The 4 Brain Superpowers You Need to Be a Successful Leader, According to Neuroscience 10-16

Leaders who understand how brains work can make themselves and their teams more nimble, innovative, and resilient.

Kevin Chin wants his executives to limber up their brains.

Chin's investment company, Arowana, based in Sydney, Australia, is expanding into London, Los Angeles, and Asia, and "it is imperative to have a senior leadership team that is mentally agile and resilient," says Chin. Last year, the entrepreneur began working with Tara Swart, a neuroscientist, executive coach, and lecturer at MIT's Sloan School of Management. Now, he is extending that coaching to his top decision-makers so they, too, can get in touch with their amygdala.

Interest in applying neuroscience to business has been mounting for decades. One reason, according to Swart, is that leaders prefer the idea of optimizing an organ--which is tangible--to the idea of optimizing behavior--which is not. "If I say, 'You need to be more emotionally intelligent,' I have had people respond, 'I don't understand what I'm supposed to do,'" she says. "If I tell them, 'You can build a pathway in your brain that will make it easier for you,' then many are more willing to embark on that process."

Optimized thinking requires a healthy brain, and so part of Swart's advice falls into the familiar sleep-eat-hydrate-and-exercise domain. Disturbed sleep is particularly damaging. Your IQ can take a hit of 5 percent or more after a bad night. (Swart began working with Chin to combat the debilitating effects of jet lag on his sleep and, consequently, his thinking.)

A well-fed, rested, and oxygenated brain is necessary for mental resilience and peak performance amid stress and uncertainty. "When all other things are equal, mental resilience is the factor that really distinguishes the CEO," says Swart. To improve resilience and performance, Swart recommends leaders work on the following:

1. Neuroplasticity

"Everything you have experienced in your life has molded and shaped your brain to favor certain behaviors and habits," says Swart. But those behaviors and habits may not be optimal. By focusing attention on and repeatedly practicing new, desirable behaviors, leaders can redirect their brains' chemical, hormonal, and physical resources to create new pathways. The old ones, meanwhile, wither from lack of use.

Learning--particularly attention-heavy subjects like a language or a musical instrument--is the best way to enhance plasticity. "The fact that you are forced to attend to things that your brain hasn't experienced before has its own benefit apart from what you learn," says Swart. "The brain becomes more flexible, which [supports] things like being able to regulate your emotions, solve complex problems, and think more creatively."

2. Brain agility

To be nimble, you must think nimbly. Brain agility is the ability to switch seamlessly among different ways of thinking: from the logical to the intuitive to the creative. Agility may be particularly important for entrepreneurs. "The fact that the brain is likely to think in diverse ways or absorb diverse ideas means that you are more likely to spot trends, pivot, be ahead of the curve," says Swart.
Multitaskers who try to use several modes of thinking at once generally do less well at all of them. Swart recommends working on problems consecutively and looking at them from different angles. Leaders can also leverage different thinking styles within their teams.

3. Mindset mastery

People with fixed mindsets believe traits like intelligence and talent are settled. People with growth mindsets see themselves as works in progress who develop their intelligence and talent through hard work. A fixed mindset leads to stagnation: a growth mindset to innovation and progress.
Leaders with fixed mindsets should use neuroplasticity to try to move themselves toward growth, according to Swart. For entrepreneurs, that may not be a stretch. "It is about your appetite for risk and attitude toward failure, so it makes sense that entrepreneurs are more comfortable with this," she says.

4. Simplicity

A hyperactive world places impossible demands on limited brains. Stress rises. Decision-making suffers. Swart advises that leaders practice mindfulness--focusing on their bodies, breathing, and thoughts in the moment--as a way to reduce stress hormones and multiply folds in the part of the brain associated with executive function. She is also an advocate of reducing noncritical decisions. "Figure out what you are going to wear the night before or wear the same thing every day," she says.
Leaders who know how to improve their own brain function can then apply those lessons to their companies. For example, by creating cross-functional work programs they help employees forge new neuro-pathways and develop brain flexibility as they master unfamiliar knowledge and skills.
Leaders can also use their understanding of the brain to drive fear and stress out of the workplace and to develop trust. Stress spikes cortisol in the brain, which negatively affects thinking and the ability to control emotions. At sustained levels, people go into survival mode.

By contrast, "if you are in a really exciting environment where you have got lots of the hormone oxytocin flowing around your organization, you are more likely to make decisions that are not based on scarcity and survival but on abundance," says Swart. Innovation and risk-taking flourish.

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Distortions and deceptions in strategic decisions 04-26

Companies are vulnerable to misconceptions, biases, and plain old lies. But not hopelessly vulnerable.
          
The chief executive of a large multinational was trying to decide whether to undertake an enormous merger—one that would not only change the direction of his company but also transform its whole industry. He had gathered his top team for a final discussion. The most vocal proponent of the deal—the executive in charge of the company's largest division—extolled its purported strategic advantages, perhaps not coincidentally because if it were to go through he would run an even larger division and thereby be able to position himself as the CEO's undisputed successor. The CFO, by contrast, argued that the underlying forecasts were highly uncertain and that the merger's strategic rationale wasn't financially convincing. Other members of the top team said very little. Given more time to make the decision and less worry that news of the deal might leak out, the CEO doubtless would have requested additional analysis and opinion. Time, however, was tight, and in the end the CEO sided with the division head, a longtime protégé, and proposed the deal to his board, which approved it. The result was a massive destruction of value when the strategic synergies failed to materialize.

Does this composite of several real-life examples sound familiar? These circumstances certainly were not ideal for basing a strategic decision on objective data and sound business judgment. Despite the enormous resources that corporations devote to strategic planning and other decision-making processes, CEOs must often make judgments they cannot reduce to indisputable financial calculations. Much of the time such big decisions depend, in no small part, on the CEO's trust in the people making the proposals.

Strategic decisions are never simple to make, and they sometimes go wrong because of human shortcomings. Behavioral economics teaches us that a host of universal human biases, such as overoptimism about the likelihood of success, can affect strategic decisions. Such decisions are also vulnerable to what economists call the "principal-agent problem": when the incentives of certain employees are misaligned with the interests of their companies, they tend to look out for themselves in deceptive ways.

Most companies know about these pitfalls. Yet few realize that principal-agent problems often compound cognitive imperfections to form intertwined and harmful patterns of distortion and deception throughout the organization. Two distinct approaches can help companies come to grips with these patterns. First, managers can become more aware of how biases can affect their own decision making and then endeavor to counter those biases. Second, companies can better avoid distortions and deceptions by reviewing the way they make decisions and embedding safeguards into their formal decision-making processes and corporate culture.

