Diversity - AT THE TOP!

I just read an article in the WSJ which was an interview with PwC U.S. Chairman Tim Ryan.  Great read!  The article basically touches on the efforts of Mr. Ryan to force leadership and all employees into discussion about race relationships within the organization as well as a focus on diversity.  These efforts were born out of tragedy after Botham Jean, a 26-year-old PricewaterhouseCoopers senior associate, was shot to death by an off-duty police officer while watching football in his Dallas apartment.  The article / interview goes deeper into the efforts of PwC to focus on diversity at the cultural level as well as institute employee empowerment programs designed to sharpen the skillset of employees.

Tim Ryan: CEO - PwC

It was a great read but left me feeling like something was missing… like Ryan and PwC were falling short.  I’ll explain shortly. 

I like the fact PwC leadership decided to support and promote discussions about race and diversity.  They also did so on an internal level where the focus was truly about the employees and the company culture.  It was established as an opportunity for the people from all levels of PwC to learn about each other and understand different perspectives. Simply having diversity focus is more than just hiring diversity; its sharing a diverse culture.  PwC gets this. 

In an article written for the Harvard Business Review, David Thomas and Robin Ely noted, “…diversity goes beyond increasing the number of different identity-group affiliations on the payroll to recognizing that such an effort is merely the first step in managing a diverse workforce for the organization’s utmost benefit. Diversity should be understood as the varied perspectives and approaches to work that members of different identity groups bring….  Women, Hispanics, Asian Americans, African Americans, Native Americans—these groups and others outside the mainstream of corporate America don’t bring with them just their “insider information.” They bring different, important, and competitively relevant knowledge and perspectives about how to actually do work—how to design processes, reach goals, frame tasks, create effective teams, communicate ideas, and lead. When allowed to, members of these groups can help companies grow and improve by challenging basic assumptions about an organization’s functions, strategies, operations, practices, and procedures. And in doing so, they are able to bring more of their whole selves to the workplace and identify more fully with the work they do, setting in motion a virtuous circle.” 

So Mr. Ryan got this one right.  He not only works on bridging a gap of understanding between different races and cultures; he does so at the employee-to-senior management levels, establishing a true culture that focuses on the heart of diversity; diversity in thought and focus on true differences and how these can be celebrated, shared and embraced.  Though it took a tragedy to spark this conversation at such a level, the result is a win for the people and culture of PwC.

An article in Chief Executive Magazine published a story on his efforts to address diversity and inclusion and noted the following.  “Ryan didn’t just take stock of where PwC was in the area of diversity and inclusion, he looked at the business world at large. What he saw was a lot of room for improvement. A lot of companies went the safe route and didn’t scratch the surface. As such, Ryan helped launch CEO Action for Diversity and Inclusion in 2017, an initiative aimed at getting CEOs to advance diversity and inclusion initiatives at their companies.  More than 550 CEOs have signed the organization’s diversity pledge since last year and many led their companies in December’s “Day of Understanding,” where employees convened to discuss bias in the workplace. CEO Action for Diversity and Inclusion has also published more than 450 best practices and already had three closed door/CEO only meetings on how they can expand and improve diversity and inclusion efforts across the business community.”

I also liked Mr. Ryan’s thinking and comments about wanting people to be with PwC in both mind and body, and as such not only promote the discussion of inclusion and diversity but also focus on "upskilling"; putting in place programs to develop skills and foster personal growth for the employees.  Mr. Ryan’s move not only does the obvious “saw sharpening” to increase employee production; he presents programs to assist those who don’t have the skills necessary to advance where others climb freely… programs which can narrow the chasm of developed skill sets which exists between races (a point of merit in the discussion of “white privilege” and systematic minority suppression).  

As noted by Mr. Ryan in his WSJ interview, “To win the war for talent, part of the proposition has to be, ’Come for our culture, come for your career growth opportunities, come because you’re going to be constantly invested in to make sure you stay relevant.”  Successful organizations understand this and are acting accordingly.  Employee Engagement at its finest.  BRAVO PwC!

Understand… PwC is not alone regarding employee engagement.  Employee engagement is definitely on the rise.  A recent Gallup poll published in August 2018 noted three undeniable trends and facts:

• 34% of U.S. workers are engaged, tying highest in Gallup's history
• "Actively disengaged" percentage is down to 13%, a new low
• Engagement is highly related to positive business outcomes

So what was missing?  THE NEXT STEP!  

