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PHINNEY, INC.
PART A

INTRODUCTION


Phinney, Inc. is a $775 million emerging technology company that makes leading-edge batteries for products ranging from the smallest computer devices to hybrid vehicles. It's a 12-year-old company that started with venture capital (VC) funds but successfully went public five years ago, just before the financial crisis. The company weathered the crisis and is optimistic for its future as its investments in technologies, for the most part, are on track to pay off for years to come.

The company currently has 8,700 employees, though it plans to double in size in the next three years as it brings several new products online. Phinney is primarily a manufacturer (though it outsources some production of specialty products) with some wholesale and distribution business as well. It participates in three joint ventures in Asia and owns manufacturing facilities in Central America and South America.

Most of its engineering and business workforce is based in the San Diego, California area, though the company is domiciled in Delaware. Like many new-technology companies, a noteworthy component of Phinney's compensation structure involves stock options. Even after the initial public offering (IPO), this structure has helped encourage employees to stay with Phinney.

Phinney is led by a relatively young management team, which supports its culture of risk-taking. The team's bios include:

Jim Fallon, Chief Executive Officer
Fallon is one of the engineers who originally brought the core idea for Phinney's technologies to the VC firms. He has natural talent as a leader and has been CEO from the start. On the downside, he isn't the best public speaker.

Mari Charmasson, Senior Vice President and General Counsel
Charmasson served as counsel at one of the lead VC firms before she was asked to join the Phinney management team. She is a bright lawyer whose specialty is extracting the value out of Intellectual Property (IP)—she outsources many of the company's other traditional legal needs to outside counsel.

Steve South, Senior Vice President, Communications
Representing Phinney internally and externally, South is a former political speechwriter who transitioned into the business world flawlessly. He's savvy and quick and is Fallon's closest confidante.

John Buchaca, Vice President, Human Resources
Buchaca was hired away from Phinney's biggest domestic competitor, Guinness Technology. He has been with Phinney since the IPO and played an enormously important role building the company's employee base, as he is relentless in his efforts to secure the best human assets.

Phebe Flaherty, Vice President, Information Technology
Flaherty is a key member of the management team. As a technology company with a youngish, engineering workforce strewn across 13 countries, Phinney's IT department commands a noteworthy share of the budget and Fallon's attention.

VISION AND MISSION

From day one, Phinney has aspired to become the world's leading advanced-battery manufacturer. When asked what it means by "leading," it answers that it seeks to become the highest-revenue and most-profitable company in the industry. It wants a reputation built on emerging battery technologies, quality, and the most-enduring patents.

The company's mission is to improve the lives of consumers worldwide by freeing them from wired energy sources. Phinney proudly boasts that, at a time when electric car batteries last only 60 miles and smartphones only 8 hours, it is designing technologies that will multiply these limited numbers by 10 or more within 5-7 years.

COMPETITIVE LANDSCAPE

Given the extraordinary potential in the battery market, Phinney's competition is fierce and comes from every part of the globe. Guinness Technology is also based in California, in Silicon Valley. Compared to Phinney it is more risk-averse, willing to "play it safe" rather than make mistakes that could ruin its future. The business media as well as Wall Street has rewarded Phinney for its more-aggressive culture, though the company is not without its detractors. More than a few former employees, for example, have been willing to gripe on the internet and elsewhere.

As it pursues this mission, its greatest competition is not Guinness or another U.S. company; it's two manufacturers in Asia. A Chinese company and a Korean firm have the backing of their respective governments and seem to benefit from access to unlimited capital. As Fallon and his team make difficult strategic decisions that plot the company's future, they constantly confront the unknowns that challenge all U.S. companies, including ever-changing regulations and tax rates. Phinney is working hard to compete in a global marketplace where foreign competitors may not face these same obstacles.

CORPORATE CULTURE

Which brings to mind Phinney's corporate culture and attitude toward business ethics. As described earlier, the company is proud of its reputation as a risk-taker. This trait has resulted in attracting not only Buchaca but scores of other entrepreneur-minded employees who have helped realize the company's success. Like a myriad of Silicon Valley peers to the north, Phinney has fashioned an environment on its home campus filled with basketball courts, pets in the workplace, open cubes, and onsite services like dry cleaners and a Domino's Pizza.

