CHIEF EXECUTIVES of large public companies have dealt with the Sarbanes-Oxley Act of 2002 and moved on. But nearly 80 percent of all publicly traded companies, accounting for 6 percent of total U.S. equity market capitalization, are still wrestling with it.
A moment of truth is at hand. The Securities and Exchange Commission established an Advisory Committee on Smaller Public Companies to advise it on how to apply Sarbox to these smaller companies. The advisory committee will make a final report to the SEC in late April but has released an early draft.
Although generally supportive of easing the pain of Sarbox, the draft report suggests a new test for whether Section 404, which mandates internal controls that can be tested by outside auditors, should be applied. Companies with less than $250 million in sales would get relief, but any company larger than that would not.
This is a sticking point and chief executives should be demanding that all these companies get relief from a hugely expensive, time-consuming process, which ultimately does not guarantee that fraud won't occur.
Although Sen. Paul Sarbanes recently denied that Sarbox was enacted in haste, the evidence is overwhelming that the law overshot the mark.
The latest evidence is the results of Chief Executive's polling of its readers. More than 90 percent of some 193 respondents said they would prefer to manage their companies as privately held entities, far from the scrutiny of the stock exchanges and SEC. (See Confidence Index, page 22.) Some readers said public companies have to spend 30 to 40 percent more of their time on compliance and financial market requirements than privately held counterparts. Rather than putting up with Sarbox, CEOs of smaller public companies are tempted to go private or stay private. That will bring less transparency to the markets, not more.
So keep up the heat on the SEC. And if the Free Enterprise Fund's suit against the Public Company Accounting Oversight Board moves forward, there may be even more opportunity for relief from Sarbox. After all, if the PCAOB is ruled unconstitutional, then the law that created it will have to be revisited.
Chief Executive's CEO2CEO Magazine's 2005 CEO2CEO Leadership Summit- American Competitiveness:
What chief executives must do to retain their competitive edge.
In view of intensifying global competition, American companies must use technology wisely and innovate aggressively while driving down the costs of operating. It means winning governmental help in addressing educational, health care and legal and regulatory issues.
More than 50 CEOs will gather to participate in a series of roundtables on the issues that are keeping CEOs up at night. Each roundtable will be moderated by a senior member of Chief Executive's editorial staff, and sponsors will be given thought leadership positions at appropriate roundtables.
Roundtable Discussion Topics
Leveraging the Information Technology Infrastructure:
CEOs who build the right teams and instill the right discipline and process can use IT as a competitive weapon rather than regarding it as a costly nuisance
A New Model for Health Care:
CEOs need to do more than tinker with their margins to get their health care costs under better control. What are the methods that really work? Can private health care systems heal itself?
Many U.S. CEOs have the advantage of managing multinationals with well developed structures and people practices in place. Given the best ideas today for managing multinationals, can U.S.-based companies stay ahead of emerging challengers from countries such as China?
Supply Chain Magic:
Once an obscure subject, how best to manage supply chains and logistics has moved to center stage. Increasingly, many businesses are built around their supply chains. They have, in fact become competitive weapons. What is the latest thinking on best practices?
The CEO's Job Under Fire:
As evidenced by unprecedented turnover, the CEO has never been more embattled. What are the ways that the smartest CEOs are fighting back? How do they communicate with critically important stakeholders groups?
How can CEOs use technology to change the game? CEOs are discovering that innovation doesn't happen by accident. What are the best practices for finding new ideas and moving them rapidly to market?
What are CEOs doing to reform the K-12 system? CEOs recognize that American schools are not producing the right kinds of skill sets for the jobs of the future. Here's what they are doing to change a broken system.
Access To Capital:
In the Sarbanes-Oxley environment, how are the best CEOs managing their financial processes to maintain access to public financial markets? Do they offer guidance to Wall Street? What is the latest insight on the fine line between "managing" and "manipulating" earnings?
CEOs and the Environment:
Leading edge CEOs realize that it's smart business to improve the energy efficiency of their equipment, to reduce dangerous waste and emissions and to improve the management of their facilities. What are the emerging best practices?
For a complete agenda click: Summit Agenda
The survey, taken in March, included chief executives and other top officers from many industries such as information technology and telecom, business services and finance. They were allowed to choose just one country.
