Stanford Alumni Conference in London: Global Business, Global Poverty

Professor John Roberts moderated. Distinguished panelists included John Browne, MS ’81; Sir Dominc Cadbury, MBA ’64; and Sir Deryck Maughan, MS ’79.

March 11, 2005

Remarks by panel moderator John Roberts Scully Professor of Economics, Strategic Management and International Business.

This session relates in some way to the Center for Global Business and the Economy. The was established last year as part of an effort that Bob Joss is leading to make the school much more integrated into the global economy and better prepare our students to function in a global economy and in global businesses.

The center was established with gifts from British Petroleum, Cemex and alumnus John and Cynthia Gunn, and has received additional support since its founding. The Class of 2004 at the Business School gave their class gift to my center. That was the vote from the students of the importance that they place on international business and the world economy as something that they ought to be paying attention to and connecting to.

The center is about global business and the economy. There’s two parts to it, one that’s about the world economy, with a special focus on the developing world. And the other part is about global businesses. The topic that we have today brings both halves together. On the one hand, poverty continues to be the shame of the world. There are over a billion people living on $1 per day — that number would take everybody in the United States plus everybody in Europe, and then double that number. Rather I should say these people are dying on $1 a day or less because you can’t live on it and thrive. And there are another billion who are getting by on $2 a day or less. So what that means is that two billion people are getting by on less than the cost of a pint of beer.

This is I think a shame for humanity. And it’s something that the Business School has become concerned with. The reason that these economies aren’t functioning, the reason for this poverty, is that fundamentally these economies and the firms in them are not working well. That means it’s a business issue and thus it’s a Business School issue.

We’ve taken the questions of development and said: “they’re for us to study, not just for the economists and the political scientists.” Meanwhile, globalization has implied increasing roles for the multinationals in all parts of the world, but in particular in the poorer parts, as well as increasing roles for investors, buyers, and sellers. Activity in these countries has drawn a lot of criticism — complaints that companies are shipping work to these places, but then treating the workers despicably, including paying them a pittance.

We have the extractive industries where it’s alleged that the companies are not only despoiling the environments in which they operate, but that the payments they make do no good to the society as a whole. They simply line the pockets of the kleptocrats. In the consumer goods area, we hear complaints that the farmers of the Third World are selling their crops for prices that aren’t sustainable, and are being driven into forms of agriculture that are not sustainable. We hear complaints that consumer goods companies push unhealthy products on the Third World — the complaints about Nestle and powdered baby formula, for example.

Financial services doesn’t address the poor, and seems most concerned about the value of the external debt they hold. Pharmaceutical businesses are attacked for not addressing the major diseases of the world, but rather that the research goes to find a substitute for Viagra rather than a cure for malaria. And then they will sell their drugs only at very high prices that the poor world can’t afford.

And in general, there are complaints that business is too big, too powerful, and that it’s forcing governments into a race to the bottom. I’m sure you’ve all heard these complaints. On the other hand, the one thing that seems clear to an economist is that the poor countries of the world are the ones who have not connected to the world economy, and that the countries that have connected to the world economy have become richer.

And I think China is a great example. China has the most successful anti-poverty program in human history, and it comes from connecting to the world economy. One very important way to connect to the world economy is through international business. But we do end up facing these questions of corporate social responsibility which some people feel is absolutely necessary, and others are concerned is a miasma that will drag us all down.

With us this afternoon we have three very distinguished gentlemen, all of them knighted by the Queen for their services. Through their directorships, their board chairmanships, and their personal careers, they’ve been connected to many of the major industries that are most active in the third world. I hope each of them in that context will speak from experience. We’ll be doing this in alphabetical order. John Browne now claims that his last name is Madingley, as he is Lord Browne of Madingley, and that that ought to entitle him to go second, but he sat down at that end, so he’s going to go first. John is a Sloan graduate of 1981.

He’s the group chief executive of BP PLC, which is now the No. 2 firm on the global Fortune 500. John has led BP to that position in the ten years that he’s headed the company. He also is a member of the board of Goldman Sachs and of Intel, formerly on the boards of Daimler Chrysler and Smith Klein.

