01 Dec 2008
Business at the SummitRe: Hank Paulson (MBA 1970); Jay Light (DBA 1970); Jeff Immelt (MBA 1982); John Doerr (MBA 1976); Jim Wolfensohn (MBA 1959); Anand Mahindra (MBA 1981); Meg Whitman (MBA 1979); Jamie Dimon (MBA 1982); Orit Gadiesh (MBA 1977); Rick Wagoner (MBA 1977); Jaime Zobel de Ayala (MBA 1987); Ronald Cohen (MBA 1969)Topics:
HBS Centennial Event Confronts Present and Future Challenges
If timing is everything, then the Centennial Global Business Summit in mid-October was a scheduling tour de force. Two years in the making and the culmination of HBS’s yearlong centennial observance, the three-day event was designed to galvanize thinking and action around the 21st century’s transcendent business challenges. What no one expected, but what dominated the event, was the biggest financial crisis since the Great Depression.
As 2,000 alumni convened on campus Monday, October 13, the U.S. stock market soared to its biggest one-day numerical gain since 1933, following on the heels of an 18 percent decline the previous week, the worst such drop in the Dow’s 112-year history. The next day, Treasury Secretary Henry Paulson (MBA ’70) announced a plan to inject $250 billion into the nation’s banks, a painfully ironic twist for a free-market Republican administration, signaling a turning point in postwar American economic history. Against this backdrop of historic events, keynote speeches, discussion panels, and more than three-dozen breakout sessions served to sharpen participants’ focus on the summit’s agenda: profound and fundamental questions regarding leadership, globalization, and market capitalism.
The future of market capitalism was very much on Dean Jay Light’s mind during his welcoming remarks Sunday evening in a Baker Lawn “pavilion” erected for the summit’s general sessions. Nearly everyone failed to understand how much the global financial system had changed in recent years, and how fragile it had become because of “increased leverage, decreased transparency, and decreased liquidity,” Light noted. The current crisis, he continued, inevitably will lead to “an entirely new financial system with a new set of regulators, a new set of regulations, and frankly, a new set of firms quite unlike what we’ve seen before. These tasks will require capital and good decisions, but most of all, these tasks are going to require leadership.” Light declared that the School and its alumni “need to be part of the solution to these problems.”
Addressing alumni on Tuesday, Harvard President Drew Gilpin Faust recalled the words of HBS Dean Wallace Donham at the School’s 25th anniversary celebration in 1933: “The most pressing question in America today is, Can American business leadership rise to its opportunities and responsibilities?” Noting the relevance of these words 75 years later, Faust added her own coda: Looking forward, the goal for HBS and the University, she said, should be to work together to produce “leaders who make a difference not just in the world but for the world.”
Leadership Takes Center Stage
Just how to make a difference dominated the leadership discussion that opened the summit on Monday. The topic was taken up by this year’s Alumni Achievement Award recipients, who weighed in on the current economic crisis but quickly moved on to advocate for energy independence and cross-sector cooperation between business and government. The panel featured John Doerr (MBA ’76), Jeff Immelt (MBA ’82), Anand Mahindra (MBA ’81), Meg Whitman (MBA ’79), and James Wolfensohn (MBA ’59), and was moderated by PBS’s Charlie Rose.
Whitman, former CEO of eBay, noted that most Americans are “deeply afraid” as they watch energy and food costs rise and their retirement accounts shrink. More must be done, she said, to reassure the public in the midst of the crisis. “People need to be enfranchised in the solution,” Whitman stated. “We need more explanation, and we need more leadership across the board.”
Mahindra of India’s Mahindra & Mahindra called for a “reset” and a return to fundamentals. “Banking is about relationships,” he said. “It comes down to evaluating people, their governance models, and their integrity.”
Immelt, CEO of GE, described his outlook as generally optimistic. Once the crisis is resolved (and, he remarked, “the government always wins” in these situations), the United States can expect at least two quarters of negative growth. But with the right levels of liquidity, the economy will come back, he said.
The nation faces an even more formidable long-term challenge in climate change, where all panelists agreed that leadership currently is in short supply. Doerr, whose Silicon Valley firm Kleiner Perkins Caufield & Byers invests in numerous green tech start-ups, made an impassioned plea for the environment. “We can bail out the economy,” he said, “but we can’t bail out the environment,” eliciting sustained applause. Citing the country’s lack of an energy policy, he continued: “America has been borrowing from China to buy oil from the Middle East, and then burning it up in the atmosphere. Every part of that equation has to stop in the next decade, or we are going to have a carbon crisis that is going to make this financial crisis look like a minor blip.”
Progress in deploying green technology does not depend so much on new discoveries as on commercializing what is already known, said Immelt. And there’s an important role for government to play, he added. “I’ve been a Republican all my life. I believe in free markets. But the notion that the government isn’t a catalyst for change in this country is pure garbage.”
Whitman agreed, saying that the pursuit of energy independence was the “moon shot” of the next decade, with government and the private sector acting as partners. The American people, she added, are “dying to be asked to help solve this problem.”
“Forty or fifty years ago, the great advantage held by the United States was its wealth; what will save us now is technology and innovation,” added Wolfensohn, chairman of Wolfensohn & Company and former president of the World Bank.
