Chief Executive Magazine

Making Mergers Work

Private CEO Comp

Securing Your Data

Private Aviation Guide

What CEOs can learn from deal guru Irwin Simon, p. 36

How does public and private sector pay compare? p. 43

CEOs share cyber safety tips— corporate and personal, p. 54

How to navigate the expanding world of private jet options, p. 64

SEPTEMBER/OCTOBER 2015

REIMAGINING CORPORATE CITIZENSHIP How simple giving is evolving into good business

CONTENTS

September/October 2015 No. 278

30

FEATURES 30 Corporate Philanthropy Lessons in Good Giving How companies who prioritize social change are using philanthropy to make it happen—and what they’re getting back. By C.J. Prince

36 Mergers & Acquisitions

36

Piecing Together a Natural-Foods Empire Deal guru Irwin Simon, founder and CEO of Hain Celestial, knows how to make mergers work. By Warren Strugatch

46 Economic Development Regional Report: The Southeast

With further automotive wins, the Southeast continues rolling along. By Warren Strugatch

SPECIAL EVENT COVERAGE

51 CEO OF THE YEAR

Boeing’s Jim McNerney

Recognized for smoothing out Boeing’s bumpy flight plan, Jim McNerney was chosen by a panel of CEO peers for this annual award recognizing stellar leadership.

46

54

CEO ROUNDTABLE

Understanding and Thwarting Cyber Threats

With great connectivity comes great risk—and an imperative to protect critical data and safeguard systems from attack.

57 CEO ROUNDTABLE The Data-Enabled CEO

CEOs share their experiences unlocking key insights to accelerate business performance.

51 02 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

COVER ILLUSTRATION BY THE HEADS OF STATE

CONTENTS

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi

64

DEPARTMENTS 8 Editor’s Note 10 CEO Watch

43 Comp Report

CEO Pay in Private Companies

• CSL Bhering’s Paul Perreault on pharma innovation • Citizens Bank’s Bruce Van Saun on surviving a spinoff

• Red Hat’s Jim Whitehurst on open management

• CEO Confidence: Optimistic Outlook

62 CEO Passions

22 Chief Concern

64 Executive Life

Fifty Shades of Gray: The Real World of the CEO

By Thomas J. Saporito

Collecting Earthly Treasures

Director, Business Development Liz Irving 203/889-4976

By Michael Gelfand

72 Flip Side

The Rewards of Right-Sourcing Why IT sourcing matters to CEOs and boards. By Tom Pettibone

It’s All Greek, All the Time Why is Greece suddenly getting all the glory?

By Joe Queenan

28 Sonnenfeld

The King is Dead, Long Live the King

Always tricky, leadership transitions get even tougher when a CEO departs the world along with the job.

cchalk@chiefexecutive.net

By George Nicholas

26 Making

Technology Work

VP, Associate Publisher Christopher J. Chalk 847/730-3662 Director, Business Development Lisa Cooper 203/889-4983

Riding out the turbulence of 2008’s U.S. recession was no easy trick, but the business aviation sector has made a steady comeback thanks to options for every flier’s needs.

Growth Softens for the Middle Market

Online Editor Lynn Russo Whylly

Presented in partnership with PURE Insurance, our sixth column on CEOs who are notable collectors features SAS’s Jim Goodnight.

Private Aviation Report

24 Mid-Market Report

Contributing Editors Michael Gelfand Bill Holstein George Nicholas C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld

lcooper@chiefexecutive.net

lirving@chiefexecutive.net Director, Business Development

Marc Richards 203-930-2705 mrichards@chiefexecutive.net

Vice President Phillip Wren 203/930-2708 pwren@chiefexecutive.net

Marketing Director Jason Golden 201-889-4978 jgolden@chiefexecutive.net Wayne Cooper Chairman & President

Marshall Cooper Chief Executive

One Sound Shore Drive, Suite 100 Greenwich, CT 06830, 203/930-2700

By Jeff Sonnenfeld

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 278, September/October 2015. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306.

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EDITOR’S NOTE

The Next Big Challenge for CEO As technology becomes ever more capable of doing work once thought only doable by employees, there will be fewer and fewer jobs available.

Addressing automation’s impact on employment may fall to CEOs. By J.P. Donlon WILL ROBOTS AND AUTOMATION DISPLACE WORKERS FOREVERMORE? It’s a worry shared by many, including CEOs participating in a recent roundtables held in conjunction with our celebration of our 30th Chief Executive of the Year, Boeing’s Jim McNerney. Our discussion centered on technology’s impact on innovation and how disruptive technologies such as the Internet of Things (IoT) are changing everyone’s operations and go-to-market strategies.

Along the way, two CEOs representing high-tech and low-tech industries respectively—McNerney and Ethan Allen’s Farooq Kathwari—expressed concern that as technology becomes ever more capable of doing work once thought only doable by employees, there will be fewer and fewer jobs available. Both CEOs felt that business leaders will be asked to solve this social issue and had better start thinking about it seriously. Both also said that while they want to keep as much manufacturing as practical within the U.S., from a competitive standpoint factories will still be needed around the world. Furthermore, manufacturing jobs are unlikely to continue to account for more than 12 percent of overall employment. Agriculture, which represented 92 percent of U.S. employment in the late 18th Century now represents just 2 percent thanks to automation.

“There are lots of examples of routine, middle-skilled jobs that are being eliminated the fastest,” reports Erik Brynjolfsson, professor of information technology at MIT Sloan School of Management. “Those kinds of jobs are easier for our friends in the artificial intelligence community to design robots to handle, ” he told 60 Minutes. Indeed recent developments indicate robots—or smart

08 / CHIEFEXECUTIVE.NET / SEPTEMBER / OCTOBER 2015

machines—will be taking not just manual jobs, but also intellectual jobs. Consider Watson, IBM’s computer, which played— and won—on Jeopardy! During the tournament, Watson not only came up with correct answers, but also learned why his incorrect answers are wrong. It improved rate faster than any human could.

Brynjolfsson adds that “technology is always creating jobs. It’s always destroying jobs. But right now the pace is accelerating. It’s faster, we think, than ever before in history. As a consequence, we are not creating jobs at the same pace we need to.” This is what worries CEOs like Kathwari and McNerney. Will advances in technology outpace the ability of America’s businesses to create new jobs for people, and will there be a backlash when businesses find they can’t keep up?

Brynjolfsson isn’t pessimistic. At a recent TED Talk he stated that “technology is not destiny; we shape our own destiny. We’re going to need to reinvent our organizations and even our whole economic system.”

Supporting this view is Fortune senior editor-at-large Geoff Colvin, who in his recent book, Humans Are Underrated, argues that despite growing anxiety about technology putting people out of work, the reality is that we will always want other people to do a range of tasks—even if a computer can do them better for less money. Creativity, he argues, can never be replaced by automation. This is why Google, for example, “is fanatical about forcing people to connect in person.” Colin writes that the most valuable people will not just be knowledge workers, but simultaneously “relationship workers” who create the kind of social value that people will always desire. Let’s hope he’s right.

I LLU ST R AT I O N BY T I M TO M K I N S O N

J.P. Donlon

CEO WATCH

CEO INSIGHT / CSL BEHRING’S PAUL PERREAULT

Driving Disciplined R&D The pursuit of new drugs is just one way to navigate the “innovate or exit” pharma world.

By Jennifer Pellet IN THE PHARMA INDUSTRY, a company’s future prospects are everything. One can only ride the wave of a blockbuster drug for so long before it goes off patent and generic versions edge in. But as anyone familiar with the rollercoaster-like road to FDA approval well knows, drug development is an expensive and extremely iffy endeavor. At any point along the process—from Phase 1’s early human studies and Phase 2’s efficacy testing on through navigating healthcare reimbursement programs—even the most promising compound can implode.

That’s a risk that pharma CEOs like Paul Perreault, CEO of CSL Behring, face regularly. “Our biggest business challenge is picking the right things,” he says. “It’s looking for those key items that you have insight into from a science perspective so that you’re not wasting R&D money, because that’s easy to do. You get enthralled with the neat stuff out there.”

In that sense, pharma is something of a microcosm for the broader corporate world, where intensifying global competition and commoditization have bred an “innovate or die trying” environment. At the same time, getting led astray by fear of being left behind or pursuit of the “next big thing” can be just as dangerous as inertia.

Thus far, Perreault, who took the CEO role at CSL in July of 2013, has avoided both fates, having success-

“That’s where companies get into trouble. ” We don’t acquire things we don’t know anything about.

fully launched or registered (meaning introduced existing products in new countries) 22 new products around the globe in CSL’s last reporting financial year. Going forward, however, he has more ambitious innovation plans for the King of Prussia, Pennsylvania-based company, which makes plasma-derived and recombinant therapies for rare conditions like bleeding disorders and immune deficiencies.

“I want to look beyond the product and think about how we can innovate also the delivery and the infomatics that are being required in healthcare now,” he explains, noting that patient

10 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

compliance is one of the challenges of treating children with hemophilia.

Naturally reluctant to get a shot in the arm, kids who feel fine decide to skip their medicine. “If you can collect that information about compliance via a Bluetooth device and send it directly to the healthcare provider and the payers, you’ll have greater control over both the disease and management of its cost. That’s innovation.”

Information is becoming a bigger piece of the innovation puzzle on other levels as well. For example, some new treatments have made it all the way through FDA-type gauntlets only to

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CEO WATCH

WHO

Paul Perreault, CEO of CSL Behring

that work has to be perish at the hands of done up front.” insurers who refused WHAT $5.5 billion specialty At the same time, the to cover their use. “In biotherapeutics company company is continuing Germany, there was WHERE to develop new thera case where a new King of Prussia, PA apies. One promising pharmaceutical that cost RECENTLY READ area is a reconstituted $200 million to bring to I Moved Your Cheese, by high-density lipopromarket was approved, Deepak Malhotra; The Power of Noticing, by Max tein (RHDL)—aka good but the governing body Basemann, Mao’s Last cholesterol—that will said ‘there’s no benefit Dancer, by Li Cunxin be used for patients over the current therapy BUSINESS PHILOSOPHY who develop acute corso we’re not going to re“Work every day like onary syndrome after imburse for it,’” explains someone’s life depends upon it—because it experiencing a heart atPerreault. “To spend all usually does.” tack. “From Hour Zero that money and not have to Day 60 after a heart thought about how you’ll attack is when plaque is most unstable get it paid for is a huge mistake.” and you’re at the most risk of a second To guard against that outcome, attack,” explains Perreault. “These CSL focuses not only on developing new treatments but on gathering data molecules actually attract plaque from to show a benefit over what’s current- an affected artery and metabolize it through the body.” ly available. “We have to get better at CSL is also working to finalize its making sure we deliver the data to October 2014 acquisition of Novartis’ the regulators that justifies the cost of the medicines,” says Perreault. “All global influenza vaccine business for

$275 million, a move that catapulted it into the big leagues in that business. Should the deal go through—it remains subject to regulatory approvals in a number of jurisdictions—CSL Behring will become the second largest-influenza vaccine manufacturing company, giving it economies of scale and strong pandemic capabilities in the U.S., UK, Australia and Germany.

But Perreault is quick to note that acquisitions won’t be the company’s principle growth strategy. “I looked at 200 possibilities last year; we did one,” he asserts. “We don’t acquire things we don’t know anything about.

That’s where companies get into trouble. They spend billions getting into an area and then billions getting out. When we do something, we do it in areas where we have expertise in it, adjacencies around it or the capability to improve it. I tell people that we do one big deal every decade because that situation is hard to find.”

CEO CONFIDENCE

Volatile Market Conditions Continue to Erode CEO Confidence CEOS AND THE BUSINESSES they lead have endured many ups and downs over the last few months, from global economic distress in places like Greece and China to increasing terrorist concerns worldwide, a strong U.S. dollar, low oil and gas prices, increased healthcare costs, staffing challenges and more. So it’s not altogether unexpected that CEOs’ confidence about future business conditions is down from the beginning of the year, when prospects for future business were stronger. Also adding to CEOs’ concerns is anticipation over who will be elected the next president of the United States, and where that candidate stands on issues that affect business.

CEOs collectively reported a 6.14 out of 10 points in August with regard to their expectations about overall business conditions one year from now compared with 6.71 points in January, an 8.5 percent reduction in confidence over the eight-month period.

12 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

THE TAKEAWAY

6.75

Confidence down 8.5% since January

6.50

6.25

6.00

JAN ’15 6.71%

FEB ’15 6.45%

MAR ’15 6.48%

APR ’15 6.52%

MAY ’15 6.41%

JUN ’15 6.25%

JUL ’15 6.33%

AUG ’15 6.14%

CEO WATCH

CEO CASE STUDY / CITIZENS FINANCIAL’S BRUCE VAN SAUN

Banking on Steering a Spinoff Approaching its IPO anniversary, Citizens Financial is forging an independent future. By Jennifer Pellet The Challenge You’re the group finance director of a foreign bank, which you’ve spent the past five years bringing back from the brink of failure, a gargantuan task given the circumstances. Now you’ve been tapped to spin the U.S. arm of that still-recuperating financial institution off into a healthy public company—and to do it in a year flat.

The Context

“Our returns were not where they should be, and our efficiency ratio was high,” recounts Van Saun. “We had the right level of expenses but the allocation of those dollars was not optimal.

We needed to put a lot of effort into becoming more effective and efficient so that we could invest back into areas where we saw growth opportunities.”

The Resolution

Early on, the company homed in on When Bruce Van Saun stepped boosting returns in sectors like mortin as its CEO, Providence, Rhode gages, business banking and student Island-based Citizens Financial was lending, as well as fee-based businessstill part of the Royal Bank of Scotes like wealth management services. land, although its days as such were During Van Saun’s tenure, Citizens numbered. Under pressure from regsteadily built out its commercial lendulators to make good on a government ing business, a success he attributes to bailout loan, RBS needed to unload a a relationship acquisition approach. hefty portion of its majority stake in “To me the most intelligent way Citizens Financial. Van to grow market share Saun was charged with is to bring in people WHO the dubious task of takwith pre-existing Bruce Van Saun, ing an underperforming relationships,” he says.

Chairman and CEO company public.

“We have a big capital WHAT The first step of that position on the balance Citizens Financial Group task was accomplished sheet, which gives us WHERE on September 24, 2014 in loan capacity. So if we Providence, Rhode Island what turned out to be the bring in good people, SIZE biggest financial services hopefully their [clients] $137.3 billion in assets IPO in U.S. history, a think, ‘I like what that BIGGEST INFLUENCE $3.5 billion transaction bank is doing and I “My parents. They taught me a good work ethic.” for Citizens. A second want to keep a good stock sale in March of relationship with Joe 2015—valued at $3.7 or Sally.’ That’s been a billion—further reduced successful formula for us.”

RBS’s stake to less than 50 percent of The company also focused on the bank. But while the sales firmly developing an expertise in industries established Citizens’ independence, like franchising, energy and technolVan Saun’s work had just begun. ogy, where it can add value. “We try 14 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

to bring a big bank approach to really understanding our customers and showing up with ideas,” explains Van Saun. “I never want to visit without being able to say ‘Here’s how I think you can be more successful,’ whether that’s an opportunity in your capital structure, cash management or an M&A prospect.”

In its effort to build industry verticals, Citizens has been particularly successful in the franchising sector, where it counts Dunkin’ Donuts, McDonald’s and Taco Bell as partners. “Initially our franchise finance group had six people, today we have 44,” says Van Saun, who explains that the bank has been able to take financing arrangements that begin regionally national. “McDonald’s said, ‘We like your approach, we like the quality of your people, why don’t you come national with us?’ Now we’re probably the No. 2 lender in the U.S. to their franchisees.”

The Hurdle In building the bank’s commercial business, Van Saun struggled with a which-comes-first-chicken-or-egg dilemma in hiring industry specialists to build its coverage group. “Great coverage people want to make sure you have good product capabilities so they can serve their clients well—but great product people [or specialists on transactional models] want to make sure

Patent Sea Changes New compass points four years into the America Invents Act

By Josh Pond FOUR YEARS AGO THIS MONTH, the United

are pursued than ever before—330,000 were

States embarked upon broad patent reform with the

granted in 2014 alone, an all-time high.

America Invents Act, seeking to curb skyrocketing patent litigation, costs and perceived abuses— particularly by non-practicing entity “trolls.”

