Do Business Schools Graduate Business Leaders Who Disregard America as A Stakeholder?

In a recent Linkedin group discussion, a business school graduate questioned whether we should be discussing the politics of business on the  site; rather should we be using the group discussion for issues only regarding business development and networking.  I responded that global issues of jobs are the pivotal issues we should be discussing.  My response is below.

In March 1989, a federal grand jury indicted one our most infamous Wharton alumni, Michael Milken, on 98 counts of racketeering and fraud.  In 1993, after being released from prison for serving time on six counts securities and tax violations and paying $1.1 billion to those he abused, Mr. Milken founded the Prostate Cancer Foundation and then Faster Cures, making a difference in medical research processes.   Fortune magazine called him “The Man Who Changed Medicine” in a 2004 cover story on his philanthropy.

Mr. Milken had a second chance to atone for classic Wall Street greed that erupted into criminal activity.  Yet, had he not spent time in prison for his misdeeds, would his unethical financial manipulations been acceptable by Wall Street standards?  Many in America judged him as the poster child for the problems with business schools; that schools like Wharton send guys like him to Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs without adequately preparing them to deal with the ethics of business. 

My class certainly touched on the ethics issue, going as far as to review “Den of Thieves”, an eye opener account of how a few brilliant business school graduates harmed America.  While we all gained from courses that increased insights into ethical choices and their global effects on business, if the objective of these courses was to inspire the next generation of Wall Streeters to rise above recent activity that will be recorded by history as “Milken crack steroids”, they did not succeed.

I appreciate mutually beneficial Linkedin connections.  However, at this historic fulcrum, when our childrens’ future are being defined by  our nation’s business leaders, I have acted on a purpose beyond my personal business goals by starting a blog, www.jobvoucherplan.com  to advocate for the unemployed in America.  As I write, I sense Wharton grads’ responsibility to help set our country’s path.

Milton Friedman, avowed defender of free markets, said that “the business of business is business”.  Our grads, armed with his quotes have been enlisted by investment banks and multinational corporations to transfer capital and jobs offshore.  Brandishing his philosophy, our grads chide protectionists stating that America must out innovate others to advance our country.  They then use the shield of American property laws to transfer American innovations to offshore subsidiaries, favoring international shareholders without regard for America as a corporate stakeholder.

Michael Porter is now publicly modifying Freidman’s concept with corporate social responsibility, including countries as stakeholders.  Recognizing a stark difference in this business theory from Freidman’s, I am raising issues of corporate responsibility regarding country of origin, increased national security definitions of American innovation, reevaluation of property laws regarding intellectual capital, and defining corporations as U.S. citizens with citizen rights, but equally as important, with citizen responsibilities.

Assuming that the Wharton Alumni group is specifically for professional development, networking and career/business building, if discussing these topics helps us develop deliberated beliefs about these historic issues, does it fit the group intent?  Even if we take Milton’s distilled view of business as the basis of our overarching context for business, I would say emphatically yes.  At a minimum, dismissing these issues as politics, limits our responsibility to examine a greater context for business decisions we make.   More importantly, discussing these issues may assist Wharton business leaders to consider business alternatives that create maximum profits for global shareholders while exercising corporate citizen stewardship for America.

The Wisconsin Battalion Fired the Loudest Shots in the Battle of the Bulging Government

Our country will soon be jolted by successive economic shockwaves that will ratchet down consumer confidence as our states and local governments are constitutionally forced to remedy historic revenue short falls.  With public opposition rapidly mounting against tax increases, most governments will be faced with the monumental task of slashing budgets.  The state of Wisconsin fired one of the first nationally heard shots across the bow of this newest American crisis.

In the state of Wisconsin, senators are attempting to bring to the floor a bill to give maximum flexibility for crafting a workable budget.  One line item of the bill caused half the senate to walk out, and sparked a teacher rally that filled the senate floor.  Public primary education teachers in Wisconsin make approximately $100,000 compensation, including salary and benefits. They can retire after 25 years service and receive a one time payment of $950,000, plus approximately $100,000 each year for life after that.

The Wisconsin state senate has 19 Republican senators who have vowed to reduce this budget line item.   However senate rules require 20 out of 33 senators to be physically present for a quorum to vote. All Democrat state senators staged a walk out and left the state for Illinois to avoid wounding the state teachers union. However, they must physically step onto the Senate floor to collect their checks. If even one Democrat defects, a vote will occur. Makes interesting politics.

In Sarasota, Florida where I live, the county’s tax revenue will not cover public employee retirement benefits this year. How did Sarasota, Wisconsin, and the rest of the country reach this seemingly overnight crisis?  During the economic bubble decades from 1980 until recently, government spending grossly outpaced our population and grew to spend revenues that had been inflated by economic bubbles and consumer borrowing. 

