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Home » Opinion » Chinese Views
Does capitalism need reform? Yes!
By Michael Yaziji |
November 4, 2010, Thursday
|
Print Edition
Print Edition
I want to live there! In the imaginary land of capitalism's apologists, there are no conflicting interests among employees, customers, communities and shareholders.
We can all trust that the shareholder has everyone's best interests at heart. Just put your trust in Goldman Sachs.
Sadly, I wake up each morning to a different world. I put on my shoes and go into the amphitheater and teach strategy.
In my world, competition is fierce and extracting as much net value from the supply chain - including customers, employees, local communities and the environment - is essential to maximizing shareholder value. In my world, shareholders are not committed to any particular firm, its employees, customers or community.
Their narrow measure for decision making is on shareholder value, not total value creation of the firm; indeed, if you can extract one extra euro in shareholder value at the expense of 10 euros to customers, employees or the environment, then, according to capitalism, this is what you should do.
It is no surprise that capitalism is under increasing scrutiny. "Capital-ism." Break down the word. It is a system fully designed around the power of, and for the benefit of, one single stakeholder - capital investors.
Of course, if all the other stakeholders had unlimited power and perfect information, they could ensure that the decisions made by capital investors took their needs into account. This is the fantasy land of the apologists. Other stakeholders don't always have this power and information; they cannot keep capital in check.
The apologists will claim that the economic growth over the last two centuries comes from capitalism. This confounds the facts. The economic benefits have come from market competition. They have not come from the internal governance structure (capital-owned) of the firm.
We'd be fools to give up the benefits of market competition, but we can capture these benefits without all of the dysfunction that comes from a single stakeholder - capital investors - wielding so much power for their own sole benefit. If you take one thing away from this debate, let it be this: Market competition is NOT synonymous with capitalism.
Let's build a thriving market economy owned and controlled by a broader set of stakeholders, whose interests more fully reflect all of our interests, as employees, customers, citizens as well as capital investors.
(The author is Professor of Strategy and Organizations at IMD international business school. He is director of IMD's new Open Planet Leaders program, run in conjunction with the WWF.)
No!
Arturo Bris
THE 2008 financial crisis is considered to be a crisis of capitalism.
Because too much stress was placed on shareholders' interests, banks took greater risks in the run-up to the crisis, both for themselves and for their investing clients.
New financial regulation is based on the principle that clients should now come first, and that ethics, not profit, should guide boards and top executives. This calls for a complete reformulation of capitalism as we know it.
The crisis is, however, not a crisis of capitalism.
Actually, capitalism the way we know it works perfectly fine. Firms' and banks' objective to maximize shareholder wealth is still legitimate because:
Shareholders are indeed the longest-term oriented stakeholders in a financial institution, as opposed to clients (short-term depositors) and employees;
Shareholder value maximization is the only strategy that provides us with quantifiable, objective measures of performance;
Stakeholder-based organizations (insurance mutuals, cajas de ahorro in Spain or caisses d'epargnes in France) have fared equally if not worse during the crisis; and
Shareholders are first interested in maximizing customer and employee satisfaction and hence the long-term value of the corporation.
The reform we need is a political reform. Even after World War II, governments have been delegating tasks, originally theirs, to corporations.
Philanthropy, corporate sustainability and environmental costs are essentially activities that taxpayers should bear.
However, self-interested and inefficient governments have over time generated a public sentiment that they need to be delegated to the private sector.
We are therefore in a situation where the regular citizen pays for public goods twice: directly through taxes, and indirectly through share ownership (mutual funds and pension assets).
Shareholders/taxpayers subsidize governments because companies have felt the pressure to preserve the interests of customers, suppliers and employees alike. This is not fair.
Capitalism is based on the premise that once labor is compensated, capital receives the residual rents.
It is this system which is responsible for the amazing improvement in living standards and wealth creation that we have witnessed in the last two centuries.
(The author is Professor of Finance at IMD international business school. He is director of IMD's Advanced Strategic Management program.)
We can all trust that the shareholder has everyone's best interests at heart. Just put your trust in Goldman Sachs.
Sadly, I wake up each morning to a different world. I put on my shoes and go into the amphitheater and teach strategy.
In my world, competition is fierce and extracting as much net value from the supply chain - including customers, employees, local communities and the environment - is essential to maximizing shareholder value. In my world, shareholders are not committed to any particular firm, its employees, customers or community.
Their narrow measure for decision making is on shareholder value, not total value creation of the firm; indeed, if you can extract one extra euro in shareholder value at the expense of 10 euros to customers, employees or the environment, then, according to capitalism, this is what you should do.
It is no surprise that capitalism is under increasing scrutiny. "Capital-ism." Break down the word. It is a system fully designed around the power of, and for the benefit of, one single stakeholder - capital investors.
Of course, if all the other stakeholders had unlimited power and perfect information, they could ensure that the decisions made by capital investors took their needs into account. This is the fantasy land of the apologists. Other stakeholders don't always have this power and information; they cannot keep capital in check.
The apologists will claim that the economic growth over the last two centuries comes from capitalism. This confounds the facts. The economic benefits have come from market competition. They have not come from the internal governance structure (capital-owned) of the firm.
We'd be fools to give up the benefits of market competition, but we can capture these benefits without all of the dysfunction that comes from a single stakeholder - capital investors - wielding so much power for their own sole benefit. If you take one thing away from this debate, let it be this: Market competition is NOT synonymous with capitalism.
Let's build a thriving market economy owned and controlled by a broader set of stakeholders, whose interests more fully reflect all of our interests, as employees, customers, citizens as well as capital investors.
(The author is Professor of Strategy and Organizations at IMD international business school. He is director of IMD's new Open Planet Leaders program, run in conjunction with the WWF.)
No!
Arturo Bris
THE 2008 financial crisis is considered to be a crisis of capitalism.
Because too much stress was placed on shareholders' interests, banks took greater risks in the run-up to the crisis, both for themselves and for their investing clients.
New financial regulation is based on the principle that clients should now come first, and that ethics, not profit, should guide boards and top executives. This calls for a complete reformulation of capitalism as we know it.
The crisis is, however, not a crisis of capitalism.
Actually, capitalism the way we know it works perfectly fine. Firms' and banks' objective to maximize shareholder wealth is still legitimate because:
Shareholders are indeed the longest-term oriented stakeholders in a financial institution, as opposed to clients (short-term depositors) and employees;
Shareholder value maximization is the only strategy that provides us with quantifiable, objective measures of performance;
Stakeholder-based organizations (insurance mutuals, cajas de ahorro in Spain or caisses d'epargnes in France) have fared equally if not worse during the crisis; and
Shareholders are first interested in maximizing customer and employee satisfaction and hence the long-term value of the corporation.
The reform we need is a political reform. Even after World War II, governments have been delegating tasks, originally theirs, to corporations.
Philanthropy, corporate sustainability and environmental costs are essentially activities that taxpayers should bear.
However, self-interested and inefficient governments have over time generated a public sentiment that they need to be delegated to the private sector.
We are therefore in a situation where the regular citizen pays for public goods twice: directly through taxes, and indirectly through share ownership (mutual funds and pension assets).
Shareholders/taxpayers subsidize governments because companies have felt the pressure to preserve the interests of customers, suppliers and employees alike. This is not fair.
Capitalism is based on the premise that once labor is compensated, capital receives the residual rents.
It is this system which is responsible for the amazing improvement in living standards and wealth creation that we have witnessed in the last two centuries.
(The author is Professor of Finance at IMD international business school. He is director of IMD's Advanced Strategic Management program.)
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