Chief Executive Magazine

How simple giving is evolving into good business

REIMAGINING CORPORATE CITIZENSHIP

Securing Your Data

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

Making Mergers WorkWhat CEOs can learn from deal

guru Irwin Simon, p. 36

Private CEO Comp

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

Private Aviation GuideHow to navigate the expanding

world of private jet options, p. 64

SEPTEMBER/OCTOBER 2015

September/October 2015 No. 278

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 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

COVER ILLUSTRATION BY THE HEADS OF STATE02 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

46

51

36

30

CONTENTS

S P E C I A L E V E N T C O V E R A G E

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.

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.

8 Editor’s Note

10 CEO Watch • 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

22 Chief Concern Fifty Shades of Gray: The Real World of the CEO

By Thomas J. Saporito

24 Mid-Market Report Growth Softens for the

Middle Market

26 Making Technology Work

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

and boards. By Tom Pettibone

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. By Jeff Sonnenfeld

CONTENTS

04 / CHIEFEXECUTIVE.NET / SEPTEMBER/OCTOBER 2015

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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43 Comp Report CEO Pay in Private Companies

62 CEO Passions Collecting Earthly Treasures

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

64 Executive Life Private Aviation Report 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

72 Flip Side It’s All Greek, All the Time

Why is Greece suddenly getting all the glory? By Joe Queenan

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Schnitzer Steel Industries

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EDITOR’S NOTE

08 / CHIEFEXECUTIVE.NET / SEPTEMBER / OCTOBER 2015

WILL ROBOTS AND AUTOMATION DIS-PLACE 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 re-spectively—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 competi-tive standpoint factories will still be needed around the world. Furthermore, manu-facturing jobs are unlikely to continue to account for more than 12 percent of overall employment. Agriculture, which repre-sented 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 rou-tine, middle-skilled jobs that are being eliminated the fastest,” reports Erik Brynjolfsson, professor of information technology at MIT Sloan School of Man-agement. “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 de-velopments indicate robots—or smart

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 tour-nament, 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 destroy-ing jobs. But right now the pace is accel-erating. 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 Amer-ica’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 Goo-gle, 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 simultaneous-ly “relationship workers” who create the kind of social value that people will always desire. Let’s hope he’s right.

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

The Next Big Challenge for CEOAddressing automation’s impact on employment may fall to CEOs. By J.P. Donlon

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ION

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J.P. Donlon


IN THE PHARMA INDUSTRY, a company’s future prospects are every-thing. 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 develop-ment 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 some-thing of a microcosm for the broader corporate world, where intensifying global competition and commoditi-zation 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-

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, Pennsylva-nia-based company, which makes plasma-derived and recombinant ther-apies 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

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

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

perish at the hands of insurers who refused to cover their use. “In Germany, there was a case where a new pharmaceutical that cost $200 million to bring to market was approved, but the governing body said ‘there’s no benefit over the current therapy so we’re not going to re-imburse for it,’” explains Perreault. “To spend all that money and not have thought about how you’ll get it paid for is a huge mistake.”

To guard against that outcome, CSL focuses not only on developing new treatments but on gathering data to show a benefit over what’s current-ly available. “We have to get better at making sure we deliver the data to the regulators that justifies the cost of the medicines,” says Perreault. “All

$275 million, a move that catapulted it into the big leagues in that busi-ness. Should the deal go through—it remains subject to regulatory approv-als in a number of jurisdictions—CSL Behring will become the second larg-est-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.”

WHO

Paul Perreault, CEO of CSL Behring

WHAT

$5.5 billion specialty biotherapeutics company

WHERE

King of Prussia, PA

RECENTLY READ

I Moved Your Cheese, by Deepak Malhotra; The

Power of Noticing, by Max Basemann, Mao’s Last

Dancer, by Li Cunxin

BUSINESS PHILOSOPHY

“Work every day like someone’s life depends

upon it—because it usually does.”

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 antici-pation 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.

JAN ’156.71%

FEB ’15 6.45%

MAR ’15 6.48%

APR ’15 6.52%

JUN ’15 6.25%

MAY ’15 6.41%

JUL ’15 6.33%

AUG ’15 6.14%

6.00

6.25

6.50

6.75

THE TAKEAWAY

Confidence down 8.5% since

January

that work has to be done up front.”

At the same time, the company is continuing to develop new ther-apies. One promising area is a reconstituted high-density lipopro-tein (RHDL)—aka good cholesterol—that will be used for patients who develop acute cor-onary syndrome after experiencing a heart at-tack. “From Hour Zero to Day 60 after a heart

attack is when plaque is most unstable and you’re at the most risk of a second attack,” explains Perreault. “These molecules actually attract plaque from an affected artery and metabolize it through the body.”

CSL is also working to finalize its October 2014 acquisition of Novartis’ global influenza vaccine business for

Volatile Market Conditions Continue to Erode CEO Confidence


CEO WATCH

CEO CASE STUDY / CITIZENS FINANCIAL’S BRUCE VAN SAUN

Banking on Steering a SpinoffApproaching its IPO anniversary, Citizens Financial is forging an independent future. By Jennifer Pellet

The ChallengeYou’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 ContextWhen Bruce Van Saun stepped in as its CEO, Providence, Rhode Island-based Citizens Financial was still part of the Royal Bank of Scot-land, although its days as such were numbered. Under pressure from reg-ulators to make good on a government bailout loan, RBS needed to unload a hefty portion of its majority stake in Citizens Financial. Van Saun was charged with the dubious task of tak-ing an underperforming company public.

