Journal of Business Ethics

, Volume 109, Issue 4, pp 391–410

When Ethics are Compromised by Ideology: The Global Competitiveness Report

Authors

  • Harald Bergsteiner
    • Institute for Sustainable Leadership & Australian Catholic University
    • Institute for Sustainable Leadership & MGSM, Macquarie University
Article

DOI: 10.1007/s10551-011-1136-y

Cite this article as:
Bergsteiner, H. & Avery, G.C. J Bus Ethics (2012) 109: 391. doi:10.1007/s10551-011-1136-y
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Abstract

The Global Competitiveness Report raises ethical issues on multiple levels. The traditional high ranking accorded the US is largely attributable to fallacies, poor science and ideology. The ideological bias finds expression in two ways: the inclusion of indices that do not provide competitive advantage, but that fit the Anglo/US ideology; and the exclusion of indices that are known to offer competitive advantage, but that do not fit the Anglo/US ideology. This flaw is compounded by methodological problems that raise further doubt as to the reliability and validity of the survey results. The resultant false high ranking of the US, a strong proponent of Anglo/US capitalism, pseudo-legitimizes the propensity of US-dominated institutions and entities to persuade, coerce and, in the worst-case force other countries and their constituents to adopt Anglo/US practices and behaviours. This is ethically reprehensible because research shows that these practices and behaviours, when compared with other approaches, are sub-optimal in the results they produce for individuals, corporations and nations. The report also unjustly and unnecessarily stigmatizes entire groups of countries with little conceivable benefit to anyone. Given the report’s gravitas through the profound global influence it exerts on the decisions of top government and business leaders, these are serious ethical and economic issues.

Keywords

CompetitivenessCorporate social responsibilityEthicsIdeologyNational rankingsOrganizational performanceResearch methodology

Abbreviations

ACR

Arms-length contractual relations

BMW

Bayerische Motoren Werke

CEO

Chief executive officer

CSR

Corporate social responsibility

DAX

Deutscher Aktien Index (German stock market index)

GCR

Global competitiveness report

GDP

Gross domestic product

GFC

Global financial crisis

GM

General Motors

IMF

International Monetary Fund

IT

Information technology

OCR

Obligational contractual relations

OECD

Organisation for Economic Co-operation and Development

R&D

Research and Development

S&P

Standard & Poor’s

UK

United Kingdom

US

United States

WEF

World Economic Forum

The purpose of this article is to examine and reveal ethical conundrums posed by the ideology-driven research framework of the Global Competitiveness Report (GCR). Here ethics refers to prescriptive doctrines based on shared values, and ideology (in its modern and not original Greek sense) refers to prescriptive doctrines that are not supported by rational argument (Raphael 1970, p. 21). The GCR purports to be an objective scientific instrument, but is in fact based on ideology that (mis)leads governments, corporations and individuals to make decisions that are unethical in their application and effects.

Since 1979, the World Economic Forum (WEF) has produced the GCR, which ranks 139 countries according to their alleged economic competitiveness on the basis of 118 indicators. Of these indicators, 33% represent so-called hard facts, and 67% are derived from a questionnaire completed by 13,500 “top management business leaders”. The US tends to score very highly on the GCR, taking out first place over a number of years. In 2009, it slipped into second place, after Switzerland, and in 2010 it dropped to fourth place, after Switzerland, Sweden and Singapore. The rankings are claimed to reflect sound science. Closer examination reveals that the report is seriously flawed and that many of the underlying assumptions do not reflect scientific knowledge, but ideological bias. This includes all three of the “systematic biases” covered by Kerr et al’s (1996) taxonomy of biases—judgmental sins of imprecision, commission and omission. As a result, the performance of a number of European countries is demonstrably understated, and the US’s ranking is grossly overstated and implausible.

Why is the unwarranted high ranking of the US a matter of grave and global concern? The GCR raises several issues, the most serious being that it provides a kind of pseudo-legitimacy for the tendency of US-controlled or dominated institutions and enterprises to impose an ethically indefensible and financially inferior business model on other nations and their constituents (e.g. Mitchell 2001; Stiglitz 2002). By promoting their model as the shareholder-value model, its proponents have cloaked themselves in a mantle of respectability that has enabled them to take the moral high ground along the line: since we are the true champions of shareholder value, we are entitled to make the rules. This business model is variously known as Anglo/US capitalism, the Chicago School, the Washington Consensus, neo-liberalism, liberal market economics, the shareholder-centred model, or in its most extreme form (Stiglitz 2002) market fundamentalism. Since the inferiority of this business model has been well established (e.g. Albert 1992, 1993; Willmott and Flatters 1999; Kennedy 2000; Gelb and Strawser 2001; Mitchell 2001; Vitols 2001; Hutton 2002; Mintzberg et al. 2002; Stiglitz 2002; Zalewski 2003; Ghoshal 2005; Hofstede and Hofstede 2005; Ozment 2005), its promotion and adoption in itself constitutes a breach of ethics since it perforce delivers inferior outcomes to the owners and stakeholders of enterprises that become its corporate victims.

Alarmingly, the GCR is used as a roadmap to drive national developmental agendas in the mould of the US, either by way of persuasion or coercion, again based on a false legitimacy provided by the GCR. Stiglitz (2002) gives several examples in S.E. Asia, South America and the former Soviet Union where ideology-driven policies of the International Monetary Fund (IMF) and the World Bank, that took little account of local social, cultural, or political conditions, exacerbated problems they were intended to resolve. On a less coercive note, the WEF is reported as seeing a “desperate need for reforms to modernize and liberalize the European economy to make it more like the US” (The Weekend Financial Review, January 19/20, 2008). While less coercive, this nevertheless offends in its failure to acknowledge and respect that notions of social wellbeing differ according to cultural context (Ma 2009). US-dominated institutions such as the WEF, the IMF and the World Bank morally justify this market fundamentalism, among other things, by reference to documents such as the GCR.

Finally, the GCR distorts others’ research. For example, research by oekom (2003) produced an anomaly that can readily be explained by the undeservedly high competitiveness ranking of the US. The research examined the link between a country’s sustainability performance and its credit standing and competitiveness. Specifically, oekom’s Sustainability Country Rating was compared with Standard & Poor’s Sovereign Credit Rating; regression analyses showed a highly significant correlation. While the results were as hypothesised, oekom noted:

that the Scandinavian and Central European countries which top the sustainability rating generally have a credit rating of at least AA+, while the countries doing badly in the Country Rating, such as Mexico, Turkey and Russia, fail to score higher than a BBB. Only the USA, which in the sustainability rating of 31 countries was ranked in only 25th place, achieves a high credit rating of AAA that is unusual for a country in this position.

For verification purposes, oekom’s Sustainability Country Rating was also compared with two indices of the GCR. “Here, too, a clearly significant, though slightly weaker, correlation is revealed … Again, it is principally the USA which, despite a very low sustainability rating, has to date exhibited a high competitiveness rating” (oekom 2003). Changing the US’s competitiveness ranking to where it most likely should be, would, of course, remove this anomaly.

In summary, the GCR is a seriously flawed and misleading document that seduces the WEF’s annual meetings in Davos to subscribe to and propagate a global business agenda that can be described as irrational, inequitable and ignoble—irrational because it is based on ideology and poor science, inequitable because people subscribing to the bias dominate the agenda and ignoble because it undeservedly demeans whole groups of countries.

To be sure, the GCR is the outcome of a huge research undertaking that involves reputable academics and some very sophisticated statistics. But, we argue that it asks many inappropriate questions and fails to ask some highly pertinent ones; and it addresses some issues in dubious ways, thereby wrongly fostering the perpetuation of suboptimal business practices around the world. Our objective in this paper therefore is to demonstrate that the GCR is ideologically biased in the direction of the Anglo/US business model, that Anglo/US business practices have been found to deliver inferior outcomes, that the adoption and promotion of these practices constitutes a breach of duty of care vis-à-vis a range of stakeholders, and that this renders its promoters unethical on multiple levels. This raises the general question of which activities and behaviours can/should enterprises legitimately engage in, which activities and behaviours are ethically illegitimate, and who decides what is legitimate and what is not?

In attempting to answer this question, let us state that this paper does not seek to make a philosophical case for ethical behaviour, others have done this quite eloquently (e.g. Höffe 1989; Bovens 1998; Mitchell 2001; Beu and Buckley 2001). We also explicitly accept the view shared by numerous writers that individuals, corporations and nations are well served by ethical behaviour, and that ethical behaviour contributes to businesses’ bottom lines and benefits their societies (e.g. Jones 1995; Trevino et al. 1999; Recardo 2000; Cameron et al. 2004; Eberl and Schwaiger 2004; Verschoor 2004; Cameron 2006; Montgomery and Ramus 2007).

