"Idiotic" is how one Amazon reviewer of "The Road From Ruin" describes our idea that values can be put back into capitalism. Happily that reviewer otherwise loves the book. Yet we were struck that so many Huffington Post readers who commented on our opening article were also skeptical that business could ever embrace doing good. Maybe Bishop and Green are not idiotic, you seemed to be saying, but they are certainly hopelessly naive and impractical if they seriously believe there is any prospect for redemption from within for the greedy capitalism that brought the economy to its knees.
Having spent a dozen years reporting on Wall Street (Matthew) and the same time working in government (Michael), we see ourselves more as skeptics than idealists. We don't believe capitalism will ever be perfect, or that you can entirely drive out the dark side of human nature. But we can do a lot better than we have done so far. Here's why we think long termism and values-based business -- what we call philanthrocapitalism -- can emerge as the new best way to do business, especially if the rest of us do our bit to push capitalism in the right direction.
The bottom line is, well, the bottom line. We don't think businessmen will become saints but we do think that the crash of 2008 is proof-positive that the short-termist "greed is good" capitalism that dominated the past 30 years has failed -- not just failed our society but failed its shareholders too. The obsessive pursuit of short-term profits and a higher share price tomorrow led capitalism badly astray. Business leaders and investors alike were seduced by the idea -- known in academia as the "efficient market hypothesis" -- that the current share price told you all you needed to know about the value of a company. As it turns out, it tells you very little, other than about the state of mind of investors. John Maynard Keynes had it right when he likened short-term investing in the stock market to betting on the result of a "beauty contest." The skill needed to succeed in that is to be good at forecasting who other judges (investors) would find most beautiful -- not to be a good judge of actual beauty.
Short-termism in the stock market allowed a suicidally irresponsible culture to flourish, especially on Wall Street -- where the bonuses grew ever larger as banks took on ever more reckless amounts of risky debt. This was the era of IBGYBG -- "I'll Be Gone, You'll Be Gone" -- in which bankers did terrible deals safe in the knowledge that they would have pocketed their commissions and moved on to a new job before the awful consequences of the deals became clear.
By contrast, the financier who has emerged from this crisis with his reputation stronger than ever is Warren Buffett, the doyenne of long term investing. Buffett's strategy is all based on backing good managers at good companies and sticking with them for the long term. Nor is he alone. In "The Road From Ruin" we discuss the case of Shorebank, an explicitly ethical bank that has targeted sub-prime borrowers but lent to them in a responsible way. Whereas the fraudulent and near-fraudulent loans of mortgage giants like Countrywide all went south as the housing market collapsed, Shorebank's loans were much more robust because they had done the old-fashioned thing of building relationships with clients, clients whom they knew. Community banks that behaved in this sort of responsibly long-term way deserve our support, which is why we are so enthusiastic about the "move your money" campaign championed by the Huffington Post.
It is not just Buffett and community banks that are role models for a new long-termist values-based capitalism. Even before the current crisis some of America's best-known firms, some of them with hitherto awful reputations, were starting to take their responsibility to society more seriously. Nike, PepsiCo, General Electric have all embraced a social mission with unexpected enthusiasm that is certainly more than just spin. Perhaps the most dramatic turnaround of all has been by WalMart, which is now arguably one of the strongest forces for environmentally sustainable business in the world. True, its anti-union philosophy guarantees that for some people the giant retailer will always be the Beast of Bentonville -- but the world will certainly be much better off because it is now a green beast. Even more remarkable is the partnership that is now flourishing between KKR, the private-equity firm famously described in the 1980s as the "Barbarians at the Gate", and Environmental Defense, a highly-respected non-profit, to develop environmentally sustainable strategies for all the firms it owns.
The reason for this change, we readily agree, is that these firms realize there is money in it. But that is reason to think it will prove more than a fad. Nike has recognized that consumers of luxury footwear don't want it made by abused workers. PepsiCo doesn't want fizzy drink and salty snacks to become the next tobacco, demonized and banned, so it is reducing unhealthy ingredients and selling new wellness products. GE sees profits in clean energy.
And a vast number of firms are starting to realize that if they want to hire the best people, they will have to stand for something more than profit maximization. As we write in "The Road From Ruin," one of the most encouraging developments last year was the decision of hundreds of graduating Harvard MBAs to sign an oath committing themselves to behave responsibly in their new jobs. Of course, saying such an oath does not guarantee they won't follow in the criminal footsteps of Harvard Business School alumni such as former Enron boss Jeff Skilling, but at least it shows they are aware of the pressures they will face.
Now that the intellectual support for short-termism has been discredited by the crisis, we all need to do our part to shove capitalism towards long-termism. So, if you are a manager, sign a business oath. Move some of your company's money to a community bank. Buy products that are green, or fair traded, or otherwise ethically produced. Above all, demand that the pension funds and mutual funds that manage your retirement savings invest your money in a way that rewards long-term responsible behavior, not short-term profit-chasing. Some of these pension funds and mutual funds have been the worst offenders by encouraging short-termism. Isn't it about time the government made it clear that they are failing in their fiduciary responsibility to manage our money prudently? How about a campaign to get the Department of Labor and Pensions to sue, say, Fidelity on behalf of its customers for failing to act in their long-term best interests?
Is this naïve or idiotic? Not at all. Though it does require us all to think and behave in new ways, which is always uncomfortable. In some ways, it was more comfortable for everyone when we could simply view companies as greedy short-term profit chasers. This allowed free-marketeers to celebrate the supposedly infallible wisdom of markets, and liberals to say that big government was the only solution to the excesses of the capitalists. Many people on the left and right have become so addicted to the notion that business can only be run in this greedy short-term way that they cannot take seriously the idea that there is another, better way.
Yet there is a better way. Arianna gets it -- this is one of the reasons she chose "The Road From Ruin" as her book of the month. So do some of the more sensible thinkers on the right, such as New York Times columnist David Brooks, who enthused recently about the need to "remoralize the markets". So to do management gurus like Rosabeth Moss Kanter, whose terrific new book, "SuperCorp," is all about how "out of the ashes of conventional business models arises a set of companies using their power not only for profits and sustainable growth but also social good."
As we write in "The Road From Ruin," "if business leaders, shareholders, and consumers want a better capitalism, now may be the best time to remake the system." Rather than dismissing this type of thinking as unrealistic, perhaps it is time to wake up and smell the (fair trade) coffee.
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