Conclusion

Repositioning Business as a Restorative Healing Power

We’re never in lack of money. We lack people with dreams, [people] who can die for those dreams.

Jack Ma, Founder and Executive Chairman, Alibaba Group

Every few decades, it is time to rewrite the rules about what generates value for a business. We believe we are now at another such historical juncture, where systemic change is on our doorstep and the rewriting of the rules for business must urgently begin.

There are many signs indicating the global economic system has reached the end of a cycle—an end to the era where trust in money alone was paramount, and the accumulation of financial capital was the ultimate objective. We are witnessing, for example, a shift in the economic center of gravity from the West to the East, with the traditional G7 industrialized economies (the United States, Germany, Britain, Japan, France, Italy, and Canada) now representing just 10 percent of the world’s population, while China has become the world’s foremost creditor and Africa, with its fast-growing population and relatively low-density land mass, bringing an abundance of human and natural resources.

The “old” industrialized countries may still account for about 40 percent of the global economy, but their influence is shrinking at an accelerated pace. While the West is waning, the rest of the world is busily giving rise to a new middle class ascending from the so-called base of the (economic) pyramid, adding the rough equivalent of a new “Germany” in terms of economic size every three to five years. This astounding growth of the middle class outside the traditional West will bring additional stresses on natural resources and will require the global economy to create hundreds of millions of new jobs to meet the spiking demand for employment. Together, such realities constitute a unique opportunity to create a new culture of prosperity for the many, reversing the trend among the most mature economies of widening wealth disparity that, in turn, has been a contributing factor to growing societal stress and even to some of the violence and populism we are witnessing across the Western world.

The shift from financial capital scarcity in the 1970s to other forms of scarcity today (social, human, and natural capital) is well described in this book. Similarly, and perhaps of greater importance, we have discussed the reality of the shift we are seeing today from an industrial and service economy, where the ownership of industrial and financial assets were of greatest value, to a knowledge and digital economy, where the ownership of relationships, social networks, access to data, and so on are central. Klaus Schwab, executive chairman of the World Economic Forum, describes this shift and its extension as a “Fourth Industrial Revolution” in his book of the same name.¹ Schwab’s conviction that the exponential technological advances we are witnessing that are fusing the physical, digital, and biological worlds—such as “ubiquitous mobile supercomputing, intelligent robots, self-driving cars, neuro-technological brain enhancements, and genetic editing”—are, in his words, “fundamentally changing the way we live, work, and relate to one another.” We could not agree more, but would add that it is the combination of the technologies and the reality of the new scarcities that have brought us to the brink of economic collapse and reinvention, since the old economic model through which business has operated for nearly half a century is no longer capable of functioning optimally within the new context and, in fact, is doomed to a greater spiraling dysfunction that simply is not sustainable.

A number of increasingly visible cracks in the system are becoming obvious to those looking for them. The destructive, almost irrational market overfocus on short-term maximization of earnings extracted for shareholders rather than reinvested in the value chains of stakeholders is one such example of dysfunction. The transformation of the role of money from being an instrument to provide liquidity into a high-intensity instrument of speculation and wealth accumulation is another example, and has led to the structural misallocation of resources driven by this short-term thinking. The degradation of the self-regulating mechanism of the financial markets should be of great concern, as should be the increase in size and frequency of financial crises playing out as it has over the last four decades, with the high (or low, depending upon perspective) water mark coming in late 2008. The next shock to the system could, in fact, be the one that will precipitate the collapse of the last hollow remnants of the current system and its replacement by a new system.

History teaches us that this kind of transition from one form of economic system to another is never easy or painless. The subprime crisis of 2008 continues to inflict pain, especially on the many millions who are as a result either unemployed or underemployed, not to mention the growing despair and shattered dreams among the next generation that they will ever find career paths that will at least equal if not surpass the livelihoods of their parents and grandparents. “The only surprise about the economic crisis of 2008 was that it came as a surprise to so many,” said Nobel laureate Joseph Stiglitz in his book Freefall. He continued: “For a few observers, it was a textbook case that was not only predictable but also predicted.” The International Monetary Fund’s October 2016 announcement that global (private and public) debt has reached a staggering record of $152 trillion—more than double the size of the entire global economy—highlights the fact that the next crisis, which may be far more disruptive than the crisis that began in 2008, is also predictable, and we predict it will come sooner than many may think.

