November/December 2017 Chief Executive Magazine

2018 Outlook: High Hopes! (Finally)

Mastering DIY Healthcare Reform

The CEO’s Guide to Making Good Kids

NOVEMBER/DECEMBER 2017

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C ON TE N TS

November/December 2017 No. 291

FEATURES COVER STORY

20

20 Doing What Must Be Done

Studying public schools and teaching at West Point left Jim Collins incredibly optimistic about leadership in America. Here’s what he learned, and why it matters.

By Dan Bigman

CEO OUTLOOK 2018

26 High Hopes

A growing economy, booming market and Goldilocks inflation has CEOs feeling upbeat. Still, our annual listening tour of America’s corporate leadership finds unfinished business—like that tax cut we were promised.

By Dale Buss

HEALTHCARE

34 The Doctor Is Out

The prognosis for real Obamacare reform in Congress?

Terrible. Smart CEOs won’t wait on Washington to find a fix.

By C.J. Prince

CEO ROUNDTABLE

34

40 Healthcare: Quality vs. Cost

CEOs share insights on assessing the true value of healthcare to their companies.

By C.J. Prince

CAPITAL ALLOCATION

52 Spooked

The economy’s resurgence has CEOs swimming in cash. The Great Recession changed how they’re spending it.

By Russ Banham

LIFE

58 The CEO Parent Trap

Tackling the ultimate leadership challenge: Making sure your kids turn out to be productive, empathetic members of society.

By Anne Field

58

COVER PHOTO BY GEORGE LANGE

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C O N TEN TS EDITOR-IN-CHIEF Dan Bigman

DEPARTMENTS

EDITOR AT LARGE Jennifer Pellet

9 LEADERS 9 Comp Report Time for a Raise 10 On Management No Time for Silence 12 Crash Course The Power of Purpose 14 Deal Driver It’s the Culture, Stupid 16 Law Brief Beware Obama’s Labor Legacy 10

44 Economic Development

Regional Report: The Midwest Rust Belt? Hardly. Manufacturing and innovation are alive and well in the nation’s heartland.

By Craig Guillot

64 Executive Incentives

Getting Rewards and Recognition Right How do you create an incentive program that supports your company’s talent strategy?

By Jeff Heilman

64

66 Plane Advantage

Tools, Not Toys A new study examines how much value corporate aircrafts really add to a company. The results may surprise you.

By James Wynbrandt

72 Time Capsule

New Directives for Directors How the CEO-board member relationship has evolved.

By Betsy Atkins

66

PRODUCTION DIRECTOR Rose Sullivan CHIEF COPYEDITOR Rebecca M. Cooper ART DIRECTORS Carole Erger-Fass Gayle Erickson CONTRIBUTING EDITORS Betsy Atkins Dale Buss Anne Fields Daniel Fisher Craig Guillot Jeff Heilman C.J. Prince Jeffrey Sonnenfeld ONLINE EDITOR Lynn Russo Whylly EDITOR EMERITUS J.P. Donlon PUBLISHER Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net VICE PRESIDENT Phillip Wren 203-930-2708 | pwren@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT Lisa Cooper 203-889-4983 | lcooper@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT Liz Irving 203-889-4976 | lirving@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT Gabriella Kallay 203-930-2918 | gkallay@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT Marc Richards 203-930-2705 | mrichards@chiefexecutive.net MARKETING DIRECTOR Jason Golden 203-889-4978 | jgolden@chiefexecutive.net CLIENT SERVICES ASSOCIATE Ashley Gabriele 203-889-4989 | agabriele@chiefexecutive.net VICE PRESIDENT, HUMAN RESOURCES Melanie Haniph

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 291 November/December 2017. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2017 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States.

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Serving CEOs and Now Boards, Too WITH A LITTLE LUCK AND A LOT OF work, every CEO gets to do “The Dream Deal.” It’s the one where everything—from values to vision, from customers to culture—just makes sense.

Well, we’re excited to announce that we just did one of those deals.

In August, Chief Executive Group, publisher of Chief Executive magazine and ChiefExecutive.net, acquired Corporate Board Member.

For more than 25 years, Corporate Board Member has served as a community for public-company boards across the nation, and around the world.

We’re thrilled—but not just for us. In a time of unparalleled change and opportunity for business leaders, it’s great news for the entire community we serve. As all CEOs know, great board members are their best allies, helping shoulder responsibility for the success of their organizations. They value real-world, hard-won experience above all else. That’s what Corporate Board Member is about.

From fashioning strategy to judging M&A opportunities, to the full spectrum of governance issues, we’ll offer sharp insight in the pages of the quarterly magazine, at BoardMember.com and in a new weekly e-newsletter, as well as with the Board Leadership Program for peer-to-peer networking and problem-solving, and in a robust lineup of events specifically designed for boards, including the well-known Board Leadership Summit, coming this spring.

Like we said: The Dream Deal. We think you’ll agree. To learn more and subscribe, go to BoardMember.com —Wayne and Marshall Cooper STATEMENT OF OWNERSHIP U.S. Postal Service Statement of Ownership, Management, and Circulation 1. Publication Title: Chief Executive.

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AD INDEX AAG www.flyaag.com 71 Alix & Partners www.alixpartners.com 25 Arizona Commerce Authority ww.azcommerce.com 31 Arkansas Economic Development Commission www.arkansasEDC.com/asa Outside back cover CEO Briefing www.ChiefExecutive.net/CEOBriefing Inside back cover Ceo2Ceo Summit www.ceo2ceosummit.com 7 CEO and Senior Executive Compensation Report for Private Companies www.ChiefExecutive.net/compreport 50, 51 Chief Executive Network www.ChiefExecutiveNetwork.com 57 Deloitte Private www.deloitte.com/us/private 18, 19 Executive Airshare www.ExecAirShare.com/solution 69 Harvard Business School www.EXED.HBS.EDU/CEM-AMP 5 Indiana Economic Development www.astatethatworks.com 13 ITA Group www.itagroup.com/culture 65 Jackson Lewis P.C. https://www.jacksonlewis.com 3, 15 Michigan Economic Development Corp. www.michiganbusiness.org 47 Mitsubishi Heavy Industries Group www.mhi.com 32, 33 National Shooting Sports Foundation www.nssf.org/impact 17 New York-Presbyterian www.NYP.ORG/EXECHEALTH 39 RHR International www.rhrinternational.com 8 Smart Manufacturing Summit www.smartmanufacturingsummit.com 43 Strativity Consulting https://strativity.com/ 11 Supply Chain Summit www.ChiefExecutive.net/SupplyChain 63 Textron Aviation www.txtav.com Inside front cover, page 1

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CIB ENT PDF 1017-099

THOUGHT LEADERSHIP PROVIDED BY RHR INTERNATIONAL

Founder Power When it comes to financial performance, CEOs who started their companies dominate the CEO 1000.

Here’s why.

Zuckerberg. Fink. Plank. Hamm.

Adelson. Page. Many of the most famous names in business are founder-CEOs, and a new analysis by Chief Executive/RHR International finds their performance more than lives up to the hype. While just 6 percent of CEO 1000 companies are run by founders, founder-CEOs sit in the corner office at more than 20 percent of the 50 top-performing companies on the list.

On average, these founder-led companies have compound annual growth rates that are more than 8 percentage points higher than those of other companies, with profit margins that are more than 10 percentage points higher.

Why the outsized gap? Three reasons, says Jeff Kirschner, a partner at RHR International, who has long studied executive performance.

They are groundbreakers. Founder-CEOs have usually seen some unmet need in the marketplace and exploited it, bringing new ideas or offerings to meet that need, says Kirschner. Such innovation can be an important key to strong financial performance. hey have a deep understandT ing of the company. Founders are quintessential insiders who have deep

Of the 50 top-performing public companies on the CEO 1000 list, 12 are run by the men who started the firm.

Name

Age

Company

Industry

Date Founded

Jeffrey Sprecher

62

Intercontinental Exchange

Financial

2000

473

1.00

Walter Howley

65

TransDigm Group

Industrial Goods

1992

770

1.00

Larry Page

44

Google/Alphabet

Technology

1998

26

1.25

Harold Hamm

71

Continental Resources

Energy

1967

983

1.25

Mark Zuckerberg

33

Facebook

Technology

2004

99

1.50

Francisco D’Souza

48

Cognizant Technology Solutions

Technology

1994

227

1.75

Steven Ells

52

Chipotle Mexican Grill

Retail

1993

657

2.25

Laurence Fink

64

BlackRock

Financial

1988

261

2.50

Stephen Schwarzman

70

Blackstone Group

Financial

1985

546

2.50

Sheldon Adelson

83

Las Vegas Sands

Entertainment

1988

254

2.75

Kevin Plank

44

Under Armour

Consumer Goods 1995

561

2.75

Richard Hayne

69

Urban Outfitters

Retail

717

2.75

1970

CEO 1000 Performance Rev Rank Rank*

* Financial performance rankings a combination of CAGR, profit margin and other metrics vs the full list and industry peers. Rankings based on company financial performance during the tenure of the CEO. Only CEOs with a minimum tenure of three years were analyzed. Sources: Chief Executive/ RHR; Company financial data via Barchart.com.

experience with the ins and outs of the company. “They’ve been there since day one,” says Kirschner. “They know the product and the key customers, and they’ve often been involved in big sales. In particular, they know the internal talent and have even hired a lot of those people.” In short, they are familiar with the factors that make the business work well, which puts them in a good position to identify problems early on and keep things on track.

I t’s personal. The founder-CEO’s ego and identity are typically tied to the business he or she started—so much so that “they are often closely identified with the brand,” says Kirschner. “So there are themes here around strong focus, passion and total personal dedication to the company’s success.” With that emotional investment, he says, “these folks are not deterred by adversity. It fuels their passions and they move beyond it.”

Non-founder CEOs can draw some lessons from these traits. They underscore the importance of intimately understanding the key drivers of their business’ success and staying highly focused on them—and especially, on talent and innovation.

CEOs can assess their own level of personal commitment and sacrifice against these successful founders— and ask themselves if there’s room for improvement.

For more information about RHR International, visit rhrinternational.com or call +1 312 924 0800.

LE A D E RS COMP REPORT

TIME FOR A RAISE

Forget what you’ve read about CEO salaries.

New research from Chief Executive shows they’ve stagnated for all but a lucky few.

CEO CEOMEDIAN MEDIANBASE BASESALARY SALARY&&BONUS BONUS

CEO CEOTOP TOPQUARTILE QUARTILEBASE BASESALARY SALARY&&BONUS BONUS $84,000 $84,000

2011 2011

$244,000 $244,000

$71,000 $71,000

2011 2011

$270,000 $270,000

2012 2012

$244,000 $244,000

$73,000 $73,000

2012 2012

$283,000 $283,000

2013 2013

$244,000 $244,000

$74,000 $74,000

2013 2013

$302,000 $302,000

$120,000 $120,000

2014 2014

$244,000 $244,000

$76,000 $76,000

2014 2014

$317,000 $317,000

$150,000 $150,000

2015 2015

$245,000 $245,000

$76,000 $76,000

2015 2015

$333,000 $333,000

2016 2016

$250,000 $250,000

2017 2017 Expected Expected

$250,000 $250,000

SALARY SALARY

$80,000 $80,000

$100,000 $100,000

BONUS BONUS

2016 2016

$350,000 $350,000

2017 2017 Expected Expected

$357,000 $357,000

SALARY SALARY

$105,000 $105,000

$187,000 $187,000

$210,000 $210,000

$230,000 $230,000

BONUS BONUS

* All numbers approximate, based on statistical analysis of survey data

CEO SALARIES ARE BOOMING! Just ask anyone in the mainstream business press. Sigh. If only. Actually, our annual deep dive on C-Suite compensation, just completed, finds private company CEO pay has largely flatlined.

Median base salaries went from $244,000 in 2011 to just $250,000 in 2016. Bonuses, meanwhile, have edged up from $71,000 in 2011 to a projected $100,000 for 2017. “Despite headlines that focus on the large and rapidly rising compensation packages of the CEOs of the largest public companies, the reality is that the vast majority of CEOs in the U.S. run small and mid-market privately owned companies—and most earn comfortable but not excessive salaries and bonuses,” says Wayne Cooper, executive chairman of the Chief Executive Group, who runs our annual survey.

Not everyone is stuck in the mud. In the top pay quartile, salaries jumped from $270,000 in 2011 to $350,000 in 2016 and are projected to hit $357,000 for 2017. Bonuses among the nation’s bestpaid executives more than doubled over the period.

Still, for the vast majority of America’s company chieftains, there’s been little pay recovery in this recovery. “Most companies remain cautious and are keeping a lid on salary inflation for all employees,” says Cooper, “including those in the corner office.”

For more information, visit ChiefExecutive.net/compreport

NOVEMBER/DECEMBER 2017 / CHIEFEXECUTIVE.NET

/ 9

L E ADERS ON MANAGEMENT

NO TIME FOR SILENCE

In resigning from a presidential advisory board, Merck CEO Ken Frazier led a change in the way today’s CEOs are engaging with the White House.

THROUGHOUT U.S. HISTORY, BUSINESS leaders like Robert Morris, Jay Cook, JP Morgan, Barnard Baruch, Averill Harriman, Chester Bowles and Ellsworth Bunker were as renowned for shaping public opinion as they were for private sector leadership. Yet, the concept of CEO as corporate statesman has been a matter of debate. Economist Milton Friedman famously advised that “the only social responsibility of business leaders is the bottom line.”

Many years ago, while still CEO of GE, Jack Welch told me about the reception he received as a new member of the Business Roundtable (BRT) when introduced by his predecessor, Reginald Jones. “I took out an order pad to do some business, and they all looked back at me in horror—like I was Darth Vader,” he recounted, lamenting that the group of high-minded business titans seemed more concerned about societal issues than the possibility of being outpaced by global competitors.

The BRT was founded in 1972 by CEOs of corporate behemoths like GE, IBM, Alcoa, GM, AT&T, Exxon, American Express and DuPont, who aimed to combat the perceived growing public hostility towards business in the late 1960s. Amid ongoing battles over civil rights, the antiwar effort and environmental activism, GE’s Jones championed “corporate social responsibility” and CEOs like DuPont’s Irving Shapiro spoke up on behalf of corporate America.

By contrast, in recent decades business was virtually mute during a time characterized by national regulatory excesses, budget stalemates and bureaucracy, as well as the forging of Sarbanes-Oxley, Obamacare and key trade deals. More recently, with a newer

10 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

By Jeff Sonnenfeld

generation now at the helm and a more business-friendly administration, CEOs began flocking to DC to serve on prominent White House councils.

Then came Charlottesville and a weekend of racial violence capped by President Trump’s perceived inflammatory assignment of shared blame between the murderous assault of armed white nationalists and peaceful protestors. Resigning from a presidential advisory board in its wake, Merck CEO Ken Frazier, stated, “As a matter of personal conscience, I feel a responsibility to take a stand against intolerance and extremism.” Frazier, one of three Fortune 100 black CEOs and among the BRT’s most revered members, has a career that epitomizes the American Dream. Unwisely, President Trump responded by attacking Frazier’s sterling character and his iconic firm.

The CEOs of Unilever, HPE, Disney, Intel, Under Armor, Walmart, BlackRock, UPS, PepsiCo, IBM, EY, GM and Campbell Soup spoke out in solidarity and stepped down from presidential councils. Four White House business advisory groups also disbanded, as U.S. business leaders opted to shun national service rather than risk being exploited for divisive political agendas.

The problem is that the country can’t afford CEOs to retreat right now. At a time when public opinion polls show respect for political leaders at an all-time low, CEOs remain one of our society’s most trusted groups, according to a 2017 Edelman study.

Simply walking away is not an option, and many CEOs know it. “IBM will continue to work with all parts of the government for policies that support job growth, vocational education and global trade, as well as fair and informed policies on immigration and taxation,” IBM’s Ginni Rometty recently said, and she’s right. But she can’t do it alone—no company or CEO can.

The question for business—and the BRT—is really this: If not us, then who?

T H O U G H T L E A D E R S H I P P R O V I D E D B Y S T R AT I V I T Y

THE REAL REASON YOUR STRATEGY WILL FAIL

BY L IO R A RUS SY THE DEADLINE TO COMPLETE the merger of two global health care companies was approaching. We were on a conference call with 18 stakeholders (yes, 18— they all needed to be there) to discuss the deployment plan for the new merger employee portal. The plans were clear, and even the mock-up was designed. After 90 minutes, we heard all the reasons why the plan would not work and not a single idea about how to make it work.

It seemed that not one person who had the desire to actually make it happen or to be accountable was on the call; it was only the nay-sayers. Later, I reflected on how clueless the CEO was to what was happening underneath her.

“

This is the story of strategy execution everywhere. From mergers and acquisitions to digital transformations to customer experience, CEOs spend their time approving and financing strategies that do not materialize on time, in scope, or on budget.

DEDICATE TIME

AND RESOURCES TO THE STRATEGY EXECUTION EQUAL TO,

What will make your next strategy more successful? What are the chances that the strategy will be embraced by the organization the way it was intended?

Based on a 2016 Harvard Business Review study the answer is: Very slim. Only 5% of the responding executives agreed that their strategies were implemented as planned. Unlike popular perception, the cause behind of 91% of the failed strategies (strategies that needed to be rescoped, watered down, or extended in the time frame of executions) was not the usual suspect. Budgets, timelines, or governance were ranked at the bottom of the list of root causes for strategy execution failure.

IF NOT MORE THAN, WHAT YOU DEDICATED TO CREATING IT. —LIOR ARUSSY

”

The top reasons for strategy failure were all human related: lack of executive sponsorship, lack of understanding of the purpose of the new strategy, lack of internal collaboration. Strategies fail because people refuse to execute them. Refusal is not often direct. It is not a case of employees refusing to do something they are asked to do. They play politics and find effective ways to delay and postpone.

® UNITED STATES • CANADA • UNITED KINGDOM • AUSTRALIA

How do you increase the chances that your new strategy will achieve the promised benefits in the marketplace? Start by abandoning old methods. Dedicate time and resources to the strategy execu-

tion equal to, if not more than, what you dedicated to creating it. I always find it puzzling that a company will spend $30 million on a new digital platform and less than 1% of the budget to get their employees to support it. And I am not talking about skills training—I mean real change preparation.

Organizations who seek to increase their strategic success should approach strategy execution as a strategic effort: 1. Assess the degree and scope of resistance the new strategy will generate.

