CEO Business Climate Survey

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The 2012 Business Climate Survey is produced by the Silicon Valley Leadership Group.

Overview jobs, jobs.” Since 2008, that simple J obs, mantra has been expressed again and



again by economists, business leaders and labor spokespersons as the path out of the Great Recession. In 2012, the “jobs” chorus has been joined by countless candidates in this election year. And now the recovery has begun. Still, for most areas of the nation, including California, the road out of the recession has been halting, inconsistent and slow. Yet, in Silicon Valley, the economy is shifting into high gear, according to recent data. This information is hardly new to most members of the Silicon Valley Leadership Group. Last year, in the 2011 CEO Business Climate Survey, 55 percent of the respondents predicted improved conditions for their companies, compared to only 5 percent who forecasted otherwise. Other predictions in the 2011 CEO survey proved equally prescient, which is why the 2012 outlook is more important than ever. Simply put, the CEO Business Climate survey has a proven track record for foreshadowing the future. As the 2012 survey data shows, Valley CEOs remain bullish about the area economy for the coming year, although not quite to the extent of last year’s results. Good news notwithstanding, the times are challenging as other centers of innovation ratchet up the competition. Today’s companies in the Valley have to think harder, act faster and innovate more quickly to stay ahead of other economic sectors in the country and world. Leadership Group companies today have a physical presence in all 50 states and in more than 140 countries. Yet at the same time, foreign companies are setting up shop right here. All this points to an environment that will thrive only if businesses, employees and government leaders work hard toward pursuing a thriving economy. Today’s economic environment is far from perfect and there is much left to do, but the Valley is heading in the right direction. Prophetically, respondents to the 2011 survey predicted as much when asked about their anticipated hires for 2011. They remain optimistic in 2012, with responding Leadership Group companies anticipating more than 5,000 new hires in the Valley during the coming year—and that figure does not include employment numbers from companies that did not participate in the survey. No other region in the state has matched the recent economic successes of

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CEO BUSINESS CLIMATE SURVEY 2012

Silicon Valley, which clearly has once again emerged as the driving force for California’s economic well being. In addition, the gains in the Valley have greatly exceeded the recovery of the nation as a whole, especially with respect to high-tech employment. All this is to point out that nothing guarantees continued success in Silicon Valley without dutiful attention from all constituencies. Just as companies must continue to offer the best working conditions and salaries for their incredibly productive employees, governments at all levels need to do their part to allow companies to innovate on a level playing field and make available a supportive infrastructure. To that end, the CEO Business Climate survey identifies key areas where governments can help facilitate a better economic environment for their citizens and employers alike. The remaining sections of this document report and analyze the findings provided by 188 respondents, more than half the members of the Silicon Valley Leadership Group, and up from 175 in 2011. If the accuracy of past assessments is any guide to the future, public policy makers will be wise to consider its contents.

Analysis by: Larry N. Gerston, Ph.D., Professor of Political Science, San Jose State University

About the Survey December 15, 2011 and January 31, 2012, the Silicon Valley Leadership Group conducted its B etween ninth annual CEO survey of member companies. As in the past, the questions focused on the Silicon

Valley business climate, employee living and working environment, recent public policy decisions, and future expectations. The survey also asked respondents their opinions on current issues impacting the Leadership Group and the Valley. The respondents were organized into 10 sectors, from which their answers to various questions were compared and assessed.

Which of the following most closely describes your industry sector?

36

34

High-Tech Manufacturing

Utilities/Energy

16 14 Communications/ Internet

Other

12 Healthcare/ Bio-Tech

31 20 Financial/Professional Venture Capital

9

9

Education

Transportation

Software

7 Manufacturing/ Aerospace/ Defense

The combination of participating companies in 2012 is considerably more balanced than in recent years, a development that parallels the findings of other studies. The High-Tech Manufacturing sector has the highest representation with 19 percent (n=36), followed closely by Energy/Clean Tech/Utilities at 18 percent (n=34). The Financial/Professional/Venture Capital sector and Software sector round out the most participation with 16 percent (n=31) and 11 percent (n=20). The 2012 pattern differs a bit from 2011, when the Financial/Professional/Venture Capital sector enjoyed the greatest representation while High-Tech Manufacturing in 2011 had 14 percent of the respondents. But the “sleeping giant” change in 2012 comes with the Energy/Clean Tech/Utilities sector, which has doubled its share from 2011.

CEO BUSINESS CLIMATE SURVEY 2012

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Key Findings

Job Growth More than three out of five companies added jobs in Silicon Valley during 2011, nearly matching the growth rate of the previous year; only 7 percent reduced the size of their Silicon Valley workforce. More than half (55 percent) expect to see job growth in their sector in Silicon Valley during 2012, equaling the percentage gains for 2011; only 14 percent anticipate a decline.

Strengths of Silicon Valley (in rank order) Access to skilled labor Entrepreneurial mindset

Housing costs High taxes Health care Traffic congestion

Recommendations for local governments to strengthen Silicon Valley’s business climate (in rank order) Improve K-12 public education Reduce public pension costs

Proximity to customers and competitors

Approve more affordable home developments

Access to venture capital

Ease local street and road congestion

Merit-based work environment World class universities

Business challenges (in rank order) Employee recruitment/retention High housing costs for employees Business regulations Health care costs Business taxes

03

Cost of living challenges for employees and their families (in rank order)

CEO BUSINESS CLIMATE SURVEY 2012

Recommendations for the state government to strengthen Silicon Valley’s business climate (in order of prominence) Improve K-12 public education Reduce public pension costs Strengthen higher education funding Invest in traffic improvements

relief

/

transportation

Other Observations

Recommendations for the federal government to strengthen Silicon Valley’s business climate (in order of prominence) Comprehensive tax reform H1-B visa/green card reform STEM (science, technology, engineering and math) education to develop domestic work force talent Comprehensive energy policies

Complete questionaire and results begin on page 17

Other Observations Respondents are split on the merits of the Affordable Care Act (national health care reform), with the largest percentage responding that they have no opinion. The largest plurality of respondents believes that Governor Brown’s pension reform proposal does not go far enough. A significant percentage of respondents support more government investment in public education and housing. Only one out of every six companies moved jobs out of state this past year; nearly half of the respondents cited labor costs as the most important reason. Little support exists for increasing corporate taxes, personal income taxes, sales taxes and property taxes; strong support exists for higher motor vehicle fees and gasoline taxes. A majority of members are ambivalent on moving the single sales apportionment from voluntary to mandatory. Silicon Valley Leadership Group companies have a physical presence in all 50 states and in more than 140 countries.