The pain of transition

The main response to the continuing crisis from the fully industrialized old economies, which may very well segue into the next, bigger (decisive) one, has been to grow the money supply at staggering rates through quantitative easing (QE) strategies. The QE was named innocuously perhaps to make more palatable the “printing” of huge sums of money essentially from nothing—with no true underlying value except the confidence of the people that there is a value to what John Tamny of Forbes magazine described in his 2014 article “The Fed Is Not Printing Money, It’s Doing Something Much Worse” as “the corruption of money’s sole purpose as a stable medium of exchange.”

There has, as yet, been no meaningful effort to effect systemic change before systemic change is by natural circumstances forced upon us abruptly and painfully. Instead, doing more of the same seems to dominantly characterize the lack of imagination of the central bankers and government leaders in the face of imminent change. Such loose monetary policies, carried on to this degree, are nurturing the financial assets bubble, thereby creating the conditions for a future crisis that may well dwarf the last one. There is now a dysfunctional gap between financial assets inflation and real consumer goods inflation. This has even spurred negative interest rates in some situations that many are now beginning to call the “new normal” rather than the very rare exception.

Negative interest rates send a dangerous implicit signal across the markets that there is no longer an incentive to invest in the future; that there is no hope in the current economy to create growth and prosperity in the future. QEs are also a sign of surrender in that governments now feel they have no choice but to artificially invest with what is essentially faux currency—something allegedly of value that is created from nothing. Negative rates, moreover, confirm that the value of financial capital is decreasing, even withering, which is a situation that can be sustained for only a temporary period of time, but will gradually undermine the whole foundation of the system if it is prolonged.

We are now forced to rethink a new global financial order and the role of financial capital in the new economic context. As investors, the options we have today are essentially either to invest in government bonds or other financial assets with near zero or negative interest rates, which means losing, or we can invest at a risk in the real economy and specifically in businesses that know how to manage the other forms of capital described in this book. But investing in the new economy is truly a new frontier, with the nature of risk shifting from what in the old economy was purely a financial risk management exercise (via a cohort of complex financial engineering products) to something entirely different.

Mitigating the risks in managing a basket of multiple new forms of capital, not surprisingly, will be more complex than mitigating risks from a single form of capital. Not all business practices to mobilize and deploy social, human, and natural capital to benefit a wider range of stakeholders will work in every business situation or in every business culture. Hence, a new breed of entrepreneurial managers must be willing and allowed to experiment with a mix of different management practices around the different forms of capital—and be rewarded for risk taking, not penalized for every failure, as with true entrepreneurs. There really is no choice in the matter. Either we adapt, and quickly, or we perish. As Stiglitz notes in Freefall, “If no action is taken to manage the global financial and global economic system better, there will be more, and possibly worse, crises in the future.”

Fresh thinking born of very old truths

The new rules of the new economy actually are not really so new, in truth. In fact, they come from an ancient concept about the role and priorities of the key pillars of prosperity in any economic system—people, planet, and profit. They are rooted in the deep recesses of our culture, history, and human identity. This is called the principle of the Jubilee, whereby caring sufficiently for each form of capital and seeking mutually beneficial rather than exploitative relationships constitute the norm rather than the exception. Embedded within the Jubilee way is recognition of the need for some financial capital accumulation, in the hands of talented entrepreneurs, to grow prosperity, so this is not about equalizing asset allocation through redistribution, but rather about giving the responsibility for managing the financial capital to those gifted to do this. The same is true for managing the other forms of capital, as long as the intent is to grow prosperity holistically to benefit the many rather than the few or just the individual at the expense of the others.

The Jubilee is also about resetting the norms every so often to ensure that everyone, at given waypoints in their journey through life, has a chance to begin again without the burden of debt. In this way, the risk of excessive capital accumulation over an excessive period of time, during which the many would be left in an overly disadvantaged circumstance, is mitigated. Misusing financial capital for highly risky speculation and solely for wealth accumulation purposes is also rendered less possible through this approach.

What is new, perhaps, is that these principles can now be enacted as natural laws for doing business, and not just as inspiring but seemingly impractical philosophical principles. There is a better way of doing business, and one through which more are rewarded for their participation, on multiple levels. This means that doing good for society and for the planet can actually come about through business practices without coming always at the expense of financial capital. “Win-win-win” scenarios across the value chains of business actually are possible and can bring about superior, holistic value creation that will make businesses more sustainable in terms of their continued success in the marketplace over time. And in this way, businesses can bring about societal and environmental transformation in ways that governments and charities cannot.

An environment conducive for a systemic shift

The emergence of negative interest rates and the prospect of this becoming the “new normal” has opened a window of opportunity to rethink what the role of money should be in the new economic context. Negative rates leave investors with no real choice but to redirect financial flows away from financial markets—the bond markets with their near zero to below zero returns and the stock markets which are presently very overvalued—to other forms of investment that are not focused on short-term financial gains. Such investments in the real economy, like housing, infrastructure, and education, especially among impoverished communities, can have higher returns than zero or negative rates are providing, as we have seen through our piloting business experiments to date.

