Chief Executive / Jan/Feb 2014

Leadership Development

How the best companies foster talent, p.22

Regional Report

What Midwestern states do to support business, p. 52

Intangible Capital

Learn how to leverage—and protect—your non-material assets, p. 42

Mergers & Acquisitions

How to guard against biases that can derail your deal, p. 29

JANUARY/FEBRUARY 2014

MEET THE

Mid-Market Elite OtterBox’s Brian Thomas and 99 other CEOs show the way to achieve exceptional growth.

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CONTENTS

Meet the Mid-Market Elite

January/February 2014 No. 268

COVER STORY 34

Meet the Mid-Market Elite Chief Executive presents its first annual list of 100 top-performing, mid-sized companies.

by Steve Rosenbaum and Jennifer Pellet

34

06

Editor’s Note

08

CEO Watch • YP.com’s David Krantz on taking the Yellow Pages digital • Tetraphase’s Guy MacDonald on targeting superbugs • POV: Brooks Sports’ Jim Weber on life as a Berkshire Hathaway portfolio CEO

19

Chief Concern Placing Trust: A CEO’s Dilemma Relying on others is fraught with risk. Here’s how to manage it.

by Dr. Thomas J. Saporito

20

CEO Confidence CEOs Remain Cautious About Business Conditions

22

Leadership Development 2014’s Best Companies for Leaders Which companies do best at developing leaders—and what can you learn from them?

08

2014 Best Companies for Leaders

by Dr. Jenna Filipkowski and J.P. Donlon

29

Expansion How SMEs Go Global Small- to mid-size company CEOs report on what works—and what doesn’t—in entering overseas markets.

by Bill Holstein

42

Intangible Assets How Safe is Your Intangible Capital?

Trademarks, patents, brands and other non-material property are often a company’s most valuable assets. Here’s how companies are leveraging and safeguarding them.

by Dale Buss

22

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CONTENTS

RT O P E R L A REGION WE ST D I M E H T

46

Mergers & Acquisitions Three Killer Biases to Avoid in M&A In the world of deal-making, blind spots can be brutal. Becoming aware of them can mean the difference between wild success and dismal failure.

52

by C.J. Prince

52

Economic Development Regional Report: The Midwest A state-by-state look at what the Midwest has to offer businesses.

by Warren Strugatch

58

Big Data Getting Advanced Analytics Right What CEOs need to know about advanced marketing analytics in the era of Big Data.

by Mark Taylor

58 62

Essentials How to Get the Most Out of Your COO Today’s best COOs often complement—rather than duplicate—a CEO’s skill set.

by Fran Hawthorne

65

Executive Life The Second Home Search Looking for a haven from the daily bustle? Here’s how to find and manage a second home.

by Michael Gelfand

71

Flip Side Game of Drones

72

Final Word The Invisible Achievement Cover Shot: Harper Point Photography

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 268, January/February 2014. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2013 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $198. U.S. single-copy price is $33. Back issues are $33 each.

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The Best Tips, Tools, Insights & Practices for CEOs EXCLUSIVELY ONLINE NOW More CEOs Are Hoping the Second Time’s a Charm A number of former CEOs of top companies are finding out what it’s like to come back as CEO—of the same company. Since the late Steve Jobs handsomely succeeded in his second tenure at Apple, the idea has lost its traditional stigma. A steadily growing group of such chiefs are succumbing to the pleas of boards of directors who are certain that they’re the only people for the job—again.

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You can, too.” Here, he tells how to get started.

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When Is the Right Time to Step Down?

At some point, many CEOs face the dilemma that confronted Microsoft CEO Steve Ballmer: How long to continue to run the one-time leading tech company—now fallen on much less dominant times with him at its helm.

READ MORE ONLINE >

Made-in-USA Push Is Great—But Exactly Where?

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There may be a manufacturing comeback in America these days. But exactly where in the United States is this happening? A slow-growth economy dictates that state governments must sometimes entertain even unreasonable demands for tax breaks and other economicdevelopment incentives from CEOs who dangle the possibility of building new facilities and providing scarce jobs at some lucky, albeit American, winning site.

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04 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2014

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EDITORS NOTE

Two Cheers for the Middle Market In the last issue, we celebrated the Mid-Market CEO awards, giving cover treatment to three leaders: for Leadership (Chuck Runyon, CEO, Anytime Fitness), for Innovation (Steve LaBella, CEO, iSend), and for Overall Excellence (Jeff Silver, CEO, Coyote Logistics). In this issue, we highlight the Mid-Market Elite—100 mid-market companies that we’ve identified as top performers in their respective fields (See page 33.)

These are both private and public high performers with annual revenues between $10 million and $1 billion. We used both quantitative and qualitative metrics to sort through the estimated universe of 197,000 firms, according to the National Center for the Middle Market at the Fisher College of Business at Ohio State University. We looked for companies that grew faster than their market-sector rivals. We also looked for unusual innovations and business models. In addition, we interviewed select leaders and company founders to learn, to the extent possible, their “secret sauce” and what propelled them forward.

Our purpose is to draw attention to a vibrant and often neglected segment of the U.S. economy. For example, this group represents 3 percent of all U.S. companies, one-third of all jobs and more than $10 trillion in combined annual revenue. Not many appreciate this sector’s resilience. During the financial crisis, big business lost 3.7 million jobs, but the middle market

added 2.2 million jobs. And 70 percent of middle-market firms have been in business at least 20 years. In fact, according to the National Center’s analysis, if the mid-market were independent of the U.S. it would comprise the fifth-largest global economy.

As of the third quarter in 2013, 63 percent of the middle market reported positive revenue growth compared with 60 percent of the S&P 500. And 40 percent of the middle market companies expect to add jobs over the next 12 months, as compared to 34 percent of the S&P 500. Furthermore, almost half (49 percent of middle marketers) say they are confident about their prospects in the global economy, as compared to 29 percent of the S&P 500.

Likewise, 61 percent are more confident in the national economy for 2014, as compared to 48 percent among the S&P 500.

Just who are these firms and why do they go unheralded?

They are comprised of an astonishing range of low-profile businesses in every industry and in every part of the country.

They can employ a few dozen to several thousand people. They perform vital tasks and develop and manufacture critical parts and technologies that drive our national and global economy.

They are often suppliers that make key components for the bigger public companies. Taken together, they are the “Intel inside” that makes our economy hum. Because of their size and the fact that they don’t have an Intel-like brand, they don’t often get noticed—that is, until now.

06 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2014

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CEO WATCH | CASE STUDY

YP: An Icon’s Rebirth

by Jennifer Pellet THE CHALLENGE You’re a young executive sent to manage AT&T Interactive, the business unit charged with developing and distributing digital advertising products across the company’s media platforms.

The year is 2008 and the role is meant to be the first in a series of rotational assignments, but you find yourself hooked. Despite a me-too product and so-so technology, your division has managed to sign hundreds of thousands of advertisers and amass $500 million in annual revenue. You think: If we can do this with that, imagine if we had a real technology platform and great products.

THE CONTEXT Initially, David Krantz focused on revamping AT&T’s digital offerings. “We hired between 300 and 400 engineers and product people and rebuilt everything from the ground up, from our database to our search algorithm,” he recounts.

By 2012, Krantz had doubled the unit’s revenues. Yet, the company’s legacy advertising business and primary ad revenue producer, the iconic Yellow Pages, remained part of a separate business unit known as AT&T Advertising Solutions. Despite wide recognition of the long-term potential for a shift to digital media sales, little attention was being paid by the parent company to managing that shift.

“AT&T was spending its time and its capital thinking about mobile broadband,” explains Krantz. “It was a classic case of a [$1 billion] business within a $100 billion business not getting enough attention or capital to keep up.” What’s more, the 4,000 salespeople charged with selling both the print and digital advertising fell under the rubric of AT&T Yellow Pages, meaning Krantz had no control over the distribution of his own channel.

THE HURDLE Realizing that AT&T Interactive and Yellow Pages were inextricably intertwined, Krantz set about getting private equity support to engineer a combination of the two. In May of 2012, backed by Cerberus Capital Management, the two entities were spun out of AT&T and brought together as YP Holdings, billed at the time as North America’s largest local

search, media and advertising company, with a collective $3.3 billion in annual revenues. The deal called for Krantz to take the CEO post at the new company, in which Cerberus would own a controlling stake of 53 percent, with AT&T retaining 47 percent ownership.

“The idea was to get both this billion dollar growing business and the declining billion dollar-plus business focused around a common mission: helping local businesses grow,” says Krantz, who explains that YP’s salespeople function almost as media consultants, advising business owners on effective local marketing practices. “We have a print product line and we have a digital product line, but we have one organization managing all those products and one sales force selling them.

We’re a one-stop shop for business owners’ local advertising needs such that they don’t need to manage five or six different vendors.”

THE RESOLUTION Sixteen months into the transaction, YP has weathered the consolidation of the two business units and is focusing on the future, says Krantz, who notes that the YP.com web site now boasts approximately 60 million unique visitors each month.

“We’re well on the way to creating the company of the future growing our revenue in the future-type product line,” he says.

“And we’ll continue to print books as long as that adds value.”

THE ENDGAME Always a big believer in the power of communication—or “overcommunication” as he calls it—in aligning employees around an objective, Krantz has found that philosophy particularly effective in his new role. Early in his tenure at YP, he launched Krantz’s Corner, a Monday morning off-the-cuff email briefing and found the responses intriguing. “I got email responses that said, ‘This almost sounds like David actually wrote it,’ and I’d write back and say, ‘Well, that’s good, because I actually did,’” says Krantz, who adopted a policy of responding to all employee emails within 24 hours. “They were always amazed to have heard back from me. Having that level of transparency makes a big company feel smaller.”

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WHO: David Krantz, CEO of YP WHERE: Tucker, Georgia BUSINESS BOOK: Leading Through Transformation, by John Kotter COMPANY CHEER: “I’m all in!”

BIGGEST CAREER INFLUENCE: John Colombo, CEO of AT&T Consumer. “He was a phenomenal motivator.”

FAVORITE PASTIME: Horseback riding with his daughter, Katie.

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CEO WATCH | CEO PROFILE

Tetraphase:

BANKING ON BACTERIA

Unless you’ve been living under a rock, you’ve probably heard the term “superbugs” and have at least a vague understanding of the concept behind them. In brief, bacteria have been mutating to become so drug-resistant that approximately 2 million Americans get infections each year that refuse to respond to antibiotics, according to the Center for Disease Control. At least 23,000 people die each year as a result.

While these figures are scary enough on their own, another factor warrants heightened alarm—namely that big pharma companies are simply not all that interested in devoting resources to developing new, more potent antibiotics. There are many reasons for their reluctance. First, the easy pickings have been plucked—all the natural and simple drugs have presumably been discovered or developed. Second, a broad trend toward shorter drug-patent exclusivity means generics will swoop in and snap up market share before a company can recoup its R&D investment. And third, the likelihood that a new antibiotic will achieve the $1 billion in annual revenue necessary to achieve blockbuster-drug status is slim—successful ones tend to top out at $500 million.

The good news? This [condition] leaves the antibiotic market relatively wide open to smaller biopharm companies like Tetraphase, a biopharm in Watertown, Massachusetts, focusing on developing antibiotics effective against multidrug-resistant bacteria, says CEO Guy Macdonald, who notes that drug resistance is, if anything, intensifying. “For example, the resistance rate for a bacterium called Klebsiella, which is very prominent in pneumonia, urinary tract infections and stab wounds and has historically been treated with the [big-name antibiotics] has gone from 3 percent up to 9 or 10 percent in the U.S., and it is even higher in countries in Eastern Europe and India,” he explains.

“We estimate that multidrug-resistant infections is a $5 billion to $7 billion market in the U.S. alone—and there aren’t many drugs in development toward that. So there’s a huge, unmet need.”

The flip side, of course, is that drug development is a pricey endeavor fraught with risk—something Macdonald knows all too well. Before joining Tetraphase in 2008, the former Merck executive served as COO of Idenix, where he spent four years working toward guiding a hepatitis C drug to Phase II trials only to have it scuttled due to toxicity issues. “We basically had to

WHO: Guy Macdonald, CEO of Tetraphase WHERE: Watertown, Massachusetts SIZE: 40 employees PASTIME: Cycling, recently participated in a 75-mile charity ride for Cystic Fibrosis RECENTLY READ: London by Edward Rutherford

10 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2014

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’t

CEO WATCH | CEO PROFILE

refocus the whole company; it was like going backward by three years,” he recounts. “In one day, I had to lay off 130 people, which was a really bad day because they were all really good people and we had to tell them, ‘The dream you all came here for isn’t going to work.’”

At first blush, Tetraphase sounds eerily similar to Idenix. The company’s resources are currently rallied around a drug called eravacycline, which is in Phase III trials. This time, however, Macdonald has a backup plan. “We have other, exciting compounds in early-stage development; so while it would be a major setback for [eravacycline to fail in the trial phase], we would just have to regroup, focus on another compound and bring it through,” he asserts.

Still, this is a tricky period for the company, which must invest the effort and expense to shepherd eravacycline through clinical trials and, eventually, through commercialization, while simultaneously continuing to nurture its pipeline.

“A lot of companies have to make this hard choice: Do you continue to do discovery?” says Macdonald, who hopes to bring eravacycline to market by 2017. “Because, clearly, that’s a burn on your cash; but if you still think it adds value, which we do at this point, then the challenge is in finding the right balance between the different areas.”

Since the company went public last spring, Macdonald must also balance the need to spend a week or more of each month on the road meeting with shareholders and potential investors. “In the end, you have to let go of a lot of the things you were managing and rely more on your team to execute,” he says. “It forces you to delegate.”

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Art Director Raymond Palmer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi Contributing Editors Dale Buss Michael Gelfand Bill Holstein C.J. Prince Joe Queenan Warren Strugatch EVP, Publisher Geri FitzGerald 203/930-9798 gfitzgerald@chiefexecutive.net

Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net

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CEO WATCH | POINT OF VIEW

Jim Weber, CEO of Brooks Sports, the Seattle-based running shoe maker, has worked under parent company Berkshire Hathaway’s legendary Warren Buffett for several years. In the interview to follow, he shares his insights on how Buffett works with the CEOs who work for him. by J.P. Donlon Berkshire Hathaway annual meetings are unlike any other. For one thing, how many company annual general meetings (AGMs) attract 30,000-plus people? Jim Weber, CEO of Brooks Sports, a Seattle-based, high-end running shoe maker and a Berkshire Hathaway company since 2006, reckoned such an event would be a great selling opportunity and sold product right on the 2012 expo floor. Having good success, Weber sent Warren Buffett a note: ”We sold x number of shoes; thanks for the opportunity. We talked to a lot of shareholders, had a lot of fun and we learned a lot. I think we can do more next year.” Buffett sent a note back, saying, “That’s great; everybody loves Brooks. If you’re ever in Omaha, come by; we’ll go have a steak.”

Weber soon found himself in Omaha, where he took Buffett up on his offer—and talked him through Brooks’ strategy. “I knew he’d love Brooks,” Weber recalls. “We have high returns on capital, we’re very profitable, we’re growing double-digit, we have a brand, we understand what our competitive strengths are and we are stoking the fire on being who we are. We’re not chasing any other brand.”

Buffett did indeed fall in love with the company. Six months later, he called Weber to say, “You guys are doing some interesting, unique things and we’re going to spin you out of Fruit of the Loom [Brooks’ parent company at the time]; we will set you up as a standalone subsidiary of Berkshire Hathaway, and you’ll report to me.”

The sage of Omaha’s conglomerate owns or has a controlling interest in a bewildering array of businesses, from Acme Brick and car insurer GEICO to over-the-road trailer-rental company Xtra.

People marvel at how he and sidekick Charlie Munger keep track of the menagerie of 53 companies. The short-hand answer is that Buffett acquires well-run, growth businesses and never sells. He gives his individual enterprise CEOs a long leash but a tight cultural tie that binds them to the Berkshire Way. In 2001, Brooks had an epiphany in which it decided it could not sustain growth in the athletic shoe business if it was going to chase the volume price points and go up against major players such as Nike and Asics. The company, which did about $60 million in revenue at the time, exited about $15 million of that business by abdicating the cheap-shoe sector in

favor of higher-end, highly engineered products retailing between $90 to $160. Today, it has annual revenues just under $480 million.

“We were 8th or 9th or worse at everything we were playing at,” recalls Weber. “We were a very small brand in a very large category, and we were overspent by our competitors in every space, from R&D to marketing.” The firm concentrated on what it did best—running shoes. No lifestyle or family shoes. It treated the product with the same technical-performance focus that manufacturers of ski boots practice.

“Everybody has a relationship with their shoe, and so the shoe is a pretty important piece of equipment, even if you’re just running two or three days a week,” Weber says. Fifty million people say they run for fitness and an even greater number say they walk for the same reason. The athletic-footwear market is estimated globally at $8 billion. The average runner has 2.6 pairs of running shoes. Over 80 percent of Brooks’ business is running shoes; the rest is athletic apparel. Due to high growth in its U.S. market, the domestic vs. non-U.S. split in its business is 50-50.

In the interview to follow, Weber discusses the future prospects of being a premium player in this huge, global arena, as well as his experiences as a Berkshire Hathaway portfolio CEO.

What is truly different about your product to command a price premium?

Our product line is created from a biomechanical point of view.

Some people need a little bit more stability. Most people like more cushioning. Some people don’t; they like to be more minimalist and [to] be totally in tune with the road with a super-flexible shoe. But there’s a whole range of what people need. If everyone could run on the same shoe comfortably, mile after mile, the top brand in this category might have 100 percent market share. But people’s needs differ.

It sounds simple, but the foot is a very complicated part of your body. Everyone’s running gait is different. Most people run on asphalt. It’s a repetitive motion, so the shoe can really matter in terms of comfort when you’re running; think about

14 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2014

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CEO WATCH | POINT OF VIEW

knee pain and other things. So people have a sense that they need the right shoes.

How has the operational performance of the company changed since Brooks went to a higher price point, technical-performance end of the market?

We added 16 points to growth margin, and we did that in the first five years of the strategy. We don’t sell on price; we sell on performance. And what I’m most proud of is that growth is all in our best products, selling through the best retailers at full margin. We haven’t chased any sales. We’ve really created brand demand for premium-priced products in a very competitive market with players bigger than ourselves.

Can you point to some technology that you offer that others do not have?

Yeah, I’ll give you one example. The engine and drive train of a shoe is the midsole. That’s where everything happens.

It’s basically the cushioning system. When you think about a running shoe, it’s got to dampen and absorb shock as you land; then, it’s got to transition to the forefoot. But it needs to be firm as you push off. You propel off your toes, essentially.

For four years, we worked to create—at the molecular level—a material, we call DNA. We’ve engineered 40 formulations on this [item] with leading chemical companies [like Mitsui]. It’s our proprietary technology. In fact, we just got a patent approved on this DNA system. It’s a non-linear, non-Newtonian material, like cornstarch, that cushions a stride due to the give in the material. When a runner lands with two to three times one’s body weight, it allows the runner to transition to toe-off because the shoe rebounds before the runner hits his or her next stride. It’s in every shoe we make, and it’s our secret sauce. You feel it when you run.

Most running shoes are made in China. What would it take for you to re-shore some manufacturing in the U.S.?

We’re thinking and working on some things that’ll allow that to happen. There’s so much labor in our running shoes right now. There’s still a lot of stitching in the upper, and there’s a lot of componentry in the way we build product.

We’re making progress going to technologies like no-sew: it’s essentially glued pieces instead of stitching, and there’s a lot less labor in it. Unfortunately, the U.S. no longer has the skilled labor in handwork and sewing. But I think that in the next five years, it’s not unlikely that we could see some shoes being made in America—but not sooner than the next two or three years.

How often do you talk with Buffett, and does this generally result in a material change to the business?

He has one required meeting a year, and that’s really around the year-end review on compensation. I don’t get to set my own compensation. That’s all he requires, and, then, it’s more “whenever you need me.” I will send him a report. It’ll show up on a Monday morning at 10 a.m., and I’ll get a response back by 2 p.m. He’s always available. I had a call with him two days ago.

Here’s where he’s impacted us: he listens to our strategy, he has seen us as we’ve worked through our business plans and he challenges us to stay a premium brand. What does “premium” mean in running? We’ve created a brand that runners are falling [in] love with. They’re paying full price for our products; we’re not a discount brand. We used to be. I mean, we once sold $30 shoes. But we lost money at it. He’s seen what we’ve created.