Trimming your company’s sails for the new patent seas is clearly a worthy endeavor—three new compass points to guide by:

The new laws appear seaworthy. According to PricewaterhouseCoopers, U.S. patent infringement suits dropped for the first time in five years, from a crest of almost 6,500 in 2013, to less than 5,700 in 2014; and fewer of those suits are from trolls.

Conversely, patent validity challenges before the U.S. Patent & Trademark Office, particularly newly enacted Inter Partes Reviews, rose to almost 1,900

1. Reengineer your patent portfolio process— to best harvest and enhance your technological edge. Expedite invention disclosure (and review) to be first-to-file. And draft patent claims away from scrutinized business methods, toward more patentable technology—focus on the hardware, for instance, at least as much as the software.

in 2014. These challenges are swift, laser-focused

2. Modernize patent enforcement—

and less-costly—they are now standard-operating-

rigorously develop claims to withstand USPTO validity

procedure for accused infringers striking back

challenges. Particularly avoid claims to computer

against patentees.

implementation of long-standing abstract ideas.

Four other developments have further reshaped U.S. patents in these four years. First, winning litigants are getting less money—court-awarded damages to patentees that prevail are down to their second-lowest level in 20 years. Second, accused infringers have a better shot at reclaiming attorneys’ fees from patentees behind spurious suits, in the wake of the Supreme Court’s Octane and Highmark rulings. Third, that high court’s Alice ruling has increased scrutiny of claims to business method software. And fourth, you now have to be “firstto-file” a patent application, rather than “first-to-

Provision your litigation to weather a stay pending a validity challenge, as now happens in most U.S. District Court suits. Or, bring your complaint to the U.S. International Trade Commission to block infringing imports, as these expedited proceedings are generally not stayed for validity challenges. On defense, always consider challenging validity at the USPTO, but take heed: a failed challenge can bulletproof a patent for litigation. And look for ill-founded allegations, as you are now more likely to win back attorneys’ fees for a forceful defense, or at least to contain damages such that the ship stays afloat.

invent”—thus the new “race to the patent office.” In

3. Communicate your patent course—

sum, those attempting to gain and enforce patents

both internally, to foster a culture of capturing

in America are facing rougher seas.

innovation, and externally, to attract investment.

Still, it is a huge ocean out there, with patent stakes higher than ever: intellectual propertyintensive U.S. industries account for over $5 trillion in value-added each year—almost 35 percent of U.S. gross domestic product.

Accordingly, more U.S. patents

And consider aligning against trolls: innovative new collaborations are pioneering creative tactics.

As the America Invents Act turns four, some seas remain unsettled, with Congress considering even further patent reform. But new compass points have indeed emerged, opening new blue-ocean opportunities.

JOSH POND is a patent litigator, strategist and partner at Kilpatrick Townsend in Washington, D.C. He is also a sailor.

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CEO WATCH

you’re adding good coverage people so they have more swings at bat and a bigger book,” he explains. “We’ve been on a journey to invest in both.”

The Endgame Citizens’ first-quarter earnings were $209 million, up 27 percent from a year ago, and beat analyst expectations. The market has noticed. At press time, Citizens’ stock price was a healthy $26.70, a considerable bump from its IPO offering price of $21.50.

“We’re on a good trajectory,” says Van Saun. “I tell my commercial guys, ‘Our customers love us; we just need more customers.’ That’s always the way when you’re plotting expansion. The perception of the people who haven’t used you yet isn’t as high as that of the people who use you and know you and love you. So we just need to continue to bring good people onto the platform.”

The Lessons For Van Saun, batting cleanup for a floundering foreign bank underscored the dangers of a growth-by-acquisition strategy. “Both RBS, and also Citizens indirectly through RBS owning Citizens, prized acquisition-led growth,” he explains. “They were both always looking for the next deal. So there was insufficient investment in organic growth and investing in the necessary technology to be successful and in stitching everything together in a coherent delivery model for customers.”

It’s a mistake he’s determined to avoid repeating by developing a comprehensive plan, building team buy-in and focusing on execution. “My lessons are: make sure that the bank from an organic standpoint is running well and take care of customers so you have a firm franchise and foundation and it’s sustainable,” he says. “Then to also keep some dry powder because there will be acquisition opportunities that can further your agenda—but they shouldn’t be the be-all and endall, which is what they became at RBS and Citizens before.”

CEO POV / RED HAT’S JIM WHITEHURST

On Becoming an Open Organization Leader Red Hat CEO Jim Whitehurst believes he’s latched onto the best way of leading an organization and solving problems. Open management challenges conventional ideas of what companies are. But is it for everyone? By J.P. Donlon BEFORE JIM WHITEHURST became president and CEO of Red Hat, the largest open-source software company in the world with nearly $2 billion in revenues, he held various positions at Delta Airlines. Most recently, he served as COO, responsible for operations, sales and customer service, network and revenue management and corporate strategy. Before that he was a partner at The Boston Consulting Group and held various leadership roles in its Chicago, Hong Kong, Shanghai and Atlanta offices. Not bad for a guy raised in rural Georgia.

Before he took the helm at Red

16 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

Hat, Whitehurst was being wooed primarily by big industrial companies interested in turnarounds.

“They were literally sending private planes and taking me to five-star dinners and all that mess,” he recalls. But one day, a recruiter convinced him to fly to Red Hat’s headquarters in Raleigh, North Carolina on a Sunday. He arrived at the building to find it locked and no one in sight. Was this a gag? As Whitehurst pondered going back to the airport, Matthew Szulik, the company’s CEO drove up in his car, rolled down the window and asked, “Want to grab some coffee?” The conversation went well until Szulik

CEO WATCH

Q

went for his wallet to pick-up the tab and realized he didn’t have it. Could Whitehurst spring for the coffee?

Next, Szulik asked Whitehurst to meet with Michael Cunningham, the company’s general counsel, at a local Mexican eatery. He did and had another great conversation, after which the restaurant informed them that its credit card machine was broken. Cash-poor, Cunningham turned to Whitehurst and asked him to cover the bill. To make matters worse, Cunningham offered to take Whitehurst to the airport but first had to get gas because his car was “running on fumes.” You guessed it. The gas station didn’t accept credit cards.

Whitehurst had to pull out his wallet a third time.

Despite the inauspicious beginning, Whitehurst, the product of top-down, traditional, hierarchical organizations, soon embraced what he terms an “open organization” which he defines as one that “engages participative communities both inside and out—responds to opportunities more quickly, has access to resources and talent outside the organization and inspires, motivates and empowers people at all levels.”

He recently set forth these ideas in a book, The Open Organization.

Much has been written about “crowdsourcing,” which attempts to harness mass participation to generate big ideas and solve complex problems. The Linux operating system, which played a key role in Red Hat’s start, is an open-source system where communities of people self-organize a problem or activity. The power of open networks has been championed by such gurus as Don Tapscott and innovation evangelist Henry Chesbrough.

Companies such as Whole Foods, Pixar, Zappos and Starbucks are said to have implemented open organization precepts. But how does it really work and can it be scaled for most organizations? That what we asked Whitehurst when he recently visited New York.

It probably spooked you when you joined Red Hat as CEO in 2007, having been an executive at traditional companies such as Delta Airlines and Boston Consulting Group. What did you find?

JW: At first it seemed like chaos. I thought, “Oh my God, this place is more of a train wreck than I thought.”

There was no order; no structure.

How do things get done? I didn’t know the industry either.

Then I was out talking to customers and investors and, during that time, the organization made a series of decisions that at Delta would have been made by the executive committee. I went to the team and asked, “Do you guys not trust me?” They replied, “What do you mean?” Soon I began to realize that people here make a number of decisions and there’s more buy-in because they’ve made them.

Red Hat was an open organization long before I came on board. I made my mark as a quintessential topdown kind of leader. The company changed me and taught me how to be a better leader. At the same time I’ve put enough structure in place that focuses people’s passion towards specific purposes. Overall, I’ve just gotten more comfortable. Ambiguity is good if you have smart people.

Here’s the danger, though. You’ve probably read about the chaos that developed with Zappos, where it experimented with their version of open (i.e. leaderless) management they call “holacracy.” Chaos degenerated into anarchy and then civil war to the point where people were resigning in droves. How do you contrast what you describe in your book with this?

JW: I hope the book describes that managers play a really important role. The problem is middle managers have gotten a bad rap because middle managers used to be the people who

18 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

controlled the information flow.

What I suspect happened at Zappos was trying to have a leaderless organization without having any managers to direct things. It is a little bit like having a brain that has neurons, but not synapses.

How do you connect? How do you create meaning around strategy?

How do you decide how much leash people get, and how do you connect and look for patterns? That’s what managers have to do. They need to enable. So, if you say in the old world any manager’s or leader’s job was to drive performance, today I would argue it’s still about performance, but it’s around how do you create the context in which your people can perform well.

If you’re saying you don’t have people to help create the context in which people perform well, it seems to me like it’s chaos. Again, maybe I’m wrong, but I think people need a degree of structure and that’s what managers provide. I’m not proposing a new grand theory of management. I’m just saying here’s a structure that works really, really well and has scale.

Is what you practice servant leadership?

JW: No, but it’s very similar. Servant leadership misses what I call the catalytic part of what I need to do as a leader. If serving is what one does to create the environment where good performance happens, I would agree.

But I also try to catalyze direction by using what I talk about and the people I put in place and other things to catalyze a general direction. An example would be how we get to be more customer-focused, but still be

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CEO WATCH

WHO

a technology company. I didn’t go out and say we’re running a project to figure out how we get more customer-focused. I just started talking about it and people started to do things. Think of a coral reef. Plant a stick near the ocean shallows and walk away. Before you know it organic life forms all around it.

You write that employee engagement has nothing to do with morale—something you learned at Delta Airlines when it filed for bankruptcy. Explain.

The Delta bankruptcy experience taught me that people really want to understand context more than anything. They want to understand the direction of the company and the role they play in it. Most of what we were doing at Delta was negative: cutting pay, laying people off, cutting benefits.

I remember going into a meeting to talk about the direction of the company.

Everyone’s initial reaction was to try to make people happy or tell them it’s going to be okay. Wrong. A leader’s job is to impart the facts so they know what’s coming and they can make informed decisions for themselves.

I was asked by a flight attendant what are we going to do about our morale? And my answer was “nothing.” Surprisingly I got a round of applause. I said, “Look, my goal is to get the planes out on time, build a stable company, give you a great work environment so you serve the customer

Jim Whitehurst, CEO Red Hat Software

well. I’m hoping if we WHAT do all those things $2 billion provider of openyou’ll be happier, but source solutions your morale ain’t my source immediately WHERE goal. My goal is to flips the model around Raleigh, NC build a great company because you don’t BUSINESS PRACTICE and hopefully that will have control. You have “I answer make you happy.” to trust that the comevery email I get.”

Engagement goes munities are going to RECENT READS off track when you try do the right things.

Blindspot: Hidden Biases of to make employees Some traditional Good People, by Mahzarin happy versus saying software companies R. Banaji and Anthony G. Greenwald; The Innovators, here’s the strategy and think open-source

by Walter Isaacson how you fit into it. By is interesting and all imparting context and that’s required is openinformation, you end up doing different ing up their code. But if you open up things and communicating different your code, but don’t make it inclusive, things than if it’s a morale exercise, people don’t join or you make changwhich comes off as disingenuous. It es that go upstream. As a result, your generally becomes an HR-led thing engineers get frustrated and start versus a CEO-led thing. doing their own thing.

There are 100 reasons why people What is it that you do that your aren’t successful doing it. Many tradinearest competitor cannot do or tional software companies start with do as well? a brilliant CTO making an educated Our advantage looks a lot like Toyguess on where the world is going. ota. What I mean by that is Toyota’s Our model is completely different. We source of advantage is its production look outside and see what the most system called Kaizen. They have been technically sophisticated people are doing it for years and said to Ford, doing. They’re probably doing it in GM, and others, come look at how we open source because the Googles do it. Yet, it’s hard for others to fully and Amazons are all doing that. We duplicate it because it’s a capabiliglom onto those things. We bring a ties-based advantage. Our advantage consumable version of what Google or is centered on being able to work in Twitter is doing to the enterprise. We open source communities to deliver don’t assume that we know where the great technology. Sounds easy but future of technology is going. We make one reason it’s hard to replicate, is sure that we’re involved in the right that engineers like control and open communities to bring the right things.

THORNS AND ROSES Tarred by a Brush With Toxicity THE ENVIRONMENTAL PROTECTION AGENCY spilled 3 million gallons of toxic sludge into a tributory of the Animas River in Colorado. The stinky yellow flume of old mine waste—rife with cancer-causing mercury and arsenic—threatens to pollute the drinking and recreational water of three states. Had a private oil company acted so incompetently and negligently, it would have been fined billions of dollars by the same EPA and its executives possibly subject to criminal prosecutions. The business’s reputation would have been tarnished for years. Just ask BP officials what the Obama Administration did to the corporation after the Deepwater Horizon oil spill of 2010 in the Gulf of Mexico.

THORNS

20 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

Sanders’ Scandinavian Sensibilities Presidential contender BERNIE SANDERS deserves credit for his transparency as a socialist, but he frequently points to Sweden specifically and Scandinavia generally as utopian ROSES ideals. Yet, as Kelly McDonald argues in The Federalist, in some ways Sweden is now less progressive than the U.S. Wealth inequality is more pronounced in Scandinavian countries than it is in the U.S. In Sweden, Denmark, Finland and Norway, the top decile of earners own between 65 and 69 percent of the country’s total wealth, an astonishing figure. Sanders is apparently unaware of this reality, given that one of his reasons for praising Scandinavia is its supposed low levels of wealth inequality.

CHIEF CONCERN

Fifty Shades of Gray: The Real World of the CEO

By Thomas J. Saporito IT WOULD BE NICE for CEOs if decisions involved simply examining hard data and making the tough decisions.

However, what constitutes the “right” decision is often unclear. Today’s CEOs sit in a world of nuances that require judgement, insight and the ability to weigh in on the soft issues— not just the hard ones. Whether it is strategy, handling complex negotiations, orchestrating senior team dynamics, handling a major customer relationship or CEO succession, CEOs must lead in a world of gray.

Take a financial services company faced with a CEO succession dilemma.

The transition came at a difficult time for the company, as it struggled to meet new competition. On top of this, the board needed a candidate with the right balance of continuity and change.

Two strong internal candidates seemed prepared to take the reins. The first candidate was a company veteran, very close to board members. The second was newer to the firm and favored by board members who had been most

heavily involved in recruiting her. In this case, eventually the newer executive was selected over the company veteran. The new CEO wanted to retain the veteran, expanding the role and addressing compensation with hopes of retention. But that led to another difficult situation, and the new CEO’s skills will be put to the test as the world of gray continues.

This story puts in high relief where the job of just about any big-company CEO resides: in the lonely, often murky “gray zone.” As Doug Conant, chairman of Avon and former CEO of Campbell Soup says, “The blackand-white, right-or-wrong decisions happen before they reach the CEO’s office. The gray area is where the CEO lives and proves his or her worth.”

This means that CEOs face less-clearcut decisions on strategy, direction, and people. They have to proceed with the nuance, flexibility and maturity to navigate complex human variables that have as much to do with inference and, say, assessing levels of trust among colleagues as hard analysis.

The rub is that while the gray zone

is where the CEO position sits, it is not always the comfort zone.

I knew an exceptional CEO who got fired after executing a decision he knew was right for the company, but which went against the personal priorities and ingrained business values of the board chairman, whose family had founded the company. Although the CEO analyzed the facts and thought the answer was clear, he failed to consider the underlying dynamics in the organization and on the board.

As Dominic Pileggi, former chairman and CEO of Thomas & Betts, puts it, “When reacting and making decisions at the top, you have to operate more like a dimmer switch than a simple on-off switch. Things are rarely black and white.”

So, how can CEOs prepare for the gray zone? They must continually ask, “Where is it necessary to have agreement among constituencies for an outcome to go well, even if I’m right and I’m the top boss?” They should also build a strong team of advisors who have license to challenge them.

And what can be done to ensure that top CEO candidates can thrive in the realm of the gray? Most important, smart boards must determine whether the potential leader is an agile thinker.

Can she apply wisdom, nuance and a human element into decisions concerning trust, communication and power?

It is proven that this kind of agility is critical in the gray zone. According to a recent Harvard Business Review article, research showed that people who got high scores at “learning agility”—being able to adjust on the fly to changing conditions, process information quickly and effectively challenge the status quo—are also high performers in top leadership roles.

