Month: September 2015

The Value of Trust: Operating for Success

The Value of Trust: Operating for Success

The Value of Trust: Operating for Success

In business and life, we grow to expect certain things. Namely, our society expects companies to produce products that are safe and reliable. We go to Yelp and rail against restaurants that do not meet our expectation for service. However, large firms, when caught red-handed often have gotten by with a mere slap on the hand. When we see a firm misbehave or use a controversial advertisement, we see boycotts initiated and apologies extracted. What about more severe damages? How a firm operates is important in its success and in forming trust with its customers.

In the last few weeks, we have seen a couple of major developments in how firms have cheated and thus lost trust. Stewart Parnell, the former CEO of Peanut Corporation of America, was sentenced to 28 years in prison for knowingly selling and distributing peanut products containing salmonella. At least nine people are known to have died from these contaminated peanut products. It is a striking case, because we now have the science to keep food safe. We now have the science to find what has killed us and identify the source of that contamination. Yet, a firm and its executives decided to operate in a reckless manner. It is the first severe penalty levied on a food company for selling contaminated food. In the trial, former employees of the Peanut Corporation of America testified that the CEO and firm prioritized profits over safe operating conditions. Of course, the tragic deaths cannot be reversed with prison time or fines. The damage to the Peanut Corporation of America was self-inflicted. No competitor or market force did that to them. No surprise in the capital markets or fear of peanuts by consumers brought them harm. When firms cheat and do harm, they ultimately hurt themselves. This fraud is of course a major risk to shareholders, customers, markets, and, in this case, the health of people.

The recent EPA disclosures about how Volkswagen has more or less gamed its diesel engine systems to perform well on emissions tests (and only during tests) showcases yet another case of internal fraud. Attorneys General across the US are already calling for billions in damages from Volkswagen. The firm created an image for “clean diesel,” sold it to well-educated and wealthy Americans, who wanted an environmentally palatable vehicle, and they profited handsomely from it. Now the lies have been revealed. The fraud, again, is internal and self-inflected. No competitor, regulator, customer, or market force made Volkswagen do this. It is risk that now will harm shareholders, customers, the German economy, and the environment. And, let’s not forget about Toyota and its accelerator, GM and its ignition switches, and well… the list goes on and on. We lose trust in firms because of the harm they cause and because that is the result of internal risk taking and decision-making gone awry.

These two recent cases are largely about internal fraud. It is clear that the firms knew about their misdeeds and elected to operate in a reckless and harmful manner. We often think of internal fraud as a banker walking out of the vault with gold bars. Such fraud is far less likely to occur than that of an executive taking undue risk against the firm to meet short-term goals. With average CEO tenures on the order of 5 years, the pressure to preform is high and the window of opportunity is short. The threat of internal fraud is a risk that all firms must address.

The management of such risk falls under Operational Risk Management. Operational Risk and self-inflicted damages are the cause of the greatest reputational harm. Nobody forced BP, GM, Volkswagen, Toyota, or the Peanut Corporation of America to do what they did. Their executives elected to take risks (and dangerous ones). Trust requires operating successfully over many transactions and creating value for customers. Once that trust and reputation are damaged, the firm must work to change not only its image, but also its operation. The process to managing Operational Risk requires a treatment that addresses the organization, its culture, its management, and leadership. We will explore all of these topics in the upcoming course Operational Risk Master Class: Measurement, Management, and Leadership.

Join us!

About Russell Walker, Ph.D.

Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University. His most recent book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

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He  has advised many leading institutions on Operational and Reputational Risk Management, including: The World Bank, SEC, Genworth, Capital One Financial, Discover Financial, PNC, The Bank of England, and the US State Department, among others.

You can find him at @RussWalker1492 and russellwalkerphd.com

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The World in 2050: Rapid Changes Ahead

The World in 2050: Rapid Changes Ahead

The World in 2050: Rapid Changes Ahead

Last week, I picked up a copy of the Wall Street Journal and was saddened and troubled to see the picture of a baby Syrian boy’s body being recovered from the sea. It was all the more ironic that I was preparing to give a talk on the World in 2050. It made me think that we are on the cusp of many rapid and dramatic changes. By 2050, we will have some 9.6 billion people on the planet, up from our current population of some 7.3 billion.[1] A big change facing the human race is the massive demographic shift that we will see in accordance with this population growth. Not all populations are growing equally. The sad events in Syria and elsewhere are part of this big shift. The world will have a super abundance of people in some places and a rapidly aging population in other places. As far as we can tell, the size, speed, and dramatic nature of the changes to our population are unprecedented in human history and will pose both challenges and opportunities.

India will Surpass China in Population (and Growth?)

We have grown comfortable with China being the population and economic growth engine for the world. Need another factory? China has been able to add manufacturing capacity in a low cost manner and find new workers to operate the factories. Due to the one-child policy and now the movement of many Chinese to urban areas, which typically results in the downsizing of family size, China will have a smaller and older population by 2050 (1.30 billion) than it does today (1.37 billion in 2015). It is somewhat hard to accept that China will soon be shrinking. The challenge here is that economically speaking, much of China’s growth has come from its ability to generate a labor supply and customer demand to fuel global markets. With concerns about China not meeting economic growth targets today and some 45% of the population already urbanized, one is forced to wonder if this slowing growth is a permanent change for the future and an earlier start to the inevitable slowdown than anticipated.

This brings us to India, which will be by 2050 become the most populous nation in the history of the world with over 1.66 billion people, up from its current population of some 1.25 billion. India will add more people to its population in the next 35 years than we have in the U.S. today! India still has a great deal of growth potential with only some 30% of its population living in urban areas. India’s growth will require access to more and new food supplies and a low-cost supply of energy. The opening of Iran and the access of other large energy finds in recent decades are all positive factors to support the economic growth of India. There is a strong intellectual base and educational system in India. Conditions for economic hyper growth are very positive.

