BUSINESS SCHOOLS’ ROLE IN DEVELOPING GOOD VALUES
Speech of Fernando Zobel de Ayala, Ayala Corporation President and Chief Operating Officer, before the graduating class of Asian Institute of Management’s Master in Business Administration on 14 December 2008 at the AIM Conference Center, Manila.
President Francis Estrada
Dean Victoria Licuanan
Faculty of AIM
Graduating Students, Families, Ladies and Gentlemen
Good morning.
I am honored to be part of this important occasion and I thank Francis Estrada for inviting me to address you today. In truth, I initially hesitated to accept his invitation. It seemed a daunting task to offer inspiration and encouragement to new MBA graduates at a time when there seems to be a dearth of good news all over the world. I wondered what insights I could offer during this period of extreme challenge and uncertainty.
But then again, I also realized that this is an opportunity to personally reflect on the events that have transpired over the past months. I have always had great respect and admiration for AIM as a learning institution, for the fine work it has done to help shape management thinking in Asia and for the many excellent graduates it has formed for many Asian businesses. I decided that addressing you at a time of gloom and doom could be a unique moment to re-examine our mental frameworks and models of engagement as we pursue the challenges ahead of us. Global business has shifted so dramatically. Our minds are frantically trying to catch up with changing realities and no one has fully figured these out yet. Thus, this is a possible learning moment for all of us in the midst of this raging crisis. The lessons we derive can help shape our business models, our individual behavior, and moral consciousness, as we pursue our professional goals and build careers within this global business environment.
The world you are entering today is so different from the one past AIM graduates entered, even as recently as a couple of years ago. The era of deregulation in the nineties brought down barriers, opened economies, allowed much freer movement of goods, services, and human capital at a pace never conceived before. It ushered a globalized world of greater interdependence and connectedness.
Globalization has been a tremendous creative force in business. As we all know, it has expanded, deepened, and shaped markets for all sorts of businesses. It has created jobs and new enterprises as goods and services flowed freely across borders and as human capital migrated to parts of the world that offered the best of opportunities. Our own overseas workers are one of the clearest examples of this trend. Globalization has given rise to new global industries in the offshoring and outsourcing space which have helped the Philippines and India in such a significant and unique way, accelerating economic growth and prosperity and giving hope to so many of our youth . Globalization has made competition in cost, quality, efficiency, and innovation so compelling that consumers as well as producers have gained. It has mobilized financial investments, intellectual capabilities, information resources, and most of all, good old sheer human effort in order to create wealth from meeting the needs of the world’s customers wherever they are. We have seen in many ways how the free market model within this global order has spurred material and social progress in varying degrees all over the world.
However, the scale, severity and depth of the ongoing financial crisis, which seems to have emerged almost unexpectedly, have highlighted the risks of this interconnected world, putting the predominantly Western-ascribed free market model under greater scrutiny. When venerable financial institutions in the US and Europe collapse, when companies that served as symbols and icons of the free markets resort to government relief, when increasing government intervention is required to stem further corporate failures, the world has to re-examine the underlying business philosophies that have pervaded much of the Western world.
The unprecedented failures we have seen in global financial markets signal a breakdown within this highly deregulated system and requires our governing bodies, at the very minimum, to reassess the policy and regulatory frameworks that shape the structure and conduct of industries.
However, over and beyond the policy frameworks and checks and balances that can be put in place by regulatory agencies, we do also need to question, in a very fundamental way, the corporate governance structure employed by the participants of this free market system. Some very pointed questions are being asked today about the roles of boards and executive management. This comes to light as companies today are seen to be highly driven by the relentless pursuit of double-digit profit growth quarter by quarter, as we see many examples of CEOs replaced in an instant for not meeting targets successively, and as compensation structures and incentive schemes disproportionately reward executives even in the midst of financial failures. This apparent disconnect completely undermines the foundation of governance and the confidence in boards and executive management who are mandated to preserve and enhance value for its stakeholders.
It begs the question whether the pressure of free market competition, with rewards tied mainly to profits, revenues, and stock price performance, has put people in too great a pressure to break basic rules of conduct or push them to take on far more risk than is fundamentally tolerable.
While the free market economy certainly is not a perfect system, I share the belief that its flaws have stemmed less from its design and more from the actions and motivations of its human participants. At the heart of this are the values and business ethics that shape its behavior. These are the components that build trust to ensure markets continue to function as they should. Trust leads investors to place their hard-earned savings in financial institutions and enterprises, guides corporate boards to act responsibly and motivates professional managers to lead their organizations to perform even when not being observed and measured.
