Is Moral Capitalism An Oxymoron?

A quote by Gus Speth, co-founder of the Natural Resources Defense Council and environmental lawyer, is often reiterated by those monitoring biodiversity collapse; Gus said, “I used to think the top environmental problems were biodiversity loss, ecosystems collapse and climate change. I thought that with 30 years of good science we could address those problems. But I was wrong. The top environmental problems are selfishness, greed and apathy… and to deal with those we need a spiritual and cultural transformation, and scientists don´t know how to do that.”. Selfishness, greed and apathy are most certainly correct; notice poverty didn’t get a mention.

As a result, events such as the recent Financial Times Moral Money Summit are of interest, as they provide an insight into how thinking may be evolving. Sadly, what they mainly highlight is how slow we learn, and that the necessary transformation, highlighted by Speth, is no closer. The discussions on cleaner, fairer capitalism are so light touch that it would appear economists and bankers still have very little understanding that a collapse is nothing like a crisis.

A useful way to reflect on this is using a presentation given to the 2019 Banking and Financial Services Oath Conference, titled, Is self-regulation dead? From its website, the Banking and Financial Services Oath (BFSO) states it is a “unique initiative that seeks to strengthen the ethical standards of financial services through the empowerment of individuals making a personal commitment of integrity.”, continuing, “We support decision-making that aspires above the law, because poor choices can have harmful and costly consequences.”.  

This is a rather self-serving statement that has zero practical value, given the law enables shareholders to sue any board/executive that goes beyond the absolute minimum level of compliance, if doing so has a material effect on the share price. That is not a risk boards and executives (who are heavily incentivised to prioritise shareholder returns) are going to be willing to take. Most people get to executive level and board level because they comply with the system, not because they are mavericks!

The conference presentation, by Wayne Byres who was then Chair of the Australian Prudential Regulation Authority and is currently a non-executive director of ASX Limited and Macquarie Bank Limited, discussed how laws, codes, governance and ethics were the foundation of a society’s values and norms.

He illustrated this with the diagram shown defining society’s values and norms divided into four sections:

1. Formal regulation (the law),
2. Industry self-regulation (codes),
3. Company self-regulation (governance)
4. Personal self-regulation (ethics)

This whole discussion was based around what we have been conditioned to think, namely the optimal model of financial regulation – lowest cost, best outcomes – requires self-regulation to play its part.

Byres goes on to say, “Good self-regulation – in the broadest sense of the term, capturing self-discipline and restraint – is essential to providing the community with a well-regulated, efficient and value-adding financial services sector. It is not optional. The fact the question is being asked indicates self-regulation, while perhaps not dead, is certainly not in peak physical condition.”

While Byres discusses self-regulation not being in peak physical condition, key is that neither are the other three quadrants. Where is the evidence that company self-regulation (voluntary governance), industry self-regulation (voluntary codes) or even government, formal regulation (the law) are working well? All four quadrants are in bad shape. Given the scale of biodiversity loss, the accelerating consequences of global warming, PFAS chemicals, sewage pollution in water supplies, the list goes on, some would say the four quadrants aren’t just in bad shape, they are all on life support!

While I commend the FT Moral Money Summit for its range of speakers, including activists, what it clarified is that we haven’t even taken the first step.

After 30 years of discussion, there is no resolution of Shareholder Capitalism v. Stakeholder Capitalism. Until we change business regulation, namely changing the law away from shareholder primacy, we are stuck in no man’s land. While the law enables shareholder primacy, limited company liability etc, the path to collapse will continue.

Listening to the Shareholder Capitalism v. Stakeholder Capitalism debate for 30 years has been similar to listening to the Pro-Trade v. No-Trade debate in the conservation world. In all cases the No-Trade group is challenged to justify every small step they request to make trade in a species just that little bit harder, while the Pro-Trade group aren’t challenged to prove anything. They simply have to say that the trade is sustainable (no proof provided or required) and the world responds “Oh, OK then”, no questions asked.

So, when the likes of Wayne Byres say in his presentation, “Yet we still too often see in the financial sector a failure to self-regulate in a manner that appropriately balances the interests of all stakeholders.”, it is useful to note that when pushed on this issue the financial sector (or any listed company) too often resorts to Shareholder Capitalism, dropping Stakeholder Capitalism in an instant. This debate spilt onto LinkedIn during the summit with one of the speakers posting “Stakeholder capitalism, by contrast, is #socialism in that it takes money from shareholders for a political, social or environmental agenda.”

At the extreme end, the believers in shareholder primacy do see stakeholder capitalism as socialism. The McCarthy-est language they use makes stakeholder capitalism sound like communism, which it is not.

So here we are, most certainly at the end of the current economic and social cycle created by the industrial revolution, and the argument is between liberal democracy v. social democracy. Those who believe in liberal democracy may not what to accept that their lack of willingness to regulate industry has collectively got us to the tipping points we are at, environmentally and socially. The inability to self-regulate personally and the 40 years of accepting voluntary company self-regulation (voluntary governance) and voluntary industry self-regulation (voluntary codes of practice) means all we have left to help mitigate the risks of collapse and transition is formal government regulation (mandatory law). Given how successful business has been in capturing the state and neutralising regulation and regulators, this is unlikely to happen anytime soon.    

So the only question is, after 30 plus years of the debate Shareholder Capitalism v. Stakeholder Capitalism, we are collectively ready to formally move to Stakeholder Capitalism? If we are then we need to move from a liberal democracy to a more social democracy mindset; as such it is important to have a clear definition of what social democracy is and isn’t. Social democracy is firmly rooted in representative and participatory democracy; it isn’t communism! It is committed to curbing inequality, eradicating poverty, and upholding universally accessible public services, such as child care, education, elderly care, health care, and workers’ compensation.

Economically, social democracy supports income redistribution and formal, mandated regulation of the economy in the public interest. It balances the self-interests of business and the responsibility to people and the planet. Until we do this, let’s be honest, there is no useful or genuine sustainability agenda; there will be no cleaner, fairer capitalism.

Moral capitalism will remain an oxymoron, with all its harmful and costly consequences, accelerating us to global collapse.