Adrian Blundell-Wignall, Special Advisor to the OECD Secretary-General on Financial and Enterprise Affairs, argues that key corporate and financial issues must be addressed if globalisation is to work better for all. These issues are examined in the new 2017 OECD Business and Finance Outlook.
Today the debate rages about whether the decline in living standards is due to the effects of globalisation or to poor domestic policies. Both have surely played a role. But the problems often associated with globalisation (inequality, the hollowing out of the middle class, employment of less-skilled workers in advanced countries, etc.) do not originate from “openness” as such. The problem is that not all countries are open to the same degree and the playing field in the cross-border activities of businesses is not level.
Since entering WTO in 2001, China has quickly become the largest exporting nation in the world, with 14% of merchandise exports and 18% of manufacturing. Hong Kong (China), Singapore and Korea together export as much as the United States or Germany. Companies may also set up production abroad, closer to foreign markets. China has increasingly joined this model too, and is now responsible for 11% of world merger and acquisition (M&A) outflows in 2016. In recent years it has been switching away from M&A in oil and gas much more towards high technology companies.
In parallel, the number of state-owned enterprises (SOEs) among the Fortune Global 500 companies grew from 9.8% in 2005 to 22.8% in 2014. Most are domiciled in Asia, and the largest among them are Chinese banks. Distortions, resulting from subsidies and other advantages accorded to SOEs, often coming via cheaper finance from SOE banks, are important. But strong government ownership of shares in emerging economies is present across all industrial sectors. Emerging-market SOEs have greatly contributed to the current excess capacity in key materials, energy and industrial sectors, contributing to a decline in the average return on equity in many sectors and countries.
No matter where firms sit in the value chain, penetration of markets by emerging economies evokes responses from companies to move further up the value chain – forcing them to restructure and enhance technology to remain competitive. If they don’t take advantage of global economies of scale, they will in any case find themselves facing strong competition from other successful firms, whether at home or abroad. The fastest productivity growth companies are also those that take advantage of foreign sales—whether by exporting or by setting up subsidiaries that produce abroad to serve foreign markets.
There is nothing wrong with success in cross-border activities—provided of course that success is not based on unfair competition.
The leaps in productive potential can be enormous, but all of this requires investment, innovation and new technology. The company data shows that it makes no sense to try to separate these things out. The companies at the forefront of innovation and technology (as reflected in productivity growth) are often multinationals engaged in trade and foreign direct investment—they buy and sell business segments, set up to produce abroad and the export from multiple global production bases.
The losers in this story—those workers affected by reduced hours, innovative work contracts and compressed wages—belong to companies that are scattered within their own industry. It is not that the middle class as such is being hollowed out but that these ranks are swelled by those that work for less successful companies forced to restructure or exit.
Some large emerging economies have managed to pull millions of people out of poverty—and the long-term future of every country lies with continued success in this regard. Competition too is to be welcomed. Like any sporting match, let the best teams win. But also like any sporting match, the game needs to be played with the same rulebook. If the same rules do not apply to all, then fairness is put into question. If fairness is questioned, then sustainability of open trade and investment in the global economy is also put at risk.
Openness promotes opportunities for business. But the governance of trade, international investment and competition does not use a common rule book. Without this, the size and cost of the other policies needed to protect the losers will continue to be burdensome and possibly beyond reach.
This year’s OECD Business and Finance Outlook discusses many aspects of the lopsided nature of the world economy, among them: the growing role of state-owned enterprises (SOEs), uneven financial regulations, distorting capital account and exchange rate management, cross-border cartels that translate into benefits for companies and shareholders rather than into lower consumer prices, collusive behaviour in investment bank underwriting practices, corner-cutting responsible business conduct, and the bribery and corruption that distort international investment and misallocate resources.
We need improved rules of the game and enhanced international co-operation. OECD standards can play a leading role in shaping this conversation, and promoting a level playing field that ensures the benefits of globalisation are shared by all. This requires a commitment by economies participating in globalised markets to a common set of transparent principles that are consistent with mutually-beneficial competition, trade and international investment across a range of areas.
OECD Business and Finance Outlook 2017 is available at: http://oe.cd/BusinessAndFinanceOutlook2017
OECD Business and Finance Scoreboard 2017 is available at: www.oecd.org/daf/OECD-Business-and-Finance-Scoreboard.htm
Today’s post is by Bhaskar Chakravorti Senior Associate Dean for International Business & Finance at The Fletcher School, Tufts University, and founding Executive Director of Fletcher’s Institute for Business in the Global Context. He is the author of “The Slow Pace of Fast Change.”
