Business is meant to serve society – and for that, corporate governance needs to change
The COVID-19 pandemic and the consequences for economies around the globe have made many business leaders, analysts, scholars, politicians and interest groups call for a re-assessment of the purpose of business. The shareholder-driven way of doing business has led to extreme exploitation of natural and human resources. Mammon is in charge. While many hope to get back as soon as possible to business as usual in order to earn back what was lost and to forget about this horrible time, one thing is certain. The burden of the pandemic will be divided unequally – hitting those without financial or political leverage harder than those with. Exploitation will continue, and the younger generation will be left with an even heavier task of dealing with the negative consequences.
Business was never meant to exploit, and a business leader was never meant to be a profit-driven person focused on the short term and grabbing the low-hanging fruits. Business and entrepreneurship were meant to serve society and the flourishing of human beings and their communities. Business and entrepreneurship were not meant to set themselves apart from society, reap the benefits and dump the costs on the shoulders of society, communities and individuals. Business and entrepreneurship were meant to contribute and receive a fair return for their contribution, with a drive to keep on improving that contribution.
The post-COVID-19 world will offer business leaders the opportunitiy to look in the mirror and turn the direction of their businesses towards serving the common good. In order to do so, corporate governance structures and practices will have to be changed. The so-called Anglo-Saxon model of corporate governance with its focus on shareholders is a dead-end street. But even the Continental European model of corporate governance with its recognition of a say for a wider set of stakeholders needs an overhaul. This model adopted the spirit of the Anglo-Saxon model too implicitly. Scandals in big European firms are proof of that.
Corporate governance structures and practices in the post-COVID-19 decade will need to take the common good as their point of departure, not the shareholder. Shareholders will become well-respected partners, as will the society at large and employees. The dominant philosophy of the corporation as a nexus-of-contracts needs to be replaced by a view of business as a community of persons working together in cooperative business relationships toward the shared purpose of contributing to human flourishing. There is just no alternative, and it is better to accept this conclusion sooner rather than later.
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Blog:
A CALL FOR VALUES-BASED FOREIGN TRADE AND INVESTMENT POLICIES: BEYOND NEO-LIBERALISM AND BACK TO WHERE WE STARTED FROM
Introduction
The world economy is suffering an even severer crisis than the deep recession following the financial crisis of 2007/2008. Collaboration and cooperation are needed more than polarization. However, it is also time for reflection rather than responding to the automatic reflex of back to ‘business-as-usual’ as soon as possible. In this light the following thought may be worth considering.
Until the Corona crisis, the foreign trade and investment policies of liberal democracies were guided by (neo-)liberal thought, supported by WTO rules. These policies promote trade and investments with any country that may be of economic significance to the home economy. Whether governments adhere to and apply value sets that are opposite to those of liberal democracies is not in question at all. However, in a world in which autocracies are on the rise, this may be dangerous and a threat to liberal democracies. With the WTO ‘in limbo’ now, despite a temporary fix applied by the EU, China and 15 other countries (Reuters, 24 January 2020), it is time for a new type of foreign trade and investment policy, one that takes off the coat of neo-liberalism and liberal internationalism. Liberal democratic governments should consider taking a stance and defending what is dear: values such as human dignity, the common good, (international) solidarity and civil society. As a way forward, I propose in this article to apply these values, which are rooted in Christianity in particular (no, this is not a call for a religious revival), to develop a framework for foreign economic and trade policies of liberal democracies.
Liberal democratic leaders meet with autocrats
Before COVID-19 caught the world, we saw heads of states of liberal democracies smilingly meet and greet President Xi of China in order to promote trade and investment, even though they know that the Chinese government has initiated and is executing a detailed and merciless crackdown on ethnic minorities. The Dutch queen meets with the Saudi Crown Prince, a leader of an autocratic regime and a person who is under investigation for the brutal killing of journalist Khashoggi. Liberal democracies supported the organization of the 2022 football world cup in Qatar although this country, like many other Gulf states, is known for flagrant abuse of the migrant workers who are involved in building the new stadiums. President Putin was welcomed back to the G8 meeting, despite his support for the Syrian army and its President Assad, who is responsible for the use of chemical weapons against Syrian rebels and citizens.
Liberal democracy prevailed?
After the end of the Soviet Union, it became the dominant general belief that liberal democracy had prevailed and (neo-)liberal economic policies would make the former Soviet Union and Warsaw Pact countries rich, prosperous and democratic. The end of history had come, as Fukuyama claimed. Actively engaging and promoting unconditional foreign trade and investment was considered good for spreading democracy and prosperity – full stop – even with countries like China, Saudi Arabia and Russia. These countries are more or less autocracies and do not adhere to the principle values of liberal democracies, which emerged from Christian social thought and in particular from Catholic Social Thought, such as respect for human dignity and, as a result, respect for economic, social and cultural human rights, the common good, solidarity, subsidiarity, and special attention to the poor. It was believed that international trade and economic engagement would sooner or later spark a development towards liberal democracy and the adoption of these same values.