McKinsey says smaller American companies tend to see faster growth in the U.S., but larger U.S. companies see faster growth in China. Of the respondents from companies with revenues of less than $250 million, 30 percent chose the U.S. But 41 percent of companies with more than $5 billion in revenues picked China.
Another part of the explanation for why respondents picked the U.S. as their biggest sales target was that non-American companies expect to expand here. "Chinese and Indian companies are the ones that actually said the United States was going to be their biggest growth market," says Lenny Mendonca, a director at McKinsey who helped conduct the survey. "A lot of the big American companies said China or India."
It is hardly surprising that Europe fared so poorly in view of its perennially slow growth and overall Euro malaise. But it is noteworthy that Britain came in third. "It's a relatively open country," says Mendonca. "It was on the list for Indian companies."
And which industry do business leaders see as offering the highest growth rates in the entire global economy? Health care and pharmaceutical, reflecting the aging of populations throughout the industrialized world.
CEO CONFIDENCE INDEX
Some 259 out of 477 respondents, or 54.3 percent, said they had used business schools in one of those ways (see story, page 34). Presented with Business Week's top 25 business schools, they chose the 10 best for CEOs to use (below left). But they also nominated a sampling of a surprising array of other business schools, which we've listed (below, center).
Respondents noted it is difficult to compare business schools because they have such different strengths. "Darden is more real world and hands-on with participation by top industry leaders such as George David of United Technologies," one reader wrote. "MIT is the choice of many for manufacturing and is also highly practical. Harvard still ranks high, but it is overrated."
Harvard does seem to be a lightning rod, with other CEOs defending it vigorously. "Harvard still has the strongest brand among all business schools, and it has the best senior executive level programs," one reader stated.
As to why so many CEOs have never used a business school, it may be frustration with what is taught. "Business schools teach their students how to think and how to plan and creatively analyze problems," one reader wrote. "But they do not teach them how to manage people, how to mentor or be mentored, or how to deal with the frustrations inherent in following someone else's directives. I wouldn't hire an MBA if the government gave me a 100 percent subsidy."
Another reader added: "The gap between real-world business needs and the curricula at these branded business schools continues to widen at a frightening pace."
In other news, CEO Confidence bumped up this month after a decline the previous month (below right). The benchmark indicator, launched in October 2002 with a base value of 100, hit 165, up from 146.8 the previous month. That was largely driven by a 19.8 point increase in the Employment Confidence Index, a key component. The sharp month-to-month fluctuations mean it is difficult to tell whether the increase in hiring intentions is a short-term blip or a meaningful long-term trend.
For Wally Parker, a recent conversation with a job candidate underscored the growing importance of his company's longstanding diversity program. "She shared with me that when she interviews, she looks at the company's management to see if there are players at the senior level who are African-American women," said the CEO of KeySpan Services. "She asks herself, 'Can I look up and see someone I can go to for advice, counsel and mentoring?' "
Driving diversity has been a guiding principle at KeySpan since well before the company was formed in a merger in 1998. Yet the question from the job candidate drove home for Parker the role of diversity in recruiting and retention. "When CEOs think about diversity, we think about serving a diverse group of customers and about doing the right thing," he told participants gathered for a roundtable on diversity held in partnership with Russell Reynolds Associates. "But do enough of our diverse groups of employees see role models above them that they can aspire to? Or do they look up and, seeing none, assume there's a glass ceiling?"
Over the past 15 years, the corporate perspective on diversity has evolved from mere lip service to a strategic directive with clear business benefits. Both demographic shifts in the American marketplace and globalization have led to recognition of diversity initiatives as not only the right thing to do ethically and culturally, but also a competitive imperative. Companies with successful diversity programs cite benefits ranging from access to a wider variety of perspectives and more effective multicultural marketing efforts to better employee morale and reduced turnover.
Despite this growing awareness of the issue's importance, many U.S. corporations continually struggle to deliver on diversity's promise. "All of our clients are grappling with this issue," said Andrea Redmond, co-leader of the CEO and Board Services Practice of Russell Reynolds Associates and author of Business Evolves, Leadership Endures. "It's moved from a discussion of whether we should be paying attention to diversity to looking at the numbers and trying to assess the culture."
