THE THIRD ANNUAL NYSE CEO SURVEY REVEALS HOW THE WORLD’S MOST INFLUENTIAL COMPANIES ARE SUCCEEDING BY PLACING CUSTOMERS FIRST.
REPORTING BY SUSAN CAMINITI
“2008: THE YEAR OF THE CUSTOMER” analyzes the views expressed by 240 of the world’s most powerful business leaders and is based on responses to the NYSE CEO Report 2008 questionnaire. nyse magazine reports where these executives see opportunities for growth, where obstacles may lie and how today’s challenges have altered the way they do their jobs. Respondents include CEOs from 24 countries and more than 20 industries. Combined, their companies represent a market capitalization of more than $1.6 trillion and 2006 reported revenues of nearly the same amount.
In the midst of running their businesses in an increasingly global marketplace, the CEOs of companies listed on the New York Stock Exchange share their thoughts about the challenges and opportunities they see in 2008 and beyond. Themed “2008: The Year of the Customer,” this third annual survey captures the CEOs’ views that a renewed and robust focus on the people their companies serve is at the very core of what it will take to grow in the years ahead.
As CEOS continue to grapple with the seismic changes born of an ever-faster, more global economy, they acknowledge a renewed focus on one of the biggest drivers of growth: their customers. Over the next few years, CEOs report, meeting and exceeding customer expectations in all aspects of business will build the best foundation for sustainable growth.
More than half the respondents this year say they’ll budget more for customer-relationship management through 2008, and nearly a third expect to spend more time courting customers. “The power to attract and retain customers is fundamental to a successful organization,” says Steven Loranger, CEO of ITT CORP. (ITT). “Satisfying customers requires a solid understanding of their needs, and fostering that understanding has to come from the top.”
Despite this renewed focus, the leaders predict more challenges just around the corner. While 39 percent of respondents say it is easier to attract customers than it was three years ago, only 29 percent say it is easier to keep them. “When the difference between products from company to company is decreasing, the quality of your service is often what allows you to keep customers,” asserts Jim McCluney, president and CEO of the California data-storage company EMULEX CORP. (ELX).
CEOs of companies based outside the U.S. are particularly aware of this challenge. Nearly 40 percent of these leaders say it’s gotten harder to attract customers over the past few years, and 42 percent say it’s more difficult to keep them.
REGIONAL VIEWS DIFFER
For the first time, the report looks at how attitudes diverge by region. While sharing similar views in many instances, non-U.S.-based leaders express a greater concern with inflation, the cost of capital and global competition than do leaders in the U.S. CEOs outside the U.S. feel they get a bigger bang for their technology buck. A little more than 40 percent say the return on their company’s technology investment has fully met or exceeded expectations. By comparison, only one in four U.S. CEOs feels as satisfied. “The bar is constantly being raised regarding what you want technology to do for your company,” says Edward Hanway, chairman and CEO of health insurer CIGNA CORP. (CI). “We need to have a better return.”
CEOs outside the U.S. have a different take on what matters to shareholders as well. For instance, 43 percent of non-U.S.-based chiefs feel the company’s brand matters more to their stakeholders today than it did three years ago.
Similarly, 63 percent of executives outside the U.S. say shareholders find a company’s reputation more important today than they did three years ago, but only 41 percent of their U.S. counterparts agree. Patrick Cescau, group chief executive of the U.K.-based consumer-goods companies UNILEVER PLC (UL) and UNILEVER NV (UN), says maintaining the Unilever Group’s reputation is “a critical part of my role, and I make sure that we work hard to both protect and enhance our reputation. When issues do arise, our reaction is swift, honest and with the company’s long-term reputation in mind.”
Geographical differences among respondents also signify which regions are important to their companies. While nearly all U.S.-based leaders cite the U.S. as strategically crucial or important, 77 percent of CEOs based elsewhere feel that way. Regarding the single most crucial region, most choose their home market. Just 7 percent of U.S.-based leaders call China the strategically most crucial region, while 15 percent of leaders outside the U.S. rank China as No. 1. Non-U.S. CEOs are also more likely to say that their jobs are more rewarding today than they were three years ago, compared with U.S. business leaders.
LESS ANGST OVER COMPLIANCE
Compliance and health care — two topics that a few years ago riled even the most serene CEOs — seem to be generating less angst. This year 59 percent of respondents expect compliance costs to affect profits compared with 70 percent in 2006. With companies already creating the infrastructure to cope, governance issues “have settled into the organization,” observes Richard Schnieders, chairman, president and CEO of food distributor SYSCO CORP. (SYY). “There aren’t the incremental costs associated with Section 404.”
Similarly, 47 percent of executives say health-care costs will affect 2007’s bottom line, versus 59 percent last year. Executives report that they are implementing health-management programs rather than upping employee premiums. “More companies realize that healthy employees simply cost less,” says CIGNA’s Hanway. “Keeping them healthy is the only long-term solution for driving down health-care costs.”
As they devote less time to compliance and health-care issues, CEOs say they are focusing on the pressing duties of setting strategy and managing customer relations.
A robust global economy is good news, but respondents point to costs associated with prosperity. Globally, inflation and the cost of capital remain major concerns. In the U.S., however, fears about inflation and energy costs appear to have lessened. Indeed, 84 percent of U.S. CEOs describe the U.S. economy as excellent or good — as do only 51 percent of their non-U.S. counterparts and just 37 percent of American adults. One interpretation is that, because their fingers are on the pulse of the U.S. economy, U.S.-based CEOs are better equipped to forecast economic direction.
Columbia University professor Joseph Stiglitz has a different take on the data: “American CEOs are doing well,” he says. In contrast, he notes, U.S. median income is falling, and the average middle-class citizen worries about job security and health-care costs. “Executives outside the U.S. look at America and ask, ‘How can you have a robust economy with declining incomes or savings rates that are negative?’” says Stiglitz.
But WASTE MANAGEMENT INC. (WMI) CEO David Steiner points out that “if you look at high energy prices, a weak dollar, a housing market that’s not great and commodity prices at three-year highs, our economy looks disastrous. Still, the consumer is spending, and we’ve been through cycles like this before.”
