Chief Executive Sept/Oct 2014

Lessons from Entrepreneurs What CEOs can learn from startups, p. 38

Save That Company!

Rebound veterans offer remedies for failing firms, p. 26

Private Co. CEO Comp The reality of CEO pay is vastly different from the perception, p. 22

Corrupting Capitalism?

How cronyism is killing our economic system, p. 56

IS OBAMACARE STRANGLING BUSINESS?

2014_CE_SO_Cover.indd 1

8/26/14 11:24 AM

My business card says Founder.

So everyone thinks all these folks work for me. Everyone is wrong.

These people carry this business on their shoulders. Every day.

Good times and bad. No matter what they are up against.

These people don’t work for me.

I work for them.

Š 2014 Sprint. All rights reserved.

SprintBusiness_I_work_CEX_8x10.75_090114.indd 1

04/08/2014 11:24

CONTENTS

September/October 2014 No. 272

COVER STORY 32

Obamacare Threatens to Overwhelm CEOs As if struggling to adapt to the new healthcare landscape wasn’t hard enough for SMEs, now the new ground is shifting underfoot.

By C.J. Prince

32

06

Editor’s Note

08

CEO Watch • Derma Sciences’ Ed Quilty on the skin game • SCI’s Dan Rooney on finding a niche • POV: Nelson Obus takes on the SEC

16

CEO Confidence Index CEOs Are Optimistic, But Still Hope for Political Change

18

Chief Concern Great Boards Have Great Dynamics

By Dr. Thomas J. Saporito

20

Mid-Market Report Bye-Bye, Recession

22

CEO Compensation Report Widening Gap Between Public and Private Company CEO Pay

26

26

Leadership & Strategy How I Would Fix… Troubled companies abound. Here’s how veteran CEOs would tackle some of the solutions.

By Dale Buss

38

Innovation Act Like a Startup Five lessons bigger-company CEOs can learn from entrepreneurs.

By C.J. Prince

44

Technology Cloudy With a Chance of Rain-Making How cloud computing helps SMEs go global.

By William J. Holstein

38

SEPTEMBER/OCTOBER 2014

2014_CE_SO_TOC.indd 1

/

CHIEFEXECUTIVE.NET

/

01

8/27/14 2:05 PM

CONTENTS

September/October 2014 No. 272

50

CEO of the Year Celebrating the CEO of the Year The business world gathered to toast Walt Disney’s Bob Iger.

By Jennifer Pellet

54

CEO Roundtable Capitalism Under Siege

50

Does the perception of cronyism hurt business, and what should business leaders do about it?

By C.J. Prince

56

The Role of the CFO

ORT P E R L A ION

REG

THE THE SOU

AST

CEO Roundtable How broadening the finance chief’s role can enhance CEO effectiveness.

By Jennifer Pellet

58

Economic Development Regional Report: The Southeast A state-by-state look at what the nation’s Southeastern States have to offer.

By Warren Strugatch

66

Executive Life The Plane Truth Business aviation represents a win-win solution for CEOs, helping them save time, cut costs and indirectly create jobs in all 50 U.S. states.

By Michael Gelfand

58 71

Executive Leadership Leadership Lessons from West Point

By Jennifer Pellet

72

Flip Side High Finance

By Joe Queenan

Cover Illustration: Andrew Roberts Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 272, September/October 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 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each.

Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306.

66

Subscription Customer Service:

p | 818.286.3119 e | cexcs@magserv.com

w | chiefexecutive.net/magazine

02 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_TOC.indd 2

8/26/14 11:26 AM

B:8.25” T:8” S:7.5”

left coast right fit what happens when

Web company eagerly leaves Valley. It’s not often you hear of a web company departing Silicon Valley to pursue their dreams. But that’s precisely what Nathan Labenz and Jay Gierak of Stik.com did when they moved back to downtown Detroit. Back to a huge collection of engineering and design talent. Back to lower costs and welcome support from the state. And back to a collaborative community that will help accelerate their company like nowhere else could.

Because having it all come together is Pure Michigan.

1.888.565.0052 michiganbusiness.org/CE

360 West Maple Road • Birmingham • MI • 48009 • 248-203-8000

Client: MEDC Job #: MIEC Gen 10159908

Art Director S. Stallings

Ratio 1” = 1”

Copywriter None

Live

7.5” x 10.25” Trim 8” x 10.75” Bleed 8.25” x 11”

4 Color

Color

Acct Coord PROOFREADER Art DirECTOR

Creative Director None

7.5” x 10.25” Trim 8” x 10.75” Bleed 8.25” x 11” Live

Line Screen 133 lpi

MAC Artist

Ad #: 10159908RRRR

Ad Description 2014 Business Attraction Media Type Print Unit Full Page

Approvals: initial/date

Division: ME ECON DVLPT CORP.

copywriter product spec art buyer legal

Acc’t Executive None Acc’t Coordinator Chelsea Huguley MAC Artist Patrick J. Zech

Caption Left coast meets right fit

Production John Masyra

Images None

creative dir exec crea dir asst acct exec acct exec

Pubs Chief Executive

Sept/Oct Issue

Route

1

SPELLCHECKED

Saved at 8-5-2014 3:42 PM Printed at None HIGH RES. ART PLACED

by Jessica.Bidne / pat.zech

APPROVED EMAIL UPLOAD

APPROVED UPLOAD & PRINTOUTS

Pre Press McGraphics Fonts Avenir, Avenir LT Std

Inks CMYK NOTES: Work Order #52

sr acct exec acct super acct director production

B:11”

S:10.25”

T:10.75”

meets

The Best Tips, Tools, Insights & Practices for CEOs

EXCLUSIVELY ONLINE NOW How to Make Better Leadership Decisions Than GM, VA or Xerox

The 1969 Moon Landing: A Chief Executive’s Greatest Impact on History

By understanding the underlying behaviors involved in achieving results, leaders can determine how to effectively use positive reinforcement for the behaviors involved in improving performance.

One president’s vision, and one chief executive’s leadership and execution, turned big challenges into one of the greatest achievements in modern history. The methods they used are still applicable in business today.

WWW.CHIEFEXECUTIVE.NET/SOTOC1

Building a Culture of Safety and Prevention Amid War and Other Crises With Malaysian Air Flight 17 being shot down over the Ukraine and the war raging in Gaza, airlines are rethinking their safety policies.

Should companies be doing the same?

WWW.CHIEFEXECUTIVE.NET/SOTOC2

Lessons From a Manufacturer That Successfully Shifted to Onshoring Arnold Kamler, CEO of bike maker Kent International, talks about cost, profit margins, choosing a location and more.

WWW.CHIEFEXECUTIVE.NET/SOTOC3

Businesses Should Steer Clear of Crony Capitalism Mid-market firms must have policies in place to ensure they are neither benefiting by nor bearing the brunt of governmental favoritism.

WWW.CHIEFEXECUTIVE.NET/SOTOC7

CEOs Weigh in on How to Fix a Troubled Company

WWW.CHIEFEXECUTIVE.NET/SOTOC4

Chief Executive talked with CEOs about ways to straighten out one struggling retailer.

Soldiers to Software Engineers: How One Company Transitioned Heroes Into Corporate America

WWW.CHIEFEXECUTIVE.NET/SOTOC8

Epicor’s “Hiring Heroes” program gives the company a competitive edge with employees who are loyal, dedicated, punctual, adaptable, versatile and trained to “keep calm and carry on no matter what.”

Max Schireson resigned recently as CEO of MongoDB to spend more time with his family.

It turns out that while the 300,000 miles he logged in travel each year between New York and Palo Alto, Calif. were brief, the results were enduring.

WWW.CHIEFEXECUTIVE.NET/SOTOC5

Enduring Leadership: How We All Gain From Max Schireson’s Experience

WWW.CHIEFEXECUTIVE.NET/SOTOC9

5 Simple Mistakes Even Experienced CEOs Make By understanding the reasons behind these five costly mistakes, CEOs can prevent them.

WWW.CHIEFEXECUTIVE.NET/SOTOC6

04 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_TOC.indd 4

8/26/14 11:26 AM

CEN_1pgAd_v5.indd 1

4/17/13 10:38 AM

EDITOR’S NOTE

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Art Director Raymond Palmer

When the Law Is Not on Your Side Two external forces are driving CEOs to distraction. One is the fact that the Affordable Care Act (aka Obamacare) was built on shifting sands, and the other is the regulatory overreach of federal agencies such as the SEC, EPA, NLRB and others whose further intrusions into the marketplace are making business leaders cautious and lawyers rich. Combined, these unholy forces add to the uncertainty plaguing the U.S. economy.

According to this issue’s Mid-Market Report (p. 20), company leaders continue to express concern about the cost of healthcare and how it impacts their cost of doing business. In the years since the passage of ACA, the President has issued no fewer than 38 executive orders directing the Department of Health and Human Services to implement rules in direct contradiction of the law as written. Regardless of what one thinks of Obamacare itself, this creates a great deal of confusion for business leaders, particularly those in the middle market where many employers have elected to forego their own plans in favor having employees insured through exchanges.

This sense of uncertainty will likely continue as the law won’t be amended or repealed in the next two years. Further complicating matters is the fact that the administration is adding more and more waivers to groups and individuals. What the law actually means and what it may really cost in the end is now unclear. In our cover story (p. 32), we examine how mid-market company CEOs are coping with the impact of the law on their business and what, if any, action is open to them. Continued uncertainty is the last thing our slow-growth economic recovery needs just now as it impedes job creation when we need it most.

Tax inversions are very much in the news—and with good reason. The U.S. corporate tax system is the highest in the world. So it’s no surprise that many corporations are driving a truck through the one loophole that allows them to lower their tax bill by flipping their corporate citizenship to a lower tax country. (Who wouldn’t want to be domiciled in Ireland, where corporate rates are 12.5 percent vs. the U.S.’s 35 percent?) But there is an even larger burden facing American companies. It’s the debilitating cost of regulation. In an annual report for the Competitive Enterprise Institute, Wayne Crews calculated that the total cost of federal economic environmental and health and safety regulation is around $1.86 trillion annually.

Crews based his research on government data. The Federal Register, the daily depository of all of Washington’s rules, was 79,311 pages long in 2013. And the numbers, staggering as they are, keep going up. 3,659 rules were issued last year by 63 departments, agencies and commissions.

Congress passed and the President signed 72 laws in the same period. Most lawmaking is now done by the unelected.

What’s more troubling is that some regulatory agencies also use their authority in punitive ways. On p. 12, we explore the case of Wynnefield Capital’s Nelson Obus and his 12-year battle with the SEC over charges of insider trading. The 67-year old hedge fund manager ultimately triumphed and even had the federal judge instruct the SEC to issue an apology, but the struggle cost him $12 million and years battling in court. Congress is considering the Regulatory Accountability Act advanced by Congressman Lamar Smith (R-TX) and Sen. Rob Portman (R-OH). But this would only require agencies to base their rulemaking on evidence and cost benefit analysis. Congress will need to act to reign-in the abuse of powers by agencies that have become a law unto themselves.

Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi Contributing Editors Dale Buss William J. Holstein C.J. Prince Joe Queenan Warren Strugatch Graphic Designer Rob Cassella Online Editor Lynn Russo Whylly Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net

Director, Business Development Lisa Cooper 203/889-4983 lcooper@chiefexecutive.net

Director, Business Development Liz Irving 203/889-4976 lirving@chiefexecutive.net

Director, Business Development Dave Wallace 203/930-2705 dwallace@chiefexecutive.net

Marketing Director Michael Sherman 203/889-4978 msherman@chiefexecutive.net

Vice President Phillip Wren 203/930-2708 pwren@chiefexecutive.net

Wayne Cooper Chairman & President

Marshall Cooper Chief Executive

One Sound Shore Drive, Suite 100 Greenwich, CT 06830, 203/930-2700

06 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_EditorsNote.indd 6

8/26/14 11:24 AM

Finding The Needle in the Haystack is Just The First Step The Mid-Market Talent Experts Executive Recruiting

Talent Development

Employer Branding

Succession Planning

Assessment

Compensation

ransfordtalent.com

ransfordTalent.indd 1

12/16/13 10:32 AM

CEO WATCH | CASE STUDY

Skin Is the Game Derma Sciences’ Edward J. Quilty on turning a oneproduct wonder into a dominant player in its field.

By

Jennifer Pellet

THE CHALLENGE You’re a healthcare company CEO approached by a small wound-care company that has been treading water for more than a decade. The founder, a former nurse who built a $5 million company around an ointment she invented, shares her concern that the business she and her sons are now running will flounder due to changes in Medicaid and Medicare reimbursement policies. Fresh from engineering the successful sale of the company you were leading previously—MedChem Products, acquired by C.R. Bard—and somewhat familiar with the $5 billion wound-care marketplace, you see the opportunity to build a much larger enterprise.

THE CONTEXT After joining Derma Sciences as CEO in 1998, Edward J. Quilty lost no time embarking on an ambitious growth strategy centered on serving a growing need for effective ways to treat chronic, non-healing wounds, such as diabetic foot ulcers. “I lined up some investors, including friends in investment banking and a venture fund, and we started making acquisitions, both in traditional and advanced wound care,” he recounts.

The company’s new management vetted each potential acquisition carefully. “If it was a new product, we looked at the odds of getting approval by the FDA; if it was an existing one, we looked at things like how it fits into our business, who will buy it, how much it will cost to manufacture and what can we sell it for,” Quilty explains. “We’re also careful to acquire and develop products that fit into existing reimbursement [programs]. We spend a lot of money and time on lobbying and having a good understanding of the reimbursement landscape.”

THE RESOLUTION As a result of this acquisition spree, the company’s operations now fall into three divisions: standard wound-care products like bandages and gauze; advanced wound care products that employ proprietary, patented technology to treat chronic wounds and pharmaceutical product research.

While its standard wound products are essentially commodities, those developed for advanced wound care—such as Total Contact Casting (a patented cast designed to relieve the pressure on diabetic foot ulcers, allowing them to heal)—feature proprietary technology. For example, the company’s MediHoney Wound & Burn Dressing products are bandages saturated with manuka honey, a New Zealand honey that has potent antimicrobial properties to which Derma Sciences has exclusive access. “We’re the sole partner of the world’s largest manufacturing of this medical-grade honey, which works really well with wounds that are difficult to heal,” explains Quilty.

THE HURDLE Acquiring products with great potential in its niche proved only part of the company’s growth challenge. Lacking the name recognition of larger medical-device and wound-care companies, such as Covidien, Derma Sciences faced an uphill battle convincing healthcare facilities and professionals to try its products. “Five years ago, no one had heard of Medihoney,” says Quilty. “When our sales reps walked into a hospital or wound center and said, ‘I’m with Derma Sciences,’ people would say, ‘Who the hell is that?’”

Early on, sales and marketing overcame that hurdle by being “willing to run anywhere anytime,” he says. “In wound care, you can have a lot of clinical statistics, but you still basically have to make the rounds and talk to one clinician at a time. Now that we’re more established and our salesforce is bigger, we’re able to be more analytical and more disciplined about how we build relationships with facilities.”

THE ENDGAME Under Quilty’s tenure, Derma Sciences has grown its singleproduct line into a portfolio of 2,000 products and brought a 100,000-square-foot Canadian manufacturing facility into the fold. The company expects revenues to hit $95 million this year, driven largely by its advanced wound-care arm, which grew by 36.3 percent in 2013, as compared to the company’s overall growth rate of 9.7 percent.

08 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOWatch.indd 8

8/26/14 11:23 AM

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, Zx Pharma Partner/Managing Director, Healthcare, 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 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

WHO: Ed Quilty, CEO of Derma Sciences

C O N TACT U S

WHERE: Princeton, NJ

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

SIZE: $79.7 million in 2013 MOTTO: “Never give up.”

Letters to the Editor letters@chiefexecutive.net

Perhaps most exciting, however, is the pharmaceutical product for treatment of diabetic foot ulcers, burns and scars that Derma Sciences currently has in a Phase III clinical trial. “We’re in the final stage of development of what will be the first drug with a wound-healing indication,” explains Quilty, who sees the drug, known as DSC127, as a potential game-changer. “If it’s approved, it will be a first-line treatment for the 900,000 diabetic foot ulcers diagnosed in the U.S. each year. That represents hundreds of millions of dollars.”

THE LESSON For Quilty, perseverance in the face of adversity is a cornerstone of success. “I think the most important thing we did was [to] develop a strategic plan early on—which was to focus on using our commodity business to support a focus on technology and growth—and to stick to that plan,” he says. “Inevitably, you run into problems along the way; and the minute things go wrong, it’s easy for you or your investors to succumb to self-doubt. We are realizing success today because we didn’t abandon our strategy.”

Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 | Fax: 847.730.3666 advertising@chiefexecutive.net Reprints Phone: 203.889.4974 hdewing@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

SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOWatch.indd 9

/

CHIEFEXECUTIVE.NET

/

09

8/26/14 11:23 AM

CEO WATCH | CEO PROFILE

Total Transformation Dan Rooney on morphing a research-oriented specialty materials company into a niche manufacturer.

When Daniel Rooney joined SCI Engineered Materials in 2002, the company’s focus was still largely the same as it had been at its inception in 1987—exploring the market potential of what was then a newly discovered, hightemperature, superconductivity material called YBCO. Still run by its founder, Dr. Edward Funk, the company had “very few products and an awful lot of R&D,” explains Dan Rooney, CEO of SCI Engineered Materials. “Two people were working on 32 projects, so they weren’t accomplishing a whole lot.”

Charged by the board with transitioning the company toward a manufacturing focus, Rooney had his work cut out for him. Facilities were dingy and outdated and revenues were just $3 million, 50 percent of which stemmed from government grants. What’s more, Funk, who was the company’s primary source of funding, was ill and rapidly declining.

“I came on board in March and he passed away in December, so our funding sources disappeared when we were in the middle of a move,” says Rooney. “We had to raise money and basically refocus the company all at once.”

Rooney began by identifying projects with market potential.

One early focus became materials used to coat glass in products like thin-film solar panels, flat-screen televisions, insulated windows and the screens on computer devices. Today, for example, the company manufactures ceramic sputtering targets used by thin-film solar panel manufacturers to bond ceramic material—transparent conductive oxide—to the panel glass, which then facilitates the flow of energy in the solar cell. (Sputtering— commonly used for thin-film deposition and etching—is a process whereby atoms are ejected from a solid target material due to bombardment of the target by energetic particles.)

“You touch things every day that have thin film coatings on them,” says Rooney of the broad coating-materials market.

“Everything from anti-reflective eyeglasses to energy-efficient windows and iPad screens. What we do is try to identify niches where the volume is low enough that we won’t need to compete with big companies like Honeywell.”

The strategy appears to be working. SCI now boasts revenues of $8 million and sells to customers in 20 countries— and Rooney anticipates growth to accelerate going forward.

“We’ve been laying a lot of groundwork over the past four years, particularly in Asia, where it takes a while to get traction,” he says. “We expect to be doing a lot more business internationally over the next several years.”

WHO: Dan Rooney, CEO of SCI Engineered Materials LOCATION: Columbus, Ohio SIZE: $8 million EMPLOYEE BASE: 24 employees, 25 percent with advanced degrees BACKGROUND: Chemical engineering, Rutgers LEISURE INTEREST: Rowing on the Olentangy and Scioto Rivers

Reflecting on his leadership journey thus far, Rooney says that re-orienting the company toward a customer focus was one of the toughest challenges. Along the way, the company lost a number of researchers who preferred the pursuit of innovation over commercial application. “Looking back, I think the most important thing is to identify the people who will be on your team, who are on board with the idea that at the end of the day, the customer determines if you have a great idea,” he says. “Get that behind you as quickly as possible, because it’s just not a lot of fun, and then you can move forward.”

