Chrystia Freeland

Who knew Swedish finance could be so sexy? The late, great Stieg Larsson’s best-selling The Girl with the Dragon Tattoo — the Hollywood version hit North American theaters this week — was the first to tap into a hitherto undiscovered global fascination with Nordic number crunching.

Following gingerly in his footsteps, I’d like to report on a fascinating discussion at the Securities and Exchange Commission in Washington this month, where the Scandinavian story was center stage.

The conference, where I moderated a panel, was organized by the European Corporate Governance Institute and Columbia Law School. The theme was the involvement of shareholders in the companies they own.

Americans like to think of themselves as the world’s archcapitalists, especially compared to Europeans, whose fondness for a social safety net often earns the label, applied on this side of the Atlantic as an insult, of ”socialist.” That’s why the message from many of the speakers at the SEC discussion, particularly the visitors from Europe, would come as a surprise on Main Street, USA.

The United States, they argued, has created a system of capitalism without capitalists, of private sector companies whose owners have abdicated responsibility for the companies that belong to them.

“In the U.S., you can more or less do whatever you want, without having the support of the owners,” Mats Andersson, the chief executive officer of the Fourth Swedish National Pension Fund and a speaker at the conference, told me in an interview afterwards. “Because of the composition of the boards in Sweden, the company’s big decisions all have to be based on a mandate or the support of the owners.”

”Who is actually responsible for executive remuneration in U.S. companies?” Andersson said. ”If I could decide on my own salary, I would certainly love that system.”

In Andersson’s view, greater shareholder involvement is good both because it is right and because it works. ”If you put your money at risk, you should have influence,” he said. ”Capitalism without owners doesn’t work.”

Andersson’s biggest worry about companies without engaged owners is that they fall victim to the tyranny of short-term stock-market expectations or the self-interest of their executives, rather than building for the future.

”We are long-term investors. The point is to increase our returns, so we need to be active and engaged,” Andersson told me. ”The next quarter is pretty much irrelevant. We are interested in building a good company that will perform long term.”

Andersson isn’t alone. Earlier this year, Dominic Barton, global managing director of McKinsey, the management consultancy, got the business world talking with an essay in the Harvard Business Review titled ‘‘Capitalism for the Long Term.”

Barton’s point was that the current sickness of global capitalism wasn’t some passing infection, caused by the financial crisis and susceptible to a natural cure. Instead, he argued, capitalism, especially in the West, needed a ”deep reform” that would shift it from ”quarterly capitalism” to ”long-term capitalism.” One of the culprits Barton identified was ”the ills stemming from dispersed and disengaged ownership.”

A Canadian who now lives in London, Barton has spent much of his career working in Asia — in fact, he was in India when I reached him on a fuzzy cellphone line this week. He told me that one of the most striking differences he has observed between the rising economies of Asia and of other emerging markets like Brazil compared to the United States is their owner-dominated long- term capitalism, versus the quarterly capitalism of the United States, with its widely held public companies.

”Thinking about where the company should be in 10 or 12 years, these are not the discussions held in many widely held companies,” Barton said.

The irony is that directly engaged owners are the men who made American capitalism great and who remain responsible for its most outstanding companies. In his 1890 masterwork, Principles of Economics, Alfred Marshall, the seminal English economist, bemoaned the feebleness of the staid British joint-stock company, compared to an America dominated by owner-entrepreneurs: ”The area of America is so large and its condition so changeful, that the slow and steady going management of a great joint-stock company on the English plan is at a disadvantage in competition with the vigorous and original scheming, the rapid and resolute force of a small group of wealthy capitalists, who are willing and able to apply their own resources in great undertakings.”

More than a century later, the American companies the world most admires — Google, Amazon, Apple, Facebook — are the creations of that same breed of rapid and resolute founding owners.

Things get more complicated when companies go public and the founder retires or moves up to St. Peter’s boardroom. Many European countries, including Sweden, get around that problem by keeping things in the family, with the founders’ descendants retaining a significant ownership stake and voice in the family firm.

That tradition doesn’t sit so well with Americans, whose country was, after all, created in part in rejection of the hereditary principle.

”Why do U.S. families retreat from corporate control? They don’t seem to be very dynastic,” Marco Becht, a professor, the executive director of the European Corporate Governance Institute and one of the organizers of the SEC. conference, mused to me when I called to discuss the issue. ”If people care so much about having owners who care about the company, maybe the U.S. and the U.K. have the wrong type of owners,” he said. ”The logical conclusion is if you want long-term owners who care, you have to bring back the families.”

