Reimagining Capitalism in a World on Fire by Rebecca Henderson

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Excerpted from Reimagining Capitalism in a World on Fire by Rebecca Henderson. Copyright © 2020. Available from PublicAffairs, an imprint of Hachette Book Group, Inc.

Business as usual is not a viable option. We have to find a different way to operate if our planet—and with it capitalism—is to survive. We need to move from a world in which environmental and social capital are essentially free—or at least someone else’s business—to a world in which the need to operate within environmental limits within a thriving society is taken for granted. The transition will be massively disruptive—but like all such transitions, it will also be a source of enormous opportunity.

Everyone must breathe to live, but the purpose of living is not breathing. In today’s world, reimagining capitalism requires embracing the idea that while firms must be profitable if they are to thrive, their purpose must be not only to make money but also to build prosperity and freedom in the context of a livable planet and a healthy society. […]

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Contrary to what many believe, embracing pro-social goals for the firm—a pro-social purpose—is eminently legal. Nowhere in the world are firms legally required to maximize investor returns. Under US law, for example, it is probably illegal to make a business decision that will certainly destroy long-term shareholder value, but except in a few tightly defined situations such as when they have committed to sell the firm, directors have very wide latitude. Under Delaware law, for example, where the majority of US companies are incorporated, directors have fiduciary duties of care, loyalty, and good faith to both the corporation and its shareholders. This means that directors can—and should—sometimes make decisions that do not maximize shareholder value in the short term to pursue long-term success. US directors facing hostile takeover bids do this routinely, turning down offers that value the firm at significantly more than its current stock price in the belief that the takeover will reduce the company’s long-term value. They are protected by the business judgment rule, which presumes that in making a business decision, the directors of a corporation act on an informed basis, in good faith, and in the honest belief that the action taken is in the best interests of the company.

But creating shared value is not sufficient to reimagine capitalism. It’s not enough to adopt a pro-social vision for the company. We also have to change the way organizations are run.

There are essentially two ways to run an organization. Low road firms assume that people are cogs in a machine and manage them as things, while high road firms treat people with dignity and respect, as autonomous and empowered cocreators in building a community dedicated to shared purpose. Running a high road firm might sound expensive, but it doesn’t have to be. There’s lots of evidence to suggest that in many circumstances high road firms are significantly more innovative and productive than their low road rivals. Making the switch from the low road to the high road is critical to reimagining capitalism for two reasons.

Read Social economy and the COVID-19 crisis: current and future roles on our COVID-19 Hub

The first is that reimagining capitalism is not going to be easy. Deciding to create shared value is often risky. Building a just and sustainable economy will be disruptive, and the dynamics of disruption are always difficult. Purpose-inspired high road firms are much better equipped to handle the transition […] and are likely to be catalytic in driving the kinds of change we need.

The second is that building high road organizations is in itself a crucial piece of building a just and sustainable society. Not all high road firms can afford to pay higher wages, but many can, and that in itself will be a critical contribution to reducing inequality. Moreover, good jobs—jobs with meaning, in which people are treated with respect and encouraged to grow and to contribute to the best of their ability—are themselves crucial to the development of a healthy society.

Creating shared value and building high road organizations will be hugely important steps toward reimagining capitalism, but they will not be enough. Purpose-driven firms seeking to create shared value can have enormously positive impacts on the world. […] When competitors see that there is money to be made from acting in new ways, they will often embrace the change themselves. Improving energy efficiency used to be the province of inspired individuals. Now that everyone can see it’s often hugely profitable, building green is fast becoming the industry-wide standard. But many firms that would like to do more find themselves constrained by the short-termism of the capital markets. Transforming the behaviour of investors is just as important as transforming the behavior of firms.

Find out more about Reimagining Capitalism in a World on Fire

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Rebecca Henderson

Author, Reimagining Capitalism in a World on Fire; John and Natty McArthur University Professor, Harvard Busniess School

Rebecca Henderson is one of 25 University Professors at Harvard, a research fellow at the National Bureau of Economic Research and a fellow of both the British Academy and of the American Academy of Arts and Sciences. She is an expert on innovation and organizational change, and her research explores the degree to which the private sector can play a major role in building a more sustainable economy, focusing particularly on the relationships between organizational purpose, innovation and productivity in high performance organizations. For several years she taught “Reimagining Capitalism: Business & the Big Problems”, a course that grew from 28 students to over 300 and that is the basis for her book “Reimagining Capitalism in a World on Fire” (Hachette/Public Affairs, April 2020). Rebecca sits on the boards of Idexx Laboratories and of CERES. Her publication include Leading Sustainable Change: An Organizational Perspective, and Accelerating Energy Innovation: Lessons from multiple sectors. She was named one of three “Outstanding Directors of 2019” by the Financial Times. Profile Photo © Natlie Chladek

3 Comments

Go to the profile of SERGIO DI TILLIO
SERGIO DI TILLIO 15 days ago

Agree "Purpose-inspired high road firms are much better equipped to handle the transition […] and are likely to be catalytic in driving the kinds of change we need."

Many thanks for the piece.

Regards

Sergio Di Tillio

AILM

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Go to the profile of Jacques Fournier
Jacques Fournier 13 days ago

Great article. The last sentence (Transforming the behaviour of investors is just as important as transforming the behavior of firms) is, in my opinion, the critical one. How to tackle this is probably more of a challenge than all the other issues put together...

Go to the profile of Chetna KS
Chetna KS 13 days ago

Re-imagining but somewhat hesitantly? Worrying that "it is probably illegal"? One way out could be to use the stakeholder concept. And put it in action, not merely pay lip service to it.

Community, society, employees, customers, all are stakeholders. What if they were all awarded stocks and given representation on the board? Make management, low road or high road, answerable to that board, to those shareholders.

And it's perfectly legal.