Medium 9781523082681

Capitalists, Arise!

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Peter Georgescu arrived in this country as a penniless Romanian refugee and rose to become the CEO of Young & Rubicam. This is why he's so heartsick that with flat wages, disappearing jobs, and a shrinking middle class, his kind of rags-to-riches story doesn't seem possible now. But he has a message for his fellow CEOs: we're the ones who must take the lead in fixing the economy.

Marshaling deeply sobering statistics, Georgescu depicts the stark reality of America today: a nation with greater wealth inequality and lower social mobility than just about any other country in the developed world. But the problem isn't that free-market capitalism no longer works—it's that it's been hijacked by shareholder primacy. Where once our business leaders looked to the needs and interests of a variety of stakeholders—employees, community members, the business itself—now they're myopically focused on maximizing their shareholders' quarterly returns.

Capitalists, Arise! shows how the short-term thinking spawned by shareholder primacy lies at the root of our current economic malaise and social breakdown. But Georgescu offers concrete actions that capitalists themselves can take to create a better future. The irony is that if businesses do this, shareholders will do even better. In the long run, businesses can thrive only when society is healthy and strong. This book is a manifesto calling on capitalists to heal the nation that has given them so much.

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8 Chapters

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1. Capitalism on the Brink

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I’M UP EARLY, READY for breakfast with an old friend, Ken Langone, who is planning to pick me up and take me to his favorite Florida haunt for a meal. I’m going to tell him how worried I am about the state of our economy. My hopes for the future depend on being able to find common ground with people like Ken: conservative, smart, and willing to recognize that our system is in trouble.

Reports regularly tell us that our economy is recovering, but I don’t believe it. Certain indicators are up, but people are living in debt, and incomes have been stagnant for decades. Meanwhile, during those same years, roughly since the mid-1970s, profits and productivity have risen, with only occasional slight dips before bouncing back to the same rate of increase from year to year. What’s happened over those years is that most people have been locked into their stations in life, while the corporations that employ them are thriving. Opportunities to improve and get ahead have withered, and though many people are getting by—while getting deeper into debt in the process—they are losing hope. What’s needed is action from people like Ken, who have the power to influence how we do business—because business, the private sector, is what generates opportunity in a free-market capitalist system. Without the creation of new opportunities within the private sector, that profit-making system itself will come apart. If wealth rises to the highest ranks of our society without circulating back into the system in the form of wages and benefits, then spending inevitably declines or collapses.

 

2. The Dangerous Inequality

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WE GATHERED AT OUR cottage in western New York State on a Friday afternoon, had a meal, got some sleep, and met at our dining-room table the next morning with coffee, tea, and cereal. Andrew had provided us with copies of his findings the night before, but none of us had really studied them. So Andrew took us through the charts he’d created. He’s good company: still boyish but frighteningly informed, with a quick wit, wonkish black eyeglasses, and a shock of brown hair over his brow.

“Okay, gents. Income is what’s at the top of our minds, so let’s start there,” Andrew said. “All the numbers in these charts include transfer benefits. All government support: food stamps, unemployment insurance, state and local supplemental income, and more.”

He showed us a chart on how income is distributed across the American population. It confirmed what many have been saying about income inequality, so it wasn’t a surprise.

“If you check this column over on the right,” he said, “that’s more dramatic.”

 

3. The Outcome of Inequality

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It is often claimed that there is much tolerance in the U.S. for high levels of inequality as long as that inequality arises from a fair contest in which all children, no matter how poor or rich their parents, have the same opportunities to get ahead.

—Miles Corak, Canadian economist1

WHEN KEN LANGONE AND I talk to business leaders, we encounter what to us is a strange reaction from many of them. They want to know why we’re wedging issues of inequality of opportunity and income into the business arena. They see it essentially as something outside their field: their job is to make a profit and grow the business, not to be a steward of the larger society. The fact that this country began splitting itself in two some decades ago, in part because of choices made by our public companies, hasn’t crossed their minds. That’s understandable. Based on today’s operating philosophy, it shouldn’t be their concern. They believe business leaders should simply follow what “the market” demands and succeed or fail based on nothing else. Period. We find in these conversations an insistence on a total disconnection between business and what happens in the larger social scene.

 

4. The Perfect Storm

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IN MANY QUARTERS THESE days, as well as in this book, the argument against the way we do business now goes like this: Instead of focusing on maximizing shareholder value as the primary or even the only goal, those who run our corporations should balance the needs of all stakeholders—employees, customers, communities—and consider the long-term interest of the corporation itself and the economy as a whole.

