Advice Inc. | Robotics Confidential | Smarter About Cyber | When CEOs Tweet
SEPTEMBER/OCTOBER 2018
EXCLUSIVE INTERVIEW
PATRICK LENCIONI
WHAT MATTERS MOST Why keeping things simple is the key to survival in complex times
C ONTENT S
SEPTEMBER /OCTOBER 2018 No. 296
FEATURES COVER STORY
24 WHAT MATTERS MOST Patrick Lencioni has a powerful, contrarian message for CEOs: Lasting success won’t arise out of better AI or breathless promises of “purpose.” It will only come from the disciplined improvement of what he calls organizational health. By Dan Bigman
SMART MANUFACTURING
24
32 SO HOW ABOUT THOSE ROBOTS? Promising? Sure. Replacing humans? Ask Elon Musk. By C.J. Prince
CEO SUMMIT
40 MANUFACTURING SUCCESS Beyond understanding and adopting new technologies, Factory 4.0 is about creating a culture of constant innovation. Here’s how. By C.J. Prince
SPECIAL REPORT: CYBERSECURITY
44 HARDENING YOUR COMPANY As if navigating cyber risk wasn’t tough enough, evolving threats and tougher disclosure requirements are complicating the challenge. Plus: Cyber Risk Forum Takeaways By Russ Banham 32
2018 CEO OF THE YEAR GALA
54 CELEBRATING LOCKHEED MARTIN’S MARILLYN HEWSON CEOs gathered in New York City to recognize a peer’s exemplary leadership. By Jennifer Pellet
CEO ROUNDTABLES
56 THE CEO’S ROLE IN SOCIETY Do leaders have an obligation to step up and speak out on social and political issues? By Jennifer Pellet
59 EMERGING TECHNOLOGIES AND THEIR IMPLICATIONS CEOs share insights on coping with the risks and opportunities of digital transformation. By C.J. Prince 54 COVER PHOTO BY JEFF SINGER
C O N TE NT S EDITOR-IN-CHIEF
Dan Bigman
EDITOR-AT-LARGE
Jennifer Pellet
MANAGING EDITORS
Kimberly Crowe Patrick Gorman DIGITAL EDITOR
Gabe Perna
PRODUCTION DIRECTOR
Rose Sullivan
CHIEF COPYEDITOR
Rebecca M. Cooper ART DIRECTORS
18
Carole Erger-Fass Gayle Erickson Alli Lankford RESEARCH EDITOR
DEPARTMENTS
Melanie Nolen
CONTRIBUTING EDITORS
Russ Banham Dale Buss Daniel Fisher Craig Guillot Jeff Heilman C.J. Prince Laura Rich Jeffrey Sonnenfeld
6 EDITOR’S NOTE The Good Fight
9 LEADERS 9 Advice Inc. Selling the Secrets of Your Success
EDITOR EMERITUS
14 Law Brief A Court on the Cusp
J.P. Donlon PUBLISHER
Christopher J. Chalk 847-730-3662 | cchalk@chiefexecutive.net
16 Exit Interview Smooth Selling
PUBLISHER, CORPORATE BOARD MEMBER/ DIRECTOR OF EVENTS, CHIEF EXECUTIVE GROUP
18 Crash Course A Talent for Talent
Jamie Tassa 615-592-1506 | jtassa@chiefexecutive.net
20 Sonnenfeld on Management You Are What You Tweet
VICE PRESIDENT
Phillip Wren 203-930-2708 | pwren@chiefexecutive.net
62 REGIONAL REPORT
DIRECTOR, BUSINESS DEVELOPMENT
The Southeast Diverse sectors are driving economic growth in the nation’s southern states. By Craig Guillot
Lisa Cooper 203-889-4983 | lcooper@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT
Liz Irving 203-889-4976 | lirving@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT
68 BOARD MEETINGS Acing Director Face Time A CEO’s guide to board and strategy meeting best practices. By Jeff Heilman
Gabriella Kallay 203-930-2918 | gkallay@chiefexecutive.net DIRECTOR, BUSINESS DEVELOPMENT
Marc Richards 203-930-2705 | mrichards@chiefexecutive.net MANAGER, STRATEGIC PARTNERSHIPS
72 LAST WORD Challenge Everything Looking for an edge in the tightening labor market? Former Dunkin’ Brands CEO Nigel Travis extols the power of pushback.
Rachel O’Rourke 615-592-1198 | rorourke@chiefexecutive.net CLIENT SUCCESS MANAGER
Ashley Gabriele 203-889-4989 | agabriele@chiefexecutive.net
CHIEF EXECUTIVE GROUP EXECUTIVE CHAIRMAN
Wayne Cooper
Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 296 September/October 2018. 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 2018 by Chief Executive Group LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Stamford, CT, and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive Group, PO Box 47574, Plymouth, MN 55447.
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Steve Hallem MANAGING DIRECTOR
Scott Budd
MARKETING DIRECTOR
Debra Menter
PURE INTELLIGENCE
As cyber becomes more embedded in life and business, one state is developing revolutionary new initiatives to advance cybersecurity. Michigan. The nation’s leader in tech job growth, our state is also home to the Michigan Cyber Range, a virtual unclassified platform for cyber exercises, product testing and digital forensics to foster cyber talent and industry engagement. Which makes Michigan a smart move for cybersecurity businesses.
michiganbusiness.org/pure-cybersecurity
FROM THE CHIEF EXECUTIVE E-NEWSLETTER
AD INDEX
PREPARING FOR THE DIP By Fred Engelfried
12/11/2017
PEOPLE OFTEN ASK ME WHEN THE ECONOMY will cool and how to prepare for a downturn. I leave the first question to folks more qualified than me to debate, but I do try to answer the second. Drawing on 35-plus years experience working with more than 100 enterprises across the full gamut of manufacturing, distribution and service, here’s what I counsel:
CAESARS FORUM caesarsforum.com 8 CENTER FOR AUDIT EQUALITY thecaq.org 51
preview
Monday, December 11, 2017
Did Jeff Immelt fumble the GE handoff? Once considered the best-managed company in America, General Electric has suffered a series of crushing blows to its reputation. What lessons can be gleaned for the rest of American industry?
CEO AND SENIOR EXECUTIVE COMPENSATION REPORT FOR PRIVATE COMPANIES ChiefExecutive.net/compreport 38, 39
The CEO parent trap. You've made it to the corner office, but you want your kids to understand the value of work and to have compassion for humanity. Here's how to make sure your kids turn out to be productive, empathetic members of society.
From SaaS to XaaS. Cloud computing is transforming the way business is done and this model is sweeping across B2B sectors from transportation to printing and jet engines. As the playing field levels, the only difference is how you treat the customer. Here's how to move forward in this XaaS-based world.
CEO2CEO SUMMIT ChiefExecutive.net/ceo2ceosummit INSIDE BACK COVER
Manage risk by betting small and often. Growth requires taking and managing risk. The most successful leaders do not simply mitigate risk, they also identify and assess the risks that will fuel their next expansion or acquisition. Three key things can help you create processes that identify, scope and manage risks in your business. We'll challenge you to think differently and move beyond what's comforable. The age of smart manufacturing requires new ways of leading. At the 2018 Smart Manufacturing Summit, we'll recharge your imagination as you engage with some of the most innovative industrial minds of our time. SMS18 is the place for manufacturing CEOs who are looking to create a fearless culture of constant learning and innovation, embrace new digital technologies, attract and develop extraordinary leaders for their company and create growth and profitability in a
Know your “space.” Does history show your industry or profession to be a leading or a lagging indicator? What trends are industry associations and broader economic studies reporting? Retrace the trend lines preceding the Great Recession and factor in your post-9/11 experience as well. Read those road signs to make an informed judgment about what the next few years will bring. If that outlook warrants concern, start adjusting your strategy today so that your company will be positioned to rebound from a downturn if and when it comes. http://emailactivity1.ecn5.com/engines/publicPreview.aspx?blastID=1946636&emailID=330525841
Modify your capital investment strategy. Look to emphasize projects and programs that have a high short-term return. The payoff will come just when you need it—during the down cycle. Employ “contractible” resources. Shift toward accommodating 10 percent to 15 percent of demand with resources that you can easily pull back on. For example, offering employees overtime instead of hiring, adding temporary or contract workers or outsourcing. In a downturn, you’ll then be able to reverse scale without impairing your core capabilities. Address inventory issues. Working capital tied up in slow-moving inventory is painful—it’s cash that could be used for another purpose and it leads to obsolescence at the worst possible time. Shore up your access to capital. Negotiating lending arrangements, lines of credit, interest rates and loan terms is always easier in a position of strength. Lock in your customer/client base. Customers try be loyal to their supply base in downturns but hungry competitors will look to tempt them astray. Don’t be fooled by past billings. Early in a downturn, accounts receivables from healthier times will still be flowing in, which can give you a false sense of security—until the collection process catches up with the new, lower revenues/billings. If you’re flush with cash, save it for the rainy days to come. Negotiate better terms. Ask for extended terms before they are actually needed, and then set the precedent of meeting those terms from the onset. Fred Engelfried is director/chair of Lewis Tree Service and president of Market Sense Inc., a participative management firm that has served more than 100 regional clients over 35 years.
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THE BROADMOOR broadmoor.com 71
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CONNECTICUT ECONOMIC DEVELOPMENT ctforbusiness.com 22, 23 DELOITTE R.E. AND LOCATION SERVICES deloitte.com/us/locationstrategy 11 ENTERPRISE FLORIDA floridaisthefuture.com/technology 13 GULFSTREAM gulfstream.com 17 HARVARD BUSINESS SCHOOL EXED.HBS.edu OUTSIDE BACK COVER JOBS OHIO ECONOMIC DEVELOPMENT JobsOhio.com 19 LEADERSHIP CONFERENCE ChiefExecutive.net/leadershipconference 43 MICHIGAN ECONOMIC DEVELOPMENT CORP. michiganbusiness.org/pure-cybersecurity 3 NATIONAL SHOOTING SPORTS FOUNDATION nssf.org 7 PNC FINANCIAL SERVICES GROUP INC. pnc.com INSIDE FRONT COVER RECRUITER.COM recruiter.com 21 RHR INTERNATIONAL rhrinternational.com 5 SMART MANUFACTURING SUMMIT ChiefExecutive.net/SMS 67 STRATEGIC LOGISTICS SUMMIT ChiefExecutive.net/strategiclogistics 31 TATA CONSULTANCY SERVICES info.tcs.com/bts-home.html 15 TRUE OFFICE LEARNING trueoffice.com 53 WILLIS TOWERS WATSON willistowerswatson.com 49
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 R H R I N T E R N AT I O N A L
CEO1000: THE LIFE CYCLE OF THE CEO BY PAUL WINUM, PH.D., ABPP, CO-HEAD, BOARD AND CEO SERVICES, RHR INTERNATIONAL LLP IN 2016, CHIEF EXECUTIVE GROUP AND RHR INTERNATIONAL FORGED A PARTNERSHIP TO LAUNCH THE CEO 1000 TRACKER. The partnership gathers, analyzes and reports information about the CEOs of the 1000 largest companies in America. This is the first of a new series of articles addressing the opportunities and challenges faced by CEOs over the five distinct phases in the Life Cycle of the CEO. Drawing upon targeted research and the decades of experience, Chief Executive Group and RHR International have in providing services to CEO and board audiences, the series will provide pragmatic insights to CEOs and their boards about navigating the challenges in each phase of their tenure.
THE FIVE PHASES. While every organizational context is unique, there are general imperatives that must be addressed in each life cycle phase: PREPARATION PHASE. Those aspiring to a new CEO role must maximize their readiness to be viable candidates by acquiring extensive knowledge about every aspect of the business. This includes company history, strategy, revenue streams and the competitive landscape within which the organization operates.
8 TO 10 YEARS 10+ YEARS
94
5 TO 7 YEARS
256 185
It’s equally critical for would-be CEOs to develop relationships and credibility with key stakeholders, including the board, investors, key customers and suppliers and the organization’s workforce. Executives in this phase must also achieve a high degree of self-awareness of their strengths and weaknesses, then construct and actively work a development plan to build on those strengths and close any gaps.
CEO1000 BY TENURE
162
303 2 TO 4 YEARS
1 YEAR OR LESS
ENTRY PHASE. During this period, the focus is on successfully integrating into the organization by attaining the following four goals. New CEOs should build a constructive partnership with the board and ensure clarity with the board regarding performance objectives and how they will be measured. They must also ensure clarity about or revise the strategy to achieve company performance objectives.
roles increased responsibility and development coaching to prepare them for succession.
This phase also entails re-recruiting, evaluating and repurposing the inherited senior team to execute the strategy and lead the development of an organizational culture that will support the company’s mission, values and strategy. At the same time, new CEOs should seek to deliver early wins to build credibility and confidence among stakeholders.
It also involves working with the board to develop leadership criteria for the CEO role and giving the board multiple opportunities for exposure to potential CEO candidates. CEOs should also look to continue personal and leadership growth, fighting complacency and the temptation to protect the status quo, and begin preparations for their post-CEO lives.
MIDDLE PHASE. The challenges presented in this phase will vary significantly depending upon the specific company context, but the overarching task is to drive the performance of the company. This entails evolving or changing the strategy as needed in response to changes in the operating landscape. The CEO will also need to continue to evaluate, develop and, when necessary, replace staff in mission-critical roles.
EXIT PHASE. In the final stage of the CEO life cycle, CEOs should cement their legacy by enabling effective transition to their successors. This involves assisting the board in the selection of a successor and supporting the successor with a full orientation to the organization, board and stakeholders.
It’s also key during this phase to strengthen and extend connections with external stakeholders. This will ensure leaders stay on the leading edge of trends in the industry, technology and understanding investors and competitors. CEOs in this phase should also be actively investing time in the development of a successor.
AVERAGE: 8.2 YEARS / MEDIAN: 5 YEARS
During this transition phase, CEOs should work closely with their boards to determine whether they will continue to be involved with the organization in the future and, if so, in what capacity. Once leadership has been transferred, outgoing CEOs must give their successors full latitude to lead without interference.
CLOSING PHASE. Preparing the next generation of organizational leadership and performance is a crucial focus in this phase. This entails giving successors to all mission-critical
For more information about RHR International, visit rhrinternational.com or call +1 312-924-0800
F R O M T H E E D I TO R CHIEF EXECUTIVE OF THE YEAR
THE GOOD FIGHT NIGEL TRAVIS HAD JUST STARTED AS CEO OF DUNKIN’ BRANDS in 2009 when he met a franchisee from Texas named Russ. Russ was thinking of dumping his Dunkin’ stores—the company’s growth strategy was too fast, the cost of goods in his region was skyrocketing and new franchisees didn’t understand the regional market, among other things. “Russ, have you discussed these issues?” Travis asked. “With management?” he responded. “No. Not exactly. I didn’t think that would get good results. Things can get contentious, you know?” It’s a great illustration, recounted in Travis’s new book, The Challenge Culture: Why the Most Successful Organizations Run on Pushback, of one of the most vexing issues for corporate leaders (See “Last Word,” p. 72). We’re increasingly told that success, especially with younger workers, lies in kum-ba-yah consensus. We’re on tenterhooks about saying the wrong thing, of somehow offending someone. Meanwhile, as one Fortune 50 CEO recently told me, he lives in fear that bad news isn’t getting to him fast enough. Avoiding conflict at work is hardly new, of course, but I worry that the swirling incivility of our politics, rising concern over political correctness and the Internet’s seething hate are poisoning us on one of the most essential, joyful parts of any job: arguing with each other. Patrick Lencioni (See “What Matters Most,” p. 24) says watching top leadership in a meeting is like x-raying a company. “If the meeting is boring and there’s no tension,” he says, “and there’s not emotional engagement with one another, I know that there are really bad things going on.” As Lencioni first recounted in his classic The Five Dysfunctions of a Team, quiet disengagement usually signals a lack of trust among co-workers. Critical issues go unresolved, politics fester and gossip becomes the main mode of communication. The results can be devastating. Asked for his biggest takeaway from investigating the leadership disaster at Uber, former U.S. Attorney General Eric Holder recently said that the company’s directors simply gave too much deference to CEO Travis Kalanick. Oops. It’s a good rule of thumb for leaders: if no one is arguing with you, maybe no one trusts you enough, or they’re scared of you. It isn’t a lack of problems in your organization worth hashing out, that’s for sure. Arguing—civilly and professionally but passionately—is how we figure stuff out. It’s an amazing tool for surfacing and processing key information and getting buy-in, because people have been heard. Silence and false consensus? They do the opposite. So here’s to getting into it about stuff that matters with a group of people you respect and trust. Whether it’s your leadership team, your family or your franchisee Russ, there’s nothing more healthy or more helpful. Besides, agreeing with each other all the time is boring. —Dan Bigman, Editor
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2019 SELECTION COMMITTEE DAN GLASER President and Chief Executive, Marsh & McLennan
FRED HASSAN Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus
MARILLYN HEWSON Chairman and CEO, Lockheed Martin 2018 CEO of the Year
TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries
ROBERT NARDELLI Chief Executive, XLR-8
THOMAS J. QUINLAN III Chairman, President and Chief Executive, LSC Communications
JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management
MARK WEINBERGER Chairman and Chief Executive, EY Exclusive Adviser to the Selection Committee
TED BILILIES, PH.D. Chief Talent Officer, Managing Director, AlixPartners
CONTACT US Corporate Office Chief Executive Group LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 Fax: 203.930.2701 ChiefExecutive.net Letters to the Editor letters@ChiefExecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 Fax: 847.730.3666 advertising@ChiefExecutive.net Reprints Phone: 203.889.4974 hdewing@ChiefExecutive.net
MAKING A DIFFERENCE FOR A SAFER AMERICA The firearms industry welcomes participation in the national conversation to make our communities safer. Our trade association, THE NATIONAL SHOOTING SPORTS FOUNDATION, has long advocated for effective solutions to prevent access to firearms by criminals, children and the dangerously mentally ill. We run programs that make a real difference.
NSSF has led the way in improving the FBI National Instant Criminal Background Check System (NICS) through our FixNICS® initiative that has reformed the law in 16 states and improved the reporting of disqualifying records. The Don’t Lie for the Other GuyTM program helps firearms retailers prevent illegal straw purchases and is conducted in cooperation with Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF). Project ChildSafe® has distributed more than 37 million free gun locks since 1999. Our partnerships with federal and state agencies, as well as a leading national suicide prevention organization, are building public education resources for firearms retailers, shooting SUICIDE PREVENTION
ranges and the firearms-owning community. Operation Secure StoreSM is a comprehensive joint initiative with ATF to help Federal Firearms Licensees make wellinformed security-related decisions to deter and prevent thefts.
Practical solutions that protect lives and preserve our citizens’ liberties – making a difference for a safer America.
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 BY C A E S A R S E N T E R TA I N M E N T
FUTURE FORWARD
How to meet evolving customer needs while staying ahead? Innovate and invest on a grand scale.
O
On July 16, 2018, Caesars Entertainment Corp. broke ground on CAESARS FORUM. Slated for 2020, this $375 million conference center delivers 320,000 square feet of cutting-edge conferencing space into the heart of the Las Vegas Strip. That’s more than five football fields—and includes the world’s two largest pillarless ballrooms, at 110,000 square feet each. Plus, an adjacent 100,000-square-foot outdoor events plaza; direct access to 8,500-plus rooms at three Caesars properties with proximity to 20,000 Caesars rooms overall; and seamless connectivity to dining, live entertainment, retail and attractions at Caesars’s outdoor LINQ Promenade. It’s a blockbuster project for a destination like no other. Caesars Chief Sales Officer Michael Massari explains the business case, borrowing from the popular Vegas mantra, “Go big or go home.”
Rounding Out the Portfolio “The Las Vegas resort property of 2018 pursues three distinct segments—the leisure, gaming or business traveler,” says Massari, who celebrates his 20th anniversary in Vegas this year. “Elsewhere, business travel is largely based on visiting local companies. That transient customer is atypical in Vegas, however. While there is a growing corporate presence here, business travel in Vegas means coming for conventions and events. Accordingly, properties without meeting space, or access to space, will not attract the business customer.” Home to eight of the company’s nine Las Vegas properties, including Caesars Palace, the Center Strip area is a Caesars’s stronghold. Yet, three of these resorts—Harrah’s, The LINQ and Flamingo, offering more than 8,500 newly renovated rooms combined— are missing that business leg of the stool.“CAESARS FORUM resolves that issue by centering a state-of-the-art conferencing venue within easy reach of those properties and Caesars’s other assets,” says Massari. “By providing business travelers with a reason to stay, this rounds out the properties to the current standard.”