2. Map the customer and employee journeys that the new strategy will impact and identify the vulnerability areas.

3. Develop a clear plan to address the strategy execution’s vulnerability.

4. Stay with the cause and do not speak about change. No one likes change.

Rally people around a cause and then present the strategy as a way to achieve it.

5. Allow employees to engage in the strategy’s rationale.

6. Turn employees into co-creators in the path forward.

7. Be empathetic to those who struggle.

8. Develop a persona-based approach to address resistance.

9. Never stop communicating.

10. Celebrate milestones of success.

A strategy without a time-bound execution is nothing more than an expensive PowerPoint file. The amount of change in organizations is growing exponentially in speed and scope. It is crucial that we increase the ability to execute it effectively. Strategy execution can not be left to chance or lower level management. It’s time to do something different in order to generate different results.

If we approach strategy with the understanding that failure is not an option, then we also need to rethink how we increase the chances of success and not just leave it to fate.

Lior Arussy is the CEO of Strativity Group, Inc., an experience and culture design firm, and the author of five books including Exceptionalize It! LArussy@Strativity.com

L E ADERS CRASH COURSE

THE POWER OF PURPOSE

By Jennifer Pellet

National Life had to “recreate a melting pot,” says Assadi. “We defined what we needed in every seat within the company and matched the [employees] we had with the right seats for their skill sets. Then we went to the market and picked some free agents. Our attitude was not that we needed wholesale change; it was that we needed to supplement our best and brightest to position the company for the next century.”

Leading the Leadership

To beat complacency, Mehran Assadi put Vermont’s National Life on a mission.

WHEN MEHRAN ASSADI TOOK THE HELM at National Life Group, the Montpelier, Vermont-based insurance company was doing just fine and had been for more than 160 years. There was low employee turnover, happy customers—and no burning reason to compel transformative change.

“It was a gem of a company that needed to be polished,” he recalls. “We needed to bring out its potential for top- and bottom-line growth.”

Leading change at a trouble-free business isn’t as easy as it sounds. Tackling a turnaround gives newly minted CEOs carte blanche to lead an upheaval, whereas those who inherit bliss face just the opposite: complacency.

The Call of Duty

To unlock the kind of growth he envisioned, Assadi decided to focus on culture.

It “was all about defining the ‘why’ behind what we do,” he says. “That meant revisiting our vision, mission and values.”

Most corporate mission statements are crammed with long, tired bromides like “dedicated to enhancing the customer experience.” National Life kept it simple and concrete: “Keeping our promises,” reflecting the philosophy that insurance is about delivering peace of mind by fulfilling promises.

Of course, words alone can’t create cultural and organizational change. For that,

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Putting the right people in the right chairs, however, also didn’t quite cut it. It wasn’t until National Life began collecting feedback on how its top leaders were faring at servant leadership that the company realized the double-digit increases that Assadi coveted. That annual process involves having at least 20 peers, subordinates and superiors evaluate the company’s top 200 leaders on tenets like inspiring others to be their best selves, demonstrating respect and coaching when opportunities arise.

“That’s what makes it different from a 360 review,” says Assadi, who says embracing servant leadership creates a company-wide effort to “talk about imperfections” and look for ways to get better individually and collectively. “Every year it gets richer because it’s okay to talk about what you need to do more of or less of, as opposed to, ‘if I talk about my imperfections, my growth opportunities and upward mobility are dead’.”

The ethos extends outside the company walls. In 2016, employees collectively spent 5,400 hours doing volunteer work, taking advantage of the 40 hours of paid time off the company offers each employee.

National Life is now the country’s fastest-growing life insurance company.

“Being purpose- and cause-driven has really changed our company,” says Assadi. “I firmly believe that culture and cause has been the jet fuel behind our growth.”

L E ADERS DEAL DRIVER

IT’S THE CULTURE, STUPID The secret to truly successful M&A? It isn’t in the numbers.

Thomas van der Meulen, CEO, Backyard Products

Through dozens of M&A deals over the last two decades, Thomas van der Meulen, CEO of Monroe, Michigan-based Backyard Products and operating partner with private equity firm Source Capital, has seen his share of both success and failure. His best advice for a winning acquisition: Keep an open mind and pay as much attention to culture as the numbers.

Set the Table for Success. If it’s a non-marketed deal, you need to feel out what the seller wants or expects. When it’s a typical entrepreneurial family-owned business, the seller may have super-high expectations, which can make it more difficult. On the other hand, someone who wants their employees taken care of and the team to stay intact, likes you as a friendly competitor and believes it’s a good home for the business may be entirely reasonable.

If it’s a marketed deal and there’s a broker or intermediary involved, CEOs don’t even have to worry because it’s an auction process. A majority of these deals are auction processes these days, because everyone has smartened up about how to get maximum value for their company and there are tons of these intermediaries out there.

Stay Flexible. There can be a lot of leeway between the first time you look at a business and you think you know how much they’ve really earned and the second, third and fourth time you’ve done your due diligence.

You may find out the actual earnings are lower or higher. You may find that there’s a real estate component to the sale with some hidden value. As you go along in the due diligence process, you may find that your synergies are higher or lower. You need to

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have a fairly open mind for the first several months of the process.

Culture Is the Key. A lot of mistakes get made in figuring out how these companies fit with existing businesses. Is there a cultural fit?

How will it run post-acquisition, and have they really thought that through? How will the existing organization absorb it? Sometimes companies are overly optimistic with add-on acquisitions. A lot of mistakes get made at that conceptual level, where expectations are high and integrating synergies seems easier than it really is. We shy away from add-ons that are not good cultural fits.

Communication. These days, unfortunately, you don’t have much time before going public with your news—a week is really about as much time as you have. So you need to have a good 100-day plan before you acquire the company, and you need to communicate that plan within your organization and with the target company, too. We have found that typically you get a lot of buy-in if you are very forthcoming and honest about what you want to do. It can be a positive not to walk in as the acquirer and the victor, but to walk in as more of a partner and make them part of it so they become a part of the plan.

Respect Where It’s Due. Ultimately, when we buy something, the company has been doing well for quite a long time and we can’t just ignore that. There is some real talent and some real knowledge, and maybe it hasn’t been done your way necessarily, but it was certainly done a pretty decent way. If you try to get the best components of both companies and do something better with it, we’ve seen that work really well.

THOUGHT LEADERSHIP PROVIDED BY JACKSON LEWIS

BECOMING BUSINESS INTELLIGENT How to use employee data you already have to enhance your company culture—and boost your bottom line.

IF YOU’RE LIKE MOST EMPLOYERS, INFORMATION THAT YOU ALREADY HAVE AT YOUR fingertips can be leveraged in many ways—from anticipating staffing needs and identifying top job candidates to reducing litigation risk and enhancing your corporate culture. In this Q&A, Eric J. Felsberg, who heads workplace law firm Jackson Lewis’s national data analytics group, shares insights gleaned from helping the firm’s clients extract value from their existing employee data.

You’ve said that in many cases, data that employers already have on their existing employees can be analyzed to offer a competitive edge. What kind of data are you referring to and where does it typically come from?

Most employers collect robust employment-related data as a matter of course. They routinely track personnel movement, so they have an idea of who they’ve hired, promoted, transferred and terminated. They also have access to digital-footprint data based on everyday tasks like identity-card swipes and computer logins that provide insight about employees’ work habits. Many employers will also have information about candidates who haven’t actually been hired but have expressed interest in joining the company. These are all examples of the kinds of information collected in the ordinary course of doing business that can be potentially drawn upon and analyzed.

Where should companies start in terms of gaining a competitive edge from the analysis of existing data? What benefits should they work toward?

One school of thought is to jump into the data and see what it can tell us, but I usually urge employers to start out by identifying the questions that they are trying to answer or the objectives they’re trying to achieve. Maybe they’re trying to figure out why people are leaving the organization or identify who has the right skill set to fill a certain position. Once we understand the strategic business objective, we can look at the data that might help us reach that goal. For example, if they’re concerned about attrition, we can look at who has been leaving the organization—are departures coming from a certain business unit or product line? And if so, what can they do about it? Maybe they need more development, stronger mentoring, a new training component. Or there could be a work environment or morale issue that they need to address.

What role does the CEO play in initiating this type of analysis?

CEOs are in a position where they can champion this type of approach. Often, the people who will be on the front lines of gathering data and working through the analysis, whether that’s human resources or someone in systems administration, will see the value in it but need assurance that it’s something the company wants to pursue. A digital initiative, particularly one about personnel issues, can feel so big to a junior-level professional that he or she needs clear direction from the top that this is something the organization wants to embark upon. The role the C-suite can play is to clearly communicate that they see value in the analysis, are prepared to deal with the outcome of the analysis and support the project. That will encourage and empower teams to embark upon and follow through on these initiatives.

What bottom line benefits can companies realize from these types of data analysis initiatives?

Data can be used to laser focus a company’s vision on concentrating resources to improve the business model. Taking the example of attrition above, some companies will go a step further by saying, now that we know there is a higher attrition in a given business segment, we can look at those who left and try to find links in the data—what qualifications, experiences or involvement do those employees share? Then we can apply that intelligence to the existing workforce and try to predict who is likely to leave in the next year or two or beyond.

That type of analysis can help the company from a business planning perspective. Maybe they start recruiting now so there’s no lag time between people leaving and positions being filled—or, during financial planning, they budget for the cost of filling the position and on-boarding new employees. Or it can help identify who is likely to be a more productive and successful long-term employee. Those few examples are all low hanging fruit where you can clearly see an immediate, direct impact on the bottom line. But data analytics can provide insight into pretty much any aspect of your business process.

Really, the sky is the limit.

“ The role the C-suite can play is to clearly communicate that they see value in the analysis, are prepared to deal with the outcome of the analysis and support the project.”

—Eric J. Felsberg, Principal and National Director, Jackson Lewis Data Analytics Group

L E ADERS LAW BRIEF

BEWARE OBAMA’S LABOR LEGACY

By Daniel Fisher

PRESIDENT BARACK OBAMA WAS never shy about using his pen to end-run a recalcitrant Congress, but few areas bear his stamp more firmly than labor policy. From doubling the salary threshold for overtime pay to requiring companies to turn over employee contact information to labor organizers, the Obama administration and its allies at the National Labor Relations Board (NLRB) pursued a relentlessly pro-union agenda.

Think it’s over? Think again. “We’re just in the ninth year of the Obama administration when it comes to the Labor Board,” says Michael Lotito, a labor attorney with Littler

issued a permanent injunction on August 31. The Trump Labor Department, meanwhile, solicited comments for a new rule likely to have a lower threshold and clearer distinctions between managerial employees and workers.

Joint Employer. In 2014, the NLRB sued McDonald’s over alleged labor law violations by its independent franchisees, disregarding decades of precedent and clear language in most franchise agreements defining franchises as independent owner-operators. In 2015, the NLRB ruled that Browning-Ferris Industries was the “joint employer” of workers employed by an outside contractor servicing one of its plants. Both matters remain unsettled, with appeals pending.

And Congress is considering a bill that would prohibit the NLRB from enforcing the new rule.

Arbitration. Ignoring a federal appeals court decision, the NLRB maintains it is illegal for employers to require individual arbitration of employee labor disputes. The Supreme Court will decide the issue in a trio of cases this fall.

Nearly a year after leaving office, President Barack Obama’s heavy hand on labor regulations continues to shape business.

Mendelson who once calculated that the NLRB reversed more than 4,000 years of precedent during the Obama years.

Yes, courts have struck down some of the most pernicious labor rules and the Trump administration is working to dismantle others. But the fallout from those decisions is continuing, and CEOs shouldn’t lose sight of what happens with these in-flux regulations: Overtime Rule. In December 2016, the Labor

Department raised the threshold below which employers must pay overtime wages from $455 to $913 a week, or $47,476 a year, describing it as a long-overdue adjustment designed to bolster the middle class. But employers and 21 states sued, saying it ignored differences between managers and workers, as well as regional differences in wages. A federal judge in Texas ultimately

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ment Opportunity Commission dramatically increased reporting requirements on age, gender, ethnicity and other characteristics in an effort to uncover pay discrimination.

The Trump administration suspended the new EEO-1 rules in August, but unions and labor lawyers will be seeking to restore at least some of the requirements, which would provide a treasure trove of data for discrimination lawsuits.

Meanwhile, the NLRB, a supposedly independent agency, still has Obama-era nominees who could serve as long as 2020.

Chairman Philip Miscimarra is a Republican, and the five-member board now has a GOP majority. But General Counsel Richard Griffin, former chief counsel for the International Union of Operating Engineers, is arguing against the new administration in a key challenge to arbitration contracts before the Supreme Court. “The question,” notes Lotito, “is just how far the board swings back.”

Photo by Joshua Lott/Getty Images

Reporting Requirements. The Equal Employ-

AMERICA’S FIREARMS INDUSTRY Real Growth. Real Jobs. Real Impact.

Total Jobs

2008

2016

166,200

301,123

+81%

$51.3 billion

+168%

Total Economic Impact $19.1 billion

% CHANGE

Federal Taxes

$1.5 billion

$3.8 billion

+156%

State Taxes

$1.3 billion

$2.7 billion

+107%

$352 million

$838 million

+138%

Excise Taxes*

*Used pursuant to the Pittman/Robertson Act for Wildlife Conservation

The economic growth America’s firearms and ammunition industry has experienced over the years has been nothing short of remarkable, driven by an unprecedented number of Americans choosing to exercise their fundamental right to keep and bear arms.

The National Shooting Sports Foundation, the trade association for the firearms industry, has released its latest Firearms and Ammunition Industry Economic Impact Report, showcasing the industry’s impressive growth.

Learn more at nssf.org/impact

Every move begins with a decision

Complexity can breed indecision, but it doesn’t have to. Deloitte Private offers a broad range of services to help inform confident decisionmaking. So you can move fast and smart.

Start at deloitte.com/us/private.

Copyright Š 2017 Deloitte Development LLC. All rights reserved.

THOUGHT LEADERSHIP CONTENT PROVIDED BY DELOITTE

How boards can rally around innovation’s challenges and opportunities GONE ARE THE DAYS WHEN INNOVATORS COULD RIDE THE success of their discovery over the course of a generation. Today, startups crack the billion-dollar mark in a matter of months, displacing and often wiping out the competition. This brand of change has not only shortened the lifespan of the traditional company and led to a sustained erosion in return on assets – it has left leaders reeling as they figure out how to survive the shift.

Boards that think boldly about ways to strengthen their core business often stand a better chance of surviving the storm, however. And leaders that identify a promising edge that can eventually become the new core of their business can neutralize their competitors. Those were among the themes of our recent Deloitte DBrief webinar on the need for boards to rally around the challenges and opportunities that come with innovation.

“Every board I know right now is focused on ensuring their strategy is the right strategy, not just for today, but more importantly for the future,” Deb DeHaas, vice chairman, chief inclusion officer and national managing partner for the Center for Board Effectiveness, Deloitte LLP, told attendees. “Organizations want to make sure they’re the disruptor, not the one being disrupted.”

Accelerated computing power We draw inspiration on the notion of exponential change from Intel co-founder Gordon Moore’s seminal paper on the doubling of transistor chips approximately every two years.

More than half a century later, acceleration only continues to increase. Mobile phones in the 1980s gave way to the Internet in the ‘90s, which in turn has given rise to progressively faster connections across devices through the network known as the Internet of Things.

Thomas Nassim, ecosystems and exponentials leader for Deloitte Consulting LLP, explained how this growth is playing out through disruption in the big data era. “There are sensors in every single device that we have: our cars, in the environment, smart cities. We’re producing exponentially more and more data every day that passes,” Nassim told attendees. But there’s resistance to making the appropriate changes to adapt to these new models. “We’re adept at linear change as organizations. But exponential change demands new approaches.”

Performance pressure, practical strategies While many executives understandably focus on cybercrime and cybersecurity, they often miss an array of other challenges, including intensifying competition, accelerating change and extreme events that are among the scarier parts of this new environment. “Our view is that you cannot have this technology without this dark side of mounting performance pressure,” said John Hagel, co-chairman for Deloitte LLP’s Center for the Edge.

23%

of respondents said they were well-prepared for disruption, or creating it.

A sample of attendees from the webinar suggests many companies have yet to respond to this pressure, however. Among the more than 1,400 attendees who responded to an informal poll during the session, 57 percent said their organizations were experiencing “mild” or “massive” disruption.

In a separate question, only 23 percent of respondents said they were well-prepared for disruption, or creating it.

As Hagel explained, as a practical response to disruptive pressure, some of the most successful technology companies in Silicon Valley have embraced a “zoom out,” “zoom in” approach.

The “zoom out” view takes a 10- to 20-year view of the industry, marketplace and the organization itself over a prolonged horizon and seeks to align the leadership of the company around a shared view of that long-term future. The “zoom in” approach focuses on the next six to 12 months to identify two or three business initiatives that have the greatest potential to accelerate the movement of the organization towards the longer-term future identified in the “zoom out” process, asks the leadership to assess whether they have a critical mass of resources committed to those near-term initiatives and determines metrics for success for those initiatives.

One of those near-term initiatives should be focused on identifying an edge of the business that has the potential to scale to the point where it becomes the new core of the company. This edge becomes the focus for the transformation process that will help the company to prosper in a rapidly changing environment with increasing pressure. Scaling the edge also helps to avoid exciting the immune system and antibodies that so often mobilize to resist the process of change.

One of our webinar attendees asked for ideas on how to attack technology changes across the organization, including the right investment to make. In that spirit, here are some questions your board should consider in an environment of disruption: • Do we have sufficient awareness of the exponential changes unfolding around us?

• Are we freeing up enough resources to scale the edge and strengthen the core?

• Are we moving with enough urgency?

• Where’s the money?

DeHaas posed other questions, and a challenge for organizations to approach change systematically to stay ahead of the churn: “What does the future look like for us? What could disrupt our industry? Every board needs to be asking questions around technology.”

Authors: Deb DeHaas, vice chairman, chief inclusion officer and national managing partner for the Center for Board Effectiveness, Deloitte LLP. John Hagel, managing director and co-chairman of Deloitte LLP’s Center for the Edge, Deloitte Services LP

Learn more at www.deloitte.com/us/private Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/us/private to learn more about our global network of member firms.