—Jennifer Pellet

10 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOWatch.indd 10

8/26/14 11:23 AM

SIAS813-ManateeMan-CEG-m.indd 1

2/4/14 4:49 PM

THORNS & ROSES

“C12 is the single-most important commitment I make to improve my business in every aspect.”

THE C12 DIFFERENCE

business with an eternal perspective.

Interested in membership or becoming a C12 Chair? Contact us today!

Christian CEOs & Owners Building GREAT Businesses for a GREATER Purpose™

ANDREW ROBERTS

If you’re a Christian CEO desiring the proven benefits of an executive roundtable, we invite you to explore The C12 Group, America’s leading Christian business forum.

THORN The CIA has embraced social media and joined Facebook and Twitter. Its first Tweet, “We can neither confirm nor deny that this is our first tweet,” was re-tweeted more than 75,000 times in just a few hours. Only in Langley can humor be classified.

ROSE Starbucks CEO Howard Schultz announced a new program to help pay college tuitions for employees. In partnership with Arizona State University, his company will offer discounted tuition for employees in the first two years of online instruction. If Starbucks workers go on to complete a four-year degree, Schultz’s company will pick up the complete tab for the final two years. Employees can pursue any degree and aren’t obligated to stay with Starbucks after graduation. Schultz hopes some baristas will stick around while they pursue their degrees.

A brilliant move by a CEO, who we hope will influence others.

336.841.7100 C12Group.com

2014_CE_SO_CEOWatch.indd 12

8/26/14 11:23 AM

Where life is a sound investment.

THE STAGE IS SET FOR YOU IN TENNESSEE. This is the place where work feels more like vacation. Those who don't believe us, have never worked in Tennessee. Every day more and more people are singing our praises. And for a good reason. Some say it’s the only place where the quality-of-life equals the quality of their work.

Put us to work at TNECD.com.

CEO WATCH | POINT OF VIEW

The Perils of Regulatory Overreach Since the 1980s, creeping precedent has allowed federal agencies to amass considerable regulatory and enforcement power. Undaunted by recent defeats in the courts, the SEC wants to become both judge and jury. But one small cap hedge fund managed to stop them in their tracks. by J.P. Donlon Last May, Nelson Obus stood outside the federal courthouse in Manhattan after a jury found him and two others innocent of an Securities and Exchange Commission charge for an alleged $1.3 million insider-trading scheme. Obus, who staunchly maintained from the beginning that he was innocent, felt vindicated, if weary, after 12 long years where the SEC, he feels, tried to intimidate him into settling the case.

A former Lazard manager, he later told reporters outside the courtroom that the case was less about him, but about the bullying tactics of the SEC, whose attorneys, in their zeal to prove they could notch up an insider-trader conviction, thought they could use their power to force him to capitulate.

Obus’s story would be unremarkable were it not that he and his partners surprised the SEC attorneys by refusing to settle.

The power of the SEC, like many federal agencies, is formidable and few companies resist it lightly. Last May, Obus argued in a Wall Street Journal op-ed that his case is just but one example of what he called an “unbridled regulatory overreach without accountability.”

“It’s about an abusive system that threatens the nation’s economic vitality by jeopardizing small business and its entrepreneurial spirit,” he adds. He won his case after incurring more than $12 million in legal and court costs. To many S&P companies, this amount is a rounding error, but to a small hedge fund run by Obus, his partner Josh Landes and eight staff members, it was not a trivial sum. Even a settlement requiring no admission of guilt, he feels, would have stained his small company’s reputation and stunted its growth. As it is, some 7 percent of investors withdrew their money because of the case.

Obus’ company, Wynnefield Capital, is a small New York-based hedge fund managing $330 million in assets with a limited number of investors, including some institutions. It crossed swords with the SEC as far back as 2002, when it bought a block of stock in SunSource, an industrial-products company based in Philadelphia.

Convinced that insider trading was involved the SEC requested information about Wynnefield’s purchase, which the company provided. Confident that the information and review would show that it behaved appropriately, Wynnefield was stunned when four years later the SEC began its campaign to indict the firm and Obus

himself. The SEC accused him of using an insider tip to buy shares in SunSource weeks ahead of its sale to Allied Capital, a trade that earned him a $1.3 million profit. Obus could have settled the case two years ago but chose instead to fight to prove his innocence. In 2010, a federal judge even sided with him, saying the SEC failed to prove its case. But The SEC won on appeal in 2012 and decided to make an example of Wynnefield.

Undeterred, the SEC indicates that it may take more of its law-enforcement cases away from courts and juries, altogether, by prosecuting defendants before SEC administrative law judges.

Since the passage of Dodd-Frank in 2010, the agency has increased the number of administrative law judges from three to five. In other words, an agency founded as a law-enforcement arm is moving to become its own judge and jury as well.

The problem of regulatory overreach is not confined to the SEC. Energy business leaders have worried for sometime about the EPA’s pernicious rulings, particularly those that make it impossible for the coal industry to operate. Two scholars at the Mercatus Center at George Mason University, Patrick McLaughlin and Richard Williams conducted a recent study that found that the accumulation of federal regulations slowed economic growth by an average of two percent per year between 1949 and 2005.

Not all regulations are anti-growth, but this finding supports several earlier studies by the World Bank and the Organisation for Economic Cooperation and Development (OECD) that found that the effects of certain types of regulations can slow growth when they impede innovation and entrepreneurship.

Why do you reckon your company was singled out and given the treatment it experienced?

At the time, there was some very suspicious trading that the SEC was looking at, and they were connecting the dots. The agency was criticized for not being vigorous in its oversight of hedge funds. Some members of Congress were critical of the agency for being lax. I don’t exactly know about the timing, but all of a sudden, three smaller hedge funds were told that a complaint would be lodged against them. Two of them settled quickly.

It was inconceivable to the SEC that anyone accused who was

14 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOWatch.indd 14

8/26/14 11:23 AM

Former NYSE director Ken Langone, Eli and Nelson Obus, Wynnefield Capital co-founder Josh Landes, and Buckingham Capital Management’s Larry Leeds

small would ever fight it. The reasons being the cost and the likelihood that their investors would abandon them. So the SEC believed that filing a complaint was tantamount to getting a settlement. Settling without admitting innocence or guilt, on the surface, appears to be no problem. But people understand that it’s a big stigma, and you’re basically incapable of raising money from endowments and pension funds. I knew we had done nothing wrong and felt it was wrong to admit to something that we did not do.

The case echoes the dispute former attorney general Eliot Spitzer had with then NYSE director Ken Langone. I understand you sought Langone’s advice in the matter.

I’ve known Ken for 25 years—maybe longer. I asked him what he thought I should do. To cut to the chase, Ken said, “There’s no better use of your net worth than to clear your name.” Then he took me through a very interesting drill. In 1981, when the market was really bad, maybe the fall of ’81, he did the first IPO that had been done in 10 years. But unfortunately, right at the end of the day, somebody kicked the company’s share price up an eighth, so it closed an eighth above the offering price, which was a technical violation of front running.

He decided he’d fight it. But then the bull market took off, and he couldn’t do any IPOs because he was in this battle with the regulators about front running for an eighth that he didn’t control. So while the bull market got into full swing, he paid the $8,200 fine and got into the fray. At the time his company, Invemed, was a very successful institutional broker.

Ken then said that Spitzer brought this up as part of the record in terms of Ken’s character. And Ken said, “I let this thing slide. I basically paid these guys off so I could get on with my life instead of fighting it, and it came back and got me 20 years later.”

So I decided to fight the SEC not because I’m a hardass, but because I couldn’t allow the consequences of this being used against me like Spitzer used it against my friend Ken. Besides when the SEC actually issued its complaint, they made me look like Jack the Ripper.

You wouldn’t want to be in the same room with me. That didn’t help.

Why do you think your case is significant to other businesses?

We were targeted not because they felt we were particularly guilty, but because they thought that they had enough enforcement weapons in terms of regulatory powers that the mere accusation would lead to our capitulation. They thought they could bully us and get away with it because we were small and they were powerful.

Over the years, the SEC has gathered powers that make them formidable to any company. As a result of many new insider-trading laws, a regulatory acorn has given rise to a judicial oak, or a judicial forest of oaks. Congress has never passed a law giving them these powers; they have accrued over the years due to precedent. It’s time for Congress to reign them back.

What advice would you give other CEOs who may find themselves in a predicament with the SEC? As a small company, I could afford to put my ideals forward. For larger company CEOs, this may not be so straightforward owing to multiple stakeholders such as employees and shareholders.

If you’re going to fight these guys, obviously you need to clearly figure out what the fact pattern is. You first need to get the facts straight, and sometimes that’s not always clear. There could be people in your organization who have done some things that weren’t appropriate that you didn’t know about, but you have responsibility for. Then you will would need to assess the spectrum of penalties, and determine—almost stakeholder by stakeholder—how people would be affected.

So it’s not a simple calculus. To some degree, it was easier for me because I could very clearly identify the downside. Also, legal counsel becomes very important, because they can look at comparable situations and tell you what you need to do.

There’s also who you know in government. Try to get to somebody in power who could argue what the deleterious economic effects might be by your being left in limbo. Even if you are innocent, you do not want to the outcome delayed. Postponing judgment or some outcome can sometimes be just as bad in terms of attrition to your business.

SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOWatch.indd 15

/

CHIEFEXECUTIVE.NET

/

15

8/26/14 11:23 AM

CEO CONFIDENCE

CEOs Are Optimistic, But Still Hope for Political Change 10.0 8.0 6.0 4.0 2.0 0.0

The CEO Confidence Index, Chief Executive’s monthly gauge of CEOs’ expectations for business conditions over the next 12 months, was relatively unchanged in August compared to July, falling just 0.7 percent to 6.11 out of a possible 10. This rating is still among the highest CEOs have given since 2011.

The rating of current conditions also stayed flat since July, dipping only 0.8 percent to 5.88 out of 10. This rating is the second-highest CEOs have given for current overall business conditions since the onset of the financial crisis in September 2008, indicating the current economic climate is as good as it has been in at least six years in the eyes of CEOs. “Business is slowly improving, margins are improving, and new capital investment is starting to happen,” reported the CEO of a middle market energy company. “Overall we see all businesses improving: energy (power delivery and generation), food, environmental and federal. We do,

however, see a decline or delay in most international projects.”

Despite the fact that ratings for business conditions are at multi-year highs, the majority of CEO respondents expressed skepticism, especially about conditions in Washington, D.C. and the leadership of the executive branch.

While the economy has seemingly turning a corner, most CEOs still hope for a change in the White House that will yield better conditions over the coming years.

In a trend that has continued for the past several years, the CEOs of largest companies rate business conditions the highest among their peers, both currently and for expectations a year from now. Companies with $100 million or more in revenue rated current conditions at 6.03, as compared to those with between $10-99.9 million in revenue, which rated conditions at 5.82. Optimism is growing, but the largest companies seem to be benefiting the most in the short term.

16 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CeoConfidence.indd 16

8/26/14 11:22 AM

NETJETS INC. IS A BERKSHIRE HATHAWAY COMPANY. ALL AIRCRAFT OFFERED BY NETJETS® IN THE UNITED STATES FOR FRACTIONAL SALE, LEASE, OR USE UNDER THE MARQUIS JET CARD® AND PRIVATE JET TRAVEL CARD™ PROGRAMS ARE MANAGEDR AND OPERATED BY NETJETS AVIATION, INC., A WHOLLY OWNED SUBSIDIARY OF NETJETS INC. NETJETS, EXECUTIVEJET AND THE MARQUIS JET CARD ARE REGISTERED SERVICE MARKS. ©2014 NETJETS IP, LLC. ALL RIGHTS RESERVED.

FIFTY YEARS OF NURTURING POSSIBILITIES Expertise isn’t a given. It’s learned. We know. We started the first private aviation service back in 1964. And we’ve been perfecting it ever since by developing the largest private fleet in the world and all new standards for safety. So we can help you make your own way – wherever that may be.

R E A DY TO TA K E A L E A P ? 8 6 6 J E T 9 0 6 7 / N E T J E T S . CO M

f o r b u s i n e s s , f o r f a m i l y, f o r l i f e

NJ_Afar Magazine_family.indd 1

6/5/14 3:34 PM

CHIEF CONCERN

Great Boards Have Great Dynamics Healthy boards deliver better value. How do your directors measure up?

By Dr. Thomas J. Saporito There are “good” boards—and then there are “great” boards. Increasingly, research points to the link between effective board dynamics and shareholder value. In fact, 73 percent of directors polled in a recent study indicated that “great” boards are a substantial component of corporate success.

So, how do you move the performance dial of your board?

First of all, let’s recognize that boards are social systems—their own unique “teams.” Why is this important? According to a study by Solange Charas, “The impact of [a] board functioning as a team is an eight times greater predictor of corporate performance than individual director demographics.”

The first step in creating any great team is getting the talent right. In the boardroom, this means a candidate should have highly developed business skills that match the organization’s needs and help drive its vision and business model. To avoid group-think and to stimulate meaningful discussions, look for potential directors with diverse ways of thinking and a wide range of career experiences.

In typical boards, the commitment to excellence usually stops at selecting highly qualified individual directors. For superior board effectiveness, however, the devil is in the dynamics—how well the board members interact and work together.

According to a New York University study, this includes the ability to “…effectively deal with differences; generate a trusting environment; create a meaningful context for discussions, deliberations, and decision-making; handle conflict and tension effectively; and enact effective leadership and non-leadership roles within the team.”

A culture built on candor, trust, collaboration and mutual respect sets the framework for positive dynamics among the directors. An atmosphere of honest and open communication enhances the directors’ ability to ask management the tough

questions, to challenge assumptions and to truly leverage the value of the entire board to the organization. This is a key finding, since 88 percent of the respondents in a recent RHR International study indicated that the quality of dialogue and debate within the boardroom is a major differentiator between average and great boards.

It is important to keep in mind that board dynamics are always complex. The odds of harmonious interaction happening spontaneously are slim. Therefore, careful orchestration of the dynamics is central to the development and maintenance of a great board. Group dynamics are influenced by a host of factors, many of a social-psychological nature. Tying all these elements together requires strong leadership—an effective, non-executive chair or a lead director who pays close attention to the working relationships.

Respondents in the RHR study agreed, often commenting on the influence of effective relationships on facilitating strong levels of communication between the directors and the CEO. In addition to giving feedback and acting as an honest broker between the board and the CEO, an effective lead director can ensure that everyone is on the same page and aligned with the corporation’s goals and strategies.

Finally, remember that maintaining productive board dynamics is a journey, not a destination. A good feedback process helps develop the effectiveness of every individual director and the dynamics of the group as a whole. Based on the feedback, the composition of the board may change.

The new dynamics will then require monitoring and aligning by the lead director. The loop is continuous.

Unfortunately, respondents to the RHR survey indicate that only 4 percent of U.S. corporate boards have adequate feedback mechanisms in place. The journey continues.

Dr. Thomas J. Saporito is CEO of RHR International.

18 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_ChiefConcern.indd 18

8/26/14 11:23 AM

The only state to master the sun and the cloud.

es calling Florida With more than 26,000 high-tech compani more to oer has e home, it’s clear that the Sunshine Stat puting to surgical than just beautiful weather. From cloud com ing high-tech technologies, Florida is laser-focused on help tax climate, ndly -frie ness busi a businesses prosper. Featuring sted in inve n billio 0% personal income tax and nearly $8 engineer your to nts R&D every year, Florida has all of the compone workforce of more success. Combined with a talented high-tech currently ranks #1 for than a quarter million, it’s no wonder Florida ate for business. innovation. Consider Florida. The perfect clim

MID-MARKET REPORT

Bye-Bye, Recession

With two consecutive quarters of solid revenue growth under their belts, most middle market firms are now optimistic about the future.

Confidence in U.S. economy reaches record high

Global Economy

A whopping 70 percent of middle market leaders say they expect revenues to increase in the next 12 months, up significantly from 59 percent last quarter, according to the Middle Market Indicator, a quarterly business performance and economic outlook survey by the National Center for the Middle Market at Ohio State University. What’s more, projected growth rates are the highest they’ve been in a year, with middle market companies anticipating 5.8 percent growth over the next year, as compared with the 4.5 percent they expected just last quarter.

However, the picture isn’t all rosy. The 1,000 survey participants, who represent companies with between $10 million and $1 billion in revenues, continue to express concern about the cost of healthcare and the cost of doing business.

Confidence is on the Uptick 2Q’14

70 %

47 %

OF MIDDLE MARKET COMPANIES PROJECT POSITIVE REVENUE GROWTH

OF MIDDLE MARKET COMPANIES EXPECT TO ADD JOBS

65%

2Q’13

43%

2Q’13

55 %

VS. 1 YEAR AGO 2Q’13

48 %

National Economy

68 %

VS. 1 YEAR AGO 2Q’13

64 %

Local Economy

77 %

VS. 1 YEAR AGO 2Q’13

79 %

Revenue Growth Outspaces S&P 500 2Q’14 MIDDLE MARKET GROWTH OVER THE PAST 12 MONTHS

NEXT 12 MONTHS

6.6 %

5.8 %

3.4%

PAST 12 MONTHS S&P 500

$ $ $ $ $ $ $ $ $ $ $ $

20 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_MidMarketReport.indd 22

8/26/14 11:25 AM

CohnReznick is an independent member of Nexia International

STRATEGY WILL MOVE YOUR BUSINESS FORWARD. To succeed today, you need industry expertise and transformative advice to drive your business forward. Find out what CohnReznick thinks at CohnReznick.com. Forward Thinking Creates Results.

Joe Torre 2014 National Baseball Hall of Fame Inductee

cohnreznick.com

025C-CR-14_CEO Magazine.indd 1

7/30/14 1:19 PM

CEO COMPENSATION REPORT

Widening Gap Between Public and Private Company CEO Pay While most headlines on CEO pay focus on the total compensation packages of the CEOs of the largest public companies, the reality is that the vast majority of CEOs did not enjoy multi-million dollar pay packages in 2013.

Of the roughly 30 million businesses in the U.S., fewer than 6,000 are publicly traded and only the largest 8 percent of these public companies make it into the S&P 500. Despite this reality, most media outlets focus on the $12 million average pay package among S&P 500 company CEOs—or even more misleading, the $38.7 million average annual pay package for the CEOs of the largest 200 companies.

According to the just released 2014-2015 CEO and Senior Executive Compensation in Private Companies Report, produced by Chief Executive Group, the median private company CEO earned $343,000 in cash compensation in 2013 (base salary and bonus) and total compensation of $378,000 including benefits, perks and equity gains. (See chart below) Median total compensation for private company CEOs

was up approximately 5 percent from the prior year— outpacing the inflation rate of 1.5 percent in 2013—but not growing as fast as pubic-company CEO compensation packages. The S&P 500 median package increased by 9.5 percent over the same period.

