September/October 2013

CEO of the Year

Celebrating Honeywell’s Dave Cote, p. 24

Regional Report

What the Southeast has to offer business, p. 42

Mining Technology CEOs on harnessing Big Data, p. 32

Healthcare Reform Is your company ready for the ACA?, p. 28

september/october 2013

meet the man who changed tv news

What is Fox News’ Roger Ailes up to now?

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contents

September/October 2013 No. 266

COVER STORY 56

The Man Who Changed TV News Is About to Change It Again

Roger Ailes disrupted the TV news industry when he created Fox News, now a profitable and powerful voice. But is technology threatening to destabilize access as young people increasingly opt to watch online video rather than pay for traditional TV content?

56

by J.P. Donlon

06

Editor’s Note

08

Letters

10

CEO Watch • Cianna Medical’s Jill Anderson on spinoff success • Wize Commerce’s Jeff Katz on the coming retail revolution • POV: Lexmark’s Paul Rooke on avoiding obsolescence

20

Mid-Market Report Where Mid-Size Companies Stand on Smart Manufacturing

22

CEO Confidence Expectations Improved, But CEOs Remain Cautious

24

10

CEO of the Year Celebrating Honeywell’s Dave Cote CEOs gathered at the New York Stock Exchange to honor the 2013 CEO of the Year.

by Jennifer Pellet

28

CEO Roundtable—Technology The Promise of Big Data Can aggregating and analyzing information transform businesses?

By C.J. Prince

32

CEO Roundtable—Healthcare What will be the Impact of the Affordable Care Act on Business?

Uncertainty plagues preparations for the transformation of the nation’s healthcare system.

by Jennifer Pellet

24

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contents

36

Sustainability Leaders in the Global Clean-Tech Economy Sustainability is more than just a fad—but that doesn’t make it easy.

By Dale Buss

36

42

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

by Russ Banham

52

Armchair CEO Research on Creating Companies, Jobs and Wealth

RT

EPO NAL R

REGIO

CE brings you highlights and takeaways from the latest research on business leadership, corporate competitiveness and economic trends.

by Bill Holstein

64

T HEAS T U O THE S

Essentials How to Get the Most Out of Your CMO At a time of crucial developments in customer data and social media, marketing chiefs are collaborating in new ways with the rest of the C-suite.

by Fran Hawthorne

42 67

Executive Life Beyond Business Meet seven CEOs and the unusual activities they’re passionate about.

by George Nicholas with Michael Gelfand

71

Flip Side He Used to Be a Big Shot Meet seven CEOs and the unusual activities they’re passionate about.

by Joe Queenan

72

Final Word It Isn’t Just Detroit; the Pension Tsunami Will Eventually Hit Job Creation

71

CHIEF EXECUTIVE, USPS # 431-710 (ISSN 0160-4724) is published bimonthly by Chief Executive Group, LLC with executive and editorial offices at One Sound Shore Drive, Suite 100, Greenwich, CT 06830.

Wayne Cooper, president. Copyright 2013. Published and printed in the United States. All rights reserved.

Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $198. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices.

POSTMASTER: Send address changes to Chief Executive, PO Box 15306, North Hollywood, CA 91615-5306. For subscription customer service inquiries, contact cexcs@magserv.com or 818.286.3119.

02 chiefexecutive.net september/october 2013

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The Best Tips, Tools, Insights & Practices for CEOs Exclusively online now JCPenney Board Plays Russian Roulette Succession Recently a fight broke out among the board of JCPenney about the retail giant’s future and who should lead it.

Read more online >

Five Lessons for CEOs from Yahoo’s Marissa Mayer Maybe it’s too soon to pop the champagne corks for Yahoo’s Marissa Mayer, but there are signs. People are spending more time on Yahoo’s flagship website.

Read more online >

What You Are Not Hearing About Detroit’s Bankruptcy Detroit’s bankruptcy is a warning that no city is too big to fail. Cities that fail have knock-on effects that impact business.

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As GM Braces for Disruptive Innovation, How Should You? “As General Motors CEO Dan Akerson sees it, Tesla Motors has the potential to be a disruptive force to the automotive industry,” reports the Washington Post....

Read more online >

CEOs Can’t Cut the Cost-Cutting Habit

sign up and RECEIVE FREE exclusive online ceo briefings

www.chiefexecutive.net/ceobriefing

The absence of revenue growth is driving a disconcerting trend lurking beneath the recent round of solid profit forecasts announced by companies ranging from United Technologies Corp to Wendy’s.

Read more online >

04 chiefexecutive.net september/october 2013

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editor’s note

Talent and the Talented CEOs Who Tap Them The search for talent among organizations is relentless, as is the understanding of where good leaders come from. In our cover story (p. 56) interview with Fox News CEO Roger Ailes, he informs us that identifying and securing talented people lies at the core of his success. CNBC was a struggling business channel when NBC president Bob Wright hired Ailes to run it in the early ’90s. When Ailes took over, CNBC’s asset value was $400 million. When he left two years later, it had more than doubled.

By most accounts he is popular with the people who work for him. When he left CNBC to start Fox News, 72 people followed him. So how does he hire? Ailes, who remembers the ’60s without nostalgia, regards elite universities as enemy territory. “If I get a job application from someone who went to Princeton or Harvard, they have a harder time selling me. I’d rather hire state school kids,” he told the journalist Zef Chafets, who authored, Roger Ailes, Off Camera. “They hustle, they’re not entitled, and they have a work ethic, a desire to win and practical intelligence.”

This description describes half the CEOs in the Fortune 500 and likely a majority of those beyond. It certainly applies to our 2013 Chief Executive of the Year, Honeywell’s David Cote, a product of public education and the University of New Hampshire. Cote isn’t the first CEO who was the first in his family to attend college. Our celebration of his award ceremony held at the NYSE in July (p. 24) was attended by 200 well-wishers—many of his peers and Honeywell colleagues including those who graduated from elite schools.

Ailes, a product of Warren G. Harding High School and Ohio University, would be the first to admit that his sentiment is far from a universal truth. FNC’s Washington news bureau includes Harvard grads, Jennifer Griffin, Catherine Herridge, Chris Wallace and Charles Krauthammer who went to Harvard Medical School. John Stossel, Judy Miller and Andrew Napolitano have degrees from Princeton. Amy Kellogg is a Brown University grad with a master’s from Stanford. And FBN’s brassy business reporter Brenda Buttner is not only a Harvard woman but a Rhodes scholar to boot. Although a Marist College graduate, Bill O’Reilly was hired by Ailes right after the would-be Factor host picked up a master’s in public administration from Harvard’s Kennedy School.

Unlike most outsiders coming into a company, when David Cote came to Honeywell from TRW he did not eliminate a huge swath of executives in order to bring in his own people. He had a lot more faith in the abilities of the people inside. After a number of town hall gatherings where he mostly listened, Cote came away impressed. “There was a lot of resident knowledge in the people already there,” he later recalled. “ I just needed to figure out how to build upon it.”

During his acceptance speech he joked with the audience, noting that he would like to say that in deserving the award “I did it all myself.” But that, he added, would never be true. “What we did, we did as a team and we couldn’t have accomplished any of it without the talent and effort of my colleagues here and elsewhere that deserve the credit.”

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

VP, Sales Philip G. Wren 203/930-2706 pwren@chiefexecutive.net

VP, Sales Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net

Director, Online Michael Bamberger 203/930-2709 mbamberger@chiefexecutive.net

Wayne Cooper Marshall Cooper Chairman & President Chief Executive One Sound Shore Drive, Suite 100 Greenwich, CT 06830, 203/930-2700

06 chiefexecutive.net september/october 2013

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letters & feedback

Skeptical About the Skills Mismatch [Regarding “The Great Skills Mismatch,” equipment? Why won’t firms retrain 40, 50, March/April 2013], I do not see any shortages

and 60-year-olds with university degrees to do

in people that are underemployed or unem- the work they need done today? There never ployed and looking for a better opportunity. has [been] and never will be enough recent What I see every day are firms looking for five- college grads (i.e., relatively competent and inlegged purple sheep, when four-legged white

expensive staff) to fill the exact roles firms need.

sheep are perfectly trainable.

It is time for firms to look in the mirror and

I see the great skills mismatch as an ex- take responsibility; stop blaming the market. pectation gap and a responsibility gap. Why

Paul Bryant

does a receptionist need a bachelor’s degree?

CEO

Why can’t a French Lit graduate be trained to

Operations Associates

operate complex, advanced manufacturing

Greenville, SC

Skills Disconnect “The Great Skills Mismatch” article refers to a low-paying job. Considering the high cost hundreds of thousands of jobs being “lost of an education, they want a better return on either to Asia or Mexico” and later states, investment.

“American CEOs have been complaining for at This article focused on the manufacturleast a decade that they cannot find workers ing industry, but it is not the only industry afwith the right skills.” To me, this indicates a fected. The service industry was also affected, lack of proper planning for the future. The including oil & gas. A March 2013 Oil & Gas companies were interested in short-term Financial Journal [magazine article] stated, profits in the 1970s, so they laid off experi- “Many engineers were forced out of the busienced engineers, IT people, mathematicians ness in the 1980s, which fostered an underand skilled laborers. Even call centers went lying mistrust of the entire industry among overseas. Well, what did they expect for the potential college students.” As an example, the article further states, “An article in Fortune future? There must be a long-term strategic reported that in the 1970s, 40 U.S. colleges and plan to prevent this from happening again.

Carlos Cardoso, (Kennametal’s CEO ap- universities offered degrees in petroleum enpointed to U.S. Department of Commerce gineering. By 1984, these 40 schools awarded Manufacturing Council), states, “young peo- approximately 1,500 undergraduate degrees in ple, parents and high school teachers are not petroleum engineering. By the 2000s, only 20 interested in engineering or the types of ed- remaining colleges were awarding around 800 ucation that lead to jobs in manufacturing.” petroleum-engineering degrees. In addition to I am sure that these high school and college the drop in petroleum-engineering degrees, students had parents or grandparents [who] roughly 35 million Generation X and Y emwere seriously affected by these massive lay- ployees are available to replace the nearly 70 offs and are fearful of entering the industry million baby boomers who will hit retirement and having that happen to them. Why would age between 2005 and 2020.” The proposed anyone invest their lives and career for an solution is to offer blocks of restricted stock uncertain future when it can happen again? that will vest over time to attract and retain a I have a problem with the title, “Human Re- growing scarcity of employees. This stock can source Department.” To me, a resource is an then be sold at the then-current market price. asset, and companies have been treating the Both industries have their own way of tryworkforce as a liability. ing to fix the job mismatch. No matter how you [Sending] these jobs overseas reduced the look at it, there is a serious problem in various company’s salary of those skilled workers. industries that much be addressed quickly— Now that the companies are trying to bring and there appears to be no one answer to this back the jobs to the U.S., the salary structure problem. is higher here and companies are reluctant Wess J. Schmidt to pay higher salaries, since they were used President & CEO to paying lower salaries overseas. Somehow, Strategic Business Planning and this wage gap must be resolved. College stuDevelopment, LLC dents do not want to invest in an education for Maywood, New Jersey

In the Next Issue...

Look for the following features in the November/ December issue of Chief Executive:

Introducing the Mid-Market Elite CEO Guide to Business Intelligence CEOs on Incisive Capital Spending Plus: The End of Sales as We Know It Is your company ready for a revolution in B2B sales?

08 chiefexecutive.net september/october 2013

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When teams are inspired, they can inspire the world.

And they can make a difference in the lives of many, near and far.

Š 2013 Ernst & Young LLP. All Rights Reserved. ED None.

For more information, visit ey.com.

CASE STUDY

ceo watch > case study

Cianna Medical’s Metamorphosis

CEO Jill Anderson on company sales and spinoffs.

by Jennifer Pellet

The Challenge You’re the president of a medical device company whose main product—a nonsurgical breast biopsy device that makes mammograms more comfortable—is one you believe will encourage women to get screened for potentially deadly cancer and thereby save lives. Patients rave about it and your company is already profitable, albeit small and in need of funding to grow.

Unfortunately, VC investors can’t see potential in a low-tech, $3$4 device that insurance companies won’t cover—which means that yet another good product, and your company along with it, will likely die on the vine.

The Context Jill Anderson, currently CEO of Cianna Medical, was working in cancer services at a Pennsylvania hospital when she got a call from Steve Gex, a California entrepreneur hoping to recruit her to drive an effort to commercialize the MammoPad for California-based BioLucent (which was later reconfigured and reborn as Cianna Medical).

“Absolutely not,” she recalls telling Gex. “I was in healthcare services; how could I head a sales and marketing organization?

How could I go over to the dark side?” Meeting with Gex and seeing the product changed her mind. “It was something I believed could make a real difference,” she explains.

Signing on as president in 2001, Anderson took on the formidable task of growing sales on what was—by pharmaceutical company standards—a shoestring budget and a skeleton staff. During the next six years, she made considerable headway, convincing nearly 20 percent of the country’s breastimaging clinics to buy the devices. Still, long-term prospects as a standalone company were grim.

The Resolution To position the company for the long term, management opted to focus on developing a treatment product immune to the issues that it faced in marketing the MammoPad. The result?

The Strut-Adjusted Volume Implant or “SAVI” device that delivers precisely targeted radiation for lumpectomy patients over a treatment period of five days, rather than the six weeks breast cancer radiation treatments typically require. Unlike the MammoPad, SAVI is a high-tech product, sells for a healthy $2,750 and qualifies for reimbursement by healthcare insurers.

Once implanted by a surgeon, the device essentially uses several catheters to deliver radiation to a breast tumor site. The dose of radiation can be customized based on the size, shape and location of the tumor bed, minimizing damage to healthy tissue.

The endgame Ultimately, the company opted to sell off its principle product, change its name and start fresh, devoting its resources to marketing SAVI. September of 2007 saw the sale of BioLucent to Hologic, which makes mammography equipment and other diagnostic imaging systems, and the spinout of SAVI under the new company name Cianna Medical. “We were able to negotiate a deal where we could sell to a mammography company that wanted the MammoPad for their product line and was willing to let us spin out the SAVI technology,” recounts Anderson.

“So we formed a new company and our employees were then able to participate in funding that company—approximately 50 percent of our initial funding came from our own people and 50 percent came from our existing venture capital team.” The payoff? Over the next six years, privately held Cianna grew between 20 percent and 40 percent year-over-year to become a leader in its sector.

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WHO: Jill Anderson, CEO of Cianna Medical WHERE: Aliso Viejo, California SIZE: $15 million revenue, 30 employees MENTOR: Robert Scanlon, former Secretary of Education for the Commonwealth of Pennsylvania Biggest Life Influence: “My mother, Carol. She was a small-business owner herself and she always encouraged me to go outside of my safety zone.”

Extreme Sport: “I’ll tell you an extreme CEO activity: taking care of an 18-month-old. That’s extreme. Trust me.”

WHO: Jill Anderson, CEO of Cianna Medical WHERE: Aliso Viejo, California SIZE: $15 million revenue, 30 employees MENTOR: Robert Scanlon, former Secretary of Education for the Commonwealth of Pennsylvania Biggest Life Influence:

“My mother, Carol. She was a small-business owner herself and she always encouraged me to go outside of my safety zone.”

Extreme Sport:

“I’ll tell you an extreme CEO activity: taking care of an 18-month-old. That’s extreme. Trust me.”

By providing targeted radiation therapy where it’s needed most, the SAVI applicator minimizes damage to healthy tissue and lowers the risk of cosmetic side effects.

The Lesson Understandably, Anderson places great value on remaining flexible and future-oriented. With SAVI comfortably established, she’s now readying her team for the next commercialization challenge. “We’ve gotten to a point where we are looking for other technologies to bring to market,” she says. “I have an ongoing R&D effort and we are optimistic that we will bring a new, exciting technology to the market within the next year or so. We’ve also been looking for possible acquisitions that are as exciting as SAVI was for us. Those are not easy to find, but we’re fortunate in that if we were to find something like that we have the track record to have access to capital for the right deal.”

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ceo watch > point of view

POINT OF VIEW

Structuring the

Unstructured

Why Lexmark’s Paul Rooke is fixing the engine while the airplane continues in flight.

by J.P. Donlon Transforming one’s company before the market disrupts it is not a task that CEOs undertake lightly. Management experts often compare the challenge to trying to repair an engine while the aircraft continues to fly—but it certainly beats the alternative. No leader wants to risk becoming the Kodak, Blockbuster or Borders of his industry.

Lexmark, a $3.2 billion Lexington, Kentucky, maker of printer equipment faced such a dilemma, as its traditional core business started to decline several years ago. A spin-off in 1991 from IBM, the company spent about $555 million on seven additional acquisitions since it bought Perceptive Software in 2010 to help further its focus on software and print services. From 2007 to 2010 it initially sold off its consumer inkjet-printer business and finally sold what remained—its business-inkjet operation—to Funai Electric for $100 million. Molly Toll-Reed, a credit analyst at Standard & Poor’s, told Bloomberg that Lexmark’s competitors were also exiting the hardware business “because the equipment business is going nowhere.” Lexmark competitors, such as Xerox and Hewlett-Packard are making similar transitions.

In an April analyst call, Lexmark CEO Paul Rooke said 2013 sales will decline by almost 10 percent from 2012 as inkjet revenue declines more than 40 percent, offsetting gains in services and software. No one said changing course from a hardware-centered to a software and solutions-centered business wouldn’t involve an air pocket. The company has already migrated its business-printing devices into most big retail operations. Labels in most pharmacies, including Walmart, are printed on Lexmark devices.

