Lipscomb at Davos

By Barry Stowe

(Dean’s Note: Barry Stowe, Lipscomb Alumnus and CEO of Prudential Corporation Asia, is attending the World Economic Forum’s invitation-only annual meeting at Davos, Switzerland this week. This is the final dispatch from Davos.  We trust you have enjoyed this unique opportunity to engage with Lipscomb through a world forum.)

A parting note from Davos…as I sit in the lounge at the Zurich airport I reflect back on a great week and find myself encouraged by the mood of almost everyone I met.  Compared to six months ago when investors were counseling an exit from equities in favor of cash, there is more optimism…or at least less pessimism. So what has changed? I think the concern over the “fiscal cliff” was a weight on the minds of many, but we survived it for now. The political stalemate in America is an issue of grave concern globally because, the rise of China notwithstanding, what happens in America drives the world. And there has been concern about China’s ability to continue to grow its economy fast enough to avoid rising unemployment…and the potential for social unrest…which leads some to worry about a “hard landing” in China that would impact all of Asia.  But these worries also seem to be abating.

Many global leaders seem to have concluded that the proper balance between driving economic growth and increased regulations designed to ensure that growth is resilient has been lost…that efforts to avoid a future crisis are serving more than anything to keep us mired in the current economic slump. In Davos there was much more consensus around the need to restrike that balance…and soon.  Many of the public sessions were focused on this topic and there will have been hundreds of private conversations had in an attempt to find a way forward.  One gets the sense that progress was made.

Davos matters because of these conversations that can only happen there, far from the stifling effect of bureaucrats, the pull of politics and the glare of the media. Consider this:

When the Berlin Wall was crumbling and the Eastern Bloc countries were freeing themselves from Soviet dominance, the first discussions on German reunification between Berlin and Bonn were held at Davos.

South African President F W deKlerk first approached Nelson Mandela to discuss the prospect of ending apartheid and holding free, universal elections… in January 1992 at Davos.

Bill Gates first met with the WHO at Davos, and was inspired to create history’s greatest philanthropic foundation, focused on improving the lives of children.

I am encouraged by the optimistic tone at Davos because it is unshakeable optimism that drives people to solve the seemingly insoluble.

We often recall the public writings of Thomas Jefferson…”When in the course of human events”…”we hold these truths to be self-evident”…and so on. But my favorite bit of writing by Jefferson was written very late in his life, at a time when his personal affairs were in disarray and America was on a political and social course which was in most every respect inconsistent with his world view. In a letter to his old friend John Adams, Jefferson wrote:

“I believe in the dreams of the future more than the history of the past.”

Lipscomb at Davos

By Barry Stowe

(Dean’s Note: Barry Stowe, Lipscomb Alumnus and CEO of Prudential Corporation Asia, is attending the World Economic Forum’s invitation-only annual meeting at Davos, Switzerland this week. He is filing daily dispatches.)

I suspect that not many of you are planning to retire on your Social Security income alone…while there is virtual certainty that you will receive your benefits, the amount you receive won’t be adequate to support you in reasonable comfort. There are other countries, most notably in Europe, that provide their citizens with much higher levels of benefits, amounts that are adequate to support a modest,  middle-class lifestyle. This sounds great until you realize that these programs face solvency issues that even  confiscatory tax rates can’t solve (The French are now able to demonstrate their patriotism by paying taxes of close to 75% of income).  So governments all over the world are trying to figure out how to create retirement income schemes that are both adequate and sustainable. No one has solved it…at least not yet.

The World Economic Forum is in the midst of the debate on this issue, and a policy group organized by WEF (of which Prudential is a member) has been working on solutions based  upon the World Bank’s  ”Four Pillars” approach…that is to say the four essential elements of successful retirement provision. These are:

1.  Public retirement programs (think US Social Security) that provide for basic needs. These are contributory (you have to pay in order to participate) and are typically funded on a pay-as-you-go basis (there is no “trust fund”…current contributors fund current beneficiaries).

