Saving Capitalism!

Michael Porter recently co-authored an article in Harvard Business Review on "How to Save Capitalism". He elaborates on the fall of capitalism and how people's trust of capitalism has progressively receded even as businesses have increased their spending on CSR. After setting the context, he advocates the concept of 'Shared Value' as the panacea for Capitalism's current ills. He asks businesses to create economic value in a way that also creates value for society by addressing its needs and challenges. He urges businesses to take up the task of reconnecting business success with social progress. Some of the examples cited as known to most of us - Unilever's network of poor women in rural India to sell its products, Tata's focus on the bottom of the Pyramid, GE's strategy of selling environmental friendly solutions etc.

When Mr. Porter writes, the world reads and pundits come out agreeing or criticizing. The Economist has taken the concept of Shared Value and shred it to pieces. It has criticized the concept as undercooked and nothing new. Some of the industry leaders say it is interesting while some say it has to be a joke.

I am no authority on management or economics to offer a critique on what Mr Porter proposes or what other say of it. But on this topic, I do have a strong point of view. I strongly believe that a capitalist system within a democratic political system is the best of all systems tried so far. Communism, which is both a political and economic philosophy, failed miserably with the fall of Berlin wall and disintegration of the USSR. India's experiment with a mixed economy also failed in 1991. China's experiment with capitalism within a communist political system seems to be working so far but calling it a success would be premature. Saving capitalism therefore has an existential criticality attached to it. So here are my two cents on how to save capitalism:

Believers in Adam Smith's 'Wealth of Nations' never really read or chose to ignore his follow on work 'Theory of Moral Sentiments'. That is where the first and foremost problem of todays capitalism lies. To me, purpose of a business is to create a product or service that fulfills a customer need in the most efficient and compliant way to create economic value. Compliance is the key word here - businesses often focus on the efficient part and ignore compliance as policy making can always be influenced or businesses can just comply with the letter of the law while defeating its spirit. Businesses achieve this by employing an army of lobbyists, by financing political campaigns and by adopting highly skilled accountants and lawyers to circumvent regulations. First two deal with influencing policy making and the last one, on defeating the spirit of regulations.

Fixing the lobbyists and policy-makers nexus is the first step in fixing capitalism. It is unthinkable but for the influence of lobbying that derivatives market is still unregulated and run by a group of banks. Stated objective of derivatives as instruments for wider distribution of risk and efficient price discovery has proved to be empty rhetoric. AIG collapsed and needed a bailout due to derivative losses. But there has been no progress on regulating the derivatives market as yet. Even efforts for strengthening financial regulations have proved futile so far. In such an atmosphere, how could the people trust businesses. This nexus has to be broken to ensure sensible policy making prevails over influenced policy making. It starts from disallowing corporations and businesses from donating to political campaigns. Then lobbyists need to be reined in - a start would be to legislate no one holding a political position and their direct relatives would not be allowed to engage in any form of speaking engagement or any other activity that results in a monetary or quantifiable non monetary benefit.

Second step would be to align the incentives of management with that of owners and other stakeholders. The great management invention of separating ownership and professional management has turned out to a grave misalignment of incentive between managers and other stakeholders. Long term sustainability of businesses has given way to short term financial returns that are often built on excessive risk taking. These incentives need to be aligned to restore people's faith in management as they run corporations forming the very core of capitalism.

I am hopeful the world would not have to see a struggle for saving capitalism that creation and preservation of democracy has often seen and continues to witness.