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Leadership, Values and the Role of International Contracting

August 29, 2010

The news that US economic recovery is faltering comes at the same time as data showing that the biggest US corporations are wealthier than ever and have unparalleled cash reserves.  This inequality of distribution is mirrored at a personal level, where income disparities continue to increase. The wealthiest 1% of US households now receive a higher share of total income than the combined total for the bottom 40% (which means that in the last 30 years it has roughly doubled its ratio). But the US is not alone; in China, it is estimated that the top 1% now controls more than 60% of total wealth. And of course, when we look at other markets such as India or Russia, there is further evidence of increasingly dramatic disparities between rich and poor.

In one sense, it has always been this way – the privileged elite and ‘the rest’. But it appears that the extremes are becoming far greater, not less – in fact the reverse of what we might expect in a supposedly democratic, increasingly egalitarian society.  Indeed, it is concerns such as these that have led to the growing debate about the size of executive compensation packages and their apparent disparity not only to performance, but also relative to all the workers who make it possible. So why is this happening – and what impact is it having on the chances of economic recovery?

 A recent edition of Harvard Business Week alerted me to the work of Paul Lawrence and in particular a recent book, Driven to Lead: Good, Bad and Misguided Leadership. In this, he makes the statement, “Humans have evolved a leadership brain. Good leaders are people with a conscience who respect and reward all the four drives of other stakeholders [the drive to acquire, to defend, to bond, and to comprehend], even as they respect and reward their own drives.”

Of course, not everyone may accept that these are in fact the characteristics of a good leader. Throughout history, people have shown a strong propensity to follow leaders who represent their own narrow interests or moral codes, regardless of wider social or human impact. The imperatives that cause them to do so may be economic, but can also be driven by issues of security or distorted moral values.

 However, we would in general probably agree that leaders who promote and demonstrate fairness and respect for others are more desirable than those who do not – and certainly are more likely to preside over a peaceful and harmonious society. Lawrence’s work is interesting to those in the world of contracts and commercial management because he looks at this question from the perspective of global trade – and in particular, the impacts of outsourcing.

 Applying classical trading and economic theory to today’s global business environment, Lawrence concludes that win-win exchanges occur ‘when both trading partners are either (1) industrialized nations with modern impulse/check/balance governments, no excessive unemployment, and reasonably effective control of corporate abuses or (2) less-developed nations roughly equal in power and with some control of corporate abuses.’

 However, he goes on to demonstrate that much of today’s international trade does not meet these conditions.  Colonialization – both physical or economic – is one form of such trade and generally leads to abuse of the weaker or less knowledgeable party, unless there are very strong governance procedures in place. Outsourcing is another approach that comes under scrutiny and Lawrence’s research leads him to say: ‘Transnational outsourcing, as when a U.S. auto company builds a parts plant in Mexico, has come into prominence only in the past few decades. Cutting costs is fair enough, unless it is done by paying less-than-living wages, creating unsafe working conditions, or causing environmental damage which would be prohibited in the United States. But because most American corporations are currently designed and mandated to fulfill ‘the drive to acquire’ exclusively, both top management and shareholders might object to incurring any costs in Mexico beyond those that are legally required, so transnational outsourcing is frequently a win-lose exchange between nations which are unequal either in their power or in their willingness to enforce basic standards of human rights, worker safety, and environmental impact. Another golden opportunity for people without a conscience.’

The evidence certainly suggests that today’s trade flows and contractual frameworks are indeed adding to the disparity of wealth distribution. But even if true, does this really matter? Economist Benjamin Friedman has researched the question of rising and relative living standards and he concludes, “Broadly distributed economic growth creates the private attitudes and public institutions that foster, not undermine, a society’s moral qualities…. Any nation, even one with incomes as high as America’s, will find the basic character of its society at risk if it allows its citizens’ living standards to stagnate…. At the outset of the twenty-first century, America’s problem is not unemployment. It is the slow pace of advance in the living standards of the majority of the nation’s citizens.” And of course, this ‘slow pace of advance’ is now preventing any consumer or domestic demand-led economic recovery. As big corporations and wealthy individuals hoard wealth to protect their narrow interests, the chances of economic upturn for the majority are reduced.

So if we want a world at peace – and people who live at peace with themselves – then these questions really do matter. Of course, in the end it is not international trade or outsourcing that are the guilty parties – they are just a symptom of the true underlying problem, and that is the greed that drives far too many of our leaders, propelled and validated by the social admiration for wealth and celebrity, rather than more sustainable and worthy human values. Even those who then become philanthropic with their wealth perhaps miss the fundamental point about the inequity of a process that gave them such riches in the first place; or the humility that might lead them to question their right to determine ‘worthy causes’.

 Lawrence is not in any sense against world trade or globalization. He ends with the comment: ‘Globalization need not work this way. Its benefits can be steered to all nations and to all levels in each nation in a more equitable manner. But a free-market, laissez-faire process will not do this automatically. It will require governmental regulatory action with guidelines and incentives that can best be established at the world level.’

 As you negotiate your next contract, are there moral questions you should be asking? As a community, should we care about the wider social impacts of our actions, or should we simply accept the crumbs that are thrown our way as a reward and rely on someone else to worry about moral and ethical principles? For example, we could rely upon our leaders to give this matter their attention, in between working out how to acquire more money!

  1. “So if we want a world at peace – and people who live at peace with themselves – then these questions really do matter.”

    Interesting commentary, Tim. Thank you.


  2. Venkateswarlu permalink

    Though societies transformed largely at macro level, perinnial disparities still persist.We should not ignore moral aspects while dealing the negotiations.

    Thanks Tim.

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  1. New World, New Rules, New Role For Commercial & Procurement? « Commitment Matters

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