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What Just Happened?The Impact and Opportunities of Global Government Changes

December 12 and 13, 2012

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The Yale CEO Summit December 12–13, 2012 What Just Happened? New York, NY The Impact and Opportunities of Global Government Changes

© 2013 Chief Executive Leadership Institute All rights reserved. Page 2

Table of Contents

Key Themes from the Yale CEO Summit 4

Jeffrey A. Sonnenfeld, Yale CELI/Yale School of Management

Session 1: Coming Back from the Brink: Lessons on Enterprise Recovery 6

Panelists: Robert E. Diamond Jr., Former President & CEO, Barclays PLC Joseph J. Lhota, Chairman & CEO, Metropolitan Transportation Authority (MTA) Robert S. Miller, CEO, Hawker Beechcraft Corporation Gary P. Naftalis, Partner & Firm Co-Chair, Kramer Levin Naftalis & Frankel Thomas J. Quinlan III, President & CEO, RR Donnelley & Sons Co. William V. Roberti, Managing Director, Alvarez & Marsal Lynn Tilton, CEO, Patriarch Partners Charles A. Tribbett III, Managing Partner, Russell Reynolds Associates Benjamin A. Walter, CEO, Hiscox USA Keith E. Williams, President & CEO, Underwriters Laboratories Respondents: Douglas H. Ginsburg, Judge, District of Columbia Circuit, U.S. Court of Appeals Sherrill W. Hudson, Executive Chairman, TECO Energy Robert J. Kueppers, Senior Partner, Deloitte Matthew Sherman, Partner, Joele Frank, Wilkinson Brimmer Katcher

Session 2: The Safest Place on the Planet 8

Panelists: Ashton B. Carter, U.S. Deputy Secretary of Defense Gen. Peter Chiarelli (Ret.), 32nd Vice Chief of Staff, U.S. Army Robert D. Hormats, U.S. Under Secretary of State Gen. Stanley McChrystal (Ret.), Commander of U.S. & International Security Assistance Forces J. Stapleton Roy, Former U.S. Ambassador to China, Singapore, and Indonesia Shlomo Yanai, Former Head of Planning, Israeli Defense Forces Respondents: Brian G. Bowler, Retired Ambassador to the United Nations, Republic of Malawi Richard W. Edelman, President & CEO, Edelman Quentin Hardy, Deputy Technology Editor, The New York Times Christopher K. Johnson, Former Senior China Analyst, Central Intelligence Agency Xiaoyi Liu, President, China ComService (USA) Corporation Charles Prow, General Manager, Global Business, IBM James M. Shannon, President & CEO, National Fire Protection Association Christopher Shays, Member of Congress (1987-2009), State of Connecticut Zhihong Yi, Vice President, Renmin University of China

Session 3: Repairing Economics With or Without Governments 10

Panelists: Richard J. Byrne, CEO, Deutsche Bank Securities James S. Chanos, Managing Partner, Kynikos Associates Gregory J. Fleming, President, Investment Management, Morgan Stanley Maurice R. Greenberg, Chairman & CEO, CV Starr & Co. Michael F. Holland, Chairman, Holland & Company Anthony Scaramucci, Managing Partner, SkyBridge Capital Stephen A. Schwarzman, Chairman & CEO, The Blackstone Group Andrew Ross Sorkin, Editor, DealBook, The New York Times David M. Walker, 7th Comptroller General of the U.S. Respondents: William N. Goetzmann, Director, International Center for Finance, Yale School of Management Thomas A. James, Chairman, Raymond James Financial Xiongwen Lu, Dean, Fudan University School of Management



Frederick O. Terrell, Vice Chairman, Credit Suisse John C. Whitehead, Former Co-Chairman, Goldman Sachs Robert Wolf, Former Chairman, UBS Americas Kevin Worth, President & CEO, The Deal Edward Zeng, Founding Partner, China Bridge Capital

Session 4: Risk Takers vs. Rule Makers: Are Governments the Enemy of Entrepreneurship? 12

Panelists: Joel Babbit, CEO, Mother Nature Network Saul J. Berman, Global Strategy Leader, IBM Roger W. Crandall, Chairman, President & CEO, MassMutual Financial Group Martin Fleming, Chief Economist, IBM M. Christine Jacobs, Chairman, President & CEO, Theragenics Corporation Tom Lynch, CEO, TE Connectivity Steve Odland, President & CEO, Committee for Economic Development Joseph C. Papa, President & CEO, Perrigo Company Todd Peters, Chief Executive Officer, GENCO Nicholas T. Pinchuk, Chairman & CEO, Snap-on Incorporated Dan Reardon, CEO, North Highland Jeffrey D. Sachs, Director, The Earth Institute, Columbia University Jeff Xiong, Chief Technology Officer, Tencent Group Respondents: Douglas R. Conant, Retired President & CEO, Campbell Soup Company Zack Cooper, Professor, Yale University Scott R. Cutler, Executive Vice President, NYSE Euronext Peter J. Devlin, President, Fish & Richardson Charles D. Ellis, Former Managing Partner, Greenwich Associates Seth Feuerstein, President & CEO, Cobalt Therapeutics Raymond V. Gilmartin, Former Chairman, President & CEO, Merck & Co. Santago Iniguez, Dean, IE Business School Benn R. Konsynski, Professor, Goizueta Business School/Emory University Bernard Yeung, Dean, National University of Singapore Business School

Legend in Leadership Award: Jeffrey L. Bewkes, Chairman and CEO, Time Warner Inc. 15

Presenters: Christopher J. Dodd, Chairman and CEO, Motion Picture Association of America; Former U.S. Senator N.J. Nicholas Jr., Former CEO, Time Warner Inc. Paul E. Steiger, Editor-in-Chief, President, and CEO, ProPublica; Former Managing Editor, The Wall Street Journal

Session 5: Knowing Your Customer Regardless of Government Changes 16

Panelists: Brian Cornell, CEO, PepsiCo Americas Foods Thomas H. Glocer, Former CEO, Thomson Reuters Rick Goings, Chairman & CEO, Tupperware Brands Corporation Gary E. Knell, President & CEO, NPR Kay Koplovitz, Founder, USA Network Chuck Leavell, Keyboardist, Rolling Stones Thomas S. Rogers, President & CEO, TiVo Respondents: Maxwell L. Anderson, Director, Dallas Museum of Art Sanford R. Climan, President, Entertainment Media Ventures Ravi Dhar, Director, Center for Customer Insights, Yale School of Management Arun Sinha, Senior Faculty Fellow, Yale School of Management