CEO BUSINESS CLIMATE SURVEY 2012

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Quality of Life

Business Climate

Improving the Quality of Life in Silicon Valley

The Business Climate

cannot do without dedicated C ompanies employees, and employees are just as

the second straight year, Silicon Valley has F orenjoyed an improving economy. The depress-

dependent upon outstanding companies. Southwest Airlines CEO Herb Kelleher once said, “If the employees come first, then they're happy.... A motivated employee treats the customer well. The customer is happy so they keep coming back, which pleases the shareholders. It's not one of the enduring Green mysteries of all time, it is just the way it works.” And so it is in Silicon Valley, too. Bearing in mind this fundamental relationship, the survey asked respondents to identify the three top cost of living challenges for Silicon Valley employees and their families. The top challenges in order for the 2012 survey are housing costs (87 percent), high taxes (59 percent), and health care (37 percent). Traffic congestion was a close fourth with 33 percent.

Top 3 Cost of Living Challenges in Silicon Valley for workers and their families.

ing experiences of a few years ago are increasingly distant memories. As the headline to one recent newspaper account crowed, “Boom is back in Silicon Valley.” Nowhere is this more apparent than in Valley company hiring practices. Sixty-three percent of the CEO Business Climate survey respondents indicate that their companies added jobs in 2011, compared with only 7 percent that subtracted jobs. These data almost replicate the numbers from one year ago; at that time, 66 percent spoke of new hires over the previous year, compared with 11 percent that had fewer jobs at their companies.

Since January 1, 2011 have you added, stayed the same, or subtracted jobs in Silicon Valley? 7%

37%

59%

Housing Costs

87%

28%

High Taxes

Recognizing the difficulties of affordable housing, the Silicon Valley Leadership Group has worked extensively to solve this pressing problem through creation of the Housing Trust of Santa Clara County. Since 2001, the Housing Trust has contributed $40 million to public/private partnership which, in turn, has leveraged $1.8 billion in private investment. As a result, more than 9,000 families in the Valley have housing they otherwise could not afford. Meanwhile, more needs to be done.

Subtracted Jobs

Respondents remain bullish in 2012 with the survey forecasting a solid year, although not quite as rosy as the past two. Forty-six percent see job growth for their company during 2012, compared with 13 percent that predict fewer employees. Although the growth pace has abated a bit, growing companies enjoy nearly a 4-to-1 ratio over employers that expect fewer employees.

How do you see job growth in Silicon Valley for your company in 2012?

36% 13%

CEO BUSINESS CLIMATE SURVEY 2012

63%

Stayed the Same

Health Care

The data for this question parallels the data from recent years. In fact, the housing issue has come in first for each of the nine years of the CEO Business Climate Survey. Even with lower housing prices as a result of the Great Recession, home ownership is still out of reach for many working families and an impediment to recruiting and retaining talent.

05

Added Jobs

46%

Better Worse No Change

Business Climate Part of the success of Leadership Group companies has been and continues to be growth in the Valley. Few companies moved jobs out of the Valley, either to other states or countries, underscoring the many benefits of their expansions here. More employees mean more purchasing power, which translates into more tax revenues for state and local governments. Of the few companies that did move employees out of states, the most important reason for such decisions have revolved around reduced labor costs. Still, such decisions were the exception to the rule.

Did your company move jobs out of state since January 1, 2011?

What is the most important reason your company moved jobs out of state?

4%

16%

80%

No Answer No Yes

Did your company move jobs out of the US? 6%

15%

79%

More Available Workforce

10%

13% 13%

45%

Proximity to Customers Less Regulation Reduced Labor Costs

What is the most important reason your company moved jobs out of the U.S.? 7%

No Answer No Yes

10%

Less federal regulation

62%

Proximity to customers Reduced labor costs

CEO BUSINESS CLIMATE SURVEY 2012

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Challenges and Opportunities in Silicon Valley are no guarantees in today’s increasingly T here competitive international business environ-

ment. In fact, given some of the budget challenges in the local environment, it’s almost amazing that companies thrive in spite of them. Still, one wonders to what extent the economy would soar if conditions were better balanced. To that end, the CEO Business Climate Survey asked participants to identify the five most difficult challenges to doing business in Silicon Valley. For the first time, employee recruitment/retention costs emerge as the number one concern (69 percent), eclipsing high housing costs (54 percent). Business regulations draw the attention of 46 percent of the respondents, followed by health care costs (37 percent). Traffic comes in sixth, cited by 31 percent of the survey respondents. Why the shakeup in order? Probably because of the increased difficulty for local companies to find good talent. One recent study found that 77 percent of Silicon Valley companies “are having difficulty or some difficulty in hiring people.” Clearly, finding capable employees has become more burdensome for local companies. Among those respondents in 2012 who cite business regulations as an obstacle (compared with 41 percent in 2011), 42 percent mention wage and hour issues as their biggest concern (such as the 40 hour flexible work week). Two federal laws, Sarbanes-Oxley and Dodd-Frank, draw negative responses from 34 percent and 29 percent of these respondents, respectively. On the other hand, California’s AB32 requirements to reduce green house gases are worrisome to only 13 percent of the respondents concerned with business regulations, down from 23 percent in 2011.

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CEO BUSINESS CLIMATE SURVEY 2012

What are the top 5 business challenges in Silicon Valley?

