Reimagining Capitalism in a World on Fire (2020) asks us to rethink the way our economic system functions if we’re to survive our current crises, like climate change, inequality, and authoritarian populism. In this guide to the future, Rebecca Henderson describes how we must instill purpose into our business ventures, so that they create shared value, rather than merely shareholder value.
Politics, Social Sciences, Government, Capitalism, Economic Systems, Ethics, Society, Environmental Sustainability
Who is it for?
- Business leaders and CEOs looking to change the world
- Economists and academics interested in rethinking capitalism
- Anyone interested in the world of the future
What’s in it for me? Discover how capitalism can be reformed for good.
Imagine you’re walking through a forest of quiet oak trees. You can smell the bark and their deep green foliage. Their huge canopies sway gently above you. You’re fully at peace. Now, imagine those ancient trees withering, their leaves turning black, and the great trunks dying in front of you.
This apocalyptic vision is similar to the one that struck the author when she first found out about climate change. As someone who had not only benefited from our capitalist system but had taught its merits as an academic, she began to wonder if she was complicit in this impending disaster. She wondered what could be done differently. How might capitalism be reformed? How could her beloved trees, and Earth, be saved?
In these summaries, we’ll consider how business can help combat these crises. We’ll look at how businesses can become purposeful and sustainable rather than go after destructive short-term goals. And crucially, we’ll discover how capitalism can give value back to our communities, rather than simply profiting from them.
In these summaries, you’ll learn
- how a waste collection company from Norway made radical change;
- why Nike formed a coalition with other businesses; and
- that Unilever revolutionized the production of tea.
Prioritizing shareholder returns is damaging to both the planet and to business.
The plight of shareholders has long been discussed in the boardrooms of big businesses. Everything else – from innovation and the environment to workers’ wages – has come after the interests of the shareholder.
But how did we reach this point? To find out, we have to turn to the ideas of the American economist Milton Friedman, who was popular with business thinkers in the late twentieth century. He claimed that the only moral responsibility of business was to increase profits – businesses that only sought profit would become more efficient and innovative, and bring broader prosperity. Essentially, the market would take care of everything.
And as shareholders are the people who stand to gain from a business’s profits, Friedman believed that they should be a corporation’s main priority. That’s why, today, many businesses believe that they answer only to their shareholders.
The key message here is: Prioritizing shareholder returns is damaging to both the planet and to business.
The result of prioritizing shareholder returns can be linked to most of the problems that we face today. Let’s start with the climate. As big fossil fuel companies prioritize their shareholder returns over the planet, they too are driving devastating climate change.
Then, there’s widespread inequality. This is partly as a result of big business successfully lobbying against legislation that would make things more equal. Legislation that they believe would affect their shareholder returns.
And then, partly because of this inequality, we see the election of authoritarian populist leaders across the world. In short, we’re in a mess, and businesses seeking short-term goals are largely to blame.
The thing is, this kind of business model doesn’t actually hold any long-term benefit for businesses either. Take the fossil fuel companies. By pursuing a business strategy of short-term profits but long-term destruction of the natural world, they’re destroying the very foundations of their business model. Not only will reputational damage hit them hard in the future, it’s rather tricky doing business in a world on fire.
One illustration of just how short-sighted this model is comes from the American coal firm, Peabody Energy. Even though we face a climate crisis, Peabody continues to prioritize coal. In 2018, their total revenues were $5.6 billion for shipping 187.7 million tons of coal. However, the climate and health costs of burning 186.7 million tons of coal are around $30 billion.
Peabody is destroying about five times the value that it’s generating. Rather than creating shared ‘prosperity’, as Milton Friedman claimed, profit-hungry businesses like this are threatening the very prospect of life on Earth.
It’s possible for a business to be successful and do the right thing.
Business gets a bad rap. And as we learned in the previous chapter, it can often be well deserved. There are just too many companies in the world that neglect their responsibility to the environment, their employees, and the wider community.
However, not all businesses are driven purely by short-term interests. Some have been changing the world for the better.
The key message here is: It’s possible for a business to be successful and do the right thing.
The story of Norsk Gjenvinning (or NG), a Norwegian waste disposal company, shows us how capitalism can be both ethical and profitable. When the current CEO, Erik Osmundsen, took over, he wanted to create a company that was a force for good in the world.
As a hands-on leader, he traveled with the waste trucks and hung around the depots to see how everything functioned. What he saw appalled him. He discovered that his company and the industry at large were engaged in corrupt practices. Osmundsen witnessed how NG disposed of waste illegally and mislabelled hazardous refuse as ordinary.
That was enough to motivate the forward-looking CEO to do things differently. First, he introduced a zero-tolerance policy on corruption. If anyone broke this policy through illegal dumping or mislabelling, they were fired immediately. These tough measures were initially unpopular. And some line managers, used to the old way of doing things, resigned before they could be fired.
Second, he made new hires from outside the waste disposal industry. These were people with fresh ideas unrelated to waste disposal. He brought in professionals from companies like Coca-Cola, Norsk Hydro, and NorgesGruppen, the largest grocery chain in Norway.
Third, he introduced new technology, which recycled waste more effectively. This new machine used optical technology to sort metals, and made it possible to recycle up to 96 percent of an old car.
Not only were these developments good for the world at large, they also presented profitable opportunities. Because they could salvage lots of valuable metals with the new technology, the company was able to sell them to an ever-growing market.
Soon, NG’s ethical mission attracted lots of world-class talent who shared Erik Osmundsen’s way of doing business. These talented people helped the company unite ethical purpose with profitability. As a result, NG is now one of the most profitable waste disposal companies in Scandinavia.
Business can avoid short-term investor demands by reforming their accounting, relying on impact investors, and limiting investor power.
We’ve already learned how shareholders can exert too much influence on the way businesses work. As companies strain every muscle to meet investors’ demands, they tend to think only in the short-term. That means, they often neglect pressing issues, like climate change and poverty.