Or next panelist is Sir Dominic Cadbury, an MBA from 1964. He joined Cadbury upon graduation. It was then his family firm, I believe, but shortly after it merged with Schweppes and became a public firm. Dominic rose eventually to be CEO and chairman of Cadbury Schweppes, a position from which he retired in 2000. He is now chairman of the Wellcome Trust, one of the biggest philanthropies aimed at medical research in the world.

Finally, we have Sir Deryck Maughan, a Sloan graduate from ‘79. He started his career with the treasury, and then joined Salomon Brothers and rose to become CEO and chairman. And then Salomon was eventually brought into Salomon Smith Barney and then Citigroup. Deryck served as vice chairman of Citigroup and CEO of Citigroup International, where as the bio indicates, he served 75 million customers in 100 different countries.

He is also on the board of GlaxoSmithKline and a trustee of the Trilateral Commission under the British American Business Incorporated.

So we have people who connect to the extractive industries, to finance, to pharma, to consumer goods. What I’ve asked each of the panelists to do is to open with a statement of his views on the role of business in the third world, of global business in the third world, and of corporate social responsibility more broadly should he choose to go there. Lord Browne?

Browne: John, ladies and gentlemen, good afternoon. I think I’m meant to be talking about the future, and indeed I find that much more exciting than the past. But I think it’s worth just reminding ourselves about a couple of facts: The last half century has been, as John Roberts alluded to, the most extraordinary period of poverty alleviation in the world. There’s no other period in history which has matched it.

It is a time of an extraordinary change in the wealth of a burgeoning population of the globe. And there’s no part of the world which has been untouched, but each has been touched in a rather different way. The past 10 years alone, the data is absolutely spectacular. The population grew by 800 million people. Per capita income increased by a cumulative 20 percent in real terms on a basis of near doubling of international trade. So before we go to the future, to ask what else has to be done, I think we should reflect on the fact that we have a very confident base upon which to go forward, not a base which is going backwards, not a base which is to be ashamed of.

So there is something about globalization, about the activities of the participants in that globalization that has been successful, and therefore there is no reason to believe anything other than the most optimistic view that these participants can bring about something better, not worse, as time goes by. Now, having said that, I think I would talk in terms of no model, no easy recipes, no ten tips, no formulas, but just a set of thoughts.

My view is that business is a great player in this alleviation of global poverty and the advancement of society. In that, it has a truly honorable and arguably noble position in the world. And this position of course is simply to provide goods and services of ever increasing quality to the growing number of people who want them and can afford them. That’s it, that’s what it does. If it does it very well, of course, it makes money. In that approach, I think when you look at what business is actually doing today, it seems to me it’s doing some very important things about poverty.

It’s creating wealth, but rather more importantly it’s recycling it. I’m always struck when I go around this small economy of the UK to find out that BP, which is quite a big company, supports one pound out of ever six that flow into every private pension plan in the UK. And those pension plans are about peoples’ future. It’s not about speculation, it’s not about anything else.

So they do that on a very wide scale. Secondly, they solve lots of problems. These problems are solved by industry, by global business, whether it’s agriculture and feeding lots and lots of people, pharmaceuticals making people healthy, or in my case, providing mobility, which is a way of building the future. Thirdly, it creates social mobility. Corporations are set up, business is set up on the basis of meritocracy.

It’s extraordinary in my experience to see how many people who don’t know each other, who don’t like each other apparently before they meet, who have different dogmatic or social beliefs, come together and become much more inclusive when they join together in business activity. So that all sounds wonderful. What are some of the things that don’t work? Because a lot doesn’t work.

In my experience, I think I want to start with just four points. First, the question of standards and governance. Not all governments are of the same quality, I would say. When they neither have capability, nor, often, experienced people, others are reluctant to join them. Very often, they work on patronage, not on meritocracy, on open selection and appraisal or evaluation. Many of them might just be clubs.

And so they are the source of great concern. Especially when large amounts of revenue are available, the revenue just simply disappears. Everybody knows that, and you can see it, and indeed, the level of corruption in so many governments makes it impossible for those governments to change. Those in power are very frightened of leaving because when they leave, they have no power to protect their past. This is not only a problem, it’s a perpetuating problem.