In many industries, there is a serious lack of diversity in senior leadership though there are many organizations within these industries promoting diversity in hiring practices, cultural awareness and assimilation, and employee training and skill development.  

Here is a statistic for you:   According to a recent publication produced by BCG, “Among Fortune 500 CEOs at the time of publication, only 24 are women (less than 5% of the total), only three are black, and only three are openly gay, including just one lesbian…. Most company leaders—primarily white, heterosexual males—still underestimate the challenges diverse employees face. These leaders control budgets and decide which diversity programs to pursue. If they lack a clear understanding of the problem, they can’t design effective solutions.”

Diversity in leadership is a necessity!  There is also true value in ensuring diversity in leadership roles.  The Ladders recently published an article by Sharon E. Jones which focused on the value of diversity in leadership and link in senior leadership diversity to greater financial returns.  Some of the major benefits noted were…

• Diverse teams produce better solutions to complex problems; 
• Diversity in leadership can help with retention of diverse staff
• Diverse leaders can serve as mentors and sponsors to diverse professionals and others and build multi-cultural competencies within the organization

Her conclusion: "One of the best investments that a company can make is to be intentional about increasing the diversity in leadership by recruiting, retaining, and promoting diverse professionals."  And she is dead-on!

So what about the board room?  PwC’s 2018 Annual Corporate Directors Survey shows that directors are listening more, learning more and engaging more. One of the top findings from the survey - "Board diversity has been a hot topic for years, and directors seem to be getting the message. Most recognize the value that diversity adds. Nearly all agree that it brings unique perspectives to the boardroom, and the majority say it enhances board performance. Most also say diversity improves relationships with investors—those who have been strong supporters of it. While 91% of directors say their boards are taking steps to increase diversity, many directors seem cynical: more than half say board diversity efforts are driven by political correctness. And nearly half think shareholders are too preoccupied with the topic. Some also hint that it’s just a “check-the-box” exercise."

Herein lies the heart of the problem. 

So my question to Mr. Ryan – “Do you value diversity in leadership? Does your board?  

PwC Board Of Directors:  

• 20 Members.  
• 15 White Men
• 5 White Women
• No minorities

Where is the diversity? It looks like PwC didn’t even check the box!

And don’t get me wrong… I am not attacking Mr. Ryan for the lack of diversity on the PwC Board.  I applaud Mr. Ryan for championing the issue and forcing C-level executives and senior management to face the issue.  He didn’t chose his board; they chose him.  In a perfect world, the PwC board would reflect the goals of diversity Mr. Ryan preaches (and practices).  If more leaders address diversity issues like Mr. Ryan has, this will happen in  time. 

So if diversity in leadership should be a goal for all organizations to strive for, how do we ensure we not only establish programs that discuss diversity and foster employee development but also shape tomorrows leaders… tomorrows senior leadership? Tomorrow’s Boards?  There must be a focus on 1- ensuring a diverse senior leadership team and board of directors, and 2- developing and implementing leadership development programs for the workforce in preparation for tomorrow’s senior leadership roles.  

Though there is a definite difference in the skill sets and core competencies possessed by senior leadership, management and the employee work force, there are many employees joining organizations at the entry level who possess the core competencies needed to be an exceptional leader.  They are the diamond in the rough of the company human capital pool.  However, prior to joining the organization, they may not have experienced the opportunities to develop their skill sets or show what they can accomplish.  They go un-noticed with their potential untapped.  Organizations who truly want to reach diversity milestones must consider instituting leadership programs designed to identify and develop diverse senior leadership from within!  IT is more than just developing talent into successful and productive team members . It is about effectively growing a diverse group of leaders from within... Leaders of tomorrow who get the company culture of diversity and the benefits it brings for the entire organization!

Let’s see Mr. Ryan take this on as well.  Maybe others will follow. 

