“Transparency Eludes Founder of Davos Forum”
Line Between Elite Group And Personal Ventures Is Sometimes Blurry

By Julia Flynn and Steve Stecklow
Staff Reporters of The Wall Street Journal

27 January 2000

Page A14
(Copyright (c) 2000, Dow Jones & Company, Inc.)

GENEVA — Klaus Schwab springs from his chair and gestures toward his office’s dramatic, floor-to-ceiling glass wall, which looks out over a lake and distant, snowcapped peaks. This new headquarters, he says, was designed to symbolize the transparency of his organization, the World Economic Forum.

“This building perfectly reflects our culture,” says Mr. Schwab, host of this week’s annual gathering in the Swiss ski resort of Davos, which is drawing the usual parade of global power-brokers, including Microsoft Corp.’s Bill Gates and President Clinton. “It’s open and transparent.”

But an examination of Mr. Schwab and his organization shows it’s not all as clear as he suggests. The line between the activities of the not-for-profit forum and some of Mr. Schwab’s personal, for-profit ventures has often been a blurry one, and some people who have worked closely with Mr. Schwab have found the forum to be a confusing web of its 61-year-old founder’s personal and professional interests.

Indeed, concerns about Mr. Schwab’s management style and outside activities have been growing for some time, and they have played a role in the forum’s high staff turnover. In the past year alone, about 30 forum employees have quit-more than a third of the staff. Others say they plan to leave after this year’s Davos confab.

Some forum directors and insiders argue that the group should stick to its original mission of fostering dialogue, and not get distracted by other ventures. “When you have a brilliant, innovative idea, like Klaus had in starting the annual meeting at Davos, you need to keep it preciously clean,” says Maria Cattaui, who worked closely with Mr. Schwab for 19 years as his second-in-command and is now secretary general of the International Chamber of Commerce in Paris. “It’s important that the values of the original concept be preserved and not be contaminated.” Ms. Cattaui quit the forum in 1996 in part because of misgivings about Mr. Schwab’s outside for-profit activities, say people familiar with the situation.

One example of this odd mix of not-for-profit and for-profit ventures can be found in Mr. Schwab’s dealings with USWeb Corp., a California Internet consulting company. In June 1998, the forum announced it had awarded an $8 million contract to USWeb. Just 13 days later, USWeb appointed Mr. Schwab to its board and gave him valuable stock options. When the forum later wanted to get out of the contract, Mr. Schwab says, he redirected it to another Internet company where he also serves on the board and in which he now holds stock options.

The forum’s managing director, Claude Smadja, plus another member of the executive board and three outside directors say they weren’t aware of the USWeb stock options until contacted by this newspaper. “It could be of some concern,” says William I.M. Turner, an outside director.

Mr. Schwab and USWeb, which is now called USWeb/CKS Corp., say there was no connection between the awarding of the forum contract and Mr. Schwab’s appointment to the board. Mr. Schwab also says his activities posed no conflict of interest. A forum attorney, Daniel L. Spiegel, adds that he sees nothing wrong with Mr. Schwab protecting the interests of both the forum and USWeb.

No one is accusing Mr. Schwab or the forum of breaking any laws, and there is no evidence that they have done so. Many forum officials, including Mr. Schwab himself, also stress that the forum isn’t publicly traded and is answerable only to Swiss law and Swiss authorities. It would be a mistake, they say, to apply American standards about conflicts of interest to a European organization.

But for-profit activities seem to be at odds with the forum’s goals. “Its purpose is the objective analysis of issues, [and it is not meant to further] the aims or ambitions of anybody,” explains Peter D. Sutherland, the chairman of Goldman Sachs International and a member of the forum’s board. Mr. Sutherland wouldn’t comment specifically on Mr. Schwab’s for-profit activities.

To understand some of the confusion about how the forum operates, consider a separate not-for-profit entity it created two years ago. The new entity, the Schwab Foundation for Economic and Social Development, acquired the forum’s profit-making ventures for an undisclosed price. Mr. Schwab initially referred questions about the new foundation to the forum’s managing director, Claude Smadja, who said the Schwab Foundation was Mr. Schwab’s family foundation and that Mr. Schwab’s wife, Hilde, serves on the board. But Mr. Schwab himself later said it was a public-service, not a family, foundation, and that Mrs. Schwab isn’t a board member. The forum later provided a Swiss registration form showing that the board comprises Mr. Schwab and two Swiss accountants, who also do work for the forum.

Mr. Schwab acknowledges there is confusion between the Schwab Foundation, which he heads, and the forum, which also is a foundation and which he also heads. “It is clear there has to be a transparency” between the two organizations “to avoid the misunderstandings that have occurred,” he said.

The tensions partly reflect the success of Mr. Schwab, a Harvard-trained, Swiss business-school professor. Since its founding in 1971, the forum has mushroomed from a proudly amateurish operation into a powerful player in global economic affairs. Mr. Schwab’s idea for the first meeting was to introduce European business leaders to leading-edge management thinking from top universities. He chose Davos because he and Mrs. Schwab had once spent a pleasant holiday there.