The first step of that task was accomplished on September 24, 2014 in what turned out to be the biggest financial services IPO in U.S. history, a $3.5 billion transaction for Citizens. A second stock sale in March of 2015—valued at $3.7 billion—further reduced RBS’s stake to less than 50 percent of the bank. But while the sales firmly established Citizens’ independence, Van Saun’s work had just begun.

“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 alloca-tion 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 ResolutionEarly on, the company homed in on boosting returns in sectors like mort-gages, business banking and student lending, as well as fee-based business-es like wealth management services. During Van Saun’s tenure, Citizens steadily built out its commercial lend-ing business, a success he attributes to a relationship acquisition approach.

“To me the most intelligent way to grow market share is to bring in people with pre-existing relationships,” he says. “We have a big capital position on the balance sheet, which gives us loan capacity. So if we bring in good people, hopefully their [clients] think, ‘I like what that bank is doing and I want to keep a good relationship with Joe or Sally.’ That’s been a

successful formula for us.”The company also focused on

developing an expertise in industries like franchising, energy and technol-ogy, where it can add value. “We try

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 verti-cals, Citizens has been particularly suc-cessful 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 HurdleIn 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 trans-actional models] want to make sure

WHO

Bruce Van Saun, Chairman and CEO

WHAT

Citizens Financial Group

WHERE

Providence, Rhode Island

SIZE

$137.3 billion in assets

BIGGEST INFLUENCE

“My parents. They taught me a good work ethic.”

ADVERTISEMENT

FOUR YEARS AGO THIS MONTH, the United States embarked upon broad patent reform with the America Invents Act, seeking to curb skyrocketing patent litigation, costs and perceived abuses—particularly by non-practicing entity “trolls.”

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 in 2014. These challenges are swift, laser-focused and less-costly—they are now standard-operating-procedure for accused infringers striking back against patentees.

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 “first-to-file” a patent application, rather than “first-to-invent”—thus the new “race to the patent office.” In sum, those attempting to gain and enforce patents in America are facing rougher seas.

Still, it is a huge ocean out there, with patent stakes higher than ever: intellectual property-intensive 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

are pursued than ever before—330,000 were granted in 2014 alone, an all-time high.

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

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.

2. Modernize patent enforcement— rigorously develop claims to withstand USPTO validity challenges. Particularly avoid claims to computer implementation of long-standing abstract ideas. 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 bullet-proof 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.

3. Communicate your patent course— both internally, to foster a culture of capturing innovation, and externally, to attract investment. 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.

Patent Sea ChangesNew compass points four years into the America Invents Act

By Josh Pond

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


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 EndgameCitizens’ first-quarter earnings were $209 million, up 27 percent from a year ago, and beat analyst expecta-tions. 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 LessonsFor 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 Citi-zens, 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 co-herent 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 end-all, which is what they became at RBS and Citizens before.”

CEO POV / RED HAT’S JIM WHITEHURST

On Becoming an Open Organization LeaderRed Hat CEO Jim Whitehurst believes he’s latched onto the best way of leading an organi-zation 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 opera-tions, sales and customer service, network and revenue management and corporate strategy. Before that he was a partner at The Boston Consulting Group and held vari-ous 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

Hat, Whitehurst was being wooed primarily by big industrial com-panies 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


QCEO WATCH

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 custom-ers and investors and, during that time, the organization made a series of decisions that at Delta would have been made by the executive commit-tee. 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 top-down 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 “holacra-cy.” Chaos degenerated into anarchy and then civil war to the point where people were resign-ing in droves. How do you con-trast 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

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 begin-ning, Whitehurst, the product of top-down, traditional, hierarchical organizations, soon embraced what he terms an “open organization” which he defines as one that “engag-es participative communities both inside and out—responds to oppor-tunities 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 prob-lems. 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 inno-vation evangelist Henry Chesbrough. Companies such as Whole Foods, Pix-ar, Zappos and Starbucks are said to have implemented open organization precepts. But how does it really work and can it be scaled for most organiza-tions? 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?

controlled the information flow.What I suspect happened at Zap-

pos was trying to have a leaderless organization without having any man-agers 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 cat-alytic 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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a technology company. I didn’t go out and say we’re running a project to figure out how we get more cus-tomer-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 organ-ic life forms all around it.

You write that employee engage-ment 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 “noth-ing.” Surprisingly I got a round of ap-plause. I said, “Look, my goal is to get the planes out on time, build a stable company, give you a great work envi-ronment so you serve the customer

well. I’m hoping if we do all those things you’ll be happier, but your morale ain’t my goal. My goal is to build a great company and hopefully that will make you happy.”

Engagement goes off track when you try to make employees happy versus saying here’s the strategy and how you fit into it. By imparting context and information, you end up doing different things and communicating different things than if it’s a morale exercise, which comes off as disingenuous. It generally becomes an HR-led thing versus a CEO-led thing.

