30 Nov 2011  Research & Ideas

Only Capitalists Can Save Capitalism

Capitalism appears to be going through a crisis of confidence, evident in everything from Occupy Wall Street to middle-class riots across the globe. The fix? Capitalists themselves. An interview with the authors of Capitalism at Risk, Joseph L. Bower, Herman B. "Dutch" Leonard, and Lynn S. Paine. Key concepts include:

  • Executives cited 10 major systemic problems that have created a break in trust between business and society, including a breakdown in the rule of law, environmental degradation, and weakened oversight of the financial system.
  • With government regulators and politicians unable to address these problems effectively, it's up to business leaders to step up.
  • Even as the market system has created threats to its own sustainability, it can also reward enterprising companies of any size that can turn these problems into opportunities.

 

If capitalism was a stock, the market would appear rather bearish on its future.

Bank failures, economic crises, and middle-class riots across the globe appear symptomatic of large systemic weaknesses in the market system, highlighted by the 2008 global financial meltdown. Income inequality separating corporate leaders from their rank-and-file workers has become a hot-button issue in the upcoming presidential election. And in public opinion polls, business moguls are cushioned from the bottom of the reputation scale only by members of Congress. Fixes so far have largely eluded elected officials, government regulators, and tent city activists.

Capitalism at Risk: Rethinking the Role of BusinessBut there is one group of citizens with the power to make a difference: business leaders themselves, say Harvard Business School Professors Joseph L. Bower, Herman B. "Dutch" Leonard, and Lynn S. Paine, authors of Capitalism at Risk: Rethinking the Role of Business.

"Our book argues that if we don't begin to address, in a systemic way, the issues and problems and the negative outcomes and challenges [of market capitalism], then we are likely to see a lot more movements like Occupy Wall Street," says Leonard.

Capitalism at Risk grew out of preparations for Harvard Business School's centennial celebration in 2008. Bower, Leonard, and Paine felt it important to identify key issues that HBS should focus on going into its next 100 years, so they organized a series of forums on four continents with top business leaders, many of whom were HBS alums. "We set up the forums as opportunities for candid discussion among peers," says Paine.

The principal question asked of each participant was this: "If we stipulate that the system of market capitalism has been the source of remarkable economic growth, what are the prospects for continuing growth in the future? What aspects of the system at the level of firms, industries, nations, or multilateral institutions might cause serious difficulties?"

The principal response is summed in the book: "Market capitalism has proven to be a golden goose providing historically unimaginable economic benefits to many, and if we don't look out, we may kill it."

From prediction to fruition

Problems that forum participants cited included environmental degradation, trade breakdowns, and failure of the rule of law. Concerns over the lack of transparency into and oversight of the financial system were voiced by many. In all, 10 potential disruptors of the global market system were identified.

"One of the things we were told even before the economic crisis was that the financial system had grown to such a scale and was functioning in such a way that it was no longer necessarily lined up with the needs of the industrial system, or the way society wanted it to function," says Bower. "And lo and behold, we now have a crisis that illustrates what they were concerned about."

"If you believe that the problems ahead are likely to be very serious, and neither government nor business can address them, that doesn't leave you with many options."
—Lynn Paine

"Perhaps we should credit the participants in our forums for their prescience," notes Paine, reflecting on an e-mail she received recently from a participant on how much the world had changed since 2007. "The question now is whether we can mobilize business leadership on a sufficient scale to make a difference."

"Our view is the system could go, if companies don't step up," says Bower. "It's companies that have the skill sets necessary to go from a vision to making something a reality."

Considering the number of corporations whose annual revenue is larger than the GDP of many small countries, the proposition makes sense. The authors argue that the problems are systemic, and who better to attack huge issues than people who run small, medium, and huge organizations.

Bower, Leonard, and Paine are prepared to have their views challenged. Even some of the forum participants, says Leonard, "didn't think what we are calling for is either appropriate for or likely to come from business and business leaders." And while Leonard agrees that some of the criticisms are valid, "the alternative of having business sit this one out is too risky."

Adds Paine: "Of course we recognize that there are serious obstacles to the view we recommend," including a lack of structure, tools, and incentives within businesses to do the sort of work that's needed, and a lack of skills and incentive on the part of business leaders to operate on the global political front. "But we see those as challenges to be overcome rather than fatal flaws in the idea. If you believe that the problems ahead are likely to be very serious, and if you believe that neither government nor business can address them, that doesn't leave you with many options."

