Q2 2020 Texas CEO Magazine by txceomag

Q2 2020

These are challenging times. We asked top leaders and experts for insights on serving as CEO through uncertainty.

Wa r r e n i s c l e a n i n g u p Te x a s – a n d K E E P I N G I T S A F E.

Warren Paynes | Lead Residential Driver | Texas Disposal Systems, Inc.

Warren Paynes doesn’t just make Texas a cleaner place — he makes it a safer place. As a driver for Texas Disposal Systems, he knows that driving safe protects him, his route partner and everyone around them. He stays focused, performs inspections on his vehicle and puts his cell phone away. Warren takes his driver safety training seriously, and that’s why Texas Mutual is proud to support him and all the Texans who make the road their workplace. Texas Mutual is changing the way workers’ comp works for you. See Warren ON THE JOB at WorkSafeTexas.com/OnTheJob. © 2019 Texas Mutual Insurance Company

Letter from the OWNER During times of economic uncertainty, the CEO’s burden of command becomes heavier than ever. As always, we are asked to make the tough decisions and meet the needs of employees, customers, and shareholders—only now we are doing it with fewer resources, in a climate of fear, and under a harsh spotlight. This special issue of Texas CEO Magazine came together fast as we asked experts and leaders to offer their insights on leading through crisis. I hope these perspectives give you strategies to use in your own life and business, as well as reassuring you that you are not alone. The CEO role can be isolating and lonely. It helps to be reminded that there are others out there facing pressures and obstacles similar to those you’re facing. On p. 38, I offer some of my own thoughts on keeping your organization steady through the storm.

DURING TIMES OF ECONOMIC UNCERTAINTY, THE CEO’S BURDEN OF COMMAND BECOMES HEAVIER THAN EVER.

Every CEO will face problems during his or her tenure. I led NetQoS as CEO through thirty-one consecutive quarters of double-digit growth, but that winning streak was bookended by the recession after 9/11 and the Great Recession beginning in 2008. Things were incredibly tough in both recessions, testing my competence and leadership ability. But in both cases, we took the opportunity of a crisis to reexamine our mission, vision, and values as an organization and to refocus on the fundamentals of the business. All of us at Texas CEO Magazine hope that you and your organization stay safe and strong during what has so far been a difficult year, and that you find opportunities hidden in the midst of chaos. This is our second issue since our 2020 relaunch, and I’d like to thank all of our subscribers, contributors, sponsors, and advertisers, as well as everyone who’s attended one of our recent events or offered us feedback on the magazine. As we grow, we want to continue to be a resource to Texas CEOs and the wider business community, not only through this magazine but through events, newsletters, our podcast, and more. And, as always, we would love to hear from you about people and ideas you would like to see us cover in the future. Reach out anytime at info@texasceomagazine.com.

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FEATURES 6

BANKING IN THE AGE OF COVID-19 Tim Klitch

6 38

IN TIMES OF CRISIS, FOCUS ON YOUR SPAN OF CONTROL Carey Lohrenz

CEOS: MAINTAIN CYBER RESILIENCE

WHILE DEALING WITH COVID-19 Bob Barker

LEADING THROUGH CRISIS Joel Trammell

HOW TO HEDGE

AGAINST AN UNSEEN ENEMY A Conversation with Decision Strategist Annie Duke

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Texas CEO Magazine Q2 2020

AROUND THE WORLD WITH JIM ROGERS

The Legendary Investor on Global Disruptions and His World Travels

Q2 2020 Publisher Lauren Daugherty Editor Aaron Hierholzer Operations Tamara Trammell Graphic Design Michele Rodriguez Contributors

Jason A. Aimone, PhD, Bob Barker, Eric Bonugli, Elena L. Botelho, Bret Boyd, Craig Casselberry, Gordon Daugherty, Annie Duke, Marc J. Epstein, PhD, Manny Fernandez, George Friedman, PhD, Gary Hoover, Keeli Jernigan, Tim Klitch, Carey Lohrenz, David Marquet, Blaine McCormick, PhD, Valerie Metzker, Kim R. Powell, Jim Rogers, Jenifer Sarver, Rob Shelton, Sam Silverstein, Paul G. Stoltz, PhD, Tony Streeter, Alicia Thrasher, Joel Trammell, Sunny Vanderbeck, Paige Velasquez, Ellen Wood, Michael W. Wright To subscribe to the print or digital edition of Texas CEO Magazine, please visit our website: www.texasceomagazine.com and click subscribe. POSTMASTER Please send address changes to: The American CEO, LLC dba Texas CEO Magazine 8012 Bee Caves Road Austin, TX 78746 © 2020 The American CEO, LLC dba Texas CEO Magazine. All rights reserved. The Content in this issue may not be reproduced, distributed, or otherwise used without the prior written consent of the American CEO, LLC. The various contributors own their respective Content that is published in this magazine. The beliefs, content, comments, opinions, statements and viewpoints (collectively, the “Content”) published in this issue are those of the respective contributors and we do not necessarily agree, endorse, support or verify such Content. The Content presented in this issue is for informational purposes only and is not advice of any kind. Your use of the Content is at your own risk. The Content is provided on an “AS IS” basis, without any warranties of any kind, either express or implied. Neither The American CEO, LLC nor any person associated with us makes any warranty or representation with respect to the completeness, reliability, quality, or accuracy of the Content. Without limiting the foregoing, The American CEO, LLC does not represent or warrant that the Content will be accurate, reliable, error-free, that errors will be corrected, or that the Content will otherwise meet your needs or expectations. The American CEO, LLC disclaims all warranties of any kind, whether express or implied, statutory or otherwise, including but not limited to any warranties of merchantability, non-infringement and fitness for particular purpose. The foregoing does not affect any warranties which cannot be excluded or limited under applicable law.

INSIDE 14

Bret Boyd

[LEADERSHIP]

DEVELOP YOUR LEADERSHIP LANGUAGE Elena L. Botelho and Kim R. Powell

[MANAGEMENT]

HOW CEOS CAN NAVIGATE THE PROS AND CONS OF REMOTE WORK Alicia Thrasher

KEEPING THE TEXAS ECONOMY ON TRACK Craig Casselberry

3 THINGS BRANDS SHOULD KEEP TOP OF MIND IN TIMES OF CRISIS Paige Velasquez

[CULTURE BUILDING]

TAKING YOUR TEAM FROM “CAN DO” TO “CAN THINK” A Conversation with Best-Selling Author Captain David Marquet

THE STORM BEFORE THE CALM

International Strategist and Best-Selling Author Dr. George Friedman on What’s to Come in the 2020s

[MANAGEMENT]

READY, SET, DELIVER:

GETTING YOUR SUPPLY CHAIN READY FOR SAME-DAY DELIVERY Valerie Metzker

[ENTREPRENEURSHIP]

STARTUP SUCCESS: PLANNING A FUNDRAISING CAMPAIGN Gordon Daugherty

[INNOVATION]

LESSONS FROM THE RETAIL APOCALYPSE Gary Hoover

[LEADERSHIP]

GLOBALIZATION AND THE FUTURE OF SUPPLY CHAINS

HOW ARE YOU LEADING THROUGH CRISIS? Texas CEOs Share Their Advice and Strategies

[LEADERSHIP]

SOUTHWEST AIRLINES AND BOEING:

CONTRASTING CASE STUDIES IN ACCOUNTABILITY Sam Silverstein

[CULTURE BUILDING]

THE LEAN EXECUTIVE

Michael W. Wright and Blaine McCormick, PhD

[LEADERSHIP]

COVID-19 AND BEYOND:

THE LEADERSHIP CHALLENGE OF OUR LIFETIME Ellen Wood

[SELF-AWARENESS]

ARE YOU A MAVERICK CEO—OR ARE YOU ACTING LIKE A BRILLIANT JERK? Rob Shelton and Marc J. Epstein, PhD

[PERFORMANCE]

GOING BEYOND THE CALL:

IMPLEMENTING A FULLY FUNCTIONING SERVICE DESK Tony Streeter

FINDING THE UPSIDE IN ANY CIRCUMSTANCE— INCLUDING A PANDEMIC Paul G. Stoltz, PhD

[LEADERSHIP]

HOW TO LEAD THROUGH TRANSFORMATIVE CHANGE

Keeli Jernigan

[MANAGEMENT]

THREE PRIORITIES FOR BOARD AGENDAS IN 2020 Manny Fernandez

SOCIAL DISTANCE VS. SOCIAL DISTANCING Jason Aimone, PhD

[ENTREPRENEURSHIP]

YOU CAN SELL YOUR BUSINESS WITHOUT COMPROMISING

WHAT MATTERS MOST TO YOU A Conversation with Investor and Entrepreneur Sunny Vanderbeck

[CULTURE BUILDING]

4 BIG BENEFITS OF STRUCTURED MENTORSHIP PROGRAMS Eric Bonugli

[LEADERSHIP]

COMMUNICATING IN TIMES OF CRISIS Jenifer Sarver

TexasCEOMagazine.com

Tim Klitch

IN THE AGE OF COVID-19

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The events of the last few weeks have been shocking—both from a societal viewpoint and in the impact on individuals, governments, and businesses worldwide. After being a lender through the Texas real estate crash of 1986–1990, the tech bubble bursting and 9/11, and the 2008 financial crisis, I see elements of all of those events unfolding in recent weeks. The breadth, suddenness, and unforeseeability of this crisis is shocking. After 9/11 we had airlines shut down for seven to 10 days and sports teams took a few days off out of a sense of respect and patriotism. But the number of businesses impacted by COVID-19 so far, and the length of the potential impact, is startling. Not knowing the duration and the immediate revenue impact is stark—thus the Fed’s reducing interest rates to 0 percent in March, itself a stunning move in what was a healthy economy at near full employment. It tells you what the Fed knew and what we may not be able to see yet.

Don’t make it easy on the bank to say no to your use of the credit facility by delaying the use of your revolver until you are in an MAC (material  Recast your 2020 and 2021 financial plans, assuming drastically lower revenues immediately. adverse change) position. You should have a worst-case plan that is darker  If you have ample liquidity, consider drawing than your imagination allows. This should be down enough available liquidity (lines of completed and reviewed with your board credit, open-term loans, committed capital from this week. investors) to fund operations on your newly downscaled operating plan for a minimum of 12  If your liquidity was tight before now, you need to undertake immediate steps to preserve existing to 18 months—or longer if you are not expecting a rapid bounce back in the near term. liquidity and draw down alternative sources of

FROM A CREDIT PERSPECTIVE, I SEE A FEW THINGS THAT CEOS SHOULD CONSIDER IMMEDIATELY:

capital with only secondary regard to the dilutive effects on capital.

 Remember that there are two bars to clear with banks—one higher bar to get new credit and a lower bar to keep the credit line you already have.

 Once you have your plan recast and have your arms around the worst-case scenario, visit with your banker and either (a) get covenant waivers/ resets done in advance or (b) get a line of credit established with wide operating tolerance to get to TexasCEOMagazine.com

the lending window quickly, before the banks start having a huge increase in non-performing assets and immediately narrow the lending window.

 In 2008, companies were drawing down on the revolvers and keeping the money in government- backed mutual funds. I do not see the same need to avoid a toxic and undercapitalized banking system as in 2008—however, the pain of these events will affect different banks by varying degrees, so I would encourage all companies to have at least two or three safe banks to park your money in. Now is not the time to deal with a weak or undercapitalized bank—no matter what rate they will pay on a CD or money market account. Monitor your bank’s credit rating and be prepared to switch depository institutions if your bank’s rating weakens significantly.  Keep in mind that money market mutual funds have changed since 2008—they no longer have a constant $1.00 NAV (net asset value) and can fluctuate in value based on the quality of the underlying securities. I would not keep corporate cash needed to fund short-term operations in an account with a variable NAV, such as a general commercial paper money market fund.  Staff reductions may become necessary, but start by devising a plan to reduce hours or offer team members reduced pay. This can help you achieve the dual goals of reducing monthly expense burn while maintaining the loyalty and commitment of your staff.  One of the key items bankers always look at is vendor and supply chain diversification. It seems that every company that makes a product feels forced to offshore manufacturing to China—I get it—but if 100 percent of your product supply is shut down, your COGS won’t matter when your company is gone. You must start working today on a secondary source of manufacturing resources that will withstand similar unforeseen events.

Texas CEO Magazine Q2 2020

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 Expect any open contracts, purchase orders, and deals with no earnest money to fall through, especially if your customers are in affected industries.  Prepare for assets to devalue by 25 percent or more immediately (even greater if you are in a business that relies on travel or people gathering). If you are selling something and need the liquidity to keep operating, don’t be proud and assume someone retrading a deal on you can be replaced by another buyer.

IN ADDITION TO THOSE RECOMMENDATIONS, HERE ARE A FEW OF MY PERSONAL OBSERVATIONS ON THE CURRENT SITUATION:  Banks are in way better shape than they were in 2008. We will find out in 2021, when 2020 earnings are known. Regulators have been way more diligent in risk-assessing banks leading up to this event. It appears that the NYSE stock-price party was not accompanied by a bank lending binge as in 2008.  When the Fed cut rates to near zero in 2008, I never had a single commercial borrower show up at my office saying, “Hey, I want to borrow some of that cheap money you have on sale.” Interest rates have almost zero impact on the attractiveness of debt to most businesses. Prime bank loans that were at 4.5 percent going down to 2.5–3.0 percent are not going to change any capital decisions. It really is a sign of how bad things are going to get.  With the rapidly declining stock market (based on the apparently accurate perception that future corporate earnings will be massively impacted), I expect to see secondary assets that are sensitized to the stock market and wealth effect deeply discounted for the next 18 months. If you have ample liquidity and low debt levels, the next several months will present massive bargain

opportunities from sellers who have leverage or insufficient cash flows and need to get cash and reduce balance sheet debt.

 I don’t want to see the government make the same mistake they made with TARP in 2009. It was smart, well designed—and made the government billions of dollars of profit by punishing the banking/insurance industries for their collective sins. But it left too many weak competitors in the market after the crisis ended, with excess capacity and too many dollars to lend and not enough qualified borrowers. These adverse events are nature’s way of making the weaker companies perish and rewarding the stronger ones—and if a few airlines, hotels, and restaurants need to consolidate, then we will all be better off in the long run, with better-capitalized and better-run survivors in these industries.

ONE FINAL THOUGHT: We will get through this. I hope that the combined number of deaths from COVID-19 and normal flu season are less in the United States than in prior years due to our increased diligence. Governments, businesses, and people get smarter every year, and while I think the short-term impact on certain individuals and companies will be materially negative, I think our society and culture will be strengthened by this test of our resolve, our community spirit, and our collective health. After a brief appearance on the pro tennis tour in the 1980s, Tim Klitch was a 35-year commercial banker, with experience in real estate and tech lending, culminating in his serving as president of Comerica in Austin for 15 years. Tim now consults with companies on debt structuring alternatives.

TexasCEOMagazine.com

Leadership requires fearlessness, and that’s never truer than in a crisis. When problems and setbacks occur, everyone looks at you, the leader, to see how you are going to react. As the leader, you have to steer the ship and prevent yourself— and others—from panicking. Panicstricken people do not make good decisions, nor do they inspire confidence in their team.

IN TIMES OF CRISIS,

FOCUS ON YOUR

SPAN OF CONTROL Carey Lohrenz

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As the US Navy’s first female F-14 Tomcat fighter pilot, I’m familiar with handling crisis and operating under pressure. One of the most valuable tools I got from training is understanding my span of control. And it’s a practice that can help any CEO lead an organization through even the most trying of times. In the corporate world, your span of control is the number of direct reports you can effectively manage at one time. But in the Navy, the idea is a lot broader. Your span of control is determined by the things you can and should control at any given time. Span of control was how we reminded ourselves what to focus on right now, knowing that the other stuff was outside our control and shouldn’t take up precious mental space. Recognizing our span of control kept us focused on what mattered, and became a primary tool in taming the distractions and pressure of flying demanding missions. Since active duty, I found myself applying this tool to my personal and working life. Again and again, I have seen its power to keep me sane in the midst of chaos, pressure, and adversity, including some of the most tumultuous times I’ve ever faced. For me, span of control isn’t just a neat concept—it’s a way of life. So much so that I got the letters “SOC” tattooed on the inside of my right wrist. Every time I feel the overwhelm, it takes a glance down at those three letters to remind myself that I can only control so much. And that the best way to conquer the chaos is to stay focused on those things I can control, right now, in this moment.

WHAT CAN BE DONE? As leaders, we cannot waste time and energy trying to change circumstances we can’t control. We must accept the

things we cannot change, which in turn allows us to focus on the things we do have control over. Even if you can’t change a stressful situation, you have a choice in how you respond. Ask, “What can be done?” I’m going to share an example that hits close to home for me—and has heavily influenced my views on resilience. Though he probably doesn’t know it, my cousin Charlie Lemon is my hero. At twenty-six years old, Charlie enlisted in the US Army, in combat arms. As an Abrams tank soldier, he deployed in 2010 to Iraq. About ten months into deployment, while out on a routine mission, his truck was hit by an improvised explosive device—an IED. Charlie was standing in the truck. The penetrator went through his legs and also killed his best friend. Although the truck wasn’t badly damaged, the devastation to Charlie physically was profound. He fought for his life over the course of the next few weeks and endured many surgeries in the months that followed. He ended up losing both of his legs. Yet Charlie has managed with grace the new deck of cards he was dealt. In fact, he has grabbed life by the horns. He now cycles and races all over the world with Operation Comfort. He has done 500-mile races, and he keeps pushing through barriers. He surfs, he fishes, he stays engaged. His next goal is to make the US Paralympics team. Instead of doubting his capabilities and getting mired in longing for what used to be, Charlie strives to answer the question “What can be done?” He understands his span of control, and he maximizes what he does have power over. To do anything less would have been self-limiting. By taking charge of what he can control, he has been able to bounce back and go beyond the typical expectations, exhibiting astounding resilience, not just mentally but TexasCEOMagazine.com

YOUR SPAN OF CONTROL IS DETERMINED BY THE THINGS YOU CAN AND SHOULD CONTROL AT ANY GIVEN TIME.

physically. He has chosen to push ahead and define life on his terms, while blasting through barriers. Some of the most poignant words about his resilience come from Charlie’s mom: “Some people never even get to meet a hero. I am proud to say that I got to raise one. I have been truly blessed to be a military mom.” Amen. Rather than dwelling on a factor he can’t control, Charlie decided he wanted to live a life that is, as he says, “worthy of my best friend’s sacrifice.” Mission accomplished, Charlie.

SPAN-OF-CONTROL STRATEGIES As you lead your team through periods of uncertainty, there are some concrete steps you can take to recognize your span of control and use it as a guideline for action. Acknowledge the situation. Start with yourself. Acknowledge that you feel like things are out of control right now. Examine the outcomes that worry you the most. Sit with the fear for a moment. Feel it and acknowledge it. Just as important is acknowledging the situation with your team. People need to hear from you frequently in times of crisis, and they need to hear you being open and honest. 12

Texas CEO Magazine Q2 2020

Maybe you can’t say everything you want to, but let people know that you are aware that they are feeling uncertainty and fear. Again, you don’t want people to panic, but don’t sugarcoat or twist your words. A solid grounding in reality, with yourself and with your team, is required to find your true span of control and recognize what can be done to improve the situation. Hack the clock. When we aviators face a crisis in midair, we hack the clock—which means we start a timer in the cockpit that will measure the next leg of the flight. Hacking the clock does two things for the aviator: (1) it provides us with an automatic reaction to crisis that reasserts our sense of control even as adrenaline is coursing through our veins, and (2) it subtly changes our perception of passing time as we deal with the issue at hand. Hacking the clock isn’t just for fighter pilots. When we earthbound civilians hit a sudden storm, hacking the clock is a tried-and-true method for slowing down, taking stock, and not letting this new level of chaos throw us off. During a crisis, noting the time and possibly even slowing things down for a period of hours or days can help you and

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your organization maintain a more realistic perspective. What are your organization’s main priorities? Get all the information by pulling the team together to get a sense of the scope of the problem. Wall Street’s “circuit breakers” are a great example of hacking the clock. As Stacey Cunningham, president of the New York Stock Exchange, explained in a recent post on Twitter, “market-wide circuit breakers enforce a trading pause so that investors have time to absorb information, better understand what’s happening in the market, and make decisions accordingly.”

THE BEST WAY TO CONQUER THE CHAOS IS TO STAY FOCUSED ON THOSE THINGS I CAN CONTROL, RIGHT NOW, IN THIS MOMENT. Focus on what matters. When you or your team faces a crucible, laser-like focus becomes more important than ever. You’ve got this giant weight on your shoulders, but you have to find a way to still keep your eye on the ball. People are still relying on you. So start with the big picture. Take a quick inventory. What do you see from the 30,000foot level? Sometimes you have to go even higher, maybe to 80,000 feet. First, are you alive? Okay, then you’re still in the game. I am not being sarcastic here. When your world is crumbling around you—because of a death in a family, the loss of a limb, divorce—tomorrow doesn’t even seem tolerable, let alone getting through today. But if you’re alive, there’s reason to hope. Then, when you feel as though you can breathe again—and maybe make it until lunchtime—step it down a little. Zoom in on what really matters to you: your core values, your purpose. What are the most important parts of your life today? Family? Work? Community? Self-development? The legacy you want to leave? Things might not look so great right now, but if you have embraced your new reality and can focus now on what matters most to you, you’re on your way to making a comeback.

Now analyze your part or role in the new reality, and plan your course of action. What are the next steps? What are the top three things you and your team need to focus your time and attention on? When you have too many priorities, it’s easy to become overwhelmed, overloaded, and hopeless. Focus on what matters! As we say in fighter aviation, “If you lose sight, you lose the fight.” Take action. Finally, look forward and take action! Action conquers fear. It may not eliminate it completely, but acting on the items that are firmly in your and your team’s span of control can give you back a sense of power. Even if you feel afraid, anxious, disappointed, or completely screwed over, move quickly from analysis to your plan of action. Respond. Be intentional. Work on those top three priorities. Feel the fear, and do it anyway. Nobody can prevent you from choosing to move forward and be exceptional. Do something specific that can lead to a more positive outcome. It may start with picking up the phone or just getting out of bed, but whatever it is, keep moving forward. When you get hit with adversity, it’s important to take stock and then keep moving. Find the opportunities hidden within the obstacles. Do something positive with what happened to you. Those who survive and thrive are able to turn setbacks into successes and roadblocks into steppingstones. Fearless leaders discover meaning in every mishap, and they emerge not just stronger but better equipped with tools to lead. —

As humans, our resilient mindset is our superpower. We have a keen ability to reconstruct narratives and redefine moments and learn from them. This is the perfect place to start as you identify your span of control. Because one thing that is always—and I mean always—within your span of control is your attitude, resilience, and mindset.

As the first female F-14 Tomcat fighter pilot in the US Navy, having flown missions worldwide as a combat-mission-ready United States Navy pilot, Carey Lohrenz is used to working in fast-moving, dynamic environments, where inconsistent execution can generate catastrophic results. She is the author of the Wall Street Journal bestseller Fearless Leadership: High-Performance Lessons from the Flight Deck and has appeared on CNN, MSNBC, NBC, CBS, ABC, and NPR, and in Inc., Time, Huffington Post, and more. She has delivered her leadership and strategy experience to such companies as Cisco, Dell, Teva, Deloitte, Underwriters Laboratories, Verizon, AT&T, Kimberly-Clark, State Farm Insurance, and Sea Ray Boats, to name a few.