A thriving economy is an interdependent ecology of interests. At the center of this ecology is a robust middle class, which is the source of healthy commerce and the fuel of a growing economy. Very simply, without robust wages and benefits, spending eventually dwindles and sputters as households go into austerity mode. When that happens, profits wane and drop. Without devoted employees, customers do business elsewhere. Without vital communities providing opportunities and quality education, companies can’t hire the people they need. And so on, in a continuous downward spiral. It’s an interlocking system in which each element depends on the health of all the others.

 

5. Shareholder Value Gets Lean and Mean

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IN MY TWENTIES, WHEN I was closer to the bottom than the top at Young & Rubicam, I had a front-row seat at a drama that revealed to me the heart of free-market capitalism in one of its finest moments. It became an episode much studied in the following years for the way a particular CEO acted with integrity, courage, and moral grit—and by doing so, he rescued his company’s hopes for a profitable future. In the short term, he faced an enormous hit to the firm’s market value and the possibility that his tenure at the helm would be viewed as a catastrophic failure. And yet he didn’t flinch. Short-term shareholder value was the last thing on his mind.

The corporation was Johnson & Johnson. The year was 1982. On the morning of September 29, in Elk Grove Village, Illinois, an unsuspecting mother opened a bottle of Tylenol and gave her feverish twelve-year-old daughter, Mary Kellerman, a capsule that turned out to be tainted. Mary was dead by 7 p.m.—poisoned by potassium cyanide believed to have come from the Tylenol. In rapid succession, six more people in the Chicago region died after ingesting cyanide-laced Tylenol.

 

6. The Way Forward

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IN THE MID-1990S, alone in my office, I was preparing for a major meeting with AT&T’s still newish CEO and top management. For some time, AT&T had been struggling. Separate from operational issues, a number of business initiatives that had been a slam dunk in the past just weren’t working. I got the call to meet with AT&T’s top team and explain our view of what was happening in the marketplace. It wasn’t a strange request. I’d had the same concern for some time, and several other clients were struggling with similar issues. What we needed weren’t just new tactics or new communication efforts. First we needed to grasp the fundamental changes in the marketplace—changes that created an unfamiliar discomfort, a sense of dislocation. The old tactics weren’t effective. We were at a loss.

The epiphany came with a song that popped into my head. R.E.M. had released “It’s the End of the World as We Know It,” and it concluded with the words “I feel fine.” The world felt as though it were ending, yet we felt anything but fine. Those lyrics were like a taunt. I needed to know just what it took to feel fine in a new and unrecognizable world. In the days to follow, with that song playing in my head, I figured out the new rules of engagement.

 

7. Stakeholder Value is Already Working

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WE’VE TOLD THE STORY of the transformation in American business from a devotion to multiple stakeholders—when business had a much larger sense of its responsibility to its workers and the nation as a whole—to shareholder primacy. The magic of free-market capitalism that drove America from World War II up to the late 1970s was known for an allegiance to employees, customers, communities, the nation, and the economy itself. Now it has become a game of shareholder take all.

Yet there is much to celebrate in the way that many businesses are waking up to what a dead end this transformation has turned out to be. Hundreds of companies are practicing a smarter version of free-market capitalism every day—because they realize it’s the only way to survive in the long run. The plea for business to abandon shareholder primacy may sound like an appeal to moral responsibility, but in reality it’s a warning that only by giving up shareholder primacy will companies be able to keep rewarding shareholders. Some of these bellwether companies are very successful private firms; others are courageous and principled corporate leaders who have always known that the stakeholder model would yield better results, as well as being the right thing to do for individual workers and for the nation. By celebrating what these individual leaders and their companies are achieving, it’s possible to imagine a tipping point, when the stakeholder model returns as the primary way we imagine a company’s purpose.

 

8. The Time to Act is Now

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FACED WITH ALL THIS, Ken and I talked about what we could and couldn’t do to raise awareness among key influencers in the private sector. For months we met with CEOs, think tanks, nonprofits, foundations, and other individuals and organizations, and we found common ground in many places. Yet we wanted to jump-start the process a bit—scale it up somehow. We needed to ring the bell—to call attention to the issue and ignite constructive conversation about it.

We decided to do an op-ed, which is easy enough to write (if you know what you need to say, and we did) but hard to get published. We made a list of potential news organizations and decided there were only four viable choices: the New York Times, the Wall Street Journal, the Washington Post, and the Financial Times. We started with the New York Times. At least I knew where to send the story. I’d been submitting pieces for months on various subjects, to no avail, but I’d always gotten a polite and brief decline. Luckily, this one caught the eye of an editor, and a long back and forth of revisions ensued until we’d polished it enough to pass muster. I was told early, a week before the publication date, that it would appear on August 9, 2015, in that Sunday’s “Week in Review.” It would go online at the Times’s digital site two days earlier. But first we faced a gauntlet: the fact-checkers.

 

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