The financial crises that hit the world in 2000 and 2008 raised serious doubts about the moral and practical failings of capitalism. The yawning gap between rich and poor and neglected social problems like climate change have raised serious questions about the profit-centered business model. Critics from Bill Gates to the Pope have called it a “moral crisis of capitalism.” Repeated failures could discredit the profit-centered model of business and shift to a new business paradigm, much as the fall of Communism gave way to free markets. [1]

Nobel economist Joseph Stiglitz wrote, “The financial collapse may be to markets what the Berlin Wall was to Communism.”

A study by Deloitte finds that 60-80 percent of Millennials want to work for companies with a strong social purpose. A poll found that 51 percent of Americans age 18-29 do not support capitalism and only 42 percent think it is a good economic system. [2]

Institutional Investors Laurence D. Fink, founder and CEO of BlackRock, which holds US$6 trillion in investments, told 1000 of the world’s largest corporations:

“Society is demanding that companies… serve a social purpose… every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Jeffrey Sonnenfeld, a senior associate dean at the Yale School of Management, said. “It is huge for an institutional investor to take this position across its portfolio.‘‘ He said he’s seen “nothing like it.” The New York Times called it a “watershed moment … that raises questions about the very nature of capitalism.” [3]

Many corporations are making the transition to a quasi-democratic form of business that includes social responsibility, ethics, the triple bottom line, employee engagement, community relations, equality and diversity, environmental management, and other progressive practices that we call “democratic enterprise.”

Ideally, the focus is on forming collaborative partnerships with investors, employees, customers, business partners, and the public to solve complex problems. Collaborative problem-solving goes beyond “doing good”  to create value, better serving economic goals as well as social needs.

Studies show that managers realized higher financial gains when focusing on stakeholders rather than on profit alone. Some claim companies that have a social purpose, high customer satisfaction, and strong employee involvement outperformed others by 10 to 1. Having women in corporate leadership is also found to improve performance, largely because women excel at building effective working relationships.

Jack Welch, the former CEO of General Electric who gained fame for pushing the primacy of profits, acknowledged “Shareholder value is a result, not a strategy. Your main constituencies are your employees and customers.” [4]

New Business Paradigms

Various alternative models of business and economics are appearing around the globe to challenge the old “Capitalist” form of business.  

Fortune 500  Over 80% of Fortune 500 companies now publish Corporate Social Responsibility reports, covering issues like governance, community and partnerships. The editor of Fortune said: “an ever-growing group of business leaders … are building efforts to address social problems … Companies are moving beyond fuzzy notions like sustainability and corporate citizenship to making meaningful social impact central to how they compete.” [5]  

United Nations  The UN Global Compact is an association of businesses committed to universally accepted principles in human rights, labor, environment, and anti-corruption. The association includes over 13,000 organizations from more than 145 countries currently, although growth seems to have leveled off over the past couple of years. [6]  

Coop Movement  The International Co-operative Alliance represents the global cooperative movement, with 284 organizations across 95 countries.

B Corporations  This group of 2,000 corporations across 50 countries focuses on solving social and environmental problems. Unlike traditional businesses, they meet comprehensive and transparent standards of social performance.

Benefit Corporations  The Benefit Corporation goes beyond the B corporation to make its status legal. California and another 26 American States recently enacted laws requiring Benefit Corporations to provide a “public benefit,” be governed to serve all stakeholders, assess social and economic performance annually, and to operate transparently.

Business for Social Responsibility  This global network of 250+ companies, thought leaders, and stakeholders shares best practices and forges new relationships for innovative solutions. [8]

 

Change is Hard

The obstacles are enormous, of course. Change is hard, so bold leaders are needed to take on this difficult challenge. Some countries have cultures that are committed to traditional forms of “capitalism” focused on profit and the rights of shareholders, and they are likely to resist the difficult changes that are involved.

Shareholders legally own a corporation, which tends to stress the central role of profit. In fact, shareholders can sue if not satisfied that management is doing everything within reason to maximize their profit. However, some corporations are learning to fight back and are in turn suing their shareholders. A growing number of nations and US states now recognize legal rights of stakeholders other than shareholders. [9]

The possibility of takeover has traditionally forced firms to focus on short-term gains to avoid losing capital as their stock drops under threat of being absorbed by another company. The democratic enterprise offers the possibility of resolving this problem by having stock held by stakeholders (employees, clients, etc.) who are interested in the long term.

Collaboration is more time-consuming and difficult than autocratic leadership, and it may fail or mire business with internal politics. The intention may be good, and some firms may thrive, but there is a serious risk of wasted time, endless conflict, and rising costs with democratic processes.

Few present business leaders seem able to make this change, and a new generation of executives less wedded to tradition may be required to spearhead the transition. Forming working relationships is inherently a political act, so managers must adapt by developing political skills. It requires a more challenging form of “political” leadership and depends on stakeholders being receptive to partnering.

 

Most Likely Forecast

A robust leading edge of progressive business firms and practices have long thrived around the world: Saturn, Johnson & Johnson, Nucor in the US; the Mondragon in Spain; labor participation in Germany; self-management in France; Japanese and Indian firms have practiced various forms of collaborative management for years. Recently, “Conscious Capitalism” has been advocated by John Mackey, the CEO of Whole Foods. [10]

These “democratic” practices are usually relegated to the margins of business culture, but they are more productive than traditional corporate doctrines and may now be moving into the mainstream.

The TechCast Global Brain Trust of experts collectively estimate a roughly 30 percent probability that mainstream business shifts to collaboration with workers, customers, governments, and other stakeholders in the next decades. Although their confidence is relatively low, they estimate a big positive impact, which also suggests the big potential such an historic change could present.

 

Impacts and Implications

It is hard to think of a more wide-ranging positive impact. A democratic form of enterprise would spur cooperation throughout the social order, relieve government of burdensome responsibility, and reduce the risk of market volatility. Generally, it would encourage a more collaborative society

Business is a powerful institution that sets the character of a society, so this shift to more equitable and more productive paradigm could have a profound impact on economics and civilization itself. Corporations practicing democratic enterprise may prove better at competing in a market economy, and change societies for the better. They could serve as a model of cooperation

Because business firms would be controlled by their stakeholders, they would “internalize” social impacts and reduce the cost of government regulations and the bureaucracy needed to enforce them.

Gaining the support of all major constituencies would reduce the risk of labor conflict, cutthroat competition, swings in consumer loyalty, unexpected regulatory change, and other disruptive factors.

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[1] Christian Felber, Moral Crises That Have Resulted from Free Market Capitalism (Zed Books, 2015)
[2] Fortune, Jun 1, 2016
[3] New York Times, Jan 15, 2018
[4] Harvard Business Review, Apr 4, 2013
[5] Fortune, Sep 1, 2016
[6] UN Global Compact, Mar 27, 2017
[7] B Corp, Mar 27, 2017
[8]  BSR, Mar 27, 2017
[9]  Investopedia, Feb 23, 2017
[10] John Mackey, Conscious Capitalism, 201