Can we save American capitalism?

Sunday’s Washington Post contained this great article by Steven Pearlstein “Can we save American capitalism?”

Pearlstein reviewed a range of recent books on economics and, through his conclusions; I believe he also offered a litmus test of the role of the corporate responsibility field, coming at it from the economist’s perspective.

“What’s been lost from American capitalism” Pearlstein posits, “is any sense of a larger purpose, of how it fits into and serves society…”

He draws a common theme from some of the books reviewed; highlighting the lack of what is variously called ‘social capital’, ‘civic capital’ and ‘civil foundation’.  Sounds like the terminology of corporate social responsibility and corporate citizenship to me.

While I bristled at some of the commentary, I did find some especially provocative discussion that I’ll highlight here.

A dozen Labor Days — and three presidential elections — ago, the world was in the thrall of American-style capitalism. Not only had it vanquished communism, but it was widening its lead over Japan Inc. and European-style socialism.

Today, that economic hegemony seems a distant memory. We have watched the bursting of two giant financial bubbles, wiping out the paper wealth many of us thought we had in our homes and retirement accounts. We have suffered through two long recessions and a lost decade of income growth for the average family. We continue to rack up large trade and budget deficits. Virtually all of the country’s economic growth and productivity gains have been captured by the top 10 percent of households, while moving up the economic ladder has become more difficult. And other countries are beginning to turn to China, Germany, Sweden and even Israel for lessons in how to organize their capitalist economies.

It’s no wonder, then, that large numbers of Americans have begun to question the superiority of our brand of free-market capitalism. This disillusionment is reflected not only in public opinion polls but on the shelves of American bookstores, where the subject has attracted many of the best economists in the country. Retooling American capitalism has become something of an national — and even international — obsession.

“Capitalism has always changed in order to survive and thrive. It needs to change again,” writes Martin Wolf, the uncompromisingly pro-market columnist for the Financial Times, in an essay in “The Occupy Handbook.”

A more practical reform idea comes from Roger Martin, dean of the Rotman School of Management at the University of Toronto. Once a partner at the Boston Consulting Group, Martin saw corporate America from the inside and has a pretty good fix on why it has lost its way: its single-minded focus on maximizing shareholder value.

In “Fixing the Game,” Martin argues that there are two markets in which big companies operate. There is the real market, where the company wins or loses by selling products and services. And there is the “expectations market” — the stock market — where people wager on the company’s prospects.

In this market, what matters is not the company’s actual profits but whether those profits meet expectations.

As Martin sees it, the problem comes when the people who run big businesses are rewarded for winning not in the real market but in the expectations market. And what that means in practice is constantly raising expectations about future profits. Eventually, these expectations grow so inflated that they are impossible to realize without manipulating the books (think Enron) or taking undue risk (think Lehman Brothers or AIG). In either case, it requires diverting time and attention from the real market, where actual long-term value and wealth are created.

As Martin notes, it was only in the mid-1970s that winning in the expectations market — a.k.a. “maximizing shareholder value” — began to be considered the sole purpose of a corporation. That prompted companies to start offering extravagant grants of stock and stock options to top executives. Unfortunately for investors, Martin writes, the returns of the 500 largest U.S. corporations have been lower, not higher, since shareholder value became the holy grail. As for that executive pay, he calculates that it has grown eight times faster than the reported profits of the companies those executives run.

“The expectations game is beginning to destroy the real game,” Martin concludes. The way to stop it, he says, is for American business to adopt a broader, healthier definition of its purpose, and reflect that in the way executives and money managers are compensated and the way corporations are governed.

He concludes that it is the trust this engenders that gives us the comfort to ‘accept the inevitable dislocations of the economy’s creative destruction’.

Without that trust, Pearlstein explains, the business model is not sustainable.

Pearlstein ends by asking rhetorically where the change is going to come from that will provide the blueprint for new more socially, and therefore, economically sustainable form of capitalism. He discounts economists and journalists, politicians too.  Instead he suggests it will come from executives, entrepreneurs, workers, consumers, money managers and bankers “who find the courage to demand something better of themselves and others.”

I believe the insistent growth in the Social Enterprise, B-Corp, Benefit Corporation, L3C, and Corporate Social Responsibility movements are an outgrowth of this inevitable evolution to the American form of capitalism – call it Capitalism with a Conscience.

I thought it was a great article and would urge you to read it and then really test yourself on whether, you, as a leader within your organization are having to find the courage to demand something better of yourself and of others?