Gates Champions Creative Capitalism
Seated in comfortable armchairs, keynote speaker Bill Gates continued on the theme of cross-sector cooperation in an informal conversation with HBS professor emeritus James Cash. Capitalism, Gates said, does many things well, but the inspiration for the Bill & Melinda Gates Foundation came in part from a market failure in health-care delivery. Individuals who live in areas where tuberculosis, AIDS, and malaria are still common are often too poor to afford the drugs needed to cure or prevent those diseases. “These people have no voice in the marketplace,” Gates said. As a result, ten times as much funding is devoted to research on the prevention of male baldness as malaria, a disease that kills more than 1 million people each year, he said. The foundation seeks to rectify that imbalance. Gates noted that about half of the foundation’s annual grants, or $1.6 billion, is devoted to global health, with around $800 million each devoted to grassroots financial services in the developing world and to education in the United States. With that level of funding, he added, people should expect dramatic results. “If we haven’t gotten rid of malaria in fifteen years, we’re stupid. We should be fired.”
As an example of the sort of cross-sector cooperation he favors, Gates pointed to the foundation’s work with GlaxoSmithKline on a malaria vaccine. “It’s an idea that I sometimes call creative capitalism,” said Gates. “But it’s not just about dollars. It really is about the innovation power” that American businesses could unleash by allowing their most creative and innovative people to spend 5 percent of their time working to solve social problems.
Measuring the success of creative capitalism remains a major challenge. “When you don’t have the marketplace slapping you in the face, telling you your product is no good, you can really get confused,” Gates acknowledged. In health care, the foundation simply looks at the numbers: How many people have died of or been infected by the various diseases the foundation is fighting? Ironically, the hardest area for the foundation to measure is educational reform because “metrics don’t exist” in that field, he said. Taking a swipe at both major political parties, Gates noted that “the Republicans don’t like ‘national,’ and the Democrats don’t like ‘standards.’ ”
Lessons from History
The summit’s second keynote speaker, HBS professor Niall Ferguson, an economic historian, brought a sobering perspective to the topics of globalization and market capitalism. Both, he argued, are inherently unstable. But that doesn’t prevent people from being surprised each time an economic crisis erupts, something that has happened with regularity. Nor does it stop governments from intervening at the risk of doing more harm than good. Few, it seems, learn from the lessons of history.
In Ferguson’s view, the real strength of globalization is the way it wrings inefficiencies out of everything from manufacturing to capital markets and even services. Paradoxically, the greater the global system’s efficiency, the greater its fragility. Herein lies the Achilles’ heel of globalization, said Ferguson. “Almost everyone who talks about a flat world doesn’t realize that it is over-optimized to the point of maximum vulnerability,” he cautioned. Hence, a global economy is more likely to generate economic crises than a nonglobal economy, an inconvenient fact of economic life.
Turning his attention to the nation’s current financial crisis, Ferguson noted that such episodes “are much more frequent than we expect them to be.” Over the past 100 years, the S&P 500 has ended the year down 20 points or more on seven occasions, including this year. While it’s human nature to believe that the unthinkable, such as a collapse of U.S. housing prices, cannot happen, human calculation also comes into play. Ferguson faulted widely used mathematical risk models for failure to build in historical data reaching back more than five years. “The problem with only five years of data is precisely that it will lead you to miss the next big crisis,” he said.
Taking historical perspective to another level, Ferguson compared evolutionary developments in the natural world with recent developments in the global economic system. Over the past two decades, he explained, there has been an “incredible financial evolution,” from the proliferation of private equity and hedge funds, to the deployment of all sorts of derivatives and collateralized debt. However, a crucial difference is that in the natural world, events that disrupt evolution are random. The asteroid that hit the earth and caused the extinction of the dinosaurs was not the dinosaurs’ fault, Ferguson wryly noted. In contrast, “we cause disasters that happen to ourselves,” he said.
But there’s a built-in tension between having the state protect businesses from failure and allowing financial evolution to take its course, resulting in moral hazard — the fear that a party insulated from risk may take more risk. “It’s not clear how you solve that problem,” Ferguson said, noting that it is a topic that commands considerable attention in HBS classrooms.
Another problem is that new financial regulations imposed after a crisis occurs may “impede the process of natural selection that is essential in a system of economic evolution,” he explained. “It is never good when the state intervenes to the point that it essentially controls a financial system and makes bankruptcy a near impossibility.” Citing Harvard economist Joseph Schumpeter, Ferguson observed that the process of “creative destruction” is the essential fact about capitalism. The lesson not to be overlooked, he warned, is that government interference with this natural selection process could impede the innovation that is the lifeblood of modern capitalism.
Failures of Corporate and Political Leadership
The flip side of government intervention is government paralysis, the topic that resonated most deeply with the alumni audience Tuesday morning during a second panel discussion on leadership. Moderated by HBS professor Nitin Nohria, the panel included Jamie Dimon (MBA ’82), chairman and CEO, JPMorgan Chase; Orit Gadiesh (MBA ’77), chairman, Bain & Co.; Rick Wagoner (MBA ’77), chairman and CEO, General Motors; and Jaime Zobel de Ayala (MBA ’87), chairman and CEO, Ayala Corporation in the Philippines.
