American Capitalism: An Evolution or a Revolution?
CRB Executive Director Robert Strand was invited to testify to a U.S. Congress committee hearing on December 4, 2019 to consider issues of responsible business in American capitalism. Below is the formal testimony Robert submitted in advance of the hearing followed by the subsequent formal response submitted by Robert after the conclusion of the hearing.
The full testimony can be viewed here with Robert’s testimony beginning at 16:56 with relevant exchanges about American vis-a-vis Nordic capitalism at 1:05:18 and 1:13:00.
“The success of American capitalism in the 21st century will be measured against the Sustainable Development Goals.”
Statement of Dr. Robert Strand
To be presented to:
United States House Committee on Small Business, hearing on
“Embracing Corporate Social Responsibility: Small Business Best Practice”
December 4, 2019
I am Robert Strand, Executive Director of the Center for Responsible Business and faculty member at the University of California, Berkeley. I also hold the title of Associate Professor of Leadership and Sustainability with the Copenhagen Business School in Denmark.
The 20th century was defined in large part by the ideological battle between American capitalism and Soviet communism. The 21st century will be defined by whether American capitalism sufficiently meets our collective needs and tackles our greatest challenges including climate change, growing inequalities, decent work for all, and threats to our democratic institutions. The 17 UN Sustainable Development Goals (SDGs) succinctly articulate these needs and challenges1. The success of American capitalism in the 21st century will be measured against the Sustainable Development Goals.
With this in mind, I deeply welcome the recent restatement on the purpose of the corporation by the Business Roundtable to embrace a stakeholder view of the firm2. This represents a pragmatic step to improve American capitalism3 4 as a stakeholder view increases our likelihood to successfully achieve the Sustainable Development Goals.
A stakeholder view states that the purpose of a firm is to provide value to its stakeholders. It represents a stark shift from the previous stated purpose known as “shareholder primacy” long promoted by the American economist Milton Friedman that prescribes a lone corporate purpose to maximize profits5.
Dr. Friedman was a central figure in the ideological battle between American capitalism and Soviet communism6. For Freidman, anything other than a free market response was the enemy and profit-maximizing firms were central to Friedman’s view of free markets. Friedman contended anyone suggesting firms have a responsibility beyond profit maximization – such as avoiding pollution or addressing discrimination – were “preaching pure and unadulterated socialism.”7 That use of the word ‘socialism’ is a Cold War ideological relic – it served its purpose then but I cringe at its use today. The Business Roundtable’s restatement helps move us past these tired ideological debates.
I now turn attention to the smart policy and corporate governance structures necessary to best ensure the Business Roundtable’s words are turned into durable action supportive of the stakeholder view.
B Corps (i.e. Benefit Corporations) presents great promise. In 2012, when Patagonia became the first California company to sign up for B Corp certification, its founder Yvon Chouinard stated that B Corps created the necessary legal framework through which Patagonia could remain committed to a stakeholder view even through changes in ownership8 9. B Corps has yet to be widely tested in the domain of public corporations where I also look to examples from elsewhere in the world for institutionalizing a stakeholder approach en masse.
Chiefly, I look to the Nordic countries comprised of Denmark, Finland, Iceland, Norway, and Sweden given the Nordics are originators of the stakeholder view of the firm10 11 and have developed a variety of corporate governance structures that support the stakeholder view. This includes the Danish industrial foundation model12. Leading Danish firms like Carlsberg and Novo Nordisk are public corporations whose majority of voting rights are held in perpetuity by an associated industrial foundation. This enables the company’s management to embrace a long-term perspective supportive of the stakeholder view. The 1969 Foundation Law prevents such a structure in the U.S. We may want to revisit this.
A stakeholder view also comes with challenges. Patagonia is widely heralded as a responsible company in part because it provides a key stakeholder – its employees – with benefits like fully paid parental leaves, access to quality childcare, paid medical leaves, and sufficient healthcare coverage. I applaud Patagonia as such offerings are widely recognized as beneficial to society but I have significant concerns for a capitalistic system that pushes such responsibilities into the domain of business. This is inefficient and can unintentionally exasperate inequalities. Furthermore, it redirects the precious resources of small and medium sized companies who may not be able to satisfy these demands. My experiences in the Nordics have convinced me there is a much more efficient and equitable way to handle these things 13 14 15. I believe small business could be the champion of pragmatic explorations to consider what might work better in an American context.
In closing, I would like to point out that small business is the most trusted institution in the U.S.16 17. I am deeply concerned about mounting populist attacks on the concept capitalism. But I am equally concerned about inaction on the part of our business and political leaders to go about the pragmatic work of improving our version of American capitalism so it best meets our needs and tackles our greatest challenges. As representatives of the most trusted institution in the U.S., this congressional committee has the opportunity, and dare I say responsibility, to assume a leadership role to usher in a new era of American capitalism in which the stakeholder view is mainstreamed and the challenges represented by the Sustainable Development Goals are met.
Response of Dr. Robert Strand
December 11, 2019
To be amended to presentation for:
United States House Committee on Small Business, hearing on “Embracing Corporate Social Responsibility: Small Business Best Practice”
December 4, 2019
We need an evolution of American capitalism to avoid a revolution of American capitalism.