Distortions and deceptions

Errors in strategic decision making can arise from the cognitive biases we all have as human beings. 1. See Charles Roxburgh, 'Hidden flaws in strategy,' The McKinsey Quarterly, 2003 Number 2, pp. 26–39. These biases, which distort the way people collect and process information, can also arise from interactions in organizational settings, where judgment may be colored by self-interest that leads employees to perpetrate more or less conscious deceptions (Exhibit 1).

Exhibit 1

Sources of error in strategic decisions

Distortions

Of all the documented cognitive distortions, over optimism and loss aversion (the human tendency to experience losses more acutely than gains) are the most likely to lead people who make strategic decisions astray, because decisions with an element of risk—all strategic ones—have two essential components. The first is a judgment about the likelihood of a given outcome, the second a value or utility placed on it.

When judging the likelihood of potentially positive outcomes, human beings have an overwhelming tendency to be overoptimistic or overconfident: they think that the future will be great, especially for them. Almost all of us believe ourselves to be in the top 20 percent of the population when it comes to driving, pleasing a partner, or managing a business. In the making of strategic decisions, optimism not only generates unrealistic forecasts but also leads managers to underestimate future challenges more subtly—for instance, by ignoring the risk of a clash between corporate cultures after a merger.

When probabilities are based on repeated events and can therefore often be well defined, optimism is less of a factor. But loss aversion is still a concern. Research shows that if a 50–50 gamble could cost the gambler $1,000, most people, given an objective assessment of the odds, would demand an upside of $2,000 to $2,500.

2. Daniel Kahneman and Amos Tversky, 'Prospect theory: An analysis of decision under risk,' Econometrica, 1979, Volume 47, Number 2, pp. 263–92. Overoptimism affects judgments of probability and tends to produce overcommitment. Loss aversion influences outcome preferences and leads to inaction and undercommitment. But the fact that overoptimism and loss aversion represent opposing tendencies doesn't mean that they always counteract each other.

Loss aversion wouldn't have such a large effect on decisions made in times of uncertainty if people viewed each gamble not in isolation but as one of many taken during their own lives or the life of an organization. But executives, like all of us, tend to evaluate every option as a change from a reference point—usually the status quo—not as one of many possibilities for gains and losses over time across the organization. From the latter perspective, it makes sense to take more risks. Most of the phenomena commonly grouped under the label of risk aversion actually reflect loss aversion, for if we integrated most gambles into a broader set, we would end up risk neutral for all but the largest risks. This truth has important implications for strategic decision making.

Deceptions

The strategic decisions that companies make result from interactions among their executives: a manager proposes an investment, for example, and an executive committee reviews and evaluates it. In this kind of setting, a conflict of interest often arises between an "agent" (in this case, the manager) and the "principal" (the corporation) on whose behalf the agent acts.

3. Michael C. Jensen and William H. Meckling, 'Theory of the firm: Managerial behavior, agency costs, and ownership structure,' in Michael C. Jensen, A Theory of the Firm: Governance, Residual Claims, and Organizational Forms, Cambridge, MA: Harvard University Press, 2001. Such "agency problems," which occur when the agent's incentives aren't perfectly aligned with the principal's interests, can lead to more or less intentional deceptions—misleading information provided to others—that compound the problem of the agent's unintentional distortions. Recall the CEO who was grappling with the big merger decision: trusting the protégé (the head of the largest division) exposed the CEO to the risk that the merger's proponent was not only overoptimistic but also attempting to further his own career by exaggerating the deal's upside or underestimating its risks.

When companies evaluate strategic decisions, three conditions frequently create agency problems. One is the misalignment of time horizons between individuals and corporations. Several consumer goods companies, for example, have noted that brand managers who rotate quickly in and out of their jobs tend to favor initiatives (such as introducing new product variants) with a short-term payback. These managers' deception, intentional or not, is to advance only certain projects—those aligned with their interests. The development of radically new products or other important projects with longer payback times can rarely succeed without a senior sponsor who is likely to be around longer.

Another problem that can generate harmful deceptions is the differing risk profiles of individuals and organizations. Consider a real-life example. A midlevel executive at a large manufacturing company decided not to propose a capital investment that had a 50–50 chance of either losing the entire $2 million investment or returning $10 million.

Despite his natural loss aversion, the chance of a 5:1 gain should have enticed him into accepting the bet, and his superiors, for the same reasons, would have deemed it attractive. Instead, he worried that if the investment failed, his reputation and career prospects would take a blow, though he didn't anticipate being punished if the investment was forgone. As a result, he decided not to recommend it and thus in effect acted deceptively by not promoting an attractive investment. This asymmetry between results based on action and inaction is called the "omission bias," and here it magnified the executive's loss aversion.

The final agency issue arises from the likelihood that a subordinate knows much more than a superior does about a given issue. Higher-ranking executives must therefore make judgments about not just the merits of a proposal but also their trust in the person advancing it.

This is unavoidable and usually acceptable: after all, what more important decision do CEOs make than choosing their closest associates?

The tendency, however, is to rely too much on signals based on a person's reputation when they are least likely to be predictive: novel, uncertain environments such as that of the multinational that went ahead with the megamerger. We call the tendency to place too much weight on a person's reputation—and thus increase the exposure to deception—the "champion bias."

Furthermore, the multinational's merger decision exhibited an element of "sunflower management": the inclination of people in organizations to align themselves with the leader's real or assumed viewpoint. The CEO had expected to find dissenting voices among his senior executives. But except for the CFO, they believed that the CEO favored the deal and that the merger would proceed no matter what they said and thus kept their doubts to themselves for fear of harming their careers. In effect, they misled the CEO by suppressing what they really thought about the deal.

Improving individual decisions

Knowing that human nature may lead decision making astray, wise executives can use this insight to fortify their judgment when they make important decisions. To do so, however, they must know which bias is most likely to affect the decision at hand. Exhibit 2 offers a road map for the types of decisions where overoptimism or excessive risk aversion will probably be the determining factor.

In general, the key to reducing overoptimism is to improve the learning environment by generating frequent, rapid, and unambiguous feedback. In the absence of such an environment—for instance, when companies face rare and unusual decisions, which, unfortunately, are the most important ones—there is a bias toward optimistic judgments of the odds. The size of a decision determines the appropriate degree of risk aversion. For major ones, a certain amount of it makes sense—nobody wants to bet the farm. For smaller ones, it doesn't, though it often prevails for reasons we'll soon explore.

Companies should see minor decisions as part of a long-term, diversified (and thus risk-mitigating) strategy.