TexasCEOMagazine.com

[LEADERSHIP]

GLOBALIZATION AND THE FUTURE OF SUPPLY CHAINS Bret Boyd

We live in a globalized world, one in which most organizations of any size have customers, supply chains, and outsourced services teams spread across the globe. Modern companies are able to leverage talented, inexpensive labor, low transportation costs, and (relatively) free-trade policies to manufacture goods more efficiently, and the growing international consumer class enables them to sell goods more broadly. The benefits of the past 30 years of globalization have been fantastic in terms of capital efficiency, labor productivity, and net economic growth. This complex, intricately connected global system has been a key driver of our current age of abundance. However, this system carries risks that executives who operate in global markets need to understand. Our globally connected system provides for efficiency and scale but also adds risk and fragility. These risks have largely been hidden, but cracks in the system are beginning to emerge, and supply chain resilience has become an issue of intense focus across industrial sectors. Many organizations are working diligently at this moment to map out connections and dependencies in their supply chains—whether they sell widgets, services, or complex manufactured systems.

THE SIGNIFICANCE OF CHINA What has happened in and around China in recent years illustrates why leaders need to think strategically about supply chains. China has become the destination of preference for manufacturing and related supply chains for many American companies. In most cases this has proved to be a great decision for those companies: costs declined, margins rose, sales increased. Going all in on a globally interconnected business model can be a good strategic decision—until, of course, it’s not. An example of this may be rearing its head in China, namely the US–China trade war (2018–present)1 and the shutdown of parts of China due to the coronavirus beginning in early 2020.2 14

Texas CEO Magazine Q2 2020

These forces may or may not have enduring systemic effects. At best they will be localized disruptions and tragedies that cause us to review our supply and logistical systems; at worst they will converge in such a fashion that will seriously damage companies that have made major commitments in China. Our current connectivity with China needs to be understood within the broader context of globalization; thus, what follows is a massive oversimplification of where we are in the cycle of globalization. Globalization, per se, is not new. Industries and companies have operated with global supply chains and customers for centuries, from the East India Company of the 17th–19th centuries and Standard Oil of the 20th century. The global outsourcing movement that is more directly relevant to modern China began in earnest in the 1980s and 1990s. The data describing the growth of global connectivity during this period is staggering—international trade grew around 35 times, and global foreign direct investment (FDI) grew from $0.7 to $25 trillion between 1980 and 2010.3 Much of this growth concentrated primarily in large countries, exemplified by the BRICs—Brazil, Russia, India, China (a term coined in 2001 by a Goldman Sachs executive).4

The scale and rapid growth of China has provided an environment that is so compelling that many large organizations today are utterly reliant on China. Outsourcing in China began around relatively low-skilled commodity-type subcomponents, but over decades the types of systems that are outsourced have become increasingly complex, requiring higher-skilled and highercost labor. Today, for example, some of the most advanced electronics on the planet, from iPhones to quantum computers, are manufactured in China. Exports from China to the United States increased from $3.86 billion in 1985 to $539.5 billion in 2018, highlighting the magnitude of US–China connectivity.5

particularly in those industries that rely on lower-skilled labor (such as clothing), to leave China and locate manufacturing in other countries. However, China’s rise up the capability scale has made it a compelling place for many technology and electronics companies that require more skilled labor. This has also created the world’s largest middle class,6 which is capable of buying these consumer electronics products and has had the secondary result of making China one of the most important consumer markets in the world. Thus, companies have had dual reasons to concentrate their efforts in China, which up to this point has been a very productive decision. Until, that is, something happens.

As China has risen up the ladder of value-added manufacturing capacity, labor costs have risen. This has caused some companies,

Concentrating operations in one country or region magnifies both benefits and risks. There are a variety of issues associated with China that range from human rights to intellectual property protections, but let’s focus on two recent developments: the US–China trade war and the coronavirus. The trade war, which has been particularly damaging to specific sectors, is effectively a tit-for-tat exchange of targeted tariffs. The United States imposed tariffs on $360 billion in Chinese goods in 2019, while China reciprocated with $110 billion in duties.7 The

coronavirus has closed down travel, factories, and movement of goods in parts of China, resulting in material reduction to production capacity, the full extent of which is not yet known. While these developments are totally different, they both have the potential to bring ruin to companies that have prized efficiency over resilience and run their entire supply chains through China. The effects of both developments at once is even more significant and is the reason why most large organizations in the United States are looking closely at this issue today.

THINKING STRATEGICALLY ABOUT SUPPLY CHAINS The intent here is not to point fingers at China or advise companies to move their supply chains out of China. Rather, China serves as a timely example of how interrelated and potentially fragile these systems can be. China is unique in that it is large enough to be a single supplier for even the most significant organizations, but we could use other events in other countries to make the same point. Optimization of supply chain operations provides efficiency but also creates risk, and there are many risk vectors that can cause organizations to pay for overconcentration. Executives need to be thoughtful and proactive in identifying potential drivers of risk. Books can (and have) been written about sources of technological, socioeconomic, and geopolitical risks that leaders need to be aware of when conducting risk analysis and stress testing of supply chain operations. Political drivers can influence import/export policies, as has happened in the US with respect to China. However, they can also influence regulations around “local content” or the foreign ownership of local companies and operations, as well as labor stoppage, blocked or destroyed transportation networks, and even directly malicious activity. Technological forces such as cybersecurity, biotechnology, 3D printing, and exotic computing could quickly and significantly affect global networks. “Black swan” events such as terrorism, war, pandemics, and ecological disasters are unlikely on any given day, but over a long enough period of time will happen. After developing a comprehensive picture of risk drivers, executives need to have open and realistic conversations about the tradeoffs between cost and efficiency. We all want to run low-cost, efficient operations. However, by definition, optimally efficient systems lack slack. Slack is needed to manage disruptive events—the spare capacity to pick up production taken offline by a tsunami, for example. These are very real and difficult tradeoffs. Multiple, redundant vendors and manufacturing sites would be optimal from the perspective of slack and resilience but would be expensive, perhaps cost prohibitive. How do we balance these tradeoffs? What are the sunk costs and switching costs that constrain our ability to adjust, either proactively or reactively? How can we use automation to build more scalable and perhaps geographically fungible operations? These tradeoffs are different for every organization and need to be contextualized for an organization’s specific financial, geographic, and operational profile. 16

Texas CEO Magazine Q2 2020

WHAT COMES NEXT The butterfly effect, explored in mathematics and chaos theory, also applies to companies and industries because of these complex interconnections. When supply chains are global, as opposed to local or national, disruptive events in faraway places can have an outsized and cascading impact in other geographies and industries. What is happening in China and elsewhere in 2020 may or may not prove to have an enduring systemic effect. We could see some large companies shed significant market capitalization as a result of decisions made decades ago. Or we could see markets and executives sigh a huge sigh of relief as these challenges shift from international panic to localized tragedy. We simply do not know if this will be the catastrophic event that breaks organizations with fragile supply chain systems. However, we can predict with high confidence that, given enough time, there will be such a catastrophic event. It does cost more in the short term to develop supply chains that use redundancies and other techniques to increase resilience. Ensuring resilience may be worth the margin degradation for most organizations with long-term stakeholders, but all companies do not have the benefit of long-term stakeholders. This creates a difficult calculus for executives with more short-term focus, such as those who operate in public markets that concentrate on quarterly performance. Incentives that prioritize short-term wins over long-term health may be misaligned, but they are a reality that we need to acknowledge. This is a fascinating time to lead a global organization, rife with both risk and opportunity—and it’s certainly not for the faint-hearted.

Bret Boyd is the cofounder and managing partner of the Grayline Group, an Austin-based advisory and analytics firm. He has served in a variety of business, technology, and strategy leadership roles throughout his career, most recently as CEO at Knoema and Vice President at Stratfor. He is a graduate of West Point, a former Army Ranger, and the coauthor of Catalyst: Leadership and Strategy in a Changing World.

1 Timeline of the trade war: https://www.reuters.com/article/us-usa-trade-chinatimeline/timeline-key-dates-in-the-u-s-china-trade-war-idUSKBN1ZE1AA

Timeline of the Wuhan coronavirus: https://www.cnn.com/2020/02/06/health/ wuhan-coronavirus-timeline-fast-facts/index.html

Fredrik Erixon, ECIPE: https://ecipe.org/publications/the-economic-benefits-ofglobalization-for-business-and-consumers/#_ftn1

4 Goldman Sachs: https://www.goldmansachs.com/our-firm/history/ moments/2001-brics.html 5 Statista: https://www.statista.com/statistics/187675/volume-of-us-imports-oftrade-goods-from-china-since-1985/ or Bloomberg https://www.bloomberg.com/ graphics/2019-globalization/ 6 Brookings, p7: https://www.brookings.edu/wp-content/uploads/2019/02/us_ china_economic_relationship.pdf 7

BBC: https://www.bbc.com/news/business-45899310

DEVELOP

[LEADERSHIP]

YOUR

LEADERSHIP LANGUAGE Before you became CEO, you likely added value to the business by being the one with the knowledge and insight to make the big decisions. But the higher you go, the more of your impact comes from the actions of others rather than directly from your insight, information, or experience. We like the way Tom Erickson, who has been a CEO and chairman of several companies, put it: “Ninety percent of CEO leadership is behavior modification.” This article is adapted from the New York Times and Wall Street Journal bestseller, The CEO Next Door by Elena L. Botelho and Kim R. Powell.

Behavior modification is all about getting scores of people acting in an aligned fashion to achieve the goals of the organization. Trust people enough to step back and let them do their job, but also find opportunities to use your presence to keep people accountable and on point and to keep them moving in the right direction. Choose where you get involved based on what signals need to be sent to an employee, to your team, or to the broader organization. Thanks to “amplification”—the outsize effect the power of the CEO role has on those around you—any suggestion, no matter how gently you deliver it, feels like an edict. The best CEOs deliberately develop their own language of leadership, an idiosyncratic repertoire of small gestures that send big signals. Here are a few examples of the symbolic language of CEOs we’ve noticed: • CEO for “This matters”: When Tom Monahan was CEO at CEB, he read every benchmarking report the company produced. Every so often he’d follow up to offer a specific point of view on something he’d read. The point he was making wasn’t as important as his sending a powerful message that product quality and customer experience were top priorities for the CEO. • CEO for “I’m paying attention”: When a CEO drops in for a surprise plant visit or walks the halls to smile and shake hands, he or she does so in part to remind people that every single day they have an opportunity to excel or to slip up—and, yes, their efforts count. TexasCEOMagazine.com

• CEO for “I know you’ve got this”: You go to the meeting—just to listen. John Zillmer, a serially successful CEO currently at the helm of $16 billion Aramark, in his previous role decisively turned around Allied Waste. Yet, if you attended one of his management meetings, you’d be shocked to see that he often barely said a word. He was present where it mattered, and his silence said, “I’ve got the right people at the table doing the right thing.” • CEO for “We’re discussing, not deciding”: When former CEO of Arrow Electronics Steve Kaufman wanted to remind his staff that his participation in discussion and debate is meant to explore—not direct—he literally took off his CEO hat (it’s a baseball cap) and put on a second hat that says TEAMMATE. “Otherwise, when I ask questions, people think I’m giving answers they have to run with,” he says. • CEO for “I want the truth”: Steve Kaufman doesn’t just explicitly ask direct reports to tell him the unvarnished truth; he ensures that bad news travels up to him fast by thanking the bearer and reacting calmly and graciously every single time he’s given information, even when the responses aren’t what he wanted to hear.

Kim R. Powell grew up in Atlanta, Georgia, and earned a BA from the University of Notre Dame and an MBA from the Kellogg School of Management. For nearly twenty years, Kim has applied her passion for helping people to her role as a trusted advisor to CEOs and high-potential leaders, first at the Boston Consulting Group and now at ghSMART.

• CEO for “I’m never too busy for you”: Marc TessierLavigne, president of Stanford University, a school with more than 16,000 students, has office hours for students. Through an online signup sheet, anyone enrolled can get ten minutes with the president, with priority given to first-time visitors. • CEO for “I’m human”: Whether you wear a Hawaiian shirt or find other ways to bring your personality to work, people want to follow full human beings, not walking suits. For some CEOs, self-effacing humor goes a long way. After replacing half her team at Reader’s Digest, Mary Berner passed out Halloween costumes at a leadership off-site. Her costume? The Wicked Witch of the West. The language of leadership has to do with actions, not words; signals, not demands. In the CEO seat, success is no longer your success. It’s your team’s. Adapted from THE CEO NEXT DOOR: The 4 Behaviors that Transform Ordinary People into World-Class Leaders © 2018 by G.H.SMART & Co, Inc. Published by Currency, an imprint of Penguin Random House LLC. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Texas CEO Magazine Q2 2020

Elena L. Botelho advises leading CEOs and boards. She grew up in Azerbaijan and Russia in a family of mathematicians and earned her MBA from Wharton. She has advised more than 200 CEOs and boards over nearly two decades, first as a strategy consultant at McKinsey and currently as a partner at ghSMART.

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CEOS: MAINTAIN CYBER RESILIENCE WHILE DEALING WITH COVID-19 Bob Barker

“The crux of the problem is that many boards, C-suite executives, and CAEs [chief audit executives] have not caught up with the fundamental structural change digitalization implies.” —Dominique Vincenti, Chief Audit Executive at Uber

Feature

What is the relationship between the coronavirus outbreak and cybersecurity? Answer: They both require conscious CEO leadership— and attending to one must not subtract from a focus on the other. Attempting to “flatten the curve” of coronavirus diffusion by practicing “social distancing” has caused enormous business upheaval. Massively more people working from home combined with disrupting and modifying supply chains and routine work processes significantly increases the potential for cyber breaches against unprepared organizations. For example, rushing to set up thousands of new computers for remote work without adequate security policies and processes already in place opens enormous openings for penetration of corporate networks. For a CEO not already exercising leadership to ensure that cyber risk is well managed, the current crisis is a wakeup call. While digitalization of business over the past two decades has delivered substantial improvements in efficiency, online cyber risk has mushroomed, growing to become the single greatest hazard to most businesses. The onus to protect the organization ultimately falls on its leader, the CEO. What can a CEO do to implement changes and mitigate the risk? Dr. Michael Parent of Simon Fraser University recently pointed out that “cybersecurity has reached its Sarbanes-Oxley moment.” Several years ago, responses to cyber risk began mirroring steps previously taken to handle financial risk, and we began to hear about cybersecurity governance, or “cybergovernance” (see diagram below). In reaction to the out-of-control fraud exposed at Enron and other notorious companies, the Sarbanes-Oxley Act of 2002 mandated dramatic upgrades in financial reporting. Today, the accelerating threat from cyber risk demands analogous behavioral changes. These could come from farsighted, proactive CEOs—otherwise, Sarbanes-Oxley-like cyber legislation will likely be enacted.

CHANGE STARTS WITH THE CEO For the past five years, boards and executives have been told repeatedly that responsibility for managing cyber risk must start at the top. Two-thirds or more of recorded cyber breaches are not caused by failing technology but instead by failures of people, policy, and process. The obvious response is to implement an effective cyber risk governance program that helps executives and boards oversee cyber risk just as they do other enterprise risks, without requiring them to become cyber experts. Recently, members of the Chinese military were charged with stealing names, addresses, Social Security and driver’s license numbers, and other personal information stored in Equifax’s databases. Access to massive amounts of personal data was possible because software patches weren’t applied in a timely manner. Equifax’s CEO blamed an employee, but the facts pointed to management’s failure to ensure that policies and processes were followed, which subsequently led to massive third-party lawsuits alleging negligence and malfeasance by the management and the board.4 Despite high-profile management failures and repeated warnings to CEOs, the frequency and impact of cyber events, especially against small and medium-sized businesses, continues to accelerate. As Scott Steinberg of CNBC recently noted, “With 43 percent of online attacks now aimed at small businesses, a favorite target of high-tech villains, yet only 14 percent prepared to defend themselves, owners increasingly need to start making high-tech security a top priority.”5

SMALL AND MEDIUM-SIZED ENTERPRISE RISK To identify the causes and effects of cyberattacks on small and medium-sized businesses in North America and Europe, property and casualty insurer Hiscox recently surveyed 3,300 firms.6 The study revealed that more than half of companies in the United States had TexasCEOMagazine.com

suffered a breach within the previous 12 months, and 40 percent had incurred multiple breaches. Even worse, the estimated total losses had doubled those of the previous year. The percentage of medium-sized firms with between 50 and 249 employees reporting recent cyber incidents jumped from 36 percent the previous year to 63 percent.

GROWING AWARENESS Given the increased attention to and spending on cybersecurity, is progress being made? With respect to growing awareness of the problem, the answer is yes. The Institute of Internal Auditors recently published its inaugural OnRisk report.7 The report asked participants to list and rank the greatest risks their organization faces in 2020 and is expected to face in 2024. Cybersecurity and data protection were number one in both cases. If awareness has grown, why do so few CEOs apply the energy and resources needed to implement an effective cyber risk program? It’s not really a mystery, and it comes down to the positive orientation of most leaders. As Robert S. Kaplan and Anette Mikes write in Harvard Business Review, “Managing risk is very different from managing strategy. Risk management focuses on the negative—threats and failures rather than opportunities and successes. It runs exactly counter to the ‘can do’ culture most leadership teams try to foster when implementing strategy. And many leaders have a tendency to discount the future; they’re reluctant to spend time and money now to avoid an uncertain future problem that might occur down the road, on someone else’s watch.”8

CHANGING MENTALITY Most larger companies have begun treating cybersecurity as an enterprise risk alongside financial and other risks. As cyber risk threatens to impact credit ratings that determine access to needed capital, small and medium-sized companies must invest in policies and processes that will increase their cyber resilience. Managing cyber risk effectively requires applying a set of management principles and taking direct steps in support of them. I suggest applying five principles derived from studying the Equifax breach that will increase your company’s cyber resilience:

a year before its massive breach.9 Despite Equifax receiving a score of zero out of 10 in MCSI’s cyber assessment, management failed to ensure that basic measures were in place before the breach occurred (for example, a process to double-check that patches were being regularly applied). Begin investing now to put the 3 P’s of good cyber governance—People, Policy, Process—in place to increase cyber resilience. 2. Learn from the mistakes of others. When you see a headline about a breach, look for lessons and discuss them with your staff. For example, the Equifax breach exposed unacceptably negligent behavior and a lack of commitment to well-understood cyber policies and processes. One obvious first step is to implement policies and processes based on national standards—for example, the National Institute of Standards and Technology’s Cybersecurity Framework—that can bridge the gap between “tech speak” and “exec speak” so your board and management team can track progress. 3. Apply the same rigor to cyber audits that you do to financial audits. Well-accepted standards become the foundation for rigorous cyber auditing. Automating continual tracking of improvements leads to more efficient audits. Encourage staff members to capture their comments and electronic artifacts that support their input as they complete self-assessments, information that will provide valuable input to those who may audit the assessments. If you have an internal audit group, task them with auditing the organization’s progress toward greater resilience, or consider hiring an outside auditor.

4. Engage all key stakeholders. Having strong IT and Security teams is important, yet many other stakeholders need to do their part. For example, Human Resources and Purchasing departments 1. Move immediately when action is needed. create cyber risk when they bring in new Stock index evaluator MCSI presented the results people and technologies. Educating them about of its evaluation to Equifax management almost their cybersecurity responsibilities and arming 22

Texas CEO Magazine Q2 2020

Feature

them with protective policies and processes is vital to the success of your cyber risk management program. The CEO can help IT and Security by creating an inclusive cyber culture that helps all relevant stakeholders—for example, HR, Purchasing, Internal Audit, General Counsel, and Risk Management—understand what they bring to the table and incorporate practices that protect the organization.

5. Improve continuously. Standing still in the face of continuously changing cyber threats means falling behind. Establish a program that monitors and reports continuous improvements. As mentioned previously, the National Institute of Standards and Technology brought 3,000 experts from commerce, government, and academia

THE SAFETY ACT Most people haven’t heard of the SAFETY Act. Soon after 9/11, the SAFETY Act was passed to encourage development of solutions that protect the homeland. This federal law offered liability protections to firms creating anti-terrorism products and services, since the high risk could otherwise discourage their development. For example, the software that powers the Transportation Safety Administration’s Secure Flight program was built by Infoglide, a small firm in Austin. Imagine the liability if the software allowed a bad actor to board a plane that was later attacked. Lawsuits against the federal government are prohibited. The SAFETY Act extends this “sovereign immunity” to offerings vetted and approved by the Department of Homeland Security (DHS). Companies that use these offerings, designated as “Qualified Anti-Terrorism Technology” by DHS, gain significant liability protection from third-party lawsuits against their boards and executives.

together to create its comprehensive Cybersecurity Framework. While every organization is unique, you can take advantage of the massive amount of experience embedded in leading frameworks when building your program.

THE BOTTOM LINE The increased cyber risk caused by a disruption like the coronavirus event is a threat, yet it’s also an opportunity to reexamine cyber risk management policies and processes, which few CEOs feel confident about managing. When confronting the existential risk posed by a massive cyberattack, they are naturally more comfortable focusing on growing revenue. Moving past this tension to include regular discussions of cyber risk in business reviews is challenging. The CEO should lead by emphasizing the significance of effective cyber risk management to the company’s digital transformation, and by encouraging incorporation of appropriate behavioral changes into normal operations. Cyber risk will remain long after the coronavirus pandemic has come and gone, and continuing CEO leadership is essential.

Bob Barker is chief strategy officer, cofounder, and director of Cybernance Corporation, a cyber risk governance platform based on the NIST Cybersecurity Framework. He has been interviewed by and quoted in the Wall Street Journal and Forbes, and he has written for numerous industry publications, including Westlaw Journal, Directorship (National Association of Corporate Directors), and Information Management. You can reach him at bob.barker@cybernance.com.

1 Michael Parent, “Growth in Data Breaches Shows Need for Government Regulations,” The Conversation, December 4, 2019.

Bob Barker, “Are We Heading for a Cyber Sarbanes-Oxley?” Cybergovernance Journal, May 23, 2016.

“A New Metric for Cybersecurity,” Editor’s Note, Corporate Board Member, Second Quarter 2018, Volume 21, Number 2, p. 2.

4 Bob Barker, “Equifax: The Cyber Law Test Case of the Century,” Westlaw Journal, Volume 32, Issue 5, January 2018. 5 Scott Steinberg, “Cyberattacks Now Cost Companies $200,000 on Average, Putting Many Out of Business,” CNBC, October 13, 2019. 6

Hiscox Cyber Readiness Report 2019, Hiscox.

OnRisk 2020: A Guide to Understanding, Aligning, and Optimizing Risk, The Institute of Internal Auditors.

Robert S. Kaplan and Anette Mikes, “Managing Risks: A New Framework,” Harvard Business Review, June 2012.

Asjylyn Loder, “A Warning Shot on Equifax: Index Provider Flagged Security Issues Last Year,” Wall Street Journal, October 6, 2017.

TexasCEOMagazine.com

HOW CEOS [MANAGEMENT]

CAN NAVIGATE THE

PROS AND CONS OF

REMOTE WORK Alicia Thrasher

With so many companies asking employees to work remotely due to the coronavirus pandemic, it’s up to CEOs to help employees ease the transition from working in the office to working from home. For some people, the adjustment is seamless—they’ve been enjoying their home-cooked lunches and the ability to start a load of laundry between meetings. But others will have more difficulty. Where’s my big screen? My Wi-Fi is slower at home! And are my employees really working on the most important stuff? I’ve spent the majority of my career working remotely in some capacity, either being fully remote with occasional travel or being remote at least one day per week. In that time, I’ve developed a keen understanding of the pros and cons of remote work, both from the perspective of the individual contributor trying to get stuff done and from the perspective of the executive or manager seeking to lead a distributed team.

