Jennifer Pellet

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As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.

Alcan Packaging CEO Ilene Gordon: Passion for Packaging

Packaging isn’t terribly sexy—but don’t tell Ilene Gordon that. To hear the president and CEO of Paris, France-based, Alcan Packaging tell it, there’s plenty to thrill and excite about the alchemy of turning resins, aluminum, paper and glass into innovative containers for food, beauty products, pharma and tobacco.

“I love packaging,” says Gordon, who credits her enthusiasm in part for her success recruiting and motivating employees in a competitive industry. “I’m able to get people excited; people on my team glom onto my energy and optimism.”

But Gordon, who also serves on the executive board of Alcan’s Australian parent, the mining company Rio Tinto Alcan, brings much more than a positive outlook and passion for packaging to Alcan Packaging, which employs 31,000. The 55-yearold’s formidable background began with undergrad and MBA degrees from MIT followed by four years with Boston Consulting Group and then a 17-year stint with Tenneco Inc., where she headed up the behemoth’s folding carton business and served as vice president of operations. Next, she rounded out her packaging background by joining Pechiney Plastic Packaging, which was merged with Alcan, a Montreal- based supplier of bauxite, aluminum, metal and packaging materials, in 2003.

Gordon took the CEO seat at Alcan’s packaging business in 2006, just before the entire company was acquired by Rio Tinto for a hefty $38.1 billion in July 2007. Analysts immediately speculated that the company’s packaging arm would be sold off—and continue to do so today. But Rio Tinto, a mining company whose businesses align most closely with Alcan’s aluminum and metals divisions, may have difficulty unloading the $6.2 billion packaging unit in today’s tight capital market. What’s more, the packaging industry as a whole is grappling with a number of challenges, including rising raw material costs, pressure around sustainability and the demands of increasingly global customers.

But acquisition rumors and industry pressures don’t faze Gordon, who has always found a way to thrive in difficult circumstances. Attending MIT back when the male-to-female ratio was 18 to 1, she graduated summa cum laude and is well versed in navigating a male-dominated industry. “It was perfect training for the environment of the business world then,” reflects Gordon. “Today, with so many women in most organizations, we forget what it was like back then.”

Her vision for Alcan Packaging is centered around expanding the company’s global footprint and creating innovative packaging solutions that trump cost as a selling point. Sales in emerging countries grew from 5 percent of total sales in 2003 to 18 percent in 2007—and Gordon intends to continue that trajectory. “There’s no reason why that number won’t be 25 percent in the next few years,” she asserts.

Alcan is also actively pursuing innovations that will help it stand out from competitors. Companies whose packaging consists of Alcan’s Ceramis film, for example, can boast that no solvents or other chemicals are used during the production process, so there are no emissions to impact the environment. What differentiates competitors in the packaging industry are innovative features like packages that open more easily, provide a longer shelf life, lessen environmental impact or take up less space so that customers can display more product per square inch, Gordon explains. “The right package—like plastic cans for Campbell’s soup—can re-energize a brand.”

She points to tamper-proof packaging as an innovation area that currently offers the most potential for packagers. Packaging that incorporates holographs or other printing technologies can help manufacturers and retailers prevent counterfeiting or spot counterfeit product.

But while such innovations are in hot demand, Gordon recognizes that end customers are only willing to pay so much for packages that can identify a counterfeit product, zip open or biodegrade. Even Wal-Mart, which professes to place a premium on sustainable packaging, isn’t willing to actually fork over a premium for meeting that ideal.

“If you have innovation you can deliver value, but the challenge is to bring that innovation at a cost that customers will accept for that product,” notes Gordon. “An extra 10 cents might be affordable to package a $5 pack of cigarettes, but not for a bag of potato chips.”

Alcan, however, has an innovation edge in its global footprint. The company already has 130 factories in 31 countries, including a recently opened facility in India, and plans another new one in the Czech Republic. “Among the leading packaging companies, there is no other that has operations in every major region,” notes Gordon, who plans to use that global presence to push for growth. “International players are looking for global capability, as well as packaging that is innovative and low cost. For a global customer, such as Kraft or P&G, we’re the only company that can deliver that around the world.”

Next-Generation Globalization

Oil price spikes, reeling markets, the implosion of global companies—clearly, the onward march toward a borderless world economy has hit a few roadblocks. Yet even as economies across the globe grapple with uncertainty and calls for greater regulation, corporations recognize that the current crisis brings growth opportunities along with challenges.

Those enterprises able to effectively employ innovations and advances in information technology, fast-cycle logistics and transportation networks will emerge from the current chaos positioned to sell and source globally—at a profit. “The opportunities are bright as long as we can get to them,” David Bronczek, president and CEO of FedEx Express, told CEOs gathered for a roundtable discussion sponsored by FedEx. “Getting to them—and getting to them profitably— is the challenge.”

Already, some companies are finding growth in international markets can compensate for a sluggish U.S. economy. “We’re seeing revenues coming out of markets we weren’t in before that is, frankly, offsetting some of the softness [in the U.S.],” reported Lyndon Faulkner, CEO of Torrance, Calif.-based Pelican Products, a marketing and manufacturing firm that made a fortuitous global push two years ago. “The U.S. still supplies 70 percent of our revenue, but we now do millions of dollars a year out of China, which is all new revenue for us.”

For Bronczek, international global profitable growth ranks first on FedEx’s “critical few” list of priorities. Demand in growth markets such as India and China, Eastern Europe and Africa is such that FedEx could easily achieve triple-digit revenue growth, he reported. But profitable growth is a different story. To achieve that, the company has had to take a hard look at both cost structure and resource allocation.

“We’ve become top-heavy in terms of resources we put in the U.S., because this is a saturated, mature market,” he explained. When shifting resources to growth markets became a major priority, FedEx attacked the issue with an early retirement program that cut hundreds of millions from its cost structure. Operational changes, such as moving from three-pilot planes to two-pilot planes, further trimmed expenses.

However, the crisis in the U.S. financial, housing and auto markets— all major customer bases for FedEx—only intensified the need to reorient toward growing markets. A drop in oil prices helped offset some of the downturn, and November brought a bigger boon when competitor DHL announced plans to exit the U.S. domestic package shipping market. “It’s a little bit brighter of a time for FedEx today, but we have a long way to go,” said Bronczek.

Communicate and Conquer

The pressure is on to build up capabilities in markets like China, Russia and India to meet the needs of global players like H-P and Dell. “We’ve acquired a company in China, we have a domestic hub right outside of Shanghai and an international hub in Guangdong,” reported Bronczek. “But I can tell you that in terms of their global logistics and supply chain, we’re failing H-P right now. We’re okay in some areas, but we’re not okay in, say, ocean shipping.”

FedEx works feverishly to address issues like that, in the meantime steadying relationships by meeting quarterly with each of its 100-plus major global accounts to assess and address priorities. “If it’s not me, it’s my executive vice presidents or it’s Fred,” said Bronczek. “We talk about their global needs and their global portfolios, and they tell us what they need and where they want to grow.”

“It’s about customization, about customer intimacy,” asserted Larry Chaityn, CEO of New York Citybased True North Global. “You need to know your customer on multiple levels. So ask the questions, understand how your customers do business and what they need. That’s how we see our clients being successful.”

FedEx is taking a proactive approach to a challenge facing all large companies, noted Anil Gupta, professor of strategy and entrepreneurship at the University of Maryland and author of Getting China and India Right. “The question is, how do we become a global company—not just a U.S. company doing business abroad?”

To Gupta, the answer is both physical— managing the repositioning of resources FedEx is homing in on— and psychological—changing the mindset of the company. Managing the latter, he hypothesizes, may require repositioning not only financial resources but management.

Location, Location, Location

“If 34 percent of the market opportunity is in Asia and only 2 percent of the top 200 managers are from Asia or sitting in Asia, then we have a 10,000 mile gap between where the opportunities are and where the power sits,” he pointed out. “When you have that gap, your insights will be faulty or delayed and your actions will be delayed.”

