The Game is Rigged: 7 Reasons to Believe the Transition to Capitalism 2.0 has Begun

[Editors note: To learn more about the transition towards a more sustainable economic system that encompasses many of the ideas in the article below, please download our free white paper entitiled, “A Journey in Search of Capitalism 2.0.”]

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For decades now, the wealth and income increases in this country have gone to a small elite. Much of the blame for that has gone to corporate America, which has driven down wages, laid off millions, shipped jobs and factories overseas and dodged taxes at an astonishing rate. Wall Street has become a symbol for greed and sociopathic behavior. The game is rigged; people are fed up and want change.

Change is indeed in the air, but for the better or worse? Actually both, and that is good. As is often the case in nature, decay begins within and shows on the surface as the affected organism dies.

So it is with many of society’s old institutions. They may appear bigger and more powerful than at any time in their history, but that is just the bloat of decay.

As is often the case in nature, decay begins from within and while the organism may appear more powerful at first, it’s an illusion, nothing more than the bloat of decay.

Wall Street’s version of “greed capitalism” may appear to be omnipresent, especially through its influence over politics, its success in getting elite-friendly legislation passed, its control of the media, and its vast amounts money, gained at the expense of Main Street, now starving for adequate financial resources.

But there is new life stirring around the bloated body of greed capitalism, and it marks the beginning of the end for that old corporate regime. Driven by a shift in consciousness, it manifests as bottom-up, group-driven efforts, replacing the old top-down, authoritarian model. In other words, we are the solution.

But is a new people and planet-friendly form of capitalism, one we might call Capitalism 2.0 still just a gleam in the eye, or have we actually begun transitioning from idea to implementation? To find out, let’s go back half a century.

1. Moving money

The shift likely started in the 1960s when the socially responsible investment (SRI) trend was born out of the social struggles of the civil rights movement and a growing environmental awareness (themselves group efforts). John Elkington, a leader in the SRI movement, introduced the term triple bottom line in 1994 (social and environmental bottom lines, in addition to financial). He, along with others, began pushing corporations to be more responsible citizens to society and the planet.

Wikipedia’s entry under the now more common label of “impact investing” says this “refers to investments ‘made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.’ It is a form of socially responsible investing that serves as a guide for various investment strategies.”

Ultimately, shareholders will dictate the direction that the companies they invest in will follow. And the more money that pours into SRI/impact investment funds, the sooner business will no longer be dominated by greed capitalism. It is estimated that screened investments with a double or triple bottom line element is now the fastest growing investment sector, rapidly approaching $10 trillion in assets under management!

Norway is the first country to dump fossil fuels as the divestment movement heats up.

On the flip side is the “divestment” movement (i.e., extracting from an investment), primarily from the carbon industries. Since its beginnings in 2012, the fossil fuel divestment movement has succeeded in getting more than 800 institutions worldwide, including universities, faith organizations, local authorities, pension funds and foundations to commit to divesting from fossil fuels. Perhaps the most symbolic action came in September 2014 as the heirs to Rockefeller oil fortune withdrew fossil fuel investments in the $860 million Rockefeller Brothers Fund.

More recently, Norway became the first country to dump fossil fuels as the divestment movement heats up. Norway’s Government Pension Fund Global reported that a total of 114 companies had been dumped because of their risk to the climate, according to The Guardian.

This movement is having a huge impact on the carbon industries. Divestment is likely one reason why oil and gas companies are seeing their share prices plummet alongside the drop in oil and gas prices, causing many of them to abandon new and existing projects that are no longer viable. Coal companies have been filing for bankruptcy at levels never dreamed of just a very short while ago. Meantime, renewable energy projects are exploding, as the price of renewable energy rivals fossil fuels, and in most cases without subsidies.

2. Political pressure

While the impact investment and divestment movements have not been very visible to the general public, a new phase of awareness has exploded onto the public’s consciousness.

It began on September 17, 2011 with the birth of the Occupy Wall Street movement. For the first time in modern history, the disparity between the haves and the have nots (which Occupy brilliantly characterized as the 1% and the 99%) became front-page news. The main issues raised by OWS protestors were social and economic inequality, greed, corruption and the undue influence of corporations on government—particularly from the financial services sector.

Even though Occupy has not translated to the same direct political clout demonstrated by the parallel protest movement of the Tea Party, it nonetheless has probably influenced society on a deeper and broader level than the Tea Party, and will likely have greater staying power and influence over time.

The Occupy Wall Street movement has brought attention to social and economic inequality, greed, corruption and the undue influence of corporations on government.