"There is clearly political content to what we are suggesting," says Bower. "We talk about the need for leaders of companies to develop skill sets that they might not have—a lot of our business leaders have not been brought up to be comfortable in dealing with politicians. So part of what we're talking about is learning how to operate in the public arena without getting into trouble. It's hard."

Addressing the problems

HBS has made significant strides in preparing students to be the kind of leaders that the book calls for, says Leonard, noting as one example the required first-year MBA course Leadership and Corporate Accountability. "Where I think we still have far to go is in teaching the skills for operating in the high-conflict, low-authority zone outside your own firm. Most of what we teach is about how to optimize within your firm, where you tend to have a high level of authority and where there is general agreement on goals.

"Where I think we still have far to go is in teaching the skills for operating in the high-conflict, low-authority zone outside your own firm."
—Dutch Leonard

"By contrast," Leonard continues, "when our book calls on business leaders to exercise leadership outside their firms, we are inviting them to operate in a domain where they have little authority and where there is great conflict over what the most important goals are. The skills to do this involve what we might call small 'p' political skills—and we don't teach nearly as much of that as we could and should, nor do we have many cases about business leaders operating in that high-conflict, low-authority domain."

Giving students a broader perspective outside the HBS classroom is another possibility, such as pairing B-school students with other Harvard students who are studying similar big problems, says Paine, who cofounded and served for five years as course head of Leadership and Corporate Accountability.

"For example, I have in mind a course that would bring together students from HBS, Harvard Law School, and the Kennedy School to explore, as board members and as leadership teams of companies, what could be done … both through innovative business strategies and through innovative institutional arrangements."

According to Paine, many HBS students share the concerns voiced in the book and aspire to the type of entrepreneurial leadership needed for reform. "It's critical that we harness the energy and ideas our students bring to these challenges, and that we as a faculty help them develop the skills and capabilities needed to practice this kind of leadership."

So even as the market system has created threats to its own sustainability, it can also reward enterprising companies of any size that can turn these problems into opportunities. The book provides examples of business efforts that promote social good without sacrificing profit: a mobile communications rollout in rural China that "extended the benefits of participating in the market system to millions of people" while increasing profits and growth at the country's largest telecommunications firm; "a boutique asset-management firm that invests in companies whose business models are aligned with the needs of a sustainable global economy."

But Capitalism at Risk leaves a lot of the heavy lifting in the hands of business leaders. "We're pretty clear that we don't have all the answers," says Bower, "but we're also pretty clear that we need action."

The form that action takes remains to be seen. But it's worth noting that while members of the "Occupy" movements may be retreating for the winter, the problems they have highlighted are likely to remain with us for some time.

About the author

Maggie Starvish is a writer based in Somerville, Massachusetts.

Comments

    • Anonymous

    We all know that capitalism is a process devised by the wealthy to maintain control over the establishment. That being business, banking, government and finally the people. Capitalism allows some trickle down allotments of wealth to the masses to maintain the brain wash that it works for all of us when it truly don't. Capitalism is evil because it promotes greed by those individuals who are in a position to what else "capitalize" on building wealth for themselves. Look at our world economies and what has contributed to it. The demise of our financial institutions who have created such a demonic means of creating wealth most of them probably can't even explain how it works. What is a derivative or derivatized investment..real estate, mortgages...etc? f(x) = dy/dt?

     
     
     
    • Tom Dolembo
    • Founder, New North Institute

    As an investor, I'd have to ask, "when is it too late to act?" With due respect, how much cash in hoards is required to buffer a company from 'risk'. When are our managements going to 'risk' in line with the compensation they receive for not risking? What shareholder value is sustained when profits are neither distributed (except to regal management), nor placed for return? What unknowns exist today that are different from unknowns when these venerable corporations were actually functioning to serve investors?

    We are well past the stage when voluntary dribbling of benefits will satisfy. If we had free markets and true capitalism, would we see concentration of wealth so extreme it parallels pre-Jacobean France? It is not in the power of the wealthy, now to avoid more wealth, much as Marley's ghost could avoid his chains. As we await the errant butterfly's wings and the smash of markets, we who have invested have also been deprived of participation and rational voice in our companies. How can we hedge corporate mortality? As you assemble your committees, be sure to include a shareholder or two.

     
     
     
    • Paul Nicholas
    • Director, Soul-Chaplain Consultancy

    Wonderfully interesting - and disturbingly sobering - thank you.