Some companies, he points out, are exploring addressing that issue by placing top executives in growth markets. In 2006, for example, Cisco moved Wim Elfrink, EVP of Cisco services and chief globalization officer, from San Jose, Calif., to Bangalore. “Over the next five years, he and the rest of his colleagues will engineer that 20 percent of Cisco’s top leaders are sitting in Bangalore,” noted Gupta. “The next-generation global enterprise of 2020 will require not only a shift in resources, but a shift in the mindset of the architecture of corporate leadership, shifted power.”

“That’s a good point,” agreed Bronczek. “When I went to Europe in 1991, all of my top management in Europe were U.S. [people]. So we were a U.S. company trying to be an international player. It’s a huge shift to become global rather than be a U.S. company doing business offshore.”

A company culture that translates well internationally eases the transition, he added. “One thing I found was that people worldwide, from Dubai to Memphis, want to be treated with respect. Our company prioritizes our people first and then our customers, and that translates well all over the world. So if you can line up your organization on strategic objectives, centered on your customers through service and your employee’s discretionary efforts to provide that, everything else cascades from there.”

Signature Bank CEO Joseph DePaolo: Banking on Businesses

Seven years ago, 65 HSBC executives simultaneously jumped ship to embark on an unlikely adventure: launching a brand new bank at a time when most financial institutions were consolidating. HSBC would later point to Joseph DePaolo, the former Republic National Bank of New York managing director who became CEO of New York City-based Signature Bank, as the "mastermind VbCrLf behind that launch- and the resulting HSBC exodus. For those who need a bit more information on bank accounts, consider going to wecu.com/business-banking/. It's a charge DePaolo, 49, doesn't contest. "We started putting together a business plan the day HSBC announced they were taking over Republic,VbCrLf he recounts. "We didn't even give them a chance.VbCrLf To DePaolo, the very concept driving the rash of mergers sweeping the banking sector-that bigger translated to better-was anathema. At a time when globalization was being heralded as the great growth opportunity du jour, his view was very different. Rather than global reach and international brand recognition, he felt that Republic's prized private banking clients wanted a more intimate relationship with their bank. "HSBC was too large, too global and wouldn't have allowed us to function the way we needed to handle Republic's New York clientele,VbCrLf he says. As it happened, HSBC didn't get a chance. DePaolo and four other former Republic executives, including vice chairman John Tamberlane, departed shortly after the merger to assemble what would become Signature Bank. Raising the funds to launch-Bank Hapoalim of Israel provided startup and operating capital-and luring employees took the better part of a year. Then Signature staged a coup by orchestrating that now-legendary simultaneous resignation. The 65 former Republic Bank employees, representing 12 client teams, left HSBC on April 27 of 2001 and picked up their Signature business cards that same evening. "We were constantly talking to those team members, and there were a lot of big bets going on that not everyone would resign, VbCrLf says DePaolo. "But we had a cocktail reception that night and every single one came. As they left we handed them their business cards. We opened the bank on May 1. VbCrLf The hope was that each team would bring with it a roster of clients in Signature's primary target market: owners and managers of privately owned businesses. And Signature (trading on NASDAQ at $29.80 at press time) continues to follow that growth strategy of acquiring people rather than banks. "We tell people, You bring in your book of business, you develop it, and, if you're good, you will earn more money here than you would anywhere else because you'll get a piece of the action, 'VbCrLf says DePaolo, who has made it his practice to snap up top talent at recently purchased banks. "That's our modus operandi. These are people who are very loyal to their institution and don't want to leave, but then change is thrust upon them. They need to find a place that's like [their bank] used to be. VbCrLf By all measures, the strategy appears sound. DePaolo recently brought eight former North Fork Bank teams into the fold, after that bank was acquired by Capital One. Today, Signature has 21 offices in the New York metropolitan area and $6.5 billion in assets (as of Q2, ended June 30, 2008), ranking it among the top 3 percent of commercial  banks in the U.S. based on assets, according to the FDIC Market Share Report. In September, while other banks were looking for funds to stave off credit trouble, Signature went trolling for capital to fuel growth. Despite the financial downturn, the move proved fortuitous, raising a hefty $148 million in its fourth public offering (the first was in March of 2004) and jumping its debt to capital ratio to 10 percent- a heady figure in banking circles today. "It wasn't necessarily the best time to start raising money, but since we were doing it for growth rather than to pay for past sins we thought it would be viewed in a favorable light, VbCrLf recounts DePaolo. "And it was. In fact, we had planned to raise $100 million, but reception was so good that we upped the offering a bit while we were on the road. VbCrLf But that healthy balance sheet didn't save Signature from having to reassure jittery clients as financial upheavals continued into October. The owner of a hotel chain, for example, may not understand the fundamentals of finance well enough to feel confident that leaving his $50 million in deposits at Signature is wise, notes DePaolo. "Every day I call clients and talk to them about our capital levels and why what happened at Bear Sterns or Wachovia isn't happening here, VbCrLf he says. "It's not a walk in the park, but there is an upside. When this is all over we will be that much closer to our clients because they will remember the time we spent with them during these issues. VbCrLf At press time, the FDIC announced a decision to temporarily provide full coverage of non-interest bearing deposit transaction accounts, such as the payroll accounts used by businesses, taking some of the pressure off of banks like Signature. But even before that move, DePaolo was determined to maintain Signature's growth track with plans to open a 22nd office-its first in Staten Island, New York-and to hit $8.5 billion in assets within the next 18 to 24 months. "We've faced difficult times- including 9/11 and the past 18 months-ever since we started the bank, VbCrLf he points out. "And we've been able to persevere against competitors who are trillion dollar institutions. We are literally a rounding error to some of our competition. So it's exciting for us that we were able to find this market, privately owned businesses, and a wonderful challenge every day to continue to take it on. VbCrLf

Barclays Global Investors CEO Lee Kranefuss: Vindicated by Volume

To hear iShares' Lee Kranefuss tell it, hawking investment products in today's brutal marketplace isn't as daunting as one might think-at least not if it's ETFs you're peddling. In fact, the Global CEO of Barclays Global Investors (BGI) iShares reports that in today's tumultuous environment the already-popular arena his company plays in is now attracting even more investors.

Volume reports for the volatile months of September and October support the claim. In September, ETF trading volume reached record highs, accounting for as much as 40 percent of total U.S. market trading volume, up from a daily average of 28 percent for much of 2008. By October the figure had retreated somewhat, hovering at 35 percent, according to the National Stock Exchange. Still, representing a third of stock trades is no small feat-particularly for an investment vehicle that barely registered on investors' radar screens a scant five years ago. ETFs-or funds that track an index, but can be traded like a stock-are a relative newcomer to the trading block, debuting in the U.S. market in 1993.

Of course, volume rises when investors flee a vehicle, but that's not the case here, says Kranefuss, 47, who reports that by the end of September equity mutual funds had seen outflows of $71 billion year-to-date while ETFs reported inflows of more than $89 billion. "In times of volatility, people value even more the ability to have broad diversification, to move quickly, to know what they are holding and to know how much they are paying without having to wait until the end of the day," he says. "People are voting with their dollars."

While not quite gloating, there is a definite note of satisfaction-perhaps even vindication-from Kranefuss these days. "One of the claims of active management has always been, ��In times of trouble, we can avoid problems,'" he points out. "But to outperform the market, active managers try to load up on things that will do very well. And the flip side of that is if they load up on things that do very badly, you're worse off." What's more, he notes, mutual funds don't disclose their holdings until the end of a quarter- which means investors can get blindsided by an overweighting in, say, the financial sector. ETFs, by contrast, make holdings public on a daily basis, a valuable commodity now that transparency is suddenly highly prized. And finally, ETF fees are lower (30 basis points on average) than those of their mutual fund peers, which typically are in excess of 1 percent.

The ETF vs. mutual fund argument is one Kranefuss, who came to iShares shortly after BGI introduced its first ETF in 1996, has made many times over the last decade. Charged with building investor interest in the asset class and driving the development of new fund offerings, the Boston Consulting Group alum performed his task admirably. He spearheaded iShares' growth from a handful of funds and $2 billion in assets in 2000 into the ETF behemoth it is today. iShares is currently the world leader in ETF funds, with 330 funds globally, assets in excess of $350 billion and  600 employees worldwide.

