Capitalism in Question

The Academy of Management (AOM) is a professional organization that strives to further the scholarship of management. It comprises twenty-five professional divisions and interest groups focussing on management problems. Examples of these divisions are „Business Policy and Strategy“, “Entrepreneurship“, “Human Resources“, or „Social Issues in Management“. Every year, the AOM carries out an Annual Meeting. Last year, more than 10,000 participants – primarily university professors – took part from all over the world. In numerous events, such as the Professional Development Workshops, Paper-Sessions, Panels and All Academy Symposia, the newest research and teaching methods were discussed. Also Switzerland was well represented, coming in at 10^th place with respect to the number of participants.

For each of the AOM annual meetings a theme is selected. For this year’s meeting that takes place between the 9^th and 13^th August in Orlando, Florida, the theme will be “Capitalism in Question”.  Indeed, following the financial crisis of 2008, the business schools are challenged to review the foundations and assumptions upon which their research and teaching are based on. Currently, this is the neo-liberal economic theory and the corresponding theory of the firm. Questions and problems that the organizers have put in the center are for example:

·        While it is recognized that the market competition during the last decades brought great benefits, material prosperity and much innovation, it has also become clear that there are serious down sides: economic, social and ecological “costs”.

 

·        Research questions are called for that deal with the question if and how the capitalistic economic system can and should be further developed.

·        In need are also contributions that elucidate what alternatives there are to the current system and what would subsequently change in a social, economic and ecological context.

·        Connected with the above is also the question of by what social and ecological components the objective of shareholder value maximization by firms need be complemented and what this means for the role and self-conception of managers and leaders.

·        Also the question how true innovation can be upheld in firms – as for example via a shift of focus from rivalry to cooperation with stakeholders – has been included in the call for papers.

It will be interesting to see what an event of this size and scientific reputation will bring forth in terms of insights and impulses for the academic research and teaching in the area of management. I hope to be able to report some of these interesting news in a later blog post.

Edwin Rühli

Tales from the “Real World” – how much ethics can the world of business tolerate?

In my last blog post I described a concrete example of a moral dilemma that I faced while I worked in the international business arena (and I use the word “arena” for a reason…). I posed the question as to what realistic options are available to business leaders should they like to take the moral high road. The answer hinges upon, I think, how we should like to define “realistic”.

Would it have been “realistic” for me to go sign up the fledgling start-up as our distributor in Tunisia, foregoing engaging the established Dutch firm? As much as I am loath to admit it, I think not. The company I worked for was operating in a highly competitive industry where thin profit margins provided for very little largesse in choices that were not tightly aligned to short-term profitability. In another industry, with a pioneering product with no immediate competitors, or in a domestic market artificially shielded by high entry level costs or tariffs, there might have been more room to maneuver. But when one was competing tooth and nail for survival, this was not a viable option.

Prior to working in the low profit margin apparel industry, however, I worked in a radically different industry for a medical laser manufacturer where profit margins hovered around 60%. While obviously also a competitive industry (after all, everybody was scrambling at getting a piece these dream margins…), there certainly was more room for maneuver from a moral point of view. Regrettably, this option was not always exercised. A case in point: over the course of several years I had the pleasure – and it was indeed a pleasure – to nurture a start-up firm in Russia to be our distributor in this promising market. They were highly motivated and worked endless hours. Even though they had very limited resources, they sent one of their engineers over to the United States for a one week product training program we offered to our distributors. After two years of major investments and working the market, the company was finally poised to make some important sales. This was, however, also the point in time when the medical laser company I worked for was bought by another medical device company and consequently overnight we had two distributors in virtually all of our markets.

Our new owners insisted on using their own distributors in all of the countries where they themselves were present or alternatively forced our distributors to become sub-distributors, which for our distributors essentially meant giving up all control of the business and taking a major cut in their earnings. I remember being on the phone with a manager at our new parent company and him telling me to terminate the sales agreement we had with our Russian partner. When I explained to him that our Russian partner had worked for two years to build up the necessary relations in a market that had very long decision making procedures, he told me that “first cut him, bring him to his knees and then we renegotiate our terms with him from a position of strength.” So the basic strategy was to first make him desperate (he would lose two years worth of investments!) and then try to squeeze the max out of him so that he could salvage at least a pittance of what he had invested. Hardly a win-win strategy.

While many people sincerely tried to do their best to remain “humane” in an essentially a-moral system and things seem – at least in public discourse - to be changing somewhat these days, many of the things I saw and heard while in the business world were diametrically opposed to a human centered, win-win, stakeholder approach. A few of the ones I still remember I wish to share with you here (some are paraphrased by me, their essence is however retained):

·         “There is no ethics in the business world”

·         “If we don’t do it, somebody else will”

·         “No matter how much you may like somebody and how close you get to them in your work dealings, never make the mistake to think that they are your friends”

·          “The [neo-liberal] economic system as it is today reflects a deeper reality that is inherent in all of nature and therefore cannot be changed: just look at Communism!"

