Reimagining Capitalism In a World on Fire

As part of the London Business School Wheeler Institute’s ‘Rethinking Capitalism’ series, Rebecca Henderson, John and Natty McArthur University Professor from Harvard University joined LBS Professor, Ioannis Ioannou to discuss her latest book “Reimagining Capitalism In a World on Fire” and consider how capitalism needs to be reformed and some of the implications of COVID-19 on the global economic system.

  • The free market needs to be balanced by politics and strong civil society; over the last few decades there has been an erosion of a voice for labour, independent judiciary and a strong, free media;
  • Capitalism needs to be rebalanced, with businesses becoming more purpose-driven, creating shared value, cooperate, rewire finance and capital markets and fix democracy. Having a purpose can increase creativity and does not have to conflict with generating a profit;
  • Architectural innovation, where everything is shifted, can be scary, but it is possible and can create energy and creativity among employees to achieve the transition;
  • Climate change could cause the next crash in the financial markets and we are starting to see asset managers look at ESG metrics to identify those companies that are taking the issue seriously;
  • Businesses need to step in where they see democracy being subverted, and withdraw their money from the political process, in order to try and fix societal issues;
  • Covid-19 has put a spotlight on the weaknesses of capitalism and torpedoed the idea that free markets can work without the government, so hopefully, there can be a long-lasting positive impact.

We’ve got so prosperous it’s become too easy to say ‘Government is the problem. Drown it in the bathtub’

According to Henderson, author of “Reimagining Capitalism In a World on Fire”, capitalism is broken. This can be seen through rising inequality and falling social mobility, leading to people feeling as though the world is ‘rigged against them’, while in the US, the bottom 50% of the population haven’t had a pay rise in 20 years. Moreover, there is a major environmental problem and a significant risk of catastrophic climate change. Henderson thinks that capitalism only works when the market is balanced by the Government, with a strong social safety net, public goods, regulation of pollution and real freedom of opportunity.  

Capitalism needs to be run by rules that don’t let large firms keep out entrepreneurial companies and governments need to reflect the will of the entire population, not just those with resources. Henderson’s view is that business has a role to play in rebalancing capitalism; taking 5 key steps:

  1. Firms need to embrace ‘shared value’; turning a profit while still creating value for all stakeholders,
  2. Companies need to collaborate and build strong, multi-stakeholder agreements around pressing global challenges,
  3. Finance needs to be rewired to move money back to firms that are cooperating and creating shared value,
  4. Democracy needs to be fixed with the creation of inclusive institutions that ensure the rule of law is free and fair, the media that speaks the truth and everyone can participate in democracy,
  5. A major cultural and ideological shift to enable business to take a higher purpose, with making money a means to an end, but the end is building strong and healthy societies.

“Many of the world’s companies believe that it is their moral duty to do nothing for the public good”

Firms need to address short-termism, by running strategic plans that cover three, four or five years. They should also engage with investors so that they also take a long-term perspective. Managers also need to change their mind-set about maximising immediate shareholder value and focus on building a great enterprise.  Henderson thinks that in an ideal world, that looks a little like Denmark, there is much conflict between shareholder value and purpose. That is because the essence is not a shareholder value problem, but our lack of consideration for the rest of society. Henderson argues that firms can increase creativity through purpose and identify new opportunities through cooperation. She also thinks that having a social purpose does not necessarily mean a company makes less profit, managers just need to be clear about the metrics that they are using.

“You can build a just and sustainable world… and make a great deal of money”

There needs to be a complete rethink about how a whole range of industries operate, a massive transition that requires real change. This can be achieved through architectural innovation, where everything is shifted and companies can no longer assume that they can take the world for granted and all they need to do is focus on their part. There is a significant disruption that needs to take place, and some firms will thrive while others won’t survive.

There is a portion of the financial community that understands that assets are moving towards sustainable industries. ESG metrics are becoming increasingly important and allowing investors to identify firms that are managing the disruption and taking the lead. While it is difficult to find ESG metrics that are auditable, replicable and material is tough, there is a major accounting disruption that will influence the way asset managers think about how their funds are allocated in the future.

“Climate change is the next major risk and there’s not going to be a vaccine”

Increasingly people are understanding that issues such as climate change cannot be diversified away from and the environment presents a very significant risk of causing the next crash. In order to address this issue, there needs to be collective interest from the whole economy, finance will play a major role in reimagining capitalism.

