Is capitalism under siege, post-financial crisis?

THE Bank of England's chief economist proposed last week a "refresh" of the capitalist model. The suggestion by Andy Haldane underlines lingering disquiet, more than a decade after the financial crash, at wage stagnation and rising inequality that is having not just profound implications for politics, but also wider society and the economy.

Dr Haldane, who favours change to the UK's 2006 Companies Act with legislation to shift corporate governance rules away from a sole focus on shareholders, is far from being the only leading public figure to argue for reform of contemporary capitalism. Take the example of the Business Roundtable, a US non-profit association whose members are CEOs of major corporations.

Last year, this body released a new statement on the purpose of corporations signed by 181 CEOs who committed to a new modern standard for corporate responsibility and long-term value creation by leading their firms for the benefit of all stakeholders, not just shareholders. The new corporate purpose document highlights that corporates share a fundamental commitment to what Dr Haldane calls "the plurality of stakeholders" including employees, local communities, suppliers, and customers.

On communities, for instance, the Business Roundtable commits to respecting local people and protecting the environment by embracing sustainable practices across their businesses.

Meanwhile, there is a pledge to invest in employees through fair compensation and wider key benefits; support for training and education that help develop new skills for a rapidly changing world; and fostering diversity and inclusion, dignity and respect.

While the document seeks to shift the paradigm popularised by leading conservative economist Milton Friedman that the business of business is business, it also includes a paramount position for shareholders.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The announcement stresses that generating long-term value for shareholders is key since they provide the capital to invest, grow and innovate.

The Business Roundtable announcement was greeted with much acclaim within the corporate community with Darren Walker, president of the Ford Foundation saying, for instance that "this is tremendous news because it is more critical than ever that businesses in the 21st Century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society".

Meanwhile, Tricia Griffith, president and CEO of Progressive Corporation said that "CEOs work to generate profits and return value to shareholders, but the best-run companies do more. They put the customer first and invest in their employees and communities. In the end, it's the most promising way to build long-term value".

RESONANCE

Yet, it remains to be seen what resonance it will have with the wider populace, given significant levels of distrust in business, not least among the young. While growing concern about what Dr Haldane called the "moral compass of capitalism" is shown in numerous opinion polls, and also symbolised by the significant protests since 2008, including the 'Occupy movement' which came to international prominence in Wall Street in 2011 in its campaign against social and economic inequality.

The occupy demonstrations, often driven by younger people, subsequently spread to around 1,000 cities and over 80 countries in all continents of the world from Canada to Norway to New Zealand.

And it is this sentiment which is, of course, fuelling the growth of political populism across the world. Some academic research, for instance, has indicated that a staggering 2 billion of the world's population is now governed by populist leaders, including the world's two largest democracies - Narendra Modi in India and Donald Trump in the United States.

For business, one of the key problems of this post-crisis landscape is that stakeholder belief in what many corporates are saying and doing has been undermined as distrust has grown.

This poses significant new hurdles for firms looking to grow and enhance reputations in a world where there is already longstanding, and growing backlash to corporates on issues such as executive pay, through to international trade and globalisation.

Dr Haldane's intervention, and the release of the Business Roundtable document, builds from the apparent paradox of 21st Century polities that while there is growing distrust of business, many people nonetheless expect the private sector to play a greater role in society. This includes helping tackle the range of problems facing the world from climate change to growing economic inequality.

Among the key ways that businesses can rebuild trust include tried and tested ones of creating good new jobs and investing in the economy, while paying workers fair wages and benefits.

Yet, beyond this, a growing number of firms and business organisations are using new thinking and ideas to restore credibility.

Of course, firms have long had sustainability, social responsibility, and/or philanthropic programmes to address such issues.

However, the challenge - and potentially opportunity - is greater now, giving rise to what leading Harvard academic Michael Porter has highlighted as a new way for firms to secure competitive advantage by creating "shared value" for society as well as shareholders.

Perhaps the key idea behind this shared value concept is that the corporate competitiveness and the health of society at large are mutually dependent and reinforcing. Thus capitalising on the connections between societal and economic progress, including tackling challenges ranging from climate change to the obesity crisis in many countries, can help drive growth for years to come.

As well as showcasing greater purpose, corporates also have to grapple with another trend within the distrust agenda which has been called the 'inversion of influence'. That is, while faith in big institutions and many elites - including CEOs and leading politicians - is declining, trust in everyday stakeholders - including family, friends and colleagues - who are perceived to have more authenticity and legitimacy - is growing.

Business needs to future proof itself against this phenomenon too with some research showing that public recommendations from family, friends and colleagues we know and trust, is becoming increasingly influential in shaping views and opinions.

BUSINESS AMBASSADORS

One way in which corporates are harnessing the power of this shift is through empowering a new breed of grassroots advocates, or business ambassadors, to help rebuild trust.

For instance, employees and supply chain partners have significant credibility and legitimacy as third-party validators, and social media has significantly increased the level of influence that these single persons or organisations can have, for positive or negative benefit.

Taken together, the interventions from Dr Haldane and the Business Roundtable underline the flux in contemporary capitalism.

The implications are key not just for politics but business too, reflecting not just the loss of faith in big institutions and many elites, but also the fact that many people now expect the private sector to play a greater role in tackling the 21st Century's grand challenges.