Texas CEO Magazine Q2 2020

Let’s start with the pros of remote work. While a lot of hourly workers don’t have the option of working remote (e.g., healthcare and restaurant workers), remote work has plenty of advantages. This crisis is a good opportunity to build your team’s remote-work capabilities—and you can apply what you learn long after it passes. Some of the advantages of remote work:

•

People generally want more remote work. In its latest annual report on remote work, Buffer found that 99 percent of people want to work remotely at least some of the time for the rest of their careers.1

•

You don’t waste time (and mental energy) commuting. Commuting has been proven to make us less happy. One study found that adding 20 minutes to a person’s commute had a similar demotivating effect as cutting their pay by 19 percent.2

• There are fewer unneeded meetings and distractions (like people dropping into your office).

• There’s a reduced carbon footprint.

• You don’t have to buy or bring a lunch.

• It’s a good recruitment tool for top talent.

That sounds great, right? But as CEO, you also have to be mindful of the following disadvantages of working from home: • It can be difficult to separate home and work life. Without a cue to stop working, some people will just keep going. • Working from home can be lonely, especially for extroverts and people who thrive on personal interaction. • You’re free of office distractions, but not from other types of distraction—kids, partner, TV, etc.

• Digitally connected teams can struggle to collaborate on problem solving and innovation. • It’s more difficult to develop company culture when everyone is separated.

A POSITIVE REMOTE-WORK CULTURE STARTS AT THE TOP If all or some of your company has been working remotely in recent weeks, you’ve probably experienced a few of those pros and cons yourself. As CEO, it’s your job to lead the way in creating a positive culture around remote work. Your goal is to capitalize on the advantages and weaken the effect of the disadvantages—and that starts with your own actions. Here are some recommendations for the CEO leading a permanently or temporarily remote team: • Be present in online tools and channels. Let people see and hear from you regularly. Over-communication is a good way to increase engagement. •

Be open and authentic online. As you communicate, be open with people. Transparency is vital in times of uncertainty, especially when your team is distributed. Let people know what’s going on and strive to be your authentic self.

ENRICHING YOUR OWN “WFH” EXPERIENCE As you lead your digitally connected organization, you also need to look out for your own well-being. If you’re working remotely too, these are some of my best practices you can use to stay focused:

• Go offline after hours. One of the dangers of remote work is long hours. When people see you stop communicating after hours, they understand that they too can disconnect from work and get some much-needed rest. •

Reinforce the company’s mission, purpose, and values. During this time of uncertainty and crisis, reminding people of the essentials of the company is critical. At every opportunity, reshare the big picture of what the company is all about.

•

Consider a daily standup with your executive team. Use this time to talk about what you are doing that day and resolve any issues that might be impeding productivity or success.

•

Make sure people have what they need. Remind employees that they can bring home equipment from the office—laptops, monitors, keyboards, etc. Resources are likely tight right now, but when and if possible, offer a stipend for people to set up a home office where they can be comfortable and productive.

• Keep cybersecure. Have all employees use a VPN if operating on Wi-Fi outside of the office, including (eventually) at airports, coffee shops, coworking spaces, etc. •

Schedule virtual coffee breaks. Keeping up culture and camaraderie is difficult when people are remote, so consider a daily 15-minute virtual water cooler with employees to stay connected. This can be less structured than the daily standup, involving casual conversation and “aha” moments from the day.

•

Ensure participation during meetings. If your team is partially distributed, it’s a good idea to ask remote attendees to speak first. Otherwise, the people who aren’t in the room can get excluded from conversation.

Texas CEO Magazine Q2 2020

•

Have a separate workspace. It doesn’t have to be a dedicated office with door, but find an area where you mentally get into work mode. Avoid hunching over a laptop on your couch. Don’t intermingle workspace and relaxation space.

•

Get dressed each morning. Even when you’re at home, get dressed each morning and have a routine. Start and end your workday at the same time every day, with scheduled breaks and lunchtime around same time every day (extra points if you get out for some fresh air and movement). Obviously, there will occasionally be deadlines or something that needs after-hours attention, but make this an exception, not a rule.

•

Limit distractions. Turn off social media. Limit notifications on your phone. It’s also wise to set ground rules with people in your home—they should know that just because you are at home, it doesn’t mean that you’re not working. What are the rules for when you’re headsdown on deep, strategic work? What about when you’re on a conference call?

•

Stay positive. This is likely a stressful time in your professional and even personal life. As much as possible, enjoy the flexibility, freedom, comfort, and extra time that working remotely allows.

As much of the world learns to work remotely, the CEO has an opportunity to build a culture that understands the pros and cons of a distributed team. In stressful, uncertain times, keeping everyone communicating freely and on the same page is more vital than ever, especially if you and your employees are working from home for the foreseeable future. Alicia Thrasher is CEO of MGR360 (mgr360.com), the go-to certification program for well-rounded people managers. Before becoming CEO of MGR360, she brought her leadership, vision, and strategic oversight to many executive positions, including leading programs for eBay/ PayPal, Google, and Anheuser-Busch. Alicia graduated with a BBA from the University of Texas at Austin and holds Project Management Professional (PMP) and Certified Scrum Master (CSM) certifications. 1

Buffer, State of Remote Work 2019, https://buffer.com/state-of-remote-work-2019.

Kiron Chatterjee, Commuting and Wellbeing, August 2017, https://www1. uwe.ac.uk/et/research/cts/researchprojectsbytheme/influencingbehaviours/ commutingandwellbeing.aspx.

In this unpredictable period, Texas CEO Magazine is speaking with leaders about how they’re navigating the current health and economic crisis. Tune in to Texas Business Pulse each week for a conversation about the latest developments.

EPISODES AVAILABLE NOW INCLUDE: Mark McClain, founder and CEO

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new technologies. We’re currently at the end of a socioeconomic cycle that began with the rise of the microchip, the turmoil of the Nixon administration, and a period of high unemployment, interest rates, and inflation. Today, economic advances driven by the microchip and the success of Ronald Reagan’s economic reforms have reached their maturity. Dr. Friedman foresees where the next emergent technology will rise: medical advances that allow older people to stay productive longer. We will see these two cycles, institutional and socioeconomic, converging for the first time in American history in the 2020s, says Dr. Friedman. It will be a time of pain—a convulsion of American society. America will work it out in the only way we know how: through a chaotic process, as we’ve seen in previous cycles. Despite what he foresees, Dr. Friedman doesn’t come across as a pessimist. He believes that the United States’ brightest moments are still ahead and that we will come through the difficult years of the 2020s. “I know of no country that understands itself less than the United States,” Dr. Friedman concluded. It serves business leaders well to be among the minority who do understand the cycles that are both coming to a head in this just-entered decade, making The Storm Before the Calm a read that’s not only fascinating but instructive as well.

[SELF-AWARENESS]

ARE YOU A

MAVERICK CEO

ARE YOU ACTING LIKE

A BRILLIANT JERK? Rob Shelton and Marc J. Epstein, PhD

Don’t assume that becoming a jerk is something that only happens to others. There has been and will always be a place for inspired business leaders who seek to do things in a new way. Thomas Edison and Edwin Land—cofounder of Polaroid Corporation—were visionaries who broke rules, challenged the status quo, and reconfigured industries in the 19th and 20th centuries. More recently a host of CEOs have proved that a maverick can create a truly great company. Think Marc Benioff at Salesforce and Steve Jobs returning to Apple after his ouster by the board. Similarly, Reed Hastings’ Netflix has made an indelible mark on the entire media industry. And Jeff Bezos’ juggernaut, Amazon, has left competitors in its wake to become a convention-crushing bulldozer, the largest Internet company by revenue, and the top retailer by market capitalization. Mavericks who challenge convention have the ability to create things others can’t and generate a bewildering collection of 42

Texas CEO Magazine Q2 2020

opportunities in their wake. But things don’t always work out that way. Some trailblazers turn into troublemakers who vex investors, employees, and board members. Travis Kalanick’s notoriously bad behavior when he was CEO of Uber caused one board member to announce that they should never hire another brainy jerk. Some pioneers step outside boundaries so badly they implode the enterprise they help build. Theranos’ founder, Elizabeth Holmes, lied about the company’s so-called revolutionary blood-testing technology. Theranos, which once had a market capitalization of $9 billion, withered to nothing. Why do some visionary leaders create value while others generate havoc? To understand, we talked to board members, discussed the realities of working with high-energy leaders, and analyzed groundbreakers who exemplify the range of ways a gifted CEO at the helm can sink or soar, along with the company.

ARE YOU A MAVERICK OR JERK? Texas birthed the concept of the maverick. A mid-19th century San Antonio land baron, lawyer, and legislator, Samuel A. Maverick, had a strong independent streak and often took positions of principle. At one point, receiving several hundred head of cattle as payment for legal services, he broke with tradition and steadfastly refused to brand the cattle. As a result, the word maverick entered the English lexicon, referring initially to unbranded range animals and later becoming a slang term for someone who exhibits a streak of stubborn independence. If you handle it right, being a maverick CEO—an independent-minded visionary willing to make unorthodox moves—will make you as revered as Steve Jobs and Marc Benioff. But some ascending luminaries go over to the dark side and become first-class jerks. History shows it is a slippery slope—every strong boss has the potential to slide from valuecreating maverick to a value-destroying jerk.

RED FLAGS We asked board members and executives with battle scars from dealing with some of the worst incendiary chiefs to give us some specifics on what they had witnessed on the front lines. Here are five red flags they described that signal you are slipping into dangerous territory. Wimpy board—If the only role of the board is applause, you are in deep trouble. Brilliant jerks often create weak boards by influencing board membership and procedures to minimize dissent and contrary opinions. This asymmetry of power contributes to their illusion of executive omniscience. Overconfidence and an alarming disregard for alternate opinions and board advice is a clear danger signal. Even the most headstrong mavericks we studied received valuable guidance and governance from their boards. Blinding dazzle—If you always have strict control of the board meeting agenda and deliver slick presentations that leave little room for alternate perspectives or constructive disagreement, you have adopted a jerk’s modus operandi. With this sort of razzle-dazzle, you may see senior executives leaving in droves or departing after a short stay. But even if executives stick, stifling beneficial discussion ends up blinding you and alienating the team. Insensitivity—Thoughtlessness and lack of respect for employees’ feelings will make you a loathed terror. Sad to say that this sort of insensitivity often accompanies first-rate minds, and tough taskmaster behavior is the norm for every inspired CEO; creating a powerhouse company requires a highly energized approach to nearly everything. But too much toughness—a combination of ferocity and tyrannical mindset—can demotivate, corrode trust, and undermine the collaboration you need to make ideas come to life. It creates a company culture in which overly aggressive behavior is expected from everyone all the time. Left unattended, that leads to feral behaviors among the staff and inevitably to ethical and legal overreach, as we witnessed at Uber.

Secrecy—You are flying blind if you limit board access to important information and block contact with key people who could provide insights into the current company culture and the effects of your leadership. We found that the best visionary-led companies have a give-and-take relationship between the CEO and an active, informed board. One board member said the CEO should “get their brilliant thoughts out in the open so the board can help make something useful of it.” Savvy CEOs know that they are not the only ones who need to know what’s really going on. Lies—Lying is part of the ethos common to many visionary leaders. In Silicon Valley, it’s referred to as “faking it till you make it.” Far too many executives believe it is okay to bend the truth or lie in pursuit of their goals. Charlie Munger, vice chairman of Berkshire Hathaway, said he and Warren Buffett “have seen all sorts of bad corporate behavior, both accounting and operational, induced by the desire of management to meet Wall Street expectations. What starts as an ‘innocent’ fudge in order to not disappoint ‘the Street’—say, trade-loading at quarter-end, turning a blind eye to rising insurance losses, or drawing down a ‘cookie-jar’ reserve—can become the first step toward full-fledged fraud.” Munger nailed it— white lies are an early sign you are in serious danger.

YOUR LEGACY LEDGER Obstreperous behavior once in a while is not uncommon and probably deserves little concern. But exhibiting any of these five behaviors is a clear signal you are clouding your vision, compromising your strengths, and on your way to becoming a jerk. Not every CEO needs to be revered as someone who changed the world. But every powerful and thoughtful leader needs to ask themselves, What sort of legacy will I leave? On one side of the legacy ledger are the bosses who create value and construct a great place to work. Far on the other side of the ledger sit tyrannical hotshots who create value but leave a trail of collateral damage and a corrosive company culture in which value is easily destroyed. If you stay vigilant of your own tendencies and behaviors, it is possible to be a smart, aggressive, risk-taking executive—a talented maverick who makes great things happen—and make room for the collaboration, openness, and strong ethical compass that prevent you from becoming a talented jerk. Rob Shelton and Dr. Marc J. Epstein, are authors of two books, most recently The Brilliant Jerk Conundrum: Thriving with and Governing a Dominant Visionary (The Conundrum Press, 2019). They can be reached at theconundrumpress@gmail.com. Rob is a globally recognized Silicon Valley–based consultant, author, and speaker on entrepreneurial excellence, breakthrough innovation, and scaling to drive rapid growth. Over the past forty years, he has served as trusted partner and advisor to boards, CEOs, and executives at leading organizations around the world. Marc was Distinguished Research Professor of Management at Jones Graduate School of Business at Rice University, as well as a former professor at Stanford Business School and Harvard Business School. He has written extensively on governance, the role of boards, organizational trust, and corporate accountability.

TexasCEOMagazine.com

[MANAGEMENT]

READY, SET, DELIVER: GETTING YOUR SUPPLY CHAIN READY FOR SAME-DAY DELIVERY Valerie Metzker

Same-day delivery isn’t a new idea. Businesses of all types routinely need some critically important item, right away—not tomorrow, not next week, but within hours. Take a retailer that runs out of stock of a hot-selling, highly profitable item and needs to restock immediately while demand is still high. Or a factory where a broken pump has shut down an assembly line, costing the company thousands of dollars an hour—they need a replacement pump as soon as possible. Traditionally, some systems have been in place to meet these specialized same-day needs. But same-day delivery at scale is new, and it’s becoming the new normal. Consumer expectations have been transformed by the “Amazon-ing” of the customer journey, and delivery is no exception.

years.1 To add pressure, a survey by BigCommerce showed that 58 percent of consumer respondents said they’ve stopped shopping with a particular retailer because of a negative delivery experience.2

Not so long ago, your customers were satisfied with next-day, or even second-day, delivery. But thanks to Amazon, consumers now crave—and demand—speed, simplicity, and optionality when it comes to delivery. They want what they want, when they want it: whether it’s next-day, same-day, or even “choose your day” (Amazon’s latest offering).

And what about when a crisis hits? As the novel coronavirus sweeps the globe, many different types of businesses are struggling with this question: How does your business model change when person-to-person contact has to be severely limited? How can you keep the proverbial lights on when your customers are stuck at home?

The traditional same-day delivery process for emergency scenarios (like the ones I mentioned above) is highly manual and inefficient because, historically, these have been one-off situations. If you’re saving a crucial customer relationship, you might be okay with a suboptimal emergency delivery system; the cost of failure is too high. But as the soaring growth of e-commerce continues to fuel demand for speed, same-day delivery has to work at scale within your entire supply-chain ecosystem—and do so with fail-safe reliability.

In short, having the capability for same-day delivery matters, and it matters that you can do it well at scale. Failure to do so effectively will cost you.

The stakes for retailers are high. A McKinsey report projects that same-day delivery will open up a $200 billion opportunity for retailers in the US and North America within the next several 44

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PREPARE YOUR SUPPLY CHAIN FOR SAME-DAY DELIVERY Successful same-day programs go beyond identifying a delivery partner for each market. Same-day affects multiple components of the supply chain. Preparing your supply chain for same-day means taking a holistic approach to inventory visibility, management, customer experience, and last-mile delivery. Here are four actions your business can take to prepare for the same-day revolution.

1. GET VISIBILITY INTO THE PHYSICAL LOCATION OF INVENTORY. To get an order to a customer within a few hours,

retailers need several key pieces of information: Where is the product? Where is the most efficient place from which to fulfill the order? Are there resources on the ground to pick, pack, and stage the order for pickup? Is there a service provider who can schedule delivery? And last but not least—is there enough inventory to fulfill online orders, as well as walk-in purchases, at each site?

2. MOVE INVENTORY CLOSER TO CUSTOMERS. Reducing

the physical distance between the inventory and the buyer is one of the most impactful ways to get closer to offering same-day in communities large and small. One way top-performing retailers are achieving this (without massively expanding their physical footprints) is by leveraging traditional brick-and-mortar facilities to do double duty. Local stores are now serving as productstaging fulfillment centers for customers who buy online and choose delivery from the store, as well as walk-in sites for the customers who prefer in-person experiences.

3. PROVIDE GREATER VISIBILITY TO CUSTOMERS. Do you

remember the last time you clicked a tracking link only to see that your order was “out for delivery”? Once, being able to see the last known location of a package was a good customer experience. Those days are gone. A recent study shows that one-third of customers want real-time tracking for orders. Consumers want an Uber-like, on-demand experience, with reliable, accurate, real-time visibility across pre- and post-pickup processes. If one retailer can’t deliver, another one will.

4. BUILD A TOOL KIT OF LOGISTICS SOLUTIONS FOR VARYING DELIVERY SCENARIOS. There is no one-size-fits-all

solution for logistics—every model has strengths and weaknesses. Particularly with same-day delivery, ensuring the best customer experience means deploying the most cost-effective service for each and every order.

Asset-heavy solutions, like hub-and-spoke networks, are great at logistics—just not when it comes to same-day delivery. Hub-andspoke is excellent at getting recurring parcel shipments where they need to go on set schedules. But the efficiencies gained through these kinds of networks conflict with the demands of same-day: speed and visibility for items large and small. Traditional same-day solutions, such as couriers, have their limitations as well. There’s little to no flexibility to adjust for larger items or longer distances or to respond when an urgent lastminute order comes in and the truck has already left the dock. Crowdsourcing offers a creative, yet practical, solution for retailers who need flexibility and scalability to meet same-day demands. By using a crowdsourced model, it’s possible to tap into resources already on the road—nearby employees, customers, and commuters—when needed, creating a just-in-time delivery service. The result is an asset-light logistics solution that better meets same-day needs for faster, more efficient delivery, allowing retailers to flex up and down as demand ebbs and flows.

Choose a crowdsourced delivery provider that plays well with your supply-chain infrastructure; can flex to meet a variety of sizes, distances, and volumes; and has coverage in as many of your delivery zones as possible.

THE FUTURE IS NOW

We’re only at the beginning of the market for same-day, last-mile, twohour delivery services. Retailers, service providers, and consumers are still sorting out the balance between speed and price. But it’s clear that consumers are willing to pay for convenient same-day delivery. We see it when: • A car mechanic needs a spark plug this afternoon. • A patient needs a new prescription in a few hours. • A construction manager needs HVAC parts at the job site before the workers go home. • A customer wants their new high-def TV they just purchased online delivered in time for tonight’s football game. And in 2020, as the world grapples with the long-term effects of a pandemic on businesses of all sizes (not to mention the global economy), it’s becoming increasingly clear that bringing your goods directly to the audience you serve is table stakes. It’s an uncertain and frightening time for many businesses. To ensure that yours is strong on the other side of the health crisis, start laying the groundwork for delivery now. The best time to start a same-day delivery program was last month; the second-best time is today. Valerie Metzker is the Head of Partnerships and Enterprise Sales at Roadie, a crowdsourced delivery service that works with consumers, small businesses, and national companies across virtually every industry to provide a faster, cheaper, more scalable solution for scheduled, same-day, and urgent delivery. With over 150,000 verified drivers, Roadie covers 89 percent of US households—the largest local same-day delivery footprint in the nation.

TexasCEOMagazine.com

STARTUP SUCCESS:

A STARTUP FUNDRAISING SERIES

PLANNING A FUNDRAISING CAMPAIGN Gordon Daugherty

The previous Startup Success column focused on strategies for determining how much money to raise, while stressing the importance of funding desired outcomes rather than activities. Armed with these strategies, the startup is ready to plan out the phases of a fundraising campaign.

Texas CEO Magazine Q2 2020

[ENTREPRENEURSHIP]

HOW DOES A NATIONAL CRISIS AFFECT STARTUP FUNDRAISING? I have three adult daughters and two granddaughters. During the recent coronavirus outbreak, I worry most about their personal health safety. But I’m also worried about their personal financial security, and that causes me to think about the financial health of the companies they work for. Startups are used to dealing with basic financial survival, but many that I talk to during these interesting times are more concerned than normal because they don’t know if their vehicles for funding their company are still available. The immediate impact to startups will be a slowdown and delay in funding activity while investors of most types try to decide for themselves how much worse things will get and how long the situation might last. The slowdown will also occur simply due to the increased difficulty of travel and recommended social distancing. Videoconferencing only goes so far when it comes to investor interactions. Angel investors and family offices will be much more conservative as they deal with the value of their personal investment portfolio dropping quite a bit. However, after venture fund managers have a month or two to figure out how bad things might get, I’m of the belief they will continue to invest at a similar pace as before the crisis. That’s because a fund manager for a traditional 10-year fund needs to deploy their LPs’ capital within the first three years (or so) of the fund to optimize their internal rate of return (IRR) and other key fund performance metrics. They can’t just sit on the sidelines for a year. The question is whether they’ll prioritize the use of their capital to help companies they invested in from their prior fund(s), thereby protecting their portfolio and potentially investing at a good valuation for the benefit of the LPs in their current fund. My opinion on venture funds would change quite a bit if the economy and stock market get so whacked that it causes fund LPs to decommit on their capital calls, as happened in the years following the Great Recession. I’m also nervous about venture funds that have completed their initial close and started making investments, but haven’t yet reached their final close. Those funds will need to recalibrate their investing amounts and frequency. The longer this “new normal” continues, the more the balance of negotiating power will swing to the investors’ favor. This translates to more aggressive and investor-friendly terms (we might start seeing 1.5–2.0x liquidation preferences and the like) and lower valuations. But I believe that Silicon Valley valuations will take a far bigger hit than the middle of the country, where startups don’t typically experience wide ranges of increasing and decreasing valuation. Instead, their valuations tend to remain pretty steady throughout.

A successful fundraising campaign always has a rhythm, no matter the stage of the company. It has a start, a middle, and an end. It is critical to plan that rhythm and understand the associated time commitment before launching the campaign. Entrepreneurs are taught to move fast and break things, but doing so with a fundraising campaign will actually deliver on the stated promise: It will break things.

ALLOCATING TIME AND PRIORITY Maintaining the proper rhythm throughout a fundraising campaign involves careful allocation of both time and priority. Most entrepreneurs know things won’t play out exactly according to the plan, but having a plan helps them figure out when it’s time to adapt on the fly.

Before Starting: Pick a Team Captain During the pre-seed and seed stages of funding, it might be obvious who will lead the fundraising efforts, but that might be because there is only one full-time member of the team. If, instead, there are multiple cofounders but no one individual carries the CEO title (versus just “founder”), only one person should bear the burden of being the fundraising lead. Trying to share the duty will be as ineffective as rotating sales reps each week for a million-dollar opportunity with a large enterprise, or rotating football quarterbacks with each play. The fundraiser needs to get into a rhythm, which means context switching isn’t helpful. This doesn’t mean investors won’t want to meet and interact with other members of the team; they will. But the chief fundraiser leads the process and is the frontline person for most interactions. Once a founder adopts the title of CEO, she will become the chief fundraiser by default. Being the CEO and serving as the chief fundraiser go hand in hand throughout the life of the company. Investors want to evaluate and get to know the CEO more than any other member of the team.

