What happens next?
Agility, resilience, long-term capitalism will shape the coming decade
With just over a month to go before the presidential elections, Korean voters and the presidential candidates are busy talking about how Korea Inc. should change under the new administration. They discuss many pending issues, such as democratization of the economy, job creation and so on.
The problem is that the elections and worsening economic situations have made the scope of the discussions somewhat shortsighted. Given that the global crisis has blurred barriers between countries and there has been accelerating global rebalancing, the ongoing talks
seem too focused on domestic concerns.
The strength of the latest economic indicators matters. But since Korea’s role and influence has been growing following the crisis, what matters more for the future of Asia’s fourth largest economy are the long-term implications of an ongoing shift in global economic power.
Dominic Barton, managing director of McKinsey & Company, said that the most urgent task for Korea is to anticipate the global trends that will shape the evolution of the economy over the next twenty years and prepare for them.
He identified three key themes that will shape the next decade and beyond — agility, resilience and long-term capitalism, which Korea should focus on in order to progress to the next level.
“First, you should try to be agile because now everything is variable. You need to have the ability to move very quickly depending on change in the environment,” said Barton in an interview with The Korea Times at The Westin Chosun on Oct. 25.
“We had five of the 10 biggest economic catastrophes in history over the last 10 years. If you are not fast enough to notice changes, you can fail.”
He said that an automaker, for example, should be more flexible depending on external environments by establishing multiple production modules to make a quick shift once an exchange rate changes unexpectedly.
In Barton’s view, a successful company should also be equipped with resilience, the ability to handle and survive simultaneous financial and operational risks.
“You have to have an answer to how many torpedoes your ship can take without going down. They (risks) don’t come in one but in a clump. Resilience will be more like the management of measures,” he said.
The last key phrase he suggested was “stakeholder capitalism.” He said that the concept of shareholder capitalism focusing only on shareholder values economist Milton Friedman invented was wrong
“If you don’t take care of the environment, your firm will not do well as a company. You have to think about the duty of entrepreneurs and take care of society where you operate,” he said.
“Look at what Unilever, Shell, Apple and Coca Cola are doing. They are very much involved in the broader stakeholder thing. If they aren’t, their shareholders won’t do well,” he added. “We need to get rid of quarterly capitalism in which people focus only on quarters and short-term results.”
In his contribution titled “Capitalism for the Long Term” from Harvard Business Review in March 2011, Barton cites three essential elements of the paradigm shift in capitalism.
“First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders — employees, suppliers, customers, creditors, communities, the environment — is not at odds with the goal of maximizing corporate value.”
He pointed out that few compensation schemes carry consequences for failure — something that became clear during the financial crisis, when many of the leaders of failed institutions retired extremely wealthy.
“Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering the ability of boards to govern like owners. The board must represent the firm’s owners and serve as the agents of long-term value creation,” he wrote.
The following is an excerpt from the interview.
Q: According to latest data released by the World Bank, Korea ranks the eighth in the world in business environment. How do you evaluate Korea’s business environment?
A: Korea’s improvement in the business environment ranking does not surprise me because the country is perceived very well. But it does not mean that there are no challenges. Labor productivity in the services sector, regulatory issues, and underdeveloped SME sectors need more support.
We need more women in the workplace. It’s not about men and women. If you don’t have more workers in workplaces, you don’t get productivity. The bulk of U.S. productivity improvement over the last 30 years was because women could work in the workplace. Itthe number, not how well they work.
I think regulatory overburden has to be examined so we can move quickly because speed is going to be the most important thing with everything happening. It is important to make it much easier to set up new businesses. It takes longer to be able to get a new business going in Korea than in many other countries.
Q: Do you think the Chinese economy will undergo a hard landing? And when do you think the eurozone will get back on track?
A: China is slowing down. There is a leadership transition going on. There is no way they will let that drop. There will be a huge stimulus package and there is a lot of infrastructure built. For that reason I feel bullish (on China). They have resources to keep it going. Consumers have to come into play. I just don’t believe there will be a hard landing. If there is we will be in a very serious condition.”
It will take up to 10 years to fix the mess in Europe because there will be restructuring in labor market productivity and the social safety net, while the government will cut back on spending. That will do slow down overall global growth. The prolonged crisis in Europe and challenge in U.S will lower overall growth. However, long-term trends will continue. We will move toward a more Asia-dominated economy over time.
Q: What kind of strategies should a company deploy to ensure sustainable growth in this volatile world?
A: The life time of companies has been shrinking due to changes in technology and more competition.
This implies that a company should always think about modifying business models depending on changes in product lifecycles and others.
They need to renovate and fundamentally challenge orthodox structures by ensuring flexibility of business models. For example, a value chain shifts so fast. In 1998, in the steel industry, the bulk of the value chain is in steel manufacturing. At the time, POSCO was so good at manufacturing products and maintaining quality. However commodity prices have shifted due to demand. Now the bulk of that value is in the upstream, which is iron ore. They are now actually capturing most of the value in that value chain. Flexibility is going to make it very important for companies to be successful.
Prior to his current role, he was McKinsey’s chairman of Asia from 2004-2009, based in Shanghai, and he led McKinsey’s office in Korea from 2000-2004. He is an active participant in many international fora including Davos, the Aspen Strategy Group, the World Bank and IMF meetings.
Barton is a trustee of the Brookings Institution and is chairman of the International Advisory Committee to the President of South Korea on National Future and Vision. He was made a Rhodes Trustee in April 2010 and is an honorary fellow at Brasenose College, Oxford. He is a Rhodes Scholar with an MPhil in economics from Oxford University.