Further, we acknowledge and heed Ma’s (2009) finding that future research themes in business ethics are likely to concentrate more on the practical importance of business ethics. Looking at trends in research themes over the period 1997–2006, Ma identified somewhat of a shift “from research on ethical decision-making and on the relationship between corporate social responsibility and corporate performance to research on stakeholder theory in business ethics and on the relationship between consumer behavior and corporate social responsibility [CSR]” (p. 255). An argument can be made that there is a strong linear linkage between ethics and these four research areas—CSR, stakeholderism, consumer behaviour and organizational performance. Viewed somewhat simplistically, ethics is at the top of a kind of ‘value chain’, with CSR being a specific application of ethics; stakeholders are those who benefit from CSR, consumers are a sub-group of stakeholders, and organizational performance is one of the outcomes of this ethics > CSR > stakeholderism > organizational performance value chain. This value chain essentially describes a process whereby idealistic values contribute towards the creation of social and material wealth. Each of these terms throws up its own set of questions and requires a definition and a short comment.

Ethics, as stated above, refers to prescriptive doctrines based on shared values. In the ethics literature, ethics is sometimes represented as a means to an end (you do it because it brings benefits to the self) and at other times as an overarching ideal (you do it because it is the right thing to do). Both of these notions are the subject of an extensive literature that is beyond the scope of this article.

CSR refers to leadership practices that: (a) are deemed to properly and justly meet role, normative and moral obligations with respect to defined stakeholders; and (b) willingly accept accountability for the consequences of corporate actions and behaviours. We discuss CSR in more detail below.

Stakeholderism defines the universe of parties to whom the corporation has obligations and to whom it is accountable for its actions and behaviours. The question of stakeholders is probably one of the most ideologically vexing issues in the management and business ethics literature—who they are, their role, and how to treat them. For some, there is only one stakeholder, namely the stockholder; others are only considered in so far as this serves to promote the interests of the stockholders. For yet others, stakeholders include all those people who are affected by a firm’s activities, however remotely or indirectly that may be (e.g. Freeman 1984). We have more to say about this below.

Organizational performance refers to outcomes sought by corporations including financial performance, shareholder value, brand and reputation, customer satisfaction and stakeholder value. While there is a strong consensus on the first four of these, stakeholder value is subject to dispute depending on whether one views business as a zero-sum game or a win–win opportunity.

In focusing more on the practical importance of business ethics, we take up Bishop’s (2000) suggestion of avoiding, as far as possible, philosophical terms such as utilitarianism, categorical imperative and Hobbesian egoism, but use language that practitioners may be more comfortable with, like honesty, integrity, wealth creation, freedom, consent, loyalty, no harm and respect.

Problems with the GCR

On the empirical side, the ideological bias in the GCR manifests itself in three different ways: the inclusion of irrelevant indicators that support the bias; the exclusion of relevant indicators that run counter to the bias; and a reliance on naïve opinions, instead of available research evidence. Examples of each form of Kerr et al’s (1996) systematic bias follow. In the following discussion, indicators that are based on existing data are simply referred to as indicators, indicators that are based on the results of the questionnaire survey are referred to as questions.

Problem 1—Inclusion of Ideologically Contaminated Indicators and Questions (Judgmental Sins of Commission)

The GCR proposes indicators and asks questions that do not reflect scientific evidence, but ideological assumptions and beliefs of the researchers. In examining the GCR indicators and questions, we shall make comparisons with four other countries: Switzerland (7.6 million people), Sweden (9.2 million) and Singapore (4.7 million) because they, respectively, ranked in first, second and third place in the 2010 GCR, and Germany because at 82 million people it is somewhat closer in population size to the US (around 315 million), it is regarded as the economic powerhouse of Europe, and both the US and Germany are part of the G8.

Hiring and Firing

Question 7.04 of the GCR asks: “How would you characterize the hiring and firing of workers in your country?” Countries where hiring and firing are easy, receive a high score; countries where hiring and firing are impeded by regulations, get a low score. The underlying premise is that ease of hiring and firing confers competitive advantage. Ideologically speaking, this is probably the most contentious issue raised by the GCR. It is an issue that contributed to a recent Australian Prime Minister not only losing an election, it also cost him his own seat. In an attempt to make his party’s hiring and firing policy palatable to the Australian electorate, the then PM resorted to terminology used by the IMF—“labour market flexibility”. As Stiglitz (2002, p. 84) has pointed out, this is basically a euphemism for “lower wages, and less job protection”. Euphemisms, of course, are a form of deception whose purpose is to clothe unpleasant or offensive truths in agreeable language. In this case, the deception was more sinister, and hence quite unethical, assuming its purpose was to mislead the electorate. McKinsey & Company shares the IMF’s view about hiring and firing, but uses plain language: “Giving companies the freedom to hire and fire employees and to negotiate salaries will actually boost job creation overall in Europe’s economy” (Baily and Farrell 2005, p. 6). No research evidence for this view was provided. Interestingly, a study of over 200 manufacturing firms in the UK found that ‘low-road’ labour-market-flexibility practices such as a lack of employer commitment to job security, short-term contracts, low levels of training and low levels of human resource sophistication were negatively correlated with corporate performance (Michie and Sheehan-Quinn 2001).

The practice of hiring and firing may be feasible, or even unavoidable, in certain situations; for example, when producing cheap commodity items in emerging markets, in hiring in highly seasonal markets, or in restructuring failing enterprises quickly (Hodges and Woolcock 1993). However, research of best practice companies in innovation-driven economies does not support hiring and firing as a general practice (e.g. Ichniowski et al. 1997; Holm and Hovland 1999; Cascio 2002; Pfau and Cohen 2003; Glebbeek and Bax 2004; Hillmer et al. 2004; Ramsay-Smith 2004; D’Souza et al. 2005; Love and Kraatz 2005; Pfeifer 2005; Yu and Park 2006). Yet on this irrelevant metric, US managers quite legitimately rank the US 6/139 (it is easy to hire and fire in the US), whereas German managers rank Germany 133/139 (it is difficult in Germany). Unfortunately, from a national competitiveness point of view, this is a meaningless question. The point is, high-performing enterprises in innovation-driven economies such as Sweden, Switzerland, Germany and the US are much more interested in keeping staff turnover low (including during bad times), because research evidence shows that this does confer competitive advantage. For example, staff turnover at SAS in the US is around 4% whereas typical for the US IT industry is 20%. Even less innovation-focused companies such as Marriott Hotels in Hong Kong, which has a staff turnover of under 10% in a market where the industry average is closer to 30%, profit from low staff turnover (Avery and Bergsteiner 2011). High-performance companies understand hiring and firing to be a destructive organizational practice that serves short-term objectives at the expense of long-term performance. There are six key reasons why hiring and firing is a poor management practice.

First, research evidence shows that the direct monetary cost of later rehiring tends to cancel out the benefits of an at-will hiring and firing practice. Replacing a US call-centre customer-service representative costs roughly a year’s wages (Hillmer et al. 2004). Other reports place the cost of replacing people at anywhere between 50 and 250% of annual salary, depending on seniority.

Second, firms with high staff turnover invest less in training, which is counterproductive because training is linked to high productivity (e.g. Becker et al. 1997; Jacobs and Washington 2003; Wilson and Hogarth 2003). An ongoing research study by Bassi and McMurrer (2004), which takes the form of investment portfolios, found that over a nine-year period US public companies that invested heavily in training and developing their people outperformed the S&P stock index by almost 36%. A British study concluded that many UK companies are confronted by “a plethora of economic, social and institutional factors, which conspire to encourage operations that place a relatively low emphasis on higher level skills”, essentially condemning them to a “low skills equilibrium… situation where an economy become[s] trapped in a vicious circle of low value added, low skills and low wages” (Wilson and Hogarth 2003, p. viii). Their rather pessimistic conclusion was that “quick and easy solutions to moving the UK closer towards being a knowledge driven, high-wage, high-skill, high productivity economy may not be available” (p. xv). Similar mechanisms appear to be at play in the US. Foregoing training for the sake of some short-term savings in wage costs therefore seems poor economics.

Third, research shows that shareholder value can decrease by 5.6% if employees are, in effect, developed for their next job rather than for their current one (Pfau and Cohen 2003).

Fourth, firms that do not lay off have lower absenteeism, sick leave, and ‘internal migration’ (Cascio 2002; D’Souza et al. 2005).

Fifth, and perhaps surprisingly, even stock markets react negatively to downsizing (Love and Kraatz 2005; Djordjević and Djukić 2008).