In the short term, firms will have to self-regulate in the interests of the economy and society as a whole at a global level. For example, the International Chamber of Commerce is completely voluntary and provides a set of rules for global trade that runs its courts and adjudication procedures. This gives Henderson hope that firms will self-regulate when it comes to addressing the climate, although she is less hopeful when it comes to inequality and social inclusion. However, pressure needs to be exerted by employees and customers, who will switch brands if sustainability is not taken seriously, which leads to businesses engaging and prioritising these issues. Henderson is not optimistic, but she is hopeful that there can be long-term change as a result.

Business needs to identify when society is not balanced and has self-interest in fixing these issues

There have been moments in history where business has realised that society is imbalanced and has realised that there is a benefit to fixing these issues. According to Henderson, business should lobby to get money out of politics to support transparent and level democracy. Business needs to step up when it sees voter suppression and gerrymandering and subversion of democracy. Just like how business leaders stepped in to say it is unacceptable to discriminate on the basis on sexuality, which played a role in the recent supreme court decision, business can also speed up support for change when it comes to climate change.

Companies can also make a positive difference in developing countries, especially when they focus on governance. Businesses can stand up for democracy and freedom of speech. Henderson hopes to see large multinationals working with local institutions to become a positive ally to develop inclusive institutions to raise the economy in a powerful way.

COVID-19 may have a silver lining in the form of shining a light on the weaknesses of capitalism

While the pandemic has been a terrible event, with deaths and unemployment causing despair and isolation, Coronavirus has also heightened our awareness about the weaknesses in our current system of capitalism. Inequality has been shown to impact those who we consider ‘key workers’ the most, even though they may be the most underpaid. The pandemic may also have made the argument about climate change even more visceral because we can compare the millions of people who are killed by fossil fuels every year. COVID-19 has torpedoed the notion that free markets can work without government intervention. It has also widened the conversation for people who are looking to reform the overall economic system, who now have a greater appreciation for having a capable, democratically accountable government.

Stewardship from the investment community needs to focus on transparency while those who inherit wealth from their parents need to insist that businesses do the right thing. Henderson also thinks there is a role for business education to convey the message that reimagining capitalism and thinking about reforming the structure of the world’s economic system is going to need everyone’s buy-in. Business schools need to move in this direction, raise questions about cooperation and how to deal with externalities and talk about the fact strong capitalism requires strong government and strong civil society. People can make a difference as employees too, whether it be driving initiatives about sustainability to save costs or to change recruitment efforts so that the organisation is more diverse; this social behaviour can have a massive impact.

Henderson’s message is this is not a done deal. Society may not succeed in stopping climate change fast enough to arrest serious damage or in fixing inequality or in solving the 100-year-old problem of racial inclusion. But that’s is not a reason not to try. She implores people to work on these issues as it’s a road to hope and joy, but it will be hard. Thousands of people are trying to drive change and that’s where the future is, which is why we have to try and make this work.

Rebecca Henderson’s conversation with Ioannis Ioannou is part of the Wheeler Institute’s Reimagining Capitalism Series. Please follow the link for the previous webinar of the series, hosting Thomas Philippon, Professor of Finance at New York University, Stern School of Business, discussing his latest publication “The Great Reversal: How America Gave Up on Free Markets”. A conversation with Martin Wolf, Chief Economics Commentator at the Financial Times.

Rebecca Henderson is one of 25 University Professors at Harvard, a research fellow at the National Bureau of Economic Research and a fellow of both the British Academy and of the American Academy of Arts and Sciences. She is an expert on innovation and organizational change, and her research explores the degree to which the private sector can play a major role in building a more sustainable economy, focusing particularly on the relationships between organizational purpose, innovation and productivity in high performance organizations. For several years she taught “Reimagining Capitalism: Business & the Big Problems”, a course that grew from 28 students to over 300 and that is the basis for her book “Reimagining Capitalism in a World on Fire” (Hachette/Public Affairs, April 2020). Rebecca sits on the boards of Idexx Laboratories and of CERES. Her publication include Leading Sustainable Change: An Organizational Perspective, and Accelerating Energy Innovation: Lessons from multiple sectors. She was named one of three “Outstanding Directors of 2019” by the Financial Times.

Ioannis Ioannou is Associate Professor of Strategy and Entrepreneurship at London Buiness School. His research focuses on Sustainability and Corporate Social Responsibility (CSR). More specifically, he seeks to understand whether, how, and the extent to which the modern business organization contributes towards building a sustainable future. His academic work evolves around two main themes: a) understanding how the broader investment community perceives, evaluates and reacts to corporate engagement with, and integration of, environmental and social issues into strategy and b) understanding the multiple and multilevel factors that may affect the corporate decision to adopt environmentally and socially responsible strategies. He is currently a member of the Editorial Board of the Strategic Management Journal and in 2015 received an Outstanding Editorial Board Member Award for his service. He is also a Senior Editor for Organization & Environment.

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