Davos Annual Meeting 2010 - Business Leadership for the 21st Century

ï»¿Robert Greenhill, Managing Director and Chief Business Officer, World Economic

Forum:

Well, good afternoon and welcome, everyone, to our session on business leadership in the

21st century. Peter Drucker defined management as 'doing things right; leadership is doing

the right things'. Well, what does it mean to do the right things, particularly coming

out of a global recession? What are the right things in terms of economic growth, in terms

of dealing with employment, dealing with the key issues of climate change, food security

and other areas that businesses are called upon to engage in? And last year when we were

here together, governments were looked upon as being the last line of defence at a critical

time economically and business seemed to be playing a lesser role. Now, we're seeing the

constraints on government fiscally, we're seeing the constraints on government agreements,

such as at Copenhagen, and so the issue of the relationship between governments and business

in trying to solve these broader issues is perhaps more complex and yet more important

than ever.

We have a great panel to discuss some of these issues here this afternoon: Stephen Green,

Chairman of HSBC; Rosabeth Moss Kanter, celebrated author and Professor of Harvard Business School;

Indra Nooyi, Chair and CEO of PepsiCo; Eric Schmidt, Chairman of the Executive Committee

and CEO of Google and Co-Chair of the 2010 Annual Meeting; and Wang Jianzhou, Chair and

CEO of China Mobile Communications. Welcome.

Indra, on this challenge of working to solve not only economic but social issues and the

relationship between governments and industry in trying to deal with these things, how are

you seeing this emerging coming out of the global recession?

Indra Nooyi, Chairman and Chief Executive Officer, PepsiCo, USA; Member of the Foundation

Board of the World Economic Forum; Global Agenda Council on the Role of Business:

So, let me provide some context and actually go back a little bit in history, because I

think it's important we put this whole issue in context. Let's go back to 2000, 2001, when

we had the meltdown of Enron and WorldCom. Interestingly, when Enron and WorldCom ran

into those issues it didn't really bring down the economy, it didn't bring down the financial

system, but it shook public's confidence in corporations and CEOs. And in anger, Washington

passed Sarbanes Oxley. It was passed hastily, but it was passed and it brought some comfort

to the public and said maybe now corporations are fixed, because Sarbanes Oxley is going

to take care of everything. The question is did that help? Did that one act actually bring

confidence back in companies? I'd like to say yes, because the amount of work that went

into Sarbanes Oxley was staggering, but unfortunately, Sarbanes Oxley didn't prevent the financial

meltdown we had in 2008 and 2009, because that brought the financial sector to the brink

of a meltdown, forced governments to act rapidly and inject a lot of money into the system.

And what happened to a public that was always sceptical of corporations and CEOs? It actually

shook their confidence completely and the most depressing thing was to look at the Edelman

Trust numbers and to see the CEOs rock bottom in that whole trust index. And for us hard-working

people that was a very tough, you know, position in that Barometer to take on. And because

of what happened last year, faith in corporations in particular is at an all-time low.

Short-term, there have been a lot of actions by governments, be it taxation on bonus, you

know, increased proxy disclosure, lots of negative attention on CEO pay, you name it.

I mean this is not a popular job to have these days. But governments have not acted in concert

to implement anything sweeping, but the public is waiting for something to happen to regulate

private enterprise and to rein in the financial sector. Whatever the outcome, I think we have

to accept that the outlook and the future for CEOs and corporations post-2009 is going

to be very, very different than life was before.

But as we move forward, I want to keep a couple of facts in mind. Private enterprise is critical

for economic development and growth, because we create jobs, we spur innovation, we improve

quality of life. Yet if we are not pragmatically regulated we can create problems too, as was

evidenced by the last couple of years. But going forward, we in the private sector have

to recognize that governments are going to play a bigger role in our life in overseeing

us and providing a lot more direction. And as the discussions in Davos last year and

this year have indicated and as all the editorials in newspapers, many books have been written

about it, I think the nature of the enterprise, the nature of capitalism is going to change,

whether it be capitalism 2.0 or 3.0. I think all companies are going to have to think long-term

and not short-term, the focus has to be on the stakeholder not the shareholder, and we

have to marry performance and purpose. And this is not new news. You know, corporations

operate from a licence â€“ with a licence from society and we owe society a duty of

care.

But let's also be clear: corporations can't do it alone, we have to work in concert with

governments and governments need us to be the engines of growth, as I explained earlier.

And this mutual interdependence means that public-private partnerships are absolutely

critical going forward. Today, if you look at the environment, I wouldn't say that partnerships

exist. I'd say there's a lot of scepticism and anger. But I suspect coming out of this

short-term anger you are going to see many more public-private partnerships emerge, because

governments can't do it alone and we need government to work with us, not against us.

Greenhill: Well, Indra, let me go forward on that point. This issue of trust, it's not

only a challenge of trust with the public; it's actually a challenge of trust between

the corporate sector and governments. And yet as you were pointing out, this issue,

this isn't just a relationship between governments and business on stopping bad things happening

through regulations. It's how they actually work together to achieve some of the good

things that need to be done. How do you see that challenge over the next couple of years?

Nooyi: Well, the question is are we, the business sector, going to take the leadership and actually

propose to governments a new way that we can operate, so that government doesn't have to

tell us how we should operate? And I'm not sure we, the business sector, are willing

to come together and propose that framework. Were we to do that, then I think we could

have really sort of chalked up marks on the board for the private sector. That's a challenge

I'm throwing out to myself; maybe it's foolish, but what the hell.

