My intention: to talk about some trends in governance and business prosperity in Europe, as seen by the CEO of a global company. I will only address a few selected points, among them the lack of business dynamics, the erosion of entrepreneurship and changing language of corporate leaders. You will tell me if some of my observations also apply to the US.

I will close with some more specific conclusions from Nestlé’s point of view – adding a certain note of optimism.

It is a particular pleasure and honour to address these points in front of an audience of this calibre, and in an event organised up by an Institution that has a number of things in common with the company I am running.

Nestlé was founded only three years after the Boston College; and both have an international origin. The founder of Nestlé was a German emigrant, and I am told that Boston College’s first president was a Swiss  who had emigrated to the US. Good reason for somebody from Nestlé to feel at home here, both institutions have strong historic roots and an international perspective from the beginning.

Just a few more details on Nestlé today.

• A widely held company, with more than 250,000 shareholders from all continents, more than 50,000 in the USA, mostly through ADRs.
• Simple, everyday products: not just chocolate, but also milk products, nutrition, ice cream, beverages, cooking aids, prepared dishes, pet care, pharmaceuticals.
• 2004 sales of US$ 70 billion, up 6.8% from the year before (in US$).
• truly global: only about 1% of sales in our home market; strong presence in the US: Nestlé USA: 2004 Sales: $12.2 billion, more than 22,000 employees; 65 factories; plus ALCON, Dreyer’s Grand Ice Cream and global strategic alliances with Coca-Cola and General Mills. 

Still a strong presence in Europe, this is why we are somewhat worried about recent developments there.

Europe is losing ground compared to other economies around the world. This is my first point; let me illustrate it with three drivers of competitiveness, namely: 
 
- Growth of productivity. US productivity has been increasing almost two-and-a half times as fast as that of Europe.
- Research spending in the EU is 2% of GDP, compared to 3% of GDP  in the US.
- third: entrepreneurship, the most important factor. In the EU today, there are fewer than 5 entrepreneurs per 1000 population, in the US 10.5, in China as many as 12.5. 

I believe we all know a lot about weaknesses of Europe: rigidity, a large public sector, risk aversion and a rate of change lagging far behind the one of competing economies. New regulations proliferate, not only on European level, but also on national level, and with a huge number of self-appointed regulators developing so-called “voluntary” codes of conduct for business.

Europe needs to focus on competitiveness and growth if it is to achieve its ambitions for sustainable development. Yet it puts constantly higher priority to promoting environmental, social, consumer and competition interests at the expense of competitiveness.

Regulations restricting the room for manoeuvre of business are nothing new. What has changed over the last ten years is the language used by European and US business leaders. It has become much more defensive and more influenced by PR agencies than by their own thinking.

Four examples of this change in language, first very briefly, then in some more detail:

1. in discussions on regulations for corporate governance, industrialists join in proposing more details and more control, allegedly in order to “rebuild trust”;
2. they speak about “giving something back to society”,
3. fair trade is entering mainstream companies, and finally, there is
4. the story of the rise and fall of the concept of maximising shareholder value.

On the first point, corporate governance: No need to repeat the story of events earlier in the decade, the bankruptcies and subsequent regulatory frenzies. In the US it was politicians, going very fast, very far. In Europe a mixture of politicians, lawyers, professors and the usual group of not necessarily business-friendly advocacy groups seized the opportunity to air their pet issues. This produces many trends and restrictions, but no clear direction.

The loss of clarity affects the coherence of our system. The German professor Karl Homann points out that a coherent society needs differentiation. I quote: "Modern societies develop functionally different subsystems such as politics, economics, law, science, and education, that function according to their own laws; indeed they owe their effectiveness to this very specialisation."

For business, this specialisation, or responsibility for that which one can do best, is increasingly being called into question. Part of this trend is extending governance to new subject areas, to the so-called “corporate social responsibility”, including everything from public healthcare to global human rights. Another part of this trend are concepts based on mistaken analogies: the extensive debate, particularly but not exclusively in Europe, about alleged risks of the double mandate – one person acting both as CEO and chairman – often refers explicitly or implicitly to the organisation of our states. The flawed concept of shareholder democracy. But, as Homan points out, these are different subsystems of a society, with different structural needs.

We have this debate presently at Nestlé in the run up to our Shareholders Meeting. The "double mandate" issue has turned into a matter of "corporate governance ideology", with a so-called ethical NGO claiming that Nestlé should change voluntarily its by-laws to prevent once and forever that the function of Chairman/CEO can be combined; although both the law and best corporate practices allows it. It is a voluntary mutilation of our corporate governance structure, resulting in a clear loss of global competitiveness on the altar of dogmatic corporate governance ethic. Nestlé's Board of Directors remains pragmatic. For us, the decision must be about a well thought-through governance construct that seeks the smoothest and most cost-effective division of responsibility for strategy, control and execution between the board of directors and the executive board. We have come to the conclusion that – under present conditions – the best solution for Nestlé is the double mandate.

We must urgently bring back some pragmatism to corporate governance that facilitates the choice for the best option under given circumstances. And if we want governance schemes that actually work in a real business environment, they must be based on principles, not detailed rules that try to pre-empt all the eventualities a lawyer can think of.

The second point of my considerations: “giving something back to society”. This wrongheaded idea that companies incur a debt to society by virtue of being successful is based upon some fallacious assumptions.

- First, business activities are seen as fundamentally exploitative; actions motivated by self-interest are seen as harmful to society.

- Second, free-market transactions are regarded as a zero-sum game in which one party wins and the other loses.  