Occupy’s influence is visible in protests today, linking causes from incarceration rates and excessive policing (especially of the poor and minorities) to wage disparity and more. For example, out of Occupy came the living wage movement that has been sending shock waves through corporate America, impacting even the largest employers like WalMart and McDonalds. Where minimum wage proposals have been on the ballot in recent elections, they have won by overwhelming margins, cutting across the political spectrum, even in conservative states.

And while the push for a substantial increase in the minimum wage has barely moved in Congress, multiple cities have embraced a $15 minimum wage and New York and California lead the states in adopting $15 minimum wage programs.

Income inequality and the outsized influence of the wealthy became a central theme of the 2016 election, on both the right and the left, driving the campaigns of both Donald Trump and Bernie Sanders. Regardless of the outcome of that election cycle, most observers predict that this theme will drive politics for the foreseeable future.

3. Local focus

Decentralization efforts are also moving the transition to Capitalism 2.0 forward. One is the rapidly growing local investment movement (i.e., investing in local businesses rather than Wall Street), as chronicled by Michael Shuman in his book Local Dollars, Local Sense and Amy Cortese in her book Localvesting. This is a modern day version of a community barnraising.

Similarly, a growing number of “buy local” campaigns promote supporting local businesses instead of chains that export the gains to remote headquarters.

Complementary “local “currencies are also proliferating. These, like the Berkshares in Massachusetts and the small-business oriented Wir Bank in Switzerland (which has assets of almost $5 billion), provide an alternative means of exchange alongside the national currency. The concept, which has a long history of success stretching back to ancient Egypt, is explored in-depth by euro architect Bernard Lietaer and Stephen Belgin in their book New Money for a New World, and in the book The End of Money and the Future of Civilization by Thomas Greco.

4. Collective ownership

On a parallel track is the collective ownership/cooperative movement chronicled by Marjorie Kelly in her book, Owning Our Future: The Emerging Ownership Revolution. All kinds of cooperatives are being launched, many in the local food movement, not to mention the most pervasive type of coop in the country – credit unions, key beneficiaries of the “Move Your Money” campaign to get citizens to remove their money from the Wall Street banks and place it with local financial institutions.

One of the most successful business enterprises in the world, of any kind, is the Mondragon Corporation, a federation of worker-owned cooperatives based in the Basque region of Spain. It has grown to be the 10th largest Spanish company in asset turnover and employs more than 74,000 people in more than 250 organizations in finance, industry, retail and knowledge. The region it serves has essentially zero unemployment and it is recognized worldwide as the ideal coop model.

5. New financial alternatives

There is a growing interest in the concept of public banking, i.e., banks that exist to serve the public rather than just wealthy shareholders (they may be owned by governments or some form of a non-profit organization). Germany is a leader here, with its vast network of locally controlled, non-profit community owned public banks(Sparkassen), credited with making Germany’s small and mid-size companies some of the healthiest in the world. Those Mittelstand (small and medium) companies contribute about 52% of Germany’s total economic output and 19% of its exports . One of the leading proponents of public banking worldwide is Ellen Brown, as detailed in her book The Public Bank Solution: From Austerity to Prosperity.

There is a growing interest in the concept of public banking, i.e., banks that exist to serve the public rather than just wealthy shareholders.

Another collaborative “group” investment paradigm that has seized the public’s interest is crowdfunding, an outgrowth of another collective undertaking, social networking.  Laws governing investing in small companies have barely changed since the 1930s, yet a groundswell demand for crowdfunding from entrepreneurs and the small business community pushed Congress to pass a rare, overwhelmingly bipartisan bill, the 2012 JOBS Act, which authorized small private companies to make investment solicitations to the general public.

6. A better venture capital model

Venture capital has long been the domain of the wealthy. But recently a concept called a business development company (BDC) has been rediscovered. Created by Congress in 1980, BDCs were originally intended to “democratize” venture capital by providing both capital and credit to small businesses via a public venture capital company that anybody, not just the rich, can own.  The original vision for BDCs was co-opted by Wall Street-controlled financial firms into serving only the upper tier of the kinds of companies that Congress had in mind.

But that is about to change. BDCs are poised to replace the old venture capital model, a topic explored in depth in my article Venture Capital 2.0: The VC world is about to be disrupted – by something it created more than 35 years ago.

BDCs were originally intended to “democratize” venture capital by providing both capital and credit to small businesses via a public venture capital company that anybody, not just the rich, can own.