Start: Determine Investor Interest The purpose of the first phase is relationship building. While it’s going on, it should consume about 20 percent of the fundraiser’s time. Over the course of a month or two, they should try to determine which investors could be viable prospects, and that is best accomplished by meeting with them before actually being ready to hit them up for investment. In fact, they should make that clear when reaching out to them by saying something TexasCEOMagazine.com

like “We’re not raising money at the moment, but I wanted to see if I could spend some time with you to let you know what we’re working on and to get your feedback.” With the understanding that the fundraiser isn’t going to ask them to write a check at the end of the meeting, investors will give some of the most honest feedback possible. Their questions, concerns, level of excitement, body language, and—hopefully—a twinkle in their eye will inform the fundraiser as to their level of interest. The reactions fundraisers get across these meetings (and you might have dozens of such meetings) should be analyzed carefully before the next phase.

The end phase should consume at least 80 percent of the chief fundraiser’s time. That means the cofounders and other team members have to pick up her workload. Let me be really clear on this: Fundraisers cannot dial in this phase at only 50 percent of their time. If they execute the prior phases effectively and are representing a sound investment opportunity, they should have created momentum they can capitalize on aggressively. That means the business won’t advance at the same pace as before, and this is another reason to get aggressive on closing the funding round.

Even when not executing a fundraising campaign, startups should always operate in some level of relationship building. The most successful startups I work with are perpetually fundraising, which means that, even when they aren’t actively executing a campaign, they’re building and grooming their investor pipeline for the next round.

Middle: Preparation and Prioritization The purpose of this phase is to take the campaign on a test-drive while setting the environment for the final phase, in which they will actually hit up potential investors for money. Over the course of several weeks, the fundraiser should interact with the most interested investors from the first phase to get the next level of feedback. If a company is raising a small round and has fewer than 10 interested investors, this middle phase might only take a couple of weeks. For a larger round that includes interested institutional investors, it could take a month or more. This phase should consume 30 to 40 percent of the fundraiser’s time. For startups raising funding out of need instead of want, the stakes get higher during this phase. Stress increases because, by now, the startup is definitely watching the projected date on which they will run out of cash. These interactions with investors will be more specific than in the starting phase. The fundraiser is now exposing investors to the amount of money the company has decided to raise, the proposed terms, and the milestones expected to be reached with new funds. In some cases, the fundraiser will communicate ranges, to gauge investor reaction and not lock themselves into a given number. If the fundraiser completes this phase correctly, by the end they will have a list of investors (prioritized by likelihood of investment), a specific amount to raise, and a final set of proposed terms.

End: Ask for Money Too many startups begin their campaign by hitting up investors for funds while adjusting their proposed terms along the way. Not only is this inefficient, but it burns bridges. It’s not very effective to come back to an investor after a failed pitch to inform them that the terms are now more attractive. For something as important as a fundraising campaign, it’s best to measure twice and cut once. 48

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IDENTIFYING PROSPECTIVE INVESTORS Now that we understand the key phases of the campaign from start to finish, we can examine the process of identifying prospective investors. Much like a marketing campaign that has an objective of securing new customers, the fundraising campaign could be diagramed as a funnel. The fundraiser must start by filling the top of the funnel with prospective investors. If they can’t find them, they can’t build a relationship with them. And just like a marketing campaign, the quality of the prospects makes a big difference in the efficiency and effectiveness of the campaign. Optimizing the mix of investor prospects, and balancing quality and quantity, takes a lot of research and a lot of hustle.

Ideal Targets by Stage Most investors are stage-specific. In other words, they only invest in seed-stage companies or only in Series A companies. So, let’s start by looking at the most common types of investors by funding stage. Pre-Seed Friends and family are the most likely source of investment before the product is launched and before revenue is being generated. However, startups shouldn’t just take investments from anyone willing to support them; in many cases, they must be accredited investors as defined by the US Securities and Exchange Commission (SEC). Crowdfunding portals can be a good solution for some startups that haven’t launched their product, but research is needed to compare the options and to make sure the product is a good candidate for presales via crowdfunding. Government grants are also a possibility, and research is needed to find the right programs. Angel investors are yet another possibility, but only a very small subset of angels will participate in a pre-seed round—and they aren’t easy to find.

Seed Angel investors are the dominant source of investment for the seed stage. They can invest solo or as part of an angel network or syndicate. Angels that invest solo usually only do so in their areas of expertise, which usually means startup ventures that somehow overlap with their own professional career. Their online biography or LinkedIn profile can serve as a good source of information for filtering and rating them. There are also some venture funds that invest in seed-stage startups, although they are in the minority. Series A Venture funds are the dominant source of investment for Series A funding. They usually have one or more areas of focus, dictated by their investment strategy. This can be along industry lines (healthcare, education, real estate), technologies (artificial intelligence, virtual reality, robotics), business models (e-commerce, marketplaces, tech licensing), solution types (mobile apps, SaaS, hardware), customer segments (consumer, small to medium-sized businesses [SMB], enterprise, government), or just about any aspect of a business plan you can think of. The good news is that venture funds make it easy to decode their investment strategy; the fundraiser can just read their website and look at their existing portfolio of investments.

investments while actively helping their portfolio of startups as an advisor of sorts. This means that angels from elsewhere in the state or a neighboring state might still be candidates, but securing an investment from them is going to be more difficult. As we have seen, successful fundraising campaigns have a certain rhythm. Time spent planning out this campaign rhythm and identifying the best targets will pay dividends, improving the odds of raising the desired amount from the right investors. But if the startup begins randomly pitching investors without preparation, they risk losing credibility and wasting time. Since credibility with prospective investors is absolutely required, and since time is a startup’s most valuable resource, such lack of planning is a double whammy. I would rather see a fundraiser tell an interested prospective investor they haven’t yet launched their round of funding rather than try to formally pitch the investor unprepared. A fundraising campaign almost always involves a lot more time and effort than anticipated. Fundraisers should mentally prepare to grind through lots of meetings and lots of rejection. But they should also know that each positive meeting recharges the battery. Those boosts—combined with the fire they already have in their belly—will propel them through the fundraising grind.

Regardless of the funding stage, the fundraiser’s mission is to find the right investors to meet with rather than just seeking out anyone who invests in startups. This requires research on each prospect, and prioritizing based on how aligned their investment strategy is with the business.

Where to Find Investors Venture funds, angel networks, crowdfunding portals, and government grant programs are all searchable online. Success in finding the best targets is mostly a matter of effort. Individual angel investors are much more difficult to find, at least the best ones for a specific startup. That’s because they don’t have websites and don’t openly publish investment criteria. In fact, they aren’t always actively investing, so even if the fundraiser discovers a perfect match, the investor might not be investing at the time the startup needs the money. To find the best angels, fundraisers have to go where they hang out. Some are members of angel networks or similar angelinvesting syndicates. And even though they sometimes invest with a group, many of them invest individually as well. Some are affiliated with startup incubators and accelerator programs, probably as a mentor or maybe in a leadership role. Some serve as judges for pitching events and hackathons. Getting involved with those groups and activities is a good way to meet angel investors. For those who live in a city that doesn’t have much in the way of angel networks, startup accelerators, startup-pitching events, and the like, it’s going to be a lot more difficult. Angel investors very much like to invest locally so they can keep tabs on their

Gordon Daugherty is a seasoned business executive, entrepreneur, startup advisor, investor, and the best-selling author of Startup Success: Funding the Early Stages of Your Venture. A proud native Texan, Gordon graduated from Baylor University. He has vast experience with early-stage fundraising from both sides of the table, making more than 200 investments and raising more than $80 million in growth and venture capital as a company executive, fund manager, board director, and active advisor.

TexasCEOMagazine.com

A CONVERSATION WITH ANNIE DUKE

HOW TO HEDGE AGAINST AN

UNSEEN ENEMY

Annie Duke has evolved from professional poker champion to one of the top authorities on decision strategy in the country. Her best-selling book Thinking in Bets is all about making sound decisions in the midst of uncertainty—so she seemed like the perfect person to talk to about the uncertainty that reigns in the world due to the current pandemic. We asked Duke about some of the top questions on leaders’ minds in the age of COVID-19: How do we hedge against the worst outcomes possible without paying too high a cost? And how do we determine how much risk we’re willing to tolerate in the first place?

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We have seen a lot of tough decisions being made across the world in the past month or two. What have you been noticing? These certainly are strange times we’re living in. It’s a good demonstration of decision making and risk, I have to say. The concept of hedging comes up a lot in how we respond as a nation. We’ve had to make difficult decisions about the cost we’re willing to pay for hedges that mitigate risk. Because we didn’t get some early, low-cost hedges in place, we had to make far more costly hedges, like shutting down whole sections of the economy. We all hedge every single day in all sorts of ways. The simplest example is insurance. We pay for fire insurance, but we also hope to never use it. That creates an interesting dynamic in terms of cognition. Another example is if I want to have my wedding outdoors: I might recognize that the weather could be bad, so I could rent a tent, but I’m still hoping I don’t have to use the tent. We’re willing to pay those extra costs for hedges that de-risk the situation and lower the impact of the downside. What’s interesting is that there are two kinds of hedging. There are status quo hedges, where everybody’s doing it. This is like the case of fire insurance. If your house doesn’t burn down, you don’t necessarily regret having had the insurance, because it’s an accepted thing to do. But other hedges do have aftereffects, where you experience regret. If your wedding day is beautiful and sunny, you feel sad you paid for the tent. Fear of that regret often makes us not hedge in the first place. If it turns out we didn’t need the hedge, we’re going to feel like an idiot, and other people will think we’re an idiot too. During the last year, if you had a balance of 60 percent stocks, 40 percent bonds in your portfolio, you were probably pretty sad about the bonds portion. Recently, I imagine you’d be pretty happy with that mix. Periods like this are the reason you have these hedges in place. What hedges would you have put in place during the early days of the pandemic? Do you think we did enough? If I had been the decision maker, I would have been looking at what was happening in China in the early days. I was actually doing that as a citizen and seeing the exponential transmission. That creates an interesting problem, because when you have exponential transmission with a delay, the world as you see it right now is not the world as it actually is. You have this underlying thing that people can’t necessarily see. TexasCEOMagazine.com

The thing about a hedge, of course, is that you have to get it in place before the tipping point occurs. You need the fire insurance before your house actually catches on fire. It becomes a probabilistic problem. As we watched the course of this virus, even before things got bad in Italy, we could see in China that there was a good possibility of a fire. We couldn’t see the fire here, but we knew there were embers burning, and that we should hedge against those embers catching and burning the house down.

not saying, “Why did we do it? We didn’t end up needing it!” When those disastrous things don’t occur, even if it’s partly because you hedged, we tend to look back and say, “We should have known that was a poor decision,” simply because the quality of the decision isn’t particularly settled.

DETERMINING OUR RISK TOLERANCE FOR SOMETHING NEW LIKE COVID-19 IS A REALLY HARD CONVERSATION FOR ANYBODY TO HAVE.

There were a couple of hedges we could have done pretty early on. In January, we could have been ramping up testing. There’s a cost to producing all the testing kits, but in case the embers catch fire, these kits become really important. They would have allowed us to reduce the impact of the downside—we could have done what South Korea did through widespread testing, isolating where the virus is, and cutting it off.

Another hedge we could have put in place was earlier and stronger messaging about social distancing, to lower the rate at which those embers were going to catch. Social distancing is obviously only going to do so much, and I wouldn’t have suggested locking people in place in January, but social distancing measures do slow the spread and stop hospitals from getting overwhelmed. A third hedge would have been to do some kind of emergency powers early in order to increase medical equipment, whether that was through massive 3D printing of ventilator parts or activating the Army Corps of Engineers and building field hospitals. You could see what was starting to happen in China and Italy and say, “Okay, what are we going to run out of? Let’s ramp up production of that stuff.” Again, you’re hoping that your house doesn’t light on fire and that you have warehouses full of testing kits and extra ventilators and people who did social distancing and didn’t get the virus. That creates the paradox, and I think it’s why we saw people at the beaches during spring break. When it’s something that isn’t status quo, we’re worried about the criticism for having hedged aggressively if the thing that we were trying to prevent doesn’t occur. It’s the result you want, but people have a hard time after the fact 52

Texas CEO Magazine Q2 2020

It’s hard to make those initial decisions when you don’t have all the information on transmission rates and death rates. When we compare places where they put in these big measures and places where they didn’t, we need to make sure that we’re comparing apples to apples. Back in the early days, we couldn’t say, “Well, this country only had a 0.6 percent death rate, so that’s what we can expect here,” because that death rate may have been that low, relatively, because of the hedges they put in place.

It’s been difficult to get accurate information on the actual death rate, with lots of disagreement about where it’s likely to end up. Right. Because early testing rates were so low in many places, the death rate looked artificially high in some reports. But on the other hand, the death rate, the numerator, is always going to lag behind the number of people infected, or the denominator. Because we’re still at the front end of the pandemic, the death rate can also look artificially low. Sadly, we have to wait before we start to get a real idea of what the death rate is, because it’s going to lag behind. And if you can only treat, say, one in 10 people, that’s obviously going to shoot your death rate through the roof. Figuring out how many lives could be lost in the United States was, and is, difficult. There’s a whole range of scenarios, and we needed to know the probability of each of those scenarios occurring and what we could do to prepare. How can we increase the probability of the good scenarios occurring? How can we decrease the probability of the bad scenarios occurring? If we can’t decrease the probability of the bad scenarios occurring, let’s at least figure out how we can hedge against that. The most difficult part of determining how to de-risk the situation is figuring out our tolerance in terms of death rate. Once you’ve figured that out, then you can figure out whether the cost of the hedge was worthwhile. We’ve already answered that question for the flu. As a society, we

Feature tolerate the death rate of the flu. The flu spreads, but not at a rate that it’s like a fire through dry tinder, and the death rate is pretty low. We don’t do social distancing. We don’t shut anything down. We also tolerate the death rates of non-transmissible illnesses like heart disease. And we’ve all decided on our tolerance for the possibility of getting in a car accident. That’s something we decide every single time we get in a car. Determining our risk tolerance for something new like COVID-19 is a really hard conversation for anybody to have. You have to say, “Okay, if we’re talking about a transmission rate of between 3 and 4 for a new virus, what is the death rate that we’re willing to tolerate here?” In other words, what are we willing to pay in order to hedge against the really big downside? And we humans certainly struggle to think rationally about things like that, especially when emotions like fear get involved. Right. And those are hard conversations in the same way it was hard for people to understand the danger back when we had 15 cases in the US. We tend to think, “15 people in a country of 350 million? That’s nothing.” But you have to first understand that people weren’t getting tested,

so the real number was orders of magnitude more than that. And then if you understand exponential growth, you know how it’s going to spread. If it’s going to double every three days, two weeks looks pretty bad now. Three weeks starts to look really scary, and four weeks is terrifying. Those are all things you can’t see with your own eyes. That’s an obstruction; people have a really hard time thinking probabilistically, so they don’t really get that. It’s hard to think about the rate of growth abstractly, just like it’s hard to think abstractly about your tolerance in terms of death rate. It’s easier for people to think about grandma getting sick. And it’s nearly impossible to have that conversation in a political environment. Exactly. But if you do not understand what your risk tolerance is, how could you possibly figure out what you’d be willing to pay to hedge? If I were a decision maker, I would have had that conversation early on to try to figure that out. It’s a horrible conversation to have, but without it, you can’t make a decision. You want to have those hard conversations before they become the truly and deeply difficult conversations they had in Italy, about which patients to treat and which to let die.

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Given the effects on the US economy, many people will be examining the quality of the decision to shut down so much activity, even if we did save lives, right? In order to protect the economy, we had to look at the downside risk, which in this case was pretty severe. We had to ask, “What can we do to really reduce the impact? Some of that stuff is really, really bad for business. I wish that back in January we had ramped up the testing kits and been more aggressive about travel bans for people coming into the United States from places where we knew there were cases. Had we gotten those hedges in place fast, we could have blunted some of the economic impact. The downside risk of not spending money on those testing kits was huge, and we got into a situation where America was shutting down.

What do you foresee from this point on? I have great faith in humanity to figure out something that reduces the death rate. And I have great faith in humanity to figure out a vaccine. There’s luck involved as well. Viruses mutate. I’m hoping for some luck to intervene because the virus can mutate to something that looks more like a cold. We shouldn’t forget that. We have it in our head that they only mutate for the worse, but they’re as likely to mutate for the better.

I HAVE GREAT FAITH IN HUMANITY TO FIGURE OUT SOMETHING THAT REDUCES THE DEATH RATE. AND I HAVE GREAT FAITH IN HUMANITY TO FIGURE OUT A VACCINE.

The hedge on the testing kits was a slam dunk, and obviously that was a mistake. That one’s a very lowcost hedge. Exactly. Producing the medical equipment is a pretty low-cost hedge as well when you look at the downside economic impact of not having medical care in place. As we know, it could be millions of lost jobs and trillions of dollars in stimulus. Producing test kits early, ramping up production of medical equipment, activating the Army Corps of Engineers—those are all super-duper low-cost hedges. Because there are so many unknowns, you always want to start with the lower-cost hedge. You want to put the slamdunk, no-brainer hedges in place to prevent the costly hedges later. Absolutely. And the social distancing hedge is about three orders of magnitude higher in cost. Right. There is a difference between social distancing and locking down, though. Getting the message out really, really early about handwashing, not shaking hands or hugging, using your sleeve when you open doors, standing farther apart, not touching your face—those are very low cost and they really slow the spread of transmission. Nothing’s shut down under those kinds of social-distancing measures. We could have put out PSAs and gotten this message out in a really strong way in January to try to avoid “shelter in place” measures. 54

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If they only mutated for the worse, we’d be gone by now. That’s exactly right. The other thing I’m hoping is that the virus is vulnerable to heat and humidity. If summer slows it down, that buys us time for a vaccine or treatments that significantly lower the mortality rate. The 1918 flu didn’t wipe out humanity, and this was way before ventilators and an understanding of germs in the first place. That doesn’t make it any better for someone who’s personally affected; all sorts of awful personal experiences have happened and will happen. But humanity as a whole is pretty resilient. We’re going to get through this. This one seems to spare young people, fortunately, and in sparing young people, you should be able to speed up herd immunity. No matter what happens, this is going to be a defining moment for everyone alive on this planet right now. There isn’t going to be anybody who doesn’t know somebody personally affected by it. I feel the same way about the economy. The economy is resilient, but it’s going to be horrible in the short term. We can go through history and look at what’s likely to happen in the long term. We recovered from 2008 and the dot-com bubble and so many others. There are cycles to these things. Assuming that the underlying economy was healthy in the first place, there’s a good possibility that you get a pretty big boom after it happens. Thanks for speaking with us, Annie. Hopefully next time we talk, it’s about how wonderful things are. I hope so. I’m an optimist overall—pessimistic in the short term, maybe, but optimistic in the long term. Follow Annie Duke: @AnnieDuke on Twitter or AnnieDuke.com.

WE KNOW THAT BEING A CEO CAN BE CHALLENGING IN GOOD TIMES, AND EXTRA CHALLENGING IN BAD TIMES. Texas CEO Magazine is here to help. To that end, we are launching CEO2CEO!

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LESSONS FROM THE RETAIL APOCALYSPE

[INNOVATION]

As a student of retail trends and strategies for over 50 years, I believe true understanding of the rise and fall of companies requires a look at each company and industry segment, always seeking patterns. And in a time of economic upheaval, understanding the lessons of business history is imperative. This article first appeared in Apogee Results’ Legends of Marketing Series. Gary Hoover The impending death of bricks-and-mortar retail stores has been heavily reported. While a look at the facts indicates a more nuanced analysis, there is much to be learned by physical retailers and e-commerce sellers alike from the decline of so many formerly prominent retailers. As these retailers have declined, “easy” but inadequate answers are quick to be voiced. First the cause was Walmart. Yet as far back as the 1960s, discount retailing was the fastest-growing type of store, with Kmart racking up billions in sales and growing rapidly. Walmart was insignificant. By 1990, Kmart was as large as Sears in domestic retail sales. Next came cries about Amazon and online selling. While their impact varied greatly by category, being especially tough in books and recorded music, today online represents only 11 percent of total US retail sales. That is a big dent, but still 89 percent of consumer purchases are made in bricks-and-mortar facilities. These “easy answers” have been part of the challenge to retailers like Sears and Macy’s, but much can be explained by other factors that receive far less attention. The following thoughts are applicable to other businesses and industries, including e-commerce. It is hard to start anywhere but Sears, Roebuck. Their mail order catalog was the equivalent of Amazon in its time. In the 1920s the company began building stores, and from the 1950s through 56

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the 1980s was the world’s largest and most profitable retailer by a large margin. Today Sears is in its final death throes. So what happened? Unfortunately, many things. First, they did not understand a broader concept of what their catalog represented. They closed it down the year before Amazon was created. While Sears can be excused for not foreseeing the power of the Internet, perhaps they should have understood the power of ordering from home coupled with efficient delivery, things they had pioneered and dominated. Every leader should ask, “Do we really understand the principles behind our success?” Second, Sears did not defend its greatest strengths. The company was dominant in auto parts, batteries, tools, and hardware. It “owned” the major appliance business. It was strong in sporting goods. In the same years that Sears went “down the drain,” each of these categories have grown, giving rise to the tremendous success of Home Depot, AutoZone, and other companies. Yet Sears tried to find a “softer side” in high-margin apparel and a “financial side” by acquiring stock brokerage Dean Witter Reynolds and real estate company Coldwell Banker. They made no aggressive moves to defend their “moats” until it was too late. Every company needs a deep understanding of its real strengths, what customers most love about it. Third—and the cause of most big company failure—was success itself. Prosperous large companies strongly tend toward

bureaucracy, complacency, and arrogance. Sears built the world’s then-tallest building, which did nothing to serve its customers. Headquarters became rife with executive squabbling. By the time Edward Lampert bought control of Sears (and Kmart), both were sick companies, though his leadership (or lack thereof) likely accelerated the decline of these formerly great organizations.

assortment by neighborhood and branch location. These buyers searched the earth looking for items that their competitors did not carry. In any given city, one store might be strong in china and glass, another in toys, yet another in high fashion apparel. And most had distinctive, interesting restaurants to keep their shoppers in the store longer.

(An aside on Kmart: Just as Walmart was rising to surpass them, they bought BizMart, Builders Square, Sports Authority, Waldenbooks, and Borders. Management appeared to think there was no future in discount stores, allocating human and financial resources to these distractions. Sam Walton had a very different perception of the future of discount retailing, and remained focused on his customers.)

Over time, in seeking efficiencies and economies of scale, this system collapsed. The stores increasingly abdicated their roles as “merchandise curators,” turning over valuable floor space to suppliers like Tommy Hilfiger and DKNY. Seeking the higher gross profit margins of apparel, they dropped booming categories like stationery, toys, and sporting goods. (Note that Walmart and Target did not drop these.) Chasing cost reduction, they eliminated local buyers and removed those decisions from local markets.