What is it that you do that your nearest competitor cannot do or do as well?Our advantage looks a lot like Toy-ota. What I mean by that is Toyota’s source of advantage is its production system called Kaizen. They have been doing it for years and said to Ford, GM, and others, come look at how we do it. Yet, it’s hard for others to fully duplicate it because it’s a capabili-ties-based advantage. Our advantage is centered on being able to work in open source communities to deliver great technology. Sounds easy but one reason it’s hard to replicate, is that engineers like control and open

source immediately flips the model around because you don’t have control. You have to trust that the com-munities are going to do the right things.

Some traditional software companies think open-source is interesting and all that’s required is open-

ing up their code. But if you open up your code, but don’t make it inclusive, people don’t join or you make chang-es that go upstream. As a result, your engineers get frustrated and start doing their own thing.

There are 100 reasons why people aren’t successful doing it. Many tradi-tional software companies start with a brilliant CTO making an educated guess on where the world is going. Our model is completely different. We look outside and see what the most technically sophisticated people are doing. They’re probably doing it in open source because the Googles and Amazons are all doing that. We glom onto those things. We bring a consumable version of what Google or Twitter is doing to the enterprise. We don’t assume that we know where the future of technology is going. We make sure that we’re involved in the right communities to bring the right things.

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 bil-lions 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.

Presidential contender BERNIE SANDERS deserves credit for his transparency as a socialist, but he frequently points to Sweden specifically and Scandinavia generally as utopian ideals. Yet, as Kelly McDonald argues in

The Federalist, in some ways Sweden is now less progress- ive 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.

THORNS ROSES

THORNS AND ROSES

Tarred by a Brush With Toxicity Sanders’ Scandinavian Sensibilities

WHO

Jim Whitehurst, CEO Red Hat Software

WHAT

$2 billion provider of open-source solutions

WHERE

Raleigh, NC

BUSINESS PRACTICE

“I answer every email I get.”

RECENT READS

Blindspot: Hidden Biases of Good People, by Mahzarin R. Banaji and Anthony G.

Greenwald; The Innovators, by Walter Isaacson

CEO WATCH


CHIEF CONCERN

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

heavily involved in recruiting her. In this case, eventually the newer exec-utive 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-compa-ny CEO resides: in the lonely, often murky “gray zone.” As Doug Conant, chairman of Avon and former CEO of Campbell Soup says, “The black-and-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-clear-cut 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 ana-lyzed the facts and thought the answer was clear, he failed to consider the un-derlying dynamics in the organization and on the board.

As Dominic Pileggi, former chair-man and CEO of Thomas & Betts, puts it, “When reacting and making decisions at the top, you have to oper-ate 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 concern-ing 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.

IT WOULD BE NICE for CEOs if deci-sions 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 nego-tiations, 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 sec-ond was newer to the firm and favored by board members who had been most

Fifty Shades of Gray: The Real World of the CEO

By Thomas J. Saporito

10%

6%

8%

4%

4% 40%

5%

3% 30%

2% 20%2%

1% 10%

-2%

0%

0% 0%

20% 30% 40% 50%

50%2Q 2014


MID-MARKET REPORT

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.

Growth Softens for the Middle Market Workforce issues and concern about economic growth and the

business climate are dampening gains.

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.

A dip in confidence about economic conditions, business climate concerns and the potential impact of an interest rate hike are hampering hiring.

Staff/Employees

Business Growth

Finances

Costs

Government Regulations

Government Regulations

Competition

Costs

Economy

Business Growth

Finances

2Q 2014 2Q 2015

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

Mid-Market Company Hiring Slows

MIDDLE-MARKET EMPLOYMENT GROWTH

INTERNAL CHALLENGES

EXTERNAL CHALLENGES

RESPONDENTS WHO PLANNED TO ADD JOBS

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

MIDDLE MARKET

S&P500

47%

22%

15%

17%

5%

24%

19%

14%

14%

13%

11%

3.9%47%

2.7%38%

LAST 12 MONTHS(MEAN)

NEXT 12 MONTHS (EXPECTED)

2Q 2015

THE AVERAGE PROJECTED INCREASE IN PROFITABILITY

AMONG MID-MARKET FIRMS HAS DROPPED FROM 3.1% TO 2.4%

% OF RESPONDENTS CITING THIS AS A TOP CHALLENGE

REVENUE GROWTH


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, total-ing 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 compa-nies 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, en-able contracts can be “financially engi-neered” to pull savings ahead, creating a windfall for current management.

Outsourcing can also enable a com-pany to quickly acquire new technical capability and capacity to expand, move into new markets or overcome inter-nal 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 PITFALLSAn 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 exam-ple, 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 un-realized because contracts are badly written, poorly defining current and future situations. Frequently, busi-ness changes are not anticipated and vendors charge extra for each change. In addition, the skills necessary for maintaining and enhancing the sys-tems are often underestimated. During a recent network outage, the CEO of a

MAKING TECHNOLOGY WORK

high-volume financial payment proces-sor 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 min-imum, resulting in poor service.

Outsourcing and offshoring can also provoke social unrest within the company. Organization struc-ture and jobs change and people get

laid off. While this may be inten-tional to jog the organization into a

new operating paradigm, it invariably results in mistrust, passive-aggres-sive 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 RESPONSIBILITYFor 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 ex-perts 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.

The Rewards of Right-SourcingWhy IT sourcing matters to CEOs and boards. by Tom Pettibone

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


SONNENFELD

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

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 reas-sure all of the continuity of command. Such consolation is just as essential in business, where companies are often caught unpre-pared 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 Gold-berg, 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-year-old 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 Mon-key has demonstrated how businesses can rally in the wake of such tragedy by:Mourning without defining the enter-prise 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 cred-ible 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.