THE EMPLOYEE FACTOR
In fact, with job prospects more plentiful, more CEOs are registering a concern about employee retention. While 31 percent say keeping employees is easier than it was three years ago, 34 percent feel that it’s gotten harder. “We’re in a talent war,” observes Bob Gandossy, global solutions leader for HEWITT ASSOCIATES INC. (HEW), the human-resources company. “Employees are looking at options all the time. Very few organizations are doing the things that can really differentiate their companies from competitors when it comes to employees.”
Employee issues have a ripple effect on customers. “Workers who are passionate about what they do directly influence the customers’ experience,” says Jeffrey Resnick, president of Opinion Research Corp., the market research firm that conducted the NYSE CEO survey. “Employee commitment helps create the very fabric of how a company is viewed.”
Even more than bonuses and stock incentives, employee development and good management build loyalty, according to the respondents. “Our employees thrive on being challenged,” says Rex Tillerson, chairman and CEO of EXXONMOBIL CORP. (XOM). “Our business provides many complex technical, engineering, commercial and political challenges that test the best minds in our industry. In the first few years, new employees decide whether we are the right fit. Very few leave after five years.”
Methodology
In 2007, Time Inc. Content Solutions commissioned Opinion Research Corp., an independent global strategy and market research and consulting organization, to conduct the NYSE CEO Report 2008, the third annual survey of CEOs of NYSE-listed companies, on behalf of NYSE Euronext. A questionnaire was administered via the Internet, phone and mail from Feb. 22 to March 28, 2007, generating 240 responses from leaders in 24 countries and more than 20 industries. Of that total, 188 responses were from the U.S.; 23 from Central and South America; 10 from Europe, the U.K. and the Middle East; eight from the Asia-Pacific region; seven from Canada; three from Bermuda; and one from South Africa. Some 35 percent of companies had a market capitalization of $3 billion or more. Although the average respondent reported CEO tenure of seven years, 26 percent had been in the position for less than three years and 21 percent for 10 years or longer.
An additional CARAVAN Omnibus survey conducted to include comparisons of the American public’s sentiment polled 1,035 American adults from March 30 through April 2, 2007.
Opportunities & Risks
GROWTH DRIVERS, CHALLENGES AHEAD WHICH FACTORS HAVE THE MOST IMPACT ON GROWTH AND PERFORMANCE? WHICH AREAS REQUIRE BUDGET INCREASES? HOW HEALTHY IS THE U.S. ECONOMY? ARE YOU SATISFIED WITH YOUR TECHNOLOGY ROI?
THE CEOS of NYSE-listed companies reveal a major priority for the coming year: to heighten their focus on customers — both getting and keeping them.
“Every employee — from the CEO to business-unit leaders to employees in sales, engineering, manufacturing and administration — must feel a real sense of ownership in enhancing customer satisfaction,” points out ITT CEO Steven Loranger. At ITT, “we encourage an environment of innovation and risk taking that empowers our employees to satisfy our customers.”
REVENUE DRIVERS
A number of internal factors influence whether customers keep coming back (and sales keep growing), according to the business leaders. At the top of that list is leadership, as three out of four CEOs say they expect their management team to have more or much more impact on their company’s revenue growth through 2008.
New technology, brand strength and new product development make up the next-tier drivers of top-line growth. In fact, more than three out of five respondents indicate they believe that technology is the key to revenue increases.
“We understand our customers better today than at any time in the past,” says Richard Schnieders of SYSCO. “Technology allows businesses to have more data about them. But more important, we have the skills to interpret that data to figure out how to better serve them.”
For business leaders who are based outside the U.S., sales and distribution channels, price flexibility and employee-incentive programs are expected to have a larger impact on revenue growth than they will for U.S.-based CEOs. Regarding which external factors affect overall growth, respondents from all regions agree that U.S. and global economic conditions will be the biggest influences. One discrepancy: more than one-third (35 percent) of non-U.S.-based CEOs cite inflation and the cost of capital as having a strong impact on their company’s growth, compared with only 21 percent of U.S. business leaders.
THE IMPACT OF M&A
Just as important as the economy are regulation and M&A. Yet even as nine out of 10 CEOs say that M&A activity will have an impact on revenue growth, more than half (56 percent) expect growth to be driven organically. Only 20 percent of survey respondents say they believe revenue growth will come primarily from M&A, while 24 percent say internal growth and M&A will contribute equally.
CEO Jim McCluney indicates that 70 percent of Emulex’s revenue comes from its core businesses. However, he agrees that M&A activity is crucial to his company’s success. “We made two acquisitions in the past year, one of which was immediately accretive,” he points out. “The other acquisition is what I call a long ball because it won’t pay off for a few years but positions our company for the future. There’s only so much you can do organically.”
Operational efficiency scored highest among respondents comparing internal factors that affect profitability with their impact of three years ago. However, when asked to name the single most important profitability driver through 2008, 19 percent of CEOs point to their management team. That contrasts with last year, when business leaders indicated that compliance costs was the factor most likely to affect profits. The expected impact of health-care costs is also less of a concern this year, with just 1 percent of survey respondents naming it as the most important profit influencer.
Edward Hanway of CIGNA insists that having the right management team is what fosters efficiency in an organization. “At CIGNA, our team is the No. 1 determinant of success in anything we do — and that includes efficiency drives,” he says. “If we weren’t strong or didn’t work well together, we couldn’t succeed.”
HOW STRONG IS THE U.S. ECONOMY?
It turns out that executives at U.S.-based companies have significantly different views about the American economy than CEOs outside the country — or even the general public. When asked to rate U.S. economic conditions today, nearly three-quarters of U.S. business leaders call them good, 10 percent characterize them as excellent, and only 1 percent consider them poor.
More than half of responding executives outside the U.S., however, categorize the U.S. economy as good, with the rest describing it as fair or poor. The average American is the most pessimistic, however. With just 8 percent of surveyed adults describing the U.S. economy as excellent, more than one in five view it as poor.
Energy rates rank highest among the factors with the greatest influence on business planning, with two-thirds of CEOs naming it first. GDP, interest rates and the Consumer Price Index also factor heavily into business planning, note the respondents.
When answers are broken down by industry, other measurements gain importance. For instance, personal bankruptcies play a bigger role in business planning for companies in financial-services industries, banking and real estate than they do for retailers and consumer-goods and health-care companies.
SPENDING HIKES
Although they expect to boost spending across all budget areas in their companies, the respondents say, the increases should generally be less than 10 percent. The CEOs predict the largest percentage increases will come in technology spending and capital expenditures.
