Capitalism
has served us enormously. It remains the predominant economic system in the
world today. And despite the gloomy state of current global affairs, our
society has made tremendous progress over the last century.
All
the metrics used to measure human development, indicated by our health, economics
and education, have globally improved
ranging from 80% to 400% between 1900 and 2012. This is despite over a 300 percent
increase in the global population during the same period.
Looking
into the future, however, it is clear that the methods and the approach we used
to achieve the above progress need fundamental change. The current path is
simply not sustainable and also poses serious ethical concerns.
The
fruits of capitalism are not being shared equally, causing massive income and
wealth inequality. The richest 85 people in the world have the same
wealth as the bottom 3.5 billion people. The combined wealth of the richest 1 percent
will overtake
that of the other 99 percent by next year. More than one billion people go to
bed hungry every night.
We
are presently consuming earth’s natural resources at an alarmingly unsustainable
rate, using 150 percent
of its sustainable capacity. Continuous overconsumption reduces planet’s long-term
carrying capacity. The excessive use of fossil fuels has brought our planet to
the brink of irreversible climate change. Our actions have already resulted in the
extinction of hundreds of thousands of species.
This
situation will worsen as our population balloons to around nine billion people by
2050.
The
very survival
of the human race hangs in the balance.
So,
what is the solution?
Sustainable Capitalism
Sustainability — in all endeavors of human growth, prosperity and happiness — has to be the mantra. It should be the litmus test for everything we do.
I
believe capitalism is still the right economic system. Taking a cue from
Winston Churchill’s comment about democracy, it can similarly be said that capitalism
is the worst economic system - except for all the others that have
been tried. However, we need to fundamentally evolve capitalism and put sustainability
at its core.
At the heart of a sustainable capitalist system is the goal of maximizing the interests of all stakeholders.
The current
system maximizes only shareholders’ interests. Stakeholders in an economic
system include all the parties who are impacted by the economic operations of
an enterprise. Company shareholders are its obvious stakeholders. But so are
its employees, customers, business partners, the local community and the
environment.
No
business operates in a vacuum. It owes its health to that of the society in
which it operates. No business can survive without happy employees, satisfied
customers, enthusiastic partners, a vibrant local community and stable environment.
The
corporate pursuit to solely maximize shareholders’ interest encourages a
zero-sum mindset at the expense of other stakeholders. To illustrate its ill
effects, let’s look at the current economic stagnation in the U.S., the model
of capitalism in the world and its largest economy. Our economic growth has
been stymied despite companies sitting on billions of dollars in profits.
Companies have squeezed profits for themselves at all costs, with their
‘zero-sum’ mindset, consequently leaving fewer
customers with available purchasing capacity to buy their products and
services. And, it has left
in its wake a polluted planet desperately crying for responsible behavior.
Major Wall Street indices are showing record gains. But the Main Street is
struggling. And the global leaders are currently huddled together in Paris at
the 2015 United
Nations Climate Change Conference to figure out how to save our planet.
New Leadership Skills
A
sustainable capitalist system will require its leaders to have new skills, in
addition to all the traditional management skills.
Business
leaders will need to acquire a ‘win-win’ mindset while dealing with other
corporate stakeholders, outside of shareholders, whose long-term health is
critical to the long-term survival of their business.
Business
leaders will need to think and plan long-term. They will also need to ensure,
through an appropriate incentive plan, that the long-term focus permeates down
the management chain. Short-term thinking, often pressured by the grueling quarterly
reporting cycle imposed by investors and Wall Street, can be blamed for many
disastrous corporate decisions. The quarterly cycle creates a perverse
incentive for managers whose performance bonuses are tied to short-term
corporate metrics. In an age when people are switching jobs more frequently
than ever before, there is no incentive for them to worry about their
decisions’ long-term impact that may show well after they have left the
company.
The
above purpose-driven approach with an inclusive growth model for running a
business also boosts employee morale and engagement and reduces their turnover.
Numerous studies have clearly proven that going to work every day in order to
make a positive difference in our society is one of the biggest motivators for
employees.
Alignment between corporate management and shareholders on long-term view
There
has to be an alignment between corporate management and its shareholders on
long-term business focus. Too often, companies have operated with an eye on
short-term quarterly performance with no long-term discipline imposed by its
shareholders, many of whom themselves are guilty of focusing on short-term
investment returns.
Companies
need to attract shareholders focused on long-term returns. And all long-term
investors need to apply pressure on companies to institute long-term corporate
planning and execution.
For
companies, attracting right shareholders may be a hard and time-consuming task.
Investors focused on short-term gains may anyway not be the right fit for
companies. They are most likely short-term speculators looking to make a quick profit
from short-term price fluctuations in stock price. In the U.S., institutional
investors hold the vast majority of public capital, and many of these are, or
should be, focused on long-term returns. For example, pension funds own 75
percent of public capital in the U.S. The primary mission of these funds — preserving
and growing capital for retirement — requires
long-term investment focus. Their goal is therefore totally aligned with the
goals of companies that are operating their business with a longer-term horizon
in mind. However, many funds have incentive structure for their fund managers
that rewards managers based on monthly and quarterly returns, thus promoting
short-term investment policies that are contrary to the fund mission. Companies
therefore need to do their homework before identifying and attracting the right
institutional investors that are aligned with the management objectives.
Regulators
too can play a role by ensuring financial reporting requirements and tax code encourage
long-term value creation for all stakeholders in the economic system.
Sustainable Capitalism in Action
I’m
very encouraged to notice changes emerging to promote sustainable capitalism
across-the-board.
With
respect to sustainable practices affecting our planet, this summer, Norway’s US$900
billion sovereign wealth fund, the world’s biggest, divested
out of coal, the largest fossil fuel divestment yet, affecting 122 companies
across the globe.
An
eye-opening decision came earlier when the Rockefeller Brothers Fund, one of
the world’s renowned family foundations, divested
out of fossil fuels. The irony was that the direct descendants of John D
Rockefeller, founder of the oil empire that eventually became ExxonMobil,
started the fund 75 years ago.
Both
these decisions provided impetus to the UN-backed Summit on climate change
currently underway in Paris. The Divest-Invest
campaign, whose aim is to sign-up investors that will divest from fossil fuel
industries and instead invest in clean energy, has already signed
up over 110 investors worldwide.
 |
| My four-year old daughter at the People’s Climate March held in New York City on September 21, 2014. With over 300,000 activists participating to advocate global action against climate change, the event was the largest climate change march in history. |
On the corporate side, companies like Unilever, a US$59
billion consumer goods global giant, are setting an example that sustainable
and equitable growth model can be achieved without sacrificing financial
returns. Unilever, with over 400 consumer brands that are used by two billion
people around the world every day, is the perfect candidate to test sustainable
capitalism. In 2009, Paul Polman, the CEO of Unilever, established a sustainable
living plan for the company. Six years into its
new direction, Unilever is already showing impressive results.
Finally,
there seems to be an alignment emerging amongst investors and corporations to suggest
a global
resurgence on long-term wealth creation instead of short-term gains. Hillary
Clinton, the U.S. Democratic Presidential candidate, has called for an end
to ‘quarterly capitalism’ in America. If elected, she is likely to push for
regulatory changes necessary to promote sustainable capitalism in the country.
To
conclude, while adopting a sustainable capitalist system may at first seem a
tall order, early results prove that it can be successfully done, and winds of change across the board are already underway. It’s the only
way to create an economic system for the 21st century that ensures we create
wealth in a sustainable and equitable manner. We owe it to our children and
future generations.
