We might never ask ourselves what companies and organizations are good for. But amidst the rising critique of capitalism and corporatism that undermines companies’ social contracts, they are in search of a new narrative and purpose to answer this question. The traditions of the Rhine model of capitalism could provide inspiration for our times.

Our observations

  • Last week, members of America’s Business Roundtable, a group of 200 CEOs of major U.S. companies that, all combined, represent about $7 trillion in annual revenue, issued a statement called “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’”. As the “American Dream is alive, but fraying” (Dimon, CEO of JP Morgan Chase), these companies vowed to invest more in workers and communities, play a bigger role in social issues, and aspire to meet the needs of all U.S. stakeholders (e.g. employees, neighborhoods, the environment).
  • Collins and Porras describe in their book Built to last: successful habits of visionary companies (1994) that “visionary companies” do business according to a vision that expresses the company’s raison d’être, its ideals and values, as well as expressing the company’s broader societal goals and objectives. Visionary companies have a stable management and low employee turnover, a strong focus on long-term innovation and pay attention to the social effects of their business, and as a result they realize higher profits. Recent research by McKinsey shows that companies that operate from a long-term horizon have superior financial performance and higher investment rates, boosting employment. Likewise, research by Credit Suisse shows that family firms – which could be considered paradigmatic examples of companies with a long-term horizon given management’s emotional attachment to survival – outperform companies that are owned by diverse shareholders on a number of metrics.
  • On a macro-level, Michel Albert shows in his book Capitalism vs. Capitalism: how America’s Obsession with Individual Achievement and Short-Term Profit has Led It to the Brink of Collapse (1993) how the social market economies found in Europe have a stronger focus on societal consensus among all stakeholders, an active role of the state and a long-term orientation and how these economies outperform the U.S. on most socio-economic indicators (e.g. inequality, crime, life expectancy, health, happiness).
  • The social contract of big tech is weakening. Until recently, tech companies were hailed as beneficial disruptors, ready to shake up many rusted and consolidated industries, driven by visionary founders that brought creative destruction from their innovations produced in their garages, embodying the American Dream. However, we have now entered a period of backlash against big tech. Since 2017, we have seen numerous scandals, social media platforms causing negative social externalities (e.g. polarization due to the spreading of extremist, illegal and fake content), big tech actually hampering innovation, while these “superstar firms” depress wages, often have bad working conditions, and contribute to a falling labor share while realizing huge profits and cash reserves, thus contributing to rising inequality (especially on a local level, such as in Silicon Valley’s Bay Area). As such, big tech has gone from being heroic to harmful, and tech entrepreneurs from do-gooders to bandits (as exemplified by the rise and fall of the public image of Mark Zuckerberg).

 

 

Connecting the dots

Since the 1970s, the dominant raison d’être of companies (especially in the U.S.) was to increase their value to its shareholders. This is called the “Friedman doctrine”, after neoliberal thinker Milton Friedman in his famous 1970 essay “The Social Responsibility of Business is to Increase its Profits”. Therefore, the recent turn of America’s Business Roundtable, now advocating a broader, societal purpose of its members’ companies, implies a significant shift in the attitudes and ideas of big business in corporate boardrooms.
In part, this is a pragmatic and strategic move. The statement could be seen as an attempt to pre-empt an attack from politics, as Democrats are increasingly voicing anti-corporate sentiment in the face of rising corporate power and profits. For example, Elizabeth Warren made breaking up big tech her core issue, while Bernie Sanders wants regulation of corporate financial behavior tied to social objectives (e.g. raising worker pay). If Democrats win the 2020 presidential elections, combined with a majority in the House of Representatives, this will give them significant regulatory firepower. Furthermore, given the deteriorating public image of big business, they need to position themselves in order to attract future talent, which is why companies increasingly want their employees to take a stand on social, political and economic issues. Lastly, such a stance can attract a new source of finance. We have written before that younger generations prefer to invest and donate to organizations with a strong sustainable and ethically responsible stance, further empowered by digital technologies that can track their investments. Similarly, large institutional investors are demanding that the companies in their portfolios take more social responsibility (e.g. BlackRock) and help to address climate change (e.g. State Street). As such, business ethics is no longer an oxymoron, and could even become a source of comparative advantage for companies.
However, the move also marks a more fundamental turn in the philosophy of management and organizations. In his book Birth of Biopolitics, Michel Foucault distinguishes between two major forms of liberal policy: the German “ordoliberalism” of the Freiburg School that emphasizes the need for state intervention to generate a well-functioning social market economy. He contrasted this with the Chicago and Austrian schools that fiercely criticize any government involvement in private affairs and hold that markets – when left to themselves – produce the best socio-economic outcomes (i.e. laissez faire economics). This was inspired by the libertarian and individualistic cultures of the U.K. and U.S. Michel Albert built on this distinction and showed that there are in fact different types of capitalism: the Anglo-American model in the Anglophone world, and the Rhine model on the European continent, with the latter outperforming on most socio-economic indicators. This debate continued in the work of Hall and Soskice, who distinguished between two varieties in organizing capitalist societies: liberal-market economies and coordinated market economies (e.g. in Japan, Germany, the Nordics, Switzerland).

