MORAL CAPITALISM

COMMENTARY ARCHIVES, 12 Oct 2008

Stephen B. Young

Is Moral Capitalism Possible?

Can morality be made relevant to business? Can virtue and self-interest ever coincide? If not, then a moral capitalism is not possible.  Morality is an idea invented by people; it does not exist of its own in the natural order. Therefore, morality must be made to happen through human action. The realm of the ideal must be brought into the realm of the material, creating a compound where a value-laden adjective can be applied to something real and physical. The German philosopher Hegel spoke of human action as imposing subjective reality on objective reality. More recently, another German philosopher, Jurgen Habermas spoke of human action as bridging the timeless realm of “normitivity” and the mortal realm of “facticity”. Moral Capitalism is therefore possible once individuals decide to act morally in their business decision-making. In this sense, virtue and self-interest are not always inconsistent.

Second, a sustainable business, of necessity, must blend self-interest with a common interest, finding a point of equilibrium between self-interest and virtue. This result arises from the need of a business to replenish its capital inputs. A business needs more than finance capital: it also needs physical capital, human capital, reputational capital and social capital.  By paying a return from its profits on all these forms of capital, a business lowers its net profits available for owners but sustains inputs of other forms of capital. The form of returns on human, physical, reputational and social capital are what we call corporate social responsibility.

The Many Varieties of Capitalism

The role of values in business appears through a comparison of market capitalism as it is practiced in different cultures. Different core national values bend business practices in a variety of directions. In China, living up to an ideal of T’ai He, or fundamental order and harmony, produces a distinctive pattern of business behavior.  Through government order or private sector cartel arrangements, markets are divided and competition restrained. Instead of adversarial competition, personal relationships or quan si determine winners and losers because mastery of relationships gives privileged access to market opportunity.  

In Japan the core ideal is ninjo, a feeling of acceptance and personal security not unlike a child’s serenity in the arms of a doting and loving mother. To obtain the ninjo experience, reciprocal relationships of giri-on are established. Once the desire for giri-on relationships is brought into business, the interlocking mutualities of the keiretsu group of companies become inevitable.  A business culture of keiretsu permits production for market share on low margins as business is financed far more through debt than through equity capital. However, should debt become excessive, the system will fall into stagnation as has been the case in Japan for 12 years now. A keiretsu system does not permit injection of new equity as new owners will disrupt giri-on relationships and undermine feelings of ninjo. Nor does such a system permit bankruptcy or reduction in employment.

In Mexico, the core value used to govern business conduct is the achievement of dominion, personal discretionary power over others.  The ideal is almost feudal – the status and patronage due to the owner of a large hacienda. Ownership is more a matter of lordship, the accumulation of retainers and clients, and less the pursuit of profit.  Business owners and senior managers like to govern their investments autocratically. Generally, employees are left unempowered; customers are neglected; outside investors are not welcomed as they would dilute autocratic control and government regulation is resented.

Another variety of market capitalism found throughout the developing world is crony capitalism. In this arrangement, social dominance is the core ideal. Government police power is bought to enforce monopoly and cartel arrangements dividing up the economic and creating a few very wealthy families. Those families then use their wealth to dominate politics, society and culture. Classic examples of this system are the Marcos family in the Philippines, the Duvaliers in Haiti and Mobuto Sese Seko in Zaire.

Brute Capitalism: Survival of the Fittest?

Another variety of market capitalism is Brute Capitalism where self-interest is elevated to the status of core value. This version of capitalism was not advocated by Adam Smith in his famous book on the advantages of markets, The Wealth of Nations. Rather, it was advocacy by Herbert Spencer of social darwinism that has given us this ideal. Spencer wrongly concluded that humans could be analogized to creatures in the plant and animal kingdoms where survival of the self was the highest goal of life.  Spencer instead discounted the fact that humans have a moral sense and need the society of others if they are to prosper.

