The novel coronavirus pandemic "makes clearer than ever that the social contract in many places is not fit for purpose and needs to be reformed," observed Aron Cramer, president and CEO of the responsible business coalition BSR, earlier this month. As we see the shortcomings in how business, government and civil society work together to meet people's needs when it counts the most, now is an ideal time to think about how we can reimagine capitalism to function in a way that's constructive, not extractive.
At the Ceres 2020 conference last week, which was moved online in response to the pandemic, Harvard Business School professor Rebecca Henderson unpacked how business can be the driving force behind this very change.
"I'm a huge fan of capitalism," said Henderson, who teaches Reimagining Capitalism in Harvard's MBA Program and explores how organizations respond to large-scale technological shifts as a research fellow at the National Bureau of Economic Research. "But at the moment, our system is wildly out of bounds."
"We've created a capitalism in which firms can privatize the profits and socialize the risks, in which it's quite legal to throw greenhouse gases out the window in nearly every jurisdiction on the planet, to dump plastic into the ocean, to treat employees as disposable objects, and to take most of the returns for oneself. And that is not an acceptable outcome going forward," she continued.
So, what can be done? Henderson laid out a five-step action plan for businesses to drive positive change in capitalist systems, suggesting "the best place to act and to reimagine capitalism might be business itself." Read on for her insights.
Coined by Michael Porter and Mark Kramer in their 2011 Harvard Business Review article of the same name, shared value refers to business models that turn a profit while still creating value for all stakeholders, including employees, customers and communities, as well as the environment. And it's the first step in Henderson's five-point plan to reimagine capitalism.
"That's clearly not enough to solve the problems we face, but it's hugely important in many cases," she insisted. "It can drive the transformation of entire industries."
To have any measurable affect on the way we reimagine capitalism, efforts to drive shared value must scale up. That means building strong, multi-stakeholder collaboration around pressing global challenges that "can only be addressed at the industry level," Henderson advised. "Let's make them pre-competitive. Let's all agree not to throw greenhouse gases out the window. Let's all agree not to throw our waste into the river. None of us will suffer if we all agree, and our reputations and the health of our long-term supply chains will be preserved."
She cited multi-stakeholder efforts to improve the sustainable sourcing of ingredients like palm oil, beef and soy as examples of pre-competitive collaboration in action. "Like the first one, it's clearly not enough," she continued. "But these kinds of collaborations create enormous information about what works, and they create a constituency of firms that says, ‘We're still committed to moving forward.’"
"The third step is rewiring finance and moving money to back those firms that are creating shared value, that are cooperating with each other to insist that the entire economic system decarbonize and that firms find ways to treat their employees in more sustainable and just ways," Henderson said.
"This is a movement …. that’s already well underway," she insisted. Indeed, a record $21.4 billion in new money flowed into sustainable and socially responsible investment funds last year, a fourfold increase from 2018. "The idea that longterm investors with very large portfolios cannot diversify away from the risk of catastrophic climate change or the death of the ocean is, I think, a profound realization that's going to yield all kinds of fruits over the next few years."
"Rewiring finance is tricky, however I fear it’s not enough," Henderson went on. "Without re-making our institutions, we will not solve the problems of environmental degradation and accelerating inequality. We need to build what development economists call inclusive institutions: a rule of law that’s really free and fair, a media that speaks the truth and is rooted in the science of democracy, in which everyone participates."
"This is a little controversial," she continued, "but business should play a role in getting us to that place." This perspective again overlaps with that of Cramer, who spearheaded BSR's effort "calling for a modernized social contract for the 21st century," including the ways in which business can serve to strengthen — rather than weaken — our institutions.
Finally, to reimagine capitalism, "we need to believe," Henderson said firmly. "We need to act on the idea that the purpose of business is not maximizing shareholder value. Making money is a necessary means to an end, but the end is building strong and healthy societies."
No executive would proudly tout his company's use of child labor because it's profitable, she went on, but we can't yet say the same about other destructive practices that are tied to global businesses and their supply chains.
"We need to build a society in which it's not alright to emit carbon and do nothing to mitigate it. It's not alright to argue against legislation that increases taxes that will take care of education and healthcare. It's not okay to go along when governments suppress voters to maintain the influence of the powerful," she continued. "We need a major cultural and ideological shift."
We can already see this shift beginning to happen, Henderson continued. And now, amidst a pandemic that threatens widespread loss of human life and has brought the global economy to its knees, "we can imagine it in ways that perhaps six months ago made these five steps seem pretty remote," she told attendees at Ceres' virtual conference.
Through this lens, she insisted, COVID-19 gives us a reason to hope. "In the first place, it makes it very clear that bad things can happen," she said. "The power of business-as-usual has been so strong. We’ve been so prosperous and so happy that building the urgency about real change has been hard. Perhaps COVID-19 will help."
"Secondly, this epidemic demonstrates like nothing else can that we are immediately dependent on our community," she continued, becoming emotional and visibly choking back tears. "I can’t stay home and make money and trust that everything will be okay. We are clearly all interconnected. We clearly all have a responsibility to each other."
And any illusion that the free market alone is enough to provide us with a healthy, free and fair society is shattered by this crisis: "We need a functioning government and a functioning civil society that can work in partnership with firms to build the kind of world that is so eminently possible," Henderson said.
"Nothing is guaranteed, but everything is possible," she concluded. "We have the resources and the technology we need to address climate change, to address inequality and, yes, to contain this epidemic and build a just and sustainable society. All we need to do is find the time, energy and passion to act, and I know we have that. I know it can be done."
Image credit: Macau Photo Agency/Unsplash