THESE SUMMARIES REFLECT BULLSEYE RESOURCES, INC.’S SUBJECTIVE CONDENSED SUMMARIZATION OF THE 2012 YALE CEO SUMMIT. THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE SESSIONS. IN NO WAY DOES THE YALE CHIEF EXECUTIVE LEADERSHIP INSTITUTE OR BULLSEYE RESOURCES ASSUME ANY RESPONSIBILITY FOR THE INFORMATION CONTAINED HEREIN, OR ANY DECISIONS MADE BASED UPON THE INFORMATION PROVIDED IN THIS DOCUMENT.



Key Themes Jeffrey A. Sonnenfeld, Yale CELI/Yale School of Management

Overview Led by Yale professor Jeffrey Sonnenfeld, the founder and president of the Chief Executive Leadership Institute, the 71st Yale CEO Leadership Summit brought together business leaders, government officials, investors, academics, and nonprofit leaders to examine the implications of changes in governments in the U.S. and abroad. Participants shared their thoughts on the status of the U.S. and Chinese economies and major short- and long-term issues facing the United States. They reflected on managing in crises and pursuing opportunities regardless of the impact of government.

Key Themes There is general optimism

about the U.S. and world economy. While few participants see U.S. economic growth for 2013 at 4% or more, most participants see positive economic signs. Corporate balance sheets are strong and companies are sitting on cash (although much of this cash is outside the country). Corporate profits are up, as is capital spending. Over the past three years, the S&P is up, showing that investors don’t see doom. Banks are increasingly healthy, the energy sector is going strong, and many healthcare companies are faring well. Also, the housing sector is bouncing back, which could have a positive effect on employment. In addition, there remain significant opportunities and strong growth in many markets around the world. While the problems facing the U.S. economy are significant, multiple participants made comments to the effect of, “We created these problems, and we can fix them.”

However, the U.S. faces serious structural problems and dramatic change is required. Among the structural problems discussed were: the lack of job creation in the U.S. due to a jobs/skills mismatch; enormous waste in the U.S. healthcare system; lack of investment in infrastructure and basic science; and lack of a U.S. government strategy that defines key investments areas, such as energy, science, and infrastructure. There is also a view by some, which Columbia professor Jeffrey Sachs challenged, that “the private sector will solve all problems.” In Mr. Sachs’ view, the government must play a key role, yet leadership from the president has been lacking.

IBM’s Saul Berman offered the observation that the world has changed dramatically, but America’s institutions all are from the past. To deal with the country’s structural problems, government must change, and to prosper in this new world, companies must

change and do things differently. This requires overcoming the resistance to change and building a culture of transformation.

The United States must find short- and long-term solutions

to the country’s fiscal problems. Most participants were incredulous at the inability of policymakers to work out a deal to avoid the fiscal cliff. The belief is that most reasonable business people could figure out how to negotiate a deal. Lack of a deal has enormous implications for business as it creates tremendous uncertainty and causes companies to hold back in making investments and hiring.

In addition to frustration directed at policymakers about the lack of short-term progress, business leaders are also frustrated regarding the country’s long-term fiscal situation. Former Goldman Sachs co-chair John Whitehead and former Comptroller General David Walker expressed great worry about the country’s debt and deficits. Solving the country’s fiscal problems will require political leadership and hard decisions. Policymakers must deal with entitlements, tax policy, defense spending, and more. But based on the political gridlock that exists, these business leaders were less than optimistic.

Out of strategic and financial necessity, the U.S. military must undergo significant changes.

In discussions that included U.S. Deputy Secretary of Defense Ashton Carter, retired General Peter Chiarelli, and retired General Stanley McChrystal, it is clear that where the U.S. military has focused and how the military operates must change. After spending the past decade in Iraq and Afghanistan, the U.S. is now shifting its strategy by “pivoting” to increasingly focus on Asia. And, the very nature of combat is changing, requiring new strategies, capabilities, and technologies.

At the same time, America’s military power comes from having a strong economy. Under Secretary of State Robert Hormats cited Alexander Hamilton, who said, “We need strong credit to have strong defense.” Therefore, keeping the country’s fiscal house in order is essential to the country’s long-term security. Most attendees are not in favor of the rigid defense cuts under sequestration that risk hollowing out the military, but believe that the Department of Defense can—and needs to—operate far more efficiently and wisely.

Views differ on China’s economy, its level of threat to America, and how the U.S. should respond. Investor James Chanos is bearish on China’s economy because he doesn’t think the fundamentals are good. He believes many of the numbers coming out of China are not accurate, particularly GDP growth. He sees the Chinese stock market as unchanged over the past 10 years, while GDP has supposedly increased by four times. And, he believes the much talked about transition to a consumption society is not occurring, with economic growth being driven by investment and credit. However, others such as investor Michael Holland and former AIG CEO Hank Greenberg are much more optimistic about



China. Mr. Holland has had success investing in China, and Mr. Greenberg sees much opportunity there. He believes that ineffective state-owned enterprises will go away, there will be efforts to uncover corruption, and there will be greater focus on small and mid-sized enterprises—but these steps will take time. Among American business and governmental leaders, the general perception is that China represents a significant threat. Those in the manufacturing sector see a playing field that is not level, and those in other industries—particularly technology-based businesses—see a massive and continuing theft of intellectual property and trade secrets by Chinese entities. Because so much of the U.S. economy is dependent on information technology, the entire economy is vulnerable to technology-based threats. In contrast, entrepreneurs from China believe such concerns by American business people are unfounded, and that Chinese businesses are simply seeking to grow and globalize. Some attendees, such as Harvard professor Quinn Mills, are concerned that China desires a policy like the Monroe Doctrine for Asia. After decades of regional security and stability due to the presence of the United States, China appears to be seeking to exert more power in the region. Former Ambassador to China J. Stapleton Roy has seen a new generation of political leaders taking charge in China, who are more focused on social and political reforms.

