« Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance | Main | Policy-dependence, Transitions and Turbulence: Market and Economy in the New Normal »

The Cusp Point is Here: Lessons From Davos

The primary concern of the last post was defining the "new normal" and adding on the strong suggestion that each and every business needs to be constantly monitoring external events and not keep getting blindsided by them (Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance).

As it happens almost everything we've had to say about the nature of the new normal, the pressures on governance and performance, etc. almost ad nauseum were discussed at last week's Davos sessions. Over the weekend we had a chance to sample many of the major presentations and 99% of the readings this time are the links to the ones we think you need to pay attention to. The real reason is that the WEF and the Davos participants have largely done your work for you in terms of assessing the multiplicity of risk factors and outlining the likely paths things will follow over the next several years. So between our work on the economy and business and theirs on the big picture environment most of what you need to populate your own dashboard is readily available. We start with a session that Bill George (Harvard, Medtronics) led on re-thinking global capitalism which gives you a pretty good flavor of the pressures that will be mounting and mounting over the rest of this decade (it's an hour+ but just the first few minutes tell you what you need to get started about trust in Business!).

Overall there were several themes that resonated across every session - a fragile recovery exposed to downside risk, a "new normal" that will be much lower and slower than anybody appears to be preparing for despite vast amounts of data, a loss of confidence in globalization (with massive implications for trade and foreign investment), a profound loss of confidence in global governance and trust - in governments in general, enormously so for business, and at contagion levels for finance. A need to re-balance the world economy, i.e. developed economies need to/will save more and consume less and rapidly developing economies (China especially) need to shift to more domestically oriented economies and away from export-driven ones as rapidly as possible. A widespread concern for a re-discovery of values and responsible behavior - "re-thinking capitalism"! No kidding, really. An equally widespread concern for green thinking which is, not far underneath, a concern for transiting to a new energy basis for the world economy given the likely growing gaps between supply and demand plus a parallel concern for other resource shortages (water, food/agriculture, etc.).That's it in a nutshell but let me add some observations on a few of the key themes, later.
 
 

 

 

The Global Risk Landscape

Reinforcing the information in the sessions was some outstanding work that one of the working groups did on assessing global risk. Frankly, since the alignment between their assessment and my fears are so good, we wholeheartedly support paying lots of attention to what they had to say. Take a really good look at this chart (click to enlarge as always).
 
We think it is particularly important to note, that with two exceptions, ALL the major risks that are likely to shape things in the immediate future are related to the global economy. The two exceptions are chronic diseases - a continuing drain on worldwide well-being and prosperity, and global governance. A point of emphasis for us and one that runs thruout each and every session. We'll have more to say later on but the bottomline here is that the new normal is fragile and exposed to some tectonic risks, e.g. China's growth being sub-par. Our analysis would actually put the likelihood over the rest of this decade much higher than the WEF does!
 

The Interconnectedness of Risk: Tectonic Shifts and Haiti Surprises

This year the "kind" folks of the WEF staff and working groups went one better and exploited the miracle of modern technology to give us this interactive map of global risks. If you click on thru you get select any risk to tunnel down on and get more details. What we find particularly interesting is that the biggest risks are sub-par Chinese growth, further collapses in worldwide asset values and the associated pressures from saving the world economy on governments fiscal posture and positions.
 
Just to review the bidding our argument about the new normal is that 1) growth will be very sup-par in the US, 2) as a result employment growth will be extraordinarily weak, 3) the private sector in the developed world is facing a decade of deleveraging which will result in 4) reduced demand for the output of the export-based developing economies. The scary implication of that is that 5) if China, et.al do not RAPIDLY adjust to the new normal their GDP will be adjusted for them and see a sudden drop; resulting in serious risks of political turmoil and regime-threatening instabilities with all the attendant geopolitical risks. We also think that the likelihood is being under-estimated, that the Chinese are adjusting too slowly because of internal political pressures and businesses are VERY ill-prepared to deal with any of these factors.

