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To most people, capitalism would be a lot better if it allowed entrepreneurs to start businesses and make profits, but steered them towards thinking long term, protecting the planet, and valuing customers and employees and sharing rewards with them.
In the USA and the US, the left is making a lot of noise about the failings of capitalism. But the solutions it talks about simply postpone the day when we get a government which promotes long-term wealth creation that serves us all.
In his speech to the Labour Party Conference John McDonnell talked lovingly about Clause 4 of the party’s constitution, which implied ‘fair, democratic and collective solutions to the challenges of the modern economy’. In the whole of his speech he never mentioned entrepreneurs or the importance of encouraging people to start businesses. His only reference to wealth creation was when he said ‘employees who create the wealth’. Not entrepreneurs, not managers, not leaders not customers or investors or business partners. Nowhere did he mention that companies might have a part to play in mitigating climate change, lifting people out of poverty, or reducing pollution.
In the USA, many people still believe in the self-destructive dogma of shareholder primacy. Research has consistently shown that companies with a purpose beyond profit for shareholders produce stronger long-term performance. Shareholder primacy, we now know, is bad for shareholders, let alone stakeholders! Senator Elizabeth Warren is reacting to this outdated emphasis on shareholder primacy by proposing the ‘Accountable Capitalism Act’. Under this, American corporations with more than $1 billion in annual revenue would have to obtain a federal charter. This would ‘obligate company directors to consider the interests of all corporate stakeholders – including employees, customers, shareholders, and the communities in which the company operates’. Under this charter a corporation would also be required to ensure that no fewer than 40% of its directors are selected by the corporation’s employees. The courts would be left to decide whether companies had properly balanced the interests of all their stakeholders. Good luck with that judges. Good fortune, corporate lawyers!
The extreme world of shareholder buybacks and executive greed make it understandable that politicians want to act. The problem for McDonnell and Warren is that, far from taming capitalism, their rhetoric and their proposals risk moving their respective countries towards an even more extractive and unacceptable design for capitalism.
Consider the assumptions that lie beneath these proposals. To John McDonnell there is no Schumpeterian ‘creative destruction’, no business life cycle, with companies being born, growing, competing, rising, falling, merging, morphing. He doesn’t talk about the importance of markets, properly set up and tuned to serve the common good. He doesn’t seem to worry about how companies have come to exist. It is as if they had simply been planted on the earth, already mature enterprises, habitually exploiting workers, by a greater force called Capitalism. His is a creationist view of capitalism. Warren’s proposals seem to treat the company less as a living being and more as a piece of kill being fought over by shareholders, customers employees and other stakeholders.
To those who invest in or lead or work in or lead, companies they are dynamic and ever-changing organisms of wealth creation, requiring imagination, sensitivity and fast decision-making. To McDonnell and Warren, they are simply venues where workers arrive to find, miraculously that the complicated effort to set up successful enterprises and devise smart solutions and business models has already been done. Thus, the focus can be on how the dividends are distributed and who sits in the boardroom.
Theresa May has suffered from a similar superficiality in understanding how wealth is created. Hence her ill-thought-through proposal about workers on the boards. At least, with the encouragement of the IPPR, McDonnell has started to think about the importance of share ownership, even if his approach was unduly crude.
But what characterises all this thinking is that it is about extraction, not stewardship. It doesn’t tackle the messy essence of true wealth creation. It tries to treat enterprises as if they were quasi -political institutions sitting on top of magic money machines out of which dividends will effortlessly flow. And the focus is still on financial rewards, not long-term value for staff, shareholders and society. For decades politicians have tried to make the National Health Service better by imposing different decision-making structures over the communities and people where the real value gets created. All they have done by these efforts is to destroy value by sowing chaos and uncertainty.
The best contribution governments could make to the world of wealth creation is this. Celebrate and encourage entrepreneurship. Encourage the flow of people’s savings into investment channels that help long-term wealth creation. Reward larger listed companies which set aside a proportion of their profits into a shareholding fund as Handelsbanken has done. Encourage social enterprises, employee ownership, mutuals and all kinds of hybrids. Reinforce the accountability of boards for fulfilling their obligation to promote the long-term success of the company. Protect employees who don’t want Amazon-style zero-hours contracts. Invest in vocational training and apprenticeships.
Then get out of the way!
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