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Many companies striving to be good corporate citizens today face an internal tug of war between giving attention to community initiatives that address social problems and the growing demand to make environmental issues paramount.
Time for capitalism to adapt or depart
By Brad Googins
Leaders in the public and private sector are scrambling to put America’s disheveled financial house in order, but perhaps they should pay more attention to the cracks starting to show in the house’s capitalist foundation.
While many of us are worried about our 401k plans, houses and jobs, something even more fundamental is beginning to find its way into our discourse – the future of capitalism. This somewhat unsettling conversation has begun to bubble up to the surface as we try to understand the roots of the current economic situation and find solutions that stick.
While we throw bailouts, stimulus packages and anything else we think has a chance of reversing fortunes against the wall, we are still left with a sickening feeling that the darkness of the current downturn may not lend itself to any quick fix.
In fact, the banking crisis, the Bernie Madoff ponzi schemes, sub-prime mortgages and toxic assets might be only manifestations of something larger, more systemic, and more problematic than anything we have even imagined. We saw a glimpse of what this might be in the meltdown in Iceland last month. But in truth we are still absorbing the reality of what is unfolding in front of us and holding out hope – but not much beyond that.
Most of us are either too young or not quite old enough to have a good perspective on the global economy and the forces of globalization that have shaped and characterized the world we know.
The freeing of markets has unleashed many unintended consequences not envisioned by the architects of global capitalism. Key issues ranging from the growing inequality gap, persistent poverty and negative consequences of loose regulation to environmental degradation and chronic corruption are increasing the call for a re-examination of the current state of capitalism and challenging us to create a version that can better address these issues and build in different trade-offs.
While many have prospered over the past two decades through global capitalism – more than a quarter of a billion people pulled out of poverty in China in the past decade – too many are sinking further and further into persistent poverty.
There are in effect a series of cracks appearing in the foundation of capitalism, cracks that need to be seriously examined. Perhaps, as Bill Gates suggested last year at Davos, it is time for creative capitalism. We need new approaches that can build on the aspects of capitalism that have worked so well, while finding new ways to offset the downsides that have opened up the fissures in our society.
Fareed Zakaria penned a very interesting and provocative piece last month in Newsweek – “Can Capitalism be Saved” - that generated a great deal of comment and reaction. In looking over the landscape Zakaria, like many others, observed radically new and by some measure troubling developments.
Banks and automobile manufacturing are being bailed out by the government. New interventions into the housing industry portend a much increased government role than capitalism as we have known it would have ever tolerated. Credit markets are broken and trust in the financial and banking systems are about as low as they can go. Even the nationalization of banks has become a viable option in some quarters. Look out, here comes socialism.
But one of the benefits of the crisis is that it allows a more open and honest examination of the social and economic systems that underpin our societies. And the very nature of capitalism should be the subject of much discussion, since the underlying principles and assumptions of capitalism are being turned on their head. By some measures the very notion of government bailing out the private sector is contrary to the basic concept of capitalism, and from other perspectives signals its end.
The current crisis has brought government and its role back to the top of the agenda. While waves of globalization had kept government in a subservient role, the new environment prompts calls for government to lead and legislate the way forward. The political system seems to be where the muscle and the answers are coming from, and that is not something we have seen in capitalism in theory or in practice for quite some time.
So how can we begin to understand what led us to this point in time and what will lead us to the next iteration, modification or even new paradigm of capitalism?
Opinions and theories abound. Perhaps it has been more about the excessively weak role of government than it has been about the corporate sector. On the other hand, have we been witnessing the evolution of an extreme capitalism over the past decade that is now undergoing a long overdue correction? Does capitalism need a few tweaks or a radical overhaul?
Under any scenario some things are clear.
The extremes of capitalism will be tamed and modified primarily through additional internal and external oversight. Externally, some form of oversight will have to emerge to address the excesses that have led to the current meltdown. The coming debates in Congress, unlike the rush to Sarbanes-Oxley to quickly fix what was termed the bad apples of Enron, will have to open up a more complex dialogue. Hopefully this will result in new oversight mechanisms and governance principals that will not depress and snuff out the amazing innovation that capitalism brings to the table, but is able to create better incentives and brakes to insure a more sustainable model.
Internally, business must adapt more quickly and more pro-actively to the twin forces of transparency and accountability. The public and media focus on excessive compensation, bonuses, corporate jets and the like speaks to the fact that too many business leaders are blind to the new operating environment and the new expectations of business as citizen. The culture of self is now bumping headlong into the demands of society.
Boards and executive suites have to become more open and engaged with key stakeholders and not excessively focused on the single metric of profit. In addition, business must be more agile in incorporating the new measures of reputation, authenticity and accountability into their operating models. Value creation and sustaining business in the 21st century require a very different governance and business model, one that creates effective relationships and works closely with a range of key stakeholders, creates a transparency and accountability that speaks to the values of the company, and develops new standards and metrics of business success.
There is little doubt some form of capitalism will emerge from this work out – after all, what’s the alternative? Capitalism, for all its weaknesses and defects, still is better in the long run than other economic systems.
It is increasingly clear, however, that capitalism as we know it in the United States is neither viable nor sustainable in its current form. We are headed into a long overdue re-examination of what is working and what is not, and moving toward a new iteration.
The question is whether it will be the creative capitalism that Bill Gates envisioned, or some new conceptualization that brings a more even sense of justice and equity, and a new form that will create a true model of sustainability.
Time to get engaged in the debate.
February 5th, 2009 at 4:21 PM
I think our current problems stem from indivdual dishonesty and greed not our historically proven system.