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

The King is Dead,Long Live the KingAlways tricky, leadership transitions get even tougher when a CEO departs the world along with the job. By Jeffrey Sonnenfeld

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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 backby C.J. Prince

ILLUSTRATION BY THE HEADS OF STATE

SEPTEMBER/OCTOBER 2015 / CHIEFEXECUTIVE.NET / 31

Lessons in Good Giving

Key Takeaways

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

Get Involved Employees will take it seriously if they

see the CEO participating

Ask Employees Invite employees to submit suggestions for

worthy causes and host a companywide vote to choose the charity you will support

1 2

43

GIVING ON THE RISEWhile 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 philan-thropy. The report attributed some of that upswing to faster growth in cor-porate 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-year-old, $1.3 billion provider of risk and asset management software and services to the insurance industry. Instead, Solera funds six philanthrop-ic expeditions per year that allow em-ployees 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 commu-nity, 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

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.


Brewster, CEO of CECP, a coalition of 150 Fortune 500 CEOs who believe that investing in societal engage-ment brings a critical return. “We’re approaching an emerging sea change as leading companies move from occasional check-writing to increased community engagement, viewing so-cietal 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 di-rector and head of U.S. Corporate Responsibility for global PR firm Burson-Marsteller, says the outper-formance of socially responsible com-panies 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, includ-ing 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 GIVEJohn Ferdinandi makes it a practice to get engaged in the local communities in which his company, Milano Restau-rants, operates. With 43 restaurants and 18 franchises located primarily in California, Milano habitually approaches local communities to find out what they most need. That pres-ence 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 partici-pate. 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 in-creasingly do make purchasing deci-sions based on a company’s corporate citizenship. According to Nielsen’s 2014 corporate social responsibility survey, 55 percent of global respon-dents said they are willing to pay

extra for products and services from companies that are committed to pos-itive 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. Represen-tatives 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 tech-nology 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 princi-ple 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 cre-ate 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,”

When you do this stuff, you end up reaping these ancillary benefits YOU DIDN’T ANTICIPATE WHEN YOU STARTED OUT.”

- David Sanford, WinterWyman



2014 CORPORATE GIVING, UP 12% FROM LAST YEAR

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

55 PERCENT

SIXTY-ONE

$17.8 BILLIONsays 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 non-profit 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 efficient-ly. 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 hun-dreds of thousands of dollars each year. Other employees participate by raising money or covering for employ-ees who travel to Central America to donate time and service.

A RECRUITING ADVANTAGEMiller notes that people genuinely like to work for “good” companies. “They like to know that the people who em-ploy 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 find-ing 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 com-pany’s commitment to the community when making a job decision.

“One of the things I’ve seen in the

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 Schum-acher, president and CEO of Goddard Systems, which operates the Goddard School franchise. Schumacher insti-tuted a program to offer the compa-ny’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 evo-lution 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 WinterWy-man, a global recruiting firm, agrees. When he formalized the compa-ny’s giving strategy 10 years ago by creating a new role for community development and employee engage-ment and establishing a new commit-tee 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 San-ford, 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 an-cillary benefits you didn’t anticipate when you started out. As we were working the marketplace and trying to attract people, 20- and 30-some-things, 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

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


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.

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 Mus-sallem 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 celebrat-ed 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

underserved people. The fund will support 25-plus nonprofit partner or-ganizations 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 Mussal-lem 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.”

Passing out United Way checks is faceless, nameless and, frankly, MEANINGLESS FOR CREATING A CULTURE OF HELPING PEOPLE.”—Tony Aquila, Solera

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

Do You Have a Great Corporate Citizenship Effort?


Whether your efforts are local, national or global, visitwww.chiefexecutive.net/corporatecitizenship

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

MERGERS & ACQUISITIONS

“Simon says: Don’t push

round pegs into square holes.”

A

TOGETHER

PIECING

FOODS

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

NATURAL

EMPIRE

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-for-you products, including wraps, pizza crusts, breads and bagels. Simon was happy to enter the fast-growing market for whole-grain, organic and gluten-free baked products without having to develop a product line from scratch.



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 nat-ural 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 distri-bution 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 expand-ing 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.


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 dis-closed 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 man-ufacturing, 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 late-60s hippy heyday before selling to Si-mon. “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.”

MARCH

1993MAY

1993NOV

1993APRIL

1994

PRICE & TERMS: PRICE & TERMS: PRICE & TERMS: PRICE & TERMS:

CALIFORNIA SLIM

KINERET (KOSHER FOODS)

PUBLIC STOCK OFFERING

HAIN PURE FOOD CO.

$50,000 + 7 year royalty agreement

$2 million Raised $4 million

$22 million

TIMELINE OF ACQUISITIONS


NOV

1995OCT

1997JULY

1998OCT

1999


ESTEE CORP.

WESTBRAE NATURAL, INC.

SHANDBY GROUP 4 PORTFOLIO COMPANIES

EARTH’S BESTBABY FOOD

Undisclosed $23.5 million $60 million + $20 million debt

Part of $100 million deal in which H.J. Heinz Co. acquired

19.5 percent stake of Hain.

