The pro- vs anti-business spat currently being vented by politicians in Westminster and certain red-faced businessmen is as meaningless as it is dispiriting. To call opponents out as anti-business because they suggest that all is not 100 per cent for the best in the best of all possible business worlds is childish, self-demeaning and deeply insulting to the rest of us.
The fact is that a love-hate relationship with business is entirely justified. The company is one of mankind’s most prodigious inventions. Large corporations are central to our current existence. No advanced economy has been built without them; they and their supply chains have hauled billions out of poverty, and in the developed economies, life, both work and play, would be inconceivable without them. Yet as with any technology, business’s potential for harm is as great as that for wellbeing. While no organisation is responsible for so much prosperity, none, particularly since 2007, has also created more confusion and mayhem. If it is inconceivable that that many of the world’s biggest problems, from global warming to inequality, can be solved without business involvement, it is partly because of the business role in causing them.
It is difficult, then, to exaggerate business’s importance. As the FT’s chief economics writer, Martin Wolf, has put it: ‘Almost nothing in economics is more important than thinking through how companies should be managed and for what ends.’
And here’s the rub. Unfortunately, Wolf goes on, ‘we have made a mess of this. That mess has a name: it is “shareholder value maximisation”. Operating companies in line with this belief not only leads to misbehaviour but may also militates against their true social aim, which is to generate greater prosperity’.
Wolf is not alone. At the Global Peter Drucker Forum in November, Roger Martin, previously dean of Toronto’s Rotman School of Management, observed that today’s capitalism was structured to reward banditry rather than stewardship. Colin Mayer is another past business-school dean, this time of Said at Oxford. In his recent book (review here), he charges that notwithstanding their near-miraculous past achievements, companies are now endangering their creators. ‘It is not an exaggeration to say that through their negligence, incompetence, greed, or fraud, corporations are a threat to our livelihood and the world we live in’ – ‘our Frankenstein’, in fact.
I could go on. These are just three in a growing chorus of business A-listers (many others include Dominic Barton, global head of McKinsey, Paul Polman, chairman of Unilever, Jack Welch, former CEO of GE, long-time UK business observer Charles Handy) voicing alarm that business-as-usual is increasingly not the answer, as David Cameron, George Osborne and, disappointingly, even Vince Cable seem to assume, but the number one problem we need to solve. Even Ed Milliband appears to imagine that a few minor tweaks and one-off tax charges will do the trick.
But judge for yourself. The fact (yes, fact) is that shareholder capitalism, an ideological construct of the 1970s, has not delivered the goods, even for shareholders. Martin has shown that shareholders have done less well under the regime that puts them first than it did in the postwar years, when companies accepted that they had obligations to employees and society too. Since then, companies’ return on assets has fallen by 75 per cent. Corporate longevity is plunging; on both sides of the Atlantic, the number of publicly quoted companies has dropped by half in 15 years. Brutally, the PLC, the core institution of capitalism, is no longer its dynamic engine but the millstone holding it back. It may even be on the way out.
The reason? Simple: the short-termist, shareholder-dominated formula favoured by capital markets and corporate governance codes is a recipe for slow, sometimes rapid, death rather than robust health and long-term survival. Companies are escaping the constraints of that regime by going private, merging, or going bust. In this light the current bout of business Labour-bashing resembles nothing so much as the last roar of the dinosaurs as they blunder witlessly towards their own extinction.
We know what’s brought us to this pass. The most dangerous bubble of all, as Mihir Desai pointed out in an important HBR article, is the one that has attracted least attention: the giant financial incentive bubble that has been inflated with the intention of aligning the interests of corporate and fund managers with those of shareholders. As was the intention, these incentives have indeed changed behaviours, but the results are disastrous. As Desai points out, through massive misallocation of talent and resources, ‘These changed incentives and rewards have contributed significantly to the twin crises of modern American [and more generally Anglophone] capitalism: repeated governance failures, which lead many to question the stewardship abilities of American managers and investors, and rising income inequality.’
What Chicago’s clever economists failed to foresee in their free-market zeal was that shareholder primacy effectively put managers and corporations on a collision course with the rest of society. While society benefits from well-functioning markets that oblige companies to innovate to create new advantage, which is then commodified by rivals to the profit of all consumers (think of the repeated cycle of innovation in semiconductors and personal computers), under shareholder value it is in companies’ interests to strive to make markets as imperfect as possible – through cartels, oligopolies and lobbying for special privilege, for example – to protect their own rents. In a zero-sum game, the object of business strategy, as in Michael Porter’s well known model, is to prevent other stakeholders from eating the shareholders’ (including CEOs’) lunch – in other words, capturing value rather than creating it, working against the larger interests of society.
As Desai suggests, here in these distorted incentives is the cause of the financial crash in 2008; here is the explanation why companies are investing in cost-cutting measures in order to return cash to shareholders via dividends and share buybacks instead of in innovation that would create new markets, jobs and value, as in the past; here is the reason for the race to the bottom in wages and benefits and the race to the top in CEO pay; here is the reason why companies in the richest countries apparently can’t afford to pay a living wage or live up to their pension commitments.
Here too is the reason why the much vaunted internet will, under present conditions, create neither jobs nor wealth for the majority. On the contrary, as Andrew Keen and others have argued, it simply turbocharges present tendencies to a frightening degree. On the other side of the ledger, chief executives and short-term shareholders have benefited in direct proportion to the extent that they have kept wages down, exploited suppliers and externalised as much of their costs as possible (in-work benefits to subsidise low pay, bail-outs and quantitative easing for the banks, environmental clean-up) on to society as a whole. And without orchestrated political change, they will continue to do so. Of course they will; why wouldn’t they? That’s what business schools teach them, consultants recommend and corporate governance codes solemnly condone.
So now tell me why ‘thinking through how companies should be managed and for what ends’, and similar debate over organisations in the public sector, shouldn’t be at the very top of the electoral agenda – or to put it the other way around, why failing to put it there is not a dereliction of Westminster’s primary duty to its constituents. Those perverse incentives are still there. The one good thing about the unfolding scandal of HSBC and Lord Green is that it reveals in all its cynicism what for politicians being ‘business-friendly’ really means. As so often, for the larger perspective one has to come back to Peter Drucker. ‘Free enterprise,’ he wrote, ‘cannot be justified as being good for business. It can be justified only as being good for society’. If being good for society involves a little temporary unfriendliness to companies and their leaders unwittingly undermining it, so be it.
(See also ‘Being pro-market and being pro-business are two very different things’, here)