Saturday, January 29, 2011

Two Davos Takeaways: Stock Markets To Boom and CEOs to Resist Social Value Creation

This week the world's elite met at a Davos, a Swiss ski resort. Based on reading the breathless Davos dispatches, two things caught my eye: the elite are exuberant and 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 for managers -- they should turn to Value Leadership.

Just because an invite to the World Economic Forum's annual meeting in Davos, Switzerland is highly coveted and expensive, it does not mean that not being invited should give you a reason to ignore the elite meet-up. After all, between Jan. 26th and 30th, about 2,500 of the world's top leaders, thinkers and business titans showed up -- with the intent of building relationships, doing deals, and maybe learning a new idea or two.

Business Elite Exuberance Means Cross-Border Deals

I think the most important thing to come out of Davos is a major mood shift among the business elite. According to the BBC, the Jan. 2010 meeting featured a gloomy, fearful mood among the world's elite. A mere year later, the emotional shift is manic-depressive. Now, the business elite are filled with exuberance. BBC notes that "there's a really bullish feeling among many economists gathered at Davos."

And that represents a big turnaround from the last few years. As U.C. Berkeley economist Laura Tyson told the BBC, "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 is not unanimous -- perma-bears like New York University's Nouriel Roubini continue warning about debt and deficits (possibly hoping that the global economy will relapse again so he can get more media attention).

This mood shift is very relevant for investors. How so? The Davos elite control huge amount of capital. And if the U.S. performance is any guide -- with $1.66 trillion in 2010 profits and nearly $2 trillion in balance sheet cash -- the world's business leaders have a huge amount of money to invest in their confidence about the future.

While it is interesting to examine the list of attendees and imagine deals that might have been kicked off during the week that's ending, the general point is that when you combine massive amounts of cash with a recent mood of optimism, you have the ingredients needed to unleash a wave of investment -- most likely in acquisitions targeted at lowering costs and accelerating revenue growth.

This means that investors should expect to see deals in the wake of Davos. And it would not surprise me if those deals involve emerging markets like China, India and Brazil. The reason for that, as I posted last March, is for companies based in slower-growing developed nations -- expecting GDP growth of 3% -- to tap into the markets that are growing at least three times faster.

Can Michael Porter Convince Boards to Pay CEOs To Create Shared Value?

Davos also generated buzz, according to Justin Fox, for a Harvard Business Review (HBR) article, Creating Shared Value, co-authored by Harvard Business School professor Michael E. Porter (for whom I worked at his consulting firm, Monitor Company). The basic idea 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 is not new nor is it universally accepted. As Fox pointed out, it is 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 is now dean of the Rotman School of Management at the University of Toronto, an 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. And it contains a way to measure this broader concept of value, the Value Quotient (VQ) -- it measures how well a company performs 24 specific activities related to value creation. It is interesting to apply the VQ framework to different companies. As I posted on Jan. 21, Google (GOOG) earned a VQ of 88% -- pretty good, but not as good as Southwest Airlines' (LUV) 95%.

I am hoping that Porter succeeds where I have failed. But unless he can persuade boards of directors to adopt a CEO bonus scheme 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 the 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 developing-to-emerging markets deals to flow from the exuberance of 2011 Davos executives flush with cash.


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