Stephen B. Young, The Daily Record Newswire
Over the past 15 years, accelerating since the 2008 collapse of global credit markets, capitalism has been growing in a new direction, toward greater responsibility to stakeholders, including communities and the environment.
The movement has been a bit amorphous — starting small, on the margins, and growing by bits and pieces just as most evolutionary changes in nature and in free markets have done.
Loosely speaking, it is the corporate social responsibility movement.
The changes in capitalism can be seen best in new industry codes of conduct, the creation of social responsibility offices and programs in more and more companies, and the publication of non-financial reports covering a company’s interactions with stakeholders.
Another part of the movement has involved enhanced corporate governance and more sensitivity to preserving and enhancing brand equity as a crucial “goodwill” component of a company’s market value.
In a fundamental sense, the corporate social responsibility movement built on the success of the quality movement of the 1980s. The quality movement brought about more responsible business practices vis-à-vis customers, employees and suppliers. Importantly, the quality movement led to higher returns for companies along with more satisfaction for customers, more appreciation for the roles of companies down the supply chain, and more authority for line employees. It was a classic free market win/win where all parties gained from higher standards.
The evolution of the new CSR sensibility began in the 1990s under the banner of “business ethics.” The collapse of communism at the beginning of the decade generated new interest in the virtues of capitalism. Global attention accepted the successes of capitalism and a “Washington Consensus” based on Reaganism and Thacherism became the mantra for national economic development.
But concerns lingered that unfettered Social Darwinism would pervert free markets toward inequality and sub-optimal outcomes. These fears focused on sustainability of the environment, consumption that contributes to climate change, exploitation of Third World workers, outsourcing, and financial bubbles. Thus, civil society activists turned to principles of self-regulation within firms as means to balance profit and the common good.
Now the cure for the classic shortcomings of capitalism would be found, not in government regulation, but within capitalism itself.
My organization, the Caux Round Table took a leading role in this movement with its 1994 publication of stakeholder relationship principles that companies around the world could use for enhanced self-regulation.
The insight of the Caux Round Table was that good stakeholder relationships produce more certain future income for a company which increases its present capitalized valuation. This was a new take on Adam Smith’s belief in the beneficial working of an “invisible hand” within capitalism that coordinates self-interest with a larger common good.
Though his position has often been overlooked and ignored, Smith posited that capitalism is most successful in environments of responsibility, trust, and mutuality. The famous Protestant Work Ethic associated with the rise of capitalism was just such an ethic of responsibility. Societies where fraud, extortion, deceit, oppression, corruption prevail have, historically, not done well in accumulating capital or in creating wealth.
Then, following the lead of the Caux Round Table, the United Nations proposed a formula of 10 ways in which companies could demonstrate higher citizenship responsibilities by supporting international treaties calling for enhanced delivery of public goods through worker entitlements, environmental protection, human rights, and reduction of corruption.
At the same time a new organization was formed — the Global Reporting Initiative — to draft and publish templates for reporting on non-financial business outcomes.
With the Enron and WorldCom scandals of the early years of this new century, Social Darwinism as the main way for business to prosper again came under serious criticism.
The collapse of a financial bubble built on subprime mortgages drove many to turn a corner in thinking about which standards of responsibility should apply to business. A belated Occupy Wall Street protest gave voice to much of the fear and anger triggered by this massive, systemic business failure.
Business schools around the world then added required courses in CSR. Thunderbird and students at the Harvard Business School proposed that MBAs as professionals take an oath of personal responsibility as lawyers and doctors do.
About this time — all over the world — a values shift happened. People wanted action related to protection of the environment and climate change. Wal-Mart went “green” and was rewarded for it by customers and community opinion. Other companies sought to identify themselves with this set of values that were motivating their customers and widely respected in society at large. Branding consciousness went green.
Members of the Millennial Generation showed growing excitement about “social entrepreneurship” — starting businesses both to make profits but also to enhance the non-financial interests of stakeholders, communities, nature and culture.
Social entrepreneurship, as part of the CSR movement, provides new opportunities for providing quasi-public goods — or, in other words, private goods such as education, entertainment, health care services, or recreation that have positive consequences for society. Where social entrepreneurs go to work in the marketplace, society benefits but government does not have to “tax and spend” for society to enjoy such goods and services.
But out-of-date legal forms now restrict the range of goods and services that free markets can provide. Traditional for-profit corporations are designed to maximize profits. Where the provision of quasi-public goods and services or goods and services that reduce negative externalities cannot be done with earning returns of 15 percent or 20 percent per annum, such goods and services are sub-optimized.
The function of law in capitalism — property rights, contract rights, liability for harm in tort — is to encourage people to invest capital and effort in productive activity. Thus, today, the law can serve our evolving, more socially responsible capitalism by providing security for social entrepreneurs.
This can be done easily and quickly through a new form of private corporation, one that calls for its owners and managers to seek win/win outcomes between financial profit and social benefit. These modified for-profit private market corporations are called “public benefit corporations” or PBCs.
In one form or another, some 21 states, including Delaware, have provided these new investment vehicles to their entrepreneurs and investors.