Sixth, firing large numbers of people can have disastrous local and regional consequences. Two separate studies by University of Michigan researchers found that layoffs can lead to between eight and 15 other jobs being lost in the region (Krzyzowski and Molnar 2011; Zullo and Mukherji 2011). Layoffs should therefore be avoided if other, more innovative, options are available. For example, during the worst of the 2008–2009 GFC, BMW collaborated with the German government to shift many workers to a 4-day working week. BMW paid wages for 4 days; the government paid 80% of the wages for the fifth day, which meant that employees only lost 20% of one day’s pay. However, staff gained a 3-day weekend and retained their jobs. The government benefited because it only paid 80% of one day’s wages, instead of a full week’s unemployment benefits had the company terminated any of these workers; and the company reduced its wages bill while retaining its skilled workforce—a classic win–win–win situation.

The notion of hiring and firing has an intuitive appeal about it because of its obvious simplicity—sacking staff saves money, which instantly improves bottom lines. What could be simpler than that? It is, in fact, a highly complex issue that has many undesirable secondary effects for many stakeholders—and it has profound ethical implications. Key among these is that ad hoc hiring and firing is justifiable in only a few exceptional situations. Considerable anguish and cost is therefore unnecessarily inflicted on the most vulnerable. Some might argue that those who subscribe to the hiring and firing mentality are not acting out of malice, but because they see no other alternative, and hence have nothing to account for when things go wrong for the enterprise. The notion of ignorance as a mitigating circumstance is based on what a person could reasonably have been expected to know or understand in a particular circumstance (Bergsteiner 2012). It applies to those persons who through genuine lack of access to relevant information, or an inability to comprehend that information, are unaware of better choices. This would hardly apply to senior managers, part of whose business it is to find out best practice. Such information is widely available in research journals and books, by observing what best practice companies do, by taking note of who wins all manner of awards, by attending training courses, and so on. One must concede, however, that managerial disinterest in the ethical implications of hiring and firing reflects a general disinterest in this topic in the financial literature and media, which, after all, tends to be dominated by Anglo/US interests.

Thus, by including an irrelevant survey item (hiring and firing), excluding a relevant one (low staff turnover), ignoring the costs of hiring and firing (e.g. redundancy payments and the high cost of rehiring), and ignoring ethical implications (e.g. inflicting unnecessary pain on employees, long-term damage to the enterprise, and costs to society), the ranking is distorted in the direction of the Anglo/US business model. However, the GCR’s distortion on this metric runs deeper.

Indicator 7.05 collates data on “redundancy costs (in weeks wages)” and indicator 7.03 examines the “rigidity of Employment Index”, which is itself “the average of three subindexes: Difficulty of hiring, rigidity of hours, and difficulty of firing” (GCR 2010, p. 497). Indicators 7.03 and 7.05, and question 7.04 therefore basically address highly related issues. Comparing the pattern of rankings for these three indicators/questions bears this out. For example, for the US and Sweden, the rankings for these three subindices, respectively, are 1, 6; 1, 90 and 128, 48. Obviously, the reason firing is expensive in Sweden is because it is fairly difficult, and one of the reasons it is fairly difficult is because the employment index is fairly rigid. Is there a pattern here? Asking the essentially same question thrice further biases the overall results in one direction. Arguably such practice is not only poor science, but unethical because it distorts the GCR rankings, which in turn leads to wrong decisions being made.

Compensation, Productivity and Wage Setting

Question 7.06 asks: “To what extent is pay in your country related to productivity?” This is another question where folk wisdom, or mainstream thinking, and science tend to be poles apart. Both US and German executives tend to believe that because the US pays lower wages than Germans, the US must be more productive. Consequently, the US executives ranked the US 9/139, and the Germans ranked Germany 43/139. This premise is, of course, false since salary levels per se do not determine productivity, they are an outcome. Productivity means output per unit of input. If, in a comparable situation, a German worker is capable of producing a 60% higher output than a British worker, which is what Leibenstein (1987) from the London School of Economics found in a comparison of two identical Ford plants, one in Germany the other in Britain, then it makes sense to pay the German workers higher salaries—higher productivity warrants higher wages. There are several interrelated reasons for Germans’ high productivity: (a) the German workforce is highly skilled (Estevez-Abe et al. 2001; German Private Equity and Venture Capital Association 2010); (b) Europeans “take a more aggressive stance toward employee self-influence” than do Americans; Americans tend to mean participation whereas Europeans mean empowerment (Manz 1990, p. 276); (c) a highly skilled and empowered workforce requires less costly supervision than its counterpart in the US (Hofstede 2003/1993); and (d) Germany delivers high quality and innovative products. The resultant higher productivity of the German workforce therefore justifies a shorter working week and higher rates of pay (Ewing and Wunnava 2004), which in turn raises morale, commitment and loyalty to the organization. German workers thus contribute to and benefit from a virtuous cycle.

Streeck’s (1997) paper “German Capitalism, does it exist, can it survive?”, postulated rather pessimistically that Germany’s Rhineland capitalism with its high-skill, high quality and high-wages labour market was destined to come under pressure from low-wage countries. Five years later, Hoffmann et al. (2002, p. 11) in response to Streeck observed: “At present, however, the empirical evidence suggests that it is particularly the low-skill, low-pay labour markets in the EU that are coming under competitive pressure from low-wage countries.” Five years later again, Venohr and Meyer (2007) published a paper whose content is reflected in the title: “The German Miracle Keeps Running: How Germany’s Hidden Champions Stay Ahead of the Global Economy.” In 2011, one of Germany’s most pressing problems is a shortage of skilled labour.

Even the US government appears to be accepting the US’s underlying lack of competitiveness and be embracing the notion that high pay is not a bane per se. Indeed, there is tacit acknowledgement that competitiveness is linked to high-skill–high-wage structures. In 2007, President George Bush signed into law the “America COMPETES Act” (capitalization part of original), an Act designed “to invest in innovation through research and development, and to improve the competitiveness of the United States”. Section 1005(a) of the Act states: “It is the sense of Congress that, in order to strengthen the competitiveness of United States enterprises and institutions and to prepare the people of the United States for high-wage, high-skill employment, the Federal Government should better understand and respond strategically to the emerging management and learning discipline known as service science” (America COMPETES Act 2007).

However, the Anglo/US media steadfastly maintain their simplistic position that competitiveness is largely a matter of hourly pay rates. For example, under the headline “Is Deutschland AG kaputt?”, the Economist on December 7, 2002 questioned the viability of the German business model stating:

the hourly cost of labor in manufacturing industry in western Germany, including wages, social security (including health), and pension contributions, is 13 percent more than in America, 43 percent more than in Britain and 59 percent more than in Spain, according to the US Bureau of Labor Statistics.

So what? In like vein, Business Week (Saving Germany’s auto industry 2004, p. 72), asks: “could auto manufacturing become the 21st century equivalent of Germany’s coal industry, uncompetitive and destined to collapse?” The major reason advanced by BusinessWeek for this predicted imminent demise is Germany’s 35-h workweek and the fact that “at GM-Opel’s Bochum and Russelsheim (sic) plants, workers earn $41 an hour”. Again, so what? Seven years later, GM had been nationalized, while BMW had announced its best year ever. Curious also, while Germany had a trade surplus of US$ 93.6 billion on car sales in 2010, the US incurred a trade deficit on car sales of US$ 77.5 billion (The International Trade Centre 2011). Even more curious, according to the OECD (2011), the US has run a trade deficit every year since 1976; Germany a trade surplus. Noteworthy also is that the only ‘German’ car company that is in serious difficulties is the one with an American parent. One has to be forgiven for asking: who is kaputt, and who is competitive?

Question 7.02 asks: “How are wages generally set in your country?” (‘by a centralized bargaining process’ = low score, ‘up to each individual company’ = high score). This question offends academically on multiple levels; it is simplistic, bi-polar and ideology-driven. Of greatest concern is the implicit assertion that centralized bargaining processes of any kind are necessarily bad. This ignores several findings made by Hoffmann et al. (2002, pp. 28, 31–33). Among other things, these authors found that: (a) the European scenario appears to be much more nuanced and dynamic than that of the US; (b) contrary to some authors’ expectations there was little Americanization of industrial relations in Europe; rather it has undergone “an astonishingly lively and broad-based revival” of institutionalized consultation and cooperation on macroeconomic policy, involving peak representation from the state, employers’ associations and the organized labour movement; (c) centralized coordinated bargaining systems exhibited lower unemployment rates; (d) inflation rates and income inequality were lower in bargaining systems with a medium and a high degree of centralization/coordination; (e) “even employers have been reluctant to abolish the general structures of collective bargaining systems”; and (f) “in terms of the European social model, collective bargaining at the sectoral level performs better because it limits wage competition (and some forms of labour market regulation), ensuring a higher level of social cohesion”. Q7.02 essentially confronts countries that regard their central wage bargaining systems as an integral part of their industrial landscape with the false proposition that this is a non-competitive practice. Some could interpret the manner in which this question was put as an affront, since it disenfranchises a view that centralized bargaining processes are worthwhile. We argue that this kind of manipulation of the survey process is arrogant and unethical.