As Exhibit 2 shows, companies don't always rationally factor risk into their decisions. In the large, infrequent ones (for instance, the industry-transforming merger that went horribly wrong) represented in the exhibit's upper-left quadrant there is a tendency to take an overly optimistic view. In essence, faulty judgments lead executives to take risks they would have avoided if they had had an accurate judgment of the odds. Since executives facing such a rare decision can't benefit from their own experience, they should learn from the experience of other companies by collecting case studies of similar decisions to provide a class of reference cases for comparison.

Conversely, excessive risk aversion is usually the dominant bias in the small but common decisions shown in the exhibit's lower-right quadrant: good learning environments temper optimism, and the human reluctance to bet—unless the potential gains are much bigger than the losses—comes to the fore. A key factor in such cases is the tendency of companies not to see individual projects within a stream or pool of similar undertakings. If companies did so, they would move closer to risk neutrality.

Instead they tend to evaluate projects in isolation, which leads them to emphasize a single project's outcome and thus to fear the losses. A complicating factor, as we have already noted, is the possibility that the decision maker expects to be blamed if an investment fails and thus has a more risk-averse attitude than might be rational for a company, which can pool comparable investments into an attractive risk-mitigating portfolio. Senior executives sometimes fail to compensate for this bias, as they could by encouraging a higher degree of risk taking in minor decisions, which are often made in lower levels of the corporate hierarchy.

The remaining two cases in the exhibit are relatively unproblematic. In large, frequent decisions—for example, a private equity firm's deliberations about a new investment or the construction of a new plant using existing technology—a significant degree of risk aversion is sensible and the frequency of the endeavors offers ample learning opportunities. In small, rare decisions optimism and loss aversion may counteract each other, and by definition this class of decision is comparatively unimportant.

Engineering better decision making

Organizations don't all suffer equally from distortions and deceptions; some are better at using tools and techniques to limit their impact and at creating a culture of constructive debate and healthy decision making. Corporate leaders can improve an organization's decision-making ability by identifying the prevalent biases and using the relevant tools to shape a productive decision-making culture.

Identifying the problems

Corporate leaders should first consider which decisions are truly strategic, as well as when and where they are made. Applying process safeguards to key meetings in formal strategic-planning exercises is tempting but not necessarily appropriate. Often the real strategic decision making takes place in other forums, such as R&D committees or brand reviews.

After targeting the crucial decision-making processes, executives should examine them with two goals in mind: determining the company's exposure to human error and pinpointing the real problems. A decision-making safeguard that is useful in one setting could be counterproductive in another—say, because it reinforces a high level of risk aversion by enforcing hard targets for new projects. An objective analysis of past decisions can be a first step: does the company often make overoptimistic projections, for example?

Tools against distortions and deceptions

Once companies undertake this diagnostic process, they can introduce tools that limit the risk of distortions and deceptions. One way of tempering optimism is to track the expectations of individuals against actual outcomes in order to examine the processes (such as sales forecasts) that underlie strategic decisions. Companies should review these processes if forecasts and results differ significantly. They can also provide feedback where necessary and show clearly that they remember forecasts, reward realism, and frown on overoptimism.

A more resource-intensive way of avoiding overoptimistic decisions is to supplement an initial assessment with an independent second opinion. Many companies try to do so by assigning important decisions to committees—for instance, the investment committees of investment firms. If the members have the time and willingness to challenge proposals this approach is effective, but committees depend on the facts brought before them. Some private equity firms address that problem by systematically taking a fresh look: after a partner has supervised a company for a few years, a different partner evaluates it anew. A fresh pair of eyes with no emotional connections can sometimes see things that escape the notice of more knowledgeable colleagues.

Loss aversion, magnified by career-motivated self-censorship of "risky" proposals, has its roots in explicit and implicit organizational incentives. Lower-level managers typically encounter more but smaller risks, so organizations can embed a higher tolerance for them in certain systems—for instance, by using different criteria for the financial analysis of larger and smaller projects.

Financial incentives also can be used to counter distortions and related principal-agent problems. Many companies, for example, find that operating-unit managers tend to optimize short-term performance at the expense of long-term corporate health, partly because their compensation is tied to the former and partly because they might well have moved on by the time long-term decisions bear fruit. Some companies address this problem through "balanced scorecards" that take both dimensions into account. Others tie compensation to the performance of an executive's current and previous business units.

Another technique is to request that managers show more of their cards: some companies, for instance, demand that investment recommendations include alternatives, or "next-best" ideas. This approach is useful not only to calibrate the level of a manager's risk aversion but also to spot opportunities that a manager might otherwise consider insufficiently safe to present to senior management.

Finally, the radical way of counteracting the loss aversion of managers is to take risk out of their hands by creating internal venture funds for risky but worthwhile projects or by sheltering such projects in separate organizations, such as those IBM sets up to pursue "emerging business opportunities." The advantage is that norms can change much more easily in small groups than in companies.

Fostering a culture of open debate

It is essential to realize that these tools are just tools. Their effectiveness ultimately depends on the quality of the resulting discussions, which can't be effective unless the organization has a culture of reasonably open and objective debate.

Shaping such a culture starts at the top, as one chief executive discovered. This CEO was eager to encourage debate on the strategic plans of his company's divisions but didn't want to put his direct reports under pressure by publicly challenging them himself. He therefore created a process intended to make all division heads challenge one another in open debate. These managers refrained from voicing any real dissent, however, so the result was a dull and pointless exercise. Later, they made it clear that they had seen no upside in challenging their peers, given the company's nonconfrontational culture and rigid organizational silos.

Although the CEO's experiment failed, he was on the right track. A CEO in a health care company ingeniously solved a similar problem by separating proposals from the proposers. Previously, strategic options for the company's future were closely identified with their most vocal proponents, so it was hard to conduct dispassionate debates.

Instead of having each executive present his or her favorite option, the CEO organized a senior-management seminar where he asked each person to advocate another's preferred strategy. Although everyone knew that the exercise was intentionally artificial, it helped foster rational debate instead of a battle of egos. More important, perhaps, it helped senior executives see the merits of other strategies and led the group to adopt a plan that synthesized aspects of several proposals.

One way to initiate a culture of constructive debate is for the CEO and the top team to reflect collectively on past decisions. A willingness to ask how they emerged—in effect, holding a conversation about conversations—shows that the company can learn from its mistakes.

Another prerequisite of good strategic decision making is the ability to "frame" conversations in order to ensure that the right questions get asked and answered. One key principle, for instance, is clearly distinguishing a discussion meant to reach a decision from one meant to align the team, to increase its commitment, or to support a project champion. This elementary but often overlooked distinction may also change the composition of the group that attends discussions intended to reach decisions.

Once it becomes clear that a meeting has been called to reach a decision, framing the discussion involves understanding the criteria for reaching it and knowing how far the range of options can be expanded, especially if the decision is important and unusual. Thus a well-framed debate includes a set of proposed criteria for making the decision and, when appropriate, an effort to demonstrate their relevance by providing examples and analogies. Some companies also set ground rules, such as the order in which participants voice their opinions or a ban on purely anecdotal arguments or on arguments that invoke a person's reputation rather than the facts.