True Aim The investment is even more remarkable considering that Caesars Entertainment recently exited a prolonged bankruptcy. “That process forces you to figure out how to win without your regular tool set,” says Massari. “It’s a time of sharpening operational and strategic focus so that you emerge with new arrows in your quiver. That’s when it gets fun, and that’s where we are now.” Crediting Caesars Entertainment President and CEO Mark Frissora with “setting the right energetic and enthusiastic tone for the company’s future direction,” Massari adds that the new venue and other investments are about continually staying ahead. “Innovation defines and drives this market, which is large enough to accommodate multiple products in the same category, while Vegas’s meetings market dominance only makes us a bigger target every year,” says Massari. “Competition from within and without keeps us all on our toes and pushes our ambitions and investments to greater heights.”
Just ask Massari’s colleague Shaun Swanger. As vice president and general manager of The LINQ Promenade & Caesars Attractions, Swanger lives by “outside-thebox” thinking. “Opened in 2014, the open-air LINQ Promenade was concepted from recognizing the need to create an environment and experiences that departed from Strip norms,” he says. “Creating the first true outdoor space on the Strip, The LINQ maximized prime real estate while providing guests with an outdoor adult playground.” Slated for 2019, The LINQ’s latest attractions—the $20 million Fly LINQ zipline and $100 million Kind Heaven, an interactive Southeast Asian–themed digital experience mixing virtual and augmented reality technology—are positioning Caesars in a bold new light. “Kind Heaven will completely change the Strip,” says Swanger. “There is nothing like it in the world—and it’s a huge brand statement for Caesars and the future.”
Shifting Reality “Entrepreneurial spirit” is embedded in Caesars’s corporate DNA. “If you’re aiming to create something that does not exist, like the world’s two biggest ballrooms, you must be bold—and have the latitude to try,” says Massari. “Some larger companies tend to quash that. At Caesars, it’s encouraged.”
Michael Massari Chief Sales Officer Caesars Entertainment
CAESARS FORUM BY THE NUMBERS • Groundbreaking: July 16, 2018. Projected opening: 2020 • Project cost: $375 million • 650,000 square feet of space for 10,000-plus attendees, including the world’s two largest pillarless ballrooms, at 110,000 square feet each, and 320,000 total square feet of flexible meeting space • Opens onto 100,000-square-foot outdoor events plaza • Direct access to 8,500-plus hotel rooms at Harrah’s Las Vegas, The LINQ and Flamingo hotels • Seamless connectivity to open-air LINQ Promenade
LE ADERS
ADVICE INC.
Could your hard-won business wisdom become a lucrative sideline business? Meet three conventional companies that moonlight as consultants. BY DALE BUSS
ARI WEINZWEIG IS PROFESSORIAL, but he’s not from Harvard Business School or Kellogg or Stanford. He’s actually chief of another in-demand leadership training insitution: Zingerman’s Delicatessen of Ann Arbor, Michigan. In a room in a small industrial park on the fringes of this college town, Weinzweig is promoting leadership through anarchy to an audience of about 70 managers and owners of other businesses from across the country. And they’re hanging on his every word. “Between equals, the task is more difficult, but always more exalted,” he says, citing the obscure 19th century French anarchist Élisée Reclus. In other words, “It’s far quicker in the moment just to tell everyone what to do, but that creates heroes, victims, villains and the opposite of everything
you want to accomplish,” says Weinzweig, explaining the business application. Sacré bleu! As a progressive-minded creature of the local culture around the University of Michigan, Zingerman’s co-founder made his fortune teaching teenagers how to slather mustard on challah bread. Now, as the conductor of “ZingTrain,” Weinzweig wears a lime-green T-shirt that promotes one of his company’s restaurants and brandishes a glass of red tea while citing narrowly celebrated anti-capitalists from across the ages. “Stewardship doesn’t take away your authority, but you want to use it as little as you need to,” he asserts. “It’s actually more effective the less you use it. The power we have as leaders is inversely connected to how frequently we use our
ZingTrain, a talent development course launched by Zingerman’s Deli, contributes $2 millionplus to its coffers annually.
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launched it three years ago. Based on the culture-building nostrums of CEO Robert Chapman, the program counts supercenter operator Meijer and the San Francisco 49ers among its clients. Meanwhile, at Brentwood, Tennessee-based Ramsey Solutions, lessons on “EntreLeadership” now account for 27 percent of revenues, reports founder and CEO Dave Ramsey. That’s quite a side hustle for a 700-person media company.
Leadership training has become a profitable sideline for manufacturing company BarryWehmiller.
authority. Your authority is technically your title, but power is given to you by the people around you.” Though Weinzweig’s experience began behind a deli counter, his rapt audience members come from buttoned-down corporations such as Delta Air Lines, FordDirect and Compass Group—and they’ve sought out ZingTrain much as previous generations of business leaders turned to Walt Disney Co. for sprinklings of “pixie dust” or to Seattle’s Pike Place Fish Market for lessons on fish tossing and to reading Tom Peters or Jim Collins. Companies pay handsomely for management aphorisms these days because they’re desperate to attract and retain good workers and build strong cultures as the labor squeeze tightens. Just how many companies are turning their internal training programs into external businesses? Experts aren’t sure. “There [just] haven’t been any studies of how widespread this phenomenon is,” says Wayne Baker, a business professor at the University of Michigan. Still, the Advice Inc. phenomenon feels bigger than ever, as a new crop of somewhat unlikely enterprises rises to the forefront of this cottage industry with their own gurus, books, seminars and teams of on-site consultants. Zingerman’s “community of businesses,” including the original deli, a creamery and several other food outfits, will generate about $63 million this year, but ZingTrain annually now contributes $2 million or more to its coffers. In a similar vein, $3 billion manufacturer Barry-Wehmiller has found a fast-growing sideline in its Leadership Institute, where revenues have ballooned to $8 million since the diversified St. Louis-based manufacturer
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COTTAGE CONSULTING
While Advice Inc. prescriptions tend to be basic—some are downright obvious—the teachings are enhanced by these companies’ proven success in their own domains. Often there’s perceived value simply in hearing familiar ideas from actual practitioners. “People running companies don’t trust theoretical professors to teach them how to run their business,” explains Ramsey. “They want someone like them.” Consider one of Ramsey’s primary teachings: ruthlessly get rid of bad people. “We spend all of our time hiring and firing, and everything else gets done after you do that,” he says, pointing out that payroll accounts for 70 percent of client company expenses. “Just firing a ‘donkey’ employee is liberating to business owners.” To Josh Hayes, such observations land as pearls of wisdom. Ramsey “may not know stuff about anyone’s business in particular,” says the Phoenix-area operations head for Dutch Bros., which has 312 drivethrough coffee outlets across the country, “but he knows about people. And the things his company stands for, we’re trying to instill. We’ve already got much more of a team mentality.” PRACTITIONER’S PROGRAMS
Two of the nation’s biggest airlines, both based in Dallas-Ft. Worth, also tapped Advice Inc. for managerial tips. Jennifer Paine, a chief technical director at Southwest Airlines, annually takes a few dozen of her charges to EntreLeadership seminars. And Patrick O’Keeffe, senior vice president of people at American Airlines, recently enlisted Barry-Wehmiller to come
THOUGHT LEADERSHIP CONTENT PROVIDED BY DELOITTE
How CEOs Should View Business Climate THE TERM BUSINESS CLIMATE RECEIVES PROMINENT USAGE as a general indicator of an area’s economic suitability and receptivity for business. Traditional and social media outlets generously cover business climate news; rankings can pose an influential input to CEOs seeking to expand or improve current operations. While it is critical for CEOs to understand how the organization’s footprint is aligned to deliver on enterprise objectives, using business climate alone is not sufficient to develop a nuanced footprint strategy. To take the next step, CEOs should first move beyond the idea that business climate is a single issue, and instead consider it as the summary of several distinct factors. So how should organizations define business climate? To use business climate as a reductive measure of geographic suitability, organizations should first define the relevance of each component: 1. Labor Characteristics – How large is the relevant talent pool in our key locations? Does each area have the right types of talent in terms of education / experience? How do talent costs compare to other locations?
climate. However, CEOs should also be aware that identifying an “optimal business climate” is a highly relative process. Beauty, after all, is in the eye of the beholder. The importance that firms ultimately place on each category (and each factor within a category) should be based on the nature of the business, its internal characteristics, and its strategic objectives. How can CEOs ensure that assets are deployed and maintained in areas that meet business climate objectives? Armed with a more comprehensive definition, organizations should be proactive about evaluating the business climate surrounding each of their major geographical assets.
Business climate is the summary of several distinct factors
2. Industry Cluster / Competitive Environment – How mature / sophisticated is the local sector? Have competitors invested near our flagship sites? Do our locations provide access to relevant suppliers? 3. Regulatory Environment – What are the relevant policies in terms of employment, trade, permitting, etc.? Are there restrictions that impede the business in a meaningful way? 4. Cost of Doing Business – What costs can a business anticipate in terms of startup capital requirements, licenses and registrations, taxation, accessing credit, trade costs, etc.? 5. Supporting Infrastructure – What is the condition and suitability of the supporting infrastructure (road, rail, port, air) near our locations? Are local utilities reliable and of suitable quality? 6. Logistics and Access – How accessible is our footprint to customers and suppliers? Do our sites provide easy access for employees? How about executives traveling from other locations? 7. Operating Risk – Is the geopolitical situation stable? What is the probability of terrorism / violent conflict? Are organizations likely to directly experience corruption or IP theft? 8. Quality of Life – Will essential employees be willing to move to our main locations? What amenities are available that might be able to attract and retain high-value managerial / technical talent? A thorough reflection of the importance of each of these categories can help organizations develop an expanded view of business
Business climate evaluations need to be directed from the executive level. In fact, CEOs themselves should be the ones that define what climate factors are most important for an organization’s strategy. This involvement enables any resulting evaluations to produce a strategically aligned point of view on how well an organization’s geographic footprint is performing.
How can CEOs ensure that the footprint grows in areas with a favorable business climate? Even the most comprehensive business climate review will still only represent a snapshot. CEOs should have the expectation that every business climate factor will likely change over time. Labor costs in emerging markets are likely to rise, tax and trade policies are subject to change, and new customers in remote geographies need to be served. Moreover, as organizations evolve their business process and make strategic transactions, the importance an organization puts on business climate factors will likely change as well. For example, vertical integration may reduce the importance of being in a strong industry cluster, and outsourcing an IT function may reduce the need to have a high-skilled local labor force. Ultimately, regardless of organizational size or industry, CEOs need to understand how their footprint is impacted by business climate factors. Successful CEOs will ensure that they consistently have an updated understanding of the multitude of variables that make up business climate and of how shifts in those factors will affect the growth and efficiency of the business. Darin Buelow (dbuelow@deloitte.com) is a principal at Deloitte Consulting LLP and leads the Real Estate & Location Strategy practice
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.
Learn more at www.deloitte.com/us/locationstrategy ABOUT DELOITTE: 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/about to learn more about our global network of member firms.
LE AD ER S
from training in “emotional intelligence” and leadership skills. REAL-WORLD LESSONS
Seeking talent development tactics backed by real-world success, companies are tapping programs like Dave Ramsey’s EntreLeadership.
to the Big D and run the airline’s new leadership training program. O’Keeffe says that, in the wake of the 2013 merger of American Airlines and US Airways, the company finally has gotten around to improving its culture “by creating and developing inspiring leaders in the company.” American CEO Doug Parker hit it off with Chapman at a civic function in Dallas. They ordered up a two-day program for Barry-Wehmiller to instruct the airline’s top 550 executives last year, with plans for 2,200 additional leaders to cycle through this year. The agenda is simple, if a bit wispy. “The first day is about understanding what motivates you at work, what’s your personal ‘why,’” O’Keeffe explains. “The second day is really about listening skills, including the importance of recognition, of communicating and connecting with your team.” Gobsmacked American executives quickly incorporated a Barry-Wehmiller keystone by creating a formal “recognition platform” for birthdays, anniversaries and “great work” by employees. “Usage has skyrocketed since we launched it,” O’Keeffe says. And the airline initiated its first extensive employee survey in over a decade, generating “great opportunities for leaders to apply their listening skills.” Next, Barry-Wehmiller will develop a leadership enhancement program for American based on the first course, including a 360-degree evaluation for all of its top managers. At Southwest, Paine took 40 of her IT subordinates to a three-day EntreLeadership seminar in San Antonio earlier this year, at a cost of about $3,000 a person. Tech leaders, she says, often can benefit
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Instruction by Ramsey consultants—and by other speakers in seminar lineups that feature icons like former Secretary of State Condoleezza Rice and marketing guru Seth Godin— focuses on “finding team players and making sure we’re creating white space in our work for creative thinking, instead of just focusing on e-mails and meetings,” Paine says. For Eileen Crane, repeated exposure to ZingTrain led to similar revelations about how to rally employees. The winery she runs in Napa, California, Domaine Carneros, produces notable sparkling varietals and pinot noirs, has 80 employees and generates annual revenues of as much as $50 million. Crane figures Domaine Carneros has spent more than $100,000 at the Zingerman’s tap through on-site consulting and sending managers to Ann Arbor. As a result, for example, Domaine Carneros began doing open-book management, and “we can explain the costs of our products, of running the chateau—and, yes, we make a reasonable profit, but all of a sudden the light goes on and [employees] get it,” Crane says. Kevin Harrison also found ZingTrain sessions illuminating. “We realized maybe we were underperforming in certain areas because we weren’t being clear with employees about our expectations,” says the vice president of Dura-Pack, a $6 million maker of packaging equipment in Taylor, Michigan. “So we’ve been working on rolling out expectations for new hires and existing employees and clearly defining their expectations for us.” The results: Engagement is up. Employee support for company objectives is higher “because you’re getting buy-in before you finalize stuff,” Harrison says. And bottom-line improvement is following. That outcome doesn’t surprise Weinzweig. “When people are disengaged, angry, bored and disinterested and don’t believe in what they’re doing, they’re not going to do great work,” he observes. “You need everyone to think like a leader, and people need to believe in what they’re doing.”
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LE AD ER S LAW BRIEF \ DANIEL FISHER
A COURT ON THE CUSP Kennedy’s retirement means a pro-business court for decades.
REUTERS / Joshua Roberts
Expect Brett Kavanaugh to be a more dependable ally for Chief Justice John Roberts.
Daniel Fisher, a former senior editor at Forbes, has covered legal affairs for two decades.
JUSTICE ANTHONY KENNEDY’S retirement from the U.S. Supreme Court isn’t just an opportunity for President Donald Trump to cement a conservative majority on the court, potentially for decades. It also signals the transition from the Kennedy Court to the Roberts Court, as Chief Justice John Roberts will finally have a reliable majority of justices who share his views on environmental regulation, employment law and other issues of vital interest to business. Justice Kennedy wasn’t such a dependable ally. While a staunch defender of the First Amendment and individual liberty, he was less supportive of business in its many fights with regulators, tax authorities and plaintiff lawyers. He deprived the conservatives of a clear victory in the 2006 decision Rapanos v. U.S., for example, penning a muddled concurrence that allowed federal regulators to claim authority over any waters with a “substantial nexis” to U.S. “navigable waterways.” President Obama used that narrow sliver of language to ram through his expansive “Waters of the U.S.” regulation, covering huge swaths of land miles from any navigable waterway. Farmers and businesses are still slugging it out in court to blunt the impact of WOTUS on their operations. Kennedy’s designated replacement, Brett Kavanaugh, will display no such uncertainty if named to the court. As a judge on the U.S. Court of Appeals for the D.C. Circuit, Kavanaugh has consistently ruled in favor of narrow interpretations of the powers Congress has delegated to regulatory agencies. It’s not a popular philosophy with many members of Congress, since it forces
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political accountability back on them. But for business litigants, it means more consistency and predictability in the courts when they challenge regulations based on ambiguous statutory language. “Justice Kennedy’s departure gives corporations and employers an opportunity to advance their ball a bit further,” says Neal Katyal, a partner with Hogan Lovells in Washington, who served as acting solicitor general in the Obama administration and has argued more than 30 cases before the Supreme Court. With Kavanaugh on board, Roberts can count on a reliable majority in favor of tighter controls on class-action lawyers, who use mass litigation to extract large settlements and fees from companies, often regardless of the merits of the underlying case. Roberts also has demonstrated strong support for the Federal Arbitration Act, which gives companies the option of using arbitration instead of litigation to settle most disputes over employment and consumer transactions. Plaintiff lawyers and more than a few judges hate arbitration, because it deprives them of fees and authority, but the future Roberts Court can be counted upon to defend arbitration, as it did this term in a trio of cases upholding arbitration clauses in employment contracts. Democrats will call this a “pro-business” court, but that’s not entirely accurate. The chief justice joined Justice Neil Gorsuch to dissent this term against the majority’s decision upholding inter partes review, a system Congress created to save businesses the expense of fighting patent trolls. And just as Roberts surprised many by siding with the liberals to uphold the constitutionality of Obamacare, Kavanaugh’s strict attention to the words of a statute might not always please corporate litigants. “He’s very principled,” says Katyal. “If he thinks Congress has written a law that’s anti-business, he’s going to enforce that law anyway.”
Starting with End in Mind to Select Better M&A Targets and Improve Outcomes THE BUSINESS WORLD AS WE KNEW IT NO LONGER EXISTS. Every industry is being redefined by new technologies that blur the lines of the physical, digital and biological worlds. These shifts are accelerating change like never before, creating great opportunities…and risks. Business practices are also rapidly evolving, becoming automated, intelligent, agile and ubiquitous. What TCS calls “Business 4.0.” M&A has always been a part of every business strategy. In today’s era of rapid transformation, mergers, acquisitions and divestitures have become the dominant play to capture new customers, compete in emerging markets and jettison assets that no longer enable competitiveness. YOUR M&A STRATEGY
ACCELERATING DEAL DUE DILIGENCE
From TCS’ experience, there are four dominant M&A strategies. Most companies embrace one as their primary M&A strategy and are opportunistic in the others:
In today’s world of low-cost capital, competition for M&A opportunities can easily come from competitors willing to make decisions with limited data. Accelerating deal due diligence is crucial. To speed this process:
1. Optimizers focus on improving existing products, services and business practices to maximize customer satisfaction and profitability. 2. Transformers seek incremental technological innovation to actively capture new customers and markets. 3. Explorers are the mirror image of the Transformers. They invest in leading-edge technologies to expand customer capture within existing markets. 4. Revolutionaries take the boldest steps. They seek ways to disrupt and cannibalize so they can take on new competitors and capture new markets and create new industries.
Successful M&A is a combination of good strategy and great execution. TCS’ FITME framework can help companies evaluate options and create the M&A strategy that’s right for them.
1. Build a trusted M&A advisory team with the right industry, operational and technology knowledge to be engaged at the earliest stages of M&A exploration. This team will likely be a combination of internal and trusted third-party experts. 2. Establish risk thresholds to address unknowns. Managing risk is a part of evaluating every M&A opportunity, especially when acquiring cutting-edge technologies or entering new markets. Companies waiting for concrete answers will likely find themselves outflanked by more nimble competitors. Defining likely risks and rapidly testing “Go–No Go” tolerances will accelerate decision-making. 3. Give the CIO a starring role. Business and supporting systems are no longer separate considerations. IT cannot make an M&A deal, but certainly can break one. When it comes to the potential system impact of an M&A opportunity, the best person to make that judgment is generally the CIO. Engaged early, the CIO can quickly assess compatibility and identify pitfalls and deal-breakers. 4. Formalize your playbook. Every company should have an M&A playbook that scripts the activities for due diligence, M&A planning, financial modeling, execution and synergy management. A good playbook also describes the roles, both internal and external, to execute these scripts. For due diligence, pre-defined assessment and analysis frameworks can greatly accelerate the process. In business, time to market is everything. Creating the M&A strategy that fits your company’s growth and risk profile will provide clarity as to where to capitalize on opportunities that enhance competitiveness. Add to that your own due diligence accelerators to quickly evaluate and exploit those M&A opportunities that best advance your strategic ambitions and enhance business outcomes.
Thought Leadership Content Provided by TCS, https://info.tcs.com/bts-home.html
LE AD ERS EXIT INTERVIEW \ LAURA RICH
SMOOTH SELLING
Josh McCarter on navigating a $150 million sale to Mindbody— and life afterward.
Laura Rich is the founder of Exit Club, an organization focused on helping entrepreneurs successfully transition into their next phase after the sale of their business. She hosts The Exit Club podcast on Fratzke Media.