It may have helped that ETFs as a whole were winning favor with both investors and the financial journalists who make a living touting investments. Or possibly it was iShares, which took a near-evangelical approach to promoting the low fee, broad diversification and trading flexibility ETFs offer to financial advisors and their clients, that helped the category as a whole.

"We have a joke internally that we've sold an awful lot of ETFs for our competitors- in some cases more than they have sold themselves," says Kranefuss, with a laugh. "But that's okay. It's good to have competition in the marketplace and people want choice."

These days ETF-hungry investors have plenty of that-there are now more than 1,499 ETFs available globally (681 in the U.S.), with 356 new launches in 2008 alone (through third quarter). ETFs now come in all sizes and flavors, including a wide range of commodity, fixed income and country-specific varieties. In fact, the flood of new entries has led to some criticism of fund managers' propensity for bringing out new iterations of existing funds. The gold rush mentality has also led to some winnowing of the field, with 42 funds liquidated in 2008 through the end of October.

Kranefuss, however, has no plans to consolidate. In fact, quite the contrary. "We are continuing to bring product out," he says, noting that iShares is slower to market than some fund managers. "Because we're in it for the long term and because parts of our clientele are large institutions and financial advisors, we have to make sure we're building products that live up to the quality standards we're comfortable with. In some cases, we would love to have [an iShares version] of some products on the market; we just can't figure out how to do one quickly that would match our standards."

Over time, Kranefuss sees the ETF industry expanding to the point where virtually every asset class-including currency, real estate and venture capital- is available in ETF form. "Why shouldn't you be able to access any part of the market with one trade through any broker into any brokerage account?" he asks. "The answer is just engineering, figuring out how to get every investable asset class into an ETF. And there is a huge amount of effort going into that."

How Effective Is Your Senior Team?

Today, CEOs rely on their senior teams or sometimes several teams more than ever. Thanks to an ever-more-complex operating environment, the challenges of competing in a global marketplace and a mind-boggling pace of change, the leadership role is simply too complex for one person, no matter how talented he or she may be. In fact, increasingly the most effective leaders are not the "heroic CEOs" who can do it all, but those who are able to assemble and energize effective senior-level teams.

Yet many CEOs fumble in creating and directing a leadership team. In fact, less than 25 percent of senior teams actually realize their potential, according to a recent study by the Hay Group that examined more than 120 senior teams in 11 countries. "Most of the really important decisions get made in other forums," Ruth Wage-man, director of research for Hay Group, told CEOs gathered for a recent roundtable discussion cosponsored by Hay Group and Chief Executive magazine. "In fact, rather than creating synergy, what most leadership teams are doing is trading reports. And members, including CEOs, typically find the teams to be sources of frustration and alienation rather than a place where real leadership happens."

What factors hamper the top talent in their mandate to pull together and move the company forward? Several CEOs pointed out that one or more "derailers"- team members who are dead weight for whatever reason are often at the root of the problem. Inevitably some senior executives will continue to focus more on their individual roles than on the team's shared work. "A lot of people just can't make that leap," says Anne Drake, CEO of DSC Logistics. "They're used to just doing their piece, and they just can't step outside of what they're used to in order to view the whole enterprise."

In other cases, egos clash, noted Ronald Naples, CEO of Quaker Chemical. "Following isn't easy when you're in the C-suite," he points out. "People tend to think of themselves as leaders rather than followers."

Hay Group's researchers actually looked into the common denominators of "derailers," by asking experts to look at the individuals most likely to crater a team and identify what those people had in common. "Most typically it was, ��Will not support the strategic direction of the CEO and is actively undermining it in some way,"' reports Wageman. "Second was an inability to take an enterprise perspective." In many cases, however, the latter issue can be remedied through coaching the employee on embracing his or her enterprise leadership role, she adds.

Feigned collaboration that masks problems plaguing a team can also contribute to a lack of effectiveness. Often a leadership team will seem to be functioning in harmony on the surface yet fail to be productive. "I wouldn't call it derailing, because I don't think anyone is necessarily malicious," says Hassan Ahmed, chairman of Sonus Networks. "But people haven't bought in 100 percent, and the team's effectiveness goes way down."

Lack of clarity as to what, exactly, the team is charged with doing is another stumbling point. "Is it a decision- making team, a consultative team, an information team?" asks Wageman. "What do you want them to do on behalf of the organization? The team cannot decide that. The CEO must."

Fixing the Focus

What can CEOs do to create and sustain a leadership team whose members learn from one another while collaborating effectively on a shared mission? One clear prerequisite for success is to create a clear and compelling purpose for the team. The CEO must be crystal clear about a team's purpose and boundaries. CEOs, for example, should be clear about which decisions they want the team to resolve versus which decisions they reserve for themselves.

When a Team Fails

To illustrate some of the common failings companies fall prey to in assembling senior teams, Hay Group's Ruth Wageman describes a real-world scenario about a CEO in office for a year whose company is embarking on a new strategic direction after a merger. "He's creating more interdependence among the [various] offices, saying, ��There's really no justification for separate practices, services and functions within each country,'" she explains. "��We want to create the focus, clarity and independence needed to do what's right for a particular set of customers and free up costs that don't add value.'"

The CEO assembles a team of 14 leaders and spends a week with them clarifying the new operating model and the roles and responsibilities of the leaders in implementing the strategy, then charges them with helping to chart the company's future. Within a few months, however, it's clear something is amiss. Each team member is continuing to operate pretty much as they always have. Members are repeatedly returning to the same issues, energy levels at group meetings are very low and when asked to make a joint decision, the team can't come to consensus. "Where," asks Wageman, "did this CEO go wrong?"

"First, he's got too many direct reports," suggests Eran Broshy, executive chairman of InVentiv Health. "Second, after being locked up together for a week they probably all hate each other. Third, rather than bring a lot of people together at the same time, you should start at the other end, talking to people individually about the road map and where they see themselves fitting in."

For Andy Taylor, CEO of Enterprise Rent-A-Car, the transition from independence to interdependence is one that must be handled with greater delicacy. "Expecting people to make that shift without laying the groundwork for the two acquisitions to come together could be a recipe for a lot of friction and under-the-surface tension," he points out.

Transitions can be particularly trying following an acquisition, adds Donnelly, who points out that often there will be those among a CEO's senior talent who will resist the new entity's structure or direction. "In an [acquisition scenario], there are always going to be some people who maybe for ego or other reasons won't play ball," he notes. "When that happens, you end up having to make changes. Replacing people sends a signal but so does not replacing people. The lesson there is not to wait too long to replace the underperformers."

How to fix the issue? Create a common destiny, suggests Al Ehrbar, president of EVA Advisers. "When you have a frank discussion about the need for collaboration and a common destiny, these problems tend to go away," he says. Once you get the message of what it is you want to achieve and why that will be good for the company, people sign up and begin behaving differently."

Ultimately, says Wageman, CEOs must also define a compelling purpose for the team. "It's really about defining the work of the team and what [each person's role is] in accomplishing that work," she says.

The next hurdle is to choose leaders who will be effective contributors to the team. Some CEOs feel compelled to include everyone at a certain level of the organization, which can lead to a team size too cumbersome to meet regularly and have robust dialogs. "Don't fall into the trap of thinking you have to be inclusive," warns Gene Bauer, managing director of Hay Group. "I learned the hard way that you don't have to have all your direct reports on a team."

Other business leaders steer clear of strong personalities. But while potentially combative team members may jeopardize team cohesiveness, letting the desire for harmonious collaboration dictate your choices is equally dangerous, warns Robert Donnelly, CEO of Compact, who shuns compliant personalities in favor of "troublemakers with passion."

Six Steps to Effective Team Leadership

In a study of 120 senior teams in 11 countries, the Hay Group found that CEOs themselves aren't always clear on the decisions they want a leadership team to resolve versus those they reserve for themselves. The research findings identified six steps that increase the likelihood of a senior team evolving into an efficient and effective unit capable of leveraging its collective expertise to address an enterprise's most important challenges and opportunities.

These are:

  • Deciding you need a team.
  • Creating a compelling purpose for the team.
  • Getting the right people on and the wrong ones off.
  • Giving a team the solid structure it needs to work.
  • Giving it the support it needs to succeed.
  • Coaching the team.