So what can be done? Well, we’re in the forefront of something called transparency. It’s simply one aspect of trying to publish the level of taxes and royalties and things like that that we pay governments where the world has concerns that the governments are not wholly above board.

There is no certainty that transparency — publishing what you pay — will do anything other than produce documents which contain numbers about what you pay. But there may be a chance that this sort of pressure begins to create pressure from their peers around the world to say: “come on, you better account for what you’re doing with the money”. Something may happen. So spreading benefits comes from perhaps in some ways getting aspects of governance right in government.

That’s something I think companies can do something about. The secondary is education. I can’t think of any global enterprise, any large multinational that isn’t doing a lot in education. A lot of that of course is to the purposes and benefits of the corporations themselves. There is a wider aspect, however, the question of building capability in the larger society. It’s my belief firmly that you have to educate the leaders of the future, and you have to educate people who will potentially become those who will educate leaders of the future. The proper application of all forms of support to education produces a society in which you can actually do a better business.

Third, we have to worry about the environment, the natural environment. I am struck that to do repeat business, you not only need new customers every day, but you need a world that exists around you. In our business in particular, where we provide products that some people may think are lethal to the world’s future, there is a significant risk that we need to take precautionary steps against. We have to do things to make sure that future is there. So this is about rigid determination to make things better, to provide the world with products that don’t damage the environment in the long run.

That’s happening and that’s something that can continue. All these points I think we would summarize as fundamental to the heart of business, not separate and apart. I don’t think they’re about corporate social responsibility, I think they’re about being in business. Being in business is about goods and services, but doing it in such a way that all those that you touch actually have advantage from you, not disadvantage.

If you can do it that way, I believe you can carry on doing business. Very often, that’s called sustainability. But simply keeping it up, carrying it on is I think a simpler way of putting it. If you don’t get these things right, I think you’re at risk.

Cadbury: Good afternoon, ladies and gentlemen, and thank you, John. I’m delighted that the Economist voted your book best business book of 2004. Otherwise, you probably wouldn’t have invited me here. But I got a better reception as a result of that.

John Browne has made a very eloquent case — both in general terms and in specific areas of his interest — for the benefit that global corporations have brought to the developing world. I think this is a very sophisticated audience, being connected with Stanford.

It seems in some ways a bit unnecessary I think to make the case for the reasons why investment by global corporations has been a huge factor in promoting economic interests and the welfare interests of the developing world. If for example we look at the state of South Africa post-Apartheid and the growth that’s taken place despite huge difficulties in that country, we see the extent to which foreign investment has played a part there.

Then you look at other parts of Africa where foreign investment plays no part. Only a few weeks ago I was in a supermarket at the checkout in South Africa. When you saw the goods being piled into the bags by black South Africans and the way they were taking these goods home with their children and compare that with what’s happening in other parts of South Africa, you said to yourself it’s amazing.

Why will South Africa in my view stay on its current, very mixed economy and not go for example the way of Zimbabwe? I looked at the wealth that was being created and consumed, and I thought as long as that is happening and growing, then South Africa is going to improve and improve. Now, are there problems in South Africa? Of course there are. There’s a high degree of unemployment, the wealth of South Africa is not shared in any way equally by the population. But nevertheless, it does have a foundation of real wealth. And it just seems to me that we only have to look at that and say to ourselves relative to other parts of Africa, at least in part the success of a country like South Africa right now is correlated foreign investment. This then says a great deal at the global level about why foreign investment in the developing world is so important.

It seems to me that the argument is more about what standards are being applied to corporations working in the developing world, and there the disagreements come. I think those disagreements need to be thought about quite carefully, because there is a view — and I hope John Roberts was being the devil’s advocate about this — that if you place those standards very, very high, then you can actually dissuade or prevent corporations investing in the developing world.

By that I mean if you are going to say that a corporation that puts a call center into India or in Bangladesh has got to pay first world wages, the answer is it won’t happen, they’re not going to do it. If you are going to say that all aspects of health and safety regulations as applied within the European Union must be applied in your operations in Indonesia or in Bangladesh, then that too is going to create a wholly unrealistic cost.

