Davos in Review: Markets Will Boom, and CEOs Will Resist Social Value Creation

Last week, the world's elite met at Swiss ski resort Davos for the annual World Economic Forum. Invites to the gathering are highly coveted -- and expensive. But just because you didn't make the list, that doesn't mean you should ignore the meet-up. After all, from Jan. 26 to Jan. 30, about 2,500 of the world's top leaders, thinkers and business titans hobnobbed in Switzerland with the intent of building relationships, doing deals and maybe learning a new idea or two.

As I read the breathless Davos dispatches, two things caught my eye: First, the elite are exuberant, and second, they're annoyed by the idea that they should create societal value. The first has implications for investors: Stocks are likely to pop for the next several years. The second holds a hint for managers: They should turn to value leadership.

Elite Exuberance Means Cross-Border Deals


The most important idea to come out of Davos is that a major mood shift has occurred among the business elite. As UC-Berkeley economist Laura Tyson pointed out to the BBC, last year's meeting featured a gloomy, fearful mood among the world's elite. A mere year later, the emotional difference is profound: The BBC notes that "there's a really bullish feeling among many economists gathered at Davos."

That represents a big turnaround from the last few years. As Tyson said, "Two years ago there was a lot of doom and gloom about the financial crisis, last year there was uncertainty and now there's more confidence in the business community that the global economy is on a rebound."

Of course, this feeling isn't unanimous -- perma-bears like New York University economist Nouriel Roubini continue warning about debt and deficits. Another, more obscure pundit, Barrie Wilkinson of consulting firm Oliver Wyman, got Bloomberg's attention by warning of a 2015 financial meltdown caused by even looser loose-money policies and ever-widening trade imbalances.

Unleashing a Wave of Investment


How is the positive mood shift is relevant for investors? The Davos attendees control huge amount of capital, and the world's business leaders have massive amounts of money to invest in their confidence about the future. In the U.S. alone, businesses pulled in $1.66 trillion in 2010 profits and hold nearly $2 trillion in cash on their balance sheets.

It's interesting to examine the list of attendees and imagine deals that might have been kicked off during the week -- such as the potential merger of Norway's Statoil ($77 billion market capitalization) with India's Suzlon Energy ($89 billion market cap). But the general point is that when you combine massive amounts of cash with rising optimism, you have the ingredients needed to unleash a wave of investment. And that money is most likely to go into acquisitions targeted at lowering costs and accelerating revenue growth.

This means investors should expect to see some serious deals in the wake of Davos. And it wouldn't surprise me if those deals involve emerging markets like China, India and Brazil. The reason, as I wrote in a DailyFinance column last March, is that companies based in slower-growing developed nations -- where the expected GDP growth in in the neighborhood of 3% -- want the opportunity to tap into markets like China (10%) and India (9%) that are growing at least three times faster.

Paying CEOs to Create Shared Value

Davos also generated buzz, according to Justin Fox, for a Harvard Business Review article, "Creating Shared Value," co-authored by Harvard Business School professor Michael E. Porter. (Full disclosure: I worked for Porter at his consulting firm, Monitor Co.). The basic idea of that article is that business and society should not be at odds with each other. Rather, business should work with society to profit by solving its problems.

This idea isn't new nor is it universally accepted. As Fox, editorial director of the Harvard Business Review Group, pointed out, it's irritating to at least one economist. Fox wrote: "When a prominent economist pulled me aside last night to bend my ear for 10 minutes about how wrongheaded Porter's arguments were, I knew the piece had hit a nerve." And many others have written about this, including a former Monitor colleague, Roger Martin, who's now dean of the Rotman School of Management at the University of Toronto, in another HBR article, "The Age of Customer Capitalism."

I wrote a book on the topic in 2003, Value Leadership, that I hoped would put business on a more virtuous path in the wake of Enron's bankruptcy. It contains a way to measure this broader concept of value, the Value Quotient (VQ), which tracks how well a company performs 24 specific activities related to value creation.

Since it puts a number on a difficult-to-measure phenomenon, the VQ would be a useful way for boards to assess how well CEOs are creating value for customers, employees, shareholders and communities. As I wrote on Jan. 21, my research showed Google (GOOG) earning a VQ of 88%. That's pretty good (and perhaps a bit too high -- a New York Times article on Saturday pointed out that the results of Google's efforts at philanthropy have been disappointing), but not as good as Southwest Airlines' (LUV) 95%, for example.

Needed: Changing How CEOs Get Rewarded


I'm hoping that Porter's push for value leadership succeeds where mine failed. But unless he can persuade boards of directors to adopt a CEO bonus structure that's linked to a measure of social value -- and I'd nominate the VQ -- his efforts will fall on resistant ears.

You can't afford to attend Davos unless you've got big bucks, and for now, those only flow into the pockets of CEOs who boost shareholder value. If Porter's efforts change how CEOs get rewarded, then corporate behavior will also change. Until then, look for a wave of deals in developing-to-emerging markets to flow from the exuberance of Davos executives flush with cash.


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alansmichaels

Excellent article, Peter - thank you.

I wonder if the people at Davos appreciated the simple concept behind "Creating Shared Values" .... or did they assume it was just another generation of CSR speak?

I believe the major difference is that:
- CSRs, or Corporate Social Responsibility, is typically viewed as an expense item run by a CSR cost center (that hopefully is aligned with the company's stratgies as it helps the community)
- Creating Shared Value highlights that there are many profitable industries out there that help society... and many added potential opportunities to start new profitable businesses in new innovative industries that help society too (like new cancer treatments that will kill the cancer stem cells and cure the patient, more energy efficient devices, etc.). Unlike another tax (or CSR shakedown) Creating Shared Value implies starting a new business that is going after profits in new ways in areas that help the business & society.

Correct?

March 12 2011 at 11:33 AM Report abuse rate up rate down Reply
mrhutcher

Can't believe it - Cohan wrote an article WITHOUT slipping in some vitriolic diatribe against gun owners! Must hav slipped his mind this time!!

January 31 2011 at 5:42 PM Report abuse -1 rate up rate down Reply
hgeorgech

Isn't it wonderful how the "fat cats" squander their corportions' money on the annual trek to Davos while staff positions in many of these firms are being cut? Why not hold the 2012 summit in a more practical locale .. like Peoria?

January 31 2011 at 3:19 PM Report abuse +3 rate up rate down Reply