Of all Felix Salmon’s many unjustified criticisms of our work (and this blog, like our books, is always written jointly), none is odder than his assertion in his latest attack (“Philanthropy Can’t Be Outsourced To A Profit Motive”) that “when corporate leaders listen to Altman and Bishop, then, they get the message that if they just do what they claim to be doing already, then they’re already doing all they can in terms of their corporate social function.”
We hold no brief for our friend Dan Altman – whose recent paper on “The Single Bottom Line”, as we said in our first response to being Felixed, “we share some of Felix’s scepticism about” – but we defy anybody to read our books, articles and blogs and conclude that they make the case for the status quo.
In “Philanthrocapitalism” we devote a chapter, “The Good Company”, to the role of businesses in delivering social benefit. In this we write, “Beyond their role in making their founders wealthy enough to give, are companies an integral part of philanthrocapitalism? Certainly the scale and power of big companies means they have the potential to be an important force for good. However, the need to make a profit will constrain the ways they can do so in ways that their non-profit partners in any cause need to understand, or risk disappointment.” We also note that “the public should ensure that politicians properly regulate companies in areas where it is unrealistic to rely on self-regulation or good behaviour” and that “companies claiming to do good should be scrutinized as carefully as anyone else who makes such claims – especially as firms often have large public relations budgets to spend on making themselves look good.”
We conclude the chapter by saying, nonetheless, that “there are many reasons to believe that firms pursuing their enlightened self-interest can play a significant part in tackling the world’s biggest problems. Potentially they have a huge role to play in philanthrocapitalism’s new division of labour.” Here, the key word is “potentially” – which means we don’t think it is yet happening anything like enough.
Our view that the status quo needs a drastic overhaul is explained at length in our second book, “The Road From Ruin“, which calls for profound reform of capitalism in the aftermath of the global financial crisis that brought the economy to its knees in September 2008. In the introduction we point out that, among other things, “the crisis was also the result of a general failure of leadership in the business world. Too often corporate executives excused themselves from asking deeper questions about where things were going by focusing on rising quarterly profits as the only yardstick of good capitalism. This failure of values at the heart of capitalism needs to be addressed by the capitalists themselves.”
Perhaps, as Felix suggests, corporate leaders could read this and “get the message that if they just do what they claim to be doing already, then they’re already doing all they can in terms of their corporate social function”, but only if they are, much like Felix himself, determined to keep on thinking whatever they like regardless of the actual content of our writing.
As we describe in “The Road From Ruin”, corporate bosses (especially in America) are so insulated from their shareholders that they can take most motions passed at AGMs as ‘precatory’ (advisory) rather than mandatory, and ignore them. Boards, all too often, lack the skills and the will to take on CEOs. As a result we get companies that follow strategies which, rather than maximising long-term shareholder value, massage executive ego and boost executive bonuses. Instead of the long-term enlightened self-interested behaviour we want, there is a widespread culture of “I’ll be gone, you’ll be gone” short-termist behaviour.
Institutional investors deserve much of the blame for this. The norm amongst pension and mutual funds is simply to track the short-term performance of the market, adjusting their portfolios to hold the stock of companies posting good quarterly earnings figures, often heedless of long term strategies. They rarely ask whether the company is doing the right things to maximise its value over a ten or 20 year period, or take any interest in whether its board is doing a good job in overseeing the chief executive. As a result of this failure to do their job properly by institutional shareholders, we have what Lord Myners, a veteran of the City of London and one time Minister in the British government, calls ‘ownerless corporations’.
Felix is right that how the wealth-creation process of capitalism serves humanity has been debated for centuries, but it has entered a new phase, especially since the global financial crisis. Before then, much of the world had settled on a consensus that what is good for today’s stock price is probably good for humanity. That belief has been proven wrong. We now have an opportunity to build a better capitalism where the self-interest of investors and the interests of society are aligned more effectively. (And no, we don’t believe that a long-term focus in the corporate world would deliver nirvana, as government regulation will certainly still be needed, but we do think it would be a huge step in the right direction.)
Improving our capitalist system will not be easy. As we argue in “The Road From Ruin”, there is an urgent need to tackle fundamental flaws in the economic system by strengthening shareholder rights, improving the role and effectiveness of boards, and updating the fiduciary duties of institutional investors to make clear that they have a legal obligation to act in the long-term interests of those whose assets they manage. It is going to require reforms to how companies are run, new ways of thinking about success, and the owners of businesses – including all of us ordinary ‘citizen capitalists’ who own shares through our savings, investments, and pensions – being part of that debate. Sadly, little of this is on the political agenda in America, though it seems that Britain’s coalition government is taking some of it seriously.
As we argued in our previous post, the status quo is compelling to many people because it is comfortable and familiar. A capitalism that is more responsible is not going to come from a few enlightened CEOs choosing to do good – it will only come from an overhaul of the way business is run. We wish that Felix (and many others) would join us in being part of that change. Reading ‘The Road from Ruin’ might be a good start.