The story of the American department store industry, today dominated by Macy’s, is different. Unlike Sears, Macy’s is relatively healthy. Yet department stores as a group have lost dramatic market share over the last 40 to 50 years. Their story offers more lessons. In the late 1970s, I did strategic planning for an industry leader, May Department Stores, headquartered in St. Louis. At the time, we closely tracked the performance of the other six big players: Federated Department Stores, Allied Stores, Associated Dry Goods, Dayton-Hudson, R. H. Macy, and Carter Hawley Hale. Each of these companies owned the largest general merchandise retailer (outside of Sears) in the cities where they operated. Famous names included Macy’s in New York and San Francisco, Abraham & Straus in Brooklyn, Wanamaker’s in Philadelphia, Filene’s and Jordan Marsh in Boston, Rich’s in Atlanta, Burdines in Miami, Hudson’s in Detroit, Dayton’s in Minneapolis, Kaufmann’s in Pittsburgh, Famous-Barr in St. Louis, Foley’s in Houston, Bon Marché in Seattle, the Emporium in San Francisco, the Broadway in Los Angeles, and many others. These companies had dominated American retailing in their markets since the 1890s. Sears sold hardware and focused on male customers. These department stores carried a wide range of products, but focused on selling apparel and home furnishings, primarily to women. They were extremely profitable. America’s great malls were anchored by the locally famous department store at one end and a complementary Sears at the other. Yet today, all seven of those “big players” listed above are part of Macy’s, and Macy’s share of total US retail sales is far smaller than what those companies had 40 years ago. What happened? Was it Walmart? No, Walmart has not been strong in apparel, the heart of the department stores. Was it Amazon? Not really. The place to start in understanding this decline is differentiation. When these companies were strongest, all merchandise buying was done by category expert buyers in each city. They knew their market, often varying their product

Those decisions combined to result in lookalike stores. By 2000, it became impossible to tell one department store from another. Hence, why even have all those stores? Through a series of mergers, the vast majority are now Macy’s. Nothing in marketing matters as much as differentiation. When General Motors, Ford, and Chrysler cars looked alike, Toyota and Honda offered something different. When American, Delta, and United all behaved the same way, Southwest, Virgin, and JetBlue offered something different. When Kroger and Safeway felt similar, Whole Foods, Wegmans, Trader Joe’s, WinCo, and Aldi offered interesting alternatives. In the eyes of your customers, is your company deeply and clearly differentiated from your competitors? Along with these stories of decline and ruin, it is important to note that America is full of strong, vibrant retailers. Companies that continually innovate and differentiate. Companies that deeply understand and listen to their customers. Companies that don’t hide under excuses. Home Depot continues to grow rapidly. TJX, the owner of TJ Maxx, Marshalls, and HomeGoods, is booming and adding new stores. Dollar General is opening 900 new stores in the United States each year. New concepts like Five Below flourish. Grocers like Wegmans and H-E-B compete successfully with giant Walmart every day. As a lover of retailing, it saddens me to recite the preceding stories of decline and decay. Yet, despite the never-ending intensity of retail competition, those bricks-and-mortar and e-commerce companies that think and learn can prosper. As has been said many times, it is not about what happens to you so much as how you react to it. Gary Hoover was a cofounder of Bookstop and Hoovers Inc., and serves as executive director of the American Business History Center. He is the entrepreneur-in-residence at the School of Information at the University of Texas. His writings can be found at Hooversworld.com.

TexasCEOMagazine.com

HOW ARE YOU LEADING THROUGH CRISIS? TEXAS CEOS SHARE THEIR ADVICE AND STRATEGIES As we forge through uncertainty, it’s helpful to know that you’re not alone. We asked your fellow Texas CEOs to share their thoughts on how they have led and managed the business through the pandemic and its fallout.

Katy Messersmith

CEO, Katydid Wholesale — Dallas, Texas We are using this time to focus on alternative ways to grow the company— like drop shipping and no minimum for wholesale orders—and expanding retail by launching new initiatives that we were always “too busy” to focus on, such as influencer marketing, review gathering, text marketing, Facebook ads, etc. That way, when business does come back in a few months, we will come back “bigger and better,” since we continued to diversify and focus on initiatives that we probably wouldn’t have had time to focus on prior to the virus. This also keeps our current warehouse staff busy, which would normally be shipping orders. Now they’re learning new tasks to keep busy and help grow the company so morale stays high.

Andy Keith

CEO, MultiView — Irving, Texas We foremost want to provide clarity and security for our employees. Clarity is a finite resource at the moment. And so is security, for that matter. In an environment where information and misinformation spreads rampantly, we’re striving to be a source of clear communications to the MultiView team. The company needs a unified voice, ideally from the top levels of leadership, and needs to be on the same page at all levels. Yes, uncertainty is in the air, but maintaining unity and stability in the organization is the first step to navigating crisis. Beyond that, we’re also trying use this as an opportunity to apply some focus to innovation. Businesses tend to take defensive actions in a crisis, and some may be necessary. However, let’s look at this as an opportunity to get the entire organization thinking about ways to innovate. That could be externally focused on our product lines or internally focused on processes and methods. Don’t be afraid to give employees some time to analyze and think about how we can do things better during and on the other side of this crisis.

Todd Coerver

CEO, P. Terry’s Burger Stand — Austin, Texas Lead with calm, compassion, and transparent communication. This isn’t the time for panic or profit. Do the right thing, take care of your people, and stay true to who you are as a business and a culture.

Samantha Boles

President and CEO, Automated Security Integrated Solutions — Houston, Texas As a leader and business owner, this is a challenging time. I find communication is important. Just as I like to see the news briefs daily from the White House, I know my employees like to stay informed, and it (hopefully) eases their anxiety a bit about their jobs. We are used to natural disasters in Houston. We have dealt with office, school, and business closings many times. Even in recent years. Texans are resilient. We get through these things.

Gary Keller

CEO, Keller Williams Realty — Austin, Texas Bottom line: We want our Keller Williams family to know we are with them every step of the way. We are doubling down on the heart, training, technology, and leadership needed to protect and power our agents’ business through the unexpected. We are packing our current livestreamed training sessions with even more valuable content focused on tackling the realities of today’s market. Every day, from 10am to 4pm, we’ve been kicking off a live session every half hour, covering the topics that matter most right now: mindset, lead generation, remote working, expense, management leverage, and more.

Adam Zeitsiff

President and CEO, Gold’s Gym — Dallas, Texas There’s no playbook to follow here, so we’re doing our best to stay as up-to-date and informed as possible and to approach each day with the goal to do right by our valued members, team members, and communities. We did proactively decide to temporarily close all of our companyowned gyms in advance of most city and state mandates in an effort to help “flatten the curve.” Our top priority after public health has been making sure we make smart decisions that ensure Gold’s Gym remains a viable, long-term business for our team members and members to return to upon reopening. As a company, we are staying focused on our core mission to change lives by helping our members achieve their potential through fitness—especially now that COVID-19 has morphed into a public health crisis that is redefining every aspect of our lives. That’s why we began offering our digital personal training app GOLD’S AMP™ for free to everyone in the United States, member or otherwise, through May 31, 2020. We are also providing free Gold’s Gym at-home video-on-demand workouts globally so people across the world can stay active and healthy and continue working out wherever they feel comfortable and safe. That was a humanity decision, not a business decision, and that’s where Gold’s Gym needs to be right now. TexasCEOMagazine.com

Carol Y. Guess

Esq., Chair, Greater Houston Black Chamber of Commerce Board of Directors — Houston, Texas The Greater Houston Black Chamber of Commerce’s primary focus at this time is the viability of our businesses both during this unprecedented event and in the foreseeable future. As small and minority-owned businesses will be the hardest hit, we take seriously the effect COVID-19 has and will have on the lives of our member businesses and their families. Accordingly, we have begun providing our members with webinars and live social media events centering on business sustainability and resilience, featuring experts from various industries, as well as public officials, who provide up-to-the-minute information that affects our member businesses’ survival.

Rom Krupp

Founder and CEO, OneDine — Dallas, Texas In times like these, I am reminded that companies are not just legal entities that generate sales and profits but are a collection of people joined together towards a common goal. When we face a crisis like this one, we need to move to daily planning and short-term goals and be extremely agile, as plans can change by the hour. Stay honest to all the stakeholders, not just the exec team, and create an environment in which minds can join to find creative ways to overcome these hurdles.

Brittany Hebert

Founder and CEO, Sky High for Kids — Houston, Texas As a leader, it is my responsibility to set the tone for everyone involved in our mission to help end childhood cancer. Organizations, especially those like Sky High for Kids, which rely heavily on fundraising events, must adapt and innovate as recommendations from health authorities shift. Frequent communication, utilizing every tool available, is required with all stakeholders, including donors, volunteers, board members, and especially staff. Even when working remotely, Sky High maintains daily check-ins and has built virtual brainstorming sessions that have resulted in new strategic initiatives. I’ve even shifted the normal job descriptions, encouraging my team to be creative and find new ways to diversify how we fundraise. CEOs must now, more than ever, allow for free flowing of ideas from all staff, no matter the level, by building a culture of trust. Extreme challenges can ultimately breed enormous opportunities. At the end of the day, mission comes first and always. 60

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Allie Danziger

President and Founder,  Integrate Agency — Houston and Austin, Texas During times of crisis, your voice is amplified to the max, and people listen to every word you have to say, which is why—if not completely thought through—your voice can breed misinformation, confusion, and stress across the board. It’s critical for business owners to say the right things, to the right people, that will inform and motivate, and use their voice and skills to make a positive impact on the community. Don’t let others control your company’s narrative. As humans, we naturally fill in gaps in communication to understand what’s going on around us. Rather than letting people assume information about your business, get in front of the conversation and share real-time updates as you adjust to a new business-as-usual.

Ross Buhrdorf

Founder and CEO, ZenBusiness — Austin, Texas My advice during these times? Communicate. Communicate often. Communicate honestly. Communicate clearly. Communicate! Leaders need to stay engaged with their teams and customers. Don’t hide during this time, whether that means leading chats in Slack, making a point to appear in companywide or team-wide Hangouts to check in and provide updates, or simply making appearances and giving people a sense of calm. Morale-wise, the last thing people want to see is a nervous CEO leading the pack. Being a Texas CEO, I keep telling others not to panic. Show grit. We’re a business-friendly state with tons of small businesses. We’ve seen a lot. Been through a lot. Survived a lot. We’ll survive this, too. Especially if we show grit and stick together.

S T

Each week on Ask a CEO, veteran tech CEO Joel Trammell explores a challenge of one of the least understood jobs in business—that of the CEO. Some topics we’ve covered: • DECISION MAKING UNDER PRESSURE • SUSTAINING THE CULTURE THROUGH CRISIS • PREPARING YOUR BUSINESS FOR A CRISIS • COMBATING CEO ISOLATION

Do you have a topic you’d like to hear discussed? Or a question about an issue you’re facing? Let us know at ask@texasceomagazine.com. SUBSCRIBE NOW on Apple Podcasts or Google Podcasts.

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OPINION

SOUTHWEST AIRLINES AND BOEING:

CONTRASTING CASE STUDIES IN ACCOUNTABILITY The airline’s leadership takes action in support of a critical commitment to employees. Sam Silverstein Southwest Airlines has given all of us a major lesson in accountable leadership during challenging times. Leadership at Boeing—and indeed throughout the industry—would be wise to take note of that lesson. Let’s start with Boeing. By now, we all know about Boeing having to ground its troubled 737 Max planes following two fatal crashes. We know that Boeing is awaiting certification from the FAA that the modified aircraft is actually safe to fly. And we know that Boeing’s CEO recently resigned, following revelations about internal voices that questioned the safety of the 737 Max—voices that were allegedly ignored. Business Insider has reported that employees at Boeing felt there was “immense internal pressure” to “build planes quickly and rush through aircraft safety features while keeping costs low.”1 Other troubling reports about the working culture at Boeing have come to light in the wake of the 737 Max scandal. A former qualitycontrol engineer working on a different plane, for instance, said that he reported to management in 2016 that oxygen bottles were faulty—a serious problem that could have left passengers without 62

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oxygen in an emergency situation. He claims that his concerns were stonewalled.2 These are serious accusations, worthy of the government and media scrutiny they have attracted in recent months. But I want to look at an even deeper issue than the important ones of safety and honoring the public trust that reporters and regulators are focusing on now. I want to look at the underlying issue of accountability. Accountability is about keeping commitments to people. It always starts with leadership. You are responsible for things, but you are accountable to people. If the reports about Boeing ignoring or punishing workers with safety concerns are accurate, then Boeing’s leadership has manifestly failed to keep a number of key commitments, commitments that all accountable leaders must be ready to make to employees. These include their commitment to the company values, their commitment to a good reputation, their commitment to a workplace that is both physically safe and receptive when employees raise problems, and their commitment to the critical cultural mindset I have called “It’s all of us.” It is that last commitment that I want to look at closely in this article.

In any truly accountable organization, leadership keeps a deep commitment to “It’s all of us” on a very personal level. The attitude of senior leadership is “We succeed together. We fail together. We are all on the journey together. There are no silos. We are one organization. If you do your job well, we all do well. If you don’t get the support you need to do your job well, then we are all the worse for it.” The evidence now out in public suggests that Boeing may have abandoned its commitment to “It’s all of us.” It also suggests that Boeing’s leadership may have failed to uphold its own stated values on this score, which read in part: “We value the skills, strengths, and perspectives of our diverse team. We foster a collaborative workplace that engages all employees in finding solutions for our customers that advance our common business objectives. . . . We act with integrity, consistency, and honesty in all that we do. We value a culture of openness and inclusion in which everyone is treated fairly and where everyone has an opportunity to contribute.” These words describe a company that fulfills leadership’s commitment to “It’s all of us.” A company that lives those values would have created, sustained, and personally modeled a work environment where everyone felt valued and empowered to step up and take resolute action on another stated company value: safety. Had Boeing not allegedly violated them, they may have avoided the crisis that faces the company today. Next, let’s look at Southwest, and at how it has managed to address the same commitment. Here is just one example. The grounding of the 737 Max carried immense financial implications, not just for Boeing, but for the airlines that are its customers. Shortly after the grounding was announced, Boeing said it would compensate its customers for losses related to the FAA’s decision. Southwest has reported losses of over $800 million sustained in 2019 due to not being able to fly the 737 Max. Boeing has been compensating Southwest for those losses. Here is the big lesson in accountability. Southwest CEO Gary Kelly, in assessing what should be done with this compensation income from Boeing, immediately said that he was “looking for ways to share proceeds as appropriate with all of our employees.” In an earnings call, Kelly repeatedly thanked employees for how they handled the groundings, and said that even though the Boeing settlement money didn’t strictly meet the definition of “profits” for profit-sharing, he and the board were “delighted” to bring employees into sharing the compensation.

straight to the employees’ profit-sharing plan. This is accountable leadership in action. The strong working culture for which Southwest is famous is no accident. It is the result of honoring critical commitments from leadership to the people who show up for work each day. As I have already pointed out, one of the key commitments of accountable leadership is a total, unconditional commitment to the principle of “It’s all of us.” When this commitment is upheld, leadership takes action that delivers the essential messages “I only succeed if you succeed,” and “We are all in this together.” Those sentiments are easy enough to say, as a visit to Boeing’s web page on company values proves. Following through on them, however, takes unrelenting discipline, effort, and character. These are the traits of accountable leadership. And these, I believe, are what has distinguished Southwest’s leadership from Boeing’s. No matter what words come out of your mouth, no matter what text you put up on your website, no matter what posters you put up on your wall, employees have a way of figuring out quickly when you are simply paying lip service to this commitment of “It’s all of us.” They know when you are not following through. At Southwest, employees have received tangible proof of the leadership’s clear commitment to this ideal. They have experienced “It’s all of us” in action. For ten years running, Southwest has made Glassdoor’s list of the best companies to work for. It has a reputation for great customer service. I would submit that a major reason for both of these realities is that Southwest actually treats its employees the way it wants employees to treat customers—as though “we are all in this together.” They are in it together! And that means they are better positioned to survive—and thrive—in the face of literally any setback, including the current coronavirus crisis. Southwest’s example leads directly to some important questions about accountability for leaders in all industries. • Do your employees know that you make important decisions based on the commitment “It’s all of us”? • How do they know that? • What action can you take today to demonstrate and strengthen that commitment?

Author, speaker, and consultant Sam Silverstein is on a mission to create a more accountable world. You can learn more about that mission in his book No Matter What: The 10 Commitments of Accountability. Sam was recently named one of the top organizational culture professionals in the world by GlobalGurus.org. You can reach him at BeAccountable.com.

Let that sink in for a moment. The CEO of one of the largest airlines in the United States began his response to this crisis by looking for appropriate ways to share the compensation payment his company received with every single one of his company’s employees. As of this writing, nearly $100 million of the Boeing compensation to Southwest has gone

Alexandra Ma, Business Insider, “A Boeing Whistleblower Says He Tried to Raise Concerns about Sloppy 737 Max Production, but Was Ignored by the CEO, Board, FAA, and NTSB,” December 10, 2019.

2 Theo Leggett, “Boeing Whistleblower Raises Doubts over 787 Oxygen System,” BBC News, November 6, 2019.

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AROUND THE

WORLD

Texas CEO Magazine Q2 2020

Feature

WITH JIM ROGERS Many of us Texans think of our great state as its own country. But there’s a whole wide world out there, and it behooves leaders in any industry to know what’s going on beyond our borders. Who better than legendary investor, best-selling author, and avid globetrotter Jim Rogers to give Texas CEOs a global perspective? Now based in Singapore, Rogers is the chairman of Rogers Holdings and made the Guinness Book of World Records twice for a 100,000mile motorcycle trip across six continents as well as a 150,000mile world circumnavigation by car. We asked him about his smalltown beginnings and what he sees happening in the rest of the world.

You grew up in small-town Alabama. Since then, you’ve traveled to six continents and now live in Singapore. What do you think gave you your interest in the world? Right, I grew up in a place called Demopolis. Our phone number there was five. If you grew up in a town where your phone number’s five, you either want to see the world or you never leave. I knew there was something out there. There were 40 people in my class at school. I tell people I only had 20 girls to choose from! I have young daughters, and here in Singapore, with thousands of children their age, they can’t quite conceive of it. I remember when I was 16, I told my girlfriend I’d never been anywhere. She said, “Well, I’m 16 and I’ve been to Birmingham, Mobile, and Huntsville.” I thought, “Wow, she’s been everywhere!” It made me want to get out and see what was out there. And I’m still doing it. What was it like when you first left Demopolis? I knew nothing about the world when I got to New Haven [to attend Yale University]. I knew nothing even about Louisiana, much less the Northeast. By the time my brother went to Yale 16 years after I did, he could speak like they did because he’d been watching national TV his whole life. But I’d rarely heard a Yankee accent. I’d been talking Demopolis English my whole life. The world has, of course, changed dramatically since then. I don’t have a TV and I’ve never had a TV, but young people today have access to much of the world through the Internet. My 16-year-old and 11-year-old listen to Korean pop and watch Korean drama. I may not have a TV, but they know how to go on the Internet and see the world. We still get out and see things for ourselves, too. Last summer, my family and I drove from the Atlantic Ocean to the Pacific Ocean. The highlight of that trip—one of the highlights of my life, actually— happened to be a Texas CEO. My older daughter had said, “We should see a Texas oil tycoon.” I thought, “Wow, how does she know there is such a thing?” But I organized a meeting with the last of the Texas oil tycoons. I thought we’d get to visit with him for 10 minutes or less. But two hours later, we were still there having a wonderful time with T. Boone Pickens. He was great in every way. It was a lot of fun to see T. Boone before he died. That had to be special. Texas thinks of itself almost as another country, but there is a whole world out there that Texas CEOs should educate themselves on. Obviously, China is an area of interest for you. Do you think China’s the country of the 21st century? Yes. China is the only country in world history that’s had recurring periods of greatness. They’ve been great three or four times. Egypt was great only once. Rome was great only once. Great Britain was great only once. But China, for whatever reason, has collapsed three or four times and come back to the top again and again. They are certainly going to have problems, though, just as we had in America as we rose. TexasCEOMagazine.com

Is the tipping point their ability to establish an alternate currency to the US dollar? That certainly is in the process of happening, unfortunately. I’m an American, so that’s why I say “unfortunately.” They and the Russians and the Brazilians and a few others are agitated that when Washington gets angry at you, they just cut you off from the US dollar. That’s an abuse of power as far as they’re concerned, so they’re in the process of organizing a competing currency and competing banks to the IMF and the World Bank, which are both dominated by the US. These are facts that are hitting me in the face almost every day. How do you see coronavirus impacting the growth story not just of China but of all the other countries affected? It’s obviously having a huge effect at the moment, as much of the world is closed down. As the consequences continue, it could conceivably lead to China’s first recession in years, since debt has built up in the last 10 to 15 years or so. Recession is coming, whether from China or elsewhere. We are all interconnected now. But the US had several depressions, a civil war, massacres in the streets, little rule of law, etc., etc., and it still became the most successful country in the 20th century. Recessions and the like are often useful for long-term growth, since they curtail excesses. Does coronavirus increase the risk of government instability around the world? All crises increase that risk everywhere. The subsequent economic slowdown will cause new ways of looking at things as they always have throughout history everywhere. There will be bankruptcies, which will shake up a lot. So, China will see more changes, as has been happening for 40 years, but Mao is not coming back. Worldwide we will see companies, institutions, governments, and even countries fail since so much debt has built up. How about India? The Indian prime minister visited Houston a few months ago. It seems that India will be a key strategic relationship for the United States going forward. If you can only visit one country in your life, you should visit India. It’s an extraordinary place, both its manmade and natural sights. It’s a sensory feast to just walk down the street. The food, the religions, the languages, the people. But as an investor there are drawbacks. It’s the world’s worst bureaucracy, and I’ve seen lots of bureaucracies. They learned it from the English, but then took it to a higher plane. There’s also an educational shortage there—most Indians don’t even 66

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stay in school past 12 or 14 years old. The infrastructure’s a nightmare. There are, of course, some extraordinary success stories coming out of India, but many of the success stories of Indians come out of the US. In India, the educational and entrepreneurship opportunities are not great unless you partner with the right political party. Let’s move to Russia, which has of course been in the American news a lot lately, along with Ukraine. What opportunities do you see in that part of the world. Well, I first went to Russia in 1966, before a lot of your readers were born. Along the way, I also went to East Berlin, Prague, Warsaw, Kiev, St. Petersburg. I came away saying, “This is never going to work.” And for the next several decades, 45 years or so, I was very pessimistic and bearish on the Soviet Union and then on Russia. I didn’t even like going there. But about four or five years ago, I realized something had changed in the Kremlin, and now I’m very optimistic about Russia. They’ve got vast natural resources. They have a convertible currency, which is unusual for countries like that. And since nobody would lend money to Khrushchev and those guys, they don’t have much debt. I’m very, very keen on Russia now. North Korea is another country we’ve been hearing about a lot in recent years. Do you see unification happening on the Korean peninsula? I see the 38th parallel coming down soon, though it won’t be instant unification. The peninsula has always been one. They all share a culture and speak the same language. President Kim wants it. The North Koreans want it. The South Koreans want it. The Chinese want it. The Russians want it. Japan is one of the few countries against it because they will not be able to compete with an open Korea. The real obstacle is the US Army. We have 30,000 troops there, and the generals and the Pentagon don’t want to leave. It’s the only place we can keep troops on the Chinese border and the Russian border. Even Trump hasn’t been able to make it happen. You and I could sit down and solve this tomorrow afternoon. Unfortunately, we have to go through the US Army, and the US Army is more powerful than you and I. President Kim, you know, grew up in Switzerland. He doesn’t want to live in North Korea either. Would you rather live there or in Switzerland? But he can’t leave, so he’s trying to change North Korea into Switzerland or even South Korea. He has made many speeches in China and other places saying that he wants to do for Korea what Deng Xiaoping [leader of the People’s Republic of China until 1997, who opened the country to free enterprise and

