 Welcome to the GEC, the podcast for enterprise leaders delivering timely insights for today's global economy and tomorrow's competitive advantage. I'm your host, Chris Kane, president of the Center for Global Enterprise. And on today's podcast, we are exploring a series of issues business leaders need to understand and prepare for in the new year and beyond. Our regular listeners will know that before we close each program, we ask our guests in one word or one phrase, tell us what emerging issue you see on the horizon that business leaders need to put on their radar. We call this our emerging critical issues moment. In today's episode, we'll be hearing from six of our guests, Michael Spence, Dave Capos, Victor Fung, Sao Palmosano, John Owada, and Alex Fernandez. In our first episode of the new year, we want to fulfill a promise we made to our listeners to come back to the issues we see having a big impact on global business. We've selected six emerging issues cited by our guests and asked them to spend a few minutes with us to dig a little deeper into the reasons why these issues are on their radar and what CEOs need to consider and plan for. If these topics are not already on your radar, we hope this episode will bring them to your attention and start a conversation. And from all of us at the get, we wish you a healthy and prosperous new year. It's a pleasure to welcome back, Mike, you to the get. In our inaugural episode, we discussed the reshaping of economic and business relationships caused by geopolitical events such as the Ukraine conflict and how CEOs and business leaders should plan for a different global marketplace. Today, that requires company leaders to take a more globally segmented operating approach instead of what once was a globally integrated approach. You cited energy transition as the emerging issue everybody has to deal with. Can you elaborate on why energy transition should be a critical part of every business leader strategy? Well, there may be people who disagree with this, but we're at the point at which we really do need an energy transition. This is a multi decade proposition. It's got to be conducted on a global basis. It's very difficult to do because there are stakeholders who are all over the place on this issue. But the past summer taught us that climate change is with us. Corporate leaders need to do really two things or think about them carefully. One is to get ahead of the game on planning for their own companies part of the energy transition. And that means sitting down and thinking carefully about energy efficiency, about the way operations are configured, about what the options are for reducing the carbon intensity of the company's footprint, and so on. I'm sure regulations coming. It will be misguided at times that, you know, it's an experimental process. I think it's important to get out ahead of that game. And then especially for global companies, I think the second big component of this is climate change is now a kind of major economic event. These things come with a frequency and severity that we have not experienced in the past. And so I think the second part of a top flight sort of corporate approach is to start thinking about things like insurance, things like resilience of operations and so on in a world in which you can expect random but significant disruptions of your logistics. The airlines, we just saw an example of this in the United States. And there's going to be a lot of pressure from a lot of stakeholders and some of it's not very helpful. So whether it's regulators or stakeholders, you have something to say that's well considered thought through options, look at some rejected and so on so that you're ready for a world in which this is going to be a prominent part of everyday life. And you're talking about energy transition. And if we're right that the world continues to march down a globally segmented economic path where relationships are going to be reestablished and redefined, then from a practical standpoint, would it make sense for CEOs to think about where to begin their energy transition in practical terms given the segmentation that we see going on? I would look carefully at sort of energy efficiency and that is so many dimensions. You know, do we have to fly around? Do we need a whole bunch of meetings? What do our buildings look like? Are we building new buildings up to a set of new standards and so on? I think the harder part is thinking about the carbon intensity side. What are the options for decarbonizing the energy footprint that everybody is going to continue to have? And those are going to evolve over time. So one aspect of that I think is keeping track of the advancing technologies for dealing with this. I mean, there's a lot of investment going on in both the public and private sectors that are going to make this easier over time. Some of them are fit for purpose now and some of them aren't, but I would assign a team to generate options and commentary on those options with time horizons on them so they can be integrated as they become available into the company's plans. Mike, thank you very much for diving deeper into this with me and our listeners. Thank you, Chris. Happy New Year. Continuing on the theme of restructuring economic relationships, for the past 40 years, the United States and China, the two largest economies in the world, have been leading forces for global economic integration. Today, both are signaling their interest in decoupling major parts of their economies from each other. The impact on the global economy is to be determined, but the need for CEOs to assess the impact of this decoupling is immediate. In Episode 5, Dave Capos, partner at Caravath Swain & Moore and former director of the U.S. Patent and Trademark Office, cited decentralized finance, or DEFI, as becoming mainstream during this period of decoupling and holding tremendous promise in a segmented global economy. Dave, thank you for continuing this discussion with us on DEFI. DEFI