As a reminder, the approach underpinning those pilots—with its modest number of key variables and a shared value index that can be used across the different forms of capital—can be briefly summarized as follows:

Regardless of the simplicity and actionability of the approach, a movement will be required for the kind of paradigm shift in thinking to take place about the value of capitals beyond the financial. Thankfully, we are seeing signs of just such a movement beginning to emerge. This phenomenon is not driven by activists or ideologists, but rather is being nurtured—consciously or subconsciously—by a small but influential number of long-thinking business leaders who could, using the prioranalogy of the collapse of the Soviet Union, be the proverbial Gorbachevs of our time, but for business. These leaders, who number among them true captains of industry, know the ways of business from the inside, are challenging traditional thinking more openly, intuitively understand the fundamental flaws of the current approach, and perhaps most importantly are trying hard to find a new way before the system collapses upon itself and leaves their firms in a disadvantaged position.

One can “see” the rumblings of such thinking in the artifacts many consider to be central strongholds of the financial capitalism system. Larry Fink, for example, the chief executive of Black-Rock—the world’s largest investor, managing $4.5 trillion—said in a February 2016 public letter to senior executives of S&P 500 companies and large European corporations that “today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need.” He went on to explain that “generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today. These issues offer both risks and opportunities, but for too long companies have not considered them core to their business—even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord. Over the long-term, environmental, social and governance (ESG) issues—ranging from climate change to diversity to board effectiveness—have real and quantifiable financial impacts.”

Paul Poleman, chief executive of Unilever, one of the world’s leading fast-moving consumer goods (FMCG) companies, has been equally blunt in public interviews about his firm’s ten-point Sustainable Living Plan: “I don’t think our fiduciary duty is to put shareholders first,” said Poleman. “I say the opposite. What we firmly believe is that if we focus our company on improving the lives of the world’s citizens and come up with genuine sustainable solutions, we are more in sync with consumers and society and ultimately this will result in good shareholder returns.” Poleman has also observed publicly that “the very essence of capitalism is under threat as business is now seen as a personal wealth accumulator. We have to bring this world back to sanity and put the greater good ahead of self-interest. We need to fight very hard to create an environment out there that is more long-term focused and move away from short-termism.”

One of Asia’s most successful entrepreneurs, Jack Ma, whose Alibaba Group is widely described as the “Amazon.com of China,” is publicly quoted as believing that “today, making money is very simple. But making sustainable money while being responsible to the society and improving the world is very difficult.” Ma goes on to explain: “If you want to grow, find a good opportunity today. If you want to be a great company, think about what social problem you could solve.”

Such unorthodox thinking among titans of business like Fink, Poleman, and Ma, among others, are amplified by such aspirational global initiatives as the UN Millennium Development Goals, which aimed by 2015 to “eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainabilty; and develop global partnerships on development.” Failing to achieve these lofty aspirations, the goals were updated/replaced in 2015 by the UN Sustainable Development Goals (to be reached by 2030), which seek to end poverty and hunger; promote health, gender equality, clean water and sanitation, affordable clean energy, decent work, and economic growth; to build industry, innovation, and infrastructure; reduce inequalities; make cities and communities more sustainable; drive responsible consumption; take action on climate change; improve life below water and on the land; promote peace and justice; and forge partnerships to achieve these goals.

While such ambitions are laudable, the contrast between what international institutions and governments aspire to achieve and what the Larry Finks, Paul Polemans, Jack Mas, and others in the realm of business can practically deliver—if equipped with a new model with new metrics and management practices to drive superior holistic performance—is a stark one. Business, in our view, is much more likely to move the world from the aspirational to the practical in terms of transformational lasting change, provided business leaders are convinced that a new way is available to them to “do good, and do well, at scale.” Business won’t be transformational, however, if it only has the tools to make trade-offs between doing good and doing well, which limits the prospect of adequate scaling up.

