Long-term capitalism that can work everywhere, Core results and Apple’s bruises reviewed

In it for the long term

The financial crisis has led to much pontification about where it all went wrong and how to put things right. The usual responses are outside-in. Regulators and lawmakers need to get tougher on business, it’s said. Crack the whip. Tie the private sector’s hands.

This illuminating paper goes against that trend. McKinsey’s managing director, Dominic Barton, asks what capitalists themselves can do to save capitalism. The system espoused by David Hume and Adam Smith is not dead, the author maintains – a view based, he claims, on more than 400 conversations with senior business and government leaders over the past 18 months. But it is in need of reform. And the change is relatively simple: quit so-called “quarterly capitalism” and start looking and acting long term.

The question of how to do so occupies the bulk of the paper. First off, understand the problem. Why did western capitalism originally became so short-termist? Western, note – not eastern. Oriental countries, Barton maintains, are culturally far more disposed to a long-term perspective. (The South Korean president, for instance, wanted McKinsey to write up a 60-year plan for his country. Barton convinced him 2020 would be far enough.)

The answer lies with the financial markets and, more particularly, with incentives. Typically fund managers are remunerated according to the amount of assets they manage, which typically rises when short-term performance is strong. And there the rot begins. Because their position is so powerful (investment funds control roughly 35% of the world’s financial assets), everyone follows their lead. So, lesson one: rein in asset managers. Barton makes a number of eminently sensible suggestions, including to forget holding thousands of stocks and get used to sticking with a hundred or so.

The revamp of myopic capitalism requires two further steps. Neither will be new to sustainability advocates. First, treat all stakeholders with the same weight as shareholders. Second, bolster boards’ ability to govern. “Act like you own the place,” is the author’s message to executive and non-executive directors. Get them working more (non-execs in UK banks only turn up between 12 and 20 days a year), ensure they have relevant industry knowledge (four out of five in big businesses do not) and make committee structures more effective.

This is no rant. It’s a reasoned plea to fellow capitalists to act in their own interests – and to do so fast. Without “deep-seated, systemic changes”, public trust will continue to slip and political intervention increase. The end result: business-as-usual will look a whole lot different – and a whole lot messier.

“Capitalism for the Long Term” Dominic Barton, Harvard Business Review, March 2011.

Reasons to report

Ten years ago, a group of UK environmental organisations banded together to form the Corporate Responsibility Coalition, or Core. And core to its mission was making non-financial reporting mandatory for UK plcs.

Ten years on, Core is still fighting. This Harvard working paper should add to its armoury. Taking data from 58 countries, the researchers show that the adoption of mandatory sustainability reporting laws and regulations has a demonstrable impact on the responsibility of business leaders.

The big wins fall for sustainable development and employee training, both of which are shown to shoot up management priority lists. Strategies to improve ethical practices and reduce bribery mark other identified benefits.

But the picture is not uniform. Mandatory reporting tends to work in countries where laws are well enforced and independent assurance of reports is widespread. Voluntary reporting, it should be said, results in similar outcomes – only, being voluntary, not everyone does it.

“The Consequences of Mandatory Corporate Sustainability Reporting” by Ioannis Ioannou and George Serafeim, Harvard Business School Research Working Paper No 11-100, March 2011.

Supply chains: biting into the Apple

iPod, iPhone, iPad, iPrettyMuchEverything creator Apple is currently the veritable fruit of the investor’s eye. Yet the US tech whizz has come in for some bruising over recent years. Cropping up with more regularity than senior execs at Apple’s Infinite Loop HQ would like are problems in its supply chain. A rash of suicides and injuries, in particular.

Bad management, not bad faith, lies at the root of the problem, according to this paper. Current supply chain management efforts are too risk-based. Emphasis lies on punishing a supplier after the event, rather than working with it before. Companies should appear not with a clipboard and stick, it is argued, but with on-site training modules and a willingness to work together.

Short and punchy, this summary of 25 years of academic research provides a practical steer on the “whys”, “whats” and – most importantly – the “hows” of effective supply chain management. Practitioners will find a helpful steer in the concluding four-stage framework.

“Managing Sustainable Global Supply Chains: Framework and Best Practices” Network for Business Sustainability (Richard Ivey School of Business), April 2011.

Campus news

The University of Guelph in Canada is to introduce a chair in sustainable food production following a $3m gift from food distribution giant Loblaw Companies.

The Bainbridge Graduate Institute has appointed Washington State University’s John Gardner as dean. The institute was one of the first US higher education facilities to offer an MBA in sustainability.


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