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Reforming Capitalism

The changes needed but impossible to make

Can It Be Done?

Capitalism must reform itself writes Dominic Barton, the global managing director of McKinsey & Company. He’s not talking about oversight or imposing regulation. He’s talking about fundamental differences in how it is actually working, changes for the “long term.”

Today’s emphasis on quarterly earnings has to go. Then business’s primary focus on “shareholder value,” i.e. stock prices, has to be altered. Finally, boards have to take seriously their fiduciary responsibility to represent shareholders. They have to act as if they were the owners, not the partners of management.

Here are his own words in The Harvard Business Review: “First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.” (See “Capitalism for the Long Term”)

It is a good program, one I suspect many top executives responsible for running our industries would be in agreement with. They know they would have an easier time managing effectively if they did not have to constantly look over their shoulders at how financial markets were judging their performance. But how to get it implemented? He is probably right that capitalism can’t be reformed from outside. Labor lacks the force or political clout, and the legislatures are controlled by lobbyists and campaign donations.

On the other hand, capitalism is a juggernaut that runs on a logic of its own. Barton makes it seem that good management could get its hands around the problem. But there are two problems with that assumption. Changing any organization is immensely difficult. Individuals tenaciously resist change but organizations are even more entrenched in doing things the way they have always done them. Even worse: In an age where the financial industry is driving the economy, the entire system of financial relationships would have to be revamped. Someone is bound to lose money and power with these changes. To be sure, the losses would be in the short term, but who is willing or able to do even that?

So what is Barton up to in offering this analysis? As a director of McKinsey, he knows better than most how difficult it is to bring about organizational change and how improbable it is that large, systemic restructurings can be effected.

Is he protecting consultants from the charge of failing to change what management “must” but can’t or won’t do. Alternatively, by setting such an agenda, perhaps he is drumming up business for his firm – business for the long term.

It’s an interesting moment for our economic system. The solutions are becoming apparent, but the means for change are not. And yet it is something of a relief to see someone distancing himself from Wall Street and its one-sided focus on finance, offering an intelligent analysis of the larger problems our system faces.

Even if we can’t see how it can be changed, it’s better to see the problems more clearly.

Can It Be Done?

Capitalism must reform itself writes Dominic Barton, the global managing director of McKinsey & Company. He’s not talking about oversight or imposing regulation. He’s talking about fundamental differences in how it is actually working, changes for the “long term.”

Today’s emphasis on quarterly earnings has to go. Then business’s primary focus on “shareholder value,” i.e. stock prices, has to be altered. Finally, boards have to take seriously their fiduciary responsibility to represent shareholders. They have to act as if they were the owners, not the partners of management.

Here are his own words in The Harvard Business Review: “First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.” (See “Capitalism for the Long Term”)

It is a good program, one I suspect many top executives responsible for running our industries would be in agreement with. They know they would have an easier time managing effectively if they did not have to constantly look over their shoulders at how financial markets were judging their performance. But how to get it implemented? He is probably right that capitalism can’t be reformed from outside. Labor lacks the force or political clout, and the legislatures are controlled by lobbyists and campaign donations.

On the other hand, capitalism is a juggernaut that runs on a logic of its own. Barton makes it seem that good management could get its hands around the problem. But there are two problems with that assumption. Changing any organization is immensely difficult. Individuals tenaciously resist change but organizations are even more entrenched in doing things the way they have always done them. Even worse: In an age where the financial industry is driving the economy, the entire system of financial relationships would have to be revamped. Someone is bound to lose money and power with these changes. To be sure, the losses would be in the short term, but who is willing or able to do even that?

So what is Barton up to in offering this analysis? As a director of McKinsey, he knows better than most how difficult it is to bring about organizational change and how improbable it is that large, systemic restructurings can be effected.

Is he protecting consultants from the charge of failing to change what management “must” but can’t or won’t do. Alternatively, by setting such an agenda, perhaps he is drumming up business for his firm – business for the long term.

It’s an interesting moment for our economic system. The solutions are becoming apparent, but the means for change are not. And yet it is something of a relief to see someone distancing himself from Wall Street and its one-sided focus on finance, offering an intelligent analysis of the larger problems our system faces.

Even if we can’t see how it can be changed, it’s better to see the problems more clearly.

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