Opinion

Chrystia Freeland

Retooling capitalism for the social good

By Chrystia Freeland
July 19, 2013

When the financial crisis threatened to topple the global economy, my Russian friends took great delight in calling me from Moscow and sharing the bittersweet response that was making the rounds of a city that always laughs loudest when things go wrong: Everything Marx told us about communism was false, the gag went, but everything he told us about capitalism was true.

In 2008, it was easy to see their point. The lopsided recovery hasn’t brought much comfort, either. Across Western Europe and North America, corporate profits and stock prices have rebounded, but the middle class is more squeezed than ever.

Even so, my Muscovite pals were wrong. Marx didn’t just get communism wrong – he was also profoundly mistaken about capitalism, which turns out to be the best prosperity-creating system humanity has come up with so far.

But that doesn’t mean it doesn’t need to evolve. The high-tech, globalized capitalism of the 21st century is very different from the postwar version of capitalism that performed so magnificently for the middle classes of the Western world.

That’s why a lot of people, including many hard-driving capitalists, are trying to figure out how to retool the institutions of capitalism for our time.

This week, the state of Delaware, which has made corporate governance its regional cuisine, approved a new form of incorporation, the B-corp, or benefit corporation. These are companies explicitly charged with a dual mission: to earn profits for shareholders, the traditional business goal, and also to pursue the social good in other ways, ranging from protecting employees to safeguarding the environment – even if these goals come at the cost of short-term financial gain.

Jack Markell, Delaware’s governor, traveled to a seminar discussion in New York on the sweltering day his state signed B-corp into law. “This is a very significant public policy issue,” he said. “There is both a market need and a societal need.”

Markell admitted that “there are a lot of skeptics out there,” but he said the B-corp status was an important response to a world in which the way we do business has changed.

“When businesses first started up, they operated in the communities where they existed. This was where the executives lived,” Markell said. Because they were so deeply rooted in particular communities, they didn’t need legal structures that required them to take into account all of their stakeholders – social pressure served that role.

In today’s virtual, global economy, those personal constraints are eroding fast. The B-corp structure is a way to recreate them.

Markell believes there is a hunger among investors and entrepreneurs to both do well and do good: “What an unbelievable opportunity this represents to harness the energy of entrepreneurs who are really focused on making money and who want to give back at the same time.”

Albert Wenger, a partner at Union Square Ventures, a New York-based investment firm, buys that argument. He was at the seminar with Markell, and in a blog post earlier that day, he laid out what he sees as the critical challenge for capitalism today: “Our problem as society is no longer how to make more stuff. Cars, clothes, computers are all becoming better and cheaper.”

Instead, Wenger argued, “Our biggest remaining problems, however, require social innovation: How to distribute the benefits of progress more widely, how to live in better harmony with the environment and how to provide affordable access to education and healthcare for all.”

The good news, Wenger believes, is that it is not just Occupy Wall Street that has focused on this dilemma. Business people are worried about it, too. “At Union Square Ventures, we are seeing more and more entrepreneurs and startup employees who are motivated as much by making the world a better place as they are by making money,” he said.

The optimists at the B-corp discussion, which was hosted by the World Economic Forum, hoped that doing well and doing good could be seamlessly aligned. They argued that by freeing businesses to be mission-driven and pursue long-term goals rather than short-term profits, and by appealing to a new generation of idealistic consumers, B-corps could be as, if not more, profitable as traditional companies that maximize shareholder value.

That is a comforting thought. Frederick H. Alexander, the former chair of the Delaware Bar Association’s Section of Corporation Law, suggested a tougher possibility.

“Part of the struggle is facing up to the hard facts,” he said. “The basic thing that underlies a B-corp is that you don’t have to maximize shareholder value. You are accepting the possibility of a lower return.”

That may have been common sense for the Greatest Generation. But for most of us today, that notion of voluntarily forgoing higher profits for the benefit of the wider community is, as Alexander put it, “counterintuitive.”

The B-corp structure is part of a wider movement to make that trade-off more natural. As Alexander said, “the issue is, do you want to conduct your investments in the way you wouldn’t conduct your life.”

That is a very good question, and one we have gotten out of the habit of asking.