A capitalism run according to the norms of social darwinism is unnecessarily destructive. The total cost to society of all the recent corporate scandals is more than the wealth such companies created, leading to a net loss for the global economy. This kind of capitalism is inconsistent with the objectives of wealth creation and improving standards of living that Adam Smith saw as the beneficial outcome of free markets.

Moral Capitalism: Using Private Interest for the Public Good

Markets promote virtue. First, the possession of wealth, property in ownership, is necessary for living out moral norms. Not to have property is to be unable to impose one’s will and ideals upon the things of this life. Property is a medium common to subjectivity and objectivity, “normativity” and “facticity”, virtue and self-interest. Subjective thoughts and virtuous ideals without material expression have no impact. Property permits expression of ideals.

The religious ideal of asceticism – of seeking otherworldly detachment in this life – stands apart from the compromised conditionality of human experience. It is a seeking of the beyond, of what is not ordinary for people. As such, the life of the ascetic cannot be taken as the norm for those of us committed to this life in this red dust world, as the Buddhists describe it.

Second, over time, markets promote trust. They drive out those who deceive and who are unreliable. Consider the case of Enron. At the revelation of Enron’s true condition, the markets withdraw their patronage from the company and, within a few months, forced it into bankruptcy.

Third, markets promote individualism. They give expression to free will and so enhance the power of individual choice.

Fourth, markets enhance conditions of mutuality. The never-ending process of division of labor, giving rise to new specializations, makes us more and more dependent on each other for our food, our clothes, our computers and our cell phones. By becoming more and more dependent, we grow in relations of mutual need. Game theory provides mathematical demonstrations of how individuals making choices from the rationality of self-interest come to states of equilibria where the interests of many are concurrently served.

The morality of capitalism arises from this mutual dependency. For capitalism to flourish, dependency must be encouraged. A moral sense is therefore required in those who make business decisions. They must rise to the demands of social responsibility. Their self-interest must be considered upon the whole, with an appropriate time horizon very much in mind. The relevant norm is that of fiduciary stewardship. The needed personal capacity is self-restraint and the ability to meet the obligations of a social office.

Moral Capitalism and Poverty:
Must the Poor Be With Us Always?

While capitalism has created historically unimaginable levels of wealth – some $79 trillion in liquid assets, most of humanity is poor. Wealth in concentrated in the economies and financial markets of very few countries. And, there are poor people living in many of those wealthy countries as well. What can be done?

First, for poor people living in successful economies, four devices can be manipulated to bring about wealth. These mechanisms collapse time, so that a poor person can benefit from what others do on their time. Savings permit current income to be converted into capital. Small amounts invested at compound rates of interest over a working lifetime grown into significant sums of money. Next, education permits a person to gain from the experience and knowledge of others. Productivity enhancement – obtaining tools and machines – permits one to do more work and earn higher returns. Finally, borrowing – using financial mechanisms – brings under one’s power the wealth already earned by others in the past.

Poverty in poor nations can only be overcome through the creation of new wealth. That process, in turn, is driven by private investors. Fortunately, the capital available in private financial markets is more than enough to do the job – if only it would be invested in poor countries. Wealthy nations have good reasons to increase investment in the developing world. The growth of democracy and of political and religious tolerance, less stress on the global environment, reduced population growth, reduced spread of infectious diseases – all follow in the wake of successful economic development. And, perhaps more importantly, wealthy nations faced economic contraction brought on by aging and declining populations. As people live longer in wealthy nations, the cost of their retirement years goes up, as does the cost of their health care. Savings will decline. And, as the pool of younger workers shrinks, consumption will decline and earnings with which to support the elderly will decrease. Wealthy nations today need to invest in the growth of poor nations with young populations in order to benefit tomorrow from returns on such investments.

Economic development in poor nations must start with improvements in social capital, one of the necessary inputs for sustained business success. Governments have an important role to play in the creation of social capital. When governments play their part responsibly, private capital will be invested and economic growth will occur. The Caux Round Table, therefore, suggests certain Principles of Responsible Government to enhance the formation of social capital. In particular, certain 12 core best practice standards of fiscal management are recommended to promote conditions for sustained business success.