AS THE SAYING GOES, keep your friends close—and then let them acquire you for $150 million. Josh McCarter, founder and CEO of Booker Software, had known Rick Stollmeyer, the CEO of competitor and future acquirer Mindbody, since 2011, when the two met through Young Presidents’ Organization on a father-daughter trip in Colorado. “We had this competition thing going on on the business side and a really nice friendship developing on the other side,” McCarter says. In March 2018, Mindbody announced its intention to purchase Booker, launched in 2010, closing the deal 30 days later. Three months after the close, McCarter spoke about selling the business. How does it feel to have the deal done? Is it like you crossed the finish line? The sale is done, but now we’re climbing a bigger mountain with a bigger team. So, I’ve barely taken any time off since. We’ve had a remarkably fast and positive integration. Just like the actual sales process itself went really fast, the integration has been about as smooth as any integration you could ask for. How did you ensure it would be a smooth transition? One hundred percent of the Booker team carried over and got offers from Mindbody at closing. That was a very good signal to both companies that, hey, we’re bringing these companies together, and the intent is that this is a growth business. That sent a really good message. Then as we were in our 30 days of final diligence, I had my entire executive team go to Mindbody’s headquarters, and we started to talk about integration plans, roles and responsibilities, holes in our organization, holes in Mindbody’s organization and really started
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mapping out what the combined org would look like. Some things we were able to transition almost seamlessly on day one. In other instances, we said, “OK. Here’s the 90-day plan, and here’s how we get from A to B.” We spent a lot of time thoughtfully thinking about: What’s the strategy? What are our top priorities? Then, what’s the organization that we’ll need to be able to support that, and then the roles and accountabilities fall out of that. We first got alignment on that part and then started drilling into the other items. By the time the deal closed, there was some ambiguity, but directionally, we knew where things were going. How did you prepare yourself for no longer being the boss and having a boss yourself? On one side I would say it’s a strange experience, because I’ve been the boss for a long time. On the flip side, I feel that coming in here, I’ve got a great relationship with Rick, and I have developed a very good relationship with the other executives on the executive team and feel there are very meaty areas of the company where I can make an impact. That still keeps me motivated and excited. I don’t have CEO on my card anymore, but I still feel like I can make some very impactful decisions for the business. There’s also part of me that, for a little bit, [will] enjoy not having the stress of managing investors, preparing for board meetings and so forth and [instead] really focusing on driving some key initiatives at the business. Do you expect to start another business venture? I’m not sure, but I’m only 45, so I’ve got a long way to go before I ever even think about retiring. In one way, shape or form, I expect I’ll still be involved in businesses, whether it’s as an investor, a CEO or a board member. I still feel like I’ve got a lot of wood to chop here.
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LE AD ER S CRASH COURSE \ JENNIFER PELLET
A TALENT FOR TALENT
Protiviti CEO Joe Tarantino shares the strategies that consistently land him and his company on best employer lists.
A COHESIVE CORPORATE CULTURE, an environment of continuous learning, committed and engaged employees—these talent triumphs are hard to come by. They’re even tougher to manage in consulting, where far-flung offices and cutthroat internal competition are the norm. Yet, $850 million global consultancy Protiviti manages all three, regularly appearing on Best Places to Work lists, such as Fortune’s 100 Best Companies to Work For, as a result. CEO Joe Tarantino, who has a 93 percent approval rating on Glassdoor, outlined five practices that factor into his company’s talent success story:
ployee’s experience level into account in the orientation process. “They actually learn about the organization by playing a game with a number of other new hires around the world,” explains Tarantino.
A Learning Culture. From intern to newly appointed managing director, employees receive level-based training after every promotion to help ease into their new role. “We have a very progressive career continuum with training programs aligned to each level taught by practitioners from the field,” says Tarantino, who says he typically gives a presentation and participates in a question-and-answer session. “One of the fabrics of our culture is that we give all of our people access to the senior team.” It’s a pricey endeavor, both in terms of the development effort and the opportunity cost of taking consultants out of the field to facilitate sessions—but the payoff is worth the investment, he says. “It’s a big number, but we think it’s worth it because we’re trying to develop their careers and have them stay with us for a long period.”
Community Commitment. Recognizing that the millennial employees who comprise 80 percent of the company’s workforce have a strong desire to contribute to their communities, Protiviti launched an ‘i on Hunger” program to provide meals to the hungry. The effort has been a “big igniter” for Protiviti’s culture, reports Tarantino. “We’re now collaborating with our clients on these events, which has really solidified our relationships.” Since the program’s inception, Protiviti’s employees, together with volunteers from 245 of the firm’s clients, have packed, cooked or delivered more than six million meals.
Effective Onboarding. Since 50 percent of new recruits are experienced hires as opposed to recent college grads, the company developed Passport to Protiviti, an onboarding program that takes the new em-
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A Feedback Focus. To ensure that employee concerns percolate up the ranks, Protiviti regularly solicits internal feedback, participates in external surveys by Fortune and Consulting Magazine and monitors social media sites. The company then acts on that feedback and communicates to employees about the actions it takes, building trust between employees and leadership. Feedback has led to initiatives like paid sabbaticals and a mobility program geared toward employees interested in working outside of their home offices, or even outside of their home countries.
CEO Involvement. Tarantino, who was named a Glassdoor Top CEO for the third time in 2018, credits his participation in Protiviti’s schools for that recognition. “It’s about being hands-on and also being honest and transparent with people when they have tough questions about what’s working and what’s maybe not working,” he says. “That resonates when people evaluate you.”
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LE AD ERS ON MANAGEMENT \ JEFFREY SONNENFELD
YOU ARE WHAT YOU TWEET
What leaders tweet can tell stakeholders everything they need to know about what’s really going on in the corner office.
Jeffrey Sonnenfeld is senior associate dean for leadership studies and Lester Crown professor in management practice at Yale University and president of the Yale Chief Executive Leadership Institute.
IT MAY HAVE BEEN A BIG HIT for 19-year-old pop star Britney Spears in 2000, but “Oops, I did it again” is hardly a smart communications strategy. Yet, these days, some Twitter-happy leaders can’t seem to resist firing off ill-formed invectives with the forethought of an impulse-impaired mean girl. And thank goodness for that. In an era where more and more leaders are, ironically, less and less likely to offer unfiltered remarks, what leaders tweet is one of the most revealing public displays of their true character, a crisp, candid signal to stakeholders of all kinds about the thinking in the corner office when the comms folks aren’t there to spin it. President Donald Trump and Tesla’s Elon Musk are prime examples. First, Musk. By going after Business Insider’s Linette Lopez (accused of corruption and conspiracy), a heroic British cave diver (labeled “a pedo” for disparaging Musk’s mini-submarine rescue idea) and Sanford Bernstein analyst Toni Sacconaghi (told “Boring, bonehead questions are not cool”), he’s offered ample evidence that, despite his brilliance, he’s also deeply insecure and thin-skinned—especially under pressure. And that was before his recent out-of-the-blue tweet threatening to take Tesla private. History tells us this kind of defensiveness is a bad sign in business leaders. Enron’s Jeff Skilling, for instance, had very similar retorts for analysts and reporters 17 years ago. Then there’s the president. Trump’s first tweet was in May of 2009, promoting an appearance on the Late Show with David Letterman, and since then he has gathered more than 20 million followers and tweeted out over 40,000 messages, or about a dozen a day. In his first year in office, he tweeted 2,548 messages, targeting everyone from Rosie O’Donnell and Arnold Schwarzeneg-
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ger to members of his own cabinet and leaders of countries from North Korea to Canada, Europe and Iran. The “fake news” media is in a complete category of its own. Some say it’s a strategy to divert public attention away from scandals and setbacks. But only 20 percent of U.S. adults and only 1 percent of Republican voters are on Twitter, so the main target is really the news media, which dutifully amplify whatever message the president is looking to send that hour. What’s really worth examining though, is the trend: A telling study by linguists Jack Grieve and Isobelle Clarke from the UK’s University of Birmingham finds that as Trump grows in stature and power, his tweets become increasingly negative and defensive. His most commonly used terms are schoolyard taunts like “loser,” “dumb” and “stupid.” The takeway here is obvious, and it hardly inspires—or projects—confidence. Of course, Musk and Trump are not the only leaders tweeting. The tweets of some of the most active business leaders on the platform self-classify into three categories: BITERS. Trump, Musk, Travis Kalanik and activist investors Nelson Peltz, Carl Icahn, Bill Ackman and Paul Singer all fall in this group. They seem to lose ground, and stature, with each additional ad hominem attack and personal invective they blurt out. FIGHTERS. T-Mobile’s John Legere, JPMorgan’s Jamie Dimon, ADP’s Carlos Rodriguez, Dunkin’ Brands’ Nigel Travis and Kevin Johnson of Starbucks all respond with factual corrections or genuine apologies—showing discipline and cool confidence under stress. COWARDS. Richard Smith, formerly of Equifax, Micky Arison of Carnival Cruise Lines, Steven Ells of Chiptotle and, of course, Mark Zuckerberg of Facebook hid from timely responses at times of public crises, missing the moment to restore needed trust. In other words, sometimes not saying anything says it all.
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Connecticut THE WORLD'S OTHER FINANCIAL CAPITAL
CONNECTICUT HAS HARBORED America’s most important concentration of insurance and financial services companies for two centuries. Now the members of this unique ecosystem are trying to ensure the industry’s next century in the Constitution State is as prosperous as the previous two. Financial and insurance companies, state and local governments and Connecticut’s colleges and universities are working together to further anchor this high-value sector and to expand its investments in facilities, services and people across the state. Such efforts include provision of economic development incentives, systematic nurturing of promising starup companies and the fine-tuning of higher-education curricula for supplying the ample pipeline of the qualified professionals required to keep the industry’s rudder right where it is amid recent storms in some sectors of the business. “There’s a rich history for this industry in the state,” says Stanley Galanski, CEO of Navigators, a 48-year-old specialty insurer that moved its headquarters to
Stamford from New York City in 2013. “But today there’s the combination of a good business environment, access to intellectual capital and proximity to the New York metro market, making Connecticut an ideal place for an insurance company to be headquartered.” GLOBAL PLAYER Connecticut also is the third-largest global center of the hedge fund industry, after New York and London. “Some of the biggest players in the world are based here, including the largest, Bridgewater Associates,” notes Bruce McGuire, president of the Connecticut Hedge Fund Association. Connecticut enjoys an edge over the rest of America as a hub for insurance, investment and financial services for substantial reasons. There’s history: The Hartford was founded in Hartford more than 200 years ago as a fire insurer, for instance, while health insurer Cigna dates its origins back to 1865 with the creation of Connecticut General Life Insurance Co. Geography played a role—the leafy, seaside locale is an attractive place to live and work. Connecticut’s proximity to New
Hartford is the insurance capital of the United States.
York City, the world’s financial capital, was crucial to growth, both for its symbiotic business effects and because many Wall Street pioneers lived in suburban Connecticut. More recently, the dispersal of service work facilitated by digital technology has prompted financial and insurance services outfits to hang shingles in Connecticut. The state also retains the crucial distinction of providing lower business tax rates than New York City. Meanwhile, Connecticut and local-level officials keep courting existing industrial and financial systems (IFS) companies and potential newcomers. The state's Department of Economic and Community Development (DECD) has granted financial incentives to several prominent companies, including Bridgewater, Synchrony Financial and AQR Capital Management, and to Seven Stars Cloud Group, a China-based outfit, to sweeten locations and expansions in the state. IFS players also cite the close and effective coordination among the office
THOUGHT LEADERSHIP PROVIDED BY THE STATE OF CONNEC TICUT
Over the last 200 years, leafy, suburban Connecticut has built a reputation as one of the world’s great hubs of financial and insurance companies. Now it’s working to dominate the 21st century, with ambitious economic development, a slew of startup fintech and insurtech business—and an unrivaled, expert workforce that’s more than 110,000 people strong. of Gov. Dannel Malloy, the DECD under Commissioner Catherine Smith and the insurance commission as a big boost for doing business in Connecticut. UNRIVALED WORKFORCE Even more important may be attention to ensuring the right human capital to fuel the growth of an industry that employs about 110,000 Connecticut residents. The state enjoys nearly double the number of insurance industry employees per capita than the national average, is No. 3 among states for the percentage of employees with advanced degrees and is No. 5 for labor productivity. “That means we have access to a really highly qualified workforce that has very relevant training,” says Jill Hummel, president of Anthem Blue Cross & Blue Shield in Wallingford. “Connecticut offers a diverse workforce, supported by more than 40 colleges and universities," says David M. Cordani, president and CEO of insurance giant Cigna, “as well as a strong entrepreneurial spirit that drives a high-growth business environment where Cigna thrives.“ FINANCIAL INNOVATION The state actively fosters this entrepreneurial energy in IFS. In January, Hartford InsurTech was launched by local companies—including Cigna—as well as the University of Connecticut and the City of Hartford as an accelerator and “boot camp” for industry startups. The goal is to help insurers “build a culture of innovation outside their headquarters,” explains Michelle Cote, managing director of UConn’s Connecticut Center for Entrepreneurship & Innovation. Ten startups from around the globe spent nearly four months working on their business models and forging relationships with industry partners. Four of them secured more than 20 pilot projects with Connecticut companies and are in the process of raising more than $20 million in Series A investments.
LASTING RELATIONSHIPS One of them, Pentation Analytics, quickly leased space in the Upward Hartford shared-office facility. The company already has conducted a hackathon at UConn, participated in capstone projects with grad students and recruited interns from the school. “We want to look at the future,” says Anirban Roy, CEO of the data analytics company based in Mumbai, India, which helps insurers maximize the value of customer relationships. “Connecticut is getting into the digital zone in our industry and the insurtech map of the world, and we want to be part of that process.” Another InsurTech participant, BuzzGroup, is looking to roll out its digital home insurance products and services to the United States. BuzzGroup won InsurTech’s initial $500,000 grand-prize investment and will put it toward opening its first American office, in Connecticut, around the end of this year. “The biggest thing for us with InsurTech is relationships, and there are a lot of companies [in Connecticut] that we’re looking to develop relationships with now,” says Roelien Ruys, chief strategy officer for the London-based outfit. Players in Connecticut keep finding other new ways to synthesize all these advantages to keep the state No. 1 in the IFS business. State and university officials continue to adapt curricula to fit the industry’s needs, for instance, with the University of Connecticut, the University of Hartford,
Hartford Insurtech acts as a "boot camp" for insurance-related startups in the state.
Southern Connecticut State University, Capital Community College and Norwalk Community College all adding classes and degree programs in IFS, insurtech, cyber risk management and other areas. “This is a strong partnership with our educational institutions and one that’s continuing to adapt as the industry continues to adapt,” says Susan Winkler, executive director of Connecticut Insurance and Financial Services (CT IFS), a cluster of industry CEOs who help promote the sector. CT IFS showcases the annual Insurance Market Summit that attracts 400 insurance executives and innovators to Hartford each year. And the hedge fund association plans to host its first Greenwich Economic Forum this fall in Greenwich, inviting about 300 CEOs and others who comprise the most important people in the industry worldwide. “We’re using Greenwich as a backdrop just as the World Economic Forum uses Davos, [Switzerland],” McGuire says. “This will help Greenwich tell our story as a hedge fund center and cement our position.”
C OV ER STORY
What Matters Most A CONVERSATION WITH PATRICK LENCIONI BY DA N B I G M A N In an era rife with rock star tech titans, unicorn-or-bust business plans and management by metrics, Patrick Lencioni has a powerful, contrarian message for CEOs: Lasting success won’t arise out of better A.I. or breathless promises of “purpose.” It will only come from the disciplined improvement of what he
I
f you want to navigate the incredible cultural changes reshaping corporate America right now, there’s no better destination than a sixdesk, open-plan office over a hair salon in tony Lafayette, California, two traffic jams east of San Francisco. That’s the home base of bestselling author and counselor to CEOs Patrick Lencioni. The low-key location suits him and his mission. Just close enough to keep the pulse of disruption in Silicon Valley, just far enough away to grow increasingly skeptical that “change the world” mantras are actually creating great companies— and may actually be doing the opposite. Ask Lencioni to name a great company, he’ll bring up Southwest Airlines. Great leadership? Ford under Alan Mulally. “Google has heated toilet seats, an infinity pool, organic gardens, free bicycles and a spa, and that’s great,
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but as soon as things go bad, there is going to be a bloodbath,” he says. “Companies, especially in technology, that love the accoutrements of culture, that’s not really culture. To me, that’s excess. And I have to say I think it’s rooted in narcissism.” His aversion to business BS runs deep. The son of a salesman, he joined Bain & Co. consultants in the 1980s on a quest to discover why his father—and so many millions like him—suffered under unending corporate chaos. Finding few answers in the actual practice of Big Consulting, he set off on his own. Meeting with hundreds of clients over the next few years, he realized that it isn’t strategic miscues or failures to keep pace with technology that cause disasters. Those are symptoms. The causes are rooted in the usual grab bag of fundamental human flaws—fear, greed, mistrust, etc.— and how they play out among top leaders.
PHOTOS BY JEFF SINGER
calls organizational health. Here’s why—and what to do.
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To help, he wrote a series of deceptively simple books, all of which you’re likely familiar with, including The Five Temptations of a CEO, Death by Meeting, The Advantage and, most famously, The Five Dysfunctions of a Team. By design, each can be read in a sitting and do not require an advanced degree to comprehend. Now, as business and technology grow faster and more complex, Lencioni is increasingly convinced that what he calls “organizational health” will prove to be the decisive edge among companies in the future, not game-changing A.I. or the tally of Ph.D.’s on your staff. With corporate culture dominating the headlines, Chief Executive decided it was the right time to sit down with Lencioni and get his take on business, from leadership meltdowns and tech titans to millennials and the #MeToo movement. Here’s an edited version of the conversation. We talked a bit about that new book Bad Blood [by Wall Street Journal reporter
John Carreyrou] and what happened at Theranos. What’s your take on the idea of the hero CEO and what it’s done to American business? People always ask me, “Who’s the best CEO in the world?” And I say, “Well, do you want a famous one, or do you want a great one?” Most of the great CEOs, nobody knows who they are, primarily because they don’t want to be known, that wasn’t their goal. Their goal was to create a great organization to serve their customers and their employees well and change people’s lives. So I think that the problem is that the media creates this. Greed is no longer cool. But fame… Like this young woman [CEO Elizabeth Holmes] at Theranos, she’s still determined to turn this into something, she’s still trolling the Valley, looking for deals and the next thing. I don’t know if it’s sunk in with her exactly what happened. I worked in the database industry back in the 1990s, and there were two companies, one of which was Oracle, with Larry Ellison, and it was a miserable place to work, it just was. Then I went to work for a guy named Mark Hoffman, who most people never heard of, at a company called Sybase, and it was just a completely different place. Sybase continued to grow and do well, and one day they started to say, “We should be like Oracle.” They got a new CEO who was much more of a personality, and they lost the very thing that distinguished them. I think that’s very natural for people to seek that out because they think that’s what makes for great leadership, but it’s quite the opposite.
What Matters Most: Four Disciplines for Organizational Health According to Lencioni, competitive advantage comes from a few simple things: A cohesive, frank leadership team; clarity about what matters most for the company’s success; communicating that message over and over to everyone in the company; and structure—without bureaucracy—that reinforces that clarity. These four disciplines—cribbed here from Lencioni’s work—are outlined in the pages that follow (visit tablegroup.com for Lencioni’s complete organizational health checklist).