Business Leadership in the New Normal

There are several (actually ALL) sessions you should pay attention to in the listed links after the break. From the opening session where Pres. Sarkozy announces the world's intent to sharpen its pitchforks to the closing session on re-discovering the role and importance of values and responsibility. Given our primary interest in business performance and the role of leadership however we'll point you to this session on re-thinking business leadership. Listen and make up your own mind but the two things, perhaps three, that struck us were: 1) how much they said the right things, 2) how disinterested some of the panelists sounded and 3) how the Finance guys in particularly continue to under-estimate the backlash that's built up.
 
Summary Impressions
 
Which lead us to this summary of key take-aways across all the sessions. Think of this as our attempt at some Cliff Notes and take it FWIW. But over the next few days or weeks we strongly suggest that you a) take the opportunity to listen to these sessions (the world and US economic outlook and the Energy outlook are particularly eye-opening even though they'll guarantee your eyes will be open at 0200!). An b) and make sure any decision-makers you know are aware of this wealth of valuable but scary information! Anyway here's my key take-aways:
 
1. Trust and Governance - starting with Sarkozy's opening plenary remarks and woven thru almost every single session a complete disenchantment with the social performance of business in general and Finance in particular. The sessions on business leadership and re-thinking compensation are well worth listening to if you don't listen to anything else. NB: the Finance folks acknowledged all this but kept pushing back - both semi-rationally but also very self-interestedly. As an outside observer they still are under-estimating the depth of the anger, backlash, pressures for re-regulation and need to re-think their business models. Business as usual after a few tweaks seems to be their mantra.Setting that aside the pressures on re-thinking and re-structuring corporate governance, performance management and compensation would be at Defcon 1 if Finance hadn't pre-empted that position. In terms of direct impact on NACD-like concerns this is perhaps the most important take-away.
 
2. New Normal Economy - the sessions on the future of the world economy and the specific Industry outlooks carry those themes and reinforce them. But more directly there was almost a universal consensus on how weak any so-called recovery will be, how fragile it is, how very poor employment recovery will be and how these problems will go on for the rest of the decade. In my own work ALL the indicators are that most businesses don't seem to have factored these structural trends into their strategic planning and translated it into on-going strategy, operational and execution thinking. I'd be more than happy to be corrected on this but.... so far that's what the evidence shows.
 
3. Re-balancing - the basic structure of the world economy that evolved over the last 30 years was consumers in the developed world drove world growth while the export-led economies became the workshops of the world. This was acknowledged by all hands but there are two very deep problems. No matter what China, for example, does it won't make up the shortfall for a long time if ever. And, despite acknowledging the problem, the speed of adjustment is less than that required. Which means, again using China, that they are enormously exposed to structural drop in GDP with enormous geo-political implications. Think of this as stress lines in the global tectonic structure that are shifting and may shift very suddenly with little obvious warnings.
 
As business leaders those strike me as the most important "finding" - though to understand what's being said in the sessions a certain amount of background knowledge is required.
 
4. Clean Energy - at some level concern for green energy and climate change was touched in almost every session, even those not directly concerned. But completely set aside the climate issue and think about this as energy security. As the economy "recovers", even with weak growth, the gap between new supplies of oil will not keep up with the growth of demand, resulting in a growing gap between S/D. That's due to aging existing field, under-investment in the development of new fields and exploration and just "normal" frictional problems. Yet a dependence of oil will be with us for the next 30 years because it will take that long to change the structure of the Industry (something that was pointed out in the '70s btw). At the end of the day a concern for "green energy" is really a concern for returning predictability, stability and control to energy markets PLUS a concern to shift those markets to new foundations.
 
Hopefully this is more than enough to frame the take-aways and not too much. Ignore it completely if you like and listen to the sessions without my biases. Those biases are based though on some deep digging and I'd be happy to share that work, including on the l.t. economic outlook, the Finance Industry or corporate governance and performance if you like.