Sources:   

• WSJ Article: “This Boss Is Making Race Relations a Business Matter: PWC’s U.S. chief talks about discussing race, gun violence and justice with employees after a colleague was shot by a police officer”  Published March 13, 2019.  By Vanessa Fuhrmans.  Website Source: https://www.wsj.com/articles/the-chairman-who-has-made-race-relations-a-business-matter-11552483800

• For more information on PwC Chairman Tim Ryan: https://www.pwc.com/gx/en/about/leadership/tim-ryan.html

• Boston Consulting Group (BCG): Article – “Fixing the Flawed Approach to Diversity”,  Published JANUARY 17, 2019.  Authors Matt Krentz , Justin Dean , Jennifer Garcia-Alonso , Frances Brooks Taplett , Miki Tsusaka, and Elliot Vaughn.  Website Source: https://www.bcg.com/en-us/publications/2019/fixing-the-flawed-approach-to-diversity.aspx

• SHRM (Society for Human Resource Management) Website:  Article “Development Employee Career Paths and Ladders”.  Author Unknown.  Date Published Unknown.  Website Source: https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/developingemployeecareerpathsandladders.aspx

• Gallup:  “Employee Engagement on the Rise in the US”; By Jim Harter.  Aug 26, 2018.  Website Source:  https://news.gallup.com/poll/241649/employee-engagement-rise.aspx

• Forbes: “How To Lead The Push For Diversity in the Workplace”, by Monica Thakrar; June 9, 2017.  Website Source: https://www.forbes.com/sites/forbescoachescouncil/2017/06/09/how-to-lead-the-push-for-diversity-in-the-workplace/#509ca67a415b

• Harvard Business Review. “Making Differences Matter: A New Paradigm for Managing Idversity”.  By David A. Thomas and Robin J. Fly.  Sept-Oct 1996 Issue.  Website Source: https://hbr.org/1996/09/making-differences-matter-a-new-paradigm-for-managing-diversity

• The Ladders.  “The Value of Diversity In Leadership Roles”, by Sharon E. Jones.  November 12, 2018. Website Source: https://www.theladders.com/career-advice/the-value-of-diversity-in-leadership-roles

• PwC United States.  “The Evelving Boardroom: Signs of Change”.  PwC’s 2018 Annual Corporate Directors Survey.  Website Source: https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey.html

• Chief Executive.  “Why PwC Chairman Tim Ryan’s Top Priority is Diversity And Race”.  By Gabriel Perna.  Jan 9, 2019.  Website Source: https://chiefexecutive.net/pwc-chairman-tim-ryan-top-priority-diversity-race/

• PwC Board of Directors Website Source: https://www.pwc.com/us/en/about-us/our-board.html

Millennials

Photo via www.workflexibility.org

Interesting survey in the NYT.  I came across this article on FB. Interesting (and simple) "look-in" to the millennial mind.  Good food for thought where management is concerned.  Days of IBM environments are not only over but out of sight and mind with today's young work force... Tomorrows leadership.  Strategic Agility is a common core competency for level 5 leadership.  C- level needs to understand this includes adapting internal culture for tomorrow's success.  We strive to achieve the "long term" sustainable strategic competitive advantage in our markets.  We need to focus within our organizations to ensure we are fostering an environment that will produce the leaders tomorrow needs.  "Long-term" can't be achieved without it.

http://nyti.ms/20WFZqD

Leadership during Crises… For Whom the Bell Tolls…

Thinking about all of the serious issues facing the world today, we find ourselves in numerous precarious situations like never before.  These situations we face are calling for serious leadership like never before, and in all areas of our lives; Government… Business… Community… even Church, Neighborhood, and home!  We are facing issues today that are unprecedented.  From weather events producing tornado outbreaks never witnessed in the previous 3 generations; hurricanes and super-storms threatening entire regions of civilizations; massive earthquakes, tsunamis, and other natural catastrophic events.  Natural disasters are occurring on an unprecedented scale, effecting communities, governments, businesses, and the entire world economic and security structure. 

Threats are not limited to natural disasters by any stretch of the imagination.  The threat of terrorism and ethnic strife continues to rise as tensions mount in the middle east, east-Asia, and Africa. Ecological disasters from oil spills to climate change are no longer ideological, but real, existing and experienced threats.  And political and economic troubles continue to loom; from Greece and the Euro Union to the fiscal cliff faced on our own home front.   Simply reviewing the headlines of today’s media sources testify to the simple fact that we as a human race face more crises today than yesterday, and leaders of today have no choice but to be exceptional leaders in times of crises if they plan to truly lead.  And today, all of us on this planet are in a position where we need true leadership to lead; to lead us out of the situations we find ourselves in economically, politically, socially, and globally. 

