Deliberations at the World Economic Forum in Davos last month did not go entirely as planned, but few of the 2,400 people attending the meeting were deterred by the plunging market. In this opinion piece, management professor Michael Useem, who directs Wharton’s Center for Leadership and Change Management and who attended the forum, discusses how Davos has emerged as a “classroom on globalization.” Among the key lessons from this year’s class: Central bankers have lost their way; sovereign wealth, hedge and private equity funds are the new power brokers; and no new authority should be put in control.
I was about to board a flight to London and then onto Zurich for the annual meeting of the World Economic Forum in Davos, Switzerland. With a final check of the Internet, my laptop screen lit up with headlines of financial crises, sparked by sub-prime woes and, we would later learn, rogue trading at Société Générale. The Frankfurt and Mumbai stock exchanges had dropped 7% in a single day. The European Wall Street Journal headlined the stunning developments: “Stocks in Europe, Asia hammered by U.S. woes; more downside seen and recession fears; ‘panic’ out there.”
It was obvious that the Davos discussion would not go entirely as planned. But few of the 2,400 people expected to attend the 38th annual meeting of the World Economic Forum were deterred by the plunging market. The four-day gathering of the world’s leading business and political figures was too instructive to miss. The annual meeting of the World Economic Forum has come to serve as one of globalization’s best classrooms.
My formal assignments at the meeting included moderation of a session on “The Rising Influence of Minority Shareholders” and a panel on “The DNA of Effective Boards.” In anticipating my informal experience during the flights to London and then Zurich, however, I was reminded of a response that I often received when I asked American and British CEOs in a research study why they served on the boards of other companies. Yes, they were extremely busy running their own firms, but their outside board service provided an unrivaled personal education in the corporate issues of the moment. For me and many others, Davos constituted an unrivaled personal window into the global issues of the moment.
Lands of Opportunity
My experiential learning began as I left customs at the Zurich airport. Two years ago, a luminescent display touted “!ndia.” Today, in its place I found “Turkey: Land of Opportunity.” In 2006, Indian business had sought to brand itself in the minds of those on their way to Davos; two years later, Turkish business now evidently appears to be coming of global age.
On the two-hour bus drive to Davos, the editor-in-chief of a financial media company characterized what lay ahead. “This is a conference,” he said, “on steroids!” The event and the energy behind it are the brainchild of Klaus Schwab. Starting with nothing, he has single-handedly created what Forbes magazine recently named the world’s number-one corporate leaders’ conference. Schwab today oversees a large staff with dozens of programs and events, but he has built them all on his own with neither university incubation nor state subvention. I was reminded just how much impact one person with vision and resolve can have on the world, and I made a mental note to reinforce those qualities in the MBA and mid-career leadership courses and programs that I offered at home.
New Power Brokers
The first morning of the conference, I wedged into a jam-packed session hosted by CNBC’s Maria Bartiromo under the intriguing banner, “Who’s in Charge?” On stage was a luminary cast including former U.S. Treasury secretary John Snow, Nobel-prize winning economist Joseph Stiglitz, financier-philanthropist George Soros and Infosys board co-chairman Nandan Nilekani. With studio cameras everywhere — CNBC would later broadcast the session in the U.S. and Europe — they and a set of designated challengers including former Treasury secretary Larry Summers debated three timely resolutions:
Motion 1: Central bankers have lost their focus and control with respect to economic governance.
Motion 2: New stakeholders such as sovereign wealth, hedge and private equity funds, have become the new power brokers.
Motion 3: We need a new sheriff to police global financial markets.
The sides were drawn, and the rhetoric was sharp. One of the participants advocated for the first motion, declaring that “sovereign wealth funds are the new powers and the new power brokers” — and they are now deciding “which banks are re-capitalized and which will fail.” Another advocated against the third motion, asserting that a global sheriff is “completely impractical.” Can you imagine, he warned, “the President or the Fed calling up a sheriff to ask for permission to stimulate the economy or cut interest rates?”