He challenges us not to chase opportunity that takes us away from what “premium” means. He’d rather have a smaller, highly profitable, highly defendable and special business than a big one.

That’s exactly how he’s described it to me.

You don’t have quarterly reports or annual budgets?

He doesn’t want a budget from me. Oh, I send him quarterly reports and he reads them, but he doesn’t ask a lot of questions because I think he’s got a lot of confidence in the way we think about the business and the way we’re executing it. We’ve earned his support, but that’s my responsibility. Prior to our being owned by Berkshire Hathaway, we had a private equity owner.

One of the things I learned is that if you have opportunities and you know where you’re going and you’re executing it, you don’t get sold; you attract an investor. If you’re a company with issues, and you’re not really on it, you get sold and the agenda’s going to change. So as a CEO, I [feel] my job is to create a vision for this company, a plan to execute against it, and I own that. I have to get approval and support for it. If I don’t have approval and support, I don’t get to play that plan.

Do any of Buffett’s lieutenants get involved with what you’re doing?

Absolutely. But they only have 24 people at corporate, right?

The internal audit folks do, and obviously we’ve got policies and the like, so the internal-audit side is engaged. Both Todd Combs and Ted Weschler, two of Warren’s investment guys, are runners. They’re not involved with Brooks, but they love to hear our story, and we’ve got them testing some of our shoes.

Then, we’ve hosted other folks [who] have come through Seattle, such as Tracy Britt, his financial analyst/assistant, who’s very involved with a lot of the companies.

There’s no structure at Berkshire to kind of manage, police

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WHO: Jim Weber, CEO of Brooks Sports PLACE OF BIRTH: St. Paul, Minnesota PRIVATE ACTIVITY: Running (what else?)

FIRST JOB: Weber’s Supper Club. “The bowling alley was my grandfather’s business and my dad ended up running it, so I grew up working there from age eight through high school.

I used to count change from the vending machines and roll quarters, nickels and dimes.”

EDUCATION: University of Minnesota; MBA at Dartmouth’s Tuck School of Business CAREER: Commercial banker with Norwest, (now Wells Fargo), executive positions at Pillsbury, Coleman Company and O’Brien Watersports BIGGEST MANAGEMENT INFLUENCE PRIOR TO BUFFETT: Jerry Levin, boss at Pillsbury and Coleman Company FAVORITE APHORISM: “The secret to success is constancy of purpose.” —Benjamin Disraeli, 1st Lord Beaconsfield, who twice served Queen Victoria as Prime Minister

and birddog companies. They don’t do that. They expect the CEOs and the leadership teams to do that. It’s really unique.

Doesn’t he ask his CEOs to name their successors?

Yeah, you have to send him a hit-by-the-bus letter every December. You have to lay out the succession plan if you’re not there tomorrow and send it to him personally.

Where will you take the business? Will it be a Berkshire business indefinitely, or are there other plans?

In Warren’s owner’s manual, which he published along with his annual letter years ago, (but is now published separately as “The Berkshire Hathaway Shareholder’s Owner’s Manual”), there’s an item in there that basically says this may affect our returns, but you all need to know that we will never sell a business. They don’t sell businesses, ever. It’s Berkshire Hathaway’s business model to acquire, in many cases, family businesses, which have to sell because of estate planning issues. But they want to continue to run the business, and drive the culture because they enjoy it. That’s why Berkshire is the acquirer of choice for many sellers. It’s unique in that regard. Warren creates trust because he doesn’t look over people’s shoulders.

What things are likely to raise red flags in Buffett’s mind?

Completely shifting your strategy in a direction that he doesn’t have confidence in. If we went down-market to pump sales and to try to grow into places that, ultimately, weren’t all that smart for the brand or long-term profitability, I would expect he wouldn’t be happy.

Really? No minimum thresholds like operating margin, EBITDA or market share, etc.?

What impresses me about him is his breadth of knowledge.

He’s got everything from insurance and ice cream to building products, running shoes and railroads—all over the world. He has incredible bandwidth to look at good businesses in a wide degree of categories. I’ve never seen him say, “Hey, these guys are doing this; you oughta try that.” In fact, there’s a story I heard where he sees all the furniture retail companies meeting together and jokes, “What are you guys doing? You better not be working on synergies. I bought three good businesses, and I don’t want to have just one.”

He once said that he’s painting a painting; and if the shareholders looked over his shoulder and told him he needs a little more blue or red, he wouldn’t like that. He wants to paint his painting. He thinks CEOs want to do that too. I think he believes that you [have] got to let people run their own show because, if you don’t, they won’t stay at Berkshire. And he believes he’s got better talent because he gives full autonomy.

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CEO WATCH | THORNS & ROSES

Chief Executive of the Year 2014 Selection Committee

David Cote Chairman and Chief Executive, Honeywell 2013 Chief Executive of the Year Dan Glaser President and Chief Executive, Marsh & McLennan Fred Hassan Chairman, Bausch & Lomb Senior Partner, Warburg Pincus Christine Jacobs Former Chief Executive, Theragenics Director, McKesson Tamara Lundgren President and Chief Executive, Schnitzer Steel Industries Robert Nardelli Chief Executive, XLR-8 ANDREW ROBERTS

THORN Motley Fool’s Buck Hartzell says it’s amazing how many boards are requesting shareholder approval for new stock options plans. Google, for example, is requesting the right to re-price options, while others, such as eBay, want to exchange underwater stock options for restricted stock. “Hmmm. It seems executives want all the upside without any of the downsides of options,” he says. “As I see it, either management is just not very good at allocating capital, or insiders are putting their own interests ahead of your [investors].”

William R. Nuti Chairman and Chief Executive, NCR Thomas J. Quinlan III President and Chief Executive, RR Donnelley Jeffrey Sonnenfeld President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management Mark Weinberger Chairman and Chief Executive, EY Maggie Wilderotter Chairman and Chief Executive, Frontier Communications Solutions

C O N TACT U S Corporate Office Chief Executive Group, LLC One Sound Shore Drive, Suite 100 Greenwich, CT 06830 Phone: 203.930.2701 | Fax: 203.930.2700 www.chiefexecutive.net Letters to the Editor letters@chiefexecutive.net

ROSE McAlester Regional Health Center CEO David Keith is projecting the McAlester, Oklahoma hospital will lose nearly $28 million over the next decade due to Obamacare, sequestration and other government actions. With 750 employees, the hospital has a huge impact on the town’s economy. But Keith doesn’t intend to cover the projected impact by terminating employees. How will he make up the difference? “We believe in creating a better product,“ Keith says. “I don’t believe in slash and burn.”

Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 | Fax: 847.730.3666 advertising@chiefexecutive.net Reprints Geri FitzGerald, EVP, Publisher Phone: 203.930.9798 gfitzgerald@chiefexecutive.net Back Issues Back issues are $33 each. For back issue availability and additional order information, please contact us at: Phone: 203.930.2701 circulation@chiefexecutive.net Subscription Customer Service Chief Executive, P.O. Box 15306 North Hollywood, CA 91615-5306 Phone: 818.286.3119 | Fax: 800.869.0040 cexcs@magserv.com www.chiefexecutive.net

18 / CHIEFEXECUTIVE.NET / JANUARY/FEBRUARY 2014

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CHIEF CONCERN

Placing Trust: A CEO’s Dilemma

Relying on others is fraught with risk. Here’s how to manage it.

By Dr. Thomas J. Saporito

“It’s a vice to trust everyone, and equally a vice to trust no one,” said the Roman philosopher Lucius Annaeus Seneca. That was back in the mid-1st century but the sentiment remains true today.

The question “Who can I trust?” is a classic leadership paradox.

While seemingly a simple question, the answer is quite complex.

Chief executives must rely on others to succeed. Yet, misplaced trust can jeopardize the entire organization, not to mention a CEO’s personal reputation. Leaders must remain vigilant from Day One to mitigate vulnerability to trust issues while simultaneously seeking their benefits.

Trust always comes with an element of risk. Board members, shareholders, analysts and even suppliers have agendas, which, naturally, are uppermost in their minds. Each is a potential vulnerability.

For example, when former director Bill Ackman persuaded other JCPenney board members to radically overhaul the company by ousting CEO Mike Ullman and replacing him with Ron Johnson, the results were disastrous. Distrust on all sides continues to affect operations and stock price to this day.

Managing the Risk Individuals with selfish motives can burn CEOs with half-truths, partial information and intentional misinformation. John Hanson, non-executive chairman of Joy Global, says that sometimes it’s a challenge to manage such individuals, but over the years he learned a method for doing so.

“Shortening the leash can be done through a whole range of things: more direct contact, closer oversight of work product and limiting their decision-making ability. It’s, in effect, taking away the options that are likely to lead to poor outcomes with someone you don’t fully trust.”

To limit risk, leaders must hone their ability to sort through the various motivations. Most chief executives learn to ask themselves these three questions: • Who’s telling me what they think I want to hear?

• Who’s not telling me what I need to hear because they are being deferential?

• Who’s telling me what they want me to hear because it serves their own agenda?

CEOs must know when to suspend trust and step up their personal involvement to resolve issues and maintain (or regain) the faith of the board and, in turn, shareholders. The challenge boils down to this: “Who to trust, how much and with what consequences?”

A Culture of Trust Many trust issues can be resolved with careful communication, facilitated by an HR professional or objective third party. Joy Global’s John Hanson solved the trust dilemma by projecting a style of leadership that encouraged a culture of trust.

“I’ve discovered in my role as CEO that it’s important to constantly create dialog around those trust issues and not let time and uncertainty complicate matters,” he says. “I worked very hard to make sure the issues requiring trust were always at the forefront of our discussions.”

For Denise Morrison, Campbell Soup’s president and CEO, the key has been assessing trustworthiness. “I tend to look at trust in layers—as a pyramid,” she explains. “On the bottom is mistrust— people who can’t be trusted because they have their own agenda.

Then, there’s casual trust. You take people at their word until they can prove they’re trustworthy. Then, there’s situational trust—some people can be trusted in certain things that align with a perspective or motivation, as long as you can recognize that. Finally, there’s confidence, or having complete confidence that people can be trusted with confidential information and will always do the right thing.”

To Trust, We Must Every CEO should find someone he or she can trust. A CEO I’ve known for several years knows three people whom he can go to in any situation: his COO, his vice president of HR and his outside advisor. He has enormous trust in these three individuals and they, in turn, feel safe in speaking openly and truthfully with him.

A recent RHR International CEO Snapshot suggests that most CEOs find such confidants. Ninety percent of male CEOs and 78 percent of female CEOs surveyed reported having someone they trust to tell them the unvarnished truth essential for their decisions. In fact, despite lurid headlines to the contrary, boards remain a solid source of CEO support, with 96 percent of CEO respondents saying they can speak honestly with certain directors about their performance. Lead directors emerge as key confidants; with 50 percent of CEOs surveyed naming them as the individuals they trust to discuss key decisions.

Ultimately, CEOs who want to perform at their best have no choice but to trust. The answer to the trust dilemma is that if you want to perform at your best, you have no choice but to trust. The key is in managing your vulnerabilities while maximizing the contributions of others.

Dr. Thomas J. Saporito is chairman and CEO of the consulting firm RHR International. This article is the first in a six-part series.

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CEO CONFIDENCE

CEOs Remain Cautious About Business Conditions November’s survey shows that CEOs of small companies are the least confident of business leaders.

The CEO Confidence Index, Chief Executive’s monthly gauge of CEOs’ expectations for business conditions over the next 12 months, rose 1.2 percent in November, reaching 5.7 out of a possible 10. This is the same rating given just two months ago, which maintains a trend over the last four months where the Index has been between 5.6 and 5.9.

Overall, CEOs’ confidence in business conditions remains stagnant. Despite improving jobs reports and all-time highs on domestic stock indices, the level of optimism about both current and future conditions for business remains unchanged. “There is so much uncertainty in the global economy that I’m reluctant to pull the trigger on certain deals that in the past I would have done,” reports a CEO in the professional services space. “Being ultra-conservative has become the business norm. Every time it starts to clear and things look better, something else comes up that makes you think twice.”

A similar message of uncertainty came from the CEO of middle market industrial manufacturing company: “[We’re] unable to make estimates based on past experience or customer contacts.

Most are waiting to see the impact of the Obamacare implementation on the business climate and corporate costs,” he noted, adding that he expects decreases in revenue, profit and headcount over the next 12 months.

The vast majority of comments we received mention the federal government and a lack of confidence that the proper steps are being taken to prop up businesses. “We are being punished by sequestration, which had a material impact on revenues and profits in 2013,” said another business leader and survey participant. “We are working hard to diversify into new markets and economies going into 2014, so we should return to more typical sales and profitability. Government inaction and ineptitude is the key problem for us, as it is for the overall economy.”

The most startling revelation from our continued research on CEOs’ perceptions on business conditions is that the majority of the pessimism is coming from CEOs of the smallest companies.

For companies with less than $10 million in annual revenue, CEOs rated their confidence in current overall business conditions at 5.1 out of 10. This is 7.8 percent lower than the overall rating (5.5) and almost 10 percent lower than the rating from CEOs of companies with more than $100 million in revenue (5.7).

The CEO of a small marketing agency noted that uncertainty around the actions of the federal government is having a pernicious

CEO Ratings of Business Conditions CCI Rating

Current Conditions Rating

Expectations Over the Next 12 Mos./Current Conditions 5.95 5.76

5.7

5.69

5.65

5.54

5.21 5.11

trickle-down effect. “As a small B2B agency, our success depends on the success of our clients—many of whom are Fortune 500 companies,” she said. “The trend towards cash hoarding and profitability through reduction in expenses continues. The C-suite clients we deal with (both liberal and conservative) are worried about what impact the government will have on business going forward. It’s an unsure environment still and we see no promise of growth in the next two years.”

Over the past several years, a growing number of business leaders have reported being truly fed up with government. This trend began when Obama first came to office and initially appeared to be partisan-related. However, it has since broadened. This comment from the CEO of a mid-sized nonprofit is typical of those voiced by more and more CEOs: “As a result of Washington activities and leadership, there are feelings of uncertainty, disappointment, downright disgust and lack of confidence in and trust of government and some business leadership. Politics seems to pursue absolute power, not what is best for the country and all its people.”

It is becoming increasingly clear that CEOs believe the American political system is broken and no longer acting in the best interests of the people and businesses it is meant to be helping most. As it stands, a fifth of CEO respondents expect to reduce headcount over the next year, 17 percent expect a decrease in revenues and only 39 percent expect an increase in capital expenditures. These numbers are certainly alarming, and it appears only a major shake-up in Washington can affect any short-term change in expectations.

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LEADERSHIP DEVELOPMENT

In their book, The Game-Changer, P&G CEO A.G. Lafley and noted author and business advisor Ram Charan observed that “to prosper, companies need to do four things well: develop leaders of the future, improve productivity, execute strategy and create innovation.” Arguably, the first step must be done well if the prospect of succeeding at the remaining three steps is to have any chance of success.

Each year since 2005, Chief Executive has sought to identify those companies that excel in leadership development. In partnership with Chally Group Worldwide, a Dayton, Ohio-based sales and leadership talent-management firm, and with the Human Capital Institute, we canvas world-class companies through a questionnaire and interviews in order to learn what companies are doing to identify and nurture people three or more levels down the chain from the CEO. The final, top-40 ranking consists of public companies with over $1 billion in revenue, and the top 10 on the list scored within several points of one another.

Rankings are affected by a company’s reputation among its peers, as a source for well-rounded talent. The percent of senior management recruited from internal talent pools is another criterion. Similar to 2013, some attrition among last year’s winners accounts for why previous winners did not appear on the 2014 listing. As a clear indication of the escalating importance of leadership-development processes, half of the companies on the 2014 ranking are new to the list.

P&G once again tops the list as the Best Company for Leaders, with IBM coming in second at just a fraction below and GE moving to a No. 3 ranking. These three, leading contenders have different but parallel methods of developing talent. P&G and IBM, for example, place a premium on developing people

Companies are scored on five key criteria: 1. Having a formal leadership process in place 2. The commitment level of the CEO to the leadershipdevelopment program, as measured by the percentage of time spent 3. The depth of the leadership funnel, as measured by the percentage of senior-management positions filled by internal candidates, as well as the percentage of middle-management positions filled by internal candidates 4. The number of other companies that report recruiting from the company being evaluated 5. A shareholder value-performance metric based on 10-year growth or decline in market capitalization from within. All of P&G’s senior managers are judged on their abilities to develop those who report to them. Development includes both formal as well as informal training. Lafley himself mentors a group of high achievers several levels below. He also monitors the company’s top 300 executives and ensures that they are inculcated with the values of the firm.

The company often assigns some of its best up-and-coming executives to tough jobs—not just to test them, but to provide useful experiences that will come in handy in future.

P&G also takes 150 promising leaders for leadership training at such off-site locations as the U.S. Military Academy at West Point or the Center for Creative Leadership (CCL) in North Carolina. “The challenge at P&G,” he remarks, “as at most every company, is to get the right balance between stretch goals and game-changing results.” continued on page 27

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COMPANY/CEO

2013 RANK

2014 RANK

40 BEST COMPANIES FOR LEADERS COMPANY/CEO P&G

1

P&G

2

IBM

3

General Electric

4

Accenture

Dow Chemical

Pierre Nanterme

Andrew Liveris

5

Unilever

Verizon Communications

Paul Polman

Lowell McAdam

6

Dow Chemical

7

McDonald’s

8

Monsanto

9

Hormel Foods

Boeing

Jeffrey M. Ettinger

W. James McNerney, Jr.

10

General Mills

11

VF Corporation

Monsanto

Eric C. Wiseman

Hugh Grant

12

W.W. Grainger

PepsiCo

James T. Ryan

Indra Nooyi

13

Caterpillar

14

Verizon Communications

15

TJX Companies

General Mills

Carol Meyrowitz

Kendall Powell

16

Sprint

17

Maxim Integrated

18

Southwest Airlines

McDonald's

Gary Kelly

Donald Thompson

19

DENTSPLY International

ADP

Bret Wise

Carlos Rodriguez

20

ADP

3

Virginia Rometty Jeffrey Immelt

4

Andrew Liveris

18

Donald Thompson

11

Hugh Grant

15

Kendall Powell

Douglas Oberhelman Lowell McAdam

6 5

16

Daniel Hesse Tunc Doluca

Carlos Rodriguez

2

37

19

Robert McDonald

General Electric Jeffrey Immelt

IBM Virginia Rometty

Caterpillar Douglas Oberhelman

Hitachi Data Systems Jack Domme

Arthur J. Gallagher J. Patrick Gallagher, Jr.

3M Inge Thulin

Royal Caribbean Cruises Richard Fain

The Cooper Companies Robert Weiss

Sprint Nextel Daniel Hesse

Bridgestone Americas Gary Garfield

Shoppers Drug Mart Domenic Pilla

VEER

1

A.G. Lafley

Continued on page 25 JANUARY/FEBRUARY 2014

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Because private companies operate in a much different business environment than public companies and those that commit to leadership development deserve to be recognized in their right, those with $1 billion-plus in revenue have their own ranking right. Here are the top-10 large, private companies for leadership development. (For more on this year’s No. 1 ranked private company, see “Deloitte: Building a Future on Millennial Recruits,” p. 28.)

COMPANY/CEO

2013 RANK

10 BEST PRIVATE COMPANIES FOR LEADERS

2014 RANK

LEADERSHIP DEVELOPMENT

COMPANY/CEO PwC

1

Deloitte Joseph J. Echevarria

2

PwC

3

Transplace

4

American Infrastructure

5

Clark Construction Group

Transplace

Robert Moser, Jr.

Thomas Sanderson

6

Dell

CHG Healthcare Services

Michael Dell

Mike Weinholtz

7

AlliedBarton Security Services

Day & Zimmermann

William Whitmore

Michael Yoh

8

Day & Zimmermann

9

MWH Global

Genesis HealthCare

Alan Krause

George Hager, Jr.

