WORKING DRAFT Last Modified 4/10/2012 3:27:03 PM Central Standard Time Printed. Long-term capitalism. Icare Santiago presentation April 2012

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1 WORKING DRAFT Last Modified 4/10/2012 3:27:03 PM Central Standard Time Printed Long-term capitalism Icare Santiago presentation April 2012

2 Five mega-trends reshaping the global economy The great rebalancing The productivity imperative Rapid technological change - everywhere Re-pricing the planet The market state 1

3 Massive urbanization is underway Old Shanghai 2

4 Massive urbanization is underway New Shanghai 3

5 Resource scarcity - leading to a global race for commodities Water Energy Food ~40% gap between supply and demand by 2030, unless we use technology and manage resources better Increasing gap between demand and supply of fossil fuels; e.g. by % gap for oil 30% gap for gas years of historical food production that must be matched in the next 50 years 4

6 Commodity prices trended down for a hundred years and have more than doubled in the last ten years MGI Commodity Index (years = 100) World War I World War II 1970 s oil shock Post-war Depression 1920 Great Depression % p.a

7 Major implications for the public and for leaders Changes to the economy Increased significance of multinational corporations High and persistent unemployment, especially amongst youth (~50% in Spain, 29% in Ireland) Growing distrust in business: 47% trust in 2012 vs. 53% in Rising inequality around the world: Gini coefficient has increased in 80% of OECD countries versus 1980s Increasing strain on public sector can no longer handle issues alone Advent of GDP growth with lesser job growth, through technological change 6

8 Several mature economies see double-digit drops in business trust Trust in business Percent Informed Public Global Informed Public Trust up China Trust steady Canada US Australia Poland Sweden Russia India Singapore Trust down Italy Indonesia Ireland Mexico UK Argentina Japan Netherlands Germany Double-digit decline UAE South Korea Brazil France Spain 7

9 Inequality has increased globally Income inequality, mid-1980s to mid- 2000s Percent of OECD countries Income inequality ratio of top 10% versus bottom 10% By job category Increase in inequality Service workers Manufacturing & industrial workers Within category range ~5x 3-4x Decrease in inequality Agricultural workers ~2x 8

10 Inequality is highly correlated with health and social problems Index of health and social problems High USA Finland Denmark Austria Belgium Norway Sweden Germany Netherlands Ireland Greece France Canada Spain Italy Switzerland UK New Zealand Australia Portugal Japan Low Low High Income Inequality SOURCE: Tony Judt, Ill Fares the Land (2010) 9

11 Nations are struggling with high levels of youth unemployment Youth unemployment rates by country Spain Greece Portugal Ireland France Sweden United United Kingdom States Netherlands Germany Global average Latin EU-27 America average 10

12 As a result, there is an urgent need for change by business leaders Three essential elements of the shift: Emphasizing the 10+ year view versus the quarterly view Serving stakeholders and shareholders Acting like an owner 11

13 Average stock holding periods have decreased significantly NYSE average stock holding period FTSE average stock holding period 7 years 1 year Years years <1 year Years Hyper-speed stocks (holding less than 7 seconds) account for 70-80% of US equities trading today 12

14 Organizations need to increase focus on long-term health Performance Health EBIT ROIC TRS Net operating profit Employee satisfaction Organization alignment Quality of leadership Innovation Brand health / reputation External stakeholder / community health We have not achieved our tremendous increase in shareholder value by making shareholder value the only purpose of our business John Mackey, founder and CEO, Whole Foods 13

15 DSM has adopted integrated reporting, including measures of long-term health and sustainability DSM has: Set concrete business goals for sustainability Embedded sustainability into all business activities, including integrated reporting 14

16 Organizations focused on long-term health perform better Likelihood that companies have above-median financial performance, % EBITDA margin Company performance by organization health quartile Bottom Middle 2 Top Similar results when measuring growth in ratio of: Net income to sales Enterprise value to book value 15

17 Companies have already taken steps towards more long-term thinking 16

18 Edward Freeman believed that entrepreneurs must protect and enhance the society in which they operate The view that business is business has dominated for the last 30 years In a free society "there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits. - Milton Friedman, 1970 but Adam Smith believed that entrepreneurs must take care of the society surrounding them The wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest. - Adam Smith, The Theory of Moral Sentiments,

19 No society can surely be flourishing and happy of which the far greater part of the numbers are poor and miserable. Adam Smith 18

20 Businesses must engage with stakeholders, not just shareholders Alcoa has a systematic process for partnering with stakeholders to ensure there is shared accountability for addressing broader business and social problems Communities in which they operate NGOs "interested in what we are doing" Public agencies that regulate their business Shareholders, lenders who provide financial capital Employees Customers Suppliers 19

21 China s 12 th Five Year Plan reflects good stakeholder management 1 Consumption Innovation Urbanization Regional specialization Sustainable development Accelerate development of new rural villages (create >45 million new jobs in urban areas) Focus regional economies where they have comparative advantage Capture global green-tech opportunities (e.g. measure energy use per GDP point) 6 Harmonious society Improve equality and social stability through public services (e.g., 36m apartments for low-income people) 7 Reform Strengthen the socialist market economy 8 Internationalization Improve international relations 20

22 Examples of companies with excellent stakeholder management Launched five-year, $20 million initiative through Walmart Foundation aimed at combating the high veteran unemployment rate Committed $2 billion, including 1.1 billion pounds of food from Walmart stores, to fighting hunger in local communities Clinton Global Initiative commitment to provide financial literacy training to 5,000+ women across Asia Developed Women in Business Resource Centre which gives basic education on financial topics and tools to help women set up and grow their businesses Established Supplier Connection to provide a web-based solution for facilitating improved access to global businesses for small and medium enterprises 21

23 We need owners. We must bring owners back because an owner thinks and acts differently about a business than do investors. Charles Sirois, Founder, Chairman and CEO of Telesystem, Chairman of CIBC 22

24 Directors - more time on strategy, less time on compliance Desired shift of time spend by boards Increase No change Decrease Strategy Talent management Business risk management Performance management Execution Core governance and compliance

25 Non-Executive Directors of PE-owned companies invest nearly three times as many days/year versus public companies Public limited company Private equity Time invested non- Executive Directors Days/yr x 54 Proportion of time which is formal Percent

26 Boards of family-owned businesses spend significantly more time on boards than required by statutes Frequency, duration, and dedication Number of meetings/year: % Up to four meetings Between 5-8 meetings In general, statutes call for four ordinary meetings. All other meetings are considered extraordinary; 80% of these meetings are >3 hours Between 9-12 meetings 47 25

27 Family-owned businesses have outperformed non-family companies over the last decade Performance of family-owned businesses versus benchmark Rebased for comparison purposes Credit Suisse Family Index MSCI World Price

28 5 things you can do on Monday morning Drop quarterly earnings guidance Develop a set of 5 health metrics versus only short-term performance metrics Identify and develop specific goals for 3 key stakeholders beyond shareholders and financiers Review investor base and examine ways to incentivize longer-term investment Ensure dedicated board time to discuss and review company position and options for 10+ years out 27

29 Long-term capitalism Icare Santiago presentation April