Feature Western culture] did for China. They don’t report that in the Americas or even South Korea, because we’re censored on what we hear on the topic of North Korea. We get Pentagon propaganda instead. But one of the first things President Kim did was set up an international ski resort in North Korea. He wanted to go skiing. They have around 15 free trade zones, international bicycle races, international marathons, an international film festival. A dramatic change is taking place. You bring up an interesting point on this censorship. What news sources should a Texas CEO be looking at to get a full picture of the world? I used to read newspapers from five different countries nearly every day to solve that exact problem. They all had different views, and they all thought they were telling the truth. I learned at an early age that you need to get information from lots of sources, digest it, put it through your brain, and then something will come out and you might get it right. I’m trying to teach my daughters the exact same thing. As I said before, they watch Korean drama and Korean pop stars on the Internet. I encourage that as well as their watching media from other nations, including the United States, because I want them to get as many different viewpoints as they can. It’s a problem we all have, CEO or not. And all I can suggest to you is use the Internet, where so much more information is available than ever before. Read different newspapers, watch different shows, get as many different viewpoints as you can. Then try to figure out reality. You’ve talked a lot about agriculture and the opportunity you see there. Is that something CEOs should keep an eye on? It’s a smart sector to invest in right now, because no one wants to be a farmer anymore. But demand is going to keep going up as supply goes down, and that’s going to drive agricultural prices higher. Related to that, every day Russian farmers wake up and say, “Thank you, Mr. Trump,” because of the sanctions he put on Russia. These Russian farmers are all booming because they can’t import wheat or cotton from anywhere else. Agriculture in Russia’s going through the roof because of those sanctions. I know of few cases in history anywhere in the world where sanctions have worked except for short periods and some groups. It goes to show that nearly all disasters are an opportunity. It’s interesting, the Chinese, Koreans, and Japanese all have a word that means both “opportunity” and “disaster.” In Chinese, the word is wéi jī. Opportunity

and disaster go together. We don’t have the word in English; we haven’t been around as long as some of the Asian cultures. But if you think about it, we know that’s true too. If your house burns down, that’s a disaster for you, but somebody has to rebuild it and it’s an opportunity for them. That, fortunately or unfortunately, is happening now in Russian agriculture. What do you think of Bitcoin and these other currencies not backed by the government? The bottom line is they’re all going to disappear, as many already have. Let me tell you why. A hundred years ago, we could use anything we wanted for money—gold, seashells, whatever. Banks could legally print their own money. But then in the 1930s, the Bank of England declared it an act of treason to use anything as money except government-issued currency. Needless to say, treason means they execute you. People had to abide by the law, like it or not. The crypto guys today say, “We’re smarter than the government,” and they are, for goodness’ sake! But the government still has the guns, just as they did in the 1930s. We all have to play by their rules. If the governments come in and say, “We’re going to execute you if you use anything but our digital money,” most people are going to obey. If you get the timing right, you might make a lot of money investing in Bitcoin. It’s not going to disappear this week, but it’s not going to be around in a few years. I assure you. The more success it has, the more certain its demise. It is true that money as we know it is going to disappear. It’s all going online. It already has in China. I tried to buy an ice cream the other day in Beijing. The poor woman couldn’t sell it to me because I had Chinese paper money. In China, they all have their money on their phone. Governments love it because it’s cheaper—they don’t have to print it and transport it and guard it. But all-digital transactions also mean that they have complete control over all of us. They’re going to know everything we do. They’re going to call you up one day and say, “You’ve been drinking too much coffee this month.” I hate that, but that’s the way it’s going to be. I’m sure your friends in Singapore want to know what they should think about Trump. What do you hear about Trump through a Singaporean filter, if you will? Most people in the world are, at best, perplexed by Trump. Most of the rest don’t particularly like him. In Asia, he is making China great again. He pulled out of the TransPacific Partnership in his first week in office and the Chinese looked around and said, “Oh my God, that leaves TexasCEOMagazine.com

it to us!” Now, a new free-trade zone is developing in Asia, led by China. So, I’m afraid that the Chinese love him right now, at least from that point of view. But if he ran internationally for president, he would lose big. If there were a change of president in 2021, do you see that making a significant difference in the region? It will certainly make some difference, but as you well know, it usually hasn’t made a huge difference who’s president in America. The Democrats and Republicans hate each other and yell at each other all the time, but there’s not that much difference between them. They both love the income tax. They both love to meddle in our lives and businesses. If someone else won the presidency, it would certainly send shockwaves through the world. But in the end it would take a long time to make radical changes because everything has to go through Congress and the courts and everything else. Right. Most people don’t understand that the US has by design a very weak president. The position has been strengthened over the years, but still is not particularly strong, except maybe in foreign policy. Most CEOs have a lot more power in running their organizations than the president has in running the country. The CEO can change things if he wants—he can fire people and so on. It’s not so easy for the American president, who has Congress, the bureaucracy, the judiciary, the states, and of course the media. Donald Trump, for example, used to go on about NATO. “Why do we need NATO anymore? The Berlin wall collapsed 30 years ago. Who are we fighting? The Russians should be our allies, not our enemies.” But as you know, we’re still in NATO, still spending huge amounts of money on all those troops and all those bureaucrats. Even he hasn’t gotten us out so far. Great Britain tried to get out of the European Union. It doesn’t look like they’re going to be able to escape, maybe for some of the same reasons. What do you think happens there? It’s going to happen because [Prime Minister Boris] Johnson has insisted it will happen. I do think that more and more European countries will start to say, “Wait a minute—these guys are right. There is a problem with Brussels.” It’s not so much the EU that’s 68

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the problem. It’s Brussels. It’s all those bureaucrats telling the Finns they have to be just like the Portuguese, and those Finns don’t particularly like somebody telling them how to live. If I were Britain, I would stay in the EU and continue to resist Brussels, but I’m not Britain and they don’t have to listen to me. I’m concerned about when Brexit does happen. The Scots tried to leave not too long ago, as you know, and they will try to leave again. The Scots have had the oil and if they leave, that’s going to leave little England with far fewer assets. Then the Northern Irish are probably going to say, “Wait a minute, this is a pain for us too.” That will leave England and Wales, and they don’t have a lot to sell. What haven’t we talked about that you think a Texas CEO should know? I would urge everybody to understand the economic changes taking place and prepare themselves. In America, we’ve had the longest period without an economic problem in our history. Until recently, of course. I would urge everyone, whether you’re the lowest employee or the CEO, to understand how these economic cycles work. The last time we had a big economic problem was, of course, 2008. That was because of too much debt, and since 2008, debt everywhere in the world has skyrocketed, even in China. In 2008, China had a huge amount of money saved for a rainy day. Then it started raining, so China spent that money and helped save the world. Now, even China has a lot of debt. You’re going to see bankruptcies in China, which is going to shock a lot of people—it’s even going to shock me, and I just told you it’s coming. President Trump is running up debt faster than any president in history, and the coming problems are going to be a nightmare. That’s why I urge everybody to get informed. If you understand what’s likely to come, you will get worried. But if you get worried, you will get prepared. And if you’re prepared, you will survive what’s coming. In fact, many people come out of hard times rich. There were some great success stories that came out of the 1930s in America. Others lost everything, as you well know. But it’s like what the Asians say: Disaster and opportunity are the same thing.

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[CULTURE BUILDING]

LEAN EXECUTIVE THE

Michael W. Wright & Blaine McCormick, PhD

Prices, customers, and especially competitors are all difficult variables for executives to control. But there is one variable over which executives can exert some level of control: cost. As such, it is the role of the executive to minimize costs and, more broadly, build a culture that values the same.

Lean is a proven method for not only building such a culture of cost-minimization but also increasing quality, improving delivery performance, and more. If executives launch a Lean initiative, they must be prepared to address a variety of misconceptions and myths about Lean—even the myth that Lean is only about cost control. If not addressed head-on, these misunderstandings can undermine a Lean implementation and the building of a Lean culture. The purpose of this article is to share these common myths, offer counter-narratives and executive commentary (from Mr. Wright, who has led many Lean transformations), and discuss some confirmatory research outcomes (provided by Dr. McCormick).

MYTH #1 – WORKERS LOSE JOBS WHEN LEAN IS IMPLEMENTED. Counter-narrative: Lean enables organizations to survive the inevitable vicissitudes of the business cycle.

AT ITS CORE, LEAN IS MORE A CULTURE THAN A METHOD.

Executive Commentary: Because Lean is so effective at reducing cost, and because labor is usually such a big component of cost, it is certainly possible that employees will be worried about a Lean implementation. Though employee reductions are seldom the reason Lean is implemented, if your workers assume layoffs are going to happen, then you have lost them before you even started. Executives must fully communicate that Lean initiatives are primarily a transformation of the organization’s culture. They should share the key objectives of a Lean transformation, and employee reductions should not be among them. When there is risk of reductions, executives should find visible ways to redeploy and invest in those people and clearly communicate this as an objective. I learned the importance of addressing this myth up front when I was involved in a Lean deployment in a well-established business with union-represented employees. The very first day of training, the Lean trainer noticed that no one was listening or engaging. When asked why, the employees stated that they would not participate in laying off their fellow workers. The Lean trainer summoned me to the room to address their concern. I told the workers that we were facing a 50 percent reduction in work orders coming into the facility for the coming year. The intent of our Lean initiative was to invest in them during this contraction. By training them and deploying Lean now, we would not have to lay off any of their team members because of next year’s work reduction. Further, our backlog indicated that work orders would increase by 200 percent in the year following the reduction. With a Lean culture in place, the workers could also handle the increase without having to add members to their current team. Communicating a bigger context for Lean made the difference, and the workers went on to successfully implement the initiative. Executives must address this myth up front, whether they think it is on employees’ minds or not, because they will not always have employees who communicate as clearly as mine did that day. TexasCEOMagazine.com

Consider the Evidence: If Lean is all about getting rid of workers, why does the company that invented most of our Lean practices continue to grow? In 1977, Toyota reported about 50,000 total workers. As of 2020, Toyota reports having more than 370,000 workers worldwide. Ground zero for evidence that Lean practices work is surely the 1977 article by four Toyota Production Control Department workers published by the International Journal of Production Research. For the first time, Toyota began sharing its production ideas and outcomes in the public domain—and forty-plus years later, the paper is still an amazing read. Observers then and now clearly understood that something new was emerging, and it was time to pay attention. The data on setup times, “man hours” for completion of a vehicle, turnover ratio of working assets, and per capita improvement proposals continue to impress—and clearly workforce reductions were not a primary goal. This is one 1977 Toyota that still gets good mileage!

MYTH #2 – LEAN APPLIES ONLY TO MANUFACTURING PROCESSES. Counter-narrative: A surprising amount of Lean happens away from the factory floor. Executive Commentary: At its core, Lean is more a culture than a method. The culture that Lean creates when properly applied and fully embraced is one of continuous improvement and relentless elimination of waste within the entirety of an organization’s processes—not just those on the factory floor. Take a moment to think about a few of the processes in your organization. Lean suggests that waste is present in most of them and that eliminating it will reduce cost, improve quality, and get things done faster. In fact, at the executive level we sometimes inadvertently create waste by inserting unneeded bureaucracy, controls, and metrics that we seldom pay attention to. These can put a tremendous strain on the organization. I am reminded of the time I took over as top executive for a very large division. The administrative assistant brought in a thick stack of papers needing my signature to approve petty cash expenditures. I immediately saw this as potential waste. So, I set them aside and did not sign them. The next week the assistant came in again with a similar stack and asked why I had not signed the previous stack. I asked if anyone in the organization was complaining or unable to make these “unapproved” expenditures. The assistant quickly answered that all those expenditures were already made before the paper was generated for me to sign, so there was nothing to complain about. I then asked if I was holding up reimbursement of these expenditures. The assistant told me that everyone would get paid whether I signed them or not. My final question regarded how much trouble it was for everyone to put these requests together for my signature and track them. The assistant informed me that it took several hours to create each form for signature. We immediately stopped the practice. 72

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This is just one small example of hundreds I could convey, a great deal of which would have no relation to the factory floor. What would happen if every one of our executives, managers, and people looked for waste in every part of the organization, and the company culture rewarded those who did? Consider the Evidence: In the service sectors, healthcare providers and hospitals embrace Lean more and more with each passing year. In the early 2000s, Seattle’s Virginia Mason Medical Center responded to a performance crisis by applying tools from the Toyota Production System at the hospital. At the beginning of the implementation, executives proactively announced a “no layoff” rule. Rapid process improvement workshops sprang up and employees were encouraged to turn in “My Everyday Lean Idea.” Now, the Virginia Mason Medical Center is a leader in Lean training for healthcare providers.

MYTH #3 – FIRMS MUST HIRE EXPERTS TO IMPLEMENT LEAN. Counter-narrative: Executive leadership matters far more than experts. Executive Commentary: I have seen Lean, when correctly implemented, result in 60 percent reductions in cycle time (speed) and cost reductions exceeding 50 percent for large, complex organizations. But I have talked to many leaders who say, “Oh yes, we embrace Lean here,” without seeing any evidence of that in their organization. Over the years I began to discern a pattern in the performance histories of companies I worked with. The metrics looked more like an electrical sinewave that mirrored changes in executive leadership rather than underlying business cycles. I slowly became convinced that executive and managerial leaders play the most critical role in the Lean transformation, through their role in initiating and sustaining a Lean culture in the organization. Lean experts, while important in the deployment and use of the improvement tools, seldom influence the culture over the long run. Experts can apply Lean methods, but only internal executives and leaders can meaningfully change and sustain a culture. At its core, Lean is a culture of continuous improvement focused on the relentless elimination of waste within an organization. As such, executives and leaders must set the example and walk the Lean talk. They must serve, reward, and support everyone in the organization who embraces the Lean culture and show that it is in their best interest to do so. Consider the Evidence: Since 2003, the World Management Survey has collected management and performance data in 35 countries while conducting over 20,000 interviews with managers. The WMS is one of the most extensive datadriven projects to document outcomes associated with good management practices—and Lean is central to their efforts. A 2013 paper published in the Quarterly Journal of Economics by Nicholas Bloom and others titled “Does Management Matter?

Evidence From India” studied the effect of Lean practices in a randomized control trial of treatment plants in India. Treatment plants using Lean practices documented 17 percent productivity gains in the first year via quality and efficiency improvements and reductions in inventory. The authors noted that “managerial time” was central to the success of the transformation. So, management does matter—especially managerial attention!

MYTH #4 – LEAN IS ONLY ABOUT COST CUTTING. Counter-narrative: Lean certainly cuts costs, but it also can improve safety, worker participation, process flexibility, and other important outcomes. Executive Commentary: I have transformed organizations using Lean multiple times, and the reason was never solely cost reduction. Lean also improves cycle time, process flexibility, quality of the product or service being delivered, and even worker safety. When we transformed organizations, we would ask everyone within the organization to relentlessly look for ways to eliminate waste as well as ways to improve safety and quality. During a regular shop walkthrough, I once observed a worker putting himself in a very unsafe position to do some work. In fact, it was a stance that could ultimately limit his ability to work this job into the future. I stopped and asked why he hadn’t done something to improve this. A crowd quickly gathered while the employee told me that they thought all we cared about was cost savings. I responded that we also worried about their safety and asked them to find a way to improve the way to do this particular job. The employees informed me that they had already done that multiple times and that their ideas were rejected by engineering and management. Many of them said they had done this job before but couldn’t anymore because of the cumulative damage to their bodies. I directed engineering to once again meet with these workers and find a way to do the job more safely. Engineering returned with unaffordable estimates to build new tooling, even though the employees who did the job every day showed me how the improvement could be made for no cost. The engineers acknowledged that the employees’ way was cost-free, but they could not guarantee that a certain $500,000 part would hold its shape if this new method were used. If the part couldn’t hold its shape, we would have to scrap the part and lose $500,000. If Lean was only about cost, we would have stopped right there. We proceeded, and the employee’s idea worked perfectly. Was it worth the risk? I would say yes, because the number of improvement ideas from employees increased tenfold from that point on and the cultural change toward Lean also accelerated. As an executive, I have many times been told by Lean experts not to promise employees that we will consider implementing every one of their ideas. These experts would warn me that considering “stupid” ideas is harmful to the Lean implementation. In a single, isolated implementation, I would tend to agree, but when we

are using Lean as a transformation of the organization’s culture, no idea should ever be considered “stupid.” Workers generally know their processes and job better than anyone, so they must be allowed to generate and implement improvement ideas freely without fear. In some instances, they must even be allowed to fail. It is only in this environment that a culture of continuous improvement can begin; people see we are serious about change, serious about supporting them, and willing to let them implement their ideas. As they learn, they will grow and begin to embrace their successes. Consider the Evidence: Can Lean improve social performance metrics in addition to productivity metrics? A 2016 paper in Management Science (“Does Lean Improve Labor Standards? Management and Social Performance in the Nike Supply Chain”) provided strong evidence that Lean proved transformational in the Nike supply chain. Social protestors consistently spotlighted Nike’s practice of manufacturing shoes in developing countries and raised questions about labor practices in these environments. Nike’s multifaceted response included the introduction of Lean practices to their contractors, along with 5S, visual management, Kanban inventory systems, and the like. Surprisingly, labor compliance outcomes improved significantly in tandem with the introduction of Lean manufacturing practices. These practices also helped Nike accurately identify truly dangerous workplaces in Bangladesh. Nike began reducing its Bangladesh footprint before the Rana Plaza garment factory collapse forced many other companies into that conversation. — Customers are demanding, competition is relentless, and costs always seem to rise. Executives live and work in this context, and our hope is that understanding these four Lean myths can help you better control those factors you can control—costs, certainly, but also culture.

Michael W. Wright worked as an executive in the aerospace industry for 18 years with companies like Boeing and L3Harris. He is currently a Clinical Professor at the Hankamer School of Business at Baylor University. Dr. Blaine McCormick is Chair of the Department of Management at the Hankamer School of Business at Baylor University.

TexasCEOMagazine.com

[LEADERSHIP]

COVID-19 AND BEYOND: THE LEADERSHIP CHALLENGE OF OUR LIFETIME Ellen Wood

Texas CEO Magazine Q2 2020

The COVID-19 crisis presents CEOs with a remarkable leadership opportunity. Employees and clients alike are looking for leadership and reassurance. We must all rise to the challenge. While the pandemic is something none of us have experienced in our lifetimes, the havoc it is causing bears some similarities to other major disruptive events of the past 40 years.

The impact to various business verticals has been dramatic across the board, with early impacts on the hospitality, entertainment, and airline sectors having an immediate ripple effect. Fallout is likely to continue for months to come as the ramifications across multiple business sectors filter throughout the ecosystem. Though these circumstances are unique, we can draw upon experiences from previous crises to guide us. Companies are at different places in responding; however, it is critical for leaders to focus on the following priorities to optimize their probability of stabilization and survival. Take care of your people. Your team is looking to you for information and reassurance. They are hearing and reading the same news you are, and they need to know you are staying on top of rapidly changing conditions, that you know how they will impact the company, and that you are thinking about what is best for them and their families. Make sure they understand how their insurance provides coverage in a situation like this. Encourage them to continue to follow CDC guidelines. Expand upon workfrom-home protocols. Let them know that you are aware of the havoc this is causing on their personal lives and that you will make accommodations where you can. Err on the side of too much communication with staff at a time like this. The federal government has stepped up in an unprecedented way to provide a variety of channels, primarily funneled through new employer obligations, to fund working Americans impacted directly and indirectly by COVID-19. Make sure you know what those provisions are and how they impact your obligations to your employees, and that your employees know how to access them. These provisions will be an important safety net for your employees, and they need to understand their ability to access them.

INNOVATION IS OFTEN BORN DURING TIMES LIKE THIS. STEP BACK AND THINK CREATIVELY ABOUT WHAT ELSE YOU CAN DO WITH YOUR RESOURCES.

Continually project and protect your cash flow. Without cash, you are in a tough position. If you do nothing else to respond to the crisis, put together a detailed weekly 90-day cash plan with realistic expectations of dollars coming in and the most conservative estimates of cash going out. Remember, your clients who owe you money are facing the same problems you are. If you are counting on sales during this period, anticipate some delays and cancellations. If your clients are more adversely impacted than you are, anticipate not being paid at some level. Restaurants, bars, hotels, airlines, theaters, event production companies, and all of their suppliers are examples of industries that have been disproportionately and immediately impacted. Energy has been devastated for reasons including but also beyond COVID-19, including excess capacity and intentional supplier price reductions. Do you have receivables from these sectors? Defer all discretionary expenditures, defer capital purchases, and donâ&#x20AC;&#x2122;t pay anything before it is due, even if you are passing on discounts. Make sure every payroll-related payment, including taxes, is made absolutely on time. Review and plan for the TexasCEOMagazine.com

potential impact on your company of the cash obligations to staff for COVID-19 related benefits, as mentioned above. All of these benefits will be due from the employer to the employee and will be a significant unplanned cash requirement. Provisions are being negotiated to provide for relatively quick reimbursement from the federal government to employers for these new expenses, but keep in mind that you will be fronting the cash for some as-yetundetermined time should this provision be called upon by your team. If some percentage of your income-producing staff is out on paid leave, that will create a significant unanticipated use of cash until you receive reimbursement at a later date. Anticipate varying levels of impact on your business and reforecast to see what that will do to your profitability and cash position. Prepare a worst-case and most-likely-case scenario. This will lead to some serious strategic decisions regarding staffing levels, product release delays, suspensions of projects, hiring delays, reductions in force, revisions to capital expenditure plans, and M&A activity. Don’t overlook the strategic decisions you need to make in the immediate timeframe while you are being pulled into dealing with the myriad of tactical initiatives demanding your attention. You can never recover dollars that have already gone out the door. If you have to cut expenses, including reductions to employee pay or layoffs, do it immediately and go deep. Incorporate all the rapidly changing federal, state, and local regulations into your workplace, employee expectations, as well as your reforecast. Conditions are changing daily. It’s likely that the details of the various programs will change as implementation begins. Assess ongoing risk and course-correct in your policies and operations as you need to in all areas. Innovation is often born during times like this. Step back and think creatively about what else you can do with your resources. Invite your employees and advisors to join you in this exercise. Companies hardest hit are already pivoting to provide a different suite of services with their existing workforce and resources. Restaurants are working to provide employment for at least a skeleton crew and to maintain market presence by shifting to take-out and delivery services. Event planning and catering companies are looking at how they can provide services to first responders across the country. Do not ignore your IT infrastructure and cybersecurity and assume it will maintain status quo. Support the necessary actions for your team to work remotely and stay remote for an extended period. That may mean moving your server-based systems to the cloud, increasing bandwidth, providing laptops, providing hotspots for remote access, and more. Emphasize the enhanced levels of cyber attacks happening and urge vigilance for detection of the phishing that will be piggybacking on crisis-related topics. When in doubt, don’t click. If you don’t have the resources to handle this internally, consider outsourcing this function to a qualified provider. — Take care of your people, protect your cash, mitigate the income impact, innovate, help your clients, maintain situational 76

Texas CEO Magazine Q2 2020

awareness, and provide resources needed for security and remote working. Along the way, above all, stay calm and project confidence, possibly beyond what you are feeling. Reach out where you can and help those in your sphere of influence who have less experience, fewer resources, or are experiencing greater consequences from the events that are unfolding. Together we will all get through this. Author’s Note: Given the rapid development of the COVID-19 situation, we realize the situation may be different upon printing of this publication. Please utilize this article as an initial guide and visit our website (vcfo.com) for more in-depth resources and updates.