The acquisition of Perceptive Software, which specializes in electronic storage and retrieval of data, has helped boost Lexmark’s sales. Together with its acquisition of ACUO, a medical software firm, the company is able, for example, to scan images in hospitals and connect them with core documents to provide a single, patient-wide view. The healthcare industry is drowning in unconnected data, and the endgame for Lexmark is to drive more revenue from software and solutions via its strategy of “structuring unstructured data.” The imaging market alone is around $70 billion.

“Every company has a core system—ERP, SAP, Oracle, whatever it is—designed to process massive amounts of structured data,” says Rooke. “But outside the core, outside the circle, is a real mix of what we refer to as unstructured information. It could be emails; could be documents, contracts, invoices; could be digital. [It] could be videos of surgeries, or high-def images of CT scans. All this stuff not processed by

these core systems is unstructured, but companies have to make sense of this unstructured data and connect to the core in order to act on it intelligently.”

Born in South Houston but raised in Midland, Michigan, where his father worked for Dow Chemical, Rooke graduated from the University of Michigan as a mechanical engineer. In 1980, he started his career with IBM at the Austin, Texas, plant where its typewriters were made.

In fact, his first two weeks on the job involved being on the Selectric assembly line. “They said, ‘If you’re going to support the line operation, then you need to know how the stuff is made,’” he recalls.

Some consultants say that as much as 80 percent of the information within any company is unstructured, and falls outside the core run by enterprise systems such as SAP and Oracle. Seventy percent of most processes are, by definition, unstructured, meaning they are manual, paper-based, and disconnected. So it’s a big productivity issue for many enterprises.

“We’re going to be living in a mixed world of paper and digital for some time, because there’s not an immediate substitute for paper for a lot of the transactions and things that happen,” says Rooke. “Despite what we once read about the paperless office of the future, the fact is the transactional nature of paper is a very usable medium. “The challenge is: how do you deal with it where it makes sense, so the content can be automated seamlessly and not be a barrier to productivity.”

In what way is your “structuring the unstructured” niche solving real problems for companies?

We try to leverage information that may be locked in company silos. Part of the problem is that the information is not only in different forms but in different locations. If we can help aggregate it, that represents a major boost. Take a back-office operation like accounts payable. Siemens is one example of a very large European international customer with huge back-office operations that require processing all the invoices they have from their suppliers.

Because the invoices come from a variety of different suppliers, it can be difficult to integrate them into one’s enterprise system.

With the intelligence we have in our software, we can look at these invoices and automatically extract content in a very human-like way. Consequently, it automates the whole process and connects it the company’s core SAP system in order to deal with it.

Their pain point is getting at content that’s trapped on paper with

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Reduce time to market

Our control and information technologies and expertise help you to combine production velocity with precision delivery, meaning you can get ahead of the competition. And stay there.

To see how we could drive your business forward, visit

www.rockwellautomation.com Copyright Š 2013 Rockwell Automation, Inc. All Rights Reserved.

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ceo watch > point of view

Doesn’t this put you squarely in competition with big players like Xerox or Hewlett-Packard?

We don’t believe so, and here’s why: When you look at the competitive map, there are pure hardware competitors, other imaging players and pure software competitors—SAP maybe at the high end with smaller players following. Then, there are solutions players, people who have integrated hardware and software. We’re unique in having imaging output—scanning—with software to solve this unstructured problem. The others—IBM, Dell, EMC, Oracle now with Sun—are mostly PC server-storage and software, so they’re attacking different problems. Xerox, for example, is an imagingsolutions provider, but they’re in the business processing outsourcing (BPO) business. They bought ACS, which is a BPO firm. You’ll hear them say, “We’re in the services business,” which is the outsourcing of services, a very different play. We’re not in the outsourcing business.

We’re in the solutions business. Very different.

Which companies best represent your target customer base?

We have a big opportunity selling our solutions to the Fortune 1000. That’s why we have a $3 billion imaging business. We’re in nine of the top-ten retailers in America, including Walmart and Target. We’re in nine of the top-ten worldwide banks. Healthcare, particularly hospitals, is drowning in unstructured information.

If they didn’t use the Lexmark process, what process would they be using?

Much of this is manual. People manually enter the information in files, or input the data into a system. Banks are a classic example.

Some send bags of documents to our solution center because a lot of this involves trailing documents. Think of new accounts opened or mortgage applications with all the supporting documents that follow. And consider why banks often ask multiple times for the same information. Many times, they lose it. They put documents in a bag, the truck picks them up from all these branches and takes them to a centralized processing center, they unzip the bags and a large number of clerks manually enter it, inputting errors along the way.

Using our systems, some of the large banks have cut their cycle times to process a mortgage loan application from three weeks to two days.

How do you charge for your service? Is it a fee for service or retainer?

On the imaging side, we sell hardware and the supplies. On the software side, we’ll sell a license, and then we’ll get a maintenance annuity after that for keeping up the software. In addition, there are professional services, such as analyzing how to optimize a

Z

different formats. They were scanning it and extracting it at a much lower extraction rate. Our software improved the rate by another 30 percent—a huge gain in productivity for them, because all of those people having to deal with exceptions in a massive flow of invoices was a productivity killer.

WHO: Paul Rooke, CEO of Lexmark Best management thinker: Peter Drucker Favorite aphorism: “Technology is interesting, but it’s the people who create and sell the product.”

Biggest Influence: “My father, who grew his career

at Dow Chemical, taught me a lot about business, in general, and dealing with people. He also knew how to achieve balance between work and family.”

Favorite private activity: “My daughter sings and

I like to play piano.”

Best management book: “Blue Ocean Strategy,” by

W. Chan Kim and Renée Mauborgne.

Favorite musical style: Contemporary Christian Observation on hometown of Lexington, kentucky: “It has basketball, bourbon and horse

racing. What more does one want?”

Biggest worry or concern: “Are we moving fast

enough?” customer’s output, including offering a process to improve it. Our professional-services people get paid by the hour for whatever the engagement is.

How do you leverage your offerings to stall competitors from trying to win that business away from you?

These multi-function devices that a Walmart or Target needs to print certain things in [its] stores are also capture devices because they’ve got a scanner built into them. Once a customer becomes aware of the other process-software elements we offer, these become natural onramps to process other things in the store, such as backoffice data or whatever it is. The imaging device is much more than just a commoditized thing. Properly understood, it’s actually a process-improvement device. That’s our differentiation. It’s the synergy between the imaging side and our software side.

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ceo watch > ceo brief

Wize Commerce CEO Jeff Katz offers insights on the coming retail revolution and how to harness the potential of search engines and Internet sales.

Readers of The Wall Street Journal may recognize Jeff Katz as the pundit whose 2012 op-ed took Google to task for “stacking the deck” by playing favorites. “It’s easy to see when Google makes changes to its algorithms that effectively punish its competitors, including us,” wrote Katz, whose digital marketing company depends heavily on search engines to funnel customers to its shopping sites. The thrust of his gripe? Instead of sorting URL results by relevancy to search terms—as search engines, by definition, purport to do—Google gives greater weight to those that advertise most heavily on its site.

The piece sparked a maelstrom. Naturally, Google took issue with Katz’s charges—posting a detailed response just six hours later—and a host of Internet activists rushed to take sides in the ensuing debate. A year later, those waters have calmed, but Katz’s frustration still strikes a chord with the many CEOs struggling daily to navigate the notoriously complex and fickle world of e-commerce.

It’s a struggle that Katz, whose business model depends on helping clients optimize traffic and—ultimately—sales, well understands. “One of the interesting things about the online world is that you have different universes—the Google world, the social media world, the mobile device world, the Amazon and Apple worlds—where audiences reside,” he notes. “If you’re a marketer, you have to be thinking about all of those worlds—and that turns out to be hard to do.”

While each has distinct attributes, all of these worlds increasingly intersect with one another, as well as with traditional brick-and-mortar sales venues, when it comes to reaching customers. Online consumers comparison shop with a vengeance, weighing price, delivery fees and timing— as well as customer service ratings and return policies—when deciding where to buy. Online-only merchants, as a result, have become increasingly sophisticated about monitoring, managing and matching one another’s offerings—resulting in a world where prices change on a daily, even an hourly, basis.

Meanwhile, brick-and-mortar stores must contend with customers who come into their establishments to browse, then use mobile devices to find and buy the same items for lower prices online. “What’s ahead for us is even more raw competitiveness that technology is helping to make happen,” says Katz, who watched a similar transformation take place in the travel industry as the founding CEO of the

Z

CEO BRIEF

Wizening Up About E-Commerce

Who: Jeff Katz What: CEO of Wize Commerce Where: San Mateo, California Size: 400 employees Motto: “Set the bar high—and then move it up a peg or two.”

E-mail Sign Off: “Rock and roll!”

Favorite Band: Alabama Shakes Interests: Trail running, hiking, skiing and snowboarding online travel company Orbitz. “Already, if I’m shopping for a sneaker at Foot Locker, I can whip out my phone and use my Amazon app to find out that it’s $7 cheaper delivered to my house in two days and I can order it right then and there. I can use an app to scan a barcode in a store and comparison price check.”

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ceo watch

Chief Executive of the Year 2013 Selection Committee

Dan Glaser President and Chief Executive, Marsh & McLennan Fred Hassan Chairman, Bausch & Lomb Senior Partner, Warburg Pincus William Hickey President and Chief Executive, Sealed Air Christine Jacobs Chairman, President and Chief Executive, Theragenics Tamara Lundgren President and Chief Executive, Schnitzer Steel Industries istockphoto

Robert Nardelli Chief Executive, XLR-8 David Novak Chairman and Chief Executive, Yum! Brands 2012 Chief Executive of the Year 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 James Turley Chairman and Chief Executive, Ernst & Young

c on tact us Corporate Office Chief Executive Group, LLC One Sound Shore Drive, Suite 100 Greenwich, CT 06830 Phone: 203.930.2701 | Fax: 203.930.2700 www.chiefexecutive.net Letters to the Editor letters@chiefexecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 | Fax: 847.730.3666 advertising@chiefexecutive.net Reprints Geri FitzGerald, EVP, Publisher Phone: 203.930.9798 gfitzgerald@chiefexecutive.net Back Issues Back issues are $33 each. For back issue availability and additional order information, please contact us at: Phone: 203.930.2701 circulation@chiefexecutive.net Subscription Customer Service Chief Executive, P.O. Box 15306 North Hollywood, CA 91615-5306 Phone: 818.286.3119 | Fax: 800.869.0040 cexcs@magserv.com www.chiefexecutive.net

Wize Commerce, which gets between 40 million and 50 million visitors a month on its Nextag shopping site, is in the process of broadening its repertoire.

The company plans two new sites that leverage its analytic technology to help consumers vet their online options and—not incidentally—to reduce its own dependence on the search engine world dominated by Google. Wize.com, which features the tagline “Millions of options, one Wize choice,” sounds like something of a Zagat meets Consumer Reports hybrid—the site will offer an overarching recommendation, supported by as list of options. The second, Pricemachine. com (tagline: “The place to shop if you care about price”) is described by Katz as “not a place to find the lowest price; it’s the place to shop if you really want to learn everything about price—the fastest price delivered to me, the most recently changed price, the price at my favorite vendor, the price at the closest retail outlet to me.”

Ultimately, Katz envisions something of a retail revolution—one that companies will need to adapt to in three key areas in order to survive: Get Ready to Manage Dynamic Pricing. Brick-and-mortar retailers may need to rethink their business models or step up their games to compete, notes Katz, who points out that airlines charging for baggage checking could be akin to retailers charging for expert advice or the opportunity to try clothes on. “I’m speculating that we’ll see unbundling in retail—making sure that retailers get paid for the value of their deliverables,” he says.

Enable Salespeople with Information. “Whether it’s on a work station, a tablet or a phone, you have to empower that person because the customer is empowered already,” says Katz, who envisions a world where store managers and line employees can verify and match an Internet vendor’s price.

Acknowledge Online Shoppers in Physical Stores. More than 80 percent of shoppers who walk into a retail store have shopped online. “When they come into a store, we should do everything we can to make sure that online shoppers are recognized in the physical store and vice versa,” notes Katz.

“Retailers should be preparing for a very exciting and thriving world that benefits customers versus the ‘let’s ignore it for now’ strategy that’s been widely happening in retail,” sums up Katz. “If they do these three simple things, retailers have a powerful future.” —Jennifer Pellet

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Illustration: Pablo Lobato

Thorns & Roses Thorn Jon Corzine will not be cuffed over MF Global’s improper handling of customers’ funds leading up to the commodity brokerage firm’s spectacular collapse in late 2011. Federal investigators have found no evidence that the disgraced Wall Street titan broke the law. The Commodities Futures Trading Commission hit former MF Global CEO Corzine (and former Goldman Sachs CEO) with civil charges concerning some $1.6 billion in misused customer funds in connection with the eighth largest bankruptcy in U.S. history and the largest Wall Street collapse since Lehman went under in September 2008. Do you think Bernie Madoff wishes he had Corzine’s attorneys?

Rose Bowing to board pressure, Walt Disney CEO Bob Iger has agreed to delay his planned retirement by 15 months. Iger, who became Disney’s chief executive in April 2005, was scheduled to step down in April 2015. Under his leadership, Disney shareholders have enjoyed a 193 percent return.

Maybe the Mouse should consider pushing it off until 2016.

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mid-market report

Where Mid-Size Companies Stand on Smart Manufacturing How many middle-market manufacturers currently leverage advanced manufacturing—and what are those who do getting out of it?

While some manufacturers have moved operations abroad or reduced capabilities, the middle-market manufacturing base remains a solid contributor to the local, regional and national economies. Manufacturers also represent a significant portion of the middle market as a whole—accounting for more than 17 percent of U.S. middlemarket revenues and approximately 33,000 companies. Given the middle-market manufacturing base’s relative importance, the National Center for the Middle Market and the National Association of Manufacturers recently teamed up to explore the implementation of advanced manufacturing techniques (AMTs) within the sector and the impact of those efforts on improving competitiveness and catalyzing economic growth.

The research found that nearly half of middle market manufacturers currently leverage advanced manufacturing techniques—and to great advantage (see charts below). The techniques have a significant impact on profitability within these companies without negatively affecting jobs. In fact, users of advanced manufacturing nearly unanimously stated that the techniques have had a positive impact on their profitability.

On average, firms reported a 20 percent increase in their profitability over the past five years. What’s more, advanced manufacturing users reported a net increase of 3.4 percent in jobs over the past year and anticipate growing jobs by 4.7 percent over the next 12 months.

The data presented in the tables and charts on this page offer a look at the status of AMT implementation among midsize manufacturers and the impact AMT has had for those adopting it.

Do You Use Advanced Manufacturing Techniques (AMTs)?

The practices most commonly leveraged by survey respondents who use AMTs include: automation (68%); computer technologies such as CAD, CAE or CAM (62%); process technologies (59%) and information technologies (57%).

Have AMT Practices Met Your Expectations?

What Has AMT Adoption Done for Your Company?

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

20 chiefexecutive.net SEPTEMBER/OCTOBER 2013

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ceo confidence index

Expectations Improved, But CEOs Remain Cautious Over the next 12 months, what changes do you forecast for your firm compared to the past 12 months?

60.0% Up over 20%

50.0%

Up 10 to 19.9%

40.0%

Up less than 10%

30.0%

No change

20.0%

Down less than 10% Down 10-19.9%

10.0% 0.0%

Down over 20%

Revenues

Number of Employees

Capital Expenditures

The CEO Confidence Index, Chief Executive’s monthly gauge of CEOs’expectations for business conditions over the next 12 months, stayed relatively flat in August, falling just 0.4 percent from July to 5.82 out of a possible 10. The Index has fallen more than 4 percent since June when it reached a two-year high of 6.09, a number that had not been seen since May 2011.

The Current Confidence Index, which provides a snapshot of CEOs’ perceptions of current conditions, rose 1.3 percent from the previous month to 5.58. This marks the 46th consecutive month (since November 2009) that CEOs’ ratings of future conditions is greater than their rating of current conditions, indicating an optimism that the economy and business conditions will continue to improve.

The rating of current conditions are better than CEOs had predicted a year ago. When polled in August of 2012, CEOs’ expectations for business conditions in August 2013 was for a rating of 5.34. Current conditions in August 2013 were actually rated 4.5 percent higher than CEOs had expected. This is the third consecutive month where the current conditions rating beat the expectations from a year earlier.

Despite beating expectations, the Confidence Index did fall this month, and comments from CEOs indicate that the optimism is cautious if not tenuous. The CEO of a middle-market consumer goods manufacturing company provided perspective on current conditions and how it is affecting her business: “Doing business in this economic environment is like running through ankle deep mud. We are getting stronger doing it but progress is very slow.”

Concern regarding the implementation of the new health care law, the Fed’s quantitative easing program, gridlock in Congress, and a general mistrust of the current administration’s aptitude in helping spur the economy are all weighing on our respondents’ level of confidence, according to the survey comments we received.

Profits

The CEO of a multi-billion dollar industrial manufacturing company provided his purview on current conditions and the mitigating factors affecting his optimism: “The U.S. market is a better performer among weak markets globally. We would have a strong recovery if policy makers would [get] out of the way. The U.S. will be burdened with uncertainty around the ACA, tax policy, spending proclivity, and monetary policy (which cannot overcome delinquent public policy). This all is compounded by a malaise in Europe and a modest Asian retrenchment after some superb growth. Where is the leadership? But as business people we must find a way to perform in this reality.”

There is great disparity in the level of confidence from CEOs among companies of different sizes. The smaller the company, the less confident they are both in current and future business conditions.

For the smallest companies in our survey (with revenues less than $10 million), current conditions were rated at 5.40 and future conditions were rated at 5.63, which are both more than 3 percent lower than the overall ratings.

The largest companies in our survey (greater than $100 million in revenue) are by far the most confident cohort. CEOs of these companies gave current conditions a rating of 5.81 and future conditions a rating of 6.07. These are each more than 4 percent higher than the overall ratings.

