#09 March 2023
20 CHF
RIDERS IN THE STORM
SCENARIO PLANNING
TACKLING A POLYCRISIS
AI SEARCH REVOLUTION ENGAGE ACTIVISTS
CONSTRUCTIVE DISHARMONY ibyimd.org
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[ Foreword ]
Making sense of the turmoil
T
Illustration: Jörn Kaspuhl
he theorist Karl Weick contends that a fundamental task of organizing is to “make sense” of the environments that we are embedded in. How then to make sense when we are suspended in, as my colleague David Bach calls it, “vectors of turbulence” – wars, pandemics, climate crisis, and large-scale discontent? One answer, as we examine in this of issue of I by IMD, is for leaders to cultivate a diverse set of what I would call “environmental sensors” as they deal with what is sometimes called the polycrisis around us.
real and has propelled it to great success. Will Butler-Adams, the CEO of Brompton, the iconic British folding bicycle maker, takes us through how his team responded when things didn’t “go according to plan” during the pandemic in a way that has made the business more agile. My colleagues Winter Nie, Ivy Buche and Mahwesh Khan, who have researched close to 40 incumbent companies in the past two years, share valuable insights on how such companies can orchestrate transformation by extending credibility and creating differentiation.
The renowned American futurist Peter Schwartz advises us to connect to people who have “their fingers on the pulse of change”. Simone Menne and Sunnie Groeneveld recommend that boards – which currently have an average age of just over 57 years – incorporate the voices of multiple generations.
The focus on personal aspects of leadership is another hallmark of IMD’s engagement with the world of practice. The vocal leadership consultant Robin De Haas reveals the secrets of correct breathing to Albrecht Enders. Heather Cairns-Lee and Francesca Guilia Mereu, and our regular columnist George Kohlrieser, stress the importance of managing one’s emotional state while holding critical conversations.
Michael Skapinker exhorts employers to tune in to the needs and aspirations of a new generation that is joining the workforce while holding on to older talent. Ian Charles Stewart encourages us to get out of our echo chambers and hear the other side of an argument. In two different sides of stakeholder engagement, presented by activist Etelle Higonnet and Rio Tinto’s Chief Legal Officer Isabelle Deschamps respectively, we learn of the need to sense the important constituents in our environment and to have a dialogue with voices that matter. Russell Napier, a founder of The Library of Mistakes, reminds us to keep one foot in the past and learn from the lessons of financial history.
Sustainability also features prominently in this issue. Regular columnists Jerry Davis and Arturo Bris, along with E4S Professor Jean-Pierre Danthine, question current approaches that financiers are taking to address the question of sustainability. The Club of Rome’s Carlos Alvarez Pereira pleads with leaders to look beyond the short-term and towards regenerative organizations as a possible solution. Julia Binder looks at how ESG is increasingly becoming conflated with “woke capitalism” and sustainability. Florian Hoos and Rodrigo Tavares warn that ESG reporting, thus far confined to large organizations, is soon coming the way of smaller organizations too. ■
Contact with organizations in the process of transforming is an endless source of learning at IMD. The CEO Dialogue between IMD President Jean-François Manzoni and Danone CEO Antoine de Saint-Affrique sheds light on what the early days of a transformation process looks like. Mars CEO Poul Weihrauch, in his conversation with Thomas Malnight, tells us how purpose-driven transformation of the company’s pet care business was made
Plenty to make sense of in this issue!
Anand Narasimhan, Dean of Research March 2023 • I by IMD 1
[ CONTENTS ] 04 [ In good company ]
The battle for the soul of corporate America is as perplexing as it is unpredictable, argues Jerry Davis, but one thing seems certain: shareholder value always wins.
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#09 March 2023
20 CHF
The world is being buffeted by multiple distinct forces that are interacting and mutually reinforcing one another. Our 30-page in-depth report and analysis will help to guide you through the maelstrom, starting on Page 8.