SIMON’S FIRST DEAL of the 21st century was a $390 stock-swap with Celestial Seasonings, a Boulder, Colora-do 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 addi-tional 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 com-pany’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 main-stream retail outlets accounted for 80 percent of sales. This channel strength appealed greatly to Simon.

Siegel struck what analysts con-sidered 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

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 blend-ing 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 com-pany, Kineret, then bought a couple of distressed California health food brands bearing the name Hain Pure Foods,

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: opera-tion consolidation.

Siegel recounts: “I dug in my heals and so did Irwin. We fought over that. I saw Irwin’s point: You consolidate ship-ping 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 his-tory—the Celestial founder still lives in Boulder, remains active in the industry and still holds Hain Celestial stock—Sie-gel 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.”

Welcome To Irwin Simon’s Tea Party



Studies have suggested that between 50 percent and 70 per-cent 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. —Irwin Simon, Chairman & CEO, Hain Celestial

■ Scout for roll-ups among companies whose founders are looking to exit. — David Wessels, associate professor of finance, Wharton School of Business

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

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

■ 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.

■ Communicate early, clearly and consistently with stakeholders, including customers and staff. —McKinsey & Co.

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

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

■ Execute every feasible consolidation opportunity. —Irwin Simon

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

■ 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-

MAY

2000JUNE

2006JULY

2010OCT

2011


CELESTIAL SEASONINGS, INC.

LINDA MCCARTNEY® BRAND

3 GREEK GODS LLC

DANIELSGROUP

$390 million Undisclosed Undisclosed $230 million in cash

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

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?”

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 con-sistently profitable whole. Always alert to potential acquisitions, Simon was hot on a Leeds company, the Daniels Group, a heavily leveraged food com-pany coming off a $280 million sales

Art of the Roll-Up


year. Simon liked Daniels’ manage-ment, 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 brava-do, the U.S. dealmaker boasted to an audience of analysts that his latest ac-quisition would become a UK natural foods “powerhouse.”

Daniels had bounced around under several Asian owners taking on grow-ing 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 prod-ucts 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 McCart-ney’s chilled meat-free meals. He added a barrage of U.S. brands acquired piece-meal over the past 15 years including Celestial Seasonings teas, Earth’s Best organic baby foods, Rice Dream dairy-free drinks and Terra Chips vegetable

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, procure-ment, manufacturing, warehousing and distribution processes. Next they culled several underperformers, discontinu-ing 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 acqui-sition 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

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 pow-erhouse 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 perfor-mance remains impressive, marked by record sales, efficient expense man-agement 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 momen-tum and appears favorably positioned to capitalize on the growing global demand for organic products.”

MAY

2012OCT

2012MAY

2013APRIL

2014


CULLY & SCULLY

PREMIER FOODS PLC

ELLA’S KITCHEN GROUP, LTD

RUDI’S ORGANIC BAKERY

$11.3 million (estimated) $317.6 millionin cash and stock

Undisclosed $61.3 million

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.”

COMP REPORT

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.)

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

Size Does Matter

Public vs. Private Company Pay Gaps

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.

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:

PUBLIC VS. PRIVATE COMPANY MEDIAN CEO PAY BY SIZE OF COMPANY

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)

$0.1M-$249.9M

$500M-$999.9M

$1.0B-$9.9B

$10B+

$1.4M $1.6M$1.2M$1.0M$800K$600K$400K$200K

UNDER $2M

$2M-$4.9M

$5M-$9.9M

$10M-$24.9M

$25M-$47.9M

$50M-$99.9M

$100M-$249.9M

$250M-$499.9M

$500M-$999.9M

$1B-$10B

COMPANY SIZE:

$250M-$499.9M

PRIVATE COMPANIES PUBLIC COMPANIES

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

Salary Bonus

Equity Benefits/Perks


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.

MEDIAN PRIVATE COMPANY CEO COMPENSATION FOR THREE HIGHEST AND THREE LOWEST PAID INDUSTRIES (INDEXED)

MEDIAN PAY COMPOSITION OVERALL AND FOR TOP AND BOTTOM QUARTILE CEOS

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

Sole Proprietorship

Partnership

Family

Employee

Venture Capital

Private Equity

Other

3 Highest Industry Medians 3 Lowest Industry Medians

Advertising/ Marketing/

Sales

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.

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

Pay Composition Ranged WidelyThe 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 CEO TOTAL COMPENSATION IN PRIVATE COMPANIES BY OWNERSHIP TYPE (INDEXED)

140%120%100%80%60%40%20%0%

Energy/ Utility/Oil/Gas

Real Estate/ Property

Management

Retail/ Wholesale/ Distribution

Healthcare/ Pharmaceutical

Finance/ Insurance

Salary Bonus Benefits Equity Perks

25th Percentile Median 75th

Percentile


OWNERSHIP:

200.0%

150.0%

100.0%

50.0%

0.0%

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 Ala-bama, 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 Mississip-pi. Toyota, Ford and GM are major em-ployers 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 ab-solutely controls the U.S. auto industry.”

Cars are not the Southeast’s sole suc-cess story. Attracted by lower tax rates


ECONOMIC DEVELOPMENT

and amicable regulatory environments, clusters of financial services, transpor-tation and logistics, call center opera-tions 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 incen-tive 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 Develop-ment 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 cli-ent being ignored by the local economic development community,” she notes. The attention clients receive “proves southern hospitality is no myth.”