When the Great Recession hit, state revenues from most sources shrank, including federal transfer, sales, and income taxes.  All these sources had been artificially buoyed by successive bubbles, and now popped simultaneously along with our latest and greatest housing bubble.  With shrinking housing prices, plunging ad valorem revenues just added to the fray.  When tax revenues shrank to fit our sustainable private industry job base, decades of excessive government spending left an overwhelming shortfall that exposed both our governments’ lack of understanding of bubble risks, and their willingness over thirty years to spend increasing tax windfalls rather than reduce tax rates.

As an example, our local and state governments escalated public employee ranks and pay scales to match escalating revenues; increases that well outpaced our population increase.  During the last three decades, the U.S. population increased 37 percent, but our local government employment increased 56 percent, and state government employment increased 68 percent. 

State and local budget line items increased well beyond our population growth as well.  As an example, while an increasingly older and poorer population could partially explain a 100 percent increase in health/welfare spending in real dollars, the vast majority was spent to increas staffing, compensation, and programs.  Also, educational spending increased 50 percent in real terms when the school age population only increased 11 percent. In the last five years of the great housing bubble, total state spending increased 30 percent in an attempt to keep pace with accelerating home prices. 

Because of 30 years of escalating state and local government spending during the boom years, we now face yet more waves of economic crises, the first of which will be successive slashing of state and local budgets that will cause economic backlash and social unrest as a poorer public is forced to adjust to fewer government services.  Governments will have little choice but to reduce public employee ranks by 20 percent to right size government to our population size.  To balance budgets, remaining public employees will be forced to take 20 percent compensation cuts to match resulting sustainable GDP.  When the suds clear from this latest bubble burst, 4 million public servants will lose their jobs and an additional multiplier of parasitic jobs will be lost as well, exposing America’s latest of its coming destructive waves.

For the Sake of America’s Health and Jobs, Congress Must Debate Healthcare Again

As the courts decide the fate of Obamacare, the hard work of congress regarding a comprehensive healthcare policy must begin again.  America cannot afford for Congress to wait when America’s health is at stake.  And waiting also has the foreboding consequence of continuiing our downward economic spiral and loss of jobs.

As a result, Congress must first decide how much of our budget can support healthcare. No more than 10% of GDP is needed for government to support America’s economic growth. Today, we tax America 28% of GDP and borrow an additional 13% of GDP. The additional 31% goes to military, interest, and the redistribution of America’s wealth to improve the lives of Americans.

A consequence of spending more than 10% of GDP is that supplying today’s needs reduces the economic output and social spending of future generations. Our budget now demonstrates both the overwhelming desire of Americans to care for our own, and our inability to pay for our altruism. For every dollar our government spends, we borrow 40 cents from future Americans that will also want to meet the social needs of their citizens. Before we resolve healthcare, we must agree on a sustainable social care budget, the priority of our causes, and the amount available for healthcare. This amount combined with private contributions must meet our healthcare needs.

Then we must set about reducing costs to meet revenues. For instance, government has placed restrictions on revenue aggregation that are unnecessary burdens. Both political parties have advanced methods to reduce these costs. Compromise should float best ideas to the top.

Prevention must be on the legislative table. America’s habits promote peculiarly western major disease processes. Sugar, corn syrup, and processed fats industries promote an epidemic of obesity, diabetes, heart and vascular disease and strokes. Cigarettes help a quarter of our country to die extended, painful COPD deaths. Our dependence on pharmaceuticals precipitates growth of resistant bacteria.

Cultural decisions should not necessarily be a burden to all Americans and need prioritizing in the healthcare budget. Our disconnection with our elderly has escalated institutional costs. Our striving to extend lifespan has led us to spend a majority of healthcare costs on the last few years of life.

Competition must be allowed to drive costs down. Americans are rightly skeptical that capitalism will lead to corporate profits at the expense of our health. We have too many examples such as insurers culling unhealthy persons from the pool of insured, leaving the very people who need insurance without the ability to pay for their care. Much more competition balanced with thoughtful regulations is required. The alternative is a healthcare system marred by cost controls, leading to shortages of quality care.

American healthcare is dominated by a medical cartel that limits supply of doctors, limits procedures that can be performed by lesser educated personnel, and limits information needed for the average American to make good financial decisions regarding their health. To truly have competition, doctors must loosen their grip on access to medical schools, and permit more procedures to be performed by others. In the process, our medical professionals must be protected from our litigious society’s need to blame inaccurate medical science for the natural course of life.

Information must become transparent. We need knowledge of physicians’ capability to manage the health of their constituents just as we need knowledge of school teachers’ ability to teach. Our fractured healthcare industry also needs to aggregate information to increase up front spending that will decrease long term costs and to reward industry participants for achieving this outcome. 

These problems are certainly looming but not insurmountable. However, both parties must subordinate the interrelated goals of their special interests to America’s goal of providing all Americans access to a healthy life, and must work together to put the best ideas of both sides of the aisle to work on behalf of all of us.

