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C ON TE N TS
September/October 2017 No. 290
FEATURES COVER STORY
20 How to Be a Tech Hero
Here’s a look at 12 new technologies that could make or break your company (and your career)—and a guide to how to make them work for you. By Dale Buss
32 A Guide to Giving
How four business leaders decided on philanthropic vehicles—and what you can learn from their experiences. By William J. Holstein
CEO OF THE YEAR
36 Honoring the 2017 CEO of the Year
Highlights from the gala celebrating Henry Schein’s Stan Bergman. By Jennifer Pellet
40 What You Need to Know about Dodd-Frank The facts on fixing Dodd-Frank. By Peter Haapaniemi
44 Disrupting the Organization
CEOs share insights on the challenges and opportunities of developing next-generation leaders in an atmosphere of rampant disruption. By Jennifer Pellet
48 Understanding the Mindset of Risk
How CEOs can ensure their companies take the right risks to explore emerging opportunities. By William J. Holstein
52 Technology and the CEO Résumé
Yout don’t have to be a tech CEO to act like one. But acting like one might be what helps you keep your job. By Peter Haapaniemi
COVER ILLUSTRATION BY HANK OSUNA
While automotive design and technology are constantly changing, the place that leads the world in automotive manufacturing remains the same. Michigan. Home to 27 assembly plants and 63 of the countryâ€™s top 100 automotive suppliers, we produce more vehicles than any other state in the country. Which makes Michigan the best place for your business to manufacture success.
C O N TEN TS EDITOR-IN-CHIEF Michael Winkleman
EDITOR AT LARGE Jennifer Pellet
6 Editor’s Note
8 E-Newsletter Excerpt
Hacked One CEO loses everything—for a while.
11 CEO Inbox
Millennials Say: Get Up on Your Soap Box Accountability: The Buck Stops Where? CEO Criteria Explained
Understanding the Skills Gap Ten Minutes with Kraft Heinz’s Bernardo Hees Cuba: Ready for Tourists, But Not U.S. Business Write Your Own Book CEO Confidence Index Cautionary Lessons About Innovation From the Archives Getting the Most Out of Your Executive Compensation Plan
56 Economic Development
Regional Report: The Southeast Home to two of the country’s fastestgrowing state economies, the Southeast lures investment with a lower cost of living and engaged workers. By Craig Guillot
62 Rewards and Incentives
The Loyalty Factor How to use recognition and reward as a talent strategy and competitive edge. By Jeff Heilman
66 Executive Retreats
A CEO Guide to Venue Selection For off-site executive meetings, destination and venue selection is as strategic as the agenda. By Jeff Heilman
72 Time Capsule
The Structure Behind the Strategy By Sandro Bassili
Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 289 September/October 2017. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2017 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. 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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T H O U G H T L E A D E R S H I P P R O V I D E D B Y S T R AT I V I T Y
CREATING A CULTURE OF RESILIENCE AND EMPOWERMENT BY L IO R A RUS SY IF AN NBC NEWS TRUCK WERE to park in front of your office, what would your employees do? When I ask this question, most CEOs squirm and mutter the answer we all already know: they would run away. A news truck is rarely interested in good news, and there are few in an organization who are authorized to speak to the press.
RECOGNIZE AND CELEBRATE
THE CULTURE OF EMPOWERMENT. CELEBRATE EMPLOYEES WHO
Congratulations! Your PR Department now includes every employee in your organization. The “customer as broadcaster” era demands complete organizational transparency. Customer relationships need to morph from a traditional, vendor-consumer relationship to a co-creation model. Organizations need to redefine their culture to respond to the new rules.
BREAK THE RULES, USE GOOD JUDGMENT AND DELIGHT CUSTOMERS.
It’s time to rethink this policy. In today’s era of empowerment, every customer operates a personal news network and is able to easily broadcast their experiences and opinions to millions. (News flash: United Airlines)
In many corporate cultures, decisions are only made by the most senior executives. Employees hide behind processes and procedures and are reluctant to make decisions and take risks. Past experience teaches them to seek approval from management and minimize the initiative they take. Fear of failure stymies imagination and creativity. A culture of compliance evolves in the name of best practices and consistency. The price is a lack of resilience and an inability to handle ever-evolving situations.
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In the new era of empowered customers, companies must evolve from a world of consistency and top-down control to create a culture of resilience and empowerment; a culture that will tolerate mistakes and allow employees to use common sense at moments of truth with customers. This type of change can’t simply be communicated via a memo from the CEO. Our experience designing cultural transformations for hundreds of organizations has taught
us that when this message comes from the top, it is often met with suspicion. After many years of adherence, employees are not quick to make this change. Designing a culture of empowerment includes the following steps: 1. Co create the future of empowerment with employees. Do not deploy the typical top-down “new program of the day” approach. Create a program with the people who need to live it. 2. Map the customer journey and the employees’ empowerment. Ensure clear understanding of the exceptions employees will need to manage. 3. Create an empowerment guarantee. Employees long felt their hands were tied and any empowerment belonged to senior management. They are not going to change those beliefs overnight. Create a mechanism to “protect” them from “bad” decisions. 4. Remove obstacles religiously. Ask employees to guide you to principles, processes and procedures that prevent them from acting with empowerment. Designate a team to assess and remove those roles. 5. Recognize and celebrate the culture of empowerment. Celebrate employees who break the rules, use good judgment and delight customers. 6. Increase communication to overcome cynicism. Create and deploy a vocal, multichannel communication campaign to convey the new culture and invite employees to experiment with empowerment. Culture is not an internal HR initiative. It is the essence of the organization’s ability to respond and interact with customers and create value that is worth the price we charge. Culture is an integral part of the value proposition and it is being delivered in front of a live audience every day. Lior Arussy is the CEO of Strativity Group, Inc., an experience and culture design firm, and the author of five books including Exceptionalize It! LArussy@Strativity.com
The equation is increasingly complicated. But CEOs’ jobs may depend on getting it right. By Mike Winkleman
I’VE BEEN SPENDING MUCH OF MY TIME THE PAST FEW WEEKS recruiting CEOs to speak at this year’s CEO2CEO Summit. While we’ve traditionally focused this annual event on digital transformation, this year we decided to broaden the scope, since it’s increasingly clear that the sort of transformation with which most companies are wrestling is not strictly digital. It may be exacerbated by the need to adopt new technologies, but it’s enabled by a company’s people, reinforced by an innovative culture and only happens if the leadership at the top is committed to change. 1-800-Flowers’ Jim McCann and others at last year’s Therefore, when Summit atCEO2CEO Summit. tendees convene at the Apella Center in New York City on December 7, what they’ll hear from the podium will be the reflections of a dozen CEOs—including Henry Schein’s Stan Bergman (this year’s CEO of the Year), Siemens USA’s Judy Marks, P.F. Chang’s Michael Osanloo and RingCentral’s Vlad Shmunis—on how they, themselves, have led change in their companies, using people, technology and a commitment to innovative thinking to fuel growth. Of course, leading change has always been critical for CEOs. Arguably, however, a number of forces have aligned to make it more important than ever. First there’s the rapid increase in the number of new technologies that need to be harnessed if a company is to be the disruptor, rather than the disruptee in its industry—and if a CEO is to keep his or her job in the midst of this disruption (see “How to Be a Tech Hero,” page 20). This has underscored the need for CEOs not only to be receptive to new technologies, but to approach almost everything with a technological mindset (see “Technology and the CEO Résumé,” page 52). And it’s reinforced by the growing stature of the HR department (see “The Structure Behind the Strategy,” page 72) which itself relies on technology—in the form of Big Data—to help it provide the structure to keep the company’s strategy going (we’ll dig deeper into people issues at our Talent Summit in Orlando this October). Part of this charge, as Jeff Sonnenfeld details on page 12, is the importance of taking control and being accountable—not passing the buck when things go awry, when change isn’t achieved. And pushing ever forward, making the best use of the best available technology (see page 21), talent (see page 13) and innovative thinking (see page 17)—as well as speaking out clearly whenever you can (see page 11). Reach Mike Winkleman at mwinkleman@ChiefExecutive.net.
6 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2017
CHIEF EXECUTIVE OF THE YEAR
2017 SELECTION COMMITTEE CATHY ENGELBERT CEO, Deloitte LLC
DAN GLASER President and Chief Executive, Marsh & McLennan FRED HASSAN Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries ROBERT NARDELLI Chief Executive, XLR-8 WILLIAM R. NUTI Chairman and Chief Executive, NCR THOMAS J. QUINLAN III President and Chief Executive, RR Donnelley JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management RANDALL STEPHENSON Chairman and Chief Executive, AT&T, and 2016 CEO of the Year MARK WEINBERGER Chairman and Chief Executive, EY MAGGIE WILDEROTTER Chairman & CEO, Grand Reserve Inns Exclusive Advisor 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
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E- NEW SL ETTER EXCERPT
Hacked: One CEO Loses Everything… for Awhile IMAGINE THE SURPRISE SECURITAS PRESIDENT AND CEO Alf Goransson felt when he learned that he had not only been declared bankrupt by the Stockholm District Court but also de-registered as the company’s CEO and removed from external board positions by the Swedish Companies Registration Office after his identity was stolen and a fraudulent bankruptcy application was made in his name. According to Securitas, Goransson’s personal information was stolen online in late March, when a fraudulent loan application was filled out in his name. Goransson reported that incident to police in early April, then heard nothing about it until July 10, when he was declared bankrupt. The eye-opening news that the CEO of Sweden’s most prominent security firm had fallen victim to identity theft from hackers painfully illustrates how data breaches can wreak havoc not only on businesses and their customers, but also on those in charge of managing businesses. While Goransson successfully appealed the ruling two days after it was issued and has had all of his positions officially re-registered, the optics of the situation are anything but ideal for a security firm CEO. The incident underscores the ongoing importance of data security for CEOs—both for their companies and for themselves. Bob Shields, director of forensic investigation services at professional services firm Sikich LLP and a former FBI special agent, shared a few tips for CEOs looking to keep their company, customer and personal data safe and sound: • Rehearse: Conduct a tabletop exercise where C-suite executives come together to walk through a scenario in which the company’s information has been compromised and to determine how they would react to that situation. • Engage: Establish a corporate culture where cybersecurity is a priority—from the C-suite down. Making sure that everyone in the company is diligent about not opening any email files from untrusted sources is a critical first step in this process. “The C-suite encompasses the entire company,” Shields points out. “They’re the ones who will set the tone as far as making sure everyone is engaged when these situations occur.” • Check: For CEOs concerned about their own personal information being targeted, Shields suggests keeping close tabs on personal credit reports and information to ensure their identity information hasn’t been compromised. “Checking your personal data or accounts is no different [for CEOs] than for anyone else,” Shields says. —Patrick Gorman Excerpted from a recent edition of Chief Executive’s CEO Briefing e-newsletter. This story reflects the kind of CEO-focused content in the reimagined CEO Briefing e-newsletter. Sign up at ChiefExecutive.net
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TH O UGH T LEADERSHI P P ROV I DE D BY RH R I N T E RN AT I ON A L
INSIDE VS. OUTSIDE: REELING IN THE NEW CEO In many areas of business, companies face a basic choice—build or buy? And in a sense, that’s the case when it comes to finding a new CEO. That is, do we draw on internal talent, or do we look outside?
Overall, the emphasis on hiring CEOs from within probably stems from the fact that boards see it as the lower-risk route. “There are many studies that show better performance over time for companies who promote insiders to the CEO role,” says Dr. Paul Winum, head of RHR International’s Board and CEO Services practice. “Except in situations requiring a turnaround or change in strategy, inside successors are usually the preferred option and are able to leverage their knowledge of the company, its culture and the talent to build on past performance. Plus, the compensation required to bring in an outside leader is on average more than twice as expensive, as there is usually a need to buy out stock options. Investing in the development of internal CEO pipeline candidates usually yields a much better ROI.” In addition, he says, “an inside succession often indicates a planful development process over years with an intentional grooming process.”
The CEO Tracker shows that companies clearly tend to look inside for CEOs, with more than three quarters of today’s CEOs having been promoted from within. The smallest companies (5,000 employees or less) and largest companies (100,000-plus employees) are somewhat more likely to have internally sourced CEOs. There is also some variation by industry, with more media, retail and technology CEOs being recruited from outside the company. Internally sourced CEOs are most likely to have been COO, president or executive vice president prior to taking on the top job. On average, they were with their companies for 22 years before becoming CEO. Nearly three out of 10 started their careers at their company, a group that averages 25 years with the organization before becoming CEO. And 5 percent are the ultimate insiders, having founded the companies they currently lead.
At the same time, however, internal experience is no guarantee of success: In the CEO 1000, the CEOs at the lowest performing segment of companies actually had the highest number of years with their companies, on average—a reminder of the importance of leadership development and careful succession planning when relying on the internal pipeline.
The road to the top differs somewhat when looking at CEOs brought in from the outside. Here, the CEO role is by far the most common source of talent, with 44 percent having come from that position. Presumably, boards like the experience and track record they see in those who are already CEOs.
5% 10% 15% 20% 25% 30%
EVP Divisional Pres/ CEO
Transportation/ Logistics Industrial Goods
20% 40% 60% 80% 92%
8% 13% 16% 17% 10%
Internal vs. External Hire
Top 5 Previous Positions Before Becoming CEO: External
Top Industries Hiring Internally
Top 5 Previous Positions Before Becoming CEO: Internal
CEO 12% 11%
Top Industries Hiring Externally 20%
Percentage of External Hires from Companies in the Same Industry 64%
For more information about RHR International, visit rhrinternational.com or call +1 312 924 0800.
Millennials Say: Get Up on Your Soap Box MILLENNIALS ARE KNOWN FOR THEIR OUTSPOKENNESS—and it turns out they expect the same from their bosses, too. Two just-released surveys (from PR giant Weber Shandwick and consulting firm BSG) indicate that CEOs who speak their minds on social and political issues get rewarded with loyalty from both employees and consumers—regardless of whether those audiences agree with the CEOs’ positions. But there are caveats. Andy Polansky and Joel Benenson, CEOs of Weber Shandwick and BSG, respectively, offer these pointers to CEOs who feel compelled—or led—to climb on their soapboxes. 1. Be selective. CEOs must have a reason for speaking out and it must be authentic, Benenson says. “Is it something intrinsically important to you, your business, your employees, your customers and your community?” he asks. 2. Know your audience. Benenson notes that most companies know their audience, but only as consumers: “It is essential to also know them as political beings. You need to know how strongly they feel about the issues you would speak out on and to what degree they could potentially separate from you.” 3. Reckon with differences. Millennials are the largest U.S. generation now, and they tend to be more progressive and more attuned to social action than older generations. “Millennials are much more oriented to care deeply about CEO activism than gen-Xers and boomers,” Polansky says. But people who lead companies with large, diverse workforces—and those whose customers are older than 35—should be wary of offending those constituencies with outspoken opinions or stridency. 4. Don’t go from your gut. CEOs shouldn’t “act on instinct alone,” Benenson advises, “even if it’s a strongly held belief and core to your company’s values. That’s not to say you shouldn’t speak out in these situations, but first fully understand the impact, so you can anticipate how consumers will respond.” —Dale Buss
Nearly half the millennials in the Weber Shandwick study say CEOs have a responsibility to speak up on important societal issues.
SEPTEMBER/OCTOBER 2017 / CHIEFEXECUTIVE.NET
The Buck Stops Where?
Accountability, apologies and assurance GREAT LEADERS MAY TAKE THE CREDIT FOR triumphs, but do they also take the blame for missteps? As it happens, Hillary Clinton’s new book, What Happened, reflecting on her unsuccessful presidential campaign was scheduled for release at the close of a run of setbacks her victorious rival Donald Trump suffered after assuming office. Both politicians blamed others for failures or “passed the buck,” directly contradicting the maxim Harry Truman famously posted in the Oval Office: “The Buck Stops Here.”
GM’s Mary Barra restored trust by demonstrating genuine compassion, including candid congressional testimony, authentic apologies and appropriate reparations.