37% 37%

Employee recruitment/retension

69%

46% 63%

High housing costs for employees Business regulations Health care costs Traffic congestion

What are the top 5 business regulation challenges in Silicon Valley? Wage and hour issues

16%

Sarbanes-Oxley Act

17%

42%

29%

34%

Dodd-Frank Act (a.k.a. financial service reform), including the Volker Rule Other, please specify Import-export controls

Despite what some would consider formidable challenges, most businesses have managed to survive the recession in Silicon Valley, and grow. Why? The answer lies in a series of local characteristics that go a considerable distance toward neutralizing otherwise harsh elements. In fact some of the negatives also turn up as positives when considering the region’s complex setting. For example, when asked to delineate the most important benefits of doing business in Silicon Valley, the largest number of respondents (69 percent) mention access to skilled labor as the No. 1 strength. In other words, skilled employees are hard to find and keep (see opposite page), but there are few better places to find them than right here. That’s the conundrum so many companies face today. Close behind the skilled labor pool category, respondents point to the Valley’s entrepreneurial mindset (67 percent), followed by proximity to customers and competitors (42 percent). These data are the same mentioned in the 2011 survey and are represented in virtually identical percentages. Whatever the difficulty of doing business in the Valley, respondents appreciate the benefits.

What are the top benefits/strengths of doing business in Silicon Valley? Access to skilled labor

20%

26%

42%

69%

67%

Entrepreneurial mindset Proximity to customers and competitors Access to venture capital World class universities

CEO BUSINESS CLIMATE SURVEY 2012

08

Elected Officials Performance of Elected State Officials Silicon Valley Leadership Group interacts with local, state and federal officials regularly on all of their policy T he issues. The survey directed a series of questions to respondents on the performance of the state legislature,

governor, and regulatory sector. Participants were asked to respond on a 1-to-5 scale, with 1 being the best and 5 being the worst.

In general, Leadership Group participants are concerned about state leadership on key issues and policies. Regarding whether the state legislature is on the “right track” or “wrong track” with its policies, 61 percent believe that it is on the wrong track (responses 4 and 5 combined). The outlook is slightly less negative than 2010 and 2011. Meanwhile, 9 percent answer that statewide legislation is on the “right track” (responses 1 and 2 combined). While the “right track” replies are frightfully low, they represent the highest percentage of positive responses since 2008. Without a doubt, state policy makers have a long way to go.

6WDWHZLGHOHJLVODWLRQLVRQWKHULJKWWUDFN  ¬RUWKH ZURQJWUDFN  ¬LQFUHDWLQJDKHDOWK\EXVLQHVVFOLPDWH" 2009

2010

2011

2012

80 60 40 20 0

5 - Wrong

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CEO BUSINESS CLIMATE SURVEY 2012

4

3

2

1 - Right

It’s a very similar story with statewide regulations, where 67 percent feel they are on the “wrong track,” compared with only 9 percent who approve of the regulatory environment. Of interest here is that disappointment with statewide regulatory activity is not quite as high as 2011. Nevertheless, over the past five years, disapproval has never been lower than 64 percent. Clearly, there is a disconnect between the values of Leadership Group members and state regulators.

2009

2010

2011

2012

80 60 40 20 0

5 - Wrong

4

2

3

1 - Right

Lastly, there’s the issue of Leadership Group evaluation of the Governor’s performance. Survey participants now have had one full year to assess the work of Governor Brown. With respect to the most recent data, 30 percent of the participants see Brown as being on the “right track,” compared with 27 percent who view Brown on the “wrong track;” another 27 percent are neutral, with 14 percent maintaining no opinion. The support for Brown is only down slightly from the Leadership Group support for Governor Schwarzenegger. Nevertheless, respondents clearly view Governor Brown as the most sensible of the various state public policymakers whose activities impact the organization.

Governor Brown is on the right track (1) or the wrong track (5) in creating a healthy business climate? 60

2009

2010

2011

2012

50 40 30 20 10 0

5 - Wrong

4

3

2

1 - Right

CEO BUSINESS CLIMATE SURVEY 2012

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Improving Government Group members appreciate the L eadership importance of a strong, positive relationship

with leaders of government at all levels. That’s why the organization goes to great lengths to communicate with public policymakers on an ongoing basis, both at Leadership Group events and at the offices of policy makers. To help leaders understand the basis of a healthy business climate, the CEO Business Climate survey asked participants to articulate the changes by governments that would be most helpful to improve the Silicon Valley business environment. At the Local Level With respect to the local level, a strong plea went for the improvement of K-12 public education. Not only does an educated society make for a vibrant society, it also provides the basis of a strong workforce. In the 2012 survey, 66 percent of the respondents cited K-12 public education as an important area for local government improvement. Reduced public pension costs came in second with 52 percent, followed by more affordable housing, which was mentioned by 46 percent of the participants. Improving local street and road congestion and streamlining permit approval processes were mentioned by 41 percent and 37 percent, respectively. The exact same improvements in the exact same order were cited in the 2011 survey.

What changes could local government undertake to improve the business climate for your company? Improve K-12 public education

37%

41%

66%

46% 52%

Reduce public pension costs Approve more affordable home developments Ease local street and road congestion Streamline permit approval process

At the State Level Respondents also were asked what state officials should do to improve the business climate. Again, the No. 1 answer came with the plea to improve K-12 public education, which was given by 56 percent of the survey participants. The second most popular answer, reducing public pension costs, drew agreement from 44 percent of the participants. These replies also were first and

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CEO BUSINESS CLIMATE SURVEY 2012

second in 2011. Investing in traffic relief/ transportation improvements came in third with 39 percent, followed by strengthening higher education (39 percent), and making permanent the research and development tax credit (36 percent). Clearly, public education remains a critical concern for Leadership Group members given its presence as the number one concern for state and local government actions.

What changes could state government undertake to improve the business climate for your company? Improve K-12 public education

35%

39%

56%

39%

44%

Reduce public pension costs Invest in traffic relief/ transportation improvements Strengthen higher education funding Enhance and make permanent the research and development tax credit

At the Federal Level Finally, the same question about government action to secure a better business climate was asked about political leaders at the federal level. Here the responses of Leadership Group survey participants echoed the national debate that has roared on for the past few years. More than half, 53 percent, listed comprehensive tax reform as an issue in need of attention. H-1B Visa and Green Card reform, an issue that complements the employee recruitment concern, came in second with 31 percent. STEM (science, technology, engineering and math) education received mention from 29 percent of the survey participants, followed by comprehensive energy policies (29 percent) and making permanent R&D tax credits (22 percent).