Autocracies undermine liberal democracies
But that was then and this is now…Times have changed, and 30 years after the collapse of Soviet communism, autocracy has not been declining. On the contrary, autocracy is on the way up and ‘faring’ very well. And many of the autocracies use the support, state visits, and trade missions of liberal democratic government leaders and officials in their favour. They ‘show off’ to their national audiences that they are being respected by – or even close friends with – liberal democratic leaders. This enables autocrats or near-autocrats to continue with human rights violations and the suppression of opponents, while filling their own pockets and those of their friends with the benefits of international trade and investments. Even worse, the gains of trade with and investments of liberal democracies are used by autocrats to destabilize liberal democracies. For example, Russia attempted to meddle in electoral affairs in the US and Europe, and China’s Belt and Road Initiative (BRI) actively seduces neighbouring countries to accept their ‘free’ investment in a new railway from Beijing to Rotterdam. Of course, nothing is actually for free…
But most importantly, unconditional trade and investment relations with autocratically led countries do not fit the values that liberal democratic societies claim to adhere to which are built on respect for human dignity and, as a result, respect for economic, social and cultural human rights, the common good, solidarity and civil society. This undermines the foundations of liberal democracies. These values are too valuable in a world in which autocracy is far from over. It is high time to re-appreciate the values on which liberal democracies are built; the time for naive and ‘indifferent’ foreign trade and economic policies is over. What is then the way forward?
Christianity, Catholic Social Thought and international trade
Christian social thought and in particular the long tradition of Catholic Social Thought provided the core values that in essence are the values on which liberal democracies are built: human dignity, the common good, solidarity, civil society (subsidiarity), and special attention to the poor and underprivileged. But over the past decades the governments of liberal democracies were seduced by (neo-)liberalism as the guiding philosophy for foreign trade and investment policies. The values on which their societies are built were neglected in international trade relations.
These principles, human dignity, the common good, solidarity, and civil society (subsidiarity) and special attention to the poor and underprivileged should be taken by liberal democracies to determine and formulate their foreign trade and economic policies. Back to where they started from. Trade and investment should only be promoted by their governments with countries that basically adhere to these principles. That would mean that liberal democracies would not promote their national businesses and organizations to trade with or invest in countries with governments that do not respect human dignity and, as a result, economic, social and cultural human rights; that do not promote solidarity (in terms of promoting prosperity for all and especially for the poor and underprivileged); and that do not adhere to the principle of subsidiarity, which basically implies respect for and fostering civil society. Therefore, stop promoting trade with and investment in China, Russia, Saudi Arabia, and many other countries that are effectively autocracies. No trade missions by heads of states and other government officials should go to autocratically led countries.
Obviously, this sounds undoable at first glance, since for example China is the largest economy in the world in purchasing power parity terms and therefore too big to ignore. There are plenty of alternatives, however. The set of countries that share the core values of liberal democracies is large enough (all 30 EU countries, plus OECD countries (the richest countries in the world) and countries such as India). India is the second most populous country in the world and in essence much closer than China to the values that liberal democracies are built on despite its current level of emerging economic and societal development.
Not a boycott but at least no use of taxpayers’ money
To the opponents of ‘old skool’ naive and (neo-)liberal international trade and investment, this may sound like a boycott. However, this is not what I am calling for; governments of liberal democracies should not forbid individual businesses and organizations from trading and investing wherever they choose. What I am calling for is putting a stop to liberal democratic governments using taxpayers’ money for foreign trade and economic policies and practices with countries that do not adhere to human dignity and human rights, serving the common good, solidarity and supporting civil society. The OECD already has guidelines for multinational enterprises (MNEs) that prohibit them from being involved in business activities that use child labor or are corrupt. Several liberal democracies try to promote corporate social responsibility practices in international business. However, the values that liberal democracies themselves are built on and adhere to should not be forgotten to prevent them being ‘wiped out’ by autocratic regimes that benefit from foreign trade with and the economic policies of liberal democracies. Now that the WTO is basically ‘bankrupt’, it is time that liberal democratic governments take a stance and defend what is dear. It is time for values to be upheld in foreign trade and economic policies, values that are rooted in Christian social thought and on which liberal democracies are built but that have been neglected in favor of (neo-) liberalism.
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Blog:
The end of innovation-as-we-know-it era: toward community-initiated innovation circles as an alternative?
How will societies and economies restart?
In times of crisis, change comes calling! The Covid-19 virus is currently challenging societies and economies around the world and stretching their limits in terms of solidarity, patience and discipline. For economies, this crisis is yet another challenge after the deep recession just about one decade ago as the aftermath of the financial crisis. Many businesses are challenged to their limit in terms of how to survive, while another group is even thriving due to the increased demand for equipment and specific services. In one way or another, the virus will be contained, and societies and economies will restart. But then comes the next question – how will they restart? Will it all be business as usual? Or will it all be different? Or even perhaps somewhere in between?