FLORIDA | #2 | A SUNNY OUTLOOKFlorida’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. Hous-ing 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 pro-fessional & 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 Sun-shine State’s population growth rate is also slowing, although it still slipped past New York earlier this year to be-come 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 gover-nor has signed 104 of them,” he adds.

Gov. Scott’s aggressive use of in-centives, his media-ready promotional zeal, and the state’s celebrated lack of individual income taxes helped jump-start 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.

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

The SoutheastREGIONAL REPORT


Florida

N. Carolina

Tennessee

Georgia

Louisiana

S. Carolina

Virginia

Alabama

Kentucky

W. Virginia

Mississippi

2

3

4

5

7

10

14

24

28

38

39

4

9

19

10

24

28

11

26

29

39

36

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

$38,689

$44,281

$42,115

$43,131

$46,448

$36,124

$51,338

$37,593

$38,938

$36,768

$31,551

5.5 (flat)

5 (flat)

6.5 (flat)

6 (flat)

8

5 (flat)

6 (flat)

6.5 (flat)

6

6.5 (flat)

5

RankBest/Worst

States 20151

GDP Rank 20132

Right toWork4

Education Quality (K-12)/

Post-Secondary5

GDP PerCapita ($)2

Top Corporate

Tax Rate (%)3

Quality ofState

Service5HQ

Incentives5Jobs

Incentives5Green

Incentives5

B+

C

B+

B+

B

B+

B+

B+

B

B+

B+

B+

C

B+

B+

B+

A-

B+

B-

B+

C

C+

B+

C

B-

B

B+

B+

B+

B+

B+

B

B+

D

B-

C+

B-

C

C

B

C

C

C

C+

B / B

B- / B

B- / B

B- / B+

C / B-

C+ / B

A- / A-

C / B

C / B

C+ / C+

C / B

How The States Stack Up

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

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 se-lectors 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 competi-tive,” says Larry Gigerich, managing director of Ginovus, a site selection firm in Indianapolis. “As it stands now, North Carolina is not competi-tive 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 communi-ty 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 incen-tives 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 gro-cer, which announced a $125 million regional headquarters and distribu-tion 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 mil-lion per year on incentive programs.

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

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 Bridge-stone 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 Gino-vus’s Gigerich. He also gives thumbs-up to their recent efforts to streamline and align state agencies to provide better service.

The Tax Foundation ranks Tennes-see’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 IMPROVEMENTVirginia 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 com-monwealth has tweaked its incentive programs over the past couple of years to include more funding for job training and programs that reimburse com-panies for internal training programs, as well as increased job creation tax credits, says Ginovus’s Gigerich. The moves will further strengthen a work-


ECONOMIC DEVELOPMENT

WHO Naren Gursahaney, CEO of ADTSITE 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.”

WHY WE’RE HERE / FLORIDA

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 AHEADVolvo 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 Univer-sity 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 em-ployment 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 DROPPINGGeorgia’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-ori-ented economy has been hammered by market slowdowns in Asia, Europe and Latin America, but benefits from a re-surgent construction market, including two new sports stadiums. Technology, entertainment (particularly film produc-tion) and biotech are growing, and man-ufacturing shows signs of rebounding. Georgia’s aggressive incentive programs helped bring Mercedes’ North American headquarters to Sandy Springs, lever-aging an incentive package estimated at up to $50 million for about 800 jobs, but a few months later lost Volvo to South Carolina.

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

The Tax Foundation ranks Geor-gia’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 DEPENDENCYCheaper energy costs hammer fuel-de-pendent 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 opportuni-ties in Mexican waters may benefit Lou-isiana energy interests. The two-parish Lake Charles Metropolitan Statistical Area has logged over $81.7 billion in re-cent 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 Louisi-ana Economic Outlook: 2015 and 2016.

Getting a foothold in the Pelican State can be daunting. While Gov. (and presi-dential 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 func-tioned, if you knew somebody things happened.”

The Tax Foundation ranks Loui-siana’s tax burden 5th lowest and its


WHO Steven B. Tanger, President and CEO, Tanger Factory OutletsSITE 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.”

WHY WE’RE HERE / NORTH CAROLINA

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

ALABAMA | #21 | EDGING INTO AUTOMOTIVEOne 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 automo-tive 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 high-tech growth companies have borne fruit. Alabama’s successful wooing of Airbus brought its aerospace sector in-ternational 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 Cul-verhouse College Center for Business forecasts GDP growth of 2.3 percent this year and 2.5 percent next, follow-ing two years of 2 percent growth. The Tax Foundation ranks Alabama’s tax burden 10th lowest and ranks its busi-ness tax climate 28th. Alabama spends over $277 million per year on incentive programs.

KENTUCKY | #25 | BLUEGRASSBLUES 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. Manufac-turing 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 atten-tion; 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 Christo-pher Bollinger, director of the Center for Business and Economic Research at Uni-versity 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 PERCEPTIONMississippi’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

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 ex-cellent 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 Missis-sippi’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 MININGThe 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.

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

ONCE A YEAR, a selection committee com-prised of business leaders meets to tackle a diffi-cult feat—selecting a CEO whose vision, busi-ness 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 adviso-ry 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 Dis-ney 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 com-pany’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 devel-opment,” 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 compa-nywide 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. Lead-ership 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 Muilen-burg, 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.”

