Jan - Feb 2012 issue

Excellence in Executive Education Chief Executive’s guide to top programs

Secrets of MiniMultinationals How smaller companies can gain global reach

The Impact of Scientific Illiteracy

What declining technological skills means for your business

Ask the Right Questions Clayton Christensen on the power of why

JANUARY/FEBRUARY 2012

The 2012 Best Companies for Leaders How the top companies—public and

private—excel in leadership development

Bob McDonald, CEO of P&G, which ranked No. 1

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contents

January/February 2012 No. 256

Cover Story

24

The 40 Best Companies for Leaders How the top companies, public and private, excel in leadership development—and what every CEO can learn from them.

by J.P. Donlon

24

06

Editor’s Note

08

Letters

10

CEO Chronicles Positec’s Tom Duncan on building a brand with direct marketing • Joe Herring takes on turnover at Covance • Ziopharm Oncology’s doctor-turned-CEO Jonathan Lewis steers a new drug development approach • CEO Watch: Claudio Gonzalez of Kimberly-Clark offers insights on U.S.-Mexico relations

20

CEO Confidence

Is November’s surge in CEO confidence real?

22

Uncommon Wisdom

How to deal with the Chinese government.

by Robert Lawrence Kuhn

32

features

10

Technology Highlights from Chief Executive’s CEO Summit at Stanford Mobile, cloud, social media and analytic technologies are altering the ways companies and consumers function on a daily basis.

Excerpts from Chief Executive’s CEOtech offer insights on how CEOs can adapt their business models to harness the power of technological advances.

by Jennifer Pellet

40

Insights from INSEAD Why Ask Why? Disruptive innovation often begins with a simple question.

by Hal B. Gregersen, Jeff Dyer and Clayton M. Christensen

44

22

Mergers & Acquisitions You’re Married, Now What?

The brutal truth is that most mergers fail to create market value.

Here’s how to make sure yours works.

by Russ Banham

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45

A Special Supplement How to ensure an executive education program pays off in business results.

by C.

by C.J Prince

59

The CEO Guide to Executive Education

53

Global Competitiveness

The Perils of Scientific Illiteracy What does the prospect of a decline in technological skill mean for U.S. competitiveness?

by John Kador

59

Global Expansion

Secrets of Mini-Multinationals How companies can attain global reach—and sometimes teach the big guys a thing or two.

by William J. Holstein

64

Essentials How to Get the Most from Your CIO Savvy CEOs partner with their CIOs to drive efficiencies and enhance business capabilities.

By Michael Gelfand

66

Executive Life

CEOs Who Ride the Wind

By George Nicholas

71

Flip Side

Pitch Battle Beware the sports metaphor.

by Joe Queenan

64

final word 72

66

• Declinism Redux • A Tale of Two CEOs

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

Wayne Cooper, president. Copyright 2012. Published and printed in the United States. All rights reserved.

Reproduction in whole or in part without permission is strictly prohibited. Annual subscriptions are $196.

U.S. single-copy price is $13.95. Periodicals postage paid at Greenwich, CT and additional mailing offices.

POSTMASTER: Please send change of address to Chief Executive, PO Box 15306, North Hollywood, CA 91615-5306. For subscription inquiries, call 818-286-3119. All reprint and permission requests should be made to Brian Cuthbert (Email: bcuthbert@chiefexecutive, net, Phone: 203-889-4974).

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contents

January/February 2012

features

A Business Model for the 21st Century A demand chain puts profits back into your business, while a supply chain reduces costs and complexity. The combination can be a powerful engine for growth.

Over-Surveyed Nation: “Your Opinion Is Important to Us!” Here’s one over-surveyed person’s opinion: Enough!

by Jeff Hunt

by Rick Kash

Will Government Crush Economic Recovery?

Small businesses are struggling under an increasing regulatory burden.

always available

Can CEOs Find Relief From Skyrocketing Health Costs?

New study confirms healthier employees mean a healthier bottom line.

Books in Review Strategy for You

By Rich Horwath (Greenleaf Book Group Press)

by Darrell Moon

Reviewed by Bob Donnelly

Seven Strategies for Driving Technological Advances An asset recovery CEO shares his path for strategic IT integration with his business.

CEO BRiefing

by Doug and Polly White

CEOs Should Take the First Steps on Financial Reform Corporate issuers are now waking up to the fact that preventing another financial meltdown is their issue as well.

ceo confidence index

by Paul A. Larkin

by Allan D. Grody

The Real Lessons from Steve Jobs’ Career What to take from Jobs’ life and times, and what to leave in the dust.

Entrepreneurial CEO

It’s All About Removing Hassles

by Bob Donnelly

How to Reward Top Performers The rank-and-yank system pioneered by GE has given way to more sophisticated methods.

What Every CEO Should Know About Navigating State and Local Taxes Defining and determining residency is one of many elements that can prove troublesome for high net worth individuals.

by George Nicholas

by Michael A. Tedone

by Karol M. Wasylyshyn

So, You Want to be a Multinational?

Addressing fraud risk when small firms meet global supply chains.

by David Riker

The High Risk of a “Wait and See” Approach In a world of uncertainties, inaction may be your biggest risk.

by Daniel Burrus

Increase Your Chances of Survival Are you aware of your blindspots? Do you rate your leadership higher than stakeholders do and sometimes misfire as a leader? Outside intervention can help.

COMING IN MARCH:

The CEO Guide to Mergers & Acquisitions • Secrets of Great Dealmakers • Prepping your Company for Sale • What to Look for in an Advisor or Consultant • Top Companies at Adding Shareholder Value Through M&A

by David Brookmire

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Congratulations, Bob McDonald and P&G, for rolling up your sleeves and leading the way.

Our hats are off to you for being named the 2011 Best Company for Leaders by Chief Executive magazine.

At Xerox, we’re proud to do business with organizations that are committed to excellence. And we know how much work it takes to make it look so easy.

RealBusiness.com

©2012 XEROX CORPORATION. All rights reserved. Xerox®, XEROX and Design® and Ready For Real Business® are trademarks of Xerox Corporation in the United States and/or other countries. All other logos, trademarks, registered trademarks or service marks used herein are the property of their respective holders.

editor’s note

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Art Direction Fastlane Production Rose Sullivan Director

The Twin Challenge of Talent On afternoon several years ago, I got a call from A.G. Lafley, then the CEO of Procter & Gamble. He wanted to know whether his company made first place in our Best Companies for Leaders annual ranking. In 2005, the inaugural year of the study, P&G was first among the 20 we ranked that year, and Lafley was very proud of his company’s standing. Over the next two years, GE pulled ahead as the top-ranked firm, just edging out the folks from Cincinnati. It was shaping into a rivalry on the order of the Ohio State vs. Michigan contest. It seems that Lafley, who served on GE’s board, was going into a board meeting the next day and wanted to check if, indeed, P&G was able to eclipse General Electric in the standings (If it had, Lafley wanted to lord it over Jeff Immelt, as he knew the latter also was proud of GE’s ranking.) As it happens, P&G had to settle for No. 2—still an extraordinary result compared to the universe of companies measured.

“Darn!” a disappointed, Lafley said, “Nevermind, we’ll do better next year.”

Exceptional leaders know that their greatest contribution is to cultivate other exceptional leaders. Peter Drucker often wrote about the importance of creating leaders for “the future that has already happened.” Every CEO I have ever met has told me that that the only real difference between a high-performing enterprise and those who stuck in the middle is the quality of talent throughout its ranks. So, when we inaugurated the Best Companies for Leaders rankings in 2005, we sought to measure how good companies were at doing this. Last year, we partnered with Howard Stevens, CEO of Chally Worldwide, who showed us a way of creating a more rigorous set of measures to capture what companies are doing to look three to four levels below the CEO to identify, nurture and refine their talent base. We expanded the list from 20 to 40 because in truth, all of the top companies were very close to one another and leagues ahead of most everyone else. If your company is not represented and you feel it has been unfairly overlooked, send me a message (editorial@chiefexecutive.net) with the name and contact information of your senior HR executive and we will be certain to include your company in our subsequent study.

In the future, more and more jobs, even entry level ones, will require a minimum level of technical competency. Part of the nation’s unemployment woes are not just job creation, but a mismatch between the jobs that are on offer and the inability of employers to find people with the matching skills. Recently, we were speaking with Michael Bronfein, CEO of Remedi SeniorCare, a $150 million private institutional pharmacy company based in Baltimore with a proprietary technology for packaging and delivering medications to senior care facilities. Looking out over the next several months, he observes that the single biggest limiting factor in Remedi’s growth is not building the robotic systems that are at the heart of its pharmacy distribution, but in finding the electrical and mechanical engineers with the right skills to run the robots. Over the next six months, the company is looking to hire 60 such people to add to its workforce of 420.

This coming transformation of the workforce is one reason “The Perils of Scientific Literacy” (p. 53) is a key issue facing business leaders today. Two generations ago, a person armed only with a high school diploma could join GM, Ford or Chrysler and earn a good living. But even automobile assembly jobs today require advanced technical and analytical skills. In addition to building leaders for the future, CEOs must find a way to build the workforce of the future.

Copy Chief Rebecca M. Cooper Copyeditor Carl Levi Contributing Michael Gelfand Editors William Holstein John Kador Robert Lawrence Kuhn George Nicholas C.J. Prince Joe Queenan Photographer Paul O. Colliton Online Associate Karin Moyer Editors Fayazuddin A. Shirazi CEO Entrepreneur Robert M. Donnelly Publisher Marshall Cooper VP, Associate Phillip G. Wren Publisher 203/930-2706 pwren@chiefexecutive.net VP, Sales Central Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net VP, Sales West Brian Cuthbert 203/889-4974 bcuthbert@chiefexecutive.net Director, Business Cristina Vittoria Development 203/930-2707 cvittoria@chiefexecutivegroup.com

Director, Business Rick Groves Development 610/341-0630 WV, VA, NC, SC rgroves@chiefexecutive.net

Director, Business Catherine Hanson Development 770/569-0825 chanson@chiefexecutivegroup.com

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

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

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letters

Chief Executive of the Year 2011 Selection Committee Dan S. Glaser Chairman and Chief Executive, Marsh Hugh Grant Chairman, President and Chief Executive, Monsanto 2010 Chief Executive of the Year Fred Hassan Chairman, Bausch & Lomb C. Robert Henrikson Chairman, President and Chief Executive, MetLife William Hickey President and Chief Executive, Sealed Air Christine Jacobs Chairman, President and Chief Executive, Theragenics Kristian P. Moor President and Chief Executive, Chartis William R. Nuti Chairman and Chief Executive, NCR Steve Odland Former Chairman and Chief Executive, Office Depot Thomas J. Quinlan III President and Chief Executive, RR Donnelley Jeffrey Sonnenfeld President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management James Turley Chairman and Chief Executive, Ernst & Young

c on tact us

Chief Executive Group, LLC One Sound Shore Drive, Ste. 100 Greenwich, CT 06830 www.chiefexecutive.net Letters to the Editor Address above or letters@chiefexecutive.net Advertising & Custom Publishing 847.730.3662 advertising@chiefexecutive.net Events, Roundtables & Conferences 847.730.3662 advertising@chiefexecutive.net Fax: 847.730.3666 Subscriptions Chief Executive, PO Box 15306 North Hollywood, CA 91615-5306 circulation@chiefexecutive.net Reprints: Brian Cuthbert, 203.889.4974 bcuthbert@chiefexecutive.net Back Issues & Customer Service circulation@chiefexecutive.net

Want to Fix America?

Fix Congress In “Building Back America” (September/October 2011), Gary Shapiro stated that, “So we are a nation without strong leadership, clear strategy or defined direction.” The reason for this is that many people don’t know or refuse to admit that the United States is in another civil war. The first one was a military action and this current one is political. Like any other wars, there are casualties—the American people.

Unlike the Iraq and Afghanistan wars, there are no posted monthly statistics of all the casualties. What is the real number of casualties; does anybody know?

The longest American war—in Afghanistan—is now 10 years, the first American Civil War lasted four years and the current American Civil War is about 40 years old. This current civil war is being fought in Washington, D.C., between the Republicans and Democrats. Regarding cost reductions, Republicans refuse to increase taxes and cut spending on defense, and Democrats will not cut expenditures to social programs like Social Security and Medicare. They also want higher taxes.

Neither party will budge, the White House offers no leadership or solutions to end this war and the American people are the casualties.

The Republicans had total control over the government for eight years under President George W. Bush, controlling the White House, Senate and House of Representatives. They controlled the country as victors taking no prisoners. There was no balance in government and no opposition was tolerated. Hence, with no regard to the economy, the country sunk to the Great Recession.

Instead of installing financial controls over Wall Street, banks and insurance companies, it was a freewheeling business era. All Congress was interested in was their re-electability and perks. The American people were frustrated and voted in Barack Obama and a Democratic Congress. As everybody knows, the Democrats could not solve the recession with all their stimulus ideas. The United States political

system is like a pendulum. The Republicans made grave mistakes and voted in the Democrats; the Democrats made grave mistakes and voted in the Republicans. Back and forth, back and forth.

What the American voters don’t understand is that they are in charge. If the Congress is not making the right decisions, then it is the fault of the voting public. For example, if a homeowner hired a contractor to remodel a house and a landscaping service or service help and they were not doing what was expected of them, they would be re-instructed or terminated. This should be the same for Congress. Keep replacing them until they do what they’re told by the American people.

The economy is stuck and affecting the world’s economies. All countries are economically dependent on each other.

American companies over the past 30 years have been outsourcing jobs overseas to reduce costs. They did succeed, but now these American people have no jobs and don’t have the money to spend. Businesses want a clear strategy and defined direction; the American people want jobs. It sounds like a simple explanation, but the constant bickering between the Republicans and Democrats is preventing a solution. We have no leadership in the presidency—just a massive war of gridlock and President Obama is no Abraham Lincoln.

The sad part of all this stagnation is the waiting for the November 2012 elections. In the meantime, the Washington politicians are spending their time raising funds for their re-elections and the American casualties are still growing and suffering. President Obama has said that they can’t wait 14 months. This government culture must be changed. Already, protestors are on Wall Street complaining about Wall Street greed and protests have been appearing in other cities of this country.

It is a matter of time before the protestors move to Washington. Hopefully, it won’t be another “Arab Spring” event.

To build jobs in the United States, we must invest more in education, job training, technology and a simpler tax code. But most of all, we need leadership and teamwork.

Wess J. Schmidt, CEO Strategic Business Planning and Development, Maywood, NJ

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ceo chronicles

Positec: DIY Brand Building Z

Tom Duncan

The Challenge. You’re a manufacturing company looking to make headway in a market saturated with established brands.

Like you, your competitors operate cost-efficient manufacturing facilities in China, so competing on price is not an option.

What’s more, several peer brands are owned by the very retail channels you’re hoping to sell through—fiercely territorial players unlikely to give prime shelf space to new competition.

The Context. Based in Suzhou, China, $350 million Positec Tool was once primarily a contract manufacturer, making private label tools for home improvement chains like Home Depot and Lowe’s, as well as brands like Black & Decker. In 2004, after some of its clients began looking to do their own manufacturing, the company’s founder, Don Gao, decided to build his own brand, Worx. But after developing a lightweight electric lawn clipper with market-making potential, Positec ran into a hitch— retailers wanted the product, but not the brand. “They said, ‘We love the product but we want our own brand on it,’” recounts Tom Duncan, the former Robert Bosch Tool Corporation executive Gao recruited to serve as CEO of Positec’s U.S. division. “It quickly became clear that if we were going to launch this brand, we needed to figure out another way to do it.”

The Resolution. Looking to bypass the hurdle, Positec opted to go direct. “We came up with the idea of producing long-form infomercials and selling directly to the public,” says Duncan.

“We tried one and the very first year it did more than $50 million.”

Sales rolled in, and along with them came a side benefit—discovering that 60 percent of buyers were women. “That prompted follow-up research about what they liked, which turned out to be that a) there was no gas and b) the trimmer weighed less than a gallon of milk,” reports Duncan. Armed with that information, Positec reworked its campaign, adding more women and seniors to the infomercial, which prompted even more consumer interest. That success, in turn, unlocked the retail doors upon which the company had been fruitlessly pounding.

“What happens with infomercials and the direct business in general is that for every one purchaser there are four or five who are interested but won’t pick up the phone or go to

the Web,” explains Duncan. “But if they see it in a store, they’ll buy it.” Within two years, Positec’s trimmer was flying off the shelves at Lowe’s and Home Depot.

The Endgame. Today, the company’s share of the battery-operated trimmer market is estimated at 19 percent, and approximately 75 percent of its sales are from its own brands. Positec’s Worx brand now encompasses a wide range of products, from the JawSaw (marketed as a safer alternative to a chainsaw) to the Intellicut Mower (a cordless, lightweight electric mower). It has also introduced a line of premium-priced tools marketed under the Positec-owned Rockwell brand. The company continues to leverage infomercials and is currently running infomercial campaigns on seven different products. “Last year we spent about $25 million on advertising—which is a lot for a company our size,” declares Duncan, who says the U.S. market accounts for approximately 65 percent of sales. “Our direct model is more cost heavy, but it drives awareness and demand.”

The Lesson. Once the exclusive domain of celebrityendorsed launches like the George Foreman Grill and Suzanne Somers’ ThighMaster, infomercials have gone mainstream. In fact, many retail chains now have prominent “as-seen-on-TV” sections showcasing the most popular infomercial products.

In short, the infomercial can be a fast track to prime retail shelf space. “This model can be replicated for any product that has a unique value proposition that the consumer can understand,” says Duncan, who points out that many innovative products die due to lack of retail support. “Some great new products don’t sell simply because people get lost in the sea of choices on retail shelves or because they were put on a low shelf and not displayed properly.” In other cases, consumers need to be educated about a product in order to see its appeal or to pony up a higher price. “Infomercials give you the time to go into all the features and benefits and to demonstrate the product,” sums up Duncan, who also cautions that they are not right for everyone. “It won’t work for a commodity. You need a high degree of innovation.”

—Jennifer Pellet

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ceo chronicles > ceo watch

What’s Ahead for U.S.–Mexico Relations Kimberly-Clark de Mexico’s Claudio Gonzalez speaks out on how long-term economic issues between the two North American trading partners—both facing presidential elections in 2012—may be resolved.

by J.P. Donlon

Z

Claudio Gonzalez

Claudio Gonzalez, 72, is one of the few remaining members of a vanishing breed of senior business figures that have won both deep respect at home and a strong international reputation abroad. From 1973 to 2008, he served as CEO of Kimberly-Clark de Mexico and continues today as that company’s non-executive chairman. (The company is a highly profitable joint venture, with the American parent owning 48 percent and Gonzalez as the principal Mexican shareholder.)

His nominal title belies his standing as the de facto voice of that country’s business community. Gonzalez’s role is akin to the ones Citicorp’s Walter Wriston and DuPont’s Irving Shapiro once filled in the U.S., GEC chairman Lord Weinstock held in the UK and Fiat’s Gianni Agnelli and Sony founder Akio Morita served in Italy and Japan respectively. Prime ministers and presidents come and go; but the real stuff was likely sorted out when this crowd got together, whether on the slopes of Aspen or Davos.

A graduate of Stanford University, Gonzalez, whose children are also U.S.educated, with some living in New York and Boston, is worried. The increasing tension over illegal immigration along the border with Mexico coupled with the violence stemming from the drug war threatens to derail Mexico’s attempt to attract tourists and investors alike.

In addition, Mexicans tend to react when American presidential aspirants publicly call for “boots on the ground” along the border.

“Talk of this kind only exacerbates old frictions,” he says. “Uh oh, here come the gringos again to try and take over.” Add to

this toxic mix the recent gun-walker scandal in which ATF officials oversaw the transfer of 2,000 weapons across the border to brutal Mexican drug cartels.

Gonzalez is touring the U.S. speaking to business leaders, the news media and anyone else who might listen, trying to convince America that its second-largest trading partner after Canada is not entirely the one they see in six o’clock newscasts about drug lord slaughters of innocents and civilian police seemingly helpless to stop them. Mexico has dramatically moved up in the World Bank/ World Economic Forum annual competitiveness rankings from 66th place in 2010 to 58th place this year. (The U.S. position slipped from 4th to 5th over the same period.)

World Bank analysts score Mexico favorably on its regulatory improvements that facilitate entrepreneurial dynamism by reducing the number of procedures and the time required to start a business.

This development, coupled with the country’s traditional competitive strengths, such as its large internal market size, fairly good transport infrastructure, sound macroeconomic policies and strong levels of technological adoption—however positive—are, nonetheless, darkened by security concerns and remaining rigidities in its energy sector.

Presidents Bush and Salinas were able to get NAFTA approved by agreeing to keep immigration and Mexico’s energy sector off the table. Seventeen years later, those issues, Gonzalez thinks, are ready to be dealt with. He anticipates that the U.S. and Mexico will ultimately hammer out a guest-worker program, whereby a fixed number of registered people will be

permitted limited residence for fixed periods of stay. Wholesale deporting of illegals, he argues, would just shut down entire industries, such as resorts like Aspen where he frequently skis. (“The entire resort is run by people from Chihuahua.”) Border control is ultimately in Mexico’s interest, as its need for skilled workers is rising. The country is now the ninth-largest producer of autos in the world and the sixth-largest exporter of autos. It now has an automotive agreement with Brazil, a country with a great thirst for automobiles, and not enough internal capacity to satisfy it.

