Reshaping Capitalism - Measure It Differently!
To modernize capitalism we need a new set of business performance targets
As we exit Coronavirus and constraints on business and society get lifted, there is likely to be growing momentum to reimagine capitalism. To make it more socially conscious, increasingly egalitarian, better at supporting diversity and more environmentally conscious. Business leaders and investors should start to consider the possible ramifications. They might affect how businesses are run.
The pandemic seems to have exposed a number of possible flaws in the current (neo-liberal) capitalist approach. Many argue it has left too many people behind, feeling under paid and poorly supported. White collar home-workers are concerned that work follows them everywhere, while front line and hospitality staff feel overly exposed.
Capitalism is shaped by economics, regulations and targets. It is the latter that has the most direct impact on business in general.
The current model measures the success of capitalistic endeavours by the increase in shareholder capital - or share price increase. This, of course, is driven by earnings performance and, to an extent, growth in sales and market share.
It is the same with public sector performance which, at the highest level, is measured by GDP and government debt. In the end we are all obsessed with sales growth, cost management and profit.
This criteria for success tends to create a ‘growth at all costs’ culture and a management approach that might be as dangerous for society as a monoculture is to the planet. Short term thinking pervades and strategies tend to be overly centred around quarterly performance and not focused enough on the big issues like innovation, customer excellence, employee wellbeing, sustainability and brand.
Maslow’s hierarchy of needs applies to economic performance. If you are growing earnings each period, you have more head space to think about future products, strategy, customer excellence and employee wellbeing. And if you are not, well, all that matters is short term sales and profits.
Growth at all costs.
Management is trained to focus almost exclusively on making money for shareholders. Year in, year out.
If earnings are increased by slashing costs that is bad for society. If they are driven by continued sales growth that could be bad for the environment, as top line growth often equates to increased emissions and the depletion of physical assets (nature).
But, what would happen if the targets were changed? Imagine if companies, public sector organisations and investors were measured by a clutch of critical targets. Each equally important to economic performance, including the share price performance.
A broader set of targets would, as usual, include share price growth, earnings growth, sales growth, cash generation and cash on hand. But perhaps we should add targets for new product introductions, customer satisfaction ratings, brand equity, employee diversity, staff turnover, senior officer wage differential versus average employee take-home, women in management and the organisation’s carbon footprint.
The starting point would be for accounting firms and reporting entities to change the rules for medium and larger organisations to take into account a wider set of reporting requirements. With this in place, the investment community could be persuaded to follow suit and change their investment criteria. On the back of this, public sector organisations would be forced to follow.
Until companies are valued on a broader set of measures, taking into account the wider impact that their employees, processes and outputs have on society, innovation and the planet, it will be hard for capitalism itself to get updated. And the current, somewhat myopic, growth at all costs approach is not sustainable. Not given a population careering toward ten billion and a planet with such challenged and finite resources. A broader set of economic targets would help foster longer term thinking and a more caring organisation.
1Starting to move towards natural capital accounting approaches is a big step forward, but until a new set of broader measures is introduced into the heart of business performance and tied intrinsically to share price performance, we have little hope of making the kind of systemic shift required to steer us through the inequality and climate crisis.
Capitalism can be updated and businesses can become more socially and environmentally conscious. Innovation and scientific progress can be measured. Surely, if we can privatise space exploration, we can figure out how to reward investors and managers for a wider definition of business performance.
A more socially conscious, sustainable and balanced business could also prove to be a more natural partner for government and help to further enhance the development of public and private partnerships.
Progressive organisations might want to get ahead of some of the likely changes. It might not be very long before society demands it.
Surviving is a Letts Group publication. Follow our twitter feed to stay updated.