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What’s your take on the rash of high-profile CEO disasters that we’ve seen recently from places like Texas Instruments to Intel to Uber? These are downstream symptoms. The core problem is a lack of what we call organizational health. They’re not sound organizations. Sometimes you can have a sound organization and a person just goes off the rails. But usually, if you look back, they were nurturing this kind of culture. And then they finally get caught, and people say, “Whoa, gee, what happened?” And it’s like, oh no, this was just a matter of time. At the heart of a great organization is a humble leader, somebody who’s doing it because they feel a great weight and responsibility in being the leader. There are two schools of thought about becoming a CEO. One is that it’s the reward for a lifetime of hard work; you’ve arrived. The other is that it’s a huge responsibility, and you are now more on the hook for your performance than you’ve ever been. I look at it like athletes who get drafted. Is it, “Finally, I’ve arrived, and now I get to enjoy a great life,” or, “oh no, now if I don’t play well, I’m gonna blow it?” The best athletes are the ones who have that second attitude. The best CEOs are the ones who go, “Now I feel more, not negative pressure, but the pressure to do the right thing, to work really hard and to steward this opportunity.” When you see it as a reward, you just cannot embrace the things you’re supposed to do. That’s kind of where it all starts. Whether it’s treating women wrong, abusing your power or abdicating responsibility for what you’re doing, it’s usually rooted in the idea that, “I’m entitled to this job, so I should get to do what I want,” versus, “I’m responsible for this job, so I have to do what’s necessary.” When you go in to work with a company, how do you know when the organizational health is good, and how do you know when it’s bad? What are the tells of both? If I could have one piece of data about a company to understand if it’s healthy and successful, I’d want to go watch the leaders
in a meeting. If the meeting is boring and there’s no tension, and there’s no emotional engagement with one another, I know that there are really bad things going on. I don’t mean emotional tension like people going after each other’s throats. What I mean is if people are engaged and feel like there’s something at stake and that they have to push each other. What do people who run companies need to do right now to really make culture better? What do they need to understand about culture? I’ve had my consulting firm for 20 years, and I worked with CEOs for five years before that. I have never seen a charismatic famous CEO whose people really wanted to follow [him or her]. They were hitching their wagon to something hoping it would work, but when those companies turn down, it’s ugly. I remember going to Walmart years ago. I was in their cafeteria, and I thought I was in
Discipline 1 BUILD A COHESIVE LEADERSHIP TEAM The first and most critical step in a healthy organization is creating a cohesive leadership team. Do you have one? Here’s a checklist: The leadership team is small enough (three to 10 people) to be effective. Team members trust one another and can be genuinely vulnerable with each other. They regularly engage in productive, unfiltered conflict around important issues. They leave meetings with clear-cut, active and specific agreements around decisions. They hold one another accountable to commitments and behaviors. They put the collective priorities and needs of the larger organization ahead of their own departments. If two or more of these statements are not true in your organization, address your team dynamics.
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Discipline 2 CREATE CLARITY Creating alignment at the executive level is essential to building and maintaining a healthy organization. There are six simple but critical questions that need to be answered, eliminating all discrepancies among team members: Why do we exist? The answer will yield a core purpose, or the fundamental reason the company is in business. How do we behave? This question examines behaviors and values required for success. What do we do? This answer provides a simple, direct explanation of the business. How will we succeed? This question requires the team members to develop a strategy. What is most important, right now? The answer will establish a unifying thematic goal and action plan. Who must do what? This question addresses roles and responsibilities.
a junior high school. And all their executives and all their employees were going to this really crappy cafeteria, and I thought, where’s the really nice part? No, this is it. The stores are actually nicer than their headquarters were—which may have changed since then. But I’m always suspect of places that are self-referential and treat the leaders like they’re important. I just love to go places where you’re surprised by the level of humility and reality that exists. I can’t even begin to imagine how much has been spent on foosball tables in the last 25 years to create a culture. The great thing about millennials is they sniff out the bullshit. If you have a foosball table and your managers treat people like crap, and they bring in dinner just because they’re trying to manipulate you to live your life there, eventually, they sniff that out. Younger people today are like, “Listen, if you’re going to treat me terribly, don’t try to win me over by letting me bring my dog to work or play foosball or build a slide from the second floor to the first floor.” If you want to do that, fine, but make it a company
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that runs well, a company that’s truly collaborative, where you ask people their opinions and consider them, and you get people involved and respect them. That doesn’t mean everybody gets to vote on everything, this is not a touchy-feely soft thing. There are these CEOs who I would say are cynical and power hungry, but they know how to dress things up to look like it’s collaborative. But underneath it, the culture is just poison. You’ve got to focus on the fundamentals of making an organization healthy, and if you don’t do that, don’t insult people by trying to buy their affection with toys. What are those fundamentals? There are really four things. Most leaders in the Valley think that to make a company big, you have to be the smartest kid on the block. Well, the funny thing is with the ubiquity of computing and information today, everyone’s smart. I honestly believe in 20 years of being a consultant, I’ve never worked with a company and walked away from the first meeting and said, “These people are just too dumb.” Everybody knows enough in the world today to run a business. It’s not about what you know, it’s can you tap into the intelligence, the experience and the talent of the people there? To do that, there are four things you have to do. First of all, if the leaders at the top are political, dysfunctional and not a cohesive team, you’re through. If the leaders are fighting against each other, you’ll never come close to maximizing your potential. It’s the worst thing. Second, they have to be intellectually aligned. There are six [see Discipline 2 sidebar] fundamental questions that if those leaders are not completely aligned around, I mean no daylight between them, then you’re going to have problems. Third, you have to constantly, persistently and repetitively communicate the answers to those questions. Alan Mulally was incredible at this when he turned Ford around. Gary Kelly at Southwest is great at this. At all the best companies we know, the leaders constantly reinforce the key messages, they don’t get bored and move on to something else. They’re like, “This is what we’re about,
and I’m going to tell it to you again and again and again.” Nobody ever leaves an organization because they think, “Well, the CEO just communicated to me way too much.” The best leaders know that you can’t overcommunicate what matters. The last thing is they have to put just enough structure in place around those answers to reinforce the culture without bureaucratizing it. Most companies over-bureaucratize. Do we overcomplicate business? Oh gosh, absolutely. Why? There are three reasons people reject simple solutions. One I call sophistication bias. I want something that’s really sophisticated and sexy. It’s like, “I lost weight, how did I do it? I ate less and I exercised more.” Nobody’s finding that interesting. The next bias is what we call the adrenaline bias. That’s, “I want something to work right now.” It’s like, “Freeze off my fat.” No solution that flips a switch and changes things right away works. Organizational health does not take that long, but it’s a discipline that you have to do for a while to see it work. The third one is quantification bias. When I worked at Bain, people would say, “Isolate all the variables and tell me exactly what the ROI of doing this one thing is.” It doesn’t work that way. When we work with companies, they ask, “What will organizational health do for us?” Our answer is: “Everything. It will permeate everything you do, and you’ll never be able to isolate the variable. It’s going to permeate how you have meetings, how you make decisions, where you put your capital, how you talk to one another, how you deal with failures.” And they’re like, “Well, if it’s not sexy, and I can’t do it right away, and I don’t know exactly what the ROI is, it must not work.” We live in an age of quantification, Big Data, machine learning. What are some of the downsides to applying all that inside of organizations?
What’s meant to be measured, measure it and measure it well, and quantify whatever is truly accurate to quantify. But you can quantify the wrong things, and the human element will always be there. I don’t care how smart a system you have, intuition and judgment will always be critical. The problem is, we have a lot of bad forensic analysis that goes into companies, like Why did that company succeed? What they’re doing is looking at it and going: “Find something I can quantify, and I’ll it attribute to that.” I worked with a big technology company once that almost went out of business; it got sold off for a fraction of its worth. And the truth is the CEO had no trust with his team because he would never admit he was wrong, ever. He was famous and brilliant, so nobody ever challenged him. They were scared of him. Well, eventually, it failed, and what did all the business magazines or newspapers write? “They made some strategic errors,” and “They had some product issues, some bugs in their product, that’s why they failed.” No, no, no, no, no. Those are downstream symptoms. Those were inevitable symptoms of a team that could not process
Discipline 3 OVERCOMMUNICATE CLARITY Once a leadership team is cohesive and has established clarity, leaders need to communicate the answers to employees over and over. Employ the following communication strategies: Commitment Clarification: After leadership meetings, review discussions and decisions for alignment and buy-in by the leadership team before they’re communicated. Cascading Communication: Leaders should then communicate results of meetings to their immediate reports face-to-face within 48 hours—and ask their reports to do the same with their teams. Top Down Communication: From intranet sites and blogs to e-newsletters and cascading communication, all must have clarity around key messages—and stick to them. Lateral and Upward Communication: Important, but not a panacea. Leaders must not give the impression they are abdicating responsibility for decisions by giving employees a vote.
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Discipline 4 REINFORCE CLARITY For an organization to be healthy, organizational clarity (the six critical questions) must become embedded into the fabric of the organization and reflect and reinforce the uniqueness of the organization’s culture and operations. A checklist: The organization has a simple way to ensure that new hires are carefully selected based on the company’s values. New hires are thoroughly taught the six elements of clarity. Managers throughout the organization have a simple, consistent and nonbureaucratic system for setting goals and reviewing progress with employees. That system is customized around the elements of clarity. Employees who don’t fit the values are managed out of the organization. Poor performers who do fit the values are given the coaching and assistance they need to succeed. Compensation and reward systems are built around the values and goals of the organization. If two or more of these statements are not true in your organization, address your human systems.
a decision honestly. The human element is always what’s underlying, and yet we are so enamored with, “Give me something I can measure.” That’s just not how things work. The other thing that’s happened in the last 10 years is the rise of always-on personal technology. What is that doing to teams and to culture? It’s not allowing us to make the best decisions because we’re not really tapping into our best thinking. I don’t have to be a Ph.D. in brain chemistry to understand this. People want to think that Alan Mulally turned Ford around because he looked at the carburetors and made a better decision or sold off this brand. But what he did is he went in there and changed the behavior of people. During meetings, people would look
at their phones. He would just stop the meeting and look at them and say, “What are you doing? We’re making decisions here.” Nobody wants to believe that Alan Mulally turned Ford around by doing what a fifth grade teacher does at my son’s school. But the fact of the matter is adults are just older kids, and it’s like “you better listen and be fully engaged here because if you don’t want to be, there’s other things you can do.” What’s your best piece of advice for a leader today? I don’t mean to sound one note, but make your organization as healthy as it can be, and you will become resilient. We had a company in the travel-related business. It was high-end travel. By their own admission, they were really dysfunctional, and it was getting painful. The CEO brought us in. They were in silos; nobody was cooperative. They didn’t like each other; they didn’t want be together; they didn’t have a clear strategy. All that stuff. They started to work on it and make progress. The industry turned down because there was all this disintermediation. They almost went out of business, and they said, “Let’s just focus on this, on being who we are, on sticking to our values, keeping the people who fit our values and acting on those.” Other people went out of business, but their customers came and said, “We can’t do this without you, you guys are so functional.” And now, they’re doing better. So it’s kind of like if my wife and I are doing well in our marriage, we have four boys, and things are going really well, that’s when we should say, “Hey, let’s go away and really understand why we’re doing well and recommit to that,” because when the inevitable crisis occurs, we’re going to weather that storm. If you wait for the storm to hit, sometimes you just don’t have the same perspective. So I think the best advice I can give to people is this: Just focus on making your organization great.
Patrick Lencioni is the keynote speaker at Chief Executive’s 2018 Leadership Conference, Nov. 8 & 9 in Phoenix, Arizona. See ChiefExecutiveLeadershipSummit.com for details and registration.
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SMART MA N U FACTU R I NG
SO HOW ABOUT THOSE ROBOTS? Promising? Sure. Replacing humans? Ask Elon Musk. BY C . J. P R I N C E
E
lon Musk had a dream: a car factory that looked more “alien” than human, with hundreds of robots working cooperatively like a hyper-efficient hive. A handful of humans would oversee the work, but for the most part, the manufacturing of Tesla’s Model 3 electric vehicle would be fully automated. Robots can do everything people can do, Musk reasoned, but much faster—so why not take the people out of the equation? His stated goal: to achieve a 20-fold increase in production speed and be cranking out
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20,000 cars per month by the end of 2017. But a funny thing happened on the way to the future: the robots weren’t quite up to the task. A mere 2,425 Model 3s rolled off the line in the last three months of 2017, leading to a record loss in Q1 2018 of $785 million. Ultimately, Musk had to reverse course, pulling his new robots off the lines and hiring hundreds of employees a week—with some production thrown together in makeshift tents—to rescue the Model 3 targets. As Tesla continues to burn through
cash, the missed targets have resulted in order cancellations, a falling share price and downgrades on both stock and debt. In July, Tesla claimed it had hit the 5,000-per-week production target, but a nervous Wall Street seems not at all confident. Musk offered his mea culpa in a tweet: “Excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated.” That’s hardly a surprise for most manufacturing CEOs. For all their promise, two decades of overblown hype and expensive
false starts have clearly demonstrated that robots will not replace humans any time soon. In fact, a study of plant performance by the consulting firm Oliver Wyman actually found that the most automated factories ranked not at the top for productivity—but at the bottom. “People are the most flexible form of automation you can have,” says Ron Harbour, a Wyman partner who has studied industrial automation for decades. Tom Shoupe, COO of Honda of America Manufacturing, agrees. “It is our fundamen-
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tal belief that humans are the most important element of our operation,” says Shoupe. While Honda uses advanced manufacturing technology, including sophisticated robotics, “we’ve taken the approach that we automate only where it’s appropriate, where there’s an efficiency issue, and then we allocate our people to something that requires more human touch. The touch, the feel, the senses of human beings can’t be replaced by machines.”
A Robot’s Role It isn’t all hype, of course. Rapid advances in technology offer increasingly tantalizing opportunities. Robots and automation already play a prominent role in all parts of Industry 4.0, coming together with learning algorithms that allow both bots and humans to optimize production and improve quality. Increasingly sophisticated systems will be critical to addressing important elements of the skills gap, which, according to the most recent study by Deloitte and the Manufacturing Institute, will result in 2 million unfilled jobs by 2025. The hardest to fill will be those jobs that are dangerous, involve tedious repetition or are simply unpleasant. In other words, jobs that are perfect for robots. “If we don’t automate, who will fill those positions? I’ll tell you: China,” says Anthony Nighswander, CEO of Hicksville, Ohio-based APT Manufacturing Solutions, which helps manufacturers automate assembly lines. “Offshoring happened because there were jobs nobody wanted to do here, so China said, ‘We’ll take them.’ Why would we not want to take those back with robots?” At the same time, CEOs who have been down this road will tell you that too much automation too soon can be the death knell of an otherwise successful manufacturer. As with the three industrial revolutions that came before this new digital age, change can’t happen overnight. “The context I like to keep in mind is when companies went from steam to electric, they tended to electrify the production line exactly as it had been set up in its steam configuration,” says Siemens U.S. CEO Barbara Humpton. “Then the groundbreakers said, ‘Wait, I can put equipment in any configuration I want because I don’t
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“With each one of these changes, we’ve elevated the role of the human in the process.” BARBARA HUMPTON, CEO, SIEMENS U.S.
have to power it down a steam production line.’ But the thing we’re talking about a lot here at Siemens is, with each one of these changes, we’ve elevated the role of the human in the process.” Right at this moment, she adds, we are seeing competing influences at work: “The fear that something is changing and the awareness that as we do this, we unleash people to be doing things that add value in new and different ways.” In the first phase, robots take over repetitive, high-volume production tasks that were often dangerous or boring—and unlikely to attract young workers. Until recently, Travis Hollman, CEO of Hollman, the world’s largest manufacturer of wood and laminate lockers, was ambivalent about using robots on his production line. He’s a big believer in humans and thinks Elon Musk missed a crucial fact: “You can’t get to a perfect product if people don’t genuinely care about it and aren’t involved in making it.” In July, he took the plunge and purchased his first robot, a machine that will do the heavy lifting and sorting of materials that was previously done by people who would often injure their backs. Those people will now oversee the machines. “It’s not going to replace people, but it will save people from getting hurt. It will help with worker’s comp,” he says. It will also boost productivity, potentially threefold, as the machines can be stacked three deep in the company’s 300,000-squarefoot factory in Irving, Texas, and operate “lights out” overnight, so the materials are ready for humans by morning. “We have the capability to make it very efficient in the future as we buy more machines, but right now it’s a money-out thing, saving injury and relieving stress on the company.”
Automation’s Limitations But Hollman is reticent to try automation anywhere in the process that involves customization, which is key for the company’s customers, who include fitness chains, major U.S. sports leagues and university sports teams. The lockers are tailored to individual team needs and include facial recognition technology, LED screens that outline daily training regimens and other high-tech amenities. The
company is constantly looking for innovative solutions for customers, and Hollman can’t see how robots wouldn’t interfere with that process. “Maybe in the future,” he says. “But right now the technology isn’t there. It might work for Elon Musk to make the same car over and over. But we’re trying to make a customized product to suit each individual need. Every time we try a new material, it might be different tooling, different machining of different parts—I don’t see how you turn that over to robotics.” Robotics—at least the kind that isn’t cost prohibitive—has been viewed as suitable primarily for manufacturers doing high volume, high scale, less customization. However, the technology is evolving. “A lot of those perceptions are grounded in a reality,” says Humpton. “But we’ve had people working on the question of ultimate customization for the last five to six years, and the technologies now exist.” That’s thanks, in part, to the R&D done by companies like Siemens, which invests more than $1 billion a year in the U.S. alone. “We’re going to see the technologies become cost competitive in the coming years,” she
“The touch, the feel, the senses of human beings can’t be replaced by machines.” TOM SHOUPE, COO, HONDA OF NORTH AMERICA MANUFACTURING
says. “If you were the first to own an iPhone, you might have paid $600 for it. You don’t necessarily have to do that today.” A new generation of less expensive, collaborative robots will account for a third of all industrial robots sold in 2025, according to Loup Ventures, a research-driven venture capital firm. These “cobots,” at a pricetag of $25,000$45,000, compared with upward of $100,000 for a traditional robot, also offer more flexibility and faster reaction time. “We created a robot with sensors, so the robot will run at full speed, but if a human gets within a caution area, the robot will keep its cycle, but slow down,” explains Roger Varin, CEO of Stäubli’s North American mechatronics operations in Duncan, South Carolina. If the human gets too close, the robot stops. As soon as the human walks out of the danger zone, the robot starts up again. “That gives the manufacturer the opportunity to integrate it in different ways based on changing scenarios and new requests from customers.”
The Fear Factor But there’s more to trepidation than cost. “Most companies just don’t even know
ROBOTICS DONE RIGHT The key to successful introduction of automation is figuring out the right balance between people and machines. To win, Ron Harbour, one of the most well-known and widely respected consultants in the field, has written that CEOs should focus first on improving and lengthening the working lives of employees. Some tips:
such as inexpensive cobots, often costing less than $50,000. 4 Experimenting with wearable automation like exoskeletons to increase the strength, mobility and longevity of workers. 4 Identifying and retraining workers who are adept at making continual transitions. They are the future.
Good Bets 4 Thinking about automation for long-term improvements, not short-term cost cutting. 4 Asking managers to list 10 to 15 processes robots could quickly improve. 4 Automating repetitive, mind-numbing or dangerous tasks wherever possible. 4 Starting with smaller automation plays,
Bad Bets 6 Trying to dramatically cut the size of your workforce with automation. 6T rying to automate systems that often change. Unlike robots, people don’t need costly reprogramming.
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ENTER THE COBOT 900K800K-
Less pricey collaborative robots—aka cobots— will account for a third of all industrial robots sold by 2025.
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where to start,” says Alexandre Capone, senior manager, delivery architecture, at consulting firm Capgemini. Even those that have begun are not yet thrilled with their results. Capgemini’s 2017 study of 1,000 large manufacturers across eight countries and six manufacturing subsectors found 75 percent had a smart factory initiative in place or were working on it, but only 14 percent were satisfied with their success. For SME manufacturers, before investing big bucks, CEOs need to know they’ll be able to boost efficiency or grow revenue, not wind up with a robot in a corner collecting dust. (In fact, several CEOs at Chief Executive’s recent Smart Manufacturing Summit admitted they had cobots effectively making coffee in the breakroom because they didn’t know what else to do with them.) Capone recommends starting with a low-cost, high-value task, such as visual inspection. “That’s probably the least costly thing you can do with A.I., to put a camera on a machine to detect if the product is good or bad. You can start
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2023
2025
Source: Loup Ventures I Estimates begin in 2017
“You can’t get to a perfect product if people don’t genuinely care about it and aren’t involved in making it.” TRAVIS HOLLMAN, CEO, HOLLMAN
using the sensors to collect data right away,” he says. Of course, you risk falling for the technology. “Engineers love to try and automate everything, but it may not make business sense—there may not be a return on investment, it may not improve the quality of the product, it may take too long to do the automation, depending on how quickly the customer wants to get their product,” says Bob Eulau, CEO of Sanmina, a $7 billion B2B manufacturer that began automating its production lines 15 years ago and now has 25,000 machines connected around the world via the cloud. “We talk about the concept of ‘selective automation.’ We are very careful to make sure we use automation in the right places and capture value when we choose to do it.” By starting small, a company can get experience with the technology, gather data and soon realize the kinds of efficiencies that enable growth—and more investment. Since UniCarriers Americas, a forklift manufacturer based in Marengo, Illinois, began working with robots in 2012, the company
has increased automation capabilities by 50 percent and allowed the business to grow enough to double headcount from 300 to 600. “Because we run a leaner operation and vertically integrate, we’ve become less dependent on outside sources,” says Jim Radous, president. “We control more of the design capabilities and the parts that go into the product and that keeps us more competitive, more internally focused on efficiencies and allows us to stay within a very tight, fixed-cost parameter as we add people to our process.” Keeping that focus on the end customer is paramount to guiding any manufacturing company through digitalization and automation. That, and remembering the value of the most complex and capable machine in their plant: People. Even the International Federation of Robotics said in its April 2017 report that “less than 10 percent of jobs are fully automatable.”
