Death of the Common Good and the Changing Role of Leadership

*As per the author's request, this transcript is not for quotation.

David R. YOUNG
Leadership is seen to be on the decline. This applies to corporations, governments and other organizations in all parts of the world.

Today, I would like to make the argument that the one thing that has been lost in leadership is an understanding of the common good.

Firstly, the many scandals that have arisen in the last few years, including the Worldcom, Enron and Madoff scandals, have undermined the credibility of private sector corporate leadership. While most executives are honest and hardworking, the impact of these big cases has worked to devastate the credibility of corporate leadership. Scandal is an internal or self-inflicted cause of this lack of leadership.

Secondly, another internal factor, the issue of remuneration or executive pay exacerbated by the economic crisis, has worked against the legitimacy of corporate leadership. This has risen to such levels that governments are involving themselves in the limitation of executive pay for firms receiving government assistance.

A third is the question of governance. While executives sentenced to prison are high profile, the directors of such corporations are relatively unknown. Remuneration issues for these executives were also excessive, and directors condoned the type of behavior that caused such public embarrassment and economic crisis. These three factors have led to a re-examination of the legitimacy and integrity of corporate leadership.

Of the 100 largest (in terms of revenues) and most complex organizations in the world, 51 are corporate entities and 49 are governments. The average size of these corporate institutions is 85,000 employees, with many employing over 100,000 people. The complexity and diversity of these corporations is enormous. Governments have been forced to involve themselves in certain financial institutions because they were deemed too big to fail. It could be that some firms are so complex they are too big to manage.

These large corporations are all organized on a matrix management system. Under this system, product management is organized vertically, geographic distinctions are made horizontally, and there is even a third dimension in global relationship management. Adding a local relationship management element would increase the matrix to four dimensions. Such complexity is particularly pronounced in large manufacturing firms where the manufacturer releases hundreds of product lines. The complexity drives the desire for some kind of measurement/assessment and the matrix system is, by conventional wisdom, the way to accomplish this. This puts a premium on measurement, and the only thing that can confidently be measured is numbers. This does not include assessments of the cultures, values, vision or the intellectual capital of an organization.

If we apply the common expression “the whole is greater than the sum of its parts,” to a matrixed organization where everything is boiled down to the efficiency, revenue and profit of a particular space on the matrix, the sum of the parts is the sum of the parts. Nobody actually knows what lies between one space and another. It is as if the conceptual area between the sum of the parts and the whole has been lost. The argument can be made that this is the area of goodwill. The difference between a company's stock price and its numerical sum of the parts. This is in fact the common good. It is difficult to assess what the common good is and what to do with it. A focus on profit and revenues does not paint a complete picture of a corporation.

One of Oxford Analytica's large private clients has asked for research to be conducted on a more balanced view of capitalism called “capitalism with a conscience.” The argument behind this posits that there is more to a corporation than profit and revenues. The treatment of employees and the environment in which the firm operates should be combined with more traditional measures to develop a more sustainable capitalism.

The concept of the common good is both a philosophical and a business model. The philosophy behind the notion of common good leads to an efficient business model. How well a corporation runs is determined by the philosophical model and a corporation's efficiency by the business model. Smooth operation and efficiency can only be sustained if these two models are combined. If efficiency becomes the sole criteria and there is no concern for the other criteria within the organization, long-term sustainability of the Western business model is difficult to maintain. The trade-off made in organizations is between the common good and efficiency. If efficiency becomes the sole criteria in a business, the value of the common good will diminish.

One could argue that this issue is an unintended consequence of globalization, which is a good thing overall. However, the ability to communicate with an entire organization allows organizations to grow in size. This ability to communicate allows businesses to disseminate the cultures, values and overall philosophy of the business. This is a positive development of globalization.

A parallel exists between governance in countries and governance in business. Wars and inter-country conflicts are not determined by who has the greatest number of soldiers, but by various other factors. Likewise, corporate organizations have to be conscious of the non-quantifiable and intangible aspects of value of their business. Oxford Analytica was built to help governments and corporations understand better the environment and the context in which they are operating.

A distinction must be made between understanding the micro environment and understanding the macro environment. There are many unknowns in the macro environment and Oxford Analytica is striving to help people understand them. Making the move from the micro to the macro level involves dealing with more unknowns. It can be expressed as three concentric circles: known knowns in the center, representing the micro area; known unknowns outside of that circle; and the third circle, even bigger than the other two, comprises of unknown unknowns. In the private sector, many large corporations have advisers who help them identify the unknown areas.

