The day before Davos

After weeks of preparation, I was delighted to finally arrive in Davos on Tuesday for the World Economic Forum Annual Meeting 2011. The Swiss mountain town was already busy with activity—delegates arriving from around the world, finishing touches being put on the new Congress Hall, and the international media ready to begin interviews.

While I find this all fascinating and exciting, one of my favorite parts of my yearly visit is the drive through the Swiss Alps to the town of Davos. I find the natural beauty in Switzerland stunning and a welcome reminder of the mountains and valleys of my childhood home in the western United States. Every year, I enjoy these few hours to take in the area’s breathtaking scenery before the start of a busy week at the Forum.

My first day was largely spent doing interviews with CNN, the Associated Press, and the Wall Street Journal. In line with this year’s meeting theme, many of the journalists were interested in discussing the new reality of a post-recession world. Richard Quest from CNN International asked me if the recovery that is underway will be sustainable. As I told Richard, I am cautiously optimistic that it is. Deloitte member firms are seeing clients look for help and assistance in managing today’s dynamic environment. Our network’s hiring numbers also are back to pre-crisis levels and we continue to invest in our people and our capabilities.

I enjoyed all of my day one activities in Davos. The interviews were engaging and I enjoyed the opportunity to catch up with the Deloitte team that supports our Forum activities every year. But most importantly, I am proud to once again represent Deloitte during the Annual Meeting. Some of the brightest minds in the world attend the gathering and it is a privilege to serve as Deloitte’s ambassador and to showcase our brand for the 2,500 delegates. I look forward to sharing more from Switzerland in the coming days.

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Jim Quigley is the Chief Executive Officer of Deloitte Touche Tohmatsu Limited (Deloitte). Prior to his current role, he was the CEO of Deloitte United States. Throughout his 36 years with the organization, Jim has held multiple leadership roles and is actively engaged in a number of international business organizations and committees, each working to help shape the policies for a successful and sustainable global economy.

For more on Jim’s perspectives on the 2011 World Economic Forum view his video message or follow him @deloitteceo.

View Jim’s interview with Richard Quest of CNN International

Deloitte’s latest look at the global economy

As editor of Deloitte Research’s quarterly Global Economic Outlook I often struggle to find new things to say about the economy other than updating the outlook. In this quarter, my colleagues and I have chosen to look a bit beyond the horizon. While many economists today focus on the short term transition out of crisis and into sustainable recovery, one cannot help but feel that a bigger and longer term transition is under way.

Of course, things have been changing for some time. For the past 30 years, the big emerging markets have gradually increased their share of the global pie following two centuries of relative decline. But now, the process of catching up appears to be accelerating, and with dramatic consequences. This is most noticeable in the aftermath of the global recession.  As developed markets struggle to recover, big emerging countries are racing ahead—not only boosting their own living standards, but stimulating growth in the rest of the world. With much more rapid growth than the developed world, these countries have become significant players in the global economy. For the first time, their policies are of critical importance to everyone else.  Moreover, as they grow, their middle classes are rising in importance and attracting the lion’s share of attention from many of the world’s biggest companies. For the developed economies, this means managing a process of relative decline.

Consequently, this quarter’s Outlook spends a good deal of time focused on the changing world of emerging nations. Interestingly, the challenges they face are quite different from those faced by the developed economies. In the U.S., Europe, and Japan, the biggest challenges are maintaining decent growth and reducing long-term fiscal deficits.  In the emerging economies, the challenge is to keep the economies from overheating and generating serious inflation. Hence governments are struggling with balancing the threat of inflation with the need to maintain competitiveness in the global economy. 

The emergence of the emerging nations is but one of the many new realities that global companies face.  Indeed, “new realities” is the theme of this year’s World Economic Forum meeting in Davos, Switzerland. In the latest issue of Deloitte Resarch’s quarterly Global Economic Outlook, Elisabeth Denison examines some of the new realities of the global economy and their implications for global business. She looks at the changing dynamics of East versus West, private sector versus public sector, energy demand versus sustainability, and youth versus aging among other topics.  The rest of the report focuses on specific geographies including the U.S., Europe, Japan, the BRIC nations, and a new outlook on sub-Saharan Africa.   

