Thought Leader Interview: Rebecca Henderson

A renowned Harvard professor introduces a new framework for a capitalist system that she believes has lost its ethical foundation.

The title of your book [ Reimagining Capitalism in a World on Fire] indicates that the world is on fire. Please explain what you meant by that.

At the most basic level, I meant that the world was literally on fire. When I finished the manuscript in early 2020, both Australia and California were burning and many of our societies were on fire with rage, anger and indignation. Months later people said to me, ‘How did you know?’ — but it has seemed to me fairly clear for at least the last 10 years that, unless we start to focus on our environmental and social problems, the situation will become increasingly dire.

Sadly, many business leaders still view issues like climate change, inequality and institutional collapse as things that have nothing to do with them. What is your message to these leaders?

My hope is that every leader will recognize that these are things they have to address in order for their business to thrive. Period. For many years, the business community has been able to think about the great social and environmental problems of our time as ‘someone else’s problem’ — as externalities. But the fact is, as our governments and societies have proved increasingly unable to deal with these ‘wicked problems’, they have begun to threaten the long-term viability of our planet’s support system, the long-term health of our societies — and the long term viability of business.

In the end, no business can function in a society that is falling apart. Someone said to me just yesterday, ‘Suppose that the American electoral system collapses and our institutions are basically powerless. Would that be good for business?’ The answer is clearly No. Is it good news if the major coastal cities flood and hundreds of millions of climate refugees start moving north in search of the basic means of survival? No. Accelerating inequality is also terrible for business. Not only does it reduce the pool of talent and the number of well-paid consumers who can buy the things businesses produce, but it also creates enormous social unrest. We are seeing that now, and it looks as if it might tip us into right- or left-wing populism. All of the research we have suggests that neither is good for business — or for the broader society.

In your book, you describe what has gone wrong with capitalism, writing that, “In a nutshell, markets require adult supervision.” Please explain what you meant.

The free market is one of the greatest inventions of the human race. The idea that prices can allocate resources far more efficiently than any form of central planning is just brilliant, and it has worked magnificently. Moreover, real competition drives continuous innovation. We just have to look around us to see its impact. Two hundred years ago, there were about a billion people on the planet and they were nearly all desperately poor. Today, there are around seven billion of us, and only around four hundred thousand are that poor. Two hundred years ago 43 per cent of all children died before their fifth birthday. Today, it’s only four per cent. GDP has increased enormously and we lead lives that our grandparents could only dream of.

But for capitalism to work optimally, there has to be real competition between firms, prices have to reflect true costs and there has to be genuine freedom of opportunity. Everyone has to be able to play, and firms must not be able to shape the rules of the game in their own favour. Given these conditions, markets will generate freedom and prosperity; but without them, there is no guarantee.

Every time I burn fossil fuels, for example, I impose very real health damage on the people who live near my power plant. I’m also contributing to climate change, and to all the damage it is causing. The health and climate costs of burning coal to generate electricity are conservatively estimated to be nearly twice the cost of generating that electricity in the first place. And if you can lobby the government for a monopoly — that’s an amazing way to make a lot of money. But it’s not conducive to what we think of as a free market. That’s why markets need adult supervision.

Talk a bit about the perceived trade-offs between focusing on the public good versus focusing on economic freedom.

Humans have always faced the trade-off between me and us. If you think about it, what do we teach young children? We tell two-year-olds that they sometimes have to share their toys. For me, the trade-off between the public good and economic freedom is a broader manifestation of that underlying tension. Pure economic freedom in the Ayn Rand- ian sense would say, ‘You can do whatever you want and keep all the money you make. There are no rules.’ But a society that embraces that notion is going to look like the Congo on a bad day. We need community. We need roads and universities and schools and hospitals. We need a government that can make sure that externalities are properly priced. And we need taxes! So, absolutely, there is a trade-off between the public good and economic freedom in the short term. But in the long term, you cannot have true economic freedom without some investment in the public good.

Healthy societies rest on three foundations. First, a free market with free competition. Second, a democratically accountable, transparent, capable government. And third, a strong civil society that supports everyone in participating in both the economy and the political process. It’s that balance between the market and the common good that creates a healthy society.

I recently published a piece in Harvard Business Review called “The Business Case for Saving Democracy”. The pandemic has shown us just how disastrous it is to think you can run a society without a capable government that recognizes that investing in public health is fundamental to economic well-being. So, yes there are trade-offs, but for the long term we simply must focus on both.

The reimagined capitalism you write about has five key elements. Can you please summarize them?

The first element is a recognition that the purpose of the firm is not to maximize profits, it is to help build a thriving and healthy society. When a firm is surrounded by strong institutions, the rules of the game ensure that prices reflect the real underlying dynamics of supply and demand and there is real freedom of opportunity. In such a case, maximizing shareholder value is a very powerful way to build freedom and prosperity.

The second pillar is to create shared value. Find an opportunity for your business to make a real difference, either environmentally or socially, while making money at the same time. Of course firms have to make money to survive, but I remind my students that leaders always have choices, and there are billiondollar opportunities to address our environmental and social

For capitalism to work optimally, prices have to reflect true costs,

and there has to be genuine freedom of opportunity.

problems. The world is changing. Employees and consumers are demanding that firms do the right thing — and it’s becoming increasingly clear that doing so is profitable. Walmart sent a billion dollars to its bottom line by making its tracking feed more efficient; and it’s no coincidence that Tesla is the world’s most valuable automobile company.