"Indifferent teams are made up of indifferent people," he asserts. "Building a team is not about getting people who can work together. It's about getting strong people who may have strong differences and finding a way to get the most out of them."

In creating an effective environment in which a team will operate, CEOs must also balance the need for guidelines on conduct with allowing a team the flexibility to be creative. "If you keep it too strict, you could miss out on some great opportunities for people to come up with creative ideas," says Gloria Bohan, CEO of Omega World Travel. "There's more than one right way to do a job."

As the primary motivator of any senior team, CEOs must also "walk the talk," demonstrating the same kind of commitment they expect of the team members. CEOs should check in regularly with individual team members for feedback on the team's progress and, when charging a team with strategic decisions, be prepared to accept its findings. "If a team comes back with an unexpected recommendation, a lot of CEOs have a tendency to either reject it or try to sway the team," says Al Ehrbar, president of EVA Advisers. "I think that's a big mistake. If you trust the people on your team, and they're doing what you tasked them to do, then trust their judgment."

Finally, the respect or lack there of a CEO evidences for a team can be a huge influence on team members' commitment to that team. "Pay the same exquisite attention to detail in your preparation for your leadership team meeting that you would put into your preparation for an analyst call, a board meeting or a meeting with a key client," advises Wageman. "And don't over-challenge the individual team members and under-challenge the team. Raise the level of expectation for the team as a whole."

WHO'S WHO

Hassan Ahmed is chairman of Sonus Networks, an IP-voice telecommunications equipment provider based in Westford, Mass.

Gene Bauer is managing director, U.S. consulting operations at Hay Group, a global management consulting firm based in Philadelphia. 

Gloria Bohan is president, CEO and founder of Omega World Travel, a provider of travel services based in Fairfax, Va.

Howard Brodsky is chairman and CEO of CCA Global Partners, a cooperative of independent retailers based in Manchester, R.I.

Eran Broshy is executive chairman at InVentiv Health, a provider of commercial and clinical pharmaceutical services based in North Somerset, N.J.

Ron Cohen is president and CEO of Acorda Therapeutics, a biotech company based in Hawthorne, N.Y.

J. P. Donlon is editor-in-chief of Chief Executive Magazine. 

Robert Donnelly is CEO of Compact, a process controls solutions provider based in Paramus, N.J.

Ann Drake is CEO of DSC Logistics, a supply chain management solutions provider based in Des Plaines, Ill.

Al Ehrbar is president of EVA Advisers, a hedge fund manager based in Locust Valley, N.Y.

Farooq Kathwari is chairman, president and CEO of Ethan Allen, a home furnishings retailer based in Danbury, Conn.

Jane Landon is chief information officer, City of New York. 

John Larrere is general manager of Hay Group's New York office. 

Ronald Naples is chairman & CEO of Quaker Chemical, a specialty chemical company based in Conshohocken, Pa.

Andy Taylor is CEO of Enterprise Rent-A-Car, a rental car company based in St. Louis, Mo. 

MG Keith Thurgood is commander and CEO of the Army and Air Force Exchange Service, a provider of products to military families. 

Ruth Wageman is director of research at Hay Group.

Robert Bosch Chairman & CEO Peter Marks: Energizing Bosch

Chances are good that there's a Robert Bosch GmbH product under the hood of whatever car you drive. Founded in Stuttgart, Germany, in1886, today the $63 billion com pany supplies automakers worldwide with a host of components, including gasoline systems; chassis systems controls and brakes; electrical drives; starter motors and generators; and steering systems. Beyond automotive technology, Bosch also manufactures household goods such as power tools, refrigerators and dishwashers, along with industrial robots and commercial packaging machines.

Annual U.S. sales have grown steadily and now account for a healthy portion$9.5 billion in 2007 of the business, with a hefty $6.2 billion of that coming from the company's automotive technology sector. But economic uncertainty in the U.S. coupled with an auto industry hit hard by rising gas prices suggest that Bosch will need to work hard to continue its upward trajectory.

And that's exactly what Peter Marks, CEO of Robert Bosch LLC, the company's North American arm, aims to do. "This year, for the first time in our history, we'll have negative growth in our automotive business, he says. We anticipate car sales in North America for 2008 may reach 14 million cars, which is about 1 million less than in 2007".

Marks is banking on leveraging Bosch's strength in innovation to offset that dismal news. And for good reason: Bosch plows an impressive 7.7 percent of sales back into R&D and dubs any day when it produces less than 14 patents a bad one.

The company, Marks points out, has long built its success around innovations in technology many geared toward fuel and energy efficiency. For example, Bosch developed a direct-injection diesel engine that uses less fuel and emits less CO2 than comparable gas engines and is now poised to launch a next generation engine that will further improve diesel fuel efficiency.

Today, increasing economic pressure for fuel and energy efficiency as well as consumer enthusiasm for environmentally conscious products suggest several growth opportunities in the automotive industry, he notes. "We see a lot of opportunity for [diesel] in the U.S., because a diesel engine (with a high pressure direct-injection system) consumes 30 percent less fuel than a traditional gasoline engine and emits roughly 25 percent fewer greenhouse gas pollutants. We are close to launching injectors designed for injection pressures of more than 2,000 bar, which will further increase diesel efficiency."

Other auto-related energy efficient technologies include the company's engine-management systems for natural gas and alcohol-powered cars and its Smart Electronic Start/Stop System, which saves fuel by automatically stopping a car's engine when the car is in neutral and restarting it when a driver applies pedal pressure.

But Bosch seems most interested in broadening its base beyond the automotive sector. Marks points to both industrial technology where the company dominates as an independent producer of wind turbines and thermal systems solar panels and geothermal heat pumps for the home as two growth areas. "We still see growth potential in automotive, but industrial technology has even more growth potential," says Marks. "And then thermal systems, because North American households will have the need for more efficient heating and air conditioning systems. So we see tremendous growth potential there."

Finally, a joint venture with Siemens AG aims to bring Bosch products into as many kitchens as cars in the U.S., largely by appealing to the growing consumer enthusiasm for energy efficient appliances. "The key for home appliances continues to be improving on efficiency and energy consumption," says Marks. "Obviously you can't have a dishwasher that doesn't use any water, but you can get to the stage where it's remarkable how little water it uses. And that's the key for us as we continue to make [incremental improvements]."