COV ER STO RY

DOING WHAT MUST BE DONE STUDYING TROUBLED SCHOOLS AND TEACHING AT WEST POINT

LEFT JIM COLLINS INCREDIBLY OPTIMISTIC ABOUT LEADERSHIP IN

i

AMERICA. HERE’S WHAT HE LEARNED, AND WHY IT MATTERS.

BY D A N B I G M A N

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burden that he had to carry, but he didn’t want it. He just wanted to go back to take care of the farm. But there was one person who could be the first president. There was only one. And he absolutely didn’t want to do it.

“He could have been a king. And he could have gotten us entangled in Europe and he could have, I mean, for someone who wasn’t traditionally book smart, he was incredibly wise. He was the Cincinnatus. But anyways…”

Chief Executive: No, it’s a perfect segue; because people seem hungry for leadership right now. There seems to be a real desire to understand it, a real desire to have it.

You look at what’s gone on with the new Administration, some people looking toward what they think is a strong leader.

What’s your take on leadership right now?

On leadership in America?

Jim Collins: My views have evolved over time. As you know from our earlier work, I

GEORGE LANGE

t’s a dreary, rainy fall day in Boulder, Colorado.

News of the Las Vegas shooting, just hours old, adds to the gloom. At a conference table in the crisp, pure-white offices of Jim Collins, author of four of the most influential business books of the last 50 years—Built to Last, Good to Great, How the Mighty Fall and Great by Choice— our conversation starts off, perhaps unsurprisingly, with books. Turns out we have more than a few favorites in common, rich, fat tomes about power and leadership, especially Robert Caro’s majestic The Power Broker, as well as Caro’s multi-volume biography of Lyndon Johnson. But one book that Collins says really surprised him because it made such a lasting impression was Ron Chernow’s biography of George Washington.

“I used to think that no president could touch Lincoln,” says Collins as the drizzle spatters outside. “I came away from Chernow’s Washington thinking: ‘Whoa. It’s a close call.’ When you really think about how he did not want to be president and the sense of almost sacrifice and

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placed less emphasis on the importance of leadership than I do now. Essentially, when we were studying in Built to Last, we were looking at companies that were visionary through generations, which meant that sometimes you had to discount the role of any individual leader. You couldn’t say that Walt Disney was Disney because Walt Disney’s not walking around anymore. There’s something about the company.

I still believe that. I still believe that even if you go back to the founding of our country, we had to have a very important starting

“ I CAN’T FIX THE WHOLE WORLD AROUND ME, BUT I’M GOING TO MAKE SURE WE SUCCEED HERE.” president, but nonetheless, it was the Declaration, it’s the mechanisms of the Constitution, it’s the cultural fabric, it’s a variety of other things. It’s not any one president or any one leader, and their wisdom was to recognize that we actually have to build the right mechanisms to compensate for the fact that we’re going to have variations in leaders. I still hold to that view. If you build the right kind of organization and the right kind of culture, you don’t have to depend on a singular leader.

That said, Good to Great really changed my view about the role of leaders at key inflection points. Good to Great was really about how companies made a real shift in their capabilities after years of wandering in their averageness, if you will. They were at best good, and they made a leap into at least 15 years of great performance. Well, there you really saw the pronounced role of an exceptional leader and exceptional leadership teams. But in my mind, what really stood out about it is that the critical thing—again, it goes back to Washington, or Lincoln—they were leaders whose ambition was always first and foremost for the cause, the country or the company—or whatever purpose in which they were engaged. They might be flawed, or they might be ambitious—we’re human, right?—but when it came right down to it, the fundamental drive in their ambition was

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channeled into something that was bigger and more lasting than they were.

That was the “Level 5 leader” that we found in Good to Great. I think we have Level 5 leaders in many organizations in our country. We have them in healthcare, we have them in education—I’m doing a study on K-12 education that is all about how Level 5 leaders transform schools. We have tremendous distributed leadership capability, and it is one of our great sources of resilience. So I actually have a fairly optimistic view when I think about the entire system of our country.

I went off to be the chair for the study of leadership at the United States Military Academy at West Point, which is an institution that has been in the business of building leaders for 210 years. I came away from that thinking that we put so much emphasis on the very top leaders, your four-star generals and whatever, and you have to have those, but it’s the unit leaders that make society work. It’s the platoon commander, it’s the special-forces leader, it’s the squadron leader. Your unit leaders are your cellular structure of a great resilient enterprise.

I came away from West Point thinking to myself, “I want to take that idea and think about it for education.” I deliberately picked the really hard places. And sure enough, what you find is Level 5 Leaders who would, with all the forces they face, simply decide to lead.

They are Level 5 ambitious that their kids are going to succeed. As a unit leader, they basically say, “I can’t fix the whole world around me, but I’m going to make sure we succeed here.” And then they just do it.

So how do top-level leaders find those people?

I would always look at folks and say, “Never underestimate how much encouraging someone that they can lead can play in having them step up to lead.” You’ve got these amazing Level 5 leaders who simply decided to make these schools great. How did they end up in their leadership roles?

If you look at it carefully, you can’t really point to some sort of systematic program that identified and made them great leaders.

But somewhere along the way you had

That something’s got to be done about this.

It’s exactly what it is. It’s, “Something’s got to be done. No, no, no, you don’t understand, this has got to be done.” I puzzled for a long time [over] “what is the essence of leading?”

That was a question I had when I went to West Point. I thought, “Man, if there’s ever going to be a place where I’m going to learn the answer to that…”

And I walk away and I finally found what I think is the essence of it, and it came from General Eisenhower: The art of getting people to want to do what must be done.

Now think about the elements of that.

Number one, you’ve got to figure out what must be done. And it’s not sort of some analytical, clinical sense. It’s, “No, you don’t understand, this has got to be done.” Like, “these kids need their education.” Like, “we’ve got to make this emergency room work better.” That clarity of what must be done that is the starting point. That means on most of the big things you pretty much [have] got to get it right. It doesn’t mean you have to have a perfect record, but part of your responsibility is to be right more than not about what must be done.

The second is it’s not about getting people to do it. It’s about getting people to want to do it. So, if you actually have to rely on power, money, incentives, position or title, or any of those things to get people to do stuff, you have failed as a leader. James MacGregor Burns had that great way of putting it, which is that leadership only exists if people follow when they would have the freedom to not follow.

In business, people confuse leadership and

GEORGE LANGE

somebody who said to a teacher, “Have you ever thought about running a school? You’re really good at leading your classroom. You might want to think about leading a whole building.” Just planting the seed.

Then if you look at them, and what these folks did, they simply decided to lead. How did they become extraordinary leaders? How do you become an extraordinary leader of a small company, how do you become an extraordinary leader of a school? How do you become an extraordinary leader of your unit? At some point you simply decide that the cause merits you suffering to become a good leader.

“ IT’S NOT ABOUT GETTING PEOPLE TO DO IT. IT’S ABOUT GETTING PEOPLE TO WANT TO DO IT.” power all the time. If you have a lot of power, it can look like you’re leading, but actually you’re just using power. Strip away all your power and would people still do what needs to be done? Then you know you’re leading.

That’s really what leading is about.

The third is it’s not a science. It’s an art.

Each leader develops his or her own artistry.

If you think about it, you should learn from other leaders but you shouldn’t copy them.

What you do is you stand back and say, “I’ve got my own artistry, maybe I’m really good at getting the right 10 people in the room and asking one question and that’s how I get it done.” Maybe it’s, I’m really good with the written word. Maybe it’s I’m really good at creating competing forces. There’s lots of different ways to be an artist. But it still comes down to what is your art for getting people to want to do what must be done?

When you look at people who become leaders, they master that somewhere along the way. Then the really great ones master it not for their own benefit, but for a much larger benefit. That’s what the Level 5 Leaders do.

If you’re a board director, how do you go about finding the kind of leader that does these things you’re talking about?

Let’s take the story of someone who I think was one of the great chief executives of the last 20 years and how she ended up in her

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role. That’s Anne Mulcahy, who saved Xerox.

Anne Mulcahy, first of all, she was one of these leaders who, as near as I can tell, didn’t want to be chief executive. It’s like we were talking about George Washington earlier. He didn’t want to be president, but he was the person the country needed. Anne Mulcahy didn’t want to be CEO, but she was the leader that Xerox needed. So how did that happen, and what role did the board play, and what role did Anne’s own behavior play in her ultimately stepping into this role to save the company and give it a shot for the future?

“ A BOARD MEMBER BASICALLY ASKED THE QUESTION, ‘WHO WOULD PEOPLE FOLLOW?’” They tried the savior CEO model and it didn’t work—which it almost never does, right? The evidence is clear. Almost 90 percent of the Good to Great CEOs come from inside their companies. That doesn’t mean it can’t work sometimes, it’s just the odds are against you. So they tried the savior, and a board member basically asked the question after that, “Who would people follow?” Simple question. Who would people follow?

Anne’s name kept coming up because she had incredible internal credibility. People believed that hard decisions had to be made.

They were going to have to shut down operations; there were going to have to be cost decisions. Who would you trust to make those decisions that may be really hard—you might even lose your job, right?—but somehow you would trust they were made with the right intent.

Anne Mulcahy had built credibility her entire career. Every position of responsibility she got, she led it as a Level 5 leader and did it in a way that created a little pocket of greatness. As her responsibilities grew, more and more people trusted her, believed in her and she built this credibility from the ground up so that when a board member asked, “Who will people follow?” she rose to the top and then when she stepped into the role, [the reaction was] this will be hard, but over the years her credibility has grown, we

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will trust her intent. That allowed her to be able to make the changes.

It’s the antithesis of the hero CEO. The cult of the charismatic genius CEO has very low statistical odds of working. And I don’t see anything that will have changed that. First of all, what happens when that leader goes away? So even if you have a charismatic genius CEO, what happens when they go away? So Walt Disney was a charismatic genius CEO. Walt died. Does that mean Disney has to die? You have to be able to go beyond any given leader.

Second, you atrophy an organization if it’s overly dependent on a single person.

Again, think back to Washington’s brilliant decision to say, “Two terms is all.” Nobody could step into Washington’s shoes. He had to prove to the country you don’t need me. I will prove to you that You. Don’t. Need. Me. I will go away, and you will see that you will be great anyway. That ability to say, “I may have strong self-confidence, but I don’t have the ego to believe that I am indispensable and the place will fall apart without me.”

The interesting thing is that you have to be able to prove that your company doesn’t need you. If your company cannot be great without you—let me repeat this—if your company cannot be great without you, it is not yet a great company. It is merely—underscore the word merely—a group of people who happen to have a leader. The test as to whether it’s a great company is it doesn’t need you.

Over time, if you’re truly great, you will actually make it such that history proves that you got it going, but it doesn’t need you.

Will you be to your company what George Washington was to this country? My challenge to anyone is: Are you really going to be historically exceptional, or are you going to be someone where it was great when you were there—and then it goes away?

Jim Collins will be the featured speaker at Chief Executive’s Annual Leadership Conference on Nov. 2 & 3 in Denver.

This interview was edited for length and clarity. For a longer version, including Collins unconventional take on Steve Jobs: ChiefExecutive.net/jimcollins.

When the digital future is happening now Success depends on agility. Partner with us to build the digital roadmap you need to compete in today’s rapidly changing marketplace.

When it really matters. AlixPartners.com

C EO O U T LO O K 2018

High Hopes A growing economy, booming market and Goldilocks inflation has CEOs feeling upbeat. Still, our annual listening tour of America’s corporate leadership finds unfinished business— like that tax cut we were promised.

BY D A L E B U S S

2018 CEO Outlook Roster TIM CHEN, NerdWallet, San Francisco Web-based personal-finance platform

JENNIFER CUE, Jones Soda, Seattle $16 million artisanal-soda pioneer

26 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

MICHAEL DECATA, Lawson Products, Chicago $250 million industrial distributor

At the threshold of 2018, most CEOs we talk with share two outlooks: a conviction that the U.S. economy will continue to grow and even strengthen, tempered by concerns about what’s going to come out of Washington. More than anything they want tax cuts.

Based on Chief Executive’s interviews with 20 CEOs of large and mid-sized U.S. companies, the C-Suite has returned to an assumption of growth after the Great Recession and eight years spent wincing at most things the Obama administration did. They foresee the continuation of gains that the U.S. economy began consolidating in 2017 as President Donald Trump rolled back regulations and demonstrated his trust in CEOs to stoke the economy with capital investments and job creation and grow their companies through mergers and acquisitions.

Interest rates and inflation are simmering just enough. Housing values and construction keep rising. Tightening labor markets have begun creating an updraft in household income and consumer confidence.

Even the economic devastation wrought by hurricanes hitting Texas, Florida and Puerto Rico in September has an upside, as massive rebuilding efforts in 2018 will help offset the retardation of activity in the fall of 2017.

“We’re expecting continued GDP growth, in the two- to three-percent range,” says John Schlifske, CEO of Northwestern Mutual Insurance. “We’re not talking about breakout growth, but all the measures we track are neutral to positive” for 2018. “They’re not signaling anything that has me alarmed.”

As Jim Peck, CEO of TransUnion, the $1.7

VICKI HOLT, Proto Labs, Maple Plain, MN Mid-market manufacturing-tech company

STEVE JONES, Allied Universal, Conshochocken, PA $5 billion market leader in physical security services

DAN KNOTTS, R.R. Donnelley, Chicago Printing and communications giant

JESSE LAFLAMME, Pete and Gerry’s Organic Eggs, Monroe, NH $180 million betterfor-you brand

about the importance of economic growth and his efforts to saddle the rich and business with the costs of social restructuring.

For many chiefs, his departure has been addition by subtraction.

But they don’t like Trump’s bluntness, unpredictability and determination to pursue socially divisive policies, such as his immigration ban. Many have expressed their discontent by dropping off White House panels they had joined early in 2017.

Even the business-friendly Trump won’t be able to engender implicit trust by many CEOs until he comes through on three of his biggest campaign promises: tax cuts and tax reform, an overhaul of healthcare and the start of a massive program to rebuild America’s infrastructure. Most important, they believe that a lighter tax load will give businesses enough extra slack to fuel expanding investments in the economic future.

“Generally, manufacturers remain optimistic,” says Vicki Holt, CEO of Proto Labs, a low-volume and prototype manufacturer.

“There are more projects and thing are more robust” than a year ago. “But there’s concern that the things we wanted to get done, such as tax reform and infrastructure overhaul, are just taking a long time. If there’s no progress on tax reform, it could take some luster off of optimism in the new year.”

Some CEOs continue to worry about America’s bifurcated economy, where the rich get richer and everyone else struggles to rise. They also recognize that black-swan events can blow up any positive expectations, from natural disasters to man-made miscalculations. But because they can’t

JIM LENTZ, Toyota North America, Dallas Iconic automotive brand

JOE MAGNACCA, Massage Envy, Scottsdale, AZ Leading franchisor in hot sector

“WE JUST SEE AN ENGAGED CONSUMER, A HEALTHY CONSUMER AND A VERY BUOYANT CREDIT MARKET.” t JIM PECK, CEO, TransUnion

MIKE MCGUIRE, Grant Thornton, Chicago, IL Consulting and accounting firm

NOVEMBER/DECEMBER 2017 / CHIEFEXECUTIVE.NET

ROB CANNON

billion credit-monitoring giant, puts it, “We just see an engaged consumer, a healthy consumer and a very buoyant credit market.”

Businesses “are doing reasonably or very well on the whole and economic growth is picking up some steam, and I think that will translate well in the new year,” says Steve Steinour, CEO of Huntington Bank, a major regional player.

“I’m traveling the country doing town hall meetings with our employees, and there are cranes in every city and development going on,” reports Steve Jones, CEO of Allied Universal, a $5 billion provider of security services, “So I look at that and ignore a lot of other metrics.”

For the first time in many years, CEOs have also built in benign economic assumptions about the rest of the world, with sustainable growth taking hold at strong levels in China and the European economy finally getting it together. “If you look at the last 30 to 50 years of globalization, the whole global economy is a lot more resilient than many people think, and everything in general is improving,” says Matt Rizai, CEO of business-software provider Workiva. “I’m very optimistic.”

To be sure, there are caveats aplenty. U.S. auto sales—still one of the economy’s biggest engines—leveled off in 2017 after a seven-year boom, and carmakers idled plants for weeks at a time. “We expect to see some continued softening of the market in 2018,” says Jim Lentz, CEO of Toyota North America.

“But we still anticipate robust sales overall.”

Then there’s the White House. CEOs didn’t like President Obama’s nonchalance

/ 27

“WE HAVE TO FIND A WAY TO DRIVE A HIGHER LEVEL OF GROWTH IN THE ECONOMY.” t DAN KNOTTS, CEO, RR Donnelley

BARBARA MORANGOODRICH, Moran Family of Brands, Midlothian, IL Automotiveaftermarket franchise operator

control Kim Jong-un or Donald Trump, they soldier on.

Dan Knotts believes that many CEOs and politicians have become far too complacent with an economy that has continued growing only anemically, with few signs of more dynamism in 2017. “We have to find a way as a country to drive a higher level of growth in the economy,” says the CEO of RR Donnelley, a Fortune 500 marketing-services provider. “A stable economy is okay but we should not settle for a stable economy. We need growth to drive this economy higher, and we have to figure out how to do that.”

“We’ve had debates over tax reform and tax decreases, and those are important elements, but we need to get the economy growing again in order to truly create the environment we want here in the U.S.” “Everyone’s looking for growth,” says Grant Thornton CEO Mike McGuire, noting that M&A activity is strong and half of CEOs also believe that they’re going to make an acquisition in the next 12 months. “Everyone is bullish. It’s a matter of how they’re going to take advantage of a market opportunity,” he says. “They’re at a fork in the road. How are they going to capture market share? Now it’s about an execution risk, not a business risk.”

Lawson Products is a Chicago-based supplier of what might be called consumable industrial trinkets: fasteners, drill bits, hydraulic fittings, automotive body clips and more. It’s got 70,000 active B2B customers. “We’re seeing no change in 2018 from the current trajectory,” says DeCata, who says his company achieved solid gains throughout 2017. “At this point we don’t see any slowdown, just a challenge for us in topping year-to-year gains that have been eight percent a quarter. Every region is improving. Every product category is improving, so we see continued, broad-based growth.”

Meanwhile, Skillett has a front-row seat on the consumer side of the American economy, because most Americans still use cars to conduct economic activity. Skillett, who is CEO of Citizens Parking, a $1 billion operator of parking facilities based in New York City, is bullish about 2018.

