The View From the Summit

The 2007 Wharton Economic Summit marked the close of the anniversary celebration by addressing global economic issues for the next 125 years.

It’s only fitting that the Wharton 125th anniversary celebration ended where collegiate business schools began—Philadelphia. On April 12 and 13, the 2007 Wharton Economic Summit drew more than 1,000 business leaders from around the world to the Pennsylvania Convention Center to address the topic “Next Moves in a Global Economy.”

Called “an absolute grand slam” by Dean Patrick T. Harker, the event culminated a celebration that began with the Mumbai Global Alumni Forum in January 2006, then circled the planet for 15 months. Along the way, Wharton faculty and alumni convened in cities from Tokyo to Miami, Rio de Janeiro to Minneapolis, Istanbul to Atlanta.

The Philadelphia event was the biggest by far. More than 30 panels and sessions drew faculty and alumni speakers, as well as business heavyweights from around the world and thought leadership from Wharton’s programs and initiatives, such as the Small Business Development Center and the Center for Leadership and Change Management. The Summit also bade farewell to Dean Harker in a gala dinner celebration that closed the event.

Global Capitalism, Critical Questions

The brute force of global capitalism has lifted many out of poverty but created urgent situations that require leadership,” said Merrill Lynch Chairman and CEO Stan O’Neal in the opening keynote speech. “When the Berlin Wall fell, many thought that democracy would become the unifying force in the world. The force unleashed in 1985 was not democracy but free-market capitalism.”

While the darker side of capitalism has been the cause of urgent problems — including environmental threats and economic inequity — the combined efforts of businesses can offer solutions. During a Friday keynote lecture, Jeremy J. Siegel, Wharton’s Russell E. Palmer Professor of Finance, made the case that free global exchange of goods and wealth are required for the developed world to maintain its lifestyle as birth rates continue to decline and populations age. Along with other speakers, Siegel noted that China and India will surpass or equal the economies of the United States and the European Union. But while some observers have interpreted the rise of other economies and the global flow of assets as a harbinger of the decline of developed nations, Siegel sees it as the best hope for the developed world.

Panel sessions — from the concrete to theoretical — drilled down into more specific industries and challenges. The topics addressed topics were as varied as “Wall Street Meets Hollywood,” moderated by Nelson Gayton, director of Wharton’s Media and Entertainment Initiative and “Succeeding in a Flat World,” moderated by Professor Yoram (Jerry) Wind and sponsored by the SEI Center for Advanced Studies in Management.

Common threads ran through the discussions, as each was colored by challenges facing business and society on a global level, including corporate responsibility, global governance, and competition for scarce resources of energy, materials, and talent.

Corporate Responsibility and Sustainable Business

Rajat Gupta, Senior Partner Worldwide, McKinsey & Company, broached the topic of corporate responsibility in his keynote speech. Business must reinforce constructive contact and dialogue with society to “earn the right to serve,” he said. “Corporate responsibility is not a luxury — we must work with partners to address problems facing society to shape social contract between business and society.”

Some critical industries, such as the energy sector, face even more daunting barriers as record profits, declining fossil reserves, and environmental damage seed distrust among both end consumers and the citizens of petroleum producing countries. Mohammed Azam Ali, W’96, E’96, CEO, Orient & Gulf DMCC, asserted during a panel called “Dividing the Pie: The Political Debate About Profits in the Energy Sector,” that increased transparency and accountability could alleviate distrust.

“Disclosure regimes in U.S. and other capital markets were put in place 30 years ago,” said Azam Ali. “A lot has changed in the industry and companies that do not pay attention to the wider context, including the need for transparency, will eventually find themselves more vulnerable to negative surprises and eventually lose credibility with shareholders.”

A challenge common among many industries is that the tenets of business are not understood. Benefits are not seen as equitably distributed, but as a skeptical public holds businesses up to greater scrutiny, corporations must step up with greater responsibility. Said Gupta, “It’s about whether we are making our contribution to society, working with the elements of society creating societal good along with shareholder value. Businesses that align strategies with trends will succeed. We should not merely respond to trends, but shape society.”

He asserted that the public sector will need to rise to the level of performance as the private sector, and that public/private partnerships will be key.

Emilio Bassini, W’71, C’71, WG’73, Managing Principal and Co-Founder, Bassini & Co. LLC, elaborated on the idea that social value and shareholder value can be compatible. “A lot of what happens in economies good and bad depend on social values,” he said during the “Emerging Markets” panel. “All things being equal, align yourself with interests of the government. As an example, we’ve been very successful investing in Mexican low-income housing. Having a flow of home supply for the many households that are formed each year is vital to maintaining social peace, and thus there is professional management, liquidity in shares, and funding available.”

Governance Issues for Multinational Corporations

While the restrictions and costs of Sarbanes-Oxley Act were frequently disparaged at the Economic Summit, speakers agreed that the ethical considerations facing multinational companies were increasingly complex, notwithstanding onerous U.S. reporting requirements.