Black & Veatch

Sheridan Healthcorp

Len C. Rodman

Mitchell Eisenberg

10

Bob Moritz Thomas Sanderson A. Ross Myers

Michael Yoh

Bob Moritz

1 5 2

7

American Infrastructure A. Ross Myers

Golder Associates Brian Conlin

Briggs International David Bratton

Lockton Companies David Lockton

WHERE THEY GO FOR TALENT—AND WHY Participants cited these three companies as top targets when recruiting from outside:

P&G

Known for outstanding technical leaders, marketing expertise and leadership know-how.

IBM

A technology and solutions leader boasting an excellent reputation for developing leaders, reinventing business models profitably and sharing success with global communities.

GE

Multinational organization with complex business units and a strong reputation for developing leaders and leading innovation in technology.

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COMPANY/CEO

2013 RANK

21

HNI

Bayer MaterialScience

Stan A. Askren

Patrick Thomas

22

McKesson

Barnes Group

John Hammergren

Gregory Milzcik

23

3M

24

Konecranes

25

Ecolab

26

EMC Insurance

27

Cardinal Health

28

10

Inge Thulin

30

Pekka Lundmark Douglas M. Baker, Jr. Bruce Kelley George Barrett

28 35 25

Green Mountain Coffee Roasters

NOVA Chemicals Randy Woelfel

Bristow Group William Chiles

Cardinal Health George Barrett

BP China Robert Dudley

Dimension Data Brett Dawson

Ecolab Douglas M. Baker, Jr.

Brian P. Kelley

29

RPM International

Johnson Matthey

Frank C. Sullivan

Neil Carson

30

Emerson Electric

Konecranes

David Farr

Pekka Lundmark

31

Comcast

Olympic Steel

Brian Roberts

Michael Siegal

32

Shoppers Drug Mart

33

Barnes Group

34

Cash America Int’l

Hyatt

Daniel R. Feehan

Mark Hoplamazian

35

Dangote Cement

EMC Insurance

Aliko Dangote

Bruce Kelley

36

The Cooper Companies

37

Huntington Bancshares

Maxim Integrated

Stephen Steinour

Tunc Doluca

38

Citigroup

Libbey

Michael Corbat

Stephanie Streeter

39

Paychex

ResMed

Martin Mucci

Peter Farrell

40

Esterline

Kelly Services

Curtis Reusser

Carl Camden

Domenic Pilla

20 22

Patrick Dempsey

Robert Weiss

14

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COMPANY/CEO

Phillips NV Frans van Houten

Autoliv Jan Carlson

Harman International Dinesh Paliwal

/

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VEER

2014 RANK

40 BEST COMPANIES FOR LEADERS continued from page 23

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LEADERSHIP DEVELOPMENT

TOP 10 SKILLS NEEDED FOR EFFECTIVE LEADERSHIP

Skill*

2014

2013

60%

54%

1

Adaptability to change

2

Strategic thinking

55

57

3

Integrity

48

51

4

Very good communicator

40

50

5

Being trustworthy and open

38

43

6

Vision

35

32

7

Develops and fosters diverse teams

33

20

8

Delegation

28

41

9

A positive mind-set

26

31

High self-awareness

26

20

10

VEER

While the top skills for effective leadership remain the same as last year’s, “adaptability to change” ranked higher, underscoring the importance of being able to navigate today’s ever-changing business environment.

*Respondents selected all that applied

TOP-RANKED LEADERSHIPDEVELOPMENT COMPANIES OUTPACE PEERS Does investing in leadership development pay off?

Yes, according to market data, which shows that the top leadership companies deliver greater growth than the lowest, as measured by market capitalization. The comparison (see table to right) is based on data from 2003 to 2013, a period long enough to minimize short-term and seasonal fluctuations.

SUMMARY 10-YEAR PERFORMANCE COMPARISONS Participant Companies*

Market Capitalization Growth

Top 15 percent

200 percent

Bottom 15 percent

84 percent

*Includes companies where public data is available for 2003 to 2013.

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VEER

continued from page 22

Likewise, IBM identifies those with early promise under its Basic Blue for IBM Leader program, where leadership competences are explored and guidance for career paths is given. As one might expect from a company of IBM’s pedigree, nearly everyone is tracked assiduously. IBM’s Chairman/CEO Virginia Rometty, like her predecessors, follows a range of specific individuals at all levels with “Chairman’s Reviews” with action follow-ups.

GE, which dominated the ranking in its early years, has undergone considerable change since Jeff Immelt took over from Jack Welch in September 2001. He believes that relatively simple actions, such as attending his own instructional courses at the company’s state-of-the-art John F. Welch Learning Center, located in Crotonville, New York, can have far-reaching effects. Crotonville has become the Annapolis and West Point of executive development. Activities there lead to selection and promotion, as they reinforce the creation of new operating mechanisms designed to drive innovation. In addition, GE encourages development by having its executives generate “Imagination

Breakthroughs” during its twice-a-year meetings of senior executives. “Chances are, a lot of people have great ideas for growth and innovation,” Immelt says. “It’s up to us to develop a disciplined process to sort them out and encourage our talented people to generate them.”

New to the top-10 ranking are Accenture (4), Unilever (5) and Hormel Foods (9), which report impressive leadership-development processes. Of the companies surveyed, 84 percent have headquarters in North America and 57 percent have international operations. The majority of industries represented included Professional, Scientific, and Technical Services (21 percent), Manufacturing (19 percent) and Finance, Insurance, Real Estate (14 percent).

Because it would be inappropriate to compare private companies with larger, public companies that enjoy greater resources, we list the ranking of large, private organizations with in-depth leadership development programs separately (See p. 24). The full Leadership Research Report will be available in February at chally.com.

BIGGEST HURDLES

TO DEVELOPING LEADERS For both public and private companies, difficulty balancing long-term and shortterm business requirements continues to be the No. 1 challenge in nurturing leaders. In addition to the three commonly cited challenges cited below, responses indicated that many leaders see room for improvement. In fact, more than one-fifth of all respondents rated their companies as “poor” or “average” at developing leaders and just 66 percent of CEO respondents agreed that HR is an effective partner in leadership development.

2014

2013

Difficulty balancing long-term and short-term business requirements

60%

Difficulty balancing long-term and short-term business requirements

71%

Rapidly changing business requirements, so criteria for success is fluid

50%

Financial challenges

54%

Financial challenges

40%

Rapidly changing business requirements, so criteria for success is fluid

48%

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LEADERSHIP DEVELOPMENT

ISTOCK

Deloitte:

Building a Future on Millennial Recruits As a potential pool of future leadership talent, Millennials represent something of a recruiting conundrum. Companies recognize the importance of attracting this new generation of workers, but they struggle to accommodate their needs.

Acknowledging this challenge, survey participants cited several areas in need of improvement or change to fit the work/ life patterns of this group, including: • Social media interaction • Mobile technology adoption • Flexible working hours and locations • Modified branding and images for recruiting • Rotational assignments with frequent core-focus changes One organization making headway with this next-generation recruiting effort is professional services giant Deloitte, which reports that Millennials today make up more than 50 percent of their client-facing workforce. Deloitte maintains a dedicated university-relations team of senior partners, principals and directors who work closely with nearly 40 target universities, actively recruiting more than 7,000 graduates each year. These recruits are then funneled into a comprehensive on-boarding program designed to provide Millennials with the skills to accelerate their productivity, beginning with a year-long “Welcome to Deloitte” (W2D) program.

“W2D introduces each new hire to the organization, instills our core beliefs, simulates the feel of working on a client team, teaches network-building skills through our ‘Deloitte People Network’ social networking tool and, later, focuses on professional development in the specific business unit the Millennial joined,” explains Jennifer Steinmann, chief talent officer, who says that more than 17,000 new professionals participated in W2D in 2012. “The emphasis is on interactive experiences, including simulations, role-plays, small-group teams—even video games—and an online ‘New Hire Center’ with a custom dashboard to track required first-year tasks.”

Deloitte also embraces social media. “Yammer is our platform of choice, with hundreds of active blogging groups forming in its first year alone,” says Steinmann. “Our people use Yammer to ‘crowd-source’ information from colleagues around the world. Professionals can also create forums to exchange information and match mentors with mentees.”

The effort seems to be paying off. In a satisfaction survey of these new hires, 97 percent of the respondents reported they felt welcomed to Deloitte, 96 percent felt they had an understanding of its culture and 96 percent reported being satisfied with their decisions to join the organization.

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MERGERS & ACQUISITIONS

Three Killer CEO Biases to Avoid in M&A In the world of deal-making, blind spots can be brutal. J.D. Ford’s Joseph Durnford outlines three biases that can derail mergers and how to guard against them derailing your deal.

By Joseph M. Durnford and Jeffrey A. Sasakura When it’s done well, a merger offers a bounty of benefits.

Whether the biases are your own, your internal teams or those The right deal can round out an acquiring company’s product of your professional advisors and consultants, self-awareness will and service portfolio, boost market share for the new entity, go a long way toward your future success as a dealmaker. The lower costs via operational synergies and increase value for following are three key biases most common among CEOs—and shareholders of both buyer and seller. what you can do to avoid them.

But success remains elusive in M&A. Countless studies have put the failure rate of mergers and acquisitions somewhere between 50 Bias #1: The Overconfidence Trap percent and 90 percent. Most of these doomed marriages fall apart As a CEO, your positive outlook and confidence enable you in the post-deal integration, when the companies fail to realize the to tackle risks from which others shy away. Your entrepresynergies promised, the performance of the combined organization neurial spirit gives you the strength to lead your company stalls, turnover spikes as disillusioned employees jump ship and the into uncharted territory and gives your employees faith in CEO is left wondering what on earth went so wrong. the future. But that same confidence, unchecked, can lead Some of these deals were wrong to begin with, but the you to miss opportunities.

That was the case for one of our former clients, the CEO of CEOs involved were too blinded by their own biases to see it. When CEOs let emotions lead, they can make decisions a leading direct-selling company. Advances in technology had that are fatal to the success of an acquisition and devastating created market opportunities in new industries, and our client to the company’s shareholders. capitalized on this opportunity by launching a direct-selling On the other hand, those who can be honest with them- business to enable customers to better utilize computer-based selves and remain aware of their own biases can mitigate tools. The business model he created was highly successful problems and objectively evaluate and successfully execute for many years, with revenues and earnings growing steadily M&A opportunities. each year.

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That success led our client to develop an overconfidence at the bargain price of $250 million cash. Barclays then-CEO bias, in which he assumed his company’s growth trajectory Bob Diamond recognized the deal as an opportunity to become would continue indefinitely. This bias skewed both his expec- a top-10 player in the global investment banking community. tations of value as well as his perception of risk. Year after year, “You cannot have a global cash equities business without a big potential purchasers came to the table offering increasingly U.S. presence. That is not something you can build organically,” attractive valuations for the company; but year after year, he he said at the time. The acquisition of Lehman gave the firm turned down these proposals with the expectation that if he the opportunity to purchase a long-established business that were to wait and sell later, the business would be worth even would allow it to quickly penetrate the U.S. market. That acquimore. The highest and final offer he received was for nearly sition paid off greatly. Not only did Barclays enter the global $100 million. top 10, it was the only European bank to be in the top five U.S. Meanwhile the competitive landscape in this industry investment banks as of September 30, 2013, according to the was changing and his target market was rapidly evolving. As Wall Street Journal and Dealogic. the business matured, the CEO failed to recognize changing fundamentals that would soon make many of the company’s Bias #3: Missing the Forest for the Trees The sale process can be daunting and mired with obstacles. products obsolete.

The business eventually lost its footing as the market Finding the right buyer who satisfies all the objectives of the evolved; and after many attempts to revive and reposition the shareholders can feel like finding a needle in a haystack. During company, the CEO finally closed shop, having lost the bulk of a complex sale process, it can be all too easy to get caught up in his net worth by passing up many opportunities to monetize the nuances of the due diligence process or minute details of negotiations and ultimately lose sight of one or more of your what was once a highly innovative idea.

Had the CEO been aware of how his emotions were playing initial objectives. You wind up focusing on aspects of the deal into his decision-making, he could have avoided that fate. He that, while seemingly important at the time, are not germane to might have recognized that hubris was playing a key role in the overall outcome or the achievement of the goals and objechis refusal to let go of the company or to make the necessary tives originally established by the CEO and/or shareholders. changes to the business model to keep up with changing times.

For example, recently, we had a client who was the owner of a In the end, his blindness proved fatal for his company.

100-unit retail jewelry business and was looking to retire. Before they even began shopping for a potential buyer, our client and Bias #2: Hopping on the Bandwagon the company’s shareholders established several key objectives, This Achilles’ heel causes CEOs either to miss out on incredible which included maximizing value at the top of the priority list and opportunities to buy assets when prices are low or to make finding an acquirer that would be a good steward of the brand, poor acquisitions simply because they see others doing deals. would retain most of the employees and would value the unique We saw much of the first example after the subprime mort- real estate assets controlled by the business. gage debacle and ensuing decline in the economy in 2008, when The sale process garnered multiple offers from highly investors fled the markets and companies hunkered down to qualified buyers, but the negotiations ultimately came down weather the storm. Rather than seeking growth, most CEOs to two finalists. One was an international strategic buyer focused on cost cutting and survival. Risk aversion skyrocketed from India, relatively unknown in the U.S.; the other was a and the M&A market dried up. Even CEOs running the health- Berkshire Hathaway company—a.k.a. Warren Buffett. The iest companies, who had plenty of cash to make acquisitions, international buyer was offering roughly double the price, were deterred by the uncertain future of the economy. stated that it would retain nearly all of the employees and Eventually, the federal government began taking steps to would use the company as a platform for U.S. expansion. re-inject confidence into the market and bolster the economy. To us, the decision to accept twice the price seemed obvious Despite the stimulatory actions of the Fed, most companies and we were confident that the international buyer had the remained on the sidelines, paralyzed by the prevailing nega- capacity and commitment to close. tivity about the economy. No one wanted to make the first move But for our CEO client, the decision was not as clear. He despite the fact that many potentially lucrative M&A oppor- became enamored with the idea of being acquired by this prestunities existed at attractive and unprecedented valuations. tigious investor and began focusing on aspects of the deal that The leading UK firm Barclays was one company that ben- were not part of the original objectives. Specifically, he began efited from bucking the negativity trend. Barclays did not fall overweighting new aspects of the deal—certainty of closing, victim to the bias that saturated the market. Instead, after Leh- employee integration and how the company might change if man Brothers filed for bankruptcy in 2008, Barclays saw an it were sold to a foreign buyer—while underweighting a key opportunity to capitalize by purchasing the assets of Lehman objective: value to shareholders.

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VEER

MERGERS & ACQUISITIONS

VEER

Ultimately, the CEO recognized and evaluated his bias, refocused on the initial transaction objectives and made the decision to sell the company to the international buyer, which turned out to be an excellent transaction for both the selling shareholders and the new owners.

Beware of Outsider Bias

On the sell-side, your investment banker is a key asset, and in many instances is the deal’s chief advocate and lead negotiator. While professional investment bankers make every effort to be objective and to work as trusted advisors, they are biased toward action and a willingness to accept risk. They are also compensated at closing.

The bottom line? Consider advice, but scrutinize all input carefully. The deal may seem ideal to your investment banker, overly complex to your lawyer or too risky to your accountant, but the final call is yours and yours alone. The better you understand all the players’ biases and what drives each one, the easier it will be to make the best decision for the most important parties: you, your employees and your shareholders. Ultimately, the ability to evaluate a transaction objectively, while staying true to your goals, can mean the difference between passing on an excellent M&A opportunity, pursuing a disastrous M&A initiative—or successfully executing the deal of a lifetime.

In addition to being aware of one’s own biases, a CEO must also manage those of the many other players—advisors, consultants, executive teams, board members—involved in deal making. Advisors and consultants play a pivotal role in the evaluation of M&A opportunities and the execution thereof, and many CEOs have profited or perished by relying on their advice.

On the buy-side, for example, outside accountants, lawyers and consultants are charged with many elements of due diligence and they are, therefore, an indispensable part of your team. However, they also tend to be biased ------------------------------------------------------------------------toward conservative decisions and focus on details, which may lead them to advise against a closing. As CEO, it is Joseph M. Durnford is founder and Jeffrey Sasakura is vice essential for you to assess your advisors’ biases and leverage present of JD Ford & Company, a boutique investment bank focused their expertise to find ways to avoid risk while still taking on providing merger, acquisition, valuation and financial advisory services to middle market companies. advantage of the broader opportunities you see.

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By Steve Rosenbaum with Jennifer Pellet

The Middle Market Represents… ...3% of all U.S. companies ...1/3 of all jobs ...Almost 33% of private sector GDP ...More than $10 trillion in annual revenue ...1.2-plus million new jobs in 2012-2013

The revenue growth of the mid-market is twice that of the S&P 500.

BUSINESS GROWTH Mid-Market/Past 12 Mos.

5.5 %

Mid-Market/Next 12 Mos.

4.4%* S&P 500/Past 12 Mos.

2.6 %

S&P 500/Next 12 Mos.

1%*

*estimated

Employment Continues to Grow: 40% of middle market companies expect to add jobs over the next 12 months.

Chief Executive’s first annual list of 100 top-performing mid-sized companies.

Superior growth rates, a track record of innovation, an exceptional corporate culture, charismatic leadership, compelling business models—these are some of the qualities we sought in choosing the Chief Executive’s Mid-Market Elite.

Applying that criteria, our researchers and judges selected 100 companies that stand out amid the middle-market universe—identified as 197,000 private or public firms with between $10 million and $1 billion in annual revenues by our partners, the National Center for the Middle Market at the Fisher School of Business at Ohio State University and GE Capital.

The economic impact of this middle-market sector is real and impressive—collectively they account for 40 percent of the U.S.’s GDP. From a qualitative standpoint, these are the types of companies and leaders who fuel our nation’s reputation for innovation, passion and perseverance. Among them, the companies that make up 100 Mid-Market Elite shine for outpacing their industry peers and demonstrating strength in various qualitative attributes, from those taking on the giants in traditional industries (Jeni’s Splendid Ice Creams and the Boston Beer Company) to those leveraging technology to forge new business arenas (Zillow, Yelp, Otterbox).

The pages that follow offer a capsule look at all 100, as well as a more in-depth peek at five of the Mid-Market Elite.

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MID-MARKET ELITE

OtterBox: Profit in Protection “In time, the consumer even comes with us and starts to say ‘OtterBox was a case company; now they are an integrated technology company.’”

—Brian Thomas, President & CEO, OtterBox

Like many startup success stories, OtterBox began life in a garage. It was there that Curt Richardson crafted the first in a series of water- and crush-proof dry boxes. These boxes were in demand by water-sports athletes, who needed them to protect various electronic devices.

As the fledgling company’s sales shot past $2 million in annual revenues, a recent college graduate named Brian Thomas joined the company. From then on, OtterBox evolved rapidly from a producer of generic dry boxes to device-specific protection products. It was Thomas who recognized the potential in the burgeoning consumer-electronics space and set about forming relationships with industry players Hewlett-Packard, Palm and Apple. Soon appointed director of sales and marketing, he continued leveraging OtterBox’s product innovations with advances in personal computers, smartphones and tablets. After nine-plus years of mentoring, Richardson turned the corner office over to Thomas.

By creating a high value, protective product, OtterBox established an industry category. The company is now the No.1 selling case for smartphones in the U.S., according to NPD Group, a global market-research company. Going forward, OtterBox is focusing on international growth with an EMEA facility in Cork, Ireland and an APAC headquarters in Hong Kong.

Viewing his role as spurring OtterBox’s associates to work at optimal performance, Thomas focuses on a two-step development process. First, he looks to bring employees to at least 80 percent of optimal performance. Once there, the task is to get them to 100 percent. Within the confines of OtterBox’s state-of-the-art headquarters, Thomas has created a Leadership Academy to help aspiring associates hone their management and leadership skills.

At Otterbox, viewing current and future product lines through the eyes of the end user is paramount. When you view your customers with empathy, you add value to the equation, says Thomas.

PRESIDENT & CEO: Brian Thomas COMPANY: OtterBox HEADQUARTERS: Fort Collins, Colorado FOUNDED: 1998 2012 REVENUES: $574 Million THREE-YEAR GROWTH RATE: 84.3% INSPIRED BY: His grandfathers. One grandfather ran a plant that originally manufactured advertising signs but switched to munitions during WWII. This demonstrated corporate flexibility and personal devotion to “greater” causes than profitability. The other grandfather was a physician who demonstrated the importance of serving others.