12 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2017
Credit: Bill Pugliano / Stringer
Clinton highlighted misogynistic bias against the first woman presidential nominee, Russian efforts to undermine the election and a “vast right-wing conspiracy.” Others might point to her inadequate economic message, poor handling of official State Department emails and other scandals—as well as a celebrity-drenched campaign overlooking much of the nation’s heartland. Meanwhile, Trump blamed the failure of key legislative efforts, poorly conceived executive orders, diplomatic disappointments, Republican senators, the “fake media,” disloyal staffers, military miscalculations and his long-gone predecessor for the dozen high-level firings that took place in his first six months. Clinton and Trump are not unique in this tendency to blame setbacks on others. Psychologists refer to the phenomenon as “self-serving bias in attribution.” George W. Bush prematurely proclaimed “mission accomplished” after the fall of Iraq’s Saddam Hussein—then years of bloodshed followed. Subsequent failures, such as the sluggish response to the victims of Hurricane Katrina in New Orleans, were met with the dismissive disparaging of critics. This same pathology haunts business leaders. Tony Hayward, BP CEO during the 2010 Deepwater Horizon oil spill, was consumed with moving on with his own life and disdainful
of questions over the repair of Gulf Coast and financial damages—busily blaming contractors for the incident. More recently, former Wells Fargo CEO John Stumpf allowed the firing of whistleblowers while ignoring the creation of millions of fraudulent customer accounts. Psychologists have studied such biases for over 60 years in a field labeled attribution theory. Summing up their findings, as actors, we are eager to attribute success to our actions but tend to blame failures on the situation. By contrast, as observers, we tend to blame mishaps on the actor—or the victim. Thus, someone who trips walking down the street blames the town for badly paving the sidewalk, whereas someone watching presumes that person is clumsy. Many great corporate leaders have shown us how to beat this bias through confession, courage, contrition and correction. In 2012, Jamie Dimon acknowledged the risk management failures at JPMorgan Chase that caused its $23 billion London Whale trading losses. Anne Mulcahy led Xerox’s recovery from near collapse, traveling 200,000 miles a year to apologize to rank-and-file workers and reassure them that management knew how bad things were then. Following a 2007 massive air travel backup caused by bad weather, JetBlue founder David Neeleman made a record 17 TV appearances in one day apologizing to travelers. All of these appeals were coupled with roadmaps showing how these mistakes will not happen again. When Mary Barra took the wheel at GM in 2014, she inherited the worst public safety crisis in the car maker’s 106-year history as the firm waited 11 years to recall millions of cars with ignition-switch problems that led to preventable fatalities. She responded with candid congressional testimony, authentic apologies, top lieutenants dispatched to fix production failures and appropriate reparations to victims’ families, all of which led to a soaring restoration of trust. The outcome was reminiscent of J&J ‘s ability to endure after its Tylenol-tampering crises. “We were cashing in on 100 years of trust that had been built up,” said CEO James E. Burke, who responded to the incident by apologizing and discontinuing Tylenol in capsule form—costing the company $150 million. “All the previous managements who built this corporation handed us, on a silver platter, the most powerful tool you could possibly have— institutional trust.” Accountability is not vulnerability; rather, it fortifies strength. —Jeffrey Sonnenfeld, Yale School of Management
CEO OF THE YEAR CRITERIA EXPLAINED
Degree of Difficulty PUT BLUNTLY, THERE IS NO SUCH THING AS AN easy CEO job. However, there’s also no denying that some captains are hit with far more headwinds than others during their leadership tenures, notes Thomas J. Quinlan, CEO of LSC Communications and a longtime member of the CEO of the Year Selection Committee. “Everyone sitting in the CEO chair faces some difficulties, whether it’s technical disruption or geopolitical or regulatory events; it just depends on the level,” he says. “But there’s no question that some situations—say, having pricing power with consumers or a helpful regulatory environment—can make continuing to perform well easier.” Having the wind very much against your sails and rocks at every turn, on the other hand, makes setting and maintaining a strategic course all the more challenging and perilous. The leaders participating in the peer-driven CEO of the Year
selection process understand that distinction and factor it into their deliberations when evaluating performance, notes Quinlan, who cites two recent CEOs of the year who faced an extraordinary degree of difficulty during their leadership tenures. AT&T’s Randall Stephenson (2016): “In addition to the transformation he undertook, the political environment was such that CEOs were not highly valued in Washington at the time that he was going through that challenge,” says Quinlan. “Yet he managed a pretty seamless transition—and did so without a lot of fanfare.” Walt Disney’s Bob Iger (2014): “When he came into the role, the Disney brand was not what it is today, plus the company was facing technology disruption,” notes Quinlan. “He was tasked with taking a brand that was being tarnished and bringing it back.” —Jennifer Pellet
Understanding the Skills Gap
A new multi-variate study sheds light on a vexing nationwide problem SKILLS GLOSSARY SKILLS GAP: training or education not sufficient SKILLS SHORTAGE: training adequate, too few people being trained SKILLS MISMATCH: supply and demand are out of sync
THE CONVERSATIONS OVERHEARD AT recent Chief Executive Group events undoubtedly echo conversations you’re having with your board, your CHRO and the heads of every division in your organization: how to deal with the skills gap that has made it difficult for companies to fill available jobs, increase productivity, navigate change and fuel the disruptive activity that is essential for survival in this economy. In an effort to get to the bottom of this question, a centrist think tank called Third Way just released a study that combined five measures (job fill rate, wage gains, education and credential attainment, employer surveys and state analyses of labor supply and demand) in order to smooth out prejudices or data inadequacies inherent in specific statistics. Although Third Way’s research indicated a nationwide, cross-industry skills gap, they found some critical variations by industry, state and cause. For example: ∫ Technology jobs, across various skill levels, are going unfilled due to a lack of qualified candidates. The U.S. Department of Labor noted that this problem was particularly evident for companies seeking “computer user support specialists” in Missouri and California and for those looking for software developers and computer programmers in New York and Washington, D.C. ∫ Financial services, Third Way warns, is on the verge of a worker shortage, although wages have been rising to lure skilled workers to available jobs. Underlying this potential shortage, Third Way suggests, is the age of the workforce: with millennials flocking to other industries, there are fewer employees to replace retiring baby boomers. ∫ Baby boomer retirement will also contribute to worker shortages in manufacturing and construction. Even though manufacturing wages are solid, Third Way notes that an increase in college attendance has made manufacturing training programs less attractive. And this, they suggest, is likely to lead to the loss of U.S.-based manufacturing jobs “as companies relocate to countries with a larger supply of qualified workers.” —Mike Winkleman ∂Dig more deeply into talent issues at Chief Executive Group’s annual Talent Summit, in Orlando on October 25 and 26.
SEPTEMBER/OCTOBER 2017 / CHIEFEXECUTIVE.NET
INBOX It’s all about meritocracy and action, people being accountable for their goals and being performance-driven. It’s ownership. Not being afraid of failure, knowing that some things are going to work well, some things are not going to work well, learning from mistakes and moving forward.
10 MINUTES WITH
BERNARDO HEES CEO of Kraft Heinz
WHILE KRAFT HEINZ—THE COMPANY created when Brazil’s 3G Capital joined with Berkshire Hathaway to acquire Kraft in 2015—has fueled speculation about acquisitions, the company’s CEO, Bernardo Hees, 47, has focused his efforts on changing the topic, looking at the gains his new company has made through cost control, product reinvention and people management. Chief Executive’s editor-in-chief, Mike Winkleman, spoke with Hees, an economist, 3G partner and former CEO of 3G-owned Burger King, about the company’s new meritocracy and how Kraft Heinz is confronting industry disruption. Mike Winkleman: Tell us about the challenges involved in taking two iconic brands, making critical cultural changes and having the brands still retain the qualities Americans have known and loved. Bernardo Hees: We’re happy with the speed with which we integrated culture, systems and people, while being transparent about what Kraft Heinz would be—a culture based on performance-driven people who grow at their own pace. We talked to everyone. And we listened, in town halls and individual meetings. We explained how people could grow within the company, what’s expected from them, what are the values, the visions, and what we’re trying to build. Not everybody’s going to say, “Hey, that’s for me.” There were quite a few who said, “Hey, I respect what you’re saying, but I want to do something else with my life.” How were you able to help people acclimate to this new way of doing things? We trained them. We gave them more opportunities. They were able to run things that were much bigger than they ever imagined. It really became a “dream big” environment. How would you compare the culture of Kraft Heinz today with the cultures of the two original companies?
Have many new people been drawn to the company by this change? Is the current workforce vastly different from the workforce when you started this? Or is it largely the same people, just energized differently? I think we’ve now got the right balance of people who were here before who are now growing and being promoted, and some people who came from the outside and a lot of new people starting their careers. How well has this worked? You can see the improvement in profitability, the initiatives we are putting behind growth with investments in innovation, go-to-market, marketing, working dollars and so on. You can see what we’re trying to do with our brands being number one and number two in every category. You can see the investment behind quality. You can see from the promotions from within that we’re developing our own people to do more, and you can see our presence in our communities and our efforts behind fighting hunger worldwide. If you combine all this with clear metrics, you will see we have come a long way in the past two years. Looking at changes in the grocery industry— Amazon’s purchase of Whole Foods, all the different ways people are shopping for groceries—what are you doing to jump ahead of this disruption? There are a lot of efforts within our company in these new channels. Not only in ecommerce, but by drug stores, by discounters, by clubs, by mainstream. We truly believe our brands can be very relevant as we continue to understand what consumers need. We are really pushing speed and investing heavily in order to adapt and serve our consumers the way they want. What sort of changes have you made to make your products more relevant? It’s all about having choices. I think the changes in Mac & Cheese have been remarkable—being natural and pushing nutrition, the same thing we’re doing with Oscar Mayer hot dogs. On the Heinz side is the variety of options in flavors. Category by category, you’re going to see much more choice, much more relevance to the brands, and that’s exactly what the consumers are telling us they want.
HEES’S KEY PRINCIPLES You cannot be afraid to make the tough calls, even if they’re sometimes very painful and difficult.
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Push speed, be data-driven and really understand the marketplace.
Be a meritocratic, performance-driven company—have people who want to dream big.
AMERICA’S FIREARMS INDUSTRY
DEDICATED TO SAFETY Our award-winning Project ChildSafe program has distributed more than 37 million free gun locks to communities nationwide since 1999.
Safety has long been one of the industry’s highest priorities.
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More than 3,500 companies and organizations use our “Own It? Respect It. Secure It.” logo to help keep safety top of mind. We’re pleased that our safety programs and others have helped reduce fatal firearms accidents to historic low levels. From 2006-2015, they dropped 24% and now make up less than 1% of all fatal accidents.1 1
National Safety Council
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Cuba May Be Ready for Tourists, but Not for U.S. Business
ALTHOUGH PRESIDENT OBAMA MADE EFFORTS to normalize relations with Cuba in 2014, President Trump announced in June that he would roll back many of those initiatives. But even before then, tourists and businesses weren’t exactly flocking to Cuba. U.S. air carriers were eager to initiate direct service in 2015, but five airlines have already cut back or cancelled flights due to low demand. With a pent-up need for products and services, there are certainly business opportunities. If the country were a U.S. state, it would have the eighth-largest population, with 11 million people. And it has the highest literacy rate in Latin America and some of the best trained doctors. Cuba has been engaged in slow economic liberalization since Raul Castro took over in 2008. But it is still a communist country with a centrally planned economy. It will take more than the dismantling of the embargo to change a culture that is so deeply ingrained in the government. Fortune 100 companies with scale and power are making inroads with the Cuban government, but mid-market companies may find that the country’s risk and hassle outweigh its market potential. Pablo Gonzalez Alonso, director of Latin American Research at Frontier Strategy Group, said that despite changes, the risks of operating in Cuba are significant and unchanged by policy. He said while the government has been trying to become a better partner to outside investors, its limited access to foreign currency and control remains a problem. —Craig Guillot visited Cuba in July. Read more of Craig’s observations on opportunities for business in Cuba at ChiefExecutive.net/cuba Photo: Craig Guillot 16 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2017
Write Your Own Book Think you’ve got a book in you? Here are some guidelines from CEOs-turned-authors.
Determine your goals: Simply gaining more visibility or advancing your company may be enough. “Writing a book is a great way to get your point of view in the public domain,” says Rob Bernshteyn, CEO of Coupa Software, who just wrote Value as a Service. “Prospects and customers can learn what you stand for—and what they can expect from your company.” Have something to say: The flip side is: make sure others will want to read it. “A new book has to be different and compelling,” advises Ray Rothrock, CEO of RedSeal, a cybersecurity consulting firm, and author of the forthcoming Digital Resilience. “You’ve also got to have enough depth to be book length.” Hone in on key audiences: Few CEOs will write best-sellers, but their books can reach target audiences. “Focus on writing the book for positioning or to promote brand awareness,” says David Mattson, CEO and president of Sandler Training and author of Why Salespeople Fail. Be realistic about publication: It would be easy for Apple CEO Tim Cook to find a publisher and earn millions. But many would-be CEO authors will need to consider self-publishing. “Distribution is also easy,” says Ian Gotts, CEO of Elements, a tech firm, and author of Why Killer Products Don’t Sell. “Give it away.” Reckon with your platform: The book-publishing industry has dramatically shrunk its publicity apparatus and often depends on authors having their own marketing machines. Doing a lot of public speaking can significantly boost book sales. The platform also works in reverse. “We use our book as a recruiting tool for speaking opportunities,” says Scott Moorehead, CEO of Round Room, the nation’s largest Verizon retailer, and co-author of Build a Culture of Good: Unleash Results by Letting Your Employees Bring Their Soul to Work. Consider getting help: Some CEOs swear they’ll write the book themselves. “Take an entire month of nothing else,” advises Bonnie Hagemann, CEO of Executive Development Associates and author of Leading with Vision: The Leader’s Blueprint for Creating a Compelling Vision and Engaging the Workforce. But few CEOs believe they have the time or skills. And there’s an entire cottage industry devoted to helping them do it right. —Dale Buss
INBOX CEO CONFIDENCE INDEX
Are CEOs in a “Wait and See” Holding Pattern?
SINCE MARCH, WHEN CEO CONFIDENCE, as measured by Chief Executive’s CEO Confidence Index, was at its highest in the last 12 months (7.41 on a scale of 1 to 10 with 10 being the highest), CEOs’ confidence has been weakening month over month, finishing out July with a rating of 7.00. The latest rating is still significantly higher than a year ago— 5.70 in August 2016, three months prior to the election. However, over the past few months more CEOs appear to be reserving judgment until they see what happens next. Similarly, while most companies remain relatively bullish, the percentage of respondents who anticipate that their revenues will grow this year has fallen slightly over the past three months, from 85 percent to 80 percent. —Lynn Russo Whylly 10 09 08 07 06 05 04 03
JULY 2017: CEO CONFIDENCE IS FLAT 6.93 5.70
FROM THE ARCHIVES
For CEOs, Email Was Just the Beginning IN BOTH THIS MONTH’S COVER STORY (page 20) and in the CEO Tech column (page 52), Chief Executive looks at a key change in the skillset that CEOs must now demonstrate—or face losing profits, market share and maybe even their jobs. “Woe to the CEO who doesn’t see these technologies coming, or fails to be opportunistic when he does,” writes Dale Buss, talking about the sorts of technological disruptions that have torn apart companies like Kodak and Blockbuster. Back in 2003, we examined the “Anatomy of the New CEO”: young leaders who were great communicators, humble team builders, hierarchy busters and technophiles who kept “in touch via technology gadgets and gizmos.” These new CEOs “are far more tech savvy than their predecessors,” wrote Justin Martin, citing a Forbes and Gartner study that found that “82 percent of C-level executives check email at the start of each workday, 58 percent do online research and 80 percent use search engines.” As a result, Martin noted, “BlackBerries are becoming as ubiquitous among newer CEOs as country club memberships were among the prior generation.” More importantly, “this communications technology is proving to be another consummate hierarchy buster.” The new CEO, circa 2003, was always available. “I’ve made it clear to everyone who works here that they’re expected to go at the speed of light. If anyone needs me, they can get me any time; they only have to realize, it may be by email. I’m a live-time manager,” one CEO explained, foreshadowing a time when email would be just the tip of the technology iceberg. —Mike Winkleman
Cautionary Lessons About Innovation HOW SHOULD CEOs THINK ABOUT—and pursue—innovation as a path to growth for their companies? Discussions with many CEOs and other innovators indicate that there are a number of so-called false paradigms that may have an element of truth but which can easily lead companies astray when seeking to innovate. Always listen to your best customers. There is great value in listening to one’s best customers. Feedback from demanding customers helps to map out a trajectory that allows a company to charge premium prices, earn attractive margins and beat market competitors. However, this can increase the likelihood of being blinkered to new growth opportunities by not appealing to established customers. By only listening to one’s best customers one might not see disruptors making headway in the lower tier of your market.
Don’t be blinkered to new growth opportunities.
Market segmentation. Segmentation schemes often define the characteristics of their products by price, industry or geographic location. The problem with normal segmentation schemes is that they assume the customer is static. Even business-to-business customer behavior changes. Most “home runs” of marketing were hit by marketers who sensed the fundamental job that customers were trying to accomplish. The illusion of core competencies. Companies make many decisions based on what they perceive to be their core competencies. But misperceptions about one’s core competencies can cause one to miss opportunities for growth. Companies that outsource what may be thought of as peripheral value-added activity sometimes find that the outsourcing partner has been building its own competency that will be the basis for future success. —J.P. Donlon For more on this topic, visit: ChiefExecutive.net/ceos-innovation
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INBOX DATA DIVE
Getting the Most Out of Your Executive Compensation Plan EXECUTIVE COMPENSATION is one of the biggest investments most companies make, yet far too few approach it strategically. A compensation plan should be about more than simply paying competitive salaries and bonuses—it should be designed to encourage executives to work together to build long-term enterprise value. Since Chief Executive began reporting on private company executive compensation six years ago, we have consistently found that too many companies provide modest annual salary and bonus increases across the board, rewarding for tenure versus performance. So how should CEOs approach executive pay? Here are four steps to get you started:
58% of companies do not have a formal long-term incentive plan.
View compensation as a strategic tool To develop a strategic executive compensation plan, business owners must first determine the business’s priorities—increased cash flow, positioning for a potential sale or IPO, increased equity value—and then establish goals, time horizons and measurable success metrics. Once a company has set clear and measurable objectives, the plan must be communicated to senior executives so they understand the value
Percentage of Companies by Company Revenue
$2 to $4.9 million
$5 to $9.9 million
$10 to $24.9 $25 to $49.9 $50 to $99.9 million million million
$100 to $249.9 million
$250 to $499.9 million
$500 to $999.9 million
$1 to $10 billion
Source: 2017-18 CEO & Senior Executive Compensation Report for Private Companies.
CEO Variable Pay
Percentage of Salary by Company Revenue — Median 50%
14.78% <$2 million
$2 to $4.9 million
$250 to $499.9 million
$500 to $999.9 million
$5 to $9.9 million
$10 to $24.9 $25 to $49.9 $50 to $99.9 million million million
$100 to $249.9 million
Source: 2017-18 CEO & Senior Executive Compensation Report for Private Companies.
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Define your compensation philosophy To craft a successful plan, define your pay philosophy by answering the following questions: • Is the company going to pay for performance versus tenure? • Who is competing against you for talent for each position? • Which positions require top talent and which require average performers? The answers may vary by type of company. A tech company, for example, may want a rock star head of R&D, but only need a solid VP of sales. Conversely, a manufacturer focused on cash flow may want a great COO or CFO, but only need an average head of engineering. Craft a specific compensation plan Next, determine how much cash from annual profits can be allocated to incentive programs. Be sure to account for new hires or other employees who may be added to the plan and then choose incentive vehicles accordingly.
Companies with Formal Annual Incentive Plans for Executives 72.15%
of their performance-based compensation—and know what is expected of them to earn their annual salary increases and bonuses.
$1 to $10 billion
Choose an optimal plan for your company Not all companies can offer equity or stock options. But family-owned businesses, for example, can provide phantom equity plans or long-term cash incentives to encourage key execs to build enterprise value. Profitable companies may opt for cash incentives rather than diluting shareholders’ equity, while early-stage companies may want to use limited cash to fuel investments and provide compensation in equity or stock options. Strategic compensation plans can make the difference between lackluster performance and sustained growth Unfortunately, our upcoming 2017-2018 CEO & Senior Executive Compensation Report for Private Companies finds that too few companies use compensation as a strategic tool. Nearly 58 percent of companies lack a formal long-term incentive plan, and of those that do, only 32 percent use performance-based vesting rather than time-based vesting. These companies are missing an opportunity to tie top performers’ compensation to results and, just as important, to send a message to under performers. —Steve Rose For more information about the report, visit Research.ChiefExecutive.net/compreport
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COV ER STO RY
how to be a tech hero
Here’s a look at 12 new technologies that could make or break your company (and your career)—and a guide to how to make them work for you.
