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Can Capitalism Reinvent Itself?

Read Tuesday, 26 Apr 2016

For decades, big businesses have profited hugely by turning a blind eye to unscrupulous behaviour. As consumers, are we finally wising up? Connor Tomas O’Brien explores the rise of ethical enterprise – and a radical new theory of capitalism as a tool for good.

Audience at <a href=””>’Is Corporate Purpose Dead or Alive?'</a> in April 2016
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Flying into Tullamarine Airport in the evening, the houses of Melbourne glimmer as their solar panels catch the final few seconds of light. This shine is seen most clearly around Werribee, a hub for first-time buyers looking for display homes that strike the right balance between size and affordability. Certain pockets of houses, though, mainly those clustered around the inner city, don’t glint at all – they’re the rented properties, almost none of which have solar.

The reluctance of landlords to embrace renewables has led to a peculiar phenomenon in the suburbs just east of the Melbourne CBD: the emergence of a residential belt that simultaneously boasts the highest concentration of Greens voters in the nation, and the lowest penetration of home solar. It’s a problem that’s difficult to crack. Few landlords, after all, are especially invested in helping slash the power bills of their eco-conscious tenants – especially if an expensive capital improvement is required before their renters can reap the rewards.

The challenge of delivering solar to the quarter of Australians who rent is an apparently intractable one – and one that unchecked capitalism, a system that implicitly directs us to look out for own best interests, seems ostensibly incapable of solving. Perhaps, all things considered, the best we can hope for is intelligent government intervention: sophisticated systems of public sector subsidies that reward landlords handsomely for their generosity.

Mark Kramer
Mark Kramer

Mark Kramer and Michael Porter are more optimistic about big business as instigators of change. In a 2011 issue of the Harvard Business Review, an article by the pair – both founders of FSG, a social change consulting firm – was run with the cover headline, ‘How to Fix Capitalism’. In the piece, they outlined a concept at once straightforward and controversial: the idea that, following a few deep structural tweaks, it might be possible for businesses to learn to seek economic value by solving major social and environmental problems instead of ignoring them. Bringing solar to renters is one example. Could a bank find it profitable to create a mechanism for owners to outfit buildings with renewables at no direct cost, then receive payment as benefit accrues to the tenant? Or, perhaps, could a small startup hit upon a system in which the tenant, landlord, and the startup itself share the value of the excess solar energy pumped back into the grid?

For those wedded to the neoclassical idea of profit at all costs, ‘shared value’ is a confronting concept, because it suggests that we are entering a stage of capitalism in which externalities – like climate change or pollution – are finally about to come back to bite the firms that created them in the first place. As customers become increasingly savvy about how profits are created – and increasingly sceptical of companies that are opaque about their practices – it seems possible that firms that continue to eke out huge profits on the back of environmental or human exploitation may be on the verge of an ever greater backlash.

‘Shared value resets the boundaries of capitalism,’ write Kramer and Porter. It’s a tempting thought – that, after dragging the planet to the brink of ecological collapse and steadily widening the gulf between richest and poorest, capitalism might be able to fix itself and the world alongside it.

From the sky, the most profound change over the past decade has been the rapid adoption of solar panels by home-owners. Compare the roofs of Werribee homes in 2006 with those in 2016. Closer to the city, though, solar adoption has been much slower. When it comes to this market failure, and others, could a rethinking of capitalism be in order?

Half a decade since the publication of the Harvard Business Review piece, Kramer remains optimistic. Businesses, he believes, are getting gradually better at broadening their field of vision – from a myopic focus on maximisation of short-term profit, toward a recognition that ‘not being evil’ might turn out to be the only sustainable long-term strategy.

It’s a tempting thought – that, after dragging the planet to the brink of ecological collapse and steadily widening the gulf between richest and poorest, capitalism might be able to fix itself, and the world alongside it.

‘There certainly is [still] a great deal of pressure for short-term profitability,’ Kramer admits, ‘Many company management teams are short-sighted in a lot of the decisions they’re making, and some are trying to cut corners. But … we’re finding that companies that are adopting a social purpose, and really beginning to think about social issues as business opportunities … positioning themselves strongly for long-term success.’

One of Kramer’s favourite examples comes from the healthcare industry. While conventional wisdom might suggest that health insurance is primarily structured around spreading risk, Kramer believes that such an approach leaves almost everybody involved worse off, with insurers led to treat their customers as adversaries. He delights in explaining a new approach, in which insurers work to reduce risk by incentivising healthy behavior. ‘When you go to the grocery store,’ he explains of one South African health insurer, you swipe a card and they’ll reimburse you 25% of what you spend on fresh fruit and vegetables – but only fresh fruit and vegetables. They’ll refund 80% of gym membership, but only if you go twice a week. Their population lives six years longer on average, so the healthcare costs of this company are about 15% less than other healthcare companies – which makes them more profitable.’

Kramer also likes to discuss banking – a sector that, in the wake of the Global Financial Crisis and a better understanding of the implications of predatory lending practices, has lost trust. It’s long been tempting, he argues, for banks to wait for customers to fall into financial strife, and then to capitalise on cascading debt to make customers dependent on high interest loans. ‘When someone falls behind in their bills,’ he says, ‘the traditional thing that happens is you get all kinds of extra fees and charges – and typically, when you fall behind in one bill, you fall behind in many. And it’s not because people went on a buying spree! It’s typically because people lost a job or had a divorce or had a health crisis that they didn’t expect.’