The roles and responsibilities of business in the new economic context, especially of MNCs, are evolving and growing in importance, making it difficult to imagine how so many business leaders can still be clinging to what now seems an archaic Friedmanic concept of “the sole social responsibility of business is to maximize profit for distribution to shareholders.” Today, MNCs—along with a small number of very large nonprofit organizations—are de facto the only truly “complete” actors of globalization in that only they can operate almost freely across the world with few exceptions, such as in a completely closed economy like North Korea. MNCs also have the means to address global challenges in ways that nation-states cannot, hence, they may be the only actors that can (re)shape the new world in which we are living. This reality brings upon MNC leaders an enormous responsibility for which most are not yet practically or emotionally equipped to address. The true responsibility of the firm today extends far beyond its traditional legal boundaries and must embrace the whole value chain or business ecosystem in which companies operate. But the existing legal framework does not yet support this extended responsibility, creating a new role for policymakers to adjust the corporate law corpus.

Evaluating the true performance of the firm must also evolve far beyond that of financial capital alone and will require business leaders to flex new muscles that are still mostly unknown to them. Friedman has given us the ability to manage financial capital in very robust ways, and those who have embraced his philosophies to the extreme have gone on to demonstrate how money can be made from money through clever financial engineering, derivatives trading, and other methods, and even how money can be made from nothing through central bank-executed unconventional monetary policies like quantitative easing. Managing value beyond the purely financial, however, is a new discipline, but one that is beginning to take root and grow, as we have discussed. This multi-capital approach requires more than willingness and an open mind. It requires a whole new range of business practices, not all of which will work in every corporation’s cultural context, so time is needed, and a movement of like-purposed partnering companies can significantly accelerate the production of actionable insights.

Along with new management practices must come new metrics for human, social, and natural capital that can proactively drive performance rather than just passively measure impact of activities, although our metrics are multipurpose and can do both. Impact metrics (lagging indicators), however, are less central to our model, whereas management metrics (leading indicators) are what we want to better understand and deploy, as they give managers a means to mobilize, access, and leverage “riches” inherent in people and the environment that have hitherto been hidden or largely ignored by business, mainly because they were not considered to be measurable in a business-actionable fashion. Hence, we believe the contribution of our work to provide management with generic, stable, actionable (at a business unit level), non-monetized metrics for human, social, and natural capital is the kind of breakthrough that has transformational potential for the way business is conducted.

The main contribution of this business model initiative could indeed serve multiple purposes. First, it is highlighting the shortcomings of the current financial capitalism model and the lack of a suitable academic (management theory) and business (practices) framework to address the new rules of the game of the emerging global economic system. Next, we are showing through business piloting activities how it is possible right now to begin to address these systemic shortcomings. We are making the case that large businesses, especially MNCs, now have the power, influence, and responsibility to act more responsibly on behalf of the stakeholders in their value chains—and that they must step up to this challenge—though many are not yet culturally, emotionally, or intellectually equipped to accept all of this needed change. And we are challenging what it means for a business to be responsible; that traditional legal boundaries of the firm are no longer sufficient parameters to determine how far business should reach because increasingly complex business value chains are only as strong as the weakest link in those chains.

The true purpose of what might be considered a great company in the future is not just to make more money for shareholders alone. It is more about how they can thoughtfully and intentionally consider what social problem(s) they can solve by leveraging the power of their enterprise for this purpose. This is a challenge to the narrow perspective that business performance is about financial performance alone, so the great companies will need to expand their balance sheets to include how they (positively and negatively) impact social, human, and natural capital across their business ecosystems of stakeholders, now that it is possible to measure these other capitals with the same degree of accuracy, simplicity, and actionability as financial capital is measured. Such firms will be those who grasp that business can simultaneously drive both profits and wider mutual benefits for people and planet by understanding and managing these multiple forms of capital.

The responsibility of knowledge

The journey from ignorance to enlightenment is not unlike the journey from astrology to astronomy. The journey from profit maximization for shareholders to making business more mutual for stakeholders is not dissimilar to this analogy. This journey has begun, but it is still at an early stage, with many corporate initiatives more closely resembling astrology rather than astronomy in that there is much more aspiration than science behind them. Moreover, few such initiatives have the kind of robust metrics behind them that can drive greater holistic business performance. This may explain why the emphasis today remains weighted toward CSR and sustainability programs—doing good for people and planet at a cost, while aiming to boost corporate reputation—rather than trying for the kind of systemic transformation that will come about when business realizes it can solve social and environmental challenges at a profit.

Every stage on this journey from ignorance to enlightenment is important, as each brings additional knowledge and the responsibility to act that comes with it. In the words of Franklin Roosevelt, “Great power involves great responsibility,” and the rising awareness of the new role and responsibility of business in society now emerging from some stakeholders (select business leaders, government regulators, academics, and consumers) is a reassuring sign of the capacity of humanity to adapt and adjust to new realities, in this instance, to the new global economic context. Similarly, the recent Sustainability Development Goals of the UN are encouraging. Yet, as Albert Einstein said, “no problem can be solved from the same level of consciousness that created it,” just as no one should “pour new wine into old wineskins,” according to the old adage, as “both the wine and wineskins will be ruined.” The adage continues: “Instead, new wine should be poured into new wineskins.”