RIDERS IN THE STORM
SCENARIO PLANNING
TACKLING A POLYCRISIS
AI SEARCH REVOLUTION ENGAGE ACTIVISTS
CONSTRUCTIVE DISHARMONY ibyimd.org
09_IMD_2023_Edition_09_March_2023_COVER_Final.indd 3
03.03.23 10:45
Cover: Environmental expert Etelle Higonnet (see P13) Photo: Alex Costa
10 The level of uncertainty is as great as I’ve seen in 50 years, renowned futurologist Peter Schwartz tells David Bach – yet he remains optimistic.
24 In the wake of the COVID-19 pandemic, power has shifted to the workers. Michael Skapinker suggests constructive ways to tackle the problem.
13 Leaders are wrong to treat activists as the enemy – with a change of approach everyone can be a winner, argues environmental expert and campaigner Etelle Higonnet. 16 A combination of youth and experience in the boardroom can lead to more creative business solutions, writes Simone Menne. 19 Younger people represent the future, so they need to be given seats at the top table, argues Sunnie J Groeneveld. 21 Ian Charles Stewart finds his dinner
party guests over recent years have become increasingly intolerant of opposing views – a reflection of a wider malaise in society. 2 I by IMD • March 2023
30 “A ship in a harbor is safe, but this is not what ships are for.” Ten quotations to inspire you in a crisis, taken from a new book compiled by Dominique Turpin. 30 Listening and learning from stakeholders – both internal and external – is vital for good decision making, says Isabelle Deschamps, Rio Tinto’s Chief Legal Officer and Head of External Affairs.
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33 Reduce stress and think clearly … IMD professors recommend six books to empower you through troubled times. 34 Regular columnist George Kohlrieser
suggests eight ways to keep you focused as you deal with a myriad of problems.
26 Will Butler-Adams, CEO of the Brompton bicycle company, explains why empowering your staff to find solutions can stop you ending up in a ditch.
36 Michael D Watkins explains why he believes ChatGPT and other AI programs will transform strategic thinking in business.
Illustration: Jörn Kaspuhl, Photos: Danone, Ravi Sharma via Unspalsh, Federico Naef, Chuttersnap via Unsplash, Jim Rakete, Jimmy Delpire
[ TACKLING A POLYCRISIS ]
38 [ Conversation piece ]
Poul Weihrauch, CEO of Mars Inc and former
global President of Mars Petcare, explains to
Thomas Malnight the importance of putting pur-
pose at the heart of business transformation.
45 [ Finance ]
The Library of Mistakes houses a collection of books chronicling financial disasters through the ages. The aim, writes Russell Napier, Keeper of the Edinburgh branch, is to help today’s financiers avoid the pitfalls of the past.
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48 [ Transformation ]
When it comes to business transformation, an incumbent’s past triumphs are no guarantee to future success, warn Winter Nie, Ivy Buche,
and Mahwesh Khan.
53 [ CEO dialogue ]
Antoine de Saint-Affrique, in a wide-ranging discussion with IMD President Jean-François Manzoni,
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explains his no-nonsense approach to problemsolving and the importance of speaking the truth, however uncomfortable.
[ Leadership skills ] 56 Heather Cairns-Lee and Francesca Giulia
Mereu present their four-step framework to help
you to deal with stress and communicate more effectively.
59 Renowned voice coach Robin De Haas tells
Albrecht Enders how correct breathing can help
Photos: Mars, libraryofmistakes.com, lom Macneill, Federico Naef, Brompton
executives deliver their message with greater clarity.
62 [ World view ]
The agenda on sustainability is not realistic and a radically different approach is needed, argues Arturo Bris.
[ Sustainability ] 63 When it comes to climate change, the financial
industry can make amends and become a force for good, argue Jean-Pierre Danthine and Florence Hugard.
65 Organizations must reject short-term gains and
learn to become regenerative – a shift that will be nothing short of a rebirth for many, writes Carlos Álvarez Pereira of the Club of Rome.
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68 Think your company’s too small to worry about ESG reporting? Beware, you may quickly find yourself out of business, warn Florian Hoos and Rodrigo Tavares.
73 [ The forecaster ]
70 ESG is different from sustainability and far from “woke capitalism” – even Milton Friedman might have approved, says Julia Binder.