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“There’s a convergence,” says John Mullen, head of Capgemini North America Application Services. “No longer can you have a tech strategy separate from your business strategy. The digital future of the organization and the physical present and future of the company are coming together, including all the components such as suppliers, customers and employees. That’s all become the purview of the CEO, and unfortunately it’s a more ambiguous conversation than ever before.” “The pace of technological disruption is accelerating,” says Roger Park, EY’s innovation & strategy lead for financial services. “You don’t have a three- to five-year horizon to plan against it, as in the past. And now it’s not just one or two technologies at a time. It’s a whole list, and all of these disruptors are starting to stack on top of each other.” In this scenario, how does a CEO become a legend and not a goat? Consider the bipolar outcomes for two big-company CEOs in metro Detroit: J. Patrick Doyle Jr., chief of Domino’s Pizza, and Mark Fields, former CEO of Ford Motor.
PHOTO BY BRAD ZEIGLER, ILLUSTRATION BY HANK OSUNA
echnological disruption has become the most decisive force in business. Digital determinism now transforms industries. It upends lofty corporate legacies and creates new entrepreneurial ones. It opens and closes markets. It drives capital investment. It dictates workforce strategies. And insistent digital technologies have practically swallowed innovation whole. So hail to those CEOs who wrestle successfully with these truths, even if they don’t understand all the digitally based technologies involved. These 12 technologies alone, individually or collectively, can make heroes—or eat their lunches: 3-D printing, advanced robotics, artificial intelligence (AI), autonomous vehicles, blockchain, drones, Internet of Things, machine learning, next-generation genomics, software robotics, virtual and augmented reality and wearables. And woe to the CEO who doesn’t see these technologies coming, or fails to be opportunistic when he does. His company may be the next Kodak or Blockbuster.
BY D A L E B U S S
“WE DIDN’T KNOW EXACTLY WHAT IT WOULD LOOK LIKE YET, BUT WE HAD TO BE IN THE CENTER OF [TECHNOLOGY].” —Patrick Doyle Jr., CEO, Domino’s Pizza
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“WE CAN TAKE THINGS DRAMATICALLY FURTHER THAN TODAY. IT’S STILL EARLY.” —Patrick Doyle Jr., CEO, Domino’s Pizza Digitizing Dominos Operating in a low-slung, Frank Lloyd Wright-style headquarters building on the fringes of Ann Arbor, Michigan, Doyle was a Domino’s lifer who seemed as square as a deep-dish pizza. A self-described people person, he was no tech guru. But in 2009, while still president of Domino’s U.S. business, Doyle and his predecessor as CEO, Dave Brandon, decided they had to leverage technology, somehow, to spark growth. “We didn’t know what it would look like yet, but we had to be in the center of [technology], understanding what was going on and creating a competitive advantage by being ahead of the curve,” says Doyle, who became CEO in 2010. The result was employing digital
technology to optimize every aspect of the business, especially the online ordering and delivery transactions that are its lifeblood. Recruiting hundreds of tech-savvy employees to its skunkworks project, Domino’s created an app and easy ways to order pizza, including via text message, voice recognition, emojis and the Sync system of a Ford. It turned to global franchisees to help with tech-focused delivery methods; Domino’s in New Zealand was first to test drone and robot deliveries, for instance. Now, more than half of Domino’s orders are handled digitally, and its tech savvy has rocketed the company’s performance to the top of the beleaguered fast-food business. Domino’s has consistently logged spectacular 8 to 10 percent increases quarterly in samestore sales and has also chomped market share against archrivals Pizza Hut and Papa John’s, now followers in the technology race. “Other chains won’t be able to succeed in the same way just by mirroring Domino’s activities,” asserts Erik Thoresen, principal at the food service consulting firm Technomic. Domino’s is now working on ways to
Next-Tech glossary There are more, but here are 12 disruptive technologies that every CEO should know about. Additive manufacturing: Also known as 3-D printing, this technology “prints” solid objects in layers of many different materials using a digital map. Soon there’ll be 3-D “blueprints” of objects from shoes to prosthetics to cars that can be printed at home, one by one, instead of mass-manufactured. And 3-D printing will cut construction time for some structures to months from years. Advanced robotics: These robots or robotic “tools” with enhanced “senses,” dexterity and intelligence can take on tasks once thought too delicate or not economical to automate, substituting for human labor in fields like manufacturing,
maintenance, cleaning—even surgery. Lowe’s, for example, is experimenting with a robotic “exoskeleton” that makes moving heavy objects easier.
driving consumer vehicles by 2025, and in the meantime autonomous driving is upending transportation sectors from trucking to haulage to taxis. But adoption may lag due to the need for better traffic infrastructure and safety and legal frameworks—as well as human trepidation.
Artificial intelligence: AI is the simulation of human intelligence processes by machines, including learning, reasoning and selfcorrection. Applications range from autonomous vehicles to virtual personal assistants and “smart” advisors. AI is invading “knowledge work,” ranging from legal discovery to journalism. Watson winning Jeopardy! is only the beginning for this field.
Blockchain: Digital currencies began with Bitcoin, which remains on the fringes, but now financial firms are piloting their own versions. And disruption won’t be limited to banking and mortgage systems: blockchain technology also could also be deployed in areas ranging from real estate to intellectual property management, and even inventory management in multiparty supply chains.
Autonomous vehicles: Tech and car companies promise to deliver self-
Drones: Known formally as unmanned aerial vehicles, these eyes in the
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use AI to “recognize people when they walk into the store and greet them by name,” reports Doyle. “We can take things dramatically further than today. It’s still early.”
Fumbling at Ford At Ford’s iconic Dearborn, Michigan headquarters, Fields’s story turned out differently. He was ousted abruptly in May after Executive Chairman William Ford Jr. decided that Fields had misplayed the technologies transforming the auto industry. Over Fields’s three-year tenure following former CEO Alan Mulally, Ford’s stock price had deteriorated by nearly 40 percent. While Fields recently touted Ford’s commitment to self-driving technologies, he was less enthusiastic early on. In mid-2015, Fields told an interviewer that being first in autonomous vehicles “isn’t necessarily the No. 1 thing that drives us.” Rather than leading the charge, he said, “we’re going to… push ourselves to make sure [self-driving] is accessible and affordable.” To replace Fields, Ford Jr. has tapped James Hackett, who had led a tech-fueled
sky are essentially flying robots that can be remote-controlled or move autonomously. Drones are being deployed for package delivery, construction, videography, agriculture and weather monitoring. Regulators will need to figure out air traffic control and privacy issues. Internet of Things (IoT): Equipping objects or beings with sensors and connectivity enables networks to collect, evaluate and transfer data without requiring human interaction. Uses include monitoring and reacting to wear on machinery, the structural integrity of bridges and the status of home appliances. Machine learning: This type of AI enables computers to learn without being explicitly programmed, focusing on the development of programs that
transformation at office furniture maker Steelcase but had never been a “car guy” until they brought him out of semiretirement to head Ford’s nascent mobility services unit last year. Testifying to his tech-visionary bona fides, Hackett had been a TED member for 30 years. “You need to be able to create ‘new,’” says Jeff Wong, global chief innovation officer for EY. “There’s not just the worry that comes from change but the massive opportunity that comes from it. So it’s important for CEOs to be able to take advantage of the fact that things are changing.”
60% OF CEOS VIEW DISRUPTION AS AN OPPORTUNITY RATHER THAN A THREAT.
Reinventing Real Estate Charlie Young is trying to keep his company ahead of the curve. The CEO of Coldwell Banker is employing artificial intelligence to target classes of likely buyers for a specific property—and piloting new AI that helps identify likely sellers who don’t even know they’re selling yet. “This information says a couple’s youngest kid just went to college, for example, and they’ve been in the home for 10 years and
can evolve when exposed to new data. Applications range from speech and handwriting recognition to improving how self-driving systems recognize objects and topography on the road. Next-gen genomics: This marries the science used for imaging the units that make up DNA with rapidly advancing computational and analytic capabilities. This will improve health diagnostics and, potentially, human longevity, enabling the creation of high-value commercial substances from ordinary organisms such as bacteria. Software robotics: “Bots” can automate an entire series of tasks that humans normally do, such as analyzing entries in an email stream and writing responses. Already used for customer support, they’ll take on tasks such as booking tickets and
Source: KPMG, CEO Outlook 2017
conducting research. Arming them with voice control opens up bots to other service solutions. Virtual and augmented reality: Creates complete digital “worlds” or “augments” images of reality with virtually imposed enhancements—think Pokemon Go. Spreading from entertainment and gaming, VR and AR are finding applications in manufacturing, education and healthcare. Wearables: Smart watches, an early wearable, haven’t taken off. But Fitbits have. Now these devices, ranging from wristbands and necklaces to chips embedded in clothing, are moving into applications such as health monitoring and providing data to real estate agents, fire and police professionals, lawyers in courtrooms and stock brokers.
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10 steps to defending disruption In taking stock of potentially disruptive technologies, CEOs should:
ple who do strategy for the long term,” Fischer says. “It’s a little lab where we play around with all kinds of ideas and ask ‘what if?’ questions.”
Be ready—really ready. Reinhard Fischer, chief of strategy for Audi of America, urges CEOs to “stop denying reality, which is what taxi operators did with Uber. Now Uber has taken about one-third of the taxi traffic in big cities.” Disruption is happening faster than ever. “Before when you talked about technologies coming, you’d name one or two,” says EY’s Jeff Wong. “Now there are 10, and they’re all relevant and important. That’s what’s really changing for the CEO.”
Expect resistance. “There are incredible forces working against innovation” in any organization, Kusserow says. “Technology has to be so good that someone has to be willing to take the risk of restructuring or disassembling an existing process to which their success or maybe their careers may be tied.”
Don’t panic. The world is rife with examples of businesses where technological revolution fell short of its warnings. Early participants in e-learning, for example, still haven’t made money, says Julian Birkinshaw, a professor at London Business School. “Sometimes we forget about industries that haven’t been turned completely, immediately upside down. You have to make an ultimate commitment to new technology, but it’s not like you necessarily have to do that immediately.” Take a long and broad view. Wall Street may demand rapid returns but woe be unto the CEO who concedes wholesale. “You’ve got to try to optimize for 10 years from now, not even just one to two years ahead,” warns Guo Xiao, chairman of the consulting firm ThoughtWorks. CEOs must also broaden their transformation push to encompass relationships with suppliers, customers and other external constituencies. “The greatest success comes through building an ecosystem of alliances and not thinking that the impact of technology is all within the four walls of your company,” says Nichole Jordan, national managing partner of markets, clients and industry for Grant Thornton. Disrupt yourself. Critically evaluate your existing business model much as a hacker would try to take down a cybersecurity network. “Find out what the weak points are that you don’t see so that a disruptor can’t take advantage of them—and so you can disrupt yourself,” says Fischer. Seed early successes. Enable a “culture of testing and learning new technologies, not necessarily passing and failing them,” advises Roger Park of EY. Former Humana innovation chief Paul Kusserow, now CEO of Amedisys, recommends testing technologies with “people in the company who have a very specific problem that a technology could solve—more acute than anywhere else in the company—or who believe that a process needs to be changed and this could help it. Then you need to make sure these people get not only the benefit of the innovation but credit for taking the risk.” Create emerging-tech scrums. EY’s Jeff Wong suggests charging a team with “actually getting dirty with tech and playing with it, trying to address and answer problems.” Audi of America created a “digital team where we pull all the bright young minds that are working on digital topics and merge them with peo-
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Don’t get hung up on a specific technology. Resist the urge to make a big bet on the latest buzzword technology, says John Mullen of CapGemini. “Don’t prepare yourself to chase certain technologies, but [rather] to get better decision making in your organization, because the technologies that pass through your ecosystem are going to be different tomorrow than today.” Focus on building capabilities. CEOs need to see their roles as “building an organizational culture that can rapidly figure out which technologies are advancing, what the paybacks are and what the future leverages of those technologies are in order to determine whether they’re part of the business strategy going forward,” Mullen says. Consider putting tech people on the board and add the CIO to the company’s core management team. “You need to infuse specific technology skill sets in management—people who understand digital as well as your industry,” says Jeanne Beliveau-Dunn, VP and general manager of Cisco Systems. “They need to be embedded in each business unit.” Reckon with legacy IT. A company’s IT base typically must provide the computing horsepower and platforms for embracing machine learning and other data-intensive disruptors. Many CEOs get excited about a shiny new app, “but they shouldn’t lose sight of the fact that existing IT can be an enabler or an inhibitor of new digital services,” advises Paul Appleby, EVP of transformation for BMC Software. “They have to work on how to turn their existing infrastructure into a competitive differentiator. It may not be the exciting piece, but it’s what will allow you to be agile and scale and do so in a trusted environment.”
“WE’RE TAKING THE ROBOT OUT OF THE HUMAN AND ELIMINATING THE ROBOTIC NATURE OF WORK .” —David Poole, CEO, Symphony Ventures
77% OF CEOS WORRY THAT SKILLS SHORTAGES COULD IMPAIR THEIR COMPANY’S GROWTH.
have been online browsing for properties in North Carolina,” Young says. “Bingo! That’s a likely seller. If we can find those people before they even know they’re selling, we’re that much ahead.” Yet the difficulties of asserting control of new technologies have staggered even corporate titans. At GE, Jeffrey Immelt aggressively embraced technology as the means to drive a complete transformation of a 125-year-old giant into an “industrial Internet” company. He shed financial services, appliance manufacturing and other big legacy parts of GE and even moved its headquarters from Connecticut to the digital-workforce dreamland of Boston. But Immelt couldn’t persuade investors that he had managed to get ahead of the technological curve. GE’s share price languished at about its level before the Great Recession, and the company announced in May that after 16 years at the helm, the 55-year-old Immelt would be leaving his post far earlier than expected. Wall Street has learned to watch for competitors and newcomers wielding disruptive technologies in disturbing ways. Murmurs of concern rippled through the auto industry after Apple CEO Tim Cook confirmed the company’s interest in the automated-driving business. Similarly, Amazon CEO Jeff Bezos’s plan to acquire Whole Foods and get serious about grocery sent shudders through the food, beverage, retail and distribution industries.
The People Hurdle
Source: 2017 PwC CEO Survey
At the same time, transformation itself is its own threat, notes Paul Kusserow, CEO of the Baton Rouge, Louisiana-based home healthcare company Amedisys. “In the rarefied air of Route 128 and Silicon Valley, they don’t consider the fact that learning a new technology and driving a new work
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flow is difficult on a good day,” says Kusserow, who is currently struggling to get Amedisys operators to adapt to the benefits of wearable monitoring devices. “But to drive it down to places where real America works and plays and is satisfied with how things are going is much harder. New technology is always a trade-off.” This human resources hurdle is one of the biggest global challenges of the digital era. A recent BMC Software survey of more than 3,200 office workers in 12 countries showed that an average of 40 percent in each country fear they won’t be able to keep up with the rate of change required by digital business. And 88 percent placed the responsibility to create innovative cultures—in other words, the solution to this problem—on their employers. “It’s imperative for all companies, and all societies, to address this, because we are going through a seismic shift in the nature of work,” says Paul Appleby, executive vice president of worldwide sales and marketing for Houston-based BMC. “And it’s not just about new entrants, but also about the existing workforce.” Many workers fear being replaced by robotic devices, systems or processes. Indeed, disruptive technologies already have obviated millions of blue- and white-collar jobs, and are poised to eliminate many millions more. CEOs are tasked with finding ways to transition employees to more advanced jobs requiring higher-level skill sets. “The jobs that remain will be much higher-value-added jobs,” says David Poole, CEO of Symphony Ventures, which helps big companies harness automation. “They’ll use the capabilities of humans to the fullest, whereas today much of what they do is repetitive. We’re taking the robot out of the human and eliminating the robotic nature of work.” At its manufacturing and distribution centers around the world, for instance, P&G is connecting “smart tools with smarter employees and with systems that work without paper and touches,” explains Liz Fikes, director of product supply engineering at P&G’s Corporate Engineering Technology Labs. “Then you get employees who are super excited about digitization and automation.”
Thought Leadership Content Provided by the Rhode Island Commerce Corporation and the Greater Providence Chamber of Commerce
5 KEY OPPORTUNITIES FOR ADVANCED MANUFACTURERS IN RHODE ISLAND The birthplace of the Industrial Revolution, Rhode Island today is an emerging leader in manufacturing innovation. General Electric recently opened operations in the state, joining venerable manufacturers like Electric Boat, Raytheon and Textron. Now ﬁrst in New England for advanced industries job growth, according to the Brookings Institution, and the second-best state in America for innovation and entrepreneurship, according to the U.S. Chamber of Commerce, Rhode Island offers exciting new opportunities for funding, partnership and support in advanced manufacturing.
Gov. Gina Raimondo has made spurring the growth of Rhode Island’s advanced manufacturing sector a key pillar of the state’s economic development strategy. A powerful suite of economic development tools has already helped existing manufacturers expand production in Rhode Island and has enticed new global manufacturers to locate important manufacturing operations in the state. On top of this, corporate site hunter The Boyd Company recently called out Rhode Island as one of the most cost-effective places to build a new manufacturing facility in the Northeast.
Rhode Island has built and continues to replenish its highly skilled talent pool with skills-development programs and partnerships. Through the Real Jobs RI program, the state worked with Electric Boat to ensure that welding and shipﬁtting are now being taught to hundreds of students at six career and technical schools, and it partnered with Greystone to recruit, train and hire a wave of new employees. Additionally, a Job-ready Workplace Learning Program provides manufacturers with refundable job-training tax credits.
2) SUPPORT Rhode Island’s efforts to reinvent manufacturing for the 21st century have led to the expansion of Polaris MEP—a nonproﬁt that guides manufacturers to growth—as well as the establishment of an Innovation Center for Design and Manufacturing. Partnering with local manufacturers, the state recently founded the Rhode Island Manufacturers Advisory Council and hosted a manufacturing-and maker-focused pop-up showcase.
