I am passing through Rio de Janeiro en route to Belo Horizonte to attend the XXV World Congress of UNIAPAC (The International Christian Union of Business Executives) on the theme of “Business, Government and civil society working together for the common good.”
This is my first visit to South America and Rio has presented me with a capitalist conundrum.
What a great city. The beach at Copacabana is wonderful (well, it looks marvellous, I have not yet had opportunity to explore!). The setting, the mountains, the water, the statue of Christ the Redeemer are exceeded only by the friendliness of the people.
I know well that many cities and metro areas like Rio throughout the Americas and Africa present contrasts and poverty and wealth mingle together. My driver took me past large swathes of ‘shanty town’ like housing. It was not that I have never seen anything like it before (I have visited Cape Town in the past), but the capitalist conundrum struck me again.
The quality of the housing was shambolic. Half-built buildings, many exposed to the elements, seemingly built one on top of the other stretching back from the highway into the hilly areas behind. The conundrum is this. Almost all had satellite dishes and air-conditioning units. So on the one hand there seems to be poverty (at least as represented by poor housing) and on the other the poor exercising consumer choices in a capitalist economy that would reflect many more affluent priorities.
Are these apparently irreconcilable priorities reconcilable? Can capitalism provide a solution to the poverty of housing and indeed poverty more generally as well as providing such consumer choice?
Here are a few thoughts:
The problems which I think arise are when wages are so low they are unable to sustain the basic infrastructure (housing) yet provide some opportunity for consumer choice. I cannot believe how cheap the taxi fares are.
According to the Economist Brazil is in a hole and still digging. One of the largest economies in the world has seen GDP contract, deficits grow and government corruption is rife. A country the size of Brazil, of course, and in its regional setting, faces many difficulties of environmental issues, inclusion and so on. The 2016 Olympics is seeing significant infrastructure investment, though, once again, government corruption damages the inclusivity of the growth which is generated. All of these things are likely to enhance the capitalist conundrum rather than solve it.
Capitalism does lead to some unintended consequences. I am not one who believes that equality per se is necessarily a desirable objective; but poverty (in absolute terms) surely cannot be acceptable to any decent human being? Yet, a market economy built upon ethical principles can be the solution to many of these problems.
Capitalism generates conundrums. Long live capitalism. Oh, but take poverty seriously and let’s use our business and economic opportunities to help.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
What a mess. Many of you won’t like my title – surely the catastrophic failures and deceits at VW make the case against rather than for capitalism? Not so and here is why.
At the root of the problem with VW is dishonesty. Now, of course, that dishonesty might have been driven by sales targets, or a brand identity to be the ‘greenest’ car manufacturer, but the essence of the problem is that somewhere in the mix VW and its management engaged in deception, a deception which is, of course, indefensible.
However, we do learn from this episode (which has yet to run its course) a few lessons which help make the case for a moral, entrepreneurial capitalism.
Surely not, I hear you say, it was the regulators who were deceived. Indeed they were, but they didn’t know about it. The discovery that VW was using underhand methods to pass emission testing was made by a not-for-profit, non-governmental organisation that put some vehicles to the test in order to gather evidence to persuade Europe to adopt the USA’s more stringent nitrous oxide limits. From this source the Environmental Protection Agency launched its own investigations.
I can see more regulators and more regulations emerging from this. But they didn’t work first time around – closing the stable door after the horse had bolted.
Actually most people do want greener technology, not least in automobile engines. Indeed, a significant part of VW’s brand was that it was a market leader in the development of such technology. VW’s market share was driven by those that wanted both fuel efficiency and lower emissions. VW’s collapse of reputation will be severely damaging to its brand in the market place; and, indeed, as a publicly quoted company, to its share price (which has already wiped €15 Bn off its market cap.). Not ultimately because of fines by regulators, but because its customers will lose confidence in the brand and especially in the green technology claims.
Manufacturers will need to develop ‘clean diesel’ technology, fuel efficient and greener engines, more investment in cheaper hybrids and electric vehicles. They will have to do so not because government says so, but because consumers want a better, greener, more environmentally responsible deal.
Can you imagine if VW had been owned by the government? Ok, I know the state government of Lower Saxony has 20% of the voting rights, but if VW had been a state-owned, nationalised industry? Does anyone really imagine that the senior executive would be held to account? If the regulators are also the owners, then there is no incentive at all for transparency. Corporate structures are complex, as indeed is the situation when boards are not aware of what is being carried out in their name. However, the existence of a supervisory board, over and above the executive board, did at least provide a means for public contrition and the holding to account of the chief executive, but many not have known, but certainly carried the responsibility.