Based on anecdotal evidence from the comments we received, it appears the largest companies in our survey have been able to become more efficient and streamlined during the economic downturn, with many achieving growth in revenue and profits recently. Smaller companies seem less capable of cutting costs and increasing efficiency than their larger counterparts, which could be a contributing factor for the divergence in confidence levels.

22 chiefexecutive.net september/OCTOBER 2013

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24 chiefexecutive.net september/october 2013

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Celebrating honeywell’s

dave cote

In July, CEOs gathered at the New York Stock Exchange to honor David Cote, chairman and CEO of Honeywell, as the 2013 CEO of the Year. Selected by a panel of CEO peers, Cote is the 28th CEO

Microsoft’s Bill Gates, GE’s Jack Welch, Intel’s Andy Grove, FedEx’s Fred Smith and Southwest Airlines’ Herb Kelleher.

“Dave Cote went into a company that needed to be turned around; and all of a sudden, things began to fall into place,” said David Novak, CEO of Yum! Brands and the 2012 CEO of the Year, in presenting the award.

“Isn’t it funny how one person can cast a shadow of leadership that can make the difference that can change a company for the better? That’s what Dave Cote has done.”

While Cote was honored primarily for his transformation of a $38 billion diversified technology and manufacturing company (See “What Transformational Leaders Do,” CE July/August 2013), the 2013 CEO of the Year Selection Committee was also impressed by the leadership role he took on as an advocate for business in Washington. As Duncan Niederauer, CEO of NYSE Euronext, put it, “What you have done outside of what is a pretty busy day job—your leadership on the Fix the Debt Campaign—has been truly inspirational.”

“Once we got past the performance dimension, the selection committee looked for demonstration of leadership qualities, including vision, innovation and the human component—such as employee engagement and the company’s impact on the community,” explained Tom Saporito, chairman and CEO of RHR International, who noted that the task was akin to selecting the best gold medalist at the Olympics. “Finally, we looked at the person—at attributes like values, courage, integrity, judgment and personal reputation.”

In accepting the award, Cote acknowledged a feeling of validation. “What makes this especially gratifying is that, in the beginning, neither the press nor security analysts were all that kind to me or Honeywell,” he said. “We started with three un-integrated companies, a history of missed expectations, an empty pipeline of products, $8 billion in write-offs over the previous four years and numerous legacy issues. From that start 11 years ago to this award has been an extremely gratifying walk through the park.” —Jennifer Pellet september/october 2013

CEOY_SO13.indd 25

BEN HIDER

to receive the award, joining a roster of business luminaries that includes

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ceo of the year

Maureen Kelly and Honeywell’s Dave Cote enjoy a celebratory toast

Yum! Brands’ David Novak presenting the award

KKR’s Henry Kravis

GAMCO’s Mario Gabelli and David Cote

The CEO of the Year Award

KKR’s Kravis, XLR-8’s Bob Nardelli, NYSE Euronext’s Duncan Niederauer on exchange floor

Reach Prep

(From Left)Yasmine Nahim, Kelly Bojic, Chris Morency and Joshua Terry all attended the CEO of the Year event as part of their internships at Chief Executive Group (CEG). All are participants in REACH Prep, a program that helps bright, motivated black and Latino students succeed by mentoring and tutoring them from an early age through their full academic careers. CEG is a proud to support REACH Prep.

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CEG’s Wayne Cooper, NYSE Euronext’s Niederauer, CE’s J.P. Donlon, Honeywell’s Cote, Yum! Brands’ Novak, CEG’s Marshall Cooper

WHO SHOULD BE 2014’S

CEO OF THE YEAR? Chief Executive is now soliciting 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/CEOoftheYear2014 to tell us about your nominee.

GTL’s David Loring and Anne Loring BioLifescience’s Zaki Hosni

CEO of the Year Dave Cote shares a moment with his mother, Georgette

Sons Ryan Cote and John Cote flanking their father

Cote, Kelly and UPS’s Scott Davis

september/october 2013

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ceo roundtable | healthcare

What Will Be the Impact of the Affordable Care Act on Business?

By Jennifer Pellet

With January 2014—the date that key provisions of The Patient Protection and Affordable Care Act (ACA) go into effect—fast approaching, businesses are scrambling to get a handle on the complex and ever-changing mandates and regulations that make up the new health law. And for good reason—the ACA will affect companies’ benefit designs, workforce compositions, reporting systems, tax administration and, ultimately, their bottom lines.

Yet, while CEOs recognize this imperative, preparing for the transformation of healthcare is no easy feat, agreed business leaders gathered for a roundtable discussion held in partnership with EY, the consulting firm previously known as Ernst & Young. “We just don’t know to what extent employers will be held accountable or what the rules are, so what we have is the certainty of uncertainty,” pointed out Bob Nardelli, CEO of

XLR-8 and the former CEO of Home Depot. “For CEOs, that demands a lot of scenario planning.”

Many companies, for example, may find that providing insurance is far more costly than ponying up the per-employee fine of $2,000 for non-compliance. Those who consider the noncompliance route would then need to factor in the impact on retention, and to gauge whether incurring penalties and raising wages to retain employees would actually be more cost effective than offering coverage. “For a medium-size employer, [paying the penalties] might be a better policy except for one thing—it’s sort of a signal of bad corporate citizenship, right?” noted Maya MacGuineas, president of the Committee for a Responsible Budget. “So basically I’m going to make what I believe is a bad economic decision for our business to avoid the appearance of bad citizenry.”

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This compliance dilemma also varies greatly by business model. Companies that rely heavily on significant numbers of part-time employees or independent contractors are grappling with the ramifications of the ACA’s definition of full-time employment of an average of 30 hours a week or at least 130 hours per month. “For some, this will be a huge issue,” noted Nardelli, who cited the challenge facing retailers. “You’ve got to tell your store managers that now, in addition to everything else they’re doing, they have to make sure that those 50 part-time employees you rely on—the ones they call in when someone else is out sick—stay under 30 hours a week.”

“We have company stores and franchise stores,” added David Novak, CEO of Yum! Brands. “On the company side we’ve always made healthcare available for all our employees and we’ll continue to do that. But that isn’t the case for our franchisees, most of whom own about 25 stores, each employing 40 people. They’re really in a chaotic situation because they don’t know what to expect.”

Government agencies, too, face huge implementation hurdles. For example, the ACA charges the Internal Revenue Service (IRS) with enforcement of the individual coverage mandate. “They are the ultimate decider as to who receives federal tax credits and subsidies and, eventually, certifying the employer mandate,” notes Anne Phelps, principal of EY’s Washington Council. “The IRS has to examine tax credits and see if they’ve been given appropriately, as well as whether employers are in compliance or at risk for penalties. We just don’t know if they’re ready for that role.”

Even those who stand to benefit from 33 million more Americans having healthcare coverage are dubious about the ACA. In theory, as a pharmacy benefit management company, Express Scripts should see a bump in business due to healthcare reform, but CEO George Paz expressed concerns about whether that would prove to be the case. “I look at the overall costs of this bill and I don’t think that anybody really understands what it means and what it will take to administer it,” he said. “Considering where the economy sits today and all the red tape and the regulation we’re going to layer on top—something like 13,000 new IRS agents—that’s just what this country needs right now, right?

We’re paying $100 million a year just to comply with Medicare right now, so I can’t imagine what all this will do to our equation.”

What’s more, employers that already have strong healthcare coverage in place will need to decide how to handle healthcare going forward. “Those companies will now need to document that coverage in a way they’ve never had to before and to consider new rules,” noted Phelps. “For example, under ACA you have to offer coverage to full-time employees and dependents but not to spouses, which is something you may have been doing previously.

Do you continue to cover spouses? Will your competitors?”

Companies that sought to combat rising healthcare costs through wellness programs that helped employees to quit smoking and manage chronic conditions may find that those approaches no longer pay off. “I’m often asked why this law is significant to employers who already offer coverage,” said

“I think we all want affordable, efficient healthcare for all— the goal is pretty clear.”

Implementing ACA: Where Are We Now? While the effective date of key components of the ACA remains January 2014, the federal government has announced a litany of postponements since the Act was passed. Most recently, the administration decided that 2014 would be a non-enforcement year for the ACA’s employer mandate provision, which requires businesses with more than 50 employees to provide healthcare coverage or face a per-employee fine. “For employers, they’re saying, ‘We hope you’ll move forward and voluntarily use 2014 as a practice year, but we’re not going to enforce penalties [for non-compliance] until 2015,” explains EY’s Anne Phelps.

Why the delay? Both employers and the government bodies charged with enforcement need more time and clarification around the rules of the mandate. “The requirements for the mandate didn’t come out until about six months ago,” points out Phelps.

However, the October 1 start of open enrollment for the new state-based health insurance exchanges—government-managed marketplaces where individuals and small businesses can purchase insurance at competitive rates—remains in place, noted Phelps.

“The administration made a very clear decision not to delay the individual mandate or to have a non-enforcement year for it. They’re really pushing to get the exchanges up and running and individuals enrolled.”

Eventually, these exchanges are meant to be available to the employees of large corporations as well. “This year they are meant for individuals who aren’t eligible for employer-sponsored coverage, but in 2017 they open up to large employers,” said Phelps. “That may become a viable option.” Ultimately, the exchanges may benefit American companies coping with an aging workforce, enabling them to transition older workers—whose healthcare coverage is more expensive—to the exchanges. september/october september/october2013 2013 chiefexecutive.net 29

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ceo roundtable | healthcare

1

2

4 1) EY’s Anne Phelps, Fix the Debt’s Maya MacGuineas 2) XLR-8’s Bob Nardelli 3) Theragenics’ Christine Jacobs, Express Scripts’ George Paz 4) Bob Nardelli, EY’s Kate Barton, Honeywell Aerospace’s Tim Mahoney

Phelps. “It’s because employers have always offered coverage on a voluntary basis, but now are being told who to offer coverage to, when to offer it and what to offer.”

As painful as that transition may be and as flawed as the ACA appears, several business leaders expressed optimism that business leaders, healthcare providers and the government would eventually work through the kinks of healthcare reform.

“What we’ve been doing historically hasn’t done very well for us in terms of [containing] costs so maybe shaking it up [might help],” pointed out Andreas Kramvis, CEO of Performance Materials and Technologies at Honeywell. “Clearly there’s an investment period up front and whether it pays off in the end will depend on the provisions made for the free market.”

“Out of every crisis there is an opportunity and perhaps some

3

good things will come out of this one,” agreed Christine Jacobs, CEO of Theragenics. “My own company runs a very large risk of not surviving (see sidebar: “The ACA: Unintended Consequences?,” p. 31), but if I can bet on the American spirit, my hope is that the healthcare providers will see this marching along and get their act together.”

“I think we all want affordable, efficient healthcare for all— the goal is pretty clear,” summed up Novak. “The problem is that we haven’t figured out how to get there. I believe that our company will be able to handle this and work through it like we’ve worked through other issues. And, as an optimist, I’m hoping that the ACA might be a 60/40 start in the right direction and that we will, as we do in business, find our way to a better solution.”

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5) Former U.S. Senator Judd Gregg, Orthonet’s Roger Shedlin 6) Cianna Medical’s Jill Anderson, EY’s Anne Phelps 7) Roundtable CEOs conversing

5

6

7

The ACA: Unintended Consequences?

Among the many elements of the ACA under fire is a 2.3 percent excise tax on medical devices that went into effect in 2013. Meant to capture the excess gains that medical device manufacturers are expected to receive as medical expenditures rise under the ACA, the tax applies to total revenues, regardless of whether a company generates a profit. As a result, many companies—particularly the kind of innovative startups essential to job growth—are now paying more in taxes than they generate.

“The medical device tax has thrown us from a profitable company to a non-profitable company,” reported Theragenics CEO Christine Jacobs. “I just announced the closing of a plant.”

Cianna Medical is also grappling with the tax. “I, too, had to lay off people coming into this year to offset the medical

device tax,” noted CEO Jill Anderson. “I’m not a profitable company and I won’t be profitable until I get my revenue 20 percent to 30 percent higher than what it today. So that $300,000 in medical device taxes has to come out of my venture capital funding. If you multiply that by a few years, you need an additional $1 million in funding just to cover this ACA funding mechanism.”

Anderson also pointed to the ACA’s Physician Sunshine Payment Act as an onerous burden for companies like hers. “I must report any transfer of value of $10 or more, or $100 cumulatively over a one year-period [by my sales team]. Basically it’s very important to this administration to know whether I bought a few bagels for physicians and whether that transaction influenced their purchasing of my device.”

Roundtable Participants Jill Anderson, CEO, Cianna Medical • Kate Barton, Americas Vice Chair–Tax Services, EY • J.P. Donlon, Editor-in-Chief, Chief Executive • Ana Dutra, CEO of Leadership and Talent Consulting, Korn/Ferry International • Judd Gregg, former U.S. Senator • Terrence Hahn, President & CEO, Honeywell Transportation Systems • Christine Jacobs, Chairman & CEO, Theragenics • Andreas Kramvis, CEO Honeywell Performance Materials and Technologies • David Loring, CEO, World GTL • Maya MacGuineas, President, Committee for a Responsible Budget • Tim Mahoney, CEO, Honeywell Aerospace • Robert Nardelli, CEO, XLR-8 • David Novak, Chairman & CEO, Yum! Brands • George Paz, Chairman & CEO, Express Scripts • Anne Phelps, Principal, Washington Council EY • Roger Shedlin, President & CEO, OrthoNet september/october september/october2013 2013 chiefexecutive.net 31

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ceo roundtable | big data

The Promise of Big Data

Can aggregating and analyzing information transform businesses?

By C.J. Prince

Key Takeaways • Big Data offers enormous growth and productivity potential.

• Projects that start with the business need, rather than the technology, see the greatest success.

• Consumer privacy issues remain a key challenge; collect only the data you need.

There is no question that Big Data promises big reward for companies that successfully harness its power.

Opportunities abound for sales and revenue growth, price optimization, recruitment, customer service improvement, productivity spikes—across every department and function in the business.

“There is evidence that points to growth rates being about 20 percent higher in companies that apply Big Data strategies, compared with companies that don’t,” Microsoft Dynamics General Manager Christian Pedersen told attendees gathered for a Big Data roundtable discussion held at the New York Stock Exchange in partnership with Microsoft Dynamics.

Yet the precise path to realizing those opportunities is not as clear, attendees agreed. CEOs of companies large and small continue to struggle to get their arms around both the concept and the practical application of Big Data. Even those who have invested in technology and systems for aggregating data are not sure which initiatives will yield the most fruit. Others are stymied by organizational siloes that don’t allow for the easy sharing of data across the enterprise.

Microsoft Dynamics’ Christian Pedersen and Two Harbors’ Tom Siering

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Aetna’s Michael Palmer, CEG’s Wayne Cooper, American Tower’s James Taiclet

But some early adopters provide solid examples of how to harness data for strategic business objectives. Pedersen cited Nike’s use of sensors in its shoes, which allows runners to measure their pace and workout distances. “It gives the consumer a really good experience, but that’s not why Nike did it. Nike executed the concept because they want to have more information about their consumers,” he said. The sensors collect data about how the shoes are utilized, what kinds of surfaces they’re being run on, how often they’re being worn, and they transmit that information back to Nike. “Once the consumers have used their shoes long enough, they can proactively reach out and sell them new shoes.”

Data analyzed strategically can help companies better anticipate the value of future investments. Aetna, for example, is helping corporate customers better forecast health issues among its employee base, explained Michael Palmer, head of Aetna Innovation Labs. One-third of the U.S. population is afflicted with metabolic syndrome, a condition characterized by factors such as large waist circumference, high blood sugar and elevated blood pressure, among others. Employees with metabolic syndrome are approximately 1.6 times as costly as those without it. “So instead of costing your employer $4,000 a year, you cost them $6,000. That’s a big deal,” Palmer noted. “If you as the employer can get people out of metabolic syndrome, in theory, you can cut your healthcare costs.” By looking at the growth rate within a specific corpoate population and then drilling down to the individual level, Aetna is able to help its large customers predict which wellness programs will give them the biggest return on investment.

Avoiding the Data Deluge For those just starting out, it’s easy to become overwhelmed by the sheer volume of data, pointed out Farooq Kathwari, CEO of Ethan Allen Interiors. The furniture company collects data about customers from multiple sources, including 2,000 interior designers, who interact with consumers daily and 1,000 truck drivers who deliver the product to consumers’ homes.

“We are lucky in the sense that we are a vertically integrated company, so we get information from manufacturing, from retail, from our interior designers, from distribution,” he said. “But the challenge is what do you do with it? How do

you prioritize it? If you don’t do that, Big Data can be a burden rather than a benefit.” Kathwari’s strategy is to simplify as much as possible. “It’s about relative importance. God gave us five fingers, so I always say, ‘Give me five priorities,’” whether it’s data, whether it’s product, whatever.”

In general, it can take time—once Big Data systems are in place—until the data can be used strategically, said Jeffrey Sonnenfeld, CEO of the Chief Executive Leadership Institute at Yale, citing the the statistic that while 81 percent of utilities collect data on outages, only 60 percent use it to business advantage. Kevin Burke, president and CEO of Con-Ed, said his utility installed equipment over the past two years to get a better sense of how the transmission system was operating across a large region. “So far the data are being used more forensically than in real-time operations,” he said.

