Henderson – Reimagining Capitalism in a World on Fire

Rebecca Henderson, Reimagining Capitalism in a World on Fire points to the real need for reform and offers several suggested improvements, primarily the need to focus on purpose. (link to Amazon) I review her book below and offer my own four cents of advice. Today (6/24/2020) Rethinking Capitalism: A fireside conversation with Rebecca Henderson and Ioannis Ioannou (register).

Henderson goes through the usual litany of problems:

• 50 individuals own more than the bottom 4 billion people.
• authoritarian populist oligarchs are consolidating power.
• tying CEO pay to shareholder value does not address social/environmental needs.
• Fossil fuels and beef only look cheap if we don’t count their damage to health and the environment.
• Legislative proposals supported by 90% in the US have little more chance of passing than those supported by 10%, unless they are supported by the rich.

She quotes Ray Dalio, of Bridgewater Associates: “most capitalists don’t know how to divide the economic pie well and most socialists don’t know how to grow it well.” At the heart of the book are many examples of companies doing the right thing, such as:

• Lipton tea moving to sustainably grown tea
• Walmart’s move to renewable energy and zero waste.

These were relatively easy moves where risks could be easily quantified, which helped the companies earn more money quickly. Other risks are harder to see. Henderson thinks the insurance industry may be underestimating losses from extreme weather by 50%.

Many of us know the survey that found 80% of CFOs would decrease spending on R&D to meet earnings targets, while 59% of executives would delay high net present value projects to avoid missing targets by a dime. “While asset owners may be focused on the long term, managers may not be. Yet, more than 40% of professionally invested assets are now invested using some form of ESG criteria. About half of that is exclusionary (guns, tobacco, coal); 10% engaged (advocates like me); and the rest is “ESG integration,” which I take to mean factoring in metrics managers hope are correlated with financial performance, such as SASB reports.

Henderson Analyzes Possible Solutions

More informative for me were her discussions with Hiro Mizuna of the GPIF. According to Mizuna, the world’s largest fund is “not interested in making excess returns. We are more interested in making the whole system more viable.” In other words, they are using ESG to push for more beta in the entire market. (See also McRitchie 2019 Proxy Season Win for Market Beta and MPT – Why Investors Might be Climate Allies: Corporate Governance Today.)

Henderson is hopeful that $68T is expected to transfer from baby boomers to younger generations, more interested in impact investing. I think many are underestimating the interest of baby boomers in impact investing and proxy voting. They just don’t have the right tools. We need to educate brokers and investment advisors now, not wait for people my age to die off.

Another hope for rewiring finance that Henderson discusses is co-ops and employee stock plans. I mentioned the work of the Democracy Collaborative when I reviewed The Making of a Democratic Economy. New to me is an even broader effort by 1worker1vote, which has formed alliances with unions, NCB and ASBC. Again, Henderson’s assessment is that progress in this area will be slow. “At the moment they are more a promising model for the future than an immediate solution–a promising project for purpose-driven millennials!”

Again, my assessment is not so pessimistic. Once Biden is President, we will see a plethora of legislation from Senator Warren and others. I and others will also be filing proxy proposals to advance the cause. No one has to wait for boomers to die before change happens.

Henderson then announces she is “a fan of the legal form known as the ‘benefit corporation'” because they do not have the same duty to maximize shareholder value if the firm has to be auctioned. Therefore, they can better serve all stakeholders. However, she identifies two serious problems, the second being more significant in my mind.

The model is heavily dependent on the firm’s ability to attract investors who share the mission of the firm…

Not all managers and boards can be trusted… it is a strategy that puts an enormous premium on good metrics and deep engagement between investors and the management team.

In the final analysis, Henderson appears to come down to the following three routes to rewiring finance:

1. Develop and utilize accounting standards so that firms “routinely report material, replicable, auditable ESG data in addition to financial data. (SASB) Almost everyone agrees to this one.
2. Rely in impact investors, employees or customers for funding. The challenge is to scale.
3. Change the rules to shelter managers from investor pressure. BlackRock, Vanguard, State Street and other largely passive investors are already sheltering managers. It does not work. Accountability is key.