But the desire to foster an inclusive corporate culture and a diverse work force is just the first of many steps necessary to achieving diversity goals. Rather than racism or sexism, factors like corporate tradition, resistance to change and ingrained misconceptions are often the biggest hurdles multicultural initiatives must overcome. "There are major corporations today whose market is very diverse and companies whose client base is predominantly women and minorities where the companies themselves have no women or minorities driving the company," noted Charles Tribbett III, co-leader of the CEO and Corporate Board Services Practice of Russell Reynolds and co-author of the book. "It's one thing to sit around the table and be passionate and excited about diversity, but it's another to actually roll up your sleeves and execute it."
For some, the barrier continues to be instilling diversity into the corporate culture. "We're not a consumer-facing business, so we have a difficult time convincing our people that diversity is good business," noted William Murdy, CEO of Comfort Systems USA. "We also have a large number of Hispanic workers, and lifting them into leadership is something we want to do. But it's been very difficult. We've thought about the idea of making our work force coincide with the population in terms of percentage of minorities. It's a goal that I think we can't achieve."
Several CEOs reported difficulty recruiting minorities and women, particularly for management positions and board seats. "I've watched managers at my previous company recruit on campus and hire in their own image," noted Mark Rose, who recently took the CEO helm at Grubb and Ellis. "They didn't know any better, and they were uncomfortable hiring outside of that image.
"I don't think there's a CEO who isn't passionate about this subject," he added. "But it's all about execution, and some of us need a handbook to help. And I don't think that handbook's been completely written."
Further complicating matters, diversity means different things to different people. "We sit around the table and talk about diversity, but it may not mean the same thing to each of us here," notes Redia Anderson, chief diversity officer at Deloitte & Touche. "We assume that because we're all saying the same word, and we all mean the same thing. But we don't. So there's a need to go back and define, refine and fine-tune until we get clarity."
Many diversity programs focus exclusively on race, gender and sexual orientation. But some CEOs see a broader definition. "Diversity has to be looked at in its broadest sense," says KeySpan's Parker. "To me, it's all about recognizing, respecting and supporting individuals regardless of what makes up that individuality. So, yes, that's race, gender and sexual orientation, but it's also introverted and extroverted, ethnic backgrounds, cultural upbringing, all of those things."
"It could also be different ages," noted Gloria Bohan, president of Omega World Travel. "One of the ways to think about diversity is to look at the customer base you're trying to reach and how it's changing. Our work force should reflect that. The older age group is also a very valuable ingredient to a diverse work force."
Get Your Hands Dirty
Those familiar with diversity are quick to caution that it is a long journey, and one that begins at the top. "The role of the CEO in diversity is to be lead dog, not to ride in the sled," asserted David Bell, co-chairman of the advertising conglomerate Interpublic Group. "And it's a journey where CEOs have to get their hands very dirty. You can send all the right signals, but if the messages are not ongoing and continual, it's not going to happen. Creating an inclusive culture out of the reverse is serious CEO kind of work."
CEO involvement must also continue well beyond an initial program launch. At Barnes Group, a CEO-directed effort brought minorities and women onto the company's board and management team. The effort succeeded in improving the company's diversity metrics, but to CEO Edmund Carpenter, the numbers still weren't there. So when his 1,500-person distribution sales force developed a new sales team concept, Carpenter pushed for diversity as a component in the program. "We quadrupled the diversity in those groups, " he reported. "I don't mean to take credit for that, but if it had just been an HR initiative, it wouldn't have worked.
"Diversity is a contact sport," he added. "We have a chief diversity officer, but you can't just set up that role and hope people follow. The CEO has to bust people, set expectations and really be involved. That's my takeaway from eight months on this."
"You cannot underestimate the commitment and the tone that is set at the top," agreed Redia Anderson. "It's that whole concept that ï¿½ï¿½we treasure what we measure.' If people see that we don't do that with diversity, they figure it's not important. It's not on the scorecard, and it's not on the CEO's agenda because if it were he or she would be saying something. You can't be neutral, because neutrality equates to negative."
One has only to look at the brouhaha surrounding Microsoft's position on gay rights as evidence of how employees and the public interpret neutrality. When the technology giant downgraded its stance on a Washington state gay rights bill from supportive to neutral, the backlash was fierce and immediate. Employees on both sides of the issue flooded Microsoft CEO Steve Ballmer with emails protesting the backpedaling. Within weeks, a chagrined Ballmer issued an email reinstating the company's support for the bill and reinforcing Microsoft's commitment to supporting "legislation that would prohibit employment discrimination on the basis of sexual orientation."
