The central premise is that capitalism in its current form is not broken. Merely that it cannot operate in a vacuum, and without moral foundation. It can be shown that socially responsible companies can provide greater shareholder value than their peers, but where they can't or are unwillingly to, then to drive the changes required, regulation is a better answer.
Has capitalism has failed, or have we failed capitalism? Either way change is required. But with the profit motive as strong as ever, and apologies to those subscrbing to stakeholder theory - the business of business is still business. I am sure there are many useful and innovative hacks and have read many of them, but fundamentally, just like a plant without water unless we create the environment to sustain capitalism and business, how can we expect capitalism to sustain us, irrespective of whether it is a new breed, a new paradigm, a new way of accounting, or merely a reversion to tried and tested methods.
Without motivation, change within organisation simply cannat happen.
First, is a new form of capitalism really needed.
Capitalism has never being able to exist without moral foundation and values like trust and confidence. Adam smith recognised this, and most economists since. Government recognised that the free market could not exist without intervention to ensure a level playing field for all and social safety nets for those unable to participate. A lack of regulation, and subsequent erosion of trust and confidence in the system have been identified as key causes of the Great Depression.
In effect regulation was the response right from 1930 up until 1980. This provided the environment for capitalism to flourish. Then came the pure free market idealists. Deregulation began, and the more powerful the industry, the greater the deregulation of industry and greater protection they received.
The Global Recession, largely caused by this lack of governance and inability of industry to self regulate over self interest, and the erosion of trust not just of financial institutions by the public, but even by themselves nearly caused the world financial system to to implode. It really was no different.
Friedman's view of the world was that organisations exist to generate profits for shareholders and to do the bare minimum to comply with legal and societal norms . In Freemans camp he suggests a wider view of stakeholders. Friedmans view is still the prevailing one today, as is clearly evidenced by the Global Recession, and where Freeman is popularised it is most often to point to higher profits generated by greater stakeholder involvement. Which to my mind is the same thing.
If we can agree that the role of management is at least in large part (if not whole) to maximise profit for shareholders then in order to change management behaviour we must either prove that a more principled and ethical organisation generates greater returns - or we must regulate them to raise their standards. There seems no other options to provide the necessary motivation to change. Human nature is human nature.
There are certain characteristics of socially responsible companies that do increase profitability, and expectation of future profitability as measured in analysis of FTSE4Good listings. Essentially large companies, financially stable already where their activities increase employee engagement and subsequent productivity or reduce the risk of fines or regulation generate higher profits. Equally there are companies that don't. If your company falls in to the former category, then the possibility of higher profits, and better access to capital (close to 10% of all investment now is socially responisble in some way) then the profit motive and your own self serving interests dictate that in order to maximise shareholder value, you would be negligent not to at least investigate.
But what if your business is one that will sacrifice profit in relation to your peers by putting your head above the parapet. You know your competitors are unethical, oversight is minimal and your job is to generate profits for your shareholders, but you are committed to a better society.
Strange as it may seem. Demand regulation. Not for regulations sake, but for capitalisms. Insist on a level playing field as mandatory to drive innovation and growth for the advancement of your entire industry. Hmm, maybe that will attract the SRI community, But it is your only chance of maintaining the drive needed to implement the change that is necessary to restore the foundations of capitalism when doing well and doing good are mutually exclusive.
And certainly each of us as investors, can help accelerate this change by insisting on socially responsible funds. (You won't? Ahh, human nature, I want the world to change, but not at the expense of my profits) But the more this investment sector increases the greater the pressure exerted on business to change. It is changing social norms, to which we know even the most ardent Friedman supporters will at least do the bare minimum.
Much of this has been covered previously. What we are concerned with is an environment that fosters capitalism, innovation and growth. Once that environment is in place, many of the leading edge ideas presented in other hacks can be implemented. But what sort of regulation should we be demanding.
- Incent our best and brightest to create. Maybe that means different income tax levels by industry.
- No one should be too big to fail. Maybe it means breaking banks up so everyone is small enough to fail
- Maybe it means shutting down a couple of sweatchops to avoid future regulations.
- Or maybe preventing ex foriegn currency traders running a country and sell off national assets or doing side deals with casinos in the name of public interest.
I didn't come here to tell you what would work and truthfully I do not know, but what I do know, is that without an environment to provide the (profit) motivation for new practices, that even flawless execution of them is doomed to failure.
Great so you want to change.
First work out where your industry sits, and where your company sits within that industry. Determine if regulation or socially responsible investment is the best course. If you determine that actually being socially responsible has a high propensity to improve shareholder returns (or reduce the risk on futre returns) then the next step is easy.
Choose another hack. One which ftis your industry and not only generates social change, but also competitive advantage.
If voluntary responsibility is not the answer - regulation. Ask yourself hard an honest questions (about your competitors of course) about what unevens the playing field, stifles innovation and those practices which are shadowy at best. Then widen the discussion to those who are equally or worse off than you are.
So many people, but mostly me :)
Adam Smith for the "invisible hand" and explaining the free market and the financial services industry for destroying all trust in capitalism, both of who without this would not be necessary.
But seriously, there is an academic piece of work which sits behind this based on a wide range of readings. The 4 that stand out as most important and heavily used in this hack are
- The Worldy Philosophers, by RL Heilbroner one of my favorite books of all time
- Amartya Sen's works especially for his piece on Adam Smith never walked alone.
- R Green for Plutocracy, Bureacracy and the end of Public Trust - an excellent read in the failures of government in the period of deregulation.
- Clacher, I., & Hagendorff, J. (2012). Do Announcements About Corporate Social Responsibility Create or Destroy Shareholder Wealth? Evidence from the UK. Journal of Business Ethics, 106(3), 253–266
A full reference list is available on request
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