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CEO Daily Brief – Nov. 16, 2010

U.S. Must Set Political, Economic Example for China Currency Swings: Summers White House National Economic Council Director Larry Summers, facing a group of American executives planning to step up investment in China, reminded CEOs that U.S. companies have an obligation to think about their role as "citizens" of the United States. "I think it is …

U.S. Must Set Political, Economic Example for China Currency Swings: Summers

White House National Economic Council Director Larry Summers, facing a group of American executives planning to step up investment in China, reminded CEOs that U.S. companies have an obligation to think about their role as "citizens" of the United States.

"I think it is incumbent on corporations everywhere – and I will speak as an American to American corporations and those corporations that do business in America – to think very hard about their obligations as citizens of this country and to think very hard about how through their activities they can make it work for all of our citizens," Summers told the Wall Street Journal CEO Council.

Summers also said that the U.S. mid-term elections could be interpreted as "a rejection of things that the president has done." But he warned the business community that the election also reflected "an important rejection of elites that were seen as too disconnected from the interests of ordinary people." CEOs, Summers said, "we’re seen as more citizens of Davos than of their countries."

Summers Monday also said the United States will have to successfully pursue a strategy of domestic renewal as it looks to set an example for China’s rise to the world stage.

But patriotism aside, there are clear financial reasons why investing in China makes perfect sense for many U.S. companies. In fact, it would be irresponsible for CEOs not to act on trade with China, given the enormous opportunities there.

During the CEO Council, Min Zhu, a former Chinese central bank official now at the International Monetary Fund, said China and other developing economies will within six years account for 60 percent of the global economy. China is moving up the value chain into high-tech capital goods and is poised to account for about a third of global manufacturing of advanced machinery and equipment within a decade, from about 8 percent today. "China will probably lead a global manufacturing restructuring," Zhu said. "That will be a big impact for advanced economies, particularly for economies that want to export tech goods."

For more from The Wall Street Journal, please click here.

What Foot Locker’s CEO Learned in the Army

Ken Hicks, the CEO of Foot Locker, formerly the president and chief merchandising officer of J.C. Penney’s, graduated from the United States Military Academy and spent six years in the army just after the Vietnam War. In an interview with the Harvard Business Review he explained how his time as a young officer helped prepare him for a career as a retail executive.

He learned that you’re very dependent on your people to be their best. You train and develop and motivate them.

To be a successful leader, you have to understand what skills are required and be competent at them, and you also have to have confidence.

In retail and the military, you’re very dependent on the people at the front or the selling floor. You realize how important the sale associate is. It’s the same thing in the army; you’re very dependent on your privates and specialists, and so you talk with them and learn from them.

Recognition is important, too. He sent out a little note card every month to the employees who performed the best, thanking them for doing a good job. In the army, a solider receives medals and ribbons.

Learning and studying each situation, Hicks said, is very important, too. U.S. General Omar Bradley, of World War II fame, would say the greatest field commander was George Patton. That’s because Patton did his homework, studied the map, and knew where the enemy was going to be and where they needed to go. It’s the same in business. You have to study the numbers and constantly try to understand where the opportunities are and how you can go after them.

Hicks has posted on his conference room wall the principles of war. And each of these principles of war applies in business. For example, Mass: don’t spread your troops out, don’t spread your resources too thin. Unity of command: know who’s in charge, who has responsibility and who doesn’t. Security: don’t be surprised, study the competition, and know what’s happening. He recalls working with a retailer who said, “Retail is war without blood.” You study and spend a lot of time understanding the competition’s situation. You learn not to overreact.

For more from the Harvard Business Review, please click here.

The CEO’s Guide to Corporate Finance

Four principles can help CEOs make great financial decisions—even when the CFO’s not in the room.

The four principles, as explained in the McKinsey Quarterly:

  • The core-of-value principle establishes that value creation is a function of returns on capital and growth, while highlighting some important subtleties associated with applying these concepts.
  • The conservation-of-value principle says that it doesn’t matter how you slice the financial pie with financial engineering, share repurchases, or acquisitions; only improving cash flows will create value.
  • The expectations treadmill principle explains how movements in a company’s share price reflect changes in the stock market’s expectations about performance, not just the company’s actual performance. The higher those expectations, the better that company must perform just to keep up.
  • The best-owner principle states that no business has an inherent value in and of itself; it has a different value to different owners or potential owners—a value based on how they manage it and what strategy they pursue.

When an organization’s senior leaders have a strong financial compass, it’s easier for them to resist the siren songs of financial engineering, excessive leverage, and the idea (common during boom times) that somehow the established rules of economics no longer apply. Misconceptions like these—which can lead companies to make value-destroying decisions and slow down entire economies—take hold with surprising and disturbing ease.

For more from the McKinsey Quarterly, please click here.

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