Ellen Wood is the CEO of the financial consulting firm vcfo, founded in 1996. Headquartered in Austin, vcfo provides an integrated suite of finance, HR, and recruiting support. Ellen is also very active in the community, having served as chairman of the board for UFCU and the Austin Chamber of Commerce in recent years. Currently she is the Vice Chair of Global Technology and Innovation for the Chamber, charged with expanding international capital relationships as well as enhancing local support of the vibrant technology community. She also serves on the board or in a committee position for the Capital Area Boy Scouts, Entrepreneurs Foundation, Austin Area Research Organization, Women@Austin, and E3 Alliance.

About vcfo: For more than 24 years, vcfo has worked with 4,000+ clients to make their companies stronger. By providing an integrated suite of finance, HR, and recruiting services through outsourcing and consulting solutions, vcfo helps companies improve their operational performance and optimize productivity. vcfo has offices in Austin, Dallas, Houston, and Denver.

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[PERFORMANCE]

GOING

BEYOND THE CALL

IMPLEMENTING A FULLY FUNCTIONING SERVICE DESK Tony Streeter

What’s the first thing that comes to mind when you think of an IT help desk?

to speed-to-market to responsiveness to competitive pressure— and a lot more.

Hopefully, you think of a friendly individual quickly answering your call and resolving whatever IT issue you may be experiencing. For better or worse, the help desk is the face of the IT department and the primary way IT interacts with the rest of the enterprise.

SEAT RESERVED

However, answering calls and resolving problems are only part of how a good internal IT support team can increase employee productivity and satisfaction. In fact, the help desk is only a segment of a broader function referred to as the “service desk.” While the help desk is typically tactical and reactive, a good service desk works strategically and proactively to improve IT and business processes across the organization. Following are a few examples of how a broader service-desk model can positively impact your organization, offering benefits every CEO should care about, including improvements in everything from the bottom line 78

Texas CEO Magazine Q2 2020

Your service desk leader should have a seat at the table for discussions of IT strategy, product development, and IT initiatives, such as companywide software upgrades. Unfortunately, IT activities are often undertaken without any forewarning given to the service desk, whether part of a product/service release, software update, or otherwise. When this happens, the service desk has to scramble to gather information on the issues employees are calling in about and figure out how to resolve them. As a member of the IT and business planning teams, the service desk leader can gather information, ask questions, identify potential employee issues, staff for peak periods during the release, determine whether they can handle maintenance and support post-release, train help desk employees, and help to ensure a smooth rollout.

COMMON THREADS The help desk typically fields many different types of issues, and a strong service desk provides great value in identifying recurring themes among them. Once a common thread is identified, the help desk can raise the issue to the service desk along with recommended solutions. In one case, a help desk team incurred a high volume of password resets every April. Through research they found that every April, employees were required to take mandatory online safety classes within a standalone application. Since these were taken only once a year, most employees had forgotten their passwords from the year prior, resulting in the yearly peak. The help desk recommended adding a “reset password” feature to the online training application; once the service desk implemented this change, help desk calls were significantly reduced the following April.

WHY “SHIFT LEFT” IS THE RIGHT MOVE As it applies to the service desk, “shift left” refers to sharing IT solutions and knowledge as early in the process, and as close to the frontline, as possible. Rather than a common technical issue being passed from help desk to service desk and service desk to IT management, a “shift left” approach means that the help desk has the information to solve the issue directly. A “shift left” approach begins with a knowledge-sharing repository that I’ll call the SD Data Repository. Help desk associates can find common IT answers in the SD Data Repository, copy and paste them in a response, and push the information to the employee. The next step in the process is putting answers to common IT questions at the employee’s fingertips, via a user-friendly help desk portal fed by the SD Data Repository. The key to offering employees a great self-service experience is making this knowledge easily searchable, well structured (consider an FAQ section), and well written and easy to understand.

IT-LITE Finally, a service desk can also perform routine IT tasks, freeing up higher-level IT personnel to focus on more critical IT initiatives while reducing your cost to serve. These tasks fall into three key areas, end-user computing, enterprise computing, and network management, and include:

End-User Computing

Enterprise Computing

Network Management

• Asset management (laptops, printers, mobile devices, etc.) • Software deployment • Patch management • Desktop standardization and rollout • Image and configuration management • Backup, recovery, break-fix

• Operating system management • Server administration • Messaging and active directory • Performance monitoring and management • Availability management • Virtualization and consolidation • Storage management • System integration • Database administration and management

• LAN/WAN management • IP telephony • Network design and architecture • Remote location connectivity • VoIP implementation and management

For smaller companies with minimal reliance on IT, a tactical help desk focused on resolving end users’ immediate needs may be all that is needed. However, for larger organizations with complex IT systems, third-party integrations, and a critical reliance on IT infrastructure, a fully functioning service desk can be an asset to the entire organization, impacting many of the metrics the CEO cares most about.

Tony Streeter is the Chief Marketing Officer, SVP, at Y&L Consulting Inc. in San Antonio, Texas. He has led new product development, e-commerce marketing, and integrated platform marketing initiatives for major companies such as Harland Clarke, Deluxe Corporation, and RR Donnelley. Currently, Tony leads marketing and branding initiatives for Y&L Consulting, a comprehensive IT services and solutions company specializing in IT development, data analytics, emerging technologies, and help desk services.

TexasCEOMagazine.com

FINDING THE UPSIDE IN ANY CIRCUMSTANCEâ&#x20AC;&#x201D; INCLUDING A PANDEMIC EVEN THE MOST SERIOUS ADVERSITIES HAVE A SIGNIFICANT POTENTIAL UPSIDE. THE BIGGER THE ADVERSITY, THE BIGGER THE POTENTIAL UPSIDE.

THREE TIPS FOR WEATHERING THE STORM Paul G. Stoltz, PhD

Coronavirus is just the latest, and certainly won’t be the last, global threat to humanity. But have you noticed a certain predictable, highly flawed pattern of response? Hint: It’s pretty much the same pattern of response we see to any impending disaster. We humanoids seem to have a distinct craving for shock and awe, even as we feel the anxiety about what it brings for our future. We’re addicted to “Have you heard the latest?!” and “Not only that, but . . .” The constant news fans the flames of dismay and depression. In today’s 24/7 digital news onslaught, it’s easy to get sucked in, pummeled, and overwhelmed by “disaster porn.” As developer of the Adversity Quotient (AQ), the most scientifically robust and widely used method for measuring and strengthening human resilience, I’ve seen how leaders overcome crises like the one that began last March. As we continue to move forward—and prepare for future crises—here are my top three tips for staying resilient.

TIP #1: CONTAIN, THEN MAINTAIN When there’s an oil spill, the first response is to lay out the booms to contain and limit the spread. Don’t wait to “see how this all unfolds,” leaving your destiny to the latest headlines. The moment you get the first whiff of potential disaster, dive in by courageously asking two questions: • What is the worst-case scenario? (Start with a bad scenario and go down multiple levels, deeper and deeper.)

• What can I/we do now to minimize the potential downside?

Here’s a variation on that second question that I use all the time: “If, like everyone else, we just wait and watch while this gets worse (and it clearly may), what would we wish we had done now, that we can’t do (as well? as cheaply? as easily?) later, to limit any potential downside to this adversity?”

TIP #2: MAXIMIZE THE UPSIDE When China first got locked down due to coronavirus, I spoke to a colleague there who was in tears—because it was the first time in her memory that the relentless pollution cleared enough for her to see the stars! It may sound irreverent, but even the most serious adversities have a significant potential upside. The bigger the adversity, the bigger the potential upside. While acknowledging that you and your employees may be going through very real times of adversity, imagine if you, because of this crisis:

• Got more rest

• Had more chill time with family/friends

• Got to read an actual book

• Could focus on some really meaningful, back-burner project

• Grabbed the lowest mortgage rate in history

• Divorced your devices for a day or two

• Played a board game—uninterrupted!

• Finally engaged in some focused, long-term strategic

thinking, or radically honed your plan

• Let an entire day go by without looking at a clock, even once!

• Did that special health fast you’ve been putting off

• Got organized

• Came up with the killer “the moment this starts improving”

upswing plan, for gaining insane momentum when the storm clears! Those who come out of the storm better and faster will win!

TIP#3: STEP AWAY Sometimes less really is more. And sometimes more is way, way less. So it goes with news and ongoing crisis. You don’t have to track these developments by the micro-second. If you get the smartest, best situational update once a day, that will free up incredible time and energy to put your plan into action. Immediately, upon getting your update, simply pause and ask: “As a result of these new developments, what, if any, adjustments can I make to our plan to help us get through this better, faster, and more completely?” — I admit it. I’m seriously weird. Adversity energizes me. And if I’ve done my job here, it can energize you, too. Why? Because real adversity is an opportunity for each of us to shed our complacency and mediocrity and rekindle our best selves, when it matters most, and for whoever matters most.

Dr. Paul G. Stoltz is founder and CEO of global research and consulting firm PEAK Learning, Inc. Voted a “Top 10 Most Influential Global Thinker,” he coaches, teaches, and collaborates with top leaders, thinkers, and influencers in organizations from startups and NGOs to the Fortune 500. He is also the founder of the GRIT Institute and the Global Resilience Institute, worldwide research collaboratives for advancing the frontiers of human endeavor. Also a #1 New York Times bestselling author, Paul has served as faculty for MIT’s acclaimed entrepreneurship program and Harvard Business School’s Executive Education and MBA programs.

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FOR THE

ROLE OF CEO,

PREPARATION IS KEY Were you fully prepared for the CEO chair when you first got it? If you’re like most CEOs, the answer is probably “not exactly.” One study by the River Group asked 75 first-time CEOs to rate how prepared they felt for the role on Day 1, on a scale of 1 to 10. The average answer was 7.2. But asked how prepared they actually were, reflecting back from six months later, the rating dropped to 3.5.1 While there will always be “learning on the job” required in the CEO role, having a strong understanding of it can give you a leg up, long before you’re first hired. For years, seasoned tech executive and entrepreneur Joel Trammell has taught a CEO seminar each spring, equipping CEOs with a systematic understanding of the role. This year, Trammell adjusted the course to focus on leaders who were still aspiring to one day serve as CEO. The two-day event, hosted by Texas CEO Magazine and sponsored by YTexas and vcfo, gathered a group of leaders together to learn what makes the CEO role so distinctive from other executive roles, and to understand why the job is so often misunderstood—even by novice CEOs themselves. At the core of the course are Trammell’s five responsibilities of the CEO. These

The River Group, Expect the Unexpected: The Experiences of First-Time CEOs, 2016.

duties, Trammell argues, are fulfilled by every successful CEO, regardless of the company’s size, industry, geography, or age. They include: • Owning the vision—setting a clear and inspiring strategy that functions as the organization’s North Star. • Providing resources—ensuring that the organization is supplied with the capital and the talented employees it needs to execute the strategy. • Building culture—creating a strong set of shared values and attitudes that characterize the organization. • Making decisions—ensuring that the right decisions are made by the right people across the entire organization. • Delivering performance—taking an active role in driving company performance and refining metrics that reflect true success. Are you interested in sharpening your CEO skills? Joel’s book, The CEO Tightrope, is available along with an online course at TheAmericanCEO.com.

THANK YOU TO OUR SPONSORS FOR THIS EVENT:

[LEADERSHIP]

HOW TO LEAD

THROUGH TRANSFORMATIVE CHANGE LESSONS FROM THE TRANSPORTATION AND LOGISTICS BUSINESS Keeli Jernigan

As recent events have demonstrated, business owners must always be alert, agile, and prepared to adapt to a changing environment. We must call upon the entrepreneurial drive, discipline, and character that helped us build our businesses in the first place to guide our companies through times of turbulence.

Even in calmer times, leading a company through change requires a constant balance of speed and quality—especially in the transportation and logistics industry. As CEO of Trans-Expedite, Inc., a transportation and logistics company with a headquarters in the cross-border trade hub of El Paso, I’ve seen these demands firsthand. As we’ve grown, meeting the needs of our Fortune 500 clients has required comprehensive end-to-end services and impeccable delivery of the client’s assets, often on an extremely time-sensitive basis. This is a challenging imperative for both new and established providers. We faced a new test when, last year, we expanded to own Transaction Packing, Inc. (TPI) and extend our management of the supply chain for our clients. Based in Houston, TPI specializes in customized crating and packing solutions for global producers of complex products, from massive oil rigs to intricate microchips. This expansion was part of Trans-Expedite’s strategy as a “4PL,” or fourth-party logistics, provider. As a 4PL provider, we increasingly serve as a single point of contact between our clients and multiple providers of logistics services, often overseeing and optimizing their entire supply chain. If you are in the transportation and logistics business, you may be seeking to evolve into a 4PL provider as well. But no matter what business you’re in, you are likely seeking to grow, change, and meet the demands of a shifting marketplace. Below are six recommendations to CEOs who want to keep their footing as they lead through transformative change of any kind. ▪

Know your core competency. This is the first step in establishing your company’s credibility. When Trans-Expedite was founded 19 years ago, it offered 24/7/365 delivery and human service contact—a differentiator at that time. Even as the company has expanded to adapt to technological advances and marketplace complexities, delivering on-time, sensitive cargo is still a key element of the brand.

For a major corporation, trying to be everything to everyone is a trust buster. Instead, articulate your strengths and secure a project to prove them. This builds credibility and gives you a chance to showcase your strategic thinking and innovative solutions.

▪

Build your capacity. In a company’s early stages, you’ll need to get creative in partnering, subcontracting, or extending your company to deliver on important contracts. This can also be a treacherous time because suddenly you are relying on others whose performance can impact your reputation.

You can reduce these risks by meticulously vetting partners and suppliers. Seek out expert counsel on prudent ways to accomplish this and draft up tight agreements. And in your spare time, consider taking an intensive executive management course to hone your strategic thinking and broaden your vision for your company’s future.

▪

Secure advance financing. Have the foresight to develop strong banking relationships as you grow. Entrepreneurs can make the mistake of living moment to moment, but the transportation industry is especially investment-heavy, and many Fortune 500s pay on 120-day cycles. Once you secure

that $20-million contract, you may need a line of credit. Keeping your bank in the loop on your progress will help secure it. ▪ Execute flawlessly. While this may seem obvious, meticulous implementation is a compelling advantage that brings your customers back. The flip side is also true— poor execution can sink your operation, especially in the world of truck transportation, where the labor market is tight and can be difficult to manage. Creating a cohesive and mission-focused culture is the best way to control execution. As with all behavioral change, this starts at the top of your company and is secured by a strong team and standard operating procedures. Make sure you have clarity on the customer’s expectations and facilitate seamless, ongoing communication between every member of the execution chain. The CEO should be involved in the early stages of any major contract, and depending on its scope, meet weekly or quarterly with the team to ensure rigorous delivery. ▪

Take calculated risks. Once all these building blocks are in place, a company is prepared to seize opportunities to expand its services. At one key juncture, our company was asked by a major customer to secure warehousing as part of our deliverables. Thanks to our financial planning, we were able to lease a warehouse, and because of relationships built at a leading women’s business organization, we were able to partner with a Texas-based company, Integrated Human Capital, to provide the warehouse staffing. It was both a risk and an opportunity for us, but having these pieces in place allowed us to capitalize on it successfully.

▪

Stay true to your principles. In partnering with TPI last year, we purposely selected a management team we had known and trusted for 20 years. As leaders, we shared a strategic mindset and always approached each conversation with the customer’s end in mind. And we thrived on being creative in our solutions—whether we are reengineering factory floor workflows to speed packaging, repurposing materials to pursue sustainability goals, or packing hazardous materials according to national and international standards. In partnering with a team that shared our core principles of strategic, creative thinking, we have built a new relationship that adds up to more than the sum of its parts.

In the fast-changing transportation industry, these guidelines may offer milestones to success. But they also offer a path forward to CEOs everywhere, because like it or not, we must always be ready to adapt. Keeli Jernigan is CEO of Trans-Expedite, Inc., headquartered in El Paso, and Transaction Packing LLC, headquartered in Houston. She is a member of Young Presidents’ Organization (YPO) El Paso/Juarez Chapter and is the current YPO Regional Chair of the Western US Region. Keeli has served on the boards of the Women’s Business Enterprise National Council (WBENC) and the Women’s Business Council–Southwest. Her leadership has been recognized with the WBENC Women’s Business Enterprise Star Award, the WBCS Lillie Knox Investing for Growth Award, and the WBCS Done Deals—Women Working Together Award.

TexasCEOMagazine.com

[MANAGEMENT]

THREE PRIORITIES FOR BOARD AGENDAS IN 2020 Manny Fernandez

Creating your board agenda for 2020 will require a balance of near-term focus, agility, and long-term thinking. Based on our work at KPMG with directors and C-level executives throughout Texas, weâ&#x20AC;&#x2122;ve identified three key issues for boards to consider as they refine their agendas to respond to the risks and opportunities in the year ahead.

Texas CEO Magazine Q2 2020

1. BUILD BOARDROOM TALENT AROUND THE COMPANY’S STRATEGY AND FUTURE NEEDS. Boards are increasingly focused on aligning board composition with the company’s strategy, today and in the longer term. Boardroom talent and diversity are also front and center for investors, regulators, and other stakeholders. According to the 2019 US Spencer Stuart Board Index, board turnover among S&P 500 companies remains low (0.88 new directors per board annually). Average director tenure (eight years) has changed little, while average director age rose slightly in the last decade (to 62.7). Progress on board diversity is constant but there is still a long way to go; 26 percent of S&P 500 directors are women, and 19 percent of directors in the top 200 of these companies are African American (10 percent), Latino (5 percent), or Asian (4 percent). In addition, 75 percent of boards in the Fortune 1000 list do not have a single Latino represented. The increased level of investor engagement on this topic highlights frustration over the slow pace of change in boardrooms, and points to the central challenge with board composition: a changing business and risk landscape. Addressing competitive threats and business model disruption, technology innovations and digital changes, cyber risk, and global volatility requires a proactive approach to board building and board diversity—of skills, experience, gender, and race/ethnicity. As part of its Boardroom Accountability Project 3.0, the Office of the New York City Comptroller sent letters to 56 S&P 500 companies requesting that they “adopt a diversity search policy requiring that the initial lists of candidates from which new management-supported director nominees and chief executive officers (CEOs) are chosen include qualified female and racially/ethnically diverse candidates.” Board composition and diversity should be a key area of board focus in 2020, as a topic for communications with the company’s institutional investors, enhanced disclosure in the company’s proxy, and positioning the board strategically for the future.

2. LINK BOARDROOM DISCUSSIONS ON STRATEGY, RISK, AND GLOBAL DISRUPTION. Trade wars, Brexit, virus outbreaks, cyberattacks on critical infrastructure, and the threat of military conflict in geopolitical hotspots will continue to drive global volatility and uncertainty. In this environment, companies will require more investment in scenario planning and stress testing. In addition, organizations will need to create contingency plans to shorten supply chains, cutting long-term fixed costs and limiting business exposure to political relationships that have considerable liability. Companies also need to address the potential disruption to business models posed by advances in digital technologies such as robotic process automation, machine learning, and artificial intelligence. Are the company’s risk management processes

adequate to address the speed and disruptive impact of these advances, and to assess the continuing validity of the assumptions that form the basis of the company’s strategy and business model? Boards will also need to assist management in reassessing the company’s processes for identifying risks and opportunities posed by disruption—geopolitical, technological and digital, social, and environmental—and their impact on long-term strategy. Is there an effective process to monitor changes in the external environment and provide early warning that strategy adjustments may be necessary? Help the company test strategic assumptions and keep sight of how the big picture is changing. Disruption, strategy, and risk should be hardwired together in boardroom discussions.

3. UNDERSTAND HOW THE COMPANY ALIGNS PROFIT AND PURPOSE. Corporate growth and shareholder return still require the essentials—managing key risks, innovating, capitalizing on new opportunities, and executing on strategy—but the context for corporate performance is changing quickly, and perhaps profoundly. Mounting societal issues—including jobs and wages, income inequality, climate and environmental issues, health and safety concerns, and calls for greater diversity and inclusion, coupled with limited government solutions—continue to heighten expectations for corporations to help address gaps and rethink their responsibility to society. Institutional investors have emphasized their expectations for companies to explain how they are addressing environmental, social, and governance (ESG) issues in the context of longterm value creation. Employee and consumer activism on ESG issues is in its early stages but growing, and we continue to see shareholder proposals on these issues—particularly the E and the S. Companies are likely to face increasing pressure to have a statement of purpose articulating their commitments to stakeholders and how stakeholder considerations factor into efforts to create long-term value. Boards play a key role in shaping the debate and setting the tone and expectations for linking purpose and profit. As stakeholder expectations for transparency and disclosure regarding these issues mount, boards should be intentional about how they engage with management on profitpurpose alignment. — As you set your board agenda for 2020, we recommend keeping these three priorities—board composition, global disruptions, and corporate social responsibility—in mind. Doing so will drive the conversations necessary to prepare your business for a changing and uncertain future. Manny Fernandez is the office managing partner for the KPMG Dallas office.

TexasCEOMagazine.com

SOCIAL DISTANCE VS. SOCIAL DISTANCING

Jason A. Aimone, PhD

Business leaders can benefit from understanding the relationship between these different—but related—concepts. In the past month, who hasn’t heard someone tell them to practice “social distancing”? The term, which is so common recently, was nearly unused in daily conversation until March of 2020. However, experimental economists have been exploring the concept of “social distance” for decades in their attempt to understand what leads to decisions to invest, cooperate, reciprocate, and trade with others, in addition to other economic behaviors. Interestingly, the two concepts, while so similar sounding and intuitively connected, are incredibly different in action and practice and potentially are at odds with one another. 88

Texas CEO Magazine Q2 2020

“Social distancing,” in common parlance, is the practice of individuals staying away from one another during global pandemics. Implicitly, “social distancing” is intended to reduce physical proximity between individuals. The idea is that if people avoid contact with others, then those that are sick cannot infect others as rapidly. Therefore, even if the total number of people infected is the same, the slower pace of disease progression will be more manageable by constrained healthcare services. People are prodded both top-down (through forceful channels) by governments, schools, and businesses as well as bottom-up (through voluntary channels) by family, friends, and social networks to avoid close contact with other people. The benefits of social distancing are obvious, but the costs of social distancing are rarely discussed.

unintended consequences of increased social distance even after social distancing regulations and policies have ceased. People may be more apprehensive of interacting with strangers and people who don’t fit into their normal circle of friends and associates (what researchers often refer to as “out-groups”). While “family” language may have gradually helped knit together a workforce and created relationships between companies and clients, reducing social distance through social distancing practices will be a tangible reminder of who is and who is not family. Businesses should be prepared for the potential undoing of those and other policies that were previously instituted to reduce social distance, and that the removal of forced social distancing is unlikely to immediately renew the former close social distance that existed previously. Reminders, particularly to regular customers of the past, of the ongoing relationship may be helpful.

BUSINESSES HAVE LONG ADOPTED PROCESSES, POLICIES, AND PROCEDURES THAT MAY WORK TO DECREASE SOCIAL DISTANCE WITHIN THEIR ORGANIZATION AND HELP THEM CAPTURE THE ASSOCIATED ECONOMIC GAINS.