Comments
36 comments so far | RSS Comments RSS

“…capitalism…turns out to be the best prosperity-creating system humanity has come up with so far.”

Just keep that thought. FOREVER! All too many BOZOS want to kill the goose that lays the golden egg. They would wrap it in so many socialist spider webs that it suffocates without having a clue as to a workable, sustainable alternative.

Posted by OneOfTheSheep | Report as abusive
 

I don’t even bother to read Chrystia Freeland anymore.

She solicits reader comments every week, but censors them one and all. The lack of courage and the poor manners are appalling.

I don’t even bother to read her anymore.

Posted by AdamSmith | Report as abusive
 

I look forward to hearing more as B-corps go into operation.

Posted by leslie20 | Report as abusive
 

This as AWESOME! Thank you for bringing it to our attention. I would love to see a TED talk on it.

Posted by tmc | Report as abusive
 

We need to retool capitalists not capitalism Chrystia.

Every business owner has choices, to pay fair wages and good benefits or not. To be an ethical leader and good steward of an organization or not. To treat employees, customers, and vendors fairly, or not.

Simple choices that should be no brainers based on a foundation of logical humanism learned from pre-school on. Instead there seems to be no “we” and all “me” in upper management of many public corporations.

B-Corp is a lovely thought but it’s no more than a Gideon’s Bible in a hotel room. If the Devil’s spending the night, it won’t make a bit of difference.

Posted by ltcrunch | Report as abusive
 

Offering investors another option is always good.

We have had socially-oriented investment opportunities for years, this is nothing new. Much like the mutual funds that will not invest in tobacco companies, oil companies, or in countries that do not offer their citizens the rights we enjoy in this country.

Most deliver mediocre performance, although a few have performed well.

Posted by COindependent | Report as abusive
 

Social good like social justice is a mirage, a phantasm. Justice is innocent until proven guilty, a uniform set of weights and measures, a law that conforms to principles of law (justice) embedded in US Constitution.
The worst performing sector of US economy is so-called not-for-profit. There is no justification for tax-exempt status of universities, think tanks and foundations.
Obama Care results from mistakes made on state and federal level. The states should not have let the medical profession accredit medical schools in name of public interest, and the federal government’s agency administering Medicare should be competing against private carriers. If a resource is being despoiled it is due to lack of title. Michael Oakeshoot of London School of Economics said private property is man’s most complicated institution.

Posted by zylon | Report as abusive
 

Capitalism is about using resources in an efficient manner. Not-for-profits are maladapted institutions focusing on politic,s not using resources efficiently. The not-for-profit is not well focused. All market needs are societal.

Posted by zylon | Report as abusive
 

Using resources efficiently is doing good.

Posted by zylon | Report as abusive
 

Only human beings sin, not corporations that are legal fictions.

Posted by zylon | Report as abusive
 

Careful Chrystia or the torch and pitchfork toting mob will brand a big red S on your forehead. Capitalism and democracy are two ingredients of a wonderful dish that will never taste quite right without that dash of “socialism” in the form of social responsibility. I was terrified of Dragonflies when I was a kid and remember learning that this insect is so voracious that if you could feed one its own tail, it would eat itself until only the head remained and it died. Probably not true but the picture is certainly symbolic of where we stand at the moment. I just hope we all make it long enough for all of us, including the folks in the leather chairs on the top floor, to see the overall benefit of taking what you need and leaving some for someone else. Oh – and maybe there’s a way to do that without completely trashing this rock we all live on. Good piece – thanks.

Posted by SGinOR | Report as abusive
 

What does it mean to do good? Does it mean to love the Lord your God with all your heart and soul and strength and might. What is god?
Does it mean the State’s foreign policy should be the spread of title IX, women’s liberation, and on line kiosks pitching the charms of electronic gadgets?
Does it mean a chicken in every pot and a car in every garage?
Does it mean the State and its agents should follow principles of law (justice) embedded in US Constitution?
Who determines the good? Should we vote on it?

Posted by zylon | Report as abusive
 

This is only counterintuitive for greedy people. For everyone else it makes perfect since. But then the mega corps will find a way to weasel in and buy or sabotage these upstarts. They will do this with clever marketing, undercutting prices, hiring gang members to rob or threaten, bribing officials, and/or all the other tools that they have up their sleeve.

