How to make capitalism more ethical

We live in an age of hyper-connectivity and many of the top 10 trends in the Outlook on the Global Agenda 2015 are bound by invisible cords. Yet some are more directly correlated than others. And perhaps the linkage that demands our attention most is that which binds income inequality (#1) to lack of leadership (#3).

According to the World Bank, almost 15% of the world’s population is living on less than $1.25 per day. Bizarrely, that represents progress, as the same statistic 20 years ago was 36%.

Yet the 86% of Outlook 2015 survey respondents who identified a leadership crisis in the world today are not optimistic. Indeed, the richest are getting richer at a phenomenal rate. The number of billionaires in the world has more than doubled to 1,646 since the financial crisis of 2009, claimed Oxfam this year. Globalization and capitalism may be applauded for lifting people out of poverty – but much depends on our definition of poverty and where we choose to draw the line between rich and poor. The same Oxfam report indicated that the richest 85 people in the world have the same wealth as the poorest half of the world’s population.

Capitalism, formalized in the late 18th century and spread around the world by globalization, remains our default “operating system”. It is based primarily on self interest, but we know that self interest is only one component of our humanity. Most of us also have a selfless gene, and it has become increasingly evident that reliance on self-interest is no longer sufficient, especially when the resulting outcomes are exclusive and damaging, as we see around the world today.

If capitalism is to remain as the primary operating system of our world, it makes sense to write values and ethics into its source code, to create a more ethical capitalism.

In the wake of the recent financial crisis, “capitalism” has become a dirty word in some quarters, blamed for the crisis, the recession, hardship and austerity measures that followed. According to a poll by Pew Research, public support for capitalism has considerably fallen in nine out of the 16 largest economies.

That’s understandable, but the wrong target is in the crosshairs. Capitalism itself is not the culprit, but those capitalists who focus on short-term gain with little or no care for the future. Capitalism is only as good as those who practice it.

Call it what you like: conscious capitalism, responsible capitalism, ethical capitalism – the better way to practice capitalism is to move the needle towards creating long-term socio-economic and environmental value: a business model with a higher purpose, where businesses build deep, trust-based relationships with their customers, employees, suppliers, investors and society.

The bottom line benefits too from this kind of ethical, values-driven capitalism. Businesses adopting this model attract more customers, reduce operating costs through energy efficiency and lower waste, boost employee loyalty and enjoy engaged workforces that share the corporate vision, aspirations and goals.

Ethical capitalism is not some implausible manifesto but a proven mechanism for driving long-term value creation. Studies by Harvard Business School, Babson College and others have demonstrated that firms that prioritize stakeholder engagement and take a long-term view significantly outperform competitors in the stock market over time.

Therefore the challenge for business is not simply “don’t be evil” as Google’s famed corporate philosophy suggests. The new challenge is seeking actively to do good.

Adam Smith’s invisible hand of capitalism was predicated on the concept of public good and public trust. But that linkage with business has been eroded over generations in the increasingly greed-fuelled race to acquire ever-more profits and wealth.

But the potential dividend for doing good in our world are enormous, from tackling climate change to gender equality.

Japan, for example, has one of the worst levels of gender equality in the developed world. But at the World Economic Forum’s Annual Meeting in Davos in January this year, Prime Minister Shinzo Abe personally committed to closing the gender gap in his country, where more than three million women in Japan would like to work but cannot, partly because of a lack of child care

Why? The prime minister may have been acting for reasons of ethics or personal conviction. But the economics are equally clear.  Japanese girls score higher in science than boys and constitute nearly half (48%) of university graduates. Yet only 67% of college-educated women are currently employed, many of them in low-paid, part-time roles. Only 7%, according to one estimate — occupy senior positions in management. Abe has spotted the huge potential for Japan to enjoy a better return on the investment it already makes in the education of its women.

Ethical capitalism must be more than a conversation about values. It must lead to changed behaviours. The WEF Global Agenda Council on Values has proposed what it calls a “new social covenant”, based around human dignity, common good and stewardship. But it recognizes that conversations are only the starting point and so is creating toolkits that will enable companies and others put their values into practice.

As in many other parts of business, there is a competitive advantage to being among the first to put values into practice, whether it’s reducing carbon footprints or eliminating pay inequalities. Meaningful values-infused programs – as opposed to meaningless window-dressing – have enabled many companies to develop new and valuable core competencies.

The message is clear: companies who fail to act now do so at their peril. But this is also a time of great opportunity. Following a more ethical brand of capitalism requires strong and courageous leadership – not something currently in abundance, according to the Outlook 2015. But just as ethical capitalism may be the only sustainable form of capitalism, values-driven leaders and companies will, I believe, prove to be those who enjoy the greatest, most rewarding and sustained success.

Author: Peter Bisanz, Head of Development and Communications, Global Knowledge Networks

Image: City workers cross London Bridge during the evening rush-hour in the City of London October 8, 2008. REUTERS/Toby Melville