You Should Keep the Neighborhood, Not Just Your House in Order
Risks, challenges and opportunities for business at the Global Alumni Reunion
(Left to right) Tony Barber, Jaime Caruana, Janne Haaland Matlary and IESE Professor Núria Mas / Photo: Edu Ferrer
Delaying a transition to “new monetary normality” and maintaining low interest rates carry risks for businesses and investors, and are hurting growth.
This was the warning from Jaime Caruana, general manager of the Bank for International Settlements. Addressing an audience of 1,000 IESE alumni on October 17 at the Global Alumni Reunion in Munich, Caruana, who is also former governor of the Bank of Spain, highlighted the most pressing macroeconomic and geopolitical challenges in the current landscape.
The first of these, keeping interest rates low, is affecting pension funds and the financial services industry and return on equity, he said – a situation that will “harm productivity in the long term.”
Caruana also highlighted the risk of excessive debt, referring to the U.S. denominated debt of $9.6 trillion held by foreigners. “If the dollar moves up and you have issued debt in that currency, you’re in trouble,” he warned. “This will lead to tightening conditions and failing growth.” Despite post-crisis deleveraging in some pockets, such as households in the U.S., the U.K. and Spain, debt overall has continued to grow, especially that of some financial firms – a situation that is “not good for stability,” said Caruana.
A third risk, that of geopolitical fragmentation, could complicate these debt issues enormously, he added. Although the “inward-looking tendency” towards protectionism in trade and currencies has been – so far – moderated successfully, it could lead to major risk in the case of trade or financial fragmentation; a “zero-sum game,” he said.
Speaking alongside Caruana were political scientist and writer, Professor Janne Haaland Matlary, and Tony Barber, Europe Editor of the Financial Times, who noted that despite a “growing sense of insecurity around the world,” the world has actually become wealthier over the last 20 years, with less acute poverty in developing countries, especially China and sub-Saharan Africa. This growing wealth, however, driven by the interconnectedness of media, transport and supply chains, has created “losers as well as winners. And inequality generates discontent, which has led to the destabilization of some existing political orders.”
His views were echoed by Matlary, who warned that we were facing “some ugly realities with state security firmly back on the agenda.”
Caruana argued that the best “vaccine” against these risks is “humility, in terms of how much we know. The world is a complex and hard-to-understand system. Tail risks exist. You think you’ll be OK when bad things happen but that’s not usually the case. The truth is that the rooms are crowded and the doors are getting narrower,” he said.
“We need to be prepared, ex-ante, and build room to maneuver.” That and understand the effect that decisions taken by large economies will have on neighbors.
“It’s not enough to focus on your own house. You have to ensure the whole neighborhood is in order.”
The theme of responsibility was also addressed by Paul Achleitner, chairman of the supervisory board of Deutsche Bank and Herman Daems, chairman of the board of BNP Paribas and KU Leuven.
In a climate defined in recent times by corporate scandal, both agreed that a move towards a new model of governance was critical.
“When people talk about corporate governance they think they are talking about rules and structures, when in reality we are talking about behavior and culture,” said Achleitner. “And culture is what people do when no one is watching.”
He drew parallels between the industrial revolution of the 19th century and the “financial revolution” of the 20th century – whose “aftermath,” he said, was revealing behaviors that by today’s standards were “unacceptable.”
“We are experiencing another revolution,” said Achleitner. “This time it is the digital revolution of the 21st century and companies using technology will be judged in just the same way in the future.”
The role of the board in defining and driving corporate culture was raised by Daems, who called for a shift in paradigm from “ticking boxes to focusing on people.” Acknowledging the challenges facing boards today – from intense scrutiny and bureaucracy to “damaged credibility – he nonetheless issued a challenge to board members: “Ask yourself the question, ‘do I add value to my company?’”
“We need a new corporate governance,” said Daems, “Today we’re focused on structure and formalization when we should be focused on behavior and responsibility. We talk about control, when we should be talking about coaching. We need to move away from the notion of formal independence to one of engaged relevance to the business.”
Things are “better today than they were in the past,” said Achleitner, adding that in the wake of the Libor affair, Deutsche Bank had “learned a good deal.”
“We have understood that focusing too much on growth can be dangerous – that you need to fix your back office and infrastructure and ensure you have a system in place to catch issues. It’s this back office capability that will sustain your future growth.”
