHIEF

Elizabeth B. Hall CREATIVE DIRECTOR

u t o r s C o n t r i b THE EXCHANGE

March 2015

FOR PEOPLE STRATEGY

Bob Birdsell

, is Managing Director for Grahall/EBS. For our March issue, Bob Birdsell has submitted Is Leverage the New Paradigm for Achieving Competitive Executive Compensation Plans? This is PART 2 in his series on Executive Retirement Benefits. Grahall/EBS is a firm specializing in the discovery of new and innovative executive benefit programs designed to replace existing plans which have become obsolete in the current regulatory and tax environment. Bob has invested the last 25 years of his career in assisting organizations in creating, implementing, and administering state of the art benefit programs for organizations in numerous industries. Bob can be reached at Robert.Birdsell@Grahall.com

Jim Finkelstein pens the monthly column for PSX titled “Lighting the Fuse”.

For our March issue Jim submits the article The 3 Myths of Leadership Development with Sheila Repeta. Jim, President and CEO, FutureSense, Inc., has over 37 years of consulting and corporate experience, and has specialized in business and people strategy, motivation and reward, and organizational assessment, development, communications, and transformation. Jim’s experience has included being a Partner in a Big Five firm; a CEO of a professional services firm; a corporate executive for Fortune 500 companies; and an entrepreneur with his current company, FutureSense, Inc. Jim can be reached at jim@futuresense.com .

Michael Graham

Michael leads Grahall Paid Fairly . Grahall is an intellectual capital firm whose comprehensive services help organizations maximize the value exchange between organizations and individuals. Michael Graham has over 38 years of experience in the compensation and benefits field advising organizations in all industries. This month, Michael penned 2 articles: GE:”Bringing Good Things to Life”…in the Boardroom and The Wealth Gap: Everyone is Talking About It, So Why Isn’t Anything Being Done About It? Michael can be reached at Michael.graham@grahall.com or through www.grahall.com.

Sheila Repeta

is a Senior Consultant at FutureSense, Inc. This month, Sheila submitted the article The 3 Myths of Leadership Development, with Jim Finkelstein. Sheila joined FutureSense in January of 2011. She earned her Bachelor's and Master's degrees in Communication from the University of Illinois. She has worked with several Fortune 500 companies working in HR and Training and Development. In addition to that work, she has taught communication and organizational development in various colleges and universities for nearly 10 years. Helping organizations align their business strategy with their people and processes, spending time with her 3 sons, and running melts her butter every day. Sheila can be reached at sheila@futuresense.com.

Releases that deserve a

place

The Grahall Executive Total Reward Strategy Solution emagazine identifies all of the necessary steps and associated tools required to create a people strategy for an organization. Executive Total Reward Strategies bring together important and critical elements of alignment to an organization in it’s pursuit of its mission, vision, values and beliefs. Developing an Executive Total Reward Strategy brings together specifically how an organization’s competitive level (money), it’s choice of balance in different reward components (mix), the key messages (messages) and how the program is managed (management) all support and drive organizational success through the support of the organization’s business and people strategies.

the book stop

on your bookshelf

This review is on: Board of Directors Governance and Rewards (Hardcover)

Mar 26, 2014

As promised, the book delivers with great insight and perspective on the importance of good AND relevant governance to a company's success. And how rewards can help to drive evolutionary governance. This is not only a must read for boards but also for shareholder who need to know how effectively their investments are overseen. The information is timely and useful.

PSX Shape of the Market Wealth Distribution in America Pew Research report shows that the Great Recession devastated middleand lower-income families’ wealth and these families have not seen and demonstrable increase in their wealth since 2010. Leaving them with wealth levels comparable to the early 1990s.

CEO to Worker Compensation Ratio The graphic on the following page, from the Economic Policy Institute shows that CEO compensation (for CEOs in the 350 largest revenue US companies that are publicly owned) compared to a proxy for the “average worker”, which is the annual compensation with wages and benefits of a full-time worker from a group that co-

vers more than 80 percent of payroll employment in the US.

THIS MONTH…

THE WEALTH GAP

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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MAR 2015 THEEXCHANGE

Presenting: Part 2 of a 3-part series on… Using

L e v e r a g e

to Enhance an Executive’s Retirement Income…

w i th ou t exposing oneself to

RISK

THEPEOPLESTRATEGYEXCHANGE

Is ‘Leverage’ Is ‘Leverage’ the new Paradigm for achieving competitive executive compensation plans? B y

a Naughty Word?

R o b e r t

G R A H A L L

B i r d s e l l

E B S

“The length of this document defends it well against the risk of being read.” –Winston Churchill

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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Last month I discussed whether leverage was a concept that could be used to enhance retirement assets for executives who desire to increase their retirement income.

This month’s article will outline a

strategy to accomplish exactly that in a real life example of a public company.

