pwc 15th annual global ceo survey - us findings

Confidence disrupted

15th Annual Global CEO Survey 2012

US Executive Summary

Contents

1. US Executive Summary on PwC15th Annual Global CEO Survey

2. David Cote, Chairman and CEO,Honeywell

3. Dominic J. Frederico, Presidentand CEO, Assured Guaranty Ltd

4. Douglas R. Oberhelman,Chairman and CEO, CaterpillarInc.

5. F William McNabb III,Chairman, President and CEO,The Vanguard Group, Inc

6. Michael Thaman, Chairman ofthe Board and CEO, OwensCorning

7. Michael White, Chairman,

President and CEO, DIRECTV

8. Richard O'Brien, President andCEO, Newmont MiningCorporation

9. Roger W. Ferguson, Jr,President and CEO, TIAA-CREF

10.Explore the data

11.Daniel S. Glaser, GroupPresident and COO of Marsh &McLennan Companies Inc.

12.Brian Duperreault, Presidentand CEO of Marsh & McLennanCompanies Inc.

115th Annual Global CEO Survey 2012—US Executive Summary

Preface

US CEOs in our 15th Annual Global CEO Survey are slightly less optimistic than they were last year, but are still focused on growth. In fact, nearly 40 percent of US CEOs plan to complete a cross-border merger or acquisition this year. Two contrasting trends shaping the global economy—crisis in Europe and vibrant growth in Asia, Africa and other emerging markets—explain this sense of guarded optimism. Despite near-term uncertainties, CEOs feel global business fundamentals point to strong future growth, and their strategies are adapting to take advantage of unprecedented new opportunities in new markets.

Customer demand is the primary driver of corporate strategy this year. Success involves understanding customer segmentation within various markets—such as rural-urban and high income-low income—and the dynamics driving it. That is why integral to CEOs’ global expansion strategies is the need to reconfigure operations at very local levels. That includes getting the product and service portfolio right across markets, nurturing talent in different locations, and encouraging free flow of ideas and innovations regardless of where they originate.

I want to thank the more than 160 CEOs from the US who took the time to participate in this survey. This includes nine CEOs who sat down with us for in-depth discussions, adding valuable insights to our quantitative findings. We hope the following pages help to generate further discussions and ideas on significant business challenges and opportunities we all face.

Bob Moritz US Chairman and senior partner

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34

Source: PwC analysis based on data provided by Oxford Economics

Cumulative GDP growth byregion, 2008–14, 2008=100)

Latin America & Caribbean

Middle East

Asia Pacific

Africa

Eastern Europe

Western Europe

US

2014201320122011201020092008

Source: PwC 15th Annual Global CEO Survey

Financially affected by Europe’s sovereign debt crisis

56%of US CEOs

90

95

100

105

110

115

120

125

130

135

More than half of US CEOs were directly affected by the Eurozone crisis last year

US CEO confidence has declined slightly as economic volatility, natural disasters, and political upheavals shook the world in 2011. Uncertain or volatile economic growth is a concern shared by 80% of CEOs worldwide. Still, over half of US CEOs continue to be very confident about revenue prospects over the next three years.

CEOs seem to be gradually letting go of the “wait and watch” attitude of recent years. They are managing disruptive events while moving forward determinedly in pursuit of new opportunities. For example, more than half of US CEOs say their businesses have been affected financially by the ongoing sovereign debt crisis in Europe and a third are

changing their strategies, as a result. Yet overall, CEOs remain optimistic because rising wealth and a large emerging middle class are fueling growth expectations in Asia and other fast-growing markets.

“We certainly see that the debt crisis in Europe could get dramatically worse and that that could affect our opera-tions, not just in Europe, but it could have some spillover into the credit markets and therefore our operations around the world.”

—Michael Thaman Chairman of the Board and CEO

Owens Corning

Weak growth in Europe and the US

is impacting businesses, but US CEOs show measured optimism


Source: PwC 2011 APEC CEO Survey

2008 2009 2010 2011 2012 2013 2014

Asia Pacific 100 101 108 112 117 124 132

Africa 100 102 107 109 114 121 127

Middle East 100 101 105 111 116 121 126

Latin America & Caribbean 100 100 106 110 114 119 124

Eastern Europe 100 94 95 99 102 105 110

US 100 97 99 101 104 106 110

Western Europe 100 96 97 98 98 100 102

Cumulative GDP growth by region, 2008–14, 2008=100)

................................................................................................................................................................

Source: PwC analysis based on data provided by Oxford Economics

Betting on increased spending in Asia for growth

44%of US and Asia-Pacific CEOs

Consumer spending power is driving growth in new markets

CEO strategies target growth outside the US

and Europe

Global businesses are taking advantage of deepening trade and investment ties among Asian economies. They are setting up new hubs as springboards for regional growth and expansion, finding new consumers, realizing supply chain efficiencies, and taking advantage of Asia’s entrepreneurship and inno-vation.1 Some companies are also implementing regional strategies in

1 10Minutes on expanding business in Asia Pacific

Despite short-term disruptions, Asia’s growth will sustain and spread to new markets. China and India, of course, are integral to companies’ Asian strategies, but this survey and related PwC research—PwC’s 2011 APEC CEO Survey—find business leaders also seeking greater scale and penetra-tion across the region through new footholds in countries like Indonesia and Vietnam.

Africa, home to some of the world’s fastest-growing economies.2

Business leaders’ commitment to doing more business globally is gradually increasing, despite economic, regulatory, and other uncertainties. There is acknowl-edgement that the risk of missed opportunity far outweighs any risks associated with expanding in fast-growing markets.

2 10Minutes on investing in Africa

“The interesting thing about how we’re positioned in the global economy today, particularly in the emerging world, goes back 10 years, when our company was largely positioned in country, working on multinational business coming out of the US and Europe for the most part. Right now the vast bulk of our global business is indigenous, local business. We still do multinational servicing, but the large part of what we do country by country is local.”

—Brian Duperreault President and CEO

Marsh & McLennan Companies Inc.

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Do you expect your key operations in...to decline, grow, or stay the same?

Base: US respondents with operations across different regions (17–158)


0% 20 40 60 80 100%

North America

Middle East

Western Europe

Central & Eastern Europe/Central Asia

Asia Pacific

Africa

Latin America

US businesses with key operations beyond the mature markets of North America and Europe are most opti-mistic about growth. Of those with operations in emerging markets, about three-quarters expect busi-nesses in those regions to expand compared to only 42% of those with operations in Western Europe. Closer to home, 65% of US CEOs

expect their operations will grow in North America. But despite the promise of high growth, US compa-nies continue to have a limited presence in emerging markets. Only about a third have key operations in Asia or Latin America, and even fewer have a presence in Africa or the Middle East. There is a tremen-dous opportunity for US companies

to expand their footprint in these markets and participate in their accelerating progress and prosperity.

“We have stepped up our global invest-ment program over the last 18 months, particularly in emerging markets, including Thailand, China, India, Indonesia, and Brazil. We’re putting in new brick-and-mortar facilities and

adding capacity in order to expand our ability to manufacture and assemble products in those markets. I firmly believe that with seven billion people on the planet wanting to live as we do in the US, they’re going to want infra-structure. Caterpillar makes infra-structure, so we have to be there.”

—Douglas R. Oberhelman Chairman and CEO

Caterpillar Inc.

US CEOs with operations outside North America and Western Europe are most bullish about growth

Business leaders must ask: are we positioned

to seize opportunities in the right place at the right time?


33%23%

34%27%

47%46%

39%19%

63%48%

76%71%

73%55%

77%63%

Which of the following factors influence your anticipated need to change your strategy?

Base: Those US CEOs whose strategy will change in 2012 (99) and those whose strategy changed in 2011 (87)

Competitive threats

Customer demand

Increasing importance

Regulation

Economic growth or uncertainty

Holding steady

Capital structure/deleveraging

Shareholder expectations

Changes in risk tolerance/Attitude towards risk

Industry dynamics/disruptions

Decreasing importance

2011 2012

0 10 20 30 40 50 60 70 80

Source: PwC 14th and 15th Annual Global CEO Surveys

Customer demand in distant markets seems to be exerting its pull on US businesses. More than three-quarters of US CEOs (77%) are revising their strategies in response to changing customer demand, up from 63% a year earlier. At home, this could be a response to changing demographic trends such as the retirement of baby boomers and the tech lifestyle choices of the Millennial generation.

But any response to changing customer demand must also take into account new global consumption trends. For example, Asia’s share of global middle-class spending is projected to increase from 23% to nearly 60% by 2030.3

CEO risk tolerance is influencing corporate strategies much less

than in the recent past. With more growth opportunities arising on distant shores, American business leaders seem to be acknowledging that an overly conservative atti-tude will put their companies at a competitive disadvantage. Only 19% are revising their strategies because of changes in their tolerance and attitude toward risk, compared to 39% last year.

“If China’s economy keeps growing at 7 percent a year and the US’s grows at 3 percent, it will take them 30 years to become the biggest economy in the world. But they still won’t have the same standard of living as in the US, meaning they can keep growing for a long time.”

—David Cote Chairman and CEO

Honeywell

US CEOs are getting more responsive to changes in customer demand and competitive threats

Customer demand is driving US corpo-

rate strategy change, as concern about risk lessens

3 Organization for Economic Co-operation and Development, 2010.

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Which, if any, of the following restructuring activities did you initiate in the past 12 months/do you plan to initiate in the next 12 months? (Respondents were able to choose all that applied)

Base: US respondents (161)

Cross-border merger or acquisition

New strategic alliance or joint venture

Previous 12 monthsNext 12 months

58%

45%

39%

25%


CEOs seem to acknowledge that taking on greater risk is part of any future success. Consider plans for cross-border M&A. Almost 40% of US CEOs intend to complete a cross-border deal this year compared to 25% last year. In fact, US CEOs show a greater appetite for global deals than their peers in other countries: Worldwide, 28% of CEOs expect

to make a cross-border merger or acquisition in 2012.

To be sure, cost reduction remains important. But the emphasis in corporate restructuring is shifting. For example, two-thirds of US CEOs plan cost cutting this year compared to 77% last year. Many companies already have made significant

defensive moves, such as strength-ening balance sheets and building cash reserves. If the recent past was about discipline and caution, we now see a readiness to take risks in pursuit of growth, whether through strategic alliances or cross-border deals.

“Our main strategic move has been expansion into emerging markets. One

example of that is our partnership in Latin America with Banco Santander. This is a strategic move for the long term. We’re also expanding in Asia; we just closed a deal in which we bought Malaysian Assurance Alliance Berhad. Balancing our strength in Europe and the US with our growing strength in the emerging markets is an important strategic priority for us.”

—Martin Senn CEO

Zurich Financial Services Group

Deal making is encouraged by growth achieved outside the US market in the past decade

US CEOs step up global transactions

in pursuit of growth


Grow your customer base 90% 93% 95%

Access local talent base 82% 85% 97%

Build internal service delivery capacity 69% 67% 64%

Access raw materials or components 47% 48% 33%

Build R&D/innovation capacity or acquire intellectual property

Build manufacturing capacity 30% 48% 21%

Access local source of capital 18% 15% 13%

Don’t know/Refused

For each of the countries that you named, which of the following objectives do you hope to achieve in the next 12 months?

Base: Those who selected a country as “important for growth” (Respondents were able to choose a maximum of three countries) (27–77)

6% 7% 0%

China India Brazil

51% 56% 21%


To expand their business overseas, some US CEOs are paying particular attention to the specific needs of customers in individual markets. They are focused on getting the portfolio of products and services right across various diverse and segmented markets. For example, 40% of US CEOs with India opera-tions are modifying their prod-ucts and services for these new consumers and another 32% are

developing products and services specifically for the local market.

Almost all US CEOs are revising their innovation strategies, with 72% focusing on creating new prod-ucts and services within existing business models. This emphasis on new products and services for local markets is also leading to the phenomenon of “reverse innova-tion,” or flow of ideas, processes,

and innovation from fast-growing to mature markets.

“In countries that have particular medical requirements, one must find innovations that are customized for those countries. For example, in China and India, you have, respectively, two hundred million and one hundred million farmers cultivating small plots. By way of contrast, in Brazil, farms, on average, are more than a thousand times larger than those in China.

The product requirements of a small farmer versus a large farmer are very different, so we have to customize our product development to meet the needs of each. The lesson here is that in order to bring products to market that meet the exacting needs of the consumer, one must be very close to the consumer.”

—Dr. Marijn Dekkers Chairman Bayer AG

More than 90% of business leaders with operations in these countries are looking for customers

US CEOs are expanding in

high-growth markets in pursuit of local customers and talent

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China 30%USA 22%

Brazil 15%

India 14%

Why companies are investing in the US

Germany 12% Russia 8%UK 6%

France 5%

71% Grow your customer base

46% Access local talent base

30% Build internal service delivery capacity

26% Build R&D/innovation capacity or acquire intellectual property

23% Access local source of capital

19% Access raw materials or components

17% Build manufacturing capacity

9% Don’t know/Refused

Which countries, excluding the one in which you are based, do you consider most important for your overall growth prospects? (Respondents were able to choose a maximum of three countries)

Base: All respondents (1,278) Source: PwC 15th Annual Global CEO Survey

America is confronting new chal-lenges to its long-held leadership position in the world. China now outranks the US in the list of coun-tries that CEOs consider most vital to their business growth prospects. Meanwhile, Brazil and India have pulled ahead of Western Europe’s major economies as important markets for growth.

Even so, the US still has strong fundamentals and continues to be attractive to global investors. Companies from Asia and Latin America increasingly have the wherewithal to invest, create jobs, and fuel innovation in the US. Seventy-one percent of all CEOs who want to enter or expand in the US intend to increase their customer base, 46% are seeking access

to talent, and 30% are building internal service delivery capabilities.

“Around the globe we are all more financially interrelated than ever before. But I also think that emerging Asia generally stands a little bit apart from what is happening in Europe and the United States. Once upon a time we relied on the markets in Europe and the US to a greater extent. If you look at the statistics over the last five years

Asian economies are trading with each other much more than ever before. This includes the changes taking place in China. Asia’s consumption-led demand is still quite strong and so is infrastruc-ture development. Those two elements will fuel a growth in our part of the world that you will probably not see elsewhere.”

—Jaime Augusto Zobel de Ayala Chairman and CEO

Ayala Corporation

Global CEOs’ ranking of important markets shows that new competitors are challenging US and European leadership

For global CEOs, China is the most important

opportunity, but the US remains attractive


Which three areas should be the Government’s priority today? Respondents were able to choose a maximum of three responses.

Base: US (161), Global (1,258) Source: PwC 15th Annual Global CEO Survey

US Global

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0% 40 60 80%20

Maintaining the health of the workforce

Securing natural resources that are critical to business

Reducing poverty and inequality

Improving the country’s infrastructure

Creating and fostering a skilled workforce

Ensuring financial stability

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Business leaders outline priorities for their governments

US CEOs don’t hide their disappoint-ment in the federal government. More than three-quarters say it did not effectively deal with the implica-tions of the global economic crisis, and a similar proportion is also dissatisfied with its response to the US budget deficit and debt burden.

Still, American business leaders expect the government to strengthen the nation’s global

competitiveness through such measures as improving infrastruc-ture and fostering a skilled work-force. While policymakers and corporate leaders alike agree that such measures are needed to boost US competitiveness, a contentious business-government relationship could impede progress. Failure to cooperate would be unfortunate, particularly at a time when public-private collaborations are increasing in other countries.

“Too many people rely on the US real estate market as either their biggest savings account or their retirement. With no value being achieved in the market, that’s going to create more pressure in the whole process. I have not seen anything from the govern-ment, either a policy or a proposal, to address that. We spend a ton of money on infrastructure at the Federal level, but that has done very little relative to unemployment or the economy. Take those same dollars and forgive every-body 20 percent of their mortgage. For

those who don’t take 20 percent, lower their interest rate. If the government lets banks borrow at 25 basis points, why not just give it to the consumer, where it’s going to have the most benefit?”

—Dominic J. Frederico President and CEO

Assured Guaranty Ltd

US CEOs expect more government

support to boost national competitiveness

10 PwC

To what extent do you agree with the above statements?

Base: Those who are increasing their investments in talent, US (136), Global (982)


US Global

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3434

We are investing primarily to enhance our reputation

We are investing primarily to improve living and working conditions where we operate

We are investing in adult/vocational training programs

We are investing in formal education systems

We invest primarily to ensure a future supply of potential employees

0% 40 60 80%20

Businesses are investing in talent to meet their own needs

Future prospects for the US economy are unlikely to improve without a long-term solution to talent shortages that exist today. Even in a weak labor market, more than 40% of US CEOs say their talent-related expenses rose more than expected, a reflection of the acute skills mismatch problem they face: talent shortages amid high unemployment. For almost 60% of US CEOs planning to hire this year, it won’t be easy to find the right mix of people. High-potential middle managers and younger workers are

particularly difficult to recruit and retain. This is impacting corporate profitability. Almost a quarter of US CEOs say they were unable to pursue a market opportunity and another fifth were unable to innovate effectively because of talent constraints.

The problem could worsen as baby boomers retire, the global market-place becomes more integrated, and technology continues to change the nature of work. CEOs are taking action: 84% are making direct

investments in workforce develop-ment. But piecemeal measures won’t suffice. Cooperation between businesses, government, and academia, with a focus on solutions rather than describing the problem is what’s needed. Measures, such as retraining workers left behind by the changing economy and easing restrictions on global workforce mobility, are best identified and implemented through collaboration among different stakeholders.

“Within the United States, certain regional markets tend to have stronger talent pools than others. For example, we get some great technologists here in the New York area, as well as in our offices in Charlotte and Denver. So we’ve put IT operations in each one of those locations. We will absolutely either shift people, or hire people, in different locations based on our assess-ment of the strength of the talent pool there.”

—Roger W. Ferguson, Jr. President and CEO

TIAA-CREF

US CEOs lead in making talent

investments for future growth


Global CEO views on their outlook for the US economy

“We believe that the turnaround in the US will take longer—but once it begins, it will have significant strength. We think things will not improve much in North America in the near term—the near term being the next four to six quarters. But longer term, the housing market will have to come back strongly simply as a consequence of the predictable rise in household formation. Historically, the American housing market represents 5 or 6 percent of US GDP. Today the American housing market is around 1 percent of US GDP. So the housing market has a significant multiplier effect on the rest of the economy.”

—Keith McLoughlin President and CEO

AB Electrolux Sweden

“The lack of a credible, long-term fiscal plan in the US is probably our chief concern. The fact that there is not actually contributes to the market volatility. Just look at August of this past year and the debate about the US deficit, and the inability for both political parties and the Obama administration to come together on the issue. We saw levels of volatility that are typically not seen.”

—F William McNabb III Chairman, President and CEO

The Vanguard Group Inc. US

“In Europe there is definitely some stress but I am optimistic about the US.”

—Ajay G. Piramal CEO

Piramal Group LTD India

“I think we are looking at flat to potentially declining economic growth in Europe which could persist for two years. We would hope to avoid a double dip in the United States and I think the numbers I’ve been seeing in our businesses suggest that things are slightly more robust in the United States than we would have thought about two months ago. I think China will see plus 8 percent GDP growth next year.”

—Tom Albanese Chief Executive

Rio Tinto UK

“In the US what you see is the big, big influence of the baby-boomers transition—78 million people will be retiring over the next 20 years. That’s 10,000 a day for 20 years. Baby-boomers control $7.6 trillion of assets. Our average customer is 62. So it’s really people who have saved and want to retire and have a relatively safe retirement. That works. It’s been very good for us and, again, it’s relatively insulated from the macro-economic environment. It’s driven by demography and ageing. The macro context has an impact but at the margins.”

—Tidjane Thiam Group Chief Executive,

Prudential PLC UK

“In the US, because it’s such a mature, highly competitive market, we’re working much more on TV Everywhere, product differentiation, mobility, and other initiatives. Whereas in Latin America, having a more affordable product is still a big innovation in and of itself. And we learn from each other. For example, our Brazil business is much better than our US business on customer service and being customer-centric as an organization, in the way they’ve designed their products and run their business model. The trick is to make sure that both organizations get to see what the other is doing, take the best, and then adapt it.”

—Michael White President and CEO

DIRECTV US

“The older white- and blue-collar workers that formed the backbone of our workforce are now retiring. And attracting young millenniums to a traditional industry and providing them with engaging careers is not easy. It’s fascinating to see, that—for example, in our US subsidiary—it is very difficult to attract good engineering talent to a basic industry like ours. Attracting talent in the developing countries is less of a problem.”