The third pillar is to work together. There are problems for which there is no easy business case to be made at the level of the individual firm. For many firms, for example, you can pretty easily cut your carbon emissions roughly in half and the steps you take to do that will still make you money. Just changing your lightbulbs generates a 15 to 20 per cent rate of return. But there comes a time at which it’s difficult to keep reducing your carbon emissions, and that’s when you need to reach out to other firms in your region or industry and say, ‘Look, if we all agree to do this, we will all be better off’. It’s too expensive for a single firm to say, ‘We will buy only deforestation-free products’. But if we all decide that we will only buy sustainably grown beef or soy or palm oil, then none of us is at a competitive disadvantage and together, we can address a problem. In some cases we are seeing firms within particular cities working together to try and improve education and healthcare, because they recognize that they all need the workforce to be healthy and properly trained.

The fourth pillar is to rewire finance. At the moment, far too many firms and investors are still focused on short-term profits. We need to develop environmental, social and governance (ESG) metrics that measure the non-financial but deeply important factors that shape a firm’s performance over the long term. Measures like, what is your turnover rate? How much are you investing in training? What is the public perception of your firm? These kinds of metrics can help investors and firms have a conversation about investing for the long term.

We also need investors to realize that they need to cooperate to solve problems like climate change, because it’s not in their best interest if we trash the planet. Some large investors recognize this and have started to band together to tell the firms in their portfolio, ‘We will simply not invest in your company unless you deal with climate change’.

Last but not least, we need to reimagine our democracies. We need to rediscover the fact that democratic, transparent, accountable government is fundamental to the health of business over the long term. Businesses need to work collectively to make sure we remember that. We can’t let ourselves tumble down a pathway into partisan division, populism and crony capitalism.

For those who want to become, as you say, “pebbles in an avalanche of change,” what are some initial steps to making a difference?

The question I get most often is, ‘What can I do?’ And I understand that question. This is a super tough moment. So many people are either suffering from COVID-19 itself or have lost friends and family to it, or they are suffering from the vast economic effects of the pandemic. It’s very easy to fall prey to despair and ask, ‘What can I do about any of it?’ The answer is, you can do a great deal — and the world will not shift until you do.

So, here’s what you can do. As an employee, you can look around your organization and try to find opportunities to create shared value, to make a difference in the problems we face collectively — ideally opportunities where you can make a strong business case for addressing the issue. So many of the stories I’ve come across are focused on the CEO, because that’s an easy place to focus — and it is true that having a CEO who is willing to do the right thing makes a big difference. But in so many firms, the first steps towards becoming a more sustainable company come from employees. They come from people on the ground who see an opportunity, start a new initiative that makes a difference and begin to transform the firm. So first, see what you can do in your role as an employee.

Second, you are also a customer. You buy products and services all the time, so start thinking about what you are buying and where you are buying it from. Nothing will change a business faster than a broad-based customer chorus saying, ‘We want you to be environmentally friendly’. So, think about how you are spending your money, particularly on big ticket items like cars and houses.

Third, you are a neighbour, so make changes in your own life that your friends and neighbours will see. Think about putting solar panels on your roof; think about flying a lot less, and

eating less meat. Meat-based agriculture is responsible for a huge share of carbon emissions — depending on how you measure it, as much as 10 per cent. Plus, it uses an enormous amount of land that we could replant with trees to bring biodiversity back to an area, catch the carbon from the atmosphere and make our planet a lot healthier.

These might seem like tiny actions — and of course alone, they won’t change the world. But there are a couple of things going on here. One is that people are hugely influenced by what they see around them. One study found, for example, that if you start eating less red meat and flying less, the people around you are far less likely to do these things. The research is very striking on this. And if you start to make these changes in your own life, you yourself will feel more hopeful.

The last thing — and this is so important — is to exercise your rights as a citizen, if you have them. Above all else, vote — but also work together with others who share your concerns. One of my friends started a group called Mothers Out Front because she thought mothers were the people best equipped to stand up and say ‘We have to do something to stop climate change’. This group has focused on pushing utility companies and regulators to fix the hundreds of methane gas leaks that exist in Boston. It turns out that having 20 or 30 angry moms turn up at legislative hearings and make a fuss makes a huge difference! They’ve been able to make tremendous progress.

So yes, you can make a difference, and I promise you, it will make you feel so much more hopeful about the future. Working with others and becoming aware of how much we can do as a society will make you feel alive and engaged in ways that sitting at home and watching the dreadful news cannot do. Remember that individually, we are all just pebbles; but it is pebbles that can start an avalanche.

Rebecca Henderson is the John and Natty Mcarthur University Professor at Harvard Business School and a research fellow at the National Bureau of Economic Research. She is the author of Reimagining Capitalism in a World on Fire (Hachette/public Affairs, 2020), which was longlisted as a contender for the Financial Time’s Business Book of the Year. She sits on the boards of Idexx Laboratories and Ceres and was named one of three Outstanding Directors of 2019 by the Financial Times.

Leaders always have choices, and there are billion-dollar opportunities

to address our environmental and social problems.