“Was there some benefit to Sarbanes-Oxley? Probably yes. Was it an overshoot? Probably yes,” said Arthur Collins, WG’73, Chairman and CEO of Medtronic, at a Friday plenary session moderated by radio host John Resnick. “A huge amount of time on an audit committee or board of directors is taken up on compliance issues without knowing whether it effects ethical behavior.”

He advocated applying a uniformly high set of ethical behavior regardless of local laws. Jon M. Huntsman Sr., W’59, H’96, founder of Huntsman Corp. and a co-panelist, agreed. “To have any policy that varies from country to country would be almost immoral,” he said. “Word spreads if one is ethical. I pulled operations out of one country because bribes were the rule. Huntsman Corp. left, but since then we have never been invited to participate in that behavior in other sites. It’s important to be above the fray.”

If corporations don’t hew voluntarily to ethical principles in regard to financial practice, environmental concerns, and human rights, global regulatory bodies may emerge to enforce those principles, according to Tom Donaldson, Mark O. Winkelman Professor and Professor of Legal Studies and Business Ethics. “The idea of single market regulated and overseen by a global body is fraught with difficulties, but the train is on the tracks,” he said.

Collins commented, “I think it’s a long time in the future where we have one market. It’s a reality that the U.S. will be a significant power in the future but not the only one. We better wake up and deal with it.”

In Rajat Gupta’s earlier remarks, he had professed that the body for global governance already existed. “The common perception in the U.S. is that the United Nations is ineffective, but if we didn’t have one, we would create one,” he said. “It would behoove us to make it more efficient rather than abandon it. The global governance mechanism must evolve, and the UN is at the core.”

He cited the Global Fund — created by the UN but independent of it — as an example of a successful international institution.

Battle for Limited Natural and Human Resources

Speakers identified competition for resources as a factor that threatened growth.

“Society is using natural resources at unprecedented rate, and the demand will continue to intensify,” said Gupta. “How do we sustain the environment and drive robust growth?”

The growing demand for declining natural resources such as water and petroleum will put pressure on another precious resource: talent. Energy supply will not keep up with demand without innovation, and the continual supply of scientists and business minds will be required to produce and commercialize those new technologies.

Michael Milken, WG’70, founder of the Milken Institute, whose keynote address followed Siegel’s at Friday’s lunch, commented, “This century will be defined by the competition for human capital.”

The developed world will be able to grow its economy by continually driving innovation, but it won’t — and can’t — corner the market on innovation. For the global economy to grow, the young population of the developing world — its most valuable of assets — will not just be the hands that produce goods and pocketbooks that purchase them, but the minds that produce innovative ideas and products as well. The prodigious talents in the developing world must be fostered through education as well. Milken said that historically, the countries that invest the most in educating their populations have the most successful economies, and those that don’t suffer.

Milken gave two contrasting examples. In 1960, Singapore and Jamaica were similar — tropical island nations with few natural resources and per-capita incomes under $2,000 per year. Jamaica emphasized an economy based on agriculture and tourism, while Singapore invested in education and technology. Today, Jamaica’s per-capita income has barely doubled, while Singapore’s is more than $31,000.

Already, said Gupta, the battle for talent and labor pools has reduced the limitations of geography. “While there is currently a divide between job categories that have globalized and those that haven’t, the divide is narrowing. The demands of labor have changed.”

In the developed world, the battle for talent and commodification of many goods means cultivating and retaining the brightest employees to stay competitive. Said Joel Cantor, WG’89, CEO and Founder, Gulf Atlantic Real Estate Companies, at the “Competitive Strategies” panel, “Differentiation of products and services is essential. How do you come up with an exciting product so consumers will pay higher margins?” In Cantor’s business of real-estate development, that means producing unique designs with dramatic architecture and innovative mixed-use plans.

“Smart people are a dime a dozen,” says Cantor. “What matters is creativity. It’s a challenge in real estate to make the product stand out, and we have a constant need for creative people who can do that.”

Weighing Risks and Rewards in Emerging Markets

As companies chase global talent pools and technology reduces the constraints of geography and time, outsourcing of labor will continue as a key strategy, tipping the shift in economic power to China, India, and other labor markets.

“Outsourcing does not equal globalization,” cautioned Morris Cohen, Wharton’s Panasonic Professor of Manufacturing and Logistics, at the panel on “Globalization and Outsourcing: Integration with India and China.” He noted that outsourcing is more of a valued-added option for organizations to meet competition and the need to coordinate global activity. Cohen said that outsourcing minimizes costs as well as cuts across the mosaic of the global supply chain.

Sashi P. Reddi, GrW’94, Founder, Chairman & CEO, AppLabs Technologies, stressed this in the advantages of doing business in India. Specifically, labor is cheap and labor laws in India are flexible, taxes are low and can be waived based on the location in India, and there is a good network of revenue flow.

Said Reddi, “India has three ways to say yes, and no way to say no.”

Rohit Aggarwal, W’94, Co-Founder and Managing Director, RAS Capital Management, weighed in on the Indian economy from a different perspective on the “Emerging Markets” panel. The country’s recent average GDP growth has been 9%, and its purchasing power is the size of the Chinese economy. While India is behind China in infrastructure, Aggarwal returned to Milken’s theme to state that India’s greatest asset is human capital, with a large population of educated English-speakers and 50% of population under the age of 25. The Indian economy is supported by its own domestic consumption and the large middle class, leading to the explosion of consumer demand.