The problem is essentially a moral one; dishonesty.
Odd then really. A capitalist scandal makes the case for capitalism.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
Are values and profitability incompatible?
Values have taken a central role in the debate about how private companies ought to conduct business in the post-recession era.
The idea that businesses should go beyond the narrow measures of shareholder value maximization and embrace a wider role of a ‘responsible citizen’ that cares about the society it operates in, is certainly not a new one. The 16th to 18th centuries saw the Quakers establish household brands such as Barclays, Lloyds, Cadbury and Rowntree. They were successful precisely because ethical behavior and a deep understanding of their responsibilities were the foundation of how they conducted business. Far from hindering profit, these companies understood that responsible behavior actually increased profitability (for more on Quakers in business, please see here). In the post-recession era, the idea of a values driven company (whether encompassed within traditional models such as Corporate Social Responsibility (CSR) or more recent development such as ‘B’ corporation certification) should therefore not be seen as simply an operational cost, or an add-on necessary only for PR purposes, but as a critical part of the long-term business plan.
But what exactly do we mean by Corporate Responsibility? Given the rather elusive nature of the concept we can easily find ourselves lost in the myriad of ideas that come to mind. However, CSR is effectively a management concept whereby companies integrate moral, social and environmental concerns in their business operations and interactions with stakeholders (adapted from the UN Industrial Development Organisation, 2015). By stakeholders we mean all actors that come into contact with the business itself, from internal stakeholders such as employees and owners, to external stakeholders such as customers, creditors, the government and so on. Ultimately, Corporate Social Responsibility is a business management strategy that holistically takes into account a company’s entire operational ecosystem.
From a more theoretical and rather traditional standpoint, one could argue that the odds are stacked against any significant CSR-related engagement. After all, it was Milton Friedman who famously claimed that “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (New York Times, 1970).
Most business schools around the world have adopted Friedman’s notions defining the purpose of enterprise solely in terms of ‘maximizing shareholder value’. We’ve heard this definition many times before and at least for the time being, it provides us with a clear purpose of what all private sector entities should ultimately be aiming for, i.e. making profit.
However, it is within this pursuit of profit that divisions begin to arise. The goal itself has an embedded sense of urgency that could (and has done in the past – prior to the financial crisis) compromise future returns in exchange for short-term gains. So at the very least the concern should be with long-term shareholder value. More importantly, how is shareholder value to be defined? Contrary to popular belief, Milton Friedman did believe that ‘CSR’-type expenditure such as local community investments, employee training or involvement in charitable activities are justifiable since they contribute to the long-run interests of a firm, whist also generating corporate goodwill (Hernandez-Murillo, 2014). It is therefore crucial that perception surrounding CSR or similar spending is changed from being seen as a cost, to an investment, a commitment to the medium and long-term goals of a company. Academics sometimes refer to this as ‘profit-maximising CSR’, whereby the firm’s ethically-driven activities are aligned with the firm’s self-interest (ibid). It ultimately leads to a win-win situation whereby both the firm, as well as the stakeholders gain from the strategy.
This leaves us with two questions that seek to answer CSR alignment on one hand, and real impact on the other. In other words: 1. Is the strategy aligned with the overall aims of the firm? And 2. Is it achieving the desired impact?
Nike, the shoe and sports clothing manufacturer is a perfect example of a CSR strategy that was not just limited to charitable donations or environmental issues, but was brilliantly in tune with the overall strategy of the firm.
Known as ‘NIKE +’, the company shifted its focus from promoting its products to helping its customers. “Instead of putting up another campaign of billboards with celebrities saying ‘buy our shoes’…NIKE + actually helps you become a better runner” (Levick, 2012). Through products such as the Nike FuelBand (a wristband which monitors your physical activity) and personalized customization through Nike iD, the firm is effectively trying to say “we care more about you and your personal fitness goals than we do about advertising our products”. This was a serious customer focused strategy which contributed – alongside the traditional CSR values type activity – to show the company strategically interested in aligning itself with the interests of its customers. Profitable too.