Hence, a maxim for CEO success might be: Seek out the best imperfect solution—the one that you can make work.

DR. THOMAS J. SAPORITO is chairman and CEO of the consulting firm RHR International. This column is part of a series on leadership.

22 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

MID-MARKET REPORT

Growth Softens for the Middle Market Workforce issues and concern about economic growth and the business climate are dampening gains.

THE RATE OF MIDDLE-MARKET revenue growth slipped this quarter, according to a recent survey of 1,000 c-suite executives by the National Center for the Middle Market, which also reported that expectations for future rates of revenue and employment growth declined for the second straight quarter. On average, mid-market companies reported second quarter revenue growth of 6.6 percent, down from 7.4 percent in Q1.

The middle market is also less enthusiastic about prospects for profits than it was at the start of the year. Though a respectable majority (86 percent) expect profit margins to grow or stay the same over the next year, the average projected increase in profitability is down from 3.1 percent to 2.4 percent. Concern about the availability and pricing of labor due to both minimum wage increases and a tighter labor market is one factor fueling this less optimistic outlook. Other issues include a dip in confidence about economic conditions and the business climate and the potential impact of an interest rate hike and/or higher energy prices. The statistics, tables and charts to follow offer a snapshot of how the middle market is performing and what’s in store for the rest of the year.

Revenue Growth Rate Outpaces the S&P For two years running, the mid-market has beaten the S&P in revenue growth.

REVENUE GROWTH MIDDLE MARKET

S&P 500

8% 6%

2Q 2014 2Q 2015

Long Term Challenges (next 12 months) Employment issues—including hiring, retention and workforce qualifications—remain the top internal challenges facing companies over the coming year. Externally, leaders express growing concerns related to competition and the impact of government regulations. % OF RESPONDENTS CITING THIS AS A TOP CHALLENGE 10%

2%

Staff/Employees

47%

Business Growth

22%

Finances

15%

Costs

17%

Government Regulations

40%

50%

5% EXTERNAL CHALLENGES

Government Regulations

24%

Competition

19%

Costs

14%

Economy

14%

Business Growth

13%

Finances

11%

THE AVERAGE PROJECTED INCREASE IN PROFITABILITY AMONG MID-MARKET FIRMS HAS DROPPED FROM 3.1% TO 2.4% Mid-Market Company Hiring Slows A dip in confidence about economic conditions, business climate concerns and the potential impact of an interest rate hike are hampering hiring.

MIDDLE-MARKET EMPLOYMENT GROWTH

RESPONDENTS WHO PLANNED TO ADD JOBS

5%

50%

3% 2%

LAST 12 MONTHS (MEAN)

3.9%

2.7%

38%

2Q 2014

40% 30%

47%

2Q 2015

NEXT 12 MONTHS (EXPECTED)

20%

0%

1%

10%

-2%

0%

0%

24 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

30%

INTERNAL CHALLENGES

4% 4%

20%

SOURCE: THE OHIO STATE UNIVERSITY FISHER COLLEGE OF BUSINESS, THE NATIONAL CENTER FOR THE MIDDLE MARKET

MAKING TECHNOLOGY WORK

The Rewards of Right-Sourcing Why IT sourcing matters to CEOs and boards.

by Tom Pettibone FOR 30 YEARS, companies have sought to outsource and offshore information technology as a way to reduce costs and/or quickly improve performance. Mega-deals were done in the ’90s and then, after that market was saturated, lesser deals ensued. IT outsourcing deals are some of the largest financial commitments companies make, totaling as much as $5 billion. What’s more, they often encompassed a company’s “crown jewels”—those mission-critical proprietary systems that provide a competitive advantage.

Recently, however, companies are insourcing that which was once outsourced. Why does one CEO outsource while another insources?

What should CEOs consider when weighing their options?

THE DRIVE TO OUTSOURCE While there are many reasons companies opt to outsource and send work offshore, cost-cutting typically tops the list of drivers. The promise of 20 to 25 percent savings to the bottom line is a powerful driver. Outsourcing can shift fixed costs to variable or, better yet, enable contracts can be “financially engineered” to pull savings ahead, creating a windfall for current management.

Outsourcing can also enable a company to quickly acquire new technical capability and capacity to expand, move into new markets or overcome internal inertia. Outsourcing also becomes attractive when IT issues consume unreasonable amounts of management time and attention. However, there are pitfalls of which you should be aware.

PROBLEMS AND PITFALLS An outsourcing contract defines your flexibility. How well or poorly the contract is written determines how nimble you can be. Many years ago, in the Ross Perot days, GM outsourced its IT. Recently, GM’s current CIO, Randy Mott, famously said, “When we have an urgent need for IT changes, I don’t call the programmers, I call the lawyers.”

When systems provide a competitive advantage, this inflexibility becomes particularly problematic. The need for speed and control is one reason we’ve seen CEOs move to in-source. For example, JP Morgan canceled its $5 billion IT outsourcing deal with IBM and brought everything in house in 2004, as did Bank One a few years earlier.

Anticipated savings often go unrealized because contracts are badly written, poorly defining current and future situations. Frequently, business changes are not anticipated and vendors charge extra for each change.

In addition, the skills necessary for maintaining and enhancing the systems are often underestimated. During a recent network outage, the CEO of a

high-volume financial payment processor asked why the company’s technical expert was so slow to respond. “He was terminated last week as part of our outsourcing deal,” he was informed.

Furthermore, management sometimes squeezes vendors during negotiations. To break even, the vendor responds by strictly following contract language and performs the bare minimum, resulting in poor service.

Outsourcing and offshoring can also provoke social unrest within the company. Organization structure and jobs change and people get laid off. While this may be intentional to jog the organization into a new operating paradigm, it invariably results in mistrust, passive-aggressive behavior and a dip in loyalty and productivity.

Finally, IT outsourcing is often a one-way street with supplier lock-in.

During the transition, the vendor capitalizes on the talent and spreads it across multiple clients. Once lost, this technical expertise is difficult to re-acquire. Those folks are now gone and one has the challenge to find and train new talent to support the old custom systems.

CEO RESPONSIBILITY For these reasons, CEOs and boards must carefully assess the rationale and consequences of both outsourcing and insourcing IT and be sure to craft a good contract. The benefits can look great particularly in the short run—but the pitfalls can cause significant damage later in the game.

Because the vendor has crafted hundreds of these deals, they are experts at contract negotiation and have the upper hand. Your goals and theirs are different—you seek responsive, low-cost service. They seek profits. So, before you jump, it may be prudent to seek the advice of an experienced and independent advisor who is 100 percent focused on your goals.

TOM PETTIBONE is a founding partner of Reston, Virginia-based Transition Partners, an IT management consulting firm and business.

26 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

SONNENFELD

The King is Dead, Long Live the King

Jeffrey Sonnenfeld

Several analysts held out hope that Steve Jobs would reappear from his deathbed during Tim Cook’s first Apple keynote.

THE TRADITIONAL CHANT when a new monarch ascends to the throne has been the unsentimental proclamation, “The king is dead, long live the king”—to instantly reassure all of the continuity of command. Such consolation is just as essential in business, where companies are often caught unprepared for the impact of a leader’s demise.

Silicon Valley was grief stricken when Survey Monkey’s CEO Dave Goldberg died suddenly May 1, while exercising during a family vacation. His wife, Facebook COO Sheryl Sandberg, had often cited her husband’s model of partnership in sharing their personal and professional lives as her “rock” and referred to him as “the love of my life.” The ripples of trauma, however, spread widely outside of their family and friends.

Goldberg had taken the company from 12 employees to 450 and to a $2 billion valuation.

To his colleagues and fellow tech titans, he was not a replaceable part on an assembly line of talent.

That sentiment is common after the unexpected demise of a business leader.

Several analysts held out hope that Steve Jobs would reappear from his deathbed during Tim Cook’s first Apple keynote in October 2011. Every industry experiences its share of losses—which come in many forms. Last year, Autumn Radtke, the 28-year-old CEO of Bitcoin exchange First Meta, jumped to her death in Singapore. Arrowstream founder Steven LeVoie was shot by one of his own top lieutenants at age 54 in 2014. Arthur Goldberg, 58, a fitness buff whose casino portfolio included Caesars and Bally’s, died in 2000.

In heavy industry, Michael Walsh, age 51 and CEO of Tenneco, succumbed to brain cancer.

In the food industry, McDonald’s 60-yearold CEO, Jim Cantalupo, died of a heart at-

tack in 2004. The board hastily replaced him with 43-year-old Charlie Bell, who died nine months later. Wendy’s CEO Gordon Teter died at age 56 in 1999; his predecessor, James Near, had died in 1996 at age 58.

Over the past few months, Survey Monkey has demonstrated how businesses can rally in the wake of such tragedy by: Mourning without defining the enterprise by its past. Business had to go on—as Goldberg would have wanted. As Executive Chairman Zander Lurie, who stepped in as acting CEO, commented, “He truly was an egalitarian man who would give without ego.

He just cared about investing in everything he was doing.”

Projecting the leader’s legacy into the future. Goldberg’s widow, Sandberg, joined the Survey Monkey board a month after his death. She explained, “I am looking forward to working with the board and this amazing team and helping to realize Dave’s vision of building a lasting company that impacts the way we all do business for years to come.”

Bringing in respectful but fresh and credible new leadership. A major search firm worked with the board to size up internal and external candidates. By July, industry veteran Bill Veghte was named the new CEO. Veghte, a cloud expert who had held top jobs at Microsoft and HP, has the skills to fulfill the firm’s new direction. Equally important, he had been a friend of Goldberg’s for 30 years and considered him a mentor.

Rather than seek to minimize grief, redirecting it into a purposeful mission.

Veghte declined Goldberg’s office, stating, “I share in the loss that everyone feels. For me, from out of this searing sadness comes fierce determination.” Employees applauded with tears and cheers.

JEFFREY SONNENFELD is senior associate dean for leadership studies; Lester Crown professor of leadership practice, Yale School of Management; president of the Yale Chief Executive Leadership Institute, and author of The Hero’s Farewell and Firing Back.

28 / CHIEFEXECUTIVE.NET / SEPTEMBER / OCTOBER 2015

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CORPORATE PHILANTHROPY

Lessons in Good Giving How companies that prioritize social change are using philanthropy to make it happen—and what they’re getting back

by C.J. Prince ILLUSTRATION BY THE HEADS OF STATE

30 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

NOT LONG AGO, a company’s philanthropic strategy largely boiled down to a decision about which large, generic charity would receive a donation and how big of a check should be cut. Employees were seldom involved save for very high levels and the giving, done overwhelmingly by big companies with deep pockets, had little to do with the rest of the company’s strategy for growth. ¶ But times have changed. Although companies are still writing checks, they’re doing it in the context of carefully crafted strategies that target specific causes based on geography and/or alignment with business goals. When they do write checks, they expect transparency and results-oriented data. They supplement cash contributions with product donation, skills-based volunteering and long-term relationship building with nonprofit organizations to provide ongoing resources. The choice of cause to support is no longer dictated by the CEO’s passion but rather by company strategy, with employees contributing their vision for making the world a better place.

GIVING ON THE RISE While still not at pre-recession levels, corporate giving rose by 12 percent in 2014 over the prior year to $17.8 billion, according to “Giving USA,” an annual report on American philanthropy. The report attributed some of that upswing to faster growth in corporate pre-tax profits and the gross domestic product, but at least some of the increase can be attributed to more companies across the spectrum participating with in-kind donations and volunteer hours counting along with cash.

“Passing out United Way checks is faceless, nameless and, frankly, meaningless for creating a culture of helping people,” says Tony Aquila, founder and CEO of Solera, a 10-yearold, $1.3 billion provider of risk and asset management software and services to the insurance industry.

Instead, Solera funds six philanthropic expeditions per year that allow employees to take up to a six-month paid sabbatical to work on an approved project.

Aquila believes that this deeply personal work benefits his employees

and the company’s culture at least as much as those they help. “This is not about ‘corporate philanthropy,’” he asserts, noting that he objects to the term. “It’s about giving not only to those lives that you touch but the lives within your company that you allow to touch them.”

More and more often, companies are seeing the causal relationship between giving back to the community, whether local or global, and the company’s own health. “What’s changed over the years is that it used to be a ‘nice to do,’” says Daryl

Key Takeaways 1

2

Make it Personal Identify and leverage the unique skills or expertise your organization can bring to bear to benefit the cause

Encourage Volunteerism Giving employees one day per year to volunteer with the charity their choice can boost enthusiasm and productivity

3

4

Ask Employees Invite employees to submit suggestions for worthy causes and host a companywide vote to choose the charity you will support

Get Involved Employees will take it seriously if they see the CEO participating

SEPTEMBER/OCTOBER 2015 /

CHIEFEXECUTIVE.NET

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CORPORATE PHILANTHROPY

Brewster, CEO of CECP, a coalition of 150 Fortune 500 CEOs who believe that investing in societal engagement brings a critical return. “We’re approaching an emerging sea change as leading companies move from occasional check-writing to increased community engagement, viewing societal advancement as a key measure of business success.”

The market has responded in kind.

Brewster points to the 2012 study by Babson professor Raj Sisodia, which looked at 28 companies identified as the most conscious—“firms of endearment” as Sisodia calls them— based on characteristics such as their stated purpose, compensation, quality of customer service, investment in their communities and impact on the environment. Out of the 28, the 18 companies that are publicly traded outperformed the S&P 500 index by a factor of 10.5 over the years 1996-2011.

Jane Madden, managing director and head of U.S. Corporate Responsibility for global PR firm Burson-Marsteller, says the outperformance of socially responsible companies isn’t so much about investors rewarding companies for their good deeds as it is that those companies

that invest in their environments and communities make better strategic decisions. “If you are measuring and managing your environment, including social and governance impact, you’re just a smarter company. You’re minimizing risk and maximizing opportunity and that has a definite positive impact on the bottom line.”

MORE WAYS TO GIVE John Ferdinandi makes it a practice to get engaged in the local communities in which his company, Milano Restaurants, operates. With 43 restaurants and 18 franchises located primarily in California, Milano habitually approaches local communities to find out what they most need. That presence and involvement gives Milano an advantage vis-à-vis other fast-casual restaurant chains.

“We want the consumer to know that we’re more than just a chain coming in,” says Ferdinandi. “It’s the idea that we’re not just here to sell you a good or service, but to participate. Your issues are our issues, and a stronger community is a benefit both to the community at large and to the business operating within it.”

The data show that consumers increasingly do make purchasing decisions based on a company’s corporate citizenship. According to Nielsen’s 2014 corporate social responsibility survey, 55 percent of global respondents said they are willing to pay

When you do this stuff, you end up reaping these ancillary benefits YOU DIDN’T ANTICIPATE WHEN YOU STARTED OUT.” - David Sanford, WinterWyman 32 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

extra for products and services from companies that are committed to positive social and environmental impact, up from 50 percent in 2012 and 45 percent in 2011.

Milano has primarily focused on youth-oriented philanthropy and projects that feed the poor, and is an example of the creativity companies are using to design efficient ways to give back to communities. Most recently, Blast 825 Pizza, a quick-fired pizza concept and division of Milano Restaurants, opened a new restaurant in Rocklin, California, and initiated a program called “Blast Buddies” to support pet-centric causes in each restaurant’s local area. Representatives from the charity come in and design their own custom pizza.

Then, for a month, that pie stays on the menu with proceeds going to the charity and Blast 825 matching.

For the Rocklin opening, the Placer SPCA designed a signature pizza they dubbed the “Pet Lover’s Pizza,” which raised more than $6,000 for the charity.

Ferdinandi notes that due to technology and social media the public is more aware and involved in different causes. “We can get more information out to more people about a subject like feeding the poor or helping animals than we could 10 years ago,” he says.

For customer-facing retail food service companies like Milano, it may be relatively easy to find a charitable cause that integrates well with the company’s mission. Others have to reach outside their core competencies, but they operate on the same principle that a better world means a better world for business as well. “If you had a factory in Guatemala or Mexico, and you were surrounded by villages who were very hostile to you, it would be to your best interest to go out and create prosperity and stability in those villages, so you would have more freedom to operate and wouldn’t have the pressure of security, or the need to move your factory at great expense,”

says Stephen Miller, CEO of Dillon Gage Metals, who objects to the term “giving back.” “It kind of implies that business people have taken things and now we’re feeling guilty, so we’re going to give it back to the poor folks.