Think of a BDC as a combined public venture capital company (its shares can be traded on a stock exchange) a commercial lender and a holding company. For example, when a BDC is used to foster local investment, local investors invest in the publicly traded BDC, which in turn invests in, buys or lends to local small companies. In this application, the community becomes an owner in local businesses, yet investors retain the liquidity offered by a public company. This provides a unique investing opportunity unavailable through any other means.

Efforts are already under way to use BDCs to focus on local communities and their mainstay small businesses. Commonwealth Group, has established a “fund of funds” BDC called Commonwealth Capital that will serve as an incubator for other BDCs, until they are large enough to be standalone public companies. Commonwealth Capital was formed as a benefit corporation (described below), so that it and all the companies it supports may pursue a more socially and environmentally responsible expression. We can assist others in establishing their own BDC, freestanding or under Commonwealth Capital’s “fund of funds.”

7. More than the financial bottom line

In recent years, advocates have encouraged state legislatures to create new forms of for-profit entities that are allowed (even mandated) to pursue double and triple bottom line objectives.

The first of these (Vermont, 2008) resulted in a new type of limited liability company (LLC). Called low-profit limited liability companies (L3Cs), they were created to bridge the gap between non-profit and for-profit investing by providing a structure that facilitates investments in socially beneficial for-profit ventures. Ten states have adopted them so far.

“Certified B Corporations” pledge to pursue triple bottom line objectives and are audited on an ongoing basis to verify they are meeting the certification requirements.

An even more widespread structure has emerged related to for-profit entities, such as LLCs, corporations and partnerships. It began with a non-profit organization called B-Lab and their independent B Corporation certification. These “Certified B Corporations” pledge to pursue triple bottom line objectives and are audited on an ongoing basis to verify they are meeting the certification requirements. Etsy is one of the first B Corps to go public representing a paradigm shift for a Wall Street listed company.

However, as I pointed out in an article I published in 2008, Rewiring Corporate DNA, if society truly wants to change corporate behavior to make corporations more socially and environmentally responsible, tinkering at the edges is not enough. We need to change the underlying statutes that form the legal basis for corporations.

The folks at B Lab recognized this problem as well and engaged attorney William Clark to draft a model set of statutes that could be used to craft state legislation defining a new class of for profit corporation. (History will likely owe Clark a great deal more recognition for his role in bringing about what is described below. I for one am very grateful for his contribution and that of his collaborators.)

The goal was to establish statutes that would sit alongside conventional corporate statutes but with four key differentiating elements. They would:

  1. Mandate that the corporation pursue a material positive impact on society and the environment.
  2. Mandate that the directors and officers consider the interests of all of the corporation’s stakeholders.
  3. Mandate that the corporation provide its shareholders with a periodic published report demonstrating that the company is pursuing that public benefit purpose.
  4. Provide a legal protective “firewall” for the directors and officers that allows them to pursue that public benefit objective without risk of being sued for making decisions and pursuing strategies that might include other than pure financial factors.

The true game changer came in 2010 when, through the efforts of B Lab, Clark and others, Maryland created a new legal category of for-profit corporation called the benefit corporation, a for-profit corporation that “includes positive impact on society and the environment in addition to profit as its legally mandated goals.” With the adoption of those new statutes, the country now had a government recognized (not just third-party certified) corporation with a purpose that transcends pure profit.

Since then, more than half (29) of the states and Washington, D.C.-, have adopted benefit corporation statutes (most of them based on Clark’s model statutes)! Even Delaware, the state with the most public companies registered, is promoting its own form called Public Benefit Corporations. The majority of state legislatures, in both red and blue states, have agreed that corporations need to have a larger purpose than solely making money. Such fast and widespread adoption represents a sea change in support of the public’s desire to have corporations be more responsible to society and the planet.

Benefit corporations represent the single biggest shift in corporate law in our nation’s history – a quiet revolution!

The ramifications of benefit corporate statutes cannot be overestimated. They represent the single biggest shift in corporate law in our nation’s history – a quiet revolution! Yet it is probably the single strongest indicator that we have begun shedding the old greed capitalism model. When legislators of both red and blue states recognize the need for more socially and environmentally responsible corporate behavior and are willing to codify that into law, we can be confident that change is underway.

It is important to note that these new benefit corporation statutes offer entrepreneurs an additional option for incorporation. They do not require existing conventional corporations to adopt benefit corporation goals, although they may adopt them if the shareholders vote to convert (usually requires a super majority approval). Nonetheless, it is likely that once benefit corporations become more visible, there will be subtle and overt pressure on conventional corporations to adopt the benefit form of corporate governance.