Today, readers of newspapers and viewers of television news are probably perplexed by the arguments about exchange rates, inflation, deficits, and the like. If you want a bit more clarity on these issues, as well as a point of view from people who do nothing but follow these issues, I suggest reading our latest Global Economic Outlook report.

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Dr. Ira Kalish is Director of Global Economics at Deloitte Research, Deloitte Services LP. He is an expert on global economic issues as well as the effects of economic, demographic and social trends on the global business environment. He has authored more than 150 articles and reports on economic and consumer trends around the world.

The Gender Dividend – Transforming business through the leadership of women

As we begin the second decade of the 21st Century, businesses need to make the most of their resources, especially those with a proven track record in boosting performance. That makes now the time for many more women to take on greater leadership roles, especially in the c-suite and boardroom.

As an accountant for the past 38 years, I have long believed that numbers tell a story. For many years, I have seen a steady stream of research whose numbers confirm the impressive contributions made by the relatively few women at the highest levels of leadership in business today. So it only makes sense that more women serving in these roles will lead to greater business performance and economic growth.

Catalyst, a nonprofit research and advisory organization focused primarily on the advancement of women, invited me to serve on its board a few years ago. I have long been acquainted with Catalyst’s research. Its research findings consistently confirm that those organizations with the most women as senior leaders enjoy rates of return that are greater—often by double-digits—than those with far fewer or no women in their leadership ranks.

That’s what the Gender Dividend is all about. Much like the dividends that public corporations pay to shareholders, the Gender Dividend is a steady benefit that is earned by making wise, balanced investments in developing women as workers and potential leaders, as well as understanding women as consumers and their impact on the economy and the bottom line. Done right, the Gender Dividend should be reflected in increased sales, expanded markets, and recruitment and retention of a key market segment—women.

It is not wishful thinking. As research has consistently proven, the Gender Dividend is a demonstrable fact. But when culture and custom conspire to keep businesses from achieving the greatest returns, investors should take note and vote with their feet. I believe that enlightened investors in search of the greatest returns will vote for those businesses that not only value diversity, but are smart enough to capitalize on it.

Beyond returns in the marketplace for talent and customers, the Gender Dividend can show a payback in the boardroom. As the chairman of Deloitte’s board, I speak often about the ABCs of corporate governance—attitude, behavior, and candor. When present and positive, they help create a boardroom environment that can set ideas into motion and enable people and organizations to move forward productively. Yet it is another element that follows the ABCs—the letter “D” for diverse people and diversity of thought—that enables businesses to enjoy strong governance and develop the best strategic decisions. The diversity of thought provided by women can bring different attitudes and behaviors to the boardroom, as well as fresh candor that can be inspired by a variety of perspectives. Diversity in the boardroom is powerful, and it works.

At the height of the recent recession, Catalyst produced a short video to address the business challenges of a desperate economy. Its voiceover concluded by telling executives that there is an “overlooked yet effective solution to help you make your numbers—and she may be seated right next to you.” I hope that documented research and an open mind will help people understand that such thinking makes perfectly good sense.

Economic growth is one of the quickest ways to unleash transformational change – and with more growth comes more possibilities. In two weeks, the World Economic Forum will convene once again with its mission to improve the state of the world. In the spirit of Davos, let me challenge you, your business, and your nation to intentionally invest in women as business leaders. The women that your investments will enable—as well as the greater returns from the Gender Dividend that it will create—can transform your business, spur your nation’s economy, and improve the state of our world.

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Sharon Allen is Chairman of the Board for Deloitte LLP where she leads the board in providing oversight and guidance to the management of the U.S. Firm and its subsidiaries. Frequently honored for her contributions to business and community leadership, Sharon was named to Forbes’ list of “The 100 Most Powerful Women in the World” for four consecutive years.