As one would expect, CEO compensation is positively correlated with a company’s size and complexity, as well as its performance, and it accelerates quickly among the largest companies—given the leverage in value creation as a company’s scale increases. (See “Median Private Company Total CEO Compensation by Company Revenue,” p. 23) Even when accounting for size, public company CEO’s make much more than CEOs of comparably sized private companies. (See “Median CEO Compensation Among Large Public and Private Companies,” p.23) It is understandable that public company CEOs would make more, on average, than their private company peers given

2013 CEO Total Compensation Among Private Companies

Perks

Benefits

Equity Gains

New Equity

Base Salary

Bonus

2013 C2013 EO Total CEO CCEO Tompensa3on otal otal Compensa3on Compensa3on Among Among Private Among Private Companies Private Companies Companies 2013 C2013 EO Total CTompensa3on Among Private Companies $ 2,500,000 $2,500,000 $2,500,000 $2,500,000 $2,500,000 $ 2,077,605

$2,077,605 $2,077,605 $2,077,605 $2,077,605 $ 2,000,000 $2,000,000 $2,000,000 $2,000,000 $2,000,000 Perks Perks Perks Perks

$ 1,500,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000

Benefits Benefits Benefits Benefits Equity GEquity ains Gains Gains Equity GEquity ains

$500,000 $500,000 $500,000 $500,000 $ 500,000

$0

New Equity New New Equity Equity New Equity

$$856,000 856,000 $856,000 $856,000 $856,000

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

$$215,500 215,500 $215,500 $215,500 $215,500

Bonus Bonus Bonus Bonus Base Salary Base Base Salary Salary Base Salary

$$378,000 378,000 $378,000 $378,000 $378,000

$0 $0 $0 $0 25th Percentile 25th P25th ercen3le Percen3le Percen3le 25th P25th ercen3le

Median Median Median Median Median

Percentile 75th P75th 75th ercen3le Percen3le Percen3le 75th P75th ercen3le

Average* Average* Average* Average* Average*

Source : 2014-2015 CEO and Senior Executive Compensation in Private Companies Report (www.ChiefExecutive.net/compreport)

22 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CompReport.indd 22

8/26/14 11:23 AM

Total Compensation as a Percentage of Overall Median

Median Private Company CEO Total Compensation By Company Revenue (Indexed) 350%

300% 250% 200%

150% 100% 50% 0%

.9 $4 to $2

2 <$

.9 $9 to $5

9.9 4.9 $4 $2 to to 5 0 1 2 $ $

.9 .9 .9 .9 99 49 99 99 $2 $4 $9 o$ to to to 0t 5 0 0 0 $ 5 0 $10 $2 $5

+ lion Bil 1 $

Company Revenue Range (Millions) Source : 2014-2015 CEO and Senior Executive Compensation in Private Companies Report (www.ChiefExecutive.net/compreport)

Median CEO Compensation Among Large (Over $5 Billion Revenue) Public and Private Companies $ 12,000,000 $ 10,000,000 $ 8,000,000 $ 6,000,000 $ 4,000,000 $ 2,000,000 $0

Median Private Company CEO

Median S&P 500 CEO

Salary

Bonus

Equity

Other

Source : Public company data provided by Equilar.com/Private company data provided by ChiefExecutive.net/compreport

the additional complexity (e.g., compliance requirements), increased scrutiny/pressure and the shorter tenures on average, but the size of the gap is noteworthy.

Most CEOs are leaders who build businesses, create jobs and contribute to their communities. While some people continue to vilify all CEOs for excess pay and mistakenly assume that all CEOs enjoy the rich compensation packages of the largest public company CEOs, the reality is far different. Regardless, even the highest paid CEOs make less on average than leading actors, sports stars and other

celebrities, and they have much greater responsibilities.

For more information about the 2014-2015 CEO & Senior Executive Compensation Report for Private Companies, which includes benchmarking data by quartile on base salaries, bonuses, benefits, perks and equity compensation for CEOs and nine other senior executive positions (e.g. president, COO/GM, CFO, CMO, VP Sales, VP R&D, VP HR) and how these benchmarks vary by company size, industry, type of ownership and other key variables, please visit ChiefExecutive.net/compreport.

SEPTEMBER/OCTOBER 2014

2014_CE_SO_CompReport.indd 23

/

CHIEFEXECUTIVE.NET

/

23

8/26/14 11:23 AM

NEGOTIATE WITH

KNOWLEDGE Introducing the

CEO and Senior Executive Compensation Report for Private Companies 2014-2015 • Attract the best candidates • Retain your top talent • Motivate your team to drive your business’ results • Align executive pay with the strategic goals of the business The war for talent is just beginning to heat up. Arm yourself now with the most current information on how private companies like yours are compensating their senior executives. Learn how the best performing companies structure and implement their compensation plans.

2014_CE_SO_CompReportad.indd 24

8/26/14 11:24 AM

To learn more about how the CEO and Senior Executive Compensation Report for Private Companies 2014-2015 can help you benchmark real dollar values for base salary, bonus, equity grants and much more, please visit our website: ChiefExecutive.net/compreport

Price: $2,995 $2,495

2014_CE_SO_CompReportad.indd 25

Save $500 by ordering directly through

ChiefExecutive.net/compreport

8/26/14 11:24 AM

LEADERSHIP & STRATEGY

“How I Would Fix…” Troubled companies abound. Here’s how veteran CEOs would tackle some of the solutions.

by Dale Buss

It’s more difficult than ever to run a blue-chip company— considering spotty economic growth worldwide, increasing geopolitical tensions, rising commodity prices, dissolving consumer loyalties and the ceaseless and often microscopic attention brought by the unblinking digital eye.

As a result of these external forces and some internal missteps, some of the biggest corporations in America are facing the most challenging periods in their history. Their CEOs are encountering rough patches that even their immediate predecessors couldn’t have predicted.

That’s why Chief Executive is helping them out. We selected 10 of these giants of American commerce—Campbell Soup, General Motors, Hewlett-Packard, IBM, McDonald’s, Procter & Gamble, Radio Shack, Target, Walmart and Whole Foods Markets—and sought advice from experienced business leaders on how to fix them. Our experts ranged from chiefs of billion-dollar companies and owners of significant small and medium-sized enterprises to respected academics to sought-after consultants.

Of course, it’s always easier to prescribe strategy from the

Meet the Experts

outside than to actually be in the hot seat; but sometimes, the best advice can come from the less-stressful sidelines. Here’s what our experts had to say:

Campbell is in the Soup The Situation: The $8.1-billion consumer-packaged-goods giant headquartered in Camden, New Jersey, remains weighed down by the continued sluggishness of U.S. consumers and by its historic association with prepared foods that are falling out of favor. CEO Denise Morrison has made some major strategic moves during her three-year tenure, such as acquiring fastgrowing healthy-food superstars Bolthouse Farms and Plum Organics. She’s also tried to appeal to a Millennial generation oriented toward fresh foods with gambits, such as Go! Soup in aseptic pouches and catchy flavors. Still, Campbell’s performance has been erratic even at best.

The Solutions: Adnan Durrani: Campbell should restructure its beverage division, get rid of their energy drinks—because they can’t compete in distribution with theirs—and focus on re-launching the V8 brand

MICHAEL BROWNSTEIN

GREG BUSTIN

President and CEO,

Master Chair, Vistage

Brownstein Group,

International, Dallas:

Philadelphia: Founded oldest

Heads world’s largest CEO

brand-communications firm

membership organization as a

in Philadelphia, with clients

leadership-development and

including Comcast and

strategic-planning consultant.

Microsoft.

26 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_HowFixv2.indd 26

8/26/14 11:25 AM

with a lot of discipline and push natural and organic versions.

Jay Gould: They’ve historically not leveraged their balance sheet for growth, so it took Morrison a lot of courage to spend $1 billion on Bolthouse Farms and Plum Organics, two moves for non-organic growth that hopefully will stimulate the company.

David Leider: I worked on Campbell Soup advertising 20-plus years ago, and they have the same mentality today: Advertising and marketing is a cost, not a driver of business. They need to change that mentality. Rather than put money into shopper-marketing programs, they need to get people to understand their brands better.

Grappling with Recalls at General Motors The Situation: Detroit’s $155-billion automaker fields the best product lineup in its history and Mary Barra, the industry’s first female CEO. But GM’s safety-recall crisis preoccupied her from the start of her tenure in January, with Barra attempting to change a GM culture that had remained sclerotic and secretive. Meanwhile, the performance of the company’s brands has been uneven. So Barra recently brought in Johan de Nysschen, who turned around Audi in the U.S. market and was helming Infiniti worldwide, to head Cadillac.

The Solutions: David Cole: A broken culture? She can’t throw away the good things, which includes the fact that GM’s portfolio of products now is world-class. Yet, [Barra] needs to look beyond what’s happening now. I’ve suggested to Mary that she take the lead in tackling the issue of training the workforce of the future in this country.

Seth Goldman: How do you change the conversation? Maybe, almost, over-sharing. What if GM created the world’s biggest database about auto accidents? And about the safety features and comparisons of every car, including competitors? It could be almost an “open sourcing” of the consumer experience with safety and show they’re not hiding anything.

Dennis Zeleny: She still needs to work on the tone at the top. If [Chief Counsel Michael] Millikin knew nothing about the big safety problem before the recall, he at least had lawyers beneath him who failed to communicate with him. So the question for [Barra] is—is it OK to let him keep running a division when he didn’t know this?

Rally Receding for Hewlett-Packard The Situation: Left behind by the Silicon Valley boom has been one of its original major players, which continued to lose ground over the years as its emphasis on selling PCs, printers and other computer hardware was outstripped by its neighbors’ surging software and services businesses. Under CEO Meg Whitman since 2012, Hewlett-Packard had seemed to stabilize and rally as she nudged the company in rivals’ direction even while stubbornly maintaining its traditional reliance on hardware. But HP said last spring that it would cut up to 16,000 jobs on top of 34,000 positions previously targeted in a multi-year restructuring.

The Solutions: Marc Brownstein: HP should get back to what it was known for. Here’s a company that used to come out with these wonderful products—often early to market—that has become reactive with me-too products and gotten bloated. I would set up an incubator division and put their smartest people there.

Leider: Maybe they need to spin off their hardware. And figure out how to connect with people as they did during their pretty cool ad campaign last year about photo sharing. Possibly Facebook could swallow them up and HP could be tied together with Instagram; at least, she needs to think about more partnerships.

Joel Trammell: At one point in time, HP was known as the leading engineering company in the world. They should try to recreate that asset. That would drive everything else.

IBM’s Need for Speed The Situation: The trailer for IBM’s recent woes may have been a five-minute video made by CEO Virginia Rometty last year in which she pleaded with employees to move faster. It was cinéma vérité: The $100-billion computing icon based in Armonk, New York, has been slumping lately with no end in sight. IBM continues to invest heavily in data analytics, cloud computing and corporate mobile and social computing in a shift of emphasis to service and software over hardware.

Rometty, however, hasn’t proven she can expand the former quickly enough to take the traditional load from the former; and

BRIAN COHEN

DAVID COLE

President, Strategic Asset

Chairman Emeritus, Center

Growth Advisors, Los

for Automotive Research,

Angeles: Turned around

Ann Arbor, Michigan: One

Farmers Insurance financial-

of world’s foremost experts

services unit and other

on U.S. auto industry and

companies. Former CEO of

advisor to CEOs and other top

Pacific Specialty Insurance.

executives.

SEPTEMBER/OCTOBER 2014

2014_CE_SO_HowFixv2.indd 27

/

CHIEFEXECUTIVE.NET

/

27

8/26/14 11:25 AM

LEADERSHIP & STRATEGY

this summer, she announced the once-unthinkable: a landmark mobile alliance with Apple.

The Solutions: Brownstein: IBM is growing only through acquisition, and they need to figure out how to clip it all together. They’re profitable, but they’re not really growing. I’m not sure what they stand for.

Trammell: They’re getting fuzzier in their vision under Rometty, not clearer. Everything publicly is very focused around Watson [the supercomputing program that beats chess masters at chess], so why would I call IBM? They’ve become almost like a holding company for 50 underlying entities, trying to be all things to all people. The executive structure, at least, should change so that it resembles more of a light holding company for all these regional services operations that actually drive the organization. And maybe they should sell off their mainframe operation, which generates lots of cash but isn’t core to a services company.

because the food was inexpensive but also because it was good. But now, they’ve commoditized the food and sent the message that it’s not about good food, it’s about price. They have to go back to doing what they were good at.

Paul Mangiamele: Re-establish that emotional connection.

No one talks about Ronald McDonald now, his appeal to children or the quality of McDonald’s food anymore. [McDonald’s founder] Ray Kroc said that quality plus service plus cleanliness equals the experience. But McDonald’s restaurants aren’t clean anymore and employees don’t deliver service.

Jason Sullivan: Even as a fast food [restaurant], McDonald’s is struggling to keep pace at store [level] with longer lines and drivethroughs. On the other hand, Chipotle and Starbucks have worked hard to optimize their processes to deliver a positive consumer experience in terms of wait time.

Problems for P&G

“I’d sell the assets to Jeff Bezos.

RadioShack doesn’t have a reason for existing anymore. The value they brought to the marketplace has long since passed.”

McDonald’s: Outgunned by Newbies The Situation: The traditional and once-unassailable leader of the global fast-food industry has sunk recently under the weight of its own mistakes—such as a paucity of hit new products, and foundering service—as well as greater competition from fast-casual chains and traditional quick feeders. Under CEO Don Thompson, over the last three years, the $28.1 billion Oak Brook, Illinois-based restaurant pioneer also has demonstrated an inability to deal decisively with consumers’ tilt toward healthier fast food and its growing reputation as the poster child for “unfair” minimum wages.

The Solutions: Brian Cohen: In its heyday, McDonald’s was where you went

The Situation: The $85-billion, Cincinnati-based giant remains the worldwide leader of the consumer-packagedgoods business, touting 25 brands, with more than $1 billion a year in sales each. It’s also increasingly gaining sales and share outside the U.S. A.G. Lafley just decided to jettison dozens of underperforming brands. But he faces tough competitors in his second go-round as P&G’s CEO, which began in mid-2013 when he succeeded his hand-picked initial successor, Bob McDonald.

The man once known as a corporate innovator nonpareil also has seen his company lose the edge in innovation.

The Solutions: Greg Bustin: Lafley can’t be a caretaker. He’s got to make bold moves and demonstrate a sense of urgency. And removing ambiguity around the new succession plan has to become a priority.

Gould: Maybe McDonald lost track of it a little bit, but one thing P&G did a great job of historically was managing their core business while also investing in growth ideas and using their balance sheet to help them invest in new business models. They have to get back to the core of doing that.

Zeleny: Lafley’s decision to take out $10 billion in costs was

ADNAN DURRANI

SETH GOLDMAN

CEO, American Halal,

CEO, Honest Tea, Bethesda,

Stamford, Connecticut:

Maryland: Founder of one of

Founded Saffron Road, first

the most successful beverage

brand of its kind to be sold

startups of the last decade,

nationally in Whole Foods and

acquired by Coca-Cola in

elsewhere. Serial entrepreneur

2011. Goldman is still building

and venture capitalist.

Honest Tea.

28 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_HowFixv2.indd 28

8/26/14 11:25 AM

smart, but he should move briskly. He also should consider bringing in some new blood from other companies [who] have different perspectives on speed and growth. And the [CEO] problem last year should be a warning to be realistic as they look at succession throughout the organization.

RadioShack: Mired in the Past The Situation: The Fort Worth-based retailer has been on life support for a while, unable to create a coherent position after one trend upon another eroded its traditional identity as the go-to depot for all things electronic. RadioShack overshot its possibilities as an all-purpose store for wireless, for example.

It posted a $400-million loss for 2013 on $3.4 billion in revenues. And when the company tried to close 1,100 stores, lenders balked. Lately CEO Joseph Magnacca has staked out a plan to crowdsource new products. But the brand’s humorous Super Bowl commercial in February hailed the ’80s—unfortunately, the high point of RadioShack’s relevance.

The Solutions: Brownstein: I’d sell the assets to Jeff Bezos. RadioShack doesn’t have a reason for existing anymore. The value they brought to the marketplace has long since passed.

Leider: They’ve got to go back to their roots as the leader in expert customer service. An advice orientation also could help them succeed online, where that is important. One thing in their favor right now is that “reverse showrooming,” seems to be increasing,

where more people now are looking online but buying at retail. It could give them a shot at a turnaround.

David Silverstein: What is their old customer building today?

They’re into home automation and home power generation. Battery technology is moving at lightning speed, and people are wanting to become more independent from the power grid. That’s their only remaining chance. Otherwise, I’d be looking to sell RadioShack to Home Depot or Lowe’s, which easily could have a RadioShack section in their stores.

Target in the Bull’s Eye The Situation: Few companies have been whacked lately like Target, the $73-billion Minneapolis-based retailer that used to epitomize strategic savvy. History’s biggest hacking fiasco afflicted the brand last Christmas, and its invasion of the Canadian market has fallen flat. Those mistakes brought down Gregg Steinhafel as CEO in the spring. But as Target searched for his successor this summer, it also became apparent that its appeal to U.S. consumers as the hip discount store already had been fading for a few years.

The Solutions: Cohen: They have to be bold again—get fashion-forward designs at cheap prices to get customers back in. The headwind they have is that the value-conscious customer doesn’t have as much spending power in this economy as that customer did in Target’s heyday. And they should make the difficult decision and get out of Canada.

Durrani: Their problems started before the data breach; their

JAY GOULD

KURT JETTA

CEO, American Standard,

CEO, TABS Group, Shelton,

Piscataway, New Jersey:

Connecticut: Founder of

Turned around $1-billion

technology-focused analytics

bathroom-fixtures brand in

firm for CPG clients.

three years. Former head of

Economist by background and

branding for Wheaties, Minute

expert on retailing, sales and

Maid and other icons.

promotions.

SEPTEMBER/OCTOBER 2014

2014_CE_SO_HowFixv2.indd 29

/

CHIEFEXECUTIVE.NET

/

29

8/26/14 11:25 AM

LEADERSHIP & STRATEGY

Meet the Experts

DAVID LEIDER

CEO, GSTV, Birmingham, Michigan: Co-founder of leading gas-pump TV network, just acquired by Dan Gilbert holding. Former member of Yahoo’s original senior management.

PAUL MANGIAMELE

AYALL SCHANZER

CEO, Bennigan’s, Dallas:

CEO, Friedland Realty Group,

Launched revival of moribund

New York: Experienced leader

fast-casual restaurant

of turnarounds comes from

brand. Career-long leader in

a long legal background.

foodservice and franchising

Now heads one of leading

sectors.

commercial real-estate firms in New York.

DAVID SILVERSTEIN

JASON SULLIVAN

CEO, BMGI, New York:

Managing Director, Publicis

Founder of operational-

Seattle: Has overseen brand-

strategy consultant with 20

boosting efforts for H-P,

international offices and client

T-Mobile, Eddie Bauer and

list including Siemens and

others. Veteran of a decade

Hitachi. Has background in

at Ogilvy, and Weiden +

lean manufacturing.

Kennedy, too.

DENNIS ZELENY JOEL TRAMMELL

Management Consultant,

CEO, Khorus, Austin, Texas:

Wilmington, Delaware: Helps

Current head of business-

big companies turn around,

management software

leading with corporate culture.

company also was leader of

Headed HR for Sunoco Oil and

two IT companies bought out

Caremark CVS.

by Fortune 500 firms.

30 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_HowFixv2.indd 30

8/26/14 11:25 AM

WHOLE FOODS

store traffic dropped to 32 percent of all U.S. shoppers from 38 percent about two years ago. Their online launch was very slow and they dropped prices dramatically to compete with Amazon and it didn’t work. Target needs to get back to the formula that worked five and 10 years ago among younger, and even older, educated shoppers.

