Companies find value in pursuing a more enlightened form of capitalism

 

BOOK REVIEW:The New Capitalist Manifesto – Building a Disruptively Better Business by Umair Haque; Harvard Business Review Press; €24.99, writes FRANK DILLON

CONVENTIONAL CAPITALISM is dying with yesterday’s industrial era model of growth in permanent decline. Increasingly, the advantage will cede to companies that practice a more enlightened form of business, paying more than just lip-service to environmental and social agendas.

That’s the central premise of Umair Haque’s thesis in this engaging book which offers a blueprint for a better form of capitalism.

Capitalism, he says, is founded on the equation of creative destruction. The cornerstones of capitalism as we know it systematically and chronically undercount the costs of destruction and over-count the benefits of creation. The result is an oversupply of “bads” with too much economic destruction for too little creation. The sum of over-destruction and under-creation is the deep debt a society incurs.

Conventional capitalism produces only short-term growth, “Dilbert-esque” jobs and pushes costs on to future generations, he says. Industrial age cornerstones limit organisations to creating “thin” value. Thin value is artificial, often gained through harm to or at the expense of people, communities or society and is unsustainable.Three iconic products of recent times – McMansions, Hummers and Big Macs – express it precisely.

How profitable would fast food companies be, for example, Haque asks, if they had to bear the partial costs of obesity, carbon emissions and malnutrition?

The hidden interest that must be paid on harm’s debt is ever compounding. Lobbying requirements, raw material and energy prices, low employee engagement, regulatory scrutiny and more active resistance from people and communities means that costs are continually rising for “industrial age” businesses.

Of equal concern, the debt of economic harm can be called by creditors at any moment by what author Nassim Nicolas Taleb has termed a “black swan” event: an unexpected, unpredictable yet unavoidable catastrophe.

A firm can be said to have created value when its returns exceed its cost of capital but thin value is a set of returns that exceed only the financial cost of capital. The financial cost of capital falls economically short of the full spectrum cost of capital. No company has yet mastered the art of measuring, applying and monitoring it.

Yet Haque sees cause for optimism in the shifting philosophies of a range of corporations that are engaging in more enlightened capitalism. Interestingly, these included well-established firms such as Unilever, Lego, Walmart and Nike as well as more recent insurgents such as Google and Apple.

These firms are now all utilising resources by renewing rather than merely exploiting resources, shifting from value chains to value cycles. Value propositions are being replaced by value conversations and competitive advantage is now increasingly seen as a matter of long-term philosophy rather than short-term strategy.

While the traditional notion of costs value derives from a value chain that exploits resources until they are depleted, loss advantage stems from a value cycle that renews resources and makes waste useful. The result is thick rather than thin value, value that matters, that lasts and that multiplies.

Take Nike, for example. Its considered design philosophy results in shoes that use environmentally friendly low-energy materials such as water-based adhesives and recyclable rubbers, cutting out unnecessary materials. The result is a lighter shoe with an 83 per cent recyclable sole that commands better margins. A win/win result for Nike and its customers. A pioneer of value cycles, two of its factories in the US and Belgium, slice and grind shoes into rubber foam that is sold to create indoor sports surfaces.

Another cornerstone of this approach is to reverse the value cycle, as in case of toymaker Lego. Five years ago it was on the brink of bankruptcy. Today it is producing record margins. The differences is attributed to Lego Factory where customers can upload their own designs for a Lego set that Lego will produce, bundling only the bricks needed. Customer designs are shared as part of the deal. Lego gains in efficiency and has a constantly renewed stock of ideas for new sets and customers only pay for what they need.

Using even the crude measure of stock market performance, such constructive capitalists have outperformed traditionalists. If you had invested $1 million in the SP 500 at the turn of the century, you would have lost 20 per cent 10 years later, yet had you invested in the portfolio of 15 enlightened firms Haque has identified for the book, you would be $3 million better off, he notes.

As he acknowledges, none of these companies is a paragon of perfection but in each of their unfinished journeys lies a deeper promise in navigating past the depleted affluence of the industrial age to reach the shores of a revitalised prosperity.