So if at that extreme, foreign investment gets turned off, well, to my mind that is much the greater evil. What I would say is that corporations, global corporations of the sort that are represented in this room, because of their reputation and their concern over their reputation, are never going to try and get away with paying wage rates which are absurdly low or have labor practices which are absurdly dangerous. If they do, then certainly reputationally they’re going to be found out very, very fast, and they pay a huge, huge price.

And you’ve only got to see the consequence of that for some of the retailers who have on occasion been accused of very low rates of pay in third world countries. So to my mind, there’s a balance there, and we have to be very careful in business that we don’t let the argument go completely against us, which I would describe as this rather specious corporate social responsibility argument.

There was a very good article in the Economist that produced the article, in January, called “Profit in the Public Good”. And they go back to Adam Smith. As the Economist puts it: “Adam Smith you might say wrote the book on corporate social responsibility, and it’s called the Wealth of Nations. It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.”

Looking back, we can see where a lot of the history of capitalism comes from. It seems to me that various bodies like the UN, the EU, the World Bank, like many NGOs, are trying to raise the bar under this very attractive brand of corporate social responsibility. Of course I accept that business has its responsibilities and must carry out those responsibilities. But I think there’s a lot of argument about just where those responsibilities lie. It seems very important that one does not, under the guise of corporate social responsibility, begin to get into a situation where you lower profits in some significant way and at the same time actually not contribute to social welfare. There’s no sense in taking profits down and finishing with a situation where welfare hasn’t actually been improved. I would make the case that if you shut off investment in developing countries, you have both lowered profits and also actually lowered welfare. So it is a pernicious sort of sense of corporate responsibility.

I’ll go to a very specific example because I think it brings out the sort of points that companies need to think about when they’re dealing in the developing world. And I talk from my own experience of the cocoa growing area of West Africa. People in the chocolate business buy their cocoa from various parts of the world, but West Africa has traditionally been the major supplier. In fact, there are other areas now that have become very competitive with West Africa. There is increasingly an argument that over whether the food industry behaving properly in terms of its raw materials. The argument is made, for instance, that cocoa is grown by farmers on a peasant farming basis where people are suffering from low wages and low prices. In the case of Cadbury Schweppes, we have for 100 years been involved in Ghana. Over that period, we have spent a lot of time and travel not owning cocoa plantations, but working with farmers in Ghana to raise the quality of the cocoa that they produce.

That has been so successful over those years and the tradition and the standards and quality and reputation have been so high that Ghana sells its cocoa for a 100£ per ton premium over all other cocoa. That is hugely significant because clearly you have on the one hand now increased the price that they’re receiving for their cocoa. On the other hand, it has been beneficial to our company because we have invested that time to get a premium quality cocoa which we pay a premium price for, and surprise surprise, we make better chocolate as a result of it.

We sell more of the chocolate at a higher price, and I give that as an example of win-win because the company has benefited. Okay, fine, but so has the country benefited. And it’s not been done simply out of a charitable donation or a misguided sense of corporate responsibility. It is enlightened self-interest, but it has been to the benefit of the country, the benefit of the farmers and the benefit of the company.

So I think it’s quite helpful to look at specific examples because it’s only when you really think these things through that businesses don’t fall into the trap of doing things because they feel hounded and pressed and pushed as a result of a lot of bodies promoting corporate social responsibility very strongly and aggressively. It seems to me that we have to stand up, be counted, be prepared to back up our arguments with the facts.

I give you another example from Zimbabwe. You might think it was impossible to do business in Zimbabwe. My former company does do business in Zimbabwe that has as you probably know, massive problems including the spread of HIV/AIDS. Now, it is inevitable if you have a factory in Zimbabwe that you will have employees who are HIV positive and will develop full-blown AIDS.

So then, of course a corporation working there rightly will be involved in the welfare, the medicine, the treatment, providing food, drugs, vitamins, and so on to help their employees. This is a third world situation, it’s not something that you’re going to run into in the same way at least in the UK or in the U.S. I would argue that any corporation that is concerned at all about its own business and the sustainability of its business is bound to get involved in that kind of a problem.

I’ll just finish up by saying that as you were told, my hat now is that of the Welcome Trust focused on medical research, which is second to Gates, the largest foundation in the world, Now, in trying to look at where a charitable foundation should be focusing its attention, the developing world offers priorities for us. Diseases of the third world that are neglected are a natural focus for us at the Wellcome Trust. And so we focus our attention, not all of it but some of it, on malaria, HIV/AIDS, and tropical diseases, a lot of it in the developing world.