Which of the following issue areas deserve the most attention from the federal government for Silicon Valley? Comprehensive tax reform

22%

28%

H1-B visa/green card reform

53%

29% 31%

STEM (science, technology, engineering and math) education to develop domestic talent Comprehensive energy policies R&D Tax Credit: Expand and make permanent

Improving Government

State Budget Deficit

The Benefits from Government Collaboration

Revenues

When considering the requests of Silicon Valley CEOs from government, it’s important to note the overall area of concern: an educated, well-trained 21st century workforce. Whether it’s improving K-12 public education, strengthening higher education, focusing on the R&D tax credit or reforming the H1-B Visa program, survey participants underscore the necessity of developing a world class workforce as a vital element of industry competitiveness. As a recent article in the Wall Street Journal concludes, a trained workforce is “an important instance where company self-interest and societal interest just happen to coincide.” CEO participants clearly identify with this theme.

2012 CEO Business Climate survey quesT he tioned respondents about the state of

California’s budget. The nonpartisan legislative analyst estimates a $13 billion budget gap at the end of the current fiscal year; furthermore, the state controller has found a current fiscal year revenue shortfall of $3.7 billion through January 2012. Bearing in mind this news, respondents were asked about how new revenue should be raised. Strong support exists for increasing the Vehicle License Fee (56 percent) and the gas tax (56 percent). In addition, a solid plurality (40 percent versus 26 percent opposed) supports an oil severance tax. California is the only oil-producing state without an oil severance tax. With respect to other tax proposals, strong majorities rejected increases in the personal income tax (71 percent), corporate taxes (68 percent), property taxes (67 percent) and increases in the sales tax rate (57 percent). A narrow plurality rejected broadening the sales tax base to include services (45 percent to 43 percent). In addition a plurality rejected moving the single sales apportionment factor from voluntary to mandatory (36 percent to 13 percent), although 51 percent of the respondents had no opinion.

The nonpartisan state legislative analyst projects a $13 billion deficit through June 30, 2013. Do you support revenue increases in the following categories? YES

NO

NO OPINION

Corporate Tax

22%

68%

10%

Sales Tax: Broaden the base to include services

43%

45%

12%

Personal Income Tax

19%

71%

9%

Property Tax

26%

67%

8%

Vehicle License Fee or Car Related Tax

56%

35%

9%

Gas Tax

56%

34%

10%

Sales Tax: Increase the rate

31%

57%

12%

Single Sales Apportionment Factor: Move from voluntary to mandatory

13%

36%

51%

Oil Severance Tax

40%

26%

34%

CEO BUSINESS CLIMATE SURVEY 2012

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State Budget Deficit

Health Care Reform

Program Cuts and Increases What about existing major state commitments? Respondents were asked about 5 major program areas which, collectively, account for about 90 percent of the state budget. Some areas attracted calls for increased commitments, while others drew calls for decreases. Lopsided majorities supported additional budget allocations in three areas. K-12 public education consumes about 40 percent of the annual state outlay; on this issue, survey participants agreed by a margin of 63 percent to 11 percent that expenditures should increase. Higher education, a major source for advanced training, accounts for about 10 percent of the state budget. Here, too, survey participants called for more money by a strong margin of 60 percent to 14 percent. Finally, survey participants addressed the issue of transportation and infrastructure, which accounts for only 1 percent of the overall general fund. On this issue, 63 percent support more spending, compared with 9 percent who call for less. Respondents were equally adamant in their support for less spending in two major policy areas. Health and human services currently take about 29 percent of the state budget. Although health and human services has had the deepest cuts in recent years, respondents believe that more cuts should be made by a margin of 49 percent to 15 percent. Regarding corrections, an area that consumes 10 percent of the state budget, respondents called for less spending by an overwhelming margin of 67 percent to 3 percent—the widest response to all of the survey questions. Lastly, on the issue of state employee salaries and benefits, respondents favor reductions by nearly a 2-to-1 margin, 48 percent to 26 percent.

In which of the following areas would you support changes in state expenditures? INCREASE

13

NO DECREASE CHANGE

K-12 education (40% of budget)

63%

11%

26%

Higher education (10% of budget)

60%

14%

26%

Health & human services (29% of budget)

15%

49%

35%

Corrections & rehabilitation (10% of budget)

3%

67%

30%

Transportation & infrastructure (1% of budget)

63%

9%

29%

State government employees: reduction in salaries and benefits or layoffs and furloughs

26%

48%

25%

CEO BUSINESS CLIMATE SURVEY 2012

issues have attracted as much attention as F ew the Affordable Care Act (national health care

reform). Enacted by Congress in 2010, this legislation will impact businesses and society. Much of the legislation has not yet been put into place. In addition, the constitutionality of the law is before the U.S. Supreme Court, which is expected to render a decision by June 2012. It is in this fluid environment that the 2012 CEO Business Climate survey waded into the health care quagmire. For the moment, more respondents support the legislation than not. Slightly more than one-third (34 percent) favor keeping the new law, whereas 26 percent believe the law should be repealed. Thirty-nine percent offer no opinion. The opinions of this year’s participants vary slightly from the data generated in 2011, when 38 percent favored the new law and 26 percent called for its repeal. One year ago, 36 percent expressed no opinion on the healthcare act.

31. Which of these statements is closest to your feelings about the national comprehensive health care reform law of 2010 (Patient Protection and Affordable Care Act)?

39%

34%

26%

Keep it Repeal it No opinion/no answer

With respect to health care as a cost of doing business, respondents to the 2012 CEO Business Climate Survey provide answers consistent with the past few years. Fifty-four percent say that employee health care costs between 1 and 10 percent, virtually identical to 53 percent cited by respondents in 2011 and 54 percent in 2010. Whatever the issues elsewhere, Leadership Group members have kept health care costs at consistent levels. Still, 37 percent of survey respondents mention health care costs as a major business challenge, tied with business taxes as the fourth most mentioned response.