“People are the most flexible form of automation you can have.” RON HARBOUR, PARTNER, OLIVER WYMAN
Robots will never be able to handle tasks “requiring high levels of creativity, empathy, persuasion or understanding of which knowledge to apply in which situation.” Instead, machines should complement and augment human labor activities, so that humans can “focus on higher-skilled, higher-quality and higher-paid tasks.” To get there, CEOs must seek a balance between human and machine so as not to sacrifice the je ne sais quoi that has made American manufacturing competitive since the first industrial revolution. “The human being’s ability to interpret and to initiate and to apply ideas is critical to making things happen,” says Honda’s Shoupe. “We feel like one without the other is a complete loss for us.” C.J. Prince is a regular contributor to Chief Executive and other business publications.
CAN CEOs CLOSE THE SKILLS GAP? Robots may help alleviate some of the need for skilled workers, but they will also widen the skills chasm as traditional manufacturing jobs become more complex. “Where before, an operator was needed to mechanically operate a device in the line, now they’ve got to have not only those physical skills, but understand the computer programming skills that will allow them to interact with the robot,” says Siemens U.S. CEO Barbara Humpton. Rather than wait for university curricula to catch up, manufacturers are implementing strategies now to bring workers up to speed. Siemens spends $50 million a year to train its existing workforce to step up as Siemens goes further down the digital path. “We’re investing a lot right now in virtual reality and other learning tools that will make the human/machine interface more intuitive,” says Humpton. Siemens has also donated $3 billion worth of software to community colleges around the U.S. so students will be trained on its framework. APT Manufacturing Solutions CEO Anthony Nighswander gave up on finding grads with the skills his company needs. Instead, APT partnered with a local community college and high school district in 2015 to create a training facility and offer paid apprenticeships, plus college tuition. “This is not just a skills gap for today,” says Nighswander, who says the problem began in the 1980s, when young people were encouraged to abandon trades in favor of universities. “This is a gap in skills for a generation.”
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C EO SUMMI T
MANUFACTURING SUCCESS
Beyond understanding and adopting new technologies, the Factory 4.0 revolution is about creating a culture of constant innovation. Here’s how. BY C.J. PRINCE
W
Creating an environment of empowerment is just as critical for production efficiency as having the latest technology, says Honda’s Tom Shoupe.
Hosted by Peterbilt, the 2019 Chief Executive Smart Manufacturing Summit will take place May 14-15 in Dallas, Texas. SmartManufacturingSummit.com
HEN CEOS HEAR “smart manufacturing,” they usually think about technology—the Big Data, analytics, IoT and machine learning that enable faster and better decision-making on the shop floor and the robotics and artificial intelligence that do the work faster and more predictably. But Honda of America Manufacturing COO Tom Shoupe wants to make sure CEOs don’t lose sight of the more important element. “The key is people and how we create an environment where they feel empowered, motivated and passionate enough to contribute their ideas and their knowledge gained at the spot of production,” Shoupe told attendees at the 2018 Smart Manufacturing Summit in Columbus, Ohio, co-hosted by Honda. “It’s not all about technology, though we certainly employ a lot of advanced technology at Honda.” CEOs gathered for the event had a chance to see that technology up close on exclusive tours of Honda’s East Liberty and Marysville plants, as well as a visit to the Performance
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Manufacturing Center, where “supercars” are handcrafted to exacting specifications. “For the 21st century of manufacturing, we think our success will be defined by the successful interaction between our associates and the technology we deploy,” said Shoupe. Striking the right balance between advanced manufacturing technology and human capital—as much art as science—was a prime focus of the two-day event, during which CEOs explored ways to create a fearless culture of constant learning and innovation; attract and develop extraordinary leaders; embrace new technologies intelligently; and create growth and profitability in a volatile time. The digital revolution is turning almost every industry on its head, and CEOs must be able to adapt, nimbly and intelligently, or risk obsolescence. As Farooq Kathwari, CEO of Ethan Allen, put it, the key is not to resist change but to manage it—and try to stay one step ahead of it. “We are always thinking about what we have to do to reinvent ourselves and about how we stay relevant.”
WINNING AT THE DIGITAL REVOLUTION In the 350-plus years since its founding in 1665, Saint-Gobain has survived countless political, industrial and social upheavals. Not least of those has been the digital revolution, which has forever changed customer expectations and, as a result, the way all manufacturers have to operate, said Tom Kinisky, CEO of Saint-Gobain’s North American subsidiary. “We’re all victims of Amazon Prime,” Kinisky said of the demand for hyperspeed delivery. “That same expectation is now flowing through all the industrial customers [too].” Digital tools, personalization, the ability to self-serve—all are having an upstream impact on Saint-Gobain’s business, he noted. “We have to be more personalized and flexible, and all of that is driving our manufacturing.” Kinisky sees the current digital revolution as more of an evolution, however, and successful navigation of the new terrain will mean a culture focused on the customer and a culture that empowers employees to think of themselves as innovative, even when they have no aptitude for accelerated math. “Innovation isn’t about technology and R&D— it’s about getting everyone in your company to think they’re creative, because they are,” said Kinisky, who instituted “Fab Labs” to encourage employees across the organiza-
tion to experiment with new ideas. “We’ve seen a huge boost of productivity on the floor because of that.” Now is a perfect time to automate, he added, because growth is high and the labor shortage is real. But CEOs have to be careful not to deploy the technology for its own sake, or even to realize cost savings, “but to make our workers’ jobs easier, to make them safer and give them [new] opportunities.” The more employees see new technology on the shop floor as valuable for themselves, rather than just for the company, the more likely they will be to embrace it. “If you can think of it from their point of view and not your point of view, you’ll have success.”
“We have to be more personalized and flexible, and all of that is driving our manufacturing.” —TOM KINISKY, CEO, SAINT-GOBAIN NORTH AMERICA
MANUFACTURING A GREAT CUSTOMER Like so many other brick-and-mortar retail industries, home furnishings has faced painful disruption from online players such as Wayfair and Hayneedle, which have driven prices down and service expectations up. Add to that the pressures of globalization, deflation and commoditization, and it’s easy to understand why legacy brands are going under. But by maintaining a focus on the customer and deploying advanced technology in combination with top talent, companies can not only survive the chaos but maintain profitability throughout, said Farooq Kathwari, CEO of high-end furniture maker Ethan Allen. “We take care of the customer,” he said—a simple formula that has enabled the company to show a profit every one of its 86 years. When online storefronts became the furniture shopper’s primary method of window shopping, Kathwari wasted no time lamenting the fact that stores had less traffic. Instead, Ethan Allen adjusted to the new reality,
investing in its online storefront and training 600 designers to live-chat with customers, highlighting the company’s unique service offering. With a new 600,000-square-foot plant in Central Mexico dedicated to cutting and sewing, and technology that produces furniture frame pieces in minutes, Ethan Allen was able to collapse production and delivery time from three months to 30 days, even though 70 percent of its products are custom made. Ethan Allen is now experimenting with small-footprint stores that use virtual reality to showcase product. But as high tech as the company gets, high touch will always be just as important, Kathwari added. “Talent is the most important challenge we have. If you don’t have talented people who are motivated, you are not going to take care of the customer and you won’t be around a long time,” he said. “When you combine the technology with personal service—that to me is the future.”
“When you combine the technology with personal service— that to me is the future.” —FAROOQ KATHWARI, CEO, ETHAN ALLEN
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ECONOMIC OUTLOOK: WHAT NOW? As the U.S. cycles through this latest recovery following a deep recession, Mike Lyons, head of corporate & institutional banking and asset management for PNC Financial Services Group, offered SMS attendees five key takeaways for American manufacturers. 1. It’s never different this time. Though the nature of cycles change, and they feel different going through them, we’ve seen the same patterns over and over, going back to 1845, said Lyons. “We always want to believe this time is different, but it never is.” 2. It’s about preparing, not predicting. Rather than staring into a crystal ball, focus on good financial hygiene and preparing your balance sheet. Is your funding matched? Have you hedged interest rate risk? Is your leverage at a reasonable level? “If you’re just taking leverage to buy back stock, that doesn’t help shareholders versus leveraging to change the dynamics of the company or expand into new markets,” said Lyons, who recommended continuing a dialogue with your credit provider in good times. 3. The balance sheet drives P&L, not vice versa. Many of the companies that
failed in the last crisis thought they could decide on their preferred growth rates and then find a way to support that growth. That’s backward, said Lyons. “You’re only going to grow as much as your balance sheet allows you to grow.” 4. Seize transformational growth opportunities. Down cycles only happen once every 10 years, said Lyons, “so don’t miss the opportunity to buy assets at attractive prices.” Do as Warren Buffett does—be ready to buy low. 5. Risk management is not a model. As much as you might try to model things out, there are limits to what you can forecast as far as risk. “You have to be careful on that front,” says Lyons.
“We always want to believe this time is different, but it never is.” —MIKE LYONS, PNC FINANCIAL SERVICES GROUP
TALENT: THE NEXT LEAN REVOLUTION
“With your collective effort, you can turn America around.” —NORMAN BODEK
With unemployment at historic lows and manufacturing already hurting for skilled labor, attracting top talent is easily one of the biggest challenges facing industry CEOs today. Norman Bodek, known as the “Godfather of Lean” for having translated the secrets of quality and productivity from Japanese masters like Taiichi Ohno and Shigeo Shingo into English for American manufacturers, had a suggestion for CEOs: “You are the visionaries. If you want to attract talent, you have to establish vision and purpose and align people to your purpose.” Given the talent shortage, leaders also need to get the best possible performance from every single player. That starts with flipping the top-down management approach on its head. “Imagine that everybody in your company is self-reliant,” said Bodek. “They each have a skill they feel confident they’re growing in, and they’re becoming a master in something.” How best to achieve that self-reliance? Enter the Harada Method, a Japanese system for transforming employees into champions using goal setting, self-evaluation and positive reinforcement through coaching. Named for Takashi Harada, the high school track and field coach who made his team the top-ranked out of 380 schools in Japan, the Harada Method can bring out the potential of every employee, regardless of his or her position, said Bodek. When each individual employee achieves greatness, the company becomes great, and, ultimately, the U.S. becomes a manufacturing giant once again, he said. “With your collective effort, you can turn America around.”
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CY B ER SE C UR I T Y
HARDENING YOUR COMPANY As if navigating cyber risk wasn’t tough enough, evolving threats and tougher disclosure requirements are complicating the challenge. A look at where we stand—and what to do about it. BY RUSS BANHAM
Russ Banham is a Pulitzer-nominated business journalist and author who writes frequently about the intersection of business and technology.
PUBLIC COMPANY CEOS NOWADAYS MUST FEEL LIKE THEY’RE RUNNING THE FBI. At any given moment, an adversary wanting to bring the organization to its knees may pounce. It could be a nation-state, a terrorist organization, a criminal group or a disgruntled employee. CEOs must identify the enemy, anticipate all threats and fortify the enterprise. If this sounds like an episode of “Homeland,” it should. Cybersecurity is among a company’s biggest survival risks, given the potential for an attack to shut down operations, compromise proprietary information and irrevocably damage business and brand reputation. All companies are at risk, not just publicly traded enterprises. But the latter are now on the hook to disclose in their periodic filings their capacity to withstand an attack. In February, the U.S. Securities and Exchange Commission (SEC) issued new guidance to public companies about the need to provide more robust disclosure of the organiza-
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4 STEPS TO MAKING YOUR COMPANY HARDER TO HACK 1. FORGET THE “WHO?” Predicting who might attack you—or even investigating who perpetrated an attack—is a waste of time and resources. Threats come from everywhere and attackers are hardly ever caught.
tion’s cyber risks and incidents, as well as controls and procedures in managing these perils, in 10-K and 10-Q reports. “In today’s environment, cybersecurity is critical to the operations of companies and markets,” SEC Chairman Jay Clayton stated in announcing the new guidance. The impetus for the SEC’s toughened stance, which arrives on the heels of even stricter rules in Europe via the General Data Protection Regulation (GDPR), is the need for investors and shareholders to have real-time and more transparent information about a company’s susceptibility to and readiness for a cyber attack. Failure to disclose material risks can result in SEC enforcement actions and fines, as well as securities litigation, says Robert Silvers, former assistant secretary for cyber policy in the Obama administration and a partner in the cybersecurity practice of global law firm Paul Hastings. “It’s a reminder that the SEC is taking cybersecurity very seriously, and it may be a prelude to even tougher enforcement actions ahead.” The buck stops with the CEO, who must ensure the organization he or she leads has done everything possible to determine the data assets most at risk of hacking, who might want to get their hands on this informa-
2. FOCUS ON THE WHY. Understanding what data hackers typically seek and correlating that to the information you have and where it lives will help you identify measures to take to minimize the likelihood of a breach and mitigate the potential damage. 3. ESTABLISH A REPORTING LINE. Companies need to define different levels of intrusions and delineate protocols for each, from specifying which cyber risk team members will take charge to establishing procedures for when and how regulators, management and board members will be notified. 4. TEST AND REFINE. Consider hiring external advisers who use simulated attacks to identify gaps in your cybersecurity measures and protocols and help you address them.
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tion, why someone may want to shut down operations, the outcomes of these attacks and the procedures needed to batten down the hatches. There’s also the question of how much of the company’s budget a CEO should invest in these actions. As Emily Mossburg, a principal in Deloitte’s cyber risk advisory services practice, puts it, “When does a CEO know that enough is enough?” WALL STREET WORRIES
Of most concern to regulatory authorities is the impact of a cyber attack on the nation’s financial institutions. Financial services firms are a magnet for cyber crimes, according to a 2017 report by IBM, F O R A which states that THE YE “ IF 2017 WA S the sector experiT H E Y E A R ences 65 percent IS 18 0 2 , E R A RANSOMW E M A LWA R E .” more cyber inciIV T C U R T S E dents than other OF D , R E N T R sectors. A P VERS, — R O B E R T S IL PA U L H A S T IN G S There are two likely reasons. First, terrorist groups and nation-states realize a cyber attack against a major financial institution can disrupt the country’s financial system, causing a loss of market confidence and economic instability. Second, the data these companies hold, such as customer Social Security numbers, credit card numbers and banking information, have substantial financial value to criminal organizations. To protect threats to trading platforms, intrusions into retail brokerage accounts and other critical market infrastructure risks, the SEC created a 30-member cyber unit last year dispersed across its offices nationally and entrusted with extensive enforcement authority. Also last year, New York State’s department of financial services implemented sweeping cybersecurity regulations for financial firms with mandates that include broader data breach notification and third-party vendor cyber risk management. The various regulations are daunting. “In our conversations with CEOs and other senior executives of financial firms, they’re still grappling with the impact of the New York
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regulation,” says John Carlson, chief of staff at the Financial Services Information Sharing and Analysis Center, the global financial industry’s resource for cyber and physical threat intelligence analysis and sharing. “And now they have new guidance from the SEC on top of it.” NUCLEAR WINTER
The current rules are just the tip of the iceberg. As cyber threats evolve, regulations need to evolve with them. An example is the increasing use of connected devices in the Internet of Things, which are marshaled by a hacker to launch a Distributed Denial of Service (DDoS) attack. In August 2016, the Mirai malware commandeered inexpensive, mass-produced Internet-connected CCTV video cameras designed for surveillance and security into a botnet that shut down hundreds of company and government websites, resulting in substantial business interruption losses. Overcome by so much traffic, the websites could not accommodate legitimate users. “Whereas the primary cyber threat to companies has long been a data breach, the major concern today is a complete shutdown of business operations,” says Dottie Schindlinger, governance technology evangelist at Diligent, a provider of enterprise governance management solutions. “The goal of most attacks today is to get into the corporate network. Once in, hackers can do most anything—turn off the electricity, the phones and e-mail and literally stop the business from operating.” A case in point is the NotPetya malware developed by the Russian government. In June 2017, NotPetya was blamed for disrupting business operations at shipping ports, advertising agencies, law firms and retail outlets. Once inside these organizations’ networks, the malware wormed its way from one computer to another, destroying the infected machines’ file systems. The goal of such an attack is to simply wreak havoc, Silvers, who led the U.S. government’s response to the Mirai attacks, agrees. “If 2017 was the year of ransomware, 2018 is the year of destructive malware,” he says. “The malware going
around now is designed to render computers completely inoperable. Even if you paid a ransom, you won’t get your data back. NotPetya’s objective was complete surrender. We’re talking pure malice.” Who are these evildoers? “You have nation-states, you have terrorists and you have three guys in a basement with Cheetos stains on their shirts,” says Jason Hogg, a former special agent with the FBI and currently CEO of Aon Cyber Solutions. “The attack surface has gotten radically bigger.” RESOURCE REASONING
In this ambiguous environment, CEOs must determine where best to allocate resources—to harden the company’s technology infrastructure and reduce its surface of vulnerabilities without spending too much or too little. It’s a Solomon-like decision and one only growing more complex the more we understand about the paths hackers use to infiltrate organizations (See “Where You’re Weak,” p. 52). CEOs grappling with preparedness should begin with an acceptance that the company will be hacked at some point, the outcome will not be pretty and they will be hacked again. “Most businesses have already been hacked, multiple times each day in many cases,” says Silvers. “Some companies face hundreds if not thousands of minor cybersecurity events each day. Hackers are endlessly probing.” It’s impossible to predict who the enemy is and when they will attack, but determinations can be made about why they would attack. “You need to consider every possible bad actor—what you have that they may want and then how they may go about getting it,” says John Reed Stark, former chief of the SEC’s Office of Internet Enforcement, now president of John Reed Stark Consulting. Generally, companies never know, post-incident, who perpetrated a hacking. “When I was at the SEC investigating a cyber attack, the chief information security officer (CISO) would always whisper in my ear that so-and-so was unhappy because he didn’t get a promotion and that we should aim our investigation in the person’s direction,” Stark recalls. “My answer in all cases
TICKING TIME BOMB Regulations governing cybersecurity have been on a fast track since the SEC’s initial guidance on cybersecurity in 2011. Prior to that year, public companies were not required to report in their filings if a data security incident had occurred or even if they had corrected the problem. Those days are gone. At the turn of the millennium, the notion of a cyber attack delivering a knockout blow to a public company seemed farfetched. Then, scant months before the 9/11 attacks, U.S. Secretary of Defense Donald Rumsfeld received an article called “The U.S. Is Not Safe in a Cyberwar,” in which the authors warned of a future where computers could be infected with malicious viruses and mass denial of service attacks, disabling networks crucial to the functioning of the American economy. “Our society,” the authors wrote, “is becoming too dependent on the Internet without an adequate understanding of the national security implications. This is becoming the worst threat the U.S. faces.” Today, the report’s prophecy resounds. The NotPetya malware developed by the Russian government and deployed in June 2017 disrupted business operations at shipping ports, advertising agencies, law firms and retail outlets. Once inside these organizations’ networks, the malware wormed its way from one computer to another, destroying the infected machines’ file systems. “The U.S. government has a responsibility to investors, shareholders and all citizens to foster regulations that compel businesses to do all they can to protect against hackings that can bring down their organizations and critical infrastructures,” says John Carlson, chief of staff at the Financial Services Information Sharing and Analysis Center, the global financial industry’s resource for cyber and physical threat intelligence analysis and sharing.