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Companies can't afford to ignore the human factor in the making of strategic decisions. They can greatly improve their chances of making good ones by becoming more aware of the way cognitive biases can mislead them, by reviewing their decision-making processes, and by establishing a culture of constructive debate.

CORPORATE GOVERNANCE 2.0

CORPORATE GOVERNANCE 2.0

Although corporate governance is a hot topic in boardrooms today, it is a relatively new field of study. Its roots can be traced back to the seminal work of Adolf Berle and Gardiner Means in the 1930s, but the field as we now know it emerged only in the 1970s. Achieving best practices has been hindered by a patchwork system of regulation, a mix of public and private policy makers, and the lack of an accepted metric for determining what constitutes successful corporate governance. The nature of the debate does not help either: shrill voices, a seemingly unbridgeable divide between shareholder activists and managers, rampant conflicts of interest, and previously staked-out positions that crowd out thoughtful discussion. The result is a system that no one would have designed from scratch, with unintended consequences that occasionally subvert both common sense and public policy.

Consider the following:

• In 2010 the hedge fund titans Steve Roth and Bill Ackman bought 27% of J.C. Penney before having to disclose their position; Penney’s CEO, Mike Ullman, discovered the raid only when Roth telephoned him about it.
  
  
• The proxy advisory firm Glass Lewis has announced that it will recommend a vote against the chairperson of the nominating and governance committee at any company that imposes procedural limits on litigation against the company, notwithstanding the consensus view among academics and practitioners that shareholder litigation has gotten out of control in the United States.
  
  
• In 2012 JPMorgan Chase had no directors with risk expertise on the board’s risk committee—a deficiency that was corrected only after Bruno Iksil, the “London Whale,” caused $6 billion in trading losses through what JPM’s CEO, Jamie Dimon, called a “Risk 101 mistake.”
  
  
• Allergan, a health care company, recently sought to impose onerous information requirements on efforts to call a special meeting of shareholders, and then promptly waived those requirements just before they would have been invalidated by the Delaware Chancery Court.
  
  
• The corporate governance watchdog Institutional Shareholder Services (ISS) issued a report claiming that shareholders do better, on average, by voting for the insurgent slate in proxy contests; within hours, the law firm Wachtell, Lipton, Rosen & Katz issued a memorandum to clients claiming that the study was flawed.
  
  
• The same ISS issues a “QuickScore” for every major U.S. public company, yet it won’t tell you how it calculates your company’s score or how you can improve it—unless you pay for this “advice."

We can do better. And with trillions of dollars of wealth governed by these rules of the game, we must do better. In this article I propose Corporate Governance 2.0: not quite a clean-sheet redesign of the current system, but a back-to-basics reconceptualization of what sound corporate governance means. It is based on three core principles—principles that reasonable people on all sides of the debate should be able to agree on once they have untethered from vested interests and staked-out positions. I apply these principles to develop a package solution to some of the current hot-button issues in corporate governance.

The overall approach draws from basic negotiation theory: Rather than fighting issue by issue, as boards and shareholder activist groups currently do, they should take a bundled approach that allows for give-and-take across issues, thereby increasing the likelihood of meaningful progress. The result would be a step change in the quality of corporate governance, rather than incremental meandering toward what may (or may not) be a better corporate governance regime for U.S. public companies.

• Principle #1: Boards Should Have the Right to Manage the Company for the Long Term

  Perhaps the biggest failure of corporate governance today is its emphasis on short-term performance. Managers are consumed by unrelenting pressure to meet quarterly earnings, knowing that even a penny miss on earnings per share could mean a sharp hit to the stock price. If the downturn is severe enough, activist hedge funds will start to become interested in taking a position and then clamoring for change. And, of course, there are the lawyers, ever ready to file litigation after a big drop in the company’s stock.
• 
  
• It is ironic that companies today have to go private in order to focus on the long term. Michael Dell, for example, took Dell private in 2013 because, he claimed, the fundamental changes the company needed could not be achieved in the glare of the public markets. A year later he wrote in the Wall Street Journal, “Privatization has unleashed the passion of our team members who have the freedom to focus first on innovating for customers in a way that was not always possible when striving to meet the quarterly demands of Wall Street.” The idea that “innovating for customers” can be done more effectively in a private company is deeply troubling; public companies, after all, are still the largest driver of wealth creation in our economy.

To allow managers at public companies to focus on the long term, Corporate Governance 2.0 includes the following tenets:

End earnings guidance.

With holding periods in today’s stock markets averaging less than six months, short-termism cannot be avoided completely. Nevertheless, dispensing with earnings guidance—the practice of giving analysts a preview of what financial results the company expects—would mitigate the obsession with short-term profitability. Earnings guidance has been in decline over the past 10 years, but many companies are nervous about eliminating it for analysts who have come to rely on it. Research shows that the dispersion in analysts’ forecasts increases after companies stop giving guidance—presumably because analysts are no longer being fed the answers to the questions. With less consensus among them, the stock market reacts less negatively when earnings are lower than the average view, thereby mitigating the pressure for quarterly results. Instead of providing earnings guidance, companies should provide analysts with long-term goals, such as market share targets, number of new products, or percent of revenue from new markets.

Dispensing with earnings guidance would mitigate the obsession with short-term profitability.

Bring back a variation on the staggered board.

When a board is staggered, one-third of the directors are elected each year to three-year terms. This structure promotes continuity and stability in the boardroom, but shareholder activists dislike it, because a hostile bidder must win two director elections, which may be as far apart as 14 months, in order to gain the two-thirds board control necessary to facilitate a takeover. In my research with Lucian Bebchuk and John Coates, of Harvard Law School, I find that no hostile bidder has ever accomplished this.

As shareholder activists gained more power in the 2000s, the number of staggered boards in the S&P 500 fell from 60% in 2002 to 18% in 2012. The trend is continuing: In 2014, 31 S&P 500 companies received de-staggering proposals for their annual meetings, and seven of those companies preemptively agreed to de-stagger their boards before the issue came to a vote. The result of this trend is that most corporate directors today are elected every year to one-year terms (creating so-called unitary boards).

It is virtually tautological that directors elected to one-year terms will have a shorter-term perspective than those elected to three-year terms. This is particularly true because ISS and other proxy advisory firms have not been shy about using withhold-vote campaigns to punish directors who make decisions they don’t like. One director attending a program at HBS told me that his board had decided against hiring a talented external candidate for CEO who would have required an above-market compensation package. Even though he was the best candidate, and even though this director thought that he’d be worth the money, the board did not move forward in part because of concern that ISS would recommend against the compensation committee at the next annual meeting. With a staggered board, ISS would have recourse against only one-third of the compensation committee each year, because only one-third of the committee members would be up for re-election.

