Time to redesign capitalist enterprises
Trouble is brewing between capitalist enterprises and national governments. An Indian cabinet minister has berated industry leaders for not serving the country’s interests, to the dismay of the industry association hosting the meeting. Four years ago, US President Trump called large US corporations anti-American for not creating more jobs in the US, and for avoiding taxes in the US by clever international arrangements.
It was not always this way: governments and industrialists used to work together in the national interests. “Japan Inc” was a partnership between stakeholders to build Japan’s industries after the Second World War. The Korean chaebol and the government together made Korea, which was behind India in development in the 1960s, into an industrial powerhouse. In India in those years, JRD Tata, the doyen of Indian industry, often said that whenever he had to take a difficult decision, he would think of what would be good for India, and after that what would be good for Tatas. And he admitted that his decisions in the interests of India always turned out to be good for Tatas too.
Ranking must be based on their impact on citizens and the environment, and not on shareholder returns alone
It is ironic that the minister focused his dismay on Tatas. The world has changed over the past thirty years, and Tatas have changed along with the world. Since the 1970s, Milton Friedman and the Chicago School of economics have promoted the idea that the business of businesses must be to serve only the interests of their investors, and that ‘externalities’ should not confuse them. At the same time, they also advocated restriction of the government’s role in the economy. These ideas influenced Margaret Thatcher and Ronald Reagan. In fact, Reagan declared that government is not the solution to citizens’ problems: government is the problem he said. With the collapse of the Soviet Union, and its opposing views about the roles of governments and private capital, the “Washington Consensus” about free markets and capitalism went into over-drive around the world.
In 2007, then Prime Minister Manmohan Singh, the architect of the 1991 economic reforms which liberated Indian industrialists from government controls, shocked them at their annual gathering by reminding them of their responsibilities to the citizens of India. He appealed to them to behave as trustees of societal wealth and not its owners and avoid vulgar displays of wealth in a poor country. They became worried that he sounded more like an old-time ‘socialist’ than a modern free market capitalist.
The clashes of interests between government and corporate leaders are built into the design of the capitalist enterprise. Citizens want their governments to improve their ease of living, whereas corporations demand that governments improve their ease of doing business.
The principal duty of a government—whether elected or not—is to improve the well-being of citizens within the country’s boundaries: whereas the primary purpose of a modern capitalist corporation is to fulfill the needs (and greed) of its investors wherever in the world they may live. It is the fiduciary responsibility of the boards and CEOs of capitalist corporations to serve their investors and they can be legally sued for acting otherwise. Governments want corporations to buy from local suppliers and increase employment within their countries to increase their citizens’ incomes. They want corporations to pay more taxes so that they can provide public services and social security to their citizens. Whereas corporations owe it to their investors to demand lower taxes and even to avoid paying them legally. The clashes of interests between government and corporate leaders are built into the design of the capitalist enterprise. Citizens want their governments to improve their ease of living, whereas corporations demand that governments improve their ease of doing business.
New ideas about human well-being and natural stability must become central to models of national as well as corporate governance.
The ravages of the natural environment and societal well-being, by an economic model in which these are externalities to be exploited by investors, have become too large to ignore. Inequalities in incomes and wealth amongst citizens have increased greatly in the last thirty years. The IPCC has declared Code Red this month: relentless economic growth has damaged Nature too much. Economic progress cannot carry on the way it is. New ideas about human well-being and natural stability must become central to models of national as well as corporate governance.
Concepts of CSR and ESG scorecards are only add-ons to the prevalent capitalist model, the core design of which remains the same, viz. boards and CEOs are legally responsible to the investors in the corporations and not to citizens of the countries in which their businesses operate. This core design principle has remained unchanged ever since the East India Company was founded in the seventeenth century. CSR is only a tiny bit of profits companies set aside to do a little good. Whereas the moral question is, how do businesses produce their profits? So long as CEOs and boards are judged by the stock-market system (including the business press) by the financial returns they produce for investors, ESG scorecards will remain a side-show.
Social enterprises must not become just another market for investors looking for further avenues for profits. The purpose of a genuine social enterprise must be very clear, and hard-wired by law. It is to serve the needs of society, and not investors.
The time has come to reinvent the design of the capitalist business corporation to align capitalists with the well-being of nations and their citizens. Concepts of ‘social enterprises’ are becoming attractive. However, most fall short of the fundamental redesign necessary. Social enterprises must not become just another market for investors looking for further avenues for profits. The purpose of a genuine social enterprise must be very clear, and hard-wired by law. It is to serve the needs of society, and not investors.
What is measured gets managed. Measurements of the performance of social enterprises must be aligned with their purpose, viz. the impact they have on the well-being of all citizens, especially the least privileged, as well as their impacts on the natural environment. Therefore, public rankings of enterprises must be based on objectively assessed all-round impacts, rather than rankings on which enterprises produce the best shareholder returns. (As an aside, it would be interesting to compare the performances of Indian public and private sector banks with a broader scorecard).
A government’s performance should also be gauged by the well-being of citizens and environmental sustainability, and not by economic growth and GDP. With citizen well-being at the centers of the purposes for existence of both, business corporations and governments, they can become partners rather than adversaries.
(The writer is a former member of the Planning Commission and author of A Billion Fireflies: Critical Conversations to Shape a New Post-pandemic World)