Most of the men and women I know in business have worked their tails off and sacrificed a great deal for the success they enjoy. So, for me, this kind of work is not a social payback.

It’s just plain smart business.”

In 1984, Miller cofounded the nonprofit HELPS International to provide relief and development services for the country of Guatemala. The organization also provides loans to farmers to purchase quality fertilizer and tools to grow corn more efficiently. Executives and employees at Dillon Gage support HELPS by participating in community projects, including installing new stoves and water filters in homes, which save villages hundreds of thousands of dollars each year. Other employees participate by raising money or covering for employees who travel to Central America to donate time and service.

A RECRUITING ADVANTAGE Miller notes that people genuinely like to work for “good” companies. “They like to know that the people who employ them are concerned about others and are developing programs that give back and allow employees to give back,” he says. The more connected they feel to their employer, outside of their normal job description duties, the longer they’ll remain with the company, which ultimately saves the company thousands of dollars in turnover costs.

Miller is among many CEOs finding that good corporate citizenship is increasingly an advantage in the ongoing war for talent. A 2011 Deloitte Volunteer Impact study found that 61 percent of Millennials consider a company’s commitment to the community when making a job decision.

“One of the things I’ve seen in the

$17.8 BILLION 2014 CORPORATE GIVING, UP 12% FROM LAST YEAR

55 PERCENT PEOPLE WHO WOULD PAY EXTRA FOR PRODUCTS AND SERVICES FROM PHILANTHROPIC COMPANIES

SIXTY-ONE

PERCENTAGE OF MILLENNIALS WHO CONSIDER A COMPANY’S COMMITMENT TO THE COMMUNITY WHEN MAKING A JOB DECISION

Millennial generation is that they have a real desire to give back to the community. But it’s also intensely personal for them,” says Joe Schumacher, president and CEO of Goddard Systems, which operates the Goddard School franchise. Schumacher instituted a program to offer the company’s 140 corporate-office employees “volunteer time off,” or eight VTO hours to help the charity of their choice. “I’m not an expert on the evolution of this, but 10 or 20 years ago, corporations would say, ‘This is what we’re doing.’ I felt that empowering employees to make their own choices would be more meaningful.”

Bob Boudreau, CEO of WinterWyman, a global recruiting firm, agrees.

When he formalized the company’s giving strategy 10 years ago by creating a new role for community development and employee engagement and establishing a new committee to develop philanthropic projects and execute them, he was clear on one thing: “I said, ‘I don’t want this to be the Bob Boudreau philanthropic club.

I want it to be what you guys want it

to be’. I do not have veto power.”

Even as a recruitment firm, WinterWyman’s senior team did not expect the new strategy to impact its own recruiting. “That wasn’t even on our radar screen,” says David Sanford, EVP, client relations. “[Doing good] was our initial driver, but what we found was that when you do this stuff, you end up reaping these ancillary benefits you didn’t anticipate when you started out. As we were working the marketplace and trying to attract people, 20- and 30-somethings, that became an important part of why they wanted to come here.”

Bill Austin, founder and CEO of Starkey Hearing Technologies, puts it simply: “People like to be served by people who care.” Starkey, a Minnesota-based, 4,100-employee company that is the largest hearing aid manufacturer in the U.S., has its own foundation that has pledged, as part of the Clinton Global Initiative, to fit one million people across the globe with hearing aids this decade.

Austin spends the majority of his time doing hearing aid fittings for

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CORPORATE PHILANTHROPY

challenging cases around the globe, and freely admits the company could be earning more if he worked more hours on the business side. “But then I’d have no life. So I traded money for life,” he says, pointing out that many younger employees are all too happy to make that same tradeoff today. That might not work as well, he adds, if his company were not privately owned. “I would be sued by my shareholders if I was public,” he says.

Edwards Lifesciences is a public company, but CEO Michael Mussallem says they’ve been able to keep the board happy by watching global-giving norms among high performing companies. “We try to stay mindful of that and responsible from a shareholder point of view.”

That means creating clear goals with measurable results. Last year, the Edwards Lifesciences Fund celebrated its 10th anniversary by launching a new initiative called “Every Heartbeat Matters,” with a 2020 goal to impact the global burden of heart valve disease by supporting the education, screening and treatment of 1 million

Passing out United Way checks is faceless, nameless and, frankly, MEANINGLESS FOR CREATING A CULTURE OF HELPING PEOPLE.” —Tony Aquila, Solera underserved people. The fund will support 25-plus nonprofit partner organizations selected to help Edwards Lifesciences reach its target.

“We expect, in return, that they will be able to tell us what their results are,” Mussallem says. “How many people who were underserved did you treat, how many were screened and so on. We keep score on that.” The company also has a challenge that every one of its 9,500 employees participate in at least one

charitable activity per year. They’re close to 75 percent now, and Mussallem is confident they will reach full participation.

Mussallem notes that for a long time, the prevailing wisdom was that it might be idealistic to think you could have both a rewarding return for shareholders and be a great place to work. But, as it turns out, the two really go hand in hand. As Boudreau puts it, “It’s not rocket science. It’s just got to matter to you.”

Visit chiefexecutive.net/SOPhilanthropy to learn about Edwards Lifesciences philanthropic work under CEO Mike Mussallem.

Do You Have a Great Corporate Citizenship Effort?

Tell us about your company’s initiative and be eligible for Chief Executive’s first-ever Corporate Citizenship Awards honoring those that:

• • • •

RECOGNIZE key employees involved in citizenship efforts DEMONSTRATE CEO leadership and commitment toward citizenship efforts HONOR and bring attention to the causes they care about INSPIRE other CEOs to improve our communities

Winners will be judged by a volunteer committee comprised of peer CEOs. Thirty companies in three categories (small, medium and large) will be honored in the magazine and at an event to be held in New York in Spring 2016.

Whether your efforts are local, national or global, visit

www.chiefexecutive.net/corporatecitizenship

to tell us your story to recognize your people and inspire others.

34 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

MERGERS & ACQUISITIONS

PI

E

N CI

G

“Simon says: Don’t push round pegs into square holes.”

TO

GE

TH

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A

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A R U NAT

S D O

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Deal guru IRWIN SIMON, founder and CEO of Hain Celestial, knows how to make mergers work.

By Warren Strugatch

E R I P EM

LAST APRIL WAS A BUSY TIME AT HAIN CELESTIAL GROUP. At its corporate headquarters on Long Island, not far from Manhattan, the organic and natural foods company was fast approaching its first $2 billion sales year. Irwin D. Simon– founder, chairman, CEO and president—was as usual perusing roll-up deals. At the moment, Simon was hot on the trail of an organic bakery called Rudi’s in Boulder, Colorado. Rudi’s was located near the Celestial Seasonings tea line he bought in 2000.

Later that month, Simon shook hands with the Charter Equity Partners deal team, paid the PE firm $61.3 million in cash and common stock and walked away owning an organic bakery. The bolt-on acquisition gave Hain Celestial about 60 new better-foryou products, including wraps, pizza crusts, breads and bagels.

Simon was happy to enter the fast-growing market for wholegrain, organic and gluten-free baked products without having to develop a product line from scratch.

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MERGERS & ACQUISITIONS

In many ways, Rudi’s meets the classic Irwin Simon roll-up profile.

Rudi’s has proven consumer appeal and enjoyed niche success, yet seemed stuck. Having been around since the early ’70s, the company’s products rang up on average barely $1 million a year. Growth seemed to have stalled.

In announcing the deal, Simon disclosed plans to take Rudi’s “into new categories” through Hain’s wide-pipe distribution channels. He promised he’d bring Rudi’s into supermarkets, club channels and specialty stores around the world.

It was a smart bet he’d do just that.

It was also a smart bet Simon would also do what he’d done dozens of times before: find ways to consolidate operations, possibly contract out manufacturing, and of course find those trademark synergies available through his global network reaching over 40 countries.

“Irwin is a great dealmaker,” says Mo Siegel, who helped create Celestial Seasonings herbal teas during the late60s hippy heyday before selling to Simon. “He has put some good operators underneath him. He is a really good communicator and is connected to a lot of people, knows what’s going in in the industry at all times. He follows his nose and sniffs out deals. I think in his sleep he dreams up deals.”

That might be a stretch, but clearly scouting deals at industry forums and gatherings is one way Simon keeps his deal pipeline full. A major stop every year is the Expo West Natural Products tradeshow held in Anaheim in March. At shows like Expo West, the curly-haired, effusive Simon is the most recognizable figure in today’s natural and organic food sector, a walking exit plan for health-food company founders around the world.

“Irwin is very approachable,” says Siegel. “And he’s very fair. He strikes a reasonable deal. That reputation helps him get more deals.” While founders and key managers are often welcomed into the fold to oversee the post-deal integration, most do not stay on after the companies have blended.

In 2013, during a conversation at Simon’s headquarters in Lake Success, New York—he bought and moved into the sprawling structure built for the United Nations in the late 1940s—the acquisitive founder expounded on his approach to deal-making and his overall management philosophy. “At Hain Celestial, we’ve built out a strong infrastructure of sales, marketing and manufacturing,” he began. “My philosophy is that if we can find great companies that need these functions, and we can buy them and bring them into Hain, we can do better than if

we started from scratch. All these acquired companies—their payables, their collections, their customer service, all their processes—can be run out of here. This makes for a lot of savings and enormous synergies.

When these conditions are met, we are going to see a lot of growth.”

Many of Simon’s deals have been for small companies that seemed to hit invisible ceilings, then got energized within Hain’s global sales and distribution channels. A key part of Simon’s deal-making acumen is his ability to see M&A as a two-way street. Not only does he plug new acquisitions into his global network, but he absorbs the networks he’s just acquired and works those channels.

Buying Celestial Seasonings brought a transformative network of supermarkets and large grocery stores, vastly expanding what had been largely specialty channels. Buying Sensible Portions in 2010 brought a distribution deal with Costco and with that entry into the huge club channel. A series of deals in between have brought access to channels like Whole Foods, Walmart and— gasp!—7-Eleven. While best known for not-exactly-healthy products like slushies and beef jerkies, c-stores have been quietly stocking healthier snacks, bowing to consumer demand. Once again, Simon is pacing the trend curve.

TIMELINE OF ACQUISITIONS

MARCH

1993

CALIFORNIA SLIM PRICE & TERMS: $50,000 + 7 year royalty agreement

MAY

NOV

APRIL

1993

1994

KINERET (KOSHER FOODS)

PUBLIC STOCK OFFERING

HAIN PURE FOOD CO.

PRICE & TERMS: $2 million

PRICE & TERMS: Raised $4 million

PRICE & TERMS: $22 million

1993

38 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

Welcome To Irwin Simon’s Tea Party SIMON’S FIRST DEAL of the 21st century was a $390 stock-swap with Celestial Seasonings, a Boulder, Colorado herbal tea brewer. The deal provided an instant infusion of $100 million a year in sales, opened new channels into mass-market stores, brought on additional management savvy and added new production facilities. Hain’s took on the tea company’s $7.8 million in debt and emerged with a new name: the Hain Food Group was now Hain Celestial.

Simon, who generally keeps his deal cards close to the vest, had publicly pursued Celestial for months through informal meetings with the tea company’s chairman and co-founder, Mo Siegel. The talks got serious just before the 1999 holiday season. Founded in 1969, Celestial had come a long way from its small-batch origins and after 30 years in operation dominated the herbal tea category. Unlike most natural and organic food products, Celestial’s forte was the mass market; sales in supermarkets and other mainstream retail outlets accounted for 80 percent of sales. This channel strength appealed greatly to Simon.

Siegel struck what analysts considered an advantageous deal; his shareholder s received 1.265 shares of Hain stock for each Celestial share.

Hain at the time was trading around $32. Wall Street turned thumbs down, sending Hain’s share price tumbling $4.75, to $27.63, before recovering and

NOV

surging forward. The feeling at the time was that he had overpaid.

Celestial chairman and co-founder Mo Siegel was named vice chairman of the combined board, which expanded to 11 members with the addition of himself and two Celestial directors.

Celestial’s CEO Steve Hughes left “to pursue other interests,” according to the deal announcement, but veteran manager Walt Freese came on board as vice-president and general manager for the tea brand and brought most of the sales team with him.

“Irwin and I had a similar mission, which was to build the largest natural products company in America,” Siegel recalled in a recent conversation. “The combination of the two companies was a really good opportunity to do that.”

From his perspective, Simon obtained “the most glamorous brand he had ever been involved with,” one that had achieved household-name status. In contrast, Hain’s offerings at the time were smaller and more niche-oriented, including brands like Arrowhead Mills, Nile Spice and Westsoy.

As with nearly all mergers, the blending of Hain Food Group and Celestial Seasonings took some finesse. The companies had dramatically different cultures. Simon had started out in the early ’90s buying a Kosher food company, Kineret, then bought a couple of distressed California health food brands bearing the name Hain Pure Foods,

OCT

adding them to the pot. As an executive, Simon drew from early-career stints with both Slim-Fast and, paradoxically, Haagen-Dazs. Siegel, in contrast, started out as a pastoral entrepreneur, leading a bunch of teenage buddies who brewed natural teas from hand-picked herbs; no amount of business success could eradicate his laid-back Colorado style.

Siegel remained vice chairman for two years, helping supervise the post-merger integration. During that time Siegel fended off one of Simon’s signature post-merger moves: operation consolidation.

Siegel recounts: “I dug in my heals and so did Irwin. We fought over that. I saw Irwin’s point: You consolidate shipping in order to save money. I just didn’t think that would work” given Celestial’s particular manufacturing issues. Siegel left soon thereafter, citing the rigors of travel and his desire to cut back from 70-hour work weeks. Simon went ahead with consolidation.

Reminiscing over the company’s history—the Celestial founder still lives in Boulder, remains active in the industry and still holds Hain Celestial stock—Siegel recalled the 2000 merger as pivotal in Simon’s relentless expansion. “It’s not easy building a company to this size,” Siegel says. “Irwin went from nothing to a big-cap company.“ (Its current valuation is $6.4 billion.) “I would not be surprised if it continues to get bigger.

Irwin has just done a great job.”

OCT

JULY

1995

1997

1998

1999

ESTEE CORP.

WESTBRAE NATURAL, INC.

PORTFOLIO COMPANIES

SHANDBY GROUP 4

EARTH’S BEST BABY FOOD

PRICE & TERMS: Undisclosed

PRICE & TERMS: $23.5 million

PRICE & TERMS: $60 million + $20 million debt

PRICE & TERMS: Part of $100 million deal in which H.J. Heinz Co. acquired 19.5 percent stake of Hain.

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MERGERS & ACQUISITIONS

Art of the Roll-Up Studies have suggested that between 50 percent and 70 percent of mergers fail, from the perspective of not increasing shareholder value. Roll-up deals, in which larger companies like Hain Celestial strategically acquire a series of smaller niche businesses, pose their own unique challenges. Here are suggestions from top dealmakers and M&A experts on how to craft and execute successful roll-ups.

■ Do your due diligence.

Understand the numbers. Always have a plan in place.

■ Communicate early, clearly and consistently with stakeholders, including customers and staff.

—Irwin Simon, Chairman & CEO, Hain Celestial

—McKinsey & Co.

■ Scout for roll-ups among companies whose founders are looking to exit. — David Wessels, associate

■ Set clear revenue and profitability targets on micro, rather than macro, levels. —McKinsey & Co.

professor of finance, Wharton School of Business

■ Retain the acquired company’s revenue producers. —McKinsey & Co.

■ Identify high-potential companies in early stages when deal premiums are lowest. — McKinsey & Co.

■ Execute every feasible consolidation opportunity.

■ Establish clear market value by determining comparables from analysis of recent deals. —David Wessels

—Irwin Simon

■ When extrapolating earnings for carve-outs, exercise good judgment. Blue-sky figures are often unrealistic. —PricewaterhouseCoopers

■ Identify the best DNA of the acquisition, and graft it onto the acquiring company. —Bain & Co. ■ Win the hearts and minds of both companies’ employees. —Bain & Co.

■ Don’t underestimate the value of integration and budget for it adequately. —Ernst & Young

Years ago, Simon feared his portfolio of organic grains and preservative-free snacks would stereotype him as a tree-hugging health-food nut driven by causes rather than spreadsheets.

