The Fuzzy Math of Traditional "Capitalism"

So, it's been a while since I've been on but I've been thinking about this issue for a while and, as is often the case, my incessant watching of CNBC triggered a post in me today!

During a segment this morning on the prospects of the economy the topic of whether or not we should raise the minimum wage began to be debated. Now I know this is a tricky subject... How high should it be? If we go to $10 why not $15? I know I'm not smart enough to peg a number or ideal level for the minimum wage. I'm pretty certain there isn't such a thing but that's a debate for another time.  What does strike me however is the certainty with which the traditional capitalists, like the reporters on CNBC, analyze the effect of such moves on the economy like economics was a science like physics or something! 

The prevailing discussion was that any increase in the minimum wage, which would be aimed at increasing the buying power of the middle and lower classes in society and thereby continuing to bolster the economy, must necessarily be met with the requisite loss of jobs. This is stated so matter-of-factly as to be akin to the physical properties of a natural system. 

To paraphrase the conversation:

"Well what would you rather have, more people making less money or fewer people with a higher minimum wage"

"And with the 29ers and 49ers, do we really want to add an increase in the minimum wage onto that?" (By the way, 29ers and 49ers refers to employers keeping employee hours under 29 / week or hiring less than 50 people respectively in order to avoid being subject to Obamacare).

What amazes me is the answers or retorts to these are so obvious as to be pedestrian: There is no physical law that states that if you pay your employees a livable wage as a large business that you then MUST hire less of these employees. This my friends is not a law, it is a choice! A choice based on a short term mentality that places the shareholder at the intellectual and operational center of the organization. 

There needs to be a voice that makes people understand that this isn't the only choice that could be made. Instead, an executive could choose to pay a living wage, accept Obamacare as the law of the land and simply do it because it's the right thing to do, and then use these both to their competitive advantage. It's simply amazing to me that no one is saying: "Look, I'm going to pay people what they're worth and what they need to support their families. I'm going to provide everyone health insurance, period! And then I'm going to let my customers know that we do the things we do because we care about our employees, their health, their families and our communities just as much as we care about making a profit!" What do you suppose would accrue to the executive who took this stand?  Do you think she'd have really happy and highly engaged employees? (Yes I'm assuming she'll do the other things necessary, like training and monitoring of culture, enlightened hiring and firing etc...) Do you think those employees, who now feel like they matter more than just a line item on the balance sheet, are going to be better employees and offer discretionary effort? Do you think that effort will endear that company to its' customers and communities where it operates? And if all of that happens do you think those customers will show loyalty in the form of increased patronage and less sensitivity to price changes..which is the only thing (CUSTOMERS) that drives revenue and shareholder value?

I don't need to tell you the answer do I?

An Investment Bank for the Transformation of Capitalism

An Investment Bank for the Transformation of Capitalism

Marion Porter (or MP for short).

100 years ago today my grandfather Marion Porter Gunthrop was born in Great Falls, South Carolina. He married my grandmother Cleo Elizabeth Lewis and they went on to create, in my minds eye, the perfect family.

For a very long time we lived with MP and Cleo. Me, my mom and dad and my three sisters. In what I know now was a really small house in Queens, NY.  It didn’t seem small at the time. Nana and Granddaddy had a bedroom in the basement and we were all the way up stairs on the 2^nd floor. It felt palatial and cozy at the same time. In fact one of the few “traumas” I remember growing up was when my mom and dad decided to move us kids all out to Long Island.  I didn’t want to leave and remember how it felt to this day. That experience of living with them has, as much as anything else, made me the person I am today. I got to know all of my other relatives, including my fathers family in some sense, because MP and Cleo made it so that everyone always felt at home in our house and everyone was always welcomed. Fellie and Joyce, (My dad’s parents) were as close to MP and Cleo in my mind as was any others in each of their own families. In fact to me as a kid the whole group of them were indistinguishable as to who was related to whom.  It seemed like they were all simply brothers and sisters, aunts and uncles, nieces and nephews all just a big part of the same brood!