Pension Reform

Conclusion

the past several years, CEO Business Climate F orsurvey respondents have indicated displeasure

a doubt, the 2012 CEO Business W ithout Climate survey has generated positive replies

with government pension programs. In 2011, when asked about the kind of plans governments should use, 71 percent preferred undefined plans similar to 401(k) programs, compared with 7 percent who countered that the defined plans should remain in place. Also in 2011, one-third of the respondents with an opinion called for pension eligibility to begin after 25 years of service, with another quarter specifying a minimum of 20 years. These numbers are considerably different from most current public plans, many of which allow employees to begin collection of modest amounts once they have reached the age of 50 and worked a minimum of 5 years. In the 2012 survey, respondents were told the major points of a pension reform plan advocated by Governor Brown and asked their thoughts about the proposal. Forty-one percent state that the Brown’s proposal does not go far enough, compared with 4 percent who said the plan goes too far. Another 27 percent believed the plan is “just right” while nearly 30 percent answered “don’t know/no opinion”

with respect to Silicon Valley business activity. Companies are growing, hiring, and in many sectors, thriving. The Valley’s successes have spilled over to other parts of the state. There are important outcomes beyond corporate profits and growing employment. Improving bottom lines mean more revenues for state and local governments to provide programs and services for the public good. But economies are fickle under the best of conditions. More than ever, challenges to the Valley’s resurgent prowess persist from other regions in the nation and from countless sources abroad. Accordingly, this is no time for anyone to rest on his or her laurels; rather, it is a time to push ahead with more determination, innovation and productivity attributes which have been long-standing characteristics of a region that has one of the richest talent pools in the world. Clearly, resources must be leveraged in new dynamic, creative ways, including partnerships between the private and public sectors. Recalling the famous observation that “a rising tide lifts all boats,” companies and state and local governments must pursue common interests that will help all parties succeed in the end. Greater government commitments to public education, carefully tailored pension programs, and balanced taxation methods are among the many policy areas that will benefit businesses and society alike. When these efforts have moved forward in the past, society has prospered. The findings in the Silicon Valley CEO Business Climate survey show that there are many opportunities for the Valley to sustain its success in the coming years. As Leadership Group founder David Packard once said, “to remain static is to lose ground.” For the sake of our economic future the Valley must continue to take bold steps.

CEO BUSINESS CLIMATE SURVEY 2012

14

Participants

15

NCAETC

Egon Zehnder International

Adobe Systems, Inc.

eHealth, Inc.

AECOM

El Camino Hospital

Affymetrix, Inc.

eLynx

AKRAYA, Inc.

EMC Corporation

Alom

Empire Broadcasting

Altera

Energyconnect

American Airlines

Enscient

Andreessen Horowitz

Enterprise Fleet Management

Applied Materials

EPRI

ArrayPower

Equilar

AT&T

ETM Electronics

Atmel Corporation

Exponent, Inc.

Audience, Inc.

Extron

Aviat Networks

Finelite, Inc.

Bank of America

Foothill-De Anza Community College District

Barclays Capital

Fujifilm Dimatix

Bay Area News Group

Full Throttle Ventures

BD Biosciences

Gavilan College

Bentek, Inc.

Golden Gate University

Better Place

Goodwill of Silicon Valley

Bloom Energy

Gordon Biersch Brewing

BMC Software

Green Machine Light Engine

Bridgelux

Greenlight Apparel

Brocade

Gridiron Systems

Burnham Energy

Heritage Bank of Commerce

Cadence

Hewlett-Packard

California Water Service Group

Hitachi Data Systems

Cargill Salt

Huawei Technologies

Casto Travel

IBM Corporation

CBIZ

Integrated Device Technology, Inc.

Centrify Corporation

Integrated Science Solutions, Inc.

Centrosolar America, Inc.

Intematix

Citibank

Intersil

City National Bank

Intel

Clear Street, Inc.

Jan Medical

Climate Strategy Advisors, LLC

Kaiser Permanente Santa Clara

Comcast

KeenHire

Coulomb Technologies

KLA-Tencor

Cypress Envirosystems

Kovio

Daintree Networks

KQED

deCarta

Landec Corporation

Declaration Service, Inc.

Lawrence Berkeley National Labs

eBay

Lehigh Cement Company

Echelon

LibraryWorld, Inc.

ECOtality

Lockheed Martin Space Systems Company

EFI

Lucile Packard Children's Hospital

CEO BUSINESS CLIMATE SURVEY 2012

M Squared Consulting

Suntech

Manpower

SuVolta

MetricStream

Symantec Corporation

MoSys

Symmetricom

Nanostellar, Inc.

Synaptics

NetApp

SYNNEX Corporation

NETGEAR

Synopsys, Inc.

NetLogic Microsystems, Inc.

Tecan Systems

New Resource Bank

Technology Credit Union

Numenta

Ternion Bio Industries, Inc.

NXP Semiconductors

Tessera, Inc.

oDesk

The Health Trust

OUTREACH

Tioga Energy

Pacific Gas & Electric

Transpak

Palo Alto Medical Foundation

Trilliant

Pinger

Trimble Navigation

Plantronics, Inc.

Tropos Networks

PLX Technology

TSMC North America

Power Freight Systems, Inc.

U.S. Bank

Power Integrations, Inc.

Union Bank

Presencia, LLC

United American Bank

Procter & Gamble

United Health Care

Progreso Financiero

University of California, Merced

Proofpoint Systems

University of California, Santa Cruz

Q-Cells North America

VantagePoint Capital Partners

Quantum Energy Services and Technologies, Inc.

Varian Medical Systems

Recurrent Energy

Virgin America

Robert Half International

Visa

San Jose Earthquakes

Wave2Wave Solution Corporation

San Jose Giants

Webcor

Santa Clara Family Health Plan

Wells Fargo

Santa Clara University

West Valley/Mission Community Colleges

SAP Labs

Wyse Technology

SC Studios Standard Chartered Bank

Xstrata Recycling, Inc.