Some American CEOs favor a strong response by the U.S. government to push for a more level playing field. However, attendees from the U.S. government see a strategy involving antagonism as bad for America’s economy. They favor working carefully with China to increase trade and advance other U.S. interests.

Regardless of the government situation, attractive opportunities exist. Participants recognize that governments play a huge and increasing role in business. But regardless of this role, enormous opportunities exist for companies that understand consumers and capitalize on powerful underlying trends. For example, the media industry is undergoing fundamental disruption as consumers have new technologies and increased power. Jeff Bewkes, CEO of Time Warner (and recipient of the Legend in Leadership Award), described the development of new business models that are transforming the industry, and Joel Babbit (CEO of Mother Nature Network) and Gary Knell of NPR described their pursuit of new technologies. Hank Greenberg asserted, “There are opportunities here and around the world,” and Jeff Sonnenfeld characterized Mr. Greenberg’s attitude as “stop whining and grow the business.”

In these chaotic, uncertain times, managing through crises is an essential leadership skill. One panel discussion focused on enterprise recovery. Panelists recounted leading their organizations through hurricanes, major operational issues, business model challenges, legal issues, and other crises. In offering lessons from these experiences, Joseph Lhota, CEO of New York’s Metropolitan Transportation Authority (who was commended his performance during Hurricane Sandy) and other panelists shared the following advice:

Plan, drill, and execute Put the right people in place Focus on the customer Communicate frequently and wisely Show courage and leadership Innovate Enlist experts when necessary



Coming Back from the Brink: Lessons on Enterprise Recovery Panelists: Robert E. Diamond Jr., Former President & CEO, Barclays PLC

Joseph J. Lhota, Chairman & CEO, Metropolitan Transportation Authority (MTA) Robert S. Miller, CEO, Hawker Beechcraft Corporation Gary P. Naftalis, Partner & Firm Co-Chair, Kramer Levin Naftalis & Frankel Thomas J. Quinlan III, President & CEO, RR Donnelley & Sons Co. William V. Roberti, Managing Director, Alvarez & Marsal Lynn Tilton, CEO, Patriarch Partners Charles A. Tribbett III, Managing Partner, Russell Reynolds Associates Benjamin A. Walter, CEO, Hiscox USA Keith E. Williams, President & CEO, Underwriters Laboratories

Respondents: Douglas H. Ginsburg, Judge, District of Columbia Circuit, U.S. Court of Appeals Sherrill W. Hudson, Executive Chairman, TECO Energy Robert J. Kueppers, Senior Partner, Deloitte Matthew Sherman, Partner, Joele Frank, Wilkinson Brimmer Katcher

Overview Crises are inevitable. A crisis may be related to natural causes, like a hurricane, or may be operational, legal, or a crisis in leadership. For an enterprise to manage through and recover from a crisis requires the basics of planning, communication, and execution. Yet because no crisis can be perfectly anticipated or planned for, successful navigation during a crisis also requires extreme courage and leadership, and at times merits the assistance of experts.

Context Edward Snyder, Dean of Yale’s School of Management, offered introductory remarks about Yale SOM’s strategy. The panelists and respondents then discussed the types of crises they have experienced and shared lessons for dealing with these crises.

Preparing Yale SOM Graduates for a Complex Environment Yale SOM Dean Ted Snyder framed his remarks in the context of diverse, global, market-oriented economies, where governments play an ever-greater role.

To equip graduates to succeed in this environment, Yale SOM aims to foster three key competencies: 1) understanding markets; 2) understanding organizations; and 3) having an awareness of the world’s complexities. To prepare graduates, Yale SOM has partnered with 20 business schools—from both developed and emerging markets—to form the Global Network for Advanced Management. This network will better educate students about the globe’s complexities and will help students develop the competencies they need to succeed.

Key Takeaways Enterprise leaders must ready their organizations for a wide

variety of unexpected crises. Leaders from a variety of industries described crises they have experienced. These include:

⎯ Natural disasters such as hurricanes, earthquakes, or floods.

⎯ Operational missteps that can occur if protocols or processes aren’t followed.

⎯ Business model issues which can result from lack of innovation and can imperil companies.

⎯ Board and shareholder tensions which may be based on sensational media, misinformation, and knee-jerk reactions, and can erode confidence in a leader, at times unjustly.

⎯ Legal issues such as a director being implicated for sharing confidential information.

In a crisis the environment is often hostile and there are often no precedents on which to rely. In addition to these firm-specific issues, enterprises are impacted by macro crises, such as the financial crisis and debt situation in Europe. Judge Douglas Ginsburg pointed out that business leaders are being vilified and government power is growing, as often happens after a crisis. This has resulted in increased regulation and legislation, which is infringing on markets.

Leaders who have been through crises and have led the recovery of their organizations have learned numerous important lessons. Most of the panelists and respondents have led organizations through complex, trying crises. Among their lessons and advice:

⎯ Plan, drill, and execute. This is basic yet essential advice. TECO Energy, which was teetering on bankruptcy when Sherrill Hudson became CEO, experienced four hurricanes in nine weeks. Mr. Hudson said the key to TECO’s survival was having a plan in place and being able to execute it.

Joseph Lhota—whose perfor-mance as CEO of New York’s MTA during Hurricane Sandy was hailed as remarkable and heroic —credits planning and conducting repeated practices and drills as the key to his organization perfor-ming so well during the storm.



AIG’s Steve Miller and R.R. Donnelly’s Thomas Quinlan also cited focus on execution as the keys to their organizations’ success in recovering post-crisis.

⎯ Put the right people in place. It is having the right people that enables an enterprise to execute its plan.

⎯ Focus on the customer. Even though the MTA is a government entity, Mr. Lhota stressed that it is a customer-driven organization. It was this customer service focus that built trust with New Yorkers and that enabled the MTA to come through Hurricane Sandy so well.

⎯ Communicate frequently and wisely. Both Mr. Hudson and Mr. Lhota emphasized the need to manage expectations by under-promising and over-delivering. Mr. Lhota also described being as transparent as possible. One way the MTA did this during Sandy was having employees stationed throughout the subway system who took pictures and videos, and posted them to the Internet. These images enabled customers to see how bad the situation truly was and to appreciate the MTA’s efforts to restore the system.

