President Sarkozy demanded “a revolutionâ€?…
Monday, February 8th, 2010Note…
“President Sarkozy demanded “a revolutionâ€? in international regulation, not only of financial institutions but also of labour, health and the environment. At the core of his speech was a proposal to establish a new global monetary system, one that demotes the US dollar as the central reserve currency. He also slammed outsized bonuses for bankers, taking aim at those leading financial firms whom he felt destroyed wealth and jobs.”
The power of the US to control the world’s agenda is shifting…Â
“Davos 2010
If the mood at the World Economic Forum at Davos last year was heavily tinted by a desire to better understand the recent financial meltdown, Davos 2010 was framed by the desire to right the economic crisis by free market reforms, if possible — or by government regulation, if not. London Business School Dean Andrew Likierman along with Professors Julian Birkinshaw, Dominic Houlder and Andrew Scott joined the search for global financial solutions.
Right after the keynote address by Nicolas Sarkozy, the first World Economic Forum (WEF) keynote given by a French president, it was apparent that there would be no easy solutions to the world’s economic crisis and that the attendees at Davos were more than ready to debate proposals. President Sarkozy demanded “a revolution� in international regulation, not only of financial institutions but also of labour, health and the environment. At the core of his speech was a proposal to establish a new global monetary system, one that demotes the US dollar as the central reserve currency. He also slammed outsized bonuses for bankers, taking aim at those leading financial firms whom he felt destroyed wealth and jobs.
Though there were more bankers at Davos this year (attendance is by invitation of the WEF) — many of whom quite probably cringed at the populist proposals of the French president — the keynote triggered debate throughout the rest of the conference. And while there was acknowledgment that the last half of 2009 saw much economic recovery, many wondered if the timing was right for a total economic overhaul. For example, Andrew Scott, Professor of Economics; Joint Chair of Economics at London Business School, observed: “There are many who believe we’re not out of the woods yet and that we face a double dip recession as consumers and corporates continue to cut spending and reduce debt.�
Five key terms
If you attended Davos 2010, there’s a good chance your personal notes had five key terms underlined numerous times:
Risk
Andrew Likierman moderated a key panel discussion on “Rethinking Risk in the Boardroomâ€?. Their discussions arrived at four conclusions: (1) how a company’s board manages risk these days can affect not only the confidence of shareholders but the relationship between the company and the nations in which it operates; (2) risk needs to be broken down into different elements for the board, including not only operational, financial and other conventional types of risk, but less conventional ones, such as leadership risk; (3) while risk management principles are universal, managing risk is more than a numerical task or a structural matter; it involves values and culture; and (4) assuring that board members are independent or are part of a risk committee does not assure sufficient risk management - the quality of board members, the quality of the information they receive and the quality of board debate are crucial to managing risk.
Change
Julian Birkinshaw, Professor of Strategic and International Management and Senior Fellow, Advanced Institute of Management Research; co-chaired the panel on “Reinventing Management: The Challenge of Exponential Change�, which stirred the audience with mention of the need for “management moonshots�. The panel concluded that: (1) management technology has not developed at nearly the same rate as other technologies; managers are still using techniques tied to the Industrial Age, (2) the rapid and unyielding pace of world change has thus made the relevance of current management thinking obsolete and (3) for management thinking to change, managers must change — dramatically. Professor Birkinshaw and his co-chair, Gary Hamel, Director of the Management Innovation Lab, also reported on the MLab initiative to solicit from top management thinkers 25 “moonshots�, the most significant ideas for developing the technology of management. Participants heard ideas such as ensuring that management’s work serves a higher purpose, embedding ideas of community and citizenship into management, empowering renegades, and disarming reactionaries while also enabling communities of passion.
Emerging economies
According to news reports, emerging markets now account for half of the world’s economic global output. Tidjane Thiam, the London-based Group Chief Executive of Prudential (the largest life insurer in emerging countries) was quoted as saying that large, multinational corporations based in countries such as Brazil, China and India are changing how developed nations both view and work with emerging economies. (It even affected the attendance list at Davos this year.) The Wall Street Journal even headlined an online report on 31 January that claimed that emerging economies were centre stage at Davos. Reported WSJ: “The business and government leaders who gathered here in recent days are pinning high hopes on developing countries to keep the world economy growing, amid widespread worry about the strength of recovery in advanced economies.� On a related note, Adjunct Professor of Strategic and International Management Dominic Houlder took part in a stimulating panel discussion on “Redefining the Global Commons�, which are the areas of the planet not under the aegis of a single nation. Among the panel’s conclusions was the recognition that managing areas such as oceans, biodiversity, rainforests, the digital infrastructure — even outer space — will be difficult. “Even when there is agreement on defining the global commons, different governments have different value sets and priorities,� said a panel report.
Reform
The majority of news reports from Davos this year seemed to be tied to bankers and the financial systems they use along with the organizational standards they observe. Many spoke of how to manage the banking world in such a way that governments aren’t compelled to levy increased taxes on profits or on salary bonuses deemed disproportionate (or offensive). At Davos, many urged banking leaders to reconsider the logic of their own pay packages. Hector Sants, chief executive of UK’s Financial Services Authority, told TimesOnline on 30 January that what bankers consider to be significant change on this matter may not be nearly enough: “Mr Sants said that it was not clear whether a majority of the industry had grasped the fact that radical reform was necessary: ‘If they get it, it’s not obvious.’�
Regulation
Davos opened with what many considered an attack speech by President Sarkozy. Whether his ideas are worthy of acceptance remains debatable, but BBC’s 31 January report on Davos carries this headline: “Davos 2010 ends with bankers on the defensive�. Why that might be is hardly a mystery: according to the BBC, “Top regulators warned that they could take drastic action to take some of the risk out of the financial industry.� A report on FT.com (31 January) indicated that bankers were leaving Davos trying “to fight off wave of controls�. The opening words of the news report captured the moment: “Protesters were handing out leaflets in the streets of Davos at the weekend. But their anger was not directed against world poverty, nuclear power or war; instead they were demanding that banks should put their derivatives business on to exchanges to make the financial system more transparent.� No one reported that any momentous stacking of hands occurred between the banking community and regulators (or anyone else). All that was agreed upon was the need for, and commitment to, further discussions.
A resolution?
Yet it would be unfair to suggest that Davos 2010 was all talk and no action. It may be that this annual summit of 2,500 influential world citizens is most successful at both identifying the current mood — of key executives, politicians, social movement leaders and business thinkers — and setting the mood for the coming year.
Tidjane Thiam was part of the “Redesigning Financial Regulation� panel that was the subject of much discussion. That panel recognized that “work at the international level to redesign the global financial system is ongoing at the Financial Stability Board (FSB), the G20 and the Basel Committee on Banking Supervision� and the panellists, at least, seemed to concur on the need for new ways to minimise major failures in global financial systems.
The panel also recognised the demands by those who would be regulated to resist any kind of “one size fits all� regulatory body or set of standards. “A regulatory regime,� the panel report states, “must be flexible enough to take into consideration national differences.� Lastly, the panel asserted that capital and liquidity ratios of banks must understand the dietary analogy of capital being “fat� and liquidity “air�: “Banks do not starve and die because of lack of capital; but when deprived of liquidity, they are instantly suffocated.� And the panel underscored the need for an early warning system to alert nations to financial emergencies.
As Prudential’s leader Thiam said to those at the World Economic Forum, according to TimesOnline: “We acknowledge the need for change both at large companies and financial institutions. There is a resolution at Davos that we do need to change.