was a fringe libertarian concept five years ago, but it's still not a widely known or understood term. Can you tell us what DEFI is and is it becoming a mainstream issue in global business today? Great to be with you again, Chris, and thanks for inviting me back to the get. DEFI has simply access to capital without a centralized operator. So in traditional finance systems, you're dealing with intermediaries to whom we have some measure of trust that we grant. We've built a complex set of legal mechanisms to enforce promises, financial intermediaries that these trusted intermediaries make regarding our money. Now DEFI, on the other hand, removes trust from the equation by relying instead on smart contracts that run autonomously, thereby put capital to use. And you can think of a smart contract on a sufficiently decentralized blockchain like Ethereum as an example, contract that runs exactly like any other software, meaning the promises that are made are enforced. They're enforced by the blockchain that the smart contract is running on rather than the law. So there's a little abstract. Let me briefly give an example. If you want to lend money in a traditional finance lending approach, you'll sign a contract with the borrower and then you hope they repay the loan with the required interest. Now perhaps you'll hold some of the borrower's assets as collateral to be sure this is very traditional. But this system inherently has some major inefficiencies. Maybe the borrower doesn't repay the loan requiring you to look to the legal system for redress or maybe you have a dispute over the terms of the loan and under what conditions the collateral can be liquidated. Well with DEFI, with decentralized finance, all this ambiguity can be coded into the smart contract. As a lender, you provide liquidity to a lending smart contract. The smart contract takes care of matching the loan to a borrower who will need to provide collateral to the smart contract in exchange for the loan. And then the smart contract and the code automatically liquidate the collateral if its value begins to drop to ensure you won't be left holding the bag. The smart contract otherwise manages the loan. So coming back to the beginning, the fundamental advantage of DEFI is that it takes centralized operators out of the equation. It takes trust out of the equation and it enables access to capital based on blockchain and smart contracts and not based on all the intermediaries that we're familiar with in traditional financing. So it seems like it takes complexity out of the relationship but it adds an element of risk to the relationship that may not have existed before. Is that right? It's an interesting question because if the blockchain is sufficiently decentralized, which is why I mentioned that, DEFI takes risk out of the system. It can completely eliminate the risk. The reason we've seen the meltdowns we have in recent years, months and even weeks, some of the high profile events that we have in the crypto space, which is a little bit, you know, it's a part of DEFI, but not all of it, of course, is because of finance schemes that have not been sufficiently decentralized and that have not been sufficiently run on the smart contracts and on the blockchain. And in the end, we found have been under the control of individuals or small groups of individuals. So Chris, coming back to your question, if a DEFI system is run correctly on a completely decentralized blockchain that cannot be put under the control of any one party or small group of people and the smart contracts are appropriately set up, the risk actually is much lower than in relying on traditional financing. So for CEOs, what are the benefits and challenges of DEFI? And how would you recommend business leaders approach DEFI? You know, the core top benefit that I would see is reducing cost of borrowing, reducing cost to access capital. If you step back a little bit from that, beside the inefficiencies of having to go through intermediaries, you know, trust also has its, if you will, nefarious side, humans are fallible, and will at least in a few cases misuse trust. DEFI presents a way for CEOs to access capital without needing to worry about the trustworthiness of their counterparties. We clearly see interest rates rising around the world. Cost of borrowing is going up. And you talked about DEFI being a mechanism to reduce the cost or access to capital. Does the value proposition of DEFI become even more compelling? I think it can become more compelling. The more interest rates rise, the more arbitrage opportunity there is. And the more opportunity there is to match sources of liquidity with those that are in need of liquidity. When we've seen the borrowing environment tighten quite a bit in the last year as interest rates have gone up, and DEFI makes more and more sense in that environment. Because more parties will be incented to overcome the technical barriers, establish the wallets, manage private keys or get, you know, intermediaries to do that for them as the cost of borrowing goes up. Thank you very much, Dave, for taking us further down the road of understanding DEFI and its relevance for business leaders and CEOs. I hope you found this to be valuable. And CFOs, we suggest you dig into this and better understand it for the use in your company. Yeah, thanks, Chris. My pleasure. Multilateral institutions have been the basis of the world's prosperity since World War II, but they're losing their efficacy to manage global commerce and resolve disputes. Victor, you proposed reconstruction of a global trading system from the ground up into large trading blocks that could replace our existing multilateral institutions as long as they were seamlessly connected. You talked about how CEOs should consider establishing multi-location headquarters under a new multilateral system of trading blocks. Can you explain the concept and why multi-location headquarters would be beneficial for global organizations? Happy New Year, Chris. You