—Dimitrios Papalexopoulos CEO

TITAN Cement SA Greece

12 PwC

Research methodology

Contacts

Editorial team

Of the 1,258 interviews we conducted of CEOs in 60 countries between 22 September and 12 December 2011, 161 were with those headquartered in the US. Forty-four percent of US respondents reported revenues up to $500 million and 10 percent were those whose companies had revenues up to $999 million. A significant number of large companies also participated from the US. These included 39 percent whose companies reported revenues between $1–$10 billion and 8 percent whose companies had $10 billion-plus revenues.

To better appreciate what is underpinning the CEOs’ outlook for growth we also conducted in-depth interviews with 37 CEOs from five continents, including 9 from the US. Their interviews are quoted in this report, and more extensive extracts can be found on our website at: www.pwc.com/usceoagenda2012

Bob Moritz US Chairman and Senior Partner 1 646 471 7293 [email protected]

Tom CrarenPartnerUS Thought Leadership and Brand1 646 471 [email protected]

Cristina AmpilManaging DirectorUS Thought Leadership Institute1 646 471 [email protected]

Deepali SussmanSenior FellowUS Thought Leadership Institute1 646 471 [email protected]

OnlineAdiba Khan

Research and data analysisThe research was coordinated by the PricewaterhouseCoopers International Survey Unit, located in Belfast, Northern Ireland.

Design: US StudioTatiana Pechenik Isabella Piestrzynska Laura Tu Adam West


US CEO Interview Transcripts 1

Interview with David CoteChairman and CEO of Honeywell

PwC: Energy security and volatility and pricing supply are prompting companies to meet demand for efficiency. In serving customers in the United States, but perhaps more important, outside the US, where is that demand being driven from? Is it lack of a national energy policy? Is it consumer-driven by residential and industrial consumers? Where are you seeing the most heated demand for energy-efficiency products either geographically or by type of consumer? And what area would you be most excited about in terms of seeing it demonstrated?

DC: I’m intrigued by all areas of energy efficiency, because it’s surprising how much possibility exists in that area. It’s something no one’s ever really focused on. Everybody tends to be more focused on consuming energy than on energy efficiency. Whether it’s industrial, residential, commercial, or government, it doesn’t matter. We actually did an analysis showing that if the US and Europe aggressively used existing Honeywell products and technologies, they could save 20 to 25 percent of their overall energy bill. Energy-efficiency products and technologies exist. It is more a question of how to get people to use and invest in them. For example, if you’re buying a new plane or putting up a new building, how do you get all the energy-efficiency products included? The behaviors and incentives aren’t correctly aligned. That’s where we have to find a different way of doing things, because you’re not going to get energy efficiency just by telling people, “You need to be colder in the winter, warmer in the summer,” or, “You’re

going to buy a car that doesn’t go as fast as your old one did.” No matter what people say in a survey, that’s not what they’re actually going to do. You have to find ways to make it easy for people while not severely impacting their lifestyles. This is where you have to get utility companies involved. Utilities are generally incentivised to sell more electricity, yet need to reduce their overall energy intensity. They need to figure out how to deploy programmable thermostats in homes and businesses, how to encourage better insulation, how to ensure factories are installing energy saving equipment. Such initiatives are too dispersed, so everybody needs to pay more attention to them.

PwC: In terms of sustainability and Honeywell’s product portfolio, which parts of the world present the greatest opportunities for environmental goods or clean-tech products?

DC: I would say the newer economies. China in particular stands the greatest chance of becoming a very energy-efficient society, just because they’re building so much new infrastructure, which presents more opportunity and less difficulty than when you’re retrofitting existing systems and facilities.

PwC: Given the current economic turmoil in Europe and in the US, what is your view of the outlook for the global economy in the next year?

DC: We’re planning on slow growth across the global economy. We should assume a slight recession in Europe, while the US should grow at a slow pace. China will grow slower but still at good

David CoteChairman and CEO, Honeywell



3 percent, it will take China 30 years to become the biggest economy in the world. But they still won’t have the same standard of living as in the US, meaning they can keep growing for a long time. We’re going to participate in that growth and continue to support it. So the biggest thing that needs to be done for Honeywell is to identify our Chinese competitors. We know who our competitors are in the developed world, but when you look at emerging regions with high growth, that’s where you next competitor is likely to emerge. The only way we’ll be able to compete is if we’re there and doing everything locally. And that’s where our big push has been.

PwC: Does that type of geographical expansion and diversification change your talent needs?

DC: I’m fond of saying that you need to have the best people organised and motivated the right way if you’re going to be successful. We have about 140,000 people in the company, half of them outside the US, so our demand for talent is very big. We’re going to keep working to develop and promote talent internally, because I like our people to feel they have the ability to move upward and look at opportunities for themselves.

PwC: Are you experiencing any talent shortages, and if so, what have you done to close those gaps?

DC: The best thing is having a successful company. If our company is successful and our people feel they’re making a difference when they work here, that they are responsible and can see progress, that’s probably one of the biggest attractors we can have.

pace, and I expect the same thing in India. The overall debt question, both in the US and in Europe, is creating this big market overhang, and it’s going to have to work its way through. Europe’s problems are the ones that we’re focusing on now, but right behind them are those in the US. In the US, it’s like we took the uncertainty of demand, we put the uncertainty of regulation on top of that, and now we’re putting the uncertainty of government financing on top of that. So everybody just holds back.

PwC: What can governments do specifically to help and support Honeywell?

DC: The biggest thing governments, both in Europe and in the US, can do is to address their debt problems. And that seems to be the one thing politicians don’t want to do. They’d rather talk about jobs, but the one big thing that they could do to address job creation is to resolve the long term financing issues in Europe and the US.

PwC: Regarding your strategy going into 2012, compared to last year, how do you perceive emerging markets, both as an area for expansion or to grow acquisitively?

DC: There won’t be any changes in our strategy, though I’m a big believer in thinking about emerging economies and the need to participate in them. Of course, the two big ones are China and India, where 35 to 40 percent of the world’s people reside. The more people engaged in the global economy, the better it is for everybody. If China’s economy keeps growing at 7 percent a year and the US economy grows at




our sales were outside the US. Today it’s approximately 55 percent. We’ve grown from a $22-billion company to a $37-billion company. You don’t do that by simply taking US products and selling them somewhere else. You have to innovate, design, manufacture, and source locally to be successful anywhere. For instance, we talk about the need to develop products in India and China, for sales both in those countries and in other markets, including the US.

PwC: Broadly speaking, how has talent become a strategic issue for Honeywell?

DC: Talent has always been a strategic issue for us, and I personally spend a great deal of time on it. For example, I review the performance of our top 200 people three times a year. In fact, either myself or Mark James, our human resources leader, personally interviews those individuals before they’re hired, even if we already know them. That type of diligence to hiring top talent accomplishes three things. First, we get a chance to imprint, or establish social attachments, with each of them. Second, the hiring process is quality controlled, ensuring that we have the best person. And third, it impresses upon the person the significance of the job they’re taking. When they talk directly with the CEO and the HR leader about what they’re going to do and why, it’s amazing what a difference that makes in terms of their outlook on being a change agent when they get in that job.

PwC: Describe the importance of forging alliances and partnerships outside the United States, whether it be with a supply-chain partner or a formal business partner.

DC: We tend to go on our own everywhere, unless we’re in a country, an industry, or a market where we can’t do it ourselves. Then we’re happy to partner with whomever makes the most sense, so that together we accomplish something neither of us could do individually. In China, for example, we’ve tended to go on our own, except in aerospace, where to participate in the building of the new COMAC C919 airliner, we did forge partnerships, because they wanted local partners.

PwC: Internally, how has Honeywell adopted energy-efficient products or put environmental initiatives in place?

DC: We laid out our own aggressive energy and sustainability goals several years ago, and we have reported the ongoing progress on our website so the public knows how we’re doing. We actually budget energy usage and greenhouse gas emissions as part of our annual operating plan, and track them monthly to see how we’re doing versus the year before. To date, we’re doing very well in those efforts.

PwC: Are you seeing more innovation coming out of your foreign operations?

DC: We’ve certainly seen much more innovation coming from outside the US. Ten years ago, less than 40 percent of




PwC: How does Honeywell coordinate with educational institutions and governments to ensure your pipeline of talent?

DC: Most governments can at least make sure their students are taught basic skills. In developed regions such as the US and Europe, graduating more engineers is critical, otherwise we’re going to get far outstripped in the number of engineers educated in other countries. The US could have a much more open minded immigration policy that allows foreign engineers to come here, or for foreign students studying engineering here to stay in the US to work and seek their fortunes. We ought to be encouraging that, not discouraging it.

PwC: Finally, in the last year, with volatility across the globe, have you allocated your time and efforts as CEO differently, and when do you think that might change and get back to normal—if there is such a thing as “normal” anymore?

DC: One of the things I’ve always liked about my job is that there is no normal. Everything is different, day to day, not just year to year. One thing that has benefited me this year is that last year I served on the Simpson Bowles Commission. I spent a great deal of time working with that bipartisan commission in trying to develop better economic policies for the US. So this year I will be able to devote more of my time running the company, which, of course, is what I like doing best.

PwC: Are you seeing any new challenges to getting the right talent in the right place at the right time?

DC: Yes, especially in our fast-growing markets, such as China and India, because they’re growing faster than the talent there would be able to support. So we are constantly working to train those people to become leaders.

PwC: Once they’re trained for leadership positions, does retention become a problem as they use those skills to explore other opportunities?

DC: Yes, which is why we devote so much attention to having people feel like they’re a part of something at Honeywell. We could just keep paying them more and more, but that’s not what’s going to hold them. People need to feel a sense of self actualisation: “I’m making a difference here. I can see what I’m accomplishing. I go home at night feeling good about what I did. I can brag to my spouse and my kids about what I’ve done.” I think that makes a difference.

PwC: Are you moving people to fill gaps in geographic areas where you’re finding shortages?

DC: We’re always more than willing to move people, but we tend to focus on in country hiring. For example, I want our China businesses run by local Chinese talent. We may not always have the talent to do that locally, in which case we will bring someone in from the outside. Promoting from within a country, though, shows everyone in the organisation that they can continue to grow and aspire to top jobs. Honeywell’s operations are big enough in any of our markets to allow our people to grow their careers for quite a while.

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Interview with Dominic J. FredericoPresident and CEO of Assured Guaranty Ltd.



PwC: What is your current outlook for the global economy, as well as the different factors you consider when you look at growth both in the US and overseas?

DF: Our business is basically predicated on growth in both Europe and the United States. As we look at Europe, the economic outlook is for flat to no growth across the continent, which is where the majority of our non-U.S. business is located. In the US, where most of our business is municipal based—in individual states and local governments that issue bonds—this was a very depressed year for issuance. With interest rates staying low, we expect issuance to pick up next year, and there are some forecasters calling for a fairly strong bond issuance year. I don’t see that, however, because you still have a balance of payments, cash in versus cash out. Municipalities remain stressed from a budgetary point of view, therefore that’s going to limit the amount of new construction and other new projects which they could consider. So we’re looking for reasonable growth in the U.S. for our business.

In Europe we’re looking at very little growth. We haven’t had much success in Europe in the last two years because of the uncertainty in the bond insurance market. I think there will be growth for us versus what the general European economy will do, just because of the fact that there was no insurance penetration in the last two years, and we expect that to pick up going into 2012 now that S&P has assigned us stable ratings in the AA category.

PwC: With the current mix of volatile circumstances—economic uncertainty, natural disasters, or political upheavals over the past year—what has been the volatility level for Assured Guaranty?

DF: Volatility for us is predicated, first, internally on the company, and then on our ratings in the business of insuring credit risk. The issuer, or the obligor, uses our insurance to improve the market’s perception of the creditworthiness of that instrument. So the first threat to the product, or to our opportunities, is our ratings. The rating agencies have been under attack because they made some rather serious mistakes back in 2007 and 2008 relative to how they rated certain instruments that were tied to US mortgages, and there’s been an overreaction on their part. The rating agencies have taken a very different look at how they rate our company and our industry, which has been detrimental to us. Over the last two years we’ve been on either a rating Outlook Negative or a rating Watch Negative at at least one rating agency, and that uncertainty in the market had the most impact on Assured Guaranty and our position relative to being able to write business.

The only benefit, if you can call it that, is that we were the only company that maintained any viable ratings in our marketplace, so we were the best option at the time. We’ve continued to show profitability, further improvement in capital position, and further run off or improvement of our portfolio of insured risks. By and large, we have weathered the global financial crisis

Dominic J. FredericoPresident and CEO, Assured Guaranty Ltd.



very well, maintaining reasonably high ratings, in the AA category, which today in the financial markets are some of the highest ratings from the agencies. We’re challenged, but in a position where we believe the worst is behind us and we are looking for a pickup in business because of the stability of our rating from S&P. It is really stable financial strength ratings that dictate the acceptance of our product.

PwC: Are those ratings then the number one risk to Assured Guaranty’s growth that you’re most concerned about, or are there other factors?

DF: For most companies, risk, first and foremost, relates to their specific business, and in our case it’s our ratings. However, we are also susceptible to risk from other areas, particularly either legislative or regulatory. On the regulatory side, there’s been movement to restrict the use of derivatives. We used to write about a third of our book of business by guaranteeing derivatives contracts. If, under the new Dodd Frank Act, a company has to post collateral to execute a derivative transaction, that will drive everybody out of the derivative markets, because the industry theoretically could be risking hundreds of billions of dollars.

Second, in the way we’re structured—with a Bermuda holding company, US subsidiaries, and UK subsidiaries—to the extent that the US changes the tax view of what a Bermuda domicile means, and how they’re going to restrict a premium ceded from a US company to an offshore company, that could have an impact.

Number three, again under Dodd Frank, there is now a federal insurance office. Whether it decides to regulate our industry could dramatically change how we do business, what business we’re allowed to do, and how much business we’re allowed to write. Stacking those factors on top of each other, ratings are our number one risk, but there are other risks in the marketplace that we are as concerned about going forward.

PwC: How much do the fiscal policies of domestic and foreign governments, especially at the municipal level, worry you?

DF: We’re very concerned, and I’ll take it into a more specific context. We write insurance for state or municipality issued bonds. We do a full underwriting of the issuer—its availability of funds, sources of funds, diversity of funds, and ability to increase in down cycles the flow of funds, their access to other unallocated or previously unencumbered funds to support the borrowing or the debt service.

Today, many municipalities are looking for the ability to abdicate some of their responsibility. For example, say a municipality issues a bond with our insurance and agrees to raise taxes if necessary to support the debt service; then, all of a sudden, because of the downturn in the economy and how its revenue base was constructed, that municipality is seeing a revenue shortfall. It’s not politically popular to raise taxes today, and although our contract specifically calls for that, the municipality decides it’s not going to do that, but instead wants to file for




bankruptcy and have debt service fall on their bond insurance. Part of the deal, however, is that they are supposed to exhaust all means possible to provide adequate cash flow to service that debt. When some local government wants to access the insurance and abdicate its responsibilities to either have balanced budgets or find additional sources of revenue, I have a big issue with that type of behaviour.

PwC: What should governments do to avoid that type of behavior?

DF: Now we’re getting into politics, but government officials first and foremost have to remember that they govern for all people. And if people need a solution, then it’s up to the government heads to craft that solution, which sometimes requires compromises. So today if you look across all levels of government, first there has to be a re recognition of what is a reasonable tax base against expenditures. Then, when you look at the revenue, did we attach to the revenue in the proper way?

It’s the government’s recognition of its responsibility. I have an engineering background, which involves knowing about my inputs and my outputs. It’s a very simple business. Everything is a process that has an input and an output, and knowing how to match the two. In a state government, it’s exactly that. What am I paying on this end, what can I collect on that end, and how do I make the two meet? This is not about making money or losing money. It’s about providing service and making sure there’s a reasonable basis for allocating the cost of that service to the recipients.

PwC: And does that same basic situation exist throughout Assured Guaranty’s various global markets?

DF: I think it does. What makes it different around the globe is the economic outlook, the size of potential sources versus the obligations. We think we have a fairly high level of benefits, of social programs built into the structure in the U.S. If you go around certain countries in Europe—and I lived in Europe for a number of years—you’ll find that the social structures there are even steeper. They have tax rates that accordingly reflect that, which is why certain countries are very attractive to live in and others are not. In the United States, municipalities could create for themselves a competitive advantage or disadvantage, depending on how governments spread their obligations across all constituents.

PwC: Have there been some actions governments or multilateral organizations have taken to create a positive impact on economic conditions?

DF: In the US, keeping interest rates very low is both a positive and a negative for the economy. If you don’t show real interest rates, there’s no reason for individuals to invest. If I’m going to earn 25 basis points on my savings, there’s not much incentive for me to save. Therefore, because many people’s ultimate goal is to build a retirement fund, if they have no real return in the market, that’s going to make it very difficult to achieve that goal.

Look at Japan, which went through 20 years of virtually zero interest rates. I don’t think that did them much good.




I see that kind of behaviour here, and while I don’t think that’s the way it has to be, it has helped in a way. To get over a credit crisis, making credit cheap is one way to do it, but then at the end of the day you need inflation. We seem to want to fight that, but inflation is like the tide that lifts all boats. It really would help with the evaluation side of the market, especially in real estate. If there’s one big thing that’s continually going to drag down the US economy and make a significant impairment or impediment to any real growth, it’s the US real estate market.

Too many people rely on the US real estate market as either their biggest savings account or their retirement. With no value being achieved in the market, that’s going to create more pressure in the whole process. I have not seen anything from the government, either a policy or a proposal, to address that. We spend a ton of money on infrastructure at the Federal level, but that has done very little relative to unemployment or the economy. Take those same dollars and forgive everybody 20 percent of their mortgage. For those who don’t take 20 percent, lower their interest rate. If the government lets banks borrow at 25 basis points, why not just give it to the consumer, where it’s going to have the most benefit?

PwC: Given all these circumstances and the various levels of volatility over the past year, did Assured Guaranty have to change its overall strategy?

DF: Because we’re in a risk-taking industry, we have to change our risk-taking appetite relative to what we

would identify as the elements or the environment in which we transact business. For us it’s been more of an increase in our credit underwriting requirements, a further pushing out of our underwriting standards. Our US municipal business today, is focused more on tax backed, revenue backed, general-obligation bonds as opposed to specific projects. In healthcare, for instance, we’ve stayed away from projects such as special-care facilities, because they’ve always been very thin on the revenue side. We’ve looked at the asset backed world and said, Okay, we now know how much potential fraud is embedded in the home mortgage process, and as an underwriter you have to make sure you can cordon off risk or control it. So when fraud is rampant and you can’t control it, you have to remove yourself from the market.

We constantly look at what we’re learning from today’s experience and adjust our views of the future in terms of what business we can write, what business we can engineer the risk out of where there’s a reasonable prospect we could take the risk at a reasonable premium and make a profit.

PwC: Do you anticipate those conditions continuing into next year?

DF: Yes.

PwC: Will you have to make further strategic changes to react to that continuation?

DF: Looking at residential mortgage backed securities, in order for us to ever get back into that business, there would have to be dramatic changes to the contractual structure around the




risk to give us more and stronger rights upfront. As a financial guarantor, we have to pay a claim to the policyholder and then argue about it or litigate it later with the sponsor, depositor or originator. In the mortgage business we have paid probably $3.5 billion in claims. We might be able to recover a substantial amount of those claims, but, in the interim, we’re still out $3.5 billion. The regulatory bodies charged with resolving the R&W violations aren’t worrying about that, which is why our ratings get threatened and the perception of the quality of our product gets impaired.

Now, if the contract said I get paid first, that would be a different story, but that’s not the way it works. Those nuances in our US business force you to make further changes. That’s probably not the same way as we look at our risk in Europe. In Portugal, Spain, Greece, and Italy, for example, the governments have their hands in everything. Although we don’t have any significant sovereign risk, the financial condition of those countries has a tremendous impact on our exposure. For example, we were looking to do a hospital transaction in Portugal, but based on the country’s economic problems, we pulled that deal off the table. So there are impacts in today’s economy that have forced us to make changes, and I don’t see them quickly reversing themselves in the new year.

PwC: You just referred to developed markets overseas. What about emerging markets, which was a major focus of CEOs in last year’s survey. What’s your position and prospects for emerging markets?

DF: For us, emerging markets do not present the same level of opportunity as they do for other companies. We

need a developed system of law and rights under contracts that you don’t see in the early stages of an emerging market. We need an active bond market, because there has to be liquidity and the ability to trade in and out, and that doesn’t exist in emerging markets.