Panel moderator N. Bulent Gultekin, Associate Professor of Finance, explained that emerging markets provide foreign investors with outlets for expansion, but as employment levels rise in the region, labor costs increase.

He cited Ireland and Spain as two economies that have succeeded through changes in the social pact, deregulation, tax reduction, investment in education, and political stability, while former Soviet bloc nations such as Poland and the Czech Republic have had a slower pace of change from their socialist economies.

“It’s difficult to find the perfect country,” he said. He advised investors to select countries, know them well, stick with a commitment once made, invest only what they can afford, and monitor investments closely and continually.

Emilio Bassini addressed the topic of Latin America, explaining that he wanted to focus on the part of the world he knew best. He cautioned that investors must price returns properly to take in to account the full risks, but asserted, “It’s a very good time to be in Latin America. If you look at the number of IPOs in the Brazilian market this year, it’s staggering. The IPOs have been well priced, and the money was being raised for the right reasons. There have been fewer IPOs elsewhere in Latin America but still quite a bit of entrepreneurial activity. Performance comes from the flow of funds through public pension plans. The power of foreign institutional dollars is very big. When lots of money goes in, stocks do well. IPOs in Brazil may slow deepening of markets.”

“Emerging Markets” co-panelist Manuel Montero,WG’73, Founder and CEO of SAFTPAY, strongly backed the region’s economic promise, asserting the presence of untapped entrepreneurial opportunity. “There’s not much cash for new entrepreneurship and a lot of cash goes in and out to Miami very quickly,” he said. “It’s difficult to start from scratch anywhere except in the U.S., where there is a robust venture capital market.”

In India, said Aggarwal, “there has been phenomenal performance in markets. Futures and options markets are only four years old, and are already four times the size of the cash stock market. You have to take into account currency depreciation in some markets, but it’s not a major factor in India.”

Touching on Bassini’s earlier theme, he commented, “A benefit is the Western legal and accounting systems based on British laws. It’s easier for many Westerners to do business there than in some emerging economies.”

There are risks — infrastructure shortfalls, overdependence on foreign capital. There is political instability as a result of the coalition government, and from global oil prices.

“We think the market rallied too much and investors need graphic reach, everyone is trying to get the scale to leverage to get realistic. Areas of opportunity include arbitrage, since the power of the institution while maintaining innovation. inefficiencies exist in the market,” Aggarwal said. “All emerging markets have risks, but a lot of the risks I saw in the mid- 1990s have gone away. Currency devaluation never happened in India. One of the problems is that India is bucketed with emerging markets, and if Thailand catches cold, India sneezes.”

Maintaining Competitiveness in Global Market

In an separate panel on “Thought Leadership,” Jerry Wind recommended thinking of outsourcing partners as true partners, not an us-versus-them transactional relationship. “Create the most powerful network of firms and think of yourself as orchestrating a network for the generation of ideas.”

It’s the generation of ideas that will distinguish companies that stay competitive in the global marketplace. Gerald Adolph, Senior Vice President, Booz Allen Hamilton, specializes in strategy and operations for technology-driven businesses. During the “Competitive Strategy” panel, he explained, “Many companies are struggling about how to bring the power of the institution together. Whether its geographic reach, everyone is trying to get the scale to leverage the power of the institution while maintaining innovation. Commodification happens very quickly—drugs, technology, consumer products.”

Investment firm maverick Alfred P. West Jr., WG’66, Founder and Chairman of SEI Investment Company, said, “If you have competition, you change the game to one you can win. You must continue to innovate.” He has found that 90% of value comes from asset allocation rather than stock picking, and more recently, the development of client services has become critical.

Advised West, “We always go after emerging client needs, not just what they tell you. We find that they ask you for something tactical, and we try to give them what they need, not what they ask for.”

Said West, “If you think you are secure you’re at risk. If you accept risk, you’re secure.”

Story: Kelly Andrews with additional reporting by Brandon Dunn, James Yu, and Joanne Spigonardo
Photos: Stuart Watson

Coverage of the 2007 Economic Summit from Knowledge@Wharton

In Oil Producers’ Brave New World, a Key Word Is ‘Partnerships’

In Venezuela, President Hugo Chavez is threatening to take control of several major projects from American and European firms. In Russia, the government recently strong-armed royal Dutch Shell into relinquishing control of a large oil field. Across the oil-pro producing world, governments are responding to higher petroleum prices by imposing new taxes on oil companies and forcing the renegotiation of contracts. (knowledge.wharton.upenn.edu/article.cfm?articleid=1731)

Scouting for the Best Athletes (or Analysts): Character vs. Performance

Character is what counts the most, whether you are scouting for a new quarterback in the NFL draft or hiring a young commodities trader. (knowledge.wharton.upenn.edu/article.cfm?articleid=1728)

Wharton Magazine - Background

Type to Search

See all results