Capitalism needs makeover to shift short-term focus
The capitalist model has run into deep trouble and is mainly surviving mainly due to a lack of obvious alternatives. For most of the past century corporations were regarded as the major driver of development and innovation for society. Now it is predominantly seen as a mechanism to serve the 1%, increasingly to the detriment of the majority.
While the capitalist model has often succeeded in the commercialisation of innovation, it has been entirely unsuccessful in innovation regarding its own model. Just as on the level of products and services, without innovation of its own model capitalism will surely cause its own demise.
Free-market economies are often confused with capitalism. They are not the same, even though they have often occurred together. Free markets imply the right of individuals and companies freely to exchange goods and services. Capitalism’s central tenet is the ownership of companies by private investors.
Yet the concept of ownership as it applies to listed companies is absurd and bears little relation to the common understanding of “ownership”. Dog owners have more responsibility than if they are part owners of a large listed company. If a dog runs into the street and causes an accident the owner is fully liable for the consequences.
If the mining company in which you own shares is run in a way that kills miners, devastates communities and pollutes the environment, or if “your” board of directors turns out to have been committing fraud, at the very worst you will find your shares trade for less. But you are never called to account.
Ownership rules encourage people to grow their portfolio by holding shares for a short time, supporting quick and typically unsustainable changes to the company that artificially increase its perceived value and the value of their shares, and then selling the shares.
This same bias applies to CEOs and senior executives, who are commonly rewarded by their boards for increasing the share price during their time in office, with little regard for what may follow thereafter.
Seasoned executives know that true and sustainable creation of value in corporations requires a long time and the collaboration of many people inside and outside the company. This collaboration is made possible by creating mutually beneficial and sustainable arrangements with stakeholders and society that are built on trust and can stand the test of time.
The current corporate capitalist model, giving overarching prominence to just one stakeholder, namely the shareholder, and fostering a short-term focus on achieving artificially inflated share valuations, is perfectly designed to subvert the creation of sustainable value, with harsh consequences for its multiple stakeholders and society.
The next generation of the corporate capitalist model should have the following basic characteristics:
For investors to enjoy influence
●
over a company’s direction they must be invested for the longer term, to ensure a tighter connection between the company’s decisions and their consequences, both good and bad. If investors therefore wish to have voting rights they must be obliged to hold this share for a certain time after their vote is exercised;
● To support and encourage this, the government would give tax incentives to investors who are in it for the long haul. We suggest that capital gains tax decreases with the time a shareholder holds a share; and
● Investors should in some way be held personally accountable for certain types of liabilities, such as preventable largescale societal and environmental damage.
These and similar rules require businesses to move towards creating more inclusive and sustainable value for themselves, their stakeholders and society. It would begin to curb the game of certain investors who seek to extract value without any corresponding contribution and commitment.
This new model would also speak to a rapidly growing global pool of funds aiming to be invested in companies that embrace a systemic, contextually aware approach to business that promises to create superior long-term value.
It would also appeal to a breed of business leaders who not only want their work to benefit the shareholders and themselves, but want their efforts to make a difference in the lives of as many people as possible.
We suggest that it is time to start designing and building a new, parallel stock exchange, one that operates under the above and similar rules. Companies and their owners will then choose under which rules they will operate.
There will be a strong case for the government providing tax and other incentives to companies that subject themselves to these more societally oriented rules. Due to its long-term orientation, we see this new corporate model releasing a major new wave of innovation, the perennial gift of capitalism.
We suggest a working group in which the government, business associations, MPs and other experts hammer out a legal framework that would actively reward ownership models and business strategies that lead to more accountability and enhance the contribution private sector companies make to their broader stakeholders.
Heil is a sessional lecturer of leadership and strategy at Wits Business School and a programme director at Cranfield School of Management. Willis is the founder of Conversations that Count and a corporate adviser.