He praises one major Australian bank for working with non-profits to train loan officers to develop solutions around mental health, redundancy, divorce and domestic violence – issues that, alone, are challenging enough to work through, but that can get much worse when they lead to compounding debt. ‘They’ve found that they’re now doing this with thousands of people, and that 95% of them are able to become current within 90 days through the workout, and it’s saved the bank $60 million in what would have been bad debt … just in 2015.’ The bank itself, Kramer argues, has a long way to go – it’s the NAB, one of the Big Four that are the target of a proposed Labor royal commission into ‘systemic and widespread problems’ in the banking sector.

Many people have serious misgivings about Kramer’s idea that businesses can seek sustainable profit from doing social good. The most convincing critique comes from sustainable development advisor John Elkington, who worries that ‘shared value’ ignores the very real possibility that it may never be fully possible to align social and economic goals. We ‘must acknowledge that capitalism is not invariably a benign process, indeed it can play a key role in destroying key resources, reducing the planet’s biodiversity and destabilising the climate,’ he argues.

‘Over the next ten years, I think we’ll really see a big change in the types of businesses that we start to invest in – especially as money begins to change hands, from Baby Boomers to younger generations.’

There’s also a dangerous precedent for businesses using ‘corporate good’ as a PR smokescreen – a hook to lure customers searching for ethical operators, who may never recognise that a company’s ethical image is merely a façade. For several decades, businesses have had major success with faking or exaggerating their green credentials to win or retain customers while making few deep structural changes. As customers grow increasingly critical of these shallow greenwashing strategies, there’s a risk that many companies will leap onto ‘shared value’ as a spin strategy to draw attention to good practices – while still engaging in deeply unethical behaviour.

Felicity Ford

Felicity Ford, the twenty-something co-founder of the Future Business Council, remains confident. She believes that Millennials are, by default, sceptical of deceptive PR strategies – and will gradually begin to drift toward businesses that are genuinely ethical. ‘I can’t speak for my generation, but I think as a trend, we don’t want to see “business as usual”,’ she says. ‘I think [shared value] will start driving business with social media. The transparency that we have through social media is important because we go out and find and source these kinds of businesses, and we want to understand more. Over the next ten years, I think we’ll really see a big change in the types of businesses that we start to invest in – especially as money begins to change hands, from Baby Boomers to younger generations.’

Ford also notes something that is often missed – the fact that customers are not simply an amorphous blob of consumers, but are employees and proprietors of businesses themselves. If young workers feel increasingly uncomfortable holding down jobs with employers they recognise as unethical, she argues, there will be a swing toward shared value enterprises as these employees move through the ranks.

Realistically, it appears more likely that new startups will find it much easier to act ethically than established firms. Changing an ingrained corporate culture, after all, is not easy, especially if a business has profited hugely for years by ignoring externalities and turning a blind eye to unscrupulous behaviour. It’s also simply difficult for incumbents to identify how to solve old problems in more equitable ways – even if they badly want to.

Ronni Kahn

Ronni Kahn is the CEO of OzHarvest, the perishable food rescue organisation she founded in 2004. Fundamentally, though a non-profit enterprise, OzHarvest is based on startup culture principles: strong branding, expert leveraging of new technology, continuous exploration of possible revenue streams and development of strong partnerships with the corporate sector. It’s a charity that may not have been possible 20 years ago – and, argues Kahn, it’s a model for business that new firms in the for-profit sector may want to emulate.

‘It’s not about profit; it’s about social profit – how much impact we can make,’ she says. ‘Of course it costs money to run a business, [especially] an impactful one. So what’s interesting for me is seeing a very slow shift in the businesses coming to us, that want to co-brand with us.’

‘I love the idea of conscious capitalism – and business existing not just to make profit, but to benefit society. That’s the shift that we all need to work towards. We keep saying, “It’s them”, but it’s actually not them. It’s our problem. Our feet do the walking.’

From Kahn’s perspective, major businesses are madly scrambling to prove their ethical credentials – and see collaboration with innovative charities like OzHarvest as a way to fast-track that process. At the same time, she’s noticed that many established firms don’t fully grasp what ‘shared value’ means, and often simply view corporate social responsibility as a checkbox item.

‘I don’t want to speak to your Corporate Social Responsibility person!’ Kahn says, of the collaborative process between OzHarvest and major firms. ‘I want to speak to your marketing person, your HR person, your sustainability person. I want to speak to every part of your business, because this isn’t just a box to tick. It’s slow, but we’re getting there.’

The most profound shift in understanding Kahn wants to see involves doing away with a distinction she views as especially damaging: the definition of ‘not-for-profit’ as charities, distinct from ‘for profit’ businesses.

‘We are not “not-for-profit”,’ she says. ‘We are “for purpose” … identifying a problem and trying to solve it, in many different ways. I love the idea of shared value, and conscious capitalism – and business existing not just to make profit, but to benefit society. That’s the shift that we all need to work towards. And since many of us work in businesses, it’s up to us. We keep saying, “It’s them”, but it’s actually not them. It’s our problem. Our feet do the walking.’

This piece is based on ideas raised and discussed at our recent event, Is Corporate Purpose Dead or Alive?, which took place with Mark Kramer, Mike Hirst, Felicity Ford and Ronni Kahn on 12 April 2016.

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The Wheeler Centre acknowledges the Wurundjeri Woi Wurrung people of the Kulin Nation as the traditional owners of the land on which we work. We pay our respects to the people of the Kulin Nation and all Aboriginal and Torres Strait Islander Elders, past and present.