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Capitalism. It has spread to nearly every corner of the globe and no other economic system has been so effective at generating wealth. But today it is broken, failing to keep its promise of rising prosperity for all and rewarding a small minority with disproportionate riches.
That has provoked mutinies: Donald Trump’s election, the United Kingdom’s exit from the European Union, riots in Chile and Lebanon. And it has provoked a rethink in the business world where, for the last half-century, the only metric for success has been the price of a company’s stock.
Now, more and more firms are saying it is time to put their purpose ahead of their profits, and to judge them also by their impact on their employees, customers, and local communities, as well as the environment.
The coronavirus – and efforts to slow its spread – will likely give this movement a huge boost. The value of mutual social obligations and shared responsibilities will be plain to see in everyone’s daily lives. Could that spell the end of capitalism as we know it – the neoliberal version – and usher in a kinder, gentler model?
Verneuil-sur-Seine is not the sort of place you expect to find a revolution going on.
It’s a sleepy, nondescript suburb outside Paris, its streets hushed on a recent midweek morning. But in a cramped office in a converted apartment, an ebullient American mother of five and her French husband, a former auto executive, are busy reinventing capitalism.
Putting purpose before profits and ethics above everything, they are building a new sort of business. “We wanted to bring all our personal values into the company,” says Elizabeth Soubelet, a trained midwife. “Basic humanist values like respect for people and the planet.”
Ms. Soubelet and her husband Nicolas make Squiz, re-useable pouches for toddlers to suck applesauce from, which help parents cut down on plastic packaging waste. Theirs is a tiny company with ten employees (we’ll come back to them later), but they are by no means alone. Even titans of finance are on the same track as a new mood sweeps through businesses on both sides of the Atlantic, prompting CEOs to shift out of greed and into good.
And the global coronavirus pandemic has added compelling force to this movement. Suddenly, firms are expected to display compassion and promote the common interest; the way in which stressed companies treat their workers has become a loud and pressing public concern; in the United States, paid sick leave has become a political issue.
Battered by the 2008 financial crisis and its aftermath, tainted by yawning disparities in income and opportunity, and focused tightly on the bottom line, “capitalism has been derailed,” says Paul Collier, an Oxford University economist and recent author of a surprise best-seller “The Future of Capitalism.”
“That is stirring new anxieties ... and mutinies” from Lebanon to Chile and from Brexit to President Donald Trump’s election, Professor Collier argues. “Potentially, capitalism is a wonderful system,” he adds. “But it doesn’t run on autopilot. It needs rules.”
After decades of laissez faire, he says, from business schools to boardrooms, “there’s a sea change going on.”
Time for a reset?
When the global businessman’s bible, the Financial Times, launches a campaign entitled “Capitalism: Time for a Reset” as it did last September, you know something is afoot.
In the developed countries where capitalism first flowered, but shifted away from its social obligations, its credibility today is badly tarnished. A worldwide poll earlier this year found that 56% of respondents thought the system was doing “more harm than good.”
And when the pro-free market think tank Legatum surveyed British public opinion in 2017, it found the notion of capitalism most often associated with greed, selfishness, and corruption – “the kind of ‘brand personality’ one would expect from an organization in acute reputational crisis,” its report pointed out.
The current model of unfettered neoliberalism is not keeping capitalism's promise of rising prosperity for all. From San Francisco to Stockholm, well-educated people living in a metropolis have done well from globalization and the prevailing ethos of individualism; less-educated provincials have seen far fewer benefits.
Labor’s slice of the global income pie has fallen from 54% to 39% since 1970, while the share going to wealthier individuals who own capital (such as stocks) has risen correspondingly. In the U.S., labor productivity has gone up by nearly 70% since 1979, but wages have risen by less than 12%.
Executive pay, meanwhile, has reached astronomical levels. In 2018, the 100 best paid U.S. CEOs earned 254 times the median pay of their companies’ employees, according to SEC filings.
Income inequalities “are going very fast in the wrong direction,” acknowledges Angel Gurria, the Mexican head of the Organization for Economic Cooperation and Development, the free market’s Paris-based think tank. “You can understand why everybody is so angry.”