Kurt Jetta: They’re at a severe disadvantage in Canada because it’s extremely price-sensitive, and Target has gotten away from compelling price promotions. Plus their big emphasis on fresh groceries in the U.S. isn’t sustainable because Target doesn’t have enough store traffic to make that business really vibrant.

Walmart’s Wind Down The Situation: The company strode as a Gulliver amid legions of Lilliputian critics because as long as its core customer base remained loyal to Walmart’s unbeatable low prices and selection, any CEO could withstand rhetorical attacks on the company’s business model. Major expansion in groceries fueled even more sales and foot traffic.

But Walmart has reported six consecutive quarters of declining same-store sales in the U.S., even as its efforts abroad—including a bribery scandal in Mexico—continue to flounder. CEO Mike Duke is pushing smaller stores as a major solution.

The Solutions: Gould: Restoring the company requires a healthy core business.

You can wonder if they have enough global growth; but even more, they have to fix the U.S. same-store sales phenomenon. And have they sufficiently mastered the omni-channel approach to retailing?

I don’t think the web-site-to-store pickup gambit is really the way people want to shop these days.

Silverstein: As a giant, Walmart should be running 100 different market experiments. They have to be in the business of creating new things and assuming that, like any startups, 90 percent of them are going to fail. They need to be creating the equivalent of a new Fortune 500 company each year. Meanwhile,

the company has got to sell everything online like Amazon does, not just focus on the products they sell in Walmart stores.

Whole Foods Markets: Losing Its Niche?

The Situation: The retailer that essentially created the U.S. better-for-you food category relied for its first two decades on a near monopoly selling organic and natural fare, a hold that was supported by a knowledgeable and helpful staff of crunchies and was reinforced by Whole Foods’ vast control over shelf space for hundreds of startups that coveted its upscale and health-conscious clientele.

However, the $12.9-billion, Austin-based company has struggled lately as competitors rushed to offer much the same fare at lower prices. Whole Foods is responding with its firstever national ad campaign, more experimentation with home delivery and bigger selection of its own lower-priced goods.

The Solutions: Durrani: Their foray into private label in a heavy way, through the “365” store brand and others, adds to cash flow and allows them to compete against Trader Joe’s and Costco. But it’s a flawed strategy and it isn’t working because people go to Whole Foods for branded, premium products—not private label. They need to go back to their roots and innovate. And they need to stop worrying about lower-priced competition because people who go to Whole Foods aren’t going to Walmart.

Ayall Schanzer: The only way to fend off competition is to broaden its base of clients beyond the affluent. How can their proposition cascade down to more middle-income individuals and capture more households? However, Whole Foods still has to offer an experience that is differentiated enough to get people to come to its stores.

Silverstein: Whole Foods needs to preserve and—in fact— build up the unique culture that it has that other stores don’t, inside its stores and for its employees, like Starbucks has. It needs to be recruiting in high schools to become the place that every kid wants to work when they’re in high school.

SEPTEMBER/OCTOBER 2014

2014_CE_SO_HowFixv2.indd 31

/

CHIEFEXECUTIVE.NET

/

31

8/26/14 11:25 AM

GOVERNMENT

Obamacare Threatens to Overwhelm CEOs As if struggling to adapt to the new healthcare landscape wasnâ&#x20AC;&#x2122;t hard enough for SMEs, now the new ground is shifting underfoot.

By C.J. Prince

32 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_Obamacare.indd 32

8/26/14 11:25 AM

Key Takeaways • Waiting for clarity around whether attacks on the Affordable Care Act will succeed has business owners mired in uncertainty • In the meantime, insurance providers have raised premiums by as much as 300 percent since implementation, business owners report • Despite its flaws, Obamacare isn’t likely to go away—which means businesses need to devote resources to lobbying for incremental change

The July bombshell of the U.S. Court of Appeals for the District of Columbia in Halbig v. Sebelius is the latest in a history fraught with challenges and confusion for the Patient Protection and Affordable Care Act, also known as Obamacare. The conflicting decision from the Fourth Circuit Court of Appeals in King v. Burwell also created a potentially game-changing quagmire for the healthcare law. It is now unclear whether more than 5 million Americans in 36 states that chose not to set up healthcare exchanges will be eligible to receive federal tax subsidies for healthcare purchased on the federal exchange—a key lynchpin in the new system.

If individuals in those three dozen states ultimately are ruled ineligible for the subsidies, they would no longer have to fear a penalty for not purchasing healthcare on the federal exchange, since that healthcare would no longer be affordable.

Employers in those states would not be subject to the $3,000 penalty if an employee receives a subsidy for coverage on the exchange, since such a subsidy will be unavailable. Together, those consequences could—at least, in theory—topple a system that relies on a critical mass of individuals signing up for healthcare.

But some say the reaction from both the right and the left has been exaggerated. “Far from all the media hype about these decisions, this is only a speed bump for Obamacare,” says Avik Roy, senior fellow at the Manhattan Institute.

No state will want to pass on federal subsidies and all will ultimately do what they have to do to comply with the law.

“Even if you’re Alabama, are you really going to turn down hundreds of billions of federal funds that go directly to your state with no outlays by you? I think that’s extremely unlikely.” Roy also points out that the ruling on subsidies would only appeal to those companies employing lower wage workers who qualify for the subsidies.

Back to the Courtroom In any case, the Obama administration is expected to appeal on multiple fronts and, if it comes to that, the Supreme Court could decide to hear the case as early as October, with a decision in May. In the meantime, with full rollout for businesses with more than 100 employees set for Jan. 1, 2015, and a year later for those with between 50-99 employees, companies will proceed as they have been and the recent challenges will not impact companies’ larger healthcare strategies. “It does create more uncertainty for the Affordable Care Act, but until a decision is made it’s business as usual” with the next open enrollment starting in November, says Brian Marcotte, CEO of the National Business Group on Health. Adds Jim Winkler, senior vice president for Aon Hewitt, “For the vast majority of employers, the lack of clarity regarding subsidies in the public exchange will have little to no impact on their health strategies for active full-time employees. Employers have more pressing concerns about volatile health costs and worsening population health.”

Not all employers agree on how to deal with those challenges, of course, and Obamacare has had plenty of dissenters. From the beginning, employers subject to the mandate bemoaned the law’s complexity, onerous requirements and expense. As the numbers were crunched over the past few years, CEOs began warning of the dire consequences to the country’s economic growth should the new healthcare system proceed.

In November of 2012, Zane Tankel, the CEO of Applebee’s New York Franchise, AppleMetro, told Fox Business, “We’ve calculated it will be some millions of dollars across our system. So what does that say? That says we won’t build more restaurants. We won’t hire more people—exactly the opposite of what the President says…if it’s possible to [implement ACA] without cutting people back, I’m delighted to do it. But that also rolls back expansion, it rolls back hiring more people and, in a best-case scenario, we only shrink the labor force minimally.”

“I think affordable care has nothing to do with affordable care because it’s actually more unaffordable today. It’s just gone the wrong way.”

Promises, Promises Some who agreed with the premise behind Obamacare’s mission don’t believe it delivered on its promises. “If you read the bill, they call it the Affordable Care Act. It’s not about affordable care, it’s about outcomes,” says Tom Harrison, chairman emeritus of Diversified Agency Services, a division of Omnicom, the global advertising and PR giant. For example, incentives were built in for hospitals to keep patients from being readmitted for the same health issue within a period of

SEPTEMBER/OCTOBER 2014

2014_CE_SO_Obamacare.indd 33

/

CHIEFEXECUTIVE.NET

/

33

8/26/14 11:25 AM

GOVERNMENT

Pete Souza / White House

“There may be some incremental changes, but frankly, I don’t think repeal will ever happen. That shipped sailed when Mitt Romney lost in 2012.”

Barack Obama reacts to the passing of healthcare bill

time, and for companies to create healthy lifestyles programs at work that keep covered employees healthier for longer.

Those are noble goals, Harrison says, and companies should be focusing on ways to keep their employees healthy and therefore using less healthcare. But, he argues, that’s not necessarily the purview of the federal government. “There is a lot in the bill that goes beyond affordable care and one could say, why is the government getting into something they probably shouldn’t control in order to only insure the 35 million who didn’t have healthcare? They probably overstepped their bounds. I think affordable care has nothing to do with affordable care because it’s actually more unaffordable today. It’s just gone the wrong way.”

Given how highly politicized Obamacare has been, and continues to be, it’s difficult to get a clear picture of how the healthcare changes are actually impacting employer decisionmaking and strategy. “Economists on each side offer wildly disparate versions of how the next several years will play out,” says Winkler. “Both sides of the political arena have economists running models that tell two different stories so it’s hard to sort through the rhetoric vs. fact.”

The Cost Quagmire That said, expenses for HealthCare.gov have been much higher than anticipated, with the July report from the Government Accountability Office estimating the tab at $840 million thus far, due to a variety of overages. Insurance providers are reporting smaller margins; Aetna CEO and chairman Mark Bertolini told CNBC in July that the numbers on new enrollees “were worse than we expected.” Those enrollees tend to be older, less healthy and expected to use more healthcare.

In part owing to that, premium costs for

employer-sponsored plans have gone up, by virtually all accounts, although the numbers vary widely depending on the source. For example, a National Small Business Association survey of 780 small business owners conducted late last year found more than 90 percent reporting higher premiums for their health plans during their most recent renewal. One in four reported that premiums jumped by more than 20 percent.

An annual 2013 survey by the Kaiser Family Foundation, however, found premiums had increased just 4 percent.

But as far as how the new law is impacting hiring and other benefits-related decision-making, surveys again tell conflicting stories. For example, according to a May survey of accountants working with privately held businesses, 54 percent said the ACA would adversely impact hiring in the year ahead, compared with fully two-thirds of respondents polled the previous year, according to Sageworks, a financial information company that conducted the surveys. The 2014 survey also found a slightly larger percentage this year predicting the ACA would have no impact on hiring in the next year.

On the other hand, the National Small Business Association survey found that one-third of small businesses had held off on hiring and more than half said they’d held off on salary increases for employees due to the added expenses of the ACA. But in early 2014, a nationwide survey of 3,500 smaller firms with 300 or fewer employees found 26 percent were adding to payrolls, while 20 percent were cutting, and about half holding steady. Overall, hiring in that group was up 1 percent over the previous month, according to Roanoke, Virginia-based CBIZ Payroll Services.

Whichever numbers one looks at, it’s clear that businesses have spent the past several years struggling to get their arms around the increased costs and compute the likely impact on their bottom lines. “The ACA has been a big distraction over the past few years as we’ve all tried to figure out the implications,” says Marcotte, of National Business Group on Health, which represents large employers, including approximately two-thirds of the Fortune 100. Those employers are looking at how to cope with the ramifications of the so-called “Cadillac tax,” which will assess a 40 percent excise tax on companies whose health insurance benefits exceed a $10,200 threshold for individual coverage and $27,500 for family coverage beginning in 2018. Employers are also trying to manage healthcare costs rising at a 6-7 percent clip, says Marcotte. “For any CEO or

34 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_Obamacare.indd 34

8/26/14 11:25 AM

CFO, when you’re faced with 7 percent trends year-in, yearout that’s incredible headwind.” Some large employers, like Target and Walgreens, are making major changes to employee benefits, with Target dropping coverage for part-time workers and Walgreens moving employees onto a private exchange.

Hampering Hiring Anecdotally, among smaller “large” employers—or those with 50 or more employees—the ACA will be a major challenge to future growth and will significantly impact key strategy and hiring decisions in the near- and long-term. Take Bongarde, a web-centered information and training tools company focused on the compliance and education needs of safety, environmental and human resource professionals.

The company, which has offices in both the U.S. and Canada, recently decided to add new hires in British Columbia, where health care costs are lower in part because of its national system. “Obamacare has made it more expensive to hire new

people in the U.S.,” says Wayne Cooper, CEO of Bongarde Media. “Even if you prorate the taxes on an SME employing fewer than 100 people, it still makes more economic sense to make new hires in British Columbia versus Washington state.”

He adds that the decision is also partly due to Washington state’s high corporate taxes.

For Kenneth Jennings, CEO of Mr. Rekey Locksmith, a company that employs 70 in more than 20 markets in the U.S., the consequences may be even more dire. Jennings competes with dozens of independents who don’t have to comply with ACA regulation. “We do a great volume, which is fantastic, but our profit per job is pretty small,” he notes, adding that with margins as thin as they are, he can’t afford to lose any more per job by adding more cost to his employees. “When we go up on our prices, we lose customers. With this ACA we’re going to have to either raise our prices substantially or we’re going to just not make a profit.”

Jennings is still in the process of finalizing premium costs

Healthcare Costs are CEOs’ No. 1 Concern Middle market CEOs rank the cost of healthcare as their top business challenge.

1

THE COST OF HEALTHCARE - 87%

2

ABILITY TO GROW REVENUE - 84%

3

THE COST OF DOING BUSINESS - 82%

4

ABILITY TO MAINTAIN MARGINS - 82%

5

THE UNCERTAINTY OF HOW GOVERNMENT ACTIONS WILL IMPACT MY BUSINESS - 77%

Source: Middle Market Indicator, National Center for the Middle Market at Ohio State University

SEPTEMBER/OCTOBER 2014

2014_CE_SO_Obamacare.indd 35

/

CHIEFEXECUTIVE.NET

/

35

8/26/14 11:25 AM

GOVERNMENT

with two insurance companies bidding for the business.

“We don’t have a final number yet and the numbers keep going up. And what can I do to stop them from going up in the future? I’m scared to go back to our customers in six months and say, ‘We’re going up another $10 a job,’” says Jennings, noting that this variable cost is one more straw on the camel’s back—and could be the final one. “I can’t control the price of fuel, electricity or materials going up—and now health insurance. It just feels like it’s so much at one time it swamps the boat.”

Because they now have to cover both healthy and less healthy individuals, insurance providers have raised premiums to cover risk for their whole book of business, which has changed. But the fluctuations in premium prices should be leveling out now, says Mark Lutes, a senior member of Epstein Becker Green’s health care and life sciences practice and the firm’s chairman. “Carriers have been baking in the increased costs of some of the coverage parameter changes that the ACA has caused, so while there are adjustments to price being made to accommodate the changes, there should be a decent estimate of those already.” As insurers get more comfortable with the new landscape, he says, the market will likely become more competitive and prices could potentially come down.

That would be good news to Bijan Golkar, principal and co-owner, FPC Investment Advisory in San Francisco. With only five employees, FPC is not required to offer insurance under the new mandate, but Golkar says it’s a must to remain competitive as an employer. “The rate for the insurance plan we were offering nearly tripled,” he says. “We just couldn’t afford it.” As many other companies are doing, FPC moved over to a high-deductible, health savings account plan and set up a pre-tax company contribution to the HSA, putting in the maximum allowed. As a company with fewer than 25 employees, FPC can deduct the premiums—but Golkar is still dissatisfied both with the cost of the plan and the quality.

“Because of Obamacare, our company is forced to pay for dental insurance for the kids on the plan. We’re paying dental for my infant daughter and she doesn’t even have teeth yet.

That’s just criminal,” he says.

For companies with significantly more employees, the other major concern, outside of higher premiums or deductibles, is the prospect of penalties for plans that do not meet the twin tests of affordability and minimum essential coverage. “[Clients] are worried about the penalties,” says Pamela Tehim, senior associate, Tredway Lumsdaine & Doyle. “If any employee is getting a tax credit for purchasing insurance outside of the plan, they’ll get hit with the $3,000 penalty per employee.”

Attorney Kaya Bromley, founder and CEO of Your Obamacare Advisors (YOA) and author of The Employer’s Guide To Obamacare and The Obamacare Roadmap, understands her clients’ fears. “It’s the most complicated law employers

have had to deal with since Social Security. Lots of red tape, pitfalls, lots of places employers will end up paying penalties they didn’t even know existed or that they were incurring for two years,” she says. “But on another level it’s really not that complicated, if you have the right resources. That doesn’t mean you have to spend $10,000 on a consultant. It means you have to learn the basics.”

Once the company’s leadership understands the basics, they can make better decisions on healthcare strategy to avoid penalties and fees, pay lower premiums and even create profit centers within the company. “An unintended consequence of Obamacare has been that more business owners are finding ways to self insure,” says Bromley, who sees self-insurance as a viable option for companies with as few as 100 employees.

“If it’s set up with proper facilities and a proper administrator and structure, it can have tax benefits and can actually be profitable for the company.”

She cautions CEOs not to delegate the company’s healthcare strategy to any one internal or external advisor or broker, but to get actively involved in the decisions themselves.

“Yes, you have to have a team of experts because it’s too much to do yourself. But they all have a stake in the outcome. As the CEO you have to take all these different points of view into account and make the decision about what’s right for your own business.”

Jennings, who has been taking a very active role in the process for his business, hasn’t quite found the light at the end of the tunnel just yet. But even he admits Obamacare has succeeded in at least one goal: “This is giving our country a rude awakening that you have got to pay attention to these things. Your company pays a lot more than you can imagine for you to have health insurance. Now people are starting to have to take responsibility,” says Jennings. “There really is no free lunch.”

That goes for employees and employers. While it isn’t yet clear just how the conflicting appeals court rulings will be resolved, Obamacare isn’t going away, even if the Senate changes hands in the midterm elections, says Manhattan Institute’s Roy. “There may be some incremental changes, but frankly, I don’t think repeal will ever happen. That ship sailed when Mitt Romney lost in 2012.” Right now, businesses have to continue on as they have been and figure out whether to provide affordable health care for all employees; provide affordable care to some, but not to others (e.g., hourly workers), and take the $3,000-per-employee hit for those individuals; or not offer coverage and pay the $2,000-per-employee penalty.

Small and midsize businesses can also talk to their legislators about ways, other than repeal, Congress might be able to soften the blow for them, says Roy. “If they’re in a state with competitive Senate election, they can make sure they’re involved in the race and that both candidates have sufficiently pledged to address those things that are important to them. They can make sure their voices are heard.”

36 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_Obamacare.indd 36

8/26/14 11:25 AM

INNOVATION

Act Like a Startup

Five Lessons Bigger-Company CEOs Can Learn from Entrepreneurs By

C.J. Prince

38 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_StartupLessons.indd 38

8/26/14 11:25 AM

If you want to stave off obsolescence, act like a startup.

Or at least that’s what the innovation gurus and management consultants often advise. But it’s easier to say than implement for established, mature companies, which often have hundreds—if not thousands—of employees in multiple offices regionally, nationally and globally. CEOs of mature companies have more risk to manage, more silos to cope with and fewer direct communication lines to customer-facing employees. They have investors and other stakeholders hovering, ready to cry foul if quarterly earnings targets are missed or if revenue fails to continue on an upward trend.

At the same time, however, competition from smaller, more nimble players along with a globally driven, exponentially faster pace of business and technological change has made it necessary for larger companies to think differently.

Obsolescence is perennially just a product release away, and those CEOs who do not operate with a healthy sense of paranoia (à la Andy Grove) and who don’t find new ways to innovate, as well as the best startup, will be left bobbing in the wake.

Fortunately, there are pages from the startup playbook that CEOs of midsize and large companies can realistically borrow. The following are five lessons startups can teach any established company.

1. Kill your babies A look at the Fortune 100 circa 1990 and then again in 2010 reveals what can happen to powerful companies that refuse to cannibalize their existing products and services in order to gain competitive edge in the future. “You see an incredible number of people who have disappeared because of global competition and because they stuck with what they thought were their cash cows, only to find that those things became commodities,” says John Ryan, CEO of the Center for Creative Leadership. Kodak, for example, had world-class research and talent, huge market share and was among the first to understand digital photography. But the company failed to adapt, refused to give up its traditional film business and is now just a thin shell of its former self following a two-year bankruptcy restructuring.