Greenhill: That's a great one and we'll come back to that when we talk with people in the

audience. And, Indra, you mentioned the issue of capitalism 2.0. Well, certainly in terms

of some of the alternative models that we're seeing in the world today one that's getting

a lot of attention is the Chinese state-owned enterprise mixed model. Mr Wang, your organization

represents not only an extraordinarily successful organization and corporation, but also an

example of an organization that's partly owned by the state, partly owned by the public through

public share offerings. How do you see this issue of the role of the corporation in providing

not only economic returns but economic returns to society?

Wang Jianzhou, Chairman and Chief Executive, China Mobile Communications Corporation, People's

Republic of China:

Yes, you are right, China Mobile is a listed company and we hold 20%-25% -

Greenhill: You speak English so well, that's why â€“

Wang: I don't know what happened, yes.

Greenhill: It's amazing.

Wang: Okay. 25% are floating public investors and 75% belong to the government. And, first

of all, I'd like to talk about the change of the business leadership before and after

the crisis. I think the crisis gave big impact on business leadership, both for the private

company and the public company. And I think there are two kinds of impact. One is tangible,

the other is intangible. Take the example of China Mobile. It is a company with a subscriber

base of 520 million and the crisis gave us the big impact, for example, because of the

decrease of the exports it gave us the slowdown for our international calls; because many

migrant workers return to rural area it decreased our growth also. But the situation of that

is over. The migrant workers now go back to the cities and we now have the international

calls number equal to that of before the crisis.

But I think we still have some intangible impact on business leadership. The biggest

one is the decline of the public trust in companies for the value creation. And, you

know, China Mobile is a big company in Hong Kong and New York, listed in Hong Kong and

New York and I think now the analysts don't know how to analyse the company after the

crisis and the investors don't know the â€“ whether the analysts' reports for a company

are believable. And for companies, for management team of company, we also complain that many

people just pay attention to the news of company, even for some rumours of company. They don't

pay attention for the financial results or for the performance, for long-term performance.

Just sometimes some rumours can affect the company's price a lot. So this is a big issue.

This is the intangible impact because of the crisis and I have three points of proposal

to deal with that.

The first thing, currently, as the management team of a company we should pay more attention

to the real practice rather than the theoretical models. The bankers give us a lot of models,

but they are based on the assumption. If the assumption changes, the results will be quite

different, so we should pay more attention to the real practice.

Second, I think we need to use new technology. During the crisis the management team just

pay attention to the cash flow healthy and now it's the time to use new technology, to

pay attention to technical innovation.

And third one, company should take more social responsibility.

Greenhill: Well, thank you very much. We're having a number of very concrete ideas here.

There's Indra's proposal that business has a responsibility to engage more proactively

on what they're going to do positively rather than just what they oppose in terms of the

regulatory area. Mr Wang, you've laid out three issues and let me come back to this

one of being more responsible socially. And how do you at China Mobile define that and

are there some concrete examples of the kind of social engagement that you see as critical

to your raison d'Ãªtre beyond just economics?

Wang: Yes. I give you an example to how the mobile coverage in rural area. You know, five

years ago when we did the coverage in rural area I got a lot of warning from analysts.

They said 'Never do that because you cannot get a financial return, because very few people

in rural area will use a mobile phone.' But we think it is the social responsibility.

We should take the responsibility. But the problem is how to balance the social responsibility

and the financial results, the value for shareholders. Five years later, today, the situation is

quite different. You know, because we have very good coverage the company becomes very,

very competitive. It's reduced the churn and it attracts more subscribers both in the rural

areas and in cities.

Greenhill: Interesting. So actually addressing the social needs actually also helped over

time improve your economic returns as well.

Well, Stephen Green, we can't have a conversation on these kind of issues without, of course,

looking at the financial industry. I'm going to shock and surprise you by asking you about

the regulatory areas, but I think we're all interested in understanding beyond that what

do you think the role is of the financial industry in not only ensuring that the bad

things of the past don't happen, but some of these really important good things in terms

of growth and addressing some of these other social issues are actually effectively addressed?

Stephen Green, Chairman, HSBC, United Kingdom:

Well, Robert, thank you. And I think the first thing to say is that everything that Indra

has said about the corporate world in general in terms of its issues of trust and confidence

amongst the wider community is true in spades of banks, for all the obvious reasons. I remember

being here last year â€“ in fact, on a panel with Indra â€“ at a time when

it did seem as though the financial world was heading towards an abyss. And I remember,

I think, Tony Blair was on the same panel and he accused me or complimented me, I suppose,

as being one of the few bankers prepared to appear in daylight. Well, it's at least true

to say that we're in a better space now than we were then. Nevertheless, there are still

major issues, clearly. There's been a huge breakdown in trust in the financial system.

This is a breakdown in trust in the institutions and the way the system operates. It's also

a more fundamental questioning of the very role of the markets and capitalist development

itself and the debate is furious and will continue for many months at least, actually

I think probably for many years, about the implications of all this. Books are being

written, more books will be written and there are lots of lessons to be learned. One of

the mistakes no banker should fall into making is of being seen to argue that somehow we've

learnt all the lessons, we've fixed our house and now we're ready to move on and please

stop beating us up, because actually life is not as simple as that. It is true that

a number of lessons have been learned. It is equally true that there's some way to go

yet. I don't think we can, any of us, say that we've got a functioning financial system

yet that is stable â€“ well, I think it's stable, but it isn't robust enough and

it isn't yet in a position where it's performing the proper role that it has in the context

of economic and social development. I want to come back to that in a minute.