Of course, shareholder activists make a strong case that a staggered board may discourage an unsolicited offer that a majority of shareholders would like to accept. But this drawback would be avoided if the stagger could be “dismantled,” either by removing all the directors or by adding new ones. A staggered board that could be dismantled in this way would combine the longer-term perspective of three-year terms with the responsiveness to the takeover marketplace that shareholders want. It would give ISS recourse against individual directors, but only every three years rather than every year. A triannual check would allow longer-term investments (such as the superstar CEO mentioned above) to play out, and would be better aligned with long-term wealth creation than an annual check on all directors.

Install exclusive forum provisions.

In our litigation-prone system of corporate governance, plaintiffs’ attorneys (representing shareholders who typically hold only a few  shares) look for any hiccup in stock price or earnings to file litigation against the company and its board. Plaintiffs’ attorneys are especially attracted to major transactions, such as mergers and acquisitions, because of corporate law that is friendly to litigation in this arena. Any public-company board announcing a major transaction is highly likely to be sued—sometimes within hours—regardless of how much care and effort its members put into their decision. It is anyone’s guess how many value-creating deals are deterred by this “tax” that the plaintiffs’ bar imposes on the system. In fact, a board that goes forward with a transaction will often deliberately keep something in its pocket—such as a disclosure item or even a bump in the offer price—to be given up as part of a quick settlement so that the plaintiffs’ attorneys can collect their fees and the deal can proceed.

It is not only the frequency of claims that causes concern, but also where they are brought. A U.S. corporation is subject to jurisdiction wherever it has contacts—its headquarters state, its state of incorporation, and states where it does business. Plaintiffs’ attorneys take advantage of this fact to bring suit in multiple states—particularly those that permit a jury trial for corporate law cases. The prospect of inexperienced jurors deciding a complex corporate case leads many companies to settle in a hurry. This kind of blackmail is bad for corporate governance and society overall. Exclusive forum provisions permit litigation against a company only in its state of incorporation. For companies incorporated in Delaware, which are the majority of large U.S. public companies this means the case would be heard before an experienced and sophisticated judge on the Delaware Chancery Court rather than an inexperienced jury.

Yet despite these clear benefits, shareholder activists have expressed knee-jerk opposition to exclusive forum provisions. Glass Lewis has threatened a withhold vote against the chair of the nominating and governance committee of any board that installs one without shareholder approval. The argument is that the prospect of multistate litigation will make directors pay more attention. But most directors do not need the sharp prod of a jury trial for them to want to do a good job. Exclusive forum provisions give plaintiffs’ attorneys a fair fight in a state where the rules of the game are well established. In exchange for such a provision, boards might consider renouncing more-draconian measures, such as a fee-shifting bylaw that forces plaintiffs to pay the company’s expenses if their litigation is unsuccessful.

Corporate Governance 2.0 asks the functional question: What goals are the activists, governance rating agencies, boards, and everyday shareholders all trying to achieve? The answer is clear: insulation from frivolous litigation, but meaningful exposure to liability in the event of a dereliction of duty in the boardroom. In the old days, activists and their allies agreed on this shared goal. In the late 1980s, when most U.S. states enabled boards to waive liability for certain breaches of fiduciary duty, ISS encouraged directors to take up the invitation, on the understanding that they should be focused on shaping strategy and monitoring performance rather than worrying about shareholder litigation. Corporate Governance 2.0 would return to this old wisdom through exclusive forum provisions. Directors would be accountable for their actions, but only as judged by a corporate law expert. The result would be greater willingness among directors to make longer-term decisions, without fear of a jury’s 20/20 hindsight.

Principle #2: Boards Should Install Mechanisms to Ensure the Best Possible People in the Boardroom

In exchange for the right to run the company for the long term, boards have an obligation to ensure the proper mix of skills and perspectives in the boardroom. Shareholder activists have proposed several measures in recent years to push toward this goal—principally age limits and term limits, but also gender and other diversity requirements. According to the most recent NACD Public Company Governance Survey, approximately 50% of U.S. public companies have age limits, and approximately 8% have term limits. ISS is urging more companies to adopt such limits, and if history is any guide, boards will give the idea serious consideration.

Activists and corporate governance rating agencies are motivated by a sense that boards don’t take a hard look at their composition and whether the skill set on the board reflects the needs of the company. Too often directors are allowed to continue because it’s difficult to ask them to step down.

But age and term limits are a blunt instrument for achieving optimal board composition. Anyone who has served on a corporate board knows that an individual director’s contribution has little to do with either age or tenure. If anything, the correlation is likely to be positive. As for age limits, directors who have retired from full-time employment can devote themselves to their work on the board. And as for term limits, directors will often need a decade to shape strategy and evaluate the success of its execution; moreover, directors who have been in office longer than the current CEO are more likely to be able to challenge him or her when necessary. Yet these are precisely the directors who would be forced out by age limits or term limits.

Corporate Governance 2.0 would approach the issue of board composition in a tailored manner, focusing more on making sure that boards really engage in meaningful selection and evaluation processes rather than ticking boxes. In particular it would:

Require meaningful director evaluations.

Many boards today have internal evaluations conducted by the chairman or lead director. Although these evaluations are well-intentioned, directors may be unwilling to disclose perceived weaknesses to the person most responsible for the effective functioning of the board. A Corporate Governance 2.0 approach would engage an independent third party to design a process and then conduct the reviews. The process would include grading directors on various company-specific attributes so that they and their contributions were evaluated in a relevant way.

In Corporate Governance 2.0, director evaluations wouldn’t just get filed away. They would be shared with the individual director, with comments reported verbatim when necessary to make clear any opportunities for improvement. They would also go to the chairman or lead director, to provide objective evidence with which to have difficult conversations with underperforming directors.
Meaningful board evaluations would also have more-subtle effects on board composition and boardroom dynamics. Foreseeing a rigorous review process, underperforming directors would voluntarily not stand for reelection. Even more important, directors would work hard to make sure they weren’t perceived as underperforming in the first place.

Consider shareholder proxy access.

Under such a rule, shareholders with a significant ownership stake in the company would have the right to put director candidates on the company’s ballot. For the first time in corporate governance, a company proxy statement could have, say, 10 candidates for eight seats on the board. Hewlett-Packard and Western Union, among other companies, have implemented shareholder proxy access over the past two years.

