Is capitalism under threat?
Last September marked 10 years since the demise of Lehman Brothers, which opened the floodgates for the financial crisis, and the deep worldwide recession that followed. Among many to reflect at the time on events in the decade since was the Archbishop of Canterbury, Justin Welby, who was quoted as saying that Britain ‘faced a crisis of capitalism’, and that our economic elite had failed to learn the lessons from the crash. Among his callouts were a continued sense of entitlement among bankers, excessive executive pay, and resultant peril for market capitalism.
Most would agree that such comments are an accurate reflection of the public mood towards capitalism, and it is surely no coincidence that we’ve seen a rise in socialist political figures on both sides of the Atlantic. Whatever one’s thoughts on this particular trend, there can be little doubt that capitalism is facing its sternest test of the past five decades.
Has anything changed since 2008?
It was in 1970 that the economist Milton Friedman published his essay ‘The Social Responsibility of Business is to Increase its Profits’, which effectively fuelled the ‘greed is good’ mentality that underpinned market capitalism in the decades that followed. Notwithstanding a few recessions along the way, it ushered in a period of prosperity for many people, and unfettered capitalism went almost unchallenged as the premier model of choice for markets in the West. But the enduring fallout from the crash, typified by a period of increasing inequality and wage stagnation not seen since the Napoleonic Wars, has brought about growing public anger which has increased scrutiny on bankers, executives and the wider financial services industry.
What is staggering to many is the lack of remorse, brazen recklessness and largesse which appears to have continued within corporate cultures. Just in recent times, high-profile controversies surrounding the likes of Carillion, or the Woodford scandal spring to mind. Executive pay seems out of control too, with a High Pay Centre report revealing a few weeks ago that FTSE 100 CEOs raked in 117 times the average salary of a British worker.
But there are signs that corporations, fund managers and big business are beginning to grasp that their relentless pursuit of ruthless profiteering, and prioritising shareholders above all else, is running out of road. For starters, that figure quoted above regarding FTSE 100 CEO pay actually represents a 13 per cent fall from a year ago. The penny seems to be dropping for executives on the other side of the pond too, with CEOs of America’s largest 181 companies redefining the purpose of a corporation from maximising shareholder gains to ‘improving our society’, with a new focus on the wellbeing and dignity of employees, communities, preservation of the environment, and conducting business in an ethical manner.
In the UK, companies such as John Lewis and Richer Sounds have pioneered new employee ownership schemes, with the latter passing on its hi-fi and television retail departments to staff. While these are the most high-profile brands to do so, the Employee Ownership Association was quoted in May as saying that over 350 firms have now adopted such a scheme, with 50 more lined up to join them in the near future.
There is also the remarkable rise in ethical investing. Research from investment platform Triodos Bank in 2018 revealed that total investment in the UK’s socially responsible investing market is set to reach £48bn by 2027. Compare that to 2016, where collective ethical investment amounted to less than a third of that. Although UK ethical funds have been around since the 1980s, it is only recently that asset managers have flocked to incorporate them into their portfolios. Environmental, Social and Corporate Governance (ESG) is enshrining its way into statute too, underlined by the European Commission’s Delegated Regulation (EU) 2017/565, which puts the onus on advisers to factor in their clients’ ESG preferences when establishing suitable investments.
And then there is climate change. Last October saw the inaugural Green GB & NI Week, and, to mark the occasion, various big businesses in Britain made significant pledges. Amazon has put pen to paper on a deal that will see all its sites in the UK powered by 100 per cent renewable energy, with additional plans to build rooftop solar systems on 10 of its fulfilment centres within the next 18 months. HSBC UK Pensions Scheme is set to invest £250 million into our renewable energy infrastructure, most notably solar parks and wind farms. EDF Energy will be electrifying its whole fleet of vehicles by 2030. Lidl and Tesco have unveiled commitments for zero deforestation by 2025. And so the list goes on.
Should we be sceptical?
Such has been the damage to capitalism’s status that scepticism is a natural default position, and few will be conned into thinking the motives of big corporates have suddenly become pure. But the truth is, they don’t need to be. Such is the growing public demand for sustainable private enterprise that the interests of capitalism are now firmly aligned with a change of approach. In effect, capitalism is just doing what it always does: following the money.
As Mark Carney said in a recent Channel 4 interview, when it comes to climate change, capitalism is part of the solution.
“There is $120tn of capital behind that framework that is saying to companies: ‘Tell us how you are going to manage these risks’ – that’s the first thing,” Carney told interviewer Jon Snow. “The second thing the capitalist system needs to do is to manage the risks around climate change, be ready for the different speeds of the adjustment. And then the most important thing is to move capital from where it is today to where it needs to be tomorrow.”
“Companies that don’t adapt – including companies in the financial system – will go bankrupt without question. But there will be great fortunes made along this path aligned with what society wants,” he added.
It isn’t just climate change which has commanded a change in direction. Charity work and donations are now a central pillar of business strategy, and all bar two of the top 10 most charitable UK companies operate within financial services. Much is also being done for communities. A good example of this was the recent Healthy High Streets programme, which, backed by a number of the UK’s biggest corporations, pumped tens of millions into revitalising the high streets of 100 different towns over the course of three years. There are numerous other such projects which are also being forged by UK plc.
Is capitalism here to stay?
Clearly, capitalism has a lot more work to do to repair its reputation, and it will do so against a backdrop of mistrust and trepidation. In particular, growing swathes of young people face an uncertain future characterised by extortionate house prices, insecure jobs and the challenges that AI and automation will bring. There are also clear symmetries between the failures of globalised markets and the rise in protectionism. It is a stark reminder within Western democracies that capitalism no longer has a blank cheque to run rampant, and hollow out communities.
Some will rightly point out that the figures invested into sustainability and communities outlined above are pittance compared to the profits being generated by these firms. But it represents a start. At the very least, the message seems to be getting through, and this reflects in the way that brand value – which is integral to the long-term prospects of any UK business – is being redefined in favour of the customer. Let us not forget that market capitalism has brought unparalleled and enduring prosperity to Western societies, and one of the reasons it has remained the dominant economic system is its ability to evolve and reform.
Ultimately, CEOs, investors and shareholders will play a vital role in shaping a future which is more sustainable and mutually beneficial for wider society precisely because it would be self-defeating not to. The only question is whether it will be done with sufficient urgency before it is barged out the door.
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