Business and Social Contribution

In 1970, Milton Friedman argued strenuously that the social responsibility of business is, above all, to increase profits. In an article for The New York Times Magazine, he pointed out that without profit there are no wages paid and no enterprise with a surplus to offer anyone. Today, many business leaders and activists alike would counter that companies have a responsibility to support various constituencies by being good corporate citizens and even that such support will ultimately benefit the business and its investors. Still, debate around corporate social responsibility continues to rage, note CEOs who gathered for a recent roundtable discussion cosponsored by Chief Executive and Ernst & Young. At issue are concerns about how public companies should balance their philanthropic endeavors against the responsibility of maximizing shareholder returns, as well as questions around how best to go about choosing altruistic causes, deploying resources and ensuring that those resources are well-used. "Prioritizing the many, many requests to respond to social and corporate responsibility initiatives that we receive as CEOs is a challenge," says Martin Sullivan, the former CEO of American Insurance Group. "Obviously companies have to take a responsible position, but at the same time we must reconcile that effort with the recognition that it is the shareholder's money that we may be using for those good works." Aligning Interests For many CEOs, that reconciliation is achieved by aligning philanthropic endeavors with company interests or business goals. "As a public company, you've got to really pick your shots and say that there's a rationale here," notes Anne Mulcahy, chairman and CEO of Xerox. "For example, we care a lot about educating students in math and science and building an interest in innovation. So, primary and secondary education is a big deal for us and an area of investment. That's the way we think about it, investment rather than philanthropy."
Similarly, Western Union Foundation, the philanthropic arm of funds transfer giant Western Union, is geared toward providing education and economic opportunities to its customer base: migrant workers around the globe who send cash to family members. "This year, $400 billion in cash will move around the world, largely in $300 increments, which is an indication of how hard these people are working," notes Christina Gold, president and CEO of Western Union. "We have a $50 million program that we're working on to drive job creation and educational opportunities that will enable our customers to have a better life. We feel very engaged in helping those people." For Muriel Siebert, founder, chairwoman and CEO of Muriel Siebert & Co., observing the financial naivete of young customers early in her career inspired a philanthropic effort to boost financial literacy among the nation's youth. "I saw young kids coming in who were basically bankrupt because of having maxed out credit cards," recounts Siebert, who has created and funded a financial literacy teaching program available free to high schools nationwide. "I decided I would help teach kids about finances. It's taken 10 years, but we now have a program going into 55 New York schools that teaches kids about things like credit cards, checking accounts and paycheck deductions." THE ROI Reward Increasingly, companies are recognizing that such efforts can have a tangible return on investment beyond benefiting society. "More and more organizations we work with are recognizing the synergies between agenda items that are socially conscious and shareholder value creation," notes Mark Manoff, vice chairman of Ernst and Young, who points out that investments in social responsibility can decrease employee turnover or reduce waste. "It requires a long-term commitment, but a lot of companies recognize the benefits of initiatives. We see companies looking for ways to drive sustainability and reduce carbon footprint, for example, and the next thing you know they're improving margins by eliminating resource consumption." A strong sense of social consciousness among the nation's youth may give those benefits a further boost. Already, market research suggests mil-lennials who are in their mid-20sand younger are civic-minded and socially conscious consumers and employees. Over time, that enthusiasm could well transform social responsibility into something of a competitive necessity for corporations, notes Howard Brodsky, CEO of CCA Global Partners. "Younger employees have grown up in a world where social responsibility isn't a change for them; it's what they believe in," he says. "If there isn't a match between a company's values and what the younger population believes in, recruiting and retention will suffer for it." In the meantime, however, economic turbulence and market pressures mean that alignment of social and business benefit is more critical than ever when justifying involvement to shareholders, who may feel funds would be better spent elsewhere. In fact, the very same programs that were once applauded by stakeholders can become a target for criticism when a company faces financial difficulties. Xerox's Mulcahy faced just that dilemma while turning the company around after she took the helm in 2001. "That kind of thing gets tested during really difficult times," she points out. When you're meeting with 58 banks to discuss your debt load, they tend to look at the $10 million in your foundation and think, 'easy pickings.' Those are the moments of truth." Xerox's foundation was an integral part of the corporate culture one that Mulcahy viewed as both crucial to employee morale and the culmination of many years of hard work. "The people of Xerox actually expect us to be good corporate citizens," she says. "They take pride in that and participate in it, and I think that helped us build the culture that saved our company a few years ago. If you cave on some of those decisions during difficult times, it will take a long time to build that credibility back up."

While maintaining a commitment to initiatives can be challenging in trying times, faltering from a community or charitable endeavor poses its own set of risks, agrees Jeffrey Sonnenfeld, chairman and CEO of the Chief Executive Leadership Institute at Yale University. "Look at Whole Foods, he notes. If you're not living the brand, you can come off as a granola-eating neighborhood bully whose [actions don't] fit the consistency of his company's brand image." What's more, failing to engage in social issues can land a company in the crosshairs of activists. People have actually gone to fast-food companies and said, 'you're contributing to obesity, and we expect you to do something', notes Brodsky. "Companies have to stay ahead of that thinking today; you can't just be responsive. Society now says it's your responsibility to be socially responsible." Leveraging Employees At a time when profit margins are being squeezed and every dollar counts, many companies are finding that employee involvement rather than corporate dollars is the most feasible way to make a social contribution. At Adecco, employee effort accounts for the company's biggest investment in social initiatives, says Tig Gilliam, the company's CEO. "The staffing business is very low margin, so our contribution has to be about engaging our colleagues," he notes. "We sponsor Jobs for America's Graduates, a school-to-work transition program focused on helping at-risk youths graduate from high school. Part of that is a financial donation, but a big part of our involvement is having our colleagues engage with these students and talk with them about the best job prospects in their communities and what kind of education they need." What's more, offering expertise can be as valuable or more so than funds. Ernst & Young partners combine the two, committing to give a percentage of their income back to the community and to sit on the board of a charity. At Drew Industries, employee involvement is viewed as more effective than cash contributions in driving progress. CEO Leigh Abrams also sees it as offering an immediate ROI. "We have a contribution budget, but we really focus on encouraging our executives to get involved," he says. "I find that it's almost as much of an advantage to the executive as to the charity because they go out and learn how to get things done without a big corporate budget and staff behind them." While the large-scale corporate donations win headlines, often it's employee efforts at the local level that bring the most progress, says AIG's Martin Sullivan. "You make these large decisions at the corporate level because you're getting these big asks,' but meanwhile what your subsidiaries and branch offices around the world are doing with far less funding is having a more meaningful effect on local communities." Maximizing the impact of socially responsible endeavors is another area where corporate philanthropy sparks controversy. Circling back to Milton Friedman, one of the economist's issues with corporate philanthropy was the fact that corporate donations provide no more benefit than those of individual donors an argument that many today contest. "People like CEOs and executives are probably much better at spending money more effectively and efficiently than people who may be investing in a company," argues Richard Thompson, CEO of Zootoo.com, an online community resource for pet owners. "A shareholder will turn around and write a check to XYZ Foundation, but a lot of foundations will spend 60 cents of every dollar running the organization and only 40 cents goes to the actual cause." At the same time, there is wide recognition that the fragmented charitable and social efforts by individual companies might be more effective when combined into a single concerted effort. "The millions of dollars applied by corporate America toward education are given in a very uncoordinated way," says Sullivan. "Everybody's got their favorite topic or favorite school. If we can coordinate all that effort, would we get a better return, as Americans, on the dollars being spent?" Going forward, collaboration between the private sector, nonprofits and government agencies may prove most effective in maximizing impact, asserts Brodsky. "To really leverage our resources both money and people you have to be in partnership," he asserts. "We think we can leverage our money better because we understand [operating efficiency] better, but nonprofits understand the mission better. And government has a place as well. All three need to be in partnership together to solve the bigger issues."

WHO'S WHO

Leigh J. Abrams is president, CEO and director of Drew Industries, a manufacturer and marketer of recreational vehicles based in White Plains, N.Y. Howard Brodsky is co-founder, chairman, and co-chief executive officer of CCA Global Partners, a floor covering company with annual sales of $10.2 billion based in St. Louis, Mo. Mark George is managing partner of the George Group Consulting arm of Accenture, headquartered in Dallas. Tig Gilliam is Chief Executive Officer of the Adecco, USA division of Adecco S.A., a workforce solutions company with offices in 70 countries. Christina Gold is president and CEO of Western Union Company, based in Englewood, Colo. Edward M. Kopko is chairman, president and CEO of Butler International based in Ft. Lauderdale, Fla., and chairman, CEO and publisher of Chief Executive magazine. Mark Manoff is vice chairman, NE managing partner of Ernst & Young, a global leader in assurance, tax, transaction and advisory services. Peter Marks is chairman, president and CEO of The Bosch Group in North America. Anne Mulcahy is chairman and CEO of Xerox Corporation, a $17 billion document management technology and services enterprise based in Norwalk, Conn. Muriel (Mickie) Siebert is founder, chairwoman and CEO of Muriel Siebert & Co., Inc., a discount brokerage firm based in New York City. Jeffrey Sonnenfeld is chairman and Chief Executive Officer of the Chief Executive Leadership Institute at Yale University. Martin Sullivan is the former CEO of New York-based American Insurance Group, an international insurance and financial services organization with more than $750 billion in assets under management. Richard Thompson is CEO of Zootoo.com, an online community resource for pet owners.

Do Intangibles Matter?

In the new economy, value isn't where it once was. Solid, quantifiable assets like plants, equipment and inventory are now often far less indicative of a company's value than intangibles like ideas, relationships and expertise. For companies like Microsoft, Google and eBay, those "soft" assets are what will determine future earnings-and, as such, can represent as much as 80 percent of total market value. Yet, because intangibles by nature defy quantification, they're rarely managed by businesses with the same integrated, ROI-centric management philosophy traditionally applied to physical assets.