Posted by 2Borknot2B | Report as abusive
 

Karl Marx talked of abolishing private property, actually, bourgeoise private property, in the Communist Manifesto. The worst performing sector of US economy is not-for-profit that includes medical schools, universities, hospitals and foundations all of which lack de jure stockholders. Marx also made some wiid historical generalizations only topped by Milton Friedman in Capitalism and Freedom and William Douglas in Griswold v. Ct (1965). Peter Bauer, former development economist at London School of Economics remarked upon modern man’s lack of a time dimension that historical researches provide.

Posted by zylon | Report as abusive
 

Cars, clothes and computers are produced by for-profit entities having common stock traded on an organized stock exchange. Not true for education, hospital care, medical education or Blue Cross and Blue Shield plans, originally financing arms of hospitals and doctors. The Blues bore same relationship to hospitals and doctors that GMAC, now Ally Bank, and Ford Motor Credit Company bore to GM and Ford Motor Company. Medical care sector and education sector have not evolved.

Posted by zylon | Report as abusive
 

It would be refreshing to buy from a corporation not run by a sociopath.

Posted by choto19677 | Report as abusive
 

Time will show is it just rebranding or something genuine – i don’t remember that many capitalist openly proclaimed that they’re interested only in satisfying their greed at society’s expense.

Anyway, as far as mentioned joke goes, there’s nothing to contradict it yet – other than in few community-servicing fields where shareholders and clients are also voters, b-corps will be eaten alive by good ole greedy capitalists – if government won’t interfer, but then it won’t be “free market capitalism”, but something more akin to social-democracy.
Of course that some of these b-corps will be frauds or badly mismananaged is also a given.

Posted by chyron | Report as abusive
 

I tried it on a large scale, it does not work;

Posted by Paats-W. | Report as abusive
 

I really wish it succeeds! But one component isn’t clear, though it is critical: competitiveness.

Posted by UauS | Report as abusive
 

About 1951, I became concerned with American manufacturers transferring valuable corporate secrets to foreign companies in a bargain to gain sales, short-term profits. To the buyers, the secrets would be valuable for decades. So the manufacturers’ birthrights were being sold for a mess of pottage. I foresaw problems, but optimistically assumed leaders would wake up. They have not.
Adam Smith, if I understand him, foresaw that owners would be tempted to underpay workers, but that patriotism and ethics would offset that. Today the Plutocrats do not see the Rest of Us (unlike barons and lords of peasants, and Henry Ford of his workers). We do not see the Plutocrats, who board their intercontinental jets out of sight of the terminals. Henry Ford started paying his workers more than the going rate, as he wanted them to buy Model T’s. But too many Plutocrats are Global Citizens, with loyalty on to their kind. And today Greed trumps ethics. So owners, having no feelings of loyalty to their workers, move manufacturing to lower-wage countries, and require their loyal workers to train their foreign replacements!

Welcome to the Global Plutocracy, the Government of the Plutocrats, by the Plutocrats, and for the Plutocrats. I have long known of their Class War against the Rest of Us, the Middle Class, the Poor, and even the Mere Millionaires. The chart of the decline of Detroit’s population, beginning in 1950, suggests to me the War had started by the time I noticed the transfer of our technology to foreign companies.

Now I see the Class War is Global. Chinese workers recently locked up an American owner after learning he was to transfer operations to a lower-wage country! Yet the Class War is self-defeating. If the Rest of Us have little or no disposable income, who will buy their production? The CEO and supporting directors must learn the War is punishing the workers, investors, and customers. They need to look a hundred years ahead, where do they want their company, and their country, to be, in a hundred years? When will they wake up? When will we wake up?

Posted by BarryWJackson | Report as abusive
 

It was most impressive that more than 10,000 people lined up to start B-Corporations. Wait a minute. That was on Faux News. Other media reported one, maybe two curiosity seekers.

Next, we’ll be endorsing motherhood and apple pie.

Posted by ptiffany | Report as abusive
 

If we gave corporations significant tax breaks for expanding operations here in the U.S., plus tax breaks for hiring American citizens and sending them overseas, corporate behavior would shift. A profit is a profit, and they’ve demonstrated they don’t care what the economic fallout is for anyone but themselves. Why not use their innate behavior?