As used in this post, “Deloitte” means Deloitte LLP and its subsidiaries. Please see About Deloitte for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

The U.S. deficit - A moment of truth

Excessive deficits are an issue that has spread across the globe, and that will be a common topic at the World Economic Forum next week as well. Several G20 countries have had their debt already exceed 100% of their GDP—and we are already reading of the public and political issues that have occurred as a result. And in the United States, the problem is acute.

Some months ago, I had the good fortune of being appointed as one of the 18 members of the Bipartisan Policy Center Debt Reduction Task Force—referred to in the media as the Domenici/Rivlin Commission. This was one of two major deficit-related studies which were reported out late in 2010, the other being Simpson/Bowles.

Even with the 37 years I have spent in public policy and public administration while at Deloitte LLP, it was an extraordinarily eye-opening and, in some cases, troubling experience. Why? Because the U.S. deficit and cumulative debt have been rising at a level that is simply unsustainable. Based on our analysis, our U.S. debt will approach 100% of U.S. GDP by the end of this decade. And interest alone on that debt will likely exceed $1 trillion a year! Perhaps more disconcerting, we found that U.S. revenue will only be adequate to cover current Medicare obligations, current Social Security obligations, and interest in 2025.

Clearly action is required and there is not much time to waste. Why should this matter to corporate America? If Federal borrowing has to continue to rise, we will ultimately see the cost of borrowing increase as well, and with rising interest rates likely rising inflation. Addressing this issue over time will be important to both confidence in the dollar and the surety with which U.S. corporate leaders can make longer-term capital commitments.

The Commission considered several alternatives and ultimately proposed some specific recommendations. Of note, our task group reached unanimity on the recommendations. Also of note, were our plan fully implemented, savings to the Federal government would approach $29 trillion over the next 20 years. You may be interested in reviewing the final report, which is attached. And, again, this is obviously also a big global issue. For more insights on the global implications of the rising debt, please see the Deloitte Research report Red ink rising.

You certainly may ask what would lead me to believe that Congress would be inclined to do anything, even with a well-thought out plan in hand. That’s a very good question. One could certainly look at the 2010 election results and key platform positions of the winners to gain some confidence. It certainly is clear that most of the new members of Congress were elected in part based on their commitment to get Federal spending under control.

Regardless of one’s confidence—or lack thereof—we will soon have some hard evidence. The first real test is likely going to be when the current legislated Federal debt ceiling is reached this spring. That ceiling can only be raised by Congressional action, otherwise certain areas of the Federal government will shut down. It will be very interesting to see what program cuts and policy changes are negotiated in exchange for a commitment to support raising the debt ceiling.

It will be a fascinating issue to follow this spring!

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Bob Campbell, Deloitte LLP U.S. State Government Leader, has, throughout his 36-year career with the Deloitte U.S. firm, worked closely with government leaders to address and resolve critical policy, financing, and operational issues at all levels of government. He has worked extensively with leaders of major federal agencies and more than 40 states on projects touching nearly every area of government concern.

Exploring new forms of economic leverage

On the snowy streets of Davos this year, almost all conversations will touch upon, in one way or another, how our increasingly interconnected economy is irrevocably altering business models. And one characteristic of this change is in the manner in which companies create leverage for themselves.

We watch in disbelief as financial markets retreat and the investment banking industry morphs into something yet to be determined. We are witnessing the dark side of financial leverage. While “de-leveraging” has become the buzzword du jour, we may miss the real lessons of the current crisis and the real opportunities for leverage.

The lure and risks of financial leverage
Financial leverage is a powerful accelerant in growing markets. Companies can extend their reach far more rapidly by borrowing other people’s money. They can also generate much higher returns for the equity investors if companies have opportunities for profitable growth. This is especially true when companies operate in an environment with relatively low interest rates and significant growth in global liquidity, as we have had over the past decade or so.

At every level of our society—individual, firm, and government—financial leverage has proven very seductive. To give an idea of how seductive , the total amount of credit market debt in the U.S. in 1980 was about the same as our GDP; by 2007, it had increased to 350% of GDP.

