posted February 25, 2014 12:30 PM            

On a Wednesday in mid-September, some 30 entrepreneurs from around the world put on boots and blue jeans and spent four hours digging out Namaste Solar, a solar-power company in Boulder, Colorado, from under three feet of mud.

The international cleanup crew was in town for the annual conference of B Lab, a global organization of for-profit businesses (known as B Corps) that choose to legally bind themselves to meeting social and environmental objectives. Namaste Solar is one of the world’s 830 certified B Corps, and after flooding of near-Biblical proportions, some assembled peers decided to lend a hand.

"As we were leaving, we got on the bus pulling away, and we saw six or seven Namaste employees having a team hug," Andrew Kassoy, a co-founder of B Lab and one of the diggers, told me. "People said, 'That's what this community is about—it is about businesses taking collective action to serve society.' "

We are well into the age of Oprah, so there is nothing too remarkable about corporate group hugs, particularly if your company has namaste in its name. Nor is there anything too special about groups of businesspeople building team spirit through volunteer work and assertions of the social value their labors provide.

But the B Corp community is genuinely ambitious. And it is part of a wider international movement of CEOs, investors, and business-school professors who hope to transform the way business is done, creating a more "sustainable" system of capitalism. Parts of the movement are familiar. Environmentally friendly business practices have long been mainstream, particularly when they create a brand advantage, as with organic foods. Humane treatment of the developing-world workers who sew our clothes or build our iPads isn’t quite as popular a brand promise, but it is hardly novel.

What is newer is the worry about the Western middle class and the fear that capitalism as it currently operates isn't delivering for that broad swath of society. In summing up the Colorado retreat, the B Lab team emphasized this idea, touting the “higher-quality jobs” that B Corps provide relative even to other socially minded businesses that have subjected themselves to a review of their social impact: employees are 45 percent more likely to be paid bonuses than people at those firms, and 55 percent more likely to have at least some of their health-care costs paid. B Corps are also 18 percent more likely to choose suppliers from low-income communities.

"We are going through a shift," said Marcello Palazzi, one of the leaders of the B Corp movement in Europe. "Society as a whole is realizing the capitalist system itself is quite dysfunctional. We have created an economy and corporations that in many ways have become unethical. One response is to go out on the streets, like Occupy Wall Street. Another is the B Corp movement."

In Western capitalism circa 2013, fear that the market economy has become dysfunctional is not limited to a few entrepreneurs in Boulder. It is being publicly expressed, with increasing frequency, by some of the people who occupy the commanding heights of the global economy.

Dominic Barton, the global managing director at McKinsey, is one critic: "Capitalism, even 150 years ago, was more inclusive; there was more of a sense of social responsibility," he told me. Today, trust in business is declining. "The system doesn't seem to be as fair or as inclusive. It doesn't seem to be helping broader society."

Barton's concern is shared by David Blood, a former head of Goldman Sachs Asset Management, who co-founded the investment firm Generation Investment Management with former Vice President Al Gore a decade ago. "Some people say income inequality doesn’t matter. I disagree," Blood said. "We are creating a situation in which only the elite of the elite can be successful—and that is not sustainable."

Both men worry that if capitalism doesn't deliver for the middle class, then the middle class will eventually opt for something else. Business needs what Barton calls "a license to operate," and without a new approach, he fears, it risks losing that license.

"We have so many people who are suffering," says Kurt Landgraf, the former president and CEO of DuPont Merck, and now the CEO of ETS, the nonprofit educational-testing company, where he is championing an ambitious new project to study and try to reverse declines in economic opportunity. (I consulted on the project.) "If we don’t do something to change the trajectory" of the economy, these people will eventually become "advocates for more-extreme change," and "we as a country will experience significant social upheaval." Landgraf told me that most of the corporate executives and board members he knows are beginning to share this concern.

Chief executives have been among the biggest financial beneficiaries of "unsustainable" capitalism. But according to Roger Martin, the head of the Martin Prosperity Institute at the University of Toronto (where I am a fellow), and a strategy consultant to CEOs, including Procter & Gamble's A. G. Lafley, their lavish pay doesn't fully compensate for being part of a dysfunctional system. Too many CEOs, Martin said, "focus on the short-term, pump up stock prices, make a bundle, and leave the company before it all comes crashing down. That is not an ethical life, that is a miserable life." And its lack of inherent rewards, he told me, is itself one reason why many CEOs don't stay long in their positions.

For those CEOs who aren't quite so troubled by leading an unethical life, the sustainable capitalists have another argument—that their approach is a better way to make money over the long term. At least some evidence exists that companies that look beyond quarterly earnings, and that make exceptional efforts to treat workers as "stakeholders," weather crises better and see higher long-term profits.