Will Microsoft’s investment in AI technology pose a significant threat to Google’s search-engine dominance? Howard Yu and his team assess the odds.
76 [ Preview ]
In June our experts will examine how leaders can create inclusive and diverse organizations that remain resilient in turbulent times. March 2023 • I by IMD 3
[ In good company ]
The permanence paradox: why shareholder value always wins (No matter who your biggest investor is) The powerful 'Big Three' index funds managers will not protect their portfolio companies from hedge fund activists. This battle for the future of corporate America is as perplexing as it is unpredictable, writes Jerry Davis
Yet the mid-2000s also saw a spike in hedge fund activism aimed at maximizing share price immediately. Activism leapt just in time for the 2008 financial crisis and has not ebbed since, reaching such stalwarts as Coca-Cola and Procter & Gamble. In any given year, 200 companies face a hedge fund demanding cost cutting, increased dividends, board representation, or often major asset sales or restructuring – particularly those companies that distinguish themselves by being too oriented toward stakeholders. Which of these forces has had the biggest impact? This battle is not over, but for now, it seems clear that shareholder primacy is not likely to be replaced by stakeholder capitalism anytime soon. The rise of index funds
In 1981, the US Internal Revenue Service issued a ruling clarifying the tax treatment of the 401(k) plan that allowed employees to direct some of their pay into mutual funds and other investments for retirement. 4 I by IMD • March 2023
These “defined contribution” retirement plans quickly spread across employers, and within a few years much of the American population found itself invested in funds run by Fidelity, Vanguard, and Capital Group. The industry’s assets under management increased 200-fold from $132 billion in 1980 to $27 trillion in 2021. Fidelity, the biggest mutual fund family, focused on actively managed vehicles advised by internal experts, and by 1995 its ballooning assets made it the largest single shareholder in roughly 400 US corporations. Fidelity often found itself owning stakes of 10% or more among competitors in the same industry. Vanguard, in contrast, focused on highly diversified indices such as S&P 500 and rarely accumulated a significant stake in a single company. Meanwhile, in 1993 State Street Global Advisors launched its SPDR, the first exchange-traded fund (ETF) that also tracked the S&P 500. Unlike traditional mutual funds, ETFs trade on a stock market just like a share in a company. The ETF model became wildly popular, and the predecessor of iShares launched in 1996, spawning dozens of ETFs. By 2003 iShares’ parent Barclays was the second-largest blockholder on the US market behind Fidelity, and in 2009 Barclays sold the iShares business to BlackRock. The 2008 financial crisis was followed by a mass exodus of investors from actively managed funds such as Fidelity into “passive” index funds such as those overseen by BlackRock, Vanguard, and State Street (the Big Three). For corporations listed in the most popular index – the S&P 500 – the results have been dramatic. In 2007, the Big Three owned seven per cent of the average S&P 500 corporation. Today they own 22%,
Illustration: Jörn Kaspuhl
T
he years since the 2008 financial crisis have seen two paradoxical trends in the American stock market. On the one hand, index fund managers BlackRock, Vanguard, and State Street have rapidly grown to become the largest shareholders in corporate America, collectively owning roughly 22% of the S&P 500. These “permanent universal owners” could be a potent force for enabling corporations to take a long-term perspective, investing in their workers, aggressively reducing their carbon emissions, and building enterprises to last.
and in some cases more than one third. If trends continue, we might see three financial institutions owning an outright majority of the shares of hundreds of US corporations. To make this concrete, the table opposite lists the largest shareholder for each of the 25 largest US corporations by revenues, according to data from Orbis and the Securities and Exchange Commission (SEC). For 15 companies, Vanguard is the single largest shareholder, often including competitors in the same industry (e.g., Apple and Microsoft; AT&T and Verizon; ExxonMobil, Chevron, Marathon, and Valero). Among the largest 1,000 American corporations, Vanguard is the largest shareholder in 351. This is something new. For nearly a century, American corporations have been known for their highly dispersed share ownership and the resulting separation of ownership and control. By 1930 nearly half of America’s 200 biggest corporations lacked a single significant shareholder, according to Berle and Means’ famous book. Today, not only do all major corporations have significant shareholders – they often have the same one. A force for collusion, wokeness, long-termism, or something else?