With this in mind, we focus on what it takes to be a true leader in times of crises.  We look at our president; we look at our governor and mayor; we look at our business leaders; pastors; community organizers, and ourselves.  What does it take to truly lead in times of crises?  What will it take to truly lead through the times we are facing?

I recently came across an article in the Harvard Business Review; an interview by Scott Berinato with Adm. Thad Allen (Retired), the Senior VP of Booz Allen Hamilton.  This interview caught my attention at first because he is scheduled to give the Key Note Address at my upcoming conference in New Orleans (International Disaster Conference & Expo, or IDCE).  But as I read this interview with Adm. Allen, I couldn’t help but to apply his thoughts to every other crises faced; from government (the fiscal cliff is a serious issue needing serious people prepared to make serious decisions… which I don’t think we have in our government on any side, at any level… sorry), to business (economic insecurity and uncertainty is definitely a major global crises), to how I lead my family. 

Admiral Allen, former Admiral of the U.S. Coast Guard, managed the response to the BP oil spill in the Gulf. Previously, Admiral Allen also managed the response to Hurricane Katrina in the Gulf, and also managed New York Harbor during the 9/11 attacks.  He also managed the U.S. response and relief activities to Haiti after the 2010 earthquake.   The interview conducted by Berinato was on-point and direct regarding leadership, and his thoughts on what it took to be a leader through these times of crises.  He summed it up into a few key points and phrases. 

• Unity of Effort: what you're trying to do is aggregate everybody's capabilities, competencies, and capacities to achieve a single purpose, still taking into account the fact that they have individual authorities and responsibilities

• Unify all on the team:  create a set of shared values that everybody that's involved can subscribe to.

• Visibility:  If you're not visible with your people, then you're not a credible leader.  You don't understand what they're going through.

• Adapt, suffer or manage.

• Leaders are responsible for their own morale… keep a level playing field.

• Definition of leadership iss the ability to reconcile opportunity, and competency

As I read, I was brought back to my time in show management with a fairly large company where we opened an event on 9/11.  It was the most traumatic experience I have ever had as a show manager, and the most challenging scenario of Crisis Management I have ever experienced.

We had opened a conference in Worcester, Ma on Monday September 10, 2001. All was quiet, and all was good.  We had a very successful registration program, presenting an attendance representing an increase in overall attendees of over 30% from the previous year.  Our exhibit sales for the year had been extremely successful, presenting an expo floor reflecting a 20% increase in exhibitors from the previous year.   Speakers selected to present in this conference program were the best of the best.  It was our first time in Worcester, and the city was happy to have us.  The event was set up to be one of the best events to date for this brand; the brand I managed.

Tuesday, September 11, 2001; 8:46 AM:  American Airlines Flight 11 crashes into the World Trade Center… the first of many which were to attack our country that day. 

With the majority of the planes on 9/11 taking off from Logan Airport in Boston, MA, the civil authorities in Massachusetts order a complete shutdown of all highways, rail, air, and sea transportation.  All public facilities in MA were shut down.  Security in public facilities ensure a complete lockdown of all buildings; no one enters or leaves. 

Our conference program kicked off day 2 of our event at 8:30AM EST.  Our trade show floor was schedule to open at 10:00AM.  We receive word through the event facility management that there had been “an incident”, and as a result, all public facilities were moved to complete lockdown.  We had freight on docks waiting to move to show floor.  About 40% of our exhibitors had not yet arrived to the facility.  All doors were closed, and military and state police surrounded the building ensuring no person would leave or enter.  We were not alone; the majority of public facilities throughout Massachusetts were called to lockdown.

Within 10 minutes of the lockdown, we began to receive reports of what was happening.  Terrorists had hi-jacked planes and had crashed them into buildings in New York.  Some planes were still unaccounted for.  A number of the planes originated out of Boston.  The entire 90-mile radius of Boston was at large.  That was all we knew. 

As the manager of the event, I was now faced with an unprecedented position.  I was being called upon to lead my entire show team through these crises.  I was also responsible for the 500+ conference attendees, 250+ exhibitors, and numerous additional staff, and would have to lead them through this ordeal.  Due to the intense and sudden use of cell phones throughout the country, cell towers began to fail.  We had to establish communications so those in the facility could begin reaching loved ones.  A number of conference attendees were from the Boston area, 2 of which had loved ones on the flights which were hijacked.  We were dealing with grief counseling; communications; security; and the need to ensure information was delivered to all. 

