For most of the past three decades, there was a general consensus around how and why capitalism worked: by pursuing their own self-interest, companies and individuals ultimately benefited society.
This, in a sense, was the idea first put forward by the man considered the father of modern economics, Adam Smith, in probably his most famous quote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
At a corporate level, this was reflected in the idea that the sole purpose of business is to maximise wealth for its owners. For publicly listed companies, that meant acting always and only in the interests of its shareholders.
Spreading the love
More recently, however, this has begun to be questioned as the benefits of capitalism have failed to reach across society. Earlier this year, the US Federal Reserve published research showing that there has been a growing concentration of wealth in the richest 10% of the population since 1989, while the bottom 50% have seen no benefit at all.
This reality has led to a growing disquiet. It is manifested in more populist politics, on both the right and the left, that is increasingly nationalist, anti-globalisation, and often anti-business.
In South Africa, it has been most prominently expressed in the idea of ‘white monopoly capital’.
The accusation inherent in this label is that business has been extractive – that it has taken far more value from society than it has ever delivered. In some industries, it is very hard to argue that this isn’t the case. Deep level mining and unsecured lending would be the most obvious examples.
Business has also faced growing criticism around its role in climate change. Fossil fuel industries, in particular, have been targeted for seeking profits at the expense of the environment.
Given this scrutiny, companies have been forced to reconsider whether the way in which capitalism has been practised since the 1970s is sustainable. In August, a prominent group in the US acknowledged that it isn’t.
Business Roundtable, which represents the CEOs of many of America’s leading companies such as JPMorgan Chase & Co, ExxonMobil, Apple and Amazon, issued a statement that set a new standard for their corporations. The 181 corporate leaders who signed the declaration committed to running their businesses not just in the interests of shareholders, but more inclusively for the benefit of all stakeholders – including customers, employees, suppliers and communities.
“Each of our stakeholders is essential,” the statement concluded. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
A similar sentiment was recently expressed by Siemens in South Africa, which called upon local companies to play a role in uplifting society:
“Although the notion of shared value, CSI [corporate social investment] and businesses giving back to the communities in which they operate is nothing new, it is becoming more imperative for businesses to integrate the well-being of society into their core objectives,” the company noted. “In many instances, contributing to society is a secondary objective for businesses and yet without a healthy flourishing society, we cannot be successful in business.”
In essence, these companies are acknowledging that their only purpose cannot be profit. They cannot exist independently of the society in which they operate, and so it is in their best interests to more directly benefit all of their stakeholders.
“For business purpose to have resonance, it should be beyond just a pure profit motive and reference some kind of social or environmental outcome,” argues Jon Duncan, head of responsible investment at the Old Mutual Investment Group.
“Strategically, they have to position themselves to be relevant in a changing world.”
More companies are being explicit about expressing this purpose because increasingly it is what is being demanded of them from customers, potential employees and suppliers. People want to be associated with businesses that are socially and environmentally conscious.
Chris Bischoff, a research analyst at Reputation Matters, highlights the stance taken by clothing brand Patagonia as an example:
“Their mission statement is ‘we are in business to save our home planet’,” Bischoff says. “They call themselves an environmental activist company.”
This might be a particularly extreme example, but the pressure that capitalism is facing demands that all companies define themselves in ways that explicitly express their purpose. Just making money for their owners is not enough.
This does not mean that businesses shouldn’t be set up to make a profit, but that profit should be the product of a more inclusive, and socially and environmentally conscious approach. Capitalism, and their own companies, may not survive if they don’t.