Behind the figures is the way capitalism has been practiced for the past half-century, since the free market economist Milton Friedman wrote in a celebrated New York Times article that “there is one and only one social responsibility of business ... to increase its profits.”
That dictum has dominated business thinking ever since, and it has made “shareholder value” the sole metric by which to judge a company’s success. CEOs have been obliged – by their boards and their investors – to prioritize quarterly earnings performance over all other criteria.
It wasn’t always like this; Henry Ford was keen on reminding people that “a business that makes nothing but money is a poor business.” But in the 1980s that mindset was swept aside by the outlook expressed in a sign hanging outside the trading room of Bear Sterns: “Let’s make nothing but money.”
It didn't help in the long run; Bear Sterns was the first bank to go under in the 2008 financial crisis.
Back in 1943, Johnson & Johnson published its business credo, stressing the firm’s responsibility to customers, employees and suppliers, and to local communities and the environment, before its duty to stockholders.
That approach was not common then, but it is stirring now in more and more boardrooms as business leaders carve out a new role for their companies. Last August 181 U.S. corporate members of the Business Roundtable, including the bosses of Apple, Walmart and PepsiCo, signed a pledge proclaiming their “fundamental commitment to all of our stakeholders” and renouncing the doctrine of shareholder primacy.
And now the coronavirus pandemic has prompted people to scrutinize such companies’ behavior, and hold them to higher standards. Whole Foods, part of the Amazon empire, ran into a storm of public criticism recently when CEO John Mackey suggested that employees could donate their paid time-off hours to colleagues facing medical emergencies. This appeared to put some of the burden on Whole Foods’ staff, rather than the company.
Whole Foods and other firms have revised their paid time off policies to help employees cope with the pandemic.
“It’s these notions of purpose, trustworthiness, values, and culture that underpin a reconceptualization of business for the 21st century,” said Colin Mayer, the former dean of Oxford University’s Saïd Business School, at a recent seminar.
But what does that look like in real life?
Considering every angle
For Elizabeth Soubelet, it all began with shame. She was buying applesauce in 64-pouch family packs, she recalls, “and my kids were finishing them in like 14 seconds flat” and then throwing the aluminum-lined plastic containers away.
“I grew up in America in the '70s and '80s, in the heyday of trash,” she says. “I thought this was one thing that I could do better.”
She looked online, and found that all the reusable pouches came from China. That was no good; she didn’t like the idea of buying something that might be made in an exploitative sweatshop with poor environmental controls 5,000 miles away. Bad for the planet.
So she decided to make her own, and with her businessman husband set about creating a company with a simple mission: to help people reduce waste by using the company’s reusable pouches, playfully decorated with cuddly exotic animals.
But Squiz also has a broader vision of its purpose, Nicolas explains. “We want to build an organization that cares for people generally – our customers, our employees, our suppliers and the environment.”
That isn’t always easy.
So as to keep the company’s carbon footprint light, and to fulfill a social purpose, Squiz entrusts its packing and dispatch to a local nonprofit employing intellectually disabled people. Last year that meant some time-consuming and costly mix-ups, but Squiz sales administrator Virginie Bartoli, who spent weeks at the packing center sorting things out, discovered a silver lining.
“I didn’t know much about handicapped people, but I realized when I was working there that everyone has the right to work,” says Ms. Bartoli. “This job I do has made me more human, in some ways.”
Squiz insists that all its products’ components should be made and assembled in Europe, to European labor standards. “We take a stand,” says Sophie Amman, head of marketing and engagement. European workers are expensive, she knows, “but for us the bottom line is not the top priority.”
Still, what does all the care for the environment, the employee perks, the insistence that all materials be recyclable, do to the bottom line? Just how much does it raise the cost per unit?
“That’s a question that drives me crazy,” Elizabeth splutters. “What would you call the base cost? The China price? You can only tell the ‘real’ price when you add in the damage to peoples’ health and to the planet.”