The regulatory debate is both intense and intricate and is complicated, as we all know,

by political initiatives emerging on both sides of the Atlantic. I'm not going to suggest,

unless you want me to, that we go into the details of that regulatory debate suffice

it, I think, to say that out of this will come a better capitalized system, a more liquid

system, a less geared system and a number of other measures to strengthen its robustness,

because we really do need to ensure that we never again get into the position that the

financial world put the real economy into in the years 2007, 8 and 9.

So there's a long way to go on all of that, but what I'd like to do, with your permission,

is kind of look beyond all of that for the moment to just reflect a little bit on what

the role of banks and the financial system is longer term. And I start with the very

simple proposition that there is no alternative to a financial system if you want viable social

and economic development. It is very important that we don't throw the baby out with the

bathwater. It is important that we don't forget that the financial system and the increasingly

globalized capital markets have facilitated significant development in many emerging markets,

which has led to hundreds of millions of people around the world being lifted out of poverty

and given their real first chance of improving their lot in the mainstream of modern society.

And these achievements need not to be forgotten.

What we need to do is ask ourselves how we ensure that we get back to that role. And

I think, in essence, there's quite a simple answer to the question of what is the responsibility

of the banks and the capital markets in all this. The answer is that we're there to contribute

to economic and social development and insofar as we do that successfully we will have profitable

businesses â€“ and we are banks, we are businesses and not NGOs, we need to make a

profit for our shareholders, but we need to recognize that we will only have sustainable

business models insofar as we are sustainably developing the position of our particular

institutions in society.

Sustainability I think is a key word to hang on to. Sustainability means at least three

different levels of things. First of all, sustainable profits. Like I say, we're businesses,

we're not charities. We need to have sustainably growing business models that are profitable

and enable us to pay returns to shareholders. Returns to shareholders are sometimes treated

as an optional extra, but actually the truth is that the people who â€“ the investors

in a company like mine are pension funds on behalf of all sorts of people. We calculate

roughly that there are some 17 million people whose pensions get paid directly or indirectly

by dividends that come from us, so yes this matters.

But in order to get that sustainable flow of returns to investors you need to have two

other sustainable watchwords. The first has to do with people. It's a clichÃ©s in many

businesses but it's certainly true in banks that the people are the real assets and unless

you engage your people and engage them over the long term, you're not going to have a

sustainable business model. I don't want to be naive about that. Businesses change, you

sometimes have to make hard decisions, but the fact is that unless you're investing in

the people who do the business for the â€“ for the company, in this case a bank, you

are not going to have a sustainable business model.

And then the third thing that follows on from this and follows from it increasingly is a

sustainable commitment to the communities in which we do our business. I say it follows

from it because all of the evidence is that we, and I've no doubt my peers in the market

do the same thing, we do people engagement surveys for our people around the world â€“

in our case, we employ some 300,000 people in 85 different countries â€“ and those

engagement surveys tell us the very strong importance to our colleagues, to my colleagues

of the commitments we make to the way we comport ourselves in the community environment. And,

in particular, they are more and more determined that we show a responsible attitude in matters

of environment, climate change and all that goes with that as we move forward.

So my general point is a simple one: sustainability is the watchword. It has levels of meaning

that have to directly do with a profitable business model, but also with people engagement

and also, above all, perhaps, with responsible commitment to the communities where we do

our business.

Greenhill: Stephen, what do you see for yourself, for your organization and the banking industry

that needs to be done differently in that â€“ specifically in that last area compared

to 12 months ago to address some of the trust gap that Indra was talking about?

Green: Well, some of this is not new. What went on in the run up to the crisis is â€“

was outrageous, has damaged trust in the industry and, tragically, as is so often the case,

it is parts of the industry that owe the rest of the world an apology. The banking industry

as a whole consists of many, many people doing honest, solid jobs of work and what I've described

to you about what our people want is not something new, but we do need to respond to it very,

very obviously and very visibly. When I visit our operations in different countries in the

world, I always make a point when I call on the authorities of talking not about the need

to be profitable, we do of course need to be profitable, but the importance to us of

making sure we're making a commitment to economic and social development. These things hang

together and it's critical that it be seen to be so.

Greenhill: Very interesting and, in a sense, very much in line with what Mr Wang was saying

just a moment ago as well. And Eric Schmidt, of course, Google has been engaged in some

extraordinary innovations economically, but also extraordinary innovations in terms of

meeting social needs, sometimes not even well defined social needs. How do you see this

issue of leadership in terms of innovation and do you see any changes now compared to

a year ago?

Eric Schmidt, Chairman of the Executive Committee and Chief Executive Officer, Google, USA;

Co-Chair of the World Economic Forum Annual Meeting 2010:

Well, the question I always ask in these sorts of conversations is where is the growth going

to come from, fellas? You know, what are our choices? You know, are we going to move all

the money around again or are we going to create something new? Innovation is fundamentally

how the world's going to become a better place. Innovation in health care, innovation in information,

innovation in governance and so forth and so on. So Google's role, we see ourselves

as basically focused on the end user and our internal view of ourselves is that whenever

there's an opportunity to provide something at low cost or, ideally, no cost to an end

user, you know, paid for by advertising or other mechanisms, that's a win, because then

they have a choice, they have an opportunity to do something with that. And the most interesting

thing that's happening in the technology centre has been the explosion of mobile devices,

which everybody knows about. What people don't appreciate, in my view, is that these mobile

devices are more than phones and cameras and so forth. They're the most powerful computers

you've ever held in your hand and they're connected to the most powerful set of servers

that have ever been developed. And it is the combination of that that really will drive

things forward. You can literally know everything: know where people are, know what people are

doing, analyse questions, translate every language into every other language, take pictures

and figure out what they are, have something called 'augmented reality' where the phone

will show you what's going on, as best we can tell, behind the images, and it's all

in a device of this size. So that, to me, drives so much of the dialogue going forward,

because it is a big change, it's a change of empowerment.

