02/27/2012 12:12 pm ET Updated Apr 28, 2012

How CEOs Can Save Capitalism

Capitalism is under fire. At the recent Davos conference, a major topic of discussion was whether capitalism is still a viable economic model. The Financial Times, Time Magazine, and Business Week have all run multiple stories in the last month that focus on capitalism. And of course, there are the Occupy demonstrations, which while offering no cures, are very critical of the capitalist system. Even to a believer in capitalism, which I am, the criticism is not surprising. High unemployment rates and growing income differences have created a population that is dissatisfied with big business.

Saving capitalism can only be accomplished by making multiple significant changes to it. One group that is perfectly positioned to make many of the needed changes are the CEOs of major corporations. They, more than any other group shape the direction that major corporations take and are highly visible beneficiaries of capitalism. Let's look at two changes CEOs can make that will go a long way toward saving it.

CEOs have consistently said that the major objective of their corporation's is to maximize shareholder value and that this is what they should be accountable for. This view ignores the sometimes unintended and sometimes intended negative consequences of corporations being focused on a single bottom line. Included among the consequences are the high-risk behavior that led to the failure of financial institutions in 2008 and 2009 and the negative impact that many businesses have on society and the environment.

CEOs need to make it clear that they and their corporations are committed to having a positive impact on employees, society and the environment. This does not mean forgetting about financial performance, but it does mean, as William Weldon, the CEO of Johnson and Johnson has said, "Targeting a fair return to shareholders, not a maximum return."

Of course CEOs must do more than just say their corporations are committed to triple bottom-line performance; they must live it and require that the people who work for them live it. They need to, as Chris Worley and I point out in our recent book, Management Reset, to specifically design their organizations to perform well in all three triple bottom line areas.

Classic bureaucratic organizations are not designed to do this. CEOs will have to lead their organizations through a significant redesign process. IBM's Samuel Palmisano is a good example of someone who has done it. He not only has said that IBM is about triple bottom line performance, he is working hard to see that the organization lives up to it. Similarly, Patagonia has recently become a "benefit corporation" to make it clear just how focused it is on social and environmental performance.

Executive compensation is one of the hot-button areas receiving a lot of criticism lately. This is an area where CEOs can easily and quickly make changes that will help rescue capitalism. The kinds of changes that are needed are clear and obvious. Executives regularly get increases to their already high compensation, even if their organization is not performing well financially, not to mention having negative social and environmental impacts. This must stop.

CEOs should receive executive compensation packages that only pay off well for them when their organization is producing good returns for its employees, its shareholders and the environment. Nothing is more damaging to the credibility of capitalism than CEOs getting large bonuses when their employees get small or no pay increases and shareholder value declines. Even more egregious is CEOs getting enormous severance packages when they a leave a poorly performing organization.

Perhaps the key change CEOs can make in this area is in the amount of total compensation that they receive. Today, their compensation is simply too high. How high? Last year at least six U.S. CEOs made over $50 million dollars. By every measure it is much higher than it has ever been and it is increasing despite the economic conditions that exist today. It has created a Grand Canyon like gap between CEOs and their workforces. CEOs don't have to take high levels of compensation; they can refuse them when they are not deserved.

Many CEOs are particularly to blame for the high compensation levels of senior executives. Not only do they accept excessive compensation packages for themselves, they sit on corporate boards and approve them for other CEOs. They can make a powerful statement by limiting their pay and that of other CEOs.

I can go on about other things CEOs can do to save capitalism, but I have already laid out an ambitious program for them, so I will stop here and offer one last thought. Ultimately, CEOs have the most to lose if capitalism is abandoned. It is very much in their self-interest to ask: What can I do to save capitalism?

Crossposted from