Laguna Development Corporation President and CEO Jerry Smith shares the lessons he has learned about building and sustaining Native nation-owned enterprises, in particular the critical step of creating a formal separation between tribal politics and the day-to-day management of those enterprises.
Smith, Jerry. "Building and Sustaining Nation-Owned Enterprises." Emerging Leaders Seminar. Native Nations Institute for Leadership, Management, and Policy, University of Arizona. Tucson, Arizona. March 25-26, 2009. Presentation.
"Good afternoon everyone. Again, thank you for the introduction. Again, I appreciate with all humbleness the introduction, because I definitely have had a lot of good and bad experiences in the arena that I've been in. But I want to say for the nation-building program -- and I'm asked to participate in a lot of activities and I've had to be selective in some of those that I do involve myself in, because there's a lot going on in terms of what's happening out there -- but I choose nation building because I believe in what they're doing. And they're doing, and it's about capacity building. It's about trying to communicate best practices, so that you don't have to go do the things and make the same mistakes I made. And I definitely made a lot of mistakes in my career as it begins to evolve. I wish that I was in a position that you're in to have an institution to go to, to talk about it. Because in the early 80s, when I started doing this, I didn't have any place to go; I had to do a lot of figuring out by myself. And some of you who work in tribal offices know that's a lonely feeling in there sometimes, sitting there and just trying to figure out what the heck are you going to do. I call myself a rez boy. I'm a rez boy raised on the rez, spent a little time away from the rez going to college but, and then came back to the rez. So definitely I'm home grown and I've tried to understand and tried to do what's best for our community.
I want to start off by a couple of sayings just to give you some idea of how we need to think about this or how I'd like to frame my presentation. One saying is, "˜Success is the point that preparation and opportunity meet.' That's been a very important thing for me in my career, because you don't have success without preparation. And whether you're an individual or whether you're in a tribal environment, you have to continue to prepare yourself to be in a position so that when opportunity presents itself you can grab that opportunity. So if you get an opportunity today to do a partnership in a big business deal, if you're not prepared for that, that thing's going to go by you because as we all know, setting up businesses isn't an overnight thing. It takes a lot of evolution. So if you're not in the process of preparing yourself for that opportunity...I've missed many opportunities in my lifetime because I just wasn't ready for them. And some of these opportunities have never presented themselves again. And so we miss a lot of opportunity. The stimulus package coming down -- how many of us are prepared to take advantage of that opportunity? I think we're all trying to figure it out, right? But the reality of it is that those that are prepared are going to benefit from it.
The other saying I like to say -- and this is something that [is] mainly for youth -- that we need to keep in perspective is that, "˜If you're chasing money, you are not necessarily chasing success.' Give yourself success and money will shadow you, wealth will shadow you. So as we try to achieve...and you would think that this came from a Donald Trump or this came from one of the big Wall Street guys. And they're in trouble now, right? But this really came from a basketball coach, Rick Pitino. And I've enjoyed reading about his story and how he's prepared his career, because there's a lot of things that we do in athletics as teams that are very applicable in business. So I recommend his book. His book is called Rebound and it's a story of leadership.
The other book I recommend is a book that was written by a guy by the name of Marshall and I just finished his book and the book is entitled The Power of Four: Leadership Lessons of Crazy Horse -- the great Lakota Sioux warrior -- and is written by Joseph M. Marshall III. And he talks about a lot of the things that are very applicable in tribal cultures that are very important in insuring that you maintain a good business structure.
So in that regard, I just want to share those with you. I have a limited time so I'm going to go through my presentation here. Again, my name is Jerry Smith and I'm president and CEO of Laguna Development Corporation. Laguna Development Corporation has to be...we have to start with the Laguna economic story. In the 1950s, we were an agriculture-based economy. And then we evolved into in the '50s to the 1980s we were very fortunate, it was very fortunate that a resource was found on our reservation called uranium. In its peak production, the Jackpile Mine was the world's largest open-pit uranium mine, and the Pueblo of Laguna benefited significantly in terms of royalty income from that mine. And I was fortunate to have my education paid for as a result of that resource. But one of the things that has been interesting in that evolution is it brought wealth to the Pueblo Laguna and I'll tell you why that's important.