Silicon Valley Bank

YouSendIt

Silicon Valley Leadership Group

Zanker Road Resource Management

Solar Junction SolarCity

11 companies asked to remain anonymous

SOLFOCUS Specialized Bicycles Splunk SPMB SRI International Stanford University Streetline, Inc. Stryker Endoscopy SunPower Corporation

CEO BUSINESS CLIMATE SURVEY 2012

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Survey Results 1. Which of the following most closely describes your industry sector: High-Tech Manufacturing Utilities/Energy Financial/Professional/Venture Capital Software Internet/Communications Other: please specify Health Care/Bio-Tech Education Transportation Gen. Manufacturing/Aerospace/Defense Don’t know/no answer

36 34 31 20 16 14 12 9 9 7 0

19% 18% 16% 11% 9% 7% 6% 5% 5% 4% 0%

8. What was the MOST important reason your company moved jobs out of state since January 1, 2011? Reduced labor costs Less regulation Proximity to customers More available workforce Lower land/lower infrastructure costs Other, please specify Government incentives in new location Don't know/no answer Lack of tax policy incentives in California State corporate taxes too high More convenient supply chain

14 4 4 3 2 2 1 1 0 0 0

45% 13% 13% 10% 6% 6% 3% 3% 0% 0% 0%

2. Number of employees in Silicon Valley: 1-20 21-100 101-500 501-1,000 1,001-5,000 5,001-10,000 10,001 or higher Don’t know/no answer

30 47 60 17 25 6 2 0

16% 25% 32% 9% 13% 3% 1% 0%

3. Since January 1, 2011, have you added, stayed the same or subtracted jobs in Silicon Valley? Added jobs 118 63% Stayed the same 53 28% Subtracted jobs 13 7% Don’t know/no answer 4 2%

9. Did your company move jobs out of the U.S. since January 1, 2011? Yes 29 15% No 148 79% Don't know/no answer 11 6%

10. What was the MOST important reason your company moved jobs out of the U.S. since January 1, 2011? Reduced labor costs 18 Proximity to customers 3 Less federal regulation 2 Other, please specify 2 Government incentives in new location 1 Lower land/lower infrastructure costs 1 More available workforce 1 U.S. corporate tax rates 1 More convenient supply chain 0 Don't know/no answer 0

62% 10% 7% 7% 3% 3% 3% 3% 0% 0%

4. If added, how many? One-20 21-100 101-250 251-500 501-1,000 More than 1,000 Don’t know/no answer

64 54% 33 28% 7 6% 6 5% 3 3% 0 0% 5 4%

5. If subtracted, how many? 1-20 21-100 101-250 251-500 501-1,000 More than 1,000 Don’t know/no answer

8 3 1 0 1 0 0

62% 23% 8% 0% 8% 0% 0%

6. Were most of the jobs subtracted: Permanently eliminated Temporarily eliminated Don’t know/no answer

9 2 2

69% 15% 15%

7. Did your company move jobs out of state since January 1, 2011? Yes 31 16% No 150 80% Don't know/no answer 7 4%

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CEO BUSINESS CLIMATE SURVEY 2012

11. How do you see job growth in Silicon Valley in your industry sector in 2012? Better 104 55% Worse 26 14% No change 50 27% Don't know/no answer 8 4%

12. How do you see job growth in Silicon valley for your company in 2012? Better Worse No change Don’t know/no answer

87 46% 24 13% 67 36% 10 5%

13. What are the top three benefits/strengths of doing business in Silicon Valley? Access to skilled labor Entrepreneurial mindset Proximity to customers and competitors Access to venture capital World class universities Merit-based work environment Climate/weather Ethnic diversity Access to airports/seaports Pacific Rim locations Other, please specify Arts and culture Don’t know/no answer

129 124 79 48 38 37 33 24 16 10 10 6 4

69% 67% 42% 26% 20% 20% 18% 13% 9% 5% 5% 3% 2%

14. What are the top five business challenges in Siliconv Valley? Employee recruitment/retention costs High housing costs for employees Business regulations Health care costs Business taxes Traffic congestion State budget structure Immigration: H1-B visas and/or green cards Frivolous lawsuits Workers' compensation costs Energy costs Access to capital Overtime/8-hour work day requirement Intellectual property protection costs Other, please specify Don't know/no answer Unemployment insurance costs Paid family leave Air transportation/cargo Water

130 118 86 70 69 59 57 46 36 21 20 19 18 15 9 7 6 5 4 4

69% 63% 46% 37% 37% 31% 30% 24% 19% 11% 11% 10% 10% 8% 5% 4% 3% 3% 2% 2%

15. Because you answered "Business Regulations" for business challenges, which of the following challenges applied: Wage and hour issues Sarbanes-Oxley Act Dodd-Frank Act (a.k.a. financial services reform), LQFOXGLQJWKH¬9RONHU5XOH Other, please specify Import-export controls AB 32 requirements Green chemistry regulations Don't know/no answer

36 29 25

42% 34% 29%

15 14 11 11 8

17% 16% 13% 13% 9%

16. What are the top three Cost of Living challenges in Silicon Valley for workers and their families? Housing costs 162 87% High taxes 109 59% Health care 68 37% Traffic congestion 62 33% K-12 education 48 26% Child care 36 19% Higher education 26 14% Energy costs 22 12% Don't know/no answer 6 3% Other, please specify 1 1%

17. What top three changes could local government undertake to improve the business climate for your company? Improve K-12 public education Reduce public pension costs Approve more affordable home developments Ease local street and road congestion Streamline permit approval process Fund more street maintenance/pothole repairs Other, please specify Support development of professional sports facilities (e.g. 49ers in Santa Clara and A's in San Jose) Improve public safety Provide more parks and open space Enhance arts and culture

123 96 86 75 69 25 17

66% 52% 46% 41% 37% 14% 9%

13 11 8 5

7% 6% 4% 3%

18. What top five actions could the state government take to improve the business climate for your company? Improve K-12 education Reduce public pension costs Invest in traffic relief/transportation improvements Strengthen higher education funding Enhance and make permanent the research and development tax credit Adopt performance-based budgeting Streamline regulatory and permit approvals Help create more affordable housing Limit frivolous lawsuits Reinstate overtime after a 40-hour work week UDWKHUWKDQDQKRXU¬ZRUNGD\ Offer full sales tax exemption for purchases RIPDQXIDFWXULQJ¬HTXLSPHQW Lower energy costs Reduce unemployment insurance costs Reduce workers compensation rates Invest in broadband deployment Other, please specify Avoid split roll tax Help advance a financing mechanism(s) to support needed water infrastructure improvements and promote water supply reliability Lower California’s minimum wage to the national minimum wage Don’t know/no answer Repeal paid family leave benefits