While the hubbub over the reversal has faded, the incident raises a bigger picture around diversity programs, noted John Mullen, CEO, Americas, at DHL Express. "As a manager, I struggle when the definition of diversity starts to stray into areas of debate that the community hasn't really resolved, such as gay marriage," he said, noting that DHL's compensation packages for expatriates offer a larger allowance for married versus single employees. "That raises the issue of whether a gay marriage is recognized as a marriage and which allowance to give. I would rather wait until the community resolves the issue, but sometimes you're hit with it and you have to make a decision."
Globalization, too, raises thorny issues when local cultural norms butt up against corporate diversity policies. Companies, for example, that do business in countries with male-dominated corporate environments must cope with the fact that suppliers and customers may resist business interaction with its female employees. "We're involved in areas in the Middle East, where I find some [business practices] not just bad business, but actually offensive and totally discriminatory," reported Mullen. "We have conscious policies to try to address that in those countries."
In other countries, diversity may well be less of an issue than in the U.S., argued Mark Dixon, CEO of The Regus Group Network. "We have a diverse work force, people from all over the world," he noted. "Our company is about 70 percent women, and our management team is 50 percent women. As a young company coming from Europe, we haven't really focused on diversity. It's just part of being an international business with an international clientele."
Tying Reward to Diversity Goals
At present, U.S. corporate diversity initiatives are primarily focused on the homefront. Even the most proactive companies don't claim to have a definitive "handbook" for diversity success. But insights from those who've made headway shed light on practices and methods that work.
Many companies, for example, find that setting goals and tying diversity efforts to employee appraisals and compensation is a critical component of a successful initiative. At KeySpan, for example, diversity, commitment, action and results, is one of eight criteria used in evaluating employees. "Every single person from the top of our company to the bottom has a portion of their pay at risk," explained Parker, who notes that metrics to evaluate progress are essential. "One of the incentive compensation goals is a placement goal. In groups where we are not where we should be from a diversity perspective we look at what was done to raise those numbers."
On occasion the company has had to push its people, and itself, to fulfill its diversity objectives. "A lot of it is attacking the excuses," Parker asserted. "We promote from within and we have about 2 percent turnover so people in areas where we needed greater diversity would say, 'I don't have an opening' or 'I don't have the budget.' So we created a separate fund; if they found someone really good, they would have the funding to hire that person as long as they could create a meaningful job for that person."
For Harold Yoh III, CEO of Day & Zimmermann Group, modeling his company's diversity program after a successful safety initiative proved effective. "Security and diversity are both mind-sets," explains Yoh, who feels that a diverse organization will naturally come up with richer solutions for clients. "We took our safety incident rate from awful down to world class, and now we're trying to teach people about diversity the way we taught them about safety."
Day & Zimmermann's diversity efforts encompass training, a mentoring program, and a policy that mandates at least one diverse candidate for any staff positions being filled from outside of the organization. Yoh also emphasizes the importance of diversity by encouraging discussion of diversity issues. "We're not there yet," he says. "When we sit around the table brainstorming for safety topics, we get five. When we ask for a diversity topic, we all look at the HR person. One of my benchmarks is our being able to come up with diversity topics as quickly as we can come up with safety issues."
Mentoring, leadership training and affinity groups continue to prove effective in recruiting, retaining and advancing minority and women employees. But some companies are now employing similar efforts to develop their external diversity practices. The New York Power Authority, for example, holds purchasing exchanges where as many as 200 minority- or women-owned firms visit its offices for a networking afternoon. "We're letting a group of people know that we're interested in their services, as well as creating an interchange among those suppliers," says Eugene Zeltmann, CEO of the Power Authority. "That has to create a larger supply of potential people in the pool."
Internally, the organization also focuses on developing its minority and women employees and potential hirees through training and educational initiatives. "We identify talented individuals, look for the holes in their backgrounds and give them courses in whatever it might be that they are missing," Zeltmann explained. "Educational programs are a way of ensuring your supply of candidates."