In fact, only one-third of executives polled in a 2004 survey conducted for Deloitte Touche Tohmatsu by the Economist Intelligence Unit claimed that their companies were proficient at monitoring critical non-financial indicators of corporate performance, let alone managing them effectively. Instead, management and boards have tended to focus their energy on budgets and operational performance, taking the value of intangibles like intellectual property, brands, customer relationships and human knowledge and talent for granted.

But that focus is shifting. Increasingly, companies are recognizing that in the drive for growth amid turbulent economic conditions, intangibles may be hidden gold, pointed out CEOs gathered for a recent roundtable discussion. (See p. 59 for a "mental map" of intangibles that can be  leveraged to drive growth.)

"In 1990, IBM's global licensing revenues were $30 million," points out Drew Morris, CEO of Great Numbers! LLC. "By 2003, that had grown-basically just by deciding to do it-to $1 billion. That's a 3,200 percent increase." In short, IBM turned soft assets-a bunch of patents not being used-into a revenue-producing licensing business.  

Profit from Patents

The specialty pharmaceutical company Barrier Therapeutics was founded on similar intangible assets. A spinout of Johnson & Johnson, Barrier "started life as an adolescent" thanks to unused patents it licensed from J&J, recounts CEO Al Altomari, a former J&J executive. "We said, ��If you give us rights to these patents sitting on your shelf that you're never going to monetize, we think we can put enough of a value proposition together to build a company,'" he says. "We have no assets other than our people and our IP. We're running a pharmaceutical company without owning a warehouse, a plant or a lab."

But even Barrier-where it was always clear that intangible assets would be the primary driver of growth-initially overlooked the value of some of its soft assets, adds Altomari. "Initially, our patents represented 90 percent of the value of our company," he says. "Now I would say it's 50 percent patents, 50 percent people. I've learned that the people in my industry are just as critical to the value creation."

Of the 30 core people involved in Barrier's early days, Altomari estimates that 25 hailed from J&J. He pegs their average age as 55. That translates to bringing a boatload of Big Pharma experience-and invaluable industry relationships-to the company's launch. "We have someone on our staff who's been dealing with the FDA for many more years than she will let me say in public," he says, crediting that experience in part for the company's smooth relationship with its industry regulator. "Our [relatively small] company had 2 of only 32 [New Drug Approvals] granted by the FDA in 2006."  

People Power

Human capital-and the ability to mine that capital-is widely recognized as one of the more powerful intangible assets. Yet many companies struggle to find ways to maximize the ROI on their investment in talent, agree CEOs. "It's not just about having the people," notes Lyndon Faulkner, CEO of Pelican Products. "It's creating an environment where those people can flourish doing what they're doing."

A work force engaged in a company's mission-one with passion-can impact competitive positioning at virtually every level: from boosting productivity and strengthening customer relationships to controlling costs. "We've all been in meetings where there's a deadline tomorrow, and if someone works a bit later that night, we'll meet the deadline-and if they don't, we won't," notes Eric Mosley, CEO of Globoforce. "It's that discretionary effort that drives a company forward."

Most companies rely on incentive compensation to drive employee engagement. At Heartland Payment Systems, CEO Robert Carr recounts cutting a deal with employees who were being paid $10.50 an hour. "I said, 'We'll increase the pay here by 50 percent if we can get more out of the organization with an equivalent amount of spend,'" he says. "Today we're three times the size that we were, turnover is down, we have the best service we've ever had, and that's all become part of our culture. Our employees don't tolerate people who aren't doing a good job because they've seen the benefits of their productivity increasing."

Leigh Abrams, CEO of Drew Industries, reports achieving similar success with a bonus program and profit pool that makes his employees the highest paid in their industry. A factory manager at Drew Industries can earn up to 50 percent of his annual salary in quarterly bonuses if he hits certain targets and receive another year-end bonus based on the size of the profit pool. "We never miss a deadline he says. "Because every single manager in our company knows that his year-end bonus and his quarterly bonuses are based on making those goals."

Better still, managers and employees down the line are so invested in the profitability of the company that they take a proactive stance on keeping costs in line with revenues. When the manufactured housing sector they play in went into a decline-volume dropped by 75 percent between 1998 and 2007-Drew Industries' numbers didn't track the drop. "Last year, our sales were down about 8 percent but our profits were up 28 percent," says Abrams. "I didn't have to do anything. People said, ��Business is down, we've got to cut overhead,' and they cut $28 million."

While most companies have incentive programs, not all incentive programs are effective, cautions Mosley. "We advise companies to lower the amount of the cash value of their incentive rewards and increase both the percentage of employees receiving them and the frequency at which they're distributed," he says. "Every time people are given an award they're reminded about the value of the company. So if you're touching only 15 percent of the workforce once a year rather than 80 percent quarterly, you've lost a real opportunity."

To be effective, bonuses must also be firmly tied to performance. "Otherwise," notes Carr, "it's called an incentive plan, but everyone considers it their base pay."  

Relationship Revenue

Robert Donnelly, CEO of Compact, sees customer relationships as his company's biggest intangible asset. "This is a battle for the customer's mind," he asserts. "Our goal is to own the plant engineer, and the way we do that is by convincing that engineer that we're able to help them engineer a solution to whatever problems they have."

For many companies, the value of customer relationships and brand go hand-in-hand. For example, Pelican Products, which makes protective cases primarily for the military, enjoys a reputation in its industry for unparalleled quality.

A company's reputation hinges on many factors, from product and service quality to the credibility of management and leadership, agrees Leslie Gaines-Ross, chief reputation strategist at Weber Shandwick (See sidebar, p.60). "You really understand the power of reputation as an intangible when you lose it," she points out. "What happened to Bear Sterns stock price is a good example. Unfortunately, the downside is a way to measure the importance of intangibles."

While overall reputation can be difficult to measure, there are ways to quantify the value of a brand. "One is called excess earnings, where you base the value on how much more of a return you're getting than you would with an unbranded product," says Morris. "Another is relief from royalty, where you model what you would have to pay as a royalty to use the brand if someone else were to own it." Neither is an exact science, which is the case with most intangible asset valuations-and at the root of why companies often fail to recognize that value, much less maximize it.

"Our job as CEO, is basically to go find the higher results inherent in the business that are latent," notes Morris. "Pick a few you think are promising and measure as you go. It's one of the more exciting and rewarding adventures you can have as a leader." 

"Getting more out of these intangible assets can be the most powerful way to boost results. For examples of that power and how executives have tapped it, visit http://www.greatnumbers.com/IntangibleAssetsRoundtable.cfm

 The Hidden Wealth of a Good Reputation

 

Reputation is increasingly recognized as a vital intangible asset and proven wealth generator. Total shareholder returns for the top 50 world's most admired company all-stars greatly exceed those of the S&P 500 over one-, three-, five- and 10-year periods (Hay- Group). The value of a good reputation continues to grow largely because of the competitive advantage and market differentiation it delivers-higher sales generated by satisfied customers and their referrals; relationships with the right strategic and business partners; ability to attract, develop and retain the best talent; benefit of the doubt by stakeholders if crisis strikes; spread of positive word of mouth; potential to raise capital and share price; and in some cases, the option to charge premium prices. Also, in an age of regulatory watchdogs, a positive reputation can improve relationships with government officials and regulators.

According to Weber Shandwick's Safeguarding Reputation™ with KRC Research, global business influencers estimate that a significant 63 percent of a company's market value is attributable to reputation. Because reputation is so widely recognized as a distinctive intangible asset and critical factor in how companies are valued today, the consequences of a damaged reputation run far and deep. Without a doubt, the convergence of globalization, instantaneous news and online citizen journalism magnifies any corporate wrongdoing or other misstep. Barely a day goes by without some company facing new assaults to its reputation. Weber Shandwick's "stumble rate" reveals that over the past five years three-quarters (79 percent) of the world's number-one most admired companies lost their crowns in their respective industries.