know, first of all, I'm really very happy to be on the program again. Before I go into any details to respond, let me first of all say I'm really a multilateralist my whole life. Now, having said that, I think the world, as you know, are really full of many considerations, including geopolitics and all these things that people talk about every day about nearshoring, French shoring, etc. I think is really wreak havoc to the multilateral system. It was already stored. So I really see if we recognize those political realities, we are now in a world in which it is only realistic to reconstruct the whole world in blocks, if you would. And I mentioned last time I see the Americas as one block, EMEA as one block, and then Asia as one block. And one thing that you also touch on is I'm seeing, especially in Asia, the development of a very strong trading block called RCEP, regional comprehensive economic partnership, RCEP. And I think that, as you may know, consists of actually 30% of the world's population, 30% of the world's GDP, and it's really becoming a very effective trade block. It consists of 15 countries, the 10 ASEAN countries, plus Japan, China, Korea, and also Australia, New Zealand. And it was put into effect on January 1 of last year, and now it's really beginning to be effective. So this is a very good example of what I'm talking about. And I would expect that very soon, maybe in response to even RCEP's development, that other blocks will be forming in the Americas, in the EMEA, and each of those will be, I think, much easier to integrate than if we try to integrate the whole world. But I do think that over time, they would merge again and come together really into a seamless multilateral system. And so from the company standpoint, what you're suggesting is that as these blocks establish themselves in mature, that a company should set up a headquarters location in each of the blocks? I would say actually goes further than that. Now, if you look at the idea, I think I need to also introduce another major development, which is in the last decade. I think the supply chains are becoming more and more fluid, and what we call end-to-end. It used to be the response time was much slower, it took a lot of time, and basically people specialize in different parts of the supply chain. They were almost compartmentalized. Now, because of the need for fast response, the need to do much lower minimum order quantities, MOQs, because of the needs of the consumer, we are now seeing the supply chain much more fluid. Today's world is totally different, especially being driven, I think, from the consumer end. Even if you design a product, you need to be extremely aware of what the consumer really wants at all times. So because of this fluidity, I think there is a tremendous need to not be one centralized headquarters, where it's very difficult to be close to any portion supply chain, especially the consumer. And certainly you cannot keep in touch with the production, which is now very spread out. We operate, for example, in 50 countries. And also, even in the design side, ideas and concepts, IP is coming from many parts of the world. So there is a absolute need to be closer to the action, if you would. Now, if you layer on top of this, the geopolitics, then it's even more than that. So I'm saying it's met more than three locations because of the three blocks. Definitely at least that I would say, but I think even within Asia, for example, it's diverse enough that you may need several headquarters locations. You may need one inside a major market like Japan or China, or India eventually, being close to those consumers. You may also need to be where the production is increasingly in China and Southeast Asia, etc. Thank you for diving deeper today with me and our listeners into a very important area of business, the new trade realities and how CEOs and companies need to adjust to them. For CEOs and business leaders, 2022 was a turbulent year as they had to deal with numerous disruptions in the areas of geoeconomics, geopolitics, technology, climate change, and many others. 2023 is shaping up to be even more disruptive. Sam is CGE founder and chairman and former IBM chairman. I think it's safe to say you've had a lot of experience dealing with business turbulence and disruption. In episode three, we focused on business continuity and protecting the critical information organizations need to keep their operations running. You cited economic decoupling as a critical issue CEOs need to focus on as data increasingly becomes the engine that propels their enterprises. So how does economic decoupling affect the ability of businesses to collect, protect, analyze, and implement insights from the data they collect? And how should CEOs plan so that there are no disruptions in their businesses? Well, Chris, thank you. And you're right, your observation is keen. I've seen lots of disruptions to the world over my years working as CEO of IBM. But rarely do they all happen at once. Rarely do you have geopolitical unrest, wars, economic downturns, inflation, recessions, and complex transitions like a pandemic at one time. So this one I think isn't unique in many ways. But to your broader point is that the impact of the data enterprise, which just means massive amounts of information that's being collected from disparate group solar with a globe that you'll consolidate into your business model and either improve your employee practices or service to your customers or product design, all elements of your company. So let's assume, for example, you need to get yourself prepared for a world that could decouple. And that decoupling probably where it's headed, but I'm not saying it's going to get there, is somewhere between the west and the east, east being led by China, west being led by the United States and Europe, if you think about it that way. If it does, there will be barriers to the transfer of data. Just like there could be barriers for trade for components that