The Securities and Exchange Commission tried to impose proxy access on all companies in 2010, but the D.C. Circuit Court of Appeals invalidated the move. The SEC has since allowed companies to implement it on a voluntary basis. My research with Bo Becker, then at HBS, and Daniel Bergstresser, of Brandeis, shows that a comprehensive proxy access rule would have added value, on average, for U.S. public companies. The company-by-company approach is not as good as a comprehensive rule, because qualified directors may gravitate to boards that don’t offer proxy access; nevertheless, it should be considered a backstop to rigorous director evaluations.

An individual director’s contribution has little to do with either age or tenure.

Implementing a proxy access rule would help ensure the right mix of skills in the boardroom. For example, if J.P. Morgan had a proxy access rule, it seems likely that it would not have lacked directors with risk expertise on the risk committee at the time of the London Whale incident. More than a year before that event, CtW Investment Group, an adviser to union pension funds, highlighted the point: “The current three-person risk policy committee, without a single expert in banking or financial regulation, is simply not up to the task of overseeing risk management at one of the world’s largest and most complex financial institutions.” With a proxy access regime, either the board would have put someone on the risk committee with risk expertise, or a significant shareholder could have nominated such a person, and the shareholders collectively would have decided whether the gap was worth filling.

This is not to say that if JPM’s risk committee had included directors with risk expertise, the London Whale incident would have been prevented. As is well known, primary frontline responsibility for managing risk exposure at JPM belongs to the operating committee on risk management, whose members are high-ranking JPM employees. But the odds of identifying the problem would certainly have been higher in a proxy access regime.

Only in the aftermath of the debacle did the board add a director with risk expertise to the risk committee. Of course, it should not take a multibillion-dollar trading loss to put people with the right skill set on the JPM risk committee. A shareholder proxy access regime should be considered as a supplement to meaningful board evaluations, to ensure the right composition of directors in the boardroom.

Principle #3: Boards Should Give Shareholders an Orderly Voice

Today, when an activist investor threatens a proxy contest or a strategic buyer makes a hostile tender offer, boards tend to see their role as “defender of the corporate bastion,” which often leads to a no-holds-barred, scorched-earth, throw-all-the-furniture-against-the-door campaign against the raiders. As George “Skip” Battle, then the lead director at PeopleSoft, put it to me in the context of Oracle’s 2003 hostile takeover bid for his company, “This is the closest thing you get in American business to war.”

Consider the more recent case of CommonWealth REIT, one of the largest real estate investment trusts in the United States. As of December 2012, CommonWealth’s properties were worth $7.8 billion against $4.3 billion in debt, but its market capitalization stood at only $1.3 billion. Corvex Management, a hedge fund run by Keith Meister (a Carl Icahn protégé), and the Related Companies, a privately held real estate firm specializing in luxury buildings, saw an investment opportunity in CommonWealth’s poor performance. In February 2013 they announced a 9.8% stake in CommonWealth and proposed acquiring the rest of the company for $25 a share. This offer represented a 58% premium over CommonWealth’s unaffected market price.

The Corvex-Related strategy for unlocking value at CommonWealth was relatively simple. CommonWealth had no employees; it paid an external management company to manage the real estate assets. This company, Reit Management & Research, was run by Barry and Adam Portnoy, a father-and-son team who also constituted two-fifths of the CommonWealth board. Corvex and Related believed that internalizing management would eliminate conflicts of interest within the board, align shareholder interests, and unlock substantial value. Their investment thesis boiled down to three words: Fire the Portnoys.

Would the plan unlock value at CommonWealth? The board was determined not to find out. Despite having given shareholders the right to act by written consent, it imposed onerous information requirements that made it impossible, as a practical matter, for them to do so. The board also lobbied the Maryland legislature (unsuccessfully) to amend its takeover laws to protect the company. Perhaps most egregious, the board added a provision to its bylaws declaring that any dispute regarding the company would be heard by an arbitration panel, not a Maryland court. After 18 months of arbitration hearings and sharply worded press releases, Corvex and Related finally replaced the CommonWealth board with their own nominees in June 2014. Today CommonWealth (renamed Equity Commonwealth) trades at about $25 a share, compared with about $16 before the offer.

CommonWealth’s board took the typical scorched-earth approach, but it shouldn’t be like this. The principle of “orderly shareholder voice” involves a different conceptualization of the board’s role—to guarantee a reasonable process whereby shareholders get to decide, rather than to defend the corporate bastion at all costs. Even when a board genuinely believes that the competing vision is mistaken (which is true in the vast majority of cases), its fiduciary duty—contrary to popular belief—does not require preventing shareholders from deciding. In a Corporate Governance 2.0 world, the directors would campaign hard for their point of view but leave the decision to the shareholders.

“Orderly” is a critical qualifier, because some shareholders are undeniably disorderly. With the steep decline of poison pills, which block unwanted shareholders from acquiring more than 10% to 15% of a company’s shares, hedge funds and other activist investors can buy substantial stakes in a target company before they have to disclose their positions. Recall the case of J.C. Penney: Because it did not have a poison pill in 2010, Roth and Ackman could secretly buy a 27% stake The company put them on the board, and Mike Ullman was replaced as CEO by the Apple executive Ron Johnson, who planned to give Penney a younger, hipper look. The strategy proved disastrous, and the stock price dropped from about $30 to as low as $7.50 over the next two years. Johnson was forced out in 2013—and replaced by none other than Mike Ullman.

In theory, companies are protected against such lightning-strike raids by the SEC rule that shareholders must disclose their ownership position after crossing the 5% threshold. But they have 10 days in which to do so, and nothing stops them from buying more shares in the meantime. This is exactly what happened in the Penney case. By the time Roth and Ackman had to make the disclosure, they had bought more than a quarter of the company’s shares.

The relevant rule dates back to the 1960s, when 10 days was a reasonable amount of time. Today, of course, 10 days in the securities markets is an eternity, and no one designing a disclosure regime from scratch would dream of giving shareholders such a long window. (European countries have substantially shorter windows.) Nonetheless, shareholder groups have resisted change, on the rather questionable grounds that the Roths and Ackmans of the world need sufficient incentive to keep looking for underperforming targets.

Under a Corporate Governance 2.0 system, boards would get early warning of lightning-strike attacks. One way to do this would be with what I call an “advance notice” poison pill—a pill with a 5% threshold but also an exemption: Any shareholders that disclosed their positions within two days of crossing the threshold would avoid triggering the pill and could continue buying shares without being diluted. John Coffee, of Columbia Law School, and Darius Palia, of Rutgers Business School, have proposed a similar version of self-help, which they call a “window-closing” poison pill. Either kind of pill would give directors fair warning that their company was “in play” before the bidder could build up an unassailable position.

Directors should guarantee a reasonable process whereby shareholders get to decide.