Although imports from China dominate headlines, Mexico is America’s thirdlargest import partner, with the U.S. being Mexico’s largest partner on imports. “We import more in dollars than Japan and China together,” Gonzalez points out. “A billion and a half dollars of legal merchandise crosses that border, going north and coming south every day.”

Mindful that both countries face a Presidential election year in 2012—polls in Mexico currently favor Enrique Peña Nieto, the PRI candidate—Gonzalez anticipates a new beginning for both countries to build a better economic future.

You tell us that Americans do not have a balanced view of Mexico. What are we overlooking?

We all see news reports of drug cartel violence and insecurity. We can’t hide it and we are working to control it. But there are other things going on in Mexico that get lost—things that are good.

The economy is growing at a good clip.

[Note: 4 percent annual GDP growth compared to U.S.’s 2 percent.] We have

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ceo chronicles > ceo watch

Oil is Mexico’s biggest source of foreign currency, followed by remittances, which suggests that the government has an economic interest in encouraging migration across the U.S. border or at least turning a blind eye.

We could speak all afternoon on this, but let me give you my personal opinion: It’s a great tragedy, because these people who go off to a new land, adapt and learn a new language are valuable and courageous people. We need such people in Mexico.

Think of the risk-taking entrepreneurs you no longer have.

That’s right, and consumers. We’re not going to have them either. The flow of people has its origins in the economic crisis of ’94-’95. We wiped out the middle class in our country. They lost their homes and their jobs. Many companies had to shut down. It was devastating, and it coincided

with a bulge in our population demographics. When people ask me why this happened at the same time with NAFTA, January 1994, I tell them that the combination of population bulge, our economic crisis and the fact that the U.S. economy was doing great was too overwhelming. We’ve got to find ways of keeping Mexicans in Mexico and we’re working on it.

So, what’s the plan?

Grow jobs. It’s the only way. Also, we’ve done a good quantitative job in education through improving secondary schooling. Now, we must extend this improvement into higher education. More of our kids want to go onto higher education, and we’re investing heavily to make that happen. Already, we are graduating 90,000 engineers a year. But this takes time. There’s no magic wand.

You say Mexico is struggling with democracy. Some would say the U.S. is as well. But unique to Mexico is the particular concentration of power. Some argue that the country is basically run by its wealthiest 1,000 families, all of whom know each other and are wiredin with the PRI. Why would this group want to broaden Mexico’s middle class and challenge the existing power structure that has ruled the country for more than a century?

Some people say it’s really just 300… but this is changing—not fast enough— but it’s changing. We’ve got our share of billionaires, and all of them that I know—and I know all of them—are investing hard.

Inequality is a huge issue in Mexico, and one that we’re prepared to overcome by closing the gap with more jobs.

If it means political power diffuses, so be it. But there’s another factor at work, too.

Lots of those families have not had to give up ownership in their company, because the country has not grown as fast as it is capable of growing. The moment we start growing closer to our potential—and opening up the energy sector would be a step in the right direction—then, they’re going to run out of means to keep their companies growing. They’re going to have to rely on a more robust stock market and give up some control in order to secure the financial backing to grow or sell their companies.

It’s got to happen if we want to grow and become a more stable democracy.

Given that 18,000 U.S. companies have operations in Mexico, what happens there is of no small importance to American business leaders. What single myth about Mexico do you think persists in the minds of U.S. CEOs that you would most like to dispel?

Great question. Fear that Mexico might not be able to work through its security situation. Some may still be troubled by Mexico’s history of expropriations in the past—oil, for instance.

Are those days behind Mexico?

If they’re not, we’re sunk. I’ve talked with Enrique Peña Nieto. He’s a pragmatic young man, a quantum leap difference from any other elected official. He’s outwardly focused and well-traveled in the U.S., Europe and Asia.

I’ve talked to him about some of these myths, such as security and energy, and he’s determined to see these issues through.

ISTOCKPHOTO

good macroeconomic fundamentals—a low deficit and low inflation. We’re creating jobs. We don’t owe that much, and what we owe is increasingly longertermed and locally financed. Exports are increasing by double digits. We’re also working on getting a stronger domestic economy going because we recognize that our dependence on exports is good, but it can’t be the only driver. In addition, we’re making progress on other issues that are indirectly tied into the economy but will take time to have an effect: namely, quality in education.

Significantly, Enrique Peña Nieto, the candidate who is currently leading in the polls, wants to head in a new direction.

For example, he has spoken about opening up the energy sector to private-sector investment for capital, technology, and for governance, without giving up ownership of the oil. This is pretty much what Brazil has done. This would be another growth driver, because we’re way behind in that sector. Mexico and North Korea are the only places that don’t permit private-sector investment in the energy sector. Even the Cubans permit it.

At the same time, we’re about to achieve universal health coverage in the country, which is another big step forward. Slowly but surely, we’re building up more of a middle class, which is our objective. But because our two economies are closely tied, we are hopeful that the U.S. can avoid a double-dip recession.

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ceo chronicles

Covance:

Tactics for Talent Troubles

Z

Covance’s Joe Herring

Innovation has always been near and dear to pharmaceutical heavyweights,

such as Pfizer and Eli Lilly, whose very lifeblood depends on minting a steady flow of new drugs for their in-patent pipelines. In the past, as long as they achieved that goal, the industry had little trouble justifying the sprawling campuses, plush salaries and pension plans, and cutting-edge research facilities for which it’s long been known. But a series of body blows—an economic dip and several Z major blockbuster drugs falling off patent among them—have forced Big Pharma to increasingly rethink its cost-be-damned approach to R&D in favor of hiving off aspects of drug development to contract research organizations (CROs).

CROs like Covance have benefitted from that wave, says Joe Herring, CEO of the $2.8 billion Princeton, N.J.-based company, which focuses on driving cost and time out of the development process. “Even throughout the rough period of 2008, 2009 and 2010, we grew revenue,” he says, noting that efficiency is a big part of the company’s appeal. “We know that we have to do it faster and cheaper every day or we don’t exist. We’re generally 30 to 50 percent faster and 30 to 50 percent less costly, particularly in early drug-development phases.”

However, a lower cost structure alone wouldn’t convince drug companies to trust an outsider with something as precious as its R&D. CROs must also deliver on drug companies’ exacting standards— a tough feat in an industry where turnover averages over 20 percent. “If you have

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a company growing 15 percent a year with that kind of turnover, about half the staff you’re putting on client projects are new employees,” says Herring. “There’s no way to maintain quality.”

That was exactly the situation at the preclinical trial part of the business Herring presided over in 1999. “That division accounted for almost half the company’s revenues and turnover was 24 percent,” he recounts. To address the issue, Covance set up a series of focus groups with trained third-party facilitators to identify top employee concerns. “When they came back with 100 things we needed to improve on, the first reaction was shock, ‘Wow, this is a long list,’” says Herring.

“But we decided to create a web site, list all 100 and provide monthly updates on our progress addressing them. Over 18 months, we tackled all 100 and then we reloaded the gun—went back and got 50 more.”

Ultimately, Herring credits the program with not only reducing turnover to a much healthier range of between 7 and 10 percent but also transforming the company. “As we worked through those lists, employee turnover dropped, employee satisfaction increased and customer satisfaction started increasing. We started swirling up in a vortex in terms of ‘happy employees give you happy clients who give you happy employees who give you happy clients.’ Over a fiveyear timeframe, we went from slow to no growth to almost 15 to 20 percent growth and low margins to 20+ operating margins.

That was all around retaining and expanding talent management.”

When Herring moved into the COO role, he expanded on the initiative companywide, launching a new employee survey, this time canvassing long-time employees on what they liked about working at Covance. “Far and away, the number one reason for preferring to work here—as opposed to a pharmaceutical company— was the opportunity to bring new medicines around the world,” says Herring.

“At Covance, a specialist in cardiovascular medicine can potentially be working on five or six therapies, rather than on making one molecule a success.” Colleagues also factored highly in the equation— respondents cited enjoying exposure to experienced team members with diverse talents. They also valued flexibility— the opportunity to work at any of 30 facilities located around the world or in

different divisions.

That knowledge, in turn, informed Covance’s recruiting and talent development efforts. “Once we had those data points, we started focusing more on “career-pathing” employees, championing breakthrough medicines we’ve worked on and on having our employees share stories about what they’ve accomplished at Covance,” says Herring. “We also got better at hiring people who not only have the scientific background we need, but who fit our culture of service, are able to work well with clients, and have the financial discipline to keep a project on track.”

More than a decade into the process, Herring can share a few best practices for CEOs in talent management: Own It. “No one knows the strategy of the company as much as the CEO, which means you’re uniquely qualified to make strategic hires even in tough times,” says Herring. “You can look one, two, five years down the road at where the company is going and how talent injections can enable your vision.”

Be Visible. “We have 180 VPs in our company and, over the last two years, only two of them were hired or promoted to that position whom I hadn’t interviewed for at least two hours,” says Herring, who also makes a point of visiting with employees as he meets with clients around the world. “I am a visible leader; I am not going to Paris without going by our office and engaging with the staff.”

Push for Improvement. Each year, Covance rates the bottom 6 percent of performers as “improvement needed.” Some end up leaving the company, which creates recruiting opportunities. For others, the ranking serves as a catalyst for improvement. “You need to let people know that you have high standards of performance and they need to continue to better themselves,” says Herring.

Grab Opportunities. “If you really believe talent is a big part of the success equation, you’re always recruiting,” says Herring, who once brought in an executive he met while watching a sports event.

Persevere. “‘People come first” is easy to say, but hard to do—“and really hard

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to live day in and day out,” says Herring.

“Having it truly become a core part of your strategy is a difficult thing to do. But, if you have best employees aligned around incentives, you can beat every company in the industry in any industry. I believe that at my core, so anything I can do to drive that strategy, I do.”

Ziopharm Oncology: A New Approach to New Drugs

Z

Ziopharm’s Jonathan Lewis

For a little biopharmaceutical company, Ziopharm Oncology has attracted capital from some heavy hitters—a coup

in an industry hit particularly hard by the financial market crunch. The two largest stakeholders are seasoned biotech investors: Fidelity Management, with a 13.75 percent stake, and Intrexon’s Randal J. Kirk, a well-known deal-maker and founder of several successful biotechs, with a 12 percent stake. So how did a 2004 startup build a $130 million bankroll during a tight capital market?

CEO Jonathan Lewis, M.D., Ph.D., a former surgeon at Memorial Sloan-Kettering Cancer Center, attributes his company’s appeal to a rigorous focus on developing lower-cost, more effective, cutting-edge anti-cancer drugs. “Coming up with products that will work in people is the real key here, but we also envision being able to get there in a straighter line and ultimately at a lower cost,” says Lewis, who likens Ziopharm’s approach to drug development to Henry Ford’s vision for revolutionizing manufacturing. “Ford

was able to take a very expensive, artisanal automobile manufacturing process, copy that science and simplify it in terms of applying automated rules of manufacturing. We believe that the same or similar principles can be applied here again to control and bring costs down.”

Ultimately, of course, efficacy is the primary goal for Ziopharm, which is pursuing both small-molecule and synthetic-biology cancer treatments but cherry picking products with optimal potential. “The possibilities are vast, but we’re not going after every single option,” explains Lewis. “We’re taking a very disciplined approach to prioritizing those products that we think have the greatest chance of success, understanding that there’s always an element of randomness.”

In screening prospective treatments, the company seeks those that can meet what Lewis describes as a “high unmet need”—drugs that target a group of cancer patients for whom there are currently no real treatment options. For example, its small-molecule Palifosfamide is geared toward advanced sarcoma patients whose cancer is not responsive to surgery. “If it’s successful, it won’t replace anything, but rather be an additional new treatment in a high unmet-need niche,” says Lewis, who notes that Palifosfamide is currently in Phase III clinical testing and may receive FDA approval as soon as year-end 2013.

But Ziopharm’s real investor appeal may well be its efforts in synthetic biology, where the company is pursuing DNA-based therapies that trigger cells to produce powerful cancer-fighting proteins precisely where they are needed in the body. Ziopharm is currently testing a gene that will trigger a patient’s own cells to produce Interleukin-12 (IL-12), a potent, naturally occurring anticancer protein instrumental to the initiation and regulation of cellular immune responses. “We’ve taken the DNA for IL-12 and put it into people with melanoma, and we’ve shown that the protein made inside these people turns on the immune system in a way similar to Ipilimumab, a drug used to treat melanoma,” says Lewis. “This is early data, but the proof of principle is there.

We can show that we can make the protein inside of people, using their own cells, and it’s working quite well—and that that’s having an effect on their immune system and then on their cancer.”

An important element of these treatments is that the protein production can be switched on and off, which is key because cancer therapies often involve striking a balance between fighting cancer and managing the toxicity of the treatment itself. For example, Ipilimumab treatment can cause severe and even potentially fatal adverse immunological effects due to T cell activation and proliferation. “Some of these proteins have been used before and proved too toxic, but we now have exquisite control over how much we deliver,” says Lewis. “That control enables us to increase effectiveness while reducing toxicity. With these protein therapies, we’re at the beginning of being able to radically change the treatment of many different kinds of cancer.”

Therapies that employ the human cell machinery to make protein, as opposed to producing proteins in labs—the core of the synthetic biology—are revolutionizing biotech. They also have the potential to do the same for medical care, asserts Lewis.

“One of the lessons I learned while treating people with cancer is the incredible resiliency of the human body,” he says. “It is just beyond anything that anyone can imagine. I think if one can harness that power in the right way, it’s going to be a ­ Jennifer Pellet whole new world.” —

In Fact Compiled by John Kador

1 The number of U.S. companies that, as of October 2011, had filed for an IPO but had not yet gone public, the highest in more than a decade: 211 2 Portion of venture capital-backed companies from 2001-2010 that went public within five years of receiving funding: 1% (from 1991-2000, the corresponding figure is 18%) 3 Average number of inventory days for U.S. businesses in 2011, up three days from 2010 (inventory represents tied-up capital, so the smaller the number, the better): 39.32 days 4 Percentage by which the average contracted project costs the government more than if the government ran the project internally: 83 5 Number of new drugs approved by the FDA in the 2011 fiscal year, an approval rate that was exceeded just once in the past decade: 35

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ceo chronicles

In Fact

InBox: How Much—and Why—Industries Lobby Critics complain that lobbying is rampant in Washington and special interest groups get in the way of political progress. But facts suggest that the relationship is symbiotic. Studies show that the most regulated industries tend to spend the most on lobbyists to protect their interests—suggesting that the more heavily government regulates an industry, the more that industry needs to deploy expensive specialists into the continuing trench warfare of politics to lobby on its behalf.

Top-Spending Industry Sectors

Lobbying Expenditure

Compiled by John Kador

6 Number of the 10 most affluent counties in the U.S. that are suburbs of Washington, D.C: 5 7 Median net worth of a sitting U.S. senator in 2010, up 11 percent from 2009: $2.63 million 8 Median net worth of House of Representatives Republican and Democratic members, respectively, in 2010: $834,250, $635,500 9 Number of current members of Congress invested in General Electric, the company with the most Congressional stockholders: 75 10 Rank of the U.S. Postal Service if it were listed on the Fortune 500 list of largest American companies by revenue: 33

Pharmaceuticals/Health Products

$181,673,492

Insurance

$116,390,030

Oil & Gas

$110,691,654

Electric Utilities

$105,832,509

TV/Movies/Music

$91,767,558

Computers/Internet

$91,537,448

Misc. Manufacturing & Distributing

$88,335,635

Securities & Investment

$74,807,000

Business Associations

$74,241,045

Hospitals/Nursing Homes

$73,738,225

Education

$70,339,741

Civil Servants/Public Officials

$60,162,428

Health Professionals

$59,160,393

Air Transport

$57,716,543

Health Services/HMOs

$54,287,648

Real Estate

$49,167,503

Commercial Banks

$46,937,128

19 Percent of seats flown on long-haul routes that are first class and business class, respectively: 5, 15

Defense Aerospace

$46,370,041

20 Percent of revenue represented by first and business class passengers: 45

Automotive

$45,839,378

Telecom Services & Equipment

$42,765,563

21 Price paid on eBay for a seat on the first commercial flight of Boeing’s longawaited 787 Dreamliner: $33,500

11 Average effective tax rate for the most profitable 280 companies in the U.S. from 2009-2010: 17.3% 12 Rank of U.S. on most business-friendly countries (Singapore, Hong Kong, and New Zealand lead): 4 13 Percentage of deaths in the U.S. in 2009 that resulted in federal estate tax liability in 2010 (estate taxes are usually filed during the year after the year in which a person dies): 0.3 14 Decrease in the median U.S. household income from December 2007 to June 2009, the official dates of the National Bureau of Economic Research for the most recent recession: -3.2 15 Decrease during the subsequent “recovery:” -6.7 16 The number of $100 bills the U.S. Treasury printed in 2009, for the first time surpassing the number of $1 bills: 2.64 billion 17 The percentage of people 18-29 who either have delayed or will delay a purchase or major life change (e.g. marriage, career change, children) due to economic factors: 77 18 Percent of people 18 to 24 who would rather have access to the Internet than access to their own car: 46

Source: Center for Responsive Politics (NOTE: Lobbying expenditures reflect data for the most recent year through October 31, 2011.)

Continued on p. 16

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ceo chronicles

In Fact Compiled by John Kador

22 Percent of Washington D.C. public school teachers who declined to give up even part of their job security in exchange for base salary increases of $20,000: 20 23 Contribution of fees from checked baggage, preferred seat upgrades, and reservation changes to airline operating revenues in the second quarter of 2011: 4% 24 Contribution of fees from checked baggage, preferred seat upgrades, and reservation changes to operating profit: 62%

Illustration: Pablo Lobato

25 Baggage fee American Airlines charges for an overweight checked bag weighing 71-100 pounds on its Asian flights: $450

Thorns & Roses Thorn George Osborne, Britain’s Chancellor of the Exchequer, compared France to Greece, hinting that France was next in line for a sovereign debt downgrade. Incensed, Christian Noyer, the governor of the Bank of France, compared Britain to Greece, and questioned its AAA status. The crisis over the euro, having started as tragedy, threatens to end in farce.

According to Klaus Regling, the head of the European Financial Stability Fund (EFSF), the eurozone’s bailout mechanism, the cost of fire-fighting the eurozone’s debt crisis is “staggering”—about one trillion euros. And to think the euro project’s aim was to lay down the ghosts of 1,000 years of discord. Interestingly, Noyer’s surname when translated into English means “drown” or “sink.”

Rose A rose to The Wall Street Journal letter writer Michael Fallon of Hancock, N.H., who suggested, “Would the speaker of the House and the Senate majority leader sign a Sarbanes-Oxley affidavit, holding them personally liable for the accuracy of the financial forecasts on which they sell their legislative initiatives to the American public? Do the mandates for honesty and integrity, which the Congress and the public rightfully demand from businesses, not apply to the Congress itself?”

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26 Price of a New York City taxicab medallion (an aluminum plate that grants the right to operate a yellow cab) in 1937 in inflation-adjusted dollars: $157.50 27 Price of a New York City taxicab medallion in 2011, representing an increase in value of 1,900 percent over 30 years (by comparison the Dow Jones industrial average has risen 1,100 points in the same period): $1 million 28 Average size of angel investments in 2010, down from $523,232 in 2005: $324,717 29 Percentage of executives who admit that they have seen favoritism at play in employee promotions at their own companies: 84 30 Additional average salary, approximately 18 percent, earned by men who gave themselves a below-average agreeableness score, relative to their male counterparts who scored themselves above-average: $9,772 31 For women: $1,826 or 5 percent 32 Additional cars, buses and trucks required if every nation emulated the number of vehicles per capita of the U.S: 4.5 billion 33 Annual costs of typosquatting, entrepreneurs who register domains such as “goggle.com or facebook.com to take advantage of fat fingered users,” for the 250 most-trafficked websites: $285 million Sources 1 Renaissance Capital.com, Greenwich, CT; 2 Case Western University, Prof. Scott Shane; 3 Sageworks; 4 Project on Government Oversight, Washington D.C.; 5 Federal Drug Administration; 6 Forbes; 7-9 Center for Responsive Politics; 10 Fortune; 11-12 Institute for Policy Studies; 13 World Bank; 14 Citizens for Tax Justice; 15-16 Sentier Research, Annapolis, MD; 17 Department of the Treasury; 18 Generation Opportunity; 19 The Gartner Group; 20-21 Ascend, Peter Morris, Chief Economist; 22-23 The Wall Street Journal; 24-25 Bureau of Transportation Statistics; 26 USA Today; 27-28 New York City Taxi Commission; 29 Center for Venture Research; 30 Georgetown University McDonough School of Business; 31-32 Cornell University School of Industrial and Labor Relations, Beth A. Livingston; 33 Commerce and Energy Departments; 34 FairWinds Partners, Washington D.C.