Then, in April, we will look

at another example of how this solution is viable for a private company.

This scenario involves a large public company

(let’s call it

“Company Public”) with several hundred highly compensated executives. The company offered a non-qualified deferred compensation (NQDC) plan which was underutilized by the executives. The NQDC plan was informally funded with COLI (corporate owned life insurance); however, most of those insureds were either retired or had terminated. There was substantial cash value held in this COLI asset which the company was not properly utilizing. The company was concerned that its executives were unable to adequately save for their retirement since few were participating in the NQDC plan.

THEPEOPLESTRATEGYEXCHANGE We were asked to explore options to remedy this dilemma. The reasons for the executives’ failure to participate in the non-qualified plan varied, but the predominate themes voiced were: lack of security, inflexibility in the timing of deferrals, and distribution options that were too restrictive. These drawbacks resulted from the enactment of Section 409A. Also noted were concerns that the executives would face higher taxes when benefits were received and a lack of control over funds during the deferral period. Let’s look at how leverage can be used to “change” and improve the benefit of both the company and the executives.

As Winston Churchill stated, “to improve is to change… to be perfect is to change often.”

Over the years, Company Public had examined various methods to rectify the low participation in the existing deferred compensation plan but none

Now, with our guidance, a reasonable and rational solution was identified. We call this new program

The Gemini Plan…

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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were successful due to challenges arising from excessive financial and tax related risks. Now ,with our guidance, a reasonable and rational solution was identified. We call this new program The Gemini Plan.

Fundamentally, the structure of The Gemini Plan involves well accepted concepts and methodologies that have been used in business and individual financial planning circumstances for years. The only difference is that this arrangement involves combining these well-established concepts into a new and innovative structure never before considered. So what are these innovative yet wellestablished elements? They are:

• Institutionally priced Indexed Universal Life (IUL) • Third Party Bank Loan Leverage • Employer Investment in the Program which involved no new P&L expense.

THEPEOPLESTRATEGYEXCHANGE Let’s first look at how this plan can enhance a participant’s portfolio of benefits, and then we will look at the unique advantages of the elements stated above and how, when combined, they can bridge gaps in a highly compensated employee’s benefit programs.

For example: a 41 year-old, highly compensated employee (HCE) earns $500,000 annually plus an annual incentive award. Let’s look at how the traditional deferred compensation plan can be replaced with The Gemini Plan.

The Gemini Plan will be funded in an institutionally priced Indexed Universal Life (IUL) requiring an annual premium of $100,000 for 10 years. In each of the first 5 years, the participant pays half of the premium ($50,000) and the other half is funded through third party bank loan leverage. With our assistance, the company arranged the bank loans. In the second 5 years of this 10 year period, the plan is

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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funded entirely with bank loans. Over the course of 10 years, $1 million is contributed to the plan and earnings have accrued on the entire amount. No further contributions are required and the loan (with interest) will be paid back from the cash value account in the 15th year.

The participant will derive the following benefits from The Gemini Plan: • At retirement, the additional income from The Gemini Plan account is projected to be $150,000 annually for 20 years. • A $2,500,000 death benefit shared by the executive’s beneficiary, the company and the funding source. • Hedging of the investment in the S&P Index Fund is utilized so that the account will likely never lose money. • Bank loan leverage of 75% of principal accrues earning in excess of the loan interest rate. • Loans do not require additional security beyond the principal in the account.

THEPEOPLESTRATEGYEXCHANGE â&#x20AC;˘ The investment is in a tax advantaged vehicle (the IUL) which at the end of 15 years is fully owned by the participant when all loans and interest have been paid off.

Why use life insurance? The type of life insurance contract necessary to accomplish the objectives is an institutionally priced Indexed Universal Life (IUL) contract that is indexed to the S&P 500. One of the unique features of an indexed IUL includes a provision that the contract will likely not lose value. Downside protection is accomplished by purchasing an option on the S&P 500. The insurance company supporting the contract covers the cost of the option and, in exchange, establishes a maximum and minimum yield on the contract which is typically 13% on the up side and 0% on the down side. This structure allows the owner of the contract (in this case the executive) the opportunity to create leverage.

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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And keep in mind the following statement from Albert Einstein: “The measure of intelligence is the ability to change.”

Life insurance contains some of the most attractive and well established contractual provisions available to the general public. These contractual provisions have not been marginalized or degraded by laws and regulations affecting many formerly attractive benefit plans.

What is the “optimal amount” of leverage?

The optimal amount of leverage is the maximum amount that can be secured without exposing either assets or income to risk. (Most prudent individuals are not inclined to exchange or expose either their income or assets to excessive risk regardless of the possible benefits.) The Gemini Plan allows the participant to accomplish two important goals: asset protection and income accumulation without personal financial exposure. In fact, the leveraged approach we suggest does not even require a signed loan document or pledging other assets as security for the loan.

