1、1Modern Capitalism as the Solution to the Financial Crisis:The Caux Round Table ApproachStephen B.YoungGlobal Executive DirectorThe Caux Round TableBelgrade,December 200823Financial meltdowns are a systematicDysfunction of capitalism Tulip mania 1620 Mississippi company France1719/1720 South Sea Com
2、pany London 1711/1720 Wall Street 1929 Junk bonds 1980s Ds/telecom 1990s Sub-prime mortgages/CDOs4 Men,it has been well said,think in herds;it will be seen that they go mad in herds,while they only recover their senses slowly,and one by one!Charles Mackay “Irrational Exuberance”Alan Greenspan5 Charl
3、es MacKay,Extraordinary Popular Delusions and the Madness of Crowds,with a foreword by Andrew Tobias(1841;New York:Harmony Books,1980).Mike Dash,Tulipomania:The Story of the Worlds Most Coveted Flower and the Extraordinary Passions It Aroused(1999)Peter M.Garber,Famous First Bubbles:The Fundamentals
4、 of Early Manias(Cambridge,MA:MIT Press,2000).Charles Kindleberger,Manias,Panics,and Crashes:A History of Financial Crises(Wiley,2005,5th edition)6What Causes a Financial Crisis?Mis-pricing of risk Increases in real risk are not captured in nominal market prices Asset prices become irrational Valuat
5、ion becomes unrealistic7Present value reflects the risk of actually receiving future incomeCapital value is a function of income!Misjudgments about future income distort present capital values8In financial bubbles,mis-pricing is sustained by infusions of debtHigher and higher asset values are suppor
6、ted by borrowed fundsExcess liquidity based on future promises to pay transforms investment into speculation;a trading mentality takes over the markets;prudence loses out to greed;illusion trumps reality for a time9 Of all the offspring of Time,Error is the most ancient,and is so old and familiar an
7、 acquaintance,that Truth,when discovered,comes upon most of us like an intruder,and meets the intruders welcome.10Dynamics of the Current Crisis Sub-prime mortgage loans made,more and more against future resale value of the home,not against real income Mortgage loans packaged and sold to global capi
8、tal markets Collateral Debt Obligations(CDOs)issued to finance purchases of packages of sub-prime mortgages and to invest in hedge funds Credit Default Swaps invented to give added value to CDOs Debt upon debt upon debt Low interest rate environment Incentive structure driven by fees not investment
9、in long term returns11Current Crisis is Global AIG Fortis Iceland EU guarantees bank deposits UK takes over two banks Equity markets in Asia tank Price of Oil drops by 50%Real economies lose employment and consumer demand12 When financial markets implode,capitalism loses liquidity,exchanges of goods
10、 and services fall,output is reduced,employment is cut Debt must be taken out of the financial system Asset values have to be reset at lower levels Asset owners loose wealth13 World Economic Order has inadequate mechanisms to prevent financial crises WTO IMF World Bank G8 OECD Bank for International
11、 Settlements14 Central Banks must step up and inject liquidity into the global system of financial intermediation Government budgets must inject new capital in financial institutions Bankruptcies must eliminate amounts of liquidity both equity and debt Bear Sterns-$80 to$2-Lehman Brothers-liquidated
12、15What is the fair value of an investment in business?Quality Income Stream High net present discounted value Good capitalization multiplier Good Corporate Value (Warren Buffet would buy it)16Today where does most corporate value come from?Intangible Assets!1750 Best Performers of 2005Business WeekB
13、urlington Northern Santa Fe:Market value:$29.2 billionBalance sheet assets:103%of market value($30.3 billion)Goodwill:NoneCaterpillar:Market value:$49 billionBalance sheet assets:95.9%Goodwill:4.1%United Health Group:Market value:$79 billionBalance sheet assets:52%Goodwill:48%Apple:Market value:$58
14、billionBalance sheet assets:19.8%Goodwill:80.2%1850 Best Performers of 2005Business WeekMicrosoft:Market value:$279 billionBalance sheet assets:33.7%Goodwill:66.3%Best Buy:Market value:$26.3 billionBalance sheet assets:39%Goodwill:61%Starbucks:Market value:$27.8 billionBalance sheet assets:12%Goodwi
15、ll:88%Goldman Sachs:Market value:$61.7 billionBalance sheet assets:1.1%Goodwill:98.9%19What is the Most Common Form of Intangible Wealth?Government Issued Fiat MoneyIts value is to be used as legal tenderWhat is a Dollar worth today?A dollar bill has no tangible worth;what is the value of ink on pap