The components of the common good in a culture are the balance between (1) profit and performance, (2) how people are involved and treated, and (3) how the environment is taken into account. Other components include remuneration, how one sees one's own abilities and leadership which has checks and balances, including boards of directors. It is important that executive leadership has some accountability in order to promote leadership that considers the common good. My assumption is that it is a recognition of values and human nature, and that it is as important in the corporate world as it is in the government world - and that we must maximize freedom of enterprise but within the context of a certain value system. Constitutions are set up to order peoples' freedoms in a framework with certain constraints built into them. The same should be true with regard to corporations and enterprises in the private sector. For example, the wealth of the robber barons of U.S. history created major issues in these terms. President Roosevelt put the freedom of these industrialists under intense scrutiny because it was recognized that the market could not be left to solve problems itself, rather, it needed a framework within which it had to work. That debate is pertinent given the current economic situation.

Some recognition of equality, in terms of opportunity and rewards, for those involved in the organization is another important factor. While meritocracy is an obvious need, it is also fundamental. This parallels the public sector in terms of how the Constitution took years to balance competing interests and it has taken hundreds of years to govern the freedom of corporations.

To conclude, a sustainable system for a government or a corporation should be holistic, balance competing interests, understand the culture and counterculture, and have a leadership that has a broader, more inclusive outlook to better understand the context in which they operate.

Michael BRUCE
It is commonly held that one of the main holdbacks to economic growth in many parts of the world has been the inability of corporations and governments to establish good corporate governance. There is currently a huge emphasis on governance generally for both governments and corporations. It is fascinating that somewhere in the complexity of trying to control both governments and organizations, the nature of the common good got lost. The question is how that can be found again.

Q: Japan has been suffering from a lack of leadership since 1990 and is currently facing political turmoil. Do you have any suggestions for the current situation in Japan?

David R. YOUNG
Many of the points made previously are applicable. Leadership has damaged itself through scandal and its credibility is very low. Recently, high-ranking officials have become despondent about this topic, and have asked how high-level leadership can be cultivated. In the middle levels, leadership is stronger than at the top. However, leadership refers specifically to the person at the top. This is a consistent theme through history, with countries and corporations being led by those at the top, be they strong or weak. Plato asked whether one would rather have a wise, weak king or an unwise, strong king. This is a difficult question. In a democratic system, a strong leader can thrive. Democracy does not necessarily produce the best people, but the fact remains that democracy is the best system out of those available.

Democracy is a messy system with which even I get exasperated. There is a price that is paid for democracy. The Communist Party in China is democratic within itself, but members are still not free to choose who they want, with the party leadership selecting candidates.

Michael BRUCE
The senior Japanese official I mentioned earlier was saying how envious he was of the American system. He felt that the Japanese government is a very exclusive group, whereas the American system is more inclusive and tries to attract a wide range of talent.

Q: I am much more optimistic about leadership in Japan. First, there is a reason why soft power is not as prevalent in Japan as in the U.S. The relationship between Japan and the U.S. comes down to hard power, of which the U.S. has more. There are many things that have not been considered in terms of why Japan is or is not influential in certain global leadership perspectives.

Looking at leadership in Japan on a domestic level, the U.S. system comes from a pluralistic background, which naturally allows for more voices. The Japanese system stems from a corporatist background with only the leaders working together. Although a transition is underway, it is coming about from a different position. The difference in the leadership situation is only natural in terms of how receptive it is to hearing a multitude of voices?? Current criticism of differences in levels of interaction is healthy. This all comes back to transparency through more sophisticated IT for ease of interaction.

Regarding corporate leadership, what is being seen is a reaction to an increase of information. People are only human, and thus are prone to error and making inadequate decisions. Now, however, people can spot inadequate decisions right away, aiding transparency. From the perspective of company middle-level management within companies, the issues that American companies are facing have certainly been taken seriously by industries. The pharmaceutical industry is heavily regulated, and although there has not been a common disregard for governance or the common good, but a definition of what common good is has changed and become much more transparent.

Corporate governance is not a thing of the past, but there is more that can be discussed in terms of the level that is shown. While examples like Enron are extreme, I am hesitant to say that there is no value or philosophy left in corporate governance. There is much more information out there that must be responded to. The definition of common good seems to be shifting.

Globalism is very important and how it interacts with other factors is crucial for leadership. Differing value systems raise the question of how the common good can be translated into a global common good.

David R. YOUNG
None of this is black and white; it exists on a sliding scale. Corporations are doing more in the area of corporate governance while the market is beginning to take such measures into account in terms of how the market perceives corporations. The end goal is to ascertain which goal is more sustainable. People are much more aware of a corporation's behavior in terms of the common good than they were 30 years ago. Bringing other factors into the equation and getting the market to give such issues credence is currently being looked into. Now, a CEO is only measured in the market by how profitable he is. The question is how mindsets can be changed to factor in these other criteria.