THEPEOPLESTRATEGYEXCHANGE As presented previously, the total ratio of investment to loan is 25% out of pocket and 75% borrowed. For the first 5 years, if the total annual premium is $100,000, $50,000 would be paid by the participant and $50,000 would be paid from bank loan proceeds. Then, during the second 5 year period, $100,000 annually is funded through bank financing for a total premium over 10 years of $1,000,000. Of this, $250,000 is paid by the employee and $750,000 is paid from borrowed funds from the bank. The plan is designed to pay premiums for a total of ten years because that is the optimal period to fund the policy. The loan, plus the accumulated interest, will be paid off in the 15th year by a withdrawal from the policyâ&#x20AC;&#x2122;s cash values.

The cost of the interest on the loan is equal to LIBOR plus 1.75%. Today the interest rate charged would be about 2.31%. The interest expense accrues and will be paid-off at the end of 15 years at the same time the premium loan is satisfied through a surrender of cash value from the policy. This approach is made possible because a consortium of banks has agreed to lend money to the participants of this program without the

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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need for loan documents or any other collateral besides an assignment of the cash value in the policy. And so, the cash value in the policy will be used to secure the loan until it is paid-off by surrendering cash value in the policy to cover the loan in the 15th year. What benefits will be derived? Benefits provided to executives include a substantial life insurance benefit and cash for other life events including long term care needs. Perhaps the most desirable benefit will be the increased retirement income. After the bank is paid-off in the 15th year, the participant will have access to the funds that have accumulated in the policy. These funds will be available on a tax-advantaged basis because the plan is supported by a life insurance product that continues to retain attractive tax advantages. If the losses in the S&P 500 over the last 25 years could be removed (there were 5 years in which there were losses), the average gain over that period of time would be approximately 14%. Even after the cost of acquiring the life insurance policy is taken into consideration, the net return, based on the 25-year look-back, would still yield approximately 11%.

THEPEOPLESTRATEGYEXCHANGE The chart below demonstrates the yield on the S&P when there are both maximum and minimum yields established. It compares these returns to what would have been achieved without the guarantees.

At this point we have established that: • A consortium of banks is willing to provide financing to secure an indexed insurance policy that is invested in an index of the S&P 500. • These banks will provide 75% of the funds necessary to fund the plan for ten years. • 25% of the funding will be the responsibility of the employee.

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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What if the Executive canâ&#x20AC;&#x2122;t afford his portion of the premium?

There remains one consideration that may cause this remarkable program to fail: the highly compensated employee for whom the plan is designed is unable to fund his portion of the premium. Regardless of how attractive the program may be, if this premium is out of reach for eligible participants, the program will fail unless the company funds the premium for all or part of the participantsâ&#x20AC;&#x2122; share during the first five years.

The challenge is that most large companies are unwilling or unable to support a new executive benefit program because of cost constraints and/or concerns about undesirable P&L costs. Or they may be simply concerned by adverse publicity and proxy issues. However, if the amount paid by the company can be booked as an asset and recovered in the future, no P&L liability would be incurred and the challenges noted above would be eliminated. Also if the company is willing to cover all or part of the premium necessary to fund the plan in the first five years, then all eligible participants will likely participate.

THEPEOPLESTRATEGYEXCHANGE You will recall that Company Public currently owns an asset in the form of COLI that is underutilized. We suggest that this asset be made available to offset the premiums that are the responsibility of the executive. Company Public chose to simply exchange one asset for another: the cash value in the COLI- which is an asset in the form of cash value life insurance- for a like asset: the cash value in the new policies secured to deliver the benefits of The Gemini Plan. The existing COLI would not be surrendered or replaced but simply used as a funding source by systemically borrowing on the cash value which was essentially a dormant asset due to the low level of participation in the existing deferred compensation plan. There would be little or no cost to Company Public because the participants would be charged interest on the monies advanced. The interest charged will be the long term AFR which currently is approximately 2%. In effect, Company Public would be making use of an inactive and underutilized asset while positioning itself to make a very attractive program available to their most senior executives. The best part though is that this new program can be established without incurring a

new expense.

IS LEVERAGE THE NEW PARADIGM FOR ACHIEVING COMPETITIVE EXECUTIVE COMPENSATION PLANS?

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MAR 2015 THEEXCHANGE

Upon the executive’s retirement, Company Public would be reimbursed from the cash flow received by the participant. The projected retirement cash flow is $150,000 for 20 years and the total advanced by the company during the first five years is $250,000, therefore, $25,000 could be deducted from the cash received by the executive and paid to the company for each of the first 10 years. The executive would receive $125,000 for the first 10 years and $150,000 for the following 10 years. The executive’s only cost to participate is the interest the company charges on the advanced premium.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” ― Winston S. Churchill In summary, there are three components involved in The Gemini Plan: 1. S&P 500 Indexed Universal Life Insurance Policy: containing useful, valuable and well established contractual provisions that have not been marginalized by laws and regulations. Using an institutionally priced IUL contract that is indexed to the S&P 500 and hedged against downside risk provides a guarantee that the contract will not

lose value.