“Social distance,” on the other hand, is typically measured by economists as the degree of connection between individuals in an environment. Anonymous strangers would typically be thought to have a large degree of social distance, while friends would have lower social distance, and spouses even less social distance. Laboratory studies across many countries consistently show that decreasing social distance is economically beneficial, typically related to increased rates of factors like cooperation, trust, and charitable giving. Decreasing social distance between people, even anonymous strangers, can lead to improved cooperative outcomes, and can potentially be done by things such as information transmission, communication, and visual or physical proximity. A large cost of recent “social distancing” can be thought of as the loss of the benefits of low “social distance.” Hoarding behavior, shortness, vindictiveness, non-cooperativeness, and social shaming may all be signs of general increases in social distance.

Businesses have long adopted processes, policies, and procedures that may work to decrease social distance within their organization and help them capture the associated economic gains. Team building, employee ownership, and “family” type language within the organization may have been an effective way to decrease social distance between those in management and the workforce, which may help increase efficiency and worker cohesion and also reduce costs. Likewise, businesses have adopted similar policies that may reduce the social distance between the business and consumers, for instance framing the producer/ consumer relationship as a family relationship. A potential downside of COVID-19 social distancing efforts, should they prove effective, is that they may have lasting

Businesses may also want to be cautious when considering how to use telecommuting during the COVID-19 crisis and whether to continue to use telecommuting when the crisis subsides. While there are many gains from telecommuting, care should be taken to ensure that those workers telecommuting remain close, in the social distance sense, to other workers and management. Frequent communication, visual if possible, through web cameras and meetings, may help maintain close social distance even when physical proximity is great. Social distance need not be social isolation. A final hope is that shared experiences have been experimentally shown to potentially reduce social distance and/or increase a feeling of “connectedness” between individuals. The health need for social distancing affects everyone, not just one group of society. Both CEOs and workers, rich and poor, liberal and conservative, in-group and out-group, family and stranger are sharing the experience of social distancing. The COVID-19 crisis, unlike a natural disaster, war, or even structural financial crises, is general and international. This shared experience and the shared unpleasantness and unnaturalness of social distancing could potentially be a force to reduce social distance in the long run, as we have now seen that we are all in the same boat. CEOs, managers, and businesses in general may recapture their former close relationships most easily through highlighting the similarities of their shared experiences.

Dr. Jason A. Aimone is an Associate Professor of Economics at Baylor University. His research expertise is in behavioral economics, experimental economics, and neuroeconomics.

TexasCEOMagazine.com

[ENTREPRENEURSHIP]

YOU CAN SELL YOUR BUSINESS WITHOUT COMPROMISING WHAT MATTERS MOST TO YOU For Sunny Vanderbeck, cofounder and managing partner of Satori Capital, selling a business is about a lot more than dollar signs. And he’s found that the vast majority of CEOs agree with him. When you decide to sell a business or take on a capital partner, price matters—but so do lots of other factors. Does the deal create real value? How does it affect your customers, suppliers, employees, and even your family? Vanderbeck’s latest book, Selling without Selling Out, is a comprehensive guide to making a sale or taking on an investor without compromising your core values. In this interview, Vanderbeck talks about some of his top advice for leaders considering a sale, as well as what running an investment firm has taught him about the CEO role.

Texas CEO Magazine Q2 2020

Let’s start by talking about Texas. You’re at the point where you could operate anywhere you want, but you’re still in the Dallas area. Why is that? There’s a couple of things. I grew up in Fort Worth, but I lived in the Seattle area when I was in the military, and I realized it wasn’t for me. I’m solar powered. I knew I was definitely headed south again. Dallas is also one of the best gateways to everywhere in the world. I can daytrip almost everywhere in the continental United States. I’ve done the 17-hour direct flight to Australia. The other big thing is our extraordinary business environment in Texas. I think we’re a bit spoiled, in that if you don’t realize what it’s like to do business elsewhere, you may not realize how good you have it, everything from the community to the legal infrastructure to the hiring pool. I had a friend with a business who left for another state—not to be named to protect the guilty—and he said that the workforce available to him there was somewhat uninterested in working. The market wage for working was so close to the market wage for not working that he wasn’t able to attract people. He later moved his business to a different state and had something like a fivefold revenue increase in the next 10 years because the workforce and regulatory infrastructure were so much better. I can’t imagine a better place in the United States to do business than Texas, and it’s an extraordinary place to live too. Heads—I win in terms of business. Tails—I still win because I like to live here too.

You’ve made the transition that a lot of CEOs hope to make or do make, from selling a business to looking for businesses to invest in. How has that been? I love to learn, so it’s been a lot of fun. Many of the things I learned from being a CEO and building a business have been extraordinarily useful in my current role running an investment firm. Our industry has a lot of mystique about it, but it has the same opportunities and challenges that every other industry has. We have customers, products, and lots of stakeholders to satisfy. Skills like culture building translate very well. We just won another Best Place to Work award, and we put a lot of energy into that. It changes who we have available to us in recruiting. A lot of CEOs might think this job is sitting in an office on a big pile of capital, deciding who gets it and who doesn’t. That couldn’t be further from the truth. This is a hard job with lots of late nights and weekends, just like a normal operating business. I talk about the intensity of a deal in the book, and those deals are our whole business. We go through that intensity two to five times a year, either on an entry or an exit. On top of that, we’ve got 12 portfolio companies that we’d like to actually help. We’re not good passive investors. We won’t make an investment where we don’t think we can make a difference; we’ve got the operating mentality.

We enjoy thinking about A/B testing on marketing, or improving salesforce compensation, or how to reach new customers. So, running an investment firm is a harder job than I thought it was going to be, but it’s more rewarding as well.

When you’re CEO and you’re working a deal, it’s everything. Does it feel different to be on the other side, as a potential investor or acquirer? I’ve learned two useful things. One, now that I’ve been on the other side of the table, I know what I sounded like when I was in board meetings. I would be a much better CEO than I was before. You have to be able to take the perspective of the investor; it’s a little easier to do that as a hired gun CEO than as a founder CEO. Today, I have a little more empathy for investors and what the world looked like through their eyes. The other thing I’ve learned is how to tolerate deals that may not work out. When you’re leading a company as CEO, you expect most of your objectives to pan out—there will be some problems and misses as you go, but that’s okay. In the investment business, a vast majority of the things we work on will never turn into a closed investment. We can look at a thousand opportunities a year and make three investments. That took some getting used to. It’s a different playbook to run—it’s a singles and doubles game versus lots and lots of at-bat and nobody throws a pitch. I didn’t expect to go to lots of meetings that at the end of the day don’t create value for anybody. You ask the question “Should we work on this or not? Is this one of the three out of a thousand?”

I CAN’T IMAGINE A BETTER PLACE IN THE UNITED STATES TO DO BUSINESS THAN TEXAS, AND IT’S AN EXTRAORDINARY PLACE TO LIVE TOO. HEADS—I WIN IN TERMS OF BUSINESS. TAILS—I STILL WIN BECAUSE I LIKE TO LIVE HERE TOO. In your book, you talk about how CEOs should deal with their investment bankers during a sale. What’s your best advice on that? First and foremost, if the CEO isn’t clear about what they want out of a sale, they’ll get what the bankers and TexasCEOMagazine.com

RUNNING AN INVESTMENT FIRM IS A HARDER JOB THAN I THOUGHT IT WAS GOING TO BE, BUT IT’S MORE REWARDING AS WELL.

attorneys want. Before you decide to bring on a banker to help you with an investment or sale, you have to figure out what you care about. Just like any other initiative in your company, you have to stop and write down what success looks like. You have to do that not just for shareholders but for your employees and customers and suppliers—and your family too. In evaluating a potential sale, a lot of CEOs take their own needs and put them last on the list. It’s funny, because that’s not the typical CEO reputation, but it’s often the reality. This is the time to make sure that you understand who you care about and what you want for them, because the investment bankers’ compensation is based on how much the company is sold for. Their guidance is going to drift toward the things that pay them the most. It’s not their job to watch out for your employees and your customers and your family. If you have two potential investors or acquirers and one of them is going to pay more but the other one’s a better fit, the vast majority of investment bankers will tell you to take the one that pays more. Otherwise, it’s literally money out of their pocket. That’s a tough spot to be in, where it costs them money to tell you about the best fit. It’s not that investment bankers are bad. The point is, they are salespeople and get paid on revenue and nothing else.

They work for the deal, not for you, right? That’s right. Their customer is a deal. A moment will come where you’re surrounded by a bunch of people, either in person or on the phone, people in neckties who do this day in and day out, with terms flying around, and they’re all trying to push you in one direction. If you voice an instinct about a buyer and that’s all you have to back you up, it’s going to be harder to stand your ground. I started writing down the five constituencies I care about and what I wanted for each one of them, so I could point back to that and remind people. It’s much, much easier to get their head in the right place if you write it down. Otherwise, the bankers will say, “Yeah, all the entrepreneurs say that until I put money in front of them.” I found that to not be true, but that’s how they’re going to look at the world if you don’t write this stuff down and communicate in advance.

Do you have that conversation with companies you’re considering investing in—what is success here? We do. Clarity about what success looks like matters a lot for us, regardless of whether we bought 20 percent or 80 percent of the company. We want a real partnership. 92

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We’re not a good fit if success for the owner looks like stepping back from the business. If you’re tired and hoping this sale is the end of the line, you’ve got to be honest with yourself about that. Once the wire clears, your new partner is going to have a bunch of energy about this brand-new thing; you have to ask if you’re really ready to dig in and build the company from, say, $100 million to $200 million. If not, a strategic acquirer is probably best, or maybe a private equity firm that has a CEO in waiting. So, we do spend a good bit of time understanding the “why” of a transaction with our potential investees.

What is the best fit for Satori Capital? What do you look for in a deal? There are a few different types of fit we look for. Misalignment of shareholders can be a good place for us to step in. On a recent investment we made, there were six owners of the company—the CEO and five external owners. Those five owners’ priority was their distribution and the reliability of cash flow, but the CEO wanted to grow the company. In that case, we were able to replace the owners who were not aligned with the CEO’s vision with people who were not only aligned but could help accelerate the vision. That CEO has gone from “Hey, you’re slowing me down” to “Wow, you can help me go faster.” Sometimes that misalignment plays out in a smaller form. Maybe Cousin Willie just wants his check but you’re trying to grow the business. Now Thanksgiving’s hard because Cousin Willie is mad he didn’t get his check because you made an acquisition. We can say, “Let us take Cousin Willie’s spot and we’ll show up and help instead.” I make no judgment on Cousin Willie’s situation. He just might not be the right shareholder. Another common fit for us is when a business hits a size where the decisions feel too big for the CEO. If you’re making $10 million a year in profit, the CEO is probably making $1 million to $5 million decisions regularly. When those were half-amillion-dollar decisions, they were easy, but now the right strategic choice might be to open a plant, but that’s two years of earnings—and you don’t want to mess up a good thing. Early in my career, someone gave me good advice, which was that the things that make you successful are the things you’re most likely to stop doing when you have success. In these situations, that plays out with the willingness to take risks and try new things. In those situations, we can say, “Let us buy 50 or 60 percent of the company so you can stop worrying about those decisions from a financial perspective.” They’re thinking more about risk than about reward, and we can help unlock that reward.

Being CEO is kind of a lonely job, so sometimes people are looking for a partner. One CEO said to me at a dinner, “Look, I just wish I had somebody to sit with me in the office to whiteboard and think out loud about where we’re going and how to get there. I don’t have anybody in my organization who can have that conversation.” It seems like a little thing until you’ve been on that island yourself. In those cases, we can be a really good fit.

Those of us who’ve been around a long time have certainly seen an escalation in pricing of businesses. Assets are expensive, money’s cheap. Are you still happy to buy businesses at these inflated prices? If we thought a price was inflated, we wouldn’t do it. We’ve got a responsibility to our investors to get great outcomes. There are a few things going on with pricing. We have a lot of capital coming in from overseas, because this is the best place in the world to do business. There’s also a big search for yield, and if it’s hard to make money anywhere else, private companies are an extraordinary way to get a return. And as you get later and later in the cycle, people are more likely to price everything to perfection.

EARLY IN MY CAREER, SOMEONE GAVE ME GOOD ADVICE, WHICH WAS THAT THE THINGS THAT MAKE YOU SUCCESSFUL ARE THE THINGS YOU’RE MOST LIKELY TO STOP DOING WHEN YOU HAVE SUCCESS. On top of that, you have availability of debt that’s driving prices up. Capital is everywhere and cheap. If you pay nine times EBITDA for a company, a lot of times you’re going to see four and a half or five times EBITDA of debt on the business. That means you’ve effectively handcuffed the business because there’s no room for anything to go wrong. You have to make everything work every quarter because you can’t miss a payment—they’re priced to perfection. A lot of CEOs look at that situation and say, “No way.” If you put too much leverage on a business, you’re risking everything. So, in a private equity transaction, the cost associated with a high price is usually a high amount of leverage. In a strategic

transaction, the cost associated with a high price is often high disruption in the business. When I’m talking to an acquirer who wants to buy a business, I always ask my favorite M&A question: “What are you going to do with it?” It’s a silly little open-ended question, but they’ll usually tell you. Recently, I asked that question and the answer was, “Well, we’ll probably close the plant, since we think there’s too much capacity in the industry. We have our own management team, so we’ll probably get rid of that too.” The answer was essentially “We’re going to shut it down.” You have to be aware that that may be the acquirer’s plan. The question I started to ask people on the seller side is “If your acquirer says they’re going to fire everybody the day after close, how much more do they have to pay?” That question puts a bright light on what you value. Over and over again I’ve heard CEOs say they’d tell the acquirer to simply go away in that scenario. They don’t even want to engage in the conversation— they’d never make a sale with that condition. Or the number they come up with is one that’s basically three years of severance for the entire workforce. Collectively as CEOs, I’ve found that we do care greatly about things other than money in a transaction. If the reader is considering a sale or investment, I encourage them to ask themselves that question. Some investors will pay high prices, but their plan is to fire everybody. You’d better find out.

You’re a proponent of “conscious capitalism,” and your definition is one of the best: “How would you run a company if you had no time horizon for an exit?” Is that a fair way to put it? Right. If you’re the largest employer in a small town and your name is on the door and you can never sell the business—how do you make decisions? There’s an even simpler version: If your plan was to run the business forever, what decisions would you make? Thinking on longer time horizons tends to make you think differently about your tactics, including engaging with shareholders, employees, and other stakeholders. I would argue that that time horizon is a necessary condition for conscious capitalism. Rather than thinking of profit as a dirty word, you think about running things in a way that creates value for everybody. I’m not shy about being a capitalist—capitalism is extraordinary. I don’t see conscious capitalism as a kinder, gentler, softer-around-the-edges capitalism. It’s simply asking the question “What’s the best way to run a company that creates the most value for everyone?” Sunny Vanderbeck offers a free workbook to help CEOs determine what is important to them in a transaction, available at sunnyvanderbeck.com/workbooks. Satori Capital manages more than $1 billion of committed capital with more than $400 million dedicated to private equity. They are actively seeking majority and minority investments in rapidly growing businesses with $5 million to $25 million of EBITDA.

TexasCEOMagazine.com

4 BIG [CULTURE BUILDING]

BENEFITS

OF STRUCTURED MENTORSHIP PROGRAMS Eric Bonugli

Across generations and industries, mentorship has made a lifelong impact on many individuals, including business leaders. While mentor relationships often develop organically, many companies may consider implementing structured, intentional mentorship programs as part of their training and development strategy.

Texas CEO Magazine Q2 2020

Mentorship programs can have a positive effect on a company in a myriad of ways, including employee growth, opportunities for professional development, and enhanced engagement. Below are four benefits that can result from a structured mentorship program.

1. IMPROVE PERFORMANCE In addition to helping guide new hires through basic company guidelines, a structured mentorship program can lead to improved performance for both employees and employers. This, in part, may be attributed to the increased feedback and accountability a mentor can provide. While many companies conduct annual performance reviews, some employees may prefer constructive feedback throughout the year—and mentors can help fill that need by providing performance assessments on a regular basis. This can help organizations track an individual’s personal and professional goals on an ongoing basis and provide the opportunity to identify and share areas for improvement sooner.

2. BRIDGE GENERATIONAL DIVIDES While some may think of the traditional mentor as a senior colleague, the outlooks and opinions of new or younger team members can also benefit an organization and its staff. As the number of generations within the workforce continues to increase, business leaders may consider launching a “reverse mentoring” program to allow younger workers the opportunity to work with senior employees in specific areas of expertise. This approach can help uncover fresh perspectives in the workplace, as each generation tends to bring varying skill sets to the business. They may include a keen understanding of new technology, a different way of approaching issues, or a better understanding of customers across various generations.

3. PROVIDE MUTUAL BENEFITS It can be natural to assume that mentees benefit more from mentoring relationships than their mentors, but in many cases, mentors may experience as much fulfillment in fostering the growth of another employee as the mentee does in receiving the support. Placing high-performing employees in mentor roles can help them hone their leadership, management, and coaching skills—and may provide a useful training ground for a more official leadership role in the future.

4. VALUE AT LITTLE OR NO COST While training programs focused on various skills are important, they may be cost prohibitive at times. A mentorship program, on the other hand, can provide immeasurable value to employees and the organization, often at little to no cost to the business. — When companies, as well as company leaders such as the CEO, take the time to establish, implement, and encourage a mentorship program, it can make a difference in company culture, business results, and the daily experiences of individual employees. Eric Bonugli is a district manager with Insperity, a leading provider of human resources and business performance solutions. For more information about Insperity, call 800-465-3800 or visit insperity.com.

TexasCEOMagazine.com

[LEADERSHIP]

COMMUNICA IN TIMES OF CRISIS Jenifer Sarver

Texas CEO Magazine Q2 2020

TING This is a time when leadership is being tested. This is also a time when effective communication can make or break a leader. In moments of crisis, strong leaders who have the ability to effectively communicate rise to the occasion. They use words as a calming salve to reduce anxiety and heal wounds. They provide credible information, realistic responses, and a course of action. They offer a clear and inspired vision for a future beyond the crisis. They can also demonstrate compassion and empathy by exposing their humanity.

In my career I have had the opportunity to help organizations and leaders navigate the dark waters of many a crisis, and emerge on the other side battle-tested, sometimes bruised, but hopefully better prepared to meet the future. Those crises have ranged from a data breach, to a bank failure, to a wrongful death. Each has its own nuance, its own facts, and its own challenges, but there are some consistent principles that apply across the board.

First, it’s important to understand that there are three kinds of crises: 1. A manmade disaster such as an accident, criminal activity, or negligence. 2. A natural disaster such as a hurricane, earthquake, or wildfire. 3. A failure to appropriately respond to either of the first two. COVID-19 is a toxic combination of all three: a natural disaster exacerbated by a failure of preparation coupled with an unwieldy global population resistant or unable to take the actions required to help stop the spread of the pandemic. As we navigate these new waters, leaders should consider their own communication as an important factor in how they manage, survive, and ultimately thrive once we come out on the other side. Here are eight principles to help leaders communicate in times of crisis:

1. PUT HEALTH AND SAFETY FIRST. The decisions you make as a leader should be guided by the question: “What is the right thing to do?” If there is any chance your actions could further endanger public health and safety, you must make the call—no matter how difficult the consequences— that will protect people from danger. Those early decisions will define your legacy and they will determine how and whether you survive the crisis.

2. IDENTIFY STAKEHOLDERS AND RESPOND TO THEIR PERCEPTIONS AND EXPECTATIONS. With whom do you need to communicate? One of the most important audiences for executives to consider is their internal audience. There’s typically a mad scramble to issue a statement or send out a press release in the event of a crisis. The natural instinct is to make sure the public—customers, vendors, investors, and creditors—know you are reacting. But, one of the most vital, often overlooked, and frequently undervalued audiences with whom to communicate is your internal audience. TexasCEOMagazine.com 97

Your team can become important brand ambassadors for you during a crisis—if they are properly informed about the situation, understand the company’s response, and are equipped with key information that they can readily share. As you identify other key stakeholder groups, it is important to view the crisis through their eyes: What do they need to hear from you? What will their concerns be? Ensure that your crisis response team is diverse and includes people from all levels of the organization to help give you insights into how all parts of your organization may be impacted by the crisis, and thus better prepare you to respond to them.

3. PROVIDE PEOPLE WITH FACTS AND ACTION. My former boss, Ambassador Karen Hughes, who served as counselor to President George W. Bush, often says that in a crisis people want two things: facts and action. She would know a thing or two about communicating in a crisis—she addressed the nation on 9/11 to let the American people know how government agencies were responding during that darkest of days. That same maxim holds true today. Executives can be a calm source of information during a crisis. You can provide key stakeholders with facts about the situation and how it will impact the organization. And you can provide action—what you are doing to respond, and what others can do to help. It is natural for people to want to help; link your communication to action to show that you are not just aware of the crisis, but that you are also working to get on top of it and finding ways to involve people in the solution.

4. COMMUNICATE EARLY AND OFTEN. There is a rightful tendency to “wait and see” until all of the facts are gathered. But nature abhors a vacuum. In a news cycle measured in seconds and minutes, not hours, it is important to get points on the board first and let people know you are in command. You may have little information to share—that is okay. Communicate quickly to let people know that you are aware of the situation and to establish yourself as a credible authority. Create a consistent channel for public information and stick to it. Let people know where and how you will provide updates and then do so regularly. Early on, you have the opportunity to frame the situation on your own terms. The longer you wait, the window to do so becomes smaller and smaller. Social media provides a wonderful tool for rapid response, and a consistent place to share information where people are already engaging during a crisis. Make sure you are leveraging those tools effectively. Either ensure that every statement made by the organization is rapidly disseminated on all of your channels, or that you post a notice on unused channels about where the public can find up-to-date information. Social channels also provide a vital tool for listening, understanding, and reacting to public response. 98

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5. USE FACTS AND DATA—BUT DON’T FORGET EMOTION. In times of uncertainty it is important to be vulnerable and let people see your humanity. Yes, you are in charge, you have a plan, and you are executing against it. But you may also be nervous. You may experience anxiety just like the rest of us. Let people know that. Be a consistent, steady source of facts and information, but always put people first. The first line in every statement should acknowledge our shared humanity.

6. BE HONEST AND TRANSPARENT. It should go without saying that honesty is the best policy. But, it is an important reminder that a time of crisis is not the time to shield the truth, or withhold information. It will all one day become public—remember that. In dark moments, when things are uncertain and the future looks bleak, remember that there will come a time when the light of day will shine on how people and organizations comported themselves during the crisis. Share appropriate information as expediently as possible and err on the side of transparency.

7. BE PREPARED. The best way to emerge from a crisis stronger than when you entered is to be prepared. Many an organization has been caught flatfooted, unprepared for a crisis of any magnitude, let alone the one we face. However, it is never too late to begin. A few quick steps to take:

• • • • • •

Compile a cross-functional crisis response team. Identify and train spokespersons. Have a rapid notification system in place. Identify and have call lists of key stakeholder contacts. Prepare template communication materials. Establish monitoring systems.

8. BE VISIONARY. As you walk through a crisis, focus your responses not only on the current state of affairs, but also on where it is going and how you will lead people to the future. However, beware the false dawn of premature recovery. The last thing you want to do is lull people into a false sense of complacency. You aren’t being asked to promise a full recovery and a perfect resolution to the crisis at hand. But you can hope for better days. Set that tone early on—be visionary.

Jenifer Sarver is a communication consultant with more than 20 years of corporate, nonprofit, and political communication expertise. Her firm, Sarver Strategies, is based in Austin, Texas. Follow her on Twitter: @UTSarver.

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