Finally, clarity around a company's vision for diversity is critical to success. Whether it's a bigger market share within a population segment or a more robust pipeline, a CEO must be able to articulate both the ultimate goal and the business imperative driving it. "If you get in the elevator and somebody asks, ï¿½ï¿½What do you think about diversity?' you shouldn't still be trying to figure out what to say when the ride is over," said Deloitte & Touche's Anderson. "We don't do that when we talk about financials or other parts of our business. We can tell you exactly what we're trying to do, and why we're trying to do it.
"If we can articulate diversity in that 30-second elevator conversation and say, "We're trying to do this, this and this,'" Anderson added, "that means we have a clear line of sigh, and a much better chance of achieving results."
Talk is Not Cheap
To achieve success, CEOs need to do more than hint about expectations.
Redia Anderson, chief diversity officer at Deloitte & Touche, says companies have to do a better job of tapping pools of women and minority executives.
What does a CEO's commitment to diversity entail?
What other cogs must be in place to drive the effort?
You can't just say, "We want an inclusive environment." Why? What will that do for your business? You need clarity around that business imperative and the ability to communicate that so others in the organization can understand.
Then you need to talk about a structure to get it done. Often, that involves a council chaired by the diversity officer and the CEO that strategizes the tactics that need to occur. All of that is critical in understanding how you can take a concept and begin to implement it in an organization.
A lot of companies talk about barriers, such as the possibility of needing to "lower standards" to meet diversity goals. Why do companies find it so difficult to access a diverse talent pool?
Similarly, board recruiters say that women and minority candidates qualified for board seats are overwhelmed with offers, making it difficult to fill board seats with minorities and/or women. What's your view?
Have diversity initiatives become a recruiting tool?
In your experience, as companies progress up the learning curve on diversity, does it become easier?
But it is well worth the investment in terms of attracting and developing the talent you have. While these initiatives may focus on a particular diverse population, if we get things right for the diverse population and translate that to the entire organization, that is a win-win for everyone.
Getting It In the Culture
At KeySpan, every officer is expected to have a diversity plan.
Wally Parker, CEO of natural gas distributor KeySpan Services, outlines a proactive approach to driving companywide diversity.
Diversity has been a commitment at KeySpan and its forerunner, Brooklyn Union, for longer than the 34 years that I've been here. We went to great lengths to make that more formal in recent years. In 1998, when we articulated our corporate values after KeySpan was formed in a merger, diversity was the first one.
We established a corporate diversity officer and put our attention on diversity at all levels of our organization, up to and including our board of directors. Management, our senior vice president of HR and the corporate diversity officer update our corporate governance committee on our efforts several times a year, and we also have presentations to the full board.
Anyone at KeySpan can request a mentor, but we proactively approach diverse candidates who we believe have the opportunity to grow in management. We pair them with a mentor, and they meet once a month. We do that from entry level to officer level. We currently have 120 people in our mentor program. I personally mentor several diverse employees, both formally and informally.
We also track how well we do on filling open positions. In units with a fair representation of diverse employees based on the population we serve, we do normal hiring. But if we have an area where diverse employees are underrepresented based on census data for the area we serve, then we focus on bringing that to a fair level. That placement goal is one of our macro-corporate incentive compensation goals. That says, ï¿½ï¿½Hey folks, diversity is important to us.' The old maxim says: If you want people to understand something is important, you measure it. If you really want them to understand, you pay them on it.
Every officer at KeySpan is expected to have a diversity plan. What will they personally do to support diversity? One of the skills and competencies we measure and rate management team members on is their attention, commitment and action to diversity. For example, I am the personal champion at the executive level of our Hispanic Leadership Organization.
Our Office of the Chairman, the top four people in the company, meets periodically with affinity groups. Their senior leadership sits down with us for an hour and a half on a quarterly basis to talk about their wants, needs and concerns. That meeting sends a powerful signal about the importance we place on diversity and also helps us monitor our progress.
Finally, we just did a diversity survey and we asked our employees how they felt about a number of diversity issues. We will use that as a baseline and measure off that going forward, and put that into a corporate goal.
Why do we do all this? Number one, it's good business. You get richer decisions as an organization when you take in more perspectives. It gets back to the basic importance of people. Every good company knows its only truly sustainable competitive advantage is its people. At the end of the day any product or service can be copied, people cannot.
