Hack:
Utilising free market forces to ensure the long term survivability of capitalism
Capitalism’s dismissal of externality issues and corporate social responsibility due to a short termism view places its long term survivability at risk. We examine what society has attempted to do, along with reasons why these attempts fail. By examining theories relating to individual's values, awareness of values, and the theory of planned behaviour, the concept of a regulatory enforced International Standard Rating has been designed. The concept utilises free market forces to ensure organisations act in a socially and environmentally responsible way. Due to only positive leakage, implementation of this concept can be implemented by countries individually without the need for a global consensus.
The foundation of capitalism is private ownership of organisations, that produce or provide goods and services that are sold for profit. They operate in free markets where the sole determining factor of price, and therefore profits, is market forces. In its pursuit of profit, capitalism has shown deficiencies in the form of short termism; consuming scarce resources, damaging the natural environment and seemingly showing disregard for societal values. Described as negative externalities, free markets are unable to correct the situation as buyers and sellers consider only their own needs, ignoring side effects of their activities (Gans, King, & Mankiw, 2009).
Society has attempted in multiple ways to protect its common resources and values. Governments have introduced regulations in attempts to correct a variety of social and environmental issues, for example, enacting anti-discrimination laws and regulating hazardous waste disposal (Griffith & Tengnah, 2010; Rae, 2003). In response to the Kyoto protocol, pigovian carbon taxes have been introduced in an attempt to internalise the externalities.
However both regulation and pigovian taxes are subject to negative leakage, where organisations relocate to countries without restrictions in order to avoid the costs of compliance. Mathiesen and Moestad (2004) modelling of the steel industry predicting leakage to be as high as 26%. In the case of international externalities such as carbon emissions, industrial migration results in lower net reductions of greenhouse gases, and for social or localised environmental issues, the economic and/or social wellbeing of others is reduced (Meltzer & Sierra, 2011). These negative leakages make governments reluctant to impose command-and-control policies for fear of losing market share.
Society is increasingly demanding that organisations operate in a responsible way, and unless the situation changes capitalism will die by its own sword. However as American economist Milton Friedman (1970) stated, "there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits”. Mainstream investors focus solely on risk-return; Sandberg (2011) contends that institutional investors, responsible for 84% of UK shareholdings, have a fiduciary duty incompatible with socially responsible investments. Although many consumers verbally express support for CSR policies, in practice the majority do not actually support them, their espoused values conflicting with their enacted values (Kollmuss & Agyeman, 2002). This striking variation between what people say versus what they actually do demands questions to be answered. Do citizens really care? What do they really want? If they want CSR, why don’t they act? And finally, what can society do?
A new form of capitalism, where change will be driven by consumers, utilising market forces that will drive organisations to operate in a socially responsible way. The principle will be to assist consumers In reducing the effort required to purchase a product or service from a socially responsible organisation with the development of an International Standard Rating (ISR), a simple numeric representation between 0 and 100, compulsorily displayed on any products or published material of that organisation. Encouraging citizens to be more aware of their values by incorporating education policies of sustainability and citizenship similar to that in the European Union will assist in creating the behavioural intention. Regulatory publication of an organisations rating on all packaging of products, branding, advertising or other visible exposure will provide additional stimulus to consumers, as well as putting social pressure on organisations to conform.
In developing the ISR consideration of existing standards and the issues associated with them have been considered. There is currently a myriad of papers, standards and recommendations, from international organisations including the United Nations, the World Trade Organisation, the World Bank and the OECD. Implementations such as Kyoto Protocol and Copenhagen Accord fail to achieve a global solution as only subsets of countries agree to comply and within those countries the level of compliance varied.