Evidently, that’s hardly the case; the man loves his occasional steak too much to fit anyone’s crunchy-granola stereotype. Nevertheless Simon has probably done more to bring better-

for-you foods into the mainstream than anyone else.

As for deal valuation, Simon genially waves off questions about preferred multiples and p/e ratios. In the past he’s mentioned “six or seven times EBIDTA” as his sweet spot. Today, with several deals possibly in the works, he stays mum.

“Deals don’t work if you chase them

MAY

2000

JUNE

LINDA MCCARTNEY BRAND

PRICE & TERMS: $390 million

Piecing Together a UK “Powerhouse” In the fall of 2011, after five years in the UK, Irwin Simon was struggling to turn his pieced-together collection of better-for-you UK brands into a consistently profitable whole. Always alert to potential acquisitions, Simon was hot on a Leeds company, the Daniels Group, a heavily leveraged food company coming off a $280 million sales

JULY

2006

CELESTIAL SEASONINGS, INC.

and overpay,” he declares. “You’ve got to have a good strategic plan, have good people responsible for the deal and be realistic in your numbers.”

Taking a philosophical turn, Simon drew a comparison between deals and marriage. “In both, you have to have the right partner and you have to come into the marriage with similar expectations,” he says. Making a deal solely to buy growth or earnings is like choosing a marriage partner solely on expectation of a dowry. “You don’t want to be pushing a square peg into a round hole,” he notes.

As with marriage, when doing deals you better be prepared for stormy weather as well as blue skies. “Shit happens,” Simon shrugs. “You can work the numbers right but still, shit happens. The question is: What are you going to do about it?”

2010

OCT

2011

3 GREEK GODS LLC

DANIELS GROUP

PRICE & TERMS:

PRICE & TERMS:

PRICE & TERMS:

Undisclosed

Undisclosed

$230 million in cash

40 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

®

year. Simon liked Daniels’ management, systems and potential to serve as a growth platform. In October he bought Daniels for $230 million cash, tapping Hains’ credit line.

The deal had synergy written all over it, in Simon’s handwriting. Back in the U.S., in a rare moment of bravado, the U.S. dealmaker boasted to an audience of analysts that his latest acquisition would become a UK natural foods “powerhouse.”

Daniels had bounced around under several Asian owners taking on growing debt the past decade. Simon took on Daniels’ debt along with its top brands: New Convent Garden Soup, UK’s top-selling fresh chilled soup brand; the Johnson’s Juice, a popular fresh line of juices, puddings and smoothies; and Farmhouse Fare, a dessert favorite.

These were well-known brands in a vibrant market. Fresh and chilled products then accounted for half of UK food sales; the segment continues to grow.

Simon wasted no time filling his new channels with products from earlier UK acquisitions, including Linda McCartney’s chilled meat-free meals. He added a barrage of U.S. brands acquired piecemeal over the past 15 years including Celestial Seasonings teas, Earth’s Best organic baby foods, Rice Dream dairyfree drinks and Terra Chips vegetable

MAY

2012

Deals don’t work if you chase them and overpay. You’ve got to have a good strategic plan, have good people responsible for the deal and be realistic in your numbers.” snacks. Rob Burnett, Daniels’ leader, stayed on as CEO of Hain Celestial United Kingdom and set to work implementing a series of consolidations that optimized purchasing, procurement, manufacturing, warehousing and distribution processes. Next they culled several underperformers, discontinuing sandwich making and chilled-soup lines. The efficiencies and asset sales paid for the deal.

Less than a year later, Simon closed on an even bigger UK deal. In August 2012, he shelled out $318 million in cash and shares for a heavily leveraged Premier Foods. Simon paid under 7x EBITDA, the cap he disclosed in June as his deal-making sweet spot. The acquisition brought such brands as Hartley’s and Robertson’s jams, Sun-Pat peanut butter, Gale’s honey and Frank Cooper’s marmalades into the fold, establishing Hain Celestial in the top 40 of all UK food and beverage suppliers. Hain also acquired Premier’s manufacturing

OCT

2012

plant in Histon, England.

Simon has continued shopping in the UK, adding each new acquisition to the Daniels platform. In 2013 he absorbed Ella’s Kitchen’s organic baby foods, a $70 million sales company he acquired for an undisclosed price. Last year, he purchased Tilda, a branded basmati and specialty rice company, for $358 million.

He’s integrated his roll-ups into the powerhouse he promised in 2011. In Q2 2015, net sales in the UK soared 38 percent to $201 million, overshadowing 8 percent U.S. growth on revenues of $354 million.

The future? “The company’s performance remains impressive, marked by record sales, efficient expense management and focus on productivity enhancement, which lead to profitable global expansion,” wrote Zacks Equity Research in August. “Hain Celestial is likely to sustain its strong momentum and appears favorably positioned to capitalize on the growing global demand for organic products.”

MAY

APRIL

2013

2014

CULLY & SCULLY

PREMIER FOODS PLC

ELLA’S KITCHEN GROUP, LTD

RUDI’S ORGANIC BAKERY

PRICE & TERMS:

PRICE & TERMS:

PRICE & TERMS:

PRICE & TERMS:

$11.3 million (estimated)

$317.6 million in cash and stock

Undisclosed

$61.3 million

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COMP REPORT

CEO Pay In Private Companies A new compensation report offers hard numbers on private sector pay.

LATELY, THE PAY PACKAGES OF CEOS OF LARGE PUBLIC COMPANIES have been getting a lot of attention from politicians, regulators and the media. However, little has been said about how the vast majority of CEOs are paid. Given that there are more than 5.7 million companies in the U.S., but only 5,292 publicly listed companies on the NYSE and NASDAQ exchanges (just 0.09 percent), the pay packages of CEOs of public companies are only part of the story. ¶ The reality is that the vast majority of CEOs in the U.S. run small and mid-sized privately owned enterprises. However, until Chief Executive’s research team starting collecting this data for an annual CEO and Senior Executive Compensation Report for Private Companies, there was limited data on what they earned.

Now that the new 2015-16 edition of the study has been released, we can share some highlights of the findings. For private company CEOs, the report provides the hard data needed to benchmark against peers by function, industry, ownership type and more. (For more information, go to www.ChiefExecutive.net/compreport.)

Size Does Matter As one would expect, a CEO’s pay is largely correlated to the size of the enterprise he or she manages. CEOs who run larger, more complex companies typically earn more than their peers at small and mid-sized companies.

COMPANY SIZE:

$200K

$400K

$600K

$800K

$1.0M

$1.2M

$1.4M

$1.6M

UNDER $2M MEDIAN TOTAL CEO COMPENSATION IN PRIVATE COMPANIES BY COMPANY SIZE (ACROSS ALL INDUSTRIES, GEOGRAPHIES, TYPES OF OWNERSHIP, ETC.)

$2M-$4.9M $5M-$9.9M

Salary Bonus

$10M-$24.9M

Equity Benefits/Perks

$25M-$47.9M $50M-$99.9M $100M-$249.9M $250M-$499.9M $500M-$999.9M $1B-$10B

Public vs. Private Company Pay Gaps It’s no surprise that CEOs of comparably sized public companies are paid more than CEOs of privately owned companies due to the additional complexity, scrutiny and risks involved. However, the size of the

pay gap is more significant than one might expect. For example, while CEOs of private companies with $100 million to $249.9 million in revenue earned a median total compensation package worth $524,500 in

2014, CEOs who ran public companies in the same revenue range earned 2.8 times that amount—and the compensation gap between public and private companies grew wider with the size of the company: $10B+

PUBLIC VS. PRIVATE COMPANY MEDIAN CEO PAY BY SIZE OF COMPANY PRIVATE COMPANIES PUBLIC COMPANIES $1.0B-$9.9B $500M-$999.9M $250M-$499.9M $0.1M-$249.9M

PRIVATE COMPANY COMPENSATION DATA SOURCE: THE CEO AND SENIOR EXECUTIVE COMPENSATION IN PRIVATE COMPANIES REPORT 2015-16 (WWW.CHIEFEXECUTIVE.NET/COMPREPORT); PUBLIC COMPANY COMPENSATION DATA SOURCE: EQUILAR (WWW.EQUILAR.COM)

SEPTEMBER/OCTOBER 2015 /

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COMP REPORT

Big Differences

By Industry and Other Dimensions Very few CEOs are “average,” so while median or 50th percentile data is interesting, it’s also important to look at the ranges of compensation overall and along key dimensions. For example, top quartile CEO compensation packages were 81 percent above the median pay overall, while those in the bottom 25th percentile earned only 57 percent as much as the median CEO on average.

There were also material differences by industry, type of ownership, geography, level of profitability, growth rate and other dimensions, as the charts on the right highlight.

Ownership Type Also Affects Pay CEOs of private equity-owned companies earned 33 percent more than the median CEO on average.

MEDIAN CEO TOTAL COMPENSATION IN PRIVATE COMPANIES BY OWNERSHIP TYPE (INDEXED) OWNERSHIP:

0%

20%

40%

60%

80%

100%

120%

140%

Sole Proprietorship Partnership Family Employee Venture Capital Private Equity Other

Pay Composition Ranged Widely The percentage of compensation comprised of base salary and benefits vs. at-risk short-term and long-term incentives varied, with the more highly paid CEOs receiving a greater portion of their pay in bonuses and equity grants.

MEDIAN PAY COMPOSITION OVERALL AND FOR TOP AND BOTTOM QUARTILE CEOS

25th Percentile

75th Percentile

Median

Salary

Bonus

Benefits

Equity

Perks

Pay Varies by Industry For example, the median pay of CEOs in advertising is 2.95 times that of the median pay of CEOs in retail/wholesale/distribution.

MEDIAN PRIVATE COMPANY CEO COMPENSATION FOR THREE HIGHEST AND THREE LOWEST PAID INDUSTRIES (INDEXED) 3 Highest Industry Medians

3 Lowest Industry Medians 200.0% 150.0% 100.0% 50.0%

Advertising/ Marketing/ Sales

Finance/ Insurance

Healthcare/ Pharmaceutical

0.0%

Energy/ Utility/Oil/Gas

Real Estate/ Property Management

Retail/ Wholesale/ Distribution

Source: The CEO and Senior Executive Compensation in Private Companies Report 2015-16 (www.chiefexecutive.net/compreport)

44 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

ECONOMIC DEVELOPMENT

REGIONAL REPORT

The Southeast With further automotive wins, the Southeast continues rolling along. By Warren Strugatch MERCEDES-BENZ has exited the Jersey Turnpike headed towards Sandy Springs, Georgia. The automaker’s New Jersey-to-Georgia relocation, announced in January, ranks among the year-to-date’s biggest corporate relocation deals, both in value and impact. Mercedes’ decision to transfer at least 800 headquarters jobs to the Peach State hit Garden State business leaders and government officials with the force of a head-on collision, while helping further strengthen the spine of what’s become known as the Southern Auto Corridor.

Mercedes expects to open a new $100 million plant in Georgia in 2017, joining Porsche and Kia Motors in the Peach State’s expanding automotive cluster. Across the state line in Alabama, the car-makers club includes Hyundai, Honda and Mercedes. North in Tennessee, Volkswagen is expanding its Chattanooga plant, while GM and Nissan’s operations are thriving. Toyota and Nissan are ensconced in Mississippi. Toyota, Ford and GM are major employers in Kentucky. BMW put down South Carolina roots two decades ago.

“The auto industry is now located in the Southeastern states,” claims Tom Stringer, who heads BDO’s incentive practice in New York. “The corporate takeover is complete. The Southeast absolutely controls the U.S. auto industry.”

Cars are not the Southeast’s sole success story. Attracted by lower tax rates

and amicable regulatory environments, clusters of financial services, transportation and logistics, call center operations and professional and business services (like temp agencies and staffing services) are growing like kudzu in the region. Employers are lured by the region’s combination of generous incentive packages, right to work laws, newer and well-maintained infrastructure and lifestyle marketing outreach.

For companies seeking low-cost land, low-cost power and low-cost labor, the Southeast offers a trifecta. “The South has all that and a trainable work force,” says Michael Philpot, chairman of the Southern Economic Development Council. A skilled labor force and training programs for workers help close many relocation deals.

“The Southeast holds up very well in terms of site selection,” says Betty McIntosh, senior managing director of Cushman Wakefield’s Business Incentives Practice. McIntosh credits the region’s thriving business networks, including many active chambers of commerce; the collaborative, rather than competitive, attitudes of many local economic-development officials, and the resources offered by regional power authorities.

“You never have to worry about a client being ignored by the local economic development community,” she notes.

The attention clients receive “proves southern hospitality is no myth.”

46 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

FLORIDA | #2 | A SUNNY OUTLOOK Florida’s economic weather report?

Mostly sunny, possibly clouds later on.

Real Gross State Product—the overall value of goods and services produced and sold—is slated to grow 3.2 percent this year, according to the Institute for Economic Competitiveness at the University of Central Florida. Housing prices are rebounding, and new construction starts are up. Job creation is slated to rise to 3.1 percent this year, led by gains in construction and professional & business services, as well as transportation/logistics.

In the shade: Florida’s exports are down, reflecting slower growth in China and Brazil, its top trade partners, and Latin America overall. The Sunshine State’s population growth rate is also slowing, although it still slipped past New York earlier this year to become the nation’s third-largest state.

“We have paid down debt, removed 3,000 regulations and cut taxes 40 times,” says Dave Hart, executive vice president of the Florida Chamber of Commerce. “The Chamber has backed 104 pro-business” bills and “the governor has signed 104 of them,” he adds.

Gov. Scott’s aggressive use of incentives, his media-ready promotional zeal, and the state’s celebrated lack of individual income taxes helped jumpstart a mature industrial base. Recently, however, the pace of job creation has lagged. From January through May last year, Florida’s private sector job creation rate was 1.8 percent. This year so far, it’s 1.4 percent, dropping more than 4,000 new jobs a month behind last year’s pace.

Meanwhile the state legislature has gotten stingier, budgeting $67.9 million in incentives this fiscal year, down from $93 million last year. The programs also receive mixed reviews.

“Their incentive programs are just not that robust,” says Cushman’s McIntosh. The Tax Foundation ranks Florida’s tax burden 20th lowest out of 50 states, and ranks its business tax climate fifth.

NORTH CAROLINA | #3 | LOSING ITS EDGE? The North Carolina economy grew more strongly than expected last year, fostering guarded optimism in a state that has largely lost the economic mojo that elevated the Research Triangle to international prominence in the ’80s and ’90s.

Many of the programs that helped nurture and attract corporations during the go-go years have been scaled back or eliminated. Site selectors complain that state and local economic development officials lack institutional knowledge and talk a good game but miss on the follow through. “Their wounds are largely self-inflicted,” says DBO’s Stringer of the state’s competitiveness problems.

“There is a lot of debate in the state about how to become more competitive,” says Larry Gigerich, managing director of Ginovus, a site selection firm in Indianapolis. “As it stands now, North Carolina is not competitive for a lot of programs.”

The state’s workforce and training programs, however, retain their luster.

“The quality of the workforce is great, there are good schools, fine community colleges and excellent universities,” says Cushman’s McIntosh.

Gov. Pat McCrory continues his

legislative battle to get funding for deal closings, fighting off Senate efforts to cap awards at $15 million.

The Senate would make larger incentives available for job creation of over 2,000 positions and for investments valued at least $750 million.

Business and government leaders began the year hearing economists and top bankers predict a 4 percent growth rate. Economic development officials celebrated recent wins, including Lidl, the European grocer, which announced a $125 million regional headquarters and distribution center in Alamance County, and Dimensional Fund Advisors, which is locating its East Coast regional headquarters in Mecklenburg County, a $106 million investment expected to create over 300 jobs in Charlotte.

The Tax Foundation ranks North Carolina’s tax burden 17th highest, and ranks its business tax climate 16th.

North Carolina spends over $660 million per year on incentive programs.

