A Harvard Business School professor believes businesses can build a just and equitable form of capitalism — here’s how, and why now’s the time
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Back when Harvard Business School professor Rebecca Henderson was pitching her latest book to publishers, she recalls, the conversation didn’t get much further than the book title before cynicism kicked in on the other side of the desk. In the latest episode of Pitchfork Economics, Henderson recalls sitting in a big New York City editor’s office and explaining that she wanted to write a book called “Reimagining Capitalism in a World on Fire,” and that it was about how business could lead the way to save the world by creating a more sustainable future.
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Henderson laughs, “I’ll always remember: He’s sitting behind his desk, looking at me, raising an eyebrow. And he’s like, ‘Business saves the world, Rebecca? Do you read the papers?'”
Here in America, we’ve done more than embrace shareholder primacy — the idea that shareholders should be prioritized above all else, from customers to employees to communities. We’ve basically absorbed it as dogma, written in stone from on high. The idea that any business would adopt a philosophy that didn’t put stock price above the survival of humanity seems downright laughable.
“I understand it’s unlikely,” Henderson said. And yet, she says, capitalism is clearly “not working for the vast majority of the people on the planet. And it is one of the major contributing factors to the climate crisis and to a whole range of environmental crises.”
But she believes that it’s not necessary to tear everything down and begin again, which is why she emphasizes the word “reimagining” in the title: “I wanted to signal that I thought we could reform it, that we can indeed build a capitalism that is just and sustainable — and, in fact, that it’s absolutely critical we do so.”
The American obsession with shareholder primacy, Henderson argues, is one of “a million different forms” of capitalism.
“I’m a fan of what I like to call free and fair capitalism, where markets reflect real costs, and there’s genuine competition between firms, and full information.”
So how did we get to this place where quarterly profits are the most important thing in the universe?
“We have elevated the free market and the power of competition so high that we have forgotten that historically really prosperous and thriving societies rested on three foundations, not one,” Henderson said. Alongside the free market, she argues, we also need “a transparent, democratically accountable, capable government and strong civil society to hold both government and the market in check.”
For the last 50 years, government has been slashed and shrunken to the point that it has lost much of its power to hold the market in check.
To build a more responsible market, Henderson says, “we need a massive political and social movement to bring back really effective, transparent, well-run government.”
But at the moment, government is gridlocked and partisan populism has transformed good governance into a controversial topic. And so Henderson is taking her case directly to the corporate world with a plea that appeals to the selfishness of businesses: “Business is screwed if we don’t fix climate change,” Henderson said. “And it’s also the case that business is screwed if we don’t address inequality, or rebuild our institutions. The world we’re creating is not going to be a good world for business.”
“Firms have a positive duty not to destroy the institutions of the society,” Henderson said “Just as we wouldn’t tolerate a firm that employs child labor, even if it’s highly profitable, we should not tolerate a company that is actively flooding the political system with money, that is actively trying to destabilize the democracy, that is trying to deny the reality of climate change.”
More ethical and responsible companies would of course be expected to generate “decent returns to investors,” Henderson says, but “it should be understood that firms have responsibility for the institutions that keep the society in balance. Firms should be about solving public problems, not creating them. So, actions that create problems should be morally unacceptable.”
In her book, Henderson highlights some successful businesses that have made a higher purpose, and not shareholder value, their primary goal. She’s already been accused of cherry-picking the successes.
“Are all businesses like that? No,” Henderson said. But she hasn’t seen any serious failures of the model. Some businesses have abandoned their purpose-driven missions when new leadership takes over, but “do I know of businesses that have embraced a purpose and then decided it was a huge mistake? I do not.”
Henderson is working on a new credo for these purpose-driven businesses that make sustainability and community important goals.
“The purpose of the firm is not to maximize shareholder value,” Henderson said, “the purpose of the firm is to maximize the prosperity and health of the society in which it’s embedded.”
“I’m not sure it’s right,” Henderson laughs of her proposed new mission statement, but she believes that a true call to action for a new kind of business is out there, just waiting to be discovered.
“One of the exciting things about the moment we’re in is that many, many people are asking that question,” she said, and someone will find the right way to redefine business for a new era. As long as business benefits in the end, Henderson is a big believer in the idea that markets will eventually find the right solution.