But, as we are learning, financial leverage has a significant downside as well. And, while challenging enough at an individual company level, it becomes even more challenging in our highly connected global economy, as our current crisis illustrates. When many companies are highly leveraged, if one company runs into financial trouble, it can generate a domino effect as each company struggles to cover its debt obligations and puts pressure on the companies that have borrowed from it. This is the scramble to “de-leverage” that we are now witnessing. Cash is king and leverage, once worshipped as a god, now becomes the devil.

Why is perfect the enemy of better?

In a few weeks at the annual World Economic Forum meeting at Davos, the concept of disruption will crop up in a number of contexts. This is a notion that I’ve spent over 10 years working with.

In my forthcoming book, The Innovator’s Manifesto, and in presentations I made in New York on the topic early this year, I offered evidence that it is possible to improve our ability to predict which innovations will succeed and which will fail through the application of Disruption theory. Disruption does not enable perfect predictions—if it did, I’d keep the knowledge to myself and simply reap the rewards of its application! But it can make us better than we are now.

This might seem a shocking claim. “Predictability” and “innovation” are often portrayed as the oil and water of management practice. For many, it seems that the goal of accurately predicting what will work is at best quixotic and for some, almost offensive. Most people seem to believe that the defining elements of successful innovations are fundamentally idiosyncratic. Every circumstance is unique, how one deals with a given circumstance is ultimately bespoke, and success lies in the inscrutable and largely intuitive choices of each decision-maker. Since innovation means making a bet about the future, the data are never dispositive, and so well-informed, highly experienced executives can look at exactly the same opportunity and come to completely different conclusions.

This phlegmatic acceptance of diverse points of view is something that has become increasingly intolerable in other fields, such as medicine. Who would accept a course of treatment based on the untested prejudices of a single clinician over that implied by carefully compiled evidence of what works best? The good news is that we need not make that choice based on personal preferences. With the birth of the “evidence-based medicine” (EBM) paradigm over the last 20 years, generally accepted methods have emerged for determining what constitutes the best evidence in support of specific tests, diagnoses, and treatments, along with processes for translating those findings into clinical practice. The results have been nothing short of miraculous: dramatically improved results at dramatically lower costs.

A key element of EBM’s success that has driven these results, and has much to teach the practice of management, is the ability to act on the best available evidence even when that evidence is imperfect. In other words, even though the state of art will often not permit a definitive diagnosis and course of treatment, using the evidence that is available to make our decisions is better than not using it. By acting based on the best available evidence, ineffective treatments are weeded out and incremental improvements are possible. These quantum leaps forward cumulate rapidly to transform clinical outcomes.

This might seem obvious, but as I have had the chance to share my findings on Disruption’s predictive power with executives charged with deciding which innovations to back, their reactions are often puzzling to me. “Sure,” they observe, “Disruption increases predictive accuracy. But it’s not perfect. You can’t tell me for sure whether this project will succeed or fail. And until your theory can do that, I’m going to stick with what I know.” Since the likelihood of the sudden emergence of a fully formed theory of innovation with total predictive accuracy is unlikely, practitioners change their approaches, if they change them at all, in ways that are subject to all the usual biases (salience, confirmation, bandwagon effects, and so on), and so  improvement becomes impossible.

Why, I wonder, do some (not you, I’m sure, but perhaps people you might know) resist an approach that is demonstrably an improvement over current practice simply because it is imperfect? Why is “better” not good enough? After all, as the saying goes, “in the land of the blind, the one-eyed man is king.” And if the evidence supporting an allegedly better alternative seems lacking in some way, ask yourself this:  what is the nature of the evidence supporting the view you currently hold, and if you had to “zero-base” your current decision-making heuristics, would you end up with the same set of principles that guides your current choices?

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In his client projects, research, and books, Michael E. Raynor, Director, Deloitte Consulting LLP, explores the challenges of corporate strategy, innovation, and growth. He is the bestselling author of The Strategy Paradox , co-author of The Innovator’s Solution , and author of the forthcoming The Innovator’s Manifesto.

