Retooling capitalism for the social good

2013-07-23 00:00

WHEN the financial crisis threatened to topple the global economy, my Russian friends took great delight in calling me from Moscow and sharing the bittersweet response that was making the rounds in a city that always laughs loudest when things go wrong: everything Marx told us about communism was false, the gag went, but everything he told us about capitalism was true.

In 2008, it was easy to see their point. The lopsided recovery hasn’t brought much comfort, either. Across Western Europe and North America, corporate profits and stock prices have rebounded, but the middle class is more squeezed than before.

Even so, my Muscovite pals were wrong. Marx didn’t just get communism wrong — he was also profoundly mistaken about capitalism, which turns out to be the best prosperity-creating system humanity has come up with so far.

But that doesn’t mean it doesn’t need to evolve.

The hi-tech, globalised capitalism of the 21st century is very different from the post-war version of capitalism that performed so magnificently for the middle classes of the Western world.

That’s why a lot of people, including many hard-driving capitalists, are trying to figure out how to retool the institutions of capitalism for our time.

This week, the U.S. state of Delaware, which has made corporate governance its regional cuisine, approved a new form of incorporation, the B-corp, or benefit corporation.

These are companies that are explicitly charged with a dual mission: to earn profits for shareholders, the traditional business goal, and also to pursue the social good in other ways, ranging from protecting employees to safeguarding the environment, even if these goals come at the cost of short-term financial gain.

Jack Markell, Delaware’s governor, travelled to a seminar discussion in New York on the day his state signed B-corp into law.

“This is a very significant public policy issue,” he said.

“There is both a market need and a societal need.”

Markell admitted that “there are a lot of sceptics out there”, but he said the B-corp status is an important response to a world in which the way we do business has changed.

“When businesses first started up, they operated in the communities where they existed.

“This was where the executives lived,” Markell said.

Because they were so deeply rooted in particular communities, they didn’t need legal structures that required them to take into account all of their stakeholders, as social pressure served that role.

In today’s virtual, global economy, those personal constraints are eroding fast. The B-corp structure is a way to recreate them.

Markell believes there is a hunger among investors and entrepreneurs to do well and to do good.

“What an unbelievable opportunity this represents to harness the energy of entrepreneurs who are really focused on making money and who want to give back at the same time.”

Albert Wenger, a partner at Union Square Ventures, a New York-based investment firm, agrees.

He was at the seminar with Markell and, in a blog post earlier that day, laid out what he sees as the critical challenge for capitalism today: “Our problem as society is no longer how to make more stuff. Cars, clothes and computers are all becoming better and cheaper.”

Instead, Wenger argued: “Our biggest remaining problems, however, require social innovation: how to distribute the benefits of progress more widely, how to live in better harmony with the environment and how to provide affordable access to education and health care for all.”

The good news, Wenger believes, is that it is not just Occupy Wall Street that has focused on this dilemma. Businesspeople are worried about it, too.

“At Union Square Ventures, we are seeing more and more entrepreneurs and start-up employees who are motivated as much by making the world a better place as they are by making money,” he said.

The optimists at the B-corp discussion, which was hosted by the World Economic Forum, hoped that doing well and doing good could be seamlessly aligned.

They argued that by freeing businesses to be mission-driven and to pursue long-term goals rather than short-term profits, and by appealing to a new generation of idealistic consumers, B-corps could be as, if not more, profitable as traditional companies that maximise shareholder value.

That is a comforting thought. Frederick Alexander, the former chair of the Delaware Bar Association’s section of corporation law, suggested a tougher possibility.

“Part of the struggle is facing up to the hard facts,” he said.

“The basic thing that underlies a B-corp is that you don’t have to maximise shareholder value. You are accepting the possibility of a lower return.

“That may have been common sense for the Greatest Generation [the generation that grew up in the U.S. during the depression, and then went on to war].

“But for most of us today, that notion of voluntarily forgoing higher profits for the benefit of the wider community is, as Alexander put it, “counter-intuitive”.

The B-corp structure is part of a wider movement to make that trade-off more natural.

As Alexander said: “The question is: do you want to conduct your investments in the way you wouldn’t conduct your life?”

That is a very good question, and one we have gotten out of the habit of asking.

• Chrystia Freeland is a journalist and the author of two books: Plutocrats: The Rise of the New Global Super-rich and the Fall of Everyone Else, and Sale of the Century: The Inside Story of the Second Russian Revolution.

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