However, there are things that can be done to improve business-investor relations. Things that will allow businesses to focus on what matters, rather than be limited to short-term demands.
But, how do we do this?
The key message here is: Business can avoid short-term investor demands by reforming their accounting, relying on impact investors, and limiting investor power.
First, let’s look at accounting reform. This requires companies to report transparently on their own environmental, social, and governance issues, as well as financial data. By reporting on these issues, firms attract investors looking to support companies that put sustainability and fairness at the heart of everything they do. This type of investor is less inclined to demand short-term returns. In fact, they’re more likely to understand the long-term choices a company might make to improve its impact on the environment and community.
The second way to improve how investors work with businesses is to rely on impact investors. These are, very simply, powerful people and institutions seeking to invest in companies that want to make a difference. They seek returns, but they want to affect things positively. The Bill & Melinda Gates Foundation is an example of an impact investor. Among its many strategic decisions, it invests in companies developing vaccines and those looking to alleviate poverty in the global south. If companies are driven by purpose, they’re more likely to attract these impact investors.
The third way is to limit investor power entirely. There are Silicon Valley firms which have managed to achieve this, by issuing two classes of shares: Class A and Class B. When it went public, Facebook issued Class A shares to everyday investors. These came with one vote per share. But Mark Zuckerberg and the other founders got Class B shares, which came with ten votes per share. Essentially, this means that the founders, and Zuckerberg especially, hold the reins at the company and can never be outvoted.
But, without changes in legislation and cooperation between companies, it’s still very difficult to reform the worst parts of corporate finance and the short-term perspective it encourages. To do that, businesses need to work together.
Through working together, businesses can help drive progressive change and legislation.
If you’ve ever been the only person arguing for a point of view, you know how hard it can be. Even if it’s just being outnumbered at the family dinner table, it’s tough when you’re alone. But, when you’ve built consensus, nothing can stop you.
The same is true in the business world. When businesses seek to make progressive change alone, they’re often ineffective. But when they work together, great progress can be made.
The key message here is: Through working together, businesses can help drive progressive change and legislation.
Take the example of Nike. Increasingly troubled by the use of child labor in its supply chain, it sought to stamp it out.
At first, it was able to reform labor practices in some factories. But then found that its suppliers also supplied its competitors, some of which had no interest in reforming child labor practices. This meant that there would be no real pressure for those suppliers to reform.
In response, Nike, along with other big firms, formed the Sustainable Apparel Coalition. The central idea behind this coalition was simple: if everyone agreed not to use child labor, then this immoral practice would end, and no business would be able to undercut its competitors through exploitation. The Sustainable Apparel Coalition ended up bringing many large firms together.
However, without full collaboration, these efforts can falter. Not everyone will get on board. Think about the analogy of a potluck dinner where everyone’s required to bring a dish to share. If people continuously fail to pitch in, the lack of effort can be contagious. If someone turns up with a packet of stale cookies, then why should you bother with a homemade lasagna? Similarly, if one business flouts the rules, why should others obey them, especially if it’s to their economic disadvantage?
That’s why we need legislation in place to push for lasting change. The good news is that businesses have helped force legislation before.
There’ve been some dramatic examples. For instance, during the English Civil War between 1642 and 1651, a coalition of merchants and other businessmen helped depose the King and write the rules of parliamentary democracy!
More recently, in 2015, when the governor of Indiana signed a bill that legitimized discrimination against gay people, the business community responded aggressively. Within a week, they’d forced the Indiana legislature to back down. Proof, then, that businesses can force lasting change, when they think and act as one.
Unilever provides an example of how sustainability can be profitable.
If you’re a tea drinker, then it’s likely that you’ve come across some of the brands owned by the multinational company, Unilever. Perhaps you enjoy Lipton, PG Tips? After all, tea drinking is serious business – it’s the second most popular drink on Earth after water!
As popular as it is, producing tea can be damaging to the environment and local communities. This was a fact that hadn’t escaped Unilever, even after it acquired these big tea brands. It wanted its business model to be both sustainable and fair, so something had to be done.
The key message here is: Unilever provides an example of how sustainability can be profitable.
Sadly, tea farming often means turning tropical rainforests into tea plantations, while the pesticides and herbicides used degrade the soil and harm biodiversity. It contributes to climate change and eradicates species. To make things worse, tea pickers can be paid as little as $1 per day for their labor, while access to health care, decent housing, and education for their children is often out of reach.
This all troubled Michiel Leijnse, the new head of brand development at Unilever’s Lipton Tea. In 2006, very shortly after joining, he committed to purchasing 100 percent sustainably grown tea. It was an extremely ambitious target. It would involve training lots of farmers, as well as raising the cost of tea for the company. But Leijnse was committed to it.
It wasn’t only the right thing to do for a sustainable planet; it also made economic sense. Simply put, tea farming is very vulnerable to the effects of global warming. Bad droughts and floods can diminish harvests so much as to make the business unviable. So, without action to counter climate change, there simply wouldn’t be enough tea harvested for the business to work.
Leijnse also wanted to make sure that tea suppliers treated their laborers well. So, the farms he sourced from paid their employees good wages and provided housing, health care, and education for the tea pickers’ children. They were able to provide all of this because their sustainable farming practices resulted in some of the highest yields. By protecting soil health and limiting agrochemicals, they produced a better crop.
By doing all of this, Unilever also avoided damaging exposés of its suppliers’ practices. The long-term benefit was a consumer base secure in the knowledge that the tea it was drinking wasn’t destroying the planet. And guess what? Happy customers are loyal customers.
The health-care company Aetna demonstrates how important shared purpose can be.
It was 2015. And inside a hotel ballroom in Jacksonville, Florida, the CEO of a health insurance company had just announced that he would be paying a minimum wage of $16 per hour. The room erupted in cheers and applause.
