Considering Governance 4.0 | Japan time

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In 2022, the COVID-19 pandemic and the myriad crises it spawned may finally begin to recede. But even in this best-case scenario, a tsunami of new challenges – from failed climate action to eroding social cohesion – is in sight. To respond to this, leaders will have to adopt a different model of governance.

When our institutions are well governed, we pay little attention to them. They are simply invisible infrastructure that supports the economy and virtually every aspect of social order. And “fairly good” governance in the second half of the 20th century enabled income growth and social peace.

Today, however, many people have lost faith in their leaders. Faced with growing risks and our collective inability to deal with them, we began to look for culprits. Some point the finger at incompetent political leaders, others blame “Davos Man” CEOs, and a desperate and growing minority sees an elite conspiracy behind the current pessimism.

The truth is more complicated. At the heart of our failure to predict and manage global risks – not only climate change and deepening social divisions, but also the re-emergence of infectious diseases, debt crises and inadequate technological regulation – lies a problem unresolved issue of global governance. Our institutions and their leaders are no longer fit for purpose.

We tend to think of history as a series of great earthquake-like events. But the deterioration of global governance was above all a case of gradual erosion.

In the period of Governance 1.0 immediately after the Second World War, public and corporate governance was marked by the rule of “the 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 worked relatively well, and technological and economic advances benefited almost everyone.

The Governance 2.0 model, which emerged in the late 1960s, affirmed the primacy of material wealth and coincided with the rise of economist Milton Friedman’s “shareholder capitalism” and progressive global financialization. The new managerial class, answerable only to shareholders, reigned supreme and had global reach. And while the 2008 global financial crisis dealt a serious blow to Governance 2.0, its tunnel 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 relative disregard for potential unintended consequences. This short-term, trial-and-error approach has led to a haphazard management of the pandemic and its socio-economic 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. The focus on current issues such as the pandemic, socio-economic crises and people’s mental health must be complemented by actions to address climate change, reverse biodiversity loss and environmental damage caused by human activity and addressing 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, non-linear world with few discontinuities. It also means that the roles and responsibilities of each actor in society must change. Companies can no longer ignore their 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 view of the economy and short-term financial interests must end. Instead, the primacy of society and nature must be at the heart of any new system of governance, whether for business or government. Finances and business are of vital importance. But they should 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 changes like the Fourth Industrial Revolution and climate change are disrupting every industry and center of power. Technologies such as blockchain replace centralized and hierarchical organizations with decentralized and autonomous entities. And social, economic and digital inequalities are increasing.

For now, many leaders remain stuck in the shareholder capitalism mentality of Governance 2.0, while some companies still favor the leadership and strongman 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 board and cabinet discussions.

But many leaders are already thinking and acting as pioneers of a new era of governance. These include business leaders who champion environmental, social and governance measures and political leaders such as French President Emmanuel Macron and Italian Prime Minister Mario Draghi who break down borders. Above all, young people are demanding a better future.

Those who still use governance manuals from previous eras blame these leaders for not staying in their lane. But we should welcome leaders who, navigating largely uncharted territory, act outside their narrow self-interest as pioneers and advocate for specific action to address climate change and address social injustice.

The best indicators of responsible and responsive governance today measure the extent to which managers adopt and consent to the responsibility of stakeholders compared to the responsibility of shareholders. Although measuring stakeholder accountability is still in its infancy, developing consistent metrics will allow 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 on the progress we have made with the same satisfaction we felt at the end of the 20th century, then our model of governance must evolve.

Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, is co-author of “The Great Narrative: For a Better Future” (Forum Publishing, 2022). © Syndicate Project, 2022

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