27
Feb
11

Changing Capitalism — Part 1

We face a major crisis as we move through this time of change. The Great Recession highlighted the role of businesspeople and our collective ability to impact the world’s economy. We came up wanting in this review and are now on the defensive, fighting for our ability to retain the same control over our world. Trust in business leaders is at an all-time low. We need to change the game.  

It’s time to take a stand for capitalism – a new type of capitalism. It’s an all-inclusive form of capitalism that goes beyond financial statements. The new capitalism takes a long-term view of business and a broad view of our impact. The new capitalism watches the bottom line and the impact business has on all stakeholders. It requires a new structure and a new ethical perspective. This week we discuss how to change the game structurally. Next time we will explore the ethical impact of our actions. 

There’s a great article outlining the structural changes necessary to change the game in the March 2011 issue of the Harvard Business Review. Dominic Barton of McKinsey wrote “Capitalism for the Long Term.” In the article, he outlines three structural changes necessary to reposition capitalism:

  1.        Overcoming the tyranny of the short term;
  2.       Serving stakeholders and enriching shareholders; and
  3.       Acting like an owner.

Business leaders must take action to change the game on all three fronts.

We have been caught up in a self-perpetuating cycle of the short-term. Short-term returns from short-term owners have driven executives to focus on short-term results. The cycle continues to tighten as the pressure for higher and faster returns accelerates. Ironically, the focus on results actually reduces the enterprise value. New leaders must uncouple this cycle and have the courage and foresight to position the enterprise for the long-term. 

Adam Smith

Serving stakeholders and enriching shareholders have traditionally been seen as mutually exclusive. The new capitalism requires a return to some very old values – values outlined by Adam Smith in 1759. “All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries…” Smith wrote outlining the interdependence between business and society at large and it never echoed as loud as it does now. Business needs a healthy society and vice-versa. It’s our responsibility to make both prosper. 

Acting Like Owners

Finally, there’s a need for all businesspeople to act like they own the place. Not just in the superficial way improvement consultants want us to approach day-to-day decisions, but also in the way we align our rewards with true ownership. That means a more sensible approach to pay, including real downside for top managers’ incentive plans. That also means stronger boards and a redefinition of shareholder democracy that rewards long-term ownership. These are all courageous stances – and all necessary to make a difference. 

These changes require new leadership. The traditional skills are still necessary, but no longer sufficient. New leaders must be able to lead from the rear as well as the front, integrating their entire teams into their activities. These three changes are just the start. In order for the changes to take root and grow, our ethical stance must also change… 

…but that’s next week’s blog!

 

 

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