Again, U.S. executives and their non-U.S. counterparts diverge on the ranking of some line items. Nearly 80 percent of U.S. business leaders expect to spend more on health care in the coming year (the same percentage who predicted increases last year), compared with only about one-quarter of non-U.S. CEOs.
Also significant for U.S. executives are expected budget increases for energy and nonmanagerial compensation. Six of 10 non-U.S. executives indicate that they will spend more on corporate social-responsibility initiatives in the coming year; that compares with just 28 percent of U.S. CEOs.
THE HEALTH-CARE AGENDA
Although most U.S. CEOs point out that they expect to budget more for health care, fewer of these respondents report that they will increase employee premiums or deductibles in the year ahead.
The survey indicates a large increase in the number of business executives who say their companies are using corporate wellness programs as a way to control health-care costs. In 2006 slightly more than one in 10 survey respondents mentioned wellness programs, compared with nearly six in 10 this year.
This coincides with the findings of a recent Hewitt Associates survey, which indicated that more large companies are going beyond shifting insurance cost increases to employees and plan to invest more in the health of their workers. Adds CIGNA’s Hanway: “Business is moving much faster than government or the states on the issue of helping to improve the health of employees.”
TECHNOLOGY ROI
More than 60 percent of survey respon-dents indicate that they expect to spend more for technology in the coming year, but many say they’re not getting their money’s worth. As in 2006, just one in four CEOs feels that the return on their company’s technology investments has fully met or exceeded expectations. Non-U.S.-based business leaders appear more satisfied, with 42 percent saying technology ROI has fully met or exceeded their expectations.
Marijn Dekkers, president and CEO of THERMO FISHER SCIENTIFIC INC. (TMO), says he is among the 24 percent of U.S. CEOs who are satisfied with their technology investments. “Our products and services are focused on the scientist in the lab, so we have to be very in tune and involved with our technology development,” he says. “As we go through different stages of new product development, we constantly look at our processes and the goals we want to achieve. And we have the discipline to terminate projects if we believe they are not going to pay off.”
Dekkers points out that his affinity for technology is long held. “In my early days I was a scientist and then a technology director for 10 years,” he says. “So this area gets a lot of my attention.”
Stakeholders
SERVING CUSTOMERS, EMPLOYEES AND INVESTORS
IS IT EASIER TO ATTRACT AND RETAIN CUSTOMERS, EMPLOYEES AND INVESTORS THAN IN THE PAST? WHICH BENEFITS AND INCENTIVES WILL HAVE MORE IMPACT ON EMPLOYEE RETENTION THROUGH 2008?
WITH CEOS REPORTING that they are more comfortable with governance issues that have dominated their time during the past few years, their focus is now returning to their stakeholders, including employees, shareholders and customers.
The business leaders report that in the years ahead, attracting and keeping customers might be among their most crucial jobs. In fact, by a two-to-one margin (38 percent versus 16 percent), CEOs outside the U.S. expect it will be more difficult to attract customers than it was three years ago. All CEOs agree that satisfied customers are essential to achieving long-term, top-line growth.
HEARING THE CUSTOMER’S VOICE
Businesses are backing up their belief in the power of customers with both time and money. More than half of respondents to this year’s survey say they will spend more money on customer-relationship management this year than in the past, and a third report that they are allotting more of their time to customer relations today than they did three years ago. ITT’s Steven Loranger says his company places “a premium on making sure we hear and understand the voice of the customer.” Noting that ITT’s value-based product development process helps ensure “that we keep our customers’ needs in mind when we design new solutions,” Loranger adds: “It also helps keep projects from going down the wrong path.” Such an approach, he says, demands some extra legwork — “meetings with customers, research and reviews of customer goods and services — but it’s worth it.”
Mark Frissora, chairman and CEO of HERTZ GLOBAL HOLDINGS INC. (HTZ), says it’s the CEO’s duty to maintain “a healthy balance between customer satisfaction, employee satisfaction and shareholder value.” He says this can be achieved “by implementing a performance-measurement system that equally values those three areas of focus.”
RETAINING EMPLOYEES
Attracting — and keeping — a company’s best employees is key to delivering the best products and services to customers, say the CEOs. Stephen Hanks, president and CEO of engineering, construction and management firm WASHINGTON GROUP INTERNATIONAL (WNG), believes that “top-line growth will happen if a business has the human resources that deliver for their customers.”
ADVANCED MICRO DEVICES INC.’s (AMD) Chairman and CEO, Hector Ruiz, points out that young employees joining his company have a different outlook from those in past years. “They want a well-paying, challenging job,” he insists. “But they also say that they want to make an impact, to make a difference in the world.”
More than 40 percent of respondents think it’s easier to attract employees now than it was three years ago, but about one in three says it has become harder to keep them. In fact, in each of the past three years, an increasing percentage of CEOs have voiced concern that keeping workers is getting harder.
The best way to retain workers, suggest 83 percent of CEOs, is good management. Next come development, cash bonuses and stock incentives. Retirement benefits are cited as a way to hold on to employees by just 21 percent of CEOs — 13 percent say they will have less impact through 2008.
Respondents from different regions diverge on what it takes to keep employees loyal. More than half of non-U.S. business leaders suggest that employee education programs, including tuition reimbursement, will have an impact on worker retention, while just a third of U.S. CEOs feel that way. Similarly, more than one in four executives outside the U.S. stress the importance of day-care programs, compared with a mere 8 percent of U.S.-based CEOs.
Size plays a role too. Nearly half the leaders of the biggest companies (those with market caps of $3 billion or more) suggest that their corporate social-responsibility efforts will contribute to increased employee retention. Companies with market caps of less than $1 billion favor cash bonuses.
Among the issues that have elicited the most discussions among employees and executives is the cost of health care. However, this year’s responses suggest CEOs are less concerned about those costs than they were in the past. As a result, fewer business leaders indicate they are increasing employee deductibles (63 percent) or employee premiums (67 percent) compared with last year, when about four out of five CEOs said those costs would be going up.
Another closely followed topic is the benefits of corporate wellness programs. Nearly 60 percent of survey respondents indicate that prevention and health-management initiatives will be among the tools they’ll use to manage health-care costs. In 2006 just 11 percent said their companies were using wellness programs to control costs.