3) EDUCATION Along with being the ﬁrst state to offer computer science to every child in every public school, Rhode Island partners its high schools and community colleges with local manufacturers to give students industry-speciﬁc knowledge, workplace tours, apprenticeships and internships. One recent grant dedicated $3.65 million to enhance the manufacturing training program at a local high school. Already home to world-class colleges and universities like Brown University and the Rhode Island School of Design, Rhode Island is also the fourth state in the country to offer tuition-free community college, an essential credential for the evolving manufacturing workforce. It also offers student-loan assistance to graduates pursuing a STEM or design career.
5) INNOVATION Rhode Island is stimulating innovation with an Innovation Voucher program that matches small companies with universities and funds in-house R&D with Industry Cluster Grants that help manufacturers collaborate and grow together. Further, a $20 million partnership with the University of Rhode Island will soon yield an Innovation Campus designed to bridge the state’s strengths in research and industry.
CONNECT WITH US The Rhode Island Commerce Corporation and the Greater Providence Chamber of Commerce are here to help both new and established manufacturers access these and other opportunities in the state.
Connect with us at: email@example.com
“WE NEED A STRONG CONTINGENT OF KIDS COMING OUT OF OUR COLLEGES SO THAT WE CAN CONTINUE TO FUEL THE GROWTH OF OUR BUSINESS.” —Richard Howe, CEO, Inuvo
Dale Buss is a financial journalist who also contributes to Forbes, The Wall Street Journal and other publications. Visit Chief Executive online for related stories on managing disruptive technology:
Building the skill levels of current employees requires expanding in-house training beyond the traditional one-day off-site approach. Ed Hess, a business professor at the University of Virginia, foresees corporate human resources being transformed into human development. “Companies will have to do their own training,” he says. “HR has to become ‘HD’ because the education system can’t produce what companies need.” “Multiplicity,” in which diverse groups of people and machines work together to solve problems, is an approach that already underlies everyday automated tasks ranging from movie recommendations on Netflix to automobile responses in self-driving, says Ken Goldberg, an engineering professor at the University of California, Berkeley, and director of the People and Robots Initiative. “Rather than discourage the human workers of the world, this new frontier has the potential to empower them,” he says. Indeed, a growing number of workers, especially millennials, relish the change and challenge that comes when companies embrace technological disruption—including disrupting their own jobs and careers. “They want the ability to test new technologies and work environments and the multidisciplinary nature of work now,” says Roger Park, Innovation & Strategy lead for EY. “So we’re continuously hiring, onboarding and training millennials, and connecting them into deep pools of experience across a lot of different disciplines. And that’s a key part of innovation.” Still, employers increasingly run into a
big roadblock: There aren’t enough technologically capable people available to fill the roles the disruptive age is opening up. Many are having to get creative. Jaguar Land Rover and Audi of America, for example, have helped U.S. dealers hire hundreds of military vets as dealership service technicians over the past few years. Likewise, Rockwell Automation and Manpower recently joined forces to focus on training veterans reentering the workforce. They plan to “reskill” about 1,000 vets each year as a new breed of “advanced digital manufacturing” employees who can help fill out the ranks of available and capable new-age workers. Others are working with undergraduates. GE, for instance, works with colleges in areas where it has plants, talking with professors to design curricula appropriate for the new jobs in its facilities. But even such efforts aren’t enough, largely because, as Appleby sees it, “the nature of education hasn’t changed since the Industrial Age.” Enlightened CEOs and politicians are also trying to help the education system adapt to the changing needs of employers. Oracle teamed up with Stanford University to fund DesignTech, a high school in Silicon Valley built around principles of technology-design thinking and intended to help create the next generation of workers. Cisco launched a college scholarship program specifically for high school kids considering careers in cybersecurity. In Arkansas, Governor Asa Hutchinson last year worked with big companies such as Walmart as well as small local tech employers to craft a tech-friendly curriculum bill that requires public high schools to count coding classes as a math credit toward graduation, among other steps. “We need a strong contingent of kids coming out of our colleges so that we can continue to fuel the growth of our business,” says Richard Howe, CEO of Inuvo, a Little Rock-based software and data analytics outfit. “These initiatives have a big impact on us and the kind of people we’re hiring.”
P&G: Recapturing an Innovative Edge (ChiefExecutive.net/SO17disruptivetech) and Steering a Move Into Self-Driven Cars (ChiefExecutive.net/SO2017automotivetech)
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Production line for world's ﬁrst hybrid forklifts with 4 to 5 ton capacity
The Secret Ingredient of American Manufacturing: Some Japanese Flavor A thriving section of American industry is taking inspiration from half a world away
THOUGHT LEADERSHIP CONTENT PROVIDED BY MITSUBISHI HEAVY INDUSTRIES GROUP
If you’ve heard that American manufacturing is in decline, consider this: The real output of U.S. manufacturers has nearly doubled in the past 30 years. Automation can claim only part of the credit. The gains should also be attributed to the introduction of new management practices, many of which ﬁrst took hold in Japan. University of Michigan management professor Jeffrey Liker says Japan is a leading inﬂuence on the development of manufacturing quality practices in the U.S. “You can ﬁnd the roots of activities such as kaizen, Six Sigma and lean manufacturing in Japan,” says Liker, author of Developing Lean Leaders at All Levels. Historically, the exchange of manufacturing practices between the two countries is longstanding. In the aftermath of World War II, Japan became known as a maker of cheap consumer
Womack recalls visiting the plant of a major U.S. auto manufacturer in 1979. It employed about 2,500 workers on assembly and an equal number on rework. “The number of people ﬁxing the mistakes was about equal to the number of people making the mistakes,” he jokes. By that time, Japan was rapidly becoming a leader in automobiles and electronics. As a researcher at the Massachusetts Institute of Technology, where he studied global manufacturing practices, Womack led a team that visited Japan and coined the term “lean production” in reference to the Toyota system. “The ability of Japanese companies to enter the North American market in the 1970s and 1980s and quickly compete with high-quality, low-cost products was really a wake-up call for many U.S. manufacturers,” says Ken Barina, president of Mitsubishi Caterpillar Forklift America.
“To survive and compete in this environment, U.S. manufacturers closely studied the concepts driving this efﬁciency and subsequently adopted many of the same techniques that allowed Japanese companies to be successful in the ﬁrst place. Concepts such as continuous improvement, waste reduction, lean and Kaizen are now standard practice among successful U.S. ﬁrms.” As U.S. manufacturers studied the Japanese model, Americans began
culture and long-term vision from our Japanese parent company, which has enabled us to react quickly to local market needs.”
If you’ve noticed how much better American automobiles are today, compared to 30 years ago, then you understand ﬁrsthand the power of Japanese management processes. But the Japan-led drive toward quality and efﬁciency has gone beyond
Manufacturing Sector: Real Output (OUTMS)
Real manufacturing output in the U.S. has nearly doubled over 30 years 130 120 Index 2009 = 100
products, such as toys. At the same time, however, it was welcoming American management experts who sought to help the nation rebuild from the war, such as W. Edwards Deming—today known as the father of Total Quality Management. “The Japanese grabbed [Deming’s ideas] and ran with them, while the Americans sort of messed around with them,” says Jim Womack, founder of the Lean Enterprise Institute in Cambridge, Mass. “The Japanese sweated out the details and worked hard to implement them sustainably.” Some of the ideas adopted in Japan had been developed by the American military to rapidly increase Allied production output during the war. Yet it was Japan—not the U.S.— that most effectively implemented these ideas during peacetime, according to Womack, Liker and other experts. “The Japanese saw the enterprise as a system with people at the center,” Liker says. “They took a longterm perspective, even in the face of short-term ﬁnancial costs.”
110 100 90 80 70 60
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: U.S. Bureau of Labor Statistics. Gray bars indicate U.S. recessions.
learning about Japanese manufacturing processes ﬁrsthand from Japanese manufacturers who formed joint partnerships or set up operations in the United States. Today, Japan is one of the largest and most technologically sophisticated sources of foreign direct investment. It is America’s third largest source of FDI (behind only the U.K. and Canada), with $424 billion invested as of 2016. Companies originating from Japan operate in sectors such as machinery, ﬁnance, metals, computers, electronics, plastics and insurance. Mitsubishi Heavy Industries Group (MHI) employs about 6,600 people in the United States in more than 100 locations across 30 states. Headquartered in Houston, it combines a Japanese-style focus on manufacturing process with American-style rapid responsiveness, Barina says. “We’ve inherited a strong quality
manufacturing and has taken hold in a variety of other industries including retail, healthcare, technology and even agriculture. Womack says that, in addition to lean manufacturing, Japan can take some credit for a broader shift in business practices. While the “quality” function at an organization used to focus exclusively on inspecting for defects, today it involves utilizing the entire organization to ﬁnd and ﬁx the root cause of problems. “Today, nearly every big organization has an operational excellence group or a continuous improvement group,” adds Womack. “And the ﬁrst concrete example of that idea was in Japan.”
For more information, visit mhi.com. For our online media, visit spectra.mhi.com.
THOUGHT LEADERSHIP CONTENT PROVIDED BY MITSUBISHI HEAVY INDUSTRIES GROUP
FAM I LY P HILANTHROPY
A Guide to Giving How four business leaders decided on philanthropic vehicles—and what you can learn from their experiences.
BY WILLIAM J. HOLSTEIN
IF IT SEEMS LIKE CEOS AND THEIR FAMILIES ARE GIVING away more money than they used to, there is a reason: they are. “It used to be in the 1980s and 1990s that most foundations were created after a CEO had passed away,” says Virginia M. Esposito, president of the National Center for Family Philanthropy in Washington, D.C. “But there has been so much money made in the late 20th century and early 21st, people are doing their estate planning earlier. What we are seeing in this millennium is that founders want to start giving away money now.” From creating a legacy and introducing family members to philan-
thropy to ensuring that your donations are used effectively, there are lots of reasons that families associated with successful businesses are opting to take an active role in giving back—and lots of different ways to go about meeting those philanthropic goals. How you should structure your philanthropic endeavors depends on your giving objectives and desired level of involvement, as well as estate and tax-planning goals. For insights on navigating the complex tangle of charitable institutions and giving mechanisms, we talked with four philanthropic business leaders about how they identified the best one for their family and philanthropic goals. Here are their stories.
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The Cordes family invests in entrepreneurial programs that address poverty in developing countries.
Ron Cordes: SUPPORTING ORGANIZATION Ron Cordes sold a privately held investment business, AssetMark, that he founded to a large insurance company in 2006. Having traveled extensively in developing parts of the world, he and his wife, Marty, understand some of the tough challenges that millions of people face. They created the Cordes Foundation with the goal of helping to “solve the big problems of the world with innovative solutions,” says Cordes. The Cordes family chose to create a supporting foundation, a philanthropic vehicle that operates in a similar fashion to a private foundation but is classified as a public charity because it is linked to and makes grants through one. The structure gives the family the ability to be have a say in how funds are disbursed while also getting a more advantageous tax treatment than a private foundation woud allow. “Like many entrepreneurs, we funded our foundation with
stock in a closely held company,” explains Cordes. “If we had chosen a traditional private foundation, the charitable deduction for our contribution would have been limited to our original ‘cost basis’ in the stock, whereas with a supporting organization we were entitled to a charitable deduction equal to the fair market value of the contribution. This favorable tax treatment allowed us to maximize the portion of our stock we contributed to supporting our charitable mission.” The Cordes Foundation has its own board and its own endowment of about $10 million but is connected to a larger public charity called Impact Assets, which provides administrative oversight and other services. However, family members are able to take an active role in grant decisions. That’s key for Cordes, who was keen to invest in entrepreneurial approaches to attacking societal problems. Cordes seeks to deploy funds to foster businesses that advance social causes. “You can use business
SUPPORTING ORGANIZATION Ideal/Appropriate for: Favorable tax deduction, relatively easy to administrer Financial commitment: No requirement for how much must be given away each year Pros: Opportunity for family involvement, less management responsibility Cons/Caveats: Lack of complete control
SEPTEMBER/OCTOBER 2017 / CHIEFEXECUTIVE.NET
models and the capital markets as a way of solving problems,” he explains. “As an entrepreneur, I liked the idea that I could build companies that solved problems.” In 2007, he provided seed funding for a group of widows in rural Uganda to make their first 20 microloans to other women. Today, The Women’s Microfinance Initiative (wmionline.org) has made 12,000 loans to women in Uganda and three neighboring countries. Altogether, Cordes has made grants or investments in 20 countries. Harris Rosen has given away more than $63 million for free preschool and college tuition.
PRIVATE FOUNDATION Ideal/Appropriate for: Providing a role for the donor or family members, building a multigenerational legacy Financial commitment: Distributing 5 percent of funds each year Pros: Complete control over disbursement decisions Caveats: Requires significant initial investment and management, annual IRS reporting
The Cordes’s 27-year-old daughter, Stephanie, is now vice chair in the foundation. Just 16 when her parents created the foundation, she took part in board meetings and decisions throughout high school and college but was not “super-engaged,” says Cordes. Instead, she pursued a career in fashion and media for several years. In 2013, however, she had an epiphany. “Dear Mom and Dad,” she wrote in a letter, “I thought I had my dream job, but I now realize I want to work in the foundation.” “We wanted it to be her decision,” explains Cordes, who says he and Marty resisted urging Stephanie to take a role sooner. “We didn’t want her to feel we were pushing her into this. But we were thrilled when she made this decision.”
Harris Rosen: THE PRIVATE FOUNDATION Harris Rosen decided not to wait until retirement to start giving away the money he made as an owner and operator of a collection of seven convention and leisure hotels all in Orlando. He still holds his full-time job
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as president and COO of Rosen Hotels & Resorts, which he founded. But in 1990, he set up a private grant-making foundation governed by a three-person board, including himself and his CFO, Frank Santos, and started giving away money. Lots of money. Rosen has given away $63.4 million for free pre-school and college tuition, room, board and books for children in Orlando, to Haitian hurricane victims, Japanese earthquake victims and to other causes. Rosen’s foundation is as close to being a one-man band as it gets, with the hotelier using the autonomy a private foundation offers to make grant-making decisions and participate in every aspect of running the foundation, which reportedly has an endowment of about $17 million. His foundation is fiscally efficient, curtailing operating expenses—which average .69 percent of assets across the universe of U.S. private foundations, according to IRS records— by outsourcing much of the machinery that most foundations build in-house. An outside lawyer handled filing for 501(c) tax status and an outside accountant prepares the annual tax return. “About 25 years ago, sitting at my desk contemplating a fifth, sixth and seventh hotel, it occurred to me I had been blessed beyond anything I had ever imagined and it was time for me to acknowledge the presence of God and also to try to offer a helping hand to people who need it,” says Rosen, who was born and raised in New York City’s then-gritty Lower East Side. Like all private foundations, the Harris Rosen Foundation must distribute 5 percent of its assets annually, although Rosen chooses to distribute significantly more. The heart of his giving has been the Tangelo Park Program. In 1993, he essentially adopted a run-down, drug-infested section of Orlando with a 90 percent minority population base. Working with the approval of county education officials, he started offering free preschool for all children in Tangelo Park from age two to four. “The advantage stays with the child through high school and college,” says Rosen, who founded the program. The program offers counseling and support to the same kids in
high school and pays for any public college or technical school enrolled in after graduation. Today, the high school graduation rate is 100 percent, up from about 45 percent when Rosen started his program. College graduation rates are 80 percent, far higher than the national average. Crime in Tangelo Park is down and real estate values have soared. There are no case officers overseeing Rosen’s projects. He simply pays the bills. Other causes have included offering scholarships to Cornell University, contributing approximately $8.8 million toward a new Jewish Community Center and endowing a hospitality school at the University of Central Florida. Rosen is about to “adopt” another tough section of Orlando called Parramore. At 77, he has no plans to slow down.
Michael Kay/Barbara Bing Pliner: THE DONOR-ADVISED FUND Michael Kay, former CEO of LSG Sky Chefs, walked away with a significant payout when his company was sold to private equity investors in 2000. Seeking to develop a more sophisticated estate plan, Kay met with his lawyer, who recommended that he consider a donor-advised fund (DAF) at the Community Foundation for Greater Atlanta. An increasingly popular philanthropic vehicle in recent years, DAFs are philanthropic enterprises typically hosted by financial companies like Fidelity Investments or university and community foundations into which donors can deposit cash, appreciated securities or other assets to be distributed to charities over time. Kay liked the relief from administrative tasks that the Atlanta community foundation DAF offered. “There was someone else to do all the homework about potential beneficiaries,” he says, explaining that the DAF helped identify and screen potential causes that fit his family’s charitable goals. “My wife and I became interested in after-school programming for disaffected youth. I could say, ‘Surface three foundations that do a first-rate job in this regard and I would like to go meet them with my wife.’” He was also able to involve his four children. As the name implies, DAFs place donors in an advisory role—they make rec-
Barbara Bing Pliner supports nonprofit programs that teach ballet to girls from low-income families.
ommendations but don’t have the absolute control over grant-making that a private foundation offers. Donors and family members, however, can serve in that advisory capacity, as is the case for the Kay’s children. Barbara Bing Pliner, who got involved in philanthropy in a big way after selling her Southern lifestyle and media company in 2012, is another fan of the Atlanta community foundation. “One of the things we have found through the community foundation is that we can join arms with other philanthropists,” says Pliner, whose particular passion is nonprofit programs that teach ballet skills to girls from low-income families. “Together our efforts make a bigger impact than just being individual donors.” Because there are no distribution requirement for DAFs, the structure has come under fire from critics who view them as a place people seeking a tax deduction can park assets indefinitely. However, the overall distribution rate of DAFs was a healthy 21.5 percent in 2013, suggesting that most are serving their charitable purpose. That figure doesn’t surprise Alicia Philipp, president of the Atlanta foundation, who says the structure has opened a gateway to the philanthropic world in her community. “The beauty of a donor-advised fund is that if people create one and get engaged, they become raging philanthropists,” says Philipp. “They find out what’s happening in their communities. You not only get the money working in the community; you also get the people engaged in the community. That’s the secret sauce.”
DONOR-ADVISED FUND Ideal/Appropriate for: Tax deduction without the need for immediate disbursement, little administration and management Financial commitment: No requirement for how much must be given away each year Pros: Donor-advised fund manager provides management and research Cons/Caveats: Lack of complete control, fees can be significant
William J. Holstein is an editor, author and journalist who specializes in technology and management.