LEADERSHIP LESSON: “I always remember that as great as your rise is, your fall can be quick and hard.”

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MID-MARKET ELITE

Qualtrics: Teaching Transparency “Keep in mind that data analytics are becoming mainstream. We saw that data was a blind spot for companies. What most companies need is the data they don’t have and that’s what we provide.”

—Ryan Smith, Co-Founder & CEO, Qualtrics Some of the best ideas are created in adverse environments, which is exactly the case with Ryan Smith and Qualtrics. As a college sophomore, Smith was working for Hewlett-Packard in a summer program when his father, Scott Smith, was diagnosed with throat cancer. Smith returned home to spend time with his father and help in his recovery.

To pass the time, father and son worked together to develop a system that would make it easier for academics to conduct research themselves. This idea evolved into Qualtrics.

Today, Qualtrics provides real-time insight into Big Data for more than half of the Fortune 100 and 96 of the top-100 business schools. “Qualtrics pioneered the online survey market by developing a sophisticated yet simple-to-use solution for academic researchers,” says Smith. “What started in academia has since spread like wildfire to corporations.” Qualtrics propels the ability to digest data beyond researchers to anyone in any business who wants insight into what customers think and, more importantly, what customers want.

Smith prides himself in giving his clients not only insight into big data but an exceedingly intimate level of customer service. “I was the only sales rep at Qualtrics for the company’s first three years,” he says. “The only time I find myself getting depressed is when I’m not talking to customers.”

Another source of satisfaction for Smith is Qualtics’ corporate culture. Other than Smith’s CEO post, there are no job titles at Qualtrics. “We’ve developed an execution system that is transparent,” he explains, “Notes from every meeting and every internal document are published and available to anyone.” This level of transparency allows employees to focus on the external factors impacting Qualtrics, instead of spending intellectual capital determining what is going on inside the company.

Qualtrics’ success has not gone unnoticed. The company was recently listed as one of Forbes’ “Most Promising,” while Smith was recognized as one of the “Most Promising CEOs under 35.” As Qualtrics expands its client base at home and abroad, Smith pledges not to rest on his laurels. “Innovation,” says Smith, “has a short shelf life.”

CEO: Ryan Smith COMPANY: Qualtrics HEADQUARTERS: Provo, Utah FOUNDED: 2002 REVENUES: $48 Million THREE YEAR GROWTH RATE: 86% INSPIRED BY: Both parents, (both Ph.D.s), who instilled the core belief that you can be anything you want to be, but you must work “super-hard” if you are to succeed.

LEADERSHIP LESSON: “When hiring a new associate, I look to hire [a mentor]. The next employee I hire has to be better than the last.”

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MEET THE

Mid-Market Elite Company Name

2012 Revenues CAGR % Why

CEO

Location

Industry

3Cinteractive

John Duffy

Boca Raton, FL

IT Software & Services

$29

52.93

Driving revenues through innovative consumer engagement

3cinteractive.com

[24]7

PV Kannan

Campbell, CA

IT Software & Services

$180

11.69

Redefining customer service via intuitive phone support

247-inc.com

Access America Transport

Ted Alling

Chattanooga, TN

Logistics & Transportation

$370

92.35

Up and comer in the 3PL space. "Easy Button" of the industry

accessamericatransport.com

Accolade

Tom Spann

Plymouth Meeting, PA

Healthcare Equipment & SVCs

$47

860.81

Partners with companies to simplify employee healthcare

accoladeinc.com

Acquia

Thomas Erickson

Burlington, MA

Software

$45

125.86

Improving security and user experience in Drupal sites

acquia.com

All Web Leads

Bill Daniel

Austin, TX

Insurance

$86

22.83

Connecting insurance brokers and agents with consumers

allwebleads.com

American Global Logistics

Chad Rosenberg

Atlanta, GA

Logistics & Transportation

$208

44.22

Fueling growth by filling dead space in shipping containers

americangloballogistics.com

American Public Education

Dr. Wallace Boston

Charles Town, WV

Consumer Products & Services

$314

25.78

Providing online education to military/service communities

americanpubliceducation.com

Ancestry.com

Tim Sullivan

Provo, UT

Consumer Prodcuts & Services

$487

27.21

Created platform allowing people to trace personal genealogy

ancestry.com

Angie's List

Angie Hicks

Indianapolis, IN

Consumer Products & Services

$156

62.45

Empowering consumers via personal crowd-sourced reviews

angieslist.com

Anytime Fitness

Chuck Runyon

Hastings, MN

Leisure & Fitness

$484

30.51

Disruptive innovation in the health and fitness space

anytimefitness.com

Armando Montelongo Companies

Armando Montelongo

San Antonio, TX

Education

$69

20.77

Generating revenues from foreclosed real estate

armandomontelongo.com

Avella

John Musil, Pharm.D., FACA

Phoenix, AZ

Health

$501

71.67

Premier wholesaler within the specialty pharmacy space

avella.com

Bazaarvoice

Stephen Collins

Austin, TX

Software

$106

65.72

Connecting brands and retailers to consumers via analytics

bazaarvoice.com

Big Ass Fans

Carey Smith

Lexington, KY

Consumer Products & Services

$87

32.31

Making a "200 Year" company through technology and people

bigassfans.com

Black Elk Energy

John Hoffman

Houston, TX

Energy

$304

67.03

Value development and recompletions of existing well bores

blackelkenergy.com

Blucora

William J. Ruckelshaus

Bellevue, WA

IT Software & Services

$407

37.78

Owns Internet businesses InfoSpace, TaxACT and Monoprice

blucora.com

Bluefin Payment Systems

John Perry

Atlanta, GA

Financial Services

The Boston Beer Company

Martin Roper

Boston, MA

Consumer Products & Services

Bridgelux

Brad Bullington

Livermore, CA

Manufacturing

BrightStar Care

Shelly Sun

Gurnee, IL

Health

Burry Foodservice

Tony Hyler

St. Charles, IL

Cenergy International

June Ressler

Houston, TX

Cirrus Logic

Jason Rhode, Ph.D.

Austin, TX

Technology

The Chef's Warehouse

Chris Pappas

Ridgefield, CT

Consumer Products & Services

comScore, Inc.

Magid Abraham, Ph.D.

Reston, VA

IT Software & Services

Complete Nutrition

Sheldon Harris

Omaha, NE

Health

Cornerstone On Demand

Adam Miller

Santa Monica, CA

Human Resources

$118

Corporate Resource Services

John Messina

New York, NY

Human Resources

Coyote Logistics

Jeff Silver

Chicago, IL

Logistics & Transportation

Cray

Peter Ungaro

Seattle, WA

FactSet Research Systems

Philip Hadley

Norwalk, CT

The Female Health Company

O.B. Parrish

Chicago, IL

Health

FishNet Security

Gary Fish

Overland Park, KS

IT Software & Services

(Alphabetical Order)

(‘10-’12)

(mm)

Website

$66

96.59

Leading provider of secure payment solutions to merchants

bluefin.com

$629

11.47

Took on the majors and profited with handcrafted beers

bostonbeer.com

$77

55.49

Exploiting LED lighting as an avenue of innovation

bridgelux.com

$212

46.20

Breakthrough franchise in at home care

brightstarcare.com

Food & Beverage

$112

53.70

Maker of such classics as Thomas' English Muffins

burryfoods.com

Energy

$248

58.34

Global supplier of expert solutions to the oil and gas industry

cenergyintl.com

$427

38.98

Provides analog/digital elements for audio/energy markets

cirrus.com

$480

20.62

The FAO Schwartz of kitchen supplies

chefswarehouse.com

$255

20.76

Creating online knowledge by monitoring website traffic

comscore.com

$953

470.31

People's desire for nutritional supplements drives revenues

completenutrition.com

64.21

Cloud-based talent management solutions worldwide

cornerstoneondemand.com

$640

71.40

Provides clients with a "one stop shop" for stafing needs

crsco.com

$786

54.82

Re-inventing the 3PL industry and $1-billion in annual revenue

coyote.com

Computer Products & Services

$421

14.82

Super computing solutions for customers arouund the world

cray.com

Financial Services

$806

12.11

Providing topflight analytical research to investors worldwide

factset.com

$35

25.56

Manufactures/markets female contraceptive in global demand

femalehealth.com

$525

28.12

Information/security provider enabling clients manage risk

fishnetsecurity.com

MID-MARKET ELITE

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MEET THE

Mid-Market Elite Company Name

2012 Revenues CAGR % Why

CEO

Location

Industry

Five Below

Thomas Vellios

Philadelphia, PA

Retail

$419

45.73

Franklin Square Capital Partners

Michael Forman

Philadelphia, PA

Diversified Financials

$134

276.86

Gazelle

Israel Ganot

Boston, MA

Consumer Products & Services

$58

Gentherm

Daniel Coker

Northville, MI

Consumer Products & Services

$555

Globus Medical

David Paul

Audobon, PA

Medical Devices

$386

Gogo

Michael Small

Itasca, IL

Telecommunications

$234

Great Expressions Dental Centers

Richard Beckman

Bloomfield Hills, MI

Health

Happy Family

Shazi Visram

New York, NY

Hulu

Andy Forsell

Los Angeles, CA

InGenesis

Veronica Edwards

San Antonio, TX

Insulet

Duane DeSisto

Bedford, MA

Integrity Staffing Solutions

Todd Bavol, PHR

Wilmington, DE

InterDigital

William J. Merritt

Wilmington, DE

iSend

Steve LaBella

Jeni's Splendid Ice Creams

John Lowe

KIND Snacks Kodiak Oil & Gas

(Alphabetical Order)

(‘10-’12)

(mm)

Website

Retail outlets for the kids who have outgrown toy stores

fivebelow.com

Providing access to financial tools used by big dollar investors

franklinsquare.com

65.02

Turning your discarded devices into cold hard cash

gazelle.com

122.21

Innovator in the HVAC space using proprietary technologies

gentherm.com

15.73

Medical devices for patients suffering from spine disorders

globusmedical.com

57.06

Partners with carriers allowing Internet access during air travel

gogoair.com

$255

25.46

Gives consumers cost efficiency/personal control in dentistry

greatexpressions.com

Consumer Products & Services

$63

117.64

Creating premium baby foods made from organic ingredients

happyfamilybrands.com

Consumer Products & Services

$695

70.17

Prime venue for growing ranks of cord cutters and cord nevers

hulu.com

Health

$84

26.79

Specializing in professional, scientific and technical staffing

ingenesis.org

Medical Devices

$211

47.49

Revolutionary insulin pump therapy empowering diabetics

myomnipod.com

Human Resources

$278

33.97

Leveraging off growing needs for temporary workers

integritystaffing.com

Information Technology

$663

29.64

Creates wireless technologies for mobile devices and networks

interdigital.com

Middlebury, CT

IT & Software

$106

124.67

Serving an under-banked section of the populace

isendonline.com

Grandview Heights, OH

Food & Beverage

$12

50.47

Gourmet concotions from organically fed cows. Worth the price

jenis.com

Daniel Lubetzky

New York, NY

Food & Beverage

$125

104.12

Leveraging off Americans’ desire for healthy eating

kindsnacks.com

Lynne Peterson

Denver, CO

Energy

$409

263.12

Exploiting the Bakken "Boom"/purchasing additional wells

kodiakog.com

Lifelock

Todd Davis

Tempe, AZ

Consumer Products & Services

$276

30.51

Innovation in personal online security space

lifelock.com

LinkAmerica

Andres Ruzo

Rowlett, TX

Telecommunications

$152

5.72

Supply chain management/services to network providers

linkam.com

LinkedIn

Jeff Weiner

Mountain View, CA

Information Technology

$972

99.99

Innovating at the intersection of social media and business

linkedin.com

Lumber Liquidators

Robert Lynch

Toano, VA

Consumer Products & Services

$813

14.51

Considered the largest hardwood-flooring retailer in N America

lumberliquidators.com

Magnus International Group Eric Lofquist

Chagrin Falls, OH

Environmental / Byproducts

$36

12.79

Innovation in the oleochemical space

magnusig.com

Matrix Medical Network

Randy Dobbs

Scottsdale, AZ

Health

$116

58.32

Attending to the healthcare needs of seniors via 1 on 1 visits

matrixforme.com

Medifast

Michael MacDonald

Owings Mills, MD

Health

$357

17.68

Providing nutritional products fueled by focus on better health

medifast1.com

Millenial Media

Paul Palmieri

Baltimore, MD

Advertising & Marketing

$178

92.74

Organic technology lets app developers to maximize revenues

millennialmedia.com

Monogram Food Solutions

Karl Schledwitz

Memphis, TN

Food & Beverage

$201

13.04

Growth through innovation in salty meat snack industry

monogramfoods.com

NorAm International Partners

Michael Dugally

Hebron, KY

Business Products & Services

$79

25.11

Distribution of wholesale/overstock media (DVDs,CDs,Games)

norampartners.com

North American Power

Kerry Breitbart

Norwalk, CT

Energy

$165

162.20

Redefining the retail electric power market space

napower.com

Northern Oil and Gas

Michael Reger

Wayzata, MN

Energy

$312

164.43

Riding the fracking tide in the Bakken and Three Forks areas

northernoil.com

Oasis Petroleum

Tommy Nusz

Houston, TX

Energy

$687

130.78

7th largest landholder in the Bakken with nearly 500,000 acres

oasispetroleum.com

OtterBox

Brian Thomas

Fort Collins, CO

Consumer Products & Services

$574

84.29

In creating a product, OtterBox created an industry

otterbox.com

Palo Alto Networks

Mark McLaughlin

Santa Clara, CA

Security

$255

128.69

Providing users with network security via next-gen firewalls

paloaltonetworks.com

Popchips

Keith Belling

San Francisco, CA

Food & Beverage

$93

51.04

Alternative to traditional salty snacks powered by social media

popchips.com

MID-MARKET ELITE

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MEET THE

Mid-Market Elite Company Name

2012 Revenues CAGR % Why

CEO

Location

Industry

Portfolio Recovery Associates

Steve Fredrickson

Norfolk, VA

Financial Services

$593

26.12

Buys, collects, manages portfolios of unpaid debt

portfoliorecovery.com

Prestige Brand Holdings

Matthew Mannelly

Tarrytown, NY

Consumer Products & Services

$441

22.78

Maker of time tested household and healthcare products

prestigebrandsinc.com

Qualtrics

Ryan Smith

Provo, UT

IT Software & Services

$48

85.79

Real time data collection / analysis for real time decisions

qualtrics.com

Questcor Pharmaceuticals

Don Bailey

Anaheim, CA

Health

$509

110.32

Creates treatments for auto-immune and inflammatory disorders

questcor.com

Red Frog Events

Joe Reynolds

Chicago, IL

Consumer Products & Services

$50

122.49

Leveraging success of the Great Urban Race and Warrior Dash

redfrogevents.com

RetailMeNot

Cotter Cunningham

Austin, TX

Consumer Products & Services

$145

693.18

World's largest digital coupon marketplace

retailmenot.com

Riverbed Technology

Jerry Kennelly

San Francisco, CA

Technology

$837

23.14

Dominates WAN (Wide Area Network) Oprtimization space

riverbed.com

Rocket Fuel

George John

Redwood City, CA

IT Software & Services

$107

153.41

Raising effectiveness of client's digital media buys

rocketfuel.com

Roku

Anthony Wood

Saratoga, CA

Media & Marketing

$140

36.63

Empowering cord-nevers to get news, info and entertainment

roku.com

Scentsy

Orville Thompson

Meridian, ID

Consumer Products & Services

$750

40.16

Franchise marketer of home fragrances and related products

scentsy.com

ServiceNow

Frank Slootman

San Diego, CA

Software

$244

137.16

Simplifies the IT space for clients across the globe

servicenow.com

ShopAtHome.com

Marc Braunstein

Greenwood Village, CO

Advertising & Marketing

$78

47.96

Partners with retailers to maximize shoppers purchasing power

shopathome.com

Skullcandy

Hoby Darling

Park City, UT

Consumer Products & Services

$298

36.15

De rigueur gear combining audio quality and durability

skullcandy.com

Sturm Ruger & Co

Michael Fifer

Southport, CT

Manufacturing

$492

38.82

Generating revenues through product creation in firearms space

ruger.com

Systems Made Simple

Ron Fishbeck

Syracuse, NY

IT Services

$167

102.87

Growing technology services company in the Federal space

systemsmadesimple.com

Tangoe, Inc.

Al Subbloie

Orange, CT

IT Services

$155

50.22

Dominanting CLM (Communications Lifecycle Management)

tangoe.com

The Cellular Connection

Scott Moorehead

Marion, IN

Telecommunications

$607

43.50

Number one retailer of Verizon products with 750+ locations

ecellularconnection.com

The Fresh Diet

Zalmi Duchman

Surfside, FL

Food & Drink

$38

49.51

Delivering fresh, healthy meals to your door

thefreshdiet.com

Think Finance

Ken Rees

Fort Worth, TX

Financial Services

$750

73.21

Creating innovative financial solutions for the underbanked

thinkfinance.com

Twitter

Dick Costolo

San Francisco, CA

Technology

$288

153.11

Disruptive innovation in social media

twitter.com

U.S. Physical Therapy

Chris Reading

Houston, TX

Health

$252

9.24

Operating more than 400 outpatient physical therapy clinics

usph.com

U.S. Silica

Bryan Shinn

Fredrick, MD

Minining & Minerals

$442

1303.45

Sand / Proppant company leveraging off fracking boom

ussilica.com

United Therapeutics

Martine Rothblatt, Ph.D., J.D., M.B.A.

Silver Spring, MD

Health

$916

24.30

Biotech making/marketing products for chronically afflicted

unither.com

Valkyrie Enterprises

Gary Lisota

Virginia Beach, VA

Aerospace & Defense

$24

30.93

Providing critical system support and upgrades for the US Navy

valkyrie.com

Virtual Instruments

John Thompson

San Jose, CA

Technology Hardware & Equip

$41

32.09

Helping companies navigate IT and Cloud environments

virtualinstruments.com

Vitamin Shoppe

Anthony Truesdale

North Bergen, NJ

Health

$951

12.49

Leveraging peope's desires for healthy, nutritional supplements

vitaminshoppe.com

Volcano Corporation

Scott Huennekens

San Diego, CA

Medical Devices

$382

13.94

Leading manufacturer of ultrasound / cardiovascular devices

volcanocorp.com

Wayfair.com

Niraj Shah

Boston, MA

Retail

$603

25.97

Only retailer of more than 11,000 types of home furnishings

wayfair.com

Web.com

David Brown

Jacksonville, FL

IT Services

$408

84.09

Growing player in online site construction with small biz focus

web.com

Winnebago Industries

Randy Potts

Forest City, IA

Consumer Products & Services

$582

13.76

Weathered recession / poised to grow with the eceonomy

winnebagoind.com

Yelp

Jeremy Stoppelman

San Francisco, CA

Technology

$138

69.77

Recreated the Yellow Pages by giving consumers a voice

yelp.com

Yodle

Court Cunningham

New York, NY

Advertising & Marketing

$132

44.29

Connecting more than 30,000 local businesses with consumers

yodle.com

$117

95.84

Disruptive innovator empowering real estate consumers

zillow.com

$556

16.78

Quenching millenials thirst for skateboarding lifestyle

zumiez.com

(Alphabetical Order)

Zillow

Spencer Rascoff

Seattle, WA

Consumer Products & Services

Zumiez

Richard Brooks

Lynwood, WA

Retail

MID-MARKET ELITE

(‘10-’12)

(mm)

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Website

Mid-Market CEO Awards Celebrating the three Mid-Market CEO Award winners at the third annual meeting held by the National Center for the Middle Market at The Ohio State University in Columbus last October, Chief Executive conferred awards for Leadership, Innovation, and Overall Excellence to Chuck Runyon of Anytime Fitness, Steve LaBella of iSend and Jeff Silver of Coyote Logistics respectively. The three CEOs will join the selection committee to decide winners for 2014.

MID-MARKET ELITE

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MID-MARKET ELITE

BrightStar Care: Addressing America’s Aging Population “Elevate yourself to be the best in class. There is always an opportunity to improve.”

—Shelly Sun, Co-Founder & CEO, BrightStar Care In 2001, corporate CPA Shelly Sun and her thenfiancé faced a dilemma encountered by a growing number of Americans. Her fiancé’s grandmother was ill and in need of at-home care. Months of searching for a quality caregiver proved fruitless; and on the day before the two were married, the grandmother passed away.