Today a change in corporate governance usually occurs when ISS threatens a withhold vote against the board unless certain reforms are implemented. Corporate Governance 2.0 takes a proactive approach that achieves the same (desirable) goals in a holistic and better way. Managers actively engage with shareholders from a functional perspective (“What are we all trying to achieve?”) rather than an issue-by-issue reactionary perspective (“Should we surrender, or do we fight?”).

In this article I have applied the three fundamental principles of Corporate Governance 2.0 to provide a package solution to certain hot-button issues in corporate governance today. A board that wants to adopt this solution could do so unilaterally in many jurisdictions (including, for the most part, Delaware), though in general it would be better advised to adopt Corporate Governance 2.0 through a shareholder vote.

Other hot-button issues will emerge in the future. The most recent version of ISS’s QuickScore, for example, includes 92 factors, any of which could become the next pressure point against corporate boards. Rather than evaluating each of these innovations incrementally, boards should hold up future proposals to the same three principles of Corporate Governance 2.0.

This shift is vital in the United States, where the power of shareholders has increased over the past 10 years and the natural instinct of boards is to simply cave to activist demands. A Corporate Governance 2.0 perspective is critical outside the U.S. as well, particularly in emerging economies where companies are trying to achieve the right balance of authority between boards and shareholders in order to gain access to global capital markets. Over the long term, a Corporate Governance 2.0 perspective would transform corporate governance from a never-ending conflict between boards and shareholders to a source of competitive advantage in the marketplace.


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IIMB’s doctoral programme research initiatives get a fillip from Wipro 01-18

Shyam's views on this project

We often ask as to why Indian Universities do not rank high in global rankings while China has some. Even a small country like Singapore has world class Universities.

This was explained by the former HRD minister and a scholar Dr. Shashi Tharoor. He says the main criteria for ranking of Universities are the amount of Research they do and citations they receive in International Papers. These two factors carry 60 weightage in the rankings.

Our Universities and the Educational... Institutions lack the funds to spend for research. They also seem to be very lethargic in approaching the corporates and multinationals for funding or collaborations in their research programmes.

in this background, it is really heartening to know the fact that Wipro has come forward to fund the research programme in sustainability at IIM Bengaluru.

IIM Bengaluru's Fellow Programme in Management (FPM) will now be funded by Wipro for research into Sustainability.

IIMB’s doctoral programme research initiatives get a fillip from Wipro

Sustainability Fellowship and Sustainability Grant from the IT major to boost FPM students’ research on sustainability.

BENGALURU, JANUARY 19, 2016: The Indian Institute of Management Bangalore (IIMB), in its efforts to reach greater heights in the domain of education and research, has entered into a partnership with Wipro Limited (NYSE:WIT, BSE: 507685, NSE: WIPRO), a leading global information technology, consulting and business process services company, headquartered in Bangalore.

Wipro will partner and support the Wipro Sustainability Fellowship and the Wipro Sustainability Grant, for doctoral students of IIM Bangalore. This is as part of their overarching charter on sustainability in education – the Wipro-earthian program. The Fellowship and Grant will commence during the academic year 2015-16.

Mr. P.S. Narayan, Vice President and Head-Sustainability, Wipro Limited, said: “We are delighted to partner with IIMB in a joint effort to foster doctoral research on areas that lie at the intersection of business and sustainability. The business sector has a critical role to play in facing the manifold challenges of sustainability. Therefore, embedding sustainability in management education has become a critical imperative.”

The Fellow Programme in Management (FPM) is the globally ranked doctoral programme of IIMB, which is committed to training individuals who will excel in their area of research and publish high quality work. Professor Shashidhar Murthy, IIMB’s FPM Chairperson, said: “We at IIMB are glad that Wipro values our students and the nurturing provided by our faculty. We thank Wipro for their generosity. This will provide an impetus to students’ research in the area of Sustainability.”

The FPM at IIMB is a premier source of rigorous and inter-disciplinary research in all areas of business management and public policy, including Corporate Strategy & Policy, Economics & Social Sciences, Finance & Control, Marketing, Organisational Behaviour & Human Resource Management, Production & Operations Management, Quantitative Methods & Information Systems, and Public Policy.

The Wipro Sustainability Fellowship & the Wipro Sustainability Grant each allows up to two FPM students to be funded, to support research interests that fall in the broad area of sustainability.

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Everybody has a plan until they get punched in the face 07-12

Everybody has a plan until they get punched in the face

“Everybody has a plan until they get punched in the face.”-Mike Tyson.

I think Iron Mike clearly nailed it when he said those eleven words. They speak volumes in life as they do in business. Even the best strategists have to be prepared for the unexpected. When tasked with a project or challenge, you spend time prepping, researching and scouring facts and figures. You analyze, speculate and coordinate your plan of attack; your masterpiece—your Magnum Opus.

You step into that ring to show off your skills…

Then that left-hook comes out of nowhere and lands squarely on your jaw; leaving you punch-drunk and reeling. ‘Where did it come from? Who threw it?’ You stagger around the ringboardroom looking to regain your footing. You start swinging wildly at your foe while frantically looking doe-eyed back to your team in the corner hoping desperately that someone will throw in the towel and call the fight. Then you’re hit in the solar plexus with a flurry of jabs.

The wind rushes out of your body and stars start forming in the corner of your vision. The room is quickly growing dim and your knees take on the consistency of cooked noodles. You list dangerously to one side; hitting the ropes. Then the canvass rushes up to slap your cheek as the ref gives you the 10 count. That’s it. You’re done. Your Manager stands over you shaking their head.

“Next time you bring me a report on this you better bring your ‘A-Game’.”

Once the crowd has cleared, the blood has been washed from your face and the tape removed from your hands you start to really question what happened?

‘How did I not see that coming? I've fought in this very same ring a countless number of times and I've always won. How did my boss know about that gap in my report? How did they know that I didn't have the most up-to-date numbers from Marketing?’

In business, much like in boxing, practice and preparation will only take you so far. You will learn to duck and weave, hook and jab with scary precision but once you step into that ring, anything could happen. Your preparation only gets you so far before instinct and timing become your guides.

So how do you prepare for future fights so you don’t end up getting ‘rope-a-doped’?

1. Get in the ring and start learning. If you’re not willing to look back over older presentations you've done or notes you've taken to see where improvements could’ve/should’ve been made, then you might as well hang up your gloves. You’ll get knocked around every time you get back in the ring and your opponent won’t need to make much of an effort to get you back on the ropes because they'll know your routine. Make it a habit to review previous comments and suggestions to ensure you’re not simply rehashing old content or mistakes. Learn from your mistakes.

