For Globalization to Succeed, 'Business Needs to Reinforce Its Compact with the Public'
Globalization is pulling tens of millions of people out of poverty annually and creating worldwide wealth unimaginable a generation ago. But its benefits are being shared unequally, resulting in widespread public dissatisfaction that business leaders ignore at their peril, two top executives told participants at the 2007 Wharton Economic Summit.
Stan O'Neal, chairman and chief executive of Merrill Lynch, and Rajat Gupta, a senior worldwide partner with McKinsey, both called on their colleagues to pay attention to their social responsibilities as assiduously as they watch their bottom lines. "As business leaders, it's too easy to focus on the winners," O'Neal cautioned. "But a vast population is being left behind. The Economist has written that the U.S. risks calcifying into a European class-based system. How do we ensure that the fruits of opportunity flow freely and equally to everyone? I went from the farm to the factory to the executive suite: What are the chances that someone today could replicate that path?"
These sorts of questions aren't just matters of morality, Gupta added. Companies' ability to operate free of onerous restraints depends on the perception that they contribute to their societies. "If society feels that business is not living up to its responsibilities, there will be significant consequences. Wise business leaders know their companies are accountable in the court of public opinion. Business needs to reinforce its compact with the public."
An Image Problem
In addition to their words of warning, both men also expressed optimism about the ability of business leaders to answer globalization's skeptics and cooperate with political leaders to address its challenges. "Most vital problems can't be solved by governments or businesses acting alone," Gupta noted. "But working together, they can solve almost anything."
Along with growing inequality, shortages of natural resources stand foremost among today's challenges, Gupta said. As emerging economies like China and India catch up with the developed world, they, too, are devouring commodities like oil, steel, aluminum and copper and, in the process, putting a strain on supplies. Worldwide oil demand is expected to increase by 50% over the next two decades.
Besides creating shortages, a surging oil-based economy will continue to tax the atmosphere's ability to absorb carbon dioxide and thus contribute to global warming, he predicted. "Innovation, technology, regulation and resource utilization will be essential to creating a world that drives vast economic growth and sustains the environment."
Solutions to many environmental problems exist already, although implementing them will entail political and personal sacrifice. But globalization's image problem in the developed world may prove even tougher to address. The costs are easy for critics to depict -- jobs moving abroad -- while the benefits, including lower prices on all manner of goods and services, are less obvious. O'Neal pointed to a recent poll of American college graduates, which found that less than 35% believed they were benefiting from globalization. "You can only imagine the result if it had included people without college degrees," he said.
Even so, Gupta predicted that the United States would continue to be one of the world's economic engines. "I'm bullish on the U.S.," he said. The country's strength won't erode in a global economy because it doesn't boil down to dollars and cents. "[The U.S.] has an entrepreneurial culture and great educational institutions. And it's a nation of immigrants, which welcomes the best and the brightest. That open society is the basis of our long-term competitiveness."
Some commentators have worried aloud about the country's ballooning budget and trade deficits. But here, too, Gupta said he expected a bright future, pointing out that the U.S. economy has long gone through cycles of swelling and shrinking deficits. He acknowledged that the country's population is aging and its birthrate is low, which means that it could face shortages of workers and rising Medicare expenses. But so far, the U.S. has compensated for these trends by its willingness to welcome younger immigrant workers, he noted.
For O'Neal, education is the key to ensuring that the U.S. remains competitive and that Americans retain their commitment to free trade and globalization. Business leaders must support education and participate in the public debate about educational policy, he said.
He shared his own biography as evidence of the hefty impact of educational opportunity -- and the way in which businesses can help to deliver it. Born on a farm in Alabama, he moved to Atlanta, Ga., while in grade school when his father decided that agriculture could no longer support the family. His father landed a job in a General Motors plant. "My father was in the first group of black men to be hired to be anything besides a janitor at General Motors," he noted. O'Neal, too, took a job at the plant when he finished high school.
GM offered its workers the opportunity to attend college at its accredited General Motors Institute -- today known as Kettering University -- and O'Neal took it. That led to business school at Harvard, a management job at GM and eventually his move to Wall Street. O'Neal became chief executive of Merrill Lynch in 2002 and has aggressively cut costs and boosted the firm's profitability. "One of the best things that ever happened to me was that the farm in Alabama couldn't support us," he noted.
Many business people mouth platitudes about the importance of education. But O'Neal's beliefs appear to be shared by at least two of the United States' most philanthropically minded billionaires. Just days after O'Neal spoke at Wharton, Microsoft founder Bill Gates and Eli Broad, founder of SunAmerica and KB Homes, announced that they were funding a nonpartisan effort to push education to the top of the agenda in next year's presidential race. The two men said their foundations would spend $60 million on a campaign calling for nationwide curriculum standards, more time in school and improvements in teaching quality, among other things.
Surge in Free-market Economics
O'Neal traced the genesis of today's global economic boom to 1989, the fall of the Berlin Wall and the collapse of communism as a serious political threat. "At that time, it was believed by some that democracy would become the world's most powerful and unifying force. That may still happen, but as we stand here today, 18 years later, it appears that most of us got that story wrong. The force unleashed in 1989 was free-market capitalism."
Since the fall of the Berlin Wall, democracy has made inroads in regions like Latin America. But a number of countries -- China and Russia foremost among them -- remain authoritarian in their style of government and may never develop representative democracies as they are understood in the West. "Yet nearly every nation in the world, with the exception of a few eccentric holdouts like North Korea and Cuba, has embraced free markets with a fervor that would have sent Joseph Wharton, not to mention Lenin, Stalin and Mao, spinning in their graves," he added.
The surge in free-market economics continues to ripple around the globe in dozens of ways, Gupta said. Capital markets have been liberalized, allowing money to flow more easily across borders, and that liberalization will likely continue, he noted. Equity markets, for example, in places like China, India and Russia are in the early stages of development.
Businesses, for their part, are responding to globalization by changing the ways in which they operate. Manufacturers are becoming more scientific, employing better tools and controls. Firms of all sorts are scouting around the world for talented workers. And executives are running organizations that sprawl across continents and time zones. "Geography and time are no longer the primary constraints" on how businesses operate and organize themselves, Gupta said.
To keep up, governments as well will have to streamline their operations and ramp up their efficiency, he added. "In emerging markets, governments will have to decide what levels of services to provide. The public sector will have to rise to the level of efficiency [that exists in] the private sector." If this acceleration of commerce sounds intimidating, it also creates opportunities that extend far beyond mere balance sheets and back accounts: "With trade between nations and also exchanges of people and cultures," Gupta said, "the risks of war go down."