Rhode Island can be fixed: It just takes commitment

PBN Staff

12/26/2009

Editor’s Note: This piece is adapted from the keynote speech that Mr. Verrecchia gave at the annual meeting of the Rhode Island Public Expenditure Council.

When Rhode Island Public Expenditure Council Executive Director John C. Simmons asked me to speak this evening I was very hesitant. I wasn’t sure what I could say that would be different. Then, I began to think about the transformation that’s taken place at Hasbro over the last eight years and the transformation that needs to take place in Rhode Island.
What were the lessons learned from our experience at Hasbro? And, what, if any, would be applicable to the transformation of Rhode Island?
I use the term “transformation” because that is what is needed. We in Rhode Island need to stop being hesitant. We need to stop being satisfied with incremental change. And we need to stop thinking that just being competitive with the neighboring states of Massachusetts and Connecticut is good enough. We’re competing in a global economy – and technology will only exacerbate the level of competition in the years ahead.
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First, let me take a moment to set the stage.
In August 2000, I became president of Hasbro. It would be a year in which net revenue would decline 11 percent and Hasbro would incur the largest loss in the company’s history – $145 million. Our stock price would decline to $8 per share, and in an effort to conserve cash, we would eliminate the dividend.
At the end of 2000, the company had $1.2 billion in debt, of which $550 million was due in early 2003. And the outlook for 2001 was bleak, as the company was facing an additional 25 percent decline in revenue. Needless to say, employee morale was low – and they were questioning whether or not senior management knew what they were doing.
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Today, Rhode Island has an unemployment rate of [12.7] percent, which translates into 70,000 people in Rhode Island who don’t have a job.
Our tax burden is among the highest in the country and has been for a number of years – especially the property tax burden. We’re viewed as having one of the poorest business climates in the nation – if not the poorest.
Our primary and secondary schools are underperforming. Our work force does not have the skills necessary to compete in the new economy. Our support for higher education continues to decline to the point that it’s getting harder and harder to justify the notion that Rhode Island College, the Community College of Rhode Island and the University of Rhode Island are state-supported institutions.
The regulatory and permitting process is burdensome, inefficient and in some cases obstructionist. We are spending far more than we can afford and most importantly, we have a negative attitude about our state. This circumstance is little different from what we faced at Hasbro.
And yet, since 2000, Hasbro has recorded eight consecutive years of earnings growth, achieving record earnings in each of the last several years. Our stock price hit $40-plus per share just before the collapse of the stock market. Today, we are trading at a little more than $28.50 per share. We generate significant cash flow; our balance sheet is among the strongest in our industry; and our dividend is now 80 cents per share, the highest in the company’s history.
How did we transform Hasbro, and how do we transform Rhode•Island?
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What we accomplished at Hasbro is not unique. It’s been done by a number of companies – including some of the companies represented in this room. Hasbro and other companies have an advantage in that they operate in a very competitive marketplace. It forces you to make decisions to stay competitive. If you don’t, you don’t stay around very long.
First and foremost, you have to be committed to the task – whether you’re transforming your company or your state. It takes leadership – collective leadership. Let me talk about collective leadership. This isn’t just about the governor, the legislature, organized labor or the business community.
Hasbro would not have been successful if Al Verrecchia had been the only one committed to fixing the company. The entire leadership team had to make the commitment, just as the entire leadership team in Rhode Island has to make the commitment.
There’s an old saying – everyone wants to go to heaven but no one wants to die.
As it turned out, there were some senior people at Hasbro who weren’t committed – and they had to move on.
In Rhode Island, I don’t believe everyone is committed to the task. I know if you speak with the governor you come away with the feeling he’s committed. I know if you speak to the members of legislature, they’re committed. If you speak with organized labor, they’re committed. But, I’m not convinced that the collective leadership of our state is willing to make the difficult decisions. They have not been willing to look to the greater good. Too often it’s all about me.
Several times during the transformation of Hasbro I had to remind people that the name on the check is Hasbro – not Hasbro UK or Hasbro Far East or Hasbro de Mexico, not marketing, not finance, not research & development – but Hasbro. If Hasbro doesn’t do well, you won’t do well.
Those same phenomena exist here in Rhod• Island.
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Next, you won’t win if you don’t believe you can win. When the Patriots take the field each week, they believe they are going to win the game. At Hasbro, we had to substantially improve the morale of our employees. We had to convince them that we were a great company with great brands and there was no reason we couldn’t be successful. We did that by communicating with them, by being brutally honest about what they had to do.
We had to fix the things we weren’t doing well and capitalize on the things we were doing well.
The same goes for Rhode Island, where there is too much negativity. It’s like we’re living under a black cloud unable to fix the things that need fixing.
We need to start to promote a positive attitude and start branding our state. When we look outside of Rhode Island we need to realize that Rhode Island is a brand, and if we continue to allow the negative aspects of our state to be talked about without responding with the positive aspects of our state, we are going to find it very difficult, if not impossible, to attract new business to Rhode Island or to keep existing business here.
Sometimes facts don’t matter – perception matters, and the perception of Rhode Island is not good. We need to fix that and starting fixing it now.
We have tremendous assets in this state. We have superb economic pillars across a broad spectrum of sectors – health care, higher education, medical research and defense, just to name a few. We have outstanding port and marine-related resources. We have a modern and competitive multimodal transportation system.
We have an exceptional quality of life with abundant community, recreational, arts and cultural amenities.
We’re home to a number of highly regarded institutions of higher learning – these institutions graduate thousands of well-educated, enthusiastic students, many of whom would stay in this state if they had job opportunities.
