Let’s get real about purpose

By Mariana Mazzucato | @MazzucatoM

Mariana Mazzucato at the World Economic Forum 2019 in Davos

One year ago, Larry Fink, the CEO of Blackrock, wrote a letter to 500 CEOs asking them to rethink their sense of purpose:

“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

He argued that companies were too focussed on the short-term and that this was hurting their ability to add to long run value creation. Similar proclamations were made before and after by political leaders, on both the left and the right. In November 2011, Ed Miliband called for a more productive — less predatory — form of capitalism. And similar calls are being heard from Elizabeth Warren in the USA but also from conservative politicians, like UK Tory Prime Minister Theresa May who began her position as PM the day after the Brexit vote by calling for a more inclusive form of capitalism (Brexit, of course, then went on to put any ambitious domestic policy on the backburner).

And yet so little real change seems to be happening. The financial sector seems to continue to obsess about itself, with most of finance being invested in other parts of finance, insurance and real estate (FIRE) and companies themselves are overly financialised spending more on share buybacks and dividend pay-outs than on human capital, machinery and R&D — with the buyback mania only getting worse. And while some companies talk about corporate social responsibility, impact, ESG, and social purpose, it does not seem to be going to the core of their value chains and changing how value creation comes about.

Fink claimed that change required companies to focus on a broader group of stakeholders:

“Shareholders, employees, customers and the communities in which they operate.”

But to give this meat, this would require organising governance structures in a way that represents maximising stakeholder value, not shareholder value — and neither Fink nor some other luminaries in business seem willing to espouse the Scandinavian route.

A more purposeful capitalism requires more than just words and gestures or speeches of good will. It requires purpose to be put at the centre of how value is defined in firms, in governments, and by economic theory. In my new book on Value, I argue that while Adam Smith and Karl Marx both had the objective conditions of production at the centre of their understanding of value (division of labour, machinery, capital-labor relations), neoclassical economics restricts its understanding of value to a theory of exchange — only what has a price is valuable, and the ‘collective’ effort is missed since its only individual decisions that matter: even wages are seen as outcomes of the choice (maximisation of utility) between leisure versus work. Governments are seen as, at best, redistributing value created in business, and GDP itself is not able to account for the value of essential public services like free health care and education — only their costs (salaries of teachers enter GDP, not the value of public education) so that civil servants cannot brag to be as “productive” as Larry Fink bragged Goldman Sachs workers to be in 2009.

And the search for purpose should not be limited to soul searching inside the private sector. Even public institutions must go deep. Civil servants have been convinced that, at best, they can fix market failures, and if they do anything beyond that they get accused of ‘crowding out’ business. Yet the most ambitious public organisations that put a man on the moon, that invented the Internet, did more than just fix market failures. They had ambition, a purpose, and a mission.

To get real about purpose we need to concentrate on purpose throughout production, recognise that value is created collectively, and build more symbiotic partnerships between public institutions, private institutions and civil society. Below I list three key steps that would make this new sense of purpose for ‘real’:

1. What to create: Paul Polman, the CEO of Unilever, has rightly tried to focus companies on substantial targets: the 17 Sustainable Development Goals (SDGs). These are concrete goals that have been signed up to by over 100 countries. Neither the public sector nor the private sector alone can solve the 169 targets underneath those goals. Governments can use the goals to set missions that require many different organisations to invest and innovate around. Going to the moon required innovation not only in aeronautics but also in nutrition, in textiles and other materials. That same mission-oriented approach could be used for the SDGs — a strong direction set by governments to solve a problem which then purposeful organisations tackle together. This is the approach I have advocated in a report I wrote which has become a key part of the European Commission’s Horizon programme. Involving civil society organisations in framing missions is a central part of the co-creation process.

2. How to evaluate: Social impact in companies would be less about fuzzy ESG targets and more about concrete steps taken to help solve problems. Financial institutions would evaluate not in terms of the loans made categories of firms like SMEs, or categories of countries (e.g. developing) but the activities that would bring concrete missions into fruition — across different size firms, sectors and countries. From getting the plastic out of the ocean to helping to create cities that are more sustainable. It may only be a small piece of a much larger puzzle, but without those concrete pieces change does not occur. Governments should worry less about handouts and more about using instruments like procurement and prize schemes, to nurture the bottom up solutions within companies needed to address the development goals. Less picking winners and more picking the willing.

3. How to share: Warren Buffet has claimed, “Society is responsible for a very significant percentage of what I’ve earned.” And Bill Gates too has said, “Success is a product of having been born in this country, a place where education and research are subsidised, where there is an orderly market, where the private sector reaps enormous benefits from public investment.” This has included not only the basic infrastructure and educated workforce that governments fund but also the tech that is in our iPhones (from the Internet to GPS). But what has been less easy to admit in the business community is how this collective effort requires sharing not only risks but also rewards. Governments could retain more of the returns from the upside to cover the downside losses that risk taking requires (as can be seen by the fact that Tesla and Solyndra received similar amounts in loan guarantees). Non-monetary returns could come about through ‘conditions’ set on prices (of goods like medicines that receive plenty of public investments) and conditions on knowledge governance (making sure that the patent system is not abused). Similarly, conditions on reinvestment of profits so that hoarding is less of an option.

These three simple rules could make the talk about purpose become more of a walk. So perhaps next year there is more to discuss in Davos.

This article was originally posted on Project Syndicate.

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