2. Change up your sparring partners. Sometimes you need to break from routine in order to see what you’re capable of. When you’re ready to get back into the ring pick a more difficult partner to spar with. Take a few shots to your ego to see what your limit is. Run your work past tougher critics within your organization. Ask them to be ruthless and scrutinize every phrase, word and syllable. In doing so, you’ll widen your view of what might happen when in the midst of a real bout. You’ll quickly identify which punches will be thrown to simply ‘test your mettle’ versus those punches that are meant to knock you flat on your backside. Watch and learn.

3. Expect to get hit. If you go into that ring thinking that you’re untouchable, the shock of getting nailed in the face may be much more than you were initially prepared for. Be ready to take a few shots. Use this as a learning technique to gauge the strength and strategy of your opponent. Use objection handling techniques such as rebuttals and redirection to keep your opponent on the defensive. Use well mapped out facts and data points as your left hook and right cross to keep them on the ropes.

4. Use your head as much as your fists. Learn how your opponent fights. Talk to colleagues or better yet to the fighter themselves and ask them what they expect to get out of your match. While it might seem odd to bring the fight to your opponent outside of the ring, good strategists will take every opportunity they can to learn from the best. When you get to fight night, watch your opponent. Watch their body language as it’s one of the best indicators as to when they’re going to throw a punch. Listen to their tone, their phrasing and their intonation. Subtle changes in the dialogue can be a warning sign. Remember their approach and their demeanor. Chances are they won’t change their approach drastically during the fight. If you can anticipate their ‘swing’ then you can duck, dodge and deck ‘em with information before they even know what hit them.

For those of us in the business world, I’m certain you've nursed more than a few black eyes and split lips in your time. But chances are you were back in the gym the next day prepping for the next match. We take our lumps from time to time with a wry smile and the knowledge that these hits will eventually make us better fighters.

If not—we can always take up Golf.

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Harnessing Data for Growth 05-28

Harnessing Data for Growth

The Western world may have a wealth of economic data, but many emerging nations can’t get enough. A new Centre for Economic Growth (CEG) in the Middle East will provide original research to address the region’s massive unemployment problems and serve as a model for developing economies around the world.

When Iyad Malas, CEO of the leading Dubai-based retail and leisure company, Majid Al Futtaim Group, visited the construction site of a massive new shopping centre in Egypt he found the biggest problem its contractors had was finding labour; a surprising revelation given the bloody protests of the Arab Spring, which were sparked, in part, by extreme and rising unemployment.

“I was shocked,” Malas admitted during a panel discussion to mark the launch of the Middle East and North Africa (MENA) Centre for Economic Growth. “You would have thought in a country like Egypt, labour would be the easiest thing to get.”

Majid Al Futtaim (which employs 10,000 people across Egypt alone) experienced similar difficulties staffing its retail and leisure establishments. “What we’re finding is a gap in terms of skills set,” says Malas. “These are not necessarily advanced skills, it’s basic service-orientated type approaches.

”This skills mismatch is a recurring problem across sectors and countries in the region. A recent World Bank International Finance Corporation (IFC) survey found a very clear and common theme ‘I have jobs but I can’t find the skills that I need’.

“Often job seekers don’t have soft skills, they don’t have language skills and sometimes they don’t have technical skills,” said IFC’s Middle East head, Luke Haggarty noting one government university in Egypt was sending out IT graduates proficient in Fulcrum, a computer language that hasn’t been used by business for more than 20 years.

Bridging the skills gap

Governments’ ability to create policies and business opportunities to address the longstanding but increasingly urgent challenges of unemployment and economic growth has been frustrated by a lack of - or inability to access - timely, reliable, country-specific statistics.

“Basic issues around job markets and skills mismatch are not well-known or well-studied beyond the macro level… we need much more detail such as infrastructure gap analysis, looking at country-by-country and sector-by-sector information,” says Majid Jafar, CEO of Crescent Petroleum and founding Chair of the CEG Business Council.

The Abu Dhabi-based CEG is a unique collaboration between the region’s private sector and INSEAD. Launched in March 2014, it aims to collate and analyse data from across the region, provide original research on key economic issues and act as a platform where government policy makers, business and academics can share information. Top of its agenda is economic growth and job creation.

Key to good policy is timely data

Whether it’s policies to bridge the skills gap (which has left millions of tertiary-educated young Arabs out of work), foster the vital SME market, or address problems of large public services and high reservations wages, timely and accurate data is essential. Providing an avenue to this data and a platform to disseminate the findings will help researchers move faster and have a bigger impact, in terms of thought leadership, INSEAD Deputy Dean Peter Zemsky notes.

“Centres like the CEG are critical in terms of two things: reaching out to business communities and government policy makers to feed in to the real challenges, and accessing an avenue of up-to-date information.

“It’s really important for academics to ask the right questions that respond to the needs of policy makers and business. We need to get consensus (from business) on what is needed and then get that knowledge to the top policy makers.”

Business: The only long-term source of economic growth

“INSEAD’s knowledge and expertise will give better insight to policy makers on how to generate faster growth,” notes INSEAD Dean Ilian Mihov. “But I think our role goes beyond that. We have to ask ourselves what is really driving growth, why are rich countries richer, how can you become a rich country?  For that, you need business. Business creation is the only long-term source of economic growth.”

New research, Mihov says, will help generate policies and models addressing productivity at the firm level and the infrastructure gap - challenges which transcend the Middle East – with relevance for researchers across the globe.

From Tunisia to Jordan

Faced with the world’s highest youth unemployment levels at over 28 percent and the need to create 100 million jobs by the end of the decade, MENA economies must grow at least seven percent a year, according to IMF predictions. Considering the recent social and political unrest and the slow growth rate (around three percent, and in some countries as low as one or two percent) the challenge is colossal.

The centre’s scope is large from Tunisia in northwest Africa across Libya and Egypt to Jordan in the Levant; economies facing very diverse economic and social challenges.

“The types of investment which are going to enhance growth and job creation are very different as you go across the region,” Jafar says, noting the CEG’s initial task was to “delve down” beyond headline figures to conduct an infrastructure gap analysis, partnering with both local and global corporations and entities.

“We want to break through silos and get more concrete facts and figures to study, to help make recommendations for policy makers and companies’ across the region.

“Clearly having investment to drive economic growth from the top down is important but it’s also important to address some of the micro aspects in terms of firm productivity, education and the skills gap, so the bottom up approach is also important.”

An international advisory council of economists, academics and former policy-makers from around the globe will compare new research with models from developing economies in regions such as Latin America and the Far East.

“Academic input is crucial if timely solutions are to be found. The type of economic problems that we deal with today, around the world and in the region, are complex, large and fast-moving. You need a multi-stakeholder approach. Government alone can’t solve them; private sector alone can’t solve them; stronger links with the academic world and original research are definitely needed.”

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