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CEO Confidence Index

A False Surge?

Three reasons CEO Confidence surged in November—and three reasons it won’t stay there.

When Chief Executive polled CEOs recently about their overall perceptions of business conditions, sentiments seemed to

be running high. The Index, our monthly gauge of CEOs’ perceptions of overall business conditions, finally saw an uptick in optimism after a general decline over the year.

Confidence jumped 7.1 percent to 5.23 out of a possible 10, bringing confidence back to levels seen this summer. Though overall confidence has dropped 18 percent since the Index’s 2011 high of 6.39 in February, November’s jump seemed to be an indication that conditions are starting to recover.

Here are three things that happened in October that helped boost CEO confidence: 1. Financial markets surged.

2. An agreement was made on euro-zone debt crisis.

3. Corporations saw solid Q3 earnings.

Projections for key business metrics also saw a boost. Over 69 percent of CEOs expect to see increased revenues over the next year, a 15 percent increase from October.

After five months of increased hiring hesitation, more than 40 percent of CEOs expect to increase their workforce over the next 12 months. In September, fewer than 30 percent of CEOs planned to hire, a huge drop from April’s 48.84 percent.

In addition to increased revenue and hiring projections, CEOs also are optimistic about profit projections. Over 58 percent of CEOs expect to see increased profits, compared with just 46 percent one month ago.

Capital expenditures are also recovering slowly; almost 45 percent of CEOs expect to increase cap ex. Though down from February’s 54 percent, cap ex increases are still an indicator of positive business investment.

Though there is continuous CEO discontent with U.S. political leadership and a consensus that regulations are stifling a full, economic recovery, there are signs that things are looking up. One CEO said, “We

CEO Confidence Index Expectations for Overall Business Conditions 1 Year From Now 50.0% 45.0% 40.0% 35.0% 30.0%

Up over 20%

25.0%

Up 10 to 19.9%

20.0%

Up less than 10%

15.0%

No change

10.0%

Down less than 10% Down 10-19.9%

5.0% 0.0%

Down over 20% Revenues

Number of Employees

Capital Expenditures

are seeing former clients become strong financially again and returning to us to receive our public relations/marketing/media relations services, which they discontinued at the height of the recession. Smart executives know that visibility equals market share, and market share is fairly inexpensive now. While others sit out on the sidelines, visionaries are getting back in the game.”

Another CEO noted, “U.S.-based corporations are cautiously giving up some cash,” which is progress in the right direction. Another has found success in specific markets: “We have been fortunate to identify specialty niches with high demand and a limited, qualified, supply of service providers. So, while we see the overall economy as weak, our growth has come from recognizing these niches early and positioning ourselves as early-market leaders.”

These numbers and comments, however, were compiled between November 1 and November 4. Since then, there have been political and economic developments that could potentially push confidence back down: 1. Italy may be poised to be the next Greece.

Profits

2. The U.S. added fewer jobs than expected in October.

3. Oil prices are up more than 20 percent in five weeks.

Online Content Chief Executive’s Full Historical CEO Confidence Index Data (From October 2002 to present) is available at: www.ChiefExecutive.

Net/CEO-Confidence

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Uncommon Wisdom

How to Deal with the Chinese Government

by Robert Lawrence Kuhn

Key Takeaways • When working with the Chinese government, seek alignment between the strategies of your company and the policies of China’s leaders.

ISTOCKPHOTO

• Meeting chinese government officials prior to or in parallel with negotiations with chinese business executives increases the chances of success.

In the real world of doing business in China, the landscape is shifting. Foreign companies can no longer do business in China today in the same way that they have in the past. China’s development has altered the economic landscape: low-cost manufacturers have more difficulties, whereas high-tech, IT and healthcare firms are more welcome. Moreover, China has money to pay them.

When discussing opportunities, problems and challenges related to their China strategies and operations, CEOs often bring up the pervasive power of China’s leaders and how to deal with the Chinese government and Chinese officials.

How to Deal with the Chinese Government

It’s all about power. The power of China’s leaders comes through their leadership of the Communist Party of China (CPC), which is constitutionally mandated to lead the government in China’s one-party political system. The fulcrum of CPC control is its appointment and promotion of all key government officials—especially party secretaries (the top bosses of provinces and municipalities), governors and mayors—and of all key senior executives of state-owned enterprises. In fact, all officials and state-owned enterprise executives are

evaluated based on their achievements of China’s leaders’ policies.

To distinguish government relations from business is to betray naiveté as to how China’s “system” works, where good relationships with Chinese government officials facilitate better relationships with Chinese business executives. (Indeed, government officials can become state-owned enterprise executives and vice versa.)

Thus, country managers of multinational corporations doing business in China should make government relations their personal responsibilities. They can have direct reports who focus on government relations, but this should not

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diminish their own “ownership” of government relations. Furthermore, when foreign firms take the Chinese market seriously, when China is or will become a global revenue driver, their worldwide CEOs should focus on Chinese government relations.

Sequencing relationships is vital: Topdown optimizes the system. When CEOs meet Chinese officials prior to or in parallel with negotiations with Chinese business executives, the character of the business meetings changes subtly—the Chinese executives become more respectful and the meetings become more productive.

Sequencing relationships is vital: Top-down optimizes the system.

Ideally, the foreign firm’s relationships with Chinese officials should be conducted independently by the foreign firm itself and not only via the foreign firm’s Chinese partner. The Chinese partner will always want to arrange these meetings, but the foreign firm should, at least on occasion, do this on its own.

While the Chinese partner may argue that they know the Chinese system far better—which is obviously true—the fact remains that the foreign firm must develop independent relationships with officials or it will forever be held captive by its Chinese partner.

Furthermore, because the Chinese partner is, indeed, part of the system (and, thus, must obey strict reporting hierarchies and protocols), the foreign firm will have greater flexibility in arranging meetings. Many senior Chinese officials enjoy visiting with foreign CEOs in order to gain international understanding, a new criterion by which they are assessed for promotion.

Unfortunately, a strong government, anchored by a one-party political system, exacerbates a human frailty called corruption.

How to Deal with Corruption

Corruption is universal and no political system is immune; but, when economic

systems change and vast state resources are privatized, the stakes shoot up—fortunes are made with astonishing speed, such that a combustible mixture of greed, envy and anxiety over eroding power can overwhelm morally weak officials.

Corruption is ubiquitous in China and noxious to the Chinese people. It transfers resources illegally from general society to venal individuals, effectively stealing from everyone. It pervades commerce and government and has proved maddeningly resilient to attack.

Corruption is a drag on the economy and a scourge on society. It distorts economic decisions and undermines market efficiencies, and it threatens political stability and delegitimizes the State. Corruption, rightly, engenders public anger.

Some say that corruption in China is the enduring, corrosive legacy of the “Cultural Revolution” (1966-1976), which so decimated Chinese culture and morality that there remains little immunity to avarice and rapacity. Others, primarily leftists, blame corruption on the market economy, which, they say, promotes wealth and individualism at the expense of socialism and collectivism.

The solution, China’s leaders have concluded, lies in deepening reform, not backtracking from it. Senior leaders do not whitewash the problem: Former President Jiang Zemin, President Hu Jintao and Vice-President Xi Jinping each have fought and railed against corruption.

To China’s leaders, corruption impedes China from becoming a great nation.

Though corruption can never be eradicated, it can be controlled with a press/ media that is free to ferret out, scrutinize and expose dishonest officials. Corruption flourishes in dark crevices, shielded by the shadow of authoritarian protectionism. Only the bright light of an investigative free press, working without restriction or fear and the enforcement power of an independent judiciary, operating under a rule of law, can root out corruption. Only the press/media has the motivation, the manpower, and the temperament to reveal corruption comprehensively. As the freedom of the press/ media to report corruption increases, the severity of corruption decreases.

While a totally free press/media is not consistent with a one-party political system, the Chinese government

does permit, and even encourages, anticorruption investigative reporting— but, then, if the reporting becomes too intense or reaches too high, the government pulls back.

Reporting corruption can be a conundrum. If reporting is too timid, corruption will remain concealed and flourish. If reporting is too intense, social confidence may waver and central authority may be undermined. It is a conundrum that is not going away.

Corruption affects foreign firms— especially firms from countries, such as the U.S.—with strict laws of what constitutes corruption and strong punishment for violations. Some CEOs worry that they can be disadvantaged by competitors from certain other countries that may have, shall we say, “more flexible standards.”

What to do? Well, why do officials take bribes? Obviously, they seek financial gain, although illegal and dangerous. So, how can your firm provide “gain” to officials in ways that are non-financial, entirely legal and not dangerous?

Here’s how: Since officials seek promotion, consider how your corporate success could translate into the official’s career success. As noted, Chinese officials are assessed on how well they execute the policies of Chinese leaders. Hence, companies should learn how to align their strategies and businesses with these policies, which will not only benefit the company but also the officials with whom they work.

The China market is huge and growing, and most major companies have a China strategy—whether they know it or not. Appreciating how to work effectively with the Chinese government and how to deal properly with Chinese officials are essential for success.

Robert Lawrence Kuhn is an international corporate strategist and investment banker who advises multinational corporations on doing business in China. A longtime counselor to China’s leaders, he is the author of How China’s Leaders Think: The Inside Story of China’s Past, Current and Future Leaders (revised edition). His biography of former President Jiang Zemin, The Man Who Changed China, was China’s best-selling book of 2005. Dr. Kuhn is a frequent commentator on China in the international media and on China Central Television (CCTV).

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leadership development

The 40 Best Companies for Leaders How the top companies—public and private—excel in leadership development.

By J.P. Donlon

Key Takeaways • The best companies for leaders generate dramatically greater market value over time than the weakest companies for leadership development.

GETTY IMAGES

Z

Bob McDonald, CEO of P&G, which returned as this year’s top-ranked company for leadership development after a five-year hiatus.

“I see my role as the chief talent officer of the company,” says Procter & Gamble CEO Bob McDonald. “Leadership is the one factor that will ensure our success long after I am gone as CEO.” The West Point graduate and former brand manager for such products as Tide, Cascade and Dawn believes leadership development is central to the consumer product giant’s ability to grow earnings and cash flow in low to nogrowth economic times. Since the ranking’s inception in 2005, P&G has numbered among the top-tier firms of Chief Executive’s Best Companies for Leaders.

The ranking is based on a study of about 1,000 firms worldwide conducted in partnership with Chally Group Worldwide (www. chally.com), a Dayton, Ohio, sales and management productivity firm. Companies were scored on four key criteria, including: 1.

Having a formal leadership process in place; 2. The commitment level of the CEO, as measured by the time and quality of involvement with the leadership process and development program; 3.

The depth of the leadership funnel as measured by the percentage of senior management positions filled by internal candidates as well as the percentage of middle management positions filled by internal candidates; and 4. The number of other companies that report recruiting from the company being evaluated. To this narrowed list, we factor in a shareholder value performance metric, slightly modifying point totals where necessary based on

• Leading public company CEOs commit a higher priority to leadership development in spite of the added burden of more complex and “distracting” environments with added pressures for short-term financial results.

• Smaller and private company CEOs spend more of their personal time (25 percent versus 15 percent) on both developing others as well as developing themselves, but are less likely to install systematic processes for leadership development.

10-year growth or decline in market capitalization. This generally results in only slight ranking adjustments, as any company making the list is a champion apart from most others. In fact, aside from P&G, the remaining top 10 scored within several points of one another, with the second 10 on the ranking scoring no more than six to 10 points below the first 10.

The Best Companies for Leaders survey tracks changes and developments from year to year. For example, this year some differences in priorities and challenges facing CEOs in public versus private companies were observed (See sidebar, p. 28). Because

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it would be inappropriate to compare private companies with larger public companies that enjoy greater resources, we list separately the most noteworthy private firms with in-depth leadership development programs (See p. 29).

Respondents this year also made it clear that when succession from outside the company becomes necessary at the highest levels of management, companies depend on external recruiters. They charge these agencies with pursuing candidates from either other companies with the greatest reputation for leadership development or admired competitors with market expertise in their industry.

Several key factors most affect company rankings, including a company’s reputation among its peers as a source for well-rounded talent. Also considered is the CEO’s personal involvement in a company’s internal process. For example, this criterion is one reason American Express dropped from last year’s ranking and PepsiCo rose 10 ranks on the ladder.

The pages to follow offer a look at the top five companies on this year’s list, highlighting some of the reasons they secured their top-tier positions. The full Best Companies for Leaders report will be available in early February at www. chally.com. Also, later in the year, an in-depth benchmark report, detailing the process and metrics of the best companies for leaders will be available at www.ChiefExecutive.net.

P&G Rank: 1

Quite simply, P&G executives are considered the Navy SEALs of management. This results in no small measure from a razor-like focus on internal succession planning at all levels. From its inception 174 years ago, promotion from within has been a hallmark of the company. It places a rigorous process on managers to develop managers below them. In general, your boss can’t be promoted until you are ready to be promoted. P&G scored very high in its internal development program, receiving the maximum points for the percentage of its leaders that are internally recruited as well as being referenced by others as the source of their external talent search.

Development encompasses both formal as well as informal training. In 2000, when A.G. Lafley became CEO, he asked then-COO Bob McDonald to start a general manager college where individuals were taught values-based leadership, a curriculum McDonald himself created. He trains many of these 250 leaders personally. Some outsiders think it crazy that the CEO devotes his own time to this process. “It’s the most valuable resource this company has,” he shoots back. “This is exactly the difference between our company and others.”

McDonald also personally looks at the top 300 to 400 executives and reviews the progress of key candidates with the board of directors. The most important element is short feedback loops that include 360-degree reviews where the system tries to prevent derailment. Failure is an option at P&G provided it’s caught early and analyzed for what went wrong. “We have assignments that test people, stretch them, but don’t break them,” offers McDonald. “We often put our best people in our toughest jobs and often they may not get great results because of the difficulty of the assignment.” McDonald learned this firsthand when he worked for P&G in Canada. After attending a number of focus groups there, he championed the idea

40 BEST COMPANIES FOR LEADERS

2012

(rank previous year)

1

Procter & Gamble

2

IBM

3

General Electric

4

3M

5

Southwest Airlines

6

ADP

7

PepsiCo

8

Cardinal Health

9

Caterpillar

10

2011

(2)

JPMorgan Chase

(4)

Procter & Gamble

Robert McDonald

B E ST FOR BU

Virginia M. Rometty (as of January 1, 2012)

(14)

Wipro Technologies

(24)

IBM

20

Jeffrey R. Immelt

George Buckley

Bharat Petroleum

B E ST S FOR BU TA SIN

Gary C. Kelly

Verizon

2012

Carlos A. Rodriguez

(17)

Caterpillar

Indra K. Nooyi

Hewlett Packard

George S. Barrett

(7)

National Australia Bank

Douglas R. Oberhelman

Discovery Communications

Wells Fargo

David M. Zaslav

11

Dow Chemical

12

Boeing

13

Verizon

14

CRH plc.

15

General Mills

16

Hitachi Data Systems (36)

17

International Paper

18 19 20

Graybar Electric

Andrew N. Liveris

Emergency Medical Services

W. James (Jim) McNerney, Jr.

(6)

Lowell McAdam

General Electric

Myles Lee

(13)

Kendall J. Powell

Jack Domme

Manpower (31)

HCL Technologies

(20)

Stanley Black & Decker

Jim Skinner

John F. Lundgren

Tata Steel

American Express

Jeffrey A. Joerres

Stanley Black & Decker

PwC

PepsiCo

John Faraci

McDonald’s

General Mills

(Continued on p. 27)

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leadership development of putting the company’s liquid products in film enviro-packs, which proved to be a non-starter in the marketplace and had to be discontinued.

“I learned that what people say in focus groups isn’t what they will necessarily do at the point of purchase,” he says. Like GE, IBM and 3M, P&G sees itself as a learning organization. “We live in a VUCA world (volatile, uncertain, complex and ambiguous), which makes it impossible to know the future,” McDonald says.

“So instead we create a learning system that prizes flexibility and adaptability. The only way to do that is to have an organization that is willing to admit when something goes wrong.

“Every year in July, I take 150 leaders from around the world for leadership training at a facility such as West Point or CCL. We have to sharpen our saw each year. We must invest in the

Leadership Development ROI The need to develop leaders is widely acknowledged but the actual return on investment from these efforts is seldom quantified. Without a meaningful expectation of a long-term return, it is more difficult to justify the investment, especially in trying economic periods. In fact, for two years in a row, almost two-thirds of responding companies listed “financial limitations” as one of the top challenges to achieving their leadership-development goals.

Comparing the long-term growth in market capitalization of public companies with their ratings for leadership development offers solid justification for investment in developing leaders. The comparison covered the 10 years from 2001 to 2011, a period long enough to minimize short-term and situational fluctuations. The correlation is dramatic (See table, below).

An equally important finding is that the differences within the four quartiles are relatively less substantial than the differences between the top and bottom performers. In terms of the contribution to growth potential, the top leadership companies show significantly greater growth than the lowest as measured by market capitalization.

Top-Ranked Leadership Companies Perform Better Summary 10-year performance comparisons* Chief Executive/Chally Worldwide

Average % Market Capitalization Growth

Best Companies for Leaders Survey Ranking

leaders and spend $2 billion in R&D and probably half that in leadership, although the company doesn’t parse LD from its other activities.”

IBM Rank: 2

IBM has a long history of innovative leadership development and cross-discipline mentoring. Its Basic Blue for IBM Leaders, Shades of Blue and Accelerate Executive Leaders program for new executives and Executive Insights for newly hired or acquired executives are among the many examples that involve deeply integrated programs for identifying, assessing and developing some 60,000 high-potential leaders at all levels.

The planning process first defines all roles across IBM and creates “Success Profiles” for all leadership roles. This system is used to define demand for leadership roles by business unit or market and to identify critical gap roles (requiring accelerated development and recruitment). The second process focuses on pipeline identification and development. Leadership competencies of those currently in leadership roles are regularly evaluated to assess the leadership potential and functional skills of IBMers globally. Guidance on potential career paths and personalized development plans are provided for each IBMer, tracking progress through the IBM management system, including providing experiences and developmental opportunities.

Placement for each leadership role focuses on defining potential candidates, considering diversity for each opening. Placement decisions are accomplished through “5 Minute Drills” conducted at annual leadership reviews at all levels of the business. This company-wide process moves upward to high visibility “Chairman’s Reviews” with action follow-ups.

According to Stanley Litow, IBM’s vice president of corporate citizenship and corporate affairs and president of the IBM International Foundation, IBM’s “success has its roots in an adherence to core values while embracing fast-paced global change.”

IBM’s succession process has been a major reason it is one of the few firms that has lasted a century. It has one of the most closely watched institutionalized succession plans of any company in the world. This was evidenced by the smooth transition of CEO responsibility to Virginia “Ginny” Rometty from Sam Palmisano. She will become the ninth CEO since the company’s founding and its first woman CEO. This was no exception, as Lou Gerstner’s handoff to Palmisano was another good case study on leadership transition.

GE Rank: 3

Top 15% of Responding Companies

+22%

Bottom 15% of Responding Companies

-23%

*Includes companies where public data is available for 2001 through 2011.

Reasons for unavailable data include merger, acquisition or start-up within the period. A full survey report is available at www.chally.com.

GE established the quintessential executive training ground at its world-famous Crotonville, N.Y. facility—on which GE reportedly spends about $1 billion a year. General Electric’s John F. Welch Leadership Center marks its 55th anniversary this year. According to chief learning officer Susan Peters: “We have 13 offerings involving leadership skills that everybody should have, such as presentation skills, project management skills and understanding finance in a generic way.” These courses are managed through the Crotonville staff but are delivered at GE businesses around the world, including Shanghai, Munich and Bangalore, among other places. This is done through a Train the Trainer (TTT) concept. “The integrity

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of the course is maintained because the Crotonville staff ensures that the person teaching it has been trained and certified,” Peters explains. GE trains 50,000-60,000 people a year digitally and an additional 9,000 attend courses at Crotonville. It’s little wonder why so many other organizations covet the company’s graduates.

40 BEST COMPANIES FOR LEADERS 2012

3M Rank: 4

3M practices leadership development through assignment rotation; but, consistent with the study’s findings of other top-rated companies, it takes the approach that executives stay in a job for about four years in order to experience failure (the best teacher) and sustained success. Other companies often move people around every year or so, which yields a limited return on the development investment. 3M also focuses on leaders two to four levels below the CEO to develop and transition them into new roles. The company projects its commitment to leadership development on its website: “The premise is simple: If your people grow, your company will grow. The key: linking growth in individuals to those things that unlock energy and activities that our customers value. Leadership development remains at the top of the company’s agenda.” 3M CEO George Buckley spends over a fifth of his time on talent issues and teaches strategy and leadership to executives who meet twice a year. He also reviews what personal experiences executives need to improve their learning and advance their career. He says he prefers surrounding himself and the organization with people more capable than himself. Courage and a strong sense of ethics will take a manager far, he believes, along with the ability to focus and separate opportunity from peril. The board has been working on a succession plan with Buckley for well over a year in anticipation of his retirement in February 2012.