But ahead of that is that it's the right thing to do. I can't say that enough. Some companies do it because it is the law, some do it because it is good business, but the smart companies do it because it is the right thing to do. - J.P.
THE American automotive industry is facing its darkest hours in decades, says Dietmar A. Ostermann, vice president and auto industry specialist at the consulting firm A.T. Kearney and a former BMW engineer. Huge layoffs, he says, are the only solution. Here are excerpts from a conversation:
Q. How serious is the situation that General Motors and Ford are facing?
A. It's the worst it has been in the 20 years that I've been associated with the automotive industry.
Q. What is at the root of the problem?
A. Consumer demands are shifting. General Motors and Ford have not been at the forefront of those demand shifts. Quality is a very significant issue, whether perceived or real. Companies such as Toyota have been given a lot of credit on that score. There's a lot of volume shift away from Ford and G.M. toward Toyota, Honda and Nissan. This trend will continue.
At the same time, we have increasing raw-material costs. We have massive overcapacity in North America. We also have increasing health care costs. The situation is actually getting worse, not better.
Q. Do you blame management of G.M. and Ford for the companies' difficulties?
A. If you are top executives of a large American corporation, you have to be responsible for the actions that the company has taken. Management is not responsible for increasing raw-material prices, clearly, but management is responsible for the design of the vehicles. It's not entirely management's fault. But if you're competing in the North American marketplace against Toyota and Honda and Nissan, you can't say that it's all unfair. That's not the case.
Q. What would you do if you were Rick Wagoner, chairman and chief executive of G.M.?
A. You have to design cars that are exciting to people. That's improving at G.M. and will continue, but I don't think at this point in time that you can design yourself out of the problems you're in.
G.M. has to aggressively cut its capacity in North America. They've announced the closure of two assembly plants. I don't think that's anywhere close to enough in view of the volume drop that has already occurred and future market-share losses that are coming. If you look at the entire infrastructure of assembly plants, power train plants and stamping plants, they need to do a lot more.
Q. What can G.M. and Ford do about their health care costs if the United Auto Workers resist changes to their contracts?
A. There's a lot you can do within the framework of the union agreement. It's not a surprise to me that the contract will not be terminated early. It's not a surprise that union insists on keeping its contract.
But there are two big areas which need to be worked on. The first is pharmacy benefits -- the way you buy drugs -- which is entirely within the control of G.M. and Ford. The situation is not satisfactory. Medco, which is the pharmacy benefits manager, has way too much control and is gaining way too much profits. That supply chain of how drugs are acquired and distributed to employees needs to be rethought and better managed.
The second area is how the health care plan is designed. That needs to be aggressively studied, not only by benefits professionals but also by business managers.
That might mean you choose certain service providers and deselect others. You might choose certain treatments and deselect others. You would focus a lot more on preventive activities and management of the people who are really sick. Disease management techniques, one would call them.
Q. Are health care costs the dominant problem facing the American auto industry?
A. No, it's just one element. If they have combined automotive sales of $150 billion-plus a year, G.M. has $6 billion in health care costs and Ford has $4 billion. Even if you drastically reduce those costs by 25 percent, which would be dreaming, that saves a billion, maybe two. The cost problem, however, is significantly larger than that. That's why consolidation of manufacturing needs to happen. Unfortunately, it will not be pretty.
Q. Both companies are spending billions in marketing to improve the image of their brands. Will that work?
A. The consumer is significantly influenced by the brand cachet around quality. Like it or not, Toyota has that cachet. It didn't have it 20 years ago.
Look at the latest quality publications. Jaguar was terrific. It ranked No.2 in North America. Unfortunately, they will have to do it for 10 more years before the consumer will actually believe that Jaguar is a high-quality car because it has been hampered by the image of 10 years ago that it spent more time in the shop than on the street.
Q. How many G.M. and Ford jobs might go?
A. It could be tens of thousands. That's not surprising if you look at what the automotive supplier industry is going through. Some of those companies are shedding half of their work forces. It could be pretty massive for General Motors or Ford.
Q. Is government action desirable or appropriate to help the American automotive industry survive?
A. No. I think that would be absolutely the wrong thing to do. That's what happened in the airline industry. I would not suggest it should happen in the automotive industry. Thank goodness, President Bush has already opted in this direction. Let Ford and General Motors compete.