THEPEOPLESTRATEGYEXCHANGE 2. Third Party Bank Loan Leverage: providing asset protection and income accumulation that can improve the overall yield on the employee’s account by approximately 30% to 40% without personal financial exposure. 3. Company Investment in the Program: booking the company’s contribution as an asset that will be recovered in the future can provide an opportunity for all eligible employees to participate even if premium levels are “out of reach.” When combined into one program, these components create interesting and attractive benefits.

I fully appreciate that this program is complex but then so was every other new program introduced for the first time, including the 401K Plan, Non-Qualified Deferred Compensation and just about every Stock based compensation plan.

Leverage offers the solution for both the Company

and its executives. ◘◘◘ – Bob Birdsell can be reached at robert.birdsell@grahall.com

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“BRINGING GOOD THINGS TO LIFE” IN THE BOARDROOM BY

MICHAEL DENNIS GRAHAM

GE “BRINGING GOOD THINGS TO LIFE” IN THE BOARDROOM

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Although it is no longer GE’s advertising slogan (retired in 2003), it did paint a picture of that company for some 25 years. And just recently GE might again be bringing good things to life, this time in the boardroom by permitting shareholders holding 3% or more of shares to have proxy access in order to nominate their own candidates for directors on the company’s own proxy. This breaks down one significant barrier to shareholder nominations – that being cost. Shareholders have always had the opportunity to nominate their own directors but to do so they need to step up to the enormous expense of producing and mailing proxies to every shareholder. Few would of course, except for perhaps wealthy

hedge funds that were intent on waging a proxy war.

o let’s take a closer look at the GE largess and see which shareholders will be able to nominate directors to GE’s

board. As of February 2015, GE’s bylaws will allow investors

holding a 3 percent stake for three years to nominate directors.

Those GE shareholders who own three percent or more of GE shares are the Vanguard Group, State Street Global Advisors, and the BlackRock Institutional Trust, according to Thompson Reuters. Some organizations (Whole Foods being one) are trying to get around growing demand by shareholders for proxy access by proposing higher than 3% ownership levels. Zach Oleksiuk, an outspoken director at BlackRock, threw down the gauntlet at an SEC meeting saying provisions that require more than 3% ownership are “… a generally meaningless right for shareholders.” He threatened that Blackrock would vote against directors if this threshold were too high.

GE may be basking in the positive attention it has received around their proxy access decision, but sadly they are still one of the very, very few companies to adopt proxy access. According to the Wall Street Journal others include Hewlett-Packard and Verizon Further, only 17 similar measures were voted on in 2014 with only six receiving a majority of the vote.

GE “BRINGING GOOD THINGS TO LIFE” IN THE BOARDROOM

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Some shareholders may hope and some organizations may fear that the decision made by GE will fuel further demands for proxy access.

So, is proxy access overblown or is there a real problem at many companies with the director nomination process that is looking for (and in the case of GE finding) a solution? Does the director nomination process (when proxy access is unavailable or the thresholds are too high) reinforce boards that are “pale, male, and stale”? And if so, is that really so bad? In my experience working with hundreds of organizations over 40 years, I have found that most board governance methodologies (the director nomination process being one) are outdated, and incomplete. Executive

and CEO compensation (for which the board is primarily responsible) has been under a microscope for some years now, but, like the shoemaker’s daughter or the ugly step child, the relationship between director’s governance and organizational performance has largely been ignored.

Entrenched boards, lack of director independence are two of the problems that proxy access might begin to cure and curing those would improve board effectiveness.

Additionally with less entrenched boards and with

independent directors, board self-assessment would be increased… thereby becoming more “situational” and better able to address the needs of the organization in our dramatically changing times. Let’s look at these aspects (entrenched boards, lack of director independence, the need for board selfassessment, and the necessity for boards to be situational) and I think we will be able to see how better proxy access might improve directors and therefore board effectiveness.

GE “BRINGING GOOD THINGS TO LIFE” IN THE BOARDROOM

Entrenched

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Boards

Many boards today are still quite entrenched, with selection and election processes far from “democratic” or even constructive. Many new (and existing) board members are some form of “insider,” either an organization executive or someone known well by the current board or management. Seldom are there strong competing candidates (or diversity candidates for that matter). As a result, the "election" is essentially won before any votes are cast. Too often, a director's removal is a condition of age (with "mandatory" retirement most often at age 72, and inching up) rather than on knowledge, experience, contribution or performance. Often, for organizations in a turnaround situation, the board is comprised of the same people who got the organization into the mess in the first place ― or close friends and colleagues. The board is comprised of individuals (the "directors") elected by the shareholders for multiple-year terms. Many organizations have a revolving system so that only a fraction of the directors are up for election each year. In that way an organization can better protect itself from a hostile takeover.

