Business December 2013

Is Capitalism in Trouble?

CEOs are growing nervous. Can they help save our system from its worst excesses?
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Signs are proliferating that the social "license to operate" that business depends on could be lost. (Joshua Lott/Reuters)

On a Wednesday in mid-September, some 30 entrepreneurs from around the world put on boots and blue jeans and spent four hours digging out Namaste Solar, a solar-power company in Boulder, Colorado, from under three feet of mud.

The international cleanup crew was in town for the annual conference of B Lab, a global organization of for-profit businesses (known as B Corps) that choose to legally bind themselves to meeting social and environmental objectives. Namaste Solar is one of the world’s 830 certified B Corps, and after flooding of near-Biblical proportions, some assembled peers decided to lend a hand.

“As we were leaving, we got on the bus pulling away, and we saw six or seven Namaste employees having a team hug,” Andrew Kassoy, a co-founder of B Lab and one of the diggers, told me. “People said, ‘That’s what this community is about—it is about businesses taking collective action to serve society.’ ”

We are well into the age of Oprah, so there is nothing too remarkable about corporate group hugs, particularly if your company has namaste in its name. Nor is there anything too special about groups of businesspeople building team spirit through volunteer work and assertions of the social value their labors provide.

But the B Corp community is genuinely ambitious. And it is part of a wider international movement of CEOs, investors, and business-school professors who hope to transform the way business is done, creating a more “sustainable” system of capitalism. Parts of the movement are familiar. Environmentally friendly business practices have long been mainstream, particularly when they create a brand advantage, as with organic foods. Humane treatment of the developing-world workers who sew our clothes or build our iPads isn’t quite as popular a brand promise, but it is hardly novel.

What is newer is the worry about the Western middle class and the fear that capitalism as it currently operates isn’t delivering for that broad swath of society. In summing up the Colorado retreat, the B Lab team emphasized this idea, touting the “higher-quality jobs” that B Corps provide relative even to other socially minded businesses that have subjected themselves to a review of their social impact: employees are 45 percent more likely to be paid bonuses than people at those firms, and 55 percent more likely to have at least some of their health-care costs paid. B Corps are also 18 percent more likely to choose suppliers from low-income communities.

“We are going through a shift,” said Marcello Palazzi, one of the leaders of the B Corp movement in Europe. “Society as a whole is realizing the capitalist system itself is quite dysfunctional. We have created an economy and corporations that in many ways have become unethical. One response is to go out on the streets, like Occupy Wall Street. Another is the B Corp movement.”

In Western capitalism circa 2013, fear that the market economy has become dysfunctional is not limited to a few entrepreneurs in Boulder. It is being publicly expressed, with increasing frequency, by some of the people who occupy the commanding heights of the global economy.

Dominic Barton, the global managing director at McKinsey, is one critic: “Capitalism, even 150 years ago, was more inclusive; there was more of a sense of social responsibility,” he told me. Today, trust in business is declining. “The system doesn’t seem to be as fair or as inclusive. It doesn’t seem to be helping broader society.”

Barton’s concern is shared by David Blood, a former head of Goldman Sachs Asset Management, who co-founded the investment firm Generation Investment Management with former Vice President Al Gore a decade ago. “Some people say income inequality doesn’t matter. I disagree,” Blood said. “We are creating a situation in which only the elite of the elite can be successful—and that is not sustainable.”

Both men worry that if capitalism doesn’t deliver for the middle class, then the middle class will eventually opt for something else. Business needs what Barton calls “a license to operate,” and without a new approach, he fears, it risks losing that license.

“If we don’t do something to change the trajectory” of the economy, we “will experience significant social upheaval.”

“We have so many people who are suffering,” says Kurt Landgraf, the former president and CEO of DuPont Merck, and now the CEO of ETS, the nonprofit educational-testing company, where he is championing an ambitious new project to study and try to reverse declines in economic opportunity. (I consulted on the project.) “If we don’t do something to change the trajectory” of the economy, these people will eventually become “advocates for more-extreme change,” and “we as a country will experience significant social upheaval.” Landgraf told me that most of the corporate executives and board members he knows are beginning to share this concern.