Parking volume flattened out in 2017, he says, guessing that many companies “put off their investments until later” in part “because of all the political noise.” Heading out of 2017, Skillett predicts that those who took a wait-and-see approach will be more aggressive in 2018, having seen “that year be relatively safe for corporate earnings…They just delayed things a year.”

The Wide-Angle View

Retail Running Out of Runway?

Lawson Products’s Mike DeCata and Citizens Parking’s Jerry Skillett, who both run companies with broad perspectives on the U.S. economy because their companies are involved in so many verticals, share an optimistic outlook.

One thing some CEOs worry about for 2018 is the continued crumbling of the traditional bricks-and-mortar retailing business across America, exemplified by the recent Chapter 11 bankruptcy filing by Toys “R” Us and indoor shopping malls falling prey to the

Stability Doesn’t Cut It

JIM PECK, TransUnion, Chicago, IL Credit information and management

28 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

ANDREW PHILIPP, Clarus Glassboards, Fort Worth, TX $40 million B2B manufacturer

MATT RIZAI, Workiva, Ames, IA Software innovator in Flyover Country

JOHN SCHLIFSKE, Northwestern Mutual, Milwaukee, WI Financial-services and insurance leader

disruptive power of e-commerce.

While recognizing that Amazon and other online retail giants are creating thousands of jobs in warehousing and distribution, many CEOs believe that the dislocation caused by the accelerating demise of so many stores will be difficult for the economy—as well American workers—to absorb.

“Historically, the economy has been a rising tide, but now it’s critical that we’re starting to see significant differences within industries operating within the same economy,” says Knotts. “Retail is facing significant disruption. So is healthcare. We need to put greater focus on what’s happening to these individual industries.”

Anything that hasn’t been reimagined and was a legacy shopping mall—even if it’s been renovated in the last decade—we’ve seen a pretty significant falloff of traffic,” reports Citizens Parking’s Skillet.

Barbara Moran-Goodrich, CEO of Moran Family of Brands, a collection of automotive-aftermarket franchises based in Midlothian, Illinois, worries about the ripple effect of “big box retailers” closing locations.

She wonders “how the auto industry will be impacted by changes that are occurring in how people shop and whether that will impact employment, even next year.”

Millennials, says Moran-Goodrich, “have changed the dynamic in how you go about shopping for things.” As traditional retailing jobs vanish, she adds, spending by American consumers will drop.

The Trouble with Tech Many CEOs see technology topping the list of big risks for their companies, their indus-

JERRY SKILLETT, Citizens Parking, New York, NY $1 billion parking operator

STEVE STEINOUR, Huntington Bank, Columbus, OH Regional financial-services stalwart

tries and the economy. Cybersecurity is a big vulnerability, as evidenced by the Equifax breach that exposed the Social Security numbers and other private data of as many as 143 million Americans to theft.

McGuire of Grant Thornton adds that many CEOs’ biggest risks in 2018 will involve how “you keep your customer base in the face of technological disruption,” such as that being wrought by Amazon’s takeover of Whole Foods Markets, which is rattling verticals from consumer packaged goods to trucking. “These kinds of things can be threats to your business models, and that alone creates lots of uncertainty for 2018,” says McGuire, pointing out that disruptors can lure customers away by coming up with a faster, cheaper or more convenient model. “CEOs know disruption is coming. But do they have the right technology platform and strategy as business becomes more digital and data becomes more and more important?”

Jesse LaFlamme, CEO of Pete & Jerry’s Organic Eggs, a $180 million producer based in Monroe, New Hampshire, predicts that “all food prices will see more pressure on prices and margin” because of the Amazon-Whole Foods deal. “It’s a simple fact that there’s too much capacity in food retail right now, and Amazon-Whole Foods is changing that dynamic, adding to the pressure.”

Today’s disrupt-or-be-disrupted competitive environment looms large for many CEOs, says Proto Labs CEO Holt, whose company provides 3-D printing and other new-era services to help manufacturers compete. “What I find is that with CEOs— particularly CEOs of traditional companies

CHUCK SURACK, Sweetwater, Fort Wayne, IN Mid-market maker of musical instruments

STEVEN E. UPSHAW, Cross Country HomeServices, Fort Lauderdale, FL Home-warranty provider

“EVERY REGION IS IMPROVING. EVERY CATEGORY IS IMPROVING.” t MIKE DECATA, CEO, Lawson Products

SHELDON YELLEN, Belfor Group, Birmingham, MI $1.5 billion property-restoration company

NOVEMBER/DECEMBER 2017 / CHIEFEXECUTIVE.NET

/ 29

“MY PERSONAL VIEW IS THAT INTEREST RATES, FOR THE BENEFIT OF THE ECONOMY, NEED TO INCREASE.” t STEVE STEINOUR, CEO, Huntington Bank

that have been producing and behaving in certain ways for many years—it’s a huge education and change-management issue for them to move toward a more digital world.”

At the same time, businesses have been quick to embrace cloud technology, notes Workiva’s Rizai, who sees that trend continuing in 2018. “CEOs are empowering IT groups to do things with cloud tech even though the tech people themselves were relatively skeptical just two or three years ago. Acceptance of that means quicker decision-making processes.”

Banking on Consumer Confidence

Dale Buss is a regular contributor to Chief Executive and other business publications.

The mindset of American consumers remains a paramount factor in the stew that warms prospects for a strong 2018.

Heading into the new year, “We see people seeking out consumer credit, and whether they’re approved or denied, things are looking solid,” says Tim Chen, CEO of NerdWallet, a provider of online financial information and advice.

“On the demand side, consumers are definitely hungry for credit, and issuers are seeing pretty good dynamics as well. They’re aggressively courting new customers, and as long as jobs are strong, the credit cycle can keep expanding. Plus default rates are still far below historical norms, and unemployment is still low.”

Yet, because household incomes haven’t been rising strongly enough to suit most Americans and inflation remains contained, the Fed has signaled a continued bias toward only very gradual increases in interest rates.

Steinour, who is a member of the Cleveland Federal Reserve Board, believes raising interest rates will continue to be necessary, partly to restrain wage inflation that he believes is stronger than commonly perceived.

“My personal view is that interest rates, for the benefit of the economy, need to increase,” he says. “We need to have some gas in the tank for the next downturn, whenever that might happen.”

Bracing for Bumps How do CEOs retain confidence, understanding that geopolitical events, political miscalculations and the occasional perfect storm of multiple negative events regularly create catastrophes such as the financial collapse and subsequent worldwide recession of 2008?

“We run the business expecting bad things to happen,” answers Schlifske of Northwestern Mutual. “I could have told you with 100 percent certainty that something like 2008 was going to happen. I just couldn’t tell you what year.

“I feel the same way now. There will be a recession and the market will go down 20 or 30 percent. I can’t tell you when. I just don’t think it will be next year. We’re not running the business with blind optimism. But we’ve fared well since 2008, so we can back up that optimism with a historical track record.”

For Sheldon Yellen, CEO of Birmingham, Michigan-based Belfor Restoration, being able to shake off worries about economic adversity is largely a matter of focusing on building his company’s book of business one day at a time. That got significantly easier for the $1.5 billion property-cleanup business leader in in the wake of the fall hurricanes, which spiked demand for Belfor’s services.

“Our offices already were rocking every day,” recounts Yellen. “We always focus on ourselves and individual productivity, goals and achievements and [don’t] worry about the big world at large as it comes to what next year brings. I’ve tried to always look at things from the viewpoint of what I can do to make next year good for the effort I’m going to put forth, and I’ve tried to convey that to our people.

“So we just keep focusing on what we’re doing, not looking at the competition or geopolitical scenarios or the economy or even interest rates. We’re focused on doing what’s right for our business and our people.”

This article offers excerpts from conversations with 20 CEOs. For insights from our full CEO Outlook roster, visit ChiefExecutive.net/ ND17CEOOutlook

30 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

CHANGE THE GAME AND STILL HAVE TIME TO PLAY IT.

Arizona’s commitment to keeping government out of the way of business innovation and growth is a game-changer for many companies. Business leaders select Arizona for its culture of innovation, top talent, and affordability. Yet more than just the ideal place for business, Arizona is a great place to live. With seemingly endless sunny days, year-round outdoor activities, and a positive attitude, our spirit is as boundless as our opportunities. It’s this perfect balance that makes life better here.

MHI Executive Experts recruits Mitsubishi retirees to provide new hires with critical on-the-job training.

The Gap Generation One strategy for solving the shortage of skilled workers: Bringing Millennials and Boomers together.

THOUGHT LEADERSHIP CONTENT PROVIDED BY MITSUBISHI HEAVY INDUSTRIES GROUP

If optimism is any gauge, the future looks bright for U.S. industry. Fully 93 percent of manufacturers feel positive about their economic outlook, according to the most recent Manufacturers’ Outlook Survey from the National Association of Manufacturers.

At the same time, the growing skills gap is a huge challenge. While 80 percent of manufacturing executives say they are willing to pay more-thanmarket rates in competitive areas, six out of 10 positions remain unfilled, according to a study by Deloitte and the Manufacturing Institute. By 2025, some 2 million manufacturing jobs will be left unfilled because of an exodus of Baby Boomers into retirement, a lack of STEM (science, technology, engineering and mathematics) skills among workers, and a dearth of technical education programs.

At Mitsubishi Heavy Industries Group, products require the highest levels of expertise and craftsman-

ship; the company, which has a $7.5 billion U.S. market and employs 7,300 employees across 30 states, can’t afford to lose its best people during a time of global expansion, says MHI CEO Shunichi Miyanaga. “I count as among my most pressing concerns the impending skills gap that employers will face in the coming years.”

He adds that it isn’t only technical skills that exiting workers take with them, but knowledge and experience. “While there is a technological solution to a customer’s need, no two customers are alike, nor are any two installations or implementations,” says Miyanaga, adding that delivery of complex, customized projects must take into account the entire context of the customer’s requirement, including external factors such as geography, weather and market factors, such as the cost of raw materials. “It is only with skilled planning and risk management that we can ensure customers get not only the product they want, but the product they really need.”

Keeping Boomers on Board

One way to retain essential skills is to keep retirees close and employ them to transfer that knowledge to the next generation. Last year, MHI launched a new company, MHI Executive Experts, specifically for workers at or above retirement age. The venture recruits veteran MHI employees, including skilled labor, engineers, managers and executives, who provide support on current projects, specifically in engineering, procurement and construction project management. “Ensuring delivery involves tapping those with experience and expertise in a particular field,” says Miyanaga. “This often involves more senior experts who can offer a wealth of experience to ensure projects go smoothly.”

MHI’s elder experts, who can work either part time or full time, also provide critical on-the-job training and guidance to newer recruits. Miyanaga notes that companies can implement any number of internal programs to enable skills transfer, from formalized mentoring arrangements to direct

training. “As technology changes and advances, there are some skills that require manual precision that stand outside of technology and therefore may be missed or ignored by new entrants into the workforce,” he says.

One such area is in the art of “peening.” The process of producing MHI’s turbines still relies on highly trained workers to hand-form blade tenons—a special form of rivet—using only a hammer, a hand-held anvil and their own hands. “These peeners train for two years in a learning environment for several hours per day before they are even allowed near an actual turbine,” says Simon Lott, EVP, Mitsubishi Heavy Industries Compressor International.

" I count as among my most pressing concerns the impending skills gap that employers will face in the coming years."

“They are so precise that no automation has been able to replicate their work.” Of MHI’s 81,000 employees, only eight people have this skill, he adds. “This is an example of something that can only be done by transferring knowledge from experienced workers to newer entrants.”

Down the road, MHI hopes its Executive Experts program will include the sales, legal and ICT fields, in addition to engineering, procurement and project management. Ultimately, the plan is for senior experts to support the full gamut of services.

Hiring Smarter

In addition to retaining institutional knowledge, MHI has learned that more strategic recruiting can help close the skills gap. Several years ago, Mitsubishi Hitachi Power Systems America (MHPSA)—a joint venture with Hitachi launched in 2014—noticed that a

significant portion of job applicants had military backgrounds. Once hired, they proved to be well trained for a career in manufacturing, arriving armed with basic skills required for precision machining and welding, large assemblymechanics, and from an environment where failure to “fix a problem” was not an option. “That’s a mindset that is extremely valuable when working on industry-leading gas turbines,” says Miyanaga.

MHI has also spent time thinking about how to recruit Millennials. Today, both young people and their parents associate manufacturing careers with yesteryear, failing to recognize the exciting innovation that is moving manufacturing forward, the challenges employees can help to solve and the potential for financial security.

By touting technological advancements, the ways manufacturing jobs have evolved and the role industry plays in society, manufacturers can begin to change their PR image. “It provides the energy needed for people to go about their lives and is the bedrock of any product that people of any age use and love,” Miyanaga says.

Companies can also attract Millennials, who tend to be passionate about working for employers that make the world a better place, by showing they’re about more than just making things. “It’s not enough to make great products or provide stability or benefits or some other material concern anymore," says Miyanaga. "Companies have to show that they stand for something—a cause or concern that Gen Y can identify with or respect.”

He adds, “When we show through our actions that we are caring, feeling members of the communities in which we live, we build goodwill and practice what we preach—namely our conviction that we are helping to move the world forward.”

For more information, visit www.mhi.com.

For our online media, visit spectra.mhi.com.

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SPEC I A L REPO RT : HEA LT H C A RE

The Doctor is Out

The prognosis for real Obamacare reform in Congress? Terrible.

Smart CEOs won’t wait on Washington to find a fix.

W

BY C . J . P R I N C E

hen the U.S. Senate rejected a bill that would have repealed parts of the Affordable Care Act and subsequent reform efforts tanked, it became clear that the nation’s healthcare system won’t see meaningful reform this year—or next. “I would not bet on anything becoming law before the 2018 election,” says Matthew Fiedler, a fellow with USC-Brookings Schaeffer initiative on health policy in the economic studies program at Brookings Institution, a Washington, D.C. think tank.

That uncertainty leaves employers in a holding pattern. With the mandate still in effect, smaller businesses nearing the 50-employee threshold may put off hiring decisions.

The requirement to cover specific essential health benefits and pre-existing conditions also remains in force—for now. Plus, the socalled “Cadillac Tax” scheduled to take effect in 2020 will impose a 40 percent surcharge

34 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

on the value of employer-based health premiums above specific thresholds.

“That’s still sitting out there and we need that resolved,” says Jerre Stead, CEO of IHS Markit, a London-based analytics solutions provider with key operations in Englewood, Colorado, where unemployment has fallen to 2–3 percent. “In recruiting today, more and more people ask whether you’re going to have healthcare coverage in the future. And the answer is, ‘Yes, we hope so.’ That’s not the answer I’d like to give. If there’s any place in the country where folks can get a job at the drop of a hat, it’s here. So, as an employer, you want to give them that certainty.”

At the end of the day, Stead says “taking care of our colleagues is just something we’re going to do.” If the tax stays on the books, then he’ll have no choice but to pay it.

With the escalating war for talent, health insurance is becoming a competitive requirement. Midsize companies (50–499 employees) mirror larger outfits (500-plus employees) in prevalence of healthcare plans, according to Transamerica’s employer survey report: in both categories, 98–99 percent offered plans, compared with 57

WIN MCNAMEE /GETTY IMAGES

Efforts by Senate Majority Leader Mitch McConnell to reform healthcare have stalled indefinitely.

percent of small businesses.

The specter of rising costs has not dampened companies’ expectations that they will continue to provide coverage, according to the annual employer survey by Willis Towers Watson, which found that in 2017, employer confidence in offering healthcare benefits rose to its highest level since the ACA was passed, with 92 percent saying they were “very confident” they would still be offering benefits in five years, up from 87 percent in 2015. And survey respondents were under no illusions about future affordability of healthcare; they anticipated healthcare costs would rise by 5.5 percent in 2018, compared with 4.6 percent in 2017.

Exploring DIY Solutions For businesses, ballooning healthcare costs are simply a fact of life. The average premium for family coverage hit $18,764 in 2017, up from $11,480 in 2006, according to Kaiser Family Foundation stats. Total U.S. healthcare spend for 2016 reached nearly $3.4 trillion, up 4.8 percent from 2015. What’s more, according to the Centers for Medicare & Medicaid, healthcare spend is projected to reach nearly

20 percent of GDP by 2025.

“Our healthcare system is a mess,” says Zane Tankel, CEO of Apple-Metro, who began self-insuring two years ago as a way of bringing costs down. (See sidebar, p. 56.)

However, many say the noise around the healthcare legislation debate is distracting CEOs from exploring solutions. Eric Helman, chief strategy officer for the employee benefits firm Hodges-Mace, says his meetings with C-Suite members get mired in talk about Capitol Hill. “It’s all about whether we will have healthcare reform. So, a CEO will only spend a couple of hours a year on benefits and that conversation is consumed with a bunch of stuff that doesn’t matter.”

Yet, regardless of the details, any future bill is won’t solve the problem, argues Paul Johnson, CEO of Redirect Health. “[The legislation] is all about how you pay for healthcare, not how you fix it,” he says. “The existing system is ripping people off because it’s not designed around the customer. It’s designed around the industry. And the industry is so freaked out now, they’re saying the only answer is single payer, because they’re terrified of having to operate in a real

92% of employers report being “very confident” they will still be offering benefits in five years despite anticipated premium increases.

NOVEMBER/DECEMBER 2017 / CHIEFEXECUTIVE.NET

/ 35

Employers estimate that in 2017, healthcare costs will rise by

5.5%

marketplace where competition exists.”

Such a marketplace would force the industry to address the waste and inefficiency responsible for soaring costs. Studies, including Harvard’s examination of Medicare, estimate that waste in the U.S. system— overcharging, overtreatment, administrative complexity and fraud—accounts for between one-third to one-half of total costs.

“We think it’s much closer to 50 percent,” says Johnson, who blames, in large part, hospital buy-ups of medical practices, which then owe a quid pro quo to the hospitals.

Redirect Health aims to bring prices down with a system that offers employees, particularly those making less than $15 per hour, unlimited access to primary care, with the long-range goal of keeping them out of the hospital labyrinth.

“We’ve found you can do that for less than $100 per employee,” says Johnson. “To be successful at disrupting the healthcare system, we have to disrupt both the supply and the demand side.” He points to Uber as an example. “Uber didn’t go after the people

going back and forth to the airport. They went after the drunks in downtown Scottsdale. They disrupted supply and demand.”