Dimon offered an unvarnished critique of both the corporate and the political worlds. He conceded that the mortgage business “was basically underregulated,” leading to the spread of exotic types of risky financial instruments. “We need good, rational regulations,” he said. Dimon also agreed with criticisms of excessive executive compensation. “There were a lot of people who in hindsight wound up making a lot of money who didn’t deserve it.”
As for politicians, Dimon railed against their inability to take action even in the light of compelling rationales to do so. Energy independence has been a national priority since 1974, but “we don’t have the fortitude to tax oil, or to tax BTUs,” he said to sustained applause. As a result, he continued, “We deserve $4 a gallon gasoline.” Too often, he continued. government proposes solutions that appeal only “to the madness of the crowd,” letting complex issues such as energy independence go unresolved. “Between their corruption, their stupidity, and their playing to the crowds,” our political leaders have failed us, Dimon said, to another round of applause.
Echoing Dimon, Wagoner stated that without a fuel tax, the United States would have recurrent energy crises “until we run out of money.” And he deplored the country’s inability to have a coherent energy policy, adding that “a little more statesmanship on the part of business leaders is a critical ingredient as we expect more of our elected officials.”
“Where are the grown-ups?” asked Gadiesh, referring to the lack of 21st-century institutions needed to lead in government and business.
Zobel described how wealth disparities in the Philippines create popular distrust of large businesses. He has found that to be successful, he must work closely with local communities, both out of pragmatism and because it’s the right thing to do, an instructive example for U.S. companies as American public opinion sours on certain elements of the private sector.
The Future of Market Capitalism
Market failures framed the Tuesday keynote presentation of University Professor Lawrence Summers, treasury secretary in the Clinton administration. Directing his remarks to the unfolding economic crisis, Summers said the challenge ahead is to create a system that maintains and shares stable prosperity and economic growth equitably and globally.
“Today,” he said, “we are being reminded of Keynes’s famous insight, that the market system is not always self-stabilizing. ...Twenty years, seven major crises, one major crisis every three years: I would suggest to you that that is not good enough.” He predicted that financial regulation will “shift from the traditional focus on prudential regulation of individual institutions to a broader concern with the stability of the financial system.”
Pointing to the rise of massive wealth inequality in the United States in recent decades, Summers said that in any society, equitable income distribution goes to the heart of a society’s legitimacy, fairness, and opportunity for its citizens. In the United States, he said, the top 1 percent of earners gained $600 billion annually in income while the bottom 80 percent lost that same $600 billion from 1979 to 2008. That translates into an average gain of $500,000 in annual income for each person at the top, while the bottom 80 percent lost an average of $8,000 annually.
Another challenge for America is to recover from recent setbacks as a “hard power,” as a moral beacon, and as an economic leader, said Summers. And the energy problem, he emphasized, must be dealt with: “The current path, sustained, does not work geopolitically or environmentally.
“All these issues have something in common,” he continued. “People who once felt secure in their communities, in their livelihoods, in their nations, and in the world now feel that their prosperity is hanging by a thread.” Noting that “business leaders have an enormous long-run interest in being part of successful societies,” he stated that “we have an enormously important challenge of saving capitalism from itself.” Achieving that and successfully tackling the other major problems, Summers said, offers “more opportunities to create more prosperity and better lives for more people than at any time in history.”
Summers then moved on to a panel with Sir Ronald Cohen (MBA ’69), a founding partner of Apax Partners and a social-venture entrepreneur, and HBS senior lecturer Thierry Breton, former finance minister of France. With University Professor Michael Porter moderating, the conversation about the future of market capitalism continued.
Porter set forth what he called an “agonizing dilemma”: While capitalism’s wealth creation is essential, the fears and insecurities it creates, exacerbated by globalization, lead to political pressures to intervene in markets and often hinder their effectiveness. Cohen responded, “Market capitalism is going to be judged by our reaction to the human problems that this crisis causes.” Breton noted that many in France were angry about rescue packages for banks when ordinary people received no help and were losing their businesses. Summers acknowledged the importance of social entrepreneurship but emphasized that business should not view it as a substitute for broad public-policy measures that reach all citizens.
Into the Future
Inside the summit, unabashed champions of free markets and government deregulation would have found the atmosphere more than a little unsettling. The biggest applause lines followed criticisms of business and government for failure to act more forcefully on behalf of the public good, whether dealing with income inequality, energy policy, or market regulation. Above all, the need for leadership framed every keynote address, every panel discussion, and every breakout session.
More broadly, the summit raised important questions about the agenda that 21st-century leaders should pursue, and pointed the way to research and teaching paths that HBS might take. As Dean Jay Light told participants, “Organizations of the future are likely to look very different than they do today, and the pace of change will only accelerate. We will need to be more global. We will have to better understand how science and technology are becoming critical drivers of strategy and success. We must think about the role of business in society when more and more is being expected of business leaders.” Ultimately, he noted, “the need for and relevance of what we do here at Harvard Business School has never been greater.”