CEOs’ Washington imperative

CEOs’ Washington imperative

Political engagement has never been more critical to companies. More CEOs need to make it a personal priority.

by Nels Olson

September 2011 Politics and policy need to be higher on the agenda of American CEOs. The ramifications of trade, taxation, and regulation are too great to be neglected, or even delegated. As notable cases show, companies are far better off working to influence the process than responding to the result. This calls for more direct effort on the part of CEOs, and for companies to recruit and develop leaders with deep policy experience.

American CEOs fall into two camps: those who relish opportunities to engage with Washington and, at the other extreme, those who engage only when threatened with a subpoena.

Ivan Seidenberg, chairman and recently retired CEO of Verizon, fits the archetype of the corporate leader who sees the long-term benefit of having a presence in the capital. As CEO, he frequently met with regulators, members of Congress, and White House officials (including invitations to speak with the President with other CEOs). President Obama named him to the President’s Export Council in July 2010, and he served three years as chairman of the Business Roundtable, the Washington-based group that advocates for pro-business policies. Among the senior executives working at Verizon are a former congressman, a former general counsel for the U.S. Trade Representative, and, until 2008, a former attorney general of the United States. “I’ve focused on Washington because it’s essential to the long-term health of Verizon, but also because I want to help develop solutions to the nation’s pressing problems,” says Seidenberg.

Engaging Washington is critical for a CEO, given the ramifications of regulation, taxation, global trade, and more. While this is well understood by top executives such as Seidenberg, Jim McNerney of Boeing, David Cote of Honeywell, Glenn Tilton formerly of United, and Bill Green of Accenture, there is a clear need for more Fortune 500 CEOs to similarly ratchet up their efforts to address what Seidenberg has characterized as “a growing disconnect between Washington and the business community.”

There is some evidence that companies recognize the likelihood of public policy impacting their operations, based on the findings of a January 2011 McKinsey global survey of business executives. Among survey respondents from companies in North America, 71 percent said they expect increased involvement from both government and regulators—the highest percentage of any region in the world. Another indicator is that membership in the Business Roundtable, which represents chief executive officers of leading U.S. companies, increased from 143 to over 200 during the past 12 months.

As a Washington-based lobbyist has succinctly explained, “The policy process is an extension of the market battlefield.”

Why Washington engagement matters The federal government’s dramatic interventions in the health care, financial, and automotive industries in recent years renewed attention on why business—and CEOs in particular—must be well versed in the ways of Washington. Company leaders in each of these sectors were thrust into the spotlight, which meant testifying before Congress, negotiating with federal officials, and appearing in the media. Their successes and failures hinged on their understanding of how to navigate Washington and communicate directly with policymakers.

Engagement is also critical to help shape high-profile policy reforms. For example, as proposals to reform the U.S. health care system were contemplated in 2009-10, the CEO of Pfizer, Jeffrey Kindler, worked closely with the pharmaceutical The need for CEOs to develop more comprehensive industry’s trade association, which relationships in Washington will extend beyond the he chaired. He also made a number of visits to Capitol Hill and the current administration.

White House, which included two meetings with the President. Kindler’s investment of time and energy paid off. “Pharma came out of [health care reform] better than anyone else,” said one Washington-based health policy analyst, echoing a widely held sentiment. “I don’t see how they could have done much better.”

The need for CEOs to develop more comprehensive relationships in Washington, and a more nuanced understanding of the policy process, reaches beyond those industries—and will extend beyond the current administration. The federal government and, to a lesser extent, state government are deeply entwined in sectors throughout the U.S. economy.

Regulation, in particular, can affect companies significantly, and in unexpected ways, given that statutes are regularly being modified in a

2

range of areas, including environmental protection, consumer privacy, and workplace conditions. It is far preferable to try to influence the process than be stuck responding to the result.

“If you’re not engaged, you can wake up one morning and find a big problem on your hands,” says McNerney of Boeing. As the company’s chairman, president, and CEO, he is acutely aware of the need to develop relationships in Washington, given that the company is consistently the second-largest recipient of U.S. government contracts. And a recent dispute between Boeing and the federal government’s National Labor Relations Board has underscored how Washington can impact companies.

Wal-Mart learned the importance of executive engagement with Washington the hard way. In the late 1990s, a key trade agreement involving China contained a provision Wal-Mart opposed, but the company did not have the relationships with government officials—or even lobbyists— to get the provision amended. In the years since, Wal-Mart executives have stepped up their involvement considerably. In January 2011, the company’s head of U.S. operations joined with First Lady Michelle Obama to publicly announce a new campaign focused on healthy foods. “When I see a company like Wal-Mart launch an initiative like this, I feel more hopeful than ever before,” said Ms. Obama.

“ If you’re not engaged, you can wake up one morning and find a big problem on your hands.”