Bruce Nussbaum’s Blog on HBR

 

Bruce Nussbaum recently posted this blog on Havard Business Review.  His message was spot on.  He heralded the issue with trumpets. Multinationals are not just transferring jobs overseas through direct foreign investments.  To gain access to China’s markets, they must couple DFI with technology transfer.    Here is my short editorial.  Our great American hope for competition, American innovation is being sold to the highest foreign bidder.  The way to compete with this innovation drain is to reseed innovation here in the fertile ground of small domestic American businesses.   Now Bruce’s great article:

What’s Wrong With America’s Innovation Policies

10:12 AM Wednesday January 26, 2011
by Bruce Nussbaum  

President Obama gave a stirring speech last night, saying “We need to out-innovate, out-educate, and out-build the rest of the world.” He used the word “innovate” more times in his State of the Union than any other U.S. president. To those of us who believe the future of the country depends on its innovative capabilities, this was hugely positive. But the obstacles to boosting innovation in the US are far higher than the President acknowledged. Indeed, as CEOs gather at the World Econimic Forum in Davos, they are much greater than most business leaders are willing to say.

Here are some harsh truths that President Obama did not face in his State of the Union speech: there is very little actual innovation taking place within Big Business; Washington innovation policy is placing big bets in the wrong places; China’s innovation policy is superior to America’s.

Let me explain. A devastating National Science Foundation Business R&D and Innovation Survey that generated almost no media discussion when it was released in the fall showed that only 9% of the 1.5 million for-profit public and private companies in the U.S. had any product, service or process innovation between 2006 and 2008. Of manufacturing firms, 22% innovated. In non-manufacturing, a mere 8% innovated. As economist Michael Mandel has observed, “you can’t be an innovation economy if only 9% of your companies are innovating.”

Under both Democratic and Republican administrations, for nearly 20 years, Washington has been placing the wrong bet on R&D. Hundreds of billions in government funding has gone into bio-sciences without any significant return. Genonomics was heralded as the Next Big Thing after silicon, the driver of future economic growth. It isn’t producing results in terms of new companies, jobs, or economic growth in general, yet billions more flow into NIH and universities every year.

China’s brilliant “Fast Follower” innovation policy is generating the biggest transfer of technology in history. A combination of state-driven policies is driving this policy — requiring Western companies to partner with Chinese firms to do business; demanding transfer of the latest technologies in exchange for access to markets; favoring “indigenous innovation” in government purchasing; fencing off green and other industries from foreign competition; offering low-interest state-bank loans to local champions. This industrial policy is at odds with WTO standards, but is a boon to Chinese economic growth and a long-term threat to U.S. global competitiveness.

A realistic American innovation policy will need to take these three harsh truths into account. We need a much more skilled business leadership than we have currently, capable of creating as well as managing. We need to refocus government investment into manufacturing, energy, and materials. And we need much more vigorous global economic policy that meets the challenge of China’s innovation policies.

When President Obama speaks of a “Sputnik moment,” he clearly understands the need for innovation. The next step is crafting policies that deal with the harsh truths of American innovation and move us forward.

Bruce Nussbaum is a member of the Council on Foreign Relations. A former assistant managing editor for Business Week, he is professor of Innovation and Design at Parsons The New School for Design.

America is Losing the Education Race

In Vivek Wadhwa’s January 12, 2011 Bloomberg Businessweek article entitled “U.S. Schools Are Still Ahead—Way Ahead”, he claimed that America’s alarm about international rankings of students overlooks some critical components of our education system, further stating that “let’s get over our inferiority complex. America is second to none. Rather than in mastery of facts learned by rote and great numbers of accomplished martinets, its strength lies in the diversity and innovation that arise in an open, creative society.” While I trust Dr. Wadhwa’s data and observations, his conclusion does a disservice to America, giving our school system high marks, ie. way ahead.

Yes, it is true that our innovative culture allows the brightest to excel, and that innovation is a critical success factor for our country. Yet, in the end, the innovations of our brightest are fungible and transferable to the highest paying nation. Rather it is the education of the students who will make up the working middle class that is most important if we are to compete globally.

International capital is invested in countries that are best able to support operations with a well educated people, and with investment comes jobs.  China knows this all too well. During the 1970’s, when they formulated their national strategy for global competition, they mandated education for all students, including college prep courses emphasizing globally competitive science and math, and technology courses for those not participating in college. Education at the college level was provided by highly competitive scholarships. China’s focus on education from that point until today has resulted in having a well educated workforce, so well educated that when for the first time mainland China participated in the Program of International Student Assessment (PISA) this year, they placed first among participating nations.

To compensate for our working class demanding among the highest wages globally, and to prepare our country to compete for future investment, America must strive for the best educated working class across the spectrum from the brightest to less bright.  Sadly, in this metric, we have allowed our educational system to collapse. We fail to keep a third of our children from even graduating high school, and among those that do, proficiency is lower than in many other industrialized countries.  In that same Program of International Student Assessment (PISA) in which China placed first, America placed 23rd.  We are losing the race.