In the early 1980s, late 1970s, the mine shut down and we went into a very serious period of having to refigure our economy. Unemployment rate went up to about 86 percent and the worst thing or the best thing that happened to me is I got hired as the tribal administrator in the early 1980s, just out of business school. [I] walked into my tribal council -- I was working at construction at the time, I was working with James Hamilton Construction out of Silver City -- and I was called home and asked to show up Monday morning at tribal council meeting. I said, "˜Okay, I'll be there.' I walked in with my cleanest pair of blue jeans and a borrowed shirt from my dad, polo shirt. And I didn't realize that I was there as an interview in front of the tribal council for the position of tribal administrator. And so I walked in to the interview and everybody was in suits, everybody was in ties, everybody looked very pretty and I was in my cleanest pair of blue jeans. And I went through the process of the interview and was asked, "˜What are you going to do to get me a job?' by 90 percent of the tribal council members who were unemployed. And I looked at them and said, "˜Well, all I can do is the best I can and I'll figure it out.' I went home and my mom -- who was then, knew what was going on -- asked me, "˜Well, how did it go?' She was all excited about it. I said, "˜I blew it. I didn't have any answers.' I couldn't commit to them. I couldn't lie to them to tell them I had the solution. So I'm headed back to Silver City, start packing my stuff. Twenty minutes later, I get a call from the personnel officer of the Pueblo telling me I was hired. So you talk about someone learning from the grassroots, from ground zero.
So what we began to do -- because of that impact -- we began to take a look at how to develop the economy, how to reinvent the economy of the Pueblo of Laguna. Again, wealth was not the issue. We had wealth as a result of the uranium mine. We had to develop an economy of employment and continued development of wealth. So we began to develop -- and a lot of the theme of this session that you heard is the need to develop businesses to give its best opportunity for success -- so what we did and what we decided to do -- and again this is a young rookie out of business school. I had to go into my tribal council and get them to understand that you're dealing with two different environments.
When you're talking about governance on one side and you're talking about business on the other side of the table, and there's that line -- that's kind of like this black line on this floor -- there's a line between the two. And it's about -- as I tell people -- it's about learning how to play Monopoly© by Monopoly© rules, and then over here learning how to play Chess by Chess rules. You can't play both sides of the thing by the same set of rules. And there's a whole history and sophistication on how business works compared to how governments work. And so each has to have their ability to operate effectively within those two environments. So I went in and said, "˜You're going to have to give me the authority to separate business from government. You're going to have to give me the authority to allow our development, our business, the environment that it needs to give it the best opportunity to succeed.' And it was great because if I was to go into my tribal council today, I don't know if I could get that decision because of the wealth. As a result of what we're doing now, one of the things that always, is the issue of control and tribal government wants to control. What we're trying to do now with our tribal leadership is try to show them how to control without micromanaging. And the techniques that as owners of a business is different than a governance of a community and a people. So we're having to go through processes of educating them. We've used nation building and our tribal council has been through nation-building sessions. The nation-building folks have been out to our tribal community, have taken our tribal council through facilitation sessions on developing that capacity and competency, so that we can from the business side -- when we walk into a tribal council meeting to report as a business entity -- they deal with us as owners of a business should deal with management and the corporate boards.
So what we did is we created three corporations since then. We created Laguna Industries, which is a manufacturing corporation. We developed Laguna Construction Company, who presently is in Baghdad doing a lot of the reclamation [and] revitalization of Baghdad right now. And then the company I manage called Laguna Development Corporation. We do have somewhat of a non-profit corporation called Laguna Rainbow Corporation and that corporation provides elderly service to community members.