Q: The proposition that common good is a thing of the past implies that there was a golden era in the first place and that times have changed. Can you guess when that era was? Throughout history government and corporations have not always held the concept of common ground in the highest regard, but it appears that much progress has been made in the last few decades.

David R. YOUNG
The title is a lamentation of present, rather than an implication of some kind of golden age. Over the last 40 years, the budgets of the CEOs and the chairmen of major corporations for projects that will benefit everyone have shrunk. On the other hand, individual remunerations for CEOs and chairmen have grown. This is all because of the matrix system. Each division or unit should take care of the common good within its own limited sphere. From an outsider's viewpoint, this is seen as selfish.

Q: Today, you focused mainly on problems of corporate governance in the U.S. Multi-layered moral hazard is prevalent in the U.S. society. The keyword is moral hazard. For example, households in the U.S. do not live within their means. Though many Americans live within their means, others live beyond their income. The U.S. government has been doing the same thing, aiming for higher growth and neglecting their balance of payments deficit. We can see a very serious moral hazard in U.S. economic management. U.S. economic management has been fatally flawed for many years.

David R. YOUNG
I cannot disagree with your comments on the U.S. Many people say that a global system cannot survive such imbalances. Clearly, this has been brought home to the U.S. It is difficult to explain, and there are no party differences in this regard in the U.S. The country, as well as individuals, has lived beyond its means. The irony is that by Americans not saving, China has been able to accumulate its balance of payments and its wealth funds. Now that U.S. consumption has dropped, it is doubtful if consumers of another country can pick up on spending. The nature of the American character is more optimistic because Americans, historically, have not suffered as much hardship as other parts of the world have.

Q: In 1998, my responsibility at the IMF was to study whether the U.S. current account deficit was sustainable. Timothy Geithner was Deputy Secretary of the Treasury at that time, and he said that he was not concerned. However, Alan Greenspan was. This problem has been around for some time, and people have regarded it with various degrees of concern. People felt it was sustainable because the U.S. was a huge financial machine with the world's savings coming to Wall Street as a safe haven. China was happy to send excess dollars to the U.S., and investors would then invest in China, creating a circle. This was efficient until the toxic asset problem rose its head. America was able to consume outside of its means at that level of financing, and consumers were able to borrow thanks to the efficient financial market. China is missing this component as people have no choice but to save because their fear of the future stops them from using their money. In order to really make China a driving force in the world economy, it has to increase domestic consumption.

Q: Since the start of the Obama Administration, it seems that the government's role in leadership has been strong with the stabilization of the financial system and the restructuring of the auto industry, etc. What is the relationship between the private sector and government in the context of leadership complexity?

David R. YOUNG
Neither Bush nor Obama had any choice in terms of the economic crisis. The American character is problem-solving in nature. Hank Paulson was a problem-solver as well, and this is true of America in general. There was a remarkably broad consensus that something had to be done rather than letting everything unravel. It now seems that fear and alarm has abated, and a degree of calm and stability has settled in. The question is who owns what and how businesses can get out from underneath all the obligations they have. The majority of the General Motors board is made up of government appointees. It is questionable whether they will be able to run an automobile company. A new relationship between government and business will start to evolve. Each company needs to figure out for itself how their market relates to the government. The earmarking phenomenon has destroyed the common good of legislation. This has been disastrous for the system, although it has made many individuals happy in certain areas. There will be a reaction against this practice and there has been a steady increase in the power of lobbying. Laws regarding former government workers entering the private sector to work as lobbyists have been lenient in the last decade.

Michael BRUCE
There is a cycle and there was a period of pork barrel politics from which the U.S. has recovered. The overconfidence that came with global markets and sustaining imbalances kept many countries going. This has led to greed and a reemergence of pork barrel politics. There was no golden age, but there has been a cycle of change in the balance between government, business and regulation. This is currently working itself out.

David R. YOUNG
The railroad barons of U.S. history had senators in office who they all but owned. It was an amazingly corrupt system.

Q: Tokyo is becoming a cosmopolis. For example, Toyota gained much information from its international branches and the headquarters became a cosmopolis in the business field. The Japanese government does not gather much information, although it could if it tried. For example in London, there are many people from different countries who are working as diplomats. A cosmopolis is a difficult concept for the Japanese. Japan is a country with one race, one language and no religion. London, on the other hand, is a more interesting city with many foreign people and cultures. Japan cannot take on the same role of international tutor as England. In that context, what is the most important element when building Tokyo into a cosmopolis?

Michael BRUCE
Tokyo already is a cosmopolitan city, though it may not have the history that London does. In the political context, Japan needs to become more embracing of not necessarily foreign factions, but different constituencies and sources of talent within Japan. If Japan can do that, it will be better able to project its influence and power. Japan is already a long way down that road.