| Horst Köhler | ||||||
“Change happens”. That’s the message the US Mint has chosen to advertise the new coin it hopes will replace America’s venerable dollar bill. The same slogan could be just as well applied across town where the IMF issues its own brand of international money known as special drawing rights. But there the specie in danger is Europe’s uniquely special right to tap one of its own and put that person into the top job at the Fund. The coin of the realm is clout.
All IMF managing directors have, by tradition, been European, just as World Bank presidents have always been American. Countries in Europe control about 37% of the voting power, with a US share of about 17%. Together, Europe and the US have picked the leaders of the Fund and the Bank since Bretton Woods.
But all is not well with this hidebound arrangement in the wake of the bare-knuckled political brawl leading up to the appointment of Germany’s Horst Köhler as the new IMF managing director. “Is this transparent governance,” asks Yukio Yoshimura, Japan’s representative on the IMF’s executive board. “I don’t think so.”
“The whole process of finding [IMF managing director Michel] Camdessus’ successor verged on the farcical,” says Roddy Gow, a headhunter with TMP Worldwide in New York. “I don’t think it helped the IMF’s cause. There was no need for that to have been such a badly organized selection process.” Köhler, however, is generally regarded as a good choice, despite the messy manoeuvering leading to his appointment.
“They couldn’t have stepped into it in a more preposterous way,” says Harvard’s Jeffrey Sachs, “with Germany announcing a candidate that the US didn’t like and the US not responding very clearly at the beginning.” The US – the Fund’s largest single shareholder – let the Germans go more deeply down that road feeling that they owned the job. Finally, the US said “no way” to the first German candidate – Caio Koch-Weser – thereby prodding the EU to endorse him as a way to score political points.
“That is recruitment disaster numero uno,” says Brian Sullivan, in charge of the global financial services practice at Heidrick&Struggles. “The situation was politically charged. It had very little to do with qualifications of the individual or requirements of the job.” Sullivan believes that would not have happened had a professional recruiter been involved. Instead, the job became a pawn in a larger game.
Back at the IMF in early March, the executive board took a “straw poll” and Koch-Weser received 43% of the votes – a weak showing. Stanley Fischer, the Fund’s first deputy managing director and a naturalized American citizen, received 12% and Eisuke Sakakibara of Japan received 9%. President Clinton spoke about it directly with the German chancellor, Gerhard Schröder – an unusual move – and announced to the press that the US wouldn’t accept Koch-Weser, but that it very much wanted Germany to nominate the next candidate. So, Koch-Weser withdrew.
A selection travesty
“The idea of the US saying to Germany ‘OK you own this one, give us the next name’ and then the US and Germany agreeing on the name of the next managing director for their 182-member international organization is a travesty,” complains Sachs.
| Paul Volcker | ||||||
Travesty or not, the IMF board later voted unanimously in favour of Köhler. But the episode broke new ground because Japan openly vied for the position for the first time by nominating Sakakibara. And most people expect Japan to campaign for a serious shot at the job next time. Angola also set a precedent by nominating Fischer, a citizen of another country.
It’s hard to see how Germany did Koch-Weser much of a favour. Even Köhler should have a right to complain. “A process controlled by two heads of state is unfair, in a sense, to the successful candidate,” says Henry Higdon, another New York-based headhunter. “These things have become so politicized that these people don’t get the respect they might deserve.”
Higdon goes on to point out that Köhler, even though most people considered him a stronger candidate than Koch-Weser, was by definition Germany’s second choice. “When you’re not the first choice,” Higdon reflects, “that makes it difficult. He has to overcome that just to start with.” For his part, Köhler has promised to reform the selection process. He was due to arrive at the Fund on May 1.
The pattern could have been completely different back in 1946. An American was the apparent choice to serve as the Fund’s first managing director in the aftermath of World War II. Harry Dexter White, had laboured side by side with John Maynard Keynes to construct the Bretton Woods system. He also served as America’s first representative on the IMF executive board. But White had a problem. Some people thought he was a communist. So, the job went instead to Camille Gutt, who had served as finance minister of Belgium’s wartime government-in-exile.
Still, it made sense for America to claim the Bank job – not the top spot at the Fund – in the early years just after Bretton Woods. Robert Solomon, author of Money on the Move, points out that the World Bank – unlike the Fund – needed to issue securities and only the US market could meet the demand.
So, the Bank needed an American with credibility on Wall Street. There’s no reason today why a European or an Asian couldn’t do well in that department as James Wolfensohn’s successor.