What I faced was not an oil spill or hurricane. It wasn’t economic uncertainty (at least not immediately).  It wasn’t government issues or community guidance.  My hurdles were specific to the situation and location at hand; but I happened to be the person tasked with leading us through the ordeal.  It was a true crises, and everyone involved needed leadership. 

As I read Adm. Allen’s comments, I realized this is exactly the leadership needed when I faced these crises in 2001.  Some I had performed well; others I hadn’t.  But as I reflected, I realized that Adm. Allen hit the nail on the head.  In leadership, there are certain attributes you must have to truly lead in times of crises, and these times of crises will define your true ability to lead.

Unity of Effort: This is something we did instinctively.  We made a conscious effort to ensure we were aware of all of the individual core competencies available to use and delegated responsibilities accordingly.  We placed certain people on counseling detail, while others were put on logistics and transportation details.  Others were tasked with working with facility management to establish communications for all in the facility.  Some were tasked with setting up internal news feeds to keep others informed, or put in charge of ensuring food and beverages were available.  I was tasked to work with facility management and government officials to ensure procedures were adhered to.  We simply put a plan in place to ensure all resources were allocated efficiently and effectively.

• Unify all on the team:  We were successful in this game plane because we united the team, discussed the challenges faced, and established a set of shared values and vision that everyone subscribed to. The result was motivation to ensure each job was done to the best of each person’s ability.

• Visibility:  I stayed as visible as possible, helping in all areas from setting up phone banks to cleaning restrooms, working with military on the loading docks to inspect freight, and sitting with people who were grieving over their loss.  I didn’t leave one task assigned where I was not around to help or assist if needed.  

I worked to ensure the morale I portrayed was positive, no matter how saddened I was by my experiences or hopeless I felt over the enormousness of the tasks at hand.  As I look back on this experience, I understand the effect this had on our team.  Leaders are responsible for their own morale, which affects the morale of others.  You have to keep a level playing field, and I did to the best of my ability.  In the end, we were able to reconcile opportunity and competency, and the result was the successful navigation of serious crises.

Bill George wrote an article for the Wall Street Journal titled “Seven Lessons for Leading in Crises”.  Bill George, author of "True North," is a professor of management practice at Harvard Business School. He is also the former CEO of Medtronic and serves on the boards of directors of ExxonMobil, Goldman Sachs and Novartis. In this article, he stresses the following:

• Leaders must face reality. Everyone on the leadership team must be willing to tell the whole truth.

• No matter how bad things are, they will get worse

• Build a mountain of cash, and get to the highest hill

• Get the world off your shoulders

• Before asking others to sacrifice, first volunteer yourself

• Never waste a good crisis

• Be aggressive in the marketplace

Many of these “lessons” are in line with what Adm. Allen refers to in his fundamental outline of success in crises leadership, and are reflective of what I experienced in Worcester, Ma, but are applied in the business setting.  From facing reality and telling the whole truth, no matter how grave, to allocating responsibilities to the right team members, putting yourself in the front line of fire, and leading others only where you are prepared to go yourself… all apply, and these fundamentals apply to all areas of leadership in any crises situation. 

As we face the “Fiscal Cliff” with our government, and economic uncertainty in the global work place, we now need leaders who will step up and lead.  We need leaders who will role the sleeves up and make tough decisions.  We need leaders who will tell the truth, no matter how rough.  We need leaders who will understand that they, as leaders, are responsible and stop blaming everyone else for the problems we face as a nation and people.  We need leaders who will recognize the opportunities we have to overcome these issues and show their competency.  We need leaders who understand that no matter how bad things are, they can get worse, and WILL get worse if these crises are not addressed… if THEY do not truly LEAD through these troubled waters.  We need leaders who will be willing to sacrifice themselves for what is right; who will volunteer themselves to get the job done. 

In short, we need true leaders.  They are out there and it is time to step up.  I just hope they hear the bell ringing.   