So, innovation drives change and wealth, in my view. Where are the jobs going to come

from? They're going to come from innovation in all of the industries we're describing.

And, second, the innovation that I'm talking about is an empowerment about individuals

and that spreads from the standpoint of self-interest, business productivity â€“ all the things

we normally talk about, but it also allows individuals to make their world a better place,

to know more things, to decide which crops to plant when â€“ all the things that

people care about in their daily lives.

Greenhill: Rosabeth, listening to this panel here talking about the role of business not

on the economic side but on the social side, the idea of a positive engagement with governments

on some of these issues, the example of China Mobile, the examples of HSBC and then the

very forward looking perspective of what Google's looking at. I mean it sounds great, but it

doesn't sound at all like the kind of things we've been hearing in the media in terms of

the debate around the role of business. So, you as a business professor have been looking

at these issues. What do you see actually are the tradeoffs here? I mean how real is

this and what do you think people should be taking away in terms of what business can

actually be doing coming out of this recession?

Rosabeth Moss Kanter, Arbuckle Professor of Business Administration, Harvard Business

School, USA; Global Agenda Council on the Role of Business:

So I think it's very real. I think it's not always happening, but it can be and it can

make a huge difference. So I have been working for the past four or five years on a set of

companies from all parts of the world, every continent in the world that were considered

exemplary. I chose them four or five years ago because they fit models like this. They

had strong cultures and they engaged with society and they're some of the world's leading

companies and I can give you the good news that they generally outperformed their industry

peers, and sometimes by a large amount, during the recession, because they had these attributes.

And we've got to get these attributes recognized as legitimate where sometimes laws don't allow

this, get them taught at business schools, get CEOs honoured for living up to them, and

they've got four characteristics.

The first is that an enterprise has to be defined in terms of how it serves society.

That's the definition of the enterprise. From that does follow shareholder value because,

as I said, these were very profitable companies that I've worked with and they're some of

the world's leaders. Some of them are sitting on this stage, but it's also IBM, Procter

& Gamble, Bank Real in Tangiers, Brazil, SEMEX in Mexico, OMRON in Japan, etc, etc.

So they do it first by defining their mission as serving society and creating out of that

sense of purpose and value something that integrates the enterprise around what it's

doing. So that, first of all, turns out to be very efficient. When you have far-flung

enterprises, if you don't have your people who have to make fast decisions on the ground

on the same page with respect to what are they doing and what are they doing it for,

you can't make good decisions. And so in many of these companies they're very fast because

they invoke a common set of standards and frameworks and, by the way, those standards

and frameworks they often use in countries other than their own to try to raise the standards

in those countries. So, for example, Procter & Gamble was heavily involved in helping

create the first health maintenance organization in Egypt, so that they could treat its people

â€“ their people the same way in every country of the world, have one integrated

enterprise.

The second thing they do is innovation. Eric Schmidt is so right on and, of course, Google's

performance demonstrates that, that innovation is always the way you make money. Innovation

is also the way you serve society. I mean in this era when NGOs are all over companies,

many companies that they say they distrust but they still would like their contributions

from the deep pockets. Actually, the best contribution companies can make to social

well-being is through their innovation, through their capabilities to create new solutions

to problems. It's nice to have a little extra cash to give away too, but it's innovation

and those companies that have society at the centre look further at unmet needs. Eric said

'where's the growth going to be?' Well, China Mobile realised it was in rural areas. The

growth is going to be in places that have needs that are not yet defined even by a market.

And the more you can innovate to meet those needs, so the more you focus your people in

a company on the needs of society the more they're going to bring back ideas for products

and services that use your capabilities that make a difference, so you get an innovation

advantage.

Third, you get a partnership advantage and no company succeeds in the world today, however

small, without being part of a network of other companies. We sometimes call it the

'ecosystem'. I mean how you develop underdeveloped places is through community organizations,

it's through business partners that might be small enterprises. And when a company is

oriented toward the wider ecosystem and how everyone's going to get some benefits, they

attract the best partners. They get those partners wanting to innovate with them and

their reach extends. You often get into new markets better because you're partnering with

local organizations and you're helping support them and that's one of the ways, by the way,

the great global multinational company gets in with government is by showing government

that they actually are doing good on the ground in that country in the interests of that local

community.

And then the fourth thing is the people â€“ and everybody here has stressed the people.

These days there is a value shift. There are young people, the most talented people coming

out of university and MBA programmes, they have values and they want to act on them.

They are more engaged if they have an opportunity to feel that they're contributing to something

that makes a difference. So I saw in these companies and I now argue for the fact that

everybody has two jobs: one job is 'do my job', the second job is 'change the world'.

That is, the more the company is able to take on an issue that's relevant to the company's

purpose, whether it's climate change or health or education, and give their people a chance

to actively go out and contribute to a solution to that problem, first of all, it's a better

way to train people to be leaders, through service; secondly, you hire and retain the

best people; third, you get those innovation ideas. And then when you use social networking

technology to allow people to communicate about that all over the world, you have a

better basis for a positive and productive conversation and, again, you're integrating

the enterprise around a sense of purpose. This is why companies that operate this way

and that emphasize their culture actually do make more money.