Southwest Airlines Rank: 5

An airline known for its low costs and high spirits, Southwest manages largely through its culture. It hires on attitude and enthusiasm and attempts to burnish this in a variety of ways, including The University for People (U4P), its corporate training facility dedicated to developing and delivering personal, professional and leadership curriculum. The Manager-in-Training (MIT) Program is a development experience for high-potential leaders who have long-term interest and future prospects within the company. There are two program levels: MIT I and MIT II. MIT I offers learning experiences and department visits that emphasize all aspects of Southwest Airlines and its culture. Participants experience 20-plus training sessions, including interactive exercises, assignments and visits by different departments within the company. Participants learn about various aspects of Southwest Airlines to give its workforce a better understanding of the “big picture” and what Southwest Airlines, as a company, is all about. MIT II focuses on leaders at the manager level to strengthen management expectations and build key leadership skills, such as strategic thinking and coaching. Building relationships with other managers, directors and senior leaders across the company is another invaluable experience of both levels of the MIT Program.

(rank previous year)

2011

21

Cooper Companies

22

Sealed Air

23

El Paso

24

National Australia Bank (9)

25

David Jones Ltd

26

Stryker

27

Wolverine World Wide

28

Konecranes

29

Unilever Plc.

30

Barnes Group

31

Aggreko plc.

32

PwC Robert E. Moritz (chairman)

Saputo Dairy Products Canada

33

Dominion

Tupperware Brands

34

DuPont Canada

35

Philips, N.V.

36

Saudi Basic Industries

37

AAM

38

(37)

FedEx

Robert S. Weiss

Steris

William V. Hickey

Aditya Birla

Douglas L. Foshee

3M

Cameron Clyne

Harris

Paulo Zahra

Medtronic

Stephen MacMillan

Acxiom

Blake W. Krueger

AVX

Pekka Lundmark

JCPenney

Paul Polman

LG Electronics

Gregory F. Milzcik

McDonald’s

Rupert C. Soames

(15)

Thomas F. Farrell II

Avery Dennison

Mike Oxley (president)

Wyndham Worldwide

Frans van Houten

Hitachi Data Systems

Mohammed H. Al-Mady

Cooper Companies

Richard F Dauch

DuPont

(39)

Sprint Nextel

Ellen J. Kullman

39

Faurecia Holdings

40

Monsanto

DuPont

Yann Delabrière

Michelin Malaysia

Hugh Grant

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ISTOCKPHOTO

leadership development

Are Private Company CEOs More Liberated?

It has frequently been suggested that executives who hone their skills at the helm of private companies have much more flexibility than those at publicly owned companies. Public company CEOs are constrained by their need to balance multiple objectives in a complex corporate ecosystem that includes Wall Street analysts, shareholders, their public culture and brand and other stakeholders. They need to be the face of the company, dealing with analysts interacting constantly with the media.

These added obligations can distract from a CEO’s focus on internal operations. Public company CEOs must also cope with the comparisons shareholders can make with returns garnered by hedge funds (fair or not) and with regulatory compliance issues. These trends can force public company executives to be more short-term focused on quarterly earnings targets and more risk-averse.

At private companies, executives are often less encumbered and make decisions autonomously. Management teams can focus on understanding the “science” of running their specific business and be more like business “technologists.” It is likely that

these CEOs, who do well with the bottom line, will be left alone.

The impact on CEO priorities may be significant: 1. Public companies have an intense focus on the numbers and stock price. These differences remain constant regardless of the size of the organization.

2. In spite of the recent turmoil in the financial markets, public companies are significantly more likely to promote from within, regardless of size.

3. Public companies find the cost of development processes and succession planning less prohibitive, again regardless of size.

4. However, probably due to the greater range of external responsibilities, public company CEOs spend almost 17 percent less time on their own development and 7 percent less time on developing others than private companies, also regardless of size.

Public companies face a paradox: The demands on their skills are greater, but they have less time to maintain and hone them.

Public and Private Companies Weight Criteria Differently

Rank

Public Companies

Private Companies

Leadership Performance Measure

Leadership Performance Measure

1

EBITDA

Customer Satisfaction

2

Gross Profit

Gross Profit

3

Income Growth

EBITDA

4

Customer Satisfaction

Income Growth

5

Costs

Costs

6

Stock Price/Valuation

Customer Retention

7

Market Share

Market Share

8

Customer Retention

Employee Retention

9

Employee Retention

Stock Price/Valuation

10

Patents

Patents

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BEST PRIVATE COMPANIES FOR LEADERS Private companies operate in a much different business environment than public companies. Nevertheless, private companies that commit to leadership development deserve to be recognized in their own right. They may not be as large, but with fewer external distractions, many are actually more focused on developing their people—if on a reduced scale and with fewer resources. Here are 10 that stand out among this year’s respondents.

Company

CEO

1

Business Publications

Connie Wimer

2

JFE Shoji Service

Mikio Fukushima

3

Westfield Insurance

Robert Joyce

4

American Infrastructure

A. Ross Meyers

5

Eagle Manufacturing

Joe Eddy

6

Golder Associates

Brian H. Conlin

7

IT Authorities

Jason Caras

8

Genesis HealthCare

George Hager

9

Bombardier Sifang (Qingdao) Transportation Ltd.

Jianwei Zhang, President and Chief Country Representative Bombardier China

Harwood International

Gabriel Barbier-Mueller

10

Reputational Leaders A company’s reputation among its peers, as demonstrated by its attractiveness as a senior executive talent pool, carries a weight and status beyond its numbers. The reputational stars for leadership development are still limited to a few at the top of their game.

GE remains at the top in the good company of P&G, IBM and HP based on their leadership development programs. J&J, Microsoft and Unilever are primarily valued due to their expertise in specific markets.

Here are the top target companies and the reasons behind their status as perceived by others.

Most Company Cited Leadership Strengths

GE Solid, disciplined process, critical thinking and leadership training provided early in an individual’s career

P&G Marketing expertise, global perspective, innovation and leadership know-how, as well as strong company values

IBM Developing leaders in a high-tech, value-add environment and performance-driven culture

HP The “HP Way”: an egalitarian, decentralized approach in which employees’ brainpower is the most important resource

J&J A proven drug commercialization skillset, medical device expertise and research capability

Microsoft

A dominant player in its marketplace

Unilever A global leader in the production, distribution and marketing of consumer packaged goods

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leadership development

CFOs Surge Ahead... Almost As with previous years, operations, finance and sales executives remain the preferred candidates for the CEO job. However, a slight but suggestive change among public companies appeared for the first time in this year’s study. Perhaps because of the length and depth of the recent recession and the pressure on financials, chief financial officers crept ahead of operational executives as preferred candidates for senior succession, at least among public companies, while R&D moved up to tie with HR executives. Public companies also showed a greater interest in technically skilled candidates in R&D and engineering. The percentages below indicate respondent company preferences of functional sources of CEO candidates.

Where Companies Look for Their Next CEO Private Companies

Public Companies

1. Operations

73%

1. Finance

72%

2. Finance

66%

2. Operations

71%

3. Sales

65%

3. Sales

67%

4. Marketing

46%

4. Marketing

51%

5. Engineering

22%

5. Engineering

35%

6. Human Resources

20%

6. Human Resources

20%

7. Other

16%

7. R & D

20%

8. IT

11%

8. Other

14%

9. R & D

9%

9. IT

6%

*Percentages indicate respondent company preferences for functional sources of CEO candidates.

Balancing Long- and Short-Term is Toughest Challenge While both public and private companies struggle with the rate of business change, public companies find it significantly more difficult dealing with the conflict of immediate tactical business issues and longer-term (more strategic) needs. Private companies struggle more with finding the financial resources and developing a more systematic approach to leadership development.

Challenge

Private Co

Public

Difficulty balancing long-term and short-term business requirements

53%

76%

Limited financial resources

57%

44%

Rapidly changing business requirements so criteria for success is fluid

45%

42%

No systematic process for identifying and developing talent

30%

24%

Difficulty attracting top talent

23%

23%

Difficulty identifying high-potential development prospects

16%

18%

Difficulty retaining top talent

14%

16%

Other

11%

11%

*Percent of respondent companies citing challenge

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ceo summit on technology

CEOs Tackle Technology

Paul O. Colliton Studio

By Jennifer Pellet

In November, more than 65 CEOs gathered in Silicon Valley to assess how mobile, cloud, social media and analytic technologies are altering the ways companies and consumers function on a daily basis—and ultimately transforming the competitive landscape.

In partnership with the Stanford Graduate School of Business Executive Education, Chief Executive hosted one of its signature CEO-only events at Stanford’s Schwab Residential Center and just-completed Knight Management Center. participants compared notes about the impact of technological advances and how best to leverage emerging technologies. The pages to follow offer highlights from the event that can help you understand, assess and leverage the technological forces currently reshaping markets and business models.

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Z

Michael Saylor, CEO, MicroStrategy

Transformative technology is hardly a new concept.

From the automobile and the calculator to the personal computer and the iPod, in every decade there are one or more examples of innovations that disrupt markets. In short, there’s nothing all that new <yawn> about new technology driving change. Yet, even veterans of the last extraordinary technology paradigm shift— the Internet frenzy that gave birth to the likes of Amazon, AOL, Google, Yahoo and eBay—are waxing dramatic about the powerful potential of the revolutionary technology currently sweeping its way into the daily lives of businesses and consumers.

“Starting in 2009—I would date it to the Apple 3GS—we saw a triple tsunami hit,” Michael Saylor, CEO of the software company MicroStrategy, told CEOs gathered for Chief Executive’s CEOtech event. “It’s three waves, all of them constructively feeding on each other and they are the mobile wave, the social wave and the cloud wave.”

Saylor went on to predict that the confluence of smart phones, social media and cloud computing would redefine markets and business models. “We’ve already got five billion people around the world with mobile phones, so it doesn’t take a rocket scientist to figure out that sometime between now and the next 10 years or so you’ll see five billion smartphones on the planet,” noted Saylor. “Those five billion people will be running software on those phones 24 hours a day, seven days a week. You’ve got yours with you right now and if I get too boring, you’ll get out your phone and start doing something else.”

But the implications go far beyond solutions for boredom, added Saylor, who notes that an untethered consumer is an empowered consumer. “They don’t have to comply with your monopoly business practices,” says Saylor. “They can walk into a store and check prices. In fact, they can check prices from their living rooms or anywhere they happen to be. And your worst enemy doesn’t have any of your overhead. Amazon doesn’t have real estate or property taxes to contend with, and they’re not particularly concerned with whether they’re compatible with the $100 million point-of-sale hardware you purchased five years ago.”

If mobile phones make things vapor, social media makes them viral. The nearly one billion people in Facebook’s network already represent a powerful database, and one with a powerful

Goggling at the Googleplex CEOtech attendees were treated to a tour of Googleplex, Google’s sprawling headquarters in Mountain View, Calif.—also known as the most entertaining workplace in America, and possibly on Earth. Famous for its dining facilities (all food free to all Googlers) and high-tech relaxation devices, including a sound and lightproof decompression chamber, the Googleplex campus is also outfitted with more traditional downtime activities like volleyball courts, bicycles, swimming pools, gym equipment and Foosball tables. And, of course, it’s green— solar powers supply approximately 30 percent of daily power needs and charge the company’s fleet of plug-in hybrid vehicles. Tour participants were most impressed with the sheer scale of the campus and the way it and Google’s employees reflects corporate culture—a selfcontained world inhabited by casually dressed, youthful employees who each play a role in the functioning of this giant colony.

Participants ready to be wowed.

Google demos its immersive 3D map of the future.

Paul O. Colliton Studio

Technology’s Trifecta

Google’s Shan Sinha shares insights on the power of cloud computing—and how Google can help you harness it.

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ceo summit on technology differentiator—it self-updates. “People change their names, they move, they change email addresses, employers,” notes Saylor.

“And when they do, they update their files. Think about the value of all of the yellow pages and white pages printed by all the phone companies on Earth concentrated.”

And then came cloud. The power of cloud computing can be hard to grasp—and suitably so since it is, after all, in the ether.

To illustrate the exponential impact of mobile+social+cloud, Saylor references the 16-year-old girl in Egypt whose videotape of soldiers beating a woman went global. The viral element of the story is clear—she shares the video with friends on Facebook or

Twitter, her friends share it with their friends who share it with theirs and so on. “But did you ever try to broadcast a video to 25 million people?” points out Saylor. “If you did that 10 years ago on your home server underneath your desk, it would have crashed as soon as 300 people hit it at the same time. The cloud is where that power comes from.”

As Saylor spoke, heads nodded. Across industries, business leaders agree that the confluence of personal communication platforms with mobile telephony and cloud capability pose serious challenges to how business will be conducted in the future.

The question still up for debate is how to meet those challenges.

How Mobility Will Transform Business

Henry Nothhaft Former CEO, Tessera

“Many companies have not extended their business model to mobile, making them vulnerable and leveling the playing field to new entrants. It is imperative for companies to adopt mobile strategies and embrace cloud computing as mobile online commerce ramps up dramatically at faster adoption rates than fixed Internet is achieving. By mid-decade, mobile will account for 4 percent to 6 percent of all retail sales. That’s an amazing number.”

Julie Ask VP, Forrester Research

“Your mobile phone will soon know more about you than any other device or person. You’re reading books, banking, programming your DVR and making purchases on this device. Many [uses] involve your current location, even your altitude and speed, whether you’re walking, running, driving.

I think of this not as big brother so much as a big mother—your device is here to care for you and help you make good decisions.”

Alex Yoder, CEO, Webtrends

Paul O. Colliton Studio

“A lot of organizations, whether it’s their marketing teams or their CIOs, are struggling with the concept of how to actually drive measurable value and insight from [mobile and social] channels, as well as throwing a lot of dollars at having to have a mobile strategy or a social strategy and not really realizing that a) they aren’t building measurement into it to begin with, so they’re failing before they even start, and b) the fundamental problems they’re trying to solve are really not that dissimilar to those customer marketing and interaction challenges experienced 10 years ago.”

Plan to join us in October at Stanford University for next year’s gathering.

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was in crisis and headed for insolvency when Kennedy took the helm in 2004. “In scanning the landscape, we found that 80 percent of the time people spend listening to music they’re not playing their own music; they’re listening to the radio,” says Kennedy.

“And, hey, we had this intellectual property that would enable us, we believed, to be the best in the world at bringing personalization to radio.”

Paul O. Colliton Studio

Strategy Session: Profiles in Innovation

The Competition: Broadcast radio. “Radio towers have specific locales and reach out for a hundred miles, it’s very much a local kind of business built on FCC licenses,” says Kennedy. “And the broadcast world in which all of us grew up is a one-to-many, one-way technology. The Internet enables us to address all markets simultaneously and to give each person have a completely unique, personalized experience.”

Z

Pandora’s Joe Kennedy, Wolters Kluwers’ Mike Sabbatis and Crosslink Capital’s Jim Feuille

The nature of disruptive technology is that it throws both businesses and their marketplaces into flux. From a CEO’s perspective, you’re either the new guy looking to use an innovation to knock the established players off the field or you’re the established guy looking to defend your turf by getting ahead of the next curve–but not so far and fast that you crash and burn. In either case, you never know how the game will play out until the dust settles. At CEOtech’s Technology’s Impact on Strategy session, we heard from CEOs at both ends of that spectrum who embraced new technology to forge a future for their businesses and, when field cleared, emerged from the fray as victors.

Here are brief recaps of the stories they shared with CEOtech attendees.

The Challenger: Pandora CEO Joe Kennedy The Business: Pandora provides personalized Internet radio over computers, phones, and other devices connected to the Web. “Instead of trying to find a station that works for you, you enter the name of a song or artist or composer or genre that you like and Pandora creates a station that plays that kind of music,” explains Kennedy. “Through your interactions—thumbs up, thumbs down— you then personalize the service to suit your taste.”

The Technology: The Music Genome Project—a database of the attributes of music that enables the company to connect listeners to tunes they will like and musicians to new audiences.

The Challenge: Conceived around selling software to music retailers, Pandora (then known as Savage Beast Technology)

The Hitch: Pandora initially pursued a subscription-based revenue model—a strategy that proved flawed. “Radio, the category that we’re disrupting, is overwhelming ad-supported free and has been for 100 years,” says Kennedy, who notes that after a few months of subscription model the company began offering free ad-supported radio.

The Lesson: “Think twice before you change the basic economics for the end user,” says Kennedy. “I also think that we got that wrong because no one here had been part of an ad supported business before. If we had a team comprised of people who fully represented the ranges of experiences of the market we were seeking to disrupt, we would have been more comfortable going in that direction earlier on.”

The Endgame: Introduced six years ago, Pandora now has 100 million registered users, and recent data showed 37 million active listeners in a trailing 30-day period. It went public in June of 2011 and has released a run rate of around $250 million a year in terms of revenue.

The Defender: CCH CEO Mike Sabbatis The Business: A division of $4.8 billion Wolters Kluwer, CCH is a leading provider of tax accounting, audit and workflow information, software and services with more than 700 publications in print and electronic form.

The Challenge: “We had a large legacy business built with old systems and old processes that we needed to migrate to new technology,” says Sabbatis. “So first, we needed to digitize all our information, everything you wanted to know about accounting law or tax law. Second, we needed a process to make our applications mobile—to moved our distributed software, all of our client server applications, into the cloud.”

The Competitive Landscape: Accounting work has historically been paper- and software-intensive. “Ten years ago you would see auditors with crates and crates of documents,” says Sabbatis. “And our program for income tax alone is more than 20 million lines of code—trying to take those applications mobile was a

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ceo summit on technology big, big challenge for us.” Yet, the benefits of being able to offer access to information and applications anytime from anywhere was clear—a strategic, competitive advantage for CCH. “The barriers to entry were high, but you have to understand that somebody will figure out a way to get there,” notes Sabbatis.

The Hitch: CCH’s revenues depended on maintaining its legacy system, yet the company needed to transition to new technology.

“In 2006, we decided to build a new house from the foundation up, because the old plumbing that was in there wasn’t going to get us to the Net, to the Smartphone, to where we needed to go. It involved a very challenging sale to our board of directors because it was a very expensive proposition—a $70 million investment for a $600 million company.”

The Lesson: “Talk to your customers and understand how they’re working, and talk to your perspective customers to understand what they’re looking for,” urges Sabbatis. “You’ve also got to be disciplined and diligent in driving data-driven decisions, whether they be about technology, cost or infrastructure. I will promise you that whatever you put together as a business plan, you will have an overrun on cost. So if I had to do it over again, I would have broken it up into a shorter, more consumable bites so that you accomplish something at a cost you can control and can continue to make that investment going forward.”

Social Media What social media should CEOs be using—and what should they be saying on them? In a session on maximizing the ROI of social media participants discussed best practices for employing social media in all aspects of business, from marketing to human resources. Panelists Wes Sterman of Pharmacofore, Alex Chang of Roost and Howard Lind of Cicoil shared their experiences leveraging social media to boost profits and manage corporate reputations.

Strolling to the Knight Management Center on Stanford’s campus

The Endgame: “Looking back, it was probably the best decision we could have made because it’s gotten us where we are today with a fully enabled cloud application anytime, anywhere across the globe,” says Sabbatis. “Multinational firms that had hundreds of instances of our application in offices around the globe can now have one instance of it on our system. And on the smaller end of the market, a sole practitioner who hasn’t got an IT budget or IT staff can have the power of this program at their beck and call just by logging on and going.”

Bend Broadband’s Amy Tykeson

Cloud Computing Panel

Technology Talk

Actv8’s Brian Shuster

Paul O. Colliton Studio

Kaiser Permanente’s George Halverson wowed CEOs with an overview of how leveraging technology can revolutionize healthcare.

(Note: Look for excerpts of these presentations in upcoming issues of Chief Executive).

Sand Hill Group’s M.R. Rangaswami, Checkster ‘s Yves Lermusi, Accolo’s John Younger, Social Rep’s Chris Kenton, Socialtext’s Ross Mayfield

Kaiser Permanente’s George Halverson wowed CEOs with an overview of how leveraging technology can revolutionize healthcare.

eBay’s John Donahoe gave insights on the future of e-commerce and online security threats.

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Paul O. Colliton Studio

1

3

2

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5

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8

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1. MicroStrategy’s Michael Saylor, Checkters’s Yves Lermusi, and Zircon’s John Stauss; 2. Sun Health’s Ron Guziak; 3. BeauMedia’s Ray Beauchamp and Baja Fresh’s David Kim; 4. Crosslink’s Jim Feuille ; 5. San Francisco Giants’ Larry Baer; 6. eBay’s John Donahoe with Bend Broadband’s Amy Tykeson; 7. SmartVault’s Eric Pulaski; 8. Googleplex tour participants

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insights from insead

Why Ask Why?

Disruptive innovation often begins with a simple question.

Hal B. Gregersen, Jeff Dyer and Clayton M. Christensen

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by

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“Any questions?”

