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A Sober and Reflective Davos
I attended my twelfth World Economic Forum meeting in Davos this past week. In previous years, there were exuberant “dot-com” savants (1999), self-assured US diplomats just before the invasion of Iraq (2003), impressive sovereign wealth funds (2007) and confident private equity barons (2008). In turn, each has been humbled within eighteen to twenty four months. Last year in Davos, the world stood at the precipice, with insolvent financial institutions looking to government as lender of last resort and global trade plummeting as recession gripped the economy. Economic collapse has been averted but this year’s Davos attendees were forced to reconsider such basic assumptions including the role of business in society and the private sector’s relationship with government. One left the ice and snow with a distinct sense of unease. Here are a few observations from WEF 2010 about the priorities of world leaders that may inform your thinking and client counsel:
1) Government on the front foot: Nicolas Sarkozy, president of France, took a very aggressive position on the future of business, calling for “moral capitalism” in place of the selfish, bonus-addicted behavior that led to the crash of 2008. The president of Korea, Lee Myung-bak, noted that the unprecedented cooperation among G-20 nations had staved off the crisis. He called for strong regulation to “counter pro-cyclical financial institutions” and an end to “too big to fail banks.” Larry Summers, chief economic advisor to President Obama, said, “We were there for the banks, now they need to be there for us and for the country. It is the task of progressive activist leadership not to work against capitalism, but to strengthen the market economy. The system cannot work for the benefit of the limited elite.” A few business leaders pushed back, for example Eckhardt Cordes of Metro Group, who said that government is now too “interventionist,” citing the Opel case in Germany where “there was a private sector solution available.”
2) Bankers on the back foot: Mr. Profumo, CEO of a large Italian bank, said, “Banks have a huge reputation problem. We need a significant regulatory framework to restore trust.” Howard Davies, former head of the UK’s Financial Services Authority, noted “mounting public anger against the bankers; broad discontent among the people.” Brian Moynihan, CEO of Bank of America (disclosure: a client), said that “pension funds need to have more sober assumptions on investment returns so that they don’t make speculative purchases.” Joe Perella of Perella Weinberg acknowledged that the “incentive system does affect behavior. You cannot have extreme bonuses linked to short term profitability. But the leadership of a firm sets the tone on culture; what are the priorities?” Bob Diamond, CEO of Barclays, took a strong stand against the Volcker plan to limit bank involvement in proprietary trading or hedge funds, saying it will hurt their ability to serve clients.
3) Business’ endorse stakeholder model: Indra Nooyi, CEO of Pepsico (disclosure: a client) calls it Performance with Purpose. Mr. Colao, CEO of Vodaphone, calls for “zero tolerance for bad values; lots of rope on operations.” However you characterize it, the consensus of CEOs was in favor of evolving the model away from Milton Friedman (the social responsibility of business is to make profit) toward a more nuanced approach of business’ positive contribution to society. Michael Porter, professor at Harvard Business School, said, “The greatest competitive advantage for business will be social. We used to believe there was a trade-off between profit and social issues. Now we know differently. We thought work place safety and environmental stewardship were expensive, but the highest return on investment comes from zero accidents and reengineering the supply chain to make you more efficient. Companies which understand complex social issues will turn them into competitive advantages.” Tim Flynn, managing partner of KPMG, said that a CEO needs to be explicit and transparent and take a long term point of view on shareholder value.
4) Copenhagen round moves forward: On the positive side, Copenhagen marked the first international meeting based on a consensus on the science (maximum desirable temperature rise of two degrees Celsius), the aid package from the developed to the developing world and a smaller divide between north and south on emission targets/caps. The negatives include failure to deliver on target amount or period in which to achieve the ‘goal by nation’; absence of private sector involvement; and the lack of capacity of the United Nations in negotiating. A senior minister from India acknowledged that climate change is now linked to trade competitiveness, economic development and politics in each nation; “let’s not trash the multilateral process.” President Calderon of Mexico, who will host the next round in December, 2010 in Cancun, said, “We must reestablish trust among the parties. We have two gaps that threaten us; the rich versus the poor and man versus the environment. Let’s connect the solutions to both problems.” Caio Koch Weser of Deutsche Bank suggested public private partnerships such as that between his institution and the German Government to provide 10% of the country’s power needs from solar projects in the Sahara Desert, with the government agreeing to take the “first loss on equity projects.” Mr. Cameron of the Climate Action Project said we will not have a low carbon economy for at least thirty years—carbon sources will account for at least 70% of supply until 2040. Mr. de Boer of the UN said, “There will be winners and losers. No way China can do 8-9% growth per year and have a low-carbon economy.” Ed Markey of the US Congress, warned that “other nations will not be allowed to exploit the US commitment to better environment because it will cause job losses. We will have tariff protection against those actors.”