Now, you asked about tradeoffs. They sometimes don't make more money tomorrow, because they

have to invest. On the other hand, we consider investment in R&D â€“ bankers consider

this a good thing for companies to do. We also have to put investment in social R&D

on the same page, where you don't expect a return in a commercial sale instantly, but

you're paving the way for the future. And so I think this is the right economic model.

I think the issue is are enough companies going to do it, because it requires leadership,

it requires trust in people, it requires values and I want to know whether everybody is going

to step up to that challenge.

Greenhill: Well listen, we're going to open it up to the audience for some questions and

comments. Before I do that, let me just turn to the panel members. Would anybody like to

comment on what they've just heard over the last few minutes? Indra?

Nooyi: I think the only thing I want to â€“ is apologize to my friend Stephen Green, because

list time when we were on this panel, Stephen, I drew a very strong line between Wall Street

and Main Street. Over the last year I guess I've grown up and I think Main Street can't

do without Wall Street and I don't think Wall Street can do without Main Street, so we're

totally interdependent.

Green: The latter point is certainly true.

Nooyi: We're totally interdependent, so it's critically important we work together to restore

faith in corporations, because nobody's going to paint us differently and we need each other.

So...

Green: I entirely agree. I think there's a collective interest in getting this right.

The collectively interest, by the way, is very broadly defined. The collective interest

is public authorities, it is businesses both in the real economy and in the financial world,

it is, of course, also people. There's a very broad sense in which there's a real common

interest in getting this right.

Can I make just one other comment? This is about innovation. I'm intrigued by the way

Eric said, you know, that there's â€“ innovation is at the centre of taking business

forward. Banks are often accused of having too much innovation. In fact, they certainly

have been accused of being rather too innovative of late and a little bit more kind of boring

return to basics is felt by many people to be the recipe for stabilizing and strengthening

the banking system. And, indeed, Paul Volker has famously said that the only innovation

that the banks cooked up over the last 25 years that was any use to anybody was the

cash machine. I haven't had a chance to take him up on this, but I think you could argue

that there are some financial techniques that are actually really rather important to social

and economic development, to corporate funding and so forth. But there is a sense in which

the imperative for the moment in the case of the banks is to get back to some basics

rather than think of being yet more â€“ rather than producing yet more cleverly innovated

financial structures. But that's a rather specific issue for the banks.

Green: Let me just, before going to the floor, ask this question. Why, if there's a sense

of the opportunity through innovation, whether it's in terms of mobile devices helping to

deal with health issues, helping to deal with empowerment of poor folks in emerging countries

or, in fact, helping to empower individuals in developed countries as well, all these

positive elements we've been hearing and yet we started off with trust in business has

never been lower and the conversations have perhaps in some ways never been more strained.

How do we match these and how do we resolve these gaps?

Nooyi: I think, Robert, my perspective is that many, many corporations are doing very

good things to help society, to make sure everybody's sustainable. I think corporations

are doing that, but when you have one problem that has profound implications, profound negative

implications on society, people forget all the good things and people focus on the negative.

I think we've got to restore confidence in the fundamental functioning of corporations

so that we can get credit for everything else we do.

Kanter: So, trust is low in business throughout the world, but it's lower in some countries

than others and some of it has to do with â€“ if I can tread on dangerous ground

here â€“ with a sense of equity and fairness. So you started out by invoking Peter Drucker.

I had the privilege of writing a centennial article about his work and it was in the 1980s

when he started to say that the ratio of top executive pay to the average worker pay was

already too high in the United States, and then it was something like 40 to one. And

it rose in the 2000s to a high of something like 500 to one and the question was, was

more value being created and for whom because of that? So there are differences in systems

around the world, so leaving aside the banking crisis, in a world where in fact we need the

brainpower of everybody and social networks predominate and innovation is important, one

question is where are the benefits going and are we a little â€“ have we been a little

out of balance? Europe has been different from the United States in terms of recognizing

a triple bottom line in terms of reporting and you get some credit for your social and

environmental performance and not just financial performance. But, you know, that's really

one of the reasons why trust is low.

And also, by the way, big companies are not necessarily net new job creators, especially

in tough times, but they have to be seen to be creating jobs through their partner network,

through their supply chain, and that message is not quite out. And I think companies also

should step up to the challenge of saying 'we have our family; we are not just the corporation

reporting to these shareholders'. IBM, for example, Palmisano says, 'We have 400,000

employees, we have a million if you count a whole range of business partners' and it's

probably a lot more if you count all the business partners â€“ cloud computing, Google,

etc â€“ and once you add that up and if they're taken seriously and have a seat

at the table you then see a company like that as a net job creator and a supporter of economic

development even when it's not coming back just in the pockets of their own shareholders.

I know shareholder value is important for listed companies, but the question is what's

the balance of responsibilities and what about day trading? There. Are those owners or not?

Greenhill: Mr Wang?

Wang: In terms of innovation, I mean the technical innovation and not financial innovation, I

think one of the important issue is to let the investors, the customers, let people know

what the innovation will bring to them. So I think that communication is very important.

One example is about the green action. We say every company should take the social responsibility

for the reduction of energy consumption and reduction of emission of carbon. And when

we talk about that we always mention the responsibility, but some people always think responsibility

means to pay more money; that is the responsibility. But if you use some new technology, we can

reduce the emission of carbon, but we also can reduce the opex and the capex of a corporation.