“Through our personal journey, we identified a gaping hole in the healthcare sector,” notes Sun. “We saw the need for a better in-home care option.”

Sun set out to create a business that would fill the unmet needs of those wanting quality, at-home care.

Her brainchild became BrightStar Care, a company that stands at the zenith of a major demographic trend. Better medical technology has led to longer lifespans, which, in turn, is driving increased demand for professional caregivers. In fact, as many as 10-million Americans over the age of 50 are grappling with the need to care for aging parents, according to recent studies.

Sun’s business model sought to address that need.

“We set out to start a business that would offer families like us a service that we were once desperate for, a service that was not being provided anywhere else,” she explains.

To expand the company’s reach, Sun opted to make BrightStar a franchise business. The company currently has more than 250 locations around the country and was recently named by the Women’s Presidents Organization as one of the nation’s 50 fastest-growing, women-led companies. Going forward, Sun is focusing on developing the talent and tools to continue that growth trajectory.

“We are incubating future executive-level talent,” she says, adding that BrightStar is leveraging technology to better serve its target market. “We’ve elevated the quality of care we provide through the use of online tools. By providing free, online resources, we foster and improve the relationship between the family and the caregiver.”

Sun, the only child of an entrepreneurial father, learned perseverance at a young age. “Trying to be good is not enough for me. Never accepting failure is in my DNA.”

FOUNDER & CEO: Shelly Sun COMPANY: BrightStar Care HEADQUARTERS: Gurnee, Illinois FOUNDED: 2002 2012 REVENUES: $212 Million THREE-YEAR GROWTH RATE: 46% INSPIRED BY: Gloria Jean Kvetko, founder of Gloria Jean’s Coffees. “I listened to Shelly and told her: ‘You have nailed the future,’” says Kvetko.

LEADERSHIP LESSON: “You have to look beyond the spreadsheet and envision success.”

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MID-MARKET ELITE

Bluefin Payment Systems: Banking on Security “I would never ask someone on my team to do something that I am not willing to do myself, and that includes calling a prospect or explaining a problem to a key client.”

—John Perry, CEO, Bluefin Payment Systems In a society where the dollar volume of the online ecosystem increases at an exponential rate, the issue of data security looms large. Entities ranging from merchants and schools to health clubs, non-profits and faith-based organizations demand highly innovative and secure methods to receive payments online.

A provider of secure-payment technologies, Atlanta-based Bluefin Payment Systems, serves this rapidly growing business imperative.

A decade ago, founder Ruston Miles (today, Bluefin’s senior vice president and chief of product innovation) was quick to understand that the growth of the World Wide Web and various mobile technologies were taking off while the arrangement for how people and organizations made payments lagged behind. Recognizing the potential of payment technology, Miles developed a system that helped customers feel more secure about their transactions and made processing two to three times faster than traditional methods. Today, the company’s security suite includes point-topoint encryption (P2PE), transparent redirection, tokenization and store-and-convert processes, and it is partnered with over 100 software companies and serves 15,000 merchants.

“We provide simplicity in payment integration,” explains CEO John Perry, “that allows small businesses the same type of cost savings, access to data and service that, in the past, were only available to much larger companies.”

Perry, a West Point graduate, who also holds an MBA from the Kellogg Graduate School of Management, sees his role as CEO as symbiotically connected to that of Miles. “I am an innovative leader,” says Perry, “[who] is willing to try different things in motivating my team or adjusting our business model. I am not an inventor.” This management model has paid off. Bluefin’s revenues have had a compound, annual growth rate north of 90 percent over the last three years.

The cross disciplines of innovation and managerial acumen should fuel Bluefin’s future growth. “We are adding new products and solutions that allow our clients to grow their businesses using our mobile-payments software,” says Perry, “and, at the same time, [to] ensure they have one of the best and most secure products in the payments industry using P2PE.”

CEO: John Perry COMPANY: Bluefin Payment Systems HEADQUARTERS: Tulsa, Oklahoma FOUNDED: 2002 2012 REVENUES: $66 Million THREE-YEAR GROWTH RATE: 96% INSPIRED BY: “I don’t think one person in particular inspired me but rather certain people, including my parents, my first boss, a university professor and certain friends. Each of them was important in molding me and providing inspiration in unique ways.”

LEADERSHIP LESSON: “Certain things are learned and come only from experience. Don’t rush it.”

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MID-MARKET ELITE

North American Power: Network Marketing Maven “North American Power is the most perfect reflection of everything that is important to me.”

—Kerry Breitbart, Co-Founder & CEO, North American Power North American Power is the result of Kerry Breitbart’s inability to retire combined with his desire to transform a moribund marketplace.

Before co-founding the company, Breitbart had already achieved success, spending 30 years in commodity and energy trading at United Companies. During his tenure, United Companies became the first over-the-counter energy broker in the derivatives and futures markets, opened offices in London and Singapore and was a market leader in brokering energy products, including crude oil, gasoline, heating oil and fuel oil. Breitbart began his career at United as a crude-oil broker and worked his way up to president and CEO. When the company was sold in 2005, Breitbart retired.

Sitting on the sidelines, however, did not mesh well with Breitbart’s persona. Spotting potential in the $70-billion retail-electricity industry, which was undergoing deregulation, the then-59-year-old came out of retirement to create North American Power in 2009.

North American Power supplies electricity (much of it generated using renewable sources) along the East Coast, including Connecticut, Maryland and Pennsylvania. The company competes with traditional utilities by buying energy in the wholesale market and delivering it at lower cost (using the same utility’s own infrastructure). Breitbart’s innovation lies in the vanguard concept of network marketing. Via network marketing, customers switching to North American Power can earn cash rewards through referrals.

“We looked at Amway, Mary Kay [and] Avon and realized that one bad element was that [customers] did not earn money,” says Breitbart, who set about revolutionizing the retail-electricity space.

“I wanted to give a robust financial incentive, as well as [to] give people the tools to educate others to do the same.” Empowering consumers paid off. Today, North American Power boasts 260,000 customers and growth prospects remain strong.

North American Power plans on moving aggressively into the renewable-energy segment. Breitbart hopes to leverage people’s desire to take control of their individual energy needs by offering a methodology to promote renewable energy.

“I have no ego because I am not foolish enough to believe it is all me,” says Breitbart of his leadership style. “I am not humble but a very self-aware CEO.”

CEO: Ryan Smith CO-FOUNDER & CEO: Kerry Breitbart COMPANY: North American Power HEADQUARTERS: Norwalk, Connecticut FOUNDED: 2009 2012 REVENUES: $165 Million THREE-YEAR GROWTH RATE: 162% INSPIRED BY: Jack Mitchell, who embodies the concept that the customer’s happiness and satisfaction is the linchpin of success.

LEADERSHIP LESSON: “I’m doing my job the best when I am not needed to make decisions.”

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Trademarks, patents, brands and other non-material property are often a company’s most valuable assets. Here’s how companies are leveraging and safeguarding them.

By Dale Buss An intellectual-property war has become the fulcrum of one of the biggest scrums in business, with Apple and Samsung engaged for three years in patent fights all over the world, each seeking to hobble the other in the $400-billion mobile phone industry. Even the White House got involved in trying to tip the scales in Apple’s favor.

So it’s no wonder that intellectual property (IP) and other intangible assets are demanding more attention these days from CEOs in just about every industry, not just digital technology and pharmaceuticals but manufacturing, construction and consumer packaged goods. Increasingly regarded as the raw materials of 21st century business success, intangible capital—trademarks, patents, brands and other crucial but non-material tools of competition—have leapt in importance as CEOs are faced with slow growth worldwide, the intensifying need for more proprietary innovations, rapidly changing technology, Internet-born instantaneous transparency and other factors. In fact, over the last 40 years, the value of intangible assets has grown from just 20 percent of the value of a typical enterprise to 80 percent and even more for tech firms, according to John Martin, CEO of Innography, an Austin, Texas-based IP-software provider.

This sea change has become so crucial that the U.S. Bureau of Economic Analysis has just begun to recognize the contribution of intangible capital to America’s modern economy in the form of a new measurement of quarterly GDP that, for the first time, includes inputs, such as R&D spending and even movies. Not surprisingly, the revision depicts a much larger and more robust U.S. economy than the old formula. IP-intensive

Key Takeaways: »» Intangible assets, such as technology patents and brand licensing, have taken on increasing strategic importance for CEOs in a slow-growth economy »» Both protection and projection of intangible capital are crucial competitive differentiators »» Optimizing intangible assets is now crucial to nearly every industry and regardless of a company’s size »» Parasitic “patent trolls” have put many companies on the defensive with their IP

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industries accounts for about 35 percent of America’s GDP as of 2010, the government says.

More importantly, such recognition is reflected in more corporate game plans. “CEOs in the past may have gotten away with not even knowing a firm’s IP strategy and how it aligned with overall goals and strategy, but that is no longer the case,” says Ronen Arad, director of the forensic services practice at PwC. Chiefs “don’t need to be experts; but, now, they definitely need to be able to drive discussion around how IP strategy aligns and supports their overall business strategy. It’s not just something that legal deals with anymore.”

Charles Riotto, president of the Licensing Industry Merchandisers’ Association, agrees. “CEOs who are not doing it are missing the boat and run the risk of having to answer to boards as to why they’re not doing it, where so many of their competitors are using it as a way to build brand recognition and awareness, consumer bases and extremely nice revenue streams, in some cases,” he asserts.

In making sure they’re on this boat, CEOs are responding in two ways. One method is to buttress their company’s defenses against incursions by competitors or other threats against the worth of intangible assets. This often involves aggregation of patents to defend against potential lawsuits from competitors and patent trolls.

The other, and increasingly important, part of CEOs’ two-headed strategy for intangible capital is active management of the range of the company’s technologies and brands to assert competitive advantages, expand to new market spaces and monetize the assets to a much greater extent.

“Some CEOs are just recognizing that IP can drive shareholder value,” says Arad. “They recognize [the need] to protect it or [its role as a] competitive advantage, but they don’t recognize it as something that can drive additional value to the bottom line. Those are the companies that will struggle over the next five years as competitors not only differentiate themselves with IP but also block other companies with it.”

Rick Cotton, senior counsel for IP protection for NBCUniversal, believes that “proprietary competitive advantage is both increasingly important and harder to maintain. Unfortunately, the dark side is that many companies’ IP advantages are under direct assault” by digital counterfeiters and other cheats.

In India, for instance, a top court recently ruled against patent protection for Novartis’ new cancer drug, Gleevec.

“That’s basically government theft of IP, of a drug recognized in 132 other countries including China but not India,” notes David Hirschmann, president and CEO of the U.S. Chamber of Commerce Global Intellectual Property Center. “That’s very frustrating to companies because it means not only the loss of the Indian drug market but also a threat to other industries.”

Yet the strategic protection and projection of proprietary technologies isn’t just the province of pharma or media or

digital-tech or fighter-jet companies in today’s new paradigm for intangible assets. Here’s how they’ve become lynchpins in major arenas across business: Online advertising: Twitter wasn’t even finished with its $2-billion IPO in November when IBM popped a nasty surprise, alleging that the high-flying social-media phenomenon had infringed on IBM patents including one that helped invent online advertising. The patents were filed in 1993 but not published in 2006, and now IBAM is “inviting [Twitter] to negotiate a business resolution of the allegations.”

Single-serve coffee pods: Nestlé has invested heavily in its Nespresso coffee brand over the past few years, and sales hit more than $3 billion a year. But aggressive copycatting of its single-serve capsules by manufacturers of generics has slowed sales growth. Nestlé just lost a decision by the European Patent Office on protecting its patent for ejecting the pods from the machine but somehow insisted that the ruling “does not have any impact on the current competitive situation.”

Men’s high-end underwear: One of the entrepreneurs who built Tempur-Pedic into a $1-billion brand now believes he similarly can use an innovative design and a web of patent protection to create a luxury segment in men’s underwear in the United States, Europe and elsewhere. Mathias Ingvarsson, CEO of Revolutionwear, began importing $25 to $100 Frigo underwear featuring an adjustable mesh pouch that slightly lifts and separates men’s privates from their body. “That way men can feel the comfort,” he says. “We’re shooting for the stars with [Frigo] and hope we end up by the moon.”

Oil and gas fracking: In the $680-billion oil and gas industry, companies are staking their claims to new techniques and equipment for the crucial technologies of hydraulic fracturing, automated drilling and computer software that have revolutionized the production of the lifeblood of the global economy.

Exxon doubled its revenue from licensing technology over the last three years. The world’s largest oil-service providers, Schlumberger, Halliburton and Baker Hughes, more than doubled the number of patents they secured over a decade earlier, including lasers to help drill wells and a “glider” robot that delivers gear to the ocean floor.

“It’s an area that’s becoming more litigious; and in the next five to 10 years, [it] might be the [cause of the] next smartphone wars,” reports Susan Jackson, an IP attorney at K&L Gates in Charlotte, North Carolina.

Brands as Intangibles Much like technology, the power of brands as differentiators has grown increasingly important as other former differentiators, such as product styling and quality and geographic availability have tended to even out. Here’s how some companies are leveraging this particular type of intangible asset: Affinity credit cards: Brands including the estate of Norman JANUARY/FEBRUARY 2014

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INTANGIBLE ASSETS

Patent Trolls: Protection or Parasite?

CEOs generally believe that when it comes to intellectual capital, “non-practicing entities” or “patent assertion entities”—also known as patent trolls—are like tapeworms on the U.S. economy, attaching themselves to productive members, feeding parasitically off of them and proving difficult to dislodge.

Congress has just tackled a reform of patent law to address the problem; but in the meantime, the sharply increased aggressiveness of patent trolls has been taking a huge toll by stifling innovation and helping boost U.S. patent-litigation costs to $29 billion in 2011 from $7 billion in 2005.

Such companies typically do not invent or manufacture products. Instead, they buy or license patents from others, primarily for the purpose of obtaining licensing fees or filing infringement lawsuits. “They have done [the most] profound damage to small and medium-sized companies that lack the resources to counter these frivolous lawsuits,” Krish Gupta, EMC’s deputy general counsel, testified to Congress in October.

The biggest problem for CEOs of companies large or small is that patent trolls “try to assert patents that aren’t of high quality, and in the process harm the competition,” said Ronen Arad of PricewaterhouseCoopers. Thereby, they pose a huge obstacle to efficient deployment of intangible assets.

Rockwell; AMC’s “The Walking Dead” franchise and Garfield, the comic-book cat, now are collecting royalties from a startup that charges consumers $5.95 a month for credit cards that bear the brand’s imagery. “These brands are using us to tap into their avid fan bases—alpha fans—people who when you launch a Star Trek Visa card will wait in 24-hour-long lines to get one,” notes Ben Katz, CEO of Santa Monica, California-based CARD.com.

Automotive parts and service: Aftermarket stuff used to be a backwater for carmakers; but now, they’re all trying to establish their superiority in the “customer experience” at dealerships—so the value of parts and service ascends into brand-building territory. Toyota, for instance, has just launched a new Toyota Service Centers brand that touts the value of using one of its dealers over an independent shop, including certified parts and technicians.

“We didn’t really have a brand around service and parts before,” explains Brian Sciumbato, a national marketing manager for Toyota. “We never really had anything that we could truly market.”

Sugary drinks: Beverages are mostly about brand, of course, so it’s no surprise that energy-drink leader Red Bull is fighting multiple actions around the world to protect things like its U.K. trademark for the word “Red” on a drink and counterfeit Red Bull products in China.

As companies begin slugging it out for market share in the existentially challenged soft-drink business, brand protection and projection is becoming even more important. Coca-Cola and CEO Muhtar Kent, for instance, are opting to boost Coke as a brand detached from selling sugar water per se. Worldwide revenues from licensing its marques were set to grow by about 10 percent in 2013 after 16 percent growth in 2012 and 56 percent growth in 2011.

“This business has huge momentum driven by the power of our brand,” says Kate Dwyer, group director of worldwide licensing. “It fuels new opportunities as long as we have the right partnerships in place. We are very tightly focused and strategic in the product categories we choose. It’s not necessarily focused on monetizing the business but on driving brand love.”

So while Coke is quick to license its brand for obvious categories, such as coasters, it also has found apparel oriented toward Millennials to be fruitful; about half its licensing business is themed clothing now, up from 20 percent five years ago. Its most recent deal involved commissioning the creation of 200 vintage-look, Coca-Cola-inspired bomber jackets and other pieces by hot designer Michael Romanelli.

Lately, Coke’s efforts to optimize its intangible assets have taken an interesting twist toward the company’s existing but unappreciated technology IP in addition to its brands. Kent isn’t about to give away the secret formula for Coca-Cola, of

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course; but he is opening up a corporate trove of thousands of underexploited patents to see, as Dwyer puts it, “how we can leverage them to drive broader value for our business and sometimes just for our customers and partners.” And Chief Technology Officer Guy Wollaert says that Coke is working on personalized beverages tailored to individuals’ specific genetic makeup.

One treasure from its latent IP that Coke is rolling out now: a design for LED lights for beverage coolers that go on when the door is opened. “We’re getting cooler suppliers who want to license it,” Dwyer says. “There is some very unexpected innovation that the company has driven through the years, but

it all goes back to the core business—things that we’ve done to ultimately showcase and drive our beverage sales.”

Not to be outdone, rival PepsiCo is also turning increasingly to technology innovations and, thus, IP protection in its own efforts to revive sagging soft-drink sales. The latest exhibit: a new patent for an “aroma delivery system” that would use scent compounds encapsulated in gelatin that breaks when a drink container is opened and emit fresh smells that make the product even more appetizing to the consumer.

Apple and Samsung don’t have anything on Coke and Pepsi when it comes to rivalry; and increasingly, their weapons of choice are intangible assets.

Atrion Networking’s IP Protection Program CEO Tim Hebert is very conscious of the fact that his Flemington, New Jersey-based, $100-million IT-solutions company has just reached the big time with its creation of a new program that helps Cisco and Microsoft products and services work seamlessly.

Privately held Atrion finally is big enough to do what Hebert has wanted to do for years: robustly protect its growing repertoire of valuable proprietary IP. “It’s not a cheap process,” he said, but the Apple-Samsung battle over IP, Hebert noted, illustrates its importance.

Hebert is facing three main issues as he beefs up protection of Atrion’s intellectual capital: »» Protecting the IP itself. “That’s the most expensive part, but I need to make sure others don’t clone our ideas.

What if Facebook had been able to protect its Like function from copycatters? That gives you an idea of the sort of value it would have for our company to be able to prevent imitators.” »» Preventing rip-offs by the departed. “That’s the biggest threat I have to worry about: how to protect myself against an employee who might be disenfranchised or less than scrupulous and does things with the knowledge that I’m funding to create. People have a tendency of hiring people from one company to another in our industry.” »» Documenting the value. Hebert is implementing lean methodologies across Atrion to document the proprietary process the company uses in software and hardware development in part to demonstrate the value of its IP in the case of a potential buyer. “We don’t have a lot of tangible assets to make the company more attractive,” he says. “So this is what we need to do.”

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GLOBAL MARKETS

How SMEs Go Global Small- to mid-size company CEOs report on what works— and what doesn’t—in entering overseas markets.

By William J. Holstein

If it weren’t for exports, Argus Fire Control, based in Charlotte, North Carolina, would have gone out of business a long time ago. When Mike Viniconis took over the privately held company in 1993 as president, the vast majority of its customers were textile spinning mills located within a couple hundred miles of Charlotte. But those mills were clearly dying in the face of mounting global competition. So Viniconis started developing sales with the non-U.S. textile-producing companies that ultimately would prove more competitive.

Argus makes systems that quickly identify the sparks that can create disastrous fires in mills and other industrial settings and then suppresses the sparks.

KEY TAKEAWAYS Start your global expansion journey by gathering first-hand knowledge about potential markets • Build relationships with potential business partners, competitors, government officials, testing agencies and others who shape the operating climate • Make it clear to your own management team that international expansion is a key objective, not a passing whim • Test and experiment before making multi-year commitments with agents, distributors or joint venture partners and conduct due diligence to understand the backgrounds of potential partners • Design an export strategy that works best for your type of product, that manages intellectual property issues and that reflects a long-term commitment

Mike Viniconis

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Today, the North Carolina textile industry has been dramatically consolidated, but Argus reaps about 85 percent of its $10 million in sales from 60 international markets.