One way to avoid data deluge is to begin with the business priority and then look for the technology and systems to support it, said Jim Taiclet, CEO of American Tower, which operates communications sites around the world, including many in emerging markets that rely on wireless technology for communications. The company identified a top priority, which is to keep its electrical power up 99.8 percent of the time. Sensors were installed on multiple parts of its tower installations, including fuel tanks, which are sometimes the targets of theft. With the sensors, the company can monitor fuel levels in real time. “If they are changing faster than actual usage, then someone’s stealing it and we need to get a truck right out there,” said Taiclet. In the U.S., through its network operations center, the company has tied sensors from fuel towers to the dispatch system, so that trucks can proactively be dispatched to those areas that most need fuel. Thanks to that efficiency, he said, “when we had Hurricane Sandy here, none of our generators ran out of fuel.”

Taiclet pointed out that the technology his company uses isn’t that complicated or costly. Today, Big Data systems can be implemented at a much lower price point than ever before.

Pedersen pointed out that, with the advent of cloud computing, companies no longer need thousands of their own servers.

Instead, they can remotely harness the power of servers in the cloud. “You get in, you consume the compute power you need; and then, when you don’t need it, you get out. You only september/october 2013

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pay for the exact time you use it,” he said.

Of course, technology can only do so much. Talent in data analytics is becoming essential for companies that need to ensure the intelligence coming from their data churn is reliable. “We do predictive maintenance on turbo machinery,” said David Cote, CEO of Honeywell. “Part of this is figuring out the vibration monitor. You don’t know what you’re looking for in the beginning.

It’s about accumulating piles of data and just trying to figure out what is the predictor of a failure? What signal do I see that says, ‘Vibration has increased. I’m going to have a problem?’ That’s where the math guys come in. For us, it’s going to be a big deal, having those kinds of people.”

Honeywell’s David Cote and Microsoft Dynamics’ Christian Pedersen

Big Data, Big Brother?

The intersection of Big Data and consumer privacy and the potential impact on business, is still relatively unknown—a concern to CEOs who don’t know just what their companies’ legal liabilities will be for aggregating useful data. “Legally, how does this ever get sorted out? Who really owns the data?” posed Cote.

And how much privacy would consumers be willing to forego to allow companies to make their day-to-day lives easier?

Utilities employing smart meters to remotely monitor electricity consumption make life more convenient for consumers, but privacy is a major concern, Burke noted. “Because you can tell when somebody’s home, when they’re on vacation, just by by looking at their electric consumption.”

Healthcare is another area with strict privacy laws that don’t allow for certain types of data sharing that could be beneficial to patients. “I think the regulations actually make

Yale University School of Management’s Jeffrey Sonnenfeld and Ethan Allen’s Farooq Kathwari

it harder, in theory, to get better care, because if all that data were available to your full-care team and to you, you’d probably make better decisions. I think we’ll eventually get to the point where folks are willing to share more.”

Meantime, Pedersen’s advice is simple: “If there’s no reason to have personalized data, don’t.”

Roundtable Participants Kevin Burke, Chairman & CEO, Consolidated Edison • Wayne Cooper, Chairman and President, Chief Executive • David Cote, Chairman & CEO, Honeywell • Linnett Deily, Former Deputy U.S. Trade Representative and Ambassador • Jim Hart, President & CEO, Senn Delaney • Farooq Kathwari, Chairman & CEO, Ethan Allen Interiors • Grace Lieblein, VP, Global Purchasing & Supply Chain, General Motors • Wayne Morris, Corporate Vice President, Microsoft Dynamics • Michael Palmer, Head of Innovation, Aetna • Christian Pedersen, General Manager, Microsoft Dynamics • Thomas Siering, President & CEO, Two Harbors Investment • Bradley Sheares, Former CEO of Reliant Pharmaceuticals • Jeffrey Sonnenfeld, Senior Associate Dean for Executive Programs, Yale University’s School of Management • Bennett Stewart, CEO, EVA Dimensions • James Taiclet, Chairman & CEO, American Tower 34 chiefexecutive.net september/october 2013

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sustainability

Leaders in the

Clean-Tech Economy

Sustainability is more than just a fad— but that doesn’t make it easy.

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by Dale Buss

8/29/13 12:17 PM

Every few weeks, dozens of denizens of 26 villages in the western Philippines gather up their discarded nylon commercial fishing nets and bring them to a central palletizer, where they’re crunched into raw material that will end up in carpet squares made by Interface, halfway around the world in Georgia. For at least three reasons, CEO Dan Hendrix is jazzed about the $1 billion company’s $300,000 investment in the process.

First, he says, the supply “is cost-neutral because if you get enough fishing nets, it’s much cheaper” than virgin nylon. Second, Interface is “cleaning up the ocean and doing something that’s sustainability measures where the raw and immediate business helping these villages, too.” And third, the effort gets the com- case alone isn’t enough to justify it. pany that much closer to an overall sustainability goal Hendrix “Sustainability is the next big wave; what if 15 years ago a CEO calls Mission Zero, which is to completely eliminate Interface’s had assumed that the Internet was just a fad?” asks Jay Friedlandenvironmental impact by 2020. er, a business professor at College of the Atlantic who specializes “It’s good business and it’s the right thing to do and our in social responsibility. “It’s about combining social benefits and customers care,” Hendrix says. “What every CEO is wrestling environmental stewardship and economic vitality, figuring out with is that consumers won’t pay more” for corporate sustain- ways to create shared values for all of those [goals]. That [activity] ability, “but they care.” creates innovation and entrepreneurship and new ways of doing In fact, nearly every CEO these days is dealing in some form things. Companies will see value that was latent.” with these twin modern dictates of corporate sustainability, which Adds Chris Laszlo, an associate professor at Case Western used to be called environmental stewardship. There’s an almost Reserve University’s Weatherhead School of Management: overwhelming public expectation for their companies to be “There are rising expectations by companies and employees working proactively, even aggressively, on this front. Therefore, and investors of what companies should do in terms of impacts about half of today’s CEOs agree that there is a business case for on society and the environment. So it’s about a smart business sustainability, up from just 20 percent three years ago, according solution, not about a liberal agenda.” to a recent survey.

While B2B customers and consumers alike universally applaud nearly every single “sustainable” thing a company does, Trend or Transformation? they’re reticent to pay more for the privilege of helping serve On one level, sustainability is simply synonymous with produc- the planet. About 10 percent of American consumers will activity improvement and reduces stresses on the environment cept a price penalty in order to purchase a product positioned merely by extending the time-honored prosecution of innovation as green or sustainable—but 75 percent won’t agree to trade to reduce and improve inputs ranging from raw materials to en- off environmental advantages for a decrease in performance, ergy and to refine the resulting outputs. Every CEO is constantly and the remaining 15 percent still don’t care much about susstriving to do that anyway. The second level of sustainability is the tainability, even now, according to Procter & Gamble research. tricky one: determining how much to capitulate to demands for Meanwhile, it’s up to CEOs to decide how far they want to go in committing their companies to the next environmentally pristine supplier, the next huge energy-efficiency initiative or Key takeaways: the next green-tinged project to ensure that raw materials or manufacturing done on their behalf in an emerging market Corporate sustainability now has become a clear priority for meets the standards of the sustainability police. most CEOs as they attempt to meet growing expectations by consumers, investors, governments and other constituencies “Right now, the emphasis is on investment, but it will take a while to sort out what’s socially correct versus what’s correct Effective sustainability strategy has become systemic, seeking for business,” says John Grace, president of corporate-brandhappy synergies of productivity improvements that also reduce a company’s environmental impact and enable the CEO to ing consultant BrandTaxi in New York. “That’s what’s being claim the “sustainability” mantle determined in this period of time: what’s socially correct about sustainability versus what’s correct for business.”

CEOs can expect customers to care about a company’s approach to sustainability but not to be willing to pay the extra Ever since the first Earth Day 43 years ago, a rising drumbeat costs of seeing environmental policies implemented of environmental concern has been fed by the American and global news and entertainment media and the educational system— The global auto industry has addressed sustainability head-on and is getting credit for the effort despite obstacles, such as a even while industry worldwide has dramatically cleaned up its act. lack of consumer interest in electric vehicles However, over the last five years, the sustainability phenomenon has become a juggernaut of concern for corporate governance “Sustainability” has taken on broad, extra meanings that can snare CEOs, including social issues that have nothing to do for three reasons. with being “green” First, the children of Earth Day have become the conistockphoto

“It’s good business and it’s the right thing to do and our customers care.”

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sumers, business executives, managers, employees and bureaucrats of today, and their minds think in green hues about everything. Second, their predilections about sustainability are being translated every day into new-product designs, marketing campaigns, Hollywood movies and government mandates that spread and reinforce the sustainability ethos.

And third, the last decade’s dubious hype over “global warming”—fed by many of the same systems and sensibilities as the Earth Day phenomenon—has created a backdrop of strong expectations that companies now can never do enough to reduce their environmental footprints because vast climatic destruction is all but inevitable unless they do.

“All of these things exert an absolutely powerful force,” asserts Kathy Nieland, leader of PwC’s Sustainable Business Solutions practice unit. “But if you’re doing sustainability right, you’re delivering business benefits—ROI and all those things that businesses are looking for—as well as benefits to the environment and to the society in which you operate. It’s increasingly important to tell the story of what you’re doing, particularly for the younger generation of consumers.”

For example, Procter & Gamble has been boosting its own environmental responsibility for two decades, but lately it has been intensifying, broadening—and marketing—it in new ways.

A recent emphasis has brought 50 plants worldwide to “zerowaste-to-landfill” status, saving $1 billion a year for the company by harnessing electricity from incinerating trimmings from Pampers production, for instance, and converting paper refuse into ceiling tiles in Mexico.

“Only in a landfill does that waste have no value,” points out Len Sauers, vice president for global sustainability. “Our goal was to find some value in all that waste, which has been a good investment for the company. Plus, not paying to have the stuff landfilled.”

P&G also has undertaken showier sustainability initiatives, such as inventing and distributing a chemical that purifies drinking water in emerging markets. Detergents have been a bellwether for green efforts, as well, including boosting liquid concentrates to reduce shipping volumes and costs, promoting use of detergents that work well in cold water and launching Tide Pods, which are heavily concentrated and control load portions that diminish rampant detergent overdosing worldwide. Tide Pods became a $500-million product globally in their first year in 2012.

A Consumer-Created Push A recent question posed to former P&G CEO Bob McDonald by an audience member at a green conference illustrated why, even with such accomplishments, changed social expectations are driving corporate leaders to keep pushing the envelope on sustainability. “As a mother of almost-two-year-old twins, I think there’s probably a special place in hell for me [for using hard-to-decompose disposable diapers],” Wendy Rosen, a media-relations executive with DuPont Industrial Biosciences told McDonald by way of introducing the query: “What kind

of technology innovation are you bringing to that particular product?” McDonald was happy to be able to respond that P&G already has taken 40 percent of the material out of Pampers over the last decade, while improving performance—but he also felt obliged to pledge that P&G is “working hard” to do even better.

The incessant drumbeat of new and improved sustainability gambits continues. General Mills is pushing to boost raw-materials sustainability across its product lines, including buying one million eggs from cage-free hens for its U.S. retail operations last year. Nike has released a new mobile app called “Making” with the lofty goal of helping the fashion industry—and consumers—decide what source materials are the most environmentally responsible. Sodexo is working with college-campus food-service managers to meet growing student expectations for “local” sourcing of produce as well as cutting fuel consumption by ordering supplies just once a week instead of two or three times. Novartis has cut the unit cost of its Lamisil Gel by more than 55 percent simply by replacing plastic packaging with recyclable paperboard.

At the Waldorf-Astoria hotel in New York, a sustainability push has produced a 12-percent decrease in waste since the start of implementing true eco-friendly practices in mid2012. The effort has included installing high-tech kitchen composters, changes in room recycling and an annual waste audit.

“We want to be able to say we’re the iconic, sustainable hotel in New York City,” says Flann Harris, the hotel’s purchasing manager. “We’re not there yet, but it positions us in the marketplace positively on something that our customer base does care about.”

Yet Chris Nassetta, CEO of Hilton Worldwide, is one-upping that effort with a comprehensive sustainability program for the chain aiming at cutting waste, carbon and energy use by 20 percent and water use by 10 percent, which he says Hilton is nearing at the end of a five-year window announced in 2009.

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sustainability

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“Our sustainability success has only complemented our “If you want to reduce the amount of waste from packaging business success,” Nassetta says, citing more than $147 mil- that goes to landfills, you can move incrementally,” Nieland exlion in cumulative cost savings across the system—even while plains. “But now you need to actually optimize things at a higher Hilton opened 1,148 new hotels and more than 170,000 rooms level. Like, why do you need packaging at all? Do you just need around the world over a three-year period. So “sustainability it to protect the product or is it a marketing consideration for and the achievement of our corporate goals” are “one in the distinguishing your products from those of your competitors? same,” he asserts.

Maybe you can achieve these marketing goals with a different Indeed, the gamut of corporate sustainability efforts runs technique. Sustainability requires you to look at things with a as wide as the variety of business itself. But while many com- different kind of lens.” panies have initiated one-off “green” efforts for decades, the At the same time, even as they might grasp the significance of emphasis for CEOs now is to approach sustainability goals sustainability to modern corporate governance, CEOs also must systematically and for the long term, keeping a “triple bottom “cascade the sustainability message to their organizations in a line” of environmental benefits, financial return on investment disciplined way,” says Clinton Moloney, the managing director and overall social-responsibility goals in mind. That strategy of PwC’s Sustainable Business Solutions. “There’s still quite a bit requires making sustainability as fundamental a concern as of work to do to get middle managers to have that viewpoint. Any the stock price, executive succession, company culture and time you make a philosophical shift in business, there’s always other primary responsibilities of the CEO. work to be done to enroll the rest of the company in that strategy.”

istockphoto

Sustainability Semantics The latest wrinkle for CEOs in “sustainability” thinking is that the very term has become amoeba-like, often bulging and stretching to cover a variety of corporate attitudes and policies that have nothing to do with strictly environmental outcomes.

Launched by activists and endorsed by some CEOs, this amorphousness often is aimed at getting companies to embrace or go along with other progressive agenda items. Collectively, these tropes used to be known as “corporate social responsibility,” but—now—by shoving them into what has become the nearly sacrosanct arena of sustainability, these additional goals can be promoted and protected as part of a nearly untouchable package whose separate components may or may not stand up to individual scrutiny as a CEO’s priorities.

For example, Novartis CEO Joseph Jiminez includes as non-environmental “sustainability” goals “making a long-lasting impact on health, the economy and global health-care infrastructures in underserved communities.” Likewise, Hilton Worldwide CEO Christopher Nassetta believes that sustainability goals “are just one component of a web of challenges driven by broader global development trends, so we could not solve for sustainability in a vacuum.” And Nestlé CEO Paul Bulcke has come to include improving nutrition labeling as a sustainability imperative.

“The environmental area is where a lot of this stuff grew out of, but the social arena now is just as important,” says College of the Atlantic business professor Jay Friedlander.

The rising sway of activist, non-governmental organizations has played a huge role in warping the definition of sustainability.

Oxfam International, for example, recently conflated environmental policies and workers’ rights in condemning the “sustainability” records of the “Big 10” of global food companies.

Thus, it was no surprise that Cargill CEO Greg Page recently acknowledged he has come to define sustainability broadly as meeting “today’s needs without impairing the world’s capacity to serve future generations,” as the grain-processing giant struggles with NGO demands over child labor on cocoa farms in Africa.

Sodexo includes as a “sustainability” goal developing its people and promoting “diversity” in its own workforce. “We bundle our goals together where we think we can impact society and the human beings we serve,” explains George Chavel, president and CEO of the Gaithersburg, Maryland-based food-service giant.

At Kering, the France-based owner of Gucci and other lifestyle brands, boosting “biodiversity” of its own workforce, as well as “fighting violence against women” and “empowering” them worldwide are “sustainability” goals. “In all areas of the social path, we have a specific responsibility to do something,” says Marie-Claire Daveau, chief sustainability officer. “We think it’s the social path of sustainability.”

Pressure to blur the distinctions between “green” initiatives and other elements on a progressive wish list can come from the outside, but John Grace blames CEOs and boards if they give in to it. “They’re trying to cobble together every ‘good’ that they do under one umbrella,” says the New York-based president of Brand Taxi, a globally renowned branding consultant. “But in the long run, they’ll be found out. Truth is the ultimate arbiter.”

Some CEOs are recognizing this situation. “‘Sustainability’ is becoming somewhat confusing; the definition got a lot broader than it was when people were just talking about the environment,” said Dan Hendrix, CEO of carpet manufacturer Interface. “So we’ve actually kicked around not calling it ‘sustainability’ anymore.”

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sustainability

High Stakes for Auto Industry No one is in the sustainability spotlight like automotive CEOs. Their industry transformed the globe and it remains the most environmentally impactful, so the sustainability stakes are high in just about everything they do and so is the outside interest.

Nowhere else can forming and executing “sustainability” strategies be so frustrating and muddled. Automakers are whipsawed by crucial yet sometimes conflicting consumer expectations, long product cycles, promising but complex technologies and the ever-higher bar set by stiffening government environmental mandates.

Yet with practically every decision they make—from engineering and design to manufacturing practices to futureproduct planning and marketing—car-company CEOs must peer through some sort of sustainability prism or risk going awry.

“Sustainability is woven into our global strategies,” General Motors CEO Dan Akerson said at a conference earlier this year.

“Every decision we make is: I want to know what it’s going to do to us in 2023, 2033, 2043, so that somebody isn’t looking back to me like I kind of, in my weak moments, look back to prior management and say, ‘What the hell were they thinking?’”

Interestingly, the general public credits automakers as “green” even while CEOs struggle with how to go in that direction.

Toyota placed No. 1, Ford No. 2, Honda No.3, Nissan No. 5 and Volkswagen No. 7 among companies across all industries in the latest version of Interbrand’s closely watched Best Green Brands survey of consumers. “What may have started in the periphery, today lives at the heart of the business and brand strategies of

the world’s most successful auto companies,” observes Andrew Martschenko, a senior director of strategy at Interbrand’s New York office.

