The Heart and the Brain by Tomas Fonseca
After winning World War II, when America realized that the threats of fascism and communism were an existential threat to our form of democratic capitalism, corporate leaders advocated for policies to create balance and stability in the economic system. Fast forward to today and the specters of the dark ideologies that drove our last global conflicts have not left our world. Unfortunately, they are growing stronger each day, in many cases fueled by inequalities created by corporate and financial power over playing its hand. This essay looks at practical ways business and policy leaders can create a new purposeful economy that regenerates our natural resources and shares the prosperity with all parts of society.
The human circulatory system is intricately complex and powerful. In one day, the blood inside your body travels 12,000 miles. To travel a similar distance in the United States, one would have to drive from coast to coast four times. The relationship between the circulatory system and the human brain is one of the most important interconnections between two organic systems. The brain requires a steady stream of blood to ensure it gets the constant supply of oxygen it needs to function properly. Too much blood can cause the pressure in the human head to increase and so damage delicate brain tissue, while too little blood will cause it to starve. The heart needs the brain to regulate the proper flows of blood; the brain needs the heart for oxygen. Both systems need multiple other elements in the body to consume and process food, water, and oxygen. To thrive, the human body requires a network of organic systems to mutually flourish.
We see similar parallels in the modern economy. What corporation would exist without customers with adequate incomes? How could the modern business succeed without educated employees? How could a business operate without a legal and political license to operate in a society? What business could operate without the enforcement of government power in contracts and the limited liability that corporate designations give?
In 1970, Milton Friedman, the economist and creator of the shareholder maximization theory, reduced this complex network of mutuality into a single objective for a corporation: “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
This persuasive theory sounds rational but what happens when the corporations in question become so powerful that that they influence the basic rules of the society, the laws that govern it, and ethical customs that drive all of our human interactions?
Over the last few decades, multinational corporations have accumulated more power in the world than most countries. If you rank states and corporations together in the top 100 revenue-generating institutions, 71 are multinational corporations and 29 are nation states. As a result, international relations theorists had to change their discipline to account for this growing power of corporations in their study of global political dynamics.
On a more personal and relational level, the advent of smart phones, social media and behavioral influence through data analytics, companies are recognizing the ethical implications of their growing power to change society, our human relationships and even our perception of reality.
In recognition of their growing power and responsibility, The Business Roundtable, a coalition of 181 of the largest, most powerful businesses in the United States recently made a groundbreaking shift in their rejection of the maximizing shareholder value as the primary objective of a business.
In their public statement, these CEOs stated that “it has become clear that the [old language] on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable.”
Predictably, their financial backers did not back their play. Investors quickly pushed back and restated their dominance, stating that ‘accountability to everyone means accountability to no-one’ and that this effort would diminish shareholder rights. The Economist piled on their criticisms that this new statement of purpose would reduce efficiency, decrease competition, and further entrench CEOs who lack legitimacy with the broader public.
On the other side of the debate, the founders of the B Corporation movement, called on the corporate, financial, and policy leaders to go beyond talk and put the declaration into practice by changing corporate governance structures and implementing new public policy to reinforce corporate intentions.
Each of these critiques is a reasonable response to this tectonic shift in corporate governance. How do we respond as business leaders and entrepreneurs? How do we put this more realistic purpose into practice while also addressing the challenges of accountability, efficiency, and competition?
Personal accountability: leaders go first
First, integrity and responsibility at a corporate level starts on a personal level. Each business leader and entrepreneur needs to ask fundamental questions about their own personal purpose and ethical performance as a leader. Although many executives are trying to escape death, it is likely still to be an inescapable reality for all of us. When we are lying in bed at the end of our life, will we be thankful of how we spent our limited days? What do we want our children, our spouses, and our colleagues to say about our leadership, our legacy at our funerals? These fundamental questions remind the leader that we will be ultimately judged on our virtues and how we contributed to the flourishing of others in our sphere of influence. Reflecting on our purpose allows us to see the value of the intangible realities like relationships and truth as more important than the tangible realities of wealth and money. I am not saying that wealth and money are not important, but rather their relative importance become clear as we reflect on our ultimate purpose as human beings.
Practically, leaders can use various techniques to discover their purpose. Virtuous leaders develop their vision of legacy and their internal conscience by taking time during their breaks from intense work to read sources of perennial wisdom: literature, philosophy, and the biographies of influential leaders. The writings of ancients like Aristotle or modern thinkers like Victor Frankl or Hannah Arendt, help leaders understand the importance of responsibility and meaning as cornerstones in a life of flourishing regardless of material circumstances. Leaders must go beyond reading to engage their full natures in the reality of existence through mediation, prayer, and time outdoors. The visionary leaders of history understood the power of strategic moments of contemplation to understand their purpose in times of great conflict and upheaval.