PwC: In that sense, how has building relationships and partnerships become more important to your success?

DF: Our municipal business in the US is typically brought to us by big investment and issuing banks, and we continue to foster and maintain those strong relationships. Europe is a different market, and there we look at infrastructure. A construction firm, for example, will put together a consortium to bid on building a railroad, a hospital, a tunnel, whatever the case may be. We have relationships with those large construction firms, because they bring in the insurer and the banker. So we probably count on a hundred contacts to drive the majority of our business.

PwC: Have environmental or social issues become an element of your operations?

DF: The essential issues for us are more relative to the breaking point for taxes and tax levies and sources of revenues. Remember, we’re all about repayment of debt or repayment of obligations. So if municipalities continue to put large benefits packages on the table, how they get funded is a critical issue for us. For example, Detroit is experiencing a huge downturn in its economy and high unemployment, resulting in a tremendous loss of revenue into the municipality. The state of Michigan had to step in to assist Detroit in managing




its debt and financial obligations. It’s going to take a long time to resurrect Detroit, though the continuing success of Chrysler and the amount of investment they’re making there may help. We’ll see how that pans out, but our issue on the social side is more about benefits against revenue and who’s accounting for the revenue.

PwC: In the wake of all the economic turmoil over the past couple of years, and its impact on your industry, Assured Guaranty’s major competitors have gone out of business, leaving you as “the last man standing.” Is competition not a factor for you? Do you wish you had direct competitors?

DF: Part of me says, yes, any industry has to be greater than one. But then I’m sure Coca Cola wishes there wasn’t Pepsi, and Ford wishes there had never been a General Motors. So it’s hard for me to take that high intellectual level and say competition is good in every case.

One positive aspect of the lack of direct competition is that when we submit a quote for a piece of business, no one’s going to offer a similar product for a lower price or weaker terms and conditions. If we’re doing business with a hospital, I want a mortgage on that property so I own the building if they default on my bond. Back in 2006, when there were seven total players in the industry, there were a lot of people waiving mortgage requirements. That’s not the smart thing to do, because, remember, the hospital is not going to be more than an operational risk. Can you continue to generate revenues in excess of your expenses, including

debt service? That’s a factor of how good of a job you do in the competitive environment. It’s a different risk entirely. That’s why you have to protect yourself, and in those days, people would waive those terms and conditions. It’s nice not to have to worry about that these days.

Competition will come back into the market, but we’re always competing, regardless of whether there’s another bond insurer out there. If you look at this year, roughly 95 percent of all US municipal issuance was issued without insurance. That’s our competition, the uninsured market. On the structured side, we did three or four direct, new money structured finance deals. How many billions of dollars of auto securitizations and credit card securitizations went out that never used insurance as a product? Our competitive environment is not limited to whether there’s another financial guarantor. Our real competitive environment is the uninsured execution.

PwC: Let’s talk about your unique environment for talent. Even though Assured Guaranty has only about 300 specialized employees, has talent become a strategic issue for you?

DF: It hasn’t, but that is because of the unique nature of our business. A few years ago there were seven AAA-rated companies doing direct financial guarantee insurance. Today there is one—Assured Guaranty. As a result, there is a tremendous amount of talent on the streets. Also, because most of our business is done with banks—including Goldman Sachs, Bank of America, Merrill Lynch, JP Morgan Chase, and




Citibank—the person on the other side of the transaction is experienced or knowledgeable enough to work for us. When we lose people, we typically lose them to the banks, and when we hire people, we typically hire them from the banks. And the banks have the same problem of reducing staff over the last three years. So in our business there’s a surplus of talent available, not a scarcity.

PwC: Does that present a challenge when you need to bring in new talent, that there is too large a pool from which to find the best and the brightest?

DF: I try to stay away from using employment agencies and headhunters. They’ll tell you who their best candidate is. I trust our senior management team. Most of them have grown up in the industry, which is very close-knit. People change hats, but they never change uniforms. Therefore, if we’re looking for somebody in surveillance, I’ll go to our head of surveillance and say, “Who do you know in the market? Who have you come up against?” Because I’d rather bring in somebody we know than somebody we don’t know.

It’s also not just talent, but also personality, especially in a small company like ours. You could have the brightest guy, but if he can’t work with people, or if he has a different view of where his career is going to go versus the rest of the people in his department, that’s going to create a problem.

PwC: In this volatile environment, have your requirements for senior leadership changed?

DF: No, we were fortunate in that, of the seven direct AAA-rated companies in our industry, the two strongest survived, and we wound up buying the other survivor. We’ve had more of a challenge of integrating talent than anything else.

PwC: Has that impacted your succession strategy?

DF: Succession has evolved for us. Every year, I present a succession plan to our board, and it’s become more difficult. In the old days, succession would be a guy who you thought knew the product or the business really well and then needed to have managerial or leadership skills. Our business today probably puts as much premium on negotiation and communication skills. When you look at the threats from the rating agencies, you have to talk to the agencies and, in effect, negotiate what position they want to take vis-à-vis your risk versus what you think is the proper position.

PwC: Are you confident that the pipeline is there to bring along that type of talent?

DF: I’m fortunate in that I believe we have a successor in the company today who could become the next CEO. I always look at who I think can be developed and ultimately get to that level. The challenge is not only to identify your successor, because




a lot of things could happen on the way to that point of succession, but to look three levels down, to whom else I think has the right amount of talent.

The problem today is, too, that the challenges of the CEO have dramatically changed. For instance, I can’t imagine a CEO who doesn’t understand the financial side, because now you’re putting your signature on your company’s 10 K form, on your 10 Q form, and on your representation letters, and you’d better understand what you just signed. Without a good grasp of the financial side, I don’t know how you do that. Is the head salesman who comes up and runs the company really capable of understanding all the financial implications? And when you look at things like Dodd Frank and Sarbanes Oxley, especially in the financial markets, it’s become a legal, an accounting, and an actuarial beast.

Yes, you ought to know your product, who your customers are, and how you’re going to service them, and maintain relationships, but if you don’t understand those other areas, I’m not so sure how successful you can be. Therefore, as the demands of the job have changed, it has become more challenging to identify a candidate who can wear all those hats.

PwC: Speaking of your evolving responsibilities as Assured Guaranty’s CEO, how has the allocation of your time and demands changed over the past year?

DF: It’s been more of an external challenge with regard to who I need to interface with more. In today’s volatile economic world, you’d better know

who your largest shareholders are, and they’d better know who you are. You need to give them access so that if, say, your stock drops three points in a day, you know you’re going to get some phone calls. You’ve got to be able to respond. Obviously, too, one of my biggest communications is to the board, which is my ultimate boss.

Similarly, we have some major issues to negotiate—settlements, agreements, et cetera—and I need to be a part of that process. I’ve always been very acquisitive. I believe that one way to move the needle is through acquisitions and consolidations. In our business, with the industry decimated, there are a lot of stranded companies that still have valuable assets. My challenge is to acquire those valuable assets and build the value of our company.

PwC: For you, then, is this the new normal, or will there be a return to a former normal?

DF: I would hope that the business gets back to what it was in years past, which means we provide a service: access to the market for a given person who needs financing at a cheaper cost. To the investor, we provide negotiation to better protect that asset. We continue the surveillance of it, we provide loss mitigation where necessary, and in the event of a default, we pay principal and interest. There is value to that proposition on both sides, because it’s a win for both the issuer and for the investor. It would be nice to get back there, to eliminate the fraud side, and to get this nice high-margin business where everyone feels good about it.

Interview with Douglas R. OberhelmanChairman and CEO of Caterpillar INC



PwC: Let’s start with the global economy. The sovereign debt problems in Europe are the focus of concern for CEOs worldwide. How much does the fiscal position of domestic and foreign governments worry you?

DO: What we’re seeing today in Europe—and throughout the US and many other countries—are the ill effects of nearly 30 years of low interest rates coupled with high government borrowing and deficit spending. Right now we all need to keep an eye on sovereign debt, particularly countries with high debt to GDP ratios. As business leaders, we need to make sure that is top of mind among political leaders. I lived in South America during the 1980s, and I remember very well country after country essentially becoming insolvent, and it took them a generation to bail out of that.

PwC: What actions taken by governments or multilateral organisations, such as the IMF or the World Bank, have had a positive impact on economic conditions?

DO: I go back to my experience in Latin America. The IMF would come in and prescribe some tough remedies for bad economic ailments. Over time, those countries got their spending and borrowing in order. Today Latin American countries, for the most part, are very strong. That’s the net worth of the International Monetary Fund and the World Bank, to provide leadership.

PwC: A recent government action was the passage of the free trade agreements in Colombia and Panama and South Korea. What other actions do you think governments should take to improve world trade?

DO: For governments worldwide, it’s fiscal stability first and foremost. Those of us in business, no matter where we operate around the world, need strong economies and fiscal soundness. Second, it would be nice to begin a global dialogue on expanding free trade for all of us. That may be “pie in the sky” at the moment, but fiscal stability across the board and working towards an open, level playing field among all countries are key.

PwC: Are you optimistic about the prospects of an open, level playing field, given what you’ve seen recently?

DO: I’m optimistic on some things surrounding a level playing field. So many countries’ backs are against the wall, fiscal stability will happen and countries will survive over time. I’m less optimistic about global trade agreements right now, particularly with depressed economies as they are. When economies are slow, unemployment is high, and countries turn inward. We’re seeing that around the world now, but I’m not giving up hope.

Douglas R. OberhelmanChairman and CEO, Caterpillar INC



PwC: What one single action could governments initiate to support Caterpillar?

DO: Caterpillar would benefit from a global round of trade agreements of some kind. With previous trade agreements—NAFTA, South Korea, Colombia—our employees, our company, our shareholders, and our customers have benefited greatly.

PwC: How will your strategy drive growth in the future?

DO: We looked deeply into the company nearly two years ago right now, what we liked, what we didn’t like. We picked a team of 16 broad and diverse thinkers, and asked them, “What do we want Caterpillar to be in five years? What should we do?” We concentrated on a few simple metrics, around employee inclusion and safety, as well as factors that drive our business model: lowest owning and operating cost for our machines; best quality equipment; high market shares in our global markets. We built a strategy around that initiative.

PwC: Do you anticipate any further changes to your strategy for next year?

DO: We made some very deep and profound changes to our corporate strategy over the past two years, aimed for our 2011-2015 time period. We are now in execution stage, and I see tweaking some of our strategic goals next year, but no significant changes

PwC: One of your so-called “Big 8 Imperatives” of the Enterprise Strategy is winning in China and growing the leadership in India, the ASEAN countries, and the

Commonwealth of Independent States that comprise the former Soviet Union. Can you provide examples of the opportunities that make those regions especially attractive for Caterpillar?

DO: I am absolutely convinced of several things about China. Number one, we will see a Chinese construction equipment player emerge over time to compete with us. Therefore we deeply believe we have to be in China to know that market and those competitors, in order to take them on at their own game. We learned that in the early 1960s when our predecessors went to Japan and successfully took on Komatsu, a very strong emerging competitor. That’s exactly what we’re going to do in China, where we’ve already established 15 plants with 9,000 employees. Our dealers there are strong. We’re building the same Caterpillar business model in China as we have everywhere else in the world, and I believe Chinese customers will respond to that over time.

PwC: Emerging markets have become a major focus for most CEOs. What progress have you made in targeting those markets, and what difficulties have you encountered there?

DO: We have stepped up our global investment program over the last 18 months, particularly in emerging markets, including Thailand, China, India, Indonesia, and Brazil. We’re putting in new brick-and-mortar facilities and adding capacity in order to expand our ability to manufacture and assemble products in those markets. I firmly believe that with seven billion




people on the planet wanting to live as we do in the US, they’re going to want infrastructure. Caterpillar makes infrastructure, so we have to be there.

PwC: How is enterprise-level risk management related to your strategy?

DO: In 2003, Jim Owens, one of my predecessors, initiated our “trough strategy.” Nobody wanted to hear about a trough, or a downturn then or the years leading up to 2008. But that strategy allowed us to do something that really helped us in 2009. It forced every one of our businesses to model and to plan for the worst recession that they’d ever seen in the history of their business. So if they saw a 30 percent drop in topline value, they told us exactly how they were going to respond, line item by line item. We drilled that over and over, so when that recession did hit in late 2008, our business leaders pulled the “trough triggers,” as we called them, and sure enough, we were in trough mode much faster than we’d ever reacted before. As a result, we maintained our dividend, we held our credit rating, and we made money through the worst recession in all of our lifetimes. We’re pretty proud of that.

PwC: Was that difficult to do, because you very seldom hear about taking such a negative looking strategic approach?

DO: The planning of it was tough, because during the last decade, our growth was between 30 and 40 percent a year, and nobody wanted to think about a downturn. The execution was brutal, and it weighed on our team, because we did things that companies

have to do to survive but are painful while doing them. We went from $51 billion in sales in 2008 to $32 billion one year later. We rapidly shrank our cost structure to make money and preserve our credit rating, which was painful on our management team. But a couple of good things came out of that. One, we got through it, and, two, we trained an entire generation of new leaders how to manage in a trough. That will serve them for their entire careers, just as some of the earlier troughs I’d been through in the early 1980s served me.

PwC: What risk factors are of greatest concern to you?

DO: Certainly I’m concerned about the debt bubble around the world. How we all manage that is something to watch. That’s essentially what we’re seeing in Europe today, how they manage their heavy debt load. The United States has been going through it, and many other countries are up against the wall on debt, as well. How that manifests itself with other actions on the banking system and financial system is something we watch every single day.

PwC: You did scenario planning with your trough strategy. Are you doing more of that type of planning now?

DO: We’re doing as much of it today and just as deeply as we did before. We know that the world economy, and any individual country’s economy, will go up and it will go down. We do business in so many countries, we have to be ready for anything. We cannot take our eye off that ball, just as we can’t take our eye off the ball in growth, and we’re in a growth mode right now. We have to juggle both of those very closely at this moment.




PwC: How have your risk management processes dealt with environmental or social costs and benefits?

DO: This area has changed immensely in the last decade. In our business, I talk with customers around the world, and without fail, within a few minutes they bring up the issue of environment sustainability, including issues such as managing fuel consumption, CO2 emissions, and oil footprint. We have a number of good ideas and initiatives in the sustainability arena. For example, our remanufacturing business takes a worn out diesel engine, a water pump, or a fuel pump and restores like new, down to a new box with a new warranty and a lower price. Think about the impact that has on the environment. Think about the emissions technologies we’re bringing to bear to clean diesel exhaust. We have many such initiatives that our people are proud of, and there are more to come as we go forward.

PwC: Has your focus on environmental and social issues impacted your cost-reduction programs in any way?

DO: It’s helped cost reduction, frankly, because what I’ve found with environmental and sustainability issues—and I’m included in this area—is that our employees will work on them for free. All of us want to help the planet, to do good things towards sustainability for our grandkids and future generations. We get great suggestions from employees, and I find

it difficult to see costs go up from things like turning lights off or becoming more fuel efficient with our vehicles. Right now I’m very optimistic about alternative-fuel efforts underway. We just acquired a company that makes engines that only burn on natural gas. That’s going to help us long term.

PwC: How does Caterpillar innovate?

DO: It starts with listening to our customers, pure and simple. They will tell us what we need to do. We also spend a great deal of time with our product-development teams and our product businesses to get into our customers’ minds. Today we have a diesel engine in the developed world, called Tier 4, which produces very clean emissions. That has helped not only our image, but our customers’, too.

PwC: As a worldwide corporation, do you find innovations coming from one geographic area as opposed to another?

DO: Innovation at Caterpillar can come from everywhere. Regionally, you’ll see differences in demand for products and services. For example, the developed countries today are pushing for GPS technology that in emerging countries is not yet known. So if we were to offer that product in emerging countries, we’d be missing the market. We have to listen to local markets and customers, and we have talented engineers from many countries who help us innovate. That makes us a stronger and a better product innovator.




PwC: Are innovations at Caterpillar primarily incremental, in the sense that you’re taking a good product and making it one level better? Or are you shifting the whole scope and coming up with something brand new?

DO: Innovation at Caterpillar is adding on to what we have and what we do. We have examples of brand-new, lightning-bolt innovations, such as our D7E electric drive tractor and our emissions technologies. But fundamentally, inside every one of our Caterpillar machines, from locomotives to generator sets, is a diesel engine or a natural gas engine. With the application of all the technology we can bring to bear, we are finding ways to increase productivity for our customers that we never dreamed of 15 years ago. It’s a fabulous time to be innovating at Caterpillar.

PwC: In what ways has talent become a strategic issue for you, and what are you planning to change in regard to your current talent strategy, if anything?

DO: Considering Caterpillar’s global footprint, our rate of growth, our expansion into new markets, and our expansion of products, talent is absolutely critical and fundamental. We’ve been in some countries and in locations only for a decade or less, so people there don’t know the Caterpillar culture that we’ve cultivated in other places over almost 100 years. So we have to work on that. In my case, I have identified that as just about my number-one priority in the next few years. How do we attract and develop talent around the world? We have

initiated a tremendous program, called Lead, which is a joint venture with Stanford University. Essentially, we use it to touch each of our nearly 13,000 leaders personally in some form once every three years. The higher up you go on the company’s corporate ladder, the more leadership development you receive. This is our first year working with Lead. Roughly 5,500 of our leaders participated in 2011, and I’m very happy with the outcome.

PwC: Are you finding as you focus more on emerging markets that you have to adopt your talent strategy to the local market, as opposed to having a one-size-fits-all approach?

DO: As we expand around the globe, one-size-fits-all will not work. For example, Chinese leadership and needs are so different from those in India, Brazil, Canada, and Belgium. Talent has to be regionally directed, and that’s what we’re working on. Frankly, it’s a big challenge, because as we’re new to some of these places and our growth is strong, we’re having trouble teaching what we want our leaders to do and know.

PwC: Do you find that your approach to talent issues has to be different in each country, or can you use a one-size-fits-all approach?

DO: With our global footprint, and the very regional and country specific differences, one size does not fit all, and we’ve had a challenge with this over the years. As our growth has been rapid, so has our hiring, and we’re challenged to teach senior people around the world what we want Caterpillar leaders to be. We’re heavily recruiting and bringing as many of our regional leaders




together as we can. We’re also creating three regional learning centres—in the Western Hemisphere, in Asia, and in Europe—to teach the Caterpillar strategy. We want leaders at Caterpillar to know what our strategy is and what we expect of them as a leader. That’s going to pay great dividends down the road.

PwC: Are you moving more people across borders, say, from the United States or the developed countries into emerging nations, as well as from the emerging nations into the more developed countries?

DO: With our continued growth around the world, and we have a high need for cross border transfers and fertilisation. It’s important that our high potential leaders, no matter where they are, learn about not only other parts of the world but also other parts of our business. I’m a great recipient of that, having lived and traveled all over the world. With our size and global footprint—nearly 70 percent of our sales are outside the US—we have a strong need for globalised leaders, so there are going to be great opportunities down the road for people. Nearly as important, though, is the need to develop local leaders, because leaders won’t necessarily be transferred around the world. We have a business to manage in that country or that location, so local leaders need to have the same tools everybody else does about our strategy.

PwC: Besides Stanford University, are you collaborating with other educational institutions or governments to keep Caterpillar’s talent pipeline flowing?

DO: We collaborate with local governments where our plants are to provide training. We also collaborate with universities and technical colleges around the world. For example, we have more than 30 technical college training programs around the world for production workers, diesel mechanics, and other technical employees. Today’s Caterpillar vehicles are very sophisticated, and people have to know how to service them in order to get the best out of them.

PwC: As you look back on the last year and your responsibilities as CEO, have you allocated your time and efforts differently than in recent years? What are the hot buttons that you’re focusing on now that you weren’t 12 months ago?

DO: I find my time increasingly aimed at government policymakers and policy itself, which is a sign of the times. I hear this from my peer CEOs all over the world. Today, government policy seems to be wrapped so much more around business than it’s ever been, and we all need to stand up and be heard. We have to make sure everybody understands what we need to do to add jobs, to grow, and to be internationally competitive.

Interview with F William McNabb IIIChairman, President and CEO, The Vanguard Group INC



PwC: What is your current outlook for the global economy?

WM: If you look at the macro economy right now, it’s hard to make a case that there’s going to be solid growth around the globe. There will be pockets of it, but we seem to be in a period of relatively slow growth, certainly in the developed markets. We see that continuing for a while to be relatively slow. A lot of the factors that got us to the recession and the crisis are still in place and need to be worked out.