“The time has passed when we ought to preserve these positions for a particular region or country,” says former US Federal Reserve chairman Paul Volcker. “I suspect that you’d get a pretty good consensus on that.”
Ridiculous notions
Volcker thinks that some rotation might be desirable, but his frequent ally in many public debates, Fred Bergsten of the Institute for International Economics in Washington, sees it a little bit differently this time. “The notion of an entitlement should be totally rejected,” he argues. “One should not replace the ridiculous notion of entitling a European with the equally ridiculous notion of entitling a Japanese or an American or an Iranian or anything else.” Bergsten thinks that the job should be contestable among all qualified candidates worldwide.
“We need to think more about the issue of rotation,” says an IMF insider. “The ideal system should be open to select the most capable and excellent candidate, but in reality that could mean that many of these organizations would be dominated by just a few countries.” Global institutions clearly would not sustain that outcome for long. “Rotation is not the ideal solution,” he adds, “but a sort of second best.”
The IMF executive board began to organize a search committee and to draw up selection criteria shortly after Camdessus announced in early November that he planned to retire. But the situation soon became more complicated and political than the board had expected. So it stopped its work and waited for agreement by the major shareholders.
True enough, it’s the board’s job – legally speaking – to elect the managing director. But nobody ever thought the 24-member IMF board would actually make the decision. The members – known as executive directors – report to their governments, but major shareholders usually try to work out decisions like this around the fringes of G7 meetings. “The actual bargaining and negotiating would be a finance ministers’ event,” says one source. “They tend to exclude the central bankers, because this is a political decision and central bankers are not politicians.”
The G7 conversations aren’t always sweetness and light, either. “I don’t know that much more went wrong this time than at other times,” says Volcker. Volcker thinks that it would be helpful if people understood that national governments are going to make this decision.
“This is an inherently difficult process,” he continues. “At the end of the day, it’s going to be a choice of somebody who commands widespread support among governments. There are things you can do to facilitate that result, but I don’t think any of them are foolproof and I don’t think they can be mechanical.”
Corporate headhunters certainly think that there’s a better way. “It would be a nightmare assignment,” predicts Thomas Neff at Spencer Stuart in New York, “but they really ought to use a search firm.” Neff sees the job of the search firm to match names against criteria, to do due diligence and to go through a filtering process with the search committee to narrow the list of, say, 80 names that come from all sources down to a workable number that will be ultimately approached to determine their potential interest.
“Professional recruitment makes it more difficult for somebody to ram through an unqualified candidate,” says Neff. “Of the, say, 40 names recommended by board members or countries, many predictably will not meet the criteria. To have somebody remind them of that would be extremely useful.” Neff thinks that people who spend their lives doing that sort of thing definitely can add value. “But first and foremost,” he argues, “it provides structure, discipline and creative ideas.”
Higdon recommends that there should be an agreed process, starting with the board. ” I understand that this is different from corporate searches in America,” he says, “but I also think that a lot of the same processes and methods can be applied.” Higdon thinks that the first step in any search should be an agreement on “a tight definition of the bull’s eye. What is the profile of the candidate? One must prioritize. Otherwise, you’re not going to get what’s needed.”
Then, the board should name a selection committee to identify, nominate and vet prospective candidates. That includes interviewing and selecting perhaps one final choice for recommendation to the entire board. “I would say there should be four to eight members of the selection committee,” he continues. “You want broad representation of the various constituencies. You want big countries, small countries, different geographies, rich countries, poor countries. You’d have to get a balance.”
Keeping things confidential is the real trick. A lot of people want to leak this information to the press as a way to gauge reactions and to promote or discredit a candidate. “One person and one person only should speak for the search committee. That should be tightly controlled,” says Higdon. “Once you open that up, the lobbyists move in. You need to do it quickly and quietly.”
Higdon also doubts that Wolfensohn, for example, would have been interested in the presidency of the World Bank if he had been one of, say, five public candidates for fear that he might not have been selected, for whatever reason. “In today’s world if you’re not the winner, you’re a loser,” he warns. “If you’re third or fourth runner up or you didn’t get the job you were interested in, you may lose a lot of prestige. That’s embarrassing.”
Opinion in the recruiting community seems nearly unanimous on that point. “The one public disclosure should be the name of the individual who’s been interviewed by the search committee, approved by the board and has accepted the offer,” says Gow. “That’s the right way of doing it. But if the exercise makes the candidates into political footballs, then it’s not likely to result in hiring the best possible person for the job.”