There’s nothing like a few revolutions to focus the mind. The lesson the world’s smartest authoritarians are drawing from Tunisia’s Jasmine Revolution and its neighborhood copycats is simple: It’s all about jobs.

“The leadership in China is always worried about how do you stay ahead of the growth to create enough jobs,” says Dominic Barton, the global managing director of consulting firm McKinsey, who has lived in Asia for much of the past decade. “They have to create over 30 million jobs a year. … They know that if they don’t and there are disruptions and the people don’t have jobs, there will be revolution.”

To illustrate how focused China’s Communist rulers are on jobs, Barton described work he had done helping the Chinese government structure its economic stimulus in the aftermath of the 2008 financial crisis. The Chinese authorities came to him with a very specific question: What sort of discount should you put on TVs in Tier 3 cities? “It was a very focused question. And the reason was, they were trying to create consumer demand in a very sophisticated manner.”

The mandarins wanted McKinsey’s advice on how exactly to implement their TV stimulus program: Should the price of televisions be cut by 25 per cent, or should consumers be required to pay the full price, then apply to their mayor for their 25-per-cent rebate? Barton says that once he understood how precise the request was, he “did the McKinsey thing” of talking about how important it was to make sure the project worked and had an impact. One Chinese official wasn’t impressed by his spiel, Barton recalls: “He says, ‘I think we have a different definition of impact than you … If this doesn’t work, we are going to have probably 12 million people that won’t have jobs. And you should know that all of the revolutions in our 5,000-year history have occurred in the countryside.”’

The Middle East’s remaining autocrats are swiftly learning the Chinese lesson, as illustrated vividly by Saudi Arabia’s new $36-billion (U.S.) stimulus program, which includes a 15-per-cent pay increase for public sector workers. As Jack Welch, the former chief executive of GE, described it this week, “In this recession, China did incredible things,” adding that “it is a little bit like what the Saudis are trying to do now to keep everyone happy.”

As Barton’s Chinese interlocutor readily acknowledged, these regimes’ concern about keeping their people employed is hardly selfless. Both China’s long history and current events in North Africa show the smart autocrat that if too many of his subjects are unemployed, their supreme leader is at risk of losing his job, too. Moreover, instant job creation is easier in economies where the state plays a dominant role — and that is particularly true for power exporters such as China and Saudi Arabia, who have plenty of cash on hand. Nor do government handouts — especially in oil-dependent Saudi Arabia — necessarily offer a path to long-term economic growth and job creation.

Even so, the authoritarian regimes’ preoccupation with jobs is in striking contrast with the United States, where despite nearly record levels of unemployment, the central issue in the political discourse at the moment is cutting government spending, a major gripe for the U.S. left, which correctly sees that less state spending will mean fewer jobs.

It isn’t only the progressive activists who think jobs needs to be at the center of the U.S. national conversation. Welch, an outspoken Republican, says: “Why did we spend a whole year fighting over health care and ignoring jobs?”

Google chief executive Eric Schmidt calls unemployment the No. 1 issue facing the country. Like those Chinese mandarins, he has a proposal. “The best way to solve that problem is to have a construction boom,” he said in an interview. “The best way to have a construction boom is for the government to create liquidity in markets that are debt-related to build whatever they care about. My favorite one is energy — rebuilding America’s energy infrastructure, insulating all the homes. This requires lots of construction. And these are nice, local American jobs.”

Both Welch and Schmidt are very worried about government debt. But governments need to be able to do more than one thing at the same time. The Arab uprisings have reminded the world’s dictators that not worrying about jobs could undermine their own job security. Kicking out elected leaders who can’t provide jobs is even easier.

During the depths of the financial crisis, Alcoa announced that it would lay off 13% of its global workforce, or about 13,500 people. Since then, they have built up their presence in China and Russia, finalized a new mine in Brazil, and started construction of the world’s largest aluminum facilities in Saudi Arabia. Alcoa’s rate of job creation in its home country of the United States, however, has been rather tepid in comparison.

Alcoa CEO Klaus Kleinfeld acknowledged that prospects for his business today were better abroad than they were at home, but he did note that in the past year Alcoa hired 1,500 people in the U.S. in the automotive and aerospace industries and so long as the United States retained its sense of entrepreneurship, creativity and excellence in higher education, jobs will come.