I’ve always felt that he was ahead of his time. But at the same time he lived in a way that wouldn’t let the best of the past get away. He lived in the city but was an avid outdoorsman. He traveled to his favorite place, upstate NY whenever he could, always stopping at the same roadside stream to bring us some “good water” back from the mountains. And if I was lucky enough to be in the trip, stopping at the same roadside stand for hamburgers from freshly butchered cows! Any wonder why I’m still a meat eater? At the same time he was a big city construction worker and spent his days creating the infrastructure of NY. He was a product of the rural south and certainly endured many indignities along the way, but I never recall him speaking out in anger or harboring resentment for anyone because of what they looked like or where they came from. He was big and quiet, funny and thoughtful. He worked as a “Sand Hog” (Laborer’s Local Union 147 in NYC) worked on Water Tunnel #3, the largest construction project in the history of New York State (it’s not scheduled to be completed until 2020). He was a blast foreman. He worked on the construction of the NY State Thruway. He ran a Jackhammer. He worked on the Pentagon the George Washington Bridge and if legend is to be believed (I may have made this up) was the first black foreman at the Brooklyn Navy Yard. He sometimes moved between jobs in Boston, Baltimore and NY by hoping on freight trains…and yes that made him a “hobo” but a more dignified hobo I suspect there never was.

When I graduated from high school we had a party at our house on Long Island. It was just after the graduation ceremony and me and all of my friends were looking forward to some time relaxing at the beach for the next few weeks … starting promptly that next day, Monday morning. My dad however had different plans. I was to begin work bright and early the next day as a messenger for his firm, Solomon Brothers. No days off, right to work. All summer long until it was time for me to report to football camp at Catholic University that August. As you might imagine I was furious. All I wanted was a few days to relax with my friends. School had just ended and I wanted to enjoy the summer for a bit. I pouted and sulked around my own graduation party for about an hour until Granddaddy pulled me aside. “You need to stop acting like this,” he told me. “I’ve been breaking my back in these tunnels all of my life. Now you’ve got a job and an opportunity to make something of your life. Take it and be thankful because you don’t want to end up like me.”  I’ve spent the last 34 years trying to become half the man that he was…I should be so lucky as to end up "like him."

Happy Birthday Granddaddy!

Choose Your Capitalism Indeed!!

(Or: Just in case you haven't voted yet!!)

New York Times economic reporter Eduardo Porter penned an interesting article last week: “At the Polls, Choose Your Capitalism”. He tells of the sense of “economic vulnerability” that has been hanging over the US middle class for more than a decade.

The common wisdom in the country, in many academic circles and in both political parties is that this is something that is beyond our control. The new normal; technological innovation and globalization have descended upon our middle class destroying once well-paying jobs through automation and competition with low-wage Chinese workers. As Porter states “these relentless dynamics have sent unheard-of profits to the prosperous few while threatening the jobs and eroding the wages of the rest”. But is that all there is to the story?  As Porter says we mistrust government more than ever (with good reason) and yet it’s pretty apparent we also have little esteem for corporate America right now. Where are we to turn? No matter how we feel about corporations we all still strive to become financially successful in some regard. And clearly there’s a role for government in our lives. If you don’t believe that just take a ride out to Staten Island this week and ask a conservative if he’d like a handout right about now?

Unlike the caricature that the politicians and news media would like to paint, I think I’m a pretty normal American when it comes to the issue of capitalism: Although I’m a committed liberal (or progressive I should say), mostly on social issues, I’m also a dyed-in-the-wool capitalist.  No other system of economic organization has provided as much benefit to humanity. Yet, like all complex systems, I believe we must continually improve even that which has benefited us greatly. Like it or not we are experiencing a crisis of confidence in capitalism today.  People simply don’t believe that the capitalists in America or elsewhere care about the welfare of the rest of us.  There was a time when that was accepted since, hey, its just business. No longer. We are evolving as a society and many of us have decided that the old shareholder-centric model of capitalism doesn’t serve us any longer. We want the companies we work for, buy from, invest in and allow to operate in our communities to take heed of how their actions affect us all and recognize their duty to contribute to our overall well-being; to enhance our lives not only through market innovations but also through societal innovations and economic growth for all of us.