Research and Development

Question 12.03 asks: “To what extent do companies in your country spend on R&D”, the premise here being that high R&D expenditure translates into high innovation. “The myth that higher R&D spend translates into competitive advantage has been around for decades” (Jaruzelski et al. 2005). However, R&D captures only one aspect of innovation capability, the other is systemic innovation; that is, how effective a firm is in eliciting, tracking, implementing and rewarding innovative ideas from throughout the organization. Such enterprises can be highly innovative notwithstanding their relatively modest R&D budgets. Apple, which had an R&D budget of only 5.9% (average spend in the US computer industry is 7.6%) in 2005, has been described as an innovation machine (Jaruzelski et al. 2005). Similarly, Colgate has fared extraordinarily well with its incremental approach to innovation (Avery and Bergsteiner 2011). Google takes innovation one radical step further and in addition to systematic innovation processes has ‘20 percent time’, whereby Google engineers spend 1 day a week working on projects that are not necessarily in their job descriptions (Manyika 2008). Indeed, the Jaruzelski study of the 1,000 largest spending corporations on R&D found no correlation between amounts specifically allocated to R&D and financial performance. Therefore, this question needs to be rephrased to capture the general capacity for innovation. In so far as the capacity for deep innovation tends to be more prevalent in so-called Rhineland companies, which tend to dominate in certain European countries (e.g. Albert 1992, 1993; Hutton 2002), such a question can be expected to improve the rankings of those countries.

Sophistication of Financial Markets and Soundness of Banks

Interestingly, Question 8.01 from the 2009 survey has been dispensed with in subsequent reports. It asked: “How would you assess the level of sophistication of financial markets in your country?” Curtis (2008), CEO of Greycourt & Co., Inc., provides an interesting insider’s view on the simultaneous sophistication and, in his view, stupidity of most of the US financial fraternity. While bankers were extraordinarily innovative in devising ingenious ways of enriching themselves, much of what they traded in was worthless junk (euphemistically referred to as subprime), ultimately leading to some players being wiped out, the near-collapse of an entire industry, and a severe shaking of several national economies. The ethics of the finance industry have been heavily criticized by Curtis (2008) among others.

Australian banks, while being on a par with US banks on the question of sophistication, were a good deal more prudent than their other Anglo counterparts—partly as a result of government regulation—and hence fared very much better during the worst of the GFC. Whereas Australia’s GCR ranking on the soundness of its banks (Q8.07) remained steady over the years 2008–2010 at, respectively, 4, 3 and 3, the US’s plummeted from an already poor 40 to 108 in 2009 and 111 in 2010. In this case, it was not so much that the question was wrong, but that the wrong people were asked the question. Had competent economists, rather than naïve managers, answered Question 8.07 objectively in 2008, it is possible that the results might have alerted some to the underlying fragility of the US financial system. We say possible, because rating agencies, which one could expect to have the expertise to have uncovered the unsoundness of the financial system, but which had a serious conflict of interest, failed in this crucial role.

It is revealing that the US’s perceived high 2009 ranking on market sophistication (rank 11) failed to translate into a high ranking on soundness of its banks (rank 108). This validates Curtis’ (2008) analysis of the US banking system, namely that soundness became the victim of delusional and malevolent sophistication. The dramatic fall in the US’s perception on the soundness of its banking system also highlights the extent to which perceptions can be out of step with reality. After all, in the period 2008–2009, the reality of the banking system did not change much; however, perceptions changed dramatically. Essentially the perceptions of 2008 were wrong, that is, many banks, including some very large ones, never were particularly sound.

There are also several questions that lack any kind of utility; we can only touch on two of them here—a question on ethics and three indices on GDP.

Ethics

Q1.17. asks: “How would you compare the corporate ethics (ethical behavior in interactions with public officials, politicians and other enterprises) of firms in your country with those of other countries in the world?” (bracketed text is part of the question). While it is commendable that ethics is on the agenda, the results from this question are likely to be meaningless for several reasons. First, opinions differ hugely as to the role of ethics in business. The most extreme view, a view now enjoying little support in the non-Anglo world, was held by Ladd (1970, pp. 499–500) who stated:

for logical reasons it is improper to expect organizational conduct to conform to the ordinary principles of morality. We cannot, and must not expect formal organizations, or their representatives acting in official capacities, to be honest, courageous, considerate, sympathetic, or to have any kind of moral integrity… Actions that are wrong by ordinary moral standards are not so for organizations; indeed they may often be required.

Friedman (1970) is one of the most influential proponents of a slightly more nuanced view that at least disapproved of deception and fraud. In his book Capitalism & Freedom he stated that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (Friedman 1970, p. 125). Friedman considered corporate engagement in anything beyond that not only as irrelevant to corporate purposes, but unethical and socialistic.

Businessmen [that] believe that they are defending free enterprise when they declaim that … business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers … are – or would be if they or anyone else took them seriously – preaching pure and unadulterated socialism. (Friedman 1970, p. 33)

Essentially, Friedman posited that executives have no right to expend corporate resources on anything that does not directly advance the owners’ interests, “which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom” (Friedman 1970). In Friedman’s view, for executives to condone and engage in, say, philanthropic or charitable matters is ethically wrong because it is a breach of the fiduciary duty that executives have vis-à-vis the owners of the enterprise. In other words, the executives are misappropriating others’ money. However, in his writings, Friedman never delivered proof that corporate engagement in, say, philanthropic activities, no matter how modest, necessarily was contrary to the interests of the owners or invariably reduced their wealth—it was an assertion. He also failed to acknowledge that polluting others’ environment transgressed against basic ethical, and sometimes legal, rules of society.

Interestingly, in a survey by Jose and Thibodeaux (1999), 80% of managers agreed with the statement that being ethical is good for the bottom line and 87% disagreed with the statement that it is necessary to compromise one’s ethics in order to be competitive. Perhaps this is part of a change noted by Minkes et al. (1999) whereby:

organisational effectiveness and organisational efficiency, formerly central issues for practising managers, with directors thinking in terms of goal achievement for their respective organisations, have now been augmented by an awareness of issues in business ethics, and a requirement for members of the corporate governance to behave in more socially responsible ways.

Second, interpretations as to what constitutes (un)ethical behaviour differ widely between countries. It seems that for many Chinese, stealing IP is the sincerest form of flattery. In the US, Lachenauer and Stalk (2004, pp. 67–68) equate success in business with ‘hardballing’, which includes “plagiarize with pride” and “… steal any good idea… as long as it isn’t nailed down by a robust patent”. Others consider such behaviours to be wholly unacceptable. In other words, certain behaviours could be judged quite differently depending on person, organization and country. In countries that embrace Rhineland capitalism, which is diametrically opposed to Anglo/US capitalism on many dimensions (e.g. Albert 1992; Avery 2005), ethical corporate behaviour is not only a core value, but an acknowledged area of organizational research with different foci and streams. For example, Preuss (1999), in an overview of the wide scope that business ethics has reached in German-speaking countries, points out that business ethics can apply at the macro-level (Wirtschaftsethik, the ethics of the economic system), at the meso-level (Unternehmensethik, the ethics of the corporation), and at the micro-level (the ethics of individuals, dyads or small groups). Practical examples at these three levels would be: government policies on unemployment benefits (macro-level), corporate hiring practices (meso-level), and expense account practices for senior managers (micro-level). The issues raised by Preuss would be equally relevant in many other parts of the world, although the emphasis would differ depending on cultural, political, social, economic and general developmental factors.

Third, Q1.17 specifically excludes three key groups of people that corporations routinely have to deal with—employees, customers and local communities. We suggest that such exclusion is not only dysfunctional, but unethical.

Rather than ask a broad question such as Q1.17, it would be much more productive to ask specific questions such as: In your country, is it considered ethically ok for a banker to sell a customer’s bank debt without the customer’s knowledge or approval? Or, in your country, to what extent can companies deceive customers about product ingredients? Even if the researchers cannot reach a consensus as to what is ethical and what is not, the answers themselves can be interpreted in a meaningful way. For many countries, information on the latter question would be available to corroborate such data, for example, to examine how strict food labelling laws and advertising codes are.