“We had people throughout the [New York City MTA] system who took pictures and videos. We managed expectations.” ⎯ Joseph Lhota

⎯ Show courage and leadership. Even with careful planning and flawless execution, unanticipated situations will arise that require leaders to make hard, courageous decisions.

Mr. Lhota described the need to deviate from the MTA’s plan and to “call an audible.” He made the difficult decision to completely shut down the MTA hours in advice of Hurricane Sandy so all rail stock could be taken to higher ground and all circuits could be removed. This decision minimized damage to the MTA’s antiquated equipment and allowed the MTA to be

back up and running quickly after the storm. There was no precedent or playbook for this decision, which was criticized by many at the time.

In a very different situation, former Barclays CEO Robert Diamond decided to resign (he “quit and shut up”) because he saw that he had become a lightning rod and that his departure was in the best interests of the company.

“It is said that in difficult times you find out who your friends are. In my experience, in times like this you find out what you are like.” ⎯ Robert Diamond

⎯ Innovate. Lynn Tilton, who has acquired dozens of broken companies, explained that companies in crisis can be rebuilt and don’t need to follow the path of creative destruction. Innovation is the key.

⎯ Enlist experts. There are times and situations when even the best companies and leaders need help from experts. This can include communications assistance from leading PR and communications firms, as well as legal advice.

“Sometimes people need an adviser.” ⎯ Jeff Sonnenfeld

Also, Deloitte’s Robert Kueppers said that being a private partnership can have distinct benefits during a crisis. Instead of being exposed to the pressures of a public company, Deloitte is only accountable to the firm’s partners. This allows Deloitte to weather storms and be opportunistic and countercyclical in making acquisitions to strengthen the firm for the long term.



The Safest Place on the Planet Panelists: Ashton B. Carter, U.S. Deputy Secretary of Defense

Gen. Peter Chiarelli (Ret.), 32nd Vice Chief of Staff, U.S. Army Robert D. Hormats, U.S. Under Secretary of State Gen. Stanley McChrystal (Ret.), Commander of U.S. & International Security Assistance Forces J. Stapleton Roy, Former U.S. Ambassador to China, Singapore, and IndonesiaShlomo Yanai, Former Head of Planning, Israeli Defense Forces

Respondents: Brian G. Bowler, Retired Ambassador to the United Nations, Republic of Malawi Richard W. Edelman, President & CEO, Edelman Quentin Hardy, Deputy Technology Editor, The New York Times Christopher K. Johnson, Former Senior China Analyst, Central Intelligence Agency Xiaoyi Liu, President, China ComService (USA) Corporation Charles Prow, General Manager, Global Business, IBM James M. Shannon, President & CEO, National Fire Protection Association Christopher Shays, Member of Congress (1987-2009), State of Connecticut Zhihong Yi, Vice President, Renmin University of China

Overview The U.S. is still the safest place on earth. But continuing to defend America and ensure protection of the country’s interests requires changes in military strategy and operations. At the same time, U.S. companies and the U.S. government are vulnerable to new types of threats—many emanating from China—including theft of IP and trade secrets as well as IT-based threats.

Context Panelists and respondents discussed safety and security in the U.S. as well as in different regions of the world. Participants described the need for a change in America’s defense strategy and the threats presented by China.

Key Takeaways Participants are most concerned about Europe.

Iran continues its saber rattling. U.S. policymakers and military remain worried about Russia. China continues to make noise and exert more power. And North Korea is still on the radar. With those and other hot spots, a poll of CELI attendees shows that participants are most concerned about the situation in Europe, followed by the situation in the Middle East.

Retired General Peter Chiarelli said that he is worried about all of these hot spots, but he is most concerned about the Middle East because what happens there could have big implications for the entire world.

There are no winners in the Israel/ Gaza situation and there is no imminent solution. Video footage showed numerous members of the media proclaiming various winners and losers from the latest round of fighting in Gaza between Israel and Palestinians. Among the supposed winners were those involved in developing Israel’s Iron Dome system which was successful at intercepting incoming missiles. But retired Israeli General Shlomo Yanai pronounced, “There are no winners.” This remains a long-term conflict, affecting the people who live in the area. In Mr. Yanai’s view the mindset should shift from one of “conflict resolution” to one of “conflict management.” Retired General Stanley McChrystal said that previously wars were viewed as a way to solve problems. But when he looks at Gaza, he sees no solution and no “fix.” Each round of fights just leaves things in a different place.

Out of circumstances and necessity, this is a moment of transformation for the U.S. military. General Chiarelli said that the nature of warfare has changed. Wars are no longer linear and there aren’t clear good guys and bad guys. Warfare today is totally different than it has been in the past. Former congressman James Shannon said that the country used to be mainly at peace, with occasional short wars. But after having been engaged in a state of war for 11 years, it seems we will now be at some level of war on an ongoing basis. This change in the context will result in other changes, including:

⎯ Changing strategic focus. Deputy Secretary of Defense Ashton Carter said the U.S. is in “a moment of strategic transformation.” While the U.S. has been fighting insurgency and terrorism in Iraq and Afghanistan, the world hasn’t stood still. Now, as the war in Iraq is over and forces are being drawn down in Afghanistan, the U.S. is defining its strategy of the future. General Chiarelli mentioned that the stated strategy of the Department of Defense is to “pivot to the Far East.”



⎯ Changing financial realities. Secretary Carter is acutely aware of the country’s financial challenges and the need to keep America’s fiscal house in order. He fully expects defense spending to be on the table. Already $300 billion has been removed from the defense budget and Mr. Carter is not trying to protect defense spending. However, he is strongly opposed to the forced cuts mandated in the sequestration process. Sequestration would be disastrous for national defense and could hollow out the military. Under Secretary of State Robert Hormats concurred, saying that strong security is necessary for effective foreign policy. He cited Alexander Hamilton, who said that strong credit is needed for strong defense. He strongly favors a rational, methodical approach to reducing defense spending versus a sledgehammer approach.