The Caux Round Table:
Advocate for Moral Capitalism

Moral Capitalism must be made to happen. Responding to moral sensibilities, it is not part of the natural order. Therefore, culture – the setting and maintaining of norms – is part of making capitalism moral. The Caux Round Table recommends certain principles for businesses to follow and advocates implementation of those principles. Proposed by senior business leaders from Japan, Europe and the United States in 1994, the Caux Round Table Principles for Business have stood the test of experience and are the most comprehensive principles available proposed by business leaders. They also reflect the ethical teachings of the world’s great religions. The Caux Round Table Principles for Business embody a stakeholder ethic whereby a business is strategically understood to be in relationships with key constituencies – customers, employees, owners and investors, suppliers, competitors and communities. The Caux Round Table Principles for Business offer seven general principles for ethical and socially responsible business practices. The foundational principle is that business has a social office to perform of new wealth creation. Its particular responsibility is to serve society by providing energy and material empowerment for use and application by individuals in pursuit of their goals and values. In addition, the Caux Round Table has developed a self-assessment process by which its recommended Principles can be implemented on a day-to-day basis in businesses around the world.

Customers:
The Moral Compass for Capitalism

Moral Capitalism draws the values it serves from its customers. The goal of a business is to meet consumer demand. Markets are secondary institutions, coming after the primary institutions that determine our desires and aspirations. Respect for human dignity leaves us subordinate to the exercise of free will by others, putting their moral choices to the fore. But many people come up short of moral perfection, if we could even agree globally on the content of a morally perfect life. Thus, capitalism measured according to the decisions made by some market participants will always come up ethically short. Recognizing this, the Caux Round Table Principles for Business obligate companies to respect their customers but not to create demands for people that tempt them into questionable or immoral conduct and to think well of the consequences when selling what is legal but nonetheless morally questionable. Market Capitalism presents an analogue to the decentralized powers of voters in a democracy: outcomes are not dictated but only arrived at through an open-ended decision-making process. Moral restraint on the actions of companies is required for them to sustain their reputation capital, a key ingredient of sustained business success.

Employees:
Parts for a Machine or Moral Agents?

We come to a discussion of Moral Capitalism out of a tradition of adversarial conflict between labor and management. Both Marxism on the left and Social Darwinism on the right agreed that employees are trapped in a win/lose rivalry with their employers. Moral Capitalism rejects this understanding of a business’s relationship with its employees. Moral Capitalism places employees in the category of human capital, where a company must pay a fair return on its human capital stock if it is to secure adequate human resources in the future. The relationship between a company and its employees, then, is one of agency, of mutual concern and support – a moral relationship, not a cash nexus. The employee has duties to the employer, who in turn has duties of care and concern for a faithful agent. The relationship is one of status, not a buy and sell contract for labor.  W. Edwards Deming recognized the advantages to a business of this agency philosophy in his Total Quality movement. The quality of acceptance of directions, and the commitment to quality, on the part of subordinates working on their own, outside of minute-by-minute supervision goes a long way towards achieving business success.  Furthermore, in a post-industrial, service and knowledge based economy, the loyalty of creative, highly educated people to a business will give it necessary competitive advantage.

Owners and Investors:
Exploiters or Fiduciaries?

Business needs finance; without money the wheels of commerce will not turn. Except for sole proprietorships, the money invested in a business – whether equity or debt – is held in stewardship for others. It is not to be wasted out of self-absorption. The business owes fiduciary duties of loyalty and care to its owners and obligations of responsible disclosure to its creditors. Corporate office is not to be abused. Boards of directors have stewardships of corporate assets and are the first and last lines of defense against such abuse of power by management. Ultimate responsibility for many recent corporate scandals can be laid at the feet of supine boards of directors. While creditors do not benefit from strict fiduciary duties on the part of directors and senior managers, they nonetheless deserve honest and fair treatment. They too are at risk, with their risk growing as the competence of management declines. But there is a moral problem with the money standing behind owners and investors. Money can become the Bitch Goddess; love of money is the root of all evil said Saint Paul. Money engenders power and power tends to corrupt our ambitions and our decency. The risk is that money will seduce owners, investors, directors and senior managers away from the path of duty and smooth the way towards abuse of corporate office. Note that possession of good moral character inoculates one against the temptations of seeking only selfish profit at the expense of others.