We have a lot of examples we can use IT technology to make contribution to the carbon emission

reduction.

Greenhill: So the power of the 'and', actually: really focusing on innovation to get economic

returns and also some of the social returns. Let me open it up to the floor now. Here's

the rules that we're going to be using here, which is I'd like you to comment for 30 seconds.

You can say what you want in terms of a statement or a question as long as it's not more than

30 seconds. If it is much more, then I will just have to cut you off. And also, these

are interesting organizations with corporations that are doing interesting things in terms

of products, financial results, strategies, none of which are relevant to the specific

issue here. The issue's about business leadership broadly, so if you have a company-specific

issue, I'll invite you to actually ask that outside. If you have an issue related to the

topic at hand, in terms of a question or a comment, it's extraordinarily welcome. Please.

Who would like to speak?

Doug Michelman, Global Head of Corporate Relations, Visa:

I have a question. First, to Stephen Green and maybe to the others, you've talked about

moving and the need to move from the shareholder model to the stakeholder model. I'm curious

how you communicate to your board. You know, in the old shareholder model you're able to

talk about your financial performance at every board meeting. How are you talking about â€“

to the board in a stakeholder model and are you â€“ are they fully supportive generally

in this transition?

Greenhill: Could I ask you to introduce yourself quickly as well?

Michelman: Doug Michelman with Visa.

Greenhill: Okay.

Green: We talk about financial performance at every board meeting. As I said, I think

financial performance is still pretty important, but we do also talk about the other things.

We do also talk about people engagement. We do regular survey work on that in all sorts

of different ways. We formally report that and discuss it at the board. We talk about

our policies for corporate sustainability, corporate social responsibility or whatever

you want to call it. And the general point is the one that I've mentioned, that I think

these things are not different things in the sense of incompatible objectives. On the contrary,

they're interdependent and you will not achieve the first one on a sustainable basis unless

you're delivering on the others. So I don't think this is a blindingly new thought to

â€“ at least to our board. This is the kind of long-term way we've always tried at

our best, we don't get it right all the time, but to think about the business.

Wang: I have an example. You know, several years ago the management team of China Mobile

wanted to create a charity foundation. We tried to use some of our cash for the charity,

but we didn't mention that in board meeting because it would reduce the value of shareholders

in near term. But we were very surprised the independent directors, people always think

they are representatives of minority shareholders, they suggested that China Mobile should set

up a foundation for some charity and some other causes. So I think that most of the

investors and the â€“ our independent directors did know that long-term interest

is very important for the company, both for the majority and the minority shareholders.

Schmidt: I've been thinking about the financial innovation question and in this context you

could think of the financial crisis that we went through as a combination of misalignment

of incentives, regulation that didn't catch up with products, and some products that were

just wrong, some of the risk models and so forth which contributed to these huge failures

were mathematically just wrong, just a bad product. There are so many other things in

the financial market where innovation makes a huge difference. The most obvious ones being

the development of new forms of credit and debit systems, which you know very well about,

which change the situation for people, millions of people when they show up. So you combine

that kind of innovation with the development of these new mobile devices and the kinds

of things that you can do where you can take a picture of a UPC code, you know, on a bottle,

figure out if you want to buy it using a payment system from your local bank and keep the money

on the phone and buy it to have it delivered as soon as possible. These are huge economic

drivers for growth and innovation that are good things for people to be working on.

Greenhill: Question right over here.

Jim Breyer, Investment Team, Accel Partners:

Hi, Jim Breyer with Accel Partners and a question for Eric and Indra, anybody who would like

to ask. You are all clearly leaders who have a genuine view that you're part of some larger

social good. I'd be interested in some specific policies, whether they â€“ whether they're

compensation policies, financial policies, motivational policies that you've implemented

as board members and as executives that have really made a difference in furthering your

company's goals while at the same time balancing the social responsibility.

Nooyi: Let me take that. You know, the objective â€“ the code of conduct for the company

is under a statement which we call 'Performance with Purpose' and it's not 'performance or

purpose', 'performance and purpose', it's 'performance with purpose'. And the way we've

defined 'purpose' is not corporate social responsibility, because our feel was in tough

times we might cut those investments. So we defined 'purpose' such that if you don't deliver

purpose you can't deliver performance. For example, 'purpose one' was how do we transform

our portfolio so that we provide healthier products to consumers and then provide nutrition

education and put kids back to, you know, an active lifestyle. So that was embedded

in the first plank of performance â€“ I'm sorry, purpose. The second plank of purpose

was environmental sustainability. We set goals for every plant on water reduction, energy

use, greenhouse gases. And then the third plank was our workforce: how do we make sure

our workforce remains the best in the world?

So what we did was we took all of these metrics, hard wired it into the incentives system and

hard wired the portfolio transformation into our long-term stock option programme. So if

you don't meet those goals you don't get your stock option payouts, okay? So it's not just

short-term performance that's critically important, but the purpose initiatives have to be fulfilled

for you to get your annual bonus, for you to make your performance goals, because we

cannot keep, you know, delivering great returns if we don't transform the portfolio and hold

on to our people. So we have linked these so intricately that I feel comfortable that

long-term goals that are more society-oriented can, in fact, impact performance.

Greenhill: Other comments on what concretely is different?

