How capitalism can repair Its bruised image

Lady Lynn Forester de Rothschild and Adam S. Posen writing in The Wall Street Journal, 1 January 2013

Canary wharf [full width]

 

One of the alarming effects of the global financial crisis has been the widespread erosion of confidence in capitalism itself. Doubt has grown that capitalist societies offer everyone as much chance of success as risk of failure. Better government policies might help accelerate economic recovery, but only business itself can restore faith in capitalism.

The need is acute, because the general public’s sense of disenfranchisement goes well beyond the Occupy Wall Street movement or protesters on the streets of Athens and Madrid. A recent poll by the Public Religion Research Institute found that 70% of white working-class Americans, 78% of blacks and 69% of Hispanics believe that the U.S. economic system “unfairly favors the wealthy.” And according to the latest Pew Research Center Global Attitudes Project survey, support for capitalism since the 2007-08 financial crisis is down in nine of the 16 countries surveyed, and in none—not even in thriving China or Brazil—has support risen.

Businesses can help combat such views—and help themselves in the process—by taking specific steps to make capitalism more inclusive. Yes, “inclusiveness” has been invoked in pursuit of dubious social-engineering ends, but in this case it is appropriate to describe what businesses can do to better share the fruits of capitalism with those who have been excluded.

Companies should invest in workers and business relationships, just as they did a century ago in response to mounting inequality and public dissatisfaction.

Companies should invest in workers and business relationships, just as they did a century ago in response to mounting inequality and public dissatisfaction. Back then, Robert Bosch in Germany, William Hesketh Lever in Britain, and the Houghton family of Corning Glass in the United States, among many other leaders of large companies, took initiatives in this direction. At Corning Glass, for instance, the company in the 1920s took initiatives internally and led a broader business movement to improve worker safety, provide employee health insurance, and establish on-site cafeterias and clinics.

Today, there are three areas where companies would do well to turn their attention. First, big business can do more to support smaller enterprises in their supply and distribution chains.

To encourage small and medium-size businesses on the basis of their productivity rather than their experience or size would help establish the idea that everyone has a stake in the capitalist system. Larger businesses can source from these smaller enterprises and use the larger companies’ better financial access to provide credit to them. The bigger outfits could also actively counsel the smaller companies about best practices and standards.

IBM addressed this issue in March 2012 through the creation in of the web-based Supplier Connection, which allows small and medium enterprises to connect to the requirements of large companies.  AT&T, J.P. Morgan, UPS, Office Depot  and Pfizer have all made themselves accessible through the Supplier Connection. Large businesses that invest in this way create a more reliable business environment for themselves.

Second, big business can do a better job of matching workers with available jobs. This is particularly necessary for younger workers, for whom time out of work does lasting damage. Conversely, a well-targeted training program or apprenticeship can nurture employees for long-term work with their companies, as well as motivate continuing learning. Investing in such programs, either as individual companies or as a federation across an industry, sends a powerful signal to a wider range of workers about where productive career paths lie.

Rolls-Royce has been a leader in this area. At any time, the company has almost 900 apprentices working. And Rolls-Royce is thriving: In the first half of 2012, the company reported profits up 7% from a year ago, with revenues up 5%. Investing in apprenticeships and other training programs means a more productive and engaged workforce, and better aligns workers’ motivations with the success of their employers.

Third, public corporations should be reoriented to the longer-term, with the power of investors and boards strengthened over management insiders. Recent years’ fixation on “shareholder value” proved to be a misnomer—if anything, that phrase often became a cloak behind which top managers enriched themselves at the expense of shareholders, as well as suppliers and employees

Persuading institutional investors to actively exercise oversight would be useful—and would reduce fixations on quarterly results.  Unilever has been a corporate leader in this area, and the Ontario Teachers Pension Plan has been an exemplar investor. While better board oversight is unlikely to improve support for capitalism as directly as long-term investments in suppliers and workers will, corporate-governance reform is necessary to make such investments possible. Arguably, it was the poor governance practices of the past decade-plus that led companies to ignore the common long-term interests of investors and of the capitalist system.

 

Lady Lynn Forester de Rothschild is CEO of E.L. Rothschild and co-chaired the Task Force for Inclusive Capitalism, which convened between December 2011 and May 2012.

Adam Posen is President of The Peterson Institute for International Economics and was a member of the Task Force for Inclusive Capitalism.

 

Click here to read this article on The Wall Street Journal