Paul Polman: The remedies for capitalism

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The remedies for capitalism

Paul Polman
Paul Polman
CEO, Unilever

It is a sign of the world in which we live that the word “crisis” should appear so often in the introduction to Dominic Barton’s well-argued critique of capitalism. But what we have experienced over recent years is not, in my view, so much a crisis of capitalism as a crisis of ethics. As the author acknowledges, capitalism itself remains the “greatest engine of prosperity ever devised.” The issue, to pursue the analogy, is that maintenance of the financial engine has too often been left in the hands of young, untrained apprentices.

The central thesis of the article is that the “short-termism” of so much modern business—“quarterly capitalism”—lies at the heart of many of today’s problems. I agree and have said so many times, occasionally to my cost. At Unilever, words have been backed with action. We have aligned management incentives for the long term and invested heavily in R&D to build our pipeline of innovations. In addition, we have moved away from quarterly profit reporting; since we don’t operate on a 90-day cycle for advertising, marketing, or investment, why do so for reporting? And as Dominic Barton acknowledges, we have also been among those companies “to resist playing the game” when it comes to issuing guidance. The share price may have fallen on the day we announced an end to guidance but is now 35 percent higher. Nothing in the intervening two years has persuaded me that this was the wrong thing to do. We will therefore go on resisting.

For all these reasons, it is difficult to argue with Dominic Barton’s prescriptions for change—management incentives that encourage a focus on the long term, a broader form of stakeholder capitalism, and stronger, better-informed boards of directors.

These will all go a long way to addressing the problems of short-term capitalism. They are necessary. But they are not sufficient. Changes in policy will mean little if not accompanied by changes in behavior. That’s why we need a different approach to business—a new model led by a generation of leaders with the mind-set and the courage to tackle the challenges of the future.

Such challenges go beyond those arising from the financial crisis. We now know, in outline, what the future will look like. It will be a world where climate will change, water will be scarce, and food supplies will be insecure.

Business has a chance to become part of the solution to those challenges. Just as we need to ensure that we do not repeat the mistakes which led to the recent banking crisis, so there is an equal imperative to face up to the realties of a world where 9.5 billion people will put enormous strain on biophysical resources. The rapidly growing populations of India, China, and Indonesia will all aspire to the lifestyles and living standards enjoyed by the Germans and the Californians. There is nothing that we can, or should, do to stop that.

The challenge for business is to meet these needs in a sustainable fashion. Success will require completely new business models. It will demand transformational innovation in product and process technologies to minimize resource use, as well as the development of “closed-loop” systems so that one man’s waste becomes another’s raw material.

Interestingly too, the challenge is likely to encourage a much more collaborative form of capitalism. Companies will have to work with each other, not just with governments, nongovernmental organizations (NGOs), and civil society. Issues like deforestation and species extinction cannot be tackled by just one company acting alone; they will require collaboration within, and across, industry sectors. To arrest the alarming rates of deforestation in Brazil and Southeast Asia, for example, not just the consumer goods industry but also the oil industry (interested in vegetable oils as feedstocks for biofuels) and big agribusinesses (like Cargill, Bunge, and ADM) must work together. Coalitions of this kind need the active involvement of NGOs to mediate discussions and ensure that the interests of civil society are fully factored into solutions.

Just as important, the growth strategies that businesses pursue will have to be more inclusive. Michael Porter captures some of this thinking in his concept of “shared-value” creation. In a world of scarcity, there will be greater pressure to ensure that wealth is created not just for the few but that the benefits are spread more widely—to small farmers, small and midsize enterprises, women, young people. If you doubt the truth of this, just look at what is happening on the streets of Cairo and Tripoli, where educated, digitally connected young people who have been locked out of the formal economy are challenging the prevailing political and economic orthodoxy.

The changes Dominic is advocating deserve very careful attention. But if the world economy is to continue to grow and flourish, it will have to learn to live within rational financial and ecological constraints. As Jonathon Porritt recently argued, “The recession we are in right now is grim, but nothing like the recession that awaits us if we don’t start living within our means.”

Business leaders join the debate

Roger Ferguson

President and CEO,
TIAA-CREF

"...it's critical that institutional investors participate as active owners of portfolio companies, using their influence and leverage to promote good corporate governance and effectively functioning markets." more