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was ‘maybe.’ The truth is you’re unlikely to ever find out who attacked you. Nobody is ever arrested. The important thing in preparing for a cyber incident is to leave no stone unturned in determining why your organization would be targeted.” Unfortunately, too many companies opt to fortify the IT infrastructure before appreciating why they might be hacked, a cart-behind-the-horse mistake. “The conversation (around cybersecurity) continues to be a technical discussion of different security solutions and controls to deploy,” says Mossberg. “You need to create worst-case incident scenarios before you implement the solutions.” “YOU HAVE NATI ON -S TA TE S, In deterYO U HAVE TE RR OR IS TS AN D YO U mining these HAVE TH RE E GU YS IN A scenarios, companies need BA SE M EN T W IT H CH EE TO S to look inward. “CEOs and board STAI NS ON TH EI R SH IR TS .” directors need to ask questions —JAS ON HO GG , CE O, AO N CY BE R of their CISOs,” says Schindlinger. “What data do we collect? Which data is most important to the business? Where do we keep it? Is it encrypted? Who has access to it and is there evidence indicating that hackers have gone after this data in past?” The answers will give CEOs a better idea of the types of attacks that will cause the greatest impact to the business. “This might be the theft of particular data like intellectual property or consumer credit card information, the complete shutdown of the network or the corruption of data—changing it in such a way that it adversely affects the ability of the organization to do what it does,” Mossburg says. Examples of the latter include altered financial data requiring the filing of a financial restatement or the change in the compound of a drug resulting in patient bodily injuries and death. Once the business risks are identified, the CISO should be able to demonstrate the optimal processes, controls and systems to minimize the possibility of an attack and soften its repercussions. Solutions include securing the network, encrypting data
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and wireless access points, strengthening password policies and data access protocols, state-of-the-art firewalls and intrusion monitoring, with clear procedures in place for abnormal intrusions. “If something sticks out like a sore thumb, it should trigger a pre-planned response,” Mossburg says. In today’s regulatory environment, a timely response is critical. Once a network has been breached, generally a company must notify regulators within 72 hours of the attack. “Between the SEC’s recent guidance, GDPR in Europe and the New York regulations, CEOs have way less ‘clock time,’” says Silvers. “They must make clear to their IT security teams that they fully expect them to address intrusions rapidly.” At the same time, the CISO should not be running down the hall to the CEO every time a cyber incident rears. “We advise setting up a cybersecurity ‘schema’—the rough criteria to determine when an attack is serious and may escalate,” says Silvers. Examples of serious attacks would include those involving large numbers of customer personal information or with the potential to cause significant operational effects on the business, a negative public relations impact or a dire impact on commercial partners. Max Solonski, CISO at finance software provider BlackLine, says growing concerns over cybersecurity are changing the reporting lines for many CISOs. “It had been very common in the past for CISOs to focus predominantly on maintaining technical information security controls and regulatory compliance,” he says. “While many CISOs still report into IT or legal for these purposes, information security has become such an essential business function that more organizations are now making their security officers also report to the CEO and the board, as I do here at BlackLine.” A UNITED FRONT
Cyber experts maintain that effective security demands a team-based approach. They advise establishing a cyber risk committee composed of cybersecurity staff members; the general counsel, chief risk officer and
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 W I L L I S T O W E R S WAT S O N
EMPLOYEE ENGAGEMENT AND ITS IMPACT ON CYBER RESILIENCY The word is out on cybersecurity threats—most executives are well aware of the need for corporate-wide cyber awareness and diligence. However, the majority of companies focus their employee cyber awareness efforts on training programs, such as phishing simulations. While these do serve a purpose, Willis Towers Watson research has shown that addressing the engagement issues that create cyber vulnerability can dramatically improve the effectiveness of cybersecurity education. We conducted multiple, in-depth studies of the workplace environments at companies that had experienced a data breach and discovered an interesting through line: When benchmarked against high-performing companies, companies experiencing cyber breaches lack certain critical aspects of employee experience and engagement. Specifically, employees from 33 breached companies gave their companies low scores in the following areas: • Purpose tied to customer centricity: responsiveness, anticipating needs, optimizing processes • Work marked by speed and flexibility in making decisions and managing teams • People practices that empower employees through voice, respect and support for teamwork • People practices that stress training and development, as well as aligning pay with performance
According to Willis Towers Watson, since more than half of cyber incidents are the results of negligent employee behavior, these results have significant implications. Even sophisticated security measures can be rendered irrelevant by a single employee with a low cyber IQ falling for a phishing scheme or exposing the company to ransomware. If that employee also perceives a disconnect between their values and the company culture or, worse yet, is apathetic about that culture, post–incident response efforts will also be at risk.
BREACH COMPANIES BELOW GLOBAL HIGH PERFORMANCE
Emphasizing the customer. An institutional lack of focus on service, customer experience and relationship management may lead employees to disregard policies regarding customer data protection and management.
Customer Focus Training & Development Empowerment Operating Efficiency -12
-10
-8
-6
-4
-2
In comparison with high-performance companies, opinions from employees in the data breach organizations are below the favorable scoring levels of employees in the high-performance group. SOURCE: Willis Towers Watson
0
ADDRESS RISK FACTORS The employee engagement risk factors companies need to address are numerous. For example, a lack of employee empowerment could prevent potential whistleblowers from reporting cybersecurity incidents. Such risks exist in corporate policies as well. Long decision-making processes around the implementation of solutions and tools can lead to a lack of efficiency and work tools. This, in turn, can lead to confusion about the correct processes for working with data, as well as older hardware or software, with poor cyber protections remaining in use. However, employers can address engagement issues by: Giving employees a voice. Employees who feel comfortable speaking out and who feel they are being heard are more likely to understand and embrace their organization’s cybersecurity policies and procedures.
confidence in the decision-making of leadership and belief in the future vision of the company. From there, companies can illustrate their commitment to employee growth and development by instigating training and talent management practices. This includes ongoing learning programs and talent retention programs, including rewards and competitive compensation. This focus will allow cybersecurity-specific education to be provided for employees in the name of career development, as well as corporate policy.
FOCUS ON EMPLOYEE BEHAVIOR AND ATTITUDES In a recent study by Willis Towers Watson and The Economist Intelligence Unit, only 15 percent of respondents from over 450 companies ranked their ability to develop a cyber-savvy workforce as “well above average.” However, on average, companies surveyed also plan to allocate approximately 50 percent of their cyber budgets to addressing the human element of cybersecurity. Since historically the bulk of budgets were devoted toward technology, this suggests companies are coming around to a more holistic cyber resiliency approach. It is important for senior leaders to remember that achieving cyber resiliency also requires greater attention to the employee behavior and attitudes that can thwart resiliency efforts. By focusing on changing behavior and attitudes— not simply compliance training—companies can mitigate the cultural and financial impact of a cyber incident.
Empowering employees. In a strong service culture, employees will hold themselves more accountable toward adhering to corporate policies. Communicative leadership. By bridging communication gaps and building engagement, companies can increase
ANTHONY DAGOSTINO Global Head of Cyber Risk Willis Towers Watson
WHEN ATTACKS SURFACE Wayne Johnson remembers the Monday morning in September 2015 when he received news that a hacker had infiltrated the network systems of Accuform. “It still freaks me out when I think about it,” says Johnson, CEO of the Brooksville, Florida-based global manufacturer of custom safety signs, labels, tags and related safety products. “It was the beginning of two of the worst weeks of my life.” The company’s IT director contacted Johnson early that morning to alert him to a data breach that had happened over the weekend. A Hong Kong–based hacker had gotten into Accuform’s systems by way of one of the company’s business customers. “They were screwing around on the customer’s site when they found a link to our site through the portal we provided customers and distributors to place their orders,” Johnson explains. More than 8,000 customer credit card numbers were stolen in the breach. “I realized we had to report the breach, notify the affected parties and get our attorneys involved—fast,” says Johnson, recounting the two terrible weeks that ensued. “It was an unbelievably protracted and expensive process,” the CEO recalls. “Our vice president of finance at the time had talked about the need for us to buy cyber risk insurance. I remember filling out the application, but he ultimately failed to submit it to the insurance company. We had no insurance to cover the attorney fees, breach notification costs and other expenses. I felt like I’d fallen down a flight of stairs.” The lawyers reaped a windfall. Since the credit cards belonged to businesses in the U.S., Canada and the UK, where data breach reporting regulations differ, the company had to retain law firms in each country. However, Johnson’s biggest concern was the impact on Accuform’s reputation. “It cost us some trust issues with a few customers, but we eventually weathered the storm,” he says. Indeed, there were a few silver linings, one of which was the cyber risk insurance that had been acquired by the company’s credit card processor, which absorbed some of the company’s expenses. Another was the fact that the vast majority of the credit card data stolen was pretty old. “Many were accounts long expired,” says Johnson, pointing out the upside of credit card fraud—it requires owners to get new credit card numbers. “The credit cards also were held by businesses, so we weren’t technically dealing with personal data, which would have been much worse,” he adds. Since the attack, Accuform has changed how orders from its customers and distributors are processed. The orders now pass directly to the company’s bank, bypassing its systems and eliminating the need for a portal to store credit card data. Accuform also employs several skilled programmers to monitor its network. “They’re constantly looking for suspicious activities and blocking those snooping around,” says Johnson. His experiential advice to fellow CFOs is this: “It’s not a question of if you’ll be hacked, it’s when.” Does the company now have cyber risk insurance? “Big time,” he says.
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CFO; line of business leaders; and third-party consulting experts. “You need a good team internally, but also some level of external validation to make sure there are no gaps in the cyber risk planning and execution,” Silvers says. Carlson also advocates the use of outside advisers. “The large and midsize financial firms I work with wholeheartedly embrace penetration testing—an authorized simulated attack on a computer system to evaluate its security,” he says. “Just like companies turn to an independent auditor to assess the financials, they should consider retaining a third-party security firm to evaluate cyber readiness.” He further recommends that boards create a cyber risk committee along the lines of the audit committee. Hogg agrees that a third-party cybersecurity firm can conduct diligent “red teaming,” attacking a company’s network and systems to unearth vulnerabilities. “When I was a division president at American Express, we brought in an outside team to pinpoint our network security weaknesses,” he says. “They provided an orthogonal view you won’t [see] internally, since they’ve performed these tests for other clients across diverse verticals.” Companies unable to afford the cost of external consultants might consider aligning with an insurer that provides cyber risk management services. Several large insurers partner with third-party IT security benchmarking firms like Cyence, BitSight and SecurityScorecard to evaluate the cybersecurity of their commercial business customers, which have a rating methodology similar to that employed by credit ratings agencies like Standard & Poor’s. “Since cyber insurers are on the hook financially for a portion of the costs attributed to an attack, it makes sense to heed the advice of cyber underwriters, whose job it is to identify and assess these risks,” Schindlinger says. Down the line, the regulatory pressures on all CEOs will intensify. Private company CEOs may not be on the hook to the SEC, but they are answerable to their customers, commercial partners and shareholders. Companies of all sizes must take this threat seriously. As Silvers says, “Hackers don’t discriminate.”
T H O U GHT LEA DERS HIP P R OV ID ED BY T HE C ENTE R FO R AU D I T Q UA L I TY
THE CYBERSECURITY DIALOGUE
KEY CONSIDERATIONS FOR DIRECTORS AND AUDITORS
A
crucial shift for companies in recent years has been the recognition that managing cyber risk is not just a challenge for the IT department. Stakeholders across the enterprise have a role to play: company management, external auditors, internal auditors, corporate directors and others. What’s more, each of these groups must also have a solid understanding of the others’ cybersecurity roles. Dialogue, therefore, is critical around cybersecurity, just as it is around any enterprise-wide issue. Here, we’ll examine one area of the cybersecurity dialogue: that between board members and external auditors. What are the topics and questions that board members and auditors should address?
How the Financial Statement Auditor Considers Cybersecurity Risk A good place for board members to begin in the cybersecurity dialogue is to make sure they have a strong understanding of the current roles and responsibilities of the financial statement auditor when it comes to cybersecurity. This conversation may include, if applicable, the audit of the effectiveness of a company’s internal
control over financial reporting (ICFR). Board members might ask the external auditor to shed light on the following questions: • How does the financial statement auditor’s approach include the consideration of cybersecurity risks when identifying and assessing risks of material misstatement for the financial statement and ICFR audits? • If, as part of understanding how the company uses information technology in the context of its financial statements and ICFR, the financial statement auditor identifies a cybersecurity risk, how does that risk get addressed in the audit process? • What impact does a cybersecurity breach have on the financial statement auditor’s assessment of ICFR?
The Responsibilities of the Financial Statement Auditor Related to Cybersecurity Disclosures The Securities and Exchange Commission is focused on ensuring the adequacy of public company disclosures of cybersecurity risks and how those risks are managed. Investors have also asked company boards to strive for transparency in reporting efforts to prevent and mitigate cyber threats. Questions that board members might consider regarding the auditor’s responsibilities related to cybersecurity disclosures include: • What does the financial statement auditor consider related to cybersecurity disclosures included in the Form 10-K or other documents that include the audited financial statements? • How do those considerations differ when cybersecurity-related information is included in another company document (e.g., a press release)?
Cindy Fornelli
Executive Director Center for Audit Quality
• If the company had a material contingent liability for an actual cyber incident, what is the financial statement auditor’s responsibility with respect
to the company’s assessment of any related financial statement disclosures?
How CPA Firms Can Assist Boards in Cyber Risk Oversight The American Institute of CPAs (AICPA) has developed a voluntary framework, known as SOC for Cybersecurity, that enables CPAs to examine and report on management-prepared cybersecurity information, thereby boosting stakeholder confidence. Questions that board members can ask CPA firms about this framework might include the following: • How can the AICPA framework be used as a self-assessment tool to help management or the auditor (via a readiness engagement) identify opportunities for improvement in the company’s cybersecurity risk management program? • How is the AICPA’s cybersecurity risk reporting framework used by auditors as part of an attestation service to evaluate management’s description of its cybersecurity risk management program and to determine whether controls within the program were effective to achieve the company’s cybersecurity objectives? • What other types of engagements are available to help board members with cybersecurity risk oversight? The questions above are not a rote checklist but starting points for what should be a robust and ongoing conversation about cybersecurity. For more ideas on enriching this dialogue, see the Center for Audit Quality’s publication, Cybersecurity Risk Management Oversight: A Tool for Board Members. A former deputy director of investment management at the SEC, Cindy Fornelli has served as the executive director of the Center for Audit Quality since its establishment in 2007.
CY B ER RI SK FORUM TAKE AWAY
WHERE YOU’RE WEAK Vendors and employees top your list of cyber vulnerabilities. Here’s what to do about it.
IRONICALLY, MOST COMPANIES LOOK to address the vulnerabilities of their technology by investing in more technology to stave off infiltrators. Yet, breaches often occur by way of employees or external suppliers who open the very doors you’ve invested heavily in sealing shut. Just ask Target, Equifax or Macy’s. The good news? Cybersecurity experts at our Cyber Risk Forum suggested ways to guard against inadequately protected suppliers and employee cyber negligence. SECURE YOUR BUSINESS PARTNERS
As many CEOs find out the hard way, a company is only as secure as the weakest link in its supply chain. That’s why it’s critical that companies vet their vendors’ security to protect their business and customers, said Stephen Boyer, co-founder and CTO of BitSight Technologies. Often, the first step is triaging vendors by degree of risk. “Companies must make sure they have insight into the risk posture of all vendors they do business with, but prioritize incident response and follow-up with those that are most critical,” said Boyer. “This ensures resources are allocated most efficiently to reduce risk.” While companies often rely on questionnaires and surveys to assess vendor risk, those methods tend to be costly and time consuming. Automated and scalable assessments conducted on a continual basis are a more effective approach, said Boyer. “Organizations need to be able to monitor new security issues and gaps present with third parties in order to react more quickly and reduce the risk of breach, compromise or disruption,” he noted. “Security ratings can help IT professionals gain a real-time understanding of the risks they are being exposed to. Being able to look at these ratings on a daily basis can help with monitoring and protecting the data living outside of a company’s own network the same way [it] monitors and protects internal data.”
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CREATE A CYBER-SAVVY CULTURE
Despite the fact that employees account for 58 percent of cyber breaches, few companies devote significant cybersecurity resources to education and training, said Anthony Dagostino, global head of cyber risk at Willis Towers Watson. Awareness of the issue is growing, and companies are moving from less effective methods, such as click-through quizzes, to hacking simulations. Still, there’s room for improvement. “Phishing attack simulations will get you from a 40 percent to 9 percent click rate, which is great, but you’ll still have one out of every 10 employees potentially opening that [door],” said Dagostino. But new, even more effective approaches are emerging—many of them more cost effective than technological fixes. “This doesn’t have to involve cutting-edge AI,” said Dagostino, who suggested CEOs start by breaking down silos. “It can be as simple as having your CISO sync with your chief human resources officer to define cybersecurity goals employees will be measured against, just as you do with metrics like sales goals or customer service goals.” Some companies find microlearning—replacing the standard 30 minutes of annual cybersecurity training with cybersecurity tips disseminated daily or weekly—can have a higher impact. At a broad organizational level, strong employee engagement may prove a company’s ultimate secret weapon against cyber infiltrators. Willis Towers Watson analyzed the results of employee engagement surveys at companies that experienced a serious cyber incident and discovered a significant correlation, reported Dagostino. “At the end of the day, when employees don’t feel overworked and stressed, when they feel they have a voice in their organization—their companies are less likely to have some kind of incident,” he said. “We are realizing that certain areas of engagement correlate to less probability of having a material cyber breach.”
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2 0 1 8 C EO OF THE YE AR
CELEBRATING LOCKHEED MARTIN’S
MARILLYN HEWSON
MORE THAN 200 BUSINESS LEADERS gathered at the iconic United Nations Delegates Dining Room in July to honor Lockheed Martin CEO Marillyn Hewson, who was selected as an exemplary leader by a jury of her peers. As Stan Bergman, CEO of Henry Schein and the 2017 CEO of the Year, put it in introducing his successor, “Marillyn never loses sight of Lockheed Martin’s goal to offer technologies and integrated solutions that help strengthen the national security, which, in turn, help strengthen economic security and the ability of nations to progress together.” In accepting the award, Hewson recognized Lockheed’s more than 100,000 employees in over 400 global facilities around the globe. “What they achieve on land, at sea, in the air, in space and in the cyber realm is absolutely extraordinary,” she said. “They work to ensure that our company and our country define the cutting edge of technological leadership and national security, and I am deeply thankful for all they do and what it means for the world.” Event photos by Ben Hider
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Marillyn Hewson and Henry Schein’s Stan Bergman, outgoing CEO of the Year
Hewson with her husband, James, and sons Will (left) and David (right)
EY’s Mark Weinberger and Johnson & Johnson’s Alex Gorsky with Hewson
From left: University of Alabama’s Culverhouse College of Business’s Kate Cleveland, Courtney Page Miller and Hill Rowan; Wells Fargo’s Phil Smith; Hewson, University of Alabama’s Kay Palan; Vulcan Value Partners’s Kelly Fitzpatrick and C.T. Fitzpatrick; Will Hewson
Hewson and AlixPartners’s Simon Freakley
Chief Executive Group’s Wayne Cooper, Bergman, Hewson and CEG’s Marshall Cooper
Lockheed’s Joe Ralston and Patricia Lewis
First Aviation Services’s Aaron Hollander with CohnReznick’s Chuck Ludmer
CNBC’s Morgan Brennan; Chief Executive’s Dan Bigman; Conduent’s Christine Landry; Project Lead the Way’s Vince Bertram
Lockheed Martin’s Jon Rambeau and Rod McLean with Hewson
Siemens’s Dave Green; MSC Industrial Supply’s Rustom Jilla; Siemens’s Raj Batra; AlixPartners’s Ted Bililies
Tata Consultancy’s Dave Jordan, NASDAQ’s Brandis DeSimone, Mike Fitzgerald and J.R. Mastroianni
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C EO ROUNDTAB LE
THE CEO’S ROLE IN SOCIETY Do leaders have an obligation to step up and speak out on social and political issues? A CEO roundtable conversation. BY JENNIFER PELLET TRADE POLICY, TAX REFORM, #MeToo,
those constituents are looking to the CEO.”
immigration, climate change—America’s sociopolitical landscape is strewn with deeply divisive issues. Today’s CEOs often find themselves compelled to tread this virtual minefield, drawn by the expectations of stakeholders, coupled with the undeniable fact that in the 24/7, eyes-everywhere world in which we all now live, it is simply no longer possible to escape the public eye.