How women can help you beat the competition

Are you looking for your next growth area? What are your plans to beat your competition? Come to think of it, what business exactly are you in? If your answer to any of these questions isn’t talent, then you are running the risk of being left behind. Why? Because growth and competitive advantage will come from innovation and creativity in the 21st century.

As John Hagel III, co-founder of the Deloitte U.S. Center for the Edge, says, “companies must truly become talent-driven firms.” Yet most today are underutilizing, and often downright ignoring, half of their talent pool—their women. Or, put another way, investing in women—both as workers and as consumers—is one of the best levers for creating competitive advantage.

Let’s take women as workers—talented workers—first. Today’s economic realities—from the shrinking taxable workforce in many countries to the importance of critical-thinking, analytical, and decision-making skills in the digital economy—underlie why talent is becoming the most valuable resource for nations and businesses alike. And women not only make up roughly half of the workforce in most of the world, but they are graduating college at higher rates than men in many countries. The World Economic Forum’s 2010 Global Gender Gap Index shows that the educational attainment gap has almost disappeared. But that is not translating into women being retained, developed, and advanced in the workforce. In fact, those numbers are dismal. There has been no change in the percentage of women in senior management among the Fortune 500^® for almost a decade¹. In Europe, where women make up more than half of college graduates and 45 percent of the workforce, they are a measly 11 percent of corporate executives². These numbers mean that the pipeline to the top either leaks women—or that they are getting stuck.

Either way, it’s not good for the bottom line. Churn has a steep price: a conservative estimate of the cost of turnover for knowledge workers ranges is 200 percent of salary. But that may not be the biggest cost to your business. Evidence is mounting that gender diversity (and diversity in general) at the top delivers better business results.  Today, Fortune 500^® companies in the top quartile when it comes to women’s representation on their boards outperform those in the lowest quartile by at least 53 percent on return on equity³.  And in Europe, of 89 publicly traded companies with a market capitalization of over 150 million pounds, those with more women in senior management and board members had, on average, more than a 10 percent higher return on equity than those companies with the least percentage of women in leadership⁴.  Women bring their experiences, perspectives, and approaches to decision making, making it more robust.

But that’s not all—because the other half of creating competitive advantage is to understand the power of women as consumers. Women are not a niche group—they are the market. Already, women control roughly US$20 trillion of total consumer spending globally, and that number is predicted to rise to US$28 trillion by 2014⁵.  And women either make or influence up to 80 percent of buying decisions, on everything from appliances to cars and medical services⁶.  This is not a consumer segment that businesses can afford to ignore—and those with more women in management are in a stronger position to understand and market to this population.

The bottom line—and that is what this is all about—is that there is a Gender Dividend to be reaped by any company or country  that invests in women. But that doesn’t mean businesses are doing all they can to take advantage of it. For many, promoting women is still a “soft” issue—not a business imperative. They have not figured out the cold, hard fact that not capitalizing on women as workers and consumers is holding their businesses back. Which means that if you build your business case for the Gender Dividend, it just might help you beat the competition.

(This column is adapted from our new study The Gender Dividend: Making the business case for investing in women.

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Anne Weisberg is a Director of Talent, Deloitte Services LP, in the U.S. member firm and co-author of Mass Career Customization: Aligning the Workplace with Today’s Nontraditional Workforce.

1 - “2005 Catalyst Census of Women Board Directors of the Fortune 500 Shows 10-Year Trend of Slow Progress and Persistent Challenges,” Catalyst press release, 29 March 2006.