Suppliers:
Friends or Foes?

A sound business treats its suppliers with respect; it does not abuse them with coercive purchasing power, late payments, etc. As W. Edwards Deming recommended in his Total Quality approach, suppliers have it in their power to enhance or to detract from quality of product sold. A sustainable business needs quality suppliers, not shoddy ones. Quality in the supply chain reduces costs of production as well. Low cost of inputs usually brings low quality and higher costs during production and in after-market customer relations. Businesses depend on the reliability and attention to detail of their suppliers. Such dependency sets up a relationship of mutual concern and joint benefit between the business and its suppliers. Adversarial tensions with suppliers, based on market power or petty arrogance lead to sub-optimal business results.

Competitors:
Repealing the Law of the Jungle

In its reliance on market competition is capitalism condemned to life in a dark Darwinian world of strife and sadness where only the most fit survive? Market competitors, driven by desire for the Bitch Goddess of money, do their utmost to grind their opponents into dust. Darwinian competition for the last penny of profit cannot sustain a business. Competing on price alone is the road to failure for markets drive prices down to the level of commodity pricing where margins are insufficient for survival. Now competition has significant social advantages; it has a place in Moral Capitalism. Self interest is not all bad as it forces hard, but necessary, decisions to be made but some framework of trust, reliance and reliability must be sustained if an economy is to grow and new wealth continuously created. Low trust societies have greater difficulty sustaining economic growth. Under Moral Capitalism competition takes place within a framework of the moral sense, where abuse of market power is avoided. The “right” kind of competition is to compete on quality and innovation, not on price alone. And, in the competition for finance Moral Capitalism sets rules to prevent the feeding of speculative investment bubbles, often depending on unsustainable extensions of credit and unrealistic expectations of profit from the trading of securities.

Community:
Enhancing Social Capital

Business thrives within a social order, not in some Darwinian wilderness where the law of the jungle prevails. Wealth creation is community-centered and not found in the state of nature. Business needs social capital for its success. The social office of business is to create new wealth. This role is now widely recognized in the growing global movement demanding enhanced corporate social responsibility. Capitalism has defeated its rival Marxism, but not everyone is happy over that triumph. Capitalism is a process of “creative destruction” where change is constant and risk is a permanent condition. People fear that the negative effects of change and the consequences of risk will unfairly be placed on their shoulders by those exercising the powers of wealth. The response to such fear is for business to assume duties to society to exercise its power responsibly. The business is also a citizen with particular positive duties to enhance social capital. Business should avoid corruption, protect culture, promote education and avoid degradation of stocks of social capital.

Principled Business Leadership:
Stepping up to the Challenge of Moral Capitalism

Without personal leadership, Moral Capitalism is only rhetoric. There is a need for personal character to prevent abuse of power. Such leadership is not necessarily far off or limited to a few remarkable people. Everyone has a moral sense. Tapping our moral sense is the road to leadership. We have an intuitive capacity to find our self-interest considered upon the whole. Some call it common sense. Leadership arises from values. Principled Business Leadership requires possession of 1) awareness of ethical norms; 2) skills of judgment to apply principles to facts; and 3) knowledge of business do’s and don’ts. Virtue is found by first going within to accept guidance from our moral sense, to become “inner directed” according to core values that we make our own. Virtue is then kept through practice and the development of habits, which become our very character. We judge, we decide, we take action from the perspective of self-interest considered upon the whole.

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According to TRANSCEND member Fred Dubee, the author is his friend, a champion of corporate ethics and sound business, and has been both a professor and Assistant Dean at the Harvard Law School and now the SG of the CRT.
(TMS Managing Editor)

This article originally appeared on Transcend Media Service (TMS) on 12 Oct 2008.

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