103 82 73 72 64

56% 44% 39% 39% 35%

60 58 51 49 32

32% 31% 28% 26% 17%

26 14% 23 23 22 21 17 11

12% 12% 12% 11% 9% 6%

8

4%

7

4%

6 5

3% 3%

19. Which three of the following issue areas deserve the most attention from the federal government for Silicon Valley: Comprehensive tax reform H1-B visa/green card reform STEM (science, technology, engineering and math) education to develop domestic talent Comprehensive energy policies R&D Tax Credit: Expand and make permanent Repatriation of foreign earnings Federal deficit Climate change legislation to reduce greenhouse gases and increase energy security Dodd-Frank reform, a.k.a. financial services reforms Sarbanes-Oxley reform Intellectual property protection 5HJLRQDOSDWHQWRIILFHLQ6LOLFRQ9DOOH\¬ Implementation of the Patient Protection and Affordable Care Act of 2010, DNDQDWLRQDOFRPSUHKHQVLYHKHDOWKFDUHUHIRUP¬ More free trade Rejection of the “Employee Free Choice” Act, a.k.a. card check bill Other, please specify Cybersecurity including internet privacy Broadband deployment Corporate governance (Shareholder Empowerment Act, derivatives, proxy, etc.)

98 53% 58 31% 54 29% 51 41 37 36 30

28% 22% 20% 19% 16%

22 22 18 18 16

12% 12% 10% 10% 9%

13 13

7% 7%

13 12 9 7

7% 6% 5% 4%

20. Are you a member of other regional business associations  LQWKH86WKDWDUH¬VLPLODUWRWKH/HDGHUVKLS*URXS" Yes 66 35% No 122 65%

CEO BUSINESS CLIMATE SURVEY 2012

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Survey Results 21. Does your company have a physical presence in states other than California? Yes 120 64% No 68 36%

22. Please select the states in which you have a physical presence: California Texas Massachusetts New York Georgia Illinois Arizona Colorado Florida New Jersey Oregon Pennsylvania Washington District of Columbia North Carolina Maryland Ohio Utah Virginia Minnesota Michigan Tennessee Nevada Wisconsin Alabama Connecticut Hawaii Indiana New Mexico Kansas South Carolina Missouri Idaho Louisiana Delaware Iowa Rhode Island Arkansas Kentucky Montana Nebraska New Hampshire Oklahoma Wyoming Maine Mississippi West Virginia South Dakota Alaska Vermont North Dakota

64 62 56 50 46 47 44 43 43 43 38 38 36 34 35 32 31 31 30 28 27 27 25 23 21 21 22 22 21 20 20 19 18 18 17 17 17 16 16 15 16 16 16 15 14 14 13 12 11 11 10

54% 52% 47% 42% 39% 39% 37% 36% 36% 36% 32% 32% 30% 29% 29% 27% 26% 26% 25% 24% 23% 23% 21% 19% 18% 18% 18% 18% 18% 17% 17% 16% 15% 15% 14% 14% 14% 13% 13% 13% 13% 13% 13% 13% 12% 12% 11% 10% 9% 9% 8%

23. Please select the cities in which you have a physical presence: San Jose, California San Francisco, California Boston, Massachusetts San Diego, California Los Angeles, California Atlanta, Georgia Austin, Texas Chicago, Illinois Dallas, Texas New York, New York Washington, District of Columbia Phoenix, Arizona Denver, Colorado Other, please specify Seattle, Washington Portland, Oregon Houston, Texas Philadelphia, Pennsylvania Sacramento, California Baltimore, Maryland Minneapolis, Minnesota Oakland, California Raleigh, North Carolina Miami, Florida Cleveland, Ohio Fresno, California Las Vegas, Nevada Detroit, Michigan Charlotte, North Carolina Indianapolis, Indiana San Antonio, Texas Tucson, Arizona Colorado Springs, Colorado Jacksonville, Florida Kansas City, Missouri Long Beach, California Nashville, Tennessee Columbus, Ohio El Paso, Texas Milwaukee, Wisconsin Memphis, Tennessee Albuquerque, New Mexico Fort Worth, Texas Oklahoma City, Oklahoma Omaha, Nebraska Tulsa, Oklahoma Arlington, Texas Virginia Beach, Virginia Louisville, Kentucky Wichita, Kansas Mesa, Arizona

56 44 41 40 39 37 37 36 36 35 34 33 30 30 29 28 26 24 24 23 23 23 23 22 20 19 19 18 17 17 17 17 16 16 16 16 16 14 14 14 13 12 12 12 12 11 10 10 9 9 7

51% 40% 38% 37% 36% 34% 34% 33% 33% 32% 31% 30% 28% 28% 27% 26% 24% 22% 22% 21% 21% 21% 21% 20% 18% 17% 17% 17% 16% 16% 16% 16% 15% 15% 15% 15% 15% 13% 13% 13% 12% 11% 11% 11% 11% 10% 9% 9% 8% 8% 6%

24. Are you a multinational corporation? Yes 100 53% No 88 47%

25. What are your top three reasons for having a physical presence outside of the U.S.? Closer to Customers Talent/Workforce Lower Cost of Doing Business Closer to Supply Chain Lower Corporate Tax Rate More Competitive Incentives than U.S. Other, please specify U.S. Regulations

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CEO BUSINESS CLIMATE SURVEY 2012

74 41 38 36 19 16 8 2

78% 43% 40% 38% 20% 17% 8% 2%

31. In which of the following areas would you support changes in state expenditures:

26. What percentage of your 2011 revenue is from sales outside of the U.S.? 18% 11% 6% 8% 14% 15% 11% 11% 5% 6%

K-12 education (40% of budget) 105 - 63%

18 - 11%

Stay the same 43 - 26%

Higher education (10% of budget) 96 - 60%

23 - 14%

42 - 26%

Health and human services 25 - 15% (29% of budget)