Even as it grew, the forum operated a bit like an underfunded graduate program — with waves of bright, eager staffers willing to put up with chaos and low wages in exchange for the chance of hobnobbing with
CEOs and prime ministers. Dependent mainly on membership dues from its 1,000 mostly corporate members, the forum struggled on a shoestring for years. (Dow Jones & Co., publisher of The Wall Street Journal, is a member of the forum; some of its executives and employees attend the Davos conference and have organized and participated in panel discussions at other forum events.)

In fact, until the forum moved into its spacious new headquarters last year, it operated from a three-bedroom house outside Geneva.

Lance Knobel, who works for a forum magazine, calls the forum “gloriously personal and amateur — and I don’t see that as a pejorative.” Staffers describe Mr. Schwab as a human tornado of ideas — often producing 10 new ones each week. They also say the forum’s mission statement has been rewritten about five times in the past 18 months, with each iteration reflecting Mr. Schwab’s latest passion. “It’s a question of the organization being able to keep up with these ideas and still put on Davos ever year,” says David Morrison, a former member of the executive board who put together the Davos program for four years until he left last year for family reasons.

Mr. Schwab’s perpetual energy has spilled over into several entrepreneurial ventures, some of which were originally set up under a forum-controlled entity called World Link Communication Development AG. One
such for-profit venture, Global Event Management, began providing logistical services to the Davos conference in 1997. Now partly owned by the French media company Publicis SA, it does the logistics for many of the forum’s regional conferences, as well as for corporate clients.

But the for-profit initiatives have worried some of Mr. Schwab’s closest advisers. One is Barbara Erskine, the forum’s director of communications and an executive committee member. “It just didn’t work,” says Ms. Erskine. “We’re a not-for-profit, but we started ventures that were bringing in money. . . . How could we explain that?”

Ms. Erskine says she first approached Mr. Schwab and other directors with her concerns in 1997. As a solution, Mr. Schwab decided to set up a separate not-for-profit foundation, to take the for-profit ventures and “park them somewhere near the forum” to protect it from losses, recalled Mr. Turner, the forum outside director. Ms. Erskine now believes that the problem has been resolved.

In February 1998, the Schwab Foundation was established in Switzerland, with Mr. Schwab as president. Soon after, it took ownership of World Link Communication Development AG. Mr. Schwab declined to specify how much the new foundation paid the forum for the assets, other than to say it was for “book value.”

According to its registration form, the purpose of the new foundation is to support “special projects of the World Economic Forum that are outside the normal activities of the Forum,” including promoting international cooperation and peace.

To date, Mr. Schwab says the Schwab Foundation hasn’t been active, other than in launching — or buying stakes in — startups. But he says he plans to announce at Davos this week its first major project: annual prizes of $1 million each to reward “entrepreneurship in the global public interest.” He says he isn’t ruling out naming the prize after himself, although “after 30 years in the World Economic Forum, I don’t need to create, just for me, a special ego trip.”

Mr. Schwab says he needs a $100 million endowment to fund the prizes. He may have a good start already. In 1998, World Link purchased an 8% stake in a private, Zurich-based problem-solving company called Think Tools AG, where Mr. Schwab later became deputy chairman. The company plans to go public on the Frankfurt Stock Exchange soon.

Not every venture has proved so successful. In 1997, Mr. Schwab set up a company in Burlington, Mass., called Advanced Video Communications Inc. that was supposed to develop a global desktop video-conferencing system for forum members. After some management turnover, Mr. Schwab appointed a forum employee as president — his half-nephew, Hans-Joerg Schwab. (Hans-Joerg Schwab couldn’t be reached to comment.)

By early 1998, despite new investments in AVC by Intel Corp. and Microsoft — both forum members — and USWeb, Mr. Schwab says it became apparent that the core technology behind AVC was being overtaken by the Internet. So he says he arranged a complex deal involving another AVC investor, USWeb, which was also doing work for the forum.

On June 3, 1998, USWeb announced that the forum had granted it a long-term, $8 million contract to take over the project from AVC. As part of the deal, USWeb acquired AVC’s assets. Thirteen days later, Mr. Schwab joined the board of USWeb, and like other directors, received options for 25,000 shares of stock. Those options, if fully vested and exercised, would be worth about than $500,000 today. Both USWeb and Mr. Schwab say there was no connection between the board appointment and the contract, and Mr. Schwab says to avoid any conflict of interest, he assigned the forum’s managing director to oversee the contract.

But Mr. Schwab became involved in the contract in late 1998, when he says the forum decided to pull the plug on the project. Because the forum was still under contract to USWeb, Mr. Schwab got USWeb to shift the contract to a new for-profit venture he had set up — a Boston-based Internet industrial auction site called Industry to Industry Inc. Mr. Schwab serves on its board and has stock options in the company, which is known as i2i, and the Schwab Foundation owns 50% of it.

Michael W.G. Fix, the company’s chief executive, says he doesn’t know the history of the USWeb contract. He also says i2i has no relationship “whatsoever” with the forum, even though a company news release describes it as “an initiative of the World Economic Forum.” Asked about that language, Mr. Fix said, “That’s wrong. It’s an initiative of Dr. Klaus Schwab.”