Although protecting the organization from takeover might be an admirable goal, academic research suggests staggered boards provide questionable value to an organization. Organizations with staggered boards have been found to have lower value, a greater likelihood of making acquisitions that are value-destroying, and a greater propensity to compensate executives without regard to whether they actually do a good job. Staggered boards have been an effective takeover prevention device whose time is really come and gone. With more investor awareness and the willingness by key investor groups to propose shareholder votes that would eliminate staggered boards; we predict that over the next 10 years the number of staggered boards to be substantially reduced .

Director

Independence

Directors can either be executive directors, perhaps the CEO, CFO or other upper management executives of the organization. Or they can be nonemployee directors, again as it sounds, individuals who are NOT employed by the organization in any way other than for their board duties. This non-

GE “BRINGING GOOD THINGS TO LIFE” IN THE BOARDROOM

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employee director designation, however, does not mean the director is totally impartial.

For example, in the category of non-employee directors fall “Affiliated Directors”, who are also not employees but may be former employees, the organization’s professional services providers, or family members of an organization executive.

Then there are “Independent Directors”, perhaps seen as the Wyatt Earps of the boardroom (being brave, courageous, and bold) who are not affiliated with the organization, but would hopefully be elected for their business, management and/or industry experience and acumen, rather than their contacts with current members of management and or board members.

Situational

Boards

Our experience has taught us that a board can have a significant impact on an organization far beyond its governance decisions. So, if board members are selected and elected without considering what they bring in terms of knowledge, experience, and credibility, they could be doing more than just a disservice to the organization and its shareholders. Organizations at different stages in their life cycles have vastly different needs that impact their short- and long-term business objectives. A company in a start-up phase will have significantly different issues than when it is growing or mature. And most pointedly a company in a turnaround situation needs a unique set of management and governance functions if it hopes to recover. The problem is, although the company may have changed dramatically, it is almost certain (except in the case of a bankruptcy) that the Board of Directors has not. Ideally, a company would have a situational board comprised of individuals with the appropriate experience to shape and enhance the organizationâ&#x20AC;&#x2122;s value in each stage of the business cycle. During a start-up phase the

GE â&#x20AC;&#x153;BRINGING GOOD THINGS TO LIFEâ&#x20AC;? IN THE BOARDROOM

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board should let the company executives determine strategy and operations. Speed and agility with strong executive leadership is the best practice in most start-ups. At the same time during the mature phase of the organization the board needs to contribute more, evaluating proposed strategies and pushing for management to take appropriate risks.

In reality though, boards are far more entrenched. And often for companies in a turnaround situation, the board comprises the same people who helped the company get into the mess in the first place.

Experienced boards know when and how to steward these special situation organizations and the corresponding shareholders investments. It is clear from our analysis of over 1,000 publically listed companies that great governance is situational. It is regrettable that most boards are not.

Board

Self-Assessment

Directors need to assess how well they are governing both individually and collectively as a board and whether, again individually and collectively, they have the right skills to steward the company. This assessment needs to occur at regular intervals and particularly when economic or business strategy changes occur that may drive the company in a new direction. When board seats become available, candidates should be sought who can help address the companyâ&#x20AC;&#x2122;s specific business issues, not just business issues in general. Unfortunately, most boards do not effectively self-evaluate often or well, primarily because they have neither the framework nor the tools to do so. Investing the time in this effort, though, could contribute greatly to the companyâ&#x20AC;&#x2122;s overall value.

GE “BRINGING GOOD THINGS TO LIFE” IN THE BOARDROOM

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The effective review of responsibilities and the allocation of individuals to be held accountable for results are threshold conditions too many boards and their advisors skip. Most of these roles, committees, and duties and designs were inherited. That is where we believe there are problems. While the industries and organizations have evolved over the last few decades, their boards have not.

Summary The Board of Directors is accountable to shareholders. The board is elected to keep shareholders interest in the forefront. Where shareholders want to nominate their own directors and boards refuse (or in other ways make this impossible) that can point to a serious breach of the board’s fiduciary responsibility to the shareholders. A “US centric, pale, male, and stale” board in a diverse global economy, just no longer makes sense from the standpoint of governance and accountability. ◘◘◘ For more information on board governance read my book Board of Directors Governance and Rewards [link to http://www.lulu.com/shop/michael-graham/board-of-directors-governancerewards/ebook/product-21049374.html]

The 3 Myths of

Leadership Development

By: Sheila Repeta with Jim Finkelstein

LIGHTING THE FUSE: IGNITING THE POWER OF PEOPLE

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According to a May 2014 report by Bersin (1),

organizations continue upping the ante on their

leadership development spending. Towering past $15

billion in the US alone, organizations continue to spend large sums of money, and perhaps of even more value, with large amounts of time invested into their

leadership development efforts. This commitment

demonstrates that organizations are starting to put

their money where their mouths are when it comes to leadership development, but are these programs effective? Do they work?

