Reimagining Capitalism in a World on Fire, by Rebecca Henderson, Penguin, 336 pp, £20, ISBN: 978-1541730151
Earlier this year I reviewed a number of books for the drb dealing with the increasing instability and sense of impending doom in a world facing environmental chaos and economic disorder. Although the essay appeared in the April issue it was written some time before the onset of Covid 19, which has intensified the sense of foreboding. One of the books reviewed was Colin Mayer’s Prosperity. Mayer, a professor at the Oxford Business School, argued that the onus was on the business community to create a more progressive and equitable world because although business was the main creator of wealth and employment it was also the main driver of inequality, deprivation and environmental degradation.
The central theme developed in the book is that the neo-liberal or “Washington” consensus which dominated the Western world from the late 1970s to the Great Recession of 2008 kick-started by Milton Friedman’s proclamation in 1970 that the sole objective of a business was to maximise shareholder revenue, was a product of a particular time and place. Mayer argued that the long history of business over the centuries showed many different motivations and objectives from organisations set up in the past to provide civic services in ancient Rome to the nineteenth century wave of Quaker-inspired business in the UK, including Cadbury’s, Rowntree’s, Clark’s and Lever Brothers, which were founded to alleviate poverty and provide employment and housing for poorer members of society. I pointed out that two parallel developments suggested that a fundamental rethink about the nature and purpose of business and capitalism may be under way; one, the increasing pronouncements from business leaders, subsequently echoed in the business press, that the existing capitalist model was failing and in need of a reset and two, the proliferation of business brands making societal interventions on behalf of progressive causes from climate change to combating gender inequality.
Mayer concluded that the business corporation had become inhumane because humans and humanity had been ignored in favour of anonymous shareholders. His solution was to propose that in addition to annual reports on their financial performance businesses would also be obliged to provide annual reports on their employee, social and environmental performance. In addition, he argued that all businesses should articulate their purpose, incorporate it in their Articles of Association and demonstrate how their corporate structure and conduct promote that purpose.
Now a new book on the same subject, Reimagining Capitalism in a World on Fire, covers much of the same ground but extends the argument, with a great deal more detail about how the system can be reimagined and a wide range of examples demonstrating that a quiet revolution in the way capitalism operates has already begun. The author, Rebecca Henderson, is eminently qualified for the task of explaining the brave new business world: she is not only a distinguished academic, formally a professor at MIT in technology strategy and organisational change and currently a professor at Harvard, but has also been an adviser and board member of some of the world’s leading companies. She has been working on the subject for twenty years, using her experience of consulting with global business and carrying out her own academic research to publish academic papers and in the recent past to create a “reimagining capitalism” MBA class in Harvard. She attracted twenty-eight students in the first year. The class now attracts almost three hundred, reflecting an increasing appetite for this subject.
She begins with a warning that the world faces an existential threat because of a vicious circle involving inequality, climate change and declining faith in democracy. An inability to reverse inequality has resulted in the election of autocratic nationalist political leaders deliberately opposed to the international cooperation required to combat the threat to the environment. At the core of this vicious circle is the belief that any deviation from maximising shareholder revenue is immoral, illegal and illogical, thus absolving businesses of having any responsibility for the communities in which they operate and the climate which they inhabit. Henderson is alive to the good and the bad in capitalism, “the greatest source of prosperity the world has ever seen but also a menace on the verge of destroying the planet and destabilising society”. She accepts that too much focus on the public good can dampen the entrepreneurial spirit but that equally too much focus on economic freedom leads to the destruction of the social and natural world. She argues that markets have now gone off the rails, first because externalities have not been properly costed: we’re paying only 40 per cent of the real cost of burning coal; second because too many people no longer have the skills to profit from the opportunities of the new economy; and third because business, through extensive political lobbying, is able to fix the rules in its favour. Her proposed solution is a five -part programme that will redirect capitalism towards a more sustainable and equitable future.
The first part of the programme is creating shared value where businesses create profit and at the same time address social and environmental issues. Henderson cites numerous examples of major businesses who are succeeding in achieving both goals; from Unilever, one of the world’s largest consumer goods companies, to Walmart, the world’s largest retailer, and from CLP, a major Asian utilities business, to Nike. Unilever is something of a lodestar for socially and environmentally responsible businesses and its recently retired CEO, Paul Polman, is widely admired as the most evangelical business leader of his generation. Many of the company’s brands have been to the forefront in taking strongly progressive stands on societal issues; notably Dove in relation to younger women’s self-esteem and more recently Knorr in seeking to change the world diet towards more plant-based foods. The company is also a brand leader in the tea market and Henderson concentrates on the efforts made by the Lipton’s brand to improve living conditions, wages and the environment in the business’s tea plantations in Kenya. There were two major environmental and societal problems in the way tea is produced. From an environmental perspective it involves the conversion of tropical forests into agricultural land, leading to reductions in biodiversity and soil degradation, which in turn means that farmers have to use more insecticides, pesticides and fertilisers, all leading to long-term environmental problems. From a societal perspective the working conditions were poor; involving low pay and no access to education or health care. The company committed to a massive and expensive change programme to improve the sustainability of the growing and working conditions, including training over half a million tea farmers. The only way this investment could be sustained was to increase the price of the brand and a successful campaign to explain the company’s thinking to consumers was launched. The Lipton’s case study is a good example of creating shared value; consumers are prepared to pay a slight premium for a sustainable product where people are paid a sustainable wage.
