Friday, March 29

‘Awakened’ capitalism is the new villain of the right. It is also the only way forward | hutton


B.British capitalism is in trouble. Populated by too many legacy companies with hardly a single big tech company in sight, the UK stock market has been the worst performer among advanced countries since 2000. Brexit has deepened the crisis. Vulnerably cheap by international standards, our companies have become easy prey for takeover traders around the world who are rarely benign stewards. Very few big new companies are emerging to take their place.

However, by the standards of the political right, the UK should be a capitalist beacon. Regulation in Britain, from the world of work to product standards, is light, weakly enforced and all too often almost non-existent. Companies and capital are subject to modest taxes by international standards. But stubbornly, the growth rate slows as investment and productivity stagnate. Could it please be that the dominant right-wing intellectual paradigm is wrong?

Endlessly inventive, the right has found a convenient new villain to blame: “awakened” or “stakeholder” capitalism. The unfortunate economic trends may be long-standing and deeply entrenched, but don’t let that get in the way of a good new culture war. Last week, the Adam Smith Institute crystallized the denunciation in an article, Capitalism after Covid, which added to stakeholder capitalism the State as the culprits in chief.

Governments, author Matthew Lesh intoned, have failed in their response to the pandemic, while the private sector has done brilliantly. This “state failure” removes the case for more government involvement in the economy, post-Covid. Instead, capitalism must be given a head, but not a wake-up capitalism that “stabs itself in the face” by wanting to address “racial justice or environmental protection.” Capitalism must ruthlessly put profits first and shareholders, it is their sacred duty, not to sacrifice profits to appease stakeholders in the trivial pursuit of good headlines – the road to perdition. Too many companies are following Unilever and sacrificing profits and performance for praise of the pursuit of sustainability and social purpose, embodied in said a leading critical investor, Terry Smith, trying to argue that the purpose of Hellmann’s mayonnaise was to promote healthy eating.

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Lesh made gracious headlines in the Mail. But his thinking became fossilized in the 1980s and singularly fails to address the facts and arguments of today. Has the failure of the State been so complete? Opinion in 27 countries has become more confident in state competence in handling the pandemic, according to the Cambridge Center for the Future of Democracy. In pandemics, collective action and state leadership are needed. Yes, there have been weaknesses, but offset by amazing successes. In Britain, for example, the speed in vaccine development and deployment was due to clever collaboration between smart public procurement, universities, notably Oxford, the NHS, and purpose-driven companies like AstraZeneca.

Similarly, economics is struggling with the enormous shortcomings of the simple free-market visions that Lesh espouses. Not least, since the winter 2021 edition of the Oxford Review of Economic Policy question: “Capitalism: what went wrong, what needs to change and how can it be fixed?” Radical uncertainty plagues economic decision making; we need institutions better designed to reap the gains from cooperation, and individuals are much more complicated than economic automatons that respond to price signals. Economic models that ignore all this (such as Lesh’s) argue successive contributors, lead to debased capitalism, stagnating living standards and rising populism in response. Witness Britain in 2022.

Companies shape and are shaped by the society of which they are a part, and this includes the evolution of shareholder preferences. The Investment Association annual review 2021 reports that 49% of the £9.4 trillion in investment funds managed by the UK are earmarked for promoting environment, social cohesion and good governance (ESG in the jargon), reflecting the wishes of its millions of savers. Founded in the 1880s, Unilever’s purpose was to “make cleanliness commonplace and lessen the burden on women.” Investors today want it to continue with an updated purpose: to make “sustainable living commonplace,” the main reason it’s a great company. Unilever, and the growing number of similar companies, are only responding to the priorities of their shareholders.

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McKinsey Global Institute declares that stakeholder capitalism, in which companies carefully manage trade-offs between their different stakeholders, is the key to long-term value creation. It is the future of business. This is not a sacrifice of profits in wakeful appeasement of unhelpful consumers, employees, and broader social pressures, as Lesh characterizes it. Stakeholder capitalism is a recognition that any business is a social organization that needs committed workers, loyal customers, supportive shareholders, and strong brands, all of whose claims must be managed, along with financial priorities. Mocking the idea that Hellmann’s mayonnaise has a purpose, but consumers care about the health of what they eat and will do more in the future. Brands with purpose, as Unilever’s own data shows, outperform rivals without purpose. And that means profit.

Are companies good enough to explain these realities and tradeoffs, to explain why they believe what they are doing is so important to their long-term profitability and why they feel compelled not to ignore climate change or Black Lives Matter? Lesh attacks the entire framework without acknowledging the huge ongoing debates about how interested companies and their investors can do better. Companies are wondering how they can best explain their best guess of future trends to their shareholders and explain why it pays to involve the workforce and customers. Investors are getting better at calling out greenwashing and soft corporate nonsense. It’s called “materiality,” borrowing the buzzword of the moment: think relevance, meaning. Ignore these material pressures beyond the immediate financial demands and businesses will be in deep trouble.

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British capitalism suffers from a long history of making easy money by being the first to industrialize and owning a global empire. As a result, the culture of innovative risk-taking and the institutions that support it, along with a sophisticated conception of the firm, are cruelly underdeveloped, as Adam Smith would have been the first to acknowledge. The value of the institute proselytizing on his behalf is that he is a useful fool, establishing so revealingly why his 1980s thinking is so flawed. And why so many in business, investment, and academia are right to discover new ways to reinstate capitalism and better capture its undoubted dynamism in serving the common good.

Will Hutton is a columnist for the Observer


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