SEPTEMBER/OCTOBER 2017 / CHIEFEXECUTIVE.NET
CEO O F T H E YEA R
HONORING THE 2017 CEO OF THE YEAR:
Henry Schein’s Stan Bergman
“Our democracy is too precious to be torn apart by our differences.” —Stan Bergman, CEO, Henry Schein
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IN JULY, BUSINESS LEADERS GATHERED at the New York Stock Exchange to recognize Stanley Bergman, CEO of Henry Schein, who was chosen as the 2017 CEO of the Year by a selection committee of his CEO peers. “Stanley Bergman was the obvious choice for this year’s award,” said Randall Stephenson, CEO of AT&T and last year’s honoree, who praised Bergman for his performance track record and commitment to social responsibility while leading the distributor of healthcare products and services. “This business has a sustained record of growth for 28 years—which just happens to perfectly coincide with Stan’s tenure as CEO. And its commitment to community goes beyond just writing a few checks—the whole Schein team is actively engaged.” In accepting the award, Bergman took the opportunity to urge business leaders to help bridge a divide being forged by advances in technology fueling what he called the Fourth Industrial Revolution. “We and our companies are beneficiaries of the Fourth Industrial Revolution, and we have an obligation to civil society to do a better job expanding these benefits to others,” noted Bergman, who grew his company into an $11.5 billion enterprise in part by embracing a technology-fueled transformation. “This is not about taking positions regarding taxes, where there is room for genuine disagreement, but about bringing more people into the digital economy.” Referencing his own immigration to the United States in 1976 and the immigration journeys of several of his key team members, Bergman also called on CEOs to be societal leaders during a time when tolerance and respect for differences is on the wane. “Americans thrive on the diversity of thought that is freely expressed by people from all walks of life and diversities,” he noted. “Business leaders must work together to bridge our political, religious and cultural differences, which is more important now than ever before. Our democracy is too precious to be torn apart by our differences. Something greater than ourselves is at stake.” —Jennifer Pellet
Clockwise from top left: Stan Bergman with Henry Schein’s Len David; cocktail hour on the NYSE trading floor; Leidos’s Roger Krone and AdvanSix’s Erin Kane; Yale University’s Jeff Sonnenfeld and Deloitte’s Bob Rosone
At left, Chief Executive Group’s Wayne Cooper, AT&T’s Randall Stephenson, Stan Bergman and Chief Executive Group’s Marshall Cooper with the CEO of the Year award. Above, NYSE’s Chris Taylor welcoming attendees
SEPTEMBER/OCTOBER 2017 / CHIEFEXECUTIVE.NET
Clockwise from top: AT&T’s Randall Stephenson; Bergman giving his acceptance speech; Dassault Falcon Jet’s Jean Rosanvallon, Dentsu Aegis’s Nick Brien and XLR-8’s Bob Nardelli; Chief Executive Group’s Mike Winkleman with Bergman and his wife, Marion; Barnes Group’s Patrick Dempsey, Chief Executive Group’s Wayne Cooper and Haverty Furniture’s Clarence Smith; Abaxis’s Clint Severson and Chief Executive Network’s Bob Grabill; Henry Schein’s Joseph Herring and Gerry Benjamin
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MERCK ANIMAL HEALTH CONGRATULATES STANLEY BERGMAN FOR BEING RECOGNIZED AS CEO OF THE YEAR
Merck Animal Health is proud to partner with Henry Schein Animal Health.
TALK I N G PO I N TS
WHAT YOU NEED TO KNOW ABOUT: DODD-FRANK
FIXING DODD-FRANK By Peter Haapaniemi
and lending that promote economic growth and job creation.” With that in mind, here are several points that CEOs can bear in mind when discussing Dodd-Frank. Everyone agrees: Dodd-Frank is very complex. In its 2,300 pages, the act covers a lot of ground, from the way banks invest to requirements that companies report the use of “conflict minerals,” or minerals extracted in a conflict zone. About 30 percent of the 390 rules mandated in the act have not even been finalized: Nevertheless, notes the American Banking Association, it “has resulted in over 3,900 pages of proposed and final rules, which laid end to end would be nearly three times the height of the Empire State Building.” Dodd-Frank has affected at least some lending. The act raised the bar for making loans, which logically would make it harder for businesses to get funds. However, com-
WIN MCNAMEE/GETTY IMAGES
THERE IS A LOT TO DISLIKE IN THE 2010 DODD-FRANK ACT, which created new agencies, more bureaucracy and a tangle of rules for financial services and business in general. In the fight against over-regulation, the act has become a high-profile target, and the White House has frequently called for it to be overturned. As is so often the case, however, things are not that simple. The act is very broad, and it clearly puts a burden on business. But it has its positive points, and it was created to address the very real problems that led to the 2007 financial crisis. Thus, many business people—including many bankers— are calling for fixing it, rather than gutting it or repealing it. “Radical change is not the answer,” James Gorman, chairman and CEO of Morgan Stanley, recently wrote. “Here is an opportunity for some common sense, targeted changes that can preserve the strength of the banking system while enabling the sector to better support the saving, investing
President Obama, shown here congratulating congressional sponsors Chris Dodd and Barney Frank, signed the Dodd-Frank Act into law in 2010.
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mercial bank loans have actually risen from about $1.2 trillion in mid-2010 to close to $2.1 trillion today. On the other hand, it may well be that smaller businesses and startups, which present more risk, are having a harder time getting loans. And a University of Maryland study found that Dodd-Frank has had unintended consequences for middle-class home buyers. From 2010 to 2014, the study found, mortgage lenders reduced loans to middle-class households by 15 percent and increased them for wealthy households by 21 percent. Compliance costs for banks have gone up—but how significantly? The American Action Forum says that in its first six years, the act cost businesses $36 billion—and a lot of that was borne by banks. However, observers point out that it can be difficult to separate out Dodd-Frank costs, especially with anti-money laundering rules and other regulations affecting banks. What is clear, however, is that the burden falls more heavily on smaller banks, which have far fewer resources to devote to compliance. And smaller banks, which really had nothing to do with the financial crisis, are a key resource for small businesses.
“We can never be confident there won’t be another financial crisis.”
First, do no harm. Dodd-Frank created mechanisms to allow government agencies to deal with systemic threats. Like many aspects of the act, such tools could be improved. But as Federal Reserve Chief Janet Yellen recently told the Senate Banking Committee, “We can never be confident there won’t be another financial crisis.” Looking back on the upheaval caused by the recession—and the trillions of dollars lost—many observers suggest thinking twice before the wholesale elimination of such safeguards. As Goldman Sachs’ Gorman told CNBC a few months ago, “The last thing anybody wants to do.... [is] move back to the deregulation that we had prior to the financial crisis. That did not end well.”
OLIVIER DOULIERY-POOL/GETTY IMAGES
Some of it seems to be working. Bank-industry profits last year reached $171.3
billion, an all-time high. At the same time, all major banks passed the most recent Dodd-Frank-mandated stress tests that assess banks’ capital. The idea is that with more capital on hand, banks will be in better position to ride out a downturn, give government agencies time to respond and, ideally, avoid the need for bailouts. “This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” Federal Reserve Governor Jerome Powell said in a release. “This would allow them to lend throughout the economic cycle and support households and businesses when times are tough.”
In keeping with his campaign promise to dismantle Dodd-Frank, President Trump signed a resolution nullifying one of its disclosure requirements.
SEPTEMBER/OCTOBER 2017 / CHIEFEXECUTIVE.NET
A NEW REPORT
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CEO RO U N DTA B LE
CHIEF EXECUTIVE OF THE YEAR 2017
Disrupting the Organization CEOs share insights on the challenges and opportunities of developing next-generation leaders in an atmosphere of rampant disruption. By Jennifer Pellet AS WE WITNESS INDUSTRY AFTER INDUSTRY disrupted by the ripple effects of technological advancements, it’s clear that today’s companies must continually adapt and evolve to survive. Against this backdrop of rapid transformation, the always challenging task of attracting, developing and retaining talent becomes even more complex, agreed CEOs gathered for a recent roundtable discussion co-sponsored by AlixPartners and Chief Executive. For UPS CEO David Abney, changes wrought by the growth of ecommerce coupled with innovative technology created talent challenges at a company long lauded for its ability to recruit and retain workers. “Our business used to be primarily B2B, but now more than half of our business is B2C,” explained Abney. “We’re determined to be on the front end of the technology that can help us be much more efficient than we have ever been before. On the other hand, there are people trying to figure out how to use the latest technologies to take a niche of our business here and a little bit there.” Embracing Outsiders Despite a reputation for successfully attracting young recruits and retaining them for decades, UPS now faces a need to augment that talent pipeline model. “Once we get them ‘brown-blooded,’ as we call it, we promote from within and keep them for life—that’s been our story,” said Abney, who joined the company himself as a loader while a freshman in college. “But our business has changed so much that for the first time we’ve been bringing in people at much higher levels in a significant way.” On-ramping experienced talent with fresh perspectives, however, has proven more challenging than expected. Ironically, the company is actually too good at indoctrinating new employees in the “UPS way.” “I’ve noticed that as soon as we bring them in, we try to make them like us,” explained Abney. “We have to learn that the reason that we’re bringing them in is that
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we need to change a little bit—and that the same things that worked with our former system are not going to work as we bring more people in midstream.” Abney noted that bearing in mind that the biggest challenges his company faces are also its biggest opportunities helped in navigating these changes. “It’s really important to frame it in that direction, because if you just focus on the challenge part, it becomes more of a defensive maneuver,” he explained. “I don’t think that brings as positive an outcome as embracing the opportunity.” Fighting Complacency Galvanizing existing employees toward change can be particularly challenging for healthy companies. Henry Schein CEO Stan Bergman is no novice at transformation, having been named Chief Executive’s 2017 CEO of the Year in part for his success in shifting his company from a healthcare product distribution company to a provider of management solutions for dental and veterinary practices. Yet, Abney’s experience resonated with Bergman, who pointed out that convincing employees to leave the familiar behind and embark on new paths takes a healthy amount of persuasion. “We have a company that has been successful for a long time, so when you go to the team and say, ‘We’ve got to change,’ they say, ‘Why? Things are working,’” asserted Bergman. “So, we have to find a way to convince the team.” Both technological innovations and the swinging pendulum of healthcare reform have become platforms for Bergman in rallying his troops toward embracing change. “We know healthcare is going to evolve over the next 10 years, because [the country] can’t afford what it is today,” he said, likening his situation to Abney’s. “No one knows exactly where the future is going, but we do know we have to change from a logistics, a technology and a solutions point of view. We need to drive change and drive change quicker. We’re not a technology company per se, but at the end of the day, we are not going
to be selling product. UPS is not going to be selling shipments. We will both be selling solutions.” For some leaders, transformation required a complete overhaul. “You don’t have to be a rocket scientist to see that seven management layers wasn’t the right structure for what we were trying to accomplish,” said Quest Diagnostics CEO Steve Rusckowski, recounting his decision to restructure the company he joined in 2012. “We took out three layers and 15 percent of management. It wasn’t easy, but it had to be done.” Having a more egalitarian leadership structure enabled the team to move more quickly and to overcome the resistance from within that typically plagues turnaround efforts. “It’s a perpetual fight against all the antibodies of change,” he noted. “There are always a lot of people in the middle who don’t want change. They think, let’s see how long he lasts. Five years later, I’m still here, so we’re wearing them down. Some of it is mechanical but some of it is just strong, hard, dedicated leadership and persistence.” The Power of Purpose For Steve Collis, CEO of AmerisourceBergen, moving toward a purpose-driven culture helped align employees behind what might well have been a tricky transition for the company, which has been working toward combining its specialty pharmaceutical and wholesale businesses. “Our purpose is honoring our responsibility to create healthier futures,” he explained. “That’s a very powerful message in the company and one that I think our teams are responding to.” Having defined values can serve as a touchstone for employees of companies navigating transformation, noted several business leaders. Faced with ramping up from 3,000 people to about 16,000 in 10 years, Gulfstream Aerospace invested two years in developing leadership and technical training programs geared toward maintaining the culture that had helped to drive the company’s success during the ramp-up process. “We were worried we were going to lose that customer intimacy culture that we had spent 40 years building,” explained Mark
Burns, president. “The training taught people how they should behave day to day interacting with each other, as well as with the customer. It was so successful for the manager-level-and-above employees that we rolled it out to every employee.” Respecting and rewarding employee initiative also goes a long way toward getting employees onboard with transformative From left: AlixPartners’s Ted Bililies, Henry Schein’s Stan Bergman, AdvanSix’s Erin Kane and Armour Residential’s Scott Ulm
strategies. “Nobody wants to be told what to do everyday,” noted Tom Quinlan III, who says empowering employees helped him lead R.R. Donnelley through a reorganization that broke the company into three separate public entities, one of them LSC Communications, which he now helms. “Personally, I wanted to work in an organization where I get up in the morning, come in and make a difference—and I think we created that. If we hadn’t, I don’t think we would have gone on.” Bridging Generation Gaps A culture viewed as outmoded and rigid can be a hindrance for established companies seeking to hire young, technically skilled workers. Alan Masarek, CEO of Vonage, pointed out an often-faced dilemma: the very companies that most need to attract young talent to transform face an uphill battle because they’re viewed as dated and out of touch. Tasked with shifting Vonage’s focus from residential communications to business communications in pursuit of growth, Masarek found it difficult to attract new
“No one knows exactly where the future is going, but we do know we have to change from a logistics, a technology and a solutions point of view. We need to drive change and drive change quicker.” —Henry Schein, CEO, Stan Bergman
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Top row, from left: David Abney, CEO, UPS Mark Mlotek, Chief Strategy Officer, Henry Schein Steve Collis, CEO, AmerisourceBergen Fred Hassan, Managing Director, Warburg Pincus
Thomas J. Quinlan III, CEO, LSC Communications Mark Burns, President, Gulfstream Alan Masarek, CEO, Vonage James Guyton, Director, AlixPartners J.P. Donlon, Editor Emeritus, Chief Executive
talent to replace employees who were ill-equipped for the journey. “We’re based in New Jersey, not viewed as particularly innovative and have a hierarchical top-down management—all things millennials hate,” he noted. “We’ve been trying to make the company a destination workplace, and doing it in the midst of a transformation, which is interesting because, when you go through a transformation you get hammered on social media on sites like Glassdoor.” Creating growth and development programs helped, as did taking a bigger role in the hiring process. “I started signing off on every new hire,” he reported. “A lot of people from the old world of Vonage don’t know what ‘great’ looks like, and that’s a problem if they’re going to be hiring for the next generation.” Like UPS and Vonage, AdvanSix CEO Erin Kane also needs to jump-start talent development at the resins and chemical company she’s been leading since it spun out of Honeywell in 2016. “I’m blessed with the privilege to celebrate employees with 30-plus-year anniversaries, but I also recognize that I need to bring the next generation workforce into the organization. We will face significant retirements in the years to come,” she said. “If you go into one of our plants, they’ll tell you it takes three to five years to train an A operator, who then may be ready to become a frontline supervisor in seven to 10 years. But I don’t have 10 years to train my next workforce for the future.” In addition to the need to speed up the development process, Kane is focused on employee engagement among her workforce, approximately 55 percent of which is union-represented employees. “As a leadership team, we are focused on building a culture
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Patrick Dempsey, CEO, Barnes Group Scott Ulm, Co-CEO, Armour Residential REIT Bottom row, from left: Jim Breslawski, President, Henry Schein Paul Horgan, Head of North American Commercial
Insurance, Zurich North America Stephen Oswald, CEO, Ducommun Ted Bililies, Managing Director, AlixPartners Stanley Bergman, CEO, Henry Schein Erin Kane, CEO, AdvanSix
that is performance driven and employee centered. With the spin we asked ourselves, ‘How do we enable a culture that will inspire 110 percent performance from those who we need to come to work enabled and connected to what we need to safely achieve, day in and out?’” The answer is a work in progress and built on a foundational principle of continuous improvement. For example, Kane started by simplifying legacy operating systems, principles and behaviors to be “fit for purpose,” and is working toward instilling them at AdvanSix. Defining values that employees can align themselves behind was a common theme among CEOs who shared their transformational journeys, noted Ted Bililies, managing director of AlixPartners. “Providing a set of behaviors or values, making that blueprint simple enough that it could be put on the back of a card and having financial and non-financial rewards for that seems like a very big theme,” he said. “Being consistent in your values and the way you behave and over-communicating those principles and values gives employees a kind of North Star that keeps companies steady.” Ultimately, responsibility for not only adopting values but ensuring that they become part of a company’s DNA falls to the CEO, added Fred Hassan, managing director at Warburg Pincus. “A culture really is the reflection of senior leadership, it’s really the CEO and the top management team,” he said. “If they truly develop a culture of expecting the best and giving your best and role model that themselves, it’s amazing how much productivity gets unleashed and how a company can change and evolve.”
CEO RO U N DTA B LE
CHIEF EXECUTIVE OF THE YEAR 2017
Understanding the Mindset of Risk PERHAPS AS NEVER BEFORE, CHIEF EXECUTIVES of established companies can sense a perfect storm in the making. The technological forces that created Amazon, Tesla and Netflix are accelerating as industry after industry undergoes digital disruption. At a time when Airbnb is booking more rooms than a major hotel chain, entire business models appear to be at risk. Meanwhile, the regulatory and political environments at home and abroad seem highly uncertain at best. And all of this is unfolding at a time when activist investors are becoming increasingly successful in forcing themselves onto corporate boards and in firing well-respected CEOs. While those who cling to the ways of the 20th century will soon be relegated to the dustbin of history, embarking on revolutionary change is also fraught with peril. The key question is how to manage these multi-faceted, compounded risks. Chief executives who attended a roundtable discussion on understanding and managing risk had experience in a broad array of American industrial sectors, including autos, defense and aerospace, pharmaceuticals, insurance, telecommunications and accounting and consulting. All of them were looking for ways to mitigate the external risks their companies face and identify and manage the measured risks their organizations need to take on to remain competitive—to the extent possible. “Risk comes in places you don’t expect and in ways you don’t expect,” noted Ross Buchmueller, the CEO of PURE Insurance, which co-sponsored the roundtable with Chief Executive. One major question is how to create an entrepreneurial, risk-taking mindset inside a large legacy company. Should it be confined to a skunkworks-like subsidiary or division and only selectively introduced into the mother ship? Should it come from joint ventures with other companies, large and small? Or are mergers and acquisitions the best way to jump-start the right sort of risk taking?