Inescapable subjectivity
Still, even a well-designed process won’t guarantee the right choice. “The selection process in our experience foreordains an outcome with much greater certainty and much greater regularity than you would suppose,” says Charles Grebenstein, a headhunter from Morristown, NJ. “But selection processes are most frequently subjective, even though the candidate pools may be narrowed by objective criteria that determine who is eligible for consideration and who isn’t.”
IMF insiders doubt that private-sector methods could add value when choosing managing directors in the future. “The private sector search for head of a large company will have a much larger stock of eligible candidates,” says one long-time observer of the Fund, “and you certainly must have a much more structured process as well as one that’s based more on objective criteria.”
There’s also a need to have a geographic sharing of top jobs at all the multilateral organizations so that leadership doesn’t all come from the same country. “That makes it difficult to conduct the process in the same kind of structured way,” he says. This source told Euromoney that the selection criteria are “whatever the finance ministers at the time think they should be”.
But there are obvious requirements that don’t seem to change. Candidates should be knowledgeable about international economic and financial issues. They should have experience in those areas. They should have political credentials to be able to deal easily with ministerial level people in major shareholder countries as well as in smaller borrowing countries.
Major shareholders make the decisions and they are all creditor countries. They want a managing director who isn’t afraid of being tough when that’s needed: somebody who could tell the leader of a country with financial problems to pull up his socks and get on with a restructuring or tightening fiscal or monetary policy.
The US also should want somebody with private sector experience or at least somebody who understands the issues in the private sector – the financial markets, Basel capital standards as well as other banking and supervisory issues.
“I can’t imagine that the G7 would stay out of this,” the source says. “They discuss and coordinate their positions on many issues in the IMF. But they aren’t going to be able to ignore the other countries. So there needs to be a process that’s broader than the G7.”
US treasury secretary Lawrence Summers, just prior to the World Bank/IMF spring meetings, proposed that each institution, whenever it faces a change in leadership, create an outside advisory committee to review a panel of candidates. Summers wants disclosure of the broad criteria and other reforms that would take the views of all countries fully into account.
But even that relatively modest approach could run into trouble. “I haven’t had sympathy for the idea of delegating the selection process to an independent committee,” says Volcker. “I don’t know who would be on it and what their criteria would be and so forth. These jobs are basically not technical jobs. You want somebody who has generally-accepted qualifications, but also broad political support. I don’t know of any corporate board that says ‘we are going to call in some independent people to tell us who should run our company’. They’d use committees of the board instead.”
Onno Wijnholds, IMF executive director from the Netherlands, puts it this way: “The key governments know pretty well who the people are with the skills for this job. But there may be one important choice: do you want a technocrat with political skills or do you want a politician who understands international finance?”
But at least some people in the private sector think that senior executives from globally active financial institutions would make good candidates. “I simply don’t believe that a person who has run a group as large as Citibank, for example, doesn’t have the capability and sensitivity to political issues,” says Gow. “People like John Reed and others simply have to be politically astute.” Reed, an American, wasn’t nominated for the IMF post.
“I’m not sure that the central bankers or the other candidates whose names were suggested would necessarily say that they’re among the top decile of politically astute analysts of finances in the world,” Gow continues.
A judicial analogy
Bergsten has a different analogy in mind: the American Bar Association’s system for rating candidates to serve as federal court judges. “When the president comes to make his appointments for those judgeships, he sends his candidate’s name to the bar in confidence,” says Bergsten.
The president isn’t required to consult the ABA, but every US administration since Eisenhower’s has renewed the arrangement. The ABA committee uses three ratings – not qualified, qualified and well qualified – based on integrity, legal competence and judicial temperament. It’s a proven method. Almost 10% of 850 judgeships fall vacant in a typical year and the ABA assists in filling all of them.
But Lowell Bryan, a partner with management consultants McKinsey&Co, argues that the problem of choosing leaders for the IFIs runs much deeper. “How can you possibly expect governments to willingly agree to the right leadership for the World Bank and IMF,” he asks “if they can’t even agree on what these institutions should be doing?”
Bryan points out that major shareholders disagree vehemently about whether governments should be able to intervene to solve problems or whether these organizations should promote globalization and strive to make markets work better. “We actually need some rethinking of what these institutions are,” he adds. “They were designed for a different era with closed economies where trade was the main way nations interacted.”
