Some government needed to save capitalism
“All my future is riding on this.”
Montreal businessman Michael Penner said that to me in the summer of 2014 while trying to save a sock factory in Burke County, North Carolina.
The gambit required importing a fleet of fancy sewing machines from Italy that left the factory floor a lonelier place than it was before the Great Recession. Still, he kept about 100 people working, while finding a way to make a consistent profit. That’s when Gildan Activewear Inc. came along with an offer that Penner couldn’t refuse, purchasing the company — Peds Legwear Inc. — for US$55 million in 2016.
I got back in touch with Penner recently because it occurred to me that his experience would give him something to say about the current crisis. If we’re certain that COVID-19 will change the economy forever, then it’s probably time to start thinking seriously about what that means.
Penner, 51, found a way to preserve North American factory jobs without the help of Donald Trump’s protectionist trade policy, and before a global pandemic forced companies and governments to rethink the wisdom of basing supply chains on cost rather than sustainability.
He served as chairman of Hydro-Québec’s board of directors from 2014 to 2018, a unique vantage point from which to watch the structural changes taking place in global energy markets. He’s been a member of Bank of Nova Scotia’s board of directors since 2017, where his focus is corporate governance. Penner’s main job these days is as a lead operating director at Partners Group AG, a Swiss private-equity firm that oversees assets worth about US$96 billion.
So Penner has seen some things, and over the past few months he’s observed plenty he doesn’t like. This time, he thinks it’s capitalism that needs saving, perhaps even from itself.
“One of the biggest things that I would love to figure out, and I don’t how I would do it with my current business responsibilities, is Canada having some economic independence,” said Penner. “We talk about spending money on buying CF-18 replacement planes, billions of dollars, but we can’t even ensure we’re going to have a vaccine for our citizens? We’ve got a major fundamental problem in our priorities.”
Private equity is an interesting place for Penner to land, since it was an over-leveraged private-equity outfit that had left that Carolina factory for dead. But Partners Group doesn’t subscribe to a predatory style of capitalism. The firm, led by co-CEOs André Frei and David Layton, put up a “seven-figure” hardship fund to support the employees of its portfolio companies during the COVID-19 lockdowns. “You can’t protect the assets without protecting the people,” Penner said.
I come across at least as many warm-blooded capitalists like Penner as I do the cold-blooded kind, but it’s the latter who get most of the attention.
The business press for a long time was too quick to reduce a chief executive’s job to making money, worshipping those who do it the best from quarter to quarter at whatever cost to his or her company and society over the long term. Think-tanks that shared that worldview had little difficulty raising money from fellow travellers in the business world. The narrative that a CEO’s only job was to maximize returns for shareholders took hold, creating a caricature of how capitalism should work.
“Based on my personal experience, I think it’s fool’s gold,” Penner said of the notion that a corporate leader’s only concern should be maximizing profit.
“It’s always easier to find an easy solution to a complex problem. ‘I answer only to the shareholder.’ We all know that doesn’t work. The best companies and people can walk and chew gum at the same time.”
For evidence it doesn’t work, look out the window.
Shareholder capitalism failed because too few of us are shareholders. Owners have an incentive to protect their wealth rather than share it, explaining why we’ve ended up with a generation of policies that put capital ahead of labour.
A lot of this is on us. Consider the grocery business. Canada’s biggest grocers ended their pandemic bonuses partly because of greed, and partly because so many of us insist on buying food at the lowest price possible, compressing the margins the grocers have available to satisfy that greed. Our obsession with price creates an incentive for retailers to exploit economies of scale, and for governments to stand aside as the market leaders buy up smaller competitors. Next thing you know, you have an immovable oligopoly.
It’s going to take some government to save capitalism. The tricky part will be figuring out how much. Just because we overestimated the benefits of free trade in the 1980s doesn’t mean we should revert to the commercial policies of the 1970s. But it might mean revisiting the idea of industrial policy and having a think about the extent to which government procurement could encourage sustainable growth.
Penner thinks Prime Minister Justin Trudeau should create a “real task force” to explore these issues “immediately.” The mission would be to expand and adjust the political consensus around free trade and balanced budgets to include policies that might leave the country less vulnerable to shocks. Two severe economic crises in two decades is plenty of evidence that something’s not working right.
“Do we need a Black Swan event every single time to test our systems and get them right?” Penner asked, rhetorically. “If that was the case, every triple-7 plane would go down because it wasn’t properly tested. We should treat our institutions as if they’re airplanes.”