That CEO was Mark Bertolini, the head of Aetna. Why exactly was he being so generous? Well, firstly, he thought it was the right thing to do in a country where inequality was soaring. Secondly, he wanted to instill a sense of shared purpose in his employees, a kind of company mission. He wanted to make sure that they’d be happy to sign up for that mission in the long-term.
The key message here is: The health-care company Aetna demonstrates how important shared purpose can be.
What was that shared purpose? It was simple. Improve health care in the US, which was, and still remains, in a bad state. In fact, according to the World Health Organization, the US is placed thirty-seventh out of 191 countries when it comes to health-care performance.
Bertolini had noticed a particular problem with American health care. This was the impersonal way patients were treated. Rather than human beings with particular needs, US health care often looks at patients as generic cases.
Bertolini had learned this in a painful way when his own son was diagnosed with terminal cancer. Rather than give in to this prognosis, Bertolini begged the doctors to try a treatment he thought might work for his son. At first, they were reluctant to try anything outside of the usual course of treatment. But they eventually relented and a miracle occurred: Bertolini’s son was cured.
Following this near-tragedy, Bertolini resolved that Aetna’s purpose would be to help US patients access the exact care they needed. To do this required a whole shift in mindset at the company. Rather than simply selling health insurance, Aetna’s mission was now to actively support patients. It was to make sure that they got the right treatment at the right time, in a way that would suit them personally.
By making sure patients were treated before they got too ill, costs were kept much lower for Aetna. So, as well as ensuring much improved health-care outcomes for patients, Aetna’s business was profitable.
And remember the wage rise? That was all part of the strategy, too. Mark Bertolini figured that financially secure people tended to be able to take better care of their own health. And healthier people would be more focused on providing the best care for Aetna’s clients.
Businesses can be powerful advocates for minority rights.
We don’t usually associate businesses with the fight against oppression. Aren’t businesses the bad guys? Well no, not always. In actual fact, some businesses have been powerful allies in the fight against the oppression of minorities.
The American multinational AT&T, for instance, adopted an anti-discrimination policy way back in 1975. It was the first major American corporation to do so. Then, in 1984, the technology giant IBM included sexual orientation within its global anti-discrimination policy. Both businesses were way ahead of their time.
The key message here is: Businesses can be powerful advocates for minority rights.
Today, many corporations have followed suit and have embedded anti-discrimination policies into the way they do things. And there’s a way to measure this. When the Corporate Equality Index, an equity index that rates big corporations on their pro-LGBTQ+ policies, was introduced in 2002, only 13 companies achieved perfect scores. Today, 366 out of 781 businesses score 100 percent. There’s still a way to go, but that’s some improvement.
In recent years, businesses have also actively challenged discriminatory legislation by reactionary governments. One recent example comes from North Carolina, in the United States. In 2016, the North Carolina government passed something called the Public Facilities and Security Act, more commonly known as the bathroom bill. This piece of legislation forced transgender people to use the public restroom corresponding to the gender on their birth certificates.
The day after the bill passed, a group of companies, including American Airlines, Facebook, Apple, and Google issued statements opposing it. With pressure mounting from the business world and the wider community, North Carolina partially revoked the bill.
Another example of principled corporate action comes from Ken Frazier, the CEO of the pharmaceutical giant, Merck. When Donald Trump claimed that there was “blame on both sides” in the aftermath of the 2017 white supremacist rally in Charlottesville, Frazier resigned from his post on the president’s Manufacturing Council. Within a week, all of the other CEOs on the council had resigned too.
While these might seem like small things, the private sector’s support of minorities and LGBTQ+ people is crucial in a time when vulnerable groups can seem besieged. If, the US moves toward a more inclusive stance on race, gender, and ethnicity, business will have a vital role to play.
Real change is gradual and the work of many. This applies to the business world, too.
Picture the scene, years from now. A series of superstorms crash into the American Atlantic coast. A drought causes millions of Africans to migrate northwards into Europe. And spurred into action by these events, the world finally tackles climate change.
In this scenario, credit would probably only go to a few visible figures – the president or prime minister who introduced a policy for change, or the leading campaigners of the time. But the fight against climate change would have been a long one. And it would’ve involved many, many people, some known to history, but countless others forgotten.
This is true of any great historical change.
The key message here is: Real change is gradual and the work of many. This applies to the business world, too.
The groundwork for any progressive change will have been laid down long before the change happens. And often, those who’ve contributed a great deal will remain anonymous. It might be a meeting of CEOs thrashing out an emissions target that’s the crucial step in the fight against climate change. But it’s often those quietly and thanklessly doing the boring work that makes change possible.
Consider the Civil Rights Movement. When we look back on it, we think first of its most charismatic figure, Martin Luther King Jr. But he was just one person, albeit an important one, in a movement of many. Without the work of thousands and thousands of others, it wouldn’t have had the success and strength that it did. Without those distributing flyers, writing up campaign strategies, or simply cooking the meals and cleaning up at meetings, the movement wouldn’t have been successful.
In the business world, those who want to create purposeful, conscientious companies are reliant on the work of many others. Think back to the Erik Osmundsen. He turned his corrupt waste disposal firm into something to be proud of.
But, when he’s called to speak about his great work, he always reiterates that it’s not just about him. It’s about the teams of people who do the dreary, day-to-day work, who deserve most of the credit. They’re the ones that shoulder the heavy work of change.
The lesson here is this: no matter how small your role seems, you can contribute to progressive change. In a world threatened by serious crises, you can be one of those that put it right.
The key message in these summaries:
The business world is currently too focused on short-term goals. This means that dealing with the great problems of the twenty-first century can seem like an impossible task – especially when the boardroom is fixated on investor returns, rather than harmful emissions and inequality. However, several businesses are already leading the way. Companies like Unilever and Norsk Gjenvinning demonstrate how capitalism can be both value-driven and profitable. After all, if capitalism is to survive, that’s exactly what it must do.
About the author
Rebecca Henderson is an economist and the John and Natty McArthur University Professor at Harvard, where she teaches the popular Reimagining Capitalism course. She’s also a board member at Amgen and IDEXX Laboratories, both S&P 500 Companies.