February 5th, 2009 at 4:56 PM
“The alternative to capitalism as we know it is not socialism, but a better form of capitalism.” —R. Edward Freeman
I think Ed Freeman has had this “better form of capitalism” figured out for quite some time. At the heart of his framework is the multi-stakeholder operating model. As more and more companies adopt this model and it becomes an integral part of their culture, we’ll need less regulation and government oversight than we even have now. The reason “many business leaders are blind to the new operating environment and new expectations” is because our reward systems, at least for public companies, are still geared toward the short-term, profit maximization philosophy that continues to fuel the quarterly earnings game. Large institutional investors have a major role to play in this regard. Until leaders that safeguard the long-term health of their businesses by creating effective relationships and working closely with a range of key stakeholders are noticeably rewarded with lower capital costs, the transformation of capitalism that Dr. Googins describes in this article will take much longer than it otherwise needs to. The adoption of longer term, more sustainable governance principles is not a very attractive option when Wall Street and shareholders consistently call for CEO and CFO heads to roll if they miss a couple quarterly EPS targets.
We’re in this economic mess because some financial institutions were putting good short-term numbers on the board and their peers either needed to play the same game or pack their bags. In an ideal world, the few leaders who raised a cautious hand and refused to play along would have been rewarded with higher stock prices and job security for their more long-term minded view. But that’s not the world we live in today. Maybe this wake up call will finally change the mindset of the investment community. But even now, few companies dare to choose not to lay people off because it’s not in the long term best interest of their company. Any leader that decides to take a short-term cash hit to keep people employed (a very key stakeholder), will undoubtedly be penalized by Wall Street analysts. And so it goes.
February 5th, 2009 at 5:08 PM
Many historically proven economic and social systems have been proven in need of change over time, to survive. Those that could not change are generally found in the pages of history books, rather than in the current marketplace. What the changes may be, how they may come and how they are used is the interesting debate for philanthropic leaders to consider….quickly!
Certainly, individual ethics has had a major impact on the current situation. We are hearing much about the damage done by ethical lapses, but there are the stories of great impact for the greater good brought forth by ethical heroism. I think we are witnessing the metamorphosis of capitalism and I hope we are looking for the good results, to promote them.
Enough energy going in the direction of good results from capitalism will out-weigh the potential for damaging results. It seems obvious from history and in current news that results moving in the direction of increased benefits for all on an even basis is going to produce longer lasting prosperity. When one or a few benefit greatly, others, somewhere are probably paying the price, probably, as history teaches, to their disadvantage.
February 5th, 2009 at 5:23 PM
Dr. Googins makes some cogent points, but I differ with his call for more legislation. I don’t think capitalism has failed, rather some key actors in it have failed. We have ample legislation to handle all the things government should be managing – and a good deal more, I might add! We have oversight committees in Congress, Federal agencies, State organizations, and local gendarmerie to watch over the activities of countless entities. We are not short of the means to control wrong-doing, and in the end, it is nothing more than wrong-doing that has created the financial problems of today. Adding to the workload of the people at the operational level by legislating more “thou-shalt-nots” is not a solution.
On the other hand, enforcing the existing raft of legislative proscription would likely have resolved a large part of what happened. The problem is that enforcement did not occur. I think the solution to the problem is to determine first the core before unleashing solutions in law by politicians who place themselves and their prospects for reelection before common sense. Witness the current bailout of American business: viable banks required to take part, dictation of terms as detailed as salary level in private business by government, funding of abortion in foreign countries, and Larry Flynt’s – perfectly reasonable, although laughable – request to be a participant. There is, indeed, a so-called “entitlement mentality” that has emerged in this country, and it is abominable that this condition has become so widespread.
If, for instance, Congressional oversight committees assumed the same degree of accountability to which the boards of directors of public companies have recently (and not unjustly) been lifted, I doubt that the progress that sub-prime mortgages made would ever have gotten off the ground. If Federal agencies are staffed, trained and applied to adequately execute the duties they are assigned, and they performed realistic checks of the activities they are charged to regulate, I doubt some of the overt fraud that has recently come to light would ever have occurred.
Management texts are rife with examples of companies who have done well, of managers who are ethical and professional, of business models that work when the leadership is held accountable. Too many organizational issues are involved here to enumerate and compare in this forum, but the point is that there is an underlying reason for all of these instances of malfeasance. The solution is education, not legislation. Legislation results in taking the car off the road because there’s a chance a drunk driver might get in it. We have far too much of that kind of legislation.
It is the work of organizations like the Center for Corporate Citizenship to provide that educational forum. Just consider the strides that have been made in a few short years toward more corporate social responsibility. It is the people who manipulate the system – in good ways and bad – who create the results we are living through today, not the system.
Economic cycles will occur, just as Ice Ages will, and it will not be the end of the world. It is folly to think we can spend ourselves out of a recession. It is folly to think we can legislate the market economy we purport to have. To do that, we have to assume that one body has all the answers to all the possible situations in which the legislation would be exercised. Surely, no one thinks the current legislature, regardless of party affiliation, has anything near that capability.
I fear the trend to socialism, just as Dr. Googins does. I agree that debate needs to be engaged. I hope it comes soon, and in the appropriate quarters.
Thank you, Dr. Googins, for your insights!
February 5th, 2009 at 5:57 PM
Please also see Australia’s Prime Minister Kevin Rudd’s essay on The Global Financial Crisis in which he theoretically attacks “extreme capitalism” and neo-liberal economic orthodoxy. GO TO: http://www.themonthly.com.au