Viniconis is just back from a trip to Uzbekistan, Turkey and Egypt. “Fishing is always good in troubled waters,” says Viniconis, who spends 50 percent of his time on the road. Sales are at a record level.

But the company doesn’t have a single employee on the ground outside of Charlotte, where it has a total of 12 employees.

It relies exclusively on third-party agents, an approach that goes against the conventional wisdom that an exporter must strive to control distribution of its goods. The reason Viniconis has resisted setting up his own distribution channels is the nature of his product. “We’re a niche within a niche,” he says. No one else in the world competes with his specialized, technology-intensive product, so why pay more money for a dedicated sales network and cut into profit margins? For his efforts, Viniconis and Argus Fire Control were given President Obama’s “E” Award for Exports in May 2013.

The Urgency of Expansion CEOs of small and mid-sized American enterprises (SMEs) are in the public eye as never before because the Obama administration and other opinion leaders are hoping the small guys can rev up their exports and global strategies to create jobs at home. Many CEOs also are interested simply because roughly 95 percent of the world’s population is outside America and the U.S. economy recovery has been tepid at best. However, according to the U.S. Department of Commerce, only 1 percent of American companies actually export. Doubling that to 2 percent—still modest by international standards—would represent enormous progress and contribute to Obama’s goal of doubling U.S. exports over five years.

Yet one of the most basic choices facing SME’s—should they go it alone in international markets or create partnerships?—remains a thicket of confusion. The rule of thumb is that U.S. companies can get closer to their global customers and realize greater profits if they pay the price to set up their own independent distribution channels. However, many CEOs—perhaps most—do not want to make the upfront investment to create foreign subsidiaries and therefore must navigate the shoals of working with agents, distributors, licensees, representatives or joint-venture partners. In aligning with others, they may sacrifice long-term profits and their non-U.S. partners may not allow them to obtain true customer insight. The partners may handle multiple, competing lines of products and give the small American outfit the short end of the stick. Or worse, they may learn to master the exporter’s intellectual property and no longer require its services.

“This is the lowest-risk rung of the foreign market entry ladder,” says Duncan J. McCampbell, an international trade consultant in St. Paul, Minnesota. “But it’s also low reward.

You put a quantity of your products in a container and ship them overseas and a check comes back. You have effectively sold your products overseas, but you know very little about who bought them, why and how your products stack up against other products.”

Interviews with CEOs across the country, whose companies range in annual sales from $10 million to $250 million, reveal that they have created a fantastic variety of relationships and structures to sustain their export drives.

Their strategies depend on the type of industry they are in—whether service sector or manufacturing—and whether they sell to businesses or consumers. As in the Argus case, the strategies depend on the levels of competition they face in their product niches.

SME CEOs have different strategies to secure long-term control of their technology where that is a concern. Their strategies also vary on the basis of the size of the company, the length of time it has been exporting and the percentage of its sales abroad. Companies that have been in the game longer and enjoy relatively high percentages of sales outside the U.S. find it easier to justify the expense of controlling their sales through wholly owned subsidiaries.

Chip Bottone

Doubling Down Chip Bottone, president and CEO of FuelCell Energy, a rapidly growing $120 million company based in Danbury, Connecticut, has devised a unique two-pronged strategy for promoting sales in Asia and Europe. His company makes fuel cells that convert natural gas or biogas from waste facilities or landfills into electricity and heat without actual combustion, resulting in ultra-clean energy generation. Two-thirds of its sales are exports.

One prong of the strategy is a relationship with POSCO, the South Korean steel giant with $57 billion in annual sales, which obviously dwarfs FuelCell. In 2007, the Korean company created an alliance with FuelCell because it was interested in more efficient ways of generating electricity, of which it is a massive consumer.

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traded American company. POSCO sells FuelCell power plants in Korea but also in Indonesia. FuelCell is not worried about losing control of its technology because it operates all of its power plants from an operations center at its own headquarters. “These plants are pretty technologically advanced and they require construction and long-term service agreements to operate them,” Bottone explains. “Our strategy is to never let anybody else in.”

He created a very different arrangement in 2012 in Germany where he visited a one-time partner, the fuel cell business of MTU, which was struggling to survive. After many meetings in Berlin and Bonn, Bottone persuaded the German government to finance his acquisition of the failing German company as part of an alliance with the Fraunhofer Institute, one of the quasi-governmental institutes the Germans use to commercialize technology and help manufacturers improve their know-how.

Bottone established a separate subsidiary, FuelCell Energy Solutions, GmBH, with six board seats. FuelCell holds four seats; the Germans have two and Bottone is chairman. It is partly staffed with FuelCell employees from the U.S. Together, Fuel Cell and its German partners have used the venture to launch sales in Germany, Norway, Switzerland, Spain and Britain. FuelCell is now selling in nine countries, including the U.S. and Canada. “We have foundations for growth on three continents and all we need is to push on those,” Bottone says.

Winning Relationships Jean Davis, director of North Carolina’s highly successful export-promotion agency, which works with 350 to 400 mostly small companies a year, says the vast majority of the companies she advises start out in global markets through some sort of relationship. “For most of our companies, entering on their own is just too daunting to imagine, in dealing with language and corruption and other potential issues,” she says. “Most people just don’t have the wherewithal to physically set up a company in a foreign country—and to understand the labor laws in Europe, for example.” She tells one nightmare story of small companies officially hiring European employees to distribute products: “If it doesn’t go well,” she adds, “they find out that European laws require them to pay a salary and health insurance for five years to someone who never showed up at the office.”

That’s why so many exporters start out with smaller profit margins by selling through some type of distributor. The key, she says, is to learn the market and adapt and improve the distribution structure. “Within two years usually,” she says, “exporters have been spending time on the ground developing relationships and those might evolve into joint ventures.”

Dan Greenberg

Taking It Slow Evolving over time is key. To paraphrase the old saying, successful exporting is not a destination; it’s a journey. ElectroRent, a privately held company based in Van Nuys, California, has been pounding away at international markets since the 1980s and has now reached the point where it prefers to operate its own global, stand-alone subsidiaries. The company offers advanced testing equipment for rental or lease in the aerospace, semiconductor, electronics and other industries. International revenue now accounts for about 15 percent of total $250 million in sales, says CEO Dan Greenberg.

Greenberg first tried to crack Japan in the 1980s by creating a joint venture with a Japanese company. But after the agreement was signed, it became evident that the Japanese partner wanted to build market share, not maximize profitability. ElectroRent eventually sold its piece of the JV back to the Japanese partner.

Over the course of a decade, Greenberg made 26 trips to Japan “but all in vain.” Much the same happened in Europe in the 1990s.

China has been a roller-coaster ride. In the early 2000s, Motorola, a large customer, asked ElectroRent to bring millions of dollars worth of equipment to Tianjin to help it ramp up production of its RAZR cell phones. ElectroRent did very well for two or three years, but then Motorola cratered and closed its Tianjin facility. Greenberg moved his China operations to Beijing. “We were sought after by several indigenous Chinese companies who wanted to partner with us; but this time, because of a change in the laws that allowed us to go it alone and our previous experience, we decided to build our own organization and not be reliant on others,” Greenberg says. “We wanted to control our own destiny.” Major customers include contract manufacturers such as Flextronics and Hon Hai, the maker of Apple products.

The company turned around its performance in Europe by finding the right individual, also in the early 2000s. The company had been working with a Belgian agent for three years. “When we got to know him and understood what he was doing, we bought his business and brought him on to run our business,” Greenberg explains. “Try it before you buy it. That’s what we did with people.”

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“If you find a really key individual,” he adds, “that goes a long way toward taking a lot of the risk out of the proposition.

The classic issue with partners is that they allow you to become much more familiar with a country and get started more quickly, but there is a huge price to pay. All of your know-how and all the skills sets you have developed serve to teach your partner how to build a business. Unless you’re protected by patents and copyrights, there is a real danger that your partner will use you, then discard you and go it alone.”

Greenberg argues that the payoff from having gone global is that his company is better able to serve major multinational

customers and this position protects his company from usurpers. “Having an international footprint makes us different from the competition,” he says. “We can respond to multinational companies and the growing interdependence of business around the world. You’ve got to defend your position.”

That’s the ultimate payoff of going global—the entire organization is strengthened and made more competitive for the battles that almost certainly lie ahead.

The bottom line? Exporting makes a world of sense, but a CEO has to carefully structure the company’s approach and develop it over a period of time. No one size fits all.

Going Global With Multiple, Carefully Controlled Strategies A mattress is a mattress, right?

N

ot if you are Frank Hood, CEO of Mebane, North Carolina-based Kingsdown, whose employee-owned company has sales of more than $100 million, makes customized high-end mattresses with sensors that can measure the respiration rates of sleepers and automatically adjust to their body movements.

They are not mattresses—they are “handcrafted sleep solutions.”

They sell for as much $16,999 and are in strong demand from newly affluent customers in Russia, China, the Middle East and Indonesia, to name just a few of his 20 international markets on five continents. “There are a lot of people out there who sleep—that’s the good news for us,” Hood says.

Because Kingsdown’s five brand names are so important to the company, it adopted a different export strategy than most companies of similar size that simply rely on agents or distributors. The company makes mattresses at its five factories in the U.S. and exports them to retailers whom it carefully vets. It also engages in contract manufacturing in which its techniques and employees are placed in 11 non-U.S. factories owned by other companies to make the mattresses and maintain control of the underlying intellectual property. More recently, it has begun licensing its know-how, but that is the most dangerous strategy because it carries the highest risk that the company’s intellectual property or brand name could be compromised. “You take a leap of faith with a licensing agreement,” says Hood. “You don’t want to be the big brother always watching, but you do have a brand you want to uphold.” Global sales account for 10 to 15 percent of total sales.

One way that the company maintains control is that each

mattress has a serial number based on a variety of factors, including its postural support characteristics.

The company keeps track of those Frank Hood serial numbers at its data warehouse back in North Carolina so that it has a record of where all of its mattresses are made and by whom. A retailer also can log onto a company portal and pull up mattresses by their serial numbers to learn more about their ranges and tolerances.

Good old-fashioned caution is a necessary piece of the company’s strategy. It carefully vets partners—sometimes for as long as three years—before signing any licensing or sales agreement.

It has just entered the Chinese market by exporting from the U.S. and through in-country licensing arrangements. Some of its own equipment sits on licensees’ manufacturing lines. A representative in Hong Kong visits the licensees and tries to keep tabs on them. “There is no substitute for in-country feet on the ground,” says Hood.

Hood recognizes that trying to go to court in another country to defend his intellectual property isn’t a winning proposition.

“That’s onerous at best and impossible at worst,” he says. “That’s what you want to avoid. That’s why we spend so much time upfront making sure we have the right folks committed to our processes.”

The net effect of the company’s efforts is that it has avoided being “commoditized” as just another mattress manufacturer.

“We want the mattress to be seen as something other than just a commodity,” says Hood. “We want to be in the sleep business.”

And it’s been able to do that globally.

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ECONOMIC DEVELOPMENT

T R O P E R L A N O I G E R T S E W D I M E TH A state-by-state look at what the Midwest has to offer businesses.

By Warren Strugatch When Coeur d’Alene Mines departed its Idaho birthplace this spring, it decamped not to the Sun Belt but rather to the business capitol of the Midwest: Chicago, Illinois. Renamed Coeur Mining, the $1.1 billion company manages five operations around the globe—and access to a global airport like O’Hare is critical. CEO Mitchell Krebs says that while moving to Chicago raises operating costs, it bolsters his company in the global marketplace.

“We’re hiring from a deeper labor pool,” he says. “More people are coming to see us now that we’re here in Chicago.

I feel more plugged into the flow. I can get to New York and back in one day, not four.” He’s recently been recruited into a couple of Chicago business organizations through other CEOs he met during recent reconnaissance tours, including an economics club, and he’s convinced the relocation has bolstered the company.

“Chicago,” Krebs declares, “is a global, pro-business city.”

While news headlines still trumpet outward-bound migration to sunnier climates, a number of companies, like Coeur, are

growing and relocating in the Midwest. Although the region was hammered like most of the country during the Great Recession, it has largely replaced its job losses; and in some categories, it now paces national recovery.

Among the attractions of the Midwest are logistics and transportation, reflecting the region’s centralized location and service from O’Hare, world’s second busiest airport; work force readiness and competitive land prices.

Labor costs, once the 800-pound gorilla in the room, are no longer the automatic deal-killer of the past. Both Indiana and Michigan passed right-to-work legislation last year, signaling that “we are not the old rust belt you thought you knew, dominated by the auto unions,” says Rich Studley, chief executive of the Michigan Chamber of Commerce.

The switch has gotten the attention of corporate decision-makers. “There are many projects where clients tell us right out [that] they only want to consider right-to-work states,” says Michelle Comerford, project director and industrial & supply chain practice leader with incentive advisory firm BLS & Co.

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How The States Stack Up Grading: A = EXCELLENT B = GOOD C = FAIR X= NONE Rank Best/Worst States 2013

GDP GDP Per Top Corporate Rank 2013 Capita 2013 ($) Tax Rate (%)

Right to Work State

Quality of State Service

HQ Incentives

Jobs Incentives

Green Incentives

Indiana

5

8

$38,119

8.00%

Y

A

B

B

C

North Dakota

15

1

54,871

5.15

Y

B

C

C

C

Wisconsin

17

32

42,121

7.90

N

B

B

B

C

South Dakota

18

46

45,381

0.00

Y

B

B

C

C

Kansas

19

35

43,015

7.00

Y

B

C

A

B

Ohio*

22

20

40,057

N/A*

N

B

B

B

A

Iowa

23

16

43,935

12.00

Y

B

B

C

C

Nebraska

25

29

45,012

7.81

Y

C

C

C

C

Minnesota

30

5

46,925

9.80

N

B

C

C

C

Missouri

31

25

39,133

6.25

N

C

B

C

C

Michigan

44

18

38,921

6.00

Y

C

C

C

C

Illinois

48

26

45,832

9.50

N

C

B

C

C

Commercial Activity Tax based upon revenues generated.

in Cleveland. “Recently, we heard from a client who wanted to reopen a search and consider Indiana.”

This year’s CEO poll shows the Midwest region faring better than last year. Eight of the 12 states finished in the top half of the rankings, paced by Indiana, ranked 5th best for business in the nation. Ohio’s efforts to be more competitive impressed our chiefs, who raised the Buckeye State’s ranking to 22 this year, up from 35 last year.

Here’s a look at the region, state by state.

Indiana (No. 5): Epic Employment Law Battle The news from Indiana this year is the continuing battle over 2012’s landmark Right-to-Work law, which blocked union membership as a criterion of employment. Following a firestorm of opposition from organized labor and its supporters, in September a state judge ruled the law unconstitutional. The law is being enforced while the decision is appealed.

Manufacturing matters in Indiana; the sector contributes 28 percent of the state’s gross product. Indiana ranks 10th in the Tax Foundation’s State Business Tax Climate Index and first in the Midwest; its residents pay a 3.4 percent flat rate personal income tax. A 1 percent corporate income tax reduction is currently being phased in. Indiana spends at least $921 million per year on recruitment and retention programs, the bulk of which are corporate income tax credits, rebates and reductions. Infrastructure, however, is problematic according to the American Society of Civil Engineers, which graded state rail transport: D+, bridges: C+ and aviation: C.

North Dakota (No. 15): On the Rise North Dakota is booming, thanks in large part to the Bakken oil field. The state now produces about 1 million barrels of oil per day, leading the nation in GDP growth in 2011 and 2012.

Other major industries include agriculture, food processing and farm-implement manufacturing. As with the other Great Plains states, North Dakota has chronically low unemployment—3.2 percent last December, compared with the national rate then 7.8 percent.

The Tax Foundation ranks its state and local burden 16th lowest and its business tax climate 28th. North Dakota spends about $33 million a year on incentive programs, mainly tax refunds, exemptions and other sales discounts; incoming or expanding manufacturers receive about $8.8 million a year.

The state runs three grant-based and service-oriented programs aimed at helping local tech companies expand; these services are valued at over $13 million a year. Its roads are ranked first in the nation by The Reason Foundation.

Wisconsin (No. 17): Needs New Companies The Badger State’s economy is driven by manufacturing, agriculture—especially cheese production—and health care.

Manufacturing—in particular, food processing—provides about one-fifth of Wisconsin’s products, placing it third among states. It tops the nation in the production of paper products. Wisconsin’s state and local tax burden ranks 5th, and the state ranks 43rd in the Tax Foundation’s State Business Tax Climate Index. Wisconsin spends about $1.5 billion JANUARY/FEBRUARY 2014

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a year on incentive programs, primarily sales tax refunds and exemptions and property-tax abatements. Manufacturers and agricultural companies are the primary beneficiaries.

Wisconsin’s manufacturing tax credit reduces the cost on income from manufacturing in the state, and its relocation tax credit gives incoming companies a two-year tax break.

Still, “Wisconsin continues to lag in the creation of net new companies,” says Tom Still, president of the Wisconsin Technology Council.

South Dakota (No. 18): Bouncing Back The Mount Rushmore State says it has turned the corner on economic recovery; in August, its total non-farm employment level was 1.7 percent higher than at its pre-recession peak.

Unemployment at 3.8 percent in August was second-lowest in the nation. Growth sectors include leisure and hospitality, trade, transportation, utilities, financial services, education and health services and manufacturing. Professional and business services are retracting. South Dakota ranks 2nd in the Tax Foundation’s State Business Tax Climate Index and second-lowest nationwide in personal tax burden. The state spends about $28 million per year on incentive programs, primarily cash grants, loans and loan guarantees; agricultural businesses are the main recipients.

Kansas (No. 19): Flying High The Sunflower State’s economy is characterized by clusters in aviation and aerospace manufacturing; significant automotive manufacturing; bioscience (especially animal-health related); renewable energy and; oil and natural gas and agriculture. Kansas’ centralized location appeals to many distribution-focused companies, and its roads rank 2nd in the nation, according to the Reason Foundation.

The state and local tax burden is 22nd highest in the country, and Kansas ranks 20th in the Tax Foundation’s State and Business Tax Climate Index. A series of tax reform bills passed and signed into law over the past two years will produce net tax cuts, claims Gov. Sam Brownback.

The state’s economic-development office has opened two new business parks near the country’s geographic center, totaling nearly 1,000 acres and attracting tenants, such as Home Depot, Bimbo Bakeries and the Mars confectioners. Kansas spends about $1 billion a year on incentive programs. Sales tax refunds, exemptions and other sales-tax discounts and corporate income tax credits or rebates are top incentives. Agriculture is the biggest incentive recipient, followed by manufacturing.

Ohio (No 22): Tackling Tax Reform The Buckeye State continues to rebound from the recession, led by auto manufacturers, the health care industry and energy production in the eastern part of the state; hiring is picking up at a faster clip than at any time over the past 20 years. In a major tax reform action, Ohio lowered its citizens’ tax burden approximately by half while eliminating its

inventory tax. Still, Ohio’s byzantine municipal income tax code is “the most complex local income tax structure” in the U.S., scolds the Tax Foundation, which notes several reform bills are currently in chamber. Ohio spends about $3.3 billion a year on incentive programs, the bulk of which are sales tax refunds, exemptions and other sales tax discounts. Manufacturers are the primary recipients, followed by electric power producers and agricultural interests. Says veteran site selector Bob Hess: “I am impressed with Ohio. They have their house in order, and they are focusing on industry.”

Iowa (No. 23): Tax Cut Pending Iowa’s diverse economy sustains strong manufacturing, biotechnology, finance, insurance and agricultural industries. Manufacturing strengths include food processing, heavy machinery and agricultural-chemical production; leaders include ConAgra Foods, General Mills, Heinz and Quaker Oats. Iowa’s state and local taxes rank 24th in the country and 40th in the Tax Foundation’s State Business Tax Climate Index. Gov. Branstad signed a new tax package into law this spring, promising a historic tax cut. Iowa spends about $223 million per year on incentive programs, mainly corporate income tax credits, rebates and reductions. A popular program called Shovel Ready Iowa helps steer investments towards approved sites. Alternative energy producers are the main recipients, followed by the film industry.