Kanter: So, here's something, again, I'm â€“ I'll give you an IBM example, because concretely

different is the idea that you can market differently, have a different conversation

with your customer if you start out with the social good thing. So they had a breakthrough

in grid computing and it was hard to explain to customers why all that data processing

would help them, so they set up a not for profit called 'World Community Grid', gave

away that computing power to the world's biggest scientific projects looking for cures for

AIDS and cancer and mapping rivers for the environment. And that was like product sampling,

which I'm sure PepsiCo does too, but product sampling on a huge basis saying 'if we do

something good for the world we now have a way to demonstrate to our customers what we're

capable of doing'. And it's a better conversation than to walk in the door saying 'I want to

sell you something'. Instead, 'look at how this product is making a difference in the

world. Now can I sell it to you?'

Greenhill: Let me continue with this issue of what's actually different if you have this

organization that has performance and purpose ingrained. What's different compared to that

organization before or different compared to organizations that perhaps don't have that

dual view? Eric?

Schmidt: The biggest difference is that your employees now have infinite sources of information

and, as a manager, you manage your employees and they read the press, they read the criticism,

they read the analysis quicker than you can talk to them. So management today is materially

different because of the information empowerment of the employees and it means that a lot of

the debates that occur inside of a company fundamentally have to take that into account.

How are we going to be perceived? This drives â€“ Elizabeth, I think, did the best

possible description: that you get better shareholder returns when you are doing something

to make the world a better place. And as long as you're coherent with that you'll be fine

with your employees. When you start doing things which are inconsistent with that goal,

it's almost impossible now to keep your employees, quote, 'under control' in the old model.

Greenhill: That's great. It looks like our element of improving the state of the world

could be adopted more broadly. Stephen, did you want to comment on this? And I'm particularly

in this issue of are there things that are different in measures or metrics or approaches

compared to, say, five years ago or compared to other organizations, in your view?

Green: Well, I wouldn't want to try and compare us to other organizations. I think that's

a bit invidious. Our journey, and I guess for all of us if we're honest, we're on a

journey and anybody who claims they've got it all right all of the time is kidding themselves.

But a couple of specific examples to answer the question, i.e. initiatives that we have

undertaken because we think they are good for business over the long term but also very

clearly have a social responsibility dimension, I'd name two things. One, we started rolling

out rural banks in China. Actually, we started the year before last, we've continued to evolve

that, we now have, at the current count I think I'm right in saying, seven different

banks. They're all rather small, they're all new. They will make money. We have to be clear.

We haven't done this because we think this is a purely charitable initiative. These are

businesses that will make money. We've done them with the encouragement and the blessing

of the authorities, because the fact about banks is that almost anything you do almost

anywhere has to have the blessing and the encouragement of the authorities, but â€“

which we've definitely received that.

So that's one example and another example is the area of environmental sustainability/climate

change, where we â€“ and other banks are doing the same here. This is absolutely

an area where I wouldn't even want to be distinctive; you actually want other banks to be doing

the same sort of thing â€“ have been evolving sector strategies for particularly

sensitive sectors: forestry products, water resources, chemicals and so forth, where you

evolve a series of policies for how you will engage with your clients with a view to the

two of you together, the bank and the client, becoming more sustainable, if I can put it

that way, with the overall objective not of cutting off the relationships because you

don't want to do business with them, but on the contrary, finding a way of doing business

that both of you are comfortable with in climate or environmental terms.

Greenhill: Great. Let's go back to the audience.

Masaki Omura, Managing Director, Japan Bank for International Cooperation:

My name is Masaki Omura. I come from Japan Bank for International Cooperation. My question

should be addressed to Mr Green. I agree with your observation that the corporate model

should be sustainable, but a key question is the standard of sustainability might be

different from that view of the general public. For example, the general public thinks, like

small and medium-sized enterprises, if banks can continue to finance it can be sustainable,

but banks tend to think no, no, it cannot be sustainable, it should stop. Then general

public should accept bank's judgement or is there any different way?

Green: If I understood it, the issue is about lending particularly I think you mentioned

small and medium-sized enterprises and banks sometimes taking decisions to stop lending

or to not make a loan in the first place. Those are, of course, rather specific decisions

that have to be made. Banks â€“ and I don't want to sound as though I'm coming across

as banks always get these decisions right; manifestly that's not true.

Greenhill: It depends on the model.

Green: There is plenty of evidence at the moment, if you look at the impairment line

in banks, that they make mistakes in their lending decisions. Overall, of course, it

is in the interests of a bank and actually I think in our collective interest to lend

where you think you're going to get the money back rather than where you don't think you're

going to get it back, and you do need â€“ socially we need to ensure that the lending

market and, indeed, other banks' services markets are provided on a competitive basis

so there is no excess price being charged.

The fact is in some countries at the moment we are all having to get used to, how can

I put it, a reversion to a prior norm. There was a time in the early part of the last decade

or this decade, depending on when you count â€“ whether you think this decade is

finished or not, in the middle years when there were examples of banks lending on terms

that became increasingly lax, for want of a better word. Where the pricing got finer

and finer, where the conditions got weaker and weaker and in the end you got the result

that we got. So we really do need to expect banks to be lending on a responsible basis

and the responsible basis means pricing properly, lending on the basis of proper risk analysis

and sometimes that simply does lead to some uncomfortable decisions.

Greenhill: We have time for one more question.

Hussein Dower, Chairman of the Cartis Group for Business and Leadership:

My name's Hussein Dower. I'm Chairman of the Cartis Group for Business and Leadership.

I'd like to ask the panel what is the role of the boards in re-establishing trust in

corporate leadership?

Greenhill: Who'd like to take a shot at that? The role of boards in restoring trust in corporations.