We still are relatively optimistic that we have an awful lot of opportunities both domestically in the US, as well as around the world to grow by, frankly, taking market share. Our business model and value proposition have much to offer, and we’re well set up for successful growth. Very importantly, that’s growth done our way — earned, if you will. We’re a very organic company. We’ve never grown through acquisitions. I like to describe it as earning our way to growth with our clients.

PwC: What is the one risk to Vanguard’s growth that you’re most concerned about?

WM: The biggest challenge anybody in the investment management industry has right now is the level of volatility we see in the markets, in particular the equity markets, but also in the bond markets. It could scare people away from investing, and if you don’t have people who want to invest, then obviously your growth isn’t going to be what you would hope. The uncertainty

that permeates the developed world right now is a big driver of that volatility. If we can take some steps to decrease that uncertainty, we’ll have an opportunity to mitigate that volatility.

PwC: Are there things you can do to try to restore confidence in the markets that would help ease consumers’ concerns?

WM: In terms of restoring confidence, the thing we’ve tried to do, and we will continue to do, is to be out with our investors talking about the issues and not being Pollyannaish about them — telling it like it is and trying to get them to understand what’s going on. Unfortunately, a lot of investors focus on what happened in the last six months and what they think is going to happen in the next three. To be a successful, long term investor, you need a much longer perspective than that, and we try to make that point as often as we can.

PwC: How much do the fiscal policies of the US, Europe, and other foreign governments worry you, in such areas as performance, tax policies, and broader global stability?

WM: The lack of a credible, long term fiscal plan in the US is probably our chief concern. The fact that there is not actually contributes to the market volatility. Just look at August of this past year and the debate about the US deficit, and the inability for both political parties and the Obama administration to come together on the issue. We saw levels of volatility that are typically not seen.

F William McNabb III,Chairman, President and CEO, The Vanguard Group INC



In terms of other policy elements that need to be in place, the single biggest is the lack of jobs. And where is job creation going to come from? There could be more thought given to training, with the focus on education, and where to invest to create the next generation of jobs.

PwC: Over the past year, in what ways has your strategy at Vanguard changed, in terms of business model, markets, new products, and other areas?

WM: Our strategy at Vanguard in some ways is timeless. We’ve had a value proposition that we believe in very strongly, which is low cost, high quality investments coupled with great service. To help investors meet their goals is what we’re all about. As we came through the financial crisis, we stepped back and asked ourselves how we need to evolve as a firm, without losing any of the key components that have made us successful.

But there certainly were opportunities for us to evolve, and I would put our evolutionary moves into four broad categories. First, we felt that we needed to think through how we were going to expand and deepen relationships with existing clients. A tremendous amount of our growth historically has been organic, through our existing client base. Second, what new markets did we need to consider addressing, and if there were new markets to address, how did we want to do that? Third, we’ve

In Europe, you see some similar issues. The markets are paying a lot of attention to how credible are the solutions that are being promoted among the European Union. A credible, long term solution there is going to add to stability, which would reduce the uncertainty a bit more. Globally, however, the most important market to get right is the US.

PwC: Has volatility in capital markets or exchange rates become an issue for Vanguard?

WM: Volatility in the markets in general has been an issue for anybody in the business, because it keeps investors from having confidence in the markets, putting some people on the sidelines. In terms of the way we manage money — certainly in the fixed income markets — it’s put us on a more conservative end of the spectrum. We’ve tried to make sure that we’re prepared for as many contingencies as possible, again, given this volatility and lack of certainty that exists.

PwC: What should governments in general do to address stability?

WM: The most important thing right now for governments to do in terms of stability is to develop long term, credible fiscal plans. The US, for example, can’t continue to run the kinds of deficits it has built up over a long period of time. Now, that’s not to say that you have to solve the problem in the next 24 or 36 months, but there needs to be a plan in place that actually addresses the long term structural issues that exist.




in terms of where the work gets done and how the works get done? We’ve made some important strides there.

PwC: Do you anticipate any strategic changes for 2012?

WM: We will continue to make some tweaks to our long term strategy, but the core elements are in place. Frankly, we’re focusing a ton of time on execution and making sure that the plans actually get executed over the next three to five years the way we envision. Of course, as outside factors shift, we have to make adjustments, and we will, but we think the core elements are strongly in place. Now it’s up to us to execute.

PwC: Has your view of the attractiveness of foreign markets changed? What progress have you made, and what difficulties are you finding, either through investment opportunities or operational locations?

WM: Several years ago we stepped back and asked ourselves“What do we want to be globally?”. We had operations outside of the US, primarily in Australia and Continental Europe. We wondered what’s it going to take for us to have a larger global footprint, and what kind of markets do we want to operate in? We turned one of our senior leaders loose on the problem. He assembled quite a team, and now we’re making tremendous progress.

In the past 12 months, we’ve opened an office in Hong Kong, and another in Canada. In fact, our Canadian funds just launched a short time ago, and

made progress industry-wide in terms of emphasising the importance of cost in investing. We asked ourselves, What steps do we need to take to make sure that we continue to be the price leader for investments, both domestically and in any other markets we might go after? Finally — and this is more internal, given the evolution of the workforce and as we become a more global organisation — what did we need to do as a company to be truly a “best place to work?” We put a lot of time and energy into that category and thinking, as well.

PwC: Can you cite anything specific that you did in that area over the past year?

WM: Specifically in terms of best place to work, we took one of our most senior business leaders, removed him from his area of responsibility and gave him the agenda of tackling things from a different perspective. Around health and benefits, for example, we opened a new wellness centre, which has onsite health clinics at our major sites, as well as promotes health and general physical fitness. We think this is going to be a good step towards reducing long term healthcare costs while, very importantly, making the workplace a little bit more vibrant.

We’ve spent time thinking about flexibility and mobility. Historically we’re a company that only has a few locations, and people generally come to those locations, and we spend a time in face-to-face meetings. We’ve begun to ask ourselves. Are there other ways to manage the business that provide some of our people a more flexibility,




WM: Building relationships wherever you go is always important. A good example of relationship building is occurring in the UK. As the United Kingdom goes through its own metamorphosis and retirement, not savings, shift from traditional defined-benefit plans to defined-contribution plans, there are a couple of firms emerging as real leaders in that space. We have great expertise there, so we recently were awarded a large investment mandate by one of the UK service providers. We’re going to be working very closely with this service provider to make sure they have high-quality, low cost investments coupled with their service. We’ll also bring some knowledge and expertise to the marketplace around defined contribution.

We’ve been doing that here in the US for a very long time and with some success, so it’s the sort of opportunity we look for wherever we go. We’ve been in Australia for a number of years. There was a very similar development a number of years ago where we partnered, very explicitly, with one of the leading Australian firms to bring cutting edge contribution services to that marketplace. That’s actually become one of the real backbones of the business.

PwC: How is your approach to managing enterprise-level risk changing?

WM: Enterprise risk is obviously a hot topic, given everything that’s gone on in the last few years in the investment world in particular. For us, it became clear that we needed to take a different approach as we began to expand more globally. We hired a senior individual

we’re getting a lot of attention in the press. We have continued to invest very heavily in the UK, which is our European centre, and to on our investment team there, as well as our service teams. Again, we are making great progress.

In Australia, we’re the fourth or fifth largest investment manager. That’s been a terrific market because of the dynamics of the Australian economy. Australia as a country has benefited immensely from the growth of China and other emerging markets, so it’s turned out to be a terrific place for us to be as a provider of investment services to individual investors.

PwC: How do you assess customer needs in those new markets in Canada, the UK, and Hong Kong?

WM: When we look at non US markets and whether or not there’s an opportunity for us, one of the first things we look at is “Is there anybody providing a similar value proposition to ours?”. We’re finding that in many markets there isn’t a firm that’s been disruptive from a price standpoint. We believe price is the one thing you control as an investor in terms of your return, and it’s a very important component in our value proposition. We look at marketplaces where we can be disruptive and give investors the value proposition that perhaps they have not seen before. At least based on the reaction we’re seeing in some of the new markets we’ve entered, that seems to be working quite well in our favour.

PwC: Has building relationships and strengthening partnerships become more important to succeed in those new markets?




PwC: As an investment management firm, have you had to deal with environmental or social issues, or sustainability in general, regarding cost management initiatives, corporate reputation, or business growth expectations?

WM: Any time we take on a new facility, whether it’s leased or we’re building it, we look at what it would take to make the building “green.” We’re finding that doing so a good way to save money in the long run. You may pay a little bit more upfront for some of those capabilities, but the savings seem to be pretty substantial.

The second thing is, our people feel great about it. When you certify a building as being green, for example, the crew who are a part of that building take pride in it. There’s more to be done in that area, but as we shape our physical plant, we’re going to look for sustainability opportunities.

PwC: How is your approach to innovation changing?

WM: Innovation is an interesting concept in the investment management world. I’ll give you a couple of perspectives on it. First, we think it’s very inappropriate to innovate around product, in the sense that you’re experimenting with other people’s money. We don’t think that’s a good idea. Investment ideas, for example, need to be proven before they’re introduced.

Now, there are huge opportunities for innovative investment services. We’ve created a framework within the organisation for pursuing innovation

who had extensive experience putting enterprise risk in a couple of other very prestigious institutions, including the Fed at one point, and he has brought an amazing new perspective to us, which has been very helpful.

He’s leveraging what I think is in our DNA, which is a sense of control and of risk management that permeates the organisation. But he’s putting more formality around it and making sure there’s consistency wherever you go at Vanguard, in terms of the way we think about risk. He’s also making sure there’s real transparency throughout Vanguard.

It’s become a board level discussion at this point. Good boards of directors want to know what every institution is doing from a risk perspective, and ours is no different. This was a positive change for us, and I’m excited about the journey we’re on.

PwC: Are there any specific initiatives that have been put in place or are being considered to deal directly with risk management?

WM: The most important initiatives are twofold. First, creating a framework that everybody in the organisation can understand and use, in terms of assessing risk. Second, creating a powerful reporting tool that comes right up to me, billed as the CEO’s perspective on risk. Essentially we’ve looked at the 10 major risks we face as a firm and tried to shed light on those risks. It’s been a very iterative process to get to where we are, and we’re not done, but it’s been a good evolution for us.




investment period were you investing for? Two, what was your own personal risk tolerance? We actually created a risk quiz to help them with that.

Over time, though, the answer to the risk quiz was coming up almost identical no matter who the investor was, and they didn’t value it that much. Simultaneously, there was the development in the marketplace of so called target date funds. We had a number of our clients say, “Your Life Strategy Funds are interesting, but have you ever thought about doing a target oriented retirement fund, where you have a specific date?” They were interested in whether we would we do it in an indexed fashion as opposed to traditional active management?

We had thought about that, and back and forth from a design standpoint, but that client feedback helped drive the development of our target retirement fund series, which in the industry today is probably the most successful target retirement suite of funds anywhere. It’s very low-cost, all indexed, very transparent. How the asset allocation changes is very clear to investors right from the get go, and they’ve met with remarkable success.

Some people would say that wasn’t truly an innovation, because we didn’t invent the concept. Target retirement funds had existed before us. But what was interesting was the client feedback around our Life Strategy Funds. How we should be thinking about them going forward played a big part in our thinking around the target retirement funds. Also, the emphasis on cost, transparency, and indexing was something that didn’t exist in the marketplace.

with a small “i.” Where can we try a new service or a new way of doing things? We actually call it — a very technical term — “firing a bullet.” The term comes from an ancient naval tactic: In the late 18th and early 19th century, when two ships of war would face each other, before they would fire their cannons and make the big commitment — there were a limited number of cannonballs — they would fire a musket to gauge distance, wind, and so forth. We’ve analogised that concept and applied it to the business world. We first fire bullets to gauge whether or not a new service makes sense and how clients are going to react to it, before we introduce wholesale change. That framework is going to lead to even better things for our clients over the long run.

PwC: Are innovations coming from different places and parts of the Vanguard organisation?

WM: Innovation can come from anywhere — from any crew member or any part of the organisation. Frankly, some of our best ideas come from clients. We gather input from clients and sift through it to figure out where there is an unmet need being expressed, and what we can do about it.

PwC: Can you cite a recent example of where a client’s suggestion has turned into action?

WM: Several years ago we introduced our Life Strategy Funds. We had four funds, each with different risk parameters, including conservative, moderate growth, more aggressive growth, and so forth. Life Strategy Funds essentially allowed an investor to consider two risk parameters. One, what was your timeframe? How long an




Second, we believed very strongly that we needed to nurture women as leaders more aggressively than we had. Over the last decade, the percentage of women going into general management leadership roles was down. This is a secular issue, not just a Vanguard issue, but it didn’t make sense to us, especially considering that women comprise roughly 50 percent of the population at Vanguard. We initiated our WILS Program — Women’s Initiative for Leadership Success — and put a great deal of time and energy into it. Two years into the program, we’re making progress. It’s still a journey that’s not complete, but I feel good about the progress to date.

PwC: How are talent challenges different in Vanguard’s various global markets?

WM: The broad talent challenges are similar throughout the world. We’re looking for people with great capability, who believe in our values and want to view us as a long term place to work. If there’s a difference, it’s probably on that last point. We want people who want to make Vanguard a career, and that has been an important element of our success. We have very low turnover. We have people who spend 20, 30, 40 years with the organisation. We think there’s great value in that.

As we’ve gone overseas, in certain markets that’s just not a common equation for a lot of people. We’re trying to make sure we attract the same like mindedness that we’ve been able to attract in the US around that concept. Time will tell, but I feel great so far about the way our teams are evolving overseas.

PwC: In what ways has talent become a strategic issue for you, and how are you addressing such talent challenges as diversity, work/life balance, and gender equality?

WM: Talent has always been a big focus at Vanguard. We have a philosophy that people really do make a difference. A lot of firms say it, but I tend to like things that are backed up by data. Here is one of the example I’ve used when talking to our people about this: In the early days of 401(k) searches, a company would bid for a plan, they send out a request for proposal. They would get all the RFPs and invite four or five finalists in for a presentation. Then typically they would narrow it down to the final two and conduct site visits.

We found that when a site visit did not occur, we’d win one out of five opportunities. But when site visits occurred, we’d win one out of two. Whenever we asked, Why did we win, it was always, “Your people made the difference. We liked your team better than what we saw anywhere else.” That was a real data point. Clearly people were making a difference, even though the recordkeeping technology, the education, and investments were similar from vendor to vendor. We take that data point and use it as an example to our own team as to how important talent is.

We’ve evolved, talent wise, in a couple of dimensions. One, work/life balance is certainly a bigger issue, especially as you deal with people coming into the company today, fresh out of school or from another firm. We’re trying to figure out how to make it easy to manage both your personal life, as well as work, and optimise both.




that’s a good way to develop people.

We have a huge advantage over a lot of our competitors with our deep pool of general managers who can do many different things. They gives us flexibility to respond to new opportunities or to respond when something changes in a way we hadn’t anticipated.

PwC: Earlier you mention the younger generation and work/life balance. Are there particular challenges with Millennial workers who are coming into the workforce?

WM: Much has been written about Millennials. Are they harder or different to manage? Maybe I’m a little biased because I have four children, all of whom are Millennials but my perspective is, Millennials bring tremendous passion and energy to any task that they take on. It may manifest itself differently from my generation’s passions, but they’re there, and the question is, How do you tap into them?

For example, we’ve seen a tremendous sense of wanting to belong to and contribute to a community in a broader way than just work. Volunteerism, for example, has become a big initiative. We have instituted an addition to our bank of days off, with one day devoted purely to volunteerism. We’ve also established a viral network, where people can connect around different community activities they want to be involved in. We have found that when people get involved with their communities, especially the Millennials, and volunteer activity, it makes them even more productive at work. It also reinforces the bonds at work more strongly than the task itself would suggest.

PwC: In what ways have the requirements for senior leadership positions at Vanguard changed?

WM: The evolution of the senior leadership teams is ongoing. If I had to peg a couple of traits, one, people will have to be more global in their perspective. They will have to understand the interconnectedness around the world. That’s going to be a very important element. Second, people are going to work differently, so we’re very much a hands on senior leadership team. We like to get together. We spend an awful lot of time together, usually concentrated in one particular conference room. Over time that’s going to change, especially as our senior team becomes more geographically dispersed.

In fact, for the first time in Vanguard’s history, one of our senior leaders is not resident in Pennsylvania — nor in the US, for that matter. He’s headquartered in London, and we’ve had to adjust how we work as a team because of that. It’s been very healthy, but I can see that continuing to evolve as we go forward.

PwC: Do you move personnel around when you open a new office or operations?

WM: One important element of our talent strategy is what we call “purposeful rotations,” and we move people around a lot. We do it domestically within business lines. We will take people who are serving 401(k) clients, for example, and put them in our direct retail business. We take US-based people and place them in London, Australia or any of our other foreign offices. We think




an education center. Within a two hour drive of Philadelphia, there are 100 plus major universities, and we have good relationships with many of them, several with whom we’ve done more explicit partnering.

I’m involved with my alma mater, the Wharton School of the University of Pennsylvania, and its leadership development. We also partner with St. Joseph’s University to provide an on campus MBA program, which has been popular with a number of our leaders. We’ve had more than 200 people go through the program so far.

As we move forward, those kind of linkages are going to be vital if we’re going to continue to attract and develop the best people in the industry.

PwC: Does that change at all when you go to some of your overseas markets?

WM: Overseas, it’s a little more challenging, because you typically are smaller and not as well known, but we will look to make those connections. Interestingly, some of the US institutions with whom we’re best connected are quite global in their reach. Wharton, for example, had a huge global footprint, while Drexel University is developing its. If we can tap into those global networks, that will help us, even if initially we’re not as well known in the local communities.

PwC: Do you ever encounter the classic “generation gap,” as you have senior managers dealing with younger workers and some of their differences in approach to work?

WM: We haven’t seen that yet. I’m sure we’ll face it at some point but — again this is just personal experience — one great piece of advice I was given early in my career was to always seek out the younger generation and spend some time with them. Because technologies evolve, ways of thinking evolve. It was a good way for me to stay fresh. I’m a former schoolteacher, so I love being in that role, where as a teacher you’re sometimes learning as much from the students as they are from you. So I encourage our people to get out and spend time with different generations.

By the way, the same is true on the older side, too. We have a number of second-career people who’ve come here after having retired from very successful careers elsewhere, and I find they have a great deal to offer.

PwC: Do you work with universities or governments to help nurture talent or develop curriculums?

WM: Our main connection from a talent perspective is through a number of universities. One of the great things about being headquartered outside of Philadelphia is that this is such

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PwC: In what ways has the allocation of your time and attention changed during the past year? Do you expect a change or a return to “normal,” if there is such a thing?

WM: In terms of time allocation, I don’t think there is any return to normal — because I don’t even know what normal is anymore. As CEO, I have spent more time in Washington, from a regulatory standpoint, than I would have anticipated. But that’s one of the outcomes of this crisis. Where does that time come from? I’m not sure you re cut the pie. You just keep adding to it over time.

Interview with Michael ThamanChairman of the Board and CEO of Owens Corning



PwC: What is your general outlook for the global economy?

MT: We’re obviously living in very volatile economic times, both in the US and around the world. Our goal is to focus on the things we can control and make sure that we’ve planned effectively for the things that are outside of our control. We certainly see that the debt crisis in Europe could get dramatically worse and that that could affect our operations, not just in Europe, but it could have some spillover into the credit markets and therefore our operations around the world.

We’re focusing on this more as a balance sheet management issue, which is to make sure we have good control of our cash flows and good contingency plans in terms of managing against risk and uncertainty. We also need to make sure that the maturities on our debt and the availability of our financing is in good shape so that if we do get into a credit situation, we would weather the storm and succeed in that environment.

PwC: How confident are you of continued growth at Owens Corning in this environment?

MT: We’re very confident about growth, in the mid term and the long term. We live in an environment today where it’s easier to forecast three to five years from now than it is to forecast next year, because of the uncertainty. We make products that benefit from a need for more energy efficiency in the world, as well as the growth of renewable energy. We also benefit from population growth, particularly populations moving into the middle class in developing countries like Brazil, Russia, India, and China, where there’s a need for heart-of-the-

market products for better housing and infrastructure. That’s a trend we think is somewhat irreversible, so we have a lot of confidence that Owens Corning products will serve that world very well in the coming five to 10 years.

PwC: What impact did this past year’s historic weather events had on your building materials business, roofing in particular?