Reputation recovery is a hard-won battle. Not only are reputation failures perceived to be escalating-a majority of global business executives believe that it is harder to recover from reputation failure than it is to build and maintain reputation. The process is neither easy nor short-term. Reputation recovery takes approximately three and one-half years. This figure squares with former Chairman and CEO Lou Gerstner's assessment of IBM's reputation recovery that began in 1993: "By 1997, we'd declare the IBM turnaround complete." When   compared to a race, reputation recovery is often more like a marathon than a sprint. Unfortunately there is no completion date.

The sheer number and severity of corporate falls from grace in the last few years have magnified the need for a viable framework for the repair and recovery of damaged company reputations. Every organization deserves the opportunity to redeem itself and in many cases, second-act performances can surpass the first. Knowing how to build a reputation may no longer be enough. The greatest intangible asset of them all may be knowing how to protect and restore a good name.

 WHO'S WHO

Leigh J. Abrams is president, CEO and director of Drew Industries, a manufacturer and marketer of recreational vehicles based in White Plains, N.Y.

Al Altomari is CEO and director of Barrier Therapeutics, a specialty pharmaceutical company based in Princeton, N.J.

Robert O. Carr is chairman and CEO of Heartland Payment Systems, a payment processing company based in Princeton, N.J.

Robert M. Donnelly is CEO of Compact, a process controls solution provider based in Paramus, N.J.

J. P. Donlon is editor-in-chief of Chief Executive Magazine, based in New York City.

Lyndon Faulkner is president and CEO of Pelican Products, a marketing and manufacturing firm based in Torrance, Calif.

Leslie Gaines-Ross is chief reputation strategist of Weber Shandwick, a public relations firm based in New York City.

Edward M. Kopko is chairman, president and CEO of Butler International based in Ft. Lauderdale, Fla., and chairman, CEO and publisher of Chief Executive Magazine.

Drew Morris is CEO of Great Numbers! LLC, a management consulting company based in Red Bank, N.J.

Eric Mosley is CEO of Globoforce, a provider of strategic recognition platforms based in Southborough, Mass.


Dr. Leslie Gaines-Ross is the chief reputation strategist at global public relations firm Weber Shandwick and author of CEO Capital: A Guide to Building CEO Reputation and Company Success and Corporate Reputation: 12 Steps to Safeguarding and Recovering Reputation.

What Can CEOs Do to Develop Leaders?

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Forget capital, strategy, R&D. In today’s fast-paced, global economy, the most important criteria for success may well be a robust, active process for identifying, developing and retaining leaders three or more levels below the CEO.

The role talent development plays in a company’s success is hardly news. After all, a smooth succession is the mark of a world-class chief executive and widely viewed as the most important duty performed by a leader and his board. But despite the intense attention paid to the selection of and transition to a new CEO, succession is a far from perfect science. In any given year, chances are good that you can find one or more headline examples of a troubled transition. Witness Howard Schulz, who recently returned to the helm at Starbucks to perk up the flagging coffee company. Or Michael Dell, who reclaimed the top seat at his namesake company early last year, looking to pull a Steve Jobs-style founder recovery effort. In fact, with Jack Welch ripping into his anointed successor for missed earnings, even the much-celebrated GE succession story is looking less than stellar.

That companies falter at even this most critical of leadership development endeavors underscores the challenge CEOs face in nurturing new leaders—whether for the CEO post or for leadership roles two to three levels down the line. What’s more, it’s a challenge growing ever more complex as global expansion both heightens the need for executives with transnational capabilities and brings potential leaders from different cultures and with different native languages into the talent pool.

While human resources and managers throughout the company play significant roles in developing talent, responsibility for meeting that challenge ultimately rests with the CEO, agreed business leaders participating in a roundtable discussion held in partnership with RHR International.

“Part of the CEO’s role is to ensure that the development of top talent fits the culture and values of the company—the culture as it is and the culture as it needs to be,” notes Tom Saporito, president of RHR International. “That’s a very sacred responsibility.”

What can CEOs do—what should they do—to influence the development of critical talent? Often, companies best known for producing leaders share a common trait: assiduous involvement of the boss. P&G’s A.G. Lafley takes time coaching regional leaders one-on-one to be “courageous and inspiring.” GE’s Jeff Immelt personally teaches up and comers on leadership style.

Personal involvement is also key for Ed Ludwig, CEO of Becton, Dickinson, who sees spending time with top employees at the company’s BD University as a way to both communicate the company’s values and to directly interact with potential leaders. “Our [high potential] employees attend a program called ‘Leaders as Teachers’ where top executives get involved in teaching the leadership development programs,” explains Ludwig, who usually spends four to five hours with each class himself. In addition to educating employees about the company’s expectations of leaders, the program serves to align employees strategically, adds Ludwig. “If you’re out there saying ‘this is what matters,’ chances are you’re going to walk that talk.”

Global, Mobile Talent

For an international company with a workforce spread out across the globe, building alignment is no easy feat, points out Bill Mitchell, CEO of Arrow Electronics.

Mitchell says uniting far-flung teams around a common goal is a crucial part of his role as CEO; he emphasizes that it requires nurturing a relationship of trust. “To do that, you’ve got to be out talking to people and having dinner with them,” he asserts. “You have to make it safe for them to tell you what’s really going on—the good and the bad. It can be complicated and messy, but if you can get alignment, a lot of good things start happening.”

At a time when people change companies more frequently than ever, alignment around a central culture and strategic mission is an increasingly elusive goal, agrees Saporito. “We are in a much more mobile society—there’s a whole new generation of people saying, ‘It’s about my career and where I want to move.’ How do you build a franchise when people are free agents willing to move from team to team?”

  

Some CEOs view a workforce of free agents as an opportunity. “The GE model—exporting four or five CEOs every year—does not work for most of us,” notes Sunil Kumar, CEO of International Specialty Products. “Most of us are importers of talent. To me the biggest aspect of leadership development is recruiting. There’s more risk, but it’s a bit like adopting grownup children. There’s some value to that.”

 Three Obstacles of Assessment

Identifying potential leaders and providing them with the guidance they need to grow into new roles may seem a straightforward enough task. But three common pitfalls often derail CEOs’ efforts to cultivate talent, says Tom Saporito of RHR International.

Over-relying on experiences. There is no checklist that ensures someone is ready for a leadership role. “When people have all the right experiences, it’s tempting to make the assumption that they’re well prepared,” notes Saporito. “But that’s simply not true.”

Looking back instead of forward. Leaders tend to look to the next generation for the same experience and qualities that made them effective, but leadership requirements change with the business environment. “You’ve got to look over the next hill and say, ‘What are we becoming and what does that mean in terms of the kind of new leadership required?’” asserts Saporito.

Overprotecting a legacy. CEOs often struggle to accept a successor who is different from themselves. “They protect their legacy and try to create people in their own image,” says Saporito. “Often, that’s what makes succession fail.”

“I would argue that it’s a big risk, albeit a necessary one depending on your size and scale,” counters Saporito. “How do you have a high degree of confidence that the people you bring in will have the ability and the orientation and inclination to align with the philosophy, value and culture that make your company unique?”

At McCormick and Company, direct CEO involvement in both recruiting management talent and integrating that talent into the organization helps bring new hires into alignment. “I try to make sure that I’m personally connecting with high potential new hires really early on,” reports CEO Alan Wilson. “I go out and talk to every group of management hires about what it takes to be successful in our company. And I make an effort to reach out and help top talent with their experiences.”

Metrics and Incentives

Ideally, both managers and employees will also make development a priority, adds Glenn Fosdick, CEO of

The Nebraska Medical Center. “At our organization we started really making progress when the people at the level below me started looking for and attracting the best and brightest,” he says. “The whole program can’t depend on the CEO.”

By taking an active and visible role in nurturing leaders, CEOs can help inspire managers down the line to do the same. Several participants also reported that having a structured process in place to develop talent, using talent development criteria in performance evaluations and tying those criteria to compensation prove effective in instilling a culture that prioritizes development.

For Craig Rogerson, CEO of Hercules, a formal assessment process is the cornerstone of the specialty chemicals company’s ongoing effort to fix a “bench string” problem created when the company downsized several years ago. “We took a big head count reduction out of the middle layer, and now we’ve got to address that [gap],” he explains.

“We’ve got a lot of good technically trained managers, but there’s a big difference between good management skills and leadership skills. So assessing the next generation of leaders coming up is a real challenge for us. We’re using tools like 360-degree analyses and other metrics to address that.”