INVESTOR APPEAL
More than half of the CEOs say that, compared with customers and employees, attracting investors is easier than it was three years ago. Less than a fifth of the executives say it’s harder.
As for what matters most to shareholders, CEOs appear to believe in the here and now. Net income growth, earnings-per-share growth and operating income growth accounted for the top three responses. Nearly one in five respondents say total debt outstanding is less important to shareholders than it was three years ago, and 16 percent indicate that dividends or dividend growth matter less.
Governance & Reputation
COMPLIANCE, CEO DUTIES AND THE CORPORATE NAME
HOW HAVE GOVERNANCE ISSUES AFFECTED COMPANY OPERATIONS? ARE BOARDS EFFECTIVE? HOW HAS THE CEO ROLE CHANGED? WHAT STEPS ARE COMPANIES TAKING TO SAFEGUARD THEIR REPUTATIONS?
Compared with the past two nyse magazine surveys, CEOs appear more at ease regarding governance issues. Seventy-eight percent report that they are spending more time on regulatory and compliance issues than they did three years ago, down from nearly 90 percent who felt that way in 2006.
Compliance, along with reporting to the board, remains a focus of a large number of CEOs. Yet a rising percentage say they are devoting more attention to setting strategy and to customer relations. Sixty-three percent of CEOs say they log more hours on strategy, compared with just 47 percent in last year’s survey. The one-third who say they dedicate more time to customer relations is up from 22 percent in 2006 and 25 percent in 2005.
The equanimity that seems to surround the issue of governance is developing for a number of reasons, according to survey participants. Perhaps most important, the Sarbanes-Oxley Act went into effect more than five years ago, and many business leaders say they have established teams to deal with compliance. “When SOX first came into being, it was such an emotional situation,” says David Steiner of Waste Management. “In that environment you couldn’t have a rational discussion — the law was either all good or all bad. Now I think people can calmly discuss it.”
BOARD RELATIONS
The changes in the roles of directors and overall expectations of boards post-SOX have also become better defined, according to the CEOs. A large majority — 93 percent — says that CEO expectations concerning their directors’ depth of knowledge have increased. The total percentage is not that different from 2006, when 95 percent of respondents agreed. But this year saw some cooling among the CEOs who strongly agree with that statement, falling from 45 percent last year to 36 percent in 2007.
Still, more than eight out of 10 CEOs agree that board members keep themselves well informed about key issues affecting their companies, a finding that also was consistent with 2006 results.
Nearly 30 percent of the survey participants strongly agree with the statement that boards are excellent sources of advice and insight, and more than half say that they’re satisfied with the level of insight their board provides concerning the global issues their company faces. Richard Evans, president and CEO of ALCAN INC. (AL), describes his board as “highly qualified and educated. We take them to sites around the world to review what’s taking place.”
Geography seems to play a role in how respondents view their relationship with their directors. Nearly a quarter of non-U.S.-based executives strongly agree that they are able to attract board members with the needed skill sets; fewer than 10 percent of U.S. CEOs make that claim. Further, 43 percent of business leaders based outside the U.S. feel strongly that they have a positive relationship with their boards, compared with just 24 percent of U.S. CEOs.
A topic that this year’s survey addresses for the first time is the executive compensation process. Although 60 percent report that they’re satisfied with the way pay is determined, a mere 8 percent of those CEOs are completely satisfied, and 40 percent are dissatisfied or did not answer.
The way business leaders feel about how their compensation is set appears to be closely tied to job satisfaction. Seventy-one percent of those who find their jobs “more rewarding” than in the past say they are satisfied with the compensation process, compared with just 48 percent of CEOs who find their job less rewarding.
CHANGES TO CAPITAL MARKETS
This year’s survey tackles another topic for the first time: the competitiveness of the U.S. capital markets. CEOs feel strongly that changes to the American legal and regulatory systems would help. For instance, 91 percent of business leaders believe changes that would lower litigation risk to market participants would positively affect the competitiveness of U.S. capital markets.
Similarly, roughly nine of 10 business leaders say they would consider the streamlining of the U.S. regulatory system and the easing of some governance rules and regulations to be positive moves. “SOX legislation is way overdone,” insists Marijn Dekkers of Thermo Fisher Scientific. “But to the extent that it reinforces the need for good systems, then that’s a benefit.”
Two-thirds of executives also suggest the convergence of international accounting standards would be a plus for the U.S. capital markets. This preference is particularly stressed by the 77 percent of non-U.S.-based respondents who agree that convergence would bring benefits, compared with just 62 percent of CEOs in the U.S.
THE CEO ROLE
How do CEOs really feel about their jobs? In the wake of increased shareholder scrutiny, heightened regulation and unrelenting global competition, 96 percent report that their work is more time-consuming. But 53 percent also say the job has become more rewarding, up from 45 percent who felt that way in 2006.
“You have to really, really want to do this job,” is the blunt assessment of Jim McCluney of Emulex Corp. “There’s the constant push and pull of trying to make everyone happy and knowing that you never can. But I love it, and I love dealing with people.”
Global Operations
ONE WORLD, MANY MARKETS
WHICH COUNTRIES ARE COMPANIES MOST FOCUSED ON? ARE EMERGING MARKETS A THREAT OR AN OPPORTUNITY? WHAT IS THE BEST STRATEGY FOR ENTERING EMERGING MARKETS?
FOR TODAY’S CEOS, the question is not whether to expand globally but which markets to focus on. The U.S. is cited most often as stragetically important through 2008, with fully two-thirds of all respondents ranking it No. 1. China is a distant second with 9 percent. Southeast Asia and Mexico round out the top four.
When it comes to U.S. versus non-U.S. CEOs, the numbers diverge. Although 79 percent of U.S. CEOs rank their home country as the single most crucial region in the coming year, just 18 percent of non-U.S. leaders rank the U.S. as No. 1, on par with Mexico and close to China and Brazil. (Of the 52 non-U.S. responses, 23 are from CEOs based in Latin America.)
Medical-device maker MINDRAY MEDICAL INTERNATIONAL LTD. (MR) chairman and co-CEO Xu Hang allows that China’s vastness is one of its principal attractions. But he also says its size makes it difficult for a business to navigate. “Developing a long-term strategy is necessary,” he says, “in order to succeed.”
