By Klaus Schwab / Geneva
In 2022, the Covid-19 pandemic and the myriad crises it spawned may finally start to recede. But even in that best-case scenario, a tsunami of new challenges – from the failure of climate action to the erosion of social cohesion – is within sight. Addressing them will require leaders to adopt a different governance model.
When our institutions are well governed, we pay little attention to them. They are simply invisible infrastructure supporting the economy and virtually all aspects of the social order. And “good enough” governance in the second half of the twentieth century enabled income growth and social peace.
Today, however, many people have lost faith in their leaders. Faced with mounting risks and our collective failure to address them, we have started looking for culprits. Some point the finger at inept political leaders, others blame “Davos Man” CEOs, and a desperate, growing minority sees an elite conspiracy behind the current doom and gloom.
The truth is more complicated. At the heart of our failure to foresee and manage global risks – not only climate change and deepening social divisions but also the re-emergence of infectious diseases, debt crises, and inadequate technology regulation – lies an unresolved problem of global governance. Our institutions and their leadership are no longer fit for purpose.
We tend to view history as a series of big, earthquake-like events. But the degradation of global governance was mostly a case of gradual erosion.
In the Governance 1.0 period immediately after World War II, both public and corporate governance were marked by the rule of the “one man”: the elected or unelected “strong leader” and the “boss.” This type of leadership worked well in a society where the cost of information was high, hierarchical power and management functioned relatively smoothly, and technological and economic advances benefited almost everyone.
The Governance 2.0 model, which emerged at the end of the 1960s, affirmed the primacy of material wealth, and coincided with the rise of the economist Milton Friedman’s “shareholder capitalism” and progressive global financialisation. The new managerial class, accountable only to shareholders, reigned supreme and had global reach. And while the 2008 global financial crisis dealt Governance 2.0 a serious blow, its narrow vision continued to prevail until the outbreak of the Covid-19 pandemic.
The brutal social and economic shock inflicted by Covid-19 ushered in Governance 3.0. Crisis management currently dominates decision-making, with leaders focusing on operational thinking and showing a relative disregard for possible unintended consequences. This short-term, trial-and-error approach has led to haphazard management of the pandemic and its socioeconomic fallout.
But when the pandemic ends, we will need a new governance model. Governance 4.0 would differ from its predecessors in several fundamental respects. First, it would replace today’s short-term crisis management with long-term strategic thinking. A focus on current problems such as the pandemic, socioeconomic crises, and people’s mental health must be complemented with action to tackle climate change, reverse biodiversity loss and environmental damage caused by human activity, and address related social challenges such as involuntary migration.
Second, Governance 4.0 must replace the tunnel vision and top-down approach that prevailed in the past. We live in a highly complex and interconnected world, not a linear one with few discontinuities. That also means the roles and responsibilities of each stakeholder in society must change. Business can no longer ignore its social and environmental impact, while government can no longer act as if it alone has all the answers.
Third, the current emphasis on a narrow conception of economics and short-term financial interests must cease. Instead, the primacy of society and nature must be at the core of any new governance system – whether for business or government. Finance and business are vitally important. But they must serve society and nature, not the other way around.
The world has changed, and public and corporate governance must change with it. Today, major structural shifts like the Fourth Industrial Revolution and climate change are disrupting every industry and centre of power. Technologies such as blockchain are replacing centralised and hierarchical organisations with decentralised, autonomous entities. And social, economic, and digital inequities are increasing.
For now, many leaders remain stuck in the shareholder capitalism mentality of Governance 2.0, while some societies still favour the strongman leadership and structure of Governance 1.0. And as long as Covid-19 remains a threat, the crisis mentality of Governance 3.0 will continue to dominate boardroom and cabinet discussions.
But many leaders are already thinking and acting like pioneers for a new age of governance. They include business executives advocating for environmental, social, and governance (ESG) metrics, and political leaders such as French President Emmanuel Macron and Italian Prime Minister Mario Draghi breaking down boundaries. Above all, young people are demanding a better future.
Those still using the governance playbooks of previous eras criticise such leaders for not staying in their lane. But we should welcome leaders who, navigating largely uncharted territory, act outside of their narrow interest as trailblazers and argue for specific action to fight climate change and address social injustice.
The best gauges of responsible and responsive governance today measure the extent to which leaders embrace and consent to stakeholder responsibility over shareholder responsibility. Although the measurement of stakeholder accountability is still in its infancy, the development of consistent metrics will enable us to judge whether leaders are taking a broader view of their role and responsibility.
The 21st century will bring many unprecedented challenges. If we want our children and grandchildren to look back at the progress we made with the same satisfaction that we felt at the end of the 20th century, then our governance model must evolve. — Project Syndicate
•Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, is co-author of The Great Narrative: For a Better Future.
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