In his 2016 book “Saving Capitalism”, Robert Reich argues that the “free market” is not a natural phenomenon but instead a human construct based on a set of rules addressing five key areas:
- Property ownership – who can own what and for how long
- Contracts – agreements in the buying and selling of products and services
- Monopolies – how much market control is allowed
- Bankruptcy – what happens when debts cannot be repaid
- Enforcement – how to insure that rules are followed
Unless all five of these areas are addressed adequately, workable markets, let alone free markets could not exist.
But like most rules they tend to favor some groups at the expense of others. Therefore, if you want to succeed at the “free market” game, it’s best that you have a say in what the rules are and how they are enforced; that is, how they can be “rigged” in your favor. If you benefit from a rigged game, it’s not so bad; but if you are on the losing end, it can be very bad. So who gets to make the rules is a very important issue.
For most societies it has been the function of government to make the “free market” rules. One would hope that in an ideal world, government would “rig” the game to benefit the most people. Although “rigging” has a negative connotation, it is not necessarily a bad thing. Consider having a handicap in golf. Here is an example of rigging the game of golf so that it provides enjoyment for the most people; that is, everyone has an opportunity to experience winning.
In a democratic society, such as in America, people or groups of people that have the most influence have a greater say on what the rules are for most things, and especially in establishing our free market system. Robert Reich contends that in the United States as well as in many other countries, three groups (i.e., the wealthy, big corporations and Wall Street or the financial sector) currently have an inordinate amount of power and influence in our political system and as such have systematically crafted the rules of the free market game to benefit themselves.
It is not by chance that the concentration of wealth in the United State has dramatically shifted to the top 1% of its population and that America’s middle class and the poor continue to experience a smaller piece of the economic pie. The very rules that were initially created to encourage healthy competition, greater opportunities for innovation and new business growth have been subverted to protect those who have already reaped economic benefits from new entrants into the market place. As a consequence, we now have rules that lessen competition, curtail new business growth and create a more challenging market place for newcomers.
Mr. Reich points out that this trend is continuing and that there is no way of stopping it until the rules of the game are changed to favor the other 99%. According to Reich, we have successfully readjusted the rules in the past and we can do it again if there is political will to pursue that course of action. He predicts that if this trend continues unchecked, our citizenry will ultimately see free markets and capitalism as a failed system and seek some other economic solution to replace it. He believes our angst must be redirected towards changing the rules of the game rather than changing the game itself.
So What Should We Do?
Robert Reich wants to save capitalism for all of us by changing the rules through political action. I believe he is correct to a point, but changing the rules will not be enough. There must also be a transformation of corporate leadership. The rules of the game have also shaped the way our corporate leaders behave and ultimately how they think. We must not only change the rules but embrace a new way of thinking about business and its impact on this planet. Our world has gotten smaller as a result of technology. We are far more dependent upon each other for our success. We are also far more aware of the consequences of our actions. A new world requires a new world view.
There are two views of business leadership that are at play in the world today. The dominant view, which I will call “profit centered leadership” is based on the idea that that the primary reason for business is to make money and create wealth for its owners. It is built upon the power of the individual. Our business schools and corporate leaders have preached this view for many decades. It is no surprise that profit centered leadership has gained so much support in our society given the growth in shareholder power and influence over other stakeholders during the past 70 years. As a consequence, business leaders see their organizations operating in a two-stakeholder world consisting of customers who they provide products and services to and shareholders who reap the benefits of the organization at the expense of others. In a world where capital is king, profits become the driving motivation for success. In a two-stakeholder world, profit centered leadership makes a lot of sense.
However, with the growth in technology and the Internet, consumer power, the demands for talent and many more trends, other stakeholders are beginning to exert far more influence in the market place. This shift in influence has allowed another view of business to emerge, especially with the millennial generation. This view, which I call “purposeful leadership”, takes into account a very complex stakeholder world or ecosystem where the needs and demands of many other stakeholders must be considered in order for organizations to thrive and survive. It is built upon the power of interdependency. It reaffirms that the reason for a business to exist is to make a difference in the world, its Purpose, a difference that will improve and enrich our lives in some way. The driving motivation behind purposeful leadership is to create a better world.
These two views are very different and will have very different outcomes for society. The dominant view, profit centered leadership, focuses on enriching one stakeholder group and as a byproduct or consequence is supposed to benefit other stakeholders (We call that approach the trickle-down effect). It is consistent with 1% of the population benefiting at the expense of the other 99%. It is also consistent with the simple notion that there is only a two stakeholder world. The emerging view, purposeful leadership, focuses on solving an important problem and as a by-product will by necessity provide value to all of its stakeholders, including shareholders. It takes into account the needs of many different constituencies and strives for a balance that works for a much more complex stakeholder world. It is also consistent with a more balanced distribution of wealth in our society. This emerging view is not new. It existed for generations prior to the shift in stakeholder power in our recent past.
The problem with profit-centered leadership is that it is not sustainable when power and influence are more diffused in a multi-stakeholder world. It only works when capital has all the power. Once the 99% begin to exercise their political will by changing the rules of the game, profit-centered leadership can no longer be competitive. The idea of maximizing profits (benefiting one stakeholder group at the expense of others) just doesn’t work when there are competing demands for resources from a multitude of stakeholders. Only through purposeful leadership will organizations be able to optimize value among its many stakeholders in order to maximize the pursuit of its Purpose.
In order to save capitalism, we not only need a new set of rules to maintain a healthy free market but we will also need purposeful leadership so that organizations can thrive in today’s new stakeholder world.
We at the Foundation for Purposeful Leadership are committed to bringing this new style of leadership to the world business community. The foundation fulfills that commitment by providing a learning platform and extensive resources on purposeful leadership, developing practices and funding research in this area and fostering a community of like-minded organizations, professionals, and business leaders who see Purpose as the pathway to creating lasting organizations that matter in the world.
I urge every business leader who sees capitalism and free markets as economic structures for good, to encourage government to change the rules to strengthen opportunities for all and not just for a few and to bring Purpose back to business as its guiding principle.