TENNESSEE | #4 | DRIVEN BY AUTOMOTIVE DEVELOPMENT Tennessee’s automotive-focused economic development efforts continue to pay off. Nissan announced in March that it was expanding its Smyrna operations to the tune of 1,000 jobs. In June,

How The States Stack Up Rank Best/Worst GDP States 2 1 Rank 2013 2015

GDP Per 2 Capita ($)

Top Corporate Tax 3 Rate (%)

Right to 4 Work

Quality of State 5 Service

HQ 5 Incentives

Jobs Green 5 5 Incentives Incentives

Education Quality (K-12)/ Post5 Secondary

Florida

2

4

$38,689 5.5 (flat)

Yes

B+

B+

B+

D

B/B

N. Carolina

3

9

$44,281

5 (flat)

Yes

C

C

C

B-

B- / B

Tennessee

4

19

$42,115

6.5 (flat)

Yes

B+

B+

B-

C+

B- / B

Georgia

5

10

$43,131

6 (flat)

Yes

B+

B+

B

B-

B- / B+

Louisiana

7

24

$46,448 8

Yes

B

B+

B+

C

C / B-

S. Carolina

10

28

$36,124

5 (flat)

Yes

B+

A-

B+

C

C+ / B

Virginia

14

11

$51,338

6 (flat)

Yes

B+

B+

B+

B

A- / A-

Alabama

24

26

$37,593

6.5 (flat)

Yes

B+

B-

B+

C

C/B

Kentucky

28

29

$38,938 6

Yes

B

B+

B+

C

C/B

W. Virginia

38

39

$36,768

6.5 (flat)

Yes

B+

C

B

C

C+ / C+

Mississippi

39

36

$31,551

5

Yes

B+

C+

B+

C+

C/B

Sources: 1 Chief Executive Best & Worst States for Business 2 Bureau of Economic Analysis 3 Tax Foundation 4 National Right to Work Committee/National Right to Work Legal Defense Committee 5 Interviews with site selectors Tom Stringer, Larry Gigerich and Betty McIntosh

Volkswagen announced a $700 million expansion plan for its Chattanooga operations that would add as many as 10,000 jobs next year. Tennessee has also attracted a number of major investments from tire manufacturers like Bridgestone and auto suppliers.

Overall, non-farm employment in the Volunteer State is expected to grow by 2.2 percent this year, according to the University of Tennessee’s Center for Business and Economic Research.

The state’s new policy of providing free community college educations to all high school graduates pleases Ginovus’s Gigerich. He also gives thumbsup to their recent efforts to streamline and align state agencies to provide better service.

The Tax Foundation ranks Tennessee’s tax burden 6th lowest and ranks its business tax climate 15th. Tennessee spends more than $1.58 billion per year on incentive programs.

VIRGINIA | #6 | INCENTING IMPROVEMENT Virginia reached its pre-Recession employment peak late last year, with most job gains coming from education and heath services. Professional and business services, a key cluster, shrunk last fiscal year, reflecting contraction in defense spending.

In general, the state’s dependence on government spending darkens the economic horizon. High-tech jobs, an economic driver nationally, shrunk by .8 percent last year, in contrast to the national 8.2 percent growth rate. Overall this year, jobs will grow a projected .6 percent, far behind the national 1.7 percent rate, according to the Bureau of Labor Statistics.

Anticipating the future, the commonwealth has tweaked its incentive programs over the past couple of years to include more funding for job training and programs that reimburse companies for internal training programs, as well as increased job creation tax credits, says Ginovus’s Gigerich. The moves will further strengthen a work-

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ECONOMIC DEVELOPMENT

force whose quality “is very high,” says Gigerich, reflecting the sizeable presence of senior-level military personnel and top corporate executives. “From the human capital viewpoint they are very well positioned,” he says.

The Tax Foundation ranks Virginia’s tax burden 21st lowest and its business tax climate 27th. Virginia spends over $1.3 billion per year on incentive programs.

SOUTH CAROLINA | #7 | SIGNS OF STORMS AHEAD Volvo chose a site in Berkeley County for its first North American factory in July, thrilling local officials and business leaders with plans to invest up to $500 million in a 100,000-vehicle a year production facility. The plant will employ up to 2,000 people when production ramps up in 2018.

The news is the cherry on top of the state’s 2015 economic-development sundae. Doug Woodward and Joseph Von Nessen, economists in the University of South Carolina’s Darla Moore School of Business, predict blue skies ahead. “If you liked 2014, you’ll like 2015,” Von Nessen quips.

A closer look reveals some storm clouds. Job creation is shifting from manufacturing toward lower-paying leisure and hospitality and employment services, including temp companies. Real income growth in the Palmetto State consistently lags the

national average.

The Tax Foundation ranks South Carolina’s tax burden 9th lowest and ranks its business tax climate 37th. South Carolina spends over $896 million per year on incentive programs. Officials are particularly strong in aligning incentive programs around a company’s actual needs, says DBO’s Stringer.

GEORGIA | #8 | JOB GROWTH DROPPING Georgia’s vaunted economic engine sputtered a bit this year. The Peach State is slated to add 71,000 jobs in 2015, down from last year’s 81,100, according to Georgia State’s Economic Forecasting Center. The Center notes that fewer than a quarter of the new jobs pay at least $60,000.

The state’s increasingly export-oriented economy has been hammered by market slowdowns in Asia, Europe and Latin America, but benefits from a resurgent construction market, including two new sports stadiums. Technology, entertainment (particularly film production) and biotech are growing, and manufacturing shows signs of rebounding.

Georgia’s aggressive incentive programs helped bring Mercedes’ North American headquarters to Sandy Springs, leveraging an incentive package estimated at up to $50 million for about 800 jobs, but a few months later lost Volvo to South Carolina.

WHY WE’RE HERE / FLORIDA WHO Naren Gursahaney, CEO of ADT SITE HISTORY The ADT Corporation, an electronic security company, was spun off from Tyco International Ltd. in 2012, moving over 800 employees into a 171,000-square-foot office building in Boca Raton.

WHY FLORIDA “The Sunshine State is extremely business friendly with no personal income tax and low business taxes. We like the pro-business culture with collaboration at all level, from the Governor to our Mayor.”

BOTTOM LINE “We work with fantastic partners like the greater Boca Raton Chamber of Commerce and the Business Development Board of Palm Beach County. Those two organizations…helped us on an incentive package to remain headquartered here.”

48 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

Focusing on infrastructure, legislators passed closely brokered bills to improve the transportation infrastructure and public transportation, raising gas taxes to pay $900 million for road, bridge construction and repair and mass transit programs.

The Tax Foundation ranks Georgia’s tax burden 16th lowest and ranks its business tax climate 36th. Georgia spends over $1.4 billion per year on incentive programs.

LOUISIANA | #13 | HAMPERED

BY FUEL DEPENDENCY Cheaper energy costs hammer fuel-dependent economies like Louisiana’s.

Choked corporate revenues cause pain in public sectors, and revenue shortfalls led to state budget-tightening. This summer, Louisiana’s incentive programs were sliced about 20 percent.

Still, the state reports success stories.

A bright spot is the I-10 corridor and regions south of it. Chemical companies headquartered there take advantage of higher prices in Europe, winning new export customers in volume. Emerging export markets and drilling opportunities in Mexican waters may benefit Louisiana energy interests. The two-parish Lake Charles Metropolitan Statistical Area has logged over $81.7 billion in recent industrial announcements, a figure “seven to 10 times larger than we would typically report for the whole state in the past,” say economists Loren Scott and James Richardson, authors of the Louisiana Economic Outlook: 2015 and 2016.

Getting a foothold in the Pelican State can be daunting. While Gov. (and presidential aspirant) Bobby Jindal personally gets plenty of positive reviews, the state’s shady legacy deters some relocation advisors. Louisiana “is not as corrupt as it used to be, but it is very political,” says Cushman’s McIntosh. Says Ginovus’s Gigerich: “The way Louisiana functioned, if you knew somebody things happened.”

The Tax Foundation ranks Louisiana’s tax burden 5th lowest and its

WHY WE’RE HERE / NORTH CAROLINA WHO Steven B. Tanger, President and CEO, Tanger Factory Outlets SITE HISTORY Steven Tanger’s father, Stanley Tanger, founded the company with a single location in Burlington in 1981.

WHY NORTH CAROLINA “Our family business has its roots in North Carolina. By headquartering in Greensboro, Tanger Outlet is centrally located on the Eastern seaboard with access to great international airports and some of the most active U.S. highways.”

BOTTOM LINE “I was born and raised here, graduated from the great University of North Carolina, started my family here and still love cheering on the Tar Heels.”

business tax climate 35th. Louisiana spends over $1.8 billion per year on incentive programs.

ALABAMA | #21 | EDGING INTO AUTOMOTIVE One of the few states in the nation that’s added manufacturing jobs, Alabama’s economy reflects the generational shift away from textiles in favor of automotive and aerospace. The state is paced to add between 30,000 and 35,000 jobs this year, according to the Center for Business and Economic Research at the University of Alabama.

Government efforts to promote such advanced manufacturing and hightech growth companies have borne fruit. Alabama’s successful wooing of Airbus brought its aerospace sector international prominence, joining Boeing in a growing cluster. A new focus on attracting pharmaceutical and related industries shows promise. Companies like these require a trained workforce, something Alabama is addressing with educational reforms.

Research conducted by the Culverhouse College Center for Business forecasts GDP growth of 2.3 percent this year and 2.5 percent next, following two years of 2 percent growth. The Tax Foundation ranks Alabama’s tax burden 10th lowest and ranks its business tax climate 28th. Alabama spends over $277 million per year on incentive programs.

KENTUCKY | #25 | BLUEGRASS BLUES The Bluegrass State continues its creaky rebound from the Great Recession, led

by Lexington and Louisville. The pair of cities, increasingly collaborative, accounted for 45 percent of the state’s job growth over the past five years, according to economist Paul Coomes. Manufacturing payrolls rose 1.8 percent last year.

Meanwhile, hiring in such areas as retail, financial services and government was flat. Toyota’s $531 million Lexus plant expansion in Georgetown, announced in 2013, continues to command local attention; it could open later this year.

Kentucky’s bedrock coal industry has been hammered by falling energy prices.

This year, real GDP growth will again lag that of the U.S. overall, says Christopher Bollinger, director of the Center for Business and Economic Research at University of Kentucky. Bollinger forecasts 2 percent GDP growth in the state. The Tax Foundation ranks Kentucky’s tax burden 23rd highest and ranks its business tax climate 26th. Kentucky spends over $1.4 billion a year on incentive programs.

MISSISSIPPI | #30 | PLAGUED

BY PERCEPTION Mississippi’s economy continues to lag. The state added 8,800 jobs last year, nearly a third in transportation and utilities. Still, employment remains nearly 40,000 jobs under the state’s 2008 peak. Casinos, once hailed as an

*STATE INCENTIVE ESTIMATES BASED ON DATA FROM THE NEW YORK TIMES.

economic driver, now represent a poor bet. Real Gross Domestic Product is currently pegged at 1.4 percent, although it’s slated to rise next year by 2.1 percent, forecasts the Mississippi University Research Center. State economist Darrin Webb professes optimism. The economy overall is “better than it has been in a long time,” he testified earlier this year to the state legislature.

A small state, Mississippi offers excellent resources to companies that seek them out, including Nissan and Toyota, according to Cushman’s McIntosh.

“There is a perception problem,” she says.

“The officials I’ve worked with have gone all out for the projects I’ve been involved with.”

The Tax Foundation ranks Mississippi’s tax burden 11th lowest and ranks its business tax climate 18th. The state spends over $416 million per year on incentive programs.

WEST VIRGINIA | #34 | MIRED IN MINING The Mountain State offers a mixed bag of economic news. John Deskins, director of the Bureau of Business & Economic Research at WVU, forecasts an uptick in employment growth, income growth and employment through end of decade.

West Virginia will, however, still lag the nation in employment, income and population growth over the next five years. The state’s mining industry, its longtime economic driver, is bleeding revenue and jobs and no new sectors have emerged to replace it, keeping per capita income in the state mired near the national bottom.

Modest growth of professional and business services, education and health services “will pace the state’s overall performance over the next five years,” says Deskins. The Tax Foundation ranks West Virginia’s tax burden 19th highest and ranks its business tax climate 21st. West Virginia spends over $1.57 billion per year on incentive programs.

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CEO OF THE YEAR

Celebrating the 2015 CEO of the Year

Boeing’s Jim McNerney ONCE A YEAR, a selection committee comprised of business leaders meets to tackle a difficult feat—selecting a CEO whose vision, business acumen and success in delivering sustained performance serve as an inspiration to his or her peers. RHR International CEO Tom Saporito, who serves the selection committee in an advisory capacity, has likened this process to choosing the best athlete from a group of Olympic gold medalists. This year, the honor went to Boeing’s Jim McNerney, who joined a roster that includes such leadership luminaries as Microsoft’s Bill Gates, GE’s Jack Welch, Intel’s Andy Grove and FedEx’s Fred Smith.

“Only a decade ago Boeing was in turmoil,” said Walt Disney’s Bob Iger, CEO of Walt Disney and the 2014 CEO of the Year, in presenting the award. “Airbus had overtaken it in sales. A defense contracting scandal had cost Boeing an important Air Force contract, tarnished the company’s reputation and left a leadership vacuum.”

McNerney stepped into that void and led the world’s biggest producer of aircraft back to prosperity. “Instead of following the typical aerospace model of a once-every-generation

moon shot, Jim embraced the example of tech companies like Apple, which drive the industry forward with constant, rapid product development,” said Iger, noting that revenue surged to more than $90 billion under McNerney and Boeing’s share price more than doubled.

In accepting the award, McNerney attributed this transformation in large part to a companywide effort to align its defense, space and commercial businesses. “One of the toughest challenges at any large, diverse organization is managing the various groups and teams, which can sometimes operate as separate tribes,” he noted. “Today, we operate as one Boeing. Leadership put this effort in motion, but the credit goes to the Boeing employees for embracing the culture every day.”

He also acknowleged that the journey would continue under his successor, Dennis Muilenburg, who took Boeing’s helm in June. “We are fortunate to be stronger, healthier and more compet itive than at any time in recent history,” he noted. “Reaching this milestone, however, does not mean it’s time to rest. We must continue to earn our position every day.”

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CEO OF THE YEAR

1 2

3

4

5

6

7 9

8

10

11

12

13

1 Attendees on the NYSE trading floor 2 CCA Global Partners’ HOWARD BRODSKY with his son, Jeff 3 Disney’s BOB IGER, Boeing’s JIM MCNERNEY and P&G’s A.G. LAFLEY 4 Zurich Global’s DAN RIORDAN with his wife 5 Lockheed Martin’s MARILLYN HEWSON 6 RYAN MACDONALD with his father, Medifast’s MICHAEL MACDONALD 7 McNerney with his family 8 McNerney shares a moment with his wife, Haity 9 NYSE Group’s TOM FARLEY and Intercontinental Exchange’s JEFF SPRECHER and KELLY LOEFFLER 10 XLR-8’s BOB NARDELLI with Iger 11 Lincoln Education’s SCOTT SHAW and GrowthPlay’s DAN WEINFURTER 12 Walt Disney’s BOB IGER and Boeing’s JIM MCNERNEY 13 Frontier Communications’ DAN MCCARTHY and MAGGIE WILDEROTTER 14 OrthoNet’s ROGER SHEDLIN and PURE Insurance’s ROSS BUCHMUELLER

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CEO OF THE YEAR

CEO ROUNDTABLE

UNDERSTANDING AND THWARTING CYBER THREATS With great connectivity comes great risk—and an imperative to protect critical data and safeguard systems from attack // by Jennifer Pellet IT’S AN IRONY OF modern life that the very technology that adds convenience and efficiency to our everyday lives also puts us at risk. We now expect to be able to check our email while waiting online for coffee, tap into our company network from a hotel in Beijing and text our colleagues from virtually anywhere, anytime. Every day, however, brings new evidence that this kind of seamless electronic connectivity comes at a cost.

We’ve all seen the headlines about companies and public institutions— from Target and Sony Pictures to the U.S. government—being victimized by hackers looking to damage, destroy or obtain confidential information. Less widely covered, yet just as perva-

sive, are cyber attacks on individuals. Furthermore, the two are often intertwined, Roderick Jones, CEO of Concentric Advisors, pointed out to CEOs participating in a roundtable discussion held in partnership with PURE Insurance.

“Individuals sitting in their homes are an enormous vulnerability for corporations,” he noted. “If someone gets control of a router in a home network, it won’t matter how advanced your corporate VPN is or what security you have in place. There are signs that executives sitting in their homes will be the next frontier for infiltrating organizations.” At a time when executives (and their children) are trolling the Internet from smartphones and tab-

lets in cars, on planes. in local coffee shops and anywhere WiFi is available, that vulnerability also goes far beyond your home PC. With attacks coming fast and furious and so many points of vulnerability, the old models of cybersecurity are no longer enough. “Building walls and expecting them not to get breached doesn’t work anymore,” explained Jones. “Frankly, this is medieval warfare and somebody just invented the cannon.” While strong system security—firewalls, encrypting data, effective anti-virus software and data backup and recovery—remains the first line of defense, it’s no longer enough.

