Towards responsible capitalism

Confronted to the speculation we observe in financial markets, I began a series of columns on the ravages of financial capitalism. In the first, I demonstrated the harms of speculation, especially the relationship between it and the economic and financial crisis raging on the planet since summer 2007. In the second, I talked about the birth and evolution of capitalism and oft he stock market, and compared two forms of investment in a high tech company. In the third column, I presented the financing needs of companies involved in technology. In this fourth and last column, I will introduce a new mode of economic organization to focus on, responsible capitalism.

To be beneficial to all mankind, development, technological or otherwise, must be based on a new paradigm called responsible capitalism, a concept we have already discussed in 2007 in Consommation et luxe. We define responsible capitalism as a socio-economic system based on free circulation of trade, business, industry and finance, in a perspective of respect for the interests of all stakeholders: the ordinary citizen, the State, financial institutions, businesses themselves their customers, employees, suppliers and investors.

Derived from the very world that gave birth to it, that of business, responsible capitalism is part of an evolution of capitalism, from Venice’s merchant capitalism to industrial Revolution’s industrial capitalism in the XIXth century, the to modern day financial capitalism (For these three forms of capitalism, see K. Galbraith, The Economics of Innocent Fraud, Boston, Houghton Mifflin Company, 2004, p. 8.).

Aware of their responsibilities in society, more and more business men and women can only subscribe to a more humane vision of commercial, industrial and financial practices. To those who might think me naive, keep in mind that I have worked in the business world for over 25 years and still am very much involved in it; I can assure you that it is not populated solely by gangsters, swindlers, tyrants and speculators. As evidence of this, I present organizations such as BSR (Business for Social Responsibility), «A leader in corporate responsibility since 1992», whose mission is to «work with business to create a just and sustainable world».

Amongst the most fervent advocates of responsible capitalism, there are also influential politicians such as Nicolas Sarkozy and Barack Obama. Thus, during the campaign that led him to the presidency of France in 2007, Nicolas Sarkozy proposed a «family type» capitalism, based on more human values, which is within the context of social responsibility we have described: «I believe in the creative force of capitalism, but I am convinced that capitalism cannot survive without ethics, without respect for a number of spiritual values, moral values, without humanism, without culture. […] Capitalism must serve a certain idea of man. I believe in the ethics of capitalism. I do not accept, nor do thousands of entrepreneurs, for paid work and entrepreneurship to be violated by the excessive remuneration and privileges benefiting a small minority of CEOs. I do not accept that, around the world, for reasons of pure profit, some people toy with employees and plants as one moves pieces on a board game. […] I will reinforce «family type» capitalism. »

One must admit, even without outrageously speculative practices, the nature of the stock market is forcing companies to engage in a race for profitability, which often forces them to make decisions contrary to harmonious long term development and some contrary to the interests of their employees and customers. From its initial public offering of shares (IPO), a company loses some of its freedom of action and is from then on subject to the profit demands of mutual fund managers, large investors and speculators. This denatures the company, which explains why Guy Laliberté has always refused to list his company on the stock exchange. Cirque du Soleil would probably not be what it is today if the company was publicly traded, because Mr. Laliberté would not have had the flexibility to choose its partners, artists, shows, and more. I also believe that we must see in Toyota’s recent setbacks the effect of a race to profitability, which had a negative impact on the quality of its products.

Some CEOs of large companies refuse to follow the whims of investors. Thus, here's what Nick Hayek, CEO of Swatch, said on March 21, 2009 further to a decline in earnings of the company he heads: «For a company listed on the stock market, announcing a decline in profit, a10% reduction in the workforce can bring the share value back up. Such is not the case in our company. There will be no layoffs or reduced investment at Swatch. We accept having diminished earnings and not to be the darlings of the stock market. » Refusal to play the stock market game to appeal to investors is a good example of responsible capitalism.