Questions on ethics are important because acting ethically pays off for an enterprise, not only by protecting its reputation, but also financially. Ethical companies are likely to generate higher market value than their less ethical competitors, as an analysis of the performance of ethical S&P 500 companies between 2000 and 2004 showed. Financial outcomes for ethical firms’ were consistently and substantially higher than the remaining S&P companies (Verschoor 2004). In 2004, the average additional value created by the ethical companies was $9.4 billion. This confirms similar findings among major UK companies that being virtuous, that is, encouraging positive behaviour in employees, pays off on various financial measures (Cameron et al. 2004). Not only do ethical companies outperform unethical businesses, but unethical or unlawful behaviour can also be expensive. Cheating on reporting requirements, falsifying expense accounts, paying or accepting kickbacks, fixing prices, stealing from employers, and taking bogus sick days cost industry billions of dollars (Jones 1995). Damage to reputation can be irreparable. Research indicates that a firm’s reputation relates positively to its future financial performance (Eberl and Schwaiger 2004). Part of this benefit comes from attracting motivated employees. Stanford University researchers found that MBA graduates would sacrifice salary to take challenging work at corporately-responsible firms (Montgomery and Ramus 2007). Employees are likely to better understand and commit to a strategy when they think their leaders have high ethical standards (Recardo 2000), which is valuable given the importance of employee commitment in achieving visions, particularly in turbulent times.

GDP Indices

Indicators 0.01, 0.03 and 0.04 are all concerned with GDP–GDP valued at current prices, per capita and as a share of world total. GDP refers to the market value of all final goods and services produced within a country in a given period. However, GDP is not an effective measure of wellbeing, social progress, standard of living, or even economic progress (Bergh 2009); it is “badly flawed as a guide to a nation’s economic well-being” (Economist, February 11, 2006). In fact, GDP does not measure productive capacity very well either, because it includes ‘defensive’ expenditures such as prisons, cleaning up pollution and repairing smashed cars; as well as the production of resources that are being wasted (e.g. gasoline), or that are wasteful (e.g. all low-quality goods). Another serious deficit of GDP is that it renders readers liable to the WYSIATI delusion (What you see is all there is) (Kahneman et al. 2011). There are other problems with GDP such as its violation of basic accounting principles, its inability to capture income inequality, the role of the informal economy, the aggregation of highly disparate and variable factors, and many more, a discussion of which is beyond the scope of this article. GDP as generally measured would tend to favour the US over Europe since it basically ignores that the US is high on income inequality, on unproductive expenditures such as wasted energy, and on defensive expenditures such as prisons.

In summary, the GCR includes a host of indicators and questions that reflect a distinct preference for certain aspects of the Anglo/US business model for which there is no evidence that they confer competitive advantage. Indeed, research shows that by and large they are uncompetitive practices. This artificially inflates the rankings of countries that subscribe to the Anglo/US business model and hence leads to sub-optimal decision-making at corporate and national levels.

Problem 2—Exclusion of Relevant Indicators and Questions (Judgmental Sins of Omission)

Numerous factors known to confer competitive advantage are not part of the survey. Here are some possible questions that could have been asked. For each question, we state in which way the factor affects competitiveness, and how this would likely affect the rankings.

Stakeholders

Q1: To what extent do the various countries’ corporations embrace a wide range of stakeholders? This raises two key issues. One, the exceptional status that is accorded to all types of ‘owners’ under the so-called shareholder model, and an apparent unawareness of the fact that stakeholder-focused companies do better on average.

Defenders of the shareholder model take a view of ownership that is problematic on three counts. One, it simply relegates past injustices to the scrapheap of history; two, it overstates the contribution some owners make to corporate performance; and three, it negates the valuable contribution of others. All three of these raise profound ethical issues. To quote Bishop (2000, p. 583) on the first issue:

The process justification for property rights often emphasizes property acquisition and transfer by legitimate means such as hard work and skills, but this cannot justify current ownership given the fact that all the land and many of the other assets in North America changed hands at some point in history through conquest, seizure, wars, theft, fraud, and other non-consensual, non-free-market exchanges. And desert (sic) based on hard work, skills, and risk taking makes inheritance problematic, and overlooks the fact that more than half the hard work that made North America what it is today was done by slaves, indentured workers, women, Native Peoples, and others whose property rights were not recognized.

An identical statement could be made about Australia, New Zealand and other colonized countries. On the point of overrating some owners’ contribution, Harvard Business School professor Bower said: “It’s not at all obvious that the very short-term investors should be regarded as owners. They are basically speculators to whom we are giving the rights of ownership” (Stern 2006, p. 11). The notion of ownership becomes macabre in the case of speculators who trade in microseconds, or worse still, who buy and sell on the basis of computer-generated decisions. In such cases, CEOs often do not know who their owners are at any given time because shares change owners with such rapidity.

Partly as a consequence of this rigid view of ownership, defenders of the shareholder model reject the notion that an enterprise has obligations to parties other than its owners. While it is relatively easy to argue that the recipients of philanthropic activities are not core to an organization’s wellbeing, and hence do not qualify as stakeholders, it is rather more difficult to marginalize, or treat with disregard, key stakeholders such as suppliers, customers and employees. The latter are often referred to by corporations as their most valuable asset, but are not always treated that way. Avery and Bergsteiner (2011) contrasted the relative contributions of capital and labour, reward mechanisms, and their relative risk exposure (Table 1). On the shareholder side, mechanisms are in place that recognize entitlements derived from the provision of capital (e.g. residual cash flow), as well as losses incurred from conducting the business (e.g. tax offsets). On the labour side, some contributions are specifically rewarded (e.g. labour), others mostly are not (e.g. ideas), and losses are not recoverable (e.g. losing pension entitlements because the company went into bankruptcy). Furthermore, the only significant beneficiary on break-through ideas is the provider of capital, ostensibly because s/he is risking money. An employee is not deemed to be taking any risks whatsoever in taking a job with a company; therefore there are no mechanisms such as tax offsets for compensating losses. In fact, partly because of limited-liability laws, the risks for employees in working for an enterprise can be high. When it comes to remuneration, the employee is rewarded on the basis of a fixed wage per unit of labour time with no consideration of value added. In other words, even if an employee’s idea increases business turnover tenfold, the only entitlement under normal circumstances is his/her wage, and this irrespective of whether the employee had the idea at work, or at home. Therefore, in a windfall situation, the provider of the capital would be entitled to the windfall, the employee may receive no more than his/her regular wage, or a modest bonus. In a worst-case scenario, the enterprise socializes the losses, while the employee ‘loses his shirt’.
Table 1

A comparison of contributions, reward mechanisms, and relative risk exposure of capital and labour

 

Shareholder

Employee

Contribution (value creation)

Capital (N.B. in public corporations, shareholders own the shares but not the corporation’s assets or liabilities)

Labour, know-how, skills, ideas, entrepreneurship, cultural fit

Fungibility

Complete

Low

Entitlement

Residual cash flow

Wages, perhaps bonuses

Expectations

Residual cash flow

Wages, other rewards, personal growth, fulfillment

Risk exposure

Low to high (risk can be managed or spread, can get out at any time, and quickly)

High (risk difficult to manage, cannot spread risk, cannot withdraw labour easily)

Catastrophic loss

Loss of capital (can be offset against gains elsewhere)

Loss of job, back-wages, superannuation/pensions (no offsetting)

Extraordinary gain

Shareholder is the major beneficiary

Some employees may derive modest to large benefits depending on shareholding/options

Source: Avery and Bergsteiner (2011, Table 3-1, p. 112)

As to the relative performance of organizations that embrace a wide range of stakeholders versus those that do not, considerable research shows that the former outperform the latter and enjoy other advantages as well (e.g. Jones 1995; Berman et al. 1999; Ruf et al. 2001; Vora 2004; Luk et al. 2005; Corsten and Felde 2005). A study by Harvard researchers Kotter and Heskett (1992) found that over an 11-year period stakeholder-oriented companies outgrew purely shareholder-focused firms by a factor of 4.1 on revenue, 7.8 on size of work force, 12.2 on stock price, and 756 on net income (shareholder-focused companies grew by only 1%). And yet some pundits marginalize stakeholders as a matter of policy. For example, George Stalk and Rob Lachenauer, respectively, senior vice president and vice president with the Boston Consulting Group, in waxing lyrical about the benefits of hardball playing, sidelined both employees and customers: “… squishy issues—leadership, corporate culture, customer care, knowledge management, talent management, employee empowerment—[have] encouraged the making of softball players” (Stalk and Lachenauer 2004, p. 64). Interestingly, illegal behaviour is rarer in organizations perceived as being employee- or community-focused, compared with their competitors (Weaver et al. 1999). Suppliers often fare no better than employees and customers. Here are two comments from the Harvard Business Review, made by the CEO and a senior executive of two suppliers to the American auto industry. “Honda is a demanding customer, but it is loyal to us. American automakers have us work on drawings, ask other suppliers to bid on them, and give the job to the lowest bidder. Honda never does that”. And, “in my opinion, Ford seems to send its people to ‘hate school’ so that they learn how to hate suppliers. The company is extremely confrontational” (Liker and Choi 2004, p. 104).