MT: In the roofing industry, inclement weather can have an impact on demand, and we tend to look at that as a long term trend. So over any 15- to 20 year period you’ll find some portion of that market driven by weather-related events, including hailstorms, high winds, and hurricanes.

We try to plan very effectively to have products available. Obviously, when a weather event creates a spurt in demand, we want to be able to bring products into that marketplace to help people rebuild. We deploy inventories early in the spring and then into the fall to make sure we’re well positioned.

PwC: What is the one risk to Owens Corning’s growth that you’re most concerned about, and why? How are you preparing to deal with it?

MT: The risks we focus on in terms of our growth are more near-term, so it’s the uncertainty in the US political process, in US fiscal policy, and in Europe’s sovereign debt and banking system. As long as we run a very competitive, disciplined, and capital-efficient company, and ensure our ability to not just survive, but to thrive in tough times, we feel that, combined with the macro trends that drive our overall growth, we’ll be well-positioned for significant long term growth.

Michael ThamanChairman of the Board and CEO, Owens Corning



PwC: What’s the one thing that governments in the US and foreign markets can do to better support your company’s operations?

MT: Our building materials business in North America is exposed to the construction markets—in particular new construction in both the US and Canada—and obviously we’ve seen a downturn in US construction over the last five years that’s absolutely unprecedented. Conventional wisdom had been that we weren’t going to see a recovery in housing until we saw recovery in jobs. I’ve never believed that’s right. I’ve actually believed we’re not going to see a recovery in jobs until we see a recovery in housing.

We’re beginning to hear economists and policymakers conclude that two or three million jobs missing from the US economy are, in fact, jobs that would have been created in housing if we could get back to the 1 or 1.5 million housing starts over the next three to five years. Today we have a number of policies that are actually headwinds to the recovery of the housing industry. Leaving aside policies that might actually improve the housing industry, we have a mortgage system, an appraisal system, and an overall banking system that are holding back a recovery in housing.

Now, I don’t think it would cause an immediate and vertical recovery in housing, but as important as this sector is to the economy and to jobs, any bureaucracy and policy that’s a headwind to recovery should be looked at by

policymakers. We would direct them to look at homeowners with high-interest mortgages who can’t refinance because they’re deemed not creditworthy, but are still making payments. It seems that Fannie Mae and Freddie Mac are better off owning those mortgages at a lower interest rate than at a higher rate. It’s got to be a better loan if it’s more affordable.

We would also look at appraisal systems that use foreclosures and other data to estimate home values. For example, you may have a couple of bidders on a house in foreclosure, the price has been established, but then the appraisal won’t support a mortgage.

Those both are policies that are standing in the way of possible forward momentum in housing, and momentum in housing will create the jobs that will get the economy going again. So those are key areas of focus that we would ask policy leaders to look at very hard.

PwC: Are you optimistic that the winds may or may not shift in that direction a year from now?

MT: Without sounding unduly pessimistic, we don’t run our business counting on policymakers to make policy that will somehow improve our markets. We definitely believe that we’re coming out of a long credit crisis, that the housing market was undermined by poor lending practices and a credit bubble that swelled house prices, and that the collapse of those house prices caused people to retreat from the market.

What solves credit crises is time. We’re now five years into letting some of




the excess of this credit crisis work its way out of the housing market. Time will ultimately heal housing, which is a demographic driven business, so we feel confident that demographics in the US and North America will drive household formation and the need for new-home construction. We would say that any policies that are anti credit in that sector are bad, because they’re just slowing down the inevitability of the sector’s recovery.

PwC: In what ways has your overall strategy changed over the past year, in such areas as business model, markets, pricing, customers, and products?

MT: Our strategy is fundamentally unchanged. We believe we have great businesses that make useful products in well-structured industries. Anything we can do to make our businesses more competitive, to make our products and offerings to customers more successful, to shape the industry to our advantage, and to improve our profitability is good strategy. We have put many tactics and initiatives in place to make those things come true, but our fundamental strategy has been unchanged for decades at Owens Corning.

PwC: So is it safe to say you don’t anticipate any strategic changes for 2012?

MT: The big strategic changes for us are going to be in capital deployment. We have very successful businesses that will generate a lot of cash. How we decide to deploy that cash, in terms of M&A or returning it to shareholders, could direct our strategy. Generally we want to find outlets for capital that put us into great businesses and industries.

PwC: In what ways is the attractiveness of different countries or regions changing, either for sales or for operations in both of Owens Corning’s core businesses?

MT: Owens Corning makes products that tend to be very beneficial to populations as they achieve a middle-class lifestyle. When you want better transportation, there’s more fiberglass in your car. When you want better housing, you want better roofs, insulation, and bathroom fixtures. Our products go into those types of applications. So as we see unprecedented population growth in parts of the world, namely China and India, with economies moving towards middle class, that creates big growth opportunities for our company.

As we continue to focus on our developing-country strategy, we’re well-positioned in Brazil, India, and Russia. We have some work to do in China, so we’re working hard to get the right kinds of capabilities on the ground in order to improve our competitive position there. Our greatest focus in the near term, though, will be the recovery of the US housing construction market. With that, as well as our developing-country growth, we feel that we’re well-positioned to take advantage of the next decade.

PwC: What differences exist in your operations between developed and emerging markets?

MT: When we look at products that we provide to an emerging middle class, we don’t believe they want a quality standard below what Americans or Europeans have come to expect. What we have seen, though, is that we have to




find ways to build capacity in emerging markets at lower capital costs. We need either smaller-scale assets, due to higher capital costs versus production, or to be able to achieve competitiveness at lower price points. Therefore we need to be able to get to return on capital with a smaller balance sheet, because we have lower income or lower margins.

Much of our R&D efforts have been devoted to looking at core manufacturing processes, which we have developed over the last 70 years. We’re stepping back from those and rethinking. Where is the most productive capital in our processes? How do we re-engineer those processes to get more bang for the buck? How do we produce low-cost, high-quality products with smaller capital footprints and smaller footprints in the market?

We’ve been quite successful at that, so we actually believe that our developing-country strategy is giving us manufacturing technologies and insights that we can then take back to our existing, bigger-scale facilities in developed markets in the Americas or Western Europe.

PwC: How has building relationships and partnerships become more important to succeed in your newer markets, such as China?

MT: Partnerships are important anywhere in the world. In the developing economies, you have to be more attuned to where the thought leaders are in that economy, as well as in your industry, because they may not necessarily be where you have found them in developed economies. There are different types

of entrepreneurialism, different types of start-up companies. So we rely on having great talent on the ground.

In Owens Corning’s core businesses—building materials and composites—our employees are out in the marketplace, calling on customers, seeing applications. They’re our eyes and ears. Their ability to cultivate the right relationships with the customers, who are driving growth, is fundamental to our success in those markets. So while at times we may use joint-venture partners, or rely on existing relationships to access markets or technology, the critical success factor for us is going to be the quality of our people on the ground and their ability to understand the unique needs of that marketplace and that customer base. We need to give them the resources and authority to take the actions necessary for us to succeed.

PwC: How is your approach to managing enterprise-level risk changing?

MT: Undoubtedly, the regulatory oversight structure has caused every company to make its approach to enterprise risk management more formal and transparent, particularly as it relates to boards of directors and governance. Our initiatives around enterprise risk management have caused us to more closely codify and communicate what we’re already doing. We’ve always been a company, because of the volatility in our markets that thinks a lot about scenarios that looks at key pinch points in our supply chain that looks at key risks as they relate to legal violations, such as antitrust or the Foreign Corrupt Practices Act.




PwC: In what ways have your sustainability initiatives regarding energy, the environment, and social concerns become an element of your cost reduction, corporate reputation, or revenue growth?

MT: Sustainability is a passion of our company. In many ways, what our company does is driven by what we consider to be great sustainability practices. When we look at the megatrends that will define the next couple of decades of global growth, you’ve got population growth and energy efficiency, especially as they relate to demographics in the US.

Those combined, if you look at our business footprint, we’re producing fiberglass that makes windmill blades longer and lighter and that makes pipes for infrastructure and energy-production facilities non corrosive and non conductive. We’re making insulation that saves energy. We’re making transportation vehicles lighter weight and more fuel efficient.

These types of practices have been in the basic sales toolkit of our company since the 1940s. We were telling customers then we can make your cars lighter and more fuel efficient. We can make your home more energy efficient. We can make your roof last longer. We can make your pipes non corrosive and non conductive. Those practices are now becoming heart-of-the-market, in terms of what the world needs to successfully navigate the next 100 years, when we’re going to see more wealth, but also greater need to utilise resources more efficiently.

We think of sustainability as a key business strategy at Owens Corning. We have a wonderful Chief Sustainability Officer, Frank O’Brien-Bernini. We look at how sustainability impacts our business, as a facility facing activity, but much more importantly as a market facing activity.

PwC: How much would the proposed US federal jobs program, aimed at retrofitting commercial buildings to improve energy efficiency, affect your business?

MT: When you look at any federal program designed to improve the energy efficiency of construction, whether it’s residential or commercial construction, the details are going to matter in terms of what we’re trying to improve. We have building codes today that say you have to build to minimum standard. Then we have incentives, whether around energy costs or tax incentives, that may cause you to build to a higher standard than the minimum. Any rules that go towards making the basic structure of the building—the roof, the walls, the windows—and that are going to be around for 100 years, we believe it’s appropriate to put policy directives around making the structure more energy efficient.

Retrofitting buildings after the fact and trying to make them more energy efficient is much more expensive and uses much more capital than designing them correctly in the first instance. The first place to really move the needle on energy efficiency is in the original construction phase.




PwC: How is your approach to innovation changing, and from what parts of the company’s businesses are the greatest innovations coming?

MT: We’re a process-driven industry—we’re a glass melter—so many of the product features we sell to our customers are designed into the manufacturing process itself, rather than the materials we use or how we fabricate them. The process itself, in many cases, defines the quality of the roofing product, the insulation product, and the fiberglass reinforcement. So we have a pretty even mix of process related innovation investment and market facing innovation investment. The magic for us is when we find market facing innovation and process driven innovation that line up together.

And as a result, we have the ability to do things in our facilities that produce a product that meets a very specific and interesting need in the market. Our most recent and exciting achievement in this area is the launch of our EcoTouch Insulation product. This year we came out with a new binder system in our insulation products that is totally natural based. It’s a plant based binder system, 100 percent renewable. It basically replaces the binder system that the entire industry has been using for 70 years, so this is the first major revamp of our technology.

We’ve created a product that is every bit as comfortable to the touch and productive for the contractor, but now we’ve achieved the levels of GREENGUARD certification, LEEDs points, and environmental sensitivity

that we’d never seen before with our other product lines. We believe it’s probably the most decorated and recognised product in the building materials industry in the year 2011. We are very happy that one of our big customers, The Home Depot, recognised us in 2011 with their Eco Options Award, which is their annual environmental award for the best environmental innovation in the building-materials industry.

We think we’ve got a real home run there, but it’s one of those great intersections of our best manufacturing and process scientists working together with our best marketers and our best commercial talent to come up with a product line that the market wants and that we can uniquely deliver.

PwC: To what degree can innovations be exported to other markets, and to what degree must they be developed in market? Looking across your various global markets, how similar are your customers and their needs?

MT: This is probably the place where Owens Corning is the most different around the world. Our composites business, which makes fiberglass reinforcements, has numerous global customers and markets and, as a result, tends to have global product lines. The needs of the market around the world can be pretty similar in terms of product, product performance, and end-use application. So that business operates quite a bit as a global market.

On the building materials side, you tend to have global technologies but local markets, so pretty much everywhere




in the world there is some desire to insulate. You can use fiberglass insulation or foam insulation. How it’s applied in the local market tends to vary. The customer base is different around the world. The market structure is different around the world. So for building materials, we have to be very aware of local building practices, local construction practices, local competition, and local rules and regulations. We have to figure out how to utilise our technology to be most effective in the context of that local market.

PwC: Your EcoTouch product and the related Handy Homeowners promotional campaign around it falls into the current wave of “consumerism,” with consumers involved in new products and service development. Has the growth in consumerism affected your strategies at all?

MT: Consumerism and information in general is important to every business. On the building materials side of our business, we make products that you’d purchase relatively infrequently. We also make products that you don’t necessarily interact with. So even if you compare insulation and roofing to, say, windows or cabinets, you open and close your windows. You open and close the doors of your cabinets. You develop a point of view on the functionality of those products. When it comes to roofing and insulation, the benefits of those products are largely invisible to you. You’re more aware when your insulation and roofing products don’t work than you are when they do work.

Consumers will invest a certain amount of energy on becoming educated about roofing and insulation. More importantly, the contractor who uses our products in the home is a very important ambassador of our company. Contractors who understand how our product works can sit across from a consumer in a trusting relationship and say, “I would use these materials in my own home. I believe these are the best materials available on the market.” That is tremendously compelling to a homeowner concerned about materials.

We look at the consumerism movement and ask, How can we be most valuable to the contractors or to some of the intermediaries in our market who are ambassadors to the consumers? Our focus in the near term is more on the electronic exchange and sharing of information with the professionals in our markets. We’re allowing them to carry the information to the homeowner—in addition to enjoying a great homeowner brand with our Pink Panther icon and the Owens Corning name.

PwC: Is some of that behind the thinking of your Handy Homeowner video contest to affect both the consumer and when they talk to a contractor?

MT: Generally we believe we need to continue to invest, in effect, to keep our name out there. So because these are products that are infrequently purchased if at any point in time let’s say 4 to 5 percent of Americans may be considering a new roof, 4 to 5 percent of Americans may be considering improving the energy efficiency of their




homes, and obviously they don’t do that for 12 months out of the year, they might be thinking for two months of the year that they might want to go do a project like that, it’s a pretty narrow target of finding that 4 or 5 percent during the two months during the year that this happens to be on their minds.

One of the things you have to do is you have to be somewhat ubiquitous in keeping your name out there so that when that thought occurs to you, somehow the name Owens Corning passes in front of you, and you become predisposed to want to investigate the quality of our materials and the quality of our solutions. So we do things like the Handy Homeowner. We were involved in the HGTV Home Giveaway. We’ve been involved from time to time in other promotions and events to get our name out there and just get some buzz going in the industry about the Owens Corning name.

PwC: In what ways has talent become a strategic issue for Owens Corning?

MT: In many ways, I would say talent is the strategic issue for companies. At the end of the day, people do business with people. Our customers want to buy from the company that they believe has the best people who will most effectively help them support and grow their business. Having the best people, who understand our markets wherever we are in the world, is very important to our success as a company.

I’ve been the CEO of Owens Corning for about four years, and one of the things I’ve been very passionate about is that I’d like future generations of our leaders

to come from inside the company. We benefit tremendously from having people who have depth and a track record and experience in our markets. I’d also like them to come from market facing and commercial facing activities. Not to say that I don’t love our folks in manufacturing, finance, and human resources, but ultimately I want people who have been out in the marketplace, helping our customers make money, to move into our general management and executive-level positions. That’s where practical strategies that have a big impact on the success of our customers, and therefore our company, come from.

PwC: Are you confident that you will have the breadth of talent needed to deliver your global strategy?

MT: Anybody who ever rested or felt confident that they had met all their talent needs probably isn’t aiming high enough. That’s a great source of impatience and in some ways paranoia. Are we doing enough? Are we going fast enough? Do we have enough initiatives in place to attract, develop, and retain the best? I think we’re making good progress. I’ve been very happy with what we’ve been able to get done.

Nonetheless, the challenges are different in our domestic and foreign markets. Emerging economies where we spend a lot of time talking about talent are India and China. We’ve been pretty successful in India, where Owens Corning has been a net exporter of talent, with some highly talented members of the Indian team running operations for us around the world and who have progressed into senior-level jobs.




We’re a little newer to the scene in China, but we’re growing a bit faster there than in India. China’s consumed all the talent we’ve been able to find and grow in country. Generally, we’re gaining the confidence and courage to bet on the younger Chinese talent. Conventional wisdom was that you needed to find experienced leaders in China to help bring your multinational company there. We’ve recruited those types of people, and they’ve been very effective in leading our Chinese operations, but we’re also seeing that the younger generation is very talented.

PwC: In what ways have the requirements for senior leadership positions throughout your organisation changed?

MT: The requirements around senior leadership do go up, pretty much every year. Given the nature of global competitiveness, the rapidity of change in the global economy requires senior leaders to be more externally driven, more outside in, in their points of view. They need to be more creative in their thought processes around scenarios and how the world can develop. They also have to be very clever and capable in their ability to translate that into simple and clear objectives that an organisation can move the needle against every single day with confidence.

In a less interconnected, more multipolar world, it was easier to come up inside a market, believing you understood that market, and progress deep into a career as a senior executive. Today you have to be more agile to understand how the world’s interconnected and how your built-in biases of what you learned in

the market over the last decade aren’t going to apply in the coming decades. So you need the ability to question your assumptions, to see clearly where your biases come from, to trust your instincts and give the organisation confidence in your experience. But you also must show a little caution, and when you get outside the zone of experience, to look outside in and figure out what the things are we can do today that will create value for our shareholders.

We’re now in finding senior leaders with a broader variety of experiences—staff jobs, line jobs, running mature businesses, running turnarounds, working in developing economies, working in more mature economies, having experience in Asia, having expat experiences.

PwC: Are you finding a need to move personnel across borders to fill talent gaps, and what skills or levels or functions are you moving most often and into what regions?

MT: Like every company, we use the ability to move people across countries and expatriate people very judiciously. On one hand you want to give confidence to your employees in a region that you have great talent there and that you’re willing to bet on that talent and give them authority to make decisions and grow their business. That’s balanced against your need to develop executives and to inject experience and a learning curve into a developing economy more quickly.

We would never want to overwhelm a region of the world with too many expats. Conversely, we use expatriation as a development opportunity to take




the best of the best and give them development experiences. Among our senior team, we spend a full day each quarter talking about talent and succession. We also spend three days on a retreat in the second quarter where we do a full review of our talent pipelines in all of our businesses. It’s a significant commitment of senior time. One of our most important conversations is whether or not we will expatriate executives and into what regions of the world. And not only how that will benefit the development of those executives, but how it will impact the development and the confidence of our team in country. When you can get the rightbalance you know you have a special executive.

PwC: What are the challenges and opportunities that younger workers, the millennial generation, bring to your company?

MT: The millennial generation is interesting to us. I like to tell a story that, when I was coming out of college, the two hot jobs were consulting and investment banking. I ended up going into consulting. Those of us who went into consulting were worried that consultants only worked 70 to 80 hours a week, while investment bankers worked 100 hours a week. Were we going to fall behind in our development? How early in our career did we need to make sure we were doing the most challenging work to get the most experience and be able to have the most valuable careers.

Quite often today when I spend time talking with either undergraduate or graduate students, one of their first questions is about work/life balance, and I don’t find that unhealthy. It’s such a

significant generational shift from where my classmates and I would have been 25 years ago to where folks are today.

I talk to young people about the need to learn, which sometimes means stretching yourself beyond your immediate comfort zone. What may seem like more work than you’re interested in doing within your concept of work/life balance may, in fact, be more rewarding than you think. Experiences you have travelling the world, going into environments where you’re in over your head and have to learn quickly are the experiences of life.

There are a couple of things I encourage them to do. One, find not so much a work/life balance, but a separation between work and life. When you’re working, work intensively, get things done, execute, and make things happen. But you also have to be able to step away from your work and spend time with friends and family. That balance may be more rewarding than you’d expect it to be.

PwC: Have you had to address that in a classic “generation-gap” sense, where you need to create an understanding about work and life among older and younger generations within Owens Corning?

MT: There are conscious tradeoffs that have to be made here for the younger generation in terms of what level of lifestyle they would like to enjoy, and then how much of that is a birthright and how much is earned? I have found great personal reward in what I’ve been able to learn, the experiences I’ve had over periods of my life when I worked intensely. I’ve also had great satisfaction during periods where my





job was a little less challenging, and I used that time to explore other interests. But my life would have been much less interesting, and I would have felt much less alive as a human being, if I had approached work cautiously and said, “I know for sure that too big a commitment to work is detracting too much from my overall quality of life.”

PwC: How does the company collaborate with educational institutions or governments to better develop a pipeline of future talent?

MT: We have a conventional approach to recruiting and developing talent. The one big change we made five or six years ago is that most every undergraduate hired into Owens Corning would comes through a summer internship program. We looked at the costs of recruiting and retaining young talent and realised that the smartest thing we could do is pay them for three months so that we had 12 weeks to see them, to interview them, to see their capabilities, and to attract them to the opportunities our company offers.