Now some would argue that this isn’t a crisis of confidence in capitalism but a failure of the welfare state to create economic growth. But seriously do you really believe, that Mitt Romney’s economic policies are all that different from President Obama’s? They both tinker at the margins. One leaning towards the rights of corporations and the other leaning towards the rights of individual citizens but on the whole neither has looked at transformative notions of capitalism.  Find a libertarian friend and ask them what they think. I might not agree with their hands-off solutions to generating economic growth but I do think they have a sober view of the differences in the two approaches…not much they’ll tell you.

But there is an alternative out there and it’s not necessarily the alternative being pushed by either candidate or the press (mainstream or otherwise). Those of you who follow me (and my partner in crime Mr. Frazier…libertarian as he may be) know we’ve been talking about this for years: We call it conscious capitalism, which is embodied in companies that practice a business model that we call the multi-stakeholder system. Others have given it other names, stakeholder capitalism, good business but the moniker is not important. What is important is that the practitioners of this new form of capitalism understand that what we have wrought cannot stand. Yes we are rightly skeptical of governments ability to provide for equal financial opportunity but at the same time we need to disavow ourselves of this myth that a Darwinian market, winner take all and losers deserve what they get is the only other alternative. Our friend Ed Freeman, Professor of Business Administration at The University of Virginia and Academic Director of the Business Roundtable Institute for Corporate Ethics and the godfather of stakeholder management who began writing on the issue in 1978. He states clearly and precisely that “The alternative to capitalism as we know it is not socialism, but a better form of Capitalism – one that recognizes the existence of the commons and acts to prevent the single minded individualism capable of destroying it.” I think of this as a capitalism that softens the rough edges and takes into account the total complexity of human behavior and human needs in the consideration of markets and value creation.

NYT writer Porter points out that our “cutthroat” form of capitalism has been “ineffective at transforming affluence into broad-based well being.” As if anyone needed that to be pointed out? The problem is that most Americans not only think this is ok but they also remain unaware that capitalism can be practiced in another way. They think any change in capitalism; any evolution is a move towards “socialism” or “income redistribution”. That’s the economic war that the two candidates are currently waging but opposed to the myths on either side of this debate we have the opportunity to create a form of capitalism that, as Rick says, truly lifts all boats and not just the yachts. Not in the trickle down sense. That was and is a preposterous idea that doesn’t work. And not based on a government that taxes and spends in hopes of creating millions of middle class jobs. That approach is less preposterous but only slightly more effective in light of the financial resources we actually have to deploy. Wealth doesn’t trickle down and generally isn’t created in large enough measure by government spending. It’s created by a growing, well-employed and highly compensated middle-class. But there is a movement about to attack cutthroat capitalism with a device of it’s own creation: New, unorthodox and ironic “market based solutions”.  The movement started in 2006 with the publication of  the book “Firms of Endearment: How World Class Companies Profit from Passion and Purpose” in which the authors (Raj Sisodia, Jag Sheth and the late David Wolfe) offer stark evidence that operating from a multi-stakeholder model produces exponentially superior financial returns while simultaneously responding to the civic and financial needs of all the company’s’ stakeholders.  More recently Sir Richard Branson pens “Screw Business as Usual” in which he describes how the “boundaries between work and purpose” are converging, in fact must converge if companies are to continue to satisfy and depend on all the stakeholders they need to be successful. Then you have my friend Dr. Laurie Bassi an economist and the CEO of McBassi & Company, a consulting company that specializes in human capital analytics. Her 2010 book “Good Company” describes the “economic, social and political forces across the globe that are changing the contours of the playing field on which companies must compete”. And on the horizon the coming title “Conscious Capitalism” by Whole Foods CEO John Mackey and Firms of Endearment author Mr. Sisodia. All of these voices point to a need for a more critical discussion about the economic structure that underpins our social democratic system. A need to look at how short-term emphasis on earnings at all costs has impacted our society, and how we might transform our value creation processes into something that does indeed create the greatest opportunity for the largest contingent of our society; a way to stop the consistent bubble and bust cycles that we seem to have generated for at least the last generation. And yet the disconnected talking heads on CNBC prattle on about quarterly earnings and the demise of some company because they “missed earnings by a penny a share!” Not only do such pronouncements highlight their ignorance about what really matters but they are also a corrosive component of the infrastructure and dysfunctional dialogue that props up this system that no longer serves society to the greatest extent.