The Laguna entity business structure or model, it's the separation: it's the government model versus the business model. Government and its role and its model provides governance for tribal membership. It's not profit motivated. It's the fiduciary custodian of tribal wealth. The business model is a model where we have to work within the governance of the tribe, which means that if you run a private business in the State of New Mexico you can't divorce yourself from government. Government has a role to play in everything you do. But they provide you regulatory oversight, not day-to-day oversight of your business. So the tribe has to get involved in developing all the infrastructure it needs to be able to provide that oversight. We're profit motive and we're a huge investment of capital in risk-based ventures. We're also the revenue and tax base to the tribe. We're the economic engine that pays probably at this point probably 80 percent of tribal governmental operating needs. And in most tribes, especially with casinos, that number ranges from 80 to 95 percent of revenue that goes to the tribe normally comes out of those kind of activities.
We've explored a number of business structures in our evolution. We started out as a tribal enterprise and chartered under the constitution of the Pueblo Laguna. Then we evolved to a state-chartered corporation. That evolution really was the result of the challenges of the state of New Mexico to tax our income. There were legal opinions coming down that says if you're a tribal enterprise at that time that you would be taxable. So we went to a state-chartered corporation. And then later we got an IRS ruling saying that's not good enough. So then we went to a Section 17 corporation, which then we basically resolved that taxation issue. But as things have evolved, we have also been able to...those other areas have cleaned up in terms of taxation. So I believe today, now you can do any of the three and still be secured in your taxation on income.
But the other thing that, reason that we did that is that...from a tribal environment, not very many people out there -- especially if you're looking for business partners -- understand how you work as a government. And you have 500-some-odd Indian tribes across the country with all unique forms of government. How do you expect a Microsoft or how do you expect a financial institution and investors to try to understand how all 500 of us work? So what we have to do is create an intermediary corporation that they're used to dealing with -- they understand the nature of corporations, they understand the nature of how corporations work. So when we apply and we introduce ourselves to people, they don't need to go back and try to understand how our constitution works and all those things. They understand how corporations work and we can talk at the same level and in the same language. So that was one thing.
But from internally to the tribe, what was important to us was the insurance of protection of tribal wealth. Remember, Laguna had wealth. Laguna had wealth as a result of the uranium mine. And we had to go understand why Donald Trump declares bankruptcy probably every other year but he's still wealthy. And the way he does that, and business is as a foundation a risk-proposition environment. You have to take risk. But you don't want to risk the tribal wealth. In my operations, I could say within the five years of our new property, we've had probably about three people die on our property. And so what you have to be very careful about is the claims that can come at you from people who do things on your property and the liabilities you assume by allowing them to come onto your property. So you're at risk every day. You're at risk for a lot of different things but you don't want to put the tribal wealth at risk as result of that.
So what we were able to do was separate the two through the corporate veil and that's why people set up corporations is they protect their individual wealth from the business wealth and the business risk. So you have this corporate veil that prevents you from doing that, from putting tribal assets at risk. So that was another major reason is that we didn't want to put the tribal treasury at risk. And so if anybody sues Laguna Development Corporation, it's only within the limits of what the corporation owns. They cannot touch tribal assets.
The state of the industry: Las Vegas is down 8.7 percent; Nevada casinos are down 68 percent at the net-income level. Fitch -- who's a rating company that comes in and evaluates your capacity -- tells us that Native American operatives are feeling the same kind of pressures Nevada is feeling and those businesses that operate to a conservative operating file will survive this pressure. You've got numerous retail and F&B closures. Who would imagine that Mervyn's© was going to close? Who was going to imagine that Circuit City© was going to close? You've got a lot of businesses going out of business. And then in New Mexico, we've had a huge expansion in gaming properties with the Ysleta Pueblo property expanding, with Buffalo Thunder and then now the Navajo Nation has gotten into gaming. So there's expansion in the market when 2008 the economy is coming down. So what's ultimately result of that is only the fittest are going to survive. Because you can run an operation and some gaming operations at a 65 percent gross profit level. It's easy to run a business that way. But if things that are happening with your economy are attacking that and now you're having to operate at a 30 percent or a 40 percent gross profit level, it's a whole different ballgame, which means that you have to be a lot more efficient in the way you run your business.