India is also promising, says Marijn Dekkers of Thermo Fisher Scientific, who predicts 20 percent annual growth in that country through 2012. Citing its already huge generic-drug market, India “will be doing more clinical trials and will need the type of products we’re known for,” says the CEO, who notes that Thermo Fisher Scientific is building a new factory in India.
Companies are expanding around the globe primarily to identify new markets for their goods and services. In fact, 72 percent of business leaders are looking to Russia in the coming year for this very reason. Says Tony Maher, CEO of WIMM-BILL-DANN FOODS OJSC (WBD): “Today we serve in excess of 250 million consumers from Ukraine, Belarus and the Central Asian countries as well as Russia. These are markets with huge potential as incomes rise.”
When asked to characterize emerging markets through 2008, 61 percent see them as opportunities, with just 2 percent calling them a threat. Just over one-third of CEOs say they maximize emerging-market opportunities through local partnerships. Nearly one-quarter of all CEOs invest in wholly owned local facilities, but it is the most popular route for corporations with market caps of $3 billion or more. For companies with market caps of less than $1 billion, local partnerships are preferred.
This year 48 percent of CEOs call the impact of global trade on their businesses favorable, up from 38 percent in 2006. Large-cap companies have the most bullish outlook about the impact of global trade. Non-U.S. companies are the most optimistic: 64 percent of CEOs of corporations that are headquartered outside the U.S. view the global trade environment as favorable.
Less than half of CEOs who have moved some operations offshore view the experience as very successful. While the percentage of CEOs who describe offshoring as very successful rose from 43 percent last year to 48 percent, that’s down from 64 percent in 2005. Still, less than 5 percent of CEOs say their offshore operations have failed to achieve goals.
The CEOs agree that the need to understand and adapt to local cultures and preferences will only get stronger in the years ahead. Says Neville Isdell, chairman and CEO of THE COCA-COLA CO. (KO): “Long-term success requires developing enduring preferences that earn a daily invitation into people’s lives.”
Rex Tillerson, ExxonMobil Corp.
WHAT ARE THE CHALLENGES OF OPERATING IN A GLOBAL INDUSTRY?
Perhaps no industry is closer to the epicenter of what shapes world economies than the energy sector. As chairman and CEO of the world’s largest oil company (based on market capitalization), EXXONMOBIL CORP.’s (XOM) Rex Tillerson notes: “We live in a world characterized by complexity, geopolitical uncertainty and, especially for our industry, questions about which regions will have an impact on our future.” The one thing that remains “clear and simple,” he says, is “our fundamental mission as an industry: We must meet the world’s growing need for affordable, reliable energy in a manner that is economic, safe and environmentally responsible.”
Tillerson acknowledges that operating in a global industry that touches everyone from policymakers to consumers presents special challenges. “The questions we get reveal the lack of knowledge about the energy industry, its enormous scale and the long-term nature of our business,” he says. For instance, he points out that the U.S. consumes about 25 percent of the world’s energy, so a large portion of the supply ExxonMobil develops in other countries comes to the U.S. “We have to buy that supply from the global pool,” Tillerson explains. “Without understanding our business fundamentals, policymakers might make decisions today that could have long-term, negative consequences for society.”
Tillerson says that the interdependency of countries, while challenging, is ultimately the path to worldwide economic growth for all global citizens. “What we do in the U.S. affects the rest of the world, and vice versa. Reliable supplies of energy and other products have revolved over the past several decades around the principles of open trade and healthy interdependencies. Consuming countries need producing countries and producing countries need consumers. These interdependencies should not be feared but embraced as a source of future economic growth.”
Neville Isdell, The Coca-Cola Company
WHAT DOES IT TAKE TO LEAD A GLOBAL COMPANY INTO THE FUTURE?
Neville Isdell, chairman and CEO of THE COCA-COLA CO. (KO), says running a successful global company requires developing relationships with local businesses. Coca-Cola, he notes, contracts locally for the ingredients, equipment and supplies used to produce products in the more than 200 countries where the company has a presence.
This model, says Isdell, pays dividends by creating employment opportunities, income, tax revenues and sustainable businesses. The approach also helps strengthen community ties and leads to higher living standards in local markets, explains Isdell.
“The contributions we make in local communities create a kind of virtuous cycle that earns a business its social license to operate in a global economy,” he says.
Isdell notes, however, that a social license to operate only allows a global business to exist. To thrive, he advises, a company must align its products and services with consumers’ larger economic interests and social values. To achieve this growth, the CEO says, companies must work with local partners. For example, Isdell says Coke’s partnership with the environmental activist group Greenpeace led it to introduce refrigeration technologies that not only reduce the environmental impact of its coolers but also cost less to operate.
Ultimately, explains Isdell, a company’s most important partnership is with the larger community within which it does business. “Successful collaboration is built on multilateral diplomacy — finding the common ground where a company’s self-interest and the economic development, environmental stewardship and social-justice needs of communities converge,” he says. “The integration of the global economy, coupled with respect for local interests and cultures, remains the most effective means to lift people out of poverty, advance prosperity and ensure the sustainability of a business.”
Hector Ruiz, Advanced Micro Devices Inc.
WHERE ARE THE GREATEST GROWTH OPPORTUNITIES FOR THE FUTURE?
Over the next 18 months, Hector Ruiz says, healthy growth will come from information technology, with the strongest contribution to that growth coming from China, Eastern Europe, India and Russia. “IT is the oil of the 21st century, and high-growth markets are hungry to participate,” states the chairman and CEO of ADVANCED MICRO DEVICES INC. (AMD).
Ruiz acknowledges that “emerging markets are not the same as poor markets,” especially when it comes to technology. He cites Russia as an example, noting that government officials are acutely aware of the need to build “enterprise infrastructure,” such as data centers and switches for telephone networks. “When businesses have the necessary IT systems, they grow,” says Ruiz. “That results in job creation, which gives consumers money to spend. Among the things they spend it on are home computers. And the cycle continues.”
In India, Ruiz observes, the general consumer is “fascinated by the use of technology for home entertainment,” and if choosing between a television and a computer, consumers there more often choose the TV. “That gives us a tremendous opportunity to work with our partners in developing a digital home solution that consumers can afford,” Ruiz says. Educated populations in countries such as Poland and the Czech Republic create markets that seem more analogous to the U.S. when it comes to IT, Ruiz says. “These consumers want technology that will enable them to run small businesses out of their homes,” he says.