Rebecca Henderson is the McArthur University Professor at Harvard University (the highest honor that can be awarded to a faculty member), where she teaches the acclaimed course on “Reimagining Capitalism.” Henderson spent the first twenty-one years of her career at MIT’s Sloan School where she was “teacher of the year” and where her research focused on the economics of innovation and on the question of how large organizations can reinvent themselves..
Inducted in to the American Academy of Arts and Science in 2018, Henderson is also a Research Fellow at the National Bureau of Economic Research and the recipient of a number of academic prizes, including most recently the Viipuri Prize for strategy research and a recent election to the British Academy.
Henderson’s academic career is complemented by a deep engagement with the practice of management. She has been on the boards of Amgen, a Fortune 200 company, for eight years, and Idexx, an S&P 500 company, for fifteen. She has also consulted with a wide variety of companies including IBM, Motorola, Cisco, Nokia, Eli Lilly, BP, ENI, Unilever, P&G, and many smaller firms, and is routinely invited to speak to executives across the world.
Table of Contents
- “When the facts change, I change my mind. What do you do, sir?”: Shareholder value as yesterday’s idea
- Reimagining capitalism in practice: welcome to the world’s most important conversation
- The business case for reimagining capitalism: reducing risk, increasing demand, cutting costs
- Deeply rooted common values: revolutionizing the purpose of the firm
- Rewiring finance: learning to love the long term
- Between a rock and a hard place: learning to cooperate
- Protecting what has made us rich and free: markets, politics, and the future of the capitalist system
- Pebbles in an avalanche of change: finding your own path toward changing the world.
A renowned Harvard professor debunks prevailing orthodoxy with a new intellectual foundation and a practical pathway forward for a system that has lost its moral and ethical foundation.
Free market capitalism is one of humanity’s greatest inventions and the greatest source of prosperity the world has ever seen. But this success has been costly. Capitalism is on the verge of destroying the planet and destabilizing society as wealth rushes to the top. The time for action is running short.
Rebecca Henderson’s rigorous research in economics, psychology, and organizational behavior, as well as her many years of work with companies around the world, give us a path forward. She debunks the worldview that the only purpose of business is to make money and maximize shareholder value. She shows that we have failed to reimagine capitalism so that it is not only an engine of prosperity but also a system that is in harmony with environmental realities, the striving for social justice, and the demands of truly democratic institutions.
Henderson’s deep understanding of how change takes place, combined with fascinating in-depth stories of companies that have made the first steps towards reimagining capitalism, provide inspiring insight into what capitalism can be. Together with rich discussions of important role of government and how the worlds of finance, governance, and leadership must also evolve, Henderson provides the pragmatic foundation for navigating a world faced with unprecedented challenge, but also with extraordinary opportunity for those who can get it right.
Read an Excerpt
“WHEN THE FACTS CHANGE, I CHANGE MY MIND. WHAT DO YOU DO, SIR?”
Shareholder Value as Yesterday’s Idea
What is capitalism?
One of humanity’s greatest inventions, and the greatest source of prosperity the world has ever seen?
A menace on the verge of destroying the planet and destabilizing society?
Or some combination that needs to be reimagined?
We need a systemic way to think through these questions. The best place to start is with the three great problems of our time—problems that grow more important by the day: massive environmental degradation, economic inequality, and institutional collapse.
The world is on fire. The burning of fossil fuels—the driving force of modern industrialization—is killing hundreds of thousands of people, while simultaneously destabilizing the earth’s climate, acidifying the oceans, and raising sea levels.1 Much of the world’s topsoil is degraded, and demand for fresh water is outstripping supply.2 Left unchecked, climate change will substantially reduce GDP, flood the great coastal cities, and force millions of people to migrate in search of food.3 Insect populations are crashing and no one knows why—or what the consequences will be.4 We are running the risk of destroying the viability of the natural systems on which we all depend.5
Wealth is rushing to the top. The fifty richest people among them own more than the poorer half of humanity, while more than six billion live on less than $16 a day.6 Billions of people lack access to adequate education, health care, and the chance for a decent job, while advances in robotics and artificial intelligence (AI) threaten to throw millions out of work.7
The institutions that have historically held the market in balance—families, local communities, the great faith traditions, government, and even our shared sense of ourselves as a human community—are crumbling or even vilified. In many countries the increasing belief that there is no guarantee that one’s children will be better off than oneself has helped to fuel violent waves of anti-minority and anti-immigrant sentiment that threaten to destabilize governments across the world. Institutions everywhere are under pressure. A new generation of authoritarian populists is taking advantage of a toxic mix of rage and alienation to consolidate power.8
You may wonder what these problems have to do with capitalism. After all, hasn’t the world’s GDP quintupled in the last fifty years, even as population has doubled? Isn’t average GDP per capita now over $10,000—enough to provide every person on the planet with food, shelter, electricity, and education?9 And, even if you think business should play an active role in attempting to solve these problems, doesn’t it seem, at first glance, an unlikely idea? In the majority of our boardrooms and our MBA classrooms, the first mission of the firm is to maximize profits. This is regarded as self-evidently true. Many managers are persuaded that to claim any other goal is to risk not only betraying their fiduciary duty but also losing their job. They view issues such as climate change, inequality, and institutional collapse as “externalities,” best left to governments and civil society. As a result, we have created a system in which many of the world’s companies believe that it is their moral duty to do nothing for the public good.