But metrics for evaluating development efforts can be murky, warns Mitchell. “We ask every senior manager in our company to identify what they will do in terms of talent development, and part of their compensation is based on how well they do that,” he says. “We try to hardwire it as much as we can. It doesn’t always work, but we have quarterly reviews with people about how they’re doing with those objectives. I find those to be very rich conversations.”

Leading Learning Helping high-potential employees grow is a complex endeavor, requiring exposure to the right experiences at the right times, as well as the necessary feedback to help them interpret and grow from those experiences.

“At the end of the day, there are three components to how talent gets developed in an organization,” points out Saporito. “First, people have to have the right experiences. Second, they need some kind of mechanism to process those experiences. And third, they have to have the inclination to learn.”

Sunil Kumar urges CEOs to provide growth experiences by moving high-potential employees into new areas of responsibility. “You tell a sales executive on Monday that he’s now responsible for manufacturing and place the manufacturing person in R&D or sales, then tell them to figure it out,” he explains. “It can be very effective.” Craig Rogerson recounts experiencing just such a move when he was taken from sales and given a group of plants to run at Hercules. “I was 31 and had never worked in a plant,” he recalls. “It was difficult for me, but good. It gives you a different perspective.”

Despite that positive experience, Rogerson sees the concept as potentially problematic. “It’s very tough to take that risk at a public company today, because if it blows up on you, how do you defend taking a sales executive and letting him run your most important plants?”

Bring in the Board

Calling upon experienced and involved board members can be a less risky way to provide growth experiences for up and coming leaders. Several CEOs reported making  a point of bringing senior executives in front of the board on a regular basis, both to familiarize board members with potential leaders and to give the executives board presentation experience.

At The Nebraska Medical Center, senior leaders are also encouraged to visit with board members outside of board meetings to discuss challenges and ask for feedback. “We urge them to meet one-on-one outside of the office,” reports Fosdick. “Our board members are willing to take that time and we’ve found that our managers enjoy it and really good things come of those meetings.”

At Vermont Electric Power, board members sometimes take on a more involved role, in one case even chairing a working unit assigned to address an operational issue. “I take issues that we have and send one or more executives out to visit a board member and discuss it,” says CEO John Dunleavy. “It’s good exposure for everybody involved.”

 

 Assessment Abroad

For Craig Rogerson, CEO of Hercules, assessing the next generation of leaders has always been a “real challenge.” And now that challenge is intensifying with the company’s growth in international markets. “I believe that a lot of our good talent is outside of the U.S., but I don’t know how to assess their leadership capability,” says Rogerson. “Our assessment process is done by a panel that works in English, and I think the people from Korea, from Brazil, from France going through the process in a second language are at a disadvantage.”

It’s a problem shared by an increasing number of CEOs as their companies extend their reach—and their workforces—on foreign shores. How do you create a fair and equitable process to develop a global talent pipeline?

For Sunil Kumar, CEO of International Specialty Products, the assessment process must be adapted to the individual employee. “If we’re assessing someone in Korea, we want the assessment done in Korean,” says Kumar. “Even if the person speaks fluent English, they probably think in Korean. So we want all the interviews, the 360 evaluations, everything done in Korean.”

Tougher to address, says Kumar, are the cultural differences that can color perceptions of an assessment team. “To some extent you can do that by using a local team, but the metrics are still off,” he says.

“We’re better at getting exposure for American expatriates getting broadening assignments outside the U.S. than we are at bringing international executives into the U.S.,” agrees Alan Wilson, CEO of McCormick and Company.

To compete for and retain top global talent, companies will need to develop an inclusive evaluation and development processes. After all, “intercultural facility” will be an essential capability for future leaders, notes Allen Parchem, CEO of RHR International. “There’s got to be a discipline to be inclusive and give serious consideration to the people in countries where you operate,” he says. “And that will mean going out into the field, whether it be to France, Germany or wherever, to see people who have been identified as [having potential].”

 WHO'S WHO

J. P. Donlon is editor-in-chief of Chief Executive Magazine.

John Donleavy is president and CEO of Vermont Electric Power, an electric power company based in Rutland, Vt.

Glen Fosdick is president and CEO of Omaha, Neb.-based The Nebraska Medical Center, which owns a 687-bed teaching hospital and portions of facilities in Iowa, Missouri and Nebraska.

Edward M. Kopko is chairman, president and CEO of Butler International, based in Ft. Lauderdale, Fla., and chairman, CEO and publisher of Chief Executive Magazine.

Sunil Kumar is president and CEO of International Specialty Products, an $8 billion chemicals manufacturing company based in Wayne, N.J.

Ed Ludwig is president and CEO of Becton, Dickinson, a $7 billion medical technology company based in Franklin Lakes, N.J.

Bill Mitchell is CEO of Arrow Electronics, a $16 billion distributor of electronic components, systems and products based in Melville, N.Y.

Al Parchem is CEO of RHR International, a global management consulting company based in Wood Dale, Ill.

Tom Saporito is president of RHR International.

Craig Rogerson is president and CEO of Hercules, a $2 billion global specialty chemicals com pany based in Wilmington, Del.

Alan Wilson is CEO of McCormick and Company, a $3 billion seasonings and specialty food manufacturer based in Sparks, Md.

LexisNexis CEO Andy Prozes: Trials and Triumphs

When Andy Prozes took the helm at LexisNexis in 2000, the com pany was the go-to resource for legal records, relied upon by law firms and corporate law departments as a one-stop resource for all manner of articles and public records. In fact, among the legal community, "LexisNexis" was practically a verb, as in "I'll Lexis it and see what turns up." That kind of brand equity-a name that's synonymous with the service you provide-is tough to come by.

As Prozes is finding out, it's also tough to change. Seven years later, LexisNexis is a very different company, but "the market doesn't understand that we're no longer a database company," says Prozes, who spent the last seven years working to transform LexisNexis from primarily a research entity into a strategically aligned, global solutions provider. "When I came on board, we were a very dispirited, [disjointed] company that was losing out to our prime competitor, Thompson," recounts Canadianborn Prozes, who has seen revenues rise from $1.9 billion (2001) to $3.2 billion (2007) under his tenure. "We needed to build a global organization that was unified under a common brand around a common strategy, and to focus on improving our products through a renewed emphasis on technology."

Prozes lost no time taking steps to bring the ailing collection of disparate country operations of Lexis- Nexis, a division of Reed Elsevier based in New York City, into alignment. "It was remarkably difficult, and still is," he says. "To compare an operation in Malaysia, for example-where the people speak a different language, live and work in a different time zone, have an entirely different set of customers-

to what we do in Germany or France or Australia isn't an easy concept." In addition to forging a corporate culture capable of embracing the local cultures of LexisNexis outposts across the globe, Prozes faced the challenge of shifting the company's business focus. "We've essentially taken the information we have and added technology based workflow tools to allow, typically, legal practitioners, but other information practitioners as well, to do their jobs better and more quickly," he explains.

Much of that additional technology came to LexisNexis through a series of acquisitions-35 over the past nine years-which had to be integrated into the company's offerings and sold to a client base spread out over more than 100 countries.

"Lawyers all over the world need to handle their practices, get new clients, handle litigation, apply for patents and so on," says Prozes. Delivering such information-based solutions to lawyers across the globe comprises the bulk of LexisNexis' total revenue-about 75 percent.

While the U.S. market still accounts for a hefty two-thirds of that revenue, the balance is beginning to shift. LexisNexis already has significant business in the U.K., France, Canada, Australia and Germany, and Prozes expects "explosive growth" in markets like India, Taiwan, Korea and China. In addition to that global growth, he's banking on the fast-growing sector of risk information analysis (RIA) to continue to drive Lexis- Nexis' profits going forward.

"RIA has grown dramatically, and continues to grow in the double digits," says Prozes, who says the credit card boom and security concerns are the principal drivers of that growth. "Laws about [privacy] are much more stringent here in the U.S. and in the U.K., which means that you have to rely much, much more on news articles to verify that people are who they say they are-and we have by far the largest database of news articles of anybody else on the face of the Earth."

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