Today’s OECD Global Forum on Responsible Business Conduct comes not a minute too soon, with far too many recent examples of irresponsible – and, in many cases, criminal conduct – in international business. There is reason to worry that such problems will worsen as the center of gravity of the world’s economic activity moves towards the developing nations, since the necessary institutions and the context within which global business operates have not had the time to catch up with the rapid market changes. For this reason, business must take on a disproportionate share of responsibility to compensate for the missing institutions.
Of course, simply putting people together in a room will not resolve all issues. But we can make a start. I am particularly excited about the fact that I have the privilege of moderating a discussion with leaders representing multiple stakeholder groups during the opening plenary. We can help establish a tone for the Forum.
One of the themes I would like to explore is how to make the “responsible” adjective in the term “responsible business conduct” redundant. Responsibility is a rather loaded term. It suggests that decision-makers in the business world want to conduct themselves in one way, while responsible business conduct would require something quite different.
You cannot scold, regulate, punish and nag your way to responsible conduct. It has to become part and parcel of regular business practices. This means that everything that comes under the label of “responsibility” is compatible with the natural incentive systems that drive managerial conduct. I see four developments that might offer clues on how to make responsible conduct compatible with managerial incentives.
Environmental, Social and Governance Investing (ESG) Criteria and Shareholder Activism. To understand what drives business conduct, follow the money. What if money were not to follow you if you deviate from responsible conduct? ESG investing aims to do precisely that. Beginning with the churches in the 1920s that excluded “sin stocks”, ESG compliant portfolio managers screen companies that do not meet certain environmental, social and governance criteria. This can make a difference to the conduct of managers.
In addition, and perhaps even more significantly, such investors also engage in shareholder activism that has a significant impact on executive decisions. But this also requires a larger body of clients who demand such criteria from their portfolio managers.
At least $13.6 trillion of assets under management incorporate ESG concerns into their investment selection and management, according to the Global Sustainable Investment Review 2012, representing 21.8% of the total assets under management in the regions covered. In addition to religious institutions, there are other major investors, such as state pension funds and corporations, who have an interest in growing this form of investing.
Creating Shared Value. This approach focuses on areas where responsible conduct can help in growing the pie rather than asking managers to consider a zero-sum situation between business interests and those of other stakeholders. Michael Porter of Harvard Business School argues that this can be accomplished by re-conceiving products and markets, reconfiguring value chains, enabling local cluster development. These notions take on a particularly crucial role in the emerging markets where many key institutions are missing or have not kept pace with market growth.
Tailored products and helping to fill gaps in the context can clearly contribute to longer-term value creation despite the near term costs, and provide incentives to managers who take a longer view. The challenge is that most managers have been schooled in Porter’s earlier framework of the Five Forces model, which places a high premium on playing in industries where managers can optimize on their negotiating power. This is based on a static concept of industries and markets and has more of a zero-sum connotation. So I am glad Professor Porter is taking the lead in dismantling a framework – ill-suited for dynamic market contexts – that he had originally created.
Rewards for Optimizing Needs of Multiple Stakeholders. Good managers inherently manage competing demands from several parties and take pride in setting priorities and making trade-offs. Many managers and executives often start out as entrepreneurs primarily motivated by a “purpose” that extends well beyond profit. These inherent traits of many managers tend to remain under-utilized and under-rewarded. Reminding managers of such inherently powerful motivators and reinforcing the mindset can prove to be a powerful incentive to look beyond the demands of shareholders or the analyst on Wall Street – and consider the needs of other stakeholders: employees, consumers, the environment, advocacy groups, the market ecosystem, etc.
It is extremely important to get enough of a community of peers to come together around such a notion to enhance managerial motivation. But most critically, such an initiative has to be led from the very top of the corporate hierarchy and must be consistently applied to the managerial rewards systems affecting decision-makers at every layer. It cannot work if the CEO says one thing in public and then goes back to the line management and simply rewards them for “making their quarterly numbers.”
CEOs can take comfort in the analysis by Raj Sisodia of Babson college that 18 such publicly traded companies out of the 28 he studied outperformed the S&P 500 index by a factor of 10.5 over 1996-2011. Sisodia and Whole Foods’ founder, John Mackey has now started encouraging a community of such peers to gather as “conscious capitalists”.
Legislating CSR. Finally, another way to align managerial incentives with responsible business conduct is by simply requiring it by law. India might become the first country to have mandatory CSR: a Bill in the Parliament requires companies above a certain size to ensure that they spend at least 2% of annual profits on CSR activities. It is hard to tell how productive such a measure might be, but it offers an opportunity for the wider international community to observe and learn from an experiment in taking a blunt instrument approach to the problem.
We are in effect coming to the realization that singling out responsible conduct can set it outside the realm of business-as-usual. Paradoxically, the way to ensure more responsible outcomes, may be to aspire to the day when we do away with the notion of responsible business conduct. For it to be a reality we must create mechanisms and incentives that produce a larger overlap between responsible business conduct and plain, unadorned business conduct.