But this mind-set is changing, and changing very fast. Partly this is because millennials are insisting that the firms they work for embrace sustainability and inclusion. When I first launched the MBA course that became “Reimagining Capitalism,” there were twenty-eight students in the room. Now there are nearly three hundred, a little less than a third of the Harvard Business School class. Thousands of firms have committed themselves to a purpose larger than profitability, and nearly a third of the world’s financial assets are managed with some kind of sustainability criterion. Even those at the very top of the heap are beginning to insist that things have to change. In January 2018, for example, Larry Fink, the CEO of BlackRock, the world’s largest financial asset manager, sent a letter to the CEOs of all the firms in his portfolio that said the following: “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”10
BlackRock has just under $7 trillion in assets under management, making it among the largest shareholders in every major publicly traded firm on the planet. It owns 4.6 percent of Exxon, 4.3 percent of Apple, and close to 7.0 percent of the shares of JPMorgan Chase, the world’s second-largest bank.11 For Fink to suggest that “companies must serve a social purpose” is the rough equivalent of Martin Luther nailing his ninety-five theses to Wittenberg Castle’s church door.12 The week after his letter came out, a CEO friend reached out to me to confirm that surely he didn’t—really—mean it? My friend was in a state of shock. He had based a long and successful career on putting his head down and maximizing shareholder value, and to him Fink’s suggestion seemed ludicrous. He couldn’t imagine taking his eye off the profit ball in today’s ruthlessly competitive world.
In August 2019 the Business Roundtable—an organization composed of the CEOs of many of the largest and most powerful American corporations—released a statement redefining the purpose of the corporation: “To promote an economy that serves all Americans.” One hundred and eighty-one CEOs committed to lead their companies for “the benefit of all stakeholders: customers, employees, suppliers, communities, and shareholders.”13 The Council of Institutional Investors (CII)—a membership organization of asset owners or issuers that includes more than 135 public pension and other funds with more than $4 trillion in combined assets under management—was not amused, responding with a statement that said, in part:
CII believes boards and managers need to sustain a focus on long-term shareholder value. To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners. Accountability to everyone means accountability to no one. BRT has articulated its new commitment to stakeholder governance… while (1) working to diminish shareholder rights; and (2) proposing no new mechanisms to create board and management accountability to any other stakeholder group.14
One of the world’s largest financial managers insists that “the world needs your leadership,” and some of the world’s most powerful CEOs publicly commit to “stakeholder management,” while many businesspeople—like my (hugely successful) CEO friend and many large investors—think they are asking for the impossible. Which of them is right? Can business really—and I mean really—rescue a world on fire?
I’ve spent the last fifteen years of my life working with firms that are trying to solve our environmental and social problems at scale—largely as a means of ensuring their own survival—and I’ve come to believe that business has not only the power and the duty to play a huge role in transforming the world but also strong economic incentives to do so. The world is changing. The firms that change with it will reap rich returns—and if we don’t reimagine capitalism, we will all be significantly poorer.
I started this journey with an appropriately British degree of skepticism, but I am now surprisingly optimistic—in the “if we work really hard, we might just succeed” sense of optimistic. We have the technology and the resources to build a just and sustainable world, and doing so is squarely in the private sector’s interest. It is going to be hard to make money if the major coastal cities are underwater, half the population is underemployed or working at jobs that pay less than a living wage, and democratic government has been replaced by populist oligarchs who run the world for their own benefit. Moreover, embracing a pro-social purpose beyond profit maximization and taking responsibility for the health of the natural and social systems on which we all rely not only makes good business sense but is also morally required by the same commitments to freedom and prosperity that drove our original embrace of shareholder value.
A mere decade ago the idea that business could help save the world seemed completely crazy. Now it’s not only plausible but also absolutely necessary. I’m not talking about some distant utopia. It’s possible to see the elements of a reimagined capitalism right now, and to see how these elements could add up to profound change—change that would not only preserve capitalism but also make the entire world better off. Indeed this book is an attempt to persuade you to give your life to the attempt.
How We Got Here
A central cause of the problems we face is the deeply held belief that a firm’s only duty is to maximize “shareholder value.” Milton Friedman, perhaps the most influential intellectual force in popularizing this idea, once stated that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” From here it’s not far to the idea that focusing on the long term or the public good is not only immoral and possibly illegal but also (and most critically) decidedly infeasible. It is true that the capital and product markets are ruthless places. But in its current incarnation, our focus on shareholder value maximization is an exceedingly dangerous idea, not just to the society and the planet, but also to the health of business itself. Turing Pharmaceuticals’ experience with Daraprim illustrates the costs of chasing profits at the expense of everything else.
In September 2015, Turing, a small start-up with only two products, announced that it was raising the price of the generic drug Daraprim from $13.50 to $750 a tablet—an approximately 5,000 percent increase. Daraprim was widely used to treat complications from AIDS. It cost approximately $1 per pill to produce and had no competition.15 Anyone wanting to buy Daraprim had to buy it from Turing. The move unleashed a media storm. Martin Shkreli, Turing’s CEO, was vilified in the press and accosted in public. But he was unrepentant. Asked if he would do anything differently, he replied:
I probably would have raised prices higher.… I could have raised it higher and made more profits for our shareholders. Which is my primary duty.… No one wants to say it, no one’s proud of it, but this is a capitalist society, capitalist system and capitalist rules, and my investors expect me to maximize profits, not to minimize them, or go half, or go 70 percent, but to go to 100 percent of the profit curve that we’re all taught in MBA class.16
It’s tempting to believe that Shkreli is an outlier. He is a deeply eccentric person and currently in jail for defrauding his investors.17 But he expressed in the starkest terms the implications of the imperative to make as much money as you can, and Daraprim is not the only generic drug to have had its price hiked. In 2014, Lannett, another generic pharmaceutical producer, raised the price of Fluphenazine—a drug that is used to treat schizophrenia and is on the World Health Organization’s list of most essential medicines—from $43.50 to $870—a 2,000 percent increase.18 Valeant increased the prices of Nitropress and Isuprel—two leading heart drugs—by more than 500 percent, reportedly leaving the firm with gross margins of more than 99 percent.19
Surely this can’t be right. Do managers really have a moral duty to exploit desperately sick people? Purdue Pharma’s decision to aggressively promote the prescribing of OxyContin was—at least in the short term—hugely profitable.20 Does this mean that it was right or even good business? Do firms have a duty to pursue the maximum possible profit, even when they know that doing so will almost certainly have significantly negative consequences for their customers, their employees, or society at large? Since December 2015, when the Paris Climate Agreement was signed, for example, the world’s fossil fuel companies have spent more than a billion dollars lobbying against controls on greenhouse gas (GHG) emissions.21 Lobbying in favor of heating up the planet may have maximized shareholder value in the short term, but in the long run, was it a good idea?