READINGS: Re-thinking Business and Business Performance

 INTRODUCTION: This section starts with a selection of recent articles illustrating the state of play in serious re-examination of the spectrum of dimensions of business performance, from operations to leadership and values to metrics & controls to managing people. For each of the articles listed we also include previous work of ours that covers similar ground, often providing complementary analysis, or deep and more workable machinery or even radically different alternatives. For example the Fortune column on EVA Momentum is, we strongly suggest, exactly the wrong way to go about it being yet another search for the magic performance measurement #! Instead our radically different approach is to focus on strategy, execution and management system knowing that the performance, profits and value-creation will follow

Radical Shifts Take Hold in U.S. Manufacturing America's industrial base is undergoing its most radical restructuring in decades as manufacturers rethink their businesses in the wake of the recession. From Dow Chemical Co. to Intel Corp., iconic companies are telling stories of wrenching change—both contraction and recovery—as they report their earnings for 2009. Dow Chemical said Tuesday it is aiming to shed some $2 billion worth of basic-chemical factories and other assets this year as it moves into more-profitable specialty chemicals. Appliance maker Whirlpool Corp. said it cut about a tenth of its capacity in 2009 as it struggled with a 9.6% drop in sales. Intel, by contrast, is investing billions of dollars in its U.S. plants as demand for computer gear recovers. "We are emerging from one of the most challenging economic environments we've seen in decades," said Whirlpool Chief Executive Jeff Fettig, on a conference call Tuesday. The latest moves are accelerating the U.S. manufacturing economy's longer-term shrinkage, as well as its shift away from heavy sectors, such as automobiles and basic chemicals, toward higher-tech products like super-fast computer chips. In some cases, as with auto makers, companies are stripping down to adjust to diminished U.S. demand or investing in smaller, more-efficient facilities. In other cases, as with chemical makers, they are relocating labor-intensive operations to countries where wages are cheaper.

Global Risk Report 2010 The result of extensive input throughout the previous year by experts from business, academia, and the public sector, Global Risks 2010 highlights a number of slow-moving risks exacerbated by the financial crisis and global economic downturn, and stresses the continued need to further enhance global resilience to risks. Global governance gaps, an issue already to the fore in Global Risks 2009, continues to be at the nexus of global risks and the need for coordinated global action is increasingly urgent. Fiscal crises and unemployment, underinvestment in infrastructure and chronic disease are identified as the pivotal areas of risk over the next years. At the same time, the Report warns that there are also a number of risks to keep on the radar, including the economic and social costs of transnational crime and corruption, biodiversity losses and risks to critical systems from cybervulnerability. The Report suggests that the events of the past year have highlighted the systemic nature of global risks and the need to rethink how to manage and respond to them. Reverting to “business as usual” could have serious implications in the long term in several risk areas. This reflects the premise at the core of the Global Risk Network’s work that global risks do not manifest themselves in isolation.

Why doing good is good for business He makes an economic argument: Globalization has made it increasingly difficult for companies to differentiate themselves based on their products alone. Whatever your product or service might be, chances are that someone on the other side of the world can copy and sell it for less money. And if money is the only bond between you and your employees, they will quit the moment another firm offers them more cash.All the more important, then, for companies to compete at the level of behavior: crucially, how they treat customers and employees. "It's about who has the most trust in their relationships, and where most people want to work," Seidman told me. "This will be the soft currency of the 21st century."But can you really measure the impact of good behavior? One promising area of research is around trust. The practice of corporate social responsibility has been on the rise for some time, evidenced most recently by the outpouring of U.S. corporate donations to support earthquake relief in Haiti. But Seidman believes it should go well beyond a company's CSR department.