The role of the board, he added, is not to make “spot checks” but to ensure it provides on-going guidance for the future. “There may be issues coming up every day or week. The job of the chairman should be that the board is an effective body that can live up to the responsibility to deliver to the company.”
The digital revolution was a focus of debate across other expert panels in Munich.
Charles-Edouard Bouée, CEO of consultancy firm Roland Berger, defined the digital transformation as “a double revolution: one which is both technological and sociological. There is a new wave of digital transformation coming to Europe and bringing with it opportunities and challenges.”
In this rapidly shifting environment, he said, “corporations need to develop a new mindset. It’s not the time to be defensive: it’s time for aggressive, strong leadership.”
Bouée estimated that the potential net gain to European firms of the digital transformation wave could be as much as €1.25 trillion, but cautioned that there would also be a price to pay for missing the opportunity. He urged firms to have a lighter management footprint – to be more agile – and to provide answers to crucial questions on data and security.
“People are now prepared to give information to companies they wouldn’t give to governments but who’s going to take care of that data if companies collapse?” he said.
The issue of data security was also taken up by Bruno Di Leo, senior vice president of sales and distribution for IBM Corporation.“There is a huge opportunity to make the economy more efficient,” he said, “but it urgently requires regulation,” said Di Leo.
People, he argued, are becoming “part of the innovation engine. Consumers have new expectations of companies and governments. So the pressure is on to deliver.”
Di Leo cited the example of the healthcare sector, where demand is driving the development of next-generation cognitive computing, or Artificial Intelligence. Doctors read on average only five or 10 papers in their career on any given disease, he said. And the average doctor makes a correct primary diagnosis only 43 percent of the time. Computers can access a high percentage of the 25 million papers that are published each year and can already help doctors to avoid expensive errors.
This new healthcare technology paradigm, said Di Leo, would change the rules of engagement for the pharmaceutical sector and for governments.
Di Leo and Bouée were joined by María Garaña, vice president of Microsoft EMEA, who urged business leaders to avoid becoming “lost in the details of digital. We should focus on the forest, not the trees and ask how technology is going to impact customers.”
In the tech sector, she said, companies need to understand that their customers “don’t care about the technology itself, but about how it affects profit and loss. It’s not about getting information, it’s about making it work for you.”
Garaña said there are five core technology “must-haves” that all companies should integrate to drive business results. These are cloud, mobile, social, Big Data and security.
“Technology is there to help you join the dots. It’s the engine of business.”
Technology is also the engine driving the Industry 4.0 of automation, data exchange and manufacturing technologies. Two perspectives on innovation in manufacturing were provided by BASF board member Michael Heinz, and Hans J. Langer, CEO of 3-D printing pioneer, EOS.
Innovation is happening faster than ever before, said Heinz. “We used to replace broken pumps in our factories when they failed. The next step was preventive: replacing them after a certain number of hours of use. The third step was monitoring them so the pumps tell us when they need to be replaced. But the next step will be to have them talk to each other to optimize the efficiency of reactions and increase yields.”
Industry 4.0 will require employees to have different skill sets. “As things get more complicated, we will require people who are better educated, who can work with sophisticated processes,” said Heinz.
New technologies will also empower creative people to do new things, said Langer. “Germans are successful exporters. We have creative companies and engineers. Innovation increases their potential,” he said.
The changes will, however, require innovations in management. “When we spread technology and product innovation around the world, we have to make sure we are not duplicating work,” said Heinz. “We need new ways of working with each other, and new IT learning solutions.”
“An invention is just an idea,” he said. “An innovation is when the cash register rings.”
This year’s Global Alumni Reunion featured a first: a simulated entrepreneurial funding pitch. Three real business projects were presented to two investors, Hendrik Brandis, co-founder and partner of Earlybird Venture Capital, and Rainer Strohmenger, general partner of Wellington Partners.
Pitching for capital were Antonio Rami, co-founder and COO of FX platform for businesses, Kantox; Pablo Graiver, founder and CEO of medical trials patient-matcher TrialReach; and Michael Altendorf, CEO and co-founder of personalized customer intelligence solutions provider Adtelligence. Delegates were invited to use the custom-built GAR app to “invest” virtual funds in the project with most appeal. The winner, netting more than 3.4 million euros from alumni, was TrialReach, which matches patients to medical trials.