Also like many start-ups of its size, Phinney has no ethics officer. It has the standard legal documents—an employee handbook, employment contracts for key personnel, policies where necessary, and a code of ethics. The code addresses Phinney's five corporate values: Innovation, Leading Customer Service, Return on Investment, Accountability, and Fun. Beyond these values, the code addresses multiple employee responsibilities, including protecting Phinney's IP, not revealing proprietary information, and the importance of respect in the workplace. On the benefits side, Phinney offers the previously mentioned stock options as well as a generous 401(k) plan.

ISSUE: LOCATION-BASED TECHNOLOGY

The difficult decision facing Phinney's leaders involves the use of location-based technology, especially as it occurs in smartphones. The issue began when Flaherty shared with Fallon that she recently learned that Guinness is using a tracking application to locate Phinney employees—i.e., corporate espionage. Apparently, Guinness began by identifying a few specific Phinney employees and then built a social media profile of each. Using the fact that each individual carries a GPS-enabled smartphone—either a Phinney-issued device and/or a personal device—Guinness's IT group allegedly began tracking the whereabouts of the employees 24/7. It began by focusing on those with responsibilities for prospective acquisitions, new product development, supply-chain, and critical marketing initiatives. Such tracking is easiest when someone's GPS is enabled, but it's said that it can happen even when the device is operating only on its mobile network.

Fallon knew about location-based technology—he remembered the iPhone controversy a couple of years ago—but this was the first time he heard about it in the competitive intelligence context, let alone against his own company. He asked Flaherty if she knew this was happening or was she reacting to rumor. She said she hasn't visited Guinness's IT department personally, of course, but she was told specific details about what Guinness is doing by a friend. The friend works at the company that sold and services the tracking application Guinness is using. Fallon's next question was if the solution to the problem is as simple as calling the police to report a crime.

Flaherty responded "no." Like scores of other new technologies, she continued, the U.S. legal system is lagging behind this issue. A bill was proposed in the U.S. Senate in 2011 but it died behind bigger problems. Another proposal, the "GPS Act," made it further in the Senate in 2012 but it, too, failed to attract enough support. Mexico and some European countries have passed laws, especially regarding when the government is or is not allowed to secretly track people, but there isn't anything now—or in the foreseeable future—that stops Guinness from doing what it's doing.

Fallon asked Charmasson and Buchaca whether they knew anything about the issue. Charmasson knew about as much as Fallon—she committed to do her own research and ask outside counsel—but she affirmed what Flaherty shared about the legal landscape. She recalled issues somewhat like this being raised at a privacy seminar she recently attended, but nothing specifically on this subject. She mentioned the Electronic Communications Privacy Act, which is referenced in Phinney's Code of Ethics, but only to the extent it addresses whether Phinney can force employees to reveal content from their private e-mail accounts.

Buchaca said he'd be surprised if doing this really was legally allowed, though not surprised that Guinness was doing it. "I've told you stories about when I worked there—the leaders are scum. They'll do anything—lie, cheat, or steal—to make a buck. I can't believe they're still in business." Then Buchaca remembered reading a tweet about Google Maps Coordinate, an application designed for companies to track the locations of their employees. He actually looked into it at the time because of the number of Phinney employees who work at home or on the road. He never bought the product, though he still believes he needs to be able to identify where employees are or, at least, where a particular smartphone is in case it's lost or stolen.

At this point Fallon said this was much more than simply a legal issue. First, he was angry at Guinness and wondered how long it had been doing this. Second, he wondered if the acquisition Phinney pursued last year—which mysteriously fell apart at great expense—was scuttled by Guinness and its unethical use of this technology. As he listened to Flaherty talk about competitive espionage, and then Buchaca add in the idea of Phinney tracking its own employees, he asked for a "time-out." "Is this ethical?" Fallon asked, "… something we should be doing?" "Well," Flaherty responded, "I've been asking myself that question from the moment I heard about it. Obviously, it shocks me to hear about it—I have the same feelings of anger toward Guinness that you do. But I'm also wondering if the Chinese or others have been doing it to us. Then I think about how upset I would be as an employee if I was being tracked … but how can we not use available technology when we know our competitors do?"

"Hold on a minute," Charmasson interjected, "I know I'm a lawyer, but someone needs to say that, just because something may not be illegal, doesn't mean we should automatically do it." Fallon inserted, "I'm still not sure what we're talking about here. Phebe, help me understand the full scope of our options."