2.  Private, employer-based retirement plans that can be either voluntary or mandatory (required by law) and either defined benefit (a traditional pension that pays a percentage of working income in retirement) or defined contribution (such as a 401K where your employer pays a percentage of your income into a fund).  These can include contributions from employees as well as employers.

3.  Individual savings…very simple but very important.

4.  Longer working lives…for instance, changing retirement age from 65 to 67…and allowing retired individuals to continue to work part-time without forfeiting retirement benefits.

On Friday morning I helped lead a discussion on this extremely important topic. The timing could not be better. In most countries around the world populations are aging and the resulting stress on social protection systems is growing with each passing month.  The situation in America is very difficult. Historically, Americans retired around age 65 with their home paid for, a pension, Social Security and enough money in the bank for the occasional luxury. With life expectancies meaning that most people only lived for five to seven years in retirement, the economics worked. Today, most Americans pass age 65 with a home that is mortgaged, savings equal to less than two years of working income and a 401K that isn’t large enough to provide a stable income for more than a few years. This is exacerbated by ever-longer life expectancies…a healthy 65 year old faces the realistic prospect of a 20 to 25 year retirement. These economics do not work.

Our discussion this morning focused on how the private sector can help solve the issue of retirement, and specifically how we can design the “employer” pension plan of the future. Here’s what we can up with…I wonder if you will like it:

FINANCIAL LITERACY…key to solving problems is understanding them. It is important that Banks, Insurance Companies, Financial Planners, whoever you use to craft your own plans, help you understand the gravity of the issue and the fact that individuals MUST save significantly more than they have been over the past generation.

PORTABLE PERSONAL PENSIONS…people change jobs much more frequently today than they did in the past, so it would be helpful to have a single, portable pension that travels with them through their career. This would eliminate the situation where individuals have multiple, small accounts and would eliminate the loss of benefits when individuals leave a job before they “vest”.

Employees would be required by law to contribute 10% of their income to their pension every year…employers would be required to at least match that 10%. This seems like a loss of choice for freedom loving Americans…but in an environment where people clearly have lost the discipline to save, it may well be the only sensible solution.  I fear the alternative to this would ultimately be additional government provision to those who failed to save. I personally would rather give up some freedom rather than pay the additional taxes required those who didn’t have the good sense to prepare for their retirement.

“DRAW DOWN”…After you’ve spent a lifetime accumulating assets you need to figure out how you’re going to live on them in retirement. It is sensible for some portion of one’s savings to be “annuitized”…a lump sum paid in return for a guaranteed income for life. Some countries require this (or provide major tax incentive to do so). This is what that old-fashioned Defined Benefit pensions did for your parents, and you can do it yourself. Annuities provides a level of certainty that there will always be an adequate level of income…even if you live significantly longer than you expect. And chances are, you will live longer than you expect.

The seed of the broad solution to the retirement problem is in the Four Pillars above…not some of them but the combination of ALL of them. Key to this will be more savings by individuals…enabled by government policy (why is there a maximum on IRA contributions?)…but ultimately emphasizing the individual’s responsibility to provide for himself. Just like our parents did.

Lipscomb at Davos

By Barry Stowe

(Dean’s Note: Barry Stowe, Lipscomb Alumnus and CEO of Prudential Corporation Asia, is attending the World Economic Forum’s invitation-only annual meeting at Davos, Switzerland this week. He is filing daily dispatches.)

One of the most interesting sessions of the week took place Thursday afternoon and focused on World Development needs and priorities.  The panel leading the discussion has an enormous amount of intellectual bandwidth, and no small amount of “star power”.  Included were Former Microsoft CEO Bill Gates, Secretary-General to the United Nations Ban Ki-moon, British Prime Minister David Cameron and Queen Rania Al Abdullah of Jordan among others. Gates said that much progress has been made in the reduction of global child mortality and that further improvement should be expected.  “We’ve improved the human condition faster than ever before,” he said, referring to the impact of the United Nations’ Millennium Development Goals (MDGs) and specifically MDG number four, which addresses child mortality.  “In 1990, 12 million children died every year. By 2015, it will be below 6 million.”