With handheld voting devices, the large audience then cast its ballots
- against the central bankers — 59% said they have indeed lost their way;
- for the new stakeholders — 81% said they are the new power brokers; and
- against a global sheriff — 75% said we need no such policing.
It proved one of the most riveting sessions of my six years at the forum, in part because the audience’s votes confirmed a new global reality: Several hundred of the world’s elite had concluded that central bankers had lost control; sovereign wealth, hedge and private equity funds were increasingly in control; and no new authority should be put in control. But it was also riveting for what it said about the conduct of dialogue on contentious issues whether in Davos or the classroom: For optimal impact, sharpen the issues — as the motions and debaters had so well achieved — and sharpen the conclusions — as the audience voting had decisively done.
Further insight into new power brokers came from a subsequent panel on sovereign wealth funds with those who managed the funds for Kuwait, Norway, Russia and Saudi Arabia. Driven by oil revenues, many of these funds have become enormous, and they now operate at the same scale as giant investment firms such as Fidelity or Vanguard. The Norwegian fund, for instance, has accumulated $380 billion, now the equivalent of Norway’s GDP. Taken together, such funds worldwide control $2.5 trillion in assets, and like traditional institutional holders such as pension funds and investment companies, their managers said that they considered only risk and return in their investment decisions. But another panelist questioned whether they would long stay so un-sovereign in behavior. He urged that they explicitly pledge to use purely financial principles in their investment decisions now to ensure that political calculus would not intrude later.
Within the new power-broker club, private equity welcomed the rise of the sovereign wealth funds with some ambivalence as well. A panel with principals from private equity firms Carlyle Group, Clayton, Dubilier & Rice, and Apax Partners attracted a number of private equity managers. They and the audience questioners implicitly concurred with the “Who’s in Charge?” vote that private equity was indeed an ascendant power. One person noted that the sovereign wealth funds were fortunately taking some of the heat off private equity. Media criticism and public “scorn” had long been directed at private equity funds, he said, but now the public spotlight was turning on sovereign wealth funds. It would be only a fleeting advantage, however, since he expected the sovereign wealth funds to move into private equity themselves. As private equity continues to globalize in its search for deals, it may be facing a new set of far larger competitors in the field.
Leadership and Big Capital
A personal directive from these sessions on sovereign wealth and private equity was to ensure that the leadership classroom includes a focus on how company executives and directors can effectively work with the principals of such funds. Company leadership has traditionally been defined around inspiring and directing those below, but increasingly it will also require a capacity to attract and enthuse those above — the new holders of big capital whose decisions to invest or not can be just as fateful for an enterprise as employee decisions to rally around the enterprise.
Finally, this year’s Davos forum provided insights into an array of global trends with implications for both teaching and research. India’s aviation minister, for instance, reported that more people travel on Indian trains in a day than by air in a whole year, almost the reverse of the U.S. But his country’s 9% annual growth rate is transforming traditional habits in everything from aviation to consumerism (see the interview with ICICI Bank CFO Chanda Kochhar in India Knowledge@Wharton). India boasts 450 commercial aircraft now, up from 125 four years ago. Daily flights between New Delhi and Bombay total 57 now, up from four. India operates 50 commercial airports now, but 400 are planned. Other Indian political and business leaders in Davos recited a host of similar growth statistics over the four days, and anyway you looked at it, “!ndia” was booming. I am working with several colleagues on a study of Indian business leadership, and I was reaffirmed in our belief that the story of Indian business leadership success is one that business leaders everywhere will need to know more about.
New worries over sub-prime loans and rogue traders altered the tenor of the annual gathering of the World Economic Forum, but the rising economies of India, Turkey and elsewhere, and the rising assets of sovereign wealth, hedge, and private equity funds all suggested that whatever has been transpiring in mortgage markets or French banks, global business will remain vibrant and — hopefully — resilient.