Innovation demands taking risks, which is hard to do when you’re ducking for cover, says Avik Roy, president of the Foundation for Research on Equal Opportunity, an Austin-based think tank. “CEOs are cautious and reluctant to do anything that might rock the boat on health benefits because they fear there will be a backlash among employees,” he says. “I respect that concern and the need to make sure employees are happy, but at the end of the day, they will be happy if you can increase their compensation because your healthcare costs are lower than your competition’s. There’s too much fear and not enough courage and innovation.”

Helman adds that doing nothing to address rising costs can have a lasting, if not permanent, effect on future bottom-line costs. “That inaction has a compounded future cost. You take a year off and you never get that back. Because guess what?

Inflation didn’t take a year off.”

Premiums Continue to Soar PREMIUMS CONTINUE TO SOAR Average Annual Premiums for Single and Family Coverage Average Annual Premiums for Single and Family Coverage

SINGLE COVERAGE

FAMILY COVERAGE

PREMIUMS CONTINUE 1999 $2,196 $5,791 TO SOAR Average Annual Single and Family Coverage 2000 $2,471* Premiums for$6,438* 2001 1999 2002 2000 2003 2001 2004

2002 2005 2003 2006 2004 2007 2005 2008 2006 2009 2007 2010 2008 2011

SINGLE COVERAGE

2009 2012

$4,824 $5,615*

2010 2013

$5,049* $5,884*

2011 2014

$5,429* $6.025

2012 2015

$5,615* $6,251*

2013 2016

$5,884* $6,425

$13,375*

$15,745*

$13,770*

$0

$2,000

$16,351*$18,142* $16,834* $18,764* $17,545* $4,000

$6,000

$8,000

$10,000

$6,425 *Estimate is statistically different from estimate for the previous year shown (p< .05). $6,690* 2017 $0

$2,000

$16,834*

$15,745*$17,545*

$6,251*

2015

$16,351*

$15,073*

$6.025 $6,690*

2014 2017

2016

FAMILY COVERAGE

$2,689* $7,061* $2,196 $5,791 $3,083* $8,003* $2,471* $6,438* $3,383* $9,068* $2,689* $7,061* $3,695* $9,950* $3,083* $8,003* $4,024* $10,880* $3,383* $9,068* $4,242* $11,480* $3,695* $9,950* $4,479* $12,106* $4,024* $10,880* $4,704* $12,680* $4,242* $11,480* $4,824 $13,375* $4,479* $12,106* $5,049* $13,770* $4,704* $12,680* $5,429* $15,073*

$4,000

$6,000

$8,000

$18,142*

$14,000

$18,764* $10,000

*Estimate is statistically different from estimate for the previous year shown (p< .05).

36 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

$12,000

$12,000

$16,000

$18,000

$20,000

Chart sources: Kaiser Family Foundation, 2017

$14,000

$16,000

$18,000

$20,000

20%

3-49 Workers

50-99 Workers

100 or More Workers

ALL FIRMS

0% 1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

*Estimate is statistically different from estimate for the previous year shown (p< .05).

Calling on Consumers Employers continue to offload some of the burden with high-deductible plans and health savings accounts (HSAs), which shift more control and responsibility to employees. In 2017, 55 percent of employers offered an HSA, up from 42 percent in 2013, according to the Society for Human Resource Management. Helman says that a year in which premiums don’t go up generally is a perfect time to impose a modest increase in employee premiums, so that when they go up the following year, the bite will be less painful.

“But employers know there’s a limit to that,” says Ron Williams, former CEO of Aetna and a board member at Boeing and Johnson & Johnson, who notes that cost-sharing can only take one so far. “The real question is how do companies get better value out of the money they are spending?”

The more innovative approaches move away from the classic fee-for-service model that rewards quantity over quality toward value-based reimbursement. With bundled payments, for example, providers receive one fee for all the care required to treat a patient’s medical condition. “From pre-op to surgery to post-op physical therapy, it’s one fee,” says Brian Marcotte, CEO of the National Business Group on Health (NBGH). “If it gets screwed up, you don’t pay again. That’s a more value-based arrangement.”

Chuck Ludmer, principal at tax advisory firm CohnReznick, says he is working with third-party firms to negotiate costs with providers using a method called focused average cost tracking, which caps expenses based on what Medicare/Medicaid would reimburse. “They can bring the costs down by as much as 30 percent,” he says. Benefits consulting firms have also sprung up, offering employers a way to dramatically slash hospital bills.

One way for self-insured employers to experiment with bundling is to work with an accountable care organization (ACO), a network of providers who share responsibility for quality and cost of care.

Because they are rewarded both for positive outcomes and for efficiency, typically in the form of bonuses, they’re incentivized to give

Costs Up, But Companies Continue to Insure % of Firms Offering Health Benefits 199998% 100% 2000 200196% 2002 80% 2003

200466%

60%2005 200663% 2007

$4,247 $1,543 $5,791 98% 98% EMPLOYER 96%* 97% 97% 96% CONTRIBUTION $4,819* $1,619 $6,438* $5,274* $1,787* $7,061* 94% 94% 92% 91% $5,866* 93% $2,137* $8,003* 92% $6,657* $2,412* $9,068* 68% 66% $7,289* $2,661* $9,950* 60%* 59% 60% 59% $8,167* $2,713 $10,880* 66% 63% $8,508* $2,973* $11,480* 57% 57% $12,106* 57%* 56% $3,281* $8,824*

WORKER 97% 96% 95% CONTRIBUTION 91%

89%

57%

57%

55%

54%

90%

53%

50% $9,325* $3,354 $12,680* $9,860* $3,515 $13,375* 2010 $9,773* $3,997* $13,770* $10,944* $4,129 $15,073* 20% 2011 3-49 50-99 100 or More ALL FIRMS 2012 $11,429* $4,316 $15,745* Workers Workers Workers 2013 $11,786 $4,565 $16,351* $12,011 $4,823 $16,834* 0%2014 2015 $12,591* $4,955 $17,545* 2001 2003 2005 2007 2009 2011 2013 2015 $18,142* 2017 20161999 $12,865 $5,277 2017 $13,049 $18,764* *Estimate is statistically different from estimate for the previous year shown (p< $5,714 .05).

40%2008 2009

$0

$4,000

$8,000

$12,000

$16,000

$20,000

*Estimate is statistically different from estimate for the previous year shown (p< .05).

Investing in Keeping Employees Well

% of Healthcare-Providing Firms Offering Wellness Initiatives EMPLOYER WORKER $4,247 $1,543 $5,791 CONTRIBUTION CONTRIBUTION $4,819* $1,619 $6,438* ALL LARGE ALL SMALL FIRMS FIRMS 2001 $5,274* $1,787* $7,061* (3-199 Workers) (200 or More Workers) 2002 $5,866* $2,137* $8,003* 2003 $6,657* $2,412* $9,068* 38%* Offers Health Risk Assessment 2004 $7,289* $2,661* $9,950* 62%* 2005 $8,167* $2,713 $10,880* Provides Incentive for$8,508* Completing 5%* 2006 $2,973* $11,480* Health Risk Assessment 32%* $12,106* 2007 $8,824* $3,281* 2008 $9,325* $3,354 $12,680* 21%* 2009 Offers Biometric Screening $9,860* $3,515 $13,375* 52%* 2010 $9,773* $3,997* $13,770* Provides Incentive for 5%* 2011 $10,944* $4,129 $15,073* Completing Biometric Screening 28%* 2012 $11,429* $4,316 $15,745* 2013 $4,565 $16,351* Provides Incentive$11,786 for 2%* 2014 Meeting Biometric Outcomes $12,011 $4,823 $16,834* 7%* 2015 $12,591* $4,955 $17,545* 58%* 2016 Specific Wellness Programs $12,865 $5,277 $18,142* Offers 85%* 2017 $13,049 $5,714 $18,764* 1999

2000

Provides Incentive for Participating $0 $4,000 In or Completing Wellness Programs

7%* $8,000

$12,000 27%*

$16,000

*Estimate is statistically different from estimate for the previous year shown (p< .05).

0% 20% 40% 60%

$20,000

80%

100%

*Estimate is statistically different from estimate for the previous year shown (p< .05).

ALL SMALL FIRMS

ALL LARGE FIRMS

only the quality that’s needed.

Accord(3-199 care Workers) (200 or More Workers) ing to the most recent survey from NBGH, 38%* Health Risk Assessment 20Offers percent of large employers are currently experimenting with ACOs,5%* and that numProvides Incentive for Completing ber willHealth riseRisk toAssessment 50 percent by 2020. 32%* 21%* Offers Biometric Screening Efforts are also underway at companies of all sizes to bring down consumption Provides Incentive for 5%* Biometric Screeningalternative deliv28%* ofCompleting healthcare through Provides Incentive for 2%* ery, such as telemedicine, and workplace Meeting Biometric Outcomes 7%* wellness initiatives. Stead swears by the Offers Specific Wellness Programs carrot method and credits IHS’s health incentives—which have a 707%* percent particProvides Incentive for Participating In or Completing Wellness Programs 27%* ipation rate—for the fact that the company 0%

20%

40%

62%*

52%*

58%*

60%

85%*

80%

100%

*Estimate is statistically different from estimate for the previous year shown (p< .05).

NOVEMBER/DECEMBER 2017 / CHIEFEXECUTIVE.NET

/ 37

Self-Insurance: Not Just for Big-Caps A FEW YEARS AGO, ZANE TANKEL, CEO OF

Apple-Metro, the New York City area franchisee for Applebee’s, took for granted that self-insuring would be cost prohibitive. Then insurance companies began hiking premiums, and Tankel decided it was time for Plan B. Before signing up, Tankel wanted concrete evidence that the new plan would be affordable. For two years, his executive team “phantom-tracked” the health insurance claims of his roughly 200 fulltime managers and calculated what it would have cost the company to self-insure. “As we tracked it, we saw it made a lot of sense,” Tankel says.

In 2015, the company began self-insuring, with Aetna managing the plan. Apple-Metro has continued to track what it would have paid in premiums so Tankel can see the savings. “It’s not cheap, but, for example, just this past month we paid something like $180,000. If we had been fully funded, it would

have been $225,000,” he says. “When you buy insurance, you buy for the worst-case scenario. When you self-insure, you buy for the reality.”

Apple-Metro still has to cope with rising healthcare expenses, but Tankel says he is not even considering raising employee’s share of the tab. “For us, insurance is a perk. It helps us attract and, most importantly, keep the best in class talent.”

He adds that his restaurants have low management turnover compared with industry averages. In October, Apple-Metro sent out a letter to all health plan members letting them know that, while overall healthcare expenses rose for the company, employees’ share of the cost would remain the same. “If the savings are substantial enough, we can absorb the increase,” says Tankel. “Because if we’re saving $2 million on premiums and costs go up by $100,000, then we’re still saving $1.9 million. That’s not bad.”

has raised employee premiums only once in five years. “The key is you have to start with an assumption that it will take five years to break even,” he says, noting that companies often scrap wellness plans when they don’t see results in two years. “But it really does take that long to educate people.”

The Search for Value

C.J. Prince is a New Jersey-based freelance writer specializing in business and finance.

“It’s incredibly difficult to calculate an ROI for wellness,” syas Linda Keller, COO of employee benefits for global insurance brokerage Hub International, who says she sees the language moving away from ROI and toward VOI, or value for investment.

“If you can organize it around engagement, your [company] will see the value because that improved morale results in decreased absenteeism and improved productivity.”

Hub’s annual survey of companies with 50–1,000 employees found that 54 percent cited morale as their most improved metric from implementing workplace wellness programs.

38 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

According to Transamerica’s survey, 70 percent of employers said their wellness programs had a positive effect on cost.

“Facts are our friends,” says Stead. “If you measure it, you’ll see it.”

CEO involvement is also key—though rare. Williams recalls a meeting of CEOs during which he asked how many of the participants knew how to reach the person responsible for the company’s supply chain.

“All the hands went up, even if that person was two levels down. Then I asked how many know the name, location and number of the person responsible for purchasing healthcare benefits in their organization. I didn’t get a lot of hands.”

He likens healthcare to IT, which was also once seen as a specialized area. “Most companies recognize that IT is a central vector of the business, and they don’t leave their digital strategy to a unique part of the business. It is the business,” he says.

“Now they just have to think that way about healthcare.”

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CEO RO U N DTA B LE

CHIEF EXECUTIVE OF THE YEAR 2017

Healthcare: Quality vs. Cost CEOs share insights on assessing the true value of healthcare to their companies.

By C.J. Prince

From left: EVA Dimensions’s Bennett Stevens, HSS’s Catherine MacLean, Ethan Allen’s Farooq Kathwari, Henry Schein’s Bridget Ross

We spend a lot of money on healthcare but not on health and wellness.

—Catherine MacLean, Chief Value Medical Officer, HSS

AS LAWMAKERS CONTINUE TO DEBATE the future of the Affordable Care Act, company leaders struggle to rein in the rising costs associated with maintaining employee health. “I don’t know a lot about the healthcare space as an industry, but I do know that it is the second-biggest line item after payroll for our consulting firm of a little more than 100 people,” Dax Cross, co-founder and CEO of Atlanta-based Revenue Analytics, told fellow attendees at a roundtable sponsored by Hospital for Special Surgery (HSS), a top-ranked New York hospital for orthopedics and rheumatology.

Those costs are expected to continue to climb. According to the most recent survey released by the National Business Group on Health, large employers project that the average cost of benefits will rise 5 percent

40 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

in 2018—representing the fifth consecutive year of increases—reaching an average of $14,156 per employee, with employers paying roughly 70 percent. Employee health issues also impact bottom lines in indirect ways, in the form of absenteeism and “presenteeism.”

“Presenteeism is when workers come to work, but can’t work at full capacity because they have some kind of health problem,” explained Catherine MacLean, chief value medical officer for HSS. As a result, productivity plummets. In fact, for some companies, presenteeism is more of a drain on the bottom line than healthcare costs.

Given the uncertainty around healthcare legislation, business leaders will have to address this for themselves by looking

for innovative ways to lower medical costs, increase from our providers,” said Chuck Ludmer, principal productivity and keep their employees healthy as well and chief marketing and practice development officer as happy. One way to think about that is to approach it for CohnReznick. from a value perspective—getting the highest quality of care for the lowest price.

Creating a Culture of Wellness “Many healthcare providers don’t like the concept of Of course, the problem won’t be solved with a one‘value’ because they see it as code for ‘cheap’,” said Maprong approach. “There are certain things we can concLean. “But it’s really about not overspending on procetrol, and we would, of course, like to see medical costs dures and medication that aren’t needed and increasing going down,” said Farooq Kathwari, CEO of Ethan the quality of care so that correct diagnoses are made Allen Interiors. “But that is not all under our control. the first time.” When the quality is low—resulting in What we have to do is create a culture of wellness.” misdiagnoses and delayed treatment—costs soar. “But if By intervening before employees get sick, compawe can treat people in a timely nies can do a lot to lower their fashion, make the right diagultimate medical expenses. nosis the first time, people can “If we look at the determiget better sooner and then they nants of health, what we do can get back to work sooner,” in the healthcare system realAs healthcare costs continue to MacLean noted. “We’re never ly only accounts for about 40 rise, CEOs must find innovative really going to get to a real value percent of health,” explained ways to lower expenses. equation unless we really start MacLean. “Most of the deterto think about both the quality minants are things outside of Workplace wellness programs and the cost involved.” the healthcare system—[such keep employees healthier, but the as] lifestyle. There’s a lot that Roger Shedlin, CEO of culture has to start at the top.

White Plains, New York-based [CEOs] can do with workOrthoNet, noted that the U.S. place wellness programs.

Companies are using a mixture is spending more than othThere’s a lot that you can do of “carrot” and “stick” er countries, but with less as employers, and there’s a to show for it. For example, lot we can do as a society. approaches to encourage the UK spends roughly 9–10 We spend a lot of money on employee participation. percent of GDP on healthhealthcare but not on health care, while the U.S. spends 18 and wellness.” percent. “Yet, when you look at the relative value, by Kathwari recounted a lesson learned setting up many measures, of health status and health outcomes plants in Honduras and Mexico. “They didn’t have internationally, I don’t think we’re doing twice as well doctors there because they couldn’t afford them,” he as Britain.” said. “They got sick, and then they wouldn’t be back One method employers have used to find value is to work for a week.” Ethan Allen decided to provide known as reference-based pricing, which essentially a doctor and nurses and arranged for employees’ limits what employees can spend on procedures, with families to come and be screened and treated twice anthe goal of inducing them to find the best bang for the nually. “Because if the children are not well, they don’t buck. However, this model can be taken to an extreme. come to work,” Kathwari noted.

“CALpers did a program where they basically laid out Since then, Ethan Allen also has set up medical clinics a specific price that they would pay for procedures at plants in North Carolina and Vermont “so that people and said, ‘You can go anywhere you want, but this is have the ability to come for small things before they get all we’re paying for’,” says MacLean.” That hasn’t been big,” he said, noting that the effort paid off. “We’ve been wildly popular with employees, and no one has really able to not increase our medical costs in the last four or followed suit.” five years, which is a major undertaking.”

However, a relatively new version, called focused For many, however, the business case for return on reference-based pricing, or FACT, works to cap hosinvestment is difficult to prove, given the many factors pital and outpatient facility charges based on average involved. “Wellness traditionally is hard to measure costs primarily tracked by Medicare. The costs are an ROI on because it’s over a long time period and negotiated with the medical facility upfront, before over a large population of things that are challenging they are incurred. “We’re just now hearing about this to measure,” Shedlin noted.

THE TAKEAWAYS

NOVEMBER/DECEMBER 2017 / CHIEFEXECUTIVE.NET

/ 41

Roundtable Participants

Dax Cross, CEO, Revenue Analytics Clare Hart, CEO, Sterling Talent Solutions Farooq Kathwari, President and CEO, Ethan Allen Interiors Michael Landy, President and CEO, Monmouth Real Estate Investment Chuck Ludmer, Principal, CohnReznick

Catherine MacLean, Chief Value Medial Officer, HSS

Bridget Ross, President of Global Medical Group, Henry Schein

Prem Parameswaran, President, North America and CFO, Eros International

Clint Severson, Chairman and CEO, Abaxis

Jeff Paraschac, EVP and CFO, PURE Risk Management Karen Prange, EVP and CEO of Global Animal Health, Medical and Dental Surgical Group, Henry Schein

Yet those companies that have invested do generally find the return. Henry Schein, a Melville, New Yorkbased provider of management solutions for dental and veterinary practices, offers employees a wide variety of on-site screenings, including mammograms, as well as telemedicine access so they can speak to doctors without necessarily having to take time off work for an in-person appointment. “I don’t know that we have all the financial elements of the business case, but we certainly have lots of evidence of chronic diseases caught early,” said Karen Prange, CEO of the company’s Global Animal Health and Medical Group. The earlier those diseases are caught, the easier and less costly they are to manage.