Inaugural Address by Her Excellency Dr. Dipu Moni, Foreign Minister of Bangladesh, at the OECD Global Forum on Responsible Business Conduct (pdf)
In today’s post, Simon Upton, head of the OECD Environment Directorate, founder and Chairman of the Round Table on Sustainable Development, and former New Zealand environment minister, gives his personal view of the Rio+20 summit
As with most large UN conferences, there is a “glass half empty and a glass half full” perspective on how the outcome of Rio+20 may be viewed, including the negotiated text, The Future We Want. As someone who left the Rio+10 conference in Johannesburg saying that the world didn’t need another mega-conference, I confess to having some instinctive sympathy with the former camp.
That’s not to say that tricky issues were ignored. Every conceivable element of the sustainable development agenda was offered space. The environmental side was no exception. Water got six paragraphs, energy five, cities four, mountains three, transport two and so on. Oceans somehow seized 19 paragraphs including the only new commitment: “to take action by 2025 (!) … to achieve significant reductions in marine debris”. Not surprisingly, perhaps, issues that are the subject of negotiations in other fora received cursory attention. Climate change was awarded three paragraphs which managed to express “profound alarm” and “grave concern” but not much else.
Fossil fuel subsidies, the hottest single issue in the Rio twitter-sphere, were nowhere to be found in relation to climate change or energy but were tucked away in a couple of paragraphs on sustainable production and consumption, including this example of the highly cautious, negotiation-speak of the document as a whole (italics added): “Countries reaffirm the commitments they have made to phase out harmful and inefficient fossil fuel subsidies that encourage wasteful consumption and undermine sustainable development. We invite others to consider rationalizing inefficient fossil fuel subsidies…”
Note the artful choice of verbs. One of our analysts, Andrew Prag did a quick analysis of the frequency with which key verbs were used in The Future We Want. Here is what he found:
In short, the closer the world got to action the shyer it got about agreeing to do anything and Andrew’s analysis of the ‘we will’ category reveals a fondness for process and political declarations rather than concrete implementation.
But what of the glass half full camp? Here the emerging story is that there are plenty of ‘hooks’ in the text on which to construct future engagements. The most significant of these is probably the agreement to develop ‘Sustainable Development Goals’. This was Colombia’s great mission and it is to their credit that they battled suspicion and some outright hostility to build a sufficiently broad coalition to get this initiative adopted. Colombia wanted the subject matter of the goals defined at Rio. This was a step too far, so a smaller, regionally balanced working group will be tasked with reporting the putative subject matter of these goals to the UN General Assembly in 2013.
The question has to be asked whether we needed the conference to secure the agenda. Because the best bits of it are happening anyway. Action by leading businesses far outstrips intergovernmental action. Those of us who attended the ‘Business Day’ events were struck by just how far some businesses have come in the twenty years since the 1992 Rio conference.
Changing Pace: Public policy options to scale and accelerate business action towards Vision 2050 is the World Business Council for Sustainable Development’s incredibly ambitious picture of where the world has to be by 2050: zero waste, near zero net energy buildings, low carbon mobility, doubled food production with much lower inputs, etc. But the big change is not so much in their aspirations as in their target audience. They used to explicitly exclude telling governments what to do. Now, governments are seen to be laggards and they are calling for a much more robust and transparent public policy framework.
They outline a policy accelerator which involves setting goals, communicating and educating, regulating, reforming budgets, investing, monitoring and coordinating. It is, for business, a radical message for governments. It is worth looking at the explanatory section of the document in its entirety, but here is a flavour: “Since the 80s, the notion spread that less government intervention is better for business and economic growth. Yet the resulting deregulated world, with its weak financial and multilateral governance, has a mixed record of progress. It also accumulates economic distress, social tensions and increased environmental risks. It deals badly with the magnitude, depth and urgency of our systemic challenges.”
This language would have been unthinkable at Rio 1992. We are not talking about minor companies here. And they are not without self-interest – large global food companies for instance need access to resources, so it is perhaps not surprising that they oppose subsidies that distort food and energy prices in favour of other businesses. I would be wary of suggesting that governments and businesses should sing in unison – they represent different constituencies and we shouldn’t try to conceal that. But the insistence by some of the biggest companies in the world that they need a coherent regulatory framework that recognizes resource scarcity and the fragility of ecosystem services is surely a milestone.
The references to inequality and social tensions are also significant. A number of business people observed the People’s Forum down the road which drew 35,000 attendees. They were struck by the anger and several made the point that if young people are left unemployed for years on end the anger will spread to political and extra-political action in a way that could be both nasty and unpredictable – and certainly not good for growth and stability.
So the verdict might be that while parts of the conference were seen as empty, what occurred around it was full of promise. But as the business audience reminded us, whether that promise is fulfilled will depend on the response of governments.