In addition, having a few close friends that know us well can help us sift through the wheat and chaff of our own self-perceptions. I know in my life, having a few deep, long-term relationships with friends whom I talk to on a regular basis and who know my strengths and weaknesses has positively impacted my growth as a leader and deepened my understanding of true success. Via reflection, contemplation and friendship, these encounters with “ultimate reality” help each of us to develop the inner resources needed to face the competing and sometimes conflicting needs of stakeholders. Without this inner sense of purpose, we can become unconscious pawns in someone else’s game.
Professional accountability: steward the assets that drive long-term growth
Growth is a good thing. Without growth, any living thing cannot flourish. However, business and economic growth needs to be grounded in the reality of our human relationships and our renewable biosphere. We need to account for and steward all types of assets: human, social, and natural.
With the advance of artificial intelligence, robotics and a host of other advanced technologies, we are witnessing a widening skills gap between the talent of today and the skills needed for tomorrow’s economy. Right now, technological changes are already transforming the types of workers in demand. Given the speed and complexity of these changes, business cannot fully depend on the education system alone to catch up and fully fill these gaps. Business leaders need to make significant investments in employees to develop these new skills.
In the wake of corporate scandals, from General Electric’s potential $38 billion accounting fraud, Google’s recent child privacy violations and Volkswagen’s tampering of emission monitoring technology, business people are waking up to the value of intangible assets like trust. The most advanced companies are learning new ways to model their social ecosystems and use a host of approaches to build better relationships with their various stakeholders. Each of these relationships is an opportunity for service and the creation of new value. These companies are measuring social capital on three fronts: trust, social cohesion, and the capacity for collective action. The most advanced technology firms are incorporating ethical considerations into their new product design.
In addition, our current way of managing the economy does not account for our dependencies on scarce resources of water, energy, soil and biodiversity. By measuring natural resource inputs (oxygen used in combustion, energy, etc.) vs. outputs like carbon, a company can align the corporate responsibility (stewarding the planet) with corporate interests (reducing costs). For example, Bill McDonough, one the leading thinkers in sustainability, has helped companies design products, office buildings and factories that are fully renewable and reusable. He recently worked with Ford to design a factory that uses renewable power, saving the automaker over $900 million.
At the recent Responsible Business Forum at Oxford, leaders from across the financial value chain, from top accounting firms to private equity groups to commercial banks, discussed the idea of creating a new global standard for stewarding these non-financial assets for long term growth. This type of collective action among the private sector could create a common rule book for CFOs across the economy and fundamentally change the relationship between business, society, and the environment.
Public accountability: get the blood to the heart of the economy
While CFOs can help steward resources for efficiency and long-term value creation, the CEO’s direction of the VP of Government Relations may be the most important lever for improving the health of the capitalist system. With over $2.6 billion in corporate lobbying spent every year, US corporations have a massive impact on the “basic rules” of the game. Unfortunately, using this influence, tax laws have been changed to greatly favor investments in financial capital over human capital, anti-trust laws have been weakened to squash competition and privacy laws have largely been written in favor of the technology sector. That corporate lobbyists would hard wire these advantages into law is rational but at some point sending all of this blood to the head of the body will kill the heart that they rely on. Public leaders need to return to earlier legal foundations of the corporation to restore the social purpose and obligations of all corporations.
This was not always the case. After winning World War II, when America realized that the threats of fascism and communism were an existential threat to our form of democratic capitalism, corporate leaders advocated for policies to create balance and stability in the economic system. A new bipartisan consensus was built in the domain of domestic economic policy. Anti-trust law was further strengthened to encourage competition and entrepreneurship. The US Government made significant investments in American talent through the GI bill and expansions of public education. Tax policy was genuinely progressive and more fairly balanced between human and financial capital. Our social welfare system was strengthened to help the average American navigate economic change. The civil rights movement gave more people opportunities for economic opportunity and democratic participation. Labor policies were put in place to protect the interests of workers and to ensure the benefits of success were shared broadly across the company. Environmental laws were strengthened. As a result, those post war years were years of growth and strength for the American economy.
The specters of the dark ideologies that drove our last global conflicts of World War II and the Cold War have not left our world. Unfortunately, they are growing stronger each day, in many cases fueled by inequalities created by corporate and financial power over playing its hand. Fascism, thought long dead with the end of Hitler’s regime, is growing across the world. As I write this essay, the power of totalitarian socialism in China is encircling the free citizens of Hong Kong. To save the system that has created freedom and prosperity for millions from these existential threats, corporate and financial leaders need to support serious reform proposals from across the political spectrum to increase competition, steward our natural resources wisely, educate our citizens for the new economy, and share the benefits of capitalism across the entire system. If we fail to take care of the heart of the body, the whole body could die. It is time to be accountable and lead our society back into a season of sustainable prosperity.