Nebraska (No. 25): Keeper of the Corn The Cornhusker State sustains major agricultural production, manufacturing, transportation services, telecommunications, insurance and IT services. Unemployment is among the lowest in the nation. Nebraska’s state and local tax burden ranks 21st highest of 50 states, and it ranks 34th in the Tax Foundation’s State Business Climate Index. Nebraska spends about $1.4 billion a year on incentive programs—primarily state tax refunds, exemptions and other sales tax discounts; manufacturers are the primary recipients.

Minnesota (No. 30): Profiting from Privacy Minnesota is home to Cargill, the largest privately owned company in the U.S, as well as 33 of the country’s top 1,000 publicly traded companies. With a diverse economic base, Minnesota has weathered the recession relatively well, recovering faster than most of its neighbors, according to Wells Fargo Economics Group. Manufacturing growth has stalled, but hiring in the business and professional services and leisure and hospitality sectors continues moving forward.

Minnesota’s tax burden ranked seventh-highest out of 50 states, and it ranks 47th in the Tax Foundation’s State Business Tax Climate Index. Minnesota spends at least $239 million per year on incentive programs, primarily sales tax refunds, exemptions and discounts, as well as corporate income tax credits, rebates and reductions. Top incentive recipients are the agriculture, finance and telecom industries.

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CEO PERSPECTIVES:

WHY WE’RE HERE Who: Lori Schaefer-Weaton, President of Agri-Industrial Plastics Co. Site History: Founded in 1974 in Fairfield, Iowa by Richard Smith, the current president’s father. The company started out in leased warehouse space, then in 1978 acquired and moved into 265,000-square-feet building on 20 acres in Fairfield.

Reason for Location: Needed space for growth.

Why Iowa: “The number one reason we are in Iowa is the people, as are reasons two and three.

There is a definite work ethic here. The educational system in the state supports what we do, through a very strong university and community college system. If we see more and more need for robotics programming, for example, I know my community college will support me in that.

Iowa is a right-to-work state and maybe life is a little more small-town here, but it has everything we need—and more.”

Who: Warren Buffett, Chairman and CEO of Berkshire Hathaway Site History: In 1962, Warren Buffett dissolved his six partnerships and consolidated his business activities in Kiewit Plaza, one of the tallest office towers in Omaha. Eventually the company was run under the name Berkshire Hathaway, a textile manufacturing company acquired by Buffett.

Reason for Location: Buffett wanted to live and work in his hometown.

Why Nebraska: “For the last many decades, I could have lived any place in the country I wanted to and conducted my business from there, but I’ve never given a thought to being any place but in Nebraska.”

Who: Traci Tapani, Co-President, Wyoming Machine Site History: Founded in leased space in Wyoming, Minnesota, in 1974 by current president’s father. Acquired larger space five miles away in an industrial park in Stacy.

Reason for Location: Expansion demanded additional space.

Why Wyoming: “For manufacturers in Minnesota, the supply chain is well developed. I do not do plating or painting, but I have many companies located close to me who do. If I need specialized welding, I have easy access to suppliers. We have a very stable workforce here of talented and educated people. If they do not have the specific skills we need as our needs evolve, they are trainable. It’s impressive that as a small business owner I can say that.”

Who: Jim Hawkins, President and CEO, Kenall Manufacturing Site History: Founded in 1963 by Ken Hawkins in a Gurnee, Illinois, manufacturing plant. In September, Kenall announced plans to move across state line to Wisconsin into a 354,000-squarefoot facility to be completed in 2014.

Reason for Location: Facilities modernization. Facility upgrade includes advanced-manufacturing equipment for fabrication, finishing and assembly capabilities and certified UL testing facility.

Relocation incentives not immediately announced.

Why Wisconsin: “As Kenall continues to grow, this new headquarters is a commitment to our future and manufacturing in the United States. We look forward to watching our building take shape as we expand Kenall’s presence in the heart of America and beyond.”

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Missouri (No. 31): Building Business The Show-Me State has targeted development of eight industries: agribusiness, automotive, defense, energy, finance, information technology, life sciences and transportation-logistics. Big gainers through 2020 are projected to be the building-construction and metal-fabrication fields. Missouri’s tax burden ranks 17th lowest in the country, and it ranks 16th according to the Tax Foundation’s State Business Tax Index. Missouri spends about $97 million a year on incentive programs, primarily corporate income tax credits, rebates and reductions. A recent restructuring has streamlined the incentive process from four applications to one and a popular tax-refund program is billed as 100 percent refundable. Companies in the finance and insurance sectors are the two top recipients.

Michigan (No. 44): Gunning for Right-to-Work Boosters hope becoming a Right-to-Work state, as well as recent tax reforms will help stem years of decline. In addition to automotive manufacturing (See sidebar, “Detroit’s Debt Dilemma, p. 57), Michigan is home to major clusters of furniture manufacturing, medical-device manufacturing and IT employers. Professional and business services, trade, transportation, utilities and construction are staffing up now through 2015, says RSQE Forecasts of Ann Arbor. Michigan’s tax burden ranks 18th highest in the nation, and it ranks 14th in the Tax Foundation’s State Business Tax Climate Index. “The tax climate has improved dramatically over the past three years,” says state chamber chief Rich Studley. Michigan spends about $6.6 billion per year on incentives programs, the largest in the Midwest, representing 30 cents of every budget dollar. Top incentives are sales tax refunds, exemptions and other sales-tax discounts, followed by property-tax abatements. The major recipients are manufacturing companies, followed by the film industry and alternative-energy producers.

Illinois (No. 48): Pension Problems VEER

The Prairie State ranked third from last in a recent economic outlook report released by the American Legislative Exchange Council, reflecting such factors as corporate tax rates, inheritance taxation, workers’ comp costs and outward-migration patterns. Thanks, in large part, to its massive pension liability, Illinois has the lowest credit rating of any state. Illinois “is not on the radar of the site-selection community,” declares site selector Hess, a state resident himself. Still, Chicago remains the business capital of the Midwest, home to such mammoths as Boeing, Motorola and McDonald’s. Key industries include machinery, food processing, electrical equipment, chemical products, publishing, metal fabrication and agriculture.

Doing business in the state can be challenging; the Illinois Policy Institute rails at the state government’s “arbitrary and anti-growth policies.” Illinois spends about $1.5 billion per year on incentives like sales-tax refunds, exemptions and other tax discounts. Agriculture concerns are the top recipients, followed by manufacturers.

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VEER

DETROIT’S DEBT DILEMMA The city’s Chapter 9 filing is the largest municipal bankruptcy in U.S. history.

Business interests across the Midwest supported the efforts that recently landed the City of Detroit in bankruptcy court, in hopes of stemming decades of financial decline and governmental ineptitude—and recreating a city built on manufacturing prosperity.

The heart of the concern over Detroit’s financial future is its debt—$18 billion in unfunded municipal employee pensions, health care obligations and bond debt. That was the figure put forth by the lawyers pushing for bankruptcy.

Organized labor and other creditors argue that the true amount is a fraction of that figure.

“We can’t turn Detroit around until we shed the albatross of the city’s balance sheets,” says Sandy Baruah, president and chief executive of the Detroit Regional Chamber. Across Michigan, manufacturers, business leaders and government officials believe bankruptcy is the best option for reversing decades of decline, rebuilding urban neighborhoods and shoring up an economic base.

However, only time will tell how the move will play out.

“There is no precedent for a Chapter 9 bankruptcy filing of

this magnitude,” says Paul Hage, a Southfield, Michigan insolvency and reorganization lawyer and president of the Detroit/ Grand Rapids chapter of the Turnaround Management Association. (He also represents a bond holder in a potential settlement.) Several California cities, including Stockton and San Bernardino, have completed Chapter 9 restructuring, as has Orange County. Those precedents, however, pale in comparison with the Motor City in terms of scale.

Advocates say the turnaround’s already begun, citing an influx of employers into downtown office space. Firms like Quicken Loans, Compuware, KPMG and Deloitte have hired for and added more than 12,000 jobs over the past five years.

Companies like these, says Baruah, are invested in seeing a Detroit where employees can live where they work. He calls low vacancy rates for new housing and prime office space proof that the turnaround’s already begun. “We’d like to see the city leadership structure a budget and live within their means,” he says. “Detroit needs to deliver better services at a much lower price. We need to attract investment capital, and that won’t come until financial sanity is restored.” —WS JANUARY/FEBRUARY 2014

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TECHNOLOGY

Getting Advanced Analytics Right What CEOs need to know about advanced marketing analytics in the era of Big Data.

By Mark Taylor

Key Takeaways A truly effective program of advanced analytics requires three capabilities: • You must be able to identify, engage and activate your best customers by extracting the right insights from an overflow of available information • You need the capabilities, or a customerengagement agency partner with the capabilities, to build, implement and manage an advanced analytics platform and approach that is right for your business • You must create an organizational culture that is customer-obsessed by breaking down the marketing channel silos

Most CEOs understand that they need to be obsessed with customer engagement to drive growth. They need to identify their best customers, engage them and activate them across numerous, critical touch points, while creating meaningful and authentic branded experiences that culminate in the most important interaction of all—the transaction. This is where consumers become customers and where the value exchange is consummated. The question is how to accomplish this arrangement.

The key pillars of customer engagement are customer insights, brand experiences, analytics (all fueled by customer data) and enabling technologies. Each component strengthens the others to create relevant engagement between customer and brand. Take Amazon, for example. They have captured 16 percent of all e-commerce sales by combining these four pillars to create a spectacular customer experience and high levels of customer engagement. However, unless you get the advanced analytics right, you won’t uncover the unique customer insights that serve as the foundation.

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TECHNOLOGY

When used correctly, advanced marketing analytics allow organizations to study how their best customers behave and— more importantly—why. They help differentiate brands and allow enterprises to seize marketplace advantage. Consider Zappos’ removal of a key barrier in buying shoes on-line by making the return process both free and simple. They also put in place a customer experience post-sale that leads the industry, reinforcing the quality of the occurrence and the resulting engagement.

Samsung, meanwhile, has become a serious player in the smartphone category by focusing on the consumer types most

likely to be attracted to their brand and crafting specific strategies that appeal to the needs of that audience—an example of big data leading to sharp focus. The smartest analysis engenders focus for the company, not more information. According to MIT, CEOs who effectively employ advanced analytics in their businesses can expect to see 5-6 percent higher profitability.

Insights gained from advanced analytics apply at every stage of superior customer engagement—from marketing strategies and insights to brand experiences to sales and CRM—and are key to accelerating growth. Analyses are generally focused in three areas: • Descriptive analytics—using historical data to understand your customers’ behavior.

• Predictive analytics—using data to predict trends and patterns in customer behavior.

• Prescriptive analytics—using data to optimize your business and setting inventory levels.

Aligning Analytics

5 Questions to Ask Your CMO

Ultimately, the customer has to be at the heart of the business, and the business has to move actionable insights swiftly toward execution to maintain relevance. CEOs with traditionally structured marketing departments should integrate them around their best customers. If need be, they should find a CMO who understands how to get the job done.

1. Do you have a multi-year vision and plan that defines the roadmap and business case for a new level of customer engagement?

2. Do you activate marketing based on a full understanding of your “consumer’s DNA?” 3. Is your marketing department aligned and rewarded around the consumer, not the channel?

4. Is your marketing platform agile, self-optimizing and performance-based?

5. Has the culture of the entire organization been engaged to understand the new reality?

I often hear CEOs say they want to become more customer-centric; but if the organization isn’t aligned and focused, they won’t succeed. In working with companies, we often find that each channel leader is entrenched in a silo with his or her own data pool that he/she is reluctant to give up—because that’s the way he/she is incentivized. In the initial discovery phase, we will gather with managers from stores, from online, from merchandising, from marketing and from analytics; and they have rarely talked together, if at all. They most often see the customer through the lens of the channel, not that of the company.

It is difficult to change such organizational behavior. The C-suite is aligned; but below it, managers are not. It requires a shift in compensation, incentives and evaluation. Teams must align with each other, charged with improving the customer experience and their subsequent engagement, and collectively rewarded as a consequence of improvement. We see employees and middle managers hide or protect their data at all cost because they have no incentive to help other divisions. For this reason, the C-suite level should own advanced analytics and not consign them to the channels. Optimization must be to the consumer and not the channel.

Ideally, advanced analytics reside closest to the customer, where marketers can quickly develop and implement decisions from insights. This often requires reorienting marketers to a holistic approach, considering the customer experience from the perspective of every potential touch point with the company. Every customer within a target market has individual motivations and needs that cross numerous channels and touch points. Advanced analytics focused on the customer gives companies a chance to meet those needs. A leading apparel retailer, for example, identified three core target segments, each with

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differing motivations and channel preferences. The company focused its efforts on personalizing their marketing communications to each of these segments; and as a result, has more than doubled its online revenue in less than a year. Big data + focusing on what matters = big results.

CEOs who have had bitter and expensive experiences with ERP systems should be less leery about implementing advanced analytics platforms because a key to using them well is to start small and grow. Each phase should be self-funding and lead naturally to the next phase of deployment. Start with the biggest marketing pain point; then, follow a rule of thumb: 30 days to prove a concept, 90 days to install the project and 120 days for total completion and achievement of a planned-for ROI. Investment is usually under a million dollars for software and services, with payback in a year or less. For a leading national insurance company, we focused our efforts on optimizing customer engagement for one or two key segments in the channels that we found to be most relevant to them. Once we established early successes against a limited number of segments and in a restricted number of channels, we were then able to extend the program to a broader target audience. We often employ this pragmatic approach with each phase charged

with earning its way to the next.

Each phase should prove its value in key performance indicators. CEOs should focus on outcomes—what made the difference and how. Metrics can include the bottom line, customer retention, average order value, conversion, loyalty, lead-to-revenue conversion, qualified leads, etc. Whatever metric the CEO uses, he/she should demand an outcome within a clearly established and agreed timeframe. This approach will vary according to the objective, of course. Increasing customer retention in the automotive field requires a longer period than increasing average order value for an online retailer. If it can’t be done, the focus point is wrong.

It’s important to remember that the goal of advanced analytics is to drive business decisions. This is why CEOs retain customer engagement agencies to advise them—with real-life examples of increased conversion rates, deeper loyalty and greater penetration—with returns in three to six months. CEOs need to know the practical points for leveraging analytics to make better customer-focused decisions.

Mark Taylor is chief operating officer of Rosetta, one of the nation’s largest digital and interactive agencies.

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ESSENTIALS

How to Get the Most Out of Your COO

By Fran Hawthorne When David R. Lumley, one of two co-chief operating officers at Spectrum Brands, was promoted to CEO in 2010, the maker of Cutter Insect Repellent, Rayovac batteries and other consumer products eliminated the COO position. Now, the Madison, Wisconsin-based company is considering reviving the job.

At first, Lumley says, “We created a flatter organization,” saving $10 million to $20 million annually. Each business unit was run by a president, and shared services like finance, legal, human resources and information technology—which had been part of the COO portfolio—were consolidated under an upper-mid-level director who reports to the CFO. During the intervening years, Spectrum more than doubled in size to $4.3 billion in sales from $2 billion. Now, Lumley has found himself spending roughly half his time doing operations-type work, such as overseeing his divisional managers.

He would like to hand a lot of that effort off to another manager and thus have more time to focus on compensation, e-commerce, expansion, integrating last year’s $1.4 billion acquisition of Stanley Black & Decker’s hardware and home improvement group and other strategic issues.

If Spectrum does bring back the COO job, however—a decision that’s expected next year—Lumley says it should be assigned to a single person with a clearly defined focus.

“The CEO and COO should be complementary,” he says. “I wouldn’t hire a clone.”

The chief operating officer position is probably the most amorphous in the C-suite. CEOs have historically defined the

role according to their individual preferences and needs, as well as macroeconomic and industry pressures. Today, those pressures include globalization, the economy and technological change.

Because its purview is the entire company, the COO post is the most obvious stepping-stone to the top job; but for the same reason, its functions can be dispensed to other executives, and thus it is often the easiest to eliminate. According to the most recent Crist-Kolder Associates’ Volatility Report of America’s Leading Companies, the number of large companies with a COO has been steadily declining, from 47.4 percent in 2000 to 35.4 percent in 2012.

Define the Differences “The best way for the CEO to leverage the role is to have a well-defined job and set of rules,” says George L. Davis, co-managing partner of the global board practice of executive search firm Egon Zehnder.

For instance, it’s all well and good if CEOs want a No. 2 who can reliably fill in for them on business trips or at meetings.

But first they must define just who will regularly attend which meetings. “If you willy-nilly go through days and months where sometimes the COO shows up and sometimes the CEO, it gets very confusing,” says Cindie Jamison, a senior partner at the New York-based executive search and consulting firm Tatum.

Tom Feeney, CEO of Safelite Group, a $771 million autoglass repair company based in Columbus, Ohio, divided the functions neatly when he promoted Steve Miggo to senior vice president of operations (the equivalent of COO) last

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year. Miggo has responsibility for the company’s auto-repair business, and Sweeney oversees the other three business units. Among other benefits of that move, Sweeney says he now spends less time traveling to the 500 retail stores.

At Southlake Regional Health Centre, a $350 million hospital in Ontario, Canada, the division between CEO Dave Williams, M.D., and COO Gary Ryan is different but equally clear-cut: Williams does the external outreach to universities, donors, other hospitals and government agencies, while Ryan runs day-to-day operations with internal managers. By delegating weekly manager meetings and other such in-house responsibilities “I’m freeing up a morning a week,” figures Dr. Williams—who is both an emergency physician and a former astronaut.

Some experts say that the chief operating officer’s job description has recently expanded beyond day-to-day operations into more strategic areas. In the past, these executives were involved only in short-term planning, says Brad Newman, Partner/Principal, Performance Improvement, Advisory Services at consulting firm EY (formerly Ernst & Young). “What we’re seeing now,” he adds, “is the COO being a louder voice at the table, as it relates to discussions of three-to-five-year horizons.”

Southlake COO Ryan, for instance, not only participated in the hospital’s review of its strategic plan, but he is now in charge of a wide-ranging project to partner with tech companies to develop new software programs.

Balance of Talents Increasing the COO’s duties is particularly important if the CEO is specifically grooming this person as the heir apparent. According to a recent report by EY, The DNA of the COO, which analyzed two surveys of a total of more than 500 top executives, “Forty percent of COOs polled aspire to be promoted to CEO within the next five years.” That was a much higher percentage than for other C-suite colleagues.

(The survey did not calculate how many COOs actually achieve this career goal; but according to the Crist-Kolder report, 46.7 percent of new CEOs were previously COOs, the majority promoted from within.)

While managerial experience is obviously important in a COO, more and more companies are looking at other criteria. One common strategy is to seek a chief operating officer with a background totally unlike that of the chief executive— someone who can fill in the blanks. A CEO who rose through the marketing ranks might want a COO with finance experience, for instance. “The skill sets are complementary but different,” says Dr. Williams of Southlake Regional.

At Safelite, Feeney chose Miggo to run operations because of his “people” skills: Miggo had been Safelite’s head of human resources for four years and held HR management

“The best way for the CEO to leverage the role is to have a well-defined job and set of rules.” positions at four other companies before that. “The COO must have an understanding of what motivates people, providing them [with] the [leader] who can create loyalty and trust,” explains Feeney.

One of Miggo’s first projects was to craft a “technician’s pledge” that, Feeney says, has inspired the staff and is now used in the company’s commercials. The pledge is: “Service so great, it’s memorable.”

Waiting for a COO Pat Patel, the CEO of Intelliswift, could probably use Miggo right now. Patel estimates that he is spending eight hours per week working with outside counsel to set up an employee stock-ownership plan (ESOP) for the nearly 500 staffers of his software development and systems integration company based in Fremont, California. “That is work that could be better handled by the operations person,” he says.

However, Intelliswift has no COO. Patel figures the company needs $50 million in revenue or 500 employees to justify that role, and it is only at $38.7 million now. He hopes to hit the milestone in six to 12 months, but he didn’t want to delay the ESOP. Having a COO, Patel says, would mean that “I don’t get pulled into non-revenue-generating kinds of tasks that would take my focus away from the strategy that we have laid out.”

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EXECUTIVE LIFE

The

Second Home Search Looking for a haven from the daily bustle? Here’s how to find and manage a second home.