Most people have heard that phrase hundreds, if not thousands of times. It often comes at the end of a presentation or meeting and yet most attendees shuffle away without posing a query. That’s unfortunate because innovation often begins with a question. In fact, disruptive innovators ask more questions than non-innovators—and their questions tend to be more provocative. That’s what we found in a recent eight-year research project based on interviews with founders and CEOs of the world’s most innovative companies (people like Jeff Bezos at Amazon, Marc Benioff at Salesforce.com and Meg Whitman at eBay) and surveys of more than 5,000 executives and entrepreneurs from diverse industries and countries.

Our study unveiled five innovation skills (associational thinking, observing, idea networking, experimenting and questioning) that anyone, including CEOs, can use to discover disruptive new business models, products, services and processes. Of these five skills, we found that questioning often served as the starting point for disruption.

In fact, questioning is a way of life for innovators, not a trendy intellectual exercise. Our research found that not only do innovators ask more questions than non-innovators, they also ask more provocative ones. For instance, innovators who “strongly agreed” with survey statements such as, “I often ask questions that challenge the status quo,” produced twice as many successful new businesses than innovators who simply “agreed.” Among the different types of innovators we studied, product innovators relied most on questioning to deliver results, followed by start-up and corporate entrepreneurs and, finally, process innovators. (See “Who Asks the Most Provocative Questions?” p. 42.)

By asking lots of questions, A.G. Lafley (recent chairman of the board and CEO at Procter & Gamble) helped change the game at P&G. Lafley often began conversations with: “Who is your target consumer here? What does she want? What do you know about her? What kind of an experience does she really want?

What does she think is missing today?” When working within categories, Lafley often asked, “How well do you understand the different segments of consumers—not so much what we know about them demographically, but psychographically? What do we know about their biggest desires that aren’t met today? What are they most unhappy about today?”

After searching for a deep understanding of what is, Lafley shifted lines of inquiry to powerful what-if questions to help deliver customer-centric innovations. For example, if talking to someone about science and technology, he asked: “What else is available in the world? Where else might we access what we need? Who across P&G—thinking across our business units or outside of P&G—could help us get what we need in the timeframe and cost structure that we want?” Most of all, Lafley was constantly hunting for counterintuitive questions. Instead of asking, “How can we help consumers get floors and toilets clean?” he would query, “How can we give consumers their Saturday mornings back?” He found the latter question far more fruitful for surfacing rich insights about what might be in order to develop new products and services that consumers would want to “hire” to get their jobs done at home.

How to Ask Disruptive Questions

Innovators’ provocative questions push boundaries, assumptions and borders. They leave few rocks unturned when cultivating the garden. Aaron Garrity, founder of XANGO, told us, “I

am questioning, always questioning, with a revolutionary mindset.” During interviews with disruptive innovators, we noticed not only a high frequency of questions but a pattern as well. They started with a deep-sea-like exploration of what currently is and then rocketed to the skies for an equally compelling search for what might be. Focusing on what is, they asked lots of who, what, when, where and how questions (as world-class journalists or investigators do) to dig beneath the surface and truly “know the place for the first time” (as poet T. S. Eliot observed).

They also invoke a series of what-caused questions to grasp the drivers behind why things are the way they are.

Collectively, these questions help describe the territory (physically, intellectually and emotionally) and provide a launching pad for the next line of inquiry. To disrupt the territory, innovators puncture the status quo with why, why-not and what-if questions that uncover counterintuitive, surprising solutions. Whether descriptive or disruptive, innovators perpetually invoke powerful questions to help see beneath the surface of everyday action and discover what’s never been.

“ To disrupt the territory, innovators puncture the status quo with why, why-not and what-if questions that uncover counterintuitive, surprising solutions.”

Tactic #1: Ask “what is?” questions. In hot pursuit of what is, innovators inquire deeply for answers about what is happening right here and right now to gain understanding and empathy for others’ experiences. IDEO and other successful design firms employ diverse questions about the physical, intellectual and emotional terrain to obtain a rich three-dimensional view of how end users actually operate.

Intuit’s Scott Cook also does this by asking fundamental questions such as, “Where is the real problem?” What’s the person trying to achieve?” “What’s most important?” and ultimately, “What’s the real pain point?” Innovators like Cook know their questions work when they reveal what is and build empathy for how it feels. Such empathic understanding produces the deep understanding behind better what-caused and what-if questions.

Tactic #2: Ask “what caused?” questions. The next step in understanding the way things are is to ask causal questions to gain insights into why things are the way they are. To illustrate, Mike Collins, founder and CEO of the Big Idea Group (BIG), shared an example of how inventors hunt down the real job to be done by understanding better what is really going on in their world. One inventor had pitched a 15-minute card game to Collins and his team for potential development and distribution

by BIG. Collins felt that the game, as presented by the inventor, wouldn’t crack a tough family-gaming market. But instead of turning the inventor away, Simon Cowell-style, he paused and asked, “What caused you to develop this game?” The inventor

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insights from insead quickly replied by answering a series of implicit who, what, when, where and how questions: he had three children (who?) and little time after work (when?) to spend with them at home (where?). He wanted to have fun in the evening with his children (what?), but there was no time for games like Monopoly or Risk.

He was in search of a 15-minute game (how?) that would do the job of connecting him with his children for a quick and enjoyable few minutes at the end of the day.

From Collins’s initial “what caused?” question, a series of answers to implicit who, what, when, where questions emerged that resulted in a successful line of “12 Minute Games” sold through Target. These games did the job many families needed at the end of a busy day or long week, and the insight to that job came by asking questions that gave simple, but critical insights into what was really going on in the inventor’s life.

Tactic #3: Ask “why?” and “why not?” questions. After describing the territory well enough to thoroughly understand what is, innovators started their search for new, potentially disruptive solutions by leveraging why and why-not questions to discover what might be. David Neeleman, founder of JetBlue and Azul airlines, says that one of his strengths “is an ability to look at a process or a practice that has been in place for a long time and ask myself, ‘Why don’t they do it this other way?’”

In his most recent venture, a Brazilian airline named Azul, Neeleman asked his senior team, “Why aren’t more Brazilians taking advantage of Azul’s low fares?” Azul’s flights were cheaper than the competition’s, but his question surfaced the real challenge—getting price-sensitive customers to the airport. Then Neeleman asked, “How much does a cab cost for our typical customer to get to the airport?” The answer was “too much,” potentially 40 percent to 50 percent of the airline ticket cost. So Neeleman searched for lower-cost bus or train alternatives, but they were either nonexistent or too infrequent. This vacuum prompted him to then ask, “Why not start our own free bus service to get customers to the airports (to take advantage of Azul’s inexpensive fares)?” Today, passengers book over 3,000 bus rides per day to the airport with Azul, the fastest-growing airline in Brazil.

Tactic #4: Ask “what if” questions. At Hindustan Lever (Unilever’s business in India) executives wondered how to reach millions of potential consumers in small Indian villages where severe constraints existed: no retail distribution network, no advertising coverage and poor roads and transport. Collectively, these constraints challenged its existing business model and produced a fundamental question: How might we sell products in small villages without any access to traditional distribution networks, advertising or infrastructure?

The answer ultimately surfaced from direct-selling business models (from companies like Avon). In close partnership with nongovernmental organizations, banks and the government, Hindustan Lever recruited women in self-help groups across rural India to become direct-to-consumer sales distributors for its soaps and shampoos. The company also provided substantial training for them to succeed as micro-entrepreneurs. By 2009, the innovative solution in a highly constrained country context produced over 45,000 women entrepreneurs selling Hindustan Lever products to three million consumers in 100,000 villages.

Questioning as an Executive Innovation Turbocharger

Questions are critical catalysts to creative insights. And innovators were even more likely to successfully launch new ideas when they combined an ongoing instinct to formulate and ask the right questions with other innovator’s DNA skills. In other words, executives and entrepreneurs who ask questions as they observe the world, like anthropologists, discover more than those who don’t.

Leaders who ask questions as they network with polar-opposite people (holding vastly different perspectives) discover more than those who don’t. Leaders who ask questions as they experiment and prototype discover more than those who don’t. Ultimately, questioning combined with the other innovator’s DNA skills can truly turbocharge innovation results—or you and your company.

Hal B. Gregersen, professor of leadership at INSEAD; Jeff Dyer Professor of Strategy at the Marriott School, BYU; and Clayton M. Christensen, author and speaker, are co-authors of The Innovator’s DNA (Harvard Business Review Press, 2011).

Who Asks the Most Provocative Questions?

Innovators mostly on questioning to deliver results.

90th

Percentile

80th 70th 60th 50th 40th 30th Product Inventor

Startup Entrepreneur

Corporate Entrepreneur

Process Inventor

Non-inventor

Sample Questions: 1. Asks insightful “what if” questions that provoke exploration of new possibilities and frontiers.

2. Often asks questions that challenge the status quo.

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Two Paths to Questioning Skills Question Storming. We have worked with executives and their teams over the years to develop a process we call Question Storming. Here’s how it works: First, identify a personal, work unit or organizational problem or challenge to solve.

Then, write down at least 50 questions about that problem or challenge. We suggest a couple of extra rules when doing this as a team: Generate only one question at a time. Have one person write the questions down so that everyone can see and reflect on each question being asked. No one can ask a new question until the last one is completely written down. This helps the group build on prior questions to generate better queries about the challenge. Prod each other to ask a full range of what is, what caused, why and why not, and what if questions during the exercise. After listing the questions, prioritize and discuss the most important or most intriguing ones in your search for better solutions.

We have found that individuals who frequently engage in personal Question Storming are more likely to be viewed as creative, innovative or strategic thinkers. One executive in a large pharmaceutical company started writing down questions for 15 to 20 minutes each morning before work. Three months later, his boss told him that he had become the best strategic thinker in his business unit. Six months later, he was promoted. Practice does make perfect, or at least better, when it comes to questioning. So if your “questioning muscles have atrophied,” as Ahmet Bozer (Eurasia and Africa Group president at Coca-Cola) recognized after a recent Question Storming workshop with his senior team, “it’s time to start exercising those muscles.”

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ISTOCKPHOTO

Track your Q/A ratio. Disruptive innovators we interviewed consistently displayed a high Q/A ratio, where questions (Q) not only outnumbered answers (A) in a typical interaction, but good questions generated greater value than good answers. To check your current Q/A ratio, take time to capture your questions regularly. Richard Branson does this in notebooks full of questions. Review them periodically to see how many and what kinds of questions you’re consistently asking (or not asking). For example, in the last work meeting you attended or directed, what percent of your comments were questions? Keep a record of your Q/A ratio (percent of comments made that fall into each category) during meetings you attend in the coming week. When reviewing self-observations, you might ask what was your personal Q/A ratio? How many questions did you ask?

Work to increase your Q/A ratio by reflecting on what questions were asked and then asking yourself, “What are the questions that aren’t obvious or are not being asked?”

chiefexecutive.net 43

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STANFORD EXECUTIVE PROGRAM June 24 – August 4, 2012 Application Deadline: April 30, 2012

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the ceo guide to executive education

GETTY IMAGES

THE 2012 CEO GUIDE TO LEADING EXECUTIVE EDUCATION PROGRAMS

There’s no question that a stronger leadership team will give any company in any industry a competitive edge. That means helping your management talent continue to grow and build on their skill sets is a worthwhile investment. Yet in tough economic times, it can be harder to justify devoting time and resources to executive education—unless you can be confident that the investment will have a real business impact.

That’s why our staff has sifted through the scores of executive education programs available to companies to offer you a detailed guide to the top options available (see p.

50), as well as a look at the trends shaping today’s learning opportunities for executives. As always, we welcome our readers’ input, so if you have experience with management learning program you’d like to share with us, please drop us a line at executiveeducation@chiefexecutive.net.

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the ceo guide to executive education

Making the Grade How to ensure an executive education program pays off in business results.

ISTOCKPHOTO

By C.J. Prince

By 2002, five-year-old smartphone maker HTC was already proving itself a force with which to be reckoned.

First to market with palm-sized PCs in 1999 and 2000, the startup was about to release the first Microsoft-based wireless smartphone. But, though he was encouraged by the company’s hypergrowth, cofounder and CEO David Chou was also worried about the future. He knew he had the engineering skills and the entrepreneurial vision to make HTC a major player in the smartphone market, but he was concerned that he lacked the business savvy—management, strategy, finance, and the like—to take the company to the next level.

Twice, Chou enrolled in executive management programs, first at Cambridge University in the U.K., and then at Stanford Business School. Both times he backed out, unable to tear himself away from the office. Finally, in 2006, Chou’s concern about the future outweighed his worry about leaving the day-to-day business. “We had this great company,” Chou recalls. “I thought, I don’t want to destroy it because I’m not capable of managing it.”

So he enrolled in Harvard Business School’s advanced management program, which, at eight weeks, was a significant time commitment for a busy entrepreneur. But Chou told himself he would be able to answer emails and participate in phone conferences and even fly back two or three times during the program to visit headquarters in Taiwan. “The first day, I realized that would be almost impossible. We had a lot of cases to read and discuss and prepare and I realized I couldn’t go back to the office three times.

I needed to completely focus on what I was doing there.”

The sacrifice was worth it, Chou says. He returned with a broader perspective, fresh insight gleaned from fellow executives and a few clear action items. For one example, Chou immediately fired his entire board, having realized that they did not understand the business and were not adding the critical knowledge and judgment HTC needed. It was a bold move—one Chou likely would not have taken before. “I had much more confidence in myself in terms of running the company and I really understood what I should be doing as a CEO,” he says. Chou has since grown HTC to be the third-largest smartphone manufacturer worldwide.

Chou admits that had he been facing the same choice in 2008, when the market was freefalling and the economy recessing, he likely would not have taken the plunge. And indeed, business

schools’ executive education programs felt the pinch as companies pulled way back on spending and, running leaner, were reluctant to let employees take time off to go back to school.

“Both open enrollment and custom were hit pretty hard across the whole industry at the tail end of 2008,” says David Newkirk, CEO of executive education at the Darden School of Business.

But business schools have grown more bullish on their numbers.

According to a survey early last year by the International University Consortium for Executive Education (UNICON), 65 percent of member B-schools expected increased open enrollment this year and 78 percent projected an increase in custom programs.

Customized Curriculums

The Center for Creative Leadership (CCL), a nonprofit that focuses on leadership training, reported revenue was up 22 percent in 2010 and expects 2011 to be a record year. The biggest bump in CCL’s open enrollment has been its Leadership at the Peak program, designed specifically for C-suite and other senior executives and held in both Colorado Springs and Davos, with another planned for Singapore in May. “C-suite executives are saying to us, ‘This is a complex world, I can’t hit the pause button, I have to get better, I have to be able to communicate with stakeholders and be able to drive my strategy,’” says John Ryan, president of CCL. While custom is up at CCL, at most traditional schools, custom programs have had a tougher time coming out of the recession. David Yoffie, senior associate dean and chair of executive education at Harvard Business School, attributes only part of that to continued belt-tightening, noting that there has also been a bit of a strategic shift. “Five years ago, the perception was that the future of executive education was custom programs designed for individual companies. What we’ve seen in the last five years is that open enrollment programs have had the most robust and stable demand.” At Harvard, for example, open enrollment has grown 50 percent over the past five years, while the custom business has stayed flat. Companies are recognizing the benefit of having their executives interact and learn from executives from other companies, industries and geographies, he says. “There is enormous value in participating in a broader network, beyond just your own people talking to each other.”

At the same time, companies are still seeking the personalized

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the ceo guide to executive education

China 101 For most U.S. CEOs of companies both large and small, the question is not whether to conduct business in China, but when and how. This question is even more relevant today as China assumes its place as a leading force in the global recovery. But significant cultural, political and economic challenges abound, threatening the viability of any U.S. leader’s global strategy. Fortunately, B-schools studying both the challenges and the opportunities in the burgeoning Far East have created a wide range of programs to help senior executives develop and execute their strategies for penetrating and expanding in emerging markets. Here are just a few offerings from the top schools in 2012: • “Building Businesses in Emerging Markets” • Harvard Business School • April 23-27, 2012 • $9,000 This five-day intensive held at the HBS campus is designed to help senior executives of regional or multinational companies explore untapped opportunity in emerging markets, analyze business model options and develop a comprehensive strategy for sustainable growth. Participants from around the country and the globe, including CEOs, COOs and other operations and business development executives, learn through a mix of classroom presentations, workshops and case discussions.

• “Building the Business: Strategies for Asia Pacific” • INSEAD • May 21-25, 2012 and Nov. 19-23, 2012 • SGD 11,800 A five-day program held in Singapore, this course offers participants an opportunity to develop their strategic managerial skills in Asia while building a cross-industry, international network.

Through lectures, work groups and discussions, participants explore a host of topics, including the socio-political environment, building human capital and expanding through acquisitions and joint ventures.

• “Global Business Strategy: China” • Columbia Business School and Cheung Kong Graduate School of Business • August 8-10, 2012 • $6,750 Designed specifically for senior executives of multinational companies that wish to compete and cooperate successfully in China, this three-day partnership program, hosted at Columbia’s New York City campus, brings faculty from both schools as well as Chinese government officials, Chinese CEOs and other company professionals to offer insights on Chinese economic development. Participants will leave the program knowing how to position China within their company and understand the intricacies of the country’s policies and economy.

• “Global CEO Program: A Transformational Journey” • IESE Business School, The Wharton School and The China Europe International Business School (CEIBS) • Nov. 2012, March 2013 and June, 2013 • $39,000 For those able to devote more time, an alliance among these three top schools offers an immersive three-week experience on three continents, geared to CEOs, business owners, board members and other C-suite executives. A diverse group of participants spend one week each in Sao Paulo, Philadelphia and Shanghai with the objectives of deepening their knowledge of global market dynamics and honing their leadership skills in a global context. Through discussions with faculty experts and peers, participants gain insights into the latest models and frameworks for understanding business problems and specific strategies for identifying new opportunities and capitalizing on them.

attention of a custom program, which has led to the inclusion of more custom elements, such as coaching, in open enrollment, says Yoffi. Ryan points out that CCL has seen its best year for coaching yet. Wharton has also made changes to its open-enrollment program, having added new courses based on feedback from corporate clients who need help exploring new core competencies such as customer focus, innovation leadership and cooperation across boundaries, to name a few.

Dartmouth’s Tuck School of Business created a hybrid offering that allows four to six companies across industries that share a common view on leadership development to come together for a more customized program that also offers the classroom diversity of open enrollment. “Because it’s only four to six companies, the professors and coaches can prepare specifically for those companies and tailor the courses to their issues,” says Clark Callahan, executive director of Tuck’s executive education program.

One example is the Global Leadership 2030 Consortium, which recently convened executives from Colgate-Palmolive, Corning, Deere & Co., and Rolls Royce to learn how to compete successfully in the global marketplace. The course includes one week at Tuck’s Hanover, N.H. campus; one week in Chennai, India and one week in Shanghai. The school has considered developing a similar program for companies along the supply chain; the consortia might include a commercial airline, a jet supplier, a turbine company, a security firm, a provider of inflight food and beverage and on down the line. “That would be interesting because they share strategic challenges, but it’s incredibly complex to put together,” says Callahan.

“We had the idea, but so far we haven’t done it.”

What’s the ROI?

Measuring ROI on big-ticket purchases has always been important to the efficient organization, but in the wake of the recession, hunkered-down companies have become that much more insistent that dollars be wisely spent. While skills-based training benefits can be tracked and measured, quantifying the return on big-picture, strategic learning is as challenging as ever. “Executive education is about learning new tools, frameworks, ways to think about the business and the global economy. That’s not something you can test at the end of a chapter,” says Rochelle Weichman, associate dean for executive education at MIT Sloan.

Even if one suspects that a program may have helped ready a senior executive for the next big task, it’s nearly impossible to trace a direct line. When Callahan talks about ROI with CEO clients, he uses the analogy of the strategic radar screen. Every CEO has a list of big, strategic issues and challenges he or she would like to tackle in the next three, six or eighteen months. “When the CEO sends someone to us, he or she is looking for us to help ready that person to address a particular issue on the radar screen. So the question is, three months later, six months later, is it clear that we helped with that issue or not?”

