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March 9th 2010 No Comments

Part II: Roger Martin on the Canadian dimension of the crisis

Roger Martin is dean of the Rotman School of Management in Toronto. Previously he was a director with the global strategy consulting firm Monitor Company, and founded its Canadian office. He has written on integrative thinking, business design and corporate citizenship.

“Corporations have a choice. Either they make money while not striving to make the world a better place – or they make money AND strive to make the world a better place.”

If you have missed part I, read it here: Part I: Roger Martin on the Canadian dimension of the crisis

NFB: Many Canadians have looked on with dismay and anger as their retirement and pension funds shrunk during the downturn. What would you say to them?

Martin: I feel badly for them, and I wish it weren’t the case. In the main, although not entirely, you’re hearing this from people who chose a defined contribution pension plan, instead of a defined benefit pension plan. So far nobody has had their defined benefit pension plan cut.

For the last ten years, anyone who chose a defined benefit pension plan was considered Neanderthal or worse. But if you chose the defined contribution, where you put money in the stock market and watched it accumulate like crazy, you were smart. Well it hasn’t turned out that way. So you have to go back and ask the question: How many years of increases has the downturn wiped out? In Canada, given the recovery in the stock market, the answer is not many years.

Many people whose pensions were dramatically cut were essentially counting all their eggs at a time when they were holding something volatile – investments that were doing nicely at the time, way better than they ever imagined when they first put their money in. And then suddenly there was a reversal.

I feel badly for them, because many were just following advice – to get into defined contribution plans, when that wasn’t quite so obviously the right way to go. Many people became unwitting participants in the stock market. Unions got involved as well – the Ontario teachers and Ontario municipal employees have their pension plans tied up in the stock market. How those investment entities do will determine a lot about their long-term benefits.

There’s also the fact that people were expecting the same level of returns to continue. Look at Harvard University, which has seen a huge cut in its endowment, from something like $38 billion to $24 billion. That seems to be a gigantic decline – but it had been growing at something like 20 percent compound annual for the last few years. So in fact Harvard’s endowment is only going back to where it was 5 or 6 years ago, when Harvard was doing just fine. The problem now is that it has spent all the increases – assuming that that high level would be there forever. So it’s not that they’re poor – they’re just not as rich as they thought they would be, and they’ve created a lifestyle that required a certain level of wealth that’s only been possible during the recent fat years.

It’s a tough lesson: The stock market both giveth and taketh away. And if you plan your life around it giving all the time, then you are completely unrealistic.

NFB: As someone who’s worked as a consultant for General Motors, what future do you envisage  for the thousands of Canadians who’ve lost their jobs in the auto sector?

Martin: It’s a very difficult situation because most of those jobs are not coming back. It is clear in hindsight that they were not realistic jobs. They were paid at a level that ensured that the company paying those wages would go broke. They were fundamentally unrealistic wages. Neither the companies nor the workers knew that for certain. But the workers had very little concern about whether that was the case, and I would argue that if they’d been smart about it, they would have had a higher level of concern to begin with.

But it’s hard. When you’ve got a union leadership telling you to get more, I think the workers say, yes, that’s right. That helped create an environment where the companies became fundamentally uncompetitive – so much so that they’re now in financial distress – and had to shrink dramatically. They’re having an exceedingly difficult time making money producing cars in this labour-cost environment, and I don’t see a substantial rebound in the jobs assembling automobiles in North America.

NFB: You’ve also consulted for groups engaged in social entrepreneurship. How do you define the term?

Martin: That’s an interesting question. Working with Sally Osberg, a wonderful woman who’s president of the Skoll Foundation (skollfoundation.org), I co-authored an article defining social entrepreneurship, partly because there wasn’t a broadly accepted definition in use. A social entrepreneur is somebody who faces an unpleasant equilibrium, whereby people are suffering because of a certain set of conditions, and sets out to create a product or service, and an appropriate business model, that has the effect of changing that unpleasant equilibrium into a more pleasant one. And they do so sustainably and they create an economic system around that.