Queen Rania is focused on equality of education…ensuring that children around the world have access to quality education and that girls have the same access as boy (still a problem in many parts of the world today). A great quote regarding the need to improve the skills of teachers:  “Good teachers teach,” Queen Rania said. “But great teachers transform.”

As we move through the week at Davos, I am reflecting on the extraordinary discussions that take place and how interesting it is to be a part of it. One thing that makes the interactions here so unique is the “principals only” dimension of the events. Tight security ensures no one is able to “gate crash”. The technology employed to create this environment is impressive, and it all revolves around one’s “badge”.  Davos Lesson #1:  Not All Badges Are Created Equal.  Follow this link for an entertaining tutorial on the hierarchy of badges at Davos:

http://www.theatlanticwire.com/global/2012/01/visual-guide-many-different-davos-badges/47579/

As noted in an earlier post, there are lots of parties at Davos, but Thursday night is definitely the main event. Like everything else here the parties are by invitation only and, once again, the badge is important…you need it for admission to the parties. There’s a theory that work gets done in meetings but deals get done over drinks, so the parties are an interesting element of the experience here. And they’re fun. My schedule was busy:  we started at the Bank of America/Merrill Lynch party hosted by Brian Moynihan, then we moved on to The Duke of York’s party for British executives (I qualify as an executive of a British company). Next was PwC’s party where Michael Phelps spoke (inspirational guy, I must say) and then it was on to the party hosted jointly by CNBC and the Financial Times. My last stop was everyone’s favorite party, the one hosted by the partners of McKinsey and Company.  And I am pleased to report that the partners still have their “Motown/Funkadelic” thing going on…the great band from Detroit was back again this year and they were better than ever.

Lipscomb at Davos

By Barry Stowe

(Dean’s Note: Barry Stowe, Lipscomb Alumnus and CEO of Prudential Corporation Asia, is attending the World Economic Forum’s invitation-only annual meeting at Davos, Switzerland this week. He is filing daily dispatches.)

Davos is a small town, so during WEF it can get a little crowded.  On Wednesday evening I was headed to a reception at the invitation of Michael Andrew, Global Chairman of KPMG. As I was making my way through the corridors of the Steinberger Belvedere Hotel it seemed to be a bit slower than usual, and then I realized there was an elderly gentleman ahead of me who, though moving diligently down the same path, was doing so at a much slower pace.  As I was already a little late I tried, as discreetly as possible, to pass him. Then I recognized his face, and I immediately slowed my pace to match his. “Secretary Kissinger”, I said, “I’m looking forward to your session tomorrow morning” We exchanged a few pleasantries and moved on. People have different views of Kissinger. But when you consider that our generation and those to come live in a world materially influenced by the rise of Asia, led by China, it is difficult to deny that Richard Nixon, and Henry Kissinger, opened the door to the future in 1972.

Kissinger’s session this morning did not disappoint.  He spoke about a wide range of topics including Syria specifically and the Middle East more broadly.  He emphasized the difficulty in trying to keep peace in a region where political boundaries were “artificially created” by Europeans at the end of the First World War.  The lesson here is that people who have never chosen to live together shouldn’t be expected to react well when they’re forced to do so.

Kissinger went on to predict a long-term rivalry between the United States and China:  ”They will interact with each other everywhere … These countries will conduct an increasing rivalry.”  He clearly is in favor of a united Europe: “the ideal of Europe must be continued even if the ideal solutions don’t exist”, and he made it clear that he’d prefer someone other than Barack Obama as President of the United States.