Accelerating Expectations When debate swirls around controversial issues and policies likely to directly or indirectly impact companies and their constituents, as well as economic conditions broadly, eyes turn to the corner office. “In working with business leaders, it feels to me that the CEO’s role is being redefined and leadership is being redefined,” said Ted
“CEOs are in a much different role today than they were in the past 30 years, primarily because the world is far more interconnected,” Marillyn Hewson, CEO of Lockheed Martin, told business leaders gathered for a recent Chief Executive roundtable sponsored by AlixPartners. “The reality is they are running large institutions and partnering with governments on economic growth. They have responsibilities to their employees, customers, shareholders and communities—and all of
Bililies, managing director of AlixPartners, who cited BlackRock CEO Larry Fink’s now-famous letter to CEOs earlier this year as evidence of a shift in how society views business leaders. “Public expectations of your company have never been greater,” wrote Fink. “Society is demanding that companies both public and private serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
“It feels to me that the CEO’s role is being redefined and leadership is being redefined.” —Ted Bililies, AlixPartners
AlixPartners Ted Bililies, Lockheed Martin’s Marillyn Hewson
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That expectation is echoed by other stakeholders. In a recent poll conducted by the consumer marketing firm Edelman, 64 percent of 33,000 consumers surveyed said that they expect chief executives to proactively take steps on social issues, even before lawmakers do. It’s a role more and more CEOs seem to be accepting. “Everything you do is visible, but it should be, because you hold a position of trust,” said Gen. Herbert J. “Hawk” Carlisle, CEO of the National Defense Industrial Association. “Part of the requirement of a CEO is that you have to be inspirational, up front talking, doing the right thing and setting an example. As a leader, you are in the public eye—but you should be, because you were given that position of trust.” While leaders acknowledged the potential risk that voluntarily walking into a maelstrom of controversy can entail, several noted that failing to step up and speak out can be equally problematic. “Our employees have expectations about us taking stands on certain issues for their sake,” said Tim Reardon, president of Leidos’s defense and intelligence group. “I think that’s what has changed from the past.” Younger employees, who typically have a different perspective on privacy, are raising the ante for what companies and CEOs choose to make public. “They have a different mindset,” noted Anna Park, CEO of Great Minds in STEM. “They’re not necessarily looking at our lives for negative purposes. It’s just very natural for them to know everything about everyone they work with.” The How and Why Given the new reality—that flying under the radar is no longer a viable option—CEOs are realizing that it’s not a matter of whether to be engaged with the issues of the day, but how. Rather than take a public stance, many focus on adopting and instilling values within their organizations that resonate with stakeholders. “We’ve decided that modeling the right behaviors as a corporation is more important than being out in front, lecturing politi-
cians or society about what they should do,” said Tom Bell, CEO of Rolls-Royce North America. “So we more frequently use these issues to look at our own policies and procedures and ask, ‘Are they a match fit for the 21st century, 2018 and beyond?’ That’s a big decision that I think every company and every CEO can make.” Several CEO reported focusing on tackling societal issues where there was broad
consensus, such as the need to improve the nation’s educational system and to support inclusiveness. “The biggest thing we’ve seen happen is CEOs align their corporate responsibility [initiatives] with diversity and inclusion with their recruiting efforts at universities,” said Park. Such corporate outreach efforts can be a positive influence on multiple fronts—helping support underfunded local K12 school systems while engaging employees, strengthening community relations and building a future talent pool for the company. Others opt to tackle thornier issues, such as trade policy—if only internally. “We choose to keep a low profile on it, but to educate our employees on the facts of global trade and hope that through that, our message gets out in a subtle fashion,” said Bell. “We in America spend a lot of time talking about nationalism here, but nationalism is sweeping the globe. For those of us who do business globally, no matter where our home markets or export markets
Brookdale Senior Living’s Cindy Baier, National Defense Industrial Association’s Gen. Hawk Carlisle
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are, advocating for a global free trade regime is always advantageous.” Some leaders, however, feel compelled to go further. “We fundamentally believe in the core values we have and in being passionate and enthusiastic about speaking about those values, but every now and then things are happening externally that really cause us to ask, ‘Are we actually doing enough?’” said Jim Breslawski, CEO of Henry Schein Global Dental, who suggested companies that falter at being proactive could suffer far- and long-reaching consequences. “If you lose the trust [of your team members], it’s really, really difficult to get it back.”
Confident and experienced leaders are generally comfortable with setting core values for an organization, communicating them clearly and holding people responsible for upholding those values. Taking them further, however, is a whole different ballgame, noted Bililies. “That is the true north, the question many CEOs face and that I hear in my conversations with business leaders. It’s about how far should we go? We don’t want to lecture society, but at the same time we’re being asked to have an expanded role.” Several CEOs felt the answer was a matter of choosing the right battles. “Be authentic,” advised Jay Sidhu, CEO of Customers Bank. “It’s better to deal with issues that are somewhat relevant for you and stay out of those that you would just be talking about for the heck of publicity. Talking about something that has a direct relationship with what you do has more meaning; people will believe you.” Ethan Allen CEO Farooq Kathwari found that to be the case when he, with some trepidation, accepted the role of co-chair of the Muslim-Jewish Advisory Counsel at a tumultuous time for relations between those two communities. “I was concerned, but the reaction has been positive—every time I’ve been involved in social issues,” he said. “I find that when people understand what you’re doing and why you’re doing it, there is a positive reaction internally and externally.” Lockheed Martin’s Hewson agreed, adding that greater transparency around corporate values and the rationale behind business perspectives on issues and policies could ultimately help stem the erosion of public trust that has been plaguing business. “In today’s environment, because we see so much divisiveness and so much challenging happening on social media, I think it’s very important for CEOs to demonstrate civility—that we are, frankly, good members of society,” said Hewson. “We’re running companies, we’re hiring people, we are spending money on technology and on partnering with governments on economic growth. If people just look at us as a machine that just wants to make money, they don’t see that public and private companies serve an important role in helping people better their lives and do it in a way that is civil and kind and caring about employees and customers.”
“I think it’s very important to demonstrate civility— that we are, frankly, good members of society.” —Lockheed Martin’s Marillyn Hewson
Walk the Talk Failure to live up to values you, as CEO, have carefully and regularly communicated both within and without the company is the easiest way to lose that trust. “Where it really matters is how you live your culture,” said Cindy Baier, CEO of Brookdale Senior Living. “If you allow someone who doesn’t live up to your culture but is making his or her financial targets to stay, you don’t have a culture. I would say that the first time you compromise on that, you’ve lost.”
Roundtable Participants Top row, from left: Alan McLenaghan, CEO, SaintGobain SAGE Electrochromics Claude LeBlanc, President and CEO, Ambac Financial Group Kevin Lauri, Principal, Jackson Lewis Farooq Kathwari, Chairman, President and CEO, Ethan Allen Interiors General Herbert J. “Hawk” Carlisle, CEO, National Defense Industrial Association Andrew Sculley, President and CEO, eMagin Timothy Reardon, President, Defense and Intelligence Group, Leidos
Jay Sidhu, Chairman and CEO, Customers Bank Tom Bell, President and CEO, RollsRoyce North America
Bottom row, from left: Lucinda “Cindy” Baier, President and CEO, Brookdale Senior Living Christine Landry, Group CEO, Conduent Marillyn Hewson, Chairman and CEO, Lockheed Martin Ted Bililies, Managing Director, AlixPartners Anna Park, CEO, Great Minds in STEM James Breslawski, CEO, Henry Schein Global Dental Group
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C EO RO U NDTAB LE
EMERGING TECHNOLOGIES AND THEIR IMPLICATIONS CEOs share insights on coping with the risks and opportunities of digital transformation. BY C.J. PRINCE LAST YEAR, RETAIL GIANT TARGET agreed to pay $18.5 million to settle claims by 47 states related to a massive data breach in late 2013. The payout was just a small percentage of the total $200 million the company spent on the fiasco, in which hackers stole data from up to 40 million credit and debit cards of shoppers during the 2013 holiday season. Like most retailers, Target believed its data security was airtight. But hackers came in through a back door—network credentials stolen from Target’s HVAC subcontractor, Fazio Mechanical Services. It’s just one of the myriad ways that technology, while helping companies serve customers better, faster and cheaper, is also complicating the lives of CEOs, agreed attendees gathered for a roundtable sponsored by insurance firm Zurich North America. “When we look at the interconnectedness of risk and we see businesses looking at new supply chain and new manufacturing processes, these are creating great opportunities to improve the business model and the customer experience, but they are also creating risks to the business that could be profound,” said Randall Clouser, head of marketing, distribution and regional management for Zurich. The unprecedented risks and opportunities posed by technologies such as artificial intelligence, data analytics and the Internet of Things were among the topics discussed at the roundtable. While the degree to which attendees had explored new technologies varied widely, all agreed that survival depended on the ability to adapt to change quickly. “The model of those companies that are just stable, traditional, and ‘this year is going to look a lot like next year’— that model may not exist anymore,” said Walter Siegel, SVP and general counsel at
Henry Schein. “So we are very sensitive to the point that we can’t sit still.” To underscore that point, Clouser cited an alarming statistic: since 2000, 41 percent of the S&P 500’s consumer-facing companies no longer exist “because of their inability to adapt to emerging technologies, disruptions and the changing needs of consumers.” However, those that are able to anticipate disruption can not only survive but thrive in the age of digitalization. Back in 2004, for example, commercial printing company R.R. Donnelley & Sons “saw the freight train coming at us,” recalled Tom Quinlan, who was then CEO of the company and now leads its spinoff, LSC Communications. The move from print to digital, which translated to fewer magazines, fewer catalogs and more electronic content distribution, could have had a disastrous effect on the company’s core business. But rather than wait for the tsunami, Quinlan and his team began shifting focus toward digital communications solutions. “We wanted to make sure we remained a leader from a logistics standpoint,” he said. Similarly, accounting firm CohnReznick has been working to prepare for the radical changes blockchain technology will soon bring to the industry, particularly its auditing practice. “In volume, half of our business is in the audit business,” said Chuck Ludmer, principal. “When blockchain hits and A.I. is being utilized, and our approach to audit gets reduced by 20 percent, 35 percent, that’s a lot of business from a strategy
Since 2000, 41 percent of the S&P 500’s consumerfacing companies no longer exist “because of their inability to adapt to emerging technologies, disruptions and the changing needs of consumers.” —Randall Clouser, Zurich
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CohnReznick’s Chuck Ludmer, National 4-H Council’s Jennifer Sirangelo, Henry Schein’s Chris Pendergast
Embracing digital transformation revitalized a floundering Henry Schein, CTO Chris Pendergast told CEOs.
standpoint that we as an organization will need to be able to replace.” With that view of the near future in mind, CohnReznick is undergoing a dramatic preparation for that disruption. But the biggest challenge has not been the technology, Ludmer noted. “It’s how do you manage through the fear of what that is going to look like five years from now? That has probably been the toughest strategic hurdle we’ve had to get over—getting everyone on board as we’re approaching the transformation of our business.” In an effort to get Gen Xers and baby boomers as comfortable with the change as millennials, CohnReznick implemented a reverse mentoring program and spent “thousands of hours dealing with people and getting them prepared,” Ludmer said. The firm also created an innovation lab, a high-tech room with one fully digitized wall, which all employees are strongly encouraged to utilize. “We tried to make that a cultural change within our organization so that everyone from young to old now had an obligation to be innovative and to think about being innovative.” The culture challenge is huge for legacy companies, where, historically, IT and manufacturing silos rarely spoke to one another. “Today, that cultural silo mentality, although it’s getting a bit more permeable, is still pretty tough,” said Raj Batra, president of Siemens’s Digital Factory. “But it fundamentally has to change to really capitalize on what digitalization brings.” Siemens is helping corporate clients get past some of the cultural hurdles and trying to get them to see change as positive rather
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than threatening. “People come to us and say, ‘We have an aging workforce. These million people are eligible for retirement in the next decade,’ like it’s a bad thing,” says Batra. “It is a bad thing only as long as you’re harboring tribal knowledge, you need eBay to buy parts and you’re keeping [legacy] machines and operations running. But it’s not a bad thing when you’re bringing digital natives into the workforce. They are tech savvy, adept and can get things done very quickly.” A Spectrum of Progress Although conventional wisdom assumes a deep-pocket advantage, Batra says progress comes in all sizes. “I’ve seen small and midsize enterprises that are so progressive in their thinking, and I see big companies that still use DOS and floppy drives. Everyone starts the journey from a different place.” The legal services industry, for one, is notoriously more laggard than leader when it comes to technology. “Whatever the new thing is that everyone is using now, we’ll get five years later,” said Lori Bauer, office managing principal at Jackson Lewis. But the firm has begun wading in the pool, using artificial intelligence to enable lawyers to research relevant cases much more quickly from the database. They are now venturing further with a client-facing product called Work Through IT, which will allow busy clients, who don’t want to pay for every question they have, to find answers themselves more quickly via A.I. At Rolls-Royce North America, the military and civil engine manufacturer (not to be confused with the luxury car brand), CEO Marion Blakey has made it a strategic priority for employees to learn how to use digital tools to enhance their jobs, according to executive vice president Jarrett Jones. “Digital for us means that we can compute 10 to 100 times faster analyses for health of engines,” he said, noting that the technology has reduced the design cycle from 24 months to around three months. The company is using Big Data and, to some extent, artificial intelligence to help move processes faster. “I look at it as more of an enabler, but it is a huge game changer if you’re not
already doing it,” said Jones. Rolls-Royce is also working on its first electric personal aircraft. “That’s the future. That’s the disruptor,” he said. “Distributed power and the personalization of aircrafts— that’s what’s going to disrupt our industry.” For some legacy companies—even those hailing from IT—the move to digital happens in stages. Vivek Gupta, an IT executive for more than 30 years, who took over as CEO of IT staffing company Mastech Digital in 2016, has been methodically shifting the company’s focus from IT staffing to digital transformation services. Having just acquired a data and analytics company, Mastech Digital aims to help corporate clients take unstructured data and turn it into meaningful insights about their businesses. JCPenney, for example, is building its “data lake,” a storage repository that holds a vast amount of raw data in its native format, including sales data for particular product sizes, quantities, etc., and social media data regarding customer feedback on products. “So now, how can I bring those two pieces of information together and do some analytics on it, figure out the seasonality of it? And how can I be better prepared next year for spring or for that particular thing, whether it’s a lawnmower or a blue floral dress?” said Gupta. The whiplash-inducing pace of change means companies must constantly stay on top of change because what was once disruptive quickly becomes the norm. MSC Industrial Supply was a disruptor in the ’90s, getting fulfillment centers built across the country and cutting product delivery times. “We were ahead of the curve,” said CFO Rustom Jilla. “But that was 20 years ago. The curve has moved.” For the past three years, MSC has been working on predictive analytics data mining, focusing on profitability by product and by customer, so that it can share that valuable data, along with its metalworking expertise, with customers as needed. “We really want to embed ourselves with our customers,” said Jilla. The key to successfully navigating the new environment, attendees agreed, is to learn how to balance risk and entrepreneurship because, while the risks of
breaches and other kinds of cyberattacks or intellectual property theft are real, too much focus on them can undercut innovation. “It may be a little different in manufacturing, but I know, in many service organizations, it can really stifle the way people want to grow,” said Ludmer. “If we are too risk averse, then we don’t grow. And if you stay the same, you lose.” Being an early adopter can have the added benefit of helping to attract the best and brightest at a time when talent is scarce. Chris Pendergast, who took over as chief technology officer at Henry Schein in April, said it was the company’s embrace of digital transformation in the areas of medical and dental supplies that intrigued him when he was evaluating job opportunities. “Instead of sitting on the sidelines and watching to see what happens next, they dove right in,” said Pendergast, citing, in particular, the company’s work in digital dentistry and the move from traditional mold-taking to oral scanning and then integrating data capture with their customers’ software. The biggest risk of all, CEOs agreed, is to do nothing. “We cannot be complacent,” said Zurich’s Clouser. “We have to lean in and understand our customers’ business at a more strategic level, understand their priorities, their risks and make sure that we’re continuing to evolve to create value.”
Roundtable Participants Top row, from left:
Bottom row, from left:
Thomas J. Quinlan III, President and CEO, LSC Communications
Vivek Gupta, CEO, Mastech Digital
Chuck Ludmer, Principal and Chief Practice Development Officer, CohnReznick J.P. Donlon, Editor Emeritus, Chief Executive Group Raj Batra, President of Digital Factory, Siemens Rustom Jilla, CFO, MSC Industrial Supply
Jennifer Sirangelo, President and CEO, National 4-H Council Lori Bauer, Office Managing Principal, Jackson Lewis Randall Clouser, Head of Marketing, Distribution and Regional Management, Zurich North America Walter Siegel, SVP and General Counsel, Henry Schein Chris Pendergast, CTO, Henry Schein
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EC O N O M I C D E VE LOPME NT
REGIONAL REPORT
THE SOUTHEAST
Diverse sectors are driving economic growth in the nation’s southern states. BY CRAIG GUILLOT THE SOUTHEAST CONTINUES TO SEE expansion across a wide range of industries. Alabama’s auto manufacturing sector is beginning to rival some of the biggest players in the nation. In Louisiana, global chemical companies are investing hundreds of millions to capitalize on low natural gas prices and logistical assets. Florida continues to add residents as a low-tax haven for wealthy entrepreneurs from the Northeast. And in Tennessee, one of the country’s most ambitious educational initiatives is propelling its workforce to new levels. 2 FLORIDA
#Ranking in the 2017 Chief Executive Best & Worst States for Business (ChiefExecutive. net/2017-Best-Worst-States)
A TAX CODE ADVANTAGE Recent changes in the federal tax code are making Florida even more attractive to entrepreneurs and businesses, says Peter Antonacci, CEO of Enterprise Florida. The Tax Cuts and Jobs Act, which went into effect January 1, capped the amount of local income taxes taxpayers can deduct from their federal income taxes at $5,000 for in-
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dividuals and $10,000 for married couples. The inability to deduct high property taxes in the Northeast may accelerate the influx of wealthy people from states like New York, Connecticut and New Hampshire. “There was already a wave of wealthy people moving from north to south,” Antonacci says. “They’ll be buying businesses, creating economic activity. They’re generally members of the entrepreneurial and knowledge economy. It will create economic activity that we have not yet been able to foresee.” Florida is already home to some of the nation’s lowest tax rates and fastest-growing metro areas. The Orlando-Kissimmee-Sanford and Cape Coral–Fort Meyers metro areas ranked in the top 10 on the Forbes list of America’s Fastest-Growing Cities 2018. Economists at the 2018 Economic Outlook Summit in Tallahassee in January said the state is on track to surpass a $1 trillion economy this year, enough to rank it 16th in the world if it were a country. The aerospace industry also continues
SOUTH CAROLINA Record cargo volumes suggest a trade boom for the Port of Charleston. to thrive, with recent expansions by Boeing, Emery Air and Lockheed Martin. In May, jet engine manufacturer Pratt & Whitney announced a $100 million expansion and 215 more engineering jobs at its Palm Beach County location. VT Mobile is also growing its aviation maintenance, repair and overhaul operations at the Pensacola airport. “Aviation has really locked onto Florida. They’re not only coming here but expanding at a big clip,” Antonacci says. 3* SOUTH CAROLINA MOMENTUM IN MANUFACTURING Manufacturing remains a primary driver in South Carolina’s economy, and new investments abound. Medical device manufacturer Becton, Dickinson and Co. announced an additional $150 million investment in its Sumter facility in June. Aluminum manufacturer JW Aluminum also announced a $255 million expansion of its operations in Berkeley County. And Volvo is investing an additional $520 million and adding 1,900 jobs to expand its operations in Berkeley County. Manufacturing growth has also been boosting the state’s exports. In 2017, the state exported more than $32 billion worth of goods, representing its eighth consecutive year of record exports. The Port of Charleston is experiencing record cargo volumes and will have invested more than $2 billion on infrastructure upgrades by 2021. “One time a leader in the export of rice, indigo and cotton, we now export a more diverse group of products, including complex items, such as cars, planes and major household appliances,” says Secretary of Commerce Bobby Hitt. The new Center for Advanced Manufacturing at Clemson University brings together university manufacturing initiatives that focus on advanced robotics, composites, product life cycle and workforce development, making them available to the state’s manufacturing community. The university already has
existing partnerships with employers such as Boeing, BMW, GE, Siemens and Michelin. 3* NORTH CAROLINA GETTING BACK TO BUSINESS Leaders in North Carolina say they’re moving forward, not only with their economy but with state laws. The controversial “bathroom bill” (House Bill 2) put the state in an unwelcome national spotlight in 2016 and 2017 when proponents said it was discriminatory against LGBT people. It spurred several boycotts. PayPal canceled plans for a facility, and Credit Suisse delayed the addition of 1,200 jobs at its technology hub there until HB2 was partially replaced. In March 2017, a few months after taking office, Gov. Roy Cooper repealed the bill. While the compromise still restricted anti-discrimination ordinances in cities, economic development professionals say it was a big step in the right direction. “Based on goodwill from both sides of the aisle, the legislation was repealed, and we actively worked to put us back in business…,” says Secretary of Commerce Anthony Copeland. “It’s bringing stability back to the process and predictability—bringing our brand back.” Gov. Cooper gave Copeland latitude to use incentives and resources to guide large manufacturing projects into rural areas. Triangle Tyre is investing $600 million in a facility in Edgecombe County, the company’s first investment outside of China. Austrian company Egger Wood Products is also preparing to start construction on its $700 million North American headquarters and manufacturing facility near Linwood. The project will create nearly 800 jobs over the next 15 years. “We’re trying to work with companies to spread out our economic growth….We’re trying to distribute some of that growth and restore it back to where there is an industrial infrastructure outside of urban areas,” Copeland says.