“Military strength affects our ability to conduct foreign policy.” ⎯ Robert Hormats

Among attendees, 67% believe that current and future cut-backs in U.S. defense spending are hindering global security.

⎯ Changing culture and capabilities. As the nature of war changes, and as the technologies used change, General McChrystal believes the culture of the military and everyone’s job must change as well.

Retired Brigadier General Thomas Kolditz, who taught leadership for years at West Point, said that officers are now being taught differently. Instead of being taught what to think, officers are taught how to think, and education focuses on thinking styles, critical thinking, and problem solving.

Stephen Berger, chairman of Odyssey Partners, expressed concern that the country is essentially committed to a set of existing platforms, and is thinking creatively about the types of platforms that are needed. (He also suggested some form of public service for everyone on the country.) Tupperware CEO Rick Goings sees a great deal of lobbying for the status quo, but believes the entire defense system needs to be rethought. He believes that a business approach could have great value. Today the hands of military leaders are tied and they don’t have the same flexibility as business leaders.

China presents new types of threats to which the U.S. and American business are extremely vulnerable. Mr. Hormats said there is massive piracy of IP by Chinese companies (as well as companies from other countries), and all big global companies are at risk of having their IP and trade secrets stolen. In particular there has been a pattern of theft in the aviation and telecom sectors. Former CIA senior China analyst Christopher Johnson said it is likely that the Chinese government plays a role in this activity. The government in China has enormous influence and it would

be extremely difficult for a Chinese company not to comply with a government request to gather strategic information. American companies such as Cisco believe that Chinese companies, like Huawei, which now controls a significant portion of the telecom equipment market, gained unfair advantage by stealing IP. New York Times deputy technology editor Quentin Hardy thinks this accusation is true.

“The threat of IP being stolen is a great strategic threat.” ⎯ Quentin Hardy

Business leaders from China don’t see Huawei or other Chinese enterprises engaged in blatant theft of IP. As occurs in Silicon Valley, a company will hire a person who brings knowledge with them. In China, companies like Huawei are seen as committed to long-term success by investing in R&D and other capabilities. (Mr. Johnson said the lack of transparency by China’s companies breeds rumors.)

Former U.S. Ambassador to China J. Stapleton Roy sees the situation as more complex. He said the U.S. is not sitting idly by, but is taking action. However, what the U.S. does versus China is secret. Also, as the U.S. becomes an IT-driven society, the types of risks that enterprises are exposed to are changing. As a result, companies and the government are now more vulnerable to intrusions from perpetrators around the world. Actually, China is also losing IP and is behind the U.S. in its ability to protect it.

“The U.S. is building a society based on IT that is vulnerable to intrusion.” ⎯ J. Stapleton Roy

Harvard professor Quinn Mills sees more at stake than just IP and trade secrets. He sees China asserting a policy in Asia that is analogous to America’s Monroe Doctrine in the Western Hemisphere. This is counter to the U.S. view, which is that America’s presence in Asia has brought security and stability to the region, has helped the economies in the region develop, and has benefitted all. Increasingly it seems that China views America’s presence in the region as unwanted. In light of growing concerns about Chinese expansion, one response of the U.S. government is to limit or prevent acquisitions by Chinese companies. Mr. Hormats indicated that the U.S. government must be cautious, be selective, and make judgments. But preventing acquisitions can have negative consequences for American workers. Steve Miller, CEO of Hawker Beechcraft, described a deal to sell a business to a Chinese company that was blocked by the federal government. The result was that 1,500 people in Kansas were laid off. Several panelists said that antagonism between the U.S. and China would be bad for both countries and economies. This makes alignment and cooperation important, even though it won’t be easy. Zhihong Yi of Renmin University of China agrees. He sees cooperation as in China’s interests and said it is important for China to learn to live peacefully with other nations. Mr. Hormats believes that in the next two years—with the second Obama administration and a new administration in China—there is an opportunity for a stronger relationship between the U.S. and China.

Stanley



Repairing Economies With or Without Governments Panelists: Richard J. Byrne, CEO, Deutsche Bank Securities

James S. Chanos, Managing Partner, Kynikos Associates Gregory J. Fleming, President, Investment Management, Morgan Stanley Maurice R. Greenberg, Chairman & CEO, CV Starr & Co. Michael F. Holland, Chairman, Holland & Company Anthony Scaramucci, Managing Partner, SkyBridge Capital Stephen A. Schwarzman, Chairman & CEO, The Blackstone Group Andrew Ross Sorkin, Editor, DealBook, The New York Times David M. Walker, 7th Comptroller General of the U.S.

Respondents: William N. Goetzmann, Director, International Center for Finance, Yale School of Management Thomas A. James, Chairman, Raymond James Financial Xiongwen Lu, Dean, Fudan University School of Management Frederick O. Terrell, Vice Chairman, Credit Suisse John C. Whitehead, Former Co-Chairman, Goldman Sachs Robert Wolf, Former Chairman, UBS Americas Kevin Worth, President & CEO, The Deal Edward Zeng, Founding Partner, China Bridge Capital

Overview Corporations are performing relatively well and are flush with cash, which are a few of the many positive signs about the U.S. economy. But the country’s fiscal mess continues to be a drag on the economy. The uncertainty, lack of optimism, and lack of confidence continue to cause consumers and businesses to hold back. Short term, solutions are needed to the country’s fiscal problems; long term, structural changes are required to put the country on solid footing. This will mean restructuring government, setting priorities and budgets, and making hard choices. But there seems little political appetite or leadership for this.

Context Panelists and respondents shared their perspectives on the U.S. economy, the country’s short-term fiscal problems and long-term structural issues, and the outlook for China.

Key Takeaways The U.S. economy has positive momentum.

Several panelists made positive remarks about the U.S. economy. Participants see healthy corporate balance sheets and companies sitting on huge amounts of cash. Former UBS Americas chairman Robert Wolf said manufacturing is at a 15-year high. Also, exports are moving towards 20% of GDP and are on track to double in the next five years. Deutsche Bank Securities’ Richard Byrne is telling clients that “the underlying market is pretty good” and Thomas James of Raymond James Financial agrees that corporations are fundamentally healthy. Banks are doing much better and several sectors—including energy, housing, and healthcare—are performing well. Blackstone Group CEO Steve Schwarzman said shale gas has been a positive for the energy sector and the overall economy, and housing is making a comeback; his firm has actually purchased $2.2 billion of individual homes, house by house.