The design of the ISR will utilise methodology similar to that of the International Standards Organisation (ISO). ISO has membership from both large and small countries totaling over 163 national standards bodies. The standard will be created by experts from industry, technical and business organisations in conjunction with government agencies, consumer associations and academia. It is proposed to create an ISR incorporating all the features of ISO 50001 energy management systems, the ISO 14000 family of environmental management systems, and ISO 26000 social responsibility standards. Unlike ISO 26000 which is not a certification, the new ISR will be designed such that organisations can complete compliance while allowing for continual improvement. The numeric rating will apply to the organisations internal processes in relation to corporate social responsibility, as well as factoring in the rating of all inputs from its supply chain weighted on the value of inputs. This input calculation could easily be calculated from financial accounting systems. Calculation of the rating would be self assessed but subject to audit by regulatory bodies.
Compliance would be compulsory for organisations with more than ten employees and a yet to be determined turnover amount. Regulatory compliance for publication of the rating whenever a product, brand or organisation name is displayed would provide points of difference and give higher rated organisations a competitive advantage.
Consumer value awareness in relation to social responsibility and sustainable development needs to be addressed. Knowledge is an important factor in formation of attitudes, and attitudes guide an individual’s behavioural intentions. Education policies such as those in the European Union on citizenship can be enhanced with information relating to the purpose of the ISR and how it functions. While knowledge is important, it does not have a significant effect on actual behaviour. The stimulus of the ISR will be the enacting force.
Consumers have expressed desires to purchase goods and services that are provided by organisations that operate in a socially responsible way. The visible ISR will not only provide that information, it will also provide a stimulus reminding the consumer of their own values and intentions. The visual stimulus of the ISR when purchasing items of a similar cost with different ratings will even make consumers with the most insensitivity to environmental issues purchase the higher rated products due to social norms and rejection issues from peers. Even a small change in consumer behaviour will have a significant effect on the marketplace as it is estimated by US government agencies that gross world product (GWP) in 2011 exceeded $70 trillion US dollars.
Consumers include organisations that procure raw materials and other products and services. In making purchase decisions the suppliers ISR will become a major factor, as the suppliers ISR will be proportionally incorporated in their own rating.
The effect of the ISR will extend beyond only consumers. Employees’ of organisations will have a visible signal about an organisation prior to applying for positions, allowing them to make ‘healthy choices’ about their employment. Working for companies with a low rating would have similar social implications to that of working for the taxation department. Employee morale would be affected by low ratings and management would need to address their CSR policies in order to retain valuable staff. Higher rated organisations will gain from employee loyalty and commitment
Leaders of organisations will gain the advantage in that shareholders will need to ‘cut them some slack’, releasing the pressure of short-termism, in order to implement policies to improve their ISR. Integration of management performance bonuses can be linked to the ISR, whereas previously there was no effective and acceptable standard for remuneration.
Governments will be free to maintain existing trade agreements, establish new ones and maintain any sovereign policies they wish. If citizens wish national authorities will still be free to impose or dispose of taxes without condemnation from the world.
Negative leakage which exists in the case of pigovian taxes and regulation will become a positive leakage, expanding the ‘social good’ into non participating countries. OECD statistics for member countries and major non-OECD countries show total exports in excess of $15 trillion US dollars in 2010, with China’s trade valued at $1.5 trillion US dollars alone, making any leakage a significant factor. Imports of both raw materials and finished goods from the non-participating countries will be rated, and due to economies of scale, the same factories who need to be concerned with the ISR to retain customers in participating countries will sell ISR products locally. Exports to non-participating countries will benefit from the CSR rated goods. Third world countries supplying goods will benefit as organisations will need to consider their local social and economic externalities.
Organisations will be forced to change, not just by external pressures from consumers to maintain market share and profit, but internal pressures to retain employees. The new ‘green’ investors will have visible ratings of organisations provide additional financial benefits in the form of capital. The visibility of the rating will affect the reputation of organisations with all stakeholders. Those with higher ratings will benefit, while those with lower ratings will suffer. Product lines may be dropped and complete sectors will be re-organised as organisations drop low rated products. By creating a new International standard rated marketplace, free market forces will operate to pull even the most reluctant participants into compliance, with the alternative being closure
Dr Bernie Frey, MBA Lecturer at Massey University
For giving inspiration to read more journals than I knew existed
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