A useful perspective on stakeholder relationships emerges from Sako’s (1992) distinction between arms-length contractual relations (ACR) and obligational contractual relations (OCR). These two concepts are envisaged as forming ends of an ACR–OCR continuum. At the ACR end, explicit contracts detail each party’s roles, tasks and obligations under every imaginable circumstance. Unforeseen events are dealt with by invoking universalistic rules. Generally, organizations accept employees, suppliers and customers as relevant stakeholders to enter into contracts with. At the other extreme, OCR relies heavily on trust, strong social relationships and self-control to regulate relations between parties. There are incentives to be flexible where required, and to do more than the partner expects to maintain good will. In the context of this discussion, this would basically include all others who are affected by a corporation’s activities, but with whom they have no contractual relationship. Interestingly, Sako concludes that there are good reasons for the empirical finding that OCR is associated with superior performance compared with ACR. In other words, Sako’s work raises the question of whether enterprises might well be served to do more than a stakeholder, such as society, expects, in order to retain their ‘license to operate’.

Again, in so far as American and British CEOs favour the short-term shareholder model, and Continental European CEOs prefer to engage long-term with a range of stakeholders (Stadler et al. 2006), Q1 would raise European countries’ GCR ranking vis-à-vis the US.

Corporate Social Responsibility and Ethics

Q2: To what extent do corporations embrace the concept of corporate social responsibility?

The GCR has no question on this and so presumably does not consider it relevant to competitiveness. Indeed, in its 492 pages, the 2009 GCR does not mention CSR, social responsibility, or even responsibility. The 516-page 2010 GCR mentions social responsibility once in a section-heading, and then no more. CSR does not get a mention. In this the GCR reflects influential main stream financial media such as the Economist. While the Economist (2005a) concedes that there is a form of CSR that raises profits while simultaneously advancing society’s wellbeing (it calls this “good management”), it warns of three other types of CSR it calls “borrowed virtue”, “pernicious CSR” and “delusional CSR”. The arguments advanced by the Economist, while cleverly formulated, are shallow and specious. For the purposes of this article, one example will have to suffice.

Remember that corporate philanthropy is charity with other people’s money – which is not philanthropy at all. When a company gives some of its profits away in a good cause, its managers are indulging their charitable instincts not at their own expense but at the expense of the firm’s owners. That is a morally dubious transaction. When Robin Hood stole from the rich to give to the poor, he was still stealing. (Economist 2005a)

This is a specious analogy because it is based on three challengeable assumptions: that the rich were legitimately rich, that the poor were legitimately poor, and that the transfer of goods from the alluded-to rich to the alluded-to poor was therefore necessarily wrong. One could with some historical and moral authority rephrase this statement to say: when Robin Hood stole from thieves and villains to restore to the poor that which belonged to them, he was correcting a wrong. As Lodge (1982, p. 85) said: “It is right not to steal but who among us would deny Robin Hood his glory?” Sadly, things have not changed that much. The rich still steal from the poor, but we now have laws that sanctify this. Immense sums of others’ money are, in effect, ‘stolen’ by corporations when they socialize their losses, which all too frequently have been generated by unethical and sometimes illegal behaviour. This, indeed, is a morally dubious transaction that is, however, legally sanctioned by morally debatable limited-liability laws. Is this not a modern version of the rich legitimately stealing from the poor, by cloaking their actions in a mantle of respectability via laws that were made for them or that they made for themselves?

Contrary to Friedman and the Economist, research suggests that corporate activities that one would not generally regard as core to an enterprise’s business, such as community engagement, do not necessarily harm the enterprise, but generally benefit it. Reynolds (2003), for example, provided a theoretical framework and some cases to demonstrate that supporting community-focused programs, such as educating children in poor countries, can be right and profitable when strategy and ethics are treated as mutually supportive rather than mutually exclusive domains. Singer (2010) also examined this relationship in a highly theoretical manner and concluded “that as our understanding of the strategy–ethics relationship develops, our main focus should be on discovering, designing and re-inventing good ways to live with others”. While neither the above practical nor the theoretical research is proof of a causal relationship between corporate social responsibility, ethics and profitability, research across large numbers of enterprises (Avery and Bergsteiner 2011) allows an inference to be drawn that engaging in CSR and stakeholder-focused activities can positively contribute to organizational outcomes, and is therefore an ethical practice.

There are many other questions that could be asked as part of the GCR that do not touch on ethics per se. However, in so far as they falsify research outcomes, they have no moral legitimacy.

Other Omitted Indices

In the following, we list somewhat more briefly a number of other omitted indices in order to render our proposition that a realistic ranking in the GCR for the US might be somewhere between 30th and 60th more plausible.

Q3: To what extent do corporations in this country report on their sustainability practices? There are a number of research institutes that report on this on a regular basis, such as oekom research AG, a sustainability rating agency specialising in the analysis of companies and countries according to social, environmental and ethical criteria. For over 15 years they have evaluated data on more than 1,100 companies from over 40 countries using more than 100 criteria. Its 2009 review of corporate responsibility ranks Spain highest out of a list of nine countries with 75.33% and the US last with 28.67%; Germany ranks 50% (oekom 2009). This does not bode well for the US since a recent study by Mahler et al. (2011) showed that sustainability-focused companies performed better in the GFC than their “conventional” rivals. In 16 of 18 industry sectors examined, sustainable companies achieved a performance over the survey period from May to November 2008 that was 15% better on average than that of the industry as a whole.

Q4: What proportion of CEOs in this country has the final say on everything, what proportion is the speaker of the top team? Research shows that top-team led companies tend to outperform CEO-led companies (e.g. Finkelstein and Hambrick 1996; Hubbard et al. 2002; Certo et al. 2006). This would favour European countries where the top-team-led approach is more common.

Q5: How successful is this country at attracting and retaining talented staff? This is much more important than the ability to fire them! As a group, corporations that are able to attract and retain talented staff outperform those that do not. Keeping voluntary turnover low contributes about 3.2% to a company’s value, while strong commitment to job security adds another 1.4% (Pfau and Cohen 2003). The introduction of retention initiatives at Fleet Bank reduced the turnover rates of salaried employees by 40% and of hourly employees by 25%, saving the bank $50 million (Nalbantian and Szostak 2004). This question would tend to favour European countries that embrace Rhineland capitalism, which is less prone to hiring and firing and has lower staff turnover (e.g. Doellgast 2008).

Q6: What proportion of corporations in this country is independent of the financial markets? Research shows that as a group, corporations that are independent of financial markets outperform those that are dependent. For example, a study of privately held, high-performing German companies revealed annual revenue growth rates among such companies almost double that of the German stock market index (DAX), and three times the average growth of all German companies (Venohr and Meyer 2007). If independence from financial markets were included, the Global Competitiveness Index for, say, the Netherlands and Germany would rise, for the US it would fall.

Q7: In your country, are management decisions driven more by short-term or by long-term considerations? This question has much to do with the fixation of stock markets on the short term, and the fact that the proportion of private investment versus publicly traded shares varies widely from country to country. Developed Anglo countries tend to have proportionally much higher exposure to the financial markets than most developed non-Anglo countries. For example, Australia and Germany both have around US$1.3 trillion of publicly traded shares (CIA 2011), even though Australia is less than a third the population size of Germany. This has quite profound ramifications for these countries. For example, because of their higher exposure to the financial markets, American, Australian and British CEOs tend to favour the short-term shareholder model, whereas CEOs in continental Europe have traditionally preferred leadership that engages long-term with a range of stakeholders (Stadler et al. 2006). Germany’s lower exposure to the financial markets means that more of its industry is able to plan for the long term, which in turn has been linked to higher and more sustainable performance. Curiously, while the WEF recognizes “that focusing only on the short term does not work” (WEF Global Agenda 2009, p. 21), it has no question on this—why?

Q8: To what extent are senior managers ‘grown’ from within their own organizations in your country? There are numerous studies that show that developing managers and CEOs from within organizations confers competitive advantage in various ways (e.g. Boeker and Goodstein 1993; Collins and Porras 1994; Clutterbuck 1998; Purcell et al. 2003; Van Herpen et al. 2005; Bernthal and Wellins 2006). The researchers concluded that it is not the quality of leadership that most separates excellent companies from others but the continuity of quality leadership. This kind of continuity; which preserves core organizational values, maintains a strong and consistent culture, and helps ensure that long-term plans and strategies remain on target; is typical of Rhineland capitalism. By contrast, Anglo/US capitalism’s propensity to hire senior executives from outside the organization and more frequent changes at the top puts core values and cultural identity at risk. This approach makes it harder to become and remain successful.