Stakeholder Capitalism:

According to the website of the Conscious Capitalism Institute, Conscious Capitalism “is a philosophy based on the belief that a more complex form of capitalism is emerging that holds the potential for enhancing corporate performance while simultaneously continuing to advance the quality of life for billions of people.” But what does that really look like? Well for our part when we talk about conscious, humane or stakeholder capitalism we’re talking about a type of capitalism that affirmatively provides for the opportunity of mobility for the middle-class. A system where once again what’s good for the company is also good for the employees and for the country as a whole. Shareholder centric companies maintain a single allegiance. Their pursuit of profit un-moored from any larger purpose. So layoffs of the employees who can least afford it, during what everyone realizes is a temporary slow-down, are not only tolerated but also encouraged by Wall Street investors and business school professors alike.  The shareholder centric model is the one that leads to the completely discredited notion that tax cuts for “business owners” will lead to job creation! Think of the recent spate of CEOs who, in the midst of record profits, have told their employees that they may face layoffs if President Obama is re-elected and their taxes are raised! If tax cuts were synonymous with job creation you’d also be hearing the other side of that story right? That if their taxes get cut under a President Romney all the employees would be getting raises and the floodgates of hiring would be opened. Of course you don’t hear this because in the shareholder-centric world the only thing that matters is “maximizing shareholder value”. Which has come to mean short-term profit and not long-term organizational health. You also don’t hear this because like all business owners they increase wages and hiring when demand increases…and tax cuts for “business owners” doesn’t raise demand…only tax cuts for consumers can do that. (Look here! http://www.youtube.com/watch?v=3Wc9bWc-WRs)

Stakeholder capitalism also looks to support suppliers. Not as servants but as partners. Actively seeking to help them generate adequate returns on their capital, helping them develop innovations and assuring that all the employees throughout their supply chain (even those that work for others) are treated fairly and humanely. These types of capitalists have an authentic respect for their customers, providing for their emotional as well as their technical needs because they view customers as whole humans not simply as participants in a transaction meant to extract value for shareholders. These types of capitalists recognize and respect the awesome power they have to impact the natural resources they depend upon as raw inputs…and that we all depend upon for life and joy. Thus they become authentic and dedicated stewards of those resources.

 

Although I do believe we are choosing how close we want to get to this type of capitalism at the polls today, ultimately government isn’t the answer. Mr. Romney will make it much harder to get there and the President will do less to keep us away from this end but ultimately it’s up to us, investors, employees and perhaps most important customers to drive this change.

In the end this is a choice between a point of view: One that places shareholders at the center and one that focuses on stakeholders as a way to create real long-term wealth. Those that chose shareholder centricity will continue to separate profit and purpose and we believe, make it more difficult for those businesses to create and maintain authentic relationships: Employees will become disillusioned and in-effective; suppliers will be uncooperative and unresponsive; communities and regulators will become more aggressive and assertive. All of which adds friction to the business, making it more difficult to engage customers. For our part we’re striving to help create these types of capitalists by bringing investment to them and helping entrepreneurs who want to operate in this manner thrive. I truly believe those who practice this type of capitalism in a democracy will find customers choosing to do business with them, communities welcoming them in and investors lowering their cost of capital…and ironically…creating real value for shareholders and for society.