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How CEOs can ensure their companies take the right risks to explore emerging opportunities. By William J. Holstein
Aetna is one giant wrestling with such questions. “We are a 164-year-old insurance company and we are trying to transform ourselves into something different,” said Rick Jelinek, executive vice president for enterprise strategy. “One of the most challenging things in our business is that we pay our executives to basically protect the company. It’s very difficult to transform or change when you have that culture embedded inside the company.” One path Aetna has chosen is to create a new division that concentrates on individual consumer business. The company, based in Hartford, Connecticut, is moving its headquarters to a trendy building in lower Manhattan to accelerate its transformation and attract the best and brightest young professionals. Acquisition Risks and Rewards Aetna was also willing to gamble, and lose, on an attempted $37 billion takeover of rival Humana. “We paid a $1 billion breakup fee on a risk we took,” Jelinek said. “Periodically you have to step up and take the risk and you can’t punish people for taking that risk. Your incentive systems have to be right.” Overall, the company is trying to protect entrepreneurial hotspots inside its walls. “We don’t want the mother ship to unintentionally roll over and suffocate the baby,” he added. Randall Stephenson, chairman and CEO of AT&T and last year’s CEO of the Year, noted that his predecessor, Edward Whitacre Jr., pulled off a string of acquisitions that catapulted his Southwestern Bell into becoming the new AT&T in 2005. “He was a riverboat gambler,” Stephenson said. “It was anything but a riskaverse culture.” Stephenson continued that string of big bets in attempting to acquire T-Mobile, the No. 4 provider of
wireless telephone service in the U.S., in 2011. “We knew going in it was a high-risk proposition,” he said. “We had a $3 billion breakup fee. We thought it was a 70 percent probability we could get this thing done. We thought it would be easy to get $40 billion in synergies.” While that deal was blocked by the U.S. Department of Justice, AT&T has successfully purchased DIRECTV satellite television and its acquisition of Time Warner is pending during a governmental anti-trust review. Those deals are fundamentally changing AT&T’s business mix by adding content generation. “We manage the risk down by how we do the deals,” Stephenson said. “You cannot do these types of moves if you have a board that doesn’t have the right disposition.” That’s one reason Stephenson has remade his board by adding more Silicon Valley and private equity figures. Bringing Innovation Back As with insurance and telecommunications, the closely related defense and aerospace industries are grappling to find ways to spur greater innovation. Roger Krone, chairman and CEO of Leidos, which manages military health records, is a veteran of 30 years at McDonnell Douglas and Boeing. He said the great burst of innovation in these industries occurred at the hands of Sandy McDonnell, Jack Northrup and Bill Boeing, who built the companies bearing their names. Then the field consolidated. “There were probably 50 standalone companies and now there are probably less than a dozen,” Krone said. “Now we have these big companies. We all got MBAs and read [management] books and the innovation just stopped.” The fact that the U.S. government for many years paid for the costs of products developed for the military plus a guaranteed profit, the socalled “cost-plus” model, also contributed to a general decline in risk-taking and innovation, he noted. As a result, there is deep concern at the U.S. Department of Defense today that the U.S. military is losing its technological advantage over potential enemies, Krone noted. Major defense contractors such as Lockheed have created internal skunk-
From left: Zoetis’s Juan Ramon Alaix, PURE Insurance’s Ross Buchmueller, AT&T’s Randall Stephenson and BDO’s Wayne Berson
works and rotate people in and out of these innovation “enclaves.” The Pentagon also has created a Defense Innovation Unit Experimental to reach out to the talent in Silicon Valley. But the sense remains that the traditional defense companies are lagging behind Elon Musk and his SpaceX, Solar America and Tesla companies. “We looked at Elon and we all bet that he would fail,” said Krone, who, among other jobs, managed the International Space Station. “But right now, Tesla has the highest market capitalization of any car company in the U.S. and there is a message in that. Maybe Elon’s biggest legacy will be that he convinced the government it was okay to take risks again.” Some CEO participants pointed out that a publicly traded company subject to quarterly earnings reports—and under pressure from activist shareholders—has a tougher time making a long-term, big bet than its privately held peers. “Originally, Elon could take risks because he wasn’t a public company,” Krone argued. “He didn’t have to close his books the way we have to close our books. He didn’t have Sarbanes-Oxley Section 404. He was able to create SpaceX and Solar America and Tesla in an environment where he could control a lot of the variables.”
“Risk comes in places you don’t expect and in ways you don’t expect.” —Ross Buchmueller, CEO, PURE Insurance
Incubation vs. Acquisition Large companies often have difficulty in recognizing an innovation when it happens in a detached skunkworks environment. Moderator Jeffrey Sonnenfeld, senior associate dean at Yale University, pointed out
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Top row, from left: Bob Nardelli, Founder, XLR-8 Keith Denham, Principal, CohnReznick Clarence Smith, CEO, Haverty Furniture Companies Stephen Jones, CEO, Covanta Holding
Thomas Siering, CEO, Two Harbors Investment Dave McKinley, Chief Commercial Officer, Henry Schein Roger Krone, CEO, Leidos Tom Rogers, Executive Chairman, Winview Nick Brien, CEO for the Americas, Dentsu Aegis
that Xerox’s research center in Palo Alto, California, came up with the concept of using a mouse to control a computer, but Xerox could not imagine a use for it. Apple recognized the potential and made billions from the concept. “The question is, how do you bring an innovation back into the core of the company?” Sonnenfeld said. Often, executives at headquarters are skeptical of the people who work offsite in innovation centers, posited Thomas Siering, CEO of Two Harbors Investment, which has spun out several different real estate units. “The problem I’ve faced is with what we call the civilians—the lawyers and accountants,” Siering said. “They think of the innovators as rogue operatives. Culturally, it can be a real challenge.” Instead, some larger firms opt for an acquisition route to innovation, allowing small companies to develop a technology and either make mistakes or get the formula just right and then snap them up. “Don’t do it in-house” with a new technology, advised Stephen Jones, CEO of Covanta Holding, which turns waste into energy. “Let it go out-house somewhere and then acquire it.” If major acquisitions and internal innovation strategies are difficult, it may be that the strategy of partnering and perhaps acquiring smaller companies is the best way for a major company to remain at technology’s cutting edge, said Stephen Marcus, the CEO of Cantex Pharmaceuticals, which is in clinical trials with several new medicines. “For Pfizer, it’s okay to take 10, 12 or 15 years to develop a great product. But in a small company, venture capitalists basically want an exit within five years. So it doesn’t necessarily
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Jim Harding, CTO, Henry Schein Jeffrey Sonnenfeld, Senior Associate Dean, Yale School of Management Bottom Row, from left: Bob Rosone, Managing Director, Deloitte Stephen Marcus, CEO, Cantex Pharmaceuticals
Juan Ramon Alaix, CEO, Zoetis Ross Buchmueller, CEO, PURE Insurance Randall Stephenson, CEO, AT&T Wayne Berson, CEO, BDO Rick Jelinek, EVP, Aetna Kerry Sulkowicz, Managing Principal, Boswell Group
mean that you develop a drug all the way. Sometimes it’s developed to the point where it looks highly likely that it will be commercialized. Then a Pfizer or other major company comes along. The engine of innovation now is largely small companies.” Tom Rogers, who built and sold TiVo and is currently executive chairman of Winview, said it was much the same in the media and Internet worlds, where long-term strategic investors want a new idea to be “de-risked” at a smaller company before they commit to buying it. Major companies want to see if a start-up can survive two or three rounds of financing and demonstrate staying power before they step in and commit major resources to expanding the startup’s technology. “Basically the whole venture capital ecosystem serves in many ways to de-risk the entire decision-making process,” he said. One question mark hanging over the innovation efforts of all large companies is the impact of activist shareholders, who take a stake in a company and then look to force their way onto the board and influence management decisions. Nelson Peltz of Trian Fund Management, for example, played a role in persuading the board of General Electric to retire Chief Executive Jeffrey Immelt. Bob Nardelli, who famously competed for the top job at GE before moving on to Home Depot and Chrysler, predicted that the activist attacks will eventually fade. “The activists will go away when the market stalls and they can’t go in and get a quick hit,” said Nardelli. “When the market tips, I think the activist act will be over.” Every CEO of a publicly traded company can only hope he is right.
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CEO T EC H
Technology and the CEO Résumé You don’t have to be a tech CEO to act like one— and acting like one might be what helps you keep your job. BY P E T E R H A A PA N I E M I
echnology has rapidly become smarter, more pervasive and more “human”—all of which makes it an increasingly powerful business tool. As a result, many executives are looking to digital transformation to reshape their companies—and it is increasingly clear that such efforts start at the top. Today, a technology background plays a growing role in the selection of CEOs, even well outside the tech industry—witness Mark Fields’s being replaced at Ford by Jim Hackett, former CEO of Steelcase, who was running the company’s technology-based autonomous driving business. Or consider Howard Schultz’s successor at Starbucks, Kevin Johnson, whose background includes a stint as CEO of Juniper Networks, as well as successful efforts to use mobile technology at Starbucks. Perhaps with such changes in mind, 43 percent of top executives believe that they need to understand the technical side of the business in order to be a good CEO, according to a recent KPMG report. Not every CEO will have a technology experience—nor should they. But CEOs increasingly need to understand why technology is important and what it can do—and take steps to make sure they are factoring it into both their decisions and their company’s strategic direction.
Why It Matters Today, technology is key to increasing operational efficiency, building agility, becoming more customer-centric and driving innovation. It is fundamental to the creation of new products and services. And it is reshaping the competitive landscape, lowering the cost of entry for smaller companies and enabling competitors to quickly cross traditional industry boundaries. “Technology is in everything,” says Stephanie Woerner, a research scientist at the MIT Sloan Center for Information Systems Research. In her research, inter-
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ogy are expecting someone else to come out with something more competitive and better the next day,” says Margot McShane, executive director at the San Francisco office of the Russell Reynolds Associates executive search firm. “They are constantly assuming that what’s worked in the past will not work in the future. It’s an agile environment of ‘try, optimize, learn, evolve.’”
Climbing the Learning Curve Fortunately, CEOs do not necessarily need to learn how to write code or understand the technical details behind the cloud to adapt. Instead, they just need to be comfortable and conversant with technology. “The CEO needs to have enough proficiency and knowledge to be able to ask intelligent questions, to be prodding people to stay on the leading edge of what the technology can do, and to ultimately make resource-allocation decisions about where the company is going to make their investments,” says Paul Winum, senior partner and practice leader, Board and CEO Services, at RHR International, a leadership development firm. “Most CEOs who grow up within an industry learn about the technologies that apply to that industry. The challenge is to stay current about how emerging technologies might apply in the future.” When RHR assesses clients’ internal candidates for executive positions, “part of what we’re trying to gauge is their comfort level with technology and their attitude toward technology,” says Winum. “People who embrace technology, who have a certain fluency in talking about technology, will be better equipped to deal with the unforeseeable changes that will occur in the next five years.” CEOs can start raising their technological fluency with plain old-fashioned learning. “Read up on it,” says Acorda’s Cohen. “Make a determined effort to go online, go to conferences. If you hire a good head of digital strategy, go to a conference with them and have them introduce you around. Meet some of the people who are involved in that world.” Sharing insights with executives at other firms can also help. “Spend time with peers
43% OF TOP EXECUTIVES BELIEVE THAT THEY NEED TO UNDERSTAND THE TECHNICAL SIDE OF THE BUSINESS IN ORDER TO BE A GOOD CEO.
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viewers have shifted from asking about IT group spending to asking about overall digital spending, because technology is now used—and purchased—by functions ranging from marketing to HR and R&D. Digital technology is woven deeply into the business, and its impact is widespread— making it a clear CEO issue. Ron Cohen M.D., CEO of the Acorda biotech company, notes that in his industry, companies rely on new technologies to manage R&D data, tap into crowdsourcing to find innovative ideas and improve the management of data from field tests. Soon, he expects artificial intelligence and machine learning to streamline processes even more. In that environment, he says, “We have an absolute obligation to understand where the tech world is at any given time, and then understand how it can best be adopted to improve what we do.” To a great extent, the importance of a tech background for CEOs lies not so much in having deep technology expertise, but rather in attitudes and perspectives. Technology changes so rapidly, and the likelihood of disruption is so great, that tech-company executives are generally more accustomed to making product investments that might look too risky to someone with, say, a traditional finance background. For Vonage, a business cloud communications firm, evolving technology has prompted a dramatic shift from Voice over Internet Protocol (VoIP) platforms for consumers to cloud-based communications products for businesses of all sizes in just a few years. “Given that the world is changing so quickly, if you’re not betting on tomorrow at a healthy percentage of revenue— and each industry is going to be different— you run the risk of being left behind,” says Alan Masarek, the company’s CEO, and a former Google executive. In the tech world, he says, you have to “be willing to invest, be willing to fail. Because otherwise you’re not going to innovate.” In essence, technology leaders are steeped in constant technology-driven change. “People who grow up in technol-
Four Steps to Raising Your Digital IQ
1 2 3 4
Boost Your Technology Fluency. Attending conferences, comparing notes with peers, forming a technology advisory board and good old-fashioned research can all improve your digital literacy.
Be a Digital Anthropologist for a Day. Visit a tech startup—not necessarily in your own industry—to experience the culture of disruption in action.
Adopt Reverse Mentoring. Find a tech-savvy staffer who can help you boost your proficiency about new technologies and how they might impact your world.
Drive a Digital-First Mentality. Encourage your staff—and yourself—to routinely ask yourselves, what new technologies are emerging and how can they be leveraged in your business?
Peter Haapaniemi covers technology, leadership and other business topics from Farmington, Michigan.
in the market—not direct competitors, but companies that might be at a similar life stage and grappling with similar questions about technology,” says Russell Reynolds’s McShane. “Having good peer support is important.” Spending time with companies that are driving disruption can also help. McShane says that some CEOs visit Silicon Valley firms, where “they are not just going in for a dog-and-pony show for an hour. They are sitting with the culture, they are sitting with the employees.” They learn “how we are doing business. This is how we make decisions. This is the language we use.” For more formal input, Alan Guarino, vice chairman of CEO and Board Services at the Korn Ferry search firm, says his company has helped CEOs create technology advisory boards. “They are made up of executives who have recently had tech leadership roles,” he says. “They serve as a sounding board and occasionally evaluate the organization’s technology decisions. The type of technology leaders who serve on these boards is dictated by the client based upon the company’s technology needs and its market.”
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Instilling the Right Perspective CEOs also need to think in terms of educating their executive teams. MIT’s Woerner suggests “reverse mentoring”—establishing learning relationships where tech-savvy employees from lower in the organization help executives understand the potential impact of technology. Some companies have executive meetings centered on technology-based case studies—led, perhaps by the CIO—that can provide insights into how technology can be used at the company. One company, Woerner says, recently held a retreat where “they actually had all of their executive committee members write a description of where they thought the company was going and how technology would get them there.” To a great extent, success with technology is a matter of mindset—of instilling the qualities often found in tech-industry CEOs. That means CEOs should remind themselves to be alert to disruptive possibilities and be willing to ask questions and take risks—and encourage those qualities in others. Woerner advocates a “digital first” attitude in organizations, where everyone is thinking constantly about how technology can change the business. That starts at the top. “Does the CEO make sure that the investment patterns match being digital first?” she asks. “Does the CEO make sure that the organizational structure is in place and then use the board to back him or her up, so that the firm is actually able to become more digital?” “Build technology topics and questions routinely into your management and leadership cadence,” urges RHR’s Winum. “CEOs should be routinely asking: ‘How is technology that is now available being leveraged? What are the emerging technologies that we think will enable our business in the future—or that might enable our competitors to attack us—and how do we defend against that?’” Staying on top of emerging technology, adds Acorda’s Ron Cohen, “requires, as everything else does if you’re a busy CEO, that you deliberately allocate mindshare and timeshare to it—which means you have to consider it a priority.”