“The economy is positioned to do better. DC needs to do something substantive and get out of the way.” ⎯ Gregory Fleming, Morgan Stanley

Despite this momentum, the U.S. government’s fiscal mess remains a short- and long-term problem. While positive signs abound, participants were in agreement regarding the government’s short-term fiscal issues and long-term structural problems—which are weighing heavily on businesses.

“The underlying market is pretty good. It feels good except for clarity and certainty.” ⎯ Richard Byrne

Short-term Fiscal Issues Former Goldman Sachs co-chair John Whitehead and former Comptroller General David Walker were emphatic that the country is spending far too much and is flirting with enormous financial problems. Each day the United States government spends $4 billion more than it takes in. In 2013, the deficit will once again exceed $1 trillion. The situation is far worse when unfunded liabilities are considered. Uncertainty about the fiscal cliff is causing individuals and investors to hold back and is hurting U.S. credibility. A solution will likely require some combination of spending cuts and revenue increases, which could negatively affect GDP. Long-term Structural Problems Beyond just finding a short-term solution to the country’s immediate fiscal problems, participants were emphatic about the need to deal with structural issues. This is essential to restore investor confidence and strengthen national competitiveness.

“We have to get onto a prudent, sustainable path. We have to restructure [the government].” ⎯ David Walker



There must be significant cuts to the country’s bloated bureaucracy and changes to entitlements. All government agencies need cuts, but there needs to be a prioritization process, so cuts are made thoughtfully and strategically. Participants such as Frederick Terrell of Credit Suisse are astounded by the lack of a process in the government to set priorities and make decisions. General Chiarelli said that the government typically lacks any sort of budget, making it extremely difficult to make decisions and enter into contracts. In discussing the short- and long-term fiscal issues, attendees used words like “depressing” and “embarrassing.” There is a lack of optimism and lack of leadership. Former congressman Chris Shays said the president is acting like a legislator, not a president.

AIG is generally seen as a success by the U.S. government. But a different approach might have been even better. Former Barclays CEO Robert Diamond and other participants applauded AIG’s recovery and the repayment of its loans to the U.S. government, netting U.S. taxpayers $23 billion in returns. This exceeded what most people expected when the government stepped in. This is an example where intervention by the government helped stabilize the situation, allowed the country’s banks to emerge stronger, and in the end proved beneficial, not detrimental, to taxpayers. But former AIG CEO Hank Greenberg was not as complimentary of the government’s actions. The issue was liquidity, not solvency. This didn’t require the govern-ment taking 79% of the company’s equity and providing a loan at 14% interest. Repayment of the loan, which involved selling off pieces of the company, shows AIG’s basic strength.

Most investors and business leaders are optimistic about the reforms underway in China. Investor Jim Chanos remains bearish on China. He thinks many of the numbers reported, including GDP, are inaccurate. He continues to see corruption and has not seen the expected transition to a consumption economy. He believes growth in China continues to be fueled by credit and investment. Others such as Michael Holland and Hank Greenberg are much more optimistic about prospects in China. Mr. Greenberg sees more economic liberalism, a reduction in inefficient state-owned businesses, and greater access to capital for smaller and mid-sized companies, which will help propel growth. He also sees political reform taking place, though he acknowledges this is a slow process that will take years. He believes the U.S. needs to begin negotiating a free trade agreement with China, which could take more than a decade, but will be beneficial when completed. Former Ambassador J. Stapleton Roy and Chris Johnson, former senior China analyst at CIA, believe that the leadership change occurring in China is extremely significant. China’s new leaders are younger, more educated, and more worldly. They are extremely focused on social and political reforms. These leaders are focused on how to make China more global and more competitive. (Mr. Chanos responded, “Meet the new guy, same as the old guy.”)

Xiongwen Lu, dean of Fudan University School of Management, noted that China’s economy is growing, but the country still has a long way to go. He indicated that the country has its own financial challenge, and as China becomes more global, it is also part of the interdependent global economy. As a result, China cares a great deal about America’s short-term fiscal situation and long-term structural issues.

Stephen Hank Schwarzman Greenberg

John Whitehead Jim Chanos

Michael Holland



Risk Takers vs. Rule Makers: Are Governments the Enemy of Entrepreneurship? Panelists: Joel Babbit, CEO, Mother Nature Network

Saul J. Berman, Global Strategy Leader, IBM Roger W. Crandall, Chairman, President & CEO, MassMutual Financial Group Martin Fleming, Chief Economist, IBM M. Christine Jacobs, Chairman, President & CEO, Theragenics Corporation Tom Lynch, CEO, TE Connectivity Steve Odland, President & CEO, Committee for Economic Development Joseph C. Papa, President & CEO, Perrigo Company Todd Peters, Chief Executive Officer, GENCO Nicholas T. Pinchuk, Chairman & CEO, Snap-on Incorporated Dan Reardon, CEO, North Highland Jeffrey D. Sachs, Director, The Earth Institute, Columbia University Jeff Xiong, Chief Technology Officer, Tencent Group

Respondents: Douglas R. Conant, Retired President & CEO, Campbell Soup Company Zack Cooper, Professor, Yale University Scott R. Cutler, Executive Vice President, NYSE Euronext Peter J. Devlin, President, Fish & Richardson Charles D. Ellis, Former Managing Partner, Greenwich Associates Seth Feuerstein, President & CEO, Cobalt Therapeutics Raymond V. Gilmartin, Former Chairman, President & CEO, Merck & Co. Santago Iniguez, Dean, IE Business School Benn R. Konsynski, Professor, Goizueta Business School/Emory University Bernard Yeung, Dean, National University of Singapore Business School

Overview The United States faces serious structural issues related to the country’s infrastructure, the capabilities of the workforce, and the costs of the healthcare system. These issues affect national competitiveness and the ability to produce jobs. While the government has focused on short-term stimulus and tax cuts, the country needs long-term investments in targeted areas, policies to promote the formation of new businesses, efforts to alleviate the jobs/skills mismatch, and decreased healthcare spending. These long-term changes require presidential leadership and firms that build cultures of transformation.