I'm the 47%

I got student loans when I was in college (still paying!), was in a government sponsored minority business set aside program, had an SBA guaranteed business loan...I bought a house with my own money, I pay almost $700 a month for my own health care, I've started 6 businesses, at last count creating more than 200 jobs and generating revenues in excess of $100MM, was named to the Inc. 500 list as one of the fastest growing companies in America...oh and I pay income taxes...do I sound like a victim? Like I'm dependent? Like I believe government has a responsibility to care for me? Like I need to be convinced to take responsibility and care for my life??... I'm the 47%

Facebook and the Fallacy of Shareholder Primacy

I was just watching CNBC and a protracted discussion about whether Facebook should look to replace Mark Zuckerberg as CEO.  Sometimes it is amazing to me how much the stock market talking heads think they know about business…and how little they actually know. 

The entire conversation about Mr. Zuckerberg’s tenure focused on the fact that the stock has dropped by about 50% since the IPO.  No discussion was made about the fact that the company has almost a billion users; that the employees love the place with a fanaticism that borders on irrational. All of the criticism of Mr. Zuckerberg’s leadership centered around a temporary loss of un-realized gains for shareholders.  Of course this can only be the prime metric for CEO performance if you believe that shareholders are the primary stakeholders for his company. Which, of course, any businessperson worth their salt will tell you is not the case.  I’ve been railing at this ridiculous short-term mindset that is fostered on Wall Street for the last 6 years.  Noting how on so many occasions, including the one that resulted in our recent financial crisis, this short-term mentality can lead to executives making decisions that destroy long-term value. These yahoos on Wall Street have concluded from a single quarter of stock performance that this guy isn’t up to the challenge. 

I don’t know if he is or not, but I do know that Wall Street continues to look at all the wrong metrics.

Philanthropy or Humanity....

A friend sent me an article the other day about how us CEOs were recently lamenting the fact that investors don't seem to be interested in corporate efforts to do social good and philanthropy. (Click on the title above to see the article) The context for these comments was a conference by an organization called: The Committee Encouraging Corporate Philanthropy (CECP). For those of you who have read my writings before you might initially surmise that I'd opine on why investors are missing the point regarding how doing social good is good for business. But in fact, based on the way these ideas are being presented by CECP and many of these executives I'd agree with the sentiment they're experiencing from investors. Investors are in the business of making money. Most of them are also interested in living in a just and functioning society. And I'll bet that some of them are even proponents of Philanthropy. But philanthropy and business that creates social good are two entirely different things. One is about doing good for the sake of doing good. The other is about creating a business that respects its place in society as a social entity and operates in a fashion such that its entire ecosystem is sustained. That ecosystem must include investors and you must show those investors that you will provide them returns consistent with the money they have at risk in addition to honoring your place in and effect on society.

Oddly enough some of the executives at the meeting were indeed focused how efforts to do social good must become a profitable part of their core businesses. But as one of my partners often says; Language matters! In this case the language of an outdated paradigm, one that suggests you can either do well or do good, persists in the lexicon of even those executives who understand that we have shifted to an environment where you must do good in order to do well. If executives continue to use outdated concepts and phrases to describe what's happening in the world, the idea that companies can be instruments of good to society while also creating outsized returns will not gain traction because it will be mired in the old paradigms of environmentalism and "giving back". If you operate your business based on the notion that you are an instrument of service to society, even as you make money, you're not likely to have "taken" something in the first place. No reason to "give back" if you've been adding multiple levels of value (not just financial) all along.