Sources:

Leading Through a Major Crisis. by HBR IdeaCast  |   5:26 PM October 14, 2010. Featured Guest: Adm. Thad Allen, USCG (Ret.).  Accessed via Web: 12/06/12.  http://blogs.hbr.org/ideacast/2010/10/leading-through-a-major-crisis.html

Wall Street Journal  GUEST COLUMN March 5, 2009.  Seven Lessons for Leading in Crisis. By BILL GEORGE.  http://online.wsj.com/article/SB123551729786163925.html#printMode

Corporate Responsibility

There are many companies who are recognized for what they “Give Back”.  Forbes just published an article regarding the top companies who “give back” (Forbes- Oct 19).  What was interesting is they based this list on the amount of money each company gave in “Charitable contributions” and what percentage these donations were to pre-tax profits.  The top 10 on this list were Alcoa ($36.6m / 6.7% ), Merck ($72.6m / 4.4%), General Mills ($88.7m / 4%), Kroger ($69.7m / 4%), Xerox ($27m / 3.3%), Target ($126m / 3.3%), Goldman Sachs ($337m / 2.6%), Safeway ($21.6m / 2.5%), NW Mutual ($17m / 2.4%), and Starbucks ($30.5m / 2.12%).  It is impressive to see companies giving so much back. 

However, there is so much more to Corporate Responsibility than simply making charitable donations based on profits.  Of more importance is what a company does to truly benefit the communities and people as a whole.  This includes employees, the environment, citizens, and more.  Corporate Responsibility is defined in BusinessDictionary.com as “A company’s sense of responsibility towards the community and environment (both ecological and social) in which it operates. Companies express this citizenship (1) through their waste and pollution reduction processes, (2) by contributing educational and social programs, and (3) by earning adequate returns on the employed resources.” 

(http://www.businessdictionary.com/definition/corporate-social-responsibility.html).

On Wednesday November 14, Bloomberg Business Week reported Cisco Systems announced its 2012 Annual Corporate Responsibility Report.  The Report outlines what Cisco believes to be the core components of its Responsibility to the company and community: governance and ethics, supply chain, employees, society, and environment.  Cisco publishes this report “to illustrate the company's broad reach and innovative solutions designed to help Cisco, its customers, and its partners address social issues and promote environmental sustainability.”   Though some may see these reports as simply a marketing and public relations tool (which it is to some degree), it is refreshing to see companies make such a statement in regards to their conscious decision to ensure their organization benefits more than just shareholders. 

Topics addressed in this report include human rights (global), efforts to lead in ethics and employee compliance to ethics policies, privacy policies, global transparency, labor practices, women’s issues (Cisco launched the Women in Technology Conference), commitment to diversity, corporate and foundation cash and in-kind contributions worldwide, employee volunteers to various non-profit organizations, education programs, efforts to reduce GHG emissions, and more.  It shows a true commitment by an organization to give back to the community, environment, and employees, and work to use company resources to make a difference through a positive impact on the world in which we all live.

What makes a company truly great is the ability of the company to better the world in which we live.  Successful companies are in a position to have an amazing, positive impact on the world and all of the people who reside on this planet.  From working to ensure fair global labor practices, protecting the rights of minorities and women, and championing human rights to protecting the environment; companies have the resources to truly make a difference. 

Even small companies have the ability to present a positive impact on their communities. This could be something as small as ensuring recycling programs are in place to adopting training programs to educate employees on sexual harassment, discrimination, and tolerance, creating training and development plans to assist employees in advancing careers, providing balanced and fair employment practices and work expectations, and ensuring community outreach.  It is the job of company leadership to address these issues and ensure companies position resources, including human capital, to address these issues.

In my current company, we have numerous programs designed to assist the employee, and by definition of what we are (convention center), our mandate is to support the community, boost the economy, have an economic impact on the community, and present programs that better the world in which we live.  From recycling programs and blood drives to habitat for humanity volunteer days and food drives, our operation truly focuses on what we can do to better the world we all live in.   

For more information on Corporate Responsibility, visit Corporate Responsibility Magazine online at http://www.thecro.com. 

Sources:

Bloomberg BusinessWeek: Cisco Issues 2012 Corporate Social Responsibility Report.  SAN JOSE, CA -- (Marketwire) -- 11/14/12.  Accessed 11/16/12. Link: http://buswk.co/TJME6E

BusinessDictionary.com: Accessed 11/17/2012:  Link: http://www.businessdictionary.com/definition/corporate-social-responsibility.html

RADIO RADIO

I am noticing a number of friends and acquaintances in music posting comments on Facebook, Twitter, and other social media regarding Pandora’s efforts to push through the Internet Radio Fairness Act, and it is interesting to read.  I get it.  I get the argument and why artists are concerned.  But I am also not bought in to the artist’ reasoning and believe the fear of “lower royalties” from one industry segment is blocking people from seeing the forest through the trees.