It will be different
My bet is that all will be different. So far, we have lived in the era of innovation, with knowledge economies all striving for some competitive advantage. Innovation is considered the key to business survival and to finding solutions to the challenges of the world we live in today. The adage is: innovate or die, eat or be eaten, shareholder value above all. Yes, there seem to be signs of change, as evidenced by concepts such as the circular economy, sustainability, CO2-neutral economy, climate change, and equality and calls for social entrepreneurship. But again, the dominant approach to realizing a circular economy or a fully sustainable business has always been that of innovation. The dominant belief is that if we keep on researching and keep on connecting innovative ideas and solutions with the right business model, we will be able to solve even the biggest problems.
Economic liberal idea of innovation will not be able to solve challenges of today and tomorrow – it helped creating them
However, this paradigm, which I call the economic liberal idea of innovation, will not be able to solve the challenges of today and tomorrow. In fact, these challenges have been created by this economic liberal idea of innovation: the plastic soup in the ocean, deforestation, climate change, air pollution are results of a way of thinking about innovation that keeps on producing an excessive amount of useless, unnecessary and non-contributing products and services that are piling up in today’s international society. A majority of innovative products and services have not been requested by consumers or citizens, the ‘demand’ was created by smart marketing paid for by huge budgets that are financed in turn by consumers through consumer prices. Take mobile phones, for example. Let us assume that mobile phones have proven to serve a useful and admirable purpose, namely that we can stay in touch with our closest family and friends wherever we are. They have contributed to our human characteristic as a social being. However, nobody (except for a few fanatics) asked for a device with a triple camera and plenty of other features. It was only brought to the market and the need for it created by this innovation paradigm, to keep sales up and to keep on thinking in terms of revenue and profit targets and increases. Consumers needed to be seduced to buy a ‘new’ version of a mobile that was serving its purpose perfectly well. In the meantime, the pile of e-waste, waste from mobile phones, laptops and other devices, is mounting, and plenty of scarce resources have been used and thrown away. Yes, there are companies that try to trade e-waste and bring it to African countries, for example. These countries are easy targets, and the waste is piling up there and polluting our planet. In the meantime, the profits of the big players in the mobile market are up and shareholders benefit. And yes, via corporate social responsibility, the companies try to buy credibility, but this is just a tiny little share of their profit and dividend.
No blame for companies but innovation-as-we-know-it
Please note, I am not blaming those companies. The cause of this destructive behavior is the economic liberal view of innovation, or as I call it, innovation-as-we-know-it. This way of innovation will not last since it simply cannot last, it is a dead-end street, and the longer we keep on walking down this street, the bigger the challenges will become.
Toward community-initiated innovation
What is needed is a new way of community-initiated innovation – one that is not driven by economic drivers only, but by the entire circle of those who are affected by the companies’ products and services. I define a community as the set of all actors (this can be individuals as well as groups) that are impacted by a business’ activities. One way to realize this is by establishing community-based innovation circles. Only when community-based innovation circles see a need for a better version of a product or service would a company be allowed to produce it. But there are plenty of other ways to reduce the cycle of useless and polluting innovation, and to switch to responsible innovation.
Changes of rules of the game will be needed
This will require changing the economic rules of the game, as provided by governments. And no, I am not trying to suggest communism or a centrally led economy – history has convincingly shown that will not work in my view. Community-based innovation circles will have to be incorporated in the governance structure of businesses, and the rules of the economic game will need to incentivize societal contributions rather than economic value (read shareholder). Stock markets indexes will reflect the societal value of businesses rather than their economic value. Shareholders will of course get their share of return, but the profit is divided among societal actors as well.
What will this do to the mindset of investors? Let’s see – perhaps the ‘old skool’ investors will die out, but societal investors will flourish. There will be fewer individual billionaires, which was a shame for humanity anyway. No, I am not a supporter of some sort of totalitarian equality, but yes, I disagree with the view that not being a billionaire means that an individual should worker harder and smarter in order to become one. These times of Coronavirus make us aware of this more than ever: those who work in the hands-on healthcare sector are the real heroes – and most likely, none of them are billionaires. And they should not ever feel that they ‘failed’ since they are not billionaires.
Better ant-trust monitoring, stricter rules on market consolidation, higher taxes and fees for pollution
Far better anti-trust monitoring, far stricter rules on market consolidation, far higher taxes and fees for pollution, and far tighter rules for companies to take responsibility for the pollution their products and services create. As an example, cigarette companies should be held responsible and pay for the cigarette waste. Currently, the societies pay for cleaning up the mess, or nature struggles to absorb the waste, which takes decades. An economic model is needed that is far more responsible and does not reduce citizens and human beings to economic units, to passive consumers only.
Innovation is human, but innovation-as-we-know-it is a dead end street
Renewal, innovative and creative thinking are as human as loving and caring. Innovation-as-we-know-it, driven by a shareholder-value focus is a dead-end street – piling up the problems and creating new ones. Societies and economies driven by community-initiated innovations will generate only solutions that are truly useful. If we do not choose this way ourselves, the future will force us to make this change.