Dennis LeStrange has no intention of following suit. The CEO of Neopost USA, a 90-year-old company that made its name in postage-meter equipment, is helping Neopost reinvent itself by encouraging employees not about the products it offers, but about the services customers actually want. “What our customers really want is help communicating with their customers,” says LeStrange. “We used to do that with postage meters; but in the future, we’re going to do it with digital alternatives, as well—with sophisticated documentmanagement solutions and other innovative products. You have to be willing to eat your young because if you don’t do it, someone else will, and you’ll just lose the customer.”

“You have to be willing to eat your young because if you don’t do it, someone else will, and you’ll just lose the customer.”

To get the kind of innovation that has helped him steal 4 percent market share from Goliath competitor Pitney Bowes over the past two years, LeStrange has developed a multipart strategy that includes new product innovation, process improvement, entry into new business arenas and strategic acquisitions. “When we make an acquisition, we set very aggressive targets to ensure we’ll get growth from those.

And we don’t blend them in because when you do that, they lose their identity and get gobbled up culturally.”

2. Lower your center of gravity A small startup with just 25 employees can execute ideas swiftly. Getting approval on a decision is as simple as a walk down the hall or a shout over the cubicle wall.

But for larger companies, bureaucracy is almost an inevitable byproduct of growth and success. That’s why CEOs actively have to combat the chain-of-command syndrome by empowering middle managers to make strategic decisions—one of the principles of CEO Ron Hovsepian’s agile development strategy at IntraLinks, a provider of secure collaboration solutions for 99 percent of the global Fortune

IntraLinks’ Ron Hovsepian

SEPTEMBER/OCTOBER 2014

2014_CE_SO_StartupLessons.indd 39

/

CHIEFEXECUTIVE.NET

/

39

8/26/14 11:25 AM

INNOVATION

1000. The agile framework emphasizes a collaborative approach to development, with small teams of developers, designers and testers working together in short-duration “sprints,” delivering fully released code at the end of that time.

“This allows us to engage our customers early in the design process and often throughout the development and test lifecycle,” he says. “That enables us to build the right product to meet customer needs and allows us to validate our direction constantly throughout the development process.”

Because developers are building software in time-boxed sprints, the company can stay nimble, pivoting with changes to market needs. Empowering these small teams encourages savvy and quick decision-making—with real accountability.

“Senior leadership has to set the table. We’re still there to drive it, bring energy to it, add vision and guidance; but as you scale, you need to lower of the center of gravity so you can move quickly.”

That’s a lesson Hovsepian learned as CEO of Novell from 2005 to 2011. He was tasked with turning around a company that had once dominated its industry but whose primary product, Netware, had been declining at a 12-percent clip.

“Within two years, we had slowed that decline down to 6 percent,” he recalls. “But the big learning there was that you have got to grow the other part of your business faster.”

Hovsepian invested heavily in SUSE Linux, an operating system platform that Novell had acquired in 2003. “It was a $30 million business; and within three years, we had that up to a $270 million business.” When Attachmate agreed to acquire Novell in 2010, the SUSE growth was a big part of the value proposition.

“The lesson there for me is you have to take risks in growing your company when you have a declining business.

You have to be even more aggressive about your execution and risk taking.”

“The lesson there for me is you have to take risks in growing your company when you have a declining business.

You have to be even more aggressive about your execution and risk taking.”

He credits the board with giving him the right amount of leeway. “The board let us fail. Version 1.0 was not perfect.

Agile development methodology is all about fast learning, and I want our company to be a fast learner. You want always to be learning and improving while knowing that you’ll never reach perfection, you’re always still striving for it.”

4. Take it outside One way to imitate startups is to hire their people away.

But mature companies need more than gimmicks to attract entrepreneurial innovators to the mother ship. For starters, entrepreneurs like to have a lot of skin in the game—more than what a few hundred stock options can provide, says Trevor Owens, co-author of The Lean Enterprise: How Corporations Can Innovate Like Startups. “When you’re starting something from nothing, you very closely identify with what you create. Ownership is the reason you stay up all night thinking about a product, and stock options in a huge company are just not going to feel like ownership.” That’s one of the reasons some companies have only limited success with “innovation labs” inside the company. “It sounds like something that’s in the basement,” says Owens. “A lot of these innovation labs look like projects just for corporations

3. Convince your board to let you take risks When Hovsepian took over at IntraLinks, he immediately ramped up investment into research and development, now topping $40 million, with the long-term goal of being a 15-20 percent growth company. Investing more in R&D meant temporarily lowering the profitability of the company—something not all boards are keen on. “You’re in a constant pressure cooker to deliver more growth and more profitability,” Hovsepian explains. “What you have to do is step back at points in time and say, ‘Look it, this market we’re in is getting into a next-generation growth phase. We need to invest.’”

The numbers suggest that it was the right call. Where historically, IntraLinks has had only a handful of patents, it now has hundreds of innovations for which patents will be filed over the next 18 months. The company’s market cap has climbed from $325 million in 2011 to $500 million today.

Trevor Owens, co-author of The Lean Enterprise

40 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_StartupLessons.indd 40

8/26/14 11:25 AM

5. Keep it personal

William Raveis Real Estate’s Bill Raveis

to show how cool they are. ‘It’s there and it’s ours and it’s in service of us.’ But the innovators don’t have the autonomy and they can’t move fast enough through the bureaucracy.”

Instead, Owens says, companies need to set up an environment that essentially is a startup, independent of the company providing its seed money. “When doing disruptive innovation, that type of work has to have different rules. There needs to be autonomy and employees need to be compensated with equity. The rules of engagement are different—it’s the Wild West.”

He recommends the concept of the innovation colony, where the innovation is happening entirely apart from the company. One model is to set the colony up as a limited liability corporation with the parent company taking just a limited partner role. The LLC employees are tasked with creating something that the market wants, and the parent company hopes it is something that will fit its portfolio of products and services.

But there are no guarantees. The LLC can raise capital from outside investors, including venture capitalists, who may eventually make a bid for the company. “It happens all the time that a venture capitalist takes the project away from the company. But a lot of the projects aren’t really good fits.” The bottom line, says Owens, is that you can’t start with the task of creating a product that fits with the company’s portfolio; to really succeed, the team has to start by designing products the market wants. “And when one of them fits into your strategy, then you can bring it back inside.”

One advantage of the small company culture is familiarity.

Everybody knows the CEO by first name and nobody thinks twice about sending him or her an email or stopping by the office for a chat. Bill Raveis remembers that time well.

He founded the William Raveis Real Estate, Mortgage & Insurance company 40 years ago in a 10x10 office above a grocery store on a busy street in Fairfield, Connecticut.

“I thought if I had a big desk, I’d look important,” Raveis recalls. “My desk was almost as big as the office, so nobody could come in.” Four decades later, he still hasn’t forgotten why he went out on his own: he’d been working as a systems analyst for a large company in Manhattan’s Pan Am building.

The company threw a dinner at the Biltmore to celebrate an IT system that Raveis’ team had built for a client, Westinghouse. “They recognized everybody but us for doing it,” he says.

So Raveis left. Today, his soup-to-nuts home homeownership company is the third-largest, family-owned real estate firm in the U.S., with more than 3,000 sales professionals in 100 offices across seven states in the Northeast. “One of the things we do here is [to] recognize the work people do.

We look at our sales force, rather than the end client, as our customer. Because if we can support the sales force, they will gather the business.”

Corporate America is filled with silos, a situation which creates a culture of distance and apathy, he adds.

“There’s no organizational chart here. We’re all on the same level. I’m equal to the receptionist—we just have different responsibilities.”

Raveis’ goal continues to be treating every employee like family. If someone has an illness in the family or a new baby, the company’s senior management reaches out to them.

The key, as a company grows, is to maintain communication, whether it’s by phone, by email or, when possible, in person, he says. “You have to pick up the phone and call people. Let them know they can call you any time. It can’t be a mindset of, I’m a big shot and they’re a little shot. We’re all just helping each other succeed.”

One more thing to learn from startups? “They have fun,” says CCL’s Ryan. “They have a sense of humor. I’m struck by how seriously we take ourselves on boards and in senior management. I know we have scale, complexity and regulations—all that stuff, and we do need to take our jobs seriously—but not ourselves. We should make fun of ourselves much more often.”

SEPTEMBER/OCTOBER 2014 /

2014_CE_SO_StartupLessons.indd 41

CHIEFEXECUTIVE.NET

/

41

8/26/14 11:25 AM

Learn To Grow When Your Markets Arenâ&#x20AC;&#x2122;t FEATURED SPEAKERS: Leslie Wexner Chairman and CEO L Brands

Howard Janzen President and CEO Cool Planet Energy Systems

Jeff Silver CEO Coyote Logistics

Andra Rush Chairman and CEO Rush Trucking

Andrew N. Liveris President & CEO Dow Chemical

Eric Spiegel President and CEO Siemens USA

Eric Fyrwald President & CEO Univar

Brainstorm your challenges in interactive panel discussions and dynamic roundtables with our featured speakers and your CEO peers this December 4th at the NYSE

Presented by

2014_CE_SO_CEO2CEOad.indd 42

8/26/14 11:23 AM

t

Leslie Wexner Chairman and CEO, L Brands

Lifetime Achievement Award Join us to honor Leslie Wexner, a retailing legend and the current longest-serving CEO of a Fortune 500 company. Leslie nurtured a $5,000 investment in 1963 into a $10 billion company whose brands include Victoriaâ&#x20AC;&#x2122;s Secret, Bath & Body Works, Henri Bendel and others. Through the years, Wexner has grown and spun off top retail brands such as Lane Bryant, Abercrombie & Fitch, Lerner New York, Express and his flagship property, The Limited, as the retail environment has evolved.

For more information about the CEO2CEO Leadership Summit, visit ceo2ceosummit.com or call 203-889-4974

2014_CE_SO_CEO2CEOad.indd 43

8/26/14 3:09 PM

TECHNOLOGY

Cloudy With a Chance of Rain-Making How cloud computing helps SMEs go global.

By William J. Holstein

44 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_Technology.indd 44

8/26/14 11:26 AM

One of the biggest hassles in exporting goods to a foreign land has long been getting paid. For years, small and medium-sized exporters tried to obtain letters of credit from U.S. banks guaranteeing they would get paid on a timely basis, but it was expensive and time-consuming—and precious few banks wanted to be in that low-margin business. Many exporters made the gut-wrenching decision to just ship their goods and simply hope they would get paid quickly.

Avery Brewing, a 21-year-old maker of craft beers based in Boulder, Colorado, has solved that payment problem by taking advantage of cloud computing, the poorly defined but hugely powerful notion of placing much of a company’s IT infrastructure and software needs in the hands of large providers ranging from SAP and IBM to Amazon.com, Salesforce.com and NetSuite.

Avery did created an Enterprise-Resource Planning (ERP) system in the cloud, relying on SAP software customized by Orchestra Software, a specialist in the brewing industry.

That system was aimed at running the overall business— not exporting. However, it has come in handy when selling brewskies to the Japanese and Swedish markets—and even a scientific research station in Antarctica. “One of the big features that our ERP system will allow us to do to expand our global footprint is a customer web portal that our international customers use to place orders directly,” explains Conner Helton, the company’s assistant controller and architect of its IT systems. “They can track the status of their shipment, see if there are any changes and also make payment through that system. Getting international payment within a week’s time is almost unheard of.”

The Next Frontier Welcome to the next chapter of how small- and mediumsized enterprises (SMEs) can compete globally. Just as the fax machine transformed doing business internationally and then email transformed it again, a new wave of technologies is giving smaller companies the ability to go places and do

Avery Brewing’s Conner Helton

things they would never have dared before. Some of the new tools are not cloud-related. Avery Brewing, for example, relies on Google Translate to help communicate with nonEnglish-speaking customers and Google Earth to study how specialty malt crops are growing in Canada. Social media tools, meanwhile, allow small companies to reach distant customers and lure them to their websites. Data-mining tools provide new insights into what customers want.

However, the cloud does appear to be at the center of growing competitiveness among small and medium-sized firms. Being able to expand a company’s IT infrastructure quickly and to cherrypick precisely which functions are needed allows CEOs to take on global risks they might not have once contemplated. Flexibility in “scaling” is particularly important for smaller companies because they can’t always anticipate a surge in orders. Using the cloud, “you can scale within hours, not months,” says John Mason, IBM’s general manager of the midmarket.

To be sure, CEOs are not taking the complete plunge overnight. Many appear to be testing one or two functions at a time. Sono-Tek, a $10 million-a-year maker of ultrasonic liquid atomizing nozzles—that earns 60 percent of its sales

Key Takeaways • Develop a strategy to deploy cloud solutions where they are most useful for what your business is trying to achieve • Prioritize functions to move to the cloud. Some of the first are usually marketing automation, customer relationship management and collaboration among employees at multiple, geographic locations • Consider retaining financial records and trade secrets on premises partly for security reasons but also because different countries have different privacy, tax and financial-reporting rules • Find a trusted technology advisor who knows your industry is critical • Remember: the cloud is not a cure-all. No vendor can solve every technology issue for every customer

SEPTEMBER/OCTOBER 2014

2014_CE_SO_Technology.indd 45

/

CHIEFEXECUTIVE.NET

/

45

8/26/14 11:26 AM

TECHNOLOGY

internationally—has moved its customer-relationship management (CRM) system to the cloud. CEO Christopher L. Coccio, says the company, based in Milton, New York, keeps analyzing and reviewing to decide which function will be next. “It’s going to be an organic evolution as opposed to saying, ‘Tomorrow, Sono-Tek is going onto the cloud and that’s it,’” he explains.

The array of SME’s doing business internationally is fabulously complex. Some companies export manufactured goods, relying on distributors and partners. Others are professional service firms that deliver engineering or legal services. Still others are retailers of everything from beer to shoes. Some are just starting out on their global strategies, but others already have graduated to opening offices, plants and stores in foreign lands. Certain companies have sprung up precisely because of the power of the cloud. One small company called Music Mastermind, based near Los Angeles, sells its musical game applications in 154 countries because it

relies on IBM’s SoftLayer hosting platform. Its business model would not be possible without the cloud.

It’s increasingly clear that the cloud, when used wisely, can make SME companies more competitive than ever against larger rivals. “There’s no question [that] the cloud levels the playing field,” says Laurie McCabe, co-founder and partner in the research firm SMB, based in Northborough, Massachusetts, which specializes in the IT needs of smaller companies. “They couldn’t possibly do all this on their own.

They are not Coca-Cola. They don’t have zillions of tech people to evaluate things.”

McCabe says one key to using the cloud is to develop a go-global strategy and understand how the technology can support what the business is trying to achieve. The functions that touch customers or employees in multiple geographic locations are often the first to move to the cloud, such as marketing, CRM, human resource systems and employeecollaboration tools.

A Cloud-Based Business Model

the music industry to allow it to sell bits of its most famous songs for a modest fee. Any source of revenue is positive Music Mastermind couldn’t exist without cloud computing. for an industry that has been disrupted by the likes of The company’s core product is Zya, a free music application Napster, iTunes and newer variations on that theme. and game that allows customers—mostly in the 13- to 24- Music Mastermind’s game allows users to download year age range—to download clips from clips and manipulate them in real their favorite songs and add their own time with studio-quality results. Its voices in what they call a “mash-up.” systems concentrate on the musical It’s wildly popular with the younger quality and the user’s experience. A set, which is reflected in the fact that user also can transform his or her own the company has 400,000 users in 154 voice into a guitar sound or that of any countries. And it has not built one bit other instrument. of the global infrastructure necessary John Mason, IBM’s general to reach that audience; instead, IBM manager of the midmarket segment, has. Apple also has helped because says it only makes sense for a small fans download Zya to their iPhones company like Music Mastermind and iPads its app stores. to concentrate on what it does The company relies on a hybrid best—creating the right kind of user cloud infrastructure based on IBM’s interface and offering the right artists SoftLayer hosting service to offer its “rather than having to spend their services. Very few major companies scarce resources building out an IT can claim to sell in 154 countries, yet infrastructure that is not going to Music Mastermind’s Bo Bazylevsky Music Masterind has achieved that differentiate them.” Out of the 22,000 in less than a year. “Without [the] customers using SoftLayer, Mason says cloud, could we have a viable product? Absolutely not. 21,500 of them are small or medium-sized. They pay a Not one that scales,” says Bo Bazylevsky, president and monthly fee that varies depending on their overall usage co-founder of the Calabasas, California-based company. levels. They can ramp up one month, then ramp down “There is no question that the cloud will dominate the the next. That flexibility is what makes cloud computing content delivery for most companies, not just ours.” such an attractive choice for so many smaller companies Music Mastermind has concentrated on persuading going global.

46 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_Technology.indd 46

8/26/14 11:26 AM

MCKINSEY & COMPANY CITES BIG DATA AS ONE OF THE EMERGING GAME CHANGERS OF THE 21ST CENTURY. GET THE WHOLE STORY AT JOBS-OHIO.COM/GAMECHANGERS.

BIG DATA KNOWS WHAT WILL HAPPEN IN THE FUTURE.

THAT’S WHY IT’S MOVING TO OH1O. IBM. dunnhumbyUSA. Teradata. JPMorgan Chase. The list of best-in-class data-driven companies thriving in Ohio is growing by the day. Hmmm. What do they know that you don’t?

THE FUTURE IS HAPPENING IN OHIO. GET THERE FIRST.

24852-6 JOBigData_ChiefEx_Ad_8x10_75_CR.indd 1

7/30/14 10:01 AM

TECHNOLOGY

SMB’s Laurie McCabe

Clouding Up Data One source of confusion is the terminology that surrounds the cloud. What is a “private cloud” versus a “public cloud” versus a “hybrid model?” The best rule of thumb is that a private cloud refers to the decision by a company to locate servers, software and data in a gated area in a host company’s data center. It is walled off from other systems and locked with a key—either literally or figuratively. But it is considered a public cloud if a company’s IT assets are located in servers that also help other customers. That may be cheaper, but it implies less security and privacy.

The term “hybrid” is what the vast majority of SME companies seem to end up with. They shift some functions off to either public or private clouds while retaining their own IT systems for older, legacy applications. “Most companies are in a hybrid state and I think they will be there for a long time,” says SMB’s McCabe. “There are so many kinds of solutions coming to the forefront that help you streamline your business, manage performance or offer broader [types] of analytics that CEOs say, ‘We’ve got to make this function in the business more effective. But we don’t have anybody in house to stand this up and manage it day-to-day.’” That triggers a decision to rely on cloud companies to buy, install and service the necessary hardware and software.

Major IT companies are chomping at the bit to expand their cloud services in the small and medium-sized business segment. SAP, the big German software company with $100 billion in sales, once had a reputation for installing its ERP systems in mostly large companies but now says that

70 to 80 percent of its 200,000 customers are in the SME segment. Kevin Gilroy, senior vice president and general manager of the company’s small and midsize segment, says one key to understanding how the little guys are using his company’s services is that they no longer have to make capital expenditures to build IT systems to support their strategies in Vietnam or the Middle East. They can convert to paying for these services on a monthly basis, which makes them an operational expense and helps give the bottom line a quick lift. “The consumption of technology is becoming more retaillike,” Gilroy says. “They don’t need engineers and architects to design systems and then other professionals to run them.