Despite recent tough times, we haven’t cut back at all on our internship programs, because we need to continue to see young talent and have the opportunity to recruit right out of our internships. I’m pretty proud of that.

PwC: In what ways have the allocation of your time and attention changed over the past year, and will that return to “normal,” whatever that might be, in the near term?

MT: A long time ago I concluded that the volatility we’re seeing in the world economy is the “new normal.” I don’t think that we can just get through this quarter, things will go back to normal, where I can start working less. I try to macro plan my time. I look at how much time I want to spend travelling, or with my senior team, or with my customers, or with our employees. Once I have a road map for the year, I’ll go back and adjust month to month, quarter to quarter. I try very hard to balance my time between them all.



Interview with Michael WhitePresident and CEO of DIRECTV

PwC: What is your outlook for both the US and the global economy in 2012?

MW: Every day I look at the newspaper, I think I know less about the future. It’s getting harder and harder to predict. If you looked at consumer confidence in August, it was at an all time low. If you look at it here in November, it’s had the highest monthly increase in 20 years. So we’re taking a prudent and cautious approach to the economic outlook for next year, assuming US GDP is only going to grow by low single digits.

Europe has way too much debt, therefore there is huge risk on the overall system. You can’t plan for that, although we don’t have big operations in Europe. Our business in Latin America is growing quite well, and we’re expecting continued growth there.

In terms of tightening spending, it’s a combination of two things. One is, frankly, our content costs—the fees we pay for the entertainment products on our system—which are growing at a very high rate, much faster than what we can price them at. Therefore, we have to get more productivity out of the rest of the enterprise. In this volatile environment, we’re trying to be prudent in getting a reasonable balance between continuing to grow our top line and having stable or improving margins.

PwC: How will the prospect of economic growth impact DIRECTV and the industry as a whole, considering your dependence on consumer confidence and spending, as well as operating in such a competitive environment?

MW: It is exactly the competitive-environment challenge. When markets mature, everybody’s fighting for the same scraps on the table, and therefore you tend to see heightened competition. We’ve seen that in our industry, where housing—which we’re very dependent on—is still in the doldrums and there is very little household-formation growth. Eventually that has to change, but it still looks like it might be a couple more years before we work our way through the housing inventory.

Therefore, we have to get market share. And to gain share, it’s a combination of being price competitive and having a more differentiated service and entertainment product than the competition. But competition is fierce in every industry, not just ours. I don’t see that getting any easier in 2012. If anything, we’re all going to have to run faster and harder.

Michael WhitePresident and CEO, DIRECTV



customers call our call centres. We need to take our game to a whole other level on both of those fronts. To me that is part of the core, basic business.

We’re also looking for new revenue opportunities anywhere we can find them, because every incremental revenue dollar I can find is one less price increase our customers have to incur. For example, we are aggressively looking at how to make our advertising business more competitive with local ads. We’ve also put much more emphasis on movies, pay per view, and video-on-demand options for our customers in order to drive that source of revenue, as well as our commercial businesses that serve hotels, sports bars, and other commercial establishments. Commercial has been a big growth driver for us this year. Basically, we have to address enterprise-wide productivity and get smarter at doing more with less.

PwC: Are there strategic changes being made in your distinct and burgeoning Latin American markets?

MW: Our Latin American business is booming. One of the fundamental elements there was to think about a more affordable price point with more affordable programming for the market’s middle class, which in Latin America earns about $8,000–$12,000 a year. To put that in historical context, a couple of years ago we were the premier product for Latin America’s “A-B” consumer—the top of the pyramid, the most wealthy consumers—and that remains a growing business for us as incomes increase in those countries.

PwC: In what ways have you reshaped DIRECTV’s strategy in the US over the past year, in terms of customer service, new products and technologies, and competition?

MW: Our industry has seen everything changing. I feel some days like the walls are moving, the floor’s moving, and the ceiling’s moving. So strategy doesn’t necessarily stay still. On the other hand, a lot of the basics of trying to be the low cost producer, and trying to differentiate our product and provide the best customer service, are not changing. But a lot is happening in terms of the pace of change.

If we look at our strategy, certainly we’re having to spend more time thinking about mobile, wireless, out of home entertainment experiences—smartphones and tablets—and how we compete with those. In the home we’re having to think more about connecting the television to the Internet in order to expand our video-on-demand service and compete with players like Netflix, Google, Amazon, Yahoo!, and Apple. Thinking beyond the living room is a pretty fundamental change to our business.

You also have to think in terms of the customer experience, not just customer service. In our business the customer experience is made up of both the entertainment experience—which is the functionality of what you watch on the screen, the user interface, the remote and how easy it is to use—as well as the variety of content options and the service experience itself, whether it’s the installation experience or when




As I said earlier, we’re looking to provide more options outside the living room, particularly on mobile devices, because Millennials want those options. Secondly, they want a more realistic experience, so how do you take HD to a whole other level? How do you offer 3D without glasses?

The third thing in terms of Millennials is, many of them are living at home right now, and affordability is a challenge in this economy. Ensuring that we have smaller, more affordable packages for them is critical. Also, Millennials are on Twitter, Facebook and other social networks. We have spent time thinking about ways to link our products to those websites, so they can let their friends know what they’re watching. It’s seamless and easy to do.

PwC: How is your approach to managing enterprise level risk changing?

MW: We’re all more cognisant of asking, first and foremost, what are the downside risks that we face? Then how do you get more transparent about those risks on an enterprise-wide basis? And what are the key things that you can do to manage them? In our case, you could say, “Well, a satellite could fall out of the sky. Have you thought about that?” Four or five years ago we might not have thought as much about that. Now we do. With our audit committee, we do an enterprise-wide risk assessment, where we talk about the big risks, what could go wrong, and have taken steps to provide additional safety. For example, what if there’s a big earthquake in Southern California that knocks out our broadcast centre? What do we do?

But the real prize in any emerging market is getting at the base of the pyramid, the B minus and the C customer who has income in that $8,000–$12,000 range. So we’ve changed our product offerings, our approach, and our business model to be able to target a more affordable offering for that consumer, and that has unlocked an enormous amount of growth for us in Latin America.

In Brazil, we’re also launching a product that has movies and pay per view that you can watch on the Internet. We’ve also been doing some things in Argentina with Internet service to the home and are now expanding that into Brazil. Finally, I think Colombia represents our biggest opportunity in Latin America, so we’re putting a particular focus in 2012 on how to take advantage of the opportunity we see in that country.

PwC: Looking more broadly at your strategy, how do you approach this sort of digital divide between Baby Boomers who stay at home and watch on giant HDTVs and the Millennials who are on the go and want to view content on their phones, tablets, and other mobile devices?

MW: The first thing is, you’ve got to harness the Millennial talent in your organisation and ensure that they are empowered to be part and parcel of defining the product experience, and in some cases even reverse-mentoring “old guys” like me. At DIRECTV, that’s been a critically important thing. Both in engineering and IT in particular we’ve got lots of Millennials, and ensuring that they have a voice in product development is crucial.




Fortunately we’ve had a heritage of innovation, but you can’t just innovate on the product and the technology. You’ve got to innovate the service, to innovate across every part of your supply chain in your value proposition with consumers. For us, the changes that we’ve taken to innovation are a little more subtle.

First of all, we’re trying to do a better job on consumer research, to better understand the consumers’ needs and how those needs are changing. It’s the old “skate to where the puck is,” as Wayne Gretzky used to do, rather than “where are we today?” How do I look around the corner and anticipate not 2020, because our business changes too fast, but 2014 or 2015? Where can I ensure that we’re going to be well-positioned, not just for next year, but at least for the next three or four years with the bets that we’re making?

The second thing that we’ve done differently is to increase the resources around innovation. We substantially upped our capital spend in both IT and in engineering this year to get at some critically important strategic innovations. Nomad, our “TV Everywhere” product, is one example that’s driven by innovation.

Third, we’ve changed some things organisationally. We’ve created a Product Management Group, which is working together with engineering to improve product experiences. That’s more of a cross functional effort in thinking about innovation. We’ve also created a Product Steering Committee to look at innovative products and ensure that we’re allocating our resources according to the right priorities.

So we’ve done much more holistic thinking about the big stuff that could go wrong and building protections around that. You get to a point where there certainly are risks that you just accept if you’re going to be in business today. Particularly in a technology-dependent business like ours, there are certain risks that go with the territory—that those satellites continue to operate up in the sky, because I can’t send a truck to fix one if it goes out.

More and more, though, I find the real risks are either market changes or competitive changes, and that gets back into your core strategy. At DIRECTV, if the consumer wants a bundle with both broadband and a video product, how do we make sure we can provide that as the industry evolves? If the consumer wants to watch outside the home, how do we provide that opportunity?

A lot of the risks you tend to look at on risk maps are less of the traditional, financial risks, the control risks—albeit I strongly believe that internal audit ought to continue to focus on those. But there is much more risk around changes in competition or your consumers and how you’re trying to accommodate those in your business strategy.


MW: Innovation is the lifeblood of any consumer-product or service company. Consumers are changing, so you’ve got to be changing. And competition only gets tougher. So at the end of the day you’ve got to continue to differentiate your product, and that means innovation.




women, men, different races. Having a diversity of experiences to me is the essential part of getting the best ideas. You’ve got to fish in all the ponds.

But then you need an inclusive culture that fosters teamwork so that people are comfortable speaking their mind, that they can speak with truth and candor, that they’re not afraid of, “Oh, I’d better not say this.” At the same time, there must be mutual respect within the organisation. At the end of the day, we’ve all got to line up as a team to get things done.

For innovation to thrive, you also need world class experts like we have—everyone from rocket scientists to direct marketers, from call agents to technicians in the field. The combination of all that talent is what makes us successful.

PwC: Consumers have become a driving force behind new product and service development. They’re self organising and innovating in new and unexpected ways, making it harder to predict their tastes, preferences, and choices at any time. How is such open innovation and customer co creation changing your industry, and what are some of the strategies you’re adopting to change this transformation in consumerism?

MW: When I was on the television show Undercover Boss, I had to deal with a shortage of set-top boxes, which was upsetting a number of our customers and created a little chaos on the show and with my management team. The reason for the shortage was that we had just launched a brand-new box which was much faster than the old box. The

Innovation continues to be critically important to us, and more and more, it’s cross functional. You can’t get anything done in any one siloed function. Anything we bring to market is complex and relies on our entire set of functions working together as a team. So we’ve also spent a lot of time culturally talking about the importance of teamwork at DIRECTV.

PwC: Does innovation mean different things in your US and Latin American operations?

MW: Yes. In the US, because it’s such a mature, highly competitive market, we’re working much more on TV Everywhere, product differentiation, mobility, and other initiatives. Whereas in Latin America, having a more affordable product is still a big innovation in and of itself. And we learn from each other. For example, our Brazil business is much better than our US business on customer service and being customer-centric as an organisation, in the way they’ve designed their products and run their business model. The trick is to make sure that both organisations get to see what the other is doing, take the best, and then adapt it.

PwC: Are innovations coming from different places within DIRECTV?

MW: I’m a big believer that, if you want to be an innovative company, you can’t be a closed shop. You have to have an open, transparent culture, and you have to empower people. They have to feel free to speak their mind. That means you’ve got to have a diverse organisation and an inclusive culture. They go hand in hand.

You need diversity so that you get ideas from all walks of life—from customers, employees, Millennials,




Joseph Bosch, who reports directly to me, and he’s brought in some other talented HR folks. We’ve created an agenda for development, starting with defining what we mean by excellence at DIRECTV and what we expect out of a DIRECTV leader, such as strategic thought leadership, self awareness and savvy, good team player, able to bring people with you, values based leader. We now have a way of defining and communicating to folks what we expect as we develop them as leaders.

We’ve already built some development programs around that, and we have another set that will focus on our front line next year. For example, we’re building wholly new screening tools using the Internet to better assess talent—particularly technicians and call agents—when trying to hire them. We want to hire ones who will stay and not churn out prematurely.

One of our most important strategies is how we nurture and develop that next generation of talent. Let’s face it. There are 80 million Baby Boomers who are going to retire over the next five to seven years, and they’re going to be replaced by 40 million Gen Xers. That’s two to one, so you’d better be developing your next generation now if you’re going to be ready for that transition.

PwC: How did your experience on Undercover Boss affect your view of the company’s talent base, and what initiatives have you put in place since then in response?

MW: My experience on Undercover Boss was humbling. First of all, you’ve got to walk a mile in the shoes of your frontline workforce—climbing ladders, getting on roofs, installing a satellite dish,

blogs got a hold of it—the ones that really love our product—and started blogging about it and saying, “Call in and get the newest box.” Our supply chain got inundated with requests, and we ended up with a shortage.

That was a good wakeup call for us, that we have to think about the customer differently, particularly the passionate, loyal customer, who is leading edge and always trying new things. We need to make sure we take their views into consideration in designing new products.

Ensuring that we’re getting the best ideas from our customers is absolutely critical. We learn from them. They’re out there playing around with our products and teaching us what absolutely needs to be built in. Having a two way dialogue with your best customers, to me, is essential if you’re going to be customer-centric as an organisation.

PwC: How is your approach to talent changing, and has talent become a more strategic issue for you?

MW: Absolutely. When I was named CEO in 2009, one of the first things I committed to was to take our human resources function to a whole other strategic level and capability to impact the business. I firmly believe that we’re a people business, that while we have brands and satellites in the sky, the only reason they’re there is because of the expertise and the capabilities of this organisation and the talented people who work here.

That’s one of the most valuable assets not on the balance sheet—our talent. So how are we building and nurturing that talent? We brought in a world class head of Human Resources,




our company. As a country, we have to do more to encourage kids to get an education in science and technology.

We’re trying to do that with our corporate citizenship work as well. This is a great country. We have some of the best educational institutions, particularly at the university level, in the world. It is our job as managers and leaders at DIRECTV to ensure that we’re continuing to fill the pipeline with bright, young, talented folks, and nurturing and developing them so they can have not just a job, but a career here.

PwC: In nurturing your talent, are you moving personnel across departments or offering international assignments? How actively are you recruiting high school and college students?

MW: We’ve done a number of things. For example, we moved a US senior executive into our Latin American business, and we’ve moved some Latin American folks into our US business. We’ve moved people cross functionally, too. We took someone out of operations and put him in sales and marketing. That’s sent the message that you can’t just grow up in your own functional silo. You’ve got to learn more about the business across the organisation. That’s been a big change.

Second, we’re trying to be more coordinated in the way we do on campus recruiting. We have a tremendous summer internship program, and we’re trying to do a better job of turning those interns into full time, long time employees.

Working together with our head of HR, Joe Bosch, we have developed a one

answering phones with upset customers in the call center. It was an invaluable experience for me. It taught me a lot about, number one, the complexity of our business and how challenging it is for our frontline workforce.

Number two, I was just amazed at the quality of our people, their passion for DIRECTV and for customer service. We have some amazing folks, some of whom we showcased on the show itself. Coming out of that, we did a number of things. We’ve adjusted compensation levels for frontline employees; I felt that we were maybe being a little penny-wise, pound-foolish, so we’ve actually taken up compensation. We’ve increased what we’re doing in employee recognition. We’ve also increased our investment in developing talent. Next year, for instance, we’re rolling out some training for frontline supervisors to try and take their capabilities to another level. Finally, we’re more active in our college-scholarship program for the kids of our workforce, and it’s been fun to see that grow.

PwC: Are you confident that you will have the talent needed to deliver your strategy over the next few years, both in the US and in Latin America?

MW: I’m confident we’ll have the talent…because if we don’t, I think the board will find a different CEO. As a CEO, one of my most important responsibilities is ensuring that the company is developing our talent base. Clearly in this country we have a shortage of science and engineering graduates, which is a challenge for


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PwC: In what ways have the allocation of your time and attention changed in the past year, and will that return to ‘normal,’ if there is such a thing anymore?

MW: There is no going back to an old normal for any CEO. As I look forward, my sense is I want to spend more time on the customer and how we’re serving the customer cross functionally. This is a very complex business, and so you do an awful lot of things with each function, because the metrics are different by function. But it seems to me that my job is to focus on the longer term and to make sure that we are taking the steps today to ensure that we’re as successful five years from now as we were over the last five years in growing our business and improving our profitability and cash flow.

I fully expect that I’m going to be spending a lot more time on building a better customer experience over the next three or four years. That’s probably the biggest change.

week leadership-development program for our most high-potential executives, which I teach. It covers areas such as strategic thinking, self awareness and savvy to taking others with you to values based leadership. It’s something I’m pretty passionate about as well.

PwC: Given those efforts, have the requirements for your senior leadership positions changed?

MW: Absolutely. We have put together a framework we call our Formula for Leadership, which describes what we expect of them as strategic thinkers. Strategy isn’t just for the CEO. The world is changing all the time. Everybody’s got to think more strategically.

Interview with Richard O’BrienPresident and CEO of Newmont Mining Corporation



PwC: What is your general outlook for the global economy today, and how confident are you of growth in this environment? What factors are most important to you?

RO: It’s a diverse economy across the world, as we would expect. We have a two speed global economy, with developed countries growing slower and developing countries growing at a faster pace.

Over the next five years, we’re going to see those come together, as we’re seeing with China, whose economy depends on its abilities to export to other countries. To the extent that those countries are starting to slow down, that malaise may impact the Chinese economy, and we’re beginning to see that. Also, currency unrest and fiscal regime unrest continue to impact our view of the global economy.

So the biggest factor facing the global economy of today is, how do we re inject growth into countries? If we get that right, then there’s a world of possibilities for the economy. If we don’t, it’s going to be left up to those growing economies to pull the rest of the world along.

The days of being able to assume that the economy is going to take care of itself are gone. We have to be more willing to look at different solutions that are politically tougher. Nobody wants to talk about revenue increases or just decreasing expenses. We need to do both. As a CEO, that’s what we struggle with every year, every day, and that’s what governments need to do.

Access to capital is also a factor. We need make sure the world has the capital it needs to continue to reinvest in people and in fiscal areas that are important to infrastructure.

PwC: Looking toward 2012, what is the one risk to Newmont’s growth that you are most concerned about, and why?

RO: Mining around the world is a very local business, one that requires care and respect for local communities, as well as the states or governments within which those communities thrive. For us right now, given the record gold prices and earnings for companies, governments and communities are wondering what share of that should belong to them, and that’s an appropriate question.

The reason it’s a risk is that we can’t answer that question based on what gold prices, or more importantly, what commodity prices mean today, because our business is very long-term. It’s a risk particularly as we look to extract new resources from new places.

PwC: As you assess your US and international operations, and the mining industry as a whole, how much do the fiscal positions of the various governments worry you, and what should those governments be doing to allay any worries?

RO: We appreciate governments that look at infrastructure investments and mining in similar ways. Infrastructure investments take a while to recover, thus the word capital. It takes capital to make a business work. It takes return to pay that capital back.

Richard O’BrienPresident and CEO, Newmont Mining Corporation



PwC: Recognising the importance of having that dialogue, when Newmont initially explores for a particular mineral, along with your industry tools, do you also bring trust and other relationship-building factors to the table?

RO: It’s becoming more of our practice that we establish trust from the beginning. Newmont was the first mining company in the world to have a community relations review. We reached out into the communities where we’ve been mining for a long time and asked questions about what we do well and what we don’t do well. Armed with that, we’ve begun to change some of our practices. I’d like to say that that makes us totally aware, that we get it and we know just what we need to do, but we’re finding that it’s much more difficult than that. Instead of saying, “We’re big, we’re Newmont, we know how to get it done,” we’re becoming more like, “We know how to do mining right, but we need your help to figure out how to do it right in your community, because what’s right for us may not be right for you.”

We need to be better about that. We need to be more aware. We have a team trying to do that, and we lead the industry in many ways in such practices, but we still have a long way to go.

PwC: In light of Newmont’s current growth programme, enacted this year, and the state of the mining industry—gold in particular—in what ways has your overall strategy changed during the past year?

RO: This has been a big year of change for strategy at Newmont. A couple of things headline that. When we

Fiscal policies that hurt include windfall profits taxes, which are put in place to satisfy headline risks for politicians who feel they should get more when prices are higher. But government policies that restrict our ability to have expatriates come in and live for a few years to help train newly appointed nationals influences our ability to deliver on the promise of Newmont becoming their partners.

A good policy is one that recognises, like any infrastructure investment, we’re going to be there for a long time. So let outside people into the country to accelerate the development and coaching of the local workforce. We want a nationally based workforce with national leaders, but with the same standards we deploy in other places in the world.