I don’t think any of us would accept any of these assumptions; nevertheless we hear the “giving back” phrase more and more frequently from the private sector, also in the US.  Originally, in the US the concept is addressed to individuals, not firms, something that makes somewhat more sense. And there is also some good reason for corporate philanthropy. But as managers, we have to be careful with what we give back, we are handing out money that belongs to shareholders, and we should only do it if it works out as a good investment.

My third point is about Fair Trade: these days, you see the label on international brands. The implicit message is that normal trade is not fair. Apparently, this implicit message is not a matter of concern for those from mainstream business who use the label to appease some critics.  FREE TRADE IS FAIR TRADE.

Finally, and in a bit more detail, on shareholder value. Last spring, Matthew Bishop, Business Editor of the Economist, summarised the outcome of the Davos Annual Meeting 2004. According to him, only one industrialist there had still the courage to say that creating shareholder value was one of his priorities and main responsibilities. Many of his peers, still according to Bishop, thought this guy was a lunatic.

So what about this idea that has apparently become a four-letter word? It has been around since the 1920s and has turned out to be a formidable instrument. It gave markets more scope to discipline companies, to demand better performance from poorly managed companies.

Some managers saw it as a short-term exercise – and ultimately destroyed shareholder value. But overall it drove a more efficient reallocation of resources in whole industries, both within companies and through mergers. Returns on capital have increased – to the benefit of retirement schemes all over the world.

Everybody in Europe used the word during the 1990s. Today, it is no longer part of politically correct language.

What does all this mean for the years to come?

You may say that words do not really matter, as long as we do a good job within the company. But this is about language on essentials of our system, and if this language remains ambiguous it will be affecting entrepreneurship and further weaken growth.

So, present growth differentials between Europe and other regions may increase rather than decrease. Europe-15 risks to fall behind to about half the size of the US economy in less than 40 years, and one can easily imagine worse.

And China and other emerging economies will continue catching up, naturally developing much faster and further reducing the relative importance of the EU.

So, if this is my outlook, what can we do at Nestlé?

Clearly, we will further strengthen our business outside Europe. That is part of what being ‘global’ means.

But even in Europe, we are not going for zero growth; we just do not expect the overall market to help us grow. We must create the market ourselves. We are not going to wait for consumer surveys to tell us what we should invent. We will innovate and renovate and drive qualitative growth in the best sense. The underlying vision: evolving from being "a respected and trustworthy Food Company" to being a "respected and trustworthy Food, Nutrition, Health and Wellness Company". In other words, we will offer more value to consumers.

Our response to outside rigidities is greater flexibility within the company. Part of this is Nestle becoming multifocal. We want to drive within Nestlé the continuous restructuring that the shareholder value did across whole industries. Our GLOBE programme will provide the tools for this. 

To succeed, we need leadership and long-term orientation in two main areas:
- Vision and clear goals for the company, as outlined above;

- Credibility, including clear language in the public policy debate – while being pragmatic and answering to the concerns of so-called civil society.

On this last point: The apparently crazy industrialist who was still talking about the need to create long-term shareholder value in Davos was me.

I do not take this line because I see myself as the last defender of the Alamo; I only try to use language that will not embarrass me when I hear things I said again in five to ten years from now. Ultimately, I am convinced it will pay off in the form of long-term credibility.

Maybe, I am influenced by my experience in the consumer goods industry. I have great respect for the instincts of people around the world. They know when your language does not match your purpose. It is OK to adapt technical language according to your audience – whether it happens to be the financial community, your employees, or the public at large. But when your basic priorities, or worse, your underlying concepts, goals and beliefs change as you address one public or another, they will know it instinctively.

Davos 2005 was a case in point. Each year, I am leaving the security compound where you hear a lot of the politically correct talk for a speech and discussions in the Open Forum. Last year, my defence of shareholder value met with outright hostility. I kept my line and language, and this year, for the first time, got applause.
 
Conclusions

Back to the issue in the title of my speech: corporate governance. There is an interesting fact: we have no equivalent for the term in German. In earlier years, it was translated into something comparable to “constitution for a company”, in analogy to the constitution of a state that sets the main principles for a country. Such a constitution must also reflect values – our own language and values, honest and straightforward. When I say constitution, I am not necessarily thinking of something on paper – it is about the underlying spirit.

It is a matter of long-term coherence.

How can we convince others if we are not fully convinced ourselves that our main driver, profit orientation, has been the source of unprecedented prosperity of the last 60 or so years? How can we gain the respect of others if we risk undermining our own self-respect with ambiguous language? I am not calling here for dogmatism or missionary zeal, but for the necessary pragmatism building on clear basic principles. We should have the courage to insist:
- that corporate governance is at least as much about business prosperity as it is about control and that principles and personal integrity are more important than detailed rules;
- that profits are nothing to be ashamed of;
- that free trade and competition are necessary and good for prosperity of society at large;
- and, fourth, that focusing on long-term benefits to shareholders also contributes to increased prosperity in society as a whole.

Finally, summarising my optimistic note: what can we do, if in a region the outlook for growth is poor? On the one hand, you go global. But as a leader in many European markets, Nestlé’s has also a clear corporate strategy there: concentrate on increasing value added. Qualitative growth is something we can drive ourselves with ideas, innovation and renovation.

As I have said many times, I do not believe that there are mature markets, but only mature managers. Perhaps, this is a good subject to start our question and answer session.

Ladies and Gentlemen, let me close at this point. Some of my remarks were quite provocative; I am looking forward to our exchange of views.