Africa will Surprise Us

The largest boom in population growth will come from West Africa. Nigeria, which has a landmass about the size of Texas, will grow from its current population of 180 million to about 400 million in 2050.

It will more than double its population in a landmass that is already feeling crowded. The following population pyramid growth for Nigeria shows that Nigeria will remain a growing population through the next century, too.[2]

Most forecasts suggest that Nigeria will about equal the U.S. in population by 2050. Some project even faster population growth for Nigeria such that Nigeria will top the U.S. by 2040. This growth in Nigeria will be similarly matched by other countries in West Africa, leading many industries to examine Africa as a source for talent, customer demand, and indeed overall growth!

The U.S. will become more Hispanic

The U.S., like most developed countries, is aging. We are all familiar with the Baby Boomer population. However, the delay in marriage, lower rate in the formation of families and the reduction of family sizes are new normals for millennials. The net is that America will see an aging population, but immigration and the higher birthrate of immigrants in the U.S. will have U.S. population grow from today’s level of approximately 325 million to some 395 million by 2050. It is a respectable growth, which will come almost entirely from the Hispanic population. The Pew Research Center estimates that 82% of the U.S. population growth will come from Hispanics and that by 2050, the Hispanic population will grow from a current 17% to nearly 30%.

Foreign-born Americans will make up nearly 20% of the population by 2050, up from today’s 12% (although these number are clearly hard to confirm owing to undocumented residents). The Asian population, which is now about 5%, will double to 10% by 2050; the African-American population will remain at about 13%, and Caucasians are expected to comprise less than 47% of the population by 2050, showing a dramatic decline.[3] As you can see from the above population pyramid for the US, we will have an abundance of older people and fewer young people, suggesting that population growth will slow into the next century in the absence of greater immigration. Of course, immigration pressure will exists for the US, suggesting an even richer ethnic composition after 2050!

The World Will Need More Women

The population explosion that is occurring in India comes with an unfortunate and troubling imbalance. Owing to cultural preferences and gender-specific infanticide, India produces more boys than girls, and this is a growing problem. This cultural preference has been at work for many decades now and the population imbalance of women is irreversible. Consider the population pyramids for India and China, showing this grave imbalance.

The United Nations predicts that in Asia, there will be some 80 million to 100 million men with no prospect of forming a family by 2050. We should expect that the imbalance will be concentrated in the poorest strata of society. As families form, the poorest women will have mobility upward and the poorest men will have the hardest time in having families. This will be a social challenge that will bring changes to the concept of families, communities, marriage, and happiness in many of the poorest parts of Asia. The world has not seen this level of imbalance before and how it will be resolved is a new challenge.

Some Thoughts and Observations on Growth

For companies and investors looking for growth in the world, I offer a few major trends. The world will have massive expansion in the warmest climates. Warm climates demand air conditioning, refrigeration, and such comforts go a long way in changing the satisfaction of the population. With rare exception do people ever give up such comfort. Also, the growth of these populations (especially in India) will correspond to higher per capita GDP. As people move out of the depths of poverty and into the so-called “global middle class” they adopt a richer diet that is based more on animal protein. This will require more soybean production for the raising of animals and put new pressures on sustainable animal husbandry as meat consumes not just soy beans, but large amounts of water and energy. These people will need transportation and communications. The development of low cost automobiles and the expansion of mopeds will bring these growing populations access to combustible engines and the continued environmental challenges posed by them. On the flip side, the U.S., Europe, and Japan will need solutions for an aging population. Obviously healthcare is a focus. But these aging populations will consume services. Some of this can be met by immigration, but automation and even robots will, and already are answering the call.

It is clear from the Syrian crisis that millions people will need to move across borders in pursuit of peace and prosperity. This movement will continue to be amplified in the coming decades. Arguably, we are just seeing the beginning. Businesses and governments will need to change how they connect supply and demand globally. Workers are not just contributors but are also customers. Growth will come from matching supply and demand and bring peace and prosperity to the millions (actually billions) of people who are looking to improve their lives.

About Russell Walker, Ph.D.

Dr. Walker is Clinical Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University.

Professor Walker has developed and taught executive programs on Enterprise Risk, Operational Risk, Corporate Governance, Analytics and Big Data, and Global Leadership. He founded and teaches the Analytical Consulting Lab, Risk Lab, Global Lab, and Digital Lab – all very popular experiential learning classes at the Kellogg School of Management, which bring Kellogg MBA students together with corporate opportunities focused on data and strategy. He also teaches courses in risk management, analytics, and on strategies in globalization.

His most recent book From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data. He is the author of the book Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.

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He has also authored many business cases and published multiple Kellogg case studies through Harvard Business School Publishing. His cases have been highlighted by the Harvard Business School Publishing, the Aspen Institute, PRMIA, and the Bank of England for excellence in teaching risk management.

He serves on the Scientific and Technical Council for the Menus of Change, an initiative led by the Harvard School of Public Health and the Culinary Institute of America, to develop healthier and more environmentally friendly food choices. He was formerly on the board of the Education and Technology Committee to the Morton Arboretum. He was a board member of the Virginia Hispanic Chamber of Commerce, where he developed support programs for Hispanic entrepreneurs and worked with US senators on US Latino matters.

He is at @RussWalker1492 and russellwalkerphd.com.

[1] United Nations Population Projections, 2012.

[2] Population pyramid graphics are from the International Data Base, made available by the US Census Bureau.

[3] http://www.pewhispanic.org/2008/02/11/us-population-projections-2005-2050/