Alan Greenspan puts it right when he was questioned by the US Congress at the onset of the financial crisis. He believed that the ideology of the free market model worked well and efficiently and produced much prosperity over the past 40 years, but he also assumed that he could trust institutions first and foremost, to protect its stakeholders. Trust has become an extremely valuable commodity in these difficult times as it has been severely diminished, and in so many cases destroyed, by the global crisis. We have seen the devastating impact when banks were suddenly unwilling to lend to one another. Trust is the public good that depends so much on responsible private behavior. We have witnessed, in just a few months the kind of value destruction and breakdown in trust that can take place when individuals and institutions in this open global free market system are allowed to behave irresponsibly.
To restore this rare commodity of trust into markets and institutions is a challenge to all of us. Businesses and its leaders, in particular, must help shape new values and moral concerns before they can hope to shape the rules of the market. Over an unbridled pursuit of wealth or profit, a greater sense of “balanced capitalism” must pervade, where businesses find equilibrium in fulfilling its profit-seeking nature and simultaneously create a positive social and developmental impact. Businesses are now increasingly regarded as having an implicit social contract with society and now, more than ever, they need to take into account the social impact of board room decisions and business activities beyond achieving profit metrics.
I do feel that Asian companies, and in particular, family-led Asian companies, can provide some interesting examples in this regard. The reality of doing business in a developing economy, where social inequity pervades glaringly, has sensitized Asian companies to many matters that most Western companies probably take for granted. We cannot single-mindedly pursue our narrow corporate prosperity in the midst of so much mass poverty and disadvantage without putting at risk our fundamental social contract to even exist and much less prosper. And we also realize that corporate growth anchored solely on serving the needs of the small sliver of the wealthy in emerging markets is unlikely to be robust or sustainable.
New models of “balanced capitalism” or what Bill Gates has often referred to as “Creative Capitalism” is not brand-new, but it is gaining ground and is happening faster and more visibly today than ever before. Real-world examples are providing a steady stream of learning opportunities. This certainly is not about changing capitalism, which has worked wonders for billions of people and will continue to do so, but rather seeks to harness capitalism in ways that speed progress, that get more enterprises to work with business models that reduce inequity, address social needs, and uplift lives.
In our own experience within the Ayala group, we are increasingly discovering how each of our businesses can adapt business models appropriate to the needs of a much broader segment of the population, including low-income sectors. For example, our companies involved in water distribution, telecom and banking services, are finding out that the needs of low-income families can be the foundation of profitable businesses. In the course of delivering services to these low-income sectors, new models of engaging communities to solve business problems are also developing. Our experiences validate the platform of “social entrepreneurship” where it makes strategic business sense to create a social good by tapping non-traditional markets in financially viable ways. These experiences have proven to be financially and socially rewarding for us, as out of it came the opportunity to uplift and make a significant difference in other people’s lives. Perhaps, operating in an emerging market setting puts a natural check and a certain degree of sobriety on business behavior. It compels businesses and companies to act in temperance, foster greater consciousness and sensitivity for social issues, and take a larger part in addressing problems within their communities.
I believe that the lessons of this global crisis will continue to move the world increasingly towards an era of more responsible capitalism. This environment in turn also calls for a richer set of education experiences, and business schools have a critical role in developing individuals who are able to identify, understand, and intrinsically integrate values into their decision-making processes. Business schools certainly cannot guarantee that its graduates are magically more ethical managers, but in this diverse landscape it must provide grounding in how to manage the forces at play in this globalized, competitively intense business world to ensure that unethical options do not become either tempting or overwhelming.
I am confident that given the education you have had at the Asian Institute of Management you are all well-positioned and well-equipped with tools to approach the changing and complex business environments which you will someday lead. And while some may think this is not the most auspicious time to be graduating and entering the business world, I would argue that you are well-timed to be in the midst of a dynamic part of the world -- Asia, that is teeming with opportunity for growth and development. With Asia learning its hard lessons of too much leverage and inadequate supervisory functions from its own crisis nearly ten years ago, it remains today a region that is fundamentally solid and well-positioned to take a greater role in global business. India and China, have been a significant part of this, along with the move of ASEAN countries towards greater economic integration and cooperation. Many Indian, Korean and Chinese companies are now considered the “new challengers” of global business. We are witnessing a radical shift in the business landscape and the players that will emerge as the new leaders. They will set a new paradigm in Western business.
Admittedly, as part of an integrated global ecosystem, we will feel some effects of this crisis, but I do feel that the impact will be less severe and the recovery much faster as Asia has gone through its own restructuring and re-balancing.
I do hope that each of you will search for your own answers and look for your own ways to create your own balanced capitalism. As you pursue your own professional goals, I hope you will keep in balance with the needs of your family and community, the promotion of trust and other social goods that will serve others both inside and outside of economic exchanges. It is certainly not a perfect world, but the system of the free markets has succeeded more than it has failed in human history. But it is a system that depends on individual morality and many human virtues of prudence, industry, diligence, foresight, and good judgment. These values ultimately result in increased social capital which is the best lubricant to keep the machines of the free markets moving.
I congratulate all of you and wish you all the best as you pursue your careers and build your lives wherever you choose to be in this globalized world.
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