Our success at Laguna Development Corporation -- in a period of time when Las Vegas is dropping 28 percent in '08, we grew our revenue by 15-16 percent. We improved our total company gross revenue. We just don't do casinos. More than 50 percent of our revenue comes from non-gaming activities -- we're in travel centers, we run restaurants, we run...name it, we run those kind of operations. 23.4 percent growth in our EBIDA [earnings before interest, depreciation, and amortization] in '08. We had 115 percent growth in our revenue in food and beverage. We had a 33 percent return on an equity. You ask any investor whether that's good or bad and they'll tell you. Our debt service coverage ratio, our leverage ratios are very good. We actually increased payments to the tribe by 47 percent during this period of time. And again, we're rated from Fitch standpoint as being a very stable company. So as you can see, structure and having your proper environment in place is very good.
I cannot recruit executives today. Let me say, it's very difficult to recruit executives today in our industry, especially in the Indian community. The people I want, the first question they ask me is, "˜Is there a separation between tribal government and the business.' And if you say no, they're not coming, because there's been too many experiences...the average tenure of somebody that sits in my position in New Mexico is one year. That's the turnover for someone that sits in my position in New Mexico -- one year. So there's a huge turnover and the number-one reason why that occurs in their opinion is because of tribal politics' intervention into the business and that they have to worry about, on a day-to-day basis, whether a tribal council family member is going to come up and shoot them. Where in our operation, we do have very much respect for our council and our government and our governor, who's the president or chairman of our tribe, but the governor has no authority to hire or fire anybody in the corporation. And so we have control over day-to-day operations through this model.
Keys to success -- tribal council understood the need to release day-to-day management over day-to-day control. We killed a lot of businesses before 1980 because of day-to-day intervention from political people into day-to-day operations. So the second thing we did is we formalized all our relationships between tribal government and the entity. For example, we have the charters, we have the bylaws, all reported transparency is there -- we provide financial statements monthly, quarterly, all those kind of things -- we also have a formula that basically defines how cash gets transferred. A lot of my counterparts in New Mexico at the end of the month, all excess cash gets transferred over to the tribal government. In our environment we go through a very diligent process of closing the year, closing the books, evaluating performance and we've negotiated a cashiering agreement with the tribal council whereby it's all formula-based. So no politics, nothing can enter into the picture and all the needs of the business are there in terms of supporting the business before any money goes over to the tribe. So from that standpoint, we can get the favorable ratings from the rating companies.
We also have had to help tribal government understand and set up their own infrastructure to handle these kind of entities. For example, we have to make sure that administratively they know how to read the reports -- they know what they're getting, they know how to read it, they know what it's telling them. We also have to make sure from a legal standpoint you have all the things like codes in place -- there's things like building codes, there's things like commercial codes. So if there's a dispute between me and one of my suppliers, they don't need to go run to tribal council. They go through the judicial process and they file as any other community, metropolitan does; they go through the court systems to get their problems resolved. So it keeps a lot of calls from going into the chairman's office from people who don't necessarily, when you find yourself in dispute with. And that happens every day folks and we all know that. We also have to look at capitalization needs and all the way down to things like tribal preference. So we've taken the time to insure that we formalized and put everything in rules so that it's not discretionary or arbitrarily determined based on who knows who and who knows what, that it's consistent. Because one of the things that we have to develop is consistency in applications so we get trust.