5) Sustainability as a core value: Water needs to move to the center of planning for development. According to Peter Braubeck, chairman of Nestle, “Seventy percent of our use of water is in agriculture and 85% of that is used in less developed nations. We must improve agricultural efficiency and raise the intensity of production. In fact, 20% of our water use is in manufacturing and 10% is for drinking and personal hygiene.” It was suggested that water used in cities could be recycled but that a significant psychological barrier remains. Vindi Banga of Unilever (disclosure: a client) said that the carbon footprint on a typical Unilever product is 2% at the company offices, 25% at the factory, 10% in logistics and 50% when the consumer uses the product. He said that it is a company’s responsibility to educate consumers, to provide enough background so the consumer can make well-informed product choices. Mark Parker, CEO of Nike, said companies should take on the case for the environment. “Consumption has been seen as linear, from ‘Buy to Use to Throw Away. We have to recapture the value in reuse. We have to tell our investors how we are saving money and creating a sustainable business model.”
6) Education: There are 72 million children who do not go to school, half of whom live in Africa. Queen Rania of Jordan cited the “marginalization of girls and minority groups. We must offer access to all. We should also empower parents in the local environment; they are the best advocates.” Her campaign, 1Goal seeks to raise the $16 billion needed to build schools and hire teachers for those outside of the educational system. Terry McGraw, CEO of McGraw Hill (disclosure: a client) described a program his company is rolling out that “prepares workers seeking re-training over a ten week period to be ready for their next jobs via on-line training modules.” He suggested educating the teachers via broadband, so that they teach critical thinking skills instead of rote instruction.
7) Chronic disease is preventable: The threat of obesity, tobacco and alcohol abuse to incidence rates of heart disease, cancer and diabetes is now present not just in the West, but in China, India and Africa. George Halvorsen, CEO of Kaiser Permanente, said, “We have intervened aggressively, offering every blue collar worker who is overweight a personal trainer. We have achieved lower rates of back pain, heart disease, absenteeism and diabetes.” He asserted that there is “no deterministic link between rates of obesity and education or income.” The health minister of Tanzania said that 60 years ago, cancer and diabetes were rare in his nation, “now many children have Type I diabetes and cancer kills more of our people than AIDS, tuberculosis and malaria together.” The panel agreed that there should be incentives for people to modify diet and start exercise. There is potential for technology to be used in disease prevention, with weight and blood pressure monitors linked to PCs. I attended a dinner on Altzheimer’s, where Dr. Robert Butler of Mt. Sinai Hospital called for a public-private partnership to fund a massive study on use of drugs in prevention, not treatment of the condition.”You have to get to the patient early, even at age 40 when abnormal proteins begin to be produced in the part of the brain where memory lives. One important discovery is that the disease is not genetic.”
8) Emerging market consumers: The consumer in the developing world is seeking to trade up, while the consumer in developed markets is trading down, according to a Boston Consulting Group study released at Davos. Consider that the Chinese saving per family is dropping from 26% of income to 13% of income. In the developing world, 85% of purchases are made by women, who go to 3-5 stores as “deal hunters.” The CEO of Carrefour said these women “value affordability, aspiration and availability. They are smart and empowered.” Newly wealthy people in developing nations “have high aspirations. They want high value premium brands.” In fact, China will pass Japan next year as the #2 luxury market in the world. The CEO of tech giant HTC of Taiwan, Ms. Sher, said that companies must move to local production, given the demand for ecological stewardship. “We need much better communication to customers on the provenance of the product.” In a session on media in developing markets, Shekar Gupta of the India Express Co. said that locally produced content does better than global content. Eddy Saramedia of Indonesia’s leading media company said that he buys scripts from Korea and India, then localizes the creative and shoots at home. I met the creator of “99” comics from the Middle East, super heroes of the Batman and Superman vintage, except of Arabic origin. “I make the story lines local. I give my writers a character guide—no romantic scenes allowed.”
The World Economic Forum experience is akin to being thrust into a blender with the world’s smartest people for four days, then being poured out on the other side. I come away convinced of the necessity of explaining how and why business exists. It is not good enough to generate strong financial returns, outstanding stock price or to have a celebrity CEO. We must demonstrate that business is a change agent, a flexible and fast instrument of social good through employment and better life. Those of us in PR play a vital role in this endeavor.
Richard
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