The result? Nike’s share price almost doubled over the last 24 months from $64 per share to $115 per share while its closes competitor Adidas, dropped from $84 to $64 over the same period of time. Of course, one could argue that there are other contributing factors to the success of Nike and apparent decline of Adidas, but the commitment and focus on a morally-guided strategy of placing the customer’s interests first have clearly paid off.
Values, corporate responsibility and profitability are not juxtaposed as alternatives – they are two parts of the whole. A concept such as CSR and its wide-ranging type of activities and approach to business should therefore not be seen as a cost, but a crucial part of the long-term business plan. As a strategy that holistically takes into account the entire business ecosystem and if aligned correctly, it can produce tremendous results indeed.
Andrei Rogobete is a Research Fellow with the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
Is the purpose of taxation payment for common services (defence, health, welfare) or a tool for the redistribution of wealth? That decision, and the balance between them, is a political one. However, there is nothing intrinsically moral about either high or progressive taxation. First, higher rates of taxation may not raise more revenue (the argument would be about the precise positioning on the Laffer Curve). Second, an extra pound raised for the government means a pound less at the disposal of individuals and families or for philanthropic activities. There is no greater morality attached to a government pound than a pound used in support of family life or philanthropic cause. If such spending encourages enterprise, reduces reliance on the state and achieves social purposes effectively and efficiently, then the moral imperative is to reduce taxation.
What about the collection of the tax that is due? There is an absolute moral obligation to comply with the rule of law (in a free, democratic society) including the payment of tax. How much tax should a person pay? Answer – the amount determined by the laws established by the legislature. The UK tax code is complex and lengthy with numerous provisions, allowances, schemes, exemptions, compliance requirements, elections and claims to be made. An individual or corporation who complies with these requirements cannot be said in any way to be acting either illegally or immorally. If Parliament wishes to change the tax legislation then that is precisely what they must do. Legislators legislate. Politicians should be very wary indeed of criticising those who comply with what they have passed into law.
Are there any limits? Yes, there are. It has been long established that artificial transactions or structures with the sole purpose of avoiding tax are irresponsible. HMRC possesses considerable powers to deal with such transactions. Indeed, given that, we should be wary of giving more powers to the tax authorities to pursue taxpayers complying with their legal obligations. High taxation and progressive taxation are not intrinsically moral. There is a balance in society between the rights of individuals to plan their affairs to minimise their tax liabilities, the laws passed by the legislature and the powers of the executive arm (HMRC) to enforce. The current rather sanctimonious debate around taxation has the danger of destabilising this balance by increasing the power of the executive, getting the legislature off the hook for lack of clarity and to the damage of individuals, families and society.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME).
The market economy is not perfect. However, we do sometimes forget that it is the market that has delivered significant prosperity to the world and lifted millions of people out of poverty. Improvements in literacy and sanitation have contributed to a significant reduction in the number of people existing on the benchmark measurement of $1 a day. Enterprise, trade, micro-credit and social venture capital are, however, foundational to a global reduction in poverty. This reminds us that there is a moral case to be made for the market.
Capitalism is built upon four moral principles. These principles are rooted in the Judeo-Christian tradition upon which a market based enterprise economy is constructed.
First, the principle of creativity. This idea is expressed through the creation of wealth and the flourishing of human creative skill. Wealth creation is about the harnessing of human capital, skills and innovation to add value to the productive capacity of the economy. So, the combining of raw materials to make goods for sale, the delivery of services, entrepreneurial skill in developing and applying new ideas lie at the heart of enterprise. Wealth creation has to precede the debate on distribution.
Second, the principle of responsibility. Encouraging dependency denies the essence of humanity. Human flourishing means recognising humanity’s uniqueness and capacity for innovation and learning.
Third, the principle of freedom. Free human expression is only possible within a context of both economic and political freedom. That is one reason why Marxist command economies don’t work. It is also why excessive economic control constrains enterprise and innovation. Entrepreneurial skill and risk needs recognition and reward.
Fourth, the principle of fairness. The fairness of the capitalist system stems from the fact that the market allocates goods and services fairly and efficiently between willing buyers and sellers at agreed prices. Excessive levels of taxation in this respect are intrinsically unfair.
The market economy also generates moral problems. Issues of greed, excess, monopoly and oligopoly mean that there is a proper place for regulation. However, because we seem to have lost sight of the intellectual case for the market, regulation and taxation seem to have become ends in themselves, rather than as means or tools to act as moral restraints in an essentially free economy in a free society.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
I am fascinated that in the early years of the industrial revolution some of the great businesses were established by Quakers – not least the first iron foundry established by Abraham Darby.