Squiz has settled on a price of $5.50 for a pouch designed to be used at least 50 times. Sales have risen 40% year on year as the company’s reputation for fairness has spread.
That reputation has been cemented by Squiz’ certification as a “B Corporation” (the B stands for benefit) by an independent agency that has validated the company’s performance as a sustainable and ethical enterprise.
The 3,000-plus B Corps around the world, which include Ben and Jerry’s and the outdoor-gear manufacturer Patagonia, are legally obliged to consider the impact of corporate decisions on their workers, customers, suppliers, community and environment. They see themselves as the vanguard of “business as a force for good,” a better way of running capitalism that benefits a range of stakeholders, not just shareholders.
And there is no more vocal champion of “doing well by doing good” than Paul Polman.
Making capitalism sustainable
Mr. Polman, an energetic and talkative Dutchman, climbed the corporate ladder at Procter & Gamble for 27 years. But he made his name as the boss of a rival consumer goods giant, Unilever, the Anglo-Dutch firm that owns brands worldwide such as Hellmann’s, Dove, and Lipton tea.
It was there, until he left his job last year, that he pioneered the stakeholder model of multinational capitalism.
At first, he angered investors when he took over in 2009 by refusing to offer the traditional quarterly profit forecasts on which financial analysts rely, and insisting on taking a longer-term view of his company’s performance. Unilever shares fell 10%.
Then Mr. Polman alarmed them even more by devoting money and attention to something he called the Unilever Sustainable Living Plan, which involved all sorts of projects that seemed harebrained at the time.
He pledged Unilever would buy all of its agricultural raw materials from sustainable sources by 2020. (In fact, it has managed to hit 70%.) He announced ambitious personal hygiene targets in developing countries, launching hand-washing programs for kids and building 30 million toilets.
“Each Unilever brand had a social mission and a purpose,” Polman recalls.
That built the trust that is especially critical to consumer product companies, but which can decide the fate of any company. And a global study earlier this year found that ethical issues such as integrity are three times more important to people than competence when it comes to trusting a company.
For Unilever, all this paid off. The company yielded 290% shareholder return over Mr. Polman’s decade at the helm, he says proudly. “The development agenda is a business agenda,” he insists. “It doesn’t have to be a tradeoff.”
The financial markets are still somewhat hesitant, he says, “but investors are starting to wake up.”
BlackRock, the largest asset management company in the world, handling $7 trillion, is a case in point.
In his 2019 annual letter to the heads of the companies that BlackRock invests in, CEO Larry Fink urged them to identify and express their companies’ purpose. This year he announced that BlackRock’s actively managed funds will no longer invest in companies that derive more than 25% of their revenue from thermal coal.
“We’ll walk away from businesses whose purpose we don’t believe is particularly compelling or will ensure that the company will be around for a long time,” explains BlackRock spokesman Ryan O’Keeffe.
In the same vein, the head of the world’s largest asset owner, the Japanese government’s pension investment fund, warned in an open letter earlier this month that “companies that seek to maximize corporate revenue without considering their impacts on other stakeholders ... are not attractive investment targets for us.”
Such pronouncements have drawn accusations of “purpose washing”; and activists are still waiting to see any change in behavior by any of the companies that signed on last year to the Business Roundtable’s declaration of commitment to “all of our stakeholders.”
“That was just a statement,” says Andrew Winston, who advises businesses on sustainability. “It didn’t actually commit the companies to much of anything and it remains to be seen how they apply it. But it was symbolically important and it has started a debate.”
Now they must put their money where their mouth is, says Mr. Polman. And he doesn’t think they should be afraid to forge a new path for capitalism. The figures seem to back him up: In the current stock market rout, ESG funds (focusing on environmental, social, and governance investing) have outperformed their peers.
“Ten years ago, I did what I did as an act of faith,” Mr. Polman says. “But now there are quite a lot of hard facts showing that purpose-driven, long-term, multi-stakeholder firms which respect people and the planet see better business performance.
“Companies that do all this will be ready for the future. The rest will turn out to be dinosaurs.”
Read the entire Navigating Uncertainty series.