No matter how much research is done on promising markets, Ruiz says, nothing compares with actually doing business there. He explains that AMD vastly underestimated the customer desire for online banking in Brazil. “We thought the most important thing consumers would want was to surf the Web,” he says, noting that the company had to retool its products to install the security features needed to bank online. Says Ruiz: “The opportunities are great if you understand the market.”
Peter Georgiopoulos, General Maritime Corp.
WHAT WILL BE YOUR APPROACH TO M&A IN 2008 AND BEYOND?
When it comes to mergers and acquisitions, Peter Georgiopoulos says he favors a two-pronged strategy. As chairman, CEO and president of GENERAL MARITIME CORP. (GMR), a leading worldwide transporter of petroleum products, Georgiopoulos says he looks first at whether the ships he’s considering acquiring are in a segment of the industry with growth potential — would they enable General Maritime to receive the proper return required from leasing them to various oil companies? “I want to see that the ships are modern and well maintained,” he says, noting, “I’ve done deals where I’ve bought one ship, and others where I’ve acquired 19.” The CEO categorizes the second prong of his M&A strategy as less analytical. “It depends on how I feel about where the market is heading,” he says plainly. Through 2008, Georgiopoulos says, he’ll likely wait for values to come down. “Prices for ships are high because demand from the oil companies has been strong,” he explains. “I don’t think we’ll invest in additional ships for the rest of 2007; however, we would seize the opportunity if we saw a deal that met our return requirements.”
Georgiopoulos says understanding the psychology and undercurrents of any industry are essential. “There’s a herd mentality in business,” notes this former Wall Street investment banker and son of a maritime lawyer. “When I see that everybody has the same bright idea at the same time, I tend to back off.” Case in point: A few years ago many competitors were getting into the liquefied natural gas (LNG) business, he explains. But, Georgiopoulos says, building a new, LNG-ready ship would have cost at least $200 million (compared with the typical $19 million to $75 million cost of a used tanker), and his sense of where the market was heading didn’t support spending so much money on one vessel. “If oil companies know you’ve ordered a $200 million ship, they can drive a hard bargain in the prices they’re willing to pay to charter it from you,” he explains. “It was one of the best decisions not to do something that I’ve ever made.”
Patrick Cescau, Unilever Group
HOW DO YOU COPE WITH RISING COSTS?
For a multinational corporation such as the Unilever Group — whose two parent companies are UNILEVER PLC (UL) and UNILEVER NV (UN) — managing costs requires a multifaceted approach, says Group Chief Executive Patrick Cescau. “In highly competitive environments, you cannot let costs get out of line,” he says. “So our approach is to focus less on costs themselves and more on driving productivity.” In fact, Cescau explains, “it’s not just the finance department that worries about costs; all our managers are taught to own the issue. The key starting point is ensuring that they understand their cost drivers. It is essential to have a real knowledge of all the components across the whole product cycle — from raw materials to distribution to marketing.”
Unilever’s more recent efforts to rein in costs grew out of its new corporate structure. In April 2005 Unilever PLC and Unilever NV began operating as one company with a single CEO, thus eliminating overlap and lowering overhead, Cescau says. For example, Unilever launched a hair-care product in Brazil, Russia and China simultaneously, using the same television commercial with three different voice-overs, Cescau explains. “One idea, one execution,” he says. “The savings of doing things once rather than twice are considerable.”
Cescau adds that innovation also helps Unilever manage costs. Sometimes that involves reformulating products by using lower-cost ingredients or reduced packaging, he explains. “Other times it can mean creating innovative products in higher-value areas,” Cescau says. As an example, he points out that “margarine was once viewed as a basic commodity, so it was more susceptible to cost pressures.” Unilever added ingredients that support heart health, and consumers now see a higher value and are therefore less price sensitive, he explains. “The point is that if you talk to your customers and suppliers about costs, it’s a difficult discussion,” Cescau says. “But if you talk to them about value creation and innovation, it’s a positive discussion.”
Xu Hang, Mindray Medical International Ltd.
WHAT IS YOUR APPROACH TO R&D?
Success in R&D has a lot to do with “listening to what customers need,” says Xu Hang, chairman and co-CEO of MINDRAY MEDICAL INTERNATIONAL LTD. (MR). Xu launched the Shenzhen-based medical-equipment developer and manufacturer in 1991 with co-CEO and President Li Xiting. Customer needs in China, he says, may differ from those of consumers in more developed markets. “We don’t develop products unless we see the potential for bringing something unique to the market, or at least significantly improving a product or reducing the price,” Xu says. He points to Mindray’s introduction of color Doppler ultrasound imaging and high-end patient-monitoring systems. Mindray’s products emphasize portability and such features as color LCD monitors, which, he notes, makes them more versatile than the bulky analog machines with monochrome displays that they replace.
“We don’t think about technology without considering price,” says Xu, explaining that “China is a price-sensitive market with most demand at the low end and midlevel.” Noting that Mindray plans to expand into areas that complement current product categories, he cites anesthesia machines as an example. “They are used in the same operating rooms as patient-monitoring systems,” says Xu, “so they are used by the same customers.”
Pointing out that China’s infrastructure is underdeveloped, Xu insists that R&D must be backed by service and support. “Weakness in this area may explain why the failure rate of overseas operations is high in China,” he suggests. In addition to 650 of its own directsales personnel, Mindray taps 1,800 distributors to cover hospitals, clinics and health-care facilities throughout China’s vast countryside. The company augments its service staff of 150 with distributors who also offer service and support. To succeed in China, Xu adds, “service and support have to be good. They have to be better than elsewhere.”
Roger Linquist, MetroPCS Communications Inc.
HOW WILL TECHNOLOGY ASSIST GLOBAL COMPANIES IN THE FUTURE?
Roger Linquist, chairman, president and CEO of METROPCS COMMUNICATIONS INC. (PCS), the Dallas-based wireless communication provider that he founded more than 10 years ago, calls technology a “scale enabler.” His experience has taught him that “cost-structure reduction remains the foundation for competitive companies and thus will ultimately drive profitability.” Those businesses that use technology to reduce recurring costs “are the companies that will survive, be more competitive and ultimately be more profitable,” says Linquist.