·         “Survival of the fittest”

·          “Markets always know best”

·          “If you can’t beat them, join them”

·         “The corporate world is essentially one of war without weapons”

·         “Money is success and success is no coincidence”

·         “Make money first, then do good”

·         “Too much ethics is a weakness and we have no place for weak people in our management team”

·         “The business world is the only real world and we who actually operate in it have nothing much to learn from researchers and intellectuals as they live – at best - in a naive utopian, imaginary one”

What all these quotes reveal is that, at the end of the day, there was a widely prevalent attitude (even if not voiced thus publically) that ethics, a humane stakeholder approach and the competitive business world simply don’t mix. Regrettably, the way our current economic system is set up and the widespread normative mantra of “profit and shareholder value maximization” inculcated into students, employees and managers, this has become in many ways a self-fulfilling prophecy.

In my next blog posts, we shall take a look at these proclamations and how they fit or don’t fit into a sustainable economic system.

Manuel Heer Dawson

The Great Transformation 2.0

This year’s World Economic Forum WEF is headlined: “The Great Transformation: Shaping New Models”.  However, the term “The Great Transformation” does not seem to be all new to us. It has not been invented by Klaus Schwab, Founder of the WEF, but by the Austro-Hungarian philosopher Karl Polanyi. As early as 1944 he described what he understood as the “Great Transformation”: The transformation of traditional societies into market societies, characterized by the subordination of the substance of society to the laws of the market.[1]

For many years, the World Economic Forum was almost a synonym of this development, and to big business; and politicians who attended the forum seemed to understand economy as “the continuation of politics by other means.” As opposed to Clausewitz, who understood war as “the continuation of politics by other means”, they certainly shaped a more peaceful process. Nevertheless, the WEF was one of the most important forums and market places of “The Great Transformation”: The subordination of all realms of society under the laws of economy. Those were the days when protests against the WEF mobilized thousands of “anti-globalization activists”, and the critics of capitalism were suspected to be reactionary communists.

Today, there are just a few dozen protesters, and Klaus Schwab himself publishes the following sentence on the front page of the WEF website: “Capitalism, in its current form, no longer fits the world around us. We have failed to learn the lessons from the financial crisis of 2009. A global transformation is urgently needed and it must start with reinstating a global sense of social responsibility,” (http://www.weforum.org/). What a remarkable shift! Are the illustrious attendees of the forum willing and able to work towards a second “Great Transformation?” Do they understand what has been wrong with “Capitalism in its current form?”

I dare to doubt. I dare to doubt that “Capitalism in its current form” is capitalism at all! I haven’t heard any better analysis of what we have seen during the last couple of years than the one of Marc Chesney, Professor of Finance at the University of Zurich, who said this was not capitalism but “betrayal of capitalism”[2]. According to him, capitalism is based on an elementary principle: Those who are taking entrepreneurial risks, are entitled to reaping the benefits of their endeavors. However, “Capitalism in its current form” has been the art of separating risks from benefits, of creating “absolute return” to owners of capital, no matter which way the markets would develop. Governments, tax payers, unemployed people, society at large are paying the bill today and in the future.

Thus the problem is not with capitalism, but with its abuse by those who created – or tried to create – private wealth at the cost of society, and legitimized their action by referring to mainstream economics. Stakeholder theory is about value creation through fair exchange of risk and benefit potentials in stakeholder networks. This has been described and explained by many scholars from Freeman’s seminal Book in 1984 (Freeman, R. Edward, 1984: Strategic management: A stakeholder approach. Boston: Pitman) to the latest publication of my colleagues Sybille Sachs and Edwin Rühli at HWZ (Sachs Sybille / Rühli Edwin, 2011: Stakeholders Matter, Cambridge: Cambridge University Press).  

We may call it capitalism; we may call it anything else: I do agree with Schwab, a “Great Transformation” is needed. However, I would call it “The Great Transformation 2.0”, towards true leadership and management in the service of a peaceful and prosperous global society. Do we need the WEF for this insight? Not really: We could have known earlier – at least since 1944 – and we could have known better – at least since 1984. Let’s hope the attendees of the World Economic Forum 2012 are wise enough and fast enough – not to turn back the wheel, but to make credible steps forward towards a fair and more stable economic system in the service of humans around the globe.  

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[1] Polanyi Karl, 1944: The great transformation. New York: Rinehart

[2] Chesney Marc, 2009: La finance trahit-elle le capitalisme? In: Revue Finance & Bien Commun, Genève, Mai/Juin 2009