In reviewing success stories, Henderson concludes free-riding must be made difficult, government support is often critical, cooperation must be in the interst of all stakeholders it. We need to ensure it is hard to enter/leave agreements and it is easy to punish those not playing by the rules. Governments, multinational organizations and large funds (universal owners) have the best potential as enforcers.

Dipping back into the problems introduced at the beginning of the book, Henderson concludes that “the issues central to reimagining capitalism can only be addressed by limiting the power of business.”

The choice is between inclusion–transparent, democratic, effective, market-friendly government supported by a strong society and a free media–and extraction, the rule by the few on behalf of the few. Free markets need free politics. It is time for the private sector to play and active role in supporting them.

Broadening the franchise, inclusiveness, and supporting democracy have been critical to our success to date. “Facts and science matter.” “Diversity is an asset.” Henderson points to Leadership Now and its commitment to American Democracy. The group works to end gerrymandering, ensure voter access, push for campaign finance reform, identifies and supports political candiates supporting the same goals.

These are definitely important goals. However, we can do more than one thing at once. Corporations are arguably as important as governments. Corporations, governments and other instutitions like universities must all adopt more representative and democratic structures if we are to succeed. When we learn how to make our voices heard in these other institutions, we will know better how to make governments work for all of us. I am reminded of the following cartoon: 

Henderson’s Six Steps to Making a Difference

1. Discover your own purpose. Like the purpose driven corporations, “you’ll need to be connected to the fire within if you’re not to burn out.”
2. Do something now. Calculate you carbon footprint. Eat less meat. Find others who share your goals.
3. Bring your values to work. Start a new company, build a team around an opportunity for change, go to work for an NGO.
4. Work in government. “We won’t get far without rebuilding trust in government.”
5. Get political. Politicians never hear from the vast majority of constituents. Join a group and get moving.
6. Take care of yourself and remember to find joy. “It is not dealth that is the tragedy. It is failing to live that is the tragedy. Everybody dies. But not everybody lives.”

My Four Cents

Henderson has written an important book, full of facts, intelligent analysis and excellent examples. Anyone concerned with reimaging capitalism is likely to find many takeaways. I know I did. Here’s my own list of a few needed reforms.

1. Try to make all institutions more democratic, including your own family.  Peter Berger once wrote, to a child “a thing is what it is called, and it could not be called anything else. All institutions appear in the same way as given, unalterable and self-evident.” We are waking up to the fact that our institutions, our own roles in society–are socially assigned typifications–Berger’s socially constructed reality. Although many of our socially constructed roles and institutions are the result of simple reflexive power dynamics, having the bigger stick, we now have an opportunity to reconstruct social reality in full concious awareness. We need to all institutions that shape us, to be more democratic, saluberous and humane– especially governments and businesses.
2. Real-time proxy votes. Henderson discusses the role of mega-funds like GPIF to make the whole system more viable. The problem is that fund proxy votes don’t often reflect the full values of their investors. The SEC should require funds to announce their votes in real-time, in user friendly sortable format, not just once a year in unreadable code. When investors see their ESG funds voting against ESG proposals and principles, there will be Mutual Fund Wars Over Fees AND Proxy Votes. Main Street investors will demand that our investments begin to reflect our full values as people.
3. Promote co-ops and employee stock plans, with voting power passed to employees. Co-ops and employee stock plans are not just for “purpose-driven millennials.” No one who works wants to be just a cog in the machine. With the right infrastructure, these more democratic forms of business can spread like a positive virus. With a greater voice, employees and their companies will be more creative and productive. Henderson’s class “Reimagining Capitalism” has grown from 28 to 300–nearly a third of the Harvard Business School Class. Clearly, her students are searching for something different. Why isn’t Harvard offering a Master in Social Economy and the Cooperative Company or a PhD in Entrepreneurship, Cooperative and Innovation Management like Mondragon?
4. Hedge limited liability. A good portion of the problem of capitalism, as currently practiced, is that investors have limited liability. Investors are only liable for the dollar amount they have invested in a firm. In Redesigning Corporations: Incentives Matter, Nicholas Benes, outlines a system that could incentivise investors to take up their moral responsibilities to monitor possible negative impacts, such as occur when a company externalizes costs off onto the environment or society. Capitalism is off-course. Benes offers a way to hedge limited liability so that we can steer in a better direction.