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G100 Network Notebook | February 2017

What You Don’t Know About CEO Tenure

New data from Spencer Stuart reveals an encouraging and overlooked sign in the media coverage of CEO turnover. Tenure for S&P 500 CEOs continues to rise partly because of better board and management alignment around performance:

“Contrary to common perception that the market has become less patient with public company CEOs, for S&P 500 chief executives, the average total tenure has increased 35%, from 6.79 years in 2004, to 9.20 in 2016. Much of the increase came from boards sticking with their CEOs after the 2008 financial crisis. And tenures have continued to increase, rising 30% since 2010.”

The research also explains what longer CEO tenure means for recruiting and succession. For one example, consider Richard Anderson, who led a remarkable industry transformation during his nine years as Delta CEO. His success helps explain why Warren Buffet is bullish on airlines, reports Business Insider:

“The 2008 Delta-Northwest merger was an absolute home run. The resulting airline not only generates the best financial performance in the business, it’s also an industry leader in operational excellence. It’s considered to be the strongest of the big four.”

What Talent Fuels the Future of Silicon Valley?

Computer scientists? Guess again, says Wired — physicists now rule large in the tech world. From Microsoft to GE to Google, machine learning initiatives, particularly those utilizing neural networks, are led by physicists drawing on their training in complex math, probability theory, and familiarity with enormous data sets:

““The only thing that is really new to physicists is learning how to optimize these neural networks, training them, but that’s relatively straightforward,” Boykin [a software engineer at Stripe] says. “One technique is called ‘Newton’s method.’ Newton the physicist, not some other Newton.””

The Great American Escalator is Broken

Wealth creation has surged since the recovery from the 2008 crash — but that’s only one side of the “terrible contraction of economic life in what we might call America’s Second Gilded Age,” says AEI’s Nicholas Eberstadt. His bleak new essay in Commentary describes the forgotten populations to showcase where vaunted American social mobility is more myth than truism:

“The bittersweet reality of life for real Americans in the early 21st century: Even though the American economy still remains the world’s unrivaled engine of wealth generation, those outside the bubble may have less of a shot at the American Dream than has been the case for decades, maybe generations—possibly even since the Great Depression.”

Is Passive Investing a Tailwind for Activists?

Yes, says a compelling profile on Lazard’s Jim Rossman that centers on the relationship between shareholder ownership and CEOS. Rossman urges companies to gain a proactive understanding of how the growth in passive investors, like Vanguard, State Street, and BlackRock, increases the clout of activists:

““It’s become a lot easier for activists to influence the shareholder base, because they have fewer and fewer shareholders that they have to talk to,” says Rossman, who calculates that the top 25 investors hold almost 40 percent of the S&P 500.”

How Does Machine Learning and IoT Impact the Cloud?

Competition in the cloud has tightened while more and more companies move backend operations off-premise. What will happen in ten years? A thought-provoking presentation from Peter Levine of Andreessen Horowitz argues centralized computing will move back to a PC-era distributed model, with machine intelligence happening on edge (IoT) devices, not the cloud. We can see this already with driverless cars, or “data centers on wheels.”

Andy Jassy, CEO of Amazon Web Services, has a different take on the virtues of the cloud. In this video interview, Jassy explains how AWS became the go-to cloud solution for businesses and governments:

“Novartis, a large multinational pharmaceutical company with a big research arm, wanted to do virtual screening on 10 million compounds against a common cancer. [This meant] researching 50,000 cores and 39 years of computational chemistry at an estimated cost of $40 million. They did it in 9 hours for $4,200 on AWS.”

The Science of Creating Effective Teams

Deloitte and a pioneering researcher at Match.com think the algorithms helping people procreate can also build high performance teams. How? Not with personality tests, like Myers-Briggs, but with a system based on neuroscience to identify the strengths from diverse work styles, they argue in Harvard Business Review. The articles offer leaders a useful taxonomy for leveraging marginalized people and ideas to create value. An excerpt:

“Complementary styles of thinking make for a more effective team. Unfortunately, it seems that when organizations think about diversity, they look at race or gender or cultural background—but not diversity of mind. So you have your women and minorities represented, and that’s great—but they may all share the same temperament, so the group isn’t as diverse as you think.”

Mitigating the Cost of Short-Termism

Short-termism comes with a hefty price-tag. U.S. companies not operating with a long-term mindset forfeited up to $1 trillion in GDP and 5 million jobs over the last decade, according to research from McKinsey. The study highlights the higher average revenue, earnings, market capitalization, and R&D investment growth realized by public firms identified as managing for the long-term. Looking at economic profit, the gulf between long-term and short-term views appears more striking:

“From 2001 to 2014 those managing for the long term cumulatively increased their economic profit by 63% more than the other companies. By 2014 their annual economic profit was 81% larger than their peers, a tribute to superior capital allocation that led to fundamental value creation.”

Boards can wield bigger influence in shifting the focus away from quarterly earnings, says Mark Wiseman, formerly head of Canada’s biggest pension plan and now BlackRock’s Global Head of Active Equities. He proposes one, perhaps surprising, measure to get board members to support a long-term perspective:

“If we expect board members to be proactive in creating longterm shareholder value, they have to be properly incented. It might seem counter-intuitive, but we actually believe that board members should be paid more, because they need to be more engaged and financially aligned with a firm’s long-term outcomes.”

Hospital CEOs Keep Customer Focus

The business of improving population health continues among healthcare providers despite the furor around ObamaCare, say two hospital system CEOs. For example, Michael Dowling, CEO of Northwell Health, writing in Becker’s Hospital Review, expresses concern with patient access to care, not just coverage:

“As health systems seek to improve the health of the populations they serve and expand their market reach, they must be strategic about where they place facilities and offices, especially ambulatory centers. It will be impossible to keep people healthy if it’s impossible for them to attain medical services.”

In a Wall Street Journal interview, New York-Presbyterian CEO Steve Corwin parallels the need to expand ambulatory care and preventative medicine. While the push to repeal will have significant effects, Corwin believes he and industry peers have plenty to concentrate on outside of D.C.:

“Hospitals have to move beyond their four walls, they need to be able to deliver regionalized health care, they need to be able to lower the cost of care over time, [regardless of who is president]. That requires an integrated delivery system, everybody trying to avoid unnecessary utilization.”