Leadership Challenges in the Context of Demographic Change

Leadership Challenges in the Context of Demographic Change

Dr. Johannes Meier

HHL, Leipzig, 26. 05. 2004

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Aktion Demographischer Wandel

20. 5. 2004

Our Future?

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20. 5. 2004

Agenda

1. Demographic change in Germany: Need for a turn-around

2. Complication: Bail-out opportunities for the talented and wealthy

3. Excursion: How to manage a corporate turn-around

4. Application of leadership lessons from corporate turn-arounds to demographic challenge

5. What does it mean for you?

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Agenda






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Germany‘s population will shrink dramatically until 2050

50 55 60 65 70 75 80 85

DIW Var. Ia

BMI Var. A

Statistisches Bundesamt V1

United Nations

IBS-Bielefeld, mittl. Var.

Eurostat

Current State

Bevölkerung in Deutschland in 2050 in Mio. Personen

Quellen: Enquete-Kommission „Demographischer Wandel“, UNFPA, EUROS-TAT/Economic Policy Committee, Bundesministerium des Innern. Source: Enquete-Kommission Demographischer Wandel, UNFPA, Eurostat, Bundesminister des Inneren

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20. 5. 2004

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Erwerbs-personen

in Tsd

1996 2000 2005 2010 2015 2020 2025 2030 2035 2040Jahr

Source: Fuchs/Thon 1999,

The working population will shrink most dramatically

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20. 5. 2004

Source: Fuchs/Thon 1999,

25

29

24

22

21

25

30

23

21

21

31

27

21

21

27

31

20

23

23

34

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1996 2005 2010 2015 2020Jahr

50-jährige und älter

40-49- jährige

30 bis 39-jährige

bis 29-jährige

Quelle: Statistisches Bundesamt, Prognos

The aging of the working population has started already

Seite 820. 5. 2004

Employment Rates of Older People (55 – 64 Jahre)

Source: OECD-LMS

20,0

25,0

30,0

35,0

40,0

45,0

50,0

55,0

60,0

65,0

70,0

Deutschland

Schweiz

Irland

Niederlande

GB

Dänemark

USA

Finnland

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The baby boomers are moving towards retirement

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

Jahre

in 1

00

0

Daten 2000

Projektion2010

Projektion2020

15-19 20-24 30-3425-29 40-4435-39 45-49 50-54 55-59 60-64

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The debt crisis (I): Spending commitments

0

10

20

30

40

50

60

70

80

90

100

2005 2010 2020 2030 2040 2050

75

80

85

90

95

100

105

Source: DIW; middle sceanrios and status-quo taxationt; Färber, 1995

Pension entitlements

Cities, CountiesState

Fed. States

%Mrd. €

Seite 1120. 5. 2004

0

10

20

30

40

50

60

70

80

90

100

2005 2010 2020 2030 2040 2050

75

80

85

90

95

100

105

Direct taxes

VAT

Total tax

Tax Income

%Mrd. €

The debt crisis (II): Shrinking tax income

Source: DIW; middle sceanrios and status-quo taxation; Färber, 1995

Cities, CountiesState

Fed. States

Pension entitlements

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Need for a turn-around

Public social systems will collapse unless changed fundamentally

Pay-as-you-go-system of pension financing no longer robust given jobless rates and demographics

Financing for health system linked too much to employment income as basis for contributions

Corporate pension systems likely to be under-financed

Prevalent accounting practices may not properly reflect the longer life expectancy of former employees with pension rights

Education system not performing adequately to guarantee necessary productivity increases to maintain prosperity levels

PISA-study reveals fundamental deficits in education system

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Corporate warning signs

Significant differences in accounting practices and interpretation by rating agencies of on- vs. off-balance sheet funding of pensions

IAS accounting practices regard pension commitments equivalent to credits (taking account of long-term capital market interest rates and future income and pension increases) whereas HGB accounting practices uses a fixed discounting factor of 6% without taking account of future income and pension increases.

• Thyssen-Krupp with on-balance sheet pension accruals of 6,6 bn € and 440 mill. € annual pension payments in defined benefits pension system was downgraded from 'Investment Grade' to 'Junk' status by S&P.

• Many corporations moving from defined benefits to defined contribution systems: 84 of the 1000 largest British corporations shut down their «Defined Benefits»-pension systems in 2002 (National Association of Pension Funds)

• British Telecom pension fund had assets of 25 bn £ in 2003 with commitments exceeding assets by 4,2 bn £.

• British Airways has off-balance-sheet pension fund assets of 10 bn £ and a market cap of 2 bn £.

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Qualification structure of German population

Dramatic increase of youths

without formal degree or

finished apprenticeship by

age of 25

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Agenda






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Complications: Bail-out opportunities for the talents and wealthy

Bail-out 1: Migration and brain drain• Intra-national migration: The emptying of some parts of the country• International migration: Brain drain towards attractive regions

(currently USA)

Bail-out 2: Career wins against child bearing especially among educated women• Better educated women get less children and at a later stage in life

Potential results of bail-outs for Germany• Note: School performance of children correlates with education of

parents• Risk: We may end up with those who do not have the talent, education

and mobility

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Migration 1999-2020(Optimistic scenario)

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Agenda






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How to manage a corporate turn-around?

Lesson 1: Face reality• Fact-based analysis of drivers of success or failure• Performance metrics for the whole value-chain

Lesson 2: Create a positive vision• Without hope there is no reason why employees should bother• Positive earnings above the cost of capital are a must for survival

Lesson 3: Measure and celebrate success on the way• Many steps are necessary on all levels for an effective turn-around• Clear priorities need to be set and measured relentlessly• Celebrate each successful step!

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Agenda






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More work for the young and the old is possible

Employment rates of young and older population segments, 2001

Erw erbstätigenquote 15-24 J.

706050403020

Erw

erb

stä

tig

en

qu

ote

55

-64

J.

70

60

50

40

30

20

USA

E

CHS

P

A

N

NL

L

J

I

IRL

UK

ELF

FIN

D

DK

CAN

B

AUS

Source: DIW

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PerformanceMetrics

t

PositiveVision

‚Horror‘

Measures taken M1 .. Mx

5 Y. 10 Y.

M1

M2

MX

A paradigm for change

(

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Szenario planning as tool for making vision concrete

Social civil society

Dynamic growth society

Tough competitive

society

Declining envy society

Nostalgic state society

Current state?

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Demographic change as opportunity for wide-ranging innovation of society

FROM

• Longer life working time

• Need for private insurance

• Loneliness in old age

• Young generation as financial burden bearer

• Children as poverty factor

TO

• Ability to work longer

• Permission to work longer

• Freedom of own responsibility

• Contribution to society value chain in old age

• Young generation as our future

• Children as basis for meaning in life

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Agenda






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What does it mean for you?

New concept of work

New concept of age

New concept of society

New concept of identity

• Additional focus on value add for society• Work outside employment contexts• Multi-generational, multi-level division of work

• Older age with large productivity potential• Older age with large responsibility to harness

productivity potential

• Opportunity for civil society• Competition for talents and youths among

communities

• Balance between self-interest and interest in self• Multi-cultural, global development space

Business

Leadership Challenges in the Context of Demographic Change