FOUR OPTIONS

Flaherty proceeded to identify four uses of the location-based technology on which she believed they needed to decide:
  1. "First, we have to decide if we'll use the technology at all. If we do, at a minimum, we'll use it to track the extent to which our competitors track us. We think we can easily identify the Phinney employees they're tracking and then begin tracking them too, so we at least know what information they have about us. If we confirm our competitors are doing this, we'd have to decide if we should "out" them to the media, such that they'd look terrible for what they're doing. Or we can keep it quiet and simply know what they know. Or, we can go one step further and use what we know to give them misinformation. In other words, we would intentionally send someone—or at least her device—to a location to make Guinness THINK we're doing something that we're not. I know it sounds like a bad Bond movie but we've got to play the cards we're dealt.

  2. If we're up for going farther, we match Guinness bit for bit. We identify its key employees: think of Jen in M&A, Frank Prantil's entire Business Development team, Rachel's marketing folks who do their competitive intelligence. Maybe 20 in all. We know exactly who they are just like they know all of us. We even add their executives, given Guinness is probably doing the same thing to us.

    The software follows them every minute of the day, 24/7. Where they travel; where they eat; where they live; where, when, and for how long they might visit a bar; where Guinness may be considering buying a company; which firm on Wall Street it's talking to (e.g., about financing a new product line?); what country it's flying to (e.g., to scout building a new factory?). We'll know it all as it's happening, with enough time for us to do something about it, yet Guinness not knowing that we know.

  3. Then there's Level Three. Like I said before, we have our own key people. Think Rick, Arnold, Katie J., Katie R., Doug, Kirsten, Anne—we're probably talking a minimum of 50. These folks are family, but can make or break us. Almost any one of them has enough access to kill our future. We're already tracking everything going in and out of their computers as well as in and out of their smartphones. With their keycards we track every room they enter and how long they're in each.

    The big decision at this level is whether we tell them or not. I know it sounds crazy, but you guys have seen CSI and TV shows like that. If they know we're tracking them, they won't do what they would naturally do. In this day and age, in this competitive environment, we must know who at Phinney we can trust and who we can't. Again, I know this is family—we would never abuse the situation or unnecessarily violate their privacy. We pay attention only to what is important, only what we need to. If there are signs that someone may leave us, we pay attention to where they are. If someone's acting strangely or dropping in productivity, we look at the data just enough to see if he's frequenting a bar too often or has a big uptick in visits to a liquor store. If we think someone is being too cozy with their secretary, we can track them both, as long as each has a smartphone.

  4. Which takes me to the fourth and last option. Most companies that do this turn it on for everybody who has a smartphone, sometimes even those that aren't company-issued but have been authorized to carry work e-mails and calendar. Charmasson will be the first to tell you that we're actually taking a liability risk if we go with Option Three and single the 50 employees out—there's less of a risk if we track everyone. It's all done by software so there's no additional cost or manpower—it's just data.

    Now Charmasson will also tell you about other things that can happen if we go down this path. For example, if someone finds out we're doing this—because in all instances, let me remind you, we have to decide who we tell, if anyone at all, and who we don't—then we can get subpoenaed. Take the case of a husband who thinks his wife, who's an employee here, is cheating on him. He decides to divorce her and, to get the most money possible, he needs to prove she's been cheating on him. If he knows, or his lawyer knows, that Phinney uses location-based technology, such that our servers have data on the whereabouts of his wife for every minute she's worked here...think about it. We get the subpoena, and now we help the guy win the divorce case against our employee. Now there's the additional risk that she sues us, plus the cost and time of responding to subpoenas. Plus think of the excellent employees—like this woman, let's say—who don't come to work here or stop working here because they don't want to work at a place that tracks its employees."

DECISION TIME

"So that's it," Flaherty continued, "the four options I can think of. Remember, for each one, we decide if we tell, or who we tell, and how we tell them. And as we decide this, we should think about which set of our five corporate values our decision is linked to. Of course, we can decide not to use the technology at all, but we'll still have to answer the question what to do about Guinness."

"Folks, this technology is not only here to stay, it's going to become 'more' over time: more prevalent, more risky, more invasive, more a part of business. One final example: Will the medical community work to get chips with our personal medical histories placed in us someday, such that the chips would also have location-based technology?"

"The point is, Jim," Flaherty concluded, "we've got to make some serious decisions. What do you think we should do?" Fallon had no immediate answer, though he agreed with Flaherty about the urgency. He ended the conversation by telling his team he thinks it is best to hire a management consulting firm to research and consider the issue and then recommend a strategy that Phinney should pursue. He committed to hosting the firm in April to hear the recommendation—everyone present would be invited to hear the proposal and help him make the final decision.

Tim Mazur wrote this case with the approval and collaboration of the Daniels Fund.

© 2015 Daniels Fund. All rights reserved.