Q9: How engaged is staff in this country? Three separate studies by Towers Perrin (2003), Jamrog (2004) and Meere (2005) indicate that only about a quarter of US staff is engaged, around one-fifth is disengaged, and the rest is non-engaged. Meere (2005, p. 3) defines the three types of engagement as follows: “Engaged employees feel connected to their work and work with passion. Not-engaged employees participate at work but are considered timeserving and do not have passion for their work. Actively disengaged employees are unhappy at work and act out their unhappiness in the workplace through deviant behaviors”. Research carried out in the US on employee engagement estimates that the US economy is operating at only 30% efficiency because of low staff engagement (Bates 2004). Other research estimated that dis- and non-engaged workers cost the US economy between $270 and 343 billion/year (Shaw and Bastock 2005). This is an extraordinary indictment of US managerialism, but is not measured in the GCR. Key drivers for staff engagement are staff development, amicable labour/management relations, security of tenure, a stakeholder approach, a high degree of worker autonomy, a compelling/shared vision, teamwork, a willingness to share knowledge, an enabling culture, and very high levels of trust. These are all hallmarks of Rhineland capitalism, but factors that are difficult to achieve in an Anglo/US context (Avery and Bergsteiner 2011). As is apparent from this question, there are many other factors that contribute to the success of the Rhineland business model, which could be the subject of further questions in the WEF survey.

In summary, the GCR excludes a host of questions the inclusion of which would tend to improve the competitiveness of countries that subscribe to the Rhineland business model. Once again, this artificially inflates the rankings of countries that subscribe to the Anglo/US business model.

Problem 3—Reliance on Naïve Opinions in Lieu of Hard Science (Judgmental Sins of Imprecision)

At the beginning of this article, we stated that ideology refers to prescriptive doctrines that are not supported by rational argument, one of the hallmarks of the latter being a reliance on evidence and facts. Curiously, the GCR relies for some of its data on opinions of mostly naïve respondents, rather than on evidence gathered as part of prior research. Mostly, the results tend to have the effect of raising the rankings of countries that subscribe to Anglo/US capitalism.

Labour Relations

Question 7.01 asks: “How would you characterize labor–employer relations in your country?” (‘generally confrontational’ = low score; ‘generally cooperative’ = high score). In the 2009 and 2010 GCRs, US ‘experts’ ranked the US, respectively, at 24/134 and 33/139 on this question, German ‘experts’ ranked Germany 26/134 and 18/139. This once again is an over-simplification of a complex issue because labour–employer relations are generally measured on several dimensions (Weiler 2004), the most critical one being strikes. On this metric, neither of the above two results reflect what the research shows, namely that significantly fewer strikes occur in Germany than in the US. Obtaining conclusive data on this has, however, been somewhat of a challenge.

According to the UK Office for National Statistics (Beardsmore 2006), the US loses consistently more days through industrial disputes than does Germany (Table 2). In both cases, the actual number of days lost is likely to be higher than stated. In the case of the US, because only those disputes that involve more than 1,000 workers are included (Beardsmore 2006), and in the case of Germany, because “only strikes and lockouts reported by employers are included—not those reported by the unions which regularly outnumber the former” (Lesch 2011). Given that German employers are required by law to report stoppages to the local employment bureaus, this raises the question of how it is that strikes can occur in Germany that are recognized as such by the unions but apparently not by the employers? US statistics are also more likely to be inaccurate since “work stoppages data are gathered from public news sources, such as newspapers and the Internet” (US Bureau of Labor Statistics 2011, 2nd paragraph), whereas in Germany there is a mandated, albeit allegedly flawed, reporting mechanism. All inexactitudes and comparability issues notwithstanding, there is a broad consensus in the literature that in relative terms Germany has substantially fewer strikes than does the US.
Table 2

Working days not worked (=days lost) per 1,000 employees

 

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Germany

8

3

2

1

2

0

1

10

5

2

United States

51

42

38

42

16

161

9

5

32

8

The conclusion that Germany has a substantially healthier industrial relations climate than the US is borne out by other research as well. For example, in European countries with Works Councils (e.g. Austria, Denmark, Germany, Netherlands and Sweden) union-management relations tend to be far less confrontational and antagonistic than in the ‘union-busting’ Anglo countries. In countries with Works Councils, unions are involved in key decision-making processes and hence tend to adopt a more balanced attitude than is often the case in Anglo/US-run corporations (Albert 1993; Upchurch 2000; Hoffmann et al. 2002).

We hypothesize that the cause for the significant divergence between perceptions and reality is that in Germany industrial disputes are seen by its managers as a failure in the system, therefore provoking significant dissatisfaction, whereas in the Anglo world they are normality. German managers therefore may be disproportionally more negative about their industrial climate than their US counterparts—a case of different base line expectations.

Other Issues with the Opinion Survey

There is a whole raft of other questions where opinions were sought via the questionnaire, rather than drawing on available research data. In many instances, one wonders what made the researchers believe that they would elicit well informed opinions. For example, Question 5.03 asks: “How well does the educational system in your country meet the needs of a competitive economy?” For respondents from Anglo cultures to answer this question in an informed way would require an understanding of the different dual education systems practised in a number of European countries, how effective these practices are vis-à-vis each other, and how they compare with more conventional educational systems elsewhere. Given the generally negative image that the Anglo/US media paint of Europe begs the question: why would Anglo/US managers want to inform themselves about business, educational and other practices in such allegedly backward countries?

Q5.04 asks: “How would you assess the quality of math and science education in your country’s schools?” The results of the PISA tests surely are of relevance here. While only 30 countries participate in the PISA studies, they tend to be countries that score highly in the GCR, and so would provide a good validity check. If one compares the 2009 test-based results of the PISA study (using the totals of the overall reading scale, mathematics scale and science scale) with the 2009 opinion-based GCR rankings for Australia, Germany, Japan, Singapore, Sweden, Switzerland, the UK and the US, one obtains the following rankings (first number in each case is PISA, second number is GCR): Singapore (1, 1), Japan (2, 5), Australia (3, 3), Switzerland (4, 2), Germany (5, 8), UK (6, 6), US (7, 7) and Sweden (8, 4). Interestingly, while there is complete concordance for Singapore and for the three Anglo countries, the GCR overestimates the performance of Switzerland and Sweden and underestimates the performance of Japan and Germany. While these results do not reveal any ideological biases, they are nonetheless misleading. One also wonders why the GCR question was limited to “math and science education”. Is there an implicit assumption that a humanistic education is not relevant to managerial education?

Q6.15 asks: “In your country, how do buyers make purchasing decisions?” (‘based solely on the lowest price’ = lowest score, ‘based on a sophisticated analysis of performance attributes’ = highest score). This question delves into the realms of psychology, sociology and economics and is far too complex for naïve opinions to be able to produce meaningful comparative knowledge across 139 countries. In any event, the notion of homo oeconomicus was debunked a long time ago. In this context, one is tempted to ask to what extent (presumably) sophisticated purchasers of subprime mortgage pools, securitized loans, Auction Rates Securities and other dodgy financial instruments were driven by price rather than “performance attributes”?

In summary, the GCR overly relies on naïve opinions rather than on informed research data, and poses questions in a manner and on topics that are unlikely to result in informed answers. To what extent, and in what way, this biases results can only be ascertained through a substantial research effort that is beyond the scope of this article.

Problem 4: Methodological Problems

According to the GCR, the questionnaire survey asks executives to provide their expert opinions on 79 aspects of the business environment in which they operate. The survey raises several questionable methodology issues that further skew the results in the direction of Anglo/US capitalism:
  1. 1.

    The WEF defines “competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country”. This definition can be read in three ways: one, the word “determine” can refer to input or endowment factors (e.g. size of domestic market), that make it more or less likely that a country is competitive; two, it can refer to actual output measures of competitiveness (e.g. GDP per capita); and three, it can refer to a mixture of input and output factors. Since these input and output factors constitute independent and dependent variables, they should not be part of a composite measure of competitiveness. After all, when two countries with similar potential (or capability) achieve vastly different outcomes (or performance), they rank the same on potential, but rank differently on the outcome. Mixing the two in the one measure therefore makes no sense. Yet this is exactly what the GCR does. Mixing these factors also runs counter to a very old adage, namely that the proof is in the pudding—not the recipe. Were the rankings done on ‘pudding facts’ alone, the US would not rank nearly as well as it has traditionally done because its performance on many of these indicators is mediocre to dismal. For example, life expectancy is 34/139, government debt 122/139, the national savings rate 130/139, exports as a percentage of GDP 131/139, and imports as a percentage of GDP 137/139. There are many other ‘pudding facts’ that one could add to this list, such as the US’s third-last place on a ranking of inequality and poverty among the 30 OECD member states (just before Mexico and Turkey); a mediocre ranking of 66/151 on van de Kerk and Manuel’s (2008) Sustainable Society Index; and possibly related to these, the US jail/prison population, the world’s largest at around 25% of the globe’s entire prison/jail population. Recalculating the US’s GCR ranking on the basis of relevant ‘pudding facts’ therefore would suggest that its ranking may be somewhere between 30th and 60th out of the 139 countries included in the GCR survey.