MetroPCS reports that it was one of the first wireless operators to use an all-digital network based on third-generation infrastructure and handsets. “Companies should focus their tech resources to increase return on capital employed or simply to leverage a company’s existing capital base,” Linquist says. While acknowledging that it is difficult “to save your way into prosperity,” he suggests that using technology in both noncore and core competencies will drive a lower cost structure and increase speed to market that will ultimately encourage corporate profits.
For instance, technology investments in R&D, says the CEO, will not only provide additional revenue sources but will also promote efficiencies and better capital management and lead to quicker or greater economies of scale. “There is still room in today’s business environment for technological advances that can drive new product revenue and product extensions,” Linquist insists.
He adds that these opportunities may come from anywhere around the globe. “Businesses need to be at the forefront of creating greater customer value from new technology with emphasis on cost efficiency,” Linquist says. “In a competitive marketplace, it is the low cost provider that will prosper.”
Patricia Woertz, Archer Daniels Midland Co.
HOW DOES YOUR COMPANY ATTRACT AND RETAIN EMPLOYEES?
Patricia Woertz, chairman, president and CEO of ARCHER DANIELS MIDLAND CO. (ADM), believes that world-class employees may be a company’s only true competitive edge. “The creative and intellectual capacity of employees is ultimately the only thing that can’t be duplicated by someone else,” she says.
The key to attracting and keeping the best workers involves creating conditions in which people want to give their best, suggests Woertz, who spent nearly 30 years in the oil industry before joining the agricultural-products company in 2006. At ADM, “we do a good job of engaging people during their first years with us, giving them responsibility and interesting challenges,” she says. Once employees have been with a company for a few years, she notes, the need to reconnect becomes important. “At that critical three- to seven-year mark, they need to see clear career paths and options, and understand what learning and development they will need to continue progressing in their careers,” she says.
Woertz favors the term “colleague” rather than “employee.” She explains: “A colleague is a respected individual you work with. The term captures the sense of shared endeavor. The Latin root of colleague means ‘to choose,’ and I am always mindful that commitment and passion only come by choice.” Woertz believes that ADM’s mission of providing alternative-energy supplies and enhancing agricultural economies around the world is a big reason why the company attracts and keeps employees. “We find that all kinds of talented people are eager to join in these efforts and take on the challenges ahead,” she says.
The CEO says that over the past year she has visited more than 6,000 of ADM’s colleagues
and regularly communicates with all 26,000 through e-mail. “One of a leader’s most important roles is to help the organization see what it can become and help people get fit for the journey,” Woertz states. “So it’s vital that leaders share their passion.”
Stephen Hanks, Washington Group International
WHAT ROLE DO EMPLOYEES PLAY IN CUSTOMER SATISFACTION?
Stephen Hanks, president and CEO of global engineering, construction and management firm WASHINGTON GROUP INTERNATIONAL (WNG), says the days of pleasing customers by merely being the lowest cost provider are over. “Customers want to know that we are reliable and efficient, that we complete projects in a timely manner and for a reasonable price,” he says. Beyond that, he adds: “The relationship with customers is more strategic today. Customers want solutions.”
Hanks notes that with a doubling of the world’s middle class taking place in developing nations, the demand for power, water treatment and industrial equipment services is huge, and that Washington Group’s customers — businesses and government entities — are providing goods and services to meet the needs of this burgeoning demographic. “Our customers want to focus on what they do best, and we help them accomplish that goal,” says Hanks. For example, he explains, Washington Group not only engineers and builds companies’ manufacturing facilities, but also provides complete facility management services — from maintaining building infrastructure, HVAC systems and production equipment to managing grounds, security and food services. Similarly, he points out, Washington Group builds roads and barracks for the U.S. Army so soldiers can concentrate on defense work.
Key to customer satisfaction, explains the CEO, are Washington Group’s more than 25,000 employees. “If CEOs spend 30 percent to 50 percent of their time on employee engagement and development,” advises Hanks, “they will find employees rising to the occasion, and the company will provide superior results for customers and shareholders.” Employee engagement is tied directly to customer satisfaction, says Hanks, who adds that 75 percent of Washington Group’s business comes from repeat customers. “We provide industry-leading professional development and encourage our employees to get involved in strategic issues,” he says. “If you’re productive yet not solving your customers’ problems, then you’re not really getting at what drives a business.”
Steven Loranger, ITT Corp.
HOW DO YOU BALANCE GOVERNANCE AND SHAREHOLDER INITIATIVES WITH BUSINESS PRIORITIES?
In the three years since Steven Loranger joined ITT CORP. (ITT) as chairman, president and CEO, the global engineering and manufacturing company has put a vigorous emphasis on governance best practices, he says. “We’ve adopted a majority vote rule for electing directors, our board now includes an independent presiding director and, as CEO, I am the only management member of the board,” explains Loranger. Compensation for senior management is performance based, he adds, with an emphasis on “at risk” compensation tied to achievement of performance goals and share-price growth.
Transparency and simplicity in the company’s financial reporting are paramount, insists Loranger. He adds that each ITT board meeting includes a session for the independent directors to meet privately, which provides a level of independent oversight necessary to a healthy corporate governance system. Loranger says the company also has simplified the language in its proxy statement and other required filings to make them easier for shareholders to understand. “On a number of occasions we have met with shareholder groups to listen to their suggestions, issues and concerns,” he says. “We fully recognize that they own the company and, as owners, have justifiable expectations of us as managers. Our efforts center on the transparency of our actions, the independence of our board and our responsiveness to shareholder questions and concerns.”
Still, Loranger says, he’s realistic about what can — and can’t — be done. “We work hard to maintain the appropriate balance between shareholder initiatives and business priorities,” he says. “We may not be able to please all of our shareholders all of the time, but we make ourselves available to listen to what’s on their minds and take their concerns into consideration when making decisions.”
David Steiner, Waste Management Inc.
HOW CAN A COMPANY BEST REBUILD ITS REPUTATION?
In rebuilding and safeguarding a company’s reputation, never underestimate the role of employees. So says David Steiner, CEO of WASTE MANAGEMENT INC. (WMI). When he joined the company as deputy general counsel in 2000 (he became CEO in 2004 after the retirement of the previous CEO), “we had to mend our house,” he admits, “and we had to regain our reputation.” According to Steiner, following shareholder and SEC lawsuits over a series of accounting scandals, “we put in place strict internal controls and accounting policies and created an ethics and diversity position that reported to the CEO. Basically, we did everything required by the Sarbanes-Oxley Act before SOX came to be,” he notes.