We have to provide incentives for the corporations to change. Contrary to what many Republicans think (OOTS), most Democrats don’t want to strip corporations of their profits to distribute by check to those less fortunate, but want to use the corporate system (after all, it’s the only economic game in town) to re-energize the American economy; something the corporations are NOT willing to do out of any ethics or morality, or loyalty to the U.S. economy.

As it’s structured now, corps take the profits from lower wages, fewer regulations, etc., they earn through Globalization and simply invest them in additional countries with even lower wages and even fewer regulations. The U.S. economy is not seeing ANY return on its corporations’ investments.

The more jobs we lose, and the more part-time jobs here that pay minimum wage, the fewer people there are to purchase products. The fewer there are to purchase products, the more the jobs flow overseas to recoup the corporations’ profit losses.

Retool the corporate structure? Sure. After we toss Congress out and and eliminate lobbying, but after that, provide tax breaks for investing in the U.S. economic structure, and American citizens. Then stand back and watch as our corporations climb all over each other to be those “Job Creators” they now like to claim they are. It would be just like stepping back into the 1950s.

But a B-Corp is a great idea and a good step forward. We should provide tax breaks for them, too.

Posted by JL4 | Report as abusive
 

A government owned and operated by large corporations, a populace that admires criminals and considers them intelligent, and industries that reward fat lazy managers over productive workers makes only the insane work hard.

Posted by brotherkenny4 | Report as abusive
 

Social Good again AKA communism. With the coming turmoil in financial markets social good corporations will do good to last a year.

Posted by elsewhere | Report as abusive
 

Won’t work, because in capitalism profits are ultimately the rule. The only way a for-profit company will honestly take on this B-corp concept is if they can make being good profitable, if they can’t then why bother. Plus, this model is relying on a rather small market, as mentioned in the article, the “new generation of idealistic consumers,” ya, like there are a whole lot of people out there who can afford to be idealistic in their consumption, not to even mention the few numbers of idealistic consumers as a whole.

At best, this idea of a B-corp is just a fad.

Also, Freeland (the article’s author) doesn’t know Marx all that well. She says, “Marx didn’t just get communism wrong – he was also profoundly mistaken about capitalism, which turns out to be the best prosperity-creating system humanity has come up with so far.” Well, Marx didn’t get communism wrong, because he didn’t really say anything about it to get wrong. Marx doesn’t write hardly a thing on what communism will be like except a few speculative thoughts really, he’s too busy critiquing Capitalism. And this idea of hers that Marx was “profoundly mistaken about capitalism”… well, Marx didn’t just criticize Capitalism, he also praised it – he praised it as “the best prosperity-creating system humanity has come up with so far.” So here Freeland is in the very same sentence where she says Marx is “profoundly mistaken”, she counters him with an important Marxist concept.

Posted by ThomasDidymus | Report as abusive
 

This article demonstrates again, if further validation is required: the advocates of capitalism today, as it continues to decline, can only see boardrooms and green plants in the executive suits.

The almost 50 million hungry Americans, and the untold millions out of work need only sit back and wait for the “social good” to descend upon them… after some 300 years of capitalism, and an equal number of years defending this system of social organization.

As to those with a social conscience, their problem is that they did not read their Marx in the way the author of this article did – or probably not!

Posted by RobertFrost | Report as abusive
 

@JL4,

I’m delighted. This is the first time we are on the same “side”! Actually I’m just a sucker for logical thinking…not the “party conservative” you believe me to be. I’m also pro-choice. For the record, I do not think either major party has more than a third of “the answers”.

“If we gave corporations significant tax breaks for expanding operations here in the U.S., plus tax breaks for hiring American citizens and sending them overseas, corporate behavior would shift. A profit is a profit…”.

I agree completely! For years I have said that Capitalism is the engine of prosperity but, like a horse, it needs the proper harness to apply it’s magic efficiently to benefit one and all. Government makes and adjusts the harness, and it has done an incredibly poor job adapting to changing economic conditions. Even the word “incompetent” is inadequate.

“We have to provide incentives for the corporations to change…Democrats…want to use the corporate system…to re-energize the American economy…”. Why can’t we use the proper term…”businesses”?