Today, companies and executives must layer additional security strategies together to minimize the risk of an attack and/or mitigate the damage should one occur. Here are four points of protection shared by CEOs during the discussion:

Detect and Destroy Many companies take steps to guard against attacks but are ill-equipped to detect those that make it through their defenses. “We have attacks every day,” noted Maggie Wilderotter, executive chairman of Frontier Communications and chair of the U.S.’s National Telecommunications Security Advisory Board. “One of the big changes we’re

Frontier Communications’ Maggie Wilderotter urged CEOs to vet their suppliers’ cyber vulnerability

54 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

seeing and that we put in place at our company has been a lot more forensics and detection so that we’re not just waiting for a big event [to come to light]; we’re looking for it all the time.”

People Protection Employees are often a company’s weakest link from a cyber-threat perspective—and one of the hardest areas to address. Today’s workers expect to be able to check their personal email and use their own devices in the workplace, as well as to bring work home on laptops or transmit it through file-sharing services like Dropbox.

Plus, rules restricting such practices could well stifle the culture of creativity and collaboration a company hopes to foster. “This notion of constant vigilance is hard,” noted Brian Fetherstonhaugh, CEO of the digital marketing company OgilvyOne. “Our culture is very much about freedom of expression, a safe place where you can say anything.”

Still, employees must be educated about cyber vulnerability and incented to prevent it, agreed CEOs. “The

last line of the defense is making sure your employees are thinking about this on a 24/7 basis, says Tom Siering, CEO of Two Harbors Investment. “So when our people thwart a threat, we make a big deal out of it—giving out little notes and calling them heroes.”

“When I was a small company with five people, it was easy to simply keep computers with sensitive information offline,” noted Anil Diwan, founder of NanoViricides, which develops applications for nanomedicine technology.

“Now we set up VPNs and do employee training to make sure they don’t put technical matter into emails, but it’s a continual battle.”

More than half of roundtable participants said their companies train and test employees—including senior staff—on detecting “phishing” emails designed to lure recipients into opening their cyber gates for intruders. “We publish the results if you fail,” said Wilderotter. “We found that makes people take it seriously.”

At some companies, the bonuses of employees who fail a phishing test are docked by as much as 5 percent.

“There are cost-effective tools that will continually monitor activity and alert you if suppliers that you welcome into your network take out data they shouldn’t.”

—ROSS BUCHMUELLER CEO, PURE INSURANCE

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CEO OF THE YEAR

Safeguard Your Supply Chain All the companies you share information with to boost efficiency are now points of vulnerability—and there’s a decent chance that not all of them are practicing good cybersecurity hygiene.

One way to vet suppliers is to look for National Information Security Technology (NIST) certification, which indicates that a given company has met the data management security standards required for certification.

“There are also cost-effective tools that will continually monitor activity and alert you if suppliers that you wel-

“The bad guys are always changing the playbook... what they’re trying today will be different from what they’ll do six months from now.”

—TOM SIERING CEO, TWO HARBORS INVESTMENT

come into your network take out data they shouldn’t,” explained Ross Buchmueller, CEO of PURE Insurance.

“The earlier you detect incidents the more difficult it will be for [hackers] to accomplish their goal.”

used in an office environment, noted Jones, who urged CEOs to make sure they have guest networks for visitors and educate family members on use of social media and public WiFi. “We typically run an intrusion-detection system on home networks, so we can detect and shut down attacks. We also look at social media settings, which can be very complicated.”

Finally—and perhaps most im-

From left: Fifth Street Asset Management’s Len Tannenbaum and Concentric Advisors’ Roderick Jones

portantly—business leaders and their companies must strive to stay current as cyber crime evolves. The bad guys are always changing the playbook,” noted Siering. “What they’re trying today will be different from what they’ll do six months from now. Protection needs to be an ongoing process.”

CEO Roundtable Participants ■ ROSS BUCHMUELLER CEO, PURE Group of Insurance Companies ■ MARSHALL COOPER CEO, Chief Executive Group ■ WAYNE COOPER Executive Chairman, Chief Executive Group ■ CRAIG COY CEO, Command Security ■ ANIL DIWAN Chairman, NanoViricides

It’s Personal As you put protection in place, don’t neglect the homefront. The approach to security at home is similar to that 56 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

■ TOM FARLEY President, New York Stock Exchange ■ BRIAN FETHERSTONHAUGH CEO, OgilvyOne Worldwide ■ RODERICK JONES CEO, Concentric Advisors ■ DAVID LORING Chairman, GTL Solutions for America ■ MIKE MACDONALD CEO, Medifast

■ DR. RANDELL MILLS CEO, BlackLight Power ■ THOMAS SIERING CEO, Two Harbors Investment ■ LEONARD TANNENBAUM CEO, Fifth Street Asset Management ■ MAGGIE WILDEROTTER Executive Chairman, Frontier Communications

CEO ROUNDTABLE

THE DATA-ENABLED CEO CEOs share their experiences unlocking key insights to accelerate business performance //

By William J. Holstein THE PHENOMENON called “Big Data” might seem like something only the geeks in IT need to grapple with. But the use of data is exploding in all aspects of most every company’s activities with stunning speed, forcing CEOs to become personally involved in data issues and to rethink not only how their organizations are structured, but also what skills sets are needed to manage many functions.

Data collection and mining has emerged as a major opportunity, but also a major challenge—one for which getting it right demands CEO involvement, agreed participants in a recent Chief Executive roundtable held in partnership with AICPA. “Are you partnering yourself with not only the business owners but also chief financial officers and with IT to make sure that you’re doing the right collection, the right analytics?” asked Arleen Thomas, AICPA’s senior vice president for management accounting and global markets, noting that CEOs must often drive adoption. “Are you providing insight and making a difference? I truly believe it starts with you.”

A.G. Lafley, the current and former CEO of P&G and 2006 CEO of The Year, has experienced both the upsides and the frustrations of using data tools. In his second stint as the consumer goods company’s CEO, he is using those tools to completely restructure the sprawling P&G mix of

Are you partnering yourself with not only the business owners but also chief financial officers and with IT to make sure that you’re doing the right collection, the right analytics?”

—ARLEEN THOMAS SENIOR VICE PRESIDENT, AICPA

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businesses. In the past 10 months, he has sold businesses that represented 5 percent of the company’s profit, 15 percent of its sales and 40 to 50 percent of what he calls its complexity. “What data did we use?” Lafley recounts. “It was this simple—is it a business we think we should be in because we think it’s strategically interesting, structurally attractive and will give us the kind of return we want? Are we performing at a level where we’re delivering best in industry results? Do we think we can continue to bring the innovation and capability we need? There’s a ton of data, and we make judgments.”

Building a Consumer Portrait Lafley also uses tools such as Net Promoter Score, which measures the loyalty of a company’s customers, to try to understand consumer behavior over a five-year future horizon.

P&G also seeks to create even broader portraits of what its customers will want by obtaining what Lafley calls a “360-degree view.” “You’re trying to get it all in context,” he said. “I think the company of the past would just stare at your mouth and go through the usual product offerings. But now we have to step back and say, ‘Wow, that’s John’s mouth and John has all these other

things going on in his life. Oral care has actually maybe a fair amount to do with heart health and maybe a whole bunch of other things which will be useful to him.’”

It can be difficult at times to use data to achieve an enterprise-wide perspective. “One of the biggest struggles I have is not the business-unit parochialism—it’s the discipline parochialism,” Lafley said. “I have my finance gang selling their world view of analytics. I have my mathematics jocks selling their view. I have researchers and scien-

“Are we performing at a level where we’re delivering best in industry results?

Do we think we can continue to bring the innovation and capability we need?

There’s a ton of data, and we make judgments.”

—A.G. LAFLEY CURRENT AND FORMER CEO OF P&G

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EY’s Mark Weinberger says designating someone to drive data analytic efforts is critical

tists of all kinds and then I’ve got a whole bunch of marketing analytics.

I don’t know if I have an elephant or a camel half the time because they’re telling me only about the part of the animal they touched.”

Building the bridges between different flows of analytics and dealing with the organizational ripple effects of doing that are clearly challenging. Mark Weinberger, CEO of EY, said his consulting firm, which consists of 200,000 employees in 152 countries, has created a position called the Chief Analytics Officer.

“You have to have somebody as the center,” he said. The company also had to define the reporting relationship the many different units within EY would have with the analytics officer.

For older services that are arguably more entrenched, such as tax or audit, EY created dotted line, or matrix, reporting relationships to the center and built compensation systems that rewarded the right flows of data. Weinberger was able

CEO OF THE YEAR

From left: Majesco’s Katen Mehta, ICE’s Jeff Sprecher, Yale’s Jeff Sonnenfeld

to gradually start getting buy-in from these units as well. But he also recognized that within the accounting practice, for example, he didn’t want an accountant “who did analytics on the side,” but rather a recognized data expert within that unit.

That required some new personnel policies. Overall, “it’s working a lot better than it did, but I can’t tell you we have it all figured out,” he acknowledged.

Biotech firm Acorda Therapeutics uses data mining tools to better serve victims of multiple sclerosis.

By tracking movements of patients as they navigate a resource website the company created, Acorda can glean insights about what its patients need without violating their privacy, says CEO Ron Cohen.

Don’t Dump “Soft” Data Methods Data is at the very heart of ICE, recounted CEO Jeff Sprecher, whose company runs the New York Stock Exchange and 10 other global exchanges plus seven clearing houses and is seeking to standardize trading on those platforms. Sprecher recently created a data subsidiary that aims to achieve $1 billion in sales within the next year.

“It’s been a mind shift for us, realizing that we’re actually a data company,” said Sprecher, who also shared an “aha” moment from a recent meeting with Thomas Farley, CEO of ICE’s NYSE Group. “I said, ‘I’m participating in this data roundtable, which will be weird because I don’t consume any of this data that you produce about market share and

what customers are doing,’” he recounted. “Farley responded: ‘No, you consume more data than any CEO I’ve ever met. You’re talking to a lot of people. You’re asking questions about people, and you’re gleaning insights.

It’s not driven by a lot of reports.’”

The moral? Coupling Big Data with good old-fashioned entrepreneurship is a winning combination.

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60 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

■ JEFF SONNENFELD Senior Associate Dean, Yale School of Management ■ JEFF SPRECHER CEO, ICE ■ ARLEEN THOMAS SVP, AICPA

■ MEETA VYAS CFO, Nanoviricides ■ MARK WEINBERGER CEO, EY ■ DAN WEINFURTER CEO, Growth Play

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CEO PASSIONS

Clockwise from left: A hunk of amethyst from Brazil; Jim Goodnight with his collection; malachite from the Congo and a Cretaceous-period Goodhallites fossil found in Oklahoma

Presented in partnership with PURE Insurance, our sixth column on CEOs who are notable collectors features SAS’s Jim Goodnight.

By George Nicholas

HE HAS A PH.D. IN STATISTICS, calls himself a “science and math” person and is usually taciturn and private.

Asked about his minerals collection, however, SAS CEO Jim Goodnight becomes passionate. Minerals, he says, are the “first art—art that can’t be replicated by man.”

Goodnight shows his more than 400 specimens in his office and elsewhere in his business analytics software company’s headquarters in Cary, North Carolina. Each piece is displayed on a Plexiglas pedestal, with its name and provenance etched into its base, as in a museum.

The collection’s minerals come from 40 countries, from Afghanistan to Zaire. “You have to be amazed at all the colors and formations out there,” Goodnight says. He owns a pure white quartz piece from India that looks like icy snowballs; copper-touched malachite from the Republic of Congo, intensely green; glowing purple fluorite from Tennessee; arrowheads from the site of SAS’s headquarters that date back to the Archaic Period, c. 8000 B.C. to c. 1000 B.C.; and a recent acquisition, crystallized gold from Kalgoorlie, West Australia, rare because unlike most gold it hasn’t been smoothed by water.

Goodnight’s passion dates back to his childhood. As a boy living at the

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edge of town in Greensboro, he would venture out looking for arrowheads and quartz crystals. These days he buys some 10 or 12 minerals specimens a year. His collection includes a meteorite, a cross-section of a fossilized dinosaur egg from the Gobi Desert and a 70-million-year-old fossilized nautilus shell from Oklahoma.

Among his favorite pieces is a large chunk of colored quartz from Brazil known as the “merchant’s stone” because it’s associated with business success, generosity and sharing. He is an active philanthropist and an advocate for education.

Goodnight founded his company in 1976, together with other faculty members at North Carolina State University. Goodnight, whose net worth is estimated by Forbes at $7.8 billion, urges businesses to care better for their “creative capital,” employees whose ideas generate valuable products and services. In an industry where yearly turnover of 20 percent is norm, his company has only four percent.

He is also known as a patron of visual arts. Together with his wife and partners he founded an independent prep school, Cary Academy. He also owns Cary’s Prestonwood Country Club and the Umstead Hotel and Spa at the edge of SAS’s campus.

JIMMY WILLIAMS (GOODNIGHT); STEVE MUIR

Collecting Earthly Treasures

PRIVATE AVIATION REPORT

BUSINESS AVIATION:

Back on the Rise

Riding out the turbulence of 2008’s U.S. recession was no easy trick, but the business aviation sector has made a steady comeback thanks to options for every flier’s needs. By Michael Gelfand

IN BUSINESS, air travel is a basic necessity. Whether it’s to spend face-time with clients or suppliers or conduct town halls with employees and conferences with investors, most of today’s executives spend a fair amount of time on the road—or rather in the air. At the same time, using commercial aviation to get from point A to point B can be a chancy, “hope for the best, prepare for the worst” proposition. What’s more, it’s generally an experience cursed with no privacy, little comfort or productivity, and lots of nuisances.

That fundamental truth is at the heart of the appeal of private aviation, says Alex Wilcox, CEO of JetSuite.

“The best sales and marketing tool for business aviation is commercial aviation,” he notes. “Planes are packed and airports are swollen with travelers, so people are voting with their feet. Most major commercial aviation carriers

don’t have an interest in the consumer experience.”

Even platinum fliers find themselves jostling through packed airports and security checkpoints, waiting patiently at gates and taxiing through Dante’s rings of hell on the tarmac before ever getting airborne. “Existing and potential clients continue to say the same thing,” says Patrick Gallagher, executive vice president of sales and marketing for NetJets. “They want control over their schedules, unlimited access to airports and routes and the ability to go where they want when they want.”

“First-class just means a shorter line, and the airport experience is the same,” agrees Wilcox, who points out that with careful planning private aviation can actually be just as economical. “Business travelers should think about where they need to go, and how they want to spend their time. If you

64 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

Despite headwinds that still confront the industry, the number of business aviation flights has nearly recovered to the highs last seen in 2007

have 3-4 people that need to go to a certain place, using business aviation definitely competes against commercial travel on a dollar-to-dollar basis.”

NAVIGATING OPTIONS OVERLOAD Private business aviation represents the opposite end of the user experience spectrum. It delivers a streamlined, more refined travel experience that dramatically increases travelers’ efficiency, productivity, privacy and comfort—and that adds both tangible and quantifiable value to business conducted while in transit and on the ground.

The industry has also evolved into an intricate web of categories of service from which executives can

PRIVATE AVIATION REPORT

choose, each with its own set of benefits and challenges. As overwhelming as sifting through options like outright jet ownership, fractional ownership, charter services, jet cards or buya-seat programs may feel, having a wealth of choices enables you to find the best one—or best combination— to serve your specific needs and, of course, your budget.

To start, you’ll need a holistic view of your expected usage. “That means assessing how many hours you will

really fly and what type of flying you need to do,” explains Michael Riegel, president of Aviation IQ, a business aviation consulting firm based in Lake Tahoe, Nevada. “What I find more and more as I examine people’s needs is they need a blend of different services.

About 30 percent of their travel occurs within a 90-minute radius of home, and those trips don’t take them away for more than one night. That’s perfect for using a charter company.”