What we can do as Wellcome Trust is fill a gap, which inevitably private enterprise may be unable to fill, because there is no money in producing a vaccine for malaria. Malaria kills millions of very young children in Africa, and increasingly in Southeast Asia. So we can perform a role there, and we can work then with the corporate sector to do that job better in ways we could explore, like distribution, which is a major problem.

Maughan: I feel passionately about the subject, and if I simplify and overstate, I make no apology for it. It is perhaps the single most important challenge the world faces. It connects to all of the other challenges John described that interest Stanford for the future of the planet, and for our children it will be dispositive. The case for John Browne and for globalization is well articulated in Martin Wolf’s Why Globalization Works. I agree with Martin and I agree with John.

The best single hope is to connect the countries to the global liberal economic order and allow multinationals to build functioning economies that can support income growth and relieve poverty. There is no evidence to support the closed economy, government-owned, state-directed model. However, I will argue that for many important parts of the world, we are not set up in the trade, investment, political, social, legal systems to allow companies to function. And if you want to understand the scale of the 2.8 billion people who live on $2.15 a day or less, the official poverty line, read the UN Millennium Project Report of 2005 by Jeffrey Sachs called Investing and Development.

There are 516 million people in Africa below that line. That’s 77 percent of the population of Africa. Can Africa possibly sustain itself when four out of five don’t have an income? And for those who preach aid, Africa has received $1 trillion in the last 50 years and has not yet provided the solution. We all know that the rich world continues to close its markets to African exports.

There’s nothing worse than the hypocrisy of the west when confronting tragedy. But if you think there’s a problem and you think business can help, and you believe in the World Bank as an essential agency of change, and if you think Jim Wolfenson is smart and cares a great deal, then read Steven Malaby’s book called the World’s Banker and understand why it is the World Bank is struggling to meet its mission. So I am on the one hand hopeful, and on the other hand very fearful.

We know of the successes of Asia, and I’m a great optimist for China and for India, and, I would say, for Brazil. I’m undetermined on Russia. But Malthus, that decried figure, stalks Africa. Malthus, you will remember, said when the rate of population increase exceeds the rate of economic growth you have a huge problem. And historians will point out how he forgot about technology — witness the industrial revolution, the agricultural revolution and everything they brought.

Well, Russia and China didn’t make it, by the way, if you want to look at the first surge of globalization at the turn of the 19th and 20th centuries. And the occasional European king lost his head, so be it. In Africa there are 650 million people in sub-Saharan Africa, there are 300 million Arabs. The population of Saudi Arabia will double in the next 20 years. I have no idea what they’re all going to do. I guess stare at the oil field.

That’s a billion people who are, in my judgment, hanging in the balance. Now, as shareholders, as business leaders, as people who care about the university, what do we think businesses can do about it? I think the first thing you have to understand that at the level of corporate strategy — businesses understand these differences. I will draw some examples from Citigroup and GlaxoSmithKline, but I would ask you to understand, these are strictly personal observations and I speak for neither company.

We built a model at Citigroup. We’ve been in 100 countries for 100 years; 75 million customers, 150,000 employees outside America, drawn from 120 nationalities. Historically, Citigroup had looked at all countries as equal, God’s children. But the modern view is of course that they’re not, and if you assemble economic and social data and build a model for the future, you will come to understand that the outcomes are going to be very different.

Hypothetically at least, one could say of the 100 countries, 20 are mature economies, Europe and Japan, stable populations, low risk environments, with moderate returns to capital. There’s a group of 15 or 20 countries, the usual suspects that I mentioned that are large population, high growth, high return markets that we believe will join the global trading and capital system. These are getting the overwhelming attention of the world’s multinationals. They’re getting heavy capital flows. It’s a bed worth making.

That’s the positive case. There are 40 countries of the 100 that are business as usual, nothing much will change. And there are 20 of the 100 where it’s difficult to figure out what on earth we’re doing there since they are failing or failed states. It’s hard to see how they can dig themselves out. Now, the data are clear. If you look at foreign direct investment flows, markets vote every day. We’re not on a four-year cycle.