Taken literally, a single-minded focus on profit maximization would seem to require that firms not only jack up drug prices but also fish out the oceans, destabilize the climate, fight against anything that might raise labor costs—including public funding of education and health care, and (my personal favorite) attempt to rig the political process in their own favor. In the words of the cartoon: “Yes, the planet got destroyed, but for a beautiful moment in time we created a lot of value for shareholders.”
Business was not always wired this way. Our obsession with shareholder value is relatively recent. Edwin Gay, the first dean of the Harvard Business School, suggested that the school’s purpose was to educate leaders who would “make a decent profit, decently,” and as late as 1981, the Business Roundtable issued a statement that said, in part: “Business and society have a symbiotic relationship: The long-term viability of the corporation depends upon its responsibility to the society of which it is a part. And the well-being of society depends upon profitable and responsible business enterprises.”
A Beautiful Idea
The belief that management’s only duty is to maximize shareholder value is the product of a transformation in economic thinking pioneered by Friedman and his colleagues at the University of Chicago following the Second World War. Many of their arguments were highly technical, but the intuition behind their work is straightforward.
First, they argued that free markets are perfectly efficient, and that this makes them a spectacular driver of economic prosperity. Intuitively, if every firm in an industry is ruthlessly focused on the bottom line, competition will drive all of them to be both efficient and innovative, while also preventing any single firm from dominating the market. Moreover, fully competitive markets use prices to match production to demand, which makes it possible to coordinate millions of firms to meet the tastes of billions of people. Friedman himself brought this idea to life using a very ordinary example:
Look at this lead pencil. There’s not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it is made… comes from a tree that was cut down in the state of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make steel, it took iron ore. This black center—we call it lead but it’s really graphite, compressed graphite… comes from some mines in South America. This red top up here, this eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native! It was imported from South America by some businessmen with the help of the British government. This brass ferrule? I haven’t the slightest idea where it came from. Or the yellow paint! Or the paint that made the black lines. Or the glue that holds it together. Literally thousands of people co-operated to make this pencil. People who don’t speak the same language, who practice different religions, who might hate one another if they ever met!22
If Friedman were trying to make the same point today, he might use a cell phone—each of which contains hundreds of components that are manufactured all over the world.23 But the key point is that truly competitive markets allocate resources much more effectively and much more efficiently than anything else we’ve tried. Indeed, pathbreaking work in the fifties and sixties established that under a number of well-defined conditions—including free competition, the absence of collusion and of private information, and the appropriate pricing of externalities—maximizing shareholder returns maximizes public welfare.24
The second argument behind the injunction to focus on shareholder returns rests on the normative primacy of individual freedoms, or the idea that personal, individual freedom is—or should be—the primary goal of society and that an individual’s ability to make decisions about the disposition of her resources and time should be one of society’s highest goals. This idea is deeply rooted in the post-Enlightenment, classical-liberal tradition of the eighteenth and nineteenth centuries. Milton Friedman and Friedrich Hayek drew from this tradition as a way to articulate an intellectual counterpoint to the Soviet Union’s philosophy of centralized economic control.
Freedom, in this context, is “immunity from encroachment” or “freedom from”—the ability to make decisions free from the interference of others. Friedman and his colleagues suggested that free markets create individual freedom because, in contrast to planned economies, they allow people to choose what they do and how they do it and give them the resources to choose their own politics. It is difficult to be truly free when the state—or a small group of oligarchs—controls whom you work for and how much you’re paid.
Third, Friedman and his colleagues argued that managers are agents for their investors. Acting as a trustworthy agent is a moral commitment in its own right, rooted in the widely shared idea that one should keep one’s word and not misuse funds with which one has been entrusted. Since managers are agents, they argued, they have a duty to manage the firm as their investors would wish—which Friedman assumed would in most cases be “to make as much money as possible.”
Together these three arguments make a powerful case for shareholder value maximization and are the moral force behind many businesspeople’s belief that to maximize profits is to fulfill deep normative commitments. From this perspective, failing to maximize shareholder returns not only constitutes a betrayal of your responsibility to your investors but also threatens to reduce prosperity by compromising the efficiency of the system and reducing everyone’s economic and political freedom. To do anything other than maximize returns—to pay employees more than the prevailing wage for no obvious benefit, for example, or to put solar panels on the roof when local coal-fired power is cheap and abundant—is not only to make society poorer and less free but also to betray your duties to your investors.
These ideas are, however, the product of a specific time and place, and of a particular set of institutional conditions. Given the realities of today’s world, they are dangerously mistaken. Friedman and his colleagues first formulated them in the aftermath of the Second World War. At the time it seemed there was a serious risk that a reliance on the market would be replaced by centralized planning. Governments—after conquering economic depression and war—were popular and powerful. Capitalism was not. Enduring memories of the Great Depression that had preceded the war—at its height US GDP fell by 30 percent, while industrial production fell by almost 50 percent, and a quarter of the working population was unemployed25—meant that for the next twenty years, unregulated, unconstrained capitalism was regarded with suspicion nearly everywhere. This was the dominant view in Europe and in Asia. In Japan, for example, the business community explicitly embraced a model of capitalism that stressed the well-being of employees and a commitment to the long term, while in Germany, firms, banks, and unions cooperated to create a system of “co-determination” that routinely sought to balance the well-being of the firm with the well-being of employees and of the community.