The last thing is definitely is adherence to the rules through visions and missions and core values of the corporation. Now as a corporation...I listened to the session before lunch and they were talking about, how do you operate in the business world? Like I can put on a suit and do I have to give up my tribal heritage and my tribal ways for that? I can tell you that my father is one of the top religious leaders in my pueblo. And as one person, he was the one that encouraged me to go on to college. And after I came out of college, I tried to figure out why you sent me there. And then when I come home I get a lot of criticisms about losing my ways from community members. 'You're educated, you lost your ways, you joined the other guys' kind of thing. And one of the things that he helped me understand is that in order to survive, we have to understand and have the knowledge to survive. So we have to go out into this other world and do the things necessary to provide for our families and our community. But you should not have to give up your heart in the process and where your heart values are coming from are from your tribal core values. In our language, we have basically four core values that we're told every day from community leaders, religious leaders is -- and I'll use my language -- it's [Laguna Pueblo language]. And those four things are love one another, respect one another, understand what the way is, understand what the truth is, and live your life by them. And when you begin to run business, when you begin to take opportunities of kickbacks, they present themselves to you. I don't think anybody in this room that's run a business hasn't been given the opportunity to take a kickback. But your core values of right and wrong will tell you not to do those things. So it's very important for our young people to understand that they can be successful, they can be successful in athletics, they can be successful in their careers by using their core values that each tribe, everyone of us has as tribal communities, because you can connect the two. You don't have to give up your heart to survive.
So we run our business on those tribal core values. In fact, the core values of our corporation are tribal core values. And everybody who has gone through a strategic planning session know you have vision, mission and then you set core values. So we didn't see the need to create new core values because we've had core values that our ancestors have given us through time. Why do we need anymore and how can I be more creative than those people? They've given us the menu to success if we just follow it in whatever we experience.
Keys to success from a business responsibility standpoint: you have to hire the most competent executive team you can find. These people have to have the knowledge, they have to have the experience and most importantly they have to have the character. And you have to make sure you insist on knowing the character of a person. So what do I do when I hire executives? I just don't take their resume and a one-hour interview. Not only do I use my gaming commission's authority to go check their background, their criminal, their financial, I want to know everything, as much as I can about the person. So I use those mechanisms to find out as much as I can about the person. I've got my internal networks where I do evaluations on every one of these individuals.
Anybody heard about DISC? It's a tool that you can use to determine whether or not you have an individual that's a driver, somebody that's task oriented; or an I, which is somebody that's an intelligent thinker; or an S, who's a supporter; or a C, who's a communicator. So I want to know 'cause I have to have everyone of those characteristics on my leadership team and I use that tool to tell me what kind of people I have. When I first used the tool, I found out that 90 percent of my managers, my executive team, were Ds. They were all direct, they were kind of like me, go get it, get it done. And so, and it's the nature that you kind of lean towards hiring people like you, but it's not always the best thing to do. What I found out was a lot of people didn't understand what we were doing even though we were doing great things [because] we weren't great communicators. We weren't able to go out and tell people what we were doing [because] that wasn't our nature. So now I make sure I have Cs on my leadership team.
So there's tools that you can use to help you understand who these people are and what you're hiring and what you need in your leadership team. The second thing I do is I send all my people up to a place called Professional Decision-Making, Inc. in Denver, PDI, and they do a complete assessment of that individual to tell you whether or not that person is really an executive quality person. Because for many years we as tribal people have been sucked into thinking that because I can put on a suit and tie that's an executive. You've got to know more about that person because you're entrusting that person with a tremendous amount of resources and decision-making. So you've got to know as much as you can about that person and make sure that person fits your organization. My leadership team I've had with me for about seven to eight years now, and there are not very many people that leave me because of these principles. So it helps your retention, it helps you keep people because they definitely understand a lot of these principles in which you're operating by.
The other thing you have to do is make sure you have the business systems in place that operate in financial human resources systems. You have to make sure that you have transparent reporting not only to...I report to a five-member board that's appointed by the tribal council. So I make sure that the reports I give to them are very, can be verified and validated at any time. And the last thing is that we focus on developing and growing the business not on tribal politics. So many tribes and many of my colleagues at the end of the year that are in positions like me worry about who's running for the chairmanship position and what's going to happen to them. And a lot of them are sending out resumes in that process. In our situation we honor the change in administration, the change in leadership but we don't have to worry about our jobs the next day as a result of that.