NORTH CAROLINA Political controversy put a temporary damper on some expansion plans, but businesses are ramping back up as the controversy fades.
6 TENNESSEE DEVELOPMENT THROUGH EDUCATION Education remains a primary economic
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GEORGIA A hub of the nation’s Internet infrastructure, Atlanta is also home to a large and growing fintech sector.
driver in the Volunteer State. In 2014, Gov. Bill Haslam signed into law the Drive to 55 initiative to offer tuition-free community or technical college to high school grads. In February 2018, Tennessee Reconnect extended the program to adults of any age who do not already hold an associate’s or bachelor’s degree. “We’re really upping our game from an education perspective….It’s really about supplying a talented and qualified workforce in a very competitive environment,” says Bobby Rolfe, commissioner for the Tennessee Department of Economic and Community Development. These initiatives are crucial as Tennessee is in an “arms race” with neighboring states in competing for new projects, Rolfe says. So far, it’s paying off. Tyson Foods announced a $320 million capital investment and 1,600 new jobs in Humboldt in March 2018. And money management firm AllianceBernstein is moving its headquarters from Manhattan to Nashville with 1,000 new jobs. The automotive industry is also expanding, and Japanese global automotive supplier DENSO recently announced a $1 billion expansion at its Maryville operations. The challenge is keeping pace with the growth. “What we’re dealing with now is the low unemployment rate. It’s a challenge most healthy states are dealing with,” Rolfe says. 7 GEORGIA FINTECH AND CYBERSECURITY Georgia’s fintech sector grew at a rate of more than 250 percent in 2017 and shows no signs of slowing down. A strong talent pool and tech infrastructure is driving the expansion, says Tom Croteau, the Georgia Department of Economic Development’s deputy commissioner of global commerce. Much of the nation’s Internet infrastructure, includ-
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ing Internet2, National LamdaRail and many international and North American Internet providers, possess core connection points in Atlanta. Atlanta Tech Village has now grown to be one of the largest tech hubs in the country, and Georgia State University recently opened a fintech lab. “It’s access to top talent that helps bolster and support the growth of the fintech industry,” Croteau says. “Through education and innovation happening at institutes across the state, Georgia provides companies with the best and brightest.” Georgia is also becoming a hotspot for cybersecurity. According to theGDEcD, there are now more than 115 IT security firms in the state, generating more than $4.7 billion in annual revenues. In July, the Hull McKnight Georgia Cyber Center for Innovation and Training will open in Augusta to promote cybersecurity innovation. In addition, Georgia remains a magnet for Fortune 500 and global companies. In the first half of 2018, the state saw investments by Facebook, Instacart, Pandora, InComm, Gulfstream, Hanwha Q CELLS Korea and OFS Fitel. 15 VIRGINIA EYEING RURAL DEVELOPMENT Rural areas of Virginia have struggled to attain economic prosperity. Despite growth in places like Arlington, Virginia Beach and Richmond, rural communities continue to lag due to declines in the coal, tobacco and textile industries. A renewed focus on bringing more development to rural areas aims to change that, says Stephen Moret, CEO of the Virginia Economic Development Partnership. Last year, at the SWVA Economic Forum at UVa-Wise, Moret noted that rural Virginia now competes with states like Georgia and South Carolina, both of which have been far more aggressive. Moret laid out a plan that called for a new workforce development program, expansion of computer science in higher education and new tax incentives for capital-intensive manufacturing programs. He also recommended a job creation payroll credit and new initiatives to brand rural Virginia as a place for manufacturing, lower-cost software development data centers
and business process outsourcing. Despite its rural challenges, Virginia’s urban economy continues to thrive. Cybersecurity remains one of the fastest-growing industries, Moret says. The state offers grants to higher education institutions to attract eminent researchers and new programs. The recently announced Commonwealth Cyber Initiative led by Virginia Tech seeks to build an ecosystem of research, education and expertise in the state. 17 ALABAMA BUILDING ON THE WORKFORCE Alabama’s auto industry is experiencing a record year of growth, with more than $3.3 billion in investments and the addition of 5,400 jobs in the past 16 months. In March 2017, Honda announced an $85 million expansion at its plant in Lincoln. Toyota is also undergoing a $106 million upgrade and expansion at its engine plant in Huntsville. Mercedes-Benz announced a $1 billion investment in a plant in Tuscaloosa County to produce electric cars, and in January 2018, Mazda and Toyota formed a partnership to construct a $1.6 billion facility in Huntsville. While the Cotton State already has one of the country’s top skilled workforces, it will need to produce more talent to sustain the growth. The state announced the Success Plus workforce development initiative in May 2018. It focuses on promoting post– high school certifications, defined pathways from education to training and jobs and an assessment of continuous improvement. “It is establishing some pretty aggressive goals and some bold initiatives, some of which are already underway. We ultimately want to add a half-million skilled employees to the workforce by 2025,” says Greg Canfield, secretary of commerce. Other sectors are prospering in addition to automotive. In mid-June, Facebook announced a $750 million data center in Huntsville, which is set to open in 2020. 25 KENTUCKY BOOSTING THE BUSINESS CLIMATE Kentucky drastically improved its business climate by cutting red tape and passing right-to-work legislation and tax reforms. It’s building corporate confidence in the
infrastructure, workforce and the direction of its leaders, says Terry Gill, secretary of the Kentucky cabinet for economic development. “We’re seeing the fruits of those efforts in the amount and quality of new corporate interest, requests for information, site visits and commitments for investment and job creation,” says Gill. Earlier this year, Kentucky was one of the first states approved for the federal Opportunity Zones program, an initiative to spur investment in distressed communities by offering preferential tax treatment for new investments. There have been a number of multi-million investments in the past year in metals and advanced materials manufacturing. Century Aluminum is investing $116 million at an aluminum smelting operation in Hawesville. EnerBlu is opening a $412 million headquarters and R&D location in Lexington, and Novelis is constructing a $305 million plant and creating 125 advanced manufacturing jobs in southwest Kentucky. “We’re seeing it particularly in the automotive and aerospace industries, both of which need stronger and lighter materials,” Gill says.
ALABAMA Honda is doubling down on production in Alabama, where it recently announced an $85 million expansion in Huntsville.
33 LOUISIANA ADVANCING IN MANUFACTURING Chemical manufacturers flock to Louisiana to capitalize on low raw material costs, natural gas prices and access to the Gulf of Mexico. According to the Louisiana Chemical Association, the industry now supports two of every seven jobs in the state and
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LOUISIANA Tech companies are discovering a skilled talent pool in the Big Easy.
accounts for nearly $80 billion in sales. Global chemical manufacturers and petroleum companies plan hundreds of billions in investments in Lake Charles and along the Mississippi River between Baton Rouge and New Orleans. In April, Formosa announced a 2,400-acre, $9.4 billion chemical manufacturing complex on the Mississippi River in St. James parish to produce ethylene, propylene and other polymers. “It’s a strong international investment portfolio and a tremendous domestic portfolio of expansion that’s ongoing right now,” says Don Pierson, secretary of Louisiana Economic Development. Tech is also expanding in the Bayou State. In New Orleans, Accruent announced a 350-job tech center in June, and DXC Technology plans to create 2,000 jobs over the next five years. In May, CGI announced a significant expansion of its IT Center of Excellence in Lafayette, with 400 new jobs and a payroll that will near $500 million over the next decade. Dave Henderson, president of CGI’s U.S. commercial and state government operations, credited a “skilled and highly motivated workforce” that consistently exceeds expectations. 36 MISSISSIPPI ALL ABOUT PEOPLE While the Magnolia State offers logistical advantages and strong incentives, its primary asset is its people, says Glenn McCullough Jr., executive director of the Mississippi Development Authority. “We win with a dedicated and skilled workforce, and it makes us a place where companies can achieve their goals,” he says. Manufacturing continues to be a growing bright spot in the state. According
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to the Mississippi Institutions of Higher Learning’s University Research Center, the Mississippi Manufacturing Employment Intensity Index recently saw one of the largest gains in more than a quarter century. Toyota is investing an additional $170 million and adding 400 jobs at its Blue Springs plant to produce the next-generation Corolla. Raytheon announced in May an expansion of its manufacturing center in Forest to test and build the next generation SPY-6, Air and Missile Defense Radar program. And Singapore-based Milwaukee Tool announced in December 2017 a $33 million expansion at its three Mississippi locations. “We’re seeing tremendous expansion and new investment from [manufacturers] in Mississippi. We win because companies win here. We play as one team,” McCullough says. 37 WEST VIRGINIA STRIVING FOR RECOVERY West Virginia is still recovering from losing half of its coal production and more than 26,000 jobs between 2012 and 2016. While the economy ticked slightly upward in 2017, there’s a strong need for diversification and new opportunities, says John Deskins, director of the bureau of business and economic research at West Virginia University. “The recovery is underway, but the state still has many challenges in front of it as it continues to grow,” he says. West Virginia Forward, a new collaborative partnership between government, academia and private enterprise, plans to drive economic change through strategic investments, education and human capital. The strategy is to maintain existing industries with growth potential while finding new sectors and long-term growth opportunities. Struggling with an opioid addiction epidemic, the state has the highest drug overdose rates in the nation, according to the CDC. The issue is impacting employers’ ability to recruit and retain workers and likely contributing to the state having the lowest labor participation rate in the country. “One of the biggest challenges we face is human capital issues,” Deskins says. “Poor health outcomes and the terrible drug abuse epidemic are playing a role.”
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A CEO’S GUIDE TO BOARD AND STRATEGY MEETING BEST PRACTICES.
Above: The Cypress Executive Lounge at ARIA Las Vegas was designed for board and high-level strategy meetings.
where members of management and the board can do a deep-dive into critical issues like digital transformation, cybersecurity practices and mitigating risk. Choosing a venue, setting the agenda and steering the meeting all factor into success when planning and conducting these increasingly intense gatherings.
Sensitive Meetings, Sensitive Settings Mission-critical meetings require venues that can offer security at a time when privacy is hard to come by. “For board meetings and other high-level corporate gatherings, the venue must offer an absolute comfort level for discussing confidential and sensitive matters,” says Alan Stenberg, co-proprietor of Glenmere Mansion, who jokes that his property boasts the most paper shredders of any hotel in the Northeast.
MGM RESORTS INTERNATIONAL
G
E’s high-profile executive shakeup. Equifax’s near implosion. Pfizer getting whipsawed on prices. Today’s businesses are operating in an era of unprecedented dramatic and rapid change. “No company today is the same as it was three years ago, if it exists at all,” says Joel Koblentz, senior partner at Atlanta-based executive search firm The Koblentz Group, which specializes in recruiting C-Suite leaders and board directors. “In this time of extraordinary and rapid transformation in corporate America, the CEO must bring a new awareness and sensibility to interacting with and utilizing the board.” For CEOs, this ups the ante for the board meetings and strategy sessions
Curious—and Courageous Gatherings should be orchestrated to facilitate candid information sharing and a meaningful exchange of ideas between directors and management. “The goal is to foster an agile partnership between the CEO and wise, curious and engaged directors, aligned to current strategy and responsive and adaptable to evolving conditions,” says Koblentz, who urges CEOs to treat their directors as trusted partners. “When convening the board and setting the agenda, that means encouraging an ‘outside-in’ attitude of relentlessly asking tough questions about business strategy and priorities, with the courage to consider new ideas and change direction when necessary.” Frequency of face-to-face meetings also helps ensure that a board is able to cover the full gamut of business issues and that everyone’s voice is heard. “That’s fundamental to the success of our organization,
Accessibility and privacy are hallmarks at Glenmere Mansion, an 18-room estate in Chester, New York.
“As CEO, my job is to clarify strategy, solve problems and set the vision, making my ownership of the meeting essential.” —T im Giuliani, CEO, Orlando Economic Partnership
strategically reinforced by holding six board meetings throughout the year,” says Tim Giuliani, president and CEO of the Orlando Economic Partnership. “This sets a reliable cadence for engaging our board members, most of whom are peer CEOs, on a consistent basis that keeps them completely connected to the organization.” For Giuliani, directing the board meeting agenda as CEO is paramount. “As a regional enterprise, akin to an organization with diversified business units, our work involves constant decision making on multiple fronts,” he says. “The level of activity can be overwhelming, which requires me to take a hands-on role in managing interaction with the board. I use each meeting to level-set and ensure that our members thoroughly understand the dynamics and ramifications associated with opportunities in play. Putting the issues on the table is just the first step. As CEO, my job is to clarify strategy, solve problems and set the vision, making my ownership of the meeting essential.” Every week, Giuliani e-mails each board member five key issues facing the organization. “It’s an effective and efficient way to get feedback, maintain focus and keep people prepared,” he says. Designed to capture director insights and enable meaningful decision making, each gathering targets one or two issues and is followed by an offsite reception. “This is a purposeful networking
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MICHAEL WONG
“Nothing can compromise the business proceedings, which means complete privacy, and no intermingling with other guests or outsiders.” Full-property buyouts set the stage for consummate confidentiality at Glenmere. Set on 150 acres just over an hour from Manhattan, this $40 million update of a 1911 Renaissance Revival mansion has 18 luxurious rooms, a helicopter pad, fine dining, an outdoor pool and a luxurious spa. Plus, its owners and staff are well-versed in hosting meetings. “We monitor every detail and choreograph the program with stopwatch precision,” says Stenberg. Properties like MGM Resorts International’s new high-tech Cypress Executive Lounge at ARIA Las Vegas also emphasize features geared toward hosting high-level meetings, such as a 30-person conference room with movable furniture, an abundantly stocked self-serve pantry, three private suites and a library-style study. “Purpose-built for boards and high-level strategy meetings, the space is geared to maximize concentration, thought and action,” says Michael Dominguez, the company’s Las Vegas-based chief sales officer.
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THE POWER OF PACING event that puts directors in the same room with local business leaders, elected officials and other constituencies,” says Giuliani. “No death by PowerPoint: this firsthand experience of our organization and success stories is invaluable for promoting their awareness of and guidance for our work.” Timothy Franzen, president of Chicago-based Graduate Hotels, also follows this school of thought. “I firmly believe that senior leadership, as the people charged with setting company strategy and direction, must be the primary authors of any annual meeting at which the plan for achieving the company’s goals and objectives is formulated and set forth,” he explains. Graduate Hotels’s annual GM Summit—a gathering of the general managers of its growing collection of hotels—is a defining event for the company. Drawing on advice from department heads and team leaders, Franzen creates the agenda and leads the Chicago-based meeting. “Seeking [their] input on improving company processes and performance is key,” he says. “Those leaders are often best suited to communicate those ideas to attendees and take ownership of implementing any performance improvement initiatives arising from the meeting.” While key team members, the board secretary and a meeting planner can be good resources when deciding on core program elements, decisions about prioritizing issues on the agenda ultimately falls to the CEO, says Dr. Lynea Diane LaVoy, director and instructor for the foremost hospitality management program at Madison College in Wisconsin, who points out that previous board discussions, developments since then and pressing issues of the moment all factor into the process. “A powerful agenda focuses on what’s important, and the CEO must fully back the issues being discussed,” she says. “The CEO’s priority for the board meeting is to collaboratively establish, and get board buy-in for, the strategic vision and direction for the company,” agrees Jeff Freemyer,
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While sharp focus and discipline are essential for an effective board meeting, directors also need room to breathe and stretch. “When it comes to sharing and acquiring knowledge, studies show that adults can only sustain attention for about 20 minutes,” says MGM Resorts International’s Michael Dominguez, who urges CEOs to set a reasonable pace for the The conference room at Las Vegas agenda and budget for frequent breaks. ARIA’s Cypress Executive Lounge can accommodate 30 people. Madison College’s Dr. Lynea Diane LaVoy supports this view. “Don’t be the architect of exhausted people,” she says. “When designing high-level agendas, schedule time with respect and care. Address the most important topics early. Be mindful of energy pitfalls. Don’t schedule a guest speaker during lunch—let people eat and connect. Create time for cognitive breaks—people need time to reflect. The overall idea is to give delegates the time and resources to recharge so they can be most present in the conversation, and you can move forward.” Wise to this science, Timothy Franzen of Graduate Hotels keeps his company’s summit sessions to under an hour. “Most are structured as roundtable discussions to actively involve all participants,” he says. “We purposefully mix up the tone, going from serious discussions to inspiring activities to creative thinking forums. The day is interspersed with several 20- to 30-minute breaks, speakers rarely exceed 30 to 40 minutes and we always include an offsite event for everyone to unwind, socialize and have fun with their peers.”
“We purposefully mix up the tone, going from serious discussions to inspiring activities....”
— Timothy Franzen, President, Graduate Hotels
co-founder and president of Atlanta-based LyfeWell hyperbaric clinics, who advises taking a 360-degree look at the enterprise, inside and out, and runnng everything past the “Why?” and “To what end?” tests. “The effective agenda to accomplish that starts with defining goals and objectives, including one primary takeaway or action item,” he says. “The discussion itself centers on surgically measuring and clarifying the business....The aim is to foster a tribal sense of belonging and purpose, animated by the spirit of exploration and adventure, that creates an inspirational context for moving the enterprise forward and achieving success.” Brooklyn, New York-based journalist Jeff Heilman has been covering the global meetings and events industry since 2004.
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L AST WOR D NIGEL TRAVIS / DUNKIN’ BRANDS
CHALLENGE EVERYTHING As CEO of Dunkin’ Brands from 2009 to 2018 (and now its executive chairman), Nigel Travis oversaw a dramatic revitalization of the brand, following a career leading high-profile companies like Papa John’s, Burger King and Blockbuster. In a new book, The Challenge Culture: Why the Most Successful Organizations Run on Pushback, Travis outlines his approach to driving workforce engagement. Here are excerpts from a recent conversation with Chief Executive:
Looking for an edge in the tightening labor market? Former Dunkin’ Brands CEO Nigel Travis extols the power of pushback.
The challenge culture is a simple concept. Essentially, it’s encouraging people in organizations to challenge from all angles or, more specifically, to encourage pushback—in a civil way. The benefit is greater buy-in and hopefully better solutions and, at the same time, creating a culture that people like working in. REMOVING BOUNDARIES The worst thing to do is to say, “We’re going to install a challenge culture.” It’s not like you’re putting in ERP. It needs to take time to evolve, and you probably shouldn’t label it. It’s gradual and it encourages people to question, to challenge. There are some overt things you do from day one. When I first got to Dunkin’, I didn’t want people just to accept what the boss said. I wanted people to think about issues. I said to the marketing people, “I want you to think about the finance issues and make a contribution.” Everyone should think like a general manager. I’ve taken this right down the organization by demonstration. I was asked by HR to do a session with all our interns. The first thing I say right up front is, “This is not a Q&A of Nigel. The aim is for everyone to have a dialogue.” It encourages them to talk about any subject they want to talk about. I ask them more questions, like, “What’s it like working at Dunkin’? How is this different from other
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companies? Where do you think we can improve?” Then we have a discussion. The other key thing is when people contribute, you reinforce that behavior by documenting what they say. Yesterday, I wrote up 10 lines of what came out of that meeting and sent it to the leadership team. It doesn’t mean we do everything that was suggested, but, again, it’s a challenge to what we do day-to-day. By listening to other people you should challenge yourself—but it’s all about improvement. It is not about destruction in any way. If you do this, you’ll get better solutions, and, from an individual point of view, you will progress with your career far faster than if you just come up with your own ideas. A CHALLENGE CHECKLIST Some questions to consider as you think about your culture and whether it encourages questioning, dialogue and challenge: For your company: Do people fear they will be fired if they challenge the status quo or question ideas or plans too forcefully or too often? What defines a culture that is not what you want yours to be? What qualitative skills are most important to your culture and business? How do you foster and encourage them? Have you defined and distributed the ground rules for civil dialogue? Do you have channels that provide opportunities for workers to pose questions and challenge their bosses? What role does HR play in your organization? Does it help create the challenge culture? For your management team: Does your core team consist of people who will challenge and question each other? Do they have a diversity of viewpoints and backgrounds? For yourself: Do you practice listening skills? Do you take notes during conversations? Do you have an emotional consigliere? A sparring partner? Do you, and members of your team, personally model the challenge culture?
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LYNDON FAULKNER CEO Pelican Products
ERIK FYRWALD CEO Syngenta
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LAUREN TAYLOR WOLFE Founding Partner Impactive Capital; Board Member, HD Supply
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