The second step in the programme is to build purpose-driven business organisations. Henderson defines purpose as “a clear collective sense of a business’s goals which stretch beyond making money and is rooted in deeply held values and embedded in the firm’s strategy and organisation”. She emphasises that if all departments in a business are not aligned it is very difficult to implement a purpose above and beyond profit. The main example used to illustrate how shared purpose can work is US health insurer Aetna. In 2015 Aetna’s CEO announced that the company was increasing the minimum wage to $16 an hour resulting in average pay rises of 11 per cent and with some employees seeing their disposable income rising by 45 per cent. The decision was taken partly because of serious medical problems encountered by the CEO and his son which alerted him to the fact that the US healthcare system was in a mess, applying too many standardised procedures rather than dealing with the individual requirements of each case. The reality is the US was spending twice as much per capita as the rest of the developed world on healthcare but in most cases providing an inferior service. He was also alarmed to discover that many of his own employees could not afford healthcare for themselves. His response was to drastically reconfigure Aetna’s strategy to transform members’ healthcare by making it more personal and connected through more use of big data and behavioural economics, partly designed to enable members to take better care of their own health. Henderson makes the point that a shared purpose beyond profit gives more meaning to people’s work that in turn will lead to more innovation better service and ultimately greater profits. This can only be achieved if everyone shares the higher goal: a better healthcare outcome for members.
A major obstacle to creating shared value and purpose is the short-term objectives of investors and the negative attitude of the financial services sector towards any deviation from maximising profits. Therefore, the third part of any re-imagining programme is what Henderson refers to as the rewiring of finance. Part of the problem is lack of information; all businesses report financial returns on an annual basis but there is no imperative to report on their impact on the environment or on their effect on the communities in which they operate. Current accounting practice doesn’t tell us which firms are pumping greenhouse gases into the atmosphere or selling products made with abusive labour conditions or whether their suppliers are violating human rights. This is however, an area where considerable progress is under way as the concept of environmental, social and governance (ESG) metrics gains ground partly due to the pioneering work of Jean Rodgers, an environmental engineer who in 2011 founded the Sustainable Accounting Standards Board. The objective of the SASB is to enable anyone to view ESG data on any company as easily as they could access financial data; “her plan was to develop separate standards for each industry so companies need only report on the issues that were material to them”. Further evidence of increasing interest in this area is the growth of the “benefit corporation” (B-Corp), where firms legally incorporate as benefit corporations by formally committing to create public as well as private value. There are now over 3,300 benefit corporations around the world across 150 industries and 71 countries. These models are dependent on being able to attract investors who agree to operate this way, but the concept of “impact investors”, who are prepared to do this, is also gaining ground. Henderson proposes three routes to rewiring finance; first, reform accounting and introduce good ESG metrics, then encourage more impact investors and finally protect managers from investor pressure.
The fourth part of the programme will involve more cooperation within industry sectors: re-imagining capitalism will only happen as the result of industry-wide agreement. Once again Unilever is used as the main example of how an industry-wide group of companies can effect change. In 2018 the firm was the subject of a protest at their London headquarters by a group of Greenpeace activists dressed up as orangutans protesting against the use of palm oil in the Dove cosmetic brand. This action, accompanied by a series of imaginative videos which went viral, forced the company to publicly pledge that by 2020 only sustainable palm oil would be used in their products. However, a single firm’s action would not only put it at a cost disadvantage; it wouldn’t really solve the environmental problem unless all firms using palm oil made the same pledge. The solution was to “socialise the problem”; organise as many as possible of the world’s largest users of palm oil to commit to using sustainability; if every firm in the industry agreed to buy sustainable palm oil, everyone’s costs would increase but everyone’s brand would be protected and no one would put themselves at a competitive disadvantage. Unilever’s Paul Polman undertook the organisational task through one of the largest industry organisations in the world; the Consumer Goods Forum. But even with this level of cooperation among business the environmental problem couldn’t be solved unless governments in the producing countries were also prepared to cooperate. Over 90 per cent of the world’s palm oil is grown in Malaysia and Indonesia, where it is an important sector of the economy and politicians in both countries believed that there was a direct conflict between local economic development and sustainability. The Consumer Goods Forum continue to have regular meetings with NGOs, local communities and politicians in Indonesia and Malaysia but progress is slow, leading the author to conclude that four conditions must be in place if self-regulation is to succeed. First it must be seen to be in everyone’s interest, second everyone in the industry must be involved for the long term, third cooperation will only succeed if it is easy to see if everyone is pulling their weight and finally it must be easy to punish those not playing by the rules. These are fairly tough conditions to put in place but the momentum has started. Many of the world’s leading businesses are committed but it will also be necessary to take account of a world in which trust in democracy has declined and global government institutions have been weakened.