“You may think you want to fly 100

Jet Service Providers FRACTIONAL OWNERSHIP

JET CARD PROGRAM

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COMPANY

CONTACT INFO

Associated Aircraft Grp.

flyaag.com / 845.463.6500

Delta Private Jets

deltaprivatejets.com / 859.534.4300

Executive AirShare

execairshare.com / 866.946.4900

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FlexJet

flexjet.com / 866.473.0025

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Flight Options

flightoptions.com / 877.703.2348

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JetSuite

jetsuite.com / 866.779.7770

NetJets

netjets.com / 877.356.5823

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Nicholas Air

nicholasair.com / 866.935.7771

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PlaneSense

planesense.com / 866.214.1212

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Sentient Jet

sentient.com / 866-602-0044

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Comfort and privacy are paramount for CEOs who choose private aviation for business travel

hours a year in a Gulfstream 4, which is a great plane with a flight attendant where you’ll get to enjoy a nice dinner,” he adds. “The truth is that there will be 20 hours where that’s an interesting option, but there are better options for the other 80 hours of your travel.”

Obviously, different planes serve different travel needs. For example, some trips may demand access to an aircraft with exceptional field performance, others may require a larger cabin space that accommodates more key personnel, and still others a jet built for speed quickest flights. “So instead of doing your 100 hours with one type of aircraft, you might end up purchasing a 50-hour share in a fractional provider, 25 hours with a local block charter arrangement and split the rest between a jet card and a shortrange plane with additional short leg waivers,” says Riegel.

Safety and security also remain important considerations, both juxtaposed against commercial aviation as a whole and as a point of comparison

PRIVATE AVIATION REPORT

between different business aviation services. “Knowing everything associated with who the crew is, who maintains the plane, and who is responsible for the safety and security of flight… these are differentiators that customers are vigilant about,” notes Gallagher.

INNOVATION IN THE AIR As with any business, new entrants are always looking for game-changing services that can disrupt the competitive landscape. Smartphone apps are an increasingly popular approach as companies like JetSmarter look to replicate the Uber taxi model in business aviation. However, but many of those apps are front-end screens for quote request engines, warns JetSuite’s Wilcox. “They’re creating a lot of excitement, but most of the time these apps just point back to a broker with a cell phone, which is not that revolutionary,” he says.

Other companies, like Fly Victor (www.flyvictor.com), have introduced apps tied into the backend systems of operators, giving users a view into the real-time availability of fractional and chartered planes, and enabling customers to book private flights online the same way that they might book a flight on a commercial airline today.

Upstarts, like Surf Air (www.surfair.com), Wheels Up (www.wheelsup. com), SkyJet (www.skyjet.com), Rise (www.iflyrise.com) and Beacon (www.

Promising Aviation, Promising Economy THERE’S A HIGH CORRELATION between the health of the U.S. economy and sales of aircraft, says Jens Hennig, vice president of operations for General Aviation Manufacturers Association (GAMA).

“The correlation of new aircraft sales to U.S. GDP or corporate profits is typically very close,” he says. “The R-square statistical measurement is 0.9,” he says. “If you add 18 months of lag time to the peaks and valleys of business jet sales, the R-squared measurement between corporate profits and

business jet sales is extremely high.”

According to NBAA’s Hubbard, industry data shows that flight hours are up. “If you look back to 2008, into the teeth of the greatest recession since the Great Depression, we saw steep drop-offs across the board.

People were flying 40 percent less, and sales of aircraft of all types were in steep decline for the next two to three years,” says Hubbard. “We’re probably still down about 10 percent from 2007, which was the historical

flybeacon.com) among others, are also looking to offer intriguing twists on a private jet subscription model. However, these providers largely haven’t evolved from regional brokers into actual operators as of yet.

CALLING ON COPTERS Booking private aviation services has a long way to go before it’s as convenient as grabbing a cab across town. Despite the hype, smartphone apps don’t currently add new value beyond enabling users to a new view of the same

high watermark on hours flown, but we are gaining traction.”

Hubbard says gains have not always been continuous, month-over-month, and the numbers don’t match the heights of 2007, but since around mid2011 to today, he has seen gains, and sales of new and pre-owned aircraft have continued to march higher. “More companies and entrepreneurs are flying in North America than ever before, and we’re also seeing more international missions, as well.”

network of existing planes. “With planes, there’s quite a bit more involved than going out to find a car and have someone pick you up,” explains Dan Hubbard, senior vice president of communications for the National Business Aviation Association (NBAA).

“You can’t just pull up an app and say, ‘Here’s what I need.’ That said, we are seeing a continual effort being made— but not necessarily increasingly—to find new ways to connect people who need to make a business flights with available plane, and it will continue.”

“The correlation of new aircraft sales to U.S. GDP or corporate profits is typically very close.”

JENS HENNIG, VICE PRESIDENT OF OPERATIONS, GENERAL AVIATION MANUFACTURERS ASSOCIATION

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PRIVATE AVIATION REPORT

Luxuriously outfitted helicopters are becoming an attractive option for regional executive travel

Ways to Fly With commercial aviation now more akin to cattle herding than transportation, business aviation has become an attractive option for some, and a no-brainer for many others. However, understanding the differences between the available options isn’t always straightforward, especially because so many operators spread themselves across large swaths of the spectrum. Here’s a look at the pros and cons of the most common private aviation options.

AVIATION SOLUTION

WHEN IT MAKES MOST SENSE

Ownership

>400 hours

A plane is a valuable asset, gives you complete travel flexibility (last-minute and in-transit changes are simple) and total control over safety. However, you are responsible for the entire capital investment as well as all associated operating costs, including staffing pilots, a flight department and maintenance, plus all security and comfort features.

Fractional ownership

50-400 hours annually

If you can’t justify the capital investment but regularly require private jet solutions to work around your schedule, fractional ownership gives you guaranteed access, rapid availability (4-6 hours), and a great plane without the cost of pilots, scheduling or planning responsibilities. There are also tax benefits for certain types of usage. However, the fractional pricing model can be more complicated than it seems on the surface thanks to potential escalation provisions, and you may still pay take-off/ landing fees for taxiing at airport.

On-demand charter through brokerage

1-100 hours

There’s no long-term commitment or ownership contract, you can select the type aircraft you want and planes are readily available through broker networks. Also, many charter brokers provide value-added services (ground transportation, catering and customized flight amenities). However, some planes can be difficult to access during peak demand and learning who owns the plane, how many hours it has flown and how well the pilots have been trained isn’t always easy. Furthermore, charter brokers receive an additional fee for their services.

Jet card programs

10-100 hours annually

Planes are typically available on short notice (typically less than 10 hours) and you pay as you go. That said, programs that aren’t affiliated with fractional ownership programs offer very limited—or no—control over plane type, age or pilots. Availability can be dicey depending on the program you choose, particularly during peak travel times, and some programs don’t offer international travel.

Buy-a-seat or helicopter

1-25 hours annually

Buy-a-seat and helicopter travel are ideal for executives who travel regionally. Buy-a-seat pricing is within reach of firstclass commercial travel and comes with the convenience and amenities of business aviation, but you must adapt your schedule. Helicopter travel <250 miles provides rapid door-to-door service thanks to dramatic cuts in your ground transportation time and new technology has brought the cabin volume down to levels comparable to planes.

annually

PROS & CONS

70 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

While these next-generation applications capture a lot of attention, the helicopter—that old-school aviation alternative—has become a more viable, if not sexier, business aviation option for business travelers whose needs it best fits. “The helicopter plays a unique role in business aviation, especially along the Northeast coast,” says Scott Ashton, president and general manager of Associated Aircraft Group, a subsidiary of Sikorsky. “If you look at Washington, D.C., Philadelphia, New York, Hartford and Boston, they’re each separated by about 100 miles and that’s a perfect chain for utilizing helicopters.”

Until recently, business travelers often used helicopters for short distance jumps between airports, such as from New Jersey’s Teterboro Airport to John. F. Kennedy International in New York. Lately, however, they’re becoming more attractive as a primary mode of travel for executives in need of regional intercity connectivity. “For trips less than 250 miles, we can show that a helicopter will save you time door-to-door because it gets you out of and into small locations, even personal property,” says Ashton.

“A jet can easily fly twice as fast for that distance, but it’s about efficiency,” explains Ashton. “We’re only flying at 150 knots (170 mph), but we can do that round-trip in the same day, and there’s no other way to do that efficiently. If your corporate headquarters has a helipad or there’s one nearby we can pick you up at the end of a meeting, get you onboard and have you at your next meeting in 50 minutes with very little, if any, ground transportation time.” To do that on a jet, he says, that same executive needs to be transported to an airport with a 5,000-foot runway where he can board a waiting

AD INDEX A BUYER’S MARKET? THERE MAY NEVER BE a better time to buy a plane, says Michael Riegel, president of Aviation IQ, thanks to a chain of events that upended the sector over the past eight years.

According to Reigel, when the 2008 recession first hit, airplane manufacturers mistakenly expected buyers in ex-U.S. markets not to waver on taking delivery of existing orders when the U.S. economy faltered.

However, deliveries were cancelled, sending stocks of some major jet manufacturers into a free fall.

At the same time, a wave of fresh “for-sale” listings from the recent buyers of new planes flooded the market, meaning the top of that market got stuck with aircraft they couldn’t sell.

The situation was further compounded around 2012 when the Gulfstream 650 emerged as the premier plane for the wealthy elite and multinational banks in top end of the market, while Embraer’s Phenom 300, which is sold in large part to fractional providers,

simultaneously enjoyed success at the bottom of market. “Many manufacturers believed that sales of these two aircrafts were leading indicators of a full-blown recovery,” recalls Riegel, “but those were false indicators.”

Today’s resale market includes thousands of owners who strategically continued to pay overhead costs for years, waiting to be able sell their planes without taking a 50 percent loss. It also encompasses those who purchased new planes recently and want to unload their previous ones. “Most Gulfstream 650 owners, for example, owned other large planes before they upgraded, but now they can’t get rid of those old planes at any price,” he explains. “So today you have wealthy buyers shopping around for a $50 million plane, and these are the types of buyers who ordinarily wouldn’t consider a used aircraft at any price.

Because of this glut of used aircraft, beautifully refurbished aircraft with less than 30,000

miles are selling for $15 million,” he says.

These are not planes with arcane systems, Riegel adds. “They incorporate almost all the best systems, the computation fluid dynamics and many of the same high-end features and amenities you would still find on many of today’s brand new planes,” he says.

“There are many staggering deals for great aircraft available at one-half to one-third of a comparable new aircraft in the upper-end and the super mid-size categories of the market. Buyers go in thinking they’ll purchase a Phenom 300, and in process learn I can get them into a better plane with faster speed, greater range and higher capacity costing 25 percent of the price of that new Phenom 300, and that decision takes them a few seconds.”

The bottom line? A saturated pipeline is spitting out planes at unbelievable prices, says Riegel.

“Those variables make for a buyer’s market the likes of which I’ve never seen.”

AAG www.flyaag.com 67 AICPA www. CGMA.org Outside back cover B2B Sales and Marketing: Benchmarks and Best Practices Report www.chiefexecutive.net/media/b2breport/ 11 CEO2CEO Summit www. www.ceo2ceosummit.com 61 Chief Executive Insurance Services www.chiefexecutiveinsurance.com 42 CohnReznick www.CohnReznick.com 25 Compensation Report 2015 www.chiefexecutive.net/compreport 29 Enterprise Florida www.perfectbusinessclimate .com/craigtechnologies 45 Greater Fort Lauderdale Alliance www. lesstaxing.com 21 Harvard Business School www.exed.hbs.edu/cem 9 Indiana Economic Development www.astatethatworks.com 35 JetSuite www.jetsuite.com Inside back cover Jobs Ohio www.jobs-ohio.com/ohiotech 27 Kilpatrick Townsend & Stockton LLP www.kilpatricktownsend.com 15 Leadership Summit www. chiefexecutiveleadershipsummit.com 19 Michigan Economic Development Corporation www.michiganbusiness.org/CE 3 Microsoft www.microsoftcloud.com Inside Front cover, page 1

jet, then deal with the routing, the travel time and the ground transportation.

SAFETY VS. SPEED When weighing which solution best serves your needs, be sure to factor in flight safety. NetJets’ Gallagher points out that there are a number of questions you should be asking providers before you sign up for their service. “What kind of plane will they be flying? Who’s flying it and what kind of training did they receive? How many hours has it been flown? Who owns and maintains it?” he asks. “Getting answers to these questions will add to your overall peace of mind.”

JetSuite’s Wilcox concurs. “If a provider can’t tell you or won’t answer these questions, you should beware,” he says.

In other words, if you get a deal that’s too good to be true, it probably is. He also advises that business travelers in search of a new provider shouldn’t search for an operator who always gives them what they want. “There are a number of airplanes in the sides of hills in Aspen, Colorado, because of pressure being put on pilots to do something they shouldn’t do,” he says. “I’d rather have you angry at me because I won’t take you somewhere than let you push me into taking you somewhere I shouldn’t have.”

NetJets www.netjets.com 5 Nicholas Air www.nicholasair.com 65 PURE Insurance www. pureinsurance.com 63 Stein IAS www.steinias.com/ceo 59 Talent Summit www.ceotalent2015.com 7 Tennessee Economic Development www.masteredintn.com 13 Textron Aviation www.cessna.com 69 Wharton School of the University of Pennsylvania www.whartonCEOAcademy.com 17

FLIP SIDE

It’s All Greek, All the Time One major point of discord is the global competition for the vaunted title of World’s Stupidest Economy.

LEADERS OF COUNTRIES with preposterous economies are justifiably furious at the Greeks for stealing all their headlines. “We have insane inflation, we have a worthless currency, our political system is completely corrupt,” says a high-ranking economist from Argentina. “Yet we never make the front page of The New York Times and The Wall Street Journal. Why do the Greeks get all the ink?”

Brazilians are similarly irate. “Our economy never works for more than a few years at a time,” fumes a top Rio de Janeiro economist. “We are always at risk of stiffing our creditors, devaluing our currency, laying off half the workforce. Our economy is a million times bigger than the Greeks. But all you ever hear about is Greece, Greece, Greece.”

One major point of discord is the heated global competition for the vaunted title of World’s Stupidest Economy. For many years, Zimbabwe held the $12 million prize—the Golden Ding-Dong—walking off with top honors nine years in a row. But then Greece, Ireland, Spain and Iceland all stepped up to the plate. Zimbabwe has finished no higher than fifth the past six years. Locals are livid.

“It isn’t fair, and it isn’t right,” seethes a political scientist in Harare. “On a dollar-by-dollar basis, no one can touch us for systemic corruption, diabolical incompetence and jaw-dropping fiscal irresponsibility. Yet, it’s all about the Irish, the Portuguese and those damn Greeks now.”

A Nobel-prize-winning economist adds, “The Greeks have the Parthenon. They can always fall back on that. But if you’re living in Venezuela, the only thing you can point to with pride is a 96 percent inflation rate. But nobody

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seems to care about that anymore.”

Many citizens of profoundly ridiculous countries resent the indifference with which their efforts to make their economy even dumber is greeted by the movers-and-shakers who dominate the media. “Do you think it’s an accident that we have no industries, no exports, no future?” demands an apoplectic Italian finance minister. “That we have to vote in a new government every six weeks? We work hard to have an economy that doesn’t work.”

“The very notion that Greece has a stupider economy than ours is deeply offensive,” says a politician based in La Paz. “The Bolivian economy has been idiotic for centuries. It’s been a joke since Pizarro blew through town in the 1500s. The Greeks are the very definition of parvenus, Johnny-Come-Latelies.”

“The only thing this country was ever famous for was being a joke,” says a Sudanese insider based in Khartoum. “We prided ourselves on our inability to get anything done.

We were the 1962 Mets of the financial world, the most ridiculous economy in the history of the world. Then along come the Greeks to steal our thunder. Damn show-offs.”

Seasoned observers note that the Greek seizure of the media spotlight cannot last, that in due course order will be restored. But even they commiserate with brain-dead societies that feel slighted by the current focus on the plight of the Greeks.

“Argentina has forgotten more about structural economic incompetence and corruption than the Greeks have ever known,” says one expert. “Ditto Nigeria. You can understand why the citizens of these countries feel slighted by the media. Since the days of Juan Perón, Argentina has done everything in its power to remain incompetent and corrupt. And all for what?”

Q U E E N A N I LLU ST R AT I O N BY T I M TO M K I N S O N

Joe Queenan

Similarly debt-laden countries wonder: Why is Greece suddenly getting all the glory?

By Joe Queenan