16、er?Its value lies in the mind of whoever will take it.20What is Another Very Desirable Common Form of Intangible Wealth?Stocks and BondsWho Determines their Values?21Financial Meltdown of 2008Bear Stearns:on Friday,$80 per share book value;on Sunday sold for$2 per shareLehman Brothers:Billions in ba
17、lance sheet assets;liquidated as no one wanted to buy them on a going concern basis22What is a company worth?How to we measure its value?Most simple calculation:Discounted net present value of future income X capitalization multiplier23First Fundamental ConclusionYou cannot establish value withoutpu
18、tting risk into the calculation What is the risk of not achieving predicted future revenue?How certain are estimates of future income?What are the risk factors that determine the capitalization multiplier?A higher risk demands a lower multiplierHigher risk more uncertainty lower present value24Note:
19、Each source of risk drives business value up or down25Second Fundamental ConclusionManagement of Risk Enhances Enterprise Value-Risk management leads to more certain income-Risk reduction leads to higher valuation26How do you manage risk?-Each risk hides in a relationship -customers -investors -gove
20、rnment regulation -employees-Each relationship is an intangible asset of the business(Assets can Appreciate or Depreciate).-Lowering risk for each relationship enhances the quality of intangible assets and increases business valuation27CSR&ValuationIntangible Assets=CSR Stakeholder Relationships Cus
21、tomers Employees Owners/Investors Suppliers Competition Strategies Community Support28Tangible ValuesIntangible ValuesFinancial CapitalTangible Assets(Generally Audited Financial Information)(Generally Non-audited,Non-financial Information)Intellectual propertyUnallocated goodwillLabor environmentBr
22、and loyaltySustainabilityQuality of employeesCommunity support29Growing Importance of Intangible WealthChange in US Employment:Dec 2007-Nov 2008tangible sector(manufacturing,construction,natural resources,real estate,wholesale and retail,transportation and warehousing)-1,791,000 jobsintangible secto
23、r(education,health care,computer system design,finance and insurance,scientific research,etc.)+515,000 jobsall other services-635,000 jobs 30To improve company valuation,Improve CSR relationships!Good CSR Relationships Lead to The Sustainable Corporation31How to measure CSR RelationshipsUse CRT Arct
24、urusRisk Assessment Instrument New metrics for enhanced profitability32How to Manage for Sustainable Value?CRT Theory of the Firm Arcturus33INPUTS$;sustainable profits;low beta;maximum value Reputational capital Social capital Finance capital Physical capital Human capital Conversion processes OUTPU
25、T Goods/services Customers Return on Capital(preserve adequacy of capital inputs)Theory of the Moral Firm(self interest considered upon the whole)34Capital AccountsCapital Accounts are your defense against risk and your resource base for competitive initiativesFinance CapitalPhysical CapitalHuman Ca
26、pitalReputation CapitalSocial Capital35FINANCE CAPITALTraditional capital account stock of ready money and amount of sunk cash investments36PHYSICAL CAPITALTraditional capital account Plant and equipment Tools of the trade Sub account really of financial capital as purchased with monies raised in th
27、e past37HUMAN CAPITALNon-traditional capital account-intangible asset-vital for success in services and high tech businesses-takes care of customer needs and demands38REPUTATION CAPITAL(brand equity;goodwill)-needed for quality income-needed to get low cost of capital and the best employees-gets you
28、 through rough times-avoids commodity pricing/builds value added39SOCIAL CAPITALInternal:-culture-leadership-strategyExternal:-rule of law/no corruption-education-public health-public goods:market regulation,transportation,etc.40 Inter-relationships among capital accountsSocial Capital+Reputation Ca
29、pital+Human Capital Finance Capital+Physical Capital41Stakeholders:-Customers moral compass for capitalism-Employees moral agents,not parts for a machine-Owners and Investors fiduciary duties of loyalty and due care-Suppliers friends,not foes-Competitors compete with quality and innovation,not price
30、-Communities enhance social capital to enhance future profitability 42Stakeholders and Capital AccountsInternal Social Capital=owners/employees/suppliers/competitive strategyExternal Social Capital=CommunityReputation Capital=customers/employees/owners/suppliers/communityHuman Capital=employees43Tak
