Moving Forward

JAN-FEB 2016|BY GEORGE SERAFEIM, HARVARD BUSINESS SCHOOL
Commerce, the synthesis of entrepreneurship and business, has been one of the most powerful institutions the world has ever seen. Commerce unlocks the highest human potential for creativity, innovation and discovery.

We have seen enormous benefits from unleashing this human potential worldwide. We now have standards of living that would be unthinkable even 50 years ago. Life expectancy keeps increasing, we are making tremendous breakthroughs in medicine, telecommunications, transportation, energy generation and many other sectors.

We have seen that where commerce and entrepreneurship have flourished so have local communities, and the broader societies in which commercial activity takes place. Exceptions can be found to this principle and in some cases we find a divergence between private and societal interests. We see increasing levels of social inequality across almost all countries and a worsening climate crisis. We need to deal with those problems and the good news is that an increasing number of private sector leaders, CEOs as well as big institutional investors, are committing capital to solve such problems.

But let me come back to the basic point that commerce and entrepreneurship have undeniably been at the center of the exceptional economic and societal growth we have experienced in the past 100 years. Where property rights are well protected, foreign direct investments are higher. Where tax systems are stable, foreign direct investments are higher. Where the venture capital industry and other sources of financing have flourished, the number of new companies with exporting capacity has increased.

Greece—The Past

The problems of Greece are not new. They were there well before the financial crisis. They were just hidden due to the ability to borrow money at very low interest rates and a growing global economy. Taking a look at the data one can see that Greece was at the bottom or close to the bottom across all Eurozone countries before the crisis in two key metrics, percentage of foreign direct investment as a percentage of GDP and percentage of company sales that are sold outside the home country. No foreign investments and no exports mean imminent death. But these are the outcomes of other pathogeneses such as the ones articulated above, poor protection of property rights, unstable tax systems, and limited access to financing. Let me just mention that after years of reforms these three areas are still not reformed.

Greece now holds a record: the country with the longest recession among all countries in modern history. I know only of Tajikistan and Liberia as examples of countries with longer recessions but I am sure we do not aspire to benchmark our economy against theirs, as the data would suggest. We can do better. Actually I believe much better.

Greece—The Potential

Greece is what I call the classic case of a turnaround. In business language, it has great assets. A skilled, English speaking labor force, situated strategically and enabling transport of goods and services, with a rich history and culture that would naturally give us good branding and a competitive advantage in sectors such as tourism. Unfortunately it is also the prototype, again in business terms, of a badly managed economy. Poor information sharing structures, absence of proper cost accounting and transfer pricing systems, outdated capital budgeting techniques and, perhaps most importantly, anachronistic accounting practices and the absence of even basic financial statements.

The production of financial statements will have a tremendous effect on the economy. The balance sheet will show that the present value of Greek government net debt is just a fraction of the future face value that is being reported, showcasing that the true level of indebtedness of the country is much lower than other EU programme countries (i.e. Portugal, Spain, Ireland). 2-year Greek government bonds yields are still higher than 7%, when yields on Portuguese bonds are close to 0%. There is no chance the Greek economy will recover if that gap does not close. The current yields are suffocating the Greek economy, limiting access to finance for nonfinancial corporations, financial institutions and ultimately households, and depressing real estate prices. Educating the world that Greece is not a bankrupt nation but actually has much lower debt level than previously advocated will be the first step at closing the gap.

Production of financial statements will also increase transparency and help in the fight against corruption. Moreover, it will promote good management, consistent with the well-known quote “what gets measured gets managed.” But let me highlight that the most significant antidote to the deleterious effect of corruption is entrepreneurship. When people feel that meritocracy is the key to success rather than nepotism then they will spend time improving themselves rather than gaming the system. When new entrepreneurs disrupt existing businesses social mobility increases. This creates a recycling of power in society and mitigates corruption and cozy relations between business and government. Entrepreneurship then is the key to winning the fight against corruption.

Greece—The Future (and You)

I remain optimistic about Greece. Because I know that there is a solution. The question is one of implementation. My sense is that we need to rebuild trust and confidence among us before restoring trust with the rest of the world. In my opinion business leaders have an important role to play here—to educate, to invest, to show the path forward, to find solutions, to collaborate, to show leadership. They are already doing so globally in investing in renewable energy to fight climate change, to increasing the minimum wage to reduce social inequality, to leveraging technology to deliver healthcare in underprivileged areas of the world. Just look at what companies such as Novo Nordisk, Unilever, Dow, General Electric, BMW, and Aetna are doing.

I would like to leave you with a question: Can we always wait for the government to act, even when the underlying problem seems so big and intractable? Is the time now for personal responsibility and accountability?

No Responses to «Moving Forward»