Our World in 2017

ISSUE#1193 | January 2017
THE AGE OF POPULISM
NEW EUROPE: OUR WORLD IN 2017
Page-50
www.neweurope.eu
by Dominic Barton
Meeting the populist challenge
Global Managing Partner of McKinsey
& Company.
UNITED KINGDOM - LONDON
Capitalism is the greatest engine for prosperity
that the world has ever seen. But the democratic
institutions that create the space for business
leaders to operate have not kept up with
accelerating economic and technological
change; nor have they made the necessary
adjustments to ensure that enough people
benefit from the system to which they all
belong.
All leaders should keep these two thoughts
firmly in mind as they respond to 2016’s
populist backlash – manifested in Brexit,
Donald Trump’s election victory in the United
States, Italy’s failed constitutional-reform
referendum, and so forth.
We capitalists can no longer simply
celebrate the fact that open markets and
technological innovation have lifted more than
one billion people out of extreme poverty since
1990, including hundreds of millions in China
alone. We must acknowledge our postwar
global order’s failures, such as rising inequality,
decades of stagnant wages in many developed
markets, and sustained unemployment at or
above 20% – and over 40% for young people
– in several European countries. Most of all,
we cannot simply assume that the system will
somehow “self-adjust.” Instead, we need to act.
Of course, meeting the challenge of
populism is not a task for business alone.
Political leaders have a critical role to play, by
shoring up and extending the social safety net
to cover those who have been, and will be, “left
behind,” and by providing – through smart
infrastructure investment and policy reforms –
a stronger foundation for inclusive growth. But,
beyond creating good jobs and higher-quality
products and services at lower prices, privatesector
executives must lead in several key areas.
First, they should ensure that their
organizations pay taxes. While a company’s
shareholders and employees rightly demand
sensible stewardship of its financial resources,
nothing does more to undercut the case for
globalization than the specter of wealthy
individuals and institutions gaming the system
to reduce their tax bills far below the rate that
the struggling middle class pays.
Second, executives should expand privatesector
efforts to provide the skills training that
workers in a dynamic economy need, especially
in areas where educational establishments are
not keeping up. Such efforts benefit companies
and society alike, as corporations such as IBM,
AT&T, and many others are discovering. For
example, Generation, a youth unemployment
skills-building program that McKinsey &
Company helped launch in specific industries
across five countries, has placed more than
10,000 graduates in jobs since 2015 – and
at a far lower cost than existing approaches.
Ninety-eight percent of our more than 440
employer-partners say they are eager to hire
more Generation graduates.
People take part in 'A Picnic to discuss Brexit' organised by the 'General Assembly' in Green Park, central London Britain, 09 July 2016.
Third, executives must make sure that
their companies are playing a positive role in
the communities where they operate, because
shareholder capitalism, properly understood,
is grounded in stakeholder capitalism. For
example, at a recent Fortune Global Forum
in Rome, more than 80 executives made
commitments to provide access to health
care for 100 million children in underserved
parts of Sub-Saharan Africa. Corporate social
responsibility entails responding to social needs.
Above all, executives should work together
to strengthen modern capitalism’s ability to
deliver long-term value. This is no easy task. In
a recent McKinsey survey of senior executives
from around the world, 65% reported that they
felt more pressure today to deliver short-term
results than they did five years ago, and this is
especially true in developing markets. Only
37% of executives believed that their company’s
culture encouraged long-term thinking, and
half of the remaining 63% acknowledged that
they would delay investing in a project that
would add value if it meant that they might
miss a quarterly earnings target. Meanwhile,
the proportion of net income that S&P 500
companies spend on dividends and stock
buybacks has now reached almost 100%.
The collective cost of this pressure is
high. Short-termism lowers growth by
lowering investment and R&D expenditures,
ultimately manifesting in fewer jobs. According
to preliminary estimates from the McKinsey
Global Institute, short-termism has cost the US
economy an additional 5-6 million jobs over
the past 15 years, and more than $1 trillion in
unrealized GDP growth.
What will it take to accelerate sustainable
global growth and create more good jobs?
For starters, we need to change behaviors and
incentives at every step of the investment value
chain, starting with the institutional investors
who provide long-term funding, and continuing
with corporate managers and the boards that
supervise them. One good model for a longterm
asset owner is GIC, the Singaporean
sovereign wealth fund, which bases its rewards
to asset managers on a 20-year rolling rate of
return, and uses a minimum five-year horizon
to measure performance. Similarly, the Canada
Pension Plan Investment Board has moved
to five-year rolling returns as its incentive
benchmark. It is time to move from quarterly
capitalism to long-term capitalism. As I wrote
five years ago in the Harvard Business Review:
“Business leaders today face a choice: We can
reform capitalism, or we can let capitalism be
reformed for us, through political measures and
the pressure of an angry public.” The bill for our
collective failure to change is now coming due.
But we still have a choice to move from words
to deeds – and to preserve and strengthen the
best system the world has yet found to deliver
prosperity for all.
Copyright: Project Syndicate, 2016.
www.project-syndicate.org
EPA/SEAN DEMPSEY
What will it take to
accelerate sustainable
global growth and
create more good jobs?
For starters, we need to
change behaviors and
incentives at every step
of the investment value
chain, starting with the
institutional investors
who provide long-term
funding, and continuing
with corporate managers
and the boards that
supervise them