This brings us to the fifth part of the programme; rewiring democracy itself ‑ and Henderson believes business also has a part to play; “free markets need free politics ‑ it’s time business played an active role in supporting free politics”. She argues that the twin problems of environmental degradation and inequality require government action and she repeatedly emphasises the need for more vigorous official intervention. In the US only around 20 per cent of any student’s success is a function of his or her education whereas 60 per cent is attributable to family , especially family income. Between 1946 and 1980 all segments of US society benefited from economic growth but between 1980 and today the incomes of the poorest 50 per cent of the population increased by only 1 per cent, the incomes of the top 10 per cent increased by 121 per cent and the incomes of the top 1 per cent rose by 300 per cent. Meanwhile average CEO pay, which was thirty times that of the average worker in 1978 increased to 312 times in 2017. Obviously, this contributes to the declining faith in democracy, which has been further weakened in the US by blatant gerrymandering and arbitrary restrictions on voting. Some progress has been made as businesses in the US withdraw investment from states that have introduced barriers to ethnic and gender rights.
The book highlights how two very different countries tackled similar problems. Mauritius was a racially divided society with a huge imbalance of wealth between a powerful class of sugar barons and a large indigenous sugar plantation workforce. After a period of civil strife, the sugar barons agreed to co-operate with a newly elected socialist government and the country is now regarded as a model of economic and social strength. Denmark is another example where a small country with minimal natural resources has become one of the richest in the world because of the way leading institutions, including business, work together. The country is committed to a free market but also to providing generous safety nets to those who fall behind. But the main lesson for other countries is the high level of cooperation between business and government without compromising the democratic process. The Danes have recently set up a “Disruption Council” involving eight government ministers and another thirty members drawn from business, social partners and academic experts to prepare the country for possible disruptive effects of new technologies like AI and Big Data.
Throughout the twentieth century those wishing to counter capitalism sought either to destroy it, through communism, or to take the commanding heights of the economy into the control of the state through socialism. By the end of the twentieth century it was obvious that neither of these solutions worked; the end of history appeared to be nigh. But the triumphalism of the 1990s proved premature. The internal contradictions of capitalism; the inexorable tendency towards inequality and the regularity of disruptive recessions, culminated in the Great Recession of 2008. This left vast swathes of the populations in the old industrial heartlands of developed countries and Eastern Europe facing a decade of austerity. The resulting mood of sullen resentment saw the election of a succession of authoritarian leaders who based their appeal on crude nationalistic rhetoric and were not especially concerned with the impact of climate change or with inequality. Henderson makes that the point that the idea of business being the solution to these problems in the past would have been regarded as eccentric but that now “it is not only plausible but necessary”. In this book she has built an impressive case for how it might happen. It will be partly out of self-interest; business prefers stability to civic and political unrest, but also because many business leaders are genuinely committed to a fairer, more sustainable, world. There will be exceptions; the hairy bacon capitalist class (HBCs) will continue to plunder the environment, avoid paying taxes and treat their employees and communities as mere pawns in the game of profit maximisation. Like the poor, the HBCs will always be with us, but they could become an increasing minority vulnerable to damaging consumer hostility. Henderson points out that Nestlé was reluctant to join Unilever in organising the ban on unsustainable palm oil until activists produced a video showing a consumer eating a Kit-Kat while the blood of an orangutan begins to drip from the chocolate. The marketing communications business have proved adept at persuading consumers to consume stuff over the last hundred years; they could be equally adept at persuading consumers not to buy stuff over the next century.
Unfortunately, the HBCs are a majority in the most powerful business sector today, the tech titans of Silicon Valley. Amazon, whose work practices have been described as Dickensian, is now the most highly valued company in the world, closely followed by Google, Facebook and Apple. They are all tarred with the libertarian brush which permeates the Valley, whose denizens regard themselves as existing in a separate world, cyberspace, and therefore beyond the reach of what they regard as a criminal cartel depriving business of their wealth in order to build schools, hospitals and roads. However, I believe that time is on Rebecca Henderson’s side and as more businesses adopt her proposals the tech sector will become more isolated. They may consider themselves beyond reach but no one ever is.
The after-effects of the pandemic could also turbo-charge a move towards more civilised business behaviour. In a recent Observer column Anthony Rawsley wrote: “A philosophy rooted in the conviction that individualism and competition are the well-spring of healthy and productive societies is found wanting when confronted with a crisis that can only be endured and resolved by rediscovering the virtues of solidarity and collectivism.” From our current 2020 perspective a more civilised and humane world may seem a forlorn hope but what felt impossible before has now became thinkable and Rebecca Henderson’s book is the most comprehensive and readable roadmap for how this ideal might be achieved.
John Fanning lectures on branding and marketing communications at the Smurfit Business School in Dublin.