PwC: Beyond economic policies, what’s the one thing governments can do to better support your company?

RO: One of the most important dialogues governments can have with us is connected to our entry into a new place to do business.

To help support that process, we would like to become part of multilateral conversations around responsible mineral development. We would like the opportunity to engage proactively before going into a country, so the government, non government organisations, and the people have a fair expectation of what mining can and can’t do, and that we have a fair expectation of the environment for mining in a particular country and community.




gold prices. It should be about people who are interested in an investment that is linked to a safe haven, but that still responds well in a business environment.

One of my big goals for this company is to continue our great operational and technical expertise, and to blend that with the sense that we’re in the business of mining, which means generating shareholders’ returns, as well as stakeholder returns for others. That means we connect the dots, and the dots mean that things like per-share metrics matter, that dividends and return of capital to shareholders matter, particularly in what we believe will be a bullish gold price environment for the next decade.

PwC: How has the investment community reacted to those changes?

RO: Very well. In fact, a number of our investors have told us that we’ve changed the conversation around investing in gold. All the gold in the world fills up two Olympic size swimming pools. There is not very much of it. That’s why it’s called precious. Nobody can make more. We can discover it, we can mine it, but people view gold as inherently valuable. What we’re trying to show investors is that in addition to gold being inherently valuable, Newmont’s management team wants to run a valuable business. It’s the confluence of both.

That’s going to challenge other people in our industry to have a story that is either different from ours, in that they have their own way to go, or that as it’s still the old way of doing gold business. We have changed the conversation. Let’s check back five or 10 years and see if it sticks. I hope it does.

entered the year, we had a pretty flat production expectation, and that’s what we told people. We had a dividend policy that was pretty standard fare, relative to the rest of the gold mining industry. That was before April 7, when we had our Investor Day.

As we sit here today, at the beginning of December, we have a much different strategy around growth. We’ve established that we’re going to grow gold production from 5.2 million ounces at the midpoint to 7 million ounces by 2017, and grow copper production from 200 million pounds to 400 million pounds. When we set those expectations, we established some goals regarding our portfolio of assets in order to align the company to reach those goals. In addition to having projects, it takes the right culture, where people know where we want to go, but that we’re going to get there the right way. Because if we step on people trying to achieve our goals, we are not going to make it. We need to recognise that mining impacts people differently, from entering new communities and obtaining permits to getting governments and local communities onboard, all the way through construction operations. I can tell you we’re up for the challenge. The people at Newmont are charged up about getting up that mountain.

Newmont also went from a median level of dividend to now having the industry’s leading policy around a gold linked dividend. That means gold price increases or decreases actually impact the dividend level investors get at Newmont. We now have the leading dividend by cash per share, as well as dividend yield, in the marketplace. Why did we do that? We recognised that the gold industry shouldn’t just be about




putting money back into the community comes from payroll, while the second largest source comes from sourcing our supplies from local vendors. We help them develop products we need and that meet our standards, which involves coaching them and providing them the capacity. Capacity-building is big thing for us, whether it’s the capacity to help people learn new skills, build new things, or supply products and services for the mining business. With those types of relationships, there’s a whole world of possibilities around drawing the community in and providing them benefits.

PwC: How is your approach to managing enterprise level risk changing?

RO: This is a great question, and one for which I can provide a timely answer. Like many public companies, Newmont’s board is interested in enterprise risk management. That means having the knowledge and capability to understand what the various risks are in your company and how you’re going to mitigate or accept those risks. It can be a very intensive process that engages many different people.

We confirmed where Newmont’s biggest risks lie, then asked our people what we might have missed. It wasn’t just a conversation about risk gathering but, more importantly, risk managing.

How has managing risk changed for us recently? Last year’s BP oil spill in the Gulf of Mexico has led many companies to re ask the question, Is enterprise risk management one of those unfortunate check the box activities that every company should be doing because

PwC: How has building relationships and partnerships become more important to succeed wherever you have operations?

RO: There are a couple of examples. We’ve had a partner in Peru for quite some time, Buenaventura, that helps us understand the local political environment. Importantly, they’re a miner as well, so we can talk to each other about our issues and our opportunities, as well as share technical competence and other information between our two publicly traded companies.

It helps to risk-share with a willing partner, but what’s more important for us is for people to understand the risks they’re taking. It’s one thing to put risk off in, say, a project financing. It’s another to accept and understand the risks and have your partners work together so you’re not putting it off on anybody.

In Europe, for example, we’re going to see less and less financing flowing out of banks that have traditionally been more accepting and desirous of putting money into projects. That means that we’re going to need more local support. We could invest in some projects 100 percent ourselves—we have a big enough balance sheet—but I find that relationships with local entrepreneurs and mining companies is a good way to make sure we get the right support.

It is also important to engage communities in ways that they feel part of the effort, such as local sourcing. We recently completed a study in Ghana, where we do business, showing that a large portion of what we do in terms of




every day, from my level right on down. Our goal over the next five years, which we’ve publicly stated, is to be fatality- and serious-injury free in five years.

Newmont’s been a leader in environmental performance in the mining business for some time. We were the first company to adopt the Cyanide Code, a voluntary programme for the industry to promote responsible management of cyanide used in gold mining. Every one of our operations is now cyanide-compliant. We also were one of the first companies to ensure that each of our operations uses the ISO environmental management system.

Newmont has also engaged in a community relations review. In 2009 we published on our website the results of a survey. We worked with outside experts and NGOs so that we could independently assess what we learned from the communities.

PwC: - How do you define innovation across Newmont’s operations, and how is your approach to innovation changing?

RO: Our approach has changed to recognise that we need both the small “i” innovation and the big “I” innovation. Innovation starts with a cultural change, because without a learning culture, which accepts failure and celebrates success, innovation won’t thrive. In the mining business—and I only judge our company and our conditions—it could be the case that we’ve sometimes focused on our various global operations in vertical space instead of horizontal space.

We think about what’s right for our operations. It could be that somebody has a great idea in one operation, but

people tell us we should, or is it one that we embrace? And one we embrace understanding that there could be tail events we had previously thought were so remote as to not be worthy of our time thinking how we might manage them.

At Newmont, that doesn’t work. We accept the fact that there will be tail events in the business at some point, and we need to understand how to manage them appropriately. Today we do a much better job of identifying risk and of scenario planning.

The next step is to ensure that we can employ mitigating techniques so that those risks, when they happen, are managed well and don’t hurt the reputation of our company. Because not managing them well will certainly hurt our reputation and, as we’ve seen with BP and other companies, our ability to do business and generate a profit. We make sure that affected stakeholders understand that we have the right mitigating circumstances in place.

PwC: Newmont has made substantial investments in safety, environmental, and social initiatives in recent years. How have those sustainability initiatives impacted costs, your corporate reputation, and revenue growth?

RO: At Newmont we take safety as job number one, and have made significant investments in safety training and in innovation to assure that we have safer operations than before. We’ve engaged in more safety conversations with people. Safety is personal, so we want to make sure people understand that they own safety, but we have an environment within which we demonstrate safety




leading cause of death. We have people there who either drive their own vehicles or take buses to work. To promote safe driving, we put GPS devices in employee vehicles and buses. If they’re driving too fast, they receive a signal. We also get the signal, allowing us to warn people to observe speed limits. We’re committed to do our part to reduce those fatalities.

Big “I” innovation for Newmont are ideas about changing what we do. Our job is basically to take big rocks and turn them into small rocks. We start with a deposit, and turn it into gold. What if we didn’t have to break the rocks at all? What if we could figure out another way to extract gold? That’s big “I” innovation, because the possibilities of not having to dig a big hole in the first place not only reduces our costs but also makes our business that much more environmentally friendly.

PwC: In what ways has talent become a strategic issue for you? Are talent challenges different than they used to be, and how are you addressing those challenges?

RO: Our growth strategy, which I explained earlier, also encompasses being able to live our values every day in an environment and culture where people feel that this is a great place to work. It’s people who make that work. We need ideas, technical competencies, financial and business competencies, and relationship competencies, and all those things come from people.

Our gold mining business has become more complex. We’re going to different countries and finding deposits which are more difficult to extract. As a result, we are absolutely thirsty for

we haven’t figured out how to share that idea horizontally as well as we could. It could also be that in those vertical operations, whoever sits on top gets to decide how a company innovates, how a company thinks differently. They could help set the tone for whether or not we support learning.

At Newmont over the last couple of years, we’ve had a more global focus on learning and innovation. It’s okay to make a mistake as you try to do things differently, as long as you’ve thought it out and don’t continually make the same mistakes over and over again. That puts my leadership team, as the head of that horizontal focus, in the position of supporting innovation and the right culture to allow it to thrive in the company.

By small “i” innovation, I mean that we can take incremental improvements in many of our operations, whether it’s through business excellence to increase throughput or investments other people have made in innovation and transformed them into our business, such as remote applications.

Newmont has drilling programmes at across the world, and this year, we’re going to spend about $350 million in exploration. If we can explore for less and find more, we’re going to get a higher return. We currently have drill rigs that are remote operated, in places where we want to make sure the conditions are safe. Being able to operate four or five drills at one time remotely also allows us to be more effective.

Another example of small “i” innovation is our use of GPS technology in Ghana, where motor vehicle accidents are the




the US, Australia, Ghana, Indonesia, and Peru—with internship programmes. Those programmes help students understand what we do, how we do it, and how they can fit in.

PwC: In what ways have the requirements for senior leadership positions throughout Newmont changed?

RO: There are several. First, as the mining business has evolved, we’ve had to get beyond just being the best technical people in the world. We need to be better businesspeople, who understand why we make investments, what the risks are, and what the return should be. We need to have a number of different competencies.

We also need to make sure people get different points of view, who don’t stay in just one job. Their aspiration should be to learn about the business from the 360-degree perspective. That makes for a better employee. So we have rotational assignments, from the senior leadership level down. We move people around the globe so that they have different experiences and different perspectives.

Diversity is also important for us. We encourage employees around the world to take different points of view. We do business on five continents, but when I go to Indonesia, I meet experts from Peru. Here in our Denver headquarters, we employ Peruvians, Ghanaians, and Indonesians. Promoting people and making them prominent is important, too. For the first time in Ghana, where females are an important part of the workforce, we have two Ghanaian women on our leadership team.

more competent, and sometimes just more, employees. So meeting our talent needs is absolutely one of the highest risks and opportunities we have. We embrace that as a management team, at every level in the company.

Then, we have to look at our different talent needs in our different markets around the world. Each region has its own economy. For instance, while the United States has 9 percent unemployment, Western Australia can’t find enough people for its mining activities and is actually looking to import employees.

In the United States, we probably missed a whole generation of people coming into the mining business 20 years ago. People were interested in investment banking and IT. Today mining offers tremendous personal growth, operates around the globe, is technically challenging and interesting, and there are great people in the business. So I’m hopeful that we’re going to be able to attract people to our business. We’re starting to attract some technically inclined people out of the schools today, but there are fewer mining schools and mining engineers—at the same time there’s more demand for them.

We need strategies to accomplish our goal of providing talent on a continual basis. We need to retain older people who have technical skills and want to continue to work. Do we adopt new policies where people can work part time or work from home?

To attract younger people, in the last several years we’ve reached out to community colleges and universities—in




educational institutions by giving them feedback on curriculum and ideas about the kinds of graduates we’re looking for. We also contribute to their educational funds by establishing scholarships. Important, as well, are the internship programmes mentioned earlier.

PwC: You have certainly had a very busy year—on top of everything else that’s going on in the global economy. In what ways has the allocation of your time and attention changed over the past year, and will there be a return to “normal” any time soon?

RO: The new normal is volatile. The new normal is more engagement with communities and governments and with my own employees around the world. Over the last year my time has changed pretty dramatically.

When I became CEO at Newmont, about five years ago, I spent a great deal of time understanding our operations and what we could do to improve them. I spent time building our management capability. That’s changed quite dramatically, too.

I’ve been more externally focused, investing my time with people who work at levels below the people who report directly to me, to ensure that we have a long term capability. That requires that I get to know the top leaders in the company, spend time with them. I find myself doing more and more of that.

Importantly, over the last year, gold has been in the headlines for multiple reasons. We’ve seen it hit an all time high price of $1,900 per ounce. That’s perhaps illustrative of where world economies might go. A preeminent

PwC: You talked about moving people across borders. Is that done to fill talent gaps? What are the skills, levels, or functions you’re moving most often and to what regions?

RO: First, it’s important to decide where you want to end up. If we move to a new region and find a new deposit, we want national employees to run the business in that country. We also want those employees to learn how to work in a global organisation so that, should they desire, they can go from being a leader there to being a leader at Newmont’s Denver office.

When we go to a new country, it’s often the case, too, that people we may want to hire don’t have the same standards of performance that we have developed over our 90 plus years in business. So how we address things like safety, environmental policies, and community relations are critical. We actually have some programmatic ways to accelerate performance.

PwC: You talked earlier about working with colleges and universities. How are you collabourating with educational institutions or governments to better develop a pipeline of future employees?

RO: There are a couple of examples. One, Newmont has people around the world who are competent technical leaders. We make those people available to help with some of the institutions who are in the mining business. For instance, we have a couple of people in Denver who teach part time at the Colorado School of Mines. We help the mining





financial writer said that the price of gold is “one divided by fear.” As people think about that, they wonder, what is gold really telling people? As a consequence, I spend time talking to people about what direction I think gold is going.

Perhaps most important, through the World Economic Forum, the International Council of Metal and Mining, and the World Gold Council, our industry is engaging with the communities of the world about how we can do our job better. We have been changing the reputation of the mining industry step by step.

So when I look back at my calendar compared to a couple of years ago, it’s much more externally facing, more strategically oriented. As a CEO, that’s the right place for me to be. It does mean, though, I need to spend enough time here to ensure that I have the right team looking after the business. We like to say we’re all working at the right level, we know what our assignment is, and what we’re supposed to take on, and we need to be sure we’re actually doing that.

I feel that I’m working at my right level. I actually embrace the fact that it’s going to be different for me, for my calendar, for my company. I think it’s terrific.

Interview with Roger W. Ferguson Jr.President and CEO of TIAA-CREF



PwC: What is the outlook for the global economy, as you see it today, and how confident are you of growth in this environment? What factors are you most dependent on?

RF: As we see it in our company, TIAA-CREF [Teachers Insurance and Annuity Association-College Retirement Equities Fund], the next year or so will be a period of moderate to slow growth, but with very low inflation. We see that the US economy is still dealing with some very important headwinds. Obviously, the housing sector is still quite weak. Unemployment is likely to remain stubbornly high. We also see some headwinds still coming from Europe and a lot of market volatility.

On the other hand, businesses have ample capital. We see businesses investing in equipment and software. And consumer spending of late has picked up. So there are some headwinds, there are some things that are supportive, and overall that’s going to make for a picture of relatively slow growth but with very low inflation.

PwC: With the mix of volatile circumstances surrounding the business environment this past year, not only economic uncertainty, but natural disasters and political upheavals, has it also been a particularly volatile year for your business?

RF: Actually, TIAA-CREF—which deals with investments and asset management and advising people—has not had a volatile year across the board. Clearly, in the equity markets, because we are always fully invested, our funds have shown the ups and downs of

the markets, but nothing particularly unusual, given the volatility of the environment. On the other hand, in many parts of our business, we’ve had a very good year. This year we expect to have record net inflows into our mutual funds and other funds. In TIAA, we ended 2011 with a record amount of capital. So while there’s a great deal of volatility in the marketplace and in the market overall, we see many positive things happening for our company during the course of this year.

PwC: Looking forward, what is the one risk to your growth that you are most concerned about, and why? How are you preparing to deal with that?

RF: There are a number of challenges for our growth as we go forward. The biggest risk is the behaviour of individual consumers. Thus far, we have seen that they are continuing, at a somewhat slower pace, to invest. They certainly are continuing to hold their money in solid mutual funds and other very strong investment options. If that were to change, that would be a risk, but I’ve been pleasantly surprised that in 2011 we’ve seen record net inflows, suggesting that at least TIAA-CREF is continuing to hold onto consumer confidence and bringing the assets under management and administration up over 2010.

PwC: Do you expect that to continue into 2012?

RF: We believe it’s likely to continue into 2012. We are making investments to deal with a larger pool of assets. We also intend to invest in our advisor pool so that we have more individuals ready to serve clients.

Roger W. Ferguson Jr.President and CEO, TIAA-CREF



Our brand, TIAA-CREF, stands for integrity. It stands for longevity. It certainly stands for thinking about a long term investment horizon. We believe that many of the elements of our brand will continue to enable us to attract assets and retain those assets. So unlike many other businesses, we built our strategy with an expectation of volatility, and we’re confident that we’ll have opportunities for growth.

PwC: Have you had to make any adjustments in that long term strategy, or do you anticipate making any changes in strategy next year?

RF: I don’t anticipate making any adjustments to our long term plan. 2011 was the first year of its execution, and we’re off to a good start. I expect 2012 to be a year of continued growth as we continue executing on our long term plan.

PwC: How is your approach to managing enterprise level risk changing? Are you doing more scenario planning or putting other risk-management processes in place?

RF: TIAA-CREF has a long history of focusing on risk management, which has helped us avoid some of the issues that have hit other financial services companies. Having said that, we are always looking for ways to evolve and modernise what we do with respect to risk management. Indeed, we have started to do more scenario planning, for example. And in addition to market risk and interest rate risk, we are also focused on operational risk and reputational risk.

We’re continuing to invest in our institutional relationship managers, so that we have more people ready to serve our institutional clients, as well.

PwC: How much do the fiscal positions of the US and foreign governments worry you, and has volatility in capital markets and/or exchange rates become an issue for you?

RF: We are fully invested, so we see the ups and downs of the markets on a daily basis. We also are aware that volatility in the global marketplace, and uncertainty around the fiscal situation in the United States and Europe, is feeding into market volatility, so we watch that closely. On the other hand, we take a very long term perspective at TIAA-CREF. We try not to be too heavily influenced by the ups and downs of politics or the fiscal situation. These elements do influence financial markets, so we have to take them into consideration, but we maintain a long term perspective. We believe there are opportunities to make wise investments, even against the backdrop of fiscal uncertainty.

PwC: In what ways has TIAA-CREF’s strategy changed over the past year, in areas such as business model, markets, pricing, and product/service offerings?

RF: TIAA-CREF was actually developing its 10 year strategy during 2009 and 2010. We’ve built a strategy against the backdrop of the great uncertainties that we’ve seen. Against that backdrop, there are opportunities for us to continue to grow our company and deepen relationships with our clients.




We’ve engaged with hundreds of companies on various issues of corporate governance over the years. We’ve also become an important signatory to a number of international protocols around responsible investing—like the United Nations’ Principles for Responsible Investment Initiative. At the end of the day, one of the core elements of the TIAA-CREF brand is socially responsible investing and corporate governance.

PwC: In what ways have your response to environmental and social concerns become an element of your cost reduction, corporate reputation, or revenue growth?

RF: There are a number of ways in which our broader interests in socially responsible investing and corporate governance have manifested themselves. We have one of the largest and oldest socially responsible investment options in the world—the CREF Social Choice Account—which reached its 20th anniversary and topped $10 billion in assets in 2010. We have also recently been involved in major investments in the agricultural sector, and we’ve made sure that these investments reflect our commitment to sustainability, transparency, and accountability. A third example is our longstanding leadership role in corporate governance. We believe that many of our participants value being associated with a company that puts a great deal of focus on corporate governance.

PwC: Is your board becoming more engaged in enterprise risk?

RF: Our board absolutely is becoming more engaged in enterprise risk management. I joined the company in April 2008, and in October 2008 our board created a Finance and Risk Management Committee. That has been a great avenue for me and Steve Gruppo, our Chief Risk Officer, to talk to the board about our risk profile, our risk appetite, and what we’re doing to mitigate various elements of risk.

PwC: And how do those risk management processes account for environmental or social costs and benefits?

RF: TIAA-CREF has been a recognised leader—and a trailblaser, even—in thinking about environmental issues, socially responsible investing, and corporate governance. We believe good governance and socially responsible practices can contribute to better financial performance and expose companies to lower risk. This in turn contributes to the strength of the return we seek for our participants and to the strength and stability of the markets

We have been actively involved as a leader in corporate governance for many years. Our position as a universal investor gives us a seat at the table with the world’s companies. Our goal is to influence companies to adopt policies and practices that align with the best interests of shareholders.




deal of turmoil and change. We’ve discovered that as other financial services companies are downsising or perhaps exiting businesses, that’s been a great opportunity for us to bring on some great talent.