So the coordinated, social market “Rhine” economies, mostly found in continental Europe, can thus be distinguished from the laissez faire economics found mostly in the Anglophone world. A few core distinctions with respect to their ideas of a company stand out. First, the Rhine model of capitalism focuses on all stakeholders of the organization, and on the social and environmental embeddedness of the company, whereas the Anglo-American model focuses solely on shareholder value. Furthermore, organizations in the Rhine model focus on long-term relationships (e.g. enduring employment of managers, contracts with suppliers) and innovation to ensure survival, while Anglo-American organizations focus on short-term profits (related to their focus on shareholder value), and understand society primarily in terms of market competition. In contrast, the Rhine model focuses on societal consensus and collaboration between various social, public and economic organizations to realize objectives that transcend individual agents. The Dutch poldermodel (or “Rhine delta model”) is a good example of this. Lastly, the Rhine model assigns an active role to the state, which should help to establish conditions under which the market won’t derail and the behavior of individual companies will not result in bad macro-social outcomes.
These qualities of the Rhine model are becoming increasingly important, as the social contract of business organizations is under pressure because of rising socio-economic inequality and climate change. We have argued before that if we want to tackle these dual grand challenges of our times, we need a radical overhaul of the meta-rules of our socio-technical systems; that we are in need of a Second Deep Transition of the way we run our economies and society. One such directionality should be for companies to take more responsibility for and be more aware of their social embeddedness and their environmental impacts.
This also provides an opportunity for Europe to strategically position itself in the sensor-based economy. Recently, we wrote that a European Stack is taking shape, with a focus on setting the ethical standards for the implementation and social adoption of next-gen technologies. Europe’s socio-democratic and collaborative capitalism could strengthen its position as a regulatory and normative tech superpower, in between the libertarian capitalism of Silicon Valley and China’s techno-authoritarianism. Furthermore, given the rich and strong civil society in European countries, they could prove fertile soil for the emerging decentralized Stack, in which innovation is open-sourced; companies, public and social parties collaborate to tackle large social and environmental problems. Lastly, by operating on the basis of trust and reciprocity, values such as privacy and autonomy, as well as ethical codes of conduct could be strengthened by data ownership for citizens that are organized around specific co-operatives.

Implications

  • Recently, POLITCO obtained a draft plan in which EU officials want a €100 billion wealth fund to bolster “European champions” against American and Chinese business rivals, as well as set more stringent regulation for tech companies and measures against strategic takeovers. Last year, we forecast that, facing the risk of being left behind, Europe is in search of its own European champions, and combined with strategic positioning on the decentral Stack, the EU should redefine its investment strategy. For example, in public-private partnerships in healthcare, public distributed ledgers, internet architecture, the. sharing economy.
  • As the social contract of big business – and big tech in particular – is under increasing pressure, we can expect these companies to take more social and ethical responsibility for the negative externalities their products and services generate. Examples of this are already emerging, such as Microsoft spending $500 million on “affordable housing” in Seattle, Uber sharing its data with city planners to help tackle mobility problems, Facebook setting up “war rooms” to monitor fake and extremist news on their platforms at times of important political events, or Airbnb setting up offices to reduce “mass tourism” around certain hotspots and popular destinations.