1. THE “TRUTH” ABOUT GROWTH NIRI Senior Roundtable December 10, 2010 Ed Hess Professor of Business Administration Batten Executive-in-Residence Hesse@darden.virginia.edu www.EDHLTD.com 1

2. THE DNA OF GROWTH 2

3. RESEARCH FINDINGS 5 research projects The Organic Growth Index ( “OGI”) The Characteristics of High Organic Growers (“HOGS”) The Challenges of Managing Private Company High Growth The Myths of Growth The Risks of Growth 3

4. WHAT DO WE KNOW ? Commonly held beliefs about growth are not supported by research and at best are half-truths There are many ways to create earnings and all earnings are not equal Short-termism dominates the capital markets Stock ownership has been replaced by the “renting” of stock for the short-term 4

5. WHAT DO WE KNOW? Consistent linear corporate growth is rare Short-termism drives bad behaviors Executive compensation generally is aligned with short-termism Earnings games are alive and well: GE and Dell settlements with the SEC “Spin” can become fraud: Dell and Citigroup SEC settlements 5

6. WHAT DO WE KNOW? Growth and Innovation are complex people dependent processes Growth and innovation are not linear mechanistic processes 6 different research reports conclude that above industry average or average GDP growth occurs in less than 10% of the samples studied 6

7. WHAT DO WE KNOW? Consistent above average growth for seven years or more occurs less than 3 % of samples Sustainable competitive advantage is a dying strategic theory Growth is much more than a strategy: it is a System Growth results from the right leadership, culture, and processes 7

8. WHAT DO WE KNOW? Growth results from experimental learning Good growth companies have high employee engagement and are customer centric Good growth companies create a 2 X 2 X 4 Growth Portfolio Growth can create material risks that if not properly managed can lead to value destruction: Toyota, Starbucks, BP 8

9. CAN THIS BE TRUE? Our Capital markets are controlled by short-term interests that do not care about the long-term health of your business; Executive compensation has been aligned with those interests; We have a large professional services industry ( lawyers, IBs, management consultants, accountants) whose income depends on volatility and transactions not stability and patient growth; and All of this is masked behind the theoretical concept that the sole purpose of a business is to create shareholder value now regardless of the long-term ramifications. 9

10. SAD BUT TRUE? Does Wall Street control the investment policy of U.S. business ? Has the fundamental principles of capitalism as espoused by Adam Smith been corrupted by short-termism and sole stakeholder theory? How are the assumptions underlying our capital markets reconciled with the realities of business growth and innovation? 10

11. THE ROLE OF INVESTOR RELATIONS Let’s explore this together taking into account the above and the SEC settlements with Dell and Citigroup? “Strategic management responsibility that integrates finance, communication, marketing and securities law compliance….that contributes to …fair valuation” 11

12. QUESTIONS Does the SEC view IR as a financial disclosure quality control function? Is there a conflict between what the SEC wants (“fair”) and what your “shareholders” want (‘high”)? Is there a conflict between what the SEC wants and what some executives want ? Dell case Does who you report to increase those conflicts? What are the implications of the Citigroup SEC case for you? 12

13. QUESTIONS Do these SEC settlements make knowledge a personal risk ? Does a company have a duty to disclose the character or quality of its earnings? Do you have an independent duty of due diligence to confirm ? Should IR report to the Board of Directors or the General Counsel ? How does the recent evolution in corporate governance interact with the notion of short-termism and growth? 13

14. IS YOUR PROFESSION UNDERGOING A SEA CHANGE? From communications and marketing To fiduciary to the public ? Or, fiduciary to whom? Where is your ethical compass? 14