History bears this out. One related set of laws in particular provides a template for the far-reaching effect of legal changes that at first seemed inconsequential. The Emergency Planning and Community Right-To-Know Act (EPCRA) under Title III of the Superfund Amendments and Reauthorization Act (commonly called the “Toxics Reporting Act”), mandated that companies publicly report the toxic chemicals they generated and what they did with them. There were no further requirements beyond the reporting. Simply tell the world which ones you handle and how you handle them. But in retrospect, this set of laws is considered by many to be the most successful environmental legislation ever!

The results of that simple sounding legislation were stunning. By having to tell the world about their use of toxic chemicals, corporations were embarrassed into radically altering their behavior. Company after company raced to paint themselves as more responsible than their competitors. It’s probable that more toxic cleanup has resulted from the anticipated public pressure (often not forthcoming but nonetheless feared) than by all previous environmental legislation.

Applying that same logic to benefit corporation codes, we anticipate that companies that become benefit corporations will want to tell the world, with the expectation that it will enhance their public image and translate to increased sales and a higher share price. Market forces (i.e., capitalism in its truest form) may very well drive the adoption of this alternative code more effectively than any mandatory action ever could.

Sir Richard Branson and Salesforce CEO/Founder Marc Benioff have joined forces to actively promote benefit corporations and Certified B Corporations.

Already corporate thought leaders are embracing benefit corporations as the future. Industry heavyweights Sir Richard Branson and Salesforce CEO/Founder Marc Benioff have joined forces to actively promote benefit corporations and Certified B Corporations in a program they call Born B. They describe Born B this way:

“The startup community is a powerful driver of disruptive innovation, creativity and change in the business world. New companies have the opportunity to manage their businesses in progressive and innovative ways from the start, rather than backwards engineering them when they become large and complex. When a new company embraces and integrates social and environmental purpose into its core business model from inception, it has the opportunity to vastly improve its ability to address long-standing global challenges. Companies who do this will realise significant benefits for their investors, shareholders and customers. We call this being ‘Born B’.”

So far, the many thousands of companies formed as a benefit corporations are all still privately held. To date (April 2016) no benefit corporation has gone public, but that will be changing soon. Commonwealth Capital plans on going public sometime in 2016, at which time it will likely be the first public benefit corporation BDC in the country and very possibly the first public benefit corporation of any kind.

Commonwealth Capital plans on going public sometime in 2016, at which time it will likely be the first public benefit corporation BDC in the country and very possibly the first public benefit corporation of any kind.

Commonwealth Capital intends to adopt triple bottom line practices for itself, either as a Certified B Corporation or equivalent. In addition, any prospective portfolio company wishing to receive funding from, or be acquired by, Commonwealth Capital shall be required to likewise adopt practices equivalent to those advocated by B Lab, whether or not they are benefit corporations or L3Cs. Certain others will be required to be incorporated as a benefit corporation, in addition to conforming to B Lab-like practices.

Commonwealth Capital’s business model entails creating many other BDCs that all will be benefit corporations. And any portfolio company that plans on going public will be required to be a benefit corporation as a condition of an investment by Commonwealth Capital. Thus by Commonwealth Capital’s efforts alone, the number of public benefit corporations could grow rapidly. Once they do, investors in Wall Street will finally have an alternative to the old, profit-only companies. As benefit corporations proliferate, pressure will mount on conventional companies to convert.

The increase in public benefit corporations will drive the need for new ways of valuing such public companies. To date there are no commonly accepted metrics for establishing the value of the social and environmental bottom lines that are comparable to the metrics for financial bottom lines. This is a key point.

People and organizations perform according to how they are measured. Managers of public corporations are currently measured and rewarded for short-term profits, which results in many behaviors that are detrimental to society and the planet.

So we must develop ways to value the social and environmental dimensions. In so doing, we will drive corporate behavior in new, more sustainable directions. With that, Capitalism 2.0 will truly begin to soar.

The ramifications of benefit corporations will be far reaching. When I called for this kind of change to corporate statutes in 2008, the prospects for such accelerated transformation to occur within just eight years were dim to say the least. The rapid expansion of the benefit corporation and Certified B Corporation movement shows that massive change is already underway. Business might, sooner than expected, become the servant and not the master of society. Capitalism 2.0 is much closer than we think.

This article was originally published on the Commonwealth Group website.
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Michael Sauvante is Executive Director of Commonwealth Group LLC, the only firm specializing in the use of BDCs for small business investments.