This meant that for roughly thirty years after the war, in the developed world the state could be relied on to ensure that markets were reasonably competitive, that “externalities” such as pollution were properly priced or regulated, and that (nearly) everyone had the skills to participate in the market. Moreover, the experience of fighting the war created immense social cohesion. Investing in education and health, “doing the decent thing,” and celebrating democracy seemed natural.
Friedman’s ideas did not get much traction until the early seventies, when the turmoil of the first oil embargo ushered in a decade of stagflation and intense global competition, and the US economy came under significant pressure. Under these conditions, it was not crazy to believe that “unleashing” the market by telling managers their only job was to focus on shareholder returns would maximize both economic growth and individual freedom.
The Chicago-trained economists blamed the economy’s lackluster performance on the fact that many managers were putting their own well-being before their duty to their investors. Their suggested solution—to tie executive compensation to shareholder value—was eagerly embraced by investors. Managers were told that they had a moral duty to maximize profits—indeed that to do anything else was actively immoral—and CEO pay was linked tightly to the value of the company’s stock. GDP took off like a rocket and with it, shareholder value and CEO pay.26
But… meanwhile, the environmental costs of this growth—trillions of tons of greenhouse gases in the atmosphere, a poisoned ocean, and the widespread destruction of the earth’s natural systems—remained largely invisible. Worldwide inequality fell as several of the developing economies—most notably China—began to catch up to Western levels of income. But in the developed world income inequality has increased enormously. The vast majority of the fruits flowing from the productivity growth of the last twenty years have gone to the top 10 percent of the income distribution, particularly in the United States and the United Kingdom.27 Real incomes at the bottom have stagnated.28 The populist fury that has emerged as a result is threatening the viability of our societies—and of our economies. What went wrong?
In a nutshell, markets require adult supervision. They only lead to prosperity and freedom when they are genuinely free and fair, and in the last seventy years the world has changed almost beyond recognition. Global capitalism looks less and less like the textbook model of free and fair markets on which the injunction to focus solely on profit maximization is based. Free markets only work their magic when prices reflect all available information, when there is genuine freedom of opportunity, and when the rules of the game support genuine competition. In today’s world many prices are wildly out of whack, freedom of opportunity is increasingly confined to the well connected, and firms are rewriting the rules of the game in ways that maximize their own profits while simultaneously distorting the market. If firms can dump toxic waste into the river, control the political process, and get together to fix prices, free markets will not increase either aggregate wealth or individual freedom. On the contrary, they will wreck the institutions on which business itself relies.
Why Markets Are Failing Us
The Turing Pharmaceutical example illustrates the essential nature of the problem—but we can be even more precise. Markets have gone off the rails for three reasons: externalities are not properly priced, many people no longer have the skills necessary to give them genuine freedom of opportunity, and firms are increasingly able to fix the rules of the game in their own favor.
Energy is cheap because we don’t pay its full costs. American consumers pay roughly five cents per kilowatt-hour (¢/kWh) for electricity from coal-fired power plants. But burning coal emits enormous quantities of CO2 (coal is essentially fossilized carbon)—one of the leading causes of global warming. Producing a kilowatt-hour of coal-fired electricity causes at least another four cents of climate-related damage. Moreover, burning coal kills thousands of people every year and destroys the health of many more. The extraction, transportation, processing, and combustion of coal in the United States cause twenty-four thousand lives to be lost every year due to lung and heart disease (at a cost of perhaps $187.5 billion per year); eleven thousand additional lives are lost annually due to the high health burdens found in coal-mining regions (an annual cost of perhaps $74.6 billion).29 Calculating an aggregate, global figure for the health costs associated with burning fossil fuels is enormously difficult since costs differ significantly depending on a wide range of factors, including the type of fuel and on how and where it’s being burned. One estimate suggests that every ton of CO2 emissions is associated with current health care costs of about $40, which would imply a cost per kWh of about four cents, but my colleagues who work in this area remind me that these costs can vary enormously and are often much higher.30 When you add these costs back in, the real cost of a kilowatt-hour of coal-fired electricity is thus not 5¢ but something more like 13¢. This means we are only paying about 40 percent of the real costs of burning coal. Fossil fuel energy looks cheap—but only because we’re not counting the costs we are imposing on our neighbors and on the future.
Every coal-fired plant on the planet is actively destroying value, in the sense that the costs these plants are imposing on society are greater than their total revenues, let alone their profits. For example, Peabody Energy, the largest coal company in the United States, shipped 186.7 million tons of coal in 2018 for total revenues of $5.6 billion.31 The combined climate and health costs of burning 186.7 million tons of coal are about $30 billion, so—taking total revenue as a measure of total value creation, which is conservative—Peabody is destroying at least five times the value that it is creating.
