An article in the current issue of Harvard Business Review, by eminent Harvard Business School economist, Michael Porter, and his business partner, consultant Mark Kramer, claims to be showing ‘how to reinvent capitalism – and unleash a wave of innovation and growth’. The secret is “Creating Shared Value”.
It criticises the ‘outdated approach to value creation that has emerged over the past few decades’. That ‘outdated approach’ might be summarised as short term shareholder value maximisation – the target of much criticism in other posts on this site. Porter and Kramer propose a “new conception of capitalism”. But, despite the rather breathless, teenage language, it all boils down to an increased orientation to the usual candidates: concern for the wellbeing of customers, employees, suppliers, local communities, and also for the firm’s role in depletion of key resources, especially water and energy, and its role in polluting the atmosphere and thus, probably, contributing to climate change. So what’s new?
It’s all very laudable, but not much different from previous approaches to achieving a more enlightened and humane allocation of resources. They’ve all failed to have much impact because of the persistence of the neoclassical maximising ideology. They’ve sought to build on that orthodoxy, but bend it in the direction of equity and sustainability. But maximisation is not flexible. Whatever is to be maximised, everything else is inevitably impoverished. It is the maximisation model itself that has to be challenged and replaced.
But Porter and Kramer offer no such challenge. Like all their predecessors, they accept the general case for a mathematically based model of neoclassical maximisation. In so doing, they assure their own failure to ‘reinvent capitalism’. They acknowledge that ‘Capital markets will undoubtedly continue to pressure companies to generate short-term profits’. So how can company directors afford to ignore that basic reality?
Outside of the United States and Britain, firms are protected from the market in corporate management, by various means: two tier boards granting power to employees, cross shareholdings, stable ‘families’ of companies, as well as state shareholdings. Such arrangements protect companies from the sort of asset stripping raiders that inhibit Anglo-American companies from investing in ‘shared value’. These protective arrangements can only persist where neoclassical ideology is rejected. Example firms quoted by Porter and Kramer as investing in ‘shared value’, for example Nestlé, actually enjoy much of that protection.
Perhaps Porter is inhibited by the fact that his best known previous work is an application of neo-classical theory. It is not clear whether this sort of consideration influences business school faculty. But, while ever Professor Porter and colleagues continue to proselytize neoclassical theory, there will be no reinvention of capitalism, even though it might appear, as they suggest, to be ‘under seige’. The moment will have been lost. And ‘shared value’ will become just another failed good intention.