If you looked at foreign direct investment, which is the engine of growth, building the economic and financial infrastructure of these countries, in the decade to 2000 China received $407 billion. Brazil $175, Mexico $133, Poland $50, Korea $38, India $25, Russia, $25, South Africa $17, a collective cheer. But looking at the list the last year when China received $50 billion I counted 30 countries that received only $100 million. You can’t do a lot with $100 million. So those 30 countries got about half of what China gets. And I counted another 41 that get zero, zippo, nada, on your own.

They don’t generate domestic savings, so how capital formulation takes place I leave to the theoreticians. My first assertion is that no one, the positives or the critics should look to the multinationals to save that half of the world. It’s not going to happen, it’s not our job and we’re not paid to do it. Now, turn to corporate philanthropy and Glaxo. The neocons, the purists, the classicists of economic theory and shareholder value, would say you’re there to maximize profit. It’s the work of governments, taxpayers, or private philanthropy to give to starvation causes or to subsidize the distribution of medicines. Who asked you to do this? Where is your mandate? Nobody elected you, no one appointed you.

And if you do this sort of thing, you’ll detract from your primary purpose and fail. That’s all very fine, I’m not in that camp. I put myself in the realist camp. Businesses exist only in a social and political context. And whoever forgets that, it’s dead. There are no do-gooders, no bleeding hearts, no liberals, these are realists. They define shareholder interest over the longer term, and they seek to engage the governments, the NGO and the press in trying to understand these problems and help where they can if they conclude it is in their self-interest to do so.

That self-interest has something to do with reputation and brand, which is a value. It has something to do with employee satisfaction. Many employees feel good if companies help with tsunamis or Iraq or Africa. The more cynical might suggest it has something to do with political protection, or perhaps I should say more politely, political insurance. If you want to protect certain price policies of the United States, you give cheap drugs to the poor.

If you want preferential access to certain markets around the world, the same applies. So GSK (GlaxoSmithKlein) has judged it to be in their interest to give away $650 million a year. The question is: should it be $100 million or a couple of billion? If it’s good enough for them, why not the others? $250 goes to subsidize medicines in the states. $200 million goes in health and education programs.

And $200 million goes to drugs that cost the EM. We are actively involved in fighting with the World Bank, with Bill Gates, with Wellcome and with others, malaria, TB, elephantitis, HIV, gastroenteritis. We have a drug that takes care of diarrhea. An unpleasant subject. It’s unpleasant because 600,000 children a year die of it. HIV/AIDS, we give away 33 million treatments at 65 cents a day, which is cost, versus $10 a day in the states. We get to 350,000 patients.

There are only 20 million infected. What can a company do if a government or a multilateral government seeks not to act? We could go on. The fundamental challenges lie in the competence of the government. That’s what John said, and it’s what Wolfenson has said. The infrastructure is not there in many cases. There are huge problems of corruption and diversion. We fully expect these tablets to show back up in the developed market, although we’ve colored them all.

The local incentive structures leave something to be desired. I think it’s fairly graphic to observe there are more doctors from Benin in Paris than in all of Benin. There are more doctors in New York and New Jersey from Ghana than in all of Ghana. So we shouldn’t simplify the problem, we shouldn’t go into denial. We shouldn’t as companies do what they can’t do, but I believe that where there are functioning societies and governments that embrace the liberal economic order, multinationals can deliver huge benefit, and none of us is defensive about that.

You’re talking to the wrong people if you want an apology. We need to understand there are large parts of the world that we cannot reach, the data suggests that. And the world has yet to come to terms with how this will play out. When I graduated from Stanford ‘78 there were one billion people in the developed world, and 3.25 billion in the less developed. My daughter graduates this year. There’s one billion still in the developed world, but now there are five billion in the developing world.

And we know two of the five are having a hard job living. When our childrens’ children go to Stanford, we hope, in 2025, not so far from now, a mere 20 years, there will still be one billion residents in the enclosed communities of the rich north (they’ll be fully gated by then) and seven billion in the developing world. We’re going to add two billion people in the next 20 years all in the poor world.

So the problem has to get better or it will get a great deal worse. Thank you very much.

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