Automakers used to try to trump each other with breathless touts of the horsepower and handling of their new sheet metal, but now the brand-building drumbeat focuses on out-greening one another. No sooner had Ford’s Executive Chairman Bill Ford Jr. pledged recently to cut the company’s carbon-dioxide emissions another 30 percent by 2025—on top of a 37-percent drop since 2000, for example—than a VW executive in Germany was promising the company would become No. 1 globally in sustainability via ambitious energy-efficiency gains in manufacturing under a program called Think Blue.

Giving such prominence to a sustainability ethos also is causing problems for the industry, and electric vehicles provide the best illustration. One of Akerson’s predecessors as CEO of GM, John Smith, was pilloried for killing the original mass-market batterypowered car, the EV1, in 2002. Now, just about every auto brand has an EV or a “plug-in hybrid” like the Chevrolet Volt, but they can’t travel substantially further on a charge than the EV1 did 20 years ago, and they remain very pricey.

So mainstream American consumers have been rejecting all-electric vehicles en masse. Yet auto brands are forced to treat EVs as the lynchpin of their future lineups by an Obama administration that has invested heavily, both financially and politically, in the commercial success of the segment. Federal tax credits of up to $7,500 are meant to lubricate purchases, and

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popular culture keeps propping up the idea that all-electric cars are the most responsible way to travel.

The pressures are immense on CEOs, and some are drinking the Kool-Aid. Akerson is striving to cut the sticker price of the Volt by $5000 to try to boost its potential mass-market appeal.

Already in 2013, an electric-vehicle price war of sorts has erupted as Nissan and Ford have slashed stickers on their money-losing EVs in a last-ditch effort to woo reluctant consumers.

Meanwhile, shedding what he called “German angst” about making paradigm-busting decisions, BMW CEO Norbert Reithofer told shareholders at the annual meeting in May that the company is embracing “electro-mobility” because “being the spearhead of change means taking a calculated risk. The future belongs to those who dare to take bold actions.” So BMW has begun producing an i3 all-electric car and plans an i8 plug-in hybrid, with Reithofer’s promising that “we will earn money with [the i3], too.”

On the other hand, German luxury rivals Audi and MercedesBenz have remained much more conservative about EVs. Ford wasn’t an early producer of EVs. Toyota essentially has gotten out of the all-electric business and is concentrating on bolstering the dominance of its Prius brand in the conventional-hybrid segment.

In addition, no automotive CEO is more skeptical of EVs than Sergio Marchionne. His conglomerate was among the slowest in the industry to delve into the segment, and for good reason: For

every all-electric version of the Fiat 500 that U.S. dealers sell, he told an industry group in May, the company loses about $10,000.

“Doing that on a large scale would be masochism to the extreme,” Marchionne complained. “My fear is that regulators are rushing precipitously into embracing electric vehicles as the only technological solution” to environmental concerns.

Ironically, so far—and perhaps astonishingly in the future— those CEOs who are fixated on EVs may be denying the auto industry faster adoption of a basket of other technological approaches that could bring about true, long-term sustainability that American consumers would embrace.

For one thing, new methods are boosting the mileage of conventional gasoline engines by double-digit percentages.

A new generation of fuel-efficient “clean diesel” vehicles are catching on with consumers. And the growing revival of domestic production of hydrocarbons means that relatively clean-burning natural gas actually may become the preferable automotive-propulsion system of the next few decades.

Even Akerson has acknowledged this opportunity. “I think we have a moment in time to really change the calculus for this country on so many dimensions,” he said at the green conference.

“We’ve been given a gift called shale [because] we sit on more BTUs of energy than Saudi Arabia does.” And “natural-gas engines … exist today,” he said.

“We have this moment,” GM’s CEO concluded, and “it has to be grasped.”

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economic development

L A N O I EG

R

T R O REP

T S A E H T U O S THE

A state-by-state look at what the Southeast has to offer businesses.

By Warren Strugatch Strolling around his desk wearing a wireless head- manufacturing facilities and has hired about 1,000 workers; set, Governor Rick Scott of Florida cold-calls chief Grayton added about 40. executives. After chatting about sunny weather, white sand Scott likes to bring up other topics that make the case for beaches and lifestyle amenities, the governor launches into Florida as a manufacturing state. That case includes the pipeline pitch mode, proclaiming Florida the country’s best place to of young workers and managers coming out of universities and operate a business. (Chief Executive’s “Best & Worst States for technical schools, transportation and logistics positioning with Business” ranks Florida first in the Southeast, and second in access to multiple deep-water ports, rail, truck and jet service, the absence of a personal income tax and a government’s making the country, behind Texas.)

The talk is backed by cold cash. Last year, Florida spent good on its promise to be business friendly. nearly $4 billion on incentive programs, according to the New Florida ranks high in other key criteria. Its corporate tax rate York Times’ national database. Florida’s generosity makes it the tops out at 5.5 percent, lower than all but three regional neighbors. most welcoming state in the Southeast. Sales tax waivers and A right-to-work state, Florida offers full corporate-tax rebates job-creation tax credits are available. Several funds, including based on investment size, work force hiring quotas, target-inallocations to provide worker training and to reduce closing dustry criteria and geographic location. Add discretionary costs, are also available. deal-closing grants, training grants and job-creation rebates and During the first two quarters of this year, the gover- Gov. Scott’s waiting to shake your hand. nor’s direct appeals have lured nearly 80 companies down Aiming to eclipse its old hospitality-industry/retirement-livsouth, from aerospace giant Northrop Grumman to a local ing image, the Sunshine State has embraced the global economy. brewery, Grayton Beer Company. Northrop Grumman opened Business services now comprise the largest employment category,

42 chiefexecutive.net SEPTEMBER/OCTOBER 2013

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

GDP Rank 2013

GDP Per Capita 2013

Top Corporate Tax Rate

Right to Work State

Quality of State Service

HQ Incentives

Jobs Incentives

Green Incentives

Florida

2

14

$34,802

5.5%

Y

A

A

A

B

North Carolina

3

11

$40,289

6.9%

Y

A

A

B

B

Tennessee

4

9

$37,254

6.5%

Y

A

A

A

C

Virginia

7

42

$47,127

6.0%

Y

A

A

A

C

South Carolina

8

12

$31,881

5.0%

Y

B

A

B

A

Georgia

10

24

$37,702

6.0%

Y

B

X

B

C

Louisiana

11

30

$43,145

8.0%

Y

A

A

A

B

Alabama

16

39

$32,615

6.5%

Y

B

C

B

C

Kentucky

29

33

$33,519

6.0%

N

B

C

B

B

Mississippi

38

17

$28,944

5.0%

Y

C

B

B

C

ranking second in the U.S. Jobs in transportation and logistics have boomed—in this, Florida is third-ranked—as the state leverages its location as portal into South America. Additionally, the boom in banking, insurance and credit-industry jobs establishes Florida as fourth-ranked nationally in that cluster.

Over in Louisiana, Governor Bobby Jindal is making a similar case for the Pelican State. Like Scott, Jindal has expanded the state economy’s dependence on subsidized recruitment. His economic inducements, many deployed to rebuild or lure back businesses washed away by Hurricane Katrina, represent 21 percent of state outlays. George Gsell had relocated his 80 year-old water filtration company, MECO, to Houston after Katrina destroyed its facilities and inventory in Covington. Gsell recalls being pursued by the state’s business relocation advocates, known locally as “the Fast Start boys.” Although the invitation was sweetened with at least $5 million in incentives, Gsell contends that Louisiana’s “home boy” work force was the real deal-maker. “In Houston,” he says, “we were just another company looking for engineers. The big oil and gas companies pretty much got them all.”

Gsell isn’t the only chief smitten with Louisiana’s pro-business climate; CEOs nationwide rank Louisiana 11th in the nation, a steep climb from its 47th ranking in 2006. A hiring spree in construction, oil and gas, business services and transportation and logistics helped revive an economy battered by losses in oil and gas, tourism, aerospace, financial services and apparel. Last year, KPMG’s Competitive Alternatives looked beyond the complexity of the state’s byzantine tax structure and ranked New Orleans and Baton Rouge among the most cost competitive cities for their sizes. Jindal says tax reform is his No. 1 goal.

North Carolina earned a No. 3 ranking in Chief Executive polling. With three of the state’s top traditional industries—tobacco, furniture and textiles—in decline, economic development proponents tout the Research Triangle to IP-oriented businesses seeking smart workers, good infrastructure and location to lure investment. While the Triangle and other developed areas have become choice addresses for a wide variety of service firms, research operations, financial players and IT companies of all stripes, development has largely bypassed remote areas. Major income tax reform passed this summer will reduce corporate income tax to 6 percent from 6.9 percent next year, and drop to 5 percent in 2015; lower individual income tax rates to a flat 5.75 percent in 2015; and introduce a $50,000 deduction for small business owners. Additionally, recent legislation cutting unemployment insurance, education expenditures and various entitlements has been generally hailed by business leaders, with some reservations. Says North Carolina Blue Cross and Blue Shield CEO Brad Wilson: “I don’t believe now is the time to start walking away from our investment in public education.”

Tennessee, ranked fourth by CEOs, offers a muscular and expansive transportation and logistics center, anchored by the FedEx headquarters. Tennessee incentivizes aggressively; its $554 million subsidy of Volkswagen’s Chattanooga plant set a new record for auto-industry subsidies, which backfired when the German automaker announced layoffs earlier this year. Transportation and logistics company investments have led job creation over the past decade.

Virginia, ranked No. 7, figures high in most comprehensive headquarters-relocation searches. Incentives are competitive, especially for manufacturers, although finding sites can be

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tough. Major grants have gone to Orbital Sciences, Canon and Rolls-Royce. The governor’s use of subsidies has become a political liability, possibly tightening the spigot for future deals.

Lifestyle and infrastructure—two seaports and an international airport—garner high marks. Also, a $6 billion highway improvement program was recently announced.

South Carolina, No. 8, offers a business-friendly climate and good quality of life. Companies in manufacturing, health services and construction are hiring, reducing persistent unemployment. However, government and military sectors cast a big shadow, leaving the regional economy vulnerable to public sector belt-tightening. The state’s Chamber of Commerce is pushing for infrastructure improvement, workforce development programs, and comprehensive tax reform.

Georgia, ranked No. 10, is not just the home of the CocaCola Company. Hartsfield International Airport, among the world’s busiest, gives Georgia companies global connectivity.

Alan Dabbiere moved his mobile-technology management company, Air Watch, from the Silicon Valley to Atlanta and found hiring people got much easier. Cluster growth in the last decade has favored chemical products, construction materials, processed foods and heavy machinery.

Alabama, ranked No. 16, continues to rebuild after experiencing significant contraction during the Great Recession. Strong gains in the automotive-manufacturing industry, rising exports and a housing market on the rebound signal a more robust business climate. Regional economists predict employment gains in professional and business services, healthcare, tourism and retail.

Strong ports and a well-trained work force—plus a $158 million incentive package—have helped attract companies like Airbus.

Kentucky, No. 29, boasts two international airports, two top air-cargo hubs and third place in the country’s total air cargo shipment rankings. Extensive air, rail, maritime and roadway connections bolster the state’s position as a top transportation and logistics hub. Kentucky spends roughly $324 per capita to attract companies, and oil, gas, mining and agriculture business are top beneficiaries. Years of state and regional investments have strengthened the community-college system and other technical and workforce training, much of it supporting advanced manufacturing skills and mindsets.

It is the only Southeast state without right-to-work legislation.

Mississippi, ranked No. 32, has the smallest budget in the Southeast for incentives. Recent arrivals include SiliCorr ($76 million), Stion and Virdia (both $75 million). Tax rates—both personal and corporate—cap out at 5 percent. Cluster formation in recent years include: aerospace and aviation, health care, automotive, shipbuilding, energy, agribusiness and advanced manufacturing.

For CEO perspectives on site location in the Southeast and more detail on incentive programs, see p. 46–50.

Airbus Comes to Alabama Airbus’s decision to build a $600 million manufacturing and assembly plant in Mobile, Alabama, makes little sense in P&L terms. The company will ship components across the ocean to Mobile, pay local workers to assemble them into jets and then reship them back. While nonunionized U.S. labor costs will be lower, any benefits will be wiped away by shipping costs.

Lowering costs, clearly, was not the reason parent company EADS made the investment. It’s all about being close to the customer—U.S. commercial airlines and, potentially, military procurement bosses. With a foothold in the market of archrival Boeing, Airbus now sees itself as better positioned to compete in the U.S., a key market where its share lingers around 30 percent. Over the long term, Airbus plans to increase the percentage of local parts, scoring local points and reducing its costs, as well.

The roots of the Mobile deal are in Paris, where in June 2011 Alabama Governor Robert Bentley scheduled a meeting with EADS chief Tom Enders. EADS had just lost a $35 billion Defense contract, after Boeing had successfully challenged the deal on the grounds of unfair subsidies. Although Airbus had picked out a site in Mobile in preparation for executing the contract, the two men had never met. When they sat down two years ago in Paris, apparently there was much to discuss.

When the conversation ended, the governor had committed, in principle, to offer significant accommodations; the CEO had committed to reviving his plan to manufacture jets in Alabama.

Ultimately, Alabama agreed to provide $158 million in financial and logistical support in exchange for a promise to hire 1,000 Alabamians. The deal was not hard to sell at home.

Explaining it in Europe was a different matter. “The perception at Airbus, as you can imagine, was skeptical,” recounts Allan McArtor, who founded Legend Airlines in Texas and held a series of Washington posts before being appointed executive chairman of Airbus Americas. “For Europeans without much experience in America, Alabama was something they knew about from movies, if at all. Perceptions were decades old. Many didn’t realize what industrial and technological capabilities exist in the Southeast.”

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With our climate, business grows year round in Florida.

vering Florida’s Corporate leaders all over the world are disco (the 4th largest flourishing business climate. $777 billion GDP t and 0% personal in the U.S.), the #1 tax climate in the Southeas s to thrive. esse busin for income tax provide a rich landscape etitive comp and And our streamlined regulator y environment and prepare for costs make it easy to plant your roots in Florida ct climate for business. perennial success. Consider Florida. The perfe

economic development

CEO Perspectives:

Why We’re Here Who: George Gsell, CEO and President, MECO Mechanical Equipment Site History: Founded in 1928 in New Orleans; relocated headquarters to Houston, Texas, area in 2005; opening new fabrication plant in Mandeville, Louisiana, late 2013.

Reason for Relocating: After flooding from Hurricane Katrina surged into the New Orleans factory housing the equipment and inventory of MECO in August 2005, CEO George Gsell established operations in Houston area and began rebuilding.

Why Louisiana: In 2011, Gov. Bobby Jindal called asking Gsell to return—and offered at least $5 million in state assistance. Gesell moved into space in Covington and is now building an $11 million plant in Mandeville with plans to hire 157.

Bottom Line: “We’re a small company but Gov. Jindal came out to visit us and see what we needed. Now, the state is helping us recruit mechanical engineers. That never would have happened five or six years ago.”

Who: Alberto Peisach, CEO, Grupo Phoenix Site History: Company launched in Colombia in 1999, combining several packing and packaging companies in Colombia and Venezuela, and opening a U.S. location in Virginia.

Reason for Location: Need for U.S. production facility to service growing American market.

Why Virginia: Company looked to Southeast for logistics reason; initial choice of Tennessee was upended by unplanned encounter with rival economic-development team from Pulaski County, Virginia.

Bottom Line: Pulaski County “made it so easy. That is what pulled us into Virginia. They were incredibly efficient and generous with their resources. They helped us understand the labor laws; and while our building was under construction, they even found office space for us at the community college so [that] we could do hiring interviews. We did get incentives, but it was really about these guys being available. When I had a problem, I had someone to call.”

Who: Peter Kassabov, Chairman and CEO, Digital Risk Site History: Founded 2005 in Maitland, suburban Orlando, Florida.

Reason for Location: Sought a Florida office space that accommodated traffic and commuting patterns.

Why Florida: Large population of mortgage-industry professionals.

Bottom Line: “Florida offered exactly the business climate we wanted. First, access to a talented, career-minded workforce was essential. Also, our beliefs and dedication to providing ongoing learning and development align with that of the state of Florida. It’s important to help people build long-term careers. To do that, we invest approximately $10,000 in every person we hire.

I’m not certain this would be possible if we weren’t in Florida.”

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Life. Less taxing.

Photo by Ken Henson ken@whitehotmedia.com

With no state income tax, relocating to Greater Fort Lauderdale is like getting an instant raise. More than 10%. Plus, with three major airports, three major seaports and seven executive airports in South Florida, you’re at the gateway to the world. Join the over 150 corporations that have already made the move.

“Hey, it’s not what you make. It’s what you keep.”

- Wayne Huizenga, Chairman, Huizenga Holdings

Winner of Business Facilities 2013 Economic Development Excellence Award (Population greater than 500K) and Business Facilities 2012 Inaugural Economic Development Achievement Award in the Public/Private Partnership Category For relocation information: lesstaxing.com / 954.627.0134

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economic development

Who: Alan J. Dabbiere, Founder, Manhattan Associates; Chairman, AirWatch Site History: Founded Manhattan Associates 1990 in Manhattan Beach, California; moved to Atlanta, Georgia, in 1995; founded AirWatch in 2003 in greater Atlanta, Georgia.

Reason for Relocating: Struggling to recruit talent in highly-competitive labor market.

Why Georgia: Better access to talent pool; greater employee commitment.

Bottom Line: “In California, we were hindered by our work force. When times get good, they get almost too good, and you start to lose employees. Here at AirWatch in Atlanta, we have the airport, the technology cluster and a more reasonable cost of living and hiring. We’ve gone from 100 to 1,400 employees over the past 2 ½ years. The employees we hire are loyal. We could have gotten more incentives from other places; but if incentives are the only reason you show up in an area, you are probably in the wrong place.”