That’s what regular entrepreneurs do when they see economic inefficiency. Take Jeff Skoll himself and his partner Pierre Omidyar, who founded eBay. They identified an unpleasant equilibrium when they noticed that people had all this stuff in their garages that they wanted to sell -  but the only buyers who saw it were not the people who valued it the most. They took that unpleasant equilibrium and created eBay, a vehicle that helps sellers discover the buyer who values the item the most. They’ve created a new equilibrium

Social entrepreneurs do the same thing when they see an unpleasant equilibrium that involves a group of people in a completely unsatisfactory situation. Mohammad Yunus of the Grameen Bank (grameen-info.org) is the perfect example. You had poor Bangladeshi women who have no chance of getting out of poverty. So Mohammad Yunus says – give them 10 or 15 dollars, give them 60 or 75 dollars worth of credit – and they’ll buy a sewing machine. And we know the rest of the story. He helped create a better equilibrium where you have this whole host of successful small business people. But rather than for profit and for an audience that can pay – as is the case with eBay – it is non-profit and for an audience that often can’t afford to pay.

NFB: Related to this – how do you define corporate social responsibility?

Martin: Corporations have a choice. Either they make money while not striving to make the world a better place – or they make money AND strive to make the world a better place.”And I think corporate responsibility is the attempt to do both. It operates in the for-profit world, by the rules of the for-profit world – because shareholders give you their money with that purpose in mind. But by dint of being a corporation it also aims to make the world a better place. I think the Royal Bank, with whom we worked on developing a corporate responsibility strategy, is attempting to do that with its Blue Water Project and their other environmental initiatives.

NFB: Do you find yourself drawing upon your Mennonite background when you approach management and entrepreneurship?

Martin: People say that I do. I don’t know. I’m leery of saying I’m a special guy because I’m Mennonite, which implies if you’re not a Mennonite, then too bad for you. That said, there are certain ways that I think and operate that are characteristically Mennonite.

I have a sense of community that comes from growing up in a small, relatively close-knit community that was mutually supportive. Mennonites believe in hard work, and in not being particularly flashy. Just work hard and in due course good things will happen. I think I have that kind of patience with my work at the Rotman School. It doesn’t have to happen tomorrow, and we don’t have to tell everybody that we’re better than we are – we just have to be good and work hard at it.

The other thing that is somewhat Mennonite is the idea that you don’t need everything. You don’t need extravagance. All you need is the basics. We don’t have an ostentatious culture at the school, where everyone needs a gigantic office. There was a boardroom next to my office that got used by lots of people but was too small, so I chopped 6 feet off my office. I think of that as sort of Mennonite. I Iooked at those 6 feet and thought: Do I really need them? Those other people need a bigger space. This type of thinking comes from my background.

NFB: What role can art and culture play in the midst of an economic crisis?

Martin: I have pretty strong views on this. Although Mennonites are pacifists, I admire Winston Churchill. And during the Blitz of Britain, when Britons were being bombed every night, his homeland security people urged him to close the theatres. But Churchill refused.  What are we fighting for anyway?, he said. Aren’t we fighting for the British way of life? In Churchill’s view that included going to the theatre.  Why bother fighting this war if we’re not fighting to be who we want to be?

And I would say that’s a good way to think about the arts. The arts are a big piece of who we are. They are a manifestation of what we believe about our culture, the stories we want to tell, the pictures we want to paint. The public art we want to create is hopefully the best expression of our culture. So the notion that art is somehow expendable during an economic downturn is not even as good the argument that you  can do without it during wartime, when the very survival of the country is at stake. So if it didn’t fly then with Winston Churchill, it sure doesn’t fly now with a decline of several percentage points in GDP per capita – to go back to that subject. We live to move civilization forward, and the arts are a key part of civilization moving forward.

Philip Lewis – researcher-writer with the NFB’s GDP project – asked the questions.

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