Address by Prof Klaus Schwab on the occasion of the 90th Anniversary of the UL Riga, 28 September 2009
Address by Professor Klaus Schwab, the founder and executive director of the World Economic Forum in Davos on the occasion of the University of Latvia Senate that is going to be held in honour of the university’s 90th anniversary.
Managing Global Inter-Dependence
Your Excellency Mr Valdis Zatlers, President of the Republic of Latvia,
Prof. Juris Rozenvalds, Chairman of the Senate of the University of Latvia,
Prof. Mārcis Auziņš, Rector of the University of Latvia,
Dear distinguished audience,
It is a great honour for me to given the opportunity to be with you today on this very special occasion. I am particularly delighted to be back in the stimulating atmosphere of a university – after having been an active professor myself for 32 years. I am also pleased to be here in Latvia and I remember vividly my first visit to Riga in the early 90s, just after the fall of the Wall and the restoration of Latvia’s independence.
Even if the country is confronting the consequences of a major global crisis, what change has happened in between my last and my present visits. Today, you feel in Latvia this great sense of belonging to Europe and its values. Even if Latvia is a small country, it has a major role to play in promoting the idea of a strong Europe, a Europe which has its respected voice even in a changing geopolitical and geo-economic context. What we are striving for, is a Europe with a highly competitive economy but also being a role mode in terms of its value system and its commitment to social responsibility.
Almost 40 years ago, I wrote a book entitled “Modern Management for the Machine Building Industry”; it was published in 1971 and has served as the philosophical foundation of the World Economic Forum ever since. The first meeting in Davos, which also took place in 1971, was a direct consequence of the “Stakeholder Theory” that was defined for the first time in this book.
The Stakeholder Theory assumes that an enterprise is a social community with a number of “stakeholders” – in other words, social groups that are directly and indirectly connected to the enterprise and that are dependent on its success and prosperity. These of course include shareholders and creditors; but the employees, the customers, the suppliers, the state and especially the community in which the enterprise is active also are stakeholders.
The idea at the core of Davos therefore was to create a platform, where managers can meet their stakeholders and discuss their mutual responsibility. According to the Stakeholder Theory, the top management of the enterprise acts as a trustee for all stakeholders – and not just the trustee of the shareholders. In reality this translates into the top management of the enterprise needing to satisfy and reconcile often conflicting expectations and wishes of all stakeholders in the best possible way.
The overarching guiding principle in all the decision-making processes of the top management should therefore always be the long-term prosperity of the enterprise; this is because all stakeholders should be aware that the overriding interest of EVERYONE lies in the sustained, long-term growth of the enterprise. Even though the basic approach between the Stakeholder versus the Shareholder Theory is quite different, this difference remained rather small on a practical, management level, as long as the enterprise had a shareholder structure that was oriented towards adding value in the long-term.
However, the difference between the Stakeholder and Shareholder approach has become increasingly noticeable because of rising short-term profit orientation among shareholders in the recent past, partly encouraged through new financial instruments such as hedge funds.
The Stakeholder Theory can and should be applied not only to enterprises but to all social organizations with a common purpose. It is based on the principle that each individual is embedded in societal communities in which the common good can only be promoted through the interaction of all participants.
The essence of a community is defined through a collaborative spirit, where each individual is not only aware of his or her rights, but also his or her responsibilities. In this context, contributing to the common good – the commonwealth – is just as much a part of the equation as are demands made by the individual on society.
We have witnessed a gradual and recently accelerating erosion of this communitarian spirit over the past years; this has been visible not only in business but also in politics and other areas as well. This erosion of societal values has obviously progressed to a great extent in business and is also one of the primary reasons of the current economic crisis and its consequences.
What we have seen over the past years has been the transformation of the enterprise from a purposeful unit to a purely functional unit: The purpose on an enterprise to create goods and services for the common good – creating a commonwealth -of society has been replaced by a purely functional enterprise philosophy, aimed at maximizing profits in the shortest time possible with the aim to achieve a maximum of shareholder value.
This transformation – which often took place in rather subtle ways – was driven by increased competitive pressures to secure global markets, goods, services and resources. While nobody can dispute that globalization has raised the living standards of millions of people, it has also contributed to an increased commercialization and hollowing out of values. In this way, it has undermined the original communitarian purpose of the enterprise.
The enterprise is no longer an organic community; it is now seen as a functional “profit-generating-machine” in which all parts that do not fulfil their purpose are replaceable: managers, employees, products, locations… This development was particularly visible in the tertiary sector – i.e. the financial sector – where there is at best only an indirect connection with the original purpose of an enterprise, meaning the creation of substantive, real value.
It is clear that with such a new, purely commercial function of enterprises, the traits that otherwise are the hallmark of a well-functioning community become eroded. One cannot expect anything other than selfish thinking and action from an individual that knows he / she is replaceable at any time. In such a purely functional setting, there is little room for a sense of fairness. In such an environment, one simply “helps oneself” (to huge bonuses, for example) and is driven by a selfishness, grounded in the knowledge that this is the new global best practice.
There is also no room for loyalty in this new world. The spirit of maximizing ones selfish interest is undermining not only the business world, but it is also seriously threatening the long-term political and social prosperity of our nation states and global society. If this trend continues, we will not, for example, be capable to collectively take the necessary steps to protect our children from an environmental catastrophe. We also know that we need to reform our social and healthcare systems, but we are not willing to make the necessary sacrifices in order to achieve this.