There will be a very short list of qualified people with political acumen, according to Bryan, only if shareholders want them to play the old game. Bryan thinks that game should be over, but it lives on because these institutions still have vast amounts of money. “If you thought markets and globalization were bad and wanted to push for a closed system with real government power, you would push for one kind of leadership. If you believe in an open system, you would push the other way.”
The need to rethink the IMF was another strike against the man who was arguably the best qualified candidate: the IMF’s Stanley Fischer. Fischer, formerly a professor at MIT who had also served as the World Bank’s chief economist, currently serves as the IMF’s first deputy managing director. But Fischer had the misfortune of being in the wrong place at the wrong time. “If you have an underperforming organization, taking somebody from within and promoting that person to the top doesn’t usually inspire confidence from around the world,” says Higdon.
Controversy over the selection process has already spawned a debate about contracts for people like Köhler as well as performance-evaluation for high-level jobs more generally at the IMF and the World Bank. “We should link compensation to operational measures of the quality of their work,” says Edward Kane, a banking expert at Boston College.
But whether compensation matters is an open question. “Camdessus was motivated by the opportunity to play a role in politics and diplomacy at a very high level, to see heads of state often and to discuss the crucial issues for their countries,” says an IMF insider. “[US Federal Reserve chairman Alan] Greenspan and Wolfensohn are wealthy. Salary almost certainly doesn’t motivate them.”
Be that as it may, adopting new performance measures would almost certainly change the set of individuals that each organization attracts and then promotes. “People looking for a soft job with a tax advantage and little accountability would no longer prosper at the World Bank or the IMF,” Kane predicts. “These institutions need a very different type of person to be more effective.”
Kane wants top officials at the World Bank to receive bonuses and deferred compensation scaled to cumulative changes in, say, real income per capita in developing countries. At the IMF, incentives would track indicators of exposure to banking crises and currency attacks, including measures of the integrity of financial reporting and corporate governance. Needless to say, the Bank and the Fund should not be allowed to construct those indicators.
But the IMF and the World Bank are a long way from having a merit system to pick the best possible leaders. And they are even further from giving those leaders powerful incentives to improve the performance of their organizations. Motivation, for now, can only be delivered in the old-fashioned way. “If a person is an obvious failure, shareholders just should tell him to go away,” says Wijnholds. “I also think that if a person feels too much pressure from certain shareholders, he should be tough enough to say that he won’t do what they are asking and resign if they insist.”
But the fact is that effective recruiting occurs behind closed doors. The uproar this time seems to result from Germany’s snubbing of the usual G7 process. That, and greater disclosure by the IMF executive board, made choosing the new managing director earlier this year more transparent, not less.
But the prospect for turmoil surrounding future selections could be even greater. “Once you depart from the presumption that these positions are the sole preserve of some country or region,” says Volcker, “you have a complication. That makes it harder rather than easier.”
And shareholders seem far from convinced about the merits of significant reform. “I haven’t sensed any interest in opening up the World Bank position,” says one former official. The Bank always seems to be trying to raise appropriations for concessional money and the US congress has been the biggest obstacle. “Most countries recognize the need for some high-profile American,” he continues, “who has some influence in congress.”
As for the IMF job, there will probably be the appearance of greater openness. But that could be misleading. Virtually nobody expects the EU openly to assert a claim. The Europeans will probably say formally that they will consider any suitable candidate, but they will still feel they have the right to put forward the first name. If they can’t field a first-rate candidate and if an American is still running the World Bank, they might consider an outstanding Asian.
It’s already clear that Japan and the Asian countries will campaign to have a better chance of placing one of their own in the IMF job. But the Asians will recognize the need for that person to come from a creditor country. And apart from Japan there are no serious contenders. The major shareholders – all of them creditor countries – don’t want somebody from a borrowing country who might go easy on borrowers. There is a perception financial assistance is doled out readily. And that would be just another reason to shut it off. “I think the creditor countries will feel that it’s essential for somebody who is attuned to their concerns to be in charge,” says one source, “since they put up money for the IMF’s operations.” Volcker sees that as the dilemma: “There should be some way of bringing the interests of the rest of the world more directly to bear. I think that’s the heart of the problem.”
For some this is a storm in a teacup: the more important issue is the future role of the Bank and the Fund. Capital available from private markets now dwarfs their resources. And they’re on track to becoming increasingly irrelevant, without the consensus and the leadership to harness those markets and to make them work better.