80 - 49%

57 - 35%

107 - 67%

48 - 30%

27. What percent of your total business costs are attributable to healthcare?

Transportation and infrastructure 102 - 63% (1% of budget)

14 - 9%

47 - 29%

26% 28% 11% 3% 2% 30%

State government employees: 43 - 26% reduction in salaries and benefits or layoffs and furloughs

79 - 48%

41 - 25%

0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 71-80% 81-90% 91-100%

15 9 5 7 12 13 9 9 4 5

1-5% 6-10% 11-15% 16-20% Over 20% Don’t know/no answer

47 51 21 6 3 55

28. Which of these statements is closest to your feelings about the Patient Protection and Affordable Care Act of 2010, a.k.a. national comprehensive health care reform law? Keep it Repeal it No opinion/no answer

63 34% 49 26% 73 39%

29. Do you think Governor Brown's plan goes: Too Far Just Right Not enough Don't know/no answer Other, please specify

7 4% 50 27% 74 41% 50 27% 2 1%

30. The nonpartisan state legislative analyst projects a $13 billion deficit through June 30, 2013. Do you support revenue increases in the following categories: Yes

No

Corporate Tax

38 - 22%

118 - 68%

No opinion/ Don’t know 18 - 10%

Sales Tax: Broaden the base to include services

74 - 43%

79 - 45%

21 - 12%

Personal Income Tax

33 - 19%

122 - 71%

16 - 9%

Property Tax

44 - 26%

114 - 67%

13 - 8%

Vehicle License Fee or Car Related Tax

94 - 56%

59 - 35%

16 - 9%

Gas Tax

97 - 56%

58 - 34%

17 - 10%

Sales Tax: Increase the rate

52 - 31%

96 - 57%

21 - 12%

Single Sales Apportionment Factor: Move from voluntary to mandatory

22 - 13%

61 - 36%

88 - 51%

Oil Severance Tax

70 - 40%

46 - 26%

59 - 34%

Increase

Corrections and rehabilitation (10% of budget)

Decrease

4 - 3%

32. Generally speaking, would you say that: Don’t know/ no answer 20 11%

Right

2

3

4

Wrong

Statewide legislation is on the right WUDFN  ¬RUWKH ZURQJWUDFN  ¬LQ creating a healthy business climate?

1 1%

14 8%

33 19%

59 33%

50 28%

Statewide regulations are on the right WUDFN  ¬RUZURQJ WUDFN  ¬LQFUHDWLQJ a healthy business climate?

0 0%

10 6%

27 15%

65 37%

53 30%

23 13%

Governor-elect Brown is on the right track (1) RUZURQJWUDFN  ¬LQFUHDWLQJ a healthy business climate?

6 3%

48 27%

49 28%

30 17%

18 10%

25 14%

The state legislature is on the right track  ¬RUZURQJWUDFN  in creating a healthy business climate?

0 0%

7 4%

27 15%

64 36%

61 34%

19 11%

33. In this economy, what should be the top two SULRULW\¬LVVXHVIRUWKH6LOLFRQ9DOOH\/HDGHUVKLS*URXS that would be worth your personal involvement? Education: Pre-K Education: K-12 Education: Higher Ed Energy Environment Health Care Housing/Land Use Immigration Reform: H1B Visas and Green Cards for Highly Skilled Workers 6WDWH%XGJHWDQG¬*RYHUQDQFH¬5HIRUP Transportation Tax Policy: Repatriation/Deferral of Foreign Earnings Tax Policy: R&D Tax Credits Tax Policy: Comprehensive Tax Reform Other, please specify

6 55 31 38 23 23 12 31

3% 31% 18% 22% 13% 13% 7% 18%

44 23 20 9 40 13

25% 13% 11% 5% 23% 7%

CEO BUSINESS CLIMATE SURVEY 2012

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About the Leadership Group The Silicon Valley Leadership Group, founded in 1978 by David Packard of Hewlett-Packard, represents more than 365 of Silicon Valley's most respected employers on issues, programs and campaigns that affect the economic health and quality of life in Silicon Valley, including energy, transportation, education, housing, health care, tax policies, economic vitality and the environment. Leadership Group members collectively provide nearly one of every three private sector jobs in Silicon Valley.

Board Officers: Chairman: Mike Klayko, Brocade Vice Chair: Tim Guertin, Varian Medical Systems Secretary/Treasurer: Robert Shoffner, Citibank Past Chairman: Tom Werner, SunPower Past Chairman: Aart de Geus, Synopsys Past Chairman: Mike Splinter, Applied Materials President & CEO: Carl Guardino, Silicon Valley Leadership Group

Board Members: John Adams, Wells Fargo Bank Shellye Archambeau, MetricStream, Inc. Andy Ball, Webcor Builders Greg Becker, Silicon Valley Bank Dave Bell, Intersil Steve Berglund, Trimble Navigation George Blumenthal, University of California, Santa Cruz Tom Bottorff, Pacific Gas & Electric Company Chris Boyd, Kaiser Permanente Tory Bruno, Lockheed Martin Space Systems Company David Cush, Virgin America Steve DeWitt, Hewlett Packard Michael Engh, S.J., Santa Clara University Tom Georgens, NetApp, Inc. Raquel Gonzalez, Bank of America Barbara Holzapfel, SAP Ken Kannappan, Plantronics Gary Lauer, eHealth Tarkan Maner, Wyse Technology Alberto Mas, BD Biosciences Jai Menon, IBM Ken McNeely, AT&T California Len Perham, Monolithic Systems Kim Polese, Clear Street, Inc. Alan Salzman, VantagePoint Capital Partners Ron Sege, Echelon Mac Tully, San Jose Mercury News Rick Wallace, KLA-Tencor Corporation Bill Watkins, Bridgelux, Inc. Jed York, San Francisco 49ers

Report Design by: Colin Buckner, Creative Associate Laila Barakat, Communications Coordinator © 2012 Silicon Valley Leadership Group

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CEO BUSINESS CLIMATE SURVEY 2012