Distressed, stunned, shocked: These are the words used by Michael Useem, director of Wharton’s Center for Leadership and Change Management, to describe the mood at Davos, the global economic forum usually known for its blue-chip guest list, high-level debates and upbeat mood. Not this year. As Useem, who has been attending the forum off-and-on since 1997, notes: “If exuberance ignited the financial meltdown in 2008, anguish described those now picking through the debris.” In the article below, Useem offers a perspective on the global economic crisis and the opportunities for moving forward, as seen through the lens of Davos.
Distressed; stunned; shocked. However portrayed, the mood was extraordinarily subdued when 2,500 business and political leaders gathered in Davos, Switzerland, January 27 through February 1 for the 39th annual meeting of the World Economic Forum. If exuberance ignited the financial meltdown in 2008, anguish described those now picking through the debris.
And what a contrast it was to what I had witnessed in 1997, my first visit to this annual conclave of global business leaders. Then, banks stood strong, free enterprise reigned and technology promised prosperity. When Microsoft’s Bill Gates and Intel’s Andy Grove walked through a reception hall in Davos, their mere passing stopped conversation as participants silently turned to watch two icons of the global era who were helping to define a new age that looked limitless.
In later years, global sustainability, poverty reduction and sovereign wealth also took center stage in Davos. This year, however, all else gave way to the most brutal financial collapse that any of the participants had ever experienced. An economic system had shifted into reverse, spreading calamity instead of prosperity.
Gallows humor served as momentary painkiller. In one event, somebody moved that we imprison the bankers who had triggered the crisis. When a lawyer objected that criminalizing the problem would not solve it, a participant said fine, in that case just “hang ’em.” Another suggested sending them to Guantanamo.
Tensions boiled over. When Michael Dell asked Russian Prime Minister Vladimir Putin what technology companies could do to help Russia, Putin tartly responded that pensioners and developing nations needed help, but Russia certainly did not. When a session moderator denied Turkish Prime Minister Recep Tayyip Erdogan time to respond to Israel President Shimon Peres’ comments on Gaza, Erdogan stormed off stage.
Yet above all, Davos denizens sought tangible solutions to the immediate challenges brought on by the crisis. In years past, company executives offered management prescriptions from their own experience. This year, many were humbled, hungry for fresh ways forward. They had come to Davos to listen and learn from others’ experience. Here is a sampling of what they heard — observations on the state of the world, and opportunities for moving forward.
- As a matter of homespun wisdom, business leaders were reminded that crises always contain opportunities. “A fall in the pit,” offered Chinese Premier Wen Jiabao, “is a gain in your wit.”
Some no doubt felt like British Prime Minister Winston Churchill when his wife told him after his defeat at the polls in 1945 that it could be a blessing in disguise. He said if so, it was “very well disguised.” Still, Davos participants saw not-fully disguised opportunities in many venues. Some were regional: India, argued one Indian executive, was even now “fraught with opportunity” for international investors. Despite the global slowdown, the Indian economy is expected to grow by 7% in 2009, and with more than a billion people, the demand for mobile phones, small cars and other consumer products will remain very brisk.
- Looking to publicly traded American companies for best governance practices seems less wise than in the past. While independent directors, as mandated by Sarbanes-Oxley in the U.S., are supposed to be guardians in the boardroom, there is still too little time to really appreciate enterprise risks. The governing boards of some of the most damaged companies had looked good on the surface, but independent directors at AIG, Citi, and Lehman had failed to foresee the accumulating risks that would cripple their companies.
A smaller set of more engaged non-executive directors — similar to private equity investors who join the board of their recipient companies — would constitute a better board model, urged one governance expert. The need is for more directors who are not spread thin, who devote significant time to the board, and who dive deeply into the company’s operations and hidden risks. Whatever the particulars, the crisis offers an opportune moment to strengthen corporate governance everywhere since few still doubt it needs improvement.
- Paying company executives to act like self-interested agents of company owners unfortunately was too successful for its own good. It transformed professional managers into self-serving optimizers, more private opportunists than purpose-driven managers. Compensation committees should take heed, advised several participants, aligning executive pay in 2009 around stakeholder, not just stockholder, metrics. Executive raises, bonuses and options should be awarded for not only enhancing shareholder value but also improving workplace safety and reducing harmful emissions.