Also, as a mission-driven company with a 93 year history, we have seen that many people working in financial services are drawn to the kind of reputation and stability we have. So we are optimistic that we’ll be able to continue to attract and retain the talent needed to grow our business.

PwC: What are some of the particular skills that are vital to hiring at TIAA-CREF?

RF: Several skills are pivotal. One is a focus on delivering excellent client service. The ability to be empathetic and to listen very closely is quite important in this regard. Another important skill set is around technology, since financial services is a technology-oriented activity. Then there are a range of special technical and financial skills—actuarial skills, risk management skills, regulatory skills, and communication skills, both internally and externally.

PwC: In what areas do you risk falling short of fulfilling any of those talent needs, and what will it cost if that happens?

RF: There are a couple of places where the competition is heavy and there’s a risk of falling short. One is having people who know how to listen to, work with, and empathise with clients. That’s an extremely important talent, so we are always looking for employees who have that capability. More broadly, there is the need to have risk management capabilities. We have a long history there, but over the last couple of years there’s

PwC: In what ways has talent become a strategic issue for you, and are talent challenges different than they used to be? How are you addressing those challenges?

RF: Talent challenges have always been critical in the financial services industry. After all, two of the most important assets for any financial services company are its reputation and its employees. TIAA-CREF has always looked for individuals of high integrity, who support and understand our noble mission and purpose. In line with our strategy, we are investing more in the people who represent us with our clients, both individual participants and institutions. Continuing to build that talent pool is an area of reinforced focus and emphasis.

PwC: Are your talent challenges any different in your different markets across the US?

RF: Within the United States, certain regional markets tend to have stronger talent pools than others. For example, we get some great technologists here in the New York area, as well as in our offices in Charlotte and Denver. So we’ve put IT operations in each one of those locations.

PwC: Do you shift people around the country based on regional needs?

RF: We will absolutely either shift people, or hire people, in different locations based on our assessment of the strength of the talent pool there.

PwC: As you continue to execute your long-term strategy, are you confident that you will have the talent needed to deliver it?

RF: I do, for a couple of reasons. One is that financial services industry is undergoing a great




are some of the strategies you’re adopting to manage that?

RF: As a leading financial services company, we clearly understand the importance of listening to and understanding our clients’ needs, so we’ve done a more granular segmentation of our client base in order to better understand what each segment needs. We’ve thought very deeply about gender differences in financial services and have developed a new initiative targeted to women and their specific needs. Certainly we’ve seen generational differences, particularly around social networking and the use of technology, so there are many ways in which we are listening to clients and adapting our practices to respond to the unique needs of different groups.

PwC: Have you put forth any initiatives to address any of those areas?

RF: We’ve put forth a number of initiatives to address those areas. We’ve been thinking very much about under represented minorities, so we’ve started a Spanish-language initiative that has allowed us to give advice and information about our products and services to individuals who want to hear from us in Spanish as their first language. We have also developed a new initiative targeted to women and their specific needs. We also consider generational differences and the needs of younger individuals versus those who are more mature. For example, we have launched social media programs to reach younger people who tend to be heavier users of that form of communication.

been a greater demand for employees with these capabilities, as other financial services firms also come to understand the importance of risk management.

PwC: Can you think of an example where you found a new or unexpected source of talent?

RF: We have traditionally hired people at mid career, but over the last few years we’ve also reinvigorated our college campus recruiting.

PwC: Does that mean you are collaborating more with educational institutions in different areas, whether it’s curriculum or recruiting, to keep the entry-level pipeline flowing?

RF: We are always collaborating with our clients—who happen to be higher education institutions—and we’ve discovered that helping them understand the technical skills we’re looking for is very important. As I mentioned earlier, we need individuals who have actuarial skills, finance skills, risk management skills, and client facing skills. So letting the schools know that that’s the pool we’re looking for has been quite valuable.

PwC: Consumers have become the driving force behind the development of new products and services. They are self organising and innovating in new and unexpected ways, making it harder to predict their preferences and choices at any time. Within the framework of financial services, how is open innovation and customer co creation changing the industry, if at all? And what




Roger W. Ferguson, Jr.President and CEO, TIAA-CREF

PwC: In what ways have the allocation of your time and attention changed, and do you anticipate a return to “normal” at any point, if there is such a thing anymore?

RF: As you said, is there a normal? Over the last several years I’ve spent a great deal of time talking to clients, explaining what we see and what they can expect and reassuring them as best I can about the volatile and uncertain environment. I’ve also made sure that we’re communicating well internally. As we continue to execute on our new long-term strategy against the backdrop of a very volatile market, it’s

important that all of our employees understand the path we’re on and why we have chosen that path.

Like any financial services CEO, I’ve also allocated time for the interaction between risk management and the investment side of the house, so I’ve chosen to personally chair our Risk Management Committee. I’ve closely followed the changes in the regulatory environment. Frankly, that is the new normal. We have to run our businesses on a day to day basis, but remain focused on client communication, internal communication, risk management, and understanding the changing regulatory environment.

Confidence disrupted


Key US findings and data charts

How local is your global growth strategy?

US companies are aggressively pursuing both local customers and talent in high growth markets

Operations in China Operations in Brazil Operations in India

2012 objectives US Global US Global US Global

Grow your customer base90 79 95 83 93 79

Access local talent base 82 55 97 61 85 61

Build internal service delivery capacity 69 46 64 55 67 54

Build R&D/innovation capacity or acquire intellectual property 51 27 21 22 56 31

Access raw materials or components 47 34 33 31 48 31

Build manufacturing capacity 30 30 21 33 48 38

Access local source of capital 18 14 13 11 15 12

Q: For each of the countries that you named, which of the following objectives do you hope to achieve in the next 12 months?Respondents were able to choose all that applied

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End an existing strategic alliance or joint venture

Insource a previously outsourced business process or function

Divest majority interest in a business or exit a significant market

Outsource a business process or function

Implement a cost-reduction initiative

Complete a cross-border merger or acquisition

Enter into a new strategic alliance or joint venture

Planned restructuring activities in 2012 Global US

US companies plan to step up cross-border transactions and alliances in pursuit of growth

Q: Which, if any, of the following restructuring activities do you plan to initiate in the coming 12 months?

Base: US respondents (161), Global respondents (1,258)

58%49%

28% 39%

35%33%

22%14%

21%16%

15%12%

66%66%

0% 10 20 30 40 50 60 70%

How are you balancing local execution with global capabilities?



Companies are investing in talent primarily to meet their business needs

Q: How much do you agree with these statements about investments in talent?

Base: Respondents who are investing in workforce developmentUS = 136, Global = 982

........................................................................................................................................................................................

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........................................................................................................................................................................................

0% 40 80%20 60

We are investing primarily to enhance our reputation

We are investing primarily to improve living and working conditions where we operate

We are investing in adult/vocational training programs

We are investing in formal education systems

We invest primarily to ensure a future supply of potential employees

Reasons for talent investment US Global

Is your talent strategy fit for growth?



Cost reductions for existing processes

Changes to existing products and services

New products and services within existing business models

New business models

Areas of change in the innovation portfolio Global US

CEOs worldwide are focusing their innovations on both product launches and process breakthroughs

Q: To what degree are you changing the emphasis of your company’s overall innovation portfolio in the following areas?

Respondents who stated emphasis increased ‘somewhat’ or ‘significantly’

0% 10 20 30 40 50 60 70 80%

56%54%

72%69%

57%55%

66%60%

Do your innovations create value for customers—or just novelty?



Are you prepared to deal with the consequences of risk?

CEOs around the world are concerned about uncertain economic growth

Q: How concerned are you, if at all, about the following potential economic and policy threats to your business growth prospects?

1 1 1 1

2

2 2

2 2 2

2

2

1

3 3 3

3

3

33

3

2 3

3 33

1 1 1Uncertain or volatileeconomic growth

Exchange rate volatility

Lack of stability in capital markets

Over-regulation

Government response to fiscal deficit and debt burden

Bribery and corruption

US NorthAmerica

WesternEurope

AsiaPacific

LatinAmerica

MiddleEast

Africa Central andEastern Europe



Are you responding to the needs and constraints of the local markets in which you operate?

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........................................................................................................................................................................................

........................................................................................................................................................................................

........................................................................................................................................................................................

There are opportunities to collaborate on shared priorities

Q: How much does your company plan to increase its investment over the next three years to achieve the following outcomes in the country in which you are based?

Base: Respondents who are investing in workforce developmentUS = 161, Global = 1,258

US Global

0% 40 80%20 60

Improving the country’s infrastructure

Securing natural resources that are critical to business

Reducing poverty and inequality

Addressing the risks of climate change and protecting biodiversity

Ensuring financial sector stability

Maintaining the health of the workforce

Creating and fostering a skilled workforce

Investment priorities 2012–2015



Interview with Daniel S. GlaserGroup President and COO of Marsh & McLennan Companies Inc.



PwC: Is the political outlook the key factor in global economic growth?

DG: Absolutely. Brian is spot on when he talks about uncertainty. The reality is that we have two different worlds—the developed world and the emerging world. In the developed world, there’s tremendous uncertainty, which impacts the willingness to invest for the future, and discretionary spending comes under pressure. When we look at the developed world in these uncertain times, a slow growth environment is what most companies will have to learn to manage. Now, in the emerging world, it’s important that no one takes a one size fits all strategy. We need to invest where there is growth and not hold the emerging world back because of the uncertainty in the developed world.

PwC: What changes in strategy during the past year would you emphasize?

DG: The most important thing for a company, when it has its strategy well articulated, is to make sure that it does what it’s supposed to do. So when I look at our company and its growth, over the last several quarters, we’ve grown as a firm around 5 percent organically, which under the circumstances seems pretty strong. We’re also very confident that our people, throughout the company can articulate our strategy. We just did an all colleague survey, in which we had 80 percent of the people who work for Marsh & McLennan fill out a comprehensive survey about not only strategic issues, but also about the company’s performance in general, what’s working, what we can do better. We’re going through the results right now, reviewing areas that we can fine-tune next year.

PwC: What emerging economies in particular look most attractive to you, Dan?

DG: I look at the world and create several buckets around how we view economies. There are regions growing like gangbusters, including Latin America, Asia, some parts of Eastern Europe, and the Middle East. We’re well-positioned in all of those territories. We’re also in the process of finalizing an acquisition in South Africa that will make us the largest broker and advisor in Africa. We now see much more movement south to south trade, where before it was north to south trade and east to west. The interesting thing about how we’re positioned in the global economy today, particularly in the emerging world, goes back 10 years, when our company was largely positioned in country, working on multinational business coming out of the US and Europe for the most part. Right now the vast bulk of our global business is indigenous, local business. We still do multinational servicing, but the large part of what we do country by country is local.

PwC: Are you doing more scenario planning in your risk management strategy?

DG: Absolutely. It starts with knowing our risks and creating a risk register, where we literally work with our management team to define the largest risks facing the organization. We may start out with 100 risks, and end up with a top 10 list of risks. Then we talk about what the impacts of those risks could be, both from a severity and frequency standpoint. One of the most important things we do around risk is to consider our systems and controls, and then evaluate those to make sure

Daniel S. Glaser Group President and COO,Marsh & McLennan Companies Inc.



we’re comfortable. Now, the end goal is not to necessarily avoid risk entirely. There’s profit in risks, so it’s an issue more about identification of risk and managing risk, deciding what to avoid, what to mitigate, what to transfer.

PwC: Are innovations in a global company of this size coming from different sources, maybe different geographies, different parts of the organization, or even some from outside your own organization?

DG: Absolutely. First of all, I’m very proud of the fact that in a slow-growth period in the world, Marsh & McLennan has focused a great deal of time and effort on innovation. Innovation, defined very broadly, is incrementally doing our existing business better, being more imaginative and creative around delivering value for our clients, our colleagues, and our shareholders. Innovation is also the “big idea.” So we’ve done things internally created around the big idea as a way to generate momentum around change. I often say to people that you need an environment that’s open and transparent, where it’s safe to speak up and give your views, because there will be no innovation without some element of dissent. Innovation really starts with, “Why do we do it that way?”

PwC: Do you find that the talent mentioned before are in fact different in different regions of the world, or do you find the same talent issues wherever you’re located?

DG: We sometimes use a phrase written by John Kotter, a former professor at Harvard Business School: “We’ll give you meaningful work in exchange for passion for that work.” People want to have an impact. They want to be listened to, no matter the size of the company they work for. They want to be part of something bigger and broader, to work for a company that shares their values and their view of their place in the world. Some of those truths are universal. But then those truths start to split, between the developed world, where for several years there’s been slow growth, and the emerging world, where there’s rapid growth and a sense of future. We have to manage talent very differently. One phenomenon we have noticed over the last five years—not only for ours, but among many companies—is that voluntary turnover rates in the developed world are quite low, while in the emerging world they’re quite high.

Interview with Brian Duperreault President and CEO of Marsh & McLennan Companies Inc.



PwC: What is your outlook for the global economy?

BD: We’re optimistic as a rule, particularly of our company’s prospects for growth in 2012 and going forward. But this is such a strange time, because one day we’re up and one day we’re down, and the markets are so volatile. That uncertainty is going to remain with us, yet I also believe that the underlying strength remains. Whether it’s the US, Europe, or the emerging world, there is much more strength than weakness. Part of the problem, of course, is the political uncertainty, and with that comes volatility. If politicians could get their act together, get the uncertainty down to a minimum, you’d see tremendous growth. The balance sheets of companies are very strong. The cash balances are extraordinarily high. Companies are incredibly efficient. Everyone’s poised for activity, and with a little less uncertainty, you’d see the whole world grow economically.

PwC: Has the last year been particularly volatile for Marsh & McLennan?

BD: It hasn’t been particularly volatile for our core business, which is divided about 50/50 between insurance and consulting. In the insurance world, we have a rhythm and cycle all our own. That business doesn’t match up with economic cyclicality, as a rule. Our volatility has more to do with natural events and catastrophes, events that can create price movements. In the past year, we had an enormous number of significant natural-hazard events—earthquakes, tsunamis, hurricanes…

and while you might think those would have created tremendous volatility, they haven’t moved our pricing very much. There’s some degree of stability in that pricing. So that half of our business hasn’t been too volatile.

In the consulting half, we run the rhythm of the economies. Where things are growing, which is the emerging world, business has been quite good for us. Where it’s not so great, it’s been slow but reasonably balanced, and therefore no volatility.

PwC: What is the single most important non economic event that affected Marsh & McLennan last year?

BD: Over the last couple of years, the low interest-rate environment is probably the one issue that has had the most impact on our company. We collect between $50 billion and $60 billion in premiums from clients, and then we pay insurance companies. So we manage that money in a very short term way, on a fiduciary basis. In a low interest rate environment, we actually do all the work that we’ve always done before. We just don’t get paid anything for it. For many of our clients, we still have defined-benefit pension plans. Even if they’re closed, they have to manage those plans, and low interest rates create volatility for them in that process.

PwC: What is one thing that government could do that would help support Marsh & McLennan?

BD: The US government could certainly do something about corporate taxes. We have the highest corporate taxes in the world.

Brian Duperreault President and CEO, Marsh & McLennan Companies Inc.



With all the discussions around fiscal policies, including Congress’s so-called Super Committee formed to deal with our national debt, I understand the push and pull of the debate. But it’s causing issues with respect to the US economy. It’s keeping productive cash in other parts of the world. We have a lot of cash; we’re a cash generating company. We keep it in other countries’ economies, because the tax consequences of moving it into the United States are high. So that cash is working in some other economies. If US tax policies were changed, I think you’d have much more domestic productivity, the economy would rebound, and things would be a lot better. That alone would make a huge difference.

I would also like to see a little more certainty. Uncertainty is a killer from a business-planning point of view. Knowing what was going to happen in a relatively reasonable perspective of time would be enormously helpful to us. I understand the whole process of next year’s US presidential and Congressional elections; that’s the way things have always been in the United States. When times are good, we can handle that uncertainty and rhetoric, but these are not normal times here. The country isn’t as well served by that process, and more integrity and certainty coming out of Washington would really help us.

PwC: In what ways, if any, has your strategy changed over the past year?

BD: We refined our strategy at the end of 2010 and implemented it in 2011, focusing on four principles: growth; high cash generation; not using much capital; and lowering our risk. So I’m not sure we changed our strategy this year, but we’ve certainly refined it, particularly growth.

PwC: In what ways is the attractiveness of different countries or regions changing for Marsh & McLennan?

BD: We have a great global footprint, operating in almost 90 countries. We make our living by providing financial and operational consulting services. In emerging countries that have a relatively simple economy, their need for us is limited. But as they start to grow economically and their companies become more global, they need us more. So we’re finding that the demands for our services are growing much more rapidly than the actual economies are growing.

PwC: Are the criteria you use for assessing the attractiveness of new markets changing?

BD: I’m not sure that the assessment changes. We have more markets that make the cut, with economies that are interesting to us, where there’s demand for our services, where the level of payment they expect to give us for the quality of our service meets our criteria. There are just more of those markets out there.

PwC: How is your approach to managing enterprise risk changing?

BD: It’s something that we pride ourselves on. We’re one of the world’s great advisors on enterprise risk management, so there’s a particular burden on us to make sure we manage our own enterprise risk in a state of the art way. And we’re well on our way in that regard. We have a new chief risk officer, for instance. Nonetheless, the CEO is still the chief risk officer. That doesn’t change. . Putting together a structure that pulls in all of our work is probably the most important thing




we’ve done. Risk management and management itself are basically the same. You can’t distinguish one from the other. And as long as your process recognizes that management is risk management, you’re well on your way.


BD: We’ve just appointed a chief innovation officer, responsible for both technology and innovation.. Prior to that we were siloed, where each operating company took innovation on as part of its normal process of growth development. But there wasn’t a coordinated, consistent, scientific emphasis on process approach, and we’re now introducing those into the system. We have an enormous number of very creative people, who are in our clients’ offices daily helping them solve problems. So we have a tremendous day to day input within the company. Harnessing that incredible intellectual capital in a more systematic way—bringing great ideas developed in one company over to another client—is the big change that’s taken place here.

PwC: Are innovations in a global company of this size coming from different sources, maybe different geographies, different parts of the organization, or even some from outside your own organization?

BD: To me, one of the interesting things that’s changed globally, particularly in our company, is where innovation takes place and where it migrates to. Classically innovation resided in the developed world. We took ideas and moved them into the emerging world. There’s now an equal chance, and maybe

a greater chance, that innovative ideas will come out of the developing world, where the action is, where the need to deliver more for less is even more heightened. Today we’re getting as many ideas out of, say, China and India as we were before out of the US and Europe.

PwC: In what ways has talent become a strategic issue for Marsh & McLennan?

BD: Talent has been a strategic issue as long as this company’s been around, which is 140 years. It’s always a question of emphasis, and we’re all guilty of looking at our human resources during difficult times as more of an expense than an asset, but you pay the price for that. We haven’t fallen into that trap recently, but it is always a worry.

Today, we’re spending much more time talking to our employees. It’s a different world out there today than when I started in the business. The communication capabilities are enormous. The ability for me to communicate directly with an individual in any part of our organization is so much greater. Therefore the burden is on us to communicate with our employees. Transparency is also a huge issue. Companies that can bring the tremendous global talent they have into a single, cohesive group, win the battle.

PwC: A key focus of talent is senior management. In what ways have the requirements for senior management changed at Marsh & McLennan over the last year?

BD: I’m not sure there’s more change than there is constancy. The core requirements of senior management don’t change very much over time—or at





least they shouldn’t. But recognizing that the world is somewhat split down the middle between slow growth and rapid growth, you’d better be able to operate in both at the same time. You have to manage that difficult slow growth and then completely switch gears and go to high growth. You have to find ways of moving your resources—and for us it’s talent—from where it’s not being utilized to where it can beutilized. You also have to be a good communicator today, because the tools are there. Our employees expect us to communicate to them regardless of where they are, and you’d better be able to do that. You can’t hide in the corporate suite anymore. You have to deliver consistent messages to everybody, and you’d better tell the truth.

PwC: Can you give us an example of anything you’re doing to develop a leadership pipeline?

BD: The most important thing we do to develop our leadership pipeline is stretch assignments. We have an extensive leadership development program, as well as an appraisal system based upon performance, and it’s constant. For colleagues who we think have tremendously high potential within the organization, we seek stretch assignments. More so than in the past, we look within all four of our operating companies for colleagues who can possibly get a stretch assignment. We also move high-potential people back and forth seamlessly between corporate and operating environments.

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