Every time you use fossil fuels—whether it’s to drive a car or to take a flight—you are creating lasting damage that you are not paying for. The production of every ton of steel, every ton of cement, and every single hamburger—to focus on a few products that are particularly energy intensive to produce—creates significant damage that isn’t included in the price. The production of every cheeseburger generates approximately the same emissions as half a gallon of gasoline, and beef consumption alone is responsible for about 10 percent of global GHG emissions (and only about 2 percent of calories consumed).32
When you add these costs to the bottom line, it turns out that nearly every firm is causing significant damage. In 2018, for example, CEMEX, one of the largest cement companies in the world, emitted more than forty-eight million tons of CO2
Shortlisted for the Financial Times/McKinsey Book of the Year Award
“Henderson’s convincing arguments and passion will be a clarion call to action for business leaders and interested readers everywhere.” – Library Journal, starred review
“Lucid and optimistic…this accessible and richly detailed call to action offers a clear vision for policy makers and business executives who agree with Henderson that the private sector has an obligation to tackle the world’s biggest problems.” – Publishers Weekly
“A well-constructed critique of an economic system that, by the author’s account, is a driver of the world’s destruction… A readable, persuasive argument that our ways of doing business will have to change if we are to prosper-or even survive.” – Kirkus Reviews
“This book has an important message about the critical role of purpose-driven businesses in our society and how capitalism and democracy need to interact constructively to solve our most pressing challenges.” – Stanford School of Business
“The COVID-19 pandemic has given the ideas in… Reimagining Capitalism in a World on Fire…a perverse timeliness, making these issues not only relevant, but even appealing, to people who previously may not have touched them with a 10-foot pole.” – Katherine Dunn, Fortune
“In engaging and refreshingly candid writing, Henderson sets out her vision of equitable and sustainable capitalism and enumerates the changes needed to get us there….Her blueprint may sound impossible, yet Henderson’s optimism is founded on deep expertise as a scholar who has worked closely with corporate leaders.” – Mark Kramer, Stanford Social Innovation Review
“Coupling detailed accounts from companies taking strides toward redefining capitalism with her own rich understanding of the potential of modern businesses, Henderson makes a compelling argument that capitalism as we know it is a missed opportunity, and builds the framework for business to prosper while complying with environmental factors and championing social justice.” – WBUR.org The ARTery
“Reimagining Capitalism in a World on Fire…should encourage a new era of co-operation & collaboration between government, business & communities of individuals.” – Andrew Hill, Financial Times
“This powerful and readable book is a clarion call for reimagining and remaking capitalism. The market economy, which used to generate rapid productivity growth and shared prosperity, has done much less of that over the last four decades. The shifting balance of power in favor of large companies and lobbies, the gutting of basic regulations, the increasing ability of corporations and the very rich to get their way in every domain of life, and the unwillingness of the government to step up to protect its weakest citizens are likely responsible for low productivity growth and ballooning inequality in the US economy. Rebecca Henderson argues that the market system can be reformed and this can be done without unduly harming corporations. We can have a more moral and more innovative capitalism. There is hope!” – Daron Acemoglu, coauthor of Why Nations Fail
“If you are unsatisfied with today’s economic arguments–which too often seem to present an unappealing choice between unbridled markets and old-school collectivism–you need to read Rebecca Henderson’s Reimagining Capitalism in a World on Fire. Henderson offers a system that rewards initiative and respects the power of free enterprise, but that also recognizes that we have a higher purpose in life than pure profit maximization. This is a book for the realist with a heart.” – Arthur C. Brooks, president emeritus, American Enterprise Institute; professor of practice, Harvard Kennedy School; senior fellow, Harvard Business School; and author of Love Your Enemies
“Rebecca Henderson is masterful in both elegant articulation of one of society’s great challenges and clarity of vision in laying out a roadmap for practical and essential change. Reimagining Capitalism is a great read, full of insights, and a refreshing perspective that is new, practical, and ground-breaking, offering clear steps for transitioning to a capitalism that is both profitable as well as just and sustainable.” – Mindy Lubber, CEO and president, CERES
“Rebecca Henderson is a provocative thinker on the purpose of business in society. In her new book, she advances the dialogue about the role of business in addressing the big social and environmental challenges of our time. Hers is an important voice in an essential conversation.” – Doug McMillon, president and chief executive officer, Walmart
“In a world on fire, status quo is not a great option. Rebecca Henderson rightfully argues for a refoundation of business and capitalism and offers thought-provoking ideas on what needs to be done to address some of the world’s greatest challenges.” – Hubert Joly, former chairman and CEO, Best Buy
“A must-read for every person with a stake in our economic system since change or die is the inescapable reality confronting capitalism. The question is how. Rebecca Henderson provides investors and corporate executives with the thought leadership and compelling examples foundational for understanding how to deliver sustainable and inclusive economic growth.” – Hiro Mizuno, executive managing director and chief investment officer, GPIF
“Capitalism as we know it has gotten us this far, but to take the next steps forward as a society and species we need new ways of seeing and acting on our world. That’s exactly what Rebecca Henderson’s book helps us do. This is a smart, timely, and much-needed reimagining of what capitalism can be.” – Yancey Strickler, cofounder and former CEO, Kickstarter, and author of This Could Be Our Future: A Manifesto for a More Generous World
“A breakthrough book, beautifully written, combining deep humanity, sharp intellect, and a thorough knowledge of business. It rigorously dismantles old arguments about why capitalism can’t be transformed and will reach people who haven’t yet connected with the need for deep change.” – Lindsay Levin, founding partner, Leaders’ Quest and Future Stewards
“With great clarity and passion, Rebecca Henderson provides a stellar guide to building a purpose-driven organization, the surest path to success in a time of rising temperatures and declining trust.” – Andrew McAfee, author of More from Less and coauthor of The Second Machine Age and Machine, Platform, Crowd
“Rebecca Henderson weaves together research and personal experience with clarity and vision, illustrating the potential for business to benefit both itself and society by leading on the most challenging issues of our day. Read, and feel hopeful.” – Judith Samuelson, vice president, the Aspen Institute
“Reimagining Capitalism is a breath of fresh air. Written in lively prose, easily accessible to lay readers, and chock full of interesting case studies, Henderson comprehensively surveys what we need to secure a workable future. Some readers may think she goes too far in places, others may think she doesn’t go far enough, but everyone will want to think about the economy she urges us to create.” – Larry Kramer, president of the Hewlett Foundation
March 5, 2021, Video: “Yes, capitalism is the greatest source of prosperity the world has ever seen. But many also blame it for the massive problems that plague the modern world. In ‘Reimagining Capitalism in a World on Fire’, Harvard Business School Professor Rebecca Henderson argues that only a new form of capitalism can drive the innovation we need to build a just and sustainable world, and can play a leading role in solving the three great problems of our time: climate change, inequality, and threats to democracy. But first we have to get rid of the dangerously mistaken idea that the only purpose of a business is to make money. “Business can change the world,” says Henderson. How? At a special online event on March4, 2021, organized by the John Adams Institute and the Amsterdam Business School, Rebecca Henderson talked about this with Rick van der Ploeg, Professor of economics at Oxford University and the Universiteit van Amsterdam, and with Julia Szubert, Masters student of international business at ABS and an Honours student of sustainability.”