UNC Kenan-Flagler Business School and the Human Capital Institute (HCI) put together a 2014 survey assessing the ROI of leadership development, and

reported only 21% of senior leaders were satisfied with their

bench strength. (2)

A 2010 McKinsey study reported that only a quarter

of organizations they assessed said their “programs are effective at improving performance measurably”. (3) Despite spending billions of dollars (and

countless hours), report after report tells us that the answer to the question of leadership program effectiveness leaves us with a resounding “

n o ”.

n building some of these leadership models and development plans, there

are three fundamental assumptions that organizations have long held on to which lead to ineffective programs. These myths are: • Leadership development is knowledge

• Leadership development should happen only with the top leaders • Leadership development is about learning, not asking

Myth 1:

Leadership Development Is Knowledge…

While we see inspirational

quotes and posters indicating the power of “being” a leader, organizational

approaches to developing leaders has remained highly “intellectualized” over the years. Many, if not most, leadership development efforts are “event

driven” – focused on a survey, assessment, retreat, or training where

participants engage in contemplation, practice in isolation, or even formulate

leadership action plans. This thought leadership approach seldom translates

into action and change.

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This intellectualization of leadership only addresses the “mind” component of leadership. Adult learning theories (such as Noel Burch and others)

have long demonstrated that to develop new competencies takes significant mental AND emotional effort. It is critical to shift efforts to a

leadership development program or model that accounts for both the intellectual knowledge base, as well as the emotional capacity to engage in making changes. And it is not just making

changes for change sake; leaders must want to make changes because their current leadership methods aren’t exactly working.

Myth 2:

Leadership Development

Should Happen Only With the Top Leadersâ&#x20AC;Ś

When

organizations go about putting together their leadership development plans or models, they frequently have the executive leadership team do the heavy

lifting. It is mission critical to leverage the strength of this team to align the

leadership plan with the business objectives. But, by stopping at the executive level, the critical competencies that the organization needs to be successful cannot be fully understood.

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The best way to understand the demands and needs of your

organization is to go straight to your middle management and

get their feedback. This provides benefits that are two-fold: it not only allows you to build your leadership development plan, but also creates

developmental opportunities for your high potential leaders. Conger &

Fulmer of Harvard Business Review comment, “Succession management must be a flexible system oriented toward developmental activities, not a rigid list of high-potential employees and the spots they might fill.” (4) When you

engage your mid-level managers in the process, you build a stronger model –

and create the possibility of engagement and competency development down your leadership pipeline.

And not only getting middle management feedback, but actually having them

do the heavy lifting will help determine the competencies they need for the organization to be successful in reaching business outcomes. Middle

management wants the opportunity to do the heavy lifting and the top leaders need to let them.

Middle managers are in the challenging role of not only having to lead, but

also being led. Being pulled in two different directions typically gives them a

strong sense of the competencies needed from their leadership team to help meet business objectives. When selecting the team from whom you will get feedback, it’s important to choose your star performers, who are in critical

roles in the organization with a wide breadth of responsibility. This builds

engagement in the leadership process throughout multiple layers of the

organization, and strengthens your succession planning. That is how to grow future leaders.

Myth 3:

Leadership Development is

About Learning Not Asking The

inception of many well-intentioned leadership development programs begins with lining up the business objectives and talking through the competencies needed to achieve those outcomes. The crux of these programs is change –

change in behavior, people, processes, and procedures. To effectively change, leaders must be mindful of the organizational culture. Cameron and Quinn

(authors of Diagnosing and Changing Organizational Culture) explain that the

“most frequently cited reason given for failure [in change] was a neglect of the organization’s culture.” (5)

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How do organizations get to talking about culture? By asking

the hard questions. The first two critical questions that must be asked to begin the conversation: “What is working?” and “What is missing?”

However, many organizations fail to take the time to address a third and perhaps more important question in order to develop a truly efficient

leadership development plan and explore the “hidden culture”. The best question to explore these practices is “What is unspoken?”

John Coleman of Harvard Business Review notes that one of the six elements

of a good organizational culture is “practices”. (6) While an organization has

stated values that comprise the culture, the actual practices become the foundation of the “real vs. ideal” culture. We know that many issues,

concerns and elements of an organization’s culture emerge in the inability to “practice what we preach”.

While this can be the most difficult question to ask, and can likely expend priceless political capital, failure to ask this question and address the

responses in a productive and open discussion can leave your leadership

development plan right where it started. Failure to tackle the unspoken issues

among leadership and staff ultimately stifles change.