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ECO N O M I C D EV ELO PM EN T
Home to two of the country’s fastest-growing state economies, the Southeast lures investment with a lower cost of living and engaged workers. BY CRAIG GUILLOT
THE SOUTHEAST WHILE THE SOUTHEAST IS sometimes overlooked in national conversations about economic development, it is a powerhouse of manufacturing economic growth. At a time when populations on the coasts are shrinking, the Southeast is home to some of the nation’s fastest-growing cities, including Greenville, South Carolina, and Fort Myers, Florida. Residents flock to many of these areas in search of lower costs of living and growing opportunity, but many corporations are also headed south. Florida and North Carolina are among the nation’s top 10 fastest-growing economies, with GDP growth rates more than double the national average. In Alabama, the nation’s most engaged workforce continues to drive aerospace manufacturing. Georgia remains a growing hub for finance and fintech, and reduction in red tape is spurring the growth of aluminum manufacturing in Kentucky. From the pines of the Florida Panhandle to the hills of Tennessee and Virginia, the federal government and Fortune 500 companies are even bringing multi-billion dollar investments to rural areas. NO. 2* FLORIDA
*Ranking in the 2017 Chief Executive Best & Worst States for Business (ChiefExecutive. net/2017-Best-Worst-States)
Manufacturing Shines in the Sunshine State The Sunshine State attained a GDP growth rate of 3 percent in 2016. Florida is home to more than 19,000 manufacturing businesses that employ more than 330,000 workers. Lockheed Martin currently has nearly 1,000 employees working on various projects along the “Space Coast” and has announced it will move more workers from California to Florida in 2018 and 2019. In the northwestern part of the state, Eastern Shipbuilding in Panama City recently announced the addition of 2,000 jobs to support a $10.5 billion contract to build more than two dozen U.S. Coast Guard cutters. “We’ve got the workforce and infrastructure for these manufacturers and you don’t have to look very far to see it,” says Mike Grissom, interim president
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and CEO of Enterprise Florida. Tampa Bay and Orlando, which both ranked among the top-10 fastest-growing metro areas in 2016, are experiencing strong growth in tech and manufacturing. A $15 billion infrastructure investment in Orlando includes an overhaul of Interstate 4 and expansions of the rail system, international airport and Port Canaveral. Grissom says the state’s business-friendly climate and its lack of a personal income tax have driven growth. Florida has invested more than $63 billion in its ports, airports and highways in recent years. The state’s growth as a logistics hub is also being fueled by the recent Panama Canal expansion and upgrades at ports to accommodate larger ships. “We continue to be the gateway to Latin America, and there are few places in the state where you’re an hour from the interstate or coast,” Grissom says. NO. 3 NORTH CAROLINA A Growing Base for Educated Talent The rapidly growing state of North Carolina now has more than 10 million residents and is the ninth most populous state in the U.S. Chris Chung, CEO of the state’s Economic Development Partnership, says many workers relocating there have a bachelor’s degree. Well-respected universities such as Duke and UNC Chapel-Hill contribute to the strong talent base. “It has become a virtuous cycle. They’re coming here for jobs and economic opportunity. And the growing talent pool is attracting companies,” Chung says. Credit Suisse announced in May 2017 that it would invest $70 million and add another 1,200 jobs to its Raleigh operations. Many of these jobs were being relocated from New York City and other areas to help reduce costs. In March 2016, Novo Nordisk broke ground on a $1.8 million diabetes medicine production facility in Clayton. And in April 2017, smart grid company Trilliant
Courtesy: Lockheed Martin
announced a new headquarters in Raleigh. CEO Andrew White said the Research Triangle offers “some of the brightest and most innovative talent for a high-tech company like us.” Yet the benefits of North Carolina’s growth also present challenges. Chung says planners are considering how the social infrastructure, transportation and educational system can support the population growth. “I don’t think it’s uncommon to any state that has seen the same degree of growth, but it’s a big issue,” Chung says. NO. 4 SOUTH CAROLINA A Bright Future for Manufacturing According to the Census Bureau, South Carolina is now one of the fastest-growing states in the nation. And it’s attracting not only people but corporate investments. The South Carolina Department of Commerce says the state recruited more than $3.4 billion in capital investment in 2016, much of it in the manufacturing sector. BMW announced in June it would invest $600 million in its Spartanburg facility to grow the site’s total workforce to 9,000 and annual production to 450,000 vehicles. Samsung also announced its intent to open a $380 million plant in Newberry County. Greenville is now one of the top 10 fastest-growing cities in the country. Yet Kay Maxwell, vice president of the Southern Regional Development Alliance, says the growth in population, manufacturing and activity at the ports is also spurring more development in rural areas of the state. She says there has been strong growth in the food processing sector and in logistics and distribution plants. In order to address the surges in volume at the ports of Savannah and Charleston, South Carolina and Georgia are joining forces on a Jasper Ocean Terminal, a new 1,500-acre container port in Jasper County. “It’s a perfect storm, and South Carolina is positioned so well with the trends you are seeing nationally and internationally,” Maxwell says. “We have this great opportunity this area never had before in manufacturing and distribution.” Earlier in the year, the state’s Depart-
ment of Commerce announced the South Carolina Innovation plan, which is intended to provide direction on how to best encourage the growth of tech-related entrepreneurial activity and innovation through workforce development. Secretary of Commerce Bobby Hitt called the plan a “roadmap” to focus on innovative companies and concepts in advanced manufacturing, life sciences, computer hardware and software sectors. NO. 7 TENNESSEE
FLORIDA LOCKHEED MARTIN’S NEWLY RENOVATED FLEET BALLISTIC MISSILE FACILITY IN CAPE CANAVERAL EMPLOYS MORE THAN 1,000.
Expanding Workforce and Education Tennessee’s Drive to 55 program aims to equip 55 percent of Tennessee residents with a four-year college degree or certificate by the year 2025. The initiative offers high school seniors tuition-free attendance at any of the state’s 13 community colleges or 27 colleges of applied technology. Ted Townsend, COO for the Tennessee Department of Economic and Community Development, says it was the first state in the nation to make this kind of promise to its citizens. “We’ve made a commitment that education beyond high school is a top priority and it’s important for our workforce,” he says.
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Courtesy: Georgia Port Authority
GEORGIA THE PORT OF SAVANNAH HAS BEEN GROWING IN NATIONAL AND INTERNATIONAL SIGNIFICANCE, REACHING RECORD CARGO VOLUMES IN 2017.
Companies have responded with notable investments and expansions. Last year, GM announced a $788 million expansion at its facility in Maury County and, in 2015, Nissan further expanded its facility in its Smyrna campus. “All of our automotive OEMs have had expansions and that has had a multiplier effect with driving expansions from the supply chain,” Townsend says. One challenge the state faces is expanding economic development to its rural areas. Townsend says 78 of Tennessee’s 95 counties are rural, with 19 of those considered “distressed” by federal definitions. In 2016, Tennessee passed the Rural Economic Opportunity Act to improve rural infrastructure and make tax credits more accessible for rural business. NO. 8 GEORGIA The Southeast’s Financial Hub Atlanta has been building on its long-held position as a financial and commercial center. More than 70 percent of the financial transactions in the U.S. are routed through home-based payment processors such as World Pay, First Data and Global Payments. In recent years, Atlanta has become one of the country’s top fintech capitals. Eloisa Klementich, CEO of Invest Atlanta, says the area is home to 90 fintech companies employing more than 30,000 people. The tech-related activity and talent is also spurring development in other sectors. More than 20 major companies, including Home Depot, Panasonic, Boeing and Siemens, now base innovation centers in the state. Klemen-
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tich says the development is being fueled not only by the corporate talent base, but by the community of more than 250,000 students at the area’s four major universities. “There’s an explosion at the crossroads of technology, innovation, entrepreneurship and each of our clusters,” he says. Out on the coast, the Port of Savannah has also been growing in national and international significance, reaching record cargo volumes in 2017. It is now one of the few ports on the East Coast that can accept the largest ships coming through the expanded Panama Canal. Griff Lynch, executive director of the Georgia Ports Authority, believes the port’s impact on the state will grow as the Savannah Harbor Expansion Project is completed in 2020. NO. 15 VIRGINIA A Global Data Center Home to more than 4.5 million square feet of data center space, Virginia is a transit point for 70 percent of the world’s Internet traffic and is the largest data center market in the U.S. Amazon Web Services recently announced a new corporate campus in Herndon, adding 1,500 new jobs to the 7,000 workers it already employs in the state. Leading tech company IOMAXIS also plans to add more than 500 jobs over the next three years to support its mission to thwart cyber threats. “To stay ahead of that challenge requires a talented, diverse workforce and policies friendly to small companies seeking to grow rapidly. Virginia provides these things,” said Bob Burleson, CEO of IOMAXIS. Stephen Moret, CEO at the Virginia Economic Development Partnership, says the state also has robust manufacturing and finance sectors. There are roughly three dozen Fortune 1000 companies headquartered in the state, including Capital One, Freddie Mac and Northrop Grunman. Nestlé USA announced in February that it would move its headquarters from California to Arlington. “Virginia is a quiet state and doesn’t always make itself known, but it’s a place where the world’s leading brands do business,” Moret says. While Virginia’s economy is branching into new directions, a large portion of it is
NO. 19 ALABAMA Highly Engaged Workers Fuel Manufacturing A recent Gallup survey found that Alabama has the most engaged workers of any state in the country. Thirty-seven percent of Alabama workers said they were “highly involved in and enthusiastic about their work and workplace.” This excitement is being fueled by workforce investments, strong economic growth and an influx of high-paying jobs. In January 2017, Alabama initiated its Accelerate Alabama 2.0 program to focus on trends in advanced manufacturing and other sectors. It identifies recruitment and retention initiatives, and the state has restructured seven new regional workforce councils made up of companies and educational institutions in those regions. “[Accelerate Alabama 2.0] is providing a lot of value-added services to companies that are either expanding or relocating here for the first time as an incentive,” says Greg Canfield, Alabama secretary of commerce. “We recruit workers and provide pre-employment screening and training at no cost.” The National Association of Manufacturers recently named Alabama one of the top five states for manufacturing growth. Canfield says the sector now generates 17 percent of state GDP. Last year, Alabama hit a new annual record of $1 billion in manufactured good exports. In late-June, Jeff Bezos’s space company, Blue Origin, announced a $200 million investment in a 200,000-square-foot plant to build its BE-4 rocket engines. In April, Aerojet Rocketdyne announced it would construct a facility in Huntsville to produce its next-generation rocket engine. Eileen Drake, CEO, said Huntsville was a “logical choice” to locate production of its new AR1 engine due to the “top-tier talent” in the area.
NO. 22 KENTUCKY Training Initiatives Fuel Manufacturing Sector Economic development in Kentucky is gaining momentum. Terry Gill, secretary for the Kentucky Cabinet for Economic Development, says the Bluegrass state attracted nearly $7 billion in new investments in the first half of 2017, shattering the full year record set in 2015. Gill attributes this to initiatives like right-to-work legislation and the Red Tape Reduction Initiative. “We move at the speed of business—not of government,” says Gill. “That’s been pivotal in our ability to take major projects from corporate inquiry to closed deal in as little as 90 and 120 days.” Toyota recently announced a $1.33 billion investment in its Georgetown plant to refurbish and replace equipment to prepare for the company’s new global platform. Ford Motor also announced a $900 million investment in its Kentucky Truck Plant in Louisville. Gill says the state’s aluminum industry is “on fire” and being fueled by demand from automakers, parts suppliers and the aerospace industry. Braidy Industries will construct a $1.3 billion aluminum rolling mill in Greenup County that will create 550 advanced manufacturing jobs. Craig Bouchard, CEO, said that the passage of the right-to-work legislation was a key factor in bringing the project to the state.
Courtesy: Alabama Department of Commerce
still linked to government-related activity that can be susceptible to federal spending slowdowns. “Our single biggest sector is business related to the federal government so we’re trying to focus more attention on diversifying economic growth and other parts of the economy,” Moret says.
ALABAMA AEROJET ROCKETDYNE LAUNCHED A STATE-OF-THEART PRODUCTION PLANT IN HUNTSVILLE, WHERE IT PLANS TO BUILD ITS NEXT-GEN ROCKET ENGINE.
NO. 32 MISSISSIPPI Quiet Growth in Aerospace and Automotive Economic growth in Mississippi has trailed national averages in recent years, but the state’s manufacturing sector continues to expand. Glenn McCullough, Jr., executive director of Mississippi Economic Development, says it is the only state with both a Nissan and Toyota assembly plant and that it has seen more than $2 billion in auto manufacturing investments since 2012. Mississippi is also experiencing strong growth in aerospace manufacturing. Northrop Grunman, which recently celebrated the 10-year anniversary of its advanced manufacturing facility in Moss Point, announced a lease extension and additional investments to expand production of its unmanned systems. The aerospace sector also continues to grow at the NASA Stennis Space Center in Hancock County.
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minority investment to expand its global reach. In the Shreveport-Bossier region, tech is now one of the fastest-growing sectors, driven by recent investments from IBM and CenturyLink. “Many cities are hosting IT development opportunities and we’ve been able to utilize our higher education facilities with partnerships around workforce development,” Pierson says. NO. 37 WEST VIRGINIA
LOUISIANA INVESTMENTS IN CHEMICAL MANUFACTURING FACILITIES HAVE TOTALED MORE THAN $135 BILLION OVER THE PAST FIVE YEARS.
Aerojet Rocketdyne announced last year that it would expand its Center of Excellence for Large Liquid Rocket Engine Assembly and Test to assemble its ARI advanced liquid rocket engine. “Man will go to Mars one day but the road there travels through Hancock County,” McCullough says. “The rockets that have powered every manned flight to outer space for the past 50 years, and the next 50 years, will be tested there.” Continental Tires is also performing site prep work on a $1.45 billion state-of-the-art manufacturing facility in Hinds County that is expected to start production in 2020 and create 2,500 jobs. NO. 33 LOUISIANA
Craig Guillot is a New Orleans, Louisiana-based business writer specializing in technology and economic development.
A Global Hub for Chemical Manufacturing Falling oil prices took a bite out of Louisiana’s economy in recent years, but that’s been offset by an influx of big investments by global chemical manufacturers. Don Pierson, secretary of Louisiana Economic Development, says investments in chemical manufacturing facilities have totaled more than $135 billion over the past five years. Many of these facilities are being constructed by foreign firms to supply the global market. Projects include an $8.9 billion ethane cracker outside of Lake Charles by South African firm Sasol, a planned investment in a $9.4 billion plastics facility in St. James Parish by Formosa Plastics of Taiwan and a $1.4 billion ethylene plant in Iberville Parish by Japanese firm Shintech. Outside of the chemical industry, Louisiana has been diversifying its economy in recent years with more technology-driven sectors. Pierson says corporate and entrepreneurial tech development is thriving in many of Louisiana’s cities. In April, New Orleans startup Lucid announced a $60 million
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Making the Coal to Shale Transition West Virginia has faced tough economic times in recent years due to the collapse of its coal industry. According to the WVU College of Business and Economics, the state produced 80 million tons of coal in 2016, roughly half of what it produced in 2008. Woody Thrasher, West Virginia’s secretary of commerce, says the state is aiming to capitalize on new opportunities arising in the shale gas industry. He says shale gas could not only be extracted but also refined there, and he points to the cluster of refineries on the Gulf Coast as an example of what shale could do for the Mountain State. “I don’t think it’s out of line to think we could see $100 billion [in investments] in the next five to 10 years,” Thrasher says. “Now that the raw material is here in the U.S., the manufacturing facilities are coming back.” He adds that the multiplier effect of such investments is “enormous” and could create ripple effects in other sectors. While there’s hope shale can help pull the state from the coal slump, Thrasher says there’s an even bigger need to diversify beyond resources. While West Virginia’s manufacturing sector is small compared to neighboring states, it is growing. Last year Procter & Gamble announced a $500 million investment in a one million-square-foot facility on a 458-acre site Martinsburg. Danish Insulation manufacturer ROXUL also announced a $150 million manufacturing plant in the city of Ranson, which will place production near major population centers in the Northeast, Mid-Atlantic and Mid-Western U.S. “We’re paying the penalty for not diversifying and need not make that mistake again,” Thrasher says. “We definitely have some initiatives that we are moving forward with to diversify our economy.”
To Get Your Company to the Next Level...
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IN C EN T I V ES
The Loyalty Factor How to use recognition and rewards as a talent strategy and a competitive edge.
BY J E F F H E I L M A N
Jeff Heilman is a freelance writer based in Brooklyn, New York.
ecognition starts at the top. In his 14 years as CEO of global fast-food restaurant leader Yum! Brands (KFC, Taco Bell, Pizza Hut), David Novak cultivated an enterprise-wide culture of employee appreciation and recognition. Lauded by Warren Buffett and others, Novak believed passionately in “taking people with you for operational excellence.” Apparently, though, the memo, or in Novak’s case, his books, Taking People with You and O Great One, A Little Story About the Awesome Power of Recognition, missed many CEO desks. Appearing on CNBC in May 2017, Novak cited findings from a recent Gallup poll of some 1,500 working Americans. “Seven out of 10 employees today are not engaged… and 20 percent are disengaged,” he said. “You’ve got on average 30 percent of your employee base driving your results. Those are not good results. They’re going to work and they can’t wait to go home. Versus, you know, tap dancing to work.” The good news? A company’s leader can
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make a real impact. Coming from a CEO, praise, from the Latin pretiare meaning “to value or prize,” can move an employee like positive earnings on the stock price—up. The converse is obvious—depreciation. As How to Win Friends and Influence People author Dale Carnegie once observed, “People work for money but go the extra mile for recognition, praise and rewards.” A well-designed and implemented recognition program is proven to energize employee confidence and loyalty, measurably impacting talent acquisition, performance and retention. As the following experts explain, recognition is also good for business, in ways that include reinforcing corporate values, improving organizational outcomes—and driving positive financial results.
A Long Game “As the talent war escalates, an inclusive recognition strategy that emphasizes motivating, retaining and developing your entire talent pool is more important than ever,”
says Brent Vander Waal, COO of West Des Moines, Iowa-based ITA Group, a global leader in partnering with companies and brands to align and motivate their people through recognition, incentive and related programs. “And it needs to be viewed as a long-term investment, not an expense. Give your recognition program time to grow. You may not see the benefits to your retention or recruiting for a year or more, but trust in this as a long-term strategy.” Implementing an effective program starts on the individual level, adds Vander Waal, who says executives are generally very self-motivated, but are also goal-oriented and thrive on accomplishment. “Typically, though, those goals will vary for each team member,” he explains. “For example, one person may thrive on public recognition in front of the department, while another hates the spotlight and would prefer a day off. So, connecting with each executive on their personal goals and understanding what truly motivates them is
often the most effective way to know how to recognize their efforts.” Effective rewards can take many forms, from premium parking spots and team lunches to flexible work arrangements and volunteer hours during the work day. Since some will work better than others, getting candid feedback on whatever programs you deploy will be key—as is defining the metrics that will earn them. “The best program strategy will fall flat if you don’t ensure that your people know what behaviors to recognize,” says Vander Waal. “It starts at the top—the entire leadership team needs to demonstrate an openness to communicating with employees and hearing constructive feedback. The results may be surprising, but it’s worth it in the long run. And empower your leaders to make judgment calls. Often, they know the needs of team members better than any best practice or industry white paper.” He adds that CEOs should not expect
“THE BEST PROGRAM STRATEGY WILL FALL FLAT IF YOU DON’T ENSURE THAT YOUR PEOPLE KNOW WHAT BEHAVIORS TO RECOGNIZE.”
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to always get everything right. “What is important is that you don’t stop collecting and evaluating feedback.”