Boeing’s Jim McNerney

Celebrating the 2015 CEO of the Year

CEO OF THE YEAR


CEO OF THE YEAR

1

2 3

4 5 6


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

7 8

9 10 11

12 13

14

sive, are cyber attacks on individu-als. 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 cor-porations,” 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 ex-ecutives sitting in their homes will be the next frontier for infiltrating orga-nizations.” At a time when executives (and their children) are trolling the Internet from smartphones and tab-

UNDERSTANDING AND THWARTING CYBER THREATS

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. Ev-ery 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-

CEO ROUNDTABLE

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


With great connectivity comes great risk—and an imperative to protect critical data and safeguard systems from attack // by Jennifer Pellet

CEO OF THE YEAR

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 vul-nerability, the old models of cyberse-curity 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 strate-gies 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 DestroyMany 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 Tele-communications Security Advisory Board. “One of the big changes we’re

“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

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 ProtectionEmployees are often a company’s weakest link from a cyber-threat per-spective—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 work-place, as well as to bring work home on laptops or transmit it through file-sharing services like Dropbox.

Plus, rules restricting such prac-tices could well stifle the culture of creativity and collaboration a compa-ny hopes to foster. “This notion of con-stant 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 incent-ed 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 appli-cations for nanomedicine technology. “Now we set up VPNs and do employ-ee 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.


■ ROSS BUCHMUELLERCEO, PURE Group of Insurance Companies■ MARSHALL COOPERCEO, Chief Executive Group ■ WAYNE COOPERExecutive Chairman, Chief Executive Group■ CRAIG COYCEO, Command Security ■ ANIL DIWANChairman, NanoViricides

CEO Roundtable Participants

■ TOM FARLEYPresident, New York Stock Exchange■ BRIAN FETHERSTONHAUGHCEO, OgilvyOne Worldwide■ RODERICK JONESCEO, Concentric Advisors■ DAVID LORINGChairman, GTL Solutions for America ■ MIKE MACDONALD CEO, Medifast

■ DR. RANDELL MILLSCEO, BlackLight Power■ THOMAS SIERINGCEO, Two Harbors Investment■ LEONARD TANNENBAUMCEO, Fifth Street Asset Management■ MAGGIE WILDEROTTERExecutive Chairman, Frontier Communications

Safeguard Your Supply ChainAll the companies you share informa-tion 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-

come into your network take out data they shouldn’t,” explained Ross Bu-chmueller, CEO of PURE Insurance. “The earlier you detect incidents the more difficult it will be for [hackers] to accomplish their goal.”

It’s PersonalAs you put protection in place, don’t neglect the homefront. The approach to security at home is similar to that

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-

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 to-day will be different from what they’ll do six months from now. Protection needs to be an ongoing process.”

“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


CEO OF THE YEAR

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

THE PHENOMENON called “Big Data” might seem like some-thing 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 stun-ning 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 manage-ment 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 for-mer 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 re-structure the sprawling P&G mix of

THE DATA-ENABLED CEOCEO ROUNDTABLE

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


CEOs share their experiences unlocking key insights to accelerate business performance // By William J. Holstein

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

“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.”

CEO OF THE YEAR

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 complex-ity. “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 in-teresting, structurally attractive and will give us the kind of return we want? Are we performing at a level where we’re delivering best in in-dustry 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 PortraitLafley also uses tools such as Net Promoter Score, which measures the loyalty of a company’s customers, to try to understand consumer behav-ior over a five-year future horizon. P&G also seeks to create even broad-er 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 busi-ness-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-

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 dif-ferent flows of analytics and dealing with the organizational ripple effects of doing that are clearly challeng-ing. 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 relation-ship the many different units within EY would have with the analytics officer.

For older services that are argu-ably 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

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


■ RON COHENCEO, Acorda Therapeutics■ JON ELLENTHALLCEO, Patent Properties■ MARC KRIGSMANformer CEO, Cross Media Works■ A.G. LAFLEYCEO, Procter & Gamble■ KETAN MEHTACEO, Majesco■ DOUG MELLINGERManaging Director, Clarion Capital Partners■ DANIEL RIORDANCEO, Zurich North America■ SCOTT SHAWCOO, Lincoln Educational Services ■ ROGER SHEDLINPresident and CEO, OrthoNet

CEO Roundtable Participants■ JEFF SONNENFELDSenior Associate Dean, Yale School of Management ■ JEFF SPRECHERCEO, ICE■ ARLEEN THOMASSVP, AICPA

■ MEETA VYASCFO, Nanoviricides■ MARK WEINBERGERCEO, EY■ DAN WEINFURTERCEO, Growth Play

to gradually start getting buy-in from these units as well. But he also recognized that within the account-ing practice, for example, he didn’t want an accountant “who did analyt-ics on the side,” but rather a recog-nized 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 Therapeu-tics uses data mining tools to better serve victims of multiple sclerosis. By tracking movements of patients as they navigate a resource web-site 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 MethodsData is at the very heart of ICE, recounted CEO Jeff Sprecher, whose company runs the New York Stock Exchange and 10 other global ex-changes plus seven clearing houses and is seeking to standardize trading on those platforms. Sprecher re-cently 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 round-table, 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 re-counted. “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.