—Farooq Kathwari, CEO, Ethan Allen Interiors

42 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

Bennett Stewart, CEO, EVA Dimensions Mike Winkleman, former Chief Content Officer, Chief Executive

the employer,” explained Severson. “Then the employer takes those plans and reinforces them, which then causes the insurance rates to come down because they have fewer problems. The insurance company [also] wins because they don’t have as many claims. So look how much you could reduce healthcare cost if every employer put a program together like that.”

Unfortunately, the carrot doesn’t always work. Sterling Talent Solutions of Independence, Ohio, offered lower premiums to any employee who agreed to verify that he or she did not smoke, had gone for a physical in the last year and had a BMI, or body mass index, within normal range. Only 35 percent of employees took advantage of it, reported CEO Clare Hart. “It’s shocking to me the number of people who ignore the emails and don’t go for the discount.”

Those who opt for the stick approach may get a slightly better result, said Prange of Henry Schein. “If you don’t opt in, your cost of care goes up 5 percent. That works a little bit more effectively.”

Participants around the room agreed that any effort would likely only succeed in the context of a greater cultural shift toward wellness. Hart pointed out that her senior executives model good behavior. “Culturally, from the top, there’s very much a focus on making sure people know the executives exercise and are eating right,” she said.

Kathwari agreed. “You have to make it a part of your DNA of your enterprise that is constantly reminding people, you’ve got to be well and you’ve got to take care of your family,” he said. “It is our responsibility as CEOs to create that culture.”

What we have to do is create a culture of wellness.

If You Build It, Will They Come?

For a truly effective employee wellness program, employees have to be willing participants and partners, taking advantage of screenings, onsite gym facilities, weight-loss programs and so on. That isn’t always the case. Many employees aren’t accustomed to visiting doctors regularly for checkups and may even be wary of getting negative results.

Some companies employ “carrot” and “stick” approaches to boost involvement. Clint Severson, CEO of Abaxis, a company that manufactures portable blood analysis systems, told the story of a client firm brought in to do onsite screening for companies with high incidences of diabetes and heart disease. Those whose results are high get immediate counseling on how to change their numbers. “They come back three months later and every employee whose blood pressure is down, glucose is down, lipids are down, gets $500 from

Roger Shedlin, Chairman and CEO, OrthoNet

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ECO N O M I C D EV ELO PM EN T

REGIONAL REPORT

THE MIDWEST AFTER A LAG IN RECENT YEARS, conditions in the Midwest are improving, say business leaders, who report that cities like Columbus, Boise, Indianapolis, Grand Rapids and Des Moise are showing impressive growth, while manufacturing strongholds like Wichita, Kansas, and Dayton, Ohio remain vibrant. Across the region, low costs and high quality of life also continue to be a draw for talent.

RUST BELT? HARDLY. MANUFACTURING AND INNOVATION ARE ALIVE AND WELL IN THE NATION’S HEARTLAND.

BY CRAIG GUILLOT

#48 ILLINOIS Leading the Way in Direct Foreign Investment The city of Chicago alone is now home to 1,800-plus foreign-based companies with more than $100 billion in direct foreign investment. In Des Plaines, German pharma manufacturer Vetter is planning a one-million-square-foot, $320 million facility.

The state is now launching an “aggressive” foreign direct investment strategy to expand that growth, says Mark Peterson, president and CEO of Intersect Illinois.

“What we’re focused on now is growing what we already have and tapping that chain to attract new companies.”

Despite a decline in total jobs in the sector, Peterson says there’s growth in advanced manufacturing, which is creating jobs in engineering and advanced technologies.

The state’s strong university system, along with the presence of the Applied Research Institute in Champagne and the Digital Manufacturing and Design Innovation Institute (DMDII) in Chicago, are fostering innovation. “In the long run, you’ll see we will be a big part of the change in manufacturing with both new companies from overseas, as well as existing companies retooling in the state of Illinois,” Peterson says. #5 INDIANA

#Ranking in the 2017 Chief Executive Best & Worst States for Business (ChiefExecutive. net/2017-Best-Worst-States)

Boosting the Business-Friendly Environment The Hoosier State has risen to first in the Midwest and fifth in the nation in Chief Executive’s “Best & Worst States for Doing

44 / CHIEFEXECUTIVE.NET / NOVEMBER/DECEMBER 2017

Business” ranking. The “secret sauce” behind that bump has been an “unprecedented collaborative effort” between state government, local government, universities and the private sector to drive a pro-business culture, says Jim Schellinger, Indiana Secretary of Commerce.

The state still boasts one of the highest concentrations of manufacturing operations in the country. Advanced manufacturing, which makes up 30 percent of state GDP and employs roughly 20 percent of the workforce, is also spurring development in IT. Schellinger says the tech sector has added nearly 15,000 jobs in the past two years, largely driven by an influx of companies escaping the high costs of the coasts.

“We have the second-lowest cost of living in America,” he says. “Everything is also now done with technology so that concentration of advanced manufacturing is drawing the IT businesses here to be next to their customers.”

The state is working to address emerging challenges related to talent scarcity. Gov. Eric J. Holcomb recently created a state-level position, Secretary of Career Connection and Talent, dedicated to collaborating with business, trade groups and government to connect workers with training and highwage positions. Schellinger predicts it will be a “game changer.” #14 IOWA Development in Data Centers Iowa’s capital has one of the fastest-growing employee bases in the Midwest, reports David Maahs, executive vice president of the Greater Des Moines Partnership.

One of the biggest stories in Iowa is the growth in data centers. Apple is planning a 400,000-square-foot, $1.4 billion data center in nearby Waukee. Gov. Kim Reynolds said it “puts Iowa on the world stage.”

Facebook recently started a one-million-

square-foot expansion at its data center facility in Altoona, and Microsoft is completing its largest data center in the country in West Des Moines. “In total, Facebook, Microsoft and Apple have made more than $8 billion in commitments and investments in recent years,” says Maahs.

A focus on attracting talent has brought Des Moines a new downtown arena, a new science center, a new public library, sculpture park and multiple new hotels.

“There’s a strong focus on making this a great place to live and our public sector and private sector working together,” he says. “It’s really set the foundation for the growth that we’re experiencing right now.” #27 KANSAS Flexible Workforce Development The Sunflower State is striving to meet its workforce needs by prepping workers for dedicated roles and creating “flexibility” in the workforce, says Susan NeuPoth Cadoret, acting director of the business and community development division at the Kansas Department of Commerce.

Kansas’s Workforce AID (Aligned with Industry Demand) program helps employers close the skills gap through a public-private partnership for training and development with eight- to twelve-week certification programs with on-the-job training.

Welders and manufacturing maintenance techs are in especially high demand.

“We’re really working hard with businesses to identify what skill sets they’re missing and develop a shortened program,” Cadoret says. “It’s helping address those needs.”

Kansas is experiencing strong growth in the biosciences sector, especially in animal health at companies like Merck Animal Health, Bayer Animal Health, Hill’s Pet Nutrition and CEVA Animal Health. Dairy Farmers of America recently completed a 214,000-square-foot plant in Garden City. In Wichita, the aviation and aerospace sectors continue to thrive. Wichita State University’s Innovation Campus opened earlier in the year in partnership with Dassault Systèmes and Airbus, and serves as a manufacturing innovation hub.

However, talent supply is an emerging challenge. “We just don’t have enough people,” Cadoret says. “Looking out over the next three years, I think we’re going to have to do something more aggressive.” #36 MICHIGAN Diversifying Manufacturing Michigan is leveraging its automotive history to grow as a global manufacturing powerhouse. Already home to 75 percent of all R&D in the automotive industry, the state’s talent and infrastructure strengths are fueling innovation in other sectors, says Jeff Mason, president and CEO of the Michigan Economic Development Corporation.

Defense contractor Williams International is expected to invest up to $300 million in new facilities in Pontiac over the next five years. Packaging manufacturer Dart Container also announced a $40 million investment in an innovation center in Lansing. LG Electronics announced a 300,000-square-foot plant in Hazel Park, and Switch recently opened a large advanced data center campus in Grand Rapids. “We have the innovative spirit, the engineering and the IT talent. We know how to design, develop and making things in Michigan,” Mason says. “And we have the assets that will keep us a leader in this space.”

Michigan is also growing as a distribution hub. Amazon is currently constructing two fulfillment centers, including a one-millionsquare foot facility in Livonia.

However, with the unemployment rate

MICHIGAN

Strengths in innovation and infrastructure are attracting facilities like Switch’s advanced data center campus in Grand Rapids.

NOVEMBER/DECEMBER 2017 / CHIEFEXECUTIVE.NET

/ 45

MINNESOTA

The Mayo Clinic plans to invest more than $3 billion in a “destination medical center” in Rochester.

at 3.7 percent, Mason says there’s a growing “battle” for workers in skilled trades. #38 MINNESOTA Healthcare and Manufacturing Growth In 2013, the Mayo Clinic announced it will spend more than $3 billion over the next 20 years to transform its operations in Rochester. “There will be a lot of economic growth around Rochester over the next five years, and it’s fueling [development] around the region,” says Kevin McKinnon, deputy commissioner of economic development at the Minnesota Department of Employment and Economic Development.

Minnesota is also seeing growth in other sectors. Electronics distribution company Digi-Key recently announced a $250 million investment in a one-million-square-foot distribution center in Thief River Falls. Last year, Kraft-Heinz announced an additional $100 million investment in its New Ulm facility.

Medical device manufacturer Biomerics plans a 52,000-square-foot facility in Brooklyn Park, while Faribault Foods, a food manufacturer owned by Mexico’s La Costeña, is constructing a $100 million plant in Faribault.

While the state’s unemployment rate is below the national average, it is still challenged with finding more jobs for some citizens. “We’ve been putting a lot of time and effort into skills, training and working with populations that might have barriers to employment,” McKinnon says. #25 MISSOURI A Growing Global Hub of Agtech The Show-Me State continues to grow as a global leader in agtech, which contributes $33 billion in GDP to the state economy and provides over 378,000 jobs. St. Louis, global

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headquarters of Monsanto, is seeing new innovation in farming practices and soil management at companies like TerraManus Technologies and Shatto Milk. Israeli company NRGene also chose St. Louis as its U.S. headquarters in 2016.

The state’s central location has also attracted new investments in logistics and distribution. Amazon recently announced a 448,000-square-foot distribution center in Hazelwood. In July, Dollar Tree broke ground on a $110 million, 1.2-million squarefoot distribution facility in Warrensburg.

Norwegian aerospace and defense company Nammo AS also plans to locate its Capstone Precision Group U.S. logistics center in Pettis County. And American Outdoor Brands Corporation will soon break ground on a new $55 million, 500,000-square-foot national distribution center in Boone County.

However, Missouri still ranks behind some other states in the region in terms of GDP and job growth. New growth initiatives by Gov. Eric Greitens include a reduction in red tape, better workforce training and more support for entrepreneurship.

The new Skilled Workforce Missouri program, currently being used by 3M and Leggett and Platt, is designed to give businesses access to skilled labor with better training programs and recruitment tools. “Now, you can contact the Department of Economic Development. They will be a one-stop shop to help businesses find skilled workers, and Missourians get the skills they need to find jobs,” Greitens said. #20 NEBRASKA Cultivating People and Relationships Nebraska Gov. Pete Ricketts says the state’s high-quality workforce remains its single greatest competitive advantage. “Whenever I’m talking to companies about why they want to expand or move to Nebraska, the conversation always starts with the workforce,” Ricketts says.

The governor has taken a hands-on approach to economic development by traveling on trade missions and working on relationships with CEOs. He has also taken his private sector experience as COO of Ameritrade to convert state government into a more “customer-focused” organization.

PURE CYBERSECURITY

As the world becomes dependent on the Internet of Everything, there’s one state that’s developing innovative solutions for protecting the security of both systems and people. Michigan. Home to two world-class cybersecurity testing ranges, we’re one of the few states that actively trains and cultivates cyber talent. Which gives cybersecurity businesses in Michigan a solid lock on the future of the industry.

michiganbusiness.org/pure-cybersecurity

OHIO

Named for the state’s growing financial sector and I-71, which connects Cincinnati, Columbus and Cleveland, Fintech71 focuses on attracting more firms to the state.

“Everything that occurs around economic development boils down to relationships...I call companies directly,” Ricketts says.

While the state logged a negative growth rate in the first part of the year due to declines in the agricultural industry, sectors such as manufacturing and tech are showing robust growth. The development of data centers is also gaining momentum. Facebook recently announced it will construct a $307 million, 450,000-square-foot data center south of Papillion. In the past couple of years, Yahoo has also expanded its data center presence in the state, and Travelers opened a $200 million data center in 2015.

Ricketts says it’s being fueled by some of the lowest utility rates in the nation.

One challenge Nebraska faces is that its low unemployment rate is leaving some companies with a dearth of workers. The new Nebraska Developing Youth Talent Initiative is aiming to create collaboration between businesses and public schools. High school students can now be exposed to the skilled trades at an earlier age, and they can even earn credit at local community colleges before graduation. “By the time they are a senior, they’ll have already had the opportunity to explore different career fields and be ready to develop a skill,” he says. #11 OHIO From the Rust Belt to the Knowledge Belt Manufacturing remains a key driver in Ohio’s GDP. However, the Buckeye State has moved from the Rust Belt into the “Knowledge Belt” with diversification into biohealth, tech and new innovative industries, says John Minor, president and chief investment officer for JobsOhio.

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One such area is in Fintech. Financial services is now the second-largest private sector in Ohio and the sixth-largest such sector in the US by GDP. A number of companies in the state, including KeyBank, Progressive and Kroger, joined forces in April to form a Fintech business accelerator. Fintech71— named after I-71, which connects Cincinnati, Columbus and Cleveland—will focus on growing entrepreneurial activity and attracting more Fintech companies to the state.

Facebook announced in August that it will build a $750 million data center facility outside of Columbus in New Albany. Amazon Web Services recently opened three data centers in the state in Hilliard, New Albany and Dublin, for a $1.1 billion total investment. And Cincinnati Mayor John Cranley told CNC in mid-September that the city would be ‘very aggressive on tax incentives” in trying to land Amazon’s HQ2 project.

“There is a growth and momentum that is happening here,” says Minor. “I would say we’ve become quite diversified our industry bases.” #28 NORTH DAKOTA Tech Flying High in the Roughrider State While it’s one of the most sparsely-populated states, North Dakota has one of the fastest-growing economies in the nation. A study

by ExpertMarket indicated the state has the best economic outlook for 2017 based on unemployment rates, GDP per capita, startup design and number of new entrepreneurs. The state, which derives a large portion of its GDP through natural resources, is also a growing hotbed for tech and entrepreneurship, reports John Schneider, economic development and finance division director at the North Dakota Department of Commerce.

A business-friendly regulatory climate, low taxes and strong incentives are fueling growth.

Microsoft and Amazon have operations in the state, and Midco has invested more than $200 million in the Fargo region since 2014. “[Our] technology-based business sector is growing and diversifying,” Schneider says. “Keeping pace with rapid changes in the technology arena and integrating those advances benefits all North Dakotans.”

North Dakota has also become a hub for

#21 SOUTH DAKOTA A Government to Support Businesses South Dakota has a “philosophical drive” to ensure that government is there to support businesses and citizens, says Scott Stern, commissioner of the Governor’s Office of Economic Development. South Dakota’s business tax burden is ranked No. 2 by the Tax Foundation, thanks to no corporate income tax, personal income tax, personal property tax or business inventory tax.

There are also generous incentives. “We find ways to help companies succeed and look at it with a long-term view,” Stern says.

Gage Brothers Concrete recently broke ground on a $40 million plant in Sioux Falls, and Wind Chill recently started construction on a 205,000-square-foot refrigerated foods warehouse and distribution center. Stern also says the state’s agricultural background and science industries have merged to make bioscience one of the fastest-growing sectors.

Biotech ag firm SAB Biotherapeutics recently announced an expansion with the construction of an eight-acre “pharm” to harvest plasma from cattle to be used in the production of human biopharmaceuticals. “There have been a lot of opportunities and activity in genetic research, advancing food performance and seed performance sectors,” Stern says.

One challenge the state continues to face is workforce recruitment and retention.

While South Dakota has been outpacing the nation in population growth for the past few years, there’s also a growing need for talent. “It’s important for us to get the messaging out, change some of the perceptions of South Dakota and let people know that

Stocktrek Images

unmanned aircraft systems (UAS) and has invested $16 million for infrastructure projects to establish the UAS training academy at the Grand Sky UAS Business and Technology Park in Grand Forks. Northrop Grunman plans to expand its UAS operations in the state with a new hangar and research facility in Grand Forks. Other smaller UAS companies, such as SkySkopes, are setting up shop in the region. “Within its borders, we already have all the components needed to support UAS education, training, research and commercialization,” Schneider says.

we have not just opportunities for jobs but for careers,” Stern says. #10 WISCONSIN Attracting Big Investments Wisconsin has been rising through the ranks of economic development with strong momentum. Tricia Braun, deputy secretary and COO of the Wisconsin Economic Development Corporation, says the state has been enhancing its business climate with tax reform and business-friendly incentives.

“We’ve figured out what we needed to do to compete for companies and protect investments that were already here,” she says.

“We’ve leveled the playing field and made it [easier] to invest.”

The efforts are paying off. German Gummy Bear manufacturer Haribo recently announced construction of its first North American plant in Pleasant Prairie. Taiwanese electronics manufacturer Foxconn announced in July that it would construct a $10 billion plant in southeast Wisconsin.

The project, expected to be operational by 2020 and to create up to 13,000 jobs, was fueled by a package of incentives worth up to $3 billion for capital costs, workforce development and tax exemptions. “There are already some global operations centered in the state and other companies see that as a benefit, with opportunities for collaboration and business relationships,” Braun says.