Increasingly, companies that send executives to Continued on p. 52

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the ceo guide to executive education

Human Resources

Global/Int’l

IT

Marketing

Operations

Finance

Institution

Strategy & Leadership

LEADING EXECUTIVE EDUCATION PROGRAMS

Other

0

0

1

1

5

Customized

1

1

Institution’s web site

Locations

wpcarey.asu.edu/professional-development

Tempe, AZ

Number of Courses Offered Arizona State University: The W. P. Carey School of Business

2

0

Ashridge Business School

23

3

Aspen Institute, The

1

5

2

1

2 1

1

1

1

ashridge.org.uk

Berkhamsted, Herfordshire, UK

aspeninstitute.org/aspenseminar

Aspen, Colorado, Wye River, MD

Babson College F.W. Olin Graduate School of Business

3

California Institute of Technology (Caltech): The Industrial Relations Center

6

Center for Creative Leadership

12

City University of Seattle

6

2

Columbia Business School

11

4

Dartmouth College: Tuck School of Business

5

1

tuck.dartmouth.edu/exec

Hanover, NH

Disney Institute of Excellence

1

5

Disneyinstitute.com

Orlando, FL, Anaheim, CA, Paris, Hong Kong

Duke University: Fuqua School of Business

2

2

ee.fuqua.duke.edu

Durham, NC

1

goizueta.emory.edu

Atlanta, GA

13

esade.edu

Barcelona - Pedralbes, Barcelona-Sant Cugat, Madrid, Buenos Aires

3

6

2

1

1

2

2

Y*

5

0

0

Y*

3

babson.edu/bee

Wellesly, MA

3

irc.caltech.edu

Pasadena, CA

ccl.org

Greensboro, NC/Colorado Springs, CO/San Diego, CA/Brussels, Belgium/Moscow, Russia/Addis ababa, Ethiopia/Singapore/Pune, India

Multiple 2

2

1

1

1

cityu.edu

(multiple)

gsb.columbia.edu/execed

New York City

Emory University: Goizueta Business School

5

3

ESADE Business School

9

7

9

Georgetown University: McDonough School of Business

2

1

1

Harvard Business School

44

19

6

9

5

6

29

IESE Business School

7

5

3

6

2

2

4

IMD Business School

6

1

1

1

INSEAD

13

5

Korn/Ferry International

Y***

London Business School

9

4

2

1

General Mgmt, 3 6

luc.edu/exec-ed

Chicago

McGill Executive Institute

5

1

2

1

15

executive.mcgill.ca

Montreal, QC

Michigan State University: Eli Broad College of Business

6

3

4

2

0

0

1

execed.broad.msu.edu

Troy & Lansing, MI

MIT: Sloan School of Management

7

2

3

1

1

0

3

Multiple

executive.mit.edu

Cambridge, MA

New York University: Stern School of Business

6

5

2

3

stern.nyu.edu/programs-admissions

NYC

Northwestern University: Kellogg School of Management

12

3

2

3

kellogg.northwestern.edu/execed.aspx

Evanston, IL

Pepperdine University: Graziadio School of Business and Management

4

4

bschool.pepperdine.edu/programs/ executive-education

Malibu, West LA, Irvine, West Lake Village, Encino, Santa Barbara, San Jose, Singapore

Queen’s University: Queen’s School of Business

6

1

Santa Clara University: Leavey School of Business

1

1

Stanford Graduate School of Business

13

1

4

1

Thunderbird School of Global Management

3

2

2

1

1

2

Fordham Graduate School of Business

2

4

1

3

5

35

12

1

0

1

1

1

UCLA Extension

6

1

UCLA: Anderson School of Management

14

3

2

1

University of Chicago: Booth School of Business

6

4

3

1

University of Michigan: Ross School of Business

10

1

University of Mississippi: School of Business Administration

1

1

University of Notre Dame: Mendoza College of Business

8

1

University of Pennsylvania: The Wharton School

19

9

University of Tennessee: College of Business Administration

3

1

University of Toronto: Rotman School of Business

11

2

2

1

1

Lausanne, Switzerland

13

executive.education.insead.edu

Fontainebleau, FR; Singapore; Abu Dhabi UAE

3

1

1

5

University of Virginia: Darden Business School

16

1

2

University of Washington: Michael G. Foster School of Business

5

2

1

University of Western Ontario: Richard Ivey School of Business

2

1

University of Wisconsin: School of Business

10

5

10

(multiple)

london.edu

London, U.K.

execdec.com

Ontario

scu.edu/business/executive-education

Santa Clara, CA

3

gsb.stanford.edu/exed

Stanford, CA

thunderbird.edu

Glendale, AZ; Sao Paulo; Geneva

uclaextension.edu

Los Angeles, Hollywood, CA

2

uclaexeced.com

Los Angeles, CA

1

8

ce.chicagoexec.net

Chicago, IL

5

4

execed.bus.umich.edu

Ann Arbor, MI

8

6 1

kornferry.com/LeadershipConsulting

5 1

5

Barcelona, Madrid, NYC, Munich

Y**

2

1

Boston, Brazil, California, China, England, France, India, Spain

iese.edu imd.org

4 4

exed.hbs.edu

9

Loyola University: Chicago School of Business Administration

3

New York City, Westchester Georgetown U, Washington DC

1

10

2

bnet.fordham.edu msb.georgetown.edu/openenroll

2 1 1

4

olemissbusiness.com/execed

Oxford, MS

4

business.nd.edu/executive_education

Notre Dame, IN; Chicago, IL

4

execed.wharton.upenn.edu

Philadelphia & San Francisco

4

execed.utk.edu

Knoxville, TN

6

rotmanexecutive.com

Toronto

General Mgmt, 3

darden.virginia.edu

Charlottesville, VA

3

foster.washington.edu

Seattle, WA

Multiple 4

ivey.ca/executive

London, ONT; Toronto, Hong Kong

21

exed.wisc.edu

Madison, WI

*Included in comprehensive management programs | **All programs include global | ***Content is embedded in 25% of the top 20 MBA programs; creates custom programs for corporate clients and other universities 1. In addition to open programs, Ashridge offers customized programs to help clients and helping organizations achieve their strategic ambitions | 2. Comprehensive management, 4; Social Enterprise, 2 | 3. Innovation, 2; Negotiation, 1; Systems Thinking, 2; Product Development, 2; Entrepreneurship, 3; Collective Intelligence, 1; Law, 1 | 4. General Management, 7; Communications, 1; Career Renewal, 1; Investor Relation, -1

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the ceo guide to executive education Continued from p. 48

A Blend of High and Low Tech With companies still struggling to keep costs low in the post-recession economy, technology that allows busy executives to receive top-quality training without leaving their offices would seem a grand idea. But even if the videoconferencing technology and necessary bandwidth were ubiquitously available around the globe (which they aren’t), leaders in executive education say e-learning will likely never replace the face-to-face experience.

“Schools invested millions of dollars many years ago thinking distance learning was effective and necessary and they lost millions of dollars because it didn’t work the way people anticipated,” says Rochelle Weichman, associate dean for executive education at MIT Sloan. Even at MIT, where technology is a key focus, e-learning platforms are viewed as an extension of in-class learning. A virtual classroom doesn’t allow for the sort of easy exchange of ideas and networking that face-to-face programs offer, adds Weichman. “We still believe that personto-person contact in a room, in plenary with faculty and each other, is the best way to really create change and learn.”

But much-improved technology is enhancing executive education in a variety of ways. For starters, it helps with pre-program prep. Harvard Business School uses online tutorials to get executives up to speed on basic skills and required background before they arrive on campus. Once on board, they can view business cases via the iPad and Kindle and a host of other multimedia via mobile devices. “We have our own app,” says David Yoffie, senior associate dean and chair of executive education at Harvard Business School.

Social media is also helping students stay connected, both during the program and after. Harvard Business School uses Facebook and LinkedIn to keep students in touch during breaks from its modular long courses. At Duke, students can use Twitter to share insights and data. MIT’s Media Lab has created a name badge with digital chip that tracks how many people participants interact with, who they are and how long the interaction lasts. This proved illuminating for participants, who can see whether their view of their own networking capabilities measures up to reality.

“It’s interesting to see whether or not people think it reflects them the way they expected,” says Weichman, who adds that while technology can prove invaluable for skills-based training, executivelevel learning isn’t as easy to quantify and standardize. “Executive education is about learning new tools, frameworks, ways to think about the business and global economy,” says Weichman. “That’s not something you can test at the end of a chapter.”

open-enrollment programs are sending them with very specific goals, challenges they are expected to solve while they’re away, says Dr. Jason Wingard, vice dean of executive education at Wharton. “In the past it was: Broaden their perspectives, give them new knowledge, best practices, tools to use in the field. Now it’s much more: Do all that, but also get something done while you’re here that’s going to impact our P&L or our bottom line this fiscal year.”

Executives arrive at Wharton with several significant business challenges their companies need to address. When they leave, they are expected to bring back keen insights, new thought leadership and, most importantly, solutions to those problems. For open enrollment, the more focused the company’s objectives for the executive, the easier it is to measure results. In custom corporate programs, metrics for evaluating return can be embedded upfront, says Wingard. “We are very clear in the design phase about what they’re hoping to achieve, how soon post-program they want to achieve them, and in what form. Then we can be thought partners together and be very clear before we even design the program about what we want to measure on the other end,” he says.

One area in which companies have had a relatively easy time justifying education spend is in succession planning, whether it’s preparing a candidate for the CEO office or readying a middle manager for a C-suite role. Darden, for example, has a program for controllers who have their eye on the CFO job and need a more sophisticated financial view of the firm, a better understanding of the strategic questions that need to be asked in the boardroom and the sort of leadership and communication skills necessary to head up the financial group, explains Newkirk. “If you want to move from being a bean counter to being the financial voice in the boardroom, that’s a whole different set of skills.”

The same approach works for potential CEO successors.

Michael DeCola has been CEO of Mississippi Lime Company, a 100-year-old manufacturer of high-calcium lime products, for the past 12 years. Recently, he and his board had begun thinking seriously about his successor. They identified one high-potential candidate, but felt that individual needed to broaden his perspective and develop some additional skills he lacked for the job. “More important than that even was the opportunity to get away and interact with other high-level executives and think about the kind of leader he wanted to become,” says DeCola. A Darden alum, DeCola sent the candidate to Darden’s executive education program.

“It gave him a chance to see how all the pieces fit together,” DeCola says. “He came back with a respect for people in other functions and a conceptual framework to be able to diagnose problems, think about a broad range of alternatives to solving the problem and get to the right answer and implement it.” Shortly after that, the executive, William Ayers, was named president and COO of the company. DeCola says he views executive education in general as a good way to test the mettle of high-potential candidates and determine whether they are ready to move up. “If someone came to the program and struggled, didn’t do well or found it boring, it would tell me this person is not ready to move on to a higher leadership role.”

Both for open enrollment and custom programs, executive education leaders say their schools are taking more of a partnership approach, listening to feedback from clients and constantly evolving their programs to meet those needs. MIT’s Weichman says CEOs may not realize how flexible schools are to help with a specific request. “I would say, talk to us. Many of us have degrees of freedom in terms of designing a program or putting together a combination of open enrollment and customized work that could fit the company’s need well.”

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GETTY IMAGES

global competitiveness

The Perils of Scientific Illiteracy

What does the prospect of a decline in technological skill mean for U.S. competitiveness? by

John Kador

Early in 2010, Steve Jobs, the visionary founder and former CEO of Apple, arranged a small dinner between President Obama and six or seven Silicon Valley CEOs who could explain the innovation challenges facing America. “Apple employs 700,000 factory workers in China because we can’t find the 30,000 engineers in the U.S. that we need on site at our plants,” Jobs told the President, according to the recent authorized biography by Walter Isaacson. “If you could educate those engineers, we could move more manufacturing jobs here.”

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gobal competitiveness

GETTY IMAGES

In 2009, the U.S. ranked second (behind Japan) in patent filings.

By 2015, China is expected to lead the world in patent filings.

Key Takeaways • Scientific literacy is the foundation of America’s competitiveness.

• CEOs of both tech and non-tech companies have a vested interest in advancing it within their enterprises and communities.

• CEOs

have a role to play in creating incentives to encourage U.S. students to pursue science, engineering and math careers in the corporate world.

• CEOs of companies big and small can support academic partnerships, internships, mentorships and ways to inject more scientific talent into the worker pipeline. One of the longest running industry-education partnerships, the Xerox Science Consultant Program, partners Xerox scientists and engineers with elementary school teachers.

Jobs was so concerned about the disintegration of U.S. competitiveness that in the last year of his life, he worked with other CEOs to encourage investment in technical education that actually stays in the U.S. He made the point that American competitiveness was being hollowed out by immigration policies that educate a growing number of foreign engineers at the best U.S. universities then immediately send them home. Jobs suggested that any foreign student who earns a science or engineering degree in the U.S. should have a green card stapled to his or her diploma.

CEOs across the country are alarmed at the dearth of scientific and technical talent in the U.S. Apple may be able to relocate R&D facilities to Singapore, Finland or wherever the technically proficient workers reside, but most companies have little recourse but to recruit locally. At a time when even automobile assembly jobs require advanced technical and analytical skills, some CEOs are worried that the pipeline of skilled workers will be inadequate to meet the demands of a complex, global work environment. Others are concerned that scientific illiteracy will result in workers making avoidable mistakes.

Top executives are not immune from scientific illiteracy. In his new book, Thinking Fast, and Slow, Daniel Kahneman, winner of the 2004 Nobel Prize for economics, recalls visiting the chief

investment officer of a large financial firm who had just invested tens of millions of dollars in Ford Motor Company stock. When asked why, the executive replied that he had a very good experience with Fords. “He made it very clear that he trusted his gut feeling and was satisfied with his decision,” Kahneman writes, adding that he found it remarkable that the executive had apparently not considered the one question—is Ford stock currently underpriced?—that a rational decision-maker in his position would deem relevant.

The executive in this case was guided by what scientists term the “affect heuristic,” in which judgments and decisions are guided directly by feelings. That’s just one of the many perils of scientific illiteracy. Other pitfalls include the inability to assess risk by falling into the traps of framing (executives are more likely to take risks if told that the success rate is 90 percent, rather than the failure rate is 10 percent) and loss aversion (most people would rather choose to receive a sure $40 than have a 50 percent chance of making $100; scientific literacy insists the bet is a winner.) Evidence abounds that corporate decision-making, from investments to acquisitions to hiring, is replete with such insufficient recourse to scientific literacy (see sidebar, “What is Scientific Literacy?” p. 55).

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Where We Stand

The U.S. spends more than $100 billion every year to support a massive infrastructure for science. In years past, the results were stunningly effective. Americans developed a vaccine for polio, put a man on the moon, decoded the genome and created the Internet. And yet the U.S. is also home to a strain of anti-intellectualism that is suspicious of scientists, rejects discomforting evidence and is hostile to scientific principles that conflict with deeply-held doctrines. The global leadership in science education that the U.S. built after Sputnik has been eroded to the point that America is lagging on many indicators: • R &D: In 2010, for the first time, the federal contribution to R&D fell below 1 percent of GDP, which is a commonly accepted minimum goal for economically developed countries, according to the National Science Board. North America’s share of global R&D activity fell from 40 percent to 35 percent between 1996 and 2007 while the Asia-Pacific region’s share rose from 24 percent to 31 percent.

•P atent filings: In 2009, the U.S. ranked second (behind Japan) in patent filings. By 2015, China is expected to lead the world in patent filings, according to Thompson Reuters.

•S cientific Literacy: In a 2009 national survey by the California Academy of Sciences only 47 percent of American adults were able give an approximation of how much of the Earth’s surface is covered with water, and 50 percent thought that early humans co-existed with dinosaurs.

•H igh School Science and Math Scores: Out of 34 countries, U.S. high school students ranked 17th in science and 25th in math in 2009, according to the Program for International Student Assessment, although some researchers reject a link to the quantity or quality of American scientists.

•S elf-esteem: The sole measure in which the average American high school student leads the world.

An Ample Shortage

Many CEOs agree with the charge that the U.S. is not producing enough science, technology, engineering and math (“STEM”) graduates to maintain U.S. competitiveness. Yet, most academics say there is no such shortage. What do the facts say? Here’s where a modest grounding in scientific literacy comes in handy because the facts are in disagreement.

If there were a shortage of STEM graduates, Economics 101 would predict that STEM salaries would be on the rise. And that’s exactly the case. For example, from 1998 to 2009, the inflation-adjusted salaries for industry-employed Ph.D. chemists went up 12 percent, according to the American Chemistry Council. “For an economist, rising salaries is the very definition of a shortage,” says Anthony P. Carnevale, director of the Center on Education and the Workforce at Georgetown University.

At the same time, the number of science graduates produced by U.S. universities has steadily increased every year since 2000, the National Science Foundation estimates. The U.S. produced 68,735 Bachelor’s level engineers in 2009, plus an additional 33,755 at the Master’s level. In fact, three times as many Americans earn degrees in science and engineering each year as can find work in those fields, according to Science & Engineering Indicators 2010, a publication of the National Science Board.

The Bureau of Labor Statistics reported that 29,000 electrical engineers were out of work in the second quarter of 2009, an

unemployment rate of 8.6 percent, virtually identical to national unemployment overall. “There is, in fact, no scientist shortage,” declares Harvard economics professor Richard Freeman, an authority on the scientific work force.

However, American companies are moving R&D facilities overseas in a quest to hire scientists they say they can’t hire domestically. So if American universities are, in fact, producing STEM graduates, what’s happening to them?

One issue is that incentives have shifted in such a way that STEM-trained graduates are being diverted into non-STEM occupations. Out of every 100 students with a Bachelor’s degree, only 19 graduate with a STEM degree. Of those 19, only half are working in STEM occupations 10 years after graduation, reports Nicole Smith, senior economist at the Georgetown University Center on Education and the Workforce. “At the end of the day, the perceived shortages are due to the movement/diversion of STEM talent into non-STEM occupations.”

What is Scientific Literacy?

Scientific literacy, according to the National Science Foundation, calls for the knowledge and understanding of scientific concepts and processes required to optimize economic productivity, inform personal decision-making, and participate in civic decision-making. Scientific literacy is less about knowing scientific facts than being able to ask, find or determine answers to questions derived from curiosity about everyday experiences.

A person who is scientifically literate has the ability to describe, explain and predict natural phenomena. Scientific literacy entails being able to read with understanding articles about science in the popular press and to engage in social conversation about the validity of the conclusions. A literate citizen should be able to evaluate the quality of scientific information on the basis of its source, have the capacity to pose and evaluate arguments based on evidence and to apply conclusions from such arguments.

Diversions in the Pipeline

Too many of America’s world-class engineers follow the money, opting to use their skills in building hedge fund portfolios on Wall Street, rather than building bridges on Main Street.

Some STEM graduates eschew the corporate track altogether, favoring the entrepreneurial route. (See “STEM Diversion,” p. 57.)

Corporate America also contributes to the distortion of incentives. Businesses typically thrust a management track on STEM superstars, depriving the company of the very technical expertise of which it claims a shortage. When scientists go into management, they tend to leave science behind.

If the goal is to inspire America’s ablest students to become scientists, says sociologist Harold Salzman of the Heldrich Center for Workforce Development at Rutgers University, the nation must undertake reforms—but not of curriculum or the schools. Instead, national policy must reconstruct a career path that will once again promise people at the beginning of their careers a reasonable hope that spending 10 or more years

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global competitiveness

Test Your Scientific Literacy You don’t need to memorize the Periodic Table of Elements to be scientifically literate. You do need to understand some basic principles and how those principles apply to making decisions. To test your scientific literacy, mark the 10 following questions true or false.

1. Scientific laws are absolute or certain.

2. To be scientific one must conduct experiments.

3. Scientists usually expect an experiment to turn out a certain way.

4. Scientific theories only change when new information becomes available.

5. A powerful benefit of science is its ability to make predictions.

6. Science only produces tentative conclusions that can change.

7. An experiment can prove a theory true.

8. Scientific theories are explanations and not facts.

9. When being scientific one must have faith only in what is justified by empirical evidence.

10. Science relies on deduction (x entails y) more than induction (x implies y).

Answer Key: 1. F; 2. F; 3. T; 4. F; 5. T; 6. T; 7. F; 8. T; 9. T; 10. F

Scoring:

Count the number of correct responses and score yourself as follows: 10 Correct: A+ Perfect. The administration is calling you for policy advice.

preparing to be scientists will provide a satisfactory career. “Labor markets are demand-driven, not supply-driven,” Salzman says. “When there’s demonstrated demand and that demand is clearly signaled by rising salaries, the labor market responds.”

Experts also reject the conclusion that the lackluster showing of American students in international comparisons threatens the supply of potential scientists. That’s because scientists tend to come not from the ranks of average students but the very top scorers. “In this regard, American students compete well with the best international students,” says Michael Teitelbaum, a national authority on science training and a demographer with the Alfred P. Sloan Foundation. “The best empirical evidence is that U.S. students in the top deciles are among the best in the world,” he says, adding that the national average is depressed by the low performance of the bottom deciles.

Scientific education will be an afterthought until innovation in education is rewarded as abundantly as it is rewarded in other fields, says Daniel Zajfman, the president of The Weizmann Institute of Science, one of the world’s leading multidisciplinary research institutions.

“Nobody has ever become rich providing scientific education, the way they have by developing software or imaging technology.” Zajfman is not a supporter of mass privatization of education, but is making a statement about incentives. The best investment with the least risk for any society, he insists, is the human brain.

The human brain, even among the most developed of the species, sometimes betrays us. In the final months before his death, Steve Jobs responded to the cancer that would ultimately claim his life by veering between a rigorous evidence-based, scientific approach—he had his DNA sequenced and, eventually, a liver transplant—and a series of alternate therapies—herbal remedies, a fruit juice diet and meditation. No one may ever know if Jobs’ fascination with alternative treatments or his decision to delay surgery by nine months hastened his death. Walter Isaacson called Jobs’ determination to stay ahead of his cancer, “magical thinking.” Individuals are entitled to make survival decisions by whatever conjecture they prefer. Societies may not have that luxury.

Only 47 percent of Americans adults were able to give an approximation of how much of the Earth’s surface is covered with water, and 50 percent thought that early humans coexisted with dinosaurs.