Lessons learned -- the first lesson I learned is the maintenance of the separation of tribal governance and business is a very delicate balance. For example, tribal membership's demand for per capita could definitely effect you as a business. And given the hands of people in a tribal governance role, they may have an agenda to get more money out of you. And from a business standpoint, we can only give what we can afford to give to the tribe. And so political factors can come in and wipe you out. We don't go promote ourselves and sell ourselves as a service to anybody, because in my opinion we're still learning how to do this. And if anybody tells you they're expert at it, I'd like to meet them. I really would like to meet them.
But what we continue to try to do is help when we're asked to help, and we've had tribes come to us and ask for help to do this. And the biggest challenge that I've run into in trying to help those tribes is the issue of control, and government does not want to give up that control, especially in tribes that already have ongoing gaming operations. And so they'll commit to the idea of doing it, but once they understand that they can't go in and fire the manager tomorrow or go in there and do the things that they're used to doing, they don't like it. So you have to manage that every day. It's something that I have to manage every day. The governor doesn't have any authority to come in and take any actions within the operation on a day-to-day basis. But everybody knows that when the governor shows up on any one of our properties I need to know immediately and we have somebody there to make sure that he's seeing, he's getting what he needs. So you've got to manage that. You have to recognize who the owner is. And so again, that's a delicate balance.
Due diligence -- I went through this. You have to hire the best you can afford and sometimes you have to hire the person you can't afford. That's one of the 201 business lessons when I went to New Mexico State and went to my first business management class, that's the thing that I remember hearing out of that class is that you've got to...in order for you to be successful, you've got to hire successful people. You've got to surround yourself with successful people. And so it's been my agenda to always hire the best. And not only stop at hiring what I can afford, but I've actually had people that I couldn't afford but I made sure that within a year I could afford them because then they grew my revenue. They grew my EBIDA.
Setting up tribal government and business infrastructure is very critical. The government needs to understand how to interact with this new animal that you created. And that's kind of been one of the struggles of Section 17 and business entities is government not necessarily having the infrastructure to know how to deal with this new animal. One of the ones that kills you a lot is personnel issues. I am the final say. My board does not even have a say as to what the final conclusion of a personnel action internally within the corporation is. That's my decision as CEO of the corporation. If a tribal member does not agree with that, they take me to tribal court. And tribal court through a wrongful termination hearing then determines whether I did the right thing or the wrong thing. So that's an example of infrastructure. So that the council doesn't have to be tied up with that issue because tribal members are complaining about...
And it always happens that they only hear one side of the story. I have grandmothers calling me, I have mom and dad's calling me and these are for people that are probably 40-50 years old some of them. Grandma's still calling me and saying, "˜How come you fired or how come you took this action on my grandson,' or, "˜How come you took that action on my child?' And I will say, "˜I wish I could talk to you about it, but there's something called the Privacy Act. And you take this form; you take it home to your child or your grandchild and have them sign this document. Then I'll tell you what's really in your grandson and your son's file.' I have not gotten one of those back yet because only one side of the story is told and we love the opportunity to tell the other side of the story.
This is a weakness is that tribes normally set up these operations without adequate capital. Most of the business ventures, you're expected to put at least 30 percent equity into a business start-up and tribes notoriously don't want to do that. So that's always been a weakness in tribal economies. The diversification, the economic base, we learned that through the Jackpile Mine when you have all your eggs in one basket. And there's a risk in a lot of tribes [because] the only economic engine a lot of tribes have right now are your casinos. And you're seeing right now that these casinos are not recession proof. There was a fallacy out there that gaming casinos were recession proof. Just look at what's going on in Nevada with the big ones. And then the other thing is that we also have to make sure that we stay business vision and mission focused. It's important for us to maintain that vision focus because if we don't who else is going to do it?"