"People ask, 'What is the cost of being sustainable to your portfolio?,' " Blood said. "Actually, we think that by being sustainable, it gives us a better chance of delivering returns to our clients." Intellectual champions of this view now include Barton; Harvard Business School’s Michael Porter, the father of the theory of national competitive advantage; and Mohamed El-Erian, the CEO of PIMCO, a $2 trillion global investment-management company.

Barton precisely dates the moment Western capitalism started to go off the rails: it was 1970, when Milton Friedman first advocated maximizing shareholder value as the paramount duty of the chief executive. That notion—which reduced issues like employee well-being to "externalities" that shouldn't concern a company's manager—helped catalyze a divorce of business from society. As Friedman said, the job of business was business, and that was it.

What made it possible to sell this version of capitalism to society was the promise that if business were allowed to simply get on with the job, all of us would be better off. Businesses were, as Mitt Romney’s 2012 presidential campaign had it, "job creators"; burdening them with additional responsibilities would be self-defeating.

It is easy to forget that this black-and-white view of the role of companies replaced a very different philosophy. In the 1950s and '60s, America’s business leaders widely believed they were responsible to the community as a whole, not just shareholders. They led their companies in a time when their workers’ wages increased faster than their own salaries. And they collectively advocated policies—like higher taxes—that went against their immediate class interests. (History lesson for those that have ears to hear - AG)

That era, of course, had roots in a messier period that recalls our own. Business in the late 19th and early 20th centuries was red in tooth and claw, and inequality surged. One consequence was tremendous innovation. Two others were periodic financial crises and violent social upheaval—including the rise of communism. By the end of the Second World War, smart capitalists throughout the West realized they had to serve society as a whole, or be devoured by it. The communist specter no longer haunts Europe, of course, but the leaders of the sustainable-capitalism movement believe we are approaching a similar tipping point in the relationship between business and society.

It is unclear to what extent "sustainable business" can solve the big problems its leaders have set out to address. Treating workers decently and paying them better would help ease the middle-class squeeze and, within limits, might ultimately improve the bottom line. But those limits, presumably, would be reached fairly quickly: Most businesses are constrained by the way their competitors operate. The decisions of individual CEOs won't stop what's new about capitalism in the 21st century—the job-hollowing impact of technological change and globalization.

The sustainable capitalists don't claim to have all the answers to these challenges. But one measure of their concern is the newfound openness some of them have toward a greater role for the state. They want the government to help them—and their rivals—do the right thing, like raise wages or repatriate taxable profits. "If the rules were changed," everyone would have to behave differently, Kurt Landgraf told me. "If they believe that those changes are in the interests of society, I don’t think American CEOs and boards would go into a massive revolt."

posted February 26, 2014 10:59 AM            

The U.S. is at risk of becoming a "Downton Abbey" economy, as the gap between the top 1 percent and the poor widens, former U.S. treasury secretary Larry Summers has warned.

In a comment piece for the Financial Times, Summers highlighted that the share of income going to the top earners in the U.S. has increased sharply, while real wages and family incomes remain stagnant. These conditions will last beyond the normalization of the economic cycle and budget deficits, Summers added.

"The cumulative effect of all these developments is that the U.S. may well be on the way to becoming a Downton Abbey economy. President Barack Obama is right to be concerned. Those who condemn him for 'tearing down the wealthy' and engaging in un-American populism are, to put it politely, lacking in historical perspective," Summers wrote.

Summers, who was at one time in the frame to take over Ben Bernanke as chairman of the U.S. Federal Reserve, added that President John Kennedy sent the FBI to audit executives' personal tax returns following a spike in steel prices, while President Richard Nixon insisted on tax investigations "of the books of companies which raised their prices more than 1.5 per cent above the January ceiling" he said.

Recent analysis by Oxfam, released ahead of last month's World Economic Forum held in Davos, found that 85 of the richest people in the world have accumulated as much wealth between them as half of the world's population. The charity said the tiny elite of multibillionaires, who could fit into a double-decker bus, have piled up fortunes equivalent to the wealth of the world's poorest 3.5 billion people, boasting a collective worth of $1.7 trillion.

Oxfam also calculated that almost half the world's wealth, $110 trillion, is owned by just 1 per cent of its population. The group said 70 percent of people live in countries where the gap between the rich and poor has widened in the last 30 years. Policies that prefer the rich, such as the capital gains exemption, the ability to defer tax on unrealized capital gains, and the tax-free nature of gains on assets that passed on at death reinforce inequality, however identifying policies that reduce inequality "is not enough" said Summers.

"To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play. The current tax code is so badly designed that it is very likely to be having the effect of reducing economic growth. It also allows the rich to shield a far greater proportion of their income from taxation than the poor. For example, last year's increase in the stock market represented an increase in wealth of about $6 trillion, of which the lion's share went to the very wealthy," he added.
President Obama used his State of the Union address last month to highlight the growing disparity between America's richest and poorest citizens, saying that, after four years of economic growth with sky-high corporate profits and stock prices, average wages had not changed.