Initiatives like the Millennium Development Goals or Sustainability Development Goals, placed as they are within proverbial “old wineskins,” might bear little fruit at the end of the day. Hence, we are aiming to address the issue at its root to trigger the kind of systemic reformation that will reinstate the role of money in business to what it should be—a means of economic exchange and of distributing ownership rather than of a pseudo-commodity meant to be infinitely accumulated. Money can and should still be a powerful instrument, but one that is so because it is in service of the economy rather than the most valued output of the economy.

An equally important part of our objective is the proper remuneration of each different form of capital and the reinstatement of nonfinancial capitals valuing the contribution of human beings, societies, and nature to a position of economic preeminence. The (re)discovery of the central role that human, social, and natural capital can play—if properly managed—in driving economic performance is the key to achieving this realignment of priorities. When the realignment begins to scale up, financial capital and the financial system itself should revert to the role of “good servant,” as we have seen the damage money can do as a “bad master.” Money needs to be remunerated like a good servant rather than a master, hence, the concept of there being a “right” level of profit for the firm—the basis of the extraordinary question posed to us almost two years before the 2008 crisis that launched this remarkable journey.

One of the most important tools of management is the measurement of profit. Determining what is the “right” profit for the company has from the outset been the overarching objective of our new business model program. Existing measures of profit, as we have explained in this book, are not complete—and are actually misleading—in so far as they do not correctly account for the maintenance of the firm’s capital. Conventional measures of profit are defined as the net of the cost of maintaining physical capital—plant, machinery, buildings, inventories, etc.—but do not take into account the cost of maintaining other forms of capital, such as human, social, and natural capital. Such measures, therefore, substantially overstate the true profit of the firm because they fail to reflect the actual cost of doing business in maintaining the nonfinancial forms of capital.

As we have argued herein, it is possible that the right level of profit for a firm might actually be higher than existing accounting measures tell us. For example, it is possible to develop commercially viable solutions (i.e., financially profitable) to either address issues created by a commercial activity or to leverage hidden riches that were not hitherto harness-able. To address a commercial activity that has a negative impact on natural capital, like water pollution, it may be possible to offset the cost of restoring the capital (the cost of the technology needed to clean the water after it is contaminated through business use), but to do it in such a way that the technology has a dual function, such as more efficiently extracting ethanol from corn, as one plausible example. This could potentially convert an investment cost into a profit, thereby providing both an environmental good and a good-for-business outcome. In the Maua micro-distribution/micro-entrepreneurship initiative in Kenya, where we have identified human and social capital in places where there is no (or very little) visible financial capital, we are intentionally managing and growing these nonfinancial capitals to deliver social good, human well-being, and stable incomes (at higher margins than usual), while generating as an outcome higher growth and profit for the MNC. In a way, this approach is a means to convert what were the hidden riches of the impoverished or of the environment, measured in social, human, or natural capital assets, into profit for all involved.

Historically, the type of dysfunction we observe today—visible in such conditions as the stress on natural resources, environmental degradation, widening wealth disparity, and even the fact that many rights groups now say there are more slaves today than at any point in human history—is often resolved through one or a mix of the following:

Natural or social disasters, such as famine, wars, revolutions, or epidemics.

The conquest of new land, such as “Manifest Destiny” or what could soon be space colonization.

Scientific or technological breakthroughs; a new economic model that manages new forms of scarcity, allocates resources, and redistributes value creation differently.

The solutions coming from new science and technology, and from new business models, are far preferable than the other historical solutions, which can inflict great suffering on the world. But to paraphrase Winston Churchill, “You can often count on human beings to do the right thing—after they have tried everything else.”

We now have what may be a once-in-a-generation opportunity to reposition business as a restorative, healing power for the global economy. Business can and must become an engine for profound positive change for the many, and management science can become a discipline that can create and harvest the true riches of the new century. In the wise words of King Solomon in the book of Ecclesiastes, “There is a time for everything, a time to keep and a time to throw away; a time to plant and a time to uproot; a time to speak and a time to stay silent.” We believe it is the time to uproot and discard the dysfunctions of financial capitalism; to sow the seeds of a more complete form of capitalism; to speak about what we are learning through education and business; to share that there is a way to heal business and that the healing of business can bring about greater healing in the world—of relationships among mankind and between mankind and nature. We invite you to join in this journey of discovery with us.