On December 3, 2008, the United States, columnist Ray Williams published an article in which he argued that the current business paradigm was no longer viable, encouraging entrepreneurs to adopt responsible capitalism. Capitalist societies have initiated evolutionary transformation of who we are, what we value and how we behave. This requires social and environmental responsibility, to which CEOs must actively participate. This transformation requires a model that focuses on more than the sole profitability (bottom line) objective. It considers a creation of wealth that adds personal, social and ecological gains to the bottom line. (R. Williams, «CEOs need to adopt responsible capitalism», Financial Post, 3 décembre 2008)

US President Barack Obama’s position fits into this perspective. For instance, in a speech pronounced on February 24, 2009, he defended a vision of capitalism in which prosperity benefits to all. Although he did not himself named this new capitalism, others have done for him, Responsible Capitalism. Williams goes on saying that President Barack Obama’s speech was peppered with phrases and ideas outlining his vision of his government's responsibility to not only promote a strong economy, but also to ensure that ordinary people were taking advantage of this economy . He [Obama] has not yet fully articulated his economic philosophy, and has not given it a name either. But we can see in this speech outlines a new approach that could be called "responsible capitalism" in contrast with the "crony capitalism" of the Bush era. […] More accurately, he redefines the meaning of a "healthy business climate" — a widely shared prosperity for workers, an economy that creates good jobs, allows access to the middle class to the poorest, provides first rate schools, decent health care, and housing that families can afford, while protecting the environment.

President Obama also criticizes abuses, including those of the industry and the financial world; in his opinion, government must exert tighter control in these areas.

In short, the need for a reform of capitalism no longer need to be demonstrated; countless leading actors agree on the need for international collaboration to define actions to take, world economies being so interrelated that unilateral action by one country would have no effect. To put in place measures to curb speculation, on raw materials for instance, must necessarily involve all major states.

Link between stock market speculation and corporate bankruptcies

Confronted to the speculation we observe in financial markets, I began a series of columns on the ravages of financial capitalism. In the first, I demonstrated the harms of speculation, especially the relationship between it and the economic and financial crisis raging on the planet since summer 2007. In the second, I talked about the birth and evolution of capitalism and oft he stock market, and compared two forms of investment in a high tech company. In this third column, I present the financing needs of companies involved in technology. Of course, these findings also prove accurate in other sectors of economic activity.

I have already outlined the fact that today technological development requires massive injections of capital, available only to States and major financial players, such as banks, mutual funds and a few wealthy investors, amongst whom we find both entrepreneurs and speculators. Small technology companies are struggling to find capital for their development; they rely on state subsidies, bank loans, venture capital and a few private investors. When they reach a certain size, they seek to get listed on the stock market through an IPO; from then on, they are subjected to the dictates of investors demanding an increased profitability year after year. Failure to deliver will cause their shares to be dumped, their capitalization diminished and their development compromised.

Several flourishing companies have disappeared over the years. Even large companies, sometimes listed on the stock market for decades, are vulnerable; some have collapsed, their shares sometimes dropping from hundreds of dollars to a few cents. Consider Norton Telecom (Nortel) a jewel high-tech company in Canada. Market speculation is perhaps not the only culprit in Nortel’s bankruptcy, but it is a major factor. Without the excessive demands of some large investors with respect to a short-term excessive profitability, business decisions made by management would probably have been different; they would have been better suited to a more harmonious long term development of the company. Companies, technological or otherwise, should not have to finance through the stock markets and see their business decisions dictated by a handful of speculators who care only about their own short term profit, often at the expense of the company itself.

What other avenues might there be? I have already said that technological development can take place in a capitalist type economic organization, while remaining beneficial to society as a whole. However, to remain the privileged method of economic organization, capitalism must transform, be associated with State imposed social measures, and above all eliminate, or at the very least restrict, speculation. This new paradigm is already emerging in the form of responsible capitalism and new values; in my next column, I will present its broad outlines.