    How can we save a system that has developed such complexity as to be beyond understanding? When there are no models that even approximate to our varied perceptions of this system how can anyone "have the skill sets necessary to go from a vision to making something a reality"?

    Is this a fever beyond medicating - one that must be allowed to run its course?

     
     
     
    • Hugh Quick
    • A Bloke, Home

    I think Capitalism is rooted in the strong desire of most humans to own property and therefore we are not going to get rid of it. However, I do think the laws governing companies and other present Capitalist institutions are inappropriate for presnt conditions, many were formulated 300 years ago, or more. E.g. Why are Shareholders treated so much better than Employees?

     
     
     
    • David Lindsay
    • Lecturer/Tutor, Edinburgh Napier University

    As capitalism was borne out of the narcissism of industrial revolution self-agrandissment, agression and egotism of the "west" and sustained by a malignant belief in individualism surely the exemplar to follow would be a more sophisticated model of eastern collectivism and positivism "lite" -our belief systems have not reigned in the excesses nor excecuted sufficient erthical corporate governance to avoid this catastrophe from re-occuring -we never learn. Perhaps it is inevitable - our culture based now on the indoctrination of wealth-seeking and global domination, a la Bernays, Packard and Machiavelli -there is no panacea for this disease apart from a complete re-thinking of our inability to recognise that when today is a good day -put something aside- for tomorrow may be a bad day.. we would not wish to be risk averse -only to remember that there is no such thing as a free lunch.. I think Maggie has underline d the key areas here such as the Chinese example mentioned, and I could add Ricardo Semlar also as one who broke the mould -profitability need not be sacrificed for social good but the organisation must embody the creed that it is not money that is the root of all evil -it is the desire for it -and a post-Freudian might suggest that our super-ego's have failed miserably in countering the raw demands of our Ids and allowed a few [individuals,races,countries] to dominate the global market place without guidance and caution for too long . We are all at fault, and to blame in the "west" for this -and we need to start dismantling from the top down -re-educating and re-motivating without the deviant side effects of monetary reward....we need a new god!

     
     
     
    • D G Bokare

    Only capitalists will destroy capitalism. This is what is happening at present. Capitalists' greed is killing the foundation of capitalism itself. They will never save capitalism at this stage when the greed is surpassed the stage of its survival. Now only catastrophe and pains can be expected by mankind.

     
     
     
    • Dennis Nelson
    • Quality Lead, SFS

    Too often the people or system in place when material success is realized due to the lack of competition receive credit for the success. Also, any non-regulated system (self or otherwise) or group historically is ravaged when the benefits to the few are perceived to be unjustifiably outrageous and even harmful to the many, once the many feel enough pain, injustice and lack of hope to overcome their natural fear of change.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Capitalism is an economic system in which invested private capital is used for production and distribution of goods with the sole aim of profit making. In strict capitalistic environment the owners/share- holders aim to improve their profits without much concern for the good of the society. Self interest is prime. There is no consideration of Corporate Social Responsibility and the interests of stakeholders, other than owners and shareholders, are not taken care of. Hence, capitalists have per say earned a bad reputation. Of late, however, some changes have taken place with the enforcement of healthy Corporate Governance norms by Regulators. Legal machinery is also getting geared up to enforce discipline. That is one part of the state of affairs. For saving capitalism, positive involvement - for example by weighing down greed- of capitalists is ultimately required. They are strong enough due to their clout to even twist laws, rules and regulations for personal gratification by hook or by crook little realizing that the watchdogs do catch and punish them may be a little late.

     
     
     
    • Mark A. Gomulka
    • GM

    Capitalism by definition is characterized as private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. That being said we all should agree that it is the fundamental reason that our great country became a great country. Unfortunately capitalism breeds greed which in turn breeds corruption and poor decisions.

    How about we ask ourselves what destroys capitalism? Does big government destroy capitalism by being involved too much and by adding complexity? Simply put, bring back pride into "Buy American" and jobs will be created which in turn ignites the middle class. By definition capitalism works and socialism does not.

    I for one will say let it fail and correct itself (Natural Course). If we bail it out each and every time we do not teach lessons to the corrupt and greedy! We call this "Moral Hazard"! Lessons need to be learned and natural course of poor actions needs to be allowed!

    It takes ethical leaders of ethical organization to make sure capitalism works! So yes, ethical capitalists can save capitalism. The greedy and corrupt need to move on!