Who: Allen E. Gant, Jr., President & CEO, Glen Raven Site History: Founded by John Q. Gant, current CEO’s grandfather, in 1880 in Altamahaw, North Carolina. Built new headquarters nearby in 1963.

Reason for Location: Company’s roots are in North Carolina, growing through global acquisitions.

Why North Carolina: A lifelong North Carolinian, Alan Gant is a believer in his state’s business environment.

Bottom Line: “We are one of the rarities of the textile industry—from the manufacturing point of view. We no longer drive for cost only. We drive for brands. The universities of North Carolina—schools like Chapel Hill, Duke, Wake Forest and Davidson—produce young, aggressive [people with] brainpower [who are] moldable and [have] a desire to produce solutions for consumers. Those are the people we want to hire.”

Who: Jim Bolte, President, Toyota Motor Manufacturing, Alabama Site History: Toyota Motor Manufacturing, Alabama, opened in Huntsville, Alabama, 2001.

Reason for Location: Site enables auto-industry supply-chain advantages.

Why Alabama: Location is near center of southeast auto-industry cluster. Also, state and local grants, incentives and nearly free use of city-owned land helped pave the way for recent $88.3 million expansion.

Bottom Line: “We’ve expanded four times over the last ten years. We just announced a $150 million investment of machinery and equipment that will make us the largest engine plant Toyota has in North America. We are going to hire over 100 workers early next year. It’s all driven by consumer demand. We just love being in Alabama.”

Who: Joel Rood, CEO, CalStar Products Site History: Founded 2006 in Newark, California; opened plant in Ohio.

Reason for Location: Seeking manufacturing facilities in well-located, low-cost states.

Why Mississippi: The company’s new 100,000 square-foot Columbus plant, slated to open early 2014, is well situated to supply Gulf Coast region, a major market, with reduced delivery radius and lower logistics costs.

Bottom Line: “Columbus is an ideal setting for the new plant, with a central location in the South, an able labor force and a strong government and business leadership. We’re thrilled to call Columbus our new second home.”

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The New Incentives Game The first thing to know about incentives is: they’re the last things you should discuss. “Incentives are relative to final-stage relocation negotiations,” says Gregory Burkart, managing director of the Detroit office Duff & Phelps, a financial advisory firm. Burkart, a specialist in structuring and negotiating government-sponsored economic development incentive packages, suggests focusing your search on availability and cost of labor. Don’t bring up subsidies, grants or other forms of government give-backs until you’ve narrowed your choices down to two or three finalists.

Your costs will typically entail real estate, utilities, transportation, architects, building services, professional fees, labor and more; government negotiators, on the other hand, are concerned primarily with job generation. “The more jobs you bring to the table and the more the jobs pay, the more value the deal will have to the officials across the table,” says Burkart.

“That’s your leverage.”

While cash incentives are often discussed first, they also become headline fodder and are politically risky. Increasingly, cash incentives are deployed as closing-round deal sweeteners budgeted to the “governor’s discretionary fund.” For years, cash grants were often effectively traded for job-creation commitments. In the face of public backlash in situations where those commitments were not honored, government negotiators now seek to avoid cash deals. Executives who press for cash may find their best bet is a loan with a forgiveness covenant pegged to new jobs.

Many other incentives are available—some listed publicly, some stored in the memory bank of the government negotiating team. Often, incentive programs are renamed from year to year in an effort to avoid backlash from soured deals. The most advantageous incentive packages, from the executive’s point of view, are generally those negotiated across multiple levels of government.

Look into—and ask your negotiating partner to do the same— what subsidies, grants, loans, refunds or waivers might be available on other levels, including federal, county, municipal, industrial development authority, port authority or business/industrial zoning authority. When it comes to negotiating incentives, don’t wait for offers. Ask for what you want.

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economic development

Who: Dave Swift, CEO, Goodman Global Group Site History: Founded in 1954 in Houston as local air-conditioning contractor; opened plants in Tennessee.

Reason for Relocating: Goodman has built four facilities (manufacturing, cooling, R&D and logistics) in Houston and two manufacturing plants in Tennessee.

Why Tennessee: In April, citing growing market demand for his company’s air-conditioning and heating equipment products, Dave Swift announced a $2 million expansion of Goodman Manufacturing’s plant in Dayton, Tennessee.

Bottom Line: “The renovation and expansion of our Dayton facility is a direct result of increased demand for our products. This facility has also developed and designed several innovative products that have supported the overall growth of the company. This facility represents our American Pride manufacturing philosophy.”

Who: Jochen Etzel, CEO, Continental Tires the Americas Site History: Continental AG of Germany acquired General Tire and Rubber Company in Akron, Ohio, in 1987. In 1996, relocated to Charlotte, North Carolina. In 2009, moved again to Fort Mill, South Carolina. A $4 million expansion followed in 2012.

Reason for Relocating: The company’s original location was less convenient for its new European parent, which sought port access.

Why South Carolina: New $500 million manufacturing plant in Sumter, South Carolina, slated to open in early 2014. Location positions the tire manufacturer near center of auto-industry cluster.

Bottom Line: “South Carolina has proven to be a business-friendly environment and is an attractive region for our employees to live and work. Our employees really enjoy the amenities available in metropolitan areas, [such as] Columbia and Charleston, as well as the convenience of the international airport in Charlotte. In addition, operating in this region allows us to be able to receive incoming raw materials and export goods at favorable costs and [to] service our customers along the East Coast.”

Who: Kent Howard, CEO, Balluff Site History: A subsidiary of Germany’s Balluff GmbH; company’s U.S. headquarters were founded in New Jersey in 1978. The company moved to Florence, Kentucky in 1983. Expansions followed in 1994, 2001 and 2013.

Reason for Relocating: Looking to expand warehouse and manufacturing facilities.

Why Kentucky: Balluff values northern Kentucky for logistics and for growth capacity.

Bottom Line: “Initially, my predecessor chose Northern Kentucky for several reasons. It was then a big tool area, cost of land was good and there was flexibility in government. We like the work force and Kentucky is a right-to-work state. Kentucky is business-friendly, focused not just on attracting companies but helping companies already here. For our recent building expansion, we received about $300,000 in incentives. We get training grants every year and tax credits for sales tax and increasing our work force. The state is helping with road building and land acquisition. We have the advantage of a very good airport for package shipments and access to I-75—plus several other major roadways. This location puts us right in the middle of the auto-industry concentration, going down from Michigan through Alabama. You could say we came for the machine tooling and stayed for the automotive.”

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Research on Creating Companies, Jobs and Wealth In this new, regular feature, CE brings you highlights and takeaways from the latest research on business leadership, corporate competitiveness and economic trends.

By William J. Holstein

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Where $100 Million Companies Are Created When most people think about the companies that emerge from nowhere and achieve $100 million in sales, they think about Silicon Valley. Not so fast, says a new study from the Ewing Marion Kauffman Foundation in Kansas City, Missouri. In a paper entitled “The Constant: Companies that Matter,” researcher Paul Kedrosky found that 125 to 250 companies that will ultimately reach $100 million in sales are created each year in the U.S. The most geographically productive region is the Southeast, specifically the states of Georgia, Florida, Kentucky and Louisiana.

The Pacific Region, including California, Oregon, Washington and Hawaii, comes in second. “Unsurprisingly, but contrary to some rhetoric, while information technology is important, it is not the most important contributor in percentage terms,” Kedrosky wrote. “Instead, the largest contributors, in percentage terms, are consumer-discretionary and industrials.” The study looked at both publicly traded and privately held companies but did not publish specific company names. If California alone is examined, it represents about 20 percent of the creation of $100 million companies, but it is far from dominant.

Coming at a time when political leaders urgently want to see the creation of large numbers of jobs in their districts and states, this study is of particular note in that a mere startup does not necessarily generate lots of jobs. It’s only when a company starts to achieve scale that it begins hiring thousands of workers. Kedrosky says that’s why he called the $100 million firms “companies that matter.” They are disproportionate creators of jobs and wealth, he asserts. 1

allowing these entrepreneurs to build their businesses, but they are fundamentally retail companies, the professors argue.

In this category are Jeffrey Bezos of Amazon and the Walton family, who collectively own a controlling stake in Walmart.

It’s noteworthy that the list is becoming more democratic in some ways, not less so. About half of the country’s wealthiest people grew up in middle-class or upper-middle-class families, not affluent ones. That’s up sharply from 1982 when just 30 percent of those on the list came from more modest backgrounds. 2

How Your Company Can Live Forever

A Stanford University Graduate School of Business professor believes that he has figured out the secret to eternal life— for companies, that is. Charles O’Reilly, a professor of management, says companies can endure despite dramatic shifts in the marketplace if their CEOs display “organizational ambidexterity”—the ability to manage the current business while simultaneously preparing for changing conditions. He takes issue with Harvard’s Clayton Christensen, author of the famous book, The Innovator’s Dilemma, who argued that if a company has a promising new business model or innovation, it has to spin that idea out as a separate organization because the incumbent company will stifle it.

O’Reilly asserts that it is possible—and desirable—for a CEO and his or her management team to run the established company at the same time that they nurture a new business, as Walmart has with its Express stores. These much smaller stores compete against the likes of CVS and Walgreens How Wealth Changed in America drug stores and leverage “the strengths of the mother ship,” One popular myth in American culture is that the ranks of i.e., Walmart’s skills in real estate, purchasing, logistics and the country’s richest people are dominated by those who information technology. An ambidextrous company requires were born into great wealth or are CEOs of large companies. a leader with “an overarching vision,” says O’Reilly. If other Not so, say a pair of professors who studied how the Forbes senior managers disagree with that vision, the CEO must have list of 400 wealthiest individuals in America has changed the force of personality and persuasion to “make sure that over a 20-year period. In a study released in March entitled, everybody is singing off the same hymnal,” the professor says.

“Family, Education, and Sources of Wealth Among the Richest One key is the culture that the CEO fosters. The more Americans, 1982-2012,” Steven N. Kaplan from the University adaptive cultures that emphasize speed and experimentation of Chicago Booth School of Business and Joshua D. Rauh from are the winners. “A culture that says, ‘We don’t have all the Stanford University’s Graduate School of Business conclude answers; we’ve got to try these experiments’—that’s the type that entrepreneurs who have made their fortunes the old- of culture that promotes ambidexterity,” O’Reilly concludes. 3 fashioned way—by earning them—increasingly dominate the Forbes list.

Could Backshoring in the U.S. Get Started The authors note that the explosion of information technology in Earnest? companies has been a major contributor to creating billionaires. For years, as labor and transportation costs soar in China and Three of the 10 wealthiest people in the U.S.—Bill Gates, Larry other emerging hotspots, experts have been debating whether Ellison and Michael Bloomberg—built their fortunes around American CEOs and their foreign counterparts would shift technology that barely existed in the 1980s. On a weighted basis, production back to the U.S. from Asia and put down new the authors found that 25 percent of the businesses owned by bets on the American market. The latest indicator from A.T. the richest people had a sizable technology component.

Kearney, the Chicago-based consulting firm, suggests that However, not all such companies did. Another sector that the trend could, in fact, be taking shape. The firm surveyed grew even faster than technology, as measured by its contribution executives from 302 companies around the world and did a to the incomes of the people on the Forbes list, was retailing, ranking of the countries they see as most attractive for their including restaurants. Technology may have played a role in investments—called the Foreign Direct Investment Confidence

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Index. The U.S. edged out China for first place for the first time since 2001. Following China, in second place, were Brazil, Canada and India. The results suggest that the world’s CEOs are looking more favorably at investing in established economies than in emerging ones. Australia, Germany and the United Kingdom joined the U.S. in the top eight positions.

As with investments in the rest of the world, U.S. inflows are still below their 2008 peak of $306 billion, but Kearney said this country has made a gradual rebound. Inflows during 2011 were up 15 percent from 2010, reaching $226.9 billion and making the U.S. the world’s No. 1 recipient of foreign direct investment for the sixth consecutive year. U.S. manufacturing productivity has been on the rise since the recession and companies have invested in productivity-enhancing tools and equipment. “Coupled with a weaker dollar and rising wages in developing countries, these gains have the potential to bring long-term benefits to the U.S. economy,” the study concludes.

China slipped to the No. 2 position because higher labor costs raised questions about the long-term attractiveness of China’s development model and create the potential for reshoring certain manufacturing to customer markets, Kearney says. 4

Do CEOs Have Million-Dollar Voices?

A team of professors has concluded that the tone of a male CEO’s voice has a direct relationship with the size of the company he runs and how much money he makes.

Writing in the Evolution and Human Behavior journal, the professors analyzed earnings conference calls archived

by Thomson Reuters. The three—William J. Mayhew and Mohan Venkatachalam from the Fuqua School of Business at Duke University and Christopher A. Parsons from the Rady School of management at the University of California at San Diego—examined a pool of 792 male CEOs from companies in the Standard & Poor’s 1500 stock index. They measured the CEOs’ “vocal fundamental frequency,” which listeners perceive as voice pitch. The pitch levels were cross-referenced with data on the total assets managed by each CEO. The result: CEOs with lower voices manage larger companies and make more money than CEOs with higherpitched voices. A decrease in voice pitch of 22.1 Hertz meant an increase in company size of $440 million and higher compensation of $187,000 a year. Plus, male CEOs with lower voices are retained longer by their companies.

The professors did not seek to analyze the voices of female CEOs because, in terms of mating over the course of human evolution, women have fared better by possessing higher pitched voices. They speculate that one barrier to more women becoming CEOs is that their voices are too high. 5 Sources: [1] www.kauffman.org/uploadedFiles/DownLoadableResources/companies-thatmatter.pdf [2] www.gsb.stanford.edu/news/research/joshua-rauh-what-forbes400-list-says-about-american-wealth [3] www.gsb.stanford.edu/news/headlines/ charles-oreilly-why-some-companies-seem-last-forever [4] www.atkearney.com/ news-media/news-releases/news-release/-/asset_publisher/00OIL7Jc67KL/content/ a-t-%C2%A0kearney-fdi-confidence-index-news-release/10192 [5] www.fuqua.duke. edu/news_events/news-releases/ceo-vocal-pitch/#.UbnutJwz8Sk.

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AMR SHAALAN

cover story

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The Man Who Changed TV News Is About to Change It Again

In 1996, when Fox News was launched, it received a less than friendly reception from the journalistic establishment. CNN founder Ted Turner said he looked forward to “crushing Rupert Murdoch like a bug.” When that didn’t happen, the vituperation against Fox News and its founder Roger Ailes went nuclear. Turner famously compared Ailes to Hitler. Reprimanded by the Anti-Defamation League, who thought this was trivializing the Holocaust, Turner relented but continued comparing Murdoch and Ailes with “the late Führer” and Goebbels. Bill Keller, former executive editor of The New York Times called Fox New Channel’s (FNC’s) slogan, “Fair and Balanced,” a “slogan for suckers,” and blamed the network and Ailes specifically for creating a climate of polarization. Esquire magazine wrote that Ailes was a “highly paid operative of a foreign-born tycoon, a man who reengineered political and media culture and fomented a revolt that threatens the very stability of our country.” The 73-year-old former political strategist, who launched his career in television as a producer for “The Mike Douglas Show,” chuckles at the paranoia he tends to arouse among the elite.

The most reviled CEO in America—at least by the establishment media—was Roger Ailes, who disrupted the TV news industry when he created Fox News, now a profitable and powerful voice that has elbowed its way into American media past established rivals. But is technology threatening to destabilize access as young people increasingly opt to watch online video rather than pay for traditional TV content?

By J.P. Donlon

Ailes’ derangement syndrome continues in media circles to this day, but it is just as often tempered with grudging respect.

Today, Fox Television Stations Group is one of the nation’s largest owned-and-operated network broadcast groups, comprising 28 stations in 18 markets and covering nearly 37.28 percent of U.S. television homes. (In June 2013, News Corp split itself into two separately traded companies—with 21st Century Fox retaining the media and entertainment businesses.) At a recent investor conference, Rupert Murdoch stated that Fox News now has annual profits of $1 billion. (The company reported 2012 revenues (for 12 months ending June 2013) at $27.68 billion.) In addition, Fox Business News (FBN) was profitable in 2013, a year earlier in its existence than when FNC achieved the same goal. According to Nielsen data, FNC has been No. 1 in cable news prime time with adults 25-54 for 65 consecutive months from March 2008 to July 2013. FNC has been No. 1 in cable news total day and prime time for 139 consecutive months—from January 2002 to July 2013.

Launched in 1997, FBN is still playing catch-up with CNBC, but it’s no longer a drain on Murdoch’s wallet.

When Murdoch called Ailes and asked if a new cable TV

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“Most of the media bullshits you about who they are. We don’t. We’re not programming to conservatives, we’re just not eliminating their point of view.”

selection,” he says. “Most of the media bullshits you about who they are. We don’t. We’re not programming to conservatives, we’re just not eliminating their point of view.”

The truth is that he is cannier than most in understanding what attracts attention, which makes him a transformational figure in his industry. Fox is not shy about stockpiling liberals among its pundits. Former Clinton advisor Kirsten Powers and former democratic senator Evan Bayh are among 24 left and center-left commentators who are paid FNC advisors. Former ABC White House correspondent and FNC analyst Brit Hume observed that “there are more liberals on Fox than all the networks combined have conservatives.”