They can buy it by the drink and deploy it in a consumer kind of way.”

Just as SAP bought the online business-to-business trading platform Ariba to help SMEs buy and sell products, IBM has bulked up its portfolio of offerings by putting forward one-stop shopping. It bought SoftLayer in July 2013 and is rapidly expanding the hosting service to 40 data centers around the world. A customer’s traffic is free and runs through a closed, high-speed communications network, guaranteeing security. IBM also bought Cognos, a company that offers analytical tools, and it is rolling out those services to smaller customers. As with SAP, most smaller customers rely on middlemen to customize IBM’s offerings to their specific industrial and geographic needs.

All the computing power that the giants have put in place is what allows Avery Brewing’s Helton, a veteran of Lockheed Martin, to compete globally from the beautiful confines of Boulder, Colorado. The privately held company will produce 60,000 barrels of beer this year but doesn’t disclose annual revenue. It has started selling to a Japanese distributor who supplies American military bases there and to Sweden’s state-run liquor stores. Helton wants to continue to expand internationally. Not lacking in ambition, Helton says the ultimate goal is 350,000 barrels a year.

Avery had been using Quickbooks small-business accounting software for many years, but revenue and volume soared 60 percent in 2011. “That almost crippled the company from a systems standpoint, as well as from a human-capital standpoint,” Helton explains. “We didn’t have anything in place that could scale with us.”

By late 2012, the company moved over to the ERP system set up by Orchestra Software, a Portland, Oregonbased specialist in craft breweries, which wraps its own layer of software around SAP’s software. “The overall platform allowed them to grow and have the confidence to deal with the supply chain and all the concerns about going global,” says Brad Windecker, CEO of Orchestra, which hosts the brewery’s ERP system on the cloud for a monthly subscription fee. Some 35 people at Avery have access to the system. “Most of our

48 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_Technology.indd 48

8/26/14 11:26 AM

customers don’t even know that SAP exists,” says Windecker.

“SAP is just another part of the platform that creates a solution to the problem. If you’re less than a $1 billion-a-year company, it’s really difficult to deal directly with an IBM or SAP or Oracle.”

The ERP system helps Avery Brewing on multiple fronts, not just getting paid. International customers all have special requirements in terms of packaging and labeling.

The company’s IT systems communicate that information seamlessly to the brewery’s production staff. Moreover, because it is exporting alcohol, it has to make specific reports to the U.S. Treasury Department’s Alcohol and Tobacco Tax Trade Bureau, which the system handles automatically.

Even though Avery is based in the Rocky Mountains, its supply chain is surprisingly international and the Orchestra system helps with that as well. Some of its raw materials, such as specialty malts, come from French-speaking parts of Canada or from Germany. Some packaging materials also come from abroad, as does some of the hardware that Avery uses, such as a canning line. “The procurement of those [items] comes straight out of [the] ERP system,” Henton explains. The system handles sometimes-tricky issues, such as currency differences. Henton can select what currency to display on an invoice and be sure that it is accurate in U.S. dollars. He is beginning to explore SAP’s Ariba cloud-based businessto-business network, because he thinks it will give Avery a competitive advantage in sourcing internationally at better prices—all of which is a huge change from how a smallish company would have operated just a few years ago.

Go With Your Gut Sono-Tek, the New York-based maker of ultrasonic spray nozzles, is a classic, niche-manufacturer and exporter.

It knows how to coat things in a unique, environmentally friendly way, which is valuable to the consumer electronics, energy, medical-device, glass, textile and food industries. It can, for example, provide a precise coating for heart stents and catheters. CEO Coccio, who, like Helton, is a veteran of a much larger company, namely GE, arrived in 2001 when Sono-Tek was a purely North American company, about a quarter of its current size and selling primarily to the electronics industry.

“Our conscious strategy was to diversify in two dimensions,” Coccio explains. “First, we went into new product areas, such as medical devices and glass applications, then into advanced energy, such as solar and fuel cells. The other dimension of expansion was going from a North American company to being an international one. We started to ‘colonize’ Europe, Japan and parts of Africa.”

The company does not manufacture outside the U.S. but maintains an office in Hong Kong to coordinate Asian sales. It

Sono-Tek’s Christopher L. Coccio

also runs lab-testing facilities in Germany, Hong Kong, South Korea and Taiwan—which are spread over many time zones.

The Internet “is the only thing that allows it to take place,” he said. “Otherwise, we’d be on planes all the time and it would be inefficient.”

Distributors also can get access to information about products from Sono-Tek’s website. “When I was at GE in the late ’90s, the Internet was just becoming important,” Coccio recalls. “If you went back before that and tried to do what we’re doing today, it would have been very difficult.”

The company took the plunge into the cloud by turning to SugarCRM, a smaller, specialized provider, to manage its CRM system. Like many SME CEOs, Coccio says he will keep evaluating specific IT functions to see when it’s time to take them to the cloud, as well. “We do evaluate the ‘make it ourselves’ versus ‘buy it’ decision from time to time. Would we be better off doing that and what are the security concerns?

If you have it here on premises, that doesn’t mean it’s more secure, because someone somewhere in the world will figure out how to crack your onsite servers.”

Coccio is not a techie and relies on an IT manager, who reports to the vice president of engineering. “You need to apply your business judgment to investments in any area, including IT, and evaluate the people you have to see if something has a good, gut feel,” he says. “A lot of what CEOs do is based on [their] gut.” And Coccio’s gut almost certainly will lead him deeper into the cloud.

The bottom line? A judicious use of cloud computing can give a smaller company enormous advantages globally.

SEPTEMBER/OCTOBER 2014

2014_CE_SO_Technology.indd 49

/

CHIEFEXECUTIVE.NET

/

49

8/26/14 11:26 AM

2014 CEO of the Year

50 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 50

8/26/14 11:23 AM

Celebrating the 2014 CEO of the Year—Walt Disney’s Bob Iger In July, Bob Iger joined a roster of business luminaries that includes Microsoft’s Bill Gates, GE’s Jack Welch, Intel’s Andy Grove, FedEx’s Fred Smith and Honeywell’s David Cote.

“When Bob stepped into the CEO role at Walt Disney, the company faced significant challenges, including declining financial performance, a weakened global brand and employees who no longer believed in the company’s historic greatness,” said David Cote, CEO of Honeywell and the 2013 CEO of the Year, in presenting the CEO of the Year award at a gathering held at the New York Stock Exchange. “One of America’s greatest brands seemed to have lost its way. Shareholders, including the family of the founder, were up in arms. Bob moved swiftly to resolve conflicts, restore relationships and focus Disney back on the track of unparalleled creativity, innovative use of technology and global growth. And the results have been astounding.”

Cote was not exaggerating. Over the course of Iger’s tenure through the end of the 2013 fiscal year, Walt Disney’s total shareholder return was 202 percent. In addition, the company’s share price—$23.81 when Iger became CEO—recently hit $86.75.

In accepting the award, Iger paid homage to his former boss and mentor, Tom Murphy, former CEO of Capital Cities/ABC. “Tom taught me, as well as everyone else who worked for him, that there is never a substitute for integrity,” he said. “No matter what your business strategy was, no matter what initiative you were taking, no matter what decision you were making, it would never be and should never be at the sacrifice of integrity.”

He also acknowledged the challenges business face keeping up with the pace of change. “One of the real reasons why Disney is so successful today is that we look at change as an opportunity, not as a disruption. We believe that it’s really important for us to welcome change because we’ve learned that resisting it, trying to will it away is futile. And trying to protect the status quo—that’s never really a winning strategy.”

—Jennifer Pellet SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 51

/

CHIEFEXECUTIVE.NET

/

51

8/26/14 11:23 AM

2014 CEO of the Year

CE’s J.P. Donlon, ICE’s Jeffrey Sprecher, Honeywell’s David Cote, Disney’s Bob Iger, CEG’s Wayne Cooper, CEG’s Marshall Cooper, NYSE’s Tom Farley

WHO SHOULD BE 2015’S

CEO OF THE YEAR? Chief Executive is now accepting nominations for next year’s CEO of the Year. Candidates must be current CEOs of for-profit companies with more than $500 million in revenues who have demonstrated outstanding leadership performance and accomplishments. Visit CHIEFEXECUTIVE.NET/CEOOFTHEYEAR2015 to tell us about your nominee.

A + E Network’s Mel Berning, Nancy Dubuc and David Granville-Smith ICE’s Kelly Loeffler and Jeffrey Sprecher

Alessandra Delacruz, United Financial Bancorp’s Bill Crawford, Sylvia Rogers and TiVo’s Tom Rogers

52 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 52

8/26/14 11:23 AM

Disney’s Bob Iger and Willow Bay enjoy a celebratory toast

Mary Beth Riordan and Zurich’s Dan Riordan

Chief Executive’s J.P. Donlon raises a toast

Capital Cities / ABC’s Thomas Murphy

Bob Iger and XLR-8’s Bob Nardelli

Frontier Communication’s Dan McCarthy and Maggie Wilderotter, Harman Int’l’s Dinesh Paliwal and DeVry’s Daniel Hamburger

SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 53

/

CHIEFEXECUTIVE.NET

/

53

8/26/14 11:23 AM

2014 CEO of the Year

Capitalism Under Siege

Does the perception of cronyism, overregulation and overtaxation hurt commerce, and what should business leaders do about it?

By C.J. Prince Heated public debate surrounding renewal of the Export-Import Bank charter, which expires at the end of September, makes clear that concerns about giveaways to connected corporations have reached a boiling point in the United States. Conservatives point to Solyndra and the Ex-Im Bank while progressives point to powerful lobbying by wealthy companies, such as Boeing and General Electric, as evidence that the relationship between government and business has crossed the line well beyond benign partnership.

Meanwhile, the average citizen, soured by declining real personal income, has become increasingly cynical regarding a system that appears to benefit the big, corporate elite at the expense of small enterprise. “Since 2009, growth has been appalling and these people are struggling. Meanwhile, Wall Street is up. That’s what makes people susceptible to the idea that the system is rigged,” Lawrence Mone, president of the Manhattan Institute, told participants at a CEO roundtable at the New York Stock Exchange in July.

But they’re not necessarily wrong, said Tom Rogers, president and CEO of TiVo. “I don’t think the public is confused.

They see it clearly. There’s a reason there is a 9 percent Congress approval rating,” he said, noting that the issues CEOs are facing around growth don’t make it into the public light. “You can draw a pretty straight line from contributions to committees and the positions on those committees.”

As a result of one-sided media coverage, Main Street continues to view capitalism as corrupt. “All we read about in the

paper is who is getting fined for what and who is being investigated for what. It’s just negative about business altogether. You don’t see the positives, and that’s a major issue for this country,” said Maggie Widerotter, CEO of Frontier Communications.

Global U.S. businesses, hampered by high corporate taxes and onerous regulation, face an uphill battle for growth, as well as image, noted Bob Iger, Disney chairman and CEO and the recipient of the 2014 CEO of the Year Award. “When you’re running, as many of us are, a big, global company that is being scrutinized on a regular basis by all sorts of different entities, you are under extraordinary pressure not only just to deliver the bottom line but to deliver growth quarter after quarter after quarter. You’re looking for any angle you possibly can—never sacrificing integrity, of course—to reduce your expenses to grow your revenue. That puts a huge amount of pressure on us in many, many different directions,” he said.

That pressure has led to more inversions, like Medtronic’s proposed acquisition of Dublin-based Covidien, which would give it an Irish address for tax purposes and free up $14 billion of the company’s foreign income that would otherwise be taxed at 35 percent. “Part of competing globally is recognizing that U.S. companies are at a disadvantage on tax,” noted Steve Howe, managing partner for Ernst & Young in the Americas, adding that inversion strategies are not usually driven solely by tax imbalance but that it’s all a part of the equation for maximizing value. “Let’s not put a law in place regarding tax inversions. That’s the symptom, not the problem.”

54 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 54

8/26/14 11:23 AM

Fifth Street Finance’s Len Tannenbaum and Yale CEO Institute’s Jeffrey Sonnenfeld

Bausch & Lomb’s Fred Hassan and Christine Jacobs

Fred Hassan, chairman of Bausch & Lomb, agreed. “We are the only major country in the world that taxes foreign income. It’s really out of date and creates artificial patterns of behavior [such as the Medtronic deal]. It has really reflected a lack of leadership for the last several years in terms of not talking about it.”

A lack of introspection is one of the country’s biggest hindrances to growth, added Farooq Kathwari, CEO of Ethan Allen Interiors. “I think one of the challenges that we should think about is, what are the things we are doing internally to ourselves [that are] weakening us? We should spend a lot of time [discussing]—and I think it’s a good debate—what we are doing right here in the United States that’s weakening the country. Russia is doing it. Argentina is doing it. China is doing it. We need to be doing it.”

Although several participants agreed that a 25 percent flat foreign income tax might help U.S. businesses keep their American addresses, Medtronic, as a medical-device company, was also facing a 2.3 percent tax on revenue, pointed out Christine Jacobs, former CEO of Theragenics, also a medical-device maker. “That is a tough hurdle for any $17 billion company.”

R.R. Donnelly, a 150-year old print, digital and supply-solutions company, which “has survived the telephone, the telegraph, the radio [and] the TV,” has had to consider inversion as a strategy, given that 26 percent of its revenue comes from outside the U.S., said CEO Tom Quinlan. “We work for the shareholders. There are rules that we’ve [been] given that we play within. Those are the rules. We’re not going outside the rules. The tax code needs to be changed.”

Participants also agreed that, taxes aside, lawmakers of both parties and heads of businesses have to start working in partnership to make the U.S. a friendlier place for business.

“We need to stop fighting,” said Gregory Cappelli, CEO of the Apollo Education Group, “because if we put our heads together, we could be a much more formidable force.” It’s a problem, he added, that other countries continue to court business much more aggressively. “There’s something wrong with dozens of other governments saying, ‘Come in and make investments.

Build our infrastructure. Put in technology. Put it online. We’ll help you. Educate our people.’ Our government isn’t saying that.”

The country may have to wait for the next generation to take the helm, suggested Tom Harrison, chairman emeritus of Diversified Agency Services, a division of Omnicom Group.

“The Millennials are a very collaborative group of individuals.

They are very co-creative, they are very digitally hooked up and they are very participatory. When we get a Millennial, or Millennials, beginning to run the country and run the government, I think we’re going to have a much more collaborative, open-minded participant of government that we’re not going to get to with anybody [who] now walks the halls of Washington.”

Despite the challenges of cronyism and a hyperregulated, overtaxed climate, participants agreed that the fundamentals of U.S. capitalism will prevail. “Things actually do work in this country,” Wilderotter said. “That’s why we are still muddling along. I mean, we are talking about some fairly major issues here. I think the resilience of business in this country is [that] we go make it work no matter what we’re faced with.”

Disney’s Bob Iger and Apollo Education’s Greg Cappelli

SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 55

/

CHIEFEXECUTIVE.NET

/

55

8/26/14 11:23 AM

2014 CEO of the Year

The Role of the CFO

How broadening the finance chief’s role can enhance CEO effectiveness.

By Jennifer Pellet More than ever before, CFOs are being called upon to stretch the finance chief role far beyond crunching numbers—and for good reason. Traditional finance-team functions like tracking and reporting results, allocating capital, ensuring control and compliance and supporting decision-making have always been critical components of business strategy. But today’s increasingly complex and competitive business environment demands that CFOs work even more closely with their CEOs in charting a strategic course and steering the company along it.

Take Zurich North America, an insurance firm currently seeking a CFO. “I’m looking for a business partner,” CEO Daniel Riordan told participants in a recent roundtable discussion held in partnership with the American Institute of Certified Public

Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA). “I’m looking for someone who can create a non-siloed environment where we bring an entire executive team together to face growing challenges.”

Like many companies, Zurich faces regulatory requirements, tax considerations and cyber security threats. Still, Riordan shuns the notion of an office-bound CFO toiling behind the scenes to churn out financial reports and control costs. “I want a marketfacing CFO,” he asserts. “One who is comfortable in his own skin dealing with customers, being out in the marketplace, standing in for me or for sales—to be the face of the company. That’s very, very important.”

It’s a sentiment that resonates with Arleen R. Thomas, senior

56 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 56

8/26/14 11:23 AM

vice president of management accounting and global markets at the American Institute of Certified Public Accountants (AICPA), who notes that her organization recently surveyed 300 CEOs on current global challenges and top priorities. “Seventy-six percent of respondents said that they were spending too much time on the financial system and financial reporting,” she said. “Seventyfive percent said, ‘If we could spend more time measuring and demonstrating the nonfinancial value of our businesses, we would be in a better place.’ The bottom line is that the CFO of today and the CFO of the future need to bridge their knowledge from finance to include a more holistic view and all aspects of the business.”

Intensifying regulatory scrutiny, rampant mergers and acquisitions, shareholder activism, increasingly demanding customers and cyber security threats represent a wide range of factors contributing to the need for this broader interpretation of the traditional CEO role. Still, it can be tough to achieve, noted Kurt Schneider, CEO at Harlem Globetrotters. “Our CFO comes from an accounting background and is great at generating reports,” he said. “That doesn’t help our operating guys because they’re trying to live in the future and he’s trying to justify the present by reporting on the past. So we’re focusing on trying to find the vision of where we want to go and work toward that.”

“What I find most valuable is making sure that they understand they will sit with me on a monthly basis and give a report on the context of the entire business globally. It’s almost like mentoring. ”

Honeywell’s David Cote and AICPA’s Arleen Thomas

Getting There From Here Bringing your CFO up to speed on an expanded role may take some nurturing, noted Eric Apelfelbach, CEO of ZBB Energy.

“You can stretch CFOs to get better and better by making sure they understand what you need to hear from them and challenging them to make decisions,” he said. “What I find most valuable is making sure that they understand they will sit with me on a monthly basis and give a report on the context of the entire business globally. It’s almost like mentoring.”

Broadening an existing CFO’s role requires changing the mindset of not only the finance chief but the rest of the organization, as well. “You have to truly empower them to be sure they have a seat at the table and that everyone knows it,” says John Lundgren, CEO of Stanley Black & Decker. “When someone says, ‘what did [Mr. CEO] say,’ they have to be comfortable saying, ‘I haven’t talked to him. Stop wasting my time.’”

Spending time in the field is another way to give your CFO the confidence to step out of his or her comfort zone. For Roger Shedlin, CEO of health services company OrthoNet, that meant taking a leap of faith. “The way we really got our CFO up to speed was by putting him in charge, soup to nuts, of a cardiology management company we acquired,” he explained. “I knew I had succeeded when other fellow employees had medical questions and our CFO would raise his hand and answer them. Getting him embedded both operationally and intellectually in the business was incredibly helpful and tremendously improved his performance as CFO.” Ideally, companies that work toward growing the CFO’s skill set will apply the same concept to broadening the financial

Harman’s Dinesh Paliwal and Stanley Black & Decker’s John Lundgren

skills across the rest of the organization, noted David Cote, CEO of Honeywell. “I’m looking in both directions,” he said. “I want the finance guys to be able to have a strategic insight; and by the same token, I would like the general managers to have a fundamental understanding of finance.”

Toward that end, Honeywell has developed a five-day basic financial course for non-financial employees. The course helps the company’s general managers to truly understand terms like operating income and how cash flow differs from net income.

“While all of us get measured on financials, many general managers in the organization really don’t understand the financials,” explained Cote.

“It’s really kind of surprising how there’s a fundamental lack of understanding in a lot of this amongst people who are being measured on it.”