The situation: Pandora Radio (NYSE: P. www.pandora.com) is trying to mobilize its more than 150 million listeners behind the Internet Radio Fairness Act, a bill that would lower the royalty fees paid by online radio stations for playing a song.  On the other side of the issue are record labels and artists, who believe that the existing rates are fair and accuse Pandora and others of wanting to deprive copyright holders of the income they deserve.

The problem is royalties from satellite/cable and internet mediums vary to such a degree, they are unfair.  The worlds of satellite/cable and internet radio continue to converge, resulting in an unbalanced competitive environment where one entity faces licensing and royalty expenses of less than 10% of revenues while another faces costs close to 50% for the same product.

Last year, Pandora paid about half its revenue to labels and performers. Sirius’s current rate is 8 percent. (Both kinds of services also pay separate royalties to songwriters and publishers.) 

• Total Revenue - 2011

• Sirius XM Radio (SIRI) Annual Revenues 2011: $3.01B

• Pandora Media Inc Annual Revenues 2011: $137.76M

• Percentages of Revenues Paid in Music Royalties: 

• Sirius XM Radio (SIRI): Approximately 8% (estimated $248m)

• Pandora Media Inc.: Approximately 49% ($69.5m)

• Productivity of Businesses:

• SiriusXM Net Profit/Loss: $426.9M

• Pandora Net Profit/Loss:  $(1.76M)

• Total Royalties Earned: $317.5M

(source: MarketWatch / published 2011 corporate financial statements)

Pandora is championing the Internet Radio Fairness Act (introduced in the House by Jason Chaffetz, Republican of Utah, and Jared Polis, Democrat of Colorado) which proposes to put online radio under the 801(b) standard of the Copyright Act, which is the same standard used by the Copyright Royalty Board when setting royalty rates for cable and satellite radio. Pandora argues that this would stop discrimination against Internet radio services.  Much to the dismay of my fellow musicians, I agree… sort of.

Let me explain:

The industry of music has moved from terrestrial radio to satellite radio and Internet streaming.  The majority of music is now published, promoted, sold and traded online and in space.  The organizations that compete in this field bring options to artists.  Business Management 101: the more entities competing in a free market to distribute goods and services, the better the environment for the producer of these goods and services.  Business can’t continue to compete in an environment that does not present a level playing field. 

As a former professional musician (ok… a drummer, but I used to hang out with musicians), I can look at this from the artist’s perspective and agree all artists should be paid their value for their creative work.  I will NEVER disagree with this position, and will fight to support royalty payments to artists across the board.  But as an executive in business, I also understand the perspective of Pandora and believe something has to be done to level the playing field as these markets (as well as future markets to arise through advances in technology) continue to converge.  In addition, a competitive landscape of promotional and publishing vehicles benefits the artists through more choices and resulting leverage throughout the negotiating and contracting process. 

So how do we ensure we manage a level playing field AND protect the artist’s pay for works created?  Put internet radio under the 801(b) standard of the Copyright Act so the playing field is fair, and ensure this standard is based upon a flat standard % of revenues (company makes more with your music, they pay more for your music) as well as the contribution this music has to the overall revenues generated.  This is, to the basic degree, what the IRFA is trying to do.  But I would go a step further.  RAISE THE OVERALL RATE established under the 801(b) standard! 

What is SiriusXM doing paying artists only 8% of revenues while making a profit of almost $427 Million dollars?  I would ensure the “fair rate” established is raised from the current status in addition to lowering the rates paid by companies such as Pandora.  Looking at the financials from both SirusXM and Pandora for 2011, look at the impact such a move would have on the industry overall: 

Total Revenue - 2011

Sirius XM Radio (SIRI) Annual Revenues 2011: $3.01B

Pandora Media Inc Annual Revenues 2011: $137.76M

Percentages of Revenues Paid in Music Royalties: 

Sirius XM Radio (SIRI): 25% = $775m (increase of 348.1M)

Pandora Media Inc.: 25% = $34.44m (decrease of 35.1m)

Productivity of Businesses ADJUSTED:

SiriusXM Net Profit/Loss: $78.8M

Pandora Net Profit/Loss:  $36.8M

Total Royalties Earned: $809.4M… increase of almost $492M in royalties to artists.