Growing Wisconsin’s talent pool is a big priority, he adds. “Inspire,” a new statewide platform aimed at connecting employers to students and supported by all of the state’s nine regional economic development organizations, is helping bridge the gap with more regional collaboration.

NORTH DAKOTA

A $16 million investment in infrastructure for unmanned aircraft operations has paid off, making North Dakota a hub for the emerging industry.

Craig Guillot is a New Orleans, Louisiana-based business writer specializing in technology and economic development.

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CAPITA L A LLO C AT I O N

SPOOKED The economy’s resurgence has CEOs swimming in cash. The Great Recession changed how they’re spending it.

BY RUSS BANHAM

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Nearly a decade of bullish business has brought surging employment, resilient stock market indices and swelling consumer confidence. It has also created an unfamiliar issue for many CEOs: What to do with all that cash?

“There’s no shortage of money for CEOs,” says CEO Jeff Pedowitz of consulting firm The Pedowitz Group. “The big question is where to put it.”

Should the bounty be invested in acquisitions? A new headquarters? In product development or geographic expansion? New equipment? Or some other high-priced plan to increase revenue and market share?

The answer for many CEOs these days is none of the above.

With nightmares from the Great Recession still fresh in their minds, many are choosing something a bit more hum-drum, like making their organization’s operations more efficient and resilient.

Rather than bold bets, they’re carefully weighing their options and making more judicious, conservative wagers. In this period of economic resurgence, business’s Lost Decade still haunts their decision-making.

“As a CEO whose company has taken a while to come out of the recession, I’m frankly still in a state of considering that it might happen Still skittish from the Great Recagain,” says Therese Tucker, CEO of sion, CEOs remain cautious about publicly traded BlackLine, a leading spending. financial and accounting automation software firm. “Sure, our financial There’s a growing appetite for less situation has improved dramatically, capital-intensive investments in and there’s lots of capital to invest. boosting operating efficiency.

But I’m not going ‘whoo-hoo,’ let’s go Cloud-based solutions are inspend money!” creasingly attracting interest— Instead, CEOs are looking interand cash. nally at moves that will make operaCEOs are still pursuing strategic tions leaner and less capital intensive. acquisitions—when the timing and “I don’t want to spend a lot of our terms are right. capital on moving into a new region and have to shut it down in a year, or to start a project with a lot of ongoing cost that it turns out we can’t finish because of reasons outside our control,” explains Tucker. “Investments in more efficient operations are sustainable. They’re not going to cause me pain later, when the economy inevitably turns south.”

THE TAKEAWAYS $

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CAUTION PREVAILS This is not to say CEOs lack the intestinal fortitude to make big bets on new products, acquisitions and geographic expansion. It’s just that the surprising ferocity of the financial crisis and subsequent recession is tough to shake. Once burnt, twice—okay, maybe more than twice—shy.

“When a downturn happens, it usually happens fast,” says Gaurav Dhillon, CEO of data integration software firm SnapLogic.

“Economic upswings don’t last forever, and few people can predict when things will cool down. While CEOs should be aggressive during an upswing and strike while the opportunity is hot, we also need to exercise caution in making expensive decisions that lock us in.”

Such capital resource decisions are the ones that Tucker described, where companies have no way out if a big bet backfires. On the other hand, investments that improve operational efficiency, sales and marketing tactics and customer service are less risky decisions. The capital savings flow immediately to the bottom line to improve net earnings.

The challenge for many CEOs is the pressure placed upon them to increase revenues. “You’ll often hear that this particular CEO has a reputation for being a good capital allocator or not a good capital allocator,” says Tim Koller, a partner in management consultancy McKinsey & Company’s strategy and corporate finance practice. “Activist investors have influenced the language.”

With the economy riding high, investors expect CEOs to make big decisions capable of driving big jumps in shareholder value.

Interestingly, many CEOs aren’t caving in to their demands. Stephen Hall, a senior partner and co-leader of McKinsey & Company’s strategy practice, reports that in the last five years, most businesses were no more active in their capital allocations than

“I DON’T WANT TO SPEND A LOT OF OUR CAPITAL ON MOVING INTO A NEW REGION AND HAVE TO SHUT IT DOWN IN A YEAR.” —THERESE TUCKER, CEO, BLACKLINE

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they were during the recession. “There are a whole set of challenges that [CEOs] face internally in doing what they know they need to do and what they’re being pressured to do,” he reports.

BUYING INTO DIGITAL TRANSFORMATION What many CEOs “need to do” and are, in fact, doing is investing internally in transformative digital and data cloud-based technology solutions that offer enhanced operational efficiencies. Purchased on a subscription basis from software vendors, these systems, platforms and applications also are seen as a way to relieve the financial impact of the next downturn.

“You’re insulated if the economy turns,” Dhillon explains. “The CEO isn’t saddled with all that technical debt from over-investing on expensive hardware. This goes instead to the vendor. The company has the option to simply stop paying the monthly fee.”

Many CEOs are dining at the table. “Last year, we eliminated more than 30 different on-premises technology solutions as part of our operational transformation,” says Pedowitz. “We’re using more and more cloud-based tools to do what we do better.

It makes it easier and less expensive to run the business, making us more profitable.”

(See “Following the Money,” opposite page.)

Other CEOs also are eyeing investments in cloud-based solutions. “The capital allocation opportunities on my plate that I find most interesting are all cloud-based,” says Dan McDade, president and CEO of PointClear, a provider of account-based marketing tools. “For instance, we’re experimenting with a cloud tool that gives us insight into the intent of a customer to buy our services. The technology uses algorithms to analyze a customer’s digital footprint to predict their possible interest in buying something.”

Wayne Johnson, CEO of Accuform, a manufacturer of industrial safety signs, tags and labels also reports betting on big data cloud solutions. The company just signed a subscription with Salsify, a provider of a content management platform in the cloud centered on improving online

Following the Money… Into the Cloud SEEN AS A LOW-RISK WAY TO BOOST OPERATING efficiencies, cloud-based digital and data tools are capturing a significant amount of CEOs’ strategic spend. Fifty-three percent of CEOs participating in a recent BARC Research survey reported planning to invest in cloud-based predictive and advanced analytics tools, and 44 percent plan to invest in cloudbased operational planning and forecasting tools.

Companies like BlackLine, which has inked subscriptions with more than 90 different cloud vendors, view the cloud-based solutions as a way to boost operating efficiencies without committing to a huge IT spend. “Because the cloud is a subscription service, if you need to cut back you can,” explains CEO Therese Tucker. “The efficiencies are tremendous. Something as simple as automating the reconciliation of bank accounts is easily done, freeing accountants from these labor-intensive tasks to focus on more value-added contributions—like bringing to light mistakes in the numbers that could result in a financial restatement.”

The ever-expanding universe of options is also driving the trend. An extraordinary array of cloud-

based digital and data tools are available to replace nearly all on-premise computerized transactions and virtually every manual task—from front office sales, marketing and customer service to back office billing, accounting and the financial close. The solutions promise enhanced agility and responsiveness, accelerated product development and innovation and cost effectiveness, among other benefits.

Companies are gobbling them up: IT spending on the cloud is projected to exceed $1 trillion by 2020, according to Gartner, which predicts that more than half of global enterprises currently using cloud tools will adopt an all-in cloud strategy in the next four years.

“Obviously, every CEO is interested in digital right now, but it means different things to different companies,” says McKinsey & Company’s Tim Koller.

“Some companies are investing in the IoT (Internet of Things) to run their factories better and provide better products and services to customers. But the reality is that most industries are doing digital to drive down costs and make their products more competitive.” —R.B.

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“WHILE CEOS SHOULD BE AGGRESSIVE DURING AN UPSWING AND STRIKE WHILE THE OPPORTUNITY IS HOT, WE ALSO NEED TO EXERCISE CAUTION IN MAKING EXPENSIVE DECISIONS THAT LOCK US IN.” —GAURAV DHILLON, CEO, SNAPLOGIC

product page sales conversions.

“We’re loading all our data from multiple sources, including our ERP (enterprise resource planning) system, web system and manufacturing system, into the platform, which aggregates this big data to get our products into the market and within each sales channel faster,” says Johnson. “Whenever our customers are looking to shop, our product content is instantly put before them, resulting in a higher rate of sales conversions.”

Russ Banham is a Pulitzer-nominated business journalist, author of 26 books, and a frequent contributor to this magazine.

CAPEX IS ALIVE AND WELL, TOO Not that all traditional investment is being avoided. To be sure, plenty of money, talent and management attention are also going toward traditional capital expenditures.

Mike Flaskey, CEO of Diamond Resorts International, a global vacation ownership company that sells timeshares, has digested nine acquisitions in the past six years.

“We’ve grown organically, but the bulk of our growth has been through strategic acquisitions,” says Flaskey. “In some cases, we’ve bought a hotel or an apartment complex in a destination location and turned them into vacation properties. In other cases, we’ve acquired a competitor. I’ve been very focused on opportunistic buys, given the economic rebound.”

Flaskey has also sought ways to make operations more efficient, recently investing in a cloud-based email system, employee recruiting system and team member email system. “As the business continues to grow, we are constantly evaluating cloud-based technologies to make every department run as smoothly as possible,” he says.

Accuform announced three strategic acquisitions in the past year, giving the company new markets, customer bases and manufacturing capabilities. “We’d wanted

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to make these deals for some time now, but didn’t have the cash,” says Johnson. “The last couple years have been very good to us, making the timing right.”

The company is also evaluating a proposal to build a new, all-concrete manufacturing facility. At present, it operates a campus of four separate buildings. “We’d like to consolidate into a single structure,” says Johnson. “We’re also in the Tampa area and got lucky with Hurricane Irma, hence our interest in a more reliable concrete structure.”

BlackLine will also shell out money when it makes sense. Last year, Tucker inked the largest acquisition in the firm’s history, acquiring Runbook, an EU-based provider of financial close and automation solutions to the SAP market, for approximately $34 million. “It was an important investment that made us both stronger on behalf of our respective customers,” she says.

PROFITS PULL THE STRINGS The bottom line when it comes to allocating funds appears to be, well, the bottom line— higher net profits. Big bets with the potential to send revenues soaring and build a CEO’s legacy will continue to make news.

Still, one can argue that OPEX has become more attractive than CAPEX. “This was the first year we didn’t have ‘sales growth’ as part of the strategic plan,” says Johnson, whose company chose to invest in a cloud-based sales order automation tool. “Even though we already run a lean company, we wanted to challenge people here to control their budgets even better. And it has resulted in nearly doubling our profits from the same period last year.”

While their coffers are full, many CEOs are willing to risk only so much of their hard-earned capital—and planning to do so conservatively. “That recession we came through was stark,” says Tucker. “Those of us that made it through don’t have short memories. Things look great right now, but we live in uncertain times. And when times are uncertain, you keep a close eye on your bank account.

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LI FE

The CEO Parent Trap How to make sure your kids turn out to be productive, empathetic members of society.

BY A N N E F I E L D

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IMAGE SOURCE

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or many CEOs, the definition of a nightmare is two words: Ethan Couch.

Remember him? Back in 2013, the spoiled scion of a roofing and construction company entrepreneur killed four people in a drunk-driving wreck in Texas. His lawyer, using the “affluenza” defense, argued that the 16-year-old had been so pampered, he didn’t know the difference between right and wrong, and the presiding judge sentenced the teenager to 10 years’ probation with no prison time. After he violated the terms of that deal by participating in a beer pong game, he and his mother fled to Mexico, where they were apprehended two weeks later. Earlier this year, a different judge sentenced him to two years—180 days for each of the four people killed in the crash.

Perhaps the thorniest conundrum for CEOs isn’t forming a successful corporate strategy, getting along with the board or meeting quarterly projections. It’s raising their kids in an environment of affluence— how to bring them up to be productive, self-confident, generous and just plain good people. “This is a topic of great concern among many of my clients,” says John Nersesian, senior managing director of Nuveen Investments, who works with highnet-worth families, many of them headed by current or former CEOs. In fact, a 2014 study of 3,000 wealthy families conducted

by Withers LLP and Scorpio Partnership found that their greatest fear, after serious health problems, was, “My children will lack the drive and ambition to get ahead.”

That’s not a misguided concern. Ensuring your children benefit from your financial success without becoming spoiled, dependent, entitled brats biding their time until their trust fund kicks in is no easy feat. Yet avoiding the “silver spoon syndrome” is possible, say experts who work with wealthy families. “The families I work with that are the healthiest understand that their financial capital is the least important thing they can give their children,” says Anne Hargrave, senior consultant with the Family Business Consulting Group.

“What’s important is how they develop their children.”

MODELING MORALITY The general rule of thumb is that the lessons begin and end with you, starting when your kids are very young. That means you need to be the model for whatever behavior and values you want to see in your children.

“Children learn by what their parents do, not what they say,” says Dr. Kyle Pruett, professor of child psychology at Yale University.

“They’re watching you with great interest.”

That’s particularly true for how you act with strangers in everyday interactions—people from whom there’s no expectation of getting something in return. If they see you going out of your way to help a homeless person on the street, say, or talking politely to the telemarketer (yes, that’s a hard one), you send a clear message about respect and empathy. On the other hand, if you only talk a good game, your kids will notice, and the

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older they get, the more cynical they’re likely to become about the discrepancy. “Teenagers tell me, ‘My parents say I should do community service, but the only people they have time for are people who can do things for them,’” says Pruett.

Because consistency is crucial, another prerequisite is that you and your spouse discuss what you’re going to do beforehand—and back each other up. “You have to be on the same page,” says Andrew Glincher, CEO of Nixon Peabody, the Boston-based mega law firm, and the father of three kids who are now in their 20s. When their kids were little, he and his wife decided on a number of steps they would take, such as insisting their children get jobs when they turned 14—babysitting or working at the local supermarket, for example—and not paying for unnecessarily expensive clothing. (The kids had to make up the difference if they wanted to buy pricey brands.)

Even more basic is examining exactly what values you want to convey. Scratch

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the surface and many CEOs may realize they’re not really interested in “good.” In fact, Pruett says that while he’s often asked by top execs what they can do to help their children be successful, he rarely hears much concern about guiding them to be good people. The point is, if that’s really not what you’re after deep down inside, your children will detect it in a heartbeat.

Once you’ve done that soul-searching, your focus should be on developing a sense of competency and self-worth in your children. That’s especially important for children of successful, high-achieving parents, who often fear they won’t measure up, according to Hargrave. She’s not talking about encouraging your kids to build the next Apple. Instead, it’s about helping your kids find their strengths and areas of interest—occupations and pastimes that will give their life meaning, help them to define themselves by something other than their wealth—critical elements in developing their own true north.

ENABLE, DON’T DIRECT GROWTH She points to a successful entrepreneur and father of seven who, starting when the children were little, set up stations in the basement for each one to pursue his or her particular interest—painting, say, or chemistry experiments. If a child’s inclinations changed, he went with the flow and helped set up activities related to that new interest. Hargrave reports that they’re all grown now and, with one exception, are all successful entrepreneurs.

Or consider a former telecommunications CEO in the Northeast. The father of three kids, now between the ages of 20 and 27, says, “I created a platform for them to find out what they’re interested in and then supported them in those interests.” For example, when his youngest daughter was in the eighth grade, she saw the play The Curious Incident of the Dog in the Nighttime, which is about an autistic boy, and became fascinated by the subject—so interested that she saw the show 10 times. As the years went by and she continued to display a passion for learning about the condition, her father made a point of supporting her

BIG CHEESE PHOTO

“TEENAGERS TELL ME, ‘MY PARENTS SAY I SHOULD DO COMMUNITY SERVICE, BUT THE ONLY PEOPLE THEY HAVE TIME FOR ARE PEOPLE WHO CAN DO THINGS FOR THEM.’”

Fostering Financial Responsibility IT MAY SOUND LIKE A NO-BRAINER, BUT

you can’t expect your children to learn fiscal responsibility if you buy them whatever they want, whenever they want it. That’s a lesson best taught early. Even in preschool—and certainly by elementary school—you can begin teaching your kids about the difference between wants and needs, about making choices and trade-offs.

Take Nixon Peabody CEO Andrew Glincher.

When his kids reached the age of 10, he‘d give them a choice when they went out to dinner.

They could order a soda or water; if they chose the latter, they would get the money the drink would have cost. According to Glincher, they usually asked for water.

Similarly, when they were teenagers, he gave them a used car to share. When the vehicle was 10 years old, they asked for a newer model. “I told them you can sell this car and use the money to buy whatever you want,” he says. “The car was safe. It worked fine.” They decided to keep it.

Another way to teach fiscal smarts is by introducing your children to philanthropy, tailoring involvement to their age level. For example, when his children were young, Nuveen Investments CEO John Nersesian asked them to suggest charities for the family to support every six months. Now that they’re a little older, the kids also get involved with the organization. His daughter, a dog lover, not only donates to a pet shelter, but also volunteers there once a month.

Family foundations are another route. Anne Hargrave advises placing kids on a grant-making committee in their early teens to learn about reviewing applications and the award process.

She points to an extended family that gathers for a big reunion annually. Among other activities, all the cousins, ranging in age from 6 to 14, team up to select a charity to support financially. Recently, the six-year-old persuaded the rest of the clan to adopt her cause, an organization working to save elephants.

Setting up trusts can also be useful, but only if you’re thoughtful about when the kids get access to the money. Lee Hausner, for example, urges parents not to let their children tap the funds until at least age 40, thereby giving them enough time to find their sea legs and define their lives without that wealth. She makes allowances for what she calls “trigger” events, during which you can loosen the purse strings, such as starting a business or paying tuition. A down payment on a house also fits the bill, as long as your child can afford the mortgage.

Another approach is to appoint a trusted advisor to be a co-trustee along with your child.

The secret is finding someone who has a good relationship with your kid. Together, the two can discuss your child’s goals and devise longterm plans for how much money will be released and how that fits into those overall objectives.

Even CEOs who may feel they haven’t paid enough attention to these matters can still step in and turn the situation around. Two years ago, Todd Mitchem, CEO of Todd Mitchem Companies in Denver, started noticing signs that his middle-school-age son was acting spoiled—not just asking for a new bike, for example, but “a special type of bike and can I have it now?” he says. It was a wake-up call. So he and his wife decided to start the kids on an allowance, with which they could buy extras. If his son ran through the cash early, there would be no advances. Now, says Mitchem, “He’s talking about starting his own business because he wants to make more money.”