Context Panelists and respondents discussed the impediments to growth faced by both entrepreneurial firms and large businesses and the need for strategic investments by the government.

Key Takeaways The country has a mismatch between the jobs that are

available and the skills of the workforce. Under Secretary of State Robert Hormats is most troubled by job issues facing the United States. He sees three factors at work:

⎯ Technology. Firms are using technology to make widgets more efficiently, thereby replacing people.

⎯ Outsourcing. While some companies are insourcing and bringing operations back to the United States, with increased globalization, many firms now hire across the globe.

⎯ Lack of skills. There is a severe jobs/skills mismatch. At the same time that unemployment remains high and millions of people are out of work, companies can’t fill many critical jobs. In looking at China, the country is training large numbers of “engineers.” Even though these individuals are the caliber of U.S. engineering graduates, they are still skilled labor (perhaps the equivalent of trained technicians) who can contribute to China’s manufacturing sector. American companies need to do more to train U.S. labor for such jobs.

“The jobs/skills mismatch is a serious problem.” ⎯ Robert Hormats

Patriarch Partners CEO Lynn Tilton expounded on the importance of jobs. She said that many people have been laid off, which has been devastating to individuals, families, and communities. The reality is that our country hasn’t put people back to work. The only way to do this is to make things, which requires policies that inspire it. She doesn’t believe the argument that lower labor costs justify moving jobs. For example, for a paper mill labor represents only 6% of the costs. Even if labor were half as much in China, then labor would represent 3% of costs, which isn’t a big enough difference to transfer jobs. The bigger issue is that the playing field is not level. China helps companies located there and

Lynn Tilton



subsidizes many costs. For U.S. manufacturing companies to compete globally—and to preserve jobs in America—there needs to be a more level playing field. Mr. Hormats agreed with the importance of manufacturing and the need to induce manufacturers to stay here and to come back, as other countries have done. J.P. Donlon of Chief Executive Magazine referred to a collaborative program in Wisconsin involving the Chamber of Commerce and the government. This program aims to develop skilled workers to support small and mid-sized manufacturing companies. The program involves apprenticeships as a way to train workers in specific skills.

The U.S. government isn’t dealing properly with structural changes in the economy and major societal problems. Jeff Sachs, director of The Earth Institute at Columbia University, agrees with the job/skills mismatch and sees deep structural changes and problems in America’s economy: ⎯ A disruptive IT revolution is underway. ⎯ A global convergence is taking place. ⎯ China is increasing in power. ⎯ Climate change is real. ⎯ The rich are getting richer and aren’t providing for the poor

(the last progress in reducing poverty was in the 1960s).

Mr. Sachs believes the government’s response has been completely off target. Specifically, stimulus spending and tax cuts have been absurd and are not what the country needs to solve our long-term problems. Also, believing that the banks and private sector will come to the rescue and on their own solve the country’s problems is also misguided.

Instead, Mr. Sachs advocates long-term investments by the government is areas such as infrastructure, basic science, climate change, alleviating poverty, and other targeted areas that will strengthen U.S. competitiveness and produce jobs. Making such investments requires long-term planning, a budget, and strong presidential leadership, all of which have been lacking.

“Short-term stimulus is silly. We need ten- to twenty-year investments in areas like infrastructure. . . . We need a budget, a plan, and it has to come from the president.” ⎯ Jeff Sachs

Making long-term strategic investments doesn’t mean becoming a planned economy like Singapore. But it does mean planning ahead, creating the right infrastructure, and developing a skilled workforce, which economically healthy countries such as Germany, Sweden, and the Netherlands have done.

Steve Odland, CEO of the Committee for Economic Development, agreed. He doesn’t want the government to direct

the economy like in China. The U.S. remains a country built on free enterprise, with the government playing the role of facilitator.

“The role of government is to level the playing field, not to direct the economy.” ⎯ Steve Odland

Other countries care deeply about the U.S. and want to see the U.S. succeed. Brian Bowler, former Ambassador to the UN from Malawi, declared America as the greatest country on earth. He believes that the country’s leaders, including the business leaders, need to be more patriotic and need to rebuild confidence in America. Creating a more conducive environment is critical so investors see the U.S. as an investment destination.

“We see America as the sun. America has to work.” ⎯ Brian Bowler

Entrepreneurs can create jobs but need supportive policies. Many jobs are created by entrepreneurs and small businesses, stressed NYSE Euronext executive vice president Scott Cutler. But entrepreneurs have been hampered in their ability to access capital. The recently passed JOBS (Jumpstart Our Business Startups) Act is bipartisan legislation that helps small companies go public, which will help create more jobs. Mr. Donlon said the key to job creation is not so much small companies as new companies. He said that 80% of jobs are created by companies that are less than five years old. Recognizing this, the U.S. needs policies to encourage the formation of new companies. One example is giving foreign graduates H1B visas so they can stay in the U.S. after they graduate, and form companies that create jobs.

Among the country’s most significant structure problems is the unconstrained growth in healthcare costs. Mr. Sachs said the greatest factor contributing to current and future levels of government spending is out-of-control healthcare costs. While there is amazing technology, services are overpriced and there is tremendous waste—at $750 to $800 billion. Healthcare spending represents 18% of U.S. GDP compared to other developed countries where it is 10% to 11%. Essentially, we don’t have a “system” in the United States; delivery of care is highly fragmented, with a large number of mom and pop physicians. Also, we continue to spend massive amounts on excessive care at the very end of life. Former Teva CEO Shlomo Yanai believes that America’s litigious culture leads to defensive medicine, which adds significantly to overall healthcare costs. Yale Professor Zack Cooper sees inefficiency as the main reason the United States spends more on healthcare; the high rate of growth is driven by technology. By having consumers pay more, the belief is that this will slow down the use of technology that costs much more but is only marginally better.



In the view of former Merck CEO Raymond Gilmartin, inefficiency in the healthcare system is due to lack of a market-based approach. Healthcare in the U.S. has been administered based on a command-and-control approach, with the belief that consumers can’t understand quality and cost information. Mr. Gilmartin advocates moving Medicare to a market-based approach, which would better serve the public interest and would result in lower costs.