Do the math! 

Though passing IRFA could include lowering rates paid by Pandora and the internet community, it could raise the rates paid by Satellite and Cable companies.  By keeping the markets fair, they become more competitive.  It also potentially reduces financial hurdles to the development of new markets based on expanding technology (such as internet radio), reduces barriers to entry for new businesses, and allows expansion of the industry as a whole.

The IRFA legislation expands 801(b), and includes the creation of a panel of judges whose primary function is to consider evidence both on the value of the music and on the effect the royalty rate would have on the industry over all. To ensure the artists receive fair market value for their work, have artists represented on the panel of federal judges that will establish royalty rates so the artists have a voice.   

As a result, you have a fair and balanced competitive landscape fostering growth and expansion of the industry and an industry paying fair market value for products ensuring artists are justly compensated for their work.  In negotiating terms, this is a win-win. 

Now obviously the satellite and cable industry will argue their costs of infrastructure and operations are considerably higher than Pandora.  But the facts are SiriusXM made over $400M in profits in 2011.  They can afford an increase in royalties (and the artists deserve this).  They can’t pass this directly to the consumer because the consumer has options through companies like Pandora.  (Just yesterday, I streamed Pandora through my iPHone while in my truck, listening to Pandora on my truck radio in place of XM.  I can promise you if XM raised my rate, I would simply cancel and utilize services available to me such as Pandora over my phone!)

Actually, the profitability concerns of Sirius or Pandora is of no concern to me, other my desire to see a healthy, competitive environment so artists grow options and receive true value for goods and services produced.  My support of this bill is for the betterment of the artists in the long-run; not the corporate health of the individual players in the industry. 

Pandora did not make a profit because they are not effectively managing their business.   It is an issue with their business model… not the royalties.  If I were the CEO of Pandora, I would be working to push through the internet radio fairness act to level the playing field, but at the same time, would be reviewing my entire business model to ensure efficiency and productivity and possibly firing my VP of Sales and Marketing for a lack-luster performance in generating revenues needed to support the business in the field we compete in.

The Internet Radio Fairness Act will not bring Pandora a long-term, sustainable, competitive advantage in the market served.  A productive, efficient and effective business model, creative products, efficient operations, effective marketing, and high sales performance are the key to success in a free market.

But unfair business practices and an uneven playing field can ensure these keys are not achieved… not just for Pandora, but all other organizations striving to compete in this industry, which will hurt the artist and industry in the long-run.

IRFA can actually be a good piece of legislation… not just for Pandora, but for all artists, listeners, and the industry as a whole.  As long as it is fairly administered with the artist having a voice, it is a win-win.

Some of my friends sit around every evening

And they worry about the times ahead

But everybody else is overwhelmed by indifference

And the promise of an early bed

You either shut up or get cut up, they don't wanna hear about it

It's only inches on the reel-to-reel

And the radio is in the hands of such a lot of fools

Tryin' to anaesthetise the way that you feel 

Elvis Costello – Radio Radio

Sources:

New Your Times: http://www.nytimes.com/2012/09/24/business/media/proposed-bill-could-change-royalty-rates-for-internet-radio.html?_r=0

Wall Street Journal: http://online.wsj.com/article/PR-CO-20120921-906857.html?mod=crnews

MarketWatch: http://www.marketwatch.com/

The Hill: http://thehill.com/blogs/hillicon-valley/technology/258881-pandora-aims-for-sopa-repeat-in-battle-over-online-music-royalties 

LA Times: http://www.latimes.com/entertainment/music/posts/la-et-ms-house-bill-pandora-internet-radio-fees-20120921,0,3290862.story

Digital Trends: http://www.digitaltrends.com/music/is-internet-radio-about-to-get-rocked/

2011 Corporate Annual Report – SiriusXM: http://files.shareholder.com/downloads/SIRI/2102812002x0x559248/2AED8B19-6E00-43EA-B61E-A42B2C473CC2/Sirius_XM_AR.pdf

2011 Corporate Annual Report – Pandora Radio: http://investor.pandora.com/phoenix.zhtml?c=227956&p=proxy