A new financial checkup In business as in life, be careful what you wish for. I know a company that wished for a better return on equity. What could be wrong with that? It paid its executives according to that measure, and man, did they deliver. In some years the firm had the best ROE in its industry. It was winning bigtime.The firm was Lehman Brothers, now dead because managing for ROE caused executives to overborrow; after all, debt is capital that earns a return (in good times). Yet it isn't equity, so extreme leverage simply juices ROE until bad times arrive. Wishing for the wrong thing -- managing for the wrong ratio -- killed the company.The larger, chilling reality is that every other ratio out there can lead to the same disaster. Gross margin? Earnings per share? It's easy to make any of them look better while damaging the business.Which is why a new ratio that you've never heard of, EVA momentum, is so intriguing. It has been developed by consultant Bennett Stewart, one of the creators (with Joel Stern) of the measure called economic value added, or EVA.

 When money doesn't talk Money is overrated: In fact, pay has little, if anything at all, to do with motivation in the workplace. That's the controversial argument put forth by best-selling author Daniel Pink in his new book, Drive: The Surprising Truth About What Motivates Us (Riverhead Books). "Pay for performance has to be exposed as folklore," he says.Pink contends that, provided employees receive a baseline level of compensation, three other factors matter more than moola: a sense of autonomy, of mastery over one's labor, and of serving a purpose larger than oneself. Hmmm. There may be something in all this -- but the executives at Goldman Sachs (GS, Fortune 500) aren't exactly busting a gut to adjust. Like others on Wall Street, the banking giant, which is expected to earn $6 per share in the fourth quarter, argues that fat bonuses are crucial to making its numbers.Responds Pink, in a now common refrain: That's precisely the attitude that led to the recent financial meltdown, as traders and mortgage brokers focused on short-term rewards that encouraged "cheating, shortcuts, and unethical behavior."Moreover, the 45-year-old author and former Al Gore speechwriter cites social-science experiments and experiences at such workplaces as Google (GOOG, Fortune 500), JetBlue (JBLU), 3M (MMM, Fortune 500), online shoe retailer Zappos, and software companies Meddius and Atlassian.

Davos Sessions

Major Overview Sessions

Welcoming Remarks by Doris Leuthard, President of the Swiss Confederation and Federal Councillor of Economic Affairs Klaus Schwab, Founder and Executive Chairman, World Economic Forum Davos Annual Meeting 2010 - Nicolas Sarkozy Opening Address by Nicolas Sarkozy, President of France Chaired by Klaus Schwab, Founder and Executive Chairman, World Economic Forum

Rethinking Values in the Post-Crisis World Values are considered important and enduring principles, which are correct and desirable in life, shared by members of a community.What values need rethinking in the wake of the "Great Recession"? Speakers: Yvan Allaire, Thomas H. Glocer, Yasuchika Hasegawa, Hartmut Ostrowski, Jim Wallis, Muhammad Yunus, James H. Quigley

Davos Kick-off of the 2010 FIFA World Cup in South Africa Share in the "spirit of Davos" to support this historic event of Africa and the global community. Speakers: Mark Fish, Lucas Radebe, Klaus Schwab, Zuma

"Yes We Can?" US President and Nobel Peace Laureate Barack Obama awoke high expectations with his slogan "Yes, we can!" After one year of presidency, it can be seen where President Obama has introduced political innovation and where he has not. To what extent has the impact of the financial and economic crisis been curbed in the US? Speakers: Susan M. Collins, Riz Khan, Sir Martin Sorrell, Christine Maier, Kenneth Roth, Ulrike Lunacek

A Roadmap for a Sustainable Recovery The Annual Meeting Co-Chairs examine what industry and government should do to lead the global economy on a path of sustainability and job growth in 2010. Speakers: Azim H. Premji, Peter Sands, Ronald A. Williams, Patricia A. Woertz, Josef Ackermann, Michael Oreskes, Klaus Schwab