LIGHTING THE FUSE: IGNITING THE POWER OF PEOPLE

When looking:

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to invest your time, money, and resources

into building your leadership development plan, take the time at the start to ask the right questions and to develop a model that considers both the intellect and the emotion. Then apply it beyond the top tier of your organization to create lasting and effective change.◘◘◘

Sheila Repeta can be reached at sheila@futuresense.com Jim Finkelstein can be reached at jim@futuresense.com

(1) http://www.bersin.com/News/Content.aspx?id=17488 (2) http://www.kenan-flagler.unc.edu/~/media/Files/documents/executivedevelopment/unc-white-paper-the-ROI-of-talent-development.pdf (3) http://www.mckinsey.com/insights/organization/putting_a_value_on_training (4) https://hbr.org/2003/12/developing-your-leadership-pipeline

(5) Cameron, K., & Quinn, R. (2011). Diagnosing and Changing Organizational Culture Based on the Competing Values Framework. San Francisco: John Wiley & Sons. (6) https://hbr.org/2013/05/six-components-of-culture

Speed of Thought, Speed of Action, Speed of Resultsâ&#x201E;˘

FutureSenseÂŽ Inc. is a consulting firm specializing in areas of organization and people. We advise our clients on how to build and sustain their human capital capacity and improve organizational performance by attracting, developing, engaging, motivating and retaining people.

For further information, contact: Jim Finkelstein, President and CEO 415-453-1514 jim@futuresense.com www.futuresense.com

THE WEALTH GAP: EVERYONE IS TALKING ABOUT IT…

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“…after nearly five years of payroll expansion and 11 million new jobs, real incomes have barely budged for the vast majority of Americans. And so far, the wealth generated by the growing economy has not trickled down.” – New York TImes

The Wealth Gap

THE WEALTH GAP: EVERYONE IS TALKING ABOUT IT…

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Everyone is Talking About It,

So Why Isn’t Anything Getting Done? B y

M i c h a e l

D e n n i s

G r a h a m

THEPEOPLESTRATEGYEXCHANGE This is the first in a series of articles on the subject of the gaps in wealth and income and the implications for people and the organizations that employ them. This month, we will

start with a discussion on why it happened, looking at an array of authors, economists, pundits, and politicians to see where they agree and where they disagree. In subsequent months, we will look at the global scene and end our series with some ideas on how (and if) this problem (if it is one) can be solved or even should be, and the implications for organizations and HR executives in particular.

It’s not just the Frenchman and economist Thomas Piketty or the Nobel Prize winning economist Joseph E. Stiglitz who are talking about the growing gap between the Rich-y Riches and the rest of us, it’s everybody. And the current statistics and forecasts are nothing more than dramatic…

THE WEALTH GAP: EVERYONE IS TALKING ABOUT ITâ&#x20AC;Ś

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Income inequality between whites and blacks, between men and women, between younger and older workers has existed here in the US pretty muchâ&#x20AC;Ś forever. So too has wealth inequality in that there were always fewer wealthy folks holding a bigger piece of the pie, than the rest of us.

hy then have both these subjects entered the national dialogue

and debate? It is because of the great recession. Since

2009 the economy has shown signs of rebounding. Everything from job creation to real estate prices have started to rise from the depths of the 2008 debacle. Even though the US has created many jobs over that time, wages have not returned to pre-recession numbers. And as we described in our September 2014 PSX article Part Time Recovery (for Economic

Reasons) we now have a vastly larger number of workers who are UNDERemployed, in many cases working part time jobs since no full time positions are available. The Bureau of Labor Statistics found that 18.5% of workers are part time (meaning working 35 hours or less at one or more jobs). This number is down from its high in 2010 but not nearly back to pre-recession numbers.

THEPEOPLESTRATEGYEXCHANGE This part time expansion has hurt US workers across the board, but there is another issue facing women: the gender gap in pay. According to the World Bank, in the US (as of 2013) just over 46% of the labor force was made up of females, and as we know (and shared in our story that ran in April PSX ) women are paid 77 cents on the dollar compared to men (these numbers are worse for women of color). The New York Times points out that “…after nearly five years of payroll expansion and 11 million new jobs, real incomes have barely budged for the vast majority of Americans. And so far, the wealth generated by the growing economy has not trickled down.”

ne bright spot (if you can call it that) in the income inequality discussion is the minimum wage, currently set at $7.25. There have

been increases for federal hourly workers and, with this past election, many states opted to increase minimum wage generally to something around

$10 per hour. But have you ever really thought about what that means? For an hourly worker clocking 40 hours per week (and many do not) that is an increase from about $15,000 to about $20,000 per year (or $1,250 to $1,700 per month). Not much for an individual to live on, let alone a family.

THE WEALTH GAP: EVERYONE IS TALKING ABOUT IT…

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t the same time, the attention of the “movers and shakers” (think the 1%) has turned from value creation to personal wealth creation.