Chief executives have been among the biggest financial beneficiaries of “unsustainable” capitalism. But according to Roger Martin, the head of the Martin Prosperity Institute at the University of Toronto (where I am a fellow), and a strategy consultant to CEOs, including Procter & Gamble’s A. G. Lafley, their lavish pay doesn’t fully compensate for being part of a dysfunctional system. Too many CEOs, Martin said, “focus on the short-term, pump up stock prices, make a bundle, and leave the company before it all comes crashing down. That is not an ethical life, that is a miserable life.” And its lack of inherent rewards, he told me, is itself one reason why many CEOs don’t stay long in their positions.

For those CEOs who aren’t quite so troubled by leading an unethical life, the sustainable capitalists have another argument—that their approach is a better way to make money over the long term. At least some evidence exists that companies that look beyond quarterly earnings, and that make exceptional efforts to treat workers as “stakeholders,” weather crises better and see higher long-term profits.

“People ask, ‘What is the cost of being sustainable to your portfolio?,’ ” Blood said. “Actually, we think that by being sustainable, it gives us a better chance of delivering returns to our clients.” Intellectual champions of this view now include Barton; Harvard Business School’s Michael Porter, the father of the theory of national competitive advantage; and Mohamed El-Erian, the CEO of PIMCO, a $2 trillion global investment-management company.

Barton precisely dates the moment Western capitalism started to go off the rails: it was 1970, when Milton Friedman first advocated maximizing shareholder value as the paramount duty of the chief executive. That notion—which reduced issues like employee well-being to “externalities” that shouldn’t concern a company’s manager—helped catalyze a divorce of business from society. As Friedman said, the job of business was business, and that was it.

What made it possible to sell this version of capitalism to society was the promise that if business were allowed to simply get on with the job, all of us would be better off. Businesses were, as Mitt Romney’s 2012 presidential campaign had it, “job creators”; burdening them with additional responsibilities would be self-defeating.

It is easy to forget that this black-and-white view of the role of companies replaced a very different philosophy. In the 1950s and ’60s, America’s business leaders widely believed they were responsible to the community as a whole, not just shareholders. They led their companies in a time when their workers’ wages increased faster than their own salaries. And they collectively advocated policies—like higher taxes—that went against their immediate class interests.

That era, of course, had roots in a messier period that recalls our own. Business in the late 19th and early 20th centuries was red in tooth and claw, and inequality surged. One consequence was tremendous innovation. Two others were periodic financial crises and violent social upheaval—including the rise of communism. By the end of the Second World War, smart capitalists throughout the West realized they had to serve society as a whole, or be devoured by it. The communist specter no longer haunts Europe, of course, but the leaders of the sustainable-capitalism movement believe we are approaching a similar tipping point in the relationship between business and society.

It is unclear to what extent “sustainable business” can solve the big problems its leaders have set out to address. Treating workers decently and paying them better would help ease the middle-class squeeze and, within limits, might ultimately improve the bottom line. But those limits, presumably, would be reached fairly quickly: Most businesses are constrained by the way their competitors operate. The decisions of individual CEOs won’t stop what’s new about capitalism in the 21st century—the job-hollowing impact of technological change and globalization.

The sustainable capitalists don’t claim to have all the answers to these challenges. But one measure of their concern is the newfound openness some of them have toward a greater role for the state. They want the government to help them—and their rivals—do the right thing, like raise wages or repatriate taxable profits. “If the rules were changed,” everyone would have to behave differently, Kurt Landgraf told me. “If they believe that those changes are in the interests of society, I don’t think American CEOs and boards would go into a massive revolt.”

Of course, global markets and global competition constrain even national action today, in a way they didn’t in the 1950s. Solutions to the problems of the middle class are neither obvious nor easy. But if corporate culture is genuinely beginning to shift, that would doubtless open new opportunities, and make room for new ideas—as well as some old ones. What one increasingly hears in Western boardrooms and corner offices is a twist on Saint Augustine: Lord, make me good, but make my competitors and my investors good, too.

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Chrystia Freeland is the managing director and editor of consumer news at Thomson Reuters.

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