While the company was providing all the information that stakeholders needed to understand the direction it was taking, executives decided it was best to “lay low from a public point of view,” says Steiner. Rather than seek coverage for “what we were trying to accomplish,” he explains, Waste Management decided to let the results speak for themselves.
In contrast, the internal approach involved regaining the trust of employees, says Steiner. “As a leader, you can never lose sight of the fact that the battle might look pretty good from where you are standing, but employees are the ones at their neighbor’s barbecues having to hear, ‘Boy, I read about your company in the paper. Things must be really bad.’ Employees basically had to stop reading about us in the newspaper for a while as we rebuilt their trust in the company.”
In fact, Steiner points to the importance of communication as the biggest lesson he’s learned in successfully rebuilding Waste Management’s reputation. “I’m out of my office a lot talking to our people, trying to understand their concerns,” he says. “I constantly talk about the fact that the scandals had nothing to do with a failure of our business model or our folks in the field. It was a failure of leadership, plain and simple.”
J.W. Marriott Jr., Marriott International Inc.
HOW DOES THE ROLE OF TODAY’S CEO COMPARE WITH THAT OF THE PAST?
“The CEOs who are successful today are not the tough, mean guys who we admired 10 or even five years ago,” says Bill Marriott, chairman and CEO of MARRIOTT INTERNATIONAL INC. (MAR), which operates and franchises nearly 2,900 properties in 68 countries and territories. As leader for the past 35 years of the company founded by his parents, Marriott says he has seen the evolution of the top job — and the outside pressures that affect those who sit in the corner office. “The tough-guy approach is passé,” he says. “Treating people right, listening to their ideas and being a compassionate CEO is what is required today, not the executive who sees only the bottom line.” Marriott acknowledges that the job is pressure-filled, but adds, “I love what I do. It’s fun and exciting and still thrilling to me.” Most business leaders, he believes, understand the importance of their employees. “If you start making your people feel that they don’t matter to the success of the company, they’ll leave,” he says.
Beyond the shift away from the command-and-control leader of yesterday, Marriott says, technology has made the CEO’s job — in fact, everyone’s job — more complicated in many respects, even as it increases efficiency and productivity. “I get about 120 e-mails a day from all over the world,” he observes. The desire of hotel guests for technology also has led Marriott to include high-speed Internet access and 42-inch LCD televisions in every room. “Capital expenditures for technology are growing so quickly that it’s often hard to know what will make a difference,” Marriott says. “If we put 32-inch TVs in our guest rooms but our competitors put in 42-inch TVs, will that matter?” Perhaps, but Marriott is quick to add that what never goes out of style is treating people well. “When a CEO does that right,” he says, “everything else falls into place.”
Richard Evans, Alcan Inc.
HOW DO YOU MITIGATE RISK IN TODAY’S GLOBAL MARKETS?
When it comes to managing global risks, knowledge is power, says Richard Evans, president and CEO of ALCAN INC. (AL), a Montreal-based aluminum company. Taking into account Alcan’s 2006 revenues of $23.6 billion and its operations in 61 countries, he acknowledges that risks associated with currency fluctuations, geopolitical unrest, supply-chain disruptions and ethics and corruption issues demand careful attention. “The first line of defense is a deep knowledge of the regions where you do business,” Evans says. Most senior Alcan executives, he reports, understand the language and nuances of doing business in foreign markets because they have worked on different continents (Evans has lived in Africa and Europe as well as North America).
The CEO points to Alcan Integrated Management System (AIMS) as a crucial tool for staying ahead of shifting business winds. The AIMS approach, he explains, addresses how and where the company spends money, the health and safety of its workers around the world, improvements in manufacturing processes, the ongoing development of its human capital and environmental issues. “Many good risk-management strategies come from being proactive,” Evans says. For example, he notes, investments in technology have enabled Alcan to develop a robust network to ship bauxite (the principal source of aluminum) to refineries around the world. If one part of the supply chain is disrupted, says Evans, “we go to Plan B and avoid huge problems.”
Evans suggests that a solid reputation can blunt some emerging-markets risks. “You do not have to pay bribes,” he states. “Alcan has a reputation for being ethical, and we expect companies we do business with to behave that way. If not, we walk away.” Evans says companies that enter into a partnership with Alcan receive a code-of-conduct document that sets expectations of behavior for both parties. “We don’t want our company deeply exposed before we realize that we don’t like the way business is being done,” he says.
Tony Maher, Wimm-Bill-Dann Foods OJSC
WHAT SHOULD CEOS OF GLOBAL COMPANIES KNOW ABOUT DOING BUSINESS IN EMERGING MARKETS?
“The consumer markets of Russia and the Commonwealth of Independent States present enormous opportunities for innovative and fast-moving players,” says Tony Maher, CEO of WIMM-BILL-DANN FOODS OJSC (WBD), the largest dairy producer and one of the top juice producers in Russia. Maher, who joined WBD in 2006 after working for 30 years in THE COCA-COLA CO. (KO) system throughout Europe and Russia, cites a steady rise in consumers’ personal incomes as a pivotal factor in his company’s growth. Indeed, Standard & Poor’s Corp. predicts that by 2008 Russia will move past South Africa, Malaysia and Mexico in per-capita income levels.
Maher acknowledges that such growth is taking place across the country, and a company doing business in Russia should not ignore the vast opportunities — and potential competition — in less-developed regions of the country. “Russia’s consumer boom has created a new culture,” he explains. For example, younger consumers with growing families are tending toward healthier fare, which helps explain the growth in the dairy, juice and baby-food sectors, points out Maher. “The demand for our baby-food products continues to surpass our ability to supply, and we are investing in new capacity,” he says, adding that WBD’s sales in the baby-food segment increased by one-third in 2006.
A key challenge in high-growth emerging markets, says Maher, is the lack of trained managers. To address this issue, he says, last year several business leaders along with the Russian government launched a business school. “It’s going to take a few years to start turning out managers, but we know the need is there,” Maher says. In the meantime, he believes that companies that can provide in-house management training will be surprised. “Russians are fast learners,” the CEO says. “Once they receive tools and training, the personal growth is really phenomenal.”