And, according to a study conducted by Oxfam with results released in

January of 2015, “the richest 1 percent are likely to control more than half

of the globe’s total wealth by next year.” In December of 2014, the Pew Research Center wrote that “[the] wealth gap between America’s high income group and everyone else has reached record high levels … with a clear trajectory of increasing wealth for the upper-income families and no wealth growth for the middle- and lower-income families.” (Even Andy Borowitz ran an article in The Borowitz Report, his humorous and satirical column for The New Yorker, titled “Richest One Per Cent Disappointed to Possess Only Half of World’s Wealth.”)

THEPEOPLESTRATEGYEXCHANGE So what do folks have to say about how and why this has happened?

et’s start with everybody’s recent favorite economist and author, Thomas Piketty. His bestselling book, Capital in the 21st Century,

when translated into English, became an instant (and long lasting) best seller. (Note that Piketty’s title is a nod to Karl Marx’s Das Kapital, but also bear in mind that Marx’s other famous book is The Communist Manifesto). Not to get all “Freedom Fries” over this, but when did we Americans get all gaga over a Frenchman’s point of view? But Piketty does make some solid (and frightening) arguments about how the Wealth Gap came to be (some 400 years ago), came to be not (in the early 20th century), and came roaring back again in the 20th century, and continues unabated today.

Piketty’s book, nearly 700 pages in length, is both understandable and well researched with solid historical data to support his views (in a nutshell and according to the New York Times book review) that capitalism drifts towards inequality, because “capital” such as assets, real estate, and stocks are mostly owned by the wealthy (capital) and these rise in value faster

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than the growth of the economy (where the everyday folk gain the resources to live on). Piketty points out that this process was reversed in the first half of the 20th century (because of WWI and WWII), but now wealth inequality is returning to pre-war levels. Piketty’s stance is that this is bad and should be fought with radical policy measures, one of his favorites is a global tax on wealth.

Mr. Piketty’s “left leaning” policy recommendations certainly rubbed The Economist the wrong way resulting in their suggestions that he “ignores tradeoffs and costs” and fails to consider “other ways to redistribute capital”. They end by dismissing Piketty as a social ideologue and suggest that his recommendations present a “poor blueprint for policy.” Good thing Piketty is an economist and not a politician.

Here in the USA, the wealth gap is not just blamed on the ability for the wealthy to increase their wealth themselves through sound investments, etc.; but tax policy (harkening back to Piketty’s recommendation) is pointed to as a

significant contributor. State and local tax policies are

THEPEOPLESTRATEGYEXCHANGE pointed to as highly regressive forcing the poor(er) to pay a high(er) portion of their income in taxes. On the Federal level, the capital gains tax, which is where most ultrawealthy find their taxable income, is very low at 15% (even under Reagan, though he was a Republican, you will remember, it was 28%).

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So with money that begets money and lower taxes the wealthy are in pretty good shape. But it doesn’t end there. According to Seeking Alpha, the Federal Reserve policies such as TARP, qualitative easing and zero loan programs to Wall Street also contribute to this gap by supporting the wealthy companies and thereby their executives at the expense of “Regular Joe” taxpayers.

An article published in Forbes last October said, “Economists and politicians blame [wealth inequality on]… tax codes, the cost of healthcare, the welfare and benefit systems to care for the bottom 10%, rising costs of education versus the increased demand for more highly educated employees, the aging of the population, and so on.”

e believe that the future debate will drift from describing the

current condition, to a general acceptance of the academic

findings i.e. “the current state.” Then the debate will move on to defining the “desired state” and then ultimately focus on the most appropriate process to get from where we are to where we want to be. Too many

THEPEOPLESTRATEGYEXCHANGE people are jumping to a proposed solution for how to get from here to there without defining where “there” is.

If we continue to focus on the stand-in issue of how much of the wealth should be held by the top “x” percent, we won’t address the core issue. That core issue is to determine and articulate our shared values and beliefs associated with the living conditions and opportunities we want all citizens of our country and the world for that matter to enjoy. To borrow from Voltaire it is not inappropriate to point out that “with great wealth comes great responsibility”.

There is no doubt in my mind that the dialogue over the next months leading up to the 2016 elections will color, popularize and polarize this issue with various slogans from various politicians, and there will be many

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$10,000 a plate dinners for the faithful “1%’er” while the “99%” crowd will look for another candidate that will promise and with luck deliver “change we can believe in.”

The result of this, we predict will be a very public dialogue on individual tax policy. But less easy to see is that it will have a significant impact on tax and regulatory policy for organizations. If the wealth of individuals and organizations - not just their incomes - is taxed annually (as suggested by Piketty) there will be, no doubt, a significant deployment of wealth across individuals and organizations.

In the coming months we will put on our predictive hats and discuss the implications for employees, organizations and HR executives regardless of whether you are republicans or democrats.◘◘◘ Michael Graham can be reached at michael.graham@grahall.com

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