Now, imagine that you are the single largest shareholder of hundreds of corporations in an economy. You have no discretion over which companies you buy and sell because you follow a set of rules that compel you to own a particular set of companies forever (or until your investors abandon you). You are, in short, a universal, permanent investor: universal because you own bits of every significant listed company; permanent because you never sell, regardless of performance. How do you use your power? One possibility might be to encourage your portfolio companies to ease up a bit on their rivalries. Fierce competition and price wars might be great for consumers, but not so much for investors, who prefer steady profits. This was, of course, the rationale for the Standard Oil Trust and many collusive schemes since.
Infographic: Theresa Schwietzer, Source: Orbis
A second possibility is that index funds could somehow join together to force corporate America to adopt a “woke” agenda that is contrary to the nation’s perceived basic values and the funds’ own fiduciary obligations. This whimsical idea has gathered a surprising constituency among several Republican politicians as well as libertarian-minded Silicon Valley types as part of a broader backlash against ESG. Texas and Florida have both pulled billions in investments from BlackRock under the pretext that the asset manager is somehow boycotting fossil fuel companies. (To be clear, BlackRock’s holdings in fossil fuels are gargantuan.) Are giant index funds woke? Critics on the left certainly don’t think so, as they point out that the Big Three are almost inevitably among the largest investors in every major fossil company, and fairly meek when it comes to climate activism. (Note that Vanguard holds the top spot in all the biggest US oil companies.) Larry Fink’s annual letter to CEOs urging them to think about the future is hardly a forced ESG re-education camp. There was one major exception to the funds’ quietism, however: in 2021 climate activist fund Engine #1 ran four dissident candidates for the Exx-
The biggest shareholders in America's 25 largest companies Company
Largest shareholder
Largest %
Big 3 %
Walmart
Walton Family
47.0
10.4
Amazon.com
Jeffrey Bezos
12.7
15.8
Apple
Vanguard
7.9
18.2
CVS
Vanguard
8.7
20.5
ExxonMobil
Vanguard
8.8
21.5
McKesson
Vanguard
10.6
23.2
Alphabet
Lawrence Page
26.3
18.7
19.5
20.8
AmerisourceBergen Walgreens Boots Alliance Costco
Vanguard
8.7
20.0
Microsoft
Vanguard
8.3
19.2
Cardinal Health
Vanguard
13.7
32.7
AT&T
Vanguard
8.1
18.8
Chevron
Vanguard
8.4
22.5
Home Depot
Vanguard
9.1
20.7
Kroger
Vanguard
11.3
25.7
Ford
Ford Family
40.0
21.2
Verizon
Vanguard
8.2
19.8
Walgreens
Alliance Sante
16.9
18.7
General Motors
Capital Group
12.0
20.4
JP Morgan Chase
Vanguard
8.8
19.7
Marathon Petrol
Vanguard
9.7
26.3
Meta
Mark Zuckerberg
52.9
15.7
Elevance Health
BlackRock
9.1
22.5
Comcast
Brian Roberts
33.3
20.1
Valero Energy
Vanguard
10.7
27.4
Source: Orbis (January 2023); EDGAR (SEC). Note: Alphabet, Ford, Meta and Comcast all have multiple classes of shares with different voting rights; "Largest %" represents the voting shares held.
onMobil board, and after making their case to the Big Three as well as other major investors, three of their candidates won. Perhaps this hit a bit too close to home for corporate America and its political allies. And this hints at a third, more interesting possibility for index funds: that as universal permanent investors, they could become a force for long-termism, insulating companies from Wall Street’s pressures to focus slavishly on immediate profits. Imagine that companies are faced with a choice about whether to invest in their employees, which is costly in the short run but beneficial in the long run. As eternal investors, the Big Three might vow to support such investments even if a company’s share price might take a hit for now. Over time, as more investment flowed into index funds, a new ownership regime would usher in a golden age of patient capital. Indeed, a similar idea underlies the enthusiasm for “social wealth funds” in which corporate ownership » March 2023 • I by IMD 5
[ In good company ]
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