British capitalism is in trouble. The UK stock market, populated by too many legacy companies with scarcely a major hi-tech company in sight, has been the worst performing among advanced countries since 2000. Brexit has deepened the crisis. Our companies, vulnerably cheap by international standards, have become easy prey for takeover merchants from all over the globe who are rarely benign stewards. Too few great new companies are coming through to take their place.
Yet, by the criteria of the political right, the UK should be a capitalist beacon. Regulation in Britain – from the world of work to product standards – is light, applied weakly and is too often close to non-existent. Companies and capital are taxed modestly by international standards. But, stubbornly, the growth rate shrinks as investment and productivity stagnate. Could it be, pray, that the dominant rightwing intellectual paradigm is wrong?
Endlessly inventive, the right has found a convenient new villain to blame – “woke” or “stakeholder” capitalism. It may be that the woeful economic trends are longstanding and deep-seated, but don’t let that get in the way of a good new culture war. Last week, the Adam Smith Institute crystallised the complaint in a paper, Capitalism After Covid, which added stakeholder capitalism to the state as culprits in chief.
Governments, intoned author Matthew Lesh, have failed in their pandemic response while the private sector has done brilliantly. This “state failure” removes the case for more government involvement in the economy, post-Covid. Instead, capitalism must be given its head, but not a woke capitalism that “stabs itself in the face” by wanting to address “racial justice or environmental protection”. Capitalism must ruthlessly put profit and shareholders first, which is its sacred duty, not sacrifice profit to appease stakeholders in the trivial search for good headlines – the road to perdition. Too many companies are following woke Unilever and sacrificing profit and performance for lofty talk of pursuing sustainability and social purpose, personified, said a leading critical investor, Terry Smith, by trying to argue that the purpose of Hellmann’s mayonnaise was to further healthy eating.
Lesh won kind headlines in the Mail. But his thinking is fossilised in the 1980s and singularly fails to address today’s facts and arguments. Has state failure been so complete? Opinion in 27 countries has become more trusting of state competence in handling the pandemic, according to Cambridge’s Centre for the Future of Democracy. In pandemics, you need collective action and state leadership. Yes, there have been weaknesses – but offset by astonishing successes. In Britain, for example, the speed at developing and rolling out vaccines was because of smart collaboration between clever public procurement, universities, notably Oxford, the NHS and purpose-driven companies such as AstraZeneca.
Equally, economics is wrestling with the gaping shortcomings of the simple free market views that Lesh champions. Not least, as the 2021 winter edition of the Oxford Review of Economic Policy asks: “Capitalism – what has gone wrong, what needs to change and how can it be fixed?” Radical uncertainty besets economic decision-making; we need better designed institutions to win the gains from cooperation and individuals are much more complicated than economic automata responding to price signals. Economic models that ignore all this (such as Lesh’s) argue successive contributors, lead to a degraded capitalism, stagnating living standards and rising populism in response. Witness Britain in 2022.
Companies shape and are shaped by the society of which they are part and this includes the evolving preferences of shareholders. The Investment Association annual 2021 review reports that 49% of the £9.4tn of investment funds under UK management are pledged to promote the environment, social cohesion and good governance (ESG in the jargon), reflecting the wishes of their millions of savers. Founded in the 1880s, Unilever’s purpose was “to make cleanliness commonplace and lessen the load for women”. Today’s investors want it to continue with an updated purpose – making “sustainable living commonplace”, the principle reason it is a great company. Unilever, and the growing number of companies like it, are only responding to their shareholders’ priorities.
McKinsey Global Institute declares that stakeholder capitalism, in which companies carefully manage the trade-offs between their varying stakeholders, is the key to long-term value creation. It is the future of business. This is not a sacrifice of profit in woke appeasement of useless consumers, employees and wider societal pressures, as Lesh characterises it. Stakeholder capitalism is a recognition that any company is a social organisation that needs engaged workforces, loyal customers, supportive shareholders and strong brands, all of whose claims have to be managed, alongside financial priorities. Mock the idea that Hellmann’s mayonnaise has a purpose, but consumers care about the health of what they eat and will do more in future. Purposed brands, as Unilever’s own data shows, outperform their non-purposed rivals. And that means profit.
Are companies good enough at explaining these realities and trade-offs, at explaining why they consider what they are doing is so material to their long-term profitability and why they feel compelled not to ignore climate change or Black Lives Matter? Lesh attacks the entire framework without recognising the huge current debates about how stakeholder companies and their investors can do better. Companies are asking how they can better explain to their shareholders their best guess of future trends and explain why engaging workforces and customers is so worthwhile. Investors are becoming better at calling out greenwashing and soft corporate baloney. It’s called “materiality”, to borrow the buzzword of the hour – think relevance, significance. Ignore these material pressures beyond immediate financial demands and companies get into profound trouble.
British capitalism suffers from a long history of making easy money through being the first to industrialise and possessing a global empire. As a result, the culture of innovative risk-taking and the institutions to support it, along with a sophisticated conception of the company, are cruelly under-developed, as Adam Smith would have been the first to recognise. The value of the institute that proselytises in his name is that it is a useful fool, setting out so revealingly why its 1980s thinking is so wrong. And why so many in business, investment and academia are right to figure out new ways to reset capitalism and better capture its undoubted dynamism to serve the common good.
Will Hutton is an Observer columnist
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