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Changing the Culture of Capitalism

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As capitalism continues to evolve, what strikes me is that the changes we see have less to do with the fundamental building blocks of capitalism, and more to do with the culture of capitalism. Capitalism isn't going away. Indeed, it is the most powerful mechanism on the planet for moving people, money and resources and for creating wealth. Our entire developed world civilization of a billion and a half people owe their privileged lifestyle in large part due to the institution of capitalism. Capitalism is here to stay. But the culture of capitalism is changing in dramatic and disruptive ways.

A large part of the shift in the culture of capitalism is we are seeing the end, or at least the minimization, of short-term thinking. Yes, quarterly profits still rule the Street, but those forces are being tempered by the very real realization -- in board rooms across the United States -- that short term thinking is leading the United States, and the planet, down an unsustainable path with climate change, newly emerging billions who want to live an American middle class lifestyle, and terrorism as a response to what seems to be the unfair distribution of wealth that globalization has created.

Jim Stengel studied companies in order to determine what resulted in their success, and he found that companies with high ideals far outperform the broader market. In short, board rooms and the executive level suite are coming to terms with the fact that embracing sustainability, and longer-term strategies that allow for sustainability programs to thrive, actually improve economic performance and lead to longer-term financial wellbeing.

Companies still have a fiduciary responsibility to their investors to maximize wealth creation. But up until now, the culture of capitalism has said that in order to fulfill this fiduciary responsibility, corporations must maximize short term profits. That idea is slowly coming to its necessary end.

Instead, companies are recognizing that by embracing higher minded ideals, including the maximization of human potential, and commitments to sustainability that have teeth, they are in fact able to outperform the market. In other words, companies are able to fulfill their fiduciary responsibility by embracing the ideals of sustainability.

Sustainability is a buzzword these days, and so it's important to define it with constraints so as to give it a cogent meaning. Stuart Hart's definition of sustainability in his path-breaking book Capitalism at the Crossroads provides us with a detailed, simple, and yet all-encompassing roadmap for embracing sustainability, all while continuing to focus on earning a profit for shareholders.

Hart breaks down the understanding of sustainability into two parts -- managing today's business and building tomorrow's opportunity. First is the understanding that the tradeoff between waste and profit is illusory. Indeed, Hart's business colleagues including 3M and DuPont have found that by reducing waste, they are actually freeing up dollars in the supply chain, creating more value through increased efficiencies and reduced risk. So the first part of sustainability is in cutting out waste, which leads to more value created for the firm -- and ultimately, for shareholders.

Second and equally important in managing today's business is embracing key relevant stakeholders. When the firm interacts with external parties such as suppliers, customers, regulators, communities, NGOs and the media, the firm can enhance its legitimacy and reputation. Hart calls this "product stewardship," and he has found that companies that engage in product stewardship by reaching out to relevant stakeholders experience improved community relations, legitimacy and brand reputation. This is the second pillar of managing today's business within the context of sustainability.

A great example of a failure of product stewardship was Monsanto's intention to introduce genetically modified seeds to the European market. Had Monsanto developed the product with input from and in dialogue with relevant stakeholders, including European farmers and regulators, their product might well have been accepted. But their failure to do so resulted in enormous backlash that forced the company away from what would have been a profitable European market. Here, we can explicitly see that a shift in culture towards embracing stakeholders has direct impact on increasing shareholder value.

Next in understanding sustainability is examining business practices that build tomorrow's business. Namely, what's called for is R&D in disruptive clean technologies that leapfrog traditional business technologies and indeed render them obsolete through creative destruction. By accelerating innovation and repositioning around clean technology, firms can begin to tackle social and environmental problems that plague us while simultaneously positioning their firm for increased profit opportunities in the future -- therefore maximizing long-term shareholder value. Notice that each of these pillars embraces sustainability as a business strategy that also maximizes shareholder value in the long run.

Finally, firms can enter into Bottom of the Pyramid markets where four billion people live in a traditional economy that relies more on barter than money. Firms can enter into these markets by reaching out to fringe stakeholders that might not seem relevant until firms "get indigenous" by living with the poor for a period of weeks or months, understanding the problems and needs to be addressed in first-person form. A thorough understanding of the needs of the poor, compounded with a recognition that the poor are generally capable but lack income-generating opportunities, leads businesses like Cemex in Mexico or Drishtee in India to enter into rural village markets and roll out profitable businesses in conjunction with the local communities that create mutual value, leading to high profitability once the pilot projects have been brought to scale successfully. These increased profits benefit shareholders in the long run, but they simultaneously create much mutual value in the poor communities into which the business enters.

In this case, the cultural shift that is most important in entering into Bottom of the Pyramid markets is the understanding that highly profitable opportunities actually exist in the Bottom of the Pyramid. There is a procedure for engaging the Bottom of the Pyramid effectively, and Stuart Hart has written it -- it is called the BOP Protocol, and it is freely available to all businesses that wish to expand not only to emerging middle class markets but to entirely new markets of poor people that can become consumers, producers, entrepreneurs, and active role-players in an expanding economy that benefits all stakeholders (including, of course, shareholders).

Of course, some structural changes are needed around the regulation of capitalism -- the institution cannot self-regulate entirely, as demonstrated by the 2008 stock market debacle due to lax rules and overly-leveraged investments.

But by embracing a culture of sustainability and moving away from the short term profit motive, businesses can position themselves to prosper in the new economy, maximizing shareholder value while simultaneously addressing environmental and social concerns. Capitalism is here to stay, but there are numerous cultural shifts in the areas of ending the short term profit motive and sustainability that are needed to drive sustainable long term value to shareholders. Fiduciary responsibility is indeed fulfilled, but so too are our human responsibilities to leave behind for our children and grandchildren a world as least as good as we found it.