SEPTEMBER/OCTOBER 2014

2014_CE_SO_CEOY_Dinner.indd 57

/

CHIEFEXECUTIVE.NET

/

57

8/26/14 11:23 AM

ECONOMIC DEVELOPMENT

T R O P E ONAL R

REGI TH

T S A E H E SOUT

A state-by-state look at what the nation’s Southeastern States have to offer.

By Warren Strugatch

Chief Executive’s newest Regional Report offers an in-depth look at “The Southeast will always beat the Northeast and the the pros and cons of doing business in Florida, Tennessee, North West Coast in terms of ‘executability,’” says James Renzas, Carolina, South Carolina, Louisiana, Georgia, Virginia, Alabama, principal of The RSH Group location-strategy consultancy.

Kentucky and Mississippi.

The Southeastern states “get things done faster,” says Renzas.

As the U.S. continues its stop-and-start economic recovery, “They have more land. There is more integration on the part of the Southeast is doing rather well overall. Home to five of state and local economic development agencies. There, utilities the nation’s CEO-ranked Top-10 states and four of its Top-Five are huge supporters of economic development.” states, the region continues to bolster its appeal to relocating Competition among states in the region has led to increasingly pro-business tax policies, faster permitting and executives while retaining homegrown stars.

Thanks to a series of high-profile, incentive-laden more creative, flexible and aggressive incentive programs manufacturing wins—Volkswagen, BMW and Airbus have south of the Mason-Dixon Line and east of the Mississippi. either expanded or announced new plants—the Southeast is in “Clearly, public policy in the Southeast has created a really good the throes of reshaping American manufacturing. The region’s business climate on the tax and regulatory sides,” says Larry automotive and aviation clusters mushroomed during the Gigerich, managing director of site selection firm Ginovus. “On 2010s, pulling their multipliers along with them; professional the labor side, the fact that these are right-to-work states and service searches nearly always include Southeastern finalists. that labor costs are more affordable are very important factors.”

Favorable right-to-work laws, increasingly nimble government Increasing emphasis on job-training programs also corporate recruiters, pro-business tax policies, generally mild bolsters the region’s appeal. “Many of the states have done climate and relatively low costs of living—these and other wonderful jobs on the workforce-development side,” continues factors combine to form a business-friendly buffet designed Gigerich. “Georgia and the Carolinas are the top three states to delight corner-office palates. for job training and workforce development. They deliver the 58 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_RegionalReport.indd 58

8/26/14 11:25 AM

How The States Stack Up Grading: A = EXCELLENT B = GOOD C = FAIR X= NONE Rank GDP Per Top Corporate Best/Worst GDP Right to States 2014 Rank 2013 Capita 2013 ($) Tax Rate (%)(4) Work State

Quality of HQ State Service Incentives

Jobs Incentives

Education Green Workforce Quality (K-12)/ Incentives Quality Post-Secondary

Florida

2

4

42,187

5.5%

Yes

A-

A-

A-

-

B-

B- / B+

Tennessee

3

19

45,212

6.5%

Yes

A-

B-

B+

B

B+

B- / B

North Carolina

4

9

50,634

6%

Yes

B-

B

B

B

B

B- / A-

South Carolina

5

27

40,464

5%

Yes

A-

A-

A-

C+

B-

B- / B

Louisiana

9

24

49,077

8%

Yes

A-

B+

A-

C

B+

C/B

Georgia

10

11

46,801

6%

Yes

B+

A-

B+

B

B+

B / B+

Virginia

11

10

56,109

6%

Yes

A-

A

A-

A-

A

A/A

Alabama

17

26

39,652

6%

Yes

B+

C

A-

C+

B+

C+ / B

Kentucky

25

28

40,894

6%

Yes

B

C

B

C

C+

C / B-

Mississippi

37

37

33,200

5%

Yes

B

C-

B+

C-

C+

C- / B

Research and Analysis Warren Strugatch Sources Chief Executive Magazine survey, Bureau of Economic Analysis, Tax Foundation, New York Times Business Incentive Database

best job training and retraining for companies relocating or site selection list, and we’d try to talk them out of it. Nowadays, expanding in their states.” it’s one in five, and we try to talk them into it.”

Florida’s legislature’s Office of Economic and Demographic Logistics also drives the region, as both transportation companies and enterprises dependent on distribution favor Research told Floridians last December that their personal its northernmost states. With the growth of Latin American income growth is ahead of the national average; while GDP trade, this trend has benefitted the more southerly states, as growth is advancing, it lags behind the national average. well. “One of the major influences on the Southeast will be the Florida recruits migratory executives with a combination Panama Canal expansion,” says William Hearn, senior vice of lures, including its zero percent individual income tax president of strategic consulting at CBRE, the consulting and rate, abundant sunshine and work force capabilities. The economic-incentives group. “Most people believe the southeast Tax Foundation ranks Florida’s state and local tax burden ports up to Norfolk will be the beneficiaries. But I believe we 20th-lowest out of 50 states and fifth for business-tax climate. will see more goods moving through the east coast ports The state spends over $4 billion per year on incentive programs. that get their dredging done. One of the major projects is the recently opened inland port in Spartanburg, South Carolina, Tennessee (No. 3): Bugging Out that’s tied to BMW expansion, providing great accessibility to Volkswagen’s July announcement that it would invest over and from both Georgia and North Carolina.” $600 million in its Chattanooga plant, adding an additional “When you talk about the Southeast, you are talking about manufacturing line, was a major win for Tennessee. Other the major leagues of economic development,” notes Chicago- major recent expansions and relocations include the ABC based site selector Jerry Szatan. “Economic development in Group’s $25.5 million facility expansion in Sumner County the U.S., in the years since the end of World War II was pretty and MicroPort Orthopedics’ $100 million plant upgrade much invented by the Southeast out of economic necessity.” in Arlington. The most important cluster in Tennessee is transportation manufacturing, including automotive. The Florida (No. 2): Bringing in Business state’s key advantages in manufacturing include relatively The Sunshine State continues its recovery from the Great low labor costs and increasing productivity, says Matt Murray, Recession, driven in large part by its successful policies director of the Baker Center at the University of Tennessee. aimed at attracting migratory companies. The state’s business “We cannot compete with China on wages, but we can environment “has improved enormously under Governor compete on productivity of workforce and economy,” Scott and Enterprise Florida CEO Gray Swope,” says Gregory he notes. The Tax Foundation ranks Tennessee’s Burkart, managing director in the Detroit office and leader of state and local tax burden 6th-lowest out of 50 states the business incentives advisory practice at Duff & Phelps. and ranks its business tax climate 15th. The state “Before Scott, maybe one in 10 executives had Florida on their spends over $1.58 billion a year on incentive programs.

SEPTEMBER/OCTOBER 2014

2014_CE_SO_RegionalReport.indd 59

/

CHIEFEXECUTIVE.NET

/

59

8/26/14 11:25 AM

ECONOMIC DEVELOPMENT

North Carolina (No. 4): Tackling Tax Issues

South Carolina (No. 5): Excelling at Efficiency

This spring, North Carolina lawmakers followed up on last year’s widely-lauded tax reform to eliminate entrenched municipal-privilege taxes and reformed the corporate income tax code; the changes are designed to soften tax bite when business cycles fluctuate. There’s growing admiration for the state’s evolving business climate.

“North Carolina is turning economic development upside down in terms of servicing, client handling and tax structure,” says Jay Garner, president of Garner Economics in Atlanta.

The region’s three major urban areas continue to experience service-sector growth—Charlotte is now the country’s second-largest center of banking services—while the state’s rural areas continue to shed jobs. Major corporate relocations and expansions this year include Novozymes’ $36 million bio-agricultural R&D facility in Wake County; BorgWarner Turbo Systems’ $32 million factory expansion in Buncombe County; and GKN Driveline’s $18 million plant expansion in Lee County. The Tax Foundation ranks North Carolina’s prereform state and local tax burden 17th-highest out of 50 states, and ranks its business tax climate 44th in the country. The Tar Heel State spends over $660 million a year on incentives.

BMW’s announcement that it would invest $1 billion in its Spartanburg factory was a major win for the Palmetto State. All counties saw employment growth in 2013 continuing into 2014, yet most job growth clustered around urban areas.

There is a positive mindset at the statehouse, says site selector Gingerich. “Governor Haley is making things as efficient as possible. There is one stop for what you need to get done.”

Major recent expansion and relocations include Giti Tire’s $560 million factory in Chester County, GE’s $400 million advanced manufacturing plant in Greenville County and LPL Financial’s $150 regional headquarters in York County. The Tax Foundation ranks South Carolina’s state and local tax burden 9th-lowest out of 50 states, and ranks it 37th in business tax climate. South Carolina spends over $896 million per year on incentive programs.

Louisiana (No. 9): Touting Training In 2013, Louisiana announced more new jobs and recorded more capital investment than any year since the Great Recession began. Did somebody say, “oil exploration?” The state attracted 67 major projects representing over $26.4 billion

Innovation Depot: Building in Birmingham Larry Lilley and a couple of buddies had an idea for an IT company in 1996. What they didn’t have was money or space.

One of the young entrepreneurs offered the living room of his Birmingham apartment and the bootstrapping trio went to work.

One of their first decisions as a company was to apply to an incubator program called the Entrepreneurial Center run by the University of Alabama at Birmingham. Their nascent company, Computer Technology Solutions, was accepted. The men packed up and moved into the incubator, where they stayed for eight years. During their incubation, the center merged with another local program, changed its name to Innovation Depot and moved into new space in downtown Birmingham. The prolonged incubation period provided the ramp-up time they needed, Lilly believes.

When they did venture out into the business world, they were positioned to succeed.

Now ringing up $27 million a year in sales and employing over 250, the CTS chief looks back at the company’s lengthy incubation period with a mix of nostalgia and appreciation.

When business is slow to develop, “You start asking yourself, ‘Is this thing really going to happen?’” he notes.

“The energy of being in an incubator, as we were, and seeing other companies being successful, encouraged everybody to

celebrate success together. We’d be working at all hours and letting off steam at all hours, playing ping pong games and holding bowling tournaments. The incubator provided the sense of community you just can’t put a value on.”

Casual conversations with fellow entrepreneurs offer incubator tenants insight into such processes as hiring, realestate decision-making and intellectual property protection, said Lilly. More structured classes, lectures and workshops organized by the incubator’s staff or visiting consultants provided further knowledge.

Innovation Depot graduates like CTS account for over $250 million a year in economic impact, says Devon Laney, CEO of the high-tech/biotech business incubator, which occupies 140,000 square feet on two downtown blocks.

About four-fifths of the space is leased out as dry lab, wet lab, private office and conference space, reports Laney. Offices that can accommodate three desks rent out for $400 a month.

Ninety-three companies are enrolled, employing about 540 people.

“Our goal is to help entrepreneurs eliminate the fatal mistakes” that start-ups are prone to, explains Laney. “The real benefits come from the connecting and the relationships formed. It’s the people you meet who help you move your business to the next level.”

60 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_RegionalReport.indd 60

8/26/14 11:25 AM

CEO PERSPECTIVES:

WHY WE’RE HERE Who: Paul Thompson, Chairman and Founder, Transportation Insight Site History: Founded in Hickory, North Carolina in 1999 with 80 employees in leased space downtown, the company currently occupies about 35,000 square feet spread across three downtown buildings. It presently is redeveloping a historic, local mill into a $10 million, 76,000-square-foot corporate center downtown.

Why North Carolina?: “We are 15 minutes from wonderful mountains, four hours from beautiful beaches and 50 minutes from three resorts. We enjoy the culture of Charlotte and benefit from one of the best college systems in the Southeast. We enjoy [a] low cost of living and an unbelievably good quality of life.”

Bottom Line: “We are based in one of the distribution hubs of the country. The business dynamics to support our success are here, and the local workforce has the work ethic and logistics experience we need.”

Who: Rob Bellenfant, CEO, TechnologyAdvice Site History: Opened in 6,000 square-foot, company-owned office building in 2006 in Brentwood, near Nashville, Tennessee.

Why Tennessee?: “Growing our business in Middle Tennessee has produced many challenges, location and talent being the biggest. But it’s also proven to have incredible benefits.”

Bottom Line: “We are entirely bootstrapped. Building here has allowed us to make some decisions and take some risks that may not have been possible in more expensive cities (at least not without outside funding).

The region is still lacking a bit in elite-level IT talent, but the South has countless major universities that produce quality interns and graduates. There is no income tax in the state and the city is alive with culture and entertainment. This combination of elements produces a quality of life that has attracted major businesses and earned us a ranking as one of the fastest-growing cities in the country.”

Who: Tony Argiz, Chairman and CEO, Morrison, Brown, Argiz & Farra (MBAF) Site History: MBAF opened in downtown Miami in 1969; relocated to South Miami in 1973; and relocated to downtown Miami in 1997. It moved into its present space in Miami’s financial district in 2012, where it occupies 26,000 square feet.

Why Florida?: “The location is ideal for servicing growth-oriented, globally-oriented clients across the state and beyond.”

Bottom Line: “Miami is the gateway to Latin America. We benefit from the presence of fine local universities; from Florida’s lack of personal or state income taxes, and from Miami’s growing cultural vitality.”

Who: Dan Campbell, CEO, Hire Dynamics Site History: Company was founded in 2001 in 1,500-square-foot office in Suwanee, Georgia. Seeking more visibility, it relocated to Duluth in 2007 where it leases 5,500 square feet across from the Gwinnett Chamber of Commerce and the Gwinnett Arena.

Why Georgia?: “Georgia is in a great position in terms of growth. It is very pro-business and the school systems are very strong. There is a good Chamber of Commerce. And, we get to know the leaders in the community.”

Bottom Line: “The bulk of our business is drawn from Georgia.”

SEPTEMBER/OCTOBER 2014 /

2014_CE_SO_RegionalReport.indd 61

CHIEFEXECUTIVE.NET

/

61

8/26/14 11:25 AM

ECONOMIC DEVELOPMENT

in new capital investment, associated with 27,000 new jobs.

Nucor has started production on its $750 plant in Convent, and Bell Helicopter began building an $11.4 million aircraft assembly facility in Lafayette.

According to Louisiana State University’s economic forecasters, eight of the state’s metro areas will record robust employment gains through at least 2015, driven by increasing construction activity. Real GDP growth is slated to rise to 2.6 percent next year, up from the current 2.4 percent. Site selector Jerry Szatan touts Louisiana’s LED FastStart program, aimed at providing relocation and training programs to expanding and transferring companies. “No state has done more than Louisiana in getting the employer a workforce trained in its particular needs,” he claims.

Recent strides mark a turnaround for a state that “historically has been very challenging” as a business environment, says Thomas Ryan, principal and practice leader at Ryan’s Business Incentives and Site Selection department. “But you have a dynamic administration in place now, implementing substantial policy changes in how they work with businesses.” The Tax Foundation ranks Louisiana’s state and local tax burden fifth-lowest out of 50 states, and ranks its business tax climate 33rd. The state spends over $1.8 billion per year on incentive programs.

national rate, and the state remains a magnet for corporate headquarters. More than 70 companies with revenues north of $1 billion call the state home.

“If you are looking for a capable work force, executive-style living, connectivity to service providers and you need to be in proximity to the capital, it’s very tough to beat Virginia,” says site selector Thomas Stringer.

Major recent relocation and expansion announcements include Shandong Tranlin Paper Company’s $2 billion investment in advanced manufacturing operations in Chesterfield County, Microsoft’s $347 million Mecklenburg County expansion and CEB’s decision to invest $150 million in a new headquarters in Arlington. The Tax Foundation ranks Virginia’s state and local tax burden 21st-lowest out of 50 states, and ranks its business tax climate 26th. Virginia spends over $1.29 billion per year on incentive programs

Alabama (No 17): Taxed for Talent

Driven in part by aerospace gains, Alabama’s economy is on pace to grow 2.4 percent this year, up from 1.9 percent last year, according to the center for Business and Economic Research at the University of Alabama’s Culverhouse College of Commerce.

Last year’s economic development coup—Airbus’s $600 million agreement to build an assembly plant in Mobile—has moved into hiring mode, with about 1,000 workers coming Georgia (No. 10): Struggling for Growth onto payroll. The state’s fast pace of industrialization leaves The Peachtree State’s business-friendly governor found friends employers competing for qualified workers. in the business community by seeking their suggestions for “The state doesn’t have enough people,” says Stringer. economic development, thus spurring an increasingly pro- In Alabama, “the first thing you see is their pro-business business image in the business press. Behind the imagery, attitude,” says Gregory Burkart. The Tax Foundation ranks however, are troubling metrics. Georgia is one of two states— Alabama 10th-lowest out of 50 states, and 21st in business tax the other is Nevada—where real per capita GDP has fallen climate. Alabama spends upwards of $277 million a year on in this young century, slipping beneath the national average incentives programs. for the past 15 years. Positive signs include recent passage of Kentucky (No. 25): Hampered by Hidden Costs workers’ compensation reform.

Georgia’s “tremendous in terms of increasing the Closely associated with thoroughbred horseracing, bourbon ease of doing business, creating incentive packages and distilleries and coal mining, Kentucky continues to diversify handling business recruitment,” says local economist its economy through advanced manufacturing gains in the Jay Garner. Rural areas, however, greatly lag metro aerospace and automotive industries and growth in life Atlanta in infrastructure and workforce readiness. sciences and healthcare. Major expansions and relocations Georgia’s state and local tax burden ranks 16th-lowest this year include Bardstown Bourbon’s $150 million in the nation, according to the Tax Foundation, and aluminum production facility in Bowling Green, Diageo’s 32nd in its State Business Tax Climate Index. Georgia $115 distillery in Shelby County and Ford’s $80 million facility spends over $1.4 billion per year on incentive programs. upgrade in Frankfort.

Sometimes “hidden costs” catch execs unaware, says site Virginia (No. 11): Bring on Big Government selector Gigerich; “I don’t think people fully evaluate workers’ Virginia’s close proximity to the nation’s capital positions it compensation structure in this state.” The Tax Foundation as a natural for defense-related industries and contractors ranks Kentucky’s state and local tax burden 23rd out of 50 of all stripes—and leaves it vulnerable to government cost- states, and 27th in business tax climate. Tax reform policies cutting and other budgetary rollbacks. Professional, scientific put forth by Gov. Steve Beshear earlier this year were derided and technical services employment—proxies for government as ill-conceived, and business leaders complain of gimmickry contractors—is down 2.1 percent this year. In contrast, in budget-balancing policy. The Bluegrass State spends over financial services employment is expanding at triple the $1.41 billion per year on incentive programs.

62 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_RegionalReport.indd 62

8/26/14 11:25 AM

Toyo Tire Company’s Jim Hawk

State-Provided Training Looms as Game Changer In White, Georgia, construction on the Toyo Tire Company’s one-million-square foot expansion is proceeding on schedule, looking at completion in December. When that happens, Toyo will have tripled the space it acquired 10 years ago when it arrived in this rural region north of Atlanta, an expansion made necessary by increasing productivity from 5 million tires a year to 9 million. It will also have nearly tripled its work force, reaching 1,600 employees.

Like most of Toyo’s hires, the majority of the 500 workers the company expects to hire next year will begin work with little relevant manufacturing experience. No matter; Toyo Georgia offers all employees a variety of onsite training programs, ranging from general orientation and safety classes to electrical training, confined-space training and customized instruction designed for new equipment.