2 - “More women in senior positions: Key to economic stability and growth,” European Commission, January 2010

3 - Lois Joy, Ph.D., Director, Research, and Nancy M. Carter, Ph.D., Vice President, Research, at Catalyst Inc.; Harvey M. Wagner, Ph.D., and Sriram Narayanan, Ph.D., The Bottom Line: Corporate Performance and Women’s Representation on Corporate Boards (Catalyst, 2007)

4 - McKinsey, Women Matter

5 - Michael J. Silverstein and Kate Sayre, The Female Economy, Harvard Business Review, Sept. 2009, see also Sylvia Ann Hewlett, “Why Women are the Biggest Emerging Market,” Harvard Business Online (March 8, 2010)

6 - See e.g., The Economist, A Guide to Womenomics (April 12, 2006); Sandra Lawson and Douglas Gilman, The Power of the Purse: Global Equality and Middle Class Spending, (Goldman Sachs Global Research Institute, 2009)

Prelude to Davos

I have enjoyed the privilege of representing Deloitte at the World Economic Forum Annual Meeting for a number of years. I always look forward to this global event and the opportunity to interact with some of the brightest minds in the world. The 2009 and 2010 Annual Meetings were relatively subdued due to the economic challenges, but this year’s theme, "Shared Norms for a New Reality," sets an optimistic tone and should help frame constructive and positive discourse.

I believe that many leaders will come to Davos ready to discuss innovative strategies, policies, and perspectives for driving future growth. I am proud that delegates from the Deloitte organization will be participating in dialogues to address the new norms that are emerging in the wake of the downturn, including: accountability, responsibility, and sustainability. For me, every Davos discussion is compelling and deepens my understanding of the critical issues that our organization and our member firm clients face.

This year, the Forum’s organizers invited me to moderate a panel on The State of Manufacturing: A Global Update. As “an old manufacturing guy,” I am delighted to moderate this session on the state of the industry after the great recession. I also will be participating in Accounting for New Realities: Redesigning Corporate Reporting. KPMG Chairman Tim Flynn, PwC Chairman Dennis Nally, and E&Y Chairman and CEO James Turley also have been invited to take part in the discussion.

While I enjoy all of my Annual Meeting activities, the greatest highlight for me has always been the opportunity to connect with so many leaders from so many backgrounds in such a short period of time. When I think back on my years of participation at Davos, what I remember the most is time spent with Deloitte member firm clients—our unexpected hallway chats, our formal meetings, and engaging dinner discussions.

We also will be introducing a new book, As One: Individual Action, Collective Power, at the Forum. As One began from a conversation I had three years ago with Mehrdad Baghai about leadership. We both believed that many leaders are searching for a pragmatic approach to help them realize the full potential of their people—particularly at a time when economic, political, and social norms are changing. The book offers a pioneering new way to think about leadership and how to galvanize large groups of people to work productively towards a common purpose. I am proud to have the opportunity to share insights and information from As One during the Annual Meeting.

Every year the pace in Davos borders on frantic. But, I have found that with some planning and hard work, I can learn more and do more during my few days in Switzerland than in any other event. I look forward to my time at the Annual Meeting this year and invite you to return during the week of 24 January, when I will share my perspectives in blogs posted from Davos.

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Jim Quigley is the Chief Executive Officer of Deloitte Touche Tohmatsu Limited (Deloitte). Prior to his current role, he was the CEO of Deloitte United States. Throughout his 36 years with the organization, Jim has held multiple leadership roles and is actively engaged in a number of international business organizations and committees, each working to help shape the policies for a successful and sustainable global economy.

For more on Jim’s perspectives on the 2011 World Economic Forum view his video message or follow him @deloitteceo.

 

Further insights on Summer Davos CEO roundtable

As the China Managing Partner of Business Development and Public Affairs, I found the Deloitte and Talents magazine breakfast roundtable extremely insightful.  The following are my strongest impressions from listening to the open sharing of experiences by business leaders of many of Tianjin's top enterprises.

Although there is common acknowledgement that regulatory risk is the biggest current and medium term challenge, different industries face different specific risks.  That is why it is so important that our national industry practices and our enterprise risk management advisory specialists continue to work closely together to assist clients.