8-9 Correct: A Congratulations. You made the honor roll.

5-7 Correct: B You have a good grounding in science but there’s more to learn.

4-6 Correct: C Your career may be held back without a better grounding in science.

1-3 Correct: D You’re missing opportunities for advancement.

0 Correct: F It’s not too late to build your scientific literacy skills.

What Engineering Gap? An oft-quoted claim is that China and India produce more engineers than the U.S. The raw statistics support the claim. A study conducted by Duke University’s Pratt School of Engineering found that in 2008 the U.S. graduated 222,000 engineers compared to 660,000 in China. However, the numbers are misleading as to quality. The skills of a majority of Chinese “engineers” are often likened to that of “technicians” in the U.S. A 2008 McKinsey study finds that only 10 percent of China’s engineering graduates are considered employable in global firms, compared to more than 80 percent of U.S. engineering graduates. Therefore, adjusting for quality, China is actually graduating fewer internationally qualified engineers than the U.S., says Harold Salzman of Rutgers University.

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STEM Diversion Only 8 percent of students who enter college and obtain a BA end up with a science, technology, engineering and math (STEM) degree and are working in a STEM occupation after 10 years.

100

All students who enter college and obtain a BA

19

Students who graduate with a BA in a STEM major

10

STEM BA graduates working in STEM (after college)

Source: Georgetown University Center on Education and the Workforce

8

STEM BA graduates working in STEM (after 10 years)

International Science Students The reality today is that America’s university labs and high-tech industries are increasingly staffed by foreign-born technical and scientific students on temporary visas. The growing number of international students is making it harder for American students to get into American graduate schools. Three percent more international students received offers of admission for the 2010-11 academic year than in the previous year; for the same period, 1 percent fewer U.S. students were admitted, according to the Council of Graduate Schools.

Businesses Step Up to the Challenge Businesses large and small want to be part of the solution. Mark Zuckerberg, CEO of Facebook, famously donated $100 million to improve schools in Newark, N.J. Other companies are targeting education and training science, technology and technical trade skills.

Prosetta Antiviral: A San Francisco-based company with about 50 employees, Prosetta Antiviral participates in Bridge to Biotech, a City College of San Francisco internship program that helps students without a science background gain laboratory certification. “Our experience has been amazing,” says co-CEO Vishwanath R. Lingappa, a former professor who initially volunteered to participate as form of corporate social responsibility. But he was soon delighted by the effectiveness of the program. “About a fifth of our full-time employees, including two team leaders, are now former Bridge to Biotech students.” This is particularly impressive outcome because none of the students had bachelor’s degrees in anything, much less in science. “When they come to us, the students have a basic foundation on how to do research and that’s an incredible value for us to add to,” Lingappa notes.

IBM: Through its Academic Initiative—an academic/corporate partnership to supplement core science curricula—IBM is helping students around the world prepare for the jobs of future providing no-charge access to technology and expertise in the classroom to help students develop the skills they need for 21st Century jobs. “IBM’s goal is to help develop future leaders who understand how information technology can be applied to society’s toughest challenges in areas like health care, transportation, urban development and energy,” says Bernard S. Meyerson, vice president for innovation and leader of the IBM’s Global University Relations Function.

The model of the expert has changed, Meyerson says. “IBM is looking for a specific type of expert. We used to look for great depth.

We still need great depth, but we also need great breadth to conduct complex business analytics in parallel environments. There’s a definite shortage of people who combine both assets.” The important thing is to look forward, not backward. “The key issue is to examine how the skills that are being produced today map against the needs of the future.”

“IBM has an uncanny ability to forecast into the future and envision a shortage of talent with the interdisciplinary skills they will need,” says Fordham Professor R.P. Raghupathi, adding that Big Blue donated the latest business analytics software for classroom use.

“Students can now get hands-on experience with the actual tools to create the dashboards and models that will allow executives to dip into the vast quantities of data that their companies control,” he says. “The tools are available, the software is available, and now the curriculum is developing to meet the demands for students with functional skills in marketing, media, and business to use the tools.”

Grainger: A $7.2 billion maintenance, repair and operating products company serving manufacturers, hospitals, and hotels, Grainger works with the American Association of Community Colleges (AACC) to encourage and train the next generation of skilled trades people. “Our vision is to create an environment that elevates awareness about the need training and advancement of these technical jobs and skilled trades a priority,” says CEO Jim Ryan. “Too often, people still think of these jobs as dirty and menial, when in fact they require advanced problem-solving and analytical skills.”

Grainger supports individual students by giving them the resources and tools they need to successfully enter the workforce.

Through the Grainger Tools for Tomorrow scholarship program, the company has provided more than 350 scholarships to students at almost 100 community colleges across the country. In addition, as an incentive to complete their studies, Grainger awards students a toolkit customized for their skilled trades when they graduate. “We view investing in students as a path to investing in the future vitality of both industry and our local communities,” Ryan says.

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global expansion

Secrets of Mini-Multinationals

How modestly sized companies can attain global reach—and sometimes teach the big guys a thing or two.

William J. Holstein

ISTOCKPHOTO

by

Think a company needs to be big to play on the world stage? Think again. Plenty of companies in the $10 million to $1 billion range are emerging as full-fledged international players by finding ways to move faster than their bigger competitors.

Just ask Dawne S. Hickton, CEO of RTI International Metals, a $431 million titanium products company based in Pittsburgh, who recounts what happened when an explosion ripped through BP’s offshore oil platform in the Gulf of Mexico, resulting in a huge spill. The head of her energy unit in Texas called her directly and she authorized the immediate dispatch of a team of engineers. “When that crisis hit and everyone was watching CNN, we had 40 engineers on the platform out there working very closely with BP and others to develop an alternative solution,” Hickton says. “We weren’t this giant company that has to get every “I” dotted in a contract. A lot of their very large suppliers didn’t have the flexibility to stop everything they were doing, get all the approvals in place and get moving.”

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global expansion

“A large company has to go to a committee and put together a lot of graphs and charts. But entrepreneurs say, ‘Let’s go and see if it works.”

—Dan Durda, Aeration Industries International

Key Takeaways • There is no substitute for previous experience in new markets. Build management teams and boards with meaningful global experience.

• Maintain intense sensitivity to local markets by, for example, promoting local nationals and making them responsible for more decisions.

The moral of the story is that you don’t have to be a giant to go global—that, in fact, smaller companies can use their size as an edge in overseas markets. Although it’s generally known that small to mid-size companies can be successful as exporters of their products, what has largely escaped attention is that a subset of these companies are defying the conventional wisdom that one must be a multi-billion-dollar-a-year multinational to play in such tricky markets as China and India. These “mini-multinationals” do more than just export their products to a single customer or a single distributor offshore. They operate factories, sales offices and laboratories in multiple countries on multiple continents. (See “A Sampling of Mini-Multinationals,” p. 63.) They do so by leveraging their ability to be more agile, more focused on a core competency and more entrepreneurial than their larger peers. Here are some of the global strategies they employ: • Focus on serving a relatively narrow technological niche. While mini-multinationals as a whole play across the technological spectrum, each focuses on competing in a core area of expertise. On the larger end of the size range, privately held Revstone group, for example, supplies large automakers like GM, Ford, Toyota, Volkswagen and Hyundai with castings, forgings, tools and precision machining. GrafTech International, based near Cleveland, manufacturers in four countries and sells its graphite electrodes to steel producers in 65.

In other sectors, U.S. mini-multinationals are very competitive in sectors where they combine manufactured products with systems know-how. For example, Aeration Industries International

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• Resist the impulse to compete with larger rivals on their terms. Instead of mimicking their bureaucracy, exploit your agility and flatter structure.

of Chaska, Minn., sells water pollution control equipment in multiple countries, particularly China. While it might be easy for a competitor to imitate Aeration’s equipment, it’s much more difficult to develop the body of knowledge about how to use the equipment in particular circumstances.

Some mid-sized American companies are also particularly strong in new cutting-edge technologies such as genomics decoding (Illumina); lithium ion batteries (A123 Systems); advanced surgical instruments (Intuitive Surgical); and software and services for mobile broadband systems (Tekelec). These competitors have helped create brand-new business sectors.

• Expand step-by-step, exploiting adjacencies and new geographies. The mini-multinationals are adept at taking their core technologies and rolling them out in adjacent product segments—without straying too far—while at the same time gradually expanding to new countries. “Don’t try to go into 40 countries simultaneously,” warns Ron de Lange, CEO of Tekelec, a mobile broadband software and services company that has established offices in 20 countries in less than a decade. “That will kill you.”

His company has survived competition from giants like Cisco Systems, China’s Huawei and Sweden’s Ericsson by staying focused on the brains of the mobile broadband systems management by national operators such as Deutsche Telekom and France’s Orange.

Its largest single market outside North America is India, where the vast majority of mobile Internet traffic touches Tekelec systems. One key to Tekelec’s geographic expansion has been piggybacking on the

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market presence of a systems operator. If Deutsche Tekekom operates in 20 countries, Tekelec can sell its product in all those markets by building relationships with DT headquarters.

Some mini-multinationals infiltrate new turf by following their customers into new terrain. In fact, Revstone expanded largely because its largest customers demanded it. Ford Motors and General Motors are both opening new factories in countries such as India. Revstone also supplies the top German, Japanese and Korean automakers, which are extending their global reaches. “We try to follow and serve our customers,” says the company’s founder and chairman, George Hofmeister, who built the company from scratch through a series of acquisitions and recently turned over the CEO spot to successor Kevin G. Cramton, a former Ford Motors executive.

Revstone now operates 71 factories in the United States, Canada, Mexico, China, India, Costa Rica and the Dominican Republic and is closing deals in Germany, Hungary, Saudi Arabia and the United Arab Emirates. Some 25 percent of its revenue comes from outside the United States.

• Concentrate on remaining agile and entrepreneurial. “We are very nimble,” says Hofmeister.

“We do everything we can to empower our people to make decisions and not wait for bureaucracies and committees on top of committees to make decisions.” At Revstone, he notes, the parent company standards —George Hofmeister, imposes of accounting, quality, efficiency and financial Revstone reporting, but each factory remains its own profit center. That’s very different from how a standard multinational seeks to homogenize its disparate manufacturing operations.

“We never try to homogenize—I wouldn’t even know how to spell that word,” says Hofmeister. “We want to retain the competitive advantage and the entrepreneurial spirit in each one of the operations. It allows people on the front lines doing the business to understand what their costs are and to determine our success or failure.”

An entrepreneurial culture and the flexibility that comes with a lack of bureaucracy also helps a mini-multinational adapt quickly to changes in overseas markets like China, which is 12 time zones and 12,000 miles away with a very different culture.

Dan Durda, chairman and CEO of Aeration Industries International in Chaska, Minn., is in the midst of moving assembly of the

“We do everything we can to empower our people to make decisions and not wait for bureaucracies and committees on top of committees to make decisions.”

water pollution control equipment and systems his company produces to China because the Chinese government has imposed a 24 percent duty on imported environmental products. “A large company has to go to a committee and put together a lot of graphs and charts,” says Durda, who notes that reacting quickly is essential to success in China. “But entrepreneurs say, ‘Let’s go and see if it works.’ In bigger companies, everybody is watching their backsides. If you’re a [Fortune 500] CEO, you have about six vice presidents right behind you looking for you to slip up.”

The Sales Dilemma: Agent or In-Country?

At the early stages of simply exporting products, companies tend to find an established distributor of similar products with a multi-country footprint or hire independent agents to market, sell and distribute their products. Each of those approaches has positives and minuses. The plus side is that an exporter can get started with no or very little capital outlay. But an exporter can get lost in a big distributor’s entire portfolio of products. And agents can create performance problems—do they really have the incentive to maximize sales?

That’s why many companies find, over time, that they need to establish a bigger presence in key markets. As they grow in size and capability, the American exporter can make a local acquisition and/or establish a local full-time employee base that may involve marketing, distribution, sales, testing, assembly and ultimately manufacturing. It is more expensive to take the next step of creating an in-country presence but it allows the company to have much better control over the product, it allows a much better understanding of the ultimate customer’s needs and it allows better financial controls. Ultimately, most CEOs argue that it is more profitable than simply exporting.

Durda also protects his intellectual property by sourcing different pieces of equipment from different contract manufacturers. “I learned the hard way in Taiwan” in the 1980s, he says. “You don’t put everything in one place. You disperse it. One person makes one piece in Dalian and another makes something in Ningpo. You scatter it around so no one knows what you’re making.”

• Build management teams and boards that include nonAmericans or recent immigrants and executives with international experience. Mini-multinationals by definition tend to have flatter managerial hierarchies, enabling them to be more sensitive to local market preferences and conditions than their larger, more top-heavy competitors, which tend to impose more policies from headquarters on their local operations. CEOs like Craig Shular, chairman and CEO of Parma, Ohio-based GrafTech International take that strength a step further by appointing local nationals to manage its non-U.S. subsidiaries whenever possible.

“When we do put an expatriate into the field, we work hard to make that a limited assignment, a couple of years, to groom and develop the local talent and then move on,” says Shular, a veteran of Union Carbide who spent half his career living abroad. “We have huge operations in Mexico, Brazil, South Africa and Europe, but you’re going to find no expats. Nationals have the local language and local business skills, and they can engage with the

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global expansion

Tekelec: Nimble in a Niche Tekelec was founded in California but is now based in the Raleigh suburb of Morrisville, N.C. Some 60 percent of its $424 million in 2010 revenue came from outside North America and 40 percent of its 1,250 employees are based outside the United States. The company, whose CEO Ron de Lange is a first-generation Dutch descendant, specializes in the brains of mobile broadband systems around the world, meaning it sells mostly software and services, not hardware. The company’s focus and agility often allows it to outflank competitors of much greater magnitude. In the Q&A to follow, de Lange shares his strategies for competing globally against larger firms.

Who do you compete against?

Most everyone we compete with is a mega-multinational such as Cisco Systems, Huawei, Ericsson and Alcatel-Lucent.

How can you beat those guys?

We have offices in 20 countries and use a direct sales model. We have used local sales agents to introduce us to the key decision makers at telecom companies such as British Telecom, Orange and Deutsche Telekom. They may be operating in 20 to 30 markets. If we can get into their headquarters, then we can leverage their broad, geographic reach. We use other people we call fulfillment partners to actually service the accounts. We train them. Then we base our own subject matter experts around the world. This strategy has accelerated our ability to globalize, and we can keep some of our costs variable, rather than fixed.

Why don’t the big guys simply crush you?

We stick to our core competencies and we are very careful not to go outside them. We are specialists in a very niche part of the market, what is called the control plane of an operator’s network. We are the brains of an operator’s network, not the brawn. We connect all the organs of the body like a spinal cord, including the databases that they use to bill customers and protect privacy. We have a number of patents for doing all that; and, as we get feedback from the market, we can adjust our go-to-market strategies more quickly than the big guys can.

How did you learn how to create such a global company?

I had years of experience with Lucent and was based in Amsterdam and London for a period of time. Most of my management team consists of people who have done a tour of duty with the large multinationals. They’ve worked for Nortel, Lucent, Ericsson and other telecom companies as well as for software companies like Symantec. They’ve had the breadth of experience and they know how to do large-scale global growth. For example, we’ve done four acquisitions outside the United States in Amsterdam; France; the Czech Republic and Montreal, Canada. My board of directors also has two members who are non-U.S. and bringing that perspective is important. We’ve had sales conferences in different places in the world and we try to create a multicultural environment.

Why would executives from larger companies want to work for such a small outfit as yours?

Well, the Raleigh area has been named the best place to live in the United States. A smaller company also gives people an opportunity to move and grow. It’s amusing to see an engineer visiting Pakistan for the first time and bringing home candy as if it were so exotic. When you have 1,250 people, you get exposed to more and you can have a bigger impact on the business than if you are at a multinational where you are one person out of 100,000.

business community better than any expat can.” GrafTech gives stock options to its foreign managers as readily as it does to its headquarters staff to increase retention and Shular also promotes local nationals to top management jobs at headquarters. His two key operating vice presidents, for example, are both South African.

To be sure, not every mid-sized U.S. company that seeks to establish a global footprint makes it. Some simply fail to develop essential “global skills,” says Oded Shenkar, Ohio State professor of global business and a specialist in mid-sized companies.

“They don’t have a tradition of working in other countries,” he says. “They don’t have a tradition of learning about other cultures and how to operate in those cultures.” Others fail at expanding because they were dragged into international markets before they were ready. Sometimes, says Shenkar, their largest customers tell them, “Listen, we don’t want to deal with 50 different suppliers around the world. Either you internationalize or we are going

to do business with someone else.” Often, these wannabes “get acquired because they cannot muster the skills and the resources that they need to survive in the global environment,” he notes.

However, for those that are ready, willing and committed to success, evidence suggests that there are ways for mini-multinationals to compete—and possibly even beat—larger competitors in global markets. Whether it be through intense focus on a core expertise or greater speed and flexibility, smaller companies can find and leverage an edge that enables them to operate better and smarter than the big guys do.

The bottom line? Companies do not have to be giants to operate successfully on multiple continents.

William J. Holstein (www.williamjholstein.com) is the author most recently of The Next American Economy: Blueprint for a Real Recovery.

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Eight Mini-Multinationals that Punch Above Their Weight COMPANY NAME

CEO

HQ

ANNUAL SALES

BUSINESS

MULTINATIONAL PRESENCE

GLOBAL STRATEGY STRENGTH

A123 SYSTEMS

David Veau

Waltham, Ma.

$105 million

Lithium ion batteries for customers like BMW, Daimler and General Motors.

28 percent of sales outside U.S.

Started manufacturing in China and South Korea before U.S. to achieve scale, drive down costs.

Dan Durda

Chaska, Minn.

$10 million+ (privately held)

Water pollution treatment systems.

50 percent of sales outside U.S. Largest market outside the U.S. is China.

Located contract manufacturing in different cities in China to avoid piracy.

Craig S. Shular

Parma, Ohio

$1 billion

Graphite electrodes for the steel industry and new materials for advanced electronics.

80 percent of sales outside the United States; Sales in more than 65 countries.

Operates 14 plants on four continents.

Emphasizes hiring local nationals to manage foreign subsidiaries.

Gives them stock and promotes them to headquarters.

Jay Flatley

San Diego

$1 billion

Machines and equipment for decoding human DNA.

40 percent of sales outside U.S. Manufactures in Singapore among other locations. One of its largest customers is Chinese.

Has largely prevented the emergence of non-U.S. competitors by rapidly rolling out its technology around world.

Gary S. Guthart

Sunnyvale, Ca.

$1.4 billion

Makers of the daVinci minimally invasive surgical system.

25 percent of sales outside U.S. Offices in Switzerland and China, manufactures in Mexico.

It is engaged in a classic roll-out of its core technology into adjacent fields and new geographies.

George Hofmeister (chairman)

Lexington, Ky. & Southfield, Mich.

$1 billion+ (privately held)

Supplies parts for GM, Ford, Toyota, Volkswagen and Hyundai.

25 percent of sales are non-U.S. Operates 71 factories around world.

It grows by acquisition and allows each factory to remain its own profit center.

Dawne S. Hickton

Pittsburgh

$431 million

Makes titanium products for aircraft and offshore oil rigs. Supplier to Boeing and Airbus, as well as BP.

33 percent of sales outside U.S., including exports from U.S. Locations in Britain, France, Canada and China.

Emphasizes that all managers of business units may call CEO directly for speedy decision making.

Ron de Lange

Morrisville, N.C.

$424 million

Mobile broadband software and services.

60 percent of sales outside U.S. Secondlargest market after North America is India.

Maintains a tight focus on making the brains of mobile broadband systems, rather than the brawn.

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a123systems.com

AERATION INDUSTRIES INTERNATIONAL aireo2.com

GRAFTECH INTERNATIONAL graftech.com

ILLUMINA illumina.com

INTUITIVE SURGICAL intusurg.com

REVSTONE revstone.com

RTI INTERNATIONAL METALS rtiintl.com

TEKELEC tekelec.com

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ceo essentials

Key Takeaways

How to Get the Most From Your CIO Savvy CEOs partner with their CIOs to drive efficiencies and enhance business capabilities.

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by Michael Gelfand

The German statesman Otto von Bismarck once noted that “those who like laws and sausages should never watch either one being made.” Until fairly recently, the same sentiment could easily have applied to the role of information technology (IT) at a company. Even CEOs who acknowledged IT’s import and relied on a CIO or CTO to make sure that everything happening down in the technology netherworlds did so according to plan would just as soon not delve into details of how it all came together—they just wanted the company’s technological needs and capabilities met without any gritty back-story or new requests for expensive hardware.

Times have changed. These days, technology doesn’t just support operations, it’s a key driver aligned with a company’s overall enterprise strategy. Computing power has steadily increased and new technologies—such as virtualization and cloud computing— have changed the way CEOs of both small firms and Fortune 500 companies view both information technology as a whole, and the CIO who runs IT. A department that once primarily served in a purely support role—upgrading systems, debugging PCs and managing telecommunications—is now at the forefront of optimizing costs, standardizing and streamlining business processes, assessing weakness and recognizing redundancies in global infrastructures, improving cost effectiveness and efficiencies and building out technical capabilities integral to delivering a competitive edge.