are moving across borders. So the question to me is you should have a plan to design for a world where you are segmenting the information from where you operate. So that means your data has to reside on infrastructure in the east or in the west, design it that way. I would say that the data sets are large enough in those main geographies that you get enough insight to apply from a global perspective. I would optimize the location of that data and the protection to that data within those geographies. Now having said that, we should address the bigger concern with data, which is usage and privacy. So Sam, what business processes does economic decoupling most threaten? Or potentially create an opportunity for, such as supply chain, market development, talent recruitment, corporate processes that you see being either advantaged or disadvantaged by economic decoupling. And as you said Chris, there's both opportunities and there's also could be impacts associated with this. Clearly, depending upon where you're positioned, if you're engaged in companies that are redesigning their supply chains or their data sources based upon a potential for decoupling, that's an opportunity for you. Whether that's relocating manufacturing plants or building manufacturing plants or massive data centers for the data where it's going to reside, that's all business opportunity. However, at the same time, if you're operating the company that's trying to operate a global scale, you have to plan for these things. The first thing I would start with when I say plan for these things is the very, very important strategic issue of the data itself, how you're using that data, the usage and the privacy protections associated with that data. I would recommend as you prepare for this, you take a leadership position. Try to work with your various industry groups or maybe a large set of other companies where you're leading the discussion on the right way to responsibly manage data versus being on defensive to regulation that's going to occur as a result of a model emerging that solves the problem. So take a leadership position, get yourself prepared. I'm not saying you necessarily have to decouple the data, but be prepared to do so if you have to do that. That's really, really important because as you know, you never want to be behind a regulatory shift. So there you have it, economic decoupling and the kinds of things CEOs should be preparing themselves for. Sam, thank you very much. A corollary to the importance of protecting the critical data organizations need to keep their operations running is understanding how new digital technologies such as artificial intelligence, machine learning and algorithms are reinventing how business decisions are made. John Awana, executive fellow at Yale School of Management and managing director of the data and trust lines has been working with companies to address concerns around whether companies can be trusted with these new capabilities. In get episode six, John pointed out that as businesses use algorithms to mine data to determine who gets hired or promoted or into the university, they need to be aware of potential bias and practice algorithmic safety. John, thank you for continuing our get discussion on emerging critical issues. And for our listeners not familiar with algorithms and their increasing importance to all businesses. Can you explain what you mean by algorithmic safety and is this about the amount or type of data collected or is it about how data is analyzed used within an organization. Algorithms aren't new algorithms are are fundamental to computer science and information technology. Algorithms are formulas, the rules to determine how outcomes are factored by computers. What's different today is that because of machine learning, as you mentioned, the algorithms are trained based on data. So in the past, you would have a programmer or an IT professional write an algorithm that determine the output based on if then logic and so forth. Then data was used to be processed based on that that algorithm with machine learning. You do have humans playing a role, of course, but the key differences of the algorithm learns based on data that is ingested. And therefore, the quality of the data, the trustworthiness of the data is hugely important because it will affect the recommendations or the determinations, the diagnosis, the findings that are coming out of the algorithm. So you asked whether it's the same as data and data privacy, I would suggest that they are related but different. I think we're all used to the issues around data security, data breaches, data privacy. Think of data as an asset or as raw material, but think as algorithms as what happens with that raw material. So the data by itself does not determine who you should hire or extend credit to or a diagnosis based on a medical test. That's the algorithm. And so you do have to ensure that the data is as unbiased as you possibly can make it. You have a good sense of where the data came from, what's happened to it since it was collected, what permissions and consent and rights are associated with that data because it will affect the quality and the trustworthiness of the algorithm. It struck me that if data is the raw input and algorithms are the refining process to use an industrial metaphor of oil and refining, it strikes me that algorithms end up being the process by which data is valued and relevant to application and business. That's right. That's right. I mean, part of this is based on our knowledge of our work in the data and trust alliance. Now we have 25 member organizations. And if you ask as we have, you know, the companies invest in applications, applications to provide some sort of business value. And we ask them, what kinds of applications are you investing in today and tomorrow? And an increasing number of these applications are decision support systems. I think 20 years ago, they might have said, we're investing in transaction processing systems for