“Move Medicare to a market-based approach. . . . This would create competition, which would help control costs.” ⎯ Raymond Gilmartin

Organizations need to build cultures of transformation. IBM’s Saul Berman offered a general point to close the session. He noted that a theme pervading the discussion is that the world has changed and that the country’s institutions are from the past. But because of the changes in the world, businesses and government institutions must do things differently, and we need new firms and new institutions. Bringing about these changes requires organizations to build cultures of transformation.

Other Important Points Financial services industry. J. Stapleton Roy provided data indicating that prior to 1986 the financial services sector never earned more than 16% of corporate profits, but in 2007 the sector earned 41% of profits. He isn’t clear whether this sector is designed to benefit society or profit from society. The industry’s short-term focus has certainly been detrimental.

Earnings held overseas. While U.S. companies are flush with cash, Columbia professor Norman Bartczak said that about 75% of that cash (totaling more than $1 trillion) is sitting outside of the country, largely to avoid taxes. It isn’t clear if those funds will ever be brought back to the United States. In 2004, corporate tax rates were lowered for one year as an incentive to firms to bring cash back to the country. The majority of those funds (50–90%) went back to shareholders and the rest of the money was kept by companies and reinvested in the business. Several attendees see keeping earnings or IP in off-shore locations as in bad faith.



Legend in Leadership Award Recipient: Jeffrey L. Bewkes, Chairman & CEO, Time Warner Inc. Presenters: Christopher J. Dodd, Chairman & CEO, Motion Picture Association of America; Former U.S. Senator

N.J. Nicholas Jr., Former CEO, Time Warner Inc. Paul E. Steiger, Editor-in-Chief, President, and CEO, ProPublica; Former Managing Editor, The Wall Street Journal

Presentation The presenters described Jeff Bewkes as a leader of tremendous integrity who has both outstanding people skills and a first-rate analytical mind. With his candid, disarming, non-threatening style, he is able to challenge the status quo, and has fundamentally transformed the culture at Time Warner.

In his career, Jeff has refined new business models—such as convincing consumers to pay for HBO’s content—and has overseen the creation of groundbreaking content including The Sopranos and Sex in the City. Under Jeff’s leadership, Time Warner’s share price recently reached an all-time high. Time Warner is clearly one of the leaders in the media industry as the company proceeds on its path to delivering content via the Internet around the globe.

Beyond being a remarkable leader at Time Warner, Jeff is respected as an industry leader and has contributed greatly at Yale.

Paul Steiger Jeffrey Bewkes Christopher Dodd N.J. Nicholas Jr.



Knowing Your Customer Regardless of Government Changes Panelists: Brian Cornell, CEO, PepsiCo Americas Foods

Thomas H. Glocer, Former CEO, Thomson Reuters Rick Goings, Chairman & CEO, Tupperware Brands Corporation Gary E. Knell, President & CEO, NPR Kay Koplovitz, Founder, USA Network Chuck Leavell, Keyboardist, Rolling Stones Thomas S. Rogers, President & CEO, TiVo

Respondents: Maxwell L. Anderson, Director, Dallas Museum of Art Sanford R. Climan, President, Entertainment Media Ventures Ravi Dhar, Director, Center for Customer Insights, Yale School of Management Arun Sinha, Senior Faculty Fellow, Yale School of Management

Overview In the media industry, a transformation is underway. Consumers and technologies are changing much more rapidly than slow-moving institutions; governments can’t keep pace and traditional businesses are at risk of being disrupted. Yet as challenging as the environment is for companies and business leaders in all industries, this is a moment of new beginnings. The current moment marks an opportunity for every business leader to ask themselves what they can do create jobs, inspire others, and make the world a better place.

Context Panelists and respondents discussed changes in the media landscape, the rising influence of consumers, and what this means for business leaders.

Key Takeaways The media industry is at a moment of great transformation.

Following the Legend in Leadership presentation to Time Warner CEO Jeff Bewkes, Sandy Climan of Entertainment Media Ventures declared this a moment of great transformation in the media industry that will touch everyone on the planet and will affect all other industries.

“An important transformation is underway [in media] that will touch all.” ⎯ Sandy Climan

Cable television pioneer Kay Koplovitz remarked that there are some similarities to the early days of the cable industry. New business models were emerging and it wasn’t clear which models would win in the end. Then, as now, she believes that people will pay for good content. The current situation is particularly exciting as mobile devices make content even more broadly accessible. It creates an even larger potential market as people across the globe at the bottom of the economic pyramid will now have access to content. But with transformation comes potential disruption to existing players. Gary Knell, CEO of NPR, said that all traditional media

companies with legacy operations and businesses are now trying to transform themselves.

“We have to transform ourselves in a disruptive era. We have to reinvent ourselves; it is imperative.” ⎯ Gary Knell

Former Thomson Reuters CEO Thomas Glocer said that in the digital age it is not just companies that need to transform, but also institutions. Historically, national institutions were developed around physical things, like ships and planes. And, historically rules developed in the U.S.—in areas such as securities and anti-trust—were followed in other countries. But the global, digital age is different. Governments will need to work together and develop new types of treaties and agreements dealing with content.

In this changing media landscape consumers have more power than ever. With an increasingly flat world, Arun Sinha of Yale believes that the power held by consumers is enormous. This is the case regardless of the role of government. Examples of how connected consumers across the globe are include the fact that within one hour of his first tweet the Pope had more than one million followers, and the video Gangnam Style, by Korean singer Psy, has been viewed more than one billion times.

The current moment provides an opportunity for business leaders to change the world. David Miller, director of the Faith & Work Initiative at Princeton, offered the Summit’s closing comments. Mr. Miller acknowledged the problems and challenges that exist, the frustrations with government, and the wishes expressed that the playing field was different. These are the realities that business leaders face. But instead of lamenting the challenges of the current environment and instead of talking about “they,” Mr. Miller encouraged CELI attendees to view this moment as a new beginning. He suggested that each person ask what they can do to create jobs, to encourage and mentor children, and to figure out how we as a country can build things.

“Let’s end this Summit on a note of encouragement. We can look at business as a noble calling and we can change the world for the better.” ⎯ David Miller

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