The Global Agenda 2010: The View from Davos Join experts from over 70 Global Agenda Councils in a brainstorming session to map the critical global issues that emerged from the World Economic Forum Annual Meeting 2010 Speakers: Brainstorming session with Nik Gowing

Being Responsible for the Future Speakers: Rowan D. Williams, Joao Rafael Brites, Tshepiso Gower, Sarah Jameel, Carmina Mancenon, Mousa Musa, Nishin Nathwani

Capitalism, Governance and Performance

Rethinking Market Capitalism A sudden global recession, massive government bail-outs and a steep loss of public trust in corporations have forced a re-examination of the spirit and structure of capitalism. What elements of market capitalism should be rethought? Speakers: HRH Prince Salman Bin Hamad Al Khalifa, Herman Gref, Guy Ryder, Ben J. Verwaayen, Jacob Wallenberg, Tony Tan Keng-Yam, Willam W. George

Rebuilding Trust in Business Leadership A global survey in 2009 revealed that only 29% of respondents trust information communicated by CEOs, down from 36% in 2008.What steps should business leaders take to rebuild trust among their stakeholders?

Business Leadership for the 21st Century "Management is doing things right; leadership is doing the right things." -- Peter F. Drucker (1909-2005) What are the pressing global, industry and societal issues that business leaders must address in the wake of the "Great Recession"? Speakers: Stephen Green, Rosabeth Moss Kanter, Indra Nooyi, Eric Schmidt, Wang Jianzhou, Robert Greenhill.

Rethinking Compensation Models A 2009 study revealed that 70% of the 200 largest companies (by market capitalization) in the S&P 500 Stock Index reported changes to their executive pensation programmes. How should compensation systems be redesigned in the wake of the "Great Recession"? Speakers: Shumeet Banerji, Mark Mactas, Stephen G. Pagliuca, Guy Ryder, Peter A. Weinberg, Adi Ignatius.

Rethinking Systemic Financial Risk In 2009, the G20 tasked the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision to develop "macro-prudential tools" to combat systemic risk. What structural deficiencies still persist in the regulation of systemic financial risk and how will they be addressed in 2010? Speakers: Jaime Caruana, Ibrahim Dabdoub, Robert E. Diamond Jr, Stefan Lippe, Jonathan M. Nelson, Guillermo Ortiz, Suzanne Nora Johnson

Redesigning Financial Regulation An Internet search of "global financial regulation" results in over 17 million possible entries to explore. How should the largest financial institutions in the world be regulated domestically and internationally? Speakers: Agustin Carstens, Pravin Gordhan, Davide Serra, Tidjane Thiam, Jean-Claude Trichet, Barry Eichengreen, Stanley Fischer

The Economic Outlook

What Is the "New Normal" for Global Growth? Despite an upward revision of the International Monetary Fund's most recent World Economic Outlook, average real GDP growth of the global economy over the next five years is expected to be less than that of the five years (2003-2007) before the crisis. Speakers: Dennis Nally, Arif M. Naqvi, Raghuram G. Rajan, Nouriel Roubini, David M. Rubenstein, Heizo Takenaka, Michael J. Elliott

2010 The Year of Recovery? As we enter a new decade, the global economy has been shaken by over a year of recession. This raises questions about trust in political and financial establishments, and the accelerated shift of power from West to East. Speakers: Sharan Burrow, Barney Frank, Pascal Lamy, Gerard Lyons, Nik Gowing, Hirotaka Takeuchi

The US Economic Outlook The economic outlook for the world's largest economy remains uncertain with unemployment levels reaching 10% and budget deficits increasing at the national and state levels.How will the Obama Administration address these and other economic challenges in 2010? Speakers: Lawrence H. Summers, Charlie Rose

Global Economic Outlook The International Monetary Fund is forecasting positive growth in 2010; yet, it warns the pace of growth will be too sluggish to prevent further increases in unemployment across the global economy. What is the outlook for the global economy in 2010? Speakers: Josef Ackermann, Montek S. Ahluwalia, Dominique Strauss-Kahn, Lawrence H. Summers, Zhu Min, Martin Wolf, Yoshito Sengoku