"Those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled," he said. "The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by – let alone get ahead. And too many still aren't working at all," he added.

In his Financial Times piece, Summers suggested closing loopholes enjoyed by the wealthy, which would enable taxes to be cut elsewhere. He suggested measures such as earned income tax credit, which could raise the incomes of the poor and middle class by more than they cost the Treasury, by giving people incentives to work and save.

He said it was ironic that advocates of the free market are often those that are least in favour of curbing tax benefits for the rich, and sooner or later inequality needs to be addressed. However policies that aim instead to thwart market forces rarely work, he said, and usually "fall victim to the law of unintended consequences," said Summers.

posted February 26, 2014 11:57 AM            

"I consider income inequality the most dangerous part of what’s going on in the United States," former Federal Reserve Chairman Alan Greenspan said at the National Association of Business Economists conference.

"You can see the deteriorating impact of that on our current political system, and you cannot talk about politics without talking about its impact on the economy."

Greenspan also calls for immigration reform, where he sees a connection to the income inequality issue, according to The Fiscal Times. The economy needs a boost in immigration, especially among high-skilled workers, he says.

"We cannot manage to staff our very complex, highly sophisticated capital structure with what’s coming out of our high schools," Greenspan said Monday. "If we’re not going to educate our kids, bring in other people who want to become Americans. Let them in here, and let them use their skills."

The current restraints on immigration for skilled workers act in essence as a wage subsidy for the economy's big money makers, exacerbating the unequal income distribution, Greenspan says.

Others agree with Greenspan.

The head of the International Monetary Fund also warned that rising inequality can damage economic growth and social ties, and may also cause political instability, Reuters reported.

"Rising inequality and economic exclusion can have pernicious effects,"said IMF Managing Director Christine Lagarde, according to prepared remarks, pointing to IMF research that shows income gaps can lead to slower and less sustainable growth.

"In the years ahead, it will no longer be enough to look simply at economic growth," she said. "We will need to ask if this growth is inclusive."

Meanwhile, a new study from the Brookings Institution shows that income inequality is much greater in cities like San Francisco with high-flying economies than in more sluggish ones like Wichita, Kan.

"These more equal cities—they’re not home to the sectors driving economic growth, like technology and finance," Alan Berube, the report's author, told The New York Times. "These are places that are home to sectors like transportation, logistics, warehousing."

posted February 26, 2014 08:14 PM            

Still, thought I'd throw this out as this is a paradox I still don't understand about the Republican Party:

posted February 26, 2014 09:44 PM            

That's weird that you ask about the Left making stuff up at will considering all that you've made up at will including just now when you once again divined the future without any regard for anything.

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This might've gone over better had it not been implied by the title that Communism was the answer to the problem.

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It was not my intent to imply that. My point was made in the article, and generally is that growing income inequality could cause people to revolt and otherwise adopt Communistic views far in excess of whatever they think is present currently.

posted February 26, 2014 09:59 PM            

Actually, the five richest people in the Senate are Democrats.

posted February 27, 2014 09:10 AM            

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Originally posted by Randall:
American citizens are not going to revolt and become communists. That comment is the epitome of idiocy. Communists ran the OWS, and where is that operation now? Americans are averse to communism, although a good percentage of Democrats lean toward socialism.

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Yes. Let's please differentiate between communism and socialism. Capitalism and Communism are just two extremes on a spectrum.

Fun fact.

Did you know that in any country, you will find the people with the lowest intelligence on the far right side? Followed by the far left side, then the right side. The most intelligent people are (statistically) found just left of the centre.

posted February 27, 2014 11:41 AM            

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The question is do you think you should be paid the same as your bosses? Clear enough for you now?

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Yes, but I'm good either way.

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Actually, the five richest people in the Senate are Democrats.

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If this is true, I'm not surprised.

quote:

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American citizens are not going to revolt and become communists. That comment is the epitome of idiocy. Communists ran the OWS, and where is that operation now? Americans are averse to communism, although a good percentage of Democrats lean toward socialism.

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posted February 27, 2014 02:15 PM            

I also doubt the US will ever be Communist. But you are calling us Commies for suggesting that better employee conditions means better business, so I'm not sure why you think Communism isn't already here? Lotsa folks think likewise! And they take a dim view of the relentless emphasis on feeding the rich at the expense of the poor.

Do you know how many of your "free market" successes pay so little that their employees have to get food stamps to make ends meet? It's not just Walmart, but McDonalds and many others, to the tune of billions...now if those people were earning a living wage the foodstamp program could actually cover the needs of those who can't work for some reason..those companies are taking the food out of the unemployed's mouth