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Capitalism at the Crossroads: From Obligation to Opportunity

Stuart L. Hart introduces his book, Capitalism at the Crossroads: Next Generation Business Strategies for a Post-Crisis World, 3rd Edition, and explains that business—more than either government or civil society—is uniquely equipped at this point in history to lead us toward a sustainable world in the years ahead.
This chapter is from the book

This book takes the contrarian's view that business—more than either government or civil society—is uniquely equipped at this point in history to lead us toward a sustainable world in the years ahead. I argue that corporations are the only entities in the world today with the technology, resources, capacity, and global reach required. Properly focused, the profit motive can accelerate (not inhibit) the transformation toward global sustainability, with nonprofits, governments, and multilateral agencies all playing crucial roles as collaborators and watchdogs. The book is written with a practical focus and should be of direct use to executives, entrepreneurs, and technologists, as well as business school faculty and students. The contents are equally appropriate, however, for those from the nonprofit world, the public sector, and society at large, especially those interested—and inclined—to collaborate with the private sector.

The book carries an optimistic message. Despite the gathering storm of environmental degradation, poverty, financial crisis, and terrorism, it envisions a central and expanding role for commerce in fostering global sustainability. It foresees massive opportunities for companies both to make money and to make the world a better place, particularly among the four billion poor at the base of the economic pyramid. This book is the result of an intellectual journey that began for me nearly four decades ago. My own personal evolution is reflected in its structure and flow. Allow me to explain.

Having grown up in western New York in the 1950s and '60s, I have memories of family vacations spent at destinations like Niagara Falls. Although the Falls themselves were indeed magnificent, equally memorable for a 10-year-old was the soot from nearby factories that accumulated on the porch furniture, requiring that we cleaned the furniture daily, lest we ruin our clothes. The accompanying stench was also something to experience. I still remember asking why, in a place of such natural beauty and splendor, did it have to be so polluted? The answer, accepted wisdom in those days, was that this was "the smell of money." If we were going to have economic prosperity, then we would have to put up with some minor inconveniences, such as soot, stench, rivers that catch fire, and mountains of waste. It was the cost of progress. I remember being singularly unsatisfied by this response.

Fast-forward to 1974. As a freshly minted college graduate headed to Yale for graduate work in the School of Forestry and Environmental Studies, I was convinced that corporations were the "enemy" and that the only way to deal effectively with environmental problems was to "make them pay" through regulation—to internalize their externalities, in the jargon of economics. This was probably a correct perception at that point in history: Large corporations, by and large, had been unresponsive to environmental issues, and it appeared that the only way to deal with the problem was to force them to clean up the messes they were making. The Environmental Protection Agency and scores of other regulatory agencies were created precisely for this purpose. A mountain of command-and-control regulation was passed during the decade of the 1970s, aimed at forcing companies to mitigate their negative impacts.

Regulators and citizen activists, buoyed by their newfound power, increased the pressure on companies through fines, penalties, campaigns, and consent decrees. The courts became clogged with lawsuits aimed at halting projects that were deemed unacceptable due to their environmental or social impacts. Economists of the "environmental" variety wrote books about externalities and the public policies that would be required for them to be "internalized" most efficiently by companies.1 In the process, companies became convinced that social and environmental issues were necessarily costly problems, usually involving lawyers and litigation. For better or worse, the message was that environmental and social issues were "responsibilities" that companies were required to deal with—and it was going to be expensive.

The Great Trade-Off Illusion

There can be no question that command-and-control regulation was of enormous importance; it required, perhaps for the first time, that business address directly its negative societal impacts. Since the time of the industrial revolution, enterprises had relied upon the extraction of cheap raw materials, exploitation of factory labor, and production of mass quantities of waste and pollution (think of those "dark, satanic mills"). Indeed, pollution was assumed to be part of the industrialization process. When economists conceived the concept of externalities, in other words, it seemed virtually impossible that firms could behave in any other manner. For the better part of 200 years, industrial firms engaged in what might be described as "take, make, waste" as an organizing paradigm.2 Command-and-control regulation seemed a necessary and appropriate counter to the prevailing industrial mindset.

Paradoxically, this mindset also resulted in what I call the "Great Trade-Off Illusion"—the belief that firms must sacrifice financial performance to meet societal obligations.3 A massive wall of environmental and social regulation has been spawned over the past 30 years, most of which has been written in a way that makes the Great Trade-Off Illusion a self-fulfilling prophecy. Just track the thickness (and lack of flexibility) of the Code of Federal Regulations in the United States for confirmation.4 Too often, command-and-control regulations prescribed specific treatment technologies without regard to their efficiency or cost-effectiveness.

A generation of businesspeople was shaped by this framing of the situation. Not surprisingly, the managers and executives who rose to prominence during the postwar years were predisposed to think of environmental and social issues as negatives for business. A socially minded executive or company might "give back" to the community through philanthropy or volunteering, but such concerns would certainly never be part of the company's core activities! The social responsibility of business was to maximize profits, as Milton Friedman advocated, and it seemed clear that social or environmental concerns could only serve to reduce them.5

Even today, this mindset lingers. Try the following thought experiment: Imagine that you are a general manager in a business or company of your choosing. Your assistant calls saying that the environment, health, and safety (EHS) manager and the public affairs director are in your outer office, and they say the matter is urgent. What is your first reaction? If you are honest with yourself, you will have to admit that the first thoughts that come to mind are something like: problem, crisis, spill, incident, accident, boycott, protest, lawsuit, fine, or jail time. Your first instinct was probably to head for the back door of your office to escape.

But now try a second thought experiment: Your assistant calls saying that the heads of marketing and new product development are in your outer office, and they are anxious to meet with you. Now, what is your first reaction? What thoughts or issues come to mind? In all likelihood, your mind probably flashes to images like: breakthrough, opportunity, blockbuster, innovation, or growth. Your first instinct is to run to the front door of the office to let them in.6

The Great Trade-Off Illusion trained a generation of corporate, business, and facility-level managers to assume that societal concerns could only be drags on their business. As a consequence, their attitude tended to be reactive—they would do only the bare minimum necessary to avoid legal sanction. Unfortunately, when lawmakers and activists unfamiliar with operations or market dynamics write the rules for compliance, it is a virtual certainty that the rules will not integrate well with company strategy or operations. Taking a reactive posture thus doomed companies to a decade or more of onerous regulations that treated the symptoms rather than the underlying problems. These regulations targeted specific wastes, emissions, pollutants, and exposure levels through command-and-control-style rules that forced companies to deal with problems "at the end of the pipe" rather than addressing them as part of their core strategy or operations. Unfortunately, pollution-control devices can never improve efficiency or produce revenue; they can only add cost.

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