ESG: What boards can learn from ‘Reimagining Capitalism in a World on Fire’

Maria Rotondo
Nov 25, 2020

Capitalism is probably the greatest source of prosperity the world has ever seen but also the source of massive problems. In her new book ‘Reimagining Capitalism in a World on Fire’, Professor Rebecca Henderson discusses a paradigm shift from the idea that the only purpose of a business is to make money. Companies are to play a leading role in solving the three great problems of our time: environmental degradation, economic inequality and institutional collapse. A new way of thinking about the purpose of firms, their role in society and institutional relations, accountable governments and strong civil society.

Rebecca Henderson is a Professor at Harvard University. She is also an advisor to some of the world´s leading companies and board member of Amgen and INDEXX Laboratories. The Financial Times recently named her “director of the year”. I read her book recently and was quite impressed. I thing this book is a must for any Board Member. I have selected a few extracts that I found particularly interesting.

Probably, what really impressed me is the statement of Professor Henderson that if something is going to change the World it will probably be accounting. In the sense that only what is measured and quantified is managed. As Rebecca states in page 125, “it took me a surprising long time to embrace the idea that accountants hold the key to saving civilisation. Even tiny changes in accounting rules can change behavior in profound ways”.

In fact, I see important developments are underway since the weight of intangibles within companies balance sheets has increased vs tangible assets. A good example of this are companies such as AirB&B, Amazon, Google/Alphabet. Also, from a sustainability point of view, companies should account for the negative externalities they produce in the course of business instead of being left to governments and civil society to take of them. How to account at company level for this? What is going to be the fiscal approach to provisions related to write-offs of legacy assets? We are seeing energy companies making important write-offs/provisions (ex: Repsol). What about positive externalities generated by business; brand value (another intangible), reputation, corporate culture. From a risk angle, risk matrix at companies are being revised to include new emerging risks (cyber, reputational risk, pandemics, etc).

The book goes through ESG metrics, GRI, SASB “sasbee”, materiality maps, etc. But interestingly, some companies are also starting to use artificial intelligence to construct information about social and environmental performance from scraping the web.

Henderson also definitely supports the idea that companies both public and private should serve a social purpose and benefit all of their stakeholders. The book goes through interesting case studies and references: Turing Farmaceutical, Lannet another Pharma Producer, Purdue, Chobani (CEO Hamdi Ulukaya), GM, Toyota, Nordstrom, JetBlue, GPIF (Japanese Government Investment Fund, the largest pension fund in the World), Triodos Bank,  Mondragon (Spain, the largest employee-owned firm in the World, 8000 people), Publix (the largest US employee controlled firm, supermarket), John Lewis (largest employee controlled firm in the UK), King Arthur Flour. Rebecca is a fan of “benefit corporations”, a legal form under which the company formally commits to creating public benefit as well as giving decent returns to its shareholders. Directors are required to consider the public interest in making any decision (ex: Patagonia, Danone). Other companies mentioned include Nike, Tesla, Amazon, Mc Donald, Shell, BP, Mercadona, Nokia, Kodak.  Rebecca spent the first 20 years of her career trying to persuade Kodak and Nokia to change their ways.

But probably one of the best case studies exposed is that of Unilever (Paul Polman) with Lipton Tea switching to sustainably grown tea. “Make a Better Choice with Lipton, the World first Rainforest Alliance Certified Tea”. Sales were up 11% and market share rose from 24% to 26%.  In a recent global study, nearly three-quarters of consumers claimed that they would change their consumption habits to reduce the impact on the environment. In Latin America and in Africa and the Middle East, roughly 90% of respondents expressed an urgent need for companies to embrace environmental issues. In 2010 CEO Paul Polman commitment to a “Sustainable Living Plan” and sourcing 100% of agricultural raw materials sustainably by 2020. In 2019, Unilever announced that its purpose-led “sustainable living” brands were growing 69% faster than the rest of the business and generating 75% if the growth of the company.

Also, Walmart (“save money, live better”)  and the US$20bn bill was presented in big detail. In the 2000s Walmart was under fire, accused of hurting downtown areas by driving out smaller independent stores, also accused of hiring illegal workers, violating child labour laws, it was sued for gender discrimination, illegal workers. CEO Scott shifted the strategy, with strong implication at the time of Hurricane Katrina in New Orleans donating food, clothes and announced a major commitment to sustainability with 3 goals (2005): be supplied 100% by renewable energy, create zero waste, sell products that support our environment. While in 2007 Walmart ranked last in the list of 27 retail companies by ethical reputation, in 2008 it took the 3rd place.

The book also offers very interesting data points to illustrate that it has also become significantly harder for entrepreneurial firms to succeed. Between 1997 and 2012, the four largest firms in every sector increased their share of their sector’s revenues from 26% to 32%. The other side of the equation is that young companies have reduced their share from 15% in 1980 to just 8% in 2015 (basically halved). This increase in concentration reduces workers bargaining power and may drive up prices and profits. Reimagining Capitalism can only be addressed limiting the power of business (page 201) through the push to create shared value. The choice between inclusion and extraction.

Between 1946 and 1980 US total pretax national income nearly doubled; the poorest half of the population saw its income slightly more than double, the richest 10% saw a slightly smaller increase. By contrast, In the last 34 years (from 1980 and 2014), pretax national income was up 61% but the income of the poorest half was up just 1% while the income of the richest 10% was up 121%.

A reimagined capitalism – a reformed economic and political system – has five key pieces:

  1. Creating Shared Value. Case study NG, the largest waste-handling company in Norway.
  2. Building the purpose-driven organization
  3. Rewiring finance: accounting, voting shares, report material, replicable auditable data, longer-term view, changes in corporate governance, alternate sources of capital. In 2018 more than US$19trn – 20% of total assets under management was invested using ESG-Based information. We are also seeing new models with consumer and employees owned firms. Changing Corporate Governance, or the rules that specify who controls the firm
  4. Building Cooperation: global solutions,  partnership with local governments, NGOs, Greenpeace, cooperation within regions and sectors/industries
  5. Rebuilding our institutions and fixing our governments. Basically finding a way to balance the power of the market with the power of inclusive institutions and purpose-driven businesses committed to the health of the society. Firms have enormous power to influence governments.

Business must step up. It is immensely powerful. It has the resources, the skills and the global reach to make enormous difference. IT has also a strong economic case for action. Global warning is likely to shrink the American economy by 10% by the end of the century (Davis Wallace-Wells) at two degrees the ice sheets will begin their collapse estimating that 400m more people will suffer from water scarcity, there will be 32 times more heatwaves in India. At three degrees, Southern Europe will be in permanent drought. By 2050 as many as one billion people could be on the move (Ray Dalio, Bridgewater Associated).

The last paragraph of the book leaves us with a good point for reflection:

The roots of our current predicament are fear and separateness. We fear we will never have enough. We feel we are separate and alone. But we are not. I can´t tell you that trying to solve the great problems of our times will make you either rich or famous – although it might. I can tell you that you will have wonderful companions for the  journey , that you will feel both more hope and more despair than you expect, and that in the end you will die knowing that you have lived to the full.”

Thank you, Rebecca.

Maria Rotondo

Independent board member at INDRA, Member of the Auditing and Compliance Comission, on the advisory board at IE and Hotelab. Maria is also a professor at Instituto de Consejeros y Administradores. Maria Rotondo is also one of the corporate governance advisors, focusing on providing boards with strategic advisory services and a greater understanding of today's challenges.