Global Energy Outlook Despite the major decline in energy prices from their peak in 2008, energy security concerns have increased as major producing and consuming economies differ significantly on how to develop a more secure and stable energy system. How can producers and consumers develop mutually beneficial approaches to energy security? Speakers:  Ilham Aliyev, Thierry Desmarest, Khalid A. Al Falih, Tony Hayward, Andrew N. Liveris, Peter Voser, Daniel Yergin

Global Industry Outlook: Finance, Services and Media No industry is immune to the global, cyclical and structural changes reshaping the world economy. Chairs of the World Economic Forum Governors Meetings each share their industry's evaluation of the most important challenges and opportunities in 2010. Speakers: Josef Ackermann, Hans-Paul Burkner, Colin Dyer, Eric Mindich, Jeff Zucker, Kevin Steinberg

Global Industry Outlook: Heavy Industries No industry is immune to the global, cyclical and structural changes reshaping the world economy. Chairs of the World Economic Forum Governors Meetings each share their industry's evaluation of the most important challenges and opportunities in 2010. Speakers: Frank Appel, Samir Brikho, Gerard Mestrallet, Feike Sijbesma, Klaus Kleinfeld

Global Industry Outlook: Health, Consumers, Tech and Travel No single industry is immune to the global, cyclical and structural changes reshaping the world economy. Chairs of the World Economic Forum Governors Meetings each share their industry's evaluation of the most important challenges and opportunities in 2010. Speakers: Jon Fredrik Baksaas, Paul Bulcke, James Hogan, Lars Rebien Sorensen, Patricia Woertz, Jean-Pierre Rosso

Re-Thinking the Brave New World

 Special Message: Recipient of the first Global Statesmanship Award from the World Economic Forum (President Lulu of Brazil)

Global Governance Redesigned Effective global governance requires not only nations to agree on common goals but also to design and build the systems and institutions that can achieve them. How can global governance be significantly improved in the 21st Century? Speakers: Felipe Calderon, Lee Myung-Bak, Nguyen Tan Dung, Stephen Harper, Jose Luis Rodriguez Zapatero, Jacob G. Zuma, Fareed Zarkaria

The Great Shift East in the Global Agenda Nearly 3 billion people residing in the 21 economies of the Asia-Pacific Economic Community (APEC) account for more than one-half of the world's GDP. What are the implications of the West to East power shift on the global agenda? Speakers: Cheng Siwei, Peter Sands, John Lipsky, Abhisit Vajjajiva, Aiko Doden, Kamal Nath, Motohisa Furukawa

Special Message by Li Keqiang, Executive Vice-Premier, State Council of the People's Republic of China

Redesigning the Global Dimensions of China's Growth China's transition from a low-cost, export-driven developing economy into an advanced one with a diversified industrial base is happening faster than the rest of the world expected. Speakers: Klaus Kleinfeld, David Li Daokui, Stephen A. Schwarzman, John Zhao, Rui Chenggang

India's Future Agenda The 2009 victory of the United Progressive Alliance (UPA) was the first time since 1962 that an Indian prime minister was elected to a second five-year term. Speakers: Reuben Abraham, Montek S. Ahluwalia, Shyam Saran, Anand Sharma, NK Singh, John K. Defterios, Venu Srinivasan

Will India Meet Global Expectations? Multilateral trade, climate change, Millennium Development Goals and nuclear non-proliferation are just some of the items on the global agenda in which the ld expects India to play an active and constructive role.What does the world expect from India and what does India expect from the international community? Speakers: Robert D. Hormats, Anand G Mahindra, Zakir Mahmood, Anand Sharma, Vikram Chandra

Posted by dblwyo on February 3, 2010 09:25 PM |

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)