CEO OF THE YEAR

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


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CEO PASSIONS

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 repli-cated 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

Collecting Earthly TreasuresPresented in

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on CEOs who are notable collectors

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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 me-teorite, a cross-section of a fossilized di-nosaur 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 advo-cate for education.

Goodnight founded his company in 1976, together with other faculty members at North Carolina State Uni-versity. 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.

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


PRIVATE AVIATION REPORT

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

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 gen-erally 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 avia-tion,” he notes. “Planes are packed and airports are swollen with travelers, so people are voting with their feet. Most major commercial aviation carriers

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

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

Even platinum fliers find them-selves 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 Galla-gher, 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 avi-ation can actually be just as economi-cal. “Business travelers should think about where they need to go, and how they want to spend their time. If you

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

NAVIGATING OPTIONS OVERLOADPrivate business aviation represents the opposite end of the user experi-ence spectrum. It delivers a stream-lined, 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

BUSINESS AVIATION:



choose, each with its own set of bene-fits and challenges. As overwhelming as sifting through options like outright jet ownership, fractional ownership, charter services, jet cards or buy-a-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

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CONTACT INFOFRACTIONAL OWNERSHIP

JET CARDPROGRAM

Jet Service Providers

hours a year in a Gulfstream 4, which is a great plane with a flight atten-dant 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 perfor-mance, 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 frac-tional provider, 25 hours with a local block charter arrangement and split the rest between a jet card and a short-range plane with additional short leg waivers,” says Riegel.

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

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

COMPANY



between different business avia-tion 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 compet-itive landscape. Smartphone apps are an increasingly popular approach as companies like JetSmarter look to rep-licate the Uber taxi model in business aviation. However, but many of those apps are front-end screens for quote request engines, warns JetSuite’s Wil-cox. “They’re creating a lot of excite-ment, but most of the time these apps just point back to a broker with a cell phone, which is not that revolution-ary,” 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 cus-tomers to book private flights online the same way that they might book a flight on a commercial airline today.

Upstarts, like Surf Air (www.sur-fair.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 opera-tions for General Avi-ation 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 mea-surement 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

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 mid-2011 to today, he has seen gains, and sales of new and pre-owned aircraft have continued to march higher. “More companies and en-trepreneurs are flying in North America than ever before, and we’re also seeing more international missions, as well.”

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

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

CALLING ON COPTERSBooking 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 en-abling users to a new view of the same

network of existing planes. “With planes, there’s quite a bit more in-volved than going out to find a car and have someone pick you up,” explains Dan Hubbard, senior vice president of communications for the National Busi-ness 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.”

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



While these next-generation appli-cations 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 gen-eral manager of Associated Aircraft Group, a subsidiary of Sikorsky. “If you look at Washington, D.C., Phila-delphia, New York, Hartford and Bos-ton, 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 dis-tance 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 effi-ciently. If your corporate headquarters has a helipad or there’s one nearby we can pick you up at the end of a meet-ing, get you onboard and have you at your next meeting in 50 minutes with very little, if any, ground transporta-tion time.” To do that on a jet, he says, that same executive needs to be trans-ported to an airport with a 5,000-foot runway where he can board a waiting

With commercial aviation now more akin to cattle herding than transportation, business aviation has become an attractive option for some, and a no-brain-er 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.

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.

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

Ways to Fly

AVIATION SOLUTION

WHEN IT MAKES MOST SENSE PROS & CONS

Ownership

1-100 hours

annually

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

Buy-a-seat or helicopter

Buy-a-seat and helicopter travel are ideal for executives who travel regionally. Buy-a-seat pricing is within reach of first-class commercial travel and comes with the convenience and amenities of business aviation, but you must adapt your sched-ule. 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.

1-25 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.

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.

50-400 hours annually

10-100 hours annually

On-demand charter through brokerage

Fractional ownership

>400 hours

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

SAFETY VS. SPEEDWhen 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 pro-vider 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.”

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 reces-sion first hit, airplane manufacturers mistak-enly 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 manu-facturers 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 manufac-turers 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 over-head costs for years, waiting to be able sell their planes without tak-ing 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, beautiful-ly 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 incor-porate 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 stagger-ing deals for great aircraft available at one-half to one-third of a compa-rable 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 sat-urated pipeline is spitting out planes at unbeliev-able prices, says Riegel. “Those variables make for a buyer’s market the likes of which I’ve never seen.”

A BUYER’S MARKET?

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FLIP SIDE

LEADERS OF COUNTRIES with preposter-ous 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 econo-my never works for more than a few years at a time,” fumes a top Rio de Janeiro econo-mist. “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 dol-lar-by-dollar basis, no one can touch us for systemic corruption, diabolical incompe-tence and jaw-dropping fiscal irresponsibili-

ty. Yet, it’s all about the Irish, the Portuguese and those damn Greeks now.”

A Nobel-prize-winning economist adds, “The Greeks have the Parthe-non. 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

One major point of discord is the global competition for the vaunted title of World’s Stupidest Economy.

It’s All Greek, All the TimeSimilarly debt-laden countries wonder: Why is Greece suddenly getting all the glory?By Joe Queenan

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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-shak-ers who dominate the media. “Do you think it’s an accident that we have no industries, no exports, no future?” demands an apo-plectic 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 fa-mous for was being a joke,” says a Sudanese insider based in Khartoum. “We prided our-selves 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 struc-tural 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?”

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