The problem of stagnant cable subscription growth, however, poses a challenge for Ailes, as well as rival cable-content providers. SNL Kagan analyst Ian Olgeirson noted that 85 percent of U.S. households paid for TV service in the third quarter of news network could be created with essentially nothing—there 2012, down from 87 percent penetration in the same period was no studio, no equipment, no staff and no infrastructure— in 2009. SNL Kagan estimates that 4.3 million people relied the exchange, according to journalist Zev Chafets, who au- on Internet video instead of paying for TV, projecting that thored Roger Ailes, Off Camera, an insider’s look at the FNC number will double by 2016. The current spat between Time founder (Chafets was given access but nothing more), went Warner Cable, which has blacked-out CBS over a fee dispute, as follows: involves, in part, digital rights for carrying CBS programming online to smartphones and other digital devices. Predicting that “How much will it cost me?” Murdoch asked.

“Nine hundred million to $1 billion,” Ailes said. “And you the transmission of TV will eventually move to the Internet, Cablevision Systems CEO James Dolan told the Wall Street could lose it all.”

Journal, “there could come a day” when his company stops “Can you do it?” Murdoch asked. offering television service, making broadband its primary “Yes,” said Ailes. offering. If cable operators should drop TV service, charging “Then go ahead and do it.” Murdoch said.

Many observers, including some close to Murdoch, thought only for broadband, it would force channel owners like Fox to the venture was daft. One who didn’t was CEO Jack Welch sell directly to the public or through Web outlets. of NBC’s parent company General Electric. “I told them they While mindful of the threat, Ailes offers a surprising statiswould rue the day they let Roger team up with Rupert,” Welch tic from McKinsey & Co., which recently measured news contold Chafets. “You put a creative genius together with a guy sumption in the U.S. by time spent, rather than raw audience with the guts and wallet of Rupert Murdoch and you have an numbers. Digital platforms, it turns out, are getting only 8 percent of the action. Smart phones and tablets each account unbeatable combination.”

A man who grew up digging ditches as a kid in the work- for 2 percent of time spent and desktop/laptop accounts for 4 ing-class town of Warren, Ohio, Ailes is a far cry from the percent. McKinsey data show 35 percent of news consumption bien pensants of Manhattan or Georgetown and is a figure of remains in newspapers and magazines, 16 percent in radio and paradoxes. Douglas Kennedy, the youngest son of Bobby Ken- other audio, and 41 percent with television. In other words, 92 nedy and a reporter Ailes once hired, said, “What people don’t percent of news is consumed on legacy platforms. Although understand is that Roger is very comfortable with others who he rarely gives interviews, recently, Ailes spoke with Chief don’t agree with him.” He helped coach Ronald Reagan for his Executive’s J.P. Donlon at his News Corp office in Manhattan: second TV debate with Walter Mondale, but he also produced public affairs interviews with Malcolm X—and counted both Time Warner CEO Jeff Bewkes has said he worries about the impact of what he called “cord nevers.” These are consumers, as friends.

Ailes capitalized on two simple insights. First, he realized often younger people, whose media consumption habits simply that news is entertainment and that talent and content draw do not and may never include a monthly subscription to tradiviewers. His influence is such that it often goes unrecognized. tional cable. Do you share this concern and its possible disruptive Second, Ailes took note of the fact that a sizeable portion of the consequence for cable news?

American TV audience, conservatives and independents, were Anybody in our business who didn’t worry about how the underserved. Ailes qualifies this: “The first rule of media bias is youth is affecting the use of media would be negligent. The good

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JIM COOPER/ASSOCIATED PRESS

news about younger people is they get older. And when they get older, some of their habits change back to older people’s habits.

So this tremendous fear that it’s all going to disappear would depend on [everybody’s] staying 22 years old, and they don’t.

On the other hand, media habits are changing. Information is flowing across different platforms. When we started Fox News in 1996, there was a tremendous push because we believed that convergence had already occurred between the computer and the television screen. MSNBC—Microsoft and NBC—started by assuming the convergence was there. They tried to create shows that were sort of hybrids between television and the Internet. It failed. They tried something similar in Seattle. That didn’t work either.

I bet on the fact that television was still the dominant media— and that the Internet was kind of a junior partner at that time— because there was no way to monetize the Internet. Therefore, to create it as 50 percent of your business model seemed to me not a wise move. Since then, of course, Fox News has been tremendously successful financially and MSNBC has not.

That said, today there’s much more convergence than there used to be, and much more use of the Internet in moving information and news. However, the Pew [Research Center] recently did a study, and it determined that the dominant source of news to most Americans is still television. The Internet is having impact, particularly with younger people, and it has to be assumed that [this influence] will continue. People are exploring ways where technology can move news directly from the newsroom to mobile devices. Going forward, we expect [that] a lot of Fox News will be consumed on mobile devices, skipping the desktop and perhaps the iPad.

We believe there’s an audience shift. Younger people are not necessarily going to sit in front of a television set. I have a 13-yearold son. He rarely sits in front of a television set; and when he does, it’s to play a DVD or order up a show that he wants. I suspect he’ll never just sit down and watch TV, as my generation did.

Bewkes is right: Everybody in the business is looking at the shifting of audiences and shifting of platforms and shifting of usage. But everybody won’t be 22 forever. Giving up your core business in search of a phantom audience is not wise. You have to try to program to that audience and bring them in and get them loyal to your brand. If they like your brand, they’ll watch it on a mobile, on their iPad or whatever.

How is your brand doing amongst this group?

Most news consumption in America is consumed for those older than 50. Those 30 and younger tend to see news differently. What did Lindsay Lohan wear to her latest hearing? This is news to some. So, TMZ, a kind of fast-paced celebrity-type show, would appeal to some of that audience. And if you don’t incorporate that in your coverage in addition to the Middle East, you probably are going to miss part of that audience.

Our education system, of course, doesn’t teach civics. It propagandizes current events for political purposes, so creating curiosity among the young about actual news events is a challenge. People in my industry should spend as much time with students as they can. I’ve spoken to students at West Point, talked with journalism students in North Carolina, pointing out, for example, that Lindsay Lohan’s dress is not as important as the Middle East.

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cover story

When Time magazine polled 9,000 people, 44 percent said Comedy Central’s “Daily Show” host Jon Stewart was the most trustworthy source of news. Given that trust is the cornerstone of your business and your brand, how do you convert this segment of the population from satire with an agenda to your brand? Or maybe you feel you don’t have to.

The problem with answers to questions like that is that it’s a hip answer. If they know their friends watch Jon Stewart, that’s how they’re going to respond to that question. Whether or not that’s actual news consumption, I’m not sure. It is comedy; and when I was young, all I wanted to do was laugh, too.

But the reality is: to watch Jon Stewart, you already have to have watched the news. In other words, it’s not funny if he does a joke about John McCain and they don’t know who John McCain is. I’m always curious about people when they tell me that they listen to Dennis Miller or Jon Stewart or whoever, and [they] act as if they’re reading a newscast. They know damn well they’re not reading a newscast. They know that they’ve already consumed some information elsewhere.

One of the reasons young people like Jon Stewart is because their parents don’t. Anything to stick it to their parents. Their parents are probably watching Fox News. They’re thinking Jon Stewart makes fun of Fox News; so, therefore, I’m not going to watch that. They watch him because he’s a renegade and partly because he’s funny. I watch Jon Stewart. I think he’s funny.

I have a running dialogue with Jon Stewart. He once told me he’s a socialist and would have voted for Norman Thomas, who was the greatest socialist of the 1950s. [Thomas was a Presbyterian minister, who achieved fame as a socialist, pacifist, and six-time presidential candidate for the Socialist Party of America.] I told him: “I’ll tell when you are a capitalist, Jon. On the day you have to renegotiate your own contract. My guess is you will really go for the money then.” He laughed.

A federal appeals court recently ruled that [Barry Diller’s IACowned] Aereo’s TV anywhere service, doesn’t violate copyright law. And in April of this year, News Corp president Chase Carey said, “If you can’t have our rights properly protected through legal and political avenues, we’ll pursue business solutions.” One such solution is to turn the network into a subscription service.

Two questions: One, does Aereo represent disruptive innovation or piracy, as you see it? And two, do you believe people are willing to pay for a Fox News channel?

Yes, people will pay for the Fox News channel—despite the fact that the general feeling, one created by the Internet, is that everything should be free. I don’t want to speak for Chase Carey or our company and [I want] to stay clear of strategic conversations; but my personal view is that the work of creative artists of any kind should be paid, whether it’s a songwriter or a show writer. So, I don’t want to comment on inflammatory words like “piracy,” but I have worked with creative people for 40 years and believe their work should be protected. One could argue that Google’s business plan is to resell everybody’s

Top Cable Networks Total Day (Mon-Sun, 6 a.m.- 6 a.m.)

Persons 2+/Total Viewers 2013 To Date Top Networks

P2+ AA (000)

1

NICK

1,770

2

USA

1,294

3

Adult Swim

1,276

4

TNT

1,135

5

FOXNC

1,113

6

cartoon network

1,089

7

NAN

1,079

8

HIST

981

9

AEN

852

10

ESPN

807

11

HGTV

757

12

TBSC

743

13

FX

701

14

FOOD

599

15

DISC

585

16

AMC

582

17

ID

582

18

TVL

532

19

FAM

531

20

TRU

516

26

CNN

448

32

MSNBC

393

Rank

Source: Nielsen (Live+SD), 2013 to date (12/31/12-7/30/13) Top 20 Cable Networks P2+ AA (000)

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Fox News Outperforms Broadcast & Cable News with 2012 Presidential Election Coverage Delivering FNC’s Highest Rated Primetime Election Ever 12.1

11.5 10.5 9.3 7.9

4.6

NBC

fox news

abc

cnn

cbs

msnbc

Source: Nielsen Media Research; 11/6/12 – 8-11P Election Coverage; Persons 2+ (000)

Cable News

2,500 2,000

2021

2043

FOX

1868

1,500 1,000 500 0

763

775

590 443

689

2010

905 MSNBC 677

CNN

490

334

HLN

2011

2012

work. Simple. Can [you] put it on one page? Now, that’s a great philosophical discussion for some university to study. Is that moral, immoral or amoral? Or does it matter?

Do you have any countermoves up your sleeve that may disrupt the disrupters like Aereo or others?

I wouldn’t say it’s above my pay grade, but it’s not my focus.

It’s the focus of lawyers and financial executives and people here at the company. My job is to run Fox News, beat everybody who’s in the cable news business and run television stations and try to beat everybody in the television business. Running two cable networks and 28 television stations actually takes most of my time.

Can you describe what the cable news industry and Fox News, in particular, might look like in 2016 when your current contract comes to an end?

I’ll try to answer your question without giving away certain

FNC had over 2 million primetime viewers in 2012, with CNN having 677,000 and MSNBC having 905,000 during the same year. Since 2010, the trend line has been up slightly for FNC while CNN lost 2% from 2011 to 2012 and MSNBC showed 17% growth from 2011 to 2012.

Source: Nielsen (Live+SD), 2010-2012, Time Period Averages, MondaySunday 8-11p, Persons 2+ (000).

strategies I have in mind because I don’t particularly want to help CNN and MSNBC, even though they need it. I don’t want to give them my ideas. The days of people sitting around waiting for a news show, with somebody putting a box behind an anchor’s head are over. We will see some changes in the way we do television news in the next few years. For example, we’ll see an integration of digital platforms and social media. The social media problem becomes one of verification, because you could easily put things up that are not real news. There’s a lot of false news in that genre, but it also is a way people communicate.

Social media has been very helpful to us, in Iran, for instance, or in places where you can’t put your camera crew. So, I foresee a wider use of what I call “pocket news.” What once required a bureau of 10,000 people or 10,000 square feet now becomes a guy with something in his pocket. That’s your “bureau” at any given time. Beyond this, I don’t want to predict too much, because I’m trying to figure out how to do it myself in order to be able to take my competitors out.

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Primetime

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2013 compensation report

Much Ado About Pay, Much Misunderstood Already enormous, the gap between public and private company CEOs’ pay is widening.

“

Most media outlets focus on the $15.1 million average annual pay package for the CEOs of the largest 200 companies in 2012 and mistakenly assume that this 0.001 percent of companies is representative of all CEOs.”

Private Company CEO Compensation $1,000,000 $900,000

Perks

$800,000

Benefits

$700,000 $600,000

Equity Gains

$500,000

New Equity

$400,000 $300,000

Bonus

$200,000

Base Salary

$100,000 $0

Bottom Quartile

Median

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 enjoying multi-million dollar pay packages in 2012. In fact, the median private-company CEO earned $326,000 in cash compensation in 2012 (base salary and bonus) and total compensation of $360,000 including benefits, perks and equity gains, according to Chief Executive Group’s 2013-2014 CEO and Senior Executive Compensation in Private Companies Report.

Of course, there were big differentials by quartile, as well as

Top Quartile by a variety of dimensions: company revenue size, number of employees, growth rate, level of profitability, type of private ownership, geography, etc.

Of the roughly 30 million businesses in the United States, 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 $15.1 million average annual pay package for the CEOs of the largest 200 companies in 2012 and mistakenly assume that this 0.001 percent of companies is representative of all CEOs.

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Compensation Correlates with Size (Median CEO Total Compensation by Company Revenueâ&#x20AC;&#x201D;Indexed) 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% <$2

$2 to $4.9

$5 to $9.9

$10 to $24.9

$25 to $49.9 Overall Median $50 to $99.9

$100 to $249.9 $250 to $499.9 $500 to $999.9

$1,000+

Company Revenue Range (Millions)

Private Equity-Owned Company CEOs Have Highest Pay

Base Salary

Bonus

New Equity

Equity Gains

Benefits

Perks

$500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0

Employee Owned

Family Business

Other Investor Owned

There are also big differences by type of ownership.

Private equity-owned companies, on average, have the richest compensation packages among privately owned companies. Itâ&#x20AC;&#x2122;s no coincidence that private equity-backed CEOs, on average, outperform their peers in terms of operational results.

Private equity-owned companies, on average, have the richest compensation packages among privately owned companies The pay differentials by type of ownership are even more striking when looked at within each size category.

Most CEOs are leaders who build businesses, create jobs and contribute to their communities. While some people

Partnership

Private Equity Owned

Sole Proprietorship

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.

For more information about the 2013-2014 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

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Venture Capital Owned

Source: 2013-2014 CEO and Senior Executive Compensation in Private Companies Report (www.ChiefExecutive.net/compreport)

(Median Total CEO Compensation by Ownership Type)

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essentials

How to Get the Most Out of Your CMO At a time of crucial developments in customer data and social media, marketing chiefs are collaborating in new ways with the rest of the C-suite.

ISTOCKPHOTO

by Fran Hawthorne

Soon after becoming CEO of U.S. Cellular in June 2010, Mary N. Dillon brought in David Kimbell—her marketing head when she was president of Quaker Foods five years previously—to be chief marketing officer at the $4 billion, Chicago-based wireless phone company. Acknowledging that it’s unusual for a tech company to reach out to the consumer-products field for marketing savvy, Dillon explains, “It’s a new model. We’re focusing on marketing as a demand driver, using consumer insight.”

Eighteen months later and some 700 miles to the east, in a suburb of New York City, the Leukemia and Lymphoma Society was crafting a new strategic plan. With total American charitable giving flat or falling ever since the recession, CEO John Walter decided that a high-level marketing executive was needed to rebrand the $300 million organization and expand its donor base. The Society established the job of senior vice-president of marketing and communications—later upgraded to CMO—and hired Lisa Stockmon, a 20-year marketing veteran from Time Warner and Limited Brands.

CEOs like Dillon and Walter are relying more and more on their chief marketing officers today, largely because these executives are the keys to two crucial developments: customer data and social media. In order to use these tools most effectively,

marketing chiefs are collaborating in new ways with the rest of the C-suite.

“I consider my CMO the chief revenue officer of the company,” reports Michael MacDonald, CEO of Medifast, a $360 million diet-products company based in Maryland.

A major impetus for this change has been the growth of electronic communication over the past five to 10 years. Indeed, Gregory S. Carpenter, a former chair of the marketing department at Northwestern University’s Kellogg School of Management, specifically traces the trend to 2007, when both the iPhone and the Amazon Kindle were launched. Before then, he says, “technology was seen by the majority of people as something frustrating that always crashed.” But the new gadgets, he adds, “had a big impact on how people thought about technology. These became invaluable devices, which people can’t live without.”

The more that consumers use their e-gizmos, the more usage data they produce. Marketing departments can now analyze and massage vast streams of information about customer demographics, location, tastes and frequency of use. Moreover, consumers have started talking back—directly to official outlets, such as corporate blogs, and indirectly to each other via Twitter, Facebook, Yelp and other social media.

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Digging Into Data Of course, savvy CEOs have been surveying their customers for years. “The newer part,” Dillon of U.S. Cellular says, “is that there’s a lot of data that’s been available through technology, and more being captured through social media, wireless and the Internet. At an aggregate level, we know about what types of activities for which people use their smart phones, the peak hours, locations—questions like that.”

At the Leukemia Society, Stockmon is boring into details about the current donor base, such as “where they come from and what their interests are,” reports CEO Walter. These are the kinds of intimate facts that old-fashioned surveys never captured. Stockmon and other CMOs then take all that information one e-step further, using that data—along with the same online tools that provided it—to reach straight back out to the public.

The details that Stockmon has learned about current donors, for instance, become clues to help the Leukemia Society “explore how we can find more of these kinds of donors,” according to Walter. With the aid of three new hires and an outside agency, Stockmon is also upgrading the Society’s web site and crafting You Tube videos.

At Hyatt Hotels, John Wallis, the global head of marketing and brand strategy, has employed You Tube plus a special web site to test-market new ads targeted to female travelers. Medifast— which spends 60 percent of its $34 million marketing budget on Web-based media—launched a new, multi-channel online survey this year and—at the same time—added promotions to its web site.