“As it’s structured now…he U.S. economy is not seeing ANY return on its corporations’ investments.” I think it would be more accurate to say “…on it’s businesses’ investments.”

“The more jobs we lose, and the more part-time jobs here that pay minimum wage, the fewer people there are to purchase products.” Absolute nonpartisan truth.

“Retool the corporate structure? Sure.” Oops…emotion, not mind speaking. It’s thinking business incentives and disincentives that can produce the changes needed.

“After we toss Congress out and and eliminate lobbying, but after that, provide tax breaks for investing in the U.S. economic structure, and American citizens. Then stand back and watch…”. I’m with you 100% here!

“But a B-Corp is a great idea and a good step forward. We should provide tax breaks for them, too.” Why not?

Posted by OneOfTheSheep | Report as abusive
 

In the past few days I have kept my eyes open on this forum as the subject matter aroused my interest.

IMO the government should solely be responsible for providing social welfare to counterbalancing capitalism, or free market economy as I preferred to call it. Let the capitalists zero in wealth maximization.

Neither capitalism nor socialism alone would work. Both of them are in fact practical complements to one another. The difficult task of a government in tackling these issues is to find an accurate gauging method in determining the degree of involvement of helping the destitute. Not too much so as to discourage hard work, and not too less so as to create social problems.

Trying to shift a governmental responsibility to private corporations as Delaware did cannot solve this social problem.

“A socialist society has capital problem but no social problem. A capitalist society has social problem but no capital problem.” I forgot who said so. However I believe most societies have both problems, and the government should tackle this.

Posted by Kailim | Report as abusive
 

” Marx didn’t just get communism wrong – he was also profoundly mistaken about capitalism, which turns out to be the best prosperity-creating system humanity has come up with so far.”

Actually, the greatest wealth creation was during the ‘New Deal’ era in the US, and the very similar Social Democratic model in Europe. Unregulated capitalism leaves you with the great depression and/or Victorian levels of poverty.

Marxist analysis of capitalism really is spot on.

The truism quoted by your Russian friends does have one fault. Marx foresaw a time when the state would take over everything, and the class war for control of the state would determine who owned the future.

I used to think this was a load of rubbish, but the expansion of government spending as a percentage of total spending, the auto and financial bailouts, the pervading security state we live under all point to Marx being rather closer than I gave him credit for.

Posted by Urban_Guerilla | Report as abusive
 

I enjoyed this column very much, and would like to see much more of this type of conversation going on in the world today. We are at a point in time where it is critical to think of the long term effects of things. One example would be the shale industry, which only prolongs our dependence on fossil fuels and generates more pollution and sources of future health, environmental, and even existential problems.

One of the reasons why these B-corps will see smaller returns is because nominal price does not reflect real value. We know that companies have enormous influence in our everyday lives and the way the government is ran, so we need to align their interests with the interests of society, in order for that influence to be a positive one.

Further, we need to absolutely eradicate government from the areas that the private sector can better handle, and create an intelligent government that is there for the real interests of the people, not politicians and corporations.

Not a small task by any means, but if we decide to take necessary actions I have no way to believe that we won’t succeed.

Posted by objectivity101 | Report as abusive
 

This is brilliant. There’s a huge market of people out there fed up to the, well, I can’t even articulate how fed up… Point is, there is a huge market of people who will want to deal with B-Corps over those run by the Sociopaths. Kind of like buying those free run chickens. If you’ve got to eat the poor things, then at least you know they were treated well in their short life on the way to the table.

Thumbs up guys! Gotta love the socially respectful.

Posted by takeapill | Report as abusive
 

I really don’t understand from this article what the differences are in how a B-corporation will, in practice, operate. It seems likely a B-Corp would incur higher costs than a competitor which is a regular corporation. If so, even if investors happily put their capital in a lower return investment, it seems naive to think consumers would accept higher cost/lower quality products and services just because they come from a B-Corp.

What we really need is enhancements to accounting that are applied to all enterprises. We need triple bottom line accounting rules. We need them standardized globally and at least require all multinationals and other big corporations to adopt them, together with independently appointed (and rotated) auditors. No more externalized costs!

For example, lots of projects that were undertaken in the past would never have been started had the true environmental costs, as under triple bottom line rules, been incorporated into the economic analysis.