31、ing Due Care of StakeholdersEnhances Capital Accounts;Undermining Stakeholders Puts Capital Accounts at Risk44How Can you Measure and,therefore,Manage Stakeholder RelationshipsAnd all a companysCapital Accounts?45ASK QUESTIONS!Assess the Quality of yourrelationships46Category1.Fundamental Duties2.Cu
32、stomers3.Employees4.Owners/Investors5.Suppliers/Partners6.Competitors7.Communities1.Responsi-bilities of BusinessCriterion1.1Criterion1.2Criterion1.3Criterion1.4Criterion1.5Criterion1.6Criterion1.72.Economic and Social Impact of BusinessCriterion2.1Criterion2.2Criterion2.3Criterion2.4Criterion2.5Cri
33、terion2.6Criterion2.73.Business BehaviorCriterion3.1Criterion3.2Criterion3.3Criterion3.4Criterion3.5Criterion3.6Criterion3.74.Respect for RulesCriterion4.1Criterion4.2Criterion4.3Criterion4.4Criterion4.5Criterion4.6Criterion4.75.Support for Multi-lateral TradeCriterion5.1Criterion5.2Criterion5.3Crit
34、erion5.4Criterion5.5Criterion5.6Criterion5.76.Respect for the EnvironmentCriterion6.1Criterion6.2Criterion6.3Criterion6.4Criterion6.5Criterion6.6Criterion6.77.Avoidance of Illicit OperationsCriterion7.1Criterion7.2Criterion7.3Criterion7.4Criterion7.5Criterion7.6Criterion7.7 Arcturus Risk Assessment
35、Instrument Criteria Matrix47Assessment Framework Criterion/Benchmark ExampleCUSTOMERS(Section B)1B-Beyond Shareholders towards Stakeholders-CustomersDoes the company provide its customers with quality products and services at reasonable prices,and on fair terms,while protecting their health and safe
36、ty and their physical environment,and respecting their culture and individual dignity?POINTS TO CONSIDER The company seeks customer feedback on its practices,monitors impacts,and is prepared to modify production or service as a result,plus provides relevant training of staff.Point(s):Please circle12
37、34567Please write down any concerns,explanations or additional comments on how or how not,the company is performing._2B-Economic&Social Impact of Business -CustomersDo the companys products and services contribute to the economic and social advancement of its customers and to the well-being of their
38、 communities?POINTS TO CONSIDER Quality of product/service development;product quality and safety;adherence to relevant customer,safety and environmental codes;products/services positively impact living standards?Point(s):Please circle1234567Please write down any concerns,explanations or additional
39、comments on how or how not,the company is performing._48The Corporate Improvement CyclePerformance ImprovementPerformance Feedback to ManagementManagement ActionCRT Assessment49Who Participates?Board of directors CEO Senior management Division heads and group managers Unit managers Employees50Sample
40、 Gap Analysis between Managements and Employees(Provided by CRT-Japan)A.Fundamental Duties B.CustomersC.Employees D.Owners/Investors E.Suppliers/Partners F.Competitors G.Community Performance by Principle1.Responsibilities of Businesses 6.5/5.26.3/5.16.0/4.86.8/5.25.9/4.96.1/4.86.4/5.444.0/35.42.Eco
41、nomic/Social Impact of Business6.0/5.35.6/4.76.7/4.54.9/4.44.9/4.46.6/4.65.1/5.239.8/33.13.Business Behavior 6.4/5.05.8/5.05.8/4.26.2/5.05.0/4.55.5/4.65.2/4.539.9/32.84.Respect for Rules 5.9/5.36.8/5.96.5/5.66.5/5.76.1/5.66.2/5.66.9/5.244.9/38.95.Support for Multilateral Trade6.9/5.26.3/5.06.5/5.26.
42、2/5.26.0/4.86.4/4.47.2/5.045.5/34.86.Respect for Environment 7.0/6.66.0/5.35.7/4.46.3/5.65.2/4.24.4/4.44.7/4.039.3/34.57.Avoidance of Illicit Operations 6.7/5.86.5/5.86.8/6.56.3/5.46.5/5.26.0/5.25.9/5.744.7/39.6Performance by Stakeholder45.4/38.443.3/36.844.0/35.243.2/36.539.6/33.641.2/33.641.4/35.0
43、298.1/249.151Sample Radar Chart(Provide by CRT-Japan)Vision not yet fully embedded across the company.No integrated local community development program across different countries.Company internal communication is poor on the issue of environment.Customers trust is weak.Communication with suppliers/p
44、artners is poor.High level of compliance,risk management and internal audit have been achieved.52How Do Companies Create Value?-The Good-The Bad-The Ugly53The Good(Moral Capitalism)Risk Assessment/continuous Risk Reduction Optimize Stakeholder Benefits 54The Bad(Brute Capitalism,Crony Capitalism)Fee
45、d Shareholders,Abuse Stakeholders Commodity pricing/compete on pricing/low costs Rent seeking(market power)Take the money and run:short termism Unsustainable Valuations-Eventual Failure55The Ugly(Punting on the trading floor)No net wealth creation;speculation in trading (Rob Peter to pay Paul)Irrational Exuberance (Market traders/short termism)False Valuations (Enron:Ponzi Scheme;sub prime mortgages,CDOs,CDSs)Encourage unsustainable pricing of securities(CDOs,CDSs)INEVITABLE FINANCIAL MELTDOWN56Thank You