In other words, the CIO now sits in the C-suite as a key member of the executive leadership team, serving as a trusted advisor, valued confidant, and critical business partner of the CEO. At companies of every shape and size, CIOs are working with the heads of sales and marketing to grow revenue, deliver new products and extend brands via mobile technology and social networking, as well as partnering with CFOs to ensure a financial reporting system that delivers cleaner and more trustworthy data.

“The role has become more visible and more important, and this phenomenon has accelerated because technology is so vital to corporate well-being and success,” notes Mark Polansky, senior client partner and managing director of information technology officers’ practice at Korn/Ferry. “It can no longer be

• Make sure your CIO can discuss Technology programs and projects in business terms.

• Look for a CIO who leads rather than micromanages domain experts.

• Do a cultural assessment to make sure your CIO and Information Technology team are the right match for your organization’s needs.

delegated and swept aside as a cost center that reports to a CFO or any other chair than the CEO or, perhaps, president or COO.” Korn/Ferry anecdotally estimates that roughly 50 percent of all Fortune 500 CIOs now report directly to CEOs, and the firm expects that number to continue increasing. “We hear about companies that are looking to change how they use technology, and to do that effectively you have to elevate the strategic value of the person who oversees it all,” says Polansky. “These companies are trading out their legacy MIS director—who is probably working with 20-year-old technology and likely reporting in to the CFO— for someone far more strategic who reports directly to the CEO.” Get Your CIO to Talk Your Talk

To get the most out of your CIO, you’ll need to establish a mutual level of trust, says Mark Benaquista, who was co-CIO at Warner Music Group for two years with responsibility for WMG’s global transformation program before joining Thomas H. Lee Partners, the Boston-based private equity and growth buyout firm. “It’s not very different from any other successful relationship, whether you’re managing up or down. Communication, expectation setting, truthfulness, honesty, respect for knowledge and background… there’s got to be mutual respect for the role each person plays.”

CEOs need to demonstrate a willingness to hear the good, the bad and the downright ugly. “CEOs win the trust of their CIOs by expecting—if not demanding—candor and conviction,” says Benaquista, who is currently tasked with ensuring that technology and business processes are well understood before and after his firm makes investments. “They need to be willing to hear what they’re told, not just what they want to hear.”

During Benaquista’s tenure at Warner Music Group, Lyor Cohen, WMG’s CEO of recorded music, asked him to be a closer partner in the C-suite. “Lyor is an icon in the music business, someone with deep relationships, a great reputation, and an impressive track record in the industry,” says Benaquista. “He knew that the company couldn’t successfully achieve its goal of participating in 360 degrees of artist revenue (adding previously

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untapped areas like ticket sales and online store merchandise to the company’s revenue stream) unless he bridged a yawning technology gap. He knew he wasn’t a technology expert, but he appreciated the value of technology and also recognized that I understood where the business was going and knew how to leverage the technology the company needed to get its house in order.”

While Cohen needed a technology solution, he also needed a CIO who could contribute to getting the rest of the company oriented around the transition. Benaquista was charged with translating the streams of technological acronyms and Star Trek vernacular into regular business language that the entire C-suite would understand. “He let me know that I would need to be the kind of business partner who could have a business conversation in language he’d understand and still deliver the technology component,” recounts Benaquista. “CIOs earns their seats in C-suites by articulating how IT will forward the objectives of the company, the board and the shareholders. Any conversation the CIOs have about IT must relate in business terminology to how they’re making things happen... every IT program or project has to relate back to the CEO’s or the board’s perspective in business terms.

If the CEO or board has to ask the CIO, ‘Why are we doing this?’ the CIO is wasting their time.”

Don’t Get (or Stay) Trapped

As business technology has evolved from the world of mainframes to more flexible, less costly distributed systems, many CEOs have voiced concerns about feeling trapped by their CIOs and the technology they are deploying. That trapped feeling, says Benaquista, may be a sign that there’s a larger problem smoldering just under the surface. “If you’re feeling constrained by the technology your CIO has in place, and your business strategy isn’t being attained because of it, you might just have the wrong person leading IT.” CEOs in such circumstances must assess both the CIO and their team to figure out what’s broken—and whether it’s fixable. “It’s the CIO’s responsibility, in large part, to make your business strategy achievable. If all you hear is, ‘We can’t do that,’ you probably do have the wrong person leading your technology group,” says Benaquista.

But don’t confuse your CIO’s reluctance to be a bleeding-edge adopter of new technology as a sign of incompetence. Everyone wants the cloud, and everyone is rushing to adopt new technology, says Benaquista, but it’s prudent to question technology until it is proven to avoid undue risk. “Having the right leader of IT means having someone who understands where the business is going, what the right timing is, and how to make it work within the framework of your business strategy and the technology you already have in place.”

Confirming that the CIO has the right people on the IT team is equally critical. “CIOs are only as good as the people around them. You can’t possibly keep up on everything in the market place, so your team has to be robust in given domain areas,” says Benaquista. “If they don’t have the best people to help with transformative strategies, you’re wasting money supporting a situation where there’s a huge disconnect.”

Look for a Leader CEOs need CIOs who are capable of assembling a team of individuals with varying expertise and aligning them around meeting the company’s strategic needs rather than micro-managing. “It takes multiple areas of expertise to come up with right solution set, so CIOs must be able to lead by getting out of the

way,” Benaquista says. “There are lots of people in technology areas who are afraid to let go of things, but micro-management slows companies down.” The CIO’s domain expertise is very important, especially when one is building one’s own team and assessing competencies, but it needs to be used as a tool by someone who is equally, if not more talented as a leader and a manager.

It’s important for CEOs to support IT efforts by emphasizing the role it plays in the company’s overarching business strategy to the rest of the company. Today’s CIO should be capable of bringing that message home, says Benaquista. Ultimately, “it’s the CIO’s job to make sure their organization gets it, understands how technology supports it and feels empowered and yet accountable for that responsibility,” says Benaquista.

Find the Right Fit Competence, expertise and experience are obviously important in any role, particularly senior leadership roles, but according to Michael Haynes, CEO of American Precious Metals Exchange (APMEX), a privately held, leading online precious metals dealer, “given the way IT gets things done, and the way senior management makes decisions, the biggest challenge for making the CEO-CIO relationship work is about identifying a CIO with the right ‘cultural experience.’

“Technology culture of Apple is different from Google, which is different from Facebook, which is different still from Amazon,” points out Haynes. “Regardless of skill, [one of the greatest challenges] for a company is when the technology leader does not know how to lead in the specific culture of the organization. The primary reason that senior staff added in an organization fails is because of the mismatch of culture [between] the senior executive and the organization.”

This puts the onus on the CEO to innately understand whether the CIO currently in place has the right intangible makeup to succeed with the team—and the culture—that’s in place. Haynes, whose firm was conducting a search for a new CIO at the time this article was being written, has specific criteria for the role. “I need and expect our CIO to be my partner,” he says. “We’re very collegial, and no one makes important strategic decisions on [his or her] own. Our CIO will be part of the team that I rely on to help me make key decisions. I cannot choose someone who is only going to have a caretaker mentality—technology is extremely explosive, and we need our CIO to be tuned into what’s going on and how to leverage it for our needs so that we don’t get left behind.”

Ultimately, that’s what it’s all about.

CEO Online Exclusive Visit www.chiefexecutive.net/Essentials for additional articles on getting the most out of your CIO and IT team, including:

• Six Ways to Boost Your technology ROI • Build People, Not Systems

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executive life

CEOs Who Ride the Wind Greek mythology’s Icarus, using wax wings, crashed because he flew too close to the sun.

But a fair number of today’s CEOs harness the wind to skim across snow, ocean, surf, sand or paved surfaces at 40-plus miles per hour, even uphill. by

George Nicholas

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The Paragliders

Jeff Hamann of Hamann Companies flying his powered paraglider over the Pacific Coastline in Oaxaca, Mexico.

KAVU’s Barry Barr about to launch his paraglider.

Mike Roberts

Barry Barr, CEO of KAVU True Outerware, got hooked on free flight when his father, a pioneer during the infancy of hanggliding, duct-taped him to his chest and they ski-launched down a mountain in Sun Valley. Now a paraglider, he has been flying in the Americas, Europe and the Pacific over the last 23 years.

Barr tries to paraglide everywhere he goes and he encourages the company’s staff to drop everything and get outside when the weather is good. In fact, there’s even a contest for the KAVU employee who sleeps outside most often during the year—the prize is a pair of ski passes.

Jeff Hamann, president of Hamann Companies, flies a powered paraglider, which includes a motor backpack unit to give thrust to a climb. In the last eight years, he covered almost the entire distance between Arizona and Panama, and he expects to fly the remaining parts by year’s end. On a recent group trip, he flew over the nearly impenetrable rain forest of Panama’s Darien Province, home to crocodiles and FARC guerillas.

The Windsurfer

David Troup of Solinus windsurfing off the coast of Maui.

Dirk van Rees of Courtroom Visuals landing after paragliding off Basalt Mountain in Colorado.

Dirk Van Rees, president of Courtroom Visuals, has been paragliding for 10 years and flies all over the world. He also flies tandem, taking along family and friends for fun, or flying with tourists over Aspen and Snowmass for a paragliding tourism service.

“When it’s windy and I’m in the office, my staff wonders why I’m there and not out sailing,” says David Troup, CEO of Solinus. A windsurfer for the last 30 years, he sometimes hits 44-plus miles per hour and somersaults up to 40 feet over waves.

Troup hauls his gear on business trips and surfs between meetings. An extreme sports omnivore, he also does stand-up surfing, giant slaloming, snowboarding, kiteboarding, skiing, rock climbing, mountain biking, sailboating and flying. When he was 15, he raced in the Windsurfer World Championships.

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ceo life > extreme ceos

The Skydivers

As Brandon Radcliff, president of Specialty Watercraft, makes his safety check before a jump, he says to himself, “No. 1. Gravity is non-negotiable; No. 2. For everything else, see No. 1.”

The “New Golf” of Silicon Valley

Dave Afre of Apollo Innovations skydiving in Florida.

The challenge of jumping out of a plane 13,000 feet in the sky and plummeting to earth at 160 miles per hour has helped Dave Afre of Apollo Innovations “sweat the small stuff and overcome those self-limiting beliefs we hold, sometimes.”

Sergey Brin has kiteboarded along a 40-mile path in San Francisco Bay and built a sailboat that can be kite-powered. Larry Page kiteboard-raced against Sir Richard Branson between two British Virgin Islands. The Google founders’ passion for kiteboarding has encouraged a wave of Silicon Valley entrepreneurs to begin kiteboarding, one of the newest of the extreme sports.

Bill Tai, a partner in Charles River Ventures, who converted to kiteboarding from windsurfing 10 years ago, is another Pied Piper for the sport. He has drawn hundreds of Silicon Valley entrepreneurs into kiteboarding. They include: Trip Adler, Jared Friedman and Tikhon Bernstam, co-founders of Scribd; Josh Williams, CEO of Gowalla; Johann Schleier-Smith, co-founder of Tagged; Ed Baker, CEO of Friend.ly, Tim Hickman, CEO of Hard Candy Cases, Susan Coelius Keplinger, COO of Triggit; and Scott Painter, CEO of TrueCar. The list keeps growing. Tai’s annual kiteboarding and tech networking camp drew more than 150 founders and executives of high-tech, startup companies in 2010, compared with 80 in 2009. He also created a snow-kiting camp that was attended by three dozen participants this year.

Among its enthusiasts, kiteboarding has become known as the new golf of Silicon Valley. Scott Painter of TrueCar, who has attended the kiteboarding camp for the last four years, says he was kiting before it became a sport. Nearly 20 years ago, he was “an odd sight, sand-surfing down the beach in Santa Monica in my Army boots.”

Elsewhere, Brian Beveridge of Greenridge Business Systems, kite-skis on frozen lakes in Canada in temperatures hitting -40 degrees, including wind chill. He ranked second in a 2010 Worldwide Speed Kiting contest, reaching a speed of 55.3 knots. Other active kiteboarding executives include Dave Morin, CEO of Path; Ken Howery, managing partner of Founders Fund; Konstantin Othmer, CEO of SpeedPad.com; and Jim Pitkow, CEO of Attributor. Sir Richard Branson tried to kiteboard across the English Channel for his 60th birthday, but didn’t make it because of bad weather.

Kiteboarding is not for the faint of heart. Once Tai was kitesurfing under the Golden Gate Bridge and broke his kite. Tangled in his lines, he was swept out into the Pacific Ocean and had to be rescued by the Coast Guard. “I thought I was toast,” Tai says. Undeterred, he was back on his board a few days later.

Among its enthusiasts, kiteboarding has become known as the new golf of Silicon Valley.

Peter Shankman skydiving over New Paltz, New York.

Entrepreneur Peter Shankman has skydived over 220 times, all over the world, “whenever I’m in a city with a drop zone.

Sadly, it’s never enough.” He’s also completed 13 marathons and seven Olympic distance triathlons.

Brandon Radcliff of Specialty Watercraft skydiving in Florida.

George Nicholas (georgenicholas@mindspring.com) is a New York-based business writer and communications consultant.

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flip side

Pitch Battle Beware the sports metaphor.

by Joe Queenan

(Michael Jordan, George Foreman); sometimes not so great (Kobe Bryant). For a few years, a high-profile razor blade company was using the potent trio of tennis star Roger Federer, soccer star Thierry Henry and golf legend Tiger Woods to promote its products. The message in these glitzy promos was simple: Successful individuals never rest on their laurels; you cannot afford to lose your edge. Especially if you’re in the razor business.

“Yesterday is history,” declared Federer, strolling into view at the beginning of the TV spot. “Just a nice memory.”

“I never think about yesterday,” added an equally confident Henry.

“The only thing that matters is today,” said Woods.

As it turns out, yesterday is not always such a nice memory. We all know what happened to links lothario Tiger Woods, whose status as a beloved pitchman is now kaput, but his colleagues have also tumbled from their pinnacles.

Henry disgraced himself in 2009 when he used his hand to set up the winning goal in a match the French national team played against the Irish, a defeat that cost the Irish a chance to compete in the World Cup for the first time. And Federer, no longer capable of beating his arch-rival Rafael Nadal, is now having trouble beating the new world No. 1, Novak Djokovic.

No longer the most gracious loser, Federer has now slipped to No. 4 in the world rankings, behind uberchoker Andy Murray, who only wins tournaments that don’t matter—usually with his mother in attendance. That’s why you haven’t seen those Federer-Henry-Woods television commercials for some time. But somebody somewhere should exhume them

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Businesses love to use glamorous athletes in their TV commercials and print ads. Sometimes this works great

for a marketing course to drive home the message: When you hitch your product’s image to a star, you must be aware that the star’s luster can fade overnight. For more on this subject, check out LeBron James’ recent marketing triumphs. Or O.J. Simpson’s.

Attempts to use sports and commerce as perfect analogies often run into huge obstacles. Except for the desire to prevail over the opposition, the two have very little in common. When Indianapolis Colts quarterback Peyton Manning was sidelined with a career-threatening neck injury last summer, his team immediately went out and lost the first eight games of the new season. These are the guys who were in the Super Bowl just 18 months ear-

Attempts to use sports and commerce as perfect analogies often run into huge obstacles.

Except for the desire to prevail over the opposition, the two have very little in common. lier—which seems to suggest that Manning, already viewed as one of the greatest players ever and a very effective corporate pitchman, may have been even better than anyone suspected.

But it also suggests that the Colts have

a different business model than, say, Starbucks or McDonald’s. Corporations often depend on the health and talents of a charismatic leader; but for a company to go as completely into the tank as the Colts did, it would have to first lose its CEO and then have him or her replaced by someone so inept, so inexperienced, and so lacking in inspirational qualities that the company literally couldn’t get anyone to buy its products anymore. There is no corporation in the United States that fits this image. There is no corporation that has gone from the top to the bottom, from sheer brilliance to abject failure, as quickly as the Indianapolis Colts.

Well, maybe Research in Motion. Or Netflix.

There is a company, of course, that just lost its brilliant, charismatic, inspirational leader: Apple. Yet, thus far, Steve Jobs’ death has not caused the company he cofounded to plummet into the abyss, Coltsstyle. Nor is there any reason to believe it will. Companies tend to have a plausible line of succession in place that football teams do not.

If the top gun goes down, it doesn’t mean that the entire company is going to go down with him. This is the principal difference between professional quarterbacks and CEOs. Well, that and the ability to throw a ball 60 yards in the air while being menaced by four men weighing 1,200 pounds between them. So, the next time you see an ad proclaiming “Joe Torre means business,” try to imagine a spot declaring “Bill Gates means sports.” That’s about how much these two worlds have to do with one another.

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final word

Is China cleaning our clock? In speech after speech, President Obama calls on the People’s Republic of China to stop manipulating its currency. Republican presidential nominee Mitt Romney milks his favorite applause line about the first thing he’ll do if elected as president: Denounce China as a currency manipulator. Former SEIU union boss Andy Stern thinks the U.S. is too timid in the face of competition from China and that the U.S. should throw out its historical reliance on free trade and free markets in favor of the so-called Chinese model. The New York Times’ Thomas “The World Is Flat” Friedman, daydreams in his new book, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, of having the U.S. being able to imitate the PRC’s authoritarian approach in order to “transcend ideology” and “get things done.”

To quote Yogi Berra, it’s déjà vu all over again. Twenty-five years ago, the source of shock and awe was Japan. Scholars like Harvard’s Ezra Vogel and trade specialists like Clyde Prestowitz wrote and spoke incessantly about the coming Japanese century—just in time, as it turned out, for the bursting of Japan’s financial bubble which triggered its “lost decade” of low to negative economic growth.

Reason correspondent Ron Bailey aptly calls this “China Derangement Syndrome.” Jim O’Neal, head of Goldman Sachs’ asset management business may be right that China’s economy could match that of the U.S. as early as 2027, and “perhaps even sooner.” (This is three years earlier than his last prediction back in 2007.) But does this port end gloom and decline for everyone

A Tale of Two CEOs We are told by the OWS crowd that the nation’s current economic problems are mostly due to the sinister machinations of the “1 percenters,” greedy corporate business leaders and Wall Street plutocrats who rig the system to their advantage and force students to take loans for their college education that they are unable to pay back. As with any caricature there are shadows that outline some truths. Certainly the meltdown of MF Global Holdings Ltd. is a glaring example of how politically connected finance firms regardless of their ideology, give new meaning to the term crony capitalism. Now under Congressional subpoena, former CEO Jon Corzine has to explain not just the collapse of MF Global, thanks to his series of risky bets on European bonds, but also how some $1.2 billion in MF Global’s customer accounts, which are supposed to be kept separate from the firm’s own capital, seem to have disappeared. He and others responsible could face the same fate as Bernie Madoff and former Enron’s Jeff Skilling in sporting the latest fashion; jumpsuit orange (It’s the new black).

As a former Goldman Sachs CEO, Corzine is an insider’s insider. Just a few months earlier, the Obama administration was considering him as a possible successor to Treasury Secretary Timothy Geithner. Investors in the bonds of his firm demanded the right to an extra percentage point of interest if he left as its

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Declinism Redux

else? Has everyone forgotten the law of large numbers? Trees do not grow to the sky. China is not likely to grow 9 percent a year indefinitely. History suggests that when economies catch up they tend to slow down. It also bears repeating that per capita purchasing power for China is around $6,000, vs. $46,000 for the U.S. Of course, it’s possible that the U.S. could continue to follow antigrowth, anti-energy policies as it does now which could lead to years of economic stagnation. But American history suggests otherwise. Prosperity flows from open societies with a flare for innovative management and experimentation, something China, with its historical preference for control over liberty, is unlikely to try.

CEO and chairman. This is the same big government Corzine who as governor of New Jersey, promised to bring fiscal stability to state finances and reduce the crushing property-tax burden on homeowners. Needless to say, his failure to do so opened the door to Chris Christie being elected the Garden State’s governor on a platform to de-Corzine the State.

Contrast this with Michael Woodford, the ousted CEO of the Japanese camera and electronics maker, Olympus. He raised uncomfortable questions about the company’s fraudulent financial payments for acquisitions and was summarily fired by the company’s chairman and board of directors for exposing the cover-up. Woodford could have taken his golden parachute and flown back to his native Britain a wealthy man. Instead, he decided to confront the board and the management that desperately wanted to hide $1 billion in investment losses, some dating back to the 1990s. Sobered by the company’s 44 percent share drop since it fired Woodford, some Olympus shareholders and employees are campaigning for his restoration.

Reading more like a John Grisham novel than a HBS case study, the Woodford saga continues to unfold. But it is clear that there are CEOs who stand for their ethical principles even when it means risking standing athwart the closed ranks of an entire nation. An old Buddhist proverb holds that one individual can change the destiny of a nation. If so, then certainly he or she can do the same for an enterprise.

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Leader shi

re atness

Congratulations to CEO Bob McDonald for making P&G the 2011 Best Company for Leaders.

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