It's amazing to me that after reading Porter's article on Creating Shared Value, we still have executives talking about philanthropy in terms of strategic and competitive advantage. Yes you can give money away in ways that might support your strategy, but those opportunities are minuscule compared to the good you can do and returns you can get by operating your core business in a way that honors the humanity of your stakeholders. 5 or 6 years ago in a "debate" put forth by Reason Magazine (I think that's where it was) the topic was posed as a contrast between Ed Freeman (Academic Director, Business Roundtable Institute for Corporate Ethics at The University of Virgina) who advocates managing for stakeholders and Milton Friedman who famously quoted about making a profit being the only social responsibility of business in the 70's. Ed addressed this then and the same is true now: CSR becomes an outdated and useless term (and therefore much less prone to attack by shareholders and other opposition) if we frame the idea as managing for stakeholders (long-term) vs. managing for shareholders, which has been co-opted to justify a short-term, "quarterly earnings above all" mindset. Yes, when the article says: "Corporate philanthropy is no longer just writing a check for charity - more executives are making efforts to do social good part a profitable part of their core business." its apparent that some CEOs understand what I'm saying here but they have such an outdated mindset that its impossible for them to get even their enlightened message across. If "Social good" is a profitable part of their core business can it or should it still be called philanthropy? Or should we just do away with the whole CSR infrastructure and operate our businesses so that we constantly honor the humanity of employees, customers, suppliers, partners and our local communities where we do business? This is not to say we should eliminate philanthropy. We will always care about things that bring us joy, beauty, and areas where we have no business interest but feel compelled to help. That's fine and its the right thing to do. That work though should be separated from operating your business as a tool for the betterment of society. That's not philanthropy. It's humanity and simply the way business ought to be approached. The Sustainability index idea (which was posed by some executives at the conference) is an idea that has come and gone if it is focused on the traditional definition of sustainability. We've not been able to prove that investment returns or corporate performance can be enhanced through the environmentally based definition of sustainable. If however they mean investing in businesses that sustain themselves, their employees and their employees families, their communities, their suppliers, their partners, their governments and their shareholders, well then that is an index that can and will be built and will indeed generate alpha. Investors are educated only when you can show them that your approach is good for you AND good for them. Some of the CEOs there wondered about the metrics for creating such an index. I contend that once you understand the right question to ask, defining the metrics is not difficult at all. Reporting standards for corporate philanthropy are useless in that they don't give investors any insight into risk or potential returns. What would give investors insight is if they new what types of cultural organization they were investing in; this would tell them about the potential for financial shenanigans, how engaged employees were and thus the likelihood that they would give discretionary effort, insight into the strength of the customer asset for these companies (emotionally engaged customers are loyal and more profitable), how they deal with human rights issues in their supply chain and how they work to sustain their local communities. Peter Drucker addressed this long ago when he separated social responsibilities into "social impacts," or what business does to society and social problems, or what business can do for society. My basic claim is that those impacts need to be eliminated to the greatest extent possible and the problems need to be addressed humanely, and companies that operate from a stakeholder mindset are more likely to find ways to execute in this manner. I recently read an example in an Insead article of how this works that describes my feelings pretty well: "Fast food companies certainly appear to have a responsibility to act to eliminate the negative social impacts evident in their contributions to obesity in children. In contrast, the pharmaceutical companies dealing with requests to give away life-saving drugs to all that need them are responding to what Drucker would term social problems rather than social impacts. They are not responsible for the limited healthcare budgets of developing countries that preclude purchase of drugs at developed country prices, but they might choose to act on the issue of access to essential medicines nonetheless."

The main take away: Identify and address, if not eliminate undesirable social impacts of business activities and if they cannot be turned into profitable business opportunities, seek a regulatory solution (industry self-regulation or government regulation) that creates an optimal trade-off for all parties. Social problems can also be sources of opportunities as described in "The Fortune at the Bottom of the Pyramid" by the late C.K. Prahalad. But not all of them. And that's where philanthropy comes in.

If CEOs want to contribute to this discussion they should simply be more transparent about their ability to, and history of, making these types of decisions in this manner.