Blog 5: Saving Capitalism: Moving from profit-based to a value-based system

In 1962, Milton Friedman argued that the sole responsibility of a corporation is to maximize shareholder wealth. It has gained popularity and guided the policies of corporations over the last 50 years. Instead of developing strategies that positively impact all stakeholders involved and reap benefits in the long run, companies increasingly relied on "Quarterly capitalism". Quarterly capitalism refers to the system where the CEO’s and the top management employ techniques focused on short term performance and returns. It has yielded results at the expense of the other stakeholders involved in the business. 

Corporations have laid off workers, cut employee salaries, compromised on product quality, gutted unions, expanded at the cost of the environment to save costs and generate maximum profit. As a result of these practices, there has been a massive societal backlash against large corporations and capitalism. Customers have started to view corporations with skepticism and populist politicians that have promised to be tough on trade, regulate corporations have found tremendous success. A recent example of this was the pushback against Amazon opening its second headquarters in New York City. Local leaders and activist groups argued against the tax breaks offered to Amazon and said it would lead to gentrification and create jobs only for the wealthy.

Despite the backlash, capitalism has been a force for good. The global rate of extreme poverty has been cut in half from 1990 to 2010 according to a World Bank Report. Improvement in overall quality of life has followed the sharp decline in poverty. Infant mortality, life expectancy, hunger index, etc.,  have all improved tremendously especially in the developing world. Though these numbers should be a good enough defense for the system, the system has come under attack due to rising income inequality, wealth gap, and corporate greed.

At this critical juncture, corporates need to take more social responsibility by working along with all the stakeholders and developing strategies profitable to everyone in the long run. Companies don’t have to transform themselves into non-governmental organizations or forgo profit goals to create shared value. For example, Heinz one of America’s largest condiment companies launched a “micronutrient campaign” to combat the threat of iron-deficiency anemia and vitamin and mineral malnutrition among infants and children in the developing world. They created powder packs approved by WHO and UNICEF and sold it for low, affordable prices. These packs became extremely popular and generated a significant return on investment. The government plays an important role in ensuring corporates play by the rules and keep customer interests at the forefront of their policies. It should not overly regulate markets and corporate practices but work along with them to deliver the best value proposition for customers. Public-private partnerships are a good example of government and corporations working together to deliver value for society. Corporates can also support the suppliers in different ways by equipping them with the latest technology, finance directly eliminating the middlemen. It results in a better quality of raw materials and long-lasting mutually beneficial relationships.

In order to win back the faith of customers, government and other stakeholders, corporations need to move from a profit-oriented capitalist system to a shared value based one. Ensuring that all stakeholders are profitable and happy will yield great results in the long run.