Jim McNerney

Chairman, President and CEO, Boeing

Microsoft is another company that was slow to engage with Washington as it expanded. When the U.S. Justice Department filed an anti-trust suit against the company in 1998, it was largely bereft of valuable, long-term relationships throughout the executive branch and Congress. Since then, Microsoft’s current CEO, Steve Ballmer, has devoted significant energy to federal policy issues, and the company has measurably increased its Washington presence. Ballmer’s years of advocacy, focused on curtailing software piracy, helped the issue become a centerpiece of the U.S. government’s negotiations with Chinese officials as part of the Joint Commission on Commerce and Trade.

Microsoft provided an object lesson for other companies. “The entire tech industry has learned from Microsoft,” said the head of Google’s Washington office in 2007. “Washington and its policy debates are important. We can’t ignore them.” Indeed, Google quickly established its presence in Washington, and, importantly, the company’s leaders have become personally engaged with policymakers.

More recently, Facebook raised its Washington profile, hiring a number of notable Democrats and Republicans. According to The Wall Street Journal, the company has “learned quickly that demands for regulation would pile up, not just from users and advocacy groups, but also from competitors.”

3

For companies across a number of industries, recent policy developments underscore the importance of engagement. The financial sector, for example, is focused on a range of provisions in the landmark Dodd-Frank law that was enacted in July 2010. One such provision vests the federal government with the authority to take control of a bank that is judged to be on the brink of failure. With the precise criteria for a takeover uncertain, some fear political considerations might influence how this authority is exercised. “Companies that are connected to Washington, that curry political favor, will be favored at the expense of companies that do not have their business model revolve around appeasing politicians and making campaign contributions,” according to Ken Griffin, founder of the $15 billion hedge fund Citadel Investment Group.

CEOs also need to weigh the potential personal consequences of failing to develop relationships in Washington—a risk crystallized in a recent ruling by the U.S. Department of Health and Human Services (HHS). In April 2011, the department informed the U.S. pharmaceutical company Forest Laboratories that it would be prohibited from doing business with the federal government as long as it retained its CEO. The threatened prohibition followed from the company’s $313 million settlement of misconduct charges related to drug marketing. While there was no allegation of CEO misconduct, HHS cited the Social Security Act to justify its action. Other federal agencies are vested with similar authority, including the Environmental Protection Agency and the Department of Defense. The specifics of every case will differ, of course. But being forced to choose between its CEO and its federal contracts is a scenario no company wants to face.

Opening the door for advocacy on other important issues There is a growing tendency for CEOs to involve themselves with policy issues that may not be tied directly to their line of business.

Honeywell CEO David Cote serves on the Deficit Commission created by President Obama. Travelers CEO Jay Fishman has been outspoken on the need for the United States to reduce its long-term debt. Pepsi CEO Indra Nooyi has highlighted the value of sustainability, linking the company’s financial success to its social and environmental responsibilities. Starbucks CEO Howard

4

Schultz has been a long-time advocate for expanding access to health care.

“We all have a role as business leaders, to help nurture an environment that is conductive to competitiveness, job creation, and rising standards of living,” says Accenture’s Bill Green, who chairs the Business Roundtable’s Education, Innovation & Workforce initiative.

A CEO’s involvement in “big picture” publicpolicy issues can help to reinforce to

policymakers that the individual has vision beyond that of the next quarter’s earnings statement. And that will give them added credibility when advocating on behalf of their company. Says Verizon’s Seidenberg, “The most effective executives are those who can straddle the line between what their company or industry needs while also looking at issues from the other side and seeing the broader public interest.”

Companies can mitigate this risk through regular communication with federal officials, but such outreach will be most effective if it begins absent any crisis.

How CEOs should engage CEO engagement with Washington can take many forms. The traditional steps of making campaign contributions, joining trade associations, and hiring government relations staff remain important. But they’re no longer sufficient.

Glenn Tilton, who was CEO and chairman of United Airlines and chairman of ATA (and is now chairman of the Midwest Region for JPMorgan Chase), recommends that CEOs cultivate relationships with decision-makers even if there are no policy issues on the horizon.

The most important thing a CEO can do to better understand issues in Washington, DC, is to be personally involved. Nothing I’ve learned suggests that anything can be delegated. You need to be here, personally involved, and must have personal relationships.

They must be sufficiently informal and personal, so you can have candid, transparent conversations. Otherwise, you are relying on many different filters. And by the time information gets to you, it has been diluted.

Reinforcing the importance of CEO involvement is the proliferation of advocacy efforts by those who aren’t CEOs. In 2010, there were nearly 13,000 registered lobbyists in Washington, DC. The large number of lobbyists creates more competition for companies as they seek to deliver their message to policymakers. CEOs can speak with greater authority than other company officials or external lobbyists CEOs can speak with greater authority about the intersection of public policy and their company’s operations. company officials or external lobbyists

than other about the intersection of public policy and their company’s operations.