Dominic Barton was similarly sober about the current state of the U.S. labor market, saying that it’s currently undergoing an acute phase of creative destruction. However, he urged the audience to focus on long-term job growth, citing the example of Samsung in the wake of Korea’s financial crisis in 1997:

Samsung.  In 1997 there was massive layoffs that were going on. So if you looked at them with the lens of what happened in that crisis, yep, they laid off a lot of people. The number of jobs they’ve created since because of the investments that they’ve made is many, many multiples of what they’ve lost. But they’re different people. I think that what we need is this. There is restructuring, and there always will be restructuring. We can never get away from that.  But what’s — what are the conditions that are in place in the country to enable jobs to be created? And that’s something where I think business can help play a role. Not to subsidize jobs when they shouldn’t exist, but to help create the conditions to do it.

Towards the end of the Newsmaker, Chrystia steered the conversation to the relationship between the business community and the Obama administration. Klaus Kleinfeld observed that after a period of remarkable coordination during the financial crisis, government policy since then become less responsive to current developments and that the “societal dialogue” has become more “stratified.” Dominic Barton agreed and offered his own solution to this problem:  stripping elected officials of some authority over issues of economic competitiveness and handing it to technocrats who will be able to administer policy over a time-frame longer than the next election. Countries like Malaysia and South Korea have lessons to teach the United States in terms of of streamlined policy-making, Barton said:

Posted by Peter Rudegeair.

It was striking to hear how encouraged both Klaus Kleinfeld and Dominic Barton sounded when Chrystia asked them about the effects of the recent turmoil in the Middle East on the business environment there. Barton believed the regime changes in Tunisia and Egypt were “the dawn of a new good thing that’s occurring” and noted that it is likely that new capital will come into these countries as a new leadership emerges. Kleinfeld, whose company is in the process of building the world’s largest integrated aluminum system in Saudi Arabia, said that Alcoa is still very comfortable in the region and that the only surprises with their Saudi partners have been positive surprises. For Kleinfeld, the most assured way to bring about stability in a region plagued by unrest is to have businesses come in and create jobs:

If there’s one thing that the Middle East needs particularly for the young — as well as well-educated people — it’s jobs. And it does it in a region which typically has not had much of an economic growth around Ras Azzour. So that’s all very, very good. And not just for us as a company but also for the region. And it’s gonna have a stabilizing as well as a kind of uplifting, positive element

Like Saudi Arabia, China has a large population that accepts a level of repression so long as the leadership can deliver economic growth. Barton, a China expert who headed McKinsey’s Asia operations before ascending to the consultancy’s top spot, said that he did not think that dissent in China would spillover and create a Middle-East-style uprising because the Chinese Communist Party has been able to stay on top of job growth. He had an interesting anecdote about McKinsey’s study on the effectiveness of China’s stimulus plan that illustrated the leadership’s obsession with maintaining growth:

During the financial crisis, there was a stimulation program that was being put in place. And we’d been asked, almost ordered to do work to figure out what sort of discount should you put on TVs in tier three cities? It was a very focused question. And the reason was they were trying to create consumer demand in a very sophisticated manner. Do you sort of drop the price by 25 percent or do you have people buy it and they get a 25 percent rebate from the mayor? That was literally the thing.

And as we were talking about this I was amazed at how sort of precise it was. I said, you know, we gotta make sure that the impact is there and how we do — sort of doing the McKinsey thing, we wanna make sure this happens. And this guy said to me, “I think we have a different definition of impact than you.” And I said, “What’s that?” And he says, “If this doesn’t work, we’re gonna have probably 12 million people that won’t have jobs. And you should know that all of the revolutions in our 5,000 year history have occurred in the countryside.”

And so there is a revolution — it — so he was just trying to explain to me we understand how important this is, you idiot, basically.

Posted by Peter Rudegeair.

At this morning’s Newsmaker “Thriving in the New Global Economy,” Alcoa CEO Klaus Kleinfeld and McKinsey Global Managing Director Dominic Barton told Chrystia their outlook for the world economy. From his perch atop one of the world’s leading aluminum producers, Kleinfeld was “really positive” about global growth prospects. Coming off a strong year in which aluminum demand rose 13 percent, the Alcoa chief forecast that aluminum demand will grow at a slightly slower rate of 12 percent this year thanks to China’s efforts to slow down its economy:

While also bullish on global growth, Barton noted that there was a sense of fragility in the world economy that concerned him. Specifically, the McKinsey head was worried about the government’s response to looming inflation, which he predicted would rise to the range of 6 to 7 percent. Mounting government debts and the rising cost of capital, which Barton believes will be “up fairly significantly” as savings rates in the emerging markets decline, will exacerbate the inflation problem:

“We’re in a slack period if you just look at what the cost of money is. It’s an incredibly unique period. I think that’s going to go away, and that’s going to make it challenging.”

Posted by Peter Rudegeair.