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Saturday, 3 December 2011

Only Capitalists Can Save Capitalism

English: Harvard Business School, as seen from...Image via Wikipedia

Maggie Starvish

If capitalism was a stock, the market would appear rather bearish on its future.

Bank failures, economic crises, and middle-class riots across the globe appear symptomatic of large systemic weaknesses in the market system, highlighted by the 2008 global financial meltdown. Income inequality separating corporate leaders from their rank-and-file workers has become a hot-button issue in the upcoming presidential election. And in public opinion polls, business moguls are cushioned from the bottom of the reputation scale only by members of Congress. Fixes so far have largely eluded elected officials, government regulators, and tent city activists.

Capitalism at Risk: Rethinking the Role of BusinessBut there is one group of citizens with the power to make a difference: business leaders themselves, say Harvard Business School Professors Joseph L. Bower, Herman B. "Dutch" Leonard, and Lynn S. Paine, authors of Capitalism at Risk: Rethinking the Role of Business.

"Our book argues that if we don't begin to address, in a systemic way, the issues and problems and the negative outcomes and challenges [of market capitalism], then we are likely to see a lot more movements like Occupy Wall Street," says Leonard.

Capitalism at Risk grew out of preparations for Harvard Business School's centennial celebration in 2008. Bower, Leonard, and Paine felt it important to identify key issues that HBS should focus on going into its next 100 years, so they organized a series of forums on four continents with top business leaders, many of whom were HBS alums. "We set up the forums as opportunities for candid discussion among peers," says Paine.

The principal question asked of each participant was this: "If we stipulate that the system of market capitalism has been the source of remarkable economic growth, what are the prospects for continuing growth in the future? What aspects of the system at the level of firms, industries, nations, or multilateral institutions might cause serious difficulties?"

The principal response is summed in the book: "Market capitalism has proven to be a golden goose providing historically unimaginable economic benefits to many, and if we don't look out, we may kill it."

From prediction to fruition

Problems that forum participants cited included environmental degradation, trade breakdowns, and failure of the rule of law. Concerns over the lack of transparency into and oversight of the financial system were voiced by many. In all, 10 potential disruptors of the global market system were identified.

"One of the things we were told even before the economic crisis was that the financial system had grown to such a scale and was functioning in such a way that it was no longer necessarily lined up with the needs of the industrial system, or the way society wanted it to function," says Bower. "And lo and behold, we now have a crisis that illustrates what they were concerned about."
"If you believe that the problems ahead are likely to be very serious, and neither government nor business can address them, that doesn't leave you with many options."
—Lynn Paine
"Perhaps we should credit the participants in our forums for their prescience," notes Paine, reflecting on an e-mail she received recently from a participant on how much the world had changed since 2007. "The question now is whether we can mobilize business leadership on a sufficient scale to make a difference."

"Our view is the system could go, if companies don't step up," says Bower. "It's companies that have the skill sets necessary to go from a vision to making something a reality."

Considering the number of corporations whose annual revenue is larger than the GDP of many small countries, the proposition makes sense. The authors argue that the problems are systemic, and who better to attack huge issues than people who run small, medium, and huge organizations.

Bower, Leonard, and Paine are prepared to have their views challenged. Even some of the forum participants, says Leonard, "didn't think what we are calling for is either appropriate for or likely to come from business and business leaders." And while Leonard agrees that some of the criticisms are valid, "the alternative of having business sit this one out is too risky."

Adds Paine: "Of course we recognize that there are serious obstacles to the view we recommend," including a lack of structure, tools, and incentives within businesses to do the sort of work that's needed, and a lack of skills and incentive on the part of business leaders to operate on the global political front. "But we see those as challenges to be overcome rather than fatal flaws in the idea. If you believe that the problems ahead are likely to be very serious, and if you believe that neither government nor business can address them, that doesn't leave you with many options."

"There is clearly political content to what we are suggesting," says Bower. "We talk about the need for leaders of companies to develop skill sets that they might not have—a lot of our business leaders have not been brought up to be comfortable in dealing with politicians. So part of what we're talking about is learning how to operate in the public arena without getting into trouble. It's hard."

Addressing the problems

HBS has made significant strides in preparing students to be the kind of leaders that the book calls for, says Leonard, noting as one example the required first-year MBA course Leadership and Corporate Accountability. "Where I think we still have far to go is in teaching the skills for operating in the high-conflict, low-authority zone outside your own firm. Most of what we teach is about how to optimize within your firm, where you tend to have a high level of authority and where there is general agreement on goals.
"Where I think we still have far to go is in teaching the skills for operating in the high-conflict, low-authority zone outside your own firm."
Dutch Leonard
"By contrast," Leonard continues, "when our book calls on business leaders to exercise leadership outside their firms, we are inviting them to operate in a domain where they have little authority and where there is great conflict over what the most important goals are. The skills to do this involve what we might call small 'p' political skills—and we don't teach nearly as much of that as we could and should, nor do we have many cases about business leaders operating in that high-conflict, low-authority domain."

Giving students a broader perspective outside the HBS classroom is another possibility, such as pairing B-school students with other Harvard students who are studying similar big problems, says Paine, who cofounded and served for five years as course head of Leadership and Corporate Accountability.

"For example, I have in mind a course that would bring together students from HBS, Harvard Law School, and the Kennedy School to explore, as board members and as leadership teams of companies, what could be done … both through innovative business strategies and through innovative institutional arrangements."

According to Paine, many HBS students share the concerns voiced in the book and aspire to the type of entrepreneurial leadership needed for reform. "It's critical that we harness the energy and ideas our students bring to these challenges, and that we as a faculty help them develop the skills and capabilities needed to practice this kind of leadership."

So even as the market system has created threats to its own sustainability, it can also reward enterprising companies of any size that can turn these problems into opportunities. The book provides examples of business efforts that promote social good without sacrificing profit: a mobile communications rollout in rural China that "extended the benefits of participating in the market system to millions of people" while increasing profits and growth at the country's largest telecommunications firm; "a boutique asset-management firm that invests in companies whose business models are aligned with the needs of a sustainable global economy."

But Capitalism at Risk leaves a lot of the heavy lifting in the hands of business leaders. "We're pretty clear that we don't have all the answers," says Bower, "but we're also pretty clear that we need action."

The form that action takes remains to be seen. But it's worth noting that while members of the "Occupy" movements may be retreating for the winter, the problems they have highlighted are likely to remain with us for some time.

About the author:Maggie Starvish is a writer based in Somerville, Massachusetts.

Related post:

We need to talk about capitalism, say CEOs

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