     
  2. 2.

    Is it reasonable to presume similar base lines for all nations on the different survey items? Who sets the benchmark on questions such as Q1.08: “How would you rate the composition of public spending in your country?” (‘extremely wasteful’ = low score, ‘highly efficient in providing necessary goods and services’ = high score). The premise here seems to be that the higher the proportion of public spending, the lower the country’s competitiveness. A study based largely on OECD data by Birch and Cumbers (2007) showed that there is no such correlation. For example, Sweden (rank 2 on the 2010 GCR) and the US (rank 4), respectively, spent 52.5 and 38.9% of GDP on government expenditure and, respectively, had a tax burden of 47.9 and 26.9% (Heritage Foundation 2011).

     
  3. 3.

    Is it reasonable to assume that people from different cultures necessarily interpret questions in the same way? If questions are answered quite differently because of cultural background (Ma 2009), this undermines the validity of the survey results. While the GCR attempts to take countries’ stage of development into account by applying weightings, depending on whether a country is “factor-driven”, “efficiency-driven”, or “innovation-driven”, it takes no account of the fact that there are significant cultural differences in how business is typically conducted in different countries. Thailand has embraced the notion of a “sufficiency economy” (National Economic and Social Development Board 2004), while Singapore remains consumer driven.

     
  4. 4.

    How meaningful (and statistically valid) is it to draw conclusions about the competitiveness of, say, China by interviewing 362 Chinese managers out of a population of 1.3 billion? Indeed, how meaningful is an average sample size of 98 respondents per country?

     
  5. 5.

    Which of the 79 questionnaire-based survey items are these managers expert on? All of them? For all 139 countries? How was this expertise established?

     
  6. 6.

    Why were opinions sought on issues for which research evidence exists? While opinions are always interesting, they do not necessarily reflect reality. Is perception deemed more important than reality? If so, why?

     

In summary, the GCR is prone to a range of methodological flaws some of which were noted by previous researchers, but were not addressed. Their effect mostly appears to work in favour of the Anglo/US business model.

Summary and Conclusions

In the case of the US, the GCR is, and always was, grossly misleading. The events of mid-2007, and subsequent events, revealed that the US economy was never the stellar performer it was made out to be, but was a myth that was kept alive by hype, (self)deception and blind faith (Curtis 2008). As everybody now recognizes, mid-2007 was no accident, but a disaster waiting to happen.

Clearly the GCR’s, that is, the WEF’s, bias is all in one direction, namely towards Anglo/US capitalism. It represents the polar opposite of another business model called the Rhineland model, also known as social market economics, stakeholder-centred capitalism, or simply as the Continental model. These terms find applicability at both the level of the state and the organization.

At the level of the state, while current comparisons generally lack scientific rigor, they in no way support the efforts of some US media and US-dominated institutions to promote Anglo/US capitalism as a global role model. Indeed, most of the available evidence suggests that the Rhineland model facilitates better national outcomes. At the level of the firm, the evidence for the superiority of the Rhineland model over the Anglo/US model is long-standing and overwhelming. Interestingly, much of this research comes out of the US, and the list of leadership gurus who urge a change in approach reads like a who’s who of American academia—Warren Bennis, Clayton Christensen, Stephen Covey, Austrian-born Peter Drucker, Gary Hamel, Lawrence Mitchell, Tom Peters, Joseph Stiglitz, Dave Ulrich, Margret Wheatley, just to name a few. And yet, the WEF and other US-dominated institutions persist with their bias towards the Anglo/US model. Again, we quote the Economist (May 21, 2005b): “The way to support enterprise – American enterprise, the best in the world – is to be as unEuropean as possible”. Even at face value this is a silly comment given the huge variety of political, social and economic systems that constitute Europe.

While the WEF Global Agenda (2010) is more balanced than the GCR, the WEF’s Council on Benchmarking Progress in Society has recommendations for establishing, among other things, a “Best Practices Benchmarking Handbook” (p. 58). If this handbook draws in any way on the GCR, the GCR’s biases stand to be perpetuated, and with it decision making that is unethical in its effects on countries, corporations and their stakeholders.

It is axiomatic that in order to be able to solve a problem, one must first recognize that one has a problem. Unfortunately, in this regard the WEF, the pro-US media, certain US-dominated institutions, and other partisan groupings do not know what they do not know—and do not want to know. In the GCR, the US’s poor performance is simply negated by swamping the abysmal ‘pudding facts’ with a plethora of frequently irrelevant ‘recipe’ parameters or opinions.

As to which country might top a set of sanitized competitiveness rankings (one on potential, the other on actual performance), we are reasonably confident that as far as per capita performance is concerned, it will be one of the highly developed countries in central or north-Europe, Asia, or Oceania. Perhaps it will be Switzerland, given that it has made top ranking in the 2011 Global Innovation Index, as well as top ranking for the second year in a row in the GCR, despite the numerous biases favouring the US.

As far as the potential for competitiveness is concerned, one would, of course, expect the US to rank very highly. However, here too the GCR rankings are overly simplistic because they fail to take account of countries’ asymmetrical underlying competitiveness profile, which makes it relatively easier or harder for them to achieve high performance. For example, developed, resource-rich countries such as Australia or Canada ought to have a competitive advantage vis-à-vis developed, resource-poor countries such as the Netherlands or Singapore, other things being equal. Other factors might be climate, (un)availability of resources for domestic consumption such as water and fuel, cost of energy, distance from markets, self-sustainability with foods, recurring major calamities (e.g. hurricanes, cyclones, bush fires, droughts, earth quakes, floods), exceptional situations that consume large financial resources (e.g. Germany’s reunification), or external commitments that are a drain on the domestic economy (e.g. Belgium’s net contribution to the European Union), or other factors that constitute competitive (dis)advantage. The real winners therefore are countries that perform well notwithstanding their inherent or inherited disadvantages. The high ranking of a country such as Switzerland is all the more remarkable given its small size, lack of resources, difficult terrain, severe winter climate, and dependence on imported food and energy. For large Anglo countries to be totally outclassed by tiny Switzerland on multiple dimensions ought therefore to lead to considerable head-scratching.

Based on its potential, the US should be a frontrunner in a competitiveness race. On the GCR’s ‘pudding’ figures, it demonstrably is not. Therefore, instead of cajoling or coercing others into adopting Anglo/US ideology, US pundits, patriots and politicians need to be more self-critical, recognize their country’s relatively poor performance, find out why its potential is not translating into corresponding performance outcomes, and initiate and champion change. To identify what changes need to be made in order to earn a deserved high ranking on performance, US managers and legislators need look no further than some of its own highly sustainable organizations such as Continental Airlines, Colgate, Marriott Hotels, Nordstrom, SAS, W.L. Gore & Associates, and many others.

Finally one should ask what the purpose of the GCR is. What is the value of being told that Paraguay (120/139) ranks one place ahead of Ethiopia? Who benefits from this information? Indeed, what is the purpose of the individual rankings? As Squalli et al. (2008) point out, in their current form the individual rankings stigmatize those at the bottom and suggest differences at the top that are essentially meaningless. These authors therefore recommend putting the rankings into broad groups. Would it not be sufficient and perhaps more useful to have reliable, comprehensive and meaningful information, free of ideological biases, about the first 30 countries to provide guidelines for the rest, and cease demeaning the other countries, in particular those at the bottom of the scale?

There is much to be said for ranking countries, and governments should be invited to actively support ranking projects. However, to discourage countries from voyeuristic gloating, and from knowingly or unknowingly manipulating the methodology and/or the data, we would recommend that only the first 30 or so countries be published, and that these top 30 countries obligate themselves as a condition of participation to make a contribution to a global development fund (another area where the US does not score well), with the size of the per capita contribution increasing as the ranking increases. The bigger a country is and the higher a country ranks, the more it pays. That would be rational (it is evidence- and not ideology-based), equitable (it respects alternative points of view), noble (it assists struggling nations), and hence, in every respect, ethical.

Copyright information

© Springer Science+Business Media B.V. 2011