By Michael Gelfand

If you were to conduct an informal, anonymous lifestyle poll of CEOs, most would admit that they give up time at home to gain it at the office an on the road. That’s not a news flash— that’s just life in the corner office, albeit with a Shakespearean twist. “Uneasy lies the head that wears a crown, especially when that head lies on a lumpy hotel pillow 24 weeks out of the year.”

This all-too-typical work/life imbalance is part of the appeal of second-home ownership for CEOs. Some seek a vacation home to enjoy with their spouses, kids and friends, or a place for the family to summer—and where they can join the fun on weekends. For others who frequently travel to the same region, investing in a self-styled pied-à-terre offers a pragmatic alternative to staying in a homogenous, impersonal hotel. Many also appreciate the tantalizing investment angle of an asset

that can appreciate in value over time or whose cost can be offset by rental income.

Whatever your rationale, if you’re considering a second home, now may be the time to turn concept into reality. While home prices nationally are rising steadily, vacation-home markets have experienced a more sluggish recovery since the real estate bubble bust, according to a recent report in The Wall Street Journal. However, this buyer’s market for second-homes is poised to change, according to the 2013 Investment and Vacation Home Buyers Guide from the National Association of Realtors, which notes that the combination of a recovering stock market and attractive prices is driving purchases of second homes throughout the U.S. In fact, transactions for existing and new vacation homes—which accounted for 11 percent of all home sales—rose more than 10 percent to 553,000 in 2012.

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EXECUTIVE LIFE A Location for Your Vocation From ski chalets and remote country cottages to cattle ranches, from panoramic beachfront homes to ultra-luxury high-rise apartments—there’s a second home out there to meet just about every fancy. For those who appreciate the tried and true, a handful of perennial hotspots within the continental U.S.—think Vail, Aspen, Hilton Head, Palm Beach, Martha’s Vineyard, the Hamptons and Miami—remain synonymous with second-home ownership. There are also numerous less publicized but no less luxurious destinations, as well as a host of high-end resort communities popping up in more taxfriendly regions of the country to offer potential vacationers and investors desirable homes and lifestyle amenities.

While locations that offer easy access to favorite pastimes, such as beach lounging and skiing, will always appeal, more and more second-home buyers are prioritizing other attributes, notes Dena Hospodka, luxury agent and managing broker for Coldwell Banker Select in Reno, Nevada. “[Location] has become less important in the ultra-luxury space,” she explains.

“CEO buyers used to look at specific neighborhoods, but now the market is more global and they’re opening up their options and focusing on proximity to airports or an FAA-approved helipad to let them come and go at will.”

In a world where 24/7 connectivity is critical, business leaders also look for places where they can easily transition between work and play. “CEOs with families want to be able to provide special places where their kids can swim, ski and play golf or share hobbies as a family, but they’re also looking to have the ability and convenience to run their business from that home without being bound to a specific location,” notes Hospodka.

For most buyers, there are also less tangible, more visceral criteria, such as a scenic vista, that deeply affect how you respond to a home. In fact, it’s all too easy to visit a gorgeous home and fall in love, warns Timothy Corrigan, founder and principal of the architectural restoration and design firm Landmark Restoration, who urges second-home shoppers to honestly assess how they intend to use a home and then weigh those intentions against reality.

Do Your Due Diligence “I help my clients think about the location and the ease of literally getting there,” Corrigan explains. “How close are the airports? How far is the second home from where you’re based?

Are there easy ways to get from the nearest transportation to the home? If you’ll use it infrequently but for weeks at a

Proximity to year-round outdoor activities is a plus for luxury home buyers in Lake Tahoe, Nevada.

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Why Invest In Nevada? dŚĞ ^ƚĂƚĞ ŽĨ EĞǀĂĚĂ ŽīĞƌƐ ŽŶĞ ŽĨ ƚŚĞ ŵŽƐƚ ĨƌŝĞŶĚůLJ ƚĂdž ĂŶĚ ďƵƐŝŶĞƐƐ ĞŶǀŝƌŽŶŵĞŶƚƐ ŽĨ ĂŶLJ ƐƚĂƚĞ͘

tŚLJ ĂĚǀŝƐŽƌƐ͕ ĐĞůĞďƌŝƟĞƐ͕ ŝŶǀĞƐƚŵĞŶƚ ďĂŶŬĞƌƐ͕ KƐ͕ ĂŶĚ ĂƚŚůĞƚĞƐ ĐĂůů EĞǀĂĚĂ ŚŽŵĞ͗ ͻ EŽ ƉĞƌƐŽŶĂů Žƌ ĐŽƌƉŽƌĂƚĞ ŝŶĐŽŵĞ ƚĂdž ͻ EŽ ŐƌŽƐƐ ƌĞĐĞŝƉƚƐ͕ ĨƌĂŶĐŚŝƐĞ͕ Žƌ ŝŶǀĞŶƚŽƌLJ ƚĂdž ͻ EŽ ƚĂdž ŽŶ ŝƐƐƵĂŶĐĞ Žƌ ĐŽƌƉŽƌĂƚĞ ƐŚĂƌĞƐ ͻ EŽ ƌĞƋƵŝƌĞŵĞŶƚƐ ĨŽƌ ƐŚĂƌĞŚŽůĚĞƌƐ Žƌ ĚŝƌĞĐƚŽƌƐ ͻ EŽ ƚĂdž ŽŶ ƐĂůĞ ŽĨ ƚƌĂŶƐĨĞƌ ŽĨ ƐŚĂƌĞƐ ͻ EŽ ƐƵĐĐĞƐƐŝŽŶ ŽŶ ŝŶŚĞƌŝƚĂŶĐĞ ǁŝƚŚ /Z^ ͻ EŽ ƐŚĂƌŝŶŐ ŽĨ ŝŶĨŽƌŵĂƟŽŶ ǁŝƚŚ /Z^ ͻ ^ŝŵƉůĞ ĂŶŶƵĂů ƌĞƋƵŝƌĞŵĞŶƚƐ ͻ EŽ ŝŶŝƟĂů Žƌ ŵŝŶŝŵƵŵ ĐĂƉŝƚĂů ƌĞƋƵŝƌĞŵĞŶƚƐ

2500 Manzanita Lane Reno’s Most Regal Estate ŶũŽLJ ϮϬͲƉůƵƐ ŐĂƚĞĚ ĂĐƌĞƐ ŽŶ Ă ŚŝŐŚ ƉůĂƚĞĂƵ ǁŝƚŚ ϭϴϬͲĚĞŐƌĞĞ ǀŝĞǁƐ ŽĨ ƚŚĞ ƐƚƌŝŬŝŶŐ ĐŝƚLJ ƐŬLJůŝŶĞ ĂŶĚ ŵŽƵŶƚĂŝŶƐ͘ &ĞĂƚƵƌĞƐ ŝŶĐůƵĚĞ DĞdžŝĐĂŶ ƌĞĚͲŽŶLJdž ƐƵƌƌŽƵŶĚ ĮƌĞƉůĂĐĞƐ͕ Ă ŐŽƵƌŵĞƚ ŬŝƚĐŚĞŶ ǁŝƚŚ Ă ƐĞƉĂƌĂƚĞ ĐĂƚĞƌĞƌ͛Ɛ ŬŝƚĐŚĞŶ͕ Ă ĨŽƌŵĂů ĚŝŶŝŶŐ ƌŽŽŵ ǁŝƚŚ ƌŽƚƵŶĚĂ ĐĞŝůŝŶŐ͕ ŽĸĐĞ͕ ĂŶ ĞdžĞƌĐŝƐĞ ƌŽŽŵ͕ Ă ƚŚĞĂƚĞƌ ƌŽŽŵ͕ ĂŶ ŝŶͲŐƌŽƵŶĚ ƉŽŽů ĂŶĚ ϯ ĂĚĚŝƟŽŶĂů ďĞĚƌŽŽŵ ƐƵŝƚĞƐ͘ ůŽƐĞ ƚŽ ǁŽƌůĚͲƌĞŶŽǁŶĞĚ >ĂŬĞ dĂŚŽĞ͕ ƉƌĞƐƟŐŝŽƵƐ ŐŽůĨ ĐŽƵƌƐĞƐ͕ ƉŽƉƵůĂƌ ƐŬŝ ƌĞƐŽƌƚƐ ĂŶĚ ƚŽƉͲƌĂƚĞĚ ƐŚŽƉƉŝŶŐ ĂŶĚ ĚŝŶŝŶŐ͘ &ůLJ ŝŶ ĂŶĚ ŽƵƚ ŽŶ LJŽƵƌ ŽǁŶ ƐĐŚĞĚƵůĞ ǁŝƚŚ ƵƐĞ ŽĨ Ă ƉƌŝǀĂƚĞ & ĂƉƉƌŽǀĞĚ ŚĞůŝƉĂĚ Žƌ ƚĂŬĞ ĂĚǀĂŶƚĂŐĞ ŽĨ ƚŚĞ ĐŽŶǀĞŶŝĞŶƚ͕ ĞĂƐLJ ĂĐĐĞƐƐ ƚŽ ZĞŶŽͬdĂŚŽĞ /ŶƚĞƌŶĂƟŽŶĂů ŝƌƉŽƌƚ Žƌ ƚŚĞ dƌƵĐŬĞĞ dĂŚŽĞ ŝƌƉŽƌƚ͘ ϰ ďĞĚƌŽŽŵƐ͕ ϱ ĨƵůů ĂŶĚ ϯ ŚĂůĨ ďĂƚŚƐ / Ψϭϴ͕ϱϬϬ͕ϬϬϬ / sŝĞǁ ĚĚŝƟŽŶĂů WŚŽƚŽƐ͗ 2500manzanita.com

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EXECUTIVE LIFE

COST CONSIDERATIONS Before you make a bid on your dream vacation residence, you’ll need to take a hard look at not only how you’ll pay for your new home but what ownership will cost. While mortgage rates remain relatively low, many luxury home buyers still prefer to sidestep them entirely. According to the 2013 Investment and Vacation Home Buyers Guide from the National Association of Realtors, all-cash purchases remain very popular in the investment- and vacation-home market, with nearly half of all investment and vacation homebuyers going that route.

“We’re not seeing the banks doing many jumbo portfolio loans anymore, and even if they are willing, in my experience with higher-end homes cash is always preferable for everyone because it closes the deal very quickly,” says Coldwell Banker Select’s Hospodka.

However, even if you buy with cash, the costs associated with ownership— such as property taxes, utilities, insurance, community dues and security—add up fast. Vacation homes don't qualify for a homestead tax exemption and often require higher homeowners insurance premiums. What’s more, flood insurance on homes on or near waterfront can be pricey, as can hiring a property manager to check on and maintain your home when you’re not there. Be sure to consider all the ancillary costs before you take the ownership plunge.

In Park City, Utah, buyers sometimes offset these carrying costs by renting out their homes when they aren’t in use, notes Matthew Sidford, a principal of Park City, Utah-based Sidford Real Estate (an affiliate of Christie’s International Real Estate), who urges home buyers looking to go that route to rent to investigate the area’s rental market.

“Many homes rented out by our clients are located in ski valleys and are affiliated with country clubs, swimming pool, and front-desk check-in, which renters find attractive,” he says. “And if you rent your place three or four weeks out of the year you cover your own cost of ownership.”

time, then the ease of getting there isn’t as relevant, but if it’s for weekends, it becomes an issue. It’s obvious, but it’s a key consideration: If it’s too difficult to get to, you won’t go there because you’ll be thinking about the trek.”

Happily, you have the business acumen to vet prospective second-home options. As a CEO, you constantly evaluate complex opportunities, and this one is no different.

Analyze a potential home as if it were a new business you are considering buying. “Ask yourself what the anticipated needs and uses are,” suggests Corrigan. “The functionality and lifestyle configurations are very important. I’ve had clients who have bought much bigger places than they needed, or the converse where they think it’s personal escape and then find out they don’t have room or facilities for how they really want to use it.”

“You have to know whether you want the history of a trophy property or the bells

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ad index Albuquerque Economic Development abq.org 61 Butler Manufacturing butlermfg.com/BeAMaker Outside back cover C12 Group C12group.com 12 Coldwell Banker Select Real Estate cbselectre.com 67 EY ey.com/advisory 3

The owner of this southern California home travels between this lush retreat and residences in Washington, D.C. and Florida.

Enterprise Florida perfectbusinessclimate.com 49

Photo Credit: Michael McCreary

and whistles of new construction,” he adds. In other words, make sure that “charming” really is more important to you than “air conditioning” or you’ll live to sweat—and regret. It’s also crucial to consider the relative time, effort and cost of any updates you’ll be taking on. For example, changing a home’s interior color is simple enough, but tearing into plaster walls to overhaul the plumbing is an exponentially more costly and time-consuming endeavor.

If, however, you have the time and resources, don’t be put off by a crumbling stone wall, a dark living room or a dated kitchen.

“There’s a solution to any problem if you have enough money to throw at it,” says Corrigan, who suggests bringing in experienced professionals to assess your concerns and estimate the cost of mitigating them. “Call in the experts and figure it all out before you buy it, rather than make tradeoffs about the way you want to live after the fact.”

Ultimately, a potential buyer should think very hard about how they’ll use property, than buy or build accordingly. “That sounds obvious, but you’d be amazed at how challenging it can be,” says Corrigan. “Real estate can be so emotional. Everyone says to themselves, ‘I love this, I’ll make it work;’ but trust me, you’re much better off doing all of the serious, rational thinking first.”

Greater Fort Lauderdale Alliance lesstaxing.com 21 Indiana Economic Development iedc.in.gov Inside back cover Louisiana Economic Development opportunitylouisiana.com/customfit Inside front cover Michigan Economic Development Corp. michiganbusiness.org/CE 5 Ransford Talent ransfordtalent.com 7 Wisconsin Economic Development Corp.

Advance.InWisconsin.com 11

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FLIP SIDE

Imagine a world where sophisticated robots replace flesh-and-blood leaders. by

Joe Queenan

The newest and most exciting development on the technological horizon may well be the lethal, autonomous robot (LAR). The LAR is a drone that can make its own decisions about attacking targets based on inputs provided by whomever happens to own the drones. You point it in the right direction, you describe the kinds of targets you want it to take out and it executes. The advantage of such pitiless, Terminator-type weapons is that they run on autopilot and do not require any additional input whatsoever from human beings. Once they’re activated, they’re on their own. What’s more, because they are self-contained, they are difficult to hack into and re-program.

Not impossible to hack, but difficult.

“If a drone’s system is sophisticated enough, it could be less emotional, more selective and able to provide force in a way that achieves a tactical objective with the least harm,” says Purdue University Associate Professor Samuel Liles, an expert in cyber warfare. “A lethal, autonomous robot can aim better, target better, select better and—in general—be a better asset with the linked ISR [intelligence, surveillance and reconnaissance] packages it can run.”

Thus far, the use of LARs is only being discussed, in a military and strategic context, as powerful, anti-terrorist devices. The LAR knows the kind of target it is looking for, and it knows where to find it. So you dispatch it and bingo!

You have the desired result. But in fact, there is no earthly reason that the range of applications for these revolutionary devices should be so narrowly defined. In a sense, LARs simply mirror what some investment firms already do in the equities markets. They take aim and they attack. So there is no reason a portfolio manager could not be replaced by a drone. Or a series of drones—perhaps one for each market sector: automotive, tech, consumer durables and restaurants. The LARs could be fed the relevant data about earnings, return on equity, the size of the market and such variables as potential regulatory issues, and they would then be expected to make the proper, judicious, dispassionate decision. No fuss. No muss.

There are many reasons that the use of cold-hearted drones, rather than portfolio managers, is desirable. Whereas a human being might hesitate to pull the trigger on a risky investment, for any number of reasons ranging from fear that the market is already saturated to disliking the company’s management style to “having a queasy feeling about this company,” an investment-oriented LAR would simply make a cold-hearted decision to buy or sell the stock. Its logic would be perfectly simple: Sales are good, earnings are solid, earnings momentum is positive, the market is growing and competition is weak.

And the folks running this company know what they are doing. So go ahead and buy the stock. Or go ahead and short the company’s competitors. But whatever you do, just do it.

Let us go one step further and imagine LARs in the boardroom. Is it possible to envision a society where corporations are run by lethal, autonomous robots rather than flesh-andblood CEOs? Why, sure it is. In the fullness of time, we could easily have CEOs who are actually Terminator-like robots who make decisions based on pre-set inputs about costs, human resources, diversification and unexpected shifts in the underlying, economic climate. There will be no waffling, no backsliding, no sudden reversals of strategy. Once the LAR is in place, he will do the job he was hired to do. And an LAR replacing the CFO will help him. And the board of directors can stay home.

Obviously, replacing chief executives with drones will be the end of business leadership as we know it. This will have its downside; many CEOs are charismatic and inspiring in a way a drone could never be. They have the ability to garner headlines, rally the troops, face down the competition and stifle the naysayers. No drone, no matter how sophisticated, could ever stifle a naysayer. You could never replace Donald Trump with a lethal, autonomous robot, nor could a drone ever replace Larry Ellison or Jack Welch. But you could certainly get a drone to run Research in Motion or Sears. It’s hard to see how a lethal, autonomous robot could make things any worse. The situation with those companies is already lethal.

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FINAL WORD

“I am convinced that the enactment, this year, of tax reductions and tax reform overshadows all other domestic problems in this Congress, for we cannot lead for long the cause of peace and freedom if we cease to set the pace at home.

I am not talking about giving the economy a mere shot in the arm to ease some temporary complaint. This [tax cut] will increase the purchasing power of American families and business enterprises. It will, in addition, encourage the initiative and risk taking on which our free enterprise system depends; induce more investment, production, and capacity use; help provide the two million jobs we need every year and reinforce the American principle of additional reward for additional effort.”

To which American politician would you attribute the above quote? Mitt Romney? George Bush (41 or 43)? Newt Gingrich, perhaps? Or if you are a member of the mainstream media, maybe you think it was some Tea Party wing nut like Rand Paul. Nope. It comes from the 1963 State of the Union address of John F. Kennedy.

As we honor JFK in the 50 years since his martyrdom, we would do well to consider who he really was and what he actually believed, instead of the Camelot-ized persona that has been created to represent him to history. Firstly, this was a Democrat who believed in free markets and how incentives motivate people to create businesses and real jobs. The actual starting point of the supply-side, Keynesian debate about the effects of tax-rate reductions and the true cause for economic growth had their origins with his proposal to lower the top, personal-income-tax from an astonishing rate of 91 cent to 70 percent. This meant that the largest, individual reductions would go to a relatively small number of high-income taxpayers. Today, this approach would be indignantly dismissed by members of the Pelosi-Reid Democrats as “giveaways to the rich.” Kennedy softened this tactic politically by adding deep cuts in the bottom-income levels.

The tax cuts President Kennedy proposed in 1963 were the most dramatic since the Coolidge-Mellon cuts of the 1920s.

But back then, only 7 million people paid any taxes at all.

Even in Kennedy’s day, few people paid at the top rate. Today, middle-income people are paying at the “rich people’s” rate.

It was clear that JFK believed in the importance of incen-

tives and that government could best support its citizens by allowing them the freedom of keeping their money to invest and save as each saw fit. JFK’s martyrdom won the day for many of his ideas, including tax cuts. When the law was finally passed—taxes would be cut in stages, in 1964 and 1965—Treasury Secretary Douglas Dillon proclaimed that it would “help launch a brilliant, new chapter in the economic history of the United States.” As Harvard economist Lawrence Lindsey observed in his brilliant 1990 book, The Growth Experiment, “Even treasury secretaries can succumb to hyperbole; but with the benefit of hindsight, it is difficult to argue with Dillon’s assessment.” Real GDP grew 5.3 percent between 1963 and 1964 and a further5.8 percent between 1964 and 1965. Civilian unemployment rates fell from 5.7 to 4.5 percent between 1964 and 1965. Business productivity jumped 4.3 percent and 3.5 percent in 1964 and 1965, respectively.

The effect on personal income tax receipts was even more impressive. Though rates were cut between 17 and 30 percent from 1963 and 1965, receipts rose $1.2 billion—or 2.5 percent.

In addition, the federal deficit declined $4.8 billion to $1.4 billion over the same period.

By any measure, Kennedy’s tax cut was an astounding success. So much so, in fact, that it inspired a later President to try this again in 1982 and with similar success. Is it not curious that in the recent celebrations and retrospectives of JFK’s life and presidency that this one signal, indelible and incontrovertible achievement hardly received mention?

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