Disrupting Capitalism

Don’t we all?

Make no mistake: economic growth is the primary method of human progress to date. We have made incredible strides reducing poverty over the past twenty five years. In 1990 66% of the world’s population lived below the poverty line (i.e. below $3.10 per day). Today that number is roughly 30%. The most dramatic reduction in extreme poverty (less than $1.90 per day) has occurred in East Asia, down from 80% in 1981 to 7.2% in 2012.

What drove this incredible progress against poverty, one of our greatest global challenges? Economic growth. This speaks to the immense social benefits that capitalism brings. As far as improving the welfare of people around the world, economic growth is the best tool we have.

But we still have a ways to go. According to most recent World Bank estimates, in 2012, there are still roughly 900M people living in extreme poverty (less than $1.90 per day) and 2.1B living in poverty (below $3.10 per day). It’s an injustice that 30% of the world’s population still lives below the poverty line, despite the economic and technological advances of the past century. At the same time, it’s clear we can’t lift the next 2B people out of poverty the way we lifted the last 2B.

In the (admittedly oversimplified but generally true) models of microeconomics, people and the natural resources are inputs to be minimized in order to maximize profit. If that wasn’t problematic enough, in the absence of government intervention the cold calculus of profit maximization excludes consideration for social benefits like job creation as well as social costs like pollution. As a consequence, the $78T global economy sets us up for the creation of a slew of problems, the biggest of which, of course, is climate change. We are in need of a redefinition of capitalism, one that can continue to drive prosperity around the world without creating a host of problems in its wake.

How might we even begin to think about changing our very economic institutions?

Numerous trends over the past twenty years are shifting us towards a more sustainable equilibrium. Sustainability. Conscious Capitalism. For Benefit. B Corps. Social Enterprise. World Positive. Millennials are moving into prime employment and spending years, 87% of whom believe “the success of a business should be measured in terms of more than just its financial performance.”

While these are all moving us in the right direction, I’m convinced the lack of a clear definition of what a “new economy” company looks like is holding us back. The overlapping and nuanced definitions encompassed in the trends above create confusion not just in the marketplace, but between the organizations trying to orchestrate this tectonic economic shift. At best, the lack of an agreed upon standard leads to change agents talking past each other. At worst, it leads to greenwashing, with marketing organizations co-opting these trends to sell more products without companies making true changes to how they do business.

We need a single, standard definition we can all build upon. A definition that can establish a bar for what is good enough, so companies with positive externalities (they all have them) can’t get credit without making the real change that is needed in our economy. Two possibilities stand out: a third party certification or a new legal classification of companies.

A third party certification is attractive in that it allows a trusted intermediary with the right set of incentives (unlike companies themselves) to do the work consumers, investors, and employees simply cannot. By certifying and monitoring a new set of business practices, a third party can send a simple, trusted signal that by buying, investing in, or working for a company, you are supporting a new breed of capitalism. Independent organizations are more nimble than governments and can thus execute quickly. B Labs, with their B Corp certification, has worked hard to come up with a great criteria. The B Labs certification looks across business practices, from transparency to environmental footprint to workplace practices to community, and includes a legal requirement to align investors and directors with the mission of the organization. Companies need only a score of 80 out of 200 to qualify, but this has the beauty of setting the bar at a point that is reasonable for companies to aspire to.

Incorporation as a benefit corporation (not to be confused with B Corp certification, unforgivably confusing I know!), is another viable possibility. With the passage of legislation in 30 states across the US (and now in one other country, Italy), companies now have the option to incorporate as a benefit corporation instead of traditional corporate forms like C Corps or S Corps. This changes the fiduciary responsibility of directors from one of shareholder value creation to one of stakeholder value creation. The biggest implication here is that directors no longer have a legal obligation to maximize return to shareholders over social objectives, which particularly comes to a head at the point of an acquisition. More broadly, benefit corporations must consider the “public benefit” of their decisions, instead of simply the profit implications. They must also report on their efforts to this end. You can read more about it here.

Incorporation as a benefit corporation is particularly compelling as a standard definition as it essentially represents an official new sector of the economy. A legal distinction, passed by public officials, is more legitimate than one developed by a third party unaccountable to the public. Like nonprofits and the 29 types of 501c organizations, policy and law makers can create a taxonomy of companies within the benefit corporation structure. This allows differential tax and policy treatments. And that’s when things get really interesting.

There’s no question the government should be incentivizing companies to move into this new sector, whether you define it by B Corp certification or benefit corporation status: such companies have significant positive externalities, and they mitigate issues that governments would otherwise have to address . This could take the form of tax breaks for companies and investors, reduced red tape, or preferential government procurement practices (and I’m sure many more).

But far more important than government is the role that each and every one of us can play to drive this change. As consumers, investors, and employees, we are the ultimate drivers of our economy. We are complicit in our flawed economic institutions through the consumption decisions we make each and every day. The information asymmetry is immense. Do you understand the environmental impact of the cleaning products you use in your household? What about your clothing? Could it have been manufactured in a factory with horrific working conditions, or worse yet, slave labor? And what about who we work for, or where our investments dollars flow? Yes, many of us don’t have the luxury of basing our purchasing decisions on values vs. cost, and the same goes for who we work for. But so many of us do.

Yet, how are we expected to understand the implications of our consumption, investment, and employment, in order to make the right decisions? It’s clear in our current mode of increasing expectations of convenience, that we’re not going to sit down and do research on which brands we should buy from. This is why a single, collectively adopted definition is critical. Both benefit corporation incorporation and B Labs certification create a clear line by which we can demarcate the old model vs. the new.

When you put this together you get a compelling theory of change to bring our economic institutions into a more sustainable equilibrium. Here’s how it would work:

• We agree upon a definition for a new breed of capitalism. Benefit corporation status or B Corp Certification are both viable options. The best answer for now is probably to allow companies to be one or the other. The benefits of B Lab certification is that is it more thorough, is already in place globally, and is easier to adopt for existing companies (converting to a benefit corporation requires a two third supermajority vote from all stockholders). Benefit corporation incorporation stands apart in its agreed upon legal standing and establishes an easier base for policy incentives. It should be our end goal.
• We build a movement on top of this new definition, calling on each of us as consumers, investors, and employees to direct our capital towards this new economy.
• Companies clearly label themselves as B Corp Certified or benefit corporations so consumers can easily make the right decisions at the point of sale.
• Investors can more easily track how much of their capital is going to this new economy vs. the old one.
• We commit as employees to work for B Corps / benefit corporations, or put pressure on leadership at our existing employers to convert.
• Government puts in place policies to incentivize businesses to adopt the practices of this new economy, and investors to direct capital towards it (because, come on, you didn’t think policy was going to proceed popular sentiment, did you? It’s more likely to follow as the movement catches hold).

This creates a virtuous cycle as more and more human and financial capital shifts to this new breed of capitalism. Additional policies would follow popular sentiment to further favor such companies. Status quo businesses will be more and more disadvantaged as consumers shift their disposable income towards, investors allocate capital to, and labor works for companies who have joined the movement. Capital and labor become more expensive. Eventually, this new sector will grow to eclipse current institutions as a new set of incentives take hold, ones which are much more aligned with our collective social objectives.

Because the way you disrupt a behemoth as formidable as our economy is not to reform it, but to define something new alongside it. We’re watching it happen today with AirBnB in the hospitality industry and Uber and Lyft in transportation. There’s a Buckminster Fuller quote that sums up best:

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

With gratitude to Heerad Sabeti for contributing so significantly to my thinking, and all the hard work he had dedicated to this cause for the past 25 years. #imwithhim