Instead of a world guided by a sense of responsibility towards society as a whole, we now find ourselves confronted with an individualistic thinking in which society, the state, enterprises but also nature are viewed as sources for satisfying ones individualistic needs. The idea of what was called a social market economy has been hollowed out.
And by the way, it is only natural that in a competitive environment geared towards maximal satisfaction of individual needs, the value of a particular good, say luxury real estate, no longer depends on the cost of creativity and production, but on the prestige associated with the object in question.
It is understandable that greed and envy became the motivating factors, since social recognition is not based on real value contributed to society anymore, but on status symbols that demonstrate that one has done particularly well in the competition for maximal satisfaction of ones needs and thus deserves recognition. The current crisis should actually be a warning shot for us to fundamentally rethink the development of our morals, our ethical norms and the regulatory mechanisms that underpin our economy, politics and global interconnectedness – and where necessary, develop new concepts. It would be a wasted chance for all of humanity, if we pretend that the crisis was just a bad dream
– especially now that we are beginning to see the first signs of improvement in rising share prices or quarterly profits returning to banks (with corresponding bonuses), which are admittedly purely financial indicators.
Not to use this crisis for rethinking, redesigning and rebuilding would be a clear indication of the extent to which we have succumbed to fictional economic thinking and are also turning a blind eye to the real victims of the crisis: the millions of people that have lost their jobs or their home – or both.
What do we need to do? It would be an illusion to lament a lost world and to wishing to return to the past. Too much has fundamentally changed in the past few years. Globalization is irreversible. Innovations in the information and communications sector have facilitated individualization and at same time have connected the world to hitherto unprecedented levels. Informal social-networking structures have increasingly complemented – if not in some instances even replaced – formal organizations.
Traditional communities are being replaced by “virtual communities” like Facebook. New media like YouTube enable thousands of people to engage others in their own interests and concerns. What the world is witnessing today is a phase of renewed awareness-raising. This phase has the potential to result in a new development of moral structures and decision-making mechanisms that would allow us to rise to the current challenges which today are primarily of global dimensions.
Both the economic crisis and the discussions around global warming have shown that today’s global society is irreversibly linked in a common destiny. Unlike the 19th century, when local problems became national problems, we today are not in a position to simply expand the national sphere of action and create a global government, analogous to the national systems that were put in place back then.
The state alone cannot manage all the global problems today. Solutions to global problems can only be found if there is a partnership of all actors – business, science and civil society. What we need, therefore, is a renaissance of the Stakeholder Principle – but at a much higher level. Governments, enterprises, universities, NGOs: all of them are Stakeholders of our global future.
The World Economic Forum reflects the necessity for such a new global partnership. Over the last 40 years, it has developed from a meeting place for all business stakeholders into a multi-stakeholder platform for global affairs in which enterprises are challenged to take up their responsibility not just within the narrow confines of their own field, but also as stakeholders of a globalized world.
This is not about representing business interests; this is about how one can actively contribute to solutions to global problems with resources and know-how. It is in the fundamental self-interest of a globally active enterprise to ensure that principles of human dignity and ecological responsibility are firmly anchored in this global space and abided by everyone.
A global redesign must be built on the principle of real global citizenship. For an enterprise, this implies a significant expansion in the definition of so-called social responsibility. It is not just about addressing social problems within the immediate radius of action of a particular enterprise – this is also about taking responsibility for the world and to contribute to its prosperity; in other words, to improve the state of the world.
It is this shift of awareness, this shift towards a consciousness of global citizenship – not just among enterprises but also with all other public, private, collective and individual actors – that lies at the heart of a real new beginning after this crisis. If we don’t manage to make this shift in values and to make the global commonwealth a priority, then the world could really face a scenario of self-destruction. . Under the patronage of Switzerland, Qatar and Singapore, and with the intellectual support of over 1200 experts, the World Economic Forum is currently undertaking such a Global Redesign Initiative. It aims to include all actors in a process to develop a common vision about exactly which values, mechanisms and institutions are necessary to really improve the state of the world today.
This Global Redesign Initiative divides the global challenges into 5 categories:
1. How can we achieve sustained economic and social progress?
2. How can we ensure global, national and human security?
3. How can we make our economic and population growth ecologically sound?
4. How can we be better prepared for risks and how can we neutralize these risks?
5. How can we create the global institutions, instruments and legal frameworks to ensure effective global governance?
Within these categories, we at the World Economic Forum have identified over 70 individual global challenges. We define a global challenge as one that – if not managed properly – can have global consequences; cooperation is the key for addressing the challenge. Just to list a few examples, these challenges would include: population growth, fighting poverty, terrorism, food security, nuclear proliferation, water shortage, climate change and many others.
The complexity of all these challenges is enormous and often times they are intricately interlinked. Even specialists have lost the overview, as has been demonstrated during the financial crisis. Adding to the complexity is another aspect of globalization: the compression of time, meaning that developments in today’s world take place much faster than in the past. Just think how fundamentally the internet has changed our lives within with last 20 years – within just one generation.
In conclusion, my message here is that humanity is at a tipping point. We basically know what we should do to strive, as generations before us have done, for a better life – not only for us but also for the coming generations. But we will save the world not just by formulating well-considered policies or reforming institutions. What we need foremost is a renewal of our value systems, integrating a true collective and individual stakeholder approach to our common future.