Globalisation : Three Major Trends Shape Multinational Corporations Sustainability
Dr. Fariborz Ghadar is Director of the Center for Global Business Studies at Penn State. He specializes in global corporate strategy and implementation, international finance and banking, and global economic assessment.
He serves as a consultant to a score of major corporations, governments, and government agencies and regularly conducts programs for executives of major multinational corporations here and abroad
CEOs need to ready their industry for global tectonics, the underlying trends that, while gradual and often below the radar screen of business executives, have a significant impact on corporate strategy and managers’ ability to implement them over the next two decades. Like the movement of tectonics, these trends, while slow, will eventually cause major quakes, with turbulent and dramatic results on the business environment of the future. Corporate sustainability over the next 25 years will depend on three major trends in the field of governance over the next twenty-five years: the spread of democracy; corporate governance; and the influence of non-governmental organizations on multi-national corporations. Multi-national companies that fail to do so will jeopardize their futures. Democracy will continue to spread in the world and create long-term improved conditions for market-based economies. The spread of democratic societies tend to create for multinational companies a clean, fair and efficient governance environment, which is structured and strengthened by each government’s commitment to, and practice of, a series of international rules in political, economic and societal areas. In 1950, only 22 out of the 154 countries (14.3%) were defined as democracies by Free World. In 2000, the same number has grown to 119 out of 192 (62%) countries and this trend is expected to continue in the next twenty-five years.
The spread of democratic societies tend to create for multinational companies a clean, fair and efficient governance environment, which is structured and strengthened by each government’s commitment to and practice of a series of international rules in political, economic and societal areas. Between 1990 and 2001, the number of counties that ratified the six major human rights conventions and covenants has gown from 10% to 50% of all countries. As of Jan. 1, 2002, 144 countries have gained their membership of the World Trade Organization, the only global international organization dealing with the rules of trade between nations.
More and more countries adopting international rules will present a larger and better arena for multinational companies to run and grow at home and abroad, an environment where capital, labor, commodities, technology, and information can flow more freely across the borders of nation states. No single business can afford to ignore or lose this kind of opportunity. Beyond that, multinational companies should work actively to promote legal and judicial reform and challenge governments to become more transparent and predictable.
Excessive business regulation and complex procedural systems usually result in the abuse of power and the slowdown of business activities. The quick expansion of the global market put enormous power in the hands of multinational companies. In 1999, among the top 100 economies of the world, 46 were corporations instead of nation states. Nonetheless, in the wake of the scandals of Enron and WorldCom, people realized that the accountability and transparency of corporate governance could never be over-emphasized. Corporate governance will be more accountable and transparent in the next twenty-five years. My research in the past has shown that the higher the perception of corruption, the lower a country's economic development level. Business leaders of the multinational companies should once again focus on the fundamentals of their businesses, such as personnel, systems, and sound investment, rather than make reckless moves or resort to questionable business models, like Enron changing from a solid utilities company to a dangerous energy trading company.
Multinational companies need to update their risk management systems, dealing with not only the financial risks, but also the commercial, policy, safety, and ethical risks. Additionally, they ought to hire and promote more employees that are willing to tell the truth, challenge the decisions and put their credibility and career on the line in the interest of their companies, just like the three courageous women who were honored by Time as People of the Year 2002. More accountable and more transparent corporate governance will create a new set of business values. Business leaders will not just make money for their stockholders; they are expected to work for the interests of all of their stakeholders---employees, customers, suppliers and communities in which they operate. Failure to address the concerns of any of the stakeholders would be costly, if not disastrous. To settle the Exxon Valdez oil spill, Exxon Mobile has paid $300 million to the affected residents and businesses, $2.2 billion for the cleanup of the seashore, $1.0 billion for environmental studies and conservation programs, and finally $5.0 billion as punitive fines.
On the other hand, a company’s social consciousness can also be a boost of a its image and business. For example, the number of socially screened mutual funds in the United States increased from 168 funds in 1999 to 230 funds in 2001; the total of United States managed investment assets grew only 22% from 1999 to 2001, but socially screened assets under professional management increased by 36% in the same period.
The third trend of governance is that non-governmental organizations (NGO), such as Green Peace, will play increasingly important roles and impose greater influence on government and multinational corporations. There are 2091 NGOs that hold consultative status at the United Nations, compared to 928 in 1991, and 41 in 1948. These NGOs contribute information and expertise, advocate policies on behalf of their interests and help implement those policies through various international institutions. Estimates show that NGOs channel over 15% of total overseas development aid.
Over the next twenty-five years, I predict these NGOs will have more resources to expand their activities and will become more confident of their power and more confrontational. They will be better organized, more media savvy, more active as stakeholders and more connected by the Internet and telecommunication technologies. Meanwhile, government and corporations will expect non-governmental organizations to meet the similar accountability and transparency standards. NGOs themselves need to keep the balance between volunteerism, which is the defining character of NGOs, and the professionalism, which is necessary for NGOs to operate competitively in the non-profit environment.
To set up constructive relationship with NGOs, I recommend multinational businesses report to the public their environmental and social performance on a regular basis, design, manufacture and distribute products that address public concerns about environment, resources use and health. More importantly, they must learn how to work with NGOs to promote internal reforms, improve profitability, enhance reputation and, in many cases, earn their tickets to the emerging markets.
Global strategy or management teams must prepare for these tectonic shifts. While it is impossible to make an exact prediction, firms should develop two or scenarios of what their business environment is likely to look like in a few years. After developing the scenarios, firms need to determine strategies to be successful in each of their predictions for the upcoming environment. Once the strategies are in place, management teams must devise metrics or indicators to follow to decide which of the scenarios is becoming reality and how the firms need to reorient their strategy implementation. Whether and how well multi-national corporations can grasp the opportunities and avoid the risks relating to these trends will determine their fate in the first quarter of the twenty-first century.
© Copyright Fariborz Ghadar 2004