More generally, a culture of narrow self-interest had come to prevail over collective objectives. The chairman of a global bank observed that his industry had unfortunately evolved from “my word is my bond,” a world built on a community of trust, to a world in which one now thinks, “if there’s a market for a product and it’s legal, I will sell it without asking any other questions.” It is time, he and others suggested, to bring social responsibility back into business discourse.
Transcendent values are important, warned HSBC chairman Stephen Green, even for producing shareholder wealth, since principled behavior is an essential foundation for long-term growth. Jim Wallis, a faith-based activist and founding director of Washington, D.C.-based Sojourners, an evangelical ministry for social justice, summed it up as well as anybody: We have so strongly believed in “the invisible hand,” he said, that we have forgotten the “common good.”
- Some company directors and executives have become too removed from clients and customers, too detached from front-line employees. In their isolation at the apex, argued one Davos speaker, those at the top did not hear the sub-prime rumblings below, nor did they see that corporate jets had become a detested symbol to Congressional inquisitors. More personal contact with all those who impact the company would better prepare executives to lead.
- At a moment when British workers went on strike against foreign workers and Time magazine editors featured Karl Marx on its European cover, it is time to defend capitalism and globalism, suggested several speakers. Though capitalism is no longer seen as the ideal system for doing business, warned one speaker, it still should be viewed as the “least worst form of doing business.”
Many cautioned against the pernicious impact of politically popular protectionist measures, ranging from “buy American” to company subsidies. German Chancellor Angela Merkel openly criticized U.S. support for American car makers, but in a later event, several American political leaders noted that any international effort to pressure the U.S. to back off from protectionist steps could backfire, given widespread domestic support for them.
- Crises test personal principles and societal values. If prosperous companies and wealthy countries had seen their way to help combat AIDS, malaria and poverty in good times, they should be all the more ready to do so in bad times.
That was the message of a special session on private philanthropy, featuring Richard Branson (British entrepreneur), Muhammad Yunus (microfinance pioneer), Jet Li (Chinese actor), Bill Gates, Tony Blair and Bill Clinton. With greater austerity, several said, comes greater responsibility for the millions at the bottom of the pyramid who are already so close to the edge. The question now, said Clinton, is not whether, but how, to build a self-sustaining engine for improving the wealth and the health of the poor.
One device for doing so, urged Yunus, would be for all those responsible for the fiscal crisis to give 10% of their personal wealth to its unwitting victims. The concept sparked little response, but drawing on his own experience in building Grameen, a microfinance enterprise in Bangladesh, Yunus pressed more generally for creating poverty-eradicating organizations that run like a business. “Take off your profit-maximizing glasses,” he urged, “and put on your social-maximizing glasses. The world does not look the same.” One example: His organization now sells purified water, essential for rural health, at just one cent per gallon.
- The current crisis was viewed by some at Davos as good preparation for the year ahead. Charles Chao, CEO of Sina, a Chinese online media company with 280 million registered users, reported that the Internet-bubble burst of nearly a decade earlier had materially improved his company’s operations. Mexican President Felipe Calderón said his country had emerged from the 1994 peso crisis far sturdier as well. Added German Chancellor Merkel: “We want to get out of this crisis stronger than we went into it.”
Although the financial failure was precipitated by forces far beyond anybody’s personal control, restoring growth depends upon everybody’s individual leadership. Resolution of the crisis, stated Vladimir Putin, “depends on our actions.” And those actions, in the words of Wen Jiabao, will require both private confidence and public responsibility. “The financial crisis is a test of our wisdom,” he said, “and to prevail over it is our calling.”
Many in Davos concluded their commentary by saying that these extraordinary times demanded more than ordinary leadership. If we can summon up that leadership to surmount this crisis, said British Prime Minister Gordon Brown, we will be far better equipped to attack the even more threatening challenges of climate change and global sustainability. In doing so, we want to reward “responsible risk taking,” not “irresponsible risk taking.” Most of all, he said, “we want free markets but we don’t want value-free markets.”