Before the Kissinger session I participated in a discussion focused on “Building a Stable and Resilient Global Financial System”.  It was a rather technical discussion that was enlivened by an array of interesting people with strong points of view of the topic and a serious stake in the outcome: former Treasury Secretary Larry Summers from Harvard,  Nouriel Roubini from NYU, Finance Ministers from Panama, Colombia, South Africa and the Central Bankers from Korea and Israel, to name a few.  Setting aside the more technical bits, what was interesting were the fundamentally different views on “too big to fail”. There are essentially two camps: One view is that financial institutions that are too big to fail are dangerous, so regulations should be put in place to ensure that no such institution is allowed to grow to a scale where it represents a systemic risk.  The other view is that firms that are too big to fail must be governed to such a high standard that they don’t fail, thereby mitigating the system risk that large institutions represent. Bankers tend to fall into the latter camp and regulators into the former. There are noted academics on both sides of the issue.  Opinion in Davos trends strongly towards less but higher quality regulation…including much stronger measures of financial strength and  increased accountability for those that get it completely wrong, be they executive, regulators or rating agencies.

Tomorrow: an update on which development needs world leaders should be focused on, how retirement can be made more financially secure, and the “heirarchy” of Davos…or, why my badge is better than your badge.

Lipscomb at Davos

By Barry Stowe

(Dean’s Note: Barry Stowe, Lipscomb Alumnus and CEO of Prudential Corporation Asia, is attending the World Economic Forum’s invitation-only annual meeting at Davos, Switzerland this week. He is filing daily dispatches.)

When Turney Stevens asked me to provide some daily insight into what goes on at Davos, I was slightly reticent…only because there is so much going on that it is difficult to decide which things might be most interesting.  Well, one thing is for sure:  Jamie Dimon is interesting.

I spent about 75 minutes this morning in a session moderated by Maria Bartiromo, a portion of which was aired live on CNBC. The session focused on how Financial Services must play its inevitably leading role in economic recovery while managing risks in an appropriate way. The “hot” topic turned out to be the definition of “appropriate”.  Mr. Dimon (aka Everyone’s Favorite Banker) offered a passionate and logical defense of Financial Services, refuted with unassailable evidence a number of criticisms of the banking industry, including its scale, and emphasized the social utility of banking services…an important story that gets lost in the noise. Lest you draw the wrong conclusion, Mr. Dimon is a strong proponent of improved regulatory oversight. But what is clear…and this is me talking rather than Mr. Dimon…is that much of the regulatory change since 2008 has not been well-reasoned, will not be useful and may ultimately propel us into the next crisis rather than prevent it.  More proof that the intersection of Politics and Reason is difficult to find on any map.

By the way…Mr. Dimon spoke directly to the trading losses suffered at JPMorgan Chase last year. He acknowledged the “stupidity” of what happened, but again drew a distinction that you wouldn’t generally hear emphasized in the media: “Not a single customer lost a penny…the mistake was stupid but not venal…my shareholders suffered but my customers didn’t.” And even after writing down the $6 billion loss, JPMorgan Chase was likely the most profitable bank in 2012.

I also participated in a discussion titled “Leading through Adversity”. In my view the two standout contributors to this discussion were Mike Duke, CEO of Walmart and Harvard Business School Economist Clayton Christensen.  Much of this discussion was around the idea of “Disruptive Innovation”. If you Google it you’ll find that Wikipedia defines this as “An innovation that creates a new market by applying a different set of values, which ultimately (and unexpectedly) overtakes an existing market, such as the introduction in 1908 of the lower priced Ford Model T”.  (I wonder if the people at Webster’s Dictionary consider Google to be Disruptive Innovation?)

While many business people wouldn’t think they’d embrace anything “disruptive”, Mike Duke and Walmart seem to love it. He talked about Walmart’s “Innovation Loop”, which holds that innovation leads to efficiency…which leads to lower prices….which leads to more customers…which leads to efficiency…which leads to lower prices…you get the point.  The moral is that leaders who embrace innovation will make “Edsels” occasionally, but they will also create Model Ts… and change the world.

Contributions to the Lipscomb Business Blog represent the views of the author and do not necessarily represent the views of Lipscomb University nor the Lipscomb College of Business and its faculty and staff.