“You can’t outsource the Washington knowledge to external lobbyists or your in-house government relations people,” says Bill Green, chairman and former CEO of Accenture. “As a CEO, you have to have some level of depth on the issues of the day and the issues that could affect your company in the future. Relying solely on the government relations folks to raise the red flag is not sufficient and does not serve your shareholders well. In today’s world, you have to be part of the ongoing dialogue.”

5

But even with their stature and mastery of issues, CEOs must be prepared for challenges and frustrations, says David Cote, CEO of Honeywell.

There’s generally no one person you can talk to who can make the decision. Because Washington has 536 independent subcontractors [total number of House and Senate members, plus the President], you have to do a lot of talking and a lot of participating to get buy in. That can be frustrating for us who are used to talking to one person and getting a problem solved. But that’s the way it works, and you have to participate.

Indeed, CEOs must find a degree of humility in Washington, and play by the city’s rules. Arrogance can trigger a desire by policymakers to put a CEO in his (or her) place. When Google co-founder Sergey Brin came to Washington to lobby members of Congress in June 2006, The Washington Post noted that he wore “blue jeans, silver mesh sneakers and a black T-shirt.” And even with his stature, Brin was unable to secure all of his hoped-for meetings, having requested them only days earlier.

Public-policy issues change frequently, and this change is mirrored by rapid turnover among key policy officials—in Congress and across the executive branch. Companies, in fact, have some advantage here if they can stay atop the issues, and transfer knowledge and relationships Given the prominent role government plays in so many effectively. McNerney of U.S. industries, there is a need for more CEOs who Boeing recommends that work possess a Washington pedigree. on public-policy issues become one of the experiences expected of executives as they rise through ranks toward the CEO’s office.

“It is more important than ever to have experience with Washington built into the background of people who run companies,” says McNerney, who became chairman of the Business Roundtable in June.

Value of Washington experience among CEOs and directors Another way to ensure a company does not take its eye off federal issues is to hire CEOs and nominate directors who have high-level experience working in Washington and/or working with policymakers.

Given the prominent role government plays in so many U.S. industries, there is a need for more CEOs who possess a Washington pedigree. Research

6

conducted for Korn/Ferry International reveals that just 89 of the Fortune 1000 CEOs possess government experience of any kind. In many cases, the experience consists of service on a commission or an advisory board. While this service can provide valuable experience, it is not equivalent to full-time employment in an important policy position—a role that just a handful of the CEOs are known to have held.

Those few who have it, however, recognize and appreciate the distinctive ways in which public policy is shaped as it moves through the executive and legislative branches. For executives who have not worked in or around Washington, policy and politics can be mysterious, particularly when compared to the more concrete metrics used in the private sector. Says McNerney, Some CEOs will get frustrated because Washington plays by different rules, and can seem like a totally different world than what they’re accustomed to. But they have to accept that, and play within Washington’s rules—not rail against them.

Board members with high-level government experience can also help companies navigate Washington by providing guidance on how to handle a range of public-policy concerns. For instance, when Judd Gregg was nominated to the board of Honeywell in March 2011, Cote observed that, “As a former governor, and senator, he knows how to lead a complex agenda across a range of constituencies, manage a budget, and hold his team accountable for delivering real results. . . . The company will benefit from his first-hand knowledge of foreign affairs, commitment to math and science education, and public experience, at both the state and national levels.”

Conclusion Washington engagement is undeniably a form of risk management – developing the relationships with officials that can help the CEO to resolve differences (policy or otherwise) before they strike at the heart of the company’s brand or balance sheet. But engagement should not be viewed entirely as a defense mechanism. Being positioned to shape policies as they develop, and to seize opportunities emanating from policy changes, can also be a catalyst for corporate growth. And a healthy, vibrant relationship between Fortune 500 CEOs and Washington, resting on communication and cooperation, will ultimately translate to a stronger, more dynamic economy that can deliver higher levels of job creation and greater prosperity for the American people.

7

Nels Olson is a Vice Chairman and Co-Leader of Korn/Ferry International’s Board & CEO Services Practice, based in the Firm’s Washington, D.C., and New York offices.

About The Korn/Ferry Institute The Korn/Ferry Institute generates forward-thinking research and viewpoints that illuminate how talent advances business strategy. Since its founding in 2008, the institute has published scores of articles, studies and books that explore global best practices in organizational leadership and human capital development.

About Korn/Ferry International Korn/Ferry International, with a presence throughout the Americas, Asia Pacific, Europe, the Middle East and Africa, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to attract, deploy, develop, and reward their talent.

Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute com for thought leadership, intellectual property and research.

8

© 2011 The Korn/Ferry Institute