G20, are you reading this?

Posted by mind_emergent | Report as abusive
 

Classic Capitalism, as explained by Adam Smith, stated owners may be tempted to underpay workers. When industrial capitalism exploded, workers had living wages, and more. Owners were rewarded as workers bought products. Henry Ford, at the beginning, paid well, even looked into the well being of his workers. He wanted them to buy Model T’s. Beginning about 1950, the then very rich began to lose interest in workers well-being, and loyalty to workers declined. Owners focused on profits, even selling out our country. They rationalized greed as creative destruction, free trade, natural advantage, even when their profits were from selling birthrights for a mess of pottage. Even driving down wages in foreign countries was rationalized, as was child labor.
We are now ruled by a Global Plutocracy. The Global Ruling Class gains an ever increasing share of wealth by skimming an ever larger part of the gains created by the workers. If we do not wake up and turn from bread and circuses, to cure what is now a Global Cancer on Capitalism, and if the Plutocrats do not wake up and take up voluntary reform, I anticipate revolt and chaos. Will they wake up, and recognize they need the Rest of Us? Will we wake up and realize we have been taken for the greatest ride? So far, this elephant in the Global Room is unnoticed by nearly all. See my post, above, 7/21/2013 10:07 PM UTC.

Posted by BarryWJackson | Report as abusive
 

Aren’t B-corps a way to prevent the “magic” (and using that word is supposed to be reason and not emotional thinking OOTS?) of capitalism from devolving into the nightmare of depression and oligarchic control and might even provide some stability during periods of economic stagnation.

It should be obvious why Marx wrote what he wrote when he wrote it. He was critiquing a system that required nearly slave labor conditions, provided no social benefits except to a wealthy class that could live like the lords they all hoped to become, could squander resources on games of prestige and territorial aggrandizement, and spend people like they were the same natural resources they could consume in very inefficient ways.

Unfettered capitalism isn’t logic anymore than communism was. It is a bookkeeping method and a way to allocate resources and money. Illogical man never makes perfectly logical systems because he can only make logic look good by eliminating as many illogical (or not clearly understood) aspects of life irrelevant or by killing them off. Communism has the same problem with a species that never quite fits the economic/aesthetic system of choice.

What was logical about the housing bubble? What is logical about devoting about 60% of the federal budget to military hardware that then needs opportunities to use it or it starts to look suspiciously wasteful and unnecessary?

This country doesn’t have the same conditions it had even 100 years ago. There are no more wide open spaces that can be exploited cheaply, or millions of displaced agricultural workers teaming into cities to work very long hours for very low pay and no social support structure that need to be housed in some of the worst shelter conditions the country had ever seen. Those supports don’t pay and were always left to the “illogical” religious folks or “do gooders” so the beneficiaries of the “miracle” and “magic” of capitalism didn’t burn the factories down and hang the owners.

Posted by paintcan | Report as abusive
 

Capitalism works best when the workers and customers are close together and they both know exactly where the CEO lives. America’s corporations left because cheap imports gave them no choice. Put enough tariffs on the imports and domestic production is profitable again. We will have to block the southern boarder or the corps will just import the workers.

Posted by jdmeth | Report as abusive
 

A paen to the B Corp, thank you. Here’s a rhetorical you .. Just imagine we have a team, and we have a revolutionary idea we’ve been wheeling about for so long now we’re bone broke, and its a good one .. Lets call it wireless|mobile 3 factor user authentication, and we’re an excellent, experienced team, and imagine further that our multiple runs w capital have resulted in nothing but multiple complimentary rejections. The RQ = Do you honestly think changing to a DE B Corp is going to make one tiny little bit of difference for us, or any other poor creative creatures driven to do something that is both big and good, when all the money fears is disruption of their legacy/retirement? Of what They (or their friends) invented? This little success story aint changing nothing, thats for sure. Tesla died broke Chrysthia – you’re way smarter than to go showering for a B Corp panacea, no? Use your pulpit to kick more teeth, please .. Embarrass these plutocrats the hell out of their no-worry zones –nform a Team and just do it, you’re one of the few who could help shake them up .. you’re only half done Lol ..

Posted by JohnEss | Report as abusive
 

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