We have some of the finest hospitals in the country here in Rhode Island, including the Lifespan and Care New England systems. Because of the link between higher education and health care and the quality of those institutions, we have been able to attract significant research grants from the National Institutes of Health – well more than might be otherwise •xpected. n
One of the problems with economic development in Rhode Island is that we don’t have a plan. Rhode Island does not have a vision or a sense of what it wants to be when it grows up.
People need to come to work every day and know what’s expected of them and what role they play in the overall plan. Some of you have heard the term, “basket of frogs.” Well, that phrase actually came from Hasbro. We had an enormous amount of energy being expended but it wasn’t focused. The same can be said of our state; there’s a lack of focus. We need to focus our energy and leverage our scarce resources effectively.
In Rhode Island there is too much ad hoc/episodic economic-development activity. We get excited about specific projects and bring all the forces together to make that project happen – then we go away.
At Hasbro, our customers include some of the largest retailers in the world. They have one thing in common – providing a value proposition to their customer. If we as the supplier don’t provide them with products that allow them to provide that value proposition, they will not do business with us.
That’s exactly what happened at Hasbro. We were inefficient, had way too much overhead, our prices were too high and customers didn’t want to buy our products even though we had the best brands in the toy-and-game industry.
The same can be said for the state of Rhode Island. We have got to become more efficient and provide that value proposition for our customer.
Who are our customers? They are the citizens of Rhode Island; they are the students in our school system; they are our hospitals and universities and businesses.
If we don’t provide a value proposition, new business won’t relocate to Rhode Island, existing businesses will move out of Rhode Island (or at the very least expand elsewhere) and our work force won’t have the skills and education necessary to be com•etitive.
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I said earlier I didn’t think Rhode Island was committed to transforming itself. Why do I feel that way? Let’s start with the tax burden.
We all know that the tax burden in Rhode Island is among the highest in the country, driven in large part by the property tax. More importantly, we know business needs a stable tax environment.
We can’t begin to talk about reducing taxes and providing that stable tax environment unless we deal with the structural budget deficit and we significantly reduce the cost of government. And that won’t happen unless we consider consolidation.
We’re not going to reduce the property tax burden unless we improve the operating efficiency of our cities and towns. When I talk about improving the operating efficiency, I’m not talking about going into a department of 10 people and asking the manager to lay off three people and continue doing the same work. Unless we change the way we do work, we will not achieve long-term, sustainable cost reduction.
At Hasbro we had to reduce overhead by $200 million and it had to be done quickly. We looked at everything we were doing and decided which of those activities were no longer creating value for our customer. We have to do the same thing in Rhode Island.
We are a small state with 39 cities and towns. We cannot afford to have 39 fire, police and public works departments. We cannot afford to have 36 school districts. We need to consolidate the backroom activity of government at both the state and municipal level.
The collective leadership of Rhode Island needs to step up and not only support these efforts but lead them.
We need to address primary and secondary education in Rhode Island. Our school system is underperforming by almost any measure and has been for some time. We have a moral and legal obligation to provide the young people of Rhode Island with a quality education and that’s not negotiable. It’s so refreshing to be in the company of and listen to Deborah Gist, our new commissioner of elementary and secondary education talk about her vision. What’s frustrating is to hear the response when she talks about raising standards. We don’t hear cheers. We hear, “go slow, we can’t do that, not enough students will meet the new qualifications.”
Rhode Island has become accustomed to mediocrity, and if we don’t change and demand a better product – economic development will be a pipe dream and not a•reality.
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Often, I hear opponents of consolidation challenge the notion that it will reap significant cost savings.
My response: Hasbro and many other companies do just that.
A Hasbro example: Our data center is housed in Rhode Island and runs 24 hours a day, seven days a week, supporting our entire worldwide operation. Technology allows us to do that and we save millions and millions of dollars in operating expenses.
Please don’t tell me we can’t consolidate the business side of municipal government and our school system and save a lot of money. We are spending more than enough money to have a much better product than we’re getting. It’s all about performance.
The collective leadership in Rhode Island needs the will. Deborah Gist has the will, and we need to do everything we can to support her efforts.
With 70,000 people out of work and looking for jobs we should be doing everything we can to help existing business, encourage new business startups and recruit new business to come to our state.
Ninety-five percent of the businesses in our state are small businesses, which is both an advantage and a disadvantage. On the one hand, it demonstrates that entrepreneurial spirit is alive and well. On the other hand, it’s very vulnerable and needs a lot of support.
Instead, we oftentimes stifle small business with a permitting and regulatory process that is both burdensome and inefficient. I don’t reject government’s need to provide oversight – but it needs to do so in an efficient manner. Help people navigate the regulatory process – don’t let the regulatory process stifle economic •ctivity.
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Economic development is a process – it’s hard work. There are no quick fixes, but you will be surprised at what can be accomplished when people work for the greater good.
Remember a moment ago, I said Hasbro was facing a further 25 percent decline in revenue in 2001. Revenue did decline another 25 percent, but you know something? We made money in 2001 – not a lot, but we made money. And people began to realize just how great our company could be.
We can fix our school system, we can improve the efficiency of the permitting and regulatory process, we can deal with the tax burden if we are willing to make tough decisions about improving the operating efficiency of our state.
What’s been lacking is the collective will to do so.
It won’t be easy. In some instances, it will be painful. But, if we don’t, the market will force the changes and that will be far more painful, as we’re beginning to see with the 2009 and 2010 budget.
All it takes is the will and the commitment. There is no other state in the union where the collective leadership is as accessible as it is in Rhode Island.
Are you, as part of the collective leadership, willing to make the commitment? Are you willing to support those who are trying to bring about change so that we can transform Rhode Island and make it all that we know it can be? I certainly hope so. •