22%

OF U.S. TEENAGE STUDENTS LACK BASIC FINANCIAL LITERACY SKILLS*

* Program for International Student Assessment

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“YOU FOLLOW THE INTERESTS AND PASSIONS OF THE CHILD YOU HAVE, NOT THE CHILD YOU IMAGINE YOU WOULD LIKE TO HAVE.” interest by, among other things, showing her articles about research into autism in the bulletin of MIT, his alma mater. She’s now majoring in psychology and planning to work with autistic children.

What’s more, he made sure not to get in the way, even when he wasn’t sold on a child’s particular passion. He didn’t object when his oldest, an avid traveler, decided to take a gap year, even though that option wasn’t popular at the time. Only when he feared for her safety in her destination of choice—Sierra Leone, which had recently ended a gruesome civil war—did he step in and insist she select another location. Ultimately, her travels to different developing nations led to her studying hydrology. “She went to so many places where access to water is difficult, she learned how important that is,” says her father.

AVOID THE OVER-ACHIEVER TRAP

Anne Field is a New York-based freelance writer specializing in business.

While that all sounds like a good idea, it doesn’t necessarily come naturally to every CEO. Fact is, many top executives are hardcharging, high-achieving types who may not realize the pressure their kids feel living in their shadows. On top of that, they often give their children lots of things to compensate for all the time they spend away from home.

“Parents use money as a substitute for being there,” says William Messinger, an attorney who also works with children of affluent families struggling with drug addiction.

That stress can be particularly devastating for children who aren’t top students or athletes and assume they just don’t measure up. Messinger points to the daughter of a CEO, now in her 20s, who developed a serious substance abuse problem while she was in high school, where she fared poorly as a student and hung out with other low-achieving stoners. “She attended a private school, and there was a lot of pressure

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to do well,” Messinger says. “She ended up getting in trouble a lot, embarrassing the family.” Then followed a period where she was in and out of rehab facilities.

Eventually, the parents turned to Messinger, who had to hire a private detective to track her down and then took her to a different treatment center. There, diagnostic tests revealed she’d been struggling with a learning disorder her whole life. “It’s very hard to be part of a successful family if you have a learning disability,” he says.

In some cases, it’s when children of high-achieving CEOs leave for college that the pressure they’ve been under explodes.

Handled intelligently, however, that can lead to positive results, says Stacy Allred, managing director of the Center for Family Wealth Management and Governance at Merrill Lynch. She cites a CEO whose college-age son announced he wasn’t interested in school and wanted to drop out. Instead of forcing him to stay or allowing him to drift, his parents encouraged him to take time off, but to do something constructive in the process. Eventually, the son moved to a different state, supporting himself with the earnings from a job he found there and, two years later, returned to school.

Reining in your fears and expectations can be challenging. Lee Hausner, who worked as a psychologist at Beverly Hills High School for 17 years, recalls a CEO who came to see her about his son. The boy was underperforming in school and his father feared his kid was repeating the mistakes his old man had made at the same age. Hausner pointed out that the man had turned out pretty well, running three successful companies, and she was sure his son would be just fine. That seemed to calm him down.

Ultimately, it’s a matter of flexibility: listening to your kids and forcing yourself to be open to ideas different from your own. You’re looking for engagement in your children, not perfection. “Your role is to be a cheerleader,” says Hausner, now a wealth advisor and psychologist in Los Angeles who specializes in psychological issues involving wealth. “You follow the interests and passions of the child you have, not the child you imagine you would like to have.”

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EXEC U T I V E I N C EN T I V ES

Getting Rewards and Recognition Right

How do you build and sustain an incentive program that supports your company’s talent strategy? BY JEFF HEILMAN

Jeff Heilman is a freelance writer based in Brooklyn, New York.

“ATTRACTING, HIRING AND RETAINING top talent starts with becoming an employer of choice,” says Andrew Alfano, president of Deerfield Beach, Florida-based The Learning Experience, a fast-growing national network of early education facilities, with some 200 centers across the U.S. and another 130 in development. “Salary and compensation are important, of course, but it goes well beyond that. Rather, it is about the type of environment that you create—culture is our strategy.”

To Alfano, the hallmark of a healthy corporate culture that sustains recognition at every level is complete transparency with a company’s initiatives and a focus on engagement. “Far too many companies just hang a mission statement on the wall or talk ideologies,” he says. “Nobody believes in those fictions. On the other hand, when you invest the time in two-way communication at all levels of the organization, you will be amazed at what you learn.”

Employees at all levels of the company are encouraged to recognize and celebrate the achievements of their peers—with those discussions receiving the same weight as reports on the company’s financial performance. “At our monthly leadership meetings, we spend the first half hour talking about our financial performance,” explains Alfano. “Then, we devote the rest of our time to talking about

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people and their initiatives and achievements. It’s about measuring and recognizing their hard work—and we never miss an opportunity to celebrate success.”

Those frequent and open discussions about why and how executives and employees are being recognized and rewarded underscore and reinforce the expectations.

“Reward and recognition programs need to be tangible, fact-based and real,” says Richard Weissman, the company’s co-founder, chairman and CEO. “Fundamentally, that means communicating to an executive or employee exactly how they performed well and why they are being recognized and rewarded.

If a goal of these programs is to incentivize repeat great performances, the culture can only truly develop and move forward when people know why they are being rewarded.”

REWARDS AND RECOGNITIONS How people are recognized and rewarded also factors into an incentive program’s success. At Oklahoma City, Oklahoma-based American Fidelity Assurance Company, travel-based incentives have proven an effective talent strategy, says Brett Barrowman, vice president, conferences, meetings and business travel services for the family-run company, which specializes in insurance and benefits solutions for the auto, education, municipality and healthcare industries.

“Most of our ‘reward recognition’ programs at American Fidelity are based on the incentive of creating unique experiences and memories through travel,” he says. “This approach works on two fronts, both in our recruiting conversation and for keeping the great people we hire. In our competitive market, retention is a primary corporate goal, and when you reward people, you retain them.”

American Fidelity, which employs 1,400 and has been recognized as one of Fortune’s annual “100 Best Companies to Work For,” is not alone in that regard. According to research from the Chicago-based SITE (Society for Incentive Travel Excellence) International Foundation, incentive travel programs, especially when tied to specific goals and results, are proven to “increase loyalty” and “a sense of belonging” among employees and

Employees at all levels of the company are encouraged to recognize and celebrate the achievements of their peers. teams. Furthermore, it’s a strategic option that corporate leaders believe in, with other SITE research finding that 76 percent of decision-makers and buyers in the incentive travel process are in the C-suite, including the CEO, COO and CFO. “Effectively recognizing and rewarding people means not only aligning the given incentivization and motivation program to corporate goals, but also with what most resonates with the employee,” notes Barrowman, whose company is a member of SITE’s global network. “In our case, it’s about creating exceptional travel experiences that they could not otherwise access or afford. Plus, we arrange and handle all logistics and expenses from start to finish, eliminating all the hassles and providing the employee, often traveling with his or her family, to freely enjoy the experience and create the memories.”

Barrowman urges CEOs considering travel rewards as an incentive to think about their employee demographics and “what hits their hot button when it comes to travel. Boomers are likelier to prefer top-flight destinations and first-class amenities, including the carrier, hotel and attractions, while Millennials, as we increasingly see, prioritize just the destination. For them, a Eurail pass and the freedom to explore are motivation and reward enough.”

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PLAN E A DVA N TAGE

Tools, Not Toys A new study examines how much value corporate aircrafts really add to a company. The results may surprise you.

BY J A M E S W Y N B R A N D T

I

t’s the kind of trip any busy CEO dreads­—a “quick” round trip from HQ in Denver to a key client at a remote facility in Montana without a major commercial airport nearby, then a visit to another client in the region before heading back home. Rob Holland, CEO of Denver-based Flagship Foods, figures that when you throw in ground transportation, travel would be 30 hours over five days.

He had a better plan: His company’s Eclipse 550 jet. “That’s six-anda-half hours of travel as opposed to 30-plus hours over five days, and I’ve seen twice the number of customers in one-fifth the time,” he says. In addition to the productivity boost, the actual costs, factoring hotels, rental cars, meals and other expenses, come out in business aviation’s favor. “It’s real easy [to justify], whether it’s for the CFO or the IRS,” Holland, a former investment

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banker, says. “We do this [cost analysis] for every flight.”

Corporate jets routinely come under fire as playthings for the rich and powerful rather than an efficient use of capital. Yet a new study suggests that Holland is not alone—the use of business aircraft plays a significant role in enhancing an enterprise’s value. A report by investment research firm Nexa Advisors, Business Aviation and Top Performing Companies 2017, caps two decades of studies that consistently find “companies that have business aircraft at their disposal outperform those that don’t,” says lead author and economist Michael Dyment, the firm’s founder.

Released October of 2017 at the National Business Aviation Association’s (NBAA’s) annual convention, the study found that S&P 500 companies who use business aviation outperform their non-business aviation-using peers by about 70 percent over the past five years. “When you

Flagship Foods’s Rob Holland says his Eclipse 550 lets him see “twice the customers in one-fifth the time.”

segment the S&P 500 into users versus nonusers, the improvement in what we call ‘enterprise value’ is more than 70 percent greater for users over that five-year period,” says Dyment. “Without doubt it has become a very powerful tool for the best-managed companies in America.”

Covering Ground Advocates say the advantages provided are as varied as the way companies use business aviation but often boil down to saving time and/or money, improving efficiency and creating opportunities where none would otherwise exist.

The Nexa studies had their genesis in the late 1990s when NBAA asked accounting firm Arthur Andersen, where Dyment then worked, a hypothetical C-Suite question: “If I buy a business jet, will my stock price go up?” Dyment and colleagues had difficulty establishing that link between aircraft

MATT GROW

“WITHOUT A DOUBT IT HAS BECOME A VERY POWERFUL TOOL FOR THE BEST-MANAGED COMPANIES IN AMERICA.”

purchases and stock performance, because the evidence was “all circumstantial,” he says. “But we could analyze the S&P to see how business aviation might impact the drivers of shareholder value.”

The researchers developed a unique “utilization yields benefits that yield enterprise value” (dubbed UBV) methodology linking business aircraft use—whether through ownership, charter or other access model— to fundamental drivers of long-term value creation, including revenue growth, profit growth and asset efficiency.

Nexa applied the same rigorous analytics in comparative studies of S&P 500 companies before, during and after the Great Recession and in complementary studies of the S&P Small Cap 600 and international companies. All of the metrics produced similar results. “It’s truly a tool for top-performing companies,” asserts Dyment.

A number of corporate leaders have gone

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public to proclaim their support for business aviation—Andrew Taylor of Enterprise Holdings, Thomas Frist of HCA, Jimmy Hayes of Cox Enterprises and Berkshire Hathaway’s Warren Buffet among them— although many public company CEOs opt to remain mum on their use of business aviation. However, leaders of privately held companies seem less reticent, especially those who serve double duty as corporate pilots of the small aircraft they say propel them to success.

“I think of my airplane just like a forklift

in a warehouse,” says Brad Pierce, president of Restaurant Equipment World in Orlando, Florida, who used his single-engine Cirrus SR-22 to grow a business started by his father into a national company with 100,000 accounts. “I don’t think twice when I need to spend on a forklift, but people think [buying] airplanes is way, way out there.”

Flying By the Competition Restaurant Equipment World also pulls “real-world airline ticket data for every flight,” Pierce notes. “That’s not only to prove to

LIFTING THOSE IN NEED When hurricanes leveled swaths of the Texas Gulf Coast, the Florida Keys and the Caribbean this September, among the first responders were fleets of business aircraft mobilized by a network of charitable organizations and operated by companies and employees who donate airplanes and time for humanitarian missions throughout the year. “With Harvey, then Irma, and now Maria, it’s been 19 days in a row we’re flying in the most imminently needed supplies,” says Eileen Minogue, executive director of Patient Airlift Services (PALS), one of the nonprofits.

PALS primarily arranges private aircraft transporation for medical patients, but they mobilize whenever and wherever the business aviation community is needed. The NBAA maintains a Humanitarian Emergency Response Operator (HERO) database of companies and individuals ready to help. Throughout the year, business aviation provides the service backbone for a wide range of needs.

Cessna Aircraft, for example, coordinates lifts from some 200 of its aircraft owners to transport athletes for the quadrennial Special Olympics.

“It’s a great example of corporate social responsibility,” says Gina Russo, executive director of the Corporate Angel Network (CAN). CAN has arranged more than 50,000 flights for cancer patients of all ages, facilitated by its 500 corporate members—including more than half of Fortune

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Volunteers load supplies on a private aircraft bound for the Florida Keys as part of a Hurricane Irma relief effort.

100 companies—who donate the aircraft usage and/or flight hours through fractional shares.

Many community members donate not only aircraft and time, but money as well. For example, the Veterans Airlift Command, which transports current and veteran service members for medical and other compassionate purposes, receives nearly all of its financial support from “those who already volunteer”—in other words, 2,500 members of the business aviation community, says Jen Salvati, executive director of the organization. “We have some amazing Americans who know no boundaries when it comes to giving back to those who’ve defended our freedom.”

Helicopter operator AAG transports PALS patients for important, last-mile travel aboard its Sikorskys, and Scott Ashton, the company’s president, also devotes his downtime to pitching in. On days off, Ashton carries PALS patients on longer haul flights aboard his Cessna 172.

“These programs,” he says, “make a huge difference in people’s lives at a time when they desperately need it.”

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Restaurant Equipment World’s Brad Pierce thinks of his Cirrus SR22 as a necessary business tool—akin to the forklifts in his warehouse.

“[CFOS] HAVE MORPHED INTO BECOMING STRONG ADVOCATES OF BUSINESS AIRCRAFT.”

James Wynbrandt is a pilot and aviation expert and author of Flying High.

the CFO and the IRS, but for comparison to what it would have cost in time and money to go commercially.” (The comparisons have proven favorable.)

Given the time that some commercial airline trips entail, many companies without access to business aviation simply curtail travel, hoping that video conferencing through Skype and other services will suffice. However, CEOs like Rod McDermott, co-founder and managing director of executive search firm McDermott & Bull, find that that on-site face-time opportunities provide a competitive edge. The California-based CEO says he used his Eclipse jet to build his company’s financial services recruitment business by personally visiting community banks “two to four hours from big cities” throughout the West Coast area.

“My plane was the perfect business tool,” he says. “My competitors just wouldn’t visit.”

Now McDermott heads his firm’s burgeoning aerospace executive search business, and the jet remains invaluable, making multi-city cross country trips in a day or two. “In our field especially, having an aircraft makes so much sense,” he says.

Research backs up his assertion. Nexa developed a “mobility framework” to measure the value of various forms of communication for a variety of interactions.

High-value interactions, like competitive negotiations, “are so strategic, you can’t

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use a phone call,” says Dyment. “You really have to go face to face.” That gives those with the most transportation options the edge. What’s more, beyond bolstering the bottom line, having private transportation options also delivers intangible benefits that companies now have “a richer understanding” of, says Dyment, such as enabling employees to spend more nights at home.

Paradoxically, the tighter scrutiny these assets are under due to corporate accounting transparency mandated by the 2002 Sarbanes-Oxley Act is making bizav-using companies “a little less shy now about aggressively using their business aircraft,” says Dyment. Operators are less concerned about appearances now that business aviation use is given more scrutiny and there’s more oversight of usage.

In fact, we may see expanded adoption of business aviation going forward, thanks to metrics that quantify its business value.

“If you go back to the late ’90s, CFOs were very skeptical of its value,” says Dyment, who says the past two years have changed the perception that business aviation is a luxury. CFOs “have morphed into becoming strong advocates of business aircraft.

I wouldn’t call them evangelicals, not yet, but they understand. They see the impact of being able to move a deal team around and collaborate on the airplane, and the better thinking and analysis you get.”

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TIME C A PSU LE

New Directives for Directors

BY B E T S Y AT K I N S

D Betsy Atkins, founder of Baja Corporation, is a three-time CEO and serial entrepreneur who currently serves on the boards of Cognizant, Home Depot Supply and Volvo.

uring two decades serving on more than 25 public boards, I’ve seen significant change to the way that CEOs and boards engage and interact. When I first joined Lucent’s board about 20 years ago, board service was already evolving from a primarily oversight role to one of greater engagement and shareholder representation.

Still, even then, the board’s role was far more a “rubber stamping” of whatever CEO and the management team presented. Meetings were more formal—in fact, the experience sometimes felt like “death by Powerpoint.”

All of that changed in the wake of two catastrophic governance failures: Enron and WorldCom in 2001. Afterward, board composition and practices came under scrutiny and holding an executive session of independent directors became a best practice. This, in turn, created a venue for boards to work more cohesively as a team in assessing the opportunities and challenges, competitive dynamics and changes that a company faces.

Participating in these more detailed discussions led to directors having a more intimate understanding of the company’s strategy—due to the emerging practice of the annual multi-day strategy session— and greater engagement with its CEO and management. That relationship has continued to evolve. CEOs and boards have begun to speak more frequently and those discussions are more fulsome, with board members often serving as sounding boards

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or consiglieres on a company’s strategic direction or to address an emerging issue or change impacting the business.

For example, in the last five years, the need to adopt technology not only in back office ERP systems but throughout companies has caused CEOs to look to their boards for strategic insight on digital transformation. More boardroom discussions center around the use of innovations like mobile enablement, social media, data analytics and artificial intelligence to streamline operations, enhance the customer experience and transform business models.

The most recent and current catalyst for change in the role of board members has been the rise in shareholder activism. Over the past few years, CEOs and management have begun an exercise of an outside-in review of their company in order to assess how an activist investor might view their business. Decision-making has sped up as CEOs try to tune up their business performance to unlock short- and long-term value before an activist knocks on their door.

As CEOs have grown to value their boards as a competitive asset rather than simply as a necessary mechanism for operational oversight, board service has become far more demanding. As lead director at Home Depot Supply, I am in touch with my CEO one to two times a week. At Volvo, where I serve on the product and strategy committee, the CEO and I are in touch every three weeks and meet for one-on-one time once a quarter in addition to our board meetings. While board service now consumes considerably more time, I believe companies, shareholders and CEOs all benefit from it.

My experience is that CEOs today are receptive to this higher level of board engagement, as long as board members remember a defining element of their role—that they are responsible for the oversight, not operation of the company. Boards are there to oversee, not overstep. The result has been a positive change in the overall way CEOs engage with their boards, as well as a more rewarding experience for directors.

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