Working with the C-Suite Even the most tech-empowered marketing chiefs can’t do the job alone, which is why they now work more closely than ever with the rest of the C-suite. In light of all the new technology involved, cooperation with the chief technology (or chief information) officer is obviously vital. “The CMO needs to have the CTO as a friend and close ally [and] to work hand-in-hand with the CTO,” says Antonella Mei-Pochtler, a senior partner at Boston Consulting Group, who doubles as the consulting firm’s chief marketing officer. In her case, she meets at least once per quarter with Boston Consulting’s CIO, Tom Dionisio, and their midlevel managers confer weekly or monthly, depending on the projects that are underway.

Another key relationship is with the COO. Before becoming Hyatt’s marketing head, Wallis had spent three years managing more than 40 hotels across the globe. He says that operational background has come in handy as he works with the company’s U.S. and international COOs to determine which results from his department’s 18-month survey of female travelers can be realistically implemented. (Among the changes instituted so far: fresh juices and smoothies added to the menu and personal cards from the housekeeping staff in the rooms.)

“The CMO has to have good operational credibility and empa-

thy with operational managers and good communication, so he’s [or she’s] not just implementing programs that don’t have strong relationships,” agrees MacDonald of Medifast. His CMO, Brian Kagen, presents a detailed report on customer usage data at the senior management team’s monthly strategy meeting.

The chief financial officer is also being cultivated. “With the crash of 2008,” Mei-Pochtler says, “the pressure for CMOs to have the right return on marketing investments has increased.

The CMO needs to have a strong counterpart in the finance department.” Where she and her CFO used to hold a planning meeting just once a year, perhaps supplemented by a midyear review, they now meet quarterly.

How CEOs Can Help Can CEOs help foster such cooperation? They shouldn’t have to send their senior managers iCal reminders, of course. Nor is it necessary to physically relocate the marketing chief’s office closer to the CIO or CFO. However, there are other ways chief that executives can nudge matters along.

Christine Cutten principal, marketing practice leader at Deloitte Consulting, cites one large retail client that hired a new marketing head last December, as part of an effort to improve customer outreach. “The CEO drove it, working with the CMO and head of sales to better manage their annual plan,” she says.

The chief executive prodded the two managers to discuss questions, such as how often to send messages to customers and which themes would work in which seasons.

In the short run, jests Walter of the Leukemia Society, hiring an empowered CMO “is not really making my life easier because this is a lot of organizational change and a cultural shift.” However, he adds, “ultimately, it will make my life easier because we’ll be raising a lot more money. A lot of what we’re talking about probably wouldn’t get done without a CMO because I wouldn’t have the time to do it, and I don’t have the expertise.”

Executive Education Northwestern University’s Kellogg School of Management has just launched a new program targeted to CMOs:

Kellogg School of Management The Kellogg Chief Marketing Officer Program • Target: New CMOs or senior executives with the potential to move into that position. Participants must be nominated by their organizations.

• When: Four days total: two in late May and two in late July.

• Location: James L. Allen Center on the Northwester University campus in Evanston, IL. • Cost: To be determined case-by-case.

• Contact: Executive director, Eric Leininger, 630-400-0420 e-leininger@kellogg.northwestern.edu

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DRIVE RESULTS. Chief Executive Network’s Annual Fall

Leadership Conference TPC Sawgrass, Jacksonville, Florida | November 7 th & 8 th 2013

A CEO/C-Suite Event Designed to Help You Grow Your Business Chief Executive Network’s Annual Fall Conference brings mid-sized & smaller company CEOs together with America’s top business experts for practical, interactive discussions. Join us to share experiences on what’s working for companies of your size. You’ll benefit from tangible takeaways you can put into action immediately, as well as meaningful conversations led by world-class leaders to help you adapt your organization for the future, including: Talent Selection…Deal Negotiation…Emerging Opportunities That Will Reshape The World – and Your Business… and Much More. Combined with unparalled networking and no-holds-barred best practices, this is a not-to-be-missed event.

The 2013 program includes: How to select top talent

(with Jerre Stead, IHS Chairman)

Negotiating to Create Value in Deals & Disputes

(with Robert Mnookin, Harvard Business & Harvard Law School)

The Key Leadership Challenges & How to Overcome Them (with Doug Conant, Campbell’s former CEO)

Approaching the Next American Age

(With Peter Zeihan, Zeihan on Geopolitics)

For More Information, Please Visit: ChiefExecutiveNetwork.com/annual or Call 785-832-0303

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ceo life

Beyond Business Despite their demanding jobs, most CEOs find the time to pursue personal-life pastimes, some of which are pretty unique. Meet seven CEOs and the unusual activities they’re passionate about.

by George Nicholas with Michael Gelfand Championing Ballroom Dance Glen de Vries remembers dancing at family gatherings from the time he could walk. He became a competitive dancer and continues to dance—tango, his favorite, and the other ballroom dances.

The president of Medidata Solutions, a New York-based public company that provides software for clinical data collection and management, credits dancing with helping him become a wellrounded adult with poise and confidence.

Seeking to give young people the same advantage, he serves as board president of Dancing Classrooms, a non-profit group that teaches children in 509 schools across the country to dance.

From Casinos to Copters Semyon Dukach was on an MIT student blackjack team that won $4 million in Las Vegas in the 1990s and was banned by the casinos. He went on to earn an M.S. in computer science with a thesis on E-commerce and Internet money exchange “way before it was cool” and to become a technology entrepreneur. These days, he’s chairman of Cambridge, Massachusetts-based SMTP and has forsaken blackjack for helicopters.

For leisure, he windsurfs and flies a helicopter around the Boston and Cambridge area with his wife, the violinist Natasha Dukash. “I like flying helicopters because of the feeling of total control and calculated risk,” says Dukash, who is the father of five. He doesn’t play blackjack any more, but he does conduct occasional seminars about the game.

The One that Didn’t Get Away Some travel the world to see the sights, but Phil Sawyer, CEO of Invuity, ventures around the globe to catch fish. “I’m an avid fly fisherman,” he says. “I’ve fished in Russia for Atlantic salmon, over the Arctic Circle a few times, in the Amazon for peacock bass and other places,” says Sawyer, who notes that since taking the CEO seat three years ago, he has less time to travel to exotic fishing destinations. “I’ve stayed closer to home now that things are so busy.”

Sawyer’s most frequent fishing destinations include the Gaspé region of Eastern Canada and Quebec for Atlantic salmon and throughout the American West and British Columbia for trout and steelhead. Now that his sons—three and seven—are old enough to fish, the sport has become a family activity. “My father loved adventures; and as a young kid, I was always exposed to the outdoors and nature with my father on most weekends. That helped build my interest in it and now I’m continuing the tradition with my sons.”

Shooting Pool in the National Finals Dan Demaree takes on all comers one night a week at a billiards sports café in Frederick, Maryland. The owner/CEO of DPR Group, a public relations and marketing agency for hightech companies, plays “king of the hill” pool, a competition where the winner of each match is then challenged by another player. He also captains eight-person teams, one of which qualified for the American Poolplayers Association (APA)’s national tournaments four times in the last seven years. Demaree was recently named the MVP for his APA 8-ball division.

To keep his touch, he practices at least an hour a day and has gotten personal coaching from some of the game’s top professionals. “Once I played in a league [for] a few weeks, I was hooked,” says Demaree, who plays straight pool and the faster-paced 8-ball and 9-ball forms of the game—the kind often shown on televised professional matches. Before becoming a pool player, he gained national titles in whitewater slalom-kayak racing and won hang-gliding competitions.

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ad index Audi audi.com Inside front cover C12 C12group.com 19 Enterprise Florida perfectbusinessclimate.com 45

Leading Teams of Clydesdales Robert A. Funk owns 30 Clydesdales, a breed of horses he admires because “they are magnificent, large animals—gentle giants, docile and affectionate.” He leads four-, six- and eight-hitch teams of them at parades and other events. Clydesdales, originally bred for hauling and farm work, stand 17-18 hands tall (six feet at their shoulders), weigh 2,000 pounds and wear shoes four times as heavy as those of saddle horses.

His Clydesdale teams have taken part in a wide range of events, including parades on Thanksgiving Day and St. Patrick’s Day and at the Kentucky Derby, Tournament of Roses and Fiesta Bowl. Last year, he and one of his teams drove England’s royal couple, Prince William and Duchess Catherine of Cambridge, on a stagecoach to a ceremony where they kicked off the Calgary Stampede, the 10-day rodeo event held every July in Calgary, Alberta, Canada.

Funk, CEO of Oklahoma City-based Express Employment Professionals, a staffing firm, also chairs the Federal Reserve Bank in Kansas City. His other businesses include the Express Ranches cattle ranch and an agency that represents professional bull riders.

The Renegade Landscaper It pained Tom Nardone to see Detroit’s abandoned public parks and playgrounds waist-high with grass and weeds and strewn with rubble. Since government couldn’t maintain the sites, he organized the Detroit Mower Gang. Nardone, whose title is “Gang Leader,” posts clean-up events on the group’s Facebook page. Members bring their own mowers, trimmers, “any type of grass annihilation machine” or, lacking equipment, get a chance to drive someone else’s 18-horsepower lawn tractor. The group removed 120 discarded tires from a bike-racing track infield and turned it into a farm that yielded 70 watermelons, as well as corn and sunflowers.

When he’s not behind the wheel of his tractor, which is mounted with headlights for nighttime mowing, Nardone is owner/president of PriveCo, which bills itself as “the world’s most private company.” It operates 10 retail websites that offer “4,000 of the world’s most embarrassing products”—drug store items, bachelorette party merchandise and more.

Collecting Butterflies—Digitally Butterflies have fascinated Andrew Schrage since he was a child; but while some butterfly enthusiasts still collect live specimens, Schrage collects their images. The co-owner of Money Crashers, the financial-information website, takes photos of them in their habitats, at butterfly farms around the world and in his garden in Chicago, which he planted with flowers that attract these flying insects.

Schrage is drawn to butterflies for their beauty and their unique, four-stage life cycle. He is fascinated by their ability to migrate great distances, protect themselves by mimicking other insects and live in symbiotic relationships with other animals.

EY ey.com 9 Greater Ft. Lauderdale Alliance lesstaxing.com 47 Human Synergistics humansynergistics.com 7 Indiana Economic Development iedc.in.gov Inside back cover Jobs Ohio jobs-ohio.com 35 Lee County/Ft. Myers Regional Partnership 25millionreasons.com 49 Michigan Economic Development Corp. michiganbusiness.org/CE 3 Microsoft Dynamics microsoft.com/dynamics/AX Outside back cover NetJets NetJets.com 17 Rockwell Automation rockwellautomation.com 13 Strategic Instititute strategyskills.com/seminar 5 Vitesse Vitesseworldwide.com 23 Wisconsin Economic Development Corp.

Advance.InWisconsin.com 21 Wounded Warrior Project findwwp.org 55

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flipside

He Used to Be a Big Shot

Where have all the superstars gone?

There is a famous closing scene at the end of “The Roaring elected and then find out that everybody in Washington hates Twenties,” the 1939 classic that chronicles the rise and fall of a one another. So they go home. And they stay home. Senators gangster and the last movie that Jimmy Cagney and Humphrey used to be big shots. Now the big shots are governors.

Bogart made together. Kneeling over Cagney’s bullet-riddled Other things that fall into this fallen-hero category? Latecorpse, his faithful bootlegging associate, one Panama Smith, night talk shows. Before cable television blossomed 30 years looks up and tells a passing cop, “He used to be a big shot.” ago, half the country watched “The Tonight Show.” Now the This got me to thinking about other people and things that viewership numbers for late-night talk shows are miniscule. used to be “big shots” and are no more. I am not talking about Jimmy Kimmel draws a few million people. David Letterman people or products or corporations that qualify for the fleeting- attracts a few million people. Conan O’Brien has trouble fame award—the Macarena, the DeLorean, the Newton, the cracking the million mark.

Baja Marimba Band, Klinton Spilsbury—but things that were Remember when everybody watched MTV? Remember actually institutions at one time in our history and then went when everyone talked about MTV? MTV used to be a big shot. down for the count. The list is long, the list is varied.

Those days are long gone. They’re gone in part because rock ‘n’ Personal computers used to be big shots. The classic, roll is no longer the big shot it once was, having ceded pride of desktop model. They used to be the biggest big shots on place to Walmart country (Kenny Chesney, Tim McGraw, Taylor the planet. Some people think they helped bring down the Swift, assorted non-cowboys in cowboy hats the size of Texas).

Iron Curtain. But then along came laptops. Followed by smart It doesn’t end there. Movie critics used to be big shots. Now, phones and iPads and the Nook and lots of other tablet-sized nobody reads them. Bookstores used to be found everywhere. devices, all of which can do much—though not all—of what Now, they are on life support. A master’s degree used to mean PCs can do. Now, with sales dwindling, and the zeitgeist something. Now, it is little more than an ornament. France used turning against it, the personal computer risks going the way to be a big shot. Italy, too. Europe in general. Now, the only big of the fax, the eight-track player, the hurdy-gurdy and the shot in Europe is Germany. Wow. That’s a shocker.

Austro-Hungarian Empire. Yes, it may survive in a radically I raise this subject because it shows how quickly things diminished form, but its days as a big shot are over. can change for people, products and corporations. Often for Lots of things fall into this same general category. Being a the worse. Classical music used to be a big shot. Now, it is member of the United States Senate used to be an unimaginably treading water. Jazz is treading water right beside it. Digital high honor. Now, both the Democratic and Republican parties— Equipment Corporation was once the second-biggest computer they used to be big shots, too—have to go trolling in all sorts of company in the world. DEC is long gone. The American Stock murky, uncharted waters to find plausible candidates willing to Exchange used to be a big shot. No more. So whatever situation run for the office. Sometimes, not so plausible. Nobody seems you find yourself in, as an executive, as an entrepreneur, as an to want the job anymore. Senators get elected and then get investor, even as takeover specialist, don’t get too comfortable. deposed—and humiliated—in primaries. Senators get elected You might end up like Lehman Brothers. You might end up and then quit because they can’t get anything done. Senators get like Jimmy Cagney.

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final word

It Isn’t Just Detroit; the Pension Tsunami Will Eventually Hit Job Creation

The most dangerous deficit in America is not the federal deficit.

It is the jobs deficit.

Here is a list of cities and municipalities that have gone to the wall over the last five years: 1. Detroit, Michigan July 2013

2. San Bernardino, California Not only do the unemployed and the underemployed pay less taxes and fail to pay for August 2012 public services; but of necessity, they require more of those services. Companies are paying attention to more than just taxes when sizing up investment opportunities in states and 3. Mammoth Lakes, California regions across the country. This is why Detroit’s bankruptcy crisis is not isolated to Motown.

July 2012 It serves as a wake-up call, reminding the rest of the country of the economic consequences 4. Stockton, California of the rising pension debt that plagues municipalities, towns and cities across the nation. A June 2012 mismanaged budget coupled with a tough economy has left Detroit unable to dig out from an $18 billion hole, with nearly four billion of that promised to public employees in retiree 5. Jefferson County, Alabama health and pension commitments.

November 2011 According to the Center for Retirement Research (CRR) at Boston College, states’ 6. Harrisburg, Pennsylvania pensions are 27 percent underfunded—even assuming the optimistic discount rates that October 2011 make obligations look smaller. That adds up to a shortfall of $1 trillion. What is more, they are paying only about four-fifths of their required annual contribution. Even reckoning with 7. Boise County, Idaho March 2011 a more realistic discount rate of 5 percent, the CRR believes the shortfall may be closer to $2.7 trillion. Moody’s maintains that states’ pensions are, in reality, 52 percent underfunded.

8. Central Falls, Rhode Island Thriving companies, the ones most likely to create jobs, generally don’t like to invest in August 2011 areas rendered unfit to grow because of fiscal mismanagement. Given the massive sums of 9. Prichard, Alabama bonded debt, unfunded pension liabilities and underfunded retiree healthcare liabilities that October 2009 cities face, most companies realize that taxes can only go up. They understand that with those higher taxes will come lower levels of public services. Troubled cities and states will also 10. Vallejo, California have far fewer resources to invest in roads, bridges, airports, education, public safety and all May 2008 the things that businesses look for in an environment that is attractive for their employees.

Forget bailouts. Citizens of fiscally healthier states and cities are no more keen on seeing their tax dollars sucked into distressed places than Germans are when seeing their euros going to Greece.

In addition, Moodys reports that government retiree costs to date have been improperly underreported to taxpayers. New rules are now in effect from the Governmental Accounting Standards Board that are intended to fix this problem, and they may show California is worse off than expected.

Los Angeles could be two to three years away from the same kind of bankruptcy that Detroit faces, Daniel Pellissler, president of California Pension Reform, a political organization dedicated to fixing California’s pension crisis, told the Huffington Post’s Jacob Soboroff. “There is not enough money to pay the bills.” Pellissler added, “Because [L.A.] can’t project, going forward, a stable budget, [since] they face the same pension problems that everyone else in the country does.”

Oversight of state and municipal pension systems is largely absent. Detroit’s pension officials manipulated official reports for years to create the illusion that their system was in decent shape, using many of the same tricks that the California Public Employees’ Retirement System (CALpers) has used to minimize underfunding. What happened to corporate accounting after the Enron scandal needs to happen in government accounting.

The simple truth is that “moving within the U.S. has never been easier for employers,” argues Meredith Whitney in her recent book, Fate of the States: The New Geography of American Prosperity. “If all a business needs to operate is a high-speed data network, proximity to an airport and interstate and a college-educated labor pool, there’s not much difference between Portland, Oregon, and Portland, Maine.” In our current low-growth economy, the better-managed states are more than happy to exploit the economic woes of their neighbors. No wonder Gov. Jerry Brown bridles at Texas Gov. Rick Perry’s periodic visits to California executives, entreating them “to get out while there is still time.”

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