There were many others, Cadbury, Rowntree, Clarks’ Shoes, Barclays and Lloyds. Why was this so? The answer lies in some combination of moral integrity, culture, networks and spiritual commitment or purpose. I am not suggesting we all become Quakers but rather that there are lessons, both commercial and moral, which we could usefully learn. Later this year we will hold a day conference on this subject, considering the lessons for today, including debate around trust and corporate structure – join the mailing list, contact the office or watch the website for details!
Too often in our debates about enterprise, ethics and society we use ‘binary’ terms. So, for example, ‘profit’ is set up against ‘people’ or ‘competition’ against ‘fairness.’ However, these dichotomies (capital versus labour is another one) are invariably simplistic. Profit may also enable people to flourish, through the provision of goods and services as well as employment. Competition may increase fairness by allocating resources for consumers at lower prices and ensuring efficient production. The impact of enterprise in an economy cannot not be reduced to an ‘either-or’ but affects many people and their livelihoods, from entrepreneurs to consumers. The encouragement of enterprise is essential especially through what is usually termed the ‘supply-side’ of the economy. This means a fair reward for the entrepreneurs who take risks, encouragements to invest and to employ and taxation regimes that incentivise.
From an ethical perspective however the responsibilities extend more widely. Companies, large and small, have a significant impact on wider society. Do virtuous companies exist or just virtuous individuals? A virtuous enterprise might be described as one which not only behaves well or acts properly but which acknowledges and acts upon its wider role in society, even challenging that society itself in the direction of virtue. Companies and individual business people can have an enormous impact upon their local communities for the good. They can indeed act morally commercially, but also, through their actions they can, in a free economy and a free society, shape virtue itself, through service, philanthropy and example. However, to do so, they must be fashioned and led by moral individuals. Values are at the heart of both virtuous enterprises and individuals; the restoration of commercial trust will have direct commercial benefit but will also benefit society itself.
We are committed to a research agenda to think deeply about business, ethics and responsibility. As well as other
events on this page the future focus includes:
– A CEME publication on Quakers in Business.
– Autumn events (and publications) in London on the Social Value of Capital Markets and The contribution of Catholic thinking on the market.
– A Conference in London on Quaker Capitalism: lessons for today.
– Plans for a conference in 2015 on ‘Capitalism in the 21st Century’.
We were joined, in January, by civic guests including the Lord Lieutenant for Oxfordshire and the Thames Valley Police Commissioner, together with over a hundred civic, university and business guests at Harris Manchester College to hear the Chief Executive of Barclays, Antony Jenkins, outline his vision for the restoration of trust. Antony detailed the challenge faced by Barclays, the problems of transforming the culture in an authentic way in such a large institution as well as genuine issues the bank still faces. Antony noted the importance of being a steward of the original vision of the bank’s Quaker founders. There followed an extensive time for questions – many topics from remuneration to lending to small businesses were covered – then dinner and a short response and vote of thanks from the Bishop of Oxford.
To view our latest research please click here.
How can private equity and social venture capital be effectively harnessed in economic development? Dr Kim Tan will explore whether this approach is more effective than inter-government aid. Professor Alex Nicholls of the Said Business School and Penny Fowler of Oxfam will respond.
25th June 2014, Said Business School Oxford from 6pm. Places limited. Email office@theceme.org for invitation.
To view our latest Events and Picture Gallery click here.
A seminar in London heard the Revd Dr Ben Cooper reflect upon the teaching of the Old Testament on the charging of interest. He argued that in order to assist the poor it was not only permissible but essential to charge interest on loans particularly for investment rather than consumption. The availability of credit and wealth creation is essential to the relief of poverty.
A talk by the Director, sponsored by CCLA Investment Management Limited.
12th June 2014, 4.30pm – 7pm, London. Email office@theceme.org for details.
We aim to both educate and transform. We seek to change opinion and make a practical difference. Our passion is for an effective, enterprise economy shaped by ethical values so that the world can be a better place.
We are an independent Centre, and rely entirely upon donations to fund our work.
In the UK donations can be sent payable to the Centre for Enterprise, Markets and Ethics, 31, Beaumont Street, Oxford OX1 2NP. We will supply a Gift Aid form and higher rate taxpayers can claim further relief via their tax returns
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