This past Friday, conservative New York Times columnist David Brooks wrote the article “Two cheers for capitalism, now and forever.18” I may have just submitted it as my testimony had he written it earlier in the week. Within it, Brooks offers:
These problems are not signs that capitalism is broken. They are signs that we need more and better capitalism. We need a massive infusion of money and reform into our education systems, from infancy through life. Human capital-building is like nutrition: It’s something you have to attend to every day. We need welfare programs that not only subsidize poor people’s consumption but also subsidize their capacity to produce.
We need worker co-ops, which build skills and represent labor at the negotiating table. We need wage subsidies and mobility subsidies, so people can afford to move to opportunity. We need tax subsidies for health care, to make it easier for people to switch jobs. We need a higher earned-income tax credit, to give the working poor financial security so they don’t get swept away amid the creative destruction. We need a carbon tax, to give everyone an incentive to reduce carbon emissions without pretending we know the best way to do it.
Every single idea I just mentioned comes from the American Enterprise Institute or Brookings or some other institution derided as being part of the neoliberal elite. All these ideas would make capitalism work better.
A big mistake those of us on the conservative side made was to think that anything that made the government bigger also made the market less dynamic. We failed to distinguish between the supportive state and the regulatory state. The supportive state makes better and more secure capitalists. The Scandinavian nations have very supportive welfare states. They also have very free markets. The only reason they can afford to have generous welfare states is they also have very free markets.
To this list, I would add paid parental leaves. Paid parental leaves benefit children, parents, small businesses, and society as a whole, and require no infrastructure to operationalize. This is not about the rich paying for the poor. This is about the middle class paying for itself 19 20. I applaud Congress for having reached the landmark agreement just this past week on paid parental leaves for federal employees and I am optimistic this will be expanded to all working Americans.
I wish to stress Brooks’ point: we need more and better capitalism. The ideological debate of capitalism versus communism was settled in the 20th century. Thankfully, capitalism won. But capitalism comes in many varieties and it is time we go about the pragmatic work in the 21st century of making the best possible variety of capitalism that we can for America. We must not rest on the laurels of past successes or close ourselves off to learning from others. We must engage with the world with curiosity and embrace an innovative spirit of experimentation.
At the core of Nordic capitalism is the ideal and practice to ensure equality of opportunity whereby those who desire to achieve success have the opportunity to work hard to do so. To me, this is the American Dream. It has been recently said if you want to live the American Dream, live in Denmark21. Denmark and their Nordic neighbors Sweden and Finland also regularly top the annual measurements of the Sustainable Development Goals (SDG) Index 22 23 thus indicating a comparative readiness of Nordic countries to address our greatest 21st century global challenges.
One can respond to such evidence defensively, dismissively, or aggressively. I take this evidence as a challenge. I desire to be part of an aggressive response whereby we make America the best possible version of itself through which all Americans have the opportunity and freedom to fulfill their full potentials.
We need an evolution of American capitalism to avoid a revolution of American capitalism. I am at your service in the work that lies ahead.
Dr. Robert Strand
Executive Director, Center for Responsible Business
Haas School of Business
University of California, Berkeley
Associate Professor of Leadership & Sustainability
Copenhagen Business School
Appendix A: UN Sustainable Development Goals Index
1https://www.un.org/sustainabledevelopment. See also Appendix A.
3Freeman, R. E. Strategic Management: A Stakeholder Approach. Pitman Publishing: Boston, MA. (1984).
4Freeman, R. Edward, Jeffrey S. Harrison, Andrew C. Wicks, Bidhan L. Parmar, and Simone De Colle. Stakeholder Theory: The State of the Art. Cambridge University Press. (2010).
5Stout, Lynn A. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. Berrett-Koehler Publishers. (2012).
6Friedman, Milton. Capitalism and Freedom. University of Chicago Press. (2009)
7Milton, Friedman. “The social responsibility of business is to increase its profits.” New York Times Magazine 13 (1970): 32-33.
9Chouinard, Yvon, and Vincent Stanley. The Responsible Company: What We’ve Learned from Patagonia’s First 40 Years. Patagonia. (2013).
10Rhenman, Eric. Industrial Democracy and Industrial Management: A Critical Essay on the Possible Meanings and Implications of Industrial Democracy. No. 2. Tavistock. (1968).
11Strand, Robert, and R. Edward Freeman. “Scandinavian Cooperative Advantage: The Theory and Practice of Stakeholder Engagement in Scandinavia.” Journal of Business Ethics 127, no. 1 (2015): 65-85.
12Thomsen, Steen. The Danish Industrial Foundations. Djøf Forlag. (2017).
13Matten, Dirk, and Jeremy Moon. ““Implicit” and “explicit” CSR: A Conceptual Framework for a Comparative Understanding of Corporate Social Responsibility.” Academy of Management Review 33, no. 2 (2008): 404-424.
14In the words of the American economist Arthur Okun, in a capitalistic society “there must be a place for markets and markets must be kept in their place.” From: Okun, Arthur M. Equality and Efficiency: The Big tradeoff. Brookings Institution Press. (1975)
15Sachs, J., Schmidt-Traub, G., Kroll, C., Lafortune, G., Fuller, G. (2019): Sustainable Development Report 2019. New York: Bertelsmann Stiftung and Sustainable Development Solutions Network (SDSN). Available at www.sdgindex.org
19See also Partanen, Anu. The Nordic theory of everything: In search of a better life. Prelude Books, 2017.
20See also Collins, Caitlyn. Making Motherhood Work: How Women Manage Careers and Caregiving. Princeton University Press, 2019.
23See also Appendix A