As we have seen in recent times, even the most established businesses are exposed to many risks that they have not been able to anticipate nor have solutions for. Executives with whom I chatted during the Roundtable expressed concern about there being so many unknown risks.  I shared with them the approach that Deloitte advises which is to control what you can and have a structured approach to do that. The top enterprises of Tianjin attending the Roundtable have strong growth potential to become major national enterprises in the near future, and to realize this potential they must prepare to operate in increasingly complex markets within and beyond China. This is a major step and calls on them to develop capabilities and obtain experience that they may not currently have. 

Also, in chatting with the executives, I learned that even though we had open and intense sharing during the one hour Roundtable, there were many more experiences and questions they wanted to discuss had there been more time to do so. This being the case, we will be following up with a number of participants to see how we can provide further information or ideas in response to these. 

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Jennifer Xie is a Managing Partner of Business Development & Public Affairs for Deloitte China.Jennifer leads initiatives related to key government relationships business development, brand and communications. Jennifer is also an executive member of the Marketplace Council at Deloitte China.

Insights from Summer Davos: CEO roundtable on emerging growth opportunities, and new operational risks

On Monday 13 September, during the World Economic Forum Summer Davos in Tianjin, China, Deloitte China and an influential business magazine, Talents, cooperatively organized a CEO workshop focusing on sustainability and operational and regulatory risk.

Some thirty CEOs, largely from Chinese enterprises, representing large and medium, state-owned and private companies attended the workshop. It was moderated by Ken, Fion Song, President of Talents magazine.
 
Deloitte framed the discussion with the following four broad issues:

•   The new government-business relationship
  
•   The dynamics of globalization
  
•   Innovation and new business models
  
•   Closing the loop on value networks

Within this context, the discussion focused on operational and regulatory risk driven by the new role of government in business and the dynamics of globalization.  Nearly all CEOs at the workshoprelated these matters to their domestic market and the changing role of the Chinese government. Less was said about globalization and the challenges related to expanding abroad and working with foreign governments. This was a little surprising given the ongoing encouragement by the Government for Chinese enterprises to increase their foreign investment. Clearly, the local yet fast growing and intensely competitive market remains a priority.

Highlights of the discussion are summarized below:

•  State-owned enterprise executives highlighted that top executives and boards of directors still must accommodate both commercial and policy goals and expressed the need for completion soonof the long-standing program to separate business from regulation. 
  
•  Central planning has both a positive and negative impact on business. If an enterprise enjoys consumer support in the marketplace and government support in the regulatory sphere, its business can grow explosively.  However, even very innovative business initiatives by entrepreneurs in sectors like telecommunications can be frustrated by either uncertainty or resistance in regulation, and that can make regulatory risk the biggest struggle for the CEO.
  
•  Due to the fast moving dynamics of the Chinese economy, Chinese enterprises are inclined to diversify as a way of managing operational risk. Typically, a municipally-focused investment enterprise might bridge property development, finance, and infrastructure in order to limit the risk of excessive exposure to one sector.
  
•  For many industries in China, e.g. the pharmaceutical industry, their current fragmented and regional nature creates an operational risk. It generates structural problems that make scaling and competing difficult, underscoring the need for accelerated consolidation and structural reform in supply chains and transactions.
  
•  The dynamics of globalization both enable and require more complex value networks and interdependencies, offering greater revenue growth opportunities than ever before.   Along with this, however, come greater and more complex risks. For example, with more participants in the value network, operational spills may occur anywhere and their impact on brand owners and retailers is unavoidable, in particular where consumers come in contact with an industry's products and services.

Discussants also consistently stressed the difference between "uncertain factors" and "certain factors" in enterprise risk management, and the escalation of operational risks whenever the direction of government policy and investment itself is considered to be an uncertain factor.

What the discussion demonstrated was the complexity of issues impacting Chinese businesses and the related operational risks they present. Globalization and the interconnectivity of markets compound this. There is a lot for business to consider.

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Dr. Ken DeWoskin is Director of the Research and Insight Centre, Deloitte China, and serves as a senior advisor to Deloitte China. Dr. DeWoskin has been involved with China for over 46 years and has lived and worked extensively in both China and in Japan.