Capitalism is in crisis. Look at the UK politicians falling over each other to name its sins. Tune in to Davos and hear World Economic Forum founder Klaus Schwab proclaiming it “no longer fits the world around us.” Listen to America’s Occupy movement declaring it dead. But capitalism won’t be dying anytime soon. It is busy evolving into a new form.
Capitalism has always adapted as it surrounding conditions change. Beyond a few fundamentals – that it features private ownership and relies heavily on markets to allocate resources – it has no formal definition or set of rules it must adhere to. It is only what capitalists believe and do, and it changes when the bulk of capitalists start doing something different.
The current sense of crisis reflects the fact that major change is overdue. That is thanks in part to an unprecedented change in underlying conditions; the geography, demography, and technology of global trade are all in the middle of profound shifts. It’s also because some strong feedback loops have reinforced old behaviours, allowing them to outlive their relevance.
One striking sign of overdue change is that refusal by many firms to “own their impact”. Thanks to advances in measurement technology, we now have much greater knowledge of, say, the environmental damage caused by production processes, or the social costs of sourcing practices. But management has not caught up to measurement in today’s capitalist system. Terrified of legal exposure and honouring the shareholder above other stakeholders, most firms resist taking responsibility for impacts traditionally considered externalities.
But change is coming, because even though firms might like to turn a blind eye to measurable impacts, other people are measuring. Just ask Apple, whose supply chain has been thoroughly scrutinised lately by social justice watchdogs and found to be lacking.
The real sign that capitalism is evolving, however, is that some managers are getting excited about the fact that better measurements is making more of their impact manageable. Take Luiz Seabra, the found of Brazilian cosmetics giant Natura. Once the company reached a certain scale, he recognised that its choices of ingredients had real repercussions for land use and farmers. He also realised its selling model, featuring home-based agents, made Natura a source of skills training for many women who had never worked outside the home. Finally the company’s advertising needn’t sell products by playing on women’s anxiety about ageing, but could celebrate female confidence.
Seabra and his colleagues decided they wanted to have impact on a larger scale than simply the bank accounts of their share owners. The company has implemented a broad set of metrics to track its social and environmental performance as objectively as its financial results. It sets goals in all three areas, and ties it managers’ compensation to their attainment. No one would call Luiz Seabra anything but a capitalist, but he seems to be following a new rule:
Own your impact, positive and negative.
Natura is not the only company engaging in triple bottom line accounting and reporting on nonfinancial performance. Unilever, for example, is thinking just as broadly. But Natura is also significant for being situated in an emerging economy. If capitalism’s evolution is being held up by entrenched attitudes and feedback loops, it makes sense to look for change in the parts of the world least invested in the old ways. It will be the fast growth of economies like Brazil, China, and India that will spring capitalism from its well-worn grooves.
This is the biggest opportunity for the accounting profession since the double entry. Already we see the global auditing firms establishing vibrant new practice areas. When PwC helped Puma issue its environmental profit and loss statement, its explicit goal was to create an approach that could be adopted by other firms.
“This is nothing to do with corporate social responsibility and the green agenda,” Chris Knight, of PwC’s sustainability practice, told the Financial Times. “It is hard-nosed economics.”
Luiz Seabra once told us about a meeting convened to rewrite Natura’s mission statement. The wording had the company aspiring to grow its customer base while maintaining its commitment to sustainability. The CFO, however, objected. “Not while maintaining,” he corrected. “It should be through maintaining.”
Thank about it: a CFO chimed in with that comment? Apparently, capitalism evolves.
Christopher Meyer is the author, with Julie Kirby, of Standing on the Sun: How the Explosion of Capitalism Abroad Will Change Business Everywhere (Harvard Business Review Press, 2012).
