Taking Stock / The Evolution of Capitalism

Corporate greed is passe and handing out scraps to 'social causes' as a sop is revolting. But the sick relationship between business and society can be healed.

"The capitalist system is under siege," it begins. The corporate world is increasingly being blamed for social, environmental and economic problems and accused of laughing all the way to the bank at the public's expense.

"Even worse," it goes on, "the more business has begun to embrace corporate responsibility, the more it has been blamed for society's failures." Corporations' attempts to emphasize their greater social responsibility seem to backfire, exacerbating the hostility: "The legitimacy of business has fallen to levels not seen in recent history." Elected representatives then fan the fires by enacting policies that "undermine competitiveness and sap economic growth."

1930 - Bloomberg - February 15 2011

Who said this? Some left-wing rag? Some journal put out by a social organization? Surprise! It was the latest lead article in that bastion of American capitalism, the Harvard Business Review, whose editors and writers advise some of the biggest, most aggressive firms in the world. The authors are Michael Porter and Mark Kramer. Many feel Porter has been a defining figure in American corporate management, and many still define competitiveness (and how to achieve it ) based on his books and articles.

What do they say? That the present model of capitalism is screwed. It's kaput. It's out of date. It doesn't work. That it makes business act against society, and makes the community and government act against business. This conflict doesn't create, it destroys. And the public's confidence in business has imploded - with good reason.

If you feel disgust when reading in the papers about some do-good act by a big Israeli company "giving back" to the community, well, you're in good company. Pretty much everybody has also been developing a sour cynicism toward this whitewash job.

With one hand, companies squeeze the life out of their customers, the environment, suppliers, taxpayers and the community as a whole. With the other hand they scatter a little loose change on "social projects" to get good PR, cleanse their consciences, or to give the CEO a photo op.

Your faithful author has never been a fan of do-good "social responsibility" by businesses, monopolies, cartels and tycoons in general. Not only do many of these businesses cause tremendous harm to the public interest with their main operations, but some view their contribution to the community as a tool. It is a means of gaining more legitimacy among the politicians, so as to accrue even more power and influence, to castrate regulation and oversight even more, to earn even more and to cause even more harm to society and the community.

Now Porter comes along with a 15-page article, and asserts that as it stands, capitalism is broken. It needs fixing. A new age must arise, in which "social responsibility" is no longer an afterthought, but the core of the company's activity.

Porter claims that social responsibility needs to be based on the principles of true capitalism, which aspires to greater productivity and value creation. But not value creation for shareholders and managers, which is short-term, destructive thinking, Porter explains. Instead, he introduces the concept of "shared value" - for the company and for all the players in the company's environment.

First, do no harm

This is how the present system of social responsibility works. A big bank or business concern, a monopoly relying on the helplessness of its customers (who have no real choices ), which is meager with proper disclosure and spends too much, which suffers from low productivity and pushes products that cause harm to its customers, then tries to clean its conscience and image by handing over some tiny fraction of its earnings to some do-good project or other.

Porter suggests another model: that the firms put social activity at the center of operations. That they offer products or services that generate genuine value for their customers and the community. He also suggests the bank or firm or tycoon eschew activities that cause harm to customers, the environment and the nation.

The companies themselves are to blame for the cynicism and anger toward them, Porter says. They are to blame for intensifying government efforts to regulate them because they define "social responsibility" too narrowly, and marginalize it rather than making it core.

Companies and their managers and directors must eschew chasing short-term, monopolistic, aggressive gains. Porter advocates. They should focus on creating shared value for the company and society, by adopting new management and working techniques.

The growing conflict between government and business, and between business and its customers, will make it hard for exploitative companies to maintain their competitive advantages, he argues. Adopting a strategy of shared value would thus give companies a more sustainable, firmer competitive edge, he says.

Isolated social projects aren't the way for companies to contribute to society. The way, Porter says, is by changing their model - not only because what they're doing now is harmful, but mainly because it is there, in their core activity, that the corporations' great strength lies.

If companies place social responsibility at the core of their activity - in their products, in their relations with their clients, workers and suppliers and in their effect on the environment and on government - their influence would truly be tremendous. For then, their core activity could create true shared value.

When the function of business is defined as creating profit, while welfare is seen as the province of government and the nonprofit sector, the result is that business has precious few managers who understand anything about social issues, while government has precious few people who understand anything about the principles of good management that are crucial to productivity and to creating shared value for both business and the community.

Most business schools still teach what Porter feels is a narrow, outdated view of capitalism, though more and more of their graduates are hungry to do better things with their lives. These schools are missing the opportunity to link social principles with corporate activity, not to mention the application of advanced management to social issues.

Not neo-socialism

Narrowness plagues not only business but the response of government. Regulation that does not focus on the conditions for creating shared value for business and society can result in conditions that blunt competitiveness, which is ultimately bad for society. Instead of thinking about how to create value for society, regulation just winds up increasing corporate costs.

The role of regulation, says Porter, is to create the conditions for competition to grow, not to inflate costs.

"Finally, regulation will be needed to limit the pursuit of exploitative, unfair, or deceptive practices in which companies benefit at the expense of society," Porter writes. Enforcement of antitrust law is crucial to ensure that the fruits of a company's success reach the clients, suppliers and workers, he explains.

Creating shared value for business and society is not some neosocialist dogma that would toss out the market mechanism and competition. On the contrary, it is the evolution of capitalism.

It will give birth to a new wave of innovation and growth. It will link success for businesses with success for the community - two concepts that have become utterly dissociated in the era of narrow, near-sighted management. It will generate profits that advance the social good, instead of trampling on society.

We need a new capitalism, one that doesn't use mingy philanthropy as a sop to the masses.

It won't be easy. Perpetuating uncompetitive market conditions, squeezing the public and the workers, corrupting regulators and manipulating public opinion is easier. It's easier to buy the press and politicians than to think about how to create a new economic ecosystem that increases competition, lowers costs and improves productivity.

But the old system doesn't work any more. Only instituting a system that will create shared value can heal the rift between business and society.