Incenting with Intangibles “Recognition, in its various forms, acts as a strategic cornerstone of the employee engagement and alignment process,” notes Brant Dolan, director of business development for Memphis, Tennessee-based Quality Incentive Company. “It is an effective strategy because employees who feel valued and appreciated are more engaged, and engaged employees positively impact bottom-line results.” As with Yum’s David Novak, the corner office is where effectively recognizing and
rewarding employees and the executive team starts, says Dolan, who has been in the rewards and recognition industry for more than 20 years and also serves as president of Incentive & Engagement Solution Providers, a strategic industry group within the Minneapolis, Minnesota-based Incentive Marketing Association (IMA). “As the ultimate leaders and source of inspiration in their companies, the CEO’s behavior sets the tone that recognition is important,” he explains. “Leaders should focus on creating a total reward experience that is both positive and personal. Findings from a 2015 study commissioned by the IMA show that how people are rewarded can carry more motivational im-
The Psychology of Employee Recognition THERE SHOULD BE NO MYSTERY TO THE BENEFITS OF RECOGNITION. “Well-established in psychology literature and touted by management experts for decades, the principles of recognition, rewards and reinforcement are linked to higher levels of motivation, engagement and productivity, lower turnover and the ability to attract and retain top talent,” says Dr. David Ballard, assistant executive director for organizational excellence at the Washington, D.C.-based American Psychological Association (APA). An expert on workplace issues, Ballard heads up the association’s Center for Organizational Excellence. Despite these measurable benefits, recognition is sorely lacking in real-world work settings. “In a 2014 APA survey of the U.S. workforce, only 51 percent of working Americans said they felt valued by their employers. More than a third (36 percent) had received no form of recognition in the past year, and only 47 percent said recognition was provided fairly.” Why aren’t more companies taking advantage of the benefits incentive and reward programs can deliver? Ballard points out that CEOs tend to be operationally focused—too consumed with the nuts and bolts and quantifiables of management to focus on recognition. What’s more, prevailing research suggests that non-practitioners don’t think it’s important and therefore don’t prioritize it, while others say they lack the time, or don’t know how to effectively recognize or reward their employees. “With complex, high-level strategic issues commanding their attention, even an interpersonally savvy CEO may not feel the need to recognize the contributions of their
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accomplished, self-motivated executive staff,” says Ballard. “Failing to do so may be a missed opportunity to align and sustain their motivation through challenging times, model leadership qualities you want cascading throughout the organization and drive business results.” “To move forward, a CEO must reframe employee recognition as a business imperative,” he noted, offering these tips for getting started: Tie recognition to the organization’s mission and objectives. Use recognition not as a perk, but as a tool to advance the organization’s goals by rewarding performance. Reinforcing desired behaviors strengthens organizational culture by highlighting actions consistent with core values. Learn what motivates your senior leaders. Not everybody is motivated by the same incentives or values the same types of recognition. Build recognition skills. This involves learning the characteristics of effective recognition and how to apply them. Talk to experts in your HR department, learn from other CEOs or work with an industrial-organizational or consulting psychologist to build new competencies. Find what works for you. Recognition doesn’t have to be time-consuming or expensive. Use approaches that are consistent with your style and fit into your existing workflow and available resources.
portance and impact than the reward itself.” Specifically, the study found that between 40 and 70 percent of a participant’s preferred recognition experience was determined by intangible factors such as who gives the award, how it’s communicated and the professional impact it carries. The bottom line? Cash, “outperformed” by other measures, is not always king. “Meaningful displays of kind words, compliments, saying thank you and celebrating team successes are imperative,” says Dolan.
“WE OFTEN SEE CEOs WHO DON’T KNOW WHAT THEY DON’T KNOW.” “Appreciation can be further demonstrated using a combination of corporate gifts, attendance at special events and venues, trips, committee appointments, as well as involving the families of the executive team.” Setting the right tone requires thought and understanding. “We often see CEOs who don’t know what they don’t know,” Dolan says. “They try to go it alone, or put together an internal recognition task force that follows the same path they take for other initiatives. In the same way CEOs may involve their marketing team and ad agency to attract external customers, they should utilize strategic resources such as engagement agencies and incentive companies to develop their internal recognition programs.” Measuring program success and ROI should similarly follow a well-organized path. Key steps include setting clear, measurable, value-creating goals; providing the right tools and training; and consistently measuring both the business results and process results, says Dolan. “CEOs should regularly take the pulse of their executive team and the executives should be doing the same, either formally or informally, for their employees,” he says. “Important, too, is measuring customer satisfaction relative to the recognition program. If the CEO can focus on the process and accountability needed to engage a dedicated, innovative workforce, the ROI will be there.”
EXECUTI V E RET REATS
CASTLE HILL PHOTOS COURTESY OF THE TRUSTEES, BROADMOOR COURTESY OF THE BROADMORE, DORAL COURTESY OF DORAL ARROWOOD
The Broadmoor in Colorado Springs offers stunning views of Cheyenne Lake.
Golf getaways are a specialty for Westchesterâ€™s Doral Arrowwood, which features a Robert von Hagge course.
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Adjacent to the beautiful Crane Beach, Castle Hill is the crown jewel of the 2,100-acre Crane Estate.
Ski-in and ski-out access make the St. Regis Deer Valley a favorite for winter retreats.
A CEO Guide to Venue Selection For off-site executive meetings, destination and venue selection is as strategic as the agenda. BY J E F F H E I L M A N
In May 2017, the American Society of Association Executives (ASAE) introduced the Xperiential Design Project, or XDP, an innovative new model for maximizing meeting and event outcomes. XDP integrates five main tenets: experience, learning, marketing, technology and the fundamental starting point, location. Speaking at the event, Michael Dominguez, chief sales officer for leading global meetings, hospitality and entertainment brand MGM Resorts International, offered this insight: “Location will drive the whole event experience. All memories are tied to a location. The first thing you ask about a defining event is, ‘Where were you when...?’ Location creates a sense of community and memories.” Then there’s the site selection process itself. Here, guidance comes from Darrell Tamosuinas, CEO of Eden Prairie, Minnesota-based Teneo Hospitality Group. Representing more than 300 independent and luxury branded hotels, resorts and destination management companies around the globe, his company, a prominent industry player, focuses on connecting corporate clients and meeting planners with venues
that best fit their requirements for meetings, retreats and events. “Changing the environment and providing a pleasant experience are the top priorities for high-level executive meetings,” Tamosuinas says. “Typically, CEOs look for a venue that will enable thought, inspiration, relaxation and creativity and other feelings to the highest extent possible. Cost, value and convenience are always considerations, but developing the right environment will ultimately provide significant dividends.” “Must-haves” include comfort, privacy, convenience and service. Not allowed are distractions. “That means a disruption-free setting where the venue does everything possible to support and promote thought,” explains Tamosuinas. “Nice to have, but not essential, are ancillary attributes such as golf, spa, fine-dining, shopping or local sightseeing.” The litmus test begins with arrival. “CEOs and high-ranking executives are special, and want to feel special,” says Tamosuinas. They’ve earned it. And the venue, its people, infrastructure and services must make that feeling happen.” From the start, the CEO and his or her team should feel welcome and have immediately at their disposal all they need to initiate and conduct their purpose in being there. “Throughout their stay, they should never be overwhelmed, under-served or
“CHANGING THE ENVIRONMENT AND PROVIDING A PLEASANT EXPERIENCE ARE TOP PRIORITIES FOR HIGH-LEVEL EXECUTIVE MEETINGS.”
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“‘NOTHING WAS LACKING’ IS A RELIABLE MEASURE OF SUCCESS.”
surprised,” continues Tamosuinas. “They should have only good things to say about the food, service, meeting, communications and sleeping conditions. ‘Nothing was lacking’ is a reliable measure of success.” From superior service to harmony with corporate values, here are other key selection criteria from CEOs and executive planners practiced in the field.
Westchester’s Doral Arrowwood boasts 70,000 square feet of meeting space.
Developed by Citibank in 1983, the Doral Arrowwood Hotel Conference Center in Rye Brook, New York, has a blue-chip meetings pedigree, hosting groups ranging from the Fortune 500 to U.S. presidential candidates. Set on 114 wooded acres 30 miles north of Manhattan, the amenity-rich resort offers 363 guest rooms, Executive Suite included, and the Doral Executive Center. Incorporating a former sales training facility purpose-built for a leading pharmaceutical company, the expansive venue, certified by IACC (the International Association of Conference Centers), is geared for maximum productivity. For the past five-plus years, a major New York City-based professional services firm has selected Doral for business events, including quarterly internal training sessions and annual meetings. Anonymously, an executive planner for the firm explains Doral’s enduring appeal, starting with its convenient location. “Access to NYC airports and highways without paying NYC hotel prices was a key criterion in our initial search of nearly a dozen hotel groups and conference centers in New York, New Jersey and Connecticut,” she recalls. “Doral’s close proximity to Westchester County Airport and complimentary shuttle service were immediate pluses.” Sealing the deal was Doral’s core competency in conferencing. “Doral understands high-performance business event planning and how to execute programs in a corporate context,” said the planner. “Hotels can be stringent, with rigid operations and a-la-carte pricing [that adds] charges for every little item. At Doral, it’s seamless. From sales to the parking valet to the A/V
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technicians, the staff makes it their priority to support our business objectives while onsite, including tailoring a conference package to our needs. We continue to be corporate customers and have not looked elsewhere.” Good chemistry with the venue’s sales team is paramount. “Being able to honestly express your meeting objectives and expectations is key to long-term relationships,” she says. “The liberty to share ideas will pay dividends, but you can only reach that utopia if both sides (client and hospitality group) have an open dialogue.”
At Your Service For Trevor Gauthier, president of Denver-based Mortgage Cadence, an Accenture Company, “the foundation of a strong event lies in the level of service a venue can provide and how that melds with the service you provide your own customers.” Like Tamosuinas, he sees a “pleasant experience” as the primary directive. “When a customer arrives at our event, I want them to relax, enjoy their time, and focus on the event itself.” Case in point: Ascent Live, the company’s annual three-day user conference. “Consisting of informational sessions, motivational speakers, product updates, networking events and various optional activities, this is our once-yearly opportunity to meet face-to-face with customers and partners,” explains Gauthier. “Now attracting more than 350 participants and continuing to grow, the conference enables us to better serve our customers by providing in-depth product training, unlimited access to our staff, and an avenue for collaboration among industry leaders.” For the 2017 edition, selection criteria included “a large venue with high-quality accommodations within Colorado, numerous onsite meeting options, various dining options and large spaces for receptions and networking.” Imperative, too, were “qualified event staff and great overall customer service.” After considering more than a dozen properties, several site inspections included, the company chose the site of its first
GRAND ENOUGH FOR YOUR
BEST PEOPLE AND THEIR
Meetings and events take on a special energy at The Broadmoor. The magnificent Rocky Mountain setting will inspire your people. World-class golf, spa, dining and more will refresh them. The unique venues and activities of our new Broadmoor Wilderness Experience properties will challenge them and change their perspectives. The 185,000 square feet of meeting space is flexible enough to meet your most demanding requirements. And amidst it all, The Broadmoorâ€™s legendary tradition of quality and service will ensure your event is a success. Contact us today and start planning your meeting now at broadmoor.com.
1 LAKE AVENUE, COLORADO SPRINGS, CO 80906
“IT FEELS GOOD TO HOLD EVENTS AT A VENUE RUN BY AN ORGANIZATION THAT APPRECIATES AND SHARES OUR PASSION TO TREAD LIGHTLY ON OUR PLANET.”
user conference from 12-plus years back— The Broadmoor in Colorado Springs. “We knew we would return,” says Gauthier of the luxurious, perennial Forbes Five-Star and AAA Five-Diamond-rated resort, which celebrates its centennial in 2018. “In revisiting the property, we came with a refined understanding of our event requirements. The Broadmoor exceeded these in every way, and we are returning in 2018. [In our experience], venues boasting world-class service set the stage for outstanding customer events.” Superior service was also a key quotient for an executive planner organizing a recent gathering of 125 technology, media and telecom CEOs for a high-level “connectivity” conference in Park City, Utah. Satisfying this and other criteria, including one-flight access for participants coming from New York City, Los Angeles and San Francisco; an atmosphere of exclusivity; skiing activities, and entertainment, was the mountainside AAA Five Diamond St. Regis Deer Valley resort. “Travel for CEOs is a necessity, not a luxury, and so one of our main objectives was to make the event feel like a home away from home,” recounts the planner. “With the group’s preference for an intimate environment, deciding factors for the St. Regis were its scale, luxury and high level of service, along with the desired ski in/ski out amenity for the program.”
Castle Hill is located on the Crane Estate in coastal Ipswich, Massachusetts.
Brooklyn-based Jeff Heilman has covered the global meetings industry since 2004.
North of Boston in coastal Ipswich, Massachusetts, Castle Hill on the Crane Estate is a meetings destination for the ages. Commanding a hill overlooking sandy Crane Beach and the Atlantic Ocean, the property’s origins date back to 1637. It features the 59-room Stuart-style Great House (1928) and, for overnight stays and meetings, the historic 10-room Inn at Castle Hill, a luxurious conversion of a mid-1800s farmhouse-turned cottage. Natural features of the estate include hiking trails and private beach access, and it is classified as one of 116 “reservations” across Massachusetts managed by the Boston-based Trustees of Reservations,
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the state’s largest conservation and preservation organization. “The Trustees was founded in 1891 by landscape architect and land preservation pioneer Charles Eliot to save and share places of exceptional scenic, natural, and cultural significance for the benefit of the public,” explains CEO Barbara Erickson. That charter is one influential factor among several that brings New England Biolabs back to the property again and again for gatherings that include focused executive retreats, small corporate outings, and seasonal parties. “The Trustees’ mission is consistent with our core value of environmental stewardship,” says James V. Ellard, CEO of the leading biotech firm, founded in the mid-1970s. “We continuously strive for improvement in our business processes in order to minimize and, where possible, mitigate our impact on the environment. It feels good to hold events at a venue run by an organization that appreciates and shares our passion to tread lightly on our planet.” Accessibility and convenience are also natural draws—the company, also in Ipswich, is headquartered some six miles away—along with an environment conducive to results. “We have held corporate retreats for 12 or fewer people in the Tavern meeting room at the Inn,” Ellard says. “This venue offers both a quiet space for focused conversation and creative collaboration, as well as access to the entire Castle Hill property, where the beach, surrounding natural landscapes and salt marsh offer miles of conservation land to explore and enjoy during downtime. Meetings here are always productive and the relaxed setting certainly helps people bond over shared experiences and mutual admiration for nature.” The “Gatsby-esque” Great House, with its half-mile-long, tree-lined lawn, “offers an ideal setting for corporate functions and events such as our annual holiday party,” Ellard adds. “We have yet to find any venue that compares to Castle Hill on the Crane Estate.” For executive meetings, as for real estate, location is everything.
Philadelphia is a diverse, global destination on the rise. We are known for our rich history, but are also a birthplace of technology and innovation. Centrally located in the Northeast, we are a thriving metropolitan area with more than $8 billion in major developments underway. Our vibrant, walkable downtown is home to world-class arts and cultural institutions, spectacular attractions, a highly acclaimed restaurant scene and a full array of hotel options — all just steps away from our magnificent, state-of-the-art Pennsylvania Convention Center. No matter the scale of your event—be it grand, history-making convention, intimate gathering or something in between— Philadelphia is the smart choice. Let us help you begin planning today. Contact us today at MeetPHL.com or 1-855-MEET-PHL.
IRST T H E YF E A R S 40
TIME C A PSU LE
The Structure Behind the Strategy Once the domain of the “personnel” department, talent—the company’s foundation—is now clearly a C-level responsibility. BY S A N D R O B AS S I L I
A Sandro Bassili, Head of People at Anheuser-Busch, will address these topics and more at the Chief Executive Talent Summit in Orlando, Florida, on October 26.
t Anheuser-Busch, we are all brewers. We make products that millions of people enjoy during some of their simplest, most meaningful human experiences. Our products are for people. If we want to connect effectively with these people—our consumers—it’s vital that we get our approach to our people right. We believe that if the people making our products are passionate, if they are thoughtful and if they are empowered to excel, then our business excels. Forty years ago, HR was about helping employees update their files, check their benefits, monitor their vacation time. Now, technology has made employees far more self-sufficient, allowing talent management professionals to be laser-focused on the business itself, and on what will drive business success. As a result, we have much more visibility—and responsibility—at the highest levels of the company. That’s why as the Head of People, I work alongside our CEO daily—those of us who work in talent management no longer provide just a support function; we are
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enablers to business success, providing a structure for the corporate strategy. At Anheuser-Busch, as well as at other modern companies, our role now extends to maintaining and communicating our culture, ensuring that key messages are cascaded and employees feel supported to fulfill their potential. We want our employees to dream big, and that means empowering them to push to the next level, to take considered risks—and we need to give them the tools and the confidence they need to do that. Our company’s commitment to people starts at the very top. When it comes to recruiting, everyone, including our C-suite, invests their time and effort to find our next generation of leaders. Our industry is highly competitive and complex, so continuing to attract great people and build a meritocracy where people advance based on results, ability and commitment is a top priority. When our C-suite is spending full days recruiting undergrads, our people realize that we truly believe people are our greatest asset. When it comes to reaching out to the millennial generation, our research shows that while millennials want to make money, they also want to have the opportunity to learn and grow. They want to work in a company where the work that they do has impact, and they come to work wanting to solve a challenge. Not only do they want to have an impact on the company, they also want to know that the company is socially responsible and that it understands the impact it has on the environment and on consumers. For many millennials, if they don’t see that responsibility, they aren’t attracted to the company. Our people strategy has always been about ownership. Every one of us is an owner; we take results personally. This comes back to the passion we look for in our teams. That passion is at the core of our values. It’s our heart and soul. But it’s also central to our business strategy, and we’ll back it to the hilt any day of the week.
ti v e Ex e c u C h ie f a g a zi n e M
CEO2CEO LEADING CHANGE GROWTH | INNOVATION | TALENT | TECHNOLOGY
NEW YORK CITY | DECEMBER 7, 2017 FEATURED SPEAKERS Stan Bergman CEO and Chairman Henry Schein, Inc. Chief Executive’s 2017 CEO of the Year Judith Marks CEO Siemens USA
Michael Osanloo CEO P.F. Chang’s
Vlad Shmunis CEO, Founder and Chairman RingCentral
The 2017 CEO2CEO Summit is the event of the year for CEOs and C-suite executives positioning their companies for success in 2018. This year the spotlight is on how leading CEOs are using their talent and technology to speed growth and foster innovation. Through CEO speaker presentations and interactive breakout sessions with peer CEOs, you’ll hone your own growth strategy based on what’s working for other companies. This intensive single-day event focuses on actionable steps to lead change that takes your company to new heights. Attending the 2017 CEO2CEO Summit will save you months or years of effort, and help you avoid the mistakes and dead ends that others have suffered. The result will be the accelerated growth your stakeholders expect.
FOR MORE INFORMATION OR TO REGISTER, VISIT WWW.CEO2CEOSUMMIT.COM
THE GUY WHO IS TAKING ARKANSAS INDUSTRY TO THE HEAD OF THE CLASS. Governor Asa Hutchinson is a passionate believer that technology is the key to economic success. Through his Computer Science Initiative, Arkansas is the ﬁrst state in the nation to oﬀer and fund computer coding classes in every public and charter high school. This emphasis on STEM education is positioning our state, our industries and our workforce for success today and tomorrow. Use the LayAR app to ﬁnd out more about ArkansasEDC.com/asa why businesses here are in good company. Then, let’s get to work. 1-800-ARKANSAS
Published on Aug 14, 2017