Georgia’s Quick Start program provides the training— millions of hours altogether—at no charge, part of an openended inducement the state made when Toyo picked Georgia over Alabama and Tennessee in 2004. “The training Fast Start provides allowed us to focus on building and starting up the plant,” says James Hawk, chairman of Toyo Tire Holdings of Americas. “There’s no doubt in my mind they saved us at least six months when we first opened. And

Mississippi (No. 37): Working on Recovery Mississippi continues rebuilding from coastal devastation caused by hurricanes Katrina and Rita. While historically lagging Southern states, Mississippi’s economy is “expected to perform a little better” this year, according to JP Morgan Chase economists, who predicted real GDP will rise 3 percent, with job gains approaching 1 percent. Unfunded liabilities are a problem, and the gap between basic workforce skills and industry needs yawns wide.

they’re still here helping. They never actually left. It’s grown way beyond what we originally envisioned. We continue to grow and hire, and they continue to design and deliver the training we need.”

Georgia provided a reported $8 million in subsidies to open the original plant, including a five-year property tax abatement and job creation tax credits. The company has also gotten financial aid to build a traffic entrance and its share of highway upgrades was subsidized. A 10-year revenue bond was floated and property taxes are just now kicking in. But according to Hawk, it’s the training that’s been the big deal.

Provided primarily by the state’s technical college system, the program also contracts private industrial trainers to supplement their efforts. An elaborate media center, which produces videos, posters, CDs and DVDs at the behest of the training staff, is an albeit mandatory visit for site selection teams.

According to Hawk, Georgia’s all-you-can-eat customized-training buffet provides a clear advantage over the subsidies many other states routinely offer. “Rather than giving us training grants, Georgia provides the actual resources. They’ve really become part of our organization.”

Government remains the dominant employer, followed by real estate concerns, manufacturing and retailing. In July, BorgWarner announced a $43 million plant expansion in Water Valley; in February, Caterpillar announced a $14.8 million engine remanufacturing plant expansion in Corinth.

The Tax Foundation ranks Mississippi’s state and local tax burden eleventh-lowest out of 50 states, and ranked its business tax climate 17th. The state spends more than $416 million a year on incentives.

SEPTEMBER/OCTOBER 2014 /

2014_CE_SO_RegionalReport.indd 63

CHIEFEXECUTIVE.NET

/

63

8/26/14 11:25 AM

EXECUTIVE LIFE

Business aviation represents a win-win solution for CEOs, helping them save time, cut costs and indirectly create jobs in all 50 U.S. states. / By Michael Gelfand

66 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_ExecLife.indd 66

8/26/14 11:24 AM

The worst publicity the business aviation industry could have ever received occurred on November 18, 2008, when CEOs from the Big Three automakers flew into Washington, D.C. using private jets to ask the U.S. Senate for a $25 billion taxpayer bailout package. With the country teetering on the verge of financial collapse, the CEOs’ seemingly lavish airborne arrival was excoriated in the media as tone-deaf, and an unflattering association with CEO excess was born.

That “poster boy” stigma still sticks today despite mounting evidence that business aviation is an irrefutably smart idea. It saves valuable time, enabling executives to travel to as many as four cities in a single day rather than wasting time on the ground at large airports and being hobbled by the need to navigate rigid airline schedules and booking procedures.

Additionally, colleagues can discuss proprietary information en route without fear of eavesdroppers, communicate with their companies along the way and fly directly into communities commercial airlines don’t service directly. Often, these business flyers also need to safely transport items too sensitive for a cargo hold and too large for an overhead compartment.

All things considered, the argument for using business aviation is simple: “The larger the scale of your business, the more likely it is that your executives have to be all over the country or on multiple continents in a matter of days or weeks,” says Doug Gollan, editor-in-chief of Elite Traveler. “Your company may have business in New York and London, a factory in France and meetings in Germany, or somewhere on the African subcontinent.

In almost all cases, it’s easier for executives to fly by private jet.”

The Right Wings Lots of variables, from how often you fly to where you travel most regularly, factor into which of the many levels of service and layers of aviation options to choose. “Whole ownership of a plane makes sense as a company exceeds 400 hours of flying time per year, whereas fractional ownership typically is somewhere between 50-400 hours,” says Gollan. Fractional ownership is exactly what it sounds like—owners buy a “share” of a plane that entitles them to access (50–400 hours annually or a certain number of days of the year, depending on share size) to that plane, or a similar plane in the operators fleet, with as little as four hours’ notice. With a third option, jet cards, buyers purchase a block of 25 hours of flight time on a specified type of aircraft.

“Jet cards are good for those who need between 10 and 25 hours,” says Gollan, who adds that some more frequent travelers choose to restock their 25-hour card because fractional ownership typically requires a commitment of five years. “It’s the difference between renting versus owning,” he says. (See sidebar, “Which Wings Are Right for You?”) “For many, jet cards can be great because you lock in a price

and the provider; they’re flexible enough to go wherever you want and they give you guaranteed access to a certain class of jet within 6-24 hours,” says Gollan. Ultimately, however, it boils down to what your company’s mission is, where you need to go to conduct business, how frequently you need to go there and how many people will be traveling with you.

Shy About The Friendliest Skies Many CEOs keep quiet about their reliance on business aviation (as opposed to commercial air travel) for fear of inviting the wrath of uninformed critics. However, the number and sophistication of available business aviation services and solutions continues to increase, and the sector itself is creating jobs in all 50 states and enjoying a healthy sense of optimism as its growth rises in direct correlation with the country’s strengthening economy.

“There’s no doubt that there are critics of the private aviation industry,” says Jordan Hansell, chairman and CEO of NetJets.

“But I believe that if they examined the impact we have on local and national economies, they might feel differently. Our industry provides good-paying and stable jobs, contributes to local and national tax bases in the areas where we operate and, by its nature, provides a service that allows businesses and individuals to travel more efficiently and effectively.”

In the meantime, however, CEOs still prefer to fly under the radar when flying privately. For example, the CEO of a southern California-based entertainment company with whom Chief Executive spoke for this article never mentions his private flights to clients, fearing that they won’t understand how the time it saves him ultimately saves them money—that, in fact, they will assume the opposite. “It’s like a time machine,” he says, explaining that he couldn’t stay competitive in his field without business aviation. “We use it a handful of times throughout the year when we’re in a time crunch or need to get back to the office on a certain night and a commercial flight simply can’t get us where we need to be.”

Business aviation can shave hours and even days off of the time it takes to travel via commercial airlines, he asserts. “If I were just flying from San Francisco to New York, there’s no reason fly privately, but if I need to go to an important conference or meeting somewhere remote that would otherwise take eight hours to reach by car, it’s a major help.”

Blue Skies Ahead The business aviation industry as a whole is a lagging barometer for economic recoveries and a leading barometer for downturns, says JetSuite CEO and JetBlue founder Alex Wilcox. “It’s a big discretionary expense, so it’s one of the first things cut when companies are short on cash, but we’re seeing an upswing now, and the industry is creating tons of jobs.”

For example, Embraer, the manufacturer of JetSuite’s SEPTEMBER/OCTOBER 2014

2014_CE_SO_ExecLife.indd 67

/

CHIEFEXECUTIVE.NET

/

67

8/26/14 11:24 AM

EXECUTIVE LIFE

Which Wings Are Right For You? Type of Business Aviation

When It Makes Sense

Who It’s Best For

Pros

Cons

Private Jet Ownership

>400 hours annually

Those who absolutely positively have to be there on time.

Maximum flexibility—it’s on call when you need it. Counts as a corporate asset.

You are solely responsible (directly or indirectly) for safety, security, comfort and all associated operational and maintenance costs.

Fractional Ownership

50-400 hours annually

Those who would benefit greatly from private jet solutions, but don’t fly enough to warrant the capital investment of a private plane.

Costs literally a fraction of what you would pay to own a plane. Planes are generally available with 4-6 hours notice and are maintained and staffed by the supplier.

Generally requires a two- to three-year term.

Charter Plane

1-100 hours annually

Those who fly less frequently or simply prefer not to make a long-term commitment.

Readily available through a network of thousands of brokers around the world.

Access at peak demand times can be extremely difficult, requiring you to have flexibility.

Jet Cards

10-100 hours annually

Those who prefer to pay as they go by buying 25-hour increments. fixed hourly rates and fuel costs that are built into the pricing.

Enable participants to book flights with little advance notice.

Availability can vary depending on which program you choose, which level of card you purchase and whether you are traveling during a peak travel period.

Buy-a-Seat

1-25 hours annually

Those who travel regionally and have flexibility to fly on someone else’s schedule.

Offer the amenities of private aviation, giving you a seat on small planes at prices comparable to those of commercial air travel.

Does not offer the scheduling flexibility of the other options and, for now, is still pricier than commercial travel.

Getting Better All the Time Having coped with the double whammy of negative public perception and a recession, the aviation industry is gearing up for a long-anticipated upturn. According to the National Business Aviation Association (NBAA), manufacturers of business aviation products continue to invest in research and development programs, and many of those new products are starting to reach the market now. “Virtually every airplane manufacturer in the business aviation sector has introduced one or more new models during the past three years, which demonstrates their commitment and confidence in the future of industry,” says Ed Bolen, CEO of the NBAA, who notes that the industry is continually evolving to address travelers’ needs.

Multinational conglomerates are being enticed to replace older jets in their fleets with newly introduced planes from the likes of Airbus, Beechcraft, Boeing, Bombardier, Cessna, Dassault, Embraer and Gulfstream. Some of these large companies also participate in fractional ownership and jet card programs to efficiently transport executives where they need to be domestically during peek travel periods to avoid scheduling issues with their fleets of long- and mid-range aircraft.

Meanwhile, many mid- and small-cap firms continue to take advantage of increasingly flexible ownership and fractional share programs from companies like FlightOptions (www.flightoptions.com) and NetJets (www.netjets.com).

Others opt to charter flights through a vast network of brokers, or purchase jet cards from providers like Delta Private Jets (www.deltaprivatejets.com), FlexJet, Flight Options, Magellan Jets (www.magellanjets.com), Marquis Jet (www.marquisjet. com), Sentient (www.sentient.com) and others.

Recently, a new crop of startups like BlackJet (www.blackjet.com), JetSuite (www.jetsuite.com) and Jumpjet (www.jumpjet. com) have been touting variations of the “buy-a-seat” concept. As these bold upstarts continue to lower their pricing for individual seats on small (four- to six-seat) aircraft within competitive reach of commercial first-class flights, their value proposition will likely become attractive to customers who have travel flexibility within specific geographic regions (for example, flights of under 1,000 miles from select East and West coast cities) and a comfort level with booking tickets online or via smartphone apps.

68 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_ExecLife.indd 68

8/26/14 11:24 AM

TIMING IS EVERYTHING Why miss another meeting, another airport departure, another round of golf, another dinner… another opportunity?

AAG It’s about time. It’s about service.

New York’s Premier Executive Helicopter Ser vice for more than 25 Years.

Unparalleled Safety, Ser vice, Reliability.

Call AAG at 1.877.SIK.7676 ASSOCIATED AIRCRAFT GROUP

SIKORSKY-AUTHORIZED CUSTOMER SUPPORT CENTER

flyaag.com 6365 (07/14)

charter@flyaag.com l 845.463.6500 l 877.SIK.7676

EXECUTIVE LIFE

AD INDEX Associated Aircraft Group flyaag.com 69 C-12 c12group.com 10 CohnReznick CohnReznick.com 21 Enterprise Florida perfectbusinessclimate.com 19 Greater Fort Lauderdale Alliance lesstaxing.com 63 Indiana Economic Development astatethatworks.com Inside back cover

JetSuite CEO and JetBlue founder Alex Wilcox

Phenom 100 executive jet, has moved production from Brazil to Florida. “The engines are made by United Technologies, the avionics are provided by Olathe, Kansas-based Garmin International and landing gear is manufactured by Goodrich,” says Wilcox. “It’s a huge U.S. manufacturing base, and anyone who owns a plane spends twice on maintenance to fly it 100 hours a month than it costs to buy the plane.” In JetSuite’s case, that has meant creating 200 high-quality, middle-class jobs that didn’t exist five years ago. “These are our workers who fuel, clean and maintain planes, and there are also third parties providing these services, too, so there’s no doubt that this industry is making a massive contribution to jobs,” he says.

If you consider that private jets have access to more than 5,000 U.S. airports, compared to roughly 500 available to commercial airlines, Wilcox’s assessment takes on much greater meaning. For instance, Van Nuys Airport, which serves Los Angeles and is one of the world’s busiest general aviation airports, pays more than $80 million in annual taxes and contributes over $1.3 billion to the California economy. Similarly, New Jersey’s Teterboro Airport accommodates the vast majority of non-commercial flights into the New York metropolitan area and contributes an estimated $500 million to the region’s annual economy. “If you’re looking for an efficient transfer of wealth from the wealthiest of wealthy to the middle-class,” says Wilcox, “you’d be hard-pressed to find it occurring anywhere more than it is in this industry.”

Jobs Ohio jobs-ohio.com/gamechangers 47 Michigan Economic Development Corp. michiganbusiness.org/CE 3 NetJets NetJets.com 17 Ransford ransfordtalent.com 7 Rockwell rockwellautomation.com/go/cem3 Outside back cover Sprint sprint.com/business Inside front cover Stein IAS steinias.com 13 Tennessee Dept. of Economic Development tnecd.com 11

70 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_ExecLife.indd 70

8/26/14 3:09 PM

LEADERSHIP DEVELOPMENT

Leadership Lessons from West Point Chief Executive Group’s team members recently flexed their leadership skills—and their muscles—during a full-day program of seminars and outdoor activities at the Eisenhower Leadership Center.

It’s no secret that West Point, the nation’s top military academy, excels at fostering teamwork, strategic thinking and leadership skills—all capabilities prized by the corporate world. So when Chief Executive heard about a new executive education program housed within the West Point campus, we took our team there to check it out.

“The program is built around the belief that the principles taught to West Point cadets—focus, duty, honor and drive—are applicable to business,” explained Dr. Nicole Shea, executive director of the Eisenhower Leadership Center at West Point, in welcoming us. And indeed, our day began with classroom presentations by two former military officers—retired Colonel Dr. Jack Beach and retired Lieutenant Colonel Dr. James Modlin—both of whom had gone on from military service to lengthy careers as Fortune 500 executives.

Modlin offered insights on leading innovation, while Beach schooled our group on the psychology of leadership.

Both faculty members supported their points with compelling lessons from military history.

After lunch overlooking the Hudson River, we changed into outdoor gear, divided ourselves into three teams and were briefed on the series of field exercises we were about to undertake by military training guru Lieutenant Colonel Hank Keirsey—who, tellingly, also serves as an advisor for the video game “Call of Duty.” If you’ve never spent an afternoon rappelling down a series of steep hills into a riverbed, jumping from rock to rock lugging a 30-pound boulder a mile upstream and hiking with it to the top of a mountain, it might be hard to understand how that could be a fun and effective exercise in team building. Yet all three of our teams emerged from the exercise oddly energized and with a new appreciation for our colleagues’ collective talents and abilities. So you’ll just have to take our word for it—or head to Eisenhower Leadership Center and find out for yourselves.

—Jennifer Pellet For more information about the Eisenhower Leadership Center, visit www.elcwestpoint.com

SEPTEMBER/OCTOBER 2014

2014_CE_SO_ExecLeadership.indd 71

/

CHIEFEXECUTIVE.NET

/

71

8/26/14 11:24 AM

FLIP SIDE

High Finance For companies in cannabis country, maybe it’s time to separate the weed from the chaff.

By Joe Queenan The Wall Street Journal recently estimated that the 40 publicly traded companies that make up MarijuanaIndex. org have a total market capitalization of $4 billion. Yes, there is such a thing as MarijuanaIndex.org. The companies in question sell marijuana to consumers, but they also develop products or services with a marijuana component. Their market focus is both medical and recreational.

People who work in this burgeoning field recently convened in Denver for something called the “Cannabis Business Summit.” Twelve hundred people attended. They heard presentations such as, “Paying Your (Un)Fair Share: The IRS, 280E, and Keeping Your Business Tax-Compliant.” Clearly, this thing is big and getting bigger. As more and more states relax their marijuana laws, it is certain that the industry will continue to grow at a rapid pace. What, then, is the impact of increased marijuana use on American life in general?

Perhaps the most important issue is corporate transparency. In other words, who is using marijuana—and when? The consumer has a right to know. Not everyone is okay with having his or her life savings managed by a stoner, even if the broker or fund manager is only having a short toke at lunchtime. For example, if a mutual fund company is based in a state where recreational drug use is allowed, and perhaps even rampant, investors have a right to know this.

Some investors, citing their own moral and ethical principles, will pull their money out of a fund that invests in companies that either sell marijuana or allow employees to use it. Other investors will simply want to know if anyone making trades at the mutual fund is a regular marijuana user himself.

“I don’t mind my fund manager smoking a little weed if he’s mostly handling blue-chip stocks,” says a Rhode Island investor. “That kind of fund tends to manage itself. But if he’s managing an emerging world-growth-and-income bond fund, that’s a whole different cup of tea. Smoke a couple of joints and you might nod off when the Fed finally decides to raise rates.

The result: catastrophe. So I want to know in advance how much reefer the folks handling my 401k are smoking. In fact,

I want it right there in the annual report.”

In states countenancing drug use, companies may soon feel pressure to disclose how many of their employees use marijuana for recreational purposes, even if they are not necessarily lighting up in the workplace. This is particularly relevant in areas such as order fulfillment and customer service.

“People whose computers have gone on the fritz want to deal with a technician who has his wits about him, not some laid-back stoner,” says a Florida entrepreneur who sells refurbished tablets to cash-strapped seniors. “I’m not saying that there isn’t a place in this society for laid-back stoners— burger joints, tattoo parlors, nightclubs, the post office—but they shouldn’t be helping customers repair their PCs over the phone. The last thing a customer with a dud server wants to hear is ‘Don’t worry; be happy.’”

One subject that has not received enough attention to date is the presence of marijuana users on corporate boards. Should boards identify the marijuana users on the board? How about martini users? What percentage of a board can consist of active marijuana users before things start to get out of hand?

“Recreational marijuana users tend to be patient, lowkey [and] maybe even a bit passive,” says the CEO of a major weapons-systems manufacturer. “I’m not sure that’s the type of individual we want on our board.”

Others disagree.

“Marijuana users are less likely to rush to judgment than your classic red-meat-eating Type As,” says the CEO of a small Kentucky firm that makes plush toys. “In our business, we like to have a few people on board who can slow things down [and] encourage everyone to stop and smell the roses.”

Are there industries where recreational marijuana use is still verboten, even if local laws permit it?

“Obviously, police, bail bondsmen and repo men are discouraged from using marijuana in the workplace,” says the head of a Los Angeles private-security firm. “But rampant marijuana use obviously hasn’t hurt the film industry. Wait a minute: Ticket sales are down 6.6 percent this year. Maybe folks in Hollywood need to lay off pot for a while.”

72 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2014

2014_CE_SO_Flipside.indd 72

8/26/14 11:24 AM

Connected Enterprise

Demand

Connect your Enterprise.

Help improve your performance.

Increase customer satisfaction through integrating intelligent operational assets with business systems. Top performers realize heightened production visibility, enabling rapid adaptation and response to evolving customer demand.

Read the whitepaper:

www.rockwellautomation.com/go/cem3 Copyright Š 2014 Rockwell Automation, Inc. All Rights Reserved. AD2014-43-US. * Manufacturing Metrics that really Matter, 2014 LNS Research and MESA International.

Top performers achieve

95% or higher ontime delivery*