websites. And then they might have said we're investing in mobile applications so you could, you know, shop and transact on your mobile devices. What's different today is that the investments increasingly are in decision support. You mentioned many, right? Who to hire, who to extend credit for, make a recommendation, help me, the human being make a better decision. Those systems require data. The data has to come from somewhere. The algorithm is giving the output to the human being, you know, think about this, do that, don't do this. And that's a new class of applications. And it's because of this increasing use of machine learning and deep learning and other aspects of artificial intelligence. Thank you very much for allowing us to continue that and deepen the conversation for our emerging critical issues around algorithmic safety. Thanks very much. You're welcome, Chris. Thank you. 2022 was quite a year for all things metaverse, presenting CEOs with a number of decisions to confront as they continue to transform their company's operations. One of these decisions is the metaverse and the promise the virtual world offers to deliver business opportunities using new kinds of digital assets and operating models. In episode 10, you helped our listeners understand the relevance of metaverse to companies, but you also had a word of caution. You cited identity as an emerging critical issue. Can you elaborate for us on why you believe identity should be on the radar for business leaders? Yeah, absolutely. And happy new year, Chris, and to all the listeners out there. The number one thing for identity is really to protect not only the organization in terms of understanding who is accessing and who's interfacing with them. Depending on how their metaverse construct is put together and what you're actually able to do within that specific space, it's important that we understand and protect children from whatever is happening within that specific area. Think that as organizations begin to go out there and construct their own metaverses and they get enamored with all the endless possibilities of interactivity, gameplay design and effective interactions. There may be a tendency to want to just do everything when they need to remember that there's also the ability for young children and really anyone to come on there. So it's important for you to know who is effectively there and it's just good data hygiene to really understand who is interacting with your system. And ultimately as a business owner, I'm always curious about how clean my data is and understanding who my consumer is so they can better target and better service their needs. The appeal for some people in the metaverse is that they can actually create entirely new identities, ones that may not reflect their real world existence or identity. How does the importance of identity work in a virtual environment where individuals want to create an entirely new persona? Yeah, so it seems to be almost the exact contradiction to what I just said a moment ago, but honestly there are ways to still obscure people's personal data but still know that you have access to understanding who they are. And I think that ultimately in the end of the day anonymity is a great thing, but at the same time anonymity at no cost or no repercussions is not. So ultimately what I can imagine happening here and what I think will happen is that there will always be a true source of understanding of who this person is. That's only available specifically to the system administrators and people that are actually administering that specific metaverse experience. But still you need to know who these people are, where they're from and again to check children. I don't know how few were following the news with the FTC leveled a half a billion dollar fine to Epic Games. It ended up December because of the lack of protection for children. And this is ultimately something that it comes back to that as a CEO and as someone who's venturing into that metaverse space, understanding and having a clear line in the sand of who is on that system, what they have access to. It's just another reason why identity is so key to any type of adventure in metaverse for an organization. So where would I go as a CEO to get some help to start understanding the dimensions of identity and how to create a management system and some guardrails to do what you just said, which is to be on the right side of utilization of the metaverse and stay away from the wrong side of social exploitation. Well, this is interesting. This is a formal complex in terms of giving guidance. First off, I would say everyone's got to go out and do their diligence, but the good thing is that there are guidelines that have been created in terms of basically how you set up age restrictions and limitations. And I think that ultimately in a very boring and administrative way, you need to sit down and work with your IT teams to set up and establish really benchmark. How do we actually go about understanding who's coming there? What are our paywalls? What are our age restrictions? What are our gates? And ultimately, there are resources that are available out there. I believe the ESA has some of those resources. But ultimately, I think this is something that goes beyond just going to a nonprofit. It also sits down talking to your legal team and your marketing team and what you're trying to do here. I think that's the first initial is who are we targeting? And then we go from there. Great. Well, Alex, thank you very much. This was an important piece of the emerging critical issue discussion last year. And it's a very relevant business issue for CEOs and senior leaders to be putting on their agenda for 2023. We appreciate your time and happy new year. Happy new year, Chris. Thanks for having me. You've been listening to the GATT, sponsored by the Center for Global Enterprise, celebrating 10 years of convening global enterprise leaders around the most important business transformation issues.