Nooyi: It's a tough question and I'll tell you why, because boards are supposed to provide

oversight and if they'd provided the right oversight of all the enterprises perhaps we

wouldn't be in the position we're in today. But herein lies the conundrum. As companies

and businesses get more complex and board members, you know, spend a day or two at a

time on a company, who is really running the company? Boards can't become the management

of the company and try to get deep into the company to try to understand every aspect

of the company. So I think the best the board can do is make sure they have the right CEO

in place, make sure they have the right management, make sure the company has the right code of

conduct and values, and then hope that all of those come together to make sure the company

stays, you know, a highly ethical and moral company. If we try to extend the role of the

board too much, I think you'll have too many bosses, total paralysis and I'm not sure we'll

restore trust in companies.

Greenhill: We've had a great conversation in terms of going beyond the defensive issues

of what do you do to make sure corporations don't actually cause financial and economic

problems, which is a critical issue, but it's only one of the parts of how do we actually

have corporations be one of the agents for innovative and positive change both economic

and social.

Let me just go to the panel and say with the audience here and the audience watching are

there any last points or comments that you think are important takeaways? I'm going to

end up with Rosabeth. Maybe I'm just going to go right down the line, if you don't mind,

Indra.

Nooyi: I'll start again. The one message I'd like everybody to take away is that you need

private enterprise to spur economic development, spur job creation, be the engines of innovation

and I think the time has come to stop talking and acting about public-private partnerships,

to get all of the negativism about the private sector behind us and start working within

a framework that makes it possible for us to stop having these ugly debates between

the two of us, to stop having excessive paperwork and regulation imposed on private enterprise

and let's just get on with the business of innovation, job creation and really functioning

as the engine of economic development.

Greenhill: Mr Wang?

Wang: I'd like to say the great recession created a new business environment. As management

team, we cannot change the business environment, but we can do the management thing better.

For example, we can make the company more transparent and we will pay more attention

to long term.

Greenhill: Eric?

Schmidt: In thinking about the choices, if you're a large company you need to have an

innovation agenda and many large companies are still run as though they're essentially

structured the way they were when they were founded so many years ago. And innovation

applies in every one of these businesses, whether it's a service business or any kind

of material goods business, innovation in delivery, innovation in science and so forth.

If you don't know what that is, I don't think you're doing your job. This is a great time

to be starting a small business, because the government and the regulators and the banks

will figure out a way to get lending going again and this is precisely the time when

asset values are low and opportunities are greatest. And the reason it's best now is

because globalization has created an ability to have a very fast path of growth. No longer

is your customer just the local city or the local town. You can think of yourself as a

player on the global stage. You can get global distribution, global branding and so forth

at a cost at a fraction of what your predecessors did. So there's every reason to believe that

if big companies focus on literally innovation in their businesses, trying to create new

things, and little companies get formed we can solve the problems that we have before

us. If we don't, the new normal will be flat and the world will get really, really boring.

Greenhill: Stephen?

Green: I'd like to conclude actually by trying my answer to that last question, because I

think boards have an important role to play, indeed a critical role to play, because I

think we all recognize, Indra said it and I agree that a key responsibility has to do

with the nurturing of the corporate values, making sure that those are indeed nurtured

and spread by management through the system. And the only way of doing that is for boards

to pay constant attention to that question. Regulations are with us. The regulatory environment

for banking is clearly going to get more intense. It, frankly, should get more intense. There

are some lessons for regulators to learn, but it should get more intense than it was

going back a few years. But regulations, they may be necessary, they're absolutely never

sufficient to ensure right behaviour. What is necessary in addition to whatever regulatory

environment you're in is boards that are focused on the long-term, the value of the services

delivered and the values which are spread through the organization.

Greenhill: Rosabeth?

Kanter: So I think we still need all the management disciplines, but what we're hearing is it's

a different world, it's turned inside out and upside down. I mean inside out because

we have to pay attention to the voices of society, but yet they are also the sources

that could stimulate creativity and open new markets. So we have to be much more attuned

than companies have traditionally been to the outside world. Bring in those voices,

listen to those voices. I always wonder as I go to gatherings of the top management of

big companies all over the world why there are no customers in the room or why there

are no customers who are not customers yet but you'd like them to be customers. So, outside

in.

And the other thing is we have to think a little upside down. We know our world's been

turned upside down, but upside down in the sense that people at the top have to listen

to the voices of the people at the bottom. Those networks are incredibly important, we

need their engagement. And that we have to stimulate their imagination. We have to be

nurturing those who are the future of the company and give them a much more important

role in defining it.

And then, that plus, by the way, business only operates well, we've talked about regulation

and the heavy hand of government, but it only works well when governments are themselves

open, transparent, disciplined and not corrupt. So business can't do it alone and enterprise

is a way to solve important problems and enhance our lives. And for that alone we want businesses

that stimulate openness, transparency and imagination.

Greenhill: Well, I think that was an inspiring but challenging panel. I mean in the sense

of showing that businesses can actually make a very positive difference, not only economically

but socially, but that it's challenging for the CEO and the team because it's actually

requiring a much more complex multifaceted agenda and it is acquiring the willingness

to actually take some short-term hits to achieve these things in the long-term. And what Rosabeth

and the others are saying is that actually over the long-term that can have enormous

positive economic as well as social benefits and that's real leadership and that's the

kind of leadership that will maybe not only restore the economic but also the trust balance

sheets of the private sector. Please join me in thanking this panel.

Temat: Wybierz temat ↓

Poziom:

Wszystkie

Davos Annual Meeting 2010 - Business Leadership for the 21st Century